U.S. Currency: Coin Inventory Management Needs Better Performance Information
Published: 2013-10-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Efficiently managing the circulating coin inventory helps ensure that enough coins are available to meet public demand while avoiding unnecessary production and storage costs. The Federal Reserve fulfills the coin demand of the nation's depository institutions (e.g., commercial banks and credit unions) by managing Reserve Bank inventory and ordering new coins from the U.S. Mint. GAO was asked to review this approach. This report examines (1) how the Federal Reserve manages the circulating coin inventory and the related costs, (2) the extent to which the Federal Reserve follows key practices in managing the circulating coin inventory, (3) actions taken to respond to potential changes in demand for coins and notes, and (4) actions taken with regard to the circulation of the $1 coin. GAO interviewed federal and foreign officials, experts, and industry representatives; reviewed documents and data on coin inventories; and compared the Federal Reserve's coin inventory management practices to key practices in supply chain management.
section_title: What GAO Found
paragraphs: In 2009, the Federal Reserve centralized coin management across the 12 Reserve Banks, established national inventory targets to track and measure the coin inventory, and in 2011 established a contract with armored carriers that store Reserve Bank coins in their facilities. However, according to Federal Reserve data, from 2008 to 2012, total annual Reserve Bank coin management costs increased by 69 percent and at individual Reserve Banks increased at rates ranging from 36 percent to 116 percent. The Federal Reserve's current strategic plan calls for using financial resources efficiently and effectively and monitoring costs to improve cost-effectiveness. However, the agency does not monitor coin management costs by each Reserve Bank--instead focusing on combined national coin and note costs--thus missing potential opportunities to improve the cost-effectiveness of coin-related operations across Reserve Banks.
In managing the circulating coin inventory, the Federal Reserve followed two of five key practices GAO identified and partially followed three. For example, the Federal Reserve follows the key practice of collaboration because it has established multiple mechanisms for sharing information related to coin inventory management with partner entities. The Federal Reserve has developed some performance metrics in the form of upper and lower national coin inventory targets. However, it has not developed other goals or metrics related to coin supply-chain management. One key practice is for agencies to identify goals, establish performance metrics, and measure progress toward those goals. Establishing goals and metrics, such as those related to coin management costs, could aid the Federal Reserve in using information and resources to identify additional efficiencies.
To collect information on potential changes in the demand for currency (coins and notes), the Federal Reserve has conducted studies and outreach, including developing a long-term strategic framework beginning in 2010 to consider changes in demand and implications for operations. While the magnitude of potential changes in the demand for currency is inherently uncertain, the Federal Reserve anticipates a gradual decline in currency use, and officials reported such changes could likely be accommodated by the current system. While Federal Reserve studies and data indicate electronic payments have increased over time, currency usage has remained strong. For example, from 2009 to 2012, the value of currency in circulation rose about 26 percent.
Starting in 2007, the Federal Reserve took actions to overcome barriers to circulation of the $1 coin, such as holding regular meetings with depository institution representatives to gather feedback about demand for $1 coins. The Federal Reserve manages the $1 coin inventory as it does for all other coin denominations--overseeing distribution and ensuring sufficient supply is available to meet demand nationwide. Reserve Banks currently hold approximately $1.4 billion in $1 coins, an amount that, according to the Federal Reserve, is sufficient to meet demand for more than 40 years. Reserve Bank officials, depository institution representatives, and coin terminal operators stated that $1 coins are readily available to the public throughout the country, but there is very low public demand for these coins.
section_title: What GAO Recommends
paragraphs: Among other things, the Federal Reserve should (1) develop a process to assess factors influencing coin operations costs and identify practices that could lead to cost-savings and (2) establish additional performance goals and metrics relevant to coin inventory management. The Federal Reserve generally agreed with the report's recommendations.

section_title: Letter
paragraphs: Efficiently managing the nation’s inventory of circulating coins helps to  ensure that the coin supply meets the public’s demand while avoiding  unnecessary production and storage costs. Efficient inventory  management includes anticipating changes in future demand for coins  and notes—collectively referred to as currency—in light of factors such as  increased electronic payment options and changing economic conditions.  The Federal Reserve System’s 12 Federal Reserve Banks (Reserve  Banks) fulfill the coin demand of the nation’s depository institutions (e.g.,  commercial banks, federal savings associations, and credit unions) by  managing coins held in inventory and ordering new coins from the United  States Mint (U.S. Mint). In 2012, the U.S. Mint produced 9.1 billion coins.  According to the Department of the Treasury (Treasury), coins worth  approximately $42 billion were in circulation at the end of 2012. Reserve  Banks hold a portion of these coins in storage, including approximately  1.4 billion in $1 coins.
In 2009 the Reserve Banks implemented a new, centralized approach to  the management of the circulating coin inventory. You asked us to review  the Federal Reserve’s management of the circulating coin inventory and  future demand for coins and notes. This report addresses the following  questions: (1) How does the Federal Reserve manage the circulating coin  inventory and what are the coin management costs? (2) To what extent  does the Federal Reserve follow key supply-chain management practices  in managing the circulating coin inventory? (3) What actions has the  Federal Reserve taken to respond to potential changes in demand for  coins and notes? (4) What actions has the Federal Reserve taken with  regard to the circulation of the $1 coin, and what more, if anything, could  it do?
To address the first question, we reviewed documentation from and  interviewed officials from the Federal Reserve and U.S. Mint. We also  met with industry stakeholders (e.g., depository institution representatives  and coin terminal operators) and academic experts to discuss their views  on the management of the circulating coin inventory. To assess  management operations related to the circulating coin inventory, we used  the Federal Reserve’s Strategic Framework 2012–2015 and the  Committee of Sponsoring Organizations of the Treadway Commission’s  (COSO) Internal Control—Integrated Framework. In addition, from the  Reserve Banks we obtained and analyzed coin inventory and production  data from 2004 through 2012 and currency management cost data from  2008 through 2012. We took steps to assess the reliability of data used,  such as interviewing knowledgeable agency officials, and determined that  the data were sufficiently reliable for the purposes of this report.
While there are many other leading supply-chain management practices and supporting  characteristics, we selected and validated a sample of those most relevant to our review.  In addition, academic and industry experts in operations and supply chain management  validated that the selected key practices, definitions, and supporting characteristics were  relevant to coin inventory management.
U.S. Mint officials and industry stakeholders. We then compared the  Federal Reserve’s coin-inventory management practices to the selected  key supply-chain management practices. For each key practice, we  assessed whether the Federal Reserve was following or substantially  following the supporting characteristics (i.e., plans, policies, or processes  have been developed and implemented properly for all or nearly all of the  supporting characteristics), partially following (i.e., plans, policies, or  processes have been developed and implemented properly for some of  the supporting characteristics), or minimally or not following them (i.e.,  plans, policies, or processes are lacking for all or nearly all of the  supporting characteristics). Thus, the individual assessments for each  supporting characteristic served as the basis for the overall assessment  for each key practice.
To address our third and fourth questions, we obtained perspectives on  potential changes in coin and note demand, as well as the availability and  use of $1 coins from officials from the Federal Reserve and U.S. Mint,  and Bureau of Engraving and Printing (BEP) as well as industry  stakeholders and academic experts. In addition, we interviewed  government officials in Australia, Austria, and Canada to obtain their  perspectives on the leading practices in coin inventory management and  potential changes in future coin and note demand. We selected these  countries for illustrative purposes because they had replaced low  denomination notes with coins and implemented coin-inventory  management process improvements. These countries are not intended to  be used for direct comparisons to the Federal Reserve’s management of  the circulating coin inventory. For more detailed information on our  objectives, scope, and methodology, see appendix I.
We conducted this performance audit from March 2013 through October  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Roles and Responsibilities
paragraphs: The Federal Reserve System is composed of an independent  government agency—the Board of Governors (Board)—and 12 regional  Reserve Banks, each of which is located in a Federal Reserve district.  (See fig. 1.) The Board is responsible for maintaining the stability of  financial markets, supervising financial institutions such as bank holding  companies and the U.S. operations of foreign banking organizations, and  supervising the operations of the Reserve Banks. Unlike the Board, the  Reserve Banks are not federal agencies. Each Reserve Bank is a  federally-chartered corporation with a board of directors. Unlike federal  agencies funded through congressional appropriations, the Board and  Reserve Banks are self-funded entities that engage in a variety of  activities that generate revenue, such as earnings from lending to  financial institutions. The Federal Reserve deducts its costs from these  revenues and transfers the remaining amount to the General Fund of the  U.S. Treasury (General Fund). In 2012, the Federal Reserve transferred  $88.4 billion to the General Fund. Federal Reserve revenues contribute to  total U.S. government revenues, and therefore, if its costs can be  reduced—such as through more efficient coin-inventory management— more of its revenue could potentially be contributed to the General Fund.
The Reserve Banks carry out a variety of functions for the Federal  Reserve, including ensuring that coins and notes are available in  quantities sufficient to meet the public’s needs. The 12 Reserve Banks  provide coins and notes to depository institutions, among other  responsibilities. The Federal Reserve’s Cash Product Office (CPO)  manages the Reserve Banks’ coin inventory from a national perspective,  working closely with the Reserve Banks. For example, CPO places  monthly orders for new coins with the U.S. Mint on behalf of the Reserve  Banks.
Other entities, including the U.S. Mint, coin terminal operators—armored  carrier companies such as Brink’s and Dunbar, that hold both Reserve  Bank and other customers’ coins in their facilities—and depository  institutions play a role in issuing or managing the circulation and  distribution of coins. (See fig. 2.) For coins, the Treasury’s U.S. Mint is the  issuing authority. The U.S. Mint is financed through a revolving fund and  generates revenue through various means including the sale of circulating  coins at face value to the Reserve Banks. Revenue in excess of costs— including all costs allocable to the U.S. Mint’s circulating coin program—is  transferred to the General Fund. U.S. Mint facilities in Philadelphia and  Denver produce and ship new coins for circulation to Reserve Bank  offices and coin terminals. Approximately 170 coin terminals are operated  by 15 armored carrier companies. Coin terminal operators receive  deposits from and fulfill orders of coins for depository institutions on  behalf of the Reserve Banks and other customers. As we have previously  reported, coin terminals operate at no cost to the government because  while they maintain Reserve Bank coin inventories at no charge, they  earn revenue from other customers—depository institutions—from the  coin transportation and wrapping services they provide. Depository  institutions order coins from the Reserve Banks—through an online  ordering system called FedLine operated by the Reserve Banks—to meet  retailers’ and the public’s demand; depository institutions’ coin orders are  fulfilled with new and circulated coins held at Reserve Bank offices or coin  terminals. Depository institutions can deposit coins with Reserve Banks  when they have more coins than needed to fulfill demand. Depository  institutions contract with armored carriers to wrap and deliver the coins to  them, ultimately providing these coins to retailers and the general public.
The circulating coin inventory consists of coins held by Reserve Banks— both in Reserve Bank offices and coin terminals—and those coins in  general circulation for public use.percent ($2.1 billion) of the circulating coin inventory, and 95 percent ($42  billion) of the inventory was in general circulation. As of December 2012,  the 28 Reserve Bank offices held about 50 percent of the Reserve Banks’  total coin inventory of pennies, nickels, dimes, and quarters and about 92  percent of the Reserve Banks’ total coin inventory of $1 coins. The 170  coin terminals held the remainder of the Reserve Bank’s coin inventory.
In 2012, Reserve Banks held about 5  Based on the Board’s statutory authorities, it is responsible for note  issuance, distribution, and processing. For example, the Board is the  issuing authority for notes and is also responsible for distributing and  authenticating notes. The Treasury’s BEP produces notes to meet the  Board’s annual note order. According to the Treasury, at the end of 2012,  approximately $1.1 trillion in notes were in circulation and approximately  $228 billion in notes were held by the Reserve Banks. In 2012, BEP  production accounted for about 32 percent of the circulating note  inventory. This is due, in part, to the amount of new notes that need to be  replaced each year because they are worn or no longer fit for circulation.  The Reserve Banks manage the note inventory through 28 note- processing centers and 10 note distribution locations. CPO also has a  role in providing note services, including processing. Similar to the  distribution process for coins, depository institutions order notes from the  Reserve Banks through FedLine, and then place these notes in  circulation to meet the demand of retailers and the public. The Federal  Reserve also contracts with armored carriers to transport notes for  circulation or storage. When notes are returned by depository institutions  as deposits to the Reserve Banks, each note is processed to determine  its quality and authenticity; coins do not undergo similar processing.  During processing, worn and counterfeit notes are removed from  circulation, and the rest are wrapped for storage or re-circulation.
section_title: $1 Coin
paragraphs: The Reserve Banks are responsible for ensuring the efficient distribution  and circulation of coins, including the $1 coin, which co-circulates with the  $1 note. Legislation has been introduced in Congress to eliminate the $1  note and replace it with the $1 coin. In 2012, we reported that the  federal government would receive $4.4 billion net benefits over 30 years if  Congress decided to replace the $1 note with the $1 coin.recent savings estimate is lower than the results of our previous similar   This most  analyses, in part, because the life of the $1 note has increased. The  Presidential $1 Coin Act of 2005 requires the Federal Reserve and the  Secretary of the Treasury to assess and submit an annual report to the  Congress on the obstacles to the efficient and timely circulation of $1  coins, among other things. As we have previously found, while  Congress sought to increase the circulation of the $1 coin in recent years,  circulation has remained limited, in part, because the $1 note has  remained in circulation.
section_title: Inventory Management Has Been Centralized; Rising Costs Have Not Been Analyzed
subsections: section_title: Coin Inventory Management
paragraphs: Since 2009, the Federal Reserve has made changes to its coin inventory  management that includes centralizing the coin management system and  establishing a contract with coin terminal operators.
Introduced in 2009, the National Coin Inventory Management program  centralized the management of the circulating coin inventory under the  CPO so that the coin inventory would be consistently managed across the  12 Reserve Bank districts. Previously, each Reserve Bank office set and  managed its own inventory levels, resulting in varying levels of inventory  held relative to demand. Under the centralized approach, CPO manages  the distribution of coin inventory, orders new coins, and acts on behalf of  the Reserve Banks in working with stakeholders.
The centralized approach to coin inventory management was set up to  increase the efficiency of the coin distribution process. Since 2009,  Reserve Bank inventories for pennies, nickels, dimes, and quarters have  decreased due in part to the centralized program. In particular, from 2008  through 2012, the combined inventory for pennies, nickels, dimes, and  quarters decreased 43 percent. (See fig. 3.) CPO officials have  attributed these decreases in inventory and coin orders to the 2009  introduction of CPO management of the coin inventory but other factors  may have also contributed to the decrease, such as the 2007–2009  financial crisis and recession, which may have affected the public’s  demand for coins.
As part of the centralized approach to inventory management, in 2009,  CPO established national upper and lower inventory targets for pennies,  nickels, dimes, and quarters to track and measure the coin inventory.  CPO officials noted that these targets help meet their primary goal in  managing the nation’s coin inventory: ensuring a sufficient supply of all  coin denominations to meet the public’s demand. The upper national  inventory target serves as a signal for CPO to reduce future coin orders  from the U.S. Mint to avoid the risk of approaching coin-storage capacity  limits and the lower national inventory target serves as a signal to CPO  that there is a need to increase future coin orders to avoid shortages.  According to CPO officials, they view falling below the lower targets as  more problematic than exceeding the higher targets because the lower  targets are designed to guard against the more serious risk of not having  enough coin to meet demand. We analyzed national inventory targets  from 2009 to 2012 and found that in most cases the national inventory  targets were met. However, inventory exceeded the upper inventory  targets in 2009 for nickels and quarters; in 2010 for nickels, dimes, and  quarters; and in 2011 for quarters. In addition, the national inventory for  pennies was 7 percent below the lower targets in 2012. See appendix II  for additional information on coin inventories, orders, and circulation.
In addition to considering nationwide coin inventory, CPO reviews the  daily inventories of the 200 Reserve Bank offices and coin terminals and  has established upper and lower inventory levels to ensure there is a  sufficient but not an excessive supply of coins at each location. Given that  the coin supply at each location differs depending on that location’s  typical volume of coin payments and receipts, each Reserve Bank office  and coin terminal is required to hold a minimum 2 weeks of “payable   Prior to  days” and a maximum 3 weeks of payable days in inventory. 2009, there were no required inventory levels for distribution locations  and coin shortages and excesses occurred in specific locations. Since  CPO has centralized the management Reserve Banks’ coin inventory,  coin terminal operators we spoke with said coin shortages are less  common and that they are better able to manage their inventory and  provide depository institutions with the denominations they need to fulfill  public demand.
In managing the coin inventory, CPO determines if coins should be  transferred from an area with more coins than needed to fulfill current and  future demand or if additional coins should be ordered from the U.S. Mint.  (See fig. 4.) To make this determination, CPO uses a proprietary  inventory management system that collects data on inventory, receipts,  and payments from the approximately 200 coin distribution locations and  forecasts expected changes in coin demand for each location. Before  transferring coins from one region to another, CPO considers whether a  region’s future demand is expected to change and considers typical  seasonal shifts in coin demand and local market factors such as coin- recycling operations that could affect the flow of coins. These transfers,  known as interbank transfers, according to CPO officials, are the only  direct coin transportation cost to Reserve Banks because armored  carriers provide local coin transportation and delivery of new coins is  provided by the U.S. Mint. Coins are also transferred between Reserve  Bank offices and coin terminals within a region when distribution locations  need additional coin supply or have excess coin inventory. For example,  coins could be moved via interbank transfer from Reserve Bank offices in  Seattle or Minneapolis to support distribution locations in Helena,  Montana, and coins could be transferred among three distribution  locations in Helena, a Reserve Bank of Minneapolis office, and two coin  terminals. If there is an insufficient supply of coins to meet demand and  transferring coins would not be cost effective, CPO orders new coins from  the U.S. Mint.
CPO orders new coins each month from the U.S. Mint based on its 2- month rolling forecast of expected demand, as shown above in figure 4.  CPO provides a monthly order to the U.S. Mint about 2 months prior to  expected delivery (e.g., CPO submits the August order in June), and to  help the U.S. Mint prepare for potential future orders, CPO provides  estimates of projected demand and new coin orders for up to the next 12  months. After submitting orders to the U.S. Mint, CPO may increase an  order or defer shipments to later months based on updated information. In  part to respond to these changes, each month the U.S. Mint produces a  safety stock of coins. If this stock is not applied to the current order, it is  used to fill future orders.expected demand, CPO determines which Reserve Bank will receive new  coins, and then Reserve Banks determine which offices and coin  terminals will receive them. From 2008 to 2009, new coin orders for  pennies, nickels, dimes, and quarters decreased by 79 percent; however,   After the new coins are produced, based on  since 2010 new coin orders have increased annually. (See fig. 5.)  According to CPO officials, the 2009 introduction of centralized coin  management led to the reduction in coin inventories and the more recent  increases in coin orders reflect a return to a more normal ordering pattern  that is closely aligned with payments to circulation and receipts from  circulation. However, other factors may have also contributed to  decreased new coin orders in 2009, such as the 2007-2009 financial  crisis and recession, which may have affected the public’s demand for  coins.
In 2011, on behalf of Reserve Banks, CPO developed and negotiated a  contract with coin terminal operators, which standardized procedures and  internal controls for the storage and handling of coins across all Reserve  Bank districts. Prior to this contract, each Reserve Bank negotiated its  own contract with coin terminal operators that operated in its district. We  spoke with 5 of the 15 coin terminal operators, and they reported  satisfaction and efficiency gains with the standardized contract and  CPO’s centralized management. For example, one coin terminal operator  told us that the Federal Reserve’s centralized approach allows coin  terminal operators to manage their business proactively rather than  reactively. Among other things, the contract requires coin terminals to use  FedLine to order new coins and track changes to Reserve Bank coin  inventory held by the coin terminal. Coin terminal operators have told us  that FedLine works more effectively than the earlier ad-hoc  communications to order coin and track inventory that preceded it.
section_title: Coin Management Costs
paragraphs: In 2012, Reserve Bank costs related to coin management were about $62  million or 14 percent of the estimated $449 million that coins indirectly  cost the U.S. government. These costs included CPO’s administration,  coin handling, and interbank coin transfer costs. The remaining 86  percent of U.S. government costs include about $387 million for the U.S.  Mint’s production and distribution of new coins. In addition, the  government earns a return on the issuance of coins to the extent that  production and distribution costs are less than the face value of the coins  put into circulation—this value to the government is known as  seigniorage. The U.S. Mint reported that in 2012 the government received  about $106 million in seigniorage because the face value of coins  produced was $493 million, and the U.S. Mint’s cost of producing and  distributing them was $387 million.
The Federal Reserve’s 2012–15 strategic plan includes an objective to  use financial resources efficiently and effectively. In addition, according  to COSO, as part of the internal control process management should  ensure that operations, such as managing an inventory, are efficient and  cost effective, and this process includes monitoring costs and using this  information to make operational adjustments. To monitor costs related  to coin and note operations, CPO officials said they review currency  management costs—which include costs related to both coins and  notes—at the national level because individual Reserve Banks may vary  in their accounting for operational costs related to coins and notes.  When we reviewed currency management costs at the national level  using data provided by CPO, we found that from 2008 through 2012 total  annual Reserve Bank currency management costs increased by 23  percent. (See fig. 6.) Cost information for coins and notes is available  separately; however, CPO does not separately monitor coin costs.
Our analysis of coin management costs, using CPO data, indicates that  coin management costs increased by 69 percent from 2008 through  2012. CPO officials attributed the increase in coin management costs to  support costs, which increased by 80 percent during that time period,  from $24.5 million in 2008 to $44.1 million in 2012.II.) Support costs include utilities, facilities, and information technology as  well as other local and national support services such as CPO’s services.  According to CPO officials, support costs are influenced by a variety of  factors, including the number and size of operating units at each location.  Also, with the consolidation of some operating units, such as check  processing, other operations, including coin management, have absorbed   (See fig. 18 in app.  a higher percentage of support costs, according to these same officials.  They further explained that direct costs—which include personnel and  equipment—represent their primary measure of Reserve Bank coin  operation costs. We found that direct costs for coin operations increased  by 45 percent during this period; about $5 million across the 28 Reserve  Bank offices. According to CPO officials, the increase in direct costs can  be largely attributed to an increase in personnel costs, which may be  influenced by volume of coin bags handled onsite and the number of coin   By not separately monitoring coin costs, the Federal  terminals serviced.Reserve may be missing opportunities to assess and improve the cost- effectiveness of its coin operations.
In addition, we also reviewed coin management costs at each Reserve  Bank and found that the rates of increasing coin-management costs differ  across Reserve Banks. Using data provided by CPO on individual  Reserve Banks’ costs, we found that from 2008 through 2012, coin  management costs increased for all Reserve Banks with the increases   To account  ranging from a low of 36 percent to a high of 116 percent. for variations in the volume of coins handled by individual Reserve Banks,  we also reviewed the average cost per bag handled by Reserve Banks  and found that in 2012 it ranged from about $2 to $57 per coin bag.  CPO officials attributed variations in Reserve Bank coin management  costs to different operational practices such as outsourcing coin handling  to coin terminals and differences in direct and support costs.outsourcing coin handling may decrease some costs as personnel are not  required at the Reserve Bank location to perform these services, it may  also increase other costs related to daily management and periodic  auditing of these outsourced services. Without taking steps to identify and  share cost-effective coin management practices across Reserve Banks,   While  the Federal Reserve may be missing opportunities to support more  efficient and effective use of Reserve Bank resources. Moreover, more  efficient management of the coin inventory may contribute to cost savings  and additional funds returned to the General Fund.
section_title: The Federal Reserve Follows Some Key Practices in Managing the Circulating Coin Inventory but Lacks Performance Information for Additional Metrics and Forecasting
paragraphs: In managing the circulating coin inventory, we found that the Federal  Reserve follows key practices for collaboration and risk management and  partially follows key practices for performance metrics, forecasting  demand, and system optimization. To effectively manage inventory,  private and governmental organizations involved in production and  distribution operations use supply-chain and operations-management  practices. We identified five key supply-chain practices—collaboration,  risk management, performance metrics, forecasting demand, and system  optimization—and selected supporting characteristics applicable to coin  inventory management to assess the Federal Reserve’s management of  the circulating coin inventory. (See table 1.) These key supply-chain  management practices are closely related, and improvements or  shortfalls in one practice may contribute to improvements or shortfalls in  another practice. In addition, establishing, documenting, and following  these practices and their supporting characteristics contribute to a more  effective inventory management system.
The Federal Reserve follows the key practice of collaboration through its  relationships with supply chain stakeholders, including Reserve Banks,  coin terminal operators, depository institutions, and the U.S. Mint. CPO  has developed policies and guidelines governing relationships with each  of its partner entities. For example, as previously discussed, in 2011 CPO  introduced a contract with coin terminal operators, which includes a  manual of operations that standardized procedures and internal controls  for handling Reserve Bank coins. CPO has also agreed upon roles and  responsibilities with partner entities. For example, U.S. Mint officials told  us that as part of the coin supply chain, they deal almost exclusively with  CPO to manage day-to-day operations and interbank coin transfers. The  U.S. Mint arranges coin transportation across Reserve Banks, and CPO  reimburses the U.S. Mint for the cost of this transportation. CPO has  multiple mechanisms, such as stakeholder working groups, for sharing  information related to the circulating coin inventory with partner entities.  Reserve Banks, coin terminal operators, depository institutions, and the  U.S. Mint reported to us that they are generally satisfied with their  relationships with CPO.
The Federal Reserve follows the key practice of risk management  because it has identified sources of potential disruptions, assessed the  potential impact of risk, and developed plans to mitigate risk at multiple  levels of operations, including Reserve Bank, FedLine, and coin inventory  management operations. For example, the lower national-inventory  targets are set based on the highest consecutive 10-day gross pay period  from 2009 to 2012 because, according to CPO officials, the U.S. Mint can  produce and deliver new coins within 10 days. Therefore, the lower  inventory target guards against a coin shortage if a disruption prevented  circulating coin payments from depository institutions. In addition, risk  management for the circulating coin inventory is built into the Federal  Reserve’s overall risk management and contingency protocols. For  example, each Reserve Bank has a designated “buddy bank” to perform  its functions—including coin circulation activities—if it is unable to operate  due to a disruption. According to CPO officials, as soon as disruption is  anticipated, they begin planning with stakeholders operating in the  affected area, including Reserve Bank officials, coin terminal operators,  and depository institutions. Continuity plans are also in place for Federal  Reserve services such as FedLine. The FedLine website includes  information on the types of potential disruptions, such as system outages   or closures of Reserve Bank or coin terminal operations by inclement  weather or other events, and what depository institutions and armored  carriers should do in the event of a disruption.
subsections: section_title: Key Practices Partially Followed
subsections: section_title: Performance Metrics
paragraphs: The Federal Reserve partially follows the key practice of performance  metrics because its use of performance metrics is limited to inventory  targets and it has not developed other goals or metrics related to coin- supply chain management. CPO has established, tracks, and annually  reevaluates performance metrics in the form of upper and lower inventory  targets for pennies, nickels, dimes, and quarters. In addition, CPO closely  monitors “net pay” to measure how well they are meeting general demand  nationwide and at individual locations. However, CPO has not  established additional management goals or metrics to measure other  aspects of its management such as costs because, as discussed earlier,  CPO’s primary goal is to ensure a sufficient supply of all coin  denominations are available to meet the public’s demand. Federal  agencies have been required to develop performance goals and measure  and report on their progress in achieving these goals since the  Government Performance and Results Act (GPRA) was enacted in  1993.has chosen to voluntarily comply with the spirit of the act. In addition, our  previous work on managing results has shown that agencies should  identify goals and establish a suite of performance metrics to determine   Although the Federal Reserve is not covered by GPRA, the Board  whether they are meeting those goals. We have identified customer  satisfaction, efficiency, and costs, among others, as performance metrics  that can be used to measure an agency’s progress towards its goals.  Moreover, costs are among the common performance measures used in  supply chain management. The Australian, Austrian, and Canadian mint  and central bank officials we interviewed have established multiple  performance goals and metrics for their coin inventory management.  For example, the Royal Australian Mint and its commercial bank partners  have established targets to reduce coin holdings that will result in  reducing the cost of freight and other related coin expenses. Further, the  Royal Australian Mint tracks and monitors coin management costs to  ensure that they are progressing towards their targets.
We found that the Federal Reserve partially follows the key practice of  forecasting demand because it forecasts future coin demand and uses  this information to make decisions, but does not systematically track the  accuracy of its monthly forecasts compared to the final coin orders. As  discussed previously, CPO has a process in place to forecast demand by  tracking current inventory, payments, and receipts and using this  information to calculate expected future demand. These forecasts are  then used to plan and manage the circulating coin inventory, including  decisions on coin transfers and new orders. CPO officials told us they  review their annual forecasts, and have found their forecasts for  payments and receipts are within 10 percent of actual orders for pennies,  nickels, dimes, and quarters. However, CPO has taken minimal steps to  assess monthly forecast accuracy. CPO officials told us that they compare their initial coin orders to net pay, but do not track the accuracy  of their monthly forecasts because seasonal shifts in coin demand make  reviewing annual trends more useful for their purposes. Our analysis of  initial monthly CPO coin orders and actual U.S. Mint coin shipments from  2009 through 2012 indicates that initial orders were consistently less than  the final orders (i.e., U.S. Mint shipments of new coin). APICS—an  operations management industry association that offers professional  certifications—recommends that forecasting results must be continuously  monitored and a mechanism should be in place to revise forecasting  models as needed and that if the forecast consistently exhibits a bias, the  forecast should be adjusted to match the actual demand. According to  the Logistics Management Institute, accurate forecasts result in effective  and efficient inventories, whereas inaccurate forecasts often cause  inventory excesses and shortfalls. In addition, inventory management  experts told us that accurate forecasts would make the Federal Reserve  better able to respond to changing trends in coin demand, as discussed  later in this report. Taking additional steps to assess forecast accuracy  could help CPO identify the factors influencing forecast accuracy and  then adjust forecasts to improve accuracy.
Although CPO has multiple systems that provide information from across  the supply chain, we found that it partially follows the practice of system  optimization because this information is not currently used to better  understand some additional aspects of its coin management activities to  optimize the efficiency of the circulating coin inventory. As discussed  earlier, CPO has access to information and resources from across the  circulating coin supply chain. This access includes information on actual  and forecasted coin demand and Reserve Bank coin management costs,  as well as information from stakeholders, such as new coin delivery  information from the U.S. Mint. In addition, the Federal Reserve has taken  some steps to identify areas where they could gain incremental efficiency  improvements such as the centralized management of the coin inventory  and note-processing efficiencies, which we discuss later.
However, CPO could improve its use of information and resources to  identify and implement efficiencies within the supply chain by using the  range of information available to establish and track performance metrics  to measure progress. For example, the U.S. Mint’s monthly production of  new coins could be more efficient with improvements to the accuracy of  initial new coin orders. Currently, the U.S. Mint produces a safety stock, in  part, to ensure it is able to produce enough coins to fulfill CPO’s final,  adjusted order. More accurate monthly forecasts and coin orders could  lessen the need for the U.S. Mint to produce safety stock, and thus help  to optimize the efficiency of the supply chain. In addition, if CPO used its  information on Reserve Bank coin management costs and its knowledge  of coin management operations across the 12 Reserve Banks, it could  help to identify factors that have contributed to varying coin-management  costs at individual Reserve Banks and opportunities for cost savings that  could limit rising costs. Better information related to forecast accuracy and  costs could also aid CPO in using its information and resources to identify  inefficiencies and support system optimization. Further, optimizing U.S.  Mint and individual Reserve Bank operations could potentially contribute  to reducing U.S. Mint or Federal Reserve costs related to circulating  coins, a reduction that could potentially increase the amount of money  returned to the General Fund.
section_title: Demand for Currency Expected to Decline Gradually in the Near Term, but a Variety of Factors Make Predicting Longer- Term Change Difficult
subsections: section_title: Potential Changes in Demand for Currency
paragraphs: To collect data and information on potential changes in the demand for  currency, the Federal Reserve has conducted studies and outreach with  groups such as depository institutions and merchants, and found a  general consensus that the use of currency may decline slightly in the  near term. According to the Federal Reserve, this expectation is due, in  part, to an increase in alternative payment options. Federal Reserve  officials we met with described how interrelated factors make it difficult to  predict long-term (i.e., 5 to 10 years) currency demand. The factors the  Federal Reserve identified as influencing currency demand and the  mechanisms used to supply that demand include the relative costs and  benefits of currency versus other forms of payment, the level of economic  activity and other economic conditions, technological change, and  regulations and policies. Federal Reserve officials explained that how  these factors will play out in the years ahead is unknown, and therefore  the magnitude of the change in demand for currency is uncertain.
According to many agency officials, stakeholders, and foreign  government officials we spoke to, while there may be changes in the use  of various types of payments in the coming years, the effect on currency  demand is likely a gradual decline. Thus far, Federal Reserve officials  noted that their research indicates that the amount of currency in  circulation continues to rise and currency usage is currently steady.  Federal Reserve studies and data also indicate electronic payment  options have increased over time. For example, in a 2010 study, the  Federal Reserve reported that the number of non-currency payments— including credit card and debit card payments, among others—increased  4.6 percent per year from 2006 to 2009. Since 2006, the debit card has  surpassed the check as the most used non-currency payment method,  with the number of debit card transactions increasing 14.8 percent per  year from 2006 to 2009. Over the same period, check volume decreased  7.1 percent per year. Many stakeholders noted that even with changes in  non-currency payments, the effect on currency demand is likely to be  gradual. For example, BEP officials stated that the increasing use of  electronic payments has not had a major impact on demand for currency.  Further, these officials said demand for currency may even increase and  that growing use of electronic and mobile payments will likely affect  checks more than currency. Royal Australian Mint officials also stated that  while the use of electronic payment methods is expected to increase as  new technologies emerge, how fast and when such a change will occur is  unclear.
While data on credit card usage and electronic transactions are available,  the volume of currency transactions is difficult to measure. Specifically,  other data sources cannot be used to determine what portion of the  currency in circulation is being used for transactions—for example, some  currency in circulation are stored, as opposed to being deposited or used  for commerce. As the use of non-currency payment methods has  increased, the quantity of notes in the economy has also grown.  According to Federal Reserve data, the number of transactional notes  (i.e., $1s, $5s, $10s, and $20s) in circulation has increased steadily from  approximately 19.6 billion pieces in 2009 to 21.8 billion pieces in 2012.  During this period, the value of currency in circulation rose approximately  26 percent. (See fig. 7.) Coin terminal operators noted that there will be a  continued need and demand for coins and notes, particularly because  there will always be some portion of the population who will only use  currency, such as individuals without bank accounts, or “the unbanked.”
Federal Reserve officials expect that their current procedures and  approach to managing the coin and note inventory—including their  forecasting and monitoring of the coin inventory targets discussed  previously—will allow the agency to accommodate gradual shifts in  demand. For example, to respond to increasing or decreasing demand for  coins and notes, CPO can decrease or increase coin orders from the U.S.  Mint and the Board can decrease or increase note orders from BEP.
Specifically, in 2012 the Federal Reserve assessed how notes received  from circulation are processed and determined that current operations  can handle a significant change in volume—either an increase or a  decrease—without significant change to the operating model and staffing  levels. Nonetheless, according to the officials, CPO is continually working  to identify ways to streamline its processes to be more flexible and  adaptable to changes. In addition, CPO and the Reserve Banks have  established risk management plans and procedures to address the  effects associated with a short-term, unexpected change in coin and note  demand—such as from a natural disaster.
Other experts and foreign officials agree that well-managed currency  systems are capable of handling major trend-based changes. According  to inventory management experts we consulted, a key to effectively  managing a supply chain is dependable forecasts. Effective forecasts  would take both trends and cyclical demand changes into account.  Therefore, combining forecasts with continual tracking of demand and  inventory levels should allow the Federal Reserve to be able to adapt to  any major trend-based changes in coin and note demand. As discussed  earlier, this makes accurate forecasting by the Federal Reserve even  more important. Royal Australian Mint officials also stated that by  routinely monitoring activities such as coin trades and transfers between  and among institutions, any changes in these or other measures would  give officials insight on specific ways in which demand was changing,  which would ultimately allow for adjustments in the volume of coins being  circulated, responding to public demand.
While Federal Reserve officials we met with indicated their current  processes should enable them to adapt to gradual changes in coin and  note demand, a significant and unexpected change could affect the  management of the coin and note inventories. According to Federal  Reserve officials and some coin terminal operators we met with, the  elimination of the $1 note for the $1 coin would be the type of event that  could significantly affect demand for a specific coin denomination, and it  would have implications for the overall management of both the coin and  note inventory. For example, Federal Reserve officials stated that  replacing the $1 note with the $1 coin would likely require increases in  coin vault space and manpower as well as improvements in coin  authentication technologies. CPO officials also said that if a large decline  in coin usage occurs, they would adapt their management of the inventory  in response. For example, if demand for coins were to decrease  suddenly, leaving too many coins in circulation, the Federal Reserve  would first stop ordering new coins from the U.S. Mint, and would then  focus on storing the excess coin inventory. Coin attrition would reduce  this inventory over time, and CPO officials anticipate that they would have  sufficient storage capacity available to accommodate the excess coins.  CPO officials told us that inventory levels would need to be well in excess  of the existing targets before they would have an effect on storage  capacity and related costs. Further, if public demand for coins decreased  substantially, additional storage could be needed to accommodate and  store the coins returned by depository institutions to the Reserve Banks.  Coin terminal operators also did not expect a decrease in coin demand  significant enough to exceed their storage capacity.
In 2010, CPO began to develop a long-term strategic framework to  consider potential changes to currency demand over the next 5 to 10  years and how this change could affect CPO’s operations. According to  Federal Reserve officials, while the future is inherently uncertain, this  framework is an internally focused effort to help them share information,  refine internal operations, and monitor trends. The Federal Reserve has  not established deadlines for completing this effort, but CPO officials said  they continue to share what they are learning from data and other  research, and they continue to assess current coin distribution and note- processing operations. The following activities are components of these  efforts:
Engaging system stakeholders. As an initial step, CPO officials  interviewed stakeholders such as depository institutions, armored  carriers, equipment vendors, merchants, and alternative payment  providers to collect information and perspectives on potential changes  in currency demand. Groups such as the Customer Advisory Council  and the Cash Advisory Group also continue to serve as a mechanism  for the CPO to coordinate and collect data and information on  currency activity nationwide.
Examining internal operations for coin distribution and note  processing. CPO officials have sought to increase the efficiency of  coin-distribution and note-processing operations to better position the  agency to adapt to future changes in demand. For example, the  Federal Reserve enhanced its note sensor technology in 2010,  improving the efficiency of note processing operations by nearly 10  percent, according to CPO officials. CPO officials told us that they  continue to look for other areas to incrementally improve and add  additional flexibility in their operations. Incremental improvements  such as those related to note processing activities could contribute to  supply-chain system optimization, as discussed earlier.
Conducting research. The Federal Reserve continues to conduct  research and analysis related to Reserve Bank operations. For  example, one Reserve Bank is conducting the most recent in a series  of triennial payment studies, which it expects to complete later this  year, to determine the current volume and composition of electronic  and check payments, reporting trends in these payments since 2009.  As part of a broader effort to look at trends in various payment types,  another Reserve Bank is examining the detailed spending habits of a  selection of consumers, who were asked to document their  transactions and payment decisions over a period of time in a  shopping “diary.” Because, as previously noted, determining how  much of the currency in circulation is being used for transactions is  difficult—this type of study can help officials better understand  currency use in the United States. The diary study is expected to be  completed and published later this year, and CPO officials told us they  plan to assess and incorporate relevant findings into their currency  management operations.
Australian, Austrian, and Canadian officials we interviewed are also  exploring the potential impact of alternative payment technologies and  continue to analyze past trends and to collect new data to inform these  research efforts. For example, Austrian and Canadian officials have also  conducted diary studies to better understand individuals’ use of various  payment options. Collecting detailed consumer payment information  through these types of studies can help officials in these countries better  understand consumers’ payment and currency management habits.
section_title: The Federal Reserve Is Managing the Existing $1 Coin Inventory, Took Steps to Meet Demand for Circulation, and Plans No Future Action
subsections: section_title: Management of the $1 Coin Inventory
paragraphs: The Federal Reserve manages the $1 coin inventory as it does all other  coin denominations, overseeing the distribution of coins produced by the  U.S. Mint and those already in circulation. The Federal Reserve’s goal,  based on its statutory responsibilities, is to ensure that sufficient supplies  of coins are available to meet demand nationwide. According to Federal  Reserve officials, from an operational perspective, the Federal Reserve  fills all orders it receives and treats all denominations of coins and notes  the same.
Reserve Banks held approximately $1.4 billion in $1 coin inventory as of  March 2013. According to the Federal Reserve’s 2013 Annual Report to  Congress, this inventory level is sufficient to meet the demand for $1  coins for more than 40 years assuming a continuation of the current level  of demand. Federal Reserve officials told us the annual net demand for  $1 coins was approximately $51 million per year from 2010 through 2012.  Inventory increased steadily with the issuance of the Presidential Coin  series beginning in 2007, but has leveled off since the 2011 Treasury  decision to cease production of new $1 coins for circulation (see fig. 8).  In addition, $1 coin payments to depository institutions have declined  from $804 million in 2007 to $245 million in 2012, while receipts from  depository institutions generally increased until 2012. In 2012, because  there was less public demand for $1 coins than were in circulation,  Reserve Banks received more $1 coins back than they paid out, as  indicated by net pay in figure 8.
According to Reserve Bank officials, depository institution  representatives, coin terminal operators, and vending machine industry  representatives we met with, $1 coins are readily available to the public  throughout the country. Most of the officials and representatives told us  that they do not have problems obtaining $1 coins or supplying them to  their customers, but emphasized that there is low public demand for these  coins. For example, Reserve Bank officials in the Cash Advisory Group  said that $1 coins are available at their locations nationwide and that they  are able to fill customers’ orders as needed. Depository institution  representatives on the Customer Advisory Council told us their depository  institutions routinely fill $1 coin orders for organizations with standing  orders—such as transit agencies or vending machine companies—but  that requests from the general public are rare. A Federal Reserve coin  terminal we visited also had an inventory of $1 coins, and officials there  told us that while they generally receive $1 coin deposits, withdrawals are  rare. In contrast, representatives from the Dollar Coin Alliance said that  there is limited commercial and public access to the $1 coin and that  some alliance members have had difficulty obtaining the coins from  depository institutions. According to these representatives, the Federal  Reserve’s treatment of $1 coins—in particular, a limited ordering period  for new $1 coins featuring a specific president—has hampered successful  circulation. However, other depository institution and industry  representatives we met with did not identify similar access or availability  issues.
section_title: Federal Reserve Actions to Overcome Barriers to Circulation
paragraphs: Beginning in 2007, in response to a requirement in the Presidential $1  Coin Act of 2005, the Federal Reserve took steps to identify and  overcome barriers to circulation of the $1 coin early in the Presidential $1  Coin program. The Presidential $1 Coin Act requires Treasury and the  Federal Reserve to identify, analyze, and overcome barriers to the “robust  circulation” of $1 coins, including improved methods of distribution and  circulation, and improved public education and awareness campaigns.  Beginning in 2007, the Federal Reserve met regularly with depository  institution representatives to gather feedback about demand for $1 coins  and identify potential barriers to circulation. In its 2007 Annual Report to  Congress on the Presidential $1 Coin Program—a statutorily required  annual report—the Federal Reserve outlined actions it had taken to  eliminate identified barriers, including developing $1 coin distribution  plans, establishing a special ordering period for new coins along with  special packaging and order sizes, and communications with industry and  other federal agencies.conducted national and local outreach with coin user groups to gather  input and help plan for the introduction of the new coins. According to  Federal Reserve officials, most efforts began in 2007 and continued until  the 2011 Treasury decision to cease production of the $1 coin for  circulation.
In addition, the Federal Reserve and U.S. Mint  While the Federal Reserve took steps to overcome barriers to the  circulation of the $1 coin to meet existing demand, according to Federal  Reserve officials, it can do little else given the $1 coin is no longer  produced for circulation and the agency’s statutory responsibilities focus  on ensuring $1 coins are available to meet demand, not on taking steps  to change demand. The Federal Reserve’s 2007 Annual Report to  Congress reported that the U.S. Mint and stakeholder feedback identified  the co-circulation of the $1 coin with the $1 note as the most significant  barrier to improved circulation of the $1 coin. In addition, many depository  institutions, coin terminal operators, experts, and foreign officials we met  with identified the $1 note as a barrier to the increased circulation of the  $1 coin and mentioned that eliminating the $1 note would increase  demand for the $1 coin. However, neither the 2007 Annual Report nor  subsequent annual reports identified the $1 note as a barrier to the $1  coin. According to Federal Reserve Legal Division’s attorneys, they do  not consider the $1 note to be a barrier because they do not view co- circulation as limiting the circulation of the $1 coin. Rather, Federal  Reserve officials noted the $1 note is an alternative to the $1 coin that the  public freely chooses—that is, their view is that the $1 coin is fully  available to the public and its circulation is thus at the level that the public  demands. According to Federal Reserve officials, the Federal Reserve’s  authority does not extend to promotion, and therefore the agency is not  likely to take unilateral action to promote wider circulation of the $1 coin. If  this is the case, congressional actions would likely be the only feasible  action that could replace the $1 note with the $1 coin.
Consistent with the actions of other countries, we have previously  recommended that the Congress replace the $1 note with a $1 coin due  to the financial benefit the government would receive from the  replacement. As we found in our prior work, other countries that have  replaced a low-denomination note with a coin, such as Canada and the  United Kingdom, stopped producing the note. Officials in these  countries noted this step was essential to the success of their transition to  the coin and that, with no alternative to the note, public resistance  dissipated within a few years. Australian and Canadian Mint officials also  explained that they took steps in advance of the issuance of their $1 coins  to facilitate public adoption. For example, Royal Canadian Mint officials  said that public outreach, stakeholder collaboration, and removing the $1  note from circulation were key elements of a successful transition to the  $1 coin in Canada.
In its 2011 Annual Report to Congress, the Federal Reserve stated that  stakeholders and depository institution representatives reported through  their routine meetings that the $1 coins continue to be easy to order and  that its communications about the program have been effective, but that  transactional demand for $1 coins has not increased since the start of the  program and overall demand continues to come primarily from collectors.  Federal Reserve officials told us they continue to discuss the $1 coin as  necessary with groups such as the Customer Advisory Council, but that  they do not intend to take any additional actions. The Board believes the  suspension of the minting of the Presidential $1 coin for circulation makes  the annual report no longer necessary and, in its 2012 Annual Report to  Congress, proposed the elimination of the annual reporting requirement.
section_title: Conclusions
paragraphs: Since 2009, on behalf of the Reserve Banks, the Federal Reserve has  taken steps to standardize its management of the circulating coin  inventory from a national perspective. Generally, these efforts have  contributed to improvements, such as reductions in national coin  inventories and orders, and stakeholder satisfaction with the Federal  Reserve’s new approach. The Federal Reserve’s current strategic plan  calls for the efficient and effective use of financial resources that could  lead to more efficient operations and potentially cost savings. However,  some issues remain.
Reserve Bank coin management costs have risen since 2008 and  CPO has not taken steps to systematically assess factors influencing  direct and support costs related to coin management and assess  whether opportunities exist to isolate elements of their coin inventory  management that could lead to cost savings across the Reserve  Banks.
Interrelated key practices related to the Federal Reserve’s  management of the circulating coin inventory indicate opportunities to  advance the use of performance information to establish and monitor  additional performance goals and metrics and to improve processes  for forecasting demand. For example, establishing goals and metrics  and tracking progress toward those two will allow the Federal Reserve  to better ensure that multiple aspects of its coin management  activities are being monitored and will help agency officials identify  and document other program impacts or to determine where  additional efficiencies could be gained.
Taking steps to assess monthly forecasts to improve accuracy can  also lead to overall improvements in the coin supply chain.  Developing and tracking performance information and assessing  forecasts—key practices used by private and governmental  organizations to effectively manage their inventories—could ultimately  help identify cost savings for Reserve Banks or improve the efficiency  of U.S. Mint coin production, which may in turn result in more money  returned to the General Fund, contributing to U.S. taxpayer savings.
section_title: Recommendations for Executive Action
paragraphs: To ensure efficient management of the circulating coin inventory, we  recommend that the Board of Governors direct CPO to take the following  three actions: develop a process to assess the factors that have influenced  increasing coin operations costs and differences in costs across  Reserve Banks and a process to use this information to identify  practices that could lead to cost-savings; establish, document, and annually report to the Board performance  goals and metrics for managing the circulating coin inventory, (e.g.,  Reserve Bank coin management costs) and measure performance  towards those goals and metrics; and establish and implement a process to assess the accuracy of  forecasts for new coin orders and revise the forecasts as needed.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Chairman of the Board of  Governors of the Federal Reserve System and the Secretary of the  Treasury for review and comment. In written comments, reproduced in  appendix IV, the Federal Reserve generally agreed with the report’s  recommendations.  Treasury had no comments.
We are sending copies of this report to the appropriate congressional  committees and the Federal Reserve, U.S. Mint, and BEP. In addition, the  report is available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or stjamesl@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made major contributions to  this report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report addresses the following questions: (1) How does the Federal  Reserve manage the circulating coin inventory and what are the coin  management costs? (2) To what extent does the Federal Reserve follow  key supply-chain management practices in managing the circulating coin  inventory? (3) What actions has the Federal Reserve taken to respond to  potential changes in demand for coins and notes? (4) What actions has  the Federal Reserve taken with regard to the circulation of the $1 coin,  and what more, if anything, could it do?
To address these questions we met with federal agency officials, foreign  officials, industry and academic experts, and currency industry  representatives. (See table 2.) We selected industry and academic  experts with supply-chain or coin-inventory management expertise. We  selected Australia, Austria, and Canada as countries with experiences  relevant to our review—such as replacing low denomination notes with  coins, or recent implementation of coin-inventory management process  improvements. These countries were selected for illustrative purposes  and are not intended to be used as benchmarks for direct comparisons to  the Federal Reserve’s management of the circulating coin inventory. We  obtained documents from and conducted interviews with Federal Reserve  officials to obtain information about the agency’s processes for managing  the distribution of the circulating coin inventory. We also visited a Federal  Reserve coin terminal in White Marsh, Maryland. In addition, we reviewed  literature and our prior reports related to coin inventory management.
To review the Federal Reserve’s management of the circulating coin  inventory and identify costs associated with managing this inventory, we  interviewed Federal Reserve, United States Mint (U.S. Mint) officials, and  industry representatives—such as National Armored Car Association  members and depository institution representatives on the Cash Product  Office’s (CPO) Customer Advisory Council (a group established to  provide input on coin and note operations). To assess management  operations related to the circulating coin inventory, we used the Federal  Reserve’s Strategic Framework 2012-2015 and the Committee of  Sponsoring Organizations of the Treadway Commission’s (COSO)  Internal Control—Integrated Framework. We also obtained and analyzed  coin inventory and production data for 2004 through 2012 from the  Federal Reserve, U.S. Mint production data from 2010 through March  2013, and Reserve Bank coin and note management cost data from 2008  through 2012. For example, we reviewed Federal Reserve data for  monthly coin forecasts, annual coin inventory levels, analyzed data on  monthly coin orders and shipments for bias, and compared the overall  and individual Reserve Bank costs related to coin and note operations.
To assess the extent to which the Federal Reserve follows key supply- chain and inventory-management practices, we developed and validated  criteria with stakeholder and expert input. To develop and define practices  common to efficient supply chain and inventory management and  applicable to the circulating coin inventory in the United States, we  reviewed supply chain management and operations management  literature on leading practices, our past defense inventory management  and Government Performance and Results Act reports, and academic  literature.supply-chain management practices relevant to coin inventory  management. We identified five key practices: collaboration, risk  management, performance metrics, forecasting demand, and system  optimization. For additional information on these key practices, see  appendix III. The supporting characteristics associated with the key  practices were selected based on knowledge of circulating coin  management. Selected academic and industry experts in operations and  supply chain management and the circulating coin inventory as well as  foreign mint or central bank officials from Australia, Austria, and Canada  validated that the selected key practices, definitions, and supporting  characteristics were relevant to coin inventory management.
We also worked with industry experts to identify a selection of  We compared the Federal Reserve’s inventory management practices to  the five key practices by assessing the extent to which the Federal  Reserve met individual supporting characteristics for each practice. The  individual assessments for the supporting characteristics served as the  basis for the overall assessment for each key practice. Specifically, after  we assessed the selected supporting characteristics, we made an overall  assessment for each of the five practices using the following scale:
Followed or substantially followed—plans, policies, or processes have  been developed and implemented properly for all or nearly all of the  supporting characteristics.
Partially followed—plans, policies, or processes have been developed  and implemented properly for some of the supporting characteristics.
Minimally or not followed—plans, policies, or processes are lacking for  all or nearly all of the supporting characteristics.
To determine the extent to which the Federal Reserve followed these key  practices and supporting characteristics, we reviewed agency documents  and interviewed officials from the Federal Reserve and U.S. Mint. We  also met with industry stakeholders (e.g., depository institution  representatives and coin terminal operators) and academic and industry  experts to discuss their views on the Federal Reserve’s management of  the circulating coin inventory and working relationships with other entities  in the circulating coin supply chain.
To identify actions the Federal Reserve has taken to respond to potential  changes in demand for coins and notes, we interviewed officials from the  Federal Reserve, U.S. Mint, and Bureau of Engraving and Printing (BEP).  We also interviewed depository institution representatives on the  Customer Advisory Council, academic experts and industry  representatives including coin terminal operators and Coinstar. We also  interviewed government officials in Australia, Austria, and Canada to  obtain their perspectives on potential changes in future cash demand. In  addition, we reviewed Federal Reserve research and analysis pertaining  to electronic and other payment methods including reports and  documentation related to the CPO’s long-term strategic framework and  the Retail Payment’s Office triennial payments studies from 2007 and  2010. We also interviewed Federal Reserve officials who have worked on  these studies and obtained information about additional research efforts  underway related to examining and preparing for changes in future  demand for coins, notes, and other payment methods.
To identify actions taken by the Federal Reserve regarding the circulation  of the $1 coin, we obtained perspectives on the availability and use of $1  coins from Federal Reserve and Reserve Bank officials. We also met with  industry stakeholders and coin user groups—including depository  institution representatives, the National Automated Merchandising  Association, the Dollar Coin Alliance, Coinstar, and selected industry  experts. We reviewed Federal Reserve and U.S. Mint responsibilities  related to the circulation of the $1 coin, including those outlined in the  Presidential $1 Coin Act of 2005 and Native American $1 Coin Act. To  identify actions taken to identify, analyze, and overcome barriers to the  circulation of the $1 coin, we reviewed the Federal Reserve’s Annual  Reports to Congress on the Presidential $1 Coin Program for 2007  through 2013 and interviewed Federal Reserve officials. In addition, we  interviewed selected foreign government officials from Australia, Austria,  and Canada to identify examples of actions taken to promote low  denomination coins and to enhance the circulation of these coins in other  countries. We also analyzed Federal Reserve data on $1 coin inventories,  U.S. Mint orders, payments, and receipts from 2007 through 2012.
We assessed the reliability of data used in this report by (1) performing  electronic testing of required data elements, (2) reviewing existing  information about the data and the system that produced them, and (3)  interviewing agency officials knowledgeable about the data. We  determined that the data were sufficiently reliable for the purpose of this  report.
We conducted this performance audit from March 2013 through October  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Data and Figures on Coin and Note Inventory, Orders, and Circulation
subsections: section_title: Reserve Bank Coin Inventory and Inventory Targets
paragraphs: In 2009, the Federal Reserve’s Cash Product Office (CPO) established  national upper and lower inventory targets for pennies, nickels, dimes,  and quarters to track and measure the coin inventory. National upper and  lower inventory targets are reviewed and updated annually. In 2013, the  upper national inventory targets were set based on the average peak  Reserve Bank coin inventory from 2009 to 2012, and the lower national  targets were set based on the 10 consecutive days from 2009 to 2012  with the most coin payments to depository institutions. Figures 9 through  12 present the Reserve Bank inventories of quarters, dimes, nickels and  pennies from 2009 through 2012 and upper and lower national inventory  targets from 2009 through 2013.
Coin receipts from depository institutions and Reserve Bank payments to  depository institutions fluctuate throughout the year—reflecting changes  in the public’s spending patterns. (See fig. 13.) For example, in December  2012, the Federal Reserve paid about $479 million in coins to depository  institutions (payments) and received about $452 million in coins from the  depository institutions (receipts); this difference between payments and  receipts is also referred to as net pay.
Net pay is the difference between coins paid to depository institutions and  coins received from depository institutions over a given period of time.  Net pay greater than zero (positive) indicates that the Federal Reserve  paid more coins to depository institutions than it received from depository  institutions during that period (e.g., month or year). In addition, positive  net pay indicates that additional coins—coins transferred from areas with  negative net pay or new coins—are needed to meet demand. CPO uses  national data on net pay, inventory, and expected changes to demand to  make inventory management decisions such as where to transfer coin  within and between Reserve Bank districts. When coin payments to  depository institutions are greater than coin receipts from depository  institutions, CPO orders new coins or uses circulated inventory to meet  demand. Figures 14 through 17 present annual data for net pay,  inventory, and new coin orders for quarters, dimes, nickels, and pennies  from 2009 through 2012.
To manage the circulating coin inventory, Reserve Banks incur coin  management costs and interbank transfer costs. The Reserve Banks’  coin management costs include direct costs and support costs. (See fig.  18.) Direct costs are generally personnel costs such as salaries and  benefits and support costs include utilities, protection, facilities,  information technology, and other local and national support functions.  From 2009 through 2012, direct costs represented about 30 percent and  support costs represented about 70 percent of total coin management  costs. Interbank transfers are shipments of coins from one Reserve Bank  office region to another to ensure demand is met. (See fig. 19.)
From 2009 through 2012, the value of notes in circulation has increased  by 27 percent from about $888 billion in 2009 to over $1,127 billion in  2012. (See fig. 20.)
section_title: Appendix III: Discussion of Key Practices for Managing the Coin Inventory
paragraphs: To effectively manage their inventory, private and governmental  organizations involved in production and distribution operations use  supply-chain and inventory-management practices. To assess the  Federal Reserve’s management of the circulating coin inventory we  identified five key supply-chain management practices: collaboration, risk  management, performance metrics, forecasting demand, and system  optimization. Establishing, documenting, and following these practices  and their supporting characteristics contributes to a more effective  inventory management system. In addition, these supply-chain  management practices are interrelated—as activities in one area may  have implications in another—and can be used to achieve efficiency  improvements and cost savings. For example, collaborative working  relationships can improve risk management practices because  information related to disruptions and actions to minimize or mitigate  disruptions are more easily shared across the system.
To assess elements of the five key supply-chain management practices,  we selected 14 supporting characteristics based on their relevance to  coin inventory management. Based on our review, we determined  whether the Federal Reserve’s management of the circulating coin  inventory followed or substantially followed, partially followed, or  minimally or not followed each supporting characteristic. Our assessment  of the characteristics served as the basis for our overall assessment as to  whether each key practice was followed or substantially followed, partially  followed, or minimally or not followed. For example, if we found  supporting evidence that two of the three characteristics of a practice  were substantially followed but no evidence to support that the third  characteristic was followed we would determine that the key practice was  partially followed.
section_title: Appendix IV: Comments from the Federal Reserve
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Teresa Spisak, Assistant  Director; Amy Abramowitz; Douglas Anderson; Patrick Dudley; Lawrance  Evans, Jr.; David Hooper; Delwen Jones; Sara Ann Moessbauer; Colleen  Moffatt Kimer; Constance Ify Onyiah; Josh Ormond; Jennifer Schwartz;  and Maria Wallace made key contributions to this report.