U.S. Currency: Actions Needed to Improve Coin Inventory Management
Published: 2014-06-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
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. This testimony is based on GAO's October 2013 report on the Federal Reserve's management of the circulating-coin inventory. It addresses (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, and (3) actions taken to respond to potential changes in demand for currency (coins and notes).
section_title: What GAO Found
paragraphs: In 2009, the Federal Reserve centralized coin management across the 12 Reserve Banks and established national inventory targets to track and measure the coin inventory. However, based on GAO's analysis of Federal Reserve data, from 2008 to 2012, total annual Reserve Bank coin-management costs increased by 69 percent, and more specifically, costs at individual Reserve Banks increased at rates ranging from 36 percent to 116 percent. GAO found in October 2013 that the Federal Reserve did 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. Furthermore, the agency had not taken steps to systematically assess factors influencing coin management costs and identify practices that could lead to cost savings.
In managing the circulating-coin inventory, the Federal Reserve followed two of five key inventory management practices GAO identified and partially followed three. For example, the agency followed the key practice of collaboration because it has established multiple mechanisms for sharing information related to coin inventory management with partner entities such as depository institutions. The Federal Reserve partially followed the key practice of performance metrics, which involves identifying goals, establishing performance metrics, and measuring progress toward goals. While the Federal Reserve had developed some performance metrics of upper and lower national coin-inventory targets, it had not developed goals or metrics to measure other aspects of its coin supply-chain management, such as costs. 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 data and information on potential changes in the demand for currency (coins and notes), 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. This expectation is due, in part, to an increase in alternative payment options (e.g., additional forms of electronic payments), but interrelated factors—such as technological change and economic conditions—make it difficult to predict long-term currency demand. In 2010, the Federal Reserve 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 operations. This effort includes, among other things, examining internal operations for distributing coins and processing notes as well as conducting research into the use of payment types to understand currency use in the United States to better position the agency to adapt to future changes in demand.
section_title: What GAO Recommends
paragraphs: GAO's October 2013 report included several recommendations to the Federal Reserve to ensure the efficient management of the coin inventory and potentially to reduce costs. These included recommendations (1) to develop a process to assess factors influencing coin operations costs and identify practices that could lead to cost-savings and (2) to establish additional performance goals and metrics relevant to coin inventory management. The Federal Reserve generally agreed with the report's recommendations and, in response, has developed a plan for addressing them.

section_title: Letter
paragraphs: I am pleased to be here today to participate in this hearing that examines  the Federal Reserve System’s management of the circulating coin  inventory. 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. 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 2013, the U.S. Mint produced 10.7 billion coins.  According to the Department of the Treasury (Treasury), coins worth  approximately $42.6 billion were in circulation at the end of fiscal year  2012. The Federal Reserve System is comprised of a Board of Governors  (Board) and the Reserve Banks, which are self-funded entities that  engage in a variety of activities that generate revenue, such as earnings  from lending to financial institutions. The costs of operating the Federal  Reserve System are deducted from these revenues, and the remaining  amount is transferred to the General Fund of the U.S. Treasury (General  Fund). In 2012, the Federal Reserve System transferred $88.4 billion to  the General Fund.
In October 2013, we issued a report on the Federal Reserve’s  management of the circulating coin inventory and made several  recommendations to the Federal Reserve to ensure the efficient  management of the inventory and potentially to reduce costs. My  statement today is based on that report and addresses (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, and (3) actions taken to respond  to potential changes in demand for currency (coins and notes). For the  October 2013 report, we 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.
More detailed information on our objectives, scope, and methodology for  that work can be found in the issued report. We conducted the work on  which this statement is based 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: Inventory Management Has Been Centralized; Rising Costs Have Not Been Analyzed
subsections: section_title: Coin Inventory Management
paragraphs: In 2009, the Federal Reserve centralized coin management across the 12  Reserve Banks and established national inventory targets. 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, the Federal Reserve’s Cash Product Office (CPO)  manages distribution of the coin inventory, orders new coins, and acts on  behalf of the Reserve Banks in working with stakeholders, such as  depository institutions. From 2008 through 2012, the combined inventory  for pennies, nickels, dimes, and quarters decreased 43 percent, due, in  part, to the centralized program. (See fig. 1.) In 2009, CPO also  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. We  analyzed national inventory targets from 2009 to 2012 and found that in  most cases these targets were met.
In managing the coin inventory, CPO determines if coins should be  transferred from an area with more coins than needed to fulfill demand or  if additional coins should be ordered from the U.S. Mint. If there is an  insufficient supply of coins to meet demand and transferring coins from  another location would not be cost-effective, CPO orders new coins from  the U.S. Mint based on its 2-month rolling forecast of expected demand.  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.
section_title: Coin Management Costs
paragraphs: Our analysis found that in 2012, Reserve Bank costs related to coin  management were approximately $62 million. To monitor costs related to  currency management, including coins as well as notes, CPO officials  said they review these costs at the national level because individual  Reserve Banks may vary in their accounting for operational costs related  to coins and notes. In October 2013, we found that from 2008 through  2012 total annual Reserve Bank currency-management costs increased  by 23 percent at the national level.
While cost information for coins and notes is available separately, CPO  does not separately monitor the Reserve Bank’s coin management costs.  Looking specifically at coin management costs, which include direct and  support costs, our analysis found that they increased by 69 percent from  2008 through 2012. More specifically, Reserve Bank direct costs for coin  management increased by 45 percent during this period, about $5 million  across the 28 offices, and support costs increased by 80 percent, about  $19.6 million across these offices. Direct costs include personnel and  equipment. CPO officials attributed the increase in coin management  costs mainly to support costs. Support costs include utilities, facilities, and  information technology as well as other local and national support  services such as CPO’s services.
Although Reserve Bank coin management costs have risen since 2008,  we found in October 2013 that CPO had not taken steps to systematically  assess factors influencing direct and support costs related to coin  management and assess whether opportunities exist to identify elements  of its coin inventory management that could lead to cost savings or  greater efficiencies across the Reserve Banks. We also found that the  rates of increasing coin management costs differ across Reserve Banks.  Specifically, using data provided by CPO on individual Reserve Banks’  costs, from 2008 through 2012, coin management costs increased for all  Reserve Banks, with the increases ranging from a low of 36 percent to a  high of 116 percent. The Federal Reserve’s 2012–2015 strategic plan  includes an objective to use financial resources efficiently and effectively.  In addition, according to a leading professional association that provides  guidance on internal controls, 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. Without taking steps to identify and share cost-effective  coin management practices across Reserve Banks, the Federal Reserve  may be missing opportunities to support more efficient and effective use  of Reserve Bank resources. To address this issue, in our October 2013  report we recommended that the Federal Reserve develop a process to  assess the factors that have influenced increasing coin-operations costs  and the large differences in costs across Reserve Banks and to use this  information to identify practices that could lead to costs savings. We  concluded that taking these actions may help the Federal Reserve  identify ways to improve the cost-effectiveness of its coin management,  potentially increasing the revenues that are available for the Federal  Reserve System to transfer to the General Fund. The Federal Reserve  generally agreed with the recommendations in our report, including the  above recommendation as well as recommendations discussed below,  and has developed a plan for addressing them. In response to the  recommendations, the Federal Reserve also noted that it would define a  new metric that measures the productivity of Reserve Bank coin  operations and that will enable it to monitor coin costs and identify cost  variations across Reserve Banks. We will continue to monitor the Federal  Reserve’s progress in addressing our recommendations.
section_title: The Federal Reserve Follows Some Key Practices in Managing the Circulating-Coin Inventory but Lacks Others
paragraphs: In October 2013, we found that the Federal Reserve, in managing the  circulating-coin inventory, follows two of five key inventory management  practices we identified and partially follows three. Establishing,  documenting, and following these key practices contributes to a more  effective inventory-management system. Specifically, the Federal  Reserve follows key practices for collaboration and risk management and  partially follows key practices for performance metrics, forecasting  demand, and system optimization. For example, it follows the key practice  of collaboration because it has established multiple mechanisms for  sharing information related to coin inventory management with partner  entities such as depository institutions. In addition, the Federal Reserve  follows the risk management key practice because it has identified  sources of potential disruptions, assessed the potential impact of risk, and  developed plans to mitigate risk at multiple levels of its operations.
In the key practice area of performance metrics, we found that the  Federal Reserve has developed some metrics in the form of upper and  lower national coin-inventory targets. However, it has not developed other  goals or metrics to measure other aspects of its coin supply-chain  management—such as costs. Characteristics of this key practice include  agencies’ identifying goals, establishing performance metrics, and  measuring progress toward those goals. We concluded that 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 address this issue, we recommended  that CPO establish, document, and annually report to the Board  performance goals and metrics for managing the circulating coin  inventory and measure performance toward those goals and metrics. In  its response, as noted previously, the Federal Reserve said that it  planned to define a new metric that measures the productivity of the  Reserve Bank’s coin operations and use this metric to monitor coin costs.
In the key practice area of forecasting demand, we found that the Federal  Reserve 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. Our analysis of initial monthly  CPO coin orders and final orders (actual U.S. Mint coin shipments) from  2009 through 2012 indicated that initial orders were consistently less than  the final orders. A leading 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. We concluded that taking additional steps to assess forecast  accuracy could help CPO identify the factors influencing forecast  accuracy and then adjust forecasts to improve accuracy. To address this  issue, we recommended that CPO establish and implement a process to  assess the accuracy of forecasts for new coin orders and revise the  forecasts as needed. In its response, the Federal Reserve reported that in  addition to implementing a more formal program for assessing new coin  order forecasts, CPO has begun working to refine the accuracy of its coin  forecasts.
In the key practice area of system optimization, we found that CPO does  not fully use available information and resources to optimize system  efficiencies within the supply chain. Specifically, it does not use the range  of information available to establish and track performance metrics to  measure progress. Better information related to forecast accuracy and  costs—such as the types of information we recommended that the  Federal Reserve develop—could aid CPO in using its information and  resources to identify inefficiencies and further support the interrelated key  practice of system optimization. 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. In part to improve this linkage, we  concluded that optimizing U.S. Mint’s and individual Reserve Bank’s  operations could potentially contribute to reducing U.S. Mint or Federal  Reserve costs related to circulating coins.
section_title: Demand for Currency Expected to Decline Gradually in the Near Term, but a Variety of Factors Make Predicting Longer- Term Change Difficult
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 (e.g., additional forms  of electronic payments), but interrelated factors—such as technological  change and economic conditions—make it difficult to predict long-term  (i.e., 5 to 10 years) currency demand. 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.
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, CPO can decrease or increase coin orders from the U.S. Mint.  According to the officials we met with, CPO is continually working to  identify ways to streamline its processes to be more flexible and  adaptable to changes, and CPO and the Reserve Banks have established  plans and procedures, such as risk management plans, to address the  effects associated with short-term, unexpected changes in coin and note  demand. Experts we interviewed agree that well-managed currency  systems are capable of handling major trend-based changes. According  to inventory management experts we consulted, dependable forecasts— that take both trends and cyclical demand changes into account—are key  to effectively managing a supply chain. Therefore, we concluded in our  October 2013 report that 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.
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. CPO officials 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. While coin terminal operators did not  expect a decrease in coin demand significant enough to exceed their  storage capacity, additional storage could be needed to accommodate  and store the coins returned by depository institutions to the Reserve  Banks if there is a substantial decrease in public demand for coins.
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, this framework is an internally focused effort to  help share information, refine internal operations, and monitor trends.  One component of this effort includes examining internal operations for  distributing coins and processing notes as well as seeking to increase  efficiency in these areas to better position the agency to adapt to future  changes in demand. Conducting research is another component of this  framework. For example, as part of a broader effort to look at trends in  various payment types, one 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 determining how much of the currency in  circulation is being used for transactions is difficult, this type of study may  help officials better understand currency use in the United States.  Australian, Austrian, and Canadian officials we interviewed for our 2013  report were also exploring the potential impact of alternative payment  technologies and collecting new data to inform 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 may help officials better understand consumers’ payment and  currency management habits.
In conclusion, the Federal Reserve has taken steps to standardize its  management of the circulating-coin inventory from a national perspective,  steps that have led to improvements such as reductions in national coin  inventories. The actions that it has planned to address our  recommendations could potentially contribute to reducing federal costs  related to circulating coins, a reduction that could increase the amount of  money returned to the General Fund. While the Federal Reserve has a  framework that it believes can adapt to expected gradual changes in coin  demand, a significant and unexpected decrease in demand could lead to  increased storage needs.
Chairman Campbell, Ranking Member Clay, and members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to answer any questions at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information on this testimony, please contact Lorelei St.  James, at (202) 512-2834 or stjamesl@gao.gov. In addition, contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this statement. Individuals making key  contributions to the work this testimony is based on include Teresa  Spisak and John Shumann (Assistant Directors); Maria Wallace; Amy  Abramowitz; Lawrance Evans, Jr.; David Hooper; Delwen Jones; Sara  Ann Moessbauer; Colleen Moffatt Kimer; and Josh Ormond.
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