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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.) 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. Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov. 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.

Summary: 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. 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. 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.