Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss the results of our review that you requested on issues related to whether the United States should continue producing the penny. The penny was first authorized by Congress in 1792. The penny’s purchasing power is now about one-ninth of what it originally was. Today, pennies are made of 97.5 percent zinc and 2.5 percent copper. Contractors in Tennessee and Illinois produce copper-coated zinc blanks for the Mint to stamp as pennies. Pennies are then coined by the U.S. Mint, a unit of the Treasury Department, at its Denver and Philadelphia facilities. In 1995, the Mint issued 13.5 billion pennies, which represented 69 percent of all circulating coins produced that year and about 50 pennies per American. Over the past 30 years, the Mint has produced 288 billion pennies. In our 1990 report on the penny, we said that, while some Americans would welcome the elimination of the penny because of its low purchasing power and inconvenience, they seemed to tolerate the coin. We also reported that several other industrialized countries, including France, the Netherlands, Spain, and the United Kingdom, stopped producing their lowest denomination coins during the 1970s and 1980s because they were expensive to produce, did not circulate, and had very little purchasing power. Similarly, Australia, in 1990, and New Zealand, in 1989, stopped producing their 1-and 2-cent coins because their manufacturing cost exceeded their face value and because of their low purchasing power. Mr. Chairman, when you requested this work, you asked us to update our 1990 report. We examined the government’s cost to produce and distribute the penny; the public’s attitude toward the penny; the budgetary and operational impact on the Mint of eliminating the penny; other economic impacts associated with eliminating the penny; the environmental impact of producing and disposing of pennies; and how prices for cash transactions could be rounded. I will summarize the results of our work. A summary of the scope of our work and methodology is contained in appendix I. The government as a whole did not profit from producing and distributing pennies in fiscal year 1994. After considering both the Mint’s profit from producing pennies and the Federal Reserve System’s cost of handling pennies, we estimated that the net cost to the government was $8.5 million to $9.2 million in fiscal year 1994. The Mint reported that its fiscal year 1994 total cost to produce and transport 13.5 billion pennies to the Federal Reserve was $96.9 million, resulting in a unit cost per penny that was less than the face value of the penny—0.7 cents (seven-tenths of a penny). We made adjustments to the Mint’s calculated costs to produce the penny which increased the Mint’s total costs from $96.9 million to $106.6 million and the unit cost from 0.7 cents to 0.8 cents. The rationale for our adjustments of the Mint’s overhead and general and administrative costs are discussed below and shown in table 1. First, we reallocated overhead and general and administrative costs on the basis of the number of coins produced, as opposed to the Mint’s allocation which is based on direct labor hours for all circulating coins. Although the penny represented 70 percent of the total 19.2 billion circulating coins the Mint produced in fiscal year 1994, the Mint’s allocation, which was based on direct labor hours, resulted in charging only about 50 percent of all overhead and general and administrative costs to the penny. The Mint indicated that it uses direct labor hours to allocate overhead because much of the work on the penny is completed by contractors before it reaches the Mint. However, because the work completed on the penny before it reaches the Mint is done under Mint contracts, there are Mint overhead and general and administrative costs associated with contract negotiation and contract monitoring. This adjustment increased the total cost of penny production in fiscal year 1994 by $9.6 million. Second, we added additional costs of retirement for employees under the Civil Service Retirement System (CSRS) that are incurred by the government but not paid for by the Mint. According to actuarial estimates prepared by the Office of Personnel Management (OPM), the annual accruing cost of CSRS is about 25 percent of employees’ salaries. In general, employees contribute 7 percent of their salaries toward system costs, leaving a cost of about 18 percent of salary to be borne by the government. However, employing agencies’ contributions are limited to 7 percent of salary, and much of the remaining government costs (about 11 percent of salary) are covered by other government contributions to the retirement fund. About 49 percent of the Mint’s employees who worked on the penny in fiscal year 1994 were under CSRS. We added 11 percent of labor cost for the time spent by CSRS employees working on the penny in 1994, which amounted to about $100,000. We made no adjustments to the Mint’s costs for metal and fabrication, direct labor, or transportation to Federal Reserve Banks. Multiplying the unit cost of producing a penny in fiscal year 1994—0.7 cents using the Mint’s unit cost, or 0.8 cents using GAO’s calculation of unit costs—by 13.5 billion units, we estimated that the Mint’s profit, or seigniorage, was between $28.0 million and $37.7 million. Seigniorage is defined by the Department of the Treasury as the difference between the face value of a coin and the coin’s cost of production. Seigniorage is treated as a reduction in the amount of money that must be borrowed from the public to finance the deficit. production of 13.5 billion pennies. However, as also shown in table 2, the Federal Reserve System incurred costs in handling the penny, that are not recognized by the Mint. According to the Federal Reserve System, in 1994, it received and distributed about 36 billion new or circulating pennies, at a cost of $11.1 million. Deducting the Federal Reserve System’s costs of handling the penny from the interest avoided by producing the penny in 1994 resulted in a net cost to the government of between $8.5 million and $9.2 million. Four surveys taken from 1990 to 1995 indicated that a majority of the responding public either supported retaining the penny or believed that the penny was useful. Public support for the penny ranged from 62 percent of respondents in 1990 to 76 percent in 1995, while support for eliminating the penny ranged from 18 percent in 1992 to 34 percent in 1993. comparison to the previous surveys, the University of Maryland results showed the lowest level of support for retaining the penny. Specifically, our 1996 University of Maryland survey involved two questions. One was, “Do you think that the penny is a useful coin or should the government do away with it?” The results were that 59 percent of respondents said the penny was useful; 35 percent said the penny should be eliminated; and 5 percent didn’t know. The other question was, “When you buy things using cash, would you prefer that the total purchase price be rounded to the nearest nickel, making the pennies unnecessary?” The results were that 52 percent of respondents preferred that prices be rounded to the nearest 36 percent preferred using pennies; and 12 percent had no preference or didn’t know. Federal Reserve System data showed that the penny does not circulate as much as other coins. For example, as shown in figure 1, in 1991, we calculated that the circulation rate for pennies was 42 percent, whereas the circulation rate for quarters was 93 percent. Our calculations showed that in 1995, the circulation rates were 34 percent for pennies and 88 percent for quarters. These numbers tell us that for almost two-thirds of the billions of pennies produced, the trip from the Mint to the Federal Reserve to the commercial banks and finally to consumers is a “one-way trip”—they are not seen again in circulation. one-time event, but that it occurs periodically and resulted from the penny’s low circulation rate. According to the Mint, an immediate withdrawal of the penny could have a negative impact on the Mint, if the public decided to return billions of pennies. In Australia, for example, 25 percent and 35 percent, respectively, of the 1- and 2-cent coins that had been produced were returned over a 6-year period after they were discontinued. The Mint estimates that at least 132 billion pennies are currently in circulation, but neither Mint nor Federal Reserve officials said they could estimate how many might be returned. Mint officials said that they would incur costs to handle, store, and melt the returned pennies which might exceed their salvage value. Mint officials also said that negative seigniorage could result from the return of pennies if existing money were given to the public in exchange. These costs would be offset to some extent by the Federal Reserve System’s avoidance of the cost to handle pennies and the scrap value of the metal salvaged from returned pennies. Mint officials also said that they did not know how much of the overhead costs now absorbed by the penny would be allocated to other coins. In discussing the budgetary impact of eliminating the penny with Mint officials, they suggested that such an analysis should also include the benefits provided by the reduced government borrowing resulting from the stock of pennies in circulation, which they estimated to be $18 million. We agree the interest avoided from the remaining pennies in circulation if the penny were eliminated should be treated as an offset to the cost of eliminating the penny. Because of the many uncertainties involved, we were not able to quantify the specific budgetary impact of eliminating the penny. According to Mint officials, eliminating the penny would not enable them to close down either the Denver or Philadelphia facilities, which are used to mint other circulating coins, but might allow them to reduce the number of shifts from three to two.