One of the functions of the Reserve Banks is to fulfill the coin demand of the nation’s depository institutions—which include commercial banks, savings and loan associations, and credit unions—by distributing coin inventories stored in the Reserve Banks’ vaults and at coin terminals, including circulated coins and new coins ordered from the U.S. Mint. The Reserve Banks have 30 offices that provide coins to depository institutions and are responsible for an area within 1 of the Federal Reserve’s 12 districts. Figure 1 shows a map of the Reserve Bank districts (districts) and the locations of the offices that provide coin services. As figure 2 shows, the Reserve Banks hold and distribute coins from their vaults and contract with armored carrier companies to hold the rest of the Reserve Banks’ inventory. As of December 31, 2007, 179 coin terminals held about 61 percent of the Reserve Banks’ total coin inventory, in terms of volume. According to Reserve Bank officials, the arrangement between the Reserve Banks and the armored carrier companies that operate these coin terminals began because both parties agreed that having more distribution points would be more cost-efficient from a societal perspective. Federal Reserve officials and coin terminal operators said that, historically, this has been a “win- win” arrangement because it has eliminated the need for armored carriers to haul coins to and from the Reserve Banks before distributing them to the depository institutions. The armored carrier companies store Reserve Banks’ coin inventory in their coin terminals at no charge. The agreement between the two entities (1) defines a limit on the value of inventory that a particular coin operator can hold for a Reserve Bank at a particular terminal and (2) requires the coin terminal operator to maintain liability insurance for loss of or damage to the Reserve Bank’s coin inventory. The coin terminal agreements can be canceled with prior notice and without cause at any time by either party. The armored carrier companies also maintain depository institutions’ coin inventories in the coin terminals at no charge; however, the companies earn revenue from the coin processing, wrapping, and transportation services that they provide to the depository institutions. In addition to the coins held in their inventory, the Reserve Banks purchase new coins at face value from the U.S. Mint to fulfill depository institutions’ demand. To develop an annual production schedule and fulfill the Reserve Banks’ coin orders, the U.S. Mint uses national coin demand forecasting models to determine how many new coins to produce. U.S. Mint facilities in Philadelphia and Denver then produce the new coins, and the Mint ships the new coins to the Reserve Bank offices or coin terminals. Appendix II shows trends in the U.S. Mint’s coin production data for fiscal years 2002 through 2007. The U.S. Mint also may transfer circulated coins between Reserve Bank offices. We discuss this matter in more detail later in the report. Depository institutions order coins from the Reserve Banks to meet retailers’ and the public’s demand. These orders include requests for new commemorative circulating coins from congressionally enacted programs, such as the 50 State Quarters and the Presidential $1 Coins Programs, as well as for other coins for day-to-day transactional use. Reserve Bank offices fill these orders with new and circulated coins held in the offices’ vaults and at the coin terminals. Depository institutions contract with armored carriers to process and deliver the coins to them; then depository institutions provide coins to retailers and the general public. Depository institutions also return coins to the Reserve Banks when they have more coins in their inventory than they want to hold to meet demand. For example, when the public’s demand for coins falls after the holiday season and the depository institutions have accumulated more coins than they want to hold for day-to-day transactions, the depository institutions deposit the extra coins with the Reserve Banks. According to two nationwide banking associations, the depository institutions have an incentive to limit the number of coins they hold in inventory because the institutions do not earn interest on coins held in their own vaults. The Reserve Banks’ process for ordering and distributing coins uses orders of new coins from the U.S. Mint, the Reserve Bank offices’ coin inventories, and transfers of circulated coins between Reserve Bank offices to meet estimates of depository institutions’ demand. These estimates are based on coin demand forecasts generated by a forecasting tool. The offices prepare requests for coins on the basis of these estimates and on their own assessments of demand and send the requests to CPO for review. CPO then looks for opportunities to transfer circulated coins between Reserve Bank offices to help fulfill the offices’ requests. CPO reduces the offices’ requests for coins by the amounts of the transfers, consolidates the adjusted requests, and monthly sends a final consolidated order for new coins to the U.S. Mint. According to Federal Reserve officials, forecasting coin demand is not an exact science and requires judgment. Therefore, the Reserve Bank offices use both a data-driven process and professional judgment to develop coin orders. Specifically, the offices use an econometric inventory management and forecasting (IMF) tool that the Federal Reserve developed in consultation with the U.S. Mint to forecast coin demand at the Reserve Bank office level and to recommend coin orders for each office. The IMF tool analyzes historical data on coin payments to and receipts from depository institutions and is maintained by the Economic Research Group at the Federal Reserve Bank of San Francisco. According to documentation for the IMF tool, the tool is able to predict the seasonal fluctuations in coin demand fairly accurately because these fluctuations tend to be fairly regular. For example, the demand for coin rises in November in response to the public’s demand for coins over the holidays and then decreases in January. While the timing of these fluctuations is fairly regular, their magnitude is more difficult to project, according to Federal Reserve officials. In addition, the IMF tool was developed about the same time that the commemorative circulating coin programs were beginning. Therefore, according to Reserve Bank officials, the tool projects coin demand for economic transactions, but the tool does not estimate demand for collecting commemorative circulating coins. Hence, judgment is involved in estimating both the magnitude of seasonal fluctuations in coin demand and the demand for collecting commemorative circulating coins. As shown in figure 3, currently, the 30 Reserve Bank offices receive data from the IMF tool each month as a starting point for preparing their coin orders. Most Reserve Bank officials told us that they start the monthly coin ordering process by examining the orders recommended by the IMF tool or their current inventory levels for each denomination. Reserve Bank officials emphasized that although the IMF tool’s analysis is a helpful starting point for the coin ordering process, assessments of local market factors are important because the tool’s analysis is based on historical payments and receipts data and may not consider unique factors affecting future coin demand. Coin demand is affected by factors specific to particular districts. For example, five districts noted that local casinos were moving to coinless slot machines, which would reduce coin demand in and coin orders for these districts. Conversely, several districts increase their coin orders to account for collectors’ demand when new coins are released for commemorative circulating coin programs, such as the 50 State Quarters Program. Reserve Bank officials noted that changes in the U.S. Postal Service’s and local transit authorities’ use of coins also affect coin demand. For example, in one district, the local transit authority retrofitted its ticket machines to dispense dollar coins, which resulted in greater demand for dollar coins in that district. Most of the districts cited coin recycling companies, such as Coinstar, as a factor affecting the number of coins returned by the depository institutions and the number of new coins to be ordered from the U.S. Mint. Coin recycling machines found in grocery stores, retail stores, and some depository institutions have made it easier now than it was in the past for the public to trade in coins for currency or some form of credit, such as a gift card. In some districts, coin recycling has returned large volumes of coins to circulation and to the Reserve Banks. Reserve Bank officials said that when more coins are returned than are ordered by the depository institutions, they reduce their orders of new coins from the U.S. Mint. According to data from one major coin recycling company, the value of coins returned to circulation through recycling grew from approximately $1 billion in 2000 to $2.6 billion in 2006. To obtain information on local market factors, officials at the Reserve Bank offices talk with coin terminal operators and sometimes with officials at depository institutions in their districts. The coin terminal operators provide the Reserve Bank offices with daily inventory data on the Reserve Bank coins held by the terminals. The coin terminal operators hold inventory for both the depository institutions and the Reserve Banks and may provide the Reserve Banks with insight into changes in the depository institutions’ coin demand. Some Reserve Bank officials also obtain information on coin demand through conversations with depository institution officials, usually in the course of discussing currency issues. During these conversations, the depository institutions can provide advance notice of any circumstances that may change coin demand, such as upcoming festivals or state fairs, which typically would increase their demand for coins. The conversations with coin terminal operators and depository institutions are important because officials at the Reserve Bank offices can obtain information on potential coin requests or deposits back with the Reserve Banks, which could affect the Reserve Banks’ inventory levels or orders for new coins. According to the Reserve Bank officials with whom we spoke, before the offices finalize and send their orders to CPO, they look for opportunities to transfer coins within their district to meet projected demand. For example, one Reserve Bank office may want additional coins, while another office may have more coins than it wants to hold to meet short-term demand. The Reserve Bank office works with the coin terminal operators to move the coins as needed.