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.