[Congressional Record Volume 144, Number 10 (Wednesday, February 11, 1998)]
[House]
[Pages H411-H412]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                THE FEDERAL RESERVE'S PRICING PRACTICES

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentlewoman from New York (Mrs. Maloney) is recognized for 5 minutes.
  Mrs. MALONEY of New York. Mr. Speaker, the events of recent years 
have taught us time and again that we should rely as much as possible 
on the private sector functioning in the competitive marketplace to 
provide commercial-type services, particularly services sold to 
business firms.
  Where there is a Federal agency that provides those types of 
services, we must closely examine its activities to determine if it is 
competing fairly with its private-sector competitors. This becomes more 
important when the agency both competes directly with private-sector 
firms and regulates those competitors.
  Mr. Speaker, the Federal Reserve is using its role as competitor and 
regulator in the check processing system to unfairly undercut the 
private sector. They are using an accounting device called the 
``pension cost credit'' to subsidize the prices they charge banks, 
resulting in an unfair handicap to the private sector.
  When people hear the phrase ``Federal Reserve,'' they think about 
interest rates, inflation, and other aspects of monetary policy. 
However, the Fed is not just about monetary policy and banking 
supervision. Much of what the Fed does simply involves the processing 
of paper checks. The Fed charges its banks a fee for the service it 
provides.
  In 1980, Congress passed the Monetary Control Act so that private 
sector companies could fairly compete with the Federal Reserve in 
providing banks with these and other services. Accordingly, the Fed 
must fully recover the cost of its services, which means it cannot use 
subsidized prices.
  The Act specifically orders the Fed to establish the prices it 
charges based on the costs which it incurs in providing its services 
plus the costs a private company would also have to consider, such as 
the taxes it would have to pay.
  But instead of following the intent of the Monetary Control Act, the 
Federal

[[Page H412]]

Reserve is using the ``pension cost credit'' to lower the prices it 
charges banks for these services. That is, it is effectively using a 
portion of the large surplus in its pension fund to reduce the 
operating costs of its priced service activities, which in turn enables 
it to charge lower prices than it otherwise would.
  Let me explain specifically how it works. At the end of 1996, the 
pension fund for the employees of the Federal Reserve System had excess 
funding of $1.9 billion. This incredible excess, nearly double its 
pension liability, is due primarily to the so-called irrational 
exuberance of the stock market.
  The Fed then uses an accounting device to effectively take a portion 
of this excess funding in the pension fund to create an expense offset. 
This is the pension cost credit.
  Instead of sending the whole of this cost credit back to the 
Treasury, the Fed uses approximately one-third of it to reduce the 
expenses of its priced services. That reduction then allows the Fed to 
charge lower prices than it otherwise would.
  Mr. Speaker, I submit for the Record a letter that Federal Reserve 
Vice-Chairwoman, Alice Rivlin, sent to me.
  The letter referred to is as follows:

                                         Board of Governors of the


                                       Federal Reserve System,

                                  Washington, DC, October 3, 1997.
     Hon. Carolyn B. Maloney,
     House of Representatives
     Washington, DC.
       Dear Carolyn: I am pleased to forward additional materials 
     in response to your letter of September 5 regarding payments 
     system issues. Please let me know if I can be of further 
     assistance.
           Sincerely,
                                                  Alice M. Rivlin,
                                                    Vice Chairman.
       Enclosures.

  Federal Reserve Board Staff's Additional Responses to Congresswoman 
                 Maloney's September 5, 1997, Questions

       1. Please send a monthly record of ITS cost-recovery 
     matching before and after the application of the private 
     sector adjustment factor for the years 1990 to date.
       Internal reports from the Federal Reserve Bank of Boston 
     that showed monthly cost recovery numbers for 1987 through 
     early 1995 were enclosed with Chairman Greenspan's letter of 
     April 28, 1995, to Congressman Gonzalez.
       Attachment 1 shows monthly cost recovery for commercial 
     check portion of the ITS network from 1995 through the first 
     half of 1997. The Federal Reserve does not typically allocate 
     imputed costs and revenues to input components of its 
     services. As requested, the cost recovery data are shown with 
     and without imputed expenses.
       2. Please supply a breakdown of prices services income, by 
     Federal Reserve Bank for 1996. The breakdown should include 
     revenue by specific commercial check product, such as NCS, 
     RCPC, fine sort, consolidated shipments, and direct sends.
       The priced services income for 1996 and the first two 
     quarters of 1997, which you requested in question 5, was 
     provided in Vice Chair Rivlin's letter of September 16, 1997.
       Attachment 2 shows the Reserve Banks' revenues for the 
     Reserve Bank check products you requested. Revenue for 
     consolidated shipments includes only transportation revenues 
     based on ITS surcharges. Consolidated shippers, that is, 
     banks that use ITS to ship checks to a nonlocal Reserve Bank 
     office for processing, use a wide variety of checks products. 
     We do not separately track and identify the products into 
     which these shipments are deposited and, therefore, cannot 
     provide the associated revenue data. Similarly, we do not 
     separately track the check processing revenue associated with 
     ``direct send'' deposits shipped to the Reserve Banks by 
     banks that arrange for their own transportation.
       3. How is the Federal Reserve's pension cost credit 
     ($140.57 million for 1996) reflected in (a) measurement of 
     priced services profitability and (b) in the pricing of 
     specific priced services, such as check processing and 
     transportation? What accounts for the $63 million difference 
     in 1996 between operating expenses for priced services, as 
     reported on page 271 of the 1996 Annual Report of the Board 
     of Governors and the sum of the operating expenses reported 
     in the 1996 PACS Expense report. Please supply financial 
     reports for the Federal Reserve pension plan(s) for 1992 
     through 1996.
       The System endeavors to capture all of its costs applicable 
     to the provision of priced services into its pricing formula 
     and measurements of its profitability through explicit 
     recognition in the Reserve Banks' cost accounting systems or 
     through implicit allocations where appropriate. For 
     transactions relating to the provision of priced services, 
     the Federal Reserve System applies generally accepted 
     accounting practices (GAAP). Prior to changes in GAAP in 1987 
     and 1993 for employers accounting for pensions and retiree 
     medical benefits, respectively, the System accounted for 
     these costs on a cash, or ``pay as you go'' basis. The 
     System, like other services providers, changed accounting 
     practices to conform to GAAP. This change resulted in the 
     recognition of a pension asset that generates net credits and 
     a retiree medical liability that generates net expenses for 
     the System.
       As with any accounting change, the System compared the 
     effect of the GAAP changes with the effect on the largest 
     bank holding companies used in determining the PSAF. We 
     believe that the System's pricing formula properly recognizes 
     the effect of these changes to GAAP. My staff can provide you 
     or your staff with additional detail on the technical issues 
     involved with these GAAP changes at your convenience.
       The table below shows a reconciliation, for 1996, of 
     operating expenses as reported in PACS with the pro forma 
     financial statement in the Federal Reserve's 1996 Annual 
     Report.


              PACS Expense to Pro Forma Expenses for 1996


        PACS operating expenses                              (Millions)
Cash (3020)........................................................$5.1
Funds (3250).......................................................71.6
ACH (3260).........................................................83.9
Check (3360)......................................................551.4
Book-Entry (3520)..................................................43.3
Non-Cash (3810).....................................................4.6
                                                               ________
                                                               
      Total PACS expenses.........................................760.0
Less non-priced costs............................................(51.5)
                                                               ________
                                                               
      Priced PACS costs...........................................708.5
                                                               ========

Pro forma items not in PACS:
    *Proceed pension credit.....................................(45.3)*
    Imputed Board expenses..........................................2.8
                                                               ________
                                                               
      Total items not in PACS....................................(42.5)
                                                               ========

      Pro forma operating expenses................................666.0

  The letter shows that, in 1996, the pension cost credit was $45.3 
million.
  This is $45 million of taxpayer money which the Fed should have 
returned to the Treasury, but instead, it used this sum to artificially 
cut its prices. This is $45 million which, instead of going towards 
deficit reduction, went to help the Fed undercut its private sector 
competitors, many of whom they also regulate.
  Any other agency of the government cannot justify using a pension 
cost credit to subsidize their own prices.
  Mr. Speaker, as the only source of oversight for the Federal Reserve, 
Congress has a duty to police this activity in the Federal Reserve.
  We must recognize that there is inherent conflict with the Fed being 
both the regulator and the largest competitor in check processing. This 
is why we need to pass legislation which clarifies the Fed's role and 
relationship with the private sector, such as my own bipartisan bill, 
H.R. 2119, ``The Efficient Check Clearing Act.''

                              {time}  1930

  The SPEAKER pro tempore (Mr. Ney). Under a previous order of the 
House, the gentleman from Alabama (Mr. Riley) is recognized for 5 
minutes.
  (Mr. RILEY addressed the House. His remarks will appear hereafter in 
the Extensions of Remarks.)

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