[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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