[Congressional Record Volume 144, Number 74 (Wednesday, June 10, 1998)]
[Senate]
[Pages S6041-S6042]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. DORGAN (for himself and Mr. Reid):
  S. 2153. A bill to require certain expenditures by the Federal 
Reserve System to be made subject to congressional appropriations, to 
prohibit the maintenance of surplus accounts by Federal reserve banks, 
to provide for annual independent audits of Federal reserve banks, to 
apply Federal procurement regulations to the Federal Reserve System, to 
reform the pricing practices of the Federal Reserve System for services 
provided to the domestic banking system, and for other purposes; to the 
Committee on Banking, Housing, and Urban Affairs.


         THE FEDERAL RESERVE FISCAL ACCOUNTABILITY ACT OF 1998

  Mr. DORGAN. Mr. President, today Senator Reid and I are introducing 
legislation to help address a number of budgetary excesses and 
accountability lapses at the Federal Reserve Board.
  When the General Accounting Office (GAO) released its comprehensive 
and historic report about the management of the Federal Reserve 
system--which took over two years to assemble --we learned about 
disturbing financial practices and management failures within the 
Federal Reserve system. The report is packed with examples of where the 
Fed could substantially trim costs, and it makes specific 
recommendations for changes in Fed operations. Unfortunately, the 
Federal Reserve dismissed most of the GAO's recommendations as 
irrelevant or unnecessary.
  The GAO report shows that during the late 1980s and early 1990s, 
Federal Reserve expenditures jumped by twice the rate of inflation, 
while the rest of the federal government has been downsizing. This 
runaway spending is remarkable given Chairman Greenspan's advice about 
the need for belt-tightening in the rest of government.
  The gold-plated hood ornament of the Federal Reserve System's 
questionable practices is, in my judgment, its huge cash surplus 
account that's funded with billions of dollars in taxpayer money to 
protect against losses, despite the fact that the Fed hasn't suffered a 
loss for more than 80 consecutive years. When the GAO's report was 
released a couple of years ago, the Fed had squirreled away some $3.7 
billion into the surplus account, which was up some 79% from its level 
in the late 1980s. Now the Fed has increased the surplus account by 
another 40% to about $5.2 billion--even though the GAO concluded that 
``it is unlikely that the Federal Reserve will ever incur sufficient 
annual losses such that it would be required to use any funds in the 
surplus account.''
  Our bill, the ``Federal Reserve Fiscal Accountability Act of 1998,'' 
includes many of the changes recommended by the GAO. It would do the 
following:
  First, the Federal Reserve is required to immediately return to the 
general fund of the federal Treasury the $5.2 billion of taxpayer's 
money that has unnecessarily accumulated in the Fed's surplus fund. In 
addition, the bill asks the GAO to determine the extent to which the 
Fed's future net earnings should be transferred to the federal Treasury 
each year.
  Second, the GAO, in consultation with the Federal Reserve, will 
identify and report to Congress a list of the Federal Reserve System 
activities that are not related to the making of monetary policy. After 
the report is completed, all non-monetary policy expenditures, as 
identified by the GAO, would be subject to the congressional 
appropriations process.
  We do not intend to inject politics into monetary policy with this 
provision. However, over 90 percent of the Fed's operations have 
nothing to do with interest rate policy according to the GAO. And there 
is simply no good reason why the Fed's non-monetary expenditures are 
immune from the same kind of oversight and review required of other 
federal agencies.
  Third, the regional Federal Reserve banks and the Board of Governors 
will be subjected to annual independent audits. This provision merely 
codifies what the Federal Reserve has been doing for the most part in 
recent practice. The detection of any possible illegal acts must be 
reported to the Comptroller General.
  Fourth, the Federal Reserve will be required to follow the same 
procurement and contracting rules that apply to other federal agencies. 
These rules should help to prevent the examples of favoritism 
highlighted in the GAO report and increase competition among contract 
bidders with the Fed. This requirement ought to substantially reduce 
procurement costs on a system-wide basis.
  Finally, we've made some changes to require the Fed to compete more 
fairly with the private sector in providing a variety of payment system 
services, such as check clearing and transportation to banks and other 
financial institutions.
  I invite my colleagues to join us as cosponsors of this much-needed 
legislation.
  Mr. REID. Mr. President, I rise today with the Senator from North 
Dakota to introduce legislation which we believe will improve fiscal 
management within the Federal Reserve System and will allow private-
sector competitors to compete fairly in ``priced services.'' We assure 
you that nothing in this bill affects monetary policy of the Federal 
Reserve.
  Back in September 1993, Senator Dorgan and I requested a GAO 
investigation of the operations and management of the Federal Reserve 
System. We were concerned because no close examination of the Fed's 
operations had ever been conducted before. The GAO report that was 
issued in 1996 raised serious questions about management within the Fed 
which this bill will address.
  One of the most astonishing findings in the 1996 report was the Fed 
had squirreled-away $3.7 billion in taxpayer money in a slush fund. As 
of January 1998, this amount has now grown to $5.2 billion. This money 
could be used for deficit reduction. The Fed claims the slush fund is 
needed to cover system losses. Since it was created in 1913, however, 
the Fed has never operated at a loss. This bill prohibits maintenance 
of surplus accounts and the surplus funds must be sent to Treasury.
  The bill requires the Comptroller General of U.S. and the Fed Board 
of Governors to identify the functions and activities of the Board and 
each Fed bank which relate to U.S. monetary policy. After six months 
after enactment, all non-monetary policy expenses of Federal Reserve 
System, will be subject to congressional appropriations. The Fed will 
now have to justify its use of operating expenses.
  Because of the Fed's self-financing nature, its operating costs have 
escaped public investigation. In order to be fiscally responsible, all 
activities regarding government finances need to be scrutinized. 
Surprisingly, the GAO study was the very first look into the internal 
operations of the Fed. We think that oversight is needed on the 
workings of this large and influential public entity. While the rest of 
Federal government has tightened its belt and

[[Page S6042]]

down-sized, the Fed enjoyed enormous growth in its operating costs and 
questionable growth in its staffing.
  Clearly, the Fed could do much more to increase its fiscal 
responsibility, particularly as it urges frugal practices for other 
agencies. The picture the GAO report painted of the internal management 
of the Fed is one of conflicting policies, questionable spending, 
erratic personnel treatment, and favoritism in procurement and 
contracting policies.
  To date, there has never been an annual, independent audit of the 
nation's central banking system. This bill provides for annual 
independent audits of the banks, the Board of Governors and the Federal 
Reserve System. The detection of any possible illegal acts must be 
reported to the Comptroller General. The bill requires an annual audit 
of each Federal reserve bank, the Federal reserve board of governors 
and in turn, an audit of the Federal reserve system. This Auditor must 
be a certified public accountant who is totally independent of the Fed. 
An annual audit is fiscally sound policy which would instill greater 
public confidence in our banking system.
  This bill would also would reform the pricing practices of Federal 
Reserve System so that fair competition with private businesses would 
exist. It will eliminate the possibility of accusations of favoritism 
and conflict of interest in procurement and contracting. This 
examination will ensure that the Federal Reserve is competing fairly 
with its private-sector competitors. This matter of fairness becomes 
very important when the agency both competes with the private sector 
and also regulates their competitors.
  The Federal Reserve operates several lines of business, which compete 
with the private sector. These businesses are referred to as ``priced 
services.'' This legislation will ensure that the Federal Reserve is 
accountable for the manner in which these businesses are run and how 
the prices for these services are calculated. The Federal Reserve is 
required by the Monetary Control Act of 1980 to match its revenues with 
its costs so that the prices for services it sells are not subsidized.
  We want to make sure that no accounting or pricing policy hides any 
subsidy. This legislation will benefit anyone who cashes a check in 
this country because it promotes a fair and competitive market place 
for those who provide the many services necessary to process the 
collection of checks. Costs should be fully recovered in the Federal 
Reserve's pricing. These annual audits will ensure that they are 
recovered and will level the playing field for those who can offer 
competitive services
  We usually think of the Federal Reserve in the terms of monetary 
policy, of setting interest rates. I want to make it very clear, I'm 
not attempting to interfere with, or impugn, the monetary policy of the 
Fed. I am simply seeking greater accountability in the operating 
expenses and internal management of one of our most influential 
institutions. I believe that the Federal Reserve could do more to 
increase its cost consciousness and to operate as efficiently as 
possible. This bill will ensure that this happens and I look forward to 
greater discussion of this issue by Congress. I encourage the committee 
to give favorable consideration to our legislation.
                                 ______