    U.S. Coins: The Federal Reserve Banks Are Fulfilling Coin Demand,
    but Optimal Inventory Ranges Are Undefined (21-MAR-08,
    GAO-08-401).

    Federal Reserve Banks fulfill the coin demand of the nation's
    depository institutions--which include commercial banks, savings
    and loan associations, and credit unions--by ordering new coins
    from the U.S. Mint and managing coins held in inventory at the
    Reserve Banks and in coin terminals. Reliably estimating the
    demand for coins and efficiently managing the inventory of
    circulated coins is important to ensure that depository
    institutions have enough coins to meet the public's demand and to
    avoid unnecessary coin production costs. Since late 2006, rising
    metal prices have driven the costs of producing pennies and
    nickels above the face values of the coins. This report addresses
    (1) the Reserve Banks' process for ordering and distributing
    coins to the nation's depository institutions and (2) the extent
    to which this process meets depository institutions' demand for
    coins. GAO interviewed officials responsible for coin
    distribution at each of the 12 Reserve Banks and met with
    representatives of 4 large operators of Federal Reserve coin
    terminals, 2 banking associations, the U.S. Mint, and the
    nation's largest coin recycling company. GAO also analyzed
    Reserve Bank data for fiscal years 1993 through 2007. Federal
    Reserve and U.S. Mint officials generally agreed with GAO's
    findings in the report and provided technical comments, which
    were incorporated as appropriate.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-08-401
        ACCNO:   A81366
      TITLE:     U.S. Coins: The Federal Reserve Banks Are Fulfilling Coin
    Demand, but Optimal Inventory Ranges Are Undefined
         DATE:   03/21/2008
      SUBJECT:   Bank reserves
    	     Cost analysis
    	     Credit unions
    	     Currency and coinage
    	     Federal reserve banks
    	     Financial institutions
    	     Insured commercial banks
    	     Inventory control
    	     Inventory control systems
    	     Metals
    	     Monetary policies
    	     Money supply
    	     National banks
    	     Needs assessment
    	     Prices and pricing
    	     Savings and loan associations
    	     Strategic planning
    	     Program goals or objectives
    	     Supply and demand

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    GAO-08-401

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed
    in its entirety without further permission from GAO. Because this work
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    material separately.

    Report to the Subcommittee on Domestic and International Monetary
    Policy, Trade, and Technology, Committee on Financial Services, House
    of Representatives:

    United States Government Accountability Office:
    GAO:

    March 2008:

    U.S. Coins:

    The Federal Reserve Banks Are Fulfilling Coin Demand, but Optimal
    Inventory Ranges Are Undefined:

    GAO-08-401:

    GAO Highlights:

    Highlights of GAO-08-401, a report to the Subcommittee on Domestic and
    International Monetary Policy, Trade, and Technology, Committee on
    Financial Services, House of Representatives.

    Why GAO Did This Study:

    Federal Reserve Banks fulfill the coin demand of the nation�s
    depository institutions�which include commercial banks, savings and
    loan associations, and credit unions�by ordering new coins from the
    U.S. Mint and managing coins held in inventory at the Reserve Banks and
    in coin terminals. Reliably estimating the demand for coins and
    efficiently managing the inventory of circulated coins is important to
    ensure that depository institutions have enough coins to meet the
    public�s demand and to avoid unnecessary coin production costs. Since
    late 2006, rising metal prices have driven the costs of producing
    pennies and nickels above the face values of the coins. This report
    addresses (1) the Reserve Banks� process for ordering and distributing
    coins to the nation�s depository institutions and (2) the extent to
    which this process meets depository institutions� demand for coins.

    GAO interviewed officials responsible for coin distribution at each of
    the 12 Reserve Banks and met with representatives of 4 large operators
    of Federal Reserve coin terminals, 2 banking associations, the U.S.
    Mint, and the nation�s largest coin recycling company. GAO also
    analyzed Reserve Bank data for fiscal years 1993 through 2007.

    Federal Reserve and U.S. Mint officials generally agreed with GAO�s
    findings in the report and provided technical comments, which were
    incorporated as appropriate.

    What GAO Found:

    The Reserve Banks� process for ordering and distributing coins uses new
    coins ordered from the U.S. Mint, circulated coins in inventory, and
    transfers of circulated coins to meet depository institutions� demand
    for coins. New coin orders begin each month with a recommendation
    generated by a forecasting tool. Each Reserve Bank office then refines
    this recommendation in light of its current inventory holdings and its
    knowledge of local factors that may affect demand, such as changes in a
    transit authority�s use of coins. Each office next submits a request
    for coins to the Reserve Banks� national Cash Product Office (CPO). CPO
    seeks to fill the request with transfers of circulated coins from other
    offices before it consolidates the requests and submits a monthly order
    for new coins to the U.S. Mint. In fiscal years 2006 and 2007, CPO used
    transfers to reduce its new coin orders by approximately 10 percent.

    The Reserve Banks� process for ordering and distributing coins has met
    depository institutions� demand since fiscal year 2000, but the process
    does not define optimal coin inventory ranges. Currently, each Reserve
    Bank office sets and manages its own inventory levels, resulting in
    varying levels of inventory held relative to demand. Overall, inventory
    levels for most denominations have generally been decreasing since
    fiscal year 2001, yet inventory levels are more likely to be high than
    low relative to demand, because, for the Reserve Banks, the risk of not
    meeting depository institutions� demand for coins far exceeds the risk
    of holding too many coins in inventory. However, holding coins in
    inventory that could be used to fulfill demand elsewhere can be
    inefficient, resulting in new coin production costs that could have
    been avoided if coins held in inventory had been used instead. To
    increase the efficiency of the Reserve Banks� process, CPO plans this
    year to begin implementing a new approach to inventory management that
    it piloted in 2006 and found effective. Under this approach, CPO will
    determine the number of circulated and new coins each district will
    receive monthly and will be responsible for ensuring that the Reserve
    Bank offices maintain appropriate inventory levels.

    Figure: Coin Supply and Distribution Process:

    [See PDF for image]

    This figure illustrates the coin supply and distribution process, as
    follows:

    New Coin:
    From: U.S. Mint;
    To: Reserve Office Banks and Coin terminals.

    New and circulating coins:
    From: Reserve Office Banks and Coin terminals;
    To: Depository institutions;
    From: Depository institutions;
    To: General public and retailers.

    Circulating coin:
    From: General public and retailers;
    To: Depository institutions;
    From: Depository institutions;
    To: Reserve Office Banks and Coin terminals.

    Source: GAO.

    [End of figure]

    To view the full product, including the scope and methodology, click on
    [hyperlink, http://www.GAO-08-401]. For more information, contact Susan
    Fleming at (202) 512-2834 or flemings@gao.gov.

    [End of section]

    Contents:

    Letter:

    Results in Brief:

    Background:

    The Reserve Banks' Process for Ordering and Distributing Coins Uses New
    Coins, Coin Inventories, and Coin Transfers to Meet Demand:

    The Reserve Banks' Process Fulfills Coin Demand, but Optimal Inventory
    Ranges Are Undefined:

    Agency Comments:

    Appendix I: Objectives, Scope, and Methodology:

    Appendix II: Coin Production Trends, by Denomination:

    Appendix III: National Payments and Receipts Data, by Denomination:

    Appendix IV: Average Days of Payable Coin Inventory, by Reserve Bank
    District and Coin Denomination:

    Appendix V: Number of Coin Transfers and Related Costs, Fiscal Years
    2002-2007:

    Appendix VI: Comments from the Board of Governors of the Federal
    Reserve System:

    Appendix VII: GAO Contact and Staff Acknowledgments:

    Tables:

    Table 1: Average Days of Payable Inventory for the Penny, Nickel, Dime,
    and Quarter for the Reserve Banks, by District, in Fiscal Year 2007:

    Table 2: Range of Average Days of Payable Inventory for Penny, Nickel,
    Dime, and Quarter across Reserve Banks, Fiscal Years 1996-2007:

    Table 3: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Boston, Fiscal Years 2005-2007:

    Table 4: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of New York, Fiscal Years 2005-2007:

    Table 5: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Philadelphia, Fiscal Years 2005-2007:

    Table 6: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Cleveland, Fiscal Years 2005-2007:

    Table 7: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Richmond, Fiscal Years 2005-2007:

    Table 8: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Atlanta, Fiscal Years 2005-2007:

    Table 9: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Chicago, Fiscal Years 2005-2007:

    Table 10: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of St. Louis, Fiscal Years 2005-2007:

    Table 11: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Minneapolis, Fiscal Years 2005-2007:

    Table 12: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Kansas City, Fiscal Years 2005-2007:

    Table 13: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Dallas, Fiscal Years 2005-2007:

    Table 14: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of San Francisco, Fiscal Years 2005-2007:

    Table 15: U.S. Mint Coin Transfers and Cost Information, Fiscal Years
    2002-2007:

    Figures:

    Figure 1: Map of Reserve Bank Districts and Locations of the Offices
    That Provide Coin Services:

    Figure 2: Coin Supply and Distribution Process:

    Figure 3: Reserve Banks' Current Monthly Coin Ordering Process:

    Figure 4: Number of Coins the Reserve Banks Paid to and Received from
    Depository Institutions, Fiscal Years 1993-2007:

    Figure 5: Average Days of Payable Inventory for the Reserve Banks for
    the Penny, Nickel, Dime, and Quarter, Fiscal Years 1996-2007:

    Figure 6: Average Days of Payable Inventory for the Reserve Banks for
    the Half-Dollar and Dollar Coin, Fiscal Years 1996-2007:

    Figure 7: U.S. Mint's Coin Production for Fiscal Years 2002-2007, Total
    Coins (Penny, Nickel, Dime, Quarter, Half-Dollar, and Dollar):

    Figure 8: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Penny:

    Figure 9: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Nickel:

    Figure 10: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Dime:

    Figure 11: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Quarter:

    Figure 12: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Half-Dollar:

    Figure 13: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Dollar Coin:

    Figure 14: Number of Pennies the Reserve Banks Paid to and Received
    from Depository Institutions, Fiscal Years 1993-2007:

    Figure 15: Number of Nickels the Reserve Banks Paid to and Received
    from Depository Institutions, Fiscal Years 1993-2007:

    Figure 16: Number of Dimes the Reserve Banks Paid to and Received from
    Depository Institutions, Fiscal Years 1993-2007:

    Figure 17: Number of Quarters the Reserve Banks Paid to and Received
    from Depository Institutions, Fiscal Years 1993-2007:

    Figure 18: Number of Half-Dollars the Reserve Banks Paid to and
    Received from Depository Institutions, Fiscal Years 1993-2007:

    Figure 19: Number of Dollar Coins the Reserve Banks Paid to and
    Received from Depository Institutions, Fiscal Years 1993-2007:

    [End of section]

    United States Government Accountability Office:
    Washington, DC 20548:

    March 21, 2008:

    The Honorable Luis V. Gutierrez:
    Chairman:
    The Honorable Ron Paul:
    Ranking Member:
    Subcommittee on Domestic and International Monetary Policy, Trade, and
    Technology:
    Committee on Financial Services:
    House of Representatives:

    The Federal Reserve Banks (Reserve Banks) and the U.S. Mint both play a
    role in ensuring that the economy has an adequate supply of coins for
    trade and commerce. The Reserve Banks fulfill the coin demand of the
    nation's depository institutions--which include commercial banks,
    savings and loan associations, and credit unions--by ordering new coins
    from the U.S. Mint and managing an inventory of circulated coins stored
    in Reserve Banks and coin terminals throughout the nation. In 2007, the
    U.S. Mint produced 15.4 billion coins, with a value of about $2
    billion. According to the Department of the Treasury, as of November
    30, 2007, coins worth approximately $37 billion were in circulation
    throughout the country. Reliably estimating the demand for new coins
    and efficiently managing the inventory of circulated coins is
    important--first, to ensure that the depository institutions have
    enough coins to meet the public's demand and, second, to avoid
    unnecessary coin production costs. During the fourth quarter of 2006,
    rising metal prices drove the costs of producing pennies and nickels
    above the face values of these coins.[Footnote 1] According to the U.S.
    Mint's 2007 annual report, the penny costs 1.7 cents to produce and the
    nickel costs 9.5 cents.[Footnote 2]

    The Federal Reserve System is composed of a central, governmental
    agency--the Board of Governors (Board)--and 12 regional Reserve Banks,
    each of which is located in a Federal Reserve district. The Reserve
    Banks are the operating arms of the central banking system. They carry
    out a variety of Federal Reserve System functions, including operating
    a nationwide payment system and distributing the nation's currency and
    coin. The Reserve Banks have 30 offices that, among other
    responsibilities, provide coins to depository institutions. The Reserve
    Banks' national Cash Product Office (CPO), located at the Federal
    Reserve Bank of San Francisco, coordinates coin distribution from a
    national perspective as one of its responsibilities. The Reserve Banks
    store coins on-site and at about 180 coin terminals located throughout
    the country. The coin terminals provide additional storage space for
    coins and help to facilitate their distribution. You asked us to
    examine the processes for ordering and distributing all denominations
    of coins without creating excess inventory. Accordingly, this report
    addresses (1) the Reserve Banks' process for ordering and distributing
    coins and (2) the extent to which this process meets the depository
    institutions' demand for coins[Footnote 3].:

    To determine the Reserve Banks' process for ordering and distributing
    coins, we reviewed relevant reports and research papers on how the
    Reserve Banks and the U.S. Mint determine the number of coins to be
    produced and distributed. We interviewed Federal Reserve economists and
    Board and Reserve Bank officials representing the 30 Reserve Bank
    offices to understand how the Reserve Bank offices develop orders for
    new coins from the U.S. Mint and manage their coin inventory levels. We
    also interviewed key stakeholders--including officials from the U.S.
    Mint, operators of coin terminals with agreements to store Reserve Bank
    coin inventory, and representatives of banking associations--to
    determine how the Reserve Banks work in collaboration with others to
    identify and fulfill the depository institutions' requests for coins.
    We analyzed information on the costs paid by the U.S. Mint to transport
    circulated coins and analyzed the number of transfers between Reserve
    Banks from fiscal years 2002 through 2007.

    To determine the extent to which the Reserve Banks' process meets the
    demand for coins, we obtained data on the Reserve Banks' coin payments
    to depository institutions, receipts for coins deposited by the
    depository institutions, orders for new coins, and inventory levels for
    fiscal years 1993 through 2007 for each coin denomination and Reserve
    Bank.[Footnote 4] We analyzed these data to identify the demand for
    coins, the extent to which the Reserve Banks order new coins to meet
    demand, and the amount of inventory available to meet demand. We
    presented our data on a fiscal year (October through September) basis
    because the U.S. Mint operates on a fiscal year; however, the Reserve
    Banks operate on a calendar year. To assess the reliability of the
    Reserve Banks' coin data, we talked with agency officials about data
    quality control procedures and reviewed relevant documentation. We
    determined that these data were sufficiently reliable for the purposes
    of this report. We interviewed Reserve Bank officials to discuss
    factors affecting trends in the data and the Reserve Banks' approach to
    coin inventory management. We also interviewed two banking associations
    and the four coin terminal operators with the most agreements to store
    Reserve Bank coin inventory to obtain their views on the Reserve Banks'
    process for fulfilling depository institutions' demand for coins. We
    conducted this performance audit from April 2007 through March 2008 in
    accordance with generally accepted government auditing standards. Those
    standards require that we plan and perform the audit to obtain
    sufficient, appropriate evidence to provide a reasonable basis for our
    findings and conclusions based on our audit objectives. We believe that
    the evidence obtained provides a reasonable basis for our findings and
    conclusions based on our audit objectives. More details about our
    objectives, scope, and methodology appear in appendix I.

    Results in Brief:

    The Reserve Banks' process for ordering and distributing coins uses new
    coins ordered from the U.S. Mint, circulated coins held in inventory,
    and transfers of circulated coins between Reserve Bank offices to meet
    the depository institutions' demand. To develop orders for new coins,
    the Reserve Bank offices combine coin demand forecasts, local
    information, and CPO's assessment of opportunities to redistribute
    circulated coins between Reserve Bank offices. Every month, the Reserve
    Bank offices receive recommended coin orders generated by a forecasting
    tool that is maintained by the Economic Research Group at the Federal
    Reserve Bank of San Francisco. Each office then compares its current
    inventory levels with the inventory levels it wants to hold to meet
    demand and considers factors that may affect demand within its
    jurisdiction to refine the recommended coin order. Such factors may
    include coin recycling activity (i.e., the extent to which the public
    uses coin-counting machines, such as Coinstar, to trade in coins for
    currency or some form of credit, such as a gift card); the issuance of
    a commemorative circulating coin; and transit authorities' or casinos'
    use of coins. Once a Reserve Bank office has considered these factors,
    it adjusts the tool's recommended coin order and then sends a request
    for coins to CPO. CPO reviews the offices' requests for coins from a
    national perspective and looks for opportunities to fill those requests
    by transferring circulated coins between Reserve Bank offices, rather
    than ordering new coins. Reserve Bank data show that CPO reduced orders
    for new coins by approximately 10 percent in fiscal years 2006 and 2007
    by fulfilling the Reserve Bank offices' requests with transfers of
    circulated coins from other offices. Once CPO has identified circulated
    coins that can be transferred to fulfill the Reserve Bank offices'
    requests for coins, CPO reduces the offices' orders for new coins,
    consolidates all of the orders, and sends the final order to the U.S.
    Mint.

    The Reserve Banks' process for distributing coins has met depository
    institutions' demand since fiscal year 2000, but the process does not
    define optimal coin inventory ranges for Reserve Bank offices to hold
    to meet demand. Our analysis of the Reserve Banks' coin order,
    inventory, payment, and receipt data showed that the Reserve Banks
    maintained enough inventory to meet demand, even when demand was
    greater than anticipated. In addition, our analysis showed that overall
    inventory levels for most denominations have generally been decreasing
    since fiscal year 2001. However, the Reserve Banks have taken a
    decentralized approach to inventory management that allows the Reserve
    Bank offices to determine what inventory levels they should keep on
    hand to meet future demand and avoid the risk of shortages.
    Specifically, each Reserve Bank office sets and manages its own
    inventory levels, resulting in varying levels of inventory being held
    by the Reserve Banks relative to demand. Reserve Bank officials
    expressed no concern about holding too many coins and told us that
    excess inventory is an issue only when coin inventories approach
    storage capacity limits. However, with rare exceptions, the Reserve
    Banks have more storage capacity than they need to maintain their
    current inventory levels; therefore, storage capacity limits do not
    create an incentive to determine and manage to optimal coin inventory
    ranges. CPO and Reserve Bank officials noted that the risk of not
    meeting depository institutions' demand for coins far exceeds the risk
    of having too many coins in inventory, and that it is easier to deplete
    coin inventories than to build them up. However, holding coins in
    inventory that could be used to fulfill demand elsewhere can be
    inefficient, resulting in new coin production costs that could have
    been avoided if coins held in inventory had been used instead to
    fulfill demand. To increase the efficiency of the Reserve Banks'
    process, CPO received approval from the Reserve Banks in October 2007
    to centralize the development and placement of coin orders. Starting in
    three districts, CPO will determine the final numbers of circulated and
    new coins that will be shipped monthly to the Reserve Bank offices. CPO
    will also be responsible for ensuring that the offices maintain
    appropriate inventory levels. Results of a pilot program suggest that
    these changes could reduce inventories and smooth the U.S. Mint's
    production schedule. Federal Reserve and U.S. Mint officials generally
    agreed with the findings of the report and provided technical comments
    which were incorporated as appropriate.

    Background:

    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.[Footnote 5] Figure 1 shows a
    map of the Reserve Bank districts (districts) and the locations of the
    offices that provide coin services.

    Figure 1: Map of Reserve Bank Districts and Locations of the Offices
    That Provide Coin Services:

    [See PDF for image]

    This figure is a map of the United States illustrating Reserve Bank
    Districts and locations of the offices that provide coin services. The
    following data is depicted:

    District 1: Federal Reserve District of Boston;
    Offices: Boston.

    District 2: Federal Reserve District of New York;
    Offices: East Rutherford.

    District 3: Federal Reserve District of Philadelphia;
    Offices: Philadelphia.

    District 4: Federal Reserve District of Cleveland;
    Offices: Cleveland, Cincinnati.

    District 5: Federal Reserve District of Richmond;
    Offices: Baltimore, Richmond, Charlotte.

    District 6: Federal Reserve District of Atlanta;
    Offices: Nashville, Atlanta, Jacksonville, Miami, New Orleans.

    District 7: Federal Reserve District of Chicago;
    Offices: Chicago, Detroit.

    District 8: Federal Reserve District of St. Louis;
    Offices: St. Louis, Memphis.

    District 9: Federal Reserve District of Minneapolis;
    Offices: Minneapolis, Helena.

    District 10: Federal Reserve District of Kansas City;
    Offices: Kansas City, Denver.

    District 11: Federal Reserve District of Dallas;
    Offices: Dallas, Houston, San Antonio, El Paso.

    District 12: Federal Reserve District of San Francisco;
    Offices: San Francisco, Los Angeles, Phoenix, Salt Lake City, Seattle.

    Sources: Federal Reserve (data) and Map Resources (map).

    Note: The Phoenix and East Rutherford offices are processing centers
    that are responsible for distributing coins. The remaining 28 offices
    are Federal Reserve head offices and branches.

    [End of figure]

    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.

    Figure 2: Coin Supply and Distribution Process:

    [See PDF for image]

    This figure illustrates the coin supply and distribution process, as
    follows:

    New Coin:
    From: U.S. Mint;
    To: Reserve Office Banks and Coin terminals.

    New and circulating coins:
    From: Reserve Office Banks and Coin terminals;
    To: Depository institutions;
    From: Depository institutions;
    To: General public and retailers.

    Circulating coin:
    From: General public and retailers;
    To: Depository institutions;
    From: Depository institutions;
    To: Reserve Office Banks and Coin terminals.

    Source: GAO.

    Notes:

    Some depository institutions choose not to receive coins directly from
    the Reserve Banks. Instead, these banks obtain coins through
    correspondent banks that have an account with a Reserve Bank. The term
    "retailers" encompasses any commercial business that uses coins,
    including retail stores, casinos, restaurants, and vending machine
    operators.

    The new coins produced by the U.S. Mint are a small portion of the
    total number of coins in circulation. As we have previously mentioned,
    the U.S. Mint produced about $2 billion worth of coins in fiscal year
    2007, while the total value of the coins in circulation was about $37
    billion.

    [End of figure]

    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.[Footnote 6] To develop an annual
    production schedule and fulfill the Reserve Banks' coin orders, the
    U.S. Mint uses national coin demand forecasting models[Footnote 7] 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.[Footnote 8] 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 New
    Coins, Coin Inventories, and Coin Transfers to Meet Demand:

    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.

    Coin Demand Forecasts, Inventory Holdings, and Assessments of Local
    Market Demand Drive Reserve Bank Offices' Requests for New Coins:

    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.

    Figure 3: Reserve Banks' Current Monthly Coin Ordering Process:

    [See PDF for image]

    This figure is an illustration of the Reserve Banks' current monthly
    coin ordering process, as follows:

    * Reserve Bank offices review IMF tool�s recommended coin orders and
    their current inventory levels.

    * Reserve Bank offices assess local factors and may adjust the IMF
    tool�s recommended coin orders. The orders are then submitted to CPO.

    * CPO identifies opportunities to reduce new coin orders through
    transfers of existing coins. Identified coins are then transferred
    between Reserve Bank offices.

    * CPO submits a consolidated coin order to the U.S. Mint.

    Source: GAO.

    [End of figure]

    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. According to Reserve Bank and
    coin terminal officials, as part of their normal business, the coin
    terminal operators transport coins to and from the Reserve Banks and
    are able to absorb the costs of the transfers by combining them with
    previously scheduled pickups and deliveries for their depository
    institution customers.

    CPO Coordinates the Reserve Banks' Coin Order and Identifies
    Opportunities for Reducing the Order through Transfers:

    In 2001, CPO began coordinating coin distribution from a national
    perspective on behalf of the Reserve Banks to enhance coordination with
    the U.S. Mint and look for opportunities to redistribute coin
    inventories. Historically, the Reserve Banks individually developed and
    submitted their own coin orders to the U.S. Mint without any insight
    into coin inventories in other districts or consideration of whether
    coins could be transferred from other districts to meet demand, rather
    than ordering new coins.[Footnote 9] In 1999, shortages of pennies
    occurred in some regions of the country because some depository
    institutions were hoarding pennies and the U.S. Mint could not fulfill
    the Reserve Banks' increased orders for pennies. During this time, the
    Reserve Banks moved coins from one district to another to satisfy
    demand but did not have a centralized coordination process in place to
    facilitate these transfers, according to Federal Reserve officials.
    Following this experience, the Reserve Bank of San Francisco assumed
    responsibility for coordinating coin operations at Reserve Banks
    through its CPO. CPO is now the Reserve Banks' primary liaison with the
    U.S. Mint and is responsible for finalizing and submitting a monthly
    consolidated coin order for the Reserve Banks. According to Federal
    Reserve officials, CPO has focused on achieving system efficiencies by
    implementing more centralized coin management strategies, including
    enhancing coordination with the U.S. Mint; improving distribution
    channels by increasing the number of Reserve Bank coin terminals; and
    redistributing national inventories of coins, as appropriate, to meet
    demand, thereby reducing the need for new coins from the Mint.

    With the exception of new releases of commemorative circulating coins,
    CPO determines whether the Reserve Banks' requests for coins can be
    filled with circulated coins in Reserve Banks' inventories or whether
    new coins need to be ordered from the U.S. Mint. CPO compares the
    Reserve Bank offices' requests for coins with the IMF tool's
    recommended orders and the offices' current inventory levels. According
    to CPO officials, if an office's request differs significantly from the
    order recommended by the IMF tool, CPO contacts the Reserve Bank office
    to discuss the reasons for the difference. CPO also compares current
    inventory levels with historic inventory data to determine whether the
    Reserve Banks have enough coins to meet seasonal changes in demand.
    While the Reserve Bank offices make the final decision on how many
    coins they request, a recent agreement will allow CPO, with input from
    the Reserve Bank offices, to make the final decision. We discuss this
    agreement in more detail later in the report.

    CPO looks for opportunities to reduce the new coin order to the U.S.
    Mint by transferring coins from one district to another. CPO officials
    noted that using circulated inventory rather than purchasing new coins
    reduces the number of new coins that the U.S. Mint produces and the
    Mint's costs of production. Yet according to a U.S. Mint official,
    continuing demand for new coins means that using circulating inventory
    does not avoid the production of coins, but merely delays it. To
    determine whether coins can be transferred, CPO considers such things
    as constraints on storage space, the distance between the office or
    terminal that requests additional coins and the one that has available
    inventory, and insurance limits at the coin terminals. CPO then works
    with the U.S. Mint to transfer circulated coins between Federal Reserve
    offices that are more than 100 miles apart.[Footnote 10] The U.S. Mint
    paid about $1.3 million for 638 coin transfers in fiscal year 2006 and
    about $915,000 for 404 coin transfers in fiscal year 2007.[Footnote 11]
    According to U.S. Mint officials, the Mint contracts and pays for these
    coin transfers because balancing inventories among the Reserve Banks
    helps to lower the volatility of production for the Mint and the Mint
    has ongoing contracts for shipping large quantities of coins. However,
    according to a U.S. Mint official, the U.S. Mint is looking to phase
    out the practice of paying for transfers. The official recognizes that
    coin inventories may occasionally expand in some areas or regions, but
    believes that such conditions are temporary. Therefore, transferring
    coins from existing inventories may only temporarily delay the
    production of additional coins to meet the demands of
    commerce.[Footnote 12] See appendix V for data on the number of
    transfers and the corresponding budget for fiscal years 2002 through
    2007. Our analysis of Reserve Banks' order data shows that CPO reduced
    orders by about 10 percent in fiscal years 2006 and 2007 by fulfilling
    Reserve Bank offices' coin requests with circulated inventory.
    Specifically, the Reserve Banks submitted requests to CPO for
    approximately 18 billion coins in fiscal year 2006 and for
    approximately 16 billion coins in fiscal year 2007, and CPO was able to
    reduce these requests through transfers by over 2.2 billion coins in
    fiscal year 2006 and by over 1.5 billion coins in fiscal year 2007.

    Once CPO makes adjustments and consolidates the Reserve Bank offices'
    orders, CPO submits a final new coin order to the U.S. Mint 1 month
    before the coins are scheduled to be delivered. The order includes a
    shipping schedule outlining when and where the coins should be shipped
    as well as a 5-month coin order forecast. Upon receiving the order from
    CPO, the U.S. Mint ensures that it will have the coins to fulfill the
    order and then distributes coins to the Reserve Banks and coin
    terminals from its production facilities in Philadelphia and Denver.
    Both U.S. Mint and Federal Reserve officials said that they continually
    communicate throughout the month on the coin order, and that the
    Reserve Banks have the flexibility to adjust the coin order and
    delivery destination.

    CPO has several working groups of coin stakeholders, including
    depository institutions, vending machine operators, and armored
    carriers, to help address any potential or current coin distribution
    issues. For example, CPO interacts with depository institutions through
    its Customer Advisory Council, which currently consists of the 16
    largest depository institutions in the country in terms of cash volume.
    Coins are typically not the primary focus of the council's meetings,
    but the meetings give the depository institutions an opportunity to
    discuss any concerns about coins, such as the distribution of newly
    released commemorative circulating coins. As mandated by law, the
    Secretary of the Treasury and the Federal Reserve's Board of Governors
    are taking steps to ensure that an adequate supply of dollar coins is
    available for commerce and collectors.[Footnote 13] The U.S. Mint and
    the Federal Reserve are consulting with coin users and holding forums
    to identify stakeholders' ideas for the efficient distribution and
    circulation of dollar coins as well as other circulating coins.

    The Reserve Banks' Process Fulfills Coin Demand, but Optimal Inventory
    Ranges Are Undefined:

    The Reserve Banks' process for ordering and distributing coins has
    fulfilled depository institutions' demand for the coins, but does not
    define optimal ranges for the Reserve Banks to hold in inventory to
    meet demand. Our analysis of Reserve Bank data showed that the Reserve
    Banks maintained enough inventory to meet demand, even when demand was
    greater than anticipated. Coin stakeholders confirmed that the Reserve
    Banks' process has fulfilled depository institutions' demand for coins
    in recent years. However, the Reserve Banks have taken a decentralized
    approach to inventory management that allows the Reserve Bank offices
    to use their own judgment to set inventory levels that they think are
    appropriate to meet future demand and avoid the risk of shortages.
    Reserve Bank officials expressed no concern about holding too many
    coins and told us that excess inventory is an issue only when coin
    inventories approach storage capacity limits. However, with rare
    exceptions, the Reserve Banks have more storage capacity than they need
    to maintain their current inventories, and, therefore, storage capacity
    does not serve as an incentive for the banks to evaluate and manage to
    optimal coin inventory ranges. To increase the efficiency of the
    distribution process, CPO has received approval from the Reserve Banks
    to centralize the development and placement of coin orders, and CPO
    will be responsible for ensuring that the offices maintain appropriate
    inventory levels.

    The Reserve Banks' Ordering and Distribution Process Has Met Demand for
    Coins:

    The Reserve Banks' process has ensured that enough coins are available
    through orders of new coins and the Reserve Banks' inventories of
    circulated coins to meet the depository institutions' demand for coins.
    In each year since 1993, the number of coins demanded by the depository
    institutions has generally exceeded the number of coins deposited back
    to the Reserve Banks for all denominations, except the half-dollar. For
    example, as figure 4 shows, in fiscal year 2007, the Reserve Banks paid
    out 76 billion coins to the depository institutions (payments) and
    received 62 billion coins back from the depository institutions
    (receipts). This difference between payments and receipts is called
    "net pay." For example, net pay for fiscal year 2007 was about 14
    billion coins. See appendix III for payments and receipts data, by
    denomination, for fiscal years 1993 through 2007.

    Figure 7: Number of Coins the Reserve Banks Paid to and Received from
    Depository Institutions, Fiscal Years 1993-2007:

    [See PDF for image]

    This figure is a multiple line graph, depicting the following data
    (number of coins in billions):

    Fiscal year: 1993;
    Total number of coins paid to depository institutions: 41.5518;
    Total number of coins received from depository institutions: 26.2784.

    Fiscal year: 1994;
    Total number of coins paid to depository institutions: 43.2769;
    Total number of coins received from depository institutions: 26.6383.

    Fiscal year: 1995;
    Total number of coins paid to depository institutions: 43.1163;
    Total number of coins received from depository institutions: 26.4033.

    Fiscal year: 1996;
    Total number of coins paid to depository institutions: 43.5408;
    Total number of coins received from depository institutions: 28.4874.

    Fiscal year: 1997;
    Total number of coins paid to depository institutions: 44.6107;
    Total number of coins received from depository institutions: 31.4133.

    Fiscal year: 1998;
    Total number of coins paid to depository institutions: 51.3258;
    Total number of coins received from depository institutions: 35.478.

    Fiscal year: 1999;
    Total number of coins paid to depository institutions: 55.0282;
    Total number of coins received from depository institutions: 35.099.

    Fiscal year: 2000;
    Total number of coins paid to depository institutions: 55.5726;
    Total number of coins received from depository institutions: 32.5114.

    Fiscal year: 2001;
    Total number of coins paid to depository institutions: 55.3016;
    Total number of coins received from depository institutions: 38.2255.

    Fiscal year: 2002;
    Total number of coins paid to depository institutions: 57.7594;
    Total number of coins received from depository institutions: 42.6519.

    Fiscal year: 2003;
    Total number of coins paid to depository institutions: 59.805;
    Total number of coins received from depository institutions: 46.5953.

    Fiscal year: 2004;
    Total number of coins paid to depository institutions: 66.5196;
    Total number of coins received from depository institutions: 54.047.

    Fiscal year: 2005;
    Total number of coins paid to depository institutions: 70.8327;
    Total number of coins received from depository institutions: 56.1314.

    Fiscal year: 2006;
    Total number of coins paid to depository institutions: 73.178;
    Total number of coins received from depository institutions: 58.9393.

    Fiscal year: 2007;
    Total number of coins paid to depository institutions: 76.4597;
    Total number of coins received from depository institutions: 62.4397.

    Difference between coin payments and coin receipts = net pay.

    Source: Federal Reserve.

    [End of figure]

    Since the number of coins received by the Reserve Banks is less than
    the number of coins sent to the depository institutions to meet their
    demand, the Reserve Banks have to order new coins or use circulated
    inventory to meet demand. When depository institutions demand more
    coins than they return over a month or a year, net pay is positive for
    that period and additional coins have to be ordered or coin inventory
    has to be used to meet the demand. When depository institutions return
    more coins to the Reserve Banks than they order over a month or a year,
    net pay is negative for that period and the Reserve Banks' inventory of
    coins can grow. Net pay fluctuates throughout the year, depending on
    the public's spending patterns. Specifically, Reserve Bank data show
    that net pay was generally positive for all denominations, except the
    half-dollar, throughout the year, except in January when the demand for
    coins declines. Net pay for the half-dollar has been negative since
    fiscal year 2004 because the Reserve Banks received more half-dollars
    back than they paid out. Understanding and predicting net pay is
    critical to the Reserve Banks' ability to meet coin demand. According
    to Federal Reserve officials, net pay is positive for many reasons. For
    example, the public stores coins that it receives in jars and dresser
    drawers and sometimes discards coins. Collectors' demand for coins can
    also increase the Reserve Banks' payments for commemorative circulating
    coins, while limiting the Reserve Banks' receipts because the coins are
    kept out of circulation. When coins leave "active" circulation--that
    is, the coins are stored and not deposited or used for commerce--they
    are not available to meet depository institutions' demand.

    During fiscal years 1993 through 2007, the Reserve Banks' aggregate
    orders for new coins tracked together with net pay fairly closely. For
    example, in fiscal year 2002, total orders for new coins--14.72 billion
    coins--were a little lower than the total net pay for all coins--15.11
    billion coins--and resulted in a decrease in inventory for some
    denominations. In fiscal year 2007, total orders for new coins--14.63
    billion coins--were a little higher than the total net pay for all
    coins--14.02 billion coins, suggesting the Reserve Banks ordered enough
    coins to fulfill net pay for the year and increased total inventory.
    Federal Reserve officials suggest that this aggregate annual increase
    of nearly 600 million coins can, in part, be explained by the
    introduction of the Presidential $1 Coin Program. After the first year
    of the program, the Reserve Banks report inventories of at least 300
    million Presidential dollar coins. Orders for the penny constituted
    over half of the total orders for new coins. In fiscal year 2007,
    orders for the penny were 7.76 billion coins, while net pay was 7.79
    billion coins. According to Reserve Bank officials, the difference
    between orders for new pennies and net pay resulted in an aggregate
    decline of about 30 million pennies in Reserve Banks' inventories.

    The Reserve Banks strive to maintain sufficient inventories of coins to
    fulfill demand, despite seasonal and unanticipated changes and
    potential interruptions in the supply of new coins. First, inventory is
    important in handling the seasonal fluctuations in demand for coins.
    According to documentation on the IMF tool and Reserve Bank officials,
    this fluctuating demand can be met by either (1) adjusting the number
    of coins ordered to keep pace with known seasonal changes in demand or
    (2) keeping orders constant and allowing inventory to fluctuate in
    response to these changes in demand. The Reserve Banks place orders to
    keep the U.S. Mint's production schedule fairly consistent and allow
    inventories to fluctuate with the seasonality of coin demand. For
    example, Reserve Bank officials said they ensure that they have enough
    coins on hand to meet the high coin demand leading into the summer and
    holiday months. According to Federal Reserve officials, a Reserve Bank
    office may not transfer coins out of its area if the office knows that
    those coins will be needed in the next week or month. Federal Reserve
    officials also noted that although the Reserve Banks can predict the
    timing of seasonal changes in demand for coins, it is more difficult
    for them to predict the magnitude of the changes from one year to the
    next. Predicting demand is important because the U.S. Mint may not be
    able to produce enough coins within a short time frame to keep up with
    heavy demand.[Footnote 14] Second, since there is some uncertainty in
    the actual demand for coins in any given month, the Reserve Banks' coin
    inventory provides a buffer against any changes in demand that may
    occur between the times the coins are ordered and received. Third, the
    Reserve Banks want to hold enough inventory to handle disruptions in
    supply from the U.S. Mint. For example, when the U.S. Mint's production
    facilities in Philadelphia shut down, starting in March 2002, for 7
    weeks to correct safety concerns, the Mint worked with the Reserve
    Banks to ensure that coins were available to fulfill demand.

    Figure 5 shows that when compared with expected demand, expressed as
    days of payable inventory, the Reserve Banks' overall inventory for the
    penny, nickel, dime, and quarter has generally decreased since fiscal
    year 2001.[Footnote 15] For example, the penny inventory declined from
    an average of 32 days of payable inventory, or 3.0 billion coins, in
    fiscal year 2001 to an average of 16 days of payable inventory, or 2.2
    billion coins, in fiscal year 2007. The nickel inventory declined from
    37 days of payable inventory in fiscal year 2001 to 25 days of payable
    inventory in fiscal year 2007. Inventory levels throughout the year
    vary around these averages because of fluctuations in the public's
    spending patterns.

    Figure 5: Average Days of Payable Inventory for the Reserve Banks for
    the Penny, Nickel, Dime, and Quarter, Fiscal Years 1996-2007:

    [See PDF for image]

    This figure is a multiple line graph, depicting the following data:

    Fiscal year: 1996;
    Average days of payable inventory, Penny: 26;
    Average days of payable inventory, Nickel: 34;
    Average days of payable inventory, Dime: 30;
    Average days of payable inventory, Quarter: 23.

    Fiscal year: 1997;
    Average days of payable inventory, Penny: 32;
    Average days of payable inventory, Nickel: 36;
    Average days of payable inventory, Dime: 40;
    Average days of payable inventory, Quarter: 25.

    Fiscal year: 1998;
    Average days of payable inventory, Penny: 20;
    Average days of payable inventory, Nickel: 26;
    Average days of payable inventory, Dime: 31;
    Average days of payable inventory, Quarter: 20.

    Fiscal year: 1999;
    Average days of payable inventory, Penny: 15;
    Average days of payable inventory, Nickel: 20;
    Average days of payable inventory, Dime: 25;
    Average days of payable inventory, Quarter: 15.

    Fiscal year: 2000;
    Average days of payable inventory, Penny: 14;
    Average days of payable inventory, Nickel: 23;
    Average days of payable inventory, Dime: 25;
    Average days of payable inventory, Quarter: 12.

    Fiscal year: 2001;
    Average days of payable inventory, Penny: 32;
    Average days of payable inventory, Nickel: 37;
    Average days of payable inventory, Dime: 38;
    Average days of payable inventory, Quarter: 31.

    Fiscal year: 2002;
    Average days of payable inventory, Penny: 32;
    Average days of payable inventory, Nickel: 34;
    Average days of payable inventory, Dime: 33;
    Average days of payable inventory, Quarter: 37.

    Fiscal year: 2003;
    Average days of payable inventory, Penny: 25;
    Average days of payable inventory, Nickel: 37;
    Average days of payable inventory, Dime: 34;
    Average days of payable inventory, Quarter: 39.

    Fiscal year: 2004;
    Average days of payable inventory, Penny: 22;
    Average days of payable inventory, Nickel: 34;
    Average days of payable inventory, Dime: 29;
    Average days of payable inventory, Quarter: 30.

    Fiscal year: 2005;
    Average days of payable inventory, Penny: 19;
    Average days of payable inventory, Nickel: 34;
    Average days of payable inventory, Dime: 28;
    Average days of payable inventory, Quarter: 25.

    Fiscal year: 2006;
    Average days of payable inventory, Penny: 18;
    Average days of payable inventory, Nickel: 28;
    Average days of payable inventory, Dime: 31;
    Average days of payable inventory, Quarter: 24.

    Fiscal year: 2007;
    Average days of payable inventory, Penny: 16;
    Average days of payable inventory, Nickel: 25;
    Average days of payable inventory, Dime: 32;
    Average days of payable inventory, Quarter: 27.

    Source: Federal Reserve.

    Note: The inventory data are represented in terms of average days of
    payable inventory. A day of payable inventory is the level of inventory
    needed by the Reserve Banks to meet 1 day's expected payments to
    depository institutions.

    [End of figure]

    Figure 6 shows that the days of payable inventory for the half-dollar
    and dollar coins greatly exceed the levels for the other denominations
    and have generally increased in recent years. According to Federal
    Reserve officials, there is little demand for these denominations.
    Federal Reserve officials said that dollar coin inventories have also
    grown as a result of the Presidential $1 Coin Program, which requires
    the Federal Reserve to ensure that, during an introductory period, an
    adequate supply of each newly minted design (there are four new coins
    each year) is made available for commerce and collectors.

    Figure 6: Average Days of Payable Inventory for the Reserve Banks for
    the Half-Dollar and Dollar Coin, Fiscal Years 1996-2007:

    [See PDF for image]

    This figure is a multiple line graph, depicting the following data:

    Fiscal year: 1996;
    Average days of payable inventory, Half-dollar: 183;
    Average days of payable inventory, Dollar coin: 269;

    Fiscal year: 1997;
    Average days of payable inventory, Half-dollar: 234;
    Average days of payable inventory, Dollar coin: 212;

    Fiscal year: 1998;
    Average days of payable inventory, Half-dollar: 284;
    Average days of payable inventory, Dollar coin: 158;

    Fiscal year: 1999;
    Average days of payable inventory, Half-dollar: 286;
    Average days of payable inventory, Dollar coin: 102;

    Fiscal year: 2000;
    Average days of payable inventory, Half-dollar: 256;
    Average days of payable inventory, Dollar coin: 516;

    Fiscal year: 2001;
    Average days of payable inventory, Half-dollar: 270;
    Average days of payable inventory, Dollar coin: 361;

    Fiscal year: 2002;
    Average days of payable inventory, Half-dollar: 302;
    Average days of payable inventory, Dollar coin: 176;

    Fiscal year: 2003;
    Average days of payable inventory, Half-dollar: 317;
    Average days of payable inventory, Dollar coin: 91;

    Fiscal year: 2004;
    Average days of payable inventory, Half-dollar: 377;
    Average days of payable inventory, Dollar coin: 90;

    Fiscal year: 2005;
    Average days of payable inventory, Half-dollar: 442;
    Average days of payable inventory, Dollar coin: 107;

    Fiscal year: 2006;
    Average days of payable inventory, Half-dollar: 497;
    Average days of payable inventory, Dollar coin: 123;

    Fiscal year: 2007;
    Average days of payable inventory, Half-dollar: 490;
    Average days of payable inventory, Dollar coin: 272;

    Source: Federal Reserve.

    [End of figure]

    Several factors affected trends in the Reserve Banks' inventory levels
    during fiscal years 1993 through 2007. For example, inventory levels
    for all denominations dropped from fiscal years 1997 to 1999. Reserve
    Bank officials said that the demand for all coin denominations grew in
    1999 in anticipation of the new millennium (Y2K). In fiscal year 2001,
    inventory levels for all denominations increased. According to the U.S.
    Mint's 2001 annual report, the economy, which is directly related to
    the demand for coins, took a downturn in the middle of fiscal year
    2000, resulting in a decrease in coin demand and a buildup of coin
    inventories. According to Reserve Bank officials, the inventory trends
    for the quarter and dollar coin reflect the challenges posed by the
    commemorative circulating programs associated with these coins. The
    officials noted that commemorative circulating coin programs, such as
    the Presidential $1 Coin Program, create uncertainty about the demand
    for those denominations. These programs involve the distribution of
    multiple coin designs and require the Reserve Banks to order enough
    commemorative circulating coins to meet the normal demand for coins for
    commercial transactions as well as the potential demand from collectors
    when the coins are first introduced. According to Reserve Bank
    officials, the Reserve Banks did not initially have experience in
    working with commemorative circulating coins and placed large orders
    for state quarters to ensure that they would have enough on hand to
    meet both normal transactional demand and potential collector demand.
    As a result, more quarters flowed back to the Reserve Banks than
    Reserve Bank officials expected for the first several releases. Reserve
    Bank officials noted that their forecasts of demand for state quarters
    have improved, and that their inventory of quarters has declined. The
    officials also noted that even with more experience, however, programs,
    such as the Presidential $1 Coin Program, require the Reserve Banks to
    order more coins than they would otherwise use for transactional
    purposes, thereby increasing Reserve Banks' coin inventory levels
    beyond the levels they would ordinarily hold.

    The coin terminal operators, banking associations, and Reserve Bank
    officials with whom we spoke confirmed that the Reserve Banks' process
    has fulfilled the depository institutions' demand for coins in recent
    years. Reserve Bank and CPO officials told us that they have been able
    to fill all depository institutions' requests for coin. The four coin
    terminal operators that we spoke with also noted that the Reserve Banks
    have been able to meet the demand of the depository institutions in
    their terminals. Finally, representatives from two banking associations
    said that constituent banks across the country have voiced no concern
    about the Reserve Banks' ability to distribute coins to the depository
    institutions.

    Optimal Inventory Ranges Are Undefined, but the Reserve Banks Are
    Taking Steps to Manage Coin Inventory More Efficiently:

    The Reserve Banks have taken a decentralized approach to managing coin
    inventory, under which the Reserve Bank offices have decided what
    inventory levels are appropriate to keep on hand to meet forecasted
    demand and avoid the risk of coin shortages. Each Reserve Bank office
    has defined its own inventory levels on the basis of professional
    judgment and historical data, to meet demand and avoid running out of
    coins, and has used the capacity of its storage facilities as the key
    determinant of its maximum inventory levels. According to Reserve Bank
    officials, insurance limits at the coin terminals also help to define
    maximum inventory levels, but they can be adjusted, if necessary.
    Reserve Banks we spoke with had no specific levels for maximum
    inventory other than storage capacity and coin terminal insurance
    limits.

    Because each Reserve Bank sets its own inventory levels, the districts
    manage to different inventory levels and hold varying levels of
    inventory relative to demand. For example, according to Reserve Bank
    officials, 3 of the 12 Reserve Banks generally try to hold at least 10
    days of payable inventory for all denominations, while 6 of the 12
    districts generally try to hold at least 20 or more days of payable
    inventory. Table 1 shows that for fiscal year 2007, the districts held
    varying levels of inventory relative to demand for the different
    denominations. For example, the penny inventories ranged from an
    average of 8 days in the Boston district to 26 days in the San
    Francisco district, while the quarter inventories ranged from 17 days
    in the St. Louis district to 40 days in the Philadelphia district.

    Table 1: Average Days of Payable Inventory for the Penny, Nickel, Dime,
    and Quarter for the Reserve Banks, by District, in Fiscal Year 2007:

    District: Boston;
    Average days of payable inventory, fiscal year 2007: Penny: 8;
    Average days of payable inventory, fiscal year 2007: Nickel: 16;
    Average days of payable inventory, fiscal year 2007: Dime: 20;
    Average days of payable inventory, fiscal year 2007: Quarter: 19.

    District: New York;
    Average days of payable inventory, fiscal year 2007: Penny: 10;
    Average days of payable inventory, fiscal year 2007: Nickel: 17;
    Average days of payable inventory, fiscal year 2007: Dime: 19;
    Average days of payable inventory, fiscal year 2007: Quarter: 21.

    District: Chicago;
    Average days of payable inventory, fiscal year 2007: Penny: 13;
    Average days of payable inventory, fiscal year 2007: Nickel: 19;
    Average days of payable inventory, fiscal year 2007: Dime: 27;
    Average days of payable inventory, fiscal year 2007: Quarter: 29.

    District: Dallas;
    Average days of payable inventory, fiscal year 2007: Penny: 13;
    Average days of payable inventory, fiscal year 2007: Nickel: 24;
    Average days of payable inventory, fiscal year 2007: Dime: 30;
    Average days of payable inventory, fiscal year 2007: Quarter: 28.

    District: Cleveland;
    Average days of payable inventory, fiscal year 2007: Penny: 14;
    Average days of payable inventory, fiscal year 2007: Nickel: 25;
    Average days of payable inventory, fiscal year 2007: Dime: 36;
    Average days of payable inventory, fiscal year 2007: Quarter: 38.

    District: Kansas City;
    Average days of payable inventory, fiscal year 2007: Penny: 14;
    Average days of payable inventory, fiscal year 2007: Nickel: 28;
    Average days of payable inventory, fiscal year 2007: Dime: 30;
    Average days of payable inventory, fiscal year 2007: Quarter: 32.

    District: St. Louis;
    Average days of payable inventory, fiscal year 2007: Penny: 16;
    Average days of payable inventory, fiscal year 2007: Nickel: 21;
    Average days of payable inventory, fiscal year 2007: Dime: 32;
    Average days of payable inventory, fiscal year 2007: Quarter: 17.

    District: Philadelphia;
    Average days of payable inventory, fiscal year 2007: Penny: 17;
    Average days of payable inventory, fiscal year 2007: Nickel: 23;
    Average days of payable inventory, fiscal year 2007: Dime: 25;
    Average days of payable inventory, fiscal year 2007: Quarter: 40.

    District: Richmond;
    Average days of payable inventory, fiscal year 2007: Penny: 17;
    Average days of payable inventory, fiscal year 2007: Nickel: 22;
    Average days of payable inventory, fiscal year 2007: Dime: 27;
    Average days of payable inventory, fiscal year 2007: Quarter: 21.

    District: Atlanta;
    Average days of payable inventory, fiscal year 2007: Penny: 19;
    Average days of payable inventory, fiscal year 2007: Nickel: 30;
    Average days of payable inventory, fiscal year 2007: Dime: 40;
    Average days of payable inventory, fiscal year 2007: Quarter: 20.

    District: Minneapolis;
    Average days of payable inventory, fiscal year 2007: Penny: 23;
    Average days of payable inventory, fiscal year 2007: Nickel: 41;
    Average days of payable inventory, fiscal year 2007: Dime: 42;
    Average days of payable inventory, fiscal year 2007: Quarter: 33.

    District: San Francisco;
    Average days of payable inventory, fiscal year 2007: Penny: 26;
    Average days of payable inventory, fiscal year 2007: Nickel: 35;
    Average days of payable inventory, fiscal year 2007: Dime: 44;
    Average days of payable inventory, fiscal year 2007: Quarter: 31.

    District: Range across the Reserve Banks;
    Average days of payable inventory, fiscal year 2007: Penny: 8 - 26;
    Average days of payable inventory, fiscal year 2007: Nickel: 16 - 41;
    Average days of payable inventory, fiscal year 2007: Dime: 19 - 44;
    Average days of payable inventory, fiscal year 2007: Quarter: 17 - 40.

    Source: GAO analysis of Reserve Bank data.

    Note: The inventory data are represented in terms of average days of
    payable inventory. A day of payable inventory is the level of inventory
    needed by the Reserve Banks to meet 1 day's expected payments to
    depository institutions.

    [End of table]

    Table 2 shows how the inventories for the penny, nickel, dime, and
    quarter have varied across Reserve Banks from fiscal years 1996 through
    2007.[Footnote 16]

    Table 2: Range of Average Days of Payable Inventory for Penny, Nickel,
    Dime, and Quarter across Reserve Banks, Fiscal Years 1996-2007:

    Fiscal year: 1996;
    Range of average days of payable inventory: Penny: 16 - 33;
    Range of average days of payable inventory: Nickel: 18 - 49;
    Range of average days of payable inventory: Dime: 19 - 66;
    Range of average days of payable inventory: Quarter: 14 - 68.

    Fiscal year: 1997;
    Range of average days of payable inventory: Penny: 21 - 52;
    Range of average days of payable inventory: Nickel: 22 - 50;
    Range of average days of payable inventory: Dime: 17 - 101;
    Range of average days of payable inventory: Quarter: 10 - 137.

    Fiscal year: 1998;
    Range of average days of payable inventory: Penny: 12 - 34;
    Range of average days of payable inventory: Nickel: 20 - 34;
    Range of average days of payable inventory: Dime: 22 - 45;
    Range of average days of payable inventory: Quarter: 9 - 132.

    Fiscal year: 1999;
    Range of average days of payable inventory: Penny: 8 - 24;
    Range of average days of payable inventory: Nickel: 13 - 31;
    Range of average days of payable inventory: Dime: 16 - 42;
    Range of average days of payable inventory: Quarter: 9 - 55.

    Fiscal year: 2000;
    Range of average days of payable inventory: Penny: 7 - 22;
    Range of average days of payable inventory: Nickel: 9 - 43;
    Range of average days of payable inventory: Dime: 8 - 39;
    Range of average days of payable inventory: Quarter: 5 - 17.

    Fiscal year: 2001;
    Range of average days of payable inventory: Penny: 20 - 49;
    Range of average days of payable inventory: Nickel: 26 - 64;
    Range of average days of payable inventory: Dime: 26 - 60;
    Range of average days of payable inventory: Quarter: 23 - 51.

    Fiscal year: 2002;
    Range of average days of payable inventory: Penny: 20 - 46;
    Range of average days of payable inventory: Nickel: 22 - 54;
    Range of average days of payable inventory: Dime: 20 - 51;
    Range of average days of payable inventory: Quarter: 27 - 57.

    Fiscal year: 2003;
    Range of average days of payable inventory: Penny: 16 - 40;
    Range of average days of payable inventory: Nickel: 25 - 61;
    Range of average days of payable inventory: Dime: 24 - 63;
    Range of average days of payable inventory: Quarter: 16 - 78.

    Fiscal year: 2004;
    Range of average days of payable inventory: Penny: 17 - 37;
    Range of average days of payable inventory: Nickel: 26 - 51;
    Range of average days of payable inventory: Dime: 21 - 51;
    Range of average days of payable inventory: Quarter: 14 - 68.

    Fiscal year: 2005;
    Range of average days of payable inventory: Penny: 13 - 32;
    Range of average days of payable inventory: Nickel: 25 - 50;
    Range of average days of payable inventory: Dime: 18 - 42;
    Range of average days of payable inventory: Quarter: 11 - 55.

    Fiscal year: 2006;
    Range of average days of payable inventory: Penny: 11 - 28;
    Range of average days of payable inventory: Nickel: 22 - 40;
    Range of average days of payable inventory: Dime: 22 - 43;
    Range of average days of payable inventory: Quarter: 18 - 33.

    Fiscal year: 2007;
    Range of average days of payable inventory: Penny: 8 - 26;
    Range of average days of payable inventory: Nickel: 16 - 41;
    Range of average days of payable inventory: Dime: 19 - 44;
    Range of average days of payable inventory: Quarter: 17 - 40.

    Source: GAO analysis of Reserve Bank data.

    Note: The inventory data are represented in terms of average days of
    payable inventory. A day of payable inventory is the level of inventory
    needed by the Reserve Banks to meet 1 day's expected payments to
    depository institutions.

    [End of table]

    According to Federal Reserve officials and documentation of the Reserve
    Banks' IMF tool, the districts hold varying levels of inventory
    relative to demand because of the differences in the variability in
    coin demand and because some offices have more storage capacity. To be
    able to respond to the variability in demand, some Reserve Bank offices
    need to hold more coins than other offices relative to demand to ensure
    that they have enough coins to meet demand at all times. See appendix
    IV for the inventory levels relative to demand, by district and
    denomination, for fiscal years 2005 through 2007.

    Most Reserve Bank officials said that they were generally comfortable
    with their current inventory levels and expressed no concerns about
    having too many coins. Several Reserve Bank officials told us that they
    ordered conservatively--that is, they erred, if at all, on the side of
    ordering too many coins--because they were more concerned about not
    having enough coins to meet depository institutions' demand during high
    demand periods than about having too many coins at other times. CPO
    officials said it would be easier to deplete coin inventories than to
    build them up. Furthermore, most Reserve Bank officials were not
    concerned about having too many coins because they said they have ample
    on-site and off-site storage capacity and insurance levels at the coin
    terminals to store their coin inventory. For example, two districts
    have new, on-site coin vaults that were built within the last 10 years
    and were designed to accommodate the entire coin inventory for the
    district, even without coin terminals. Reserve Bank officials said that
    if the coin inventory level at a particular location approaches the
    storage limits, they work to move coins to another Reserve Bank or
    terminal.

    CPO and Reserve Bank officials noted that the risk of not meeting
    depository institutions' demand for coins far exceeds the risk of
    having too many coins in inventory, as long as storage capacity exists.
    For example, Federal Reserve officials told us that in 1999, they had
    problems fulfilling the depository institutions' demand for pennies.
    During this time, the U.S. Mint could not produce enough pennies to
    fill Reserve Banks' orders. In addition, the Reserve Banks were not yet
    coordinating coin distribution nationally and, therefore, could not
    easily identify sources of inventory available for redistribution.
    According to Federal Reserve officials and coin terminal operators,
    some depository institutions became concerned that coins would not be
    available to meet their demand and began hoarding coins, which further
    exacerbated the problem. Federal Reserve officials noted that since
    2001, CPO has coordinated Reserve Bank coin distribution from a
    national perspective to help ensure confidence in the availability of
    coins, and, since that time, the Reserve Banks have experienced no
    shortages.

    Although we only heard about storage capacity concerns from Reserve
    Bank officials in one district, some coin terminal operators expressed
    concerns about coin inventory levels in their terminals. Officials from
    one Reserve Bank told us that, on rare occasions, they have had to
    negotiate with depository institutions on when the Reserve Bank could
    accept coin deposits because storage space was not immediately
    available. Reserve Bank officials also said that every effort is made
    to redistribute coins before insurance levels are reached at the coin
    terminals, and that the Reserve Bank offices work with the coin
    terminal operators to stay under the insurance limits. However, two of
    the four coin terminal operators with whom we spoke said that the
    Reserve Banks maintain higher inventory levels than the operators
    consider sufficient to respond to changes in demand. CPO and Reserve
    Bank officials said that they were sensitive to the numbers of coins
    being held at the coin terminals, but the officials noted that the
    Reserve Banks work to stay within the limits established in their
    agreements with the operators. One coin terminal operator noted that it
    did not have concerns about the Reserve Banks' coin inventory levels or
    the distribution process. However, this operator noted that high
    volumes of coin recycling activity posed a challenge in some of its
    terminals. This operator also said that CPO was helping to move some of
    the coins out of the terminals, but that the high volumes would
    continue to be a problem until coin stakeholders--coin terminal
    operators, depository institutions, and CPO--find a solution to
    equitably redistribute the recycled coins.

    Although we recognize the importance of minimizing the risk of not
    having sufficient coins to meet demand at all times, the Reserve Banks'
    current approach to inventory management does not define an optimal
    range of inventory for the offices to meet demand. Inventory levels
    that greatly exceed likely future demand could result in the
    overproduction of new coins and in potential storage concerns for the
    coin terminal operators. Data show that the Reserve Banks' overall
    inventory levels relative to demand for all denominations, except the
    half-dollar and the dollar coins, have generally decreased since 2001.
    However, the Reserve Banks and coin terminals have sufficient capacity
    for the Reserve Banks to hold higher levels of inventory for some
    denominations than are likely to be used to meet demand. Moreover, the
    storage capacity at the coin terminals is provided to the Reserve Banks
    at no charge. As a result, the Reserve Banks lack an incentive to
    evaluate and manage to optimal coin inventory ranges. In addition, the
    current approach to inventory management could lead to the
    overproduction of new coins in the short term or to the retention in
    some districts of coin inventory that could be redistributed to meet
    demand in another district. Thus, a Reserve Bank may incur few or no
    charges for storing high inventory levels, but the U.S. Mint may incur
    costs for producing new coins when circulated coins may be available to
    fulfill demand.[Footnote 17] Producing new pennies and nickels when
    circulated coins could be used instead is particularly inefficient,
    since these denominations cost more to produce than they are worth.
    According to Federal Reserve officials, to mitigate this risk, CPO has
    been working with the Reserve Banks to manage inventories from a
    national perspective by transferring, where appropriate, inventories
    from one Reserve Bank to another one. According to a U.S. Mint
    official, a continuing demand for new coins means that producing coins
    when there is production capacity is not a concern because these coins
    will eventually be needed. In fact, he indicated that delaying
    production when there is production capacity may actually increase
    costs in the long run because production costs, like other costs, tend
    to increase over time.

    CPO has recognized the importance of further centralizing and
    increasing the efficiency of the Reserve Banks' approach to coin
    inventory management and has identified opportunities for doing so. In
    2006, the Reserve Banks and the U.S. Mint co-chartered a 6-month pilot
    of a new inventory management approach in one district. During the
    pilot, CPO (1) managed the inventory using vendor software that
    forecasts coin demand at the Reserve Bank office or terminal
    level[Footnote 18] to provide consistent upper and lower bounds for
    inventory levels at each terminal site in the district and (2) used
    this information to maintain inventory levels to meet demand in the
    district. The Reserve Bank office was then responsible for moving coins
    among the coin terminals to meet demand. The Reserve Banks and the U.S.
    Mint assessed the results of the pilot and found that the new approach
    reduced the risk of shortages, transportation expenses, and
    inefficiencies associated with the U.S. Mint' s production volatility
    as well as increased stakeholders' confidence in the coin distribution
    system. According to CPO officials, the pilot also demonstrated that
    the district's inventory levels could be reduced. As a result of the
    pilot, CPO received approval from the Reserve Banks in October 2007 to
    implement a more centralized approach to managing coin orders and
    inventories.[Footnote 19] According to CPO officials, they are
    expecting to phase in this new approach, beginning with three districts
    in the second quarter of 2008.

    When the new approach is implemented, CPO will have the final authority
    to determine orders on behalf of the Reserve Bank offices and will be
    responsible for managing inventory levels that are maintained at the
    office level. According to CPO officials, CPO will continue to provide
    the Reserve Bank offices with a recommended monthly order. The Reserve
    Bank offices will be able to review this order and suggest revisions,
    but ultimately CPO will decide on the final order for each office.
    Although Reserve Bank officials told us that under the current
    approach, their adjustments to the IMF tool's recommended coin orders
    were minimal, over the past 3 years the combined impact of these
    adjustments was sometimes substantial. For example, the IMF tool
    recommended a total order of $52 million in pennies for all of the
    Reserve Bank offices in fiscal year 2007. Following the offices'
    assessment of local market factors and the availability of transfers of
    circulated coins to fulfill the offices' requests, CPO submitted a
    total order of $77.6 million for new pennies to the U.S. Mint. CPO's
    ability to now decide on the number of coins each district will receive
    monthly could potentially result in decreased orders for new coins from
    the U.S. Mint. CPO is considering establishing inventory ranges for the
    Reserve Bank offices on the basis of factors such as historical trends
    in coin payments and receipts, the amount of time taken to transport
    coins to a Reserve Bank office, and storage capacity limits to better
    define the level of inventory to be held to meet demand. We believe
    that the establishment of inventory ranges could help CPO and the
    Reserve Banks evaluate and report on the effectiveness of CPO's
    inventory management approach. CPO officials believe that these changes
    will improve the Reserve Banks' inventory management because CPO can
    provide a national perspective on where inventory can be used to meet
    demand, including where coins can be moved when necessary to meet
    demand in one district, while freeing space for coin deposits in
    storage facilities that are approaching capacity in another district.
    U.S. Mint officials said that the new approach could allow the U.S.
    Mint to further smooth its production schedule, thereby lowering costs
    associated with unpredictable changes in production.

    Agency Comments:

    We provided a draft of this report to the Board of Governors of the
    Federal Reserve System and to the Department of the Treasury for their
    review and comment. The Director of the Division of Reserve Bank
    Operations and Payment Systems provided written comments, which are
    reproduced in appendix VI. Overall, the Federal Reserve agrees with the
    findings in our report and believes that the data in the report reflect
    the Reserve Banks' efficient and effective management of coin
    inventories. The Federal Reserve also provided technical comments,
    which we have addressed in this report as appropriate. The Acting
    Deputy Director of the U.S. Mint provided oral comments stating that
    the agency agrees with the information in this report as it pertains to
    the U.S. Mint and provided technical comments, which we have also
    incorporated as appropriate.

    We are sending copies of this report to interested congressional
    committees, the Chairman of the Board of Governors of the Federal
    Reserve System, the Secretary of the Treasury, and the Director of the
    U.S. Mint. We will also make copies available to others upon request.
    In addition, the report will be available at no charge on the GAO Web
    site at [hyperlink, http://www.gao.gov].

    If you have any questions about this report, please contact me at (202)
    512-2834 or flemings@gao.gov. Contact points for our Offices of
    Congressional Relations and Public Affairs may be found on the last
    page of this report. Key contributors to this report are listed in
    appendix VII.

    Signed by:

    Susan A. Fleming:
    Director, Physical Infrastructure Issues:

    [End of section]

    Appendix I: Objectives, Scope, and Methodology:

    The objectives of this report were to examine (1) the Reserve Banks'
    process for ordering and distributing coins and (2) the extent to which
    this process meets the depository institutions' demand for coins.

    To describe the Reserve Banks' process for supplying coins throughout
    the country, we obtained and reviewed relevant articles, reports,
    economic studies, and technical documentation on how the Reserve Banks
    and the U.S. Mint determine the number of coins to be produced and
    distributed. We also interviewed Federal Reserve and U.S. Mint
    economists who were involved in the development of economic models used
    to predict coin demand. During these interviews, we reviewed how the
    national coin forecast models are used by both the Reserve Banks and
    the U.S. Mint and discussed the accuracy of these models in predicting
    net pay at the national level. We interviewed officials from the
    Federal Reserve's Board of Governors (Board), each of the 12 Reserve
    Bank districts, and the national Cash Product Office (CPO) to determine
    how coin orders are developed and submitted to the U.S. Mint. In
    addition, we reviewed statutes related to the Federal Reserve and U.S.
    Mint.

    We also interviewed key stakeholders, including officials from the U.S.
    Mint, operators of coin terminals with agreements to store Reserve Bank
    coin inventory, and representatives of banking associations, to
    determine how the Reserve Banks work in collaboration with others to
    identify and fulfill the depository institutions' requests for coins.
    We obtained and analyzed information on the costs paid by the U.S. Mint
    to transport existing coins and analyzed the number of transfers
    between Reserve Bank districts since fiscal year 2002. To determine how
    CPO was able to reduce orders for new coins through transfers of
    existing coin inventory, we reviewed Reserve Bank data documenting
    actual coin demand and compared these data with the Reserve Banks'
    actual order to the U.S. Mint for new coins and the number of
    circulated coin transfers processed by CPO.

    To determine the extent to which the Reserve Banks' coin distribution
    process meets the depository institutions' demand for coins throughout
    the country, we obtained data on the Reserve Banks coin payments to
    depository institutions, receipts for coins deposited by the depository
    institutions, orders for new coins, and inventory levels for fiscal
    years 1993 through 2007 for each coin denomination and for each Reserve
    Bank. We analyzed these data using Excel and SAS statistical analysis
    software. To calculate Reserve Banks' number of coins paid to the
    depository institutions and Reserve Banks' number of coins received
    from the depository institutions at the national and district level for
    all coin denominations, we converted the data from value of coins to
    volume of coins and then calculated fiscal year totals for each
    denomination at the national and district level. We created line charts
    to compare the total number of coins that Reserve Bank paid to
    depository institutions with the total number of coins that the Reserve
    Bank received from the depository institutions. To calculate net pay
    and the Reserve Banks' coin order to the U.S. Mint, we converted the
    data from value of coins to volume of coins and calculated fiscal year
    totals at the national and district level. We created line charts to
    compare the net pay data with the Reserve Banks' coin order data.

    To calculate the Reserve Banks' days of payable inventory, we consulted
    with officials at the Board and CPO to determine an appropriate
    methodology. CPO and Reserve Banks calculate payable inventory
    information several different ways, depending upon what they are
    assessing. For the purposes of our review, we determined that a
    comparison of inventory relative to a 3-month daily average of payments
    for 3 years was the most appropriate calculation to determine the
    Reserve Banks' inventory position, because it compares inventory
    relative to what the Reserve Banks could reasonably have expected coin
    payments to be in the future. This methodology captures coin inventory
    levels relative to what Reserve Banks expected to need to meet future
    payments to depository institutions. For the numerator, we used end-of-
    month inventory levels for a given month. For the denominator, for the
    3 previous years, we used the quarter following the inventory month
    used in the numerator to assess inventory levels relative to demand in
    the following quarter. For example, when we calculated days of payable
    inventory for December 2006, we used data for January, February, and
    March, 2004; January, February, and March, 2005; and January, February,
    and March, 2006, in the denominator. To calculate the average daily
    payment rate, we took the monthly payments data from each month of the
    quarter from the previous 3 years and divided by 21 business days to
    obtain an average daily payment rate for each month. We then totaled
    the daily payment rates for the 9 months and divided by 9 to obtain an
    average payment rate of the 3 quarters for the 3 years. To calculate
    the annual average days of payable inventory, by denomination, for each
    Reserve Bank, we averaged the monthly figures on days of payable
    inventory that we computed as we have previously described. Because of
    the methodology we used to calculate days of payable inventory, 1996 is
    the earliest year for which we can present the data. We used
    statistical analysis software to complete this analysis for each coin
    denomination at the national and Reserve Bank level.

    We also interviewed officials at the Board and Reserve Banks to discuss
    factors affecting trends in the data, the level of inventory that each
    district tries to hold, and the Reserve Banks' approach to coin
    inventory management. To describe the Reserve Banks' new centralized
    approach to coin inventory management and how it might address concerns
    about inventory management, we interviewed officials at CPO and the
    Board about a 2006 pilot to test a new inventory management approach at
    the Reserve Bank of Cleveland.

    To assess the reliability of the coin data we received from the Reserve
    Banks and U.S. Mint, we talked with agency officials about data quality
    control procedures and reviewed relevant documentation. For example, we
    reviewed audit reports for fiscal years 2006 and 2007 prepared by the
    Department of the Treasury's Office of Inspector General, which
    reported that the U.S. Mint's data were accurately presented and in
    conformity with generally accepted accounting principles. The U.S. Mint
    has received approximately 15 consecutive unqualified opinions. These
    internal control audits found no material weaknesses and found that the
    U.S. Mint is in compliance with the Federal Manager's Financial
    Integrity Act. For the Federal Reserve data, we reviewed an independent
    auditor's reports on the Federal Reserve's financial statements for
    fiscal years 1995 through 2006, and found that the Federal Reserve's
    data were accurately presented and in conformity with generally
    accepted accounting principles. We also performed advanced electronic
    testing to assess the reliability of the computer-processed data, and
    determined that these data were accurate, complete, and consistent and,
    therefore, sufficiently reliable for the purposes of this report.

    We conducted this performance audit from April 2007 through March 2008
    in accordance with generally accepted government auditing standards.
    Those standards require that we plan and perform the audit to obtain
    sufficient, appropriate evidence to provide a reasonable basis for our
    findings and conclusions based on our audit objectives. We believe that
    the evidence obtained provides a reasonable basis for our findings and
    conclusions based on our audit objectives.

    [End of section]

    Appendix II: Coin Production Trends, by Denomination:

    Figures 7 through 13 show trends in the U.S. Mint's coin production
    data for fiscal years 2002 through 2007. These data represent all of
    the "circulating" coins produced by the U.S. Mint; they do not include
    the "proof" or "uncirculated" quality coins produced by the Mint.

    Figure 7: U.S. Mint's Coin Production for Fiscal Years 2002-2007, Total
    Coins (Penny, Nickel, Dime, Quarter, Half-Dollar, and Dollar):

    [See PDF for image]

    This figure is a vertical bar graph, depicting the following data:

    Fiscal year: 2002;
    Billions of coins: 14.9622.

    Fiscal year: 2003;
    Billions of coins: 11.3412.

    Fiscal year: 2004;
    Billions of coins: 13.4796.

    Fiscal year: 2005;
    Billions of coins: 14.1762.

    Fiscal year: 2006;
    Billions of coins: 16.1886.

    Fiscal year: 2007;
    Billions of coins: 15.4235.

    Source: U.S. Mint.

    [End of figure]

    Figure 8: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Penny:

    [See PDF for image]

    This figure is a vertical bar graph, depicting the following data:

    Fiscal year: 2002;
    Billions of pennies: 7.65124.

    Fiscal year: 2003;
    Billions of pennies: 6.29601.

    Fiscal year: 2004;
    Billions of pennies: 7.2068.

    Fiscal year: 2005;
    Billions of pennies: 7.13085.

    Fiscal year: 2006;
    Billions of pennies: 8.6184.

    Fiscal year: 2007;
    Billions of pennies: 8.0804.

    Source: U.S. Mint.

    [End of figure]

    Figure 9: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Nickel:

    [See PDF for image]

    This figure is a vertical bar graph, depicting the following data:

    Fiscal year: 2002;
    Billions of nickels: 1.26768.

    Fiscal year: 2003;
    Billions of nickels: 0.71352.

    Fiscal year: 2004;
    Billions of nickels: 1.52712.

    Fiscal year: 2005;
    Billions of nickels: 1.66632.

    Fiscal year: 2006;
    Billions of nickels: 1.50552.

    Fiscal year: 2007;
    Billions of nickels: 1.31.

    Source: U.S. Mint.

    [End of figure]

    Figure 10: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Dime:

    [See PDF for image]

    This figure is a vertical bar graph, depicting the following data:

    Fiscal year: 2002;
    Billions of dimes: 2.5595.

    Fiscal year: 2003;
    Billions of dimes: 1.8075.

    Fiscal year: 2004;
    Billions of dimes: 2.58618.

    Fiscal year: 2005;
    Billions of dimes: 2.6105.

    Fiscal year: 2006;
    Billions of dimes: 3.037.

    Fiscal year: 2007;
    Billions of dimes: 2.3415.

    Source: U.S. Mint.

    [End of figure]

    Figure 11: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Quarter:

    [See PDF for image]

    This figure is a vertical bar graph, depicting the following data:

    Fiscal year: 2002;
    Billions of quarters: 3.45787.

    Fiscal year: 2003;
    Billions of quarters: 2.507.

    Fiscal year: 2004;
    Billions of quarters: 2.1484.

    Fiscal year: 2005;
    Billions of quarters: 2.7562.

    Fiscal year: 2006;
    Billions of quarters: 3.0156.

    Fiscal year: 2007;
    Billions of quarters: 2.79884.

    Source: U.S. Mint.

    [End of figure]

    Figure 12: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Half-Dollar:

    [See PDF for image]

    This figure is a vertical bar graph, depicting the following data:

    Fiscal year: 2002;
    Millions of half-dollars: 1.2.

    Fiscal year: 2003;
    Millions of half-dollars: 10.6.

    Fiscal year: 2004;
    Millions of half-dollars: 5.8.

    Fiscal year: 2005;
    Millions of half-dollars: 7.3.

    Fiscal year: 2006;
    Millions of half-dollars: 4.4.

    Fiscal year: 2007;
    Millions of half-dollars: 2.4.

    Source: U.S. Mint.

    [End of figure]

    Figure 13: U.S. Mint's Coin Production for Fiscal Years 2002-2007,
    Dollar Coin:

    [See PDF for image]

    This figure is a vertical bar graph, depicting the following data:

    Fiscal year: 2002;
    Millions of dollar coins: 24.6776.

    Fiscal year: 2003;
    Millions of dollar coins: 6.58.

    Fiscal year: 2004;
    Millions of dollar coins: 5.32.

    Fiscal year: 2005;
    Millions of dollar coins: 5.04.

    Fiscal year: 2006;
    Millions of dollar coins: 7.7.

    Fiscal year: 2007;
    Millions of dollar coins: 894.48.

    Source: U.S. Mint.

    [End of figure]

    [End of section]

    Appendix III: National Payments and Receipts Data, by Denomination:

    The Reserve Banks make coin payments to depository institutions and
    accept coin deposits from depository institutions on a daily basis.
    Figures 14 through 19 show total payments and receipts for each coin
    denomination for all 12 Reserve Banks for fiscal years 1993 through
    2007.

    Figure 14: Number of Pennies the Reserve Banks Paid to and Received
    from Depository Institutions, Fiscal Years 1993-2007:

    [See PDF for image]

    This figure is a multiple line graph, depicting the following data:

    Fiscal year: 1993;
    Billions of pennies paid to depository institutions: 17.1987;
    Billions of pennies received from depository institutions: 6.52432.

    Fiscal year: 1994;
    Billions of pennies paid to depository institutions: 17.962;
    Billions of pennies received from depository institutions: 6.80718.

    Fiscal year: 1995;
    Billions of pennies paid to depository institutions: 18.2838;
    Billions of pennies received from depository institutions: 6.85322.

    Fiscal year: 1996;
    Billions of pennies paid to depository institutions: 18.4091;
    Billions of pennies received from depository institutions: 8.30715.

    Fiscal year: 1997;
    Billions of pennies paid to depository institutions: 19.0136;
    Billions of pennies received from depository institutions: 10.2861.

    Fiscal year: 1998;
    Billions of pennies paid to depository institutions: 22.5772;
    Billions of pennies received from depository institutions: 12.6209.

    Fiscal year: 1999;
    Billions of pennies paid to depository institutions: 23.9408;
    Billions of pennies received from depository institutions: 12.756.

    Fiscal year: 2000;
    Billions of pennies paid to depository institutions: 24.2058;
    Billions of pennies received from depository institutions: 12.2289.

    Fiscal year: 2001;
    Billions of pennies paid to depository institutions: 25.1053;
    Billions of pennies received from depository institutions: 15.8712.

    Fiscal year: 2002;
    Billions of pennies paid to depository institutions: 26.5673;
    Billions of pennies received from depository institutions: 18.5671.

    Fiscal year: 2003;
    Billions of pennies paid to depository institutions: 28.1207;
    Billions of pennies received from depository institutions: 21.0656.

    Fiscal year: 2004;
    Billions of pennies paid to depository institutions: 31.7255;
    Billions of pennies received from depository institutions: 25.2724.

    Fiscal year: 2005;
    Billions of pennies paid to depository institutions: 34.1638;
    Billions of pennies received from depository institutions: 26.5906.

    Fiscal year: 2006;
    Billions of pennies paid to depository institutions: 35.3171;
    Billions of pennies received from depository institutions: 27.5967.

    Fiscal year: 2007;
    Billions of pennies paid to depository institutions: 37.1904;
    Billions of pennies received from depository institutions: 29.3958.

    Difference between coin payments and coin receipts = net pay.

    Sources: Federal Reserve and U.S. Mint.

    [End of figure]

    Figure 15: Number of Nickels the Reserve Banks Paid to and Received
    from Depository Institutions, Fiscal Years 1993-2007:

    [See PDF for image]

    This figure is a multiple line graph, depicting the following data:

    Fiscal year: 1993;
    Billions of nickels paid to depository institutions: 3.88611;
    Billions of nickels received from depository institutions: 2.77899.

    Fiscal year: 1994;
    Billions of nickels paid to depository institutions: 4.1534;
    Billions of nickels received from depository institutions: 2.74413.

    Fiscal year: 1995;
    Billions of nickels paid to depository institutions: 4.08258;
    Billions of nickels received from depository institutions: 2.75884.

    Fiscal year: 1996;
    Billions of nickels paid to depository institutions: 4.12691;
    Billions of nickels received from depository institutions: 2.92514.

    Fiscal year: 1997;
    Billions of nickels paid to depository institutions: 4.19684;
    Billions of nickels received from depository institutions: 3.08856.

    Fiscal year: 1998;
    Billions of nickels paid to depository institutions: 4.94066;
    Billions of nickels received from depository institutions: 3.48294.

    Fiscal year: 1999;
    Billions of nickels paid to depository institutions: 5.40206;
    Billions of nickels received from depository institutions: 3.50816.

    Fiscal year: 2000;
    Billions of nickels paid to depository institutions: 5.29796;
    Billions of nickels received from depository institutions: 3.27786.

    Fiscal year: 2001;
    Billions of nickels paid to depository institutions: 5.02422;
    Billions of nickels received from depository institutions: 3.73539.

    Fiscal year: 2002;
    Billions of nickels paid to depository institutions: 5.24336;
    Billions of nickels received from depository institutions: 4.081261.

    Fiscal year: 2003;
    Billions of nickels paid to depository institutions: 5.36425;
    Billions of nickels received from depository institutions: 4.41853.

    Fiscal year: 2004;
    Billions of nickels paid to depository institutions: 6.36394;
    Billions of nickels received from depository institutions: 5.22649.

    Fiscal year: 2005;
    Billions of nickels paid to depository institutions: 7.00148;
    Billions of nickels received from depository institutions: 5.44547.

    Fiscal year: 2006;
    Billions of nickels paid to depository institutions: 7.18744;
    Billions of nickels received from depository institutions: 5.78301.

    Fiscal year: 2007;
    Billions of nickels paid to depository institutions: 7.48217;
    Billions of nickels received from depository institutions: 6.22689.

    Difference between coin payments and coin receipts = net pay.

    Sources: Federal Reserve and U.S. Mint.

    [End of figure]

    Figure 16: Number of Dimes the Reserve Banks Paid to and Received from
    Depository Institutions, Fiscal Years 1993-2007:

    [See PDF for image]

    This figure is a multiple line graph, depicting the following data:

    Fiscal year: 1993;
    Billions of dimes paid to depository institutions: 6.55135;
    Billions of dimes received from depository institutions: 4.68942.

    Fiscal year: 1994;
    Billions of dimes paid to depository institutions: 6.97471;
    Billions of dimes received from depository institutions: 4.66789.

    Fiscal year: 1995;
    Billions of dimes paid to depository institutions: 6.8507;
    Billions of dimes received from depository institutions: 4.57619.

    Fiscal year: 1996;
    Billions of dimes paid to depository institutions: 6.96869;
    Billions of dimes received from depository institutions: 4.86991.

    Fiscal year: 1997;
    Billions of dimes paid to depository institutions: 7.07458;
    Billions of dimes received from depository institutions: 5.03874.

    Fiscal year: 1998;
    Billions of dimes paid to depository institutions: 8.33458;
    Billions of dimes received from depository institutions: 5.93238.

    Fiscal year: 1999;
    Billions of dimes paid to depository institutions: 9.17718;
    Billions of dimes received from depository institutions: 5.98832.

    Fiscal year: 2000;
    Billions of dimes paid to depository institutions: 8.73599;
    Billions of dimes received from depository institutions: 5.46707.

    Fiscal year: 2001;
    Billions of dimes paid to depository institutions: 8.52991;
    Billions of dimes received from depository institutions: 6.02415.

    Fiscal year: 2002;
    Billions of dimes paid to depository institutions: 8.96419;
    Billions of dimes received from depository institutions: 6.4139.

    Fiscal year: 2003;
    Billions of dimes paid to depository institutions: 9.25531;
    Billions of dimes received from depository institutions: 6.98147.

    Fiscal year: 2004;
    Billions of dimes paid to depository institutions: 10.4029;
    Billions of dimes received from depository institutions: 8.18743.

    Fiscal year: 2005;
    Billions of dimes paid to depository institutions: 11.3177;
    Billions of dimes received from depository institutions: 8.63874.

    Fiscal year: 2006;
    Billions of dimes paid to depository institutions: 11.6821;
    Billions of dimes received from depository institutions: 9.09597.

    Fiscal year: 2007;
    Billions of dimes paid to depository institutions: 11.996;
    Billions of dimes received from depository institutions: 9.89061.

    Difference between coin payments and coin receipts = net pay.

    Sources: Federal Reserve and U.S. Mint.

    [End of figure]

    Figure 17: Number of Quarters the Reserve Banks Paid to and Received
    from Depository Institutions, Fiscal Years 1993-2007:

    [See PDF for image]

    This figure is a multiple line graph, depicting the following data:

    Fiscal year: 1993;
    Billions of quarters paid to depository institutions: 13.8248;
    Billions of quarters received from depository institutions: 12.2555.

    Fiscal year: 1994;
    Billions of quarters paid to depository institutions: 14.0683;
    Billions of quarters received from depository institutions: 12.3841.

    Fiscal year: 1995;
    Billions of quarters paid to depository institutions: 13.7641;
    Billions of quarters received from depository institutions: 12.1818.

    Fiscal year: 1996;
    Billions of quarters paid to depository institutions: 13.8819;
    Billions of quarters received from depository institutions: 12.3356.

    Fiscal year: 1997;
    Billions of quarters paid to depository institutions: 14.194;
    Billions of quarters received from depository institutions: 12.9354.

    Fiscal year: 1998;
    Billions of quarters paid to depository institutions: 15.3357;
    Billions of quarters received from depository institutions: 13.3657.

    Fiscal year: 1999;
    Billions of quarters paid to depository institutions: 16.3344;
    Billions of quarters received from depository institutions: 12.7691.

    Fiscal year: 2000;
    Billions of quarters paid to depository institutions: 16.6913;
    Billions of quarters received from depository institutions: 11.407.

    Fiscal year: 2001;
    Billions of quarters paid to depository institutions: 16.2484;
    Billions of quarters received from depository institutions: 12.4165.

    Fiscal year: 2002;
    Billions of quarters paid to depository institutions: 16.6745;
    Billions of quarters received from depository institutions: 13.4193.

    Fiscal year: 2003;
    Billions of quarters paid to depository institutions: 16.7919;
    Billions of quarters received from depository institutions: 13.9524.

    Fiscal year: 2004;
    Billions of quarters paid to depository institutions: 17.7864;
    Billions of quarters received from depository institutions: 15.1598.

    Fiscal year: 2005;
    Billions of quarters paid to depository institutions: 18.086;
    Billions of quarters received from depository institutions: 15.2369.

    Fiscal year: 2006;
    Billions of quarters paid to depository institutions: 18.6997;
    Billions of quarters received from depository institutions: 16.2178.

    Fiscal year: 2007;
    Billions of quarters paid to depository institutions: 18.9501;
    Billions of quarters received from depository institutions: 16.5418.

    Difference between coin payments and coin receipts = net pay.

    Sources: Federal Reserve and U.S. Mint.

    [End of figure]

    Figure 18: Number of Half-Dollars the Reserve Banks Paid to and
    Received from Depository Institutions, Fiscal Years 1993-2007:

    [See PDF for image]

    This figure is a multiple line graph, depicting the following data:

    Fiscal year: 1993;
    Millions of half-dollars paid to depository institutions: 65.8514;
    Millions of half-dollars received from depository institutions:
    26.2055.

    Fiscal year: 1994;
    Millions of half-dollars paid to depository institutions: 68.5373;
    Millions of half-dollars received from depository institutions:
    24.9356.

    Fiscal year: 1995;
    Millions of half-dollars paid to depository institutions: 61.7333;
    Millions of half-dollars received from depository institutions:
    25.1545.

    Fiscal year: 1996;
    Millions of half-dollars paid to depository institutions: 69.7242;
    Millions of half-dollars received from depository institutions:
    32.5121.

    Fiscal year: 1997;
    Millions of half-dollars paid to depository institutions: 58.3392;
    Millions of half-dollars received from depository institutions:
    42.1023.

    Fiscal year: 1998;
    Millions of half-dollars paid to depository institutions: 59.7692;
    Millions of half-dollars received from depository institutions:
    45.2545.

    Fiscal year: 1999;
    Millions of half-dollars paid to depository institutions: 71.146;
    Millions of half-dollars received from depository institutions:
    40.7568.

    Fiscal year: 2000;
    Millions of half-dollars paid to depository institutions: 85.0387;
    Millions of half-dollars received from depository institutions:
    50.2549.

    Fiscal year: 2001;
    Millions of half-dollars paid to depository institutions: 66.9184;
    Millions of half-dollars received from depository institutions:
    64.7647.

    Fiscal year: 2002;
    Millions of half-dollars paid to depository institutions: 65.6822;
    Millions of half-dollars received from depository institutions: 60.559.

    Fiscal year: 2003;
    Millions of half-dollars paid to depository institutions: 71.2811;
    Millions of half-dollars received from depository institutions:
    65.5694.

    Fiscal year: 2004;
    Millions of half-dollars paid to depository institutions: 67.9207;
    Millions of half-dollars received from depository institutions:
    81.1398.

    Fiscal year: 2005;
    Millions of half-dollars paid to depository institutions: 73.5581;
    Millions of half-dollars received from depository institutions:
    90.4998.

    Fiscal year: 2006;
    Millions of half-dollars paid to depository institutions: 92.6033;
    Millions of half-dollars received from depository institutions: 110.8.

    Fiscal year: 2007;
    Millions of half-dollars paid to depository institutions: 132.522;
    Millions of half-dollars received from depository institutions:
    143.266.

    Difference between coin payments and coin receipts = net pay.

    Sources: Federal Reserve and U.S. Mint.

    [End of figure]

    Figure 19: Number of Dollar Coins the Reserve Banks Paid to and
    Received from Depository Institutions, Fiscal Years 1993-2007:

    [See PDF for image]

    This figure is a multiple line graph, depicting the following data:

    Fiscal year: 1993;
    Millions of dollar coins paid to depository institutions: 22.1593;
    Millions of dollar coins received from depository institutions:
    3.90503.

    Fiscal year: 1994;
    Millions of dollar coins paid to depository institutions: 50.3077;
    Millions of dollar coins received from depository institutions:
    10.0734.

    Fiscal year: 1995;
    Millions of dollar coins paid to depository institutions: 73.3476;
    Millions of dollar coins received from depository institutions:
    8.12674.

    Fiscal year: 1996;
    Millions of dollar coins paid to depository institutions: 84.3832;
    Millions of dollar coins received from depository institutions: 17.084.

    Fiscal year: 1997;
    Millions of dollar coins paid to depository institutions: 73.25;
    Millions of dollar coins received from depository institutions:
    22.4259.

    Fiscal year: 1998;
    Millions of dollar coins paid to depository institutions: 77.9353;
    Millions of dollar coins received from depository institutions:
    30.8484.

    Fiscal year: 1999;
    Millions of dollar coins paid to depository institutions: 102.667;
    Millions of dollar coins received from depository institutions:
    36.7177.

    Fiscal year: 2000;
    Millions of dollar coins paid to depository institutions: 556.517;
    Millions of dollar coins received from depository institutions:
    80.2147.

    Fiscal year: 2001;
    Millions of dollar coins paid to depository institutions: 326.859;
    Millions of dollar coins received from depository institutions:
    113.446.

    Fiscal year: 2002;
    Millions of dollar coins paid to depository institutions: 244.289;
    Millions of dollar coins received from depository institutions:
    109.787.

    Fiscal year: 2003;
    Millions of dollar coins paid to depository institutions: 201.597;
    Millions of dollar coins received from depository institutions:
    111.751.

    Fiscal year: 2004;
    Millions of dollar coins paid to depository institutions: 172.945;
    Millions of dollar coins received from depository institutions:
    119.723.

    Fiscal year: 2005;
    Millions of dollar coins paid to depository institutions: 190.205;
    Millions of dollar coins received from depository institutions:
    129.252.

    Fiscal year: 2006;
    Millions of dollar coins paid to depository institutions: 199.045;
    Billions of dollar coins received from depository institutions: 135.09.

    Fiscal year: 2007;
    Millions of dollar coins paid to depository institutions: 708.532;
    Millions of dollar coins received from depository institutions:
    241.357.

    Difference between coin payments and coin receipts = net pay.

    Sources: Federal Reserve and U.S. Mint.

    [End of figure]

    [End of section]

    Appendix IV: Average Days of Payable Coin Inventory, by Reserve Bank
    District and Coin Denomination:

    The Reserve Banks strive to maintain sufficient inventories of coins to
    fulfill demand, despite seasonal and unanticipated changes in demand
    for coins and potential interruptions in the supply of new coins.
    Tables 3 through 14 show the days of payable inventory maintained at
    each of the 12 Reserve Banks from fiscal years 2005 through 2007.
    Payable inventory represents the amount of inventory needed to meet
    expected demand for coins and is calculated by comparing inventories
    with average payment data over a 3-month period for the preceding 3
    years.

    Table 3: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Boston, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 20;
    Nickel: 28;
    Dime: 18;
    Quarter: 11;
    Half-dollar: 1,044;
    Dollar: 217.

    Fiscal year: 2006;
    Penny: 17;
    Nickel: 29;
    Dime: 35;
    Quarter: 27;
    Half-dollar: 1,087;
    Dollar: 181.

    Fiscal year: 2007;
    Penny: 8;
    Nickel: 16;
    Dime: 20;
    Quarter: 19;
    Half-dollar: 1,268;
    Dollar: 446.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    Table 4: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of New York, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 20;
    Nickel: 48;
    Dime: 29;
    Quarter: 16;
    Half-dollar: 1,682;
    Dollar: 49.

    Fiscal year: 2006;
    Penny: 11;
    Nickel: 25;
    Dime: 22;
    Quarter: 18;
    Half-dollar: 1,745;
    Dollar: 87.

    Fiscal year: 2007;
    Penny: 10;
    Nickel: 17;
    Dime: 19;
    Quarter: 21;
    Half-dollar: 1,573;
    Dollar: 84.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    Table 5: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Philadelphia, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 25;
    Nickel: 27;
    Dime: 25;
    Quarter: 55;
    Half-dollar: 1,026;
    Dollar: 118.

    Fiscal year: 2006;
    Penny: 23;
    Nickel: 27;
    Dime: 29;
    Quarter: 33;
    Half-dollar: 1,261;
    Dollar: 95.

    Fiscal year: 2007;
    Penny: 17;
    Nickel: 23;
    Dime: 25;
    Quarter: 40;
    Half-dollar: 1,180;
    Dollar: 344.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    Table 6: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Cleveland, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 17;
    Nickel: 46;
    Dime: 30;
    Quarter: 25;
    Half-dollar: 551;
    Dollar: 115.

    Fiscal year: 2006;
    Penny: 15;
    Nickel: 33;
    Dime: 34;
    Quarter: 33;
    Half-dollar: 695;
    Dollar: 155.

    Fiscal year: 2007;
    Penny: 14;
    Nickel: 25;
    Dime: 36;
    Quarter: 38;
    Half-dollar: 771;
    Dollar: 490.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    Table 7: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Richmond, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 19;
    Nickel: 29;
    Dime: 19;
    Quarter: 15;
    Half-dollar: 538;
    Dollar: 119.

    Fiscal year: 2006;
    Penny: 17;
    Nickel: 24;
    Dime: 22;
    Quarter: 19;
    Half-dollar: 582;
    Dollar: 124.

    Fiscal year: 2007;
    Penny: 17;
    Nickel: 22;
    Dime: 27;
    Quarter: 21;
    Half-dollar: 550;
    Dollar: 355.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    Table 8: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Atlanta, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 16;
    Nickel: 25;
    Dime: 25;
    Quarter: 20;
    Half-dollar: 390;
    Dollar: 103.

    Fiscal year: 2006;
    Penny: 19;
    Nickel: 27;
    Dime: 34;
    Quarter: 19;
    Half-dollar: 549;
    Dollar: 152.

    Fiscal year: 2007;
    Penny: 19;
    Nickel: 30;
    Dime: 40;
    Quarter: 20;
    Half-dollar: 612;
    Dollar: 264.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    Table 9: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Chicago, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 16;
    Nickel: 26;
    Dime: 32;
    Quarter: 34;
    Half-dollar: 338;
    Dollar: 67.

    Fiscal year: 2006;
    Penny: 14;
    Nickel: 22;
    Dime: 30;
    Quarter: 23;
    Half-dollar: 389;
    Dollar: 74.

    Fiscal year: 2007;
    Penny: 13;
    Nickel: 19;
    Dime: 27;
    Quarter: 29;
    Half-dollar: 399;
    Dollar: 200.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    Table 10: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of St. Louis, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 13;
    Nickel: 29;
    Dime: 21;
    Quarter: 21;
    Half-dollar: 344;
    Dollar: 88.

    Fiscal year: 2006;
    Penny: 17;
    Nickel: 27;
    Dime: 28;
    Quarter: 20;
    Half-dollar: 547;
    Dollar: 100.

    Fiscal year: 2007;
    Penny: 16;
    Nickel: 21;
    Dime: 32;
    Quarter: 17;
    Half-dollar: 539;
    Dollar: 296.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    Table 11: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Minneapolis, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 23;
    Nickel: 50;
    Dime: 30;
    Quarter: 18;
    Half-dollar: 281;
    Dollar: 106.

    Fiscal year: 2006;
    Penny: 20;
    Nickel: 40;
    Dime: 43;
    Quarter: 27;
    Half-dollar: 215;
    Dollar: 174.

    Fiscal year: 2007;
    Penny: 23;
    Nickel: 41;
    Dime: 42;
    Quarter: 33;
    Half-dollar: 234;
    Dollar: 391.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    Table 12: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Kansas City, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 18;
    Nickel: 38;
    Dime: 27;
    Quarter: 21;
    Half-dollar: 288;
    Dollar: 100.

    Fiscal year: 2006;
    Penny: 23;
    Nickel: 29;
    Dime: 27;
    Quarter: 29;
    Half-dollar: 225;
    Dollar: 93.

    Fiscal year: 2007;
    Penny: 14;
    Nickel: 28;
    Dime: 30;
    Quarter: 32;
    Half-dollar: 208;
    Dollar: 237.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    Table 13: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of Dallas, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 13;
    Nickel: 32;
    Dime: 27;
    Quarter: 30;
    Half-dollar: 530;
    Dollar: 177.

    Fiscal year: 2006;
    Penny: 17;
    Nickel: 25;
    Dime: 28;
    Quarter: 25;
    Half-dollar: 392;
    Dollar: 167.

    Fiscal year: 2007;
    Penny: 13;
    Nickel: 24;
    Dime: 30;
    Quarter: 28;
    Half-dollar: 250;
    Dollar: 441.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    Table 14: Average Days of Payable Inventory, by Denomination, for the
    Reserve Bank District of San Francisco, Fiscal Years 2005-2007:

    Fiscal year: 2005;
    Penny: 32;
    Nickel: 46;
    Dime: 42;
    Quarter: 29;
    Half-dollar: 235;
    Dollar: 159.

    Fiscal year: 2006;
    Penny: 28;
    Nickel: 37;
    Dime: 42;
    Quarter: 29;
    Half-dollar: 229;
    Dollar: 164.

    Fiscal year: 2007;
    Penny: 26;
    Nickel: 35;
    Dime: 44;
    Quarter: 31;
    Half-dollar: 203;
    Dollar: 275.

    Source: GAO analysis of Federal Reserve data.

    [End of table]

    [End of section]

    Appendix V: Number of Coin Transfers and Related Costs, Fiscal Years
    2002-2007:

    CPO looks for opportunities to reduce orders for new coins to the U.S.
    Mint by transferring circulating coins from one Reserve Bank district
    to another. The U.S. Mint pays for the cost for transfers over 100
    miles. Table 15 shows the number and cost of transfers paid by the U.S.
    Mint from fiscal years 2002 through 2007.

    Table 15: U.S. Mint Coin Transfers and Cost Information, Fiscal Years
    2002-2007:

    Fiscal year: 2002;
    Number of transfers: 299;
    U.S. Mint transfer cost: $479,707.

    Fiscal year: 2003;
    Number of transfers: 496;
    U.S. Mint transfer cost: $744,823.

    Fiscal year: 2004;
    Number of transfers: 640;
    U.S. Mint transfer cost: $1,239,128.

    Fiscal year: 2005;
    Number of transfers: 677;
    U.S. Mint transfer cost: $1,350,698.

    Fiscal year: 2006;
    Number of transfers: 638;
    U.S. Mint transfer cost: $1,273,481.

    Fiscal year: 2007;
    Number of transfers: 404;
    U.S. Mint transfer cost: $914,769.

    Source: U.S. Mint data.

    [End of table]

    [End of section]

    Appendix VI: Comments from the Board of Governors of the Federal
    Reserve System:

    Board Of Governors Of The Federal Reserve System:
    Washington, D.C. 20551:

    March 18, 2008:

    Richard J. Hillman:
    Managing Director:
    Financial Markets and Community Investment:
    U.S. Government Accountability Office:
    441 G Street, N.W.
    Washington, D.C. 20548:

    Dear Mr. Hillman:

    Thank you for the opportunity to comment on the GAO's draft report
    titled U.S. Coins: The Federal Reserve Banks Are Fulfilling Coin
    Demand, But Optimal Inventory Ranges Are Undefined. We agree with the
    GAO's conclusion that the Reserve Banks are fulfilling depository
    institutions' coin demand while generally reducing orders for new coin
    from the U.S. Mint and inventory levels at the Reserve Banks. We
    believe that the data presented in the report reflect the Reserve
    Banks' efficient and effective management of coin inventories.

    As the report suggests, the Reserve Banks have made material
    improvements in coin distribution in recent years. The Federal Reserve
    will continue to evaluate ways to improve the efficiency and
    effectiveness of the coin distribution process.

    We have provided some technical comments under separate cover.

    Sincerely,

    Signed by:
    Louise Roseman:
    Director Division Of Reserve Bank Operations And Payment Systems:
    Email: Louise.Roseman@frb.gov:
    Phone: (202) 452-2789, Fax: (202) 452-6474:

    [End of section]

    Appendix VII GAO Contact and Staff Acknowledgments:

    GAO Contact:

    Susan Fleming, (202) 512-2834 or flemings@gao.gov:

    Staff Acknowledgments:

    In addition to the contact named above, Jonathan Carver, Jay Cherlow,
    Maria Edelstein (Assistant Director), Elizabeth Eisenstadt, Brandon
    Haller, Heather Krause, Josh Ormond, Jena Sinkfield, Susan Michal-
    Smith, and Jerry Sandau made key contributions to this report.

    [End of section]

    Footnotes:

    [1] The costs of producing other coins, such as the quarter and dollar
    coins, are below the face values of these coins. For example, in fiscal
    year 2007, the quarter cost the U.S. Mint 9.8 cents to produce and the
    dollar coin cost 15.7 cents, according to the Mint's annual report.

    [2] Proposed legislation--Coin Modernization and Taxpayer Savings Act
    of 2008, H.R. 5512, 110th Cong. (2008); Coin Modernization and Taxpayer
    Savings Act of 2007, H.R. 3956, 110th Cong. (2007); and Coinage
    Materials Modernization Act of 2007, H.R. 3330, 110th Cong. (2007)--
    would give the Secretary of the Treasury the authority to change the
    weight and content of circulating coins, which could reduce the U.S.
    Mint's production costs. Currently, the weight and composition of U.S.
    coins is set forth in law. See 31 U.S.C. � 5112.

    [3] Although one of the Reserve Banks' responsibilities is to ensure
    that enough coins and currency are available to meet depository
    institutions' demand, we discuss in this report only the coin services
    provided by the Reserve Banks.

    [4] The Reserve Bank data represent data for all 30 offices that
    provide coins to depository institutions.

    [5] The Reserve Banks and their offices also perform other functions
    and services unrelated to coins, such as supervising member banks and
    bank holding companies.

    [6] As we have previously mentioned, the production costs of most coins
    are below their face values. This difference between production cost
    and face value is called "seigniorage," or the profit earned by the
    U.S. government from making coins. Seigniorage reduces the government's
    requirement to borrow money from the public to finance the government's
    debt.

    [7] The forecasting models take into account several factors, including
    historical data on coin demand and economic variables, such as the
    inflation rate as measured in the Consumer Price Index and the federal
    funds rate, which is the interest rate that banks charge each other for
    overnight loans. According to U.S. Mint officials, until recently, the
    Mint averaged the results of five national coin demand forecasting
    models--two models maintained by the Mint and three models maintained
    by the Federal Reserve--to estimate demand and plan a long-term
    production schedule. In late 2007, the U.S. Mint stopped using its
    models and now uses only the three models supported by the Federal
    Reserve. According to U.S. Mint officials, they made this change as
    part of the Mint's efforts to increase the efficiency of its
    operations.

    [8] Depository institutions can order Presidential dollar coins
    directly from their Reserve Bank for a specified period of time before
    the public release date for the coin. This advance ordering helps the
    depository institutions to have the coins on hand on the public release
    date to meet their customers' demand.

    [9] The Reserve Banks are separate legal entities that, before 2001,
    managed their own coin inventories to meet demand within their
    districts. The Board exercises general supervision over the Reserve
    Banks.

    [10] The Reserve Banks pay for transfer between offices that are less
    than 100 miles apart.

    [11] According to 31 U.S.C. � 5136, all expenses incurred by the
    Secretary of the Treasury for operations and programs of the U.S. Mint
    that are determined to be ordinary and reasonable incidents of Mint
    operations and programs are authorized to be paid out of the U.S. Mint
    Public Enterprise Fund. The statute defines "Mint operations and
    programs" as the activities concerning and assets used in the
    distribution of coinage.

    [12] The official also noted that delaying production, when the U.S.
    Mint has production capacity, may actually increase costs in the long
    run because production costs, like other costs, tend to increase over
    time.

    [13] The Presidential $1 Coin Act of 2005, � p, 31 U.S.C. � 5112(p).

    [14] In fiscal year 2007, the U.S. Mint had an average cycle time of 61
    days. The cycle time starts when the order for the raw materials is
    placed and ends when the coin order is filled.

    [15] The inventory data are represented in terms of days of payable
    inventory. A day of payable inventory is the level of inventory needed
    to meet 1 day's expected payments to depository institutions. See
    appendix I for additional information on this calculation.

    [16] Because of our methodology in calculating average days of payable
    inventory data, 1996 is the earliest year for which we can present the
    data. See appendix I for more details.

    [17] Even though the production costs of other coins are less than
    their face values, resulting in a financial gain to the government
    (called seigniorage), there are still societal costs associated with
    producing these coins, such as the metal resources used to make the
    coins.

    [18] According to the Reserve Bank officials, the IMF tool forecasts
    coin demand for an area covered by the Reserve Bank office, which could
    include several coin terminals.

    [19] The Federal Reserve has chosen in the past to manage payments
    services on a systemwide basis for reasons of efficiency and to ensure
    effective operations of Reserve Bank programs. For example, the Federal
    Reserve consolidated the management of some payment services, such as
    check clearing and direct deposits, provided by the individual Reserve
    Banks. Federal Reserve committees worked with payments industry
    officials to develop standards to facilitate increased use of
    electronic check processing and to foster technical change on the basis
    of the preference of most payment system participants. As a result of
    these efforts, the Federal Reserve was able to consolidate check
    processing operations and apply emerging technologies to the Reserve
    Banks' business processes that led to improvements in quality and a
    reduction in costs. See GAO, Federal Reserve System: Update on GAO's
    1996 Recommendations, GAO-02-774 (Washington, D.C.: Sept. 25, 2002),
    for more information.

    [End of section]

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