Future of the Penny: Options for Congressional Consideration (Testimony,
07/16/96, GAO/T-GGD-96-153).

GAO discussed the continued production of the U.S. penny. GAO noted
that: (1) Congress needs to address several issues in deciding the
future of the penny; (2) the government spent $8.5 million to $9.2
million in fiscal year (FY) 1994 distributing and handling pennies; (3)
public attitudes towards the penny are mixed, but the majority of the
public supports retaining the penny; (4) in FY 1995, almost 66 percent
of pennies did not circulate compared to almost 12 percent of quarters;
(5) it could not determine the full budgetary impact of eliminating the
penny, but the U.S. Mint would be negatively impacted if billions of
pennies were returned; (6) eliminating the penny would result in the
loss of jobs for the two contractors who produce zinc penny blanks and
for other related businesses; (7) states' ability to collect sales taxes
would not be affected by the elimination of the penny, but charitable
donations might be affected; (8) penny production and disposal cause no
signigicant environmental problems; (9) proposed legislation would
provide a framework for rounding to the nearest nickel and would exempt
noncash transactions from the rounding requirement; and (10) military
facilities in Europe eliminated the penny in 1980 and received few
complaints.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD-96-153
     TITLE:  Future of the Penny: Options for Congressional Consideration
      DATE:  07/16/96
   SUBJECT:  Currency and coinage
             Cost control
             Economic analysis
             Monetary policies
             Contractor personnel
             Administrative costs
             Overhead costs
             Proposed legislation
             Cost effectiveness analysis
             Public relations
IDENTIFIER:  Civil Service Retirement System
             
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Cover
================================================================ COVER


Before the Subcommittee on Domestic and International
Monetary Policy, Committee on Banking and Financial
Services, House of Representatives

For Release
On Delivery
Expected at
2:00 p.m.  EDT
Tuesday,
July 16, 1996

FUTURE OF THE PENNY - OPTIONS FOR
CONGRESSIONAL CONSIDERATION

Statement of J.  William Gadsby
Director, Government Business Operations Issues
General Government Division

GAO/T-GGD-96-153

GAO/GGD-96-153T


(240190)


Abbreviations
=============================================================== ABBREV

  CSRS - Civil Service Retirement System
  EPA - Environmental Protection Agency
  IG - Inspector General
  OPM - Office of Personnel Management

FUTURE OF THE PENNY:  OPTIONS FOR
CONGRESSIONAL CONSIDERATION
====================================================== Chapter SUMMARY

The Chairman of the Subcommittee on Domestic and International
Monetary Policy, House Committee on Banking and Financial Services,
asked GAO to review whether the United States should continue
producing the penny.  GAO found that, in deciding the future of the
penny, several factors, including government costs, public attitudes,
budgetary and operational impacts on the Mint and Mint contractors,
and the fairness of rounding prices to the closest 5-cent increment,
warrant congressional consideration. 

With its relatively small purchasing power, the penny is used
primarily to make change for cash transactions and for the most part
does not circulate after initial receipt by the public.  Although it
cost less than a penny for the government to mint a penny, the
government lost $8 million to $9 million in 1994 after considering
the cost of distributing the penny to commercial banks. 

Public opinion on the penny is mixed.  According to GAO's recent
poll, while over half of the people would prefer rounding to using
pennies, a similar percentage also believe the penny is useful and
should be retained. 

An immediate withdrawal of the penny could be costly to the
government, but GAO was unable to quantify the budgetary impact,
primarily because it is not known how many of the 132 billion pennies
the Mint believes to be in circulation would be returned.  If a
substantial number of pennies were returned, the government could
incur substantial costs in processing and melting down the pennies. 
Elimination of the penny would also result in the loss of jobs for
the contractors who produce zinc penny blanks for the Mint and might
also result in the loss of jobs for related businesses. 

GAO's review disclosed no negative impact on the states' ability to
collect sales taxes if the penny were eliminated.  Neither did GAO's
review identify any significant environmental problems caused by the
production and disposal of pennies. 

H.R.  3761, introduced in 1989, suggested a rounding system whereby
cash purchases would be rounded down to the nearest 5-cent price when
the total transaction amount, including sales taxes, ended in 1,2,6,
or 7 cents and rounded up when the total price amount ended in 3,4,8,
or 9 cents.  Prices of all items would continue to be priced in
cents, and purchases paid by check, credit or debit cards, money
order, or electronic fund transfers would be exempted from rounding. 

GAO identified three options for congressional consideration: 
continue with the penny, eliminate the penny and round all cash
transactions, or authorize rounding of cash transactions as an option
to the consumer. 


FUTURE OF THE PENNY:  OPTIONS FOR
CONGRESSIONAL CONSIDERATION
==================================================== Chapter STATEMENT

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the results of our review
that you requested on issues related to whether the United States
should continue producing the penny. 

The penny was first authorized by Congress in 1792.  The penny's
purchasing power is now about one-ninth of what it originally was. 
Today, pennies are made of 97.5 percent zinc and 2.5 percent copper. 
Contractors in Tennessee and Illinois produce copper-coated zinc
blanks for the Mint to stamp as pennies.  Pennies are then coined by
the U.S.  Mint, a unit of the Treasury Department, at its Denver and
Philadelphia facilities.  In 1995, the Mint issued 13.5 billion
pennies, which represented 69 percent of all circulating coins
produced that year and about 50 pennies per American.  Over the past
30 years, the Mint has produced 288 billion pennies. 

In our 1990 report on the penny, we said that, while some Americans
would welcome the elimination of the penny because of its low
purchasing power and inconvenience, they seemed to tolerate the
coin.\1 We also reported that several other industrialized countries,
including France, the Netherlands, Spain, and the United Kingdom,
stopped producing their lowest denomination coins during the 1970s
and 1980s because they were expensive to produce, did not circulate,
and had very little purchasing power.  Similarly, Australia, in 1990,
and New Zealand, in 1989, stopped producing their 1- and 2-cent coins
because their manufacturing cost exceeded their face value and
because of their low purchasing power.\2


--------------------
\1 National Coinage Proposals:  Limited Public Demand for New Dollar
Coin or Elimination of Pennies, (GAO/GGD-90-88, May 23, 1990). 

\2 As of July 1, 1996, the Australian dollar was worth U.S.  $0.79
and the New Zealand dollar was worth U.S.  $0.68. 


   OBJECTIVES
-------------------------------------------------- Chapter STATEMENT:1

Mr.  Chairman, when you requested this work, you asked us to update
our 1990 report.  We examined

  -- the government's cost to produce and distribute the penny;

  -- the public's attitude toward the penny;

  -- the budgetary and operational impact on the Mint of eliminating
     the penny;

  -- other economic impacts associated with eliminating the penny;

  -- the environmental impact of producing and disposing of pennies;
     and

  -- how prices for cash transactions could be rounded. 

I will summarize the results of our work.  A summary of the scope of
our work and methodology is contained in appendix I. 


   PENNY PRODUCTION AND
   DISTRIBUTION WERE NOT
   PROFITABLE TO THE GOVERNMENT IN
   FISCAL YEAR 1994
-------------------------------------------------- Chapter STATEMENT:2

The government as a whole did not profit from producing and
distributing pennies in fiscal year 1994.  After considering both the
Mint's profit from producing pennies and the Federal Reserve System's
cost of handling pennies, we estimated that the net cost to the
government was $8.5 million to $9.2 million in fiscal year 1994. 

The Mint reported that its fiscal year 1994 total cost to produce and
transport 13.5 billion pennies to the Federal Reserve was $96.9
million, resulting in a unit cost per penny that was less than the
face value of the penny--0.7 cents (seven-tenths of a penny).\3 We
made adjustments to the Mint's calculated costs to produce the penny
which increased the Mint's total costs from $96.9 million to $106.6
million and the unit cost from 0.7 cents to 0.8 cents.  The rationale
for our adjustments of the Mint's overhead and general and
administrative costs are discussed below and shown in table 1. 

First, we reallocated overhead and general and administrative costs
on the basis of the number of coins produced, as opposed to the
Mint's allocation which is based on direct labor hours for all
circulating coins.  Although the penny represented 70 percent of the
total 19.2 billion circulating coins the Mint produced in fiscal year
1994, the Mint's allocation, which was based on direct labor hours,
resulted in charging only about 50 percent of all overhead and
general and administrative costs to the penny.  The Mint indicated
that it uses direct labor hours to allocate overhead because much of
the work on the penny is completed by contractors before it reaches
the Mint.  However, because the work completed on the penny before it
reaches the Mint is done under Mint contracts, there are Mint
overhead and general and administrative costs associated with
contract negotiation and contract monitoring.  This adjustment
increased the total cost of penny production in fiscal year 1994 by
$9.6 million. 

Second, we added additional costs of retirement for employees under
the Civil Service Retirement System (CSRS) that are incurred by the
government but not paid for by the Mint.  According to actuarial
estimates prepared by the Office of Personnel Management (OPM), the
annual accruing cost of CSRS is about 25 percent of employees'
salaries.  In general, employees contribute 7 percent of their
salaries toward system costs, leaving a cost of about 18 percent of
salary to be borne by the government.  However, employing agencies'
contributions are limited to 7 percent of salary, and much of the
remaining government costs (about 11 percent of salary) are covered
by other government contributions to the retirement fund.  About 49
percent of the Mint's employees who worked on the penny in fiscal
year 1994 were under CSRS.  We added 11 percent of labor cost for the
time spent by CSRS employees working on the penny in 1994, which
amounted to about $100,000. 



                                Table 1
                
                     Calculated Cost to Produce and
                Distribute the Penny As Adjusted by GAO
                          for Fiscal Year 1994

                                             Total cost      Unit cost
Cost factors                                 (millions)        (cents)
----------------------------------------  -------------  -------------
Production cost for 13.5 billion pennies          $96.9         $0.720

GAO adjustments
----------------------------------------------------------------------
Allocation of overhead and general and              9.6          0.072
 administrative costs based on number of
 coins produced, rather than direct
 labor
Recognition of all retirement costs for             0.1          0.001
 CSRS employees at the Mint working on
 penny production
======================================================================
Total production cost as adjusted by GAO         $106.6         $0.793
----------------------------------------------------------------------
Source:  GAO analysis of data provided by the Mint and OPM data. 

We made no adjustments to the Mint's costs for metal and fabrication,
direct labor, or transportation to Federal Reserve Banks. 
Multiplying the unit cost of producing a penny in fiscal year
1994--0.7 cents using the Mint's unit cost, or 0.8 cents using GAO's
calculation of unit costs--by 13.5 billion units, we estimated that
the Mint's profit, or seigniorage, was between $28.0 million and
$37.7 million.  Seigniorage is defined by the Department of the
Treasury as the difference between the face value of a coin and the
coin's cost of production.  Seigniorage is treated as a reduction in
the amount of money that must be borrowed from the public to finance
the deficit. 

As shown in table 2, multiplying these seigniorage estimates by the
average borrowing rate in fiscal year 1994 of 6.897 percent results
in an interest cost avoidance of between $1.9 million to $2.6 million
for production of 13.5 billion pennies.  However, as also shown in
table 2, the Federal Reserve System incurred costs in handling the
penny, that are not recognized by the Mint.  According to the Federal
Reserve System, in 1994, it received and distributed about 36 billion
new or circulating pennies, at a cost of $11.1 million.  Deducting
the Federal Reserve System's costs of handling the penny from the
interest avoided by producing the penny in 1994 resulted in a net
cost to the government of between $8.5 million and $9.2 million. 



                                Table 2
                
                  The Cost of the Penny to the Federal
                Government, Fiscal Year 1994: The Mint's
                Cost and GAO's Adjustments to the Mint's
                                 Costs

                                                     Cost of the penny
                                                        to the federal
                                                            government
Factors                                                     (millions)
--------------------------------------------------  ------------------
Face value of 13,459,070,000 pennies                            $134.6
Total production cost of the penny                     $96.9 to $106.6
Amount of seigniorage (the difference between the       $28.0 to $37.7
 face value of the penny and its production cost)
The amount of interest the government avoided in          $1.9 to $2.6
 producing the penny (seigniorage x 6.897 percent)
Federal Reserve costs to handle the penny                      $11.1\a
Net cost to the government (amount of interest       ($8.5) to ($9.2 )
 avoided less the Federal Reserve's costs to
 handle the penny)
----------------------------------------------------------------------
\a Federal Reserve data was available on a 1994 calendar year basis. 

Source:  GAO analysis of data provided by the Mint and the Federal
Reserve System. 


--------------------
\3 A June 1995 Treasury Inspector General (IG) report on the Mint's
fiscal year 1994 financial statements indicated that the Mint had an
inadequate and fragmented fund structure, including weaknesses in the
cost accounting system for circulating coins.  As a result, the
report stated, the Mint's true operating costs could be understated. 
According to Mint officials, the problems associated with a
fragmented fund structure were resolved when legislation was enacted
in November 1995 to establish a revolving fund for the receipts and
expenditures of circulating coins.  A May 1996 Treasury IG report on
the Mint's 1995 financial statements indicated that efforts to
achieve full integration of the Mint's financial management system
have been cumbersome and delayed. 


   PUBLIC SUPPORT FOR THE PENNY IS
   MIXED
-------------------------------------------------- Chapter STATEMENT:3

Four surveys taken from 1990 to 1995 indicated that a majority of the
responding public either supported retaining the penny or believed
that the penny was useful.\4

Public support for the penny ranged from 62 percent of respondents in
1990 to 76 percent in 1995, while support for eliminating the penny
ranged from 18 percent in 1992 to 34 percent in 1993. 

We contracted with the University of Maryland to conduct a public
attitude survey on the penny in December 1995 and January 1996.\5 In
comparison to the previous surveys, the University of Maryland
results showed the lowest level of support for retaining the penny. 
Specifically, our 1996 University of Maryland survey involved two
questions.  One was, "Do you think that the penny is a useful coin or
should the government do away with it?" The results were that

  -- 59 percent of respondents said the penny was useful;

  -- 35 percent said the penny should be eliminated; and

  -- 5 percent didn't know. 

The other question was, "When you buy things using cash, would you
prefer that the total purchase price be rounded to the nearest
nickel, making the pennies unnecessary?" The results were that

  -- 52 percent of respondents preferred that prices be rounded to
     the nearest nickel;

  -- 36 percent preferred using pennies; and

  -- 12 percent had no preference or didn't know. 

Federal Reserve System data showed that the penny does not circulate
as much as other coins.\6 For example, as shown in figure 1, in 1991,
we calculated that the circulation rate for pennies was 42 percent,
whereas the circulation rate for quarters was 93 percent.  Our
calculations showed that in 1995, the circulation rates were 34
percent for pennies and 88 percent for quarters.  These numbers tell
us that for almost two-thirds of the billions of pennies produced,
the trip from the Mint to the Federal Reserve to the commercial banks
and finally to consumers is a "one-way trip"--they are not seen again
in circulation. 

   Figure 1:  Circulation Rates
   for the Penny and the Quarter,
   1991 and 1995

   (See figure in printed
   edition.)

Source:  GAO's analysis of data provided by the Federal Reserve
System. 

As a result of the penny's low circulation rate, commercial banking
institutions must continue to order new pennies to support their
business customers.  According to the Mint, from October 1993 through
June 1994, shipments of pennies were 816 million below bank requests. 
Officials from two banks--one on the West coast and one in the
South--told us they also experienced penny shortages in 1995.  One
bank official said that the shortage was very costly because the bank
had to transport pennies from out-of-state.  Officials from both
banks said the penny shortage was not a one-time event, but that it
occurs periodically and resulted from the penny's low circulation
rate. 


--------------------
\4 These nationwide, projectable polls included the 1990 Gallup, 1992
CNN/Time, 1993 ABC, and 1995 Opinion Research Corporation surveys. 
The Gallup survey asked respondents whether they favored
discontinuation of the penny.  The CNN/Time survey asked whether the
U.S.  should remove pennies from circulation.  The ABC survey asked
whether the penny is a useful coin, or whether the government should
do away with it.  The Opinion Research Corporation survey asked
whether the government should remove the penny from circulation. 

\5 The random, projectable poll surveyed 1,000 adults aged 18 or
older, residing in telephone households in the continental United
States. 

\6 We calculated the circulation rate by dividing the number of coins
received by the Federal Reserve Banks by the number of coins paid out
by the Federal Reserve Banks to commercial banks. 


   BUDGETARY IMPACT OF ELIMINATING
   THE PENNY IS DIFFICULT TO
   QUANTIFY
-------------------------------------------------- Chapter STATEMENT:4

According to the Mint, an immediate withdrawal of the penny could
have a negative impact on the Mint, if the public decided to return
billions of pennies.  In Australia, for example, 25 percent and 35
percent, respectively, of the 1- and 2-cent coins that had been
produced were returned over a 6-year period after they were
discontinued.  The Mint estimates that at least 132 billion pennies
are currently in circulation, but neither Mint nor Federal Reserve
officials said they could estimate how many might be returned.  Mint
officials said that they would incur costs to handle, store, and melt
the returned pennies which might exceed their salvage value. 

Mint officials also said that negative seigniorage could result from
the return of pennies if existing money were given to the public in
exchange.  These costs would be offset to some extent by the Federal
Reserve System's avoidance of the cost to handle pennies and the
scrap value of the metal salvaged from returned pennies.  Mint
officials also said that they did not know how much of the overhead
costs now absorbed by the penny would be allocated to other coins. 
In discussing the budgetary impact of eliminating the penny with Mint
officials, they suggested that such an analysis should also include
the benefits provided by the reduced government borrowing resulting
from the stock of pennies in circulation, which they estimated to be
$18 million.  We agree the interest avoided from the remaining
pennies in circulation if the penny were eliminated should be treated
as an offset to the cost of eliminating the penny.  Because of the
many uncertainties involved, we were not able to quantify the
specific budgetary impact of eliminating the penny. 


   OPERATIONAL IMPACT ON THE MINT
   OF ELIMINATING THE PENNY
-------------------------------------------------- Chapter STATEMENT:5

According to Mint officials, eliminating the penny would not enable
them to close down either the Denver or Philadelphia facilities,
which are used to mint other circulating coins, but might allow them
to reduce the number of shifts from three to two.  The Mint uses
presses purchased in the 1960s and 1970s (called Bliss presses) to
make pennies.  According to the Mint, Bliss presses could not be
efficiently used to mint other coins. 


   OTHER ECONOMIC IMPACTS OF
   ELIMINATING THE PENNY
-------------------------------------------------- Chapter STATEMENT:6

Eliminating the penny would result in the loss of some jobs and
revenue for the two contractors who produce penny blanks.  Alltrista
Zinc Products Company of Greenville, Tennessee, and LaSalle Rolling
Mills of LaSalle, Illinois, manufacture penny blanks for the Mint. 
Alltrista employs about 280 people in its zinc operation, while
LaSalle employs about 110 people.  Alltrista estimated that penny
elimination would cause about a 40-percent job loss, or 112
employees.  LaSalle said that it would probably have to shut down if
the penny is eliminated since 94 of its 110 employees work on the
penny. 

Eliminating the penny would not appear to adversely affect the mining
of zinc, since penny production represents only a fraction of total
domestic zinc consumption.  According to data provided by the Mint
and the U.S.  Geological Survey, in 1995 the penny represented 2.7
percent of total U.S.  zinc consumption.  According to the American
Zinc Association, the United States produces about 30 percent of the
zinc it consumes, and if the penny were eliminated, the same amount
of domestic zinc mining could continue, since the United States does
not produce enough zinc to meet domestic demand.  This suggests that,
if the Mint stopped producing pennies, the demand for zinc mined for
pennies could be replaced by the demand generated by other domestic
uses so that no zinc mining jobs should be lost in the United States. 

According to Americans for Common Cents, an organization that has
been formed to encourage the continued production of the penny, the
discontinuation of penny production could result in the loss of (1)
356 jobs in the zinc refining and smelting industry, (2) $700,000 in
sales of chemicals used for penny production, (3) $1.2 million in
wages for truck drivers who transport penny blanks to the Mint, and
(4) an unknown number of railroad jobs from a decrease in rail
shipments from Alltrista to the Denver Mint and in transportation of
slab zinc to refining and smelting operations.  We did not verify
these estimates. 

We also contacted tax officials from Virginia and Maryland to ask
whether eliminating the penny would create problems in collecting
sales taxes.  Officials from both states said that rounding sales
taxes to the nearest nickel would not be a problem. 

We asked five charitable organizations what effect they expected the
elimination of the penny would have on donations.  One of the five
charitable organizations said that eliminating the penny could
negatively affect donations.  Three said that they expected people
would donate higher denomination coins instead of the penny, and one
said they did not know if people would donate higher denomination
coins. 

We also contacted a judgmental sample of banks to determine what
costs they incur and pass on to their customers to handle the penny. 
We contacted 22 banks located in both rural and urban areas as well
as in different geographical areas of the United States.  The banks
reported that they could not quantify the percentage of the amount of
money paid to armored carriers for coin and currency transportation
that was expended on the penny.  However, they indicated that their
cost to purchase rolled coins from armored companies or other
financial institutions ranged from 2.5 cents to 5 cents per roll,
regardless of denomination. 

The banks also reported that the fees they charged businesses to
verify deposited coins ranged from $1.25 to $5 per standard bag of
the same denomination (a standard bag for pennies contains 5,000
pennies with a total value of $50) and up to $10 a bag for mixed
coins. 


   ENVIRONMENTAL IMPACT OF
   PRODUCING AND DISPOSING OF
   PENNIES
-------------------------------------------------- Chapter STATEMENT:7

Although the mining of heavy metals such as zinc may cause leaching
of minerals into water streams and zinc smelting generally creates
air pollution, an EPA official said that the amount of zinc mined to
produce pennies is insignificant when compared to other mined metals. 
In addition, the disposal of pennies does not appear to be an
environmental problem.  According to a recent EPA report on municipal
solid waste, no coins (including pennies) were identified as
components of landfills.\7 Moreover, officials from EPA, the Natural
Resources Defense Council, and the National Solid Waste Association
were unaware of any environmental problems associated with the
disposal of pennies.  According to a study by the Garbage Project at
the University of Arizona, households threw away about 3 pennies per
year from 1980 to 1986, the most recent years for which data was
available. 


--------------------
\7 Characterization of Municipal Solid Waste in the United States: 
1995 Update, March 1996.  The report identified components
representing at least one-tenth of one percent of landfills. 


   AN APPROACH TO ROUNDING PRICES
   FOR CASH TRANSACTIONS
-------------------------------------------------- Chapter STATEMENT:8

If pennies were eliminated, one suggested approach to rounding prices
was contained in a bill (H.R.  3761) introduced in 1989 by Rep. 
James Hayes of Louisiana.  This bill would have exempted from the
rounding requirement transactions for which payment was made by check
or negotiable instrument, electronic fund transfer, money order, or
credit card.  This bill would only have applied rounding to the
nearest 5-cent price after discounts and sales taxes were computed. 
Therefore, individual goods would have been priced in cents.  This
proposed legislation provided a framework under which, in theory,
one-half of the total number of cash purchases would have been
rounded up and one-half would have been rounded down.  If the total
price ended in 1,2,6, or 7 cents, the total price would have been
rounded down.  If it ended in 3,4,8, or 9 cents, it would have been
rounded up. 

In 1990, we reported that, in 1980, the U.S.  Army in Europe asked
the American military facilities in Europe to eliminate the penny
because of the expense of transporting the coins there.  All but
three facilities--the Post Office, the commercial bank, and the
Finance Office--agreed to the change.  These three facilities were
bound by regulations that would not allow them to round prices.  The
commissaries and Army and Air Force Exchange Service facilities
welcomed the coin's elimination and said that they were not adversely
affected by it.  Officials said that, while a few complaints were
received initially, as customers became familiar with the rounding
policy, complaints decreased and then were rarely received.  However,
officials said that the facilities often rounded down to minimize
complaints.  Also, we reported that, while the facilities did not
give pennies as change, they accepted pennies if people wanted to pay
with them. 


   CONCLUSIONS
-------------------------------------------------- Chapter STATEMENT:9

The penny, with its small purchasing power, is used mainly to make
change in our monetary system and generally is not returned to
circulation after its initial receipt by the public.  When
considering the Federal Reserve System's penny handling costs,
pennies were not profitable for the government to produce and
distribute in fiscal year 1994.  The net cost to the government for
the penny ranged from $8 million to $9 million in fiscal year 1994,
which is not a substantial cost. 

Public opinion on the usefulness of the penny is mixed.  According to
our recent poll, while over half of the respondents would prefer
rounding to using pennies, a similar percentage also believe the
penny is useful and should be retained.  However, the public does not
return most pennies back to circulation after they are initially
distributed by the Federal Reserve System.  In theory, rounding could
be designed to be fair so that one-half of the transactions would be
rounded up and one-half rounded down.  However, the public may remain
concerned that merchants would try to round prices in their favor. 

Because many factors about the budgetary effect of eliminating the
penny are not known, it is not possible to calculate the budgetary
impact of withdrawing the penny from circulation.  While it is
possible to estimate how much seigniorage is generated by pennies in
circulation that would be lost if the penny were eliminated, it is
not known what portion of the pennies in circulation would be
returned and whether the Mint would incur a substantial cost. 
Further, it is not known how overhead currently allocated to the
penny would be reallocated to other coins or the extent to which the
Mint's total labor costs would be reduced. 


   OPTIONS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------- Chapter STATEMENT:10

In determining the future of the penny in our economy, the various
factors we have highlighted today warrant congressional
consideration--the cost to the government, public attitudes, possible
budgetary impact, the loss of jobs to Mint contractors, and the
fairness of rounding.  In analyzing these factors, we found no clear
path that would lead either to a substantial financial benefit to the
federal government or a clearly expressed preferred course of action
by the American public.  Within this context, however, we identified
the following three options with respect to the future of the penny
for congressional consideration. 

One option would be to stop producing the penny and round all cash
transactions.  H.R.  3761, introduced in 1989, provided a specific
approach for this option.  Among the pros of this option are that it
would allow the government to stop losing some money on the penny's
production and handling activities and that cash transactions between
sellers and buyers might eventually become quicker by eliminating the
time spent associated with handling pennies.  Among the cons are that
people would be forced into having prices rounded, the government
might incur a significant one-time cost from returned pennies, and
contractors producing the penny blanks as well as those in related
businesses would be adversely affected. 

A second option would be to continue with the penny.  Among the pros
of this option are that the public is accustomed to the penny and
that Americans have traditionally resisted changes in their monetary
system.  Among the cons are that the government would continue to
lose money on the penny's production and handling (although not a
substantial amount) and that some people may continue to be
inconvenienced by what they consider to be a nuisance coin. 

A third option would be to make the rounding of cash transactions an
option to the consumer.  Under this option, consumers could elect to
have cash transactions rounded to the nearest 5-cent price or to use
exact change, and the merchant would have to accept the consumer's
choice.  One way to do this would be to adopt the rounding rule in
H.R.  3761.  Among the pros of this option are that consumers would
continue to have the choice of using pennies and that cash
transactions between sellers and buyers might eventually become
quicker if prices were rounded by eliminating the time spent on
handling pennies.  In this situation, demand for the penny might
decrease over time, and the government could then phase out the
penny, with reduced potential for significant one-time costs from
returned pennies.  A con of this option might be that consumers could
try to game the rounding system to their advantage at the expense of
the merchant; for example by opting to round only in those situations
where the final purchase price ended in 1,2, 6, or 7 cents.  Another
con might be that consumers would question whether price adjustments
had already been made to overcome or adjust for their option to round
down. 


   AGENCY COMMENTS
------------------------------------------------- Chapter STATEMENT:11

We discussed our facts, conclusions, and options with the Director of
the Mint and the Assistant to the Federal Reserve Board on July 11
and 12, 1996.  The Mint Director and Mint officials said that they
would have used a different methodology, including a multi-year
approach, to address the issue of whether the penny should continue
to be produced.  They indicated that they would have (1) combined the
analysis of penny production and distribution costs which we
discussed on pages 3 and 7 with the budgetary impact of eliminating
the penny, which we discussed on pages 11 and 12, (2) included as a
benefit of retaining the penny, the savings produced by the existing
stock of pennies in circulation, and (3) recognized the income taxes
paid by the Mint's contractors who work on the penny as a benefit of
retaining the penny.  The Mint officials said that they could not
quantify what specific effects these changes would have, but they
were confident that such an analysis would show that continued penny
production would be more profitable to the government than
elimination of the penny. 

Although we realize that there are a number of ways to analyze the
economics of whether the penny should be continued and each
methodology has limitations, we chose the methodology we used to
respond to the questions as raised by the Subcommittee Chairman,
which dealt with the government's cost to produce and distribute the
penny and the budgetary impact from eliminating the penny.  As
already discussed, we were not able to quantify the budgetary impact
because of the many uncertainties involved.  We did not include the
savings produced from the existing stock of pennies in circulation
because our objective was to review the cost of producing the penny
in 1994, and we counted as a benefit the savings resulting from the
pennies produced in that year.  We agree that had we selected a
multi-year methodology, it would have been appropriate to accumulate
the savings of all pennies produced during the period selected. 
However, we also would have considered the Federal Reserve's penny
handling costs over that multi-year period.  We did not consider the
income taxes paid by Mint contractors as a revenue to the government
in determining the cost of producing and distributing the penny
because these amounts could not be quantified and it is unknown
whether these industries would be unable to replace the Mint business
with other sources of revenue. 

The Mint officials also said that they did not believe overhead and
general and administrative costs should be allocated on the basis of
the number of coins produced because the Mint has less work to do in
minting pennies than other coins.  We did not mean to imply that the
Mint should revise its allocation of overhead and general and
administrative costs to a different basis.  We provided this
allocation as an alternative to show what impact it had on estimated
costs.  As shown on page 7 of our statement, it had very little
impact--it increased the net cost of producing and distributing
pennies to the government from $8.5 million to $9.2 million. 

The Assistant to the Federal Reserve Board said he generally agreed
with our methodology, analysis, and options. 


----------------------------------------------- Chapter STATEMENT:11.1

Mr.  Chairman, that concludes my prepared statement.  We would be
pleased to answer any questions. 


SCOPE AND METHODOLOGY
=========================================================== Appendix I

To determine the government's cost to produce and distribute the
penny in 1994, we obtained and reviewed cost information from the two
agencies involved--the Mint and the Federal Reserve System.  We also
reviewed the Treasury Department's Inspector General (IG) reports on
the Mint's audited financial statements for 1994 and 1995, which
discussed weaknesses in the Mint's cost accounting system.  In
addition, we interviewed Federal Reserve System officials and
obtained data on penny handling costs.  We computed estimated
production and distribution costs of the penny using Mint and Federal
Reserve System costs, adjusted for (1) an allocation of Mint overhead
cost based on the number of coins produced by denomination, and (2)
an allocation of federal retirement costs for workers under the Civil
Service Retirement System (CSRS) that are not paid by the Mint.  Our
estimate was based on data provided for fiscal year 1994. 

To assess public opinion toward the penny, we obtained and reviewed
recent public opinion polls and contracted with the University of
Maryland to conduct a public opinion survey in December 1995 and
January 1996.  We also contacted officials from Australia and New
Zealand regarding their reasons for eliminating their 1- and 2-cent
coins.  In addition, we toured the Philadelphia Mint, the Baltimore
Federal Reserve Branch, and a contractor-operated coin depot to view
the production and handling of pennies. 

To obtain data on the possible economic impact on organizations other
than the Mint, we contacted zinc and the penny blank manufacturers
regarding possible job losses that could result from eliminating the
penny.  We also interviewed tax officials from Virginia and Maryland
to obtain their views on whether eliminating the penny would affect
the collection of state sales taxes.  Further, we contacted a
judgmental sample of financial institutions of different sizes and in
different geographic locations, to obtain information on their penny
handling costs and fees charged to their customers. 

We also contacted five charitable organizations that were identified
in the press as collecting pennies, to obtain their views on whether
eliminating the penny would negatively affect donations.  These five
organizations were the Salvation Army, the Kindness Foundation,
Ronald McDonald Charities, the Muscular Dystrophy Association, and
Common Cents New York. 

To obtain views regarding possible environmental problems caused by
the production and disposal of pennies, we interviewed officials from
the Environmental Protection Agency (EPA), the Natural Resources
Defense Council, and the National Solid Waste Management Association,
as well as a solid waste expert from the University of Arizona.  We
obtained domestic zinc consumption and mining data from the U.S. 
Geological Survey. 

We did our work from September 1995 to July 1996 in accordance with
generally accepted government auditing standards. 

*** End of document. ***