Coin and Currency Production: Issues for Congressional Consideration
(Testimony, 06/26/97, GAO/T-GGD-97-146).
GAO discussed issues related to decreasing the costs of producing the
nations's money, focusing on: (1) the effects of decisions on the
denominational mix of coins and currency on capital investment plans and
production costs; (2) possible structural changes in the entities
involved in producing money; (3) additional contracting out of money
production activities; and (4) the planning of money production.
GAO noted that: (1) both the U.S. Mint and the Bureau of Engraving and
Printing (BEP) have significant capital investment plans that are based
on the current denominational mix of coins and currency; (2) however,
proposals have been made to change the current denominational mix; (3)
implementation of some of those proposals could have a significant
impact on the current capital investment plans of the Mint and BEP; (4)
Treasury has considered whether merging BEP and the Mint and placing BEP
under the Federal Reserve System would produce cost savings; (5)
however, in studies it conducted, Treasury concluded that cost savings
may be possible but that the overall disadvantages may outweigh the
advantages of such organizational changes; (6) Federal Reserve officials
also identified concerns about placing BEP under the Federal Reserve
system; (7) neither the studies that were done nor Treasury officials
GAO contacted provided information explaining the basis for savings or
costs associated with organizational changes; (8) although some other
countries rely on the private sector for money production to a greater
extent than the U.S. does, Treasury has not examined the possibility of
further contracting out of money production primarily because of
security concerns; (9) BEP is in the process of attempting to obtain
competition for currency paper; (10) it is unclear whether BEP will be
successful; (11) strategic plans of the Mint and BEP do not consider the
total cost to the government of producing and distributing the current
denominational mix of coins and currency or of an alternative mix; and
(12) planning that considers such changes and their governmentwide
implications might provide additional insights for Treasury and
congressional decisionmaking.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-GGD-97-146
TITLE: Coin and Currency Production: Issues for Congressional
Consideration
DATE: 06/26/97
SUBJECT: Currency and coinage
Cost control
Monetary policies
Strategic planning
Proposed legislation
Federal agency reorganization
Privatization
Foreign governments
IDENTIFIER: France
Japan
Italy
Germany
Canada
Philadelphia (PA)
United Kingdom
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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
10:00 a.m. EDT
Thursday,
June 26, 1997
COIN AND CURRENCY PRODUCTION -
ISSUES FOR CONGRESSIONAL
CONSIDERATION
Statement of Michael E. Motley
Associate Director, Government Business Operations
Issues, General Government Division
GAO/T-GGD-97-146
GAO/GGD-97-146T
(240242)
Abbreviations
=============================================================== ABBREV
COIN AND CURRENCY PRODUCTION:
ISSUES 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 decreasing the costs of
producing the nation's money. My testimony today discusses the
issues involved in the following four areas: (1) the effects of
decisions on the denominational mix of coins and currency on capital
investment plans and production costs, (2) possible structural
changes in the entities involved in producing money, (3) additional
contracting out of money production activities, and (4) the planning
of money production.
To address these four areas, we interviewed officials at the entities
involved in money production; reviewed the agencies' strategic and
capital plans, and production and cost data; reviewed previous
Department of the Treasury studies on consolidating and reorganizing
the agencies involved in producing and distributing coins and
currency; reviewed relevant laws, legislative histories, and proposed
legislation; and submitted questionnaires to representatives of the
other G-7 nations on how they produced their money. We also reviewed
past GAO and Federal Reserve studies on the replacement of the
1-dollar note with a new coin. We did not verify the information
obtained from the various entities involved in money production or
from foreign countries. A more detailed explanation of our
objectives, scope, and methodology is contained in appendix I.
As I will discuss more fully, Mr. Chairman, my testimony today makes
the following points:
-- Both the U.S. Mint and the Bureau of Engraving and Printing
(BEP) have significant capital investment plans that are based
on the current denominational mix of coins and currency.
However, proposals have been made to change the current
denominational mix. Implementation of some of those proposals
could have a significant impact on the current capital
investment plans of the Mint and BEP.
-- Treasury has considered whether merging BEP and the Mint and
placing BEP under the Federal Reserve System would produce cost
savings. However, in studies it conducted, Treasury concluded
that cost savings may be possible but that the overall
disadvantages may outweigh the advantages of such organizational
changes. Federal Reserve officials also identified concerns
about placing BEP under the Federal Reserve System. Neither the
studies that were done nor Treasury officials we contacted
provided information explaining the basis for savings or costs
associated with organizational changes.
-- Although some other countries rely on the private sector for
money production to a greater extent than the U.S. does,
Treasury has not examined the possibility of further contracting
out of money production primarily because of security concerns.
BEP is in the process of attempting to obtain competition for
currency paper. It is unclear whether BEP will be successful.
-- Strategic plans of the Mint and BEP do not consider the total
cost to the government of producing and distributing the current
denominational mix of coins and currency or of an alternative
mix. Planning that considers such changes and their
governmentwide implications might provide additional insights
for Treasury and congressional decisionmaking.
BACKGROUND
-------------------------------------------------- Chapter STATEMENT:1
Several different organizations have responsibilities related to
money production. For example, Congress decides what coins will be
issued in our country, while the Secretary of the Treasury determines
what currency denominations will be issued. Within Treasury, the
U.S. Mint, established in 1792, manufactures the nation's coins in
Philadelphia and Denver, and BEP has been printing the nation's
currency since 1869. BEP also produces nearly half of the postage
stamps needed by the U.S. Postal Service. The Federal Reserve
System distributes coins and currency to depository institutions,
identifies counterfeit currency, and replaces currency unfit for
circulation.
Money production and related activities involve substantial
resources. For example, in fiscal year 1996, the Mint employed about
2,200 persons and spent $278 million on producing circulating coins,
and BEP employed 2,900 persons and spent $365 million on currency
production at its plants in Washington, D.C., and Fort Worth, Texas.
Also in calendar year 1996, the Federal Reserve spent $190 million to
process coins and currency, and $403 million\1 in new currency
expenses. During the past 5 years, the Mint produced coins with a
total value of $3.9 billion, and BEP produced currency with a face
value of about $680 billion. A more complete description of the
entities involved, the processes used in production, and some
perspective on the public's use of coin and currency are contained in
appendix II.
--------------------
\1 Federal Reserve expenditures of $403 million on new currency
include the BEP's $365 million cost to print currency. The
difference between the $403 million and the $365 million is because
BEP operates on a fiscal year basis and the Federal Reserve operates
on a calendar year basis and the Federal Reserve's costs also include
transportation costs and other minor new currency-related expenses.
CHANGING THE DENOMINATIONAL MIX
OF MONEY COULD AFFECT
PRODUCTION AND CAPITAL COSTS
-------------------------------------------------- Chapter STATEMENT:2
The Federal Reserve does not expect the demand for coins and currency
to be significantly reduced in the near future, despite earlier
predictions by some that electronic money would replace traditional
payment methods. To meet the expected demand for coins and currency
at the current denominational mix, both the Mint and the BEP have
significant capital investments planned to replace aging equipment
and upgrade facilities and to add capacity in the next several years.
However, legislation has been introduced in Congress to replace the
1-dollar note with a 1-dollar coin. In addition, last year, this
Subcommittee held a hearing on the future of the penny and considered
proposed legislation to authorize a circulating commemorative
quarter. Implementing proposals to change the denominational mix
could have an impact on the capital investments currently planned by
the Mint and BEP.
DEMAND FOR COINS AND
CURRENCY IS EXPECTED TO
CONTINUE
------------------------------------------------ Chapter STATEMENT:2.1
The demand for coins and currency is not expected to diminish in the
near future, despite some past predictions to the contrary.
According to a 1995 telephone survey commissioned by the Federal
Reserve, coin and currency transactions accounted for 20 percent of
adult expenditures, compared with two-thirds accounted for by checks
and 12 percent by credit cards and debit cards. The Congressional
Budget Office (CBO) estimated in 1996 that cash payments represent
about $1 trillion, or 20 percent, of annual consumer expenditures.\2
A 1997 Federal Reserve study\3 indicated that the retail payment
system in the United States remains heavily dependent on currency and
paper checks, despite predictions in the 1970s that electronic
payments (e-money) would replace more traditional payment methods.
E-money consists mainly of prepaid stored value cards, smart cards,
and on-line payments made through computer networks. The Federal
Reserve's study concluded that e-money seems unlikely to
fundamentally change the nature of the current payment system in the
near future. The CBO study came to a similar conclusion, saying that
while trials and pilot programs are under way in the United States,
markets for e-money payment systems would emerge slowly. According
to CBO, the low cost and ease of making telephone calls to authorize
purchases or withdrawals for credit and debit cards in the United
States reduce the need for, and the advantages of, smart cards as
used in other countries.
--------------------
\2 Emerging Electronic Methods for Making Retail Payments,
Congressional Budget Office, June 1996.
\3 Report to the Congress on the Application of the Electronic Fund
Transfer Act to Electronic Stored-Value Products, Board of Governors
of the Federal Reserve System, March 1997.
THE MINT AND BEP HAVE
SIGNIFICANT CAPITAL
INVESTMENT PLANS
------------------------------------------------ Chapter STATEMENT:2.2
THE MINT
---------------------------------------------- Chapter STATEMENT:2.2.1
According to the Mint, much of the equipment that it uses to produce
coins is aging and will soon need to be replaced. About 80 percent
of the Mint's coin presses are used primarily to make pennies and
have an average age of 20 years. Mint officials said that last year
the Mint's equipment ran for 3 shifts per day, 5 days per week, in
producing a record 20 billion coins. They said the equipment
suffered at this high level of output because the Mint rarely had
time to take machines off-line to perform maintenance.
The Mint plans to make about $176 million in capital investments over
the next 5 years to replace deteriorated equipment and upgrade
facilities. According to the Mint, this funding would allow the Mint
to continue producing at the 20 billion coins per year level with no
overtime. The Mint's current plans show continued production of the
penny, which, over the last 5 years, accounted for about 71 percent
of its circulating coin production. Further, the Mint's capital
investment plan does not reflect the goal in its strategic plan of
producing 24 billion coins per year by 2002--a 20 percent increase in
output over the current production of 20 billion coins. According to
Mint officials, they plan to update the capital investment plan in a
few years. The Mint's goal of producing 24 billion coins annually
assumes continued production of the current mix of coins.
The Mint's current $176 million capital investment plan also does not
include other capital investments that could materialize. For
example, it does not include an estimated $73 million in capital
investments that would be required to produce a new 1-dollar coin if
Congress authorizes its production. It also does not include the
costs of acquiring a proposed new headquarters facility, which have
not yet been estimated.
BEP
---------------------------------------------- Chapter STATEMENT:2.2.2
BEP has not developed a capital investment plan extending beyond
1999. Although BEP has a capital investment plan for fiscal years
1997 through 1999 showing planned expenditures of $251 million for
the Fort Worth, TX, and Washington, D.C. plants, BEP's Chief
Financial Officer said BEP is likely to spend significantly less than
$251 million because all capital expenditures for the current D.C.
facility, except for essential maintenance expenditures, have been
put on hold, pending a decision on whether BEP will build a
replacement facility for the current Washington, D.C., facility. BEP
officials said that they did not know when this decision will be made
and that it was at least partly dependent on whether the 1-dollar
note is phased out. Preliminary estimates of the cost of a new D.C.
facility range from about $158 million to $250 million.
While BEP could produce all remaining denomination notes at the Fort
Worth facility if the 1-dollar note were discontinued, BEP officials
said this would not be desirable in view of the possibility of a
catastrophe occurring at Fort Worth. BEP officials would like to
continue having a facility in the Washington, D.C., area as a backup
facility. We asked Treasury and Federal Reserve officials if there
were alternatives to having a backup facility. The officials noted
several alternatives, including (1) stockpiling currency, (2)
reducing the Federal Reserve's destruction rate for unfit notes in an
emergency, (3) introducing reciprocal printing agreements with other
countries, and (4) making arrangements with the private sector. They
said currently none of these strategies are employed and each has
both advantages and disadvantages, as discussed below.
-- Stockpile currency: This strategy could reduce the need for BEP
to have two facilities by providing time needed to rebuild
production capacity in the event of a catastrophe. The Federal
Reserve currently has a target of storing a 2-month supply of
currency. According to Federal Reserve officials, most of the
major industrialized countries store a 1-year supply. Storing
additional currency would require the Federal Reserve to acquire
additional vault space.
-- Reduce the rate of destruction of soiled notes: This strategy
would also have the advantage of providing the time needed to
rebuild production capacity. A disadvantage would be that more
soiled money would remain in circulation and that consumers
might experience problems using vending or automated teller
machines.
-- Reciprocal printing agreements with foreign countries: This
alternative could reduce the need for BEP to have two facilities
by providing a back-up printing capability. Other countries
have shown interest in reciprocal agreements with the United
States. This strategy, however, raises security concerns
because the Secret Service, which has responsibility for
investigating counterfeiting, has no investigative authority
outside of the United States.
-- Arrangements with the private sector: This strategy could also
reduce the need for a second BEP facility. According to an
American Banknote Corporation official we interviewed, his
company would have the capacity to produce up to 100 million
notes per month. A disadvantage to this strategy is that it
raises security concerns associated with producing money with
non-government personnel and facilities. Also, variations in
note quality produced by different manufacturers could make
counterfeits harder to detect.
ELIMINATING THE PENNY AND
1-DOLLAR NOTE COULD AFFECT
MINT AND BEP CAPITAL
INVESTMENT PLANS
------------------------------------------------ Chapter STATEMENT:2.3
As shown in table III.1, the Mint produced about 61 billion pennies
over the past 5 years, which accounted for about 71 percent of all
circulating coins produced by the Mint. During this same period, BEP
produced about 21 billion 1-dollar notes, which accounted for about
47 percent of BEP's total note production, as shown in table III.2.
During this 5-year period, the Mint coined a total of $3.9 billion in
coins, and BEP printed a total face value of $679.8 billion in paper
currency, for a total production of $683.8 billion.
Our prior report on the 1-dollar note showed that eliminating this
note could generate substantial operating cost savings and our
testimony on the penny showed that eliminating this coin could also
result in savings. Last year, we testified before this Subcommittee
that the production and distribution of the penny is no longer
profitable to the government.\4 After considering both the Mint's
profit from producing pennies and the Federal Reserve System's cost
of distributing them, we estimated that the net cost to the
government was about $9 million in fiscal year 1994.\5 We testified
in 1995 that $456 million per year could be saved if a new 1-dollar
coin replaced the 1-dollar note.\6 These estimates did not include
the long-term capital investments that could be avoided by not
producing the penny or 1-dollar note.\7
Changing the denominational mix of coin and currency in the near
future could significantly affect the capital investments the Mint
and BEP would have to make in the next decade. Eliminating the penny
could save the Mint about $2 million in planned capital improvements
over the next 5 years and perhaps even larger amounts as the Mint's
aging presses exceed their useful lives and become increasingly
unreliable. Eliminating the 1-dollar note could substantially
reduce, and possibly eliminate, the need for a Washington, D.C.,
production plant. The amount of the savings would vary depending on
what decisions are made by BEP and Treasury regarding whether a
backup facility is needed to supplement the Fort Worth plant for
currency production and whether BEP continues to produce postage
stamps. While no firm estimates have been made, BEP officials said a
new facility could range between $158 million and $250 million.
According to the Mint, a new dollar coin could require an additional
$73 million in capital investment.
As we have reported in the past, decisions on whether to eliminate
the penny and 1-dollar note should include consideration of a variety
of factors in addition to the government's cost savings, such as
public acceptance, the needs of commerce, impact on the economy,
impact on private sector and government workers producing the pennies
and the dollar notes, and the experiences other countries have had.
--------------------
\4 Future of the Penny: Options for Congressional Consideration
(GAO/T-GGD-96-153, July 16, 1996).
\5 The Mint has disagreed with our methodology for estimating the
cost to the government of producing and distributing the penny. The
Mint maintains the penny is still profitable, based on the difference
between the face value of pennies produced and their production
costs, or the seigniorage. We based our methodology on the interest
avoided from the seigniorage, not the gross seigniorage. We did this
to be consistent with our past analyses of a dollar coin and because
only the interest savings is considered by budgetary rules
established in 1968 by the President's Commission on Budget Concepts.
\6 A Dollar Coin Could Save Millions (GAO/T-GGD-95-203, July 13,
1995).
\7 In our 1990 analysis of the dollar coin, we assumed the Mint would
need about $18 million in start-up costs, including capital
equipment. The Mint now estimates that about $92 million in start-up
costs, including $73 million in capital investments, would be needed
for a new 1-dollar coin to replace the 1-dollar note.
OTHER CONGRESSIONAL
DECISIONS ON DENOMINATIONS
COULD ALSO AFFECT CAPITAL
INVESTMENT PLANS
------------------------------------------------ Chapter STATEMENT:2.4
Recent congressional proposals have been made to produce a
circulating commemorative quarter and replacing the Susan B. Anthony
dollar with another coin. The Mint is no longer producing Susan B.
Anthony dollar coins and remaining inventories are decreasing. At
the current withdrawal rate, the Mint and the Federal Reserve have a
36-month supply of Anthony dollars. Currently, the Susan B. Anthony
coin is the only dollar coin authorized by law. A new dollar coin
would require action by Congress and, according to the Mint, 30
months time to develop and begin manufacturing. If a decision is not
made to replace the Anthony dollar with a new coin before the Anthony
dollar is depleted and a new coin is ready for production, the Mint
would be required to resume production of Anthony dollars to meet the
Federal Reserve's demand. Although the coin has not had widespread
public acceptance, due in part to its close resemblance to the
quarter, it is used in certain vending machines and transit systems
and some businesses depend on it.
Congress is also considering a proposal to authorize circulating
commemorative quarters, which would be issued at face value with a
distinctive design. Last year, Congress required the Treasury to
report by June 1, 1997, on the feasibility of a circulating quarter
program to commemorate each of the 50 states. The May 30, 1997,
report contained the results of a public opinion survey indicating
that 51 percent of respondents would favor a 50-state circulating
commemorative coin program, 38 percent had no opinion, and 11 percent
would be opposed. The report said that the seigniorage\8 generated
from this program could be from $2.6 billion to $5.1 billion over a
10-year period. According to the report, this would require an
additional $13 million in capital investments at the Philadelphia
Mint and possibly an additional $22 million at the Denver Mint.
--------------------
\8 Seigniorage is the difference between the face value of coins and
their cost of production.
AVAILABLE INFORMATION DOES NOT
DEMONSTRATE SIGNIFICANT
BENEFITS FROM ORGANIZATIONAL
CHANGES
-------------------------------------------------- Chapter STATEMENT:3
Treasury has considered consolidating BEP and the Mint and placing
BEP under the Federal Reserve. However, it has not moved forward
with either idea. Studies have been done, but none have quantified
whether the savings would outweigh the costs. Furthermore, both
Federal Reserve and Treasury officials identified difficulties that
would need to be overcome before organizational changes would be
successful, and some of the savings that were identified as possible
from structural changes could possibly be achieved by other means.
None of the foreign countries we contacted had merged coin and
currency production into the same organization. However, five of the
six countries placed currency production under their central banks.
CONSOLIDATION OF THE MINT
AND BEP
------------------------------------------------ Chapter STATEMENT:3.1
A Treasury-commissioned study in 1987 and studies recently done for
the National Performance Review (NPR) have identified possible
administrative cost savings from consolidating the Mint and BEP. In
1987, the Assistant Secretary for Management, the Treasurer, and the
Treasury Inspector General conducted a study to determine whether the
consolidation of the Mint and BEP would increase operating
efficiencies. The report concluded that consolidation was feasible
only for a limited number of administrative functions, which
comprised no more than 5 percent of the total workforce of both
bureaus. The functions included executive management, management
analysis, procurement, human resource management, and information
resources management. Treasury officials told us they believed the
savings from consolidation would not significantly exceed
implementation costs. However, the study did not address the
implementation costs. A 1995 Treasury-commissioned NPR study, which
included the merger of BEP and the Mint, identified savings of $4.8
million over a 5-year period through consolidating administrative
functions and reducing personnel. It noted that an expanded
distribution of fixed costs could occur as they could be allocated
across both coins and currency. Another advantage indicated in the
study was that space requirements could be reduced by combining like
functions, such as testing labs.
The 1995 study also noted several disadvantages of merging the two
organizations. Specifically, it concluded that savings would not
significantly exceed implementation costs. The study, however, did
not identify these costs. Another disadvantage cited by the report
was that BEP and the Mint are in substantially different lines of
business, with no technology overlap. Additionally, the study noted
two obstacles to the consolidation. The first was that legislation
would be required, and the second was that bargaining with the Mint's
union and BEP's 18 unions would be required.
Treasury and Federal Reserve officials we interviewed said that the
production processes of BEP and the Mint were dissimilar and that the
production plants were located in different cities. While they said
a merger could produce some administrative savings, most commented
that they did not believe that the savings associated with the merger
would justify the costs. However, they had no analytical basis for
their opinions.
We also contacted representatives of Canada, Germany, France, Italy,
Japan, and the United Kingdom to ask them how they had organized
money production. None of the countries reported that they had coin
and currency production merged within the same organization.
PLACING BEP UNDER THE
FEDERAL RESERVE
------------------------------------------------ Chapter STATEMENT:3.2
Treasury has not studied the possibility of placing the Mint under
the Federal Reserve, but a 1995 NPR study considered the possibility
of bringing the BEP under the Federal Reserve. The study indicated
that, under the reorganization, the Federal Reserve would have more
control and direct oversight of BEP, and BEP would gain the same
procurement and personnel flexibility that benefits the Federal
Reserve, saving $34 million over a 5-year period. However, the study
did not provide any analysis or explanation of how the $34 million
savings were estimated. Treasury officials in the office that
directed the study were not able to provide any additional
information on the savings estimates.
It would be possible to exempt BEP from existing procurement and
personnel regulations while retaining BEP under the Treasury
Department. The Mint already has a waiver from federal procurement
regulations and is attempting to seek such a waiver from personnel
regulations by seeking authority to become a Performance Based
Organization.
Officials at the Federal Reserve told us that they had reservations
about moving BEP to the Federal Reserve. Federal Reserve officials
said that the Federal Reserve has no unionized employees and may not
be prepared to inherit BEP's 18 unions. A Federal Reserve official
also said that placing BEP under the Federal Reserve, with its fully
funded retirement system, could lead to an unfunded pension liability
unless Congress made provisions to appropriate funds to cover the
retirement costs of the BEP employees that would be transferred to
the Federal Reserve's pension system.
For additional perspective, we also contacted representatives of
Canada, Germany, France, Italy, Japan, and the United Kingdom to ask
them how their money production agencies were organized. In all the
countries, coin production is under the executive branch of
government, while currency production, except in Japan, is under the
central bank. In Japan, both currency and coin production are under
the executive branch of government.
OPTIONS MAY EXIST FOR FURTHER
CONTRACTING OUT OF MONEY
PRODUCTION
-------------------------------------------------- Chapter STATEMENT:4
Both the Mint and BEP rely on contracting out for most of the
materials used in money production, as well as for several support
activities. Although some of the foreign countries we contacted rely
on the private sector for basic money production to a greater extent
than we do in this country, Treasury, the Mint, and BEP have not
explored the possibility of contracting out additional money
production activities. Officials within Treasury have a number of
concerns about greater use of the private sector. These concerns
include security as well as the appropriateness of contracting out
for basic money production, which they view as an inherently
governmental function. Treasury contractors we contacted disagree
with Treasury's views. However, since the advantages and
disadvantages of further contracting out have not been thoroughly
studied, it is not clear whether savings would be achieved or whether
the concerns raised by Treasury are valid or could be mitigated. The
BEP has begun recent efforts to obtain competition for supplying
currency paper. It remains to be seen if BEP's recent efforts will
be successful.
SOME COUNTRIES RELY ON THE
PRIVATE SECTOR FOR BASIC
MONEY PRODUCTION
------------------------------------------------ Chapter STATEMENT:4.1
We sent questionnaires to representatives from Canada, Germany,
France, Italy, Japan, and the United Kingdom asking if they
contracted out the production of money. Canada and Germany replied
that currency production is done by private companies, while the
government produces coins.\9 France, Italy, and Japan said that both
coins and currency are produced by the government. In France,
currency production is done by the Bank of France, and in Italy, by
the Bank of Italy. The United Kingdom said that currency is produced
by the Bank of England, a publicly-owned corporation that is not a
government department, and coins are produced by the government mint.
Japan said that it uses a private company to perform some of the
minting process for small denomination coins.
Canada said it contracts out the production of bank notes to two
private companies. According to the Bank of Canada, the advantages
of having private companies produce notes are that the government is
not required to make large capital investments and using two private
producers provides competition. Officials said that the
disadvantages of this arrangement are that research and development
efforts are more costly and difficult. Canadian coins are produced
by the Royal Canadian Mint, which contracts out for supplies of
blanks for the 1-dollar and 1-cent coins. The Canadian Mint obtains
nickel strip for the other coin denominations from private suppliers.
--------------------
\9 In Germany, the federal government is currently the sole
shareholder in one of the two private printers.
THE MINT CONTRACTS OUT MANY
SERVICES AND MATERIALS AND
IS RELUCTANT TO CONTRACT OUT
ADDITIONAL BLANKS
------------------------------------------------ Chapter STATEMENT:4.2
The Mint has contracted out certain support activities related to
basic coin production. It has contracted out for the transportation
of finished coins from Mint facilities to the Federal Reserve Banks;
the manufacture of commemorative and bullion coin packaging materials
and precious metal (e.g., gold, platinum, and silver) coin blanks;
manufacture and assembly of numismatic jewelry; telemarketing
services to assist in marketing commemorative programs; Philadelphia
Mint retail sales; janitorial services; and executive and employee
development programs. The Mint also uses advertising agencies to
develop marketing strategies, creative mailings, and print
advertisements for its commemorative and bullion programs. Mint
officials said that they are also exploring the possibility of
privatizing retail operations at the Denver facility, but are not
considering other contracting opportunities.
The Mint has also contracted out some activities directly related to
coin production. In fact, in fiscal year 1996, $79 million, or about
69 percent, of the $115 million the Mint spent on contracting was for
suppliers of penny blanks and clad strip-metal that is blanked and
stamped for higher denomination coins. The Mint has two suppliers
for copper-plated zinc penny blanks and has two suppliers of clad
strip.
When we asked whether blanks could be contracted out for coins other
than the penny, Mint officials said that none of the Mint's clad
strip suppliers have the necessary equipment to produce blanks for
5-cent through 50-cent denominations. Further, Mint officials said
that contracting out 5-cent through 50-cent coin blanks would present
more of a security risk than penny blanks, since the blanks could be
used in vending machines. Mint officials said its suppliers would
have to construct or obtain separate, secure facilities dedicated
solely to producing coin blanks, the cost of which would be passed on
to the Mint. However, officials from two strip suppliers we
contacted did not agree. Officials from the contractors told us they
could institute additional security measures and could produce a
total of between 2.3 billion and 2.8 billion one-dollar coin blanks a
year with a total capital investment of about $300,000. We did not
independently verify these companies' ability to produce these blanks
or whether cost savings could be achieved by contracting out the
blanks, nor did we examine the security issue.
BEP CONTRACTS OUT MANY
SERVICES AND MATERIALS, HAS
RELIED ON A SOLE- SOURCE
CURRENCY PAPER SUPPLIER, AND
HAS NOT FULLY EXPLORED
FURTHER CONTRACTING
------------------------------------------------ Chapter STATEMENT:4.3
In fiscal year 1997, BEP said that it plans to contract out supplies
and services totalling $128 million specifically related to currency
production, including $65 million for purchasing currency paper.
Since 1879, the Bureau has used a single source, Crane & Co., of
Dalton, MA., for its currency paper. The Treasury Inspector General
has completed numerous audits of BEP's distinctive currency paper
supplier, and has questioned how the contractor has calculated
profit. BEP and the contractor eventually reached a settlement for
the costs questioned by the Inspector General for $12.7 million in
1995. The Treasury Inspector General is currently continuing to
audit the contract.
In 1996, Treasury studied the feasibility of obtaining competition
for the supplying of currency paper. The study noted that other
paper companies have chosen not to compete with Crane because of the
high capital start-up costs that would be required and the limited
market. On May 2, 1997, BEP sought potential offerors for that
business. Before issuing the solicitation, BEP made a draft
solicitation available to interested parties. The draft solicitation
contained a contractor acquired government property provision that
would have provided financial assistance to offerors for acquiring
the necessary equipment to manufacture distinctive currency paper.
The provision, which was to be considered in the price evaluation
when BEP evaluated offerors' proposals, was eliminated from the final
solicitation. In the solicitation issued by BEP in May 1997, the
provision was replaced by another provision allowing offerors to
propose innovative acquisition and financing arrangements. This
solicitation does not specifically mention how this replacement
provision will be evaluated. It is uncertain what effect this will
have on potential offerors. The solicitation was extended on June
19, 1997, to allow offerors until October 24, 1997, to submit their
proposals.
The 1997 Emergency Supplemental Appropriations Act, P.L. 105-18,
signed into law on June 12, 1997, requires us to analyze "the optimum
circumstances for government procurement of distinctive currency
paper" and report our findings to the House and Senate Committees on
Appropriations no later than August 1, 1998. The act also prohibits
BEP from awarding a contract under the solicitation until our review
is completed.
Aside from exploring the possibility of obtaining more than one
supplier of paper, neither Treasury nor BEP has fully explored the
potential for contracting out additional activities associated with
currency production. According to the Treasury Department, currency
production is an inherently governmental function, since a secure and
reliable source for the production of U.S. currency is of paramount
importance to the nation's economy and system of commerce. Treasury
officials also said that the production of currency by a private
contractor is not desirable from a national security perspective.
The Treasurer said that the government does not want to privatize
money production for security and appearance reasons. In addition,
Secret Service officials said that contracting out the production of
1-dollar notes, for example, would be a problem because having more
than one producer creates more variations from the original currency,
making counterfeit detection more difficult. The BEP Director said
that some agency functions such as currency engraving could not be
privatized because of limited availability in the private sector.
We did not independently evaluate whether cost savings would be
achieved by further contracting out currency production or whether
further contracting out would be desirable from a public policy
standpoint. These issues would obviously have to be addressed before
decisions on further contracting out of basic money production could
be made.
PLANNING FOR MONEY PRODUCTION
-------------------------------------------------- Chapter STATEMENT:5
Neither the Mint, BEP, nor the Treasury have overall goals to reduce
production and distribution costs across denominations or across
agencies. This issue is not new and was reported by Treasury in a
1987 study.\10 The study found that planning for future coin and
currency needs is done independently by the Mint and BEP. It stated
that in view of technological changes, including electronic money,
coins and currency should be treated as a single money system by a
single planning entity. The study recommended that a permanent
planning capability be created in the Office of the Treasurer to
focus on strategic planning related to the future structure of coin
and currency for consideration by Congress and the Secretary of the
Treasury. Further, because of the time required to establish a
permanent planning staff, the study recommended that interbureau
working groups should be established until a permanent staff could be
arranged. Treasury officials told us that they established the
interbureau working groups but did not establish the permanent
planning staff in the Office of the Treasurer because they believed
that it was unnecessary.
However, a decade later, Treasury's planning for the production of
money does not consider governmentwide costs or address the mix of
coins and currency. As we have reported in the past, while the Mint
produces pennies at a small unit profit, after considering the
Federal Reserve's costs to distribute pennies, the government as a
whole loses money on the penny. Similarly, a 1-dollar coin would be
much less costly for the government than the 1-dollar note, as we
have reported in the past.
Both the Mint and BEP view their roles as that of meeting public
demand for coins and currency and do not believe they have a role in
determining the denominational mix of the nation's coins and
currency. Both the Mint and BEP's performance measures neglect those
costs of coins and currency borne by other entities, such as the
Federal Reserve. In these respects, both the Mint and BEP have
strategic plans that reflect compartmentalized views of the costs to
produce and distribute money. Although the Treasury Department is
responsible for overseeing the strategic planning efforts of the Mint
and BEP, it has not ensured that strategic plans address the
denominational mix of money or governmentwide costs to furnish money
to the economy.
--------------------
\10 The U.S. Mint and the Bureau of Engraving and Printing: a Study
to Assess the Feasibility of Consolidation, Department of the
Treasury, January 1987.
CONCLUSIONS
-------------------------------------------------- Chapter STATEMENT:6
Congress will soon be faced with several decisions concerning money
production. These decisions are likely to have long-term and
wide-ranging effects on such issues as operating costs and capital
investments of the Mint and BEP, public reaction, the needs of
commerce, and the impact on the current Treasury and Treasury
contractors' workforces. Among the issues Congress may want to
pursue with Treasury as it deliberates on the nation's coins and
currency are the following:
-- The impact that changes to the denominational mix of coins and
currency could have on capital investment needs of the Mint and
BEP;
-- Whether consolidating any administrative functions of the Mint
and BEP or further exempting them from procurement and personnel
regulations would produce cost savings and be otherwise
advantageous;
-- Whether the Mint and BEP should explore additional contracting
out opportunities related to money production; and
-- Whether it would be useful for Treasury, the Mint, and BEP to
address in their strategic plans possible changes to the
denominational mix of coins and currency and the issue of
governmentwide money production and distribution costs.
------------------------------------------------ Chapter STATEMENT:6.1
Mr. Chairman, this concludes my statement. I would be happy to
answer any questions you or other Subcommittee members may have.
OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I
Our objective was to identify potential issues related to reducing
costs in producing coins and currency for the nation's economy. We
were specifically asked to consider our past work on the dollar coin
and penny. We identified the following four issues: the
denominational mix of coins and currency, changes to the
organizational structures of the Mint and BEP, additional contracting
out opportunities, and planning for the future of money production.
To meet our objectives, we interviewed officials from the Treasury,
Mint, BEP, and Federal Reserve and reviewed Mint and BEP strategic
plans, budgets, performance measures, capital investment plans,
production and cost data, reports on the agency revolving funds, and
Treasury studies on consolidating the Mint and BEP and on circulating
commemorative coins. We obtained information about the condition of
money production facilities and equipment by reviewing information on
their age and condition and by touring the Denver Mint and the BEP
production facilities in Washington, D.C., and Fort Worth. To obtain
information about BEP's production of postage stamps, we interviewed
BEP and Postal Service officials and reviewed agency production
agreements.
To study the effects of decisions on the denominational mix of coins
and currency on capital and production costs, we reviewed the capital
investment plans of the Mint and BEP, prior GAO reports on a dollar
coin and the penny, and recent congressional proposals to change the
mix of coins and currency.
We also interviewed Secret Service officials regarding their
anticounterfeiting efforts. To obtain the views of BEP's work force
on management initiatives, we interviewed officials from the Bureau's
major labor unions. We also reviewed historical information about
the creation of the agencies involved in money production and
distribution.
To obtain information about options for contracting Mint and BEP
operations, we interviewed agency officials and obtained information
from the Mint and BEP on the operations they have privatized,
contacted private metal and coin blank suppliers (Olin Brass and PMX
Industries) and a currency printer (American Banknote Corp.), and
reviewed Treasury's May 1997 solicitation for additional currency
suppliers.
We obtained information about the future of electronic money by
interviewing officials from the Office of the Comptroller of the
Currency, the Federal Reserve, Treasury, Mint, and BEP, and by
reviewing CBO and Federal Reserve studies.
We reviewed relevant laws, legislative histories, and proposed
legislation to obtain information about the congressional role in
money production.
To obtain information about the organization of money producing
agencies in other countries, we prepared and submitted questionnaires
to representatives of the other G-7 nations (Canada, France, Germany,
Italy, Japan, and the United Kingdom).
We did not verify the information obtained from the agencies or the
G-7 nations.
We did our work in Washington, D.C., Denver, and Fort Worth, in
accordance with generally accepted government auditing practices from
January through June 1997.
DESCRIPTION OF THE ENTITIES
INVOLVED IN MONEY PRODUCTION,
PRODUCTION PROCESSES USED, AND THE
PUBLIC'S USE OF COINS AND CURRENCY
========================================================== Appendix II
Several government entities are involved in money production,
including the U.S. Mint, BEP, the Secret Service, the Treasury
Department, the Federal Reserve System, and the Congress.
U.S. MINT
------------------------------------------------------ Appendix II:0.1
The Mint was established in 1792 to issue coins as a standard
monetary system for the newly formed country. Before 1792, money
from other countries was used in the colonies. In addition to
producing circulating coins, starting in 1892, the Mint also began
issuing noncirculating coins commemorating certain events,
organizations, and individuals. In 1937, the Mint also assumed
responsibility for protecting the nation's supply of gold and silver.
The Mint's primary mission is to manufacture an adequate number of
coins for the nation to conduct its trade and commerce. The Mint's
circulating and commemorative coin production facilities are located
in Philadelphia and Denver. The Mint also has facilities in San
Francisco and West Point, NY, that manufacture commemorative coins.
The Mint's gold reserves are stored primarily in Fort Knox, KY. As
of February 1997, the Mint had about 2,200 employees at its five
regional facilities and Washington, D.C., headquarters.
In 1996, the Mint spent about $278 million to produce circulating
coins, or about 46 percent of its total $601 million operating costs.
The Mint sells circulating coins at face value to the Federal Reserve
and earns seigniorage, the difference between the coins' face value
and their cost of production.\11
--------------------
\11 Seigniorage is deposited into the Mint's revolving fund, which
was established in 1995. Under P.L. 104-52, the Mint is required to
deposit excess funds from its revolving fund to the Treasury's
General Fund at least annually. In 1996, the Mint transferred about
$587 million to the Treasury's General Fund.
BEP
------------------------------------------------------ Appendix II:0.2
BEP prints the nation's paper currency. Before 1861,
state-chartered, private banks issued paper money, and the federal
government only produced coins. The privately issued notes were
easily counterfeited. In 1861, Congress authorized the U.S.
Treasury to issue the first U.S. government paper money in the form
of non-interest bearing Treasury notes called "demand notes," because
of a shortage of coins and the need to finance the Civil War. Demand
notes were replaced by U.S. notes in 1862, when Congress authorized
the Secretary of the Treasury to have notes engraved and printed by
private bank note companies. The actual printing of currency notes
by Treasury employees began in 1863. In 1869, Congress recognized
BEP in legislation as the entity producing currency notes.
Currently, BEP designs and prints all of the nation's paper currency
in Washington, D.C., and Fort Worth, TX, and produces some U.S.
postage stamps in Washington, D.C. BEP began printing postage stamps
for the Postal Service in 1894. It produced all of the nation's
postage stamps until 1978, when the Postal Service began contracting
out stamp production to determine if costs could be lowered through
competitive bidding by private contractors. Private-sector capacity
to produce postage stamps has grown since 1978, and BEP now produces
less than half of the stamps that the Postal Service requires. In
1996, BEP spent $365 million on currency note production, or about 81
percent of its $450 million in total operating costs; $77 million on
stamp production; and $8 million on other activities, such as the
production of security documents.
U.S. SECRET SERVICE
------------------------------------------------------ Appendix II:0.3
The U.S. Secret Service, another Treasury agency, was created in
1865 to suppress counterfeit currency. By the end of the Civil War,
one-third of all paper currency in circulation was counterfeit.
According to the Treasury Department, by 1875 counterfeiting was
sharply reduced. The current mission of the Secret Service includes
protecting the President and Vice President, their families, and
visiting foreign dignitaries, and enforcing laws relating to U.S.
money and securities as well as those relating to electronic funds
transfer and credit card fraud. The Secret Service works with BEP in
assessing the security of the Bureau's money production facilities
and with currency redesign. For the first 6 months of fiscal year
1997, the Secret Service spent about 11 percent of its time on
anticounterfeiting efforts.
DEPARTMENT OF THE TREASURY
------------------------------------------------------ Appendix II:0.4
The Department of the Treasury was established in 1789 and performs
four basic functions: formulating and recommending the nation's
economic, financial, tax, and fiscal policies; serving as a financial
agent for the U.S. government; enforcing laws under the jurisdiction
of the Secret Service and other Treasury agencies; and overseeing the
production of coins and currency.
The Mint and BEP report to the Secretary of the Treasury through the
U.S. Treasurer and the Assistant Treasury Secretary for Management
and Chief Financial Officer. The Office of the Treasurer of the
United States was established in 1777 and was originally charged with
the receipt and custody of government funds, but these functions have
been assumed by different Treasury bureaus. The Treasurer is also
consulted on policy issues affecting the Mint and BEP, is a member of
Treasury's Advanced Counterfeit Deterrence Committee, acts as a
spokesperson to the public for Mint and BEP issues such as currency
redesign, and promotes the sales of U.S. savings bonds.
FEDERAL RESERVE SYSTEM
------------------------------------------------------ Appendix II:0.5
The Federal Reserve System was established in 1913 as the nation's
central bank to establish a safe and flexible monetary and banking
system. In addition to setting monetary policy for the nation, the
Federal Reserve, which consists of a Board of Governors and 12
Federal Reserve Banks and 25 branches around the country, obtains new
currency and coins from BEP and the Mint and distribute them to the
public through depository institutions. The Federal Reserve Banks
also identify counterfeits and destroy currency that is unfit for
circulation, provide wire and automated clearinghouse transfers of
funds and securities, and process domestic checks.
In 1996, expenses related to coin and currency, including paying and
receiving, processing, and currency destruction, were estimated at
$190 million, or about 9 percent of the Federal Reserve's nearly $2.2
billion budget. The Federal Reserve also spent $403 million on new
currency in 1996.\12 If the cost of new currency is included in the
Federal Reserve's budget, coin and currency costs would represent 23
percent of its total annual costs.\13
--------------------
\12 Of the $403 million in new currency expenses, $389 million was
charged by the BEP for printing currency. The remainder was for
shipping new currency to Federal Reserve banks and other related
expenses.
\13 The Federal Reserve does not include the cost of printing new
currency in its operating budget. According to a Federal Reserve
official, new currency costs are considered separately to avoid being
driven by Federal Reserve Bank operating budgets.
CONGRESS
------------------------------------------------------ Appendix II:0.6
Congress has treated coins and currency differently in the law.
While Congress has specified the denominations of coins that may be
minted as well as their size and metallic composition, it has
authorized the Secretary of the Treasury to decide which currency
denominations to issue, provided that they are at least $1 in value.
PRODUCTION PROCESSES
------------------------------------------------------ Appendix II:0.7
The Mint and BEP produce coins and currency in the amounts ordered by
the Federal Reserve, which are driven by demand for various
denominations conveyed through the banking system. The Mint, rather
than the Federal Reserve, estimates how many coins to produce, while
the Federal Reserve determines the level of currency production. The
Mint uses an economic model to make a projection, with input from the
Federal Reserve's economic forecasts.
The Mint has two contractors that supply metal blanks for stamping of
pennies and two suppliers of clad strip metal, which is blanked and
stamped by the Mint for nickels, dimes, quarters, and half-dollars.
Coins are produced by means of a multistep process involving (1)
punching out round disks called blanks from metal strips, (2) heating
the blanks in an annealing furnace to soften them, (3) sorting out
blanks that are the wrong shape or size, (4) raising a rim around the
edges of the blanks, and (5) striking the blanks in a coining press
with designs and inscriptions to make them U.S. coins.
The BEP's Washington, D.C., currency production facility was built in
1914 (the annex was built in 1938) and is a multifloor manufacturing
plant used for both currency and postage stamps. The Fort Worth
facility, built in 1991, is a single-floor, modern facility used
solely for currency production. BEP has one currency paper supplier.
One contractor provides the Bureau with most of the ink used for the
production of currency. BEP also produces some ink at its
Washington, D.C., plant.
BEP produces currency using intaglio printing, which involves the
engraving of images below the surface of printing plates to provide a
raised image on the notes. Engraved designs are made into dies,
which are transferred to printing plates. The plates are used to
print the currency on high-speed presses. The backs of the notes are
printed with green ink and are allowed to dry for 24 to 48 hours
before the faces are printed with black ink.
After production, coins and currency are transported to the Federal
Reserve System for distribution to depository institutions.
COIN AND CURRENCY USAGE IN
THE UNITED STATES
------------------------------------------------------ Appendix II:0.8
According to the Federal Reserve, a 1995 telephone survey that it
commissioned indicated that cash (coin and currency) transactions
account for 20 percent of the expenditures of the average adult in
the United States, compared with roughly two-thirds accounted for by
checks and 12 percent by credit and debit cards. A 1995 Federal
Reserve System survey indicated that 67 percent of U.S. families
have bank credit cards; that 40 percent of families have an
outstanding balance on a credit card; and that 15.1 percent of
families do not have checking accounts.\14 A 1996 CBO report
estimated that cash payments represented approximately $1 trillion of
annual consumer expenditures, or about 20 percent of the total
consumer expenditures of $5 trillion.\15
--------------------
\14 In the survey, reported in "Family Finances in the U.S.: Recent
Evidence from the Survey of Consumer Finances," Federal Reserve
Bulletin, January 1997, families were defined as households, which
includes single people.
\15 Emerging Electronic Methods for Making Retail Payments,
Congressional Budget Office, June 1996.
MINT AND BEP MONEY PRODUCTION
========================================================= Appendix III
Table III.1
Mint Coinage Production, Fiscal Years
1992-1996
(Numbers in millions)
% of % of % of % of % of % of
Denomi tota tota tota tota tota tota
nation 1992 l 1993 l 1994 l 1995 l 1996 l total l
------ ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ===== ----
1 9,007 74.8 11,2 79.7 13,4 70.0 13,4 68.7 13,6 67.6 60,83 71.4
82 59 19 69 6
5 903 7.5 655 4.6 1,45 7.5 1,62 8.3 1,74 8.6 6,371 7.5
0 3 0
10 1,294 10.7 1,17 8.3 2,52 13.1 2,36 12.1 2,80 13.8 10,15 11.9
7 1 5 1 8
25 806 6.7 1,00 7.1 1,75 9.1 2,07 10.6 1,95 9.7 7,592 8.9
9 2 0 5
50 35 0.3 30 0.2 38 0.2 42 0.2 70 0.4 215 0.3
================================================================================
Total 12,04 100. 14,1 100. 19,2 100. 19,5 100. 20,2 100. 85,17 100.
5 0 53 0 20 0 19 0 35 0 2 0
--------------------------------------------------------------------------------
Note: Some percentages do not total to 100 due to rounding.
Source: U.S. Mint.
Table III.2
BEP Note Production, Fiscal Years 1992-
1996
(Number in millions)
% of % of % of % of % of % of
Denomi tota tota tota tota tota tota
nation 1992 l 1993 l 1994 l 1995 l 1996 l total l
------ ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ===== ----
$1 4,090 48.4 3,57 44.5 4,56 48.9 4,78 48.1 4,16 44.1 21,18 46.8
7 3 7 7 4
$2 0 0.0 0 0.0 0 0.0 0 0.0 51 0.5 51 0.1
$5 787 9.3 877 10.9 1,00 10.8 1,06 10.7 1,15 12.3 4,896 10.8
5 9 8
$10 1,037 12.3 826 10.3 794 8.5 672 6.7 1,01 10.7 4,340 9.6
1
$20 1,760 20.8 2,17 27.0 2,25 24.1 2,55 25.6 1,36 14.4 10,09 22.3
0 3 3 3 9
$50 557 6.6 259 3.2 115 1.2 147 1.5 442 4.7 1,520 3.4
$100 218 2.6 323 4.0 605 6.5 730 7.3 1,25 13.2 3,127 6.9
1
================================================================================
Total 8,449 100. 8,03 100. 9,33 100. 9,95 100. 9,44 100. 45,21 100.
0 2 0 5 0 8 0 3 0 7 0
--------------------------------------------------------------------------------
Note: Some percentages do not total to 100 due to rounding.
Source: BEP.
RELATED GAO PRODUCTS
Future of the Penny: Options for Congressional Consideration
(GAO/T-GGD-96-153, July 16, 1996).
Federal Reserve System: Current and Future Challenges Require
Systemwide Attention (GAO/GGD-96-128, June 17, 1996).
U.S. Mint: Commemorative Coins Could be More Profitable
(GAO/GGD-96-113, August 7, 1996).
A Dollar Coin Could Save Millions (GAO/T-GGD-95-203, July 13, 1995).
1-Dollar Coin: Reintroduction Could Save Millions if It Replaced the
1-Dollar Note (GAO/T-GGD-95-146, May 3, 1995).
1-Dollar Coin: Reintroduction Could Save Millions If Properly
Managed (GAO/GGD-93-56, Mar. 11, 1993).
A New Dollar Coin Has Budgetary Savings Potential But Questionable
Acceptability (GAO/T-GGD-90-50, June 20, 1990).
Limited Public Demand for New Dollar Coin or Elimination of Penny
(GAO/T-GGD-90-43, May 23, 1990).
National Coinage Proposals: Limited Public Demand for New Dollar
Coin or Elimination of Pennies (GAO/GGD-90-88, May 23, 1990).
*** End of document. ***