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Board of Governors of the Federal Reserve System

2001

Board of Governors of the Federal Reserve System

2001

May 2001
This publication is available from Publications Services, Board of Governors
of the Federal Reserve System, Washington, DC 20551. It is also available
on the Board’s World Wide Web site, at http://www.federalreserve.gov/

Contents
1
1
1
4

Introduction
FEDERAL RESERVE BUDGET PROCESSES
AND OPERATIONAL AREAS
Summary of 2000 income and expenditures
Budget processes
Operational areas

Part I The Budgets
11
12
13
14

Chapter 1
FEDERAL RESERVE SYSTEM
Net expenses
Trends in expenses and employment
2001 budget initiatives

15
15
17
19
22
24
24
25
26

Chapter 2
BOARD OF GOVERNORS
Overview of the budget process
Highlights of the budget
Operations budget by division and account classification
Operations budget by operational area
Capital budget
Positions
Trends in expenses and employment
Extraordinary items

29
30
32
37
37

Chapter 3
FEDERAL RESERVE BANKS
2000 budget performance
Factors affecting the 2001 budget
Risks in the 2001 budget
2001 capital plan

Part II Special Analysis
43
43
44
46
47

Chapter 4
CHECK MODERNIZATION
Background
Check modernization projects
Project management
Anticipated benefits

Appendixes
51
51
54
54

Appendix A
SPECIAL CATEGORIES OF SYSTEM EXPENSE
Priced services
Capital outlays
Currency printing and circulation

57

Appendix B
SOURCES AND USES OF FUNDS

59
59
59
65

Appendix C
FEDERAL RESERVE SYSTEM AUDITS
Independent audit
General Accounting Office
Office of Inspector General

67

Appendix D
EXPENSES AND EMPLOYMENT
AT THE FEDERAL RESERVE BANKS

74

MAPS OF THE FEDERAL RESERVE SYSTEM

1

Introduction

Federal Reserve Budget Processes
and Operational Areas
The Federal Reserve System consists of
the Board of Governors in Washington,
D.C., the twelve Federal Reserve Banks
with their twenty-five Branches distributed throughout the nation, the Federal
Open Market Committee (FOMC), and
three advisory groups—the Federal
Advisory Council, the Consumer Advisory Council, and the Thrift Institutions
Advisory Council. The System was
created in 1913 by the Congress to
establish a safe and flexible monetary
and banking system. Over the years, the
Congress has given the Federal Reserve
more authority and responsibility for
achieving broad national economic and
financial objectives.
As the nation’s central bank, the
Federal Reserve has many, varied
responsibilities: It acts to ensure that the
nation’s economy grows at a pace
consistent with price stability; it serves
as the nation’s lender of last resort, with
responsibility for forestalling national
liquidity crises; and it is involved in
bank supervision and regulation, with
responsibilities for bank holding companies, financial holding companies
(created under the Gramm–Leach–
Bliley Act, enacted in November 1999),
state-chartered banks that are members of the Federal Reserve System, the
foreign activities of U.S. banks, and
the U.S. activities of foreign banks.
The Federal Reserve also administers
the nation’s financial consumer protection laws.
The Federal Reserve System plays a
major role in the nation’s payment
mechanism. The Reserve Banks distribute currency and coin; process

Fedwire, automated clearinghouse, and
securities transfers; and process checks.
In addition, the Federal Reserve Banks
serve as the fiscal agents of the United
States and provide a variety of financial
services for the Treasury and other
government agencies.

Summary of 2000 Income
and Expenditures
In carrying out its responsibilities in
2000, the Federal Reserve System
incurred an estimated $1.3 billion in net
operating expenses. Total spending of an
estimated $2.5 billion was offset by an
estimated $1.2 billion in revenue from
priced services, reimbursements, and
other income received from services
provided to the Department of the
Treasury.
The major source of Federal Reserve
income is earnings on the portfolio
of U.S. government securities in the
System Open Market Account, estimated at $32.7 billion in 2000. Earnings in excess of expenses, dividends,
and surplus are transferred to the
U.S. Treasury—in 2000 an estimated
$25.3 billion. (These earnings are treated
as receipts in the U.S. budget accounting
system and as anticipated earnings
projected by the Office of Management
and Budget in the U.S. budget.)

Budget Processes
Beginning with the 1998–99 budget, the
Board of Governors has operated on a
two-year budget cycle and a four-year
planning cycle. This multiyear process

2

Annual Report: Budget Review, 2001

allows the Board to define and implement long-term strategies across functional areas. Given their current business
needs, the Federal Reserve Banks
maintain an annual budget cycle.
The following sections give an overview of the separate budgets and budgeting processes followed by the Board of
Governors and the Reserve Banks. The
Federal Reserve System’s intent in the
development and publication of this
document is to provide the reader with
the assumptions and initiatives considered when the Federal Reserve System
budgets were developed and approved
by the Board of Governors. The information contained in this document reflects
the budgets and other information
provided to the Board for approval in
December 2000.

Board of Governors
The Board’s budget covers a two-year
period. The first year of the budget
cycle—the even-numbered year—is used
to update the strategic plan for the next
four years, and the second year is used
to develop the budget for the next
two years.
The two-year cycle begins in the fall
(thus, for the 2000–01 budget, the fall of
1998). At that time, the Board’s divisions examine their operating environments and look for any adjustments to
their priorities, activities, and resources
that might improve the efficiency and
effectiveness of the Board’s operations.
The management of each division
discusses with the appropriate Board
oversight committee the issues that
result from its review. After any adjustment, the results are given to the Staff
Planning Group, a small group of senior
managers with a Boardwide perspective,
for use in their analysis of the Board’s
budget options.

After consulting with the Board-level
Committee on Board Affairs for final
guidance, the Staff Planning Group
updates the strategic plan, which is used
to prepare a preliminary budget objective that identifies the level and allocation of resources needed to support the
plan. As part of this process, individual
division budget objectives are prepared
on the basis of Boardwide priorities and
planning assumptions. The Committee
on Board Affairs reviews the plan and
preliminary budget objective, clarifies
outstanding planning issues with the
Staff Planning Group and division directors, and by summer of odd-numbered
years submits the budget to the Board
for its consideration.
The divisions use the budget objective approved by the Board to complete their budgeting under the approved
plan. The Board’s Committee on Board
Affairs, under authority delegated by the
Chairman, oversees the process until the
budget is submitted to the Board for
action at an open meeting in the fall of
the odd-numbered year.
The Board of Governors budgets its
activities across operational areas. Direct
costs, such as those for salary, retirement, insurance, and travel, are billed
to the operational areas. Costs for data
processing are also charged as a direct
expense to each of the areas according
to service-level agreements (at prices
derived from the cost of resources
needed to provide the services and
agreed upon before the budget year
starts); expenses for other elements of
support and overhead are distributed
among the operational areas in proportion to the share of direct costs attributable to each area.
The Board, in accordance with generally accepted accounting principles,
capitalizes certain assets and depreciates
their value over appropriate periods
instead of expensing them in the year of

Introduction
purchase. Hence, the Board has both an
operations budget and a capital budget.
After the budget is approved by the
Board, it is converted to an operating
plan that allocates expenditures by
month; the operating plan is also the
vehicle for subsequent adjustments
within the budget. Also at this point,
the cash requirement for the first half
of the calendar year is estimated, and
the amount is raised by an assessment on each of the Reserve Banks
in proportion to its capital stock and
surplus. The cash requirement for the
second half of each year is estimated in
June, and another assessment is made in
July.
The Board accounts for extraordinary
items separately from the operations
budget so that unique, one-time requirements do not compete with regular
operations and so that expenses in those
operations can be readily compared
across years without distortion. As discussed more fully in chapter 2, the
extraordinary items budget for 2000–01
consists of funds to support two periodic
surveys, one on consumer finances and
the other on small business finances, and
the century date change work completed
in early 2000.
The Board’s Office of Inspector General (OIG), in keeping with its statutory
independence, prepares its proposed
budget apart from the Board’s budget.
The OIG presents its two-year budget
directly to the Chairman for action by
the Board, also at an open meeting in the
fall.

Reserve Banks
Each year the Federal Reserve Banks
establish major operating goals for the
coming year, devise strategies to attain
those goals, estimate required resources,
and monitor results. The process begins
with development of a preliminary

3

budget projection, which is reviewed by
the Board of Governors. Each Bank then
develops its own budget. The budgets
are reviewed at the Board by a committee of governors—the Committee on
Federal Reserve Bank Affairs—both
individually and in the context of Systemwide issues and the plans of the
other Banks. The budgets are then
presented to the full Board of Governors
for final action at an open meeting in
December.
The Banks’ budgets are structured
in operational areas (described below),
with support and overhead charged to
these areas.
As is the case with the Board, the
Banks, in accordance with generally
accepted accounting principles, capitalize certain assets and depreciate their
value over appropriate periods instead
of expensing them in the year of purchase. Hence, the Banks have a capital
budget in addition to an operating
budget.
The operations and financial performance of the Reserve Banks are
monitored throughout the year via a
cost-accounting system, the Planning
and Control System (PACS). Under
PACS, the costs of all Reserve Bank
services, both priced and nonpriced,
are grouped by operational area, and
the costs of support and overhead are
charged to these areas. PACS makes
it possible to compare budgets with
actual expenses and enables the Board
of Governors to compare the financial
and operating performances of the
Reserve Banks.
Beginning with the 2001 budget,
significant structural changes have been
made to PACS. As a result of these
changes, some expenses were shifted
to different operational areas, thus limiting functional and District comparability of 2001 budget data with budget
and expense data from previous years.

4

Annual Report: Budget Review, 2001

Changes to Federal Reserve Bank
accounting methodology are detailed in
chapter 3 of this book.

Operational Areas
In 2000 the Federal Reserve System
accounted for costs using the following
categories—monetary and economic policy, supervision and regulation of financial institutions, services to financial
institutions and the public, services to
the U.S. Treasury and other government
agencies, and System policy direction
and oversight.

Monetary and Economic Policy
The monetary and economic policy
operational area encompasses Federal
Reserve actions to influence the availability and cost of money and credit
in the nation’s economy.
A vast amount of banking and financial data flows through the Reserve
Banks to the Board, where it is compiled
and made available to the public. The
research staffs at the Board and the
Reserve Banks use these data, along
with information collected by other
public and private institutions, to assess
the state of the economy and the relationships between the financial markets
and economic activity. Staff members
provide background information for the
Board of Governors and for each meeting of the FOMC by preparing detailed
economic and financial analyses and
projections for the domestic economy
and international markets. The Board
and the FOMC use these analyses and
projections in setting reserve requirements, setting the discount rate (which
affects the cost of borrowing), and
conducting open market operations. Staff
members also conduct longer-run economic studies on regional, national, and
international issues.

Supervision and Regulation
The Federal Reserve System plays a
major role in the supervision and regulation of banks and bank holding companies. The Board of Governors adopts
regulations to carry out statutory directives and establishes System supervisory and regulatory policies; the
Reserve Banks conduct on-site examinations and inspections of state member
banks and bank holding companies,
review applications for mergers, acquisitions, and changes in control from banks
and bank holding companies, and take
formal supervisory actions. In 2000, the
Federal Reserve conducted 589 examinations of state member banks (some
of them jointly with state agencies) and
1,247 inspections and 2,351 risk assessments of bank holding companies; it
acted on 3,232 international and domestic applications.
The Board also enforces compliance
by state member banks with the federal laws protecting consumers in their
use of credit. In 2000, the System
conducted 388 compliance examinations, including 284 covering state
member banks and 104 covering foreign banking organizations. Procedures
related to the Community Reinvestment
Act were included in 114 of the compliance examinations.
The Board’s supervisory responsibilities also extend to the foreign operations
of U.S. banks and, under the International
Banking Act, to the U.S. operations of
foreign banks. Beyond these activities,
the Federal Reserve maintains continuous oversight of the banking industry to
ensure the overall safety and soundness
of the financial system. This broader
responsibility is reflected in the System’s
presence in financial markets, through
open market operations, and in the
Federal Reserve’s role as lender of last
resort.

Introduction

Services to Financial Institutions
and the Public
The Federal Reserve System plays a
central role in the nation’s payment
mechanism, which is composed of many
independent systems that move funds
among financial institutions across the
country. The Reserve Banks obtain
currency and coin from the Bureau of
Engraving and Printing and from the
Mint and distribute them to the public
through depository institutions; they
receive deposits of currency and coin
from depository institutions; and they
identify counterfeits and destroy currency that is unfit for circulation.
In 2000, the Reserve Banks received
$564.3 billion in currency and $3.9 billion in coin from depository institutions,
distributed an estimated $527.3 billion
in currency and $6.3 billion in coin,
and destroyed $112.2 billion in unfit
currency.
The Reserve Banks (along with their
Branches and regional centers) also
process checks for collection. In 2000,
the Reserve Banks processed approximately 17 billion commercial checks for
collection with a total value of nearly
$13 trillion.
The Federal Reserve also plays a
central role in the nation’s payment
mechanism through its funds transfer
system, Fedwire. Through Fedwire,
depository institutions can draw on their
reserve or clearing balances at the
Reserve Banks and transfer funds anywhere in the country. In 2000, approximately 104.2 million transfers valued at
about $379 trillion were sent over the
Fedwire funds transfer system, an average of $3.6 million per transfer and
$1.5 trillion per day.
The Federal Reserve allows participants in private clearing arrangements
to exchange and settle transactions on
a net basis through reserve or clearing

5

account balances. Users of net settlement services include check clearinghouse associations, automated clearinghouse (ACH) networks, credit card
processors, automated teller machine
networks, and a national funds transfer
network. The Federal Reserve offers
three types of settlement services:
‘‘settlement sheet,’’ Fedwire-based, and
enhanced.1 The Reserve Banks provide
settlement services to approximately
ninety-one local and national privatesector clearing and settlement arrangements. In 2000, the Reserve Banks
processed more than 390,000 settlement
entries for these arrangements.
The Federal Reserve’s ACH service
allows depository institutions to send or
receive payments electronically instead
of by check. Institutions use the ACH
service for credit and debit transactions.
In 2000, the Reserve Banks processed
approximately 3.8 billion ACH transactions valued at about $11.3 trillion;
approximately 19 percent of the transactions were for the federal government, and the rest were for commercial
establishments.
Reserve Banks provide securities services for the handling of book-entry
(computer-based) securities and the collection of interest coupons and miscellaneous items. The book-entry service
enables the holders of Treasury and
government agency securities to transfer the securities electronically to other
institutions throughout the country. In
2000, the Reserve Banks processed
approximately 14.5 million securities
transfers valued at $190 trillion, an
average of $13 million per transfer and
$754 billion per day. The noncash
collection service, through which maturing or called physical coupons and
1. The settlement sheet service will be phased
out by year-end 2001, when all its participants
must move to the enhanced service.

6

Annual Report: Budget Review, 2001

bonds are presented for collection,
processed about 508,400 transactions in
2000.

Services to the U.S. Treasury
and Other Government Agencies
The Reserve Banks provide fiscal agency
and depository services to the U.S. government. Through its deposit accounts
at the Reserve Banks, the government
makes payments and collects receipts.
The Reserve Banks provide the Department of the Treasury with daily statements of account activity. The Reserve
Banks provide claims for reimbursement to the Treasury and other government agencies for the full cost of providing these services; reimbursement
was received or is expected for all but a
relatively small portion of the expenses
claimed.
As fiscal agents, Reserve Banks provide the Treasury with services related
to the federal debt. For example, Reserve
Banks issue, service, and redeem marketable Treasury securities and savings
bonds; they also process secondary
market Fedwire securities transfers
initiated by depository institutions. The
Reserve Banks operate two book-entry
(computer-based) securities systems for
the custody of Treasury securities—the
Fedwire book-entry securities system
and Treasury Direct. Almost all bookentry Treasury securities are maintained
on Fedwire, which is also the nation’s
principal securities transfer mechanism; the remainder are maintained on
Treasury Direct, which is used by
individuals.
As depositories, Reserve Banks collect and disburse funds on behalf of the
federal government. The Reserve Banks
maintain the Treasury’s funds account,

accept deposits of federal taxes and fees,
pay checks drawn on the Treasury’s
account, and make Fedwire and automated clearinghouse payments on behalf
of the Treasury. In 2000, the Treasury
continued to encourage electronic payments to reduce payments made by
check.
The Reserve Banks, as fiscal agents
and depositories of the United States,
collect federal taxes and invest excess
Treasury balances with depository
institutions. Any depository institution
can accept tax deposits and immediately
remit them to the Treasury. Approximately 1,300 depository institutions
accept tax proceeds as investments and
pay interest on the funds until Treasury
calls the balances. These investments
and other funds held at depository institutions must be collateralized at all
times. During the fourth quarter of 2000,
the Reserve Banks introduced new
software, called the Treasury Investment
Program (TIP), for collecting and investing tax proceeds. A principal enhancement of TIP is the real-time monitoring
of collateral and removal of undercollateralized balances.
The Reserve Banks also provide fiscal
agency and depository services to other
domestic and international government
agencies. Depending on the authority
under which the services are provided,
the Reserve Banks may maintain bookentry accounts of government agency
securities; provide custody for the stock
of unissued, definitive (physical) securities; maintain and update balances of
outstanding book-entry and definitive
securities for issuers; maintain funds
accounts for government agencies; and
provide various payment services,
including the processing and destroying
of redeemed food coupons for the
U.S. Department of Agriculture.

Introduction

System Policy Direction and
Oversight
This operational area encompasses
activities by the Board of Governors
in supervising Board and Reserve Bank
programs. At the System level, the

7

expenses for these activities are considered overhead and are therefore allocated across the other operational areas.
At the Board level, these expenses are
not treated as overhead nor allocated to
other operational areas.

Part I
The Budgets

11

Chapter 1

Federal Reserve System
For 2001, total operating expenses are
budgeted at $2,659.8 million, an increase
from estimated 2000 expenses of
7.0 percent. Of this total, $2,442.2 million is for the Reserve Banks, and
$217.6 million is for the Board of
Governors (tables 1.1 and 1.2).1 Revenue from priced services provided to
depository institutions is expected to
total $977.8 million, or 36.8 percent
of total budgeted operating expenses.
This revenue, combined with claims for
reimbursement and other income, results
in projected net operating expenses of
$1,391.6 million.2
1. The Board of Governors now budgets on a
two-year cycle (see chapter 2); in this chapter,
2001 values shown for the System and the Board
reflect the approximate second-year effect of the
Board’s 2000–01 budget.
2. Other income (table 1.1) comes from services provided on behalf of the U.S. Treasury that
are paid for by the depository institutions using the

Not included in the budget for operations is the cost of currency, budgeted at
$427.0 million for 2001, a decrease of
1.9 percent from the estimated 2000 cost
of $435.2 million.3 The distribution of
expenses is similar to that in previous
years, with the Reserve Bank’s expenses
accounting for approximately threefourths of the total (chart 1.1).
System employment is budgeted at
25,090 for 2001, an increase of 69 from
the estimated 2000 level (details are
given in chapters 2 and 3).

services; included are fees for services such as the
settlement of transfers among depository institutions and the wire transfer of funds between
depository institutions and the Treasury.
3. The Federal Reserve bears the cost associated with the printing of new currency at the
Bureau of Engraving and Printing. Because this
cost is determined largely by public demand for
new currency, it is not included in Federal Reserve
operating expenses. See appendix A.

Table 1.1
Operating Expenses of the Federal Reserve System, Net of Receipts
and Claims for Reimbursement, 1999–2001
Millions of dollars except as noted

Item

Total System operating expenses . . . . . . . . .
Less
Revenue from priced services . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . .
Claims for reimbursement1 . . . . . . . . . . . . .
Equals
Net System operating expenses . . . . . . .

Percent change

2000
(estimated)

2001
(budgeted)

2,378.9

2,485.2

2,659.8

4.5

7.0

867.6
1.9
295.4

916.1
1.0
310.2

977.8
.3
290.1

5.6
−47.4
5.0

6.7
−70.0
−6.5

1,214.0

1,257.9

1,391.6

3.6

10.6

1999

Note. Components may not sum to totals and may not
yield percentages shown because of rounding.
Operating expenses reflect all redistributions for support and overhead and exclude capital outlays.

1999 to 2000 2000 to 2001

1. Costs of fiscal agency and depository services provided to the U.S. Treasury and other government agencies
that are billed to these agencies.

12

Annual Report: Budget Review, 2001

Table 1.2
Expenses of the Federal Reserve System for Operations and Currency, 1999–2001
Millions of dollars except as noted
Entity and
type of expense

1999

Reserve Banks 1 . . . . . . . . . . . . . . . . . . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . .

Percent change

2000
(estimated)

2001
(budgeted)

2,193.8
1,459.5
734.3

2,297.8
1,523.5
774.3

2,442.2
1,611.6
830.6

4.7
4.4
5.4

6.3
5.8
7.3

Board of Governors 2 . . . . . . . . . . . . . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . .

185.1
131.3
53.9

187.4
139.7
47.8

217.6
152.8
64.8

1.2
6.4
−11.4

16.1
9.4
35.7

Total System operating expenses . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . .

2,378.9
1,590.8
788.2

2,485.2
1,663.2
822.1

2,659.8
1,764.4
895.4

4.5
4.6
4.3

7.0
6.1
8.9

Currency 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

485.7

435.2

427.0

−10.4

−1.9

1999 to 2000 2000 to 2001

Note. See general note to table 1.1.
1. For detailed information on Reserve Bank expenses,
see chapter 3.

2. Includes extraordinary items and expenses of the
Office of Inspector General. See text note 1 and chapter 2.
3. See text note 3 and appendix A.

Net Expenses

show an increase of 10.6 percent from
estimated 2000 net operating expenses
(table 1.1).
As required by the Monetary Control
Act of 1980, revenue from priced
services represents fees set to recover,
over the long run, all direct and indirect
costs of providing the services plus
imputed costs, such as taxes that would
have been paid and the return on capital
that would have been earned had the
services been provided by a private
business. Table 1.3 provides details on
projected revenue from priced services;
the constraints imposed on Federal
Reserve budgets by the need to keep
such services competitive and the
calculation of fees are discussed in
appendix A.
Claims for reimbursement are based
on the expenses Reserve Banks incur
in providing fiscal agency services to
the Treasury and other government
agencies.

The System expects to recover 47.7 percent of its budgeted 2001 operating
expenses through revenue from priced
services, other income, and claims for
reimbursement. When these items are
deducted from budgeted 2001 operating
expenses, the net expenses of the System
Chart 1.1
Distribution of Expenses of the
Federal Reserve System, 2001

Currency, 13.8%

Board of
Governors, 7.0%

Reserve Banks, 79.2%
Note. See text notes 1 and 3.

Federal Reserve System
Table 1.3
Revenue from Priced Services, 1999–2001
Millions of dollars

1999

Service

Funds transfers and
net settlement . . . . . . . .
Automated clearinghouse .
Commercial checks . . . . . . .
Book-entry securities
transfers . . . . . . . . . . . . .
Noncash collection . . . . . . .
Special cash services . . . . .
Total . . . . . . . . . . . . . . . . . . . .

2000
(estimated)

65.0
70.6
757.8
18.0
2.4
2.3

19.9
2.0
1.7

867.6

916.1

977.8

Percent

63.2
75.5
815.4

17.3
3.0
3.0

Chart 1.3
Cumulative Change in Federal Reserve
System Expenses and Federal Government
Expenses, 1992–2001

2001
(budgeted)

69.2
67.8
707.3

13

60

Sources and uses of funds are presented in appendix B and the audits of
the System are listed in appendix C.

Trends in Expenses and
Employment
From actual 1992 levels to budgeted
2001 amounts, the operating expenses
of the Federal Reserve System have
increased an average of 4.8 percent per
year (2.9 percent per year when adjusted
Chart 1.2
Operating Expenses of the
Federal Reserve System, 1992–2001
Billions of dollars

40

Federal Reserve

20
Federal government

1992

1997

2001

Note. Federal government expenses are discretionary
spending less expenditures on defense. See also general
note to chart 1.2.

for inflation) (chart 1.2). Over the same
period, nondefense discretionary spending by the federal government has
increased an annual average of 4.4 percent (chart 1.3). Over the 1992–2001
period, Federal Reserve System employment has decreased 372 (chart 1.4).
Two areas grew notably during this
period. Spending on banking supervision rose to meet the increase in the
number and complexity of examinations, to provide enhanced supervision
Chart 1.4
Employment in the
Federal Reserve System, 1992–2001
Thousands of persons

2.5

Current dollars
1996 dollars 1

26
2.0
25
1.5
24

1992

1997

2001

Note. For 2000, estimated; for 2001, budgeted (for
more detail see text note 1).
1. Calculated with the GDP price deflator.

1992

1997

Note. See general note to chart 1.2.

2001

14

Annual Report: Budget Review, 2001

of foreign institutions, and to meet the
requirements of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and the Federal
Deposit Insurance Corporation Improvement Act of 1991. Spending also
increased as the Reserve Banks consolidated computer operations into
three sites. Expenses for this centralization effort began to increase in 1992
and peaked during 1995 and 1996, as
redundant equipment and staffing were
needed prior to full transition. These
expenditures have been balanced over
the past several years by savings enabled
by greater efficiencies and economies
of scale. In addition, Reserve Banks
have reduced expenses by consolidating
several operations performed on behalf
of the Treasury.
Reserve Banks have also realized
productivity gains in the cash and check
services areas. Based on several measures of productivity, each service has
improved productivity by at least
25 percent since 1992.

2001 Budget Initiatives
In 2001, several major initiatives will
continue to affect System budgets. As
discussed in chapters 3 and 4, installation of equipment and software to support the standardization of check processing and check imaging and archiving
is one of the primary drivers of the
overall System budget. In addition,
several Banks will realize the expense
effect of facility upgrades, repairs, and
maintenance.
Partly offsetting the greater expenditures associated with these initiatives are
the lower costs associated with staff
reductions, which were made possible
by several reengineering initiatives and
programs to increase efficiency in Federal Reserve operations, including the
Treasury Direct and Treasury Tax and
Loan consolidation efforts.

15

Chapter 2

Board of Governors
As noted in the introduction to this
book, the budget for the Board of
Governors covers a two-year period.
During 2000, the first year of the current budget period, a number of minor
reallocations were made within the
2000–01 approved operations budget.
The operations budget was also increased
$2.2 million to fund larger-thanbudgeted staff merit pay increases and
to enhance security procedures for the
Chairman. An additional $2.7 million
was added to the capital budget for
an emergency generator to enhance the
Board’s ability to operate in emergency
situations.
The revised 2000–01 budget for the
Board of Governors provides $389.8 million for operations, $7.8 million for
extraordinary items (projects of a unique
nature), and $6.6 million for the Office
of Inspector General. The Board has
authorized a revised staff position
count of 1,699 for operational areas and
29 positions for the Office of Inspector
General; no positions are required for
the extraordinary items function. The
total of 1,728 positions is a decrease of
12 positions from the number authorized
at the end of 1999.
As identified by division directors
during the planning process, four items
may require significant additional funding. Costs associated with the passage of
the financial modernization bill (personnel services, travel, and the like) are
being funded through a combination of
work reallocation and staff overtime
and, possibly, an increase in the Board’s
operations budget. Position vacancy rates
are lower than past trends, adding costs.
In addition, studies have determined
that compensation packages in some

job families are insufficient to keep the
Board competitive in the job market.

Overview of the Budget Process
On a biennial basis, the Board and its
staff undertake a process that includes
strategic planning for the next four years
and formulation of a budget for the next
two years. For the 2000–03 planning
period and the 2000–01 budget period,
the Board-level Committee on Board
Affairs, assisted by a senior-level Staff
Planning Group (SPG), guided the
process.
Each division director, working with
his or her oversight committee, examined
the division’s operations to see how
the mission, organization, and resources
needed to be adjusted to enable the
Board to carry out its mission more
efficiently and effectively. The process
reaffirmed the Board’s mission, readjusted priorities to accomplish the mission, and identified lower-priority work
that could be eliminated to fund some of
the needed programmatic increases.

Planning
The planning materials prepared by the
division directors were reviewed by the
SPG. In support of the Board’s mission
and goals, which remain unchanged, six
main, or overarching, issues were identified and used in shaping resource
decisions reflected in the recommended
budget objective approved by the Committee on Board Affairs and the Board:
• Human resources and Board organization. These critical areas affect operations through the following: compen-

16

•

•

•

•

•

Annual Report: Budget Review, 2001

sation that attracts, rewards, and retains
staff; management succession; professional development; and coordination
of employee skills to stay abreast of
the growing complexity of operations
and improvements in technology.
Financial industry restructuring. The
Board must focus its response to
changing circumstances in the financial industry, the increasing concentration of financial institutions, and the
growing importance of international
financial activity to the Board’s
mission.1
Assistance and support to foreign
governments, central banks, and
international organizations. These
activities continue to grow in importance, requiring a greater commitment
of resources and making heavier
demands on the time of key staff
members.
Technology investments. Up-to-date
and fully functioning technology
remains critical to maintaining efficient operations, implementing appropriate monetary policy decisions in
an increasingly complex environment,
and identifying supervisory risks in
the financial sector and the actions
needed to limit them.
Communications with the public. The
Board must take advantage of technology, particularly the web, to provide
materials to the public that explain
Board actions, policies, and objectives and to provide available data
useful for research and public policy
debates.
Facilities. The Board must maintain
safe facilities that foster efficient
operations; continue necessary repairs
to the Eccles Building, which is now

1. Because of the uncertain nature of the
outcome at the time the budget was prepared, no
major adjustments were included for financial
reform legislation.

more than sixty years old; and devise
a strategy to reduce the long-term cost
of space for the staff.
In the course of planning, divisions
identified areas in which they anticipated
the need for increased resources over
the next four years. Though many areas
for investment were worthwhile, the
Committee on Board Affairs focused on
initiatives related to the above overarching issues. For example, nearly threefourths of the budget increment is for
human resources issues such as a larger
pool for cash awards; funding for the
2000 and 2001 merit increases, promotions, and other salary adjustments; a
reduced number of vacant positions; and
increased training.

Board Operations
The approved budget reflects difficult
decisions affecting current operations,
provides additional resources where
operations need to respond to changes in
the financial environment, and supports
key efforts to continue to attract and
retain the first-rate staff needed to
accomplish the Board’s mission.
The budget reflects continued pressure to keep pace with rapid and
significant changes in the national economy and the world financial system.
Technological change, which increases
the risks to the economy and provides
the tools to understand and limit those
risks, is profoundly affecting the skills
required of staff members, the automation and communication systems, and
the workload of the Board. The budget
also reflects the Board’s efforts to ensure
that consumers are treated fairly as the
financial system changes and to improve
the efficiency of Reserve Bank oversight.
These changes required additional
resources; hence, the revised two-year
budget increase averages 6.3 percent per

Board of Governors
year. The increase is largely for personnel costs, which account for nearly
three-fourths of the Board’s operating
budget, and investments in technology
such as the Banking Organization
National Desktop (BOND) project.

Extraordinary Items
Inclusion of certain periodic or one-time
expenses in the Board’s operations
budget can result in undue volatility in
the size of the budget. Therefore, funds
for such extraordinary items are set
apart from the operations budget. For
2000–01, $7.8 million in operating
funds has been budgeted for three
extraordinary items: two major economic surveys and final reports and
closeout efforts to modify or replace
software to ensure continuity of operations after the century date change
(CDC). Because the CDC efforts have
been decreasing sharply over the
2000–01 period, this budget is approximately $15.2 million less than in the
1998–99 budget.

Office of Inspector General
The 2000–01 budget of $6.6 million for
the Office of Inspector General (OIG) is
separate from the Board’s. The OIG’s
budget is prepared in a manner that
is administratively consistent with the
preparation of the Board’s operating
budget. In conformance with the statutory independence of the office, the OIG
presents its budget directly to the Chairman of the Board of Governors for
consideration by the Board.

Highlights of the Budget
The Board’s 2000–01 operations budget
represents an increase of $44.6 million
over 1998–99 actual expenses, an average increase of 6.3 percent per year

17

(table 2.1). The discussion below highlights the major components of this
increase as well as the primary offsetting
decreases.
The largest force driving the increase
in the budget is personnel related. The
total number of positions decreased by
12 from the 1998–99 (table 2.2); however, positions eliminated by technology
improvements tend to be less costly than
those added to meet the changes outlined
in the overarching issues. The placeholder amounts included in the budget
for merit increases were significantly
higher than the placeholders for the
1998–99 biennium (4.4 percent and
4.0 percent in 2000 and 2001 respectively, compared with 3.8 percent and
3.5 percent in 1998 and 1999 respectively).2 The larger amounts were in
recognition of the need to keep the
Board’s salary structure aligned with
appropriate labor markets.
Higher grade levels are also affecting
personnel costs. The higher grade levels
reflect the market salaries for skills
needed for more complex operations
and special salary adjustments for critical professionals, such as financial economists. These increases also affect the
benefit-related expenses that are tied to
salary levels, such as the thrift plan and
social security.
Finally, a portion of the increase
comes from a one-time saving in 1999
from changes to the retiree health insurance plan and the transfer of the affected
individuals’ coverage to the Federal
Employees Health Benefit Program.
In sum, increased spending on personnel services, including higher compensation packages designed to attract and
2. The actual merit increases in 1998 and 1999
were 3.8 percent and 4.2 percent respectively. The
actual merit increases for 2000 and 2001 were
4.8 percent and 4.75 percent respectively. A portion of the unbudgeted increase was absorbed
internally, and the balance was added to the budget.

18

Annual Report: Budget Review, 2001

retain highly skilled staff, account for
$29.7 million, or 66.7 percent, of the
total budget increase.
The increase in the cost of goods and
services, $14.9 million, is largely due
to increased operating expenses related
to a number of projects. First, an additional $3.0 million, or 6.7 percent of the
total increase, funds further implementation of the BOND project. Second,
rental expenses associated with the
Eccles Building Infrastructure Enhancement Project account for $1.3 million,
or 2.9 percent, of the overall increase.
Finally, contractual expenses largely
related to the pent-up demand for
information technology services, restrained by Year 2000 policy decisions

and the priority assigned to software
remediation activities, are requiring an
additional $4.8 million. The remainder
of the increase is associated with rate
and volume adjustments as well as
lower expenses in the 1998–99 time
period.
Two major areas of budget decrease
are in programs and depreciation.
Program reductions worth $2.2 million
will allow added investment to support
the overarching issues identified in
planning. Depreciation expense declined
$2.3 million because of the change in
the Board’s capitalization policy that
took effect on January 1, 1998. Other,
smaller decreases come from changes in
operations. For example, mailing costs

Table 2.1
Operating Expenses of the Board of Governors, by Division, Office,
or Special Account, 1998–99 and 2000–01
Thousands of dollars except as noted

1998–99

Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Statistics . . . . . . . . . . . . . . . . . . . . . .
International Finance . . . . . . . . . . . . . . . . . . . . . . .
Monetary Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking Supervision and Regulation . . . . . . . . .
Consumer and Community Affairs . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Bank Operations
and Payment Systems . . . . . . . . . . . . . . . . . .
Staff Director for Management . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Support Services . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Technology . . . . . . . . . . . . . . . . . . . . .
Publications Committee . . . . . . . . . . . . . . . . . . . . .
Special projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IRM income account 1 . . . . . . . . . . . . . . . . . . . . . .

8,282
8,030
56,543
20,297
17,427
53,713
15,148
15,296

8,480
9,412
61,127
22,741
19,249
58,867
17,813
17,643

197
1,382
4,585
2,444
1,822
5,154
2,665
2,347

2.4
17.2
8.1
12.0
10.5
9.6
17.6
15.3

30,547
1,469
19,851
54,992
69,338
2,574
9,226
−37,556

32,435
2,620
22,079
58,121
78,220
3,059
18,134
−40,242

1,888
1,151
2,229
3,129
8,881
485
8,908
−2,686

6.2
78.3
11.2
5.7
12.8
18.8
96.6
7.2

Total, Board operations . . . . . . . . . . . . . . . . . . . .

345,177

389,758

44,581

12.9 2

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

20,401
5,640

7,847
6,617

−12,554
977

. . .
17.3

Note. Operating expenses reflect all redistributions
for support and allocations for overhead, and they exclude
capital outlays.
1. Income from various Board divisions for use of
central information resources management (IRM)
resources.

2000–01
(revised budget)

Change

Division, office,
or special account

Amount

Percent

2. Average annual change from 1999 through 2001 is
6.3 percent for Board operations and 8.3 percent for the
Office of Inspector General.
. . . Not applicable.

Board of Governors

19

Table 2.2
Positions Authorized at the Board of Governors, by Division, Office,
or Special Account, 1998–99 and 2000–01
Division, office,
or special account

1998–99
(authorized)

2000–01
(revised budget)

Change

Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Statistics . . . . . . . . . . . . . . . . . . . . . . . . .
International Finance . . . . . . . . . . . . . . . . . . . . . . . . . .
Monetary Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking Supervision and Regulation . . . . . . . . . . . .
Consumer and Community Affairs . . . . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Bank Operations and
Payment Systems . . . . . . . . . . . . . . . . . . . . . . . . .
Staff Director for Management . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concern1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Support Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Technology (IT) . . . . . . . . . . . . . . . . . . .
Special projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

34
56
276
115
65
224
76
82

35
56
279
119
65
220
78
82

1
0
3
4
0
−4
2
0

135
3
89
31
216
281
3

128
11
89
31
198
280
3

−7
8
0
0
−18
−1
0

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,686

1,674

−12

Reimbursable IT support 2 . . . . . . . . . . . . . . . . . . . . . .

25

25

0

Total, Board operations . . . . . . . . . . . . . . . . . . . . . . .

1,711

1,699

−12

Office of Inspector General . . . . . . . . . . . . . . . . . . . . .

29

29

0

1. EEO Concern—summer intern and youth positions
handled by the Management Division.
2. Positions in the Division of Information Technology
that provide support to the Federal Financial Institutions

Examination Council for processing data collected under
the Home Mortgage Disclosure Act and the Community
Reinvestment Act.

are declining because of an improved
ability to disseminate information to
constituent groups through electronic
distribution of documents and expansion
of the Board’s web site.

• Possible changes to the position
vacancy rates used in developing the
proposed salary budget and the resulting facility requirements should staffing patterns change
• A sharp increase in the rate of
financial innovation.

Risk Areas
When budgets were prepared in mid1999, division directors identified items
that could require significant additional
resources during the 2000–01 period.
These potential items were as follows:
• Passage of a financial modernization
bill (enacted in late 1999)
• Some job families in which current
compensation packages did not seem
to be competitive in the job market

Operations Budget by Division
and Account Classification
The largest increase in the 2000–01
revised budget is in the area of personnel
services (table 2.3). The proposed budget
for personnel services (salaries, retirement, and insurance) is $29.7 million
greater than the 1998–99 budget (an
average increase of 5.6 percent per
year). As the number of authorized posi-

20

Annual Report: Budget Review, 2001

Table 2.3
Operating Expenses of the Board of Governors, by Account Classification,
1990–91 to 2000–01
Thousands of dollars except as noted
Account classification

1990–91

1992–93

1994–95

1996–97

Personnel services
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

143,130
9,662
11,429
164,222

169,265
13,366
14,407
197,039

190,210
15,564
16,862
222,637

211,005
18,015
19,196
248,215

Goods and services
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postage and shipping . . . . . . . . . . . . . . . . . . . . . . .
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . .
Printing and binding . . . . . . . . . . . . . . . . . . . . . . . .
Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stationery and supplies . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . .
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Books and subscriptions . . . . . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building repairs and alterations . . . . . . . . . . . . . .
Furniture and equipment repairs
and maintenance . . . . . . . . . . . . . . . . . . . . . . .
Contingency Processing Center . . . . . . . . . . . . . .
Contractual professional services . . . . . . . . . . . .
Tuition, registration, and membership fees . . .
Subsidies and contributions . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,864
2,347
3,364
2,238
406
1,668
4,529
1,521
−282
1,187
3,388
1,945

8,453
2,327
3,665
2,237
2,212
1,635
5,615
2,442
3,156
1,451
3,683
3,402

9,399
2,483
4,168
2,866
2,976
1,755
6,453
2,497
7,202
1,913
4,145
3,273

9,391
2,261
4,367
2,829
2,544
1,756
7,865
2,568
8,648
1,904
3,995
2,996

3,734
427
5,355
1,273
1,168
11,489
−4,635
47,986

4,072
465
9,666
1,823
1,504
12,574
−8,309
62,074

4,198
206
13,797
2,394
1,433
14,347
−16,175
69,330

3,285
0
19,438
2,311
1,299
17,683
−18,502
76,638

Total, Board operations . . . . . . . . . . . . . . . . . . . .

212,208

259,113

291,967

324,853

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

0
227

0
780

0
239

4,196
5,975

tions is actually declining by 12 over
this period, this dollar increase is due
to higher compensation levels necessary to attract and retain highly skilled
staff members and a projected reduction in the number of vacant positions,
particularly in the supervision and regulation function (table 2.2).
The 2000–01 budget for goods and
services is $14.9 million greater than
1998–99 actual expenses (an average
increase of 6.3 percent per year). Much
of the increase in the area of goods and
services is attributable to a $3.8 million (7.5 percent per year) increase in
contractual professional services associ-

ated with outsourcing the cafeteria services, purchasing additional economic
data, providing technical assistance with
the Daylight Overdraft Reporting and
Pricing System, and obtaining contractual support for various information
technology initiatives. Increases in programming efforts on the BOND project
account for $3.0 million.
Partially offsetting these increases are
program reductions in various areas
throughout the Board. These include
specialized activities in the Division of
Banking Supervision and Regulation,
cafeteria services, streamlined operations in the Management Division,

Board of Governors

21

Table 2.3
Continued
Thousands of dollars except as noted

Account classification

1998–99

2000–01
(revised budget)

Average annual change
(percent)
1998–2001

Personnel services
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1990–2001

222,203
19,708
14,463
256,374

248,394
21,214
16,475
286,083

5.7
3.8
6.7
5.6

5.7 1
8.2
3.7
5.7
5.1
−3.1
6.2
1.5 1
18.9 1
2.1 1
8.8
18.9 2
. . .1
5.9
3.1
6.5

Goods and services
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postal and shipping . . . . . . . . . . . . . . . . . . . . . . . . .
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . .
Printing and binding . . . . . . . . . . . . . . . . . . . . . . . .
Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stationery and supplies . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . .
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Books and subscriptions . . . . . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building repairs and alterations . . . . . . . . . . . . . .
Furniture and equipment repairs
and maintenance . . . . . . . . . . . . . . . . . . . . . . .
Contingency Processing Center . . . . . . . . . . . . . .
Contractual professional services . . . . . . . . . . . .
Tuition, registration, and membership fees . . .
Subsidies and contributions . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,823
1,706
6,120
2,188
2,338
1,831
8,349
7,607
8,884
1,765
4,429
2,881

11,314
1,716
6,164
2,608
2,297
2,062
10,509
8,576
10,422
2,109
4,619
3,635

2.2
.3
.4
9.2
−.9
6.1
12.2
6.2
8.3
9.3
2.1
12.3

3,517
181
24,421
2,672
1,524
20,204
−22,637
88,803

4,273
0
28,226
3,427
1,482
17,939
−17,702
103,675

10.2
. . .
7.5
13.2
−1.4
−5.8
−11.6
8.0

1.4
−99.9
18.1
10.4
2.4
4.6
14.3
8.0

Total, Board operations . . . . . . . . . . . . . . . . . . . .

345,177

389,758

6.3

6.3

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

20,401
5,640

7,847
6,617

. . .
8.3

. . .
40.1

1. The method of accounting for income in performance
reports changed during the period. Until 1991, income
was netted against expenses in the appropriate cost center
and program; since then, income has been captured in the
‘‘all other’’ account. The change has had only a minor
effect on the 1990–2001 percentage change in the
accounts for salaries, printing and binding, and stationery
and supplies, but in the accounts for publications and

rentals, it has made a measurement of the 1990–2001
change much less meaningful.
2. Beginning in 1998 the threshold for capitalizing and
depreciating a purchase rather than expensing it rose from
$1,000 to $5,000. The data for 1996–97 have been
adjusted, but accurate adjustments for earlier years are not
possible.
. . . Not applicable.

attrition in the Office of the Secretary,
and administrative reductions in the
Division of Information Technology
(table 2.1).
Savings in support-related areas
include a reduction in postage and
shipping expenses due to increased use

of the Internet and intranet for information sharing, lower depreciation costs
following the 1998 raising of the capitalization threshold, and increased
income from other government agencies and Reserve Banks for information
technology services.

22

Annual Report: Budget Review, 2001
(tables 2.4 and 2.5). Overhead is allocated to each of these functions, and the
financial data include the allocation.

Operations Budget by
Operational Area
The Board’s operations budget supports
four broadly defined areas of operation:
monetary and economic policy, supervision and regulation, services to financial institutions and the public, and
System policy direction and oversight

Monetary and Economic Policy
The 2000–01 revised budget for monetary and economic policy is $164.8 mil-

Table 2.4
Expenses of the Board of Governors for Operational Areas,
Extraordinary Items, and Office of Inspector General, 1998–99 and 2000–01
Thousands of dollars except as noted

Activity

Change

2000–01
(revised budget)

1998–99

Amount

Percent

Monetary and economic policy . . . . . . . . . . . . . .
Supervision and regulation . . . . . . . . . . . . . . . . . .
Services to financial institutions
and the public . . . . . . . . . . . . . . . . . . . . . . . . .
System policy direction and oversight . . . . . . .

145,612
129,949

164,806
149,757

19,194
19,808

13.2
15.2

6,026
63,590

7,942
67,253

1,916
3,663

31.8
5.8

Total, Board operations . . . . . . . . . . . . . . . . . . . .

345,177

389,758

44,581

12.9 1

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General . . . . . . . . . . . . . . . . . .

20,401
5,640

7,847
6,617

−12,554
977

. . .
17.3

Note. See general note to table 2.1.
. . . Not applicable.

1. Average annual change from 1999 through 2001 is
6.3 percent for Board operations and 8.3 percent for the
Office of Inspector General.

Table 2.5
Positions Authorized at the Board of Governors for Operational Areas,
Support and Overhead, and Office of Inspector General, 1998–99 and 2000–01
Activity

1998–99

2000–01
(revised budget)

Change

Monetary and economic policy . . . . . . . . . . . . . . . . .
Supervision and regulation . . . . . . . . . . . . . . . . . . . . .
Services to financial institutions and the public . .
System policy direction and oversight . . . . . . . . . .

426
383
22
174

433
381
22
173

7
−2
0
−1

Support and overhead 1 . . . . . . . . . . . . . . . . . . . . . . . . .

681

665

−16

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,686

1,674

−12

Reimbursable IT support . . . . . . . . . . . . . . . . . . . . . .

25

25

0

Total, Board operations . . . . . . . . . . . . . . . . . . . . . . .

1,711

1,699

−12

Office of Inspector General . . . . . . . . . . . . . . . . . . . . .

29

29

0

2

1. Includes positions for 17 youths, 10 worker trainees,
and 4 summer interns.
2. Positions in the Division of Information Technology
that provide support to the Federal Financial Institutions

Examination Council for processing data collected under
the Home Mortgage Disclosure Act and the Community
Reinvestment Act.

Board of Governors
lion, an increase of $19.2 million, or an
average of 6.4 percent per year more
than 1998–99 actual expenses. Activities in this operational area include the
Board’s monitoring and analysis of
developments in the money and credit
markets, the setting of reserve requirements, the approval of changes in the
discount rate, and other activities related
to managing the nation’s monetary
policy. The entire increase is associated
with higher costs of personnel, including
the addition of four positions in the
Division of International Finance to
meet the expanding need for risk assessment and analysis.
In addition to the changes in personnel services are internally funded initiatives in the Division of Research and
Statistics to collect more data related to
developments in financial markets; gain
a better understanding of embodied
technological change; expand the sectoral productivity database; and further
assess credit bureau data. These initiatives are all funded by reductions,
primarily in automation support.

Supervision and Regulation
The 2000–01 revised budget for supervision and regulation is $149.8 million,
an increase of $19.8 million, or an average of 7.4 percent per year more than
1998–99 actual expenses. Activities in
this area include working with other
federal and state financial authorities
to ensure safety and soundness in the
operation of financial institutions, stability in the financial markets, and fair
and equitable treatment of consumers in
their financial transactions. The budget,
as described below, enables enhanced
supervisory activities such as continuous monitoring, inspection, and examination of banking organizations to assess
their condition and their compliance
with relevant laws and regulations.

23

The percentage increase for this
operational area is greater than the
percentage increase for the overall
budget. Besides the normal factors
affecting compensation in each of the
operational areas, new work approved in
the current budget period, such as the
BOND project in the Division of Banking Supervision and Regulation, is having a significant effect. The processing
of applications will be enhanced through
investment in the Application Information System.
Many positions in this operational
area were vacant for long periods following the voluntary retirement incentive program in 1998 but have now been
filled. Success in filling these positions
results in part from substantial salary
increases within key job families to
improve retention and assist with recruiting. Thus, in the Division of Banking
Supervision and Regulation, the vacancy
rate has decreased. The number of positions in the Consumer Affairs area has
increased, and the investment in software
to better analyze data gathered under the
Community Reinvestment Act and the
Home Mortgage Disclosure Act continues to be substantial.

Services to Financial Institutions
and the Public
The 2000–01 revised budget for oversight of Reserve Bank services to
financial institutions and the public is
$7.9 million, an increase of $1.9 million,
or an average of 14.8 percent a year
more than 1998–99 actual expenses.
This operational area provides support
to, and oversight of, the Federal Reserve
Banks and Branches—specifically, evaluation of the operational and pricing
performance for the check-payment
activities of the Reserve Banks; oversight
of the electronic payments mechanism;
and annual evaluation of the Federal

24

Annual Report: Budget Review, 2001

Reserve System’s currency, coin, and
food coupon operations. The increase
reflects new software development for
managing the currency operations and a
lower projected rate of vacancies in key
programs analyzing payment system
risk.

System Policy Direction and
Oversight
The 2000–01 revised budget for System policy direction and oversight is
$67.3 million, an increase of $3.7 million, or an average of 2.8 percent per
year more than 1998–99 actual expenses.
This operational area covers oversight
and direction of Board and Reserve
Bank programs. It includes programs
that directly support Board members in
carrying out their oversight function for
Reserve Bank operations, budgeting and
accounting, financial examinations, audit
and operations reviews, and automation
and communications. Salary increases
are the largest single factor in the higher
costs of this area, which are tempered by
lower costs associated with changes in
oversight policy.

Capital Budget
The Board’s 2000–01 capital budget is
$26.5 million, an increase of $5.5 million from 1998–99 actual expenses. Of
this total, $14.7 million is for regular
operations, an increase of $1.9 million
above the 1998–99 level. This portion of
the budget supports continued improvements in office automation and major
upgrades to the information infrastructure, including a major cable upgrade to
enhance bandwidth and communication
speeds. Funds are also provided for the
restoration of aging facilities such as
restrooms; mail distribution and central
file storage systems; heating, ventila-

tion, and air conditioning systems; and
other, smaller facilities projects.
The remaining $11.8 million is for
continuation of the Eccles Building
Infrastructure Enhancement Project. The
$3.4 million increase over expenditures
in 1998–99 is due to the phased nature
of the project, which began in July 1999.
The project, which is extending the
building’s useful life, enhancing fire
safety systems, replacing piping and
voice and data cabling, and making
other related repairs, is scheduled for
completion in 2002.

Positions
The overall position authorization for
the Board decreased by 12, primarily
in overhead and support areas, from
1998–99 actual levels, to a total of
1,699 positions (table 2.2).
Reductions in support-related areas
include a significant number in Support
Services due to faster-than-anticipated
consolidation of the duplicating, publications, and cafeteria functions, reflecting
reorganizations and changes in business
practices to increase efficiency. Reductions are projected for the Division of
Information Technology and the Management Division as part of their planning initiatives to increase efficiency
and effectiveness. Finally, reductions
in the Division of Banking Supervision
and Regulation have been made to
accommodate shifting priorities.
These decreases are partially offset
by an increase of nine positions in the
core mission areas. Three positions have
been added in the Division of Research
and Statistics to expand its analysis of
financial markets data and to continue
development of a sectoral productivity
database. Four economist positions have
been added in the Division of International Finance to meet the expanding
need for risk assessment and analysis in

Board of Governors
the monetary policy and research areas
to enable the Board to keep current on
the rapid changes in the financial industry both domestically and abroad. Two
analyst positions have been added in the
Division of Consumer and Community
Affairs to handle a growing volume of
consumer complaints and a shift to a
more risk-focused approach to consumer
compliance examinations.

25

Chart 2.1
Operating Expenses of the
Board of Governors, 1990–2001
Millions of dollars

200
175

Current dollars

150
1992 dollars 1

125

Trends in Expenses
and Employment
The rate of increase in the 2000–01
revised budget, 6.3 percent on an annual
basis, is slightly higher than the
4.1 percent rate in the 1998–99 biennium. The projected annual rate of
increase over the 1999–2001 period
averages 6.3 percent (table 2.3; see also
charts 2.1–2.5). The main cause of the
larger increase over the entire period is
the net increase in positions, higher
salary and benefit costs, and an increasingly sophisticated automation system
required to manage a sharp increase
in the volume and complexity of the
Board’s workload. The higher increase
from the last budget results from a larger
merit component (4.4 percent for 2000
versus 3.5 percent for 1999), major
software development costs for the
supervision and regulation function, and
a smaller volume of savings from
administrative actions and programmatic reductions.
Approximately three-fourths of the
Board’s operating expenses are for
personnel; consequently, analysis of
trends is heavily tied to staffing levels.
From 1990 to 2001, the number of
authorized positions for Board operations rose from 1,529 to 1,668, a net
increase of 139, or 9.1 percent.
Automation changes to provide
sophisticated analytical tools to staff
members, manage larger data sets, and

1990

1995

2001
Millions of dollars

Year
Current dollars
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001

............
............
............
............
............
............
............
............
............
............
............
............

1992 dollars 1

102.4
109.8
122.8
136.3
140.7
151.2
162.7
163.3
171.7
173.5
187.4
202.4

110.0
113.0
122.8
132.8
133.9
140.5
148.2
146.0
151.7
151.3
160.3
169.5

Note. For 2000, estimated; for 2001, budgeted.
Excludes the Office of Inspector General and extraordinary items. The annual values for 1998, 1999, 2000, and
2001 are the approximate calendar-year figures contained
within the respective two-year budgets.
1. Calculated with the GDP price deflator.

provide information to the public over
the Board’s web site required a net
increase of 32 positions over the 1990–
2001 period. Automation—accompanied
by a decline in clerical tasks and a sharp
increase in positions requiring higher
technical and analytical skills—also
resulted in major changes in the composition of the Board’s staff.
Changes in banking, frequently associated with automation enhancements,
increased the complexity of safety and
soundness activities and caused an
increase of 51 positions over the period.
Increased attention to consumer issues,

26

Annual Report: Budget Review, 2001

Chart 2.2
Expenses for Personnel Services
at the Board of Governors, 1990–2001

Chart 2.4
Annual Change in Operating Expenses
of the Board of Governors, 1990–2001

Millions of dollars

Percent

12

125

Current dollars

9

1992 dollars

100
6

75

1990

1995

2001

1990

Note. See notes to chart 2.1.

Chart 2.3
Expenses for Goods and Services
at the Board of Governors, 1990–2001
Millions of dollars

45
Current dollars
1992 dollars

30
15

1995

Note. See notes to chart 2.1.

1995

2001

Note. Year-end data. See also general note to chart 2.1.

including collection and analysis of
data collected under the Home Mortgage Disclosure Act and the Community
Reinvestment Act, added 35 positions.
Increasing complexity of monetary policy issues resulted in an increase of
34 positions. Oversight of Reserve Bank
operations became more complex, resulting in an increase of 12 positions. These
increases were partially offset by a
decline of 25 administrative and support positions resulting from capital
investments, improved efficiency, and
outsourcing.
Although the number of positions at
the Board has fluctuated during the

1990

3

2001

1990–2001 period, the salary budget
(not including retirement and insurance
benefits) has remained relatively stable
at roughly 65 percent of operating
expenses. The portion of operating
expenses devoted to retirement and
insurance has decreased approximately
1 percentage point over the period as a
result of administrative actions to limit
costs for health insurance and other
benefits.

Extraordinary Items
The Board’s extraordinary items budget
provides $7.8 million for three projects.
The first, a survey of consumer finances
($5.5 million), will provide financial
data for various policy analysis and
monetary policy purposes. This effort
reflects the Board’s interest in improving the quality of economic data by
obtaining information on the income,
assets, debts, pensions, employment, use
of financial services, savings behavior,
and other characteristics of U.S. households. Cross-categorization of the data
will allow important statistical observations useful in a wide variety of economic studies.
The second project is the completion
of the National Survey of Small Busi-

Board of Governors
Chart 2.5
Employment and Authorized Positions
at the Board of Governors, 1990–2001
Thousands
Authorized positions

1.7
1.6
Employment

1.5

1990

1995
Year

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001

............
............
............
............
............
............
............
............
............
............
............
............

2001

Employment

Authorized
positions

1,505
1,517
1,563
1,636
1,635
1,644
1,686
1,638
1,629
1,620
1,631
1,631

1,529
1,542
1,639
1,664
1,664
1,665
1,712
1,713
1,694
1,680
1,668
1,668

Note. Year-end data. Excludes summer intern and
youth positions as well as positions for the Office of
Inspector General. These positions number 60 for 2000
and 2001. Includes positions that provide support to the
Federal Financial Institutions Examination Council for
processing data collected under the Home Mortgage
Disclosure Act and the Community Reinvestment Act.

ness Finances (NSSBF), begun in 1999
for data as of year-end 1998 ($1.2 mil-

27

lion). The purpose of the survey was
to gather data from small businesses
on their financial relationships, credit
experiences, lending terms and conditions, income and balance sheet information, location and types of financial
institutions used, and other firm characteristics. The NSSBF is used in analyzing the competitive effect of bank
mergers, in benchmarking other data
series (such as the noncorporate sector
of the flow-of-funds statistics), and in
writing the quinquennial small business
report mandated by section 227 of the
Economic Growth and Regulatory
Paperwork Reduction Act of 1996. It is
also used for research and policy analysis
of a wide variety of issues in small
business finances.
Finally, the extraordinary items budget
provides $1.2 million to complete bringing the Board’s software into compliance with the century date change.
These funds are for completion of system monitoring over the leap year day
(February 29, 2000); work related to the
event management activities in January
2000; and decommissioning test facilities and equipment that are no longer
needed. Over the past three years, funds
for this project, which have totaled
$17.6 million, have been used to remediate, test, and implement Year 2000
versions of the Board’s information
systems.

29

Chapter 3

Federal Reserve Banks
The operating budgets of the twelve
Reserve Banks for 2001 total
$2,442.2 million.1 The 2001 total is an
increase of $116.3 million, or 5.0 percent, above the 2000 approved budget
and an increase of $144.4 million, or
6.3 percent, over estimated 2000
expenses (table 3.1).2 The Reserve
1. This total includes the cost of a special
project. Special projects are major efforts that have
Systemwide significance and are outside the
budgets of the individual Reserve Banks. The only
special project currently in effect reflects $16.4 million in costs associated with the check standardization initiative. (See tables D.1–D.4, appendix D.)
2. Includes expenses budgeted by Federal
Reserve Information Technology (FRIT) and the
Office of Employee Benefits (OEB); expenses
of these entities have been charged to the
Reserve Banks, as appropriate, and included in
their budgets. Because of their unique roles within
the System, FRIT and the OEB have prepared their
own budgets. Data for FRIT are included in this

Banks’ estimated 2000 expenses were
$28.1 million under budget. This underrun is explained in the 2000 Budget
Performance section of this chapter.
Approximately 40 percent of Reserve
Bank expenses in the 2001 budget are
offset by priced service revenues, and
an additional 12 percent are offset by
reimbursable claims for services provided to the U.S. Treasury and other
government agencies. Revenues from
priced services are budgeted to increase
6.7 percent in 2001, primarily as a result
of projected increases in automated
clearinghouse (ACH) volume, check
document; the OEB’s staffing level of 29 ANP
is not discussed further. Unless otherwise noted,
expenses also include costs associated with the
check standardization special project. Special
project costs are estimated to be $6.7 million in
2000 and are projected to be $16.4 million in
2001.

Table 3.1
Expenses of the Federal Reserve Banks, Net of Receipts
and Claims for Reimbursement, 2000 and 2001
Millions of dollars except as noted
Change

2000
(estimated)

2001
(budgeted)

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,297.8

2,442.2

144.4

6.3

Less
Revenue from priced services . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Claims for reimbursement 1 . . . . . . . . . . . . . . . . . .

916.1
1.0
310.2

977.8
.3
290.1

61.7
−.7
−20.1

6.7
−70.0
−6.5

Equals
Net expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,070.5

1,174.0

103.5

9.6

Item

Note. Excludes capital outlays. Includes expenses
budgeted by Federal Reserve Information Technology
(FRIT) and the System’s Office of Employee Benefits
(OEB). For more detail on FRIT and OEB, see text note 2.
Components may not sum to totals and may not yield
percentages shown because of rounding.

Amount

Percent

Operating expenses reflect all redistributions for
support and allocations for overhead.
1. Costs of fiscal agency and depository services
provided to the U.S. Treasury and other government
agencies that are billed to these agencies.

30

Annual Report: Budget Review, 2001

volume, and check fees as well as the
introduction of new priced check
products. Reimbursable claims will
decrease 6.5 percent, primarily because
of the consolidation of the Treasury Tax
and Loan and Treasury Direct servicing
functions.
At individual Reserve Banks, 2001
budget expenses vary from a decrease
of 4.2 percent from estimated 2000
expenses to a 19.3 percent increase (see
table D.1, appendix D). The wide range
is directly related to recent Reserve
Bank accounting changes that shifted
costs among the Reserve Banks and
between cost centers.3 The total Reserve
Bank increase of $144.4 million provides funding for each District’s salary
administration and benefit programs,
local operations, nationally provided
support services, and consolidated
operations.

The average number of personnel
(ANP) projected to be employed during
2001 at the Reserve Banks and FRIT
is 23,458, an increase of 68 ANP,
or 0.3 percent, from estimated 2000
staff levels (table 3.2).4 Reserve Bank
employment is expected to increase
38 ANP, or 0.2 percent, largely because
of the effect of 2000 staff additions and,
to a lesser extent, initiatives planned for
2001. FRIT employment is expected to
increase 30 ANP, or 4.5 percent, to carry
out several initiatives, including Fednet
modernization, the image services
system (ISS) and check standardization
projects, and new distributed processing
services. (For more detail on expense
and ANP changes by District, see
tables D.1 and D.2, appendix D. For
trends over the last ten years, see
charts 3.3 and 3.4 at the end of this
chapter.)

3. These cost shifts were recommended in three
studies concerning the accounting practices of
Federal Reserve Banks (the Accountability,
Integrity, Decision-making, and Efficiency (AIDE)
Report; the Treatment of National Costs and
Revenues Study; and a capitalization threshold
change proposal). Because of the cost shifts,
budget data from previous years are not completely
comparable with current-year data. An overview
of the accounting changes and the corresponding
effects on the 2001 budget is included later in this
chapter.

2000 Budget Performance
The Reserve Banks estimate 2000
expenses to have been $2,297.8 million,
4. The term average number of personnel
describes levels and changes in employment at the
Reserve Banks. ANP is the average number of
employees in terms of full-time positions for the
period. For instance, a full-time employee who
starts work on July 1 counts as 0.5 ANP for that

Table 3.2
Employment at the Federal Reserve Banks, 2000 and 2001
Average number of personnel except as noted

2000
(estimated)

2001
(budgeted)

Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Information
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22,721

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item

Change
Number

Percent

22,760

38

.2

668

698

30

4.5

23,389

23,458

68

.3

Note. See note to table 3.1. See text note 4 for definition of average number of personnel.

Federal Reserve Banks

31

Table 3.3
Budget Performance of the Federal Reserve Banks,
Operating Expenses and Employment, 2000

Item

Operating expenses
(millions of dollars) . . . . . . . . . . . . . . . . . . . . . . .
Employment
(average number of personnel) . . . . . . . . . . . . .

2000
(budgeted)

2000
(estimated)

2,325.9

2,297.8

23,751

23,389

Change
Amount

Percent

−28.1

−1.2

−362

−1.5

Note. See note to table 3.1. See text note 4 for definition of average number of personnel.

a decrease of $28.1 million, or 1.2 percent, from the approved 2000 budget
of $2,325.9 million (table 3.3) and an
increase of $104.0 million, or 4.5 percent, above 1999 actual expenses. Eight
of the twelve Reserve Banks have
estimated their 2000 expenses to have
been below the approved 2000 budget,
ranging from a 0.1 percent underrun in
Kansas City to a 3.0 percent underrun in
New York. The remaining four Reserve
Banks were over their approved budgets,
ranging from 0.1 percent in Atlanta to
2.5 percent in Richmond. Tables D.3 and
D.4 in appendix D detail 2000 performance for each District.
Reserve Bank underruns are partly
explained by staffing levels that were
substantially lower than budgeted. ANP
for 2000 is estimated at 23,389, which is
362 ANP below the 2000 approved level
and 22 ANP below the 1999 actual
level. Reserve Banks with lower-thanbudgeted staffing levels projected a
correlated underrun in officer and
employee salaries of $16.4 million. New
York’s budget underrun of $13.7 million, for example, was largely due to the
Bank’s staffing underrun of 84 ANP,
which resulted in a personnel cost
calendar year; two half-time employees who start
on January 1 count as 1 ANP.

underrun of $7.4 million. Reserve Banks
report that staffing level variances were
due primarily to turnover and delays in
new hiring because of tight labor markets
and productivity improvements.
In addition to the effect of lower-thanbudgeted ANP, more than half the
Reserve Banks have identified lowerthan-anticipated costs with respect to
retirement and other benefits because of
changes to the postretirement benefits
plan (Financial Accounting Standard 106). These changes have resulted
in savings of $3.3 million.
Despite common themes across the
Reserve Banks, a variety of Districtspecific factors were also at work, and
initiatives in several of the outlier Banks
either added to or partially offset the
underrun in 2000 estimated expenses.
The staffing level decreases at the New
York Bank, discussed above, continue a
trend of dramatic ANP declines in that
Bank that began in 1998. These declines
were due primarily to productivityimprovement and operating-efficiency
initiatives both at the Bank and resulting from System consolidation efforts.
Other Banks were under budget because
of the deferral or cancellation of capital
projects, decisions to forgo system and
equipment upgrade plans because of the
move to the common platforms required

32

Annual Report: Budget Review, 2001

in the check modernization initiative,
and declining check volume combined
with improved productivity in checkprocessing initiatives.
Richmond’s overrun of $4.5 million
has been partly attributed to unanticipated work on two projects for the
Department of the Treasury and increased
costs for an upgrade to the Bank’s
purchasing, accounts payable, and asset
management system. Expenditures by
the Retail Payments Office (RPO), which
is accounted for in Atlanta’s budget,
were also substantially more than
planned. The RPO projected increases
associated with higher-than-anticipated
fuel costs for Check Relay and for
the creation of a check modernization
implementation team. Other unbudgeted
expenses included the establishment of
a payment card research center at the
Philadelphia Bank and the accelerated
purchase of check-processing equipment in Kansas City to meet the check
standardization conversion schedule.

Factors Affecting
the 2001 Budget
Personnel expenses are the major driver
of the year-over-year budget increase.
These expenses include both salaries
and benefits and represent 63.3 percent
of projected Reserve Bank expenses.
Reserve Bank budgets include a total
of $88.7 million to fund salary administration programs for officers and
employees. 5 FRIT has budgeted
$4.2 million.
Merit increases are budgeted at
$46.9 million, or 52.9 percent, of the
total 2001 Reserve Bank salary admin5. Salary administration represents the budgeted
funds that are available to increase compensation to officers and employees in the coming year.
It does not include adjustments for changes in
staffing levels, turnover and lags in hiring, and
overtime.

Chart 3.1
Components of Salary Administration at the
Federal Reserve Banks, 2001
Merit, 53%

Retention
payments,
2%

Promotions,
reclassifications, and
market
adjustments,
18%

Cash awards and incentives, 27%
Note. See text note 5.

istration budget (chart 3.1). The budget
includes average merit increases of
4.5 percent for officers and 4.3 percent
for employees. Promotions, reclassifications, and market adjustments account
for $16.1 million; retention payments
for $2.1 million; and officer and
employee incentive payments and cash
awards for $23.6 million. Merit increases
and other salary-related expenses are in
line with trends in both the public and
private sectors.
In 2001, officer incentive payments
and cash awards are expected to total
$7.9 million, or 5.8 percent of officer
salary liability. The officer variable pay
threshold will increase to 6.0 percent of
salary liability.
Employee incentive payments and
cash award funds are budgeted at
$16.6 million, or 1.7 percent of employee
salary liability in 2001. The employee
variable pay threshold will increase to
1.7 percent in 2001.
Officer turnover (including retirements) is projected to remain stable
at 4.0 percent in 2001, ranging from
0.0 percent (Dallas) to 16.0 percent
(San Francisco). Similarly, employee
turnover in 2001 is projected to remain
stable at 13.1 percent, ranging from

Federal Reserve Banks
8.1 percent (Richmond) to 16.2 percent
(San Francisco). Banks are reporting
higher turnover in check processing and
some professional and technical areas.
If market pressures continue in 2001,
the risk of losing employees with critical skills will increase. As a result, the
Banks plan to maximize variable pay,
retention incentives, and other monetary
and non-monetary rewards for key officers and employees.
Retirement and other benefit expenses,
which account for 14.0 percent of
Reserve Bank budgets, are anticipated to
increase $23.5 million, or 7.4 percent, in
2001. The higher costs are projected to
result primarily from increases in salaryrelated benefits, such as social security
and thrift plan contributions, which are
expected to increase along with the
number of ANP in 2001. Other contribut-

33

ing factors include higher postretirement
and postemployment valuations (Financial Accounting Standards 106 and 112,
respectively); these valuations are
directly related to changes in actuarial
assumptions. The budgeted increases in
employer contributions for health benefits average 5.6 percent for non-HMO
plans, 8.5 percent for HMO plans, and
6.4 percent for dental plans.
Other major factors affecting the 2001
budget are shown in table 3.4 and discussed below.

Fee-based Services
to Financial Institutions
The factors affecting the budget for
services provided to depository institutions are primarily related to the check
modernization projects.

Table 3.4
Changes in Expense and Employment for Major Initiatives
at the Federal Reserve Banks, 2000 to 2001
Millions of dollars except as noted
Change
2000
(estimated)

2001
(budgeted)

Fee-based services provided to
depository institutions
Check modernization . . . . . . . . . . . . . . . . . . . . . . . . . .
Other check initiatives . . . . . . . . . . . . . . . . . . . . . . . . .

27.3
48.6

Reimbursable services
Treasury Direct consolidation . . . . . . . . . . . . . . . . . .
Treasury Tax and Loan consolidation . . . . . . . . . . .

Initiative

Amount

Average
number of
personnel

84.1
52.3

56.8
3.7

223
−33

19.5
4.1

15.9
1.4

−3.6
−2.7

−53
−30

Central bank services
Cash initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supervision and regulation staffing . . . . . . . . . . . . .

22.5
27.3

30.0
29.7

7.5
2.4

53
26

Cross-functional areas
Infrastructure initiatives . . . . . . . . . . . . . . . . . . . . . . . .
FRIT initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalization threshold changes . . . . . . . . . . . . . . . .

39.0
11.7
.0

58.8
24.2
12.9

19.9
12.5
12.9

25
73
. . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

199.9

309.4

109.5

285

Note. See notes to table 3.1. See text note 4 for definition of average number of personnel.

. . . Not applicable.

34

Annual Report: Budget Review, 2001

Check Modernization
The Federal Reserve Banks, under the
leadership of the Retail Payments Office,
have undertaken four major projects,
collectively referred to as check modernization. The four projects—check
standardization, enterprisewide adjustments, image services system, and
electronic access and delivery—will
standardize the check function’s operating platform across all forty-five checkprocessing sites. (For more detail on
the check modernization projects, see
chapter 4.) The 2001 budget for the
Reserve Banks includes $84.1 million
for the four projects, which is an
increase over estimated 2000 expenses
of $56.8 million and 223 ANP. The
budgetary effect of each of the check
modernization projects is described
below.

Image Services System (ISS). The
Boston District will manage the implementation and deployment of ISS to the
four regional archive sites (Cleveland,
Philadelphia, Helena, and Minneapolis).
The 2001 budget includes $17.0 million
for this project. Thirty-two sites currently are scheduled to transition to the
regional archives in 2001, with the
remaining sites converting in 2002.
Electronic Access and Delivery
(EA&D). The Dallas Bank is responsible for development of this application. Initially, the project will develop
web-based interfaces for check services
currently offered through FedLine. The
2001 budget includes $5.1 million for
the project. Web-based check services
are scheduled to be available to depository institutions in 2001.
Other Check-Processing Initiatives

Check Standardization. Six Districts
have identified costs for check standardization activities performed within their
Districts on behalf of the other Reserve
Banks, totaling $38.1 million. FRIT has
budgeted $7.3 million for data processing support, and an additional $9.2 million has been included by the Banks for
local incremental costs to implement
the project. Costs vary significantly by
District and are determined by the
timing of each office’s conversion in
the four-year implementation schedule.

Five Districts have included a total of
$52.3 million in their budgets to support
other local check-processing initiatives.
These initiatives include the Utica
regional check-processing center check
image effort, increased staff to process
volume increases, and additional equipment (personal computers, high-speed
and medium-speed reader–sorters, and
image capture systems) needed in 2001
to accommodate check modernization
project schedules.

Enterprisewide Adjustments (EWA).
San Francisco is the host Bank for the
development and implementation of the
EWA system. The 2001 budget includes
$7.4 million for this project, which
represents a $2.4 million increase over
2000 estimated expenses. Project plans
call for the conversion of twenty-six
check-processing sites to the system by
the end of 2000, thirteen sites in 2001,
and the remaining six sites in 2002.

Reimbursable Services
Factors affecting the budgets for
reimbursable services include Treasury
Direct consolidation and Treasury Tax
and Loan consolidation.
Treasury Direct Consolidation
Customer support for the Treasury
Department’s Treasury Direct application will be consolidated into three sites

Federal Reserve Banks

35

Supervision and Regulation

(Boston, Minneapolis, and Dallas). This
initiative is projected to reduce Reserve
Bank expenses by $3.6 million and
53 ANP in 2001. The three consolidation sites have budgeted an increase of
$3.5 million above estimated 2000 costs;
staff levels at the three sites are budgeted
to increase by 52 ANP above the
estimate for 2000, reflecting Treasury
requirements. This cost increase is more
than offset by cost reductions of $7.1 million and staff decreases of 105 ANP at
the other Reserve Banks. This initiative
is fully reimbursable.

Cross-functional Areas

Treasury Tax and Loan (TT&L)
Consolidation

Factors affecting the budgets across
functional areas include infrastructure
initiatives, FRIT initiatives, and capitalization threshold changes.

The implementations of the Treasury
Investment Program (TIP) and the Paper
Tax System (PATAX) operations at the
St. Louis Reserve Bank have replaced
the existing TT&L software and staff
at all Reserve Banks. All Reserve
Banks moved to this new system in
October 2000. The 2001 budget includes
a net decrease in Reserve Bank costs
of $2.7 million and 30 ANP. Minimal
staff will be retained in the other
Reserve Banks for definitive collateral
safekeeping.

Central Bank Services
Factors affecting the budgets for central
bank services include cash initiatives
and supervision and regulation.

Cash Initiatives
Cash initiatives, primarily the new
Phoenix currency operations center and
the addition of processing capacity at
the Philadelphia and Atlanta Banks, are
projected to increase costs $7.5 million
and add 53 ANP in 2001.

Three factors are contributing to staffing
increases in supervision and regulation: an increase in the number of state
member banks, the Large Complex
Banking Organization initiative, and
development of the Risk Management
Information System. These initiatives
are expected to add $2.4 million and
26 ANP in 2001.

Infrastructure Initiatives
The 2001 budget includes an expense
increase of $12.0 million for new
buildings, leased space, and enhanced
security in five Districts. Reserve Bank
automation initiatives add another
$7.9 million, of which about $2.5 million is for efforts directly tied to System
initiatives (electronic access projects,
the Internet firewall, and the Groupware
Leadership Center). The remaining
expenses address a variety of needs,
including support for Treasury-related
projects, human resource information
systems, and information security.
FRIT Initiatives
FRIT has undertaken several customerdriven projects to support web access
and centralized distributed processing
applications. These projects are projected to increase costs $8.2 million
above estimates for 2000. Infrastructure
improvements, primarily for distributed
computing and Fednet modernization,
add $4.3 million to costs.

36

Annual Report: Budget Review, 2001

Capitalization Threshold Changes
Beginning in 2001, the Reserve Banks
will increase the thresholds above which
they are required to capitalize certain
acquisitions and then depreciate costs
over time. As a result, some items
formerly capitalized, most notably
personal computers, will be expensed.
Although the changes result in higher
expenses in 2001, real spending is not
increased, as depreciation expenses will
be offset in future years. The one-time
implementation effect of changing this
accounting practice raises stated expenses
by $12.9 million.
Additional Reserve Bank
Accounting Changes
In addition to the capitalization threshold
changes discussed above, the Reserve
Banks approved recommendations made
in two studies concerning the accounting practices of the Banks (the AIDE
Report and the Treatment of National
Costs and Revenues Study). Although
the implementation of these recommendations in 2001 does not have a
material effect on Reserve Bank total
spending, some expenses have been
shifted to different cost centers, thus
limiting the comparability of budget and
expense data across Districts and functions. Several of the tables and charts
that previously were included in this
book have been excluded this year for
that reason. A summary of the accounting changes is provided below.
AIDE. In 1997, the Reserve Banks
began an extensive review of the Federal Reserve’s Planning and Control
System (PACS) and private industry
practices. The goal of the review was
to incorporate industry ‘‘best practices’’
into the Reserve Bank cost accounting
framework wherever possible, while
ensuring that the cost accounting system

maintained accountability, integrity,
decisionmaking, and efficiency (AIDE).
The AIDE concepts result in new
methods for assigning costs to the
appropriate activity, a shift of some
activities among operational areas, and
a change in management responsibility
related to statistical data. These changes
have been implemented in PACS while
maintaining the system’s full costing
foundation. The new processes and
structural changes should improve
efficiency by reducing some of the
burden currently inherent in the PACS
system.
Treatment of National Costs and
Revenues. In 1999, the Reserve Banks
also approved recommendations to
eliminate geographic sharing of costs
for all services and operations that are
provided centrally to all Reserve Banks.6
Under this new approach, the Reserve
Banks report the associated expenses
where the costs are incurred. To ensure
consistent implementation, these recommendations are being addressed in
conjunction with the structural changes
previously discussed.
Over the past several years, the
Reserve Banks have consolidated the
development, processing, and management responsibilities of many operations. Cost accounting rules have not
kept pace with this shift. Costs associated with these consolidation efforts
have been shared among the Reserve
Banks as defined in PACS. For example,
before 2001 the costs of operating the
Support Function Office (SFO) were
incurred by the San Francisco Reserve
Bank and shared with all other Reserve
Banks so that each Bank’s bottom line
reflected one-twelfth of the costs of
operating the SFO. The sharing of these
6. As a service provider, Federal Reserve
Information Technology will continue to charge its
costs to Reserve Banks and the Board.

Federal Reserve Banks
costs reduced accountability, confused
responsibility, and complicated monthly
accounting processes. These costs are
now reported in the Districts where the
activities are provided.
Based on the accounting change
described above, Banks that distributed
more costs than they received in 2000
generally have the largest year-overyear increases in 2001. With the elimination of cost sharing in 2001, Banks have
retained in their budgets the national
service costs previously shared. Conversely, Banks that were net receivers
have not included these national expenses
in their budgets.

Risks in the 2001 Budget
Reserve Banks have noted several common risks associated with the 2001
budgets. First, issues and problems
relating to the check modernization
projects could divert significant amounts
of resources, including management
attention, as complex implementation
schedules have the potential for costly
delays. As these plans are refined and
the projects progress, actual expenses
may vary considerably from the 2001
budget. Second, most Banks have
projected no increase in check volumes
and only moderate increases in cash
volumes for 2001. Volatility in production volumes could create capacity
problems and affect the System’s ability
to meet cost performance expectations.
In addition, the passage of the
Gramm–Leach–Bliley Act is expected
to have significant implications for the
bank supervision and regulation function. As the umbrella supervisor, the
Federal Reserve has broad financial
holding company oversight responsibilities. Resource implications on the
supervisory function were unclear at the
time the budgets were developed.

37

Finally, some Reserve Banks are
finding it difficult to attract and retain
key staff because of tight labor markets.
Turnover poses a significant risk when
compounded by the resource demands
necessary to implement check modernization and expanded bank supervision
and regulation responsibilities. Initiatives that are contingent upon successful
staffing efforts present additional uncertainties in the 2001 budget.

2001 Capital Plan
The 2001 capital budgets submitted
by the Reserve Banks and FRIT total
$361.3 million, a decrease of $106.0 million from the estimated 2000 level.
The budget includes $323.0 million for
the Banks and $38.3 million for FRIT.
The substantial decrease in budgeted
2001 outlays from estimated 2000
outlays results in part from the conclusion or near completion of several major
building projects, including the new
Birmingham Branch building project
($22.7 million decrease in 2001 outlays),
Atlanta’s new building project ($21.1 million decrease), and the Phoenix currency operations center ($12.8 million
decrease). After the land purchase in
2000, outlays for the new Houston
Branch building project will decrease
significantly in 2001 ($24.2 million
decrease). Capital for software and
equipment acquisitions at FRIT for the
check standardization and ISS projects
is $13.1 million lower in the 2001
budget than has been estimated for
2000. Other factors contributing to the
reduction in capital outlays include the
nonrenewal of software licenses and
maintenance contracts associated with
check standardization, a shift of outlays
for check-processing equipment from
future years into 2000 because of the
check standardization project schedule,
the completion of various building reno-

38

Annual Report: Budget Review, 2001

Chart 3.2
Major Capital Projects
at the Federal Reserve Banks, 2001
Security, 3%
Automation,
23%
Cash,
3%

Major
building,
55%

Payments, 16%

Note. Includes Federal Reserve Information Technology.

vation and software development projects, and the shift of funds from capital
to expense resulting from the capitalization threshold changes. Tables D.6 and
D.7 in appendix D provide detail of
capital expenditures by District and
asset classification.
As in previous years, the 2001 capital
budgets developed by the Reserve Banks
and FRIT include funding for projects
that support the goals outlined in the
Banks’ strategic plans. These strategic
goals include improving operational
efficiency and effectiveness, improving
services to Bank customers, and providing a safe, high-quality work environment. In support of these goals, the 2001
budget includes five major categories
of capital outlays: building and facility
improvements, automation-related initiatives, payment system improvements,
Reserve Bank security initiatives, and
cash services initiatives (chart 3.2).

Buildings and Facilities
The 2001 capital budget includes
$197.9 million for the renovation, modernization, or replacement of physical
facilities and the replacement or upgrading of critical systems. Of the total
building-related capital, $101.1 million

(51.1 percent) is attributable to seven
initiatives with budgets greater than
$4.0 million: the New York District’s
floor-by-floor head office modernization
program, the Atlanta District’s new head
office building project, relocation of the
Chicago District’s Detroit Branch and
the Chicago check-processing function,
major floor renovations at the Chicago
Bank, the Houston Branch building
project, and the check department
renovation at the St. Louis head office.
In addition to these larger projects,
funding is also provided for the routine
replacement of building-related equipment, as well as furniture and fixtures.

Automation
The capital budget includes $82.0 million for major automation initiatives.
These initiatives do not include the
automation components of building,
payment systems (including check
modernization), or cash services initiatives that are discussed separately. The
strategic directions outlined in the individual Reserve Bank budgets include
enhanced technological capabilities, the
continued implementation of LAN
technology, the development of common office environments and web-based
applications, and several Treasuryrelated initiatives.
Of the total automation-related outlays, FRIT projects and acquisitions
account for $26.7 million. FRIT’s 2001
capital plan includes outlays for Fednet
modernization ($8.7 million), virtual
tape server implementation ($1.8 million), and various software and hardware
upgrades and enhancements. Aside from
FRIT, major automation-related projects include $2.3 million for continued
development of New York’s Transaction
Processing System; $1.9 million for
enhancements to the Statistics and
Reserves (STAR) system; $1.3 million

Federal Reserve Banks
Chart 3.3
Operating Expenses of the
Federal Reserve Banks, 1992–2001

39

Chart 3.4
Employment at the
Federal Reserve Banks, 1992–2001

Billions of dollars

ANP, in thousands

Current dollars

2.2
24
1996 dollars

1

1.8
23
1.4

1992

1997

2001

Note. For 2000, estimated; for 2001, budgeted.
1. Calculated with the GDP price deflator.

for development of the Account Management Information (AMI) gateway;
$1.3 million for upgrades to the System’s
Internet and directory services (IDS)
competency center; and $1.1 million for
the Atlanta District’s ethernet conversion project.
The automation total also includes
$4.2 million in capital for software
development for, and equipment enhancements to, several reimbursable Treasuryrelated initiatives, including the Treasury
Automated Auction Processing System
(TAAPS), the Intra-governmental Payment and Collection (IPAC) system, the
Savings Bond Architecture Project
(SnAP), the Automated Standard Application for Payments (ASAP) system,
and the Treasury Check Operations
Re-engineering Effort (TCORE). The
largest share of the remaining funds
supports the Districts’ distributed technology strategies.

Payment System
The 2001 capital budget includes
$57.4 million for initiatives related to
payment system improvements. These
initiatives include $11.6 million in
FRIT’s budget for hardware, software,
and network components for the ISS

1992

1997

2001

Note. Includes Federal Reserve Automation Services.
For 2000, estimated; for 2001, budgeted. See text note 4
for definition of ANP.

and check standardization projects. The
remaining funds support other national
and local initiatives associated with
the check modernization projects, the
acquisition and installation of highspeed check imaging equipment and
software, and check reader–sorter and
endorser replacements. Many aspects
of these initiatives are under way in a
majority of the Districts.

Reserve Bank Security
The 2001 capital budget includes
$11.6 million in spending for enhanced
Bank security. Over half of this funding
($5.8 million) is for the Richmond
Bank’s security enhancement project.

Cash Services
Outlays of $12.4 million have been
included in the capital budget for cash
services initiatives. The Atlanta District’s
initiatives account for $5.9 million of
the total, including the Atlanta Bank’s
cash vault automation and currency
disposal systems ($4.2 million) and new
currency processing machines for the
Atlanta and Jacksonville offices
($1.7 million).

Part II
Special Analysis

43

Chapter 4

Check Modernization
In recent years, the Federal Reserve
Banks have explored ways of modernizing their check-processing systems
to expand the services they offer and
improve operational efficiency. In late
1999, they began the multiyear check
modernization initiative, which will
result in the standardization of check
processing at all Reserve Banks, the
adoption of common software for
processing and researching checkadjustment cases, the creation of a
national system for archiving and retrieving check images, and the delivery of
check services to depository institutions
via the Internet.
Check modernization will directly
affect approximately 5,500 Federal
Reserve employees and 8,000 depository institutions and will substantially
alter the infrastructure of the Reserve
Banks’ check service line. The four
projects that make up the initiative are
expected to result in capital expenditures
of approximately $90 million and total
expenses of approximately $250 million
over five years, from 2000 through
2004. These costs are expected to be
offset, over the long run, by more
cost-effective operations and by additional revenue from new product
offerings.

Background
The Federal Reserve Banks currently
process checks, resolve adjustment
requests, and provide image-based check
services using multiple hardware and
software platforms. They also provide
remote access and delivery of certain
check services using a technologically

outdated platform. Adjustments, imaging, and electronic delivery are key
check-related services, but the core
function on which they rely is check
processing. Accordingly, the effort to
implement a standard check-processing
platform is the most significant component of the check modernization
initiative.
Currently, seven Reserve Banks use a
Unisys check-processing platform at
twenty-six sites, and five Reserve Banks
use an IBM check-processing platform
at nineteen sites. The Reserve Banks
also use a combination of internally
developed and vendor-provided software
applications. The Unisys-based Reserve
Banks use local Unisys mainframe
computers to process checks. Four IBMbased Reserve Banks use data-processing
services provided by Federal Reserve
Automation Services, and the fifth uses
a local mainframe computer to run its
check-processing system.
As check-processing technology has
advanced, vendors have begun to discontinue support for older equipment
and software. The high cost of replacing
some of the older systems prompted the
Reserve Banks in 1997 to begin reviewing their check automation options. At
the same time, the Reserve Banks faced
changes in the market as depository
institutions began to demand greater
uniformity in the products and services
provided by the Reserve Banks. Consolidation within the banking industry has
had a major effect on customer demand.
For example, many depository institutions have come to expect the Reserve
Banks to provide uniform services,
using the latest check-processing technologies and without significant fee

44

Annual Report: Budget Review, 2001

increases, so that the depository institutions, in turn, can provide their customers with similar services nationwide. To keep up with changing market
demands and remain a viable provider
of payment services, the Reserve Banks
must improve their ability to bring
innovative products to the market
quickly.
The Reserve Banks’ current checkprocessing infrastructure, however,
hampers their ability to implement
new technologies rapidly and roll out
new national products to meet customer demand. This inability may be
attributed, at least in part, to the independence that each Reserve Bank has
historically exercised in building its
check-processing infrastructure and in
shaping its product offerings to accommodate customer demand. This independence has resulted in a large number of software applications, each with
District-specific variations. In the current environment, to offer a new national
product to meet a particular market
need, the Reserve Banks might have to
modify hardware and software configurations in up to forty-five check-processing
sites across the nation.

Check Modernization Projects
The check modernization initiative
comprises four projects—check standardization, enterprisewide adjustments,
image services system, and electronic
access and delivery. Collectively, these
projects will reduce the time needed
to develop and deploy new products;
facilitate the move to electronic payments; improve the overall consistency,
quality, and flexibility of the services
delivered to depository institutions; and
improve the cost-effectiveness of Federal Reserve check services over the
long run.

Check Standardization
The primary strategy of the check
modernization initiative is to replace the
current network of twelve relatively
independent check-processing systems
with a standard platform in all twelve
Banks. The key to accomplishing this
goal lies in the check-processing software. The core components of a checkprocessing system are check sorters,
which electronically capture data from
checks as the checks are physically
sorted, and software, which drives the
sorters and manages the captured data.
The software is the primary driver of
a platform’s functionality and its ability
to interface with other applications.
Although the Reserve Banks currently
use only two basic types of checkprocessing systems, each Reserve Bank
uses a variety of software packages to
enhance the functionality of these
systems.
In the check standardization project,
standard check-processing software will
be installed at all forty-five processing
sites. The check-processing system used
at these sites will be centrally managed
and will support a uniform set of
products nationwide. Once they have
converted to the standard platform, the
Reserve Banks will be able to operate
multiple types of check-sorting hardware
using the same software.
The check standardization project is
the most complex of the four check
modernization projects and is expected
to take nearly four years to complete,
with the last site converting to the
standard platform in 2003. Capital
outlays for the project are expected to
total approximately $60 million, and
expenses are expected to total slightly
more than $200 million through the
end of the project in 2004. Concurrent
with the project, the Reserve Banks will
be required to upgrade many of their

Check Modernization
high-speed check sorters as vendors
discontinue support for older models.
Although these upgrades will be coordinated with the check standardization
project, they are not included in the
project budget because the upgrades
would have been necessary even without
the check modernization initiative. For
several Reserve Banks, these upgrades
will constitute a significant portion of
their 2001 capital expenditures.

Enterprisewide Adjustments
The enterprisewide adjustments (EWA)
project will streamline the process for
researching and resolving check adjustments by creating a centrally managed, enterprisewide adjustment system.
The adjustments process deals with the
exceptions that inevitably occur during the normal course of processing
checks—checks processed for the wrong
dollar amount, lost checks, and the
like. Because these errors are generally
detected after a depository institution
has settled with a Reserve Bank, the
depository institution submits an adjustment request for an offsetting debit or
credit to resolve the difference.
The adjustment process has historically been manual and labor-intensive.
Over the past decade, automated systems
have been developed that manage and
aid in researching adjustment requests
and create accounting entries. In addition, depository institutions can now
submit adjustment requests electronically. Although all Reserve Banks can
receive the electronic requests, some
Banks must print out the requests and
manually enter them into an adjustment
tracking system, delaying the research
and resolution of the cases. When fully
installed, the EWA system will not only
fully automate the adjustment request
process, but will also allow adjustment
requests received by any Reserve Bank

45

site to be processed by any other
Reserve Bank site, thus relieving
backlogs.
By the end of 2000, the EWA system had been installed in twenty-six of
the forty-three Reserve Bank sites that
process adjustment requests. The remaining sites will be converted to the new
system by June 2002. Capital outlays
for the EWA project are expected to
total slightly more than $4 million,
and expenses are expected to total
approximately $14 million through the
end of the project in 2002.

Image Services System
The image services system (ISS) project will redesign the current imageprocessing infrastructure to produce a
nationwide, centrally managed system
for the storage and retrieval of check
images. This project leverages one of
the newest technologies to gain widespread use in check processing—digital
imaging. As checks are processed,
cameras on the sorter capture digital
images of each check. These digital
images can be stored in an archive at a
Reserve Bank or delivered to a depository institution by CD-ROM or magnetic
tape. Depository institutions use these
images in lieu of the original checks
in various ways, including creating
image statements, enabling account holders to access images of their checks
either on CD-ROM or over the Internet,
and archiving the images for future
research.
The Reserve Banks have been using
different hardware and software to capture and store check images and, as a
result, often deliver images in different formats. The ISS project will allow
Reserve Banks to offer a standard format for image files across all sites. It
will also establish regional archive sites
that will allow each Reserve Bank site to

46

Annual Report: Budget Review, 2001

continue capturing images locally but
will consolidate the storage of images to
achieve greater economies of scale. The
new infrastructure will enable Reserve
Bank staff and depository institutions
throughout the nation to retrieve images
captured at any Reserve Bank site.
The ISS project began in 2000, with
the first installation scheduled for early
2001. All sites are scheduled to convert to the new system by the end of
2002. Capital outlays for the project are
expected to total approximately $27 million, and expenses are expected to total
approximately $22 million through the
end of the project in 2002.1

delivery of check services from almost
any location.
The Reserve Banks are currently
converting all applications on the current DOS-based FedLine system to
either Windows- or web-based applications, depending on the requirements
of each application. The EA&D project
is scheduled to have web-based services
available by the second quarter of 2001,
at which time the Reserve Banks will
begin assisting customers with the transition to the new platform. Capital outlays for the project are expected to total
slightly more than $2 million, and
expenses are expected to total slightly
more than $6 million through 2001.

Electronic Access and Delivery
The electronic access and delivery
(EA&D) project will convert check
services from the current PC-based
FedLine platform to a ‘‘FedLine for the
Web’’ platform. The new platform will
reduce the Reserve Banks’ reliance on
an outdated DOS platform, in use since
the early 1980s, and provide opportunities for offering new services over
the web. FedLine provides depository
institutions with a secure connection to
Reserve Bank computer networks so
they can use certain transactional and
informational services, including wire
transfers, automated clearinghouse
(ACH) transactions, electronic check
presentment files, and access to account
balance information. The current FedLine platform limits access to computers
equipped with certain encryption devices.
The EA&D project will give depository
institutions the option of using FedLine
for the Web for electronic access to and

1. Capital outlays exceed expenses over the life
of the ISS project because capitalized expenditures
will not be fully depreciated by the end of the
project.

Project Management
Management of the check modernization initiative is structured to ensure that
the schedules of these four interrelated
and virtually concurrent projects are
coordinated, that interproject issues are
resolved, and that the financial and
operational risks to the check service
line are managed. Central project teams,
made up of staff from multiple Reserve
Banks, are responsible for individual
projects. A central management team,
made up of the four project leaders and
representatives from key groups, including the Reserve Banks’ Retail Payments Office, Board staff, Reserve Bank
internal audit, and Federal Reserve
Automation Services, is responsible for
overseeing the four projects and ensuring that the projects’ goals are achieved.
In addition, each of the Reserve
Banks has a District transition manager,
who is responsible for coordinating the
four projects in that District. Each
District transition manager is supported
by up to four coordinators, who are
responsible for coordinating one of
the four projects with the central project teams. This structure is designed

Check Modernization
to provide consistent communication on
key issues and to mitigate some of the
risks in managing such a large initiative.

Anticipated Benefits
The check modernization initiative is
intended to position the Reserve Banks
to meet the challenges of the changing payment services environment in a
number of ways. First, the standardization of the check-processing infrastructure will result in the uniform adoption
of new technologies across the Federal
Reserve System. Second, maintaining
and managing a single processing infrastructure should improve the operational
efficiency and cost-effectiveness of the
check services over the long run. Third,
the standard infrastructure will improve
the consistency, quality, and uniformity
of the check services that Reserve Banks
deliver to their customers and allow the
system to be modified more efficiently

47

and new services to be developed and
deployed more quickly. Finally, the
standardization of the check-processing
infrastructure will facilitate Reserve
Banks’ efforts to support national initiatives to promote electronic check
presentment.
The check modernization initiative
will also allow Reserve Banks to adjust
their processing infrastructure in response
to external market conditions. Consolidation within the banking industry and
in the operating structures within depository institutions will likely continue to
result in significant shifts in check volumes among Reserve Bank processing
sites. Further, technological and regulatory changes may result in increased
reliance on electronic payment alternatives. The standard processing environment is designed to allow Reserve
Banks to adapt more rapidly and efficiently to these types of changes in the
check-processing environment.

Appendixes

51

Appendix A

Special Categories of System Expense
Fees for priced services and the treatment of capital outlays are explained in
this appendix. Also described are the
Federal Reserve’s expenses for currency
printing.

Priced Services
The Monetary Control Act of 1980
requires the Federal Reserve to charge
depository institutions for certain services that the Federal Reserve had
previously provided without explicit
charge and only to member banks. As
the act requires, the fees charged for
providing these priced services are
based on the cost of providing the services, including all direct and indirect
costs, the interest on items credited
before actual collection (float), and the
private sector adjustment factor (PSAF).
The intent of the PSAF calculation is
to impute the costs that would have been
incurred and the profits that would have
been earned had the Federal Reserve
Banks’ priced services been provided by
a private firm.

and ultimately by the Board of
Governors.1
The cost of float is estimated by
applying the current federal funds rate to
the level of float expected to be generated in the coming year. Estimates of
income taxes and the return on capital
are based on tax and financing rates
derived from a model of the fifty largest
U.S. bank holding companies; these
rates are applied to the assets the Federal
Reserve expects to use in providing
priced services in the coming year. The
other components of the PSAF are
derived from the budgets of the Reserve
Banks and the Board: the imputed sales
tax (based on budgeted outlays for
materials, supplies, and capital assets);
the imputed assessment for insurance
by the Federal Deposit Insurance Corporation (FDIC) (based on expected
clearing balances and amounts deferred
to depository institutions for items
deposited for collection with the Reserve
Banks); and the portion of the expenses
of the Board of Governors directly
related to providing priced services.

Calculation of the PSAF for 2001
Annual Pricing Process
To meet the requirement for the full
recovery of costs, the Federal Reserve
has developed an annual pricing process
involving projections of Reserve Bank
expenses, volumes, and revenues, as
well as PSAF and net income on
clearing balances, for each major service
category.
Fees for Federal Reserve services
must be approved by the product director for the respective service, by the
Financial Services Policy Committee,

In 2000, the Board approved a 2001
private sector adjustment factor for
Reserve Bank priced services of
$206.9 million, an increase of $14.3 mil-

1. The product directors are the first vice
presidents at selected Reserve Banks with
responsibility for day-to-day policy guidance over
specific services. The Financial Services Policy
Committee (FSPC) is responsible for the overall
direction of financial services and related support
functions for the Federal Reserve Banks.

52

Annual Report: Budget Review, 2001

lion, or 7.4 percent, from the PSAF of
$192.6 million targeted for 2000.
Asset Base
The value of Federal Reserve assets to
be used in providing priced services in
2001 is estimated at $12,530.7 million
(table A.1). The value of assets assumed

to be financed through debt and equity
in 2001 is $1,162.4 million, an increase
of $45.9 million, or 4.1 percent, from
2000 (table A.2). Most of the increase
results from the growth of net pension
assets, while higher Reserve Bank building and equipment assets account for
the remainder. Partially offsetting the

Table A.1
Pro Forma Balance Sheet for Federal Reserve Priced Services, 2000 and 2001
Millions of dollars
Item

2000

Assets
Short-term assets
Imputed reserve requirement on clearing balances . . . . . . . .
762.2
Investment in marketable securities . . . . . . . . . . . . . . . . . . . . . 6,859.5
1 ...........................................
74.2
Receivables
3.4
Materials and supplies 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 ......................................
21.4
Prepaid expenses
Items in process of collection . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,804.2
Total short-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2001

742.4
6,681.9
77.3
3.6
23.4
3,606.7
11,524.9

11,135.3

Long-term assets
411.7
Premises 1,2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
180.1
Furniture and equipment 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64.2
Leasehold improvements and long-term prepayments 1 . . . .
599.8
Prepaid pension costs 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,255.8

1,395.4

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,780.7

12,530.7

417.5
185.5
73.9
718.5

Liabilities
Short-term liabilities
Clearing balances and balances arising
from early credit of uncollected items . . . . . . . . . . . . . . 7,621.7
Deferred-credit items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,804.2
99.0
Short-term debt 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.0
Short-term payables 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,424.3
3,606.7
18.9
85.4
11,524.9

11,135.3

Long-term liabilities
Postemployment/postretirement benefits 1 . . . . . . . . . . . . . . . .
238.3
400.9
Long-term debt 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

639.2

731.0

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,164.1

11,866.3

Equity3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

616.6

664.4

Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,780.7

12,530.7

Note. Data are averages for the year. Components
may not sum to totals because of rounding.
1. Financed through the private sector adjustment
factor; other assets are self-financing.
2. Includes allocations of Board of Governors’ assets
to priced services of $0.7 million for 2001 and
$0.5 million for 2000.

251.9
479.1

3. Imputed figures represent the source of financing for
certain priced-services assets.
4. For the 2001 PSAF, short-term payables attributable
to priced services are included as a financing source for
short-term assets such as receivables, materials and
supplies, and prepaid expenses.

Special Categories of System Expense
increase in asset levels is a reduction
of $80.1 million, resulting from the
inclusion of short-term accounts payable
as a financing source. Short-term

53

assets that cannot be financed with
actual (rather than imputed) short-term
liabilities are financed with short-term
debt.

Table A.2
Derivation of the Private Sector Adjustment Factor (PSAF), 2000 and 2001
Millions of dollars except as noted
Item

2000

2001

PSAF Components
Assets to be financed 1
Short-term 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

99.0
1,017.5
1,116.5

18.9
1,143.5
1,162.4

Weighted average costs (percent)
Capital structure 4
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.9
35.9
55.2

1.6
41.2
57.2

Financing rates and costs 4
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pretax return on equity 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average long-term cost of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.1
6.6
23.3
16.7

4.7
6.5
24.0
16.7

Tax rate (percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31.5

31.5

Capital costs
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.0
26.5
143.7
175.2

.9
31.1
159.5
191.5

Other costs
Sales taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assessment for federal deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses of Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.4
2.9
4.2
17.5

10.5
.0
4.9
15.4

Total PSAF recoveries
Millions of dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of expenses 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

192.6
17.3
28.0

206.9
17.8
28.5

Required PSAF Recoveries

Note. Components may not sum to totals because of
rounding.
1. Priced services assets are based on ‘‘direct determination of assets’’ method.
2. For 2001, short-term assets consist only of those
short-term assets that are financed with short-term debt.
3. Consists of total priced long-term assets, less
postemployment/postretirement benefit liabilities.
4. For 2001, net short-term assets are assumed to be
financed with short-term debt; for 2000, all short-term
assets are assumed to be financed with short-term debt. Of
the total 2001 long-term assets, 41.9 percent are assumed
to be financed with long-term debt and 58.1 percent with

equity; for 2000, 39.4 percent of long-term assets were
financed with long-term debt and 60.6 percent were
financed with equity.
5. The pretax rate of return on equity is based on the
average after-tax rate of return on equity, adjusted by the
effective tax rate to yield the pretax rate of return on
equity for each bank holding company for each year.
These data are then averaged over five years to yield the
pretax return on equity for use in the PSAF.
6. System priced-services expenses, less shipping,
were budgeted at $725.7 million for 2001 and $687.0
million for 2000.

54

Annual Report: Budget Review, 2001

Cost of Capital and Taxes
and Other Imputed Costs
For 2001, a pretax rate of return on
equity of 24.0 percent, or $159.5 million, is planned. Other required PSAF
recoveries for 2001—imputed sales
taxes, the imputed FDIC insurance
assessment, and Board expenses—total
$15.4 million (table A.2).

Capital Outlays
Under generally accepted accounting
principles (GAAP), the cost of an asset
that is expected to benefit an entity over
future periods should be allocated over
those periods. Such treatment allows
a realistic measurement of operating
performance. In accordance with GAAP,
the Federal Reserve System depreciates
the cost of fixed assets over their estimated useful lives.
The Banks and the Board capitalize
and depreciate all assets that cost
$5,000 or more; they may either capitalize or expense assets costing less.
The Banks maintain a multiyear plan
for capital spending. The Board, in turn,
requires the Banks to budget annually
for capital outlays by capital class to
estimate the effect of total operating
and capital spending. During the budget
year, the Banks must submit proposals
for major purchases of assets to the

Board for further review and approval.
The Board of Governors also reviews
capital expenditures for the Board.

Currency Printing
and Circulation
The Department of Treasury’s Bureau
of Engraving and Printing (BEP) prints
U.S. currency; the Federal Reserve
Banks put it into circulation through
depository institutions and destroy it as
it wears out. Under authority delegated
by the Board, the director of the Division of Reserve Bank Operations and
Payment Systems submits an order
for new currency to the BEP each July.
Upon reviewing the order, the BEP
establishes billing rates for new currency, which the Board’s staff uses to
prepare the annual budget for new currency. Once the Board approves the new
currency budget, it assesses each Federal Reserve Bank through an accounting procedure similar to that used in
assessing the Banks for the Board’s
operating expenses.
Estimated currency expenditures for
2000 totaled $435.2 million, which is
$21.2 million, or 4.6 percent, less than
budgeted (table A.3). In 2000, estimated
fourth-quarter note production, 201.4 million notes, was less than the original
budget forecast because Reserve Banks

Table A.3
Federal Reserve Costs of Supplying Currency, 2000 and 2001
Thousands of dollars except as noted
2000
(estimated)

2001
(budgeted)

Percent
change

Printing of new Federal Reserve notes . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Counterfeit deterrence research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursement to the U.S. Treasury’s
Office of Currency Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

423,302
6,166
3,043

410,763
9,630
3,700

−3.0
56.2
21.6

2,700

2,900

7.4

Total cost of currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

435,211

426,993

−1.9

Item

Special Categories of System Expense
generally maintained high inventory
levels after the Y2K buildup. The
printing cost for the 2001 budget is
$410.8 million, or 3.0 percent less than
the estimated 2000 expenditures.

Chart A.1
Federal Reserve Budget for
Supplying U.S. Currency, 1992–2001
Millions of dollars

400

Printing of Federal Reserve Notes
Because of high currency inventory
levels at the Reserve Banks, the Board
limited the print order for the 2001
budget to 8.2 billion notes. The budget
for printing the 8.2 billion notes is
$410.8 million, or 96.2 percent of the
total 2001 new currency budget. For
January through September 2001 (the
portion of the federal government’s
fiscal 2001 that falls within calendar
2001), production is set at 6.2 billion
notes. The Board’s staff estimates that
for October through December 2001,
production could be 2.0 billion notes
(chart A.1).
The BEP charges the Board for each
of the three types of currency produced:
unthreaded ($1s), New Currency Design
(NCD) without optical-varying ink ($5s),
and NCD with optical-varying ink ($10s,
$20s, $50s, and $100s) (table A.4).2 The
2. The color of the optical-varying ink shifts
from green to black as the angle of the note
changes.

55

200

1992

1995

1998

2001

Note. For 2000, estimated; for 2001, budgeted.

average price charged to the Board by
the BEP for producing all three types of
notes will increase 2.6 percent in 2001,
from $47.35 per thousand notes printed
to $48.58. During 2001, 42.5 percent of
the notes produced will be NCD notes,
and the remaining 57.5 percent will be
unthreaded ($1s). The billing rate for
each type blends the costs of producing
the notes at the Washington, D.C., and
Fort Worth, Texas, facilities of the
BEP. The 2001 billing rate for the
$5 note is expected to decline by about
5.92 percent because the production
volume will increase 70.8 percent over
2000.

Table A.4
Projected Cost of Printing New Notes, by Type of Note, 2001
Type of currency

Number of
notes (millions)

Percentage of
total notes

Cost per
thousand notes
(dollars)

Total cost
(thousands of
dollars)

Unthreaded ($1s) . . . . . . . . . . . . . . . . . . . . . .
New Currency Design 1
$5s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10s, $20s, $50s, $100s . . . . . . . . . . . . .

4,724.8

58

39.98

188,898

1,158.5
2,297.6

14
28

56.65
68.00

65,629
156,237

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,180.9

100

48.58 2

410,763

1. All NCD denominations except $5s carry opticalvarying ink (see text note 2).

2. Average cost for printing all three types of currency.

56

Annual Report: Budget Review, 2001

Currency Transportation
The 2001 budget for currency transportation is $9.6 million, which includes
shipments from the BEP to the Reserve
Banks and shipments among the Reserve
Banks. Although note production in
2001 is lower than in 2000, the transportation budget is 56.2 percent higher
than estimated 2000 expenses because
of a Government Services Administration decision not to permit contractors
to receive government rates for airfare.
The 2001 budget for new BEP shipments is $7.6 million, or 60.7 percent
greater than estimated 2000 expenses.
The 2001 budget for currency shipments between Reserve Banks is
$2.0 million, or 140.5 percent greater
than estimated 2000 expenses. IntraSystem shipments are used to move
currency from Banks with excess fit
currency to Banks that would otherwise
require new currency from the BEP.
Because the BEP is printing a limited
number of $100 notes and not printing

any $2 and $50 notes in fiscal 2001,
Reserve Banks that need these notes will
need to obtain them from other Banks.

Counterfeit Deterrence Research
The 2001 budget includes $3.7 million
to fund the final phase of the three-year
counterfeit deterrence system effort.
This effort, operating under the auspices
of the G-10 governors, combats digital
counterfeiting.

Treasury’s Office of Currency
Standards (OCS)
The OCS develops standards for the
cancellation, destruction, and accountability of unfit currency. As a public
service, the BEP processes claims for
the redemption of damaged or mutilated
currency that is turned over to the
Reserve Banks. The 2001 budget
includes $2.9 million to reimburse the
Treasury for OCS expenses.

57

Appendix B

Sources and Uses of Funds
The Federal Reserve System, in accordance with generally accepted accounting principles, accrues income and
expenses and capitalizes acquisitions of
assets whose useful lives extend over
several years (see appendix A).
The System derives its income primarily from earnings on U.S. government securities that the Federal Reserve
has acquired through open market operations, one of the tools of monetary
policy. These earnings account for
approximately 96 percent of current
income (table B.1).
The current expenses of the Reserve
Banks consist of their operating expenses
and the costs of the earnings credits
granted to depository institutions on
Table B.1
Income of the Federal Reserve System,
1999 and 2000
Millions of dollars
Source

1999

2000
(estimated)

Loans . . . . . . . . . . . . . . . . . . . . . . .
U.S. government securities . . .
Foreign currencies . . . . . . . . . . .
Priced services . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . .

11.1
28,216.1
224.8
835.9
58.9

22.8
32,736.9
269.5
881.5
53.2

Total . . . . . . . . . . . . . . . . . . . . . . .

29,346.8

33,964.0

clearing balances held with the Reserve
Banks (table B.2). The Reserve Banks
record extraordinary adjustments to
current net income in a profit and loss
account. The primary entries in the
account are for gains or losses on the
sale of U.S. government securities and
for gains or losses on assets denominated
in foreign currencies that result either
from the sale of those assets or from
their revaluation at market exchange
rates.
The Reserve Banks maintain a surplus account to absorb unexpected
losses, much as commercial establishments retain earnings. The Board of
Governors requires that the surplus
account at year-end be an amount equal
to the capital paid in by the member
banks. Since the end of 1964, the
Board’s policy has been to transfer to
the U.S. Treasury all net income after
paying the statutory dividend to member banks and the amount necessary to
equate surplus to paid-in capital. The
amount transferred is classified as interest on Federal Reserve notes. Such
payments were $25.4 billion and
$25.3 billion for 1999 and 2000
respectively. In addition to these payments, a special transfer of surplus of
$3.752 billion on May 10, 2000, was
statutorily required.

58

Annual Report: Budget Review, 2001

Table B.2
Distribution of the Income of the Federal Reserve Banks, 1999 and 2000
Millions of dollars
Item

1999

2000
(estimated)

Current income 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less
Current expenses of Reserve Banks 2
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of earnings credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equals
Current net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus
Net additions to, or deductions from (−), current net income 3 . . . . . . . . . . . . . . . . .
Less
Cost of unreimbursed Treasury services 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,347

33,964

1,531
321

1,586
385

27,495

31,992

−526

−1,492

8

8

Assessments by the Board
Board expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

214
485

188
436

Other distributions
Dividends paid to member banks 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to, or from (−), surplus 6,7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

374
479

410
4,115

Equals
Payment to U.S. Treasury 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,410

25,344

1. For sources of income, see table B.1.
2. Net of reimbursements due from the U.S. Treasury
and other government agencies. Also reflects reductions
in credits for net periodic pension cost amounting to
$366.8 million in 1999 and $392.6 million in 2000.
3. This account is the same as that reported under the
same name in the table ‘‘Income and Expenses of Federal Reserve Banks’’ in the Statistical Tables section of
the Board’s Annual Report and includes realized and
unrealized gains on assets denominated in foreign
currencies, gains on sales of U.S. government securities,
and miscellaneous gains and losses.

4. The cost of services provided to the U.S. Treasury
that are reimbursable under agreements with the Treasury
and for which reimbursement is not anticipated.
5. The Federal Reserve Act requires the Federal
Reserve to pay dividends to member banks at the rate of
6 percent of paid-in capital.
6. Each year, to provide a reserve against losses, the
Federal Reserve transfers to its surplus account an amount
sufficient to equate surplus to paid-in capital.
7. Does not reflect the special transfer of surplus from
the Federal Reserve System to the Treasury of $3.752 billion on May 10, 2000.

59

Appendix C

Federal Reserve System Audits
The Board of Governors, each of the
Reserve Banks, and the Federal Reserve
System as a whole are all subject to
several levels of audit and review. At
each Federal Reserve Bank, a full-time
staff of auditors under the direction of a
general auditor reports directly to the
Bank’s board of directors. The Board’s
Division of Reserve Bank Operations
and Payment Systems, acting on behalf
of the Board of Governors, regularly
audits the financial operations of each
of the Banks and periodically reviews
all other Bank operations. In addition,
the financial statements of the Reserve
Banks are audited annually by an independent outside auditor.
The Office of Inspector General (OIG)
conducts audits and investigations of the
programs and operations of the Board
and those Board functions delegated
to the Federal Reserve Banks. The OIG
retains an independent auditor each year
to certify the fairness of the Board’s
financial statements and its compliance
with laws and regulations affecting
those financial statements.

Independent Audit
The Board of Governors contracts
with an external audit firm, currently
PricewaterhouseCoopers L.L.P., for an
annual audit of the combined Reserve
Bank financial statements and the financial statements of each of the twelve
Reserve Banks. The Reserve Banks are
also audited by each Bank’s internal
audit function and by the Board’s
Division of Reserve Bank Operations
and Payment Systems.

General Accounting Office
The 1978 passage of the Federal Banking Agency Audit Act (Public Law
95–320) brought most of the operations
of the Federal Reserve System under
the purview of the General Accounting Office (GAO). The GAO, which
currently has 8 projects in various
stages of completion, since 1979 has
completed 191 reports on selected
aspects of Federal Reserve operations
(tables C.1 and C.2). The GAO has also
involved the Federal Reserve in about
104 other reviews not directly related
to the System and has terminated 56
others before completion. The reports
are available directly from the GAO.

60

Annual Report: Budget Review, 2001

Table C.1
Active GAO Projects Relating to the Federal Reserve, Year-End 2000
Subject

Date initiated

Issues related to money laundering and the securities industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal telecommunications profile project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Student credit card debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government’s financial statements in FY 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fraudulent access to financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assessment of human capital management policies and practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Siting of federal facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mandatory flood insurance purchase requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5-1-00
5-4-00
6-19-00
6-20-00
6-29-00
10-27-00
11-9-00
12-8-00

Table C.2
Completed GAO Reports Relating to the Federal Reserve System, 1979–2000
Report
Comparing Policies and Procedures of the Three Bank
Regulatory Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Are OPEC Financial Holdings a Danger to U.S. Banks or the Economy? .
Federal Systems Not Designed to Collect Data on All Foreign
Investments in U.S. Depository Institutions . . . . . . . . . . . . . . . . . . . . . . .
Considerable Increase in Foreign Banking in United States since 1972 .
Investment Policies, Practices and Performance
of Federal Retirement Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Supervision of Bank Holding Companies Needs Better, More
Formalized Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Federal Reserve Should Assure Compliance
with the 1970 Bank Holding Company Act Amendments . . . . . . . . .
Federal Agencies’ Initial Problems with the Right to Financial
Privacy Act of 1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal Auditing Can Be Strengthened in the Federal Reserve System .
Despite Positive Effects, Further Foreign Acquisitions of U.S. Banks
Should Be Limited until Policy Conflicts Are Fully Addressed . . . .
Federal Examinations of Financial Institutions: Issues That
Need to Be Resolved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Examinations of Financial Institutions Do Not Assure Compliance
with Consumer Credit Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disappointing Progress in Improving Systems for Resolving
Billions in Audit Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Economic Overview of Bank Solvency Regulation . . . . . . . . . . . . . . . . .
Federal Reserve Security over Currency Transportation Is Adequate . . . .
The Federal Structure for Examining Financial Institutions
Can Be Improved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Response to Questions Bearing on the Feasibility
of Closing the Federal Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Secrecy Act Reporting Requirements Have Not Met
Expectations, Suggesting Need for Amendment . . . . . . . . . . . . . . . . . . .
Federal Reserve Could Improve the Efficiency of Bank Holding
Company Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Institution Regulatory Agencies Should Perform Internal Audit
Reviews of their Examination and Supervision Activities . . . . . . . . .
Information on Selected Aspects of Federal Reserve System Expenditures .
Federal Review of Intrastate Branching Can Be Reduced . . . . . . . . . . . . . .
Despite Improvements, Recent Bank Supervision Could
Be More Effective and Less Burdensome . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

GGD-79-27
EMD-79-45

3-29-79
6-11-79

GGD-79-42
GGD-79-75

6-19-79
8-1-79

FPCD-79-17

8-31-79

GGD-80-20

2-12-80

GGD-80-21

3-12-80

GGD-80-64
GGD-80-59

5-29-80
8-8-80

GGD-80-66

8-26-80

GGD-81-12

1-6-81

GGD-81-13

1-21-81

AFMD-81-27
PAD-81-25
GGD-81-27

1-23-81
2-13-81
2-23-81

GGD-81-21

4-24-81

GGD-81-49

5-21-81

GGD-81-80

7-23-81

GGD-81-79

8-18-81

GGD-82-5

10-19-81

GGD-82-33
GGD-82-31

2-12-82
2-24-82

GGD-82-21

2-26-82

Federal Reserve System Audits

61

Table C.2
Continued
Report
Issues to Be Considered while Debating Interstate Bank Branching . . . . .
The Federal Reserve Should Move Faster to Eliminate Subsidy
of Check-Clearing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information about Depository Institutions’ Ancillary Activities Is Not
Adequate for Policy Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Merger Process Should Be Modernized and Simplified . . . . . . . . . . .
An Analysis of Fiscal and Monetary Policies . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Examination for Country Risk and International Lending . . . . . . . . .
Credit Insurance Disclosure Provisions of the Truth-in-Lending Act
Consistently Enforced Except When Decisions Appealed . . . . . . . . . .
Survey of Investor Protection and the Regulation
of Financial Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Institutions Regulatory Agencies Can Make Better Use
of Consumer Complaint Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expediting Tax Deposits Can Increase the Government’s
Interest Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unauthorized Disclosure of the Federal Reserve’s
Monetary Policy Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Financial Institutions Examination Council Has Made Limited
Progress toward Accomplishing Its Mission . . . . . . . . . . . . . . . . . . . . . .
Control Improvements Needed in Accounting for Treasury Securities
at the Federal Reserve Bank of New York . . . . . . . . . . . . . . . . . . . . . . . .
Statutory Requirements for Examining International Banking
Institutions Need Attention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supervisory Examinations of International Banking Facilities
Need to Be Improved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Examination of Concerns Expressed about the Federal Reserve’s
Pricing of Check-Clearing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Difficulties in Evaluating the Effectiveness of the Community
Reinvestment Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Coordination of Bank Supervision: The Record to Date . . .
Implementation of the Export Trading Company Act of 1982 . . . . . . . . . .
Information on Independent Public Accountant Audits
of Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Analysis of Two Types of Pooled Investment Funds . . . . . . . . . . . . . . .
How the Markets Are Developed and How They Are Regulated . . . . . . .
U.S. Banking Supervision and International Supervisory Principles . . . . .
Financial Institution Regulators’ Compliance Examination . . . . . . . . . . . . .
The Market’s Structure, Risks, and Regulation . . . . . . . . . . . . . . . . . . . . . . . .
Dealer Views on Market Operations and Federal Reserve
Securities Transfer System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Questions about the Federal Reserve’s Securities Transfer System . . . . . .
Federal Reserve Board Opposition to Credit Card Interest Rate Limits .
Insulating Banks from the Potential Risk of Expanded Activities . . . . . . .
The Federal Reserve Response Regarding Its Market-Making Standard .
Change in Fees and Deposit Account Interest Rates since Deregulation .
An Examination of Views Expressed about Access to Brokers’ Services .
Issues Related to Repeal of the Glass–Steagall Act . . . . . . . . . . . . . . . . . . . .
Preliminary Observations on the October 1987 Crash . . . . . . . . . . . . . . . . . .
Supervision of Overseas Lending Is Inadequate . . . . . . . . . . . . . . . . . . . . . . .
Competitive Concerns of Foreign Financial Firms in Japan,
the United Kingdom and the United States . . . . . . . . . . . . . . . . . . . . . . .
Administrative Expenses at FHLBB and FRB for 1985 and 1986 . . . . . .

Number

Date issued

GGD-82-36

4-9-82

GGD-82-22

5-7-82

GGD-82-57
GGD-82-53
PAD-82-45
ID-82-52

6-1-82
8-16-82
8-31-82
9-2-82

GGD-83-3

10-25-82

GGD-83-30

7-13-83

GGD-83-13

8-25-83

GGD-84-14

11-21-83

GGD-84-40

2-3-84

GGD-84-4

2-3-84

AFMD-84-10

5-2-84

GGD-84-39

7-11-84

GGD-84-65

9-30-84

GGD-85-9A

1-14-85

OCE-86-1

11-4-85

NSIAD-86-40
NSIAD-86-42

2-6-86
2-27-86

GGD-84-44FS
GGD-86-63
GGD-86-26
NSIAD-86-93
GGD-86-94
GGD-86-80BR

4-21-86
5-12-86
5-15-86
7-25-86
8-1-86
8-20-86

GGD-86-147FS
GGD-87-15BR

9-29-86
10-20-86

GGD-87-38BR
GGD-87-35
GGD-87-55FS
GGD-87-70
GGD-88-8

4-7-87
4-14-87
4-21-87
7-13-87
12-18-87

GGD-88-37
GGD-88-38
NSIAD-88-87

1-22-88
1-26-88
5-5-88

NSIAD-88-171
AFMD-88-33

6-2-88
6-15-88

62

Annual Report: Budget Review, 2001

Table C.2
Completed GAO Reports Relating to the Federal Reserve System—Continued
Report

Number

Date issued

Government in the Sunshine Act Compliance at Selected Agencies . . . .
Trends in Commercial Bank Performance, December 1976–June 1987 . .
U.S. Commercial Banks’ Securities Activities in London . . . . . . . . . . . . . . .
Lending to Troubled Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government Check-Cashing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GGD-88-97
GGD-88-106BR
NSIAD-88-238
GGD-88-126BR
GGD-89-12

7-20-88
7-28-88
9-8-88
9-26-88
10-7-88

Conflict of Interest: Abuses in Commercial Banking Institutions . . . . . . .
Competitive Fairness Is an Elusive Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Audits Needed to Strengthen Internal Control
and Bank Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information on the System’s Check Collection Service . . . . . . . . . . . . . . . .

GGD-89-35
GGD-89-61

1-27-89
5-12-89

AFMD-89-25
GGD-90-17

5-31-89
12-15-89

Oversight of Critical Banking Systems Should Be Strengthened . . . . . . . .
Activities of Securities of Bank Holding Companies . . . . . . . . . . . . . . . . . . .
The Stock, Options, and Futures Markets Are Still at Risk . . . . . . . . . . . . .
Update on U.S. Commercial Banks’ Securities in London . . . . . . . . . . . . . .
U.S. Financial Services’ Competitiveness under the Single
Market Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Limited Public Demand for New Dollar Coin or Elimination of Pennies .
Oversight of Automation Used to Clear and Settle Trades Is Uneven . . .
The Government’s Exposure to Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Inspector General Operations at Financial Regulatory Agencies .
Additional Reserves and Reform Needed to Strengthen the Fund . . . . . . .
More Transaction Information and Investor Protection Measures
Are Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issues Relating to Banks Selling Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IMTEC-90-14
GGD-90-48
GGD-90-33
NSIAD-90-98

1-14-90
3-14-90
4-11-90
5-7-90

NSIAD-90-99
GGD-90-88
IMTEC-90-47
GGD-90-97
AFMD-90-55FS
AFMD-90-100

5-21-90
5-23-90
7-12-90
8-15-90
8-24-90
9-11-90

GGD-90-114
GGD-90-113

9-14-90
9-25-90

Implementation of Risk-Based Capital Adequacy Standards . . . . . . . . . . . .
Overview of Six Foreign Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit Insurance: A Strategy for Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Supervision: Prompt and Forceful Regulatory Actions Needed . . . .
Many Federal Agencies Collect and Disseminate Information . . . . . . . . . .
Money Laundering: The U.S. Government Is Responding to the Problem .
A Framework for Limiting the Government’s Exposure to Risks . . . . . . .
Treasury Tax and Loan Activity at Two Troubled Banks . . . . . . . . . . . . . .
OCC’s Supervision of the Bank of New England
Was Not Timely or Forceful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Holding Company Securities Subsidiaries’ Market
Activities Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time Limits on Holding Deposits Generally Met
but More Oversight Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legislation Needed to Strengthen Bank Oversight . . . . . . . . . . . . . . . . . . . . .

NSIAD-91-80
NSIAD-91-104
GGD-92-26
GGD-91-69
NSIAD-91-173
NSIAD-91-130
GGD-91-90
AFMD-91-87

1-25-91
2-22-91
3-4-91
4-15-91
5-1-91
5-16-91
5-22-91
9-12-91

Contracting Practices with Data Processing Servicers . . . . . . . . . . . . . . . . . .
Challenges to Harmonizing International Capital Standards Remain . . . .
Assessing the Need to Regulate Additional Financial Activities . . . . . . . .
Call Report Automation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flexible Accounting Rules Lead to Inflated Financial Reports . . . . . . . . . .
Cross-Border Information Sharing Is Improving, but Obstacles Remain .
Changes in Collateral Practices Could Reduce the Federal
Government’s Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Initial Assessment of Certain BCCI Activities in the U.S. . . . . . . . . . . . . . .
Appraisal Reform: Implementation Status and Unresolved Issues . . . . . . .
Bank and Thrift Criminal Fraud: The Federal Commitment
Could Be Broadened . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FRB Examinations and Inspections Do Not Fully Assess Bank Safety
and Soundness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Improvements Needed in Examination Quality and Regulatory Structure . .

GGD-91-128

9-16-91

GGD-91-131

9-20-91

GGD-91-132
AFMD-92-19

9-30-91
10-21-91

GGD-92-19
GGD-92-41
GGD-92-70
IMTEC-92-60R
AFMD-92-52
GGD-92-110

2-5-92
3-10-92
4-21-92
5-28-92
6-1-92
7-28-92

AFMD-92-54
GGD-92-96
GGD-93-19

9-14-92
9-30-92
10-30-92

GGD-93-48

1-8-93

AFMD-93-13
AFMD-93-15

2-16-93
2-16-93

Federal Reserve System Audits

63

Table C.2
Continued
Report
Personnel Engaged in Public and Congressional Affairs
in Federal Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Availability Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury Automation: Automated Auction May Not Achieve Benefits
or Operate Properly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IRS Can Improve the Federal Tax Deposit System . . . . . . . . . . . . . . . . . . . .
Funding Foreign Bank Examinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preliminary Information Related to a Futures Transaction Fee . . . . . . . . . .
The Business Environment in the United States, Japan,
and Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Impediments to Small Business Lending Should Be
Removed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Developments in Foreign Exchange Markets . . . . . . . . . . . . . . . . . . .
Benefits and Risks of Removing Regulatory Restrictions . . . . . . . . . . . . . . .
Regulatory Burden: Recent Studies, Industry Issues,
and Agency Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strengthening the Framework for Supervising International Banks . . . . . .
Insider Problems and Violations Indicate Broader Management
Deficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Credit Card Industry: Competitive Developments Need to be
Closely Monitored . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Better Guidance Is Needed for Real Estate Evaluations . . . . . . . . . . . . . . . .
Treasury Securities Auction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divergent Loan Loss Methods Undermine Usefulness
of Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interstate Banking: Experiences in Three Western States . . . . . . . . . . . . . . .
Lessons Learned from Resolving First City Bancorporation of Texas . . .
Investment of Trust Assets in Bank Proprietary Mutual Funds . . . . . . . . .
Status Report on the Initiative to Improve Economic Statistics . . . . . . . . .
Mandated Studies to Review Costly Bank and Thrift Failures . . . . . . . . . .
Differences in Screening Bank Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banks’ Securities Activities: Oversight Differs Depending on Activity
and Regulator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual Funds: Impact on Bank Deposits and Credit Availability . . . . . . .
Bank Mutual Funds: Sales Practices and Regulatory Issues . . . . . . . . . . . .
Challenges Remain to Successfully Implement CRA . . . . . . . . . . . . . . . . . . .
Foreign Banks: Assessing Their Role in the U.S. Banking System . . . . . .
Federal Reserve Banks: Internal Control, Accounting,
and Auditing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico’s Financial Crisis: Origins, Awareness, Assistance,
and Initial Efforts to Recover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Counterfeit U.S. Currency Abroad: Issues and U.S. Deterrence Efforts . .
Money Laundering: A Framework for Understanding
U.S. Efforts Overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve System: Current and Future Challenges
Require Systemwide Attention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Lending: Federal Oversight and Enforcement Improved
but Some Challenges Remain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Inaccurate Reporting of Currency
at the Los Angeles Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation of the Foreign Bank Supervision Enhancement
Act of 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Derivatives: Actions Taken or Proposed since May 1994 . . . . .
Inspectors General: Mandated Studies to Review Costly Bank
and Thrift Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Burden: Measurement Challenges and Concerns
Raised by Selected Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Oversight Structure: U.S. and Foreign Experience May Offer
Lessons for Modernizing U.S. Structure . . . . . . . . . . . . . . . . . . . . . . . . . .

Number

GGD-93-71FS
GGD-93-15R

Date issued

3-8-93
3-30-93

IMTEC-93-28
AFMD-93-40
GGD-93-35R
GGD-93-108

4-27-93
4-28-93
5-4-93
5-17-93

GGD-93-124

8-9-93

GGD-93-121
GGD-93-154
GGD-94-26

9-7-93
9-24-93
11-2-93

GGD-94-28

12-13-93

GGD-94-68

3-21-94

GGD-94-88

3-30-94

GGD-94-23
GGD-94-144
AIMD-94-165R
AIMD-95-8
GGD-95-35
GGD-95-37
GGD-95-21
GGD-95-98
GGD-95-126
GGD-95-181R
GGD-95-214
GGD-95-230
GGD-95-210
GGD-96-23
GGD-96-26
AIMD-96-5

4-28-94
5-24-94
8-25-94
10-31-94
12-30-94
3-15-95
3-16-95
7-7-95
7-31-95
8-17-95
9-21-95
9-22-95
9-27-95
11-28-95
2-7-96
2-9-96

GGD-96-56
GGD-96-11

2-23-96
2-26-96

GGD-96-105

5-24-96

GGD-96-128

6-17-96

GGD-96-145

8-13-96

AIMD-96-146

9-30-96

GGD-96-187
GGD-AIMD-97-8

9-30-96
11-1-96

GGD-97-4

11-7-96

GGD-97-2

11-18-96

GGD-97-23

11-20-96

64

Annual Report: Budget Review, 2001

Table C.2
Completed GAO Reports Relating to the Federal Reserve System—Continued
Report
Bank Oversight Structure: U.S. and Foreign Experience May Offer
Lessons for Modernizing U.S. Structure . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation of FDICIA’s Prompt Regulatory Action Provisions . . . . .
Bank Regulatory Structure: Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Data: Material Loss of Oversight Information from
Interstate Banking Is Unlikely . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Commodity Exchange Act: Legal and Regulatory Issues Remain . .
Treasury’s Plan to Study Genuine and Counterfeit U.S. Currency Abroad .
Bank Oversight: Few Cases of Tying Have Been Detected . . . . . . . . . . . . .
Foreign Banks: Opportunities Exist to Enhance Supervision Programs
as Implementation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Four Financial Crises in the 1980s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments, Clearance, and Settlement: A Guide to the Systems, Risks,
and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Financial Crises: Efforts to Anticipate, Avoid,
and Resolve Sovereign Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Internal Controls Over Cash at Atlanta,
Los Angeles, and Philadelphia Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Banks: Internal Control and Audit Weaknesses in U.S. Branches .
OTC Derivatives: Additional Oversight Could Reduce Costly
Sales Practice Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information on Private Banking and Its Vulnerability
to Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electronic Banking: Experiences Reported by Banks
in Implementing On-line Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Oversight of Offshore Private Banking Activities . . . . . . . . . . .
Year 2000 Computing Crisis: Actions Needed
on Electronic Data Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experience With Electronic Check Presentment . . . . . . . . . . . . . . . . . . . . . . .
Risk-Based Capital: Regulatory and Industry Approaches
to Capital and Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High-Loan-To-Value Lending: Information on Loans Exceeding
Home Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Live Loan Checks: Information on Unsolicited Consumer Loans . . . . . . . .
for Preapproved Borrowers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 2000 Computing Crisis: Federal Reserve Is Acting to Ensure
Financial Institutions Are Fixing Systems But Challenges Remain. .
Federal Reserve Banks: Areas for Improvements in Computer Controls .
The Results Act: Observations on the Federal Reserve’s
1998–99 Biennial Performance Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Burden: Some Agencies’ Claims Regarding Lack
of Rulemaking Discretion Have Merit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 2000 Computing Crisis: Federal Reserve Has Established
Effective Year 2000 Management Controls for Internal
Systems Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 2000: Financial Institution and Regulatory
Efforts to Address International Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electronic Banking: Enhancing Federal Oversight
of Internet Banking Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Areas for Improvement in Computer Controls .
Federal Reserve Board: Merger Process Needs Guidelines
for Community Reinvestment Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International Finance: Actions Taken to Reform Financial Sectors
in Asian Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long Term Capital Management: Regulators Need to Focus Greater
Attention on Systemic Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Large Bank Mergers: Fair Lending Review Could be Enhanced
With Better Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

GGD-07-23
GGD-97-18
GGD-97-5

11-20-96
11-21-96
12-27-96

GGD-97-49
GGD-97-50
NSIAD-97-104
GGD-97-58

3-26-97
4-7-97
4-11-97
5-8-97

GGD-97-80
GGD-97-96

5-9-97
5-21-97

GGD-97-73

6-20-97

GGD-NSIAD-97-168

7-7-97

AIMD-97-127
GGD-97-181

8-28-97
9-29-97

GGD-98-5

10-2-97

GGD-98-19R

10-30-97

GGD-98-34
GGD-98-154

1-15-98
6-29-98

AIMD-98-124
GGD-98-145

7-1-98
7-14-98

GGD-98-153

7-20-98

GGD-98-169

8-13-98

GGD-98-176

8-14-98

AIMD-98-248
AIMD-99-5

9-17-98
10-14-98

GGD-99-9R

11-9-98

GGD-99-20

1-18-99

AIMD-99-78

4-9-99

GGD-99-62

4-27-99

GGD-99-91
AIMD-99-245

7-16-99
8-13-99

GGD-99-180

9-24-99

GGD-99-157

9-28-99

GGD-00-3

10-29-99

GGD-00-16

11-3-99

Federal Reserve System Audits

65

Table C.2
Continued
Report

Number

Financial Regulatory Coordination: The Role and Functioning
of the President’s Working Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-Focused Bank Examinations: Regulators of Large Banking
Organizations Face Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Responses to Questions Concerning Long-Term Capital Management
and Related Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Impact of $1 Coin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commodity Exchange Act: Issues Related to the Regulation
of Electronic Trading Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Areas for Improvement in Computer Controls .
CLF Lending to Credit Unions Before Year 2000 Date Change . . . . . . . .
Mutual Fund Fees: Additional Disclosure Could Encourage
Price Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking Taxation: Implications of Proposed Revisions Governing
S-Corporations on Community Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automated Teller Machines: Issues Related to Real-time Fee Disclosure .
Insurance Regulation: Scandal Highlights Need for Strengthened
Regulatory Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electronic Signature Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve System: Mandated Report on Potential Conflicts
of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Date issued

GGD-00-46

1-21-00

GGD-00-48

1-24-00

GGD-00-67R
GGD-00-111R

2-23-00
4-7-00

GGD-00-99
AIIMD-00-138
GGD-00-143R

5-5-00
5-18-00
5-23-00

GGD-00-126

6-7-00

GGD-00-159
AIMD-00-224

6-23-00
7-11-00

GGD-00-198
GAO-01-129R
GAO-01-160

9-19-00
11-8-00
11-13-00

Table C.3
Completed OIG Audit Reports Relating to the Federal Reserve System, 2000
Report

Number

Month issued

Century Date Change Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual Thrift Plan Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
e-Gov Congressional Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peoplesoft Control Self-Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the FFIEC’s Financial Statements
(years ended 12-31-98 and 12-31-99) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Board’s Financial Statements
(years ended 12-31-98 and 12-31-99) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Systemwide Review of ISM Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review of the Board’s Frequent Flyer Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Publications Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review of the Board’s Participation in PDD-63 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review of the Board’s Retirement Plan Data Conversion . . . . . . . . . . . . . . . . . . . .

A9713
A0001
A0003
A9905

March
March
March
March

A9906

April

A9906BD
P0011
A9903
R9902
A0002
A0006

April
June
June
September
September
December

Office of Inspector General
The Board’s Office of Inspector General
(OIG) functions in accordance with
the Inspector General Act of 1978, as
amended. The OIG plans and conducts
audits and investigations of the programs
and operations of the Board and its
delegated functions at the Federal
Reserve Banks. The OIG also reviews

existing and proposed legislation and
regulations for economy and efficiency.
It recommends policies, and it supervises and conducts activities that promote
economy and efficiency and that prevent
and detect waste, fraud, and abuse in
Board and Board-delegated programs
and operations.
In addition, it coordinates its efforts
with other governmental and nongovern-

66

Annual Report: Budget Review, 2001

mental agencies to promote economy
and efficiency and to detect and prevent
fraud and abuse in activities administered
or financed by the Board. The OIG
keeps the Congress and the Chairman of
the Board fully informed about serious
abuses and deficiencies and about the
status of any corrective actions.

During 2000, the OIG completed
eleven audits, reviews, and assessments
(table C.3) and conducted a number of
follow-up reviews to evaluate action
taken on earlier recommendations. In
addition, the OIG closed thirteen
investigations and performed numerous
legislative and regulatory reviews.

67

Appendix D

Expenses and Employment
at the Federal Reserve Banks
Table D.1
Operating Expenses of the Federal Reserve Banks, by District, 2000 and 2001
Thousands of dollars except as noted
2000
(estimated)

2001
(budgeted)

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

124,720
448,572
118,499
130,515
185,498
270,542
231,029
130,048
115,978
143,418
143,997
248,236

Total, all Districts . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

144,041
484,358
121,597
131,778
188,288
297,629
226,869
123,780
138,828
150,806
144,597
273,246

19,321
35,787
3,098
1,262
2,790
27,087
−4,160
−6,268
22,850
7,388
600
25,010

15.5
8.0
2.6
1.0
1.5
10.0
−1.8
−4.8
19.7
5.2
.4
10.1

2,291,051

2,425,817

134,766

5.9

Special project
Check standardization . . . . . . . . . . . . . . .

6,735

16,392

9,657

143.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,297,786

2,442,209

144,423

6.3

Note. Excludes capital outlays. Includes expenses
budgeted by Federal Reserve Information Technology
(FRIT) and the System’s Office of Employee Benefits
(OEB). (For more detail on FRIT and OEB, see text
note 2, chapter 3.)

Components may not sum to totals and may not yield
percentages shown because of rounding.
Operating expenses reflect all redistributions for support and allocations for overhead.

68

Annual Report: Budget Review, 2001

Table D.2
Employment at the Federal Reserve Banks, by District, 2000 and 2001
Average number of personnel except as noted
2000
(estimated)

2001
(budgeted)

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . . . .

1,287
3,570
1,272
1,340
2,186
2,644
2,134
1,324
1,265
1,602
1,608
2,489

Total, all Districts . . . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

1,285
3,431
1,287
1,392
2,205
2,666
2,111
1,318
1,289
1,678
1,600
2,499

−3
−139
15
52
19
22
−23
−6
24
76
−8
10

−.2
−3.9
1.2
3.9
.9
.8
−1.1
−.5
1.9
4.7
−.5
.4

22,721

23,760

38

.2

Federal Reserve Information
Technology (FRIT) . . . . . . . . . . . . . . .

668

698

30

4.5

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,389

23,458

68

.3

Note. See note to table D.1. See text note 4, chapter 3, for definition of average number of personnel.

Table D.3
Budget Performance of the Federal Reserve Banks,
Operating Expenses, by District, 2000
Thousands of dollars except as noted
2000
(budgeted)

2000
(estimated)

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

125,597
462,234
119,350
132,514
181,017
270,313
235,202
129,353
117,876
143,542
143,654
251,258

Total, all Districts . . . . . . . . . . . . . . . . . .

2,311,910

District

Change
Amount

Percent

124,720
448,572
118,499
130,515
185,498
270,542
231,029
130,048
115,978
143,418
143,997
248,236

−876
−13,663
−851
−1,999
4,481
228
−4,173
695
−1,899
−124
343
−3,022

−.7
−3.0
−.7
−1.5
2.5
.1
−1.8
.5
−1.6
−.1
.2
−1.2

2,291,051

−20,860

−.9

Special project . . . . . . . . . . . . . . . . . . . . . .

13,995

6,735

−7,260

−51.9

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,325,905

2,297,786

−28,119

−1.2

Note. See note to table D.1.

Expenses and Employment
Table D.4
Budget Performance of the Federal Reserve Banks,
Employment, by District, 2000
Average number of personnel except as noted
2000
(budgeted)

2000
(estimated)

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,308
3,654
1,287
1,381
2,195
2,762
2,163
1,324
1,270
1,614
1,635
2,515

Total, all Districts . . . . . . . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

1,287
3,570
1,272
1,340
2,186
2,644
2,134
1,324
1,265
1,602
1,608
2,489

−21
−84
−16
−41
−9
−117
−28
1
−5
−12
−27
−26

−1.6
−2.3
−1.2
−3.0
−.4
−4.2
−1.3
.1
−.4
−.8
−1.7
−1.0

23,107

22,721

−386

−1.7

Federal Reserve Information Technology . . . .
Special project . . . . . . . . . . . . . . . . . . . . . . . . . . . .

644
0

659
9

15
9

2.3
. . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,571

23,389

−362

−1.5

Note. See note to table D.1. See text note 4, chapter 3, for definition of average number of personnel.

. . . Not applicable.

69

70

Annual Report: Budget Review, 2001

Table D.5
Salary Administration Expenses of the Federal Reserve Banks for Officers
and Employees, by District, 2001
Thousands of dollars except as noted
Total
Promotions
and reclassifications

Market
adjustments

Cash
awards

Boston . . . . . . . . . . . . . . 2,558
New York . . . . . . . . . . . 10,224
Philadelphia . . . . . . . . . 2,297
Cleveland . . . . . . . . . . . 1,943
Richmond . . . . . . . . . . . 4,017
Atlanta . . . . . . . . . . . . . . 5,029
Chicago . . . . . . . . . . . . . 4,393
St. Louis . . . . . . . . . . . . 2,535
Minneapolis . . . . . . . . . 2,561
Kansas City . . . . . . . . . 3,168
Dallas . . . . . . . . . . . . . . . 2,840
San Francisco . . . . . . . 5,340

914
2,905
454
238
1,150
1,055
1,600
324
309
998
240
782

85
1,350
299
227
835
543
500
114
125
462
32
577

490
3,506
774
593
1,370
2,072
1,359
854
778
1,131
979
1,902

970
1,893
472
481
697
329
913
326
306
584
144
676

Total, all Districts . . 46,905

10,969

5,149

15,808

2,022

230

0

Total . . . . . . . . . . . . . . . 48,928

11,200

5,149

District

Federal Reserve
Information
Technology . . . . .

Merit

Note. See text note 5, chapter 3, for definition of
salary administration.
Merit: The amount of budgeted salary expense that
reflects the cumulative effect of planned salary increases
based on performance.
Promotions and reclassifications: The amount of
budgeted salary expense that reflects the cumulative effect
of salary increases for individuals as a result of grade
promotions and reclassifications.
Market adjustment: The amount of budgeted salary
expense to bring individual salaries to the minimum of
grade range or to better align salaries with the market.

Amount

As a share
of total
personnel
expense
(percent)

0
120
0
45
0
155
38
177
17
60
53
1,424

5,018
19,997
4,295
3,528
8,070
9,183
8,804
4,329
4,097
6,405
4,288
10,700

6.9
8.2
6.6
5.6
7.7
7.3
7.6
7.1
6.8
7.9
5.7
7.2

7,791

2,089

88,713

7.0

243

652

1,090

4,237

8.2

16,052

8,443

3,179

92,950

7.0

Incentive Retention
payments payments

Cash awards: The amount of expense that represents
payments for awards in recognition of exceptional
achievements.
Incentive payments: The amount of expense that
represents payments for the achievement of predetermined
goals.
Retention payments: The amount of expense that
represents payments to employees based on contractual
agreement with the Bank. Generally used to retain staff in
‘‘hot market’’ jobs or positions critical to the success of
the Bank.

Expenses and Employment
Table D.6
Capital Outlays of the Federal Reserve Banks, by District, 2000 and 2001
Thousands of dollars except as noted
2000
(estimated)

2001
(budgeted)

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18,692
50,759
10,259
40,171
20,779
132,367
22,346
13,292
4,081
16,766
38,671
43,257

Total, all Districts . . . . . . . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

12,025
53,766
7,037
17,726
22,880
85,608
46,590
20,449
4,012
16,258
10,431
26,252

−6,667
3,007
−3,222
−22,444
2,101
−46,758
24,244
7,158
−69
−508
−28,240
−17,005

−35.7
5.9
−31.4
−55.9
10.1
−35.3
108.5
53.9
−1.7
−3.0
−73.0
−39.3

411,438

323,034

−88,404

−21.5

Federal Reserve Information Technology . . . .

55,917

38,272

−17,645

−31.6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

467,355

361,306

−106,049

−22.7

Table D.7
Capital Outlays of the Federal Reserve Banks, by Asset Classification, 2000 and 2001
Thousands of dollars except as noted
2000
(estimated)

2001
(budgeted)

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, furnishings, and fixtures . . . . . . . . .
Land and other real estate . . . . . . . . . . . . . . . . . .
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building machinery and equipment . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

142,087
26,888
36,006
164,708
20,867
4,176
72,624

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

467,355

Asset classification

Change
Amount

Percent

129,489
34,503
11,956
113,571
24,745
8,064
38,977

−12,598
7,615
−24,050
−51,137
3,879
3,889
−33,647

−8.9
28.3
−66.8
−31.0
18.6
93.1
−46.3

361,306

−106,049

−22.7

Note. Includes outlays for Federal Reserve Information Technology.

71

Maps of the
Federal Reserve System

74

Annual Report: Budget Review, 2001

The Federal Reserve System

1

9
2

MINNEAPOLIS

7

12
SAN FRANCISCO

CHICAGO

10

CLEVELAND

4

KANSAS CITY
ST. LOUIS

8
11 DALLAS

BOSTON

NEW YORK
3PHILADELPHIA

RICHMOND

5

6ATLANTA

ALASKA
HAWAII

Legend
Both pages
Federal Reserve Bank city
Board of Governors of the Federal
Reserve System, Washington, D.C.

Note
The Federal Reserve officially identifies
Districts by number and Reserve Bank
city (shown on both pages) and by letter
(shown on the facing page).
In the 12th District, the Seattle Branch
serves Alaska and the San Francisco
Bank serves Hawaii.
The System serves commonwealths
and territories as follows: The New York

Facing page

•

Federal Reserve Branch city
Branch boundary

Bank serves the Commonwealth of
Puerto Rico and the U.S. Virgin Islands;
the San Francisco Bank serves American
Samoa, Guam, and the Commonwealth
of the Northern Mariana Islands. The
maps show the boundaries within the
System as of year-end 2000.

Maps of the Federal Reserve System
1–A

2–B

4–D

3–C

5–E

Pittsburgh

ME

75

Baltimore

MD

NY
PA
VA

NJ

PA

CT

OH

VT

WV

WV
NH

Buffalo
NY

NJ

CT

NC

Cincinnati

DE

MA

Charlotte

KY

SC

RI

BOSTON

NEW YORK

7–G

6–F

RICHMOND

CLEVELAND

PHILADELPHIA

8–H

Nashville

TN

KY

Birmingham

AL

MI
IL

WI

MS

GA

Detroit

IA

IN

Louisville

MO

TN
LA

AR

Jacksonville

New Orleans

Memphis

IL

Little
Rock

IN

FL

MS

Miami

9–I

ST. LOUIS

CHICAGO

ATLANTA
MT
ND

MN

Helena

MI
WI
SD

MINNEAPOLIS
12–L

10–J
WY

NE

Omaha

CO

MO

Denver

KS

ALASKA

WA

Seattle

NM

Oklahoma City
Portland
OK
OR

KANSAS CITY

ID
CA
NV

11–K

TX

Salt Lake City

NM

LA

El Paso

UT

Houston
Los Angeles
San Antonio
HAWAII
AZ

DALLAS

SAN FRANCISCO

FRB1/1–1200–0501–C


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102