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Board of Governors of the Federal Reserve System

2002

Board of Governors of the Federal Reserve System

2002

March 2002
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 2001 income and expenditures
Budget processes
Operational areas

The Budgets
9
10
11
12

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

13
13
15
15
19
21
21
23
24

Chapter 2
BOARD OF GOVERNORS
Overview 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
Office of Inspector General

25
26
28
31
32

Chapter 3
FEDERAL RESERVE BANKS
2001 budget performance
The 2002 budget
Risks in the 2002 budget
2002 capital plan

Appendixes
37
37
38
38

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

43

Appendix B
SOURCES AND USES OF FUNDS

45
45
45
46

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

49

Appendix D
EXPENSES AND EMPLOYMENT
AT THE FEDERAL RESERVE BANKS

58

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 2001 Income
and Expenditures
In carrying out its responsibilities in
2001, the Federal Reserve System
incurred an estimated $1.4 billion in net
operating expenses. Total spending of an
estimated $2.7 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 $30.5 billion in 2001. Earnings in excess of expenses, dividends,
and surplus are transferred to the
U.S. Treasury—in 2001 an estimated
$27.1 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, 2002

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 2001.

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 2002–03 budget, the fall of
2000). 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 objective 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
resources by division and accounts for
its activities by division and 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 depreci-

Introduction
ates their value over appropriate periods
instead of expensing them in the year of
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 funding 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 a second
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 2002–03
consists of funds to support planning for
two periodic surveys, one on consumer
finances and the other on small business
finances.
The Board’s Office of Inspector General (OIG), in keeping with its statutory independence, prepares its 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 the comparability of budget and
expense data across certain years.

4

Annual Report: Budget Review, 2002

Operational Areas
In 2001 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 com-

panies. 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 2001, the
Federal Reserve conducted 534 examinations of state member banks (some
of them jointly with state agencies) and
1,212 inspections and 2,626 risk assessments of bank holding companies; it
acted on 2,696 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 2001, the System
conducted 346 compliance examinations, including 291 covering state
member banks and 55 covering foreign banking organizations. Procedures
related to the Community Reinvestment
Act were included in 219 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.

Services to Financial Institutions
and the Public
The Federal Reserve System plays a
central role in the nation’s payment

Introduction
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 2001, the Reserve Banks received
$550.5 billion in currency and $4.3 billion in coin from depository institutions,
distributed an estimated $599.6 billion
in currency and $5.8 billion in coin,
and destroyed $86.3 billion in unfit
currency.
The Reserve Banks (along with their
Branches and regional centers) also
process checks for collection. In 2001,
the Reserve Banks processed approximately 17 billion commercial checks for
collection with a total value of nearly
$15 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
reserves or clearing accounts at the
Reserve Banks and transfer funds anywhere in the country. In 2001, approximately 112 million transfers valued at
about $424 trillion were sent over the
Fedwire funds transfer system, an average of $3.8 million per transfer and
$1.7 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
account balances. Users of net settlement services include local check
clearinghouse associations, automated
clearinghouse (ACH) networks, and
credit card processors. In 2001, the
Federal Reserve’s settlement sheet

5

service was phased out and all participating arrangements converted to the
national Net Settlement Service (NSS).
The Reserve Banks provide settlement
services to approximately seventy local
and national private-sector clearing and
settlement arrangements. In 2001, the
Reserve Banks processed more than
417,000 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 2001, the Reserve Banks processed
approximately 5.3 billion ACH transactions valued at about $15.0 trillion;
approximately 17 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 physical interest coupons and
miscellaneous items. The Fedwire securities transfer system enables the holders
of Treasury and government agency
securities to transfer the securities
electronically to other institutions
throughout the country. In 2001, the
Reserve Banks processed approximately
15 million securities transfers valued at
$212 trillion, an average of $14 million
per transfer and $846 billion per day.
The noncash collection service, through
which maturing or called coupons and
bonds are presented for collection,
processed about 379,000 transactions in
2001.

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

6

Annual Report: Budget Review, 2002

at the Reserve Banks, the government
makes payments, issues checks, and
collects receipts. The Reserve Banks
also process Fedwire funds transfers and
automated clearinghouse payments and
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 2001, 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 1,200 depository institutions
accept tax proceeds as investments and
pay interest on the funds until the
Treasury calls the balances. These investments and other funds held at depository
institutions must be collateralized at all
times.
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 book-entry 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.

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
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.

The Budgets

9

Chapter 1

Federal Reserve System
For 2002, total operating expenses are
budgeted at $2,801.4 million, an increase
from estimated 2001 expenses of
4.5 percent. Of this total, $2,580.2 million is for the Reserve Banks, and
$221.2 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 $954.4 million, or 34.1 percent
of total budgeted operating expenses.
This revenue, combined with claims for
reimbursement and other income, results
in projected net operating expenses of
$1,538.1 million.2 The budget includes

1. The Board of Governors budgets on a twoyear cycle (see chapter 2); in this chapter, 2002
values shown for the System and the Board reflect
the approximate first-year effect of the Board’s
2002–03 budget.
2. Other income (table 1.1) comes from services provided on behalf of the U.S. Treasury that

$12.4 million for a Reserve Bank special
project.3
Not included in the budget for operations is the cost of currency, budgeted at
$376.8 million for 2002, an increase of
9.7 percent from the estimated 2001 cost
of $343.5 million.4 The distribution of
expenses is similar to that in previous

are paid for by the depository institutions using
the services, which include the transfer of funds
between depository institutions and the Treasury.
3. Special projects are relatively costly, shortterm research and development efforts that are
expected to benefit both the System and the
banking industry as a whole. The special project
covers part of the costs of the check-processing
modernization project (see chapter 3).
4. The Federal Reserve pays for 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, 2000–2002
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

2001
(estimated)

2002
(budgeted)

2,470.7

2,681.1

2,801.4

8.5

4.5

922.8
1.0
302.4

951.8
1.1
292.2

954.4
1.0
307.9

3.1
10.0
−3.4

.3
−10.0
5.4

1,244.5

1,436.0

1,538.1

15.4

7.1

2000

Note. Components may not sum to totals and may not
yield percentages shown because of rounding.
Operating expenses include costs for special projects
and exclude capital outlays.

2000 to 2001 2001 to 2002

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

10

Annual Report: Budget Review, 2002

Table 1.2
Expenses of the Federal Reserve System for Operations and Currency, 2000–2002
Millions of dollars except as noted

Expense

2000

2001
(estimated)

2002
(budgeted)

Percent change
2000 to 2001 2001 to 2002

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

2,281.5
1,462.3
819.3

2,461.8
1,568.3
893.5

2,580.2
1,651.8
928.4

7.9
7.3
9.1

4.8
5.3
3.9

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

189.1
137.6
51.5

219.3
158.4
60.9

221.2
163.0
58.2

16.0
15.1
18.2

.8
2.9
−4.5

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

2,470.7
1,599.9
870.8

2,681.1
1,726.7
954.4

2,801.4
1,814.8
986.6

8.5
7.9
9.6

4.5
5.1
3.4

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

423.4

343.5

376.8

−18.9

9.7

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

2. Includes extraordinary items and expenses of the
Office of Inspector General. See also chapter 2.
3. See text note 4 and appendix A.

years, with the Reserve Bank’s expenses
accounting for more than 80 percent of
the total (chart 1.1).
System employment (including staff
for the special project) is budgeted at
25,241 for 2002, an increase of 314 from
the estimated 2001 level (details are
given in chapters 2 and 3).

Net Expenses

Chart 1.1
Distribution of Expenses of the
Federal Reserve System, 2002

Currency, 11.9%

Board of
Governors, 7.0%

Reserve Banks, 81.2%
Note. See text notes 1 and 4.

The System expects to recover 45.1 percent of its budgeted 2002 operating
expenses through revenue from priced
services, other income, and claims for
reimbursement. When these items are
deducted from budgeted 2002 operating
expenses, the net expenses of the System
show an increase of 7.1 percent from
estimated 2001 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

Federal Reserve System
Table 1.3
Revenue from Priced Services, 2000–2002
Millions of dollars

2000

2001
(estimated)

2002
(budgeted)

64.6
71.7
763.3

63.0
76.4
789.2

56.1
66.4
805.3

18.5
2.4
2.2

19.0
2.0
2.2

22.8
1.5
2.3

922.8

951.8

954.4

Service

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

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.
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 1993 levels to budgeted
2002 amounts, the operating expenses
Chart 1.2
Operating Expenses of the
Federal Reserve System, 1993–2002

11

Chart 1.3
Cumulative Change in Federal Reserve
System Expenses and Federal Government
Expenses, 1993–2002
Percent

60
40

Federal Reserve

20

Federal government
1994

1998

2002

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

of the Federal Reserve System (including special projects) have increased an
average of 4.2 percent per year (2.2 percent per year when adjusted for inflation) (chart 1.2). Over the same period,
nondefense discretionary spending by
the federal government has increased an
annual average of 4.6 percent (chart 1.3).
Over the 1993–2002 period, Federal
Reserve System employment has
decreased 761 (chart 1.4).
From 1982, when the transition to the
requirements of the Monetary Control
Chart 1.4
Employment in the
Federal Reserve System, 1993–2002

Billions of dollars
Thousands of persons

Current dollars

2.5
26

1996 dollars

1

2.0
25
1.5
24

1994

1998

2002

Note. For 2001, estimated; for 2002, budgeted.
1. Calculated with the GDP price deflator.

1994

1998

Note. See general note to chart 1.2.

2002

12

Annual Report: Budget Review, 2002

Act of 1980 was completed, through
1984, System expenses remained
essentially flat when adjusted for inflation, and employment declined. In 1985
the staffing level was increased in a
pronounced effort to strengthen supervision and regulation of member banks
and bank holding companies. The system partially offset the increase in staff
through reductions in employment in
other areas, mainly in services to financial institutions and the public and in the
support and overhead operational areas.
The Expedited Funds Availability Act
requires the Federal Reserve to issue
regulations to ensure the prompt availability of funds and the expeditious
return of checks. The act became
effective in 1988 and resulted in staff
increases throughout the System in 1988
and 1989. From 1991 through 1998,
spending on bank supervision expanded
to meet the increase in the number
and complexity of examinations and
the enhanced supervision requirements
for foreign institutions, problem institutions, the Financial Institutions Reform,
Recovery, and Enforcement Act of

1989, and the Federal Deposit Insurance
Corporation Improvement Act of 1991.
The System partially offset these
increases by reducing staff in other
operational areas, mainly in services
to the U.S. Treasury and in services to
financial institutions and the public.
Employment for 2002 is projected to
grow by 314, largely because of plans to
increase security staff.

2002 Budget Initiatives
In 2002, several major initiatives will
continue to affect System budgets. As
discussed in more detail in chapter 3,
security enhancement and check modernization are the primary drivers of the
overall System budget. In addition, the
Banks will continue to work on projects
on behalf of the Treasury.
Partly offsetting this increase in spending are the lower costs associated with
consolidations in the wholesale and ACH
areas as well as staff reductions due to
the continuing efforts to improve productivity and streamline operations.

13

Chapter 2

Board of Governors
The 2002–03 budget for the Board of
Governors consists of $455.0 million
for operations, $1.5 million for extraordinary items (projects of a unique
nature), and $7.8 million for the Office
of Inspector General. The Board has
authorized 1,741 staff positions for
operational areas and 29 positions for
the Office of Inspector General; no
positions are required for the extraordinary items.

Overview of the Budget
On a biennial basis, the Board and its
senior staff undertake a planning and
budgeting process that results in a strategic plan for the next four years and
a budget for the next two years. For
the 2002–05 planning period and the
2002–03 budget period, the Committee
on Board Affairs, assisted by a seniorlevel Staff Planning Group (SPG) and
staff in the Program Analysis and Budget Section of the Management Division, 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
readjusted priorities to accomplish the
mission, and identified important but
lower priority work for elimination
in order to fund some of the higher
priorities. In August 2001, the Board
approved a budget objective to implement those planning decisions, and
budgets were submitted in early September. The terrorist actions of Septem-

ber 11 resulted in significant revisions to
those budget submissions.

Planning
The Staff Planning Group reviewed
the planning materials submitted by the
Board’s divisions and offices and identified major issues that are anticipated
to have Boardwide significance over
the planning period. These issues are
reflected in the resource decisions of the
Committee on Board Affairs that form
the basis of the budget. They will also
serve as the basis for the 2002–03 Performance Plan prepared as part of the
Board’s voluntary compliance with the
Government Performance and Results
Act. Here are the major issues:
• Management and staffing. Recruiting
and retaining staff were once again
raised as issues of significant concern
in a number of divisions. In addition, because a significant number
of senior staff are eligible for retirement, management succession planning and organizational structure is a
top priority.
• Board organization. A comprehensive review of Reserve Bank oversight
activities, including a reexamination
of the legal requirements for oversight, could result in a more efficient,
effective, and consistent approach.
• Information technology. In line with
planning guidance, divisions reexamined their information technology
spending to ensure that high-priority
items are fully funded while lowerpriority items are either reduced or
eliminated. Doing so held information
technology spending at current levels.

14

Annual Report: Budget Review, 2002

• Physical plant. The 2001 purchase of
a new building will significantly lower
office space costs.
• External and internal factors. The
work of the Board will continue to
be affected by environmental factors
over which the Board has little or
no control. The Board and its staff
must stand ready to adjust priorities
as necessary to deal with economic
events, often unforeseen and rapidly
developing, and their effects on monetary, supervisory, and regulatory
policymaking.

divisions are reallocating information
technology resources among projects.
Central IT support was funded at the
current level except for increases to
enhance disaster recovery.
• Physical plant. In line with the
Board’s earlier strategic plan, a building purchased in 2001 has significantly reduced the net operating cost
for office space in this budget. Capital investments are planned for the
Board’s facilities as discussed below,
in the section on the capital budget.
Noncapital improvements are also
planned for the facilities.

Major Initiatives
To address these major planning issues,
the budget includes the following major
initiatives and projects for the 2002–03
period.
• Attraction and retention of staff. Initiatives to improve the Board’s ability
to attract and retain staff include the
variable pay program for economists,
attorneys, and officers; an increase in
the employee cash award program; a
4.6 percent merit increase for 2002;
and an estimated 4.0 percent merit
increase for 2003.
• Employee benefits. A major increase
in health insurance rates is being
funded, as are initiatives to increase
the transportation subsidy, increase
the Board match for deferred compensation, and fund costs associated with
the revised leave policy.
• Workload. New positions and a reduction in the number of vacant positions in specific divisions in response
to increased workloads, new security
concerns, and implementation of the
compensation initiatives will all affect
salary liability.
• Information technology. After a
comprehensive review of requirements and priorities, the various

Ramifications of the September
Terrorist Attacks
After the terrorist attacks on September 11, the projects and initiatives listed
below were added to the 2002–03
budget proposal. The list includes programmatic changes that will be required
to handle the long-term changes to the
working and economic environment.
These items and their associated operating costs of $13.8 million are included
in the total budget.
• Enhanced capacity Boardwide for
disaster recovery, including reducing the time to resume normal operations at remote sites and increasing the
amount of information and the number
of systems supported at those sites
• Initiatives to enhance physical security,
including adding security staff; using
bomb-sniffing dogs for greater perimeter security; using contractual support for mail processing; and other,
less visible, measures
• Additional staff in the Division of
Reserve Bank Operations and Payment Systems to focus on system
security issues in response to new
terrorism-related legislation, and a
new section (including new staff) to

Board of Governors
focus on private-sector clearance and
settlement systems in order to increase
the Board’s understanding and competence in this area
• Two positions in Banking Supervision
and Regulation, in response to new
terrorism-related legislation, to focus
on money laundering and financial
transactions associated with terrorist
activity
• Four positions in the Office of the
Staff Director for Management to
improve the planning and coordination of contingency operations and to
act as a liaison with the new Office of
Homeland Security.

Areas of Risk
The possibility remains, of course, that
further developments could require
significant resources beyond the current
proposals. These developments could
include the following:
• Significant changes in or shocks to the
economy or financial system
• Additional terrorist activity or war
• Determination that Systemwide supervisory technology initiatives should
be funded and managed by the Board
• Changes to the assumptions regarding the position vacancy rates used in
developing the salary budget.

Operations Budget by Division
and Account Classification
The Board’s overall operations budget
is detailed by division in table 2.1 and
by account classification in table 2.3.
Table 2.2 shows the number of authorized positions for Board operations
by division. The largest increase in the
2002–03 budget is in personnel services.
The budget for personnel services
(salaries, retirement, and insurance) is
$338.1 million, or $50.5 million greater

15

than the 2000–01 estimate (an average
increase of 8.4 percent per year). The
addition of eleven positions explains a
portion of this increased budget. Merit
pay, new compensation initiatives, promotions and reclassifications, higher
benefit costs, and a lower vacancy rate
in certain divisions is also increasing the
budget requirements.
The 2002–03 budget for goods and
services is $116.8 million, which is
$11.1 million greater than the 2000–01
estimate (an increase of 5.1 percent per
year). Much of this increase is attributable to additional disaster recovery
work stemming from the September 11
attacks.
Partially offsetting these increases
are programmatic reductions in areas
throughout the Board. These include
significant changes in various accounts
due to the Board’s transition from leasing office space at its new location to
owning the building, with a net reduction in expenses of $3.0 million annually. Additionally, the replacement cycle
for desktop computers will be extended,
and support for regular information
technology projects has been considerably scaled back after various divisions
changed priorities and eliminated lowerpriority projects.

Operations Budget by
Operational Area
The Board’s operations budget supports
four broadly defined operational areas:
monetary and economic policy, supervision and regulation, services to financial institutions and the public, and
System policy direction and oversight
(tables 2.4 and 2.5).
The largest increase in expenses is
in the security portions (both information and physical) of overhead, which is
spread, in proportion to direct expenses,
among the four operational areas. This

16

Annual Report: Budget Review, 2002

Table 2.1
Operating Expenses of the Board of Governors, by Division, Office,
or Special Account, 2000–01 and 2002–03
Thousands of dollars except as noted
Change
Division, office,
or special account

2000–01
(estimated)

2002–03
(budgeted)

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

8,524
8,959
62,741
22,706
18,835
62,840
18,094
18,148

Amount

Average
annual
(percent)

11,813
11,256
67,382
24,873
19,666
73,859
20,671
20,754

3,289
2,296
4,640
2,167
831
11,019
2,576
2,606

17.7
12.1
3.6
4.7
2.2
8.4
6.9
6.9

30,995
3,935
22,318
59,289
76,041
3,934
15,000
−38,968

35,548
7,097
25,248
63,684
81,855
3,687
29,073
−41,477

4,553
3,162
2,931
4,395
5,814
−247
14,073
−2,509

7.1
34.3
6.4
3.6
3.8
−3.2
39.2
3.2

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

393,393

454,988

61,595

7.5

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

8,598
6,617

1,500
7,757

−7,098
1,139

. . .
8.3

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

1. Income from various Board divisions for use of
central information resources management (IRM)
resources.
. . . Not applicable.

increase does not directly enhance the
efficiency or effectiveness of current
Board operations, but it is necessary
given recent changes in the threat
environment facing the nation and the
Board.

approval of changes in the discount rate,
and other activities related to managing
the nation’s monetary policy.
Besides the additional funding for
compensation initiatives, programmatic
increases in this area will cover the
acquisition of additional data to assist
staff in their responsibilities. These data
relate to capital risk, retail banking fees
and services, global financial markets,
and consumer credit.

Monetary and Economic Policy
The 2002–03 budget for monetary and
economic policy is $182.5 million, an
increase of $19.2 million, or an average of 5.7 percent per year, from the
2000–01 estimate. 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

Supervision and Regulation
The 2002–03 budget for supervision and
regulation is $186.7 million, an increase
of $27.9 million, or an average of
8.4 percent per year, from the 2000–01

Board of Governors

17

Table 2.2
Positions Authorized at the Board of Governors, by Division, Office,
or Special Account, 2000–01 and 2002–03
Division, office,
or special account

2000–01
(authorized)

2002–03
(budgeted)

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

43
56
279
119
60
227
78
82

42
56
278
119
59
224
82
82

−1
0
−1
0
−1
−3
4
0

127
15
93
31
212
279
2

138
19
94
27
215
278
1

11
4
1
−4
3
−1
−1

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

1,703

1,714

11

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

25

27

2

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

1,728

1,741

13

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

29

29

0

2

1. Summer intern and youth positions handled by the
equal employment opportunity function in 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.

estimate. 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 2002–03 budgetary
increases will enhance supervisory
activities such as ongoing monitoring,
inspecting, and examining of banking
organizations to assess their condition
and their compliance with relevant laws
and regulations. Programmatic increases
include funding for seven positions
added in late 2000, greater focus on
money laundering activities, international training and assistance to foreign
governments, and a review of regula-

tions and policies related to consumer
protection. As risks to the financial
sector grow, the staff will need to spend
more time on bank examinations and
monitoring under the risk-based supervision model implemented over the past
few years.

Services to Financial Institutions
and the Public
The 2002–03 budget for oversight
of Reserve Bank services to financial
institutions and the public is $9.0 million, a decrease of $0.1 million, or an
average of 0.4 percent per year, from
the 2000–01 estimate. This operational
area provides support to and oversight
of the Federal Reserve Banks and

18

Annual Report: Budget Review, 2002

Table 2.3
Operating Expenses of the Board of Governors, by Account Classification,
1992–93 to 2002–03
Thousands of dollars except as noted
Account classification

1992–93

1994–95

1996–97

1998–99

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

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

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

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

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

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

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

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

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

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

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

259,113

291,967

324,853

345,177

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

0
4,640

0
5,880

4,196
5,975

20,401
5,640

Branches—specifically, evaluation of
the operational and pricing performance
of the check-payment activities of the
Reserve Banks; oversight of the electronic payments mechanism; and annual
evaluation of the Federal Reserve System’s currency, coin, and food coupon
operations.
Costs associated with these programs
will decline slightly during the next
biennium because of the realization of
savings from previous initiatives.

System Policy Direction and
Oversight
The 2002–03 budget for System policy
direction and oversight is $76.8 mil-

lion, an increase of $14.5 million, or an
average of 11.0 percent per year, from
the 2000–01 estimate. 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.
Major programmatic changes in this
area include greater emphasis on security and contingency planning Systemwide and a new section to provide staff
expertise on private-sector clearance
and settlement systems. Fewer vacan-

Board of Governors

19

Table 2.3
Continued
Thousands of dollars except as noted

Account classification

2000–01
(estimated)

2002–03
(budgeted)

Average annual change
(percent)
2000–03

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

1992–2003

245,031
22,897
19,725
287,653

287,097
27,421
23,631
338,149

8.2
9.4
9.5
8.4

5.4
7.5
5.1
5.5

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

12,235
1,576
7,046
2,549
2,296
2,005
9,915
8,100
10,274
2,087
4,517
3,479

13,606
1,607
7,798
2,543
2,066
2,404
11,223
7,000
857
2,120
5,555
3,688

5.5
1.0
5.2
−.1
−5.1
9.5
6.4
−7.0
−71.1
.8
10.9
3.0

4.9
−3.6
7.8
1.3
−.7
3.9
7.2
11.1
−12.2
3.9
4.2
.8

4,278
400
28,538
3,214
1,866
17,420
−16,054
105,740

7,124
400
32,384
3,173
1,897
25,482
−14,089
116,839

29.1
. . .
6.5
−.6
.8
20.9
−6.3
5.1

5.8
−1.5
12.9
5.7
2.3
7.3
5.4
6.5

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

393,393

454,988

7.5

5.8

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

7,847
6,617

1,500
7,757

−56.3
8.3

. . .
5.3

Note. 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. Components may not sum to totals and may not
yield percentages shown because of rounding.
. . . Not applicable.

cies and an enhanced communication
program are also responsible for the
substantial increase.

recabling project, centralization and
improvement of distributed systems disk
storage, and scheduled server replacements in the data center. Funds are also
provided for the maintenance and upkeep
of the Eccles and Martin buildings,
including security system upgrades
planned before the events of September 11; elevator refurbishment; equipment replacement; interior restoration
on the concourse and terrace levels of
the Martin building; and restoration of
the Eccles building courtyard follow-

Capital Budget
The Board’s proposed 2002–03 capital budget is $29.9 million. Of this
total, $19.8 million supports continued improvements in office automation
and major upgrades to the information
technology infrastructure, including
completion of the Martin building

20

Annual Report: Budget Review, 2002

ing completion of the Eccles Building
Infrastructure Enhancement Project.
Major facility projects include the
purchase of an emergency generator,
replacement of the Eccles building
roof, upgrades to security at building
entrances, and a design and feasibility

study for a major renovation of the
Martin building.
An additional $3.3 million has been
budgeted for projects resulting from the
September terrorist attacks, including
substantial improvements to information disaster recovery systems and

Table 2.4
Expenses of the Board of Governors for Operational Areas,
Extraordinary Items, and Office of Inspector General, 2000–01 and 2002–03
Thousands of dollars except as noted
Change
2000–01
(estimated)

2002–03
(budgeted)

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

163,242
158,799

Activity

Amount

Average
annual
(percent)

182,475
186,711

19,233
27,912

5.7
8.4

9,083
62,269

9,015
76,787

−68
14,518

−.4
11.0

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

393,393

454,988

61,595

7.5

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

8,598
6,617

1,500
7,757

−7,098
1,140

. . .
8.3

Note. See general note to table 2.1.

. . . Not applicable.

Table 2.5
Positions Authorized at the Board of Governors for Operational Areas,
Support and Overhead, and Office of Inspector General, 2000–01 and 2002–03
Activity

2000–01
(estimated)

2002–03
(budgeted)

Change

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

431
374
24
155

429
373
24
166

−2
−1
0
11

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

719

722

3

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

1,703

1,714

11

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

25

27

2

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

1,728

1,741

13

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
expansion of the scope of the building
entrance security upgrade project already
scheduled.
The Eccles Building Infrastructure
Enhancement Project will be completed during the 2002–03 budget period.
The amount budgeted, $3.5 million,
is $8.3 million less than the amount
provided during the 2000–01 budget
period because of the phased nature of
the project, which began in July 1999.
The project consists of replacing the
voice and data cabling plant, replacing
piping, and making other, related repairs
and will extend the building’s useful life
and improve the fire safety systems.
The remaining $3.3 million of the
capital budget is for projects associated
with acquisition of the new building.
These improvements, which were identified during the due-diligence period
of the purchase negotiations, include
enhancements to building security; code
compliance issues; garage repairs; installation of an emergency generator; electrical, HVAC, and control system upgrades;
and carpet replacement.

Positions
In response to the September terrorist
attacks, a net of eleven positions have
been added to the Board’s number of
authorized positions; the proposed total
is 1,741 positions (table 2.2).
Before September 11, the staff
conducted a thorough planning review,
yielding an original budget request that
included a net reduction of eight positions. A net increase of four positions
was authorized for the Division of
Consumer and Community Affairs to
eliminate four long-term dual occupancies. One position was added to the
Division of Reserve Bank Operations
and Payment Systems and one position
to the Management Division in response
to an increased workload. Small, off-

21

setting position reductions were made in
many divisions where efficiencies and
workload factors made such decreases
possible.
After September 11, nineteen positions were added. These positions are
necessary to increase the Board’s physical security (seven), ensure compliance with new police powers provided
to System security staff under new
legislation (two), provide additional
resources for antiterrorism and antimoney-laundering activities (two), and
increase the Board’s expertise in privatesector clearing and settlement systems
(eight).

Trends in Expenses and
Employment
The rate of increase within the 2002–03
budget biennium is 7.5 percent per year,
which is slightly higher than the
6.3 percent annual rate in the 2000–01
biennium (table 2.3). The projected
average annual rate of increase from
1992–93 to 2002–03 is 5.8 percent
(charts 2.1–2.5). This increase is mainly
attributable to the increasing complexity
of Board work over this period, which
has resulted in a net increase in positions and higher average grades, higher
salary and benefit costs, and increasingly sophisticated automation systems
required to manage sharply increasing
volumes of data. Merit pay, new compensation initiatives, promotions and
reclassifications, higher benefit costs, a
lower projected number of vacancies
in certain divisions, and increased usage
of contractual support for continuity
of operations increased the budget
requirement.
Approximately three-fourths of the
Board’s operating expenses are for
personnel; consequently, analysis of
trends is heavily tied to staffing levels.
From 1992 to 2003, the number of

22

Annual Report: Budget Review, 2002

Chart 2.1
Operating Expenses of the
Board of Governors, 1992–2003

Chart 2.2
Expenses for Personnel Services
at the Board of Governors, 1992–2003

Millions of dollars

Millions of dollars

225

175

200

Current dollars

Current dollars

150

175
125

150

1992 dollars 1

1992

1997

1992 dollars

125

2002

1992

1997

100

2002

Note. See notes to chart 2.1.
Millions of dollars
Year

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003

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

Current dollars

1992 dollars 1

122.8
136.3
140.7
151.2
162.7
163.3
171.7
173.5
182.5
210.9
216.9
238.1

122.8
132.8
133.9
140.4
148.2
146.1
151.7
151.4
156.1
176.6
177.9
191.2

Note. For 2001, estimated; for 2002–03, budgeted.
Excludes the Office of Inspector General and extraordinary items. The annual values for 1998–2003 are the
approximate calendar-year figures contained within the
respective two-year budgets.
1. Calculated with the GDP price deflator.

authorized positions for Board operations rose from 1,668 to 1,741, a net
increase of 73, or 4.4 percent. Reflecting
the growing complexity of the Board’s
work, the average grade for professional
staff rose from 25 to 26.
Changes in banking, frequently associated with automation enhancements,
increased the complexity of safety and
soundness supervisory activities. To
adequately perform these activities, and
to increase attention to consumer issues,
including collection and analysis of
data collected under the Home Mortgage Disclosure Act and Community

Reinvestment Act, a net of thirty-four
positions were added. (Many positions
associated with lower-priority work were
eliminated to offset the cost of the new
work.) The increasing complexity of
monetary policy issues resulted in an
increase of twenty-five positions. Oversight of Reserve Bank operations became
more complex resulting in an increase of
nineteen positions. Finally, a net decrease
of five administrative and support positions resulted from the Board’s efforts to
outsource where feasible; without these
efforts, the number of administrative and
support positions would have increased
Chart 2.3
Expenses for Goods and Services
at the Board of Governors, 1992–2003
Millions of dollars

60

Current dollars
45

1992 dollars
30

1992

1997

Note. See notes to chart 2.1.

2002

Board of Governors
Chart 2.4
Annual Change in Operating Expenses
of the Board of Governors, 1992–2003

23

Chart 2.5
Employment and Authorized Positions
at the Board of Governors, 1992–2003

Percent

Thousands

Authorized positions

15

1.7
12
9

1.6

Employment

6
1.5
3
1992

1997

2002

1992

1997

2002

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

because of enhanced security and the
acquisition of new office space.
While the number of positions at the
Board has fluctuated during the 1992–
2003 period, the salary budget (not
including retirement and insurance
benefits) has remained relatively stable
at roughly 64 percent of operating
expenses. The portion of operating
expenses devoted to retirement and
insurance has increased approximately
1 percentage point over the period as
a result of administrative actions to
enhance health insurance and other
benefits.
The Board experienced an average
annual percentage increase in expenses
for goods and services of 6.5 percent
over the 1992–2003 period. The largest contributor to this increase was a
12.9 percent annual rate of increase in
the contractual professional services
account because of outsourcing tasks
such as security, IT services, and facilities support. Increases in the complexity of the Board’s work resulted in
additional data purchases and training
requests. Partially offsetting the overall
increase is a significant decrease in
rental costs because of the year-end
2001 acquisition of a building previously rented by the Board.

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003

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

Employment

Authorized
positions

1,563
1,636
1,635
1,644
1,686
1,638
1,629
1,600
1,568
1,599
1,631
1,631

1,639
1,664
1,664
1,665
1,712
1,713
1,694
1,680
1,668
1,668
1,681
1,681

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 2002
and 2003. 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.

Extraordinary Items
The Board’s extraordinary items budget
for 2002–03 provides funds of $1.5 million for the Survey of Consumer
Finances ($0.7 million) and the Survey
of Small Business Finances ($0.8 million). These surveys will improve the
quality of economic data produced by
the Board by gathering information on
the economic behavior of U.S. households and the financial health of U.S.
firms. Data collection for the 2001 Survey of Consumer Finances was completed at the beginning of December

24

Annual Report: Budget Review, 2002

2001, and data processing will accelerate in 2002. Final data will not be completed until 2002, though preliminary
data are expected to be available earlier.
A summary article on the survey is
scheduled to be published in the January
2003 Federal Reserve Bulletin, and a
version of the survey data will be
released to the public shortly thereafter.
Preparations for the 2004 Survey of
Consumer Finances are expected to be
under way no later than the first quarter
of 2003. The survey instrument will be
reprogrammed, requiring the generation
of highly detailed specifications and the
development of a new data management
protocol. The last half of 2003 will see
increasingly intensive testing of the
instrument, development of materials
to support data collection, preliminary
sample design work, and a full pretest
of operations. The staff expects to start
interviewing for the 2004 survey in
spring 2003.
Work on the Survey of Small Business Finances during the second half
of 2002 will involve canvassing Board
staff, academics, and other researchers
to help determine the content of the

2003 survey. By the first quarter of
2003, survey staff will write a memorandum for the Board with recommendations regarding the 2003 survey.
Survey staff will also develop a statement of work with a request for proposal
expected to be issued around May or
June 2003. Following the evaluation of
proposals, a contract will be awarded
during the fourth quarter of 2003. Work
should begin in the fourth quarter of
2003, and fieldwork (which is the
portion of the contract with the largest
expenditures) will not begin until about
April 2004.

Office of Inspector General
The 2002–03 budget of $7.8 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.

25

Chapter 3

Federal Reserve Banks
The 2002 operating budgets of the
twelve Reserve Banks total $2,580.2
million.1 The 2002 total is $118.4 million, or 4.8 percent, above estimated
2001 expenses (table 3.1).2 Approximately 37 percent of Reserve Bank
expenses in the 2002 budget are offset
by priced service revenues, and an
additional 12 percent are reimbursable
claims for services provided to the
1. These expenses include those budgeted by
Federal Reserve Information Technology (FRIT)
and the Office of Employee Benefits (OEB).
Expenses from these entities have been charged to
the Reserve Banks, as appropriate, and included in
their budgets.
2. Unless otherwise noted, expenses also include
costs associated with the check standardization
special project. Special projects are major efforts
having Systemwide significance that are outside
the budgets of the individual Reserve Banks.

U.S. Treasury and other government
agencies.
Revenues from priced services are
budgeted to increase 0.3 percent in 2002
as a result of projected price increases
and modest volume growth in the
check service. The increase in revenues
is moderated, however, by declining
revenue in other services, namely
automated clearinghouse (ACH), Fedwire, and book-entry securities. ACH
revenue reductions reflect some erosion
of commercial origination volume, due
to increased competition, as well as
price reductions. Declining revenue in
the Fedwire funds transfer and bookentry securities services is also attributed to price reductions. Reimbursable
claims for Treasury-related services are
expected to increase 5.4 percent.

Table 3.1
Expenses of the Federal Reserve Banks, Net of Receipts
and Claims for Reimbursement, 2001 and 2002
Millions of dollars except as noted
Change

2001
(estimated)

2002
(budgeted)

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

2,461.8

2,580.2

118.4

4.8

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

951.8
1.1
292.2

954.4
1.0
307.9

2.6
−.1
15.7

.3
−10.0
5.4

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

1,216.7

1,316.9

100.2

8.2

Item

Note. Excludes capital outlays. Includes expenses
budgeted by Federal Reserve Information Technology
(FRIT) and the System’s Office of Employee Benefits
(OEB). Expenses from these entities have been charged to
the Reserve Banks, as appropriate, and included in their
budgets. 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.

26

Annual Report: Budget Review, 2002

At each Reserve Bank, budgeted 2002
expenses are increasing from estimated
2001 expenses by amounts ranging from
0.3 percent to 8.7 percent (see table D.1,
appendix D). The Reserve Bank budget
increase of $118.4 million provides
funding for each District’s salary administration and benefits program, local
initiatives, nationally provided support
service (NPSS) initiatives, and consolidated operations.
The average number of personnel
(ANP) projected to be employed at
the Reserve Banks, Federal Reserve
Information Technology (FRIT), and the
Office of Employee Benefits (OEB)
during 2002 is 23,550, an increase of
282 ANP, or 1.2 percent, from estimated
2001 staff levels (table 3.2).3 Reserve
Bank employment is expected to increase
228 ANP or 1.0 percent in 2002; this
increase is largely a result of plans to
increase the number of security staff
(for more detail on expenses and ANP
3. 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
calendar year; two half-time employees who start
on January 1 count as 1 ANP.

by District and operational area, see
tables D.1 through D.4, appendix D).

2001 Budget Performance
The Reserve Banks estimate 2001
expenses to have been $2,461.8 million,
an increase of $19.6 million, or
0.8 percent, from the approved 2001
budget of $2,442.2 million (table 3.3).
The Reserve Banks estimate employment, including FRIT and OEB, to have
been 23,268 ANP, a decrease of 218
ANP from approved 2001 levels.
Eight Reserve Banks had cost overruns in 2001 ranging from 0.1 percent
(Dallas) to 6.8 percent (Kansas City).
The remaining four Banks estimated
their 2001 expenses to have been below
their approved 2001 budgets by amounts
ranging from 0.7 percent (Philadelphia)
to 4.5 percent (Atlanta). In appendix D,
tables D.5 through D.8 detail 2001
expense and ANP estimates by District
and operational area.
About $9.5 million of the Reserve
Banks’ 2001 overrun is attributable to
higher-than-budgeted contract staff
expenses. The largest share of these
expenses ($3.8 million) reflect fees for
consultants involved in national project
management and development support

Table 3.2
Employment at the Federal Reserve Banks, FRIT, and OEB, 2001 and 2002
Average number of personnel except as noted
2001
(estimated)

2002
(budgeted)

Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Information
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office of Employee Benefits . . . . . . . . . . . . . . . . . . .

22,525

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

Item

Change
Number

Percent

22,753

228

1.0

712
31

763
34

51
3

7.2
9.7

23,268

23,550

282

1.2

Note. Components may not sum to totals and may not
yield percentages shown because of rounding. See text
note 3 for definition of average number of personnel.

Federal Reserve Banks

27

Table 3.3
Budget Performance of the Federal Reserve Banks,
Operating Expenses and Employment, 2001

Item

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

2001
(budgeted)

2001
(estimated)

2,442.2

2,461.8

23,486

23,268

Change
Amount

19.6
−218

Percent

.8
−.9

Note. See note to table 3.1. See text note 3 for definition of average number of personnel.

for the check standardization project.
The remainder of these expenses
($5.7 million) reflect the hiring of technical personnel to support local information technology (IT) initiatives, the
hiring of temporary staff in New York’s
check-processing operation, and several
major Systemwide initiatives to convert
to standardized software applications.
Estimated expenses for 2001 also
include $6.8 million in unbudgeted costs
related to the September 11 terrorist
acts.4 These costs are primarily for an
increase in overtime for protection staff,
alternative check shipping arrangements, and the shipping of currency
to alternative storage locations. Offsetting a portion of these expenses are
lower-than-planned travel expenses
($1.0 million).
Estimated 2001 expenses include a
net increase of $4.7 million and 14 ANP
associated with the System’s revamped
financial services product office structure. The Reserve Banks created the
product office structure in the early
1990s to centralize leadership of the
System’s major financial services business lines. The structure is designed to

4. These costs are not included in the 2001
overrun discussed in subsequent paragraphs.

draw on leadership from Reserve Bank
offices that possess specialized expertise
in a particular business area. As business
requirements change and Reserve Banks
develop new projects and initiatives,
leadership of a product office may shift
from one Reserve Bank to another, and
responsibilities may be redefined. In
2001, the Reserve Banks redefined several areas of responsibility and shifted
leadership among several Banks. Because
final plans for these changes had not
been approved when the Banks developed their 2001 budgets, the associated
costs were unbudgeted. Most of the
increase is the result of expanded product office responsibilities.
Higher costs associated with fully
reimbursable Treasury projects account
for $2.9 million of the 2001 overrun.
This increase reflects higher communications costs for Treasury Direct consolidation, additional enhancements requested
by the Treasury for continued development of the ASAP.gov application, and
the new Pay.gov and Government Pointof-Sale Check Conversion (GPCC)
projects.
In addition to the broader trends
discussed above, specific factors at a
few Reserve Banks contributed to the
overrun in 2001. The Retail Payments
Office in the Atlanta District reported

28

Annual Report: Budget Review, 2002

higher-than-budgeted costs for the
Check Relay air transportation function
($2.1 million) because of higher fuel
costs. Several Banks incurred higherthan-planned medical costs ($5.9 million) and one-time transition costs
associated with the Systemwide consolidation of ACH operations ($1.5 million); in addition, Chicago increased its
supervision staff by seventeen ANP to
enhance the quality of that function
($1.2 million). In Richmond and Dallas,
severance payments associated with
restructuring, centralization, and efficiency initiatives also added to the overrun ($4.2 million).
Partially offsetting these increases
were lower costs related to the check
imaging project as a result of delays in
its implementation schedule ($3.6 million); lower-than-expected spending in
San Francisco ($3.0 million); and cost
reductions in Atlanta ($8.1 million and
157 ANP) and Richmond ($1.1 million
and 72 ANP).

The 2002 Budget
The discussion of the 2002 budget
covers salary administration and System
and Reserve Bank initiatives.

2002 Salary Administration
The budgets for the Reserve Banks,
FRIT, and OEB include $108.9 million
to fund salary administration programs
for officers and employees (table D.9).5
Average merit increases of 4.5 percent
for officers and 4.3 percent for employ-

5. 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.

ees account for $52.0 million, or
48 percent, of the total salary administration budget. Variable pay programs,
which include cash awards and incentive payments for officers and employees, represent $33.2 million of the
total budget.6 Promotions, reclassifications, and market adjustments represent
$16.4 million; retention payments
represent $4.1 million; and severance
payments represent $3.2 million. Merit
and other salary-related expenses are
in line with public and private sector
trends.
Officer incentive payments and cash
awards total $10.2 million, or 7.0 percent
of officer salary liability. Officer variable pay continues to show increased
funding for incentive-type awards, with
one District using the entire variable pay
pool for incentive awards.
Employee incentive payments and
cash award funds total $22.8 million, or
2.2 percent of employee salary liability.
Three Banks opted to apportion a higher
percentage of the award funds to the
top three grades, with a commensurate
reduction in other grade pools; these
actions are consistent with the variable
pay guidelines. The mix between incentive and cash awards in the employee
category continues to be heavily
weighted toward cash awards.
Officer turnover in 2002, including
retirements, is projected to decrease
from an estimated 5.9 percent in 2001 to
4.0 percent in 2002; Boston and Kansas
City expect no turnover in 2002, while
San Francisco expects 12.3 percent, the
high end of the projections. Employee
turnover is projected to increase slightly

6. Cash awards are payments for exceptional
achievements during the year. Incentive payments
represent awards for the accomplishment of
pre-defined objectives related to specific projects
and initiatives.

Federal Reserve Banks
from 10.9 percent in 2001 to 11.1 percent in 2002, ranging from 8.1 percent
(Richmond) to 15.0 percent (Kansas
City). Reserve Banks are reporting
relatively higher turnover in check operations and some professional and technical areas compared with other areas.
To assist in retaining employees with
critical skills, Reserve Banks plan to
maximize variable pay, retention incentives, and other monetary and nonmonetary rewards for key officers and
employees.
Retirement and other benefit expenses,
which account for 15 percent of Reserve
Bank budgets, are anticipated to increase
$31.0 million, or 8.9 percent, in 2002.
Salary-related benefits, such as social
security and Thrift Plan contributions,
will increase 9.7 percent. The increase is
primarily related to the combined effect
of higher salaries and a change in 2002
in the employer-matching component
of the System’s Thrift Plan (increasing
the employer match from 80 percent to
100 percent for employees with at least
five years of service). Other factors
include projections of higher postretirement and postemployment benefit
expenses, which are directly related to
changes in actuarial assumptions. Nonsalary-related benefits will increase
10.7 percent, primarily because of
increases in employer contributions for
health benefits (10.2 percent for nonHMO plans, 14.0 percent for HMO
plans, and 6.2 percent for dental plans).
These increases are partially offset by
projected savings from the new System
prescription drug program.

Initiatives Affecting the 2002
Budget
The 2002 budget provides funding for
several System and Reserve Bank initiatives. The budgetary requirements for
these initiatives are described below.

29

Fee-Based Services to Financial
Institutions
Initiatives for fee-based services in 2002
include check modernization and the
wholesale payments and automated
clearinghouse consolidations.
Check Modernization
In 1999, the Federal Reserve Banks,
under the leadership of the Retail Payments Office, initiated 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-processing infrastructure, enable new products to be
introduced into the market more quickly,
reduce operational costs, and facilitate
the move to electronic payments. The
2002 budget for the check modernization projects consists of $82.4 million
in System costs and $23.8 million in
local Reserve Bank costs. The budgetary
effect of each of the check modernization projects is described below. (For a
discussion of the operational details of
the check modernization projects, see
chapter 4 of Budget Review 2001.)
Check Standardization. For the check
standardization project, the Reserve
Banks and FRIT have identified nationally provided support service (NPSS)
costs of $39.7 million, local Reserve
Bank implementation costs of $22.5
million, and special project costs of
$12.4 million.7 Reserve Bank implementation costs vary significantly by District
7. The check standardization special project
includes only the portion of the check standardization project that relates to redundant operational
costs and severance and retention payments for
staff affected by each Bank’s transition to the new
check operating environment.

30

Annual Report: Budget Review, 2002

and are determined by the timing of each
office’s conversion in the forty-fivemonth implementation schedule.
Enterprisewide Adjustments. The 2002
budget for the enterprisewide adjustments (EWA) project consists of $7.7 million for NPSS costs and $0.5 million for
costs at individual Reserve Banks. The
San Francisco District is responsible for
the development and Systemwide implementation of EWA. Twenty-five offices
had converted to EWA by the end of
2000, and by late 2001, thirty-seven
adjustment offices were relying on EWA
for check adjustments processing. The
remaining offices are scheduled to
convert during 2002. In late 2002 and
early 2003, the servers that support
EWA are scheduled to migrate to FRIT.
Image Services System. The 2002 budget
for the image services system (ISS)
consists of $15.5 million in NPSS costs
and $0.4 million in individual Reserve
Bank costs. The Boston District is
managing the ISS project, which will
convert the Federal Reserve’s diverse
and decentralized commercial image
archive systems to a standardized,
centrally managed national image
archive. As the project management site,
the Boston Reserve Bank began staffing
an ISS centralized business administration function in 2001 that will support
ongoing operations after ISS implementation. Three Reserve Banks will serve
as regional archive sites for the System.
The first archive was not ready for
production until early 2002, almost a
year later than originally planned,
because of software vendor delays.
Electronic Access and Delivery. The
2002 budget for electronic access and
delivery (EAD) consists of $7.0 million in NPSS costs and $0.4 million

in individual Reserve Bank costs. The
Dallas Reserve Bank is responsible for
developing this application. The System
began converting customers to EAD
under a controlled rollout in July 2001.
Wholesale Payment Consolidations
The 2002 budget includes net cost
reductions as a result of the continued
consolidation efforts of the Wholesale
Payment Product Office (WPPO). In
2002, consolidation is expected to yield
savings of $4.9 million in the funds
transfer service and nearly $1.4 million
in the book-entry securities service and
a reduction in staff of sixteen ANP.
Off-line transfer services were consolidated into two Reserve Banks. In the
fourth quarter of 2001, the WPPO began
consolidating the on-line support and
related administrative functions for the
funds transfer and book-entry securities
transfer services to these two sites.
Customer testing is being consolidated
into one Reserve Bank. These consolidations, scheduled for completion in the
third quarter of 2002, will reduce costs
across the System by standardizing the
provision of the service while improving
service quality.
Automated Clearinghouse
Consolidation
Early in 2001, the RPO announced the
consolidation of ACH operations into
two processing sites, resulting in 2002
budget savings of $8.8 million and
thirty-seven ANP.

Services Provided to the Treasury
and Other Government Agencies
Five Districts identified projects for the
Treasury that in the aggregate are
projected to add $9.1 million and five
ANP to 2002 expenses. The Treasury

Federal Reserve Banks
will reimburse the Reserve Banks for
project development costs. These projects
include the Treasury Check Information
System, Pay.gov, Government Point-ofSale Check Conversion, the Intragovernment Payment and Collection System,
the Automated Standard Application for
Payment, and the Treasury Web Application Infrastructure.

Central Bank Services
Initiatives for 2002 in the central bank
services area consist of projects in the
cash and the supervision and regulation
areas.8
Cash Initiatives
Three Districts have identified cash
initiatives that will result in an aggregate
increase of $5.7 million and ten ANP.
The increased costs are primarily the
result of the full-year effect of opening the new Phoenix operations center
in September 2001. To a lesser degree,
costs related to additional currency
processing shifts at the Atlanta and
Dallas Banks and currency volume
increases in the Atlanta and San Francisco Districts are contributing to growth
in this area.
Supervision and Regulation
Initiatives affecting bank supervision
and regulation are projected to add
$5.1 million and thirty-seven ANP in
2002. Additional resources are needed
to address the growth in the number
of state member banks, increased supervisory responsibilities related to large
complex banking organizations, and the

31

full-year effect of 2001 staff increases.
These initiatives are concentrated in the
Richmond, Chicago, Kansas City, and
San Francisco Districts.

Cross-Functional Areas
Cross-functional initiatives for 2002
involve staff reductions and security
enhancements.
Targeted Staff Reductions
Ten Districts identified savings totaling
$66.0 million and staff reductions of
392 ANP resulting from initiatives to
improve productivity, streamline operations, and reduce discretionary expenditures. The majority of the staff reductions are in Reserve Bank support and
overhead areas, including information
technology, financial management,
administrative services, personnel services, and business development. Targeted reductions in discretionary expenditures include areas such as equipment,
travel, training and education, and food
service operations.
Security Enhancements
The budgets include $50.3 million to
enhance security at the Reserve Banks,
an increase of $11.4 million from
estimated 2001 expenses. About half of
the increase is associated with salaryrelated expenses for additional staff.
Also included in this increase are
expenses for security screening equipment and depreciation of various
security-related building projects.

Risks in the 2002 Budget
8. Central Bank Services is composed of
monetary and economic policy, services to financial institutions and the public, and supervision
and regulation.

The Reserve Banks have noted several
common risks associated with the 2002
budgets. A number of Banks believe
that some cost-reduction initiatives,

32

Annual Report: Budget Review, 2002

necessary to meet System budget guidance, may be difficult to achieve. Many
of the efficiency initiatives include staff
reductions through attrition. If attrition
is not sufficient to achieve needed staff
reductions, a limited amount of unbudgeted severance may be required.
The check modernization projects
continue to present budget risks. Delays
with the ISS project have shifted some
resources and costs from 2001 to 2002.
Similar pressures exist with the check
standardization project. In addition to
potential resource diversions, delays in
project schedules could result in higherthan-projected costs for staffing, equipment, and software. The amount of
expense associated with this risk varies
by Bank and is dependent upon each
Bank’s position in the transition schedule. Following conversion, unforeseen
problems, such as the inability to stabilize operations, could present additional risk.
Some risk also exists in bank supervision and regulation. Most prevalent
are concerns that additional staff could
be needed if examination requirements
exceed those already factored into the
budgets. In the past, filling additional
positions has presented challenges for
Reserve Banks because of tight labor
markets. However, with the exception
of highly specialized positions, Banks
recently have reported greater success
in hiring examiners, a fact attributable
primarily to softening labor markets. In
addition, the supervision function is
sharing more resources and specialized
skills across Districts.
The Reserve Banks are conducting
a post–September 11 assessment, with a
focus on further improving the robustness and resiliency of critical Federal
Reserve functions. Funding needed to
implement recommendations that may
arise from this assessment has not been
included in the budgets. In addition, the

Reserve Banks’ 2002 budgets include
early estimates of the expense and capital funding that will be required to
enhance the overall physical security
of the Banks. As Reserve Banks finalize
these plans, additional resources may be
required.

2002 Capital Plan
The 2002 capital budget submitted by
the Reserve Banks, FRIT, and OEB
totals $375.1 million—$338.3 million
for the Reserve Banks, $33.5 million
for FRIT, and $3.3 million for OEB.
Tables D.10 and D.11, in appendix D,
detail capital expenditures by District
and asset classification.
As in previous years, the 2002 capital
budgets include funding for projects that
support the strategic direction outlined
in the plans of the Reserve Banks, FRIT,
and OEB. 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 2002 budget
contains four major categories of capital
outlays: building and facility improvements, including security enhancements;
automation and communications-related
initiatives; payment service improvements; and cash services initiatives.

Buildings and Facilities
The proposed capital budget includes an
estimated $220.7 million for buildingrelated projects and facility improvements. These projects are geared toward
renovation, modernization, or replacement of physical facilities, and replacement or upgrading of critical systems.
Building initiatives include several
projects in New York, including the
continuation of the multiyear modernization of the head office building, and

Federal Reserve Banks
various other building and leasehold
improvements. Budgets also include
funding for the new building project at
the Eleventh District’s Houston Branch,
the Detroit building project, renovations
at the Chicago Bank, and remodeling
of the San Francisco Bank’s lobby. In
addition to these larger projects, funding is provided for security enhancements and for routine replacement of
furniture, fixtures, and building-related
equipment.

33

services in Boston, and $1.5 million
for local area network upgrades in
Philadelphia.
The automation total also includes
$11.9 million in capital expenditures
for reimbursable Treasury initiatives,
including the Treasury Web Application
Infrastructure project, the Treasury
Check Information System, and the
Savings Bond Architecture Project. The
largest share of the remaining funds
supports the Districts’ distributed technology strategies.

Automation
The proposed capital budget includes
$75.9 million in funding for major
automation and communications initiatives. These initiatives do not include
the automation components of building, payment systems, or cash services
initiatives that are discussed separately. The strategic directions outlined
in the individual Bank budgets include
enhanced technological capabilities,
the continued implementation of LAN
technology, and the development of
common office environments and webbased applications.
FRIT projects and acquisitions account
for $27.8 million of total automationrelated outlays. FRIT’s 2002 capital
plan includes outlays for FEDNET
modernization, a mainframe processer
replacement project, and various software and hardware upgrades and
enhancements. Aside from FRIT, major
automation-related projects include
$10.3 million for server equipment
(primarily in the New York and Atlanta
Districts), $5.1 million for additional
phases of the Transaction Processing
System and the Foreign Processing
System projects in New York, $2.1 million for telecommunication equipment
upgrades and Internet gateway-directory

Payment System
The 2002 capital budget includes
$43.8 million for initiatives to improve
the payment system. These initiatives
include $5.7 million in FRIT’s budget
for hardware, software, and network
components for the ISS and check
standardization projects. The remaining
funds support other national and local
initiatives associated with the check
modernization projects, the acquisition
and installation of high-speed 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.

Cash Services
Outlays of $34.7 million have been
included in the capital budget for
cash services initiatives. For 2002,
Bank budgets include $27.1 million for
the Board-approved cash project to
install new sensors and scanners on
all currency-processing machines. In
addition, San Francisco has included
$4.1 million for an inventorymanagement system.

Appendixes

37

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.

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 the 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,

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 using 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.2 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

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.
2. Beginning in 2002, a portion of depository
institution clearing balances held with the Federal
Reserve for processing transactions will be used as
a funding source for priced service assets. Equity
will be imputed at 5 percent of total assets to meet
the FDIC definition of a well-capitalized institution in its classification for assessing insurance
premiums. The equity financing rate, or pretax
return on equity, will be based on the average
of the return-on-equity results of three economic
models using data from the bank holding company
model.

38

Annual Report: Budget Review, 2002

of the Board of Governors directly
related to providing priced services.

Calculation of the PSAF for 2002
In 2001, the Board approved a 2002
private sector adjustment factor for
Reserve Bank priced services of
$150.1 million, a decrease of $56.8 million, or 27.5 percent, from the PSAF of
$206.9 million for 2001.

Asset Base
The value of Federal Reserve assets to
be used in providing priced services in
2002 is estimated at $11,846.9 million
(table A.1). These assets are to be
financed with short-term payables, clearing balances, long-term liabilities, and
equity. The value of non-imputed assets
in 2002 is $1,592.6 million, an increase
of $92.9 million over the value of
non-imputed assets in 2001 (table A.2).
Growth of $81.6 million in the pension asset explains the majority of the
increase, while increases in short-term
assets explain an increase of $9.0 million, and increases in Board and Reserve
Bank building assets explain an additional $13.6 million. These increases are
offset by a decrease of $11.3 million in
other Reserve Bank fixed assets.

Debt and Equity Costs, Taxes,
and Other Imputed Costs
For 2002, a pretax rate of return on
equity of 22.1 percent, or $130.9 million, is planned. This represents a
decrease from the pretax return on
equity of 24.0 percent for 2001. As a
result of this rate decrease and reduced
imputed equity, the imputed return on
equity declined $28.6 million. The
elimination of short- and long-term

debt results in a decline of expenses
associated with debt financing of
$32.0 million. Other required PSAF
recoveries for 2002—imputed sales
taxes, the imputed FDIC insurance
assessment, and Board expenses—total
$19.2 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 operating assets over their
estimated useful lives.
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
Federal Reserve Banks circulate new
and fit currency through depository
institutions and destroy currency already
in circulation as it becomes unfit or
when a new design is issued. Each year,
under authority delegated by the Board,
the director of the Division of Reserve
Bank Operations and Payment Systems
orders new currency from the U.S.
Department of Treasury’s Bureau of

Special Categories of System Expense

39

Table A.1
Pro Forma Balance Sheet for Federal Reserve Priced Services, 2001 and 2002
Millions of dollars
Item

2001

Assets
Short-term assets
742.4
Imputed reserve requirement on clearing balances 1 . . . . . . .
Investment in marketable securities 1 . . . . . . . . . . . . . . . . . . . . 6,681.9
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77.3
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.6
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.4
Items in process of collection 2 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,606.7
Total short-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2002

678.5
5,473.0
81.7
3.8
27.8
4,102.8
11,135.3

10,367.6

Long-term assets
Premises 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
417.5
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185.5
Leasehold improvements and long-term prepayments . . . . .
73.9
Prepaid pension costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
718.5
Total long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,395.4

1,479.3

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

12,530.7

11,846.9

Liabilities
Short-term liabilities
Clearing balances and balances arising
from early credit of uncollected items . . . . . . . . . . . . . . 7,424.3
Deferred-credit items 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,606.7
18.9
Short-term debt 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85.4
Total short-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

431.1
177.7
70.4
800.1

7,377.5
3,509.8
.0
103.9
11,135.3

10,991.2

Long-term liabilities
Postemployment/postretirement benefits . . . . . . . . . . . . . . . . .
251.9
479.1
Long-term debt 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

731.0

263.4

263.4
.0

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

11,866.3

11,254.6

Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

664.4

592.3

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

12,530.7

11,846.9

Note. Data are averages for the year. Components
may not sum to totals because of rounding.
1. Funded with clearing balances.
2. Represents float costs that are directly estimated at
the service level.

3. Includes allocations of Board of Governors’ assets
to priced services of $0.7 million for 2001 and
$1.1 million for 2002.
4. No debt is imputed in 2002 because clearing balances are used as available funding source.

Engraving and Printing (BEP). Upon
reviewing the order, the BEP sets 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
2001 totaled $343.5 million, which is
$83.5 million, or 19.5 percent, less than
budgeted (table A.3). This underrun
resulted from reducing the original
print order by close to one billion notes

40

Annual Report: Budget Review, 2002

Table A.2
Derivation of the Private Sector Adjustment Factor (PSAF), 2001 and 2002
Millions of dollars except as noted
Item

2001

2002

PSAF Components
Non-imputed assets 1
Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104.3
1,395.4
1,499.7

113.3
1,479.3
1,592.6

Imputed elements
Short-term debt 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18.9
479.1
664.4

.0
.0
592.3

Financing rates and costs (percent)
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pretax return on equity 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.7
6.5
24.0

.0
.0
22.1

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

31.5

29.3

Required PSAF Recoveries
Capital costs 5
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

.9
31.1
159.5
191.5

.0
.0
130.9
130.9

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

10.5
.0
4.9
15.4

14.1
.0
5.1
19.2

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

206.9
1.7
28.5

150.1
1.3
19.0

1. Priced services assets are based on ‘‘direct determination of assets’’ method.
2. For 2001, short-term debt is imputed to finance only
those assets that are not financed with short-term
payables. No short-term debt is imputed in 2002 because
clearing balances are used as a funding source.
3. For 2001, long-term debt consists of total priced
long-term assets less postretirement/postemployment benefit liabilities. No long-term debt is imputed in 2002
because clearing balances are used as a funding source.
4. For 2001, 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. For 2002, the
pretax rate of return on equity is determined averaging the
result from the method used for 2001 (23.5 percent),
along with results from a capital asset pricing model
(21.4 percent), and a discounted cash flow model
(21.4 percent).
5. The division of financing between debt and equity
for 2001 was determined using the debt-to-equity ratio
from the bank holding company model.
6. System budgeted priced services expenses less
shipping are $725.7 million for 2001 and $791.9 million
for 2002.

because of high currency inventories
at Reserve Banks. Budgeted currency
expenditures for 2002 total $376.8 million, or 9.7 percent more than estimated

2001 expenses (chart A.1). The increase
is due primarily to 2002 printing costs,
which are 9.5 percent greater than estimated 2001 expenses.

Special Categories of System Expense
Chart A.1
Federal Reserve Budget for
Supplying U.S. Currency, 1993–2002
Millions of dollars

400

200

41

without optical-varying ink ($5s), and
NCD with optical-varying ink ($10s,
$20s, $50s, and $100s) (table A.4).3
During 2002, 46 percent of the notes
produced will be NCD notes, and the
remaining 54 percent will be unthreaded
($1s). The average price the Board pays
the BEP for producing all types of notes
in 2002 will be $50.73 per thousand
notes printed.

Currency Transportation
1993

1996

1999

2002

Note. For 2001, estimated; for 2002, budgeted.

Printing of Federal Reserve Notes
The Board ordered 7.2 billion new notes
for the calendar year 2002 budget. The
budget for printing the Board’s order is
$360.1 million, or 95.6 percent of the
total 2002 new currency budget. For
January through September 2002 (the
portion of the federal government’s
2002 fiscal year that falls within the
2002 calendar), production is set at
5.5 billion notes. The Board’s staff
estimates that for October through
December 2002, production will be
1.7 billion notes.
The Federal Reserve System circulates
three types of notes: unthreaded ($1s
and $2s), New Currency Design (NCD)

The currency transportation budget
consists of funds for shipping new
currency from the BEP and between
the Reserve Banks. The 2002 currency
transportation budget is $9.2 million,
which is $0.4 million, or 4.5 percent,
less than the Board budgeted for 2001.
The 2002 budget for new currency
shipments from the BEP is $7.0 million,
or 7.0 percent, greater than estimated
2001 expenses because of a projected
increase in the number of currency
shipments. The 2002 budget for currency shipments between Reserve Banks
is $2.2 million, or 6.3 percent, greater
than estimated 2001 expenses. These

3. The color of the optical-varying ink shifts
from green to black as the viewing angle of the
note changes.

Table A.3
Federal Reserve Costs of Supplying Currency, 2001 and 2002
Thousands of dollars except as noted
2001
(estimated)

2002
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

328,820
8,606
3,027

360,060
9,199
4,103

9.5
6.9
35.5

3,089

3,414

10.5

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

343,542

376,776

9.7

Item

42

Annual Report: Budget Review, 2002

Table A.4
Projected Cost of Printing New Notes, by Type of Note, 2002
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 . . . . . . . . . . . . .

3,854.0

53.8

39.98

154,082

1,687.8
1,623.0

23.6
22.6

56.65
68.00

95,614
110,364

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

7,164.8

50.73 2

360,060

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

shipments move currency from Reserve
Banks with excess fit currency to Banks
that would otherwise require new currency from the BEP.

Counterfeit Deterrence Research
The 2002 budget for the counterfeitdeterrence program is $4.1 million. The
funds will support the Federal Reserve
System’s participation in the Central
Bank Counterfeit Deterrence Group
(formerly known as the SSG-2), which
operates under the auspices of the
G-10 governors to combat digital
counterfeiting.

100

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

Treasury’s Office of Currency
Standards
The 2002 budget includes $3.4 million
to reimburse the Treasury for expenses
for the Office of Currency Standards
(OCS). The OCS develops standards
for the cancellation, destruction, and
accountability of unfit currency, and
processes claims for the redemption of
damaged or mutilated currency.

43

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
Table B.1
Income of the Federal Reserve System,
2000 and 2001
Millions of dollars
Source

2000

2001
(estimated)

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

22.8
32,736.9
269.5
881.5
53.2

11.7
30,541.7
239.1
926.3
151.6

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

33,964.0

31,870.4

Note. Components may not sum to totals because of
rounding.

and the costs of the earnings credits
granted to depository institutions on
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 $25.3 billion
and $27.1 billion for 2000 and 2001
respectively.

44

Annual Report: Budget Review, 2002

Table B.2
Distribution of the Income of the Federal Reserve Banks, 2000 and 2001
Millions of dollars
Item

2000

2001
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33,964

31,870

1,587
385

1,781
253

31,992

29,837

−1,492

−1,117

8

0

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

188
436

295
339

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

410
4,115

428
517

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

25,344

27,140

Note: Components may not sum to totals because of
rounding.
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
$392.6 million in 2000 and $392.4 million in 2001.
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.

45

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 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 completed
7 reports in 2001 on selected aspects of
Federal Reserve operations (table C.1),
bringing the total number of reports
since 1979 to 198. It has 10 projects in
various stages of completion (table C.2).
The GAO has also involved the Federal
Reserve in about 111 other reviews not

Table C.1
Completed GAO Reports Relating to the Federal Reserve System, 2001
Report
Money Laundering: Oversight of Suspicious Activity Reporting at
Bank-Affiliated Broker–Dealers Ceased . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Privacy: Too Soon to Assess the Privacy Provisions
in the Gramm–Leach–Bliley Act of 1999 . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Finance: College Students and Credit Cards . . . . . . . . . . . . . . . .
Equity Hedging: OCC Needs to Establish Policy
on Publishing Interpretive Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Areas for Improvement
in Computer Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti–Money Laundering: Efforts in the Securities Industry . . . . . . . . . . . . .
Check Relay: Controls in Place Comply with Federal
Reserve Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

GAO-01-474

3-22-01

GAO-01-617
GAO-01-773

5-3-01
6-20-01

GAO-01-945

8-16-01

GAO-01-1049R
GAO-02-111

8-30-01
10-10-01

GAO-02-19

12-12-01

46

Annual Report: Budget Review, 2002

directly related to the System and has
terminated 56 others before completion.
The reports are available directly from
the GAO.

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 nongovernmental 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 2001, the OIG completed
eleven audits, reviews, and assessments

Table C.2
Active GAO Projects Relating to the Federal Reserve, Year-End 2001
Subject

Date initiated

Various aspects of identify fraud/theft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve’s role in payment systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bureau of Public Debt financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign entities in U.S. capital markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money laundering in the credit card industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supervisory issues related to the failure of Superior Bank, FSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities and Exchange Commission’s resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electronic funds transfer program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing of the new dollar coin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effects of terrorist attacks on U.S. financial markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4-4-01
4-19-01
5-29-01
6-15-01
7-30-01
8-10-01
8-28-01
9-18-01
10-2-01
11-7-01

Table C.3
Completed OIG Audit Reports Relating to the Federal Reserve System, 2001
Report
Audit of the Board’s Financial Statements
(years ended 1999 and 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the FFIEC’s Financial Statements
(years ended 1999 and 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review of the Board’s Internet Site Data Collection . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation of Critical Infrastructure Protection . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation of the Endeavor Change Control Project . . . . . . . . . . . . . . . . . . . . .
Efforts to Implement Performance Management Principles
Consistent with the Results Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Observations on the Organization of the Board’s Publications Program . . . . . . .
Oversight Approach for the Federal Reserve’s Check Modernization Project . .
Audit of the Board’s Information Security Program . . . . . . . . . . . . . . . . . . . . . . . . .
Review of the Board’s Efforts to Implement Umbrella Supervision . . . . . . . . . . .
Audit of the Federal Reserve’s Background Investigation Process . . . . . . . . . . . .

Number

Month issued

A0008BD

February

A0008
A0102
A0007
P0020

February
February
March
May

A0004
R0101
A0013
A0106
A0108
A0107

July
August
September
September
September
October

Federal Reserve System Audits
(table C.3) and conducted a number
of follow-up reviews to evaluate action
taken on earlier recommendations. In

47

addition, the OIG closed nine investigations and performed numerous legislative and regulatory reviews.

49

Appendix D

Expenses and Employment
at the Federal Reserve Banks
Table D.1
Operating Expenses of the Federal Reserve Banks, by District, 2001 and 2002
Thousands of dollars except as noted
Change

2001
(estimated)

2002
(budgeted)

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

145,356
490,179
120,743
129,413
194,906
284,111
236,690
128,164
144,707
160,993
144,777
267,970

155,701
508,994
125,751
138,766
198,829
298,857
244,842
139,348
145,083
170,040
151,614
290,009

10,345
18,816
5,008
9,353
3,924
14,746
8,152
11,184
375
9,047
6,837
22,039

7.1
3.8
4.1
7.2
2.0
5.2
3.4
8.7
.3
5.6
4.7
8.2

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

2,448,008

2,567,835

119,827

4.9

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

13,803

12,387

−1,416

−10.3

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

2,461,811

2,580,221

118,411

4.8

District

Note. Excludes capital outlays. Includes expenses
budgeted by Federal Reserve Information Technology
(FRIT) and the System’s Office of Employee Benefits
(OEB).

Amount

Percent

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.

50

Annual Report: Budget Review, 2002

Table D.2
Employment at the Federal Reserve Banks, by District, and at FRIT and OEB, 2001 and 2002
Average number of personnel except as noted
2001
(estimated)

2002
(budgeted)

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

1,316
3,428
1,290
1,344
2,139
2,504
2,145
1,305
1,296
1,717
1,561
2,479

Total, all Districts . . . . . . . . . . . . . . . . . . . .
Federal Reserve Information
Technology . . . . . . . . . . . . . . . . . . . . . . .

District

Change
Amount

Percent

1,341
3,383
1,298
1,402
2,173
2,463
2,160
1,355
1,306
1,769
1,531
2,572

26
−45
8
58
34
−42
14
50
9
52
−30
93

2.0
−1.3
.6
4.3
1.6
−1.7
.7
3.8
.7
3.0
−1.9
3.7

22,525

22,753

228

1.0

712

763

51

7.2

Office of Employee Benefits . . . . . . . . . . .

31

34

3

9.7

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

23,268

23,550

282

1.2

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

Table D.3
Operating Expenses of the Federal Reserve Banks, by Operational Area, 2001 and 2002
Thousands of dollars except as noted

Operational area

2001
(estimated)

2002
(budgeted)

Change
Amount

Percent

Monetary and economic policy . . . . . . . . . . . . . . . . . . . . .
Services to U.S. Treasury and
other government agencies . . . . . . . . . . . . . . . . . . . .
Services to financial institutions and the public . . . . . .
Supervision and regulation . . . . . . . . . . . . . . . . . . . . . . . . .
Fee-based services to financial institutions . . . . . . . . . .

234,043

242,938

8,895

3.8

265,617
578,826
444,752
924,769

284,116
626,782
474,993
939,004

18,500
47,957
30,241
14,235

7.0
8.3
6.8
1.5

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

2,448,008

2,567,835

119,827

4.9

Note. Operational expenses include FRIT and OEB
and exclude special project costs.

Expenses and Employment
Table D.4
Employment at the Federal Reserve Banks, by Operational Area, 2001 and 2002
Average number of personnel except as noted
2001
(estimated)

Operational area

2002
(budgeted)

Change
Amount

Percent

Monetary and economic policy . . . . . . . . . . . . . . . . . . . . .
Services to U.S. Treasury and
other government agencies . . . . . . . . . . . . . . . . . . . .
Services to financial institutions and the public . . . . . .
Supervision and regulation . . . . . . . . . . . . . . . . . . . . . . . . .
Fee-based services to financial institutions . . . . . . . . . .
Support and overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

886

850

−36

−4.1

1,387
2,818
2,572
5,436
9,426

1,334
2,916
2,607
5,402
9,644

−53
98
35
−34
218

−3.8
3.5
1.4
−.6
2.3

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

22,525

22,753

228

1.0

Note. Operational area employment excludes FRIT, OEB,
and special project average number of personnel.

Table D.5
Budget Performance of the Federal Reserve Banks:
Operating Expenses, by District, 2001
Thousands of dollars except as noted
2001
(budgeted)

2001
(estimated)

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

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

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

District

Change
Amount

Percent

145,356
490,179
120,743
129,413
194,906
284,111
236,690
128,164
144,707
160,993
144,777
267,970

1,315
5,821
−855
−2,364
6,617
−13,518
9,821
4,384
5,879
10,187
180
−5,277

.9
1.2
−.7
−1.8
3.5
−4.5
4.3
3.5
4.2
6.8
.1
−1.9

2,425,817

2,448,008

22,191

.9

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

16,392

13,803

−2,589

−15.8

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

2,442,209

2,461,811

19,602

.8

Note. See note to table D.1.

51

52

Annual Report: Budget Review, 2002

Table D.6
Budget Performance of the Federal Reserve Banks, by District, and of FRIT and OEB:
Employment, 2001
Average number of personnel except as noted
2001
(budgeted)

2001
(estimated)

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

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

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

District

Change
Amount

Percent

1,316
3,428
1,290
1,344
2,139
2,504
2,145
1,305
1,296
1,717
1,561
2,479

31
−2
3
−47
−66
−162
34
−13
7
39
−39
−20

2.4
−.1
.3
−3.4
−3.0
−6.1
1.6
−1.0
.6
2.3
−2.5
−.8

22,760

22,525

−234

−1.0

Federal Reserve Information Technology . . . .
Office of Employee Benefits . . . . . . . . . . . . . . .

698
29

712
31

15
2

2.1
7.8

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

23,486

23,268

−218

−.9

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

Table D.7
Budget Performance of the Federal Reserve Banks:
Operating Expenses, by Operational Area, 2001
Thousands of dollars except as noted
2001
(budgeted)

2001
(estimated)

Monetary and economic policy . . . . . . . . . . . . . . . . . . . . .
Services to U.S. Treasury and
other government agencies . . . . . . . . . . . . . . . . . . . .
Services to financial institutions and the public . . . . . .
Supervision and regulation . . . . . . . . . . . . . . . . . . . . . . . . .
Fee-based services to financial institutions . . . . . . . . . .

229,340

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

Operational area

Note. Operational expenses include FRIT and OEB
and exclude special project costs.

Change
Amount

Percent

234,043

4,703

2.1

264,406
574,360
445,165
912,547

265,617
578,826
444,752
924,769

1,211
4,466
−412
12,223

.5
.8
−.1
1.3

2,425,817

2,448,008

22,191

.9

Expenses and Employment

53

Table D.8
Budget Performance of the Federal Reserve Banks: Employment, by Operational Area, 2001
Average number of personnel except as noted

Operational area

2001
(budgeted)

2001
(estimated)

Change
Amount

Percent

Monetary and economic policy . . . . . . . . . . . . . . . . . . . . .
Services to U.S. Treasury and
other government agencies . . . . . . . . . . . . . . . . . . . .
Services to financial institutions and the public . . . . . .
Supervision and regulation . . . . . . . . . . . . . . . . . . . . . . . . .
Fee-based services to financial institutions . . . . . . . . . .
Support and overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

890

886

−4

−.4

1,422
2,834
2,575
5,396
9,643

1,387
2,818
2,572
5,436
9,426

−35
−16
−3
39
−216

−2.5
−.6
−.1
.7
−2.2

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

22,760

22,525

−234

−1.0

Note. Operational area employment excludes FRIT, OEB,
and special project average number of personnel.

54

Annual Report: Budget Review, 2002

Table D.9
Salary Administration Expenses of the Federal Reserve Banks, by District,
and of FRIT and OEB, for Officers and Employees, 2002
Thousands of dollars except as noted
Total

District

Merit

Promotions
and
reclassifications

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

3,086
10,244
2,349
2,180
4,116
5,302
4,822
2,552
2,531
3,612
2,815
6,013

525
1,687
407
370
1,334
1,914
1,650
325
328
1,394
355
1,016

63
950
281
381
734
267
600
15
125
797
70
431

460
4,688
1,057
1,096
1,812
2,132
1,586
704
775
1,080
1,102
2,092

1,365
2,303
650
514
849
940
1,669
1,006
727
970
352
1,424

. . .
398
66
145
. . .
229
200
190
1,361
277
81
540

. . .
1,499
125
. . .
. . .
203
403
. . .
. . .
74
60
824

5,499
21,769
4,935
4,686
8,844
10,987
10,930
4,792
5,846
8,205
4,834
12,340

7.0
8.5
7.2
6.8
8.2
8.9
8.7
7.3
9.0
8.9
6.4
7.9

Total, all Districts . .

49,621

11,304

4,713

18,583

12,769

3,488

3,188

103,666

8.1

Federal Reserve
Information
Technology . . . . .

2,239

420

526

1,154

625

. . .

4,963

8.2

Office of Employee
Benefits . . . . . . . .

129

11

48

101

. . .

. . .

290

8.3

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

51,989

4,724

19,158

14,024

4,112

3,188

108,920

8.1

. . .
11,724

Market
adjustments

Cash
awards

Incentive
payments

Retention
payments

Severance

. . .

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.

As a
share
of
total
Amount personnel
expense
(percent)

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
positions critical to the success of the Bank.
Severance: The amount of expense that represents
payments to employees upon separation from the Bank.

Expenses and Employment
Table D.10
Capital Outlays of the Federal Reserve Banks, by District, and of FRIT and OEB,
2001 and 2002
Thousands of dollars except as noted
2001
(estimated)

2002
(budgeted)

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

13,262
46,476
9,953
22,746
23,935
88,202
32,957
20,635
7,237
16,031
9,339
19,810

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

District

Change
Amount

Percent

19,282
66,718
19,513
22,781
27,284
26,877
54,634
19,312
7,374
19,264
18,579
36,673

6,021
20,242
9,560
35
3,349
−61,325
21,677
−1,322
137
3,232
9,239
16,863

45.4
43.6
96.1
.2
14.0
−69.5
65.8
−6.4
1.9
20.2
98.9
85.1

310,583

338,291

27,708

8.9

Federal Reserve Information Technology . . . .
Office of Employee Benefits . . . . . . . . . . . . . . .

42,035
1,475

33,511
3,300

−8,524
1,825

−20.3
123.7

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

354,093

375,102

21,009

5.9

Table D.11
Capital Outlays of the Federal Reserve Banks, by Asset Classification, 2001 and 2002
Thousands of dollars except as noted
2001
(estimated)

2002
(budgeted)

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

127,316
27,914
1,772
127,062
19,564
6,761
43,704

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

354,093

Asset classification

Note. Includes outlays for FRIT and OEB.

Change
Amount

Percent

137,083
17,496
15,403
122,899
35,984
5,402
40,835

9,767
−10,418
13,631
−4,163
16,420
−1,359
−2,870

7.7
−37.3
769.4
−3.3
83.9
−20.1
−6.6

375,102

21,009

5.9

55

Maps of the
Federal Reserve System

58

Annual Report: Budget Review, 2002

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 2001.

Maps of the Federal Reserve System
1–A

2–B

4–D

3–C

5–E

Pittsburgh

ME

59

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

FRB1/1–600–0302–C