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Board of Governors of the Federal Reserve System

1999

Board of Governors of the Federal Reserve System

1999

April 1999
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
2
4

Introduction
FEDERAL RESERVE BUDGET PROCESSES
AND OPERATIONAL AREAS
Background on the Federal Reserve
Summary of 1998 income and expenditures
Budget processes
Operational areas

Part I The Budgets
11
11
13
15
15

Chapter 1
FEDERAL RESERVE SYSTEM
Net expenses
Trends in expenses and employment
Operational areas
1999 budget initiatives

17
17
19
20
21
27
28
29

Chapter 2
BOARD OF GOVERNORS
Overview of the Board’s budget
Reductions in the cost of programs
Program requests
The operations budget
The capital budget
Trends in expenses and employment
Extraordinary items

31
31
33
34
39
41
42
44
44

Chapter 3
FEDERAL RESERVE BANKS
Major initiatives
1999 budget objective
Budget by operational area
Budget by object of expense
Capital outlays
Trends in expenses and employment
Volume and unit costs
1998 budget performance

Part II Special Analysis
47
47
49
50

Chapter 4
THE FEDERAL RESERVE’S
RESPONSE TO THE YEAR 2000 PROBLEM
Efforts at the Federal Reserve
Supervisory program and results
International initiatives

Appendixes
53
53
56
56

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

61

Appendix B
SOURCES AND USES OF FUNDS

63
63
63
68

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

71

Appendix D
EXPENSES AND EMPLOYMENT
AT THE FEDERAL RESERVE BANKS

77

MAPS OF THE FEDERAL RESERVE SYSTEM

1

Introduction

Federal Reserve Budget Processes
and Operational Areas
To improve its effectiveness in addressing priorities and allocating resources,
the Board of Governors in 1997 converted its annual budgeting and planning
process to a two-year budget cycle and
a four-year planning cycle.
The multiyear process involves the
Board members more actively and earlier
in the discussion of alternative expenditures and thus allows the Board and
the staff to concentrate less on detailed
budgeting and more on planning and the
allocation of resources among activities.
In particular, the Board can now better
define and implement its longer-term
strategies across functional areas. The
longer budget cycle also promises to be
less burdensome to the participants and
more comprehensible to observers. The
first budget produced under the new
system covers calendar years 1998 and
1999.
Given their current business needs,
the Federal Reserve Banks will continue
to maintain an annual budget cycle.

Background on the Federal
Reserve
The Federal Reserve System consists of
the seven-member 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 growth
of the nation’s economy 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, 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 consumer credit
protection laws.
The Federal Reserve System plays a
major role in the nation’s payments
mechanism. The Reserve Banks distribute currency and coin, provide wire
and automated clearinghouse transfers
of funds and securities, and process
domestic 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 1998 Income and
Expenditures
In carrying out its responsibilities in
1998, the Federal Reserve System
incurred an estimated $1.1 billion in net

2

Annual Report: Budget Review, 1999

operating expenses. Total spending of an
estimated $2.3 billion was offset by an
estimated $1.1 billion in revenue from
priced services, reimbursements, and
other income.
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 $26.8 billion in 1998. Earnings in excess of expenses, dividends,
and surplus are transferred to the U.S.
Treasury—in 1998 an estimated
$26.5 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
The following sections give an overview
of the separate budgets and budgeting processes followed by the Board of
Governors and the Reserve Banks.

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. As the first under the new system,
the 1998–99 budget and 1998–2002
plan were prepared and approved entirely
in 1997.
The two-year cycle begins in the fall
(thus, for the 2000–01 budget, the fall of
1998). At that time, the Board’s divisions examine their operating environments and look for any adjustments to
their priorities, activities, and resources
that might improve the efficiency and
effectiveness of the Board’s operations.

The management of each division discusses with its 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 updates the strategic plan and, ultimately, a preliminary
budget objective that identifies the level
and allocation of resources needed to
support the plan. 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 early summer of odd
numbered years develops a final budget
objective for consideration by the Board.
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 August of
the odd-numbered year.
The Board of Governors budgets
its activities across four operational
areas (described below). Costs for data
processing are charged as a direct
expense to each of the four areas,
according to actual usage at rates derived
from the cost of resources needed to
provide the services and agreed upon
before the budget year starts; expenses
for other elements of support and overhead are distributed among the operational areas in proportion to the share of
direct costs attributable to each area.
The Board, in accordance with generally accepted accounting principles,
capitalizes certain assets and depreciates
their value over appropriate periods

Introduction
instead of expensing them in their year
of purchase. Hence, the Board has both
an operating budget and a capital budget.
After it is approved by the Board, the
budget is converted to an operating plan
that allocates expenditures by month;
the operating plan is also the vehicle
for subsequent adjustments within the
budget. Also at this point, the cash
requirement for the first half of
the calendar year is estimated and the
amount is raised by an assessment on
each of the Reserve Banks in proportion
to its capital stock and surplus. The cash
requirement for the second half of each
year is estimated in June and another
assessment is made in July.
The Board accounts for extraordinary
items separately from the operations
budget so that unique, one-time requirements do not compete with regular
operations and so that expenses in those
operations can be readily compared
across years without distortion. As discussed more fully in chapter 2, the
extraordinary items budget for 1998–99
consists of funds to bring the Board’s
computing environment into compliance
with the century date change and support 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 proposed
budget apart from the Board’s budget.
The OIG presents its two-year budget
directly to the Chairman for action by
the Board of Governors, also at an open
meeting in November.

Reserve Banks
Each year the Federal Reserve Banks
establish major operating goals for the
coming year, devise strategies for their
attainment, estimate required resources,
and monitor results. The process begins

3

with development of a budget guideline.
The Board of Governors reviews the
proposed level of spending and communicates the budget objective to the
Reserve Banks for their guidance. Each
Bank then develops its own budget. The
budgets are reviewed at the Board by a
committee of three governors—the Committee on Federal Reserve Bank Affairs—
both as separate documents and in light
of Systemwide issues and the plans
of the other Banks, before they are
presented to the full Board of Governors
for final action at an open meeting in
December.
The Banks’ budgets are also structured
in four operational areas (described
below), with support and overhead
charged to these areas. Special projects
are approved separately from the operations budgets; these projects are longrange research and development efforts
that have the potential to make major
improvements in the nation’s payments mechanism or in the Federal
Reserve’s ability to provide services.
The Banks, in accordance with generally accepted accounting principles,
also capitalize certain assets and depreciate their value over appropriate periods instead of expensing them in their
year of purchase. Hence, the Banks
have a capital budget in addition to an
operating budget and a special projects
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 the four areas. PACS makes it
possible to compare budgets with actual
expenses and enables the Board of
Governors to compare the financial and

4

Annual Report: Budget Review, 1999

operating performances of the Reserve
Banks.

conduct longer-run economic studies
on regional, national, and international
issues.

Operational Areas

Supervision and Regulation

The Board of Governors and the Reserve
Banks account for their activities in four
major operational areas. Three of the
areas—monetary and economic policy,
supervision and regulation of financial
institutions, and services to financial
institutions and the public—are common to the Board and the Banks. The
Banks’ fourth operational area is services to the U.S. Treasury and other
government agencies, and the Board’s
fourth area is System policy direction
and oversight.

The Federal Reserve System plays a
major role in the supervision and regulation of banks and bank holding companies. The Board of Governors adopts
regulations to carry out statutory directives and establishes System supervisory
and regulatory policies; the Reserve
Banks conduct on-site examinations and
inspections of state member banks and
bank holding companies, review applications for mergers, acquisitions, and
changes in control from banks and bank
holding companies, and take formal
supervisory actions. In 1998 the Federal
Reserve conducted approximately 515
examinations of state member banks and
approximately 970 inspections and 2,640
risk assessments of bank holding companies, and it acted on 3,662 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 1998 the System
conducted 365 compliance examinations, of which 269 covered state
member banks and 96 covered foreign
banking organizations.
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.

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. These actions
include setting reserve requirements,
setting the discount rate (which affects
the cost of borrowing), and conducting
open market operations.
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. They also

Introduction

Services to Financial Institutions
and the Public
The Federal Reserve System plays a
central role in the nation’s payments
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 it 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 1998 the Reserve Banks received
$419.2 billion in currency and $4.3 billion in coin from depository institutions,
distributed $454 billion in currency and
$5.4 billion in coin, and destroyed
$94.9 billion in unfit currency.
The Reserve Banks (along with their
Branches and regional centers) also
process checks for collection—
approximately 17 billion commercial
checks in 1998, with a total value of
nearly $14 trillion.
The Federal Reserve also plays a
central role in the nation’s payment
mechanism through its wire funds
transfer system, Fedwire. Through
Fedwire, depository institutions can draw
on their deposit accounts at the Reserve
Banks and transfer funds anywhere
in the country. Approximately 8,300
depository institutions use Fedwire
through direct computer connections
with Reserve Banks, and another
1,740 institutions use Fedwire through
off-line means such as telephone. In
1998 approximately 98 million transfers
valued at about $329 trillion were sent
over Fedwire, an average of $3 million
per transfer and $1.3 trillion per day.
The Federal Reserve allows participants in private clearing arrangements to

5

exchange and settle transactions on a net
basis through deposit account balances.
Users of net settlement services include
check clearinghouse associations, automated clearinghouse (ACH) networks,
credit card processors, automated teller
machine networks, and national and
regional funds transfer networks.
During the first quarter of 1999, the
Reserve Banks will offer an enhanced
settlement service that will allow the
agents of private-sector clearing arrangements to submit files to a Reserve Bank
through a Fedline terminal or a computer
interface connection. Compared with the
current net settlement services, the new
service will improve operational efficiency and reduce settlement risk to
participants by granting finality on settlement day. It will also enable Reserve
Banks to manage and limit risk by
incorporating risk controls that are as
robust as those used currently in the
Fedwire funds transfer service. The
Reserve Banks will continue to offer the
current ‘‘settlement sheet’’ and Fedwirebased settlement services. The settlement sheet service will be phased out,
however, and all participating arrangements must complete their migration to
the enhanced service by year-end 2001.
Approximately 27,900 entities participate in the Federal Reserve’s ACH
service, which allows them to send
or receive payments electronically. The
institutions use the ACH service for
credit and debit transactions. In 1998 the
Reserve Banks processed approximately
3 billion ACH transactions valued at
about $12 trillion; approximately 20 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
securities and the collection of physical
(interest) coupons and miscellaneous
items. The book-entry service, begun in

6

Annual Report: Budget Review, 1999

1968, enables the holders of Treasury
and government agency securities to
transfer the securities electronically to
other institutions throughout the country.
In 1998 the Reserve Banks processed
approximately 14 million securities
transfers valued at $198 trillion. The
noncash collection service, through
which maturing coupons and bonds are
presented for collection, processed about
887,000 items in 1997 and about 755,000
items in 1998.

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 deposit accounts
at Reserve Banks, the government issues
checks, makes payments, and collects
receipts. The Reserve Banks also process transfers of funds over the Federal
Reserve’s Fedwire network, handle
automated clearinghouse payments, and
give the Treasury daily statements of
account activity. Reserve Banks bill the
Treasury and other government agencies
for the full cost of providing these
services; in 1998, reimbursement was
received or expected for most of the
expenses billed.
As fiscal agents, Reserve Banks
provide the Department of the Treasury
with services related to the federal debt.
For example, Reserve Banks issue,
transfer, reissue, exchange, and redeem
marketable Treasury securities and savings bonds; they also process, over
Fedwire, transfers of securities that are
initiated by depository institutions in the
secondary market. The Reserve Banks
operate two book-entry (computerbased) securities systems for the custody of Treasury securities—Fedwire
and Treasury Direct. Almost all book-

entry Treasury securities are maintained
on Fedwire, which also provides the
nation’s principal securities transfer
mechanism; the rest are maintained on
Treasury Direct.
As depositories of the U.S government, Reserve Banks collect and disburse
federal government funds. 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 electronic
payments on behalf of the Treasury. In
1998 the Treasury continued to encourage electronic payments and to reduce
payments made by check.
Depository institutions that are authorized to receive tax payments may either
place the collected funds in a Treasury
tax and loan (TT&L) account or remit
the funds directly to a Reserve Bank.
When a depository institution sends tax
payments to the Federal Reserve, the
Federal Reserve processes the payment
and credits the Treasury’s account. The
Federal Reserve holds collateral to
secure TT&L deposits.
The Reserve Banks also provide fiscal
agency and depository services to other
domestic and international government
agencies. Depending on the authority
under which the services are provided,
the Reserve Banks may maintain bookentry accounts of government agency
securities; provide custody for the stock
of unissued, definitive (paper) securities; maintain and update balances of
outstanding book-entry and definitive
securities for issuers; and maintain
funds accounts for government agencies. The Reserve Banks also provide
various payment services for government agencies, including the processing and disposal of redeemed food
coupons for the U.S. Department of
Agriculture.

Introduction

System Policy Direction and
Oversight
This operational area encompasses
activities by the Board of Governors

7

in supervising Board and Reserve Bank
programs. Expenses for these activities
are considered overhead expenses of the
System and are therefore allocated across
the other operational areas.

Part I
The Budgets

11

Chapter 1

Federal Reserve System
For 1999, the Federal Reserve System
has budgeted net operating expenses of
$1,205.9 million. Revenue from priced
services provided to depository institutions is expected to total $843.6 million,
or 35.8 percent of total budgeted operating expenses. The budget for total
operating expenses is $2,353.5 million,
an increase of 3.8 percent over estimated
1998 expenses. Of this total, $2,159.2
million is for the Reserve Banks and
$194.3 million is for the Board of Governors (tables 1.1 and 1.2).1
Not included in operational costs is
the cost of currency, budgeted at $500.1
million, an increase of 22.3 percent over
the 1998 estimated cost of $419.1 million.2 The distribution of expenses is
similar to that in previous years, with
the Reserve Banks accounting for
approximately three-fourths of the total
(chart 1.1).
System employment is budgeted at
24,949 for 1999, an increase of 276 from
the estimated 1998 level (details are
given in chapters 2 and 3).

reimbursement. When these items are
deducted from budgeted 1999 operating
expenses, the net expenses of the System
show an increase of 7.3 percent over
estimated 1998 net operating expenses
(table 1.1).
The increase in net expenses is
primarily due to expense growth in the
monetary policy function and the
supervision and regulation function relative to the priced service and Treasury
functions.
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 return on capital that
would have been earned had the services
been provided by a private business.
Table 1.3 provides details on projected
revenue from priced services; the
constraints imposed on Federal Reserve
budgets by the need to keep such
services competitive and the calculation
of fees are discussed in appendix A.

Net Expenses
The System expects to recover 48.8 percent of its budgeted 1999 operating
expenses through revenue from priced
services, other income, and claims for
1. The Board of Governors now budgets on a
two-year cycle (see chapter 2); in this chapter,
1999 values shown for the System and the Board
reflect the approximate second-year effect of the
Board’s 1998–99 budget.
2. The Federal Reserve bears the cost associated with the printing of new currency at the
Bureau of Engraving and Printing. Because this
cost is determined largely by public demand for
new currency, it is not included in Federal Reserve
operating expenses. See appendix A.

Chart 1.1
Distribution of Expenses of the
Federal Reserve System, 1999

Currency, 18%

Board of
Governors, 7%

Reserve Banks, 75%
Note. See text notes 1 and 2.

12

Annual Report: Budget Review, 1999

‘‘Other income’’ (table 1.1) comes
from services provided on behalf of
the U.S. Treasury that are paid for by the
depository institutions using the services; included are fees for such

services as the settlement of transfers among depository institutions and the wire transfer of funds
between depository institutions and
the Treasury.

Table 1.1
Operating Expenses of the Federal Reserve System Net of Receipts
and Claims for Reimbursement, 1997–99
Millions of dollars except as noted

Item

Total System operating expenses . . . . . . . . .
Less
Revenue from priced services . . . . . . . . . .
Other income 1 . . . . . . . . . . . . . . . . . . . . . . . .
Claims for reimbursement2 . . . . . . . . . . . . .
Equals
Net System operating expenses . . . . . . .

Percentage change

1997
actual

1998
estimate

1999
budget

2,172.2

2,266.9

2,353.5

4.4

3.8

818.8
5.6
223.7

839.2
5.7
298.3

843.6
5.6
298.4

2.5
1.8
33.3

.5
−1.8
.0

1,124.1

1,123.7

1,205.9

.0

7.3

Note. In this and subsequent tables in this volume,
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, and they exclude
capital outlays (as well as Reserve Bank special projects,
which are shown separately).

1997 to 1998 1998 to 1999

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

Table 1.2
Expenses of the Federal Reserve System for Operations, Special Projects,
and Currency, 1997–99
Millions of dollars except as noted
Percentage change

Entity and
type of expense

1997
actual

1998
estimate

1999
budget

Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors 2 . . . . . . . . . . . . . . . . . . . .
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . .

2,002.6
1,260.1
742.5
169.6
128.7
40.9

2,079.6
1,306.1
773.5
187.3
129.9
57.4

2,159.2
1,373.2
786.0
194.3
134.7
59.6

3.8
3.6
4.2
10.4
.9
40.3

3.8
5.1
1.6
3.7
3.7
3.8

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

2,172.2
1,388.8
783.4

2,266.9
1,436.0
830.9

2,353.5
1,507.9
845.6

4.4
3.4
6.1

3.8
5.0
1.8

1

1997 to 1998 1998 to 1999

Special projects . . . . . . . . . . . . . . . . . . . . . . . . . .

33.7

3.8

.0

−88.7

−100.0

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

367.0

409.1

500.1

11.5

22.3

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

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

Board of Governors
Table 1.3
Revenue from Priced Services, 1997–99
Millions of dollars

13

Chart 1.2
Operating Expenses of the
Federal Reserve System, 1989–99
Billions of dollars

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

1997
1998
1999
actual estimate budget

Current dollars
97.8
72.7
621.6

94.1
68.2
651.7

71.0
65.4
685.3

17.2
4.4
5.1

18.9
3.7
2.6

16.7
2.6
2.6

818.8

839.2

843.6

Claims for reimbursement are the
expenses Reserve Banks incur in providing fiscal agency services to the Treasury
and other government agencies for
which claims for reimbursement are
made.
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 1989 to budgeted 1999
amounts, the operating expenses of
the Federal Reserve System (excluding
special projects) have increased an
average of 5.0 percent per year (2.2 percent per year when adjusted for inflation) (chart 1.2); total System expenditures (including special projects) have
increased an average of 4.9 percent per
year. Over the same period, nondefense
discretionary spending by the federal
government has increased an average of
5.0 percent (chart 1.3). Federal Reserve
System employment, including staff
working on special projects and Federal
Reserve Information Technology, has
decreased 276 over the same period
(chart 1.4).
From 1982, when the transition to the
requirements of the Monetary Control

2.0
1992 dollars

1

1.6

1989

1994

1999

Note. For 1998, estimate; for 1999, budget (see also
text note 1).
1. Calculated with the GDP price deflator.

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 the 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
Chart 1.3
Cumulative Change in Federal Reserve
System Expenses and Federal Government
Expenses, 1989–99
Percent

80
60

Federal government

40
20
+
0
–

Federal Reserve

1989

1994

1999

Note. Federal Reserve System expenses are operating
expenses plus the cost of special projects; federal
government expenses are discretionary spending less
expenditures on defense. See also general note to
chart 1.2.

14

Annual Report: Budget Review, 1999

Chart 1.4
Employment in the
Federal Reserve System, 1989–99
Thousands of persons

26
25
24

1989

1994

1999

Note. Includes Federal Reserve Information Technology staff. See also general note to chart 1.2.

financial institutions and the public and
in the support and overhead service
lines.

The Expedited Funds Availability
Act, which requires the Federal Reserve
to issue regulations to ensure the prompt
availability of funds and the expeditious
return of checks, became effective in
1988. Increases in staff throughout the
System in 1988 and 1989 resulted from
implementation of the provisions of this
legislation. From 1991 through 1998,
spending on bank supervision was
expanded to meet the increase in the
number and complexity of examinations, the greater attention to problem institutions, and the requirements
of 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

Table 1.4
Operating Expenses of the Federal Reserve System, by Operational Area, 1997–99
Millions of dollars except as noted
Operational area
and entity

1997
actual

1998
estimate

1999
budget

Percentage change
1997 to 1998 1998 to 1999

Monetary and economic policy . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors . . . . . . . . . . . . . . . . . . .

231.2
144.1
87.1

252.2
153.6
98.6

269.4
167.1
102.3

9.1
6.6
13.2

6.8
8.8
3.8

Services to the U.S. Treasury and
other government agencies 1 . . . . . . . . .

207.1

223.3

222.7

7.8

−.3

Services to financial institutions
and the public . . . . . . . . . . . . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors . . . . . . . . . . . . . . . . . . .

1,219.5
1,215.1
4.4

1,255.0
1,250.6
4.4

1,297.0
1,292.5
4.5

2.9
2.9
.0

3.4
3.4
2.3

Supervision and regulation . . . . . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors . . . . . . . . . . . . . . . . . . .

514.5
436.4
78.1

536.5
452.2
84.3

564.4
476.9
87.5

4.3
3.6
7.9

5.2
5.5
3.8

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Banks . . . . . . . . . . . . . . . . . . . . . . .
Board of Governors 2 . . . . . . . . . . . . . . . . .

2,172.2
2,002.6
169.6

2,266.9
2,079.6
187.3

2,353.5
2,159.2
194.3

4.4
3.8
10.4

3.8
3.8
3.7

Note. Operating expenses reflect all redistributions
for support and allocations for overhead, and they exclude
capital outlays and special projects. The operational area
unique to the Board of Governors, System policy
direction and oversight, which is shown separately in
chapter 2, has been allocated across the operational areas
listed here. As a result, the numbers for the operational

areas in chapter 2 are not the same as the numbers shown
in this table.
1. Reserve Banks only; the Board of Governors does
not provide these services.
2. Includes expenses of the Office of Inspector General
and extraordinary items. See also text note 1.

Board of Governors
operational areas, mainly in services
to the U.S. Treasury and in services
to financial institutions and the public.
Staffing for 1999 is projected to increase
slightly primarily because of volume
increases in the operational areas and
continued automation initiatives.

Operational Areas
The expenses of the Federal Reserve are
classified according to the four major
operational areas of the System
(table 1.4). The costs of support and
overhead (including Board expenditures
for System policy direction and oversight, considered an overhead expense
of the System) are redistributed or allocated to these four areas.

1999 Budget Initiatives
Several major initiatives that affect
System budgets will continue or begin
in 1999:

15

• Century date change compliance (see
chapter 4)
• Installation of equipment and software
to support the image processing and
archiving of commercial and Treasury
checks
• Research and development efforts for
retail payment initiatives
• Facilities repair and maintenance.
Partly offsetting the greater expenditures associated with these initiatives are
the lower costs made possible by several
reengineering initiatives and programs
to increase efficiency in Federal Reserve
operations. In addition, an accounting
change to capitalize software developed
for internal use will result in a one-time
expense reduction of $18.1 million
in 1999; these costs were previously
charged to current expenses.

17

Chapter 2

Board of Governors
As noted in the introduction to this
volume, the 1998–99 budget for the
Board of Governors is the first to cover
two years (calendar years 1998 and
1999). During 1998, the first year of the
new process, only minor reallocations
were made within the approved 1998–99
operations budget, as follows: The capital
budget was increased $7.0 million, and
an additional $1.4 million was transferred
from other sources, for necessary infrastructure enhancements to the facilities
that were in the planning stages when
the budget was first prepared. Also,
$7.6 million was added to the extraordinary items budget to support significant
growth in workload and higher costs
for contract labor associated with the
Board’s century date change (CDC)
compliance program.
The 1998–99 budget for the Board of
Governors, approved in 1997, provides
$352.3 million for operations, $23.0 million for extraordinary items (projects
of a unique nature), and $6.4 million
for the Office of Inspector General. The
Board has authorized 1,711 staff positions for operational areas and 29
positions for the Office of Inspector
General; no positions are required for
the extraordinary items. The total, 1,740
positions, is a decrease of 40 from the
number authorized at the end of 1997.
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. The
budget of the Office of Inspector General is prepared separately in keeping
with the independence of the office.

Overview of the Board’s Budget
In the course of the following discussion, the 1998–99 budget is compared
with the immediately preceding ‘‘twoyear actuals,’’ which are the sum of final
expenses for 1996 and 1997.
Average annual changes in operating
expenses are also presented to allow
comparisons with earlier (annual)
budgets and expenses. It is important to
understand that the Board budget covers
two-years; it is not two one-year budgets.
Thus, the figures in the charts for 1998
and 1999 expenses are estimates of the
portion of the two-year budget that will
be spent in each year.
Because of the changes in the budgets
for capital expenditures and extraordinary items and the fact that the 1997
initial budget figures were used in last
year’s report (Annual Report: Budget
Review: 1998–99), the comparisons
given here of 1996–97 expenses with
the 1998–99 budget usually differ from
those in last year’s report.

Board Operations
The $352.3 million operations budget
covers the Board’s four operational
areas (described in the introduction to
this volume) for calendar years 1998
and 1999; it is 8.4 percent ($27.4 million) greater than the 1996–97 actuals.1
The average annual change in expenses
for the two-year period is 4.1 percent.

1. An accounting change that took effect in
1998 is responsible for $4.9 million, or 1.5 percentage points, of this increase. The threshold for
capitalizing assets increased from $1,000 to
$5,000 on January 1, 1998.

18

Annual Report: Budget Review, 1999

The 1998–99 budget reflects major
changes to support the plans developed
in 1997 as part of a revised planning
process. The $27.4 million net increase
in the budget relative to the two-year
actuals is a result of $40.4 million in
higher costs less $13.0 million in savings. The increases arise from $12.8 million in merit pay increases and $1.7 million in other salary increases and over
the two years; investments in programs
and automation amounting to $11.3 million; $9.8 million in costs resulting from
policy decisions in 1996 and 1997 and a
1998 accounting change; and $4.7 million from increases in insurance premiums and other costs paid on behalf of
employees and from higher prices for
goods and services. The $13.0 million
in savings came from reductions in
programs of $11.4 million plus administrative actions to reduce the cost of
benefits by $1.6 million.
The $12.8 million for merit salary
raises is the largest component of the
budget increase for 1998–99; the
raises, which reflect the market for
skills required by the Board, average
3.8 percent in 1998 and 4.2 percent in
1999.
Policy changes adopted in 1996 and
1997 account for $4.9 million of increased spending in 1998–99. The new
policies consist of a change in the
method of funding the Federal Reserve
System’s Office of Employee Benefits;
an expanded cash award program to
recognize excellent performance by
individual employees; revised System
accounting for communication costs
under Federal Reserve Automation
Services; funding for recruitment and
training of a small number of welfare
recipients to prepare them for employment at the Federal Reserve; a change in
the Board’s accounting policy that raised
the threshold for capital purchases from
$1,000 to $5,000; and an increase in the

scope and frequency of the external
audits of the Reserve Banks.
The $4.7 million increase associated
with benefits and inflation consist of rate
increases for federal health and life
insurance and other standard benefits
plus a higher wage base for the social
security tax; and a 2.7 percent price
increase for goods and services as
projected in the federal budget.

Extraordinary Items
In the past, certain periodic or one-time
expenses produced undue volatility in
the Board’s budget, creating competition for funds to carry out the Board’s
basic mission. To address this problem,
funding for such ‘‘extraordinary items’’
has, for the past several years, been set
apart from the Board’s operating budget.
For 1998–99, $15.7 million in operating
funds2 and $3.1 million in capital have
been budgeted for work on software to
ensure its operation after the century
date change, and $7.3 million has been
budgeted for two major economic
surveys. Details on these projects appear
at the end of the chapter.

Office of Inspector General
The 1998–99 budget of $6.4 million for
the Office of Inspector General (OIG)
represents an average annual increase of
3.6 percent over the OIG’s combined
1996 and 1997 actual expenses of
$6.0 million. The budget for the OIG is
prepared in a manner that is administratively consistent with the preparation of
the Board’s operating budget. However,
in conformance with the statutory
independence of the office, the OIG
presents its budget directly to the Chair2. Increased from $8.1 million because of
changes in reporting and testing requirements
made after the budget was approved.

Board of Governors
man of the Board of Governors for
consideration by the Board.

Reductions in the Cost
of Programs
During the planning process, the Committee on Board Affairs asked each
division director to look for ways to
improve efficiency (that is, generate
savings and eliminate lower-priority
work without reducing the effectiveness
of operations). Ultimately, in conjunction with the Voluntary Retirement
Incentive Program, directors identified
program reductions worth $11.4 million
over the 1998–99 budget period.3

Monetary Policy
Reductions in the monetary policy function amounted to $0.6 million and
twelve positions, six of which were for
summer interns. The savings resulted
from rearranging tasks to reduce clerical requirements, efforts to improve
the capture and distribution of data on
financial futures and options, and filling
positions vacated by the retirement
incentive program at lower salary levels.

Supervision and Regulation
Reductions in the supervision and regulation function were more substantial and
reflect improvements in the health of the
financial industry.
Reorganization of the Division of
Banking Supervision and Regulation
reduced expenses by $1.0 million and
eliminated twelve positions (ten of them
in late 1997). The restructuring realigns
3. The Voluntary Retirement Incentive Program
offered employees already eligible to retire a
financial incentive to move up their retirement
date. Approximately 100 employees accepted the
offer.

19

and simplifies the division’s major line
functions and improves coordination
and consistency, particularly with respect
to large interstate and foreign organizations. The reorganization also improves
the use of automation and information
technology and changes the management structure to improve the development of supervisory policies and
procedures.
The Legal Division was able to
eliminate three positions and reduce
expenses by $0.4 million because of
reductions in workload associated with
the health of the industry. Finally, the
Regulatory Planning and Review Section in the Office of the Secretary was
abolished; absorbing its work in the line
divisions eliminated five positions and
saved $0.5 million.

System Policy Direction
and Oversight
The budget for the System policy
direction and oversight function reflects
the elimination of five positions and a
savings of $1.1 million. In the Division
of Reserve Bank Operations and Payment Systems, the financial examination and automation management areas
shifted to the use of outside auditors and
consolidated the information systems
staff with the information technology
staff. These actions reduced authorized
staffing by three positions and costs by
$0.4 million. The remaining $0.7 million in savings arose from the consolidation of EEO activities, which eliminated
two positions, and from the replacement, at lower salary levels, of staff
members accepting the retirement
incentive.

Other Savings
Program changes that eliminated activity or revised procedures resulted in

20

Annual Report: Budget Review, 1999

division-specific reallocations (discussed
below under ‘‘Program Requests’’)
amounting to $5 million. Additional
management actions to adjust program
activities reduced administrative costs
and yielded gains in efficiency that
account for the remainder of the
$11.4 million in program savings.
Among the management actions were
the elimination of fourteen positions and
$2.4 million of expense by merging the
Office of the Controller with the Division of Human Resources Management
and steps taken in the Division of
Support Services to streamline procedures, implement new automation, and
reduce some services. Miscellaneous
efforts in other divisions to gain efficiencies yielded another $0.4 million in
savings.

Current Issues
A number of efficiency issues raised in
the budget process are still under review.
The more significant of these concern
the philosophy of the Board’s oversight
of the Reserve Banks, the flow of
information from the Board to the public, the advisory group structure, data
collection initiatives, and the Board’s
use of automated data sources. As the
reviews are completed, any changes in
funding that arise will be incorporated in
the budget.

Program Requests
During the planning process, division
directors identified approximately
$16.0 million in opportunities for new or
expanded programs. The Committee on
Board Affairs found most of these to be
worthwhile but did not fund approximately $4.7 million of the requests. Of
the remaining $11.3 million in requested
activities, the Board followed the Budget
Committee’s recommendation in pro-

viding new funding in the amount of
$6.3 million and encouraging division
directors to indirectly fund the remaining $5 million in requested activities
through reallocations from lowerpriority areas and savings.

Reallocations
For research on the domestic economy
(primarily in the Division of Research
and Statistics and the Division of Monetary Affairs), resources were reallocated
to enhance the efficacy of policy rules,
manage the transition to a new data
system for monetary aggregates, study
competitive forces in banking markets,
improve coordination of changes in the
implementation of interest rates, analyze
the mutual funds industry, better utilize
financial market data, and study explicit
inflation targets and loan and deposit
rates.
For research on the international
economy (primarily the Division of
International Finance), resources were
transferred to better understand the
opportunities and risks of the continuing globalization of the U.S. economy,
increase analysis of financial linkages,
and upgrade country analyses (including
additional attention to Asia).
The Division of Reserve Bank Operations and Payment Systems reallocated
funds to expand efforts to ensure the
safety and efficiency of the payments
system; these efforts include the study of
potentially useful regulatory or policy
changes and the examination of electronic money issues, multicurrency
clearinghouses and settlement services,
and new net settlement services for retail
payment systems.
Management in the Division of
Consumer and Community Affairs
redirected some resources to data
systems to better handle the high volume
of requests for interpretive information

Board of Governors
arising from revisions to the Community
Reinvestment Act. Other responsibilities, such as unifying the regulations
implementing the Truth in Lending Act
and the Real Estate Settlement Procedures Act will be met by expanding the
involvement of Reserve Bank personnel.
Should such resources not be available, the division may have difficulty in
accomplishing the regulatory unification.

New Funding
The Board approved the Budget Committee’s recommendations for $6.3 million in additional funding for programs.4
The majority of the funds, $4.1 million,
are for Boardwide automation activities
that contribute to the standardization of
automation tools throughout the System
and that advance the ability of the staff
to quickly manipulate large quantities of
data.
In addition, $1.0 million was provided
in the monetary policy function; most of
it, $0.7 million, is for data to improve
the measurement of prices, output, productivity, and aggregate resource utilization. The remainder was for four positions to further study the process of
inflation and assess whether developments in the labor and product markets
have altered it.
To assist the Division of Banking
Supervision and Regulation in operating
effectively with a smaller staff in a
rapidly changing environment, $0.3 million was allocated for improved training
of division staff, additional domestic and
4. Recent amendments to the Freedom of
Information Act became effective at various times
during 1997, most recently in November of that
year. The amendments require agencies to provide
electronic access to information without limiting
other forms of access. Additional resources may
be required to comply with the amendments, but
the resource implications were not fully known at
the time the budget was completed.

21

international travel for division business
generally, and additional travel to assist
in the training of foreign supervisors.
Investments in facilities and equipment of $0.8 million are intended to
maintain the quality of work life and
improve productivity in various Board
operations; productivity improvements
include advances in electronic printing
and the preparation of electronic manuals available to System staff and financial institutions. Minor investments
account for the $0.1 million remainder
of the $6.3 million total.

Requests Not Recommended
The remainder of the $16.0 million in
requested increases, approximately
$4.7 million, were recommended neither
for funding nor for reallocations. Among
these were program requests that the
Budget Committee found to be of
interest; most of them were offered for
longer-term consideration rather than
immediate implementation. Automation
and facilities projects were also among
the requests that were not recommended. The Boardwide plan to increase
bandwidth to employees’ desktop computers by installing fiber optic cable
was delayed until the infrastructure
improvements in the Board building are
accomplished beginning in mid-1999.
Requests for upgrades and replacements
for furniture and equipment, including a
plan to replace in all offices the furniture
that accommodates computers and their
peripheral devices, were deferred.

The Operations Budget
Presented here are the Board’s operating
expenses and authorized positions for
1998–99 in comparison to those for
1996–97. Expenses and authorized positions by organizational unit appear in
tables 2.1 and 2.2. Discussed below

22

Annual Report: Budget Review, 1999

are expenses by account classification (table 2.3) and operational area
(table 2.4) and the number of authorized
positions by operational area (table 2.5).

By Account Classification
The largest dollar increase in the
1998–99 budget by account classification is in personnel costs (table 2.3). The
total cost of personnel (which consists
of salaries, retirement, and insurance)
increased $11.1 million, or 2.2 percent,
over the 1996–97 actuals; projected
salary increases more than offset declines

from lower staffing and from administrative actions to reduce health insurance
costs.
For goods and services, the increase
of $16.3 million, or 10.1 percent, came
from furniture and equipment because
of an accounting change, software investments to improve standardization and
ensure year 2000 compliance, higher
telecommunications costs associated
with an accounting change, and investments in training. Higher costs for contractual professional services were offset
by added income from reimbursement
for those services.

Table 2.1
Operating Expenses of the Board of Governors, by Division, Office,
or Special Account, 1996–97 to 1998–99
Thousands of dollars except as noted
Division, office,
or special account

1996–97
actual1

1998–99
budget

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 . . . . . . . . . . . . . .
Controller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Human Resources Management . . . . . . . . . . . . .
Support Services . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Resources Management (IRM) . .
IRM income account 2 . . . . . . . . . . . . . . . . . . . . . .
Publications Committee . . . . . . . . . . . . . . . . . . . . .
Special projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,544
8,602
52,160
19,727
17,238
49,733
13,424
15,931

Change
Amount

Percent

8,873
8,443
57,052
20,788
18,530
55,143
14,995
17,101

328
−159
4,892
1,061
1,293
5,410
1,571
1,170

3.8
−1.8
9.4
5.4
7.5
10.9
11.7
7.3

27,148
4,406
6,578
10,364
57,029
56,827
−32,332
−181
9,654

29,973
2,252
6,925
9,240
57,945
74,501
−45,210
2,951
12,751

2,824
−2,154
347
−1,124
916
17,671
−12,878
3,132
3,097

10.4
−48.9
5.3
−10.8
1.6
31.1
−39.8
−1,727.2
32.1

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

324,853

352,255

27,402

8.4 3

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

4,196
5,975

23,010
6,419

. . .
443

. . .
7.4 3

Note. Operating expenses reflect all redistributions
for support and allocations for overhead, and they exclude
capital outlays.
The budget was approved as shown above. Effective
January 1, 1998, the Office of the Controller, the Division
of Human Resources Management, the Equal Employment Opportunity Program in the Office of the Staff
Director for Management, and the Procurement Sec-

tion of the Division of Support Services were combined in
a new Management Division.
1. The sum of actual expenses in 1996 and 1997.
2. Income from various Board divisions for use of
central IRM resources.
3. Average annual percentage change from 1997 to
1999 is 4.1 for Board operations and 3.6 for the Office of
Inspector General.
. . . Not applicable.

Board of Governors

23

By Operational Area

Monetary and Economic Policy

The Board’s budget supports four major
functions: monetary and economic policy, supervision and regulation, services
to financial institutions and the public, and System policy direction and
oversight. Expense data for the four
operational areas include overhead and
support costs. Factors affecting all
operational areas—including the largest
one, merit pay and benefits—have
already been discussed. Detailed below
are the major factors affecting cost
changes that are unique to each function
(tables 2.4 and 2.5).

The 1998–99 budget for the monetary
and economic policy function is
$152.0 million, an increase of $15.5 million, or 11.4 percent (5.5 percent annually), from 1996–97. Activities in this
area relate to the Board’s role in the
management of the nation’s monetary
policy; they include monitoring and
analysis of developments in the money
and credit markets, setting of reserve
requirements, and approval of changes
in the discount rate.
The increase in this function is
primarily the result of investments in

Table 2.2
Positions Authorized at the Board of Governors, by Division, Office,
or Special Account, 1997 to 1998–99
Division, office,
or special account

1996–97
base 1

1998–99
budget

Change

Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and Statistics . . . . . . . . . . . . . . . . . . . . . . . . .
International Finance . . . . . . . . . . . . . . . . . . . . . . . . . .
Monetary Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking Supervision and Regulation . . . . . . . . . . . .
Consumer and Community Affairs . . . . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve Bank Operations and
Payment Systems . . . . . . . . . . . . . . . . . . . . . . . . .
Staff Director for Management . . . . . . . . . . . . . . . . .
Controller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Human Resources Management . . . . . . . . . . . . . . . .
Concern 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Support Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Resources Management (IRM) . . . . .
Special projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42
62
275
113
66
225
71
87

39
54
273
109
64
223
71
84

−3
−8
−2
−4
−2
−2
0
−3

125
7
35
44
31
263
279
1

129
19
31
32
31
247
279
1

4
12
−4
−12
0
−16
0
0

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

1,726

1,686 2

−40

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

25

25

0

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

1,751

1,711

−40

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

32

29

−3

Reimbursable IRM support

3

Note. See general note to table 2.1 regarding creation
of a Management Division effective January 1, 1998.
1. EEO summer intern and youth positions managed
by the Division of Human Resources Management.
2. Includes 20 temporary (two-year) positions that will
be abolished by year-end 1999.

3. Positions that provide IRM support to the Federal
Financial Institutions Examination Council for processing
data collected under the Home Mortgage Disclosure
Act and the Community Reinvestment Act.

24

Annual Report: Budget Review, 1999

Table 2.3
Operating Expenses of the Board of Governors, by Account Classification,
1988–89 to 1998–99
Thousands of dollars except as noted
Account classification

1988–89

1990–91

1992–93

1994–95

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

117,432
7,328
8,116
132,876

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

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

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

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

6,489
2,226
3,114
2,200
−764
1,467
5,017
1,211
474
1,087
3,170
1,893

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

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

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

3,906
142
6,482
1,077
1,110
14,269
−2,228
52,343

3,734
327
5,355
1,273
1,168
11,489
−4,635
47,986

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

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

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

185,219

212,208

259,113

291,967

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

0
139

0
227

0
780

0
239

automation, taking on some responsibilities for the Regulatory Planning and
Review activities formerly housed in the
supervision and regulation function, and
a small addition to staff to study causes
of inflation and better analyze the
resulting data. These costs offset savings
from more efficient deployment of staff
members who are analyzing monetary
aggregates and from reductions of
temporary resources that had been
budgeted for international economic
analyses.
Supervision and Regulation
The 1998–99 budget for the supervision
and regulation function is $129.9 mil-

lion, an increase of $7.8 million, or
6.4 percent (3.2 percent annually), from
1996–97. Supervision includes review
of the Reserve Banks’ examination
reports on state member banks and of
their inspection reports on bank holding
companies, special studies related to
international applications, the direction
of enforcement actions, and oversight of
trust activities. Regulation includes the
formulation of regulations, oversight of
mergers and foreign banking activities,
enforcement of consumer protection
regulations, and the regulation of securities credit.
The rate of increase in this area is less
than that for the Board as a whole. The
lower rate reflects the elimination of

Board of Governors

25

Table 2.3
Continued
Thousands of dollars except as noted

Account classification

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

1996–97
actual

1998–99
budget

Average annual change
(percent)
1997–99

1989–99

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

226,012
19,089
14,244
259,345

3.5
2.9
−13.9
2.2

6.81
10.0
5.8
6.9

Goods and services
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postal and other package delivery . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

10,236
2,455
5,334
2,573
2,947
2,061
10,471
8,015
8,616
2,061
4,255
3,315

4.4
4.2
10.5
−4.6
7.6
8.3
15.4
76.7
−.2
4.0
3.2
5.2

4.7
1.0
5.5
1.6 1
. . .1
3.5 1
7.6
20.82
33.71
6.6
3.0
5.8

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

3,597
0
29,089
3,225
1,418
20,625
−27,385
92,910

4.6
. . .
22.3
18.1
4.5
8.0
21.7
10.1

−.8
. . .
16.2
11.6
2.5
3.8
28.5
5.9

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

324,853

352,254

4.1

6.6

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

4,196
5,975

23,010
6,419

. . .
3.6

. . .
46.7

1. Accounting for income in performance reports
changed during the period. Until 1991, income was netted
against expenses in the appropriate cost center and
program; since then, income has been captured in the ‘‘all
other’’ account. The change has had only a minor effect
on the 1989–99 percentage change in the accounts for
salaries, printing and binding, and stationary and supplies,
but in the accounts for publications and rentals, it has
made a measurement of the 1989–99 change meaningless.

2. Beginning in 1998 the threshold expenditure for
capitalizing and depreciating a purchase rather than
expensing it rose from $1,000 to $5,000. The data for
1996–97 have been adjusted, but accurate adjustments for
earlier years are not possible.
. . . Not applicable.

twelve positions in the Division of
Banking Supervision and Regulation
(ten in late 1997 and two in 1998) and
three in the Legal Division, all of which
were permitted by the healthy state of
the financial industry. Changes to the
Regulatory Planning and Review function mentioned above also affected the

rate of increase. The budget provides
for additional computer hardware and
software to help offset the effect of the
position reductions; greater spending on
information technology is also directed
at the workstation project to improve
efficiency in supervising foreign banking organizations.

26

Annual Report: Budget Review, 1999

Services to Financial Institutions and
the Public

or 1.4 percent, from 1996–97. This
function covers the Board’s oversight
and control with regard to services
provided by the Reserve Banks and
Branches for check payments; for
electronic payments; and for the handling

The 1998–99 budget for services to
financial institutions and the public is
$6.8 million, a decrease of $0.1 million,

Table 2.4
Expenses of the Board of Governors for Operational Areas,
Extraordinary Items, and Office of Inspector General,
1996–97 to 1998–99
Thousands of dollars except as noted
1996–97
actual

1998–99
budget

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

136,450
122,121

Operational area

Change
Amount

Percent

151,955
129,894

15,505
7,773

11.4
6.4

6,884
59,400

6,787
63,619

−97
4,219

−1.4
7.1

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

324,855

352,255

27,400

8.4 1

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

4,196
5,975

23,010
6,419

. . .
444

. . .
7.4 1

Note. Operating expenses reflect all redistributions
for support and allocations for overhead, and they exclude
capital outlays.

1. Average annual percentage change from 1997 to
1999 is 4.1 for Board operations and 3.6 for the Office of
Inspector General.
. . . Not applicable.

Table 2.5
Positions Authorized at the Board of Governors for Operational Areas,
Support and Overhead, and Office of Inspector General, 1996–99
1996–97
actual

Activity

1998–99
budget

Change

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

434
379
22
160

426
374
22
173

−8
−5
0
13

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

731

691

−40

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

1,726

1,686

−40

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

25

25

0

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

1,751

1,711

−40

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

32

29

−3

Reimbursable IRM support

2

1. Includes 17 youth positions, 11 summer intern
positions, and 20 temporary (two-year) positions that will
be abolished by year-end 1999.

2. Positions that provide IRM 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
of currency, coin, and food coupons.
The 1997 completion of automation
projects is the primary cause of the
decrease in this operational area.

Chart 2.2
Expenses for Personnel Services
at the Board of Governors, 1988–99
Millions of dollars

System Policy Direction and Oversight
The 1998–99 budget for System policy
direction and oversight is $63.6 million,
an increase of $4.2 million, or 7.1 percent (3.5 percent annually), from 1996–
97. This operational area covers oversight, direction, and supervision of
System and Board programs, including
the work of Board members in overseeing Reserve Bank operations; budgeting
and accounting; financial examinations;
Chart 2.1
Operating Expenses of the
Board of Governors, 1988–99
Millions of dollars

175
Current dollars

150

27

125

Current dollars

100

1992 dollars

75

1988

1994

1999

Note. See notes to chart 2.1.

audit and operations reviews; and automation and communications.
The rate of increase in this operational
area is less than that for the Board as a
whole. The rate was held down by a
reduction in the program for the internal
examination of Reserve Banks in favor
of outside audits of the Banks. To ensure
their independence, the audits were
budgeted in this operational area.

1992 dollars 1

125
100

1988

1994

1999

The Capital Budget
The Board’s 1998–99 capital budget is
$20.0 million,5 an increase of $2.9 million, or 17.0 percent, from the 1996–97

Millions of dollars
Year

1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

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

Current dollars

1992 dollars 1

89.9
95.3
102.4
109.8
122.8
136.3
140.7
151.2
162.7
163.3
173.2
179.0

104.7
106.5
110.0
113.0
122.8
132.8
134.0
140.5
148.0
145.0
149.9
151.0

Note. Excludes the Office of Inspector General and
extraordinary items. The values for 1998 and 1999 are the
approximate calendar-year effects of the two-year budget.
1. Calculated with the GDP price deflator.

Chart 2.3
Expenses for Goods and Services
at the Board of Governors, 1988–99
Millions of dollars

45
Current dollars
1992 dollars

30
15

1988

1994

Note. See notes to chart 2.1.

1999

28

Annual Report: Budget Review, 1999

Chart 2.4
Annual Change in Operating Expenses
of the Board of Governors, 1988–99
Percent

12
9
6
3

1988

1994

1999

and regulation function and to aggressive steps to streamline operations and
reduce costs.
Approximately 73.6 percent of Board
operating expenses is for personnel
(salaries, retirement, and insurance benefits); consequently, any discussion of
expense trends involves trends in staffing. Over the ten years between 1989
and 1999, the number of authorized
positions at the Board has increased by
152 (a total of 9.7 percent), from 1,559
to 1,711. Most of the increase—107
positions—was in the supervision and

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

actuals. The budgeted amount provides
for improvements in office automation
and the automation infrastructure;
security; and other facility elements.
The capital budget also funds design
work for major repairs to the facility
infrastructure and the first phase of the
repairs.

Chart 2.5
Employment and Authorized Positions
at the Board of Governors, 1988–99
Thousands
Authorized positions

1.7
1.6
Employment

Trends in Expenses and
Employment
The 1998–99 budget increased 4.1 percent on an annual basis. In comparison,
1997 budgeted expenses were 2.5 percent higher than 1996 actual expenses.
The increase from 2.5 percent to
4.1 percent is largely the result of salary
increases, which rose from 3.0 percent
for 1997 to 3.8 percent for 1998. The
4.1 percent average annual increase in
operations expenses between 1996–97
and 1998–99 is, however, significantly
less than the 6.6 percent average annual
rise over the ten years from 1988–89
to 1998–99 (table 2.3). The slower rate
of increase is largely attributable to
moderating growth in the supervision
5. Includes $7.0 million, added in mid-1998,
for the first phase of the Eccles Building
Infrastructure Enhancement Project.

1.5

1988

1994
Year

1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

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

1999

Employment

Authorized
positions

1,484
1,477
1,505
1,517
1,563
1,636
1,635
1,644
1,686
1,638
1,650
1,650

1,534
1,533
1,529
1,542
1,639
1,664
1,664
1,665
1,712
1,713
1,680
1,680

Note. Year-end data. Excludes summer intern and
youth positions as well as positions for the Office of
Inspector General. For 1998–99 these positions number
31 and 29 respectively; figures for 1993–97 also include
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.

Board of Governors
regulation function. The decrease of
40 positions between 1997 and the
1998–99 budget is the result of automation investments, adjustments to programs and services, streamlining and
mergers affecting administrative functions, and careful reviews by division
directors of the resources needed to
support each function.
Early in the 1989–99 period, the
number of positions at the Board hit a
low—1,529 in 1990. From 1990 to 1995
the number of authorized positions rose
to meet an increasing workload driven
in large part by expanded statutory
responsibilities and requirements. Passage of legislation emphasizing safety
and soundness, regulation, and consumer
issues significantly increased staffing
requirements in these areas. The increase
in positions over the past several years
has been moderate. The advent of the
century date change problem caused a
temporary increase of 20 positions,
which began in 1997 and will be
reversed by 2001 once Board systems
are compliant and work deferred to
provide additional resources for the
CDC effort has been completed. As
discussed earlier 40 positions were
eliminated as part of the 1998–99
budget.
While the number of positions at the
Board has fluctuated during the ten-year
period, the salary budget (not including
retirement and insurance benefits) has
remained relatively stable at roughly
65 percent of operating expenses. The
portion of operating expenses devoted to
retirement and insurance has increased
as a result of increases in health insurance costs, a change in the law to apply
Medicare costs to federal employees, a
growing proportion of Board employees
covered by OASDI (social security),
and increases in the Board contribution
rate for the employee thrift plan. The
increases were partially offset by factors

29

eliminating the necessity for contribution to the Board retirement plan and the
transfer of most employees in the Civil
Service Retirement Plan to the Board
Retirement Plan. Actions to reduce the
rate of increase in insurance costs have
been successful, and the Board terminated its insurance program in late 1998
in favor of the Federal Employees
Health Benefits Program.

Extraordinary Items
The 1998–99 budget for extraordinary
items, summarized at the outset of the
chapter, includes $15.7 million in operating funds and $3.1 million in capital to
bring the Board’s software into compliance with the century date change. The
Federal Reserve accelerated work on it’s
century date change project in 1997 in
order to complete all critical systems by
year-end 1998. The largest cost is for
labor, particularly contractor support.
Some of the labor will be provided
through reallocations from lowerpriority work. Associated hardware costs
are for test environments that will parallel the production environments. The
Board is sharing mainframe resources
with Federal Reserve Automation Services where possible.
The budget for extraordinary items
also provides $4.3 million to conduct a
Survey of Consumer Finances (SCF) in
1998. The SCF is designed to gather
data from households on their income,
assets, debts, pensions, employment, use
of financial services, and other characteristics. The survey, which is part of a
series begun in 1983, provides the only
representative microlevel data for the
United States on the structure of household finances and household uses of
financial services, and the results are
often used by the Federal Reserve in
responding to requests from the Congress
and federal agencies. The surveys are

30

Annual Report: Budget Review, 1999

used in long-term research to support
the Board’s objectives as well as in
policy analyses relating to consumer
debt, the ‘‘unbanked’’ public, the effects
of large price movements in the stock
market, and projections of household
data by income groups.
Last, the extraordinary-items budget
provides $3.0 million for the National
Survey of Small Business Finances
(NSSBF). The survey gathers data from
small businesses on their financial
relationships, credit experiences, lending terms and conditions, income, balance sheets, location and types of
financial institutions used, and other
characteristics. Similar surveys were
conducted in 1987 and 1993. The new

survey will be conducted in 1999 for
data as of year-end 1998. The NSSBF
provides the only substantial financial
services information regarding the scope
of geographic and product markets for
small businesses. The survey is used in
analyzing the competitive effect of bank
mergers, benchmarking of other data
series (such as the noncorporate sector
of the flow of funds accounts), as input
to the quinquennial small business report
mandated by section 227 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, and for
research and policy analyses of a wide
variety of issues in small business
finances.

31

Chapter 3

Federal Reserve Banks
The 1999 operating budgets approved
by the Board of Governors for the
twelve Reserve Banks total $2,159.2
million, an increase of $75.8 million,
or 3.6 percent, over 1998 expenditures
(table 3.1). The 1999 budgets include no
special projects.
Employment, including the staff associated with FRIT (Federal Reserve
Information Technology), is budgeted
at 23,271 ANP (average number of
personnel), an increase of 276 ANP,
or 1.2 percent, from estimated 1998
employment.1 Reserve Bank employment is expected to increase 242 ANP
and FRIT employment will increase
34 ANP.2
Expenses for personnel (salaries and
benefits) account for $1,373.2 million,
or 64 percent, of the 1999 operations
budget, an increase of $67.1 million,
or 5.1 percent, over estimated 1998
personnel expenses (table 3.2). Nonpersonnel expenses (mainly building and
automation projects) are budgeted at
$786.0 million, an increase of $12.5 million, or 1.6 percent, over estimated 1998
nonpersonnel expenses.
The following two sections discuss
major initiatives and the budget objective for the Reserve Banks in 1999.
Subsequent sections provide details
1. FRIT encompasses Federal Reserve Automation Services (FRAS) and Information Technology
Planning and Standards.
2. 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.

on the four operational areas and on
objects of expense, capital outlays, and
long-term trends. Appendix A gives
more information on capital outlays
and other special categories of expense;
appendix D gives additional data by
District and operational area.

Major Initiatives
The 1999 Reserve Banks budgets
provide for the following initiatives
(table 3.3):
System-defined
• Installation of equipment and software to support check image processing and archiving
• Research and development in the
retail payments area
• Century date change compliance
• Capitalization of software developed
for internal use that was expensed in
previous years
District-defined
• Initiatives in support of fiscal services.
Reserve Bank budgets reflect a continued commitment to expand the check
imaging business. Expenses for the
ongoing check imaging initiative are
budgeted at $38.0 million, an increase of
approximately $10.0 million over estimated 1998 expenditures. This projection also includes costs associated with
the national check image archive at
the Boston Reserve Bank. Currently, the
national archive supports the imaging
and retrieval of government checks
for the U.S. Department of the Treasury. In 1999, services will be expanded

32

Annual Report: Budget Review, 1999

to include commercial checks, postal
money orders, and E-Z Clear savings
bonds.
Marketing and research and development initiatives in retail payments
account for a year-over-year increase of
$3.8 million. Costs associated with these
initiatives are expected to be $8.7 million. All Reserve Bank budgets include
funding for a national automated
clearinghouse (ACH) marketing and
education effort and for research on
payment issues. The enterprise-wide
adjustments system (EWA) for checks
will be a nationwide, integrated check

adjustment processing platform that will
replace stand-alone applications currently located throughout the System.
Reserve Banks continue to devote
resources to Year 2000 projects. Yearover-year costs are projected to decrease
$6.8 million, from $35.9 million in
the 1998 estimate to $29.1 million in the
1999 budget. Total ANP devoted to
the Year 2000 initiatives is expected to
decrease from 303 in 1998 to 276 in
1999. The majority of the 1999 projection represents a reallocation of current
resources. Resources are also provided
for consulting services and contract

Table 3.1
Expenses and Employment at the Federal Reserve Banks, 1998–99
1998
estimate

1999
budget

Expenses (millions of dollars)
Operations 1 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special project 2 . . . . . . . . . . . . . . . . . . . . . . .

2,079.6
3.8

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

2,083.4

Category

Change
Amount

Percent

2,159.2
.0

79.6
−3.8

3.8
−100.0

2,159.2

75.8

3.6

Employment (average number
of personnel) 3
Operations 1 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Information
Technology . . . . . . . . . . . . . . . . . . . . . . .

22,409

22,652

242

1.1

585

619

34

5.8

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

22,995

23,271

276

1.2

Note. See general note to table 1.1, chapter 1.
Excludes capital outlays.
1. Includes support and overhead (see appendix D,
table D.3, note 1, for definitions).

2. The Automation Consolidation special project began
in 1992 and ended in 1998.
3. See text note 2 for definition.

Table 3.2
Operating Expenses of the Federal Reserve Banks, by Object, 1997–99
Millions of dollars except as noted
1997
actual

1998
estimate

1999
budget

Personnel . . . . . . . . . . . . . . . . . . . . .
Nonpersonnel . . . . . . . . . . . . . . . . .

1,259.0
752.8

1,306.1
773.5

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

2,011.8

2,002.6

Object

Note. Includes support and overhead (see appendix D,
table D.3, note 1, for definitions). The data for 1997 and

Percentage change
1997 to 1998

1998 to 1999

1,373.2
786.0

3.7
2.7

5.1
1.6

2,159.2

3.4

3.8

1998 exclude the special projects for those years; no
special project is budgeted for 1999.

Federal Reserve Banks
programmers. In addition to Reserve
Bank expense projections, the FRIT
budget includes an estimate of $8.2 million and 45 ANP in 1999.
District-defined fiscal initiatives totaling $10.0 million are included in the
1999 budget projection, an increase of
$4.4 million over 1998 estimates. Major
initiatives at the St. Louis, Richmond,
and New York Banks account for most
of this total. Initiatives such as the
Automated Standard Applications for
Payments system (ASAP), the Treasury
Investment Program (TIP), Treasury
Offset Program (TOP), Treasury Tax
and Loan Paper (PATAX), Treasury
International Capital Flows (TIC)
surveys, and TIP/PATAX consolidation
are aimed at maintaining high-quality
services to the Treasury. Costs for these
projects are fully reimbursable by the
Treasury.
Expenses for these major initiatives
are partially offset by a decrease of
$18.1 million resulting from the Reserve
Banks’ interpretation of new account-

33

ing standards; the interpretation requires
the capitalization of computer software
developed for internal use.3 Under this
new accounting treatment, software
previously charged to expense will be
capitalized.

1999 Budget Objective
The approved 1999 budget objective for
Reserve Banks was $2,146.0 million,
an increase of $86.7 million, or 4.2 percent, from the 1998 budget of $2,059.3
million. Excluding the 1998 special
project expense, the target was $91.3 million, or 4.4 percent, higher than the
1998 budget. The 1999 budget objective
included funding for ongoing Year 2000
efforts and several multiyear strategic
initiatives within financial services: to
move paper check processing toward
3. The Federal Reserve will implement Statement of Position (SOP) 98-1, Accounting for
the Costs of Computer Software Developed or
Obtained for Internal Use.

Table 3.3
Contribution of Change in Major Initiatives to the Change in Operating Expenses
of the Federal Reserve Banks, 1998 to 1999
Millions of dollars except as noted

Initiative

1998
estimate

1999
budget

Contribution of change
to change in total
operating expenses,
1998 to 1999
Amount

Percentage points

System-defined
Check imaging . . . . . . . . . . . . . . . . . . . . . .
Retail R&D . . . . . . . . . . . . . . . . . . . . . . . .
Century date change (total) . . . . . . . . . .
Software capitalization . . . . . . . . . . . . . .

28.0
4.9
35.9
. . .

38.0
8.7
29.1
−18.1

10.0
3.8
−6.8
−18.1

.5
.2
−.3
−.9

District-defined
Fiscal services . . . . . . . . . . . . . . . . . . . . . .

5.6

10.0

4.4

.2

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

74.4

67.7

−6.7

−.3

Memo
Other operating expenses . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . .

2,005.2
2,079.6

2,091.5
2,159.2

86.3
79.6

4.1
3.8

34

Annual Report: Budget Review, 1999

imaging and electronics, to increase the
use of the ACH, and to conduct research
and development on new payment strategies. The budget objective also included
resources to respond to an expected
increase in customer demand for check
and currency services, to continue the
development of applications for Treasury, and to provide competitive compensation to officers and employees. The
staffing target reflected the first projected
ANP increase since 1993. Higher
employment was projected primarily
because of higher workloads in the
check and currency areas.
The 1999 budget objective was evaluated against the approved 1998 budget.
The current estimate of 1998 spending
($2,079.6 million) is $24.9 million higher
than the approved 1998 budget. The
budget objective, when compared with
the higher base of the 1998 estimate,
reflects expense growth of $66.4 million or 3.2 percent, excluding the special
project expense for 1998 (table 3.4).
The approved 1999 budget objective
assumed a spending level of $2,146.0

Table 3.4
Change in Budget Objective and Budget
of the Federal Reserve Banks, 1998 to 1999

million; the Reserve Banks 1999 budgets
total $2,159.2 million, or $13.2 million
more than the budget objective.
Two factors, identified as unquantifiable risks when the budget objective
was developed, accounted for most of
the difference. First, the budget objective process did not include the $27 million increase in expenses added in
1998 to process unanticipated check and
currency volume. Second, as a partial
offset to this increase, the budget objective did not reflect the $18.1 million
expense reduction resulting from the
accounting change to capitalize software
developed for internal use.
Total Reserve Bank and FRIT employment is projected to be 23,271 ANP, 267
ANP higher than projected in the budget
objective. Higher employment levels
in priced services produced 255 ANP
of this variance and are due to higher
demand for traditional check and new
imaging products.

Budget by Operational Area
Tables 3.5 and 3.6 summarize employment and expenses for the Reserve
Banks’ four operational areas.
Tables 3.7 through 3.11 provide details
for each area.

Percent

Item

Monetary and Economic Policy

1999
budget
objective 1

1999
budget 2

Operating expenses . . . . . . . .
System-defined
initiatives 3 . . . . . . . . . . . .
Total, excluding
special project . . . . . .

3.8
.6

3.2
.6

4.4

3.8

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

−.2

−.2

Total, including
special project . . . . . . .

4.2

3.6

1. As a change from 1998 budget.
2. As a change from 1998 estimated expenses.
3. Check imaging, retail research and development,
century date change, and software capitalization.

The monetary and economic policy
budget is $167.1 million, $13.6 million,
or 8.8 percent, higher than the 1998
estimate. Its growth rate is the highest of
the four operational areas and largely
results from a 1999 cost accounting
change in the allocation of protection
costs for property, assets, and staff.
Employment in this area is projected to
be 728 ANP, an increase of 16 ANP, or
2.2 percent, and reflects the effects of
turnover and lags in filling open positions during 1998. Initiatives in this

Federal Reserve Banks
service line include continued investment in automation that will expand
information retrieval and delivery
systems and improve data management
processes. Other initiatives in this area
include increasing the visibility of, and
access to, District research products for
relevant audiences; expanding partnerships with local universities and other
academic organizations; and increasing
research on international issues.

35

Services to the U.S. Treasury and
Other Government Agencies
Expenses for services to the Department
of the Treasury and other government
agencies are budgeted at $222.7 million,
a decrease of $0.6 million, or 0.3 percent, from the 1998 estimate. The 1999
capitalization of software developed for
internal use results in a one-time reduction in expenses of approximately

Table 3.5
Employment at the Federal Reserve Banks, by Activity, 1997–99
Average number of personnel except as noted 1

Activity

1997
actual

1998
estimate

1999
budget

Percentage change
1997 to 1998 1998 to 1999

Operational areas
Monetary and economic policy . . . . . . . . . . .
Services to the U.S. Treasury
and other government agencies . . . . . .
Services to financial institutions
and the public . . . . . . . . . . . . . . . . . . . . . .
Supervision and regulation . . . . . . . . . . . . . . .

718

712

728

−.8

2.2

1,438

1,422

1,394

−1.1

−2.0

7,954
2,980

8,096
2,890

8,138
2,927

1.8
−3.0

.5
1.3

Support and overhead 2
Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,572
4,821

4,552
4,737

4,691
4,774

−.4
−1.7

3.0
.8

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

22,483

22,410

22,652

−.3

1.1

Note. Excludes Federal Reserve Information Technology. The costs of the special project in 1997 and 1998 do
not involve personnel; the special project ended during
1998.

1. See text note 2 for definition.
2. See appendix D, table D.3, note 1, for definitions.

Table 3.6
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1997–99
Thousands of dollars except as noted

Operational area

1997
actual
144,103

1998
estimate

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

207,079

223,309

1,215,069
436,392

1,250,554
452,178

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

2,002,643

2,079,600

2,159,222

Note. Includes support and overhead (see appendix D,
table D.3, note 1, for definitions). The data for 1997 and

153,559

1999
budget
167,125

Percentage change
1997 to 1998 1998 to 1999
6.6

8.8

222,735

7.8

−.3

1,292,505
476,857

2.9
3.6

3.4
5.5

3.8

3.8

1998 exclude the special projects for those years; no
special project is budgeted for 1999.

36

Annual Report: Budget Review, 1999

$5.9 million. Total 1999 employment is
1,394 ANP, down 28 ANP, or 2.0 percent, from the 1998 estimate.
The Reserve Banks continue to
research, develop, and implement applications to improve and expand funds
collection and disbursement processes
for the Treasury and other government
agencies and to eliminate paper-based
products and processing. For example,
the Reserve Banks are working with the
Bureau of the Public Debt to archive
paid savings bonds, to expand webbased applications for savings bonds
and Treasury Direct, and to deploy

optical scanning technology to collect
savings bond data previously entered
manually.
The effects of technology and regulatory changes are particularly evident in
the processing of food coupons. Resource
requirements in this area are projected
to decline $2.8 million (11.3 percent)
and 13 ANP because of the electronic
benefits transfer program.
Efforts to align resources with
changing technology and volumes
through re-engineering and other realignment programs continue in several
Districts.

Table 3.7
Expenses of the Federal Reserve Banks for Monetary and Economic Policy, 1997–99
Thousands of dollars except as noted
Percentage change

1997
actual

1998
estimate

1999
budget

Economic policy determination . . . . . . . . . . .
Open market trading . . . . . . . . . . . . . . . . . . . . .

112,741
31,362

120,605
32,954

131,305
35,820

7.0
5.1

8.9
8.7

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

144,103

153,559

167,125

6.6

8.8

Service

1997 to 1998 1998 to 1999

Note. The data for 1997 and 1998 exclude the special projects for those years;
no special project is budgeted for 1999.

Table 3.8
Expenses of the Federal Reserve Banks for Services to the U.S. Treasury
and Other Government Agencies, 1997–99
Thousands of dollars except as noted
Percentage change

1997
actual

1998
estimate

1999
budget

Centralized operations—savings bonds . . . .
Other Treasury issues . . . . . . . . . . . . . . . . . . . .
Centralized operations—
other Treasury issues . . . . . . . . . . . . . . . .
Centrally provided Treasury
and agency services . . . . . . . . . . . . . . . . .
Government accounts . . . . . . . . . . . . . . . . . . . .
Food coupons . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59,030
14,569

72,103
14,839

72,972
12,425

22.1
1.9

1.2
−16.3

1,984

1,639

3,742

−17.4

128.3

35,051
34,022
25,210
37,213

36,266
36,046
25,002
37,414

37,241
35,733
22,165
38,457

3.5
5.9
−.8
.5

2.7
−.9
−11.3
2.8

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

207,079

223,309

222,735

7.8

−.3

Service

Note. See general note to table 3.7.

1997 to 1998 1998 to 1999

Federal Reserve Banks

Services to Financial Institutions
and the Public
Expenses for services to financial institutions and the public, an area that
includes both priced and nonpriced
services, is budgeted at $1,292.5 million, an increase of $42.0 million, or

37

3.4 percent, over the 1998 estimate.
Expense growth in two areas, currency
and check processing, accounts for
$40.9 million of this increase. Staffing is
budgeted at 8,138 ANP, an increase of
42 ANP, or 0.5 percent, from the 1998
estimate, with approximately one-half
of this increase coming from currency

Table 3.9
Expenses of the Federal Reserve Banks for Services to Financial Institutions
and the Public, 1997–99
Thousands of dollars except as noted

Service

1997
actual

1998
estimate

1999
budget

Percentage change
1997 to 1998 1998 to 1999

Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Coin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial check . . . . . . . . . . . . . . . . . . . . . . .
Other check . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds transfer . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automated clearinghouse . . . . . . . . . . . . . . . .
Book-entry securities transfer . . . . . . . . . . . .
Other securities and noncash collection . . .
Loans to member banks and others . . . . . . .
Public programs . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

248,474
28,845
4,491
577,226
41,870
66,732
66,375
38,220
6,919
23,878
74,964
37,075

261,246
31,618
2,468
603,745
38,665
65,202
66,697
33,803
4,840
22,960
82,018
37,292

275,763
24,242
2,474
630,102
41,128
64,633
69,721
32,485
4,015
23,185
85,963
38,794

5.1
9.6
−45.0
4.6
−7.7
−2.3
.5
−11.6
−30.0
−3.8
9.4
.6

5.6
−23.3
.2
4.4
6.4
−.9
4.5
−3.9
−17.0
1.0
4.8
4.0

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

1,215,069

1,250,554

1,292,505

2.9

3.4

Note. See general note to table 3.7.

Table 3.10
Expenses of the Federal Reserve Banks for Services to the U.S. Treasury
and Other Government Agencies and to Financial Institutions and the Public, 1997–99
Thousands of dollars except as noted

Service

1997
actual

1998
estimate

1999
budget

Percentage change
1997 to 1998 1998 to 1999

U.S. government services 1 . . . . . . . . . . . . . . .
Cash services . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Priced services . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

291,650
277,319
690,744
162,435

294,806
292,864
738,145
148,048

295,239
300,006
767,955
152,040

1.1
5.6
6.9
−8.9

.1
2.4
4.0
2.7

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

1,422,148

1,473,863

1,515,240

3.6

2.8

Note. See general note to table 3.7.
1. The amounts shown here do not include expenses
in this service that are recorded in the monetary
and economic policy operational area. For 1997 these
expenses were $673 thousand, for 1998 they are estimated

at $1,227 thousand, and for 1999 they are budgeted at
$1,438 thousand. These expenses increase the total costs
of services provided by the Reserve Banks as fiscal agents
and depositories of the United States.

38

Annual Report: Budget Review, 1999

processing and one-fourth from check
processing.
Customer demand for currency and
check processing increased unexpectedly in several Districts during 1998 and
is projected to continue expanding at
that rate through 1999. Estimated volume
growth in these two areas accounts for
an additional $4.5 million in the 1999
budget.
Higher expenses in the 1999 budget
are being generated not only by increases
in traditional demand but also by several
strategic initiatives to provide a consistent product to the increasing number
of national customers and to provide
efficiencies in the development and
management of applications and products: expanding the application of
imaging to commercial checks, postal
money orders, and government checks;
stimulating demand for electronic check
presentment and the electronic cash
letter; and moving toward Systemstandard check automation platforms
and applications.
The Reserve Banks continue to seek
efficiencies by consolidating the loca-

tion of services that use highly centralized electronic applications such as
funds transfer, book-entry securities,
and ACH. The latest example is consolidation of the twelve sites providing
off-line processing for funds and bookentry securities into two sites
by the end of 1999.
Priced service costs are projected to
be $738.1 million in 1998 and $768.0
million in 1999. All of these costs, plus
the private sector adjustment factor, are
budgeted for recovery through fees to
depository institutions and others that
use the services. The Reserve Banks’
recovery rate is estimated to be
103.9 percent for 1998 and 101.2 percent for 1999.

Supervision and Regulation
Supervision and regulation expenses
are budgeted to be $476.9 million in
1999, an increase of $24.7 million,
or 5.5 percent, over the 1998 estimate.
The 1999 change in accounting of
the allocation of protection costs for
property, assets, and staff is a significant

Table 3.11
Expenses of the Federal Reserve Banks for Supervision and Regulation, 1997–99
Thousands of dollars except as noted

Service

Supervision of large multistate,
multi-District banking organizations . .
Supervision of domestic regional and
community banking organizations . . . .
Supervision of foreign banking
organizations . . . . . . . . . . . . . . . . . . . . . . .
Administration of laws and regulations
related to banking . . . . . . . . . . . . . . . . . . .
Supervision activities benefiting
the banking system . . . . . . . . . . . . . . . . .
Studies of banking and financial markets . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Percentage change

1997
actual

1998
estimate

1999
budget

. . .

70,975

76,355

. . .

7.6

. . .

165,507

174,822

. . .

5.6

. . .

57,069

60,641

. . .

6.3

1997 to 1998 1998 to 1999

. . .

89,093

91,544

. . .

2.8

. . .
. . .

46,976
22,558

49,395
24,100

. . .
. . .

5.1
6.8

436,393

452,178

476,857

3.6

5.5

Note. Expenses in 1997 for this operational area were
recorded under a structure redefined as of 1998. The data

for 1997 and 1998 exclude the special projects for those
years; no special project is budgeted for 1999.

Federal Reserve Banks
source of the budgeted increase in
this area. The size of the cost increases
varies by District and ranges from
0.5 percent to 10.8 percent. The range
of expense changes reflects the response
to District-specific environmental factors and the degree of efficiencies
realized through risk-focused examinations and improved automation.
Employment is projected to be 2,927
ANP, an increase of 37 ANP, or
1.3 percent, over the 1998 estimate.
Only three Districts are projecting
declines in staffing. Several Districts
were hesitant to reduce staffing in this
area because of uncertainty regarding the level of support needed for
century date change (CDC) efforts in
1999.
Along with ongoing examination
responsibilities, CDC is expected to
remain a high priority during the com-

39

ing year. In addition, the supervision and
regulation area continues to broaden the
application of technology to streamline
the examination process, expedite
information retrieval capabilities and
lessen the on-site burden to financial
institutions, and reduce the internal
administrative burden through the
automation of tracking and scheduling
functions.

Budget by Object of Expense
Personnel expenses are projected to
increase 5.1 percent, while nonpersonnelrelated expenses are increasing 1.6 percent. Personnel expenses include officer
and employee salaries, other compensation to personnel, and retirement
and other benefits, and account for
64 percent of Reserve Bank expenses
(table 3.12).

Table 3.12
Operating Expenses of the Federal Reserve Banks, by Object, 1997–99
Thousands of dollars except as noted
Percentage change

1997
actual

1998
estimate

1999
budget

Personnel
Officers’ salaries . . . . . . . . . . . . . . . . . . . . . . . . .
Employees’ salaries . . . . . . . . . . . . . . . . . . . . . .
Other 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement and other benefits . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

105,185
850,825
40,992
263,141
1,260,142

114,354
874,630
44,694
272,377
1,306,056

123,400
929,563
34,976
285,247
1,373,185

8.7
2.8
9.0
3.5
3.6

7.9
6.3
−21.7
4.7
5.1

Nonpersonnel
Forms and supplies . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

53,406
171,500
35,322
79,278
42,853
174,843
−53,764
239,064
742,502

52,738
177,806
39,425
77,918
44,085
174,762
−66,398
273,207
773,544

52,292
196,557
41,304
78,881
45,594
186,695
−60,769
245,483
786,037

−1.3
3.7
11.6
−1.7
2.9
.0
23.5
14.3
4.2

−.8
10.5
4.8
1.2
3.4
6.8
−8.5
−10.1
1.6

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

2,002,644

2,079,600

2,159,222

3.8

3.8

Object

Note. See general note to table 3.7.
1. Certain contractual arrangements and miscellaneous
other personnel expenses.

1997 to 1998 1998 to 1999

2. Communications, fees, contra-expenses, shared costs
distributed and received, excess capacity, and miscellaneous other expenses.

40

Annual Report: Budget Review, 1999

Salaries and other personnel expenses
account for about 50 percent of 1999
budgeted expense, and anticipated
growth is $54.3 million, or 5.2 percent.
Salaries for officers and employees are
expected to increase $64.0 million, or
6.5 percent. Merit programs averaging
4.2 percent will increase salary expenses
by $41.2 million. Also contributing to
higher salary expenses are staff increases,
promotions and reclassifications, and
structure and market adjustments. These
increases are partially offset by a
$9.7 million decrease in other personnel
expenses, which reflects a decline in the
use of outside agency help and reduced
severance and retention payments. Also
offsetting the increase in salaries are a
$4.2 million reduction in overtime and a
$4.9 million decrease in costs associated
with short-term position vacancies or
lags in hiring.
Retirement and other benefits
expenses, which account for 13 percent
of Reserve Bank budgets, are anticipated
to increase $12.9 million, or 4.7 percent,
in 1999. Contributing factors include
increases in salary-related benefits, such
as social security and the thrift plan.
Health care costs are estimated to
increase by 5.5 percent in 1999 because
of an expected increase in medical
insurance costs. To minimize future
increases in the cost of health care, the
Banks are collectively seeking consolidated purchasing of employee and retiree
benefits.
Nonpersonnel expenses account for
36 percent of Reserve Bank expenses
and are projected to increase 1.6 percent
in 1999.
Equipment expenses are expected to
increase $18.8 million, or 10.5 percent,
and account for 9 percent of total
expenses in 1999. In addition to 1999
purchases, the variance in equipment
expense is driven primarily by an
increase in depreciation ($14.9 million)

and maintenance costs ($4.2 million).
The increase in depreciation results
from the full-year effect of 1998
purchases of equipment for check imaging, voice mail, and PBX; local area
network upgrades required for CDC
compliance; and the effect of capital
purchases planned for 1999. Increases in
maintenance costs are primarily driven
by local area networks (LANs), servers,
and hardware equipment contracts.
Shipping expenses account for 4 percent of Reserve Bank expenses and are
expected to increase $1.0 million, or
1.2 percent, primarily because of higher
rates for courier contracts and shipping.
Within the travel budget, expenditures on foreign travel are projected to
be $4.4 million in 1999 and account
for 0.2 percent of total 1999 expenses.
Foreign travel expenses budgeted for
1999 are $0.5 million, or 13.2 percent,
higher than 1998; the increase covers,
in part, an anticipated rise in foreign
examinations, the consolidation of System examinations, and a rise in targeted
visitations at troubled institutions, where
extra monitoring is required.
Building expenses, which account
for 8.6 percent of total expenses, are
expected to increase $11.9 million, or
6.8 percent, in 1999. The increase is
driven by higher real estate taxes,
primarily in Cleveland, Minneapolis,
and San Francisco; higher property
depreciation associated with the completion of building improvements
and renovations; andn higher rental
expenses resulting from several lease
agreements.
Other nonpersonnel expenses are
projected to decrease $27.7 million, or
10.1 percent. Of the decrease, $18.1 million is due to the Reserve Banks’ implementation of the new accounting
standards that require the capitalization
of computer software developed or
obtained for internal use.

Federal Reserve Banks

Capital Outlays
The 1999 capital budget submitted by
the twelve Reserve Banks and FRIT
totals $405.6 million, a $129.3 million
increase over the 1998 estimated levels
(table 3.13). The budget consists of
$366.9 million for the Banks and
$38.6 million for FRIT.
The 1999 capital budgets developed
by the Reserve Banks and FRIT include
funding for a number of projects that
support the strategic direction outlined
in the Banks’ plans. These strategic
directions include improving operational
efficiency and effectiveness, promoting customer service, and providing a
quality work environment. In support
of these strategies, the 1999 budget
identifies four major categories of capital
outlay: building and facility improvements, automation-related initiatives,
check and other payment service
improvements, and building security
enhancements.

41

The proposed capital budget includes
$182.8 million for building-related
projects. These projects are geared
toward renovation and modernization
of physical facilities, replacement or
upgrading of critical systems, energy
conservation, and compliance with the
Americans with Disability Act. More
than 71 percent of the 1999 budget
comprises six major projects: four in
the New York District (improvements to
33 Maiden Lane, head office modernization, stone facade restoration, and
tenant improvements at the East Rutherford Operations Center) and two in the
Atlanta District (head office building
and Birmingham Branch building).
These six projects have a total estimated
cost of $377.2 million ($76.3 million
before 1999, $130.3 million in 1999,
and $170.6 million in later years).
Funding is also provided for the replacement of routine building-related equipment as well as replacements of furniture
and fixtures.

Table 3.13
Capital Outlays of the Federal Reserve Banks, by Class, 1997–99
Thousands of dollars except as noted
Percentage change

1997
actual

1998
estimate

1999
budget

Data processing and data
communications equipment 1 . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, furnishings, and fixtures . . . . . . .
Other equipment 2 . . . . . . . . . . . . . . . . . . . . . . . .
Land and other real estate . . . . . . . . . . . . . . . .
Building machinery and equipment . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . .
Software 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

70,714
72,726
23,299
30,337
4,695
16,528
1,889
5,548

111,952
67,863
23,364
23,414
3,044
24,183
8,166
14,301

140,167
114,970
29,562
24,140
9,551
22,279
15,985
48,902

58.3
−6.7
.3
−22.8
−35.2
46.3
332.3
157.8

25.2
69.4
26.5
3.1
213.8
−7.9
95.8
241.9

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

225,736

276,287

405,556

22.4

46.8

Memo
FRIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,356

34,722

38,641

62.6

11.3

Class

1. For Federal Reserve Information Technology (FRIT),
includes capital of $18,848 thousand in 1997, $32,291
thousand in 1998, and $29,698 thousand in 1999.
2. For FRIT, includes $28 thousand in 1997,
$20 thousand in 1998, and $20 thousand in 1999.

1997 to 1998 1998 to 1999

3. For FRIT, includes $2,481 thousand in 1997, $2,412
thousand in 1998, and $8,894 thousand in 1999.

42

Annual Report: Budget Review, 1999

The proposed capital budget includes
$122.3 million in funding for automation initiatives. Approximately $18 million of this total is attributable to the
capitalization of software. These initiatives do not include the automation
components of building projects, check
and payment services, or security
projects that are discussed separately.
The strategic directions outlined in the
budgets of the individual Reserve Banks
include enhanced technological capabilities, the continued implementation of
LAN technology, the development of
common office environments and webbased applications, and various improvements and replacements to ensure CDC
compliance.
Aside from the $38.6 million included
for FRIT, the major automationrelated projects are $3.8 million for the
Consolidated Process Encryption Center,
$2.7 million for the continued development of the Statistics and Reserves
System, and $2.6 million for the
Foreign/Domestic Trading, Analysis,
and Accounting System. The largest
share of the remaining funds supports the Districts’ strategies for distributed technology and PC replacement.
A majority of the Banks are operating
under a three-year replacement
schedule and continue to push
for the conversion of mainframe applications to a LAN environment and,
to a lesser extent, to web-based solutions.
The 1999 capital budget includes
$75.5 million for initiatives to improve
check operations and other payment
services. Nearly every District is funding reader/sorter/endorser upgrades and
high-speed imaging projects. In addition, several projects are aimed at
improving savings bond operations in
the consolidation sites, and others are
for currency-related initiatives throughout the System.

District-specific initiatives include the
Unisys check support hosted by the
Cleveland District, the continued development of an electronic check presentment environment in the Minneapolis
District, and a number of Treasuryrelated projects in the Richmond District.
The last major category of capital
expenditures included in the 1999 budget is for projects to improve security
within the Reserve Banks. These projects
include upgrades and replacements of
building security features, including
video surveillance systems, card readers
and access systems, and fire alarms, for
a total of $11.9 million. Tables 10 and
11 in the statistical appendix provide
additional data on capital expenditures.

Trends in Expenses and
Employment
Over the ten years ending with the 1999
budget, Reserve Bank expenses have
increased an average of 4.8 percent per
year (chart 3.1), and the average number of employees at the Reserve Banks
(including FRAS) has decreased 426,
from 23,697 in 1989 to 23,271 in 1999
Chart 3.1
Operating Expenses of the
Federal Reserve Banks, 1989–99
Billions of dollars
Current dollars

1.9
1992 dollars 1

1.6
1.3

1989

1994

1999

Note. See general note to table 3.7. For 1998,
estimate; for 1999, budget.
1. Calculated with the GDP price deflator.

Federal Reserve Banks
(chart 3.2). Since 1989, staff levels have
decreased in the commercial check
service (746 ANP), the overhead service
(199 ANP), securities safekeeping and
noncash services (183 ANP), the ACH
and funds transfer services (317 ANP),
services to the Treasury and other
government agencies (377), and the
monetary policy service (55 ANP).
These staff reductions have been due
largely to consolidation of operations
and increased operational efficiencies
throughout the System.
Partly offsetting the decreases are
additions to the staff in supervision and
regulation (730 ANP), needed mainly
because of implementation of the
Federal Deposit Insurance Corporation
Improvement Act and the Community
Reinvestment Act; in data services (494
ANP) because of an increase in LAN
applications; and in public programs
(130 ANP) because of efforts to enhance
consumer education and communications with the public.
The average annual growth of operating expenses, which has slowed in
recent years, is projected to be 3.7 percent over the five years ending with the
1999 budget. Mainly because of producChart 3.2
Employment at the
Federal Reserve Banks, 1989–99
ANP, in thousands

24

23

1989

1994

1999

Note. See general note to table 3.5. For 1998,
estimate; for 1999, budget. See text note 2 for definition
of ANP.

43

tion charges from FRIT, nonpersonnel
costs have been increasing at a faster
rate than personnel costs, 4.2 percent
compared with 3.2 percent, as the
Reserve Banks downsize labor-intensive
and computer operations and substitute
technology for labor.
Over this five-year period, the average annual increases in expenses by
service line have been the highest for
monetary and economic policy (6.7 percent) and supervision and regulation
(5.7 percent). Expenses in both functional areas have been affected by the
1999 change in the method for allocating protection costs and by increases
from various support areas. Expenses in
the supervision and regulation function
have also been affected by the ongoing
changes in the financial services industry and century date change issues.
Expenses for services to financial institutions and the public grew 3.2 percent per
year, primarily because of increases in
currency and check volumes.
The average number of employees at
the Reserve Banks decreased 975 ANP,
from 23,627 ANP in 1994 to 22,652
ANP in 1999. Overall, decreases in
employment are due largely to the
consolidation of operations, the realization of operational efficiencies throughout the Reserve Banks, and reduced
check volumes following the 1994
implementation of the same-day settlement rule under the Federal Reserve’s
Regulation CC.
Employment in services to Treasury
and other government agencies has
decreased primarily because of the continuing rollout of the electronic benefits
transfer program and centralization
efforts for savings bonds. In services
to financial institutions and the public,
employment has decreased because of
efficiencies gained in check processing,
reduced check volumes, more efficient
currency processors, and centralization

44

Annual Report: Budget Review, 1999

in funds and book-entry processing. The
increase in the support service area is
primarily due to additional staff needed
to support ongoing information technology requirements.

Volume and Unit Costs
The volume of measured services in
1999 is budgeted to increase 3.9 percent over estimated 1998 volume, and
the unit cost is expected to decrease
1.9 percent (table 3.14). The decrease in
expected unit costs reflects net decreases
for retail payments, wholesale payments, and cash services. A 0.6 percent
decline in unit cost is anticipated in the
commercial checks area, the largest
component in the overall index.
Table 3.14
Change in Volumes and Unit Costs of
Measured Federal Reserve Bank Services,
1998 to 1999
Percent
Service

Volume

Unit cost

Payments . . . . . . . . . . . . . . . . . . . . . .
Commercial check . . . . . . . . . .
Automated clearinghouse . . . .

3.7
2.8
10.0

−1.2
−.6
−5.0

Cash 1 . . . . . . . . . . . . . . . . . . . . . . . . .

5.8

−3.2

Fiscal . . . . . . . . . . . . . . . . . . . . . . . . .

.8

.2

Wholesale payments . . . . . . . . . . .
Transfer of reserve account
balances . . . . . . . . . . . . . . . .
Book-entry securities . . . . . . . .

2.8

−4.5

5.8
−3.0

−6.3
−.5

All measured services . . . . . . . . .

3.9

−1.9

1. Currency, coin, and food coupon services.

1998 Budget Performance
The Reserve Banks estimate that 1998
expenses will be $2,079.6 million, which
represents an increase of $24.9 million,
or 1.2 percent, from the approved 1998
budget of $2,054.7 million. The 1998
budgets, which were approved by the
Board in December 1997, resulted in an
increase of $43.1 million or 2.1 percent
over estimated 1997 expenses. At the
1998 estimated level of spending, the
increase over the actual 1997 level
would be 3.8 percent.
Nine Banks expect to exceed their
approved 1998 budget, six of them by
1.0 percent or more. The three largest
overruns are expected at Boston (2.0 percent), Atlanta (6.4 percent) and St. Louis
(6.3 percent). Boston’s overall budget
has increased because of higher-thananticipated costs for the national government check image archive and because
of Interdistrict Transportation System
costs associated with check shipments;
both are Systemwide expenses retained
in Boston’s budget. Atlanta’s projected
overrun is due primarily to staffing
additions necessitated by increased check
and cash volumes. In addition, the
Atlanta District has worked aggressively
to address issues arising from a 1997
staff ‘‘Vision’’ survey that found a need
to staff functions appropriately, reduce
overtime and turnover, and compensate
in accordance with the market. The
overrun at St. Louis is due primarily to
check write-offs and increased overtime
in the check area.

Part II
Special Analysis

47

Chapter 4

The Federal Reserve’s Response
to the Year 2000 Problem
The Year 2000 problem poses a major
challenge to the financial system. In
meeting that challenge, the Federal
Reserve has committed itself to a rigorous program of industry testing and
contingency planning. Financial institutions have made significant progress
in renovating their systems; through
its supervisory initiatives, the Federal
Reserve is focusing on those institutions that most need further work on
Year 2000 readiness.
The Federal Reserve is completing
the work necessary to make its own
mission-critical applications Year 2000
ready. To further reduce risk, the Federal Reserve will significantly limit
any changes to its computer hardware
and software and to related policy and
operational areas during late 1999 and
early 2000.

Efforts at the Federal Reserve
For 1999 the Federal Reserve has
committed $45.8 million and 353 personyears to the Year 2000 problem, to be
used for the continuation of internal
testing and certification, customer testing, planning for business resumption
and event management to minimize the
effect of Year 2000 disruptions, and for
outreach to the financial industry.

cations. Among the key applications
already certified are Fedwire funds and
securities transfer—the applications most
critical to the nation’s payment system;
the automated clearinghouse (Fed ACH);
and supporting accounting systems. In
addition, as of year-end 1998, more than
50 percent of the Federal Reserve’s
noncritical applications have been certified as compliant.
The Federal Reserve must also address
the readiness of its telecommunications
network, called Fednet
and
special-purpose computers at Reserve
Banks. The Federal Reserve has independently tested approximately 79 percent of Fednet’s hardware and software components and certified them
as Year 2000 compliant. The Federal
Reserve is conducting independent testing to verify the Year 2000 readiness of
products from vendors of the remaining
21 percent of Fednet’s components. The
Federal Reserve conducted independent
testing of the hardware and software at
the data centers to certify the mainframe
environment as Year 2000 compliant,
and it is continuing to test product
upgrades. The Federal Reserve continues
to upgrade or replace special-purpose
computers.

Customer Testing
Internal Testing and Certification
As of year-end 1998, the Federal Reserve
had renovated where necessary, tested,
and certified as Year 2000 compliant
virtually all of its mission-critical appli-

As of June 29, 1998, the Federal
Reserve began offering its customers the
opportunity to test future-dated transactions for Fedwire funds and securities
transfer, Fed ACH, the integrated

48

Annual Report: Budget Review, 1999

accounting system, Treasury tax and
loan accounts, checks, and other services involving electronic data exchanges.
All Federal Reserve customers with
electronic access to Fedwire funds
transfer are required to test that service,
and large-volume customers of other
Federal Reserve services are strongly
encouraged to test those services. As of
the end of February 1999, more than
7,000 institutions, as well as the U.S.
Treasury and other government agencies, had tested transactions with the
Federal Reserve. In July and August
1998, the Federal Reserve and Treasury’s
Financial Management Service jointly
tested social security payments, and
such testing for international social
security payments was begun in the first
quarter of 1999. None of the tests has
revealed significant problems.
The Federal Reserve will continue to
schedule testing dates through year-end
1999. In the second half of 1999, testing
schedules will include opportunities
for the revalidation of application readiness and the testing of contingency
procedures.

Business Resumption Planning
The Federal Reserve continues to
consider its own Year 2000 business
resumption preparations to be among its
highest priorities. A team of Federal
Reserve senior managers from the technical and business areas oversees plans
and efforts to support internal business
resumption. The Federal Reserve’s
Year 2000 business resumption plans
build on existing contingency plans that
have proved successful through testing
and actual experience. The new plans
address three areas: (1) disruptions to
the Federal Reserve’s internal operations, (2) disruptions that reduce the
ability of Federal Reserve customers
to conduct business with the Federal

Reserve, and (3) problems that threaten
to hamper the payment system or the
safety and soundness of the financial
services industry. In addition, the Federal Reserve and Treasury are working
together to ensure that the Year 2000
contingency plans of each agency are
aligned.
With regard to the private sector, the
Federal Reserve recognizes and emphasizes that each financial institution is
responsible for implementing sound
Year 2000 contingency measures. Nonetheless, as part of its responsibilities in
maintaining the integrity of the payment
system, the Federal Reserve is reviewing options for assisting depository
institutions to prepare and implement
contingency measures. Steps taken thus
far include providing opportunities for
contingency testing, planning for adequate supplies of currency, and providing guidance to customers on the Federal Reserve’s planning for Year 2000
operational contingencies. Throughout
1999 the Federal Reserve will continue
to refine its business resumption plans
in response to lessons learned through
testing and changes in its internal and
external environments.

Year 2000 Event Management
The Federal Reserve is organizing the
resources needed to address unforeseen
problems during the most critical period
of vulnerability, that is, the several days
centered on the century rollover and the
several days centered on February 29
(2000 is a leap year). The Federal
Reserve has established a team to coordinate the planning of responses to
defined but unexpected problems as well
as to as-yet undefined problems that
may arise during the critical period and
to coordinate the documentation of
actions taken during the date-change
period.

The Year 2000 Problem

Change Management
The Federal Reserve has established
guidelines to significantly limit changes
to its internal policies and operations
and to its hardware and software during
late 1999 and early 2000. This ‘‘change
management’’ approach addresses an
important potential source of risk and
complexity in managing the century
date change. The imposition of limits on
changes will provide a stable internal
processing environment during the
transition to the Year 2000 and will also
minimize changes that Federal Reserve
customers and other affected parties
could be required to make to their own
applications. The Federal Reserve is
emphasizing to other organizations that
typically generate policy and operational
changes in the financial industry that
requiring implementation of such changes
during late 1999 and early 2000 may
introduce significant Year 2000 risks.

Outreach Initiatives
Federal Reserve officials speak frequently to banks, financial service
bureaus, vendors, and other financial
firms on the Year 2000 issue. During
1998 the Federal Reserve has sponsored
or participated in more than 265 programs for more than 17,000 bankers and
other attendees. In December 1998, the
Federal Reserve sponsored an interactive videoconference with its depository
institution customers to discuss its contingency planning for the Year 2000.
The Federal Reserve also provides
forums, such as the March 1998 meetings on Year 2000 testing of wholesale
payments, to direct industry attention to
key aspects of Year 2000 preparedness.
In addition, the Federal Reserve participates in numerous work groups addressing Year 2000 issues, such as those
sponsored by the Securities Industry

49

Association, the New York Clearing
House, and sector groups of the
President’s Council on Year 2000
Conversion. A Board official chairs the
council’s Financial Institutions Sector
Group, a broad-based task force that
has been instrumental in advancing
the Year 2000 readiness of financial
institutions.
The Federal Reserve has issued six
bulletins, the latest in February 1999, to
inform customers of its internal readiness activities and of the process and
schedule for testing with the Federal Reserve. These bulletins, along
with a public web site (http://
www.federalreserve.gov/y2k/) and newsletter, have been the Federal Reserve’s
key means of communicating detailed
Year 2000 information to its customers.
A major element of the Federal
Reserve’s outreach activities in 1999
will concern planning for responses to
potential Year 2000 problems. The
Federal Reserve will continue to inform
the public of its Year 2000 plans and
readiness activities throughout 1999.

Supervisory Program and Results
The Year 2000 supervisory program of
the member agencies of the Federal
Financial Institutions Examination Council (FFIEC) has three phases.1 The first
phase, Awareness and Assessment, ended
June 30, 1998. It focused on evaluating
the ability of institutions to understand
the myriad Year 2000 issues and their
progress in identifying required changes
to their computer programs; work in this
phase also emphasized to institutions
the importance of Year 2000 readiness
1. The member agencies are the Board, the
Federal Deposit Insurance Corporation, the
National Credit Union Administration, the Office
of the Comptroller of the Currency, and the Office
of Thrift Supervision.

50

Annual Report: Budget Review, 1999

among their service providers and software vendors.
The second phase, Renovation and
Validation, began on July 1, 1998, and
continued through March 31, 1999.
During this phase, examiners assessed
the progress of institutions toward making and testing the required changes
identified in phase 1.
The third phase, Implementation, is
under development for the period beginning April 1, 1999, and running into
2000. It will be devoted to assessing the
adequacy of the institutions’ final testing
and contingency planning.
During 1998 the Reserve Banks
assigned Year 2000 issues to about 225
examiners, who worked about 115
person-years to review the Year 2000
readiness of financial institutions. The
volume of such work is expected to rise
in 1999.
To assist institutions in their understanding of the various Year 2000
regulatory guidance statements and the
Year 2000 review process, the FFIEC
agencies have conducted hundreds of
outreach programs throughout the
country. These programs focused on
supervisory expectations and also served
to convey a consistent message from the
regulatory agencies.

International Initiatives
The Federal Reserve has continued its
active role in international Year 2000

efforts through several venues: the Joint
Year 2000 Council, chaired by Federal
Reserve Board member Roger W.
Ferguson, Jr.;2 the Year 2000 task force
of the Basle Committee on Banking
Supervision; international conferences;
and discussions with foreign bank
supervisors.
Among the initiatives of the Joint
Year 2000 Council have been the publication of bulletins and guidance papers
and the hosting of regional meetings to
raise the awareness of financial market
regulators throughout the world of the
risks posed by the Year 2000 problem.
The Federal Reserve met with representatives of foreign central banks to
provide information on programs to
prepare for the Year 2000. In addition,
the Federal Reserve has briefed a
number of foreign delegations on the
Year 2000 strategies and programs it has
employed, and it has made such information available to supervisory authorities
throughout the world.

2. The council consists of representatives from
the Basle Committee on Banking Supervision, the
Committee on Payment and Settlement Systems
of the central banks of the Group of Ten, the
International Association of Insurance Supervisors, and the International Organization of Securities Commissions. The Bank for International
Settlements, in Basle, Switzerland, is the council’s
secretariat. The Group of Ten consists of Belgium, Canada, France, Germany, Italy, Japan, the
Netherlands, Sweden, Switzerland, the United
Kingdom, and the United States.

Appendixes

53

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 make
available to all depository institutions,
for a fee, 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 PSAF takes into
account the return on capital that would
have been provided, and the taxes that
would have been paid, had the services
been furnished by a private business
firm.

Annual Pricing Process
To meet the requirement for the full
recovery of costs, the Federal Reserve
has developed an annual pricing process
involving a review of Reserve Bank
expenses in addition to the review
required by the System’s budget processes. Use of the budgets is an integral
part of the pricing exercise because most
of the recoverable costs of priced
services are direct and indirect costs as
determined by the budgets. To assist
depository institutions in their plan-

ning to provide or use correspondent
banking services, the Federal Reserve
usually sets each year’s prices only
once, in the fourth quarter of the
preceding year.
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 If fees for any service are set so
that the full recovery of costs is not
anticipated, the Board announces the
rationale.
The cost of float is estimated by
applying the current federal funds rate to
the level of float expected to be generated in the coming year. Estimates of
income taxes and the return on capital
are based on tax and financing rates
derived from a model of the fifty largest
U.S. bank holding companies; these
rates are applied to the assets the Federal
Reserve expects to use in providing
priced services in the coming year. The
other components of the PSAF are
derived from the budgets of the Reserve
Banks and the Board: the imputed sales
tax (based on budgeted outlays for
materials, supplies, and capital assets);
the imputed assessment for insurance
by the Federal Deposit Insurance Corporation (FDIC) (based on expected

1. The product directors are the first vice
presidents at selected Reserve Banks with
responsibility for day-to-day policy guidance over
specific Systemwide priced services. The Financial Services Policy Committee comprises the
presidents of three Reserve Banks, the first vice
presidents of three other Reserve Banks, and, as
liaison, the director of the Board’s Division of
Reserve Bank Operations and Payment Systems.

54

Annual Report: Budget Review, 1999

clearing balances and amounts deferred
to depository institutions for items
deposited for collection with the Reserve
Banks); and the portion of the expenses
of the Board of Governors that is
directly related to the development of
priced services.
The intent of the PSAF calculation is
to require the Federal Reserve to include
in the costs of its priced services the
costs that would have been incurred had
the services been provided by a privatesector firm.

Calculation of the PSAF for 1999
In 1998 the Board approved a 1999
private sector adjustment factor for
Reserve Bank priced services of
$115.8 million, an increase of $7.3 million, or 6.7 percent, from the PSAF of
$108.5 million targeted for 1998.

Asset Base
The value of Federal Reserve assets to
be used in providing priced services in

Table A.1
Pro Forma Balance Sheet for Federal Reserve Priced Services, 1998 and 1999
Millions of dollars
Item

1998

Assets
Short-term assets
Imputed reserve requirement on clearing balances . . . . . . . .
750.4
Investment in marketable securities . . . . . . . . . . . . . . . . . . . . . 6,753.5
69.0
Receivables 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.3
Materials and supplies 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.1
Prepaid expenses 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Items in process of collection . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,922.8
Total short-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1999

757.7
6,819.6
69.1
4.1
20.2
3,470.7
10,514.1

11,141.4

Long-term assets
Premises 1, 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
360.4
145.2
Furniture and equipment 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
23.3
Leasehold improvements and long-term prepayments . . . .
Total long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

528.9

558.1

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

11,043.0

11,699.5

386.6
150.3
21.1

Liabilities
Short-term liabilities
Clearing balances and balances arising
from early credit of uncollected items . . . . . . . . . . . . . . 7,503.9
Deferred-credit items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,922.8
87.4
Short-term debt 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,514.1

Long-term liabilities
Long-term debt 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185.1
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

185.1

207.6

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

10,699.2

11,349.0

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

343.8

350.5

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

11,043.0

11,699.5

Note. Data are averages for the year.
1. Financed through the private sector adjustment
factor; other assets are self-financing.
2. Includes allocations of Board of Governors’ assets

7,577.3
3,470.7
93.4
11,141.4
207.6

to priced services of $0.5 million for 1998 and
$0.4 million for 1999.
3. Imputed figures representing the source of financing
for certain priced-service assets.

Special Categories of System Expense
1999 is estimated at $11,699.5 million
(table A.1). The value of assets assumed
to be financed through debt and equity
in 1999 is $651.4 million, an increase of
$35.1 million, or 5.7 percent, from 1998

55

(table A.2); the increase results from a
building project in one District, offset
somewhat by a lower asset base associated with Federal Reserve Information
Technology.

Table A.2
Derivation of the Private Sector Adjustment Factor (PSAF), 1998 and 1999
Millions of dollars except as noted
Item

1998

1999

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

87.4
528.9
616.3

93.4
558.1
651.4

Cost of capital (percent) 3
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pretax return on equity 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average long-term cost of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.1
6.8
22.4
16.9

5.1
6.6
23.5
17.2

Capital structure (percent)
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14.2
30.0
55.8

14.3
31.9
53.8

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

32.1

32.0

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

4.5
12.5
77.0
94.0

4.8
13.7
82.4
100.8

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

9.1
2.6
2.8
14.5

8.7
2.8
3.4
14.9

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

108.5
17.6
18.1

115.8
17.8
18.2

Required PSAF Recoveries

1. Calculated with the ‘‘direct determination of assets’’
method.
2. Consists of total priced long-term assets, including
the priced portion of Federal Reserve Information
Technology assets.
3. All short-term assets are assumed to be financed
with short-term debt. Of the total 1998 long-term assets,
35 percent are assumed to be financed with long-term debt
and 65 percent with equity; for 1999, the proportions are
37.2 percent with long-term debt and 62.8 percent with
equity. The data are average rates paid by the fifty largest
(by asset size) bank holding companies.

4. The pretax rate of return on equity is based on
average after-tax rates 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 the five years 1993–97
to yield the pretax return on equity for use in the PSAF.
5. The calculations underlying these data use the dollar
value of assets to be financed, divided as described in
note 3, and the rates for the cost of capital.
6. Systemwide expenses for priced services, less
shipping, were budgeted at $598.1 million for 1998 and
$636.9 million for 1999.

56

Annual Report: Budget Review, 1999

Cost of Capital, Taxes, and Other
Imputed Costs
For 1999, a pretax rate of return on
equity of 23.5 percent, or $82.4 million,
is planned. Other required PSAF recoveries for 1999—imputed sales taxes, the
imputed FDIC insurance assessment,
and Board expenses—total $14.9 mil
lion (table A.2).

Capital Outlays
Under generally accepted accounting
principles (GAAP), the cost of an asset
that is expected to benefit an entity over
future periods should be allocated over
those periods. Such treatment allows
a realistic measurement of operating
performance. In accordance with GAAP,
the Federal Reserve System depreciates
the cost of fixed assets over their estimated useful lives.
The Banks capitalize and depreciate
all assets that cost $1,500 or more; they
may either capitalize or expense assets
costing less. The capitalization guideline
for the Board is $5,000.
The Banks maintain a multiyear plan
for capital spending. The Board, in turn,
requires the Banks to budget annually
for capital outlays by capital class to
estimate the effect of total operating and
capital spending. During the budget
year, the Banks must submit proposals
for major purchases of assets to the
Board for further review and approval.
The Board of Governors also reviews
capital expenditures for the Board.

Currency Printing
and Circulation
The Department of the Treasury’s
Bureau of Engraving and Printing (BEP)
prints U.S. currency; the Federal Reserve

Table A.3
Currency in Circulation, New Notes Issued,
and Notes Destroyed, 1998
Millions of pieces
Notes
in
circulation 1

New
notes
issued 2

Notes
destroyed

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

6,785
579
1,569
1,379
4,415
982
3,147

3,899
22
821
731
1,787
377
649

3,550
5
789
687
1,580
301
338

Total . . . . . . . . .

18,856

8,285

7,251

Dollar
denomination
1
2
5
10
20
50
100

1. As of November 1998.
2. Does not include additions to inventory at the
Reserve Banks.

Banks put it into circulation through
depository institutions and destroy it as
it wears out (table A.3). Under authority
delegated by the Board, the Director of
the Division of Reserve Bank Operations and Payment Systems submits an
order for new currency to the BEP each
July. Upon reviewing the order, the BEP
establishes a billing rate for new currency, which the Board’s staff uses to
prepare the annual budget for new
currency. Once the Board establishes the
currency budget, it assesses the Federal
Reserve Banks through an accounting
procedure similar to that used in assessing the Banks for the Board’s operating
expenses.
Estimated currency expenditures for
1998 total $409.1 million, which is
$38.7 million, or 10.5 percent, greater
than the budgeted amount (table A.4).
Note production for the fourth quarter of
1998 was increased by 665 million notes
for Year 2000 contingency purposes.
The 1999 budget for new currency is
$500.15 million, or 22.3 percent more
than 1998 estimated expenditures
(chart A.1).

Special Categories of System Expense

Printing of Federal Reserve Notes
The budget for printing the 11.1 billion
new notes set for 1999 is $485.4 million,
or 97 percent of the total 1999 currency
budget. For January through September,
the calendar 1999 portion of the federal government’s fiscal year 1999,
production is set at 8.7 billion notes. The
Board’s staff estimates that provisions
for an additional supply cushion for the
century date change will mean that, for
October through December 1999, production could be 2.4 billion notes, which
is 20 percent more than is typical for
those months. The 1999 budget for note
production is based on the projected
destruction of 8 billion notes received
from circulation, an estimated 1 billion
increase in the number of notes in
circulation, and an increase of 2 billion
notes in Reserve Bank inventories.
Much of the rise in inventories is to
cover potential Year 2000 demand
(chart A.2).
The BEP charges the Board separately
for each of the three types of currency
produced, new-design, threaded, and
unthreaded (table A.5 and chart A.3).

57

Chart A.1
Federal Reserve Budget for
Supplying U.S. Currency, 1994–99
Millions of dollars

400

200

1994

1995

1996

1997

1998

1999

Note. For 1998 estimate; for 1999, budget.

The average price charged to the Board
by the BEP for producing all three types
of notes will increase 8.6 percent in
1999, from $40.26 per thousand notes
printed to $43.73. During 1999, 50 percent of the notes produced will be the
new-design Series 1996 ($20s, $50s,
and $100s), 14 percent will be other
threaded currency ($5s and $10s), and
the remaining 36 percent will have no
thread ($1s).
The billing rate for each type blends
the costs of producing the notes at

Table A.4
Federal Reserve Costs of Supplying Currency, 1998 and 1999
Thousands of dollars except as noted
1998
estimate

1999
budget

Percentage
change

Printing of new Federal Reserve notes . . . . . . . . . . . . . . . . . .
Shipment of new notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shipment of fit notes within the System . . . . . . . . . . . . . . . .
Counterfeit deterrence research . . . . . . . . . . . . . . . . . . . . . . . . .
Extended custodial inventory program 1 . . . . . . . . . . . . . . . . .
Return of currency pallets to Bureau of
Engraving and Printing 2 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursement to the U.S. Treasury . . . . . . . . . . . . . . . . . . . .

397,000
7,300
2,000
. . .
150

485,390
8,500
3,000
525
0

22.3
16.4
50.0
. . .
−100.0

30
2,600

30
2,700

0.0
3.8

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

409,080

500,145

22.3

Item

1. Funding for this program has now been assumed by
the Federal Reserve Bank of New York, which has
budgeted $260,000 for it in 1999.
. . . Not applicable.

2. Aluminum pallets, on which the BEP stores and
ships currency to Reserve Bank offices, facilitate efficient
handling and storage of the notes. The pallets remain at
the Reserve Bank offices until the currency is paid into
circulation.

58

Annual Report: Budget Review, 1999

Chart A.2
Use of Currency Printed, 1994–99
Millions of dollars
Inventory increase
Circulation increase

12

Currency replacement

8
4

1994

1995

1996

1997

1998

1999

Note. For 1998, estimates; for 1999, projections.

the Washington, D.C., and Fort Worth,
Texas, facilities of the BEP (chart A.3).
The Washington facility will print all the
new-design $100 and $50 notes during
1999, and both facilities will produce
the $1, $5, $10, and $20 denominations.

Shipment of Currency
The 1999 budget for currency transportation is $8.5 million, or 16.4 percent
more than 1998 estimated expenditures.
The increase in the cost of shipping
notes from the BEP’s facilities is due to
the 12.5 percent increase in volume of
notes shipped plus an estimated 3 percent increase both in the cost of airline
freight and in the base price of the
armored carriers.
Using competitive bidding, the Board
contracts with armored carriers to

transport new currency from the Washington and Fort Worth printing facilities to the Federal Reserve Banks and
Branches; much of the transport is by
air. Intra-System shipments of currency
are budgeted at $3.0 million for 1999,
50 percent more than 1998 estimated
expenditures. Traditionally, intra-System
shipments are used to move currency
from offices with excess fit currency,
primarily $100 notes at New York and
Los Angeles, to offices that otherwise
would require new currency from the
BEP.
The additional currency ordered for
the period around the century date
change will likely exceed the vault
capacity of several Reserve Bank offices,
and the BEP cannot store new currency
for the full length of the expected contingency period. Therefore, the System
will warehouse the additional new
currency at Bank offices with excess
storage capacity and redistribute it later;
the redistribution will increase the
transportation cost for intra-System shipments in 1999.
In addition, the BEP and some
Reserve Bank offices are holding inventories of the new-design $50s that
contain notes whose quality is unacceptable for circulation. The System will
ship these inventories of $50s to the
Baltimore Branch, where the defective
notes will be destroyed; the System
will ship the acceptable $50 notes from

Table A.5
Projected Cost of Printing New Notes, by Type of Note, 1999
Type of currency

Number of
notes (millions)

Percentage of
total notes

Cost per
thousand notes
(dollars)

Total cost
(thousands of
dollars)

New design ($20s, $50s, $100s). . . . . . . . .
Threaded ($5s, $10s) . . . . . . . . . . . . . . . . . .
Nonthreaded ($1s) . . . . . . . . . . . . . . . . . . . . .

5,600
1,500
4,000

50
14
36

56.65
36.10
28.50

317,240
54,150
114,000

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

11,100

100

43.73

485,390

Special Categories of System Expense
Chart A.3
Production of Currency, by Type, and
Unit Cost of Total Production, 1994–99
Dollars

45
40
35

Extended Custodial Inventory
Program

Billions of notes
Cost per 1,000 notes

12
Total production

9
Nonthreaded
Threaded
New design

59

6
3

1994 1995 1996 1997 1998 1999
Note. Left scale is cost; right scale is production
volume. Total production is the sum of nonthreaded,
threaded, and new design. For 1998, estimates; for 1999,
projections.

Baltimore to other Reserve Bank offices
for future distribution.

Counterfeit Deterrence Research
Through the SSG-2 (Special Studies
Group, second incarnation), which operates under the direction of the Group of
Ten central banks, the Federal Reserve
works on the deterrence of counterfeiting in cooperation with the issuing
authorities and banknote printers of
twenty-three other nations. Under its
mandate from the G-10 central banks,
SSG-2 is focusing its 1999 research on
counteracting the counterfeiting threat
posed by inexpensive scanners, computers, and printers. The 1999 currency
budget includes $525 thousand for such
research.

Since 1996 the Board has included the
cost of the extended custodial inventory
(ECI) program in the new currency
budget. The ECI program was established to provide an efficient means of
introducing the new-design $100 notes
to the international banknote market;
since then, the program’s purpose has
shifted to developing ways to enhance
the international system for distributing
banknotes. To further that end, expenses
of the program are now being covered
within the budget of the Federal Reserve
Bank of New York, which manages the
program and is expanding it. The Bank
has provided $260,000 for the 1999 ECI
program, or about 75 percent more than
the $150,000 budgeted in 1998.

Treasury’s Office of Currency
Standards
The Board reimburses the Department
of the Treasury for the operation of
the department’s Office of Currency
Standards. The 1999 currency budget
contains $2.7 million, or 3.8 percent
more than 1998 estimated costs, for such
reimbursement. The Office of Currency
Standards prescribes procedures to the
Federal Reserve Banks for canceling,
destroying, and accounting for unfit
currency. As a public service, the BEP
processes claims for the redemption of
damaged or mutilated currency that is
turned over to the Reserve Banks.

61

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 95 percent of current
income (table B.1).
The current expenses of the Reserve
Banks consist of their operating expenses
and the costs of the earnings credits
granted to depository institutions on
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
Table B.1
Income of the Federal Reserve System,
1997 and 1998
Millions of dollars
Source

1997
actual

1998
estimate

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

14.6
25,699.0
375.4
789.1
39.2

8.6
26,842.4
434.0
817.1
45.1

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

26,917.2

28,147.2

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
$20.7 billion for 1997 and are estimated to be $26.5 billion for 1998. In
addition to these payments, a special
transfer of surplus of $107 million
on October 1, 1997, was statutorily
required.

62

Annual Report: Budget Review, 1999

Table B.2
Distribution of the Income of the Federal Reserve Banks, 1997 and 1998
Millions of dollars
Item

1997
actual

1998
estimate

Current income 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less
Current expenses of Reserve Banks 2
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26,917

28,147

1,618
359

1,497
348

24,941

26,303

−2,577

1,915

35

8

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

174
364

178
409

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

300
832

343
732

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

20,659

26,549

1. 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
$200.1 million in 1997 and $288.4 million in 1998.
3. This account is the same as that reported under the
same name in the table ‘‘Income and Expenses of Federal Reserve Banks’’ in the Statistical Tables section of
the Board’s Annual Report and includes realized and
unrealized gains on assets denominated in foreign
currencies, gains on sales of U.S. government securities,
and miscellaneous gains and losses.

4. The cost of services provided to the U.S. Treasury
that are reimbursable under agreements with the Treasury
and for which reimbursement is not anticipated.
5. The Federal Reserve Act requires the Federal
Reserve to pay dividends to member banks at the rate of
6 percent of paid-in capital.
6. Each year, to provide a reserve against losses, the
Federal Reserve transfers to its surplus account an amount
sufficient to equate surplus to paid-in capital.
7. Does not reflect the special transfer of surplus from
the Federal Reserve System to the Treasury of $107 million on October 1, 1997.

63

Appendix C

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

Independent Audit
The Board of Governors contracts
with an external audit firm, currently
PricewaterhouseCoopers L.L.P., for an
annual financial 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 financial examiners.

General Accounting Office
The 1978 passage of the Federal Banking Agency Audit Act (Public Law
95–320) brought most of the operations
of the Federal Reserve System under
the purview of the General Accounting Office (GAO). The GAO, which
currently has 15 projects in various
stages of completion, since 1979 has
completed 169 reports on selected
aspects of Federal Reserve operations
(tables C.1 and C.2). The GAO has also
involved the Federal Reserve in about
94 other reviews not directly related
to the System and has terminated 54
others before completion. The reports
are available directly from the GAO.

64

Annual Report: Budget Review, 1999

Table C.1
Active GAO Projects Relating to the Federal Reserve
Subject

Date initiated

On-line banking effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA section 7(a) loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory discretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1998 consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank mergers and fair lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk based supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-line banking phase II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Emerging markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FR Systems’ Year 2000 computer efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 2000 risks of international activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Social security reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effects of megabank mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial operations of the International Monetary Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surveys of small businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8-28-97
11-19-97
4-20-98
4-21-98
6-9-98
7-27-98
8-4-98
8-24-98
9-1-98
9-17-98
9-21-98
10-15-98
10-30-98
11-25-98
12-10-98

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

Number

Date issued

GGD-79-27
EMD-79-45

3-29-79
6-11-79

GGD-79-42
GGD-79-75

6-19-79
8-1-79

FPCD-79-17

8-31-79

GGD-80-20

2-12-80

GGD-80-21

3-12-80

GGD-80-64
GGD-80-59

5-29-80
8-8-80

GGD-80-66

8-26-80

GGD-81-12

1-6-81

GGD-81-13

1-21-81

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

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

GGD-81-21

4-24-81

GGD-81-49

5-21-81

GGD-81-80

7-23-81

GGD-81-79

8-18-81

Federal Reserve System Audits

65

Table C.2
Continued
Report
Financial Institution Regulatory Agencies Should Perform Internal Audit
Reviews of their Examination and Supervision Activities . . . . . . . . .
Information on Selected Aspects of Federal Reserve System Expenditures .
Federal Review of Intrastate Branching Can Be Reduced . . . . . . . . . . . . . .
Despite Improvements, Recent Bank Supervision Could
Be More Effective and Less Burdensome . . . . . . . . . . . . . . . . . . . . . . . .
Issues to Be Considered while Debating Interstate Bank Branching . . . . .
The Federal Reserve Should Move Faster to Eliminate Subsidy
of Check-Clearing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information about Depository Institutions’ Ancillary Activities Is Not
Adequate for Policy Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Merger Process Should Be Modernized and Simplified . . . . . . . . . . .
An Analysis of Fiscal and Monetary Policies . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Examination for Country Risk and International Lending . . . . . . . . .
Credit Insurance Disclosure Provisions of the Truth-in-Lending Act
Consistently Enforced Except When Decisions Appealed . . . . . . . . . .
Survey of Investor Protection and the Regulation
of Financial Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Institutions Regulatory Agencies Can Make Better Use
of Consumer Complaint Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expediting Tax Deposits Can Increase the Government’s
Interest Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unauthorized Disclosure of the Federal Reserve’s
Monetary Policy Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Financial Institutions Examination Council Has Made Limited
Progress toward Accomplishing Its Mission . . . . . . . . . . . . . . . . . . . . . .
Control Improvements Needed in Accounting for Treasury Securities
at the Federal Reserve Bank of New York . . . . . . . . . . . . . . . . . . . . . . . .
Statutory Requirements for Examining International Banking
Institutions Need Attention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supervisory Examinations of International Banking Facilities
Need to Be Improved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Examination of Concerns Expressed about the Federal Reserve’s
Pricing of Check-Clearing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Difficulties in Evaluating the Effectiveness of the Community
Reinvestment Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

GGD-82-5

10-19-81

GGD-82-33
GGD-82-31

2-12-82
2-24-82

GGD-82-21
GGD-82-36

2-26-82
4-9-82

GGD-82-22

5-7-82

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

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

GGD-83-3

10-25-82

GGD-83-30

7-13-83

GGD-83-13

8-25-83

GGD-84-14

11-21-83

GGD-84-40

2-3-84

GGD-84-4

2-3-84

AFMD-84-10

5-2-84

GGD-84-39

7-11-84

GGD-84-65

9-30-84

GGD-85-9A

1-14-85

OCE-86-1

11-4-85

International Coordination of Bank Supervision: The Record to Date . . .
Implementation of the Export Trading Company Act of 1982 . . . . . . . . . .
Information on Independent Public Accountant Audits
of Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
An Analysis of Two Types of Pooled Investment Funds . . . . . . . . . . . . . . .
How the Markets Are Developed and How They Are Regulated . . . . . . .
U.S. Banking Supervision and International Supervisory Principles . . . . .
Financial Institution Regulators’ Compliance Examination . . . . . . . . . . . . .
The Market’s Structure, Risks, and Regulation . . . . . . . . . . . . . . . . . . . . . . . .
Dealer Views on Market Operations and Federal Reserve
Securities Transfer System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Questions about the Federal Reserve’s Securities Transfer System . . . . . .

NSIAD-86-40
NSIAD-86-42

2-6-86
2-27-86

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

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

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

9-29-86
10-20-86

Federal Reserve Board Opposition to Credit Card Interest Rate Limits .
Insulating Banks from the Potential Risk of Expanded Activities . . . . . . .
The Federal Reserve Response Regarding Its Market-Making Standard .
Change in Fees and Deposit Account Interest Rates since Deregulation .
An Examination of Views Expressed about Access to Brokers’ Services .

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

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

66

Annual Report: Budget Review, 1999

Table C.2
Completed GAO Reports Relating to the Federal Reserve System—Continued
Report
Issues Related to Repeal of the Glass–Steagall Act . . . . . . . . . . . . . . . . . . . .
Preliminary Observations on the October 1987 Crash . . . . . . . . . . . . . . . . . .
Supervision of Overseas Lending Is Inadequate . . . . . . . . . . . . . . . . . . . . . . .
Competitive Concerns of Foreign Financial Firms in Japan,
the United Kingdom and the United States . . . . . . . . . . . . . . . . . . . . . . .
Administrative Expenses at FHLBB and FRB for 1985 and 1986 . . . . . .
Government in the Sunshine Act Compliance at Selected Agencies . . . .
Trends in Commercial Bank Performance, December 1976–June 1987 . .
U.S. Commercial Banks’ Securities Activities in London . . . . . . . . . . . . . . .
Lending to Troubled Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government Check-Cashing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conflict of Interest: Abuses in Commercial Banking Institutions . . . . . . .
Competitive Fairness Is an Elusive Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Audits Needed to Strengthen Internal Control
and Bank Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information on the System’s Check Collection Service . . . . . . . . . . . . . . . .

Number

Date issued

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

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

NSIAD-88-171
AFMD-88-33
GGD-88-97
GGD-88-106BR
NSIAD-88-238
GGD-88-126BR
GGD-89-12

6-2-88
6-15-88
7-20-88
7-28-88
9-8-88
9-26-88
10-7-88

GGD-89-35
GGD-89-61

1-27-89
5-12-89

AFMD-89-25
GGD-90-17

5-31-89
12-15-89

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

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

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

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

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

GGD-90-114
GGD-90-113

9-14-90
9-25-90

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

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

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

GGD-91-128

9-16-91

GGD-91-131

9-20-91

GGD-91-132
AFMD-92-19

9-30-91
10-21-91

Contracting Practices with Data Processing Servicers . . . . . . . . . . . . . . . . . .
Challenges to Harmonizing International Capital Standards Remain . . . .
Assessing the Need to Regulate Additional Financial Activities . . . . . . . .
Call Report Automation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flexible Accounting Rules Lead to Inflated Financial Reports . . . . . . . . . .
Cross-Border Information Sharing Is Improving, but Obstacles Remain .
Changes in Collateral Practices Could Reduce the Federal
Government’s Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Initial Assessment of Certain BCCI Activities in the U.S. . . . . . . . . . . . . . .
Appraisal Reform: Implementation Status and Unresolved Issues . . . . . . .

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

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

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

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

Federal Reserve System Audits

67

Table C.2
Continued
Report
Bank and Thrift Criminal Fraud: The Federal Commitment
Could Be Broadened . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FRB Examinations and Inspections Do Not Fully Assess Bank Safety
and Soundness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Improvements Needed in Examination Quality and Regulatory Structure .
Personnel Engaged in Public and Congressional Affairs
in Federal Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Availability Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury Automation: Automated Auction May Not Achieve Benefits
or Operate Properly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IRS Can Improve the Federal Tax Deposit System . . . . . . . . . . . . . . . . . . . .
Funding Foreign Bank Examinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preliminary Information Related to a Futures Transaction Fee . . . . . . . . . .
The Business Environment in the United States, Japan,
and Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Impediments to Small Business Lending Should Be
Removed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Developments in Foreign Exchange Markets . . . . . . . . . . . . . . . . . . .
Benefits and Risks of Removing Regulatory Restrictions . . . . . . . . . . . . . . .
Regulatory Burden: Recent Studies, Industry Issues,
and Agency Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strengthening the Framework for Supervising International Banks . . . . . .
Insider Problems and Violations Indicate Broader Management
Deficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Credit Card Industry: Competitive Developments Need to be
Closely Monitored . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Better Guidance Is Needed for Real Estate Evaluations . . . . . . . . . . . . . . . .
Treasury Securities Auction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divergent Loan Loss Methods Undermine Usefulness
of Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interstate Banking: Experiences in Three Western States . . . . . . . . . . . . . . .

Number

Date issued

GGD-93-48

1-8-93

AFMD-93-13
AFMD-93-15

2-16-93
2-16-93

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

3-8-93
3-30-93

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

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

GGD-93-124

8-9-93

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

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

GGD-94-28

12-13-93

GGD-94-68

3-21-94

GGD-94-88

3-30-94

GGD-94-23
GGD-94-144
AIMD-94-165R
AIMD-95-8
GGD-95-35

Lessons Learned from Resolving First City Bancorporation of Texas . . .
Investment of Trust Assets in Bank Proprietary Mutual Funds . . . . . . . . .
Status Report on the Initiative to Improve Economic Statistics . . . . . . . . .
Mandated Studies to Review Costly Bank and Thrift Failures . . . . . . . . . .
Differences in Screening Bank Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banks’ Securities Activities: Oversight Differs Depending on Activity
and Regulator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual Funds: Impact on Bank Deposits and Credit Availability . . . . . . .
Bank Mutual Funds: Sales Practices and Regulatory Issues . . . . . . . . . . . .
Challenges Remain to Successfully Implement CRA . . . . . . . . . . . . . . . . . . .

GGD-95-37
GGD-95-21
GGD-95-98
GGD-95-126
GGD-95-181R

Foreign Banks: Assessing Their Role in the U.S. Banking System . . . . . .
Federal Reserve Banks: Internal Control, Accounting,
and Auditing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico’s Financial Crisis: Origins, Awareness, Assistance,
and Initial Efforts to Recover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Counterfeit U.S. Currency Abroad: Issues and U.S. Deterrence Efforts . .
Money Laundering: A Framework for Understanding
U.S. Efforts Overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve System: Current and Future Challenges
Require Systemwide Attention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Lending: Federal Oversight and Enforcement Improved
but Some Challenges Remain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Reserve Banks: Inaccurate Reporting of Currency
at the Los Angeles Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GGD-96-26

GGD-95-214
GGD-95-230
GGD-95-210
GGD-96-23

AIMD-96-5

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

GGD-96-56
GGD-96-11

2-23-96
2-26-96

GGD-96-105

5-24-96

GGD-96-128

6-17-96

GGD-96-145

8-13-96

AIMD-96-146

9-30-96

68

Annual Report: Budget Review, 1999

Table C.2
Completed GAO Reports Relating to the Federal Reserve System—Continued
Report
Implementation of the Foreign Bank Supervision Enhancement
Act of 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Derivatives: Actions Taken or Proposed since May 1994 . . . . .
Inspectors General: Mandated Studies to Review Costly Bank
and Thrift Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Burden: Measurement Challenges and Concerns
Raised by Selected Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Oversight Structure: U.S. and Foreign Experience May Offer
Lessons for Modernizing U.S. Structure . . . . . . . . . . . . . . . . . . . . . . . . . .
Implementation of FDICIA’s Prompt Regulatory Action Provisions . . . . .
Bank Regulatory Structure: Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number

Date issued

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

9-30-96
11-1-96

GGD-97-4

11-7-96

GGD-97-2

11-18-96

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

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

Bank Data: Material Loss of Oversight Information from
Interstate Banking Is Unlikely . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GGD-97-49
The Commodity Exchange Act: Legal and Regulatory Issues Remain . .
GGD-97-50
Treasury’s Plan to Study Genuine and Counterfeit U.S. Currency Abroad . NSIAD-97-104
Bank Oversight: Few Cases of Tying Have Been Detected . . . . . . . . . . . . .
GGD-97-58
Foreign Banks: Opportunities Exist to Enhance Supervision Programs
as Implementation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GGD-97-80
Four Financial Crises in the 1980s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GGD-97-96
Payments, Clearance, and Settlement: A Guide to the Systems, Risks,
and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GGD-97-73
International Financial Crises: Efforts to Anticipate, Avoid,
and Resolve Sovereign Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GGD-NSIAD-97-168
Federal Reserve Banks: Internal Controls Over Cash at Atlanta,
Los Angeles, and Philadelphia Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . AIMD-97-127
Foreign Banks: Internal Control and Audit Weaknesses in U.S. Branches .
GGD-97-181
OTC Derivatives: Additional Oversight Could Reduce Costly
Sales Practice Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GGD-98-5
Information on Private Banking and Its Vulnerability
to Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GGD-98-19R
Electronic Banking: Experiences Reported by Banks
in Implementing On-line Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Oversight of Offshore Private Banking Activities . . . . . . . . . . .
Year 2000 Computing Crisis: Actions Needed
on Electronic Data Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experience With Electronic Check Presentment . . . . . . . . . . . . . . . . . . . . . . .
Risk-Based Capital: Regulatory and Industry Approaches
to Capital and Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High-Loan-To-Value Lending: Information on Loans Exceeding
Home Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Live Loan Checks: Information on Unsolicited Consumer Loans . . . . . . . .
for Preapproved Borrowers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 2000 Computing Crisis: Federal Reserve Is Acting to Ensure
Financial Institutions Are Fixing Systems But Challenges Remain. .
Federal Reserve Banks: Areas for Improvements in Computer Controls .
The Results Act: Observations on the Federal Reserve’s
1998–99 Biennial Performance Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Office of Inspector General
The Board’s Office of Inspector General
functions in accordance with the Inspector General Act of 1978, as amended.
The OIG plans and conducts audits and

3-26-97
4-7-97
4-11-97
5-8-97
5-9-97
5-21-97
6-20-97
7-7-97
8-28-97
9-29-97
10-2-97
10-30-97

GGD-98-34
GGD-98-154

1-15-98
6-29-98

AIMD-98-124
GGD-98-145

7-1-98
7-14-98

GGD-98-153

7-20-98

GGD-98-169

8-13-98

GGD-98-176

8-14-98

AIMD-98-248
AIMD-99-5

9-17-98
10-14-98

GGD-99-9R

11-9-98

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 recom-

Federal Reserve System Audits

69

Table C.3
Completed OIG Reports Relating to the Federal Reserve System, 1998
Report

Number

Audit of the Federal Reserve System’s Application Commitment Processing . .
Audit Scoping Review of the FFIEC’s Operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Board’s Compliance with the Service Pricing
Provisions of the Monetary Control Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Division of Reserve Bank Operations and
Payments Systems’ Distributed Processing Environment . . . . . . . . . . . . . . . .
Audit of the Federal Reserve’s Implementation of
the Risk-Focused Approach to Supervising Community Banks . . . . . . . . . .
InterFed Security and Controls Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assistance to Financial Statement Audit of the Federal Reserve
Employee Benefits System (years ended 12-31-97 and 12-31-96) . . . . . . . .
Audit of the FFIEC’s Financial Statements (years ended 12-31-97
and 12-31-96) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit of the Board’s Financial Statements (years-ended 12-31-97
and 12-31-96) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review of Internal Controls in the Board’s Protocol Office . . . . . . . . . . . . . . . . . .
Control Self-Assessment of Information Resources Management’s
Central Automation and Telecommunications Operations Center . . . . . . . . .
Interim Assessments on the Board’s Year 2000 Readiness Activities
(Advisory Letters) 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A9710
A9802

January
February

A9703

March

A9707

March

A9709
A9711

March
March

A9804

March

A9801

March

A9801
A9805

March
May

P9717

July

Advisory Letter to the Board’s Federal Reserve Bank Affairs
Committee Regarding the System’s Approach to Allocating
Certain Corporate Overhead Costs Among Priced Services . . . . . . . . . . . . . .

Month issued

. . .

March,
July, and
September

A9703

September

1. These assessments consolidated information from
separate audits of the three components of the Board’s
response to the Year 2000 problem: oversight of financial
institution efforts by the Division of Banking Supervision
and Regulation (A9713), Board systems (A9803), and
monitoring of Reserve Bank efforts by the Division of

Reserve Bank Operations and Payment Systems (A9807).
On Sept. 17, the Inspector General provided written
testimony to the Committee on Banking and Financial
Services, U.S. House of Representatives, regarding the
status of the Federal Reserve’s Year 2000 work.
. . . Not applicable.

mends 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 1998, the OIG publicly
reported on fifteen audits, reviews, and
assessments (table C.3) and conducted a
number of follow-up reviews to evaluate
action taken on earlier recommendations, In addition, the OIG closed three
investigations and performed numerous
legislative and regulatory reviews.

71

Appendix D

Expenses and Employment
at the Federal Reserve Banks
Table D.1
Operating Expenses of the Federal Reserve Banks, by District, 1998 and 1999
Thousands of dollars except as noted

District

1998
estimate

Change

1999
budget

Amount

Percent

Boston 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . .
Philadelphia . . . . . . . . . . . . . . . . . . . . . . . .
Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . .
Richmond . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlanta 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minneapolis . . . . . . . . . . . . . . . . . . . . . . . .
Kansas City . . . . . . . . . . . . . . . . . . . . . . . .
Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco . . . . . . . . . . . . . . . . . . . . . . .

146,466
433,081
107,323
122,427
159,073
204,424
211,503
108,544
105,005
126,075
127,948
227,731

117,948
448,748
111,473
126,283
166,190
247,232
219,156
112,452
108,556
130,888
132,699
237,599

−28,518
15,667
4,150
3,857
7,116
42,808
7,653
3,908
3,551
4,813
4,751
9,867

−19.5
3.6
3.9
3.2
4.5
20.9
3.6
3.6
3.4
3.8
3.7
4.3

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

2,079,600

2,159,222

79,622

3.8

Special project
Automation Consolidation . . . . . . . . . . .

3,801

0

−3,801

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

2,083,401

2,159,222

75,821

Note. Excludes capital outlays.
1. Boston’s 1998 estimate and Atlanta’s 1999 budget
include expenses for the transportation of commercial
checks by the Federal Reserve’s Interdistrict Transpor-

−100
3.6

tation System ($32,808 in 1998 and $33,120 in 1999).
When these expenses are excluded, Boston’s year-overyear increase is 3.8 percent and Atlanta’s year-over-year
is 4.7 percent.

72

Annual Report: Budget Review, 1999

Table D.2
Employment at the Federal Reserve Banks, by District, 1998 and 1999
Average number of personnel except as noted 1
1998
estimate

1999
budget

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

1,221
3,917
1,245
1,325
2,093
2,561
2,104
1,218
1,227
1,494
1,487
2,517

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

District

Change
Amount

Percent

1,235
3,833
1,254
1,366
2,130
2,612
2,159
1,265
1,216
1,535
1,500
2,549

14
−85
9
41
37
51
55
47
−11
41
13
32

1.1
−2.2
.7
3.1
1.8
2.0
2.6
3.8
−.9
2.7
.9
1.3

22,409

22,652

242

1.1

Federal Reserve Information
Technology 2 . . . . . . . . . . . . . . . . . . . . . .

585

619

34

5.8

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

22,995

23,271

276

1.2

1. See chapter 3, note 2, for definition of average
number of personnel.
2. The ANP associated with FRIT excludes the
Information Technology Planning and Standards staff

located in San Francisco (13 ANP in the 1998 estimate
and 11 ANP in the 1999 budget).

Table D.3
Expenses of the Federal Reserve Banks, by Operational Area, 1998 and 1999
Thousands of dollars except as noted

Operational area

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

1998
estimate

1999
budget

Change
Amount

Percent

153,559

167,125

13,566

8.8

223,309

222,735

−574

−.3

1,250,554
452,178

1,292,505
476,857

41,951
24,679

3.4
5.5

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

2,079,600

2,159,222

79,622

3.8

Memo
Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . .

764,587
544,108

801,934
555,831

37,347
11,722

4.9
2.2

1

1. The costs of support and overhead are included in
the expenses by operational area shown above. Support
refers to activities, such as data processing, for which
costs can be charged to users according to the amount of

use. Overhead refers to activities, such as auditing, for
which costs are charged according to the users’ shares of
total direct costs.

Expenses and Employment

73

Table D.4
Expenses of the Federal Reserve Banks
for Salaries of Officers and Employees, by District, 1998 and 1999
Thousands of dollars except as noted
1998
estimate

1999
budget

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

59,089
215,104
52,114
51,441
80,881
94,089
95,571
47,741
48,677
60,230
62,214
121,834

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

988,985

District

Change
Amount

Percent

62,317
225,498
54,873
56,180
87,427
101,269
103,167
51,893
50,409
63,797
65,094
131,040

3,228
10,394
2,760
4,739
6,545
7,180
7,596
4,152
1,732
3,567
2,879
9,206

5.5
4.8
5.3
9.2
8.1
7.6
7.9
8.7
3.6
5.9
4.6
7.6

1,052,963

63,978

6.5

Table D.5
Factors in the Change from 1998 to 1999 in the Salaries
of Officers and Employees of the Federal Reserve Banks, by District
Percentage points

District

Merit
adjustment

Structure
adjustment

Promotion
and reclassification

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

3.3
4.4
4.1
4.4
4.2
4.1
4.0
4.3
4.0
4.0
3.8
4.4

.5
.4
.3
.3
.9
.2
.4
.4
.0
.5
.2
.4

1.0
.8
.3
.8
1.0
1.0
1.3
1.0
.5
1.1
.7
.7

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

4.2

.4

.8

Change in Turnover Overtime
staffing
and lag 1

Other

Total
change

1.8
−.4
1.3
4.9
3.7
2.8
3.8
4.8
−.3
2.8
1.1
1.8

−.6
−.1
−.5
−.4
−1.2
−.2
−1.4
−.7
−.5
−1.5
−.2
.2

−.5
−.4
−.2
−.7
−.5
−.4
−.3
−1.0
−.1
−1.0
−.9
.0

.0
.1
.0
.0
.0
.0
.1
.0
.0
.0
.1
.0

5.5
4.8
5.3
9.2
8.1
7.6
7.9
8.7
3.6
5.9
4.6
7.6

1.9

−.5

−.4

.0

6.5

1. Turnover is the replacement of a departing employee with one having a lower pay grade.
Lag is the time during which a position remains vacant.

74

Annual Report: Budget Review, 1999

Table D.6
Capital Outlays of the Federal Reserve Banks, by District, 1998 and 1999
Thousands of dollars except as noted
1998
estimate

1999
budget

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

10,789
46,610
7,219
47,398
15,858
39,999
15,346
9,391
5,758
9,175
9,189
24,832

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

District

Change
Amount

Percent

11,138
96,392
8,242
21,957
28,082
109,541
19,086
16,135
7,340
6,165
7,442
35,396

350
49,782
1,023
−25,442
12,224
69,541
3,740
6,743
1,582
−3,010
−1,747
10,564

3.2
106.8
14.2
−53.7
77.1
173.9
24.4
71.8
27.5
−32.8
−19.0
42.5

241,564

366,914

125,350

51.9

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

34,722

38,641

3,919

11.3

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

276,287

405,556

129,269

46.8

Table D.7
Budget Performance of the Federal Reserve Banks,
Operating Expenses, by District, 1998
Thousands of dollars except as noted

District

1998
budget

1998
estimate

Change
Amount

Percent

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

143,620
437,029
107,196
122,869
158,140
192,194
210,927
102,138
103,988
124,017
127,955
224,600

146,466
433,081
107,323
122,427
159,073
204,424
211,503
108,544
105,005
126,075
127,948
227,731

2,846
−3,948
127
−443
933
12,230
577
6,406
1,017
2,058
−7
3,132

2.0
−.9
.1
−.4
.6
6.4
.3
6.3
1.0
1.7
.0
1.4

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

2,054,671

2,079,600

24,928

1.2

Special project
Automation Consolidation . . . . . . . . . . .

4,649

3,801

−848

−18.2

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

2,059,321

2,083,401

24,080

1.2

Note. Excludes capital outlays.

Expenses and Employment

75

Table D.8
Budget Performance of the Federal Reserve Banks,
Employment, by District, 1998
Average number of personnel except as noted 1
1998
budget

1998
estimate

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

1,233
3,917
1,246
1,325
2,085
2,335
2,105
1,212
1,201
1,509
1,516
2,472

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

District

Change
Amount

Percent

1,221
3,917
1,245
1,325
2,093
2,561
2,104
1,218
1,227
1,494
1,487
2,517

−12
0
−1
0
8
226
−1
6
25
−15
−29
45

−1.0
.0
−.1
.0
.4
9.7
−.1
.5
2.1
−1.0
−1.9
1.8

22,156

22,409

254

1.1

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

598

585

−13

−2.1

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

22,754

22,995

241

1.1

1. See chapter 3, note 2, for definition of average number of personnel.

Table D.9
Operating Expenses of the Federal Reserve Banks, by Operational Area, 1994–99
Thousands of dollars except as noted

Monetary
and
economic
policy

Services to
the U.S.
Treasury
and other
government
agencies

Services to
financial
institutions
and the
public

Supervision
and
regulation

Total

........................
........................
........................
........................
estimate . . . . . . . . . . . . . . .
budget . . . . . . . . . . . . . . . . .

120,869
128,303
138,649
144,103
153,559
167,125

209,453
216,790
215,609
207,079
223,309
222,735

1,105,140
1,127,320
1,177,444
1,215,069
1,250,554
1,292,505

361,458
392,294
424,402
436,392
452,178
476,857

1,796,920
1,864,707
1,956,104
2,002,643
2,079,600
2,159,222

Memo
Average annual
change (percent) . . . . . . . .

6.7

1.2

3.2

5.7

3.7

Year

1994
1995
1996
1997
1998
1999

Note. Excludes special project.

76

Annual Report: Budget Review, 1999

Table D.10
Employment at the Federal Reserve Banks, by Operational Area, 1994–99
Average number of personnel except as noted 1

Monetary
and
economic
policy

Services to
the U.S.
Treasury
and other
government
agencies

Services to
financial
institutions
and the
public

Supervision
and
regulation

Support 2

Overhead 2

Total

.....................
.....................
.....................
.....................
estimate . . . . . . . . . . . .
budget . . . . . . . . . . . . . .

729
737
734
718
712
728

1,754
1,683
1,543
1,438
1,422
1,394

8,301
8,209
8,083
7,954
8,096
8,138

3,079
3,073
3,111
2,980
2,890
2,927

4,603
4,511
4,537
4,572
4,552
4,691

5,162
4,949
4,901
4,821
4,737
4,774

23,627
23,162
22,909
22,483
22,410
22,652

Memo
Average annual
change (percent) . . . . .

.0

−4.5

−.4

−1.0

−.4

−1.5

−.8

Year

1994
1995
1996
1997
1998
1999

1. Excludes special projects and Federal Reserve
Information Technology. See chapter 3, note 2, for
definition of average number of personnel.

2. See table D.3, note 1, for definition.

Maps of the
Federal Reserve System

78

Annual Report: Budget Review, 1999

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 1998.

Maps of the Federal Reserve System
1–A

2–B

4–D

3–C

5–E

Pittsburgh

ME

79

Baltimore

MD

NY
PA
VA

NJ

PA

CT

OH

VT

WV

WV
NH

Buffalo
NY

NJ

CT

NC

Cincinnati

DE

MA

Charlotte

KY
SC

RI

BOSTON

NEW YORK

7–G

6–F

RICHMOND

CLEVELAND

PHILADELPHIA

8–H

Nashville

TN

KY

Birmingham

AL

MI
IL

WI

MS

GA

Detroit

IA

IN

Louisville

MO

TN
LA

AR

Jacksonville

New Orleans

Memphis

IL

Little
Rock

IN

FL

MS

Miami

9–I

ST. LOUIS

CHICAGO

ATLANTA
MT
ND

MN

Helena
MI
WI
SD

MINNEAPOLIS
12–L

10–J
WY

NE

Omaha

CO

MO

Denver

KS

ALASKA

WA

Seattle

NM

Oklahoma City
Portland
OK
OR

KANSAS CITY

ID
CA
NV

11–K

TX

Salt Lake City

NM

LA

El Paso

UT

Houston
Los Angeles
San Antonio
HAWAII
AZ

DALLAS

SAN FRANCISCO

FRB1/1–1200–0499–C