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Board of Governors of the Federal Reserve System

2003

Board of Governors of the Federal Reserve System

2003

March 2003
This publication is available from Publications Services, Board of Governors
of the Federal Reserve System, Washington, DC 25001. It is also available
on the Board’s World Wide Web site, at HTTP://www.federalreserve.gov/

Contents
Introduction
1 Summary of 2002 income and expenditures
1 Budget processes
2 Operational areas

The Budgets
7
8
8
9
10

Chapter 1
FEDERAL RESERVE SYSTEM
2003 System budget initiatives
Risks in the 2003 budget
Trends in expenses and employment
2003 capital budgets

11
11
11
12
12
15
15
15
16
18
18

Chapter 2
BOARD OF GOVERNORS
Planning issues
Major initiatives
Ramifications of the September 11 terrorist attacks
Operations budget by operational area
Capital budget
Positions
2000–2001 budget performance
Trends in expenses and employment
Survey expenses
Office of Inspector General

19
20
21
25

Chapter 3
FEDERAL RESERVE BANKS
2002 budget performance
The 2003 budget
2003 capital budget

Appendixes
Appendix A
29 FEDERAL RESERVE BUDGET PROCESSES
29 Board of Governors
30 Federal Reserve Banks
Appendix B
31 PRICED SERVICES
31 Annual pricing process

33
33
34
34
34

Appendix C
CURRENCY BUDGET
Printing of Federal Reserve notes
Currency transportation
Counterfeit-deterrence research
Treasury’s Office of Currency Standards

Appendix D
35 EXPENSES AND EMPLOYMENT AT THE BOARD OF GOVERNORS
Appendix E
39 EXPENSES AND EMPLOYMENT AT THE FEDERAL RESERVE BANKS
46 MAPS OF THE FEDERAL RESERVE SYSTEM

1

Introduction
The Federal Reserve System consists of
the Board of Governors in Washington,
D.C., the twelve Federal Reserve Banks
with their twenty-five Branches distrib­
uted throughout the nation, the Federal
Open Market Committee (FOMC), and
three advisory groups—the Federal
Advisory Council, the Consumer Advi­
sory Council, and the Thrift Institutions
Advisory Council. The System was cre­
ated 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 Fed­
eral Reserve has many, varied responsi­
bilities. It acts to ensure that the nation’s
economy grows at a pace consistent with
price stability; it serves as the nation’s
lender of last resort, with responsibility
for forestalling national liquidity crises;
and it is involved in bank supervision and
regulation, with responsibilities for bank
holding companies, financial holding
companies (created under the GrammLeach-Bliley Act, enacted in November
1999), state-chartered banks that are
members of the Federal Reserve System,
the foreign activities of U.S. banks, and
the U.S. activities of foreign banks. The
Federal Reserve also administers the
nation’s financial consumer protection
laws.
The Federal Reserve System plays a
major role in the nation’s payment mecha­
nism. The Reserve Banks distribute cur­
rency and coin; process Fedwire, automated clearinghouse, and securities
transfers; and process checks. In addition,
the Federal Reserve Banks serve as the
fiscal agents of the United States and pro-

vide a variety of financial services for the
Treasury and other government agencies.
For a fuller discussion of the Federal
Reserve’s responsibilities, see the Board
publication The Federal Reserve System:
Purposes and Functions.

Summary of 2002 Income and
Expenditures
In carrying out its responsibilities in 2002,
the Federal Reserve System incurred an
estimated $1.6 billion in net operating
expenses. Total spending of an estimated
$2.9 billion was offset by an estimated
$1.3 billion in revenue from priced ser­
vices, claims for reimbursement, and
other income.
The major source of Federal Reserve
income is earnings from the portfolio of
U.S. government securities in the System
Open Market Account, estimated at $25.5
billion in 2002. Earnings in excess of
expenses, dividends, and surplus are
transferred to the U.S. Treasury—an
estimated $24.5 billion in 2002. (These
earnings are treated as receipts in the U.S.
budget accounting system and as antici­
pated earnings projected by the Office
of Management and Budget in the U.S.
budget.)

Budget Processes
Beginning with the 1998–99 budget, the
Board of Governors has operated on a
two-year budget cycle and a four-year
planning cycle. This multiyear process
allows the Board to define and implement
long-term strategies across functional
areas. Given their current business needs,
the Federal Reserve Banks maintain an

2 Annual Report: Budget Review, 2003

annual budget cycle. For more informa­
tion on the budget processes, see appen­
dix A.

economic studies on regional, national,
and international issues.

Supervision and Regulation
Operational Areas
In 2002, the Federal Reserve System
accounted for costs using the following
categories—monetary and economic
policy, supervision and regulation of
financial institutions, services to financial
institutions and the public, services to the
U.S. Treasury and other government
agencies, and System policy direction and
oversight.

Monetary and Economic Policy
The monetary and economic policy
operational area encompasses Federal
Reserve actions to influence the availabil­
ity and cost of money and credit in the
nation’s economy. In 2002, the FOMC
held eight regularly scheduled meetings
and adjusted the federal funds rate once.
A vast amount of banking and finan­
cial data flows through the Reserve Banks
to the Board, where it is compiled and
made available to the public. The research
staffs at the Board and the Reserve Banks
use these data, along with information
collected by other public and private
institutions, to assess the state of the
economy and the relationships between
the financial markets and economic
activity. Staff members provide background information for the Board of
Governors and for each meeting of the
FOMC by preparing detailed economic
and financial analyses and projections for
the domestic economy and international
markets. The Board and the FOMC use
these analyses and projections in setting
reserve requirements, setting the discount
rate (which affects the cost of borrowing),
and conducting open market operations.
Staff members also conduct longer-run

The Federal Reserve System plays a
major role in the supervision and regula­
tion of banks and bank holding compa­
nies. The Board of Governors adopts
regulations to carry out statutory direc­
tives 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 applica­
tions for mergers, acquisitions, and
changes in control from banks and bank
holding companies, and take formal
supervisory actions. In 2002, the Federal
Reserve conducted 550 examinations of
state member banks (some of them jointly
with state agencies) and 580 inspections
and 3,683 risk assessments of bank hold­
ing companies; it acted on 1,885 interna­
tional and domestic applications.
The Board also enforces state member
banks’ and certain foreign banking orga­
nizations’ compliance with the federal
laws protecting consumers in their use of
credit and deposit products. In 2002,
the System conducted 358 compliance
examinations, including 301 covering
state member banks and 57 covering for­
eign banking organizations. Procedures
related to the Community Reinvestment
Act were included in 265 of the compli­
ance examinations.
The Board’s supervisory responsibili­
ties 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 Fed-

Introduction

eral Reserve’s role as lender of last
resort.

Services to Financial Institutions
and the Public
The Federal Reserve System plays a
central role in the nation’s payment
mechanism, which is composed of many
independent systems that move funds
among financial institutions across the
country. The Reserve Banks obtain cur­
rency and coin from the Bureau of
Engraving and Printing and from the Mint
and distribute them to the public through
depository institutions; they receive
deposits of currency and coin from
depository institutions; and they identify
counterfeits and destroy currency that is
unfit for circulation. In 2002, the Reserve
Banks received $574.7 billion in currency
and $4.6 billion in coin from depository
institutions, distributed an estimated
$617.4 billion in currency and $5.9 bil­
lion in coin, and destroyed $92.5 billion
in unfit currency.
The Reserve Banks (along with their
Branches and regional centers) also pro­
cess checks for collection. In 2002, the
Reserve Banks processed approximately
16.6 billion commercial checks for col­
lection, with a total value of about $15
trillion.
The Federal Reserve also plays a cen­
tral role in the nation’s payments mecha­
nism through its Fedwire Funds Service.
Through this service, depository institu­
tions can draw on their reserve or clear­
ing balances at the Reserve Banks and
transfer funds to other institutions that
maintain accounts at the Reserve Banks.
In 2002, Fedwire funds participants origi­
nated approximately 115 million Fedwire
funds transfers, valued at about $406
trillion.
The Federal Reserve allows partici­
pants in private clearing arrangements to
exchange and settle transactions through
reserve or clearing account balances. The

3

Reserve Banks’ National Settlement Ser­
vice provides settlement services to
approximately 70 local and national pri­
vate arrangements, primarily check clear­
inghouse associations but also other types
of arrangements. In 2002, the Reserve
Banks processed over 415,000 settlement
entries for these arrangements.
The Federal Reserve’s ACH service
allows depository institutions to send or
receive payments electronically instead of
by check. Institutions use the ACH ser­
vice for credit and debit transactions. In
2002, the Reserve Banks processed
approximately 5.9 billion ACH transac­
tions, valued at about $15.8 trillion.
Approximately 15 percent of the transac­
tions were for the federal government; the
rest were for commercial establishments.
Reserve Banks provide securities ser­
vices for the handling of book-entry (com­
puter-based) securities and the collection
of physical interest coupons and miscel­
laneous items. The Fedwire Securities
Service allows participants to electroni­
cally transfer to other participants securi­
ties issued by the Treasury, federal gov­
ernment agencies, and other approved
entities. In 2002, Fedwire securities par­
ticipants originated approximately 17 million transfers, valued at about $229 tril­
lion. The noncash collection service,
through which maturing or called munici­
pal coupons and bonds are presented for
collection, processed about 305,000 transactions in 2002.

Services to the U.S. Treasury and
Other Government Agencies
The Reserve Banks provide fiscal agency
and depository services to the U. S. gov­
ernment. Through deposit accounts at
Reserve Banks, the government issues
checks, makes payments, and collects
receipts. The Reserve Banks also process
Fedwire funds transfers and automated
clearinghouse payments and provide the
Treasury with daily statements of account

4 Annual Report: Budget Review, 2003

activity. Reserve Banks provide claims for
reimbursement of approximately $300
million to the Treasury and other govern­
ment agencies for the full cost of provid­
ing these services; reimbursement was
received or is expected for all of the
expenses incurred.
As fiscal agents, Reserve Banks provide the Department of the Treasury with
services related to the federal debt. For
example, Reserve Banks issue, service,
and redeem marketable Treasury securi­
ties and savings bonds; they also process
secondary-market Fedwire securities
transfers initiated by depository institu­
tions. In 2002, the Reserve Banks
processed over 166,000 competitive and
noncompetitive bids for Treasury securi­
ties and printed and mailed 37.2 million
savings bonds. The Reserve Banks oper­
ate two book-entry (computer-based)
securities systems for the custody of Trea­
sury securities—the Fedwire book-entry
securities system and TreasuryDirect.
Almost all book-entry Treasury securities
are maintained on Fedwire, which is also
the nation’s principal securities transfer
mechanism; the remainder are maintained
on TreasuryDirect, which is used by
individuals.
As fiscal agents of the United States,
the Reserve Banks also invest excess
Treasury balances with approximately
1,200 depository institutions, which pay
interest to Treasury for the use of
the funds. In 2002, the Reserve Banks
invested $504 billion of Treasury balances
through the program. While most funds
are callable on demand, the Reserve
Banks recently piloted a program to auc­
tion investments with depository institu­
tions for a set term.
As depositories, Reserve Banks collect
and disburse funds on behalf of the fed­
eral government. The Reserve Banks

maintain the Treasury’s funds account,
accept deposits of federal taxes and fees,
pay checks drawn on the Treasury’s
account, and make Fedwire and automated clearinghouse payments on behalf
of the Treasury. In 2002, the Reserve
Banks processed over 883 million ACH
transactions and 289 million paper checks
for the Treasury. In 2002, the Reserve
Banks also assisted Treasury in its efforts
to increase the use of electronic payment
vehicles by assuming additional respon­
sibilities for the Pay.gov Internet portal,
which permits the public to pay Treasury
and agencies via the Internet.
The Reserve Banks also provide fiscal
agency and depository services to other
domestic and international government
agencies. Depending on the authority
under which the services are provided, the
Reserve Banks may maintain book-entry
accounts of government agency securities;
provide custody for the stock of unissued,
definitive (physical) securities; maintain
and update balances of outstanding bookentry and definitive securities for issuers;
maintain funds accounts for government
agencies; and provide various payment
services, including the processing and
destroying of redeemed food coupons for
the U.S. Department of Agriculture.

System Policy Direction and
Oversight
This operational area encompasses the
Board’s activities in supervising Board
and Reserve Bank programs. At the Sys­
tem level, the expenses for these activi­
ties are considered overhead and are
therefore allocated across the other
operational areas. At the Board level,
these expenses are not treated as overhead
or allocated to other operational areas.
■

The Budgets

7

Chapter 1

Federal Reserve System
For 2003, total operating expenses are
budgeted at $2,884 million, an increase
of 3.1 percent from estimated 2002
expenses. Of this total, $2,629.9 million
is for the Reserve Banks, and $254.1 million is for the Board of Governors (tables
1.1 and 1.2).1 Revenue from priced ser­
vices provided to depository institutions
is expected to total $925.8 million, or
32.1 percent of total budgeted operating
expenses. This revenue, combined with
claims for reimbursement and other
income, results in projected net operat­
ing expenses of $1,628.5 million.2
The System expects to recover 43.5
percent of its budgeted 2003 operating
expenses through revenue from priced

1. The Board of Governors now budgets on a
two-year cycle; in this chapter, 2003 values shown
for the System and the Board reflect the approxi­
mate second-year effect of the Board’s 2002–03
budget.
2. Claims for reimbursement refers to costs of
fiscal agency and depository services provided to
the U.S. Treasury and other government agencies
that are billed to these agencies. Other income

services, other income, and claims for
reimbursement. When these items are
deducted from budgeted 2003 operating
expenses, the net expenses of the System
show an increase of 3.7 percent from
estimated 2002 net operating expenses
(table 1.1).
Not included in the budget for
operations is the cost of currency, bud­
geted at $510.3 million for 2003, an
increase of 18.5 percent from the 2002
estimated cost of $430.5 million.3 The
distribution of expenses is similar to that
in previous years, with the Reserve Banks’

comes from services provided on behalf of the U.S.
Treasury that are paid for by the depository insti­
tutions using the services, which include the trans­
fer of funds between depository institutions and
the Treasury.
3. The Federal Reserve pays for the printing
of new currency at the Bureau of Engraving and
Printing. Because this cost is determined largely
by public demand for new currency, it is not
included in the Federal Reserve operating
expenses. For more information, see appendix C,
“Currency Budget.”

Table 1.1
Operating Expenses of the Federal Reserve System, Net of Receipts and Claims for
Reimbursement, 2001–03
Millions of dollars except as noted
Percent change

2001
(actuals)

2002
(estimated)

2003
(budgeted)

Total System operating expenses .................

2,657.8

2,796.6

2,884.0

5.2

3.1

LESS
Revenue from priced services ..................
Other income ............................................
Claims for reimbursements ......................

960.4
1.1
285.6

909.6
1.0
316.3

925.8
0.8
328.9

–5.3
–9.1
10.8

1.8
–20.0
4.0

E QUALS
Net System operating expenses ............

1,410.7

1,569.7

1,628.5

11.3

3.7

Item

N OTE. Components may not sum to totals and may not
yield percentages shown because of rounding.

2001–02

2002–03

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

8 Annual Report: Budget Review, 2003
Table 1.2
Expenses of the Federal Reserve System for Operations and Currency, 2001–03
Millions of dollars except as noted
Percent change

2001
(actuals)

2002
(estimated)

2003
(budgeted)

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

2,451.2
1,573.1
878.1

2,575.4
1,630.6
944.9

2,629.9
1,662.2
967.7

5.1
3.7
7.6

2.1
1.9
2.4

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

206.6
149.4
57.1

221.2
163.0
58.2

254.1
185.5
68.6

7.1
9.1
1.8

14.9
13.8
17.8

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

2,657.8
1,722.6
935.2

2,796.6
1,793.6
1,003.0

2,884.0
1,847.7
1,036.3

5.2
4.1
7.2

3.1
3.0
3.3

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

350.0

430.5

510.3

23.0

18.5

Item

1

2001–02

2002–03

N OTE. Components may not sum to totals and may not
yield percentages shown because of rounding.
Operating expenses exclude capital outlays.
1. For detailed information on Reserve Bank expenses,
see chapter 3.

2. Includes extraordinary items and expenses of the
Office of Inspector General. See also chapter 2.
3. See appendix C.

expenses accounting for 77.5 percent of
the total (chart 1.1).
System employment is budgeted at
24,149 for 2003, a decrease of 743 from
the estimated 2002 level.

check service, information technology,
support, and other areas have helped
Reserve Banks to address cost-recovery
pressures in the check service as well as
to continue to fund high-priority objec­
tives, such as check modernization and
projects on behalf of the Treasury.

2003 System Budget Initiatives
In 2003, several major initiatives will
continue to affect System budgets. As dis­
cussed in more detail in chapter 3, costreduction and efficiency initiatives in the
Chart 1.1
Distribution of Expenses of the Federal
Reserve System, 2003
Currency, 15.0%

Board of
Governors, 7.5%

Reserve Banks, 77.5%

Risks in the 2003 Budget
The Board and Reserve Banks have iden­
tified several risks that would require sig­
nificant resources beyond the budget. The
primary risks to the Board budget include
significant changes in or shocks to the
economy or the financial system, and
additional security and contingency
requirements.
Areas that present the most imminent
risks to Reserve Banks in the 2003 budget are extremely challenging conditions
in the check service and related Bankwide
cost-reduction strategies. The impact of
the recently announced check infrastruc­
ture changes are not reflected in the 2003
budgets because decisions were made
after the budgets were finalized. In addi-

Federal Reserve System 9

tion, most Banks have submitted budgets
for their supervision and regulation func­
tions that are based on the current condi­
tion of the banking industry. Changes
from the current assumptions could
affect staffing levels. Finally, although
Reserve Banks are fully reimbursed for
services they perform on behalf of the
Treasury, there is a continuing risk that
throughout the year the Treasury will
request additional work from the Banks
that was not contemplated when the budgets were developed.

Chart 1.3
Cumulative Change in Federal Reserve
System Expenses and Federal Government
Expenses, 1994–2003

Trends in Expenses and
Employment

NOTE. Federal government expenses are discretionary
spending less expenditures on defense.
For 2002, estimated; for 2003, budgeted.

From actual 1994 levels to budgeted 2003
amounts, the operating expenses of the
Federal Reserve System have increased
an average of 4.1 percent per year (2.2
percent per year when adjusted for infla­
tion) (chart 1.2). Over the same period,
nondefense discretionary spending by the
federal government has increased an an­
nual average of 5.2 percent (chart 1.3).
Over the 1994–2003 period, Federal
Reserve System employment has
decreased 1,595 (chart 1.4).
Throughout most of the 1990s, spend­
ing on bank supervision expanded to meet
the increase in the number and complex-

ity of examinations, the enhanced supervision of foreign institutions, the greater
attention to problem institutions, and the
requirements of the Financial Institutions
Reform, Recovery, and Enforcement Act
of 1989 and the Federal Deposit Insur­
ance Corporation Improvement Act of
1991. The System partially offset these
increases through increased efficiencies
in other operational areas, mainly services
to the U.S. Treasury and services to
financial institutions and the public. In the
most recent years, the budget has grown
at a slower rate, reflecting cost-reduction
and efficiency initiatives.

Chart 1.2
Operating Expenses of the
Federal Reserve System, 1994–2003

Chart 1.4
Employment in the
Federal Reserve System, 1994–2003

1

NOTE . For 2002, estimated; for 2003, budgeted.
1. Calculated with the GDP price deflator.

N OTE . For 2002, estimated; for 2003, budgeted.

10

Annual Report: Budget Review, 2003

Continued emphasis on efficiencies is
also reducing staffing levels. Employment
for 2003 is projected to decrease by 743
ANP, largely because of planned staff
reductions by the Reserve Banks, prima­
rily in the check, information technology,
and support areas.

2003 Capital Budgets
The capital budget for both the Reserve
Banks and the Board totals $521.3 million. The Board’s 2002–03 capital budget is $29.9 million. Approximately twothirds of this total supports continued
improvements in office automation and
major upgrades to the information infra­
structure. Funds are also provided for the
maintenance and upkeep of the Board’s
two main buildings. In addition, this bud-

get includes $3.3 million for projects
resulting from increased security. A more
detailed discussion of the Board capital
budget is included in chapter 2.
The 2003 capital budget for Reserve
Banks and FRIT totals $491.4 million, a
$160.6 million increase from the 2002
estimated levels. The budget includes
$430.5 million for the Banks and $60.9
million for FRIT. As in previous years,
the 2003 capital budgets include funding
for projects that support the strategic
direction outlined in the Banks’ plans.
These strategic goals include improving
operational efficiency and effectiveness,
improving services to Bank customers,
and providing a safe, quality work envi­
ronment. A more detailed discussion of
Reserve Bank capital budgets is included
in chapter 3.

■

11

Chapter 2

Board of Governors
Biennially, the Board of Governors and
its senior staff undertake a planning pro­
cess that results in a strategic plan for the
next four years and a budget for the next
two years. The revised 2002–03 budget
for the Board consists of $466.0 million
for operations, $1.5 million for extraor­
dinary items (projects of a unique nature),
and $7.8 million for the Office of Inspec­
tor General. The Board has authorized
1,884 staff positions for operational
areas and 29 positions for the Office of
Inspector General; no positions are
required for the extraordinary items.

Planning Issues
In developing the 2002–03 plan, the
Board identified the following issues.
• Management and staffing. Emphasis
will be placed on recruitment, reten­
tion, management-succession plan­
ning, and organizational structure.
• Board organization. A comprehensive
review of Reserve Bank oversight
activities, including a reexamination of
the legal requirements for oversight,
could result in a more efficient, effec­
tive, and consistent approach.
• Information technology. A reexamina­
tion of information technology items
allowed spending in that area to be
held at current levels.
• Physical plant. The 2001 purchase of
a new building will significantly lower
costs for office space.
• External and internal factors. The
Board and its staff stand ready to adjust priorities as necessary to deal with
economic events and their effects on
monetary, supervisory, and regulatory
policymaking.

Major Initiatives
To address these major planning issues,
the budget includes the following major
initiatives and projects for the 2002–03
period.
• Attraction and retention of staff. Ini­
tiatives to improve the Board’s ability
to attract and retain staff include the
variable-pay program for economists,
attorneys, and officers; an increase in
the employee cash award program; a
4.6 percent merit increase for 2002;
and a 4.0 percent merit increase for
2003.
• Employee benefits. A major increase
in health insurance rates is being
funded, as are initiatives to increase
the transportation subsidy, increase the
Board match for deferred compensa­
tion, and fund costs associated with the
revised leave policy.
• Workload. New positions and a reduc­
tion in the number of vacant positions
in specific divisions in response to
increased workloads, new security
concerns, and implementation of the
compensation initiatives will all affect
salary liability.
• Information technology. Central IT
support was funded at the current level,
except for increases to enhance disas­
ter recovery.
• Physical plant. In line with the Board’s
earlier strategic plan, a building pur­
chased in 2001 has significantly
reduced the net operating cost for of­
fice space in this budget. Capital
investments are planned for the
Board’s facilities as discussed below,
in the section on the capital budget.
Noncapital improvements are also
planned for the facilities.

12

Annual Report: Budget Review, 2003

Ramifications of the September
11 Terrorist Attacks
After the terrorist attacks on September
11, but before the approval of the 2002–
03 budget, the projects and initiatives
listed below, totaling $13.8 million, were
funded in the 2002–03 budget.
• Enhanced capacity Boardwide for
disaster recovery, including reducing
the time to resume normal operations
at remote sites and increasing the
amount of information and the num­
ber of systems supported at those sites
• Initiatives to enhance physical secu­
rity, including adding security staff;
using bomb-sniffing dogs for greater
perimeter security; using contractual
support for off-site mail processing;
and other, less visible, measures
• Additional staff in the Division of
Reserve Bank Operations and Pay­
ment Systems to focus on system
security issues in response to new ter­
rorism-related legislation, and a new
section (including new staff) to focus
on private-sector clearance and settle­
ment systems to increase the Board’s
understanding and competence in this
area
• Two positions in Banking Supervision
and Regulation, in response to new
terrorism-related legislation, to focus
on money laundering and financial
transactions associated with terrorist
activity
• Four positions in the Office of the Staff
Director for Management to improve
the planning and coordination of con­
tingency operations and to act as a
liaison with the new Office of Homeland Security
After further review, in July of 2002,
$11.0 million was added to the budget for
the following:
• A restructuring and enhancement of
the Board’s uniformed security force,
which involved the addition of 98

positions, to strengthen the security
provided to Board staff and premises
and to implement changes according
to the newly approved federal law
enforcement authority of Board secu­
rity officers
• Developing a contractual arrangement
with private vendors for an off-site
mail-processing operation to screen all
mail and packages before delivery to
Board premises in order to lessen the
chances for the introduction of chemi­
cal, biological, radiological, or explo­
sive materials into Board buildings

Operations Budget by
Operational Area
The Board’s operations budget supports
four broadly defined operational areas:
monetary and economic policy, supervi­
sion and regulation, services to financial
institutions and the public, and System
policy direction and oversight (tables 2.1
and 2.2).
The largest increase in expenses is in
the security portions (both information
and physical) of overhead, which is
spread, in proportion to direct expenses,
among the four operational areas. This
increase does not directly enhance the
efficiency or effectiveness of current
Board operations, but it is necessary given
the threats that the nation and the Board
are now facing.

Monetary and Economic Policy
The 2002–03 revised budget for monetary
and economic policy is $186.9 million,
an increase of $23.4 million, or an average of 6.9 percent per year, from the
2000–01 actuals. Activities in this opera­
tional area include the Board’s monitor­
ing and analysis of developments in the
money and credit markets, the setting of
reserve requirements, the approval of
changes in the discount rate, and other
activities related to managing the nation’s
monetary policy.

Board of Governors 13
Table 2.1
Expenses of the Board of Governors for Operational Areas, Extraordinary Items, and
Office of Inspector General, 2000–01 and 2002–03
Thousands of dollars except as noted
Average annual
percent change
2002–03
(revised
budget)

Operational area,
extraordinary items, or
Office of Inspector General

2000–01
(budgeted)

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

161,863
156,664

163,521
154,157

186,886
191,225

0.5
–0.8

6.9
11.4

8,892

8,500

9,233

–2.2

4.2

63,780

61,482

78,644

–1.8

13.1

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

391,199

387,660

465,988

–0.5

9.6

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

7,847
6,617

8,392
6,322

1,500
7,757

3.4
–2.3

–57.7
10.8

2000–01
(actuals)

2000–01
2002–03
actuals
revised budget
compared with compared with
2000–01
2000–01
budgeted
actuals

NOTE. Operating expenses reflect all redistributions for
support and allocations for overhead, and they exclude

capital outlays. Components may not sum to totals and
may not yield percentages shown because of rounding.

Besides the additional funding for com­
pensation initiatives, programmatic
increases in this area will cover the
acquisition of additional data to assist
staff in their responsibilities. These data
relate to capital risk, retail banking fees
and services, global financial markets,
and consumer credit.

laws and regulations. Program increases
include funding for seven positions
added in late 2000, greater focus on
money-laundering activities, international
training and assistance to foreign govern­
ments, and a review of regulations and
policies related to consumer protection.
As risks to the financial sector grow, the
staff will need to spend more time on bank
examinations and monitoring under the
risk-based supervision model imple­
mented over the past few years.

Supervision and Regulation
The 2002–03 revised budget for supervision and regulation is $191.2 million,
an increase of $37.1 million, or an average of 11.4 percent per year, from the
2000–01 actuals. Activities in this area
include working with other federal and
state financial authorities to ensure safety
and soundness in the operation of finan­
cial institutions, stability in the financial
markets, and fair and equitable treatment
of consumers in their financial transac­
tions. The 2002–03 budgetary increases
will enhance supervisory activities such
as monitoring, inspecting, and examining
banking organizations to assess their con­
dition and their compliance with relevant

Services to Financial Institutions
and the Public
The 2002–03 revised budget for oversight
of Reserve Bank services to financial
institutions and the public is $9.2 million,
an increase of $0.7 million, or an average of 4.2 percent per year, over the
2000–01 actuals. This operational area
provides support to and oversight of the
Federal Reserve Banks, including evalu­
ation of service strategies, pricing, per­
formance, risks, and service and product
design of the check-collection, automated

14

Annual Report: Budget Review, 2003

Table 2.2
Positions Authorized at the Board of Governors for Operational Areas,
Support and Overhead, and Office of Inspector General, 2000–03
Thousands of dollars except as noted
Average annual
percent change
Operational area,
extraordinary items, or
Office of Inspector General

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

2000–01
(budgeted)

2000–01
(actuals)

2002–03
(revised
budget)

2000–01
2002–03
actuals
revised budget
compared with compared with
2000–01
2000–01
budgeted
actuals

433
381

433
372

430
377

0.0
–1.2

–0.3
0.7

22

24

24

4.4

0.0

163

157

168

–1.9

3.4

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

691

734

858

3.1

8.1

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

1,690

1,720

1,857

0.9

3.9

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

25

25

27

0.0

3.9

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

1,715

1,745

1,884

0.9

3.9

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

...
29

...
29

...
29

...
0.0

...
0.0

1

2

1. Includes positions for seventeen youths, ten worker
trainees, and four summer interns.
2. Positions in the Division of Information Technol­
ogy that provide support to the Federal Financial Institu­

tions Examination Council for processing data collected
under the Home Mortgage Disclosure Act and the Com­
munity Reinvestment Act.

clearinghouse, net settlement, currency
and coin, and funds and securities trans­
fer activities of the Reserve Banks; oversight of the electronic payments mecha­
nism; and annual evaluation of the
Federal Reserve System’s currency, coin,
and food-coupon operations. Costs asso­
ciated with these programs will decline
slightly during the next biennium because
of the realization of savings from previ­
ous initiatives.

area covers oversight and direction of
Board and Reserve Bank programs, with
the exception of those mentioned under
“Services to Financial Institutions and the
Public,” above. The area includes programs that directly support Board mem­
bers in carrying out functions such as
communicating with the Congress and the
public, and oversight of significant support activities at the Reserve Banks, such
as finance, human resources, audit, and
information technology.
Major program changes in this area
include greater focus on security and
contingency planning Systemwide and
a new section to provide staff expertise
on private-sector clearance and settle­
ment systems. Fewer vacancies and an
enhanced communication program are
also responsible for the substantial
increase.

System Policy Direction and
Oversight
The 2002–03 revised budget for System
policy direction and oversight is $78.6
million, an increase of $17.2 million, or
an average of 13.1 percent per year, from
the 2000–01 actuals. This operational

Board of Governors 15

Capital Budget
The Board’s 2002–03 capital budget is
$29.9 million. This is $12.7 million over
the 2000–01 capital expenses of $17.2
million, most of which was spent on the
Eccles Building Infrastructure Enhance­
ment Project (EBIEP). Of the 2002–03
total, $19.8 million supports continued
improvements in office automation and
major upgrades to the information infra­
structure. Funds are also provided for the
maintenance and upkeep of the Eccles and
Martin Buildings. Major facility projects
include the purchase of an emergency
generator, replacement of the Eccles
Building roof, upgrades to security at
building entrances, and a design and fea­
sibility study for a major renovation of
the Martin Building.
An additional $3.3 million has been
budgeted for projects resulting from the
September 11 terrorist attacks, including
substantial improvements to informa­
tion disaster recovery systems and
expansion of the scope of the building
entrance security upgrade project already
scheduled.
The EBIEP will be completed during
the 2002–03 budget period. Because of
the phased nature of the project, which
began in July 1999, the amount budgeted,
$3.5 million, is $8.3 million less than the
amount provided during the 2000–01
budget period.
The remaining $3.3 million of the capi­
tal budget is for projects associated with
the improvements of the newly acquired
building.

Positions
For the 2002–03 biennium, a net of 139
positions were added to the Board’s num­
ber of authorized positions, bringing the
total to 1,884 (see appendix D, table D.2).
A net increase of four positions was
authorized for the Division of Consumer
and Community Affairs to eliminate four

long-term dual occupancies. Nine posi­
tions were added to the Division of
Reserve Bank Operations and Payment
Systems and two positions to the Man­
agement Division in response to increased
workload. Small, offsetting position
adjustments were made in many divisions
where efficiencies and workload factors
made such changes possible.
In response to September 11, 120
positions were added. These positions
are necessary to increase the Board’s
physical security, provide additional
resources for antiterrorism and antimoney-laundering activities, and increase
the Board’s expertise in private-sector
clearing and settlement systems.

2000–01 Budget Performance
Board operating expenses increased
by $42.4 million (12.3 percent) from
1998–99 to 2000–01. Personnel-related
expenses increased by $27.5 million (10.7
percent), while expenses for goods and
services increased by $15.6 million
(14.9 percent). Income increased by
$0.7 million (4.2 percent). Final expenses
for Board operations were $387.7 million,
or $3.5 million (0.9 percent) less than
budgeted.
The increase in personnel-related
expenses (salaries, retirement, and insur­
ance) is attributable to the merit pay
increases (3.5 percent in 1999, 4.9 percent in 2000, and 4.7 percent in 2001),
the new variable-pay program and
increased cash award programs, and sig­
nificant increases in retirement and insur­
ance costs. Health insurance costs
increased by $3.8 million (32.0 percent),
and retirement costs increased by $1.8
million (17.5 percent).
Average employment during the 2000–
01 biennium was 1,610—18 employees
(1.1 percent) lower than the 1998–99
average of 1,628. At biennium-end, the
Board had 1,650 employees, the highest
level of the biennium. The increase in

16

Annual Report: Budget Review, 2003

employment toward period-end was con­
centrated in the oversight area (aggres­
sive hiring in the Division of Reserve
Bank Operations and Payment Systems)
and support area (security and facility
operations). In the 2000–01 timeframe,
there is little change in employment patterns in the three research divisions,
where the variable-pay program for
economists was implemented to increase
recruiting and retention.
The largest contributing factor in the
increase in the goods and services areas
was a shifting of information technology
resources from the Century Date Change
(CDC) Project, which took place during
the 1998–99 cycle, to backlogged proj­
ects in the divisions, which were worked
on during the 2000–01 cycle. Because the
charges for IT resources used by the CDC
are in the extraordinary-items budget, the
Board’s operating costs increased as those
resources shifted to the divisions.
Increases in the contractual profes­
sional services area are the secondlargest factor in the overall increase in the
goods and services area over the pervi­
ous period. This growth primarily resulted
from additional security requirements
following September 11. Additional
increases were the result of more use of
outside computer services by the
Division of Banking Supervision and
Regulation, growth in the amount of and
cost of data acquired from third parties,
and additional contractor support in the
Human Resources Function of the Man­
agement Division. Partially offsetting
decreases in the contractual professional
services area resulted from elimination of
charges associated with the Resource
Shared Applications and reduced use of
contractor support by the Division of
Information Technology.

Trends in Expenses and
Employment
The rate of increase within the 2002–03
budget is 9.6 percent per year. Largely

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

1

Millions of dollars
Year

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

Current dollars

1992 dollars1

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

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

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

because of security enhancements and
merit pay initiatives, this is higher than
the projected 6.2 percent average annual
rate of increase from the 1992–93 period
to the 2002–03 period (charts 2.1 through
2.4). The increase over this ten-year
period is mainly attributable to the
increasing complexity of Board work.
This increased complexity required a net
increase in positions and higher average
grades, higher salary and benefit costs,
and increasingly sophisticated automation
systems to manage sharply increasing vol­
umes of data. Merit pay, new compen­
sation initiatives, promotions and reclas­
sifications, higher benefit costs, a lower
projected number of vacancies in certain

Board of Governors 17
Chart 2.2
Expenses for Personnel Services at the
Board of Governors, 1992–2003

Chart 2.4
Employment and Authorized Positions at
the Board of Governors, 1992–2003

Note. See notes to chart 2.1.
Year

divisions, and increased use of contrac­
tual support for continuity of operations
increased the budget.
Approximately three-fourths of the
Board’s operating expenses are for per­
sonnel; consequently, analysis of trends
is heavily tied to staffing levels. From
1992 to 2003, the number of authorized
positions for Board operations rose from
1,639 to 1,853, a net increase of 185, or
11.3 percent. A large part of this increase
in positions is for new security precau­
tions. Reflecting the growing complexity
of the Board’s work, the average grade
for professional staff rose from 25 to 26.
During the 10-year period, changes in
banking, frequently associated with
automation enhancements, increased the
Chart 2.3
Expenses for Goods and Services of the
Board of Governors, 1992–2003

Note. See notes to chart 2.1.

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

Employment
1,563
1,636
1,635
1,664
1,686
1,638
1,629
1,600
1,593
1,639
1,687
1,687

Authorized
Positions
1,639
1,664
1,664
1,665
1,712
1,713
1,694
1,680
1,692
1,714
1,853
1,853

NOTE . Year-end data. Excludes summer intern, worker
trainee, and youth positions as well as positions for the
Office of Inspector General. These positions number 60
for 2002 and 2003. Includes positions that provide support to the Federal Financial Institutions Examination
Council for processing data collected under the Home
Mortgage Disclosure Act and the Community Reinvest­
ment Act.

complexity of safety-and-soundness
supervisory activities. To adequately perform these activities, and to increase
attention to consumer issues, including
collection and analysis of data collected
under the Home Mortgage Disclosure Act
and Community Reinvestment Act, a net
of thirty-four positions were added.
(Many positions associated with lowerpriority work were eliminated to offset
the cost of the new work.) The increas­
ing complexity of monetary policy issues
resulted in an increase of twenty-five
positions. Substantial change has
occurred in the overall Reserve Bank en­
vironment, including numerous opera­
tional consolidations and related changes

18

Annual Report: Budget Review, 2003

to the governance process. As a result of
these changes, as well as increased inter­
est in private-sector companies important
to the nation’s financial infrastructure,
nineteen positions were added. Finally, a
net decrease of five administrative and
support positions resulted from the
Board’s efforts to outsource where fea­
sible; without these efforts, the number
of administrative and support positions
would have increased because of en­
hanced security and the acquisition of
new office space.
While the number of positions at the
Board has fluctuated during the 1992–
2003 period, the salary budget (not
including retirement and insurance ben­
efits) has remained relatively stable at
roughly 64 percent of operating expenses.
The portion of operating expenses
devoted to retirement and insurance has
increased approximately 1 percentage
point over the period as a result of
administrative actions to enhance health
insurance and other benefits.
The Board experienced an average
annual percentage increase in expenses
for goods and services of 6.4 percent over
the 1992–2003 period. The largest con­
tributor to this increase was a 12.9 percent annual increase in the contractual
professional services account resulting
from outsourcing tasks such as security,
IT services, and facilities support.
Increases in the complexity of the
Board’s work resulted in additional
data purchases and training requests.
Partially offsetting the overall increase
was a significant decrease in rental costs
because of the year-end 2001 acquisition
of a building previously rented by the
Board.

Survey Expenses
The Board’s extraordinary-items budget
for 2002–03 provides funds of $1.5 million for the Survey of Small Business
Finances ($0.8 million) and the Survey
of Consumer Finances ($0.7 million).
These surveys will improve the quality
of economic data produced by the Board
by gathering information on the economic
behavior of U.S. households and the
financial health of U.S. firms. A summary
article on the survey of consumer finan­
ces is scheduled to be published in
the January 2003 Federal Reserve Bulle­
tin, and a version of the survey data
will be released to the public shortly
there-after. Preparations for the 2004
Survey of Consumer Finances are
expected to be underway the first quarter
of 2003.
During the course of 2003, Small Busi­
ness Finances survey staff will make a
recommendation to the Board, issue a
request for proposal, and award a contract. Field work will not begin until about
April 2004.

Office of Inspector General
The 2002–03 budget of $7.8 million for
the Office of Inspector General (OIG) is
separate from the Board’s. The OIG’s
budget is prepared in a manner that is
administratively consistent with the
preparation of the Board’s operating budget. In conformance with the statutory
independence of the office, the OIG pre­
sents its budget directly to the Chairman
of the Board of Governors for consider­
ation by the Board.
■

19

Chapter 3

Federal Reserve Banks
The 2003 operating budgets of the twelve
Reserve Banks total $2,629.9 million.1
The 2003 total is $54.5 million, or 2.1
percent, above estimated 2002 expenses
(table 3.1).2 Reserve Banks developed
their 2003 budgets by incorporating
spending guidance provided by System
business leaders. In large part because of
poor cost recovery in the check service,
business leaders have set aggressive
spending targets for most functions. The

1. These expenses include those budgeted by
Federal Reserve Information Technology (FRIT)
and the Office of Employee Benefits (OEB).
Expenses from these entities have been charged to
the Reserve Banks, as appropriate, and included
in their budgets.
2. Unless otherwise noted, expenses also
include costs associated with the checkstandardization special project. Special projects are
major efforts having Systemwide significance that
are outside the budgets of the individual Reserve
Banks.

Monetary Control Act provides that “the
Board shall require reductions in the
operating budgets of the Federal Reserve
banks commensurate with any actual or
projected decline in the volume of ser­
vices to be provided by such banks.” The
Banks’ 2002 estimate and 2003 budget
plans reflect, in part, the spending
restraint necessary to improve cost /rev­
enue performance in the check service.
Because of Reserve Banks’ adherence
to specific targets for direct costs in the
check service and to guidance from busi­
ness leaders concerning most of the
related support and overhead functions,
the 2003 budget reflects lower checkservice costs. Targets established for the
2003 budget, however, were not limited
to areas affecting the check service. The
supervision and regulation and cash func­
tions also established budget targets.
Approximately 48 percent of Reserve
Bank expenses in the 2003 budget are

Table 3.1
Expenses of the Federal Reserve Banks, Net of Receipts and Claims for Reimbursement,
2002 and 2003
Millions of dollars except as noted
Change

2002
(estimated)

2003
(budgeted)

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

2,575.4

2,629.9

54.5

2.1

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

909.6
1.0
316.3

925.8
0.8
328.9

16.2
–0.2
12.6

1.8
–20.0
4.0

EQUALS
Net expenses ..................................................................

1,348.5

1,374.4

25.9

1.9

Item

NOTE. Excludes capital outlays. Includes expenses budgeted by Federal Reserve Information Technology (FRIT)
and the System’s Office of Employee Benefits (OEB).
Expenses from these entities have been charged to the
Reserve Banks, as appropriate, and included in their budgets. Componenets may not sum to totals and may not yield
percentages shown because of rounding.

Amount

Percent

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

20

Annual Report: Budget Review, 2003

offset by priced-service revenues (35 percent) and reimbursable claims for services
provided to the U.S. Treasury and other
agencies (13 percent). Although budgeted
2003 revenue is up slightly from esti­
mated 2002 levels, it is still significantly
below the 2002 budgeted level, reflect­
ing declines in check volume. Reimburs­
able claims are expected to increase 4.0
percent, reflecting higher costs for
Treasury-requested projects partially offset by efficiency measures and lower
allocated costs from support and overhead functions.
The Reserve Banks’ 2003 budgeted net
operating expenses are $1,374.4 million,
1.9 percent higher than the 2002 estimate.
The moderate increase reflects efforts by
all Banks to reduce costs, to improve
priced-services performance, and to meet
System targets established by national
business leaders. Banks have been able
to limit overall cost increases through
plans to self-fund many new initiatives,
implement productivity and efficiency
measures, and continue consolidating
functions at a regional or national level.
The average number of personnel
(ANP) projected to be employed at the
Reserve Banks, Federal Reserve Informa­
tion Technology (FRIT), and the Office
of Employee Benefits (OEB) during 2003
is 22,422, a decrease of 743 ANP, or 3.2
percent, from 2002 estimated staff levels

(table 3.2).3 Although all Districts are
planning to reduce staffing in 2003, three
Banks—New York, Atlanta, and San
Francisco—account for slightly more
than half of the overall reductions. As a
result of declining volumes and efforts
to improve productivity, all Banks are
reducing staff in the check service. Sev­
eral Banks will also reduce check staff
after making the transition to the stan­
dardized check-processing platform.
The remainder of the reduction is the net
effect of several System and District
efforts to meet System cost-reduction ini­
tiatives and improve operational efficien­
cies. For more detail on expenses and
ANP by District and operational area, see
appendix E, tables E.1 through E.4.

2002 Budget Performance
The Reserve Banks estimate 2002
expenses have been $2,575.4 million, a
decrease of $4.8 million, or 0.2 percent,
from the approved 2002 budget of
$2,580.2. The 2002 estimate is $116.1
3. The term average number of personnel
describes levels and changes in employment at the
Reserve Banks. ANP is the average number of
employees in terms of full-time positions for the
period. For instance, a full-time employee who
starts work on July 1 counts as 0.5 ANP for that
calendar year; two half-time employees who start
on January 1 count as 1 ANP.

Table 3.2
Employment at the Federal Reserve Banks, FRIT, and OEB, 2002 and 2003
Average number of personnel except as noted
2002
(estimated)

2003
(budgeted)

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

22,359
774
32

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

23,165

Item

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

Change
Amount

Percent

21,607
779
36

–752
5
4

–3.4
0.6
12.5

22,422

–743

–3.2

Federal Reserve Banks

21

Table 3.3
Budget Performance of the Federal Reserve Banks,
Operating Expenses and Employment, 2002

Item

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

2002
(budgeted)

2,580.2
23,550

2002
(estimated)

2,575.4
23,165

Change
Amount

–4.8
–385

Percent

–0.2
–1.6

NOTE . Excludes capital outlays. Includes expenses
budgeted by Federal Reserve Information Technology
(FRIT) and the System’s Office of Employee Benefits
(OEB). Expenses from these entities have been charged
to the Reserve Banks, as appropriate, and included in their
budgets. Componenets 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.
See text note 3 for definition of average number of
personnel.

million above the 2001 actual expense of
$2,459.3 million. The Banks estimate
ANP at 23,165, a decrease of 385 ANP,
or 1.6 percent, from approved 2002 budget levels and 54 ANP below 2001 actual
levels.
Most Bank estimates include targeted
staff reductions and realignment of
resources due to volume declines in the
check service. Check expenses and staff­
ing are declining at nine Banks as
resources are aligned to the lower vol­
ume projections, resulting in an underrun
of $10.0 million and 241 ANP from the
2002 budget. Support and overhead costs,
primarily in Information Technology (IT),
are declining by a total of $9.3 million,
largely as a result of staff reductions and
lower depreciation expense. The 2002
estimate also reflects reductions in cash
operations totaling $6.5 million from the
2002 budget, resulting primarily from
lower staffing-related costs due to lessthan-anticipated volume growth in sev­
eral Districts, productivity improvements,
and delayed implementation of equipment
upgrades.
Offsetting some of the decreases are
increasing expenses in other areas, includ­
ing two large, one-time expenses. The
Customer Relations and Support Office
in Chicago incurred an $8.6 million

expense as a result of canceling the
FedLine for Windows project. Also, esti­
mated 2002 severance payments are
$16.9 million, $13.7 million higher than
budgeted. Excluding these expenses, the
2002 estimate would be approximately
$27 million lower than the approved 2002
budget.4 In addition to these one-time
expenses, the estimate includes slightlyhigher-than-anticipated costs in several
Districts for check-standardization imple­
mentation and fully reimbursable Trea­
sury projects.5

The 2003 Budget
Efforts to reduce spending in 2002 have
positioned the Banks to develop 2003
budgets consistent with guidance pro­
vided by the System business leaders
during the budget outlook process. This
guidance has not only assisted Reserve
Banks in developing their 2003 budgets
4. Excluding these one-time costs, the 2003
budget would reflect an increase of about $77
million, or 3.0 percent, from the adjusted 2002
estimate.
5. Although projected to be over budget in
2002, overall costs for the check-standardization
project are still expected to be under budget for
the life of the project.

22

Annual Report: Budget Review, 2003

and multiyear business plans but has also
provided them with a management tool
to better monitor direct-spending plans.
Overall, Reserve Banks have met or
exceeded the aggressive-business-leader
guidance established earlier this year.
Adherence to the guidance, in conjunc­
tion with other cost-reduction initia­
tives, helps the System address the costrecovery pressures in the check service
while enabling the Banks to fund other
high-priority initiatives.

Initiatives Affecting the
2003 Budget
The 2003 budget provides funding for
several System and Reserve Bank initia­
tives. The budgetary requirements for
these initiatives are described below.
Check Modernization
Perhaps the single biggest factor influenc­
ing 2003 expense and staffing levels is
the Banks’ effort to address the shortfalls in check-cost recovery while
managing the completion of the checkmodernization projects. Check modern­
ization encompasses four projects: check
standardization, enterprisewide adjust­
ments (EWA), FedImage, and check elec­
tronic access and delivery. Check stan­
dardization involves standardizing
Reserve Bank item processing on a single
platform and software suite, and central­
ized application software support. EWA
provides a common, standard platform for
check-adjustments processing throughout
the System, which in the long term will
improve efficiency and eliminate dupli­
cate support. FedImage (formerly know
as Image Services System) integrates current image production from nonstandard
hardware and software platforms into a
consistent production environment for the
capture and archiving of check images.
Check electronic access and delivery

migrates the check service to the new
web-based platform for accessing check
products.
In the 2003 budgets, these projects
account for a $16.6 million increase over
estimated 2002 expenses. According to
the transition schedule, all Banks should
be using the standard check-processing
platform by year-end 2003. This stan­
dardization will allow Banks to gain effi­
ciencies and reduce expenses associated
with additional staff retained through conversions to ensure a smooth transition.
These savings alone, however, are not
enough to address the challenges pre­
sented by lower volume projections,
changes in deposit mix, and correspond­
ing revenue shortfalls.
The Banks are taking steps to address
these cost and revenue challenges. Banks
that have completed the transition to
check standardization and EWA have
begun to capitalize on the efficiencies
gained in the forward and adjustment pro­
cessing environments. These savings
are reflected in the check-service costs,
which are $17.2 million, or 2.2 percent,
less than 2002 estimated expenses. In the
2003 budget, staffing for check service
is 568 ANP below 2001 actual levels.
The overall reduction in check costs is
the result of Reserve Banks’ efforts to
reduce direct costs and restrain support
and overhead spending. Because charges
from support and overhead account for
about 30 percent of check-service costs,
cost reductions in these areas are a nec­
essary, though alone not sufficient, fac­
tor in achieving check spending targets.
Much as the accounting area was pro­
vided with cost-reduction guidance over
the last five years, each of the major support and overhead areas was given spe­
cific spending guidance for 2003. In
aggregate, these areas have reduced ex­
penses by $18.5 million and 504 ANP.
For most support services, expense
growth is projected to be 2 percent or less,
with the majority achieving budgeted

Federal Reserve Banks

expenses below the estimated 2002
levels.
Information Technology
The most significant cost reductions are
in the area of information technology
(IT). These reductions reflect the multiyear targeted-reduction initiative estab­
lished by the Reserve Banks to
reduce local IT costs from the 2001 budget by $65 million.6 Several efficiency ini­
tiatives are underway, including the
e-mail server administration and manage­
ment centralization project, standardiza­
tion of desktop PC software application
and hardware configurations, and imple­
mentation of Active Directory.7 FRIT also
has efforts underway to use its resources
more effectively, for example, by improv­
ing the efficiency of its mainframe pro­
cessing environment. Budgeted IT costs
for 2003 are $30.1 million below the 2001
budgeted levels.
The IT cost-reduction target was
designed to be an ambitious goal support­
ing the reengineering of Reserve Banks’
provision of IT services. Reserve Banks
recently have recognized that it is unlikely
that the multiyear target will be achieved,
in part because of delays in the desktopstandardization initiative and further
study of a server-management initiative.
They do believe, however, that the target
has fostered opportunities to streamline
and consolidate operations. In the 2003
budget, local IT staffing has decreased
154 ANP from the 2002 estimate. About
half of the local IT staff reductions have
been redirected to support initiatives in
several of the nationally provided support
services.
6. The IT multiyear target excludes support for
Treasury initiatives, check-modernization projects,
and economic research.
7. The Active Directory project is a central­
ized and standardized system that automates network management of user data, security, and dis­
tributed resources, enabling interoperability with
other directories.

23

Electronic Access Customer Support
The Customer Relations and Support
Office plans to consolidate the electronic
access customer support function at two
offices. Although project costs are
expected to total $8.6 million in the 2003
budget, these costs are expected to be
more than offset by savings at the other
ten Banks over the next three years.
Treasury-Related Functions
The growth of 5.6 percent in Treasuryrelated functions is due to higher FRIT
costs for Treasury Web Applications
Infrastructure (TWAI) and Treasury
Account Management Information
(TAMI) system ($15.8 million). TWAI
involves developing a network to support
the Treasury applications that will con­
nect customers and other businesses
through the web. TAMI will also use webbased technology to improve reporting
and reconcilement of Treasury account information. This increase is partially offset by reduced costs from the support and
overhead areas, along with the savings
that have been achieved through effi­
ciency measures, such as the consolida­
tion of Treasury check processing sites,
from eight to four during 2002.
Supervision and Regulation
Total expenses for the supervision and
regulation function increase $31.8 million, or 6.7 percent, in the 2003 budget,
primarily because of the growth in the
number and asset size of state member
banks and an increased need to closely
monitor large regional institutions in sev­
eral Districts. The Reserve Banks have
achieved efficiencies through increased
use of risk-focused examinations and
resource sharing among Reserve Banks,
and have reduced travel costs through
greater use of video conferencing.
Systemwide, staffing levels remain flat,
with a shift of personnel from foreign and

24

Annual Report: Budget Review, 2003

community bank work to multistate bank­
ing organizations. As with Treasury costs,
growth in the supervision and regulation
function would have been higher if not
for the reductions in support and overhead costs.
Cash Services
The Cash Product Office also established
budget guidance for the cash function as
part of the budget process. Most Banks
have budgeted to meet the guidance pri­
marily by increasing efficiencies and
adjusting staffing levels to meet volume
projections, which appear to be more
stable after several years of substantial
growth.
Research
During the budget guidance-setting pro­
cess, growth in the research area was
estimated to be 4.7 percent based on a
trend forecast. The research functions
have budgeted an aggregate increase of
4.7 percent, with staffing expected to be
seven ANP higher than the 2002 estimate.

2003 Salary Administration
The budgets for the Reserve Banks, FRIT,
and OEB include $117.1 million to fund
salary administration programs for offic­
ers and employees (appendix E, table
E.5).8 The largest component of the sal­
ary programs is merit.9 The average merit
increase is budgeted at 3.6 percent for
officers and 3.5 percent for employees,
totaling $43.2 million, or 41 percent of
8. Salary administration represents the bud­
geted funds that are available to increase compen­
sation to officers and employees in the coming
year. It does not include adjustments for changes
in staffing levels, turnover and lags in hiring, and
overtime.
9. Salary program costs described in this sec­
tion include program expenses budgeted at the
Reserve Banks, FRIT, and OEB.

the total salary administration budget. The
other programs that affect base salaries—
promotions, reclassifications, and market
adjustments—total $13.5 million.
Officer and employee cash awards and
incentive payments represent about $36.6
million, or 34 percent, of salary program
costs. Cash award and incentive payment
programs are increasing $3.2 million
compared with 2002 estimated spending.
Retention and severance payments (programs designed to deliver one-time pay­
ments most often associated with
reengineering and efficiency initiatives)
total $2.1 million and $10.3 million,
respectively. The 2003 budget reflects a
decrease in funding from the 2002 esti­
mate for retention payments ($0.6 million) and for severance payments ($6.7
million).
Officer incentive payments and cash
awards total $11.3 million, or 7.1 percent
of officer salary liability. Although the
officer variable-pay threshold was set at
8.0 percent of salary liability for 2003,
half of the Banks and FRIT did not fully
fund officer incentive payments and cash
awards. In 2003, ten Banks, FRIT, and
OEB targeted more than half the officer
variable-pay pool toward incentives.
Employee incentive payments and cash
awards total $25.3 million, or 2.3 percent
of employee salary liability. The mix
between incentive and cash awards in the
employee category continues to be
weighted toward cash awards (cash
awards represent 1.3 percent of salary
liability; incentives represent 1.0 percent).
Officer turnover, including retirements,
is projected to decrease from an estimated
5.3 percent in 2002 to 3.9 percent in
2003.10 Reserve Banks estimate, however,
that approximately one-third of all offic­
ers will be eligible to retire by second
quarter 2004. Average employee turnover
is projected to remain flat at 11 percent.
Reserve Banks believe that continuing
10. Turnover rates include voluntary and
involuntary departures.

Federal Reserve Banks

market pressures for critical skill sets will
increase the risk of losing key employ­
ees. The Banks therefore plan to use vari­
able pay, retention incentives, and other
monetary and nonmonetary rewards for
key officers and employees.
Retirement and other benefit expenses,
which account for 14 percent of Reserve
Bank budgets, are anticipated to increase
by $21.8 million, or 6.1 percent, in 2003.
The primary factors driving the high costs
include increases in salary-related ben­
efits, such as Social Security and Thrift
Plan contributions, which are directly
related to an increase in salaries, and
higher health care costs. The increases in
employer contributions for health benefits
average 19 percent for non-HMO plans,
8.9 percent for HMOs, and 11 percent for
dental plans. The Reserve Banks’ new
consolidated health care program has
helped to moderate the increase in
employer contributions.

2003 Capital Budget
The 2003 capital budget submitted by the
Reserve Banks and FRIT totals $491.4
million, a $160.6 million increase over
the 2002 estimated levels. The budget
includes $430.5 million for the Banks and
$60.9 million for FRIT. The increase in
2003 outlays from the 2002 estimate is
due largely to planned new building programs and various other buildingrenovation projects. Tables E.6 and E.7
in appendix E detail capital expenditures
by District and by category.
As in previous years, the 2003 capital
budgets include funding for projects that
support the strategic direction outlined in
the Banks’ plans. These strategic goals
include improving operational efficiency
and effectiveness, improving services to
Bank customers, and providing a safe,
quality work environment. In support of
these strategies, the 2003 budget identi­
fies four major categories of capital outlays: building projects, payment system

25

improvements, information technology
initiatives, and security enhancements.

Building Projects
The proposed capital budget includes an
estimated $268.7 million for building
projects. Of this total, 58 percent, or
$156.8 million, is related to the planned
new building projects in Detroit, Hous­
ton, Kansas City, and Seattle. The remain­
ing outlays in this category will fund vari­
ous other major building renovations, as
well as miscellaneous facility-improve­
ment and energy-efficiency projects and
acquisitions of contingency equipment.

Payment System Projects
The proposed capital budget includes
$109.0 million for initiatives related to
payment system improvement. Over 40
percent of these funds ($45.4 million)
support reimbursable initiatives, includ­
ing the Treasury Web Applications Infra­
structure, Pay.gov, and Savings Bond
Architecture projects. Outlays for the
cash services area account for about onethird of the outlays. The 2003 budgets
include funds for upgraded currencyprocessing equipment sensors ($19.0
million), cash inventory management sys­
tems, and Standard Cash Automation ini­
tiatives. Other outlays are associated with
equipment and software needed in Dis­
tricts migrating to the standard checkprocessing software platform in 2003
($15.9 million) and for FRIT’s Web
Applications Infrastructure initiative
($3.3 million), which includes outlays for
the Secure IP (Internet Protocol) project.

Information Technology Projects
The proposed capital budget includes
$55.0 million in funding for major infor­
mation technology initiatives. These ini­
tiatives do not include the automation
components of building or payment sys-

26

Annual Report: Budget Review, 2003

tems initiatives that are discussed sepa­
rately. The strategic objectives outlined
in the individual Bank budgets are direct­
ed toward achieving the System’s goal to
increase the business value of System IT
investments and to reduce technology
costs. Of the total automation-related
outlays, FRIT projects and acquisitions
account for over half, or $30.9 million.
The FRIT budget includes capital for the
distributed processing, network, and
mainframe environments, including a
CPU replacement project and various
software and hardware upgrades and
enhancements. Aside from FRIT, the Dis­
tricts have budgeted to begin replacing

aging servers in compliance with the
System’s server-management initiative
($6.9 million). Bank budgets also include
outlays for various other local initiatives
and for systems operated or developed on
behalf of the System.

Security Enhancements
The proposed capital budget includes
$49.2 million in funding for security
enhancements. Almost all Districts have
included capital spending for security
measures necessary to enhance security
at Reserve Bank facilities.

■

Appendixes

29

Appendix A

Federal Reserve Budget Processes
This appendix gives an overview of the
separate budgets and budgeting processes
followed by the Board of Governors and
the Reserve Banks. The Federal Reserve
System’s intent in the development and
publication of this information is to provide the reader with the assumptions and
initiatives considered when the Federal
Reserve System budgets were developed
and approved by the Board of Governors.

Board of Governors
The Board’s budget covers a two-year
period. The first year of the budget
cycle—the even-numbered year—is used
to update the strategic plan for the next
four years, and the second year is used to
develop the budget for the next two years.
The two-year cycle begins in the fall
(thus, for the 2004–05 budget, the fall of
2002). At that time, the Board’s divisions
examine their operating environments and
look for any adjustments to their priori­
ties, activities, and resources that might
improve the efficiency and effectiveness
of the Board’s operations.
The management of each division dis­
cusses with the appropriate Board oversight committee the issues that result from
its review. After any adjustment, the
results are given to the Staff Planning
Group, a small group of senior managers
with a Boardwide perspective, for use in
their analysis of the Board’s budget
options.
After consulting with the Board-level
Committee on Board Affairs for final
guidance, the Staff Planning Group
updates the strategic plan, which is used
to prepare a preliminary budget objective
that identifies the level and allocation of
resources needed to support the plan. As
part of this process, individual division
budget objectives are prepared on the

basis of Boardwide priorities and plan­
ning assumptions. The Committee on
Board Affairs reviews the plan and pre­
liminary budget objective, clarifies outstanding planning issues with the Staff
Planning Group and division directors,
and at the end of summer of oddnumbered years submits the budget objec­
tive to the Board for its consideration.
The divisions use the budget objective
approved by the Board to complete their
budgeting under the approved plan. The
Board’s Committee on Board Affairs,
under authority delegated by the Chairman, oversees the process until the budget is submitted to the Board for action
in the fall of the odd-numbered year.
The Board of Governors budgets its
resources by division and accounts for its
activities by division and across opera­
tional areas. Direct costs, such as those
for salary, retirement, insurance, and
travel, are billed to the operational areas.
Costs for data processing are also charged
as a direct expense to each of the areas
according to service-level agreements (at
prices derived from the cost of resources
needed to provide the services and agreed
upon before the budget year starts).
Expenses for other elements of support
and overhead are distributed among the
operational areas in proportion to the
share of direct costs attributable to each
area.
The Board, in accordance with gener­
ally accepted accounting principles, capi­
talizes certain assets and depreciates their
value over appropriate periods instead of
expensing them in their year of purchase.
Hence, the Board has both an operations
budget and a capital budget.
After the budget is approved by the
Board, it is converted to an operating plan
that allocates funding by month; the
operating plan is also the vehicle for sub-

30

Annual Report: Budget Review, 2003

sequent 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 sur­
plus. The cash requirement for the sec­
ond half of each year is estimated in June,
and the second assessment is made in July.
The Board accounts for extraordinary
items separately from the operations budget so that unique, one-time requirements
do not compete with regular operations
and so that expenses in those operations
can be readily compared across years
without distortion. As discussed more
fully in chapter 2, the extraordinary items
budget for 2002–03 consists of funds to
support planning for two periodic sur­
veys, one on consumer finances and the
other on small business finances.
The Board’s Office of Inspector Gen­
eral (OIG), in keeping with its statutory
independence, prepares its proposed budget apart from the Board’s budget. The
OIG presents its two-year budget directly
to the Chairman for action by the Board,
also in the fall.

Reserve Banks
Each year the Federal Reserve Banks
establish major operating goals for the
coming year, devise strategies to attain
those goals, estimate required resources,
and monitor results. The process begins
with development of budget guidance by
the business leaders in each functional
area. This information is used to develop
a preliminary budget projection, the
Reserve Bank Budget Outlook (RBBO).

Each Bank then develops its own budget
using the business-leader guidance. The
budgets are reviewed at the Board by a
committee of governors—the Committee
on Federal Reserve Bank Affairs—both
individually and in the context of
Systemwide issues and the plans of the
other Banks. The budgets are then pre­
sented to the full Board of Governors for
final action in December.
The Banks’ budgets are structured in
operational areas, with support and overhead charged to these areas.
As is the case with the Board, the
Banks, in accordance with generally
accepted accounting principles, capital­
ize certain assets and depreciate their
value over appropriate periods instead of
expensing them in the year of purchase.
Hence, the Banks have a capital budget
in addition to an operating budget.
The Banks budget annually for capital
outlays by capital class to estimate the
effect of total operating and capital spend­
ing. During the budget year, the Banks
must submit proposals for major pur­
chases of assets to the Board for further
review and approval.
The operations and financial perfor­
mance of the Reserve Banks are moni­
tored throughout the year via a costaccounting system, the Planning and
Control System (PACS). Under PACS,
the costs of all Reserve Bank services,
both priced and nonpriced, are grouped
by operational area, and the costs of support and overhead are charged to these
areas. PACS makes it possible to com­
pare budgets with actual expenses and
facilitates comparison of the financial and
operating performances of the Reserve
Banks.

■

31

Appendix B

Priced Services
The Monetary Control Act of 1980
requires the Federal Reserve to charge
depository institutions for certain services
that the Federal Reserve had previously
provided without explicit charge and only
to member banks. As the act requires, the
fees charged for providing these priced
services are fees set to recover, over the
long run, all direct and indirect costs of
providing the services plus imputed costs,
including the interest on items credited
before actual collection (float), and the
private-sector adjustment factor (PSAF).
The intent of the PSAF calculation is to
impute the costs that would have been
incurred, such as taxes that would have
been paid; and the profits that would have
been earned, such as the return on capi­
tal, had the Federal Reserve Banks’ priced
services been provided by a private firm.
Table B.1 provides details on projected
revenue from priced services.

Annual Pricing Process
To meet the requirement for the full
recovery of costs, the Federal Reserve has
Table B.1
Revenue from Priced Services, 2001–2003
Millions of dollars
Service

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

2001

2002
(estimated)

2003
(bud­
geted)

63.8
79.4
793.2

56.0
70.8
757.9

51.9
69.9
781.0

19.7
2.0
2.3

22.0
1.6
1.4

20.6
1.9
0.4

960.4

909.6

925.8

developed an annual pricing process
involving projections of Reserve Bank
expenses, volumes, and revenues, as well
as the PSAF and net income on clearing
balances, for each major service category.
Fees for Federal Reserve services must
be approved by the product director for
the respective service, by the Financial
Services Policy Committee, and ulti­
mately by the Board of Governors.1
The cost of float is estimated by
applying the current federal funds rate to
the level of float expected to be gener­
ated in the coming year. Estimates of
income taxes and the return on capital are
based on tax and financing rates derived
using a model of the fifty largest U.S.
bank holding companies. These rates are
applied to the assets the Federal Reserve
expects to use in providing priced ser­
vices in the coming year.2 The other com­
ponents 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 assess­
ment for insurance by the Federal Deposit
1. The product directors are the first vice presi­
dents at selected Reserve Banks with responsibil­
ity for day-to-day policy guidance over specific
services. The Financial Services Policy Committee (FSPC) is responsible for the overall direction
of financial services and related support functions
for the Federal Reserve Banks.
2. Beginning in 2002, a portion of depository
institution clearing balances held with the Federal
Reserve for processing transactions will be used
as a funding source for priced-service assets.
Equity will be imputed at 5 percent of total assets
to meet the FDIC definition of a well-capitalized
institution in its classification for assessing insur­
ance premiums. The equity financing rate, or
pretax return on equity, will be based on the average of the return-on-equity results of three eco­
nomic models using data from the bank holding
company model.

32

Annual Report: Budget Review, 2003

Insurance Corporation (FDIC) (based on
expected clearing balances and amounts
deferred to depository institutions for
items deposited for collection with the
Reserve Banks); and the portion of the
expenses of the Board of Governors
directly related to providing priced
services.

■

33

Appendix C

Currency Budget
Federal Reserve Banks circulate new and
fit currency through depository institu­
tions and destroy currency already in cir­
culation as it becomes unfit or when a new
design is issued. Each year, under author­
ity delegated by the Board, the director
of the Division of Reserve Bank Opera­
tions and Payment Systems orders new
currency from the U.S. Department of
Treasury’s Bureau of Engraving and
Printing (BEP). Upon reviewing the
order, the BEP sets billing rates for new
currency, which Board staff uses to prepare the annual budget for new currency.
Once the Board approves the new cur­
rency budget, it assesses each Federal
Reserve Bank through an accounting pro­
cedure similar to that used in assessing
the Banks for the Board’s operating
expenses.
Estimated currency expenditures for
2002 totaled $430.5 million, which is
$17.0 million, or 4.1 percent, more than
budgeted (table C.1). The overrun result­
ed primarily from an increase in the print
order and increased currency transporta­
tion costs. Budgeted currency expendi­
tures for 2003 total $510.3 million, or
18.5 percent more than estimated 2002
expenses (chart C.1). The increase is pri­
marily the result of a significant increase
in the billing rate for the new $20 note

Chart C.1
Federal Reserve Budget for New Currency,
1994–2003

N OTE . For 2002, estimated; for 2003, budgeted

design and an increase in the cost of transporting new currency from the BEP to
Reserve Bank offices.

Printing of Federal Reserve Notes
The Board ordered 8.2 billion new notes
for the calendar year 2003 budget. The
budget for printing the Board’s
order is $490.9 million, or 96.2 percent
of the total 2003 new currency budget.
For January through September 2003 (the
portion of the federal government’s
2003 fiscal year that falls within the 2003
calendar year), the BEP will produce

Table C.1
Federal Reserve Budget for New Currency, 2002 and 2003
Thousands of dollars except as noted
Item

2002
(estimated)

2003
(budgeted)

Percentage
change

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

411,391
12,902
2,662
3,506

490,891
13,740
2,862
2,790

19.3
6.5
7.5
-20.4

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

430,461

510,283

18.5

34

Annual Report: Budget Review, 2003

Table C.2
Projected Federal Reserve Costs of Printing New Notes, by Type of Note, 2003
Type of currency

Number of
notes (millions)

Unthreaded ($1s) .....................................

3,975.0

New Currency Design
($5S) .....................................................
($10s, $20s, $50s, $100s) ....................
Series-2004 ($20) ....................................
Average cost .............................................

521.9
2,160.2
1,560.5

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

8,217.6

6.3 billion notes; for October through
December 2003 (the remainder of the
2003 calendar year), it will produce
another 1.9 billion notes.
The 2003 billing rates reflect four
types of currency: unthreaded ($1s), New
Currency Design (NCD) without colorshifting ink ($5s), NCD with colorshifting ink 1 ($10s, $20s, $50s, and
$100s), and Series-2004 with new and
enhanced security features ($20s) (table
C.2). During 2003, 33 percent of the notes
produced will be NCD notes, 19 percent
will be Series-2004 ($20s), and the
remaining 48 percent will be unthreaded
($1s). The average price that the Board
will pay the BEP for producing notes in
2003 is $58.25 per thousand.

Currency Transportation
The currency transportation budget con­
sists of funds for shipping new currency
from the BEP and among the Reserve
Banks. The 2003 currency transportation
budget is $13.7 million, which is $838
thousand, or 6.5 percent, more than the
Board estimated for 2002. The 2003 budget for new currency shipments from the
BEP is $8.4 million, or 11.1 percent,
1. The color of the color-shifting ink shifts
from green to black as the viewing angle of the
note changes.

Cost per
thousand notes
(dollars)

Total cost
(thousands of
dollars)

48.4

39.98

158,921

6.3
26.3
19.0

57.00
68.75
98.50
58.25

29,748
148,516
153,706

Percentage of
total notes

100

490,891

greater than estimated 2002 expenses
because of a projected increase in the cost
of air shipment. The 2003 budget for cur­
rency shipments among Reserve Banks
is $5.3 million, which is unchanged from
estimated 2002 expenses. These ship­
ments move currency from Reserve Bank
offices with excess fit currency to offices
that would otherwise require new cur­
rency from the BEP.

Counterfeit-Deterrence Research
The 2003 budget for the counterfeitdeterrence program is $2.9 million. The
funds will support the Federal Reserve
System’s participation in the Central Bank
Counterfeit Deterrence Group (formerly
known as the SSG-2), which operates
under the auspices of the G-10 governors
to combat digital counterfeiting.

Treasury’s
Office of Currency Standards
The 2003 budget is $2.8 million to reim­
burse the Treasury for Office of Currency
Standards (OCS) expenses. The OCS
develops standards for the cancellation,
destruction, and accountability of unfit
currency and processes claims for the
redemption of damaged or mutilated
currency.

■

35

Appendix D

Expenses and Employment
at the Board of Governors
Table D.1
Operating Expenses of the Board of Governors, by Division, Office or Special Account,
2000–03
Thousands of dollars, except as noted
Average annual
percent change
Division, office or special account

2000–01
(budgeted)

2000–01
(actuals)

2002–03
(revised
budget)

2002–03
2000–01
revised
actuals
budget
compared
compared
with 2000–01 with 2000–01
budgeted
actuals

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

9,002
9,376
63,080
23,308
19,238
63,511
18,099
18,045

8,300
8,983
62,640
22,055
18,819
60,951
17,759
18,079

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

-4.0
-2.1
-0.3
-2.7
-1.1
-2.0
-0.9
0.1

19.3
11.9
3.7
6.2
2.2
10.1
7.9
7.1

31,988
4,060
22,755
58,371
72,906
3,497
11,442
(37,483)

29,801
3,920
21,581
59,692
71,883
3,205
17,481
(37,489)

35,548
7,097
25,248
74,684
81,855
3,687
29,073
(41,477)

-3.5
-1.7
-2.6
1.1
-0.7
-4.3
23.6
0.0

9.2
34.5
8.2
11.9
6.7
7.3
29.0
5.2

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

391,198

387,660

465,988

-0.5

9.6

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

7,847
6,617

8,392
6,322

1,500
7,757

3.4
-2.3

-57.7
10.8

1. Income from various Board divisions for use of cen­
tral information resources management (IRM)
resources.

36

Annual Report: Budget Review, 2003

Table D.2
Positions Authorized at the Board of Governors, by Division, Office, or Special Account,
2000–03
Division, office, or special account

2000–01
(authorized)

2002–03
(revised budget)

Change

Board Members ........................................................
Secretary ...................................................................
Staff Director for Management ................................
Research and Statistics ............................................
International Finance ................................................
Monetary Affairs ......................................................
Banking Supervision and Regulation .......................
Consumer and Community Affairs ..........................
Legal .........................................................................
Reserve Bank Operations
and Payment Systems ......................................
Management .............................................................
Concern 1 ..............................................................
Support Services ......................................................
Information Technology 2 ..........................................
Special projects ........................................................

54
56
25
279
119
62
227
78
82

49
55
37
278
120
69
229
82
82

–5
–1
12
–1
1
7
2
4
...

129
88
31
204
284
2

138
90
31
312
283
2

9
2
...
108
–1
...

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

1,720

1,857

137

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

25

27

2

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

1,745

1,884

139

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

29

29

...

1. Summer intern and youth positions handled by the
Management Division.
2. Positions in the Division of Information Technology that provide support to the Federal Financial Institu­

tions Examination Council for processing data collected
under the Home Mortgage Disclosure Act and the Community Reinvestment Act.
. . . Not applicable.

Expenses and Employment

37

Table D.3
Operating Expenses of the Board of Governors, by Account Classification,
2000–01 to 2002–03
Thousands of dollars except as noted
Average annual
percent change
Division, office or special account

2000–01
(budgeted)

2000–01
(actuals)

2002–03
(revised
budget)

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

246,502
21,533
19,559
287,595

242,516
22,408
19,004
283,928

292,902
27,808
24,001
344,711

–0.8
2.0
–1.4
–0.6

9.9
11.
12.4
10.2

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

11,537
1,659
6,599
2,549
2,297
1,936
9,967
8,125
10,296
2,088
4,457
3,578
4,263
...
28,347
3,270
1,809
18,842
(18,015)
103,603

10,627
1,726
7,293
2,338
1,805
2,429
9,547
7,463
8,869
1,951
4,564
3,673
3,860
457
26,875
2,805
1,688
18,855
(13,093)
103,732

13,606
1,607
7,798
2,543
2,066
2,546
11,223
7,128
857
2,120
5,555
3,688
7,124
400
35,984
3,741
1,897
25,482
(14,089)
121,277

–4.0
2.0
5.1
–4.2
–11.4
12.0
–2.1
–4.2
–7.2
–3.4
1.2
1.3
–4.8
...
–2.6
–7.4
–3.4
0.0
–14.7
0.1

13.2
–3.5
3.4
4.3
7.0
2.4
8.4
–2.3
–68.9
4.3
10.3
0.2
35.9
–6.4
15.7
15.5
6.0
16.3
3.7
8.1

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

391,198

387,660

465,988

–0.5

9.6

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

7,847
6,617

8,392
6,322

1,500
7,757

3.4
–2.3

–57.7
10.8

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

. . . Not applicable.

2002–03
2000–01
revised
actuals
budget
compared
compared
with 2000–01 with 2000–01
budgeted
actuals

39

Appendix E

Expenses and Employment
at the Federal Reserve Banks
Table E.1
Operating Expenses of the Federal Reserve Banks, by District, 2002 and 2003
Thousands of dollars except as noted
Percent change
District

2002
(budgeted)

2002
(estimated)

2003
(budgeted)

2002 estimated
compared with
2002 budgeted

2003 budgeted
compared with
2002 estimated

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

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

159,186
498,229
123,265
137,568
205,410
292,010
253,911
139,415
141,852
169,611
152,658
287,383

167,228
497,362
127,758
146,181
205,593
297,992
247,443
154,319
147,318
174,960
162,630
286,523

2.2
–2.1
–2.0
–0.9
3.3
–2.3
3.7
0.0
–2.2
–0.3
0.7
–0.9

5.1
–0.2
3.6
6.3
0.1
2.0
–2.5
10.7
3.9
3.2
6.5
–0.3

Total, all Districts .......

2,567,834

2,560,498

2,615,309

–0.3

2.1

Special project
Check standardization ...

12,387

14,890

14,627

20.2

–1.8

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

2,580,220

2,575,388

2,629,936

–0.2

2.1

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

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

40

Annual Report: Budget Review, 2003

Table E.2
Employment at the Federal Reserve Banks, by District, and at FRIT and OEB, 2002 and 2003
Average number of personnel except as noted
Amount change
2002
(estimated)

District

2002
(budgeted)

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

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

1,327
3,351
1,265
1,354
2,126
2,430
2,122
1,323
1,291
1,749
1,526
2,495

1,270
3,185
1,241
1,348
2,085
2,317
2,053
1,310
1,323
1,701
1,446
2,328

–14
–32
–33
–48
–47
–33
–38
–32
–15
–21
–5
–77

–57
–167
–24
–5
–41
–113
–69
–13
32
–48
–80
–167

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

22,753

22,359

21,607

–394

–752

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

763
34

774
32

779
36

11
–2

5
4

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

23,550

23,165

22,422

–385

–743

NOTE . See note to table E.1.
The term average number of personnel (ANP)
describes levels and changes in employment at the
Reserve Banks. ANP is the average number of employees

2003
(budgeted)

2002 estimated 2003 budgeted
compared with compared with
2002 budgeted 2002 estimated

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.

Table E.3
Operating Expenses of the Federal Reserve Banks, by Operational Area, 2002 and 2003
Thousands of dollars except as noted
Percent change
Operational area

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

2002
(budgeted)

2002
(estimated)

2003
(budgeted)

242,938

246,002

257,610

1.3

4.7

284,116

292,711

309,026

3.0

5.6

626,783
474,993

618,738
471,858

648,554
503,665

–1.3
–0.7

4.8
6.7

939,004

931,189

896,453

–0.8

–3.7

2,567,834

2,560,498

2,615,309

–0.3

2.1

NOTE . Operational expenses include FRIT and OEB
and exclude special-project costs.

2002 estimated 2003 budgeted
compared with compared with
2002 budgeted 2002 estimated

Expenses and Employment

41

Table E.4
Employment at the Federal Reserve Banks, by Operational Area, 2002 and 2003
Average number of personnel except as noted
Amount change
Operational area

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

2002
(budgeted)

2002
(estimated)

2003
(budgeted)

2002 estimated 2003 budgeted
compared with compared with
2002 budgeted 2002 estimated

850

858

865

8

7

1,334

1,313

1,273

–21

–40

2,916
2,607

2,888
2,597

2,858
2,588

–27
–10

–31
–9

5,402
9,644

5,165
9,537

4,782
9,241

–237
–107

–383
–296

22,753

22,359

21,607

–394

–752

N OTE. Operational area employment excludes FRIT,
OEB, and special-project average number of personnel.

42

Annual Report: Budget Review, 2003

Table E.5
Salary Administration Expenses of the Federal Resereve Banks, by District,
and of FRIT and OEB, for Officers and Employees, 2003
Thousands of dollars except as noted
Variable pay
Salary base

(2002 estimated minus 2003
budgeted)

District
Merit

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

Total

Percent
(total)

Promo­ Market
Cash Incentive Percent
tions and adjust­ Percent
reclassifi­ ments (subtotal) awards payments (subtotal)
cations

2,640
9,136
2,140
2,379
3,362
4,148
4,415
2,225
2,379
3,209
2,158
3,109

552
1,845
338
448
1,170
1,513
750
544
366
1,679
246
264

488
1,095
192
544
283
340
135
15
0
192
23
113

4.5
4.7
3.9
4.8
4.2
4.8
4.2
4.1
3.9
5.5
3.3
2.4

–74
–175
20
90
318
392
–353
–111
225
147
300
–560

–272
1,102
352
170
104
250
373
388
59
313
70
– 319

–0.4
0.4
0.5
0.4
0.4
0.5
0.0
0.4
0.4
0.5
0.5
–0.6

3,334
13,003
3,042
3,631
5,237
6,642
5,319
3,061
3,028
5,540
2,797
2,607

4.1
5.0
4.5
5.1
4.6
5.3
4.2
4.5
4.3
6.0
3.8
1.8

Total, all Districts .... 41,299

9,713

3,419

4.2

219

2,589

0.2

57,240

4.4

1,704

329

0

3.2

19

383

0.6

2,435

3.8

187

0

18

5.6

7

5

0.3

216

5.9

Total .......................... 43,189

10,042

3,438

4.2

245

2,977

0.2

59,891

4.4

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

Salary administration: Represents the budgeted funds
that are available to increase compensation to officers and
employees in the coming year. It does not include adjust­
ments for changes in staffing levels, turnover and lags in
hiring, and overtime.
Merit: The amount of budgeted salary expense that
reflects the cumulative effect of planned salary increases
based on performance.
Promotions and reclassifications: The amount of bud­
geted salary expense that reflects the cumulative effect
of salary increases for individuals as a result of grade
promotions and reclassifications resulting from a job
evaluation.

Market adjustments: The amount of budgeted salary
expense to bring individual salaries to the minimum of a
grade range or to better align salaries with the market.
Cash awards: The change in the amount of payments
for awards in recognition of exceptional achievements.
Incentive payments: The change in the amount of other
personnel expense that represents payments for the
achievement of predetermined goals.
Percent: The total of the stated payments as a percentage of total salary and other personnel expense.

Expenses and Employment

43

Table E.6
Capital Outlays of the Federal Resereve Banks, by District, and of FRIT and OEB,
2002 and 2003
Thousands of dollars except as noted
Percent change
District

2002
(budgeted)

2002
(estimated)

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

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

13,088
49,964
18,587
25,842
20,610
18,866
45,698
10,542
13,195
12,338
17,188
27,414

24,909
56,454
15,804
21,609
17,522
20,809
89,437
36,709
6,330
39,251
56,271
45,383

–32.1
–25.1
–4.8
13.4
–24.5
–29.8
–16.4
–45.4
79.0
–36.0
–7.5
–25.2

90.3
13.0
–15.0
–16.4
–15.0
10.3
95.7
248.2
–52.0
218.1
227.4
65.5

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

338,291

273,331

430,489

–19.2

57.5

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

33,511
...

54,021
3,439

60,870
...

61.2
...

12.7
...

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

371,802

330,791

491,358

–11.0

48.5

2003
(budgeted)

2002 estimated 2003 budgeted
compared with compared with
2002 budgeted 2002 estimated

. . . Not applicable.

Table E.7
Capital Outlays of the Federal Resereve Banks, by Category, 2002 and 2003
Thousands of dollars except as noted
Percent change
Category

2002
(budgeted) 1

2002
(estimated)

2003
(budgeted)

Building projects ...............................
Security enhancements ......................
Information technology projects .......
Payment system projects ...................
Miscellaneous 2 ..................................

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

98,219
46,562
63,510
100,379
22,121

268,678
49,213
55,003
109,020
9,444

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

173.5
5.7
–13.4
8.6
–57.3

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

...

330,791

491,358

...

48.5

NOTE . Includes outlays from FRIT and OEB.
1. Capital information by category was not collected
in the 2002 budget.

2002 estimated 2003 budgeted
compared with compared with
2002 budgeted 2002 estimated

2. Includes other equipment purchases.

Maps of the
Federal Reserve System

46

Annual Report: Budget Review, 2003

The Federal Reserve System

LEGEND
Both pages
Federal Reserve Bank city
Board of Governors of the Federal
Reserve System, Washington, DC

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 2002.

Maps of the Federal Reserve System 47

FRB1/1–800–0302–C