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FEDERAL RESERVE BANK OF NEW YORK May 1, 1985 PRICED SERVICES R EPO R T To All Depository Institutions, and Others Concerned, in the Second Federal Reserve District: Following is the text of a statement issued by the Board of Governors of the Federal Reserve System: The Federal Reserve Board has issued a report summarizing developments in the priced services areas for 1984 and providing detailed financial results of providing those services. The Board issues a report on priced services annually and a priced service bal ance sheet and income statement quarterly. The financial statements are designed to reflect standard accounting practices, taking into account the nature of the Federal Reserve’s activities and its unique position in this field. Enclosed is a copy of the Board’s report; additional copies will be furnished upon request directed to our Circulars Division (Tel. No. 212-791-5216). Ques tions on the report may be directed to Robert M. Abplanalp, Vice President (Tel. No. 212-791-5349). E. G erald C o rrig an , President. tj-liiju W BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM ANNUAL MEPOMT ON PMICED SERVICES ACTIVITIES 1984 P R IN T E D IN N E W Y O R K Report on Priced Services Activities for 1984 lo OVERVIEW The Reserve Banks fu lly recovered all the costs of providing priced services to depository institutions in 1984 as required by the Monetary Control Act of 1980 (MCA)o Improved operations and continued cost control measures resulted in an improvement in the Federal Reserve's priced services financial performance,, For the years the Reserve Banks recovered 10309 percent of total operating and imputed costs for priced services^ compared with 99o7 percent in 1983o During 1984s the Federal Reserve took a number of steps to improve the nation's payments mechanism0 In A p r ils the Federal Reserve implemented a program designed to collect $1 b illio n in checks one day fasterc In June9 the Board of Governors requested comment on an amendment to Regulation J that would require institutions upon which checks are drawn to notify promptly the in stitu tion at which the check was f ir s t deposited when a large dollar check that was collected through the Federal Reserve is being returned,, The Federal Reserve adopted this proposal for implementation in October 1985 0 Automated Clearing House (ACH) services were improved in 1984 by implementing later deposit dead lines and expanding the use of electronic transmissions,, Thp number of depository institutions with electronic connections to the Federal Reserve continued to grow during the year„ The Federal Reserve also implemented a number of enhancements to its definitive securities and noncash collection service,, IIo FINANCIAL RESULTS The MCA requires the Federal Reserve to establish fees for its payment services that over the long-run cover the full costs of providing such services9 Board of Governors - 2 - including the cost of capital and taxes the Federal Reserve would incur if it were a private firm (Private Sector Adjustment Factor)s and the cost of floato Overall9 fee-generated income for Federal Reserve priced services in 1984 amounted to $57407 m illion 0 Total production costs9 net of approved subsidiess amounted to $44903 m illion 9 thus yielding $125 05 million in income from operations. The value of float and imputed operating costs associated with the 1984 Private Sector Adjustment Factor (PSAF)s amounted to $47,2 m illion9 while the net interest income from clearing balances amounted to $306 m illion, Thuss the income before allowance for imputed income taxes was $81,8 million. Given the income tax rate assumption in the PSAF9 estimated after-tax income was $50,2 m illion 8 up from $22,8 million in 1983 and $26,3 million above the targeted return on equity for 1984, A pro forma balance sheet and income statement for Federal Reserve priced services a ctivitie s in 1984 and 1983 are presented in Tables 1 and 29 respectively. These statements reflect several changes in Federal Reserve practices made during the year. These changes are discussed in Section IV below. The Board has adopted guidelines for the provision of priced services requiring revenues for each priced service to cover the costs of that service,^/ All Federal Reserve servicesB except the definitive safekeeping and noncash collection service2 had pre-tax income that covered total targeted operating y The service lines are: (1) commercial check collection; (2) wire transfer of funds and net settlement; (3) commercial automated clearinghouse operations; (4) safekeeping of definitive securities and the collection of noncash items such as interest coupons on municipal securities; (5) the safekeeping and transfer of book-entry securities; (6) cash transportation; and (7) coin wrapping. - 3 - Board of Governors and imputed costs during 1984 (see Table 3)e Total revenues for the definitive and noncash collection service line recovered 9309 percent of the total operating and imputed costs of this service0 Financial results for each Reserve Bank for locally priced services are presented in Table 40 Generally2 Federal Reserve priced services volumes increased during 1984 as compared to 1983» Federal Reserve check processing volume grew at a rate of 3 percent in 1984s compared to the 2 percent growth rate incurred in 1983o Volume growth for Federal Reserve funds transfer for 1984 was 9 percent0 up from 7 percent in 1983e Commercial ACH grew by 37o0 percent during 1984 as compared to 4807 percent during 19830 Continued volume declines in the number of definitive securities held in safekeeping with the Federal Reserve--which was partially offset by volume increases in noncash col lection— impaired the Federal Reserve's ab ility to achieve a cost/revenue match in this service0 Book-entry securities transfers grew 13o0 percent in 1984 as compared to 1»6 percent in 19830 Priced services volumes for 1984 are presented in Table 5 0 IIIo SERVICE-BY-SERVICE DEVELOPMENTS Commercial Check Operations On April 239 19849 the Federal Reserve implemented the High Dollar Group Sort Program--a program designed to accelerate the collection of checks drawn on certain non-city institutions,, By the end of 1984s over $1 b illio n was being collected one day earlier as a result of this program,, In conjunction with this program,, the Board required the Reserve Banks to offer payor bank services to assist depository institutions in providing cash management services to their customers,. - 4 - Board of Governors The Board requested public comment in 1984 on three proposals concerning the Federal Reserve's check collection serviceSo In June* the Board requested comment on a proposed amendment to Regulation J that would require an institution upon which a check is drawn to provide notification to the institution at which the check is f ir s t deposited within specified deadlines when returning a check of $29500 or more that was collected through the Federal Reserve0 This proposal was designed to reduce the risk to depository institutions associated with the return of checks and allow them to make funds available to their depositors sooner0 The Board adopted this proposal for implementation in October 19850 In July 1984s the Board requested public comment on a proposal to eliminate one of the Federal Reserve's float recovery options (ioeos> fractional a vailab ility) in order to ensure that float is recovered from the depository institutions generating and benefiting from the flo a t0 The Board adopted this proposal for implementation in September 19860 In Novembers the Board requested public comment on two-tiered pricing-~a proposal designed to assess a different fee for a check sent to a given collection zone depending on whether the check is sent to a high or low unit cost endpointo It is anticipated that the Board will consider this proposal in 19850 After a large number of price changes during the transition to pric ings the Federal Reserve achieved a significant measure of price sta b ility with regard to its check collection fees0 Federal Reserve check collection fees remained unchanged from December 1983 until December 1984s when the prices were increased on average by 3 percent„ Board of Governors - 5 - Funds Transfer The number of depository institutions electronically on-line with the Federal Reserve rose from 4S000 to 4a500o The basic transaction fee for the funds transfer service remained the same between April 1982 and September 1984e This fee was reduced from $065 to $o60 in September 1984 because of higher than anticipated volume and Federal Reserve cost reductions0 Effective December 27s 1984s the transaction fee was further reduced to $<>55 in conjunction with the implementation of monthly electronic connection fees in January 19850 These monthly connection fees are intended to recognize the fixed costs associated with this serviceQ Commercial ACH In an effort to improve ACH servicess the Federal Reserve finalized the design and moved into the advanced stages of development of a new ACH operating system0 This new operating system will provide greater fle x ib ility in the type of ACH services the Federal Reserve can provide., In December 1984, the Federal Reserve established new and uniform deposit schedules that set later closing times for day and night cycle opera tions., These later deposit deadlines w ill provide depository institutions with a longer time to process their ACH transactions., In accordance with the policy previously adopted by the Board to encourage the development of electronic payments^ new ACH prices were set on March 29a 19843 to recover 60 percent of costs and the PSAFo A revised fee schedule was implemented on December 27s 1984s to generate revenues that would recover 80 percent of costs and the PSAF0 (The A(H subsidy will cease by the end of 1985)0 The fee schedule implemented in December 1984 eliminated the Board of Governors - 6 - concept of benefit-flow pricing and set explicit charges for institutions depositing paper return items*, Definitive Safekeeping and Noncash Collection Several securities service enhancements were introduced during 19840 In noncash collections improvements included a mixed deposit product and improved credit availability,, In definitive safekeeping,, improvements included offering nominee registrations an expansion of securities reregistration,, and a safe keeping of mortgage-backed securities,, A revised fee schedule expected to recover the costs of providing these services was issued for public comment in November 1984c This fee schedule was adopted by the Board effective February 28s 1985. Prior to this repricings these services were last repriced in October 19830 Book-Entry Securities During 1984s the Treasury Department directed the Federal Reserve to treat the safekeeping and transfer of U0S0 Treasury securities* as a service to be provided by the Federal Reserve as fiscal agent for the Treasury rather than as a priced service0 Accordingly9 the Treasury will establish the fees to be charged depository institutions for those activities,, proposed new fees for these services,, In Decembers, the Treasury In additions, the Board requested public comment on a proposed fee for the funds settlement transaction associated with the securities transfer,, Federal Reserve Float Federal Reserve float declined from a daily average of $1„5 b illio n in 1983 to a daily average of $400 million in 1984„ The Federal Reserve Board of Governors - 7 - implemented a program in April 1984 to eliminate the midweek closing float arising from its check collection service,, The cost of float associated with the check collection and book-entry securities transfer services were recovered for the entire year0 The cost of float associated with the collection of coupons and noncash items was recovered beginning in May0 The recovery of delayed file float from ACH operations was phased in during 19840 The only remaining Federal Reserve float to be priced includes small amounts of ACH return item and holiday float, which will be included in the cost base for this service beginning in January 19850 IVo OTHER DEVELOPMENTS Pricing Policy Statements Two papers were issued by the Board in August 1984s "The Federal Reserve in the Payment System10 and "Standards Related to Priced Services A ctivities of the Federal Reserve Banks0" The f ir s t paper defined the role of the Federal Reserve in the payments mechanism and established criteria that will be used in determining whether to provide new services or major service enhancementSo The second paper established standards to avoid conflicts or the appearance of conflicts between the Federal Reserve"s role as a provider of services and its role as a supervisors regulators and lenders In November 1984 3 the Board adopted a policy statement on surpluses and shortfalls in revenue that arise from the provision of priced services,, This statement clarified the policy stating that Federal Reserve fees for priced services will be established based on projected costs and volumes9 rather than to offset prior year's surpluses of sh o rtfa llsQ Board of Governors - 8 - PSAF Methodology and Clearing Balances During 19849 the Board refined the method used to calculate the P$AF„ The Board determined that imputed sales taxes9 an imputed FDIC assessment on clearing balances, and the expenses of the Board associated with the develop ment of fees for Federal Reserve priced services would be included in the PSAF in 1984s which added $8o0 m illion to required recoveries for the year„ The Federal Reserve adjusted the calculation of earnings credits on clearing balances to reflect the reserve requirements that would apply if these balances were held with a correspondent bank,, Sim ilarly, the Federal Reserve changed the way it imputes income on clearing balances to reflect the effect of reserve requirements that it would be subject to if it were a correspondent bank 0 Reviews of Priced Services A number of external reviews of Federal Reserve priced services were conducted during 19849 including a congressional review and a review by the General Accounting 0 ffice o In addition, the Federal Reserve retained an indepen dent accounting firm to review the Federal Reserve's pricing methodology and cost accounting procedures,, These groups either completed their preliminary or final reviews and concluded that the Federal Reserve was in compliance with the Monetary Control Act0 Further, they concluded that the actions of the Federal Reserve were reasonable,. These reviews yielded a number of suggestions that the Federal Reserve has implemented or is studying,, - 9 - Board of Governors Vo OUTLOOK FOR 1985 The Federal Reserve anticipates that during 1985 it will continue to meet the MCA's cost recovery requirementSo Priced services revenue should increase by approximately two percent during 1985 2 which reflects a modest increase in anticipated fees0 With the exception of the electronic connection fees effective January 1, 1985s and the repricing of the definitive safekeeping and noncash collection service effective February 289 1985 , no major fee changes are anticipatedo The Board of Governors expects to announce applicable 1986 fee changes in November 1985. Total production costs are projected to increase by about 5 percent and imputed costs are projected to decrease 6 percent in 19850 In additions the Federal Reserve anticipates implementing a number of service enhancements during 1985 to improve the payments mechanism0 The Federal Reserve intends to work closely with industry groups to implement these changes0 With regard to the check collection services the Federal Reserve anticipates implementing changes in procedures to improve return item processing and also anticipates implementing a pilot program involving the truncation of commercial checkSo The Federal Reserve expects that the number of depository institutions that have on-line electronic connections with Reserve Banks will continue to increase during 1985„ It is anticipated that these electronic connections will be used for a wide variety of electronic serviceSs including the origination and delivery of ACH paymentsc F in a lly 9 because of the continuing volume loss in definitive safekeeping service9 the Federal Reserve is continuing to evaluate its long-run role in this service0 Attachments Table 1 Pro Forma Balance Sheet For Priced Services Federal Reserve Banks December 31s 1984 and 1983 (in m illions) 1984 Short=term assets (Note 1) Imputed reserve requirements on clearing balances Investment in marketable securities Recei vables Materials and supplies Prepaid expenses ' Net items in process of collection (float) Total short-term assets Long-term assets (Note 2) Premi ses Furniture and equipment Leases and leasehold improvements Total long-term assets Long-term lia b ilit ie s Obligations under capital leases Long-term debt Total long-term lia b ilit ie s Total lia b ilit ie s Equity Total lia b ilit ie s and equity (Note 3) $147.4 1*080.6 49o0 $166.9 1 92 2 4 o0 54o0 4o7 2d 4 o4 2o3 524o8 720 o7 $1 ,9 76.4 172o9 100o9 2„2 Total assets Short-term lia b ilit ie s Clearing balances and balances arising from early credit of uncollected items Short-term debt Total short-term lia b ilit ie s 1983 $2 ,0 0 4 .4 168o? 91o9 2 05 276o0 263o 1 $2,252.5 $2 ,2 67. 5 $1,915.7 $1,948.7 55o7 60o8 $1 ,9 76.4 0o4 0o4 87 06 83o5 88 oO 83 o9 2 90 6 4 o5 2 s088o3 188o0 179o2 $2 ,2 52.5 $2 ,2 67. 5 Details may not add due to roundingG Accompanying notes are an integral part of these financial statements0 $2s004o4 Table 2 Pro Forma Income Statement for Priced Services Federal Reserve System For the years ending December 31 9 1984 and 1983 (in mi 1lions) 1984 Income (Note 4): Services provided to depository i nstitutions Expenses (Note 5): Production expenses Less: Board approved subsidies $574.7 $455,9 5.7 Net income from operations Imputed costs (Note 6): Interest on float Interest on short-term debt Interest on long-term debt Sales taxes FDIC insurance 449o2 $496.2 $442.1 9.7 29 o3 3o0 8.5 4o9 1.2 122o3 118.7 432.4 63.8 125.4 Net income from operations after imputed costs Other income and expenses (Note 7): Investment income Earnings credits 1983 19.7 10o4 10.1 47.2 40.2 78.2 23.7 3.6 84.9 71.8 13.1 Net income before income taxes 81.8 36.8 Imputed income taxes (Note 8) 31.6 14.0 Net income after taxes $50.2 $22.8 Memo: Targeted return on equity (Note 8) $23.9 $24.6 Details may not add due to rounding0 Accompanying notes are an integral part of these financial statements0 Table Income Statement for Priced Services Federal Reserve System For the year ending December 31, 1984 (i n mi 1lions) Total Hi re Commercial Transfer and Net Check Collect!on Settlement Definitive BookSafekeepi ng Cash Entry Commerci al and Noncash Collection Securities Servi ces ACH $574.7 $436.7 $62.0 $11.4 $19.0 $24.1 $21.6 Operating expenses*, net of subsidies 449.2 335ol 48 o5 10.0 18.5 16.1 21.0 Income from operations 125.4 101.6 13.4 1.4 0.5 7.9 0.6 Imputed costs 47.2 39.6 2.5 0.8 1.2 3.0 0.1 Income from operations after imputed costs 78.2 62o 1 10.9 0.6 (0.7) 5.0 0.5 3o6 2.7 0.4 0.1 0.1 0.2 0.1 $81.8 $64.8 $11.3 $0.6 $(0.6) $5.1 $0.6 Income from services (Note 9) Other income and expenses, net Income before income taxes Details may not add to totals due to roundingQ Accompanying notes are an integral part of these financial statements. Table Revenue and Expense of Locally Priced Services at Federal Reserve Banks, 1984 Mi 1]ions of Dollars (Note 10) Corromerci al Definitive Safekeeping 'heck and Col lection Noncash Collection Operating Float Total Total Net Operati ng Float Total Total Net Cost Cost Cost Cost Revenue Revenue Cost Cost Revenue Revenue Boston New York Philadelphia Cleveland Ri chmond Atlanta Chicago S t0 Louis Mi nneapoli s Kansas City Dallas San Francisco System Total 20.6 52.4 13 D7 19o3 27o6 36ol 48o3 16.1 21.5 23.5 23o0 31.5 333.7 1.8 1.6 0.3 22.4 53.9 14.1 1.8 2.8 1.8 21.1 2.8 0.8 4.5 2.5 5.0 9.7 13.3 6.1 5.2 4.2 3.7 1.0 1.5 4 .0 30.4 37.9 53.8 18.1 22.7 25.4 24.5 35.5 25.2 58.5 16.5 26.0 40.1 51.2 59.9 23.3 26.9 32.0 29.9 47.1 5.3 11.5 1.7 1.0 0.5 26.3 360.0 436.7 76.7 18.4 5.5 2.0 1.2 2.0 6.6 - - 1.6 0.9 - 2.1 - 3.4 1.1 0.8 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.2 3.1 1.6 0.8 2.1 1.7 1.0 3.0 3.5 2.8 1.1 1.2 1.1 0.0 0.5 0 .4 18.8 19.0 0.0 Details may not add to totals due to rounding0 Accompanying notes are an integral part of these financial statements 1.1 3.8 1.0 1.0 1.7 1.0 0.4 0.0 - 0.8 0.7 1.8 1.1 0.4 -0 . 7 0.1 0.1 0.2 0.9 -0.7 - 0.1 -0.3 0.1 Cash Services Total Total Net Cost Revenue Revenue 0 .5 0.6 0.1 2.8 3.0 1.3 0.2 1.3 1.7 1.3 0.0 1.0 1.0 1.5 0.8 1.8 1.4 0.1 0 .9 1.0 1.7 0.8 2.6 - 0.1 0.1 0.0 0 .0 0.0 0 .0 0.2 0.1 2.7 6.3 6.5 0.0 0.1 0.1 0.2 21.0 21.6 0.6 0.1 - Table PRICED SERVICE VOLUMES (Items in Thousands) (Note 11) Priced Service 1984 1983 Funds Transfers 4 2 96 0 2 . 6 3 8 9Q 2 1 oO Commercial ACH 2 1 4 94 0 0 o 5 1 5 6 94 7 4 o2 1 4 96 9 7 95 4 2 . 0 1 4 ,270,015.0 5 96 5 6 o4 Commercial Checks Securities Transfers Definitive Safekeeping Noncash Col lection Cash Transportation Percent Change 1984 v so 1983 9o4 % 3 5 93 8 1 o 0 Percent Change 7o5 % 1 0 5 92 4 3 o0 4 8 o7 3.0 1 3 ,9 2 9 ,9 5 9 .0 2o4 5 90 0 5 o2 13.0 4 99 2 8 o5 1.6 151.4 159-4 -5.0 178o6 -1 0 .8 4 93 0 2 o0 2 99 2 9 o 7 46.8 2 9 1 1 5 o5 3 8 o5 503o2 564.9 -10.9 607o5 -7 .0 37 oO Accompanying notes are an integral part of these financial statements. 1982 Notes to the Financial Statements The Balance Sheet (Table 1) Note 1: Short-term Assets The imputed reserve requirement on clearing balances and investment in marketable securities reflect the Federal Reserve's treatment of clearing balances maintained on deposit with Reserve Banks by depository in stitu tio n s0 For balance sheet and income statement presentation,, clearing balances are reported in a manner comparable to the way correspondent banks compensating balances held with them by respondent in stitu tio n s0 report That i s 9 respondent balances held with a correspondent are subject to a reserve requirement established by the Federal ReserveQ This reserve requirement must b@ satisfied with either vault cash or with non-earning balances maintained at a Reserve Banko Following this model,, clearing balances maintained with Reserve Banks for priced service purposes are subjected to imputed reserve requirementSo Therefore,, a portion of the clearing balances held with the Federal Reserve is classified on the asset side of the balance sheet as required reserves and is reflected in a manner sim ilar to vault cash and due from bank balances normally shown on a correspondent bank's balance sheeto The remainder of clearing balances is assumed to be available for investment For these purposes,, the Federal Reserve assumes that all such balances are invested in three-month Treasury b i l l s 0 Receivables represent: 1) amounts due the Reserve Banks for priced services which have been provided to institutions for which payment has not yet been received; and0 2) that share of suspense account and difference account balances related to priced services0 The amount shown for materials and supplies represents the inventory value of such short-term assets necessary for the ongoing operations of priced - 2 service areaSo Prepaid expenses represent items such as salary advances and travel advances for priced service personnel and the portion of priced service leasehold improvements which will be amortized to current expense during the year0 Net items in the process of collection is the amount of float as of the balance sheet date and is the difference between the value of items in the process of collection (including checks,, coupons*, securities*, and ACH transactions) and the value of deferred a v a ila b ility items0 The cost base for providing services that must be recovered under the Monetary Control Act includes the cost of float incurred by the Federal Reserve during the year and is valued at the Federal funds rate0 Conventional accounting procedures would call for the gross amount of items in the process of collection and deferred a v a ila b ility items to be included on a balance sheeto However*, because the gross amounts have no implications for income*, costs*, or the private sector adjustment factor (PSAF)*, and because the inclusion of these amounts could lead to distortions and misinterpretations of the assets em ployed in the provision of priced services which must be financed*, only the net amount is shown0 The net amount represents the assets that involve a financing costo Note Z t Long-term Assets long-term assets reflected on the balance sheet have been allocated to priced services using a direct determination b a sis0 The direct determination method uses the Federal Reserve0s Planning and Control System (PACS) t© ascertain directly the value of assets used solely in priced services opera tions and to apportion the value of jointly-used assets between priced and nonpriced servieeso Additionally9 as a result of changes to the 1984 PSAF methodology, an estimate of the assets of the Board of Governors directly - 3 - involved in the development of priced services is included in long-term le a s e s0 In accor assets in the premises account in 1984 but not in 19830 Long-term assets also include an amount for capital dance with generally accepted accounting p r i n c i p l e s 8 the c a p ita lize s leases that q u a lify for c a p ita liz a tio n . Federal Reserve P rior to 1984, the value of such leases were not shown on Federal Reserve balance sheets because they had no material effect on either assets or expenses. While the impact in the future i s also l i k e l y to be immaterial, procedures have been established in order to present these reporting practices assets of on a basis private leasehold improvements. sector consistent fir m s0 These with accounting assets a lso and include The current portion of leasehold improvements has been included in prepaid expenses. Note 3: L i a b i l i t i e s and Equity A matched-book capital fina ncing" has been structure for those assets that are not " s e l f - used to determine the lia b ility Short-term assets are financed with short-term debt. and equity amounts. Long-term assets are financed with long-term debt and equity in a proportion equal to the ratio of long-term debt and equity of the bank holding companies used in the PSAF model, Other short-term Reserve Banks lia b ilitie s and deposit include balances clearing a r is in g from balances flo a t. maintained at Other long-term l i a b i l i t i e s con sist of o b lig ation s on capital leases. The Income Statement (Table 2) The income vices, statement re fle c ts income and expenses fo r priced se r Included in these amounts are Board approved su b sid ie s, imputed flo a t costs, imputed financing costs, and income related to clearing balances. = 4 Note 4: Income Income represents charges to depository in s t it u t io n s for priced s e r v ic e s 0 This income i s realized through one of two methods: direct charges to an i n s t i t u t i o n 's account or charges against accumulated earnings c r e d i t s Q Income includes charges for per-item fees, package fees, e x p l i c i t l y priced f l o a t 9 account maintenance and Note 5: fees, shipping insurance fees, and surcharges0 Production Expenses and Subsidies Production expenses include d irect, ind ire ct, and other general adminis tr a t iv e expenses of the Federal Reserve Banks for providing priced s e r v ic e s G Also included in expenses for 1984 are the expenses of s t a f f of the Board of Governors working d ir e c t ly on the development of priced services which, in 1984, amounted to $ 109 mi 11 ion <> Board-approved subsidies con sist of programs established for the commer cial automated clearinghouse and cash transportation services,, The incentive p ric in g program established for the ACH service provides for fee structures designed to recover an increasing share of expenses0 In 1984 and 19839 ACH revenues are intended to recover 60 percent and 40 percent, respectively, of costs plus the PSAFo This incentive p ric in g program i s being phased out with complete elimination planned by the end of 1985<> The subsidy for ACH opera tio n s amounted to $6o7 m illion in 1984a and $801 m illio n in 19830 The tran = s it io n a l support program adopted concluded at the end of 19830 for the cash transportation The cash transportation service subsidy fo r was 1983 totaled $lo6 mi11ion0 Note 6: Imputed Costs Imputed flo a t costs represent the value of flo a t to be recovered, either e x p l i c i t l y or through per-item fe e § 9 during the periodo Float cost recovery for book-entry securities., services was imple mented in 1984o ACH9 and noncash c o lle c tio n Cost recovery of check floa t was implemented in 1983c In 5 19839 recovery for the value of imputed float costs in the commercial check service was phased in as follows” for the period February 24 through June 30s 1983s the value of holdover check float in excess of one percent of the total dollar value of checks received was included in the commercial check cost base; for the period July 1 to September 3Q9 1983*, the value of holdover check float in excess of one-half of one percent of the value of checks received*, plus the value of interterritory check float was included in the commercial check cost base; and*, effective October 1*, 19832 the value of all check float was included in the commercial check cost base0 The following table depicts the Federal Reserve's float performance and float recovery for 19840 The amount of float recovered through charges is valued at the Federal funds rateQ The value of this float is then billed directly to depository institutions or added to the cost base subject to recovery for each appropriate serviceo Float Recovery Federal Reserve Banks 1984 (Daily average figures in m illions) Total float Unrecovered float 1/ Float subject to recovery Float recovered through "as of" adjustments 2/ Float recovered through direct charges 2/ Float recovered through per-item fees 3j U $677o9 107oQ 57Qo9 281o4 145.1 144o4 Includes float generated in providing services to government agencies o p in other central bank services and float not recovered as a result of the ACH subsidy and the phase-in of other float recovery0 2_ Midweek closing float and interterritory check float may be recovered from depositing institutions through adjustments to the in stitu tio n 's reserve or clearing balance or by valuing the float at the Federal funds rate and b i l l ing the institution d ire ctly0 3/ This float is valued at the Federal funds rate and has been added to the cost base subject to recovery in 1984 0 - 6 - Also included in imputed costs is the interest on sh o rt- and long-term debt assumed necessary to finance priced service assets and the sales taxes and FDIC insurance assessment that the Federal Reserve would have paid had i t been a private business firm 0 Note 7: Other income and expenses Other income and expenses are comprised of income on clearing balances and the cost of earnings credits granted to depository in s t it u t io n s on th e ir clearing balanceSo As a result of financial reporting changes approved by the Board in March9 1984s income on clearing balances for 1984 represents the average coupon equivalent yie ld on three-month Treasury b i l l s applied to the total cle aring balance maintained,, requirements on clearing balanceSo by applying the average Federal c le aring balances,. adjusted for the effect of reserve Expenses for earnings c re d its were derived funds rate to the requi red portion of the Beginning October 259 19849 earnings c re d its granted to depository in s t it u t io n s were adjusted for the net effect of reserve require~ ments on clearing balances,, In 1983D neither income nor expense was adjusted for the net effect of reserve requirements on clearing balances* Note 8; Income Taxes and Return on Equity Imputed income taxes are calculated at the e ffe ctive tax rate derived from a model c o n sistin g of the 25 large st bank holding companies,, The targeted return on equity represents the a fte r-tax rate of return on equity that the Federal Reserve would have earned had i t been a private b u s i ness firm based on the bank holding company model0 7 Income Statement by Service (Table 3) (Note 9) The income statement by service adjusted for Board approved sub sid ie s* refle c ts revenue* operating expenses and imputed costs except fo r income taxeSo Imputed costs include floa t and the inte re st on short- and long-term debt* sales taxes* and the FDIC assessment as calculated for the PSAFo Float costs are based on the actual flo a t incurred in each priced se rv ic e G Other imputed costs are allocated among priced services based on the ra tio of the operating costs le ss shipping costs in each priced service to the total cost of priced services le ss total priced services shipping c o s t s 0 Other income and expenses con sist of income on c le arin g balances and the cost of earnings cre d its for the Federal Reserve,, relate d ire c tly to the Federal Re se rve 's Because cle aring balances o ffe rin g of priced service s* the income and cost associated with these balances are spread to each service based on the ratio of income from each service to a total income.. Taxes and the after-tax targeted rate of return on equity* as shown on the aggregate income statement* have not been spread by service since these elements relate to the organization as a whole., Statement of Revenue and Expense For Locally Priced Services (Table 4) (Note 10) This table depicts the fin a n cial providing lo c a l l y priced s e r v ic e s 0 re su lts The financial for each re su lts Reserve Bank in fo r each Reserve Bank do not include the d o lla rs to be recovered through the PSAF and the net investment income on cle aring balancesQ As such* in order to reconcile Table 4 net revenue data with that disclosed in Table 3* adjustments must be made for imputed inte re st on short- and long-term debt* sales taxes* FDIC a sse ssment* priced service Board expenses and net income on c le aring balances0 - 8 Priced Service Volumes (Table 5) (Note 11) This table sho^s the absolute volume and percentage change in the number of items handled by the Federal Reserve in i t s priced service operations,, Wire tran sfe r of funds volume i s the number of basic transactions originated; ACH volume i s the total number of commercial items processed; commercial check re fle c ts the total commercial checks collected^ including both processed and fine sort items; se c u rit ie s tra n sfe rs volume c o n sists of the number of basic tra n sfe rs number of issu e s originated on-line ; d e f in it iv e safekeeping or receipts maintained; noncash c o lle c tio n is the average volume i s the number of items assessed fees; and cash transportation volume i s the number of armored c a rr ie r s t o p s 0
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