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1G:(J0 A.F? , E.D.T.
May 3, 1988
Statement by
Wayne D. Angell
and
Edward W. Kelley, Jr.
Board of Governors of the Federal Reserve System
before the
Subcommittee on Domestic Monetary Policy
of the
Committee on Banking, Finance and Urbart Affairs
of the
House of Representatives
May 3, 1988
We
appreciate
this
opportunity
to
discuss
and
review the Federal Reserve System's 1988 expenses and budget
with
the
this Subcommittee.
Board's
primarily
budget
on
Governor Kelley will be discussing
and
my
comments
today
will
focus
the Reserve Bank budgets and on several major
initiatives that I believe will assist the Reserve Banks
controlling
costs
services in
the
and
in
future.
improving
I
will
in
the quality of their
also
have
some
brief
comments on the Federal Reserve System as a whole.
The Board has recently made available to the public
and to this Subcommittee copies of our publication
Annual
but
Report: Budget Review, 1987-88 presenting detailed—
readable
plans
entitled
for
updated
and
convenient— information
1988.
for
Some
1987
of
actual
the
about
spending
attached tables have been
experience
and therefore, small
variations exist from data in that document.
For 1988, the Federal Reserve System
operating
expenses
Subcommittee
operations
of
our
of
that
two
budgeted
of $1,335.7 million, an increase of 4.5
percent over 1987 actual expenses.
substance
has
1988
aspects
Before
budget,
of
I
getting
would
Federal
to
the
remind
the
Reserve
System
affect our budget in unusual ways.
First,
40 percent of System expenses arise from
services
provided
to depository institutions for which, by law, we charge fees
adequate to cover all
costs.
Since
additional
costs
of
-
2
-
these services are more than covered by additional revenues,
any increases in costs do not
returned
to
the
result
U.S. Treasury.
in
reduced
earnings
In fact, since fees cover
actual costs plus imputed taxes and return on capital
we
call
the private sector adjustment factor) and the cost
of float,
percent
(what
our
of
revenue
from
our
spending.
all
priced
services
offsets
49
Second, many fiscal agency
operations are provided to the Treasury Department and other
agencies on a reimbursable basis.
Altogether, 58 percent of
our total expenses are either recovered through
are reimbursable
pricing
or
(see Table 1).
Historical Overview
It
may
perspective by
expenses.
be
helpful
sketching
to put the budget for 1988 in
the
10-year
of
System
Since 1978, Federal Reserve expenses increased at
an average annual rate of 6.6 percent
1);
history
System
(see Table 2 and Chart
employment decreased by 442 or 1.8 percent
Table 2); and volume increased 36 percent through 1987
Chart
2).
Unit
costs
did
increase
as
Since
1983,
(see
Federal Reserve
volumes adjusted to pricing following implementation of
Monetary Control Act
(see
the
(see Chart 2).
when
the
transition
to pricing was
completed, unit cost for the composite of all functions
has
3
-
declined
1.4
percent
per
-
year
on
average
even
while
improvements have been made in the quality of services.
For
priced
services
the
particularly
sharp,
especially
in
decline
has
been
the electronic payment
areas where equipment is more readily substituted for
human
resources and where volume growth has been the greatest.
In
Commercial Checks, where there has been a significant effort
to
improve
the
quality
of
services,
increase in unit cost of 1.0 percent per
although
in
there
year
has been an
since
1983,
the most recent year over year comparison unit
cost fell 2.2 percent.
For
non-priced
distribution
cash
operations— involving
the
of currency and coin— the decline in unit cost
has also been sharp; since 1983 the average decline has been
5.2
percent
per
year.
In fiscal agency operations, also
non-priced, there has been an increase of
year
since
1.2
percent
per
1983, but a significant decline in unit cost of
4.1 percent in the past year.
Recently, 1987 over 1986, we have seen
in
a
decrease
unit costs in all individual service areas as well as in
the composite.
4
-
-
The impact of the long term
perhaps
best
employment,
seen
which
significant
in
is
trend
shown
total
Table
In
spite
of
rapid
banking
industry,
of
Reserve Bank
transition adjustments following new legislation, and
the
volumes
3.
is
major
in
in
in
in
gain
operations,
changes
growth
our
productivity
actual
employment has
decreased from 1978 to 1987 by 469 employees.
In presenting our spending plans for 1988, I
like
to
would
mention that both the Reserve Bank budgets and the
Board's budget must be approved by the Board
of
Governors,
Reserve Bank budgets must first be reviewed by the Committee
on
Federal
oversees
Reserve
Bank
Activities.
Governor
Kelley
the Board's budget and I will turn to him for that
discussion.
Board Budget
I am happy to
budget
of the Board.
discuss
with
you
since
it
Budget Review
is
the
1988
Since the budget process of the Board
has been discussed in testimony provided in
and
today
thoroughly
earlier
years,
covered in the Annual Report
for 1987-1988, which was distributed
to
you
earlier this year, I will not go over the process in detail.
-
5
-
Instead I will limit myself to the major themes of the
budget,
some
trend
1988
information you may find useful, and a
discussion of one of the more
significant
problems
facing
the Board.
The Board's budget is very carefully reviewed by my
colleagues on the Board and I am even more
in
its
preparation.
deeply
involved
I mention this to assure you that we
have a very thorough process and that we use the budget as a
key
planning
justified by
tool for operations.
the
low
levels
of
We think this effort is
growth
in
the
Board's
expenses during a decade in which there has been significant
growth in the volume of our work.
In this regard I would like to go over
data
about
the Board's budget.
percent
greater
than
our
This
1987 expenses.
amount
years,
it
was
necessary
initiatives facing the Board and some
necessary
was
While this
increase was somewhat higher than the increases in
preceding
basic
In December 1987 the Board
approved a 198 8 budget of $90.6 million.
5.0
some
the
two
in
light
of
new
areas
where
it
was
to commit additional resources.
There was no net
increase in the number of positions in the 1988 budget.
6
-
-
Over the last ten years the Board's
grown an average of 6.4 percent per year.
increase has been less
than
numbers
and
of
positions
one
have
In real terms the
percent
employees
expenses
per
year.
The
provided in the 1988
budget are virtually identical to the numbers at the end
of
1978 in spite of dramatic increases in the Board's workload.
Charts 3
and
legislation
4
display
that
have
this
information.
affected
the
Examples
workload include the
Financial Institutions Regulatory and Interest Rate
Act
impact.
A
legislative
Expedited
Competitive
Funds
Availability
Equality
developed
the
greatest
item affecting the 1988 budget was
Banking
countries,
(EFA)
Act.
problems in the banking industry,
less
Control
(FIRA), the International Banking Act, and the Monetary
Control Act, the latter of which probably had
the
of
Concerns,
the
and
title
debt
our
of
the
such
as
situation
in
growing
foreign
involvement, have also had an impact on our workload.
We have been able to hold the line on expenses
employment
aggressive
automation.
because
program
of
the
to
and
dedication of our staff and an
improve
productivity
through
As I mentioned earlier, the 1988 budget is 5.0
percent more than 1987 expenses.
Much of this increase
for initiatives that could not be deferred.
was
Factors leading
to the increase in expenses included: continuing our efforts
7
-
to
automate
key
-
functions to improve productivity and our
ability to respond rapidly to certain situations;
in
a
program
distribution
update
monetary
and
to
reduce
procedures;
expand
and
the
costs
conducting
of
special
investing
our
currency
surveys
to
the volume of information available for
economic
policymaking;
implementing
the
Competitive Equality Banking Act; and continuing our efforts
to enhance the supervision function.
During 1987 the Board formally created an Office of
the Inspector General
however,
Internal
five
of
Audit
(IG).
these
and
This Office has nine positions;
were
formerly
Operations
Review
assigned
to
Programs.
our
These
programs were consolidated under the control of the IG.
creation
of the IG Office was another factor in the size of
the 1988 budget increment; however, we feel the Office
further
The
strengthen
the
management
control
will
system at the
Board.
The 1988 increment was not spread evenly throughout
the
Board's
four
functional
areas.
While some expenses,
like the two percent general pay increase and
health
increases
in
insurance rates, affected all four functions evenly,
the initiatives approved in the budget had an uneven
on the four areas.
impact
-8
In
the
Monetary
-
Policy area the budget increment
was 6.2 percent higher than 1987 actual expenses.
identical
to
to 1988.
This
is
the average annual rate of increase from 1978
The main causes of
the
1988
increase
were
the
surveys discussed earlier and incremental operating expenses
for a workstation network that was installed during 1987
our
Division
of
Research and Statistics.
There was a net
increase of one position in this area to absorb some of
increasing
less
workload
developed
associated
countries
and
with
with
in
the
the debt problems of
the
nation's
trade
deficit.
The
budget for the Supervision and Regulation area
increased by 2.1 percent.
This is less than the 6.1 percent
average
increase from 1978 to 1988.
annual
rate
of
increase supports three new positions
data
management
provide
enhanced
and analysis in the supervision area.
increasing complexity of
the
requires
every
that
to
This
we
take
nation's
financial
opportunity
The
industry
to improve our
ability to respond to complex questions rapidly.
The Board's budget to provide Services to Financial
Institutions
and
the
Public
increased by 31.8 percent in
1988 which is substantially higher than the
average
annual
9
-
-
increase of 5.2 percent per year from 1978 to 1988.
This is
the smallest functional area at the Board. The major
causing
the
improve
1988
the
management
distribution.
reduce
the
increase
This
volume
transportation costs.
is an automation initiative to
of
improved
of
currency
management
currency
we
are
also
purchases
and
will allow us to
purchase
and
lower
Annual savings in the Currency Budget
will more than offset the one-time cost
There
factor
costs
associated
of
this
with
increase.
the
Board's
implementation of the provisions of the Competitive Equality
Banking Act for improved funds availability.
The
budget
Oversight increased
lower
than
for
System
by 2.4 percent.
to
This is
Direction
and
substantially
the 7.6 percent average annual rate of increase
experienced over the last ten years.
tied
Policy
The 1988
increase
is
the incremental costs associated with establishing
the Office of the Inspector General in late 1987.
Overall,
expenses
while
it
has
ensuring
been
our
objective
to
limit
that we are able to carry out our
very important responsibilities.
I
believe
that
through
careful management we have struck an appropriate balance.
-
A
-
problem discussed in our testimony last year was
our ability to attract and
While
10
we
retain
a
quality
staff.
remain convinced that at this time we have such a
staff, the growing disparity between
and
high
that
of
competing
our
salary
structure
institutions poses a threat to our
long-term ability to maintain that quality.
As an
recently
interim
extended
step
the
salary
Federal Reserve grades.
quite
limited,
applying
degree
combat
ranges
the
for
problem,
several of our
primarily
to
economists'
At the same time,
to
avoid
and
an
of compaction in the salary ranges for
these job families between new hires and current
have
we
To date these adjustments have been
attorneys' entry salaries.
unacceptable
to
made some modest salary adjustments.
staff,
we
We will continue
to monitor this situation so that in the future we can, with
confidence,
assure
recruit and retain
this
the
committee
first
rate
that we remain able to
staff
that
America's
central bank must have.
At
Governor
this
Angell
point
for
a
I would return the presentation to
discussion
budgets.
* * * * * * * *
of
the
Reserve
Bank
11
-
-
Reserve Bank Budgets
Planning
for 1988 Reserve Bank budgets began early
in 1987, when staff developed a budget
forecasts
of
Reserve
objective
based
on
Bank workloads and productivity.
An
objective to increase System expenses by no
percent,
excluding
expenses
associated
more
with
EFA
special research project that will be discussed
approved
by
the
Reserve
4.9
and
later,
a
was
Board in July and was used by the Reserve
Banks in developing their plans and budgets.
12
than
Banks,
the
proposed
1988
At each of the
budget
was
given
rigorous review (with the budget objective as guidance) by a
committee of senior Bank officials, the First Vice President
and
the
President.
The
budget,
reviews, was also
reviewed
Bank's
Directors,
Board
of
and
responsible in their private
organizations.
In
the
as
modified
approved
many
of
the
whose
capacity
fall,
by
for
Reserve
by
these
Reserve
members
managing
Bank
are
large
budgets were
submitted to the Board of Governors where they were analyzed
and
reviewed
by
the
Committee
on
Federal
Activities which held a separate meeting with
Bank President on the proposed budget.
Reserve Bank
each
Reserve
Both Governor Kelley
and I serve on this Committee.
As a
budgeted
result
expense
of
of
the
the
review
Reserve
process,
Banks— both
the
total
priced and
-
non-priced— was held to an
estimated
1987
12
-
increase
expenditures.
of
4.3
percent
(Over actual 1987 expenses,
the increase is now expected to be 4.5 percent since
expenses
for
1987
were
budgets were reviewed.)
cost
of
Banks'
less
than
Again these increases
initiatives
are affected by
actual
estimated at the time
EFA and the special research project.
1988 budgets
over
the
exclude
the
The Reserve
following
System
(see Table 4):
1) Automation.
Automation initiatives
in the System
will add $3.9 million to operating costs
in 1988.
These
initiatives are a direct result of the
System's decision to put more emphasis on improving
the reliability of its electronic payments services.
2) Another
part
of
this
effort
is contingency
arrangements.
Back-up
facilities
are
being
established to handle data processing contingencies
for critical operations including the transfer of
funds and securities; such facilities will cost $2.9
million more in 1988 than they did in 1987.
The
most significant project is in the New York District
and accounts for $2.6 million of the increment.
3) Increased supervision. The guidelines of the Board
of Governors regarding the frequency of examinations
and inspections of banks and bank holding companies
and the demands for oversight of these institutions
will continue to require more staff and higher
operating costs in supervision and regulation: costs
will rise $3.5 million in 1988,
and employment in
the supervision service will increase 66 average
number of personnel (ANP), to 2,213 ANP.
4) Improved cash operations. Growth in the volume of
currency handled by the Reserve Banks has provided
an incentive for the Federal Reserve to seek more
efficient
ways
of processing currency.
These
initiatives will result in an increase in the
1988
budget of $2.0 million and 50 ANP.
5) Programs for the U.S. Treasury.
Expenses
for
centrally provided Treasury services are budgeted to
increase $4.7 million,
or 24.3 percent, with an
-
13
-
increase of 82 ANP. Much of the increase is due to
the first full year of operations of the Treasury
Direct Access Book-Entry System
(Treasury Direct)
and the addition of reinvestment activity to that
system.
Also, the Federal Reserve is continuing the
development
of
a
Public Debt Accounting and
Reporting System at an increase in cost of $.3
million and is managing two savings bonds projects
at a total cost of $.4 million in 1988.
6) Facilities.
Building projects will
cost
$6.6
million
in 1988.
Most of these expenses are
associated with decisions made prior to 1987.
New
building projects account for about $1.4 million.
The total increase in 1988 expenses for these major
initiatives is $23.6 million in 1988.
costs
for these projects, the 1988 budget for Reserve Banks
would be only 2.5 percent greater
(see
Table
same time
4).
was
other areas.
more
than
expenses
for
1987
Budgeting for these initiatives and at the
keeping
percent)
were
If we were to exclude
bottom
line
expense
growth
low
(4.3
achieved by restrained growth or decreases in
Indeed, staff increases for these
than
initiatives
offset by staff decreases achieved through
early retirement programs approved by the Board of Governors
at seven Reserve Banks.
For
a
look at 1988 budgeted expenses on a program
basis, I will discuss our four service lines in the order of
their size
(see Table 5).
14
-
-
Expenses for Services to Financial Institutions and
the Public total
$827.5
million
and
account
two-thirds of the Reserve Banks' 1988 budgets.
budgeted
to
Employment
increase
is
3.5
budgeted
percent
to
decline
over
by
for
almost
Expenses are
actual
1987.
29 persons or 0.3
percent from 1987, even though volume increases are expected
in all major operations.
Commercial
check
processing
half of the budgeted expenses in this
ANP,
about
60
percent
of
the
accounts
area
and,
staff.
The
for almost
at
5,150
increase in
expenses in 1988 is expected to be only $7.3 million, or 1.8
percent,
over actual 1987, with a decrease of 57 ANP.
with a smaller staff, the System expects
percent
increase
projected
at
implementation
15.3
of
to
handle
Even
a
2.7
in the annual number of checks processed,
billion.
Expenses
associated
with
the Expedited Funds Availability Act are
not included in these data.
Restraining the growth of check processing expenses
are
early
retirement
programs,
the
consolidation
operations, incentive pay for productivity increases, and
new contract for interdistrict shipping.
of
a
-
Expenses
15
-
for currency processing
($121.5 million),
which are expected to increase $6.0 million, or 5.2 percent,
in
1988, will constitute nearly 15 percent of the budget in
this area.
net
Changes in staffing are expected to result in
increase
of
volume increases
anticipated
55
projected
to
ANP, or 3.5 percent, because of sharp
in
to
a
some
Districts.
increase
rise
0.1
6.3
Overall
percent,
percent.
volume
with
New
is
unit
cost
contracts
for
maintenance on the high-speed currency sorting machines will
also raise costs in 1988.
The
increase
in
staff
arising
from higher volumes at some Districts is partially offset by
a new currency handling process that will permit a reduction
of 19 ANP.
Expenses
for
the
are budgeted to rise $5.2
change
reflects
a
automated clearinghouse service
million,
or
and
percent.
The
16.6 percent expansion in volume and an
adjustment in accounting to distribute
processing
8.4
data
communications
the
costs
more
of
data
accurately.
A
decrease of 3 ANP is budgeted.
The
increase
costs
$1.9
for
funds
million,
or
reflecting a 6.1 percent rise in
ANP,
and
a
decrease
due
to
communications accounting change.
transfer
3.3
percent,
volume,
a
are
an
expected
on
to
balance,
additional
6
data processing and data
16
-
Expenses
total
$183.4
for
-
Supervision and Regulation,
million,
are
expected
million, or 7.6 percent, over 1987.
for
14.7
percent
12.8 percent in
of
to
which
increase
This area now
$13.0
accounts
total System expenses, compared with
1983.
A
staff
level
of
2,213
AFP
is
budgeted, an increase of 66, or 3.1 percent, over 1987.
The
increase
in
costs
is
driven
circumstances in the banking industry.
In
by
some
changing
Districts,
the condition of banks and bank holding companies subject to
our
supervision
resources.
In
continues
to
require
supervisory
addition, deregulation has led bank holding
companies to develop new service and
call
added
product
lines,
which
for more and better-trained examiners; moreover,
throughout
the
industry
are
becoming
larger
firms
and
more
complex.
As in the past, the Reserve Banks are attempting to
use resources more efficiently
personal
computers
in
the
by
field
accelerating the development of
increasing
and
in
examiners,
the
use
of
the office, by
and
by
hiring
persons with relevant experience.
Expenses
for
Services to the U.S. Treasury and
Other Government Agencies are budgeted at $142.5 million, an
17
-
increase
of
-
$6.8 million, or 5.0 percent,
area accounts for
approximately
costs.
is
Staffing
budgeted
11
to
from 1987.
percent
of
This
operating
decrease 36 ANP, or 2.0
percent, to 1,800 ANP.
Consolidation of operations and
automation
contribute
higher
levels
to controlling these costs.
of
Several
Districts are consolidating operations at one
office.
The
Banks
through
the
are
seeking
greater
substitution of electronic
("definitive")
efficiency
("book-entry")
records for
paper
securities and through the use of high-speed
sorting machines to process food coupons and savings bonds.
The most significant initiatives are
provided
Treasury
services;
in
expenses here are budgeted to
increase $4.7 million, or 24.3 percent, and 82 ANP
added
to
the staff.
Much of this increase
54 ANP) occurs because
operation
for
reinvestment
Treasury
the
1988
Direct,
is
Treasury
activity
has
centrally
the
been
added
system
to
full
and
that
year
with
expansion
permits
operation
that
of
because
system.
which handles all purchases of government
securities by individuals in book-entry form, is managed
Philadelphia
be
($4 million and
first
Direct
will
local
an
handles
in
operations in each District.
Its
offsetting
the
definitive
decrease
in
securities— "other
-
18
-
Treasury issues"-for which staff is decreasing
52
ANP
and
expenses $1.6 million.
Besides
Treasury Direct, the increase in centrally
provided Treasury services includes three
Cleveland
programs
in
the
District which will increase costs by $.7 million
in 1988 but will, we expect, lead to long run efficiencies.
Expenses for
Federal
Reserve
Monetary and Economic Policy
Banks
1987.
to
increase
the
total $91.7 million and account for
approximately 7 percent of their 1988 budgets.
expected
at
$5.3
million,
Expenses are
or 6.1 percent, over
Employment will increase 13 ANP
or
1.7
percent
to
788.
The
salary
Staff
rise in cost reflects a net addition to staff,
actions,
members
and
were
improvements
added
in
in
New
office
York
for
automation.
testing the
replacement of an eight-year-old system used for open market
trading, intensifying the monitoring and analysis of debt in
less developed countries, and studying
receiving
data
the
feasibility
of
electronically from reporting institutions;
in Atlanta for continuing a special effort
to
improve
the
quality of economic research; and in Dallas for supporting a
Southwestern economic development program.
19
-
A brief review
object
of
expense
Subcommittee
of
basis
-
Reserve
also
Bank
might
expenses
be
on
useful
to
an
the
(see Table 6).
Personnel expenses consist of salaries for officers
and
employees,
other expenses to compensate personnel, and
retirement and other benefits.
Reserve
Banks
is
their
costs
resource
of
the
people, and total personnel costs
account for 62 percent of total
Personnel
The major
Federal
Reserve
expenses.
are expected to increase $32.6 million, or
4.4 percent, in 1988.
Salaries— the major component of this
category— are budgeted to increase 4.7 percent.
Salaries
and
other personnel expenses account for
nearly 52 percent of the Banks' budgeted
expenses
and
are
expected to increase $23.3 million, or 3.7 percent, in 1988.
Salaries are expected to increase 4.7 percent,
personnel
expenses
are
expected
while
other
to decline 33.3 percent,
primarily resulting from a reduction in the use of
computer
programmers on contract.
Each
Federal
Reserve
office
structure for staff members other than
surveys
of
community.
compensation
Nationwide
bases
officers
its
salary
on
annual
offered by major employers in its
surveys
structure of officers' salaries.
are
used
to
adjust
the
20
-
Expenses
for
-
retirement and other benefits, which
account for 10 percent of the Banks' budgeted
expenses
are
projected to increase $9.3 million, or 7.7 percent, in 1988.
This increase reflects higher costs for
and
hospital,
medical,
dental insurance, along with the effect of large claims
in several Districts; an increase in the tax rate for social
security;
an
increase
employees accepting
normal
in benefits, reflecting payments to
early
retirement;
group life insurance premiums
and
resumption
of
(the Districts did not
have to pay any in 1987).
Nonpersonnel expenses account for 38 percent of the
Banks' expenses and are projected to increase 4.6 percent in
1988.
Within this category:
Equipment expenses account for 13
Banks'
expenses
and
rise
in
of
the
are budgeted to increase 3.7 percent.
Developments in priced services are mainly
the
percent
equipment
costs:
responsible
initiatives
changing needs and demands of check collection;
to
meet
efforts
for
the
to
standardize automation and communication systems in response
to the consolidation
toward
encrypting
of
financial
institutions;
communication links for various users of
priced services; and continued work to
electronic
networks
institutions.
progress
that
expand
and
upgrade
provide information to financial
21
-
-
Building expenses, which account for 9
total
expenses,
are
expected
1988.
Building renovations
York,
Cleveland,
and
to
and
Dallas
expenses
repairs
be
the
and
to
Chicago,
New
increases in
utility
expenses.
are 21.6 percent higher, primarily because
partially
costs, as
at
contribute
of a $2.8 million increase at
will
of
increase 9.9 percent in
depreciation, taxes on real estate,
Rental
percent
offset
majority
New
by
of
York.
These
increases
a decline in other building
Districts
incurred
one-time,
outside contractual expenses in 1987.
Shipping
costs, which account for nearly 7 percent
of 1988 budgeted expenses, will increase only
as
savings
from
1.6
percent,
a renegotiated contract for interdistrict
transportation will offset an increase in postal rates.
Other nonpersonnel
expenses
will
rise
only
2.9
percent.
Table
7 depicts the plans of the Reserve Banks for
capital spending in 1988.
vary
greatly
By their nature, capital
from year to year.
outlays
Outlays for buildings and
for data processing and communications equipment continue to
dominate Reserve Bank capital budgets.
22
-
-
Special Budget Emphasis
Before
mention
concluding
briefly
importance
four
my
testimony
initiatives
I
that
would like to
are
of
great
to the Reserve Banks and which will have a major
impact on Reserve Bank expenditures and operations into
next
decade.
The
cost
of
the
the first two initiatives are
outside of the budget objective set for the Reserve Banks in
1988.
As
Act
you are aware, the Expedited Funds Availability
(EFA)
gives
authority
to
the
Federal
improve
the
systems.
As a result of the
planning
to
Reserve
check
EFA,
the
Reserve
The
collection
the
and
Reserve
return
Banks
are
The
Board
has
proposed
Banks begin to offer the new services to
speed the return of unpaid
1988.
regulatory
implement a number of new services to expedite
the handling of returned checks.
that
Board
checks
beginning
September
1,
costs associated with the implementation of EFA
are not included in the 1988 Reserve Bank budgets because at
the
time
unknown.
the
budget
was
approved
the
cost
impact was
Proposals from each Reserve Bank for operating and
capital
resources
review.
The operating expense impact of EFA is expected
be
350
to
implement
EFA
are
currently under
to
less than $15 million in 1988, with an increase of about
positions.
An
additional
$15
million
of
capital
23
-
expenditures
-
will also be required.
The costs of providing
these return item services are to be recovered through
charged
to
users.
fees
Later this year the Board will approve
prices for the new return item services.
In addition to the efforts to speed up
of
checks,
the
Board
The
technology
being
image
processing
computer
and
for
improvements in
processing
has
the
both
institutions.
feasibility
the
potential
handling
of
check
and
will
return
These
Research
since
1985
has
demonstrated
Bank
test
the
phases
will
store
be
and
retrieve
conducted
under production conditions.
widespread
check images.
million
in
The
next
high-speed capture of both sides of
shared with the financial community,
offer
the
of making a computerized image on one side of a
conditions with a limited volume of checks
Reserve
item
for the Federal Reserve and for depository
checks plus the ability to
data.
storage
significant
check at high speed under laboratory conditions.
phases
of
developed, which relies on
capturing check images electronically for
retrieval,
return
of Governors has authorized further
research and development of digitized
checks.
the
benefits
in
where
the
image
under laboratory
and
then
at
a
Results will be
it
might
also
the storage and exchange of
This special project is budgeted to cost $6.2
1988.
These costs are recovered through check
-
24
-
collection fees, and the costs of implementing digital image
technology
in
the
Reserve Banks on a full scale-permanent
basis would also be recovered through check collection fees.
These
two
initiatives,
$15
million
for
EFA
implementation and $6.2 million for the check image project,
bring the total budget for the
million,
an
increase
Reserve
Banks
to
$1,266.3
of $74.5 million or 6.3 percent over
actual 1987 expenses.
During the 1980s, the Federal
Reserve
System
has
placed increasing emphasis on the quality and reliability of
its electronic payment services.
This
increasing
emphasis
is due to a number of factors, including the rapid growth in
the volume and value of funds and securities transfers,
Payment
System
Risk
Reduction Program, and the disruption
caused by the 1985 operating outage at a money
in
New
York.
the
center
bank
The emphasis on improving the reliability of
Fedwire operations
has
achieved
results.
During
the
first quarter of 1988, the Reserve Banks have improved their
up-time performance for the
critical
transfer
service
book-entry
service.
Work will continue on this effort and Reserve Bank
initiatives
services
to
will
and
the
increase
cost
the
hours
of
the
funds
securities transfer
reliability of electronic payment
Reserve
Banks
an
additional
25
-
$2.9 million in 1988.
through
fees
These
-
expenditures will be recovered
for electronic payment services.
Significant
expenditures to improve reliability will also be incurred in
1989 and beyond.
Since the
focused
its
late
efforts
on
1970s,
the
Federal
providing
Reserve
has
contingency processing
facilities to address both non-catastrophic and catastrophic
operating
outages.
Procedures to address non-catastrophic
outages are an integral part
Each
Reserve
Bank
has
of
Reserve
acquired
Bank
procedures.
redundant hardware— both
mainframes and critical components, such
as
controllers.
Reserve
transfer
This
processing
back-up equipment.
redundancy
from
permits
failed,
primary
communications
Banks
equipment
to
to
To address software related outages, the
Reserve Banks have developed thorough testing procedures for
both
applications
software
that
the
System develops and
environmental software supplied by vendors.
To
Reserve
rely
address
Banks,
upon
Culpeper.
the
catastrophic
operating
outages,
except the New York Reserve Bank, currently
Contingency
Processing
Center
(CPC)
at
The Reserve Banks have demonstrated that critical
operations can be restored at the CPC and each Reserve
tests
all
its capability twice each year.
Bank
The time required to
26
-
restore operations ranges
These
timeframes
Culpeper
load
-
from
nine
forty-one
hours.
are due to the time required to travel to
(two to sixteen hours) and
software,
to
reestablish
data
the
time
bases,
required
and
reestablish
communication connections with depository institutions
to thirty-two hours).
to
(six
As a result, many Reserve Banks would
not be able to restore
operations
on
the
day
an
outage
occurred.
To
have
same day capabilities the Federal Reserve
Bank of New York has
processing
center
implemented
in
a
Rockland
dedicated
contingency
County, New York.
same reason other Reserve Banks have undertaken a
determine
other.
expected
the
This
approach,
to
site within
declared.
feasibility
permit
four
In
providing
called
the
study
to
back-up for each
"buddy
system,"
is
operations to be restored at a "buddy"
hours
1985
of
For the
after
a
catastrophic
outage
is
the Federal Reserve began a multi-year
study on developing the Federal Reserve's electronic payment
services
in
the
1990s and identifying a production system
that would permit the Federal Reserve to satisfy the
future
needs of users of these services.
The
Reserve
Banks
have
made
a
major effort to
improve the quality of currency in circulation and to reduce
27
-
the
cost
of
printing
-
currency.
The cost to the Reserve
Banks for printing new currency is expected to decline
from
$164.2
This
million
in
1587
to
$156.3 million in 1988.
results from the improved ability of Reserve
Banks— through
improved sensors on currency processing machines— to recover
substantial amounts of fit currency
have
been
destroyed.
This
that
previously
initiative
has
allowed
Reserve Banks to reduce the production demands being
on
the
Bureau
simultaneously
circulation.
Engraving
improving
the
Beginning
developing a
equipment.
of
second
in
and
generation
the
of
of
the
placed
Printing,
quality
1985
would
while
currency
System
high-speed
focused
in
on
processing
Installation of the second generation processing
equipment will begin in
1989
improved
capability to detect fit from unfit
Reserve
Bank
and
the
results
should
currency, and faster processing of currency volume which
currently
growing
at
an
budget for the Currency
annual rate of 9.0 percent.
Equipment
Development
Program
be
is
The
is
$1.5 million in 1988.
Given
the
expanding
volumes
and new initiatives
that we are currently undertaking, a particular
the
Federal
Reserve
at
statutory
of
this time is the depletion of its
authorized fund for branch Federal Reserve
cumulative
concern
limit on these
buildings.
The
funds is $140 million
28
-
and has not been changed
-
since
1974.
Completion
of
the
current building in Helena will, for all practical purposes,
exhaust the
fund
and
inhibit
undertaking
modernization,
the
Federal
renovation,
Reserve
expansion,
from
or new
facilities planning.
Our planning suggests that funds will be needed
the
relatively
near
future
in
to meet space requirements in
Birmingham, Nashville, Salt Lake City, Houston, San Antonio,
and
El Paso.
The expenditure of funds for branch buildings
is largely recovered by the Federal Reserve through
of
its
services
pricing
to financial institutions, as required by
the Monetary Control Act.
Thus, the building costs will
be
financed in large part by the private sector.
The House Banking Committee approved an increase in
the branch building fund in
included
in
a
bill
1984,
but
the
provision
was
that ultimately was not passed by the
Congress.
We
believe
that
limitation
be
changed
in
it
the
is
critical
near
future
that
the
to allow the
Federal Reserve to meet its future building needs for Branch
facilities.
-
29
-
Conclusion
In
closing,
both
for this opportunity to
Federal
Governor Kelley and I thank you
address
Reserve System budget.
that the existing
controlling
budget
costs,
quality improvements.
while
the
on
the
I would like to reemphasize
processes
at
Subcommittee
the
are
same
working
time
well
in
encouraging
We welcome your comments and would be
pleased to address any questions you may have on our budget.
Table 1
Operating Expenses of the Federal Reserve System, Net of Receipts 1986*88 1/
Millions of dollars, except as noted
1986
1987
1988
Budget
Item
Change
1986-87
Change
1987-88
Amount
%
Amount
%
Total System operating
expenses......... .
Less:
Revenue from priced
services
Other income
Reimbursements
1,245
1,278
1,336
33
2.7
58
4.5
628
1
650
15
109
658
12
22
14
3.5
110
-3
-2.7
8
-3
1
1.2
-20.0
0.9
0
0.0
51
10.1
112
y
EQUALS
Net System operating
504
expense
1. Beginning in 1987, about $10 million
charged to depository institutions
for Treasury services has been
504
555
recorded as Federal Reserve income
rather than transferred directly to
the U.S. Treasury and claimed as a
reimbursement.
Table 2
Federal Reserve System Expenses and Employment, 1978-88 Budget
Millions of dollars
Personnel
Percent
Expenses
Percent
Amount
Change
Amount
1978
1979
703
747
4.7
6.2
24,948
24,551
1980
1981
1982
852
948
1,041
14.1
11.3
9.8
25,198
25,480
24,755
1983
1984
1985
1986
1987
1988 budget
1,100
1,145
1,199
1,245
1,278
1,336
5.7
4.0
4.8
24,466
24,257
24,609
24,721
3.8
2.7
24,483
4.5
24,506
Change
(3.2)
(1.6)
2.6
1.1
(2.8)
(1.2)
(0.9)
1.5
0.5
(1.0)
0.1
Table 3
Federal Reserve Bank Employment by Service Line
Monetary
and
Economi c
Services
to the U.S.
Treasury and
Services
to
Financial
Supervision
and
Regulation
Support
1,337
1,411
4,146
4,055
5,616
5,367
4,238
4,434
5,680
4,469
4,452
4,541
Year
Poli cy
Gov't Agencies
1978
1979
610
597
2,087
9,682
1,883
1980
1981
1982
1983
1984
1985
618
717
1,946
1,881
9,790
9,614
743
804
826
1,851
1,838
1,798
8,566
8,424
8,395
816
1,781
8,754
1,589
1,733
1,796
1,862
1,885
1,912
1986
1987
1988 BUDGET
791
775
788
1,819
1,836
1,800
8,799
8,775
8,746
2,087
2,147
2,213
Growth Rate
1978-87
2.7%
-1.4%
-1.1%
5.4%
0.8%
-1.2%
-0.2%
Recent Year
1986-87
-2.0%
0.9%
-0.3%
2.9%
-0.4%
-4.7%
-1.0%
Budget Year
1987-88
1.7%
-2.0%
-0.3%
3.1%
2.0%
-1.6%
0.1%
Institutions
9,480
4,599
4,367
4,340
4,398
Overhead
5,745
5,676
5,589
5,424
5,323
5,274
5,024
4,945
Total
23,479
23,104
23,682
23,989
23,230
22,883
22,669
22,984
23,239
23,010
23,033
Percent
Change
-1.6%
2.5%
1.3%
-3.2%
-1.5%
-0.9%
1.4%
1.1%
-1.0%
0.1%
Table 4
Increase in the Operating Expenses of the Reserve Banks, Excluding the
Increases from Major Initiatives, 1987-88
Thousands of dollars, except as noted
Expense item
Operating expenses
1987 total, actual
1988 total, budget
Increase, 1987 to 1988
Thousands of dollars
Percent
Amount
1,191,833
1,245,102
53,269
4.5
Less
Major 1988 intiatives
Faci1ities
Programs for the U.S. Treasury
Automation
6,563
4,748
3,918
1ncreased supervision of banks and bank
holding companies
Conti ngency back-up
Improved cash operations
Total
3,460
2,916
1,961
23,566
Equals
Increase excluding major 1988 ini ti atives
Thousands of dollars
Percent
29,703
2.5
Table 5
O perating Expenses of the Federal Reserve Banks, by O perational Area 1986-88
Thousands o f d o lla r s , except as noted
1986
1987
Operational Area 1/
Monetary and Economic
Pol icy..............
Supervision and
Regulation..........
Services to Financial
Institutions and
the Public..........
Services to the U.S.
Treasury and Other
Government Agenci es..
TOTAL
1988
Budget
Change
1986-87
Change
1987-88
Amount
Amount
90,570
86,484
91,742
4,086
-4.5
5,258
6.1
163,915
170,428
183,397
6,513
4.0
12,969
7.6
770,016
799,227
827,458
29,212
3.8
28,231
3.5
136,789
135,693
142,504
-1,076
-0.8
6,811
5.0
1,161,290
1,191,832
1,245,102
30,543
2.6
53,270
4.5
1/ Including the cost of support and overhead services.
Employment at the Federal Reserve Banks, by Activity, 1986-88
Average number of personnel, except as noted
1986
1987
Activity
1988
Budget
Change
1986-87
Change
1987-88
Amount
%
Amount
%
Operational areas:
Monetary and Economic
791
775
788
-15
-2.0
13
1.7
2,087
2,147
2,213
60
2.9
66
3.1
8,799
8,775
8,746
-23
-0.3
-29
-0.3
1,819
1,836
1,800
17
0.9
-36
-2.0
Supervision and
Services to Financial
Institutions and
Services to the U.S.
Treasury and Other
Government Agencies..
Support and overhead:
Total
4,469
4,452
4,541
5,274
5,024
4,945
-18
-250
-0.4
-4.7
89
-79
2.0
-1.6
23,239
23,010
23,033
-230
-1.0
23
0.1
Table 6
Operating Expenses o f the Federal Reserve Banks, by O b je c t, 1986-88
Thousands of d o lla r s , except as noted
1986
1987
Object
1988
Budget
Change
1987-88
Change
1986-87
Amount
Amount
PERSONNEL
Officers1 salaries.....
Employees' salaries....
Other personnel....... .
Retirement and benefits.
Total personnel......
56,168
523,309
16,693
133,360
729,531
60,010
545,358
16,335
121,465
743,168
62,272
571,833
3,842
22,049
6.8
4.2
2,262
26,475
3.8
4.9
10,896
130,804
-358
-11,895
13,637
-2.1
-8.9
1.9
-5,439
9,339
32,638
-33.3
7.7
4.4
1,598
-6,808
7,801
3,470
51.6
-16.7
-1,874
-6,441
11.5
8.9
6,061
4.0
7,073
7,043
5,801
232
38.0
-503
2,529
97
2,143
5,119
9,616
-2.3
10.7
0.4
775,805
NONPERSONNEL
Equipment:
Rental s............... .
Repairs and maintenance.
Total equipment......
Buildings:
1nsurance..............
Taxes on real estate....
Property depreciation...
Uti1ities..............
Rent...... ............
3,096
40,665
68,000
38,998
150,760
610
22,213
23,549
22,809
14,976
13,607
4,694
33,857
75,802
42,467
156,820
842
21,710
26,078
2,820
27,416
82,874
49,511
162,621
917
24,666
97,765
22,906
17,118
18,726
107,381
29,525
24,127
20,814
17,949
117,997
13,464
68,416
12,150
69,200
13,275
69,351
81,880
81,350
82,626
47,282
22,155
12,291
11,357
10,029
103,114
47,952
22,965
12,602
Total other
46,005
19,775
15,255
11,207
9,114
101,356
Total nonpersonnel....
431,761
448,665
Total building.......
14.3
37.6
9.8
75
2,956
3,446
1,221
-39.9
-19.0
9.3
16.6
3.7
8.9
13.6
13.2
3,695
-777
10,616
5.3
21.6
-4.2
9.9
1,125
151
9.3
0.2
1,276
1.6
1.4
3.7
2.5
■"15.7
Shipping:
-1,315
785
-530
-9.8
2.8
12.0
-19.4
9,577
12,957
106,053
1,277
2,380
-2,964
150
915
1,758
1.3
10.0
1.7
670
810
310
-1,780
2,928
2,939
469,297
16,904
3.8
20,632
4.6
Total.................. 1 ,161,290 1,191,833 1,245,102
30,543
2.6
53,269
4.5
Other..................
Total shipping.......
Other:
Supplies.............
Travel.................
Communications.........
1.1
-0.6
29.2
2.9
Table 7
C a p ita l O utlays o f th e Federal Reserve Banks, by Class o f O u tla y , 1986-88
Thousands o f d o lla r s , except as noted
1986
1987
Capital class
Change
1986-87
1988
Budget
Amount
Change
1987-88
Amount
Data processing and data
communications equipment
Furniture and other
68,246
45,162
92,833
-23,084
equipment
Land and other real estate
BuiIdi ngs
Building machinery and
equipment
19,623
432
69,930
22,394
24,435
7,137
2,771
1,327
86,209
-11,215
Leasehold improvements
Total
1,759
58,715
47,671
105.6
14.1
2,041
307.2
-16.0
5,378
27,494
9.1
305.7
46.8
-33.8
6,163
4,121
12,296
3,008
2,466
732
66.7
3,389
21.6
6,133
-1,113
99.5
-27.0
165,317
138,314
225,918
-27,003
-16.3
87,604
63.3
3,697
Chart 1
Federal Reserve System Expenses
1.4
1.3
1.2
1.1
(Billion«)
1.0
0.9
0.8
0.7
0.6
O.S
0.4
0.3
0.2
0.1
0.0
1978
1979
1980
1981
1982
1983
1984
1/ Dtfl«t«d by 6NP Dtflator (1978 - 100)
1985
1986
1987
1988~Bud0«t
Chart 2
Trends in Volume,
Unit Cost,
All Measured Functions
and Employment
1977 - 1987
Chart 3
BOARD OPERATING EXPENSES
in Actual and Constant Dollars
I in Millions
Ym t
Board Expenses Expressed
in Actual $ and Constant 1978 $
(Millions of Dollars)
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
Actual
Expenses
48.6
53.2
59.8
61.8
67.2
71.6
76.5
82.0
84.0
86.3
90.6
Expenses in
Constant 1978
Dollars (CPI)
Expenses in
Constant 1978
Dollars (GNP)
48.6
47.8
47.3
44.3
45.4
46.9
48.0
49.7
50.4
49.2
49.9
48.6
48.9
50.4
47.5
48.5
49.8
51.1
53.0
53.7
52.5
53.1
Chart 4
BOARD EMPLOYMENT AND POSITIONS
Board Bnploynent and Positions
1978-1988
Tear
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
Year-End
Bnploynent
1,469
1,447
1,516
1,491
1.525
1,583
1,588
1,521
1,484
1,486
1,486
Authorized 1/
Positions
1,544
1,508
1,575
1,543
1,563
1,612
1.653
1,580
1,540
1,541
1,541
1/Does not include 11 suiuner intern and 17 youth sumner hire positions
@FedFRASER