U.S. Coins: The Federal Reserve Banks Are Fulfilling Coin Demand,
but Optimal Inventory Ranges Are Undefined (21-MAR-08,		 
GAO-08-401).							 
                                                                 
Federal Reserve Banks fulfill the coin demand of the nation's	 
depository institutions--which include commercial banks, savings 
and loan associations, and credit unions--by ordering new coins  
from the U.S. Mint and managing coins held in inventory at the	 
Reserve Banks and in coin terminals. Reliably estimating the	 
demand for coins and efficiently managing the inventory of	 
circulated coins is important to ensure that depository 	 
institutions have enough coins to meet the public's demand and to
avoid unnecessary coin production costs. Since late 2006, rising 
metal prices have driven the costs of producing pennies and	 
nickels above the face values of the coins. This report addresses
(1) the Reserve Banks' process for ordering and distributing	 
coins to the nation's depository institutions and (2) the extent 
to which this process meets depository institutions' demand for  
coins. GAO interviewed officials responsible for coin		 
distribution at each of the 12 Reserve Banks and met with	 
representatives of 4 large operators of Federal Reserve coin	 
terminals, 2 banking associations, the U.S. Mint, and the	 
nation's largest coin recycling company. GAO also analyzed	 
Reserve Bank data for fiscal years 1993 through 2007. Federal	 
Reserve and U.S. Mint officials generally agreed with GAO's	 
findings in the report and provided technical comments, which	 
were incorporated as appropriate.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-401 					        
    ACCNO:   A81366						        
  TITLE:     U.S. Coins: The Federal Reserve Banks Are Fulfilling Coin
Demand, but Optimal Inventory Ranges Are Undefined		 
     DATE:   03/21/2008 
  SUBJECT:   Bank reserves					 
	     Cost analysis					 
	     Credit unions					 
	     Currency and coinage				 
	     Federal reserve banks				 
	     Financial institutions				 
	     Insured commercial banks				 
	     Inventory control					 
	     Inventory control systems				 
	     Metals						 
	     Monetary policies					 
	     Money supply					 
	     National banks					 
	     Needs assessment					 
	     Prices and pricing 				 
	     Savings and loan associations			 
	     Strategic planning 				 
	     Program goals or objectives			 
	     Supply and demand					 

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GAO-08-401

   

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Report to the Subcommittee on Domestic and International Monetary 
Policy, Trade, and Technology, Committee on Financial Services, House 
of Representatives: 

United States Government Accountability Office:
GAO: 

March 2008: 

U.S. Coins: 

The Federal Reserve Banks Are Fulfilling Coin Demand, but Optimal 
Inventory Ranges Are Undefined: 

GAO-08-401: 

GAO Highlights: 

Highlights of GAO-08-401, a report to the Subcommittee on Domestic and 
International Monetary Policy, Trade, and Technology, Committee on 
Financial Services, House of Representatives. 

Why GAO Did This Study: 

Federal Reserve Banks fulfill the coin demand of the nation�s 
depository institutions�which include commercial banks, savings and 
loan associations, and credit unions�by ordering new coins from the 
U.S. Mint and managing coins held in inventory at the Reserve Banks and 
in coin terminals. Reliably estimating the demand for coins and 
efficiently managing the inventory of circulated coins is important to 
ensure that depository institutions have enough coins to meet the 
public�s demand and to avoid unnecessary coin production costs. Since 
late 2006, rising metal prices have driven the costs of producing 
pennies and nickels above the face values of the coins. This report 
addresses (1) the Reserve Banks� process for ordering and distributing 
coins to the nation�s depository institutions and (2) the extent to 
which this process meets depository institutions� demand for coins. 

GAO interviewed officials responsible for coin distribution at each of 
the 12 Reserve Banks and met with representatives of 4 large operators 
of Federal Reserve coin terminals, 2 banking associations, the U.S. 
Mint, and the nation�s largest coin recycling company. GAO also 
analyzed Reserve Bank data for fiscal years 1993 through 2007. 

Federal Reserve and U.S. Mint officials generally agreed with GAO�s 
findings in the report and provided technical comments, which were 
incorporated as appropriate. 

What GAO Found: 

The Reserve Banks� process for ordering and distributing coins uses new 
coins ordered from the U.S. Mint, circulated coins in inventory, and 
transfers of circulated coins to meet depository institutions� demand 
for coins. New coin orders begin each month with a recommendation 
generated by a forecasting tool. Each Reserve Bank office then refines 
this recommendation in light of its current inventory holdings and its 
knowledge of local factors that may affect demand, such as changes in a 
transit authority�s use of coins. Each office next submits a request 
for coins to the Reserve Banks� national Cash Product Office (CPO). CPO 
seeks to fill the request with transfers of circulated coins from other 
offices before it consolidates the requests and submits a monthly order 
for new coins to the U.S. Mint. In fiscal years 2006 and 2007, CPO used 
transfers to reduce its new coin orders by approximately 10 percent. 

The Reserve Banks� process for ordering and distributing coins has met 
depository institutions� demand since fiscal year 2000, but the process 
does not define optimal coin inventory ranges. Currently, each Reserve 
Bank office sets and manages its own inventory levels, resulting in 
varying levels of inventory held relative to demand. Overall, inventory 
levels for most denominations have generally been decreasing since 
fiscal year 2001, yet inventory levels are more likely to be high than 
low relative to demand, because, for the Reserve Banks, the risk of not 
meeting depository institutions� demand for coins far exceeds the risk 
of holding too many coins in inventory. However, holding coins in 
inventory that could be used to fulfill demand elsewhere can be 
inefficient, resulting in new coin production costs that could have 
been avoided if coins held in inventory had been used instead. To 
increase the efficiency of the Reserve Banks� process, CPO plans this 
year to begin implementing a new approach to inventory management that 
it piloted in 2006 and found effective. Under this approach, CPO will 
determine the number of circulated and new coins each district will 
receive monthly and will be responsible for ensuring that the Reserve 
Bank offices maintain appropriate inventory levels. 

Figure: Coin Supply and Distribution Process: 

[See PDF for image] 

This figure illustrates the coin supply and distribution process, as 
follows: 

New Coin: 
From: U.S. Mint; 
To: Reserve Office Banks and Coin terminals. 

New and circulating coins: 
From: Reserve Office Banks and Coin terminals; 
To: Depository institutions; 
From: Depository institutions; 
To: General public and retailers. 

Circulating coin: 
From: General public and retailers; 
To: Depository institutions; 
From: Depository institutions; 
To: Reserve Office Banks and Coin terminals. 
 
Source: GAO. 

[End of figure] 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-401]. For more information, contact Susan 
Fleming at (202) 512-2834 or [email protected] 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

The Reserve Banks' Process for Ordering and Distributing Coins Uses New 
Coins, Coin Inventories, and Coin Transfers to Meet Demand: 

The Reserve Banks' Process Fulfills Coin Demand, but Optimal Inventory 
Ranges Are Undefined: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Coin Production Trends, by Denomination: 

Appendix III: National Payments and Receipts Data, by Denomination: 

Appendix IV: Average Days of Payable Coin Inventory, by Reserve Bank 
District and Coin Denomination: 

Appendix V: Number of Coin Transfers and Related Costs, Fiscal Years 
2002-2007: 

Appendix VI: Comments from the Board of Governors of the Federal 
Reserve System: 

Appendix VII: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Average Days of Payable Inventory for the Penny, Nickel, Dime, 
and Quarter for the Reserve Banks, by District, in Fiscal Year 2007: 

Table 2: Range of Average Days of Payable Inventory for Penny, Nickel, 
Dime, and Quarter across Reserve Banks, Fiscal Years 1996-2007: 

Table 3: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Boston, Fiscal Years 2005-2007: 

Table 4: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of New York, Fiscal Years 2005-2007: 

Table 5: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Philadelphia, Fiscal Years 2005-2007: 

Table 6: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Cleveland, Fiscal Years 2005-2007: 

Table 7: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Richmond, Fiscal Years 2005-2007: 

Table 8: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Atlanta, Fiscal Years 2005-2007: 

Table 9: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Chicago, Fiscal Years 2005-2007: 

Table 10: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of St. Louis, Fiscal Years 2005-2007: 

Table 11: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Minneapolis, Fiscal Years 2005-2007: 

Table 12: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Kansas City, Fiscal Years 2005-2007: 

Table 13: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Dallas, Fiscal Years 2005-2007: 

Table 14: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of San Francisco, Fiscal Years 2005-2007: 

Table 15: U.S. Mint Coin Transfers and Cost Information, Fiscal Years 
2002-2007: 

Figures: 

Figure 1: Map of Reserve Bank Districts and Locations of the Offices 
That Provide Coin Services: 

Figure 2: Coin Supply and Distribution Process: 

Figure 3: Reserve Banks' Current Monthly Coin Ordering Process: 

Figure 4: Number of Coins the Reserve Banks Paid to and Received from 
Depository Institutions, Fiscal Years 1993-2007: 

Figure 5: Average Days of Payable Inventory for the Reserve Banks for 
the Penny, Nickel, Dime, and Quarter, Fiscal Years 1996-2007: 

Figure 6: Average Days of Payable Inventory for the Reserve Banks for 
the Half-Dollar and Dollar Coin, Fiscal Years 1996-2007: 

Figure 7: U.S. Mint's Coin Production for Fiscal Years 2002-2007, Total 
Coins (Penny, Nickel, Dime, Quarter, Half-Dollar, and Dollar): 

Figure 8: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Penny: 

Figure 9: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Nickel: 

Figure 10: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Dime: 

Figure 11: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Quarter: 

Figure 12: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Half-Dollar: 

Figure 13: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Dollar Coin: 

Figure 14: Number of Pennies the Reserve Banks Paid to and Received 
from Depository Institutions, Fiscal Years 1993-2007: 

Figure 15: Number of Nickels the Reserve Banks Paid to and Received 
from Depository Institutions, Fiscal Years 1993-2007: 

Figure 16: Number of Dimes the Reserve Banks Paid to and Received from 
Depository Institutions, Fiscal Years 1993-2007: 

Figure 17: Number of Quarters the Reserve Banks Paid to and Received 
from Depository Institutions, Fiscal Years 1993-2007: 

Figure 18: Number of Half-Dollars the Reserve Banks Paid to and 
Received from Depository Institutions, Fiscal Years 1993-2007: 

Figure 19: Number of Dollar Coins the Reserve Banks Paid to and 
Received from Depository Institutions, Fiscal Years 1993-2007: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

March 21, 2008: 

The Honorable Luis V. Gutierrez: 
Chairman: 
The Honorable Ron Paul: 
Ranking Member: 
Subcommittee on Domestic and International Monetary Policy, Trade, and 
Technology: 
Committee on Financial Services: 
House of Representatives: 

The Federal Reserve Banks (Reserve Banks) and the U.S. Mint both play a 
role in ensuring that the economy has an adequate supply of coins for 
trade and commerce. The Reserve Banks fulfill the coin demand of the 
nation's depository institutions--which include commercial banks, 
savings and loan associations, and credit unions--by ordering new coins 
from the U.S. Mint and managing an inventory of circulated coins stored 
in Reserve Banks and coin terminals throughout the nation. In 2007, the 
U.S. Mint produced 15.4 billion coins, with a value of about $2 
billion. According to the Department of the Treasury, as of November 
30, 2007, coins worth approximately $37 billion were in circulation 
throughout the country. Reliably estimating the demand for new coins 
and efficiently managing the inventory of circulated coins is 
important--first, to ensure that the depository institutions have 
enough coins to meet the public's demand and, second, to avoid 
unnecessary coin production costs. During the fourth quarter of 2006, 
rising metal prices drove the costs of producing pennies and nickels 
above the face values of these coins.[Footnote 1] According to the U.S. 
Mint's 2007 annual report, the penny costs 1.7 cents to produce and the 
nickel costs 9.5 cents.[Footnote 2] 

The Federal Reserve System is composed of a central, governmental 
agency--the Board of Governors (Board)--and 12 regional Reserve Banks, 
each of which is located in a Federal Reserve district. The Reserve 
Banks are the operating arms of the central banking system. They carry 
out a variety of Federal Reserve System functions, including operating 
a nationwide payment system and distributing the nation's currency and 
coin. The Reserve Banks have 30 offices that, among other 
responsibilities, provide coins to depository institutions. The Reserve 
Banks' national Cash Product Office (CPO), located at the Federal 
Reserve Bank of San Francisco, coordinates coin distribution from a 
national perspective as one of its responsibilities. The Reserve Banks 
store coins on-site and at about 180 coin terminals located throughout 
the country. The coin terminals provide additional storage space for 
coins and help to facilitate their distribution. You asked us to 
examine the processes for ordering and distributing all denominations 
of coins without creating excess inventory. Accordingly, this report 
addresses (1) the Reserve Banks' process for ordering and distributing 
coins and (2) the extent to which this process meets the depository 
institutions' demand for coins[Footnote 3].: 

To determine the Reserve Banks' process for ordering and distributing 
coins, we reviewed relevant reports and research papers on how the 
Reserve Banks and the U.S. Mint determine the number of coins to be 
produced and distributed. We interviewed Federal Reserve economists and 
Board and Reserve Bank officials representing the 30 Reserve Bank 
offices to understand how the Reserve Bank offices develop orders for 
new coins from the U.S. Mint and manage their coin inventory levels. We 
also interviewed key stakeholders--including officials from the U.S. 
Mint, operators of coin terminals with agreements to store Reserve Bank 
coin inventory, and representatives of banking associations--to 
determine how the Reserve Banks work in collaboration with others to 
identify and fulfill the depository institutions' requests for coins. 
We analyzed information on the costs paid by the U.S. Mint to transport 
circulated coins and analyzed the number of transfers between Reserve 
Banks from fiscal years 2002 through 2007. 

To determine the extent to which the Reserve Banks' process meets the 
demand for coins, we obtained data on the Reserve Banks' coin payments 
to depository institutions, receipts for coins deposited by the 
depository institutions, orders for new coins, and inventory levels for 
fiscal years 1993 through 2007 for each coin denomination and Reserve 
Bank.[Footnote 4] We analyzed these data to identify the demand for 
coins, the extent to which the Reserve Banks order new coins to meet 
demand, and the amount of inventory available to meet demand. We 
presented our data on a fiscal year (October through September) basis 
because the U.S. Mint operates on a fiscal year; however, the Reserve 
Banks operate on a calendar year. To assess the reliability of the 
Reserve Banks' coin data, we talked with agency officials about data 
quality control procedures and reviewed relevant documentation. We 
determined that these data were sufficiently reliable for the purposes 
of this report. We interviewed Reserve Bank officials to discuss 
factors affecting trends in the data and the Reserve Banks' approach to 
coin inventory management. We also interviewed two banking associations 
and the four coin terminal operators with the most agreements to store 
Reserve Bank coin inventory to obtain their views on the Reserve Banks' 
process for fulfilling depository institutions' demand for coins. We 
conducted this performance audit from April 2007 through March 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. More details about our 
objectives, scope, and methodology appear in appendix I. 

Results in Brief: 

The Reserve Banks' process for ordering and distributing coins uses new 
coins ordered from the U.S. Mint, circulated coins held in inventory, 
and transfers of circulated coins between Reserve Bank offices to meet 
the depository institutions' demand. To develop orders for new coins, 
the Reserve Bank offices combine coin demand forecasts, local 
information, and CPO's assessment of opportunities to redistribute 
circulated coins between Reserve Bank offices. Every month, the Reserve 
Bank offices receive recommended coin orders generated by a forecasting 
tool that is maintained by the Economic Research Group at the Federal 
Reserve Bank of San Francisco. Each office then compares its current 
inventory levels with the inventory levels it wants to hold to meet 
demand and considers factors that may affect demand within its 
jurisdiction to refine the recommended coin order. Such factors may 
include coin recycling activity (i.e., the extent to which the public 
uses coin-counting machines, such as Coinstar, to trade in coins for 
currency or some form of credit, such as a gift card); the issuance of 
a commemorative circulating coin; and transit authorities' or casinos' 
use of coins. Once a Reserve Bank office has considered these factors, 
it adjusts the tool's recommended coin order and then sends a request 
for coins to CPO. CPO reviews the offices' requests for coins from a 
national perspective and looks for opportunities to fill those requests 
by transferring circulated coins between Reserve Bank offices, rather 
than ordering new coins. Reserve Bank data show that CPO reduced orders 
for new coins by approximately 10 percent in fiscal years 2006 and 2007 
by fulfilling the Reserve Bank offices' requests with transfers of 
circulated coins from other offices. Once CPO has identified circulated 
coins that can be transferred to fulfill the Reserve Bank offices' 
requests for coins, CPO reduces the offices' orders for new coins, 
consolidates all of the orders, and sends the final order to the U.S. 
Mint. 

The Reserve Banks' process for distributing coins has met depository 
institutions' demand since fiscal year 2000, but the process does not 
define optimal coin inventory ranges for Reserve Bank offices to hold 
to meet demand. Our analysis of the Reserve Banks' coin order, 
inventory, payment, and receipt data showed that the Reserve Banks 
maintained enough inventory to meet demand, even when demand was 
greater than anticipated. In addition, our analysis showed that overall 
inventory levels for most denominations have generally been decreasing 
since fiscal year 2001. However, the Reserve Banks have taken a 
decentralized approach to inventory management that allows the Reserve 
Bank offices to determine what inventory levels they should keep on 
hand to meet future demand and avoid the risk of shortages. 
Specifically, each Reserve Bank office sets and manages its own 
inventory levels, resulting in varying levels of inventory being held 
by the Reserve Banks relative to demand. Reserve Bank officials 
expressed no concern about holding too many coins and told us that 
excess inventory is an issue only when coin inventories approach 
storage capacity limits. However, with rare exceptions, the Reserve 
Banks have more storage capacity than they need to maintain their 
current inventory levels; therefore, storage capacity limits do not 
create an incentive to determine and manage to optimal coin inventory 
ranges. CPO and Reserve Bank officials noted that the risk of not 
meeting depository institutions' demand for coins far exceeds the risk 
of having too many coins in inventory, and that it is easier to deplete 
coin inventories than to build them up. However, holding coins in 
inventory that could be used to fulfill demand elsewhere can be 
inefficient, resulting in new coin production costs that could have 
been avoided if coins held in inventory had been used instead to 
fulfill demand. To increase the efficiency of the Reserve Banks' 
process, CPO received approval from the Reserve Banks in October 2007 
to centralize the development and placement of coin orders. Starting in 
three districts, CPO will determine the final numbers of circulated and 
new coins that will be shipped monthly to the Reserve Bank offices. CPO 
will also be responsible for ensuring that the offices maintain 
appropriate inventory levels. Results of a pilot program suggest that 
these changes could reduce inventories and smooth the U.S. Mint's 
production schedule. Federal Reserve and U.S. Mint officials generally 
agreed with the findings of the report and provided technical comments 
which were incorporated as appropriate. 

Background: 

One of the functions of the Reserve Banks is to fulfill the coin demand 
of the nation's depository institutions--which include commercial 
banks, savings and loan associations, and credit unions--by 
distributing coin inventories stored in the Reserve Banks' vaults and 
at coin terminals, including circulated coins and new coins ordered 
from the U.S. Mint. The Reserve Banks have 30 offices that provide 
coins to depository institutions and are responsible for an area within 
1 of the Federal Reserve's 12 districts.[Footnote 5] Figure 1 shows a 
map of the Reserve Bank districts (districts) and the locations of the 
offices that provide coin services. 

Figure 1: Map of Reserve Bank Districts and Locations of the Offices 
That Provide Coin Services: 

[See PDF for image] 

This figure is a map of the United States illustrating Reserve Bank 
Districts and locations of the offices that provide coin services. The 
following data is depicted: 

District 1: Federal Reserve District of Boston; 
Offices: Boston. 

District 2: Federal Reserve District of New York; 
Offices: East Rutherford. 

District 3: Federal Reserve District of Philadelphia; 
Offices: Philadelphia. 

District 4: Federal Reserve District of Cleveland; 
Offices: Cleveland, Cincinnati. 

District 5: Federal Reserve District of Richmond; 
Offices: Baltimore, Richmond, Charlotte. 

District 6: Federal Reserve District of Atlanta; 
Offices: Nashville, Atlanta, Jacksonville, Miami, New Orleans. 

District 7: Federal Reserve District of Chicago; 
Offices: Chicago, Detroit. 

District 8: Federal Reserve District of St. Louis; 
Offices: St. Louis, Memphis. 

District 9: Federal Reserve District of Minneapolis; 
Offices: Minneapolis, Helena. 

District 10: Federal Reserve District of Kansas City; 
Offices: Kansas City, Denver. 

District 11: Federal Reserve District of Dallas; 
Offices: Dallas, Houston, San Antonio, El Paso. 

District 12: Federal Reserve District of San Francisco; 
Offices: San Francisco, Los Angeles, Phoenix, Salt Lake City, Seattle. 

Sources: Federal Reserve (data) and Map Resources (map). 

Note: The Phoenix and East Rutherford offices are processing centers 
that are responsible for distributing coins. The remaining 28 offices 
are Federal Reserve head offices and branches. 

[End of figure] 

As figure 2 shows, the Reserve Banks hold and distribute coins from 
their vaults and contract with armored carrier companies to hold the 
rest of the Reserve Banks' inventory. 

Figure 2: Coin Supply and Distribution Process: 

[See PDF for image] 

This figure illustrates the coin supply and distribution process, as 
follows: 

New Coin: 
From: U.S. Mint; 
To: Reserve Office Banks and Coin terminals. 

New and circulating coins: 
From: Reserve Office Banks and Coin terminals; 
To: Depository institutions; 
From: Depository institutions; 
To: General public and retailers. 

Circulating coin: 
From: General public and retailers; 
To: Depository institutions; 
From: Depository institutions; 
To: Reserve Office Banks and Coin terminals. 

Source: GAO. 

Notes: 

Some depository institutions choose not to receive coins directly from 
the Reserve Banks. Instead, these banks obtain coins through 
correspondent banks that have an account with a Reserve Bank. The term 
"retailers" encompasses any commercial business that uses coins, 
including retail stores, casinos, restaurants, and vending machine 
operators. 

The new coins produced by the U.S. Mint are a small portion of the 
total number of coins in circulation. As we have previously mentioned, 
the U.S. Mint produced about $2 billion worth of coins in fiscal year 
2007, while the total value of the coins in circulation was about $37 
billion. 

[End of figure] 

As of December 31, 2007, 179 coin terminals held about 61 percent of 
the Reserve Banks' total coin inventory, in terms of volume. According 
to Reserve Bank officials, the arrangement between the Reserve Banks 
and the armored carrier companies that operate these coin terminals 
began because both parties agreed that having more distribution points 
would be more cost-efficient from a societal perspective. Federal 
Reserve officials and coin terminal operators said that, historically, 
this has been a "win-win" arrangement because it has eliminated the 
need for armored carriers to haul coins to and from the Reserve Banks 
before distributing them to the depository institutions. The armored 
carrier companies store Reserve Banks' coin inventory in their coin 
terminals at no charge. The agreement between the two entities (1) 
defines a limit on the value of inventory that a particular coin 
operator can hold for a Reserve Bank at a particular terminal and (2) 
requires the coin terminal operator to maintain liability insurance for 
loss of or damage to the Reserve Bank's coin inventory. The coin 
terminal agreements can be canceled with prior notice and without cause 
at any time by either party. The armored carrier companies also 
maintain depository institutions' coin inventories in the coin 
terminals at no charge; however, the companies earn revenue from the 
coin processing, wrapping, and transportation services that they 
provide to the depository institutions. 

In addition to the coins held in their inventory, the Reserve Banks 
purchase new coins at face value from the U.S. Mint to fulfill 
depository institutions' demand.[Footnote 6] To develop an annual 
production schedule and fulfill the Reserve Banks' coin orders, the 
U.S. Mint uses national coin demand forecasting models[Footnote 7] to 
determine how many new coins to produce. U.S. Mint facilities in 
Philadelphia and Denver then produce the new coins, and the Mint ships 
the new coins to the Reserve Bank offices or coin terminals. Appendix 
II shows trends in the U.S. Mint's coin production data for fiscal 
years 2002 through 2007. The U.S. Mint also may transfer circulated 
coins between Reserve Bank offices. We discuss this matter in more 
detail later in the report. 

Depository institutions order coins from the Reserve Banks to meet 
retailers' and the public's demand. These orders include requests for 
new commemorative circulating coins from congressionally enacted 
programs, such as the 50 State Quarters and the Presidential $1 Coins 
Programs, as well as for other coins for day-to-day transactional 
use.[Footnote 8] Reserve Bank offices fill these orders with new and 
circulated coins held in the offices' vaults and at the coin terminals. 
Depository institutions contract with armored carriers to process and 
deliver the coins to them; then depository institutions provide coins 
to retailers and the general public. Depository institutions also 
return coins to the Reserve Banks when they have more coins in their 
inventory than they want to hold to meet demand. For example, when the 
public's demand for coins falls after the holiday season and the 
depository institutions have accumulated more coins than they want to 
hold for day-to-day transactions, the depository institutions deposit 
the extra coins with the Reserve Banks. According to two nationwide 
banking associations, the depository institutions have an incentive to 
limit the number of coins they hold in inventory because the 
institutions do not earn interest on coins held in their own vaults. 

The Reserve Banks' Process for Ordering and Distributing Coins Uses New 
Coins, Coin Inventories, and Coin Transfers to Meet Demand: 

The Reserve Banks' process for ordering and distributing coins uses 
orders of new coins from the U.S. Mint, the Reserve Bank offices' coin 
inventories, and transfers of circulated coins between Reserve Bank 
offices to meet estimates of depository institutions' demand. These 
estimates are based on coin demand forecasts generated by a forecasting 
tool. The offices prepare requests for coins on the basis of these 
estimates and on their own assessments of demand and send the requests 
to CPO for review. CPO then looks for opportunities to transfer 
circulated coins between Reserve Bank offices to help fulfill the 
offices' requests. CPO reduces the offices' requests for coins by the 
amounts of the transfers, consolidates the adjusted requests, and 
monthly sends a final consolidated order for new coins to the U.S. 
Mint. 

Coin Demand Forecasts, Inventory Holdings, and Assessments of Local 
Market Demand Drive Reserve Bank Offices' Requests for New Coins: 

According to Federal Reserve officials, forecasting coin demand is not 
an exact science and requires judgment. Therefore, the Reserve Bank 
offices use both a data-driven process and professional judgment to 
develop coin orders. Specifically, the offices use an econometric 
inventory management and forecasting (IMF) tool that the Federal 
Reserve developed in consultation with the U.S. Mint to forecast coin 
demand at the Reserve Bank office level and to recommend coin orders 
for each office. The IMF tool analyzes historical data on coin payments 
to and receipts from depository institutions and is maintained by the 
Economic Research Group at the Federal Reserve Bank of San Francisco. 
According to documentation for the IMF tool, the tool is able to 
predict the seasonal fluctuations in coin demand fairly accurately 
because these fluctuations tend to be fairly regular. For example, the 
demand for coin rises in November in response to the public's demand 
for coins over the holidays and then decreases in January. While the 
timing of these fluctuations is fairly regular, their magnitude is more 
difficult to project, according to Federal Reserve officials. In 
addition, the IMF tool was developed about the same time that the 
commemorative circulating coin programs were beginning. Therefore, 
according to Reserve Bank officials, the tool projects coin demand for 
economic transactions, but the tool does not estimate demand for 
collecting commemorative circulating coins. Hence, judgment is involved 
in estimating both the magnitude of seasonal fluctuations in coin 
demand and the demand for collecting commemorative circulating coins. 

As shown in figure 3, currently, the 30 Reserve Bank offices receive 
data from the IMF tool each month as a starting point for preparing 
their coin orders. Most Reserve Bank officials told us that they start 
the monthly coin ordering process by examining the orders recommended 
by the IMF tool or their current inventory levels for each 
denomination. 

Figure 3: Reserve Banks' Current Monthly Coin Ordering Process: 

[See PDF for image] 

This figure is an illustration of the Reserve Banks' current monthly 
coin ordering process, as follows: 

* Reserve Bank offices review IMF tool�s recommended coin orders and 
their current inventory levels. 

* Reserve Bank offices assess local factors and may adjust the IMF 
tool�s recommended coin orders. The orders are then submitted to CPO. 

* CPO identifies opportunities to reduce new coin orders through 
transfers of existing coins. Identified coins are then transferred 
between Reserve Bank offices. 

* CPO submits a consolidated coin order to the U.S. Mint. 

Source: GAO. 

[End of figure] 

Reserve Bank officials emphasized that although the IMF tool's analysis 
is a helpful starting point for the coin ordering process, assessments 
of local market factors are important because the tool's analysis is 
based on historical payments and receipts data and may not consider 
unique factors affecting future coin demand. Coin demand is affected by 
factors specific to particular districts. For example, five districts 
noted that local casinos were moving to coinless slot machines, which 
would reduce coin demand in and coin orders for these districts. 
Conversely, several districts increase their coin orders to account for 
collectors' demand when new coins are released for commemorative 
circulating coin programs, such as the 50 State Quarters Program. 
Reserve Bank officials noted that changes in the U.S. Postal Service's 
and local transit authorities' use of coins also affect coin demand. 
For example, in one district, the local transit authority retrofitted 
its ticket machines to dispense dollar coins, which resulted in greater 
demand for dollar coins in that district. Most of the districts cited 
coin recycling companies, such as Coinstar, as a factor affecting the 
number of coins returned by the depository institutions and the number 
of new coins to be ordered from the U.S. Mint. Coin recycling machines 
found in grocery stores, retail stores, and some depository 
institutions have made it easier now than it was in the past for the 
public to trade in coins for currency or some form of credit, such as a 
gift card. In some districts, coin recycling has returned large volumes 
of coins to circulation and to the Reserve Banks. Reserve Bank 
officials said that when more coins are returned than are ordered by 
the depository institutions, they reduce their orders of new coins from 
the U.S. Mint. According to data from one major coin recycling company, 
the value of coins returned to circulation through recycling grew from 
approximately $1 billion in 2000 to $2.6 billion in 2006. 

To obtain information on local market factors, officials at the Reserve 
Bank offices talk with coin terminal operators and sometimes with 
officials at depository institutions in their districts. The coin 
terminal operators provide the Reserve Bank offices with daily 
inventory data on the Reserve Bank coins held by the terminals. The 
coin terminal operators hold inventory for both the depository 
institutions and the Reserve Banks and may provide the Reserve Banks 
with insight into changes in the depository institutions' coin demand. 
Some Reserve Bank officials also obtain information on coin demand 
through conversations with depository institution officials, usually in 
the course of discussing currency issues. During these conversations, 
the depository institutions can provide advance notice of any 
circumstances that may change coin demand, such as upcoming festivals 
or state fairs, which typically would increase their demand for coins. 
The conversations with coin terminal operators and depository 
institutions are important because officials at the Reserve Bank 
offices can obtain information on potential coin requests or deposits 
back with the Reserve Banks, which could affect the Reserve Banks' 
inventory levels or orders for new coins. 

According to the Reserve Bank officials with whom we spoke, before the 
offices finalize and send their orders to CPO, they look for 
opportunities to transfer coins within their district to meet projected 
demand. For example, one Reserve Bank office may want additional coins, 
while another office may have more coins than it wants to hold to meet 
short-term demand. The Reserve Bank office works with the coin terminal 
operators to move the coins as needed. According to Reserve Bank and 
coin terminal officials, as part of their normal business, the coin 
terminal operators transport coins to and from the Reserve Banks and 
are able to absorb the costs of the transfers by combining them with 
previously scheduled pickups and deliveries for their depository 
institution customers. 

CPO Coordinates the Reserve Banks' Coin Order and Identifies 
Opportunities for Reducing the Order through Transfers: 

In 2001, CPO began coordinating coin distribution from a national 
perspective on behalf of the Reserve Banks to enhance coordination with 
the U.S. Mint and look for opportunities to redistribute coin 
inventories. Historically, the Reserve Banks individually developed and 
submitted their own coin orders to the U.S. Mint without any insight 
into coin inventories in other districts or consideration of whether 
coins could be transferred from other districts to meet demand, rather 
than ordering new coins.[Footnote 9] In 1999, shortages of pennies 
occurred in some regions of the country because some depository 
institutions were hoarding pennies and the U.S. Mint could not fulfill 
the Reserve Banks' increased orders for pennies. During this time, the 
Reserve Banks moved coins from one district to another to satisfy 
demand but did not have a centralized coordination process in place to 
facilitate these transfers, according to Federal Reserve officials. 
Following this experience, the Reserve Bank of San Francisco assumed 
responsibility for coordinating coin operations at Reserve Banks 
through its CPO. CPO is now the Reserve Banks' primary liaison with the 
U.S. Mint and is responsible for finalizing and submitting a monthly 
consolidated coin order for the Reserve Banks. According to Federal 
Reserve officials, CPO has focused on achieving system efficiencies by 
implementing more centralized coin management strategies, including 
enhancing coordination with the U.S. Mint; improving distribution 
channels by increasing the number of Reserve Bank coin terminals; and 
redistributing national inventories of coins, as appropriate, to meet 
demand, thereby reducing the need for new coins from the Mint. 

With the exception of new releases of commemorative circulating coins, 
CPO determines whether the Reserve Banks' requests for coins can be 
filled with circulated coins in Reserve Banks' inventories or whether 
new coins need to be ordered from the U.S. Mint. CPO compares the 
Reserve Bank offices' requests for coins with the IMF tool's 
recommended orders and the offices' current inventory levels. According 
to CPO officials, if an office's request differs significantly from the 
order recommended by the IMF tool, CPO contacts the Reserve Bank office 
to discuss the reasons for the difference. CPO also compares current 
inventory levels with historic inventory data to determine whether the 
Reserve Banks have enough coins to meet seasonal changes in demand. 
While the Reserve Bank offices make the final decision on how many 
coins they request, a recent agreement will allow CPO, with input from 
the Reserve Bank offices, to make the final decision. We discuss this 
agreement in more detail later in the report. 

CPO looks for opportunities to reduce the new coin order to the U.S. 
Mint by transferring coins from one district to another. CPO officials 
noted that using circulated inventory rather than purchasing new coins 
reduces the number of new coins that the U.S. Mint produces and the 
Mint's costs of production. Yet according to a U.S. Mint official, 
continuing demand for new coins means that using circulating inventory 
does not avoid the production of coins, but merely delays it. To 
determine whether coins can be transferred, CPO considers such things 
as constraints on storage space, the distance between the office or 
terminal that requests additional coins and the one that has available 
inventory, and insurance limits at the coin terminals. CPO then works 
with the U.S. Mint to transfer circulated coins between Federal Reserve 
offices that are more than 100 miles apart.[Footnote 10] The U.S. Mint 
paid about $1.3 million for 638 coin transfers in fiscal year 2006 and 
about $915,000 for 404 coin transfers in fiscal year 2007.[Footnote 11] 
According to U.S. Mint officials, the Mint contracts and pays for these 
coin transfers because balancing inventories among the Reserve Banks 
helps to lower the volatility of production for the Mint and the Mint 
has ongoing contracts for shipping large quantities of coins. However, 
according to a U.S. Mint official, the U.S. Mint is looking to phase 
out the practice of paying for transfers. The official recognizes that 
coin inventories may occasionally expand in some areas or regions, but 
believes that such conditions are temporary. Therefore, transferring 
coins from existing inventories may only temporarily delay the 
production of additional coins to meet the demands of 
commerce.[Footnote 12] See appendix V for data on the number of 
transfers and the corresponding budget for fiscal years 2002 through 
2007. Our analysis of Reserve Banks' order data shows that CPO reduced 
orders by about 10 percent in fiscal years 2006 and 2007 by fulfilling 
Reserve Bank offices' coin requests with circulated inventory. 
Specifically, the Reserve Banks submitted requests to CPO for 
approximately 18 billion coins in fiscal year 2006 and for 
approximately 16 billion coins in fiscal year 2007, and CPO was able to 
reduce these requests through transfers by over 2.2 billion coins in 
fiscal year 2006 and by over 1.5 billion coins in fiscal year 2007. 

Once CPO makes adjustments and consolidates the Reserve Bank offices' 
orders, CPO submits a final new coin order to the U.S. Mint 1 month 
before the coins are scheduled to be delivered. The order includes a 
shipping schedule outlining when and where the coins should be shipped 
as well as a 5-month coin order forecast. Upon receiving the order from 
CPO, the U.S. Mint ensures that it will have the coins to fulfill the 
order and then distributes coins to the Reserve Banks and coin 
terminals from its production facilities in Philadelphia and Denver. 
Both U.S. Mint and Federal Reserve officials said that they continually 
communicate throughout the month on the coin order, and that the 
Reserve Banks have the flexibility to adjust the coin order and 
delivery destination. 

CPO has several working groups of coin stakeholders, including 
depository institutions, vending machine operators, and armored 
carriers, to help address any potential or current coin distribution 
issues. For example, CPO interacts with depository institutions through 
its Customer Advisory Council, which currently consists of the 16 
largest depository institutions in the country in terms of cash volume. 
Coins are typically not the primary focus of the council's meetings, 
but the meetings give the depository institutions an opportunity to 
discuss any concerns about coins, such as the distribution of newly 
released commemorative circulating coins. As mandated by law, the 
Secretary of the Treasury and the Federal Reserve's Board of Governors 
are taking steps to ensure that an adequate supply of dollar coins is 
available for commerce and collectors.[Footnote 13] The U.S. Mint and 
the Federal Reserve are consulting with coin users and holding forums 
to identify stakeholders' ideas for the efficient distribution and 
circulation of dollar coins as well as other circulating coins. 

The Reserve Banks' Process Fulfills Coin Demand, but Optimal Inventory 
Ranges Are Undefined: 

The Reserve Banks' process for ordering and distributing coins has 
fulfilled depository institutions' demand for the coins, but does not 
define optimal ranges for the Reserve Banks to hold in inventory to 
meet demand. Our analysis of Reserve Bank data showed that the Reserve 
Banks maintained enough inventory to meet demand, even when demand was 
greater than anticipated. Coin stakeholders confirmed that the Reserve 
Banks' process has fulfilled depository institutions' demand for coins 
in recent years. However, the Reserve Banks have taken a decentralized 
approach to inventory management that allows the Reserve Bank offices 
to use their own judgment to set inventory levels that they think are 
appropriate to meet future demand and avoid the risk of shortages. 
Reserve Bank officials expressed no concern about holding too many 
coins and told us that excess inventory is an issue only when coin 
inventories approach storage capacity limits. However, with rare 
exceptions, the Reserve Banks have more storage capacity than they need 
to maintain their current inventories, and, therefore, storage capacity 
does not serve as an incentive for the banks to evaluate and manage to 
optimal coin inventory ranges. To increase the efficiency of the 
distribution process, CPO has received approval from the Reserve Banks 
to centralize the development and placement of coin orders, and CPO 
will be responsible for ensuring that the offices maintain appropriate 
inventory levels. 

The Reserve Banks' Ordering and Distribution Process Has Met Demand for 
Coins: 

The Reserve Banks' process has ensured that enough coins are available 
through orders of new coins and the Reserve Banks' inventories of 
circulated coins to meet the depository institutions' demand for coins. 
In each year since 1993, the number of coins demanded by the depository 
institutions has generally exceeded the number of coins deposited back 
to the Reserve Banks for all denominations, except the half-dollar. For 
example, as figure 4 shows, in fiscal year 2007, the Reserve Banks paid 
out 76 billion coins to the depository institutions (payments) and 
received 62 billion coins back from the depository institutions 
(receipts). This difference between payments and receipts is called 
"net pay." For example, net pay for fiscal year 2007 was about 14 
billion coins. See appendix III for payments and receipts data, by 
denomination, for fiscal years 1993 through 2007. 

Figure 7: Number of Coins the Reserve Banks Paid to and Received from 
Depository Institutions, Fiscal Years 1993-2007: 

[See PDF for image] 

This figure is a multiple line graph, depicting the following data 
(number of coins in billions): 

Fiscal year: 1993; 
Total number of coins paid to depository institutions: 41.5518; 
Total number of coins received from depository institutions: 26.2784. 

Fiscal year: 1994; 
Total number of coins paid to depository institutions: 43.2769; 
Total number of coins received from depository institutions: 26.6383. 

Fiscal year: 1995; 
Total number of coins paid to depository institutions: 43.1163; 
Total number of coins received from depository institutions: 26.4033. 

Fiscal year: 1996; 
Total number of coins paid to depository institutions: 43.5408; 
Total number of coins received from depository institutions: 28.4874. 

Fiscal year: 1997; 
Total number of coins paid to depository institutions: 44.6107; 
Total number of coins received from depository institutions: 31.4133. 

Fiscal year: 1998; 
Total number of coins paid to depository institutions: 51.3258; 
Total number of coins received from depository institutions: 35.478. 

Fiscal year: 1999; 
Total number of coins paid to depository institutions: 55.0282; 
Total number of coins received from depository institutions: 35.099. 

Fiscal year: 2000; 
Total number of coins paid to depository institutions: 55.5726; 
Total number of coins received from depository institutions: 32.5114. 

Fiscal year: 2001; 
Total number of coins paid to depository institutions: 55.3016; 
Total number of coins received from depository institutions: 38.2255. 

Fiscal year: 2002; 
Total number of coins paid to depository institutions: 57.7594; 
Total number of coins received from depository institutions: 42.6519. 

Fiscal year: 2003; 
Total number of coins paid to depository institutions: 59.805; 
Total number of coins received from depository institutions: 46.5953. 

Fiscal year: 2004; 
Total number of coins paid to depository institutions: 66.5196; 
Total number of coins received from depository institutions: 54.047. 

Fiscal year: 2005; 
Total number of coins paid to depository institutions: 70.8327; 
Total number of coins received from depository institutions: 56.1314. 

Fiscal year: 2006; 
Total number of coins paid to depository institutions: 73.178; 
Total number of coins received from depository institutions: 58.9393. 

Fiscal year: 2007; 
Total number of coins paid to depository institutions: 76.4597; 
Total number of coins received from depository institutions: 62.4397. 

Difference between coin payments and coin receipts = net pay. 

Source: Federal Reserve. 

[End of figure] 

Since the number of coins received by the Reserve Banks is less than 
the number of coins sent to the depository institutions to meet their 
demand, the Reserve Banks have to order new coins or use circulated 
inventory to meet demand. When depository institutions demand more 
coins than they return over a month or a year, net pay is positive for 
that period and additional coins have to be ordered or coin inventory 
has to be used to meet the demand. When depository institutions return 
more coins to the Reserve Banks than they order over a month or a year, 
net pay is negative for that period and the Reserve Banks' inventory of 
coins can grow. Net pay fluctuates throughout the year, depending on 
the public's spending patterns. Specifically, Reserve Bank data show 
that net pay was generally positive for all denominations, except the 
half-dollar, throughout the year, except in January when the demand for 
coins declines. Net pay for the half-dollar has been negative since 
fiscal year 2004 because the Reserve Banks received more half-dollars 
back than they paid out. Understanding and predicting net pay is 
critical to the Reserve Banks' ability to meet coin demand. According 
to Federal Reserve officials, net pay is positive for many reasons. For 
example, the public stores coins that it receives in jars and dresser 
drawers and sometimes discards coins. Collectors' demand for coins can 
also increase the Reserve Banks' payments for commemorative circulating 
coins, while limiting the Reserve Banks' receipts because the coins are 
kept out of circulation. When coins leave "active" circulation--that 
is, the coins are stored and not deposited or used for commerce--they 
are not available to meet depository institutions' demand. 

During fiscal years 1993 through 2007, the Reserve Banks' aggregate 
orders for new coins tracked together with net pay fairly closely. For 
example, in fiscal year 2002, total orders for new coins--14.72 billion 
coins--were a little lower than the total net pay for all coins--15.11 
billion coins--and resulted in a decrease in inventory for some 
denominations. In fiscal year 2007, total orders for new coins--14.63 
billion coins--were a little higher than the total net pay for all 
coins--14.02 billion coins, suggesting the Reserve Banks ordered enough 
coins to fulfill net pay for the year and increased total inventory. 
Federal Reserve officials suggest that this aggregate annual increase 
of nearly 600 million coins can, in part, be explained by the 
introduction of the Presidential $1 Coin Program. After the first year 
of the program, the Reserve Banks report inventories of at least 300 
million Presidential dollar coins. Orders for the penny constituted 
over half of the total orders for new coins. In fiscal year 2007, 
orders for the penny were 7.76 billion coins, while net pay was 7.79 
billion coins. According to Reserve Bank officials, the difference 
between orders for new pennies and net pay resulted in an aggregate 
decline of about 30 million pennies in Reserve Banks' inventories. 

The Reserve Banks strive to maintain sufficient inventories of coins to 
fulfill demand, despite seasonal and unanticipated changes and 
potential interruptions in the supply of new coins. First, inventory is 
important in handling the seasonal fluctuations in demand for coins. 
According to documentation on the IMF tool and Reserve Bank officials, 
this fluctuating demand can be met by either (1) adjusting the number 
of coins ordered to keep pace with known seasonal changes in demand or 
(2) keeping orders constant and allowing inventory to fluctuate in 
response to these changes in demand. The Reserve Banks place orders to 
keep the U.S. Mint's production schedule fairly consistent and allow 
inventories to fluctuate with the seasonality of coin demand. For 
example, Reserve Bank officials said they ensure that they have enough 
coins on hand to meet the high coin demand leading into the summer and 
holiday months. According to Federal Reserve officials, a Reserve Bank 
office may not transfer coins out of its area if the office knows that 
those coins will be needed in the next week or month. Federal Reserve 
officials also noted that although the Reserve Banks can predict the 
timing of seasonal changes in demand for coins, it is more difficult 
for them to predict the magnitude of the changes from one year to the 
next. Predicting demand is important because the U.S. Mint may not be 
able to produce enough coins within a short time frame to keep up with 
heavy demand.[Footnote 14] Second, since there is some uncertainty in 
the actual demand for coins in any given month, the Reserve Banks' coin 
inventory provides a buffer against any changes in demand that may 
occur between the times the coins are ordered and received. Third, the 
Reserve Banks want to hold enough inventory to handle disruptions in 
supply from the U.S. Mint. For example, when the U.S. Mint's production 
facilities in Philadelphia shut down, starting in March 2002, for 7 
weeks to correct safety concerns, the Mint worked with the Reserve 
Banks to ensure that coins were available to fulfill demand. 

Figure 5 shows that when compared with expected demand, expressed as 
days of payable inventory, the Reserve Banks' overall inventory for the 
penny, nickel, dime, and quarter has generally decreased since fiscal 
year 2001.[Footnote 15] For example, the penny inventory declined from 
an average of 32 days of payable inventory, or 3.0 billion coins, in 
fiscal year 2001 to an average of 16 days of payable inventory, or 2.2 
billion coins, in fiscal year 2007. The nickel inventory declined from 
37 days of payable inventory in fiscal year 2001 to 25 days of payable 
inventory in fiscal year 2007. Inventory levels throughout the year 
vary around these averages because of fluctuations in the public's 
spending patterns. 

Figure 5: Average Days of Payable Inventory for the Reserve Banks for 
the Penny, Nickel, Dime, and Quarter, Fiscal Years 1996-2007: 

[See PDF for image] 

This figure is a multiple line graph, depicting the following data: 

Fiscal year: 1996; 
Average days of payable inventory, Penny: 26; 
Average days of payable inventory, Nickel: 34; 
Average days of payable inventory, Dime: 30; 
Average days of payable inventory, Quarter: 23. 

Fiscal year: 1997; 
Average days of payable inventory, Penny: 32; 
Average days of payable inventory, Nickel: 36; 
Average days of payable inventory, Dime: 40; 
Average days of payable inventory, Quarter: 25. 

Fiscal year: 1998; 
Average days of payable inventory, Penny: 20; 
Average days of payable inventory, Nickel: 26; 
Average days of payable inventory, Dime: 31; 
Average days of payable inventory, Quarter: 20. 

Fiscal year: 1999; 
Average days of payable inventory, Penny: 15; 
Average days of payable inventory, Nickel: 20; 
Average days of payable inventory, Dime: 25; 
Average days of payable inventory, Quarter: 15. 

Fiscal year: 2000; 
Average days of payable inventory, Penny: 14; 
Average days of payable inventory, Nickel: 23; 
Average days of payable inventory, Dime: 25; 
Average days of payable inventory, Quarter: 12. 

Fiscal year: 2001; 
Average days of payable inventory, Penny: 32; 
Average days of payable inventory, Nickel: 37; 
Average days of payable inventory, Dime: 38; 
Average days of payable inventory, Quarter: 31. 

Fiscal year: 2002; 
Average days of payable inventory, Penny: 32; 
Average days of payable inventory, Nickel: 34; 
Average days of payable inventory, Dime: 33; 
Average days of payable inventory, Quarter: 37. 

Fiscal year: 2003; 
Average days of payable inventory, Penny: 25; 
Average days of payable inventory, Nickel: 37; 
Average days of payable inventory, Dime: 34; 
Average days of payable inventory, Quarter: 39. 

Fiscal year: 2004; 
Average days of payable inventory, Penny: 22; 
Average days of payable inventory, Nickel: 34; 
Average days of payable inventory, Dime: 29; 
Average days of payable inventory, Quarter: 30. 

Fiscal year: 2005; 
Average days of payable inventory, Penny: 19; 
Average days of payable inventory, Nickel: 34; 
Average days of payable inventory, Dime: 28; 
Average days of payable inventory, Quarter: 25. 

Fiscal year: 2006; 
Average days of payable inventory, Penny: 18; 
Average days of payable inventory, Nickel: 28; 
Average days of payable inventory, Dime: 31; 
Average days of payable inventory, Quarter: 24. 

Fiscal year: 2007; 
Average days of payable inventory, Penny: 16; 
Average days of payable inventory, Nickel: 25; 
Average days of payable inventory, Dime: 32; 
Average days of payable inventory, Quarter: 27. 

Source: Federal Reserve. 

Note: The inventory data are represented in terms of average days of 
payable inventory. A day of payable inventory is the level of inventory 
needed by the Reserve Banks to meet 1 day's expected payments to 
depository institutions. 

[End of figure] 

Figure 6 shows that the days of payable inventory for the half-dollar 
and dollar coins greatly exceed the levels for the other denominations 
and have generally increased in recent years. According to Federal 
Reserve officials, there is little demand for these denominations. 
Federal Reserve officials said that dollar coin inventories have also 
grown as a result of the Presidential $1 Coin Program, which requires 
the Federal Reserve to ensure that, during an introductory period, an 
adequate supply of each newly minted design (there are four new coins 
each year) is made available for commerce and collectors. 

Figure 6: Average Days of Payable Inventory for the Reserve Banks for 
the Half-Dollar and Dollar Coin, Fiscal Years 1996-2007: 

[See PDF for image] 

This figure is a multiple line graph, depicting the following data: 

Fiscal year: 1996; 
Average days of payable inventory, Half-dollar: 183; 
Average days of payable inventory, Dollar coin: 269; 

Fiscal year: 1997; 
Average days of payable inventory, Half-dollar: 234; 
Average days of payable inventory, Dollar coin: 212; 

Fiscal year: 1998; 
Average days of payable inventory, Half-dollar: 284; 
Average days of payable inventory, Dollar coin: 158; 

Fiscal year: 1999; 
Average days of payable inventory, Half-dollar: 286; 
Average days of payable inventory, Dollar coin: 102; 

Fiscal year: 2000; 
Average days of payable inventory, Half-dollar: 256; 
Average days of payable inventory, Dollar coin: 516; 

Fiscal year: 2001; 
Average days of payable inventory, Half-dollar: 270; 
Average days of payable inventory, Dollar coin: 361; 

Fiscal year: 2002; 
Average days of payable inventory, Half-dollar: 302; 
Average days of payable inventory, Dollar coin: 176; 

Fiscal year: 2003; 
Average days of payable inventory, Half-dollar: 317; 
Average days of payable inventory, Dollar coin: 91; 

Fiscal year: 2004; 
Average days of payable inventory, Half-dollar: 377; 
Average days of payable inventory, Dollar coin: 90; 

Fiscal year: 2005; 
Average days of payable inventory, Half-dollar: 442; 
Average days of payable inventory, Dollar coin: 107; 

Fiscal year: 2006; 
Average days of payable inventory, Half-dollar: 497; 
Average days of payable inventory, Dollar coin: 123; 

Fiscal year: 2007; 
Average days of payable inventory, Half-dollar: 490; 
Average days of payable inventory, Dollar coin: 272; 

Source: Federal Reserve. 

[End of figure] 

Several factors affected trends in the Reserve Banks' inventory levels 
during fiscal years 1993 through 2007. For example, inventory levels 
for all denominations dropped from fiscal years 1997 to 1999. Reserve 
Bank officials said that the demand for all coin denominations grew in 
1999 in anticipation of the new millennium (Y2K). In fiscal year 2001, 
inventory levels for all denominations increased. According to the U.S. 
Mint's 2001 annual report, the economy, which is directly related to 
the demand for coins, took a downturn in the middle of fiscal year 
2000, resulting in a decrease in coin demand and a buildup of coin 
inventories. According to Reserve Bank officials, the inventory trends 
for the quarter and dollar coin reflect the challenges posed by the 
commemorative circulating programs associated with these coins. The 
officials noted that commemorative circulating coin programs, such as 
the Presidential $1 Coin Program, create uncertainty about the demand 
for those denominations. These programs involve the distribution of 
multiple coin designs and require the Reserve Banks to order enough 
commemorative circulating coins to meet the normal demand for coins for 
commercial transactions as well as the potential demand from collectors 
when the coins are first introduced. According to Reserve Bank 
officials, the Reserve Banks did not initially have experience in 
working with commemorative circulating coins and placed large orders 
for state quarters to ensure that they would have enough on hand to 
meet both normal transactional demand and potential collector demand. 
As a result, more quarters flowed back to the Reserve Banks than 
Reserve Bank officials expected for the first several releases. Reserve 
Bank officials noted that their forecasts of demand for state quarters 
have improved, and that their inventory of quarters has declined. The 
officials also noted that even with more experience, however, programs, 
such as the Presidential $1 Coin Program, require the Reserve Banks to 
order more coins than they would otherwise use for transactional 
purposes, thereby increasing Reserve Banks' coin inventory levels 
beyond the levels they would ordinarily hold. 

The coin terminal operators, banking associations, and Reserve Bank 
officials with whom we spoke confirmed that the Reserve Banks' process 
has fulfilled the depository institutions' demand for coins in recent 
years. Reserve Bank and CPO officials told us that they have been able 
to fill all depository institutions' requests for coin. The four coin 
terminal operators that we spoke with also noted that the Reserve Banks 
have been able to meet the demand of the depository institutions in 
their terminals. Finally, representatives from two banking associations 
said that constituent banks across the country have voiced no concern 
about the Reserve Banks' ability to distribute coins to the depository 
institutions. 

Optimal Inventory Ranges Are Undefined, but the Reserve Banks Are 
Taking Steps to Manage Coin Inventory More Efficiently: 

The Reserve Banks have taken a decentralized approach to managing coin 
inventory, under which the Reserve Bank offices have decided what 
inventory levels are appropriate to keep on hand to meet forecasted 
demand and avoid the risk of coin shortages. Each Reserve Bank office 
has defined its own inventory levels on the basis of professional 
judgment and historical data, to meet demand and avoid running out of 
coins, and has used the capacity of its storage facilities as the key 
determinant of its maximum inventory levels. According to Reserve Bank 
officials, insurance limits at the coin terminals also help to define 
maximum inventory levels, but they can be adjusted, if necessary. 
Reserve Banks we spoke with had no specific levels for maximum 
inventory other than storage capacity and coin terminal insurance 
limits. 

Because each Reserve Bank sets its own inventory levels, the districts 
manage to different inventory levels and hold varying levels of 
inventory relative to demand. For example, according to Reserve Bank 
officials, 3 of the 12 Reserve Banks generally try to hold at least 10 
days of payable inventory for all denominations, while 6 of the 12 
districts generally try to hold at least 20 or more days of payable 
inventory. Table 1 shows that for fiscal year 2007, the districts held 
varying levels of inventory relative to demand for the different 
denominations. For example, the penny inventories ranged from an 
average of 8 days in the Boston district to 26 days in the San 
Francisco district, while the quarter inventories ranged from 17 days 
in the St. Louis district to 40 days in the Philadelphia district. 

Table 1: Average Days of Payable Inventory for the Penny, Nickel, Dime, 
and Quarter for the Reserve Banks, by District, in Fiscal Year 2007: 

District: Boston; 
Average days of payable inventory, fiscal year 2007: Penny: 8; 
Average days of payable inventory, fiscal year 2007: Nickel: 16; 
Average days of payable inventory, fiscal year 2007: Dime: 20; 
Average days of payable inventory, fiscal year 2007: Quarter: 19. 

District: New York; 
Average days of payable inventory, fiscal year 2007: Penny: 10; 
Average days of payable inventory, fiscal year 2007: Nickel: 17; 
Average days of payable inventory, fiscal year 2007: Dime: 19; 
Average days of payable inventory, fiscal year 2007: Quarter: 21. 

District: Chicago; 
Average days of payable inventory, fiscal year 2007: Penny: 13; 
Average days of payable inventory, fiscal year 2007: Nickel: 19; 
Average days of payable inventory, fiscal year 2007: Dime: 27; 
Average days of payable inventory, fiscal year 2007: Quarter: 29. 

District: Dallas; 
Average days of payable inventory, fiscal year 2007: Penny: 13; 
Average days of payable inventory, fiscal year 2007: Nickel: 24; 
Average days of payable inventory, fiscal year 2007: Dime: 30; 
Average days of payable inventory, fiscal year 2007: Quarter: 28. 

District: Cleveland; 
Average days of payable inventory, fiscal year 2007: Penny: 14; 
Average days of payable inventory, fiscal year 2007: Nickel: 25; 
Average days of payable inventory, fiscal year 2007: Dime: 36; 
Average days of payable inventory, fiscal year 2007: Quarter: 38. 

District: Kansas City; 
Average days of payable inventory, fiscal year 2007: Penny: 14; 
Average days of payable inventory, fiscal year 2007: Nickel: 28; 
Average days of payable inventory, fiscal year 2007: Dime: 30; 
Average days of payable inventory, fiscal year 2007: Quarter: 32. 

District: St. Louis; 
Average days of payable inventory, fiscal year 2007: Penny: 16; 
Average days of payable inventory, fiscal year 2007: Nickel: 21; 
Average days of payable inventory, fiscal year 2007: Dime: 32; 
Average days of payable inventory, fiscal year 2007: Quarter: 17. 

District: Philadelphia; 
Average days of payable inventory, fiscal year 2007: Penny: 17; 
Average days of payable inventory, fiscal year 2007: Nickel: 23; 
Average days of payable inventory, fiscal year 2007: Dime: 25; 
Average days of payable inventory, fiscal year 2007: Quarter: 40. 

District: Richmond; 
Average days of payable inventory, fiscal year 2007: Penny: 17; 
Average days of payable inventory, fiscal year 2007: Nickel: 22; 
Average days of payable inventory, fiscal year 2007: Dime: 27; 
Average days of payable inventory, fiscal year 2007: Quarter: 21. 

District: Atlanta; 
Average days of payable inventory, fiscal year 2007: Penny: 19; 
Average days of payable inventory, fiscal year 2007: Nickel: 30; 
Average days of payable inventory, fiscal year 2007: Dime: 40; 
Average days of payable inventory, fiscal year 2007: Quarter: 20. 

District: Minneapolis; 
Average days of payable inventory, fiscal year 2007: Penny: 23; 
Average days of payable inventory, fiscal year 2007: Nickel: 41; 
Average days of payable inventory, fiscal year 2007: Dime: 42; 
Average days of payable inventory, fiscal year 2007: Quarter: 33. 

District: San Francisco; 
Average days of payable inventory, fiscal year 2007: Penny: 26; 
Average days of payable inventory, fiscal year 2007: Nickel: 35; 
Average days of payable inventory, fiscal year 2007: Dime: 44; 
Average days of payable inventory, fiscal year 2007: Quarter: 31. 

District: Range across the Reserve Banks; 
Average days of payable inventory, fiscal year 2007: Penny: 8 - 26; 
Average days of payable inventory, fiscal year 2007: Nickel: 16 - 41; 
Average days of payable inventory, fiscal year 2007: Dime: 19 - 44; 
Average days of payable inventory, fiscal year 2007: Quarter: 17 - 40. 

Source: GAO analysis of Reserve Bank data. 

Note: The inventory data are represented in terms of average days of 
payable inventory. A day of payable inventory is the level of inventory 
needed by the Reserve Banks to meet 1 day's expected payments to 
depository institutions. 

[End of table] 

Table 2 shows how the inventories for the penny, nickel, dime, and 
quarter have varied across Reserve Banks from fiscal years 1996 through 
2007.[Footnote 16] 

Table 2: Range of Average Days of Payable Inventory for Penny, Nickel, 
Dime, and Quarter across Reserve Banks, Fiscal Years 1996-2007: 

Fiscal year: 1996; 
Range of average days of payable inventory: Penny: 16 - 33; 
Range of average days of payable inventory: Nickel: 18 - 49; 
Range of average days of payable inventory: Dime: 19 - 66; 
Range of average days of payable inventory: Quarter: 14 - 68. 

Fiscal year: 1997; 
Range of average days of payable inventory: Penny: 21 - 52; 
Range of average days of payable inventory: Nickel: 22 - 50; 
Range of average days of payable inventory: Dime: 17 - 101; 
Range of average days of payable inventory: Quarter: 10 - 137. 

Fiscal year: 1998; 
Range of average days of payable inventory: Penny: 12 - 34; 
Range of average days of payable inventory: Nickel: 20 - 34; 
Range of average days of payable inventory: Dime: 22 - 45; 
Range of average days of payable inventory: Quarter: 9 - 132. 

Fiscal year: 1999; 
Range of average days of payable inventory: Penny: 8 - 24; 
Range of average days of payable inventory: Nickel: 13 - 31; 
Range of average days of payable inventory: Dime: 16 - 42; 
Range of average days of payable inventory: Quarter: 9 - 55. 

Fiscal year: 2000; 
Range of average days of payable inventory: Penny: 7 - 22; 
Range of average days of payable inventory: Nickel: 9 - 43; 
Range of average days of payable inventory: Dime: 8 - 39; 
Range of average days of payable inventory: Quarter: 5 - 17. 

Fiscal year: 2001; 
Range of average days of payable inventory: Penny: 20 - 49; 
Range of average days of payable inventory: Nickel: 26 - 64; 
Range of average days of payable inventory: Dime: 26 - 60; 
Range of average days of payable inventory: Quarter: 23 - 51. 

Fiscal year: 2002; 
Range of average days of payable inventory: Penny: 20 - 46; 
Range of average days of payable inventory: Nickel: 22 - 54; 
Range of average days of payable inventory: Dime: 20 - 51; 
Range of average days of payable inventory: Quarter: 27 - 57. 

Fiscal year: 2003; 
Range of average days of payable inventory: Penny: 16 - 40; 
Range of average days of payable inventory: Nickel: 25 - 61; 
Range of average days of payable inventory: Dime: 24 - 63; 
Range of average days of payable inventory: Quarter: 16 - 78. 

Fiscal year: 2004; 
Range of average days of payable inventory: Penny: 17 - 37; 
Range of average days of payable inventory: Nickel: 26 - 51; 
Range of average days of payable inventory: Dime: 21 - 51; 
Range of average days of payable inventory: Quarter: 14 - 68. 

Fiscal year: 2005; 
Range of average days of payable inventory: Penny: 13 - 32; 
Range of average days of payable inventory: Nickel: 25 - 50; 
Range of average days of payable inventory: Dime: 18 - 42; 
Range of average days of payable inventory: Quarter: 11 - 55. 

Fiscal year: 2006; 
Range of average days of payable inventory: Penny: 11 - 28; 
Range of average days of payable inventory: Nickel: 22 - 40; 
Range of average days of payable inventory: Dime: 22 - 43; 
Range of average days of payable inventory: Quarter: 18 - 33. 

Fiscal year: 2007; 
Range of average days of payable inventory: Penny: 8 - 26; 
Range of average days of payable inventory: Nickel: 16 - 41; 
Range of average days of payable inventory: Dime: 19 - 44; 
Range of average days of payable inventory: Quarter: 17 - 40. 

Source: GAO analysis of Reserve Bank data. 

Note: The inventory data are represented in terms of average days of 
payable inventory. A day of payable inventory is the level of inventory 
needed by the Reserve Banks to meet 1 day's expected payments to 
depository institutions. 

[End of table] 

According to Federal Reserve officials and documentation of the Reserve 
Banks' IMF tool, the districts hold varying levels of inventory 
relative to demand because of the differences in the variability in 
coin demand and because some offices have more storage capacity. To be 
able to respond to the variability in demand, some Reserve Bank offices 
need to hold more coins than other offices relative to demand to ensure 
that they have enough coins to meet demand at all times. See appendix 
IV for the inventory levels relative to demand, by district and 
denomination, for fiscal years 2005 through 2007. 

Most Reserve Bank officials said that they were generally comfortable 
with their current inventory levels and expressed no concerns about 
having too many coins. Several Reserve Bank officials told us that they 
ordered conservatively--that is, they erred, if at all, on the side of 
ordering too many coins--because they were more concerned about not 
having enough coins to meet depository institutions' demand during high 
demand periods than about having too many coins at other times. CPO 
officials said it would be easier to deplete coin inventories than to 
build them up. Furthermore, most Reserve Bank officials were not 
concerned about having too many coins because they said they have ample 
on-site and off-site storage capacity and insurance levels at the coin 
terminals to store their coin inventory. For example, two districts 
have new, on-site coin vaults that were built within the last 10 years 
and were designed to accommodate the entire coin inventory for the 
district, even without coin terminals. Reserve Bank officials said that 
if the coin inventory level at a particular location approaches the 
storage limits, they work to move coins to another Reserve Bank or 
terminal. 

CPO and Reserve Bank officials noted that the risk of not meeting 
depository institutions' demand for coins far exceeds the risk of 
having too many coins in inventory, as long as storage capacity exists. 
For example, Federal Reserve officials told us that in 1999, they had 
problems fulfilling the depository institutions' demand for pennies. 
During this time, the U.S. Mint could not produce enough pennies to 
fill Reserve Banks' orders. In addition, the Reserve Banks were not yet 
coordinating coin distribution nationally and, therefore, could not 
easily identify sources of inventory available for redistribution. 
According to Federal Reserve officials and coin terminal operators, 
some depository institutions became concerned that coins would not be 
available to meet their demand and began hoarding coins, which further 
exacerbated the problem. Federal Reserve officials noted that since 
2001, CPO has coordinated Reserve Bank coin distribution from a 
national perspective to help ensure confidence in the availability of 
coins, and, since that time, the Reserve Banks have experienced no 
shortages. 

Although we only heard about storage capacity concerns from Reserve 
Bank officials in one district, some coin terminal operators expressed 
concerns about coin inventory levels in their terminals. Officials from 
one Reserve Bank told us that, on rare occasions, they have had to 
negotiate with depository institutions on when the Reserve Bank could 
accept coin deposits because storage space was not immediately 
available. Reserve Bank officials also said that every effort is made 
to redistribute coins before insurance levels are reached at the coin 
terminals, and that the Reserve Bank offices work with the coin 
terminal operators to stay under the insurance limits. However, two of 
the four coin terminal operators with whom we spoke said that the 
Reserve Banks maintain higher inventory levels than the operators 
consider sufficient to respond to changes in demand. CPO and Reserve 
Bank officials said that they were sensitive to the numbers of coins 
being held at the coin terminals, but the officials noted that the 
Reserve Banks work to stay within the limits established in their 
agreements with the operators. One coin terminal operator noted that it 
did not have concerns about the Reserve Banks' coin inventory levels or 
the distribution process. However, this operator noted that high 
volumes of coin recycling activity posed a challenge in some of its 
terminals. This operator also said that CPO was helping to move some of 
the coins out of the terminals, but that the high volumes would 
continue to be a problem until coin stakeholders--coin terminal 
operators, depository institutions, and CPO--find a solution to 
equitably redistribute the recycled coins. 

Although we recognize the importance of minimizing the risk of not 
having sufficient coins to meet demand at all times, the Reserve Banks' 
current approach to inventory management does not define an optimal 
range of inventory for the offices to meet demand. Inventory levels 
that greatly exceed likely future demand could result in the 
overproduction of new coins and in potential storage concerns for the 
coin terminal operators. Data show that the Reserve Banks' overall 
inventory levels relative to demand for all denominations, except the 
half-dollar and the dollar coins, have generally decreased since 2001. 
However, the Reserve Banks and coin terminals have sufficient capacity 
for the Reserve Banks to hold higher levels of inventory for some 
denominations than are likely to be used to meet demand. Moreover, the 
storage capacity at the coin terminals is provided to the Reserve Banks 
at no charge. As a result, the Reserve Banks lack an incentive to 
evaluate and manage to optimal coin inventory ranges. In addition, the 
current approach to inventory management could lead to the 
overproduction of new coins in the short term or to the retention in 
some districts of coin inventory that could be redistributed to meet 
demand in another district. Thus, a Reserve Bank may incur few or no 
charges for storing high inventory levels, but the U.S. Mint may incur 
costs for producing new coins when circulated coins may be available to 
fulfill demand.[Footnote 17] Producing new pennies and nickels when 
circulated coins could be used instead is particularly inefficient, 
since these denominations cost more to produce than they are worth. 
According to Federal Reserve officials, to mitigate this risk, CPO has 
been working with the Reserve Banks to manage inventories from a 
national perspective by transferring, where appropriate, inventories 
from one Reserve Bank to another one. According to a U.S. Mint 
official, a continuing demand for new coins means that producing coins 
when there is production capacity is not a concern because these coins 
will eventually be needed. In fact, he indicated that delaying 
production when there is production capacity may actually increase 
costs in the long run because production costs, like other costs, tend 
to increase over time. 

CPO has recognized the importance of further centralizing and 
increasing the efficiency of the Reserve Banks' approach to coin 
inventory management and has identified opportunities for doing so. In 
2006, the Reserve Banks and the U.S. Mint co-chartered a 6-month pilot 
of a new inventory management approach in one district. During the 
pilot, CPO (1) managed the inventory using vendor software that 
forecasts coin demand at the Reserve Bank office or terminal 
level[Footnote 18] to provide consistent upper and lower bounds for 
inventory levels at each terminal site in the district and (2) used 
this information to maintain inventory levels to meet demand in the 
district. The Reserve Bank office was then responsible for moving coins 
among the coin terminals to meet demand. The Reserve Banks and the U.S. 
Mint assessed the results of the pilot and found that the new approach 
reduced the risk of shortages, transportation expenses, and 
inefficiencies associated with the U.S. Mint' s production volatility 
as well as increased stakeholders' confidence in the coin distribution 
system. According to CPO officials, the pilot also demonstrated that 
the district's inventory levels could be reduced. As a result of the 
pilot, CPO received approval from the Reserve Banks in October 2007 to 
implement a more centralized approach to managing coin orders and 
inventories.[Footnote 19] According to CPO officials, they are 
expecting to phase in this new approach, beginning with three districts 
in the second quarter of 2008. 

When the new approach is implemented, CPO will have the final authority 
to determine orders on behalf of the Reserve Bank offices and will be 
responsible for managing inventory levels that are maintained at the 
office level. According to CPO officials, CPO will continue to provide 
the Reserve Bank offices with a recommended monthly order. The Reserve 
Bank offices will be able to review this order and suggest revisions, 
but ultimately CPO will decide on the final order for each office. 
Although Reserve Bank officials told us that under the current 
approach, their adjustments to the IMF tool's recommended coin orders 
were minimal, over the past 3 years the combined impact of these 
adjustments was sometimes substantial. For example, the IMF tool 
recommended a total order of $52 million in pennies for all of the 
Reserve Bank offices in fiscal year 2007. Following the offices' 
assessment of local market factors and the availability of transfers of 
circulated coins to fulfill the offices' requests, CPO submitted a 
total order of $77.6 million for new pennies to the U.S. Mint. CPO's 
ability to now decide on the number of coins each district will receive 
monthly could potentially result in decreased orders for new coins from 
the U.S. Mint. CPO is considering establishing inventory ranges for the 
Reserve Bank offices on the basis of factors such as historical trends 
in coin payments and receipts, the amount of time taken to transport 
coins to a Reserve Bank office, and storage capacity limits to better 
define the level of inventory to be held to meet demand. We believe 
that the establishment of inventory ranges could help CPO and the 
Reserve Banks evaluate and report on the effectiveness of CPO's 
inventory management approach. CPO officials believe that these changes 
will improve the Reserve Banks' inventory management because CPO can 
provide a national perspective on where inventory can be used to meet 
demand, including where coins can be moved when necessary to meet 
demand in one district, while freeing space for coin deposits in 
storage facilities that are approaching capacity in another district. 
U.S. Mint officials said that the new approach could allow the U.S. 
Mint to further smooth its production schedule, thereby lowering costs 
associated with unpredictable changes in production. 

Agency Comments: 

We provided a draft of this report to the Board of Governors of the 
Federal Reserve System and to the Department of the Treasury for their 
review and comment. The Director of the Division of Reserve Bank 
Operations and Payment Systems provided written comments, which are 
reproduced in appendix VI. Overall, the Federal Reserve agrees with the 
findings in our report and believes that the data in the report reflect 
the Reserve Banks' efficient and effective management of coin 
inventories. The Federal Reserve also provided technical comments, 
which we have addressed in this report as appropriate. The Acting 
Deputy Director of the U.S. Mint provided oral comments stating that 
the agency agrees with the information in this report as it pertains to 
the U.S. Mint and provided technical comments, which we have also 
incorporated as appropriate. 

We are sending copies of this report to interested congressional 
committees, the Chairman of the Board of Governors of the Federal 
Reserve System, the Secretary of the Treasury, and the Director of the 
U.S. Mint. We will also make copies available to others upon request. 
In addition, the report will be available at no charge on the GAO Web 
site at [hyperlink, http://www.gao.gov]. 

If you have any questions about this report, please contact me at (202) 
512-2834 or [email protected] Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. Key contributors to this report are listed in 
appendix VII. 

Signed by: 

Susan A. Fleming: 
Director, Physical Infrastructure Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The objectives of this report were to examine (1) the Reserve Banks' 
process for ordering and distributing coins and (2) the extent to which 
this process meets the depository institutions' demand for coins. 

To describe the Reserve Banks' process for supplying coins throughout 
the country, we obtained and reviewed relevant articles, reports, 
economic studies, and technical documentation on how the Reserve Banks 
and the U.S. Mint determine the number of coins to be produced and 
distributed. We also interviewed Federal Reserve and U.S. Mint 
economists who were involved in the development of economic models used 
to predict coin demand. During these interviews, we reviewed how the 
national coin forecast models are used by both the Reserve Banks and 
the U.S. Mint and discussed the accuracy of these models in predicting 
net pay at the national level. We interviewed officials from the 
Federal Reserve's Board of Governors (Board), each of the 12 Reserve 
Bank districts, and the national Cash Product Office (CPO) to determine 
how coin orders are developed and submitted to the U.S. Mint. In 
addition, we reviewed statutes related to the Federal Reserve and U.S. 
Mint. 

We also interviewed key stakeholders, including officials from the U.S. 
Mint, operators of coin terminals with agreements to store Reserve Bank 
coin inventory, and representatives of banking associations, to 
determine how the Reserve Banks work in collaboration with others to 
identify and fulfill the depository institutions' requests for coins. 
We obtained and analyzed information on the costs paid by the U.S. Mint 
to transport existing coins and analyzed the number of transfers 
between Reserve Bank districts since fiscal year 2002. To determine how 
CPO was able to reduce orders for new coins through transfers of 
existing coin inventory, we reviewed Reserve Bank data documenting 
actual coin demand and compared these data with the Reserve Banks' 
actual order to the U.S. Mint for new coins and the number of 
circulated coin transfers processed by CPO. 

To determine the extent to which the Reserve Banks' coin distribution 
process meets the depository institutions' demand for coins throughout 
the country, we obtained data on the Reserve Banks coin payments to 
depository institutions, receipts for coins deposited by the depository 
institutions, orders for new coins, and inventory levels for fiscal 
years 1993 through 2007 for each coin denomination and for each Reserve 
Bank. We analyzed these data using Excel and SAS statistical analysis 
software. To calculate Reserve Banks' number of coins paid to the 
depository institutions and Reserve Banks' number of coins received 
from the depository institutions at the national and district level for 
all coin denominations, we converted the data from value of coins to 
volume of coins and then calculated fiscal year totals for each 
denomination at the national and district level. We created line charts 
to compare the total number of coins that Reserve Bank paid to 
depository institutions with the total number of coins that the Reserve 
Bank received from the depository institutions. To calculate net pay 
and the Reserve Banks' coin order to the U.S. Mint, we converted the 
data from value of coins to volume of coins and calculated fiscal year 
totals at the national and district level. We created line charts to 
compare the net pay data with the Reserve Banks' coin order data. 

To calculate the Reserve Banks' days of payable inventory, we consulted 
with officials at the Board and CPO to determine an appropriate 
methodology. CPO and Reserve Banks calculate payable inventory 
information several different ways, depending upon what they are 
assessing. For the purposes of our review, we determined that a 
comparison of inventory relative to a 3-month daily average of payments 
for 3 years was the most appropriate calculation to determine the 
Reserve Banks' inventory position, because it compares inventory 
relative to what the Reserve Banks could reasonably have expected coin 
payments to be in the future. This methodology captures coin inventory 
levels relative to what Reserve Banks expected to need to meet future 
payments to depository institutions. For the numerator, we used end-of-
month inventory levels for a given month. For the denominator, for the 
3 previous years, we used the quarter following the inventory month 
used in the numerator to assess inventory levels relative to demand in 
the following quarter. For example, when we calculated days of payable 
inventory for December 2006, we used data for January, February, and 
March, 2004; January, February, and March, 2005; and January, February, 
and March, 2006, in the denominator. To calculate the average daily 
payment rate, we took the monthly payments data from each month of the 
quarter from the previous 3 years and divided by 21 business days to 
obtain an average daily payment rate for each month. We then totaled 
the daily payment rates for the 9 months and divided by 9 to obtain an 
average payment rate of the 3 quarters for the 3 years. To calculate 
the annual average days of payable inventory, by denomination, for each 
Reserve Bank, we averaged the monthly figures on days of payable 
inventory that we computed as we have previously described. Because of 
the methodology we used to calculate days of payable inventory, 1996 is 
the earliest year for which we can present the data. We used 
statistical analysis software to complete this analysis for each coin 
denomination at the national and Reserve Bank level. 

We also interviewed officials at the Board and Reserve Banks to discuss 
factors affecting trends in the data, the level of inventory that each 
district tries to hold, and the Reserve Banks' approach to coin 
inventory management. To describe the Reserve Banks' new centralized 
approach to coin inventory management and how it might address concerns 
about inventory management, we interviewed officials at CPO and the 
Board about a 2006 pilot to test a new inventory management approach at 
the Reserve Bank of Cleveland. 

To assess the reliability of the coin data we received from the Reserve 
Banks and U.S. Mint, we talked with agency officials about data quality 
control procedures and reviewed relevant documentation. For example, we 
reviewed audit reports for fiscal years 2006 and 2007 prepared by the 
Department of the Treasury's Office of Inspector General, which 
reported that the U.S. Mint's data were accurately presented and in 
conformity with generally accepted accounting principles. The U.S. Mint 
has received approximately 15 consecutive unqualified opinions. These 
internal control audits found no material weaknesses and found that the 
U.S. Mint is in compliance with the Federal Manager's Financial 
Integrity Act. For the Federal Reserve data, we reviewed an independent 
auditor's reports on the Federal Reserve's financial statements for 
fiscal years 1995 through 2006, and found that the Federal Reserve's 
data were accurately presented and in conformity with generally 
accepted accounting principles. We also performed advanced electronic 
testing to assess the reliability of the computer-processed data, and 
determined that these data were accurate, complete, and consistent and, 
therefore, sufficiently reliable for the purposes of this report. 

We conducted this performance audit from April 2007 through March 2008 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Appendix II: Coin Production Trends, by Denomination: 

Figures 7 through 13 show trends in the U.S. Mint's coin production 
data for fiscal years 2002 through 2007. These data represent all of 
the "circulating" coins produced by the U.S. Mint; they do not include 
the "proof" or "uncirculated" quality coins produced by the Mint. 


Figure 7: U.S. Mint's Coin Production for Fiscal Years 2002-2007, Total 
Coins (Penny, Nickel, Dime, Quarter, Half-Dollar, and Dollar): 

[See PDF for image] 

This figure is a vertical bar graph, depicting the following data: 

Fiscal year: 2002; 
Billions of coins: 14.9622. 

Fiscal year: 2003; 
Billions of coins: 11.3412. 

Fiscal year: 2004; 
Billions of coins: 13.4796. 

Fiscal year: 2005; 
Billions of coins: 14.1762. 

Fiscal year: 2006; 
Billions of coins: 16.1886. 

Fiscal year: 2007; 
Billions of coins: 15.4235. 

Source: U.S. Mint. 

[End of figure] 

Figure 8: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Penny: 

[See PDF for image] 

This figure is a vertical bar graph, depicting the following data: 

Fiscal year: 2002; 
Billions of pennies: 7.65124. 

Fiscal year: 2003; 
Billions of pennies: 6.29601. 

Fiscal year: 2004; 
Billions of pennies: 7.2068. 

Fiscal year: 2005; 
Billions of pennies: 7.13085. 

Fiscal year: 2006; 
Billions of pennies: 8.6184. 

Fiscal year: 2007; 
Billions of pennies: 8.0804. 

Source: U.S. Mint. 

[End of figure] 

Figure 9: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Nickel: 

[See PDF for image] 

This figure is a vertical bar graph, depicting the following data: 

Fiscal year: 2002; 
Billions of nickels: 1.26768. 

Fiscal year: 2003; 
Billions of nickels: 0.71352. 

Fiscal year: 2004; 
Billions of nickels: 1.52712. 

Fiscal year: 2005; 
Billions of nickels: 1.66632. 

Fiscal year: 2006; 
Billions of nickels: 1.50552. 

Fiscal year: 2007; 
Billions of nickels: 1.31. 

Source: U.S. Mint. 

[End of figure] 

Figure 10: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Dime: 

[See PDF for image] 

This figure is a vertical bar graph, depicting the following data: 

Fiscal year: 2002; 
Billions of dimes: 2.5595. 

Fiscal year: 2003; 
Billions of dimes: 1.8075. 

Fiscal year: 2004; 
Billions of dimes: 2.58618. 

Fiscal year: 2005; 
Billions of dimes: 2.6105. 

Fiscal year: 2006; 
Billions of dimes: 3.037. 

Fiscal year: 2007; 
Billions of dimes: 2.3415. 

Source: U.S. Mint. 

[End of figure] 

Figure 11: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Quarter: 

[See PDF for image] 

This figure is a vertical bar graph, depicting the following data: 

Fiscal year: 2002; 
Billions of quarters: 3.45787. 

Fiscal year: 2003; 
Billions of quarters: 2.507. 

Fiscal year: 2004; 
Billions of quarters: 2.1484. 

Fiscal year: 2005; 
Billions of quarters: 2.7562. 

Fiscal year: 2006; 
Billions of quarters: 3.0156. 

Fiscal year: 2007; 
Billions of quarters: 2.79884. 

Source: U.S. Mint. 

[End of figure] 

Figure 12: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Half-Dollar: 

[See PDF for image] 

This figure is a vertical bar graph, depicting the following data: 

Fiscal year: 2002; 
Millions of half-dollars: 1.2. 

Fiscal year: 2003; 
Millions of half-dollars: 10.6. 

Fiscal year: 2004; 
Millions of half-dollars: 5.8. 

Fiscal year: 2005; 
Millions of half-dollars: 7.3. 

Fiscal year: 2006; 
Millions of half-dollars: 4.4. 

Fiscal year: 2007; 
Millions of half-dollars: 2.4. 

Source: U.S. Mint. 

[End of figure] 

Figure 13: U.S. Mint's Coin Production for Fiscal Years 2002-2007, 
Dollar Coin: 

[See PDF for image] 

This figure is a vertical bar graph, depicting the following data: 

Fiscal year: 2002; 
Millions of dollar coins: 24.6776. 

Fiscal year: 2003; 
Millions of dollar coins: 6.58. 

Fiscal year: 2004; 
Millions of dollar coins: 5.32. 

Fiscal year: 2005; 
Millions of dollar coins: 5.04. 

Fiscal year: 2006; 
Millions of dollar coins: 7.7. 

Fiscal year: 2007; 
Millions of dollar coins: 894.48. 

Source: U.S. Mint. 

[End of figure] 

[End of section] 

Appendix III: National Payments and Receipts Data, by Denomination: 

The Reserve Banks make coin payments to depository institutions and 
accept coin deposits from depository institutions on a daily basis. 
Figures 14 through 19 show total payments and receipts for each coin 
denomination for all 12 Reserve Banks for fiscal years 1993 through 
2007. 

Figure 14: Number of Pennies the Reserve Banks Paid to and Received 
from Depository Institutions, Fiscal Years 1993-2007: 

[See PDF for image] 

This figure is a multiple line graph, depicting the following data: 

Fiscal year: 1993; 
Billions of pennies paid to depository institutions: 17.1987; 
Billions of pennies received from depository institutions: 6.52432. 

Fiscal year: 1994; 
Billions of pennies paid to depository institutions: 17.962; 
Billions of pennies received from depository institutions: 6.80718. 

Fiscal year: 1995; 
Billions of pennies paid to depository institutions: 18.2838; 
Billions of pennies received from depository institutions: 6.85322. 

Fiscal year: 1996; 
Billions of pennies paid to depository institutions: 18.4091; 
Billions of pennies received from depository institutions: 8.30715. 

Fiscal year: 1997; 
Billions of pennies paid to depository institutions: 19.0136; 
Billions of pennies received from depository institutions: 10.2861. 

Fiscal year: 1998; 
Billions of pennies paid to depository institutions: 22.5772; 
Billions of pennies received from depository institutions: 12.6209. 

Fiscal year: 1999; 
Billions of pennies paid to depository institutions: 23.9408; 
Billions of pennies received from depository institutions: 12.756. 

Fiscal year: 2000; 
Billions of pennies paid to depository institutions: 24.2058; 
Billions of pennies received from depository institutions: 12.2289. 

Fiscal year: 2001; 
Billions of pennies paid to depository institutions: 25.1053; 
Billions of pennies received from depository institutions: 15.8712. 

Fiscal year: 2002; 
Billions of pennies paid to depository institutions: 26.5673; 
Billions of pennies received from depository institutions: 18.5671. 

Fiscal year: 2003; 
Billions of pennies paid to depository institutions: 28.1207; 
Billions of pennies received from depository institutions: 21.0656. 

Fiscal year: 2004; 
Billions of pennies paid to depository institutions: 31.7255; 
Billions of pennies received from depository institutions: 25.2724. 

Fiscal year: 2005; 
Billions of pennies paid to depository institutions: 34.1638; 
Billions of pennies received from depository institutions: 26.5906. 

Fiscal year: 2006; 
Billions of pennies paid to depository institutions: 35.3171; 
Billions of pennies received from depository institutions: 27.5967. 

Fiscal year: 2007; 
Billions of pennies paid to depository institutions: 37.1904; 
Billions of pennies received from depository institutions: 29.3958. 

Difference between coin payments and coin receipts = net pay. 

Sources: Federal Reserve and U.S. Mint. 

[End of figure] 

Figure 15: Number of Nickels the Reserve Banks Paid to and Received 
from Depository Institutions, Fiscal Years 1993-2007: 

[See PDF for image] 

This figure is a multiple line graph, depicting the following data: 

Fiscal year: 1993; 
Billions of nickels paid to depository institutions: 3.88611; 
Billions of nickels received from depository institutions: 2.77899. 

Fiscal year: 1994; 
Billions of nickels paid to depository institutions: 4.1534; 
Billions of nickels received from depository institutions: 2.74413. 

Fiscal year: 1995; 
Billions of nickels paid to depository institutions: 4.08258; 
Billions of nickels received from depository institutions: 2.75884. 

Fiscal year: 1996; 
Billions of nickels paid to depository institutions: 4.12691; 
Billions of nickels received from depository institutions: 2.92514. 

Fiscal year: 1997; 
Billions of nickels paid to depository institutions: 4.19684; 
Billions of nickels received from depository institutions: 3.08856. 

Fiscal year: 1998; 
Billions of nickels paid to depository institutions: 4.94066; 
Billions of nickels received from depository institutions: 3.48294. 

Fiscal year: 1999; 
Billions of nickels paid to depository institutions: 5.40206; 
Billions of nickels received from depository institutions: 3.50816. 

Fiscal year: 2000; 
Billions of nickels paid to depository institutions: 5.29796; 
Billions of nickels received from depository institutions: 3.27786. 

Fiscal year: 2001; 
Billions of nickels paid to depository institutions: 5.02422; 
Billions of nickels received from depository institutions: 3.73539. 

Fiscal year: 2002; 
Billions of nickels paid to depository institutions: 5.24336; 
Billions of nickels received from depository institutions: 4.081261. 

Fiscal year: 2003; 
Billions of nickels paid to depository institutions: 5.36425; 
Billions of nickels received from depository institutions: 4.41853. 

Fiscal year: 2004; 
Billions of nickels paid to depository institutions: 6.36394; 
Billions of nickels received from depository institutions: 5.22649. 

Fiscal year: 2005; 
Billions of nickels paid to depository institutions: 7.00148; 
Billions of nickels received from depository institutions: 5.44547. 

Fiscal year: 2006; 
Billions of nickels paid to depository institutions: 7.18744; 
Billions of nickels received from depository institutions: 5.78301. 

Fiscal year: 2007; 
Billions of nickels paid to depository institutions: 7.48217; 
Billions of nickels received from depository institutions: 6.22689. 

Difference between coin payments and coin receipts = net pay. 

Sources: Federal Reserve and U.S. Mint. 

[End of figure] 

Figure 16: Number of Dimes the Reserve Banks Paid to and Received from 
Depository Institutions, Fiscal Years 1993-2007: 

[See PDF for image] 

This figure is a multiple line graph, depicting the following data: 

Fiscal year: 1993; 
Billions of dimes paid to depository institutions: 6.55135; 
Billions of dimes received from depository institutions: 4.68942. 

Fiscal year: 1994; 
Billions of dimes paid to depository institutions: 6.97471; 
Billions of dimes received from depository institutions: 4.66789. 

Fiscal year: 1995; 
Billions of dimes paid to depository institutions: 6.8507; 
Billions of dimes received from depository institutions: 4.57619. 

Fiscal year: 1996; 
Billions of dimes paid to depository institutions: 6.96869; 
Billions of dimes received from depository institutions: 4.86991. 

Fiscal year: 1997; 
Billions of dimes paid to depository institutions: 7.07458; 
Billions of dimes received from depository institutions: 5.03874. 

Fiscal year: 1998; 
Billions of dimes paid to depository institutions: 8.33458; 
Billions of dimes received from depository institutions: 5.93238. 

Fiscal year: 1999; 
Billions of dimes paid to depository institutions: 9.17718; 
Billions of dimes received from depository institutions: 5.98832. 

Fiscal year: 2000; 
Billions of dimes paid to depository institutions: 8.73599; 
Billions of dimes received from depository institutions: 5.46707. 

Fiscal year: 2001; 
Billions of dimes paid to depository institutions: 8.52991; 
Billions of dimes received from depository institutions: 6.02415. 

Fiscal year: 2002; 
Billions of dimes paid to depository institutions: 8.96419; 
Billions of dimes received from depository institutions: 6.4139. 

Fiscal year: 2003; 
Billions of dimes paid to depository institutions: 9.25531; 
Billions of dimes received from depository institutions: 6.98147. 

Fiscal year: 2004; 
Billions of dimes paid to depository institutions: 10.4029; 
Billions of dimes received from depository institutions: 8.18743. 

Fiscal year: 2005; 
Billions of dimes paid to depository institutions: 11.3177; 
Billions of dimes received from depository institutions: 8.63874. 

Fiscal year: 2006; 
Billions of dimes paid to depository institutions: 11.6821; 
Billions of dimes received from depository institutions: 9.09597. 

Fiscal year: 2007; 
Billions of dimes paid to depository institutions: 11.996; 
Billions of dimes received from depository institutions: 9.89061. 

Difference between coin payments and coin receipts = net pay. 

Sources: Federal Reserve and U.S. Mint. 

[End of figure] 

Figure 17: Number of Quarters the Reserve Banks Paid to and Received 
from Depository Institutions, Fiscal Years 1993-2007: 

[See PDF for image] 

This figure is a multiple line graph, depicting the following data: 

Fiscal year: 1993; 
Billions of quarters paid to depository institutions: 13.8248; 
Billions of quarters received from depository institutions: 12.2555. 

Fiscal year: 1994; 
Billions of quarters paid to depository institutions: 14.0683; 
Billions of quarters received from depository institutions: 12.3841. 

Fiscal year: 1995; 
Billions of quarters paid to depository institutions: 13.7641; 
Billions of quarters received from depository institutions: 12.1818. 

Fiscal year: 1996; 
Billions of quarters paid to depository institutions: 13.8819; 
Billions of quarters received from depository institutions: 12.3356. 

Fiscal year: 1997; 
Billions of quarters paid to depository institutions: 14.194; 
Billions of quarters received from depository institutions: 12.9354. 

Fiscal year: 1998; 
Billions of quarters paid to depository institutions: 15.3357; 
Billions of quarters received from depository institutions: 13.3657. 

Fiscal year: 1999; 
Billions of quarters paid to depository institutions: 16.3344; 
Billions of quarters received from depository institutions: 12.7691. 

Fiscal year: 2000; 
Billions of quarters paid to depository institutions: 16.6913; 
Billions of quarters received from depository institutions: 11.407. 

Fiscal year: 2001; 
Billions of quarters paid to depository institutions: 16.2484; 
Billions of quarters received from depository institutions: 12.4165. 

Fiscal year: 2002; 
Billions of quarters paid to depository institutions: 16.6745; 
Billions of quarters received from depository institutions: 13.4193. 

Fiscal year: 2003; 
Billions of quarters paid to depository institutions: 16.7919; 
Billions of quarters received from depository institutions: 13.9524. 

Fiscal year: 2004; 
Billions of quarters paid to depository institutions: 17.7864; 
Billions of quarters received from depository institutions: 15.1598. 

Fiscal year: 2005; 
Billions of quarters paid to depository institutions: 18.086; 
Billions of quarters received from depository institutions: 15.2369. 

Fiscal year: 2006; 
Billions of quarters paid to depository institutions: 18.6997; 
Billions of quarters received from depository institutions: 16.2178. 

Fiscal year: 2007; 
Billions of quarters paid to depository institutions: 18.9501; 
Billions of quarters received from depository institutions: 16.5418. 

Difference between coin payments and coin receipts = net pay. 

Sources: Federal Reserve and U.S. Mint. 

[End of figure] 

Figure 18: Number of Half-Dollars the Reserve Banks Paid to and 
Received from Depository Institutions, Fiscal Years 1993-2007: 

[See PDF for image] 

This figure is a multiple line graph, depicting the following data: 

Fiscal year: 1993; 
Millions of half-dollars paid to depository institutions: 65.8514; 	
Millions of half-dollars received from depository institutions: 
26.2055. 

Fiscal year: 1994; 
Millions of half-dollars paid to depository institutions: 68.5373; 	
Millions of half-dollars received from depository institutions: 
24.9356. 

Fiscal year: 1995; 
Millions of half-dollars paid to depository institutions: 61.7333; 
Millions of half-dollars received from depository institutions: 
25.1545. 

Fiscal year: 1996; 
Millions of half-dollars paid to depository institutions: 69.7242; 
Millions of half-dollars received from depository institutions: 
32.5121. 

Fiscal year: 1997; 
Millions of half-dollars paid to depository institutions: 58.3392; 
Millions of half-dollars received from depository institutions: 
42.1023. 

Fiscal year: 1998; 
Millions of half-dollars paid to depository institutions: 59.7692; 
Millions of half-dollars received from depository institutions: 
45.2545. 

Fiscal year: 1999; 
Millions of half-dollars paid to depository institutions: 71.146; 
Millions of half-dollars received from depository institutions: 
40.7568. 

Fiscal year: 2000; 
Millions of half-dollars paid to depository institutions: 85.0387; 
Millions of half-dollars received from depository institutions: 
50.2549. 

Fiscal year: 2001; 
Millions of half-dollars paid to depository institutions: 66.9184; 
Millions of half-dollars received from depository institutions: 
64.7647. 

Fiscal year: 2002; 
Millions of half-dollars paid to depository institutions: 65.6822; 
Millions of half-dollars received from depository institutions: 60.559. 

Fiscal year: 2003; 
Millions of half-dollars paid to depository institutions: 71.2811; 
Millions of half-dollars received from depository institutions: 
65.5694. 

Fiscal year: 2004; 
Millions of half-dollars paid to depository institutions: 67.9207; 
Millions of half-dollars received from depository institutions: 
81.1398. 

Fiscal year: 2005; 
Millions of half-dollars paid to depository institutions: 73.5581; 
Millions of half-dollars received from depository institutions: 
90.4998. 

Fiscal year: 2006; 
Millions of half-dollars paid to depository institutions: 92.6033; 
Millions of half-dollars received from depository institutions: 110.8. 

Fiscal year: 2007; 
Millions of half-dollars paid to depository institutions: 132.522; 
Millions of half-dollars received from depository institutions: 
143.266. 

Difference between coin payments and coin receipts = net pay. 

Sources: Federal Reserve and U.S. Mint. 

[End of figure] 

Figure 19: Number of Dollar Coins the Reserve Banks Paid to and 
Received from Depository Institutions, Fiscal Years 1993-2007: 

[See PDF for image] 

This figure is a multiple line graph, depicting the following data: 

Fiscal year: 1993; 
Millions of dollar coins paid to depository institutions: 22.1593; 
Millions of dollar coins received from depository institutions: 
3.90503. 

Fiscal year: 1994; 
Millions of dollar coins paid to depository institutions: 50.3077; 
Millions of dollar coins received from depository institutions: 
10.0734. 

Fiscal year: 1995; 
Millions of dollar coins paid to depository institutions: 73.3476; 
Millions of dollar coins received from depository institutions: 
8.12674. 

Fiscal year: 1996; 
Millions of dollar coins paid to depository institutions: 84.3832; 
Millions of dollar coins received from depository institutions: 17.084. 

Fiscal year: 1997; 
Millions of dollar coins paid to depository institutions: 73.25; 
Millions of dollar coins received from depository institutions: 
22.4259. 

Fiscal year: 1998; 
Millions of dollar coins paid to depository institutions: 77.9353; 
Millions of dollar coins received from depository institutions: 
30.8484. 

Fiscal year: 1999; 
Millions of dollar coins paid to depository institutions: 102.667; 
Millions of dollar coins received from depository institutions: 
36.7177. 

Fiscal year: 2000; 
Millions of dollar coins paid to depository institutions: 556.517; 
Millions of dollar coins received from depository institutions: 
80.2147. 

Fiscal year: 2001; 
Millions of dollar coins paid to depository institutions: 326.859; 
Millions of dollar coins received from depository institutions: 
113.446. 

Fiscal year: 2002; 
Millions of dollar coins paid to depository institutions: 244.289; 
Millions of dollar coins received from depository institutions: 
109.787. 

Fiscal year: 2003; 
Millions of dollar coins paid to depository institutions: 201.597; 
Millions of dollar coins received from depository institutions: 
111.751. 

Fiscal year: 2004; 
Millions of dollar coins paid to depository institutions: 172.945; 
Millions of dollar coins received from depository institutions: 
119.723. 

Fiscal year: 2005; 
Millions of dollar coins paid to depository institutions: 190.205; 
Millions of dollar coins received from depository institutions: 
129.252. 

Fiscal year: 2006; 
Millions of dollar coins paid to depository institutions: 199.045; 
Billions of dollar coins received from depository institutions: 135.09. 

Fiscal year: 2007; 
Millions of dollar coins paid to depository institutions: 708.532; 
Millions of dollar coins received from depository institutions: 
241.357. 

Difference between coin payments and coin receipts = net pay. 

Sources: Federal Reserve and U.S. Mint. 

[End of figure] 

[End of section] 

Appendix IV: Average Days of Payable Coin Inventory, by Reserve Bank 
District and Coin Denomination: 

The Reserve Banks strive to maintain sufficient inventories of coins to 
fulfill demand, despite seasonal and unanticipated changes in demand 
for coins and potential interruptions in the supply of new coins. 
Tables 3 through 14 show the days of payable inventory maintained at 
each of the 12 Reserve Banks from fiscal years 2005 through 2007. 
Payable inventory represents the amount of inventory needed to meet 
expected demand for coins and is calculated by comparing inventories 
with average payment data over a 3-month period for the preceding 3 
years. 

Table 3: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Boston, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 20; 
Nickel: 28; 
Dime: 18; 
Quarter: 11; 
Half-dollar: 1,044; 
Dollar: 217. 

Fiscal year: 2006; 
Penny: 17; 
Nickel: 29; 
Dime: 35; 
Quarter: 27; 
Half-dollar: 1,087; 
Dollar: 181. 

Fiscal year: 2007; 
Penny: 8; 
Nickel: 16; 
Dime: 20; 
Quarter: 19; 
Half-dollar: 1,268; 
Dollar: 446. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

Table 4: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of New York, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 20; 
Nickel: 48; 
Dime: 29; 
Quarter: 16; 
Half-dollar: 1,682; 
Dollar: 49. 

Fiscal year: 2006; 
Penny: 11; 
Nickel: 25; 
Dime: 22; 
Quarter: 18; 
Half-dollar: 1,745; 
Dollar: 87. 

Fiscal year: 2007; 
Penny: 10; 
Nickel: 17; 
Dime: 19; 
Quarter: 21; 
Half-dollar: 1,573; 
Dollar: 84. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

Table 5: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Philadelphia, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 25; 
Nickel: 27; 
Dime: 25; 
Quarter: 55; 
Half-dollar: 1,026; 
Dollar: 118. 

Fiscal year: 2006; 
Penny: 23; 
Nickel: 27; 
Dime: 29; 
Quarter: 33; 
Half-dollar: 1,261; 
Dollar: 95. 

Fiscal year: 2007; 
Penny: 17; 
Nickel: 23; 
Dime: 25; 
Quarter: 40; 
Half-dollar: 1,180; 
Dollar: 344. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

Table 6: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Cleveland, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 17; 
Nickel: 46; 
Dime: 30; 
Quarter: 25; 
Half-dollar: 551; 
Dollar: 115. 

Fiscal year: 2006; 
Penny: 15; 
Nickel: 33; 
Dime: 34; 
Quarter: 33; 
Half-dollar: 695; 
Dollar: 155. 

Fiscal year: 2007; 
Penny: 14; 
Nickel: 25; 
Dime: 36; 
Quarter: 38; 
Half-dollar: 771; 
Dollar: 490. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

Table 7: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Richmond, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 19; 
Nickel: 29; 
Dime: 19; 
Quarter: 15; 
Half-dollar: 538; 
Dollar: 119. 

Fiscal year: 2006; 
Penny: 17; 
Nickel: 24; 
Dime: 22; 
Quarter: 19; 
Half-dollar: 582; 
Dollar: 124. 

Fiscal year: 2007; 
Penny: 17; 
Nickel: 22; 
Dime: 27; 
Quarter: 21; 
Half-dollar: 550; 
Dollar: 355. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

Table 8: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Atlanta, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 16; 
Nickel: 25; 
Dime: 25; 
Quarter: 20; 
Half-dollar: 390; 
Dollar: 103. 

Fiscal year: 2006; 
Penny: 19; 
Nickel: 27; 
Dime: 34; 
Quarter: 19; 
Half-dollar: 549; 
Dollar: 152. 

Fiscal year: 2007; 
Penny: 19; 
Nickel: 30; 
Dime: 40; 
Quarter: 20; 
Half-dollar: 612; 
Dollar: 264. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

Table 9: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Chicago, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 16; 
Nickel: 26; 
Dime: 32; 
Quarter: 34; 
Half-dollar: 338; 
Dollar: 67. 

Fiscal year: 2006; 
Penny: 14; 
Nickel: 22; 
Dime: 30; 
Quarter: 23; 
Half-dollar: 389; 
Dollar: 74. 

Fiscal year: 2007; 
Penny: 13; 
Nickel: 19; 
Dime: 27; 
Quarter: 29; 
Half-dollar: 399; 
Dollar: 200. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

Table 10: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of St. Louis, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 13; 
Nickel: 29; 
Dime: 21; 
Quarter: 21; 
Half-dollar: 344; 
Dollar: 88. 

Fiscal year: 2006; 
Penny: 17; 
Nickel: 27; 
Dime: 28; 
Quarter: 20; 
Half-dollar: 547; 
Dollar: 100. 

Fiscal year: 2007; 
Penny: 16; 
Nickel: 21; 
Dime: 32; 
Quarter: 17; 
Half-dollar: 539; 
Dollar: 296. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

Table 11: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Minneapolis, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 23; 
Nickel: 50; 
Dime: 30; 
Quarter: 18; 
Half-dollar: 281; 
Dollar: 106. 

Fiscal year: 2006; 
Penny: 20; 
Nickel: 40; 
Dime: 43; 
Quarter: 27; 
Half-dollar: 215; 
Dollar: 174. 

Fiscal year: 2007; 
Penny: 23; 
Nickel: 41; 
Dime: 42; 
Quarter: 33; 
Half-dollar: 234; 
Dollar: 391. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

Table 12: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Kansas City, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 18; 
Nickel: 38; 
Dime: 27; 
Quarter: 21; 
Half-dollar: 288; 
Dollar: 100. 

Fiscal year: 2006; 
Penny: 23; 
Nickel: 29; 
Dime: 27; 
Quarter: 29; 
Half-dollar: 225; 
Dollar: 93. 

Fiscal year: 2007; 
Penny: 14; 
Nickel: 28; 
Dime: 30; 
Quarter: 32; 
Half-dollar: 208; 
Dollar: 237. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

Table 13: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of Dallas, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 13; 
Nickel: 32; 
Dime: 27; 
Quarter: 30; 
Half-dollar: 530; 
Dollar: 177. 

Fiscal year: 2006; 
Penny: 17; 
Nickel: 25; 
Dime: 28; 
Quarter: 25; 
Half-dollar: 392; 
Dollar: 167. 

Fiscal year: 2007; 
Penny: 13; 
Nickel: 24; 
Dime: 30; 
Quarter: 28; 
Half-dollar: 250; 
Dollar: 441. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

Table 14: Average Days of Payable Inventory, by Denomination, for the 
Reserve Bank District of San Francisco, Fiscal Years 2005-2007: 

Fiscal year: 2005; 
Penny: 32; 
Nickel: 46; 
Dime: 42; 
Quarter: 29; 
Half-dollar: 235; 
Dollar: 159. 

Fiscal year: 2006; 
Penny: 28; 
Nickel: 37; 
Dime: 42; 
Quarter: 29; 
Half-dollar: 229; 
Dollar: 164. 

Fiscal year: 2007; 
Penny: 26; 
Nickel: 35; 
Dime: 44; 
Quarter: 31; 
Half-dollar: 203; 
Dollar: 275. 

Source: GAO analysis of Federal Reserve data. 

[End of table] 

[End of section] 

Appendix V: Number of Coin Transfers and Related Costs, Fiscal Years 
2002-2007: 

CPO looks for opportunities to reduce orders for new coins to the U.S. 
Mint by transferring circulating coins from one Reserve Bank district 
to another. The U.S. Mint pays for the cost for transfers over 100 
miles. Table 15 shows the number and cost of transfers paid by the U.S. 
Mint from fiscal years 2002 through 2007. 

Table 15: U.S. Mint Coin Transfers and Cost Information, Fiscal Years 
2002-2007: 

Fiscal year: 2002; 
Number of transfers: 299; 
U.S. Mint transfer cost: $479,707. 

Fiscal year: 2003; 
Number of transfers: 496; 
U.S. Mint transfer cost: $744,823. 

Fiscal year: 2004; 
Number of transfers: 640; 
U.S. Mint transfer cost: $1,239,128. 

Fiscal year: 2005; 
Number of transfers: 677; 
U.S. Mint transfer cost: $1,350,698. 

Fiscal year: 2006; 
Number of transfers: 638; 
U.S. Mint transfer cost: $1,273,481. 

Fiscal year: 2007; 
Number of transfers: 404; 
U.S. Mint transfer cost: $914,769. 

Source: U.S. Mint data. 

[End of table] 

[End of section] 

Appendix VI: Comments from the Board of Governors of the Federal 
Reserve System: 

Board Of Governors Of The Federal Reserve System: 
Washington, D.C. 20551: 

March 18, 2008: 

Richard J. Hillman: 
Managing Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. Hillman: 

Thank you for the opportunity to comment on the GAO's draft report 
titled U.S. Coins: The Federal Reserve Banks Are Fulfilling Coin 
Demand, But Optimal Inventory Ranges Are Undefined. We agree with the 
GAO's conclusion that the Reserve Banks are fulfilling depository 
institutions' coin demand while generally reducing orders for new coin 
from the U.S. Mint and inventory levels at the Reserve Banks. We 
believe that the data presented in the report reflect the Reserve 
Banks' efficient and effective management of coin inventories. 

As the report suggests, the Reserve Banks have made material 
improvements in coin distribution in recent years. The Federal Reserve 
will continue to evaluate ways to improve the efficiency and 
effectiveness of the coin distribution process. 

We have provided some technical comments under separate cover. 

Sincerely, 

Signed by: 
Louise Roseman: 
Director Division Of Reserve Bank Operations And Payment Systems: 
Email: [email protected]: 
Phone: (202) 452-2789, Fax: (202) 452-6474: 

[End of section] 

Appendix VII GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Susan Fleming, (202) 512-2834 or [email protected]: 

Staff Acknowledgments: 

In addition to the contact named above, Jonathan Carver, Jay Cherlow, 
Maria Edelstein (Assistant Director), Elizabeth Eisenstadt, Brandon 
Haller, Heather Krause, Josh Ormond, Jena Sinkfield, Susan Michal-
Smith, and Jerry Sandau made key contributions to this report. 

[End of section] 

Footnotes: 

[1] The costs of producing other coins, such as the quarter and dollar 
coins, are below the face values of these coins. For example, in fiscal 
year 2007, the quarter cost the U.S. Mint 9.8 cents to produce and the 
dollar coin cost 15.7 cents, according to the Mint's annual report. 

[2] Proposed legislation--Coin Modernization and Taxpayer Savings Act 
of 2008, H.R. 5512, 110th Cong. (2008); Coin Modernization and Taxpayer 
Savings Act of 2007, H.R. 3956, 110th Cong. (2007); and Coinage 
Materials Modernization Act of 2007, H.R. 3330, 110th Cong. (2007)--
would give the Secretary of the Treasury the authority to change the 
weight and content of circulating coins, which could reduce the U.S. 
Mint's production costs. Currently, the weight and composition of U.S. 
coins is set forth in law. See 31 U.S.C. � 5112. 

[3] Although one of the Reserve Banks' responsibilities is to ensure 
that enough coins and currency are available to meet depository 
institutions' demand, we discuss in this report only the coin services 
provided by the Reserve Banks. 

[4] The Reserve Bank data represent data for all 30 offices that 
provide coins to depository institutions. 

[5] The Reserve Banks and their offices also perform other functions 
and services unrelated to coins, such as supervising member banks and 
bank holding companies. 

[6] As we have previously mentioned, the production costs of most coins 
are below their face values. This difference between production cost 
and face value is called "seigniorage," or the profit earned by the 
U.S. government from making coins. Seigniorage reduces the government's 
requirement to borrow money from the public to finance the government's 
debt. 

[7] The forecasting models take into account several factors, including 
historical data on coin demand and economic variables, such as the 
inflation rate as measured in the Consumer Price Index and the federal 
funds rate, which is the interest rate that banks charge each other for 
overnight loans. According to U.S. Mint officials, until recently, the 
Mint averaged the results of five national coin demand forecasting 
models--two models maintained by the Mint and three models maintained 
by the Federal Reserve--to estimate demand and plan a long-term 
production schedule. In late 2007, the U.S. Mint stopped using its 
models and now uses only the three models supported by the Federal 
Reserve. According to U.S. Mint officials, they made this change as 
part of the Mint's efforts to increase the efficiency of its 
operations. 

[8] Depository institutions can order Presidential dollar coins 
directly from their Reserve Bank for a specified period of time before 
the public release date for the coin. This advance ordering helps the 
depository institutions to have the coins on hand on the public release 
date to meet their customers' demand. 

[9] The Reserve Banks are separate legal entities that, before 2001, 
managed their own coin inventories to meet demand within their 
districts. The Board exercises general supervision over the Reserve 
Banks. 

[10] The Reserve Banks pay for transfer between offices that are less 
than 100 miles apart. 

[11] According to 31 U.S.C. � 5136, all expenses incurred by the 
Secretary of the Treasury for operations and programs of the U.S. Mint 
that are determined to be ordinary and reasonable incidents of Mint 
operations and programs are authorized to be paid out of the U.S. Mint 
Public Enterprise Fund. The statute defines "Mint operations and 
programs" as the activities concerning and assets used in the 
distribution of coinage. 

[12] The official also noted that delaying production, when the U.S. 
Mint has production capacity, may actually increase costs in the long 
run because production costs, like other costs, tend to increase over 
time. 

[13] The Presidential $1 Coin Act of 2005, � p, 31 U.S.C. � 5112(p). 

[14] In fiscal year 2007, the U.S. Mint had an average cycle time of 61 
days. The cycle time starts when the order for the raw materials is 
placed and ends when the coin order is filled. 

[15] The inventory data are represented in terms of days of payable 
inventory. A day of payable inventory is the level of inventory needed 
to meet 1 day's expected payments to depository institutions. See 
appendix I for additional information on this calculation. 

[16] Because of our methodology in calculating average days of payable 
inventory data, 1996 is the earliest year for which we can present the 
data. See appendix I for more details. 

[17] Even though the production costs of other coins are less than 
their face values, resulting in a financial gain to the government 
(called seigniorage), there are still societal costs associated with 
producing these coins, such as the metal resources used to make the 
coins. 

[18] According to the Reserve Bank officials, the IMF tool forecasts 
coin demand for an area covered by the Reserve Bank office, which could 
include several coin terminals. 

[19] The Federal Reserve has chosen in the past to manage payments 
services on a systemwide basis for reasons of efficiency and to ensure 
effective operations of Reserve Bank programs. For example, the Federal 
Reserve consolidated the management of some payment services, such as 
check clearing and direct deposits, provided by the individual Reserve 
Banks. Federal Reserve committees worked with payments industry 
officials to develop standards to facilitate increased use of 
electronic check processing and to foster technical change on the basis 
of the preference of most payment system participants. As a result of 
these efforts, the Federal Reserve was able to consolidate check 
processing operations and apply emerging technologies to the Reserve 
Banks' business processes that led to improvements in quality and a 
reduction in costs. See GAO, Federal Reserve System: Update on GAO's 
1996 Recommendations, GAO-02-774 (Washington, D.C.: Sept. 25, 2002), 
for more information. 

[End of section] 

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