U.S. Currency: Coin Inventory Management Needs Better Performance Information
What GAO Found
In 2009, the Federal Reserve centralized coin management across the 12 Reserve Banks, established national inventory targets to track and measure the coin inventory, and in 2011 established a contract with armored carriers that store Reserve Bank coins in their facilities. However, according to Federal Reserve data, from 2008 to 2012, total annual Reserve Bank coin management costs increased by 69 percent and at individual Reserve Banks increased at rates ranging from 36 percent to 116 percent. The Federal Reserve's current strategic plan calls for using financial resources efficiently and effectively and monitoring costs to improve cost-effectiveness. However, the agency does not monitor coin management costs by each Reserve Bank--instead focusing on combined national coin and note costs--thus missing potential opportunities to improve the cost-effectiveness of coin-related operations across Reserve Banks.
In managing the circulating coin inventory, the Federal Reserve followed two of five key practices GAO identified and partially followed three. For example, the Federal Reserve follows the key practice of collaboration because it has established multiple mechanisms for sharing information related to coin inventory management with partner entities. The Federal Reserve has developed some performance metrics in the form of upper and lower national coin inventory targets. However, it has not developed other goals or metrics related to coin supply-chain management. One key practice is for agencies to identify goals, establish performance metrics, and measure progress toward those goals. Establishing goals and metrics, such as those related to coin management costs, could aid the Federal Reserve in using information and resources to identify additional efficiencies.
To collect information on potential changes in the demand for currency (coins and notes), the Federal Reserve has conducted studies and outreach, including developing a long-term strategic framework beginning in 2010 to consider changes in demand and implications for operations. While the magnitude of potential changes in the demand for currency is inherently uncertain, the Federal Reserve anticipates a gradual decline in currency use, and officials reported such changes could likely be accommodated by the current system. While Federal Reserve studies and data indicate electronic payments have increased over time, currency usage has remained strong. For example, from 2009 to 2012, the value of currency in circulation rose about 26 percent.
Starting in 2007, the Federal Reserve took actions to overcome barriers to circulation of the $1 coin, such as holding regular meetings with depository institution representatives to gather feedback about demand for $1 coins. The Federal Reserve manages the $1 coin inventory as it does for all other coin denominations--overseeing distribution and ensuring sufficient supply is available to meet demand nationwide. Reserve Banks currently hold approximately $1.4 billion in $1 coins, an amount that, according to the Federal Reserve, is sufficient to meet demand for more than 40 years. Reserve Bank officials, depository institution representatives, and coin terminal operators stated that $1 coins are readily available to the public throughout the country, but there is very low public demand for these coins.
Why GAO Did This Study
Efficiently managing the circulating coin inventory helps ensure that enough coins are available to meet public demand while avoiding unnecessary production and storage costs. The Federal Reserve fulfills the coin demand of the nation's depository institutions (e.g., commercial banks and credit unions) by managing Reserve Bank inventory and ordering new coins from the U.S. Mint. GAO was asked to review this approach. This report examines (1) how the Federal Reserve manages the circulating coin inventory and the related costs, (2) the extent to which the Federal Reserve follows key practices in managing the circulating coin inventory, (3) actions taken to respond to potential changes in demand for coins and notes, and (4) actions taken with regard to the circulation of the $1 coin. GAO interviewed federal and foreign officials, experts, and industry representatives; reviewed documents and data on coin inventories; and compared the Federal Reserve's coin inventory management practices to key practices in supply chain management.
Recommendations
Among other things, the Federal Reserve should (1) develop a process to assess factors influencing coin operations costs and identify practices that could lead to cost-savings and (2) establish additional performance goals and metrics relevant to coin inventory management. The Federal Reserve generally agreed with the report's recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Board of Governors | To ensure efficient management of the circulating coin inventory, the Board of Governors should direct Cash Product Office (CPO) to develop a process to assess the factors that have influenced increasing coin operations costs and differences in costs across Reserve Banks and a process to use this information to identify practices that could lead to cost-savings. |
Efficiently managing the circulating coin inventory helps ensure that enough coins are available to meet public demand while avoiding unnecessary production and storage costs. The Federal Reserve fulfills the coin demand of the nation's depository institutions (e.g., commercial banks and credit unions) by managing inventory at the 12 Reserve Banks and ordering new coins from the U.S. Mint. In 2009, the Reserve Banks implemented a new, centralized approach to the management of the circulating coin inventory. In 2013, GAO reported that Reserve Bank costs related to coin management in 2012 were about $62 million, or 14 percent of the estimated $449 million that coins indirectly cost the U.S. government. These costs included the Cash Product Office's (CPO) administration, coin handling, and interbank coin transfer costs. The remaining 86 percent of U.S. government costs included about $387 for the U.S. Mint's production and distribution of new coins. However, according to Federal Reserve data, from 2008 to 2012, total annual Reserve Bank coin management costs increased by 69 percent and at individual Reserve Banks increased at rates ranging from 36 percent to 116 percent. The Federal Reserve's 2012-15 strategic plan calls for using financial resources efficiently and effectively and monitoring costs to improve cost-effectiveness. However the agency does not monitor coin management costs by each Reserve Bank and instead focuses on combined national coin and note costs, thus missing potential opportunities to improve the cost-effectiveness of coin-related operations across Reserve Banks. In addition, if CPO used its information on Reserve Bank coin management costs and its knowledge of coin management operations across the 12 Reserve Banks, it could help to identify factors that have contributed to varying coin-management costs at individual Reserve Banks and opportunities for cost savings that could limit rising costs. Therefore, GAO recommended that the Federal Reserve develop a process to assess the factors that have influenced increased coin operations costs and differences in costs across Reserve Banks and a process to use this information to identify practices that could lead to cost-savings. In 2018, GAO confirmed that CPO developed metrics that the Federal Reserve is using to measure coin metric performance. The Federal Reserve is using these metrics, such as direct unit cost and coin bags handled per work hour, as part of a process at the District level to identify and share cost-effective coin management practices across Reserve Banks. Taken together, these efforts meet the intent of GAO's recommendation and should help the Federal Reserve better ensure the efficient management of the circulating coin inventory.
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| Board of Governors | To ensure efficient management of the circulating coin inventory, the Board of Governors should direct CPO to establish, document, and annually report to the Board performance goals and metrics for managing the circulating coin inventory, (e.g., Reserve Bank coin management costs) and measure performance towards those goals and metrics. |
Efficiently managing the circulating coin inventory helps ensure that enough coins are available to meet public demand while avoiding unnecessary production and storage costs. The Federal Reserve fulfills the coin demand of the nation's depository institutions (e.g., commercial banks and credit unions) by managing inventory at the 12 Reserve Banks and ordering new coins from the U.S. Mint. In 2009, the Reserve Banks implemented a new, centralized approach to the management of the circulating coin inventory. The Federal Reserve's Cash Product Office (CPO) manages the Reserve Banks' national coin inventory. In 2013, GAO reported that, in managing the circulating coin inventory, the Federal Reserve followed two of the five key practices GAO identified and partially followed three. For example, the Federal Reserve has developed some performance metrics such as upper and lower inventory targets. However, the Federal Reserve has not developed other goals or metrics related to coin supply-chain management because CPO's primary goal is to ensure a sufficient supply of all coin denominations to meet public demand. Federal agencies have been required to develop performance goals and measure and report on their progress in achieving these goals since the Government Performance and Results Act (GPRA) was enacted in 1993. Although the Federal Reserve is not covered by GPRA, it has chosen to voluntarily comply with the spirit of the Act. Establishing goals and metrics related to coin management costs could aid the Federal Reserve in using information and resources to identify additional efficiencies. Therefore, GAO recommended that the Federal Reserve establish and document performance goals and metrics for managing the inventory of circulating coins. In 2018, GAO confirmed that the Federal Reserve had established and documented performance goals and metrics related to its coin management activities. Additionally, these metrics-which include direct unit costs and coin bags handled per work hour-are shared quarterly on CPO's website, tracked for its annual budget process and used during quarterly management discussions. As a result, the Federal Reserve is in a better position to ensure efficient management of the circulating coin inventory.
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| Board of Governors | To ensure efficient management of the circulating coin inventory, the Board of Governors should direct CPO to establish and implement a process to assess the accuracy of forecasts for new coin orders and revise the forecasts as needed. |
Efficiently managing the circulating coin inventory helps ensure that enough coins are available to meet public demand while avoiding unnecessary production and storage costs. The Federal Reserve fulfills the coin demand of the nation's depository institutions (e.g., commercial banks and credit unions) by managing inventory at the 12 Reserve Banks and ordering new coins from the U.S. Mint. In 2009, the Reserve Banks implemented a new, centralized approach to the management of the circulating coin inventory. The Federal Reserve's Cash Product Office (CPO) manages the Reserve Banks' national coin inventory and has national upper and lower inventory targets for pennies, nickels, dimes, and quarters. The upper national inventory target serves as a signal for the CPO to reduce future coin orders from the U.S. Mint, and the lower national inventory target serves as a signal to CPO to increase future coin orders to avoid shortages. CPO orders new coins each month from the U.S. Mint based on its 2-month rolling forecast of expected demand. In 2013, GAO reported that the Federal Reserve followed the key practices for collaboration and risk management, and partially followed some key practices in managing the circulating coin inventory. Specifically, GAO found that the Federal Reserve partially follows the key practice of forecasting demand because it forecasts future coin demand and uses this information to make decisions, but does not systematically track the accuracy of its monthly forecasts compared to the final coin orders. CPO had a process in place to forecast demand by tracking current inventory, payments, and receipts and using this information to calculate expected future demand. These forecasts were then used to plan and manage the circulating coin inventory, including decisions on coin transfers and new orders. CPO officials told GAO they review their annual forecasts, and had found their forecasts to be within 10 percent of actual orders for pennies, nickels, dimes, and quarters. However, CPO had taken minimal steps to assess monthly forecast accuracy. CPO officials told GAO that they compared their initial coin orders to net pay, but did not track the accuracy of their monthly forecasts because seasonal shifts in coin demand made reviewing annual trends more useful for their purposes. GAO's analysis of initial monthly CPO coin orders and actual U.S. Mint coin shipments from 2009 through 2012 indicated that initial orders were consistently less than the final orders. APICS-an operations management industry association that offers professional certifications-recommends that forecasting results must be continuously monitored and a mechanism should be in place to revise forecasting models as needed and that if the forecast consistently exhibits a bias, the forecast should be adjusted to match the actual demand. According to the Logistics Management Institute, accurate forecasts result in effective and efficient inventories, whereas inaccurate forecasts often cause inventory excesses and shortfalls. Taking steps to assess monthly forecasts to improve accuracy can lead to overall improvements in the supply chain and could ultimately help identify cost savings for Reserve Banks or improve the efficiency of U.S. Mint coin production, which may in turn result in more money returned to the General Fund, contributing to U.S. taxpayer savings. Therefore, GAO recommended that the Federal Reserve establish and implement a process to assess the accuracy of forecasts for new coin orders and revise the forecasts as needed. In 2018, GAO confirmed that the Federal Reserve's CPO performs monthly and quarterly reviews of the accuracy of coin forecasts, as well as periodic reviews of the coin forecasting software. Based on these reviews, CPO has revised their forecasting software to improve the accuracy of forecasts. As a result, the Federal Reserve is in a better position to ensure efficient management of the circulating coin inventory.
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