Budgets: Chapter 3. Federal Reserve Banks
The 2009 operating budgets of the 12 Reserve Banks total $3,086.2 million.1 The 2009 total is $65.4 million, or 2.2 percent, above 2008 actual expenses. This growth is driven by increases in central bank functions, specifically related to growth in monetary policy and public programs, supervision and regulation, and cash operations. These increases are significantly offset by decreases in priced services due largely to the decline in paper-check volume, as a result of the electronification of check services, and the associated reductions in the check-processing infrastructure.
Budgeted net expenses for 2009, after revenue and reimbursements, are expected to increase by $246.1 million, or 14.6 percent, over 2008 actual net expenses (table 3.1). Nearly 40 percent of Reserve Bank expenses in the 2009 budget are offset by priced service revenues (22 percent) and reimbursable claims for services provided to the Treasury and other agencies (15 percent).2 Budgeted 2009 priced services revenue is lower than the 2008 actual level, primarily as a result of declining paper-check volume. Reimbursable claims are expected to increase only slightly in 2009, reflecting an ongoing effort by the Treasury and the Reserve Banks to contain costs while maintaining support for key programs and advancing new initiatives.
|Total operating expenses||3,020.8||3,086.2||65.4||2.2|
|Revenue from priced services||873.8||692.4||-181.4||-20.8|
|Claims for reimbursement1||461.1||461.7||0.6||0.1|
Note: Excludes capital outlays. Includes expenses budgeted by Federal Reserve Information Technology and Office of Employee Benefits. Expenses from these entities have been charged to the Reserve Banks, as appropriate, and included in their budgets. Components may not sum to totals and may not yield percentages shown because of rounding. Operating expenses reflect all redistributions for support and allocations of overhead.
1. Costs of fiscal agency and depository services provided to the U.S. Treasury, other government agencies, and other fiscal principals that are billed to these agencies. Return to table
Total 2009 projected employment for the Reserve Banks, FRIT, and OEB is 18,020 ANP, a decrease of 727 ANP, or 3.9 percent, from the 2008 actual staff level (table 3.2).3 The 2009 staffing decrease continues the trend of workforce reductions that began in the late 1990s; the staffing level is the lowest in the past 30 years. The 2009 budgeted staff reductions are largely due to the effect of infrastructure changes and paper-check volume declines, slightly offset by staffing increases in central bank functions.
|Federal Reserve Information Technology (FRIT)||880||889||9||1.0|
|Office of Employee Benefits (OEB)||43||45||2||4.7|
Note: Components may not sum to totals and may not yield percentages shown because of rounding. See text footnote 3 for definition of average number of personnel (ANP).
2008 Budget Performance
Total 2008 actual expenses are $3,020.8 million, which represents a decrease of $46.2 million, or 1.5 percent, from the approved 2008 budget of $3,067.0 million. Total 2008 actual staffing of 18,747 ANP represents a decrease of 508 ANP from 2008 budgeted levels of 19,255 ANP.
The expense decrease compared to budget was driven in part by the accelerated closing of check-processing sites in 2008. System check-service costs decreased $17.3 million, or 2.7 percent, because of significant cost-containment efforts and a reduction in resources commensurate with the faster-than expected decline in paper-check volumes. In 2007, the Reserve Banks planned to reduce check-processing sites from 22 to 4 by 2011 but now plan to contract to one full-service paper check-processing site by late 2009 or early 2010.
Also contributing to the underrun is a decrease in cash operation costs of $16.5 million, or 3.7 percent, under the approved 2008 budget. The underrun reflects lower personnel costs of $6.4 million, including lower staffing levels in response to volume declines and delays in equipment upgrades of $2.7 million. Timing shifts in projects account for the majority of the remainder of the underrun. Treasury services were under budget by $8.8 million, or 2.0 percent, largely as a result of the Treasury Web Application Infrastructure (TWAI) optimization program, an effort to identify efficiencies and cost savings, and delays in the Treasury's Collections and Cash Management Modernization (CCMM) initiative.4
Partially offsetting the underrun were increased expenses in the supervision and regulation area. Expenses were over budget by $1.8 million, or 0.3 percent, for enhanced automation resources.
The underrun of 508 ANP, as compared with the approved budget, reflects lower staffing in several areas. Check operations are 295 ANP under budget because of higher-than-projected volume declines. Treasury services is 62 ANP below budget, reflecting the CCMM initiative and volume reductions. Cash operations is 43 ANP under budget, primarily because of volume declines and productivity gains. The facilities management function is 32 ANP under budget because of outsourced housekeeping in one district and reduced building and housekeeping needs in some of the Branch operations. Efficiencies and hiring delays in several areas account for the remaining staff reductions.
Initiatives Affecting the 2009 BudgetFor 2009, the Reserve Banks' budgets reflect funding for several initiatives that will address financial stability and deteriorating banking conditions as well as enhance resiliency. The 2009 budget also supports the Reserve Banks' efforts to modernize and increase efficiencies in both the cash and check areas.
Central Bank ServicesIn the central bank area, which includes monetary policy, public programs, supervision and regulation, and cash operations, expenses are increasing $194.6 million, or 10.9 percent, in 2009. The staffing level is increasing 208 ANP, in part because of the full-year effect of staff additions in 2008 and personnel needed to support resiliency efforts. Total costs for monetary policy and public programs are increasing $54.1 million, or 10.4 percent, driven primarily by salary-related costs and resiliency enhancements in central bank functions and other aspects of open market operations.
The budget for the supervision and regulation function is increasing $72.0 million, or 11.2 percent, over actual 2008 expenses, primarily for additional resources to address financial stability issues and increased supervision needs. The staffing level is increasing by 111 ANP.
Expenses in cash operations are increasing $48.5 million, or 11.3 percent. The Currency and Coin Handling Environment (CACHE) project and increased support charges, primarily for building and protection services, are driving the increase.5 These expenses are slightly offset by staffing reductions resulting from lower-than-expected volumes.
Treasury-Related FunctionsThe budget for services to the Treasury, which are fully reimbursed, are increasing $2.3 million, or 0.5 percent. The CCMM initiative, which transitioned several Treasury business lines to private-sector financial agents at the end of 2008, and continued volume declines in Treasury retail securities, government checks, and postal money orders will reduce costs and the staffing level, which will decline by 44 ANP. These reductions are largely offset by increased charges from FRIT and the TWAI. Expenses related to the TWAI are increasing as the number of applications hosted in the infrastructure expands in connection with the CCMM initiative.
Priced ServicesTotal check expenses are decreasing $145.1 million, or 23.6 percent, because of check-restructuring costs recognized in 2008, the accelerated restructuring changes planned for 2009, and continued paper-check volume declines. In response to the continuing decline in paper-check volumes, the Reserve Banks recently decided that, likely by late 2009 or early 2010, the Federal Reserve Bank of Cleveland will serve as the System's single paper-check processing and adjustments site and that the Federal Reserve Bank of Atlanta will serve as the System's single electronic-check processing site. The check staffing level is decreasing 1,039 ANP as a result of these actions. Despite these cost reduction efforts, the Reserve Banks have budgeted a recovery rate of 92.3 percent in 2009. The Reserve Banks will be reviewing additional steps needed to meet long-term cost-recovery objectives. The other priced services provided by the Federal Reserve--including operating an automated clearinghouse (ACH) service, transferring funds and securities, and providing a multilateral settlement service--did not result in any major expense or staffing initiatives in the 2009 budget.
Support ServicesSupport costs are increasing $51.6 million, or 5.8 percent. The expense increases are driven primarily by increases for information technology ($30.5 million) and law enforcement ($7.1 million), mainly in salary-related costs. The staffing level is increasing 106 ANP to support application development and server and data center operations.
Five-Year Trend in Reserve Bank Expenses
Total expenses for the Reserve Banks have grown an average of 4.2 percent annually over the past five years.
Central Bank ServicesCentral bank services have grown an average of 8.0 percent annually over the past five years. The increase is primarily in the monetary policy and public programs areas, where expenses have grown on average 9.6 percent annually; the Banks have increased resources dedicated to community outreach, financial literacy, and regional economic research efforts. Expenses in the supervision and regulation function have grown an average of 8.1 percent annually over the past five years, reflecting the need for additional resources to recruit and retain staff with specialized skills, to implement the Basel II capital accord, and, more recently, to address financial market turmoil and deteriorating banking and economic conditions. There have been ongoing efficiency improvements in the cash area over the past five years. Overall, however, expenses in cash operations have increased an average of 5.0 percent annually, reflecting increased costs to modernize the cash-processing and inventory-tracking infrastructure and higher support costs, particularly protection costs.
Treasury ServicesTreasury services expenses have grown on average 4.8 percent annually since 2004. Recent efforts by the Treasury to limit expense growth and delays in some projects have resulted in modest 2009 budgeted growth from 2008 actual expenses. The growth from 2004 to 2007 was driven primarily by the expansion of the TWAI to host a growing number of Treasury applications.
Priced ServicesPriced services expenses have been declining an average of 4.2 percent annually, driven by the check service. Efforts to reduce the size of the System's check operations, consistent with declining volumes, have resulted in an average annual decline of 7.2 percent in check-service costs since 2004. The downward trend in check expenses reflects staff reductions of 2,873 ANP since 2004.
2009 Personnel Expenses
Budgeted officer and employee salaries and other personnel expenses for 2009 total $1,613.0 million, representing an increase of $59.3 million, or 3.8 percent, compared with 2008 actual expenses. The increase represents the combined effect of the budgeted salary administration program, including the staff reductions mentioned previously, partially offset by reductions in staff related to restructuring and consolidation. Funding for officer and employee salary administration programs reflects an increase of $72.1 million. The increase is due largely to base-salary programs; merit pools for officers and employees total $52.7 million, and promotions and market-based salary adjustments total $19.4 million. The merit budget reflects weighted-average increases of 4.2 percent and 4.0 percent in base salaries for officers and employees, respectively. Variable pay programs are increasing $18 million in 2009. The increase primarily is attributed to an increase in variable pay pools, which average 12.3 percent for officers, 5.2 percent for exempt staff, and 1.6 percent for non-exempt staff.
The 2009 employee turnover projection of 13.3 percent reflects continued System downsizing, particularly in the check area. Excluding positions that will not be replaced (36 percent of the total), employee turnover is 8.6 percent. The Reserve Banks project 6.1 percent officer turnover in 2009, 5.3 percent after excluding positions that will not be replaced.
Risks in the 2009 Budget
There are several risks in the 2009 budget. The ongoing challenges in the financial industry and the broader economy present a considerable amount of risk. Additional staff will be needed to meet the supervision and regulation challenges presented by the current declining banking and economic conditions as well as to support the emergency liquidity facilities. In addition, there is uncertainty about the resource needs resulting from any further market events or new legislation that might affect the Federal Reserve's responsibilities.
Cash and Treasury project changes and delays could increase budgeted expenses. The ongoing CACHE development effort poses risks to the 2009 budget, as project details continue to be refined and as business resources to support the implementation are fully assessed. Unforeseen requests from the Treasury or changes in project scope and direction could add costs and require additional resources in 2009. In connection with the CCMM initiative, the Treasury continues to refine its future vision for collections, payments, and cash-management systems, along with the timing of different components of the project. These efforts create a risk because of the potential changes in project timing and scope. In addition to the expense risks mentioned above, unforseen delays or changes in the development of the new Check 21 platform could pose a risk to the 2009 capital budget.
2009 Capital Plan
The 2009 capital budget submitted by the Reserve Banks and FRIT totals $519.4 million, a $199.0 million, or 62.1 percent, increase from the 2008 actual level. More than 70 percent of the increase is related to information technology and cash-services initiatives; the 2009 budget reflects the CACHE project and initiatives by the Federal Reserve Bank of New York to enhance resiliency.6 The 2009 budget also includes outlays for multi-year efforts to migrate applications off the mainframe, including FedACH, Fedwire, and the internal accounting system.
As in previous years, the 2009 capital budget includes funding for projects that support the strategic direction outlined by the individual Reserve Banks and the System. These strategies focus on investments that improve operational efficiencies, enhance services to Bank customers, and ensure a safe and quality work environment. In support of these strategies, the 2009 budget identifies seven categories of capital outlays: building projects and facility improvements, payment system improvements, cash-services initiatives, Treasury initiatives, information technology initiatives, security enhancements, and miscellaneous acquisitions.
The proposed capital budget includes $179.2 million for building-related projects and facility improvements. Of the total building capital, $64.8 million is related to major projects begun in previous years in Boston, New York, Philadelphia, Richmond, and St. Louis. The remaining outlays in this category will fund various building renovation and refurbishment projects, as well as miscellaneous facility improvement projects.
Initiatives related to cash, payment systems, and Treasury initiatives represent $182.4 million in the capital budget. Of this total, $72.6 million represents cash-services initiatives, including the CACHE development effort ($39.5 million) and the Systemwide upgrade of cash-processing machines ($21.0 million). The total capital budget for payment systems initiatives is $65.1 million and primarily is related to the check-distribution computing platform project. The budget also includes $44.7 million for reimbursable Treasury initiatives, including support of the Treasury Debt Management System, CCMM-related efforts, and various other initiatives.
The Reserve Banks and FRIT included $105.8 million in funding for major information technology initiatives. These initiatives do not include the automation components of building or payment systems initiatives discussed separately. Of the total automation-related outlays, FRIT projects and acquisitions account for $25.6 million and New York Reserve Bank projects, including resiliency, account for $54.5 million. In addition, the budget includes $5.8 million in funding for local server equipment at the Reserve Banks.
The proposed capital budget includes $48.7 million for security enhancements and $3.3 million for equipment and software not falling into the de.ned categories above.Footnotes
- These expenses include those budgeted by the Federal Reserve Information Technology (FRIT) and the Office of Employee Benefits (OEB) that are chargeable to the Reserve Banks. Return to text
- Reimbursable claims include costs of fiscal agency and depository services provided to the U.S. Treasury, other government agencies, and other fiscal principals that are billed to and reimbursed by these agencies. Return to text
- ANP is the average number of employees in terms of full-time positions for the period. For instance, a full-time employee who works one-half of the year counts as 0.5 ANP for that calendar year; two half-time employees who work the full year count as 1 ANP. Return to text
- CCMM is a comprehensive multi-year enterprise architecture initiative to streamline, modernize, and improve the services, systems, and processes supporting the Treasury's collections and cash-management programs. The goal is to improve efficiency and reduce costs to the Treasury, which provides a savings to the taxpayers. Return to text
- The CACHE project was formerly named the Future Cash Automation Project (FCAP). The aim of CACHE is to develop and deploy a new cash software application and technical architecture in the Federal Reserve Banks to streamline operations, improve controls, provide more robust data-management tools, and present a more standardized face to the customer. Return to text
- The New York resiliency project, a multi-year project with total capital outlays of $56.3 million, accounts for $43.4 million of the 2009 capital budget. Return to text