FRB: 2004 New Currency Budget

2004 New Currency Budget

Action Requested
Staff requests that the Board approve the proposed 2004 new currency budget of $518.4 million, which represents a $21.5 million increase over the 2003 estimate. This increase reflects a larger currency order in 2004 as well as a shift in some note production from late in calendar year 2003 to calendar year 2004, offset partially by lower billing rates for all denominations in calendar year 2004.

Discussion
Under the Board's delegated authority, the director of the Division of Reserve Bank Operations and Payment Systems submits an annual print order for new currency to the director of the Bureau of Engraving and Printing (BEP). The BEP reviews the print order and establishes billing rates for new currency that we use to prepare the annual new currency budget. The Board reviews and approves the budget and subsequently assesses the Federal Reserve Banks through an accounting procedure similar to the one used in assessing the Banks for the Board's operating expenses.

In August 2003, the director forwarded to the BEP a print order for 8.7 billion notes for fiscal year 2004. Because the BEP operates on a fiscal year, which began October 1, 2003, and ends September 30, 2004, staff estimates the Board's calendar year budget for new currency by eliminating the cost of notes that the BEP will produce in the first quarter of its fiscal year and estimating the cost of notes that the BEP will produce in the fourth quarter of the calendar year.
Table 1 compares the Board's calendar year 2004 budget with the 2003 budget and 2003 estimated expenditures.

Table 1
New Currency Budget
(calendar year)

	2003 budget (thousands)	2003 estimate (thousands)	2004 budget (thousands)	Percent Change 2003E/2003B	Percent Change 2004B/2003E
	2003 budget (thousands)	2003 estimate (thousands)	2004 budget (thousands)	Percent Change 2003E/2003B
Print order (number of notes)	8,217,600	8,092,400	9,071,575	-1.5%	12.1%
Printing costs for FR notes	$490,891	$477,002	$498,604	-2.8%	4.5%
Currency transportation costs	$13,740	$14,075	$13,126	2.4%	-6.7%
Shipping FR Notes from BEP (new)	$8,420	$11,975	$10,800	42.2%	-9.8%
Intra-System shipments (fit)	$5,300	$2,076	$2,300	-60.8%	10.8%
Shipping pallets back to BEP	$20	$24	$26	20.0%	8.3%
Counterfeit-deterrence research	$2,862	$2,495	$3,100	-12.8%	24.2%
Treasury's Office of Currency Standards	$2,790	$3,329	$3,539	19.3%	6.3%
Total	$510,283	$496,901	$518,369	-2.6%	4.3%

2003 New Currency Expenses
Staff estimates that 2003 new currency expenses will be under budget by $13.4 million, or 2.6 percent. The underrun is due primarily to a shift in note production to calendar year 2004, which we estimate will in calendar year 2003 reduce note production by 125.2 million notes, or 1.5 percent, and printing costs by $13.9 million, or 2.8 percent.

Staff and BEP management work collaboratively during the year to monitor inventories and production needs and make modifications to the print order to meet Reserve Bank requirements. While the BEP produced the 8.2 billion notes that the Federal Reserve ordered in fiscal year 2003, our requirements for the calendar year changed, particularly for $1 and $100 denominations. As we re-prioritized our requirements, we worked with the BEP to shift the production schedule for some $1 and $100 notes to calendar year 2004 from the last quarter of calendar year 2003. While both periods fall within the BEP's fiscal year (2004), they are spread over two calendar years, with a production decline in calendar year 2003 and an increase in calendar year 2004.

Estimated expenses for total currency transportation costs exceed the 2003 budget by $335 thousand, or 2.4 percent. Because of a larger-than-expected number of shipments for the Series-2004 $20 notes, we underestimated the cost of shipping new notes from the BEP to Reserve Banks; however, we overestimated the cost of shipping fit currency among the Reserve Banks by nearly the same amount. The reduction in shipments of fit currency among the Reserve Bank offices reflects our commitment to managing the currency desk operations more closely and eliminating unnecessary shipments. Because of this increased focus on currency desk operations, 2003 shipments of fit currency have declined 61 percent from 2002.

2004 New Currency Budget
The proposed 2004 new currency budget is $518.4 million, 4.3 percent greater than 2003 estimated expenses. The additional expenditure is due primarily to a larger calendar-year order, which includes 125.2 million notes that we shifted from calendar year 2003 production to 2004 because of changing demand. Total budgeted note production in calendar year 2004 exceeds estimated 2003 production by 979.2 million notes, or 12.1 percent.

Printing Federal Reserve Notes. The 2004 budget includes a print order of 9.1 billion notes for calendar year 2004. The BEP announced that its 2004 billing rates for all currency types will decrease from 2003 rates (see table 2). The weighted average cost per thousand notes will decrease from $58.25 in 2003 to $54.90 in 2004, or 5.8 percent. The decrease in the billing rates is due primarily to increased productivity, reduced spoilage, and lower material costs.

The BEP has continued to emphasize higher performance and productivity standards, which has resulted in more notes produced per man-hour. In addition, because of uncertainty related to production of Series-2004 $20 notes, in determining the 2003 billing rates the BEP budgeted spoilage at 17 percent; however, it was able to lower spoilage to historical levels sooner than anticipated, which has resulted in a reduction in production costs and a lower billing rate for 2004.¹ Material costs decreased as a result of (1) improvements in a manufacturing process that reduced ink usage and (2) reductions in the cost of Series-1996 and Series-2004 currency paper. The increased amount of currency paper required to accommodate the higher print order allows the BEP to receive a volume-based discount from Crane and Company, the paper manufacturer.

Table 2 summarizes the billing rates by currency type, which are based on the sophistication of security features. The 2004 billing rates reflect four types of currency produced: (1) the $1 and $2 notes, which have not changed in design; (2) the $5 note, which reflects the Series-1996 design but does not include color-shifting ink; (3) the $10 and $100 notes, which reflect the Series-1996 design and include color-shifting ink; and (4) the Series-2004 $20 and $50 notes, which include a new color-shifting ink and additional high-level security features.

The BEP's 2004 billing rate for $1 and $2 notes decreased 1.7 percent from 2003, the billing rate for the Series-1996 design of $5 notes decreased 8.6 percent, and the billing rate for the Series-1996 design of $10 and $100 notes decreased 6.5 percent. The billing rate for the Series-2004 $20 and $50 notes decreased 22.9 percent, from $98.50 per thousand notes to $75.90 per thousand notes. This decrease reflects the non-recurring 2003 expenses related to issuing the Series-2004 $20 note, such as public education expenses and start-up costs (for example, increased spoilage and decreased productivity) for the first note in the new series.

Table 2
BEP Billing Rates

Currency type	2003 billing rates per thousand notes	2004 billing rates per thousand notes	Projected number of notes 2004 (millions)	2004 printing cost (thousands)
$1, $2 notes	$39.98	$39.30	4,408.5	$173,255
Series 1996 ($5)	$57.00	$52.10	673.1	$35,069
Series 1996 ($10, $20, $50, $100)^a	$68.75	$64.30	1,082.5	$69,605
Series 2004 ($20, $50)^b	$98.50	$75.90	2,907.5	$220,676
Total			9,071.6	$498,604

^a No Series-1996 $20 and $50 notes will be produced in calendar year 2004. Return to table.
^b No Series-2004 $50 notes were produced in 2003. Return to table.

Table 3 illustrates the number of notes by denomination that the BEP will print in calendar year 2004 compared with the number of notes printed in 2003. The $498.6 million printing cost budgeted for the 9.1 billion new notes accounts for 96.2 percent of the total 2004 new currency budget.² Nearly three-quarters of the calendar year 2004 note increase is attributed to $1 and $20 notes. Decline in inventories resulting from greater-than-expected demand for $1 notes resulted in lower ending inventories in 2003. Lower inventory balances in one period results in higher orders in the following period, which is reflected in the calendar year 2004 order for $1 notes. In addition, we deliberately reduced the print order for the older-design $20 note in preparation for issuing the new design. The calendar year 2004 order will restore the inventories of $20 notes to normal levels. The remaining factors that contribute to the 2004 budget include currency transportation, counterfeit-deterrence research, and Treasury's Office of Currency Standards (OCS), which represent the remaining 4 percent. A description of each follows.

Table 3
Number of Notes Printed
(millions per calendar year)

Denomination	2003 Estimated	2004 Budget	Percent change 2003E/2004B
$1	3,878.4	4,408.5	13.7%
$2	121.6	0.0	-100.0%
$5	499.2	673.1	34.8%
$10	320.0	432.3	35.1%
$20	2,585.6	2,779.7	7.5%
$50	127.6	127.7	-0.1%
$100	560.0	650.3	16.1%
Total	8,092.4	9,071.6	12.1%

Currency Transportation. The 2004 currency transportation budget is $13.1 million, which includes the cost of shipping new currency from the BEP to Reserve Banks, shipping fit currency among Reserve Banks (intra-System shipments), and returning currency pallets to the BEP. The 2004 budget for new currency shipments is $10.8 million, which is 9.8 percent lower than 2003 estimated expenses because the number of shipments that will be required for the issuance of the Series-2004 $50 note will be less than the number required for the Series-2004 $20 note. The 2004 budget for intra-System shipments is $2.3 million, which, because of higher anticipated transportation costs, is 10.8 percent higher than 2003 estimated expenses. These shipments move currency from offices with excess fit currency to offices that would otherwise require new currency from the BEP. Finally, the 2004 budget for returning currency pallets from Reserve Banks to the BEP is $26.0 thousand, which is 8.3 percent higher than 2003 estimated expenses, primarily because of the increased print order. Board staff is also developing a currency transportation model designed to more efficiently move unprocessed currency to offices with excess processing capacity.

Counterfeit-Deterrence Research. The 2004 budget includes $3.1 million for the counterfeit-deterrence program. The Central Bank Counterfeit Deterrence Group operates under the auspices of the G-10 central bank governors to combat digital counterfeiting.

Treasury�s Office of Currency Standards (OCS). The 2004 budget for reimbursement to the Treasury for OCS expenses is $3.5 million, which is 6.3 percent higher than the 2003 estimated expenses. The OCS develops Reserve Bank standards for cancellation and destruction of unfit currency and note accountability, and it reviews Reserve Bank operations for compliance with the standards. As a public service, the OCS processes claims for the redemption of damaged or mutilated currency; reimbursement for these expenses is included in the 2004 budget. The OCS will also add a mutilated-currency operation at the BEP's Fort Worth, Texas, facility in 2004.

Data for Chart 1

YEAR	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003E	2004B
Nominal Cost in Millions of dollars	190	260	295	355	368	373	403	367	408	487	456	344	430	497	518
Real Cost (CPI Adjusted) in Millions of dollars	190	249	275	321	324	320	336	299	327	382	346	234	312	353	364

Chart 2 Value of Notes Printed Compared with Number of Notes Printed

Data for Chart 2

YEAR	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003E	2004B
Billions of notes	7.00	8.02	8.45	8.03	9.33	9.96	9.44	9.58	9.20	10.8	8.97	8.18	7.39	8.09	9.07
Billions of dollars	84.47	107.96	103.19	104.89	128.82	148.24	194.64	142.23	163.26	285.49	67.46	50.20	123.30	123.90	139.10

Chart 3 Cost of Currency Compared with Number of Notes Printed Bar and Line Chart

Data for Chart 3

YEAR	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003E	2004B
Billions of notes	7.00	8.02	8.45	8.03	9.33	9.96	9.44	9.58	9.20	10.8	8.97	8.18	7.39	8.09	9.07
Cost per 1000 notes	$26	$30	$36	$41	$38	$37	$40	$43	$47	$43	$47	$49	$50	$58	$55

The BEP added a new production process to include color in the redesigned series of notes. The production process required new equipment and the hiring and training of employees, which temporarily increased the amount of spoilage. In September 2003, the BEP reimbursed the Federal Reserve $6.25 million as a result of reduced spoilage and lowered the 2003 billing rate for Series-2004 $20 notes effective the last quarter of calendar year. Return to text.

Charts 1-3 in the attachment show the new currency expenses, the value and number of notes printed, and the number and cost of notes printed from 1990 through the 2004 budget period. Return to text.