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2008 New Currency Budget

Action Requested
Staff requests that the Board approve the proposed 2008 new currency budget. The proposed 2008 budget of $602.4 million is a $24.2 million, or 4.2 percent, increase over 2007 estimated expenses. The year-over-year budget changes reflect increases in the Bureau of Engraving and Printing (BEP) billing rates and in the number of new-design notes printed. The primary drivers of these changes are discussed below.

Under the Board's delegated authority, the director of the Division of Reserve Bank Operations and Payment Systems (RBOPS) submits an annual print order for new currency to the director of the BEP. The BEP reviews the print order and establishes billing rates for new currency that Board staff uses 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 Reserve Banks for the Board's operating expenses.

In July 2007, the director of RBOPS forwarded to the BEP a print order for 8.4 billion notes for fiscal year 2008. Because the BEP operates on a fiscal year, which began October 1, 2007, and ends September 30, 2008, 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 2008 budget with the 2007 budget and 2007 estimate.

Table 1
New Currency Budget
(calendar year)
  2007 Budget (thousands) 2007 Estimate (thousands) 2008 Budget (thousands) Percent Change 2007E/2007B Percent Change 2008B/2007E

Print order (number of notes)






Printing costs for FR notes $574,284 $557,064 $578,461 -3.0 3.8
Currency transportation costs $16,333 $13,679 $15,910 -16.2 16.3
Shipping FR Notes from BEP (new) $11,248 $8,744 $10,774 -22.3 23.2
Intra-System shipments (fit and unprocessed) $5,043 $4,891 $5,090 -3.0 4.1
Shipping pallets back to BEP $42 $44 $46 4.8 4.5
Counterfeit-deterrence research $3,405 $3,390 $3,730 -0.4 10.0
Central Bank Counterfeit Deterrence Group $3,370 $3,363 $3,695 -0.2 9.9
Reprographic Research Center $35 $28 $35 -20.6 25.9
Treasury's Office of Compliance $3,750 $4,032 $4,271 7.5 5.9
Total Expenses $597,772 $578,166 $602,372 -3.3 4.2

2007 New Currency Expenses
As explained below, staff estimates that total new currency expenses for 2007 will be under budget by $19.6 million, or 3.3 percent, primarily because the Reserve Banks processed currency more productively, resulting in lower-than-expected printing and transportation costs.

2007 Printing Costs
The estimated calendar year 2007 currency printing cost is $17.2 million, or 3.0 percent, lower than the budgeted amount because of the effect of a System initiative to improve processing productivity for low-denomination notes and lower-than-expected demand for $100 notes in 2007. This difference in cost results from a reduction of 380 million notes from the calendar year budget. Of these, 75 percent were $1 and $5 notes and the remaining 25 percent were $100 notes. The reduction in low-denomination notes resulted from the Reserve Banks generating more fit notes by matching unprocessed backlogs of $1 and $5 notes with excess processing capacity in certain offices. The Reserve Banks successfully reduced backlogs by more than 50 percent, which generated significant additional fit notes to meet customer demand and reduced the need for more-expensive new notes. In addition, lower-than-expected international demand reduced the need for $100 notes. Specifically, Reserve Bank payments of $100 notes increased by 3.3 percent in 2006, but the 2007 new currency budget assumed a growth rate of 9.4 percent based on a four-year average. We currently estimate a growth rate of 4.9 percent for 2007.

2007 Transportation Costs
Estimated transportation costs are 16.2 percent lower than the 2007 budget primarily because staff scheduled about 300 fewer new currency shipments than planned. The Reserve Banks satisfied more of their customer demand for currency, particularly the lower denominations, with the fit notes they generated from processing the inventory backlogs, instead of with new notes from the BEP.

2008 New Currency Budget
The proposed $602.4 million 2008 new currency budget is 4.2 percent higher than the 2007 estimate. Printing costs for Federal Reserve notes represent 96 percent of the new currency budget, and expenses for currency transportation, counterfeit-deterrence research, and Treasury's Office of Compliance (OC) account for the remaining four percent.

2008 Printing Costs
The 2008 calendar-year currency order will cost $578.5 million to print, a 3.8 percent increase over the estimated cost for the 2007 order.1 The 2008 printing costs reflect the aggregate volume of notes in the print order, increases in BEP billing rates, and the increased proportion of more-expensive new-design notes.

Table 2
BEP Billing Rates
Note typea 2007 billing rates per thousand notes 2008 billing rates per thousand notes Projected number of notes for 2008 (millions) 2008 printing cost
$1, $2b $44.54 $47.07 3,667.9 $172,648
Series-1996 ($100) $78.52 $79.11 854.4 $67,592
Series-2004 $5 n.a. $74.20 1,369.6 $101,624
Series-2004 $10 $83.51 $76.50 774.4 $59,242
Series-2004 $20, $50b $83.51 $91.63 820.1 $75,147
Series-2004 $100c n.a. $125.00 817.7 $102,208
Total   8,304.1 $578,461
Memo: Average Rated $63.30 $69.66  

a $1 and $2 notes do not include the security features that are in the Series-1996 and Series-2004 design notes; Series-1996 $100 notes include a watermark and color-shifting ink; Series-2004 $5 notes include two watermarks and additional security features; and Series-2004 $10, $20, and $50 notes include watermarks, additional security features, and a new color shifting ink. Return to table.
b The Board did not order any $2 or $50 notes in fiscal year 2008 (which the director of RBOPS approved in July 2007) because Reserve Banks have sufficient inventories to meet estimated public demand for several years. Return to table.
c The BEP is currently finalizing the Series-2004 $100 note design. The billing rate included in the table is an estimate. Return to table.
d Volume weighted. Return to table.

As shown in table 2, the average billing rate increased ten percent from $63.30 in 2007 to $69.66 in 2008; this increase is influenced strongly by the estimated cost for the Series-2004 $100 note. Excluding these notes, the average billing rate remains largely unchanged at $63.62 per thousand notes primarily because the billing rate decreased for the $10 note and the larger proportion of low-cost $1 notes mostly offset the increases for the other denominations. The lower billing rate for the $10 note represents BEP production efficiencies resulting from its decision to print the $10 note solely at its Ft. Worth location, which is a newer facility with more efficient production equipment. The cost components responsible for the billing rate changes include currency production, production support, capital investment, and public education. Figure 1 shows the contribution of these factors to the total printing cost of currency.

Figure 1. Pie graph showing new currency cost components contribution to the total printing cost of currency. Currency production and manufacturing support: both 46 percent. Capital Investment: 6 percent. Public Education: 2 percent.

Currency Production Costs
The cost of most currency production components remained stable from 2007 to 2008, increasing only 0.3 percent. Per note costs for paper, ink, and manufacturing decreased slightly from 2007 rates, but direct labor costs increased because of a three percent wage increase for BEP production employees.

Manufacturing Support Costs
The only material increase in the component costs for new currency is for manufacturing support. These costs increased nearly 13 percent from 2007 to 2008 because of utility cost increases and security enhancements. The BEP expects the prices for steam, natural gas, water, and electricity to increase significantly from 2007 rates. Also, the BEP plans to increase spending for information technology security and business continuity improvements.

Capital Investment Costs
BEP capital improvement costs represent about six percent of the 2008 currency printing budget and are unchanged from 2007. Beginning in 2006, the BEP implemented a ten- year plan to replace much of its production equipment that has fully depreciated and improve its infrastructure at both of its two facilities. During the first four years of the plan, the BEP will replace currency production equipment at the Washington, D.C., facility, including intaglio presses, overprinting equipment, and currency inspection equipment for some production lines.2 The new equipment will replace fully depreciated presses (at least 27 years old), provide more versatility for producing future security features, and increase production capacity per press.3 After the Washington, D.C., equipment upgrade is completed, the BEP will begin replacing its presses at the Ft. Worth facility. Board staff is working with the BEP to determine the optimal total number of press lines needed to meet expected long-term currency demand and continuity of operations requirements.

In addition, the BEP plans to improve its infrastructure at the Washington D.C., facility over ten years at an estimated cost of $160 million; $34 million is included in the 2008 new currency billing rates. We expect significant changes in capital charges over the next ten years as both the facility and production equipment upgrades proceed.

Public Education Costs
The BEP awarded a $36 million contract to Burson-Marsteller following a competitive bidding process to develop a public education program in support of the Series-2004 $5 and $100 notes. Burson-Marsteller also had been awarded the previous contract in support of the Series-2004 $20, $50, and $10 notes. Of the $36 million contract, the BEP expensed approximately $12 million in 2007 and expects to spend another $12.5 million in 2008. We expect that the remainder of the $36 million will be spent in 2009.

Number and Denomination Mix of Notes Printed
We estimate a 5.6 percent decrease in the overall 2008 calendar-year BEP print order compared with the 2007 estimate.4 Table 3 illustrates the number of notes by denomination that the BEP will print in calendar year 2008 compared with the number of notes printed in 2007.

Table 3
Number of Notes Printed
(millions per calendar year)
Denomination 2007 Estimated 2008 Budget Percent change 2008B/2007E

In 2006, Board staff began planning for the large number of new-design $100 notes that the BEP will need to produce in fiscal year 2009 (we expect as many as 3.5 billion new $100 notes to replace the circulating current-design notes because the Reserve Banks do not plan to co-circulate the old- and new-design $100 notes), assuming that the Secretary of the Treasury approves the new design in mid-2008.5 We estimated the total expected demand for all denominations from 2007 through 2009 and allocated the print order as evenly as possible over the three-year period, recognizing that the production capacity at the BEP would be temporarily constrained by the large number of $100 notes required in 2009. Specifically, the fiscal year 2007 print order included part of the projected 2008 demand and, similarly, the 2008 print order includes part of the projected 2009 demand.6 Accordingly, the fiscal year 2007 print order reflected half of the projected 2008 demand for new $20 notes and all of the projected 2008 demand for $50 notes. In addition, the fiscal year 2008 print order includes a portion of the projected 2009 demand for new $5 notes and current-design $100 notes and all of the projected 2009 demand for new $10 notes. As a result, we expect that the print orders for fiscal years 2008 and 2009 will be similar in volume, but expect the budget for 2009 to be significantly higher because of the large share of $100 notes, which will be the most expensive of all denominations.7

The 2008 print budget is also higher than estimated 2007 expenses because it contains a larger share of more-expensive new-design notes than did the 2007 note order. Series-2004 notes comprise 46 percent of the 2008 note order, compared with 31 percent of the 2007 note order. This increase reflects the production of the Series-2004 $5 note (currently underway), which the Reserve Banks will begin issuing in early 2008, and the expected production of the Series-2004 $100 note. The proposed 2008 budget includes the printing of approximately 818 million Series-2004 $100 notes at the billing rate of $125 per thousand, amounting to $102 million. The increased cost reflects overall improvements to the security of the note, including new public features that incorporate years of research to enhance the public's ability to authenticate Federal Reserve notes. We anticipate the new design will incorporate two new public features. The Series-2004 $100 note cost estimate represents 17.7 percent of the proposed printing costs for the new currency budget and assumes the BEP will begin production in late 2008. The BEP is working to complete the final design; therefore, the actual timeline for production and the final billing rate remains uncertain at this time. Delays in the production of the Series-2004 $100 note beyond 2008 would reduce 2008 currency expenses.

2008 Currency Transportation
The 2008 currency transportation budget is $15.9 million, which includes the costs of shipping new currency from the BEP to Reserve Banks ($10.8 million), of intra-System shipments of fit and unprocessed currency ($5.1 million), and of returning currency pallets to the BEP ($43 thousand).

The 2008 budget for new currency shipments increased 23.2 percent from the 2007 estimate for two reasons. New contracted transportation rates will increase the budget 4.9 percent and expected shipments of new $100 notes will increase the budget by 18.2 percent. For the 2008 budget period, we plan to ship 9.4 billion notes, which include 1.1 billion from the BEP inventory.8 Of the 9.4 billion notes, 0.8 billion are new-design $100 notes, which is the most expensive denomination to ship because armored carriers reach insurance limits with smaller shipments of $100 notes compared with lower denominations. As a result, we need to schedule more shipments of $100 notes than for other denominations for the same volume of notes. If, however, there are any delays in the new-design $100 note schedule, we would expect to ship roughly the same number of new notes in 2008 as in 2007, and the overall budget increase would reflect only the 4.9 percent increase from the new transportation contracts.

The 2008 budget for intra-System shipments increased 4.1 percent from the 2007 estimate and includes $613 thousand for shipments of unprocessed currency between Reserve Banks, a 20 percent increase from 2007 estimated expenses. This increase represents the additional shipments expected in 2008 to help manage System inventories during the major upgrade of currency processing machines. As Reserve Banks take machines out of production during the upgrade, the CPO will direct shipments for inventories of unprocessed currency from Reserve Banks that are unable to process to those that can.

Counterfeit-Deterrence Research
The 2008 budget for counterfeit-deterrence research is $3.7 million, which includes costs associated with the Central Bank Counterfeit Deterrence Group (CBCDG) and the Reprographic Research Center (RRC). The CBCDG operates under the auspices of the G-10 central bank governors to combat digital counterfeiting and includes 28 central banks. The Board's $3.7 million share of the 2008 CBCDG budget comprises 99 percent of the Federal Reserve's counterfeit-deterrence budget and is 9.9 percent more than the 2007 estimate.9 Most of this increase results from a revised member contribution schedule reflecting updated gross domestic product ratios.

Treasury's Office of Compliance (OC)10
The 2008 budget to reimburse the U.S. Department of the Treasury for OC expenses is $4.3 million. The OC develops Reserve Bank standards for cancellation and destruction of unfit currency and for note accountability, and reviews Reserve Bank cash operations for compliance with its standards. As a public service, the OC also processes claims for the redemption of damaged or mutilated currency. The 5.9 percent OC budget increase results from the addition of five employees, an OC staff increase of 15 percent, in the spring of 2007 to reduce the time for processing claims from the public to redeem mutilated Federal Reserve notes by as much as 25 percent.

Chart 1 New Currency Expenses Barchart

Data for Chart 1
YEAR 199019911992199319941995199619971998199920002001200220032004200520062007E2008B
Nominal Cost in millions of dollars 190260295355368373403367408487456344430514514497489578602
Real Cost (CPI Adjusted) in millions of dollars 190249275321324320336299327382346254312365356333317365369

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

Data for Chart 2
Billions of notes7.008.028.458.039.339.969.449.589.2010.88.978.187.398.398.888.
Billions of dollars 84.47107.96103.19104.89128.82148.24194.64142.23163.26285.4967.4650.20123.30126.2157.0140.8146.1178.1201.9

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

Data for Chart 3
YEAR 199019911992199319941995199619971998199920002001200220032004200520062007E2008B
Billions of notes
Cost per 1000 notes $26$30$36$41$38$37$40$43$47$43$47$49$50$58$56$55.32$55.74$63.3$69.66

1Charts 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 2008 budget period. Return to text.
2Overprinting equipment includes presses that produce both the Treasury and Federal Reserve seals and the serial numbers. A full BEP production line also includes offset presses, which the BEP purchased more recently than the intaglio and overprinting presses. Return to text.
3The large format of the new intaglio presses is capable of printing 50 Federal Reserve-sized notes per page instead of only 32 notes per page. This change increases the capacity of each machine by more than 50 percent. Return to text.
4The calendar year 2008 BEP print order includes notes ordered for January through September 2008, plus a staff estimate of notes that the Board will order for October through December 2008. Return to text.
5The Reserve Banks adopted this same strategy for the $100 redesign introductions in 1991 and 1996. Return to text.
6The BEP produces notes most cost effectively when it can plan its production schedule over a longer term. Return to text.
7These estimates are based on staff forecasts of future-year currency needs. The actual volume of notes for the 2009 print order will depend on conditions at the time the order is placed. Return to text.
8To facilitate efficient production planning at the BEP and to plan for the expected large number of new-design $100 notes that the BEP would need to produce in preparation for the $100 note introduction in 2009, we ordered notes in fiscal years 2007 and 2008 that the Reserve Banks would not need until 2009. As of October 2007, the BEP held 2.5 billion of these pre-ordered notes in inventory. As a result of these adjustments and the BEP inventory, there is not necessarily a direct relationship between the number of notes ordered and the number of notes shipped in any calendar year. Return to text.
9The estimated RRC payment of $35 thousand represents the remaining one percent of the counterfeit-deterrence research budget. The RRC is a state-of-the-art facility hosted by the National Bank of Denmark for adversarial testing of banknote designs and counterfeit deterrent features for its 12 member countries. Return to text.
10The BEP changed the name from the Office of Currency Standards to the Office of Compliance in 2007. Return to text.