Annual Report Budget Review 2012
Federal Reserve Bank Budgets
The 2012 operating budgets of the 12 Reserve Banks total $3,441.3 million. The 2012 total is $180.0 million, or 5.5 percent, above 2011 actual expenses. The growth is driven by increases in central bank functions, specifically in supervision, which represents 30 percent of total expenses. The implementation of the Dodd-Frank Act continues to be a significant factor in budget growth. These increases are partially offset by decreases in priced services as a result of continued declines in check volume and a reduction in vendor fees and staffing related to the winding down or closing of the liquidity facilities at the Federal Reserve Bank of New York.14
Budgeted net expenses for 2012, after revenue and reimbursements, are expected to increase by $208.9 million, or 9.1 percent, over actual 2011 net expenses (table 6). Approximately 27 percent of Reserve Bank expenses in the 2012 budget are offset by priced service revenues (12.7 percent) and reimbursable claims for services provided to the Treasury and other agencies (14.5 percent).15 Budgeted 2012 priced services revenue is 8.7 percent lower than the 2011 actual level, reflecting continued declines in check volume as customers shift to other payment methods. Reimbursable claims are projected to remain fairly stable in 2012.
|Item||2011 (actual)||2012 (budgeted)||Change|
|Total operating expenses||3,261.3||3,441.3||180.0||5.5|
|Revenue from priced services||478.6||436.8||-41.8||-8.7|
|Claims for reimbursement 1||485.3||497.6||12.3||2.5|
Note: Excludes capital outlays and pension expenses as well as assessments for the Board of Governors operating expenses, currency costs, the Consumer Financial Protection Bureau, and the Office of Financial Research. Includes expenses budgeted by Federal Reserve Information Technology and the System's Office of Employee Benefits that are chargeable to the Reserve Banks. Reflects all redistributions for support and allocations for overhead. Components may not sum to totals and may not yield percentages shown because of rounding.
1. Reimbursable claims include the costs of fiscal agency and depository services provided to the U.S. Treasury, other government agencies, and other principals, to whom actual costs are billed and reimbursed by those entities. Return to table
Total 2012 projected employment for the Reserve Banks, FRIT, and the OEB is 18,102 ANP, an increase of 449 ANP, or 2.5 percent, from the 2011 actual staff level (table 7). Staffing levels in 2012 are projected to increase as supervision resources are added in all Districts. From 2002 to 2010, total staffing levels consistently decreased, primarily as a result of multiyear restructuring efforts in the check-processing function. During that period, staffing reached its lowest level of 17,459 ANP in 2010. Subsequent staffing increases have been primarily driven by (1) additional resources--mainly in supervision--spurred initially by the need to address the financial crisis, then beginning in 2011, to implement the Dodd-Frank Act and (2) growth in monetary policy and information technology.
|Item||2011 (actual)||2012 (budgeted)||Change|
|Federal Reserve Information Technology (FRIT)||1,072||1,048||-23||-2.2|
|Office of Employee Benefits (OEB)||47||51||4||8.6|
Note: Components may not sum to totals and may not yield percentages shown because of rounding. See text note 9 for definition of average number of personnel.
2011 Budget Performance
Total 2011 actual expenses were $3,261.3 million, a decrease of $89.9 million, or 2.7 percent, from the approved 2011 budget of $3,351.2 million. Total 2011 actual staffing was 17,653 ANP, a decrease of 326 ANP from 2011 budgeted levels of 17,979 ANP.
The expense decrease is driven by the faster-than-projected decline in the volume of check and adjustment items (-$20.7 million). Another significant factor contributing to the underrun is lower-than-budgeted expenses in supervision, primarily caused by hiring delays for staff with specialized skills and higher-than-anticipated turnover (-$16.8 million). The research function also experienced hiring delays that resulted in lower-than-planned expenses (-$9.2 million).
Also contributing to the underrun are lower expenses associated with loans to depository institutions and others, which resulted from lower loan volume; in turn, the lower volume resulted in decreasing vendor costs, dedicated staff, and operating expenses for the Maiden Lanes, TALF facilities, and the American International Group, Inc. credit facility (-$14.8 million).
Additionally, the cash function is under budget due to greater-than-anticipated productivity and efficiency gains from the implementation of machine upgrades. As a result, several Reserve Bank cash functions reduced the number of machine shifts and experienced lower equipment repair and maintenance costs (-$12.3 million).
Treasury services are under budget as a result of a net underrun across various programs (-$12.0 million). The primary drivers of the underrun are the decision by the Treasury to cancel the planned expansion of the Stored Value Card program, accelerated consolidation of Treasury Retail Securities operations, and decommissioning of other programs. These decreases are partially offset by the implementation of new projects, such as the Do Not Pay Portal (formerly known as GOVerify).16
The underrun in total staffing of 326 ANP, as compared to the approved budget, reflects a decrease of 162 ANP within central bank services, primarily due to hiring delays in supervision (58 ANP), operational efficiencies in cash (37 ANP), and lower resource requirements in the loans to depository institutions and others function (33 ANP). Additionally, there were significant decreases in local support functions' staffing as operations are streamlined and consolidated (103 ANP). Treasury services are below budget by 97 ANP, primarily due to acceleration of the Treasury Retail Securities operations consolidation. Reductions in check operations (specifically check adjustments) to align resources to changing external and internal factors further contributed to the underrun (68 ANP). Offsetting these underruns is increased staffing at FRIT, primarily to support the System's server-consolidation initiative (106 ANP).
Initiatives Affecting the 2012 Budgets
For 2012, the Reserve Banks' budgets reflect growth of $180.0 million, or 5.5 percent, compared to 2011 actual in several initiatives, primarily for financial stability and enhanced resiliency, implementation of the Dodd-Frank Act, and application development projects for Treasury and financial services. The majority of the growth is driven by costs associated with the projected staff increases.
Central Bank Services
In the central bank area, which includes monetary policy, public programs, supervision, and services to financial institutions and the public (other than priced services), expenses are increasing $166.5 million, or 6.9 percent, compared to 2011 actual expenses. The staffing level is increasing 384 ANP, or 5.4 percent.
The majority of the expense increase is in the supervision function, which is increasing $115.1 million, or 12.5 percent, for additional staffing to implement the requirements of the Dodd-Frank Act, as well as to address training initiatives and increased workload (349 ANP).
The total 2012 budget for monetary policy is increasing $19.8 million, or 3.7 percent, which reflects a staffing increase of 57 ANP. The monetary policy increases are primarily due to the full-year effect of 2011 staff additions for financial stability work, including work related to the Dodd-Frank Act, as well as investments in data and data analytical tools and support for improved capabilities for MBS sales.
Expenses in cash operations are increasing $22.6 million, or 4.4 percent, as work continues on the CashForward project.17 Although expenses are increasing for national project investments, cash operations are decreasing 20 ANP as a result of continued operational efficiencies.
The increases in central bank services expenses are being partially offset by a decrease of $4.5 million, or 5.0 percent, in expenses related to the loans to depository institutions and others function, primarily in New York, as a result of lower vendor fees and staffing reductions of eight ANP as the liquidity facilities created during the financial crisis continue to wind down.
The budget for services to the Treasury, which are fully reimbursable, is increasing $15.5 million, or 3.4 percent, as a result of business requirements associated with ongoing Treasury projects, including the Do Not Pay Portal, the All-Electronic Treasury Initiative, and the Payment Information Repository.18 These expense increases are being offset largely by cost decreases related to the consolidation of the Treasury Retail Securities operation. Overall staffing for the Treasury function is budgeted to decrease by 10 ANP.
Total priced services expenses are declining $2.1 million, or 0.5 percent, driven by the decrease in check operations. Check expenses are decreasing $24.9 million, or 12.5 percent, reflecting lower costs associated with declining check volume as well as continued operational efficiencies and lower information technology support costs. Check staffing levels are decreasing 121 ANP, or 20.9 percent, in the 2012 budget as a result of these actions. This decrease is partially offset by the increase of $17.0 million for the Fedwire Funds and Fedwire Securities services, primarily due to work related to the Fedwire Modernization program.19 Full cost recovery is projected in the aggregate for the priced services in 2012.20
Support costs are increasing $19.2 million, or 1.9 percent, and 79 ANP. The expense increases are driven primarily by information technology ($8.0 million) and legal ($5.2 million). Information technology costs are increasing mainly as a result of application development in support of cash, Treasury, and priced services projects at the Reserve Banks. The increase in legal is primarily driven by the shift of resources back to core business from the focus on the liquidity facilities and the expansion of work related to the Dodd-Frank Act.
2012 Personnel Expenses
In December 2010, Congress enacted legislation prohibiting statutory pay adjustments for most federal civilian employees for a two-year period ending December 31, 2012. Although not required to do so under the legislation, the Federal Reserve complied with the spirit of the civilian federal government salary freeze enacted by Congress and interpreted in subsequent Office of Personnel Management (OPM) guidance, which permits increases for staff under performance-based compensation systems such as those used by the Reserve Banks. Therefore, the 2012 Reserve Bank budgets reflect a 2.0 percent program for merit and equity adjustments for eligible staff; the budgets provide no funding for increases in officer and senior professional base salaries, other than funding for promotions.
Budgeted Reserve Bank officer and staff salaries and other personnel expenses for 2012 total $1,877.1 million, an increase of $112.6 million, or 6.4 percent, compared with 2011 actual expenses. The increase reflects additional staff and budgeted salary administration programs, including merit and equity increases, promotions, and variable pay. Funding for employee base-salary administration programs totals $35.1 million; merit and equity pools for employees total $23.8 million; and funding for employee promotions totals $11.3 million. The budget also includes $2.6 million for officer promotions.
Risks in the 2012 Budgets
The most significant 2012 budget risks are related to staffing. Attracting qualified staff and hiring as scheduled was challenging during 2011 and is expected to remain so in 2012. Many Reserve Banks have aggressive hiring plans, particularly in supervision, to address current banking conditions and to meet the responsibilities mandated by the Dodd-Frank Act. Increases in market demand for labor could lead to significant turnover in key business areas, and Reserve Banks could be further challenged to retain the necessary talent to meet critical business objectives. Conversely, there is a risk that Reserve Banks will not achieve the full projected staff reductions associated with various consolidation efforts.
Another risk to the 2012 budgets is management of information technology costs. Continued growth in System projects could strain already stretched information technology resources, which could result in project delays or increased costs.
In addition, Treasury project changes and delays could affect budgeted expenses. 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.
2012 Capital Plan
The 2012 capital budgets submitted by the Reserve Banks, FRIT, and OEB total $404.2 million, a $139.2 million, or 52.5 percent, increase from 2011 actual levels.21 The capital budgets include funding for projects to support strategies that improve operational efficiencies, enhance services to Bank customers, and ensure a safe and productive work environment. In support of these strategies, the 2012 budgets include three categories of capital initiatives: information technology and System automation projects, building and infrastructure, and Treasury initiatives.
The Reserve Banks and FRIT included $186.4 million in funding for major information technology initiatives and System automation projects. Multiyear projects currently under way to migrate major applications off the mainframe represent $51.1 million of the total 2012 capital budget.22 Cash services initiatives represent $39.7 million of the Reserve Banks' capital budgets, including $16.5 million for the CashForward project and $3.0 million for cash sensor upgrades. The Reserve Bank server-consolidation effort and related network services account for an additional $18.1 million. The remaining total capital budget will fund other initiatives, such as data security, scheduled software and equipment upgrades, and telecommunications and LAN equipment for renovated or expanded office space.
The total proposed capital budget includes $177.4 million for building and infrastructure projects. Of the total building capital, $63.9 million is related to major projects begun in previous years in Boston, New York, Chicago, and San Francisco. Major new initiatives in 2012, totaling $9.2 million, include an office reconfiguration in New York to accommodate increased supervision staff and a vault-automation project in Chicago. Several Banks included capital for emergency generators, uninterruptible power-supply equipment, and security enhancements. Additional outlays in this category will fund other building renovation and refurbishment projects and various facility improvement projects.
The capital budgets also include $40.4 million for reimbursable Treasury initiatives, including support of Treasury Web Application Infrastructure, Government-Wide Accounting, Collections and Cash Management-related efforts, and various other projects.
14. Although most of the liquidity programs have ended, the Federal Reserve Bank of New York continues to support several liquidity programs, including Maiden Lane, Maiden Lane II, Maiden Lane III, and the Term Asset-Backed Securities Loan Facility (TALF). Return to text
15. Reimbursable claims include the costs of fiscal agency and depository services provided to the U.S. Treasury, other government agencies, and other principals, to whom actual costs are billed and reimbursed by those entities. Return to text
16. The Do Not Pay Portal is a project in which the Federal Reserve Bank of Kansas City is developing a data repository portal for the Bureau of Public Debt that will allow federal program agencies to verify the propriety of federal payments before they are disbursed. Return to text
17. CashForward is a cash automation platform that will replace legacy software applications, automate business processes, and employ technologies to meet current and future needs for the cash business. Return to text
18. The All-Electronic Treasury Initiative implements the requirement for all federal payments to be made electronically and eliminates paper payroll savings bonds. Return to text
19. The Fedwire Modernization initiative is a large-scale multiyear information technology project, the goal of which is to transition the applications that support the Fedwire Funds and Fedwire Securities businesses from the legacy mainframe environment to a distributed platform. Return to text
20. The Monetary Control Act of 1980 requires the Federal Reserve to charge depository institutions for certain payment services. The fees charged for providing these priced services are set to recover, over the long run, all direct and indirect costs of providing the services, plus an imputation of the costs that would have been incurred, such as taxes that would have been paid, and the profits that would have been earned (return on equity) had the priced services been provided by a private business firm. Return to text
21. The total 2012 capital budget does not include the Federal Reserve Bank of New York's acquisition of the Maiden Lane building in February 2012 for $207.5 million. The acquisition provides a cost-effective, long-term alternative to the current practice of leasing space in this and other buildings and allows for greater control over maintenance, operation, and security of the building. Return to text
22. The System's migration strategy involves moving a majority of applications from the mainframe to alternate processing environments. The migration strategy is managed in stages to minimize excess capacity and expenses. Projects included in the 2012 budget include the migration of the Fedwire Funds, Fedwire Securities, FedACH, check, accounting, and statistics/reserves systems. Return to text