The Fed pays BEP the costs  of developing and printing the currency. The Fed  buys coins from the Mint for face value. Because the Mint, a part of Treasury, is included in the budget, the  recognition of the earnings from coins—the difference between production  costs and face value, called seigniorage—is shown in the federal budget as  a reduction in needed borrowing for the government, after the deficit or  surplus for the year is calculated. Production costs of both coins and Federal Reserve notes are accounted  for as increases in the net cost of operations in Treasury’s consolidated  financial statements. Federal accounting standards provide that  seigniorage be accounted for as a source of financing in Treasury’s  statement of changes in net position, whereas interest earned by the Fed  for its open market operations is accounted for as revenue received on  Treasury’s statement of custodial activity. Treasury has not been reporting  seigniorage correctly in its consolidated financial statements but corrected  its misclassification beginning in fiscal year 2003. Budgeting for Coin and Currency Earnings

The profit earned from making coins, or seigniorage, is shown in the budget  as a means of financing the government’s borrowings and is not counted as  revenue in calculating the deficit or surplus for the annual budget. However, the interest avoided from the borrowing displaced by seigniorage  is neither quantified nor shown in the budget. In recent years, both the Mint and BEP have had some problems in  contracting for and acquiring property and equipment. In addition, the Mint  has had problems with forecasting demand, monitoring costs, and  reporting plans and results to Congress. The amount of  interest paid to the Fed, and subsequently returned by the Fed to Treasury,  is quantified and visible in the budget. The Mint and BEP have generally taken action to address the operational  problems identified in the past few years by Treasury’s Inspector General  and others. Recommendation for Executive Action

To comply with the purpose of the reporting requirement of the Public  Enterprise Fund, we recommend that the Secretary of the Treasury ensure  that the Director of the Mint identifies whether amounts are being retained  in excess of the estimated operating costs of the following year and, if so,  explains how they will be used in reports to Congress each year. Objectives, Scope, and Methodology

To better understand how the nation’s coins and currency are produced  and issued, we reviewed (1) how the production costs of and earnings from  coin and currency are budgeted and accounted for and (2) whether there  are any operational problems at the Mint and BEP needing further action. To determine how production costs and earnings from coin and currency  are budgeted and accounted for, we reviewed the history of coins and  currency in the United States and the agencies involved in producing and  distributing coins and currency; legislation and accompanying hearings and  reports concerning coins and currency; the U.S. budget for the last 5 years;  financial reports of the Fed; the consolidated financial statements of the  Department of the Treasury for the last 5 years; annual reports for the last 5  years issued by the Federal Reserve System (Fed), the Mint and the Bureau  of Engraving and Printing (BEP); accounting guidance issued by the  Financial Accounting Standards Board and the Federal Accounting  Standards Advisory Board; and budgeting guidance issued by the Office of  Management and Budget (OMB). The reserve banks back up the notes primarily with Treasury securities.
Why GAO Did This Study

The government produces billions of coins and currency notes each year. Coins are made by the U.S. Mint and issued by the Treasury Department. Currency notes are made by the Bureau of Engraving and Printing and issued by the Federal Reserve System (Fed). The Fed buys coins from the Mint at face value but pays the Bureau only the costs of printing currency. Coins on the books of the Fed are assets that are issued by the Mint, and notes are liabilities of the Federal Reserve Banks. In recent years congressional hearings have highlighted the confusion over differences in the budgetary and accounting treatment of coins and currency. In addition, the Treasury Inspector General and others have reported problems with Mint and Bureau operations. GAO was asked to review (1) how the costs and earnings from coins and currency are budgeted and accounted for and (2) whether any operational problems at the Mint and Bureau need further action.

What GAO Found

The earnings from issuing both coins and currency reduce government borrowing costs; however, how these earnings are budgeted and accounted for differs. Production costs of coins and currency are generally treated the same in the budget and accounting statements. The difference between the face value of coins and the costs of minting them results in earnings, called seigniorage, which is shown in the budget as a reduction in needed borrowing for the government, after the deficit or surplus for the year is calculated. The budgetary impact of seigniorage is interest avoided from the borrowing it displaces and is not visible because it is neither quantified nor shown in the budget. The government also generates earnings by issuing currency, but it is handled differently. The difference between the face value of currency issued and its production cost goes to the Fed. The Fed buys collateral, usually Treasury securities, to back up the currency issued. The interest collected on those Treasury securities is used to pay for Fed costs, and the remainder is returned to Treasury. The budgetary impact of issuing currency comes from the interest returned by the Fed, which is shown as a budgetary receipt and counted in the calculation of the deficit or surplus. Production costs of both coins and currency are shown as costs of operations in Treasury's financial statements. According to the Federal Accounting Standards Advisory Board, seigniorage should be shown as a source of financing in Treasury's statement of changes in net position, whereas interest returned by the Fed for currency is shown as revenue in Treasury's statement of custodial activity. Treasury has not been reporting seigniorage this way but made the correction beginning with its fiscal year 2003 financial statements. Both the Mint and the Bureau have had operational problems in recent years in contracting and acquiring property and equipment. The Mint has also had problems with forecasting demand, monitoring costs, and reporting to Congress. The Mint and Bureau have generally taken or started to take actions to address the problems. The Mint has clarified its first quarterly report for 2004 to include more information on how retained funds will be used. However, the Mint is still not explicitly stating whether the retained amounts are in excess of the estimated operating costs for the following year and, if so, it is not explaining how the retained earnings will be used, as required by law.