	Inventory Management Has Been Centralized; Rising Costs Have Not Been Analyzed

		Coin Inventory Management

In 2009, the Federal Reserve centralized coin management across the 12  Reserve Banks and established national inventory targets. CPO officials noted that these targets help meet their primary goal in  managing the nation’s coin inventory: ensuring a sufficient supply of all  coin denominations to meet the public’s demand. Although Reserve Bank coin management costs have risen since 2008,  we found in October 2013 that CPO had not taken steps to systematically  assess factors influencing direct and support costs related to coin  management and assess whether opportunities exist to identify elements  of its coin inventory management that could lead to cost savings or  greater efficiencies across the Reserve Banks. Specifically, using data provided by CPO on individual Reserve Banks’  costs, from 2008 through 2012, coin management costs increased for all  Reserve Banks, with the increases ranging from a low of 36 percent to a  high of 116 percent. To address this issue, in our October 2013  report we recommended that the Federal Reserve develop a process to  assess the factors that have influenced increasing coin-operations costs  and the large differences in costs across Reserve Banks and to use this  information to identify practices that could lead to costs savings. The Federal Reserve  generally agreed with the recommendations in our report, including the  above recommendation as well as recommendations discussed below,  and has developed a plan for addressing them. The Federal Reserve Follows Some Key Practices in Managing the Circulating-Coin Inventory but Lacks Others

In October 2013, we found that the Federal Reserve, in managing the  circulating-coin inventory, follows two of five key inventory management  practices we identified and partially follows three. For example, it follows the key practice  of collaboration because it has established multiple mechanisms for  sharing information related to coin inventory management with partner  entities such as depository institutions. In the key practice area of performance metrics, we found that the  Federal Reserve has developed some metrics in the form of upper and  lower national coin-inventory targets. However, it has not developed other  goals or metrics to measure other aspects of its coin supply-chain  management—such as costs. Characteristics of this key practice include  agencies’ identifying goals, establishing performance metrics, and  measuring progress toward those goals. We concluded that establishing  goals and metrics, such as those related to coin management costs,  could aid the Federal Reserve in using information and resources to  identify additional efficiencies. To address this issue, we recommended  that CPO establish, document, and annually report to the Board  performance goals and metrics for managing the circulating coin  inventory and measure performance toward those goals and metrics. Demand for Currency Expected to Decline Gradually in the Near Term, but a Variety of Factors Make Predicting Longer- Term Change Difficult

To collect data and information on potential changes in the demand for  currency, the Federal Reserve has conducted studies and outreach with  groups such as depository institutions and merchants, and found a  general consensus that the use of currency may decline slightly in the  near term. According to the Federal Reserve, this expectation is due, in  part, to an increase in alternative payment options (e.g., additional forms  of electronic payments), but interrelated factors—such as technological  change and economic conditions—make it difficult to predict long-term  (i.e., 5 to 10 years) currency demand. In 2010, CPO began to develop a long-term strategic framework to  consider potential changes to currency demand over the next 5 to 10  years and how this change could affect CPO’s operations. One component of this effort includes examining internal operations for  distributing coins and processing notes as well as seeking to increase  efficiency in these areas to better position the agency to adapt to future  changes in demand.
Why GAO Did This Study

Efficiently managing the nation's inventory of circulating coins helps to ensure that the coin supply meets the public's demand while avoiding unnecessary production and storage costs. This testimony is based on GAO's October 2013 report on the Federal Reserve's management of the circulating-coin inventory. It addresses (1) how the Federal Reserve manages the circulating coin inventory and the related costs, (2) the extent to which the Federal Reserve follows key practices in managing the circulating-coin inventory, and (3) actions taken to respond to potential changes in demand for currency (coins and notes).

What GAO Found

In 2009, the Federal Reserve centralized coin management across the 12 Reserve Banks and established national inventory targets to track and measure the coin inventory. However, based on GAO's analysis of Federal Reserve data, from 2008 to 2012, total annual Reserve Bank coin-management costs increased by 69 percent, and more specifically, costs at individual Reserve Banks increased at rates ranging from 36 percent to 116 percent. GAO found in October 2013 that the Federal Reserve did not monitor coin management costs by each Reserve Bank—instead focusing on combined national coin and note costs—thus missing potential opportunities to improve the cost-effectiveness of coin-related operations. Furthermore, the agency had not taken steps to systematically assess factors influencing coin management costs and identify practices that could lead to cost savings.
In managing the circulating-coin inventory, the Federal Reserve followed two of five key inventory management practices GAO identified and partially followed three. For example, the agency followed the key practice of collaboration because it has established multiple mechanisms for sharing information related to coin inventory management with partner entities such as depository institutions. The Federal Reserve partially followed the key practice of performance metrics, which involves identifying goals, establishing performance metrics, and measuring progress toward goals. While the Federal Reserve had developed some performance metrics of upper and lower national coin-inventory targets, it had not developed goals or metrics to measure other aspects of its coin supply-chain management, such as costs. Establishing goals and metrics, such as those related to coin management costs, could aid the Federal Reserve in using information and resources to identify additional efficiencies.
To collect data and information on potential changes in the demand for currency (coins and notes), the Federal Reserve has conducted studies and outreach with groups such as depository institutions and merchants, and found a general consensus that the use of currency may decline slightly in the near term. This expectation is due, in part, to an increase in alternative payment options (e.g., additional forms of electronic payments), but interrelated factors—such as technological change and economic conditions—make it difficult to predict long-term currency demand. In 2010, the Federal Reserve began to develop a long-term strategic framework to consider potential changes to currency demand over the next 5 to 10 years and how this change could affect operations. This effort includes, among other things, examining internal operations for distributing coins and processing notes as well as conducting research into the use of payment types to understand currency use in the United States to better position the agency to adapt to future changes in demand.

What GAO Recommends

GAO's October 2013 report included several recommendations to the Federal Reserve to ensure the efficient management of the coin inventory and potentially to reduce costs. These included recommendations (1) to develop a process to assess factors influencing coin operations costs and identify practices that could lead to cost-savings and (2) to establish additional performance goals and metrics relevant to coin inventory management. The Federal Reserve generally agreed with the report's recommendations and, in response, has developed a plan for addressing them.