	Background

One of the functions of the Reserve Banks is to fulfill the coin demand of  the nation’s depository institutions—which include commercial banks,  savings and loan associations, and credit unions—by distributing coin  inventories stored in the Reserve Banks’ vaults and at coin terminals,  including circulated coins and new coins ordered from the U.S. Mint. The Reserve Banks’ Process for Ordering and Distributing Coins Uses New Coins, Coin Inventories, and Coin Transfers to Meet Demand

The Reserve Banks’ process for ordering and distributing coins uses  orders of new coins from the U.S. Mint, the Reserve Bank offices’ coin  inventories, and transfers of circulated coins between Reserve Bank  offices to meet estimates of depository institutions’ demand. These  estimates are based on coin demand forecasts generated by a forecasting  tool. Postal Service’s and local transit authorities’ use of coins also affect  coin demand. CPO officials noted that  using circulated inventory rather than purchasing new coins reduces the  number of new coins that the U.S. Mint produces and the Mint’s costs of  production. Our analysis of Reserve Banks’ order data shows that CPO  reduced orders by about 10 percent in fiscal years 2006 and 2007 by  fulfilling Reserve Bank offices’ coin requests with circulated inventory. To increase the efficiency of the distribution  process, CPO has received approval from the Reserve Banks to centralize  the development and placement of coin orders, and CPO will be  responsible for ensuring that the offices maintain appropriate inventory  levels. The Reserve Banks’ Ordering and Distribution Process Has Met Demand for Coins

The Reserve Banks’ process has ensured that enough coins are available  through orders of new coins and the Reserve Banks’ inventories of  circulated coins to meet the depository institutions’ demand for coins. In fiscal year 2001, inventory  levels for all denominations increased. According to the U.S. Mint’s 2001  annual report, the economy, which is directly related to the demand for  coins, took a downturn in the middle of fiscal year 2000, resulting in a  decrease in coin demand and a buildup of coin inventories. Because each Reserve Bank sets its own inventory levels, the districts  manage to different inventory levels and hold varying levels of inventory  relative to demand. CPO and Reserve Bank officials noted that the risk of not meeting  depository institutions’ demand for coins far exceeds the risk of having  too many coins in inventory, as long as storage capacity exists. Producing new pennies and nickels when circulated coins  could be used instead is particularly inefficient, since these denominations  cost more to produce than they are worth. The Federal  Reserve also provided technical comments, which we have addressed in  this report as appropriate. We interviewed officials from the Federal  Reserve’s Board of Governors (Board), each of the 12 Reserve Bank  districts, and the national Cash Product Office (CPO) to determine how  coin orders are developed and submitted to the U.S. Mint. To determine the extent to which the Reserve Banks’ coin distribution  process meets the depository institutions’ demand for coins throughout  the country, we obtained data on the Reserve Banks coin payments to  depository institutions, receipts for coins deposited by the depository  institutions, orders for new coins, and inventory levels for fiscal years 1993  through 2007 for each coin denomination and for each Reserve Bank.
Why GAO Did This Study

Federal Reserve Banks fulfill the coin demand of the nation's depository institutions--which include commercial banks, savings and loan associations, and credit unions--by ordering new coins from the U.S. Mint and managing coins held in inventory at the Reserve Banks and in coin terminals. Reliably estimating the demand for coins and efficiently managing the inventory of circulated coins is important to ensure that depository institutions have enough coins to meet the public's demand and to avoid unnecessary coin production costs. Since late 2006, rising metal prices have driven the costs of producing pennies and nickels above the face values of the coins. This report addresses (1) the Reserve Banks' process for ordering and distributing coins to the nation's depository institutions and (2) the extent to which this process meets depository institutions' demand for coins. GAO interviewed officials responsible for coin distribution at each of the 12 Reserve Banks and met with representatives of 4 large operators of Federal Reserve coin terminals, 2 banking associations, the U.S. Mint, and the nation's largest coin recycling company. GAO also analyzed Reserve Bank data for fiscal years 1993 through 2007. Federal Reserve and U.S. Mint officials generally agreed with GAO's findings in the report and provided technical comments, which were incorporated as appropriate.

What GAO Found

The Reserve Banks' process for ordering and distributing coins uses new coins ordered from the U.S. Mint, circulated coins in inventory, and transfers of circulated coins to meet depository institutions' demand for coins. New coin orders begin each month with a recommendation generated by a forecasting tool. Each Reserve Bank office then refines this recommendation in light of its current inventory holdings and its knowledge of local factors that may affect demand, such as changes in a transit authority's use of coins. Each office next submits a request for coins to the Reserve Banks' national Cash Product Office (CPO). CPO seeks to fill the request with transfers of circulated coins from other offices before it consolidates the requests and submits a monthly order for new coins to the U.S. Mint. In fiscal years 2006 and 2007, CPO used transfers to reduce its new coin orders by approximately 10 percent. The Reserve Banks' process for ordering and distributing coins has met depository institutions' demand since fiscal year 2000, but the process does not define optimal coin inventory ranges. Currently, each Reserve Bank office sets and manages its own inventory levels, resulting in varying levels of inventory held relative to demand. Overall, inventory levels for most denominations have generally been decreasing since fiscal year 2001, yet inventory levels are more likely to be high than low relative to demand, because, for the Reserve Banks, the risk of not meeting depository institutions' demand for coins far exceeds the risk of holding too many coins in inventory. However, holding coins in inventory that could be used to fulfill demand elsewhere can be inefficient, resulting in new coin production costs that could have been avoided if coins held in inventory had been used instead. To increase the efficiency of the Reserve Banks' process, CPO plans this year to begin implementing a new approach to inventory management that it piloted in 2006 and found effective. Under this approach, CPO will determine the number of circulated and new coins each district will receive monthly and will be responsible for ensuring that the Reserve Bank offices maintain appropriate inventory levels.