Action Requested
Staff requests that the Board approve the proposed 2006 new currency budget. The proposed 2006 budget of $494.4 million is a $16 million, or 3.2 percent, increase over 2005 estimated expenses.¹ Increases in the overall Bureau of Engraving and Printing (BEP) billing rates are the primary drivers of the year-over-year budget increase.

Discussion
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 August 2005, the director of RBOPS forwarded to the BEP a print order for 8.2 billion notes for fiscal year 2006. Because the BEP operates on a fiscal year, which began October 1, 2005, and ends September 30, 2006, division 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 2006 budget with the 2005 budget and 2005 estimate.

Print order (number of notes)

8,631,606

8,294,400

8,452,720

-3.9

1.9

2005 New Currency Expenses
Staff estimates that total new currency expenses for 2005 will be under budget by $54.1 million, or 10.2 percent, due primarily to lower-than-expected printing costs, but also to lower transportation costs.

Printing Costs
Staff and BEP management work collaboratively during the year to monitor inventories and production needs, and make modifications to the print order to meet Reserve Bank currency requirements. In preparing the 2005 budget (in 2004), staff over-estimated demand for new currency during the last quarter of 2005. The Reserve Banks have accumulated larger-than-anticipated $20 note inventories because the high-speed currency sorting machines destroyed fewer new-design $20 notes than forecasted.² As a result, staff reduced the forecast for $20 notes in the last quarter of 2005 by approximately 400 million notes, or 52.8 percent.³ Also, the fiscal year 2005 print order included $10 notes of both Series-1996 and the new-design Series-2004. Development delays associated with the new-design $10 note, however, resulted in production of only the less-expensive Series-1996 notes. The smaller fourth-quarter order for $20 notes, together with the smaller order for new-design $10 notes and BEP manufacturing efficiencies, reduced the calendar year 2005 printing cost by $51.1 million, or 10.0 percent, from the budgeted amount.

Transportation Costs
Estimated currency transportation costs fell short of 2005 budget expectations by $3.1 million, or 19.4 percent. The Series-2004 $10 note development delays caused us to postpone until 2006 some anticipated BEP shipments of new-design notes. We also postponed some anticipated shipments of old-design $10 notes between Reserve Banks that we would have used to reallocate old-design notes from Reserve Banks with excess inventory to those needing additional inventory before the new-design $10 notes became available.

2006 New Currency Budget
The proposed $494.4 million 2006 new currency budget is 3.2 percent higher than the 2005 estimate. Printing costs for Federal Reserve notes represent 95.3 percent of the new currency budget, and expenses for currency transportation, counterfeit-deterrence research, and Treasury's Office of Currency Standards (OCS) represent the remaining 4.7 percent.

Printing Costs
The 2006 calendar year print order will cost $471.2 million to print, which represents a 2.7 percent increase over the estimated cost for the 2005 order.⁴ The budgeted printing costs reflect BEP billing rates along with the size and composition of the print order.

Table 3 illustrates the number of notes by denomination that the BEP will print in calendar year 2006 compared with the number of notes printed in 2005.

We estimate a 1.9 percent increase in the overall 2006 calendar year BEP note order compared with the 2005 estimate.⁶ The increase results primarily from the 32.7 percent larger order of new $1 notes to allow Reserve Banks to replenish their payable inventories.⁷ The 2006 new currency budget, however, includes approximately 55 percent fewer, more-expensive, Series-2004 $20 and $50 notes than in 2005. As a result of large Reserve Bank inventories of $20 notes, the Series-2004 notes have decreased as a share of the total order from 36.7 percent in 2005 to 23.5 percent in 2006.

Overall, the additional cost expected in 2006 from the increase in the total number of notes printed, along with higher BEP billing rates for all denominations, is greater than the budget savings from the lower percentage of high-cost notes to be printed. As a result, the weighted average cost per 1,000 notes printed of all denominations will increase 0.8 percent, from $55.32 in 2005 to $55.74 in 2006, yielding an increase in the overall printing cost of 2.7 percent.

Currency Transportation
The 2006 currency transportation budget is $16.3 million, which includes the cost of shipping new currency from the BEP to Reserve Banks, intra-System currency shipments, and returning currency pallets to the BEP.

The 2006 budget for new currency shipments is $12.5 million and the 2006 budget for intra-System shipments is $3.8 million, which are 31.6 percent and 10.3 percent higher than 2005 estimated expenses, respectively. The reinstatement of the postponed Series-2004 $10 note shipments is primarily responsible for these budget increases, although expected growth in armored carrier costs also has some effect. The 2006 budget for returning currency pallets from Reserve Banks to the BEP is unchanged from the 2005 estimate, at $32 thousand.

Counterfeit-Deterrence Research
The 2006 budget for counterfeit-deterrence research is $3.3 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. The U.S. share of the 2006 CBCDG budget comprises 99 percent of the Federal Reserve's counterfeit-deterrence budget and is 4.1 percent less than the 2005 estimate. The remaining one percent of the counterfeit-deterrence research budget represents the $17 thousand annual membership fee for the RRC, which is a state-of-the-art facility for the adversarial testing of banknote designs and counterfeit deterrent features hosted by the National Bank of Denmark. In 2005, the RRC budget was uncharacteristically high because of a one-time catch-up payment, causing a subsequent decrease of 75.6 percent in the 2006 budget.

Treasury's Office of Currency Standards (OCS)
The 2006 budget for reimbursement to the U.S. Department of the Treasury for OCS expenses is $3.6 million. OCS develops Reserve Bank standards for cancellation and destruction of unfit currency and note accountability, and reviews Reserve Bank cash operations for compliance with its standards. As a public service, OCS processes claims for the redemption of damaged or mutilated currency; the 2006 budget includes reimbursement for these expenses. The 2.4 percent OCS budget increase results from additional staffing to process Hurricane Katrina mutilated currency and increased travel costs.