2009 New Currency Budget Action Requested Staff requests that the Board approve the proposed 2009 new-currency budget totaling $631.5 million, an increase of $135.6 million, or 27.3 percent, from 2008 estimated expenses and $29.1 million, or 4.8 percent, from the approved 2008 budget. The 2008 estimated expenses are significantly lower than the 2008 budget because we moved nearly 900 million notes from the 2008 into the 2009 note order at the request of the Bureau of Engraving and Printing (BEP) to accommodate delays associated with the upgrade of its production equipment and the production of the new-design $100 note. This note order change is primarily responsible for the significant increase of the 2009 budget compared with the 2008 estimate. The 4.8 percent year-over-year budget increase primarily reflects a larger number of new-design notes ordered, as well as an increase in BEP billing rates. The primary factors behind these changes are discussed below. 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 July 2008, the director of RBOPS forwarded to the BEP a print order for 6.9 billion notes for fiscal year 2009. Because the BEP operates on a fiscal year, which began October 1, 2008, and ends September 30, 2009, 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 2009 budget with the 2008 budget and 2008 estimate.

a $1 and $2 notes do not include the security features that are in the Series 1996 and Series 2004 design notes; Series 1996 $100 notes include a watermark and color-shifting ink; Series 2004 $5 notes include two watermarks and additional security features; and Series 2004 $10, $20, and $50 notes include watermarks, additional security features, and a new color shifting ink. Return to table. b The Board did not order any $2 notes in fiscal year 2009 (a decision the director of RBOPS approved in July 2008) because Reserve Banks have sufficient inventories to meet estimated public demand for several years. Return to table. c The BEP is currently production testing the Series 2004 $100 note. The billing rate included in the table is an estimate. Return to table. d Volume weighted. Return to table.

The cost components of the billing rates are currency production, production support, capital investment, and public education. Figure 1 shows the contribution of these factors to the total printing cost of currency. Currency Production Costs The currency production budget comprises 44 percent of total currency printing costs and grew 1.8 percent from 2008 to 2009. This increase is largely attributable to the costs of the Series 2004 $100 notes. The increased $100 note production costs reflect overall improvements to the security of the note, including new public features that incorporate years of research to enhance the public's ability to authenticate Federal Reserve notes. These features raise the costs of paper and ink significantly. Per note costs for paper, ink, and labor for all other denominations decreased slightly from 2008. Production Support Costs The production support budget comprises an additional 47 percent of total currency costs and increased 7.5 percent from 2008 to 2009. The BEP budgeted higher costs for utilities, primarily natural gas, electricity, and other petroleum-based materials because it locked in prices for utilities while they were rising to guard against additional increases. Also, the BEP's research and development budget increased by $7.2 million (60 percent) primarily for research into additional currency security features for the future generation of Federal Reserve notes and options to make U.S. currency more accessible to the blind and visually impaired.6 Capital Investment Costs BEP capital improvement costs represent about 8 percent of the 2009 currency printing budget and increased nearly 48 percent from 2008 because of continued expenses associated with ongoing press upgrades and capital accumulation for future facility upgrades. Beginning in 2006, the BEP implemented a 10-year plan to replace much of its production equipment that has fully depreciated and to improve its aging infrastructure at its two facilities. The BEP will replace currency production equipment at both the Washington, D.C., and Fort Worth facilities, including intaglio presses, overprinting equipment, and currency-inspection equipment for some production lines.7 The new equipment will replace fully depreciated presses, provide more printing versatility, and increase production capacity per press.8 In addition, the BEP plans to improve its infrastructure at the Washington D.C., facility. The BEP is currently investigating various infrastructure upgrade options, and we expect significant changes in capital charges over the next 10 years as both the facility and production equipment upgrades proceed. Also, the BEP has allocated funds to comply with the Homeland Security Presidential Directive that requires a uniform government access badge and to upgrade information technology and physical security at both of its facilities. Public Education Costs The BEP awarded a $36 million contract to Burson-Marsteller in 2007 following a competitive bidding process to develop a public education program in support of the Series 2004 $5 and $100 notes (Reserve Banks issued the new-design $5 note in March 2008). Burson-Marsteller also had been awarded the previous contract in support of the Series 2004 $20, $50, and $10 notes. Of the $36 million contract, the BEP has already committed approximately $24.5 million and will commit the remainder in 2009 to support the release of the Series 2004 $100 note. Number and Denomination Mix of Notes Printed We estimate a 5.2 percent decrease in the overall calendar year 2009 BEP print order compared with the 2008 estimate. Table 3 illustrates the number of notes by denomination that the BEP will print in calendar year 2009 compared with the number of notes printed in 2008.

Table 3 Number of Notes Printed (millions per calendar year)

Denomination	2008 Estimated	2009 Budget	Percent change 2009B/2008E
$1	3,404.8	2,745.6	-19.4
$2	0.0	0.0	0.0
$5	1,267.2	780.8	-38.4
$10	966.4	140.8	-85.4
$20	409.6	876.8	114.1
$50	60.8	300.8	394.7
$100	1,296.0	2,172.8	67.7
Total	7,404.8	7,017.6	-5.2

As part of the annual print order process, we forecast five years of projected currency demand and allocate, as evenly as possible, the number and denomination of notes that we expect to order over that period.9 In 2006, we recognized that BEP production capacity would be temporarily constrained by the approximately 3.5 billion Series 2004 $100 notes that we estimated it would need to produce in fiscal years 2009 and 2010.10 Although the release date for the Series 2004 $100 note remains uncertain, for budget planning purposes we assumed that Reserve Banks will begin to issue the notes in early 2010.11 In order to allow the BEP sufficient capacity to produce these notes, we included a significant number of notes in the fiscal year 2007, 2008, and 2009 print orders to meet estimated future-year demand. Accordingly, the fiscal year 2008 and 2009 orders include all the $5, $10, and $50 notes that we estimate Reserve Banks will need to meet demand through 2010. As a result, we expect that the print orders for fiscal years 2009 and 2010 will be similar in volume and that the 2010 order will include $1, $20, and $100 notes only.12 In addition to the increase in billing rates, the 2009 print budget is also higher than 2008 estimated expenses because it contains a larger share of more-expensive new-design notes than did the 2008 budget. Series 2004 notes comprise 49 percent of the calendar year 2009 budget, compared with 46 percent of the 2008 budgeted order. Specifically, the proposed 2009 budget includes 1.3 billion Series 2004 $100 notes at the billing rate of $134.97 per thousand, amounting to $178.4 million, or 29.4 percent of the total proposed printing costs for the new currency budget. The BEP is currently testing the note extensively; therefore, the actual timeline for production and the final billing rate are uncertain at this time. 2009 Print Budget Risks There are two primary risks to the 2009 print budget: the production and issuance schedule for the Series 2004 $100 note and continued elevated international demand for $100 notes that began in September. We currently anticipate that the Series 2004 $100 note production and issuance will occur later than we planned when we submitted the fiscal year 2009 print order. Therefore, we included 480 million additional Series 1996 $100 notes in the 2009 budget to continue to meet new note demand. If the production and issuance is delayed past early 2010, we plan to substitute approximately 80 million Series 1996 $100 notes for Series 2004 $100 notes for each month of delay. Likewise, if the production and issuance occurs before current expectations, then we plan to substitute approximately 80 million Series 2004 $100 notes for Series 1996 $100 notes for each month that the project timeline is accelerated. Therefore, any delay will yield a budget savings and any acceleration will yield a budget overrun of approximately $3 million per month because the Series 1996 note is significantly less costly to produce. In addition to the Series 2004 $100 note risk, increased international demand for new Series 1996 $100 notes as a result of the recent financial market turmoil makes demand levels uncertain over the mid- to longer term.13 The original print order assumed a 3.5 percent annual growth rate for $100 note payments, but we currently estimate the calendar year 2008 annual growth rate to be in excess of 13 percent. The Reserve Banks paid nearly 66 percent more $100 notes to circulation in October 2008 than in October 2007. Because of this increased activity, we requested that the BEP accelerate the $100 note printing schedule, and we currently estimate that the BEP will produce more than 50 percent of the fiscal year 2009 $100 note order within the first three months. We plan to evaluate demand in January and will adjust the fiscal year 2009 print order if necessary. 2009 Currency Transportation The 2009 currency transportation budget is $17.1 million, which includes the costs of shipping new currency from the BEP to Reserve Banks ($10.2 million), of intra-System shipments of fit and unprocessed currency ($6.9 million), and of returning currency pallets to the BEP ($55 thousand). The 2009 budget for currency transportation increased 18 percent from 2008 estimates. The overall increase reflects a two percent increase in intra-System, and a 32.3 percent increase in new-currency shipment costs. Intra-System shipment carriers adjusted costs throughout 2008 to include fuel price changes, yielding the 33.3 percent overage in the 2008 estimate. The 2009 intra-System shipment budget only increased 2 percent compared with the 2008 estimate because we assumed, for budget planning purposes, no additional significant price increases in 2009. The new currency shipment budget, however, increased 32.3 percent over 2008 estimated expenses primarily because we assumed significant price increases for carriers that did not seek fuel surcharge relief in 2008. We are currently negotiating 2009 annual contracts with these carriers, but, for planning purposes, have based the budget on their bids, which assume continued high fuel and air travel costs. We plan to work with the carriers to refine their cost estimates. In addition to expected rate increases, the $2.6 million increase in the new currency shipment budget includes $1.1 million to ship Series 2004 $100 notes to the Reserve Banks to build inventories before issuance. Without these $100 note shipments, new currency shipment expenses would increase only 18 percent, reflecting the potentially higher carrier rates. Counterfeit-Deterrence Research The 2009 budget for counterfeit-deterrence research is $4.2 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 and includes 30 central banks. The Board's $4.2 million share of the 2009 CBCDG budget comprises 99 percent of the Federal Reserve's counterfeit-deterrence budget and is 15.2 percent higher than the 2008 estimate.14 Most of this increase is attributable to new research initiatives and legal fees in support of the intellectual property infringement suit against one member central bank. Treasury's Office of Compliance (OC) The 2009 budget to reimburse the U.S. Department of the Treasury for OC expenses is $4.0 million. The OC develops Reserve Bank standards for cancellation and destruction of unfit currency and for note accountability, and reviews Reserve Banks' cash operations for compliance with its standards. As a public service, the OC also processes claims for the redemption of damaged or mutilated currency. The OC budget increase of 5.5 percent results primarily from increased travel costs.

Data for Chart 1

YEAR	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008E	2009B
Nominal Cost in millions of dollars	190	260	295	355	368	373	403	367	408	487	456	344	430	514	514	497	489	576	496	631
Real Cost (CPI Adjusted) in millions of dollars	190	249	275	321	324	320	336	299	327	382	346	254	312	365	356	333	317	363	296	363

Data for Chart 2

YEAR	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008E	2009B
Billions of notes	7.00	8.02	8.45	8.03	9.33	9.96	9.44	9.58	9.20	10.80	8.97	8.18	7.39	8.39	8.88	8.30	8.50	8.80	7.4	7.0
Billions of dollars	84.47	107.96	103.19	104.89	128.82	148.24	194.64	142.23	163.26	285.49	67.46	50.20	123.30	126.20	157.00	140.8	146.1	178.1	160.2	257.9

Data for Chart 3

YEAR	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008E	2009B
Billions of notes	7.00	8.02	8.45	8.03	9.33	9.96	9.44	9.58	9.20	10.8	8.97	8.18	7.39	8.39	8.89	8.29	8.46	8.8	7.4	7.0
Cost per 1000 notes	$26.00	$30.00	$36.00	$41.00	$38.00	$37.00	$40.00	$43.00	$47.00	$43.00	$47.00	$49.00	$50.00	$58.25	$55.67	$55.32	$55.74	$63.30	$63.99	$86.36