FRB: 2010 New Currency Budget

2010 New Currency Budget

Action Requested
Staff requests that the Board approve the proposed 2010 new currency budget totaling $702.9 million, an increase of $163.3 million, or 30.3 percent, from 2009 estimated expenses and $71.4 million, or 11.3 percent, from the approved 2009 budget. The 2009 estimated expenses are lower than the 2009 budget because of delays associated with the new-design $100 note. In addition, the Bureau of Engraving and Printing (BEP) requested that we move nearly 630 million notes from the fiscal year 2009 print order into the fiscal year 2010 print order. These changes to the 2009 print order and the order for a large quantity of new-design $100 notes are primarily responsible for the significant increase of the 2010 budget compared with the 2009 estimate.

Discussion
Under authority delegated by the Board, 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. After reviewing the order, the BEP establishes billing rates for new currency, which Board staff uses to prepare the annual new currency budget. Once the Board approves the new currency budget, it assesses the cost of new currency to each Federal Reserve Bank through an accounting procedure similar to that used in assessing the costs of the Board's operating expenses to the Reserve Banks.

In August 2009, the director of RBOPS forwarded to the director of the BEP the fiscal year 2010 print order for approximately 8.0 billion Federal Reserve notes.¹ Table 1 compares the Board's calendar year 2010 budget with the 2009 budget and 2009 estimate.

Table 1
New Currency Budget
(calendar year)

	2009 Budget (thousands)	2009 Estimate (thousands)	2010 Budget (thousands)	Percent Change 2009E/2009B	Percent Change 2010B/2009E
Print order (number of notes)	7,017,600	6,780,800	7,616,733	-3.4	12.3
Printing costs for FR notes	$606,070	$516,512	$677,613	-14.8	31.2
Currency transportation costs	$17,145	$15,560	$17,446	-9.2	12.1
Counterfeit-deterrence research	$4,240	$3,913	$4,208	-7.7	7.5
BEP's Finance Directorate	$4,022	$3,587	$3,650	-10.8	1.8
Total Expenses	$631,477	$539,572	$702,918	-14.6	30.3

2009 New Currency Expenses
Staff estimates that total new currency expenses for 2009 will be $91.9 million under budget, or 14.6 percent, primarily because of the BEP printing fewer and less-expensive notes than planned. The lower printing costs represent 97.5 percent of the total unplanned reduction in expenses for 2009. A discussion of the primary expense drivers follows.

2009 Printing Costs
The estimated calendar year 2009 currency printing cost is $516.5 million, or 14.8 percent lower than the budgeted amount, primarily because approximately 1.3 billion new-design $100 notes (Series 2004) included in the 2009 budget were not printed because of production delays.² Instead, the BEP produced 1.1 billion current-design $100 notes (Series 1996), which have a substantially lower billing rate, reducing 2009 printing costs by $33.1 million.³ Additionally, the BEP requested that we shift 627.2 million $5 notes from the fiscal year 2009 to the fiscal year 2010 print order. This change resulted in an additional $56.5 million reduction in printing costs. The director of RBOPS approved this change in August 2009, under authority delegated from the Board.

2009 Transportation Costs
Estimated total transportation costs, including new and intra-System currency shipments, are 9.2 percent lower than the 2009 budget because of fewer shipments from the BEP to the Reserve Banks than originally planned. Estimated 2009 expenses for new currency shipments are 30.2 percent below the original 2009 budget. The budget included funding to ship new-design $100 notes to each Reserve Bank office to ensure they had sufficient inventories for issuance; however, these shipments were not made because the BEP experienced delays in the production of new-design $100 notes.⁴ Instead, the BEP printed current-design $100 notes to meet existing demand that we shipped primarily from the BEP to the Federal Reserve Bank of New York to meet international demand.⁵

In contrast to new currency shipments, estimated costs for intra-System shipments are 21.8 percent higher than budgeted primarily because there were approximately 11.6 percent more shipments than budgeted and at higher than anticipated rates. ⁶ Some Reserve Banks were unable to process all of their receipts from circulation because their banknote processing systems (BPS) were being upgraded, necessitating shipments to offices that had excess processing capacity to generate fit notes.⁷ These fit notes were then returned to the originating office to meet demand.

2010 New Currency Budget
The proposed $702.9 million 2010 new currency budget is 30.3 percent higher than the 2009 estimate and 11.3 percent higher than the 2009 budget. Significantly lower printing costs in 2009 account for the majority of the difference between the 2009 estimate and the 2010 budget. The volume of more-expensive new-design $100 notes ordered in 2010 account for the majority of the difference between the 2009 and 2010 budgets.⁸ Printing costs for Federal Reserve notes represent over 96 percent of the new currency budget, and expenses for currency transportation, counterfeit-deterrence research, and costs to reimburse the BEP's Finance Directorate account for the remaining 4 percent.

2010 Printing Costs
The budget includes $677.6 million to print the notes we have ordered for calendar year 2010, which represents a 31.2 percent increase from the estimated cost for the 2009 order.⁹ As shown below in table 2, the volume-weighted average billing rate increased 2.9 percent, from $86.36 per thousand notes in 2009 to $88.87 per thousand notes in 2010, primarily because of the large volume of Series 2004 notes ordered, specifically the large number of Series 2004 $100 notes ordered.¹⁰ The 2010 calendar year budget includes more than 2.75 billion Series 2004 $100 notes at the billing rate of $117.98 per thousand notes, amounting to approximately $324.6 million, or 48.0 percent of the total proposed printing costs.¹¹ The billing rate for the new-design $100 note is $32.63 higher per thousand notes than the billing rate for the current-design $100 note. Because no new-design $100 notes were printed in 2009, the 2010 average billing rate is strongly influenced by the large quantity of new-design $100 notes ordered and its higher billing rate.

Table 2
BEP Billing Rates

Note type^a	2009 billing rates per thousand notes	2010 billing rates per thousand notes	Percent change in billing rates	Estimated number of notes for 2009 (millions)	Projected number of notes for 2010 (millions)	2010 printing cost (thousands)
Pre-1996 $1, $2^b	$52.68	$48.07	-8.8	3,225.6	1,469.8	$70,651
Series 1996 $100	$97.23	$85.35	-12.2	1,977.6	108.8	$9,286
Series 2004 $5	$90.08	$77.57	-13.9	153.6	805.3	$62,466
Series 2004 $10	$93.50	$78.85	-15.7	134.4	214.6	$16,924
Series 2004 $20, $50	$99.18	$85.11	-14.2	1,289.6	2,267.0	$192,948
Series 2004 $100^c	134.97	$117.98	-12.6	0.0	2,751.2	$324,588
Total				6,780.8	7,616.7	$676,863
Volume-weighted average	$86.36	$88.87	2.9

^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. The Series 2004 $100 note will include additional security features. Return to table.
^b The fiscal year 2009 and 2010 print orders do not include $2 notes because Reserve Banks have sufficient inventories to meet estimated public demand for several years. Return to table.
^c The BEP is currently conducting production tests for the Series 2004 $100 note. The billing rates included in the table are estimates. Although Series 2004 $100 notes were included in the 2009 print order and cost estimates were provided, no Series 2004 100 notes were printed. Return to table.

The cost components of the billing rates are currency production, production support, capital investment, and public education. Figure 1 shows the percentage contribution of these factors to the total printing cost of currency.

Figure 1. Pie graph showing new currency cost components contribution to the total printing cost of currency. Production support: 32 percent. Currency production support: 52 percent. Capital Investment: 8 percent. Public Education: 1 percent.

Currency Production Costs
Currency production costs comprise 52 percent of total currency printing costs. These costs reflect an increase of $105.3 million, or 41.4 percent, over the 2009 billing rates. This increase is primarily attributable to the increase in the number of notes ordered as well as an overall shift in the composition of notes to more-expensive Series 2004 notes. Series 2004 notes comprise 79.3 percent of the calendar year 2010 budget, compared with 23.3 percent of the 2009 estimate.

Production Support Costs
The production support budget comprises 39 percent of total currency costs. These costs reflect a decrease of $1.8 million, or 0.7 percent, from the 2009 billing rates.¹² The BEP incurred significant research and development costs in 2009 associated with testing the new-design $100 notes. Funding for research and development will decrease by $9.1 million (48 percent) in 2010 because the BEP expects to complete testing the new-design note and begin full-scale production in January.

Capital Investment Costs
BEP capital improvement costs represent approximately 8 percent of the 2010 currency printing budget and increased $3.7 million, or 7.7 percent, from 2009 because of continued expenses associated with ongoing press and facility upgrades (approximately 70 percent of the capital investment budget is for equipment expenses and the remaining 30 percent is for facility upgrades). In 2006, the BEP began implementing a 10-year plan to replace much of its production equipment and to improve its aging infrastructure.¹³ The BEP and Board staffs are determining the number of presses needed based on projected future-year print orders. The BEP is currently investigating various options to upgrade its Washington D.C. facility. We expect capital costs to increase nearly 30 percent over the next three years as both the facility and production equipment upgrades proceed. Additionally, because the BEP printed fewer notes than originally ordered and priced in 2009, it was unable to fully fund its capital investment account; the BEP instead used funds from its working capital account. 2010 billing rates, therefore, include funding to replenish the BEP's working capital account.

Public Education Costs
In 2007, the BEP awarded a $36 million multi-year contract to Burson-Marsteller, following a competitive bidding process, to develop a public education program in support of the Series 2004 $5 and $100 notes, similar to the public education campaigns that supported the issuance of Series 2004 $20, $50 and $10 notes.¹⁴ Delays in the issuance of the new-design $100 note allowed us to re-evaluate our public education strategies to ensure that they are meeting the needs of users of U.S. currency. Through this process, we discovered that we would need to provide public education outreach to more countries than included in our original budget.¹⁵ We also determined that in order to optimize public education opportunities we would need a more robust website than we had initially envisioned. Additionally, we continue to incur public education costs during the delay in the issuance of the new-design $100 note because of ongoing work that Burson-Marsteller performs, including fulfilling orders for Series 2004 $5 note public education materials, and analyzing and monitoring the media. All of these developments have left the program underfunded. Therefore, in November 2009, the Advanced Counterfeit Deterrence Steering Committee (ACD) endorsed the BEP's proposal to increase the public education budget by $7.7 million.¹⁶

Number and Denomination Mix of Notes Printed
We estimate a 12.3 percent volume increase in the overall calendar year 2010 print order compared with the 2009 estimate. Table 3 illustrates the number of notes by denomination that we expect the BEP will print in calendar year 2010 compared with the 2009 estimate.

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

Denomination 2009 Estimate 2010 Budget Percent change 2010B/2009E

$1 3,225.6 1,469.8 -54.4

$2 0.0 0.0 0.0

$5 153.6 805.3 -424.3

$10 134.4 214.6 59.7

$20 992.0 2,267.0 128.5

$50 297.6 0.0 -100.0

$100^a 1,977.6 2,860.0 44.6

Total 6,780.8 7,616.7 12.3

Denomination	2009 Estimate	2010 Budget	Percent change 2010B/2009E
$1	3,225.6	1,469.8	-54.4
$2	0.0	0.0	0.0
$5	153.6	805.3	-424.3
$10	134.4	214.6	59.7
$20	992.0	2,267.0	128.5
$50	297.6	0.0	-100.0
$100^a	1,977.6	2,860.0	44.6
Total	6,780.8	7,616.7	12.3

^a The calendar year 2010 budget includes 108.8 million current-design and 2.75 billion new-design $100 notes Return to table.

As part of the annual print order process, we forecast five years of currency demand and allocate, as evenly as possible, the number and denomination of notes that we expect to order over that period.¹⁷ As a result, the print order for fiscal year 2010 includes predominantly $1, $20, and $100 notes and relatively small amounts of $5 and $10 notes.¹⁸ We currently anticipate that the fiscal year 2011 print order will include all denominations except $2 notes. We estimate that in calendar years 2010 and 2011 orders of approximately 4.0 billion Series 2004 $100 notes will be required to meet demand after the note is issued.¹⁹ Although the final release date for the Series 2004 $100 note remains uncertain, for budget-planning purposes, we assumed that the Federal Reserve will begin to issue the notes in late 2010.²⁰ The BEP continues to conduct production tests on the Series 2004 $100 note. When this testing is complete, we will have a more-precise timeline for production and issuance.

Production Quality Assessment
Board staff, in collaboration with the BEP, is planning to establish a quality assurance program for U.S. currency to ensure that all notes meet the needs of the Federal Reserve and the public. Staff plans to engage outside consultants to assist in the development of this program. The program may include periodic sampling and monitoring of production notes before acceptance by the Federal Reserve.

2010 Currency Transportation
The 2010 currency transportation budget is $17.4 million, or a 12.1 percent increase over the 2009 estimate. This budget includes the costs of shipping new currency from the BEP to Reserve Banks ($8.5 million), shipping fit and unprocessed currency between Reserve Banks ($8.9 million), and returning currency pallets to the BEP ($45 thousand). The overall currency transportation budget reflects an increase of 20.5 percent in new currency and 5.0 percent in intra-System shipment costs. The new currency shipment budget increased primarily because we included $1.1 million to ship Series 2004 $100 notes from the BEP to every Reserve Bank in order to build sufficient inventories before issuance.²¹ We are currently negotiating 2010 contracts with armored carriers and will work with the carriers to refine their cost estimates.
We expect to make approximately the same number of intra-System shipments in 2010 as we made in 2009 because capacity will remain constrained as the remaining Reserve Bank offices upgrade their BPS machines and we continue to ship currency to offices with available processing capacity. We project a 5.0 percent increase in intra-System shipment costs, reflecting higher armored carrier rates.

Counterfeit-Deterrence Research
The 2010 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 31 central banks. The Board's $4.2 million share of the 2010 CBCDG budget comprises 99 percent of the Federal Reserve's counterfeit-deterrence budget and is 7.5 percent higher than the 2009 estimate.²² Most of this increase is attributable to program administration costs, including conducting a market research report every other year, a BIS fee increase for providing legal support to defend the current patent infringement claim against one of the member countries, and an audit of the primary vendor for the counterfeit deterrence system. In addition, the increase reflects the full-year effect of one additional staff member.

Bureau of Engraving and Printing's Finance Directorate
The 2010 budget includes $3.6 million to reimburse the BEP for expenses incurred by its Destruction Standards and Compliance Division of the Office of Compliance (OC) and Mutilated Currency Division of the Office of Financial Management. 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 1.8 percent results primarily from increased labor and benefit expenses.

2010 Budget Risks
The primary risk to the 2010 new currency budget is the production and issuance schedule for the Series 2004 $100 note. We currently anticipate that the Series 2004 $100 note production and issuance will occur later than we planned when we submitted the fiscal year 2010 print order in August 2009. If the production and issuance is delayed past late 2010, we may need to print additional current-design $100 notes. The BEP currently plans to stop printing Series 1996 $100 notes in early 2010. Production delays or unexpected increases in demand, therefore, pose additional risks. For example, the supplies required to produce the current-design $100 note may not be readily available after production of the new-design $100 note has begun.

Chart 1 New Currency Expenses Barchart

Data for Chart 1

YEAR 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010B

Nominal Cost in millions of dollars 190 260 295 355 368 373 403 367 408 487 456 344 430 514 514 497 489 576 500 540 703

Real Cost (CPI Adjusted) in millions of dollars 190 249 275 321 324 320 336 299 327 382 346 254 312 365 356 333 317 363 304 329 424

Chart 2 Value of Notes Printed Compared with Number of Notes Printed

Data for Chart 2

YEAR 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010B

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 7.5 6.8 7.6

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 50.20 123.30 126.20 157.00 140.8 146.1 178.1 160.3 237.8 339.0

Chart 3 Cost of Currency Compared with Number of Notes Printed Bar and Line Chart

Data for Chart 3

YEAR 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010B

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 7.5 6.8 7.6

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 $88.87

1	Because the BEP operates on a fiscal year that began October 1, 2009, and ends September 30, 2010, Board 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 the BEP will produce in the fourth quarter of the calendar year. Return to text.
2	The new-design $100 note is the last denomination to be issued as part of the Series 2004 design family of notes. This design family, which incorporates new color backgrounds, began with the issuance of the Series 2004 $20 note in October 2003, followed by the $50 note in September 2004, the $10 note in March 2006, and the $5 note in March 2008. Return to text.
3	When Board staff prepared the calendar year 2009 budget in November 2008, demand for $100 notes was at a historic high and we estimated that we would need the BEP to produce 1.3 billion $100 notes during calendar year 2009. Demand moderated during 2009, however, and we only needed the BEP to produce 1.1 billion $100 notes. This change affected only the calendar year 2009 budget and did not necessitate a change to the fiscal year 2009 print order. Return to text.
4	The funding to ship the new-design $100 notes to each Reserve Bank accounts for 64 percent of the difference between the 2009 estimate and the 2009 budget. The remainder of the difference is attributable to fewer new currency shipments than expected in all denominations. Return to text.
5	The Federal Reserve Bank of New York shipped its excess inventories of fit $100 notes to other Reserve Banks to meet domestic demand. Return to text.
6	New currency shipments are based on negotiated contracts; intra-System shipments, however, are bid throughout the year, which can result in higher than expected rates. Return to text.
7	During the year, unanticipated delays associated with the upgrade program necessitated additional shipments. Return to text.
8	The calendar year 2009 budget included only 1.3 billion new-design $100 notes and the calendar year 2010 budget includes 2.75 billion new-design $100 notes. Return to text.
9	Charts 1-3 in the attachment show the new currency expenses, the value and number of notes printed, and the number and cost of notes printed from 1990 through the 2010 budget period. Return to text.
10	Although the volume-weighted average billing rate increased because of the large volume of Series 2004 $100 notes ordered, the individual 2010 billing rates per thousand notes of comparable design are less than the 2009 billing rates per thousand notes. The individual 2010 billing rates are less, because the fiscal year 2010 print order contains more notes across which to spread high fixed costs of production. Return to text.
11	The Series 2004 $100 note billing rate reflects overall improvements to the security of the note, including new features to enhance the public's ability to authenticate $100 Federal Reserve notes. This higher level of security has significantly increased the cost for both paper and ink relative to the current-design $100 note. Return to text.
12	Production support costs include costs incurred for manufacturing support, prepress and engraving, research and development, and general and administrative staff and activities. Return to text.
13	Production equipment includes presses and currency-inspection equipment. Return to text.
14	The public education program had $18.3 million remaining at the end of fiscal year 2009. We expect costs for the program to total $19.3 million in 2010. Return to text.
15	The public education program's international strategy has expanded over the past three years in response to changing $100 note markets and use around the world. Return to text.
16	The Advanced Counterfeit Deterrence Steering Committee is an interagency policy group designed to coordinate the counterfeit deterrent features of U.S. currency and make currency design recommendations to the Secretary of the Treasury. The ACD approved the $7.7 million of additional funding for public education to sustain the program through fiscal year 2011. Return to text.
17	The BEP's currency production is more cost effective when its production schedule is planned over a multiple-year period. Return to text.
18	The $5 notes that appear in the fiscal year 2010 print order were notes that were moved from the fiscal year 2009 order. A small quantity of $10 notes are needed because of lower receipts from circulation and a higher destruction rate than projected. Return to text.
19	As with the $100 redesign introductions in 1991 and 1996, the Federal Reserve plans to discontinue issuing and destroy all pre-Series 2004 $100 notes it receives after the Series 2004 $100 note has been issued. This plan is consistent with the recommendation of the Advanced Counterfeit Deterrence Steering Committee. We included 2.4 billion new-design $100 notes in the fiscal year 2010 print order and plan to include approximately 1.6 billion new-design $100 notes in the fiscal year 2011 print order. Return to text.
20	We estimate that the BEP will need between 6 and 9 months to produce the number of notes required for initial issuance. Return to text.
21	In order to build inventories of new Series 2004 $100 notes at all Reserve Banks before day of issue, we need to ship these notes from the BEP (both facilities) to every Reserve Bank, which requires additional transportation funding. In addition, at the Board's direction, the Federal Reserve Bank of New York will work with its Extended Custodial Inventory operators to pre-load vaults with sufficient new-design $100 note inventories to meet expected international demand. Return to text.
22	The estimated RRC payment of $36,000 represents the remaining 1 percent of the counterfeit-deterrence research budget. The RRC is a state-of-the-art facility hosted by the National Bank of Denmark for adversarial testing of banknote designs and counterfeit deterrent features for its 13 member countries. Return to text.

YEAR	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009E	2010B
Nominal Cost in millions of dollars	190	260	295	355	368	373	403	367	408	487	456	344	430	514	514	497	489	576	500	540	703
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	304	329	424