Appendix A: Federal Reserve Budget Processes

The budgets for the Board of Governors, the Federal Reserve Banks, and currency are separate, and each has its own budget process.

Board of Governors

For the past 12 years, the Board prepared two-year budgets. However, to better respond to the significant changes in demands placed on the Board during the financial crisis and the potential impact of regulatory restructuring proposals, the Board approved a one-year budget for 2010.

• The Board's budget is structured by division, office, or special account (see appendix C, table C.1).
• The Board establishes a base budget to support current operations.
• Each division identifies new initiatives and savings required to achieve its objectives for the next budget cycle.
• The Board's Staff Planning Group (SPG), a committee of senior officers representing major lines of business, evaluates each new initiative and proposed savings in the context of the Board's as well as the division's mission.
• The proposed budget is submitted to the Committee on Board Affairs (CBA). The CBA submits the budget to the Board for review and final action.
• Monthly expenses are compared with budgets by division and accounting classification. Variances are analyzed and reported.

The Board's Office of Inspector General (OIG), in keeping with its statutory independence, prepares its proposed budget apart from the Board's budget. The OIG presents its budget directly to the Chairman for action by the Board.

Federal Reserve Banks

The Reserve Banks' budgets cover one year. Annually, each Reserve Bank establishes major operating goals for the coming year, devises strategies for attaining those goals, estimates required resources, and monitors results. The Reserve Banks' budgets are structured by operational area, with support and overhead attributable to each area charged to that area.

The operations and financial performance of the Reserve Banks are monitored throughout the year by way of a cost-accounting system, the Planning and Control System (PACS). Under PACS, the costs of all Reserve Bank functions are grouped by operational area, and the associated costs of support and overhead are charged to these areas accordingly. PACS makes it possible to compare budgets with actual expenses, and it facilitates comparison of the financial and operating performances of the Reserve Banks. During the budget year, the Reserve Banks must submit proposals for major purchases of assets to the Board for further review and approval.

Following is a summary of the Reserve Bank budget process:

• The business leaders in each functional area provide guidance to the Reserve Banks for the upcoming budget year.
• The Reserve Banks develop early budget projections that incorporate the business leader guidance. The budgets are reviewed by the Reserve Banks for consistency with the System direction and further refined to reflect business direction.
• The Reserve Banks submit preliminary budget information to the Board for staff review, including documentation to support the budget request.
• Board staff analyzes the Bank’s budgets, both individually and in the context of Systemwide initiatives and other Banks’ plans.
• The Committee on Federal Reserve Bank Affairs reviews the Bank budgets.
• The Reserve Banks make any requested or needed changes to the budgets, and the revised projections are submitted to the Board.
• The budgets are provided to the members of the Board for final action.
• Throughout the year, Reserve Bank and Board staff compare actual performance to budgeted projections.

Currency

The currency budget covers one (calendar) year. On a monthly basis, Board staff monitors payments of currency to and receipts of currency from circulation and the number of unfit notes destroyed at the Reserve Banks. Board staff estimates the number of notes the Board will order from the BEP to meet demand based on monthly monitoring, forecasts of growth rates for payments of currency to circulation and receipts of currency from circulation, operational factors, and other policy considerations. Historically, over 90 percent of the notes that the Board orders each year replace unfit currency that Reserve Banks receive from circulation.

The currency budget process is as follows:

• Each July, based on Board staff's assessment of currency demand, the director of the Division of Reserve Bank Operations and Payment Systems submits a fiscal year print order for currency to the director of the Bureau of Engraving and Printing (BEP).
• Each November, Board staff estimates expenses for the currency budget, including printing expenses (based on billing rates provided by the BEP), currency transportation expenses, counterfeit-deterrence research expenses, BEP's Finance Directorate operations expenses, and estimated expenses for other currency-related initiatives.
• The Committee on Federal Reserve Bank Affairs reviews the proposed currency budget.
• Staff submits the proposed currency budget to the Board for its consideration and approval.
• On a monthly basis, Board staff monitors expenses and compares these expenses to the budget.

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