Board of Governors of the Federal Reserve System

Federal Reserve System Budgets

The Federal Reserve Board of Governors and the Federal Reserve Banks prepare annual budgets as part of their efforts to ensure appropriate stewardship and accountability.¹ This section presents information on the 2017 budget performance of the Board and Reserve Banks and on their 2018 budgets, budgeting processes, and trends in expenses and employment. This section also presents information on the costs of new currency.

System Budgets Overview

Tables 1 and 2 summarize the Federal Reserve Board of Governors' and Federal Reserve Banks' 2017 budgeted and actual and 2018 budgeted operating expenses and employment.²

Table 1. Total operating expenses of the Federal Reserve System, net of receipts and claims for reimbursement, 2017-18

Table 2. Employment in the Federal Reserve System, 2017-18

2017 Budget Performance

In carrying out its responsibilities in 2017, the Federal Reserve System incurred $4,531.5 million in net expenses. Total System operating expenses of $5,673.9 million were offset by $1,142.4 million in revenue from priced services, claims for reimbursement, and other income. Total 2017 System operating expenses were $143.4 million, or 2.5 percent, less than the amount budgeted for 2017.

2018 Operating Expense Budget

Budgeted 2018 System operating expenses of $5,003.3 million, net of revenue and reimbursements, are $471.7 million, or 10.4 percent, higher than 2017 actual expenses. The Reserve Bank budgets comprise almost three-quarters of the System budget (figure 1). Budgeted 2018 revenue from priced services and claims for reimbursements are expected to slightly decrease in 2018.

Trends in Expenses and Employment

From the actual 2008 level to the budgeted 2018 amount, the total operating expenses of the Federal Reserve System have increased an average of 4.7 percent per year (figure 2). Over the same period, nondefense discretionary spending by the federal government has increased an average of 1.4 percent per year (figure 3). Federal Reserve System employment declined from 2007 through 2010 because of continued efforts to reduce the size of the System's check service and because of efficiency improvements in cash. Staffing has subsequently increased in information technology (IT) to support large application-development projects, information security efforts, end-user services, and the central computing environment. Supervision resource levels were augmented to meet requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and to support portfolio growth (figure 4).

Growth in supervision expenses over the past 10 years has been driven by additional supervisory resources needed to respond to the financial crisis and a growth in the state member bank portfolio, to continue to implement expanded responsibilities mandated by the Dodd-Frank Act, to build out the cybersecurity supervision program, and to support other strategic national initiatives. Expense growth in the monetary policy area during the financial crisis has been followed by a focus on enhancing financial stability monitoring and dedicating additional resources to regional economic research.

Federal Reserve Bank expenses in the cash area have increased as a result of a multiyear effort to modernize the cash-processing and inventory-tracking infrastructure. These increases have been partially offset by lower expenses because of efficiency improvements in cash operations. Treasury services expenses have increased to meet evolving needs, including the automation of the Treasury's collection and payment services, the addition of Treasury applications to the Treasury Web Application Infrastructure (TWAI), and other requested projects.³

2018 Capital Budgets

The capital budgets for the Board and Reserve Banks total $158.0 million and $406.6 million, respectively.⁴ As in previous years, the capital budgets in 2018 include funding for projects that support the strategic direction outlined by the Board and each Reserve Bank. These strategic goals emphasize investments that continue to improve operational efficiencies, enhance services to Bank customers, and ensure a safe and productive work environment.

Board of Governors Budgets

Board of Governors

The Board's budget is grounded in the principles established by the Strategic Plan 2016-19 (www.federalreserve.gov/publications/gpra/files/2016-2019-gpra-strategic-plan.pdf)⁵ and provides funding to advance the Plan's goals, objectives, and initiatives. The budget is structured by division, office, or special account.

The Board's budget process is as follows:

• At the start of the budget process, the chief operating officer and chief financial officer meet with the Committee on Board Affairs (CBA) to recommend a specific growth target for the Board's operating budget. For 2018, the recommended growth target included known changes in the run-rate of the Board's ongoing operations, such as funding for the Board's compensation and benefit programs; no net growth in authorized position count; projected increases to centrally managed benefits, such as retirement and post-retirement benefits; and targeted increases in select goods and services accounts. After endorsement by the CBA, the target is briefed to the Board members, and to the Executive Committee, which comprises the directors of each division.
• To achieve the CBA's growth target, divisions review their resource requirements, reallocate funding to support mission-critical activities and strategic priorities, and submit initial budget requests, including proposed initiatives and potential savings. Since the growth target for 2018 did not include any new authorized positions, divisions prioritized vacancies to their most critical needs.
• Division of Financial Management staff review initial budget requests submitted by divisions and work collaboratively with all divisions to achieve the growth target.
• The chief operating officer and chief financial officer subsequently meet with the Executive Commit-tee and the CBA to further review and refine the budget submissions. Once the budget has been finalized, the administrative governor submits the budget to the full Board for review and final approval.
• Expenses are monitored throughout the year. Quarterly financial forecasts provide insights into budgetary pressures. Variances are analyzed and reported to senior management.⁶

Tables 3 and 4 summarize the Board's 2017 budgeted and actual expenses and its 2018 budgeted expenses by division, office, or special account and by account classification, respectively. Table 5 summarizes the Board's budgeted and actual authorized position count for 2017 and 2018. Table 6 summarizes the Board's budgeted and actual capital expenditures for 2017 and 2018. Each table includes a line item for the Office of Inspector General (OIG), which is discussed later in this section.

Table 3. Operating expenses of the Board of Governors, by division, office, or special account, 2017-18

Table 4. Operating expenses of the Board of Governors, by account classification, 2017-18

Table 5. Positions authorized by the Board of Governors, by division, office, or special account, 2017-18

2017 Budget Performance

Total expenses for Board operations were $707.8 million, which was $36.7 million, or 4.9 percent, less than the approved 2017 budget of $744.6 million. The Board's 2017 single-year capital spending was less than budgeted by $2.7 million, or 19.6 percent, and multiyear capital projects remained within their project budgets with actual spending in 2017 less than budgeted by $14.5 million, or 24.9 percent.

Table 6. Capital expenditures of the Board of Governors, by capital type, 2017-18

Personnel services expenses were $16.4 million less than budgeted because of the hiring freeze, which caused higher-than-budgeted vacancy rates.⁷ The underrun in personnel services was partially offset by an overrun in centrally managed benefits (e.g., retirement and post-retirement benefits), which was driven by changes in actuarial assumptions, including lower-than-planned discount rates and changes in other key actuarial assumptions.

Goods and services expenses were $20.3 million less than the budget. Lower-than-expected employment levels in 2017 contributed to underruns in several areas, particularly travel and relocation. In addition, underruns in goods and services were driven by lower utilization of contractual professional services, reduced telecommunications expenses and less professional service support for supervision projects, lower rentals and depreciation expenses because of delays in several major projects, and fewer data and software purchases.

2018 Operating Expense Budget

The 2018 budget for Board operations is $766.7 million, which is $58.9 million, or 8.3 percent, higher than 2017 actual expenses and 3.0 percent higher than the 2017 budget. The operating budget includes funding for the Board's ongoing operations and support for the six overarching pillars identified in the Board's Strategic Plan 2016-19.

The 2018 budget includes employment growth as hiring activities are expected to continue to normalize in 2018, funding for the Board's compensation and benefit programs, projected increases to centrally managed benefits (e.g., retirement and post-retirement benefits), and expenses related to preparing for the 2019 Survey of Consumer Finances. The budget allows for continued investments in strategic, high-priority projects in support of the Plan's pillars: project development and resource allocation, workforce, physical infrastructure, technology, data, and public engagement and accountability.

The Board's total authorized position count for 2018 remains unchanged at 2,847.

Risks in the 2018 Budget

The 2018 operating budget is built on the steps taken in recent years to better align budget requests with historic hiring trends and spending patterns, while ensuring the funding of the Board's highest priorities. Meeting the approved growth targets required all divisions to make tradeoffs and prioritize resources to fund mission-critical activities for 2018.

Staff from the Division of Financial Management will work closely with all divisions throughout the year to mitigate potential budget overruns by closely monitoring spending. Building improvements projects will continue to be an area of focus, from both a budget and project management perspective, given their size, complexity, and strategic importance.

2018 Capital Budgets

The Board's 2018 single-year capital budget totals $17.3 million, which is $6.1 million higher than 2017 actual capital expenditures and $3.3 million higher than the 2017 budget. The increase is primarily driven by planned equipment replacements in the data center and the continuation of pre-design efforts for the Eccles Building.

The Board's multiyear capital budget totals $452.8 million, which includes 2018 expected capital expenditures of $140.6 million. The budget includes increases to building improvement projects, such as furniture purchases and renovation funding for design phases services in the Eccles Building. The potential renovation of the Eccles Building will improve compliance with modern building codes and allow for efficient space utilization with today's technology capabilities. Other funding increases are driven by: continued enhancements of supervision and regulation data capabilities; automation initiatives, including Federal Open Market Committee (FOMC) system enhancements; and security enhancements. Expected capital expenditures in 2018 are primarily driven by the Martin Building renovation project. Table 6 summarizes the Board's budgeted and actual capital expenditures for 2017 and 2018.

Office of Inspector General

The budget for the Board's OIG is grounded in the values established by its strategic plan (https://oig.federalreserve.gov/strategic-plan.htm), which include delivering high-quality products and services that promote agency excellence and a diverse, skilled, and engaged workforce; cultivating leadership; fostering an inclusive and collaborative environment; optimizing external stakeholder engagement; and enhancing the capacity and improving the operational effectiveness of the OIG.

In keeping with its statutory independence, the OIG prepares its proposed budget apart from the Board's budget. The OIG presents its budget directly to the Board for approval.

2017 Budget Performance

Total expenses for OIG operations were $33.8 million, which was $0.4 million, or 1.2 percent, less than the approved 2017 operating budget. Personnel services expenses were $0.1 million less than budgeted. Goods and services expenses were $0.3 million less than budgeted because of lower-than-planned rental expenses and contractual professional services usage, and fewer furniture and equipment purchases. The OIG did not have single-year capital spending in 2017. Multiyear capital projects remained within their project budgets with actual spending in 2017 higher than planned because of the buildout of additional office space at the San Francisco regional office. Table 6 summarizes the OIG's budgeted and actual capital expenditures for 2017 and 2018.

2018 Operating Expense Budget

The 2018 budget for OIG operations is $35.9 million, which is $2.1 million, or 6.2 percent, higher than 2017 actual expenses and 4.8 percent higher than the 2017 budget. The OIG's total authorized position count for 2018 remains unchanged at 132. The additional funding assists the OIG in implementing the goals, objectives, and activities identified in its strategic plan.

2018 Capital Budget

The OIG's 2018 single-year capital budget totals $0.1 million for vehicle lifecycle replacements. For 2018, the OIG closed its $3.2 million multiyear capital budget, which funded the construction of temporary and permanent regional offices.

Federal Reserve Banks Budgets

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 functional area, with attributable support and overhead charged to each area. The budgets are formulated to ensure alignment with each Reserve Bank's and the System's strategic priorities, including

• contributing to the formulation of monetary policy and enhancing monetary policy implementation to become more effective, flexible, and resilient
• promoting financial stability through effective monitoring, analysis, and policy development
• promoting safety and soundness of financial institutions through effective supervision
• leading efforts to enhance the security, resiliency, functionality, and efficiency of services provided to financial institutions and the public

The Reserve Bank budget process is as follows:

• Reserve Bank and Board governance bodies provide an aggregate System-level growth expectation for the upcoming budget year.
• The Reserve Banks develop budgets that incorporate this guidance, and senior leadership in the Reserve Banks reviews the budgets for alignment with Reserve Bank and System priorities.
• The Reserve Banks submit preliminary budget information to the Board for review, including documentation to support the budget request.
• Board staff analyzes the Banks' budgets, both individually and in the context of System initiatives.
• The Board's Committee on Federal Reserve Bank Affairs (BAC) reviews the Bank budgets.
• The Reserve Banks make any needed changes, and the BAC chair submits the revised budgets to Board members for review and final action.
• Throughout the year, Reserve Bank and Board staffs monitor actual performance and compare it to approved budgets and forecasts.

In addition to the budget approval process, the Reserve Banks must submit proposals for certain capital expenditures to the Board for further review and approval.

Tables 7, 8, and 9 summarize the Reserve Banks' 2017 budgeted and actual expenses and 2018 budgeted expenses by Reserve Bank, functional area, and account classification.⁸ Table 10 shows the Reserve Banks' budgeted and actual employment for 2017 and budgeted employment for 2018. In addition, table 11 shows the Reserve Banks' budgeted and actual capital expenditures for 2017 and budgeted capital for 2018.

Table 7. Operating expenses of the Federal Reserve Banks, by District, 2017-18

Table 8. Operating expenses of the Federal Reserve Banks, by operating area, 2017-18

Table 9. Operating expenses of the Federal Reserve Banks, by account classification, 2017-18

Table 10. Employment at the Federal Reserve Banks, by District, and at FRIT and OEB, 2017-18

Table 11. Capital expenditures of the Federal Reserve Banks, by District, and of FRIT and OEB, 2017-18

2017 Budget Performance

Total 2017 operating expenses for the Reserve Banks were $4,209.0 million, which is $103.5 million, or 2.4 percent, less than the approved 2017 budget of $4,312.4 million. The actual average number of personnel (ANP) was less than the 2017 budget, largely because of delays in hiring as a result of the hiring freeze. The Reserve Banks' 2017 capital expenditures were less than budgeted by $68.4 million, or 16.4 percent, because of changes in timing and scope for numerous initiatives.

Revised project plans, benefits assumptions, and increased cash recoveries from depository institutions contributed to the 2017 operating expense budget underrun. Project plan changes include updated business-line transition plans for ongoing Treasury services, delays in development efforts for Fedwire and automated clearinghouse (ACH) enhancements and check-related projects, and the completion of software development and testing following the implementation of the CashForward initiative.⁹ The underrun is partially offset by increased expenses for the TWAI.

Total 2017 actual employment for the Reserve Banks, the Federal Reserve Information Technology (FRIT), and the Office of Employee Benefits (OEB) was 19,393 ANP, an underrun of 429 ANP, or 2.2 percent, from 2017 budgeted staffing levels. The impact of the hiring freeze affected all functional areas with the largest underruns in support services and the monetary policy business lines. Additionally, program delays in several Treasury business lines and changes in the cash environment contributed to the underrun.

2018 Operating Expense Budget

The 2018 operating budgets of the Reserve Banks total $4,451.3 million, which is $242.4 million, or 5.8 percent, higher than 2017 actual expenses. The increase in the supervision function is primarily for the ongoing support of the supervision portfolio and national and horizontal review initiatives and for the continued development and implementation of the cybersecurity supervision program. The increase is partially offset by operational efficiencies and the extension of the exam cycle for qualifying depository institutions because of the implementation of the Fixing America's Surface Transportation (FAST) Act.

Increases in services to financial institutions and the public include expenses for cash related to the first phase of the next-generation currency-processing program (NextGen) as well as staffing to address the increase in the volume of currency received from circulation. Expenses related to fee-based services are increasing to fund continuing technology investments for ACH and Fedwire enhancements. Budgeted expenses for services to the Treasury, which are fully reimbursable, are increasing primarily for the Stored Value Card (SVC) program, expanded Do Not Pay (DNP) analytics, and Pay.gov initiatives.¹⁰

Total 2018 budgeted employment for the Reserve Banks, FRIT, and OEB is 19,878 ANP, an increase of 485 ANP, or 2.5 percent, from 2017 actual employment levels. The increase is largely due to 2017 hiring delays as a result of the hiring freeze. Support and overhead functions plan to add resources to strengthen facilities maintenance, strategic planning, enterprise risk management, internal audit, and human resources capabilities. In information technology, ANP increases are for information security initiatives and application development projects, primarily for Treasury programs. In the Treasury services function, ANP increases are due to updated requirements for ongoing programs, including SVC and DNP. Staff is also increasing in cash to address local cash-processing volume increases and to support phase I of the NextGen program. Supervision ANP are increasing to support the cybersecurity program and the growth in the number of state member banks.

Reserve Bank officer and staff personnel expenses for 2018 total $2,565.6 million, an increase of $141.1 million, or 5.8 percent, from 2017 actual expenses. The increase reflects expenses associated with additional staff and budgeted salary adjustments, including merit increases, equity adjustments, promotions, and funding for variable pay.

The 2018 Reserve Bank budgets include a 3.0 percent merit program for eligible officers, senior professionals, and staff totaling $64.8 million and a variable pay program totaling $206.4 million. Budgeted equity adjustments and promotions total $7.3 million for officers and senior professionals and $26.4 million for staff.

2018 Capital Budgets

The 2018 capital budgets for the Reserve Banks, FRIT, and OEB total $406.6 million. The increase in the 2018 capital budget is $58.4 million, or 16.8 percent, more than the 2017 actual levels of $348.2 million, largely reflecting ongoing multiyear building and information technology projects. Initiatives in the 2018 capital budget include supporting workspace renovations, addressing aging building infrastructure, and providing application upgrades and releases.

Capital Expenditures Designated for Conditional Approval

The BAC chair designated projects with an aggregate cost of $83.6 million in 2018 for conditional approval, requiring additional review and approval by the Board's director of the Division of Reserve Bank Operations and Payment Systems before the commitment of funds.¹¹ The expenditures designated for conditional approval by the chair of the BAC include large-scale building projects to renovate office and cafeteria spaces, increase parking, and upgrade mechanical and electrical infrastructure. Technology projects include current and future Fedwire initiatives, Treasury applications, and the migration of major applications off the mainframe.¹²

Other Capital Expenditures

Significant capital expenditures (typically expenditures exceeding $1 million) that are not designated for conditional approval include total multiyear budgeted expenditures of $496.7 million for 2018 and future years, of which the single-year 2018 budgeted expenditures are $232.2 million. This category includes building expenditures for office space renovations, infrastructure upgrades, and security enhancements. IT projects include ongoing IT infrastructure investments and Treasury, monetary policy, and supervision initiatives.

Capital initiatives that are individually less than $1 million are budgeted at an aggregate amount of $90.8 million for 2018 and include building maintenance expenditures, equipment and furniture replacements, and scheduled software and equipment upgrades.

Currency Budget

The Board is the issuing authority for Federal Reserve notes. As the issuing authority, the Board has a wide range of responsibilities, from ensuring an adequate supply of notes in circulation, to protecting and maintaining confidence. To protect the integrity of the notes it issues, the Board works with the Reserve Banks, the Treasury Department, the Treasury's Bureau of Engraving and Printing (BEP), and the United States Secret Service to ensure that the notes meet quality standards from production through destruction, monitors counterfeiting threats for each denomination, and conducts adversarial analysis on existing and new security features to ensure they are robust to counterfeiting. The currency budget funds the Board's and BEP's activities related to note production and issuance.¹³

The annual currency budget process is as follows:

• Each August, based on Board staff's assessment of currency demand and other factors, the Board's director of the Division of Reserve Bank Operations and Payment Systems submits a fiscal year print order for notes to the director of the BEP.
• Each December, Board staff estimates expenses for the calendar-year currency budget, including printing expenses (based on estimated production costs provided by the BEP); certain other BEP initiatives; and expenses for currency transportation, quality assurance, research and development, counterfeit deterrence, currency education, and depreciation.¹⁴
• The BAC reviews the proposed currency budget.
• The BAC chair submits the proposed currency budget to Board members for review and final action.

2017 Budget Performance

The Board's 2017 actual operating expenses for new currency were $723.3 million, a decrease of $2.7 million, or 0.4 percent, from the 2017 budget. This budget underrun is primarily attributable to lower-than-budgeted expenses for currency education and counterfeit deterrence. The currency education program delivered educational content more cost-effectively by encouraging the public to download electronic versions of resources rather than ordering hard copy versions, and by using in-house web development resources instead of more-expensive contracted resources. The counterfeit-deterrence program was unable to conduct all planned research and development efforts in 2017.

2018 Budget

The 2018 operating budget for currency is $861.7 million, which is $138.5 million, or 19.1 percent, higher than 2017 actual expenses (figure 5). Printing costs for notes are 93 percent of the operating budget. Expenses for currency transportation, quality assurance, research and development, counterfeit deterrence, other BEP initiatives, currency education, and depreciation make up the remaining 7 percent (table 12).

Table 12. Federal Reserve currency budget, 2017 and 2018

Printing and Transportation of Federal Reserve Notes

The currency budget includes $801.0 million in printing costs for 2018, an increase of $127.1 million, or 18.9 percent from 2017 actual expenses. The increase is attributable to continued strong demand for banknotes, which resulted in the Board's request for 20.6 percent more notes in 2018 from the prior year, with a 61.8 percent increase in the share of more-expensive $100 notes.

The 2018 currency transportation budget is $24.3 million, an increase of $2.5 million, or 11.7 percent, from 2017 actual expenses. The budget includes the cost of shipping new notes from the BEP to Reserve Banks, of intra-System shipments of fit and unprocessed notes, and of returning pallets from the Reserve Banks to the BEP. The majority of the increase is attributable to the BEP shipping a larger volume of new notes to the Reserve Banks in 2018 than it did in 2017.

Currency Reader Program

The 2018 currency reader budget is $1.3 million, which is $0.1 million, or 9.8 percent, lower than 2017 actual expenses. The budget allows the BEP to distribute currency readers to qualified blind or visually-impaired individuals at no cost to the user; to reimburse the Library of Congress for administering the currency reader program through the existing infrastructure of its book reader program, which is managed by the National Library Service; and other administrative and outreach expenses.

Other Reimbursements to the Bureau of Engraving and Printing

The 2018 budget for other reimbursements to the BEP is $3.7 million, which is an increase of $0.1 million, or 3.6 percent, from 2017 actual expenses. This funding reimburses the BEP for expenses incurred by its Destruction Standards and Compliance Division of the Office of Compliance (OC) and Mutilated Currency Division (MCD) of the Office of Financial Management. The OC develops standards for cancellation and destruction of unfit currency and for note accountability at the Reserve Banks and reviews Reserve Banks' cash operations for compliance with its standards. As a public service, the MCD also processes claims for the redemption of damaged or mutilated currency.

Quality Assurance

The 2018 budget for quality assurance initiatives is $14.0 million, which is $0.9 million, or 6.7 percent, higher than 2017 actual expenses. The currency quality assurance consultants, in consultation with staff from the Board and BEP, will develop operational performance metrics to monitor and assess the BEP's efficiency and effectiveness. In addition, the consultants will establish process roadmaps that will facilitate the transition of responsibility for quality-related processes to the BEP. The budget also includes funding for the Board to continue working with a design consultant to assist with the accelerated development of a new family of notes.

Research and Development

The 2018 budget includes $7.7 million to fund ongoing initiatives related to research and development of security features and optical-inspection technology.¹⁵ Previously, these expenses were included in quality assurance, counterfeit deterrence, and currency education. The Board will develop, test, and evaluate new and existing security features in support of the new family of notes, continue development work on optical-inspection technology, and develop an automated system for identification and analysis of counterfeit notes. In addition, the Board will continue to work on cognitive and perception studies to help inform security feature and banknote design decisions.

Counterfeit Deterrence

The 2018 budget for counterfeit deterrence and analysis is $7.1 million, which is $1.0 million, or 17.1 percent, higher than 2017 actual expenses. The budget funds membership in the Central Bank Counterfeit Deterrence Group to combat digital counterfeiting and funds the Reproduction Research Center to perform adversarial analysis on design concepts and potential security features.

Currency Education Program

The 2018 budget for the currency education program (CEP) is $2.5 million, which is $0.2 million, or 6.7 percent, lower than 2017 actual expenses. The CEP is designed to protect and maintain confidence in U.S. currency worldwide by providing information on all circulating designs of notes to the global public and key stakeholder groups. In 2018, the CEP will continue to conduct outreach to domestic and international businesses and retailers, maintain the uscurrency.gov educational website, and launch new initiatives such as an educational app and a suite of youth-focused digital learning tools.

Footnotes