Federal Reserve Bank Budgets
The 2011 operating budgets of the 12 Reserve Banks total $3,351.2 million.11 The 2011 total is $168.2 million, or 5.3 percent, above 2010 actual expenses. This growth is driven by increases in central bank functions, specifically those related to supervision and regulation and the open market operation in New York. The implementation of the Dodd-Frank Act accounts for a significant portion of the budget growth. These increases are partially offset by decreases in priced services as a result of continued declines in paper-check volume and the full-year effect of consolidations. In addition, the expense increase is further offset by a reduction in vendor fees and staffing related to closing most of the liquidity facilities at the New York Federal Reserve Bank.
Budgeted net expenses for 2011, after revenue and reimbursements, are expected to increase by $209.7 million, or 9.7 percent, over 2010 actual net expenses (table 6). Approximately 30 percent of Reserve Bank expenses in the 2011 budget are offset by priced service revenues (15 percent) and reimbursable claims for services provided to the Treasury and other agencies (15 percent).12 Budgeted 2011 priced services revenue is lower than the 2010 actual level, primarily because of declining paper-check volume. Reimbursable claims are projected to increase in 2011, reflecting increased activity on key programs and support for new initiatives.
| Item | 2010 (actual) | 2011 (budgeted) | Change | |
|---|---|---|---|---|
| Amount | Percent | |||
| Total operating expenses | 3,183.0 | 3,351.2 | 168.2 | 5.3 |
| Less | ||||
| Revenue from priced services | 574.7 | 497.2 | -77.5 | -13.5 |
| Claims for reimbursement 1 | 456.4 | 492.2 | 35.8 | 7.8 |
| Other income | 1.5 | 1.7 | 0.2 | 14.5 |
| Equals | ||||
| Net expenses | 2,150.5 | 2,360.1 | 209.7 | 9.7 |
Note: Excludes capital outlays. Includes expenses budgeted by the Federal Reserve Information Technology and Office of Employee Benefits. Expenses from these entities have been charged to the Reserve Banks, as appropriate, and included in their budgets. Components may not sum to totals and may not yield percentages shown because of rounding. Operating expenses reflect redistributions for support and allocation of overhead.
1. Costs of fiscal agency and depository services provided to the U.S. Treasury, other government agencies, and other fiscal principals that are billed to these agencies. Return to table
Total 2011 projected employment for the Reserve Banks, Federal Reserve Information Technology (FRIT), and the Office of Employee Benefits (OEB) is 17,979 average number of personnel (ANP), an increase of 520 ANP, or 3.0 percent, from the 2010 actual staff level (table 7).13 The 2011 staffing increase is the result of resources added for supervision and regulation and New York monetary policy operations to address continuing adverse banking conditions, implement lessons learned from the financial crisis, and Dodd-Frank Act responsibilities. Also contributing to the increase is additional staffing in Treasury services due to increased activity on key Treasury projects. The 2011 budgeted staff additions are partially offset due to paper-check volume declines and the continued effect of check operation consolidations.
| Item | 2010 (actual) | 2011 (budgeted) | Change | |
|---|---|---|---|---|
| Amount | Percent | |||
| Reserve Banks | 16,467 | 16,965 | 498 | 3.0 |
| Federal Reserve Information Technology (FRIT) | 946 | 965 | 19 | 2.0 |
| Office of Employee Benefits (OEB) | 46 | 49 | 3 | 6.5 |
| Total | 17,459 | 17,979 | 520 | 3.0 |
Note: Components may not sum to totals and may not yield percentages shown because of rounding. See text note 13 for definition of average number of personnel (ANP).
2010 Budget Performance
Total 2010 actual expenses were $3,183.0 million, a decrease of $38.3 million, or 1.2 percent, from the approved 2010 budget of $3,221.3 million. Total 2010 actual staffing is 17,459 ANP, a decrease of 119 ANP from the 2010 budgeted level of 17,578 ANP.
The expense decrease is driven by the earlier-than-expected System completion of a multiyear effort to consolidate check operations to one full-service paper-check processing site and one electronic check processing site. The paper-check transition was completed in the first quarter of 2010, and the electronic check transition was completed in the fourth quarter of 2010. Significant expense reductions were also achieved in the check adjustments function and check transportation services as a result of declines in paper-check volume.
Also contributing to the underrun is lower expenses for Treasury services ($11.0 million). Treasury services were under budget largely because of reduced volume for Treasury retail securities and a reduction in expenses related to Treasury Web Application Infrastructure (TWAI).
Partially offsetting the underrun are increased expenses in supervision and regulation driven by expanded responsibilities to address the continuing adverse conditions in community and regional banking portfolios, as well as additional staffing to strengthen supervision of the largest institutions, associated macroprudential efforts, and enhanced operating procedures ($17.7 million).
The underrun in total staffing of 119 ANP, as compared with the approved budget, reflects the significant decline in check operations (122 ANP). Local support functions continue to experience decreases in staffing as operations are streamlined and consolidated (67 ANP). Treasury services are below budget 39 ANP, primarily due to volume declines in Treasury retail securities. Offsetting these underruns are increased staffing in the supervision and regulation function due to current banking conditions (56 ANP) and at FRIT, primarily to support the System's server consolidation initiative (42 ANP).
Initiatives Affecting the 2011 Budget
For 2011, the Reserve Banks' budgets reflect growth in several initiatives that will continue to address financial stability and enhanced resiliency, as well as new initiatives related to implementing the expanded responsibilities required by the Dodd-Frank Act.
Central Bank Services
In the central bank area, which includes monetary policy, public programs, supervision and regulation, and services to financial institutions and the public (other than priced services), expenses are increasing $180.0 million, or 7.9 percent, in the 2011 budget. The staffing level is increasing 408 ANP, primarily in supervision and regulation and in the monetary policy execution function in New York. These increases are being offset by nonrecurring crisis-related expenses in the loans to depository institutions and others function.
The budget for the supervision and regulation function is increasing $132.3 million, or 16.5 percent, and staffing is increasing 345 ANP, as the function plans for additional staffing resources to continue to address the adverse conditions in the banking industry and to implement the requirements of the Dodd-Frank Act. The total costs for monetary policy are increasing $40.7 million, or 8.2 percent, over 2010 actual expenses. The growth is primarily in the open market operations and is due to the need for additional staff to apply lessons learned as a result of the financial crisis and operational reviews, fulfill Dodd-Frank Act requirements, and strengthen market monitoring.
Expenses in cash operations are increasing $4.8 million, or 0.9 percent, remaining fairly stable as increased benefits and equipment expenses are offset by the nonrecurrence of a one-time write-off related to the cash automation strategy that occurred in 2010.14
Treasury-Related Functions
The budget for services to the Treasury, which are fully reimbursable, is increasing $37.7 million, or 8.7 percent, primarily due to costs associated with the expansion of the GoDirect call center and the stored value card (SVC) project, as well as increased costs for the TWAI and Collections and Cash Management Modernization (CCMM) implementation.15 Also contributing to the increase is severance expense related to the planned consolidation of Treasury retail securities operation.
Priced Services
Total priced services expenses are declining $49.5 million, driven by a decrease of $50.5 million, or 18.7 percent, in check expenses, which reflects the check restructuring costs and continued paper-check volume declines. In 2010 the System completed a multiyear effort to consolidate check operations to one full-service paper-check processing site and one electronic check processing site. In addition to the consolidations, significant reductions in the check adjustments function and check transportation services were also achieved as a result of declines in paper-check volume. All priced services are projecting full cost recovery in 2011.
Support Services
Support costs are increasing $30.5 million, or 3.0 percent, and 13 ANP. The expense increases are driven primarily by increases in facilities management ($15.8 million) and information technology ($4.3 million). Facilities costs are increasing mainly as a result of reconfiguring space in New York and Dallas to accommodate new functions and staff. IT costs are increasing in support of cash, Treasury, and priced services projects at several Reserve Banks.
Five-Year Trend in Reserve Bank Expenses
Total expenses for the Reserve Banks have grown an average of 3.8 percent annually from 2006 to 2011.
Central Bank Services
Central bank services have grown an average of 9.4 percent annually over the past five years. The increase is primarily in the areas of supervision and regulation, monetary policy, and loans to depository institutions and others, where expenses have grown, on average, 12.4 percent annually. Expenses in the supervision and regulation function have grown an average of 11.2 percent annually over the past five years, and staffing has increased by 740 ANP due to the need to recruit and retain supervisory staff with specialized skills to address financial market turmoil and declining banking conditions, as well as to address Dodd-Frank Act requirements. The increase in monetary policy, where expenses have grown on average 11.0 percent, is driven by increased resources dedicated to regional economic research and economic policy operations. Expenses in loans to depository and others have grown at an average annual rate of 31.5 percent over the past five years due to an increase in resources to support the emergency liquidity programs and other lending activities during the financial crisis.16 Expenses associated with these loan activities peaked in 2010 and are projected to decline in 2011. There have been ongoing efficiency improvements in the cash area over the past five years; however, expenses in cash operations have increased an average of 5.8 percent annually, reflecting increased costs to modernize the cash-processing and inventory-tracking infrastructure, along with higher support costs, particularly facilities and protection costs.
Treasury Services
Treasury services expenses have grown, on average, 3.1 percent annually since 2006. The increase in Treasury services reflects the expansion of the GoDirect call center and SVC programs, increased costs for the TWAI and Collections and Cash Management Modernization implementation, and other requested projects.
Priced Services
Priced services expenses have declined an average of 12.2 percent annually over the past five years, driven by reductions in the check service. Continued efforts to downsize the System's paper-check operations, consistent with volume declines, have resulted in an average annual decline of 18.6 percent in check-service costs since 2006.
2011 Personnel Expenses
On December 22, 2010, President Obama signed legislation prohibiting statutory pay adjustments for most federal civilian employees. Although not required to do so under the legislation, the Federal Reserve believes that the entire System should comply with the spirit of the civilian federal government salary freeze, given its important public mission. Therefore, the Reserve Bank budgets reflect a 2.0 percent program for merit and equity adjustments for eligible employees. The System believes that this program complies with the spirit of the civilian federal government salary freeze as enacted by Congress, which allows for increases under performance-based compensation systems such as those used by the Reserve Banks. The 2011 Reserve Bank budgets provide no funding for increases in officer and senior professional base salaries, other than funding for promotions.
Budgeted officer and employee salaries and other personnel expenses for 2011 total $1,770.0 million, an increase of $89.6 million, or 5.3 percent, compared with 2010 actual expenses. The increase reflects increased staffing levels and budgeted salary administration programs, including merit increases, market adjustments, promotions, and variable pay. Funding for employee base-salary administration programs totals $30.9 million; merit and equity pools for employees total $23.3 million; and funding for employee promotions totals $7.6 million. The budget includes $1.7 million for officer promotions.
Risks in the 2011 Budget
The primary 2011 budget risk relates to the Reserve Banks' implementation of the Dodd-Frank Act. Changes resulting from the act will directly affect roles and responsibilities in multiple areas of the Federal Reserve Banks, especially in the supervision and regulation function. The increase in resources to meet these new responsibilities continues to be evaluated by the Banks to assess staff levels necessary to manage the ongoing challenges in the financial industry.
Treasury project changes could also increase expenses. The Treasury continues to refine its vision for collections and cash management systems. If the Treasury changes its current direction for the CCMM initiative, additional costs and resources may be required. Other risks include actuarial and legislative changes that make it difficult to predict future employee and retiree health care costs.17
2011 Capital Plan
The 2011 capital budget submitted by the Reserve Banks, FRIT, and OEB totals $417.6 million, a $121.4 million, or 41.0 percent, increase from the 2010 actual levels. The variance reflects project delays in New York, resulting in a shift in the timing of outlays from 2010 to 2011. The capital budget includes funding for projects to support strategies that improve operational efficiencies, enhance services to Bank customers, and ensure a safe and productive work environment. In support of these strategies, the 2011 budget identifies three categories of capital initiatives: building and infrastructure, information technology and System automation projects, and Treasury initiatives.
The proposed capital budget includes $208.8 million for building and infrastructure projects. Of the total building capital, $58.9 million is related to major projects begun in previous years in Boston, New York, and St. Louis. Major new initiatives in 2011 totaling $15.5 million include an expansion of office space for supervision staff in Chicago and office refurbishments in San Francisco. The remaining outlays in this category will fund other building renovation and refurbishment projects, security enhancements, and various facility improvement projects.
The Reserve Banks and FRIT included $163.3 million in funding for major information technology initiatives and System automation projects. Multiyear projects to migrate major applications off the mainframe represent $33.9 million of the 2011 capital budget.18 The System server consolidation effort accounts for an additional $22.5 million. Cash services initiatives represent $20.2 million of the total capital budget, including $10.2 million for the CashForward development effort. The remaining outlays will fund numerous smaller initiatives, such as scheduled software and equipment upgrades as well as telecommunications and LAN equipment for renovated or expanded office space.
The capital budget also includes $45.5 million for reimbursable Treasury initiatives, including support of TWAI, Government-Wide Accounting, CCMM-related efforts, and various other projects.
11. These expenses include those budgeted by the Federal Reserve Information Technology and the Office of Employee Benefits that are chargeable to the Reserve Banks. Expenses exclude assessments for the Board of Governors operating expenses, the cost of currency, the CFPB, and the Office of Financial Research. Return to text
12. Reimbursable claims include costs of fiscal agency and depository services provided to the U.S. Treasury, other government agencies, and other fiscal principals that are billed to and reimbursed by these agencies. Return to text
13. ANP is the average number of employees in terms of full-time positions for the period. For instance, a full-time employee who works one-half of the year counts as 0.5 ANP for that calendar year; two half-time employees who work the full year count as 1 ANP. Return to text
14. Reserve Banks continue to develop a new cash automation platform that will enhance controls of the Banks' cash operations and improve their efficiency, provide a responsive management information reporting system with superior and flexible reporting tools, facilitate business continuity and contingency planning, and enhance the support provided to Reserve Bank customers and business partners. In 2010, the Banks terminated the development contract with the primary vendor and redefined the design for the new system (now known as CashForward). Return to text
15. CCMM is a comprehensive multiyear enterprise architecture initiative to streamline, modernize, and improve the services, systems, and processes supporting the Treasury's collections and cash-management programs. The goal is to improve efficiency and reduce costs to the Treasury, which provides a savings to the taxpayers. Return to text
16. Although some of the liquidity programs ended in February 2010, New York continues to support several liquidity programs, including Maiden Lane, Maiden Lane II, Maiden Lane III, and TALF. Over time, expenses associated with these programs will continue to diminish. In addition, the higher expenses reflect an increase in activities related to assessing value and margining collateral pledged to the Reserve Banks and steps that New York, in particular, took structurally to manage more effectively its risk. These expenses are not likely to decrease over time and reflect additional ongoing activities. Return to text
17. Risks include compliance with FAS 106; the volatility in retiree health care, long-term disability, and survivor income costs based on claims experience; participation changes; and interest rate changes. In addition, there is uncertainty about how the enactment of the Patient Protection and Affordable Health Care Act will affect the cost of medical services. Return to text
18. The System's migration strategy will involve moving a majority of applications from the mainframe to alternate processing environments over the next few years. Projects in the 2011 budget include the migration of the Fedwire, FedACH, check, and accounting systems. Return to text
