Ar Budgetrev 2002

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Board of Governors of the Federal Reserve System

2002

March 2002

This publication is available from Publications Services, Board of Governorsof the Federal Reserve System, Washington, DC 20551. It is also availableon the Board’s World Wide Web site, at http://www.federalreserve.gov/

Contents

Introduction1 FEDERAL RESERVE BUDGET PROCESSES

AND OPERATIONAL AREAS1 Summary of 2001 income and expenditures1 Budget processes4 Operational areas

The Budgets

Chapter 19 FEDERAL RESERVE SYSTEM

10 Net expenses11 Trends in expenses and employment12 2001 budget initiatives

Chapter 213 BOARD OF GOVERNORS13 Overview of the budget15 Operations budget by division and account classification15 Operations budget by operational area19 Capital budget21 Positions21 Trends in expenses and employment23 Extraordinary items24 Office of Inspector General

Chapter 325 FEDERAL RESERVE BANKS26 2001 budget performance28 The 2002 budget31 Risks in the 2002 budget32 2002 capital plan

Appendixes

Appendix A37 SPECIAL CATEGORIES OF SYSTEM EXPENSE37 Priced services38 Capital outlays38 Currency printing and circulation

Appendix B43 SOURCES AND USES OF FUNDS

Appendix C45 FEDERAL RESERVE SYSTEM AUDITS45 Independent audit45 General Accounting Office46 Office of Inspector General

Appendix D49 EXPENSES AND EMPLOYMENT

AT THE FEDERAL RESERVE BANKS

58 MAPS OF THE FEDERAL RESERVE SYSTEM

Introduction

Federal Reserve Budget Processesand Operational Areas

The Federal Reserve System consists ofthe Board of Governors in Washington,D.C., the twelve Federal Reserve Bankswith their twenty-five Branches distrib-uted throughout the nation, the FederalOpen Market Committee (FOMC), andthree advisory groups—the FederalAdvisory Council, the Consumer Advi-sory Council, and the Thrift InstitutionsAdvisory Council. The System wascreated in 1913 by the Congress toestablish a safe and flexible monetaryand banking system. Over the years, theCongress has given the Federal Reservemore authority and responsibility forachieving broad national economic andfinancial objectives.

As the nation’s central bank, theFederal Reserve has many, variedresponsibilities: It acts to ensure that thenation’s economy grows at a paceconsistent with price stability; it servesas the nation’s lender of last resort, withresponsibility for forestalling nationalliquidity crises; and it is involved inbank supervision and regulation, withresponsibilities for bank holding com-panies, financial holding companies(created under the Gramm–Leach–Bliley Act, enacted in November 1999),state-chartered banks that are mem-bers of the Federal Reserve System, theforeign activities of U.S. banks, andthe U.S. activities of foreign banks.The Federal Reserve also administersthe nation’s financial consumer protec-tion laws.

The Federal Reserve System plays amajor role in the nation’s paymentmechanism. The Reserve Banks dis-tribute currency and coin; process

Fedwire, automated clearinghouse, andsecurities transfers; and process checks.In addition, the Federal Reserve Banksserve as the fiscal agents of the UnitedStates and provide a variety of financialservices for the Treasury and othergovernment agencies.

Summary of 2001 Incomeand Expenditures

In carrying out its responsibilities in2001, the Federal Reserve Systemincurred an estimated $1.4 billion in netoperating expenses. Total spending of anestimated $2.7 billion was offset by anestimated $1.2 billion in revenue frompriced services, reimbursements, andother income received from servicesprovided to the Department of theTreasury.

The major source of Federal Reserveincome is earnings on the portfolioof U.S. government securities in theSystem Open Market Account, esti-mated at $30.5 billion in 2001. Earn-ings in excess of expenses, dividends,and surplus are transferred to theU.S. Treasury—in 2001 an estimated$27.1 billion. (These earnings are treatedas receipts in the U.S. budget accountingsystem and as anticipated earningsprojected by the Office of Managementand Budget in the U.S. budget.)

Budget Processes

Beginning with the 1998–99 budget, theBoard of Governors has operated on atwo-year budget cycle and a four-yearplanning cycle. This multiyear process

1

allows the Board to define and imple-ment long-term strategies across func-tional areas. Given their current businessneeds, the Federal Reserve Banksmaintain an annual budget cycle.

The following sections give an over-view of the separate budgets and budget-ing processes followed by the Board ofGovernors and the Reserve Banks. TheFederal Reserve System’s intent in thedevelopment and publication of thisdocument is to provide the reader withthe assumptions and initiatives consid-ered when the Federal Reserve Systembudgets were developed and approvedby the Board of Governors. The informa-tion contained in this document reflectsthe budgets and other informationprovided to the Board for approval inDecember 2001.

Board of Governors

The Board’s budget covers a two-yearperiod. The first year of the budgetcycle—the even-numbered year—is usedto update the strategic plan for the nextfour years, and the second year is usedto develop the budget for the nexttwo years.

The two-year cycle begins in the fall(thus, for the 2002–03 budget, the fall of2000). At that time, the Board’s divi-sions examine their operating environ-ments and look for any adjustments totheir priorities, activities, and resourcesthat might improve the efficiency andeffectiveness of the Board’s operations.

The management of each divisiondiscusses with the appropriate Boardoversight committee the issues thatresult from its review. After any adjust-ment, the results are given to the StaffPlanning Group, a small group of seniormanagers with a Boardwide perspective,for use in their analysis of the Board’sbudget options.

After consulting with the Board-levelCommittee on Board Affairs for finalguidance, the Staff Planning Groupupdates the strategic plan, which is usedto prepare a preliminary budget objec-tive that identifies the level and alloca-tion of resources needed to support theplan. As part of this process, individualdivision budget objectives are preparedon the basis of Boardwide priorities andplanning assumptions. The Committeeon Board Affairs reviews the plan andpreliminary budget objective, clarifiesoutstanding planning issues with theStaff Planning Group and division direc-tors, and by summer of odd-numberedyears submits the budget objective to theBoard for its consideration.

The divisions use the budget objec-tive approved by the Board to com-plete their budgeting under the approvedplan. The Board’s Committee on BoardAffairs, under authority delegated by theChairman, oversees the process until thebudget is submitted to the Board foraction at an open meeting in the fall ofthe odd-numbered year.

The Board of Governors budgets itsresources by division and accounts forits activities by division and acrossoperational areas. Direct costs, such asthose for salary, retirement, insurance,and travel, are billed to the operationalareas. Costs for data processing are alsocharged as a direct expense to eachof the areas according to service-levelagreements (at prices derived from thecost of resources needed to providethe services and agreed upon before thebudget year starts); expenses for otherelements of support and overhead aredistributed among the operational areasin proportion to the share of direct costsattributable to each area.

The Board, in accordance with gen-erally accepted accounting principles,capitalizes certain assets and depreci-

2 Annual Report: Budget Review, 2002

ates their value over appropriate periodsinstead of expensing them in the year ofpurchase. Hence, the Board has both anoperations budget and a capital budget.

After the budget is approved by theBoard, it is converted to an operatingplan that allocates funding by month;the operating plan is also the vehiclefor subsequent adjustments within thebudget. Also at this point, the cashrequirement for the first half of thecalendar year is estimated, and theamount is raised by an assessment oneach of the Reserve Banks in proportionto its capital stock and surplus. The cashrequirement for the second half of eachyear is estimated in June, and a secondassessment is made in July.

The Board accounts for extraordinaryitems separately from the operationsbudget so that unique, one-time require-ments do not compete with regularoperations and so that expenses in thoseoperations can be readily comparedacross years without distortion. As dis-cussed more fully in chapter 2, theextraordinary items budget for 2002–03consists of funds to support planning fortwo periodic surveys, one on consumerfinances and the other on small businessfinances.

The Board’s Office of Inspector Gen-eral (OIG), in keeping with its statu-tory independence, prepares its budgetapart from the Board’s budget. The OIGpresents its two-year budget directly tothe Chairman for action by the Board,also at an open meeting in the fall.

Reserve Banks

Each year the Federal Reserve Banksestablish major operating goals for thecoming year, devise strategies to attainthose goals, estimate required resources,and monitor results. The process beginswith development of a preliminary

budget projection, which is reviewed bythe Board of Governors. Each Bank thendevelops its own budget. The budgetsare reviewed at the Board by a com-mittee of Governors—the Committee onFederal Reserve Bank Affairs—bothindividually and in the context of Sys-temwide issues and the plans of theother Banks. The budgets are thenpresented to the full Board of Governorsfor final action at an open meeting inDecember.

The Banks’ budgets are structuredin operational areas (described below),with support and overhead charged tothese areas.

As is the case with the Board, theBanks, in accordance with generallyaccepted accounting principles, capital-ize certain assets and depreciate theirvalue over appropriate periods insteadof expensing them in the year of pur-chase. Hence, the Banks have a capitalbudget in addition to an operatingbudget.

The operations and financial per-formance of the Reserve Banks aremonitored throughout the year via acost-accounting system, the Planningand Control System (PACS). UnderPACS, the costs of all Reserve Bankservices, both priced and nonpriced,are grouped by operational area, andthe costs of support and overhead arecharged to these areas. PACS makesit possible to compare budgets withactual expenses and enables the Boardof Governors to compare the financialand operating performances of theReserve Banks.

Beginning with the 2001 budget,significant structural changes have beenmade to PACS. As a result of thesechanges, some expenses were shiftedto different operational areas, thus limit-ing the comparability of budget andexpense data across certain years.

Introduction 3

Operational Areas

In 2001 the Federal Reserve Systemaccounted for costs using the followingcategories—monetary and economic pol-icy, supervision and regulation of finan-cial institutions, services to financialinstitutions and the public, services tothe U.S. Treasury and other governmentagencies, and System policy directionand oversight.

Monetary and Economic Policy

The monetary and economic policyoperational area encompasses FederalReserve actions to influence the avail-ability and cost of money and creditin the nation’s economy.

A vast amount of banking and finan-cial data flows through the ReserveBanks to the Board, where it is compiledand made available to the public. Theresearch staffs at the Board and theReserve Banks use these data, alongwith information collected by otherpublic and private institutions, to assessthe state of the economy and the rela-tionships between the financial marketsand economic activity. Staff membersprovide background information for theBoard of Governors and for each meet-ing of the FOMC by preparing detailedeconomic and financial analyses andprojections for the domestic economyand international markets. The Boardand the FOMC use these analyses andprojections in setting reserve require-ments, setting the discount rate (whichaffects the cost of borrowing), andconducting open market operations. Staffmembers also conduct longer-run eco-nomic studies on regional, national, andinternational issues.

Supervision and Regulation

The Federal Reserve System plays amajor role in the supervision and regu-lation of banks and bank holding com-

panies. The Board of Governors adoptsregulations to carry out statutory direc-tives and establishes System super-visory and regulatory policies; theReserve Banks conduct on-site examina-tions and inspections of state memberbanks and bank holding companies,review applications for mergers, acquisi-tions, and changes in control from banksand bank holding companies, and takeformal supervisory actions. In 2001, theFederal Reserve conducted 534 exam-inations of state member banks (someof them jointly with state agencies) and1,212 inspections and 2,626 risk assess-ments of bank holding companies; itacted on 2,696 international and domes-tic applications.

The Board also enforces complianceby state member banks with the fed-eral laws protecting consumers in theiruse of credit. In 2001, the Systemconducted 346 compliance examina-tions, including 291 covering statemember banks and 55 covering for-eign banking organizations. Proceduresrelated to the Community ReinvestmentAct were included in 219 of the compli-ance examinations.

The Board’s supervisory responsibili-ties also extend to the foreign operationsof U.S. banks and, under the InternationalBanking Act, to the U.S. operations offoreign banks. Beyond these activities,the Federal Reserve maintains continu-ous oversight of the banking industry toensure the overall safety and soundnessof the financial system. This broaderresponsibility is reflected in the System’spresence in financial markets, throughopen market operations, and in theFederal Reserve’s role as lender of lastresort.

Services to Financial Institutionsand the Public

The Federal Reserve System plays acentral role in the nation’s payment


mechanism, which is composed of manyindependent systems that move fundsamong financial institutions across thecountry. The Reserve Banks obtaincurrency and coin from the Bureau ofEngraving and Printing and from theMint and distribute them to the publicthrough depository institutions; theyreceive deposits of currency and coinfrom depository institutions; and theyidentify counterfeits and destroy cur-rency that is unfit for circulation.In 2001, the Reserve Banks received$550.5 billion in currency and $4.3 bil-lion in coin from depository institutions,distributed an estimated $599.6 billionin currency and $5.8 billion in coin,and destroyed $86.3 billion in unfitcurrency.

The Reserve Banks (along with theirBranches and regional centers) alsoprocess checks for collection. In 2001,the Reserve Banks processed approxi-mately 17 billion commercial checks forcollection with a total value of nearly$15 trillion.

The Federal Reserve also plays acentral role in the nation’s paymentmechanism through its funds transfersystem, Fedwire. Through Fedwire,depository institutions can draw on theirreserves or clearing accounts at theReserve Banks and transfer funds any-where in the country. In 2001, approxi-mately 112 million transfers valued atabout $424 trillion were sent over theFedwire funds transfer system, an aver-age of $3.8 million per transfer and$1.7 trillion per day.

The Federal Reserve allows partici-pants in private clearing arrangementsto exchange and settle transactions ona net basis through reserve or clearingaccount balances. Users of net settle-ment services include local checkclearinghouse associations, automatedclearinghouse (ACH) networks, andcredit card processors. In 2001, theFederal Reserve’s settlement sheet

service was phased out and all partici-pating arrangements converted to thenational Net Settlement Service (NSS).The Reserve Banks provide settlementservices to approximately seventy localand national private-sector clearing andsettlement arrangements. In 2001, theReserve Banks processed more than417,000 settlement entries for thesearrangements.

The Federal Reserve’s ACH serviceallows depository institutions to send orreceive payments electronically insteadof by check. Institutions use the ACHservice for credit and debit transactions.In 2001, the Reserve Banks processedapproximately 5.3 billion ACH trans-actions valued at about $15.0 trillion;approximately 17 percent of the trans-actions were for the federal govern-ment, and the rest were for commercialestablishments.

Reserve Banks provide securities ser-vices for the handling of book-entry(computer-based) securities and the col-lection of physical interest coupons andmiscellaneous items. The Fedwire securi-ties transfer system enables the holdersof Treasury and government agencysecurities to transfer the securitieselectronically to other institutionsthroughout the country. In 2001, theReserve Banks processed approximately15 million securities transfers valued at$212 trillion, an average of $14 millionper transfer and $846 billion per day.The noncash collection service, throughwhich maturing or called coupons andbonds are presented for collection,processed about 379,000 transactions in2001.

Services to the U.S. Treasuryand Other Government Agencies

The Reserve Banks provide fiscal agencyand depository services to the U.S. gov-ernment. Through its deposit accounts

Introduction 5

at the Reserve Banks, the governmentmakes payments, issues checks, andcollects receipts. The Reserve Banksalso process Fedwire funds transfers andautomated clearinghouse payments andprovide the Department of the Treasurywith daily statements of account activ-ity. The Reserve Banks provide claimsfor reimbursement to the Treasury andother government agencies for the fullcost of providing these services; reim-bursement was received or is expectedfor all but a relatively small portion ofthe expenses claimed.

As fiscal agents, Reserve Banks pro-vide the Treasury with services relatedto the federal debt. For example, ReserveBanks issue, service, and redeem mar-ketable Treasury securities and savingsbonds; they also process secondarymarket Fedwire securities transfersinitiated by depository institutions. TheReserve Banks operate two book-entry(computer-based) securities systems forthe custody of Treasury securities—theFedwire book-entry securities systemand Treasury Direct. Almost all book-entry Treasury securities are maintainedon Fedwire, which is also the nation’sprincipal securities transfer mecha-nism; the remainder are maintained onTreasury Direct, which is used byindividuals.

As depositories, Reserve Banks col-lect and disburse funds on behalf of thefederal government. The Reserve Banksmaintain the Treasury’s funds account,accept deposits of federal taxes and fees,pay checks drawn on the Treasury’saccount, and make Fedwire and auto-mated clearinghouse payments on behalfof the Treasury. In 2001, the Treasurycontinued to encourage electronic pay-ments to reduce payments made bycheck.

The Reserve Banks, as fiscal agentsand depositories of the United States,collect federal taxes and invest excessTreasury balances with depositoryinstitutions. Any depository institutioncan accept tax deposits and immediatelyremit them to the Treasury. Approxi-mately 1,200 depository institutionsaccept tax proceeds as investments andpay interest on the funds until theTreasury calls the balances. These invest-ments and other funds held at depositoryinstitutions must be collateralized at alltimes.

The Reserve Banks also providefiscal agency and depository services toother domestic and international govern-ment agencies. Depending on the author-ity under which the services areprovided, the Reserve Banks maymaintain book-entry accounts of govern-ment agency securities; provide custodyfor the stock of unissued, definitive(physical) securities; maintain and updatebalances of outstanding book-entry anddefinitive securities for issuers; maintainfunds accounts for government agen-cies; and provide various payment ser-vices, including the processing anddestroying of redeemed food couponsfor the U.S. Department of Agriculture.

System Policy Direction andOversight

This operational area encompassesactivities by the Board of Governorsin supervising Board and Reserve Bankprograms. At the System level, theexpenses for these activities are consid-ered overhead and are therefore allo-cated across the other operational areas.At the Board level, these expenses arenot treated as overhead nor allocated toother operational areas.


The Budgets

Chapter 1

Federal Reserve System

For 2002, total operating expenses arebudgeted at $2,801.4 million, an increasefrom estimated 2001 expenses of4.5 percent. Of this total, $2,580.2 mil-lion is for the Reserve Banks, and$221.2 million is for the Board ofGovernors (tables 1.1 and 1.2).1 Reve-nue from priced services provided todepository institutions is expected tototal $954.4 million, or 34.1 percentof total budgeted operating expenses.This revenue, combined with claims forreimbursement and other income, resultsin projected net operating expenses of$1,538.1 million.2 The budget includes

$12.4 million for a Reserve Bank specialproject.3

Not included in the budget for opera-tions is the cost of currency, budgeted at$376.8 million for 2002, an increase of9.7 percent from the estimated 2001 costof $343.5 million.4 The distribution ofexpenses is similar to that in previous

1. The Board of Governors budgets on a two-year cycle (see chapter 2); in this chapter, 2002values shown for the System and the Board reflectthe approximate first-year effect of the Board’s2002–03 budget.

2. Other income (table 1.1) comes from ser-vices provided on behalf of the U.S. Treasury that

are paid for by the depository institutions usingthe services, which include the transfer of fundsbetween depository institutions and the Treasury.

3. Special projects are relatively costly, short-term research and development efforts that areexpected to benefit both the System and thebanking industry as a whole. The special projectcovers part of the costs of the check-processingmodernization project (see chapter 3).

4. The Federal Reserve pays for the printingof new currency at the Bureau of Engraving andPrinting. Because this cost is determined largelyby public demand for new currency, it is notincluded in Federal Reserve operating expenses.See appendix A.

Table 1.1Operating Expenses of the Federal Reserve System, Net of Receiptsand Claims for Reimbursement, 2000–2002Millions of dollars except as noted

Item 2000 2001(estimated)

2002(budgeted)

Percent change

2000 to 2001 2001 to 2002

Total System operating expenses . . . . . . . . . 2,470.7 2,681.1 2,801.4 8.5 4.5Less

Revenue from priced services . . . . . . . . . . 922.8 951.8 954.4 3.1 .3Other income . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1.1 1.0 10.0 −10.0Claims for reimbursement1 . . . . . . . . . . . . . 302.4 292.2 307.9 −3.4 5.4

EqualsNet System operating expenses . . . . . . . 1,244.5 1,436.0 1,538.1 15.4 7.1

Note. Components may not sum to totals and may notyield percentages shown because of rounding.

Operating expenses include costs for special projectsand exclude capital outlays.

1. Costs of fiscal agency and depository services pro-vided to the U.S. Treasury and other government agenciesthat are billed to these agencies.

9

years, with the Reserve Bank’s expensesaccounting for more than 80 percent ofthe total (chart 1.1).

System employment (including stafffor the special project) is budgeted at25,241 for 2002, an increase of 314 fromthe estimated 2001 level (details aregiven in chapters 2 and 3).

Net Expenses

The System expects to recover 45.1 per-cent of its budgeted 2002 operatingexpenses through revenue from pricedservices, other income, and claims forreimbursement. When these items arededucted from budgeted 2002 operatingexpenses, the net expenses of the Systemshow an increase of 7.1 percent fromestimated 2001 net operating expenses(table 1.1).

As required by the Monetary ControlAct of 1980, revenue from pricedservices represents fees set to recover,over the long run, all direct and indirectcosts of providing the services plusimputed costs, such as taxes that wouldhave been paid and the return on capitalthat would have been earned had theservices been provided by a privatebusiness. Table 1.3 provides details onprojected revenue from priced services;the constraints imposed on FederalReserve budgets by the need to keepsuch services competitive and the

Table 1.2Expenses of the Federal Reserve System for Operations and Currency, 2000–2002Millions of dollars except as noted

Expense 2000 2001(estimated)

2002(budgeted)

Percent change

2000 to 2001 2001 to 2002

Reserve Banks1 . . . . . . . . . . . . . . . . . . . . . . . . . 2,281.5 2,461.8 2,580.2 7.9 4.8Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,462.3 1,568.3 1,651.8 7.3 5.3Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . . 819.3 893.5 928.4 9.1 3.9

Board of Governors 2 . . . . . . . . . . . . . . . . . . . . 189.1 219.3 221.2 16.0 .8Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137.6 158.4 163.0 15.1 2.9Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . . 51.5 60.9 58.2 18.2 −4.5

Total System operating expenses . . . . . . . . 2,470.7 2,681.1 2,801.4 8.5 4.5Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,599.9 1,726.7 1,814.8 7.9 5.1Nonpersonnel . . . . . . . . . . . . . . . . . . . . . . . . 870.8 954.4 986.6 9.6 3.4

Currency 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423.4 343.5 376.8 −18.9 9.7

Note. See general note to table 1.1.1. Includes costs for special projects. For detailed

information on Reserve Bank expenses, see chapter 3.

2. Includes extraordinary items and expenses of theOffice of Inspector General. See also chapter 2.

3. See text note 4 and appendix A.

Chart 1.1Distribution of Expenses of theFederal Reserve System, 2002

Currency, 11.9%

Board ofGovernors, 7.0%

Reserve Banks, 81.2%

Note. See text notes 1 and 4.


calculation of fees are discussed inappendix A.

Claims for reimbursement are basedon the expenses Reserve Banks incurin providing fiscal agency services tothe Treasury and other governmentagencies.

Sources and uses of funds are pre-sented in appendix B, and the audits ofthe System are listed in appendix C.

Trends in Expenses andEmployment

From actual 1993 levels to budgeted2002 amounts, the operating expenses

of the Federal Reserve System (includ-ing special projects) have increased anaverage of 4.2 percent per year (2.2 per-cent per year when adjusted for infla-tion) (chart 1.2). Over the same period,nondefense discretionary spending bythe federal government has increased anannual average of 4.6 percent (chart 1.3).Over the 1993–2002 period, FederalReserve System employment hasdecreased 761 (chart 1.4).

From 1982, when the transition to therequirements of the Monetary Control

Table 1.3Revenue from Priced Services, 2000–2002Millions of dollars

Service 20002001(esti-

mated)

2002(bud-geted)

Funds transfers andnet settlement . . . . . . . . 64.6 63.0 56.1

Automated clearinghouse . 71.7 76.4 66.4Commercial checks . . . . . . . 763.3 789.2 805.3Book-entry securities

transfers . . . . . . . . . . . . . 18.5 19.0 22.8Noncash collection . . . . . . . 2.4 2.0 1.5Special cash services . . . . . 2.2 2.2 2.3

Total . . . . . . . . . . . . . . . . . . . . 922.8 951.8 954.4

Chart 1.2Operating Expenses of theFederal Reserve System, 1993–2002

1994 1998 2002

1.5

2.0

2.5

Billions of dollars

Current dollars

1996 dollars1

Note. For 2001, estimated; for 2002, budgeted.1. Calculated with the GDP price deflator.

Chart 1.3Cumulative Change in Federal ReserveSystem Expenses and Federal GovernmentExpenses, 1993–2002

1994 1998 2002

20

40

60

Percent

Federal Reserve

Federal government

Note. Federal government expenses are discretionaryspending less expenditures on defense. See also generalnote to chart 1.2.

Chart 1.4Employment in theFederal Reserve System, 1993–2002

1994 1998 2002

24

25

26

Thousands of persons

Note. See general note to chart 1.2.

Federal Reserve System 11

Act of 1980 was completed, through1984, System expenses remainedessentially flat when adjusted for infla-tion, and employment declined. In 1985the staffing level was increased in apronounced effort to strengthen super-vision and regulation of member banksand bank holding companies. The sys-tem partially offset the increase in staffthrough reductions in employment inother areas, mainly in services to finan-cial institutions and the public and in thesupport and overhead operational areas.

The Expedited Funds Availability Actrequires the Federal Reserve to issueregulations to ensure the prompt avail-ability of funds and the expeditiousreturn of checks. The act becameeffective in 1988 and resulted in staffincreases throughout the System in 1988and 1989. From 1991 through 1998,spending on bank supervision expandedto meet the increase in the numberand complexity of examinations andthe enhanced supervision requirementsfor foreign institutions, problem institu-tions, the Financial Institutions Reform,Recovery, and Enforcement Act of

1989, and the Federal Deposit InsuranceCorporation Improvement Act of 1991.The System partially offset theseincreases by reducing staff in otheroperational areas, mainly in servicesto the U.S. Treasury and in services tofinancial institutions and the public.

Employment for 2002 is projected togrow by 314, largely because of plans toincrease security staff.

2002 Budget Initiatives

In 2002, several major initiatives willcontinue to affect System budgets. Asdiscussed in more detail in chapter 3,security enhancement and check mod-ernization are the primary drivers of theoverall System budget. In addition, theBanks will continue to work on projectson behalf of the Treasury.

Partly offsetting this increase in spend-ing are the lower costs associated withconsolidations in the wholesale and ACHareas as well as staff reductions due tothe continuing efforts to improve produc-tivity and streamline operations.


Chapter 2

Board of Governors

The 2002–03 budget for the Board ofGovernors consists of $455.0 millionfor operations, $1.5 million for extraor-dinary items (projects of a uniquenature), and $7.8 million for the Officeof Inspector General. The Board hasauthorized 1,741 staff positions foroperational areas and 29 positions forthe Office of Inspector General; nopositions are required for the extraor-dinary items.

Overview of the Budget

On a biennial basis, the Board and itssenior staff undertake a planning andbudgeting process that results in a stra-tegic plan for the next four years anda budget for the next two years. Forthe 2002–05 planning period and the2002–03 budget period, the Committeeon Board Affairs, assisted by a senior-level Staff Planning Group (SPG) andstaff in the Program Analysis and Bud-get Section of the Management Divi-sion, guided the process. Each divi-sion director, working with his or heroversight committee, examined thedivision’s operations to see how themission, organization, and resourcesneeded to be adjusted to enable theBoard to carry out its mission moreefficiently and effectively. The processreadjusted priorities to accomplish themission, and identified important butlower priority work for eliminationin order to fund some of the higherpriorities. In August 2001, the Boardapproved a budget objective to imple-ment those planning decisions, andbudgets were submitted in early Septem-ber. The terrorist actions of Septem-

ber 11 resulted in significant revisions tothose budget submissions.

Planning

The Staff Planning Group reviewedthe planning materials submitted by theBoard’s divisions and offices and iden-tified major issues that are anticipatedto have Boardwide significance overthe planning period. These issues arereflected in the resource decisions of theCommittee on Board Affairs that formthe basis of the budget. They will alsoserve as the basis for the 2002–03 Per-formance Plan prepared as part of theBoard’s voluntary compliance with theGovernment Performance and ResultsAct. Here are the major issues:

• Management and staffing. Recruitingand retaining staff were once againraised as issues of significant concernin a number of divisions. In addi-tion, because a significant numberof senior staff are eligible for retire-ment, management succession plan-ning and organizational structure is atop priority.

• Board organization. A comprehen-sive review of Reserve Bank oversightactivities, including a reexaminationof the legal requirements for over-sight, could result in a more efficient,effective, and consistent approach.

• Information technology. In line withplanning guidance, divisions reex-amined their information technologyspending to ensure that high-priorityitems are fully funded while lower-priority items are either reduced oreliminated. Doing so held informationtechnology spending at current levels.

13

• Physical plant. The 2001 purchase ofa new building will significantly loweroffice space costs.

• External and internal factors. Thework of the Board will continue tobe affected by environmental factorsover which the Board has little orno control. The Board and its staffmust stand ready to adjust prioritiesas necessary to deal with economicevents, often unforeseen and rapidlydeveloping, and their effects on mone-tary, supervisory, and regulatorypolicymaking.

Major Initiatives

To address these major planning issues,the budget includes the following majorinitiatives and projects for the 2002–03period.

• Attraction and retention of staff. Initia-tives to improve the Board’s abilityto attract and retain staff include thevariable pay program for economists,attorneys, and officers; an increase inthe employee cash award program; a4.6 percent merit increase for 2002;and an estimated 4.0 percent meritincrease for 2003.

• Employee benefits. A major increasein health insurance rates is beingfunded, as are initiatives to increasethe transportation subsidy, increasethe Board match for deferred compen-sation, and fund costs associated withthe revised leave policy.

• Workload. New positions and a reduc-tion in the number of vacant posi-tions in specific divisions in responseto increased workloads, new securityconcerns, and implementation of thecompensation initiatives will all affectsalary liability.

• Information technology. After acomprehensive review of require-ments and priorities, the various

divisions are reallocating informationtechnology resources among projects.Central IT support was funded at thecurrent level except for increases toenhance disaster recovery.

• Physical plant. In line with theBoard’s earlier strategic plan, a build-ing purchased in 2001 has signifi-cantly reduced the net operating costfor office space in this budget. Capi-tal investments are planned for theBoard’s facilities as discussed below,in the section on the capital budget.Noncapital improvements are alsoplanned for the facilities.

Ramifications of the SeptemberTerrorist Attacks

After the terrorist attacks on Septem-ber 11, the projects and initiatives listedbelow were added to the 2002–03budget proposal. The list includes pro-grammatic changes that will be requiredto handle the long-term changes to theworking and economic environment.These items and their associated operat-ing costs of $13.8 million are includedin the total budget.

• Enhanced capacity Boardwide fordisaster recovery, including reduc-ing the time to resume normal opera-tions at remote sites and increasing theamount of information and the numberof systems supported at those sites

• Initiatives to enhance physical security,including adding security staff; usingbomb-sniffing dogs for greater perim-eter security; using contractual sup-port for mail processing; and other,less visible, measures

• Additional staff in the Division ofReserve Bank Operations and Pay-ment Systems to focus on systemsecurity issues in response to newterrorism-related legislation, and anew section (including new staff) to


focus on private-sector clearance andsettlement systems in order to increasethe Board’s understanding and com-petence in this area

• Two positions in Banking Supervisionand Regulation, in response to newterrorism-related legislation, to focuson money laundering and financialtransactions associated with terroristactivity

• Four positions in the Office of theStaff Director for Management toimprove the planning and coordina-tion of contingency operations and toact as a liaison with the new Office ofHomeland Security.

Areas of Risk

The possibility remains, of course, thatfurther developments could requiresignificant resources beyond the currentproposals. These developments couldinclude the following:

• Significant changes in or shocks to theeconomy or financial system

• Additional terrorist activity or war• Determination that Systemwide super-

visory technology initiatives shouldbe funded and managed by the Board

• Changes to the assumptions regard-ing the position vacancy rates used indeveloping the salary budget.

Operations Budget by Divisionand Account Classification

The Board’s overall operations budgetis detailed by division in table 2.1 andby account classification in table 2.3.Table 2.2 shows the number of autho-rized positions for Board operationsby division. The largest increase in the2002–03 budget is in personnel services.The budget for personnel services(salaries, retirement, and insurance) is$338.1 million, or $50.5 million greater

than the 2000–01 estimate (an averageincrease of 8.4 percent per year). Theaddition of eleven positions explains aportion of this increased budget. Meritpay, new compensation initiatives, pro-motions and reclassifications, higherbenefit costs, and a lower vacancy ratein certain divisions is also increasing thebudget requirements.

The 2002–03 budget for goods andservices is $116.8 million, which is$11.1 million greater than the 2000–01estimate (an increase of 5.1 percent peryear). Much of this increase is attrib-utable to additional disaster recoverywork stemming from the September 11attacks.

Partially offsetting these increasesare programmatic reductions in areasthroughout the Board. These includesignificant changes in various accountsdue to the Board’s transition from leas-ing office space at its new location toowning the building, with a net reduc-tion in expenses of $3.0 million annu-ally. Additionally, the replacement cyclefor desktop computers will be extended,and support for regular informationtechnology projects has been consider-ably scaled back after various divisionschanged priorities and eliminated lower-priority projects.

Operations Budget byOperational Area

The Board’s operations budget supportsfour broadly defined operational areas:monetary and economic policy, super-vision and regulation, services to finan-cial institutions and the public, andSystem policy direction and oversight(tables 2.4 and 2.5).

The largest increase in expenses isin the security portions (both informa-tion and physical) of overhead, which isspread, in proportion to direct expenses,among the four operational areas. This

Board of Governors 15

increase does not directly enhance theefficiency or effectiveness of currentBoard operations, but it is necessarygiven recent changes in the threatenvironment facing the nation and theBoard.

Monetary and Economic Policy

The 2002–03 budget for monetary andeconomic policy is $182.5 million, anincrease of $19.2 million, or an aver-age of 5.7 percent per year, from the2000–01 estimate. Activities in thisoperational area include the Board’smonitoring and analysis of develop-ments in the money and credit markets,the setting of reserve requirements, the

approval of changes in the discount rate,and other activities related to managingthe nation’s monetary policy.

Besides the additional funding forcompensation initiatives, programmaticincreases in this area will cover theacquisition of additional data to assiststaff in their responsibilities. These datarelate to capital risk, retail banking feesand services, global financial markets,and consumer credit.


The 2002–03 budget for supervision andregulation is $186.7 million, an increaseof $27.9 million, or an average of8.4 percent per year, from the 2000–01

Table 2.1Operating Expenses of the Board of Governors, by Division, Office,or Special Account, 2000–01 and 2002–03Thousands of dollars except as noted

Division, office,or special account

2000–01(estimated)

2002–03(budgeted)

Change

AmountAverageannual

(percent)

Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,524 11,813 3,289 17.7Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,959 11,256 2,296 12.1Research and Statistics . . . . . . . . . . . . . . . . . . . . . . 62,741 67,382 4,640 3.6International Finance . . . . . . . . . . . . . . . . . . . . . . . 22,706 24,873 2,167 4.7Monetary Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,835 19,666 831 2.2Banking Supervision and Regulation . . . . . . . . . 62,840 73,859 11,019 8.4Consumer and Community Affairs . . . . . . . . . . . 18,094 20,671 2,576 6.9Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,148 20,754 2,606 6.9Reserve Bank Operations

and Payment Systems . . . . . . . . . . . . . . . . . . 30,995 35,548 4,553 7.1Staff Director for Management . . . . . . . . . . . . . . 3,935 7,097 3,162 34.3Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,318 25,248 2,931 6.4Support Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,289 63,684 4,395 3.6Information Technology . . . . . . . . . . . . . . . . . . . . . 76,041 81,855 5,814 3.8Publications Committee . . . . . . . . . . . . . . . . . . . . . 3,934 3,687 −247 −3.2Special projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 29,073 14,073 39.2IRM income account 1 . . . . . . . . . . . . . . . . . . . . . . −38,968 −41,477 −2,509 3.2

Total, Board operations . . . . . . . . . . . . . . . . . . . . 393,393 454,988 61,595 7.5

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . . 8,598 1,500 −7,098 . . .Office of Inspector General . . . . . . . . . . . . . . . . . 6,617 7,757 1,139 8.3

Note. Operating expenses reflect all redistributionsfor support and allocations for overhead, and they excludecapital outlays. Components may not sum to totals andmay not yield percentages shown because of rounding.

1. Income from various Board divisions for use ofcentral information resources management (IRM)resources.

. . . Not applicable.


estimate. Activities in this area includeworking with other federal and statefinancial authorities to ensure safety andsoundness in the operation of finan-cial institutions, stability in the financialmarkets, and fair and equitable treat-ment of consumers in their financialtransactions. The 2002–03 budgetaryincreases will enhance supervisoryactivities such as ongoing monitoring,inspecting, and examining of bankingorganizations to assess their conditionand their compliance with relevant lawsand regulations. Programmatic increasesinclude funding for seven positionsadded in late 2000, greater focus onmoney laundering activities, interna-tional training and assistance to foreigngovernments, and a review of regula-

tions and policies related to consumerprotection. As risks to the financialsector grow, the staff will need to spendmore time on bank examinations andmonitoring under the risk-based super-vision model implemented over the pastfew years.

Services to Financial Institutionsand the Public

The 2002–03 budget for oversightof Reserve Bank services to financialinstitutions and the public is $9.0 mil-lion, a decrease of $0.1 million, or anaverage of 0.4 percent per year, fromthe 2000–01 estimate. This operationalarea provides support to and oversightof the Federal Reserve Banks and

Table 2.2Positions Authorized at the Board of Governors, by Division, Office,or Special Account, 2000–01 and 2002–03

Division, office,or special account

2000–01(authorized)

2002–03(budgeted) Change

Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 42 −1Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 56 0Research and Statistics . . . . . . . . . . . . . . . . . . . . . . . . . 279 278 −1International Finance . . . . . . . . . . . . . . . . . . . . . . . . . . 119 119 0Monetary Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 59 −1Banking Supervision and Regulation . . . . . . . . . . . . 227 224 −3Consumer and Community Affairs . . . . . . . . . . . . . . 78 82 4Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 82 0Reserve Bank Operations and

Payment Systems . . . . . . . . . . . . . . . . . . . . . . . . . 127 138 11Staff Director for Management . . . . . . . . . . . . . . . . . 15 19 4Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 94 1

Concern1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 27 −4Support Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 215 3Information Technology (IT) . . . . . . . . . . . . . . . . . . . 279 278 −1Special projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 −1

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,703 1,714 11

Reimbursable IT support 2 . . . . . . . . . . . . . . . . . . . . . . 25 27 2

Total, Board operations . . . . . . . . . . . . . . . . . . . . . . . 1,728 1,741 13

Office of Inspector General . . . . . . . . . . . . . . . . . . . . 29 29 0

1. Summer intern and youth positions handled by theequal employment opportunity function in the Manage-ment Division.

2. Positions in the Division of Information Technologythat provide support to the Federal Financial Institutions

Examination Council for processing data collected underthe Home Mortgage Disclosure Act and the CommunityReinvestment Act.


Branches—specifically, evaluation ofthe operational and pricing performanceof the check-payment activities of theReserve Banks; oversight of the elec-tronic payments mechanism; and annualevaluation of the Federal Reserve Sys-tem’s currency, coin, and food couponoperations.

Costs associated with these programswill decline slightly during the nextbiennium because of the realization ofsavings from previous initiatives.

System Policy Direction andOversight

The 2002–03 budget for System policydirection and oversight is $76.8 mil-

lion, an increase of $14.5 million, or anaverage of 11.0 percent per year, fromthe 2000–01 estimate. This operationalarea covers oversight and direction ofBoard and Reserve Bank programs. Itincludes programs that directly supportBoard members in carrying out theiroversight function for Reserve Bankoperations, budgeting and accounting,financial examinations, audit and oper-ations reviews, and automation andcommunications.

Major programmatic changes in thisarea include greater emphasis on secur-ity and contingency planning System-wide and a new section to provide staffexpertise on private-sector clearanceand settlement systems. Fewer vacan-

Table 2.3Operating Expenses of the Board of Governors, by Account Classification,1992–93 to 2002–03Thousands of dollars except as noted

Account classification 1992–93 1994–95 1996–97 1998–99

Personnel servicesSalaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,265 190,210 211,005 222,203Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,366 15,564 18,015 19,708Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,407 16,862 19,196 14,463

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,039 222,637 248,215 256,374

Goods and servicesTravel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,453 9,399 9,391 10,823Postage and shipping . . . . . . . . . . . . . . . . . . . . . . . 2,327 2,483 2,261 1,706Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . 3,665 4,168 4,367 6,120Printing and binding . . . . . . . . . . . . . . . . . . . . . . . . 2,237 2,866 2,829 2,188Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,212 2,976 2,544 2,338Stationery and supplies . . . . . . . . . . . . . . . . . . . . . 1,635 1,755 1,756 1,831Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,615 6,453 7,865 8,349Furniture and equipment . . . . . . . . . . . . . . . . . . . . 2,442 2,497 2,568 7,607Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,156 7,202 8,648 8,884Books and subscriptions . . . . . . . . . . . . . . . . . . . . 1,451 1,913 1,904 1,765Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,683 4,145 3,995 4,429Building repairs and alterations . . . . . . . . . . . . . . 3,402 3,273 2,996 2,881Furniture and equipment repairs

and maintenance . . . . . . . . . . . . . . . . . . . . . . . 4,072 4,198 3,285 3,517Contingency Processing Center . . . . . . . . . . . . . . 465 206 0 181Contractual professional services . . . . . . . . . . . . 9,666 13,797 19,438 24,421Tuition, registration, and membership fees . . . 1,823 2,394 2,311 2,672Subsidies and contributions . . . . . . . . . . . . . . . . . 1,504 1,433 1,299 1,524Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,574 14,347 17,683 20,204Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −8,309 −16,175 −18,502 −22,637

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,074 69,330 76,638 88,803

Total, Board operations . . . . . . . . . . . . . . . . . . . . 259,113 291,967 324,853 345,177

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 4,196 20,401Office of Inspector General . . . . . . . . . . . . . . . . . 4,640 5,880 5,975 5,640


cies and an enhanced communicationprogram are also responsible for thesubstantial increase.

Capital Budget

The Board’s proposed 2002–03 capi-tal budget is $29.9 million. Of thistotal, $19.8 million supports contin-ued improvements in office automationand major upgrades to the informationtechnology infrastructure, includingcompletion of the Martin building

recabling project, centralization andimprovement of distributed systems diskstorage, and scheduled server replace-ments in the data center. Funds are alsoprovided for the maintenance and upkeepof the Eccles and Martin buildings,including security system upgradesplanned before the events of Septem-ber 11; elevator refurbishment; equip-ment replacement; interior restorationon the concourse and terrace levels ofthe Martin building; and restoration ofthe Eccles building courtyard follow-

Table 2.3Continued

Thousands of dollars except as noted

Account classification 2000–01(estimated)

2002–03(budgeted)

Average annual change(percent)

2000–03 1992–2003

Personnel servicesSalaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,031 287,097 8.2 5.4Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,897 27,421 9.4 7.5Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,725 23,631 9.5 5.1

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,653 338,149 8.4 5.5

Goods and servicesTravel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,235 13,606 5.5 4.9Postal and shipping . . . . . . . . . . . . . . . . . . . . . . . . . 1,576 1,607 1.0 −3.6Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . 7,046 7,798 5.2 7.8Printing and binding . . . . . . . . . . . . . . . . . . . . . . . . 2,549 2,543 −.1 1.3Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,296 2,066 −5.1 −.7Stationery and supplies . . . . . . . . . . . . . . . . . . . . . 2,005 2,404 9.5 3.9Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,915 11,223 6.4 7.2Furniture and equipment . . . . . . . . . . . . . . . . . . . . 8,100 7,000 −7.0 11.1Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,274 857 −71.1 −12.2Books and subscriptions . . . . . . . . . . . . . . . . . . . . 2,087 2,120 .8 3.9Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,517 5,555 10.9 4.2Building repairs and alterations . . . . . . . . . . . . . . 3,479 3,688 3.0 .8Furniture and equipment repairs

and maintenance . . . . . . . . . . . . . . . . . . . . . . . 4,278 7,124 29.1 5.8Contingency Processing Center . . . . . . . . . . . . . . 400 400 . . . −1.5Contractual professional services . . . . . . . . . . . . 28,538 32,384 6.5 12.9Tuition, registration, and membership fees . . . 3,214 3,173 −.6 5.7Subsidies and contributions . . . . . . . . . . . . . . . . . 1,866 1,897 .8 2.3Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,420 25,482 20.9 7.3Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . −16,054 −14,089 −6.3 5.4

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,740 116,839 5.1 6.5

Total, Board operations . . . . . . . . . . . . . . . . . . . . 393,393 454,988 7.5 5.8

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . . 7,847 1,500 −56.3 . . .Office of Inspector General . . . . . . . . . . . . . . . . . 6,617 7,757 8.3 5.3

Note. Beginning in 1998 the threshold for capitalizingand depreciating a purchase rather than expensing it rosefrom $1,000 to $5,000. The data for 1996–97 have beenadjusted, but accurate adjustments for earlier years are not

possible. Components may not sum to totals and may notyield percentages shown because of rounding.

. . . Not applicable.


ing completion of the Eccles BuildingInfrastructure Enhancement Project.Major facility projects include thepurchase of an emergency generator,replacement of the Eccles buildingroof, upgrades to security at buildingentrances, and a design and feasibility

study for a major renovation of theMartin building.

An additional $3.3 million has beenbudgeted for projects resulting from theSeptember terrorist attacks, includingsubstantial improvements to informa-tion disaster recovery systems and

Table 2.4Expenses of the Board of Governors for Operational Areas,Extraordinary Items, and Office of Inspector General, 2000–01 and 2002–03Thousands of dollars except as noted

Activity 2000–01(estimated)

2002–03(budgeted)

Change

AmountAverageannual

(percent)

Monetary and economic policy . . . . . . . . . . . . . . 163,242 182,475 19,233 5.7Supervision and regulation . . . . . . . . . . . . . . . . . . 158,799 186,711 27,912 8.4Services to financial institutions

and the public . . . . . . . . . . . . . . . . . . . . . . . . . 9,083 9,015 −68 −.4System policy direction and oversight . . . . . . . 62,269 76,787 14,518 11.0

Total, Board operations . . . . . . . . . . . . . . . . . . . . 393,393 454,988 61,595 7.5

Extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . . 8,598 1,500 −7,098 . . .Office of Inspector General . . . . . . . . . . . . . . . . . 6,617 7,757 1,140 8.3

Note. See general note to table 2.1. . . . Not applicable.

Table 2.5Positions Authorized at the Board of Governors for Operational Areas,Support and Overhead, and Office of Inspector General, 2000–01 and 2002–03

Activity 2000–01(estimated)

2002–03(budgeted) Change

Monetary and economic policy . . . . . . . . . . . . . . . . . 431 429 −2Supervision and regulation . . . . . . . . . . . . . . . . . . . . . 374 373 −1Services to financial institutions and the public . . 24 24 0System policy direction and oversight . . . . . . . . . . 155 166 11

Support and overhead1 . . . . . . . . . . . . . . . . . . . . . . . . . 719 722 3

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,703 1,714 11

Reimbursable IT support 2 . . . . . . . . . . . . . . . . . . . . . . 25 27 2

Total, Board operations . . . . . . . . . . . . . . . . . . . . . . . 1,728 1,741 13

Office of Inspector General . . . . . . . . . . . . . . . . . . . . 29 29 0

1. Includes positions for 17 youths, 10 worker trainees,and 4 summer interns.

2. Positions in the Division of Information Technologythat provide support to the Federal Financial Institutions

Examination Council for processing data collected underthe Home Mortgage Disclosure Act and the CommunityReinvestment Act.


expansion of the scope of the buildingentrance security upgrade project alreadyscheduled.

The Eccles Building InfrastructureEnhancement Project will be com-pleted during the 2002–03 budget period.The amount budgeted, $3.5 million,is $8.3 million less than the amountprovided during the 2000–01 budgetperiod because of the phased nature ofthe project, which began in July 1999.The project consists of replacing thevoice and data cabling plant, replacingpiping, and making other, related repairsand will extend the building’s useful lifeand improve the fire safety systems.

The remaining $3.3 million of thecapital budget is for projects associatedwith acquisition of the new building.These improvements, which were iden-tified during the due-diligence periodof the purchase negotiations, includeenhancements to building security; codecompliance issues; garage repairs; instal-lation of an emergency generator; electri-cal, HVAC, and control system upgrades;and carpet replacement.

Positions

In response to the September terroristattacks, a net of eleven positions havebeen added to the Board’s number ofauthorized positions; the proposed totalis 1,741 positions (table 2.2).

Before September 11, the staffconducted a thorough planning review,yielding an original budget request thatincluded a net reduction of eight posi-tions. A net increase of four positionswas authorized for the Division ofConsumer and Community Affairs toeliminate four long-term dual occupan-cies. One position was added to theDivision of Reserve Bank Operationsand Payment Systems and one positionto the Management Division in responseto an increased workload. Small, off-

setting position reductions were made inmany divisions where efficiencies andworkload factors made such decreasespossible.

After September 11, nineteen posi-tions were added. These positions arenecessary to increase the Board’s physi-cal security (seven), ensure compli-ance with new police powers providedto System security staff under newlegislation (two), provide additionalresources for antiterrorism and anti-money-laundering activities (two), andincrease the Board’s expertise in private-sector clearing and settlement systems(eight).

Trends in Expenses andEmployment

The rate of increase within the 2002–03budget biennium is 7.5 percent per year,which is slightly higher than the6.3 percent annual rate in the 2000–01biennium (table 2.3). The projectedaverage annual rate of increase from1992–93 to 2002–03 is 5.8 percent(charts 2.1–2.5). This increase is mainlyattributable to the increasing complexityof Board work over this period, whichhas resulted in a net increase in posi-tions and higher average grades, highersalary and benefit costs, and increas-ingly sophisticated automation systemsrequired to manage sharply increasingvolumes of data. Merit pay, new com-pensation initiatives, promotions andreclassifications, higher benefit costs, alower projected number of vacanciesin certain divisions, and increased usageof contractual support for continuityof operations increased the budgetrequirement.

Approximately three-fourths of theBoard’s operating expenses are forpersonnel; consequently, analysis oftrends is heavily tied to staffing levels.From 1992 to 2003, the number of


authorized positions for Board opera-tions rose from 1,668 to 1,741, a netincrease of 73, or 4.4 percent. Reflectingthe growing complexity of the Board’swork, the average grade for professionalstaff rose from 25 to 26.

Changes in banking, frequently asso-ciated with automation enhancements,increased the complexity of safety andsoundness supervisory activities. Toadequately perform these activities, andto increase attention to consumer issues,including collection and analysis ofdata collected under the Home Mort-gage Disclosure Act and Community

Reinvestment Act, a net of thirty-fourpositions were added. (Many positionsassociated with lower-priority work wereeliminated to offset the cost of the newwork.) The increasing complexity ofmonetary policy issues resulted in anincrease of twenty-five positions. Over-sight of Reserve Bank operations becamemore complex resulting in an increase ofnineteen positions. Finally, a net decreaseof five administrative and support posi-tions resulted from the Board’s efforts tooutsource where feasible; without theseefforts, the number of administrative andsupport positions would have increased

Chart 2.1Operating Expenses of theBoard of Governors, 1992–2003

1992 1997 2002

125

150

175

200

225

Millions of dollars

Current dollars

1992 dollars1

YearMillions of dollars

Current dollars 1992 dollars1

1992 . . . . . . . . . . . . 122.8 122.81993 . . . . . . . . . . . . 136.3 132.81994 . . . . . . . . . . . . 140.7 133.91995 . . . . . . . . . . . . 151.2 140.41996 . . . . . . . . . . . . 162.7 148.21997 . . . . . . . . . . . . 163.3 146.11998 . . . . . . . . . . . . 171.7 151.71999 . . . . . . . . . . . . 173.5 151.42000 . . . . . . . . . . . . 182.5 156.12001 . . . . . . . . . . . . 210.9 176.62002 . . . . . . . . . . . . 216.9 177.92003 . . . . . . . . . . . . 238.1 191.2

Note. For 2001, estimated; for 2002–03, budgeted.Excludes the Office of Inspector General and extraor-dinary items. The annual values for 1998–2003 are theapproximate calendar-year figures contained within therespective two-year budgets.

1. Calculated with the GDP price deflator.

Chart 2.2Expenses for Personnel Servicesat the Board of Governors, 1992–2003

1992 1997 2002

100

125

150

175

Millions of dollars

Current dollars

1992 dollars

Note. See notes to chart 2.1.

Chart 2.3Expenses for Goods and Servicesat the Board of Governors, 1992–2003

1992 1997 2002

30

45

60

Millions of dollars

Current dollars

1992 dollars

Note. See notes to chart 2.1.


because of enhanced security and theacquisition of new office space.

While the number of positions at theBoard has fluctuated during the 1992–2003 period, the salary budget (notincluding retirement and insurancebenefits) has remained relatively stableat roughly 64 percent of operatingexpenses. The portion of operatingexpenses devoted to retirement andinsurance has increased approximately1 percentage point over the period asa result of administrative actions toenhance health insurance and otherbenefits.

The Board experienced an averageannual percentage increase in expensesfor goods and services of 6.5 percentover the 1992–2003 period. The larg-est contributor to this increase was a12.9 percent annual rate of increase inthe contractual professional servicesaccount because of outsourcing taskssuch as security, IT services, and facili-ties support. Increases in the complex-ity of the Board’s work resulted inadditional data purchases and trainingrequests. Partially offsetting the overallincrease is a significant decrease inrental costs because of the year-end2001 acquisition of a building previ-ously rented by the Board.

Extraordinary Items

The Board’s extraordinary items budgetfor 2002–03 provides funds of $1.5 mil-lion for the Survey of ConsumerFinances ($0.7 million) and the Surveyof Small Business Finances ($0.8 mil-lion). These surveys will improve thequality of economic data produced bythe Board by gathering information onthe economic behavior of U.S. house-holds and the financial health of U.S.firms. Data collection for the 2001 Sur-vey of Consumer Finances was com-pleted at the beginning of December

Chart 2.4Annual Change in Operating Expensesof the Board of Governors, 1992–2003

1992 1997 2002

3

6

9

12

15

Percent

Note. Year-end data. See also general note to chart 2.1.

Chart 2.5Employment and Authorized Positionsat the Board of Governors, 1992–2003

1992 1997 2002

1.5

1.6

1.7

Thousands

Authorized positions

Employment

Year Employment Authorizedpositions

1992 . . . . . . . . . . . . 1,563 1,6391993 . . . . . . . . . . . . 1,636 1,6641994 . . . . . . . . . . . . 1,635 1,6641995 . . . . . . . . . . . . 1,644 1,6651996 . . . . . . . . . . . . 1,686 1,7121997 . . . . . . . . . . . . 1,638 1,7131998 . . . . . . . . . . . . 1,629 1,6941999 . . . . . . . . . . . . 1,600 1,6802000 . . . . . . . . . . . . 1,568 1,6682001 . . . . . . . . . . . . 1,599 1,6682002 . . . . . . . . . . . . 1,631 1,6812003 . . . . . . . . . . . . 1,631 1,681

Note. Year-end data. Excludes summer intern andyouth positions as well as positions for the Office ofInspector General. These positions number 60 for 2002and 2003. Includes positions that provide support to theFederal Financial Institutions Examination Council forprocessing data collected under the Home MortgageDisclosure Act and the Community Reinvestment Act.


2001, and data processing will acceler-ate in 2002. Final data will not be com-pleted until 2002, though preliminarydata are expected to be available earlier.A summary article on the survey isscheduled to be published in the January2003 Federal Reserve Bulletin, and aversion of the survey data will bereleased to the public shortly thereafter.Preparations for the 2004 Survey ofConsumer Finances are expected to beunder way no later than the first quarterof 2003. The survey instrument will bereprogrammed, requiring the generationof highly detailed specifications and thedevelopment of a new data managementprotocol. The last half of 2003 will seeincreasingly intensive testing of theinstrument, development of materialsto support data collection, preliminarysample design work, and a full pretestof operations. The staff expects to startinterviewing for the 2004 survey inspring 2003.

Work on the Survey of Small Busi-ness Finances during the second halfof 2002 will involve canvassing Boardstaff, academics, and other researchersto help determine the content of the

2003 survey. By the first quarter of2003, survey staff will write a memoran-dum for the Board with recommen-dations regarding the 2003 survey.Survey staff will also develop a state-ment of work with a request for proposalexpected to be issued around May orJune 2003. Following the evaluation ofproposals, a contract will be awardedduring the fourth quarter of 2003. Workshould begin in the fourth quarter of2003, and fieldwork (which is theportion of the contract with the largestexpenditures) will not begin until aboutApril 2004.

Office of Inspector General

The 2002–03 budget of $7.8 million forthe Office of Inspector General (OIG)is separate from the Board’s. The OIG’sbudget is prepared in a manner thatis administratively consistent with thepreparation of the Board’s operatingbudget. In conformance with the statu-tory independence of the office, the OIGpresents its budget directly to the Chair-man of the Board of Governors forconsideration by the Board.


Chapter 3

Federal Reserve Banks

The 2002 operating budgets of thetwelve Reserve Banks total $2,580.2million.1 The 2002 total is $118.4 mil-lion, or 4.8 percent, above estimated2001 expenses (table 3.1).2 Approxi-mately 37 percent of Reserve Bankexpenses in the 2002 budget are offsetby priced service revenues, and anadditional 12 percent are reimbursableclaims for services provided to the

U.S. Treasury and other governmentagencies.

Revenues from priced services arebudgeted to increase 0.3 percent in 2002as a result of projected price increasesand modest volume growth in thecheck service. The increase in revenuesis moderated, however, by decliningrevenue in other services, namelyautomated clearinghouse (ACH), Fed-wire, and book-entry securities. ACHrevenue reductions reflect some erosionof commercial origination volume, dueto increased competition, as well asprice reductions. Declining revenue inthe Fedwire funds transfer and book-entry securities services is also attrib-uted to price reductions. Reimbursableclaims for Treasury-related services areexpected to increase 5.4 percent.

1. These expenses include those budgeted byFederal Reserve Information Technology (FRIT)and the Office of Employee Benefits (OEB).Expenses from these entities have been charged tothe Reserve Banks, as appropriate, and included intheir budgets.

2. Unless otherwise noted, expenses also includecosts associated with the check standardizationspecial project. Special projects are major effortshaving Systemwide significance that are outsidethe budgets of the individual Reserve Banks.

Table 3.1Expenses of the Federal Reserve Banks, Net of Receiptsand Claims for Reimbursement, 2001 and 2002Millions of dollars except as noted

Item 2001(estimated)

2002(budgeted)

Change

Amount Percent

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,461.8 2,580.2 118.4 4.8

LessRevenue from priced services . . . . . . . . . . . . . . . . 951.8 954.4 2.6 .3Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 1.0 −.1 −10.0Claims for reimbursement1 . . . . . . . . . . . . . . . . . . 292.2 307.9 15.7 5.4

EqualsNet expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,216.7 1,316.9 100.2 8.2

Note. Excludes capital outlays. Includes expensesbudgeted by Federal Reserve Information Technology(FRIT) and the System’s Office of Employee Benefits(OEB). Expenses from these entities have been charged tothe Reserve Banks, as appropriate, and included in theirbudgets. Components may not sum to totals and may notyield percentages shown because of rounding.

Operating expenses reflect all redistributions forsupport and allocations for overhead.

1. Costs of fiscal agency and depository servicesprovided to the U.S. Treasury and other governmentagencies that are billed to these agencies.

25

At each Reserve Bank, budgeted 2002expenses are increasing from estimated2001 expenses by amounts ranging from0.3 percent to 8.7 percent (see table D.1,appendix D). The Reserve Bank budgetincrease of $118.4 million providesfunding for each District’s salary admin-istration and benefits program, localinitiatives, nationally provided supportservice (NPSS) initiatives, and consoli-dated operations.

The average number of personnel(ANP) projected to be employed atthe Reserve Banks, Federal ReserveInformation Technology (FRIT), and theOffice of Employee Benefits (OEB)during 2002 is 23,550, an increase of282 ANP, or 1.2 percent, from estimated2001 staff levels (table 3.2).3 ReserveBank employment is expected to increase228 ANP or 1.0 percent in 2002; thisincrease is largely a result of plans toincrease the number of security staff(for more detail on expenses and ANP

by District and operational area, seetables D.1 through D.4, appendix D).

2001 Budget Performance

The Reserve Banks estimate 2001expenses to have been $2,461.8 million,an increase of $19.6 million, or0.8 percent, from the approved 2001budget of $2,442.2 million (table 3.3).The Reserve Banks estimate employ-ment, including FRIT and OEB, to havebeen 23,268 ANP, a decrease of 218ANP from approved 2001 levels.

Eight Reserve Banks had cost over-runs in 2001 ranging from 0.1 percent(Dallas) to 6.8 percent (Kansas City).The remaining four Banks estimatedtheir 2001 expenses to have been belowtheir approved 2001 budgets by amountsranging from 0.7 percent (Philadelphia)to 4.5 percent (Atlanta). In appendix D,tables D.5 through D.8 detail 2001expense and ANP estimates by Districtand operational area.

About $9.5 million of the ReserveBanks’ 2001 overrun is attributable tohigher-than-budgeted contract staffexpenses. The largest share of theseexpenses ($3.8 million) reflect fees forconsultants involved in national projectmanagement and development support

3. The term average number of personneldescribes levels and changes in employment at theReserve Banks. ANP is the average number ofemployees in terms of full-time positions for theperiod. For instance, a full-time employee whostarts work on July 1 counts as 0.5 ANP for thatcalendar year; two half-time employees who starton January 1 count as 1 ANP.

Table 3.2Employment at the Federal Reserve Banks, FRIT, and OEB, 2001 and 2002Average number of personnel except as noted


2002(budgeted)

Change

Number Percent

Reserve Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,525 22,753 228 1.0Federal Reserve Information

Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 712 763 51 7.2Office of Employee Benefits . . . . . . . . . . . . . . . . . . . 31 34 3 9.7

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,268 23,550 282 1.2

Note. Components may not sum to totals and may notyield percentages shown because of rounding. See textnote 3 for definition of average number of personnel.


for the check standardization project.The remainder of these expenses($5.7 million) reflect the hiring of tech-nical personnel to support local informa-tion technology (IT) initiatives, thehiring of temporary staff in New York’scheck-processing operation, and severalmajor Systemwide initiatives to convertto standardized software applications.

Estimated expenses for 2001 alsoinclude $6.8 million in unbudgeted costsrelated to the September 11 terroristacts.4 These costs are primarily for anincrease in overtime for protection staff,alternative check shipping arrange-ments, and the shipping of currencyto alternative storage locations. Off-setting a portion of these expenses arelower-than-planned travel expenses($1.0 million).

Estimated 2001 expenses include anet increase of $4.7 million and 14 ANPassociated with the System’s revampedfinancial services product office struc-ture. The Reserve Banks created theproduct office structure in the early1990s to centralize leadership of theSystem’s major financial services busi-ness lines. The structure is designed to

draw on leadership from Reserve Bankoffices that possess specialized expertisein a particular business area. As businessrequirements change and Reserve Banksdevelop new projects and initiatives,leadership of a product office may shiftfrom one Reserve Bank to another, andresponsibilities may be redefined. In2001, the Reserve Banks redefined sev-eral areas of responsibility and shiftedleadership among several Banks. Becausefinal plans for these changes had notbeen approved when the Banks devel-oped their 2001 budgets, the associatedcosts were unbudgeted. Most of theincrease is the result of expanded prod-uct office responsibilities.

Higher costs associated with fullyreimbursable Treasury projects accountfor $2.9 million of the 2001 overrun.This increase reflects higher communica-tions costs for Treasury Direct consolida-tion, additional enhancements requestedby the Treasury for continued develop-ment of the ASAP.gov application, andthe new Pay.gov and Government Point-of-Sale Check Conversion (GPCC)projects.

In addition to the broader trendsdiscussed above, specific factors at afew Reserve Banks contributed to theoverrun in 2001. The Retail PaymentsOffice in the Atlanta District reported

4. These costs are not included in the 2001overrun discussed in subsequent paragraphs.

Table 3.3Budget Performance of the Federal Reserve Banks,Operating Expenses and Employment, 2001

Item 2001(budgeted)

2001(estimated)

Change

Amount Percent

Operating expenses(millions of dollars) . . . . . . . . . . . . . . . . . . . . . . . 2,442.2 2,461.8 19.6 .8

Employment(average number of personnel) . . . . . . . . . . . . . 23,486 23,268 −218 −.9

Note. See note to table 3.1. See text note 3 for defi-nition of average number of personnel.

Federal Reserve Banks 27

higher-than-budgeted costs for theCheck Relay air transportation function($2.1 million) because of higher fuelcosts. Several Banks incurred higher-than-planned medical costs ($5.9 mil-lion) and one-time transition costsassociated with the Systemwide consoli-dation of ACH operations ($1.5 mil-lion); in addition, Chicago increased itssupervision staff by seventeen ANP toenhance the quality of that function($1.2 million). In Richmond and Dallas,severance payments associated withrestructuring, centralization, and effi-ciency initiatives also added to the over-run ($4.2 million).

Partially offsetting these increaseswere lower costs related to the checkimaging project as a result of delays inits implementation schedule ($3.6 mil-lion); lower-than-expected spending inSan Francisco ($3.0 million); and costreductions in Atlanta ($8.1 million and157 ANP) and Richmond ($1.1 millionand 72 ANP).

The 2002 Budget

The discussion of the 2002 budgetcovers salary administration and Systemand Reserve Bank initiatives.

2002 Salary Administration

The budgets for the Reserve Banks,FRIT, and OEB include $108.9 millionto fund salary administration programsfor officers and employees (table D.9).5Average merit increases of 4.5 percentfor officers and 4.3 percent for employ-

ees account for $52.0 million, or48 percent, of the total salary adminis-tration budget. Variable pay programs,which include cash awards and incen-tive payments for officers and employ-ees, represent $33.2 million of thetotal budget.6 Promotions, reclassifica-tions, and market adjustments represent$16.4 million; retention paymentsrepresent $4.1 million; and severancepayments represent $3.2 million. Meritand other salary-related expenses arein line with public and private sectortrends.

Officer incentive payments and cashawards total $10.2 million, or 7.0 percentof officer salary liability. Officer vari-able pay continues to show increasedfunding for incentive-type awards, withone District using the entire variable paypool for incentive awards.

Employee incentive payments andcash award funds total $22.8 million, or2.2 percent of employee salary liability.Three Banks opted to apportion a higherpercentage of the award funds to thetop three grades, with a commensuratereduction in other grade pools; theseactions are consistent with the variablepay guidelines. The mix between incen-tive and cash awards in the employeecategory continues to be heavilyweighted toward cash awards.

Officer turnover in 2002, includingretirements, is projected to decreasefrom an estimated 5.9 percent in 2001 to4.0 percent in 2002; Boston and KansasCity expect no turnover in 2002, whileSan Francisco expects 12.3 percent, thehigh end of the projections. Employeeturnover is projected to increase slightly

5. Salary administration represents the budgetedfunds that are available to increase compensationto officers and employees in the coming year.It does not include adjustments for changes instaffing levels, turnover and lags in hiring, andovertime.

6. Cash awards are payments for exceptionalachievements during the year. Incentive paymentsrepresent awards for the accomplishment ofpre-defined objectives related to specific projectsand initiatives.


from 10.9 percent in 2001 to 11.1 per-cent in 2002, ranging from 8.1 percent(Richmond) to 15.0 percent (KansasCity). Reserve Banks are reportingrelatively higher turnover in check opera-tions and some professional and tech-nical areas compared with other areas.To assist in retaining employees withcritical skills, Reserve Banks plan tomaximize variable pay, retention incen-tives, and other monetary and non-monetary rewards for key officers andemployees.

Retirement and other benefit expenses,which account for 15 percent of ReserveBank budgets, are anticipated to increase$31.0 million, or 8.9 percent, in 2002.Salary-related benefits, such as socialsecurity and Thrift Plan contributions,will increase 9.7 percent. The increase isprimarily related to the combined effectof higher salaries and a change in 2002in the employer-matching componentof the System’s Thrift Plan (increasingthe employer match from 80 percent to100 percent for employees with at leastfive years of service). Other factorsinclude projections of higher post-retirement and postemployment benefitexpenses, which are directly related tochanges in actuarial assumptions. Non-salary-related benefits will increase10.7 percent, primarily because ofincreases in employer contributions forhealth benefits (10.2 percent for non-HMO plans, 14.0 percent for HMOplans, and 6.2 percent for dental plans).These increases are partially offset byprojected savings from the new Systemprescription drug program.

Initiatives Affecting the 2002Budget

The 2002 budget provides funding forseveral System and Reserve Bank initia-tives. The budgetary requirements forthese initiatives are described below.

Fee-Based Services to FinancialInstitutions

Initiatives for fee-based services in 2002include check modernization and thewholesale payments and automatedclearinghouse consolidations.

Check Modernization

In 1999, the Federal Reserve Banks,under the leadership of the Retail Pay-ments Office, initiated four majorprojects, collectively referred to as checkmodernization. The four projects—check standardization, enterprisewideadjustments, image services system, andelectronic access and delivery—willstandardize the check-processing infra-structure, enable new products to beintroduced into the market more quickly,reduce operational costs, and facilitatethe move to electronic payments. The2002 budget for the check moderniza-tion projects consists of $82.4 millionin System costs and $23.8 million inlocal Reserve Bank costs. The budgetaryeffect of each of the check moderniza-tion projects is described below. (For adiscussion of the operational details ofthe check modernization projects, seechapter 4 of Budget Review 2001.)

Check Standardization. For the checkstandardization project, the ReserveBanks and FRIT have identified nation-ally provided support service (NPSS)costs of $39.7 million, local ReserveBank implementation costs of $22.5million, and special project costs of$12.4 million.7 Reserve Bank implemen-tation costs vary significantly by District

7. The check standardization special projectincludes only the portion of the check standardiza-tion project that relates to redundant operationalcosts and severance and retention payments forstaff affected by each Bank’s transition to the newcheck operating environment.


and are determined by the timing of eachoffice’s conversion in the forty-five-month implementation schedule.

Enterprisewide Adjustments. The 2002budget for the enterprisewide adjust-ments (EWA) project consists of $7.7 mil-lion for NPSS costs and $0.5 million forcosts at individual Reserve Banks. TheSan Francisco District is responsible forthe development and Systemwide imple-mentation of EWA. Twenty-five officeshad converted to EWA by the end of2000, and by late 2001, thirty-sevenadjustment offices were relying on EWAfor check adjustments processing. Theremaining offices are scheduled toconvert during 2002. In late 2002 andearly 2003, the servers that supportEWA are scheduled to migrate to FRIT.

Image Services System. The 2002 budgetfor the image services system (ISS)consists of $15.5 million in NPSS costsand $0.4 million in individual ReserveBank costs. The Boston District ismanaging the ISS project, which willconvert the Federal Reserve’s diverseand decentralized commercial imagearchive systems to a standardized,centrally managed national imagearchive. As the project management site,the Boston Reserve Bank began staffingan ISS centralized business administra-tion function in 2001 that will supportongoing operations after ISS implemen-tation. Three Reserve Banks will serveas regional archive sites for the System.The first archive was not ready forproduction until early 2002, almost ayear later than originally planned,because of software vendor delays.

Electronic Access and Delivery. The2002 budget for electronic access anddelivery (EAD) consists of $7.0 mil-lion in NPSS costs and $0.4 million

in individual Reserve Bank costs. TheDallas Reserve Bank is responsible fordeveloping this application. The Systembegan converting customers to EADunder a controlled rollout in July 2001.

Wholesale Payment Consolidations

The 2002 budget includes net costreductions as a result of the continuedconsolidation efforts of the WholesalePayment Product Office (WPPO). In2002, consolidation is expected to yieldsavings of $4.9 million in the fundstransfer service and nearly $1.4 millionin the book-entry securities service anda reduction in staff of sixteen ANP.

Off-line transfer services were consoli-dated into two Reserve Banks. In thefourth quarter of 2001, the WPPO beganconsolidating the on-line support andrelated administrative functions for thefunds transfer and book-entry securitiestransfer services to these two sites.Customer testing is being consolidatedinto one Reserve Bank. These consolida-tions, scheduled for completion in thethird quarter of 2002, will reduce costsacross the System by standardizing theprovision of the service while improvingservice quality.

Automated ClearinghouseConsolidation

Early in 2001, the RPO announced theconsolidation of ACH operations intotwo processing sites, resulting in 2002budget savings of $8.8 million andthirty-seven ANP.

Services Provided to the Treasuryand Other Government Agencies

Five Districts identified projects for theTreasury that in the aggregate areprojected to add $9.1 million and fiveANP to 2002 expenses. The Treasury


will reimburse the Reserve Banks forproject development costs. These projectsinclude the Treasury Check InformationSystem, Pay.gov, Government Point-of-Sale Check Conversion, the Intragovern-ment Payment and Collection System,the Automated Standard Application forPayment, and the Treasury Web Appli-cation Infrastructure.

Central Bank Services

Initiatives for 2002 in the central bankservices area consist of projects in thecash and the supervision and regulationareas.8

Cash Initiatives

Three Districts have identified cashinitiatives that will result in an aggregateincrease of $5.7 million and ten ANP.The increased costs are primarily theresult of the full-year effect of open-ing the new Phoenix operations centerin September 2001. To a lesser degree,costs related to additional currencyprocessing shifts at the Atlanta andDallas Banks and currency volumeincreases in the Atlanta and San Fran-cisco Districts are contributing to growthin this area.


Initiatives affecting bank supervisionand regulation are projected to add$5.1 million and thirty-seven ANP in2002. Additional resources are neededto address the growth in the numberof state member banks, increased super-visory responsibilities related to largecomplex banking organizations, and the

full-year effect of 2001 staff increases.These initiatives are concentrated in theRichmond, Chicago, Kansas City, andSan Francisco Districts.

Cross-Functional Areas

Cross-functional initiatives for 2002involve staff reductions and securityenhancements.

Targeted Staff Reductions

Ten Districts identified savings totaling$66.0 million and staff reductions of392 ANP resulting from initiatives toimprove productivity, streamline opera-tions, and reduce discretionary expendi-tures. The majority of the staff reduc-tions are in Reserve Bank support andoverhead areas, including informationtechnology, financial management,administrative services, personnel ser-vices, and business development. Tar-geted reductions in discretionary expen-ditures include areas such as equipment,travel, training and education, and foodservice operations.

Security Enhancements

The budgets include $50.3 million toenhance security at the Reserve Banks,an increase of $11.4 million fromestimated 2001 expenses. About half ofthe increase is associated with salary-related expenses for additional staff.Also included in this increase areexpenses for security screening equip-ment and depreciation of varioussecurity-related building projects.

Risks in the 2002 Budget

The Reserve Banks have noted severalcommon risks associated with the 2002budgets. A number of Banks believethat some cost-reduction initiatives,

8. Central Bank Services is composed ofmonetary and economic policy, services to finan-cial institutions and the public, and supervisionand regulation.


necessary to meet System budget guid-ance, may be difficult to achieve. Manyof the efficiency initiatives include staffreductions through attrition. If attritionis not sufficient to achieve needed staffreductions, a limited amount of unbud-geted severance may be required.

The check modernization projectscontinue to present budget risks. Delayswith the ISS project have shifted someresources and costs from 2001 to 2002.Similar pressures exist with the checkstandardization project. In addition topotential resource diversions, delays inproject schedules could result in higher-than-projected costs for staffing, equip-ment, and software. The amount ofexpense associated with this risk variesby Bank and is dependent upon eachBank’s position in the transition sched-ule. Following conversion, unforeseenproblems, such as the inability to sta-bilize operations, could present addi-tional risk.

Some risk also exists in bank super-vision and regulation. Most prevalentare concerns that additional staff couldbe needed if examination requirementsexceed those already factored into thebudgets. In the past, filling additionalpositions has presented challenges forReserve Banks because of tight labormarkets. However, with the exceptionof highly specialized positions, Banksrecently have reported greater successin hiring examiners, a fact attributableprimarily to softening labor markets. Inaddition, the supervision function issharing more resources and specializedskills across Districts.

The Reserve Banks are conductinga post–September 11 assessment, with afocus on further improving the robust-ness and resiliency of critical FederalReserve functions. Funding needed toimplement recommendations that mayarise from this assessment has not beenincluded in the budgets. In addition, the

Reserve Banks’ 2002 budgets includeearly estimates of the expense and capi-tal funding that will be required toenhance the overall physical securityof the Banks. As Reserve Banks finalizethese plans, additional resources may berequired.

2002 Capital Plan

The 2002 capital budget submitted bythe Reserve Banks, FRIT, and OEBtotals $375.1 million—$338.3 millionfor the Reserve Banks, $33.5 millionfor FRIT, and $3.3 million for OEB.Tables D.10 and D.11, in appendix D,detail capital expenditures by Districtand asset classification.

As in previous years, the 2002 capitalbudgets include funding for projects thatsupport the strategic direction outlinedin the plans of the Reserve Banks, FRIT,and OEB. These strategic goals includeimproving operational efficiency andeffectiveness, improving services toBank customers, and providing a safe,high-quality work environment. In sup-port of these goals, the 2002 budgetcontains four major categories of capitaloutlays: building and facility improve-ments, including security enhancements;automation and communications-relatedinitiatives; payment service improve-ments; and cash services initiatives.

Buildings and Facilities

The proposed capital budget includes anestimated $220.7 million for building-related projects and facility improve-ments. These projects are geared towardrenovation, modernization, or replace-ment of physical facilities, and replace-ment or upgrading of critical systems.Building initiatives include severalprojects in New York, including thecontinuation of the multiyear moderni-zation of the head office building, and


various other building and leaseholdimprovements. Budgets also includefunding for the new building project atthe Eleventh District’s Houston Branch,the Detroit building project, renovationsat the Chicago Bank, and remodelingof the San Francisco Bank’s lobby. Inaddition to these larger projects, fund-ing is provided for security enhance-ments and for routine replacement offurniture, fixtures, and building-relatedequipment.

Automation

The proposed capital budget includes$75.9 million in funding for majorautomation and communications initia-tives. These initiatives do not includethe automation components of build-ing, payment systems, or cash servicesinitiatives that are discussed sepa-rately. The strategic directions outlinedin the individual Bank budgets includeenhanced technological capabilities,the continued implementation of LANtechnology, and the development ofcommon office environments and web-based applications.

FRIT projects and acquisitions accountfor $27.8 million of total automation-related outlays. FRIT’s 2002 capitalplan includes outlays for FEDNETmodernization, a mainframe processerreplacement project, and various soft-ware and hardware upgrades andenhancements. Aside from FRIT, majorautomation-related projects include$10.3 million for server equipment(primarily in the New York and AtlantaDistricts), $5.1 million for additionalphases of the Transaction ProcessingSystem and the Foreign ProcessingSystem projects in New York, $2.1 mil-lion for telecommunication equipmentupgrades and Internet gateway-directory

services in Boston, and $1.5 millionfor local area network upgrades inPhiladelphia.

The automation total also includes$11.9 million in capital expendituresfor reimbursable Treasury initiatives,including the Treasury Web ApplicationInfrastructure project, the TreasuryCheck Information System, and theSavings Bond Architecture Project. Thelargest share of the remaining fundssupports the Districts’ distributed tech-nology strategies.

Payment System

The 2002 capital budget includes$43.8 million for initiatives to improvethe payment system. These initiativesinclude $5.7 million in FRIT’s budgetfor hardware, software, and networkcomponents for the ISS and checkstandardization projects. The remainingfunds support other national and localinitiatives associated with the checkmodernization projects, the acquisitionand installation of high-speed checkimaging equipment and software, andcheck reader-sorter and endorserreplacements. Many aspects of theseinitiatives are under way in a majority ofthe Districts.

Cash Services

Outlays of $34.7 million have beenincluded in the capital budget forcash services initiatives. For 2002,Bank budgets include $27.1 million forthe Board-approved cash project toinstall new sensors and scanners onall currency-processing machines. Inaddition, San Francisco has included$4.1 million for an inventory-management system.


Appendixes

Appendix A

Special Categories of System Expense

Fees for priced services and the treat-ment of capital outlays are explainedin this appendix. Also described are theFederal Reserve’s expenses for currencyprinting.

Priced Services

The Monetary Control Act of 1980requires the Federal Reserve to chargedepository institutions for certain ser-vices that the Federal Reserve hadpreviously provided without explicitcharge and only to member banks. Asthe act requires, the fees charged forproviding these priced services arebased on the cost of providing the ser-vices, including all direct and indirectcosts, the interest on items creditedbefore actual collection (float), and theprivate sector adjustment factor (PSAF).

The intent of the PSAF calculation isto impute the costs that would have beenincurred and the profits that would havebeen earned had the Federal ReserveBanks’ priced services been provided bya private firm.

Annual Pricing Process

To meet the requirement for the fullrecovery of costs, the Federal Reservehas developed an annual pricing processinvolving projections of Reserve Bankexpenses, volumes, and revenues, aswell as the PSAF and net income onclearing balances, for each major servicecategory.

Fees for Federal Reserve servicesmust be approved by the product direc-tor for the respective service, by theFinancial Services Policy Committee,

and ultimately by the Board ofGovernors.1

The cost of float is estimated byapplying the current federal funds rate tothe level of float expected to be gener-ated in the coming year. Estimates ofincome taxes and the return on capitalare based on tax and financing ratesderived using a model of the fifty largestU.S. bank holding companies. Theserates are applied to the assets the FederalReserve expects to use in providingpriced services in the coming year.2 Theother components of the PSAF arederived from the budgets of the ReserveBanks and the Board: the imputed salestax (based on budgeted outlays formaterials, supplies, and capital assets);the imputed assessment for insuranceby the Federal Deposit Insurance Cor-poration (FDIC) (based on expectedclearing balances and amounts deferredto depository institutions for itemsdeposited for collection with the ReserveBanks); and the portion of the expenses

1. The product directors are the first vicepresidents at selected Reserve Banks withresponsibility for day-to-day policy guidance overspecific services. The Financial Services PolicyCommittee (FSPC) is responsible for the overalldirection of financial services and related supportfunctions for the Federal Reserve Banks.

2. Beginning in 2002, a portion of depositoryinstitution clearing balances held with the FederalReserve for processing transactions will be used asa funding source for priced service assets. Equitywill be imputed at 5 percent of total assets to meetthe FDIC definition of a well-capitalized institu-tion in its classification for assessing insurancepremiums. The equity financing rate, or pretaxreturn on equity, will be based on the averageof the return-on-equity results of three economicmodels using data from the bank holding companymodel.

37

of the Board of Governors directlyrelated to providing priced services.

Calculation of the PSAF for 2002

In 2001, the Board approved a 2002private sector adjustment factor forReserve Bank priced services of$150.1 million, a decrease of $56.8 mil-lion, or 27.5 percent, from the PSAF of$206.9 million for 2001.

Asset Base

The value of Federal Reserve assets tobe used in providing priced services in2002 is estimated at $11,846.9 million(table A.1). These assets are to befinanced with short-term payables, clear-ing balances, long-term liabilities, andequity. The value of non-imputed assetsin 2002 is $1,592.6 million, an increaseof $92.9 million over the value ofnon-imputed assets in 2001 (table A.2).Growth of $81.6 million in the pen-sion asset explains the majority of theincrease, while increases in short-termassets explain an increase of $9.0 mil-lion, and increases in Board and ReserveBank building assets explain an addi-tional $13.6 million. These increases areoffset by a decrease of $11.3 million inother Reserve Bank fixed assets.

Debt and Equity Costs, Taxes,and Other Imputed Costs

For 2002, a pretax rate of return onequity of 22.1 percent, or $130.9 mil-lion, is planned. This represents adecrease from the pretax return onequity of 24.0 percent for 2001. As aresult of this rate decrease and reducedimputed equity, the imputed return onequity declined $28.6 million. Theelimination of short- and long-term

debt results in a decline of expensesassociated with debt financing of$32.0 million. Other required PSAFrecoveries for 2002—imputed salestaxes, the imputed FDIC insuranceassessment, and Board expenses—total$19.2 million (table A.2).

Capital Outlays

Under generally accepted accountingprinciples (GAAP), the cost of an assetthat is expected to benefit an entity overfuture periods should be allocated overthose periods. Such treatment allowsa realistic measurement of operatingperformance. In accordance with GAAP,the Federal Reserve System depreciatesthe cost of operating assets over theirestimated useful lives.

The Banks maintain a multiyear planfor capital spending. The Board, in turn,requires the Banks to budget annuallyfor capital outlays by capital class toestimate the effect of total operatingand capital spending. During the budgetyear, the Banks must submit proposalsfor major purchases of assets to theBoard for further review and approval.The Board of Governors also reviewscapital expenditures for the Board.

Currency Printingand Circulation

Federal Reserve Banks circulate newand fit currency through depositoryinstitutions and destroy currency alreadyin circulation as it becomes unfit orwhen a new design is issued. Each year,under authority delegated by the Board,the director of the Division of ReserveBank Operations and Payment Systemsorders new currency from the U.S.Department of Treasury’s Bureau of


Engraving and Printing (BEP). Uponreviewing the order, the BEP sets billingrates for new currency, which theBoard’s staff uses to prepare the annualbudget for new currency. Once theBoard approves the new currency budget,it assesses each Federal Reserve Bankthrough an accounting procedure similar

to that used in assessing the Banks forthe Board’s operating expenses.

Estimated currency expenditures for2001 totaled $343.5 million, which is$83.5 million, or 19.5 percent, less thanbudgeted (table A.3). This underrunresulted from reducing the originalprint order by close to one billion notes

Table A.1Pro Forma Balance Sheet for Federal Reserve Priced Services, 2001 and 2002Millions of dollars

Item 2001 2002

Assets

Short-term assetsImputed reserve requirement on clearing balances1 . . . . . . . 742.4 678.5Investment in marketable securities1 . . . . . . . . . . . . . . . . . . . . 6,681.9 5,473.0Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77.3 81.7Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 3.8Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.4 27.8Items in process of collection 2 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,606.7 4,102.8

Total short-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,135.3 10,367.6

Long-term assetsPremises 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417.5 431.1Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185.5 177.7Leasehold improvements and long-term prepayments . . . . . 73.9 70.4Prepaid pension costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 718.5 800.1

Total long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,395.4 1,479.3

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,530.7 11,846.9

LiabilitiesShort-term liabilitiesClearing balances and balances arising

from early credit of uncollected items . . . . . . . . . . . . . . 7,424.3 7,377.5Deferred-credit items 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,606.7 3,509.8Short-term debt 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.9 .0Short-term payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85.4 103.9

Total short-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,135.3 10,991.2

Long-term liabilitiesPostemployment/postretirement benefits . . . . . . . . . . . . . . . . . 251.9 263.4Long-term debt 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479.1 .0

Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 731.0 263.4

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,866.3 11,254.6

Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664.4 592.3

Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,530.7 11,846.9

Note. Data are averages for the year. Componentsmay not sum to totals because of rounding.

1. Funded with clearing balances.2. Represents float costs that are directly estimated at

the service level.

3. Includes allocations of Board of Governors’ assetsto priced services of $0.7 million for 2001 and$1.1 million for 2002.

4. No debt is imputed in 2002 because clearing bal-ances are used as available funding source.

Special Categories of System Expense 39

because of high currency inventoriesat Reserve Banks. Budgeted currencyexpenditures for 2002 total $376.8 mil-lion, or 9.7 percent more than estimated

2001 expenses (chart A.1). The increaseis due primarily to 2002 printing costs,which are 9.5 percent greater than esti-mated 2001 expenses.

Table A.2Derivation of the Private Sector Adjustment Factor (PSAF), 2001 and 2002Millions of dollars except as noted

Item 2001 2002

PSAF ComponentsNon-imputed assets1

Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104.3 113.3Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,395.4 1,479.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,499.7 1,592.6

Imputed elementsShort-term debt 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.9 .0Long-term debt 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479.1 .0Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664.4 592.3

Financing rates and costs (percent)Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 .0Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 .0Pretax return on equity 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.0 22.1

Tax rate (percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.5 29.3

Required PSAF RecoveriesCapital costs 5

Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 .0Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.1 .0Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159.5 130.9

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191.5 130.9

Other costsSales taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 14.1Assessment for federal deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0 .0Expenses of Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 5.1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.4 19.2

Total PSAF recoveriesMillions of dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206.9 150.1As a percentage of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1.3As a percentage of expenses 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.5 19.0

1. Priced services assets are based on ‘‘direct determina-tion of assets’’ method.

2. For 2001, short-term debt is imputed to finance onlythose assets that are not financed with short-termpayables. No short-term debt is imputed in 2002 becauseclearing balances are used as a funding source.

3. For 2001, long-term debt consists of total pricedlong-term assets less postretirement/postemployment bene-fit liabilities. No long-term debt is imputed in 2002because clearing balances are used as a funding source.

4. For 2001, the pretax rate of return on equity is basedon the average after-tax rate of return on equity, adjustedby the effective tax rate to yield the pretax rate of returnon equity for each bank holding company for each year.

These data are then averaged over five years to yield thepretax return on equity for use in the PSAF. For 2002, thepretax rate of return on equity is determined averaging theresult from the method used for 2001 (23.5 percent),along with results from a capital asset pricing model(21.4 percent), and a discounted cash flow model(21.4 percent).

5. The division of financing between debt and equityfor 2001 was determined using the debt-to-equity ratiofrom the bank holding company model.

6. System budgeted priced services expenses lessshipping are $725.7 million for 2001 and $791.9 millionfor 2002.


Printing of Federal Reserve Notes

The Board ordered 7.2 billion new notesfor the calendar year 2002 budget. Thebudget for printing the Board’s order is$360.1 million, or 95.6 percent of thetotal 2002 new currency budget. ForJanuary through September 2002 (theportion of the federal government’s2002 fiscal year that falls within the2002 calendar), production is set at5.5 billion notes. The Board’s staffestimates that for October throughDecember 2002, production will be1.7 billion notes.

The Federal Reserve System circulatesthree types of notes: unthreaded ($1sand $2s), New Currency Design (NCD)

without optical-varying ink ($5s), andNCD with optical-varying ink ($10s,$20s, $50s, and $100s) (table A.4).3During 2002, 46 percent of the notesproduced will be NCD notes, and theremaining 54 percent will be unthreaded($1s). The average price the Board paysthe BEP for producing all types of notesin 2002 will be $50.73 per thousandnotes printed.

Currency Transportation

The currency transportation budgetconsists of funds for shipping newcurrency from the BEP and betweenthe Reserve Banks. The 2002 currencytransportation budget is $9.2 million,which is $0.4 million, or 4.5 percent,less than the Board budgeted for 2001.The 2002 budget for new currencyshipments from the BEP is $7.0 million,or 7.0 percent, greater than estimated2001 expenses because of a projectedincrease in the number of currencyshipments. The 2002 budget for cur-rency shipments between Reserve Banksis $2.2 million, or 6.3 percent, greaterthan estimated 2001 expenses. These

3. The color of the optical-varying ink shiftsfrom green to black as the viewing angle of thenote changes.

Chart A.1Federal Reserve Budget forSupplying U.S. Currency, 1993–2002

1993 1996 1999 2002

200

400

Millions of dollars

Note. For 2001, estimated; for 2002, budgeted.

Table A.3Federal Reserve Costs of Supplying Currency, 2001 and 2002Thousands of dollars except as noted


2002(budgeted)

Percentchange

Printing of new Federal Reserve notes . . . . . . . . . . . . . . . . . . . . . . . . . . 328,820 360,060 9.5Currency transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,606 9,199 6.9Counterfeit deterrence research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,027 4,103 35.5Reimbursement to the U.S. Treasury’s

Office of Currency Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,089 3,414 10.5

Total cost of currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343,542 376,776 9.7

Special Categories of System Expense 41

shipments move currency from ReserveBanks with excess fit currency to Banksthat would otherwise require new cur-rency from the BEP.

Counterfeit Deterrence Research

The 2002 budget for the counterfeit-deterrence program is $4.1 million. Thefunds will support the Federal ReserveSystem’s participation in the CentralBank Counterfeit Deterrence Group(formerly known as the SSG-2), whichoperates under the auspices of theG-10 governors to combat digitalcounterfeiting.

Treasury’s Office of CurrencyStandards

The 2002 budget includes $3.4 millionto reimburse the Treasury for expensesfor the Office of Currency Standards(OCS). The OCS develops standardsfor the cancellation, destruction, andaccountability of unfit currency, andprocesses claims for the redemption ofdamaged or mutilated currency.

Table A.4Projected Cost of Printing New Notes, by Type of Note, 2002

Type of currency Number ofnotes (millions)

Percentage oftotal notes

Cost perthousand notes

(dollars)

Total cost(thousands of

dollars)

Unthreaded ($1s) . . . . . . . . . . . . . . . . . . . . . . 3,854.0 53.8 39.98 154,082New Currency Design1

$5s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,687.8 23.6 56.65 95,614$10s, $20s, $50s, $100s . . . . . . . . . . . . . 1,623.0 22.6 68.00 110,364

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,164.8 100 50.73 2 360,060

1. All NCD denominations except $5s carry optical-varying ink (see text note 2).

2. Average cost for printing all three types of currency.


Appendix B

Sources and Uses of Funds

The Federal Reserve System, in accor-dance with generally accepted account-ing principles, accrues income andexpenses and capitalizes acquisitions ofassets whose useful lives extend overseveral years (see appendix A).

The System derives its income pri-marily from earnings on U.S. govern-ment securities that the Federal Reservehas acquired through open market oper-ations, one of the tools of monetarypolicy. These earnings account forapproximately 96 percent of currentincome (table B.1).

The current expenses of the ReserveBanks consist of their operating expenses

Table B.1Income of the Federal Reserve System,2000 and 2001Millions of dollars

Source 2000 2001(estimated)

Loans . . . . . . . . . . . . . . . . . . . . . . . 22.8 11.7U.S. government securities . . . 32,736.9 30,541.7Foreign currencies . . . . . . . . . . . 269.5 239.1Priced services . . . . . . . . . . . . . . 881.5 926.3Other . . . . . . . . . . . . . . . . . . . . . . . 53.2 151.6

Total . . . . . . . . . . . . . . . . . . . . . . . 33,964.0 31,870.4

Note. Components may not sum to totals because ofrounding.

and the costs of the earnings creditsgranted to depository institutions onclearing balances held with the ReserveBanks (table B.2). The Reserve Banksrecord extraordinary adjustments tocurrent net income in a profit and lossaccount. The primary entries in theaccount are for gains or losses on thesale of U.S. government securities andfor gains or losses on assets denominatedin foreign currencies that result eitherfrom the sale of those assets or fromtheir revaluation at market exchangerates.

The Reserve Banks maintain a sur-plus account to absorb unexpectedlosses, much as commercial establish-ments retain earnings. The Board ofGovernors requires that the surplusaccount at year-end be an amount equalto the capital paid in by the memberbanks. Since the end of 1964, theBoard’s policy has been to transfer tothe U.S. Treasury all net income afterpaying the statutory dividend to mem-ber banks and the amount necessaryto equate surplus to paid-in capital.The amount transferred is classifiedas interest on Federal Reserve notes.Such payments were $25.3 billionand $27.1 billion for 2000 and 2001respectively.

43

Table B.2Distribution of the Income of the Federal Reserve Banks, 2000 and 2001Millions of dollars

Item 2000 2001(estimated)

Current income1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,964 31,870Less

Current expenses of Reserve Banks 2

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,587 1,781Costs of earnings credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 253

EqualsCurrent net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,992 29,837

PlusNet additions to, or deductions from (−), current net income 3 . . . . . . . . . . . . . . . . . −1,492 −1,117

LessCost of unreimbursed Treasury services 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 0

Assessments by the BoardBoard expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 295Cost of currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436 339

Other distributionsDividends paid to member banks 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410 428Transfers to, or from (−), surplus 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,115 517

EqualsPayment to U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,344 27,140

Note: Components may not sum to totals because ofrounding.

1. For sources of income, see table B.1.2. Net of reimbursements due from the U.S. Treasury

and other government agencies. Also reflects reductionsin credits for net periodic pension cost amounting to$392.6 million in 2000 and $392.4 million in 2001.

3. This account is the same as that reported under thesame name in the table ‘‘Income and Expenses of Fed-eral Reserve Banks’’ in the Statistical Tables sectionof the Board’s Annual Report and includes realizedand unrealized gains on assets denominated in foreign

currencies, gains on sales of U.S. government securities,and miscellaneous gains and losses.

4. The cost of services provided to the U.S. Treasurythat are reimbursable under agreements with the Treasuryand for which reimbursement is not anticipated.

5. The Federal Reserve Act requires the FederalReserve to pay dividends to member banks at the rate of6 percent of paid-in capital.

6. Each year, to provide a reserve against losses, theFederal Reserve transfers to its surplus account an amountsufficient to equate surplus to paid-in capital.


Appendix C

Federal Reserve System Audits

The Board of Governors, each of theReserve Banks, and the Federal ReserveSystem as a whole are all subject toseveral levels of audit and review. Ateach Federal Reserve Bank, a full-timestaff of auditors under the direction of ageneral auditor reports directly to theBank’s board of directors. The Board’sDivision of Reserve Bank Operationsand Payment Systems, acting on behalfof the Board of Governors, regularlyaudits the financial operations of eachof the Banks and periodically reviewsall other Bank operations. In addition,the financial statements of the ReserveBanks are audited annually by an inde-pendent outside auditor.

The Office of Inspector General (OIG)conducts audits and investigations of theprograms and operations of the Boardand those Board functions delegatedto the Federal Reserve Banks. The OIGretains an independent auditor each yearto certify the fairness of the Board’sfinancial statements and its compliancewith laws and regulations affectingthose financial statements.

Independent Audit

The Board of Governors contracts withan external audit firm for an annualaudit of the combined Reserve Bankfinancial statements and the financialstatements of each of the twelve ReserveBanks. The Reserve Banks are alsoaudited by each Bank’s internal auditfunction and by the Board’s Division ofReserve Bank Operations and PaymentSystems.

General Accounting Office

The 1978 passage of the Federal Bank-ing Agency Audit Act (Public Law95–320) brought most of the operationsof the Federal Reserve System underthe purview of the General Account-ing Office (GAO). The GAO completed7 reports in 2001 on selected aspects ofFederal Reserve operations (table C.1),bringing the total number of reportssince 1979 to 198. It has 10 projects invarious stages of completion (table C.2).The GAO has also involved the FederalReserve in about 111 other reviews not

Table C.1Completed GAO Reports Relating to the Federal Reserve System, 2001

Report Number Date issued

Money Laundering: Oversight of Suspicious Activity Reporting atBank-Affiliated Broker–Dealers Ceased . . . . . . . . . . . . . . . . . . . . . . . . . . GAO-01-474 3-22-01

Financial Privacy: Too Soon to Assess the Privacy Provisionsin the Gramm–Leach–Bliley Act of 1999 . . . . . . . . . . . . . . . . . . . . . . . . GAO-01-617 5-3-01

Consumer Finance: College Students and Credit Cards . . . . . . . . . . . . . . . . GAO-01-773 6-20-01Equity Hedging: OCC Needs to Establish Policy

on Publishing Interpretive Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GAO-01-945 8-16-01Federal Reserve Banks: Areas for Improvement

in Computer Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GAO-01-1049R 8-30-01Anti–Money Laundering: Efforts in the Securities Industry . . . . . . . . . . . . . GAO-02-111 10-10-01Check Relay: Controls in Place Comply with Federal

Reserve Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GAO-02-19 12-12-01

45

directly related to the System and hasterminated 56 others before completion.The reports are available directly fromthe GAO.

Office of Inspector General

The Board’s Office of Inspector General(OIG) functions in accordance withthe Inspector General Act of 1978, asamended. The OIG plans and conductsaudits and investigations of the programsand operations of the Board and itsdelegated functions at the FederalReserve Banks. The OIG also reviewsexisting and proposed legislation andregulations for economy and efficiency.

It recommends policies, and it super-vises and conducts activities that promoteeconomy and efficiency and that preventand detect waste, fraud, and abuse inBoard and Board-delegated programsand operations.

In addition, it coordinates its effortswith other governmental and nongovern-mental agencies to promote economyand efficiency and to detect and preventfraud and abuse in activities administeredor financed by the Board. The OIGkeeps the Congress and the Chairman ofthe Board fully informed about seriousabuses and deficiencies and about thestatus of any corrective actions.

During 2001, the OIG completedeleven audits, reviews, and assessments

Table C.2Active GAO Projects Relating to the Federal Reserve, Year-End 2001

Subject Date initiated

Various aspects of identify fraud/theft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-4-01Federal Reserve’s role in payment systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-19-01Bureau of Public Debt financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-29-01Foreign entities in U.S. capital markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-15-01Money laundering in the credit card industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-30-01Supervisory issues related to the failure of Superior Bank, FSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-10-01Securities and Exchange Commission’s resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-28-01Electronic funds transfer program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-18-01Marketing of the new dollar coin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-2-01Effects of terrorist attacks on U.S. financial markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-7-01

Table C.3Completed OIG Audit Reports Relating to the Federal Reserve System, 2001

Report Number Month issued

Audit of the Board’s Financial Statements(years ended 1999 and 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A0008BD February

Audit of the FFIEC’s Financial Statements(years ended 1999 and 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A0008 February

Review of the Board’s Internet Site Data Collection . . . . . . . . . . . . . . . . . . . . . . . . . A0102 FebruaryImplementation of Critical Infrastructure Protection . . . . . . . . . . . . . . . . . . . . . . . . . A0007 MarchImplementation of the Endeavor Change Control Project . . . . . . . . . . . . . . . . . . . . . P0020 MayEfforts to Implement Performance Management Principles

Consistent with the Results Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A0004 JulyObservations on the Organization of the Board’s Publications Program . . . . . . . R0101 AugustOversight Approach for the Federal Reserve’s Check Modernization Project . . A0013 SeptemberAudit of the Board’s Information Security Program . . . . . . . . . . . . . . . . . . . . . . . . . A0106 SeptemberReview of the Board’s Efforts to Implement Umbrella Supervision . . . . . . . . . . . A0108 SeptemberAudit of the Federal Reserve’s Background Investigation Process . . . . . . . . . . . . A0107 October


(table C.3) and conducted a numberof follow-up reviews to evaluate actiontaken on earlier recommendations. In

addition, the OIG closed nine investi-gations and performed numerous legisla-tive and regulatory reviews.

Federal Reserve System Audits 47

Appendix D

Expenses and Employmentat the Federal Reserve Banks

Table D.1Operating Expenses of the Federal Reserve Banks, by District, 2001 and 2002Thousands of dollars except as noted

District 2001(estimated)

2002(budgeted)

Change

Amount Percent

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,356 155,701 10,345 7.1New York . . . . . . . . . . . . . . . . . . . . . . . . . . 490,179 508,994 18,816 3.8Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . 120,743 125,751 5,008 4.1Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . . 129,413 138,766 9,353 7.2Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . 194,906 198,829 3,924 2.0Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284,111 298,857 14,746 5.2Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,690 244,842 8,152 3.4St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,164 139,348 11,184 8.7Minneapolis . . . . . . . . . . . . . . . . . . . . . . . . 144,707 145,083 375 .3Kansas City . . . . . . . . . . . . . . . . . . . . . . . . 160,993 170,040 9,047 5.6Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,777 151,614 6,837 4.7San Francisco . . . . . . . . . . . . . . . . . . . . . . . 267,970 290,009 22,039 8.2

Total, all Districts . . . . . . . . . . . . . . . . . . 2,448,008 2,567,835 119,827 4.9

Special projectCheck standardization . . . . . . . . . . . . . . . 13,803 12,387 −1,416 −10.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,461,811 2,580,221 118,411 4.8

Note. Excludes capital outlays. Includes expensesbudgeted by Federal Reserve Information Technology(FRIT) and the System’s Office of Employee Benefits(OEB).

Components may not sum to totals and may not yieldpercentages shown because of rounding.

Operating expenses reflect all redistributions for sup-port and allocations for overhead.

49

Table D.2Employment at the Federal Reserve Banks, by District, and at FRIT and OEB, 2001 and 2002Average number of personnel except as noted


2002(budgeted)

Change

Amount Percent

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,316 1,341 26 2.0New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,428 3,383 −45 −1.3Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,290 1,298 8 .6Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,344 1,402 58 4.3Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,139 2,173 34 1.6Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,504 2,463 −42 −1.7Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,145 2,160 14 .7St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,305 1,355 50 3.8Minneapolis . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,296 1,306 9 .7Kansas City . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,717 1,769 52 3.0Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,561 1,531 −30 −1.9San Francisco . . . . . . . . . . . . . . . . . . . . . . . . . 2,479 2,572 93 3.7

Total, all Districts . . . . . . . . . . . . . . . . . . . . 22,525 22,753 228 1.0

Federal Reserve InformationTechnology . . . . . . . . . . . . . . . . . . . . . . . 712 763 51 7.2

Office of Employee Benefits . . . . . . . . . . . 31 34 3 9.7

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,268 23,550 282 1.2

Note. See note to table D.1. See text note 3, chap-ter 3, for definition of average number of personnel.

Table D.3Operating Expenses of the Federal Reserve Banks, by Operational Area, 2001 and 2002Thousands of dollars except as noted

Operational area 2001(estimated)

2002(budgeted)

Change

Amount Percent

Monetary and economic policy . . . . . . . . . . . . . . . . . . . . . 234,043 242,938 8,895 3.8Services to U.S. Treasury and

other government agencies . . . . . . . . . . . . . . . . . . . . 265,617 284,116 18,500 7.0Services to financial institutions and the public . . . . . . 578,826 626,782 47,957 8.3Supervision and regulation . . . . . . . . . . . . . . . . . . . . . . . . . 444,752 474,993 30,241 6.8Fee-based services to financial institutions . . . . . . . . . . 924,769 939,004 14,235 1.5

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,448,008 2,567,835 119,827 4.9

Note. Operational expenses include FRIT and OEBand exclude special project costs.


Table D.4Employment at the Federal Reserve Banks, by Operational Area, 2001 and 2002Average number of personnel except as noted

Operational area 2001(estimated)

2002(budgeted)

Change

Amount Percent

Monetary and economic policy . . . . . . . . . . . . . . . . . . . . . 886 850 −36 −4.1Services to U.S. Treasury and

other government agencies . . . . . . . . . . . . . . . . . . . . 1,387 1,334 −53 −3.8Services to financial institutions and the public . . . . . . 2,818 2,916 98 3.5Supervision and regulation . . . . . . . . . . . . . . . . . . . . . . . . . 2,572 2,607 35 1.4Fee-based services to financial institutions . . . . . . . . . . 5,436 5,402 −34 −.6Support and overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,426 9,644 218 2.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,525 22,753 228 1.0

Note. Operational area employment excludes FRIT, OEB,and special project average number of personnel.

Table D.5Budget Performance of the Federal Reserve Banks:Operating Expenses, by District, 2001Thousands of dollars except as noted

District 2001(budgeted)

2001(estimated)

Change

Amount Percent

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,041 145,356 1,315 .9New York . . . . . . . . . . . . . . . . . . . . . . . . . . 484,358 490,179 5,821 1.2Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . 121,597 120,743 −855 −.7Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . . 131,778 129,413 −2,364 −1.8Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . 188,288 194,906 6,617 3.5Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,629 284,111 −13,518 −4.5Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226,869 236,690 9,821 4.3St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,780 128,164 4,384 3.5Minneapolis . . . . . . . . . . . . . . . . . . . . . . . . 138,828 144,707 5,879 4.2Kansas City . . . . . . . . . . . . . . . . . . . . . . . . 150,806 160,993 10,187 6.8Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,597 144,777 180 .1San Francisco . . . . . . . . . . . . . . . . . . . . . . . 273,246 267,970 −5,277 −1.9

Total, all Districts . . . . . . . . . . . . . . . . . . 2,425,817 2,448,008 22,191 .9

Special project . . . . . . . . . . . . . . . . . . . . . . 16,392 13,803 −2,589 −15.8

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,442,209 2,461,811 19,602 .8

Note. See note to table D.1.

Expenses and Employment 51

Table D.6Budget Performance of the Federal Reserve Banks, by District, and of FRIT and OEB:Employment, 2001Average number of personnel except as noted

District 2001(budgeted)

2001(estimated)

Change

Amount Percent

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,285 1,316 31 2.4New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,431 3,428 −2 −.1Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,287 1,290 3 .3Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,392 1,344 −47 −3.4Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,205 2,139 −66 −3.0Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,666 2,504 −162 −6.1Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,111 2,145 34 1.6St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,318 1,305 −13 −1.0Minneapolis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,289 1,296 7 .6Kansas City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,678 1,717 39 2.3Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600 1,561 −39 −2.5San Francisco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,499 2,479 −20 −.8

Total, all Districts . . . . . . . . . . . . . . . . . . . . . . . . 22,760 22,525 −234 −1.0

Federal Reserve Information Technology . . . . 698 712 15 2.1Office of Employee Benefits . . . . . . . . . . . . . . . 29 31 2 7.8

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,486 23,268 −218 −.9

Note. See note to table D.1. See text note 3, chap-ter 3, for definition of average number of personnel.

Table D.7Budget Performance of the Federal Reserve Banks:Operating Expenses, by Operational Area, 2001Thousands of dollars except as noted

Operational area 2001(budgeted)

2001(estimated)

Change

Amount Percent

Monetary and economic policy . . . . . . . . . . . . . . . . . . . . . 229,340 234,043 4,703 2.1Services to U.S. Treasury and

other government agencies . . . . . . . . . . . . . . . . . . . . 264,406 265,617 1,211 .5Services to financial institutions and the public . . . . . . 574,360 578,826 4,466 .8Supervision and regulation . . . . . . . . . . . . . . . . . . . . . . . . . 445,165 444,752 −412 −.1Fee-based services to financial institutions . . . . . . . . . . 912,547 924,769 12,223 1.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,425,817 2,448,008 22,191 .9

Note. Operational expenses include FRIT and OEBand exclude special project costs.


Table D.8Budget Performance of the Federal Reserve Banks: Employment, by Operational Area, 2001Average number of personnel except as noted

Operational area 2001(budgeted)

2001(estimated)

Change

Amount Percent

Monetary and economic policy . . . . . . . . . . . . . . . . . . . . . 890 886 −4 −.4Services to U.S. Treasury and

other government agencies . . . . . . . . . . . . . . . . . . . . 1,422 1,387 −35 −2.5Services to financial institutions and the public . . . . . . 2,834 2,818 −16 −.6Supervision and regulation . . . . . . . . . . . . . . . . . . . . . . . . . 2,575 2,572 −3 −.1Fee-based services to financial institutions . . . . . . . . . . 5,396 5,436 39 .7Support and overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,643 9,426 −216 −2.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,760 22,525 −234 −1.0

Note. Operational area employment excludes FRIT, OEB,and special project average number of personnel.


Table D.9Salary Administration Expenses of the Federal Reserve Banks, by District,and of FRIT and OEB, for Officers and Employees, 2002Thousands of dollars except as noted

District Merit

Promo-tionsand

reclassi-fications

Marketadjust-ments

Cashawards

Incen-tivepay-

ments

Reten-tionpay-

ments

Sever-ance

Total

Amount

As ashare

of totalpersonnelexpense(percent)

Boston . . . . . . . . . . . . . . 3,086 525 63 460 1,365 . . . . . . 5,499 7.0New York . . . . . . . . . . . 10,244 1,687 950 4,688 2,303 398 1,499 21,769 8.5Philadelphia . . . . . . . . . 2,349 407 281 1,057 650 66 125 4,935 7.2Cleveland . . . . . . . . . . . 2,180 370 381 1,096 514 145 . . . 4,686 6.8Richmond . . . . . . . . . . . 4,116 1,334 734 1,812 849 . . . . . . 8,844 8.2Atlanta . . . . . . . . . . . . . . 5,302 1,914 267 2,132 940 229 203 10,987 8.9Chicago . . . . . . . . . . . . . 4,822 1,650 600 1,586 1,669 200 403 10,930 8.7St. Louis . . . . . . . . . . . . 2,552 325 15 704 1,006 190 . . . 4,792 7.3Minneapolis . . . . . . . . . 2,531 328 125 775 727 1,361 . . . 5,846 9.0Kansas City . . . . . . . . . 3,612 1,394 797 1,080 970 277 74 8,205 8.9Dallas . . . . . . . . . . . . . . . 2,815 355 70 1,102 352 81 60 4,834 6.4San Francisco . . . . . . . 6,013 1,016 431 2,092 1,424 540 824 12,340 7.9

Total, all Districts . . 49,621 11,304 4,713 18,583 12,769 3,488 3,188 103,666 8.1

Federal ReserveInformationTechnology . . . . . 2,239 420 . . . 526 1,154 625 . . . 4,963 8.2

Office of EmployeeBenefits . . . . . . . . 129 . . . 11 48 101 . . . . . . 290 8.3

Total . . . . . . . . . . . . . . . 51,989 11,724 4,724 19,158 14,024 4,112 3,188 108,920 8.1

Note. See text note 5, chapter 3, for definition ofsalary administration.

Merit: The amount of budgeted salary expense thatreflects the cumulative effect of planned salary increasesbased on performance.

Promotions and reclassifications: The amount ofbudgeted salary expense that reflects the cumulativeeffect of salary increases for individuals as a result ofgrade promotions and reclassifications.

Market adjustment: The amount of budgeted salaryexpense to bring individual salaries to the minimum ofgrade range or to better align salaries with the market.

Cash awards: The amount of expense that representspayments for awards in recognition of exceptionalachievements.

Incentive payments: The amount of expense thatrepresents payments for the achievement of predeterminedgoals.

Retention payments: The amount of expense thatrepresents payments to employees based on contractualagreement with the Bank. Generally used to retain staff inpositions critical to the success of the Bank.

Severance: The amount of expense that representspayments to employees upon separation from the Bank.


Table D.10Capital Outlays of the Federal Reserve Banks, by District, and of FRIT and OEB,2001 and 2002Thousands of dollars except as noted


2002(budgeted)

Change

Amount Percent

Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,262 19,282 6,021 45.4New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,476 66,718 20,242 43.6Philadelphia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,953 19,513 9,560 96.1Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,746 22,781 35 .2Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,935 27,284 3,349 14.0Atlanta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,202 26,877 −61,325 −69.5Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,957 54,634 21,677 65.8St. Louis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,635 19,312 −1,322 −6.4Minneapolis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,237 7,374 137 1.9Kansas City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,031 19,264 3,232 20.2Dallas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,339 18,579 9,239 98.9San Francisco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,810 36,673 16,863 85.1

Total, all Districts . . . . . . . . . . . . . . . . . . . . . . . . 310,583 338,291 27,708 8.9

Federal Reserve Information Technology . . . . 42,035 33,511 −8,524 −20.3Office of Employee Benefits . . . . . . . . . . . . . . . 1,475 3,300 1,825 123.7

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354,093 375,102 21,009 5.9

Table D.11Capital Outlays of the Federal Reserve Banks, by Asset Classification, 2001 and 2002Thousands of dollars except as noted

Asset classification 2001(estimated)

2002(budgeted)

Change

Amount Percent

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,316 137,083 9,767 7.7Furniture, furnishings, and fixtures . . . . . . . . . 27,914 17,496 −10,418 −37.3Land and other real estate . . . . . . . . . . . . . . . . . . 1,772 15,403 13,631 769.4Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,062 122,899 −4,163 −3.3Building machinery and equipment . . . . . . . . . 19,564 35,984 16,420 83.9Leasehold improvements . . . . . . . . . . . . . . . . . . . 6,761 5,402 −1,359 −20.1Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,704 40,835 −2,870 −6.6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354,093 375,102 21,009 5.9

Note. Includes outlays for FRIT and OEB.


Maps of the

Federal Reserve System

The Federal Reserve System

Note

The Federal Reserve officially identifiesDistricts by number and Reserve Bankcity (shown on both pages) and by letter(shown on the facing page).

In the 12th District, the Seattle Branchserves Alaska and the San FranciscoBank serves Hawaii.

The System serves commonwealthsand territories as follows: The New York

Bank serves the Commonwealth ofPuerto Rico and the U.S. Virgin Islands;the San Francisco Bank serves AmericanSamoa, Guam, and the Commonwealthof the Northern Mariana Islands. Themaps show the boundaries within theSystem as of year-end 2001.

CHICAGO

K CANSAS ITY

HAWAII

ALASKA

MINNEAPOLIS

DALLAS

S FAN RANCISCO

S LT. OUIS

CLEVELAND

RICHMOND

ATLANTA

PHILADELPHIA

N YEW ORK

BOSTON

1012

11

9

86

7

1

2

3

5

4

Legend

Both pages Facing page

Federal Reserve Bank city • Federal Reserve Branch city

Board of Governors of the FederalReserve System, Washington, D.C.

Branch boundary


ID

NM

NH

CT

AR

New Orleans

Miami

PA

OH

WV

KY

NJPA

DE

NY

NYNJ

MA

RI

ME

VT

CT

GA

AL

FL

MS

TN

LA

MO

IL IN

MS

KY

TN

IN

WI

MI

IA

IL

CA

OR

NV

AZ

WA

UT

HAWAII

ALASKA

ND

MT

SD

WI

MN

MI

TX

LA

NM

CO

WY

NE

MO

KS

OK

10–J

1–A 2–B 3–C 4–D 5–E

7–G 8–H

9–I

11–K

12–L

6–F

BOSTON N YEW ORK PHILADELPHIA CLEVELAND RICHMOND

CHICAGO S LT. OUIS

MINNEAPOLIS

K CANSAS ITY

S FAN RANCISCODALLAS

ATLANTA

Cincinnati

Pittsburgh

Buffalo

Birmingham

Jacksonville

Nashville

LittleRock

Louisville

Memphis

Detroit

Seattle

Portland

Los Angeles

Salt Lake City

Helena

San Antonio

HoustonEl Paso

Omaha

Denver

Oklahoma City

MD

WV

VA

NC

SC

Charlotte

Baltimore

Maps of the Federal Reserve System 59

FRB1/1–600–0302–C

Documents

Ar Budgetrev 2002