SPEAKERS CONTENTS INSERTS
Page 1 TOP OF DOC
FEDERAL MONEY PRODUCTION
THURSDAY, JUNE 26, 1997
House of Representatives,
Subcommittee on Domestic and International Monetary Policy,
Committee on Banking and Financial Services,
The subcommittee met, pursuant to call, at 9:30 a.m., in room 2222, Rayburn House Office Building, Hon. Michael N. Castle, [chairman of the subcommittee], presiding.
Present: Chairman Castle; Representatives Lucas, Paul, Manzullo, Kennedy, Flake, Bentsen, and Jackson.
Chairman CASTLE. The Subcommittee on Domestic and International Monetary Policy will come to order.
This is an oversight hearing on United States coin and currency production. I am pleased, as alwaysand I worry about some of the rumors about where he may be goingto be joined by the distinguished Ranking Member, Mr. Floyd Flake. He and I will be making opening statements. If other Members do come, they are certainly welcome to submit their opening statements, but in order to get to the witnesses, we will have just the two of us speak here.
Page 2 PREV PAGE TOP OF DOC
Let me just also announce at the beginning, because of the desire of various people here, including the two of us, if possible, to attend the issuance of the first gold coin to Rachel Robinson and the Robinson family at the Treasury at 11:00, we are going to break promptly at 10:45. Those of us who are going to this ceremony will make a beelineI mean, literally, a beelineto cars, jump in cars, and return as soon as we can. But we are scheduled to resume, right now, at noon, I believe, is the bewitching hour.
That may be a little complicated for some of the witnesses, but we are going to go as hard and fast as we can, subject to votes or whatever may happen between now and 10:45, and then make that move quickly to go over to Treasury.
I will say that this is being complicated by the fact that we may have votes on the floor during that same period of time. So, I am not exactly sure what Mr. Flake and Iwe are going to have to make some decisions, I suppose, before it is all said and done.
The production of our Nation's money is the subject of today's hearing. The exchange of money affects all Americans in their daily lives. Everyone has an opinion on the convenience and importance of the penny, the $1 bill, or the new look of the $100 and $50 notes. Public acceptance of, and confidence in, our coins and currency is critical to the proper functioning of the U.S. economy and, of course, the world economy.
The creation of money is one of the fundamental duties of Congress, as outlined in the Constitution. In addition to the importance of money to the functioning of our economy, the manufacture of our money is a major business and a significant Government monopoly. It earns a profit of over $20 billion each year, the difference between what it costs to print paper and mint coins and what the Federal Reserve System credits to the Treasury and then distributes to banks.
Page 3 PREV PAGE TOP OF DOC
While these funds are not available to be spent by Congress, for which we can probably all thank God, in the same way that ordinary tax revenues are spent, they do make it possible for our Government to borrow less and limit the growth of the debt.
Overall, the United States Mint and the Bureau of Engraving and Printing, BEP, do a good job of producing our coins and currency. However, there are aspects of their operations that raise questions, and, equally as important, this subcommittee is concerned about whether the Treasury Department is devoting adequate attention to the future demands for coins and currency and for ensuring that all aspects of these basic and vital Government functions are being managed properly. They cannot be run on autopilot by the Department of the Treasury.
The purpose of this hearing is to discuss several specific issues at the Mint and the BEP and Treasury's involvement in these issues. Among the topics we would like to review today are the following:
The U.S. Mint's accounting system for commemorative coins. The subcommittee is concerned that losses in the latest United States Olympic Coin program may have been understated, and, in addition, we would like to know what steps are required to ensure that we have accurate accountings of all future commemorative coin programs;
The Treasury's management of the BEP's proposal to promote competition for the procurement of special security paper for our currency. The subcommittee is concerned that the procurement proposal was modified based on political, rather than policy, considerations;
Page 4 PREV PAGE TOP OF DOC The focus of the Treasury on the long-term planning required to assure that our currency and coin production can meet future demands and that the capacity of Mint and BEP facilities will be fully and efficiently utilized;
The Department's position on legislation passed by Congress to create a new circulating commemorative quarter. An independent study requested by the Department found that such a program would have good potential for success. The subcommittee is concerned that the Department consider all aspects of the proposal with an open mind, in a fair and comprehensive manner.
Serious questions face both the Mint and the BEP about what kinds of money they will produce in the future. Both money producing bureaus are in danger of being left with a vast overcapacity situation should they implement plant acquisition plans based on the current product mix and then find themselves in a radically changed environment.
Precedent for this kind of development lies with the BEP postage stamp printing operation. From a 100 percent monopoly before the introduction of private sector competition and e-mail, BEP production has now fallen to about a 50 percent share of a steadily declining market for postage stamps. In addition, the Washington, DC. BEP facility is outdated and deteriorating, and its replacement could exceed $300 million.
A $1 coin replacement for the paper Federal Reserve NoteFRNcould save $500 million per year for 30 years, and these savings will continue to tempt Congress as the purchasing power of the note declines.
Page 5 PREV PAGE TOP OF DOC If the BEP no longer produces stamps or the $1 FRN, all production could comfortably be consolidated at the agency's modern Fort Worth facility.
The Mint has been producing coins for several years at a rate of more than 20 billion per year, and their strategic plan calls for being able to produce 24 billion coins per year by the year 2002. However, demand has suddenly slackened in the current fiscal year, with no letup in the economy to explain it. Growth projections may have to be radically redrawn.
Complicating this scenario is the fact that more than two-thirds of the coins produced in the recent past have been 1-cent coins that the GAO last year found to be marginal in profitability and in economic utility, with over two-thirds of production simply not circulating.
Many things could account for the changes being experienced in coin demand, and they could turn out to be transitory blips on the growth chart. Still, the private sector is placing more and more coin-counting machines that take accumulations of small change off the consumer's hands for a fee and return the coins directly back into circulation. At the same time, use of debit cards and credit cards could be taking a larger share of purchases that formerly were made with cash.
The only thing that is perfectly clear is that change is occurring. In this environment, it is more important than ever that a comprehensive management strategy be thought out and implemented by the Department. Both bureaus should be managed in a coordinated manner rather than pitting them as competitors for resources and attention. This is important with the present product mix and could be even more urgent if there is any idea of creating legal tender electronic money in the future.
Page 6 PREV PAGE TOP OF DOC
We will hear first today from the General Accounting Office, whose investigators have scrutinized the operations of the Mint, the BEP, the Treasury offices, the Director of Operations, and the Federal Reserve System that constitutes the main customer for tangible forms of money in response to marketplace demands.
Michael Motley, GAO Associate Director for Business Operations, will address the interrelationships between the Mint and the BEP and the Department of the Treasury. Theodore Barreaux, Counselor to the Comptroller General, will address the particular accounting problems presented by the most recent Olympic commemorative coin program. Ted Allison, an expert on money and a key advisor to the Fed Board of Governors, is present to answer any questions on the interaction between the Fed and the money production facilities.
We are honored to have the Treasurer of the United States, Mary Ellen Withrow, with us, and she will be followed by Phil Diehl, Director of the Mint, and Larry Rolufs, Director of the BEP, who will present testimony on their respective bureaus and outline how they are positioning their organizations for the future.
Finally, we are fortunate indeed to have the presence of the Treasury Assistant Secretary for Management and Chief Financial Officer, George Munoz, to whom both bureaus and the Treasurer of the United States report. Mr. Munoz has been mentioned by the White House as a potential nominee to head up the Overseas Private Investment Corporation, and we are grateful that he was able to be with us today to discuss his management of the manufacture of money.
Let me at this time turn to Mr. Flake for his opening statement.
Page 7 PREV PAGE TOP OF DOC
Mr. FLAKE. Thank you very much, Mr. Chairman. And as you have already indicated, we will recess at 10:45 to go to the Treasury. Therefore, I will not use this time for an opening statement but, rather, to give a heads-up on the persons who come to testify before us in relationship to questions that will be forthcoming later on.
And these questions for the General Accounting Office: Can past Treasury studies on consolidation of the Mint and the BEP, as well as the placing of BEP under the Federal Reserve, be relied upon by Congress as authoritative and a political analysis can be made on these issues?
In addition to the capital investment needed for a new $1 coin, what else would be needed for a successful conversion from a $1 note?
And third, did you make any observations on capital planning at the Mint and the BEP, and do their capital investment plans reflect possible future changes for the denominational mix of coins and currency?
For the Mint Director: Congress requires the Mint to make and sell commemorative coins to support civic, philanthropic, and national business organizations. The population of coin collectors is dwindling, and we would like to know how the Mint intends to address that issue, as well as, can the Mint provide quarterly revenue and cost information on every numismatic program under the managerial cost accounting concepts and standards from fiscal year 1997 forward?
Page 8 PREV PAGE TOP OF DOC For the Bureau of Engraving and Printing: The unit cost of the new anti-counterfeiting features added to the new $100 note. Is it economically feasible to add these features to the $20, $10, $5, and $1 notes?
Second, if the $1 note is not eliminated and BEP continues to produce postage stamps, what would a replacement for the Washington plant cost? If the $1 note was eliminated and you no longer produced postage stamps, what would a replacement for the Washington plant cost?
And last, what opposition is there to eliminating the $1 bill, replacing it with the $1 coin, thereby saving the Federal Government, by some estimates, $456 million a year?
For the Assistant Secretary of the Treasury: In the GAO testimony, they state that eliminating the $1 note could substantially reduce the need for a Washington, DC., production plant. Would such a situation be desirable? Do you see advantages or disadvantages? And does the Treasury have any program to routinely examine the operations? Could they be done less expensively in the private sector? Do you think such a program would be appropriate for the Mint and the BEP? If so, why hasn't one been initiated?
These will constitute my basic questions, and when we get to that period, I would hope you will have thought about them.
And I yield back, Mr. Chairman, so that we might expeditiously move forward with this hearing.
Page 9 PREV PAGE TOP OF DOC
Chairman CASTLE. Thank you, Mr. Flake.
We are joined by Mr. Jackson and Mr. Kennedy.
I have already indicated, before you all arrived, that you are welcome to submit statements. We are going to try to go directly to the witnesses.
And, by the wayyou may not have heardwe are going to break at 10:45. The Jackie Robinson coin is going to be issued at the Treasury at 11:00. However, we are going to be voting around the same time. So, it could be complicated before it is all said and done. So, we are going to try to move forward as expeditiously as we can.
Chairman CASTLE. Mr. Motley, please.
STATEMENT OF MICHAEL E. MOTLEY, ASSOCIATE DIRECTOR FOR GOVERNMENT BUSINESS OPERATIONS, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY JOHN BALDWIN, ASSISTANT DIRECTOR, GENERAL GOVERNMENT DIVISION
Mr. MOTLEY. Thank you, Mr. Chairman.
I will try and be brief. I would like to ask that my entire statement be submitted for the record, and I will summarize my statement this morning.
Chairman CASTLE. Without objection. Anyone's full statement may be submitted for the record who testifies.
Page 10 PREV PAGE TOP OF DOC
Mr. MOTLEY. First, I would like to introduce John Baldwin, to my right. John is an Assistant Director in the General Government Division and has worked in areas related to money production since the early 1990's when we issued our first report on the $1 coin.
Mr. Chairman and Members of the subcommittee, I am pleased to be here today to discuss decreasing the cost of producing the Nation's money. My testimony addresses four areas: The effects of decisions on the denominational mix of coins and currency on capital investment plans and production costs; possible structural changes in the entities involved in producing money; additional contracting out of money production activities; and, the planning of money production.
In considering changes to the denominational mix, it is important to note that the Federal Reserve does not expect the demand for coins and currency to be significantly reduced by e-money in the near future. To meet the expected demand for coins and currency at the current denominational mix, both BEP and the Mint have significant capital investment plans to replace aging equipment and upgrading facilities and to add capacity in the next several years. However, legislation has been introduced in Congress to replace the $1 note with the $1 coin.
In addition, last year this subcommittee held hearings on the future of the penny and considered proposed legislation to authorize the circulating commemorative quarter. Implementing proposals to change the denominational mix could have an impact on capital investments currently planned by the Mint and BEP.
In order to meet the continuing need for coins and currency, the Mint and BEP have significant capital investment plans. The Mint plans to make about $176 million in capital investments over the next 5 years to replace deteriorating equipment and upgrade facilities. However, these plans do not include an estimated $73 million that would be needed to produce a new $1 coin if Congress authorizes its production, and the cost of acquiring a proposed new headquarters facility, which have not yet been estimated.
Page 11 PREV PAGE TOP OF DOC
BEP has a capital investment plan for fiscal year 1997 through 1999 showing planned expenditures of $251 million, but is likely to spend less because all capital expenditures for the current DC facility, except for essential maintenance, have been put on hold pending a decision on whether BEP will build a replacement facility. BEP officials say that they do not know when this decision will be made and that it is at least partly dependent on whether the $1 note is phased out. Estimates of the cost of the new facility range as high as $250 million.
While BEP could produce all remaining denomination notes at Fort Worth, as you indicated, Mr. Chairman, if the $1 note were discontinued, they also said that it would not be desirable in view of the possibility of catastrophe occurring at Fort Worth. Our prior report on the $1 note showed that eliminating this note could generate substantial operating cost savings, and our testimony on the penny showed eliminating this coin could also result in savings.
For the penny, we estimated that the net cost to the Government was about $9 million in fiscal 1994. We testified in 1995 that $456 million per year could be saved if a new $1 coin replaced the $1 note. Decisions on whether to eliminate these should include considerations of a variety of factors in addition to the Government cost savings.
With regard to the possible impact of structural changes in the entities producing money, we were unable to find evidence to demonstrate that any significant benefits could be made. Treasury has considered consolidating BEP and the Mint and placing the BEP under the Federal Reserve. However, even though these studies have been done, none have quantified whether the identified savings would outweigh the costs.
Page 12 PREV PAGE TOP OF DOC
Furthermore, the Federal Reserve and Treasury officials identified difficulties that would need to be overcome before organizational changes would be successful, and some of the savings that were identified as possible from structural changes could possibly be achieved by other means. None of the foreign countries we contacted had merged coin and currency production into the same organization.
Concerning contracting out, both the BEP and the Mint rely on contracting out for most of the materials used in money production, as well as for several support activities. Although some of the foreign countries we contacted rely on the private sector for basic money production to a greater extent than we do in this country, Treasury, Mint, and BEP have not explored the possibility of contracting out additional money production activities.
Officials within Treasury have a number of concerns about the greater use of the private sector. These concerns include security as well as the appropriateness of contracting out for basic money production.
BEP has begun recent efforts to obtain competition for supplying currency paper. However, it remains to be seen if these efforts will be successful.
Mint officials said that other than the penny, none of the Mint's clad strip suppliers have the necessary equipment to produce blanks. In addition, they have security concerns because other denominational blanks could be used in vending machines. However, officials from two strip suppliers we contacted told us that they could institute additional security measures and produce other coin blanks.
Page 13 PREV PAGE TOP OF DOC
In 1996, Treasury studied the feasibility of obtaining competition for supplying currency paper. This study noted that other paper companies have chosen not to compete because of the high capital startup costs that would be required in this limited market.
In May, Treasury made a draft solicitation which contained a provision that would provide financial assistance to offerors for acquiring the necessary equipment to manufacture distinctive currency paper.
In the solicitation issued by BEP, the provision was replaced by another provision allowing offerors to propose innovative acquisition and financing arrangements. It is uncertain what effect this will have on potential offerors.
In 1997, the Emergency Supplemental Appropriation Act required GAO to analyze the optimum circumstances for Government procurement of distinctive currency paper and report our findings to the House and Senate Committees on Appropriations no later than August 1, 1998. The act also prohibits BEP from awarding a contract under the solicitation until our review is completed.
Planning for money is the final area I would like to discuss. Neither the Mint, the BEP, nor the Treasury have overall goals to reduce the production and distribution costs across denominations or across agencies. This issue is not new and was reported by a 1987 Treasury study which recommended that a permanent planning capability be created in the Office of the Treasurer to focus on strategic planning related to the future structure of coin and currency, for consideration by Congress and the Secretary of the Treasury.
Page 14 PREV PAGE TOP OF DOC
However, a decade later, Treasury's planning for the production of money does not consider Governmentwide costs or address the mix of coins and currency.
In summary, Mr. Chairman, Congress will soon be faced with several decisions concerning money production. These decisions are likely to have long-term and wide-ranging effects on such issues as operating costs, capital investments of the Mint and BEP, public reaction and the needs of commerce, and the impact on current Treasury and Treasury contractors' work forces.
Mr. Chairman, that concludes my prepared statement. I would be happy to answer any questions that you might have.
Chairman CASTLE. Thank you, Mr. Motley.
STATEMENT OF THEODORE C. BARREAUX, COUNSELOR TO THE COMPTROLLER GENERAL, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY DAVID CLARK, DIRECTOR, AUDIT OVERSIGHT AND LIAISON
Mr. BARREAUX. Mr. Chairman, Members of the subcommittee, I am being accompanied today by Mr. David Clark, who is the director of our audit oversight and liaison issue area.
Page 15 PREV PAGE TOP OF DOC Chairman CASTLE. Let me just say, Mr. Barreaux, thatand I see Mr. Baldwin is here as wellas we ask questions to the panel, they are welcome to help supply answers if that is helpful to you all.
Mr. BARREAUX. Thank you very much.
We are pleased to be here today to discuss our preliminary findings regarding an allegation about the U.S. Mint's Atlanta Olympic Commemorative Coin Program. The allegation claims that the Olympic Coin Program has lost approximately $24.7 million, while the Mint has previously reported losses of only about $2 million.
You asked in April that we review the allegation to determine whether it is true. We have not yet completed our work and, accordingly, caution the subcommittee that our results are only preliminary.
Also, it is important to note that we are using figures provided by the Mint's financial management and cost accounting system. The reliability of that system has been criticized extensively over the past several years. The Mint has acknowledged this problem and has stated that it is developing a new system that is designed to integrate its finance, marketing, and manufacturing functions. Accordingly, we caution that the figures we are citing today may not necessarily be accurate.
The Mint has two lines of manufacturing business. It manufactures circulating coins, which constituted 78 percent of its fiscal year 1996 revenues. The remaining 22 percent consisted of the manufacture of numismatic products for collectors, including medals, proof coins, uncirculated coins, gold and silver bullion coins, and several commemorative coin programs, including the Olympic Coin Program.
Page 16 PREV PAGE TOP OF DOC
The Olympic Coin Program is one of the largest and most complex commemorative coin programs ever managed by the Mint. The Mint was authorized to design a total of 32 Olympic program coins and manufacture not more than approximately 18 million coins, which later was reduced to not more than 13.3 million coins. According to Mint records, it has produced 4.1 million Olympic coins, of which 1.8 million coins remain unsold.
The Olympic Coin Act provides that no coin shall be minted after December 31, 1996, but there is no date by which sales shall end. Mint officials informed us that the Mint is attempting to sell its remaining Olympic program coins. For example, officials said that the Mint's fall sales catalog will include Olympic program coins and that the Mint is negotiating a bulk sale to the U.S. Olympic Committee that they would use as contributor gifts.
The quarterly report by the Mint provided to the subcommittee through March 1997, shows cumulative losses in the Olympic Coin Program of approximately $2.8 million. According to the Mint's chief financial officer, the Olympic Coin Program could lose at least another $3.6 million if the Mint does not sell all of its remaining Olympic coins, for a total potential loss of $6.4 million. In other words, the Mint has said, if it does not sell any more coins, it will lose $6.4 million.
The $3.6 million in additional potential losses beyond the $2.8 million reported through March 1997 by the Mint, consists of labor and overhead costs to manufacture the coins, the cost of melting down all the metal for reuse, and some Olympic imprinted packaging material. Although these additional potential losses are less than the $24.7 million loss in the allegation, when added to the program's $2.8 million cumulative loss previously reported to the subcommittee, they double the Mint's losses to a total of approximately $6.4 million.
Page 17 PREV PAGE TOP OF DOC
We are currently reviewing the remaining difference between the allegation and the Mint records of $18.3 million. At this point, more than one-half of the remaining difference appears to relate to packaging material which, according to the allegation, was purchased specifically for the Olympic Coin Program. However, Mint officials contend that most of this packaging pertains either to other numismatic programs, or can be used by other commemorative coin programs.
Other remaining differences appear to relate to coin quantities and valuations, surcharges and shipping costs, and related general and administrative costs.
Recent legislation, coupled with new accounting principles for the Federal Government, provide a framework for improving the Mint's financial management. Public Law 102390 required the Mint to prepare annual financial statements and to have them independently audited, beginning with fiscal year 1993. Also, Public Law 104208, the Omnibus Consolidated Appropriations Act for fiscal year 1997, requires detailed quarterly accounting for commemorative coin programs authorized after September 30, 1996.
Finally, managerial cost accounting concepts and standards for the Federal Government are effective for the fiscal year 1997 Mint audit. If implemented properlyand that is a big ifthese requirements would provide more specific information regarding the results of individual coin programs.
For example, the fiscal year 1994 through 1996 audits of the Mint's financial statements disclosed significant problems in the Mint's cost accounting system and helped to form the basis for the Mint's decision to develop a new overall integrated financial management system.
Page 18 PREV PAGE TOP OF DOC
Mr. Chairman, that concludes my prepared remarks, and Mr. Clark and I would be pleased to respond to any questions the subcommittee may have.
Chairman CASTLE. Well, thank you, Mr. Barreaux.
I will start the questioning. We don't have the usual lights here, so the young lady with the card is going to become the most important person in the room and keep us limited to 5 minutes each. We may go to a second round if further questions are needed.
But let me start with where you closed, and that is with the accounting system as far as the Mint is concerned. Based on the reports which I have read, and your testimony here today, apparently it is very hard to truly comprehend the dollar impact.
And without getting into specific questions of the losses on the Olympic coins, which I am going to ask you as a follow-up, is it your judgmentand you said it is a big ''if,'' that they will implement a good cost accounting system properly. In my judgment, that shouldn't be an ''if''; that absolutely should be done.
Is it your judgment that should be done as well? Is it hard to comprehend exactly what the numbers are, be it losses or gains in various programs?
Mr. BARREAUX. It is our judgment that it definitely should be done, but our experience with Federal agencies across the board is that they always have a very difficult time implementing proper accounting and auditing procedures.
Page 19 PREV PAGE TOP OF DOC
Chairman CASTLE. Is there a basic reason for that? That was broader than just the Mint. Is there a basic reason why Federal agencies don't seem to do very well in conducting good accounting systems?
Mr. BARREAUX. There are traditions and histories in all of these agencies that go back many generations, and the reality is that a lot of their accounting systems were originally manual, and indeed the Mint's accounting systems still remain, to a significant degree, manual. And the implementation of modern technical information and computerization is something that just has not been fully adopted by Federal agencies to the degree that it should.
It is something that all departments and agencies are struggling with, but effective accounting systems have never been implemented to the degree that we would like to see, or to the degree that needs to be achieved to gain the confidence of the public.
Chairman CASTLE. I assume you are familiar with the legislation which was passed last year, and I won't try to detail it here. If you are not familiar with it, we will just skip the question. You mentioned some of the aspects of it: More regular accounting, costs being returned to the Mint before the various beneficiary groups can get coins, the limitation of coins.
Do you believe that those kinds of measures will help address these cost problems even if the accounting system is not changed?
Page 20 PREV PAGE TOP OF DOC Mr. BARREAUX. Well, it certainly would help improve the current situation, but I think it is essential to also try to improve the cost accounting system. They are both sides of the same coin, since we are talking about coins today.
Chairman CASTLE. I guess Mr. Diehl can answer his first question based on this conversation.
Let me go through the Olympic coin programs. Like others, I am a great fan of the Olympics, and I think the coin program is fine and these losses are not going to break the United States Government. On the other hand, it seems to me to be a huge misreading of public demand here, as well as an inefficiency in the delivery of the system. If the numbers I heard you state are correct, there were to be 18 billion coins originally; it was taken down to 13.3 even before it started, as I recall. I may have that wrong, but I think that
Mr. BARREAUX. Both of those were by public law.
Chairman CASTLE. Right. By things we did here in Congress, or other Congressmen did?
Mr. BARREAUX. That is correct.
Chairman CASTLE. And 4.1 billion were actually made
Mr. BARREAUX. Four point one ''million''.
Page 21 PREV PAGE TOP OF DOC Chairman CASTLE. MillionI have been saying ''billion,'' although it should have been ''million''were actually made, of which 1.8 remains unsold at this time. Is that correct?
Mr. BARREAUX. That is correct.
Chairman CASTLE. So, in addition to whatever the cost problems are, there seems to be an inability, at least in the area of the Olympic coins, to be able to ascertain exactly what the public demand is going to be. Is that a fair conclusion?
Mr. BARREAUX. I think that has certainly been a problem for the Mint, to anticipate what the public need will be, what the public desire would be. But it is not something that we address specifically in our study, so I can't comment to you, other than as an interested citizen.
Chairman CASTLE. And this is for either of you, or anyone out there at the table, that is. This is a 50-State commemorative coin program study, which is the quarter, of course, which I have a personal interest in, at least in having been the sponsor of. Have any of you had a chance to read this report?
And I would be interested in your comments on the financial aspects of it, or anything you might know about any downside or upside of it that could help in helping the Secretary of the Treasury eventually make a decision with respect to whether or not this should go forward, which has to happen here in a couple of months.
Page 22 PREV PAGE TOP OF DOC Mr. MOTLEY. Yes, Mr. Chairman. We have had an opportunity to look at that study, and I would say that some of the conclusions of that study are somewhat consistent with the report that GAO issued last year. Basically, that is that the potential benefits from such a distribution of a commemorative quarter appears, though, that it couldbased on production lots, of course, could potentially provide a certain amount, or a fair amount, of revenue and reduce the amountsome of the interest on the debt that we are currently incurring.
The study that we did about a year ago suggests that the quarter would require about a 50 percent greater increase in distribution of the current quarter today, but that that would be likely based on the receptivity of the 1976 Bicentennial commemorative quarter, or the circulating quarter, and several other things that we have seen in the past.
Maybe Mr. Baldwin would like to make some further statements.
Mr. BALDWIN. Yes. I think that we were conservative in our report last year. We estimated that the additional seigniorage from a circulating quarter would be about $225 million a year.
I noticed the latest study that you were referring to, Mr. Chairman, done by the contractor for Treasury. It gave a seigniorage over a 10-year period of up to $5 billion, I think. But I think that included all the seigniorage from quarters. Our $225 million just included what would be additional quarters that would normally be produced in that period.
Chairman CASTLE. Well, first of all, I felt it was a very fair study, to Treasury's credit, both the survey and some of the financial conclusions in it. And, quite frankly, as one who is an advocate, I was surprised at how upbeat and basically optimistic it was in terms of some of those numbers and some of the other aspects of it.
Page 23 PREV PAGE TOP OF DOC
Where it goes, I don't know. But, you know, I am trying to determine what the downside and the upside may be, and this is a fair hearing at which to do that.
I have a little note here that says my time has expired, and I have to obey that. So, we will at this time turn to Mr. Flake.
Mr. FLAKE. Thank you very much, Mr. Chairman.
I would just like to go back momentarily to the question relative to the Olympic coin and, more especially, the ability of the Mint to actually market its product.
The question I have, really, is, given what Mr. Barreaux had said about the inability of most Government agencies to develop the internal accounting systems current with today's technology and so forth, would not this be a potential area for looking at privatization, given that if you moved into a private market, there is no way they would allow themselves to be caught with $6.4 million worth of coins, or anything else that is a remnant from having not had a successful project or would be finding some way to make sure that they move that to the market?
So, just a general feeling about the Government actually trying to do its own business versus putting that business into the hands of people who do that in a more competent way because they are in it for a different reason.
Mr. BARREAUX. Mr. Flake, privatization is certainly an option the Congress could consider in reviewing the operations of the Mint. I suspect that if you do, you will discover how effective market analysis is in the private sector. Marketing is done by a variety of corporations that do what the Mint does, which is the manufacture of products and the distribution of those products to people who don't necessarily have to buy them, but who are motivated to buy them by convenience, efficiency, or price.
Page 24 PREV PAGE TOP OF DOC
Mr. FLAKE. If we chose not to go a privatized route, what can be internally done to guard against this kind of problem happening with the consistency with which it does happen?
I wonder if, in fact, you could find a private industry that can come in and teach the Mint to do a better job of it, or help them to develop the systems to manage it? Or is it better to consider moving the whole marketing program outside of it?
Mr. BARREAUX. Well, one of the responsibilities that the subcommittee has is to determine how the Mint decides what number of coins it is going to recommend to the Congress in any given sale. We didn't look at that, and we can't sit here today and advise you that specific changes in the Mint's procedure should be made. But it is certainly something that is appropriate for this subcommittee to look at.
Mr. FLAKE. But if it is likely that if a private industry wereassuming that it might take a lossthat it would probably produce a number that it felt comfortable in getting sold, knowing that it would have to take the hit, as opposed to in the current arrangement, where the Government takes the hit as if we have unlimited resources that we can make available to cover that, would that be
Mr. BARREAUX. I think it is logical to assume that if you require the person manufacturing the product to absorb any losses, that that organization would be extremely careful in trying to make sure that there aren't any losses. Whether or not they will always be successful is a subject of some debate.
Page 25 PREV PAGE TOP OF DOC
One of the great management courses taught at various business schools is, ''How could the Ford Motor Company make the Edsel when nobody wanted the Edsel?''
So, the private sector does make mistakes too, but they have a lot of experience on how to do it right.
Mr. FLAKE. That is because they have to eat it, and if they have to eat it, I think the attitude is different.
Let me just ask one question while you are here, and that is on the proposed change of the $1 coin from paper to coin. What is your sense of the cost factors involved? And is this really the most logical and efficient move that we can make as it relates to that change? Is it a necessary change? And if it is, what are the ultimate benefits of it?
Mr. BARREAUX. That is an issue that was handled by our General Government Division, so I would like to defer to them on that.
Mr. FLAKE. Thank you.
Mr. MOTLEY. Mr. Flake, to address what are some of the benefits from that, I think we have highlighted in our testimony that there is a potential savings of about $456 million if you were to eliminate the $1 note and move to the $1 coin.
In addition, that doesn't consider some of the additional costs that you would avoid in the future in some of the production facilities or replacement of equipment.
Page 26 PREV PAGE TOP OF DOC
It is important to note that the $1 note generally stays in circulation about 16 months, where coins generally last considerably longer, as long as 30 years. So, there is great potential there.
To come out and recommend specifically the direction that you ought to go is dependent on a variety of things. I think it is important to consider also the acceptance of the $1 coin by the public. We believe that one of the reasons that the problems existed with the Susan B. Anthony $1 coin is because of the resistance by the public. Because it was so similar to the quarter, was one of the reasons. The other thing is that it did not have a distinctive color or it did not stand out. And so, that might be something else that would be considered in trying to go forward with a $1 coin.
In addition to that, based on our experience in talking to people in Canada that also have had put into play a $1 coin, they eliminated the $1 note pretty rapidly, which is something here we did not do as well. In addition to that, there was also a champion for the $1 coin.
Maybe Mr. Baldwin wants to add some other things.
Mr. BALDWIN. Yes. I think the biggest hurdle that would have to be overcome for the $1 cointhere are a lot of opportunitiesbut the biggest hurdle is to eliminate the $1 note and to stand by that decision.
Ever since 1990, when we have been looking at this, I know the Mint and Treasury officials have been afraid to actively support it because of the fear that, even though Congress would authorize the withdrawal of a note, halfway through their productionand we are talking probably 10 or 11 billion of these coinsthat halfway through the production, for example, Congress might change its mind.
Page 27 PREV PAGE TOP OF DOC
Some banks or someone else might complain about losing their freedom of choice to pick a coin or a paper dollar, and Congress would reverse the decision, in which case the Treasury would be stuck with billions of coins that it would be very difficult to get rid of.
So, having some assurance, I think, between the Administration and the Congress that if the $1 note is eliminated, that that decision will hold, I think is the biggest hurdle that has to be overcome.
Another advantage, besides the Government savings, it does provide, I think, a useful coin for the vending industry. Some transit systems also use the $1 coin as a token, and there are other businesses. I know the Postal Service, I think, gives it in change in their postal vending machines. So, there are a lot of advantages. But there is a lot of fear, I think, also, that it could be a white elephant, so to speak.
Mr. FLAKE. All right. My time has expired, and in fairness to my colleagues, I need to give it up. But if I can ask for unanimous consent for 30 seconds just to make a quick statement?
Chairman CASTLE. Without objection.
Mr. FLAKE. And that statement is simply that if you are going to move the dollar to a coin, then you still have $5's and $10's and $20's and so forth; you still have a Government engraving office; and you have a whole change that is occurring in terms of money itself, people going to cards and swipe cards and so forth.
Page 28 PREV PAGE TOP OF DOC
The question is: How long are we going to be using coins? So, that to make the transfer and then, if this technology continues to advance the way it is, with the hearings that we have had, it seems to be imminentthen why are we making that change at this juncture? And then we will eventually not even be able to use the coins.
You don't have time to answer that, but it is something to think about, and I hope that we would think about that as we go along.
I yield back, Mr. Chairman.
Chairman CASTLE. And perhaps you might want to work that into your answers to other questions as you go along. You may be asked something similar to it.
Mr. MOTLEY. We would be happy to.
Chairman CASTLE. We will turn to Mr. Lucas for his questions.
Mr. LUCAS. Thank you, Mr. Chairman. And really I have kind of a series of rambling questions.
We were talking about the Susan B. Anthony. In your report, you point out that the present supply will be exhausted in 36 or so months and that the only present law allowable is for the minting of more of these, and I guess that I would kind of like to follow up on Mr. Flake there on the logic about the potential impact, as you see it, on those vending machine people and those transit people?
Page 29 PREV PAGE TOP OF DOC
I mean, obviously, we have an obligation to provide some kind of a coin since we have given them the impression that that medium of exchange will be there.
Mr. MOTLEY. Well, I believe you are right. I think that we do have a responsibility because this has been introduced. It is a piece of law that says that there will be a $1 coin, and a lot of companies have grown to depend on that coin. That is why we have pointed out in our statement that it becomes a very important decision for the Congress to make soon, as to the direction they might go, especially if they plan to change the structure in some way of the $1 coin.
Of course, it would be advisable to keep it at the same size and the same weight, but making it a little bit more distinctive, with maybe a different color or things of that sort, might be advisable.
Mr. LUCAS. To ask now a question from a different angle, in your report, you make the comment that a number of other countries stockpile as much as a year of their currency at a time. Could you expand on that a little bit?
Mr. MOTLEY. Well, actually, one of the areas that we addressed in the testimony that dealt with that is what would happen if you didn't have a backup facility here, let's say in Washington, with regard to currency production of the $1 note or currency production in general, if you eliminated the $1 note and went to the coin?
We believe there are a variety of options that could take place, and stockpiling is certainly one. A lot of these, as was indicated, are options as cited in our testimony. However, most of them haven't been pursued aggressively at this point in time, and we recommend that that might be a good thing to give some additional consideration to when you look at some of the capital investments that might be required over the next several years.
Page 30 PREV PAGE TOP OF DOC
Mr. LUCAS. Now once again, from a totally different direction, in your reportand I assume you are probably using statistics from the Treasury reportin reference to the circulating quarter program, the, I would say, speculated or potential cost at both Denver and Philadelphia to be able to come up to speed to do this circulating program, do you have any insights into those numbers, the 13 million potential capital investment at Philadelphia, maybe 22 million at Denver? I am just taking those numbers out of someone else's report.
Mr. MOTLEY. Right. Well, we believe that those are probably reasonable numbers, based on if you needed to increase production of that particular circulating quarter. And, of course, that remains to be seen. As that study indicates there, there are a variety of scenarios that they lay out as to what the production results might be, depending on what the amount is, how many people will hold on to them, and things of that sort.
That is one of the benefits of that particular quarter, is that only five States a year will be receiving that, so there might be a greater inclination by people to hold on to some of those.
Mr. LUCAS. Thank you, Mr. Chairman.
Chairman CASTLE. I will just take the Chairman's prerogative for a moment to explain that we are talking about two very different things. We are talking about a circulating commemorative quarter, which means different than the actual quarter, which actually, by the way, is also a circulating commemorative quarter from about 50 years ago, or 60 years ago, the George Washington quarter, in which each of the 50 States will be represented over a period of 10 years with its own design on the quarter, with everything else functionally being the same as it is now, which is the subject of a study and a subject of some of these numbers. And then we are talking about special issue commemorative coins and the sales of them with respect to the Olympic coins, and so forth.
Page 31 PREV PAGE TOP OF DOC
Sometimes that is not always clear, even in the minds of some of us up here, much less in the minds of a lot of people who are hearing about it for the first time.
Mr. BENTSEN. Thank you, Mr. Chairman.
I assume that would apply to Republics as well as States?
Chairman CASTLE. If that is what you wish to be, sir.
Mr. BENTSEN. Not me, but some of my fellow Texans.
There is some confusion. I have in your testimony, Mr. Motley, you state that $365 million is spent on currency production by the Bureau of Engraving and Printing, and then you reference a particular year. And then there is a slightly higher number for the Fed, but that includes the $365 million plus transportation costs.
Mr. MOTLEY. That is correct.
Mr. BENTSEN. And their accounting procedures, which are different.
But then you state later that a study that was done by the GAO found that $456 million per year could be saved if you went to a $1 coin from a $1 bill.
Page 32 PREV PAGE TOP OF DOC
Mr. MOTLEY. Right. The earlier amounts of $365 million deal with the cost of the printing of the currency and then the charges that would be associated with the Fed buying that money. The other one is the savings that would be incurred if you eliminated the $1 note and went to the coin.
Mr. BENTSEN. OK.
You also mention that you testified last year that the penny was no longer profitable. I know there has been a lot of discussion about the $1 coin, and I don't want to get into that.
Mr. MOTLEY. Yes, sir.
Mr. BENTSEN. There is a lot of speculation about that. The penny, I wonder if there is a difference, and I don't know if you can comment on that. We are moving in that direction in the stock market now, where we are going away from /16th's and /32nd's to cents.
Do you know of any studies, or have you all determined that there is any impact, if you moved away from the penny that would have any sort of inflationary impact?
Mr. MOTLEY. Well, that is certainly a consideration that I think the Fed has with regard to removal of the penny, because there is a concern that people might round up as opposed to down.
Page 33 PREV PAGE TOP OF DOC
The study the GAO did particularly found that the public was generally split. Many of the people in the publicin fact, the majoritywanted to keep the penny, but people also seemed to be in favor of rounding. However, there was that concern that retailers might round up more.
Mr. BENTSEN. Not to nickel and dime, but it is easier to round up
Mr. MOTLEY. Sure.
Mr. BENTSEN.From a 1 to a 5?
Mr. MOTLEY. That is correct.
Mr. BENTSEN.Than from a 5 to a 1 or something like that?
Mr. MOTLEY. That is correct. So, that is a concern and something that must be considered over a period of time.
Mr. BENTSEN. With respect to contracting out, you sent questionnaires to other nations, some which have contracting out and looked at the financial aspects. Did you find that there were any security concerns from those nations which contracted out? Because you referenced that earlier in your testimony as to one of the potential objections.
Page 34 PREV PAGE TOP OF DOC
Mr. MOTLEY. I will let Mr. Baldwin address that.
Mr. BALDWIN. You know, security is a valid concern. It is not something that cannot be overcome. It just, I think, adds to the cost of buying the money from the contractor. It is built in.
The studies thatthere is actually a dearth of studies at BEP and Mint on additional contracting out, but certainly that would have to be a cost that would have to be factored in. Whether contractors could do it less costly than the Mint or BEP, we just don't know.
Mr. BENTSEN. I guess my question is: Did you find in your research of other nations which do contract out currency production as to whether or not they had increased security breaches or counterfeiting or other concerns that might enter into it?
Mr. BALDWIN. No, we didn't get into that level of detail.
Mr. BENTSEN. And then you mention, as a potential optionand I know my time has expired, and you can respond for the recordthe question of reciprocal agreements with foreign governments. I guess this is for printingor reprinting currency holdingsforeign exchange currency holdings that they have and whether or not you have found that there are real security concerns related to that?
And they can answer that for the record, Mr. Chairman.
Page 35 PREV PAGE TOP OF DOC
Mr. MOTLEY. We would be happy to respond for the record.
We did not review possible security concerns relating to the contracting out of currency production by other countries.
Mr. BENTSEN. Thank you, Mr. Chairman.
Chairman CASTLE. Thank you. Thank you, Mr. Bentsen.
Dr. PAUL. Thank you, Mr. Chairman. My comments and questions are directed to Mr. Motley.
On page 8 of your printed testimony, you say while BEP could produce all remaining denomination notes at the Fort Worth facility if the $1 note were discontinued, BEP officials said this would not be desirable in view of the possibility of a catastrophe occurring at Fort Worth.
Could you tell me a little bit more about this potential catastrophe?
Mr. MOTLEY. Well, I think there is concern, Dr. Paul, that even though nothing like this has happened in the history of currency production at this point, I think there is a concern relative to the general security that we have experienced here in the United States over the last 5 to 8 years or so with regard to people potentially blowing up buildings or causing catastrophic things happening to things in the United States Government. And I think that is the concern there.
Page 36 PREV PAGE TOP OF DOC
Dr. PAUL. It sounded so specific. So, you are saying this is just generic and general, because you said, ''. . . in view of the possibility''?
Mr. MOTLEY. As I understand it.
Dr. PAUL. There is nothing more specific than that?
Mr. MOTLEY. No, sir.
Dr. PAUL. OK. On page 12, I wanted to ask a little bit about the Susan B. Anthony dollar. You say that the inventories are decreasing. For years we just had millions of those sitting around and stored. What caused the increased demand for the Susan B. Anthony dollar?
Mr. MOTLEY. Well, I think part of it is because the vending machine companies have adapted many of those machines now to accept those Susan B. Anthonys, and many transit companies, and I couldn't really suggest how many, but have started to use those quite extensively, almost as a token type, for gaining access to the transit system.
Dr. PAUL. People are using them?
Mr. MOTLEY. Yes, they are.
Dr. PAUL. You made the suggestion maybe changing color. That sounds like a fairly good suggestion. If the market has adapted after a few years to our mistakes, maybe by adding an alloy, changing that and making it a little bit more distinguishable, would this not be a better way to do it economically?
Page 37 PREV PAGE TOP OF DOC
Mr. MOTLEY. Well, we certainly think that it might be an approach.
If you are talkingI am not exactly sure where you are coming from, Dr. Paul, and economically whether or not the coin would be cheaper.
Dr. PAUL. It would cost less than to make a brand new coin.
Mr. MOTLEY. It would certainly cost less than to make a brand new coin.
Dr. PAUL. Because then if you make a brand new coin a different size or shape, then you have the problem of offending the vendors who have now finally adapted to our mistakes.
Mr. MOTLEY. That is correct. I think the support from the vendors would move very quickly to the negative side if you decided to change the size or the shape of the coin.
Dr. PAUL. The only other point I wanted to make, since my colleague brought up the subject of the penny, not that we are dealing with the value of money here, we are dealing with the production of money. It is interesting to note that in my lifetime a 10-cent piece is now worth about 1 penny. So, at the rate we are depreciating and devaluating our money, really, the nickel and the penny could be literally removed from the marketplace because of what we do with the value of our money.
Page 38 PREV PAGE TOP OF DOC
So, I think our problem that we are dealing with here is just a symptom of something that we do elsewhere, and that is that we ruin the value of our money, and here we deal with, what do we do with the penny that has no value? It used to be that most of us would stoop over and pick up a penny. Soon we won't even bother picking up a nickel, and at the rate we are going, we probably won't even stoop over to pick up a dime. And I guess some people don't even bother with a dime anymore.
But that, again, is not the subject of the hearings, but I just wanted to make those comments.
Mr. MOTLEY. OK.
Dr. PAUL. Thank you.
Chairman CASTLE. Actually, those are interesting comments. The only coin that has escaped attention today at all is the 50-cent piece, as far as I can see at this point.
Mr. KENNEDY. Which is a great piece of silver. At least, one of them is.
Chairman CASTLE. Mr. Kennedy might think that.
We will give him his due. We will call on him next.
Page 39 PREV PAGE TOP OF DOC
Mr. KENNEDY. Thank you very much. Thank you very much.
Well, this particular Member of this panel happens to have a favor toward a particular 50-cent piece.
But in any event, Mr. Chairman, I apologize because there is a hearing on homelessness that is taking place right at the same time which I am the Ranking Member on. So, I have to sort of jump between both hearings. But this is an issue that, as you know, Mr. Chairman, when I used to chair the Coinage Committee a couple of years ago, a lot of these issues were around then and probably will be around for several years to come.
But I do think that with regard to the $1 coin issue, this is one of those concerns that we see more interests that come out of the woodwork when this bill comes forward. You know, I used to think that every vending machine owner, every transportation system in the country, anybody that can go from a 75-cent charge to a $1 charge because the Government got rid of a $1 bill and ended up with a $1 coin, was somehow or another incentivized to support the $1 coin.
I know that we have these savings that appear on paper, and I really want to try to get to that a little bit. It seems to me that ultimately what you are talking about here is whether or not the $1 coin is going to be accepted by the American people.
Now, there is one school of thought that says that the way you do that is, you just eliminate the $1 bill and you force the $1 coin upon the American people. I mean, that might be an option that some people would like to pursue.
Page 40 PREV PAGE TOP OF DOC
The other question is whether or not revamping the Susan B. Anthony coin or something like that can make it more acceptable to the American people? And I wonderand I apologize if you addressed that issue specifically, but I think that the real question here isI mean, I used to believe very strongly that for the United States Government to set about a policy where we, as a nation, say we are going to eliminate the basis of currency that is utilized throughout the world, which I think establishes the United States dollar as the sort of fundamental currency that is accepted worldwide, when you have seen the rise in the value of the yen, you see the rise in the value of the deutsche mark, you see other currencies that have gained so much strength, I worry very much that we end up in the pursuit of what appears to be some sort of imaginary budgetary savings, you know, on paper, that, in the pursuit of that, in order to try to justify being able to spend more money in other areas of the Government, that we end up creating an enormous risk in terms of how the rest of the world ends up viewing the value of the dollar.
If we send a signal, as a Government, that we don't have faith in our own currency by saying that we want to pull that paper dollarwhich is really, I think, one of the great symbols of the United States, of the democracy and of the strength of capitalism that it portraysI worry that we end up in a situation where we are really opening up a Pandora's box.
And while we have, as I say, some opportunity for some paper savings based on some studies that say that because $1 bills end up, you know, deteriorating and a $1 coin is not going to deteriorate, that therefore that becomes the entire justification for eliminating the basic currency of the country, it seems to me it is not even close to a reasonable call or a reasonable judgment. I mean, I think this is a crazy thing to do.
Page 41 PREV PAGE TOP OF DOC
But I would be interested in hearing your reaction.
Mr. MOTLEY. Well, let me just comment first, Mr. Kennedy, that I don't believe these are sort of false savings that have been generated. Our studies have suggested that there could be true savings in this. In addition to that, I think it is important to note, based on the study that we did in Canada, that a lot of times these $1 coinsI mean, they might not be successful. They might have the same problems that the Susan B. Anthony did, if you don't have an education program to demonstrate to the public
Mr. KENNEDY. But, Mr. Motley, what I am asking you, though, the savings that you are generating
Mr. MOTLEY. Yes, sir.
Mr. KENNEDY.Are they done on a voluntary basis where the American people voluntarily accept the coin? Or are you talking about those savings being generated by you forcing these coins upon the American people?
Mr. MOTLEY. No, I wouldn't suggest that they are forcing these coins on the people. I think these are economic decisions that the Congress, along with the Government, need to make.
Mr. KENNEDY. Well, wait a second. OK. So, not you, but you are saying that we should force these on the American people? In other words, your study is based on the idea that we eliminate the paper dollar?
Page 42 PREV PAGE TOP OF DOC
Mr. MOTLEY. Our study would suggest that the paper dollar be eliminated, much like it has been done in other countries.
Mr. KENNEDY. Yes, well, thanks. Why don't you run on that platform?
Mr. MOTLEY. Thank you, Mr. Kennedy.
Mr. BALDWIN. Could I just add something? We looked at this a number of times, and the savings we estimated are the savings to the Government, assuming that the Government forces the public to use a coin by withdrawing the $1 note.
But we also noted that in Canada when they forced their looney on the public that no members
Mr. KENNEDY. Their what?
Mr. BALDWIN. Their ''looney.'' That is what they refer to their one dollar coin as.
Mr. KENNEDY. OK. I see.
Mr. BALDWIN. But no members of Parliament, you know, were defeated because of this. I mean, the press has some fun with this for a couple of months, and it kind of blows over, and people get over it and get on with their lives. So, it is a concern, I know, but it is not something that, if a decision is made to do it, that it cannot be done.
Page 43 PREV PAGE TOP OF DOC
Mr. KENNEDY. Thank you.
Mr. FLAKE. But they weren't running for governor.
Chairman CASTLE. Let me reiterate for everybody that we are not at this hearing considering a proposal to eliminate the $1 coin or even to eliminate the penny, but these areas have been discussed. We have asked for reports on them. They are just matters of financial interest to the country.
There are proposals in Congress, but that is not the intent of this hearing. We are not about to mark up a $1 coin bill or eliminate the $1 bill, or anything of that nature here at this hearing. But, I think these are worthwhile discussions and that is whatthis is a pretty far-ranging hearing we are having on virtually all coinage and currency at this point.
Let me turn to Mr. Manzullo.
Mr. MANZULLO. Thank you. I wanted to follow up on Mr. Lucas' question on the elimination of the penny as being inflationary. Don't you think that the vendor would go up and not down in terms of rounding off?
Mr. MOTLEY. Well, Mr. Manzullo, the reaction that we had in the particular study that we did is, there was a concern at the public's level that that might happen. Whether or not that would happen is certainly undeterminable at this point in time, but there is a possibility that that could take place.
Page 44 PREV PAGE TOP OF DOC
However, I think you have to consider some of the other things that would also be involved. Based on our analysis, there could be annual savings from elimination of the penny at this point.
Mr. MANZULLO. Savings to whom?
Mr. MOTLEY. It would be a savings to the Government as a result ofwell, about $9 million a year as a result of eliminating the production of the penny.
Mr. MANZULLO. In other words, if we eliminate all currency and all $1 bills and we would just put codes on our foreheads, we could save billions?
Mr. MOTLEY. No, I wouldn't suggest that.
Mr. MANZULLO. We won't have to worry about any tragedies going on. Where is itwas that in Bentsen's District? Where is that place? Where is it, Fort Worth? Fort Worth?
Mr. MOTLEY. Actually, I think it is important to note that, you know, we make money on most of the currency that is produced. So, if you look at what other countries have done, generally, when their lower denomination coins started to cost more than they were receiving from them, in what they call ''seigniorage,'' the difference between the cost of production and its face value
Page 45 PREV PAGE TOP OF DOC Mr. MANZULLO. In other words, it cost more to produce a penny than the actual value of the penny?
Mr. MOTLEY. That is correct, when distribution costs are included.
Mr. MANZULLO. Then
Mr. MOTLEY. Now, that is our analysis. We have a difference of opinion with the Mint on that.
Mr. MANZULLO. But, even if it costs more to produce that than its face value, it would still end up in a lot more loss to the consumer because of going up to the next nickel?
Mr. MOTLEY. Well, it is really undetermined what direction that might go.
Mr. MANZULLO. Oh, I mean, come on, please. I know GAO is independent and everything.
Mr. MOTLEY. Sure.
Mr. MANZULLO. We are adults here. You are going to chargeI mean, everything is $99.99. Is that going to change advertising? You know, it is now $100 because you can't buy it in pennies, provided that there is no income or sales tax on it. But, if the grocery store bill comes out to $39.12, do you really think they are going to charge $39.10? You can give an opinion on that.
Page 46 PREV PAGE TOP OF DOC
Mr. MOTLEY. Yes. Yes, sir.
Mr. BALDWIN. When we looked at this, Mr. Manzullo, we assumed that maybe Congress would legislate how rounding would be done.
Mr. MANZULLO. Oh, that is wonderful.
Mr. BALDWIN. There was a proposal before that if things ended in a cash transaction in either 1, 2, 6, or 7 cents, the vendor would be required to round down. If it was 3, 4, 8, or 9, we would round it up.
Mr. MANZULLO. So, then the vendor ends up being forced to do it. That is like a forced kiss.
Mr. BALDWIN. I guess.
Mr. MANZULLO. I mean, either you are paying the value of something or you aren't.
Mr. BALDWIN. And it would only apply to cash transactions. Credit cards and check payments, things like this, the rounding wouldn't apply.
Mr. MANZULLO. So, therefore, if you pay by credit card or check, you can actually buy something cheaper than if you buy by currency?
Page 47 PREV PAGE TOP OF DOC
Mr. BALDWIN. Possibly, by 2 cents, I guess.
Mr. MANZULLO. Is there a reason for that? I mean, a lot of people don't have checking accounts and a lot of people don't have cashing accounts. I am thinking about the people of the inner city
Mr. BALDWIN. That is right.
Mr. MANZULLO.That pay by coin, by currency.
Mr. BALDWIN. I think when you lookas we point out in our testimony, that 15 percent of the public do not have checking accounts.
Mr. MANZULLO. So, there is no move now to eliminate the penny; is that right?
Mr. BALDWIN. I don't think there are any proposals.
Mr. MOTLEY. There are no proposals currently.
Mr. MANZULLO. I wondered why I asked the question. But you asked it. It was a follow-up.
Mr. LUCAS. No; actually, Mr. Paul asked that.
Page 48 PREV PAGE TOP OF DOC
Mr. MANZULLO. Oh, all right.
Mr. LUCAS. Would the gentleman yield for a moment?
Mr. MANZULLO. Yes, but I want to say something. Dr. Paul said he wouldn't stoop over to pick up a penny or a dime. This guy is a libertarian. You would stoop over to pick up something that looked like a penny.
Mr. LUCAS. If the gentleman would yield, it is worth noting, though, that over time changes have occurred in our Nation's coinage and in our paper currency. And I assume that the folks in the Mint will verify that in a moment, but in the beginning the 1-cent piece was a big old giant copper coin. About the time of the Civil War, they shrank it down to where it is at. Things do happen. Things do change.
And I appreciate the gentleman yielding.
Mr. MANZULLO. Thank you. I yield back the balance of my time.
Chairman CASTLE. Thank you.
As I stated at the beginning of this, we are going to break in 5 minutes precisely for those who wish, including the Ranking Member and myself, to go over to the Treasury for the Jackie Robinson coin. So, we have about 5 minutes.
Page 49 PREV PAGE TOP OF DOC What I would like to do in that 5 minutes is to see if other Membersand I have one questionsee if other Members have questions so we can wrap this up in the next 5 minutes, and panel one will be free to go, and we will be done with panel one.
And I apologize to the Treasurer and Mr. Diehl, but they will be panel two. We will start with them right at noon, unless there is a vote going on at that time, and then go on thereafter to the other members.
So, let me ask sort of a hypothetical question. But I would be interested in your opinion on this. And I am sort of thinking about where we should be going, and I am not sure I have my facts quite right, but I know we are running down on the Susan B. Anthony; I hear something like 36 months or whatever.
But even if we keep the $1 bill, which I assume we are going to do in this country, would a color change and an imprint change, perhaps something different than the present Susan B. Anthony coin, but with the same specifications in terms of usage and machines and so forth, in your judgment, increase the acceptability and usage of the $1 coin?
And if that is true, how soon would we have to do that? In other words, to get it authorized, to get it planned and to get it executed? It seems to me we are beginning to go up against a time when that would have to start to go into place because we are not at the present time, as I understand it, making Susan B. Anthony coins. We haven't stockpiled them. We are starting to run out.
Mr. MOTLEY. That is true.
Page 50 PREV PAGE TOP OF DOC
Chairman CASTLE. Let me ask the same question of Mr. Diehl, but I would be interested in your answer, too.
Mr. MOTLEY. I think if you changed the design and changed the color of it, based on the estimates that we have had, it will probably take about a 30-month period. And if you have about a 34-, 36-month supply now, you need to put those kinds of plans in action today.
It is very difficult to say what the success of that might be over the Susan B. Anthony if you kept the $1 bill in place, but it is likely that it would be more acceptable to the public, because one of the concerns that hit with the Susan B. Anthony is, it wasn't very distinctive in relationship to the quarter.
Chairman CASTLE. Thank you.
Does anyone else have a brief question?
Mr. FLAKE. Just to follow up on that, and that is, could it be that a part of the problem of marketing the Susan B. Anthony has really nothing to do with the looks of it, but the fact is that it is cumbersome and people generally don't like carrying a lot of coins around in the first place?
Page 51 PREV PAGE TOP OF DOC You take $10 bills, you fold them over, you put them in your pocket, you have no excessive weight. You take 10 Susan B. Anthony coins, put them in your pocket with 50-cent pieces and quarters, you have another problem.
So, how do we know that just simply changing the color or changing some combination thereof is going to make a difference? It could be that the problem of marketing it is, it is a pain in the butt to have all of those coins in your pocket.
Mr. MOTLEY. Well, that certainly could be a problem, Mr. Flake, having all those coins.
Mr. FLAKE. Or a pain in the pocket, whatever.
Mr. MOTLEY. I think you probably might see a greater production of the $2 bill most likely as well, in concert with the introduction of a $1 coin. So, you may see people using the $2 bill more.
Mr. FLAKE. Which never got popular support, itself. I mean, the $2 bill. I have got one I have been carrying about 10 years because
Mr. MANZULLO. They use them at the racetrack.
Mr. FLAKE. They use them at the racetrack? Well, I am a preacher. I don't deal with racetracks. I didn't know about that.
Page 52 PREV PAGE TOP OF DOC I yield, Mr. Chairman.
Chairman CASTLE. Well, maybe Mr. Flake would join Mr. Paul in looking at the elimination of the penny and the nickel and the dime and get rid of all of these coins, and we can go to the dollar.
I think we will take this opportunity to go into our break. I do apologize. I would rather have continued this, but there is just no way to do it all. So, we will stand in recess until, hopefully, exactly 12:00 noon and resume here.
[Whereupon, at 10:45 a.m., the hearing was recessed, to reconvene at 12:00 noon.]
Chairman CASTLE. We will start to assume our positions for resuming the hearing. For those of you who were not able to make it, the coin ceremony in which the Secretary of the Treasury presented the first coins to Rachel Robinson, Jackie Robinson's widow, and the Foundation for Jackie Robinson, was a wonderful ceremony that we had a chance to participate in. It was a little warm out there, but it was a very nice ceremony. We are proud to have been Members of the subcommittee, to have been a part of that.
We are moving things around here a little bit in terms of the panels. As things are moving along quickly on the floor, we want to make sure we give everybody an equal opportunity. Originally, there was some discussion, I think Mr. Munoz goes separately on a separate panel. He is now going to be a part of this panel, and he will be first after I introduce the others. He is the Assistant Secretary for Management of the Department of the Treasury.
Mr. Allison is with us, who is the Assistant to the Board of Governors of the Federal Reserve System, but he is an ''expert witness'' only, which is a nice category to be in, I guess, and he will not actually testify, but will be available to answer any questions that any of us may have.
Page 53 PREV PAGE TOP OF DOC
We are very privileged to have Mary Ellen Withrow with us, who is, of course, the Treasurer of the United States, and she will also be testifying.
Phil Diehl is here, who is the Director of the United States Mint, and will be testifying, as will Larry Rolufs, who is the Director of the Bureau of Engraving and Printing.
Hopefully we have here gathered those people who know the most about currency in the United States of America today and will hopefully share that information with us.
So, we will go, hopefully keeping everybody within something relatively close to 5 minutes. Because of the break here, I am not sure who may return. I think you are used to Members of Congress wandering in and out, and we will just do that as it comes along.
So, with that, let us turn to Mr. Munoz for his testimony.
STATEMENT OF HON. GEORGE MUNOZ, ASSISTANT SECRETARY FOR MANAGEMENT AND CHIEF FINANCIAL OFFICER, DEPARTMENT OF THE TREASURY
Mr. MUNOZ. Mr. Chairman, thank you so much. I am pleased to be here today, along with the Treasurer and the Directors of the Bureau of Engraving and Printing and the U.S. Mint, to talk about the production of the Nation's money and Treasury's role in directing and overseeing those efforts.
Page 54 PREV PAGE TOP OF DOC
The production, integrity, use and security of our money is central to Treasury's mission and responsibilities. Because Treasury collects most of the revenues for the Federal Government, and because it is responsible for paying most of the obligations of the Federal Government, it is always looking for ways to reduce the cost of these transactions. Yet we know that a substantial portion of the private sector still requires the use of currency and coins, especially because of their integrity, acceptability and ease of use. For that reason, various Treasury policy officials and offices take an interest in, and are responsible for, advising the Secretary on matters having a direct or indirect impact on our use of money.
With respect to cost and production of our currency and coins, the Secretary of the Treasury has delegated responsibilities of oversight of the BEP and the Mint to my office along with the Office of the Treasurer. The Advanced Counterfeit Deterrence Steering Committee, chaired by the Under Secretary for Domestic Finance, is taking the lead on the currency redesign project.
Matters concerning the production and mix of currency and coinage are also under the purview of other central Treasury offices, including Economic Policy, Domestic Finance, Office of Enforcement, and the Treasury's Electronic Money Task Force headed by the Comptroller of the Currency. Because of the variety of issues associated with our coins and currency, such as production, integrity, security, public acceptance and usage, as well as impact on commerce, Secretary Rubin relies on various economic and enforcement offices for advice on the use and alternatives to our coins and currency.
You will hear today from the Bureau heads, as well as the Treasurer, on many details of their operations. But, Mr. Chairman, one of the points I want to make clear, based on what I heard from the GAO's testimony this morning, is that while the GAO was looking at the Bureaus, and in particular the Office of the Treasurer and my office, to determine if there is some central decisionmaking in terms of the appropriate mix of coinage and currency for the future, given the context of electronic money, credit card use and other changes in our economy, they seem to imply that there is no central point for strategic planning. They specifically pointed out that a late 1980 study had suggested or recommended that the Office of the Treasurer have a planning office, if you will, and that that did not take place.
Page 55 PREV PAGE TOP OF DOC
In fact, something better has taken place. All Secretaries of the Treasury, not only Secretary Rubin, have recognized that our currency is so central to our economy that anything that we do with it, such as eliminating the penny, for example, or having currency in denominations greater than $100, has impact that has to be taken into account. As you may know, the mix of currencies beyond $100 was part of Treasury's history, but we need to take into account impacts on the economy, impacts on its security, impacts on its integrity, and the like.
For that reason, Secretary Rubin looks to the various offices throughout Treasury, from Enforcement to those that are here before you today. And I can assure you that the discussions of the proper mix of currency are discussed in various settings, including in our Electronic Money Task Force that was developed by Secretary Rubin and headed by Eugene Ludwig, as the Comptroller of the Currency.
I would like to specifically mention some of the areas in which our office exercises oversight of these two Bureaus, the Mint and BEP.
First, and very important, is our budget review. My office is responsible for reviewing the Bureau budgets to ensure that they are in line with the President's priorities and submitting those budgets to the appropriate oversight bodies. Both Bureaus have revolving funds, which places a greater responsibility at our office level to make sure that the budgets are being prepared appropriately and that the purchaser of their products, primarily the Federal Reserve, is content with the accounting done for the cost of those products.
And with respect to the CFO activities, because I am the Treasury CFO, I meet monthly with the Bureau CFOs and am responsible for the integrity of the Bureaus' financial statements. I am proud to say that these two Bureaus have clean audit opinions, and that is quite an accomplishment. At the time when the CFO Act was passed and required that all Federal agencies needed to go through the CFO process, these two Bureaus are there, the BEP being first, and we are very proud of that. When Philip Diehl took over leadership of the Mint, and the Treasurer and I were appointed to our current positions, we found that the Mint needed some changes in its method of accounting, and its financial reporting. Fortunately, in a very short period of time we have turned that around, and the Mint now has a clean audit opinion and is in the process of making other changes.
Page 56 PREV PAGE TOP OF DOC
And then there is overall management that my office is concerned with. We address issues of personnel, procurement, security and similar matters at these two Bureaus.
I would like to point out one example of our oversight, the year 2000 computer conversion project that all of Government and all of the private sector is dealing with. This is an item that, while we allow the planning and the implementation of those changes to occur at the Bureau level, we have frequent meetings and reporting requirements. Any matters that require the attention of the Secretary go directly to Secretary Rubin.
In conclusion, let me just assure this panel that we are always looking for forums to discuss the issues that we take seriously, such as the mixture of our currency and coin, and we welcome this subcommittee's interest in our operations. We think that our operations work well, as evidenced by the fact that our currency and coins are indisputably of the highest integrity. We do not see the counterfeiting that takes place in many other currencies. Our currency is slow to change, but very much accepted throughout the world, because of the way things operate in both of these Bureaus.
I would be happy to answer any questions you might have at the conclusion of the other presenters.
Chairman CASTLE. Thank you, Mr. Munoz. We will go on with the other presenters and come back for questions.
We will turn next to our United States Treasurer, Mary Ellen Withrow.
Page 57 PREV PAGE TOP OF DOC
STATEMENT OF HON. MARY ELLEN WITHROW, U.S. TREASURER, DEPARTMENT OF THE TREASURY
Ms. WITHROW. Thank you, Mr. Chairman. I am very happy to be here along with Mr. Munoz and with both of the Directors of the Bureau of Engraving and Printing and the U.S. Mint, along with Ted Allison, from the Federal Reserve Board, to talk about the production of our Nation's money and the Department's role in directing and overseeing these efforts.
In my capacity as Treasurer of the United States, I am responsible for the oversight of the BEP and the Mint. And as you know, the BEP and the Mint manufacture products that are used by people worldwide. Most of us carry some amount of coin and currency with us every day. Two-thirds of our currency circulates outside the United States. The stamps that the BEP produces are used by citizens daily. And the Mint's commemorative products are marketed worldwide.
For that reason, Treasury takes very seriously its role in producing the Nation's coinage and currency.
As Treasurer, I observe the effectiveness of our policies and their effects on the public and commerce through my daily interactions. In the formulation of policy, my office works closely with the Mint, BEP, the Office of the Assistant Secretary for Management and CFO, other departmental offices and the Federal Reserve Banks.
As part of my oversight role, I meet with the Directors on a weekly basis, and we talk about their programs and the problems that they encounter. I interact with the management and staff of the BEP and the Mint during site visits, programs, meetings and other events. I provide guidance on policy decisions, such as currency redesign, and the implementation of those policies. These interactions allow me to advise the Secretary and Deputy Secretary about the challenges and issues involved with the production of money.
Page 58 PREV PAGE TOP OF DOC
I work in conjunction with the Office of the Assistant Secretary for Management and CFO, which promotes the efficiency and effectiveness of coinage and currency production. As part of its department-wide mission to provide oversight and assistance, I work with management in the areas of strategic planning, organizational improvement, budgeting, accounting and internal controls, personnel policy, security, property management and information systems for the Mint and BEP.
My oversight role also requires me to work closely with the Office of Domestic Finance to maintain the stability of our currency and ensure our ability to support the Nation's system of commerce.
Additionally, I work with Treasury policy offices on a number of joint initiatives, such as the Advanced Counterfeit Deterrence Committee and the E-Money Task Force.
To produce coins and currency in great quantity and to secure these products until they are delivered is a very complicated task. The employees of the BEP and the Mint do a very good job. The customer feedback we receive is quite encouraging. But there is always room for improvement, and there is always a benefit to taking time to reexamine and reflect on structures, systems and overall policies. The oversight of this subcommittee is an important part of that process, and we welcome the opportunity to respond to this subcommittee's questions on a wide range of BEP and Mint issues. We know the importance of reexamining and reinventing.
I am proud of the work of Mint and BEP. Their missions are challenging, and they are taking a forward-looking approach. BEP and the Mint have stepped up to the plate to pilot reinvention and GPRA initiatives, and have fared well in these efforts. Their Directors are aggressive in their strategic planning initiatives and want to make sure that they have the tools and resources available to most efficiently meet the demands of their customers. The implementation of the Public Enterprise Fund and the waiver of procurement rules and regulations in 1996 for the Mint have allowed for more streamlined, businesslike investments. In 1996, BEP introduced several new products, including the redesigned $100 note to provide additional counterfeit deterrence, and pressure-sensitive postage stamps to meet customer demand.
Page 59 PREV PAGE TOP OF DOC
Mr. Chairman, we believe that maintaining the confidence of the general public is very important to our success. That is why we factor in the public's attitudes and concerns when we are considering changes to our programs or products. We have observed that if there is a compelling reason or need for a change in the money, and that reason is well articulated, then the public is more likely to accept the change. For example, the objective of our currency redesign initiative is to make counterfeiting more difficult by staying ahead of changes in reproduction and computer technology. A recent article in The Washington Post cites the success of the new $100 bill, which is credited, in part, with the sharp decline in the number of counterfeit bills. Additionally, we are providing a feature on the redesigned $50 note to make it easier to use for the visually impaired. We were pleased with the worldwide acceptance of the redesigned $100 note, and we are confident that the $50 note will meet with similar success when it is released in the fall of this year.
The Department, working together with BEP and the Mint, has undertaken many initiatives to make the management of the production of money more efficient and effective. We continue to stay abreast of new developments, such as electronic money and reproduction and computer technology, and the challenges and opportunities that they represent.
However, Treasury needs to move forward cautiously, making sure to weigh cost savings measures with their impact on the public, our customers. As I stated in the beginning, our products are used worldwide and consequently any changes to those products, or their availability, can have a profound impact and implications for our citizens, as well as for others around the world.
Page 60 PREV PAGE TOP OF DOC As Treasurer, I am particularly qualified to fulfill my oversight role. I am the first Treasurer in our Nation's history to have served at all three levels of Government: local, State and Federal. In November 1976, I was elected County Treasurer in Marion, Ohio, where I served for 6 years. In November of 1982, I was elected by the people of the State of Ohio as the Treasurer of that State. I served in that capacity for 12 years. Finally, in March of 1994, I was honored to be appointed as Treasurer of the United States. That means that for a total of 21 years, I have had responsibility for taking care of the public's money.
And I would like to thank the subcommittee and you, Mr. Chairman, for this opportunity to appear before you today, and now I would be pleased to respond to any questions that you may have.
Chairman CASTLE. Thank you very much, Ms. Withrow. We will go through the other witnesses and see if any questions fall your way. There are a lot of panelists to share questions with, however.
I guess we will turn to Mr. Rolufs next. Or Mr. Diehl, if you guys want to flip a coin. I really have no preference.
STATEMENT OF HON. PHILIP N. DIEHL, DIRECTOR, UNITED STATES MINT
Mr. DIEHL. I will be happy to go next.
Thank you, Mr. Chairman. I welcome the opportunity to report on the progress the Mint has made in serving the American people, American coin collectors and the mandates of Congress. I express both fact and gratitude in saying this subcommittee has made many of our accomplishments possible because you, Mr. Chairman, and Mr. Flake and your colleagues have understood our challenges and shared our sense of purpose.
Page 61 PREV PAGE TOP OF DOC
Over the past 2 years, the Mint has launched a progressive set of reforms and innovations. In the interest of brevity, I will provide only a few highlights.
First, in customer service, we now answer customers' calls in seconds when it used to take minutes. We answer mail in days when it used to take weeks. We fill orders for our products in days when it used to take months. And for 2 years in a row, we have earned the highest customer satisfaction ratings ever given to a Government agency.
Second, in financial management, one of my highest priorities, we have redefined our allocation of cost; we have begun to bring needed systems on-line and we've established standards of process control which were long overdue. Four years ago, the Mint was unable to obtain a clean independent audit opinion on our financial statements under the CFO Act mandates passed by Congress, but for the past 3 years we have earned clean audit opinions 2 years ahead of schedule.
Third, our human resources achievements are far-reaching. We have taken our award-winning partnership with American Federation of Government Employees to a higher level by doubling the Mint's commitment to training our employees. We have recast our performance assessment and reward systems. We are aggressively instituting workplace health and safety improvements, and we are offering every employee of the Mint a personal career development plan.
While doing all of this, and launching a multimillion-dollar capital investment program, upgrading our plants, closing one facility and relocating two others, we have made a few coins; almost 60 billion over the last 3 years alone, including back-to-back record years for circulating coinage.
Page 62 PREV PAGE TOP OF DOC
Those achievements, Mr. Chairman, are only a beginning. We have submitted to Congress for review a strategic plan, now in its third iteration, that will guide our course toward 2002. By the way, GAO and our appropriators have both cited our strategic plan as one of the best in the Government.
To advance our three missions, we have committed ourselves to 10 goals with 17 stated objectives, 72 targeted tasks and 33 critical measures to chart our progress.
Although we have many successes to highlight, Mr. Chairman, we also have some programs that have fallen short of both our expectations and our efforts. Such has been the case with some recent commemorative coin programs, most notably the 19951996 Olympic program. You know as well as anyone in Congress about this program, Mr. Chairman. You know the Mint and the collecting community advised strongly against this huge long-running program when it was proposed about 6 years ago; yet when it became law, we laid our misgivings aside and put our best effort into the success of this program. We knew that traditional coin collectors could not absorb such a large program, so we mounted a far-reaching public sales venture as mandated by law, and we had considerable initial success.
Our retail and banking distribution network was, by far, the most extensive ever developed for any Olympic coin program in the world, a ''Who's Who'' of American retailers and banks, with some 5,000 points of sale nationwide. To counterbalance the weakness in our core market and financial risks related to a national retail sales campaign, we launched the most extensive and successful international sales campaign in our history. We also moved to reduce mintages for this program, and under your leadership, Mr. Chairman, Congress enacted the first legislation reducing mintages of a commemorative program.
Page 63 PREV PAGE TOP OF DOC
Even so, encouraging early victories weren't enough to overcome a dismal domestic market. Early in 1996, fully 6 months before the opening of the Summer Games, we saw the trend was irreversible. We shut down production of Olympic coins, and we brought the same vigorous attention we had brought to creating sales to trimming costs and reducing financial risks.
On the positive side, these efforts produced more than $24 million for America's athletes in the Atlanta Games, plus almost $5 million for the American people from sales by the Mint of excess silver from Government stockpiles. And we did so while covering all direct program costs of the Olympic program and $13.7 million in assigned overhead, fixed overhead, expenses of the Mint.
As of March 31, 1997, however, the Olympic program had not covered about $2.8 million in additional assigned overhead expense, based on cost allocation methods in place when the program started and which we since have revised. We will be offering Olympic coins in a special late summer mailing, highlighting the extraordinary low mintages on several of these Olympic designs, and we are currently exploring a couple of opportunities for significant bulk sales that are also likely to move some of the coins we have on hand.
In summary, Mr. Chairman, the Olympic program is Exhibit A in the case for restraint in authorizing commemorative programs and for reform of how we enact and administer these programs. I have preached those needed reforms since my confirmation hearing. This subcommittee has been receptive to those sermons and enacted reform legislation last year. As long as we are able to resist pressures to enact multiple annual programs, and especially large ones like the 19951996 Olympic program, I am optimistic that the commemorative market will recover from the excesses of the past decade.
Page 64 PREV PAGE TOP OF DOC
I would like to submit the rest of my testimony for the record, Mr. Chairman, and when the time is appropriate, I don't know if this is the appropriate time or whether you want to wait until we have completed all the statements, there are six points of fact that I want to take issue with in GAO's testimony, issues of fact and conclusion that I think we need to correct for the record.
Chairman CASTLE. Let's do that now so we don't take time from any of the questioning time periods of any of us up here.
Mr. DIEHL. OK.
Chairman CASTLE. If you can do it in some rapid order, please.
Mr. DIEHL. I will do it very quickly.
Fact number one: the estimate for the seigniorage profits that could be expected from the circulating quarters program is $5 billion. That represents incremental additional seigniorage, not the seigniorage for all quarters produced in that time period, as GAO stated.
Chairman CASTLE. And they had indicated all quarters, as I recall.
Mr. DIEHL. They indicated all quarters, yes.
Page 65 PREV PAGE TOP OF DOC
Fact number two: the cost of producing the penny is less than a penny. I know this isas GAO suggested, this is an area of dispute between us but, of course, we think our numbers are right. It is considerably less than a penny.
And as you know, Mr. Chairman, when this issue came up last year, we submitted a letter for the record of that hearing in which we substantiated the facts that there was some double counting of costs by GAO that led to their conclusion that the cost of the penny is more than a penny. So, in fact, the elimination of the penny will lead to a small net reduction in revenue for the Treasury, not a small net increase in revenue.
Mr. FLAKE. Is there an approximate cost that you can give us?
Mr. DIEHL. It is about eight-tenths of a cent.
Mr. FLAKE. Eight-tenths of a cent?
Mr. DIEHL. Eight-tenths of a cent, and it has been at that level for several years, averaging around that level.
The third fact: the United States Mint's chief financial officer was cited by GAO in their written testimony and their verbal testimony, as saying that the additional potential Olympic loss is at least $3.6 million unless all of the coins we have on hand are sold. That is incorrect. What the chief financial officer has concluded, and what we have informed GAO, is that the maximum potential loss is $3.6 million if not one more coin is sold. That is one more coin after March 31, 1997.
Page 66 PREV PAGE TOP OF DOC
We think that is a highly unlikely outcome because there are substantial additional sales opportunities we are pursuing now. And that is not uncommon for Olympic programs that other countries have undertaken. Substantial sales often come in as late as 18 to 24 months after the games, so this is not an unusual situation.
Fourth: I believe that GAO has significantly overstated the weakness of the Mint's financial accounting system. GAO said in their written testimony and repeated it on the record this morning, that the Mint's financial accounting systems have been subject to significant criticism. That is absolutely right, and it was well deserved criticism. But that criticism is, for the most part, about 3 years old. That was before the passage of legislation creating the revolving fund that we now operate under, and also before we received a clean audit opinion 3 years ago under the CFO Act.
Our financial records are difficult to maintain, and we recognize that, and we are working very diligently to fix it. It is a very high priority under our strategic plan. But our financial records are reliable. The numbers are reliable, and we could not have received the clean audit opinion from our outside auditors if those numbers were not reliable.
Fifth: there is an implication in the GAO testimony related to the $18 million difference between the allegation of losses, as high as $25 million, and this potential of $6.4 million total loss as a worst case scenario. In other words, there is an $18 million difference, which GAO implies there is some doubt about. In fact, there is no doubt about that $18 million. There is no evidence that there is any substance to that potential $18 million additional loss.
Page 67 PREV PAGE TOP OF DOC
Chairman CASTLE. You are saying there will not be an $18 million additional loss?
Mr. DIEHL. Right, and there is no evidence that what we provided to GAO and what is in GAO's testimony provides no support for the claim that there is an additional potential $18 million loss.
In fact, the GAO testimony says half of that could be from Olympic packaging. The figures we provided to GAO and that GAO has closely reviewed, show that there is, at most, an additional $363,000 in additional packaging loss, not $9 million.
Mr. FLAKE. Before you leave that
Mr. DIEHL. Yes.
Mr. FLAKE.$18 million is a huge number.
Mr. DIEHL. It sure is.
Mr. FLAKE. That is phenomenal. For that to be mere implication and based on packaging, it would seem to me, that is a difficult thing to swallow if it is categorized only in packaging. Are there other issues here that are not defined within the scope of packaging, or are there other things that would make up anywhere near that?
Page 68 PREV PAGE TOP OF DOC
I mean, there is a big difference between $3.6 and $18.
Mr. DIEHL. In fact, the difference is between $3.6 and $25 million, and that difference is that $18 million. And what we are saying is that there is no substance to the $18 million allegation whatsoever, period. In other words, the maximum potential loss that is documented in our information and in the GAO study, is $6.4 million, not $25 million. And that $6.4 million loss, we think, is an unlikely outcome because of the assumptions related to it; that is, that no more coins would be sold.
Mr. FLAKE. We will come back to the question period and deal with that.
Chairman CASTLE. I want to come back to that because Mr. Barr is here momentarily and has to leave. So, what we are going to do is go through Mr. Rolufs' testimony, and then we are going to let him, with unanimous consent of other Members
Mr. FLAKE. Of course.
Chairman CASTLE. Go first so he can go about his other business.
STATEMENT OF HON. LARRY E. ROLUFS, DIRECTOR, BUREAU OF ENGRAVING AND PRINTING
Page 69 PREV PAGE TOP OF DOC
Mr. ROLUFS. Mr. Chairman, Members of the subcommittee, I am pleased to appear before you today to report the progress of the Bureau of Engraving and Printing during fiscal year 1996 and to discuss our future plans. I prepared a comprehensive statement which I have submitted for the record, and my remarks now will highlight the major topics discussed in the statement.
As the Nation's securities manufacturing agency, BEP designs and produces United States currency, postage stamps, Treasury obligations and other U.S. securities. Additionally, BEP advises and assists Federal agencies in the design and production of other Government documents which, because of their innate value, require counterfeit deterrent characteristics. In this latter category, we have some 26 customers of the BEP.
Our mission at BEP is to securely and efficiently produce U.S. currency, postage stamps and other Government securities that satisfy the current and future needs of the American public and the Government agencies which serve them. Our primary goal is to provide complete customer satisfaction by providing quality products and responsive service. Achievement of this goal over the long term depends upon an integrated program of technology enhancement, human resource development and optimum facilities utilization.
We are striving to continually update the technology base to streamline processes, improve efficiency, control costs and have the capability to produce security products our customers will require in the future. Along with technology enhancement, a comprehensive employee development program and labor management partnerships have been put in place to prepare the work force for the challenges and opportunities of the 21st century. Finally, we must plan for the most effective use of our facilities to meet our customers' current and future product needs securely, efficiently and cost-effectively.
Page 70 PREV PAGE TOP OF DOC
As you know, GAO has performed a review of BEP to determine where we should be placed within the Government. First of all, we believe that a merger of the U.S. Mint and BEP is not practical. Within the core functions of the two agencies, the inherent differences in manufacturing and technology used precludes effective consolidation. Coin and currency manufacturing are technically different. Each requires its own facilities, production and processing equipment and skilled and specialized support. Additionally, limited precedent exists to combine minting and printing operations in either private industry or foreign countries. A merger could diffuse the special management focus within these particular industries that has evolved over the years. For BEP, some cost reduction in general and administrative expenses could result from combined office staffs, but since G&A is less than 10 percent of our total product cost, such savings would not be significant.
Also included in the GAO analysis is a proposal to place BEP under the Federal Reserve System. There are very unique issues associated with managing a manufacturing organization such as the Bureau of Engraving and Printing, with 19 bargaining units involving 16 different unions. I am unaware, however, of the Federal Reserve's official position on this issue.
With respect to contracting out activities, BEP continues to rely on contractors to provide a variety of goods and services to perform its mission in a cost-effective manner. Exclusive of acquiring normal supplies, materials and production equipment from external sources, the Bureau estimates that it will expend about $42 million during fiscal year 1997 to acquire various services from contractors. These contracted-for services are expected to generate cost savings of over $2 million and obviate the need to request over 400 additional FTEs.
Page 71 PREV PAGE TOP OF DOC Security is of paramount importance to the BEP. Security and internal control reviews were conducted by the U.S. Secret Service in fiscal year 1994 and the accounting firm of Peat Marwick in fiscal year 1995. The recommendations for improvements from these reviews are being aggressively pursued at BEP. In fact, to date 90 percent of the recommendations have been implemented. The Bureau has increased the size of the police force by one-third and the Volpe National Systems Center, U.S. Department of Transportation, is assisting us in the development, procurement and installation of a new integrated security system. The total capital cost to upgrade the Bureau's security system is estimated at $21 million. In addition, BEP has put in place a more rigorous personnel security background investigation program for all its employees.
With regard to thefts, all thefts that have occurred from 1994 to 1996 have resulted in the arrest and prosecution of all parties concerned, and the two thefts which have occurred this year are under active investigation. These thefts are an embarrassment to all of us at BEP and it is BEP's duty to ensure that U.S. currency and postage stamps are produced in the most secure manner possible.
That concludes my remarks, Mr. Chairman, and I will be happy to respond to questions from you and other Members of the subcommittee as you wish.
Chairman CASTLE. Thank you, Mr. Rolufs.
Since Mr. Allison is not testifying, we are now ready for questions, and I think we have unanimous consent to allow Mr. Barr to proceed for 5 minutes so he can return to his other active subcommittee this morning.
Page 72 PREV PAGE TOP OF DOC Mr. BARR. I appreciate that, Mr. Chairman and other Members of the subcommittee and the panel.
Mr. Rolufs, I just have a couple of questions for you, and this concernsI know that the Bureau of Engraving and Printing has been working in the development of a new substrate for the printing of currency. It is my understanding that this substrate is petroleum-based and, if successful, would last considerably longer than the current recycled cotton-based substrate that is now used in our currency.
The use of this new technology raises some questions that I know we will be addressing in the months ahead, but I would like to get your preliminary estimate on a couple of points related to this new technologypossible new technology.
What would be your best estimate as to the viability of this new product, this new substrate that is under consideration?
Mr. ROLUFS. Well, we have looked at a number of substrates, and I think we take our best guide from the nation of Australia, where they have converted all of their denominations to a new substrate, plastic-based substrate. We continue to watch that experiment, and it seems to be going well for them.
Mr. BARR. So, the experience of the folks Down Under looks pretty good?
Mr. ROLUFS. To date.
Page 73 PREV PAGE TOP OF DOC
Mr. BARR. OK. Assuming that this eventually does meet our specifications, the specifications for our Government, what is your best estimate as to how soon we would actually see production?
Mr. ROLUFS. We really haven't gotten that far yet. We are looking right now to complete the current redesign project, which will take us to about the year 2000.
I think there are so many variables in terms of the volume that the United States does, the kinds of equipment we have, how our inks will adhere, what the wear factors are, what the supply would look like in terms of our kind of volume. Supply in Australia is one thing. Supply in the U.S. is another. So, I think it is very much too early to try to project that. I think we need several pilot tests and then a projection after those.
Mr. BARR. When would you anticipate those pilot projects being ready?
Mr. ROLUFS. We are starting them now. We will be looking at them over the next 2 to 3 years.
Mr. BARR. It is also my understanding that a $1 note remains in circulation for about 18 months before it must be replaced. What sort of estimate do you have in mind with regard to how long the new bills, if we go to this new technology, would last?
Page 74 PREV PAGE TOP OF DOC Mr. ROLUFS. The Australian experience indicates about four times the life, but they still are in the preliminary stage and have not come to a hard conclusion on that. But their preliminary indications are about four times.
Mr. BARR. OK. As you all move through this process, will you be keeping us informed of how things look and, as you get more information on which to base some estimates, let us have those?
Mr. ROLUFS. Absolutely.
Mr. BARR. Thank you.
Thank you, Mr. Chairman.
Chairman CASTLE. Thank you, Mr. Barr.
Let me actually ask Mr. Allison a question or two, just to get him into the mix among other things. But I am curious about this, and maybe you may want to comment generally. I am going to ask you sort of a general question.
Is the Fed satisfied that U.S. money production is being managed with a view to the best long-term interests of the country? That is a very open-ended question, but you have sat through a lot of this today, and you have got a better sense of money than anybody in this country, and I would be interested in your views. Maybe Mr. Diehl would be kind enough to lend you his microphone.
Page 75 PREV PAGE TOP OF DOC
Mr. ALLISON. Thank you, Mr. Chairman.
The production of both currency and coin in the Bureau of Engraving and Printing and in the Mint, I think, is done well, is done efficiently, and has met our needs and met the public's needs quite well.
I would be surprised if there were major opportunities found to reduce costs or improve efficiency. We think we acquire currency at a very reasonable price in relationship to what we know other countries, other central banks, pay for their bank notes.
Chairman CASTLE. Let me interrupt you. I mean, my impression is, in hearing this testimony, that there are minor things that could be donerather than majorthat would tighten efficiencies, make the process less expensive, and so forth.
Mr. ALLISON. Right.
Chairman CASTLE. I don't know how to distinguish between major and minor.
Mr. ALLISON. Sure.
Chairman CASTLE. Is that sort of your impression as well?
Mr. ALLISON. Sure. I think in particular the GAO has identified an issue that we all need to work on, and that is planning for the $1 denomination. I think that offers some opportunities in our capital plans for all three organizationsBEP, Mint and Federal Reservein our capital plans and in our staffing levels and the like, to rationalize those with better planning.
Page 76 PREV PAGE TOP OF DOC
I think there are other opportunities related to it; for example, the possible new substrates that are being actively worked on.
Chairman CASTLE. Let me ask you this question: As you know, most of the G7 nationsI don't know about Russia, but most of the G7 nationsmanage their money production in their central banks. Is this something that we should even be thinking about at all here?
Mr. ALLISON. Well, you know, even within the G7, there is a fair range of experience there. In Japan, the setup is much like ours; the currency production takes place under the Ministry of Finance. In Germany, it is roughly split between a private firm and a governmental organization, not under the central bank. In Canada, currency is produced by two private sector firms. So, even within the G7, there is a fair range of experience.
It works well in this country. It works well in this country so long as we, the organizations involved, make it work. And we have a good record of making this arrangement work through communication and joint planning and the like.
Chairman CASTLE. That is my impression as well. I just want to make sure there weren't some doubts or something that I had not thought of that you would.
Mr. ALLISON. No.
Chairman CASTLE. To Mr. Diehl, a 1992 study by the Olympic Games Consultant McKinzie predicted $100 million in surcharge profits as a reasonable goal for the Atlanta Olympics on these coins. I think it ended up being $24 million or something like that.
Page 77 PREV PAGE TOP OF DOC
At another hearing, the editor of Coin World warned that the study was based on false premises, and using it as a blueprint would lead to disastrous results. She turned out to be a pretty good prophet with respect to that.
Now, there is a move underwayin fact, a bill has been introduced in the Senate which you are aware ofthat would authorize a permanent Olympic coin program. In light ofand the question I wrote out says ''painful,'' but I won't use that wordyour experience and your knowledge of the collector community, maybe you learned by watching this Olympic process, what would be the prospects for acceptance by numismatists of a new Olympic coin program every year?
Mr. DIEHL. Let me preface my remarks by saying that the Treasury Department does not take positions on commemorative coin legislation.
I also serve as Chairman of the Citizens Advisory Committee created by Congress to advise the Congress and the Secretary on appropriate commemorative themes. The USOC, the U.S. Olympic Committee, came before the Advisory Committee several months ago to present a proposal for a permanent annual program, and the reception was not warm. It was hot, actually. It was not a friendly reception.
I think that committee has a pretty good grasp on the thinking of the coin-collecting community. And I think there is some considerable ill-will left over from the size and scope of the Atlanta coin program. I think it would be ill-advised to try to bring another Olympic coin program into the market in the immediate future.
Page 78 PREV PAGE TOP OF DOC
Chairman CASTLE. Good. I have in front of me the Coopers & Lybrand study on the 50 States Commemorative Coin Program Study. This, again, is a circulating quarter, which you know, and as far as I know, you have always been in favor of this on a personal level. At least you expressed that to me. I don't know what you are allowed to say publicly about it. But I would like your views on this report, if you could, anything in there that struck you as being either different than might have been expected?
You did mention the seigniorage issue as one of your concerns with the GAO report here on the $5 billion. Maybe we should take a moment to explain what that seigniorage is and the significance of it. But I would just like to have you bring us up to date on your views ofnow that we have a further update with this studyof where we are with the circulating commemorative quarters.
Mr. DIEHL. I think this study pretty much confirms what the Citizens Advisory Committee and the numismatic community view was toward this proposal, and that view in a nutshell was that certainly the numismatic community was very enthusiastic about this proposal. But those who have been in the hobby and in the industry for many decades were convinced that the support of the American people and the enthusiasm of non-coin collectors would be very high for the program. That study clearly documents the strong, broad support that the American people would have for a program like this, and the bottom line is that the study comes to a conclusion that the 10-year program would raise additional seigniorage over and above what we would otherwise expect if we did not have the program, would raise between $2.6 and $5.1 billion in seigniorage over that 10-year period.
Page 79 PREV PAGE TOP OF DOC The study also makes it clear that the seignorage estimates did not include estimates of demand for non-adults, those 18 and under. It was only focused on adult demand. So, I think it is reasonable to assume that these numbers certainly aren't on the optimistic side, they are pretty conservative, and that $2.6 billion estimate was sort of the bottom line amount of seigniorage that could reasonably be expected.
Now, that seigniorage, as you know, Mr. Chairman, does go into general revenue fund through the Mint's public enterprise fund, but it is not on-budget revenue. It is off-budget revenue.
Just like, by the way, any revenue that would come from savings from a $1 coin; that is all off-budget except for a very small percentage which reflects, based on the cost of capital, the Government's cost of capital of borrowing, that represents the savings of borrowing costs from that inflow of money. And so there is some more modest amount that goes on budget, but the vast majority of the $2.6 to $5.1 billion is off-budget revenue.
Chairman CASTLE. Let me just say that I have had discussions with the Secretary about this, who will ultimately make the decision. He has raised legitimate questions. I have a great deal of respect for him and his judgment. I asked if he would just get into a room with this report and shut all the doors and not talk to anybody else and spend 6 hours studying it, and hopefully we could persuade him it is a substantial and good idea. So, hopefully the whole process is moving forward.
Mr. DIEHL. On that point, I think it is very important to make the point that the study had a limited focus, and that wasit was a fairly broad focus, but it did not cover the whole gamut of policy issues. It focused on what the public perception would be, what the demand would be, the seigniorage estimates, the logistical ability of the Mint to produce the coins. There are larger policy issues that are very appropriately under consideration.
Page 80 PREV PAGE TOP OF DOC
You do not lightly change the Nation's coins and currency, and that is certainly the focus of the discussions inside the Treasury Department over the next 6 weeks as we approach the August 1 due date for a decision.
Chairman CASTLE. Boy, I think you stated it very well. I am trying to convince people that we are not lightly changing the currency, but we are actually taking something that is not very exciting right now, a simple quarter, and making it worthwhile of going through the Garden State Parkway and getting your three quarters in change and actually looking at them and enjoying it a little bit. So, that is part of what it is all about.
My time has expired. We are probably going to have moreI know that I am going to have more than one round of questions, but we are going to keep on going in the 5-minute period to give everybody an opportunity.
Mr. FLAKE. Thank you very much.
Mr. Allison, in your statement earlier, you talked about the necessity for synergy among the various groups involved in trying to plan for the $1 denomination. Do you see at this point some problem areas by virtue of the fact that there is no synergized approach to this, or do you see some reality that you are moving in that direction, you are just not there yet? And then what doesjust an overall view of how you feel we make this dollar work.
Page 81 PREV PAGE TOP OF DOC You no doubt heard this morning some people talking about perhaps modifying the Susan B. Anthony dollar. Others are trying to decide whether or not people really will buy anything that loads them down as coins will do. And so just kind of give me some overview, first of all, starting with this whole question of planning. What is necessary? Is there any Congressional need to be involved, or does that only muddy the waters? And just how we move this process along efficiently.
Mr. ALLISON. Yes. Thank you. A bit of background, I guess. There is a certainas has been identified in the discussion this morning, there is a certain time pressure here for the following reasons: The existing inventories of Susan B. Anthony dollars are being drawn down at a rate that will exhaust those inventories in about 21/2 to 3 years; sometime around the end of 1999 I would say. At the same time, on a sort of separate track, the Treasury Department is redesigning the circulating currency notes, starting with $100 and $50, as you know now, and proceding down the line. The question is on the table now whether the $1 bill should be redesigned in that process. If so, that will take some work, that will take some expense and so on.
At the same time, there are alternatives on the table under discussion for the coin, whether to simply change the color, whether to redesign the coin from the ground up. There is a certain study going on at the BEP, the possibility of alternative substrates for the $1 note to the present paper dollar. These separate issues aren't being coordinated very well.
In the meantime, there is a great deal of planning within each of our groups. I mean, there is a great deal of planning and thoughtful planning within the BEP and the Mint and within the Fed. We haven't brought it all together and devised a master strategy for the $1 denomination.
Page 82 PREV PAGE TOP OF DOC
Mr. FLAKE. Who assumes the ultimate responsibility for bringing about the planning, I mean, for bringing all of the parties together to make it happen?
Mr. ALLISON. I think under the law that is probably, since the responsibility for note design rests with the Secretary of the Treasury, that might be said to be, under the law, a decision for the Treasury. But I think effectively it is a joint decision for the Treasury and the Federal Reserve.
Mr. FLAKE. Is there then out of this subcommitteefor instance, if the subcommittee, Mr. Castle and I, were to write the Treasury to indicate that out of this hearing information came forth suggesting that it is time to do some planning that is synergized among all the agencies so that there is no repetition or whatever, is that whatwould you think that is an appropriate thing for this subcommittee to do? Or, should we leave that to the agencies to make their determination of how they are going to eventually do that?
Mr. ALLISON. Well, I rather imagine that the agencies will take this up, and probably promptly. In the event the subcommittee were to encourage us to do it, I think that would not be a problem.
Mr. FLAKE. Kind of help to move the schedule along.
One final question, and that is earlier this morning I raised the question in the process of trying to do the changes and dealing with the whole question of coins and the relationship to the number of hearings that we have had that suggest that even coins may be obsolete soon, given all of the changes toward plastic, what is your overall view in terms of making these dramatic changes now? And if cards take off as credit cards did, will we not go through some process that is almost antiquated by the time that process reaches its conclusion? Or do you think cards will not have the impact that those who testified before seem to suggest?
Page 83 PREV PAGE TOP OF DOC
Mr. ALLISON. I am going to give you a personal opinion on that, if I may. I am not sure that the Board has a collective or an official position. In general, though, we would be cautious. We believe that the public, that the American public, will be cautious about embracing smart card technology for low-value transactions.
There are a lot of questions still to be resolved, and the likelihood of our achieving a rate of usage of smart cards that would have a substantial impact on the quantity of low denomination notes and the quantity of coins in circulation is, I think, pretty unlikely to happen within the immediate horizon.
We ought to get on with the business, I guess would be my opinion, we ought to get on with the business of planning for the right mix of coins and notes, whatever that might be, without consideration to the possible impact, without a lot of consideration anyway to the possible impact of smart cards.
Mr. FLAKE. I think some of us who have children away in college, who are, you know, trying to figure out how to control them, we might be wanting to see smart cardsor smarter cardsin the marketplace.
I only have one final question, and that is to you, Mr. Diehl, and that has to do with, we madethe Chairman and I and Mr. D'Amatohave made some prior agreements over the last 2 years in terms of how much we would authorize as it relates to coins going on the market. Of course, you know, as you were in the celebration this morning, we changed our opinion so that we could get a Jackie Robinson coin, and then the Congress changed our opinion by coming up with the Frank Sinatra coin.
Page 84 PREV PAGE TOP OF DOC
Can you give me your sense of whether or not we have already gone far enough in the market for a certain time period now when we ought to consider a moratorium or something? Have we created a burden for you that is going to make it almost impossible for you to meet the mandates that we give you?
Mr. DIEHL. We have actually made some substantial progress under this committee in the last 2 years in turning off the spigot of commemorative coin programs approved by Congress, huge progress. And we are beginning, just this year, for the first time, to see the market begin to respond favorably to the lower mintages and the stronger commemorative coin themes that have been approved by Congress.
Even though the Jackie Robinson program probably wasn't approved according to Hoyle, the fact of the matter is the program was enthusiastically blessed, there was no arm-twisting by the Citizens Advisory Committee. They were very enthusiastic about that program.
So, while Congress moved more quickly on that program than is typically the case, it was enthusiastically supported by the coin collecting community.
It is clear, there is no more deserving person than Jackie Robinson for commemoration. It was a good, solid, nice round number, a 50-year celebration. We welcome more programs with strong commemorative themes like the Jackie Robinson program.
For the record, the Frank Sinatra program is a commemorative medal program, not a commemorative coin program.
Page 85 PREV PAGE TOP OF DOC
Mr. FLAKE. So, you are not involved directly?
Mr. DIEHL. Well, we are involved, but a medal program doesn't pose the problems that commemorative coin programs pose. And certainly that is a very appropriate commemoration for a medal program.
So, the Congress has made great progress in lowering the mintages, and I will give you just two quick numbers to illustrate the point.
Over the last 3 years, Congress had authorized the United States Mint to produce and sell on average about 14 million coins a year through 1996, even though in the last 8 or 10 years we have never sold more than 4 million coins in a year and the average is probably closer to 2, 2.5 million.
Over the next 3 years, 1997, 1998 and 1999, Congress has authorized us to produce and market about 1.2 million coins a year; in other words, a 90 percent reduction in annual mintages. That is exactly where we need to be. The Citizens Advisory Committee has called for a moratorium on additional programs in 1997, 1998 and 1999, and we feel very strongly that any breach of that moratorium could threaten the health of the market.
And the legislation that this committee passed last year puts a limit on programs, beginning in 1999, of only two programs a year, and we think that is wise, at least for now. Maybe sometime in the future we might want to go back and look at that and say, can we do three or four? But right now we think that is exactly where we need to be.
Page 86 PREV PAGE TOP OF DOC
Mr. FLAKE. All right. Thank you very much. I guess we won't do the Mike Castle coin yet.
Chairman CASTLE. We will wait a few years at least.
Mr. FLAKE. I yield back the balance of my time.
Chairman CASTLE. Thank you. I think we should make a record of this, though, so everybody understands who is going to pay attention to this hearing, and that is that we have the Congressional Gold Medals, which are what Frank Sinatra and Mother Teresa have received recently, which is a striking of a gold medal for them and has no real overriding cost implications or anything of that nature. Then we have commemorative coins, which are generally done for organizations who in the past have received a surcharge on top before any costs are reimbursed. We have now changed the law so the costs will be reimbursed. And they are the ones who have potentially produced some losses; the Atlanta Olympic medal, for example, and perhaps some other losses, the ones we have to watch.
And then you have the circulating regular coinage, circulating commemorative coins, I guess they are called, the 50 State quarter program would be an example of that, but the Bicentennial quarter people are more familiar with, as an example, that. Is that the category of coins?
Mr. DIEHL. That is exactly right. And the thing that really distinguishes the circulating commemorative from the traditional commemorative is that the circulating commemorative is available to Americans at face value, in pocket change. So, it costs you a quarter to collect one of those; whereas the traditional commemoratives are sold well above face value, and there is a surcharge added to them that is passed on to the organization designated by Congress.
Page 87 PREV PAGE TOP OF DOC
Chairman CASTLE. For $12.50, every school child in America can collect all of those quarters; is that correct?
Mr. DIEHL. Correct.
Chairman CASTLE. I just wanted to make that point.
Mr. LUCAS. Thank you, Mr. Chairman.
I would like to take a moment to absolutely agree with you and the Ranking Member on the 50 State program. Whether it happens this year or the following year or the following year, this needs to occur. This is a positive idea that will touch everyone in this country. So, I want to absolutely go on record to that, and also to express my appreciation to Director Rolufs and Director Diehl, having had the opportunity in the last couple of years, since I have had the privilege of sitting on this subcommittee, to visit both the Philadelphia Mint and the Fort Worth facility. You are both engaged in a truly fascinating process, each being unique itself.
For a little background information, though, I would like to ask, my understanding is the Federal law, the way it works now, that when a denomination of a bill or a coin is authorized by law, when you receive requests from the Federal Reserve, you are obligated to deliver that product, if you have it. In the instance, of course, for Engraving and Printing, I am thinking of the $2 bill, and, of course, the Susan B. Anthony from the Mint's perspective over there. For background informationand I know that additional $2's were printed last year, I believe, because the demand was there.
Page 88 PREV PAGE TOP OF DOC
Mr. DIEHL. Yes.
Mr. ROLUFS. Yes.
Mr. LUCAS. Now we are 36 or so months away from a need for more Susan B. Anthonys.
I guess first to Mr. Diehl, assuming that there are no changes made under present law, and that the Susan B. Anthony is the $1 coin allowed by law, from the time that our friends at the Fed in the banking system put in a request to you, under the kind of production schedule you have been operating under in recent years, how long will it take to be able to shift around and produce more of those things?
Mr. DIEHL. We can do it very quickly; virtually overnight. We have the dies, or we will have the dies available by that time if Congress has not acted to change the law and create a new $1 coin, and the volumes are low enough that there really is not a logistical issue in resuming production of the Susan B. Anthony. It is something that would happen very quickly.
Mr. LUCAS. From your perspective, Mr. Rolufs, I assume Engraving and Printing maintains those plates, and it is more a matter of rolling the $2's out?
Mr. ROLUFS. It is more a matter of working it into the production schedule versus the other requirements of the Fed.
Page 89 PREV PAGE TOP OF DOC
Mr. LUCAS. So, Director Diehl, I guess following on down this line on background information, I believe I read in one of these documents today that the Mint has the capacity of producing 20 billion coins a year is my understanding.
Mr. DIEHL. That is correct. And we have produced a little over 20 billion in recent years at peak capacity. That was a real tough challenge because of the age of capital stock we have been depending on. And what our strategic plan calls for is for us to have a more reliable and more efficient capital equipment base on which to produce 20 billion coins a year.
Mr. LUCAS. What has the rate of production been on an annual basis? I may be asking for an educated guess here, or some kind of guess. What has the annual rate of production been so far for this part of calendar 1997?
Mr. DIEHL. We are on track to produce on an annualized basis this year something in the neighborhood of 14 to 15 billion coins. So, we are well off, by about 20 to 25 percent, the peak levels that we were at for the 3 years preceding.
Mr. LUCAS. And in this study of the potential impact of the 50 State quarter program, how many additional quarters would it take in a year to satisfy that?
Mr. DIEHL. It depends. It depends on which scenario develops.
Mr. LUCAS. Assuming a moderately rosy scenario, the worst case from your production requirements.
Page 90 PREV PAGE TOP OF DOC
Mr. DIEHL. Yes. It is something in the neighborhood of an additional 2 to 3 billion quarters per year. So, the study lays out four or five different scenarios regarding how we would configure our production capability in order to meet the demand under those scenarios.
Mr. LUCAS. OK. So, in the present set of circumstances, you would have the necessary additional capacity to produce them, but under the worst case scenario, if the economy just continues to bubble along, and there is a great coinage demand, what kind of physical plant improvements or enlargements would it take to accommodate this rosy scenario, this additional quarter production?
Mr. DIEHL. Yes. Under the best case, from the Mint's point of view, in which demand is very high for our product, and therefore the seigniorage profits are high, we would need to accelerate our planned expansion of our production capacity to 24 billion coins. We have two different strategic goals in our plan. One is to increase our base capacity to 20 billion coins, and then there is a second goal that by 2002 we will be able to produce, as a base capacity, 24 billion coins a year.
We would, if the circulating commemorative program were approved, probably move pretty quickly to accelerate the plan to go to 24 billion coins by the year 2000 perhaps instead of 2002.
Mr. LUCAS. Well, being a good fiscal conservative, I can honestly say then that under the most challenging scenario, we would just be accelerating what you would inevitably be doing anyway?
Page 91 PREV PAGE TOP OF DOC
Mr. DIEHL. That is correct. That is correct, yes.
Mr. LUCAS. Mr. Rolufs, one of the comments was made, I guess, in some of this documentation earlier about how different countries have different means or styles of stockpiling their currency, allowing for production difficulties or where there are acts beyond the control of the people who produce their currency. I believe I read here somewhere that you folks have approximately a 1-month supply. Was that impression I was given? Is that not accurate?
Mr. ROLUFS. I think the Fed, in their storage, maintains approximately a 2-month supply.
Mr. LUCAS. Two-month supply.
Mr. ROLUFS. Depending on the time of year and how the demand has gone during the year.
Mr. LUCAS. So the Fed is the primary storage person?
Mr. ROLUFS. That is right.
Mr. LUCAS. After production, you turn it over to them. So, perhaps I should address my question to the Fed then.
Mr. ROLUFS. Our optimal inventory level is about 40 days, 40 working days, or about 2 months' inventory.
Page 92 PREV PAGE TOP OF DOC
Mr. LUCAS. Just a general purpose background question then. To maintain a 1-year supply, that 40-day supply, does that pretty well fill in your available space, I guess is the first question I should ask.
Mr. ALLISON. We don't have anything like extra storage space in quite a few of our offices. There are some offices, though, newer buildings with bigger vaults, that could take more. I really don't know what the maximum capacity is.
Mr. LUCAS. So, then to go to a greater supply in stockpile, you would have to have more storage? That would just be an absolute necessity?
Mr. ALLISON. We would probably have to have more than we have now, and we would probably incur more transportation costs to move that around in the event it were needed, because it wouldn't be stored in the right places.
Mr. LUCAS. Absolutely.
Mr. Diehl, traditionally, the Bureau of Mint not only stamped the coins, but we also had the assay offices, and I believe, if memory serves right, you are responsible for the gold storage, and when we had a stockpile of silver from the last century, you were in charge of that. Tell me about the spaces, such as West Point, that was initially, my understanding, was a silver depository. What all has become of that in addition to making a certain amount of coins there?
Page 93 PREV PAGE TOP OF DOC Mr. DIEHL. That facility is full to the gills with production equipment. We produce all of our gold coins, commemorative bullion, recurring collectible versions of the bullion coin, and we are now producing all platinum coins in the West Point Mint. That is a tiny facility, never
Mr. LUCAS. A proverbial specialty shop?
Mr. DIEHL. It very much is. It is a tiny facility never designed as a production facility. So, we have really had to adapt that place. Included in our capital spending plan over the next several years is an expansion of that facility in order to better house the administrative functions at the West Point Mint. So, there is not much in the way of excess space at that facility.
Mr. LUCAS. Well, along those lines about space and availability, I know at your facility in San Francisco in, what, the late 1960's, early 1970's, you made some 1-cent pieces and some 5-cent pieces. I can see if we are successful with this 50 State program where the California delegation will be coming to you and insisting that that be stamped with an ''S.'' What is your capacity there these days?
Mr. DIEHL. We have some excess production capacity in San Francisco, but we do not and have not, as you allude to, have not produced circulating coins at that facility for quite some time. And we would probably seek to avoid that, if possible.
There are tremendous efficiencies, obviously, in concentrating production in the two circulating coin production facilities we are at right now. However, if that circulating quarters program were approved, there would be not only the circulating versions of that coin, but also collectible versions of that coin that would be produced; proof, silver proof, for example, and special packaging that would be created.
Page 94 PREV PAGE TOP OF DOC
One of the things that is very clear from the Coopers & Lybrand study is how strong the public demand would be for special maps and other display cases and the like for those products. And a very substantial portion of those would probably be produced in San Francisco.
Mr. LUCAS. One last question. If we are at a lower rate than compared to some of the previous years, how much storage capacity do you have for coins that you produce? And do you store them, or does the Fed serve in the capacity there also?
Mr. DIEHL. We both store coins, and we coordinate the inventory levels to make certain that we are within the Fed's inventory target. And we are also responsible for coordinating the amount of inventory at each of the approximately 72 sites around the country where the Fed distributes coins. And we make the interbank transfers as necessary upon the request of those local managers.
One of the situations that we have always struggled with, and we are beginning to get out of this situation under the revolving fund, but when coin demand unexpectedly drops, our vaults begin to fill up. And so at this point right now, we have been progressively cutting back our production over the course of the year, trying to keep up with the falling demand for coinage, but during that period of time, we have seen stocks in our vaults rise.
Part of that is because of the falling demand. Also, part of it has to do with seasonal variations in demand. We are just coming out of a period of low demand, low seasonal demand, and we will be going into a season of increasing demand as we approach the holiday sales season.
Page 95 PREV PAGE TOP OF DOC
Mr. LUCAS. One last question, Mr. Diehl. Occasionally I will have collectors comment to me, as I putter around my fine district, about times in the past, about how the inventories were handled, on coins particularly, and I sometimes get comments about paper currency. But just for the record, your policy is, I assume, first in/first out on inventory; when you get ahead on production, as in, you know, times in the past when silver dollars were produced, and nobody wanted the things, and they were piled up in the vaults and came out in strange patterns when they were finally issued. The policy of the Mint these days, I assume, has been first in/first out on your inventory?
Mr. DIEHL. That is correct. Yes, for the most part that is our policy, although in the execution, especially when vaults get full, sometimes it is last in/first out. But for the most part our policy is, first in/first out.
Mr. LUCAS. Thank you.
Thank you, Mr. Chairman.
Chairman CASTLE. Thank you, Mr. Lucas. I have this picture of a revolving vault, but we will skip that for now. Maybe you will build this new building you are talking about, which I may ask a question or two about.
I am going to ask further questions. We obviously are going to lose Members here, and maybe we can speed things up.
Page 96 PREV PAGE TOP OF DOC And I would like to go into this whole question of the security paper issues, Mr. Rolufs, if we could. I want to go through fairly quickly. I just want to know what the background on this is. And when I use the wordand maybe I am not using the right expression. When I use the expression ''security paper,'' I assume that is paper which is used for various Government documents which are under your kingdom, such as currency. But would it also include passports, stamps? I think you do some of those kind of things. Are there different contracts for all those kinds of papers?
Mr. ROLUFS. In our particular case, when you use the term ''security paper,'' we are talking about the paper that we print currency on. We also buy, of course, paper for stamps, but it is of quite a different nature and would not be classified in the same kind of category.
There are some other documents that we print on a much smaller basis that we buy security paper for, but that is usually a very small contract, nothing of the size of currency paper.
Chairman CASTLE. What does the expression ''security paper'' mean vis-a-vis currency? Is it truly paper that actually comes from the supplier? I know you do things to it. I mean, obviously with watermarks and and so forth, you do a lot of things to it to help with the security of the actual denominations that we issue. But is the paper itself different when it comesto the extent that you are allowed to share this with us publiclyis the paper different when it comes to you?
Mr. ROLUFS. The paper, when it comes to us, is ready for printing. The manufacturer puts into the substrate itself many, many security features, and when it comes to us, it is actually ready to be printed on.
Page 97 PREV PAGE TOP OF DOC
Chairman CASTLE. But some of those security features are added to it at the manufacturer level before you actually receive it?
Mr. ROLUFS. And those are the ones I can't talk about.
Chairman CASTLE. I am glad you can't, sir. Let's keep it that way.
And, as I understand it, there is an outside private contract which exists right now for that paper; is that correct?
Mr. ROLUFS. That is correct. The current supplier for that paper is Crane & Company out of Dalton, Massachusetts, and they have been the U.S. supplier of currency paper for some 117 years off and on; mostly on.
Chairman CASTLE. And I have heard no criticism of them whatsoever with respect to the paper which is produced, the paper itself. There have been some other things that we need to discuss. But is that correct, too?
Mr. ROLUFS. That is generally, true. Crane & Company has been a very good supplier for the United States Government. Like all manufacturing organizations, ourselves included, I am sure the Mint, they periodically make a mistake, but they are quick to correct it, and they are very sensitive to our needs.
Page 98 PREV PAGE TOP OF DOC Chairman CASTLE. Now, the further discussion has been that of a concern of cost, I suppose, in terms of this paper. And what is the overall cost on an annualized basis for you to purchase paper for currency?
Mr. ROLUFS. Depending on the year, it is somewhere between $65 and $75 million.
Chairman CASTLE. And did you have an interest at some point, either earlier this year or late last year, in potentially revamping the way that contract bid is sought? And if so, can you share with us the reasons why you came to those conclusions and then what you did pursuant to that?
Mr. ROLUFS. This is another one of those recurring issues. As you may know, I was at the Bureau of Engraving and Printing in the early 1980's, and it was an issue then. And if you go back in history, it has been an issue that has recurred time after time.
The difficulty is that when you have a supplier of an item that is literally sole source with very little competition, then it calls into question whether or not, without that competition, you are paying the proper price for the item.
When I first became Director 2 years ago in July, this very issue was on the table. What we did at that particular juncture in time was to do a paper study that included some rather extensive surveys of the industry to see if it was possible to generate additional competition so that we could assure ourselves that we were getting the right price for currency paper.
Page 99 PREV PAGE TOP OF DOC
We did that study. About, oh, July of last year, we put a draft solicitation on the Internet from the perspective of getting comments of both the industry and others who were interested, and then we evolved that draft solicitation through a number of stages and a number of different comments to where we are today with a real solicitation on the street, which will close, I believe, in October of this year, and hopefully that will then lead to a 4-year contract with someone for our currency paper.
Chairman CASTLE. Well, let me ask this: Pursuantand this gets a little confusing, but we all know that there was an add-on to these contracts that limited greatly who could bid on this paper with the 91 percent, I believeI don't know if it was an amendment or accompanying language to legislation adopted pursuant to a certain Congressman from Massachusetts who is no longer with us unfortunately, but in Congress, and there was some desire to change that, that was very public, to change it to the buy American standards of 51 percent.
That is not part of this bid at this point; is that correct?
Mr. ROLUFS. That is correct. There was language in the 1996 Appropriation Committee reports that attempted to express that interest, and a later legal opinion issued jointly by my chief counsel and by the Treasury folks indicated that the Conte Amendment prevailed in that particular case according to law. And so the solicitation was issued with that definition in it.
Chairman CASTLE. And where are we in the present issuance of the bid, the request for bids?
Page 100 PREV PAGE TOP OF DOC
Mr. ROLUFS. The request for proposals is on the street.
Chairman CASTLE. Request for proposals?
Mr. ROLUFS. It is due to close on October 24th, and when it closes on October 24th, then we will begin the evaluation of the proposers.
Chairman CASTLE. Is the language of the Conte Amendment in that present proposal?
Mr. ROLUFS. It is.
Chairman CASTLE. Is it your judgment that it should be there, in your understanding of the laws which have passed since that time?
Mr. ROLUFS. It is there on the advice of the best legal counsel I have.
Chairman CASTLE. That was sort of a half answer, I guess.
Mr. ROLUFS. It is the only one I have.
Mr. KENNEDY. I thought it was perfectly full, Mr. Chairman.
Page 101 PREV PAGE TOP OF DOC Chairman CASTLE. By the way, Mr. Kennedy, we welcome you back. It is a pleasure to see you here.
Mr. KENNEDY. Thank you, Mr. Chairman.
Chairman CASTLE. What do you see, maybe you can discuss this monetarily and otherwise. And again, just for Mr. Kennedy's benefit to some degree, this is not in any way disparaging the present contractor, it is just clearly a matter of trying to make sure that we do business correctly as a Government. But what do you foresee as the pluses and minuses, if any, of a competitive bid situation of the currency paper? You sort of touched on that. And I don't know if this will be an impact in terms of dollars or in terms of performance of duty or just a responsibility to give people an equal opportunity in this circumstance, or contractors.
Mr. ROLUFS. If we attain competition and fair competition in this particular case, I think there are always situations where you will probably pay less, or most likely pay less. But more from a comfort level of people in positions like mine, you can then be assured that the market has shown you where the right pricing is. And I think that is what Treasury seeks more than anything else.
Chairman CASTLE. Let me turn to one part of this whole discussion. I mean, we are not the only subcommittee that has taken this up. It has been taken up by an appropriations subcommittee as well. But one part which I thought was a little bit unfair, and that is the suggestion that either BEP or anyone else discussing this was proposing to have foreign companies print our national currency.
Page 102 PREV PAGE TOP OF DOC My understanding was that this is a special language written for this at the 91 percent level, and the concept was to take it back to a 51 percent level, which is done with a lot of American products, including military products, for all that matters. And I would like your comments with respect to that subject.
Mr. ROLUFS. Well, from our particular perspective, whatever the law is that prevails would have been what went into the RFP. What we found generally in our paper survey was that there were a number of companies who said that the so-called Conte Amendment inhibited them from bidding. That was an expression that they had given us.
What we attempted to do in the process was to bring this all to light and through the comment process, as we issued the draft RFP and went through several months and several iterations, was to see how this would all play out in a way that would enhance the competition.
So, from a Bureau perspective, we were simply reflecting what we had found in the marketplace in our survey.
Chairman CASTLE. Is it true that the presses and the inks which you use are foreign-made today?
Mr. ROLUFS. The presses that we use are foreign-made exclusively. They are made by the Giorgi de la Rue Company. The inks that we use are manufactured in two places, and I don't think we can say they are foreign-made. We manufacture ink within the Bureau itself, and there is an ink manufacturing facility that is owned by SICPA Corporation in Springfield, Virginia, and there is another ink manufacturing facility, again owned by SICPA Corporation, in Fort Worth, Texas.
Page 103 PREV PAGE TOP OF DOC
Chairman CASTLE. And that is a French company?
Mr. ROLUFS. That is a U.S.-incorporated company with an umbrella that sits overout of Lausanne, Switzerland.
Chairman CASTLE. Why was the original decision made to offer contractor-acquired property assistance to bidders on the security paper contract? And then why was the provision deleted in the current RFP?
Mr. ROLUFS. The draft included it because we had found, again, in the survey
Chairman CASTLE. You might explain what that is before you answer.
Mr. ROLUFS. Contractor-acquired property?
Chairman CASTLE. You can probably explain it better than I can.
Mr. ROLUFS. I am not sure I can, but I will try. Contractor-acquired property is a situation where the Government, in fact, helps the contractor acquire property for the manufacture of an item, but then it is paid back to the Government over the life of the contract. So it is contractor-acquired.
Page 104 PREV PAGE TOP OF DOC It began as an attempt, on our part, to elicit more competition, and as time progressed, it became more and more evident that this was a very controversial sort of approach. It also was an approach, though, that was within the Federal Acquisition Regulation and, we thought, appropriate.
As it went through the review process, both from a perspective of folks in the private sector and folks at Treasury, because we submitted it to Treasury for review, it became evident that there were perhaps other ways that this could play out.
The Bureau had asked for what is essentially a policy decision by the Treasury Department on contractor-acquired property because it had never been done within Treasury before. That request was made to our senior procurement officials. Eventually, the decision came back to the Bureau that these senior procurement officials' opinion was that contractor-acquired property was as good a way as any to obtain competition, and the current solicitation reflects that, and it allows people to make the same kind of proposals without the Government actually offering contractor-acquired property.
Mr. MUNOZ. Could I expand on that?
Chairman CASTLE. Yes, you could. But let me ask a follow-up question, and then you can either answer that or follow Mr. Rolufs.
Butand, again, this is a very difficult subject. But are you suggesting that the way the RFP is written, that a contractor would be able to have the same access to capital as a contractor would have been able to under contractor-acquired property type provision?
Page 105 PREV PAGE TOP OF DOC
I didn't think that was the case, is the reason I asked that question.
Mr. ROLUFS. In my understanding of it, they could make that proposal, and we would entertain it.
Chairman CASTLE. You would entertain it?
Mr. ROLUFS. Yes.
Chairman CASTLE. OK. I am sorry. I didn't mean to cut you off, Mr. Munoz.
Mr. MUNOZ. Mr. Chairman, that is what I wanted to expand on. The Treasury is always looking forfrom the management side, good deals, and low costs to produce our services. And when Larry Rolufs took over as Director of the BEP, he came to our officecame to Mary Ellen and myselfand asked, ''Should we go with the Security Paper Study?'', and, ''How can we increase competition?'', for the reasons that he stated. Our office said, ''That is a good direction to go in.'' It is not the first time Treasury has done it. We are always looking at it. There is tough competition only because Crane, as Mr. Rolufs has said, has a good product, is subject to audit, and making sure the costs are the fair costs.
This contractor-acquired property provision, it was felt by the senior procurement officerand that is where the decisions were madedidn't need to be put in the proposal. It can still be provided. It is under the Federal Acquisition Regulation. You can bring it up as long as the request for proposals allows you to do it, and the request for proposals says openly, we will entertain any creative way in which we can get a better productget a better price.
Page 106 PREV PAGE TOP OF DOC
Chairman CASTLE. But why was thecorrect me if I am wrong in the way I state the question, but why was the change made includingthe original decision, as I understand it, was to offer contractor-acquired property. I am not an expert on contractor-acquired property. It is used routinely throughout Government to solicit bids on things. But it apparently was going to be included and now apparently it has been taken out, it is excluded, but you can make a bid with that in mind?
Mr. MUNOZ. Sure.
Chairman CASTLE. It seems to me to be a lesser category of bid in that circumstance. It has that impression to me.
Mr. MUNOZ. It has a broader categorybecause in the other way you are narrowing it down, you would be basically sending a message out that we will want contractor-acquired property only. The fact that very few Government agencies use the contractor-acquired property is because it itself is subject to the question of is the Government giving an unfair advantage in the market? Because most contractors, if they get a contract, work out arrangements with banks and the like, to finance whatever is needed to fulfill that contract. I mean, that is out in the marketplace.
So the decision, again, was made by the senior procurement executive at Treasury, who is a career person on this thing. But it was looking more like this contractor-acquired property is what you are entertaining and what you are more interested in getting, rather than just saying not only that, but there are many other combinations of proposals that we will entertain.
Page 107 PREV PAGE TOP OF DOC
Chairman CASTLE. OK.
Mr. Rolufs, again, do you have information needed to determine the profit margin on various contracts achieved by Crane Paper Company, the incumbent, as you said it?
Mr. ROLUFS. We have audit procedures which we believe give us that information, yes.
Chairman CASTLE. And you are satisfied with that system?
Mr. ROLUFS. I have been satisfied with that since I have come to the Bureau.
Chairman CASTLE. Do you now have the support that you feel you need from Congress and the Department to ensure a fair bidding process and the best price for the taxpayer?
Mr. ROLUFS. I think this particular RFP has evolved through a process which has assured that, and if it doesn't happen, why, I will be really surprised.
Chairman CASTLE. Mr. Kennedy, let's turn to you for questioning, sir.
Mr. KENNEDY. I appreciate it, Mr. Chairman.
Page 108 PREV PAGE TOP OF DOC
First of all, Mr. Chairman, let me thank you for the interest that you have shown in this issue, and I think the reasonable and professional way with which you have, and the staff of the subcommittee has, conducted its proceedings. And I also want to thank Mr. Rolufs and a number of others who I have been speaking with over the course of the last several months about this issue.
I think that the idea of single-source contracts in general is something that a competitive bid process obviously is more preferable. I mean, any time that we can have a number of different companies bidding on a single contract, it is obviously a better thing. On the other hand, I think that in this particular case, as in a number of cases where the Government is going out and looking for a specific supply of specific goods and services, that would take a very large amount of capital in order to be able to perform the service that the Government is requesting, you get into some particular kinds of circumstances.
In talking with Secretary Rubin about this issue a number of months ago, I mean, he explained to me about this program that evidently has been in place since the 1960's that allows the Federal Government to subsidize an alternative supplier of any good or service that the Government feels it perhaps would be better off if there was a second supplier available.
I pointed out to him that I thought that Bob Reich had made a reasonably modest proposal in pushing for an industrial policy, but if we could really open up the entire Government so that I could go out tomorrow and start a B2 bomber factoryor an aircraft carrier factoryand have the Government pay for every single piece of equipment as a subsidy, and then go into competition with the guy that had the existing contract, that I might very well support it.
Page 109 PREV PAGE TOP OF DOC
But given the fact that that is not what we are dealing with, and that the actual subsidy arrangements as were concluded by the study that was doneand, Mr. Chairman, I would just like to read off the names of those who were asked to join in the study group to look at this contract:
Mr. Rolufs, the Director of the Bureau of Engraving and Printing; Charles Bennett, the Assistant Director of the Federal Reserve Bank; Greg Rothwell, the Assistant Commissioner for Procurement of the IRS; Carol Rowan, the Senior Advisor to the Treasury Office; Analee Koon, the Departmental Competition Advocate; Paul Blackmer, the Associate Director of BEP; Carla Kidwell, the Associate Director of BEP; Tom Ferguson, another Associate Director; Milt Seidel, an Assistant Director of Technology; Tim Vigotsky, the Assistant Director; and Carrol Kinsey.
Now, there is another longer working group, but let me just read to you the conclusions that have been submitted. It suggests that significant Bureau subsidies would be required if Crane remained as one of the two suppliers, so you wouldn't just shift it to another single-source contract. We would estimate that the annual costs would increase between $21 and $37 million depending on the capital base needed by the second supplier.
It further goes on to suggest that the results of the analysis clearly demonstrate, clearly demonstrate, that the less costly option is to continue to work with Crane as the Bureau's sole supplier. Developing alternative suppliers would cost between $21 million and $37 million annually. However, the presence of another supplier would not guarantee competition. For example, based on discussions with other paper manufacturers, it is likely that the end result would be two or more suppliers, each with guaranteed workloads, rather than true competition.
Page 110 PREV PAGE TOP OF DOC
It further goes on to say, it should be noted that each of the five foreign suppliers interviewed are the exclusive currency paper suppliers for their respective countries.
Therefore, the Nation's reliance on a single source for currency paper is typical of the situation in those five major countries and common to this particular market. In addition, our currency paper costs are lower than any of these countries.
Now, it seems to me that the conclusion of the study that was ordered, and I think appropriately so, was that no one is trying to suggest for a moment that we should sit idly by, as any supplier for anything in this country and say that contractors with the Government have a license to overcharge the taxpayer. That no one, I believe, would put up with.
On the other hand, I do believe that as I have had extensive discussions on this issue, I don't believe that there is any belief that Crane has been anything other than a strong, good, cost-effective supplier of our currency paper over the course of the last 117 years. If someone else wants to get into the business, I am sure that, as I have talked with Crane Paper, they would welcome the competition.
But, I think that what we have to go back to is the advocacy and the substantive study that has been done. A further review, I guess, is also contemplated. And I think that we ought to adhere to what the people that have the expertise in this area believe is the most cost-effective method for charging the American taxpayer for the cost of actually printing funds, and then, only then, will we be able to keep the politicking out of this particular area.
Page 111 PREV PAGE TOP OF DOC
There have been a number of attempts that I think have not been particularly successful because of the work of your subcommittee and the integrity that you have brought to this process, Mr. Chairman, and I appreciate the fact that what we are looking for in this whole context is to keep the most cost-effective way of getting our Nation's currency printed for the interests of the American taxpayer.
Thank you, Mr. Chairman.
Chairman CASTLE. Well, thank you, Mr. Kennedy. And I don't really beg to differ with anything that you stated in terms of some of your conclusions. I just have no way of knowing differently.
But when we talk about keeping politicking out of particular areas, it is politicking that got us into this area. It is the Conte Amendment of 91 percent that has made everybody sort of sit up and take notice? Is this different? Why is it different? Is there some protection going on?
You may well be right about all your cost estimates. I happen to have a lot of respect for the Crane Paper people and the product they deliver. And you may be right, there may be cost increases because of splits in contracts or whatever. It is just that there seems to be a degree of uncertainty and a certain degree of protection which is going on, and I think that is why the issues are being raised.
Mr. KENNEDY. If the Chairman would yield briefly?
Page 112 PREV PAGE TOP OF DOC
Chairman CASTLE. Yes, I will yield.
Mr. KENNEDY. I think that if people feel that, you know, going to foreign contractors to print American money and paying foreigners to go out and print American money is a good policy, I happen to believe that that was a very important amendment that Sil Conte put forward. I think that there ought to be certain contracts that we continue to keep in terms of our own domestic shores, and I think printing our funds certainly falls into that category. I don't want to see foreign firms coming in here and printing U.S. dollar bills. I think it would be a terrific mistake, Mr. Chairman.
Chairman CASTLE. Well, I do, too, and I don't think anyone is even talking about that. I think there are American companies which could do this. I think we are just trying to make it a level playing field for all companies which are American-based or American to do that.
And you are right, I think that the printing of currency is a special and unique circumstance, but I don't think there should be discriminatory practices with respect to American companies.
Mr. Rolufs may want to comment on this little discussion you and I are having.
Mr. ROLUFS. Let me give you two facts. One is that regardless of the percentage that eventually ends up being there, the requirement is that the paper be made on U.S. soil. It has to be. That is law. The other thing is that there is a general philosophical situation with the Bureau and the Treasury Department that is important, and that is that, regardless of what the vehicle turns out to be, we need to make an award on the lowest evaluated price for the currency paper. And that is what we will do.
Page 113 PREV PAGE TOP OF DOC
We are not going to pay more simply because of some kind of quirk situation. We need to look for the best evaluated supplier that we can get. And, again, going back to where we were before, this is a recurring situation. What our hope is is that through the process that we have just gone through, that we will put it to bed finally.
Chairman CASTLE. Actually, I think we all hope that in fairness. I think Mr. Kennedy and I would agree on that solution.
Mr. KENNEDY. You bet, Mr. Chairman. Let's get it put to bed in Massachusetts.
Mr. ROLUFS. You are not prejudiced, are you?
Chairman CASTLE. Well, I didn't know that any of these companies had anything to do with Massachusetts.
Mr. KENNEDY. No, of course not; just domestic, Mr. Chairman.
Chairman CASTLE. Mr. Lucas.
Mr. LUCAS. Just to finish my background work, Mr. Chairman.
Mr. Rolufs, once again, what is the percentage of production of currency that is $1 bills on average?
Page 114 PREV PAGE TOP OF DOC
Mr. ROLUFS. From year to year, it will vary a little bit, but on average it is 45 to 47 percent is $1 notes.
Mr. LUCAS. And, Mr. Diehl, once again, what percentage of your production is the 1-cent piece?
Mr. DIEHL. It is about 70 percent. Again, it varies from year to year, but that is a good round number.
Mr. LUCAS. I suppose, Mr. Chairman, I would just kind of like to offer a passing thought as I conclude my questions that the basic goal of these folks in front of us and the Fed and the Treasury, their obligation is to provide an even exchange to encourage commerce. That is why you exist. That is why we work with you.
And things do change. As I pointed out to my colleague that I have the greatest respect for, earlier, from Illinois, because the 1-cent piece of 200 years ago was that big around and lasted for 60 years, obviously it was in the best interest of commerce to make that change, and it was changed. So changes will continue to occur as we go through the course of events. Whatever we have to do to encourage commerce is our obligation, to better move those goods and services in this country. So, we have to have an open mind and look toward the future.
And clearly, huge amounts of resources go into these two units of currency, huge amounts of resources.
Page 115 PREV PAGE TOP OF DOC Thank you, Mr. Chairman.
Chairman CASTLE. I think Mr. Lucas has made a wonderful point, and that is that I would hope we go away from this hearing, which has been very wide-sweeping in its review of all kinds of money in America, you know, with an open mind in terms of what we can do. None of us have a preconceived notion. I don't think we should change money lightly. I think Mr. Munoz made that point. But on the other hand, I don't think we should be afraid of consideration of what the future may be.
I tend, I think, to agree with Mr. Allison a little bit, but I also worry that there may be a very sudden movement away from currency and into the use of cards and those kinds of things. You know, you wouldn't see it on a flat playing field. Just looking out over a number of years, it might just jump quickly in a period of 2 or 3 years, and we need to be ready for that if it happens as well.
I did want to askwell, let me ask Mr. Diehl a question. I wanted to make sure that our Treasurer and Mr. Munoz have said what they wanted to say today. They haven't been asked a lot of questions, and they may feel pent up about it.
Let me ask Mr. Diehl aboutand you two think aboutwhat you might want to add to this, and make sure we didn't overlook you.
And that is with respect to the $1 coin circumstance, not a $1 coin to replace a $1 bill, but you have heard the testimonyI think you referenced this, but I did not hear you directly. I would like to get your thoughts about that. I mean, we are within, say, 36 months, approximately, of running out of the Susan B. Anthony coins. You know, at some point you would have to start production of those again if we are going to go that way. And it has also been stated here that we probably would need about 30 months to plan another coin and to go in that direction that could compete with the $1 bill.
Page 116 PREV PAGE TOP OF DOC
In fact, I was talking to Ms. Withrow on the way over to the Jackie Robinson coin ceremony and suggested that, if we are ever going to have acceptance of a $1 coinI am not even sure if we should or notbut I just don't think there is high acceptance of the coin that we have, and my judgment is that if we change the color and perhaps made it a more interesting coin, that maybe there would be a greater acceptance of it.
But I would like your comments. Is there anything wrong with the logistics we have heard about, and do you have any preference in terms of where we can go, at least that you are allowed to state?
Mr. DIEHL. Our current estimate of when we will deplete our stocks of Susan B. Anthony is early the year 2000. We have seen a small decrease, but significant decrease, in demand for Susan B. Anthonys from peaks of about 12 months ago. So, it extends out the life of that inventory until early in the year 2000, sometime around February or March.
But your point is very well taken; time is running out, and we have been very clear in saying that we need at least 30 months in order to do all the testing of a new alloy and to design a new $1 coin. We cannot move forward, without Congressional action, on a new $1 coin.
So, time is growing short, and this is not the only area in which our planning efforts, both at the Mint and, from what I am hearing this morning, from BEP, have been stymied to a degree by continuing discussions about the future of the penny, about the $1 coin, the $1 bill, and these other issues. You can only put off capital investment so long before you are threatening your underlying production capability. And that is essentially the situation the Mint has gotten into in the last several years, where we were at significant risk 2 years ago of not being able to keep up with coin demand from the Federal Reserve at peak demand periods.
Page 117 PREV PAGE TOP OF DOC
Our capital spending program now is built around a recognition that we must make some commitments now in ensuring the reliability of our production capability, while at the same time having contingencies ready to execute, depending on what decisions are made about the penny and the $1 coin.
Chairman CASTLE. Thank you, Mr. Diehl.
And let me turn to Mr. Munoz. And let me just say with respect towith Mr. Kennedy not here, I don't want to unfairly carry out this discussion, but on this whole business of the paper contract, what I think we exchange is very important to me. I just want this handled fairly. There clearly, to me, has been a lot of politics in all of this and perhaps some, you know, marginal statements with respect to it all. And obviously it is something we are all going to be watching very carefully because there is some real concern.
I realize personally you are in the process of a transition, but your position is one which has some sway in this matter, and I would hope that, you know, word is out that, you know, let's make sure this is done properly in accordance with law, in accordance with bidding procedures in our country.
You may respond to that if you wish, but whatever else you might wish to say, too.
Mr. MUNOZ. Well, it will be done that way, Mr. Chairman. I think you will appreciate, as certainly I have since coming to Treasury in 1993, that usually the work product that comes out, especially on these kinds of matters, is very honestly done, very straightforward.
Page 118 PREV PAGE TOP OF DOC
The study that was done, as some of it was quoted, we had our best people working on it. And studies are normally done with, ''Do whatever is right and what is in the best interest of our Department for carrying out its missions.''
I think you will also acknowledge, in reference earlier to the 50 State commemorative coin program, we took the same attitude. We usually try to get people who don't have any personal bias one way or the other, but the best minds that we can to bring to bear on that. After that, we make sure that it makes sense in terms of its implementation. But I can assure you that with respect to the security paper, given the supply needs that BEP will have, as Director Rolufs has said, BEP will get the best price available within the confines of the law. Always we will work within whatever the Congress asks us to work with and whatever constraints or advantages that that will bring to bear.
I did want to say, Mr. Chairman, thank you again for bringing us all before your subcommittee, that the GAO did a very good job and very extensive job in looking at the Department and in terms of what was before it. This subcommittee said: ''Let's look at whether the production is being done right and economically and; second, whether the way we oversee the BEP and the Mint is structured correctly. Should they report to another body, or is there sufficient oversight on those two broad issues?''
And I know that we have gotten into other issues, but let me just say that GAO did a very extensive and thorough job, a very good job, I thought, with very probing questions at all levels. I think the level of cooperation with them in providing those answers was beneficial to them and was certainly beneficial to us in preparation for this hearing.
Page 119 PREV PAGE TOP OF DOC
But I think that after having that kind of thorough going-over, we are quite proud of certain conclusions that I think became evident today thanks to this hearing. One, we heard from the primary customer, the Federal Reserve, that they are happy. That is not surprising news to us because we are in constant contact with them in terms of do we deliver the product on time? Is it a quality product? And dialogue takes place there. So, having a customer that is happy is paramount.
Second, you are looking at two Bureaus that both have clean audit opinions, and with one of them, the BEP, it was one of the first in all of Government to get a clean audit opinion. What does that tell you? It tells you that we keep our books and records appropriately, that our internal controls are there, and it says a lot about an organization.
Last, I believe that the GAO, as well as the Federal Reserve today, independent bodies from Treasury, have said that they saw nothing advantageous from moving things around in terms of their oversight or maybe reporting to another body. We take pride in that, while we are obviously subject to being questioned as to whether we are being run the right way, it does give us comfort that outside bodies have concluded that.
So, overall, we are always open to changes, and the economy is changing with electronic money. Is the penny required, or is the $1 coin going to be brought in? Those issues have impacts on not only costs, but on the economy, and have a lot of ramifications for us. A penny, because of the level of transactions that occur in this countryin the trillions of dollarsrounding may have a tremendous impact. And we know that independent studies have actually said that elimination of the penny can have that impact.
Page 120 PREV PAGE TOP OF DOC
I cannot imagine a single week has gone by in the last 31/2 years that I have been at Treasury that there has not been a discussion of our currency transactions, whether it is about electronic money or electronic funds transfer, or the mixture of coins and currency, or the $2 bill, or the Susan B. Anthony or this or that. And that dialogue is not restricted only at these two Bureaus. It actually goes on throughout main Treasury at a variety of levels.
So, let me just assure you that Secretary Rubin runs a very, very tight ship, and he is very, very interested in seeing how these operations work. And I know that he is very proud of how they perform. And we very much thank you for bringing us together.
And, again, GAO did an excellent job, and our thanks to them, too, for being with us in the last few weeks that they have been preparing for this.
Chairman CASTLE. Thank you, Mr. Munoz. Hopefully we can give Secretary Rubin some new quarters to play with as well as the future goes on.
Mr. MUNOZ. I know that he will take that seriously.
I know earlier on, if I may touch on another point, there was some reference about couldn't weand GAO made reference on it, toocouldn't we just have all the money production in our new facility in Fort Worth, which is a state-of-the-art facility? And reference was made to Treasury not wanting that to occur because we want to have an alternate site in case of a catastrophe, which does make some good sense. But there are also some practical reasons why we would not support having all of the currency production just in that one location.
Page 121 PREV PAGE TOP OF DOC
I believe Director Rolufs wanted to expand on that.
Mr. ROLUFS. What has generally happened in the past when we have talked about the production at the Fort Worth facility is we have only looked at the potential for press capacity. And even press capacity, there would need to be expansion down there.
One of the things that has never been addressed, and it struck me as we went through today and as I looked at the kinds of things over the last 2 days that I could see written, is that we have never addressed the need for prepress capacity in Fort Worth. There exists in Fort Worth right now very little prepress capacity, and that is engravers, that is the capability of making original plates so that we can then make duplicates for the presses.
If we were to have that kind of prepress capacity in Fort Worth, it would add an additional 70,000 square feet to Fort Worth. It would mean the moving of at least 50 more people down there, and it would mean a substantial investment, too, because many of the processes are unique, and in Washington some of them are aging also. They do a good job here, but it is doubtful whether we would be able to move them or not, at least successfully.
So, I wanted to get on the record that we need to look at more than just the press capacity of Fort Worth. There are a lot of other things that, as we go down the road, looking at different ways of doing currency, that need to be considered.
Chairman CASTLE. Thank you. Mr. Rolufs.
Page 122 PREV PAGE TOP OF DOC
Madam Treasurer, if all goes well, you will have the last word.
Ms. WITHROW. Oh, that is always nice. Thank you.
Chairman CASTLE. Don't count on it, though, the way we operate around here.
Ms. WITHROW. Well, I wanted to say that I have thoroughly enjoyed my time working with the two Bureaus and their products and marketing those across the country. I am in the process now of letting everyone know what the new $50 bill will look like.
It is always so interesting to get the public's feedback, because I think we have to pay a lot of attention to what the public is saying. And so with that, I will just say it is a pleasure being here today.
Chairman CASTLE. Good. Very good.
Well, this does conclude our hearing. But is there anything else that somebody feels they should put on the record? We do appreciate you being here. We appreciate GAO's testimony. They bring a very apolitical, fair approach, I think, to anything they look at, and we appreciate that.
We didn't have everybody here. One way we do business is to reserve the right to send you all questions. In fact, frankly, nobody wants to hear this, but I could go on for another 10 hours with questions if we had the time to do it. But there may be written questions, either Members want to send, or we may want to send to you. If you could look at those and respond to them.
Page 123 PREV PAGE TOP OF DOC
If there is nothing further, we stand adjourned.
[Whereupon, at 2:10 p.m., the hearing was adjourned.]