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  • July 2014
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House Passes Permanent Ban On Internet Taxes

Consumers across America are increasingly using the Internet to shop, apply for jobs, perform schoolwork, and email one another.  In 2012, the Federal Communications Commission found in its annual report on advanced communications capabilities that 95 percent of Americans have access to broadband Internet services.  According to the International Telecommunications Union, 84.2 percent of individuals in the U.S. currently use the Internet.

In 1998, the Internet Tax Freedom Act (ITFA) was first enacted as a temporary ban on state and local taxes on Internet access.  The law also banned multiple or discriminatory taxes on Internet commerce.  The moratorium on these taxes has been extended three times, with the most recent extension occurring in 2007.  On November 1, 2014, the current moratorium expires.

On July 14, 2014, the Council for Citizens Against Government Waste asked members of the House of Representatives to support passage of H.R. 3086, the Permanent Internet Tax Freedom Act.  This legislation makes the ban on these taxes permanent, creating certainty for consumers that their Internet access will never be subject to taxation.  On July 15, 2014, the House of Representatives approved H.R. 3086 by voice vote.

During House debate on H.R. 3086, Rep. Zoe Lofgren (D-Calif.) stated “The moratorium is one of the reasons for the huge growth in the digital economy.  The Internet wouldn’t be what it is today without affordable Internet access.  And, by the way, this tax relief is not to companies.  It is to individuals who access the Internet.”

Rep. Doug Collins (R-Ga.) stated “This legislation ensures that no person is discouraged from accessing the Internet and experiencing its transformative power.  The Internet is a tool for democracy and education.  It is an outlet for free expression and the megaphone for those who were previously ignored.  It connects individuals and is a means for creating entrepreneurship.”

One of the many problems with taxing the Internet is that when something becomes more costly, people will engage in less of it.  As the economy will undoubtedly continue to be more digitally-focused, protecting users of the Internet from onerous new taxes is critical to continued job creation, economic growth, and social interaction.

H.R. 3086 now moves to the Senate for consideration, where a similar measure, S. 1431, the Internet Tax Freedom Forever Act was introduced by Senators Ron Wyden (D-Ore.) and John Thune (R-S.D.).

Gallup: “Uninsured Rate Sinks to 13.4%…Significant Decline in Uninsured Rate!” Really Gallup? Really?

Gallup released a poll yesterday with the blaring headline, “In U.S., Uninsured Rate Sinks to 13.4% in Second Quarter; Significant Decline in Uninsured Rate Across Age Groups Since the End of 2013.”  But before the Obama administration and those that support Obamacare take credit for this supposed sharp decrease in the uninsured, one needs to think about the time period that Gallup reviewed.  The polling organization admits that the figure “is the lowest quarterly average recorded since Gallup and Healthways began tracking the percentage of uninsured Americans in 2008.”

Has Gallup forgotten that the recession started in late 2007 and ended in 2009?  (For the millions who have given up looking for work, the recession has never ended but I digress.)  Considering that approximately 55 percent of all Americans have employer-based health insurance, and that 68.2 percent of those that are employed between the ages of 18-64 receive their insurance either through their employer or another person’s employer, it should not be surprising that the number of uninsured went up when unemployment went up.  In 2010, the peak of the unemployed was at an average 9.6 percent and the uninsured was at 16.4 percent.

But, as the unemployment rate started to fall, the uninsured continued to climb and reached its peak of 18.0 percent in the fall of 2013.  Why?

Gallup

Bureau of Labor and Statistics Data – Percent of Unemployed / 2008-2014

BLS Figures

It’s really very simple and perhaps Gallup just forgot about all news concerning Obamacare in the fall of last year.  Millions of people, primarily those that purchased their health insurance in the individual market, such as the self-employed, began to lose their insurance plans in 2013 because they did not meet Obamacare’s overly-restrictive and expansive mandates.  What are the mandates that are caused insurance premiums in the individual market to increase on average by 49 percent between 2013 and 2014?  Single young men and menopausal women, for example, must carry insurance policies that cover maternity and pediatric care. Mental health and substance-use disorder services must be purchased, even if an individual has never had a mental health or substance abuse problem.

Perhaps Gallup forgot that many people became uninsured because they could not purchase a plan through the malfunctioning federal and state exchanges, right up and into the new year.  It was because they were forced to purchase an Obamacare compliant policy that caused the precipitous drop in uninsured to occur between the 4th quarter in 2013 and 1st quarter in 2014.

Obamacare caused the uninsured rate to climb to 18 percent, now Gallup wants to credit it for dropping the uninsured rate to 13.4 percent.

The only problem is the uninsured rate was 14.6 percent in 2008, before Obamacare was even draft legislation.  In other words, Obamacare caused a complete upheaval in our healthcare system, at a cost of $41 billion to taxpayers in 2014, with an estimated cost of 1.5 trillion by 2024, to drop the uninsured rate by 1.2 percent.

That’s a whole lot of money that could have been better spent with much better healthcare results for all Americans.

Highway Trust Fund Nearing the End of the Road

The Highway Trust Fund is a transportation fund financed by an 18.4 cents per gallon gas tax extracted from drivers every time they fill their tank.  The tax proceeds are then used to fund work on the country’s rails, bridges, and roadways.   Unfortunately, according to a June 2014 CBO report, during the last decade “outlays from the Highway Trust Fund have exceeded revenues by more than $52 billion, and outlays will exceed revenues by an estimated $167 billion over the 2015–2024 period if obligations from the fund continue at the 2014 rate.”  The fund’s decline, brought about by inflation and increased fuel efficiency in new vehicle models, has placed the federal government in the all-too-familiar position of spending more money than it generates.

The solution preferred by many members of Congress would be to shovel more money into the fund.  However, given Congress’ poor track record with transportation spending, it is difficult to believe that additional funds would be allocated to their highest and best use.

Transportation appropriations bills have long been rife with waste.  Since FY 1991, members of Congress have added 18,174 earmarks costing taxpayers $32.5 billion to the transportation appropriations bills.  These include numerous museums, opera houses, and beautification projects such as streetscaping and bike paths over the years.  Before pumping more money into the fund, Congress should first ensure the bill is free of special interest handouts.

Perhaps the most efficient way to address the current dilemma is not to increase federal taxation, but rather to hand over both revenue generation and decision making power to the states.

An interesting idea has been proposed by Rep. Tom Graves (R-Ga.), who believes the best road forward is to “reduce the tax over five years to 3.7 cents/gallon, which could produce around $7 billion, and that money would be sent to states through block grants.”  After that, states would be free to raise their own gas taxes to pay for infrastructure as they see fit.  The contraction of federal taxation would allow for states to decide what is best for their residents and would eliminate the moral dilemma of having the residents of one state pay for residents of another.

A 2011 study by The Heritage Foundation found that in 2009 there were 28 donor states.  Worse yet, “Texas received only an 83.5 percent payback, costing it $672 million in underpayments that year.  Also in 2009, Florida received just 86 percent back, Arizona received 92 percent, and South Carolina received 85 percent.”  Regrettably, this version of robbing Peter to pay Paul has swindled Texans and others for quite some time, the tabulation of “return ratios over the past 53 years reveals that, among some of the 24 long-term losers, Texas received just 80.5 percent, Oklahoma received 86.3 percent, and Georgia received 85 percent.”

The task before legislators is to maintain the country’s infrastructure while foregoing increased funding for pet projects.  Time will tell if they are successful.

Here We Go…AGAIN!

President Obama has told the Congress and the country that he will be using his pen and phone to get his priorities implemented.  That has meant bypassing Congress and changing, or ignoring, current law.  It is well known that this has occurred several times during the horrendous rollout of the Affordable Care Act (ACA / Obamacare).  According to the Galen Institute, a healthcare public policy research organization, the Obama administration has made 23 changes to the law through administrative fiat.  The president is wielding his pen and phone in other public policy areas as well, such as immigration and environmental policy, with almost always controversial results.

This unilateralism is happening in more esoteric areas as well, which doesn’t tend to attract the attention of the main-stream news media.

In May, CAGW wrote about the 340B federal drug discount program and why Congress needs to hold hearings about the program and reform it.  The 340B program requires pharmaceutical companies that participate in Medicaid to provide heavily discounted outpatient drugs to “covered entities,” such as certain kinds of hospitals, federally qualified health centers, specialized clinics, which provide general health services as well as treatment for specific diseases to uninsured, low-income people who do not qualify for Medicaid or Medicare.  The “covered entities” that participate in the program are supposed to pass along the savings to low-income patients, but due to vague language in the 340B law, this is not always happening.

Instead, many hospitals and the pharmacies they contract with are generating millions of dollars in profit.  Both the General Accountability Office and the Department of Health and Human Services Office of the Inspector General have been critical of the Health Resources and Services Administration (HRSA), the agency that oversees the 340B program, pointing to an absence of oversight by HRSA and for not providing clear guidelines.  As always, the consumers and taxpayers end up paying for a government program gone haywire.

The 340B program was expanded under the ACA, broadening “covered entities” to include other providers such as critical-access hospitals, sole community hospitals, and free-standing cancer hospitals that can take advantage of the discounted drugs.  In doing so, it also aggravated the problems already present in the discount program.

For example, an article in an October 2013 Clinical Oncology News and a May 2014 IMS Institute for Healthcare Informatics’ study, entitled Innovation in Cancer Care and Implications for Health Systems, demonstrate how the 340B programs is driving up the cost of cancer treatment for patients and enriching hospitals instead.

One type of drug that was not originally included in ACA’s expansion of the 340B discount program was an orphan drug.  A drug receives orphan status from the Food and Drug Administration (FDA) when it is intended for use in the treatment, diagnosis, or prevention of a rare disease or disorder that afflicts fewer than 200,000 people in the United States.  Examples of such diseases or disorders are cystic fibrosis, Lou Gehrig’s Disease, Tourette’s Syndrome, Hamburger Disease, and Job Syndrome.  Pharmaceutical companies receive special incentives to create drugs to treat these types of diseases, such as tax credits and seven years of market exclusivity.

The administration decided to take matters in its own hands and on May 20, 2011, HRSA proposed a regulation that changed what the ACA law said about excluding orphan drugs from the discount program.  The agency proposed it would allow certain hospitals to purchase orphan drugs at the deeply discounted price, provided the drugs would be used for a disease or condition other than for which the drug got its orphan status from the FDA.  Sometimes an orphan-designated drug can be used to treat a non-orphan disease, similar to when a drug is used “off-label.”  When a medication is being used “off-label,” it means it is being used in a way that has not been explicitly approved for that indication by the FDA.  This is common medical practice, particularly in the field of oncology.  While pharmaceutical companies may not market off-label uses, a doctor can prescribe the use of a drug for any condition he or she feels is appropriate.

In July 2013, HRSA finalized the rule, making it official administration policy that utilizing an orphan drug for a non-orphan disease or condition would entitle a “covered entity” to get the discount.  Sen. Orrin Hatch (R-Utah) was strongly critical of the rule and wrote a letter to HRSA Administrator Mary Wakefield, stating the rule completely ignores the language of ACA and noted that it would be practically impossible for a drug company to determine whether an orphan drug was being used for a non-orphan condition or not.

The Pharmaceutical Research Manufacturers of America (PhRMA) immediately sued HRSA in September of 2013, stating the agency lacked the authority to change the clear meaning in ACA with respect to the orphan drugs exclusion from the 340B program.  It stated the rule would also create financial damage and weaken the incentive for companies to develop orphan drugs. On May 23, the U.S. District Court for the District of Columbia agreed with PhRMA’s argument and invalidated HRSAs rule.

In the wake of the ruling, in what has become a familiar executive branch gesture, HRSA simply thumbed its nose at the court and stated it would stand by its interpretation of the orphan drug exclusion language.

This action is another reason Congress must conduct oversight hearings on the 340B program and reform it to ensure it serves its original purpose.

Meanwhile, the lawlessness continues and patients and taxpayers will eventually pay the price.

Is Another Special Exemption from Obamacare on the Way?

Last week on June 18, Inside Health Policy reported that lobbying efforts were underway by organizations that represent Medicaid-dependent providers, such as home care services, establishments that care for the disabled, hospice care facilities, etc., to get a special carve-out from the employer health insurance mandate found in the Affordable Care Act (Obamacare.)  Under the health reform law, an employer with 50 or more employees is required to provide “affordable” health insurance and if they do not, the employer must pay a fine of anywhere between $2,000 to $3,000 per employee, depending on whether or not the employee gets a taxpayer subsidized credit in an Obamacare exchange.  However, because of the disastrous roll-out of Obamacare and other political concerns, the Obama Administration has delayed the employer mandate until January 1, 2015 or 2016, depending on the number of employees an employer has.

American Network of Community Options and Resources (ANCOR), which according to Inside Health Policy, represent “overwhelmingly Medicaid-dependent providers that rarely have any other source of revenue” are actively engaged in getting relief for their membership.  ANCOR’s Vice President of Policy Barbara Merrill said that although the majority of their members provide health insurance to their employees, over half believe their administrative costs will increase between 15 and 50 percent.  ANCOR is asking the Centers for Medicare and Medicaid Services (CMS) for some sort of relief such as to have the taxpayers reimburse the employer’s penalty for not providing health insurance.  Another solution they are looking at is some sort of transitional relief beyond what CMS has already done, such as providing limited but targeted federal matching tax dollars to the states in order for the providers to buy time to figure out solutions to the mandate problem.  One thing that Merrill says they are not advocating for is repeal from or an exemption to the employer mandate.  Nor are they looking to change to the definition of a full-time employee, which under Obamacare is a person that works 30 hours or more.

But according to Inside Health Policy report, other advocacy groups for Medicaid providers are looking at the aforementioned policy options.  The National Association for Home Care and Hospice (NAHC) wants a further delay in the employer mandate and other ideas, such as exempting home care workers from the mandate, changing the definition of a full-time employee, and more taxpayer funding to either pay for health insurance for the employer’s employees or the employer’s penalty if insurance is not provided.  Additional suggestions include allowing the employer’s full-time workers to also enroll in Medicaid, a “pass-through payment for commercial insurance enrollment,” and reducing administrative requirements to save in overall employer costs.

The organizations representing the Medicaid-dependent providers have also been successful in getting at least two congressional members involved in their issue.  The June 24 Inside Health Policy edition provided a copy of a letter Senator Tammy Baldwin (D-WI) and Rep. Ron Kind (D-WI) sent to Secretary of Health and Human Services (HHS) Sylvia Matthews Burwell on June 20.  They write about their concern the Obamacare employer mandate will have on Medicaid dependent home and community-based providers.  They argue that these organizations, which service Medicaid patients, run on “very slim margins” and have “raised unique concerns about complying with the ACA’s [Affordable Care Act] employer responsibility requirements.”  They state, “Medicaid dependent home and community-based providers could face significant financial burdens in complying with the employer responsibility requirements in the ACA.”  The elected officials close by saying, “In light of recent decisions to provide for transition relief with respect to implementing requirements in the new law, we request that HHS fully explore options to support Medicaid dependent home and community-based providers in complying with the ACA’s employer mandate responsibility requirements.”

Inside Health Policy notes that a congressional aide said it is unlikely any change can be made legislatively considering the political animosity around Obamacare and that the best approach is to work with CMS to get the changes.  The organizations have asked CMS to call a meeting that would include all the stakeholders to discuss ways to fix the employer mandate problem.  No doubt the letter from Baldwin and Kind will spur the administration to find some sort of solution for these types of employers.

CAGW agrees that Medicaid-dependent providers are facing a severe burden complying with the Obamacare employer mandate.  But so aren’t thousands of other employers who also operate on very thin margins, are struggling to stay afloat in a prolonged weak economy, and pay the taxes that fund Medicaid.  CAGW believes the employer mandate should be delayed permanently for all employers, along with the individual mandate.  Now those are some real solutions.

Unfortunately, the problem with Obamacare, or any federal program for that matter, is it invites the federal government to play politics and treat groups it favors differently than those it does not.  Expect a special carve-out for the Medicaid-dependent providers before the end of the year.

Here’s another thought.  Any governor thinking about expanding Medicaid to their citizens under the age of 65 with incomes up to 133 percent of the federal poverty level should pay close attention to what Baldwin and Kind stated in their letter about the government-run health insurance program.  They said, “The challenging economic conditions and tight budget environment have placed significant strain on state Medicaid programs in recent years.  As a result, provider payments have been cut or frozen across much of the country.”

Since Medicaid is in such fiscal trouble, why would any political leader want to bet their state’s budget on the belief that the federal government will provide 90 percent of the funding to expand Medicaid ad infinitum?  Governors Corbett (R-Penn.), McAuliffe (D-Va.), Pence (R-Ind.), and Herbert (R-Utah) are you paying attention?

CAGW has written about the folly of Medicaid expansion that includes a January Waste Watcher entitled “Medicaid Expansion – A Wolf in Sheep’s Clothing.”

House Judiciary Tackles GSA Waste

House Judiciary Tackles GSA Waste
By Colin Gamm

The House Judiciary Subcommittee on Courts, Intellectual Property and the Internet held a hearing today on two cases of wasteful courthouse renovations.  The hearing topic was entitled “GSA’s Failure to Meet the Needs of the Judiciary: A Case Study of Bureaucratic Negligence and Waste.”

The full Judiciary Committee is chaired by Representative Bob Goodlatte (R-Va.), who has actively confronted GSA about its renovation of the Poff Federal Building in his home district.  The project has been marred by a variety of missteps, including improper procedure, cost overruns, and serious disruption of its primary tenants, the United States District Court of Western Virginia and a regional Veterans Affairs office.

The Poff renovation, initially budgeted at $51 million, will likely end up costing taxpayers around $80 million once the final stage of the project is completed.  The Inspector General of GSA released a report revealing that GSA officials violated federal procurement laws while contracting the project, and in response to Rep. Goodlatte’s inquiries, GSA admitted that it had not conducted a full cost-benefit analysis until after the contracting was complete.  As for the tenants, the courts were subject to noisy, disruptive construction, while the V.A. was forced to scatter to multiple new offices before returning this year.

The other case concerned a landscaping project for the Pete V. Domenici U.S. Courthouse in Albuquerque, New Mexico.  While judges initially asked only that GSA fix a leak and replace an inefficient species of grass, they received much more: a six-month, $3.4 million landscape renovation, almost a tenth of the total cost of the courthouse.

Witnesses at the hearing included William P. Johnson, Judge for the United States District Court of New Mexico; Glen E. Conrad, Chief Judge, and Jennifer Smith, Architect and Project manager, of the United States District Court of Western Virginia; and Michael Gelber, Deputy Commissioner of GSA’s Public Building Service.

City Residents Tell Investment Group No

According to a June 18, 2014 article by Deseret News, residents of Lindon, Utah rejected a proposed partnership with the Australian-based Macquarie Group that would have given Macquarie control of the Lindon fiber optic network for 30 years.  Lindon is the first member of the Utah Telecommunications Open Infrastructure Agency (UTOPIA) to decline the Macquarie proposal.

UTOPIA was originally formed to own and operate a telecommunications network and provide fiber optic services in the Greater Wasatch region of Utah.  Unfortunately, after twelve years, the existing network passes approximately 40 percent of total addresses and is currently available for connection in only 27 percent of addresses.

The first twelve years of UTOPIA produced an incomplete network that is currently “serving a small base of customers and languishing in debt,” according to the Deseret News article.  As a matter of fact, UTOPIA, along with the Utah Infrastructure Agency (UIA), had accumulated “$343 million of debt obligations as [of] June 30, 2013.  However UIA issued a further $12 million of bonds in July 2013, increasing the total debt outstanding to approximately $355 million.”

Then came the Macquarie Group proposal, which residents turned down, mostly because of exorbitant costs.  The resident’s opposition resulted from the 30 year timeframe and mandatory utility fees proposed by Macquarie.

An April 29, 2014 article by the Salt Lake Tribune stated that UTOPIA “was conceived by city officials 12 years ago to give businesses and homes access to Internet download and upload speeds of one gigabit per second, some 200 times faster than rates available at the time from private vendors.”

Local municipalities believed they could give residents 200 times faster service at a cheaper price than private sector counterparts.  Instead, they stuck residents with a bill of more than a quarter of a billion dollars.

Unfortunately for the residents of Lindon, despite stonewalling the Macquarie proposal, they are still on the hook for the existing debt.

CCAGW to Senate Judiciary: Lift Outdated , Onerous Regs During STELA Markup

June 17, 2014

The Honorable Patrick J. Leahy
Chairman
Senate Judiciary Committee
224 Dirksen Senate Office Building
Washington, DC 20510

The Honorable Charles Grassley
Ranking Member
Senate Judiciary Committee
224 Dirksen Senate Office Building
Washington, DC 20510

Dear Chairman Leahy and Ranking Member Grassley,

On behalf of the more than one million members and supporters of the Council for Citizens Against Government Waste (CCAGW), I urge you to add provisions that eliminate outdated regulatory schemes, such as retransmission consent agreements and must-carry provisions of the Cable Act of 1992, during the mark up of S. 2454, the Satellite Television Access Reauthorization Act of 2014 (STELA) on June 19, 2014. These changes to the legislation would reflect the current, competitive marketplace, which includes satellite TV, and are therefore appropriate to be included in any reauthorization of STELA.

When Congress passed the Cable Act of 1992 in response to cable television rate increases following deregulation, a lack of competition in the cable marketplace, and the concern of broadcasters that their local stations would not be carried by cable companies, it did not foresee the rapid growth and innovation that has occurred in the commercial video marketplace. Television has changed vastly since the days analog signals carried only three major networks and one or two other channels. Today there is a wide range of viewing options available to consumers, ranging from cable and fiber optic networks on the ground, to satellite feeds and online distribution of programming. Rather than dealing with a single cable monopoly, broadcasters can choose among multiple providers, and as a result now hold enormous negotiating power under outdated retransmission consent rules. This re-balancing of power has led to service disruptions and increases in the cost of service for consumers.

Proponents of the status quo have argued that retransmission is good for the free market and that broadcast television programming would be threatened if the law was modified or retransmission was terminated. However, it appears from past negotiation history that multichannel video programming distributors (MVPDs) such as cable, satellite and fiber providers are at a distinct disadvantage in the negotiating process. The existing system is not pro-competition and fails to protect consumers. Short of disposing of retransmission consent agreements and must-carry provisions altogether, I encourage you to eliminate the ban on MVPDs from disconnecting service during sweeps week, and eliminating a broadcaster’s right to placement on the basic tier in order to provide for a level playing field in negotiations.

Government rules and regulations should drive businesses into the twenty-first century, not hold them back. In retransmission consent negotiations, consumers lose viewing time and pay increased costs.

I strongly urge you to include in STELA reauthorization legislation provisions that will remove the regulatory interventions that impede the free market, such as must-carry and retransmission consent.

Sincerely,

Thomas A. Schatz
President, CCAGW

cc: Senate Judiciary Committee Members

Tick Tock Goes The Clock – But H.R. 3086 Passes First Hurdle

On June 18, 2014, the House Judiciary Committee ordered reported to the House of Representatives by a vote of 30 to 4, H.R. 3086, the Permanent Internet Tax Freedom Act.

Ticking ClockThe Council for Citizens Against Government Waste (CCAGW) sent a letter to committee on June 17, 2014 supporting this legislation and urging final passage before the August recess.  The legislation has wide bipartisan support in Congress, with 221 cosponsors.  The Senate companion bill, S. 1431, the Internet Tax Freedom Forever Act has 50 cosponsors.

In 1998, the Internet Tax Freedom Act placed a moratorium on discriminatory taxes on the Internet and taxes on Internet access.  With wide bipartisan support, the Internet tax ban was extended in 2001, 2004, and 2008.  For 16 years, the ban on these inequitable taxes has benefited millions of Americans by enabling them to conduct transactions on the Internet free from worry about additional tax burdens.

During the debate over the moratorium in 2004, CCAGW President Tom Schatz noted that “a tax ban does not constitute a ‘loss’ for government officials because the money was never theirs to begin with,” Schatz continued.  “It keeps money in the hands of people who earn it.”  This sentiment remains true today.

One of the many problems with taxing the Internet is that when something becomes more costly, people will engage in less of it.  For example, today, nearly every business enterprise uses the Internet to communicate with customers, and share information about its goods and services.  However, the remarkable growth and future development of the Internet is threatened if the Internet tax moratorium is not extended.

Any new taxes on Internet access would affect job seekers who may not be able to pay for these additional taxes, as most employers now require prospective employees to fill in their job applications online; households with children who are increasingly required to perform schoolwork online; those who prefer shopping online; and, individuals who connect with friends electronically.

It is important that this measure be finalized prior to the November 1, 2014 expiration of the current moratorium on Internet taxes.

Inefficiencies in Coin Management Lead to Soaring Costs

A June 2014 report by the Government Accountability Office (GAO) revealed that, from 2008 to 2012, coin management costs associated with the Federal Reserve increased by 69 percent.  Additionally, the agency had failed to identify potential measures to save costs.

The Federal Reserve Banks of the United States are in charge of meeting the coin demand of our nation’s credit unions, federal savings associations, and commercial banks.  The 12 Reserve Banks manage inventory and place orders with the United States Mint when new coins are needed.  This is no small task; over 10 billion coins were produced by the United States Mint in 2013 alone.

Unfortunately, the Federal Reserve completely followed only two of the five management practices identified by GAO.  Additionally, the agency had not fully developed metrics to curtail coin management costs.  Interestingly, although costs from 2008 to 2012 increased for all Reserve Banks, there were large disparities between the banks in terms of percentage.  For example, cost increases ranged from 36 percent all the way up to 116 percent.

As a result of these increases, the GAO recommended that the Federal Reserve “develop a process to assess the factors that have influenced increasing coin-operations costs and the large differences in costs across Reserve Banks and to use this information to identify practices that could lead to costs savings.”

Actions have been taken in the past to increase performance and there may be hope of improvement going forward.  In 2009 the Federal Reserve centralized coin management as a way improve the relationship between coin supply and coin demand.  Due to centralization, the Federal Reserve’s Cash Product Office (CPO) “manages distribution of the coin inventory, orders new coins, and acts on behalf of the Reserve Banks in working with stakeholders, such as depository institutions.”

The 2009 consolidation by the Federal Reserve led to improvements, including a reduction in national coin inventories.  Cost savings by the Federal Reserve are important because once the costs of operating the Federal Reserve are subtracted from generated revenue, the remaining amount is transferred to the General Fund of the Treasury.

The GAO Report noted that the Federal Reserve generally agreed with the recommendations it received and is in the process of developing a plan to address the issues raised in the report.  Specifically, the Federal Reserve is going to define a “new metric that measures the productivity of Reserve Bank coin operations and that will enable it to monitor coin costs and identify cost variations across Reserve Banks.”

Hopefully the adoption of GAO proposals will ward off further increases in the cost of coin management.