Page images
PDF
EPUB

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.

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.

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 con

tacted 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.

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.

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.

[The prepared statement of Michael E. Motley can be found on page 67 in the appendix.]

Chairman CASTLE. Thank you, Mr. Motley.

Mr. Barreaux.

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.

Chairman CASTLE. Let me just say, Mr. Barreaux, that—and I see Mr. Baldwin is here as well-as 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.

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.

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 102-390 required the Mint to prepare annual financial statements and to have them independently audited, beginning with fiscal year 1993. Also, Public Law 104-208, 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 properly-and that is a big if-these 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.

Mr. Chairman, that concludes my prepared remarks, and Mr. Clark and I would be pleased to respond to any questions the subcommittee may have.

[The prepared statement of Theodore C. Barreaux can be found on page 108 in the appendix.]

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 judgment-and 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.

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? 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.

« PreviousContinue »