[ESSAY] [BOARD OF DIRECTORS] [MESSAGE FROM MANAGEMENT] [FINANCIALS PDF (172K)] [SUMMARY OF OPERATIONS] [BANK OFFICERS] [CREDITS] [TEXT-ONLY VERSION]
[President's Message]
[I. Introduction]
[II. A Few Treasury Notes]
[III. The Fed: Fiscal Agents of Change]
[IV. St. Louis Fed Steps Up]
[V. Conclusion]
Sidebars:
[A Deep Commitment]
[The Paper Chase]
[Striving to Make Pulp Fiction]
[The Treasury's Perspective]


III. The Federal Reserve—Fiscal Agent of Change

In some ways, the Federal Reserve’s relationship with the Treasury is as different as the world in general was 90 years ago. Who during Wilsonian times could have imagined a financial environment that eventually would consist of such complex automation and electronification? And who could have envisioned that the Treasury would depend on the Fed to manage these technologies and play a vital role in maintaining high standards of security, efficiency and reliability?

Today, all Federal Reserve districts provide some kind of business line support for the Treasury. What follows is a summary of some of the main tasks and functions the Fed provides for the FMS, BPD and OFAS.

Products and Services for the Financial Management Service

Collection: When the Treasury launched the Electronic Federal Tax Payment System (EFTPS) in 1995, the Federal Reserve was actively involved, helping the Treasury and the IRS implement and market EFTPS to both depository institutions and taxpayers. EFTPS collects $1.6 trillion in taxes for the government annually. Participating taxpayers can elect to go through financial institutions to send an electronic tax payment (via the automated clearinghouse or Fedwire®), or they can enter instructions directly on a web site for their bank account to be debited on the tax due date. The Federal Reserve processes and settles the tax payments and sends related information to the FMS for cash management reporting.

The Fed’s savings bonds operations in 1942 climbed to approximately 4,000 employees, or 20 percent of its work force.

The Fed is also involved in the Treasury Tax and Loan (TT&L) program. TT&L is a system that enables a financial institution to collect federal tax payments from its customers on behalf of the Treasury. The Treasury also invests excess operating funds through the TT&L system at an administratively set rate. Excess funds are also auctioned and placed at a competitive rate to participating financial institutions through a program called the Term Investment Option (TIO). The funds can provide a financial institution with a ready source of liquidity for investment opportunities. Through TT&L and TIO, the Reserve banks provide the Treasury with a safe and efficient way to manage its funds. The Fed invested $2 trillion of government funds in the TT&L program in 2004 and $309 billion in TIO, resulting in over $177 million in earned interest for the U.S. government.

Another innovative initiative the Fed manages for the Treasury is Pay.gov, an Internet portal that some federal agencies make available to the public for activities such as submitting information via forms and authorizing electronic payments to agencies. Pay.gov is available for a variety of payments, from a camping license fee required by some national parks to businesses that lease government buildings. The Federal Reserve operates the computer application for the web site and manages the vendors that perform technical support. Pay.gov in 2004 processed nearly 306,000 transactions from 73 agencies for approximately $409 million. Since its inception nearly five years ago, Pay.gov has processed slightly over 2 million transactions for approximately $14.2 billion. The Treasury expects the site to increase in popularity as agencies rely on the Internet to process financial transactions.

Payments: In the effort to convert all of its payments from paper to electronic, the Treasury has found an experienced partner in the Federal Reserve. The Fed has been offering electronic services to commercial banks for decades. After the Air Force built a similar system to pay its service men and women in the mid-1960s, the Fed in the early 1970s was one of the developers of the commercial automated clearinghouse (ACH). The ACH is a nationwide system for electronic transfer of funds now used by almost all financial institutions in the United States. Sending money to someone through the ACH process is also known as direct deposit or electronic deposit.

Treasury checks now include sophisticated encryption features that are validated at Reserve banks to enhance fraud-detection efforts.

The Reserve banks’ central clearing application for transmitting and receiving ACH payments is called FedACHSM, which is what the Treasury uses to make approximately 81 percent of all Social Security benefit payments, 98 percent of all Treasury disbursed federal salary payments and some one-time payments, such as federal tax refunds. The other Fed system the Treasury uses to make payments is the Fedwire® Funds Service, which provides immediate settlement for large-dollar payments that must be settled on the same day they are originated.

Reserve banks also participate and support other payments services used by federal agencies, including:

  • Grant payments: The Treasury’s Internet-based Automated Standard Application for Payments (ASAP) was developed and is operated by the Reserve banks. ASAP allows individuals and organizations that receive federal grant payments to submit payment requests via the Internet (ASAP.gov) and to later receive the payments electronically. After a request is submitted on ASAP.gov, it is forwarded to a related computer application at a Reserve bank, which reviews the request, compares it with the parameters established by the granting agency and initiates the payment. ASAP initiated nearly $400 billion in payments in 2003.
  • Intra-governmental payments: About 300 government agencies pay one another using a computer application that electronically transfers information and funds. This service, which the Fed developed at the Treasury’s request, reduced the need for paper invoices and agency-to-agency checks.
  • Vendor payments: The Treasury in 2003 directed the Reserve banks to manage the Internet Payment Platform. In this pilot program, three federal agencies and their commercial vendors used a central web site to exchange purchase orders and invoices and to initiate ACH payments. The Treasury has decided to proceed with a permanent Internet payment program and has asked the Fed for further support.
  • Military stored-value cards: By mid-2004, approximately 108,000 stored-value cards were issued to U.S. military personnel. The Reserve banks’ role is to maintain detailed transaction and accounting records for the Treasury, to maintain card balances, to pay participating merchants via the ACH, and to develop and maintain related computer applications. The Reserve banks also have developed kiosks for several military bases abroad to allow military service personnel to transfer funds from their bank accounts onto their stored-value cards.

Products and Services for the Bureau of the Public Debt

Like the Financial Management Service, the Bureau of the Public Debt is interested in deploying emerging technologies to achieve its objectives. One example of how the Fed is helping achieve this is through a computer application it developed that makes Treasury auctions run more smoothly. The Treasury sells marketable securities like Treasury bills, notes, bonds and inflation-protected securities to investors through periodic auctions. The application the Fed developed compares all bids submitted in an auction, assists the Treasury in determining the lowest acceptable price offered and then calculates the amount to be awarded to each bidder.

The highly automated process enables the Treasury to announce its auction results to the public electronically, usually within two minutes of the auction’s closing. This shortened time frame allows the Treasury and the Reserve banks to decrease the risk to bidders of changes in market conditions that can occur between the close of bidding and the announcement of results. The Reserve banks in 2003 supported 202 auctions and processed bids totaling almost $8.2 trillion.

The public holds approximately $4.5 trillion of the $7.6 trillion total public debt.

Another important system that the Fed operates is the Fedwire Securities Service. This service initiates transactions when interest payments are due on securities for the Treasury or other entities (e.g., Fannie Mae or Freddie Mac), as well as in instances when the Treasury redeems, or buys back, securities from current owners and retires the debt. The Fedwire Securities Service is also a safekeeping system for certain book-entry securities, meaning that it consists of an electronic vault that stores records of book-entry securities holdings by account holder. In late 2004, the system held $28.5 trillion worth of securities in safekeeping.

Many investors who generally hold their Treasury securities until maturity participate in a Fed-operated system known as TreasuryDirect. The Reserve banks issue confirmation notices and account statements to the TreasuryDirect account holders and credit interest and principal payments to their account with their depository institutions. TreasuryDirect investors can perform their transactions on the Internet or by telephone. As of December 2004, TreasuryDirect maintained almost 714,000 accounts, holding a total of $61.7 billion of Treasury securities.

U.S. savings bonds are a long-standing staple of the Treasury’s offerings to the public. As of September 2004, $204 billion in savings bonds—representing 4.7 percent of the federal public debt—was outstanding. Each year, consumers purchase more than 40 million savings bonds and redeem nearly 5 million. While the Fed is not the only outlet for issuing, servicing and redeeming savings bonds, it is a primary provider of this service for the BPD.

Products and Services for the Office of the Fiscal Assistant Secretary

The St. Louis Fed in 1998 helped develop a centralized application called CASH TRACK that provides data to OFAS for use in its daily cash management activities. CASH TRACK collects payment and receipt data from government agencies, financial institutions and Federal Reserve banks and reports the activities to the Treasury. It also tracks historical data, which is used to forecast outlay and receipt activity for cash management and debt management purposes.

“Fedwire” and “Fedwire Funds Service” are registered trademarks, and “FedACH” is a service mark, of the Federal Reserve banks. A complete list of marks owned by the Federal Reserve banks is available at www.frbservices.org.

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