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 | A DEEP COMMITMENT | THE PAPER CHASE | STRIVING TO MAKE PULP FICTION | THE TREASURY'S PERSPECTIVE | RETIRING MEMBERS | LITTLE ROCK BOARD | LOUISVILLE BOARD | MEMPHIS BOARD | ST. LOUIS BOARD | MESSAGE FROM MANAGEMENT | FINANCIALS (PDF 172K) | SUMMARY OF OPERATIONS | BANK OFFICERS | CREDITS

president’smessage

William Poole
President and CEO

Readers of our 2003 annual report will recall our essay detailing a major change in philosophy for the Federal Reserve Bank of St. Louis. We presented a new mission for our branch offices, one focusing more on intellectual leadership and less on operational functions. Last year’s report proved that the Federal Reserve System and the St. Louis Fed in particular face the same challenges as many private businesses: run a tighter ship, do more with less and leverage your strengths.

This final point—leveraging strengths in order to bring the greatest possible value to customers—sums up why in this year’s report we write about the symbiotic relationship between the Federal Reserve and the U.S. Treasury. Furthermore, we discuss how a key leadership role granted to the Eighth District helps to ensure that the Treasury can continue to count on the Fed as a dependable, dedicated partner.

Our Bank was privileged in 2001 to be chosen as the System’s Treasury relationship office, representing all Reserve banks. The assignment means that St. Louis is the central point of contact for all Federal Reserve products, services and objectives relating to the Treasury. The Fed’s commitment to the agency breaks down to approximately 1,600 employees nationwide providing more than $400 million worth of services annually.

For many years prior to 2001, the St. Louis Fed was a proud provider of Treasury-related offerings. Thus, upon accepting leadership responsibility, we were supremely confident that the knowledge and experience ingrained within our staff—led by First Vice President LeGrande Rives, Senior Vice President Dave Sapenaro and Vice President Judie Courtney—would be something our Treasury colleagues would find valuable.

Teaming up with the Treasury is nothing new for the Federal Reserve. The role of fiscal agent and depository of the Treasury was officially assigned to the Fed in 1915, shortly after the central bank was created. What is new is the type of work the Fed has performed for the Treasury over the past five to 10 years.

In the early years, Reserve banks accepted taxes and customs duties, held deposits for the Treasury, cleared Treasury checks and redeemed Treasury coupons. World Wars I and II witnessed the Fed’s involvement in issuing, servicing and redeeming bonds to defray the costs of the conflicts, with U.S. savings bonds continuing as a popular Treasury offering to this day. The relationship between the two organizations continued to evolve over the years, with emerging technologies like the automated clearinghouse network for electronic payments resulting in product and service advancements on a larger scale.

Since the end of the 1990s, however, the pace of change has quickened. The Treasury has expanded efforts to produce more convenient, reliable and secure services that are good for both the federal government and the general public. Whether we’re talking about new forms of Internet payment, stored-value cards or government direct payment programs, it’s safe to say that the past 10 years have brought more technological change and challenges than the previous 80 years combined.

For the St. Louis Fed, the daily task of managing and coordinating the Reserve banks’ many contributions to the Treasury is a momentous challenge unto itself. I invite you to read our 2004 annual report and learn how, in so many ways and with the St. Louis Fed’s guidance, the Federal Reserve is committed to helping the Treasury achieve its strategic objectives.

William Poole

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I. Introduction

March 2, 2005

On this late winter’s day, there is no obvious connection among the four. Nina is an 84-year-old great-grandmother in Denver; Patricia owns a chain of computer-repair shops in New Orleans; Andy is a proud, young father in Jefferson City, Mo.; and Vince is a U.S. Army first lieutenant on duty in Kuwait. As they go about their business today, however, one link does emerge.

Nina had been receiving her Social Security check in the mail at the beginning of every month for nearly 20 years. Then, less than a year ago, as Nina’s health began to decline, her grandson convinced her that switching to direct deposit would reduce some stress in her life. This morning, as a foot of freshly fallen snow greets Denverites, she calls her grandson to thank him for his advice. Rather than making the difficult trek to the bank to deposit her check, Nina sits comfortably at home while her money sits safely and securely in her account.

In New Orleans, Patricia is caught in a more desirable blizzard of sorts. Her computer-repair business is booming. She arrives at her office at 6:30 a.m. to prepare for a meeting with her five store managers at 8. On the agenda is the subject of adding to staff to keep up with customer demand. Ten minutes before her managers arrive, Patricia realizes she still has enough time to complete another task on her jam-packed to-do list. Her quarterly federal tax payment is due later in the week. She logs on to the Electronic Federal Tax Payment System (EFTPS) web site, enters her information and sends instructions to have her payment transferred from her bank account on the due date. With seven minutes remaining before the meeting begins, Patricia steps away to refill her coffee cup.

As first-time father Andy enjoys breakfast with his 3-year-old son, Zach, he smiles, seeing how engrossed the boy is playing with his toy cars. It suddenly occurs to Andy that, soon enough, the time will come when Zach will be old enough to do more than merely imagine being behind the wheel. As his dad had done for him, Andy wants to one day help his son pay for his first car. He decides that today is the day to start saving for it by choosing a safe investment with steady growth prospects. Later at work, a colleague recommends a web site to Andy that would enable him to directly purchase U.S. savings bonds and give them to his son when Zach is ready to pick out something he can drive in a lane that’s a bit wider than the kitchen table.

Halfway across the globe, Vince has been leading his platoon through relentless training missions for over a month, in preparation for deployment in Iraq. This afternoon, however, he is able to break away and head into town to purchase a hand-woven Kuwaiti dress for his sister, who will turn 40 later in the month. Before he leaves, Vince first stops by the currency exchange office on the base to obtain Kuwaiti currency. Later, he mails the present from the base post office. For both transactions, Vince uses his Army EagleCash stored-value card, which he had preloaded with funds from his bank account several days earlier.

The common thread running through the lives of Nina, Patricia, Andy and Vince is perhaps one that only the U.S. Department of the Treasury and the Federal Reserve can fully appreciate. But appreciate it they do. These two formidable organizations are working in tandem to push innovative, electronic mechanisms for government payments, collections and savings options for the public. The Fed’s long-standing relationship as the Treasury’s fiscal agent has taken on extraordinary significance over the past decade, as technological advancements in society have increased the likelihood of the Treasury’s ultimate goal: 100 percent electronic financial transactions. The electronic payment revolution is resulting in improved efficiencies for the federal government, greater convenience for consumers and cost-savings for both parties.

This annual report examines the critical, but little understood, role that the Fed serves for the Treasury and the central role played by the Federal Reserve Bank of St. Louis in particular.

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II. A Few Treasury Notes

Although the Federal Reserve dedicates many resources to support the goals of the U.S. Treasury, there are, in fact, many areas of the agency in which the Fed has no involvement at all.

The Treasury Department consists of 12 bureaus and offices, including familiar names like the Internal Revenue Service, the U.S. Mint, and the Bureau of Engraving and Printing. Although the Fed supports many of these areas in some capacity, this report will focus on the two bureaus the Fed provides extensive services to—the Financial Management Service and the Bureau of the Public Debt. We will also discuss the interactions between one of the Treasury’s policy-making bodies—the Office of the Fiscal Assistant Secretary—and the Federal Reserve Bank of St. Louis, which oversees all of the products and services the Reserve banks provide to these three entities of the Treasury.

Financial Management Service

The function of the Financial Management Service (FMS) is to manage the U.S. government’s money. The FMS provides centralized collection, payment and reporting services for the government. Every day, the bureau oversees the cash flow of nearly $58 billion into and out of federal accounts.

The FMS collects more than $2.3 trillion each year for the federal government. These payments include individual and corporate income tax deposits, customs duties, fees for government services, fines and loan repayments. On the other side of the ledger, the bureau disburses more than $1.5 trillion each year to more than 100 million individuals through Social Security payments, veteran’s benefits, income tax refunds and other federal payments.

The stated goal of the FMS is to move toward an all-electronic Treasury for both collection and payments. As we will detail in the next section, the Fed has partnered with the FMS to implement cutting-edge technology that advances the Treasury closer to that objective. So, how close are we to an all-electronic environment? The FMS reports that $1.9 trillion of the $2.3 trillion it collects is through electronic transactions, nearly 80 percent. As for payments, electronic-related transactions accounted for more than 75 percent in fiscal year 2004.

In addition to managing collections and payments, the FMS maintains the federal government’s set of accounts and serves as the repository of information for the government’s financial position. As part of this responsibility, the FMS assists federal agencies with adopting uniform accounting and reporting standards and systems. The bureau also assures the continuous exchange of financial information among federal agencies, the executive branch’s Office of Management and Budget, and financial institutions.

One other main FMS task worth noting is the collection of delinquent debt. The bureau uses a centralized process to collect delinquent debt owed to the U.S. government (e.g., student, mortgage or small business loans, or fines or penalties assessed by federal agencies), as well as income tax debts owed to states and overdue child support payments owed to custodial parents. Since Congress placed debt collection under a single, central authority, the FMS has collected nearly $21 billion in delinquent debts that otherwise would not have been collected.

Bureau of the Public Debt

The public has been familiar with the products of the Bureau of the Public Debt (BPD) since 1917, when the Treasury directed the Federal Reserve banks to issue Liberty Loan bonds and Victory notes to help the government finance World War I. The BPD, whose primary mission is more narrowly defined than that of the FMS, borrows money needed to operate the government and accounts for the resulting debt.

Each year, the BPD collects about $2 trillion by selling Treasury bills, notes and bonds either at auctions or directly to customers. That figure is boosted by the sale of savings bonds at 40,000 locations throughout the country. The bureau pays interest to investors and eventually redeems the loan when the item matures.

Office of the Fiscal Assistant Secretary

Overseeing the aforementioned two bureaus is the Office of the Fiscal Assistant Secretary (OFAS). This office develops policy on payments, collections, debt financing operations, electronic commerce, government-wide accounting, government investment fund management and other issues. OFAS also performs two mission-critical functions for the Treasury: managing the daily cash position of the government, and producing the cash and debt forecasts used to determine the size and timing of the government’s financing operations.

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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 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.

The Reserve banks’ central clearing application for transmitting and receiving ACH payments is called FedACH^SM, 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.

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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IV. St. Louis Steps Up

By now, we’ve learned that the Federal Reserve’s work for the Treasury is vast, varied and voluminous. With Reserve banks across the country performing many unrelated operations, it is essential that one office serve as a centralized headquarters to coordinate and manage all of the work. In 2001, the Federal Reserve Bank of St. Louis’ formal proposal to assume this role was approved by the Federal Reserve’s governing body for financial services, the Financial Services Policy Committee.

The St. Louis Fed’s Treasury Relations and Support Office (TRSO) now has about four years under its belt serving as the liaison between the Fed and the Treasury. The desire to become the Treasury’s relationship office was not a fleeting hope. The idea was a Bank strategic objective for several years running before the Fed rotated the office to St. Louis.

Prior to being awarded the office, the St. Louis Fed served as a provider of Treasury services through modernizing the Treasury Tax and Loan function and through implementing CASH TRACK. Today, the St. Louis Fed still employs a large staff whose mission is to support Treasury services such as CASH TRACK, the Treasury Investment Program, tax collections and web development services to agencies for collecting funds and reporting information.

“Our objective was to expand our Bank’s role as a key and trusted business partner of the Treasury,” said LeGrande Rives, first vice president of the St. Louis Fed and the leader of the bid to obtain the TRSO. “In addition to mentioning our past successes in our proposal, we strongly emphasized the need to identify strategic initiatives and opportunities that benefit both organizations, while ensuring that all Treasury-related Fed initiatives are successfully completed.”

The TRSO’s responsibilities fall into three major categories: 1. relationship management; 2. strategic consulting; and 3. oversight of Fed initiatives in support of the Treasury’s strategic directions.

Relationship Management: As the Treasury’s chief advocate within the Federal Reserve System, the TRSO ensures that the Treasury’s strategic direction and specific initiatives are understood by all relevant Fed System officials. At the same time, officials identify any System initiatives that may affect the Treasury and incorporate the Treasury’s interests into the System’s planning, decision-making and scheduling. St. Louis is also the focal point within the Fed System for the resolution of policy and operational issues. To keep the relationship between the Fed and the Treasury strong, the TRSO stays in constant contact with the FMS, BPD and OFAS.

Strategic Consulting: The TRSO consults with the Treasury as a think tank would—immersing itself in information about the Treasury’s strategic needs related to fiscal and payment-related activities. If the TRSO identifies any potential gaps between strategic direction and work being pursued by the Treasury and/or the Fed System, it looks to surface ideas for products and services that could fill these gaps. In this capacity, the TRSO also seeks out ways to share expertise and lessons learned between the Treasury and the Federal Reserve banks.

Oversight of Fed Initiatives for the Treasury: The TRSO is responsible for the completion—on time and within budget—of all fiscal projects the Fed performs for the Treasury. For payments-related projects that fall under the domain of other Federal Reserve product offices, the TRSO provides oversight primarily by monitoring progress on each project’s key interim deadlines, costs and status of outstanding issues. The TRSO hosts a number of regular meetings and conference calls to keep Fed System Treasury groups informed about any updates.

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V. Conclusion: Benefits for All

It is not hyperbole to state that the movement to electronic forms of payment has saved the federal government billions of dollars over the years. Without such staggering amounts saved, the government would look to taxpayers to make up the difference.

Indeed, with the Fed’s help, not only is the government saving more money, it is earning additional money on those savings through programs like the Term Investment Option. And the Fed is helping the Treasury collect money that may never have been recovered through systems developed for collecting delinquent debt.

Individuals are benefiting from the Treasury/Fed partnership as well, thanks to the many innovative methods described in this report. The Treasury and the Federal Reserve continue striving to persuade the remaining holdouts to take advantage of doing business electronically and join people like Nina, Patricia, Andy and Vince—the four hypothetical, though representative, examples described at the beginning of this essay. Whereas some people have made the transition from paper to electronics with great confidence, others have done so with a degree of hesitation and trepidation. But, once converted, nearly everyone has benefited from the convenience, reliability and security that electronic payments and processing offer.

There is no doubt that the electronic payments movement is on a one-way course. In fact, the Fed confirmed that electronic payment transactions in the United States exceeded check payments for the first time in 2003. The number of total electronic payment transactions, including nongovernment transactions, totaled 44.5 billion in 2003, while the number of checks paid totaled 36.7 billion.

With so much momentum on their side and a nearly century-old partnership defined by common objectives, the Treasury and the Federal Reserve will continue to work together to achieve the goals that make sense—and cents—for both the federal government and the public.

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Sidebar: A Commitment That Is Deeper Than the Costs

Although the Federal Reserve and Treasury have always shared common goals, for more than seven decades their relationship was uncommon in a very important way. The Fed’s costs for its services to the Treasury were not explicitly reimbursed from 1917 to 1992, at which point Congress enacted legislation to provide money to reimburse the Fed for its services for the Bureau of the Public Debt. A similar law permitted the Financial Management Service and other federal agencies to begin reimbursing Reserve banks for expenses incurred on their behalf beginning in fiscal year 1998.

Both the Fed and the Treasury support the reimbursement of the Fed’s fiscal agent services for two reasons: 1. If the federal government did not include in its budget process to Congress the costs incurred by the Reserve banks on the Treasury’s behalf, Congress would have trouble determining the true cost to taxpayers of the agencies’ operations; and 2. When services are directly reimbursed, the costs are much more transparent. As a result, the services are less likely to be overused and more likely to be used in an efficient manner.

The Treasury in 2004 reimbursed the Reserve banks $385 million. That figure is expected to rise above $400 million in 2005.

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Sidebar: The Paper Chase: Going, Going, but Not Gone

With all of the emphasis on electronic forms of payment, one might think that paper payments have gone the way of the Macarena. Not quite. The Federal Reserve in 2004 processed nearly 229 million Treasury checks with a cumulative dollar value of $277 billion. It costs the government 62 cents more per payment to issue a check rather than pay electronically.

The Fed also processes postal money orders for the U.S. Postal Service. Postal money orders are prepaid drafts drawn against the Postal Service’s account with the Treasury. Individuals purchase them with cash and use them as they do checks. The Reserve banks processed 186 million postal money orders in 2003, a decline from 226 million in 1999.

Paper is also dwindling on the collection side. But while only 5 percent of total business and individual tax dollars (or about $76 billion) were paid by check in 2003, that still amounted to more than 11 million checks.

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Sidebar: Striving To Make Pulp Fiction

Most people have begun to accept electronic payments as a fast, convenient and—most important—secure form of payment. But a hardcore segment of the population remains unconvinced.

Seeking answers as to why the paper-loyalists are reluctant to change, the St. Louis Fed, on behalf of the FMS, formally surveyed federal benefit check recipients in 2004. On one hand, it’s impressive that 78 percent of federal benefit recipients received their payments electronically via direct deposit in 2003. And while this figure easily beats the 1996 rate of 56 percent, the conversion rate has slowed in recent years to less than 1 percent a year. The 22 percent that the Treasury and the Fed are trying to bring into the fold receive about 170 million checks per year from the government.

In the survey, information from more than 4,000 people who receive federal benefit payments was collected to better understand why some have not signed up for direct deposit.¹ The survey showed that the barriers to direct deposit can be grouped into four general categories:

• Informational – includes those who don’t understand how direct deposit works;
• Emotional – includes those who just prefer to receive checks;
• Inertia – includes those who are receptive to electronic payments, but need to be motivated to sign up; and
• Mechanical – includes those who don’t have bank accounts and, in some cases, don’t want bank accounts.

With baby boomers preparing to retire in droves over the next decade, the Treasury is examining options for increasing direct deposit participation. From September 2004 to March 2005, the St. Louis Fed, on behalf of the Treasury, conducted a pilot marketing program called “Go Direct” in cities in Illinois, Tennessee and Texas, as well as in Puerto Rico. Go Direct used a combination of community outreach, direct mail and various media channels to bring messages about the benefits of direct deposit using trusted sources in the community.

¹A research report summarizing the survey is available at www.frbservices.org (click on Treasury Services) and www.fms.treas.gov/eft (click on Reports & Statistics).

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Sidebar: The Treasury’s Perspective

The following is excerpted from a discussion with the three key Treasury officials who work on a regular basis with the Federal Reserve. The St. Louis Fed’s Treasury Relations and Support Office (TRSO) oversees the Fed's overall relationship with the Treasury.

• Don Hammond, Fiscal Assistant Secretary
• Dick Gregg, Financial Management Service Commissioner
• Van Zeck, Bureau of the Public Debt Commisioner

Describe the relationship between the Treasury and the Federal Reserve.

DH: The best way to describe the partnership is a long-term, symbiotic relationship that leverages the strengths of both organizations to focus on a common mission.

VZ: I would characterize it as a principal-agent relationship in which the official roles of principal and agent are largely irrelevant because of the Federal Reserve’s and Treasury’s commitment to work together on Treasury fiscal programs.

DH: If you talk to people outside the relationship, they can’t tell where the Treasury stops and the Federal Reserve begins. It is truly seamless to external people.

DG: I think the current relationship is the best that I’ve seen in my career. The TRSO has a large part to do with that. In fact, I think it’s the biggest single factor. The TRSO brings a business mentality and interest in getting things done while at the same time asking good, difficult questions.

VZ: In addition, the TRSO has added an advocacy component. Within the Federal Reserve System, they have become an advocate and educator about the Treasury’s programs. People know what we do. They know that things aren’t handled behind the curtain; they’re out there on the table.

How does the Treasury decide when it wants the Federal Reserve involved in a function or project?

DG: The expertise that the Federal Reserve has in the area of payments is, to me, a natural fit when we look at, for example, modernizing our payments system. We look at what the Federal Reserve has that can complement the expertise that we have at the Treasury, whether it’s in dealing with an issue or developing a new system. We are also looking at whether there is a cultural match, meaning, we look at the Fed’s senior leadership and determine if they seem on board with what we are trying to do.

VZ: With the Federal Reserve, there’s a certain sense of stability and a comfort level culturally and technologically. This allows us to focus on the best of the best way to get something done, as opposed to being held somewhat captive to other more structured and rigid processes. So, the flexibility of our relationship with the Federal Reserve enables us to concentrate on things that maybe we wouldn’t have been even able to get to if we were putting everything out for bid and dealing with a new partner for every project that came along.

DH: I think that is highlighted when you look at things that are not standardized commercial processes. If you look at the work that we have given to the Fed versus our work that is out in the commercial sector, the commercial work is a commodity, meaning we are looking for someone to help us apply a known process. That’s a straightforward relationship to manage. We involve the Fed for things that are a little more fluid and innovative.

What is the future of the relationship? Will the growth of electronic payments and issuance of debt instruments necessitate an even deeper relationship? If and when the time comes when 100 percent of transactions are electronic, will the partnership have a new focus and purpose?

DH: I can’t imagine a fundamental change in the relationship looking forward from what we have today. Aspects of it will certainly be changed as the environment changes, but the relationship itself is well-positioned to deal with the future.

DG: On that point, when we first talked to the Fed about supporting us on stored-value cards, it was a bit different for all of us. But the more we thought about it, we realized that this is still related to payments and really very much in line with what we’ve been doing. And that’s what will continue to happen: Our missions probably won’t change that much, but the nature of how we perform those missions will make for different products.

VZ: Like anyone else, if you can do things at different locations and achieve efficiencies, you try to do that. So, to the extent that we have more opportunities to work more efficiently, I’ll expect we’ll rise to the challenge. Sometimes it’s hard to think what’s beyond all-electronic. I don’t know that I know. But I think there probably is something beyond all-electronic, and it may have more to do with customer relationships and the speed with which information is available. I think controls and security are going to become increasingly more of interest. The Federal Reserve and the Treasury will continue to innovate and find ways to deliver better services, but do it in a way that both organizations are comfortable with.

Are there times when the Treasury and the Fed differ on strategies and tactics? If so, how are those situations resolved?

DH: Obviously, there are differences. And you would hope for differences, frankly, because everyone brings different perspectives and experiences. If you didn’t have differences from time to time, you’d wonder what the nature of the relationship was. From my standpoint, these types of things get resolved professionally and in a business-like manner.

DG: The important thing is that people at the Federal Reserve are willing to provide their perspectives, and that’s key. If you don’t have that, then what you have is one side feeling constrained from providing the very expertise and insight that we are looking for.

VZ: Hopefully, there’s a sense that when we are asking for something or suggesting a direction, there’s more to it than just the edict or directive—that there is a willingness to explain to the Fed why we want to do it. That indicates our respect for the relationship.

The Fed’s reimbursable services have gone up over the past few years, even as some operations (e.g., TreasuryDirect and savings bonds) have been consolidated. What are the reasons for the increases? Are the Fed’s costs expected to level off at some point or keep increasing due to initiatives like software development and new applications?

DG: The reason they’ve been increasing is that we’ve been asking the Fed to do more. The development of the TWAI (Treasury Web Application Infrastructure) and the number of very large development initiatives we have under way are expensive. I expect that the costs are going to increase more over the next few years. But I would hope to see them start leveling off in two or three years, and then I would also hope to see them change direction even as we add more work.

VZ: In Public Debt, we’re trying to get more focused on tightening our costs, particularly our costs per unit. As we do that, we are making very sure we know where the bureau’s costs are coming from and where the Fed’s costs are coming from.

Even as electronic payments have taken hold so quickly, are you surprised that there is a hard-core group that remains so difficult to convert? How do you convince these people that electronic forms of payment are easy and secure?

DH: I continue to be ever increasingly surprised in places where I never thought there would be resistance. I saw a study recently that reported that 58 percent of employers in the United States do payroll by hand. When you hear something like this, it gives you an idea of some of the uphill climb we still have in terms of universal acceptance of electronics.

DG: In many respects, from my perspective, consumers have been well ahead of industry and banking. Individuals have been a lot more receptive to innovation. I think there is another 10 percent of the general public out there that we can pretty easily get if we had some kind of semi-hard mandate. But there is also a segment without bank accounts who will continue to get checks until the next generation comes along with people who don’t know what a check is.

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Thank You
Retiring Board Members

We bid farewell and express our gratitude to those members of the Eighth District boards of directors who retired in 2004. Our appreciation and best wishes go out to the following:

We also extend our deepest sympathies to the family and friends of Thomas W. Smith, Louisville board member, who passed away in 2004.

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little rockboard of directors

FEDERAL RESERVE BANK OF ST. LOUIS
LITTLE ROCK BRANCH
STEPHENS BUILDING, 111 CENTER ST., SUITE 1000
LITTLE ROCK, AR 72201

STEPHEN M. ERIXON Chairman CEO Baxter Regional Medical Center Mountain Home, Ark.		SCOTT T. FORD President and CEO ALLTEL Corp. Little Rock		SONJA YATES HUBBARD CEO E-Z Mart Stores Inc. Texarkana, Texas
ROBERT A. YOUNG III Chairman, President and CEO Arkansas Best Corp. Fort Smith, Ark.		DAVID R. ESTES President and CEO First State Bank Lonoke, Ark.		RAYMOND E. SKELTON Little Rock
SHARON PRIEST Executive Director The Downtown Partnership Little Rock

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louisvilleboard of directors

FEDERAL RESERVE BANK OF ST. LOUIS
LOUISVILLE BRANCH
NATIONAL CITY TOWER, 101 S. FIFTH ST., SUITE 1920
LOUISVILLE, KY 40202

NORMAN E. PFAU JR. Chairman President and CEO Geo. Pfau’s Sons Co. Inc. Jeffersonville, Ind.		CORNELIUS A. MARTIN President and CEO Martin Management Group Bowling Green, Ky.		L. CLARK TAYLOR JR. CEO Ephraim McDowell Health Danville, Ky.
MARJORIE Z. SOYUGENC Executive Director and CEO Welborn Foundation Evansville, Ind.		GORDON B. GUESS Chairman, President and CEO The Peoples Bank Marion, Ky.		STEVEN E. TRAGER Chairman and CEO Republic Bank & Trust Co. Louisville

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memphisboard of directors

FEDERAL RESERVE BANK OF ST. LOUIS
MEMPHIS BRANCH
200 N. MAIN ST.
MEMPHIS, TN 38103

RUSSELL GWATNEY Chairman President Gwatney Companies Memphis		MEREDITH B. ALLEN Vice President, Marketing Staple Cotton Cooperative Association Greenwood, Miss.		J. W. GIBSON II Owner and CEO Gibson Companies Memphis
LEVON MATHEWS President Regions Bank Memphis		JAMES A. ENGLAND Chairman, President and CEO Decatur County Bank Decaturville, Tenn.		DAVID P. RUMBARGER JR. President and CEO Community Development Foundation Tupelo, Miss.
THOMAS G. MILLER President Southern Hardware Co. Inc. West Helena, Ark.

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st. louisboard of directors

FEDERAL RESERVE BANK OF ST. LOUIS
ONE FEDERAL RESERVE BANK PLAZA
BROADWAY AND LOCUST STREET
ST. LOUIS, MO 63102

WALTER L. METCALFE JR. Chairman Partner Bryan Cave LLP St. Louis		GAYLE P. W. JACKSON Deputy Chairman Managing Director FondElec Clean Energy Group Inc. St. Louis		LEWIS F. MALLORY JR. Chairman and CEO NBC Capital Corp. Starkville, Miss.
LUNSFORD W. BRIDGES President and CEO Metropolitan National Bank Little Rock		DAVID R. PIRSEIN President and CEO First National Bank in Pinckneyville Pinckneyville, Ill.		A. ROGERS YARNELL II President Yarnell Ice Cream Co. Inc. Searcy, Ark.
PAUL T. COMBS President Baker Implement Co. Kennett, Mo.		IRL F. ENGELHARDT Chairman and CEO Peabody Energy St. Louis

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amessagefrommanagement

The Federal Reserve Bank of St. Louis enjoys a tradition of excellent performance. That tradition continued in 2004, a year of unprecedented change. Cash and check operations in Little Rock and Louisville were consolidated into the Memphis and Cincinnati branch locations, respectively. Overall, District check net revenue exceeded Bank goals. In fact, the Bank met or exceeded every key objective that it had targeted last year, while finishing below its planned expense budget by $3 million, or 2 percent.

The Branching Out initiative took root in 2004 as the District began looking at new ways to meet community needs in our branch cities by concentrating more attention on programs related to community affairs, economic education, regional research and monetary policy.

Our employees continued to focus on four Bank-wide initiatives: risk management, customer service, staff development and employee communications. The Bank began these initiatives in 1999-2000 to improve performance and increase our System leadership responsibilities. Improvement in these areas is continuing.

What follows are highlights of the Bank’s 2004 accomplishments:

Financial Services

• Exceeded the local check net revenue commitment of $10.4 million by $1.4 million.
• Outperformed cash high-speed processing productivity target of 75 bundles per hour and unit costs of $5.65 for high-speed processing and $2.75 for paying and receiving.
• Completed the pre-implementation phase of Check 21.
• Established outsourced cash depots in Little Rock and Memphis.

U.S. Treasury Support

• Completed 11 of 13 high-priority Treasury objectives.
• Initiated a pilot marketing program to convert paper beneficiary payments to electronic payments.
• Enhanced the Treasury Web Application Infrastructure (TWAI) and shifted 16 web applications to the infrastructure.
• Expanded the Financial Management Service’s electronic payments and collection programs.

Public Affairs and Community Affairs

• Co-sponsored an international urban planning conference in Louisville.
• Launched a community development speaker series in Little Rock.
• Co-sponsored a money and banking summer course for educators.
• Co-sponsored an education conference for Mississippi teachers.
• Revamped the format for District Dialogue programs with bankers and other business and community leaders.

Research/Monetary Policy Performance

• Staff economists completed 34 working papers, published 16 articles in the Bank’s Review and spoke at an average of six public events per month.
• Established the Business and Economics Research Group (BERG) in the Eighth District.
• Implemented the Federal Reserve Archival System for Economic Research (FRASER).
• With 27.9 million hits, Federal Reserve Economic Data (FRED) web traffic nearly doubled in 2004.

Banking Supervision, Credit and Center for Online Learning

• Met all examination and inspection mandates.
• Opened a satellite supervision office in Memphis.
• Provided internal e-learning consulting and development services for the Federal Reserve System, and developed a course for bank directors.
• Chaired the Desktop Services Business Steering Group and the Subcommittee on Credit, Reserves and Risk Management Systems Task Force.

Administrative Services

• Completed capital improvement projects, including: opening a new remote screening facility and renovating a parking garage. Began construction of a pedestrian plaza and screening vestibule.
• Opened a new District business continuity recovery facility in December. Added a secure area for check deliveries and a new screening vestibule in Memphis.

Organizational Initiatives

• Continued rolling out Enterprise Risk Management (ERM) to all financial reporting areas in 2004, including an online Risk Awareness Training program.
• Administered the third Bank-wide communications survey since 1999. The results showed steady improvement in the internal communications environment.
• Continued the Customer Service Awareness program, which includes goals for key operations.
• Expanded the Bank’s Staff Development program to include a leadership series.

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SUMMARY OF OPERATIONS

Summary of Key Operation Statistics for Services Provided to Depository Institutions and the U.S. Treasury (The following schedule is unaudited and has been included as supplemental information.)

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BANK OFFICERS

Federal Advisory Council Member J. Kenneth Glass CHAIRMAN, PRESIDENT AND CEO FIRST HORIZON NATIONAL CORP. MEMPHIS Bank Officers William Poole PRESIDENT AND CEO W. LeGrande Rives FIRST VICE PRESIDENT AND COO Karl W. Ashman SENIOR VICE PRESIDENT Mary H. Karr SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY Robert H. Rasche SENIOR VICE PRESIDENT AND DIRECTOR OF RESEARCH Michael D. Renfro SENIOR VICE PRESIDENT AND GENERAL AUDITOR David A. Sapenaro SENIOR VICE PRESIDENT Julie L. Stackhouse SENIOR VICE PRESIDENT Richard G. Anderson VICE PRESIDENT John P. Baumgartner VICE PRESIDENT Timothy A. Bosch VICE PRESIDENT Timothy C. Brown VICE PRESIDENT James B. Bullard VICE PRESIDENT Ronald L. Byrne VICE PRESIDENT Marilyn K. Corona VICE PRESIDENT Cletus C. Coughlin VICE PRESIDENT Judith A. Courtney VICE PRESIDENT William T. Gavin VICE PRESIDENT Vicki L. Kosydor VICE PRESIDENT Jean M. Lovati VICE PRESIDENT Patricia A. Marshall VICE PRESIDENT AND DEPUTY GENERAL COUNSEL Michael J. Mueller VICE PRESIDENT

Kim D. Nelson VICE PRESIDENT Kathleen O’Neill Paese VICE PRESIDENT Todd J. Purdy VICE PRESIDENT Steven N. Silvey VICE PRESIDENT Randall C. Sumner VICE PRESIDENT Daniel L. Thornton VICE PRESIDENT Carl K. Anderson ASSISTANT VICE PRESIDENT Barkley Bailey ASSISTANT VICE PRESIDENT Dennis W. Blase ASSISTANT VICE PRESIDENT Daniel P. Brennan ASSISTANT VICE PRESIDENT Susan K. Curry ASSISTANT VICE PRESIDENT Hillary B. Debenport ASSISTANT VICE PRESIDENT Michael W. DeClue ASSISTANT VICE PRESIDENT Michael J. Dueker ASSISTANT VICE PRESIDENT William M. Francis Jr. ASSISTANT VICE PRESIDENT Kathy A. Freeman ASSISTANT VICE PRESIDENT Susan F. Gerker ASSISTANT VICE PRESIDENT Elizabeth A. Hayes ASSISTANT VICE PRESIDENT Paul M. Helmich ASSISTANT VICE PRESIDENT Edward A. Hopkins ASSISTANT VICE PRESIDENT James L. Huang ASSISTANT VICE PRESIDENT Gary J. Juelich ASSISTANT VICE PRESIDENT Visweswara R. Kaza ASSISTANT VICE PRESIDENT William D. Little ASSISTANT VICE PRESIDENT Raymond McIntyre ASSISTANT VICE PRESIDENT John W. Mitchell ASSISTANT VICE PRESIDENT James A. Price ASSISTANT VICE PRESIDENT Kathy A. Schildknecht ASSISTANT VICE PRESIDENT

Philip G. Schlueter ASSISTANT VICE PRESIDENT Harriet Siering ASSISTANT VICE PRESIDENT Diane A. Smith ASSISTANT VICE PRESIDENT Leisa J. Spalding ASSISTANT VICE PRESIDENT AND ASSISTANT GENERAL AUDITOR James E. Stephens ASSISTANT VICE PRESIDENT Howard J. Wall ASSISTANT VICE PRESIDENT David C. Wheelock ASSISTANT VICE PRESIDENT Sharon N. Williamson ASSISTANT VICE PRESIDENT Glenda J. Wilson ASSISTANT VICE PRESIDENT Timothy J. Yeager ASSISTANT VICE PRESIDENT Diane B. Camerlo ASSISTANT COUNSEL Joseph C. Elstner PUBLIC AFFAIRS OFFICER Joel H. James BANK RELATIONS OFFICER Christopher J. Neely RESEARCH OFFICER Edward M. Nelson RESEARCH OFFICER Kathy R. Reckert OPERATIONS OFFICER Little Rock Office Robert A. Hopkins SENIOR BRANCH EXECUTIVE Louisville Office Maria G. Hampton SENIOR BRANCH EXECUTIVE Thomas A. Boone VICE PRESIDENT Memphis Office Martha Perine Beard SENIOR BRANCH EXECUTIVE J. Allen Brown ASSISTANT VICE PRESIDENT Matthew W. Torbett ASSISTANT VICE PRESIDENT

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CREDITS

The Federal Reserve Bank of St. Louis is one of 12 regional Reserve banks, which, together with the Board of Governors, make up the nation’s central bank. The Fed carries out U.S. monetary policy, regulates certain depository institutions, provides wholesale-priced services to banks and acts as fiscal agent for the U.S. Treasury. The St. Louis Fed serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. Branch offices are located in Little Rock, Louisville and Memphis.

FEDERAL RESERVE BANK OF ST. LOUIS One Federal Reserve Bank Plaza Broadway and Locust Street St. Louis, Missouri 63102 (314) 444-8444 LITTLE ROCK BRANCH Stephens Building 111 Center Street, Suite 1000 Little Rock, Arkansas 72201 (501) 324-8300 LOUISVILLE BRANCH National City Tower 101 South Fifth Street, Suite 1920 Louisville, Kentucky 40202 (502) 568-9200 MEMPHIS BRANCH 200 North Main Street Memphis, Tennessee 38103 (901) 523-7171

AUTHOR OF ESSAY: Stephen Greene EDITOR: Dan Brennan DESIGNER: Kathie Lauher PRODUCTION: Barb Passiglia ONLINE VERSION: Mark Kunzelmann REFERENCES DeCorleto, Donna A. and Trimble, Theresa A. “Federal Reserve Banks as Fiscal Agents and Depositories of the United States in a Changing Financial Environment.” Federal Reserve Bulletin, Autumn 2004, pp. 435-446. www.ustreas.gov For additional print copies, contact: Public Affairs Department Federal Reserve Bank of St. Louis Post Office Box 442 St. Louis, Missouri 63166 (314) 444-8809 www.stlouisfed.org

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