House Banking Committee Democrats are charging that the Federal Reserve unfairly competes against private-sector couriers by subsidizing a fleet of planes to ferry checks across the country.
"The Fed's air force often operates with no-bid, no-lose contracts, poor cost controls, and very likely routinely violates laws designed to make competition possible," said Rep. Henry Gonzalez, ranking Democrat on the House Banking Committee.
The Texan also claimed the Fed's check-transporting system costs taxpayers money.
The Fed's response: All Interdistrict Transportation System bidding has been within the law, and overall the Fed's fee services bring in more money than they cost.
"What we regard most of the report to be are honest differences of opinion about management decisions," said Paul M. Connolly, the first vice president of the Federal Reserve Bank of Boston responsible for the check transport system.
The report was the product of an 11-month investigation by the banking committee's minority staff. Rep. Gonzalez sent it to Attorney General Janet Reno and asked for a more exhaustive investigation of the system. He also asked House Banking Committee Chairman Jim Leach to hold hearings on the matter.
At issue is the Fed's flight network, run by the Boston Fed, which ties together the check processing operations of the system's 46 offices with 50 chartered planes making about 200 flights each weeknight.
The House Democrats' report charges that, because the Fed spends more on its check transportation system than it charges banks in fees, it may be violating the Monetary Control Act of 1980. Since 1991, the transportation system's revenues have come in at, one average, 93% of costs.
"This is something we've suspected for years, that this thing is being subsidized," said Lincoln Rutter, vice president for marketing and sales at U.S. Check, a Columbus, Ohio, courier company that competes with the Fed transport system. "It's just an absolutely predatory practice."
Mr. Connolly said that if one looks at the past 10 years instead of the past four, however, transport system revenues have averaged more than 99% of costs.
Also, the Fed staff's response to the congressional report cited a 1985 General Accounting Office report that concluded "the Monetary Control Act does not require the Federal Reserve to establish separate charges for the transportation component of its check clearing services." It said it had met the law's goal of matching revenues to costs, over the long run, for all its priced services, recovering 100.2% of costs from 1986 through 1995.
The Gonzalez report also criticizes the Fed for failing to allow competitive bidding on contracts. It cites one unbid contract - for nearly a $2 million a year - with Santa Express, a company that coordinates the flight plans of the Fed's charter fleet and loads and unloads some of the planes. The Fed's response: No other company could do the job.
The report also contends that the Fed overcharges the U.S. Treasury for transporting government checks. The Treasury is charged almost $5 a pound, while the fee for commercial checks is approximately $3.10 per pound. Mr. Connolly said this was the result of inaccuracies in estimating check volume that have since been reduced.
