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U.S. DEPARTMENT OF THE TREASURY
PRESS RELEASES
CO
oVJ CO
C
•
*
CO C\J
CO CO
mco CO
lO
CO CD
• * •
federal financing bank
CD
WASHINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
May 8, 1989
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing
Bank (FFB), announced the following activity for the month
of November 1988.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $143.3 billion on
November 30, 1988, posting a decrease of $2.2 billion from
the level on October 31, 1988. This net change was the
result of an increase in holdings of agency debt of
$104.1 million, and decreases in holdings of agency
assets of $68.5 million and in agency-guaranteed debt of
$2,244.1 million. FFB made 35 disbursements during
November.
The Continuing Appropriations Resolution for 1988
allowed FFB borrowers under foreign military sales (FMS)
guarantees to prepay at par their debt with interest rates
of 10 percent or higher. Pursuant to this Resolution, FFB
received FMS prepayments of $2,180 million in November 1988.
FFB suffered an associated loss of $341.8 million.
Attached to this release are tables presenting FFB
November loan activity and FFB holdings as of November 30, 1988
NB-254
Page 2 of 4
FEDERAL FINANCING BANK
NOVEMBER 1988 ACTIVI'IY
BORROWER
AMOUNT
OF ADVANCE
DATE
FINAL
MATURITY
INTEREST INTEREST
RATE
RATE
(other than
(semisemi-annual)
annual)
2/09/89
2/21/89
2/27/89
7.887%
8.354%
8.393%
AfiCTiry nEBT
NATIONAL CREDIT UNION ADMINISTRATION
Central liquidity Facility
-Wote #476
+Note #477
+Note #478
$ 33,990,000.00
11/8
11/17
9,212,000.00
11/29
45,000,000.00
TENNESSEE VALLEY AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#959
#960
#961
#962
#963
#964
#965
#966
11/7
U/9
11/15
11/21
11/23
U/23
11/28
11/30
116,000,000.00
103,000,000.00
131,000,000.00
84,000,000.00
10,000,000.00
107,000,000.00
96,000,000.00
138,000,000.00
U/15/88
U/21/88
11/23/88
13/28/88
12/01/88
12/02/88
12/05/88
12/07/88
7.817%
7.971%_
8.162%
8.333%
8.402%
8.402%
8.428%
8.393%
U/2
11/2
11/2
11/18
11/21
11/22
11/22
11/23
11/23
475,501.64
136,849.90
1,179,715.49
4,929,757.65
357,038.73
20,891,316.32
2,696,664.06
874,521.71
983,384.02
9/30/93
9/08/95
11/30/93
11/30/94
9/30/93
3/01/12
8/25/11
3/01/12
4/10/96
8.505%
8.665%
8.513%
9.044%
9.034%
9.220%
9.220%
9.241%
9.166%
11/01/94
10/02/89
9/01/89
1/17/89
2/15/89
8.482%
8.176%
8.151%
7.769%
8.340%
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Morocco 9
Morocco 11
Morocco 13
Morocco 13
Morocco 9
Greece 16
Greece 17
Greece 16
Peru 10
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Ganmunitv Develcanent
•Lincoln, NE
Lincoln, NE
Brownsville, TX
Montgomery County, PA
Newport News, VA
+rollover
•maturity extension
11/1
11/4
11/4
11/4
11/17
406,000.00
30,000.00
657,000.00
200,000.00
10,000.00
8.662% arm,
8.327% arm,
8.281% arm,
Page 3 of 4
FEDERAL FINANCING BANK
NOVEMBER 1988 ACTIVITY;
BORROWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST INTEREST
RATE
RATE
(other than
(semisemi-annual)
annual)
659,000.00
2,900,000.00
1,133,000.00
1,090,000.00
3,447,000.00
40,000,000.00
514,000.00
107,000.00
1/02/18
12/31/15
12/31/90
12/31/90
1/02/90
12/31/90
1/03/23
1/03/17
8.858%
8.850%
8.539%
8.700%
8.522%
8.734%
9.222%
9.244%
11/01/08
9.037%
2/28/89
8.398%
DATE
PTTPAT, F^'rRlFlCATION ADMINISTRATION
New Hampshire Electric #270
•United Power #139
•Colorado Ute-ELectric #96A
•Colorado Ute-ELectric #203A
•Wolverine Power #183A
•Cajun Electric #197A
Basin Electric #232
N. Dakota Central ELec. #278
11/2
11/2
U/7
11/10
11/10
11/14
11/22
U/30
$
SMALL TTTSTNESS ATJTOTISTRATION
State & local Development Cannanv Debentures
long Island Dev. Corp. 11/9 232,000.00
TENNESSEE VALLEY AUTHUkl'lY
Seven States Energy Corporation
Note A-89-02 11/30 689,681,516.11
•maturity extension
8.762%
8.754%
8.450%
8.607%
8.433%
8.641%
9.118%
9.140%
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
Page 4 of 4
FEDERAL FINANCING BANK HOLDINGS
(in mill.ions)i
Net Chanqe
Program
November 30. 1988
Agency Debt:
Export-Import Bank
NCUA-Central Liquidity Facility
Tennessee Valley Authority
U.S. Postal Service
sub-total^ 33,532.7
Agency Assets:
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
sub-total* 62,757.7
Government-Guaranteed Lending:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loan Guarantees
DHUD-Community Dev. Block Grant
DHUD-New Communities
DHUD-Public Housing Notes +
General Services Administration +
DOI-Guam Power Authority
DOI-Virgin Islands _
„
^
NASA-Space Communications Co. +
DON-Ship Lease Financing .
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total* ^7,030.3
grand total* $ 143,320.8
• figures may not total due to rounding
+does not include capitalized interest
$
10,957.6
106.9
16,876.0
5,592.2
58,496.0
79.5
96.3
-04,071.2
14.7
13,452.9
4,910.0
4
?*S
315.3
„«r°T
1
'=:f*i
3
f£,
32.1
<£%'%
2?„„
-.i'ofS'l
19,220.5
29?*:
864.2
2,195.0
."•"
illl_
October 31. 1988
$
10,957.6
120.9
16,758.0
5,592.2
TT7I788-11/36/88
$
-0-13.9
118.0
-0-
FY '89 Net Chanae
10/1/88-11/30/88
$
-o-11.2
-255.0
-0-
33,428.7
104.1
-266.2
58,496.0
79.5
96.4
-04,139.2
15.1
-0-0-0.1
-0-68.0
-0.4
-0-0-0.1
-0-68.0
-0.7
62,826.2
-68.5
-68.8
15,658.9
4,910.0
50.0
316.2
-02,037.0
387.5
32.1
26.6
995.2
1,758.9
19,221.7
614.2
866.7
2,176.3
46.2
177.0
-2,r 206.0
-0-0.4
-0.9
-0-41.7
-0.9
-0-0-0-0-1.2
-6.6
-2.4
18.6
-2.6
-0-
-2,558.8
-0-0.4
-2.7
-0-41.7
-0.9
-0-096.4
-015.2
-25.1
-6.7
32.6
-2.6
-0-
49,274.4
-2, 244.1
asssssssa
SSSS3BSSSSSESBSS
-2,494.7
=======
$ -2,829.7
$ 145,529.3
$ -2, 208.5
TREASURY NEWS .
department of the Treasury • Washington, D.c. • Telephone 566-2041
Contact: Office of Financing
202/376-4350
FOR IMMEDIATE RELEASE
May 8, 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,803 million of 13-week bills and for $6,808 million
of 26-week bills, both to be issued on
May 11, 1989,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-•week bills
maturing August 10, 1989
Discount Investment
Rate
Rate 1/
Price
8.38%
8.42%
8.41%
8.68%
8.72%
8.71%
26--week bills
maturing November 9, 1989
Discount Investment
Price
Rate 1/
Rate
8.37%
8.40%
8.39%
97.882
97.872
97.874
8.86%
8.90%
8.88%
95.769
95.753
95.758
Tenders at the high discount rate for the 13-week bills were allotted 1%.
Tenders at the high discount rate for the 26-week bills were allotted 41%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Received
Accepted
$
36,875
21,787,765
15,915
40,800
49,315
30,195
996,540
54,620
10,380
30,385
30,430
947,560
556,845
$
36,875
5,286,375
15,915
40,800
49,315
30,115
297,540
34.670
10,380
30,385
20,480
393,560
556,845
$
33,495
21,029,820
14,400
33,345
43,210
28,580
1,692,340
35,990
14,405
41.695
26,280
923,920
471,980
$
33.495
5,266,355
13,220
33,345
43,210
28,580
635,640
27,990
14,405
41,695
16,280
181,420
471,980
$24,587,625
$6,803,255
• $24,389,460
$6,807,615
$21,004,385
1,289,265
$22,293,650
$3,220,015
1,289,265
$4,509,280
:
$19,875,010
1,042,210
$20,917,220
$2,293,165
1,042,210
$3,335,375
2,268,515
2,268,515
2,000,000
2,000,000
25,460
25,460
1,472,240
1,472,240
$24,587,625
$6,803,255
: $24,389,460
$6,807,615
:
An additional $4,340 thousand of 13-week bills and an additional $260,360
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
NB-255
TREASURY NEWS _
Department of the Treasury • Washington, D.c. • Telephone 566-2041
^ 5c
For Release Upon Delivery
Expected at 9:30 a.m.
May 9, 1989
STATEMENT OF
DANA L. TRIER
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the Administration's
views regarding the nondiscrimination and qualification rules
applicable to certain employee benefit plans under section 89 of
the Internal Revenue Code. As we have testified before other
Congressional committees, the Administration believes that
section 89 is overly complex and imposes undue compliance burdens
on employers. We are pleased that Congress is promptly
addressing these problems, and the Treasury Department looks
forward to assisting Congress in developing an adequate
legislative solution. To facilitate the legislative process, the
Treasury Department and the Internal Revenue Service last week
announced additional transitional relief provisions that are
designed to provide Congress with sufficient opportunity to
develop legislation before employers are required to expend
substantial further resources to comply with the statute.
In the first part of my testimony, I will describe briefly
the provisions of section 89 and the policy rationale underlying
those provisions, the transitional relief treatment under the
regulations, and certain proposed legislative replacements of
section 89. I will then discuss the core issues the
Administration believes must be addressed in fashioning any new
legislation. Finally, I will conclude by summarizing the
Administration's position on the revision of section 89.
NB-256
- 5 .;••/
-2Background
A. Statute.
The Internal Revenue Code provides that certain
employer-provided benefits are excludable from the gross income
of employees. For example, employer-provided health coverage and
benefits are excludable under sections 105 and 106, employerprovided group-term life insurance is excludable under section 79
and employer-provided dependent care assistance is excludable
under section 129.
Section 89 provides that health coverage and group-term life
insurance may be excluded from the income of highly compensated
employees only to the extent that the coverage and insurance is
provided on a basis that does not discriminate in favor of highly
compensated employees within the meaning of certain statutorily
imposed nondiscrimination tests. In addition, employers may
elect to test their dependent care assistance programs under the
nondiscrimination rules of section 89. The rationale for
limiting the income exclusions is that the tax expenditures are
justified only if nonhighly compensated employees are provided
benefits that are comparable to the benefits provided to highly
compensated employees. In enacting section 89 and other employee
benefit nondiscrimination rules in 1986, Congress was concerned
that the prior law nondiscrimination rules did not require
sufficient coverage of nonhighly compensated employees as a
condition of the exclusions. The President's 1990 budget reports
that the revenue loss tax expenditure in 1990 for
employer-provided health coverage will be $29.6 billion, for
group-term life insurance, $2.2 billion, and for dependent care
assistance, $155 million.
Under section 89 an employer may choose to determine whether
a plan satisfies the nondiscrimination rules under one of two
testing methods. Under the first method, a plan satisfies the
rules if it satisfies three eligibility tests and a benefits
test. The first eligibility test is that at least 50 percent of
the plan participants must be nonhighly compensated. The second
eligibility test is that at least 90 percent of the nonhighly
compensated employees must be eligible for a benefit at least
equal to 50 percent of the greatest benefit available to any
highly compensated employee. The third eligibility test is that
the plan may not contain any provision relating to eligibility
that, by its terms or otherwise, discriminates in favor of highly
compensated employees. This test is intended to address those
instances of discrimination that are not quantifiable, such as
whether benefits are, in fact, available to nonhighly compensated
employees and whether more favorable eligibility waiting periods
are provided to highly compensated employees. The benefits test
is satisfied if the average value of all employer-provided health
coverage received by nonhighly compensated employees is at least
75 percent of the average value of employer-provided health
benefits received by highly compensated employees.
-3Under the second testing method, a plan satisfies the
nondiscrimination rules if it benefits 80 percent of the
employer's nonhighly compensated employees and if it does not
contain, by its terms or otherwise, any discriminatory provision.
The definition of highly compensated employees under section
89 is the same as that used for other employee benefits. The
Internal Revenue Code generally defines a highly compensated
employee as any employee who, during the current year or the
prior year, is one of the following: (i) a 5 percent owner; (ii)
an officer receiving compensation in excess of $45,000; (iii) an
employee receiving compensation in excess of $75,000; or (iv) an
employee receiving compensation in excess of $50,000, who is
among those 20 percent of employees receiving the greatest
compensation from the employer. The Code provides that the
relevant dollar amounts are indexed for inflation.
When testing its plans, an employer generally may exclude
those employees who are not yet age 21, those who normally work
less than 17-1/2 hours per week, those who normally work not more
than six months per year and nonresident aliens receiving no
United States source income.
B. Transition Rules Under the Proposed Regulations.
In the proposed regulations promulgated in March of this
year, the Treasury Department and the Internal Revenue Service
attempted to be very flexible in implementing section 89 so that
employers could more easily bring their plans into compliance.
The proposed regulations provide several transitional provisions
that apply in 1989. First, the regulations provide that
employers who reasonably and in good faith comply with section 89
and its legislative history in 1989 will be treated as having
satisfied section 89. In addition, the proposed regulations
provide that employers who elect not to test whether their plans
satisfy the 75 percent benefits test in 1989 may include in the
income of certain of their highly compensated employees all of
the employer-provided health coverage. This election relieves
employers of most of the data collection and testing burdens.
The highly compensated employees who must include in income all
of the employer-provided health coverage are the 20 percent of
such employees who receive the greatest compensation from the
employer, but not less than ten employees nor more than 2,000
employees. This transitional provision is extended to 1990,
except that the number of highly compensated employees who must
include all of the employer-provided health coverage in income is
greater. Finally, employers may generally ignore facts in
existence prior to July 1, 1989 when testing their plans for
compliance in 1989. Employers who chose to take advantage of
this relief merely annualize the benefits provided after July 1
to determine whether their plans are discriminatory.
On May 1, 1989, Secretary of the Treasury Nicholas F. Brady
announced the July 1, 1989 optional beginning date of the 1989
-4testing year provided in the proposed regulations would be
changed to October 1, 1989. On May 5, 1989, the Internal Revenue
Service published Notice 89-65 implementing the October 1 testing
period commencement and announcing that the July 1, 1989 deadline
for providing eligible employees reasonable notice of benefits
available under certain plans is postponed until October 1, 1989.
C. Proposed Legislation.
In response to the perceived problems with section 89,
several bills have been introduced in the Senate and House of
Representatives. S. 654, introduced by Senator Pryor and others
on March 17, 1989, would modify section 89 in several ways.
First, it would provide that an employer would not be required to
test its health plan under section 89 if the plan qualified as a
simplified health arrangement, which generally is a plan in which
90 percent of the employees are eligible to participate and the
cost to the employees does not exceed certain defined maximums.
In addition, the definition of part-time employee would be
changed to an employee generally working 25 hours or less, with a
phase-in of 30 hours in 1989 and 27.5 in 1990. The treatment of
family coverage, employee cost comparability, valuation of
benefits, and testing dates would also be modified. Finally, the
sanction for failure to meet the qualification requirements would
be modified so that only highly compensated employees would be
required to include in income the value of coverage.
S. 595, introduced by Senator Domenici and others on March
15, 1989, would delay the application of section 89 until plan
years beginning after December 31, 1990 and make section 89
inapplicable to any employer who employs less than 20 employees.
In addition, the definition of part-time employee is changed to
an employee normally working less than 25 hours. Finally, the
bill creates an eligibility safe harbor that allows an employer
to satisfy section 89 if all of its nonhighly compensated
employees are eligible to participate in a plan as valuable as
the most valuable plan available to any highly compensated
employee, and changes the 80 percent alternative coverage test to
a 65 percent coverage test.
S. 89, introduced by Senator Symms and others on January 25,
1989, would delay the effective date of section 89 for one year.
S. 350 introduced by Senator Lott and others would repeal section
89.
H.R. 1864, introduced by Congressman Rostenkowski and others
on April 13, 1989, would make several changes to section 89.
First, the various section 89 nondiscrimination tests would be
replaced with one simplified test, under which a plan containing
no discriminatory provision would qualify if it meets two
requirements: (1) it provides primarily core health coverage to
at least 90 percent of the employer's nonhighly compensated
employees at a cost of no more than $10 per week for individual
coverage and $25 for family coverage; and (2) the maximum amount
-5of employer-provided coverage of any highly compensated employee
is not more than 133 percent of the affordable employer-provided
coverage made available to 90 percent of the employees. Second,
part-time employees normally working less than 25 hours would not
be required to be covered. Third, leased employees could
generally be disregarded if the employees are covered under a
core health plan meeting the nondiscrimination tests. Fourth,
employees covered by a collective bargaining agreement are tested
separately. Fifth, officers with compensation not in excess of
$45,000 will not be considered highly compensated. Sixth, the
nondiscrimination rules in effect prior to the Tax Reform Act of
1986 are made applicable to group-term life insurance. Finally,
the present law sanction for failure to qualify is changed to an
excise tax on the employer equal to 34 percent of the cost of
coverage.
Issues to be Resolved in Legislation
Several aspects of the operation of section 89 have received
particular attention in recent weeks, as the process has begun of
replacing section 89 with a workable provision. Some of the most
important areas of concern are discussed below. Others may arise
as the discussion proceeds. Although the issues involved are
difficult, we intend to work with Congress to formulate
resolutions of all of these issues as soon as practicable. It is
imperative that the final statutory solution that is enacted
resolve all of the outstanding issues in a satisfactory manner.
A. Nondiscrimination Rules.
The basic objectives of the nondiscrimination tests are the
elimination of plans providing tax-favored health benefits only
to highly compensated employees and the promotion of coverage of
nonhighly compensated employees. These objectives must be
achieved by means of workable tests that can be understood by
employers and applied without undue expense in a wide variety of
circumstances. In this context, employers are confronted with
several overriding problems of statutory design, including
particularly (i) the problem of valuation of benefits, ( n ) the
question of which employees may be excluded, (iii) the treatment
of salary reduction contributions, and (iv) the special
considerations applicable to small businesses.
1 Valuation. The most fundamental problem in determining
compliance with section 89 in its current form has been the
necessity of reliance upon valuation of benefits. It has become
clear that the problems with valuation simply were not understood
in 1986 when section 89 was enacted. Valuation has proved to be
not only a very complex task, but an expensive one as well.
Thus, to be viable, any legislation replacing section 89 must
confront the problems posed by reliance upon valuation of
benefits.
-6At a minimum, employers should be assured, under the statute,
that an employer's cost may be viewed as the value of the
benefit. In addition, the Treasury Department should have the
authority to develop other reasonable valuation methods.
More important, it is crucial to replace the current
nondiscrimination tests with a test or tests which are to the
fullest extent possible "design based," i.e., tests which the
employer may be confident it has passed without undertaking a
complex valuation of benefits. In this regard, the efforts of
Senator Pryor and Congressman Rostenkowski are important first
attempts. In the case of both S. 654 and H.R. 1864, the testing
for nondiscrimination would, in part, be generally based on the
required availability, at affordable costs, of health insurance
coverage to 90 percent of the employees.
Three different types of questions are raised with respect to
design-based tests of the types included in S. 654 and H.R. 1864.
First is the question of the percentage of nonexcludable
employees to whom coverage is required to be offered. Both
Senator Pryor and Congressman Rostenkowski have required that,
generally, 90 percent of nonexcludable employees be offered
coverage. Others have suggested that, in the alternative, the
nondiscrimination test be based on the relative proportion of
highly compensated and nonhighly compensated employees covered.
We believe that such an alternative test is worthy of
consideration so long as the implementing provision does not
sacrifice the underlying policy goal of broadly available
affordable health coverage.
The second problem to be considered with a design-based test
is the "cliff effect" such a test often has. For example, an
employer providing the option of coverage to a group of employees
constituting only slightly less than the required percentage,
may, in fact, pay a large portion of the cost of providing health
coverage to nonhighly compensated employees. It seems
inappropriate to impose on such an employer the full sanction for
failure to satisfy the test, when another employer actually
providing very little health coverage could very well meet the
availability tests.
We believe Congress should consider ways of ameliorating the
cliff problem. It is important, however, in addressing this
problem not to re-introduce statutory complexity and onerous
valuation procedures.
The third question is the extent to which it is necessary
that a designed-based test be accompanied by an overriding
provision limiting the extent to which the employer-provided
benefit of highly compensated employees can exceed that provided
to or made available to nonhighly compensated employees. H.R.
1864, for example, limits the employer-provided health benefit
available to highly compensated employees to 133 percent of that
available as a core health benefit to 90 percent of the employees
-7under the basic plan. Although we recognize that this test would
not require full scale valuation because only the employerprovided benefit of highly compensated employees must be valued,
we also believe that the administrability and simplicity of the
new provision would be improved if valuation requirements could
be limited even further.
2. Employees Taken Into Account. If relatively strict,
broadly based eligibility tests are included in any new
legislation, consideration should be given to expanding the
classes of employees who may be excluded from the tests in
certain cases. For example, governmental entities and charitable
organizations, as well as for-profit entities, sometimes hire
handicapped adults for rehabilitation or job-training purposes,
for whom insurance companies often will not provide coverage. If
these individuals receive health benefits under Medicaid or other
governmental programs, perhaps employers should be permitted to
consider such individuals as excluded employees.
In addition, we believe it is appropriate to relax the
definition of part-time employee. We note that in this regard
that several of the bills have adopted a 25-hour standard to
replace the 17-1/2 hour standard of current section 89.
3. Salary Reduction Contributions. The Internal Revenue
Code generally provides that salary reduction contributions to a
health or group-term life insurance plan are employer
contributions. For purposes of determining whether at least 90
percent of nonhighly compensated employees have available a
benefit at least equal to 50 percent of the benefit available to
any highly compensated employee (the 90/50 percent eligibility
test), however, an employer may elect to treat salary reduction
contributions as employer contributions only if three conditions
are satisfied. First, all employees must be eligible to
participate in the plan under the same terms and conditions.
Second, the percentage of an employer's nonhighly compensated
employees eligible to participate cannot exceed the percentage of
an employer's highly compensated employees so eligible. Third,
no highly compensated employee eligible to make salary reduction
contributions may be eligible to participate in any other
employer plan of the same type unless the other plan is available
on the same terms and conditions to nonhighly compensated
employees. If these three conditions are not satisfied, salary
reduction contributions are treated as employee contributions for
purposes of the 90/50 eligibility test.
The proposed regulations generally provide that,
notwithstanding the rules set forth in the previous paragraph, a
highly compensated employee's salary reduction contributions used
to purchase core health benefits are treated as employer
contributions for the purpose of the 90/50 percent eligibility
test only to the extent that such contributions exceed other
employer contributions made on the employee's behalf for core
health coverage. Similarly, core health coverage attributable to
-8a nonhighly compensated employee's salary reduction contributions
are treated as employee contributions to the extent that such
contributions exceed employer contributions (excluding salary
reduction contributions) made on the employee's behalf to provide
core health coverage.
The Administration believes that any new legislation should
consider the effect of restrictive rules regarding the treatment
of salary reduction contributions on the willingness of employers
to maintain cafeteria plans. If it is determined that there are
certain types of health expenses that should not be reimbursed or
otherwise paid under a cafeteria plan or other flexible spending
arrangement, this problem should be addressed directly.
4. Small Business Considerations. The special
circumstances faced by small businesses should be addressed in
any legislation enacted to revise section 89. The situations of
small businesses may differ in several respects from those of
other businesses to which section 89 is applicable. First, the
relative burden of the costs of determining compliance may be
significantly higher. Second, because some small businesses have
only a few employees, a small change in the number of employees
in the workforce may have a disproportionate impact under the
various tests. Third, insurance companies often treat small
businesses in ways different than they treat larger employers.
Although we do not support a complete exemption of small
businesses from the nondiscrimination rules, the Administration
urges Congress to consider proposals that would enable small
businesses to comply more easily with the nondiscrimination
rules. If new nondiscrimination rules applicable to health
benefits are based on cost of coverage, the Administration
suggests that Congress consider permitting small businesses to
satisfy the nondiscrimination rules under alternative tests. For
this purpose, a small business generally would be defined as a
business that cannot purchase health insurance at group rates.
The Secretary of the Treasury would have the flexibility of
further defining this concept through regulations.
We have offered for consideration this alternative. The
dollar limitations on the employee-paid portion of the premium
would not apply if: (i) a small business has only one health
plan; (ii) the small business makes core health coverage
available to 90 percent of its nonhighly compensated employees;
and (iii) a majority of the nonexcludable, nonhighly compensated
employees eligible to participate in the plan actually do so.
In addition, many small businesses have insurance contracts
that do not provide coverage for employees working less than 30
hours per week. The Administration believes that any new
legislation requiring employers with such contracts to make
available health coverage to employees working less than 30 hours
per week should not be effective with respect to such employees
until the expiration of the current contract term.
-9B. Types of Plans Covered by Section 89 Nondiscrimination Rules.
One of the purposes of section 89 was to subject various
employee benefits to "uniform" nondiscrimination rules. In
practice, this undertaking has turned out to be misconceived.
Thus, the Administration endorses the provision of H.R. 1864
that provides group-term life insurance should be tested for
discrimination under a different set of rules than those applied
to health benefits. The income exclusion for group-term life
insurance is limited by section 79 to the cost of $50,000 of such
insurance; complex nondiscrimination rules do not seem
appropriate for such a limited tax benefit. Consequently, we
support a return to the pre-1986 Act rules applicable to such
plans.
C. Qualification Requirements.
Under section 89(k), a plan covered by the statute must meet
five so-called "qualification rules": the plan must be in
writing; employees' rights must be enforceable; eligible
employees must be given notice of their benefits; the plan must
be maintained for the exclusive benefit of employees; and the
employer must intend that the plan be maintained indefinitely.
1. Covered Plans. Congress should consider applying the
qualification requirements only to health plans and, if
group-term life insurance is subject to the same nondiscrimination rules as health plans, group-term life insurance. It is
questionable whether the tax law's qualification rules are
appropriate for all plans currently covered by these rules.
Under prior law, dependent care assistance programs were
required to be in writing and reasonable notification of the
benefits available under the program was required to be given to
eligible employees. These rules are sufficient to protect the
interests of employees and the Administration recommends that
these provisions be re-enacted rather than subjecting dependent
care assistance programs to the qualification requirements of
section 89.
Moreover, the qualification requirements appear to be
unnecessary for no-additional-cost fringe benefits, employee
discounts and employer-provided eating facilities. It is
questionable, for example, whether employers should be required
to maintain an employee discount program for an indefinite period
of time or that an eating facility should be maintained for the
exclusive benefit of employees. These fringe benefits are
adequately addressed in section 132 and the regulations
thereunder.
2. Sanctions for Failure to Meet Qualification
Requirements. The current sanction for failure to comply with
the qualification requirements of section 89 is the inclusion in
-10employees' incomes of the values of the benefits received under
the plan. H.R. 1864 would replace this sanction with an excise
tax on the employer equal to 34 percent of the amount paid or
incurred under the plan. The Administration agrees with the
sponsors of H.R. 1864 that the sanction for failure to comply
with these requirements should be imposed on the employer causing
the failure, not on employees.
Nevertheless, we perceive two problems with the proposed
excise tax. First, it should not be applied to amounts paid or
incurred under the plan. Such a provision would require an
employer to know all of the health benefits provided under the
plan to its employees during each year and the value of each
benefit. The Administration recommends that the base to which
the excise tax would apply be the cost to the employer of
providing the health coverage.
Second, we believe that a 34 percent excise tax may be too
high. Consideration should be given a two-tiered excise tax
similar to the two-tiered excise tax imposed on certain
transactions involving private foundations. Thus, a lower rate
excise tax would be applied for each year in which the failure
exists. If an employer did not correct the failure within a
reasonable time after the failure is discovered, a higher excise
tax would apply.
In addition, an employer may inadvertently fail to comply
with one of the qualification requirements. For example, the
employer may fail to provide a small number of its employees with
the required notice of material plan terms. For this reason, any
legislation that may be enacted should provide rules for de
minimus failures or should give the Secretary of the Treasury
authority to provide for such rules in regulations.
Conclusion
Although the Administration supports nondiscrimination rules
to employer-provided health benefits, the rules of section 89
are, in some cases, too complex and, in other cases, too harsh.
There is now a consensus that section 89 must be replaced, and
the Treasury Department looks forward to working with this
Committee and the Committee on Ways and Means to fashion
legislation that addresses the major concerns of employers while
serving
basic tax
policy objectives
the nondiscrimination
This the
concludes
my prepared
remarks. ofI would
be pleased to
rules.
respond to your questions.
TREASURYUEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 9, 1989
CONTACT:
Office of Financing
202/376-4350
RESULTS OF AUCTION OF 3-YEAR NOTES
The Department of the Treasury has accepted $9,794 million
of $29,713 million of tenders received from the public for the
3-year notes, Series S-1992, auctioned today. The notes will be
issued May 15, 1989, and mature May 15, 1992.
The interest rate on the notes will be 9%. The range
of accepted competitive bids, and the corresponding prices at the
9%
rate are as follows:
v
Yield Price
Low
9.11%*
99.717
High
9.12%
99.691
Average
9.12%
99.691 :•• :t '
:
*Excepting 2 tenders totaling $20,000.
t "
Tenders at the high yield were allotted 75%.
.; J _; '
I
TENDERS RECEIVED AND ACCEPTED (In Thousands) •'
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
Totals
Received
$
4,8,390
26,498,540
31,520
99,320
156,815
56,890
1,355,120
88,070
55,145
126,830
25,985
1,162,800
7,535
$29,712,960
Accepted
$
48,390
8,553,385
'30,520
\ X . 92,82ft
'.•i X v >52,81S
,• & 31,140
f'333,620
" 60,070
48,5*15
123,8,30
24,730
367,050
7,535
$9,794,420;
The $9,794
million of accepted tenders includes $1,157
million of noncompetitive tenders and $8,637 million of
competitive tenders from the public.
In addition to the $9,794 million of tenders accepted in
the auction process, $1,240 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,526 million
of tenders was also accepted at the average price from Government
accounts and Federal Reserve Bsr>k* for their own account in
exchange for maturing securities.
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
May 9, 1989
Contact: Office of Financing
202/376-4350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$13,200 million, to be issued May 18, 1989.
This offering
will result in a paydown for the Treasury of about $ 1,900 million, as
the maturing bills are outstanding in the amount of $15,093 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, May 15, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,600
million, representing an additional amount of bills dated
February 16, 1989, and to mature August 17, 1989
(CUSIP No.
912794 SU 9), currently outstanding in the amount of $8,065 million,
the additional and original-bills to be freely interchangeable.
182-day bills for approximately $6,600 million, to be dated
May 18, 1989,
and to mature November 16, 1989 (CUSIP No.
912794 TE 4 ) .
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing May 18, 1989.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities, to
the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them. Federal
Reserve Banks currently hold $1,916 million as agents for foreign
and international monetary authorities, and $4,497 million for their
own account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series)
NB-258
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
10/87
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations of the Secretary of the Treasury
shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
10/87
of
the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, .or from the Bureau of
the Public Debt.
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
EXPECTED AT 9 A.M., WEDNESDAY MAY 10
Statement By
The Honorable David C. Mulford
Assistant Secretary of the Treasury
for International Affairs
Before the
Subcommittee on International Economic Policy,
Trade, Oceans and Environment
Committee on Foreign Relations
United States Senate
May 10, 1989
Mr. Chairman and Members of the Committee, I appreciate the
opportunity to appear before you today to discuss the InterAmerican Development Bank. I am happy to report that after
three years of negotiations, agreement has been reached on a
proposal to increase the Bank's resources. The agreements
reached in the negotiations will help accelerate the
transformation and revitalization of the IDB already begun by
President Iglesias. We are now seeking your support for
legislation to authorize United States participation in the
resource increase.
Importance of Latin America
This Administration is acutely aware of the problems in
Latin America and of the region's significant commercial,
cultural, and strategic ties to the United States. The
Administration has acted quickly to come to the aid of
beleaguered Latin American nations; by reshaping the debt
strategy and now by reaching agreement on a replenishment of the
IDB. A strengthened and reorganized Inter-American Development
Bank can provide much needed funding and leadership in helping
restore sustained growth in the countries of Latin America and
the Caribbean.
Latin American countries continue to face serious economic
and financial problems. In the 1970's Latin America relied too
heavily on external borrowing.
Although some countries achieved
significant growth in this period, many did not make effective
use of the borrowed resources. Without a broad economic base,
and with heavily managed economies, these countries were not
prepared to adjust to the adverse developments of the early
1980's.
Many Latin American countries now realize they need to adopt
appropriate policies that will enable their economies to
function
efficiently and to produce growth and better lives for
NB-259
- 2 their people. Particularly since 1985, several countries have
implemented important structural reforms with the help of the
international financial institutions. These countries have
privatized government-owned industries, liberalized their trade
regimes, reformed tax systems, and pursued market-oriented
pricing.
However, much remains to be done to help Latin American
economies function efficiently and effectively — and in the
best interest of Latin Americans themselves. The reforms should
be implemented consistently: realistic exchange rates must be
maintained and public sector deficits must be further reduced.
In addition, attention needs to be focussed on other areas,
particularly measures to attract new investment and encourage the
return of flight capital.
Some countries have made a good beginning. Others must
strengthen their efforts or even make a fresh start. The IDB can
play a critical role in working with these countries to initiate
major policy reforms.
At the beginning of his tenure in March 1988, President
Iglesias' committed himself to reforming the IDB to improve the
quality and effectiveness of its lending. As part of his effort
he has:
• adopted measures to strengthen programming and loan
review;
• established a self-financing, early retirement program
to encourage needed personnel changes;
initiated an evaluation of the Bank by the High-Level
Review Committee, a group of prominent outside experts
which included a number of former Latin American finance
ministers; and
• launched task forces on programming, operations, and
administration and personnel to examine the IDB's
policies, practices, and structure.
Implementation of the recommendations of the High-Level
Review Committee and the task forces will further improve the
quality of Bank's operations and its overall effectiveness. The
recommendations have been accepted by President Iglesias who has
pledged to implement them. Once effected, the recommended
actions will need to be supported by the Bank's Board of
Directors. It is important that the Board members support these
changes and truly represent the new policy thinking of leading
Latin American governments. It is also important that Latin
governments follow through on their commitments to reorganize and
change the policies in a replenished IDB.
- 3 IDB-7 Agreement
The Seventh Replenishment (IDB-7) Agreement which was
reached during the IDB's annual meeting in March, marks the key
implementation phase of the IDB's reform efforts. Funds to make
the new IDB a more effective contributor to solving Latin
America's problems can now be injected into the Bank as the
reform efforts move forward. Governors proposed increases of
$26.5 billion in the IDB's capital and $200 million in the Fund
for Special Operations (FSO). These increases will finance $22.5
billion of lending over the four-year period 1990 to 1993. This
will be a significant increase in lending — about double actual
Sixth Replenishment (IDB-6) levels. While up to 65 percent of
IDB-7 lending could go to the most advanced Latin American
countries, 35 percent will be reserved for the smaller countries
of Latin America and the Caribbean. All the concessional FSO
lending will go to the poorest countries.
The U.S. share of the capital increase is $9.2 billion of
which 2.5 percent or $229.3 million will be paid-in. Our share of
the FSO replenishment is $82.3 million. The U.S. would thus be
providing 34.7 percent of the capital increase and 41.2 percent
of the FSO replenishment. Our payment for paid-in capital
subscriptions and FSO contributions under IDB-7 would require $78
million of budget authority annually compared to $131 million
under IDB-6.
The IDB-7 replenishment agreement incorporates a number of
significant decisions about Bank operations over the next few
years that complement the actions already taken to improve the
Bank. The IDB-7 agreement proposes:
adopting a loan approval mechanism that will promote
improved loan quality and give greater decision-making
authority to non-borrowing countries;
• strengthening the country programming process to ensure
that Bank lending will support policy reform and self
sustaining growth;
• providing up to 25 percent of IDB-7 lending for sector
loans; and
committing more staff and financial resources to
strengthening the technical and institutional
capabilities of countries in environmental management
and conservation of natural resources.
I would like to elaborate further on the significant
elements of the IDB-7 agreement and the complementary task force
recommendations:
- 4 Loan Approval Mechanism - The intent and design of the new loan
approval mechanism is to foster a Board consensus in support of
loans and thereby improve loan quality. The mechanism allows for
a delay of up to 12 months in the consideration by the Board of
Directors of a loan from capital resources (the U.S. has a veto
over FSO loans). Within specified limits, the President of the
IDB could reduce this delay period to seven months. The delay
periods will be used by Bank management to remedy those problems
that prompted objections to the loan so that it can be supported
by the entire Board of Directors.
Country Programming - A strengthened country programming process
is a critical element in improving the quality of IDB lending.
The country programming process and the Bank's policy dialogue
with each country will result in a coherent and comprehensive
framework for Bank operations. As outlined in the replenishment
agreement, the IDB will analyze potential investment areas in
each country in light of the adequacy of macroeconomic and
sectoral policies. Therefore, the Bank's entire lending program,
project as well as policy-based loans, will support needed policy
reforms. In addition, the task forces recommend ways to
reorganize operating departments to implement effective country
programming.
Sector Lending - During the IDB-7 period the Bank will begin a
program of sector lending. Fast-disbursing, policy-based lending
is new to the IDB. They will not undertake broad-based
structural adjustment lending but will focus instead on loans
aimed at improving the economic efficiency of specific sectors,
such as agriculture. For at least the first two years of the
replenishment, all sector loans will be cofinanced with the World
Bank.
Environment - In addition to committing more resources to
environmental management and establishing a senior line unit to
strengthen its own environmental assessment capabilities,
the task forces recommended that the Bank improve its
environmental action through other means as well. These include
enhancing Bank relations with non-governmental organizations,
improving its dissemination and collection of environmental
information and hiring a core group of environmentalists to
support technical staff.
Lower-income Beneficiaries - As in its last two replenishments,
the Bank will seek in the seventh replenishment to ensure that 50
percent of its lending program benefits lower income groups.
This includes sector lending where it is not always possible to
precisely ascertain the effect of a loan on various groups.
Nevertheless, the Bank will undertake to ensure that low-income
persons benefit from sector loans and that potential adverse
effects are minimized
- 5 IDB and Debt
A strengthened and reformed IDB will be in a position to
make its contribution to helping resolve the economic and social
problems facing Latin America. As far as the debt problem is
concerned, the IDB's role at this point will be to encourage its
borrowers to adopt policies that improve economic performance,
stimulate new foreign investment, increase domestic savings, and
encourage the repatriation of flight capital. Private sector
initiatives and the development of market based economies should
be emphasized.
Next Steps
The member countries of the IDB have charted a course for
the Bank over the next five years. It is now time to act to
implement the IDB-7 agreement and the recommendations of the
IDB's task forces. We will be following this closely as the
pace of our subscriptions could be affected by the pace and
effectiveness of their implementation.
We must get the new Bank up and operating. This will not be
an easy task. It will require that all members work
cooperatively and enthusiastically with President Iglesias and
Bank management.
For our part we can support the Bank by formally agreeing to
the capital increase and the replenishment of the Fund for
Special Operations. Neither can go into effect without our
agreement which requires prior Congressional authorization. We
will submit the necessary legislation to Congress shortly.
We are seeking authorization legislation this year although
subscription and contribution payments for IDB-7 are not due
until October 1990 (U.S. FY 1991 budget). The primary reason for
doing so is to demonstrate the United States commitment to the
IDB and our support for the increase in the Bank's resources. In
addition, our early agreement to the replenishment will allow
other members to begin their approval processes and will
facilitate the implementation of the IDB-7 agreement from January
1990.
I would urge you to act promptly to adopt the legislation
to authorize United States participation in the increase in the
capital of the IDB and the replenishment of the Fund for Special
Operations.
TREASURY NEWS _
D e p a r t m e n t of t h e Treasury • W a s h i n g t o n , D.c. • T e l e p h o n e 566-2041
* 5310
Text as Prepared
For Release Upon Delivery
Expected at 10:30 a.m. DST
Remarks by Thomas J. Berger
Deputy Assistant Secretary of the U.S. Treasury
for
International Monetary Affairs
before
The Ninth Annual United States Investment Policy Forum
Washington, D.C.
May 9, 1989
Trade. Economic Growth and Third World Debt:
A Potomac River Viewpoint
Introduction
Good morning. As a former investment professional, it is
a pleasure for me to address this internationally diverse group
of senior investment officers. I would like to talk with you
this morning about three critical economic issues that have
important implications for the world economy and for the
decisions of investment managers.
First, I would like to give you a perspective on the U.S.
trade deficit — where it's been, where it's going and what needs
to be done to get it down. Second, I plan to discuss our efforts
in the Group of Seven to forge a more effective process of
economic policy coordination in order to achieve sustained
noninflationary growth and stable financial markets. Finally,
I will discuss the debt problems of the developing countries and
the new approach to this issue proposed by the Bush
Administration.
The U.S. Trade Balance
Throughout much of the post-World War II period, the U.S.
ran a surplus in its current account balance. In this decade,
however, we have seen a dramatic reversal in our payments
position. Regardless of the measure used, it has deteriorated
to an unprecedented degree. In 1980, our current account was in
NB-260
- 2 rough balance, with a $2 billion surplus. By 1987, this modest
surplus had swung to a record $154 billion deficit. At the same
time, our merchandise trade deficit increased from $25 billion
in 1980 to a record $160 billion in 1987.
This deterioration has been across-the-board in terms of
products and widespread in terms of geographical regions. Our
trade balance worsened in nearly all of the major product
categories, while bilateral balances worsened against all of our
top trading partners, especially against Japan where our
bilateral trade deficit widened from $19 billion in 1982 to
nearly $57 billion in 1987.
Special factors have undoubtedly contributed to the
deterioration in our trade balance, such as the relative openness
of markets. But the worsening of our trade performance has been
much too pervasive to be explained solely by protectionist
practices in certain countries. What then explains the
deterioration in U.S. external accounts during much of the 1980s?
o The combination of a vibrant U.S. economy and relatively
sluggish growth abroad was a major factor. Between 1982
and 1985, U.S. demand increased 19 percent in real terms
compared with less than 8 percent for the other major
industrial countries. To satisfy the strong growth of
both U.S. domestic consumption and investment, the U.S.
increased imports of goods and services.
o From 1980 to 1985, the value of the U.S. dollar
appreciated substantially making our exports less
competitive in foreign markets.
o The international debt situation led to reductions in
U.S. exports to major developing country markets.
o Asian newly-industrialized economies (NIEs) emerged as
major low-cost producers of manufactured goods. (At the
same time, some of these economies have resisted opening
their markets and allowing their exchange rates to adjust
adequately.)
In 1988, the U.S. experienced an improvement in its external
accounts that was broadly based across products and regions, just
as had been the case in the previous deterioration. The U.S.
trade account began to improve in volume terms in late 1986, but
did not begin to improve in value terms until 1988. Our current
account deficit improved by $19 billion in 1988, going from $154
billion in 1987 to $135 billion. Our merchandise trade deficit
improved by some $34 billion, which reflected a robust growth in
This recent improvement reflects a number of factors,
exports of 28 percent, compared with a 9 percent growth in
many of which stem from the coordination process initiated in
imports.
- 3 September 1985 at the Plaza Hotel meeting in New York of the
Group of Five. The foreign exchange value of the dollar in
real terms has reversed its earlier appreciation, and is back on
average to its 1980 trade-weighted value. Domestic demand growth
in the other industrial countries outpaced U.S. growth in 1987
and 1988, as surplus countries, especially Japan, stimulated
their economies. In addition, U.S. exports to the LDC countries
partially recovered, while our domestic demand grew more slowly
than GNP, softening our demand for imports.
Thus, the evidence indicates that both the deterioration and
subsequent improvement in the U.S. balance of payments have been
primarily macroeconomic phenomena. Further improvement will,
therefore, depend importantly on such macroeconomic factors as:
(1) sustained strong growth in Japan and Western Europe; (2) a
reduction in the U.S. budget deficit; (3) steps by the NIEs to
adjust their exchange rates in line with economic fundamentals;
and (4) progress on the LDC debt situation. At the same time,
it is important to underscore that the adjustment of trade
imbalances will be difficult to achieve if the markets of our
trading partners remain closed to foreign goods and unexposed
to the therapeutic affects of open competition.
Economic Policy Coordination
Major structural changes in the global economy have
intensified the need for close and effective economic policy
coordination among the major industrial countries and the G-7
process was developed in response to this need. In particular:
o The globalization of financial markets has reduced
substantially the independence that domestic policymakers believed they would enjoy under flexible exchange
rates as wide currency swings involved unacceptable
economic costs and increased protectionist pressures.
o The liberalization of international trade and investment
and the development of global integrated production
facilities have increased substantially the importance
of the external sector in all countries.
o Finally, the greater balance in economic size among the
major countries requires the effective external
adjustment be a shared responsibility of a number of
countries. No single nation, be it in surplus or
deficit, can be expected to undertake the bulk of the
adjustment role.
The coordination process developed since the 1985 Plaza
Agreement — reinforced and strengthened over the last three and
one-half years — reflects these new realities. It seeks to
promote a sound world economy and stable international financial
system through the adoption of compatible, consistent and
mutually supporting policies by the major industrial countries.
- 4 It thus provides greater discipline for the international
monetary system and increased assurances that emerging problems
will be addressed in a timely manner.
Is the process working and achieving the desired results?
Notable accomplishments in 1988 included world economic growth
that exceeded expectations, inflation which remained in check,
external imbalances which were reduced substantially, and
generally stable exchange markets. But continued efforts must
be made to sustain noninflationary growth, the central objective
of the coordination process. The success of these efforts
depends on continued progress in controlling inflation and
gradually reducing external imbalances.
Countries with large fiscal and trade deficits — including
the United States, Canada, and Italy — need to make further
reductions in budget deficits to complement monetary policies.
We believe that we can achieve further reductions in the U.S.
budget deficit through the implementation of the recent
bipartisan budget framework agreement between the President and
the joint Congressional leadership. The major surplus countries
need to emphasize economic and structural policies to sustain
domestic demand growth without inflation and facilitate
external adjustment of their external surpluses. All countries
need to be vigilant on inflation, and to resist protectionist
pressures.
Finally, part of the coordination process was the establishment of more effective arrangements to deal with exchange market
pressures. These arrangements have contributed to greater
exchange market stability over the past year. In this context,
the Group of Seven agreed at their meeting last month that a rise
of the dollar which undermined adjustment efforts, or an
excessive decline, would be counterproductive and reiterated
their commitment to cooperate closely on exchange markets.
Proposals for Dealing with Third World Debt
As you may know, President Bush has made the international
debt situation a major priority for this Administration.
Recently, Treasury Secretary Brady outlined proposals to
strengthen the debt strategy that revolve around two central
themes: greater emphasis by commercial banks on debt and debt
service reduction as a complement to new lending, and special
efforts by debtor countries to adopt measures which will
encourage new investment and a return of flight capital as
important alternative sources of capital for growth. The
International Monetary Fund and the World Bank will have
continued central roles in addressing debt problems through
both their policy advice and their financial support. Special
measures
to
support
voluntarywill
transactions
which reduce
debt
the
and debt
new approach.
service
obligations
be an important
element
of
- 5 A month ago, the Finance Ministers of the major industrial
and developing nations, as well as the leaders of international
financial institutions, endorsed these proposals in a series of
communiques issued at their spring meetings in Washington. We
have been encouraged by this broad support and the speed with
which the various participants have turned to the task of
implementation.
There is no substitute for sound economic policies in debtor
nations. Without proper policies, no amount of debt or debt
service reduction will lead to sustained economic growth. The
debtor countries should design policies which will boost the
confidence of both foreign and domestic investors, thereby
encouraging new investment and fostering flight capital
repatriation. Macroeconomic reforms will be critical, as well
as supply-side policies to free up rigidities, allow the
marketplace to work, and boost production. Each country must
take the initiative to undertake the necessary reforms, fitted
to its individual needs and circumstances.
The IMF and World Bank have provided important policy and
technical advice to debtor nations in the development of key
macroeconomic and structural reforms to promote growth. Their
policy-based loans have also served as a vital catalyst for other
sources of external financial support. They need to continue
playing a central role in this process. In addition to stronger
emphasis on policies to promote foreign direct investment and
flight capital repatriation, we believe they should enhance the
effectiveness of their own financial support by using some of
their resources to support voluntary debt and debt service
reduction transactions for countries with significant debt to
commercial banks.
We have suggested that the two institutions modify their
policy-based lending operations to help finance specific debt
reduction transactions by setting aside, for example, a portion
of participating nations' policy-based loans to collateralize
discounted debt-for-bond exchanges or to replenish foreign
exchange reserves following a cash buyback, once such
transactions have been negotiated with commercial banks. In
addition, we believe that the Fund and Bank should make
available limited interest support for transactions involving
significant debt or debt service reduction. Finally, we have
suggested that they introduce greater flexibility in the timing
of their financial disbursements in order to provide visible,
meaningful support for the debtor countries' reform efforts.
Initial disbursements from the IMF and the World Bank might,
therefore, be made before final agreement is reached with
commercial banks on specific debt and debt service reduction
transactions.
Active participation by the banking community will be
critical. Under our proposal, the banks will be able to choose
what form their support of debtor reform will take from a
- 6 diversified set of choices, including debt reduction, debt
service reduction, or various forms of new lending mechanisms.
Certain steps will need to be taken, however. Attention
will need to be focused on legal constraints in existing loan
agreements between debtors and commercial bank creditors which
may impede debt and debt service reduction. Such contractual
constraints can be waived for a limited time to stimulate
voluntary transactions to reduce debt or debt service burdens.
Once these waivers are agreed upon, the debtors and creditors
should be able to negotiate a range of specific transactions,
which might include debt/bond exchanges, cash buybacks, and
interest reduction instruments.
It will be important that the banks also continue to provide
new lending, although the magnitudes required may be
substantially reduced by debt and debt service reduction. New
financing could include concerted lending, club loans, trade
credits, or project finance.
Debtor countries are anxious to proceed with debt reduction.
Several potential early candidates for debt reduction are
Mexico, the Philippines, Morocco, and Venezuela. They are
currently pursuing discussions with commercial banks, while
negotiating IMF and World Bank support. The relative balance
between debt reduction, debt service reduction, and new money
will vary for each country, based on its own individual
situation.
The Executive Boards of the IMF and World Bank are already
exploring mechanisms necessary for their support for debt and
debt service reduction transactions. Both debtor countries and
commercial banks will be watching the decisions of these
institutions carefully in considering their own options.
In terms of other support from creditor governments,
official debt rescheduling in the Paris Club and export credit
cover will continue for those countries adopting IMF and World
Bank programs. The key industrial countries are reviewing
regulatory, accounting, and tax regimes, with a view to reducing
any impediments to debt and debt service reduction. Where
possible, creditor governments should also provide bilateral
funding in support of the strengthened debt strategy. Japan has
already risen to the challenge by announcing a commitment to
provide additional financing of $4.5 billion.
Conclusion
In conclusion, I believe we have set a practical agenda for
addressing the three critical issues we have been discussing this
morning. We are working to reduce trade imbalances through
growth rather than protectionism — resorting to protectionism
would
beaasound
solution
search and
of astable
problem.
We aremarkets
working to
achieve
worldineconomy
financial
- 7 through the adoption of consistent and mutually supporting
policies by the major industrial countries — this is the heart
of the economic policy coordination process. Finally, we are
working to strengthen the international debt strategy by
proposing new ideas that we believe will promote cooperative
efforts on the part of commercial banks, debtor and creditor
governments, and the international financial institutions.
Thank you very much.
TREASURY NEWS
Department of the Treasury •;MWashington,
D.c. • Telephone 566-2041
5310
FOR IMMEDIATE RELEASE
May 10, 1989
CONTACT:
Office of Financing
202/376-4350
RESULTS OF AUCTION OF 10-YEAR NOTES
The Department of the Treasury has accepted $9,530 million
of $21,995 million of tenders received from the public for the
10-year notes, Series B-1999, auctioned today. The notes will be
issued May 15, 1989, and mature May 15, 1999.
The interest rate on the notes will be 9-1/8%.A/ The range
of accepted competitive bids, and the corresponding prices at the
9-1/8% interest rate are as follows:
Yield
Price
Low
9.17%*
99 .709
High
9.19%
99 .581
Average
9.18%
99 .645
•Excepting 1 tender of $34,000.
Tenders at the high yield were allotted 58%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received **
Accepted
Boston
21,821
$
21,821
$
New York
19,925,029
8, 767,229
Philadelphia
7,991
7,991
Cleveland
20,887
20,887
Richmond
22,460
12,460
Atlanta
11,593
10,593
Chicago
1,018,708
327,188
St. Louis
39,115
19,113
Minneapolis
7,613
7,613
Kansas City
13,604
13,574
Dallas
8,517
8,517
San Francisco
894,912
310,512
Treasury
2,358
2,358
Totals
$21,994,608
$9, 529,856
The $9,530 million of accepted tenders includes $467
million of noncompetitive tenders and $9,063 million of competitive tenders from the public.
In addition to the $9,530 million of tenders accepted in
the auction process, $300 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $200 million of
tenders was also accepted at the average price from Federal Reserve
Banks for their own account in exchange for maturing securities.
U The minimum par amount required for STRIPS is $1,600,000.
Larger amounts must be in multiples of that amount.
NB-261
TREASURY NEWS
lepartment of the Treasury • Washington, D.C • Telephone 566-2041
Hi AS
TEXT AS PREPARED
FOR RELEASE UPON DELIVERY
EXPECTED AT 10:00 A.M.
MAY 11, 1989
Statement By
The Honorable David C. Mulford
Under Secretary Designate
Department of the Treasury
Before the
Committee on Agriculture
U.S. House of Representatives
May 11, 1989
Strengthening the International Debt Strategy
Mr. Chairman and Members of the Committee:
Two months ago, the Administration concluded a thorough review
of the international debt problems of developing nations. As a
result of this review, Secretary Brady outlined several proposals
to strengthen the international debt strategy. In early April, the
Finance Ministers of the major industrial and developing nations,
as well as leaders of international financial institutions,
endorsed these proposals in a series of communiques issued at
their spring meetings in Washington. We were encouraged by this
broad support and the speed with which the various participants
have turned to the task of implementation.
I welcome this opportunity, Mr. Chairman, to discuss the
Administration's efforts to address international debt problems
and to help renew growth in debtor nations, which should in turn
help foster an expansion in our agricultural export markets.
Proposals to Strengthen the Debt Strategy
The proposals outlined by Secretary Brady reflected the
culmination of an extensive review, which confirmed that while
significant progress had been achieved since 1982, several
critical issues needed to be addressed. Notably, growth in
several of the major debtor countries has been inadequate to
NB-2S?
- 2 support sustained recovery. In some countries, reforms had not
been comprehensive and consistently applied. Investor confidence
remained weak — exacerbating capital flight. And commercial
bank financial support was not always timely or sufficient.
The approach proposed by Secretary Brady to strengthen the
debt strategy is intended to mobilize more effective external
financial support for debtor countries' efforts to reform their
economies and achieve lasting growth. Our ideas build on
suggestions of many throughout the world, including members of
Congress. The strengthened strategy revolves around two central
themes: the need to give greater emphasis to debt and debt
service reduction, and the need for debtor countries to implement
sound economic policies designed to encourage investment and
flight capital repatriation.
In unveiling the approach to strengthen the debt strategy,
we focussed on key concepts, rather than offering a blueprint,
in order to stimulate discussion and involve key players in the
development of a detailed plan. Our proposals were structured to
accomplish a broad international consensus that will move us
towards objectives for the debt strategy that are widely regarded
as necessary next steps.
Those steps include the need to strengthen growth in debtor
countries, to address the problem of capital flight, to attract
new investment, and to sustain commercial bank financial support.
Reductions in the stock of debt are also very important for both
economic and political reasons.
Strong economic reforms in debtor countries are an essential
first step. There is no substitute for sensible economic
policies. No amount of debt or debt service reduction will lead
to sustained economic growth without such policies. Inappropriate
policies and inconsistent implementation have often been at the
heart of economic and financial problems in these countries. In
the end, policies must promote confidence in both foreign and
domestic investors — for investment is the single key to growth.
Macroeconomic reforms — in particular sound fiscal,
monetary, and exchange rate policies — remain critical.
However, they are not sufficient. Policies designed to free up
rigidities, allow the marketplace to work, and boost production
are essential to combining adjustment with growth. Thus, debtor
countries should pursue policies which liberalize trade, reform
labor markets, develop financial markets, and privatize government
enterprises. This will allow the private sector to increase
employment and efficiency.
Debtor nations must focus particular attention on the
adoption of policies which can better assure the return of flight
capital; not the ephemeral return that we have witnessed in
3 certain countries from time to time, but hopefully a sustained
return of those assets that have fled abroad over the years.
Debtor nations can build investor confidence by reducing or
eliminating limitations on remittances through tax reform, and by
amending policies to assure real rates of return. Such measures
can win back the resources that have deserted archaic investment
regimes. This will not happen overnight. The web of government
controls, intervention, ownership, and regulations has to
change. And these reforms must be sustained. Frequently, we have
seen capital return early in an adjustment program, only to move
out of the country when the program falters.
Privatization programs can offer many countries a large pool
of financial resources. In several heavily indebted countries,
parastatals control on the order of two-thirds of domestic
production. Privatization programs can be structured to attract
both domestic and foreign investors, to reduce the stock of
external debt, to raise government revenues, and to cut government
expenditures on inefficient operations. All told, privatization
is a win-win deal.
To support debtor countries' reform efforts, the international
community needs to provide timely financial assistance. A
broader range of financial support by commercial banks is the
key, in our view. Debt and debt service reduction can be an
important component of this support and can be structured in
ways to meet the diverse interests of commercial banks.
New lending will also be important for most countries, but
the magnitudes of new lending required may be substantially
reduced by debt and debt service reduction. New financing could
include concerted lending, club loans, trade credits, or project
finance.
Several steps must be taken to enhance the potential for
debt and debt service reduction by commercial banks. Legal
constraints in existing agreements now stand in the way of
transactions that can directly benefit the debtor country.
Waivers of these provisions for a limited period can help to
stimulate greater activity within the market and allow those
banks willing to accept various options to do so. We believe
that a waiver can be structured to permit multiple debt and debt
service reduction transactions during a given period of time.
Such a waiver is much less cumbersome than seeking waivers on a
transactions-by-transaction basis. Once these waivers are agreed
upon, the debtors and creditors should be able to negotiate a
range of specific transactions, which might include debt/bond
exchanges, cash buybacks, and interest reduction instruments.
In addition, the IMF and World Bank can facilitate agreement
on specific transactions. We have proposed that these institutions
redirect a portion of their normal policy-based loans to fund
4 debt reduction transactions such as cash buy-backs or collateralized exchanges. We have also proposed that they provide limited
interest support for significant debt and debt service reduction.
We believe that IMF and World Bank resources should be used to
help reduce debt rather than increasing the future servicing
burdens of debtor countries.
In addition to pursuing reductions in their debt burdens,
developing countries should seek to develop other ways of
meeting their financing needs. As I mentioned above, both new
investment and flight capital repatriation are important sources
of capital and can be encouraged through sound policies.
Let me say a few words in particular about the role investment
can play in a developing economy. In our view, foreign investment
offers countries a unique opportunity to gain access to not only
capital but also technology, management expertise, and employment
for its citizens. In a time of scarce financial resources,
countries simply must be more active in seeking to develop the
potential for investment.
Debt/equity swaps can be an important vehicle for attracting
such investment and in our view should be key elements of any
debt reduction program.
Benefits
What are the benefits of this approach for debtor countries
and commercial banks?
Those countries which are prepared to adopt significant
reforms will have earlier support for their efforts, will be
able to demonstrate at home that their debt burden is being
reduced, and will enhance their potential to achieve domestic
growth, development, and social objectives. Their need for new
money from commercial banks will be reduced.
Commercial banks will be able to make realistic adjustments
in their portfolios in a way that enhances the quality of their
loans. The creditworthiness of their debtor country clients
will improve. Debt reduction will be closely linked to debtor
reforms to assure that these benefits will be sustained.
Most importantly, this approach will allow the market to
function. It provides IMF and World Bank loans to debtor nations
as a catalyst for market activity, permitting debtor nations to
pledge some of these resources as backing for new debt instruments
which reduce the burden of debt and debt service.
- 5 Next Steps
It is up to all of the parties involved to make this
strategy work. We have seen encouraging signs of progress.
Key debtor countries have begun to seek support from the
Fund and Bank for debt reduction as part of their economic reform
programs. Countries as diverse as Mexico, Venezuela, Morocco,
the Philippines, and Costa Rica are anxious to get this process
underway and have initiated discussions with the commercial
banking community.
The IMF and World Bank have prepared interim papers on the
nature of the support they might provide for debt and debt
service reduction transactions. These papers are now under
discussion within their Executive Boards. Both debtor countries
and commercial banks will be watching the decisions of these
institutions carefully in considering their own options.
The commercial banks have also begun to discuss among
themselves the potential for waivers, techniques for transactions
that reduce debt and debt service, and possible ways of differentiating new money from existing loans.
Creditor governments are following developments in each of
these areas closely. Official debt rescheduling in the Paris Club
and export credit cover will continue for those countries
adopting IMF and World Bank programs. The key industrial
countries are reviewing regulatory, accounting, and tax regimes,
with a view to reducing any impediments to debt and debt service
reduction. Where possible, creditor governments should also
provide bilateral funding in support of the strengthened debt
strategy. Japan has already risen to the challenge by announcing
a commitment to provide additional financing of $4.5 billion.
Conclusion
In closing, I want to emphasize that the Administration's
intent in strengthening the international debt strategy is to
promote an approach to debt problems that will help revive growth
and improve the creditworthiness of developing countries. The
achievement of progress in coming months depends critically on
the cooperative efforts of commercial banks, debtor and creditor
governments, and the international financial institutions.
Secretary Brady and the Bush Administration, and G-7 governments
are fully committed to making this process work.
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
-May 10, 1989
Statement by
The Secretary of the Treasury
Nicholas F. Brady
The results of today's vote in the House Ways and Means Committee
is a mistake. If adopted, this action could force us to go back
to square one on both the budget and the savings and loan plan.
It could mean months of stalemate. This is not the way either to
lower interest rates or solve the savings and loan crisis.
NB-263
TREASURYNEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE i 5 CONTACT: Office of Financing
May 11, 1989
202/376-4350
RESULTS OF AUCTION OF 29-3/4-YEAR BONDS
The Department of the Treasury has accepted $9,535 million of
$20,015 million of tenders received from the public for the 8-7/8%
29-3/4-year Bonds of 2019 auctioned today. 1/ The bonds will be
issued May 15, 1989, and mature February 15, 2019.
The range of accepted competitive bids was as follows:
Yield
Price 2/
Low
9.10%
97. 653
High
9.12%
97. 453
Average
9.11%
97. 553
Tenders at the high yield were allotted 51?i .
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
1,128
1,128
$
New York
18,353,462
81,892,182
Philadelphia
640
640
Cleveland
2,108
2,108
Richmond
12,343
8,893
Atlanta
6,324
6,324
Chicago
1,044,237
441,107
St. Louis
15,070
7,070
Minneapolis
6,043
6,043
Kansas City
6,151
6,151
Dallas
7,246
4,796
San Francisco
560,012
158,362
Treasury
459
449
Totals
$20,015,223
$9 ,535,253
The $9,535 million of accepted tenders includes $367
million of noncompetitive tenders and $9,168 million of competitive tenders from the public.
In addition to the $9,535 million of tenders accepted in
the auction process, $100 million of tenders was also accepted
at the average price from Federal Reserve Banks for their own
account in exchange for maturing securities.
1/ The minimum par amount required for STRIPS is $1,600,000.
Larger amounts must be in multiples of that amount.
2/ In addition to the auction price, accrued interest of $21.8197 5
per $1,000 for February 15, 1989, to May 15, 1989, must be paid
NB-26 4
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.
FRIDAY, MAY 12, 1989
STATEMENT OF
ROBERT R. GLAUBER
NOMINEE FOR UNDER SECRETARY (FINANCE)
UNITED STATES DEPARTMENT OF THE TREASURY
BEFORE THE COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
Mr. Chairman, Senator G a m , distinguished members of the
Banking Committee, I have the honor of being nominated by the
President for the position of Under Secretary for Finance of the
U.S. Treasury. It is also an honor to appear before this
Committee.
The responsibilities of my position include the Offices of
Domestic Finance, Economic Policy, and Fiscal Management. Domestic
Finance has primary responsibility for developing policies to deal
with the capital and securities markets, financial institutions,
and financial aspects of corporations. Economic Policy acts as
economic advisor to the Secretary of the Treasury, participates in
producing the Administration's economic forecast, and provides
primary staff support on economic issues. These issues include the
savings rate, retirement policy, and (together with the Office of
Tax Policy) the impact of tax policy on corporate decisions.
Fiscal Management acts as the government's financial manager,
handling federal collections and payments and overseeing its
central accounting and reporting systems.
I believe my experience as a teacher and researcher on finance
issues at the Harvard Business School, as a consultant to financial
institutions and business corporations, and as Executive Director
of the Presidential Task Force empaneled to study the 1987 stock
market break provides useful preparation for the duties for which
I have been nominated.
I would like to take just a few minutes to outline some of the
major policy issues with which I would deal if confirmed, apart
from the current thrift crisis.
NB-265
2
International Competitiveness
It is perhaps stating the obvious to point out that the rapid
internationalization of competition is one of the strongest forces
confronting U.S. corporations, financial institutions and financial
markets. If these institutions are to maintain and extend their
competitive position and economic leadership, we must frame
policies which take explicit account of these goals and give due
consideration to the international arena in which these
institutions must compete. As you know, the Secretary in a number
of statements has directed attention to these concerns and intends
to play an active role.
A. Leveraged Buyouts
At the beginning of this legislative session, Congressional
Committees held hearings on leveraged buyouts (LBOs), an issue
which has important implications for the competitiveness of U.S.
corporations. Contrary to forecasts that the 1986 tax rate
reductions would sharply reduce the LBO business, the amount of
such transactions has been rising. Is this trend a healthy one for
U.S. corporations? In my view, judgement should be based primarily
on whether or not LBOs contribute to the competitive position of
U.S. corporations.
The arguments are many and are arrayed on both sides. On the
positive side: management works harder when it owns a significant
piece of the equity, high debt levels can act as an effective
discipline on management, and private firms are not subject to the
short-term performance demands of the stock market.
At the same time there are aspects of LBOs which are a basis
for concern. First, more transactions are being done for companies
in cyclical industries—chemicals, paper, etc. When the economy
finally slows down, what will happen to these firms, not just their
bondholders and stockholders, but also their workers and the
communities in which the firms operate? Second, under pressure to
service debt, heavily leveraged companies may cut back on R&D and
capital expenditures—in short, they may become more short-term
oriented when private than they were as public firms. Third, the
level of LBO debt held by insured banks is growing, leading some to
question whether sufficient due diligence has been performed.
Finally, many of the brightest people coming out of college and
business schools are spending more time recapitalizing old firms
rather than rebuilding them or creating new ones.
The evidence on LBOs is ambiguous and incomplete. While
aggregate debt levels are not beyond historical bounds, levels in
certain industries and specific transactions can be cause for
concern. Moreover, the recent LBO trend has gone on against a
background of healthy economic expansion; how well will these
3
highly leveraged firms perform in a period of economic decline,
where past history cannot be the guide?
My view is that any legislative initiatives at this stage
should be limited, reflecting the inconclusive nature of the
evidence. Some steps proposed by the Administration, though, would
be useful to implement now—capital gains tax reductions, to
encourage long-term investment decisions, and clarification of the
ERISA laws, to indicate that pension fund trustees are not
obligated to take a bid higher than current market price from fear
of litigation.
A more sweeping and potentially more effective proposal would
be to make dividends tax deductible, so that companies do not have
tax incentives to replace equity with debt. The tax codes of
virtually all other major industrial countries exempt dividends in
whole or in part. But given the current size of the federal budget
deficit, such a revenue reduction would be difficult to achieve.
The elimination of the tax deduction for some or all interest
payments is an equally sweeping legislative initiative but, in my
view, is overreaching. It would adversely affect the competitive
position of U.S. corporations, by raising their cost of capital and
by favoring foreign companies, which can use tax-deductible debt,
in acquisition battles. Moreover, any attempt to eliminate the
deduction for "bad" debt—for example, debt involved in "hostile"
takeovers or raised by "excessively" leveraged firms—has and would
B.
Financial
Institutions
produce
definitional
and administrative nightmares.
Several recent legislation initiatives have important
implications for the competitive position of U.S. financial
institutions. The secular decline in the profitability of these
firms during the 1980's—commercial banks as well as thrifts—can
be traced in some considerable measure to the competition from
insolvent S&Ls which have been permitted to remain in operation.
Continuing to compete in the marketplace, these institutions have
pushed up deposit costs and reduced profit margins for commercial
banks as well as other thrifts. The S&L legislation, which was
recently and expeditiously cleared by the Senate, will resolve
these institutions and reduce the pressure.
In the broader international arena, the position of U.S. banks
has declined over the last two decades. In 1970, 7 of the world's
10 largest commercial banks, as measured by total assets, were U.S.
firms. That declined to 3 of 10 in 1980 and none today. Several
forces are at work, including the change in exchange rates,
especially that of the yen-dollar, and the more concentrated
structure of banking abroad compared to the U.S. But the
restricted range of activities permitted to U.S. banks also has
4
played a role. The broadening of permitted commercial bank
activities would enhance the competitive position of U.S. banks by
stabilizing and increasing their profitability. And it would allow
U.S. banks to meet their foreign competitors on a more level
playing field, since a number of foreign banks operating in the
U.S. are today permitted to engage in activities prohibited by
Glass-Steagall to their U.S. competitors. Moreover, the experience
some U.S. banks have developed abroad in these activities could be
used to good effect at home.
As the financial services industry continues to evolve, it may
well become clear that the distinction between commercial banks and
thrifts has less economic meaning than one between smaller,
"community" institutions and larger, "wholesale" institutions.
That is, there may be more in common among most thrifts and the
great majority of banks, all directed toward serving community,
retail financial needs than between these banks and their
multinational counterparts whose major focus is on the wholesale
banking needs of corporations and similar institutions. If this
does become the pattern of evolution, I believe it will have
important implications for, and simplify the development of,
legislation
dealing
with such issues as permitted banking
C. Securities
Markets
activities and deposit insurance.
Finally, how the markets for securities and related financial
instruments develop has important competitive implications.
The
October 1987 market break revealed important weakness in both the
institutional structure and regulation of these markets.
Competition among the marketplaces for stocks, options, and
financial futures is essential to continued capital market
innovation in the face of increased pressure of global competition.
But to operate efficiently and safely, these separate marketplaces
must be part of a system which reflects, both in institutional
structure and regulation, the economic functioning of one market.
There have been over the last year some positive developments
in this area. Both the circuit breaker mechanisms developed
jointly by the Chicago Mercantile Exchange (CME) and the New York
Stock Exchange and the cross-margining discussions between the CME
and the Chicago Board Options Exchange—initiatives of those
private organizations themselves—enhance the integrity of the one
market system. At the same time, little has been done to
coordinate and integrate the clearing and settlement systems of
these marketplaces. The October 1987 break demonstrated the
brittleness of these systems and the damage to the broader
financial system which could result from a rupture. Ah important
agenda item must be work on clearance and settlement systems, to
assure that the U.S. marketplaces relate effectively to one another
and are integrated into the evolving global clearance and
5
settlement system. This issue will be high on the agenda of the
Working Group on Financial Markets.
I would be happy to answer any questions the Committee might
have on these or other issues.
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
EMBARGOED FOR RELEASE UNTIL DELIVERY
Expected at 10:00 a.m., D.S.T.
May 12, 1989
Statement by the Honorable David C. Mulford
Under Secretary-Designate of the Treasury
before the
Committee on Finance,
Subcommittee on International Trade
United States Senate
May 12, 1989
Mr. Chairman and members of the Subcommittee:
I welcome this opportunity to discuss the issues related to
the exchange rate practices of Korea and Taiwan, particularly as
the Treasury Department has recently released a report on
international economic and exchange rate policy which addresses
this matter.
For the last several years we have sought to reduce global
trade imbalances in the context of a growing world economy. Our
efforts to coordinate economic policies with other major industrial
countries have focused on this goal. Indeed, last year economic
growth in the G-7 exceeded expectations and there was a significant
reduction in global current account imbalances. This strong
performance provides a solid basis for continued progress in
1989, although there is some concern that external adjustment is
slowing and that further efforts will be required.
We also recognize that others should play an integral role
in preserving and ensuring a strongr stable world economy. In
particular, the newly industrialized economies of Asia have
benefitted from an open, growing international trading system.
As such, it is essential for them to also work toward reducing
global imbalances by allowing the value of their currencies to
reflect the strength of their economies and by dismantling barriers
to trade and investment.
NB-266
- 2 To that end, we have held discussions with the Asian NIEs,
beginning in mid-1986. The 1988 Trade Act provided impetus to
this process by requiring the Secretary of the Treasury to issue
periodic reports* on international exchange rate policy and to
determine which economies manipulated their exchange rates. In our
first report, issued in October, we concluded that Korea and
Taiwan were "manipulating" their exchange rates to gain a
competitive advantage within the meaning of the legislation.
Consequently, as required by the legislation, we have intensified
our negotiations with Korea and Taiwan.
In reaching the conclusion, concerning manipulation of
exchange rates, we looked at a wide range of factors to determine
whether Korea and Taiwan were manipulating their exchange rates.
An important factor was the existence in both cases of pervasive
capital controls and administrative mechanisms aimed at preventing
the exchange rate from reflecting market forces. A second factor
was large-scale intervention in the local foreign exchange market
by the Central Bank of Taiwan. A third factor was the lack of
significant exchange rate appreciation at a time when Korea and
Taiwan were running very large external surpluses in both absolute
terms and relative to GNP. This relative lack of appreciation was
particularly striking when compared with the appreciation of the
currencies of other surplus economies.
Our negotiations with Korea and Taiwan have been aimed
specifically at ending such currency manipulation. We have also
sought other policy changes, including structural reforms to give
greater emphasis to domestic demand as a source of growth and the
liberalization of financial markets.
These negotiations have led to some encouraging progress. The
currencies of both Korea and Taiwan have appreciated further. In
addition, they have taken measures to open their markets and, to
varying degrees, internationalize their financial systems.
Indeed, we believe that due to these factors, a structural decline
in their external surpluses may have begun. At the same time we
believe that more progress is necessary.
•
Korea
Appreciation of the Korean won accelerated in 1988, reaching
nearly 16 percent, including about 4 percent in the 6 weeks
following the release of our October report. Also, unlike in
previous years, the won began to strengthen against the currencies
of key competitors, such as Japan and Taiwan.
Although we welcome the appreciation of the won in 1988, its
adequacy must be judged against its much slower appreciation in
1987 and the size of Korea's external surpluses. In 1988, Korea's
global current account surplus grew 44 percent to $14.3 billion.
- 3 To put this surplus*in perspective, one need only realize that it
was equal to 9.1 percent of Korea's GNP. In comparison, Japan's
1988 current account surplus was equal to 2.7 percent of its GNP.
The United Spates' bilateral trade deficit with Korea began
in 1988 to show some limited prospects of improving, growing by
only 1 percent, compared with a 34 percent increase in 1987.
Encouragingly, this reflected stronger growth of our exports to
Korea and decline in the rate of growth of our imports.
Nonetheless, at $9.5 billion, our bilateral trade deficit remains
unsustainably large.
Preliminary Korean data for the first quarter suggests a
potentially significant decline in the trade and current account
surpluses, due, in part, to the prior appreciation of the won.
This data also indicate that Korea's bilateral surplus with the
United States fell by 34 percent to $1.2 billion.
Unfortunately, the response of the Korean authorities to
these welcome developments has been to reduce sharply the pace of
the won's appreciation this year. Since the beginning of the year,
the won has strengthened by only 2.7 percent against the dollar.
Much of this occurred since late March, following another round
of negotiations and the beginning of the preparation of our April
report.
While we are somewhat encouraged by Korea's recent trade
developments, we believe that the Korean current account data are
too limited and preliminary to demonstrate clearly that a
structural, lasting decline in Korea's external surpluses is
underway. Indeed, we expect Korean exports to begin to recover
in the second quarter, once the current labor disputes have been
resolved. As such, further exchange rate appreciation is necessary
to sustain and reinforce recent developments. However, due to
concerns about the first quarter declines in the surpluses, the
Korean authorities have not been willing to provide assurances of
adequate continued won appreciation.
Our negotiations with Korea in the coming months will be
aimed at obtaining assurances of continued appropriate
appreciation. In addition, we will see£ to engage the Korean
authorities in a broad dialogue on their capital markets,
including exchange controls and the banking and securities markets.
We will also seek to obtain an understanding on the implementation
of a market-based exchange rate system and the dismantling of the
current system of comprehensive capital and exchange controls
used to manipulate the exchange rate.
- 4 Taiwan
A decline in Taiwan's external surpluses is also occurring.
Taiwan's global current account surplus decreased by 43 percent
in 1988 to $10.2 billion, or 8.5 percent of GNP. According to
U.S. customs data, the trade imbalance with Taiwan, which accounts
for 95 percent of its global trade surplus, fell last year by 26
percent to $12.7 billion. However, the large U.S. exports of
gold to Taiwan accounted for more than half of this reduction.
Preliminary Taiwanese data for the first four months of 1989,
point to further reductions in Taiwan's trade surplus with the
United States, compared to the same period in 1988, if last
year's U.S. gold shipments are excluded.
The past appreciation of the New Taiwan (NT) dollar has been
an important factor in the reduction of Taiwan's external
surpluses. Furthermore, since our October report, the exchange
rate has appreciated by 12 percent. Significantly, five percent
of this movement has been since the release of our April report.
We believe this exchange rate appreciation will reinforce the
positive trends in Taiwan's external surpluses.
Taiwan also implemented a new exchange rate system in early
April following a round of negotiations. Without this change,
the recent currency appreciation would probably not have occurred.
This new more market sensitive system could represent an important
step toward the establishment of a market-based system to determine
the exchange rate. However, it is premature at this point to
make a definitive assessment of its impact. The effectiveness
of the liberalization will depend on reducing the extent of
central bank intervention, removing the remaining controls on
capital inflows, and resolving a number of operational problems
with the system itself. Consequently, we will monitor carefully
its implementation and operation.
Given the recent sharp appreciation of the New Taiwan dollar,
the reduction in external surpluses, and the institution of the new
exchange rate system, there may not be a need for further
appreciation at this time. We will, however, continue to monitor
Taiwan's exchange rate and trade developments closely to ensure
that momentum toward external adjustment is sustained.
Conclusion
In conclusion, Mr. Chairman, we believe that Korea and
Taiwan have an important role to play in reducing external
imbalances. The progress we have achieved in our bilateral
negotiations with Korea and Taiwan could lead to a sustainable
decline in their external imbalances. In the period before our
next report in October, we will aim to have these economies
continue to correct their policies to avoid an unfair competitive
- 5 advantage in trade and, hence, contribute to the global adjustment
process.
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
Remarks by
The Secretary of the Treasury
Nicholas F. Brady
At the North Carolina Bankers Association
Pinehurst, North Carolina
May 12, 1989
I am pleased to be here in North Carolina for the annual
meeting of the North Carolina Bankers Association. Today I would
like to discuss some of the most difficult problems facing our
country and the approach President Bush is taking to solve them.
The goal of the Bush Administration's economic policy is to
continue inflation*free economic growth. The approach President
Bush has taken to meet this goal is: Tackle the tough problems.
Find bipartisan solutions.
Although we are still very early in a four-year
Administration, I believe the President has already demonstrated
the kind of leadership that will be the hallmark of his
Presidency and will ultimately mark him as a great President.
He is an action-oriented chief executive, deeply involved in
the issues. He has the ability to seek out differing points of
view, to listen, to consult, and ultimately to forge consensus.
This enables him to accomplish things that conventional wisdom
said could not be done, such as the agreement on aid to the
Contras which he successfully negotiated With Congress.
It was this same open and responsive approach that enabled
the Congress and the President to achieve consensus on a budget
agreement — the first time a President and Congress have ever
reached such an agreement so early — prior to all deadlines, and
in a calm, rather than a crisis environment.
Some of our most effective Presidents, of both political
parties, have possessed this same combination of leadership
skills. President Lincoln forged an effective war-fighting team
out of an Administration prone to division and conflict.
President Franklin Roosevelt was known for his willingness
to listen to new economic ideas — sometimes to the dismay of his
more traditional advisors. And it was in Roosevelt's first one
hundred days that he forged bipartisan consensus with Congress,
on
the 1933 emergency legislation that marked the beginning of
NB-267
2
our climb out of the Great Depression.
Thanks to President Reagan's wise stewardship, we do not
face today national crises on a par with those that confronted
Lincoln and Roosevelt. But I believe the traits President Bush .
shares with these men make him the President to lead our efforts
to solve the problems of our time.
When he took office, President Bush asked each of us in the
Cabinet to face the issues squarely, propose fair and fitting
solutions and work with Congress to implement them. That is
exactly what we have done. At Treasury we have begun by clearing
out the underbrush and some of the underbrush is sequoias.
Certainly one of the largest problems we faced at Treasury
was the crisis in the savings and loan industry. President Bush
has acted swiftly and forcefully to resolve the crisis. Just
eighteen days after his Inauguration, the President came forward
with a comprehensive plan, and the Congress has acted swiftly on
it. The Senate has already passed the legislation. The House
Banking Committee has completed its work and the bill is now
being considered by the House Ways and Means Committee.
On Wednesday, Ways and Means voted to drive a truck through
the Gramm-Rudman process in direct violation of the recent budget
agreement the President reached with Congress.
The cost of solving the S&L problem is truly staggering —
$40 billion already spent and another $50 billion needed to deal
with the remaining insolvent S&Ls.
The President's plan creates a new corporation that will
borrow the $50 billion that will be needed. It will use savings
and loan industry funds to collateralize the principal and a
combination of industry and taxpayer funds to pay the interest.
All taxpayer funds will be counted on budget as they are spent.
This structure extracts and locks up the maximum industry
contribution. It also maintains the budget discipline of the
Gramm-Rudman process.
It appears that the Ways and Means Committee wants to
directly appropriate the $50 billion we have requested for the
S&L plan and to waive the Gramm-Rudman deficit reduction targets.
This would completely, and unnecessarily, make a mockery of
Gramm-Rudman. Meeting the Gramm-Rudman deficit reduction targets
is very important to the continued vitality of our economy. When
I meet with the finance ministers from other leading industrial
nations in the so called G-7, they always tell me how they see
Gramm-Rudman as the only hope for responsible deficit reduction
in the U.S.
3
The stated motivation for the committee alternative is to
save money by having Treasury borrow directly at a slightly lower
rate. But if we wreck the Gramm-Rudman process, the markets may
lose confidence in our commitment to deficit reduction. That
could lead to higher borrowing costs, not only for the S&L plan,but for the rest of the Treasury's financing needs, as well. A
sustained increase in interest rates of only one basis point (one
one-hundredth of one percent), applied to the half of our
national debt that is financed on a short-term basis, would raise
the taxpayers' bill for interest by about $140 million per year.
This is more than the savings from any alternative plan.
The full Senate and the House Banking Committee have
previously approved our plan, and we will continue to fight for
it. Our plan preserves Gramm-Rudman, which is our best hope for
fiscal sanity. It puts as much industry money as possible into
the solution. And it is the least costly financing method.
Now, turning to the plan itself, it is not a bailout for
ailing S&Ls. Instead, its purpose is to fulfill the
government's ironclad commitment to protect depositors' savings.
But the plan involves much more than writing checks to
depositors. In addition, it is a reform plan that is designed to
ensure that the industry can never again sink into this kind of
crisis.
The foundation of our reform plan is the requirement that
S&Ls meet the same capital standards as national banks. That is,
the owners of S&Ls must put their own capital at risk ahead of
the taxpayers' money. It must be real, not phantom, capital.
This is not an unreasonable request, and we should demand no
less.
If the minimum capital standard that the President proposes
— three percent tangible capital — is adopted, two thousand
Savings and Loans could meet it immediately.
Those two thousand
represent four out of every five of the solvent S&Ls in this
country. Of the remainder, almost half have tangible capital
between two and three percent of assets and should easily be able
to meet the standard. Only 24 6 institutions might have
difficulty meeting the standard, but ought to be able to merge
with stronger ones.
The principle behind our insistence on this point is simple:
It is just plain human nature that an individual, any individual,
is going to exercise more caution and careful judgement when he
is putting his own money at risk. We should truly be ashamed if
we put in place a solution to the S&L crisis that does not
eliminate the conditions which would let it occur again.
The House Banking Committee has recognized this. It has
courageously ignored the pressure of industry self-interest and
4
required a minimum three percent tangible capital standard. This
is the crucial element of the reform package. We taxpayers owe a
great vote of thanks to the Committee for their resolve and
commitment to solving this problem for once and for all.
The second major problem we have confronted at the Treasury
is Third World de,bt. This one is simply too large for a "made in
America" solution. The overall debt of developing countries is
more than $1.2 trillion; the total commercial bank debt of the 15
largest debtors amounts to $275 billion. Only about 25 percent
of the bank debt is held by U.S. banks. The rest of the bank
creditors are located abroad. Thus, effective action will
require a cooperative international effort.
Fortunately, we have seen in recent weeks broad support for
a new approach to strengthening the international debt strategy.
This new approach represents the best ideas gathered from around
the world. I put them forward on behalf of President Bush in a
speech early in March and they were endorsed by the world's
financial leaders at meetings here in Washington early last
month. We are now in the process of implementing this new
approach.
Our new ideas are aimed at easing the debt burden of
developing countries. This will support their efforts to make
their economies more responsive to market forces, thus generating
higher growth, and a better standard of living for their people.
A dynamic process is underway — debtor countries are
already actively engaged with the commercial banks in devising a
variety of ways to secure financial support in the form of debt
and debt service reduction, as well as creative forms of new bank
lending. New energy and ideas are being unleashed; but we are
also seeing how tough this process is going to be. Both sides
need to be more forthcoming and realistic in their expectations
about what can be achieved in the initial round of this process.
o
The third major problem that we have tackled is the federal
budget deficit. President Bush has agreed with the bipartisan
leadership of Congress on a budget that will meet the GrammRudman deficit reduction target for fiscal 1990 without raising
taxes.
The budget agreement has been greeted as somewhat less than
bold and heroic, and it may be. But it should not be dismissed
lightly. It is the first time a President and a Congress have
ever reached such an agreement before the first budget resolution
required by the Budget Act. It does leave many details yet to be
negotiated, but the negotiators have shown the determination and
the good will needed to work out these details.
Most importantly, the agreement represents a promise by both
5
sides to put aside their differences in the interest of fiscal
sanity. The American people do not expect that Republicans and
Democrats will have no differences. But they do expect us to be
able to deal with our differences in the best interest of our
country. This agreement shows the people — and the financial
markets — that we can do so.
It is my experience that fiscal responsibility can lead to
financial stability. When the Gramm-Rudman law was adopted in
1985, interest rates dropped three full percentage points in six
months. If we show that we can meet the deficit reduction
requirements of that law today, interest rates will come down.
The objective of our economic policies must be to continue
strong, inflation-free economic growth. It is harder to meet
these objectives if our federal budget is out of control, so we
simply must meet the Gramm-Rudman target, not only next year, but
in subsequent years as well.
Now, many of you will have heard that the budget agreement
calls for $5.3 billion in new revenue next year. This provision
does not violate the President's pledge of no new taxes. The
way to raise that revenue without raising taxes, is to cut the
tax rate on capital gains.
However, the amount of revenue the capital gains cut will
produce really is not the best argument for it. The other
reasons for encouraging capital investment are much more
compelling. The real objective of President Bush's proposal is
not revenue, but economic growth. Jobs and opportunity are the
most important results of a preferential tax rate for capital
gains. A new factory built, a new wonder drug, better quality
products at lower prices — that's what the capital gains tax is
all about.
The underlying issue here, in fact, goes to the more
fundamental problem of how we will preserve and improve our
standard of living. How we will increase the rate of national
saving and investment. How we will encourage Americans to take
the long-term view in their economic thinking. How we will
improve our international competitiveness.
The President stands firmly behind his capital gains
proposal and I do too. The differential on capital gains will
cut the cost of capital in the U.S. and bring us more in line
with our international competitors, almost all of whom grant
preferential tax treatment to capital gains. It is the
responsible way to raise the bulk of the $5.3 billion we need to
meet the Gramm-Rudman target for next year. But more than that,
it is the right thing to do for the long-term health of our
economy.
6
In sum, the Bush Administration is already on the job
producing solutions to tough problems: The savings and loan
crisis, Third World debt, the budget. And as you look around the
Administration, the war on drugs, peace and Democracy in Central
America, education and the environment. President Bush has
tackled them all and sought the help of Congress on each one.
Thank you for your interest in these issues, and for the
opportunity to be with you today.
TREASURY NEWS
CONTACT:
of Financing
epartment
of theRELEASE
Treasury • Washington,
D.C. Office
• Telephone
566-2041
FOR IMMEDIATE
202/376-4350
May 16, 1989
A M E N D E D
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,606 million of 13-veek bills and for $6,605 million
of 26-veek bills, both to be Issued on
May 18, 1989,
were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-veek bills
maturing August 17. 1989
Discount Investment
Rate
Rate 1/
Price
8.20%
8.22X
8.21X
8.49X
8.51X
8.50X
26-week bills
maturing November 16. 1989
Discount Investment
Rate
Rate 1/
Price
97.927
97.922
97.925
8.15X
8.22X
8.19X
8.62X
8.70X
8.66X
95.880
95.844
95.860
Tenders at the high discount rate for the 13-week bills were allotted 15X.
Tenders at the high discount rate for the 26-week bills were allotted 11X.
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
$
33,615
21.849.175
29,515
46,045
46.250
38.980
1.232,800
45,730
7,620
42,285
22,070
1,203.650
594.800
$
TOTALS
$25,192,535
$6,605,915
: $21,978,715
$6,604,915
T^pe
Competitive
* Noncompetitive
*
Subtotal, Public
$20,788,925
1.315.125
-22,104,050
$2,502,305
1.315.125
$3,817,430
' $17,675,170
:
.986.120
$2,601,370
486.170
5
^18,661,290
$
:
2,200,000
1,900,000
1,117,425
1,117,425
: $21,978,715
$6,604,915
* Federal Reserve
Foreign Official
Institutions
TOTALS
33,615
5,458,970
29.515
45.620
46,250
37.790
64.000
23.730
7.620
42,285
22,070
199,650
594.800
Accepted
2,403,610
2,103,610
684,875
684,875
$25,192,535
$6,605,915
$
:
:
:
:
:
:
:
24,695
18.967,335
13,405
27,865
70,190
29.570
1,087,270
34,380
9,995
37,815
16,680
1,189,435
470,080
$
24,695
5,439,565
13,405
27,865
70,190
29,570
231,520
30,600
9,995
37,815
16,680
202.935
470,080
3,587,490
An additional $192,225 thousand of 13-week bills and an additional $299,075
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
*
Adjustments were made in these categories due to correction of amounts allotted
to
Reserve
Banks
: 8.16 Federal
— 95.875
8.17—95.870
8.18—95.865
:
8.20—95.854
8.21 — 95.849
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
M a y 15, 1989
Contact Peter Hollenbach
(202) 376-4302
T R E A S U R Y T O E X P A N D R E G I O N A L DELIVERY SYSTEM FOR SAVINGS B O N D S
Savings bond purchasers in communities served by the Cleveland Federal Reserve District will be
introduced to a new Regional Delivery System (RDS) for savings bonds on June 1, 1989. R D S is
the first significant change to the delivery system since the bond program began nearly 50 years
ago.
Investors purchasing U. S. Savings Bonds at financial institutions in western Pennsylvania, eastern
Kentucky and the panhandle of West Virginia will complete a bond order form and pay for their
bonds. Financial institutions will forward the orders and payments to the regional service center
at the Federal Reserve office in Pittsburgh, where the bonds will be issued and mailed. Bonds
should be delivered within three weeks of the day they were purchased.
Bonds will earn interest, as they do now, from the first of the month in which payment is made.
Purchasers w h o order bonds as last-minute gifts will be given a special Treasury gift certificate
for their use. Because savings bonds will be issued from a regional service center, investors will
be able to order the particular denominations that suit their needs. Under the present system,
some denominations of bonds are not always available at all financial institutions. Payroll savings
plans are not affected by this change to the regional delivery system.
RDS was introduced throughout the state of Ohio in October 1987, as a pilot. Since then, the new
system has gained acceptance with more than 600,000 Ohioans investing $314 million in savings
bonds. Financial institutions in Ohio reacted favorably to R D S as it allowed them to serve their
customers while eliminating the expense of maintaining and accounting for savings bond stock.
Tellers are also able to complete the customers' bond purchase transactions more quickly.
Richard L. Gregg, Commissioner, Bureau of the Public Debt said, "Only the way bonds are
delivered is being changed and not the features that make bonds attractive to savers. The
expansion of R D S from Ohio to western Pennsylvania, eastern Kentucky and the panhandle of
West Virginia is the first step in introducing R D S nationwide over the next few years."
Gregg added, "RDS will strengthen the savings bond program by reducing the burden on financial
institutions w h o sell bonds to their customers and by reducing the cost of processing savings
bonds transactions. The new system will also set the stage for modernizing our savings bonds
systems, which will allow us to better service bond owner inquiries and claims in the future."
Accompanying this release is a list of those counties in Kentucky, Pennsylvania and West Virginia
where R D S will be introduced. These counties, along with the state of Ohio, make up the
territory served by the Federal Reserve Bank of Cleveland.
NB-269
C O U N T Y LISTING F O R R D S I N T R O D U C T I O N
The counties listed below are served by the Federal Reserve Bank of Cleveland. R D S will be
introduced in only these counties of Kentucky, Pennsylvania and West Virginia on June 1, 1989.
Kentuckv
Bath
Bell
Boone
Bourbon
Boyd
Bracken
Breathitt
Campbell
Carter
Clark
Clay
Elliott
Estill
Fayette
Fleming
Floyd
Garrard
Grant
Greenup
Harlan
Harrison
Jackson
Jessamine
Johnson
Kenton
Knott
Knox
Laurel
Lawrence
Lee
Leslie
Letcher
Lewis
Lincoln
Madison
Magoffin
Martin
Mason
McCreary
Menifee
Montgomery
Morgan
Nicholas
Owsley
Pendleton
Perry
Pike
Powell
Pulaski
Robertson
Rockcastle
Rowan
Scott
Whitley
Wolfe
Woodford
Pennsvlvania
Allegheny
Armstrong
Beaver
Butler
Clarion
Crawford
Erie
Fayette
Forest
Greene
Indiana
Jefferson
Lawrence
Mercer
Somerset
Venango
Warren
Washington
Westmoreland
Marshall
Ohio
Tyler
Wetzel
West Virginia
Brooke
Hancock
0O0
TREASURY NEWS _
Department of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 a.m.
May 16, 1989
STATEMENT OF
JOHN G. WILKINS
ACTING ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss tax policy issues
related to recent trends in mergers, acquisitions, leveraged
buyouts, and corporate debt generally. We commend the Committee
for the thorough-going nature of its examination of the issues
raised by these trends.
We share the Committee's concerns about LBOs, and we continue
to monitor carefully the level and trends of such act ivity.
However, as Secretary Brady stated earlier before thi s Committee,
we will not counsel major tax changes to correct a tr end which
may be about to correct itself. The evidence concern ing LBO
trends and impact is far from conclusive and further study is
clearly warranted. At present, we do not believe tha t major tax
changes limiting interest deductions are justified gi ven other
concerns I will discuss today. We also note that the adverse
effects described by many critics—particularly econo mic
dislocations—are common to merger and acquisition tr ansactions
generally,
not just
LBOs.point
In short,
further
studyshould
wi th be
a wider
In our view,
a focal
of these
hearings
the
focus
is
appropriate
and
that
study
is
underway.
impact of the tax treatment of corporate debt and equity on the
competitiveness of U.S. businesses in world markets. That
concern requires a tax policy focus considerably broader than the
LBO financing issue. LBOs are symptomatic of a fundamental bias
of the corporate income tax structure, which encourages debt
financing and discourages equity financing of corporate assets.
NB-270
-2We are unique among the major industrialized nations that are our
principal trading partners because we alone provide no relief for
double taxation of corporate equity.
I. INTRODUCTION
In testimony today I will briefly review recent trends in
corporate debt financing generally and in LBOs specifically; I
will discuss potential impacts of LBOs on competitiveness; I will
evaluate the need for tax policy solutions to potential problems;
and, last, I will give the Treasury Department's views on the
specific proposals listed for comment.
Recent Trends in Corporate Finance
Fueled by press reports of large transactions that substitute
debt for corporate equity, many believe that corporate debt is
reaching all-time highs. This impression is based upon measures
of corporate leverage that do not take into account the large
increases in the market value of corporations. These measures,
which are based on book values, indicate an increase in leverage
over the past few years, with current levels at an historical
high. This may be a substantial overstatement. While other
measures reflecting market values also show an upward trend in
recent years, they remain well below the peak levels in the
mid-1970s and in line with the average over the last 20 years.
According to our estimates, the percent of the market value
of nonfinancial corporate assets represented by debt was 41
percent in 1988 and had remained between 35 percent and 40
percent from 1980 through 1987, averaging 38 percent. This
translates to a debt to equity ratio measured at market values of
.7 to 1 in 1988, and an average of .62 to 1 from 1980 through
1987. By contrast, the fraction of nonfinancial corporate assets
financed by debt in the decade of the 1970s averaged 40 percent
(or a debt to equity ratio of .65 to 1 ) , and fluctuated between
31 percent and 47 percent (or .45 to .89 to 1 for the debt to
equity ratio). Clearly, current levels of debt financing are
well under the high levels during the 1970s. Moreover, there is
as yet no hard evidence that LBOs are permanently increasing the
amount of corporate debt in the aggregate.
According to the publication Mergers and Acquisitions, the
dollar value of corporate mergers ana acquisitions completed in
this country since 1981 has increased at the rate of just over 17
percent per year; however, over the last few years, there is
evidence of some leveling off. In 1986 the total value of
mergers and acquisitions reached $204 billion but by 1988 the
level of activity had grown to only $227 billion, a modest 5
percent average annual rate of growth. Furthermore, the
preliminary figures for the first quarter of 1989 show activity
to be in the range of $195 billion, well below the trend line.
-3Looking at recent history, the period of high LBO activity,
there is no evidence that LBO financing has claimed a rising
share of merger and acquisition activity.
As a fraction of the
total value of all mergers and acquisitions, LBOs have dropped
from a 1986 high of 22.7 percent to 21.3 percent in 1987 and to
18.9 percent in 1988. Although the data for the first quarter of
1989, which are still preliminary, suggest a slight rise in the
dollar share of LBO activity — to around 20 percent — most of
this activity results from deals that were planned and in various
stages of completion last year. (These figures do not include
the $25 billion RJR Nabisco transaction because it was not formally completed until April 1989.) In 1986, when LBO financing
peaked as a share of the value of all completed m'ergers and
acquisitions, we estimate that interest payments attributable to
LBOs completed that year amounted to no more than 1 percent of
all corporate interest deductions. This calculation is apt to
err on the high side because the definition of an LBO used here
is any private acquisition of a public corporation that used debt
as well as equity in the purchase agreement and not just highly
leveraged financial arrangements.
Tax Influences
It is clear that the structure of our corporation income tax
in which the income from equity capital is often taxed twice or
more — once when income is earned by the corporation and again
at the individual tax level when distributions are made in the
form of dividends and possibly again when intercorporate
distributions are made — encourages debt over equity financing.
This non-neutrality of the corporate income tax with respect to
financing decisions is a potential source of inefficiency which,
given the structure of our trading partners' tax systems, may be
having a detrimental effect on American business as a global
competitor.
On balance, it is unlikely that the increase in LBO activity
during the 1980s has had a significant impact on revenues. This
conclusion is reached only after examining the various ways in
which LBOs may affect government revenue. Without passing
judgment on a case-by-case basis, it can generally be stated that
LBOs that increase efficiency will lead to more long-run tax
revenue and that LBOs that decrease efficiency will lead to less
long-run tax revenue.
Thus, the debate about long-run revenue
turns on evaluations of long-run efficiency, which are, of
necessity, case specific.
The elements of a typical LBO financing arrangement and the
way that they affect tax revenues are as follows:
0
Capital gains from the sale of corporate shares by
existing owners are prompted by the buyout offer and often
reflect a higher price and hence increased capital gain revenues.
Tax-exempt owners, such as pension funds, of course, pay no
-4current capital gains tax from the sale; however, taxable owners
pay a capital gains tax sooner than they otherwise would.
0
Interest income of debt holders generates additional tax
revenue to the extent that LBO debt pays a higher yield than the
debt holders would have received on alternative investments.
Again, however, revenue is lost to the system to the extent the
higher yield is paid to tax-exempt entities.
0
Interest deductions from the corporate profits base will
generally reduce corporate tax revenues by more than the
additional tax from interest income of debt holders because
corporate income tax rates now generally exceed individual income
tax rates and because tax-exempt and tax-favored entities hold a
substantial amount of corporate debt.
0
Corporate profits and the corporate income tax on them
would rise to the extent that the sum of the parts of the
original corporation are more efficiently managed under the
post-LBO scenario.
8
Capital gains at the corporate level from the subsequent
disposition of certain corporate assets typically sold in order
to help service the LBO debt will raise corporate level tax
revenue by the degree to which the sale of such assets occurs
sooner under the post-LBO scenario.
0
Dividend income and the associated individual income tax
are reduced as corporate earnings are typically devoted to
servicing higher levels of LBO debt.
Because the weight given to each of these revenue factors
differs with each LBO transaction, it is impossible to generalize
as to the overall impact of LBOs on taxes. A revenue analysis
would have to be conducted on a case-by-case basis and would have
to extend far into the future to capture important long-run
effects.
Although many dispute the conclusion that LBOs have been
undertaken for tax reasons, it is clear that tax considerations
have heavily influenced the structure of LBO transactions. Other
factors which may determine whether a transaction will occur (as
opposed to how it will be structured) include favorable interest
rates, undervaluation by the market of assets and even entire
divisions of companies, and possibly over-diversification of
certain target corporations.
The Tax Reform Act of 1986 contained a number of provisions
that altered the relationship between debt and equity financing.
The inversion of the traditional ranking of the top individual
and top corporate income tax rate in and of itself probably
encourages more debt financing of corporate assets. This is
because interest deductions at the 34 percent marginal corporate
income tax rate are worth relatively more when the highest
-5individual income tax rate applicable to returns on distributed
equity investments is 28 percent or 33 percent than when the
corporate rate was 46 percent and the top individual rate was 50
percent. On the other hand, sharply lower corporate and
individual income tax rates since 1986 reduce the overall impact
of the tax system on all transactions.
The impact of full taxation of capital gains under the 1986
Act on LBO transactions is also unclear. Full taxation of gains
made equity investments less attractive to individual investors
but also may have discouraged purchase transactions generally
because such transactions trigger immediate capital gains
realizations by taxable owners.
Good Debt and Bad Debt
It is both difficult and dangerous to try to distinguish good
debt from bad debt, good LBOs from bad LBOs, and good mergers
from bad mergers using a tax policy standard.
Observers generally identify "bad" LBOs after the fact by
examining the consequences the financing arrangement had on
corporate employment, on the amount and use of cash flow, and on
other stakeholders such as "the community of corporate
neighbors." In contrast, however, if an LBO results in improved
efficiency, there may be transitional unemployment as labor and
capital move from less efficient activities to more efficient
activities. Although this would produce short-run dislocations,
which would be a cause of concern, it would be offset by general
improvement in the economy in the long run.
From a tax policy point of view, we believe a focus on LBOs
per se is too narrow in that LBOs are merely one aspect of the
general corporate tax bias against equity capital. Consequently,
it is our position that any solution to perceived problems
associated with LBOs should not be attempted through the tax code
at this time. The tax code is too blunt an instrument and there
is a real danger that any cure — particularly one that further
increases the cost of capital to American corporate enterprise —
may be worse than the perceived problem. If changes in the rules
are appropriate, they are appropriate in other areas, such as
securities and credit rules.
Competitiveness
We are mindful, as is this Committee, of the need to ensure
that any tax legislation does not hinder the ability of U.S.
corporations to compete in the global marketplace. Congress
should weigh carefully whether proposals intended to restrict
such activities will, in fact, have unintended adverse effects on
American business and the American economy. For example, some
options consider various limitations on the amount of interest
corporations would be permitted to deduct. This approach could
have a severe consequence for competitiveness. According to our
-6estimates, a 20 percent reduction in the amount of interest that
could be deducted by corporations would raise the cost of capital
for U.S. corporations by more than 6 percent. In the long run,
the nation's capital stock would be reduced by approximately 1
percent, or $350 billion.
In contrast to our classical corporate income tax structure,
which applies tax at both the corporate level and at the shareholder level, most other major industrialized countries provide
some relief from the burden of the double taxation of dividends.
In principle, this relief makes it easier for foreign firms to
obtain corporate financing by increasing the after-tax return to
investors.
Many countries provide relief by giving the shareholder a tax
credit for all or part of the corporate tax paid, in effect
treating that part of the corporate tax as if it were merely a
withholding of tax on the shareholder. The shareholder adds the
credit to taxable income and then credits an equal amount against
his or her individual income tax due.
Eight of the 12 European Community member countries use such
an approach, as do Canada, Japan, Australia, New Zealand, and
Finland. In Germany, Italy, Australia, and New Zealand, double
taxation is completely eliminated by allowing the shareholder to
receive credit for the full tax paid by the corporation. Several
other countries substantially reduce double taxation; for
example, in Belgium, France, Ireland, and the United Kingdom, the
shareholder credit amounts to at least half the corporate tax.
In Japan and Spain, the credit amounts to 10 percent of the
dividends received.
A less frequently used alternative method provides relief for
the double taxation of dividends at the corporate level by subjecting distributed profits to a lower rate of tax than retained
profits. This approach is used by Germany and Japan, which
combine this approach with a shareholder-level credit, and by
Greece and Norway. In Germany, for example, the corporate rate
of 56 percent on retained profits is reduced to 36 percent on
distributed profits. The 36 percent rate is then fully credited
to the shareholder, eliminating double taxation of distributed
dividends. Japan currently taxes retained profits at 40 percent
and dividend distributions at 35 percent. In addition,
shareholders receive a tax credit for 10 percent of dividends
received. However, beginning in 1990, Japan will replace its
split rate tax with a single rate of 37.5 percent.
-7-
II.
OPTIONS MODIFYING THE CURRENT TAX TREATMENT
OF CORPORATE INTEREST
Current Law
Under current law, interest on corporate debt is generally
deductible by the corporate payor as paid or accrued. In the
case of a corporation as in the case of a sole proprietor,
interest expense is viewed as a cost of doing business and thus
an appropriate deduction in determining net income subject to
tax. Consequently, the corporate interest deduction is currently
limited in only very special circumstances and for clear-cut
policy reasons. These limitations can be divided into three
categories: (1) interest on "debt" that is more properly viewed
as equity; (2) interest on debt used to finance tax-favored
income; and (3) interest on current debt used to finance certain
future income. Many of these limitations apply to individuals as
well as to corporations.
Debt More Properly Viewed as Equity
Section 279 is a provision that limits the corporate interest
deduction for debt that is more properly viewed as equity. It
disallows interest deductions on certain indebtedness incurred to
acquire another corporation's stock or at least two-thirds of its
assets. This disallowance applies only to interest in excess of
$5 million and only if: (1) the debt is substantially subordinated and carries an equity participation, such as being
convertible or including warrants to purchase stock; and (2) the
issuer has a debt/equity ratio that exceeds two to one or has
annual earnings that do not exceed three times annual interest
costs.
Section 385 is a grant of regulatory authority for the
Treasury to determine whether an interest in a corporation is to
be treated as stock or debt. The statute lists five factors that
may be included in making this determination, including whether
there is a written unconditional promise to pay a sum certain on
a specified date, whether there is subordination, and the debt to
equity ratio of the corporation. Although section 385 was
enacted in 1969, to date no satisfactory general rules have been
developed under this provision. The Internal Revenue Service has
administered this area on a case-by-case basis by examining all
the characteristics of a particular instrument in determining
whether it is more properly treated as debt or equity for federal
income tax purposes.
Debt Financing Tax-Favored Income
Section 265(a)(2) denies an interest deduction on
indebtedness incurred or continued to purchase or carry taxexempt income. Under section 265(a)(2), the deduction is
-8disallowed only if there is a connection between the indebtedness
and the acquisition or holding of the tax-exempt obligation.
Section 265(a)(2) is intended to prevent the double benefit of
both earning tax-free income and deducting related interest
expenses.
Section 246A limits the dividends received deduction if the
investment in the stock is directly attributable to indebtedness.
The regulatory authority under this section provides for the
disallowance of interest deductions in lieu of reducing the
dividend received deduction where the obligor is someone other
than the corporation receiving the dividend. This provision
prevents a double benefit from the interest deduction and the
dividends received deduction.
Debt Financing Future Income
For costs incurred in manufacturing or constructing certain
tangible property, section 263A requires that interest paid or
incurred during the production period be capitalized. Interest
is allocable to the production of property not only if it can be
traced specifically to production, but also where the taxpayer
could have avoided the interest expense if amounts applied to
production expenditures could have been used to repay debt.
These interest capitalization rules are intended to avoid a
mismatching of income and expense, and capitalized interest is,
in effect, deductible when the related income from the property
is realized. Similarly, section 263(g) requires the deferral of
the deduction for interest allocable to personal property that is
a part of a straddle until such property is sold and associated
gains are realized.
Despite these various limitations, interest paid or accrued
by corporations continues for the most part to be deductible.
Accrued interest deductible by corporations includes original
issue discount. Since mid-1982, taxpayers that issue debt with
original issue discount have been required to compute the
deduction of original issue discount on a constant yield basis
over the life of the debt instrument. In the case of zero coupon
instruments, OID thus accrues in steadily increasing amounts over
the term of the obligation. In addition, the OID rules require
symmetry: Cash basis as well as accrual taxpayers must include
OID in income as the interest accrues. This income inclusion,
however, is largely an academic requirement since tax-exempt and
tax-favored entities (such as insurance companies) are the
principal purchasers of deep discount or zero coupon bonds.
Discussion
The tax bias against equity under current law could be
greatly reduced either by providing some form of tax relief for
equity distributions or by limiting the deductibility of interest
expense. These approaches, however, raise very different policy
issues. Before turning to comments on specific options that
-9would limit interest deductions, I would like to review some of
our general concerns about proposals of this type.
Most important, limiting interest deductions would increase
the cost of capital to American corporations and thus hinder
their efforts to compete in the global economy. It would have
adverse effects on the domestic economy. In addition, limits on
the deductibility of interest on acquisition-related debt would
favor foreign acquirers to the extent they are able to deduct
interest payments in their home countries.
Limiting the deduction for interest paid would also increase
significantly the tax liabilities for corporations in industries
where a high degree of leverage is customary, such as public
utilities, real estate, and finance. In the absence of special
rules, this effect would be especially severe on financial
institutions, which pay some 65 percent of all corporate
interest. In addition, it would adversely affect small firms,
start-up firms, and venture capital firms that can borrow only a
high rates of interest.
A limitation on corporate interest deductions would
discourage use of the corporate form. Any further disadvantage
to the use of the corporate form requires particularly careful
consideration given the fundamental changes made by the 1986 Tax
Reform Act. Before the 1980s, certain tax rules mitigated the
impact of the separate tax on equity income. Returns on equity
were taxed at the corporate level at rates below individual rate
(at times markedly so), and the second level of tax on the
distribution of income from corporate equity to shareholders
could be deferred by retaining earnings and ultimately minimized
through a sale of stock taxed at preferential capital gain rates
The rate inversion introduced by the 1986 Act, and the repeal of
the capital gain preference, the dividend exclusion, and the
General Utilities doctrine, have reduced or eliminated these
compensating factors that formerly ameliorated the impact of the
separate tax on corporate equity income.
Restricting the deduction for interest paid would also raise
issues with respect to the treatment of interest substitutes. I
the deduction of interest were limited, corporations would have
additional incentives to lease assets and deduct rental payments
rather than borrow to finance a purchase of the assets. A
portion of such rental payments would represent implicit
interest.
Six of the nine options before this Committee regarding
changes in the tax treatment of interest payments deal generally
with redressing the current bias against equity financing by
limiting interest deductions. With one exception, relating to
the current accrual of original issue discount, we would oppose
these proposals for the reasons stated above.
-10The other three options are aimed specifically at deterring
LBOs. These proposals reflect the view that changes in the tax
law should be made to specifically address LBOs. We do not share
that view.
Comments on Specific Options
Deny Interest Deduction and Require Recognition of Gain at the
Corporate Level For Hostile Acquisitions (Option B-l)
This proposal would deny the interest deduction .for debt
incurred in a hostile tender offer, defined as an offer
disapproved by a majority of the independent members of the
target's board. In a hostile stock acquisition, the proposal
would also require recognition of all gain at the corporate
level.
It is by no means clear that hostile LBOs, as a general
matter, are any less likely to be beneficial than friendly ones.
A hostile LBO can just as readily increase efficiency and
productivity as a "friendly" transaction. Moreover, tax rules
designed to discourage hostile takeovers would clearly serve to
entrench management.
The proposal also poses administrative and definitional
difficulties. A board of directors' determination that a
takeover is or is not acceptable is frequently a highly complex
and dynamic process. The effect of this proposal would also be
to bring new and extreme pressure to bear on the decisionmaking
of independent directors.
None of the perceived problems associated with hostile
acquisitions is caused by current tax rules. Accordingly, we
would oppose attempts to address any such problems through
changes in the tax code at this time.
Deny Interest Deduction for Acquisitions Not in the Public
Interest (Option B-2T
Under the proposal, the Federal Trade Commission (FTC) would
determine whether a proposed merger would have a substantial
adverse effect on employment. If the FTC makes such a finding,
the merger would be deemed not to be in the public interest and
the corporate deduction for interest on debt used to finance the
merger would be disallowed.
This proposal uses the tax code to address non-tax policy
concerns, and we would object to it on that basis. Furthermore,
it is not clear how the FTC would be able, in any realistic way,
to make the findings that would trigger the proposed nondeductibility, either before or after a takeover. The effect of a
change of control on employment depends on a variety of factors,
many of which cannot be predicted or anticipated.
It should
-11also be noted that the proposed standards for FTC review are
biased: They appear to exclude consideration of the benefits
derived from shutting-down obsolete or otherwise inefficient
operations. For example, a merger that produced short-term
unemployment could lead to long-term increases in employment, but
would presumably fail the proposed test.
Deny Interest Deductions on High-Yield Debt (Option B-3)
The proposal would deny the deduction for interest payments
on so-called "junk bonds" above a specified dollar amount, such
as $50 million. It would define a junk bond by reference to one
or more of several characteristics, including interest rate,
subordination, convertibility and rating.
So-called "junk bonds" can serve an important and legitimate
role in the financing of corporate activity. Increasing the cost
of their use could restrict access to capital markets for many
firms and raise the cost of capital to others. It would hurt
issuers of high-risk bonds, including small firms, start-up
firms, and venture capital companies that have difficulty raising
funds in other ways. If the problem identified is LBOs, a
proposal aimed at junk bonds, which are used in some LBOs but not
others and which are used for purposes other than LBOs, is not
well targeted.
This comment should not be read to imply a lack of concern
about risks inherent in high-yield bonds. Existing LBOs and the
junk bonds used to supply the debt capital through which they are
financed have thrived in a period of extended economic expansion.
Under such a favorable economic environment, some investors may
not have sufficiently understood the risks of junk bonds in the
event of a downturn in the economy. While older studies have
found the default rate for junk bonds to be low, a more recent
study that tracked junk bonds over time shows default rates to
have been substantial, even when the economy was strong. This
study does not, however, analyze the costs of defaults nor does
it analyze whether investors are adequately compensated for the
greater risk inherent in junk bonds by higher returns.
Ultimately, however, these are corporate finance, not tax, issues
that are best addressed through the securities laws.
Reduce Corporate Interest Deductions to Permit a Dividends Paid
Deduction on a Revenue-Neutral Basis (Option B-4)
The proposal would deny the deduction for all corporate
interest by a specified percentage. The money so raised would be
used to permit a deduction for the same percentage of dividends
paid. The percentage would be determined on a revenue-neutral
basis.
By limiting the corporate interest deduction, this proposal
raises concerns similar to those raised by other such proposals.
In addition, corporations with characteristically above-average
-12debt ratios would be heavily penalized, and corporations that are
predominantly equity financed would receive a windfall, as would
their shareholders.
Determining revenue-neutral rates at which interest and
dividends could be deducted would be very difficult. First,
estimating behavioral responses on the part of investors and
corporate managers would vastly complicate calculation of a
break-even percentage. Second, calculation of the revenueneutral deduction percentage would depend on our ability to
forecast accurately interest rates, debt levels, and dividend
payments. The actual amounts for any of these variables could
differ widely from the amounts forecasted. As a result, a
disallowance ratio that is revenue neutral under current economic
conditions would be likely either to raise or to lose revenues
under economic conditions prevailing in the future.
In order to maintain revenue neutrality, the deduction
percentage would have to be adjusted on a regular basis. The
percentages could be adjusted annually, based either on current
forecasts or on actual data on dividends and interest payments
from a prior year. Imposing such variability on a corporation's
cost of capital, however, would likely inhibit long-term planning
and investment.
Even without considering behavioral effects, the need to
adjust the deduction percentage to maintain revenue neutrality
over time can be illustrated by examining historical data. If
the revenue-neutral rate had been set in the 1960s, it would have
been approximately 49 percent. In the 1970s, it would have been
70 percent, 21 percentage points higher. Between 1980 and 1986,
the revenue-neutral rate would have increased again, by an
additional 8 percentage points, to 78 percent.
The proposal also raises technical issues, such as the
interaction of the dividends paid deduction with the dividends
received deduction for corporations, the treatment of tax-exempt
and foreign shareholders, and other issues that arise in
connection with proposals for dividend relief. Such issues are
addressed in the following section in the discussion of dividend
relief proposals.
Repeal Deduction for Corporate Interest Expense and Provide
Shareholder Credit on Dividends (Option B-5)
This proposal would deny any deduction for corporate interest
expense. Shareholders would receive a credit for corporate taxes
paid on earnings distributed as dividends.
Rather than equalizing the treatment of debt and equity, this
proposal would turn current law on its head by taxing earnings
distributed as interest twice — once when earned by the corporation and once when received by the debtholder — and earnings
distributed as dividends only once (at the corporate level), A
-13-
shareholder-level credit with respect to distributed earnings
raises issues that will be discussed in the section below
relating to equity relief proposals.
The complete repeal of the deduction for corporate interest
highlights issues raised by all proposals that limit corporate
interest deductions: increasing the cost of capital, favoring
the non-corporate sector, increased pressure on distinguishing
debt from equity instruments, and the need to identify interest
analogs such as rents or royalties. Because this proposal denies
all corporate interest deductions, it also exacerbates
transition-related problems. The proposal could, for example:
(a) dramatically increase corporate tax collections and correspondingly threaten the financial stability of many corporations;
(b) cut dividend payments (and personal tax collections) during
the interim while corporations restructure by replacing "debt"
with "preferred stock"; and (c) precipitate a restructuring of
the investment portfolios of tax-exempt organizations. While
these and other concerns could be reduced by substantial
transition relief, there does not appear to be a tax policy
justification for this proposal that is sufficiently compelling
to warrant its enactment.
Disallow Corporate Interest Deduction in Excess of a Specified
Rate of Interest (Option B-6)
The proposal would deny in whole or in part the deduction for
corporate interest paid in excess of some specified percentage
above the applicable federal rate (AFR). This partial interest
disallowance would not affect the characterization of the
instrument as debt.
This approach is apparently based on the assumption that an
unusually high interest rate indicates that a purported debt
obligation is really "disguised equity." Under this view, a high
interest rate indicates a high degree of risk, which is usually
associated with equity holdings. It is undeniable, however, that
many obligations traditionally viewed as debt also carry substantial risk. Moreover, the sources of risk for equity and
low-grade debt are often quite different. For example, the risk
of an equity owner includes the risk associated with being last
in line (after creditors) in any claim against the corporate
assets. On the other hand, even significant risk of senior debt
holders, as in the case of a financially troubled company, does
not result from the existence of any prior claims.
Finally, proposals such as this one would favor stable and
established firms and would be biased against start-up companies,
small businesses, venture capital companies, and other inherently
risky ventures. Presumably, the rate of deductible interest
could be set at a higher rate for such firms, assuming they could
be adequately identified, but this would create a bias against
still other firms with equal borrowing costs and would raise
difficult issues of definition and administration.
-14Establish a Normative Level of Debt to Equity and Penalize Levels
that Exceed this Norm (Option B-7)"
The option proposes that, if a corporation's debt to equity
ratio exceeds a specified percentage, such as 80 percent, a
penalty would be imposed, such as permitting only 50 percent of
interest on debt in excess of the ratio to be deducted.
There is no single debt/equity ratio that is appropriate for
all corporations. Real estate and financial institutions, for
example, have traditionally had high debt/equity ratios; service
corporations have not. Even within an industry group,
debt/equity ratios vary tremendously depending on conditions in
the markets the corporations serve and how capital markets
evaluate their managements.
We acknowledge, however, that a high debt/equity ratio is one
factor to be taken into account in determining whether a
purported debt instrument should be treated as debt for tax
purposes. Nonetheless, we think establishing normative
debt/equity ratios, and using them in a single-factor test, is
highly undesirable.
Replace Corporate Interest Deduction with an Annual Percentage
Deduction Based Upon Overall Capitalization (Option B-IET
Under this proposal, the corporate interest deduction would
be denied altogether and the resulting revenues would be used to
permit, on a revenue-neutral basis, an annual percentage deduction based on a company's overall capitalization. Overall
capitalization, however, would be defined for financial corporations in order to permit them to offset interest expense against
interest income.
This proposal is apparently based on the view that lenders
and shareholders of a corporation are both investors in the
corporation and they merely have different claims and rights with
respect to the corporation's assets. Under such a view, which is
not without its supporters, there is no principled reason for
distinguishing the tax treatment of debt and equity. However,
many of the issues discussed above in connection with maintaining
revenue neutrality within the scope of a particular proposal
would apply here as well, including the accuracy of forecasts and
the adverse effect on corporate planning. There would also be
substantial winners and losers as a result of the conversion to
such a dramatically different system, raising significant
transition problems.
Limit Deductibility of Accrued but Unpaid Original Issue Discount
(OID) (Option B-9)
This proposal would deny the deduction for corporate interest
expense on an original issue discount (OID) obligation issued in
-15a transaction in which debt replaces equity until such time as
amounts of interest were in fact paid. It is further suggested
that this interest disallowance might apply only to OID
obligations held by tax-exempt persons and foreign entities.
In general, there is a sound theoretical basis for allowing a
current deduction for accrued, but unpaid, OID. In some cases,
however, the assumptions underlying the OID rules do not
necessarily apply and it may be inappropriate to accrue currently
a deduction for unpaid interest. Thus, for example, the proposed
OID regulations do not generally provide for current deduction of
contingent interest. Where there is a substantial risk of
default, it may be more appropriate to treat the discount as
contingent and not to permit a deduction prior to payment. These
concerns increase as the term of the bond increases. In
addition, in certain cases, administrative concerns may argue
against current accrual. These concerns are more likely to arise
in longer-term zero coupon bonds and bonds providing for payment
in the form of new bonds (so-called payment in kind, or PIK,
bonds).
Concerns about current deductibility of OID are particularly
strong when the instrument is held by a tax-exempt organization
or a foreign person, because the issuer has a current deduction
for accrued OID (without an equivalent current cash payment) and
the holder has no corresponding income inclusion. In the case of
OID, current law already reflects this concern on obligations
issued to a related foreign person. No deductions are allowed on
such obligations until interest is actually paid.
The proposal also suggests limiting the nondeductibility rule
to debt that replaces equity. While debt replacing equity tends
to erode the corporate tax base, taxing only such debt suggests
that all corporations are free to establish whatever capital
structure they choose, but that once they have made their choice
they have "pledged" not to change the structure if the change
decreases their corporate tax liability. That is, a newly
organized corporation would be able to treat its interest deductions more favorably than a corporation wishing to recapitalize.
Moreover, defining debt that replaces equity is difficult and
complicated.
In sum, we agree that certain applications of the OID rules
merit further consideration because of the ability of issuers to
exploit the rules. Any change in the treatment of the issuer,
however, would require careful consideration of how to treat the
debtholder.
-16-
III.
OPTIONS MODIFYING THE CURRENT TAX TREATMENT OF DIVIDENDS
Current Law
Under current law, corporations are generally treated as
taxpaying entities separate from their shareholders. A
corporation separately reports, and is directly taxable on, the
equity holders' share of income. The after-tax income of a
corporation is not taxable to its shareholders until it is
distributed to them. Dividends paid by corporations other than
S corporations are taxed to individual shareholders as ordinary
income. Consequently, corporate taxable income paid as dividends
to individuals generally bears two taxes, the corporate income
tax and the individual income tax. (S corporations are an
exception to this rule. Taxable income of S corporations is
allocated and taxed directly to its shareholders.)
Corporate shareholders generally are taxed on at most 30
percent of dividends received from other corporations. Intercorporate dividends among members of affiliated groups (each 80
percent or more owned by a common parent) are not taxable to
payee corporations.
Discussion
The disparate tax treatment of debt and equity in the
corporate sector creates economic distortions. It distorts
decisions regarding a corporation's capitalization and its
policies with regard to investment and distribution of earnings
in ways that detract from the efficiency of the economy. The
double taxation of dividends encourages corporations to finance
their operations with debt rather than equity.
Prior to the Tax Reform Act of 1986, corporations with
shareholders in relatively high tax brackets were encouraged to
retain earnings in order to defer the shareholder-level tax and
to transform this income into capital gain. With corporate rates
now higher than individual rates, and with the tax rate differential for capital gains now eliminated, equity financing of
corporate assets has been made less attractive.
The double taxation of dividends also increases the cost of
capital for corporations and thereby discourages capitalintensive means of production in the corporate sector.
Similarly, it penalizes goods and services that are more readily
produced or provided by the corporate sector and the performance
of risk-pooling functions that are most effectively accomplished
by corporations. Investors are thus discouraged from using the
corporate form even in circumstances where nontax considerations
make it desirable.
-17The LBO phenomenon has focused attention on the bias in our
tax system against equity capitalization and has renewed interest
in proposals that would provide partial relief from multiple
taxation of corporate earnings. A partial dividends paid
deduction or partial tax credit to shareholders for dividends
paid would represent a meaningful first step toward reducing the
tax burden on corporate equity. By making equity securities more
competitive with debt, either of these options would reduce the
existing incentive for corporations to raise capital through
issuing debt.
Most of our major trading partners provide some form of
relief from the multiple taxation of corporate earnings.
Dividend relief in foreign countries typically is provided by
means of a shareholder level credit for part or all of the
corporate tax, less frequently by means of a reduced corporate
rate on distributed profits or a corporate deduction with respect
to dividends paid. Some countries provide full relief from the
double tax on dividends. For example, Germany, Italy, Australia,
and New Zealand allow shareholders full credit for corporate tax
paid. Other countries, including Canada, France, and the United
Kingdom, provide partial relief from the double taxation of
dividends.
Proposals for relief from the burden of multiple taxation of
corporate earnings have substantial merit quite apart from the
recent considerations related to LBOs. We recognize, however,
that revenue considerations limit Congress's ability to provide
such relief at this time. The fact that we cannot currently
afford to* grant such relief, however, should not obscure its
desirability as a matter of sound tax policy.
Comments on Specific Options
Provide a Shareholder Credit for Corporate Tax Paid with Respect
to a Percentage of Dividends (Option C-l)
The double taxation of corporate earnings distributed as
dividends could be partially relieved by allowing shareholders to
claim a credit for corporate tax paid with respect to dividends
received from the corporation. Under this approach, the
corporate tax may be viewed as a withholding tax for a portion of
the individual tax on dividends. The shareholder would
"gross-up" dividends by the amount of the credit, include the
grossed-up amount in income, and then use the credit to offset
tax liability. This approach would directly relieve the same
amount of the corporate tax for taxpayers at all income levels.
We will discuss this approach more fully below in connection with
the dividends paid deduction proposal.
-18Provide Shareholders with an Exclusion from Income for a
Percentage of Dividends Paid (Option C-2)
The double taxation of dividends could be partially relieved
by allowing shareholders to exclude from gross income a percentage of dividend income. Prior to its repeal under the Tax Reform
Act of 1986, a dividend exclusion was provided for up to $100 in
dividends for single individuals and $200 for married individuals
who filed joint returns.
A dividend exclusion would provide relief from the individual
level tax, although the corporate level tax is generally viewed
as creating the additional burden from operating in corporate
form. A partial dividend exclusion would provide an increasing
amount of relief per dollar of dividends to taxpayers in higher
tax brackets and therefore is regressive. Although the lowering
and compressing of marginal tax rates under the Tax Reform Act of
1986 has ameliorated this effect, we still find this approach
less desirable than either a dividends paid deduction or
shareholder credit.
Provide a Dividends Paid Deduction (Option C-3)
This proposal would permit corporations to deduct, in whole
or in part, dividends paid. Under the option, the deduction
could be reduced to the extent the corporation has foreign and
tax-exempt shareholders or a compensating tax on such shareholders could be imposed so that one level of tax would be
assured.
If the double taxation of corporate earnings distributed as
dividends is relieved partially by providing a deduction or
credit for only a percentage of dividends paid to shareholders,
the tax treatment of dividends and interest payments would not be
equalized; however, the present bias against equity would be
lessened.
Because both a dividends paid deduction and a shareholder
credit would reduce the incentive to retain earnings, corporations would be likely to pay greater dividends and to seek new
capital in financial markets. Corporations would thus be subject
to greater discipline in deciding whether to retain, and how to
invest, their earnings. The increased level of corporate
distributions could enhance the efficiency of investments.
The Reagan Administration's 1985 tax reform package included
a proposal that would have allowed domestic corporations a
deduction for 10 percent of dividends paid to their shareholders.
The House tax reform bill included a similar dividends paid
deduction proposal phased in over ten years.
Dividend relief proposals encourage distribution of corporate
earnings over retention of such earnings. All of these dividend-
-19relief proposals, however, would raise difficult issues, including the treatment of tax preferences, foreign shareholders,
tax-exempt shareholders, and new versus old equity. These issues
are discussed below.
Treatment of tax preferences. Dividend relief proposals
raise issues with respect to whether relief should apply to
dividends paid out of tax-free or preferentially-taxed corporate
income. If the objective of the proposals is to relieve the
double taxation of dividends, it could be argued that providing
relief to dividends paid from tax-free or tax-preferred income is
not justified. However, if the policy underlying the preference
is to provide incentives for certain economic activities, then
the preferential treatment should arguably be passed through to
the individual taxpayer. Under the latter approach, some shareholders would receive relief for taxes which were not actually
paid at the corporate level because dividends were paid out of
partially or fully tax-exempt income.
The Reagan Administration's proposal to permit a deduction
for dividends paid was limited so that the deduction would have
been allowed only with respect to dividends attributable to
earnings that had already borne the corporate income tax.
Dividends eligible for the deduction would have been paid from a
qualified dividend account, which would consist of all earnings
that had borne the regular corporate tax, less any deductible
dividends paid by the corporation. The dividends paid deduction,
therefore, would not have been available with respect to
corporate distributions from tax-preference income.
The qualified dividend account would have been increased each
year by the amount of the corporation's taxable income (computed
without regard to the dividends paid deduction). However, the
amount added each year would have been reduced by the amount of
taxable income that, because of any allowable preferences or
credits, did not actually bear the corporate tax. Even in such a
system, however, problems could arise regarding dividends paid
out of income from prior years, if the tax rate for that year
differed from that of the year of payment.
A shareholder credit system would also require rules
regarding the treatment of tax-preferred and tax-exempt income.
Foreign shareholders. Another issue is whether relief should
be available to foreign shareholders in U.S. corporations.
Unless special rules are devised, a dividends paid deduction
would permit corporate earnings to pass untaxed to such shareholders. If the objective of the proposal is to provide relief
from double taxation, foreign shareholders should be allowed the
same relief as residents. It could also be argued, however, that
the proposal is not intended to provide unilateral tax relief on
income earned by foreign shareholders in U.S. corporations and
that any such relief should be provided by the home country. If
it were decided that the United States should not grant relief
-20unilaterally from double taxation, selective relief could be
provided through bilateral tax treaties, as other countries with
shareholder-credit mechanisms usually do.
The Reagan Administration's proposal for dividend relief
would have imposed a compensatory withholding tax on dividends
paid to foreign shareholders who are not entitled to the benefits
of a bilateral tax treaty. The House version of the 1986 Tax
Reform Act would have extended the deduction to a foreign
corporation at least half of whose income is from a U.S.
business.
Tax-exempt shareholders. The treatment of tax-exempt
shareholders creates similarly difficult issues regarding the
extent of relief. If relief is provided with respect to
tax-exempt shareholders for a portion of dividends paid, either
in the form of a deduction to the corporation for dividends paid
to tax-exempt stockholders or in the form of a refundable shareholder credit, then the portion of the business income of a
taxable entity that is distributed to tax-exempt shareholders
would escape taxation entirely. However, if the objective is to
tax dividends only at the shareholder level, tax-exempt shareholders should enjoy the same corporate-level relief as other
shareholders. If such relief for tax-exempt shareholders is
believed to be desirable, it would be provided automatically
under the dividends paid deduction approach. Under a shareholder
credit approach, such relief could be provided by allowing the
gross-up and credit to tax-exempt shareholders (assuming that the
credit is refundable).
Such relief for tax-exempt shareholders also could be denied
under either approach. For example, the House tax reform
proposals contained a provision for a dividends paid deduction
that would have denied tax relief to tax-exempt organizations by
requiring such organizations to include the deductible portion of
dividends paid as unrelated business income. Under a shareholder
credit system, tax relief could be denied to tax-exempt shareholders by making the credit nonrefundable.
New versus old equity. Dividend relief would provide a
windfall to current shareholders to the extent that such
shareholders paid a lower price for corporate stock because of
the double tax on dividends. To prevent such windfall gains,
dividend relief could be provided only for new equity, but this,
too, would create problems. For example, corporations would have
an incentive to redeem old shares and to replace them with new
shares. Thus, rules would be needed to deny relief for new
equity that replaces old equity. Such rules would considerably
complicate the tax code.
Both the dividends paid deduction and the shareholder credit
can be designed to deal with the special problems discussed
above. Although the dividends paid deduction has the advantage
of simplicity in that it does not directly affect the computation
-21of the shareholder's tax liability, it does not provide much
flexibility. If it is determined that relief should be denied to
certain dividend recipients, such as nonresident shareholders in
U.S. corporations, the shareholder-credit approach may be
preferable because of its flexibility in this regard.
IV.
OPTIONS RELATING TO INVESTMENT BANKING FEES
Current Law
Profits and other income, including advisory fees, earned in
connection with leveraged buyouts and other mergers and acquisitions are usually taxed as income or gain under generally
applicable rules. A special 50 percent excise tax is imposed,
however, on any gain from "greenmail payments," defined as
payments received in redemption of stock held for less than two
years if the redeeming shareholder has made or threatened a
tender offer for the stock of the corporation. The excise tax
does not apply if the redemption offer was also made to other
shareholders. In addition, an employer may not deduct so-called
"golden parachute payments," i.e., payments triggered by changes
in the ownership of a corporation or its assets, and the employee
must pay a 20 percent excise tax on such payments.
Comments on Specific Options
Impose Nondeductible Excise Tax on LBO-Related Income
(Option D-l)
This proposal would impose a nondeductible excise tax on
income derived in connection with LBOs and other mergers and
acquisitions. The tax would generally be at a 5 percent rate,
but there would be an additional 20 percent tax on investment
banking fees.
This proposal is apparently based on the view that LBOs are
unduly stimulated by high fees earned in connection with such
transactions. The proposal would apply, however, regardless of
whether the fees earned in connection with a particular LBO were
inordinately high or whether the LBO was driven by factors
completely apart from the fees.
While the fees earned in connection with LBO transactions are
clearly substantial, we believe it is inappropriate to tax such
fees in a punitive manner. The appropriate level of fees should
be set by the marketplace. If the fees being charged to the
parties in these transactions are too large, competition should
bring them down.
-22Impose Nondeductible Excise Tax on Excessive M&A Compensation
(Option D^2T
This proposal would impose a substantial nondeductible excise
tax on "excessive compensation" derived by individuals from
services rendered in connection with merger and acquisition
activity. The threshold for excessive compensation would
apparently be set at a high level (such as $50 million per year).
This is a slight variation on the preceding proposal, and, in
-our view, it suffers the same defects. By limiting the application of the tax to income above a threshold such as $50 million,
however, the proposal seeks to penalize only those who are most
successful. It is difficult to identify a sound tax policy that
would justify such a rule.
Impose Nondeductible Excise Tax on Certain Advisory Fees
(Option D-3)
This option would impose a nondeductible excise tax on income
derived from advisory fees that are based on the success of an
offer and on the income of financial advisors who both provide an
"independent" appraisal of the target company's assets and also
play a role in the tender offer for the company.
This proposal is designed to discourage arrangements that
raise serious conflict of interest concerns. We share the
concerns that underlie this proposal and believe that serious
study should be given to addressing them, either under the
federal securities law or state corporation laws. Because these
concerns are not tax-related, however, it is inappropriate to
address them through the tax code.
V. OPTIONS RELATING TO THE TAX TREATMENT
OF FOREIGN PERSONS AND TO ISSUES OF FOREIGN INVESTMENT
Current Law
Foreign investment in the United States takes a variety of
forms. Two of the most important forms are loans (either to
related or unrelated U.S. persons) and direct equity investment
through controlled domestic subsidiaries.
Interest paid or accrued to a foreign corporation or
nonresident alien is deductible by the U.S. borrower according to
the same rules applicable to domestic transactions, except that
the U.S. borrower is not entitled to deduct original issue
discount on obligations held by certain related foreign persons
until the time of actual payment.
Under the general rule, interest actually paid from U.S.
sources to foreign persons is subject to a 30-percent withholding
-23tax, imposed on the gross amount of the interest payment. There
are, however, several major exceptions to this general rule of
taxability. First, the United States does not impose any tax on
interest paid to foreign corporations or nonresident aliens
(other than banks and persons related to the borrower) with
respect to registered debt instruments and certain bearer debt
instruments issued in accordance with specified procedures.
Similarly, U.S. tax is not imposed on interest paid to foreign
persons with respect to deposits with banks and certain other
financial institutions, or with respect to original issue
discount obligations with maturities not exceeding 183 days at
the time of issuance. Finally, the 30-percent withholding tax on
interest may be reduced or eliminated altogether under the terms
of an applicable tax treaty between the United States and the
country of residence of the beneficial owner of the interest.
Like interest, dividends actually paid to foreign
corporations and nonresident aliens are generally subject to a
30-percent withholding tax imposed on the gross amount of the
dividend payment. There are no statutory provisions that reduce
or eliminate this withholding tax, but the tax may be reduced by
tax treaty.
Capital gains realized by foreign persons on the sale or
exchange of debt instruments are generally not subject to U.S.
tax. There are exceptions to this rule for gains on certain debt
obligations secured by U.S. real property and gains that are
effectively connected with a U.S. trade or business. Gains on
the disposition of debt obligations are taxable to foreign
persons as interest income to the extent attributable to accrued
interest or original issue discount (but not market discount),
although the tax on such income may be reduced or eliminated by
any of the rules previously discussed.
Similarly, gain realized on the exchange of stock in a
domestic corporation, whether in liquidation of the corporation
or in a normal sale transaction, is generally not included in the
gross income of either a nonresident alien shareholder or a
foreign corporate shareholder. There are a number of exceptions
to this rule, the most important of which relates to ownership of
interests in United States real property.
Discussion
In our view, the dominant issue in the foreign options is the
extent to which the obligations of the United States under its
many existing tax treaties should be respected. Treasury wishes
to reiterate its general objection to the override of tax
treaties. Treasury objects to override not merely because it
violates our international commitments, but also because it is in
most cases inconsistent with the United States' long-term
economic and political interests.
-24Our tax treaties are not unilateral concessions to the
interests of foreign persons investing in the United States; they
represent a careful balance of interests and confer substantial
benefits on many U.S. persons investing overseas. The override
of existing tax treaties, and even the recurring threat of
override, make it difficult for U.S. treaty negotiators to obtain
concessions that will benefit U.S. investors, since foreign
negotiators feel that the United States may later renege on its
own concessions. Moreover, overrides by the United States will
inevitably invite retaliation from our trading partners. For
these reasons, it is Treasury's strongly held view that, although
Congress clearly is empowered to override U.S. treaty obligations, it should do so only in the most exceptional cases and
after full and careful consideration of the consequences of such
action. Treasury does not believe that any of the five foreignrelated options that are the subject of these hearings presents
an appropriate occasion for treaty override.
Comments on Specific Options
Tax on Imputed Income of Domestic Corporations to Account for
Offshore Interest Expense (Option E-l)
This proposal would apply to a domestic corporation if it is
controlled by foreign persons and otherwise would be subject to a
limitation on the deduction of interest expense under one of the
interest limitation proposals discussed above. Under the
proposal, the corporation would be required to include in its
U.S. gross income an amount of additional income to account for
"tainted" interest expense borne by related foreign corporations
outside the United States. The "tainted" interest expense is
interest that would be disallowed if it were borne by a domestic
corporation.
It is unclear under this proposal how the correct amount of
tainted offshore interest expense would be determined. One
approach would be to consider only offshore debt that can be
"traced" to the domestic corporation (e.g., acquisition debt). A
second approach would be to consider the related group's entire
worldwide interest expense and allocate to the domestic
corporation its proper share, based on the theory of fungibility
of money.
There are a number of serious problems with the proposal.
First, the proposal may violate the prohibition contained in
numerous of our tax treaties against discrimination on the basis
of capital ownership.
Second, the determination of whether taxpayers in a foreign
jurisdiction have an unfair advantage over U.S. taxpayers cannot
be made on the basis of a single criterion such as the deductibility of interest expense. A host of other factors must be
considered, including tax rates, the definition of the tax base,
-25investment incentives, depreciation methods, the treatment of
foreign source income, and direct and indirect government
subsidies. The problem of focusing on a single criterion is
illustrated by the present proposal, which attempts to neutralize
the advantage of a foreign acquirer deducting interest paid with
respect to debt financing offshore but does nothing about the
advantage of a foreign acquirer deducting dividend payments with
respect to equity financing offshore (or the advantage for
shareholders who receive a credit for taxes paid by the foreign
corporation).
Third, the proposal would be difficult to administer and
enforce. The proposal assumes, for example, that it is feasible
to identify foreign corporations that are related to a domestic
corporation. In fact, this can be a very difficult task for the
Internal Revenue Service, often requiring the use of harsh
statutory or regulatory presumptions. More fundamentally, if
administered equitably, the proposal would require domestic
corporations to provide the Internal Revenue Service with
detailed information concerning the worldwide interest expense of
the corporate group and the extent to which such interest expense
generates a foreign tax benefit.
Reimpose a Withholding Tax on Portfolio Interest (Option E-2)
This proposal would reimpose a withholding tax on interest
paid to foreign persons with respect to certain portfolio debt
obligations ("portfolio interest").
Prior to the Tax Reform Act of 1984, a 30-percent withholding
tax was imposed on portfolio interest paid to foreign persons,
although the tax was sometimes reduced under the provisions of an
applicable tax treaty. The tax was eliminated by the 1984 Act,
in part because U.S. borrowers were avoiding the tax through the
use of foreign finance subsidiaries, and in part because Congress
recognized that the tax was blocking efficient access to the
rapidly developing Eurobond capital market for U.S. borrowers.
The proposal to reimpose a withholding tax on portfolio
interest is objectionable on several grounds. The question of
whether to tax portfolio interest was thoroughly debated in 1984,
and a decision was made not to tax. Treasury supported that
decision in 1984, and we continue to support the decision now.
Reimposition of the tax after only five years could significantly
disrupt the Eurobond capital market, promote skepticism about the
U.S. commitment to particular tax policies in this area, and
possibly trigger a withdrawal of substantial amounts of foreign
capital from U.S. markets. Moreover, reimposition of the tax
would once again erect a barrier against U.S. issuers seeking
access to international capital markets. Such a barrier would
have no obvious relationship to the debt/equity concerns that are
the focus of the current hearings, since access to international
markets would be denied to all U.S. issuers, regardless of their
degree of leverage or their status as takeover targets. Finally,
-26for reasons previously stated, Treasury opposes any reimposition
of a withholding tax at rates that would apply notwithstanding
contrary rates prescribed in existing treaties.
Limit Corporation's Deduction for Interest Paid to Related
Tax-Exempt Persons Where Interest Exceeds a Certain Percentage of
Income (Option E-3)
This proposal would limit a corporation's interest deduction
for interest paid to certain related parties to prevent the
sheltering from U.S. tax of more than a designated percentage of
the corporation's taxable income (computed without regard to the
interest deduction or net operating losses). The limitation
might be applied only to interest paid to related parties who are
not subject to U.S. tax.
The proposal is similar to a provision passed by the Senate
in 1986 but deleted from the final Tax Reform Act in conference.
Treasury opposed the provision in 1986 and continues to oppose it
in its present form. The proposal should be rejected as
inconsistent with this country's tax treaty program. The
proposal appears to be targeted primarily at related foreign
lenders, since they are the related lenders most likely to be
exempt from U.S. tax. Interest paid to such lenders is normally
subject to the full U.S. withholding tax (because the portfolio
interest exemption does not apply to related party interest);
thus, the proposal apparently would apply only where the
withholding tax has been eliminated pursuant to one of our tax
treaties. The proposal, if so targeted, would clearly violate
the nondiscrimination article in the relevant treaty.
Allow U.S. Acquirers to Amortize Target's Goodwill or Review
Foreign Acquirers' Advantage from Amortizing Goodwill
(Option E-4)
This proposal sets forth two alternatives involving the tax
treatment of- goodwill in acquisitions. Under the first
alternative, taxpayers would be allowed to amortize the goodwill
in a target corporation over 40 years if the basis of such
goodwill were stepped-up as the result of a taxable acquisition
of the target (for example, in an acquisition under section 338).
Under the second alternative, U.S. treaty policy would be
reviewed to determine whether foreign acquirers are given an
advantage over U.S. acquirers relating to the tax treatment of
goodwill in acquisitions.
Foreign corporations may have an advantage over U.S.
corporations in asset acquisitions because the foreign
corporations may be permitted a deduction in their home
jurisdictions for the amortization of the cost of goodwill. This
is the situation, for example, in Japan, West Germany, and
Canada, but not in the United Kingdom. We understand, however,
that acquisitions of substantial U.S. business assets (as opposed
to stock) by foreign corporations are not common in most
-27industries, in part because the operation of a U.S. branch
instead of a U.S. subsidiary will often result in less favorable
treaty benefits and the earlier and more burdensome imposition of
tax on U.S. profits not reinvested in the U.S. business. It is
important to note that foreign corporations do not appear to have
any tax advantage in stock acquisitions of U.S. targets since,
even if the foreign acquirer makes an election under section 338
to treat the acquisition as an asset acquisition for tax
purposes, the target's goodwill will remain inside U.S. corporate
solution. We are not aware of any foreign jurisdiction that
permits its corporations to amortize goodwill for tax purposes
under these circumstances.
The treatment of goodwill for financial accounting purposes
may also disadvantage U.S. corporations relative to their foreign
counterparts. Because some countries do not require that
goodwill be amortized for financial accounting purposes (for
example, the United Kingdom and West Germany, but not Japan or
Canada), corporations in those countries may report higher
earnings on their financial statements than their U.S.
competitors, which are required to amortize goodwill for
financial purposes. As a result, such foreign acquirers may have
an artificial advantage in the competition for investors.
Treatment of goodwill for financial purposes is not, however, a
problem that can be addressed through the tax laws.
Completely apart from concerns over foreign competition,
there remains the issue of whether we should permit the
amortization of purchased goodwill. An argument can be made that
the purchase value of goodwill dissipates over time. In other
words, the value of goodwill acquired on the acquisition date
steadily declines, and additional costs incurred in sustaining
the business go toward the development of new or replacement
goodwill. Thus, under present law, taxable income is overstated,
relative to economic income, by the amount of the current year
decline in value of the intangible asset.
Were goodwill to be viewed as a wasting asset, its
acquisition cost should be amortized over its useful life. In
light of the difficulty in determining the useful life of such an
asset, however, it would be appropriate to fix by statute the
period over which the cost should be amortized. For financial
accounting purposes, the acquisition cost of an asset in the
nature of goodwill or going concern value must be amortized over
the useful life of such asset, but not to exceed 40 years
(Accounting Principles Bulletin 17). Thus, 40 years would be the
amortization period for tax purposes that would most likely
conform to the financial accounting treatment of goodwill. It is
likely that such a provision would result in a large revenue
loss.
-28Tax Foreign Shareholder's Stock Gains on Liquidation or Sale as
Dividend (Option E-5T
This proposal would treat the gain realized by a foreign
shareholder on the liquidation of a domestic corporation as a
dividend, presumably to the extent of the shareholder's ratable
share of earnings and profits. The dividend would be subject to
withholding, at either the normal 30-percent rate under section
1441 or 1442 or at a lower rate prescribed by an applicable tax
treaty. The proposal also suggests that gain realized by a
foreign shareholder on the sale or exchange of the stock of a
domestic corporation could be treated as a dividend according to
similar rules. Although not mentioned in the proposal, gain
recognized by foreign shareholders in stock redemptions could
presumably also be treated as a dividend to the extent of the
shareholder's ratable share of earnings.
The treatment of gain realized by a shareholder on the
liquidation of a corporation as a dividend is a logical subject
of study for a number of reasons; many of our major trading
partners, for example, currently have such a rule and apply it to
domestic as well as foreign shareholders. It is possible,
however, that such a rule, by increasing the total cost of equity
investments in domestic corporations, could actually increase the
incentives to use debt financing.
Moreover, there are a number of complex issues that must be
resolved before such a tax rule can be enacted. Many of the
complexities relate to the potential for avoidance if the
historical shareholder sells prior to the liquidation. In
addition,
our ability
to tax THE
theTAX
foreign
seller's RELATING
gain as a
VI. OPTIONS
MODIFYING
CONSEQUENCES
TO
dividend may CERTAIN
be limited
by
treaty
provisions.
CORPORATE FINANCING TRANSACTIONS
These options are of such disparate nature that they can be
discussed only as separate proposals.
Impose Excise Tax on Acquisitions (Option F-l)
This proposal would impose a nondeductible excise tax of 3 to
5 percent on the value of certain stock and asset acquisitions.
The acquisitions that trigger the tax could be limited to
acquisitions of more than 50 percent of the stock or
substantially all of the assets of a corporation. The proposal
could also be limited to hostile acquisitions. The revenues
raised by this proposal would be used "to help small business and
venture capital situations."
This proposal is in itself a cluster of options. At its
broadest it would be a tax on any transfer of stock or assets.
-29Thus, it seems to be an attempt to raise revenue, and we would
oppose it on that basis. In addition, the proposal is not
targeted to leveraged acquisitions in that it would seem to apply
regardless of whether any debt was used to finance the
transaction.
Insofar as the proposal might be limited to hostile
acquisitions, we have earlier described our opposition to such
proposals. There is no evidence that hostile acquisitions are
less likely to be beneficial than friendly acquisitions and the
determination of whether an acquisition is "hostile" is fraught
with difficulties. These same objections would obviously be
applicable here to the extent the proposal is confined to hostile
acquisitions.
Reestablishing a Capital Gains Preference for Certain Assets
(Option F-2)
This option would provide a 50 percent exclusion for gains
from the sale of an asset which is financed through corporate or
individual equity (or savings) and held for at least three years.
This proposal resembles the Administration's capital gains
proposal in that it seeks to encourage investors to focus on
longer term investments by requiring a three-year holding period.
However, the proposal is broader than the Administration's
capital gains proposal in that it would apparently apply to gains
realized on collectibles, and depreciable and depletable
property, as well as to gains realized by corporations. The
proposal does not provide any special relief for gains of lower
income taxpayers, a key feature of the Administration's proposal.
On the other hand, the proposal is narrower than the
Administration's proposal in that it applies only to property
financed through equity or savings. Such a rule would require
potentially complex rules to determine whether property is
financed by the required sources. While we support long-term
capital gains incentives, we believe that this proposal is not as
suitably structured as our proposal.
Trigger Gain Recognition when a Corporation Borrows Against
Appreciated Assets to Finance Distributions (Option F-3)
Under this proposal, a corporation would recognize gain when
it borrows against appreciated assets and distributes the
proceeds to its shareholders. The proposal would apply only to
the extent the distribution exceeds the amount of the
shareholders' contributions to the capital of the corporation
plus the accumulated earnings of the corporation. The proposal
also includes certain additional rules clarifying its application
and implementation.
This complex proposal is apparently intended to shore up the
rule of section 311 that treats a corporation as recognizing gain
when it distributes appreciated property to shareholders. The
-30concern appears to be that corporations will avoid the effect of
section 311 by borrowing against appreciated assets, without
recognizing any gain, and simply distribute the proceeds rather
than the appreciated assets.
Assuming this is a correct understanding of the proposal, we
would oppose it on several grounds. First, our tax system
generally defers recognition of gain until a realization event,
such as a sale or other disposition occurs. The proposal, in
effect, requires a marking to market of the value of corporate
assets, with a tax on the corporation based on that value, even
though the corporation retains the full risk of loss should the
value of the asset subsequently decline. Current law does not
generally treat borrowing as a realization event, even in the
case of nonrecourse borrowing in excess of the taxpayer's basis
in the asset. We would also note that this proposal is
distinguishable from former section 453C, which treated certain
indebtedness as payment on installment obligations (thus
triggering gain recognition), since in the case of an installment
sale the realization event (a sale) has already occurred.
Second, the proposal would apparently trigger gain
recognition even where there may in fact be no appreciation in
assets that could be distributed (and thus trigger section 311
gain). For example, a service business might have most of its
value in goodwill, an asset that it could not distribute in a
section 311 distribution. The corporation may also own furniture
and fixtures with no appreciation and be able to borrow in excess
of the basis and value of the furniture and fixtures because of
the goodwill value in the corporation and the corporation's
earning power. Alternatively a lender might lend more than the
value of the assets in the business based on a shareholder
guarantee of the loan. Yet if the corporation borrowed in excess
of its basis in these assets and distributed the proceeds to
shareholders, the proposal would apparently trigger a tax.
Third, when the provision is triggered, gain is to be
allocated to all of the corporation's assets including goodwill.
This would presumably be done under a method similar to that
required under section 1060, which makes the allocation on the
basis of the relative fair market values of all the assets.
Thus, an appraisal
of the corporation's
assets would
VII. OPTIONS
RELATING TO EMPLOYEE
STOCK be required.
We are disinclined to OWNERSHIP
add yet another
difficult
valuation and
PLANS (ESOPs)
appraisal requirement to the tax code in the absence of more
Current Law
compelling need.
An Employee Stock Ownership Plan (ESOP) is an employee
benefit plan designed primarily for investment in securities of
-31the employer. ESOPs are generally accorded the same tax
advantages as qualified retirement plans. Thus, an employer's
contribution to an ESOP is deductible to the employer and not
includible in the income of the employee until distributed from
the plan to the employee. Income earned on the contribution
while held in the plan is not taxable. An ESOP is an individual
account plan, which means that each participating employee has an
account to which employer contributions in the form of company
stock are allocated and the employee is entitled to the value of
the account. Thus, the employee, and not the employer, bears the
risk of investment gain or loss on stock allocated to his
account.
The tax law provides numerous additional advantages to ESOPs
and transactions involving ESOPs. First, there is an exception
to the prohibited transaction rules generally applicable to
qualified plans, permitting an employer to secure loan financing
through a leveraged ESOP. In a leveraged ESOP, either the ESOP
borrows money from a lender, and the employer guarantees the
loan, or, alternatively, the employer borrows from a lender and
then makes a mirror loan to the ESOP. In either case, the
proceeds of the loan are used to acquire employer securities,
either directly from the company or on the open market. The
stock acquired serves as collateral for the loan, and is held in
a suspense account to be allocated among employees' accounts as
the loan is repaid. The employer then makes annual taxdeductible contributions to the ESOP, which are used to pay down
the loan. As the loan is repaid, the shares of stock are
released from the suspense account and allocated among employees'
accounts pursuant to the plan's allocation formula.
Second, section 133 of the Code provides that in the case of
an ESOP loan, a bank or other qualified lender may exclude from '
its income 50 percent of the interest received with respect to
the loan.
Third, section 404(k) of the Code provides that an employer
may deduct cash dividends paid with respect to employer
securities held by an ESOP if the dividends are either (i) paid
to the participants (directly or passed through the ESOP), or
(ii) applied to make payments on an ESOP loan. Where dividends
are used to pay down a loan, the dividend deduction applies to
dividends paid with respect to both allocated and unallocated
securities. Where dividends paid with respect to allocated
securities are used to repay an ESOP loan, a participant who
would have otherwise been entitled to the dividends paid with
respect to his stock must receive an allocation of additional
securities equal in amount to the dividend.
Fourth, under section 1042 of the Code, if an individual
sells stock to an ESOP and reinvests the proceeds of the sale in
securities of another corporation, the individual does not
recognize any gain on the sale. Rather, the individual
recognizes the gain, if any, upon subsequent disposition of the
-32replacement securities. In addition, under section 2057 of the
Code, if an estate sells stock to an ESOP, the estate may, under
certain circumstances, deduct from the value of the gross estate
as much as one-half of the proceeds of the sale.
Other ESOP preferences facilitate loan financing and include
exceptions from generally applicable qualified plan rules. The
applicable deduction limit for employer contributions to a
qualified plan is increased from 15 percent to 25 percent of
participants compensation to the extent the contributions are to
repay principal on an ESOP loan. Also, substantially greater
allocations of benefits to highly compensated employees are
permitted under ESOPs than under other qualified plans (up to
$60,000 instead of $30,000), and the additional income tax on
early withdrawals from qualified plans does not apply to
distributions from ESOPs.
Under current law the various tax advantages are available to
an ESOP without regard to whether the company maintains any other
qualified retirement plan for the employees covered under the
ESOP.
Discussion
ESOPs are used both in LBO transactions and to defend against
potential takeovers. In an LBO transaction an ESOP may be used
to take a company private and create a company that is entirely
employee owned, or alternatively, an ESOP may be one of several
players in an LBO, as for example where a management group takes
a company private and establishes an ESOP as one source of
financing. In either case, the various tax benefits for ESOPs
may play a significant role in reducing the costs of the
transaction.
ESOPs are also frequently established as a defensive tactic
to protect against unwanted takeovers or LBOs. This is
accomplished by establishing an ESOP that acquires a significant
portion of voting stock, thus placing a significant number of
voting shares in the hands of employees, who it is presumed
(perhaps incorrectly) will vote against a hostile tender offer,
thus making it more difficult for a raider to acquire a
sufficient number of shares to consummate the transaction.
Comments on Specific Options
Repeal Interest Exclusion on ESOP Loans and Deduction for
Dividends on ESOP Stock (Options G-l and G-2)
These options would repeal or reduce the exclusion for
interest received with respect to ESOP loans and repeal the
deduction for dividends paid with respect to ESOP securities
(except to the extent that corporate dividends are otherwise
deductible).
-33While we are committed to encouraging meaningful employee
stock ownership through the ESOP mechanism, the Treasury
Department believes that the Committee should consider whether
some of the newer tax preferences afforded to ESOPs, including
the interest exclusion for ESOP loans, the deduction for
dividends paid with respect to ESOP securities, and the
nonrecognition of gain on sales of stock to ESOPs, are
appropriate. The Treasury Department believes that these new tax
benefits afforded to ESOPs may not be justified either by the
role of ESOPs as retirement plans or their aggregate effect on
corporate performance, and that further study of the
appropriateness of these additional tax benefits should be
undertaken.
We are concerned that the substantial tax preferences
available to ESOPs could lead to abuse. These tax preferences
could make them an attractive method of corporate financing,
thereby increasing the tax system's bias in favor of debt
financing. The interest exclusion results in a significantly
lower interest rate on corporate borrowing. Similarly, the
deduction for dividends paid with respect to ESOP securities and
the ability to use the dividends to repay the debt make
establishing a debt-financed ESOP a more attractive means of
raising new capital. Under our current estimates, the revenue
loss attributable to the interest exclusion alone will be
approximately $3 billion over the five-year budget period.
Recent increases in ESOP activity suggest that this revenue loss
estimate may, in fact, be conservative. While we would oppose
any reduction in legitimate incentives for meaningful employee
stock ownership, we urge the Committee to be vigilant against the
potential for abuse.
Permit ESOPs Only As Supplemental Retirement Plans (Option G-3)
Under this proposal, a company would be permitted to maintain
an ESOP that is 100-percent leveraged only where the employer
also maintains another, meaningful, qualified retirement plan or,
alternatively, the extent of leveraging permissible under an ESOP
would be limited.
We do not believe that it would be appropriate to require
that an employer maintain some other qualified retirement plan as
a precondition to maintaining a leveraged ESOP. We are
MISCELLANEOUS
particularly reluctant,VIII.
in light
of recent congressional concerns
about
section
89,
to
embark
on
the
difficult
andiscomplex
task of
The central concept of this group of
proposals
to restrict
defining
a "meaningful"
retirement
plan.
tax benefits
(such as interest
deductions)
if a merger or
acquisition fails to comply with one or more rules that could be
-34adopted. The rules that are contemplated tend to address
fairness, conflict of interest and disclosure issues.
Discussion
While we understand the concerns that underlie these
proposals, they do not arise as a result of our tax laws, and we
believe the tax laws are not an appropriate means for dealing
with them at this time. As a general matter, these concerns are
more properly addressed under federal securities and state
corporation laws.
IX.
CONCLUSION
We at the Treasury intend to continue to monitor LBOs. The
conclusions we express today reflect our view that the economic
evidence currently available does not justify major steps such as
limiting interest deductions. We are particularly concerned that
such actions, once taken, may themselves become an impediment to
future corporate tax reform to reduce the bias against corporate
equity investment.
Fundamental change in the corporate tax system should come
only after careful study—and after workable and stable methods
of financing such change have been devised. We intend to
continue a constuctive dialogue with the Congress to develop
proposals which will result in long-run improvements to the
corporate tax system.
Mr. Chairman, that concludes my formal statement. I will be
happy to answer questions which you and Members of the Committee
may wish to ask.
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
Text As Prepared
May 15, 1989
Remarks by
The Secretary of the Treasury
Nicholas F. Brady
At A Briefing With 130 Of
Senator Dodd's Connecticut Constituents
Dirksen Senate Office Building
Washington, D. C.
15, 1989 to be here with you today
Good afternoon.
It'sMay
a pleasure
to discuss the President's proposal to end the savings and loan
crisis. Senator Dodd has been one of our strongest supporters in
this important effort.
President Bush has acted swiftly and forcefully to resolve
the crisis.
Just eighteen days after his Inauguration, the
President came forward with a comprehensive plan, and the
Congress has acted swiftly on it. The Senate has already passed
the legislation and we commend Chairman Riegle, Senator Dodd and
the other Senators who were actively involved in expediting the
Senate passage.
The House Banking Committee has completed its
work and the bill is now being considered by the House Ways and
Means Committee.
The cost of solving the S&L problem is truly staggering—
$40 billion already spent and another $50 billion needed to deal
with the remaining insolvent S&Ls.
The President's plan creates a new corporation that will
borrow the additional $50 billion that will be needed. It will
use savings and loan industry funds to collateralize the
principal and a combination of industry and taxpayer funds to pay
the interest.
The private funds which are used to repay the
principal and part of the interest naturally will not be counted
on budget, but all taxpayer funds used to subsidize interest
payments will be counted on budget as they are spent.
This structure extracts and locks up the maximum industry
contribution.
It provides for a clear accounting of all costs.
And it maintains the budget discipline of the Gramm-Rudman
process.
Last week, the Ways and Means Committee voted to drive a
truck through the Gramm-Rudman process in direct violation of the
recent budget agreement the President reached with Congress.
The Ways and Means Committee wants to use direct Treasury
NB-271
2
borrowing to finance the needed $50 billion and to exempt the
additional spending
from the Gramm-Rudman deficit reduction
targets. This exemption would signal to the world that we are
not serious about meeting our deficit reduction responsibilities.
When I meet with the finance ministers from other leading
industrial nations in the so-called G-7, they tell me how they
see Gramm-Rudman as the only hope for deficit reduction in the
U.S.
Creating this exemption would establish a bad precedent for
similar exemptions any time a large spending need is seen. The
President's proposal, on the other hand, would be extremely
difficult to duplicate for another purpose.
Its very nature
requires a substantial, up-front industry contribution that is
not likely to be available in other situations.
The stated purpose for the committee alternative is to save
money by having Treasury borrow directly at a slightly lower
rate. But if we wreck the Gramm-Rudman process, the markets may
lose confidence in our commitment to deficit reduction. That
could lead to higher borrowing costs, not only for the S&L plan,
but for the rest of the Treasury's financing needs, as well. A
sustained increase in interest rates of only one basis point (one
one-hundredth of one percent) , applied to the half of our
national debt that is financed on a short-term basis, would raise
the taxpayers' bill for interest by about $140 million per year.
This is more than the savings from any alternative plan.
When you come right down to it, reduction in interest rates
is at the heart of curing both the S&L problem and providing
relief for Third World debtors. It is hard to see the logic
behind tampering with Gramm-Rudman if we are really serious about
lowering interest rates.
The full Senate and the House Banking Committee have
previously approved our funding plan, and we will continue to
fight for it and fight for it hard. Our plan preserves GrammRudman, which is our best hope for fiscal sanity, perhaps our
only hope. It puts as much industry money as possible into the
solution. And it is the least costly financing method.
Now, turning to the reform portion of the plan, it is not a
bailout for ailing S&Ls. Instead, its purpose is to fulfill the
Government's ironclad commitment to protect depositors' savings.
But the plan involves much more than writing checks to
depositors. It provides significant reforms to ensure that the
industry can never again sink into this kind of crisis.
The foundation of our reform plan is the requirement that
S&Ls meet the same capital standards as national banks. That is,
the owners of S&Ls must put their own capital at risk ahead of
the taxpayers' money.
It must be real, not phantom, capital.
3
This is not an unreasonable request, and we should demand no
less.
National bank capital standards soon will have two minimum
requirements:
a total capital-to-risk-weighted-assets ratio of
eight percent and a tangible-capital-to-total-assets ratio of
three percent.
Two thousand savings and loans could meet these standards
today. Those two thousand represent four out of every five of the
solvent S&Ls in this country. Of the remainder, almost half have
tangible capital between two and three percent of assets and
should easily be able to meet the standard.
Only 246
institutions might have difficulty meeting the standard, but
ought to be able to merge with stronger ones.
The principle behind our insistence on this point is simple:
It is just plain human nature that an individual, any individual,
is qoing to exercise more caution and careful judgement when he
is putting his own money at risk. We should truly be ashamed if
we put in place a solution to the S&L crisis that does not
eliminate the conditions which would let it occur again.
The Senate deserves a great deal of credit for moving
cruickly to adopt the President's S&L reform proposal.
It
f i s h e d action* on the legislation a month ago.
The, House
started out the same way, but now the entire process is bogging
down. I understand that two committees have been given two more
weeks to look at the bill. Delay is costing the taxpayers every
day.
Thank you for your interest in this important issue, and
thanks again to Senator Dodd for his help and support. Now, I d
be glad to take a couple of questions.
TREASURY NEWS _
Department of the Treasury • Washington, D.c. • Telephone
FOR RELEASE AT 4:00 P.M. CONTACT: Office of Financing
May 16, 19.89
202/376-4350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$13,200 million, to be issued May 25, 1989.
This offering
will result in a paydown for the Treasury of about $ 1,700 million, as
the maturing bills are outstanding in the amount of $ 14,908 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, May 22, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $ 6,600
million, representing an additional amount of bills dated
February 23, 1989, and to mature August 24, 1989
(CUSIP No.
912794 SV 7), currently outstanding in the amount of $7,261 million,
the additional and original bills to be freely interchangeable.
183-day bills (to maturity date) for approximately $6,600
million, representing an additional amount of bills dated
November 25, 1988, and to mature November 24, 1989 (CUSIP No.
912794 SN 5), currently outstanding in the amount of $9,139 million,
the additional and original bills to be freely interchangeable.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing May 25, 1989.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities, to
the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them. Federal
Reserve Banks currently hold $ 1,645 million as agents for foreign
and international monetary authorities, and $4,507 million for their
own account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series)
NB-272
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
10/87
2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations of the Secretary of the Treasury
shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
10/87
of
the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.
TREASURY NEWS _
department of the Treasury • Washington, D.c. • Telephone 566-2041
May 16, 1989
JOHN EDWIN ROBSON
Appointed Deputy Secretary of the Treasury
John Edwin Robson was appointed by President Bush yesterday to be
Deputy Secretary of the Treasury. He was confirmed by the United
States Senate for this position on May 12, 1989.
As Deputy Secretary, Mr. Robson will act as the chief operating
officer of the Treasury. He will participate in all of the
Department's key policy deliberations and decisions and play a
regular role in relations with Congress. As the number two
ranking official of the Department, the Deputy Secretary will
assume the duties and powers of the Secretary when the Secretary
is absent or unable to serve or when the office of the Secretary
is vacant.
Prior to joining the Department, Mr. Robson served as Dean and
Professor of Management at Emory University's School of Business
and Administration. He was an executive with G.D. Searle & Co.
from 1977-1985 and served as President and Chief Executive
Officer from 1982-1985.
Mr. Robson is not new to government service, having served three
times previously in Presidential Appointments requiring Senate
Confirmation. He was Chairman of the Civil Aeronautics Board
from 1975-1977; General Counsel and then Under Secretary of the
U.S. Department of Transportation from 1967-1969; and a
consultant with the Bureau of the Budget from 1966-1967.
Mr. Robson practiced law as a partner with the law firm of Sidley
and Austin from 1970-1975; and as an Associate and then Partner
with the law firm of Leibman, Williams, Bennett, Baird & Minow
from 1958-1966.
Mr. Robson was graduated from Yale University (B.A) and Harvard
University School of Law (J.D). He served in the United States
Army from 1955-1957. Born in New York City on June 21, 1930 to
Edwin 0. and Elizabeth S. Robson, he was raised in Illinois. He
currently resides in Atlanta, Georgia with his wife, the former
Margaret Elizabeth Zuehlke. They have two children, Matthew and
Douglas.
NB-273
TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 16, 1989
CONTACT:
Lawrence Batdorf
202/566-2041
New Empirical Analyses of Capital Gains Taxation
The Treasury Department today released three new Office of Tax
Analysis staff papers on the taxation of capital gains. The
papers provide additional evidence supporting the Treasury
Department estimates that the President's capital gains proposal
will increase Federal tax receipts.
These empirical papers analyze the effect of changes in capital
gains tax rates on taxpayers' capital gains realizations and
other income sources. The papers analyze prior tax law changes
and find significant short- and long-term responsiveness of
taxpayers' realizations to lower capital gains tax rates.
Taxpayer responsiveness was more than sufficient to increase
total Federal tax revenues.
The papers use three different data sources to analyse the effect
of capital gains tax rates on taxpayer,,' realizations: (1)
aggregate time-series data (national data for a 40 year period),
(2) pooled cross-section tax return data (four years of
individual tax return data), and (3) panel tax return data
(individual tax return data following the same taxpayers for a
five-year period). In addition, the papers improve on the
statistical estimation and models of prior empirical studies.
oOo
NB-274
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
Text as Prepared
For Release Upon Delivery
Expected at 8:00 p.m. DST
Remarks by Thomas J. Berger
Deputy Assistant Secretary for International Monetary Affairs
U.S. Department of the Treasury
before the
Second Harvard Conference on Latin American Debt
John F. Kennedy School of Government
Harvard University
Cambridge, Massachusetts
May 15, 1989
Of Harvard, Machiavelli and New Beginnings:
Proposals to Strengthen the International Debt Strategy
Introduction
As a graduate of Harvard College and Harvard Business School,
it is a pleasure for me to be back in Cambridge and to participate
in the Second Harvard Conference on Latin American Debt. Because
this is a Cantabrigian affair, I would like to begin my remarks
this evening by sharing with you something I learned during my
freshman year in college here in 1970. During that year I took a
course offered by the Government Department that required me to
read Niccolo Machiavelli's classic book, The Prince. One
quotation from this book that I will always remember goes as
follows:
"There is nothing more difficult to take in hand or
more perilous to conduct ... than to take the lead
in the introduction of a new order of things."
Although Machiavelli could not have known about Secretary
Brady's recent initiative regarding international debt when he
wrote The Prince in 1532, his words provide certain insights into
the process of implementing these proposals. As with any new idea
NB-275
- 2 or "new order of things"
over and exhausting work
perils that will have to
surprising.
Proposals to Strengthen
there will be doubters who have to be won
to be done. And, there will be numerous
be navigated around — but this is hardly
the Debt Strategy
The proposals outlined by Secretary Brady reflected the
culmination of an extensive review, which confirmed that while
significant progress had been achieved since 1982, several
critical issues needed to be addressed. Notably, growth in
several of the major debtor countries has been inadequate to
support sustained recovery. In some countries, reforms had not
been comprehensive and consistently applied. Investor confidence
remained weak — exacerbating capital flight. And commercial bank
financial support was not always timely or sufficient.
The approach proposed by Secretary Brady to strengthen the
debt strategy is intended to mobilize more effective external
financial support for debtor countries' efforts to reform their
economies and achieve lasting growth. Our ideas build on
suggestions of many throughout the world, including some of the
people attending this conference. The strengthened strategy
revolves around two central themes: the need to give greater
emphasis to debt and debt service reduction, and the need for
debtor countries to implement sound economic policies designed to
encourage investment and flight capital repatriation.
In unveiling the approach to strengthen the debt strategy, we
focussed on key concepts, rather than offering a blueprint, in
order to stimulate discussion and involve key players in the
development of a detailed plan. Our proposals were structured to
accomplish a broad international consensus that will move us
towards objectives for the debt strategy that are widely regarded
as necessary next steps.
Those steps include the need to strengthen growth in debtor
countries, to address the problem of capital flight, to attract
new investment, and to sustain commercial bank financial support.
Reductions in the stock of debt are also very important for both
economic and political reasons.
Strong economic reforms in debtor countries are an essential
first step. There is no substitute for sensible economic
policies. No amount of debt or debt service reduction will lead
to sustained economic growth without such policies. Inappropriate
policies and inconsistent implementation have often been at the
heart of economic and financial problems in these countries. In
the end, policies must promote confidence in both foreign and
domestic investors — for investment is the single key to growth.
- 3 Macroeconomic reforms — in particular sound fiscal, monetary,
and exchange rate policies — remain critical. However, they are
not sufficient. Policies designed to free up rigidities, allow
the marketplace to work and boost production are essential to
combining adjustment with growth. Thus, debtor countries should
pursue policies which liberalize trade, reform labor markets,
develop financial markets, and privatize government enterprises.
This will allow the private sector to increase employment and
efficiency.
"Debtor nations must focus particular attention on the adoption
of policies which can better assure the return of flight capital;
not the ephemeral return that we have witnessed in certain
countries from time to time, but hopefully a sustained return of
those assets that have fled abroad over the years. Debtor nations
can build investor confidence by reducing or eliminating
limitations on remittances through tax reform, and by amending
policies to assure real rates of return. Such measures can win
back the resources that have deserted archaic investment regimes.
This will not happen overnight. The web of government controls,
intervention, ownership, and regulations has to change. And these
reforms must be sustained. Frequently, we have seen capital
return early in an adjustment program, only to move out of the
country when the program falters.
Privatization programs can offer many countries a large pool
of financial resources. In several heavily indebted countries,
parastatals control on the order of two-thirds of domestic
production. Privatization programs can be structured to attract
both domestic and foreign investors, to reduce the stock of
external debt, to raise government revenues, and to cut government
expenditures on inefficient operations. All told, privatization
is a win-win deal.
To support debtor countries' reform efforts, the international
community needs to provide timely financial assistance. A broader
range of financial support by commercial banks is the key, in our
view. Debt and debt service reduction can be an important
component of this support and can be structured in ways to meet
the diverse interests of commercial banks.
New lending will also be important for most countries, but the
magnitudes of new lending required may be substantially reduced by
debt and debt service reduction. New financing could include
concerted lending, club loans, trade credits, or project finance.
Several steps must be taken to enhance the potential for debt
and debt service reduction by commercial banks. Legal constraints
in existing agreements now stand in the way of transactions that
can directly benefit the debtor country. Waivers of these
provisions for a limited period can help to stimulate greater
activity within the market and allow those banks willing to accept
various options to do so. We believe that a waiver can be
- 4 structured to permit multiple debt and debt service reduction
transactions during a given period of time. Such a waiver is much
less cumbersome than seeking waivers on a transactions-bytransaction basis. Once these waivers are agreed upon, the
debtors and creditors should be able to negotiate a range of
specific transactions, which might include debt-for-debt swaps,
cash buybacks, and interest reduction instruments.
In addition, the IMF and World Bank can facilitate agreement
on specific transactions. We have proposed that these
institutions redirect a portion of their normal policy-based loans
to fund debt reduction transactions such as cash buybacks or
collateralized exchanges. We have also proposed that they provide
limited interest support for significant debt and debt service
reduction. We believe that IMF and World Bank resources should be
used to help reduce debt rather than increasing the future
servicing burdens of debtor countries.
In addition to pursuing reductions in their debt burdens,
developing countries should seek to develop other ways of meeting
their financing needs. As I mentioned eariier, both new
investment and flight capital repatriation are important sources
of capital and can be encouraged through sound policies.
Let me say a few words in particular about the role investment
can play in a developing economy. In our view, foreign investment
offers countries a unique opportunity to gain access to not .only
capital but also technology, management expertise, and employment
for its citizens. In a time of scarce financial resources,
countries simply must be more active in seeking to develop the
potential for investment.
Debt/equity swaps can be an important vehicle for attracting
such investment and in our view should be key elements of any debt
reduction program.
Benefits of the New Approach
What are the benefits of this approach for debtor countries
and commercial banks?
Those countries which are prepared to adopt significant
reforms will have earlier support for their efforts, will be able
to demonstrate at home that their debt burden is being reduced,
and will enhance their potential to achieve domestic growth,
development, and social objectives. Their need for new money from
commercial banks will be reduced.
Commercial banks will be able to make realistic adjustments in
their portfolios in a way that enhances the quality of their
loans. The creditworthiness of their debtor country clients will
improve. Debt reduction will be closely linked to debtor reforms
to assure that these benefits will be sustained.
- 5 Most importantly, this approach provides an economic incentive
for the market to function better. It provides IMF and World Bank
loans to debtor nations as a catalyst for market activity,
permitting debtor nations to pledge some of these resources as
backing for new debt instruments which reduce the burden of debt
and debt service.
Next Steps in Implementing the New Approach
It is up to all of the parties involved to make this strategy
work, and we have seen encouraging signs of progress.
Key debtor countries have begun to seek support from the Fund
and Bank for debt reduction as part of their economic reform
programs. Countries as diverse as Mexico, Venezuela, Morocco, the
Philippines, and Costa Rica are anxious to get their process
underway and have initiated discussions with the commercial
banking community.
The IMF and World Bank have prepared interim papers on the
nature of the support they might provide for debt and debt service
reduction transactions. These papers are now under discussion
within their Executive Boards. Both debtor countries and
commercial banks will be watching the decisions of these
institutions carefully in considering their own options.
The commercial banks have also begun to discuss among
themselves the potential for waivers, techniques for transactions
that reduce debt and debt service, and possible ways of
differentiating new money from existing loans.
Creditor governments are following developments in each of
these areas closely. Official debt rescheduling in the Paris Club
and export credit cover will continue for those countries
adopting IMF and World Bank programs. The key industrial
countries are reviewing regulatory, accounting, and tax regimes,
with a view to reducing any impediments to debt and debt service
reduction. Where possible, creditor governments should also
provide bilateral funding in support of the strengthened debt
strategy. Japan has already risen to the challenge by announcing
a commitment to provide additional financing of $4.5 billion.
Conclusion
In closing, I want to emphasize that the Bush Administration's
intent in strengthening the international debt strategy is to
promote an approach to debt problems that will help revive growth
and improve the creditworthiness of developing countries. The
achievement of progress in coming months depends critically on the
cooperative efforts of commercial banks, debtor and creditor
- 6 governments, and the international financial institutions.
Secretary Brady and the Bush Administration — and G-7 gover
are fully committed to making this process work.
Thank you very much.
TREASURY NEWS _
Department of the Treasury • Washington, D.c. • Telephone 566-2041
Release Upon Delivery
Expected at 10:00 A.M., E.S.T.
May 17, 1989
STATEMENT OF
DANA L. TRIER
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
I am pleased to be here today to testify concerning the
following tax bills: (1) S. 659, S. 838 and S. 849 (repeal of
estate freeze provisions); (2) S. 442 (value added tax); and (3)
S. 353 (amendment to educational savings bond provisions).
REPEAL OF ESTATE FREEZE PROVISIONS:
S. 838 AND S. 849
S. 659,
Background
Section 2036(c) was enacted as
part of the Omnibus Budget
Reconciliation Act of 1987 and was further amended by the
Technical and Miscellaneous Revenue Act of 1988. The statute was
intended to eliminate the perceived unfair transfer tax
advantages of estate valuation free zes. An estate freeze is a
technique whereby the value of cert ain property is frozen for
estate tax purposes. The freeze is accomplished by transferring
the future appreciation in a busine ss or other property to a
younger generation while the older generation retains a
non-appreciating interest in the bu siness or property that
provides income or other significan t rights with respect to the
business or property. Although the re are a variety of
B-276
-2transactions and arrangements that can be used to achieve an
estate tax freeze, the most typical example is a transfer of
common stock of a business by a parent-owner to children coupled
with the parent's retention of preferred stock. Prior to the
enactment of section 2036(c), no part of the value of the
transferred common stock would have been included in the parent's
estate.
The legislative history of this provision indicates that
Congress was concerned about estate freezes for several reasons.
First, it was thought that such arrangements too often permitted
wealth to pass outside the transfer tax system. This could
result from an initial undervaluation of the transferred
appreciation interest or because of subsequent action or inaction
by the transferor with respect to the retained frozen interest.
For instance, in the typical freeze I described earlier, the
older generation's failure to take preferred dividends or to
exercise other rights in an arm's-length manner could in effect
transfer wealth to the younger generation. In addition, the
general effect of an estate freeze transaction was thought to be
essentially that of a transfer of an interest in property with
retention of the enjoyment of the entire property. Such
transfers have long been treated under the estate tax law as
incomplete for estate tax purposes.
Section 2036(c) applies if a person who holds a
substantial interest in an enterprise in effect transfers
property having a disproportionately large share of the potential
appreciation in such interest while retaining an interest in the
income of, or rights in, the enterprise. The legislative history
describes an "enterprise" as including any business or other
property which may produce income or gain. A person holds a
"substantial interest" in an enterprise if he or she owns,
directly or indirectly, 10 percent or more of the voting power or
income stream, or both, in the enterprise. An individual is
treated as owning an interest in an enterprise which is directly
or indirectly owned by any member of such individual's family.
Where the statute applies, the value of the transferred
property will be included in the transferor's estate if the
transferor continues to hold the retained interest until death or
will be treated as the subject of a deemed gift by the transferor
at the time the transferor's retained interest in the enterprise
terminates or the transferred appreciation property is disposed
of outside the transferor's family. In either case, the original
transfer will be taken into account so that the general effect of
section 2036(c) will be to tax the post-transfer appreciation in
the value of the transferred property through the time of such
inclusion or deemed gift.
Section 2036(c) generally does not apply where the transferor
receives full and adequate consideration for the transfer of the
disproportionate appreciation interest. This exception is not
available for transfers to family members, but the statute
-3generally does not apply to the post-transfer appreciation
attributable to consideration paid by the younger generation from
its own funds for the appreciation interest.
The statute contains several safe harbors for common
transactions that were thought not to provide significant
opportunities to transfer wealth outside the transfer tax system
but that otherwise might be reached by section 2036(c).
For example, the retention or receipt by the transferor of debt
that meets certain qualifications will not be considered a
retained interest that could trigger the statute. Further, the
statute would not apply solely because the transferor enters into
an agreement for the sale or lease of goods or other property, or
the providing of services, if the agreement is an arm's-length
agreement for fair market value and does not otherwise involve
any change in interests in the enterprise. The statute also
contains safe harbors for options to buy or sell property at fair
market value as of the time the option is exercised and for
grantor retained income trusts that meet certain requirements.
S. 659, S. 838 and S. 849
All three of the Bills under consideration, S. 659 introduced
by Senator Symms on March 17, 1989, S. 838 introduced by Senator
Heflin on April 19, 1989 and S. 849 introduced by Senator Daschle
for himself and Senators Heflin, Boren and Symms on April 18,
1989, would repeal section 2036(c) retroactively in its entirety.
Discussion
Although section 2036(c) was intended to address an area of
significant tax avoidance, the statute has been criticized for
being both overly broad and uncertain in its application. We
understand the views of those who have expressed such concerns,
and we share some of those concerns.
However, the repeal of the statute at this time would raise
serious revenue concerns. The revenue loss that would result
from the repeal of section 2036(c) if such repeal were effective
as of the date of its original enactment as is proposed in the
bills under consideration would, according to our estimates, be
1991
1992
1993
1994
1995
as 1989
follows 1990
(in millions):
-2
-72
-146
-249
-384
-555
-25
The Treasury Department is willing to consider reasonable
suggestions for amendment of section 2036(c) that would not
substantially compromise the revenues or the basic tax policy
goal of preventing significant bypassing of the transfer tax
system through estate freeze techniques. The repeal bills before
the Committee today would not satisfy either requirement, and we
must therefore oppose them.
-4VALUE ADDED TAX:
S. 442
Background
The Value Added Tax (VAT) is a multistage sales tax that is
collected at each stage of the production and distribution
process. A firm typically pays a fixed percent of the value it
adds to the goods and services it purchases from other firms.
For example, if a firm purchases $60 worth of raw materials from
other firms and produces a good or service that sells for $100,
the firm's value added is $40. If the VAT rate were five
percent, the firm's VAT liability would be two dollars. A VAT
that extends through the retail level would raise the same amount
of revenue as a retail sales tax levied at the same rate. The
United States does not have a value added tax, although most
states have retail sales taxes.
Under a consumption type VAT, a firm pays VAT on its value
added only, not on any purchases from other businesses. Because
purchases of capital assets are not subject to the VAT, a
consumption type VAT does not distort a firm's decision to employ
capital or labor, nor does it distort an individual's decision to
consume or save.
Under a subtraction method VAT, a firm's VAT tax liability is
computed by subtracting its firm's purchases from other
businesses from its sales to arrive at value added, and then
applying the VAT rate. Under the credit invoice method, a firm's
tax liability is determined by allowing the firm to credit the
VAT paid on its purchases against the tax computed on its sales.
In order to claim the credit, a firm would be required to furnish
an invoice indicating the amount of VAT paid on the goods and
services it purchased. The credit invoice method is less
susceptible to noncompliance than the subtraction method, because
the tendency of sellers to underreport sales and reduce taxes
will be offset by the incentive of purchasers to report sales at
their full price in order to receive full tax credits.
Under the destination principle, a good or service is
considered to be taxed in the country where it is consumed so
that imports and domestically-produced goods and services compete
on an equal tax footing. In general, the appropriate VAT rate is
applied to all imports, and a VAT rate of zero is applied at the
export stage. Exporters are given full credit for any VAT paid
on inputs purchased to produce a good or service. The method
frees the good or service from any VAT imposed in an exporting
country and subjects it to the same VAT rate as similar
domestically-produced goods in the importing country.
To the extent that a VAT is imposed at a uniform rate across
all goods and services, it will not distort an individual's
decision about what goods and services to consume. For a variety
-5of reasons, certain commodities, transactions, and/or firms may
receive preferential treatment under a VAT. This may occur
through either exemption or zero rating. Briefly, if a commodity
or service is zero rated, it is freed of all value added tax. In
other words, the good is taxed at a zero rate at every stage.
This may be contrasted with an exemption which frees the sale
of a commodity or service from explicit payment of tax. The
seller, however, does not receive a credit for VAT paid on his
purchases. Explicit exemptions in S. 442 would be given to de
minimis activities and for employee services furnished to an
employer. Exemptions would also be defined implicitly by
narrowly defining taxable transactions, e.g., by excluding sales
of intangible property.
The proponents of a VAT argue that the tax is an efficient
source of revenues in that it does not distort the present/future
consumption choices of individuals, nor the choice among
different consumption goods (if a uniform rate is applied). They
also argue that any distortion in the labor/leisure choice is
small relative to the intertemporal distortions caused by taxes
such as the income tax.
Opponents argue that the VAT is a regressive tax, because
consumption expenditures as a percentage of income decrease as
income increases. Excluding necessities from the VAT, or
reducing the VAT rate on necessities, may alleviate some of the
regressivity but may substantially erode the VAT tax base and
dilute the nondistortionary aspects of the tax. Adjusting
transfer payments or providing a refundable income tax credit are
often considered as alternatives to excluding or zero rating
commodities.
Opponents of the VAT also argue that the VAT will result in a
one time increase in the price level (if accommodated by the
monetary authority), would distort the labor/leisure choice, and
would compete with an important source of state and local
revenues. In addition, the implementation of a credit invoice
consumption type VAT would involve substantial administrative
costs. Volume 3 of the Treasury Department's 1984 Report to the
President, Tax Reform for Fairness, Simplicity, and Economic
Growth, estimated that the Internal Revenue Service would require
18 months from the date of enactment to fully implement such a
tax. It also estimated that the IRS would require an increase in
personnel of 20,000 and an increased budget of $700 million
annually to enforce a VAT.
S. 442
S. 442 would impose a VAT on the sale of property and the
performance of services in the United States with respect to
commercial transactions. The VAT would also be imposed on the
sale or lease of real property and on the importation of property
whether or not it is with respect to a commercial transaction.
-6The amount of tax would be five percent of the value added to the
property sold or the services performed and would be imposed on
the seller at each stage of production and distribution,
including the retail stage. S. 442 would require that all
revenues net of administrative expenses be dedicated to deficit
reduction and not used to finance current expenditures.
S. 442 has four important characteristics: 1) It is a
consumption type VAT; 2) It uses the credit invoice method to
calculate tax liability; 3) It uses the destination principle for
border tax adjustments; and 4) It exempts or zero rates certain
commodities.
Discussion
The Administration opposes S. 442. The Administration does
not believe that tax increases are necessary to reduce the
deficit. The value added tax, as its name states clearly, is an
additional tax liability that would be paid by the American
public. The Administration remains committed to reducing the
deficit through reduced expenditures and continued economic
growth.
EDUCATION SAVINGS BONDS:
S. 353
Background
In the Technical and Miscellaneous Revenue Act of 1988,
Congress enacted section 135 which excludes from income interest
earned on qualified United States Series EE savings bonds to the
extent the bond proceeds (principal and interest) are used to pay
qualified higher educational expenses of the taxpayer or the
taxpayer's spouse, child or dependent. Qualified Series EE bonds
are those issued after December 31, 1989 to an individual who has
attained age 24, and who is the sole owner of the bond, or who
owns the bond jointly with his or her spouse. Subject to the
phase-out rules, if the proceeds of all qualified Series EE bonds
redeemed by the taxpayer during the taxable year are used to pay
for qualified higher educational expenses, all interest accrued
on such bonds is excluded from income. If a taxpayer uses a
portion of the bond proceeds for purposes other than qualified
higher educational expenses, i.e., if the bond proceeds exceed
the student's qualified expenses, the amount of excludible
interest is reduced on a pro rata basis.
Educational expenses that qualify for the tax exemption
include tuition and fees required for the enrollment or
attendance of a student at an eligible educational institution.
These expenses are calculated net of scholarships, fellowships,
-7and other tuition reduction amounts. Eligible educational
institutions include most post-secondary institutions, including
vocational schools, that meet the standards for participation in
federal financial aid programs.
The benefits of this tax exemption are phased out for
taxpayers filing joint returns and whose modified adjusted gross
incomes are between $60,000 and $90,000 (adjusted for inflation
after 1990). Thus, a taxpayer whose modified adjusted gross
income exceeds $90,000 when the bonds are redeemed will not
benefit from the exclusion. For single taxpayers and heads of
households, the phase-out range is $40,000 to $55,000.
S. 353
S. 353 would allow a taxpayer to qualify for the interest
exclusion provided by section 135 by paying for the educational
expenses of any individual, including a person who is not a
spouse or dependent of the taxpayer.
Discussion
The Administration opposes extension of the benefits provided
in section 135 to taxpayers who are paying for the education
expenses of an individual other than the taxpayer's spouse or
dependent.
Section 135 is a modified version of a bill proposed by the
previous Administration, entitled the "College Savings Bond Act
of 1988." This Administration fully supports that initiative and
generally supports the similar provision enacted by Congress in
section 135. With the costs of a post-secondary education
continuing to outpace inflation, American families need more than
ever to save to educate their children. The current provision on
education savings bonds provides valuable and needed assistance
to low and moderate income American families in financing
post-secondary education.
We are concerned that the purposes of the phase-out could be
easily circumvented if the interest exclusion, and thus phase-out
test, were made applicable to individuals other than the student,
the student's spouse or a person who supports the student as a
dependent within the meaning of section 151. Under the bill an
individual could benefit from the exclusion even though the
income of the student or the student's parents exceeds the
phase-out limit. For example, high income parents could give
tax-free monetary gifts to others (e.g., grandparents) with lower
incomes for use in purchasing bonds to be used for the education
of the parents' children. Congress enacted section 135 to enable
low and moderate income families to save on a tax-free basis for
their children's future education. We do not believe that it is
appropriate to extend the benefits of this provision beyond that
targeted group.
-8-
The estimated revenue loss from S. 353 would be as follows (in
millions):
1989 1990 1991 1992 1993 1994 1995
r
IS—
~=l—
=IT^
4ir
^FD^
-79
-96
CONCLUSION
This concludes my prepared remarks.
answer any questions.
I would be pleased to
TREASURY NEWS .
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 17, 1989
Gregory P. Wilson
Deputy Assistant Secretary
(Financial Institutions Policy)
Leaves Treasury
Secretary of the Treasury Nicholas F. Brady announced today that
Gregory P. Wilson is leaving the Department to become a banking
consultant with McKinsey and Company, Inc.
Mr. Wilson has served as Deputy Assistant Secretary for
Financial Institutions Policy since October 1986. In that
position he served as a senior advisor to the Secretary, Under
Secretary, and other Treasury officials on all issues affecting
the financial services industry.
Secretary Brady said, "Mr. Wilson was a key player in the passage
of the Administration's 1987 legislation to recapitalize the
Federal Savings and Loan Insurance Corporation and in the
development of the Treasury's 1988 policy on reform of the GlassSteagall Act and the President's Financial Institutions Reform,
Recovery, and Enforcement Act of 1989. We appreciate his hard
work and dedication to public service and wish him success in his
future endeavors." Upon Mr. Wilson's departure, Secretary Brady
conferred on him the Department's Distinguished Service Award.
Before accepting his appointment as Deputy Assistant Secretary,
Mr. Wilson served for three years as the Minority Staff Director
to the Committee on Banking, Finance and Urban Affairs of the
U.S. House of Representatives, where he worked on a wide variety
of domestic and international financial issues. He served in
other positions on the Committee since 1977.
Mr. Wilson received his Bachelor of Arts degree, Magna Cum Laude
in 1974, from Ohio Wesleyan University, where he was a member of
Phi Beta Kappa. He attended the Fletcher School of Law and
Diplomacy from 1974 to 1976. A native of Ohio, Mr. Wilson lives
in Vienna, Virginia with his wife, Mary, and children, Sarah and
Christopher. He is the son of Mr. and Mrs. Paul M. Wilson of
Ravenna, Ohio.
NB-277
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
May 17, 1989
CONTACT:
Office of Financing
202/376-4350
TREASURY TO AUCTION 2-YEAR AND 5-YEAR 2-MONTH NOTES
TOTALING $16,250 MILLION
The Treasury will raise about $5,875 million of new cash
by issuing $8,750 million of 2-year notes and $7,500 million of
5-year 2-month notes. This offering will also refund $10,372
million of 2-year notes maturing May 31, 1989. The $10,372 million
of maturing 2-year notes are those held by the public, including
$1,326 million currently held by Federal Reserve Banks as agents
for foreign and international monetary authorities.
The $16,250 million is being offered to the public, and
any amounts tendered by Federal Reserve Banks as agents for
foreign and international monetary authorities will be added to
that amount. Tenders for such accounts will be accepted at the
average price of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks for
their own accounts hold $1,024 million of the maturing securities
that may be refunded by issuing additional amounts of the new notes
at the average price of accepted competitive tenders.
Details about each of the new securities are given in the
attached highlights of the offerings and in the official offering
circulars.
oOo
Attachment
NB-278
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TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE " CONTACT: Office of Financing
May 18, 1989
202/376-4350
AMENDMENT TO TREASURY'SMAUCTION OF 5-YEAR 2-MONTH NOTES
ANNOUNCED MAY 17, 1989
The Treasury's announcement of $7,500 million of 5-year
2-month notes to be auctioned May 25, 1989 is amended as follows:
If, under Treasury's usual operating procedures, the auction
of 5-year 2-month notes results in the same interest rate as
the outstanding 8-3/4% bonds of August 15, 1994, the new
notes will be issued with an 8-5/8% or an 8-7/8% coupon.
The 8-7/8% coupon will apply if the auction results in a
yield in a range of 8.80% through 8.98%.
NB-279
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May
18,
1989
STATEMENT BY
NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
The Ways and Means Committee vote to waive Gramm-RudmanHollings sets a precedent that would render its budget discipline
meaningless.
Their approach says it puts the financing "on-budget" but
then makes it disappear, with no GRH accounting.
It
vanishes into thin air.
just
The President's proposal fully accounts for each dollar of
industry money that is spent on the problem in a fully contained
funding corporation, and accounts for each taxpayer dollar on
budget and within the GRH spending limits.
Finally, the President's proposal would cost taxpayers less,
because it preserves GRH budget discipline.
The cost of
violating GRH would far outweigh any anticipated savings from an
"on-budget" approach.
We believe in the GRH budget discipline and will fight to
see that its integrity is maintained.
NB-280
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
REMARKS OF THE HONORABLE SALVATDRE R. MARTOCHE
ASSISTANT SECRETARY (ENFORCEMENT)
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE AMERICAN ASSOCIATION OF EXPORTERS AND IMPORTERS
NEW YORK, NEW YORK
MAY 18, 1989
U.S. Customs Policy and Procedures on Commercial Operations:
The Treasury Perspective
I am most grateful for the opportunity to be here with you
today, and I am especially pleased to be a part of your
annual forum on international trade.
For many years, this organization and the Treasury Department
have enjoyed an excellent working relationship, and I look
forward to our continuing that interaction.
Today, I want to discuss some developments affecting the
Customs Service. But first, I want to say a few words about
my role in Treasury with respect to Customs rulings and
regulatory decisions.
My role is one of policy and oversight, rather than day-to-day
management. I do not believe in micro-management, and I
will err on the side of allowing a Customs ruling or decision
to stand if it is reasonable, defensible, and in accord with
overall Treasury policy—even if it is not precisely the
decision that I would have made, had I considered it de novo.
It is a matter of exercising discretion—from the broader
perspective of seeing that general Treasury and Administration
policies are carried out.
Because I represent the Treasury Department in this policy
role, I bring to my oversight role another perspective, and
that is the Treasury and Administration perspective on
trade. Simply stated, this Administration is deeply committed
to the principles of free trade and open investment. But
that policy is a fruitless one if we do not also insist on
fair trade.
And for this, the Customs Service performs an essential
function in trade enforcement. In Treasury's viewpoint,
aggressive enforcement of our trade laws is essential, not
only
because doing so is critical to our desire to maintain
NB-281
- 2 -
a "level playing field", but also because such a policy is
one of the best ways to stave off pressures for increased
protectionism.
As important as it is to identify and attack unfair trade
practices and battle the forces of increased protectionism,
there are still other hindrances to free and open international
commerce. As everyone in this room is all too aware, we
must all deal with what might be called transactional
barriers to trade. But I think you will agree with me that
the prospects of doing away with many of these procedural
and paperwork encumbrances have never been brighter than
they are today. I want to mention just a few of the reasons
why.
Automation
One reason is automation. At Customs, as many of you know,
automation is forever changing the way commercial
transactions are conducted and processed. For example,
Customs tells me that more than 70 percent of all entries
are now processed through the Automated Broker Interface
(ABI). This is an excellent example of cooperation between
government and private industry, and we sincerely appreciate
the contribution that the broker community has made to this
effort.
On the subject of automation, Customs also tells me that
they have received their first error-free message
transmission in the new EDIFACT syntax. As some of you no
doubt know already, EDIFACT is an internationally-agreed-upon
syntax for the transmission of commercial information.
Customs is also testing and refining their Automated
Importer Interface, which is an automated format for invoice
information. This is another step toward paperless entry.
Another initiative, known as Automated Clearing House, will
permit electronic funds transfer for paperless payment of
duties and fees.
In Customs commercial processing, automation brings benefits
not only to the international business community but also to
the taxpayer.
For example, Customs estimates that had it not begun its
Automated Commercial System in the early 198 0s—and instead
resorted to the outmoded, manual processing procedures to
handle the vastly increased workload since then—their
operations today would be much more expensive. In fact,
Customs would need more than 700 0 extra positions and $154
million, just to meet the same workload demands that it is
meeting now.
- 3 -
Automation is just one of the reasons why Customs has been
able to increase both the efficiency and the effectiveness
of its cargo inspection. Another reason is the continuous
effort to refine cargo selectivity criteria, so that resources
are directed to the cargo that poses the highest risk.
Effective cargo inspection, of course, is essential not only
for trade enforcement but also for our country's war on
drugs. I am very proud of Customs' successes in drug
enforcement and its contributions to the President's goals,
and I will continue to look for ways to enhance our
capabilities in this area.
The Implementation of the Harmonized System
To return to the question of transactional barriers to
trade, no discussion of reducing these barriers would be
complete without mention of the new Harmonized Tariff
Schedule.
I know you have heard of the benefits by now, so I won't
dwell on the greatly increased predictability the Harmonized
System promises for the international business community.
But I would like to comment on the implementation.
All things considered, the transition has been remarkable—
far less disruptive than one might expect from a change of
this magnitude. We expected a number of difficult
classification issues, and some have arisen, but this has
occurred in far fewer instances than we feared.
You have probably also heard that one of the classification
issues is now before the Customs Cooperation Council—the
tariff classification of sport-utility vehicles. It will be
interesting to see how the international procedures for
resolving inconsistent decisions will work in actual
practice.
One of the reasons the transition has been so smooth is the
painstaking effort by Customs to get vital information about
the Harmonized System into the hands of the trade community.
For example, Customs to date has issued 30 Harmonized System
fact sheets on all aspects of the new tariff—from entry
procedures to statistical reporting and the implementation
of quotas.
Another smooth transition has been the implementation of the
U.S.-Canada Free Trade Agreement. I was very glad to hear
that the Canadian customs service recently complimented us
by pointing out that problems associated with the transition
were fewer than expected.
- 4 -
This is remarkable given the magnitude of the changes that
the Agreement made in the rules governing bilateral trade
between our two nations, including the adoption of an
innovative new procedure for determining origin.
There is another bit of welcome news from Canadian customs.
They tell us that U.S. exports of goods now entitled to
preferential treatment under the Agreement grew substantially
in April—indicating that U.S. exporters are discovering the
benefits achieved in the historic agreement and taking
advantage of them. That is good news for our trade balance
and for our economy.
Earlier, I mentioned what I consider to be two critical
goals of the Customs Service—rigorous enforcement of trade
laws and reduction of transactional trade barriers.
However, the Customs commercial operations mission is
broader than these two goals. We also see that mission as
one of improving our overall level of service to the trade
community.
Uniformity and the District Rulings Program
A key example is the Customs regulatory initiative to
provide uniformity in Customs decisions and in cargo
inspection. Some of you may have seen, and perhaps even
submitted comments on, the Federal Register notice
announcing this initiative. This regulatory change is
certainly one of the most noteworthy in recent Customs
history.
What I especially like about this program is the strong
emphasis it places on the needs of the importer. Consider
the District Rulings Program, which offers the convenience
of tariff classification rulings issued from District
offices—in many cases within 3 0 days—that are binding at
all ports.
The new program also allows for prompt resolution of
difficult classification issues: rulings requiring referral
to Customs headquarters are to be issued within 120 days.
These time limits are ambitious ones, and I'm not claiming
that we are up to full speed just yet. But we are strongly
committed to the idea, and we are making progress every day.
In my view, we owe it to the importing community to be as
prompt, and as consistent, as we possibly can when issuing
these rulings. I want the emphasis to be on providing a
high level of service. The importing community deserves no
less.
- 5 -
The new regulations also address uniformity in other types
of decisions, including the examination of merchandise. For
example, the regulations provide an importer a means to
object, and seek resolution, if three or more like shipments
that is, those involving the same or substantially similar
merchandise, the same manufacturer, and the same country of
origin—have been treated inconsistently from other
shipments of the same or substantially similar commodity.
This might occur when, for instance, the shipments are
singled out for intensive examination at a particular port,
or even at different ports, and when no discrepancies are
found as a result of the examinations.
The new procedure also will apply to decisions other than
inspection decisions: it will be available for any decision
that would be subject to a protest, where the importer can
show inconsistency.
There is one other aspect of the uniformity regulation that
I want to mention. It is a critical one, in my opinion,
because it embodies a concept of equity and fairness.
Customs will delay the effective date of a ruling, for up to
90 days, where an importer has relied to his detriment on a
previous Customs position.
o Customs will do this even in the absence of an
established and uniform practice—such as cases in
which an unpublished ruling letter is issued.
o Customs will consider delaying the effective date
even when there was no ruling letter, if the importer
can show that the past treatment was sufficiently
continuous to justify reasonable reliance.
Many of you know that the courts had previously held that
Customs lacked authority to grant such relief, that Customs
had no choice but to collect increased duties once a
determination was made that particular entries were subject
to them.
All of that changed when the Court of Appeals for the
Federal Circuit implied, in dicta in the Corn Growers case,
that we do in fact have such authority. It is a matter of
discretion, but as a matter of policy I am strongly
committed to the position we have taken in the regulation,
and I will see that it is applied where equitable
considerations warrant.
By the way, the regulations to finalize the uniformity and
equitable relief provisions are moving through the final
review process now. I expect to receive them for approval
and signature in the very near future.
- 6 -
Customs User Fees (Merchandise Processing Fee)
I would now like to turn for a moment to a subject in which
I know most of you have a strong interest—Customs user
fees.
I also know that this is not a favorite subject with many of
you. But given the severe budgetary restraints now facing
the Federal government, and given the substantial costs of
commercial operations, I would have to guess that user fees
are here to stay.
So our task in Treasury and Customs is to see that they are
administered as fairly as possible and in a way that is not
unnecessarily burdensome.
Last year, the current Customs user fee system was found by
a GATT panel to be inconsistent with our obligations under
the GATT. According to the panel, our merchandise processing
fee, which is an ad valorem-based fee, is not "approximately
equivalent to the cost of services rendered", as required
under Article VIII. The panel also reached some other
conclusions. They ruled that:
o the cost of services provided for entries that are
exempt from the fee cannot be subsidized by the fees
paid for non-exempt imports; and finally,
o that certain ancillary costs could not be funded from
user fees [air passenger processing costs,
international operations, and costs of administering
export controls].
The Administration is considering a proposal for a revised
user fee system that we hope will bring the United States
back into compliance with our GATT obligations. As you may
be aware, the Treasury Advisory Committee on Commercial
Operations has been helping us evaluate user fee options.
This Committee is comprised of twenty members drawn from
industry for their expertise on customs issues. Your
organization is very ably represented by your President,
Gene Milosh. Also represented are individual importers and
exporters, carriers and ports, brokers, trade associations,
and the Customs bar.
The Administration is preparing to submit a draft bill to
the Congress that will embody some important points raised
by the Committee.
o First, the proposal is for a modified ad valorem system
that we hope will have a strong chance for GATT
approval. The fee schedule will have a reasonable
- 7 -
ceiling, so that fees charged are not disproportionate
to the costs of services provided.
o User fees would be established annually by the
Secretary of the Treasury, based °n the prior year s
experience in balancing revenues collected and the cost
of commercial operations.
The new user fee system will be straightforward and easy to
administer. As far as automation is concerned, we believe
the fee schedule should reflect the difference in the costs
of processing manual and automated entries.
Some members of the Advisory Committee and the importing
community favor direct dedication of user fee revenues to
operations. They also advocate exemption of these funds
from potential sequestration under Gramm Rudman Hollmgs.
I understand fully why these representatives favor a fee on
such a basis. I must be candid and admit that I have my
doubts whether these wishes can be accommodated in an
Administration bill.
Penalties for Export Violations
So far, most of what I have said, other than my earlier
reference to the increasing shipments to Canada, has been of
greater interest to importers than to exporters. I know
that some of you represent entities interested in both arid
I want to mention something I have been working on that will
come as good news to exporters.
For a while now, I have been concerned that the existing
penalty guidelines for violations under the Export
Administration Act and the Arms Export Control Act need
certain improvements.
The good news I have for you today is that we are about to
issue better guidelines. When I say better, I mean that
they are, in my opinion, more fair. For one thing, the
penalties for many types of technical violations are
reduced.
It is my intention to treat as very serious those violations
that are truly substantive, such as those resulting from
failure to obtain an export license.
On the other hand, there are violations that I consider
technical, such as inadvertent failure to present a license
to Customs upon exportation--but where a proper license was
obtained and its number noted on the Shipper's Export
- 8 -
Declaration. I want to treat these more leniently than in
the past, particularly when they are first violations.
Also, exporters that conduct large numbers of licensed
transactions will be getting some good news in the new
guidelines. At present, the total number of past violations
compounds the size of penalties.
Under the new guidelines, I will count only those violations
that occurred within the three years prior to the new
violation. I think this is more equitable, particularly for
companies that export a high volume of controlled shipments.
Also, Customs will make every effort to promote uniformity
from port to port in export enforcement—both in
administering licensing requirements and in detentions and
seizures. In fact, this is a matter we expect to discuss
with the Advisory Committee. We do not want our export
policies—any more than we want our import policies—to
encourage "port shopping."
Conclusion
I want to conclude my remarks today by summarizing the broad
principles I want Customs to continue to pursue in its
commercial functions.
First, I want sustained, aggressive trade enforcement,
particularly in the area of commercial fraud.
Second, I want to encourage continued progress in trade
facilitation:
o in reducing transactional barriers and improving
automation;
o in cutting out unnecessary paperwork and procedures
where feasible; and
o in refining cargo selection criteria.
Third, and most important, I want Customs to move forward
with the improvements, planned and underway, that will make
its commercial operations programs more responsive to the
needs of the trade community.
Thank you very much for your kind attention.
TREASURY NEWS
Department of the Treasury • Washington,
D.c. • Telephone 566-2041
.i J liO
FOR IMMEDIATE RELEASE
May 19, 1989
CONTACT:
i'SY L..
LARRY BATDORF
(202) 566-2041
DEfARTM. ;,
INDIA AND UNITED STATES INITIAL INCOME TAX CONVENTION
Delegations from India and the United States met in
Washington from May 8 through May 15, 1989, and on May 15
initialled a draft Convention for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income. The Indian delegation was headed by G.N. Gupta,
Chairman, Central Board of Direct Taxes, and the United States
delegation was headed by Mary C. Bennett, Deputy International
Tax Counsel, Department of Treasury.
These successful negotiations conclude the latest round of
bilateral talks which began in July 1988. The delegations agreed
in all respects on the text of a new Convention and Protocol, as
well as on exchanges of notes and a memorandum of understanding.
Signature of the Convention and supporting documents awaits full
and early review by the authorities of both Governments. After
signature and completion of other necessary legal formalities,
the Convention will enter into force.
o 0 o
NB-282
TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 18, 1989
TREASURY BUILDING TOUR PROGRAM
LAUNCHED IN TIME FOR SUMMER VISITORS
Washington's oldest office building is now offering tours for
the public. Guided tours of the Treasury Building are available
on alternate Saturday mornings by advance reservation. The tour
program is part of the Treasury Department's celebration of its
200th anniversary as an Executive Branch agency.
The Treasury Building is the third oldest federal building in
the Capital City, but it is the oldest built to accommodate
members of the federal workforce. Its original T-shaped section
dates from 1836 and was designed by the American architect Robert
Mills who also designed the Washington Monument.
The one-hour tour features opportunities to view the
building's distinctive architectural and decorative features, its
large art collection and its historic nineteenth century
furnishings, and to learn about the Department's influential role
in domestic and international economic affairs. Tours begin at
10 o'clock and at 10:20, accommodate 20 Visitors, and are led by
Treasury employees trained as docents.
Advance reservations are required at least one week before
the tour date. Visitors will be asked to provide their name,
birthdate, and social security number when phoning to reserve
space. The Treasury Building is located at 15th Street and
Pennsylvania Avenue, NW. For additional information and
reservations, call 343-9136.
NB-283
TREASURY NEWS .
Department of the Treasury • Washington, D.c. • Telephone 566-2041
Monthly Release of U.S. Reserve Assets
•*v ' ;] "*
The Treasury Department today released U.S. reserve assets data
for the month of April 1989.
As indicated in this table, U.S. reserve assets amounted to
$50,303 million at the end of April, up from $49,854 million in March.
U.S . Reserve Assets
(in mi llions of dollars)
End
of
Month
Total
Reserve
Assets
Gold
Stock 1/
Special
Drawing
Rights 2/3/
Foreign
Currencies 4/
49,854
50,303
11,061
11,061
9,443
9,379
20,298
20,731
Reserve
Position
in IMF 2/
1989
Mar.
Apr.
9,052
9,132
1/ Valued at $42.2222 per fine troy ounce.
2/ Beginning July 1974, the IMF adopted a technique for valuing the SDR
based on a weighted average of exchange rates for the currencies of
selected member countries. The U.S. SDR holdings and reserve
position in the IMF also are valued on this basis beginning July
1974.
3/ Includes allocations of SDRs by the IMF plus transactions in SDRs.
4/ Valued at current market exchange rates.
NB-284
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
May 18, 1989
Roger Bolton
Assistant Secretary of the Treasury
(Public Affairs and Public Liaison)
Roger Bolton was confirmed by the United States Senate as
Assistant Secretary of the Treasury for Public Affairs and Public
Liaison on May 11 and was sworn into office by Secretary Nicholas
F. Brady on May 15. President Bush nominated Mr. Bolton for this
position on March 28.
Prior to joining the Treasury Department, Mr. Bolton was Special
Assistant to the President for Public Liaison and Director of the
Economic Division at the White House in 1988. He was Assistant
U.S. Trade Representative for Public Affairs and Private Sector
Liaison from 1985 to 1988.
In 1984 and 1985, Mr. Bolton was Deputy Assistant Secretary for
Public Affairs at the Department of the Treasury. He was
Director of Speechwriting for Reagan-Bush '84; Press Secretary
for the Joint Economic Committee of Congress, 1983; and Deputy
Director of Government Affairs for the National Transportation
Safety Board, 1983.
Mr. Bolton served as Administrative Assistant for Congressman
Clarence J. Brown from 1977 to 1983 and as his Press Secretary
from 1975 to 1977. From 1972 to 1975 he was a political reporter
for The Marion (Ohio) Star.
Mr. Bolton was graduated from The Ohio State University (B.A.,
1972). He is the son of Mr. and Mrs. John T. Bolton of
Cincinnati, Ohio, and is married to the former Lynne Melillo.
NB-28 5
TREASURY NEWS „
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
Text as Prepared
REMARKS BY
' SECRETARY OF THE TREASURY
NICHOLAS F. BRADY
UNIVERSITY OF MILWAUKEE
WISCONSIN SCHOOL OF BUSINESS ADMINISTRATION
MILWAUKEE, WISCONSIN
MONDAY, MAY 22, 1989
It is an honor to have the opportunity to participate in
this lecture series. I commend the University of Wisconsin
Business School for its recognition of the importance of bringing
together academics and professionals involved in American
business. The United States needs more programs like this
because the challenges we face today can only be met by the joint
efforts of the best minds in business and education in this
country.
I would like to address some of those challenges today.
We are fast approaching the last decade of this century. As we
enter the 1990s, ve must give careful thought to where we want
our economy to be in the year 2000—and beyond—because what we
do in the next 10 years will determine where we will be in the
21st century.
The key issue is how are we to sustain and strengthen our
position as a leading economic power in the international arena.
We have many strengths from which to approach this challenge:
strengths which propelled us into the role of dominant economic
power of the post war era, strengths that were born of American
traditions of independent thinking and innovation, of daring
vision and the drive to make that vision reality. Our society
has been characterized by a work ethic that carries a commitment
to quality, by the discipline to only produce our best. Our
heritage—that of a nation created by immigrants who settled a
vast continent—has given us the will to build an economy and
society on solid foundations, to build industry and financial
institutions to last over the decades. Traditionally, the whole
American workforce—from the boardrooms to the factory floors—
shared a pride in their work unequaled in the world. That
commitment to planning and building for the future as veil as for
the present is one of our proudest and most valuabl* legacies.
However, in recent years ve have neglected our traditional
strengths and have seen other nations move forward to challenge
NB-286
our position in the vorld economy. It may be that ve vara so
2
successful in leading the vorld economy in the post-var era that
ve allowed ourselves to become complacent. Perhaps ve began to
assume that vhat had come to us by the fruits of our labors vas
instead a birthright due us as Americans. It has taken our
nation some time to come to terms with the nev international
realities, but ve are doing so.
Our approach*to the challenges of the 1990s and beyond
should be to drav upon our traditional strengths and rejuvenate
and restore them to their proper place of prominence in our
economy. We can benefit from looking at the path pursued by
Japan, our chief competitor in many areas.
Japan's industry has developed the ability to seize upon
technological developments and turn innovative ideas into
production models. Effective, efficient quality production is
made possible by the committed, highly-skilled and motivated
workforce. Japanese dedication to hard work is veil-known.
But more important to their continued success is their business
leaders' commitment to building and maintaining Japanese
industry's leading role in the international arena over time,
vhether it be by ensuring that their technological base is state
of the art or by educating their vorkforce to meet the changing
requirements of modern industry.
Thus the Japanese share vith us a tradition of pride and
commitment to excellence and success in the economic arena.
Our task is to revitalize our pursuit of excellence in the
1990's. To maintain our competitiveness where it is strong,
and to rebuild it where it has faltered, demands a combination
of government and private sector initiatives.
For its part, the government must pursue macroeconomic
policies that create the conditions that will enable American
business to compete fairly in the international markets. There
are three areas in which the government clearly must play a role.
The first is coordinating economic policies vith our major
trading partners. The lack of consistent, compatible policies
among the G-7 countries early in the decade resulted in divergent
economic performance and a sharp appreciation of the dollar.
These led to large trade imbalances. Through the development of
the economic policy coordination process, we have produced
increased and more balanced world growth, low inflation, and
exchange rates that have made our producers competitive again in
vorld markets. As a result, the U.S. trade deficit fell by $34
billion last year, to about $127 billion. The downward trend is
continuing this year. The deficit for the first three months of
1989 vas nearly tventy percent belov that for the same period
last year; and exports averaged more than six percent higher.
This is encouraging news indeed. We need to and vill continue to
build on this progress.
3
Extensive multinational negotiations are essential to
fulfilling our second major responsibility—abolishing barriers
to free trade. Our key tool is the ongoing multilateral
negotiations under the General Agreement on Tariffs and Trade,
known as GATT. In the latest series of these negotiations, known.
as the Uruguay Round, ve are vorking to strengthen GATT and
expand its coverage. In particular, ve are striving to bring
under the tough GATT rules: trade in services, agriculture,
foreign investment and intellectual property, which includes
patent and copyright protection. As you veil knov, this is an
extremely difficult undertaking. Although much remains to be
done, vith the successful completion of the mid-term reviev in
April, the Uruguay Round is on track for a successful conclusion
at the end of next year. In addition, ve vill continue to fully
enforce tough action against unfair trade practices vhen
necessary. In accordance vith the 1988 Trade Act the U.S.
government must identify countries vith significant foreign trade
barriers or distortions by May 28 of this year. We plan to meet
that deadline.
The third major macroeconomic responsibility of the
government is to reduce the cost of capital to corporations.
This is essential to fostering the long-term planning on vhich
our future economic success depends. The high cost of capital
make short-term investments more appealing. By definition, it
makes the short-term reward the principal focus of investment.
The first step the government must take in bringing down the
cost of capital is to reduce the federal deficit. As everyone in
this room knows, the large federal deficit's effect on interest
rates has increased the cost of capital in this country and
consequently discourages business from making many long-term
investments. The Bush Administration is absolutely committed to
reducing the deficit by meeting the deficit level targets
established by the Gramm-Rudman legislation. We have already
taken a first, very important step by achieving an agreement with
the bipartisan leadership of Congress on the fiscal 1990 budget—
an agreement which meets the Gramm-Rudman target and reduces the
deficit to just below 100 billion dollars without raising taxes.
The President has met his commitment to "no new taxes, •' but more
than that, he has demonstrated the open-minded, responsive
leadership essential to a successful, multi-year process to
eliminate the deficit by 1993.
As such, this bipartisan agreement represents a promise
by both sides to put aside their differences in the interest of
fiscal sanity. This agreement demonstrates to the American
people and to the financial markets—both domestic and
international—that the U.S. Government is willing, and able, to
exercise fiscal
interests
of ourresponsibility
nation.
and act in the long-term economic
4
It is my experience that fiscal responsibility can lead to
financial stability. When the Gramm-Rudman lav vas adopted in
1985, interest rates dropped three full percentage points in six
months. If we show that ve can meet the deficit reduction
requirements of that lav today, and tomorrov, interest rates willcome down. In fact, ve have seen a decrease of a half a percent
in the last month.
The government can also lover the cost of capital by
providing a tax and regulatory environment vith the fewest
possible disincentives to capital formation and economic growth.
To this end, the Bush Administration has proposed a cut in the
capital gains tax. If enacted, our proposed tax rate
differential for capital gains vill lower the cost of capital,
thereby encouraging investment. The Bush Administration is also
on the record as advocating an end to the double taxation of
dividends. If the U.S. tax code gave equal treatment to equity
and debt, we would see the cost of capital come down. The
government also needs to pursue policies which encourage
Americans to increase the amount of money that they save. As
long as the U.S. savings rate remains so far below those of our
major competitors, the cost of our capital will remain an
impediment to equal competition in international trade.
Clearly, through its capacity to effect the cost of capital
the government has a crucial role to play. However, as I said
at the beginning of my remarks, solving the problem of U.S.
competitiveness must be a joint effort. By the very nature of
our free market economy, business must take responsibility for
its performance. I believe there are some fundamental
adjustments that need to be made to our way of doing business if
we are to remain competitive into the next century. I speak here
not as the Secretary of the Treasury, but as a businessman of 34
years experience who has seen many changes in those years in the
way we do business. And perhaps even more importantly, many
changes in our attitude about business. Some of those changes
have led us away from the strong American traditions that made us
so successful in the past.
When I graduated from business school in the early 1950's,
it was expected that you joined a firm and built a career with
that firm. There was in those days the idea that business was a
profession that you learned from the ground up, that there were
professional standards that you had to meet. You became a
professional by learning and developing over time the skills and
judgement born of experience. The career incentives in those
days were long-term; reward for professional endeavors was not
expected in the first year or two, but later vhen you had
achieved an expertise and maturity in your profession.
Clearly,
those days,
theparticularly
pace of American
in the business
last decade.
has changed
And as asince
result,
5
the pace of building a career has accelerated in the past decade.
Most successful business school students today graduate vith the
expectation that they vill begin their professional careers vith
top salaries and the promise of ever-increasing financial
rewards. I by no means begrudge those starting out today the
lucrative opportunities available to them. I vas just as eager
to do veil vhen I started out. What concerns me is that our best
young business professionals are beginning their careers and
having their attitudes and approach to business shaped by the
current, frenetic environment, vhich is not conducive to
fostering the kind of long-range planning and activity that is
essential to the future veil-being of our economy. I am
concerned that by the attention and emphasis placed on personal
gain and the financial transactions that generate the highest
immediate return, ve are losing sight of the long-term goals of
our economic endeavors.
For example, today the cutting edge of my profession,
investment banking, is the leveraged buyout. Hardly a veek goes
by that ve do not hear about some dramatic takeover fight vhich
reaps fabulous profits. There is a great deal of debate about
vhether or not leveraged buyouts are good. Congress is currently
considering legislation that vould remove some of the tax
incentives for LBOs. The viev of the Treasury Department is that
the jury is still out on LBOs; ve believe it is too soon to
determine their full effect on American industry. Proponents of
LBOs argue that they are good because they compel reduction and
streamlining of corporate structures. They argue that removing
corporate bureaucracy makes American firms more efficient and
competitive. No one vould argue in favor of corporate
bureaucracy, but if it vere really a key contributing cause of
inability to compete internationally, then Japan—vhich has
substantial corporate bureaucracies of its own—vould not hold
the standing it does in the international marketplace.
What concerns me the most about LBOs and similar currently
popular transactions is the vay they distort our perspective
about vhat is fundamentally important in business today. Their
focus is on paying out profits to pay down debt rather than
building a competitive position for the future.
Their emphasis
on immediate profits, without a long-term commitment to the firms
involved, is not in the best interests of a country attempting to
sustain and strengthen our productive capacity for the next
century. It worries me that many of the best minds in American
business are concentrating on financial engineering rather than
laying plans for corporate strategies into the future.
The verdict is still out on LBOs, but regardless of the
merits of specific transactions, the lesson ve should drav from
this
type of
that
ve from
should
it a
national
objective
to a more
careful
to activity
shift long-term
theis
emphasis
approach
to
themake
business
flashy
short-term
and
financial
deal
6
decisions. The importance of this must be understood and taught
at all levels—in the business schools, in the entry-level
training courses for young executives and in the corporate
boardrooms.
As I sound this cautionary note, let me be clear that I
believe my contemporaries as veil as the rising generation need
take notice. Our preoccupation vith the immediate and the shortterm never could have occurred vithout the advice and consent of
my generation. Ultimately, ve bear the responsibility for. the
business environment today. And by the example ve set in the
next decade—most probably our last decade of professional life—
ve vill bear responsibility for the American approach to business
into the 21st century.
Just as ve led American business through the post-var
economic boom, ve must be the leaders in the effort to
rejuvenate and draw on our traditional dedication to quality and
innovation, to hard work and team effort, and most of all, to a
shared pride, to build industries and financial institutions that
vill ensure America's place in the vorld economy for decades to
come.
This effort vill be neither simple nor easy. In some
instances solutions are not readily apparent. We need to direct
our efforts to finding the means to achieve our goals. In
closing, let me suggest where part of the solution vill be found.
It is the role that education plays in our economic endeavors.
Just as education has been the root to success for individuals in
this country, it is the root to success for our nation as a
whole. The education I refer to encompasses the broadest
possible definition of the word—from basic skills and industrial
retraining programs to support for the most advanced scientific
research being conducted in the laboratories of our leading
universities. We must put our money where our ideas are. We
must be willing to invest in research and development; ve must be
villing to educate and retrain our workforce to make it
competitive internationally. For example, it is a sad fact that
25 percent of all high school students drop out. We must ask
ourselves: How are we going to beat the competition when a
quarter of our starting team is only qualified to be second
string. Education is crucial to our efforts. We must recognize
that the varied aspects of education are links of a chain vhich
runs through our economic system.
If ve are to be successful in
remaining truly competitive we must be successful in promoting
the full spectrum of educational achievement.
We must make our traditional strengths our guiding
principles. We must make our commitment to them, rather than to
the trendy, and I believe illusory, high flying, hot house
notions
of today.
toward
the year
2 000 must
truly be a
cooperative
effort,Working
in vhich
everyone
recognizes
the importance
7
of vorking and planning to ensure that through our efforts today
the United States vill be a preeminent economic pover in the 21st
century.
TREASURYNEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
Contact: Office of Financing
. )K 5310
202/376-4350
FOR IMMEDIATE RELEASE
May 2 2 , 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,607 million of 13-week bills and for $6,610 million
of 26-week bills, both to be issued on
May 25, 1989,
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing August 24, 1989
Discount Investment
Price
Rate
Ra te 1/
8.29% a/
8.33%
8.32%
8 59%
8 .63%
8 .62%
:
:
:
:
were accepted today.
26-week bills
maturing November 24, 1989
Discount Investment
Rate 1/
Price
Rate
8.30%
8.34%
8.33%
97.904 :
97.894 :
97.897 :
8.79%
8.83%
8.82%
95.781
95.761
95.766
a/ Excepting 1 tender of $850,000.
Tenders at the high discount rate for the 121-week bills were allotted 74%.
Tenders at the high discount rate for the 2t>-week bills were allotted 16%
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
T
Accepted
25,605
19,648,465
13,875
35,525
38,365
26,880
968,935
19,630
8,725
34,810
20,965
860,960
450,000
$
25,605
5,714,265
13,035
35,525
38,365
26,880
47,135
19,630
8,725
34,810
20,965
175,280
450,000
$6,607,010
: $22,152,740
$6,610,220
$18,162,385
1,171,250
$19,333,635
$3,172,075
1,171,250
$4,343,325
: $17,817,875
:
922,365
: $18,740,240
$2,575,355
922,365
$3,497,720
2,306,785
2,006,785
:
2,200,000
1,900,000
256,900
256,900
:
1,212,500
1,212,500
$21,897,320
$6,607,010
: $22,152,740
$6,610,220
31,785
19,175,270
24,280
40,460
41,440
30,040
1,090,945
18,660
7,095
34,505
25,880
859,830
517,130
$
31,785
5,313,770
24,280
40,450
41,440
30,040
231,645
18,660
7,095
34,505
25,880
290,330
517,130
$21,897,320
$
$
:
:
:
:
:
:
:
yP e
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
1/ Equivalent coupon-issue yield.
NB-287
TREASURY NEWS _
Department of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 11 a.m.
May 23, 1989
STATEMENT OF
JOHN G. WILKINS
ACTING ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I am pleased to have this opportunity to present the views of
the Treasury Department with respect to the low-income housing
tax credit, including its efficacy in increasing and improving
the stock of low-income housing, the desirability of extending
the credit beyond its currently scheduled expiration at the end
of the 1989 calendar year, and the legislation the Chairman
recently introduced to modify the credit.
We strongly support the objective of the credit. However,
the Administration does not at this time support an extension of
the current credit or a modified credit beyond 1989 due to budgetary constraints.
In my testimony today I will briefly discuss the existing
low-income housing tax credit, and I will comment on H.R. 2319
(the "Low-Income Housing Credit Act of 1989"), legislation
recently introduced by the Chairman. Finally, I will discuss the
budgetary impact of extending the credit — either in its present
form or as amended by H.R. 2319 — beyond its currently scheduled
expiration at the end of the 1989 calendar year.
I. CURRENT LAW
The primary tax benefits for low-income housing prior to the
Tax Reform Act of 1986 ("1986 Act") were the following: accelerated depreciation at 200 percent declining balance over 15
years, recapture of accelerated depreciation of low-income housing phased out after 100 months, expensing of construction period
interest and taxes, and 5-year amortization of certain rehabiliNB-288
-2tation expenditures. These accelerated deductions resulted in
large tax reductions for owners of low-income housing projects.
Although certain tax-exempt bond financing also was nominally
directed at low-income rental housing, the income limits were
well above the poverty line and only 20 percent of tenants had to
meet the income restrictions. According to a 1986 General
Accounting Office study, that resulted in most bond-assisted
projects benefiting moderate- and high-income households.
Under current law, the low-income housing tax credit is
allowed for certain expenditures with respect to qualified lowincome residential rental housing, but only to the extent that
expenditures are for low-income units. Expenditures eligible for
the credit include some or all of the taxpayer's depreciable
adjusted basis with respect to the costs of new construction and
certain rehabilitations, as well as the costs of acquisition of
existing buildings not placed in service within the last 10 years
and not subject to a 15-year "compliance period" described below.
The credit for any low-income building generally is limited
to the credit authority allocated to that building by a designated State or local agency. State and local agencies may
authorize credits each year subject to an annual credit volume
limitation of $1.25 per resident, 10 percent of which must be set
aside for projects syndicated by qualified tax-exempt organizations. State and local agencies may not carry unused credit
authority from one year to the next and may make allocations only
through the 1989 calendar year. In 1989, the total State credit
allocation authority is approximately $325 million. A credit
allocation is not required, however, if the building is substantially financed with the proceeds of tax-exempt multifamily
housing bonds subject to the State's private activity bond volume
limitation of $75 per capita.
Although the low-income housing credit generally is scheduled
to expire for property placed in service after December 31, 1989,
certain property placed in service by 1991 may continue to qualify for the credit. This is because the Technical and Miscellaneous Revenue Act of 1988 permits a building to be placed in service within 2 years from the year in which the credit authority is
received, provided that (1) the building is part of a project in
which the taxpayer's basis at the end of the allocation year is
more than 10 percent of the reasonably expected basis for the
project, and (2) the building involves either new construction or
substantial rehabilitation.
The credit is. claimed by owners of qualified low-income
buildings in equal annual installments, generally over a 10-year
period beginning with the year in which the building is placed in
service. The annual installments generally provide a discounted
present value equal to 70 percent of the expenditures eligible
for the credit. A smaller annual installment, sufficient to
maintain a discounted present value equal to 30 percent of
-3eligible expenditures over the 10-year credit period, is available for certain acquisition costs of existing buildings and for
most federally subsidized new buildings. For these purposes,
substantial rehabilitation expenditures are treated as a "separate new building," and "federal subsidies" are defined to include
tax-exempt financing and below-market federal loans.
The credit generally is available only with respect to
housing units serving low-income tenants. In addition, projects
must satisfy one of two minimum income criteria: (1) at least 40
percent of the units in a project must have restricted rents and
be occupied by households having no more than 60 percent of area
median gross income, adjusted for family size; or (2) at least 20
percent of the units in a project must have restricted rent and
be occupied by households having no more than 50 percent of area
median gross income adjusted for family size. Gross rents on
qualifying low-income units generally must not exceed 30 percent
of the income limitations, also adjusted for family size. However, certain exceptions, such as a reduction in the percentage
of units set aside for low-income tenants, are provided where
taxpayers elect to satisfy a stricter requirement and significantly restrict rents on low-income units relative to other
residential units in the building (the "deep-rent skewing"
set-aside).
While the credit is claimed over a 10-year period, buildings
must comply with the low-income housing requirements for a period
of 15 years. If, during this compliance period, a building fails
to comply with the applicable requirements, or the taxpayer disposes of the building, the taxpayer will normally have to recapture the credit. Noncompliance or disposition within the first
11 years could result in recapture of one-third of the credit
amount, while recapture thereafter would be less.
Although credits generated by passive activity generally are
limited to tax liability attributable to passive activity income,
investors receiving the low-income housing credit are deemed to
be active participants and, thus, the low-income housing credit
may offset additional tax liability on up to $25,000 of nonpassive income. This additional amount phases out ratably as an
investor's adjusted gross income increases from $200,000 to
$250,0J0, instead of phasing out over the general $100,000 to
$150,000 income range. Similarly, although the at-risk rules
apply to the low-income housing credit, the rules for "qualified
non-recourse financing" are substantially relaxed.
II. DISCUSSION
The purpose of the low-income housing tax credit is to
increase the stock of low-income housing in the United States.
Indeed, the Treasury Department believes that the low»-income
housing tax credit represents a significant improvement over the
tax benefits for low-income housing that existed before the 1986
Act. Congress enacted the low-income housing tax credit as part
-4of the 1986 Act because the several tax preferences to encourage
low-income housing under prior law were considered to be inefficient and not coordinated. The preferences were ineffective in
providing affordable housing for low-income individuals and the
amount of tax subsidy was not directly related to the number of
low-income households served. There were no incentives for
recipients of tax subsidies to provide more than the minimum
amount of low-income units. Nor were there any direct incentives
to limit rents.
According to preliminary data compiled by the National
Council of State Housing Authorities ("NCSHA"), it is apparent
that credit utilization has increased in each year of the
program. Allocated credits as a percentage of all credits
available under the overall credit cap have increased to 67
percent in 1988 from 19 percent in 1987. NCSHA projects that
this allocation percentage will increase to 93 percent in 1989.
This increase in allocation percentages not only reflects
increased awareness of the program by developers, but also 1988
amendments to the Tax Code liberalizing allocation rules to
permit allocations for projects where only 10 percent of the
anticipated project costs have been incurred. This implies that
for many projects, credit allocation precedes the placement into
service of housing units by as much as 2 years. The potential
exists, therefore, for credit allocation to exceed final credit
utilization if planned units are not placed into service. In
1988, almost 48 percent of the credits allocated were "carried
over" for utilization in later years.
Based upon incomplete NCSHA data for 1988, credits were
allocated to projects expected to provide more than 85,000
low-income housing units at an average credit per unit of over
$25,000 over a 10-year period. Approximately 90 percent of all
units in projects receiving credit allocations are anticipated to
be occupied by low-income residents.
The Treasury Department is committed to ensuring that tax
benefits are used in a cost-effective manner. Thus, while we do
not support an extension of the credit for budgetary reasons, we
also have five other areas of concern regarding the effectiveness
of the credit to increase the low-income housing stock.
First, the low-income housing stock may be increased by
targeting the credit to new construction and substantial rehabilitation. Preliminary data for 1988 suggest that approximately 20
percent of the credit-assisted housing units represent acquisitions of existing housing stock. Providing a credit for construction and rehabilitation clearly increases the low-income
housing stock as opposed to simply providing an incentive for the
transfer of ownership.
Second, as Treasury has previously testified, the low-income
housing credit provides no incentive for maintenance. If units
-5receiving the credit are rented at below-market rental rates,
landlords could allow the projects to deteriorate substantially
without losing tenants. This would lead to an erosion of the
low-income housing stock in the long run. An incentive for the
maintenance of low-income units could be provided by reducing the
credit percentage available when the building is originally
placed in service from 70 percent and allowing a landlord subsequent credits for documented expenditures for maintenance of up
to some specified percent of the original cost.
Third, imposing more restrictive ceilings on the income
requirements for low-income units may lead to a greater increase
in the stock of low-income housing, while there is limited
empirical evidence, a study of Federal housing incentives in the
1960s and 1970s found that about 35 percent of government-subsidized low-income housing units were not offset by reductions in
market-supplied housing, and thus represented a net increase in
the supply of housing. The study found that subsidies for
moderate-income housing resulted in no statistically significant
long-run increase in housing supply. Preliminary NCSHA data for
1987 indicate that most tenants in low-income credit buildings
are in the highest category — incomes of 60 percent or less of
area median income. This suggests that the more a program
focuses benefits on the lower end of the income distribution, the
more apt it will result in an increase in the stock of low-income
housing and not just a substitution of one housing unit for
another.
Fourth, the low-income housing credit may not lead to housing
of a quality or in a location that is best for low-income individuals. For example, low-income housing property may not be
located near jobs or public transportation that low-income individuals would value. This suggests that the low-income housing
credit may not be the most efficient means of subsidizing lowincome housing. Rental housing vouchers may be more efficient,
because they allow low-income individuals to live in buildings
whose characteristics they value the most. The voucher program
is subject to periodic review by Congress and the Department of
Housing and Urban Development, an agency that has more expertise
in the housing area than does the Internal Revenue Service.
Fifth, the cost of providing the credit may increase substantially over time since all low-income housing credits are not
subject to the credit allocation. For example, investors can
avoid the cap on low-income housing credit allocations by using
the 30 percent credit in conjunction with tax-exempt bond financing. If, as expected, the demand for low-income housing
credits causes credit caps to be reached, investors may choose
the 30 percent credit combined with tax-exempt bond financing to
circumvent the cap. Imposing a specific cap on the use of the 30
percent credit in combination with tax-exempt bond financing
would limit the potential cost.
-6III. H.R. 2319
H.R. 2319 proposes to extend the credit permanently while
modifying certain provisions. The bill retains the basic outline
of the current credit, by permitting a 10-year tax credit for the
construction, rehabilitation, and acquisition costs of rentrestricted housing provided to low-income families. Within that
basic framework, however, the bill would make a number of significant changes.
In order to encourage owners to keep units in low-income
housing use, the bill limits the ability of owners benefiting
from the credit to convert or transfer low-income housing for
nonlow-income use. As a condition of being allocated the credit,
owners would be required to execute with the State housing credit
agency an extended low-income housing "commitment" to maintain a
specified percentage of the project as low-income housing for an
"extended use period" of 30 years. This commitment would be
recorded and binding upon the owner's successors. If the owner
desired to convert or transfer low-income units for other use
after the compliance period, the owner generally would be
required first to give the agency a 1-year period to locate a
buyer willing to pay an amount no less than the low-income
portion of the sum of (1) the outstanding debt balance, plus
(2) "adjusted investor equity" (the original gross equity
invested in the project, increased annually by the CPI, not to
exceed 5 percent annually), plus (3) additional capital contributions, less (4) cash distributions. The specific provisions of
this commitment, mechanisms for its operation and enforcement,
and effects of noncompliance are all unclear. Moreover, extending the low-income housing commitment is likely to make lowincome housing substantially less attractive from an investment
standpoint and consequently could reduce the low-income housing
stock in the long run.
Because the credit is a limited resource, and because demand
for it in 1989 appears to be approaching the full extent of its
availability (a trend that would continue were the credit
extended beyond 1989), the bill establishes several requirements
to encourage more efficient utilization. First, credit allocating agencies would be required to establish allocation plans,
essentially creating "ranking" systems for awarding credits.
Second, credits would not be allocated beyond the extent necessary to ensure each project's financial feasibility (considering
the sources and uses of funds and total financing contemplated
for the project, as well as anticipated tax benefits). Third, no
credits would be available for acquisitions not involving "substantial rehabilitations" defined as expenditures exceeding
$3,000 per low-income unit. These provisions of the bill would
improve the effectiveness of the credit.
The bill also includes a variety of additional provisions
that improve the feasibility of managing and operating low-income
-7housing projects, increase the availability of the credit, and
remove other limitations on the use of the credit. Most of these
are useful clarifications but some may have limited value. For
example, the bill would permit taxpayers to treat their adjusted
gross income as fixed at the outset of a low-income housing
investment for purposes of the $25,000 exception to passive loss
limitations. Such a provision would permit otherwise ineligible
high-income taxpayers to shelter nonpassive income. Given the
apparently high use of the credit, this deviation from a general
tax rule would appear to be unnecessary.
IV. CONCLUSION
The Administration does not support an extension of the lowincome housing credit at this time due to its budgetary constraints. Although the Administration supports the objectives of
the low-income housing credit, we must carefully weigh competing
needs and existing programs in light of the budget deficit. The
Administration's budget includes substantial direct expenditures
for low-income housing.
Mr. Chairman, that concludes my formal statement. I will be
happy to answer questions you and Members of the Subcommittee may
wish to ask.
REVENUE IMPACT OF ALTERNATIVE PERIODS OF
EXTENSION FOR THE LOW-INCOME HOUSING CREDIT
One-Year Extension
Two-Year Extension
Three-Year Extension
Four-Year Extension
Five-Year Extension 1/
1990
Fiscal Year
1991
1992
1993
(In billions of dollars)
-0.1
-0.1
-0.1
-0.1
-0.1
-0.2
-0.2
-0.2
-0.2
-0.2
Department of the Treasury
Office of Tax Analysis
-0.3
-0.5
-0.5
-0.5
-0.5
-0.3
-0.6
-0.8
-0.9
-0.9
1994
1990-94
-0.3
-0.7
-0.9
-1.1
-1.2
-1.2
-2.1
-2.6
-2.8
-2.9
May 23, 1989
1/ Over the 1990-1994 budget period, the revenue impact of a permanent
extension is equivalent to that of a five-year extension.
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
Speech
by the
Honorable Robert R. Glauber
Under Secretary of the Treasury for Finance
before the
Financial Services Council
May 23, 1989
Washington, D.C.
Good morning.
I am very pleased to be here with you today to discuss the
U. S. Treasury's viewpoints with respect to the need for change
in the structure of our nation's financial institutions and
markets.
Professional students of this subject have long been aware
of the existence of certain shortcomings in our nation's
financial marketplace — problems that in recent years have
become a part of the daily diet of the news-consuming public.
Hardly a day now passes without some reference to the
difficulties of the thrift industry and its required
restructuring; bank failures in the late 1980s that reached
record levels; the Farm Credit System's ongoing recovery from
near insolvency; certain Third World debtor nations desperately
seeking relief; or, finally, the unbridled pursuit of personal
gain by a few that has seriously tainted the reputations of Wall
Street and LaSalle Street.
To discuss all of these issues would clearly require more
time than available to me today. Accordingly, I will focus my
remarks more narrowly on an issue of most immediate concern to
you, that is, the proper structuring and range of activities to
be permitted to financial intermediaries.
But before I do, let me emphasize that the Treasury's top
priority in financial restructuring is passage of the thrift
industry legislation now before Congress. In this respect, I
thank all of you who have strongly supported the Administration's efforts to resolve the thrift crisis, and I hope you
continue to do so until enactment of the legislation.
As you know, a critical element of the Administration's
thrift plan is its approach to financing, where private funds
from the S&L industry are off-budget and Treasury funds are onbudget. There are those who wish to put all $50 billion onbudget but waive the resultant breach of Gramm-Rudman. The
reason is clear — to eviscerate the main pillar of budget
discipline and then nominate other "worthy" causes for similar
NB-289
2041
2
treatment. The Administration will strongly oppose this effort.
And let us not forget that the cost of delay in funding
resolution of the thrift crisis is increasing at more than $10
million a day.
Now, let us take a look at where we need to go in the
future.
The Costs of Inefficient Financial Structuring
Conceptually speaking, financial intermediaries are
essentially portfolio managers. In effect, they invest their
assets in an array of financial products and activities according
to their rate of return, their degree of acceptable risk, their
competitive advantage, the structure and cost of their funding,
and so on. For financial intermediaries to accommodate market
dynamics, to remain profitable in the face of changes in these
variables, their portfolios must be actively managed. Management
must therefore have the discretionary ability to diversify
investments and funding sources as dictated by a changing
environment. Clearly, if all financial services firms were able
to adjust in this way effectively, there would be no issue of
financial institutions restructuring and reform. But this is not
the case.
Indeed, the central problem facing the U.S. financial
services industry today is that long-standing regulation has
prevented the greatest number of financial institutions from
structuring their portfolios in the most efficient and profitable
way possible relative to their competitors, in both national and
international markets.
As a case in point, studies have shown that underwriting and
dealing in securities could substantially reduce risk to banking
organizations for two reasons. First, securities underwriting is
no more risky — and probably less risky — than commercial
lending. Is a one hour underwriting exposure riskier than a 30year loan? Second, overall earnings variability is reduced when
securities underwriting is combined with commercial lending.
Furthermore, by attracting new capital, enhancing the value of
the franchise, and stemming the erosion of assets, banks will be
1.
Institutions
in a Insured
stronger Depository
position to
meet the challenges of the future.
To date the barriers to diversification have been most
notable, and most costly, with respect to the nation's federally
insured depository institutions. In the wake of the widespread
bank failures following the Great Depression, government policy
favored increased regulation of the nation's depository
3
institutions. A system of federal deposit insurance was
established; closer federal oversight was institutionalized;
specialization of asset and liability portfolios was imposed; and
geographic diversification was strictly limited. Rather than
diminish over time, the regulation of insured depositories
expanded, so that by the early 1970's managements had effectively
lost discretionary authority over essential aspects of their
institutions, including products, pricing, organizational form,
operating standards, and location.
It was the inability of federally insured depositories to
adjust to market dynamics commencing in the late 1960's, and
extending through today, that made it progressively more obvious
that reform was required. But it is equally clear that the model
of the thrift industry in the early 1980's — with its lack of
private, up-front capital and ill-supervised reform — is not the
model to be followed as we move forward. Although the legacy of
that "experiment" will be with us for some time to come, a
"silver lining" must be the lessons learned for the critically
needed, and broader reforms, we must now pursue.
2. Benefits to Consumers
More effective financial restructuring will also redound to
the benefit of consumers. For consumers, whether states,
institutions, or individuals, are the direct or eventual
beneficiaries of our reform efforts — to offer them the broadest
range of quality services at the most reasonable cost, consistent
with preserving the U.S. financial system. For example, in the
securities area, municipalities have been denied a broader
choice of municipal revenue bond underwriters, corporations have
not been able to have banks issue their commercial paper, and
individuals were limited as to providers of mutual funds.
Businesses and consumers can only benefit from the conveniences
of "one stop shopping", while service providers gain from the
economies of scale and earnings stability associated with a broad
product mix.
3.
International Considerations
The new and present reality of global financial markets
also demands significant change in the financial landscape of the
United States. American financial intermediaries need the
freedom to become effective competitors on a sustained basis in
this global marketplace. Permitting the common management of a
broad array of financial services and products will allow our
domestic institutions to meet the foreign competition both here
and abroad. This can only help U.S. firms stem the loss of
customers to less regulated foreign firms, and, in so doing,
help prevent the erosion of the primacy of U.S. capital markets.
For purposes of illustration, look at foreign banking
structures. In France, West Germany, and the United Kingdom, a
4
banking organization can engage, directly or indirectly, in
underwriting and dealing in securities and other full service
investment banking activities; engage in unlimited insurance
activities through subsidiaries; engage, directly or indirectly,
in brokering, developing and managing real estate; and invest in
industrial companies (and vice-versa). The other European
countries are variations on this theme — a theme which may come
to dominate international finance as EC '92 approaches.
For our part, we have witnessed the disappearance of U.S.
banking organizations from the world's "top 10" list over the
course of two decades, dropping from seven banks on the list in
1970, to three in 1980, and none currently. The U.S. also underperformed other major industrial countries in terms of the growth
of banks' assets relative to the growth of nominal GNPs over the
same approximate period of time. Other forces were also at work,
including the change in exchange rates and the more concentrated
structure of banking abroad compared to the U.S. But the effect
of the restrictive range of activities permitted U.S. banks is
undeniable.
The message from all of this is loud and clear: sooner or
later we must restructure, and in a way that promotes our
international competitive posture without undermining the safety
and soundness of our financial system.
Guidelines for Financial Reform
Financial intermediaries in the future should be able to
offer a wide range of financial products and services, moving
away from the excessive segmentation of institutions that is a
relic of the past. And it should be increasingly accomplished
through a streamlined operational structure, functional
regulation, and systemic safeguards.
1. Streamlined Operational Structure
As all of you know, the prior Administration proposed that
financial reform be accomplished by permitting holding companies
to establish subsidiaries to engage in non-traditional
activities, rather than by allowing banks to engage in such
activities directly. It was felt that this would:
— better insulate the insured depository, and the
deposit insurance fund, from the perceived risks;
reduce concerns that the lower-cost funds of the
depository might be used to "subsidize" competition
with non-bank firms; and
— advance the goal of functional regulation, while
making it easier to define and enforce firewalls.
5
This approach could well streamline institutional corporate
structures and allow for the broadening of old powers and the
addition of new ones with minimal dislocation.
2. Functional Regulation
Progressive financial restructuring needs to be matched by
prudent and equitable regulation. Functional regulation avoids
the pitfalls that might arise if different service providers
engage in similar activities under dissimilar regulatory regimes.
Similar activities, wherever located in a financial organization,
should be made subject to similar controls and standards.
3. Safeguards and System Stability
Prudence also requires that insured depositories be
insulated from the higher-risk activities of broad-based
financial services firms. This can be accomplished through the
establishment of appropriate safeguards, for example, along the
lines of those included in last year's Senate legislation
(S. 188 6). Such safeguards, endorsed by all the regulators,
included a strong firewall between the bank and its securities
affiliate, greater disclosure and supervision by the appropriate
regulatory agencies, and stronger penalty and enforcement
provisions. But it is equally important that our quest for
safety through firewalls not be allowed to effectively
"suffocate" the vitality of the "new" financial institutions we
need to create. The overreaching of last year's House of
Representatives' versions of financial reform illustrate this
form of Pyrrhic victory.
There may be some types of activities that require tighter
firewalls or may be simply off-limits for insured depositories.
But I believe that allowing financial intermediaries to offer a
wide array of products and services subject to appropriate
safeguards is consistent with safety and soundness and the
protection of depositors and taxpayers. And risk-based capital
standards will put private capital on call first. Indeed, we
have absolutely no desire to extend federal guarantees — and
expose taxpayers — unnecessarily. However, the advent in the
U.S. of broad-based financial services providers is likely to
enhance, not jeopardize, the safety and soundness of the
financial system. This is so because these organizations would
gain the opportunity to compete effectively, to diversify
portfolio risk, and to evolve with the marketplace.
Conclusions
This need for reform is, of course, not unique to banking
organizations (or Glass-Steagall) but affects the broad range of
6
financial intermediaries facing the competitive requirements of
the international marketplace.
Of course such an improved structure will only be as useful
as the resultant performance of the institutions affected.
Purveyors of financial services are aware more than ever before
that the marketplace champions achievement. I would encourage
you all to continue your ongoing review of the contributions
different operational sectors of your business make to overall
performance, so you can fine tune your efforts even further.
Washington alone is not the answer.
Be assured that Treasury has no intention of rushing forth
to support financial reform legislation unless it meets the
requirements and challenges I have outlined. But Treasury must
also know directly what sectors of the financial services
industry favor legislative reform. Last year's fragile
coalition was hard enough to assemble, and there are certainly
those who would prefer not to see the Senate's financial
modernization bill put forward again. Nevertheless, these issues
will not disappear, for they represent an evolutionary outgrowth
of the marketplace's requirements for financial services. They
also offer an opportunity to reassert the prominence of American
financial institutions in the world at large. Strong momentum
has been generated. I truly hope it can continue.
Thank you for your kind attention.
TREASURY NEWS „
Department of the Treasury • Washington, D.c. • Telephone 566-2041
no
FOR RELEASE AT 4:00 P.M.
May 23, 1989
CONTACT:
Office of Financing
202/376-4350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$12,800 million, to be issued June 1, 1989.
This offering
will result in a paydown for the Treasury of about $2,000 million, as
the maturing bills are outstanding in the amount of $14,809 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Tuesday, May 30, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,400
million, representing an additional amount of bills dated
September 1, 1988, and to mature August 31, 1989
(CUSIP No.
912794 SK 1), currently outstanding in the amount of $16,692 million,
the additional and original- bills to be freely interchangeable.
182-day bills for approximately $6,400 million, to be dated
June 1, 1989,
and to mature November 30, 1989 (CUSIP No.
912794 TF 1 ) .
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing June 1, 1989.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities, to
the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them. Federal
Reserve Banks currently hold $2,353 million as agents for foreign
and international monetary authorities, and $4,298 million for their
own account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
NB-290
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series),
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
10/87
tenders.
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations of the Secretary of the Treasury
shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
of the circulars, guidelines, and tender forms may be obtained
10/87
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.
TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASF UPON DELIVERY
Expected at 10 A.M. EDT
Statement By
The Honorable David C. Mulford
Under Secretary of the Treasury
for International Affairs
Before the
Subcommittee on International
Development, Finance, Trade and Monetary Policy
Committee on Banking, Finance and Urban Affairs
United States House of Representatives
May 24, 1989
Mr. Chairman and Members of the Committee, I appreciate the
opportunity to appear before you today to discuss United States'
participation in the increase in resources of the Inter-American
Development Bank and in the Enhanced Structural Adjustment
Facility of the International Monetary Fund.
INTER-AMERICAN DEVELOPMENT BANK (IDB)
I am happy to report that after three years of negotiations,
agreement has been reached on a proposal to increase the
resources of the Inter-American Development Bank. The agreements
reached in the negotiations will help accelerate the transformation and revitalization of the IDB already begun by President
Iglesias. We are now seeking your support for legislation to
authorize United States participation in the resource increase.
Importance of Latin America
This Administration is acutely aware of the problems in
Latin America and of the region's significant commercial,
cultural, and strategic ties to the United States. The
Administration has acted quickly to come to the aid of beleaguered Latin American nations, by reshaping the debt strategy,
and now by reaching agreement on a replenishment of the IDB. A
strengthened and reorganized Inter-American Development Bank can
provide much needed funding and leadership in helping restore
sustained growth in the countries of Latin America and the
Caribbean.
Latin American countries continue to face serious economic
and financial problems. In the 1970's Latin America relied too
heavily on external borrowing.
Although some countries achieved
significant growth in this period, many did not make effective
use of the borrowed resources. Without a broad economic base,
and with heavily managed economies, these countries were not
prepared to adjust to the adverse developments of the early
NB-291
1980's.
- 2 -
Many Latin American countries now realize they need to adopt
appropriate policies that will enable their economies to function
efficiently and to produce growth and better lives for their
people. Particularly since 1985, several countries have
implemented important structural reforms with the help of the
international financial institutions. These countries have
privatized government-owned industries, liberalized their trade
regimes, reformed tax systems, and pursued market-oriented
pricing.
However, much remains to be done to help Latin American
economies function efficiently and effectively — and in the
best interest of Latin Americans themselves. The reforms should
be implemented consistently: realistic exchange rates must be
maintained and public sector deficits must be further reduced.
In addition, attention needs to be focussed on other areas,
particularly measures to attract new investment and encourage the
return of flight capital.
Some countries have made a good beginning. Others must
strengthen their efforts or even make a fresh start. The IDB can
play a critical role in working with these countries to initiate
major policy reforms.
Reforming the IDB
At the beginning of his tenure in March 1988, President
Iglesias1 committed himself to reforming the IDB to improve the
quality and effectiveness of its lending. As part of this effort
he has:
adopted measures to strengthen programming and loan
review;
established a self-financing, early retirement program
to encourage needed personnel changes;
initiated an evaluation of the Bank by the High-Level
Review Committee, a group of prominent outside experts
which included a number of former Latin American finance
ministers; and
launched task forces on programming, operations, and
administration and personnel to examine the IDB's
policies, practices, and structure.
Implementation of the recommendations of the High-Level
Review Committee and the task forces will further improve the
quality of Bank's operations and its overall effectiveness. The
recommendations have been accepted by President Iglesias who has
- 3 pledged to implement them. Once effected, the recommended
actions will need to be supported by the Bank's Board of
Directors. It is important that the Board members support these
changes and truly represent the new policy thinking of leading
Latin American governments. It is also important that Latin
governments follow through on their commitments to reorganize and
change the policies in a replenished IDB.
IDB-7 Agreement
The Seventh Replenishment (IDB-7) Agreement reached during
the IDB's annual meeting in March, marks the key implementation
phase of the IDB's reform efforts. Funds to make the new IDB a
more effective contributor to solving Latin America's problems
can now be injected into the Bank as the reform efforts move
forward. Governors proposed increases of $26.5 billion in the
IDB's capital and $200 million in the Fund for Special Operations
(FSO). These increases will finance $22.5 billion of lending
over the four-year period 1990 to 1993. This will be a significant increase in lending — about double actual Sixth
Replenishment (IDB-6) levels. While up to 65 percent of IDB-7
lending could go to the most advanced Latin American countries,
3 5 percent will be reserved for the smaller countries of Latin
America and the Caribbean. All the concessional FSO lending will
go toThe
theU.S.
poorest
countries.
share
of the capital increase is $9.2 billion of
which 2.5 percent or $229.3 million will be paid-in. Our share
of the FSO replenishment is $82.3 million. The U.S. would thus
be providing 34.7 percent of the capital increase and 41.2
percent of the FSO replenishment. Our payment for paid-in
capital subscriptions and FSO contributions under IDB-7 would
require $78 million of budget authority annually compared to $131
million under IDB-6.
The IDB-7 replenishment agreement incorporates a number of
significant decisions about Bank operations over the next few
years that complement the actions already taken to improve the
Bank. The IDB-7 agreement proposes:
adopting a loan approval mechanism that will promote
improved loan quality and give greater decision-making
authority to non-borrowing countries;
strengthening the country programming process to ensure
that Bank lending will support policy reform and self
sustaining growth;
providing up to 25 percent of IDB-7 lending for sector
loans; and
- 4 -
committing more staff and financial resources to
strengthening the technical and institutional capabilities of countries in environmental management and
conservation of natural resources.
I would like to elaborate further on the significant
elements of the IDB-7 agreement and the complementary task force
recommendations:
Loan Approval Mechanism - The intent and design of the new loan
approval mechanism is to foster a Board consensus in support of
loans and thereby improve loan quality. The mechanism allows for
a delay of up to 12 months in the consideration by the Board of
Directors of a loan from capital resources (the U.S. has a veto
over FSO loans). Within specified limits, the President of the
IDB could reduce this delay period to seven months. The delay
periods will be used by Bank management to remedy those problems
that prompted objections to the loan so that it can be supported
by the entire Board of Directors.
Country Programming - A strengthened country programming process
is a critical element in improving the quality of IDB lending.
The country programming process and the Bank's policy dialogue
with each country will result in a coherent and comprehensive
framework for Bank operations. As outlined in the replenishment
agreement, the IDB will analyze potential investment areas in
each country in light of the adequacy of macroeconomic and
sectoral policies. Therefore, the Bank's entire lending program,
project as well as policy-based loans, will support needed policy
reforms. The task forces have recommend ways to reorganize
operating departments to implement effective country programming.
Sector Lending - During the IDB-7 period the Bank will begin a
program of sector lending. Fast-disbursing, policy-based lending
is new to the IDB. They will not undertake broad-based structural adjustment lending but will focus instead on loans aimed at
improving the economic efficiency of specific sectors, such as
agriculture. For at least the first two years of the replenishment, all sector loans will be cofinanced with the World Bank.
Environment - In addition to committing more resources to
environmental management and establishing a senior line unit to
strengthen its own environmental assessment capabilities,
the task forces recommended that the Bank improve its environmental action through other means as well. These include enhancing
Bank relations with non-governmental organizations, improving its
dissemination and collection of environmental information and
hiring a core group of environmentalists to support technical
staff.
- 5 Lower-income Beneficiaries - As in its last two replenishments,
the Bank will seek in the seventh replenishment to ensure that 50
percent of its lending program benefits lower income groups.
This includes sector lending where it is not always possible to
precisely ascertain the effect of a loan on various groups.
Nevertheless, the Bank will undertake to ensure that low-income
persons benefit from sector loans and that potential adverse
effects are minimized.
IDB and Debt
A strengthened and reformed IDB will be in a position to
make its contribution to helping resolve the economic and social
problems facing Latin America. As far as the debt problem is
concerned, the IDB's role at this point will be to encourage its
borrowers to adopt policies that improve economic performance,
stimulate new foreign investment, increase domestic savings, and
encourage the repatriation of flight capital. Private sector
initiatives and the development of market based economies should
be emphasized.
Next Steps
The member countries of the IDB have charted a course for
the Bank over the next five years. It is now time to act to
implement the IDB-7 agreement and the recommendations of the
IDB's task forces. We will be following this closely as the
pace of our subscriptions could be affected by the pace and
effectiveness of their implementation.
We must get the new Bank up and operating. This will not be
an easy task. It will require that all members work cooperatively and enthusiastically with President Iglesias and Bank
management.
For our part we can support the Bank by formally agreeing to
the capital increase and the replenishment of the Fund for
Special Operations. Neither can go into effect without our
agreement which requires prior Congressional authorization.
We are seeking authorization legislation this year although
subscription and contribution payments for IDB-7 are not due
until October 1990 (U.S. FY 1991 budget). The primary reason for
doing so is to demonstrate the United States commitment to the
IDB and our support for the increase in the Bank's resources. In
addition, our early agreement to the replenishment will allow
other members to begin"their approval processes and will
facilitate the implementation of the IDB-7 agreement from January
1990.
- 6 I would urge you to act promptly to
to authorize United States participation
capital of the IDB and the replenishment
Operations.
ENHANCED STRUCTURAL ADJUSTMENT FACILITY
adopt the legislation
in the increase in the
of the Fund for Special
(ESAF)
For the world's poorest countries, the Administration is
seeking authorization to contribute $150 million to the Interest
Subsidy Account of the IMF's Enhanced Structural Adjustment
Facility (ESAF).
In recent years, the international community has adopted a
comprehensive approach to help the poorest countries, particularly those in Sub-Saharan Africa, to implement the structural
economic reforms which are essential for the increased growth and
development necessary to alleviate poverty and improve basic
human needs. This approach draws upon the collective efforts of
the IMF, World Bank, and official creditors.
The ESAF represents the centerpiece of the Fund's efforts
to address the plight of the poorest countries. It was established in 1987 to enable the IMF to provide financial
assistance on concessional terms to the poorest countries
experiencing protracted balance of payments problems and prepared
to undertake multi-year economic reforms. It builds upon the
IMF's Structural Adjustment Facility (SAF), which was established
in 1986 in response to U.S. proposals to assist the low-income
countries adopt growth-oriented reforms. The ESAF is expected
to provide new resources totaling $8 billion to low-income
countries engaged in economic and structural adjustment. These
resources will supplement the roughly $2.5 billion remaining to
be disbursed under the SAF.
Let me underscore that the purpose of the ESAF is to promote
the adoption by low-income countries of the comprehensive
macroeconomic and structural economic reforms necessary for
sustained growth on the concessional financing terms consistent
with the longer term economic needs of these countries and their
ability to meet repayment obligations. Some mistakenly argue
that the purpose of the ESAF is to allow the IMF to clear its
arrears. However, only a handful of low-income countries have
arrears to the Fund and the vast bulk of ESAF resources will be
used in the other poorest countries. Moreover, even the few
low-income countries receiving ESAF monies as part of efforts to
normalize relations with the international financial community
will be required to adopt comprehensive structural reform
programs.
The ESAF, in conjunction with other IMF efforts, should
also make a substantial contribution towards alleviating poverty.
Poverty and the effects of IMF programs on the most needy are
- 8 -
The United States is the only major industrial country that
has not yet contributed to the ESAF. The IMF is the central
monetary pillar of U.S. international economic policy and a key
policy instrument to advance our economic and security interests.
A modest contribution to the ESAF would go far to maintain our
credibility in the IMF and provide the United States with a voice
on issues of central importance to our national interests and the
well-being of the world economy. It would help many of the lowincome countries to adopt necessary growth-oriented reforms.
Many of these countries, including Pakistan, Bolivia, Zaire and
other key nations in Sub-Saharan Africa are of significant
strategic importance to the United States.
Countries contributing to the ESAF are expected to provide
loans of about $8 billion. The United States is one of the very
few major member countries not providing loans. We have
consistently indicated that we could not provide loans due to
budget constraints, and we are not now proposing any U.S. loans
to the ESAF. The necessary size of such loans would, in my view,
be prohibitive.
We should, however, contribute modestly to an account which
will help subsidize ESAF loans to developing countries. The
proposal before you is to make a $150 million contribution to an
Interest Subsidy Account of the ESAF which would make its loans
concessional. It is critical that loans from the ESAF be
provided on realistic terms to these low-income countries.
Appropriation of the full U.S. contribution is being sought
in FY 1990 to provide the IMF with adequate assurance that
resources will be available to finance the interest subsidy.
However, actual disbursements from the U.S. contribution would
occur over the period through U.S. FY 2001, roughly the final
date for interest payments on ESAF loans. Consequently, actual
budget outlays each year will be small and would not exceed $3
million in FY 1990, with the bulk of the outlays occurring in the
latter part of the 12-year period.
Such a contribution would be cost-effective. The U.S.
contribution represents only one and one-half percent of the
total resources being provided to the facility, in comparison
with our IMF quota share of some 20 percent. Moreover, the
amount of resources the ESAF can bring to bear in the poorest
countries often far exceeds the amounts that can be mobilized
through our bilateral assistance.
For these reasons, I urge you to support enactment of
legislation providing for a contribution by the United States of
$150 million to the Interest Subsidy Account of the IMF's
Enhanced Structural Adjustment Facility.
- 7 taken into account in developing IMF programs. Countries are
encouraged to include in their programs measures to mitigate the
effects of poverty on the most needy segments of the population.
The United States in particular has encouraged the Fund and
member countries to enhance the information base to assess
poverty and improve understanding of the effects of IMF policies
on low-income groups, so as to find ways to alleviate poverty
without impeding adjustment.
The ESAF is catalyzing significant additional resources for
the low income countries through its association with the Policy
Framework Paper (PFP) process. Under this process, the two
institutions work in a mutually constructive manner in helping
resolve the special problems in the poorest of the developing
countries. Member countries eligible to use the SAF and ESAF
develop a medium-term PFP — a joint document of the Fund and
Bank — outlining their structural and macroeconomic reform
efforts and containing an assessment of their financing needs,
including possible IMF and World Bank financing. The Fund and
Bank are now conducting joint staff missions to prepare the PFPs.
The PFP process represents an historic step forward in
strengthening collaboration between the IMF and World Bank in
the low-income countries, a step which in our judgment should be
built upon to intensify collaboration for all members. Intensified collaboration between the IMF and World Bank has become
increasingly imperative in recent years as widespread recognition
has emerged that the macroeconomic and structural reforms
necessary for establishing a foundation for sustained growth
require the expertise of both institutions. Recently, IMF
Managing Director Michael Camdessus and World Bank President
Barber Conable have developed arrangements to strengthen
collaboration between the two institutions. The United States
welcomes this agreement and it is our sincere hope that these
arrangements will strengthen the ability of the Fund and Bank to
fulfill their central roles in the global economy and in the
debt strategy.
In support of the PFP process, the World Bank agreed to
earmark $3 to $3.5 billion of the Eighth Replenishment of the
International Development Association (IDA) for adjustment
programs related to PFPs. Substantial donor support is also
being catalyzed through co-financing, in particular for SubSaharan Africa under the Bank's Special Program of Assistance.
Furthermore, at the Toronto Summit, the Heads of State or
Government agreed to ease the debt servicing burdens of the
poorest countries undertaking internationally supported adjustment programs. The mechanisms to address these debt service
burdens have been developed by the Paris Club, the institution
responsible for rescheduling debt owed to official creditors, and
are working smoothly.
TREASURY NEWS .
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 23, 1989
'-'BR.'
CONTACT:
LARRY BATDORF
(202) 566-2041
Mav IJ
RECIPROCAL TAX EXEMPTIONS OF SHIPPING AND AIRCRAFT INCOME
The Treasury Department today announced further agreements
with India and St. Vincent and the Grenadines for the reciprocal
tax exemption of income from international shipping and aviation
and with Peru for the reciprocal tax exemption of income from
international shipping. The exchanges of notes are in accordance
with section 872 and 883 of the Internal Revenue Code.
The
exemptions apply for taxable years beginning on or after January
1, 1987.
Copies of the notes with Peru and St. Vincent and the
Grenadines are available from the Office of Public Affairs, room
2315, Department of the Treasury, Washington, D.C. 20220. The
notes with India will be released when they arrive in Washington
and have been processed by the Department of State.
The income exempted from tax in the notes with India is
income from the international operation of ships and aircraft,
including income from the leasing of ships and aircraft on a full
basis.
It also includes income from the leasing on a bareboat
basis of ships and aircraft used in international transport,
income from the leasing of containers and related equipment used
in international transport, and gain on the disposition of ships
and aircraft provided in each case that the income or gain is
incidental to international operating income.
Revenue ruling 89-42 summarizes reciprocal tax exemptions of
income from international shipping and/or aviation with other
countries.
o 0 o
NB-29 2
TREASURY NEWS 1&
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
May 23, 1989
DAVID C. MULFORD
Under Secretary for International Affairs
U.S. Department of the Treasury
DAVID C. MULFORD was sworn in as Under Secretary (International
Affairs) of the Treasury on May 23, 1989.
Since 1984, Dr. Mulford has been an Assistant Secretary
(International Affairs) of the Treasury. As Under Secretary for
International Affairs, he will continue in his lead role for
international economic policy formulation and implementation. In
particular, he will be responsible for exchange market policies
and will remain the U.S. G-7 Deputy with responsibility for
coordinating economic policies with other industrial nations. In
addition, he will maintain his key concentration on the
international debt strategy and will continue to focus on economic
relations with the newly industrializing economies, trade and
investment matters and preparations for the annual Economic Summit.
Prior to serving at Treasury, Dr. Mulford spent 20 years in the
international investment banking business. He served as Senior
Advisor at the Saudi Arabian Monetary Agency in Riyadh, Saudi
Arabia, as well as a Director of Merrill Lynch, Pierce, Fenner &
Smith (1974-1984); and Director of White, Weld, & Co., Inc.
(1966-1974). Dr. Mulford was a White House Fellow during 1965-66
and served as Special Assistant to the Secretary of the Treasury.
Dr. Mulford earned his doctorate from Oxford University in 1965
and his Master's degree from Boston University in 1962,
specializing in African Studies, and also attended the University
of Cape Town. He graduated from Lawrence University with a B.A.
(Cum Laude) in Economics in 1959. During his academic career,
Dr. Mulford held several fellowships and wrote two books, both
published by Oxford University Press.
He was born and raised in Rockford, Illinois. He is married,
has two children, and resides in Alexandria, Virginia.
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NB-293
TREASURYJMEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
:io
FOR IMMEDIATE RELEASE
May 23, 1989
J. French Hill
Appointed Deputy Assistant Secretary
For Corporate Finance
Secretary of the Treasury Nicholas F. Brady announced the
appointment of J. French Hill to serve as Deputy Assistant
Secretary for Corporate Finance, effective May 15, 1989. Mr.
Hill will serve as the principal advisor to the Assistant
Secretary for Domestic Finance on corporate economic and
financial issues.
Since October 1984, Mr. Hill was with Mason Best Company of
Dallas, Texas, and named a director in 1988. He was involved in
mergers and acquisitions and in corporate finance for the
company's clients and affiliates. Previously he had served on
then Senator John Tower's staff and on a subcommittee of the
Senate Committee on Banking, Housing, and Urban Affairs from 1983
to 1984. During the period 1979 to 1982, Mr. Hill was a banking
officer at InterFirst Bank-Dallas and the senior financial
analyst in the Corporate Planning and Investment Group of the
Bank's holding company.
In 1981, during a leave of absence from InterFirst, Mr. Hill
played a major role in creating PULSE, the Southwest's largest
shared automated teller machine network. He was responsible for
its planning, marketing, and financial coordination during the
start-up phase. Mr. Hill has also been a frequent lecturer on
mortgage finance and was a contributor to the Heritage
Foundation's Mandate for Leadership II (1984). He is also a
director of a number of business and philanthropic organizations,
including the Texas Lyceum Association and the Dallas Museum of
Natural History and Aquarium Association.
Mr. Hill, a native of Arkansas, is a graduate of Vanderbilt
University in economics (magna cum laude). He is married to the
former Martha McKenzie of Dallas.
NB-294
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-204
May 24, 1989
HOLLIS S. MCLOUGHLIN
Assistant Secretary of the Treasury (Policy Management)
and Counselor to the Secretary
On May 23, 1989 Hollis Samuel McLoughlin was sworn-in as
Assistant Secretary of the Treasury (Policy Management). He
was confirmed by the United States Senate for this position
on May 10, 1989 and appointed by President Bush on May 22,
1989. Mr. McLoughlin will also serve as Counselor to the
Secretary.
As Assistant Secretary (Policy Management) and Counselor to
the Secretary, Mr. McLoughlin will serve as the Senior
Advisor to the Secretary and overseer of the Executive
Secretariat. He will identify and manage policies covering
the full range of the Department's activities and will
coordinate departmental policies with the White House and
other executive branch departments.
Prior to joining the Department, Mr. McLoughlin was Managing
Director of the Taggart Group. Previously, he was an
Executive of Purolator Courier Corporation, most recently as
Senior Vice President (1983-1987); Chief of Staff for then
U.S. Senator Nicholas F. Brady (1982) and Administrative
Assistant to former Congresswoman Millicent Fenwick
(1974-1979). His prior business experience was as an
Account Executive with Benton and Bowles (1980-1982); and
Assosciate with William Sword & Co. (1979-1980).
Mr. McLoughlin received his B.A. in 1972 from Harvard
College. He was born July 4, 1950 to John Thomas and
Harriette Hollis McLoughlin of Princeton, New Jersey. He
resides in Summit, New Jersey with his wife, Caroline Bickel
McLoughlin and their daughter, Caroline.
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NB-295
TREASURY NEWS
Department of the Treasury • Washington,
• Telephone 566-2041
May D.c.
24, 1989
Charles H. Dallara
Assistant Secretary of the Treasury
for International Affairs
Charles H. Dallara was appointed by President Bush on May 22 to the
position of Assistant Secretary of the Treasury for International
Affairs. He was confirmed by the Senate to this position on
May 10, 1989. Dr. Dallara's responsibilities will cover a wide
range of international economic issues. These include exchange
rate policies, the international debt strategy, relations with the
newly industrializing economies, trade and investment issues, and
U.S. Government policy in the international financial institutions.
Since 1988, Dr. Dallara has been serving as Assistant Secretary of
the Treasury for Policy Development and as Senior Advisor for
Policy to the Secretary of the Treasury. Since 1984, Dr. Dallara
has also been the United States Executive Director at the
International Monetary Fund (IMF). From 1985 to 1988, he served
concurrently as Senior Deputy Assistant Secretary of the Treasury
for International Economic Policy. From 1982 to 1983, he was the
Alternate Executive Director at the IMF, and prior to this held a
variety of other positions at the Treasury.
Dr. Dallara received his Ph.D., M.A., and M.A.L.D. from the
Fletcher School of Law & Diplomacy, Tufts University, and B.A. in
economics from the University of South Carolina. He also served
as an officer in the U.S. Navy from 1970-74.
Dr. Dallara was born on August 25, 1948, in Spartanburg, South
Carolina, to Harry P. and Margaret Dallara. He is married to
Carolyn Gault Dallara, has two children, Stephen and Emily, and
resides in Falls Church, Virginia.
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NB-296
TREASURY NEWS _
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 24, 1989
CONTACT:
LARRY BATDORF
(202) 566-2041
LINDBLAD TRAVEL PLEADS GUILTY TO VIETNAM
EMBARGO VIOLATIONS
The Treasury Department today announced that on May 15,
1989, in the U.S. District Court for the District of
Connecticut, Lindblad Travel, Inc. (LTI), a Westport, CT travel
agency, pleaded guilty to a criminal information charging the
company with unlawfully arranging, promoting, and facilitating
a group tour and travel to Vietnam and Cambodia, in violation
of the Foreign Assets Control Regulations (FACR) and the
Trading with the Enemy Act (TWEA).
Lars-Eric Lindblad, president and CEO of LTI, told U.S.
District Judge T.F. Gilroy Daly that he personally made the
decision to book customers on a tour of Vietnam and Cambodia
scheduled to leave the United States on October 16, 1988,
knowing that the company did not have Treasury Department
permission and that he would be violating the law.
One of the customers booking the tour was an undercover
agent of the Customs Service. LTI canceled the October 16 tour
after Customs agents, armed with a search warrant, seized
evidence of the violation from the company.
The Treasury Department's Office of Foreign Assets Control
(FAC) administers and enforces the FACR, which imposes a
comprehensive economic embargo against Vietnam, Cambodia, and
North Korea and prohibits (with certain exceptions) all trade
and financial transactions by persons subject to U.S. jurisdiction with these countries and their nationals. The FACR
specifically prohibit U.S. persons from arranging, promoting,
or facilitating tours or travel to or within Vietnam, Cambodia
and North Korea without an FAC license. Travel by individuals
to and within these countries is not unlawful, and individuals'
travel-related transactions are authorized by the FACR.
The plea agreement, entered into May 15 by LTI and the
Department of Justice, follows a cooperative investigation by
FAC and the Customs Service working in conjunction with the
U.S. Attorney's Office. Under the plea agreement's terms,
NB-297
- 2 -
LTI agreed to forfeit $25,000 to the United States, the amount
it was to pay to the government of Vietnam for tourist
services. In addition, LTI faces criminal penalties of up to
$500,000 under TWEA. LTI refunded to its customers the
approximately $46,000 they paid to book the tour. LTI will
also refund to the Treasury Department the $4,410 fee paid by
the undercover agent and pay the court a $200 special assessment.
As part of the agreement, the government will not
prosecute Mr. Lindblad or any other officers or employees of
the corporation individually for their participation in the
offense. Each one who knowingly participated in the violation
was exposed to the maximum penalty of 10 years' imprisonment
and a $50,000 fine. The case was continued until June 14 for
sentencing.
The stipulation of facts also describes how Mr. Lindblad
was quoted in newspaper and radio press reports as saying that,
despite the government's failure to grant the company a license,
he intended to "promote a little civil disobedience" and conduct
the tours to Vietnam anyway. After the plea agreement was
signed, the U.S. Attorney responded to such quotes by stating
that "disagreement with a law is no excuse for breaking it."
Salvatore R. Martoche, Assistant Secretary of the Treasury
for Enforcement, said, "The guilty plea by Lindblad Travel
represents a major victory in the Treasury Department's on-going
efforts to enforce vigorously the prohibitions against promoting,
arranging, and facilitating travel tours to Vietnam and Cambodia."
Mr. Martoche also said, "This case should send a strong message
that violations of the Vietnam and Cambodian sanctions program
will not be tolerated. The outcome is the result of a joint
effort and close cooperation between the Customs and FAC. The
two Treasury agencies will continue to work closely with the
Department of Justice to pursue a vigorous enforcement program
against violations of these and other embargoes."
.* oo
O
CM
::ederal financing bank'
<b ^
CD CO
(O CD
09 *
WASHINGTON, D.C. 20220
a. u.
-; 5?io
FOR IMMEDIATE RELEASE
May 24, 19 89.
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing
Bank (FFB), announced the following activity for the month
of December 1988.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $142.8 billion on
December 31, 1988, posting a decrease of $471.2 million from
the level on November 30, 1988. This net change was the
result of an increase in holdings of agency debt of
$455.5 million, and decreases in holdings of agency
assets of $0.3 million and in agency-guaranteed debt of
$92 6.4 million. FFB made 50 disbursements during
December.
The Continuing Appropriations Resolution for 1988
allowed FFB borrowers under foreign military sales (FMS)
guarantees to prepay at par debt with interest rates
of 10 percent or higher. Pursuant to this Resolution, FFB
received FMS prepayments of $927.3 million in December 1988.
FFB suffered
loss
oftables
$174.4 presenting
million. FFB
Attached an
toassociated
this release
are
December loan activity and FFB holdings as of December 31, 1988
NB-298
CD
*•
Page 2 of 4
FEDERAL FINANCING BANK
DECEMBER 1988 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
12/1
12/1
$ 281,000,000.00
70,000,000.00
12/01/98
12/01/98
9.188%
9.099%
9.085% qtr.
8.998% qtr.
3/08/89
8.393%
AGENCY DEBT
EXPORT-IMPORT BANK
Note #75
Note #76
NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
Note #479
12/8
7,600,000.00
TENNESSEE VAT TRY AUTHJRi'lY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#967
#968
#969
#970
#971
#972
#973
#974
#975
#976
#977
#978
12/2
12/5
12/7
12/12
12/16
12/16
12/19
12/23
12/23
12/30
12/30
12/31
60,000,000.00
133,000,000.00
146,000,000.00
211,000,000.00
25,000,000.00
106,000,000.00
197,000,000.00
6,000,000.00
67,000,000.00
200,000,000.00
112,000,000.00
118,000,000.00
12/12/88
12/12/88
12/16/88
12/19/88
12/21/88
12/23/88
12/30/88
12/27/88
12/30/88
1/03/89
1/06/89
1/06/89
8.243%
8.470%
8.351%
8.270%
8.602%
8.602%
8.565%
8.454%
8.454%
8.539%
8.539%
8.500%
12/8
300,000,000.00
6/02/97
9.081%
8/25/11
11/30/94
3/01/12
8/25/11
8/25/11
9/30/93
3/01/12
8/25/11
9.301%
9.264%
9.258%
9.258%
9.221%
9.319%
9.098%
9.101%
U. S. POSTAL SERVICE
Note #15
GOVERNMENT - GUARANl'VW,) TOANK
DEPARTMENT OF DEFENSE
Foreian Military Sales
Greece 17
Morocco 13
Greece 16
Greece 17
Greece 17
Morocco 9
Greece 16
Greece 17
•rollover
12/5
12/5
12/6
12/6
12/15
12/15
12/23
12/23
671,772.00
414,934.69
86,113.00
4,343,037.45
1,350,929.45
11,087.27
3,107.00
2,292,668.92
Page 3 of 4
FEDERAL FINANCING BANK
DECEMBER 1988 ACTIVITY
BORROWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
218,000.00
7,300,000.00
59,000.00
160,000.00
2/15/89
9/15/89
2/15/89
10/02/89
8.470%
8.963%
8.594%
9.154%
4,992, 000.00
15,498, 094.56
148, 000.00
9,751, 000.00
2,958,000.00
3,713, 000.00
524, 000.00
6,991, 000.00
230, 000.00
3,825, 000.00
3,358, 000.00
4,792, 000.00
1,361, 000.00
7,229, 000.00
8,110, 000.00
2,130,000.00
500, 000.00
111, 000.00
626, 000.00
4,869, 000.00
5,452, 000.00
12/31/90
12/05/90
12/31/15
12/31/19
1/02/90
1/02/90
12/31/19
1/03/17
1/03/17
12/31/90
12/31/90
12/31/90
12/31/90
12/31/90
12/31/90
1/02/18
1/03/17
1/03/17
1/02/18
1/02/90
1/02/90
8.985%
9.246%
9.073%
9.106%
9.028%
9.028%
9.135%
9.123%
9.123%
9.321%
9.320%
9.322%
9.304%
9.304%
9.303%
9.210%
9.126%
9.215%
9.193%
9.202%
9.202%
826,561,318.50
3/31/89
8.682%
DATE
INTEREST
RATE
(other than
semi-annual)
DEPARTMENT OF HOUSING AND URR&N nFVFTnwnrnr
Community Development
Newport News, VA
Binghamton, NY
Newport News, VA
Lincoln, NE
12/5
12/9
12/21
12/29
$
9.102% arm
9.363% arm
RTIRAT. FTJrCTRTJTCATlON ADMINISTRATION
Tex-La Electric #329 12/2
•Basin Electric #137
•Wolverine Power #190
Oglethorpe Power #320
•Wolverine Power #182A
•Wolverine Power #183A
S. Mississippi Elec. #330
•Wabash valley Power #104
•Wabash Valley Power #206
Associated Electric #328
Old Dominion Electric #267
Oglethorpe Power #335
•Colorado Ute-Electric #96A
•Colorado Ute-Electric #203A
•Cooperative Power Assoc. #156A
Central Iowa Power #295
•Wabash Valley Power #252
•Wabash Valley Power #206
New Hampshire Electric #270
•Wolverine Power #182A
•Wolverine Power #183A
12/5
12/7
12/8
12/9
12/9
12/12
12/12
12/12
12/15
12/15
12/15
12/19
12/19
12/19
12/20
12/22
12/29
12/30
12/30
12/30
TENNESSEE VATTPV &TTH?TIRTTV
Seven States Energy Corporation
Note A-89-03 12/30
•maturity extension
8.886%
9.142%
8.972%
9.005%
8.928%
8.928%
9.033%
9.021%
9.021%
9.215%
9.214%
9.216%
9.198%
9.198%
9.197%
9.106%
9.024%
9.111%
9.090%
9.099%
9.099%
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
Page 4 of 4
FEDERAL FINANCING BANK HOLDINGS
(in millions)
et Change
Program
December 31. 1988
Agency Debt:
Export-Import Bank
NCUA-Central Liquidity Facility
Tennessee Valley Authority
U.S. Postal Service
sub-total* 33,988.2
Agency Assets: .„,..-,»
Fanners Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
sub-total* 62,757.4
Government-Guaranteed Lending:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loan Guarantees
DHUD-Community Dev. Block Grant
DHUD-New Communities
DHUD-Public Housing Notes +
General Services Administration +
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co. +
DON-Ship Lease Financing . ,
M
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total* 46;104.0
grand total* $ 142,849.6
* figures may not total due to rounding
•does not include capitalized interest
$
11,027.2
113.9
16,955.0
5
'illil
58,496.0
79.5
96.3
~°~
4,071.2
14.4
I2
'i?%-1
4,910.0
-,5?«
321
A
««r°7
1,995.3
3
§r*9
32.1
«sf*i
tll'l
A'lzZ'Z
19
»ii5*?
f°**£
?T?*1
2,213.8
«•>• f.
llll_
November 30. 1988
$
1271/88-15/31/88
$
10,957.6
106.9
16,876.0
5,592.2
69.5
6.9
79.0
300.0
33,532.7
455.5
58,496.0
79.5
96.3
-04,071.2
14.7
-0-0-0-0-0-0.3
62,757.7
-0.3
13,452.9
4,910.0
49.6
315.3
-01,995.3
386.5
32.1
26.6
995.2
1,758.9
19,220.5
607.6
864.2
2,195.0
43.6
177.0
-963.6
-0-05.7
-0-0-3.5
-0-0.5
-0-025.4
-3.5
-5.0
18.9
-0.3
-0-
47,030.3
-926.4
$ 143,320.8
$
-471.2
FY '89 Net Change
16/l/88-l5/3l/8g
69.5
-4.3
-176.0
300.0
189.2
-0-0-0.1
-0-68.0
-1.0
-69.1
-3,522.4
-0-0.4
2.9
-0-41.7
-4.4
-0-0.5
96.4
-040.6
-28.6
-11.6
51.4
-2.9
-0-3,421.1
$ -3,300.9
TREASURY NEWS
Mpartmtnt of tho Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE
RELEASE
CONTACT: Office
of Financing
May 24, 1989
202/376-4350
HI
RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $8,769 million
of $27,778 million of tenders received from the public for the
2-year notes, Series Z-1991, auctioned today. The notes will be
issued May 31, 1989, and mature May 31, 1991.
The interest rate on the notes will be 8-3/4%. The range
of accepted competitive bids, and the corresponding prices at the
8-3/4% rate are as follows:
Yield
Price
Low
8.83%
99.856
High
8.85%
99.820
Average
8.84%
99.838
Tenders at the high yield were allotted 19%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$ 48,840
$ 47,060
New York
24,333,410
7,360,895
Philadelphia
47,455
47,455
Cleveland
82,210
74,110
Richmond
98,525
47,715
Atlanta
41,635
39,605
Chicago
1,750,240
530,970
St. Louis
116,125
73,495
Minneapolis
36,355
35,355
Kansas City
111,015
109,015
Dallas
27,805
27,805
San Francisco
896,740
188,650
Treasury
187,315
$8,769,445
187,315
Totals
$27,777,670
The $8,76 9
million of accepted tenders includes $1,2 39
million of noncompetitive tenders and $7,530 million of competitive tenders from the public.
In addition to the $8,769 million of tenders accepted in
the auction process, $1,330 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,0 24 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-299
2041
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 25, 1989
CONTACT:
Office of Financing
202/376-4350
RESULTS OF AUCTION OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury has accepted $7,507 million
of $20,752 million of tenders received from the public for the
5-year 2-month notes, Series K-1994, auctioned today. The notes
will be issued June 2, 1989, and mature August 15, 1994.
The interest rate on the notes will be 8-5/8%. The range
of accepted competitive bids, and the corresponding prices at the
8-5/8% rate are as follows:
Yield Price
Low
High
Average
8. 70%
8. 72%
8. 72%
99 .619
99 .537
99 .537
Tenders at the high yield were allotted 98%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
26,786
Boston
$
26,786
$
New York
18 ,739,831
6,630,822
Philadelphia
14,451
14,451
Cleveland
37,681
37,641
Richmond
26,815
26,580
Atlanta
20,768
20,738
Chicago
899,898
328,558
St. Louis
53,080
27,040
Minneapolis
18,302
17,302
Kansas City
40,043
39,543
Dallas
15,008
12,993
San Francisco
856,354
321,349
Treasury
2,700
2,700
Totals
$20,,751,717
$7,506,503
The $7,507
million of accepted tenders includes $562
million of noncompetitive tenders and $6,945 million of competitive tenders from the public.
In addition to the $7,507 million of tenders accepted in
the auction process, $3 00 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.
NB-300
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT:
FOR RELEASE AT 12:00 NOON
May 26, 1989
Crffice of Financing
202/376-4350
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $8,500
million of 364-day Treasury bills
to be dated
June 8, 1989,
and to mature June 7, 1990
(CUSIP No. 912794 UH 5 ) . This issue will result in a paydown for
the Treasury of about $300
million, as the maturing 52-week bill
is outstanding in the amount of $8,801
million. Tenders will be
received at Federal Reserve Banks and Branches and at the Bureau
of the Public Debt, Washington, D. C. 20239, prior to 1:00 p.m.,
Eastern Daylight Saving time, Thursday, June 1, 1989.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. This series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing June 8, 1989.
In addition to the
maturing 52-week bills, there are $15,189 million of maturing bills
which were originally issued as 13-week and 26-week bills. The disposition of this latter amount will be announced next week. Federal
Reserve Banks currently hold $1,473 million as agents for foreign
and international monetary authorities, and $7,863 million for their
own account. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills. Tenders from Federal Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at the
weighted average bank discount rate of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
Banks, as agents for foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them. For
purposes of determining such additional amounts, foreign and international monetary authorities are considered to hold $27
million
of the original 52-week issue. Tenders for bills to be maintained
on the book-entry records of the Department of the Treasury should
be submitted on Form PD 5176-3.
NB-301
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
10/87
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the ,
tenders.
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations of the Secretary of the Treasury
shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
10/87
of
the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.
TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
May 30, 1989
Ji'M
'
John C. Dugan
Appointed Deputy Assistant Secretary
for Financial Institutions Policy
Secretary of the Treasury Nicholas F. Brady today announced
the appointment of John C. Dugan to serve as Deputy Assistant
Secretary for Financial Institutions Policy, effective
May 27, 1989. Mr. Dugan will serve as principal adviser to the
Assistant Secretary for Domestic Finance on all issues affecting
financial institutions, including the savings and loan crisis,
securities market reforms, and issues affecting competition among
financial services companies.
Before joining Treasury, Mr. Dugan had been the minority
(Republican) General Counsel to the Senate Committee on Banking,
Housing, and Urban Affairs since 1987, where he worked closely on
the 1989 savings and loan bill and the bill to repeal the GlassSteagall Act. Previously, he had worked as a Banking Committee
counsel and had been an associate with the Washington law firm
Miller & Chevalier, Chartered.
Mr. Dugan received his J.D. cum laude from Harvard Law School
in 1981, and his Bachelor of Arts from the University of Michigan
in 1977, where he graduated with high distinction.
He is a native Washingtonian who now resides here with his
wife, Elizabeth Stark Dugan.
oOo
NB-302
*• oo
edercd financing bank \
WASHINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
<D ™
09 CD
lO CD
a. u.
May 30, 19 89
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing
Bank (FFB), announced the following activity for the month
of January 1989.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $142.4 billion on
January 31, 1989, posting a decrease of $402.5 million from
the level on December 31, 1988. This net change was the
result of an increase in holdings of agency debt of
$65.4 million, and decreases in holdings of agency assets
of $0.3 million and in agency-guaranteed debt of
$467.7 million. FFB made 70 disbursements during January.
The Continuing Appropriations Resolution for 1988
allowed FFB borrowers under foreign military sales (FMS)
guarantees to prepay at par debt with interest rates
of 10 percent or higher. Pursuant to this Resolution, FFB
received FMS prepayments of $315.5 million in January 1989.
FFB suffered an associated loss of $23.1 million.
Attached to this release are tables presenting FFB
January loan activity and FFB holdings as of January 31, 1989
NB-3 03
O CD
CM •*
Page 2 of 5
FEDERAL FINANCING BANK
JANUARY 1989 ACTIVITY
BORROWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
1,000,000.00
14,450,000.00
2,000,000.00
4/05/89
4/11/89
4/11/89
8.668%
8.722%
8.721%
18,000,000.00
151,000,000.00
225,000,000.00
187,000,000.00
24,000,000.00
168,000,000.00
21,000,000.00
13,000,000.00
191,000,000.00
12,000,000.00
136,000,000.00
159,000,000.00
63,000,000.00
54,000,000.00
193,000,000.00
186,000,000.00
1/09/89
1/09/89
1/12/89
1/16/89
1/17/89
1/18/89
1/19/89
1/20/89
1/23/89
1/25/89
1/27/89
1/30/89
2/01/89
2/03/89
2/06/89
2/08/89
8.500%
8.500%
8.687%
8.702%
8.657%
8.657%
8.657%
8.616%
8.616%
8.678%
8.678%
8.649%
8.763%
8.763%
8.744%
8.689%
3/1/12
2/27/12
2/27/12
11/30/94
2/27/12
3/1/12
2/27/12
9/12/90
2/27/12
2/27/12
2/27/12
5/15/91
9.216%
9.220%
9.217%
9.422%
9.137%
9.042%
9.042%
9.209%
9.019%
8.941%
8.986%
9.231%
DATE
AGENCY DEBT
NATIONAL CREDIT UNION ADMINISTRATION
Central Liauiditv Facilitv
+Note #480
+Note #481
+Note #482
1/5
1/10
1/11
$
TENNESSEE VATIEY AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#979
#980
#981
#982
#983
#984
#985
#986
#987
#988
#989
#990
#991
#992
#993
#994
1/2
1/3
V6
V9
1/12
1/12
1/12
1/16
1/16
1/19
1/19
1/23
1/27
1/27
1/30
1/31
GOVERNMENT - GUARANTEED I£lANS
DEPARTMENT OF DEFENSE
Foreiqn Military Sales
Greece 16
Greece 17
Greece 17
Morocco 13
Greece 17
Greece 16
Greece 17
Philippines 11
Greece 17
Greece 17
Greece 17
Philippines 9
•rollover
1/11
Vll
vn
vn
1/13
1/23
1/23
1/23
1/24
1/25
1/26
1/26
92,087.00
2,692,098.00
624,505.20
1,173,496.62
508,202.40
257,306.00
1,368,781.89
26,099.38
151,866.00
2,292,657.32
151,866.00
102,315.23
INTEREST
RATE
(other than
semi-annual)
Page 3 of 5
FEDERAL FINANCING BANK
JANUARY 1989 ACTIVITY
BORROWER
DATE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
2,600,379.01
5,000,000.00
160,000.00
158,815.00
1/17/89
5/15/96
8/31/04
2/15/89
8.676%
9.206%
9.140%
8.763%
9.418% ann.
9.349% ann.
9,558,294.15
340,177.76
8,391,688.88
3,180,088.88
2,327,733.36
1,666,097.59
1,090,050.51
9,749,326.86
1,600,000.00
4,020,000.00
261,333.36
1,834,000.00
3,019,000.00
643,000.00
461,000.00
132,000.00
602,000.00
738,000.00
449,074.08
1,251,074.40
9,328,000.00
432,000.00
402,016.75
18,927,000.00
2,203,000.00
2,813,000.00
8,872,000.00
623,000.00
3,365,000.00
230,000.00
4,302,000.00
1,798,000.00
32,119.00
1,154,000.00
1,465,000.00
1/3/91
4/1/91
4/1/91
4/1/91
4/1/91
4/1/91
4/1/91
4/1/91
4/1/91
1/3/17
4/1/91
1/2/18
1/2/18
1/2/18
1/2/18
1/2/18
1/2/18
1/2/18
4/1/91
4/1/91
1/3/17
V3/17
4/1/91
4/V91
1/2/90
1/2/90
1/2/18
1/2/18
1/2/18
4/1/91
1/28/91
1/28/91
4/1/91
4/1/91
1/3/17
9.268%
9.279%
9.279%
9.279%
9.279%
9.280%
9.280%
9.280%
9.277%
9.170%
9.278%
9.165%
9.165%
9.165%
9.165%
9.165%
9.165%
9.165%
9.277%
9.278%
9.170%
9.170%
9.277%
9.377%
9.273%
9.273%
9.237%
9.237%
9.117%
9.226%
9.225%
9.225%
9.197%
9.198%
8.967%
9.163% qtr
9.174% qtr
9.174% qtr
9.174% qtr
9.174% qtr
9.175% qtr
9.175% qtr
9.175% qtr
9.172% qtr
9.067% qtr
9.173% qtr
9.062% qtr
9.062% qtr
9.062% qtr
9.062% qtr
9.062% qtr
9.062% qtr
9.062% qtr
9.172% qtr
9.173% qtr
9.067% qtr
9.067% qtr
9.172% qtr
9.270% qtr
9.168% qtr
9.168% qtr
9.133% qtr
9.133% qtr
9.015% qtr
9.122% qtr
9.121% qtr
9.121% qtr
9.094% qtr
9.095% qtr
8.869% qtr
AMOUNT
OF ADVANCE
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Community Development
Montgomery County, PA
*Montgomery County, PA
Rochester, NY
Newport News, VA
1/13
1/17
1/23
1/27
PTTRAT. FTKJI'KIFICATION ADMINISTRATION
*Basin Electric #137 1/3
•Colorado Ute-Electric #78A
•Colorado Ute-Electric #78A
•Colorado Ute-Electric #78A
•Colorado Ute-Electric #78A
•Colorado Ute-Electric #297
•Colorado Ute-Electric #276
•Colorado Ute-Electric #297
•Cooperative Power Assoc. #70A
•Contel of Kansas #201
•N. Dakota Central Elec. #278
•New Hampshire Electric #270
•New Hampshire Electric #270
•New Hampshire Electric #270
•New Hampshire Electric #270
•New Hampshire Electric #270
•New Hampshire Electric #270
•New Hampshire Electric #270
•United Power Assoc. #86A
•United Power Assoc. #129A
•Wabash Valley Power #104
•Wabash Valley Power #206
•Washington Electric #269
Oglethorpe Power #320
•Wolverine Power #182A
•Wolverine Power #183A
•Wabash Valley Power #104
•Wabash Valley Power #206
Soyland Power Coop. #293A
•Colorado Ute-Electric #96A
•United Power Assoc. #145
•United Power Assoc. #159
•Colorado Ute-Electric #168A
•Colorado Ute-Electric #203A
•Dairyland Power #54
•maturity extension
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/3
1/5
1/11
1/11
1/12
1/12
1/17
1/26
1/26
1/26
1/30
1/30
1/30
Page 4 of 5
FEDERAL FINANCING BANK
JANUARY 1989 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
TENNESSEE vaT.TFV MTTHORTTY
Seven States Energy Corporation
Note A-89-04 1/31 $ 691,552,659.29 4/28/89 8.747%
FINAL
MATURITY
INTEREST INTEREST
RATE
RATE
(semi(other than
annual)
semi-annual)
Page 5 of 5
FEDERAL FINANCING BANK HOLDINGS
(in millions)
Net Chancre
Program
January 31. 1989
Agency Debt: e _ Export-Import Bank
NCUA-Central Liguidity Facility
Tennessee Valley Authority
U.S. Postal Service
sub-total* 34,053.6
Agency Assets: __ ....
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
sub-total* 62,757.2
Government-Guaranteed Lending:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loan Guarantees
DHUD-Community Dev. Block Grant
DHUD-New Communities
DHUD-Public Housing Notes +
General Services Administration +
DOI-G* m Power Authority
DOI-Viigin Islands
NASA-Space Communications Co. +
DON-Ship Lease Financing
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total* -========
grand total* $ 142,447.1
•figures may not total due to rounding
+does not include capitalized interest
5
11
'Vi4n
ii?n
K'SSO
O
„!___!_
58,4
3S c
22'5
96.3
„7°r
4,071.2
14.1
12,097.6
4,910.0
49
*S
320.2
nnZ n
1,995.3
383.0
2?*}
„2S'l
995.2
. i'Z2*?*?19,224.6
600.9
853.0
2,207.8
,J2"2
llll°
December 31. 1988
in/aa-imyfls
nu«»gftjfl«r"
-0-0.6
66.0
-065.4
69.5
-4.9
-110.0
300.0
254.6
62,757.4
-0-0-0-0-0-0.3
-0.3
12,489.3
4,910.0
49.6
321.0
-01,995.3
383.0
32.1
26.1
995.2
1,758.9
19,245.9
604.1
859.3
2,213.8
43.3
177.0
-391.7
-0-0-0.9
-0-0-0-0-0-0-38.3
-21.3
-3.2
-6.3
-6.0
-0-0-
46,104.0
=========
$ 142,849.6
-467.7
=======
-402.5
$
-0-0-0.1
-0-68.0
-1.2
-69.3
-3,914.1
-0-0.4
2.1
-0-41.7
-4.4
-0-0.5
96.4
-38.3
19.3
-31.7
-17.9
45.4
-2.9
-0-3,888.8
$ -3,703?4
$
11,027.2
113.9
16,955.0
5,892.2
33,988.2
58,496.0
79.5
96.3
-04,071.2
14.4
$
TREASURY NEWS
2041
•partment of the Treasury • Washington, D.C. • Telephone
CONTACT:
Office of F i n a n c i n g
FOR IMMEDIATE RELEASE
202/376-4350
May 3 0 , 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,407 million of 13-week bills and for $6,403 million
of 26-week bills, both to be issued on
June 1, 1989,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing August 31, 1989
Discount Investment
Rate
Price
Rate 1/
8.47%
8.52%
8.50%
8.78%
8.83%
8.81%
26-week bills
maturing November 30, 1989
Discount Investment
Rate
Rate 1/
Price
97.859
97.846
97.851
8.33%
8.37%
8.36%
8.82%
8.86%
8.85%
95.789
95.769
95.774
Tenders at the high discount rate for the 13-week bills were allotted 79%
Tenders at the high discount rate for the 26-week bills were allotted 59%
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Ty^e
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
35,420
19,686,660
18,355
30,585
40,220
37,380
931,650
42,415
4,880
46,705
34,130
902,135
523,405
$
35,420
5,318,660
18,355
30,585
40,220
37,380
106,650
26,365
4,880
46,705
29,130
189,425
523,405
$
25,495
19,450,980
16,245
31,215
32,780
32,165
840,280
27,080
6,120
47,520
25,215
849,195
447,755
$ 25,495
5,514,850
16,245
31,215
32,780
32,165
86,180
22,260
6,120
47,520
15,215
125,695
447,755
$22,333,940
$6,407,180
$21,832,045
$6,403,495
$18,918,245
1,145,995
$20,064,240
$3,291,485
1,145,995
$4,437,480
$17,148,130
925,915
$18,074,045
$2,019,580
925,915
$2,945,495
2,100,000
1,800,000
$
2,198,200
1,898,200
71,500
71,500
1,658,000
1,658,000
$22,333,940
$6,407,180
$21,832,045
$6,403,495
1/ Equivalent coupon-issue yield.
NB-304
Accepted
TREASURY NEWS
department
of the
Treasury
D.c. • Office
Telephone
566-2041
CONTACT:
of Financing
FOR RELEASE
AT 4:00
P.M. • Washington,
202/376-4350
May 30, 1989
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$12,800 million, to be issued June 8, 19 89.
This offering
will result in a paydown for the Treasury of about $2,400 million, as
the maturing bills are outstanding in the amount of $15,189 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, June 5, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,400
million, representing an additional amount of bills dated
March 9, 19 89,
and to mature September 7, 1989 (CUSIP No.
912794 SW 5), currently outstanding in the amount of $7,614 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,400 million, to be dated
June 8, 19 89,
and to mature December 7, 19 89
(CUSIP No.
912794 TG 9).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing June 8, 19 89.
In addition to the maturing
13-week and 26-week bills, there are $8,801
million of maturing
52-week bills. The disposition of this latter amount was announced
last week. Tenders from Federal Reserve Banks for their own account
and as agents for foreign and international monetary authorities will
be accepted at the weighted average bank discount rates of accepted
competitive tenders. Additional amounts of the bills may be issued
to Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount of
tenders for such accounts exceeds the aggregate amount of maturing
bills held by them. For purposes of determining such additional
amounts, foreign and international monetary authorities are considered to'hold $1,446 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $1,473 million as
agents for foreign and international monetary authorities, and $7,86 3
million for their own account. These amounts represent the combined
NB-305
holdings
ofof
such
for
the
three
issues
of
bills.
Department
Tenders
(for
13-week
for
bills
series)
theaccounts
Treasury
to be
or maintained
Form
should
PD
5176-2
be
onsubmitted
the
(for
book-entry
26-week
on maturing
Form
series).
records
PD 5176-1
of the
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
10/87
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations of the Secretary of the Treasury
shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
of the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.
10/87
TREASURYNEWS
ipartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 26, 1989
Statement by
Secretary of the Treasury Nicholas F. Brady
on the International Debt Strategy
I welcome the actions taken by the IMF this week as a major
step forward in implementing the strengthened international
debt strategy. The decision to set aside a portion of IMF
loans for debt reduction transactions and to provide
additional resources for interest support puts into place a
key element in efforts to achieve significant debt and debt
service reduction. The IMF's new emphasis on measures to
improve the savings and investment climate and to promote
flight capital repatriation in IMF programs will enhance the
Fund's ability to play an effective role in the strategy.
The IMF Executive Board approval this week of loans for
Mexico, the Philippines and Costa Rica incorporated the new
elements of the strategy. I hope that this will help lay the
basis for prompt agreement between these countries and
commercial banks.
The various actions taken by the IMF this week should
serve as an important catalyst for further progress in
strengthening the debt strategy, and promoting sustained
growth on debtor countries.
oOo
NB-306
TREASURY NEWS ^
department of the Treasury • Washington, D.c. • Telephone 566-2041
Remarks by
The Secretary of the Treasury
Nicholas F. Brady
on Reforming Economic Structures
at the OECD Ministerial
France
Chairman Slgurdsson, Paris,
Secretary
General Paye, Distinguished
Hay
31,
1989
Colleagues:
We have agreed this morning that meeting our basic
objectives — strengthening the external adjustment process and
resisting Inflation pressures — requires an appropriate
macroeconomic policy mix. But we also recognize that to be fully
successful over the longer term, traditional policy tools must be
complemented by structural reforms.
The United States has been a strong and consistent advocate
of policies to reduce the rigidities and distortions that, in
varying degrees, affect all of our economies. These rigidities
clearly diminish the effectiveness of fiscal and monetary
policies, reduce the potential for sustained, non-Inflationary
growth, and Impede external adjustment.
The OECO Secretariat has done a great deal of useful work in
identifying these problems. It 1s particularly to be commended
for formulating specific recommendations for reforms 1n
Individual countries. We also welcome the Secretariat's efforts
to develop Indicators to gauge structural rigidities and assess
progress toward their elimination.
Over the past few years some progress has been made.
Nevertheless, the pace of reform has been disappointing in many
respects. For most countries there 1s ample room for major
additional steps on tax reform, deregulation. Industrial and
agricultural subsidy reductions and elimination of labor market
rigidities. An ambitious effort In these areas 1s an essential
component of a comprehensive, forward-looking policy approach.
In addition, there are also areas where progress must be
made 07multllaterally — our agreement on the use of tied aid and
NB-3
standard export credits being a good example. Even here,
however, more should be done to increase discipline over the
competitive use of such credits. We hope the OECD will Intensify
on
Its eliminating
efforts on this
standard
score,
export
as well
credit
as give
subsidies.
new Impetus to work
2
Similarly, we must seize the opportunity presented by the
Uruguay Round to strengthen and Improve the credibility of the
GATT, and to expand GATT disciplines to reflect new global
economic realities. In particular, we must follow through
promptly on our agreed intention to reduce agricultural sector
distortions substantially.
We are all well aware of the near-term obstacles to
structural change, particularly at a political level. But we
a H o recognize that the longer-term rewards will more than
compensate. Our challenge now 1s to move ahead with the
difficult steps to Implement real reforms. If we are serious
about positioning our economies for a vibrant,..successful-future,...
it is a challenge we must accept.
Thank you.
TREASURY NEWS <^
Department of the Treasury • Washington, D.C. • Telephone 566-2041
Remarks by
The Secretary of the Treasury
Nicholas F. Brady
on Sustaining Growth and Reducing Imbalances
at the OECD Ministerial
Paris, France
31, 1989
Chairman Slgurdsson, May
Secretary
General Paye, Distinguished
Colleagues:
The key Issue for this morning's discussion — strengthening
the conditions for sustained growth — 1s an Issue many of us
wrestle with every day. But while we can't claim to have found
an Ideal recipe for success, developments' since the last
Ministerial surely suggest that we've been correct about some of
the Ingredients.
While our six-year economic expansion has not been totally
problem free, in 1988 the OECD economies turned in an Impressive
performance.
Real growth exceeded expectations, and Its
International composition Improved; key current and trade account
Imbalances were reduced; trade flows expanded dramatically; and
Inflation, while somewhat higher on average, remained modest and
under control.
Our basic challenge 1s to sustain and build on our
successes, while effectively dealing with the global imbalances
that confront us. Certainly this will require efforts on many
fronts, both 1nd1v1dualTy and collectively.
But the
indispensible component, the bottom line if you will, 1s
maintaining the solid, balanced growth that 1s essential to
achieve .our shared objectives:
reducing unsustalnably large
external Imbalances; Improving living standards by creating new
jobs and business opportunities; providing adequate support for
developing nations to strengthen their economies; and remaining
vigilant against Inflation.
NB-308
On this last point we need to maintain a healthy balance.
We should not endorse restrictive policies in those countries
where inflation 1s not a real problem, thereby risking a
premature end to an expansion that has served us all so well.
2
The Industrial countries have agreed that reducing the large
existing trade and current account Imbalances 1s a matter of
priority. There 1s a consensus that allowing these Imbalances to
persist too long Increases protectionist threats to the global
trading system and raises the risk of sharp and damaging
financial market swings.
Through cooperative- efforts substanti-al progress was- mattr
lftt year in reducing some key trade and current account
Imbalances. The U.S. trade deficit, for example, was cut by 534
billion. But recent trends 1n the largest surplus countries
raise Important questions about the continuation of the
adjustment process.
Japan's trade surplus declined modestly last year but has
Increased for three consecutive quarters.
Germany's trade
surplus continues to grow, and contributes Importantly. to the ....
major Imbalances that have developed within Europe* Progress has
been-made in- reducing the Targe surpluses ef some- of the Newly
Industrialized Economies of Asia, but there 1s room for
considerably more adjustment in all surplus countries.
Countries with large fiscal and external deficits must
reduce budget deficits substantially. For our part, the U.S.
Administration and Congress are fully committed to implementing
the recent bipartisan agreement designed to meet the target of a
$100 billion budget deficit in fiscal year 1990. But let us not
lose sight of the fact that substantial deficit reduction
progress has already been made In the United States. This year's
reductions will bring the federal deficit to 2.7 percent of GNP,
and the overall government deficit to only 1.5 percent of GNP—
both near or below the OECD average.
But many in the United States feel we are being urged to
act in a vacuum. U.S. policy alone does not drive international
economic developments, and International policy prescriptions for
current problems cannot end with U.S. fiscal action.
Sustaining growth and reducing -externa*-•imbatances—also~
requlres that steps be taken by the surplus countries. Action by
Germany and Japan Is particularly important, and the smaller OECD
countries can also make a; useful contribution.
The Newly
constructive
play
Industrialized
as partrole
Economies
of intheir
the global
oflarger
Asiaeconomy.
too
obligation
have an toessential
assume part
a more
to
3
,
Surplus countries should ensure that growth 1s led by
domestic demand.
With their strong fiscal positions, large
external surpluses, and low underlying rates of Inflation, Japan
and Germany in particular are well placed to make substantial
contributions to the adjustment process.
.u A cooperative approach to these issues 1s at the heart of
the G-7 policy, coordination process to which we remain fully
committed. Exchange rates have played an important role in this
process and must play a continuing role In promoting adjustment.
In this context, the dollar's recent rise against other major
currencies 1s a matter of concern. If the dollar's recent rise
is sustalnted for a prolonged period, or extended, 1t could
undermine our adjustment efforts.
As we meet here today there 1s broad agreement on our basic
objectives for the coming year: to ensure smooth, balanced, and
non-1nflatlonary growth; to make further progress 1n reducing
external Imbalances; and to promote a healthy and growing
International trade system.
These objectives are within our
grasp and can be achieved 1f together we share a sense of common
policy priorities.
Thank you.
TREASURY NEWS _
lepartment of the Treasury • Washington, D.c. • Telephone 566-204
For Release Upon Delivery
Expected at 9:30 a.m.
June 1, 1989
JilN
STATEMENT OF
JOHN G. WILKINS
ACTING ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
I am pleased to be here today to present the views of the
Department of the Treasury regarding revenues to be collected
under the Medicare Catastrophic Coverage Act (the "Act"). My
statement today is limited to explaining the estimates of the
income-related supplemental premium revenues that are the
responsibility of the Treasury Department's Office of Tax Policy.
Benefit Financing under the Act
Program benefits are financed under the Act by both flat fees
and income-related supplemental premiums. The structure of the
Act that gives rise to these receipts is as follows:
Catastrophic.
— Flat monthly fee. In general, Medicare Part B enrollees are required to pay an additional flat fee of $4.00
per month (equivalent to $48.00 per year) in 1989,
$4.90 per month (equivalent to $58.80 per year) in
1990, $5.46 per month (equivalent to $65.52 per year)
in 1991, $6.75 per month (equivalent to $81.00 per
year) in 1992, and $7.18 per month (equivalent to
$86.16 per year) in 1993.
— Income-related supplemental premium. In addition,
Medicare-eligible individuals who pay Federal income
tax are required to pay an income-related supplemental
premium. The premium rate is $22.50 per $150 of
MB-309
- 2 -
adjusted Federal income tax liability in 1989. The
premium rate per $150 of adjusted liability will be
$27.14 in 1990, $30.17 in 1991, $30.55 in 1992, and
$29.55 in 1993. (These figures may vary in the case of
certain individuals, such as individuals who receive
Government pensions.)
Prescription Drugs.
— Flat monthly fee. In general, Medicare Part B enrollees are required to pay an additional flat fee beginning in 1991 of $1.94 per month (equivalent to $23.28
per year) in 1991, $2.45 per month (equivalent to
$29.40 per year) in 1992, and $3.02 per month (equivalent to $36.24 per year) in 1993.
— Income-related supplemental premium. In addition,
Medicare-eligible individuals who pay Federal income
tax are required to pay an income-related supplemental
premium. The premium rate is $10.36 per $150 of
adjusted Federal income tax liability in 1990. The
premium rate per $150 of adjusted liability will be
$8.83 in 1991, $9.95 in 1992, and $12.45 in 1993.
(These figures may vary in the case of certain individuals, such as individuals who receive Government
pensions.)
Overall Income-Related Supplemental Premium Limitations.
— In general, a maximum annual income-related supplemental
premium is established by an overall ceiling per enrollee
of $800 in 1989, $850 in 1990, $900 in 1991, $950 in 1992,
and $1,050 in 1993.
— In general, individuals with income tax liabilities under
$150 are not required to pay income-related supplemental
premiums.
Administration Estimates
In June 1988, at the time of enactment of the Medicare
Catastrophic Coverage Act, the Administration estimated that
receipts from the Act would total $37.4 billion over a 5-year
period, fiscal years 1989-1993. These receipt collections
include both the flat premiums and the income-related supplemental premiums for the basic catastrophic part of the program as
well as for the drug part. Flat premiums were estimated by the
Department of Health and Human Services and income-related supplemental premiums were estimated by the Department of the
Treasury. Treasury's year-by-year estimates of income-related
Coupled with
the payments
Departmentare
of shown
Healthon and
Human
supplemental
premium
Table
1. Services'
estimates of spending on new benefits under the Act, the $37.4
- 3 -
billion of receipts through fiscal year 1993 — including $24.0
billion in income-related supplemental premiums — gave rise to
an Administration estimate of a $2.1 billion fund balance at the
end of fiscal year 1993. That may be compared with the $4.2
billion fund balance estimated by the Congressional Budget Office
at that time, which estimate was the official estimate for
congressional consideration. The Administration and Congress
were in agreement that a surplus was important to avoid underfunding in order to protect the beneficiaries of the program.
Estimates of income-related supplemental premium payments
under the Act were revised by the Treasury for the President's
Budget for fiscal year 1990. The revised estimates reflect
Administration expectations that receipts from the Act will now
total $41.7 billion for this same 1989-1993 5-year period, a $4.3
billion increase over the original estimate. These revised
estimates include $28.3 billion of income-related supplemental
premiums, also shown on Table 1.
Coupled with the Department of Health and Human Services'
current projection of spending on benefits under the Act, our
current estimate gives rise to a $6.2 billion fund balance at the
end of fiscal year 1993. This is a fund balance increase of
about $4.1 billion over the original Administration estimate and
about $2 billion over the original congressional estimate.
Reasons for Revision
The revision in the Administration's estimate between June
1988 and January 1989 occurs entirely in the income-related
supplemental premiums. The estimate of the flat premiums remains
unchanged at $13.4 billion. Our estimate of the income-related
supplemental premiums was increased from $24.0 billion to $28.3
billion; however, almost all of this revision is attributable to
a revised estimate of the speed with which the premiums will be
collected and very little is attributable to a change in the
liability of affected taxpayers. This is illustrated by the fact
that the January 1989 calendar year liability estimates shown on
the lower half of Table 1 are almost identical to the estimates
of calendar liabilities prepared in June 1988. The very small
differences — no larger than $200 million in any year — are
associated with changes in the underlying macroeconomic forecast
and other technical factors.
The original June 1988 estimate assumed that a relatively
small fraction of the additional premium would be paid in the
form of quarterly estimated taxes and, to a lesser extent, in the
form of withheld income taxes. The January 1989 estimate
reflects a reappraisal of the use of quarterly estimated taxes
and withheld taxes by elderly taxpayers who would make additional
payments under the Act's income-related supplemental premium
provision. This change in the assumed form of payment results in
- 4 -
a speedup of collections and accounts for virtually the entire
increase in receipts over the 5-year period.
Computer analysis of tax returns filed by those who may be
required to pay income-related supplemental premiums shows that
more than three-fourths currently pay quarterly estimated tax
payments or have income tax withheld from pension or wage income.
About 85 percent of income tax payments made by the elderly
population occur in the form of estimated and withheld payments.
We believe it is reasonable, therefore, to assume that in
order to avoid penalties somewhere between 80 and 90 percent of
the income-related supplemental premium payments will be
reflected in "current" tax payments, that is, quarterly estimates
or withheld taxes, and that only the remaining 10 to 20 percent
will be reflected in larger final payments or smaller refunds.
This payment pattern, however, does not apply to the first 2
years of the program. The law specifically waives the estimated
tax requirement with respect to income-related supplemental
premiums due for 1989. Thus, in that year we assume that only
about 15 percent of the income-related supplemental premiums will
be reflected in current tax payments. For 1990, we estimate that
the fraction of income-related supplemental premiums that will be
reflected in estimated or withheld payments will increase only to
about two-thirds because many taxpayers will benefit in that year
from the general safe harbor rule that estimated payments need
not exceed 100 percent of the prior year's liability.
Treasury completed this analysis after revenue estimates
were made at the time of the conference report. In June 1988,
our estimates were consistent with about three-fourths of the
premium payments showing up in yearend settlements.
Differences from CBO Estimates
A comparison of the current Treasury revenue estimate of the
income-related supplemental premium payments under the Act with
the current Congressional Budget Office estimate shows that
Treasury anticipates collections over the 5-year budget period,
fiscal years 1989-1993, to be $2.4 billion greater than does CBO.
These estimates are shown on Table 2. However, a comparison of
Treasury and CBO estimates of calendar year liabilities associated with income-related supplemental premiums (lower half of
Table 2) shows that Administration and congressional liability
estimates are quite similar. In two of the five years, 1989 and
1990, there is virtually no difference and in only one year,
1993, is the difference between the two offices' estimates as
great as $500 million, a difference of about 7 percent.
This demonstrates that the existing difference between
Treasury's estimate of $28.3 billion in income-related supplemental premiums and CBO's estimate of $25.9 billion is attributable to different assumptions concerning the payment of premiums
- 5 -
and not to fundamental differences in the amount of premium
liability. For reasons I have explained, we believe that our
current estimates accurately reflect the requirements of the
estimated tax system and incorporate a more complete understanding of taxpayer behavior.
Conclusion
The Reagan Administration supported the Medicare Catastrophic Coverage Act of 1988 when it was enacted and the Bush
Administration remains committed to its implementation. The
Department of the Treasury has reviewed the data and model used
to estimate the receipts under the Act and finds no reason to
change the estimates made last winter.
Although our current income-related supplemental premium
liability estimates are not substantially different from those
made by CBO, the Administration's estimate of actual revenue
collections under the Act are $2.4 billion greater than those
made by CBO. The Administration's $6.2 billion estimate of the
overall fund balance at the end of 1993 is not sufficiently large
in our judgment, however, to warrant altering the structure of
the program's funding mechanism. Treasury would not consider it
prudent to alter the premium structure until we have sufficient
experience to validate estimates of revenues and spending made by
the Administration and by CBO. There is general agreement that a
cushion is required to assure that promised benefits will in fact
be available. Given the uncertainty inherent in making projections in the absence of significant actual experience and in view
of Secretary Sullivan's concern that the drug fund may be
substantially underfunded, we believe that changing the level of
funding now would not be consistent with protecting the rights of
beneficiaries.
Mr. Chairman, that concludes my formal statement. I will be
happy to answer questions that you and Members of the Committee
may wish to ask.
Table 1
Medicare Catastrophic Coverage Act
Supplemental Premium Receipts and Liability
Comparison of Treasury June 1988 Estimates
and Treasury 1990 Budget Estimates
Total
(1989-93)
Year
1992
1991
( $ billions )
1993
5.9
7.1
6.3
6.9
6.9
7.3
24.0
28.3
2,1
1,2
0.6
0.3
4.3
3.9
4.1
5.7
5.9
6.2
6.4
6.8
6.9
7.4
7.4
30.0
30.7
0.2
0.2
0.2
0.1
0.0
0.7
1989
1990
0.4
0.6
4.5
6.5
0.2
June 1988
1990 Budget
Difference
Fiscal year
June 1988
1990 Budget
Difference
Calendar year
Department of the Treasury
Office of Tax Analysis
June 1. 1989
Table 2
Medicare Catastrophic Coverage Act
Supplemental Premium Receipts and Liability
Comparison of Treasury 1990 Budget Estimates
and C B O 1990 Budget Estimates
1989
1990
0.6
0.4
6.5
5.4
Year
1991
1992
( $ billions )
1993
Total
(1989-93)
Fiscal year
Treasury
CBO
Difference
11111
°'*
1 1
«
7.1
6.1
6.9
6.7
7.3
7.3
28.3
25.9
wm™ *1a2* i§jr-G,i|IIP 2A
Calendar year
Treasury
CBO
Difference
Department of the Treasury
Office of Tax Analysis
4.1
4.1
5.9
5.9
6.4
6.5
6.9
7.1
7.4
7.9
30.7
31.5
ao
0.0
-0.1
-0.2
-0.5
-0.8
June 1, 1989
TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
LIBRA: vM 5?;TO
Remarke by
The Secretary of the Treasury
Nicholas F. Brady
on
Q
X1
n<
O
'£• -'^THLM :
Debt and Development
at the
OECD Ministerial Maating
Paris, Franca
June l, 1989
Chairman Sigurdsson, Secretary-Oaneral Paya, and
Distinguiahad Colleagues:
Thia morning'a aganda topic on dabt and davalopmant ia
vitally important to all of ua, since va ara faoad vith the
formidabla challanga of halping to raviva growth and renew hopa
in tha davaloping countries. Aa you know, va hava propoaad
atapa to strengthen tha dabt atratagy and to provide financial
support for dabtor countriaa' afforta to raform thair economies
and achiava lasting growth. Thia atrangthanad atratagy ravolvaa
around two cantral thamaa: tha naad to giva graatar amphaaia to
dabt and dabt aarvico raduction to complemant new lending, and
tha naad for dabtor countriaa to implement aound economic
policiaa designed to encourage investment and flight capital
repatriation.
Implementing this approach requires concrete steps. Each
party has a critical role to play.
For the debtor countries, the essential first step ia to
adopt sound macroeoonomic and structural policies* sustained
economic growth will not materialize without euch policiaa.
Policies must promote confidence in both foreign and
domestic investors — for investment is the key to growth -—and
stimulate a sustained and durable return of flight capital.
Attention ahould also be directed to policies that free up
rigiditiee and allow tha marketplace to work.
NB-310
- 2
These policies should be accompanied by timely financial
support, particularly from the commercial banks through debt and
debt service reduction transactiona and new money arrangements.
In this regard, ve welcome the adoption by the Executive Boards
of the IMF and World Bank of guidelines governing their support
for debt and debt Bervice reduction. Individual countries are
already moving forward under these guidelines, and commercial
banks are tabling their proposals for debt and dabt service
reduction.
Creditor governments have been providing substantial
support for debtor countries, and should continue to do so. In
particular, they must assure that official debt rescheduling in
the Paris Club and export credit cover will continue for thoaa
countries adopting IMF and World Bank programs. Let me commend
Japan for stepping forward and announcing a commitment to
provide additional financing of $4.5 billion. In addition, tha
G-7 countries have been reviewing their regulatory, accounting,
and tax regimes, with a view to reducing any impedimenta to debt
and debt service reduction.
Much has been accomplished on the official side in a very
short period of time. It is now time for the commercial banks
and the debtor nations to take advantage of thia aituation and
complete their negotiations.
We recognize that this new approach has created a period of
uncertainty. But let us not forget that this is a complex
process involving many debtor and creditor countries, the
international financial institutions, and technical banking,
regulatory, accounting and tax issues unique to each country*
In any complicated process, uncertainty is an inevitable step on
the road to change and progress.
Yes, ve have raiaed expectationa. But ve have alao raiaed
Thank
hopes.
Letyou.
us work together, build on the progress ve have
made, and ensure these hopes are realized.
TREASURY NEWS
Department off the Treasury • Washington, D.C. • Telephone 566-204
FOR RELEASE UPON DELIVERY
Expected at 2:00 P.M., EDT
June 1, 1989
STATEMENT BY FRANK G- VUKMANIC
DIRECTOR, OFFICE OF
MULTILATERAL DEVELOPMENT BANKS
DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON
SUPERFUND, OCEAN, AND WATER PROTECTION
OF THE COMMITTEE ON
ENVIRONMENT AND PUBLIC WORKS
UNITED STATES SENATE
JUNE 1, 1989
Mr. Chairman. I am pleased to participate in this
afternoon's hearings and to present the Department of the
Treasury's views on the reauthorization of appropriations for the
Office of Environmental Quality and S.1045, a measure that seeks
to promote development of environmental assessments in
international financial institutions. I would like to comment
first on the draft amendment to clarify National Environmental
Policy, extending NEPA procedures to extra-territorial actions of
the U.S. Government, and then on S.1045.
Draft Amendment to Clarify National Environmental Policy
We would oppose legislation extending NEPA to international
actions of the U.S. Government. We believe this approach is
unworkable in the international context and especially in the
international financial institutions. We have already expressed
our concern about extending NEPA procedures to U.S. votes in the
multilateral development banks. We are also concerned that the
legislation would affect the International Monetary Fund. This
organization emphasizes broad macroeconomic policy issues —
fiscal, monetary, and exchange rate measures — that relate to
balance of payments adjustment and economic restructuring. These
measures do not appear to have direct effects on specific
environmental issues. Efforts to deal with those environmental
issues in the context of IMF programs could hamper the Fund's
systematic responsibilities without having a significantly
positive impact on the environment.
NB-311
- 2 S.1045 - National Environmental Policy on International Financing
Act of 1989
Let me now turn to Treasury's views on S.1045. We are
supportive of the objectives of this legislation, which is to
promote environmental reform in the multilateral development
banks. Indeed, we have taken the lead internationally to
encourage environmental impact assessment in the MDBs and early
dissemination of environmental information on specific projects
and programs.
On March 1, Secretary Brady sent a letter to President
Conable "strongly recommending that the Bank consider ways that
environmental information on specific projects may be made
publicly available on a regular basis well in advance of Board
review." I would like to provide a copy of that letter for the
record because we believe that such public participation is
essential to the environmental impact assessment process.
At the April 4 meeting of the Development Committee of the
World Bank and IMF, Secretary Brady called for stronger attention
to environmental reform in the MDBs. He asked specifically for
internal environmental impact assessment procedures and
procedures for providing environmental information about
individual loans to non-governmental organizations and community
groups. In response to the Secretary's statement, environmental
issues were highlighted in the communique of that Development
Committee meeting. Agreement was also reached that the subject
should be included in the agenda of the September meeting.
The Treasury Department has encouraged greater attention to
environmental impact assessment in statements given at the annual
meetings of the regional development banks this spring. At the
Asian Development Bank's Annual meeting, Assistant Secretary
Dallara said he was hopeful that the process for assessing the
environmental impact of projects and programs will become
increasingly effective. At the Annual Meeting of the African
Development Bank, Acting Deputy Assistant Secretary Fall said
that establishment of environmental impact assessment procedures
would be a critical factor in beginning to address that
continent's enormous environmental problems.
Environmental impact assessment and early access to
information are key conditions that the United States is now
seeking to incorporate into the IDA-IX replenishment agreement.
At the negotiations that took place in London last month,
Assistant Secretary Dallara highlighted the importance we attach
to these issues and called for a paper on them, to be discussed
at the July or September replenishment meeting.
- 3 At the ministerial meeting of the Organization for Economic
Cooperation and Development now in progress in Paris, Secretary
Brady is pressing the organization to encourage the multilateral
development banks to adopt environmental impact assessment
procedures and to increase public access to environmental
information about specific projects and programs. We are also
calling for greater emphasis on energy efficiency and
conservation and programs to promote alternatives to chlorofluoro-carbons. We plan to take the same approach at the meeting
of heads of state or government that is to be held in France in
July.
The extent of this international initiative reflects the
importance we attach to environmental issues, particularly
environmental impact assessment and early disclosure of
information. We believe these latter elements are the essential
components of environmental reform in the multilateral
development banks and in borrowing countries. However, we also
want to emphasize that a key to success in this endeavor in the
MDBs is the support of other member countries, both developed and
developing. Unless we can succeed in developing broad-based
member support we will not convince the MDBs and ultimately the
borrowing countries to adopt effective EIA procedures or move to
share relevant information with non-governmental organizations
and other interested parties.
Last year the Treasury strongly opposed legislation similar
to S.1045 because it incorporated provisions which unilaterally
imposed U.S. environmental standards on the MDBs, an action which
we believe is counterproductive. We want to compliment the
drafters of S.1045. We believe this legislation goes a long way
to eliminate some of the problems associated with last year's
bill. In fact, this bill incorporates, in section 4, some of the
changes we had suggested.
However, we are concerned about the basic thrust of the
legislation, i.e., it calls for the identification and
promulgation of criteria by the United States to apply to the
loans of the multilateral institutions. Section 2 requires U.S.
Executive Directors to request that the banks prepare detailed
statements on their environmental impact assessments, using
criteria developed unilaterally by the U.S. Council on
Environmental Quality. The directors then must gauge the banks'
statements against these CEQ-developed criteria. Any
shortcomings in the assessments, as determined with reference to
these U.S. generated criteria, would be reported to the public.
We believe that asking for detailed statements and evaluation of
the banks' work by U.S. criteria would be misconstrued as
unilateral interference and set back our efforts to promote a
- 4 multilateral consensus on environmental reform. We are convinced
that we cannot achieve our goals in the banks without the support
of other member countries.
The bill also contains some ambiguities with respect to the
duties of the U.S. Executive Directors. It is not clear whether
it is U.S. Executive Directors or the banks who are responsible
for dissemination of information to the public under the EIA
process. It is also unclear to what extent directors would have
to seek relevant information beyond that which is provided by the
banks. Will the directors have to make public confidential
information provided by the banks? Will the directors'
procedures be subject to judicial review and will private
citizens be able to seek injunctions against U.S. actions for
non-compliance with the environmental criteria? As it is
written, this bill could impose onerous fact-finding, public
relations, and reporting duties on the Executive Directors.
I would like to stress that Treasury shares the Committee's
goals in this legislation. Therefore, we would like to propose a
change which we believe addresses our mutual concerns while
avoiding the problem of unilateral U.S. action. We propose
replacing sections 106(b) and 106(c) of the bill with a provision
to authorize the Secretary of the Treasury to initiate
international discussions to develop criteria and procedures for
conducting environmental impact assessments in the multilateral
development banks. The goal of the discussions would be to
develop in concert with other member countries in the banks
internationally accepted criteria and procedures which could be
adopted by the banks to guide their internal operations. We
believe that this approach would address squarely the committee's
concern about improving project design and appraisal with respect
to environmental issues. Moreover, we would encourage the
banks' making available to the public environmental information
on specific projects and programs in advance of Board
consideration. A year after the enactment of the legislation,
the Secretary could report to the Congress on the development of
these international criteria. Section 106(a) would have to be
modified to reflect this new initiative.
I have one additional comment to make. Section 106(a), as
it stands, would include in its coverage the International
Monetary Fund. We strongly oppose this inclusion. As I
indicated earlier, this type of legislation would hamper the
Fund's primary work without advancing our efforts on
environmental reform.
TREASURY NEWS <^
Department off the Treasury • Washington, D.c. • Telephone 566-204!
Remarks by
Secretary of the Treasury
Nicholas F. Brady
.Jw
on
Current International Policy Issues
at the
Anglo-American Press Association Breakfast
Paris, France
The 1989 OECD Ministerial caps a year of Impressive economic
June 1, 1989
performance by the major Industrial countries. The past year
demonstrates that the coordination of economic policies 1s a
practical and effective means of promoting a sound world economy.
Growth last year exceeded expectations, and prospects for
continuing the current expansion Into Its seventh year and beyond
are excellent. Inflation remains moderate and contained. And
trade Imbalances have begun to be reduced 1n some countries,
although there 1s a clear need for significant further
adjustment.
Building on this success requires strengthened cooperation
by the major Industrial countries. We must Be vigilant and
guard against a resurgence of Inflationary pressures. However,
actions by the monetary authorities during the past year have
succeeded 1n containing potential Inflationary pressures. Now,
we must be eareful that we do not overreact and bring about a
premature end to an economic expansion that has served us so
well.
Recent trade data suggest that the overall adjustment of
external Imbalances 1s slowing, although first quarter figures
for the United States were encouraging. Still, the level of
deficits and surpluses 1s unacceptable. In this context, the
dollar's recent rise, If sustained or extended, would undermine
adjustment efforts. The United States has cooperated and will
continue to cooperate with Its trading partners 1n dealing with
exchange market pressures.
Our ability to reduce external Imbalances to sustainable
levels requires concerted actions by all OECD members. In this
regard, the United States 1s keenly aware of Its responsibility
to reduce the federal budget deficit.
The
NB-312
achieving
Administration
further progress
and Congress
by Implementing
are fully committed
the recent
to bipartisan
2
budget agreement and meeting the $100 billion deficit target In
fiscal 1990. And we will continue to reduce the deficit in later
years. At the same time, we must not lose sight of the
substantial deficit reduction that has already occurred. The
federal budget deficit 1s now 2.9 percent of GNP. compared to a
peak of 6.3 percent In 1983. This places the United States below
the OECD average.
Sustaining growth and reducing external Imbalances cannot be
achieved by the U.S. alone. Surplus countries, especially Japan
and Germany, must do their part. Their strong fiscal positions,
large external surpluses, and low Inflation rates enable them to
make further substantial contributions to this global effort.
TRADE POLICY
As you know, there have been some recent Important
developments in U.S. trade policy. Since Ambassador Hills has
spoken on the Section 301 Issue, I'll focus my remarks on the
President's decision to Initiate entirely separate bilateral
negotiations with the Japanese.
We have been concerned for some time that structural
rigidities in the United States and Japan have Impeded the
adjustment of our large trade Imbalances. We believe these
rigidities strongly affect each country's trade position,
offsetting to some extent the Impact of exchange rate and trade
policy changes in recent years. Examples Include retail and
wholesale distribution systems, Industrial organization, and
saving and investment patterns.
Last week the President directed the Treasury and other
agencies to propose results-oriented negotiations with the
Japanese government designed to reduce these structural
Impediments. These talks would take place outside the context of
Section 301 and would concentrate on areas not covered 1n
product-specific trade negotiations or 1n broad macroeconomic
discussions. These will continue to be handled within
established fora.
The new structural talks would permit our two governments to
address Issues that cut across traditional trade and
macroeconomic areas. This effort Is intended to complement our
broader multilateral goal: a world-wide reduction of barriers to
the free flow of goods, services, and Investment.
DEBT STRATEGY
0[ k 0W
.u
1 DOne
' we
recently
steps
to to
strengthen
economic
theMJdebt
themes:
strategy.
policies,
1s have
the especially
Our
need
proposals
for proposed
debtor
more revolve
open
countries
Investment
around
two
Implement
policies.
centralsound
The
second 1s the need to support voluntary, market-based
transactions between commercial banks and debtors that reduce
debt and debt service.
•u til? reSeirlt ¥$efcs yeLhav« 'pen encouraging progress: First,
the IMF and World Bank have taken steps to support the new
!^!2ru,JS c ?[! d 'tSr n u m & e !; 2? d ? & t o r nations have negotiated
programs with the IMF. And finally, active discussions are now
under way between several debtor nations and commercial banks.
• ~— ife.recognize that this new approach has created some
uncertainties. But uncertainty is an inevitable part of change
and progress, Yes, we've raised expectations. But so have we
raised nope.
Thank you, and now I'd be delighted to take your questions.
TREASURY NEWS
Department off the Treasury • Washington, D.c. • Telephone 566-2041!
Contact:
Office of Financing
202/376-4350
FOR IMMEDIATE RELEASE
June 1, 1989
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $8,536 million^of 52-week bills to be issued
June 8, 1989,
and to mature
June 7, 1990,
were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Rate
Low
High
Average -
Investment Rate
(Equivalent Coupon-Issue Yield)
8.,18%
8.,19%
8..18%
8..85%
8,.86%
8..85%
Price
91,.729
91,.719
91,.729
Tenders at the high discount rate were allotted 55%.
Location
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
Received
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
$
18,090
26 ,140,690
14,195
27,890
25,475
20,160
911,725
18,275
9,925
35,510
12,815
850,215
256,725
$28 ,341,690
$
18,090
7,805,390
14,195
27,890
25,475
20,160
162,475
14,825
9,925
35,510
12,815
132,715
256,415
$8,535,880
$24 ,631,540
683,250
$25 ,314,790
3 ,000,000
$4,825,730
683,250
$5,508,980
3,000,000
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
26,900
$28 ,341,690
26,900
$8,535,880
An additional $23,100 thousand of the bills will be issued
to foreign official institutions for new cash.
NB-313
TREASURY NEWS
Department off the Treasury • Washington, D.c. • Telephone 566-2041
10
Remarks by
Secretary of the Treasury
Nicholas F. Brady
to tha Press at tha Conclusion
of tha 1989 OECD Ministerial
Paria, Franca
June 1, 1989
JlJN
Good evening.
I'd like to spend a few minutes reviewing some of the key
developments at this year's OECD Ministerial meeting, and then
we'll take your questions.
We've had nearly two days of productive discussions on a
wide range of important issues. These include macroeconomic
trends in the industrial countries; policy priorities to achieve
sustained growth and further reduction of trade and current
account imbalances; the strengthened debt strategy; and trade
issues.
As the final communique makes clear, there was basic
agreement on the fundamental issues, setting the stage for a
successful and productive Economic Summit meeting of the major
industrial countries in July.
Economic Trends and Policy Priorities
On the macroeconomic front, OECD expansion is now into its
seventh consecutive year, and. mad*xa.te. growth, is expected to
continue. Inflation is being contained, and progress has been
made in reducing external Imbalances.
Our policy priorities are:
(1) to foster the well-balanced growth in the industrial
countries that is essential to promoting continued
global trade and current account adjustment;
NB-314
- 2 -
(2)
to create new opportunities for investment and job
creation; and
(3) to provide a supportive environment for implementing
the debt strategy.
The communique reflects these basic priorities.
„ Achieving our objectives requires coordinated action,
particularly by the largest countries-.- • For our-part, we-arecommitted to further reductions in the federal budget deficit.
Japan and Germany recognize the need to pursue strong growth in
order to promote reductions of their large external surpluses.
We are pleased with the emphasis given in the communique to
the need for structural reforms. Tax reform, deregulation and
subsidy cuts are essential for balanced long-term growth.
The Debt -stratauv
We are also pleased with the Ministerial's endorsement of
the strengthened debt strategy, with its new emphasis on debt
and debt service reduction and policies to promote investment
and flight capital repatriation.
In recent weeks substantial progress has been made in
implementing the proposals we advanced just three months ago.
The IMF has agreed on a number of important changes in Fund
policies to enable it to support the strategy. And we are
particularly pleased that just last night the World Bank joined
the IMF by agreeing to the necessary policy changes that will
enable it to play a crucial role in our renewed strategy.
These steps have given the process new momentum, we now look
for the debtor countries and the banks to use these arrangements
as a catalyst for agreement on specific financing packages.
Trade Issues
As you know, trade issues were another important theme at
the Ministerial. We are pleased with the outcome in this area,
particularly with the ministerial's strong endorsement of
agricultural reform and a successful completion of the Uruguay
Round. Ambassador Hills will be glad to answer your questions
on this.
3 -
Environment
The Ministerial also gave considerable emphasis to
environmental issues, which will also be a major theme at the
upcoming Economic Summit. Under Secretary McCormack would be
pleased to address this issue.
Thank you, and now Ambassador Hills, Chairman Boskin, under
Secretary McCormack and I would be delighted to take your
questions.
TREASURY NEWS ^
Department off the Treasury • Washington, D.c. • Telephone) 566-2041
Remarks by
Secretary of the Treasury
JQH
Nicholas F. Brady
on
"
Current International Polloy Issues
at the
Anglo-American Press Association Breakfast
Paris, France
June 1, 1989
(Introduction by John Flint, (Reader's Digest) President of the
Anglo-American Press Association.)
Ladies and gentlemen, good morning. We have the pleasure today
of having with us Nicholas F. Brady, the Secretary of the
Treasury, whom I would like to thank for having taken the time
from a very busy schedule to come and be with us this morning.
This is the fifth time that we have had the Secretary of the
Treasury address our Association at the occasion of the annual
OECD Ministerial meeting. I hope, obviously, that it's a
tradition that is going to be continued in the future.
As most of you probably know, Mr. Brady, before being appointed
Secretary of the Treasury last September, served briefly in the
Senate and also served on a number of important commissions
during the Reagan Administration, including the Commission on
Executive, Legislative, and Judicial Salaries; the Commission
on Strategic Forces, the Commission on Central America, on
Security and Economic Assistance, and, also, tha Commission on
Defense Management. He has of course, also, had a
distinguished career in banking which extended for more than
three decades during which time he rose to be a Chairman of the
Board of Dillon Reed and Company in New York.
Mr. Secretary, I would like to welcome you. I'd like to point
out the Secretary will have a few preliminary remarks to make
and then we oan go into questions which will be, as usual, on
the record. I would like to ask you to identify yourselves and
NB-315
2
your organization when you ask questions. We'll try to give
priority to the members of the Association in asking
questions. There will be a microphone for those of you who
want to ask questions later. Mr. Secretary.
(Secretary Brady)
I would like to make a few prepared remarks, not that they are
in the form of revelation, but to give everybody a chance to
think for a minute.
The 1989 OECD Ministerial caps a year of impressive economic
performance by the major industrial countries. The past year
demonstrates that the coordination of economic policies is a
practical and effective means of promoting a sound world
economy.
Growth last year exceeded expectations, and prospects for
continuing the current expansion into its seventh year and
beyond are excellent. Inflation remains moderate and
contained. Trade imbalances have begun to be reduced in some
countries although there is a clear need for significant
further adjustment.
Building on this success requires strengthened cooperation by
the major industrial countries. Of course, we must be vigilant
and guard against a resurgence of inflationary pressures.
HowAver, actions by the monetary, authorities- during.-the--pact• ••
year have succeeded in containing potential inflationary
pressures as we can coo it now. However, we must be careful
that we do not overreact and bring about a premature end to an
economic expansion that has served us so well.
Recent trade data suggest that"the overall adjustment Of
external imbalances is slowing, although first quartez^-flgurvs-for the United States were very encouraging. Still, the level
of deficits and surpluses is unacceptable. In this context,
the dollar's recent rise, if sustained or extended, would
undermine adjustment efforts. But in this regard the United
States has cooperated and will continue to cooperate with its
trading partners in dealing vith exchange market pressures.
Our ability to reduce external imbalances to sustainable levels
requires concerted action by all OECD members. For our part,
the United States is keenly aware of its responsibility to
reduce the federal deficit in our own country.
The Administration and-Congress-are fully committed-to -achieving further progress by implementing the recent
bipartisan budget agreement and meeting the 100 billion dollar
deficit target in fiscal 1990. And we will continue to reduce
3
the deficit in the out years. At the same time we must not
lose sight of the substantial deficit reduction that has
already occurred. The federal budget deficit is now at 2.9
percent of 0NP, compared to a peak of 6.3 percent in 1983.
This places the United States below the OECD average.
sustaining growth and reducing external imbalances cannot be
achieved by the U.S. alone. Surplus countries, especially
Japan and Germany, must do their part. Their strong fiscal
positions, large external surpluses, and low inflation rates
enable them to make further substantial contributions to this
global effort.
As you know, there have been some recent important developments
in U.S. trade policy, since Ambassador Hills has spoken on the
Section 301 issue, I'll focus my remarks on the President's
decision to initiate entirely separate bilateral negotiations
with the Japanese.
We have been concerned for some time that structural
rigidities, not only in the United States but obviously in
Japan, have impeded the adjustment of our large trade
imbalances. We believe these rigidities strongly affect each
country's trade position, offsetting to some extent the impact
of exchhange rate and trade policy changes in recent years.
Examples include retail and wholesale distribution systems,
industrial organization, and saving and investment patterns.
Last week the President directed the Treasury and other
agonoioc to propose results-oriented negotiations with the
Japanese government designed to reduce these structural
impediments. These talkB would take place outside the context
of Section 301, and would concentrate on areas not covered in
product-specific trade negotiations or in broad macroeconomic
discussions. These will continue to be handled within
established- fora.The new structural talkB would permit our two governments to
address issues that cut across traditional trade and
macroeconomic areas. This effort is intended to complement our
broader multilateral goal: a world-wide reduction of barriers
to the free flow of goods, services, and investment.
Just a word on the debt strategy. As you know, we have
recently proposed steps to strengthen the debt strategy. Our
proposals revolve around two central themes: one is the need
for debtor countries to implement sound economic policies,
especially more open investment policies. The second is the
need to support voluntary, market-based transactions between
commercial bankB and debtors that reduce debt and debt service.
4
In recent weeks we have seen encouraging progress: First, the
IMF and the World Bank have taken steps to support the new debt
strategy. Second, a number of debtor nations have negotiated
programs with the IMF. And, finally, active discussions are
now under way between several debtor nations and their
commercial banks.
W« rursngnl *P that this new approach has .created..*OWJO_
uncertainties. But uncertainty is an inevitable part of change
and progress. It's been said we've raised expectations. But
so have we raised hope.
I want to thank you for being with us this morning and I'd be
delighted to answer any questions you might have.
Q. You said at one point that you wanted to strengthen
cooperation and ooordination of economic policies. Can you
give us an idea of how you plan to do that?
A. Well, continue with the process. The 0-7 has been so
important to the policy coordination process. Meetings like
the OECD that we've been having this week add to the ability of
nations to agree on policies and procedures -that-will keep-thoworld economy going. It's had seven years of expansion.
That's important, and the meetings we have add to the ability
to keep that kind of expansion going.
Q. The riots are continuing in Argentina. But in the general
public at any rate the perception is spreading that its
debts... debts are the new-plague;--- What -is it that the -United ~
States can do by itself or in coordination in order to help
countries that faoe this extreme situation?
A. Well, we are trying to do just exactly that. The debt
strategy which was announced in March took a process that
everybody in the press and elsewhere described as fatigued and
moribund and introduced some new life into it. With regard to
the discussions that are going on right now between commercial
banks and debtor nations, although we don't have agreement,
what we have is energy and momentum. The two sides may be at
this moment too far apart, but what we're seeing both debtors
and creditors coming forward with plans and trying to get
together on a debt reduction process. I think it's extremely
important that the world financial community is now dedicated
to the proposition of debt reduction. It seems to us when we
collected the ideas which are part of the debt strategy
announced in March, that it was a totally different direction
that we were embarking on. Previous attempts at trying to
settle the debt problem involved taking countries which were
5
already overburdened with debt, engaging in negotiations which
added to the debt burden and then thinking that that was
progress. We tried to turn the problem on its head and say,
"Well, what is progress?11 And the thought was, well, progress
is trying to get total stock- of debt down-. So- we- tirhtk- tlnrtr
fhe rnnree that we're now on ic aimod at trying to ds euastly
what you've suggested, which is make the debt problem more
manageable, and by more manageable we me«rn reduce "it in size.
Q. May I follow up please. But you talked a moment ago of
providing some kind of progress on debt reduction. Is there no
way that you can address the political situation more exactly,
that you can give these people who are really quite hungry some
sense of things will get better which they don't have?
A. Well, T don't, agree with the assumption underlying your
question. I think that when we've come up with a new strategy
that donr. reduce the amount of debt, then that's comothing that
the creditor nations can provide in the way of hope. And th<
fact that three or-four countTies- -are" nrowntegotidtlTior'to- -dojust exactly that *n&toin^-«&-w*1-yHnv>y•hrsffr»ftv« ^fiT-im^-tharrwe're on the right track. It isn't going to solve every
problem of the needy but it's to me a way of lighting one
candle instead of cursing the darkness.
Q. The problem now is after the international Monetary Fund
and the World Bank which makes loans. The problem is that you
said with government guarantees some cost must be expected.
What is your opinion about this, what is the government will in
fact to reduce this kind of debt? I understand that the
Europeans are looking at this closely.
A. Let me see if I've got the question. That the IMF and the
World Bank have come forward with their outlines of support
that they're going to give and your question is what amount in
addition to that are governments going to give?
Q. What kind of guaranties about what kind of guaranties the
creditor governments will give to the banks in order to loan
new money to the debt?
A. Well, at this moment in time, the official help that is
being provided is from the IMF and the World Bank, of course,
the Japanese have agreed to put a substantial amount of money
into the process, and I believe they are going to be more
definitive about that in the next week. But with regard to
creditor governments there is no provision at this point in
time for any additional guarantees from that source.
Q* Mr. Secretary, the Saudis have indicated that they are
6
going to ask to allow oil prices to be floated at the upcoming
OPEC meeting. What's your reaction to that and what would you
hope to see from the OPEC meeting?
A. Well, I think any time we have a free market in a commodity
that's as important to the world as oil, that's a good thing.
I don't think I'm more able than anybody else to predict what
that's going to mean* But the fact that we have a market that
will be a free and open market I think is a good thing,
particularly for the consuming nations.
Q. Could you give any indication what other things you might
hope to see from the OPEC meeting coming up?
A. I don't have any more information than what you've just
alluded to.
Q. Mr. Secretary, not too long ago the Administration's been
hitting pretty hard on the European Community as well as Japan
on structural rigidities and non-tariff barriers. Now that
some decisions have been made on Japan what has happened to
Europe and the Community? What is the Administration's view
that the Europeans need to deregulate? Has that issue just
dropped out of sight?
A. Well, T don't think it's dropped out of sight. Section 301
is a law in our country that had--to be complied- with. -• The
President with the lead from Ambassador Hills has complied with
that law. The discussions with the EC and other countries
around the world will continue as before. I don't see too much
difference.
Q. Well just as a follow-up if I may. Carla Hills was talking
about using a crowbar or a handshake not too long ago when she
was referring to specific sectors like telecommunications.
Again, my question is why has the Administration stopped
talking about it?
A. Well, I don't think we've stopped talking about it
necessarily. I can't comment on Mrs. Hills' statement. That
stands on its own. But we haven't stopped talking about it.
What we've been doing in the last week is making sure that
everybody understood where 301 was and where the structural
initiatives were, and that was the subject of discussion before
everybody. It doesn't mean that we were stopping on anything
we were doing before that. But all of the interest in the
trade problem seems to have centered around that particular
part of the framework* So I can't add too much more than
that.
7
Q, You've been trying to in the last few days to sell 301 as
complementary to the multilateral trade commitments set up
under the GATT. But if I understand what the Japanese and the
British and a few other people said yesterday, they don't
consider that message as getting across and they don't consider
it complementary at all. What is your reaction?
A. Well, T don't w«nt tn q+t Infn A qnnrrpl with any
particular country about what 301 means. Mrs. Hills has been a
very adequate spokesman on that subject. It is a law in our
country that has been complied with. From my observation of
private discussions with countries involved they understand
exactly what the law was. My feeling is that business will go
on as usual. It's going to take some time, but particularly
with respect to the discussions around the structural
initiative which are outside 301, I think that progress will be
made. I don't see anything on the horizon that's going to stop
everything in its tracks.
Q. Mr. Secretary, you said at one point in your statement that
you favor more concerted international action on certain things
and at another point you said that the dollar was too high.
Does that mean then that you favor concerted international
action now to bring the dollar down and if so what?
A. Well as I've said a number of times the life cycle of
treasury secretaries who comment on the level of the dollar is
about two months, and I like the job. However, I think that
what we did say was that if the rise of the dollar was
continued or extended, it would not be a help to the
coordination prooocc Wo stand by that. Our discussions with
other members of the G-7 on policy coordination matters and
procedures that enter into these discussions is healthy and
well and alive in every respect.
Q. As a follow up to that Mr. Secretary, given the continuing
rise in the dollar and the fact that you are concerned about
it, as are your G-7 colleagues, do you think there is a strong
case now for the Federal Reserve to begin easing its monetary
policy?
A. Well, that's another area that treasury secretaries had
better keep out of. As the President says, that's the best
fight in town in Washington! the discrepancy between the
Federal Reserve and Executive Branch. Certainly, the level of
interest rates not only in the United States but other G-7
countries are part of the problem, but it's only part of the
problem or part of the solution if you want to look at it that
way. So, all of those things go into the answer, and they will
be considered.
8
Q. Regarding the dollar, you said that if the dollar's current
level is sustained that would undermine the adjustment
process. If you do not want to suggest what might be done
within the Administration in the United States, and you seem to
be telling Germany and Japan, well you probably should not
raise interest rates, and not much is being done on the
American budget deficit, are you in effect saying we're happy
with the level the dollar is because we're not going to do much
about it?
A. Well, first of all, I don't agree with you that not much is
being done on the deficit. After some eighty or ninety hours
of negotiations, the Congress came up with a budget resolution
whioh reached the Gramm-Rudman goal of 100 billion dollars,
which was the goal for 1990, and did so without raising taxes
and maintaining the President's commitment not to raise taxes.
So, although probably correctly, that resolution has been
described as neither bold nor heroic, it does do one very
important thing. It does reconcile differences between
Republicans and Democrats, between the Executive and
Legislative Branch, and it seems to be what the American people
expect out of their government. It's not that they won't have
differences but that they are able to deal with those
differences and move on. And if I had to pick one factor that
was responsible for an increase in the bond market in the
United States and the increase in the stock market, it's the
demonstration that the Bush Administration, working with a
Congress of an opposition party, can get on with the business
of government. And it seems to me that the juxtaposition of
that ability as opposed to some of the other troubles that are
going on around the world is a pretty clear indication that
things in the United States are at least settled and moving and
business is being done. And I think that's important. So I
can't agree with the fact that nothing has happened. I think
that something very important has happened.
Q. Mr. Secretary, last week in Senegal President Mitterrand
announced forgiveness of something like ten percent of the debt
in 33 African countries. Do you consider this kind of
forgiveness to be applauded or do you consider it a major
expense in the debt reduction process?
A. No. I think that any particular country ought to be able
to do-whatev&r -they • think • they • can- do--within -their-own: —
resources and their own budget constraints.
So we've said
right along that the debt strategy that the United States put
forward, which I want to keep saying over and over again is a
collection of ideas, some of which are born in the United
States ai*d some--o-f which-are born elsewhere, is in my mind al'l
9
inclusive. And when you change direction in the way the world
approaches problems, from one that was described as fatigued,
debt weary, moribund, and you turn that to a process where
there is momentum and energy, and I say hope, then you've done
something very important, in my opinion. And actions such AS ...
the one you've described can very well be part of it. I don't
know that it'c going to be the mainstay of the process but it's
an important part.
Q. Mr. Secretary, I have a question I'd like to put. In terms
of whatever the level of the dollar might be — what desirable
level there might be — do you think that the present mechanism
for keeping the dollar at that level is adequate, that it* the
means at the disposal of the central banks and the governments?
A. I really do* Because when we get to moments or
intersections like we've had in the last two or three months,
the members of the G-7 who are involved in this process have
consultations and of course they focus on the kind of question
that you've just raised. And to the extent that the process
slows down they may say, well, it slowed down some but we've
got to do something about it. If anything, I would say, the
bonds which are drawn around that process could even be
closer. So in my opiiiiun, the process is working. I think
we're always going to have moments in time when the process
looks a little creaky. But I am very, very encouraged by the
fact that at those moments in time members involved get
together, and we have a policy coordination process. There are
some questions about it right now, but what are we going to do
about it? I see cooperation at this moment in time — a time
that you say is slightly more difficult — but I see the
cooperation at this time being very helpful and all the parties
to the process being interested, recognizing the problems and
trying to do something about it.
Q. Mr. Secretary, do you consider the Louvre Agreement as
continuing — as still alive for us?
A. Yes, sure. The Louvre Agreement is part of the process and
part of the fabric of the way that the G-7 process has worked
and is a useful part of the process and I would consider it
still very much a part of the way we think about things.
Q. More of a Washington question, now with the resignation of
Mr. Wright and Mr. Coelho do you think that we've gotten to the
point in the American political process where we're asking too
much of people, where it is a question about getting people
into government service or not?
A. Well, I think it's a very hard thing on individuals. I'm
10
not commenting on either Mr. Wright or Mr. coelho, but from
watching the assembling of the Bush Administration, I'd say the
amount of particular requirements that an individual has to go
through are mounting. And there are legal requirements. You
have to hire lawyers, you have to hire accountants, and it
raises the standards of government to a level which may very
well be called for but which is exceedingly hard to comply
with. I think the basic principle that you should expect the
highest form of ethics from people who come to government is a
very good one. But the process becomes difficult when you
actually try to put that into practice, and you're asking
people without necessarily a great deal of wealth and
wherewithal to handle the process, to hire accountants, to hire
lawyers, to be so exact and clear about every part of their
existence, that it's a very hard thing to do. And of course
what happens is that all these things get looked at some three
or four years later in hindsight. I think the goal is a good
one. I think that as we always do in the American process,
we'll work it out. But at this particular moment in time I
know from the job of trying to attract people to the Treasury
that we've lost some very good people because they were
unwilling
to subject
Thank
you very
much. themselves and their families to the kind
of extra expense and potential liability that these laws
require, So it has its blessings and it has its distractions.
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
COM 5510
Q .- sw
FOR IMMEDIATE RELEASE
JiiN !i :i H
1
June 1, 1989
:..-7.-.1.-
Statement by
Secretary of the Treasury Nicholas F. Brady
on the World Bank's Action on International Debt Reduction
I welcome the action by the World Bank establishing its
policies for supporting international debt reduction efforts.
The World Bank will set aside a portion of its policy-based
loans for debt reduction transactions and provide additional
resources for interest support. The World Bank also agreed
that Bank program objectives should include measures to
encourage direct foreign investment and capital repatriation.
Following a similar decision last week by the IMF, these
actions by the World Bank essentially complete the steps by
the official community to put in place mechanisms to
facilitate debt and debt service reductions^negotiated
between debtor countries and their private creditors.
This approach offers a realistic opportunity to promote
sustained growth in debtor countries while strengthening the
debt strategy.
NB-316
FREASURY NEWS
ipartment of the Treasury • Washington, D.c. • Telephone 566-2041
Remarks by
Secretary of the Treasury
Nicholas F. Brady
before the
International Monetary Conference
Madrid, Spain
June 5, 1989
Good morning. In March the United States proposed a major
change in the approach to the problems of the heavily indebted
developing countries. The international community reacted
constructively to these proposals and now, less than three months
later, has transformed these ideas into an operational framework.
This has given us a fresh opportunity to address the debt
problems of developing nations — problems that confront all of
us. Neither the Atlantic Ocean nor the Pacific provides a
buffer for our economies against the impact of slow growth and
high debt in these countries. Everyone here shares a common
interest in their quest to sustain economic growth, expand export
markets, reduce debt burdens, and foster democracy.
Developing nations hold a large share of the world's
economic potential. And the major debtor countries represent a
significant portion of this group. Their large populations and
abundant resources make them natural centers of hope for the
future. But to unlock their potential and to enable them to take
their proper place in the world economy, debtor countries must
reform their economies and reduce their burden of external debt.
Their efforts are worthy of our active support.
But I do not intend to give a civics lecture to this
distinguished audience. We are all practical people who share an
interest in solving this global problem. And certainly the
United States cannot bring about a resolution of debt problems by
itself. The reasons are obvious: the U.S. accounts for less than
20 percent of the capital and voting power in both the IMF and
the World Bank. U.S. banks hold only about 25 percent of the
commercial bank debt of the major debtor countries. European,
Japanese, and Canadian banks also have large exposure. No
nation's commercial banks are protected islands. The overnight
inter-bank settlement system provides graphic evidence of the
links binding our financial markets together. These shared risks
imply common leadership responsibilities.
NB-317
2
Recognizing this, our proposals to strengthen the debt
strategy incorporated the ideas of many others in the
international community and reflected the need for a cooperative
approach among nations and institutions. Some were critical of
the initiative, first because of its lack of specifics; and
second because it was said that it raised expectations and
created new uncertainties. It is true that our proposals were
based on general concepts, but concepts that reflected a
consensus that existed in world opinion. We also recognized the
complexities of the process and wished to provide an opportunity
for additional contributions and refinements by others.
However, we were clear on the fundamental point: that
reducing the debt burden of debtor countries is essential to the
ultimate resolution of this problem. It is a simple truth that
the cure for too much debt is not the addition of more debt.
The meaning of the proposals was immediately clear. There
was a sense that we must face reality. No doubt expectations
rose, and these will have to be tempered by the realities of
negotiation. But most importantly, a process that was weary and
moribund has been revitalized. Hope and momentum are far better
allies for tackling a difficult task than inertia and fatigue.
As to the creation of uncertainties, this is the temporary price
of progress.
Now debate has given way to action, and concepts have been
turned into solutions. Let me be specific:
o First, the IMF and the World Bank have put into place
the resources and mechanisms for supporting debt and
debt service reduction transactions between debtor
countries and the commercial banks. The G-10 creditor
countries on Friday strongly endorsed these measures.
o Second, Mexico, the Philippines and Costa Rica have
already received IMF Board approval for strong economic
programs which provide support for debt reduction.
These countries have also initiated discussions with
the commercial banking community.
o Third, during the past two weeks, the Paris Club has
agreed to reschedule outstanding loans as well as
interest obligations of these countries.
o And fourth, Japan has agreed to provide an additional
$4.5 billion in support of the strengthened debt
strategy, and specific commitments are now under
discussion for Mexico and the Philippines.
3
The key elements of official support for debt and debt
service reduction are on the table. Now it is time for the
commercial banks and the debtor nations to seize the opportunity
that has been provided.
Fundamentally, we are faced with two alternatives. Move
forward with the new strategy which recognizes present realities
or fall back on the old approach.
The old approach did provide important progress for a
number of years. But countries found it more and more difficult
to sustain the necessary economic reforms in the face of
continued growth in debt and debt service burdens. Commercial
banks were increasingly reluctant to make new money commitments.
Poor economic performance and uncertainty about external
financial support undermined investor confidence and stimulated
capital flight. This approach, if continued, stands to produce
losses of revenue and capital for all banks that go well beyond
anything implied in our proposal.
The new strategy, on the other hand, serves the banks*
long-term interests. It allows for diversity — debt reduction,
debt service reduction or new money. Banks that participate in
debt reduction will hold new claims that are significantly
enhanced. In addition, the quality of all outstanding claims
will be improved by the debt reduction process. Furthermore,
debt reduction will occur only within the context of sound
economic programs which will improve the capacity to repay.
These programs, supported by the IMF and the World Bank, will
also emphasize measures to encourage new foreign investment,
flight capital repatriation, and debt/equity swaps. In sum, bank
claims will be somewhat lower, but they will be better claims —
and they will be better serviced. This is in stark contrast with
the alternative.
I have spent most of my life, as have you, as a member of
the financial community. And in my view the approach to
developing nation debt that we have put forward is government
policy that makes good business sense.
It is to your business judgement that I appeal today in
asking that you move ahead. I ask you to compare the risks of
inaction with the benefits of concluding transactions that meet
the tests of realism and reasonableness.
The debtor countries will need to make the same
calculations — that is, to be realistic in their expectations as
to the size and terms of debt reduction transactions and to
recognize that reasonableness requires meaningful compromise by
both parties.
4
To be sure, the new strategy will involve tough decisions by
debtor countries and commercial banks. But it is important that
we distinguish between real and perceived dangers. I am reminded
of a small piece of American frontier history which illustrates
my point.
In 1869, Major John Wesley Powell led the first expedition
down the Colorado River, which flows through the Grand Canyon.
At one point on the river — now called Separation Rapids — the
party reached a moment of critical decision. They had faced many
days of difficult rapids, and three of his crew had doubts about
continuing, preferring instead to climb out of the Canyon. Major
Powell's diary of August 28, 1869, read as follows:
We come to a place which seems worse than any yet: to
run it would be sure destruction. After supper Captain
Howland asked to talk with me. He, his brother, and
William Dunn have determined to go no further. All
night I pace up and down. Is it wise to go on? At
last daylight comes: breakfast is solemn as a funeral.
Two rifles and a shotgun are given to the men who are
going out.... Some tears are shed: each party thinks
the other is taking the dangerous course. The three
men watch us off. We are scarcely a minute in running
the rapids. We have passed many places that were
worse.
The next day, August 29th, Major Powell and his remaining
crew rowed safely out of the Canyon into quiet waters. The other
three men met a different fate, which is now recorded on a plaque
at Separation Rapids. It reads:
Here on August 28, 1869, Seneca Howland, O.G. Howland
and William H. Dunn separated from the original Powell
party, climbed to the North Rim, and were killed by the
Indians.
All courageous men, facing difficult choices. Shooting the
treacherous rapids, or scaling the Canyon wall. This story tells
us something about danger, real and perceived. It suggests to us
that the best course is to tackle our problems head on. I
believe
ouryou.
new approach does just that. Realistic expectations
Thank
and international cooperation are required. The world has asked
for decisive action. We must provide it.
^.1
federal financing bank
H
WASHINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
"fcfc, 1
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June 5, 1989
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing
Bank (FFB), announced the following activity for the month
of February 1989.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $142.1 billion on
February 28, 1989, posting a decrease of $323.8 million from
the level on January 31, 1989. This net change was the
result of an increase in holdings of agency debt of
$17.4 million, and decreases in holdings of agency
assets of $0.5 million and in agency-guaranteed debt of
$340.7 million. FFB made 42 disbursements during February.
The Continuing Appropriations Resolution for 1988
allowed FFB borrowers under foreign military sales (FMS)
guarantees to prepay at par debt with interest rates
of 10 percent or higher. Pursuant to this Resolution, FFB
received FMS prepayments of $361.6 million in February 1989.
FFB suffered an associated loss of $27.3 million.
Attached to this release are tables presenting FFB
February loan activity and FFB holdings as of February 28, 1989
NB-318
*•
o
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in
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00
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till.
Page 2 of 4
FEDERAL FINANCING BANK
FEBRUARY 1989 ACTIVITY
BORROWER
AMDUNT
OF ADVANCE
J&XEL
FINAL
MATURITY
INTEREST
INTEREST
KflE
RftlE
annual)
AGENCY EEBT
NATIONAL CREDIT UNION ADMINISTRATION
Central Ti^niiditY Facility
4Note #483
•Note #484
-Utote #485
33,010,000.00
8,600,000.00
45,000,000.00
5/11/89
5/22/89
5/26/89
8.964%
8.915%
9.086%
2/3
2/6
2/8
2/13
2/13
2/16
2/16
2/21
2/23
2/27
2/28
37,000,000.00
212,000,000.00
241,000,000.00
8,000,000.00
221,000,000.00
29,000,000.00
177,000,000.00
182,000,000.00
146,000,000.00
201,000,000.00
668,000,000.00
2/08/89
2/13/89
2/16/89
2/17/89
2/21/89
2/22/89
2/23/89
2/27/89
3/10/89
3/06/89
3/10/89
8.803%
8.903%
8.964%
8.977%
8.977%
8.922%
8.922%
8.901%
8.964%
9.082%
9.112%
2/1
2/1
2/3
2/3
2/3
2/13
2/16
2/23
2/23
2/23
2,141,868.00
79,484.55
17,662.50
2,373,537.00
1,494,325.84
234,408.00
1,510,220.00
2,916,562.52
74,128.00
112,874.14
9/4/12
9/12/90
6/15/12
9/4/12
2/27/12
2/27/12
9/4/12
3/1/13
2/27/12
9/12/90
9.022%
9.226%
8.986%
8.984%
8.988%
9.195%
9.228%
9.277%
9.281%
9.549%
2/9
2/21
2/27
$
TENNES-«?PP VAT.T£y Au/nn^rrY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#995
#996
#997
#998
#999
#1000
#1001
#1002
#1003
#1004
#1005
GOVERNMENT - GUARA^rf^p IfftN^
DEPARTMENT OF DEFENSE
Foreion Militarv Sajes
Greece 16
Philippines 11
Greece 15
Greece 16
Greece 17
Greece 17
Greece 16
Greece 16
Greece 17
Philippines 11
•rollover
(other than
semi-annual)
Page 3 of 4
FEDERAL FINANCING BANK
FEBRUARY 1989 ACTIVITY
BORROWER
AMOUNT
OF ADVANCE
DATE
FINAL
MATURITY
(semiannual)
INTEREST
.RATE.
(other than
semi-annual)
INTEREST
•EMS
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Cqnrnunity DevelommiL
Guaynabo, PR
2/9
$
2,800,000.00
8/30/89
9.120%
9.159% ann.
69,000.00
8,349,000.00
6,728,000.00
3,175,000.00
602,000.00
1,550,000.00
1,154,000.00
500,000.00
1,959,000.00
300,000.00
1,380,000.00
2,060,000.00
1,378,000.00
1,675,000.00
650,000.00
V2/18
1/2/24
4/V91
1/2/18
1/2/18
2/28/91
V3/17
2/21/91
2/21/91
2/21/91
1/2/18
1/2/24
12/31/19
4/1/91
1/3/22
9.017%
8.991%
9.317%
9.213%
9.213%
9.499%
9.233%
9.496%
9.496%
9.496%
9.301%
9.322%
9.344%
9.770%
9.344%
8.918%
8.892%
9.211%
9.109%
9.109%
9.389%
9.129%
9.386%
9.386%
9.386%
9.195%
9.216%
9.237%
9.654%
9.237%
2/1/04
9.132%
5/31/^9
9.105%
RURAL ETFXTTRIFICATION AEMTNISTRATICW
ATIpN
New Hanpshire Electric #270
Tri-State Generation #250
Oglethorpe Power #320
•Wabash Valley Power #104
•Wabash Valley Power #206
•Basin Electric #232
*Dairyland Power #54
•United Power #159
•United Power #212
•United Power #222
Central Iowa Power #295
Brazos Electric Power #230
Brazos Electric Power #332
•Colorado Ute-Electric #203A
•N. W. Electric Power #176
SMALL BUSINESS ADMINISTRATION
2/6
2/6
2/8
2/13
2/13
2/17
2/21
2/21
2/21
2/21
2/23
2/24
2/24
2/27
2/27
State & Local Development Concanv Debentures
Hudson Dev. Corp. 2/8 90,000.00
TENNESSEF V&T,TfY AUTHORITY
Seven States Energy Corporation
Note A-89-05 2/28 708,628,110.38
•maturity extension
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
Page 4 of 4
FEDERAL FINANCING BANK HOLDINGS
(in millions)
Program
February 28. 1989
Agency Debt:
$ 11 ,027 .2
Export-Import Bank
111 .7
NCUA-Central Liquidity Facility
17 ,040 .0
Tennessee Valley Authority
5 ,892 .2
U.S. Postal Service
34 ,071 .0
sub-total*
Agency Assets:
58 ,496 .0
Farmers Home Administration
79 .5
96 .3
DHHS-Health Maintenance Org.
-IQDHHS-Medical Facilities
4 ,071 .2
13 .6
Overseas Private Investment Corp.
Rural Electrification Admin.-CDO
62 ,756 .7
Small Business Administration
sub-total*
H ,,731,.7
Government-Guaranteed Lending:
4.,910..0
49..6
DOD-Foreign Military Sales
314.,8
DEd.-Student Loan Marketing Assn.
-01,,995.,3
DOE-Geothermal Loan Guarantees
383. 0
DHUD-Community Dev. Block Grant
32. 1
26. 1
DHUD-New Communities
995. 2
DHUD-Public Housing Notes +
1, 720. 5
19, 244. 6
General Services Administration + i
596. 1
DOI-Guam Power Authority
849. 6
DOI-Virgin Islands
2, 226. 7
43. 1
NASA-Space Communications Co. +
177. 0
DON-Ship Lease Financing
45, 295. 6
Rural Electrification Administration
SBA-Small Business Investment Cos
$ 142, 123. 3
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total*
grand total*
•figures may not total due to roundinc
•does not include capitalized interest
January 31. 1989
$
11,027.2
113.3
17,021.0
5,892.2
2/1/69 -2/28/89
$
16/1/88 -2/28/89
-0-1.6
19.0
-0-
$
69.5
-6.5
-91.0
300.0
34,053.6
17.4
272.1
58,496.0
79.5
96.3
-04,071.2
14.1
-0-0-0-0-0-0.5
-0-0-0.1
-0-68.0
-1.7
62,757.2
-0.5
-69.8
12,097.6
4,910.0
49.6
320.2
-01,995.3
383.0
32.1
26.1
995.2
1,720.5
19,224.6
600.9
853.0
2,207.8
43.3
177.0
-365.8
-0-0-5.3
-0-0-0-0-0-0-020.0
-4.8
-3.4
18.9
-0.2
-0-
-4,,280.0
-0-0.4
-3.2
-0-41.7
-4.4
-0-0.5
96.4
-38.3
39.3
-36.5
-21.3
64.4
-3.1
-0-
45,636.3
=========
$ 142,447.1
-340.7
== ======
-323.8
$
-4 ,229.4 .
$
-4 ,027.2
TREASURYJMEWS
apartment of ths Treasury • Washington,
D.c. • Telephone 566-2041
Contact: Office of Financing
' 5410
202/376-4350
FOR IMMEDIATE RELEASE
June 5, 19 89
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,411 million of 13-week bills and for $6,405 million
of 26-week bills, both to be issued on June 8, 1989,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
we rage
13--week bills
maturing September 7, 1989
Discount Investment
Price
Rate
Rate 1/
26--week bills
maturing December 7, 1989
Discount Investment
Price
Rate
Rate 1/
8.44%
8.46%
8.46%
8.42%
8.45%
8.44%
8.15%
8.17%
8.17%
97.940
7.97%
97.935
8.00%
97.935 • 7.99%
95.971
95.956
95.961
Tenders at the high discount rate for the 13-week bills were allotted 27%.
Tenders at the high discount rate for the 26-week bills were allotted 55%.
Location
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
$
37,295
27,984,065
16,455
38,890
42,325
36,175
1,047,440
45,505
6,450
30,265
25,595
1 115,510
544,290
i 37,295
5,499,185
16,455
38,890
42,325
36,175
46,300
25,495
6,450
30,265
25,595
62,510
544,290
$
30,600
20,162,565
15,565
39,735
48,875
25,500
730,015
32,270
10,190
41,055
16,255
885,945
459,105
i 30,600
5,545,385
15,565
39,735
34,875
25,500
68,710
24,270
10,190
41,055
16,255
93,695
459,105
TOTALS
$30,970,260
$6,411,230
$22,497,675
$6,404,940
IXPje
Competitive
$27,183,130
Noncompetitive
1,249,080
Subtotal, Public $28,432,210
$2,924,100
1,249,080
$4,173,180
$17,916,840
1,000,855
$18,917,695
$2,124,105
1,000,855
$3,124,960
Federal Reserve
Foreign Official
Institutions
2,462,730
2,162,730
2,400,000
2,100,000
75,320
75,320
1,179,980
1,179,980
TOTALS
$30,970,260
$6,411,230
$22,497,675
$6,404,940
:
An additional $5,080 thousand of 13-week bills and an additional $132,620
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield
NB-319
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 6
Author(s):
Title:
Date:
Final Communique of Ministerial Meeting in Paris of Organization for Economic Cooperation
and Development
1989-06-01
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
TREASURY NEWS _
Dopctmont of tho Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 1:00 p.m., EST
June 6, 1989
STATEMENT OF
DANA L. TRIER
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I appreciate this opportunity to appear before you today to
present the views of the Treasury Department concerning the
reform of the civil tax penalty system. The consensus for
penalty reform which brings us here today is the result of the
participation and contributions by many people, both inside and
outside the government. Earlier this year, the Internal Revenue
Service published a major study recommending many of the reforms
we.will discuss today. Private groups such as the American Bar
Association, the American Institute of Certified Public
Accountants, and the Tax Executives Institute have prepared
thoughtful and helpful comments. But these efforts would not
have been fruitful without the significant efforts of this
subcommittee and congressional staff to turn ideas and concepts
into concrete legislative proposals. In recognition of the hard
work of so many, it is a genuine privilege to comment on H.R.
2528, the Improved Penalty Administration and Compliance Tax
Bill, which was recently introduced with bipartisan sponsorship.
We welcome this attention to one of the most important
aspects of our system of tax administration. To the extent that
the efforts of this subcommittee result in legislation that
eliminates unnecessary complexity and improves the fairness and
effectiveness of the civil tax penalty system, all taxpayers and
the tax system will benefit.
NB-320
-2-
General Comments
Over the past two years, the shortcomings of the current
penalty system have received increasing attention. Both this
subcommittee and the Senate Finance Subcommittee on Oversight
have held hearings illuminating the problems with the current
system.
Those hearings revealed three major complaints about the
penalty system. First, witnesses complained that the system is
too complex both in terms of the number of civil tax penalties
and in terms of the intricacy of some of the provisions. Second,
the system is not well integrated. Taxpayers have been faced
with the imposition of multiple penalties for the same item. And
third, penalty levels were perceived as too high, particularly
for less serious conduct. Together, these perceptions raised
concerns about the basic fairness of the civil tax penalty
system.
These concerns and others have led the Treasury Department
and the Internal Revenue Service to give considerable thought to
the characteristics of a good civil tax penalty system. While it
has not always been possible to achieve complete agreement in
every detail, we believe there is now substantial agreement on
the following basic propositions:
First, the primary objective of the civil tax penalty system
should be to promote voluntary compliance. The effectiveness
of penalties should be judged by how well they promote this
important goal. This goal is achieved in two ways: by
acting directly to deter the noncompliant and by reassuring
the compliant that there are adverse consequences for those
who do not comply.
Second, penalties should be fair. This goal is achieved by
treating similarly situated taxpayers similarly and by having
the severity of the penalty be proportional to the
culpability of the noncompliant taxpayer.
Third, penalties should be integrated. This goal is achieved
by structurinc the penalty system so that noncompliant
behavior attracts an appropriately severe sanction while
avoiding the imposition of multiple sanctions for what is
essentially the same occurrence.
Fourth, penalties should be as simple and as understandable
as possible while maintaining effectiveness. This goal is
achieved by making the penalties both comprehensible to the
taxpayer and administrable by the Service.
We have reviewed H.R. 2528, and I would like to spend the
remainder of my time discussing this bill. In general, we
believe that this bill, if enacted, would greatly simplify and
-3coordinate the operation of the penalty system and would, as a
by-product, improve both the quality of information provided to
the Service and overall taxpayer compliance with the tax system.
I will give our comments in the same order in which the
amendments to the Internal Revenue Code appear in the bill.
Thus, I will first discuss the document and information return
penalties, then the accuracy related penalties and the preparer,
promoter and protester penalties, and finally the failure to file
or pay penalties.
Document and Information Reporting Penalties
Current Law
Information reporting with respect to the income and
deduction items of other taxpayers has played an increasingly
important role in recent efforts to improve compliance. The
Service currently receives approximately 1 billion information
returns and statements each year. This information constitutes
an important part of the Service's data base for auditing tax
returns and measuring compliance with the tax system. As the
Service's functions become increasingly automated in the future,
the need for accurate and timely information reporting will only
increase.
Information reporting may be divided into four main
categories: payor to Service reporting, payor to payee
reporting, payee ~o payor reporting, and miscellaneous
information reporting. Under current law, there are dozens of
different penalties to enforce these reporting requirements.
Although the obligations placed on the reporting person are
generally similar, due to the ad hoc manner in which the
reporting requirements and accompanying penalties have been
enacted, there are numerous similar reporting requirements which
impose similar but not necessarily identical penalties.
In general, any person who fails to file an information
return with the Service on or before the prescribed filing date
(February 28 for most information returns) is subject to a $50
penalty for each failure, with a maximum penalty of $100,000 per
calendar year. See section 6721(a). Any person who fails to
provide a copy of an information return (a "payee statement") to
a payee on or before the prescribed due date (January 31 for most
payee statements) is generally also subject to a penalty of $50
for each failure, with a maximum penalty of $100,000 per calendar
year. See section 6722(a). This provision is, however,
difficult to enforce. If a person fails to include all of the
information required to be shown on an information return or a
payee statement or includes incorrect information, then a penalty
of $5 may be imposed with respect to each such failure, with a
maximum penalty of $20,000 per calendar year. See section
6723(a). In the case of intentional failures to comply with the
-4information return requirements, the penalty is $100 per return
with no maximum penalty. Sections 6721(b) and 6722(b). No
penalty is imposed if the failure is due to reasonable cause and
not to willful neglect. Section 6724(a).
In the case of interest and dividend information returns and
statements, there is no maximum penalty and a penalty may only be
waived upon a showing that the reporting person exercised due
diligence. Section 6724(c).
A penalty may also be imposed for each failure to include a
correct taxpayer identification number ("TIN") on a return or
statement and for each failure to furnish a correct TIN to
another person. The amount of the penalty that may be imposed is
either $5 or $50 for each failure, depending on the nature of the
failure. See section 6676.
Persons who file large numbers of information returns are
required to file such returns on magnetic media (i.e., magnetic
tapes and disks). Section 6011(e). Filing on magnetic media is
generally required only if the number of information returns
filed exceeds 250, except for information returns relating to
payments of interest, dividends, and patronage dividends where
the threshold is 50 returns. Section 6011(e)(2); Treas. Reg. §
301.6011-2(c)(l)(i).
Provisions of H.R. 2528
Failure to file correct information returns. Section 101 of
the bill modifies the information reporting penalties in order to
encourage persons to file correct information returns and
statements even though such returns are filed or corrected after
the prescribed filing date.
Under the bill, any person who fails to file a correct
information return or statement with the Service on or before the
prescribed filing date is subject to a penalty that varies based
on when, if at all, a correct information return is filed. If a
person files a correct return after the prescribed filing date
but on or before the date that is 30 days after the prescribed
filing date, the amount of the penalty is $15 per return, with a
maximum penalty of $75,000 per calendar year. If a person files
a correct information return after the date that is 30 days after
the prescribed filing date but on or before August 1, the amount
of the penalty is $30 per return, with a maximum penalty of
$150,000 per calendar year. If a correct return is not filed on
or before August 1, the amount of the penalty is $50 per return,
with a maximum penalty of $250,000 per calendar year.
The bill also provides a de minimis exception that applies to
incorrect information returns that are corrected on or before
August 1. Under the exception, if an information return is
originally filed without all of the correct required information
and the return is corrected on or before August 1, then the
-5original return is treated as having been filed with all of the
correct required information. The number of information returns
that may qualify for this exception for any calendar year is
limited to the greater of 10 returns or 0.5 percent of the total
number of returns that are required to be filed by the person
during the calendar year.
The bill maintains the current rules that failures due to
intentional disregard of the filing requirements are subject to a
penalty of $100 per return or, if greater, 10 percent (5 percent
for certain returns) of the amount required to be shown on the
return, with no maximum penalty.
Failure to furnish correct payee statements. Under section
101 of the bill, any person who fails to furnish a correct
statement to a payee on or before the prescribed date is subject
to a penalty of $50 per statement, with a maximum penalty of
$100,000 per calendar year. If the failure to furnish a correct
payee statement is due to intentional disregard of the filing
requirements, the penalty is $100 per statement or, if greater,
10 percent (5 percent for certain payee statements) of the amount
required to be shown on the statement, with no maximum penalty.
Failure to comply with other information reporting
•requirements. Under section 101 of the bill, any person who
fails to comply with other specified information reporting
requirements is subject to a penalty of $50 for each failure,
with a maximum penalty of $100,000 per calendar year. The
information reporting requirements specified for this purpose
include any requirement to include a correct TIN on a return or
statement and any requirement to furnish a correct TIN to another
person.
Abatement. Section 101 of the bill provides that no penalty
is imposed if a failure to comply with the information reporting
requirements is due to reasonable cause and not to willful
neglect. The bill thus repeals the special due diligence
requirements that apply to reporting the payment of interest and
dividends and makes those requirements subject to the same waiver
criteria as the other information reporting penalties.
Magnetic media. Section 102 of the bill repeals the
provision of present law that requires persons filing more than
50 information returns relating to payments of interest,
dividends, and patronage dividends to file such returns on
magnetic media and provides that the Service may not require the
filing of less than 250 information returns to be on magnetic
media.
General Accounting Office Studies. Sections 103 and 104 of
the bill require the General Accounting Office to study whether
the Service should be permitted to disclose names and TINs to
payors for purposes of clearing up discrepancies on information
returns, and whether service bureaus which transmit information
-6returns to the Service should be subject to registration or other
regulation.
Discussion
The provisions of sections 101 and 102 of the bill go far
toward alleviating the two principal problems with existing
information reporting penalties. First, because these penalties
are currently imposed at a flat per item rate, there is little
incentive for a person who has missed a filing date or has filed
incorrect information to take prompt corrective action. And
second, the numerous penalties each contain slightly different
requirements, even though the underlying reporting requirements
are essentially the same.
By making.the information return penalties time sensitive,
the bill provides an incentive to correct failures to file on
time or to file accurately. However, the bill would not make the
payee statement penalties time sensitive. Because the timely and
accurate furnishing of payee statements is essential if taxpayers
are to timely file their returns, we believe that these penalties
should also be made time sensitive. On the other hand, because
the utility of such information is greatly diminished if not
received by taxpayers in sufficient time to file their tax
returns, simply copying the bill's rules for information returns
is not practical. We therefore believe that the payee statement
penalties should be reduced to $10 per statement if a failure to
provide a payee statement is corrected within 30 days after the
prescribed due date.
In addition, with respect to the information return
penalties, we believe that the first step of the penalty—$15 for
failures corrected within 30 days—may be too harsh.
Consideration should be given to lowering this penalty to $10 per
return.
Although the bill standardizes the information reporting
penalties, it does so in an uneven fashion with respect to one
important group: small businesses. Because the total dollar
caps on the penalties would be raised for all information returns
(other than interest and dividends), small business which file a
large number of information returns and payee statements may
still have very large penalties imposed. On the other hand,
because approximately 80 percent of all persons filing
information returns file less than 10 returns per year, the de
minimis rule may have the unintended effect of relieving many
filers from the obligation to file accurate information returns.
We believe that consideration should be given to two changes
to improve this uneven effect on small businesses. First,
consideration should be given to providing lower caps for small
businesses. With respect to the information return penalties, we
recommend caps of $25,000, $50,000, and $100,000 for the three
steps in the penalty. We will be pleased to work with the
-7subcommittee to develop a fair and administrable definition of
businesses eligible for this lower limit.
Second, the de minimis rule should provide that it only
applies to 0.5 percent of returns filed in a calendar year.. For
filers who file fewer than 200 information returns and would not
benefit from the de minimis rule, we would suggest that the
legislative history provide that a waiver of the penalty is
appropriate where the filer has diligently attempted to file
accurate information returns and has promptly corrected errors
when discovered. It should also be clarified that failure to
correct an information return within a reasonable time after a
request by the Service for correction is an intentional disregard
of the filing requirements and is subject to penalty.
There is also some confusion about what, if any, statute of
limitations applies with respect to information returns and payee
statements. We recommend adoption of a 6 year statute of
limitations.
We note that the bill would repeal the statutory due
diligence requirements with respect to information reporting for
payments of interest and dividends. Although we believe that
this is an important step in improving the simplicity of the
information reporting penalties, many information providers have
made a substantial investment in compliance with the existing
rules. Thus, we recommend that the legislative history clarify
that the current regulatory due diligence standards should
continue to apply as a safe harbor for determining whether the
reporting person has exercised reasonable care.
The standardization of the magnetic media reporting
requirements is an important step towards simplifying the burdens
placed on filers of information returns. We further recommend
adoption of the Service task force's recommendation that the
penalty for failure to file on magnetic media be based on the
numbers of returns filed on paper in excess of the prescribed
maximum.
We are, however, disappointed that the subcommittee has not
seen fit to allow the Service to disclose names and TINs to
filers when the Service's matching procedures indicate a
discrepancy between its records and the filer's submission.
Because many such errors involve custodianships, change of name
upon marriage, and the like, such disclosure would significantly
facilitate resolution of such errors. We want to stress that
such disclosure should be limited to names and TINs and should
not involve confidential tax return information or addresses.
Nevertheless, given the significant question of taxpayer privacy
involved, we will be pleased to cooperate with the proposed
study.
-8-
Accuracy Related Penalties
Current law
Negligence and fraud penalties. If any part of an
underpayment of tax required to be shown on a return is due to
negligence (or disregard of rules or regulations), a penalty may
be imposed equal to 5 percent of the total amount of the
underpayment. Section 6653(a). A portion of an underpayment of
tax that is attributable to a failure to include on an income tax
return an amount shown on an information return is subject to the
negligence penalty absent clear and convincing evidence to the
contrary. Section 6653(g). If any part of an underpayment of
tax required to be shown on a return is due to fraud, a penalty
may be imposed equal to 75 percent of the portion of the
underpayment-that is attributable to fraud. Section 6653(b).
Substantial understatement penalty. If the correct income
tax liability of a taxpayer for a taxable year exceeds that
reported by the taxpayer by the greater of 10 percent of the
correct tax or $5,000 ($10,000 in the case of most corporations),
then a substantial understatement exists and a penalty may be
imposed in an amount equal to 25 percent of the underpayment of
tax attributable to the understatement. In determining whether a
substantial understatement exists, the amount of the
understatement is reduced by any portion attributable to an item
if (1) the treatment of the item on the return is or was
supported by substantial authority, or (2) facts relevant to the
tax treatment of the item were adequately disclosed on the return
or a statement attached to the return. Special rules apply to
tax shelters. Section 6661.
Valuation penalties. If an individual, closely held
corporation, or personal service corporation underpays income tax
for any taxable year by $1,000 or more as a result of a valuation
overstatement, then a penalty may be imposed with respect to the
amount of the underpayment that is attributable to the valuation
overstatement. A valuation overstatement exists if the value or
adjusted basis of any property claimed on a return is 150 percent
or more of the correct value or adjusted basis. As the
percentage by which the valuation claimed exceeds the correct
valuation increases, the amount of the penalty that may be
imposed increases from 10 to 20 to 30 percent of the underpayment
attributable to the valuation overstatement. Section 6659.
Similar penalties may be imposed with respect to an underpayment
of income tax that is attributable to an overstatement of pension
liabilities, and to an underpayment of estate or gift tax that is
attributable to a valuation understatement. Sections 6659A and
6660.
-9-
Provisions of H.R. 2528
Section 201 of the bill reorganizes the accuracy penalties
into a new structure that eliminates the current overlapping
application of these penalties.
Accuracy-related penalty. The accuracy-related penalty,
which is imposed at a rate of 20 percent, applies to the portion
of any underpayment that is attributable to (1) negligence or
disregard of rules or regulations; (2) any substantial
understatement of income tax; (3) any substantial valuation
overstatement; (4) any substantial overstatement of pension
liabilities; and (5) any substantial estate or gift tax valuation
understatement.
If an underpayment of tax is attributable to negligence (or
disregard of rules and regulations), the accuracy-related penalty
applies only to the portion of the underpayment that is
attributable to negligence rather than, as under current law, to
the entire underpayment of tax. See, e.g., Asphalt Products Co.,
Inc., 482 U.S. 117 (1987). In adcTTtion, the bill repeals the
presumption under which an underpayment is treated as
attributable to negligence if the underpayment is due to a
failure to include on an income tax return an amount shown on an
information return.
In addition to coordinating the penalties in order to prevent
multiple impositions, the bill makes four changes to the
substantial understatement penalty. First, the rate is lowered
to 20 percent. Second, the list of authorities upon which
taxpayers may rely is intended to be expanded to include certain
nonprecedential authorities. Third, the bill requires the
Service to publish an annual list of positions for which it
believes there is not substantial authority. And fourth, the
bill requires the waiver of the penalty if the taxpayer's
position was shown to be due to reasonable cause and the taxpayer
acted in good faith.
The penalty that applies to the portion of an underpayment
that is attributable to a substantial valuation overstatement is
the same as the valuation overstatement penalty provided under
current law with five principal modifications. First/ the bill
extends the penalty to all taxpayers. Second, a substantial
valuation overstatement exists if the value or adjusted basis of
any property claimed on a return is 200 percent or more of the
correct value or adjusted basis. Third, the penalty is to apply
only if the amount of the underpayment attributable to a
valuation overstatement exceeds $5,000 ($10,000 in the case of
most corporations). Fourth, the amount of the penalty is 20
percent of the amount of the underpayment if the value or
adjusted basis claimed is 200 percent or more but less than 400
percent of the correct value or adjusted basis. And fifth, the
bill provides that this penalty is doubled (to 40 percent) if the
-10value or adjusted basis claimed is 400 percent or more of the
correct value or adjusted basis. The bill provides similar
modifications to the penalty for overstatements of pension
liabilities and "the penalty for estate or gift tax valuation
understatements.
Fraud penalty. The fraud penalty, which is imposed at a rate
of 75 percent, applies to the portion of any underpayment that is
attributable to fraud. This penalty is essentially unchanged
from prior law.
Abatement and special rules. The bill provides that no
penalty is to be imposed if it is shown that there was reasonable
cause for an underpayment and the taxpayer acted in good faith.
The bill also provides that an accuracy-related or fraud penalty
applies only if a return has been filed. (Under present law, a
negligence or fraud penalty, in addition to the failure to file
penalty, may be imposed in the case of a failure to file a
return.) Finally, the bill repeals the higher interest rate that
applies to substantial underpayments that are attributable to
tax-motivated transactions (section 6621(c)).
Discussion
The bill's provisions modifying the accuracy penalties make a
number of important improvements to the current system which the
Administration strongly supports:
0
The penalties would be now coordinated so that only one
penalty could be imposed on an item which resulted in an
underpayment of tax.
0
The current negligence penalty would be targeted to the
portion of the underpayment of tax that is due to
negligence. This would not only make the penalty
consistent with other penalties, but would avoid
penalizing taxpayers on the portion of an underpayment
that is due to a legitimate disagreement with the
Service's treatment of an item or to uncertainty in the
tax law.
0
The substantial understatement penalty would be improved
by broadening the definition of authority*
0
The bill would repeal three unnecessary penalties which
have added significant complexity to the tax system: the
higher interest rate that applies to substantial
underpayments that are attributable to tax-motivated
transactions (section 6621(c)) and the presumptive
negligence penalties (sections 6653(f) and (g)).
While we will suggest several modifications which would, we
believe, improve this portion of the bill, I want to stress our
-11strong support for the truly significant fundamental reforms
which the bill represents.
We cannot overemphasize the point that the purpose of the
penalty system is not to collect penalties but to encourage
taxpayers to report and pay the correct amount of tax. To a
great extent, these goals can be accomplished by encouraging
taxpayers to disclose aggressive positions or positions where the
law is unclear. We therefore recommend that consideration be
given to all of the circumstances where disclosure of a
questionable item should be sufficient to prevent the imposition
of the accuracy-related penalty. In particular, we question
whether the accuracy-related penalty should be imposed on the
basis of negligence in situations where the taxpayer has made a
specific disclosure of the item in question (as opposed to merely
completing the appropriate entry on the tax return as provided in
Rev. Proc. 89-11).
However, in order to prevent the nonimposition of penalties
in egregious cases, disclosure should not provide an "out" if the
disclosed return position is frivolous. For example, the
accuracy-related penalty should apply to a taxpayer even if he or
she discloses that tax is not being paid because United States
currency is not legal tender or that medical expense deductions
are being claimed for a pet dog. Similarly, the fact that the
taxpayer discloses that he or she is claiming a deduction for
which there is no substantiation should not prevent the
imposition of the accuracy-related penalty on the basis of
negligence.
A provision should be added to the substantial understatement
penalty to provide that the disclosure of a position will not be
effective to avoid the penalty unless there is an affirmative
indication on the return that a disclosure under this section has
been made. It is anticipated that this requirement would be met
by the Service putting a check-off box on tax returns. This rule
would be coordinated with the positions that are considered by
the Service not to need special disclosures by providing in the
instructions to the appropriate forms that the box need not be
checked with respect to such positions. See Rev. Proc. 89-11.
The special tax shelter rules contained in the substantial
understatement penalty (section 6661(b)(2)(C)) should be
repealed. Such rules inhibit rather than encourage disclosures
by denying a taxpayer the certainty that disclosure will avoid
the penalty.
The annual list setting forth positions with respect to which
the Service believes there is no substantial authority is, we
believe, a step in the direction of diminishing the confusion
regarding what is "substantial authority." It must, however, be
made clear that no inference is to be drawn that there is
substantial authority for items that are not on the list. Such a
list does not, however, deal adequately with another important
-12problem. Where a taxpayer has substantial authority for an item,
but it is clear that, if discovered, the Service would contest
the item, there is currently no penalty if the item is not
disclosed. We therefore believe that the Service should be
empowered to publish a list of items for which disclosure is
mandatory if the penalty is to be avoided, regardless of whether
substantial authority exists. Conversely, we would strongly
oppose any attempt to provide that such a list of items to be
disclosed is exclusive.
Preparer, Promoter, and Protester Penalties
Current law
Sanctions and costs awarded by courts. If it appears to the
Tax Court that proceedings before it have been instituted or
maintained primarily for delay, the taxpayer's position is
frivolous, or the taxpayer has unreasonably failed to pursue
administrative remedies, the Court may award damages not to
exceed $5,000 to the United States. Section 6673.
Return preparer penalties. An income tax return preparer is
subject to a penalty of $100 if any part of an understatement of
tax on a return or claim for refund is due to the preparer's
negligent or intentional disregard of rules or regulations. In
addition, an income tax return preparer is subject to a penalty
of $500 if any part of an understatement of tax on a return or
claim for refund is due to the return preparer's willful attempt
in any manner to understate tax. Section 6694. An income tax
return preparer is also subject to a penalty of $25 for each
failure to furnish a copy of a return or claim for refund to the
taxpayer, sign the return or claim for refund, or furnish his or
her TIN. Section 6695.
Penalty for promoting abusive tax shelters. Any person who
organizes, assists in the organization of, or participates in the
sale of any interest in, a partnership or other entity, any
investment plan or arrangement, or any other plan or arrangement,
is subject to a penalty if in connection with such activity the
person makes a false or fraudulent statement or a gross valuation
overstatement. The amount of the penalty equals the greater of
$1,000 or 20 percent of the gross income derived, or to be
derived, by the person from the activity. Section 6700. It is
unclear under present law whether the term "activity" refers to
each sale of an interest in a tax shelter or whether the term
activity refers to the overall activity of promoting an abusive
tax shelter.
Penalty for aiding and abetting the understatement of tax
liability. Any person who aids, assists in, procures, or advises
with respect to the preparation or presentation of any portion of
a return or other document under the tax laws which the person
knows will be used in connection with any material matter arising
-13under the tax laws, and the person knows that such portion will
(if so used) result in an understatement of the tax liability of
another person is subject to a penalty equal to $1,000 for each
return or other document ($10,000 in the case of returns and
documents relating to the tax of a corporation). Section 6701.
Frivolous income tax return penalty. Any individual who
files a frivolous income tax return is subject to a penalty of
$500. Section 6702. Taxpayers may contest this penalty by
paying 15 percent ($75) and filing a claim for refund. Section
6703.
Disclosure of information by return preparers. Sections 6713
and 7216 impose penalties on return preparers for the
unauthorized disclosure of information relating to a tax return.
Provisions of H.R. 2528
Sanctions and costs awarded by courts. Section 301 of the
bill authorizes the Tax Court to impose a penalty not to exceed
$25,000 if a taxpayer institutes or maintains a proceeding
primarily for delay, takes a position that is frivolous, or
unreasonably fails to pursue available administrative remedies.
The bill also authorizes the Tax Court to require any attorney or
other person permitted to practice before the Court to pay excess
costs, expenses, and attorney's fees that are incurred because
the attorney or other person unreasonably and vexatiously
multiplied any proceeding before the Court. In addition, the
bill provides for collection by the Service of monetary sanctions
and costs awarded by courts other than the Tax Court and
clarifies the authority of courts of appeal to impose sanctions.
Return preparer penalties. Section 302 of the bill revises
the current law penalties that apply in the case of an
understatement of tax that is caused by an income tax preparer.
First, the bill provides that if any part of an understatement of
tax on a return or claim for refund is attributable to a position
for which there was not a realistic possibility of being
sustained on its merits and the preparer knew (or reasonably
should have known) of such position, then that return preparer is
subject to a penalty of $250. In addition, if any part of an
understatement of tax on a return or claim for refund is
attributable to a willful attempt by an income tax return
preparer to understate the tax liability of another person or to
any reckless or intentional disregard of the income tax law by an
income tax return preparer, then the income tax return preparer
is subject to a penalty of $1,000.
Under section 303 of .the bill, the return preparer penalties
that apply to each failure to furnish a copy of a return or claim
for refund to the taxpayer, sign the return or claim for refund,
and furnish his or her TIN are increased to $50 per failure and
the total amount of penalties that may be imposed for any type of
failure for any calendar year is limited to $25,000.
-14-
Penalty for promoting abusive tax shelters. Under section
304 of the bill, the amount of the penalty imposed for promoting
abusive tax shelters equals the lesser of $1,000 or 100 percent
of the gross receipts derived or to be derived by the person from
such activity. In calculating the amount of the penalty, the
organization of an entity, plan or arrangement and the sale of
each separate interest constitutes a separate activity.
Penalty for aiding and abetting the understatement of tax
liability. Section 305 of the bill amends the penalty for aiding
and abetting the understatement of tax liability by imposing the
penalty in cases where the person aids, assists in, procures, or
advises with respect to the preparation or presentation of any
portion of a return or other document if the person knows or has
reason to believe that the return or other document will be used
in connection with any material matter arising under the tax
laws, and the person knows that if the portion of the return or
other document is so used, an understatement of the tax liability
of another person would result. In addition, the bill provides
that a penalty for promoting abusive tax shelters is not to be
imposed on any person with respect to any document if an aiding
and abetting penalty is imposed on such person with respect to
such document.
Frivolous income tax return penalty. Section 306 of the bill
increases the penalty for filing frivolous income tax returns
from $500 per return to $1,000 per return. This section would
also amend section 6703 to require the full payment of this
penalty prior to the commencement of any proceeding to contest an
assertion of the penalty.
Disclosure of information by preparers. Section 309 of the
bill would provide that, under regulations, the sanctions for the
unauthorized disclosures of information by a return preparer
would not apply to the use of such information for quality or
peer reviews.
Discussion
Given the Tax Court's view that an increase in the section
6673 penalty is needed, we do not oppose section 301 of the bill,
despite our view that this bill should generally not be a vehicle
for increases in penalties. We also do not oppose the provisions
concerning proceedings in other courts, although we do generally
endorse Assistant Attorney'General Peterson's recommendations for
improvements in those provisions.
We agree that the standard of practice for return preparers
should be raised. The bill's provision has the advantage of
setting a standard that is substantially the same as the current
ethical guidelines for attorneys and accountants. However, we
question the need to raise the level of these penalties and note
that the Service's task force recommended no such increase. In
-15addition, we recommend that the words "reckless or" be stricken
from proposed section 6694(b), thereby limiting the more severe
sanction to willful or intentional conduct. As a technical
point, proposed section 6695(b)(2) should refer to "rules or
regulations" rather than to "the provisions of this title".
In addition, we believe the abusive tax shelter and the
aiding and abetting penalties should, as a matter of equity, have
an explicit statute of limitations. We recommend adoption of a 6
year statute of limitations. We also share the administrative
concerns expressed by others today regarding the revision to
section 6700 in so far as it would make the amount of "gross
receipts derived" an issue in each such proceeding.
With respect to the frivolous return penalty, we believe that
the penalty is effective at the current rate of $500 and do not
believe that it should be raised to $1,000. We do, however,
support the bill's repeal of the ability of taxpayers to contest
this penalty in district court by paying only 15 percent of the
amount of the penalty. We also support the repeal of the section
7407 bonding provision.
Finally, we are concerned about the amendment to the
regulatory authority under section 7216(b). Although we agree
that disclosure by a tax return preparer, within well defined
limits to assure confidentiality, should be permitted for peer
and quality review, we believe that it should be made clear that
this disclosure exception relates only to return information
within the files of the preparer and would not require
disclosures by the Service (other than pursuant to existing
Failure to File or Pay Penalties
waiver provisions).
Current law
Failure to file. A taxpayer who fails to file a tax return
on a timely basis is subject to a penalty equal to 5 percent of
the net amount of tax due for each month that the return is not
filed, up to a maximum of 5 months or 25 percent. The net amount
of tax due is the excess of the amount of the tax required to be
shown on the return over the amount of any tax paid on or before
the due date prescribed for the payment of tax. No penalty is
imposed if the taxpayer is due a refund. Section 6651.
Failure to make timely deposits of tax. If any person who is
required to deposit taxes with a government depository fails to
deposit such taxes oh or before the prescribed date, a penalty
may be imposed equal to 10 percent of the amount of the
underpayment, unless it is shown that such failure is due to
reasonable cause and not willful neglect. The amount of the
underpayment for this purpose is the excess of the amount of the
-16tax required to be deposited over the amount of the tax, if any,
deposited on or before the prescribed date. Section 6656.
Provisions of H.R. 2528
Failure to file. The bill modifies current law by providing
that the fraud and negligence (accuracy-related) penalties are
not to apply in the case of a negligent or fraudulent failure to
file a return. Instead, section 401 of the bill provides that in
the case of a fraudulent or intentional failure to file a return,
the failure to file penalty is to be increased to 15 percent of
the net amount of tax due for each month that the return is not
filed, up to a maximum of 5 months or 75 percent.
Failure to make timely deposits of tax. Section 402 of the
bill also modifies the penalty for the failure to make timely
deposits of tax in order to encourage depositors to correct their
failures. Under the bill, a depositor is subject to a penalty
equal to 2 percent of the amount of the underpayment if the
failure is corrected on or before the date that is 5 days after
the prescribed due date. This penalty is increased to 5 percent
if the failure is corrected after 5 days but before 15 days after
the prescribed due date. If the failure is not corrected after
15 days after the prescribed due date, the penalty is 10 percent.
The bill also repeals the current 25 percent penalty on
overstated deposit claims.
Discussion
We support the coordination mechanism contained in the bill
with respect to fraudulent or intentional failures to file
returns. However, as with the current fraud penalty, the Service
should bear the burden of proof with respect to this portion of
the failure to file penalty.
We believe that the current rule that there is no penalty or
other charge for the late filing of a return with a refund due
should be changed. Collecting correct information about a
taxpayer's tax liability is an important function of the Service.
Where a return is not filed, the Service cannot determine whether
or how much tax is owed and must attempt to contact the taxpayer
and get him or her to file a return on the assumption that there
is a balance due. We therefore believe that, in the case of the
failure to file a refund return, a modest late filing charge
should be imposed on the taxpayer if the return is not filed
within 4 months of the due date (which is the amount of, time
typically granted by the Service in an automatic extension of the
time to file a return).
Finally, we would like to express our concerns regarding
section 402 of the bill. As you know, this specific proposal was
not recommended during the hearings and was only briefly
discussed during the "round table" meetings. The federal tax
deposit system is vital to the integrity of the pay-as-you-go
-17systenvand amendments to its operation deserve careful study. We
agree that the current penalty does not provide a sufficient
incentive for employers to quickly cure late deposits and believe
that this bill should, if possible, contain a provision designed
to correct this. We regret that we have not had sufficient time
to study all of the ramifications of this provision. In
particular, we are concerned that the 2 percent first step may be
too low and that a three step system may create significant
administrative difficulties. We would like to study this
proposal (and other proposals) further before taking a specific
position on amending this penalty.
Revenue Estimates
The Treasury Department is currently working on a revenue
estimate for H.R. 2528. We regret that we do not have a final
estimate ready in time for this hearing; however, our preliminary
estimates indicate that it should be possible for H.R. 2528, with
certain adjustments affecting only one or two of its provisions,
to be essentially revenue neutral. Although we believe that the
reforms made by this bill are important, in these times of fiscal
restraint, care must be taken in this (as in other tax
legislation) to avoid significant unintended revenue loss. After
we have finalized our revenue estimates, we will endeavor to work
with the subcommittee to make whatever adjustments in the bill
are necessary to achieve ourConclusion
goal of revenue neutrality.
In conclusion, I would like to repeat that I believe that
H.R. 2528 would, if enacted, constitute an important reform of
the civil tax penalty system and would go far toward simplifying
and improving this area of tax administration. The subcommittee
is to be commended for this significant effort which has been
achieved with bipartisan support, while we have recommended
changes which we believe will improve the bill, we strongly
support the basic structure of the reforms set forth in H.R.
2528. We stand ready to work with the subcommittee.
This concludes my prepared remarks. I would be happy to
respond to any questions.
TREASURY NEWS _
department of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 11:00 a.m.
June 6, 1989
STATEMENT OF THOMAS S. NEUBIG
DIRECTOR AND CHIEF ECONOMIST
OFFICE OF TAX ANALYSIS
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
I am pleased to have this opportunity to present the views
of the Administration with respect to the targeted jobs tax
credit (TJTC) and the rehabilitation tax credit. The Administration's Fiscal Year 1990 Budget does not include an extension of
the expiring TJTC nor any modification of the rehabilitation
credit. Accordingly, we oppose any extension of the TJTC or
modification of the rehabilitation credit.
The Administration supports the objective o
f providing
increased job opportunities for hard -to-employ
Job:s Training Partnership Act (JTPA) , the new J individuals. The
and Basic Skills Training Program (JOBS) for pe ob Opportunities
the Jobs Corps, and several other targeted trai rsons on welfare,
currently provide assistance to most of the ind ning programs
for the TJTC. We believe these prog rams are su ividuals eligible
for increasing employment of these g roups. In
bel:ieve the TJTC has been far less e ffective in perior vehicles
tar<geted employment. In this budget envi ronmencontrast, we
eff<sctive programs can be continued.
increasing
t, only the most
NB-321
-2Although the Administration supports the continued
availability of the rehabilitation tax credit, both budgetary
constraints and concerns about renewed tax shelter activity
prevent the Administration from supporting proposals to expand
the credit's use or availability.
My testimony today will briefly discuss the existing targeted
jobs tax credit and rehabilitation tax credit, and several
considerations associated with improving the effectiveness of
these credits.
TARGETED JOBS TAX CREDIT
Background and Current Law
Section 51 of the Internal Revenue Code allows employers a
tax credit for employing eligible individuals belonging to one
of nine target groups. The amount of the allowable credit is
generally equal to 40 percent of the first $6,000 of wages paid
to a member of a targeted group in the first year of employment.
An employer's deduction for wages paid is reduced by the amount
of the credit. A targeted group member must be employed at least
90 days (14 days in the case of summer youth employees) before an
employer qualifies to receive the TJTC. The credit is unavailable for wages paid to an individual who begins work after
December 31, 1989.
The nine eligible targeted groups are the following:
(1) economically disadvantaged youths (ages 18-22); (2) economically disadvantaged summer youth (ages 16-17); (3) economically
disadvantaged youths participating in cooperative education
programs; (4) economically disadvantaged Vietnam-era veterans;
(5) economically disadvantaged ex-convicts; (6) certain handicapped workers; (7) certain work incentive employees (AFDC
recipients and WIN program registrants); (8) Supplemental
Security Income recipients; and (9) general assistance
recipients. For purposes of the TJTC, a worker is economically
disadvantaged if the worker's family income is below 70 percent
of the lower living standard income level.
To claim the credit for an employee, an employer must receive
a written certification that the employee is a targeted group
member. Certifications of eligibility for employees are generally provided by state employment security agencies. The employer
must have received or filed a written request for a certification
on or before the date a targeted worker begins work. If the
employer has received a written preliminary determination
(voucher) that the employee is a member of a targeted group, the
employer may file a written certification request within five
calendar days after the targeted worker begins work.
-3Since its "enactment in 1978, the TJTC has been extended five
times with various modifications. In 1986, the credit expired
for part of the year before being retroactively extended. The
most recent changes were made by the Technical and Miscellaneous
Revenue Act of 1988 (the "1988 Act"), which extended the TJTC one
additional year for targeted workers hired in calendar 1989. The
1988 Act changed the eligibility of economically disadvantaged
youth from persons between the ages of 18 and 24, to persons
between the ages of 18 and 22. The 1988 Act also reduced the
rate of credit for disadvantaged summer youth to 40 percent of
the first $3,000 of wages.
The number of employed individuals the state employment
security agencies have certified as being eligible for the credit
reached a peak of 640,000 in 1985. Certifications in 1988
totaled 498,589, reflecting the lower credit rate and tighter
eligibility criteria in the 1986 legislation. Table 1 shows the
certifications by targeted group in calendar year 1988.
Recent tax return data on the TJTC is shown in Table 2. Due
to normal lags in processing and transcribing corporate tax
return data, 1986 returns are the latest year for which data with
detailed information is available. In 1985, $660 million of TJTC
credits were earned with $602 million reported on corporate tax
returns and $58 million on individual tax returns. In 1986,
approximately $342 million TJTC credits were earned ($299 million
by corporations and $43 million by individuals). The decline in
credits between 1985 and 1986 can be explained by the credit's
expiration for much of 1986. In fact, many of the 1986 credits
were earned on 1986 wages paid to workers hired in 1985.
The TJTC in 1985, the year with the highest number of
certifications, was claimed by only 33,400 corporations, or
only one percent of all corporations. Firms in the wholesale and
retail trade industry claimed 48 percent of TJTC credits, firms
in manufacturing 32 percent, and firms in the service industry 12
percent. Manufacturing firms were the most likely to claim the
credit, yet only 3.4 percent of manufacturing corporations
claimed the credit.
The TJTC program if extended for one year, as currently
administered, would cost an additional $200 million over the
Fiscal Year 1990-94 period ($43 million in FY 1990, $79 million
in FY 1991, and $83 million in FY 1992-94). Table 3 shows the
revenue impact of alternative periods of extensions of the TJTC
program. Administrative costs would be in addition to the
revenue loss from the tax credits.
Discussion
The TJTC was intended to increase employment opportunities
for targeted workers by reducing the wage costs of employing
these workers. The credit achieves its desired effect only when
-4it results in the hiring of targeted individuals who otherwise
would not have been hired, and when their employment results in a
net increase in the long-run employment of such workers.
Studies commissioned by the Labor Department1 in 1986 and the
National Commission for Employment Policy2 (NCEP) in 1988 have
found that workers certified as eligible for the TJTC do not have
significantly different long-range earnings and employment
histories than similar workers in "control" groups who were not
certified for the TJTC. Both studies were serious scientific
attempts to quantify the employment benefits of the TJTC through
analysis of state unemployment compensation wage data on workers
followed over several years. While the first study found some
evidence of small positive employment effects for. some groups (up
to 4 weeks of employment for certified nonwhite male youth) and
negative impacts for others (certified veterans had 1.5 quarters
less employment on average), the study qualified these results by
acknowledging that they could have been due to other differences
between the certified and noncertified groups. The NCEP study
which examined the employment histories of certified and control
groups using several years of wage data provided by the states of
Missouri and Maryland also was unable to establish that the TJTC
caused certified workers to have better, employment patterns over
long periods of time. If targeted group members do not show
measurable improvement in future employment patterns, the
credit's efficacy for those hired with the credit is minimal.
When an employer claims a credit with respect to workers
who would have been hired without the credit, the credit does
not serve its intended effect and is merely a windfall for the
employer. The two studies found that many companies retroactively request a determination of an employee's eligibility for
the credit after the hiring decision is made, thus obtaining the
credit for workers that would have been hired in the absence of
the credit.
A net increase in targeted employment may not result even
when the TJTC is directly responsible for the hiring of a
targeted worker. That is, if newly hired certified targeted
employees replace employees who are no longer eligible for the
the credit
are of
hired
place of uncertified
targeted
workers,
Impact or
Study
the in
Implementation
and Use of
the Targeted
targeted
employment
will
not
increase
on
a
net
basis.
Moreover,
Jobs Tax Credit Program, Overview and Summary, Macro Systems,
Inc. and the National Center for Research in Vocational
Education (July, 1986).
2
The Targeted Jobs Tax Credit in Maryland and Missouri;
1982-1987, National Commission for Employment Policy, Research
Report No. 88-18 (November, 1988).
-5we believe that it is likely that any increase in the hiring of
targeted workers as a result of the credit is achieved at the
expense of other low-skilled individuals who are not qualified or
not certified for the credit but have job skills similar to
workers in the target groups.
Given the ineffectiveness of the TJTC, it is important to
note the other Federal programs that currently provide assistance
to many of those eligible for the TJTC. Under the Job Training
Partnership Act, grants are made to the states to prepare lowincome and unskilled youths and adults for entry into the labor
force. Among those who are eligible to receive benefits from the
JTPA program are older workers and handicapped persons. The Job
Corps provides remedial training and job skills training for
disadvantaged youth. The new JOBS program for persons on welfare
provides education, job training, and child care assistance for
welfare recipients. Other training programs are targeted to
veterans, native Americans, and migrant and seasonal farm
workers.
The Treasury Department has a responsibility to ensure that
tax benefits are used in a cost-effective manner. Accordingly,
we oppose extension of the TJTC. If Congress chooses to extend
the credit, however, we do have two areas of concern regarding
the effectiveness of the credit that Congress should consider.
First, many TJTC credits earned by employers are for hiring
workers that would have been hired in the absence of the credit.
This is particularly true in today's tight labor market characterized by low unemployment rates, currently 5.2 percent nationwide. Regional unemployment rates for targeted workers are also
quite low in several areas of the country, attributable both
to the tight national labor market situation and to demographic
declines in the number of target group members, including economically disadvantaged youth. Accordingly, we believe that the
effectiveness of the TJTC could be improved by targeting the
credit to specific locations with relatively high unemployment.
Second, as the 1988 NCEP study has indicated, many
certifications performed after the hiring date for TJTC eligibles
are retroactive certifications for workers who would have been
hired without the credit. This problem could be addressed by
strengthening the TJTC vouchering system, under which targeted
workers receive vouchers from designated state agencies. The
TJTC vouchers indicate the workers' eligibility for the credit
to potential employers. Eligibility for the credit could be
restricted to employees who had valid vouchers prior to their
date of hire.
To insure employers an adequate supply of vouchered workers,
authority to issue vouchers could be expanded to include the
State and local programs which now administer the Jobs Training
Partnership Act, the JOBS program, and the general welfare and
-6public housing programs. The eligibility requirements for these
programs include a determination of family income sufficient to
identify economically disadvantaged individuals. TJTC vouchers
could be issued to the individuals served by these agencies as
part of their normal administrative work of verifying eligibility
for participation in the programs they administer. These
agencies could also refer persons with vouchers to employers
seeking targeted workers.
The use of vouchers in applicants' job search and increased
employment referrals from vouchering agencies could replace the
current ineffective system of retroactive certifications.
Eliminating retroactive certifications and extending the
vouchering to other agencies that currently make income eligibility determinations would also reduce the cost of administering
this labor market program.
Conclusion
The Administration does not support an extension of the
targeted jobs tax credit due to budgetary constraints and the
ineffectiveness of the current credit. Although the Administration supports the objective of assisting hard-to-employ
individuals to qualify for employment, we must carefully weigh
competing needs and existing programs in light of the budget
deficit. The Administration's budget includes direct expenditures for training of TJTC-eligible individuals, which are more
effective than the existing credit.
REHABILITATION TAX CREDIT
Background and Current Law
Section 38 of the Internal Revenue Code provides for a credit
against tax in the case of qualified rehabilitation expenditures
with respect to qualified rehabilitated buildings. The current
credit reflects Congressional concerns about the extra costs
associated with the rehabilitation, maintenance and modernization
of older and historic structures. The social and aesthetic
values of rehabilitating and preserving older and historic
structures are not necessarily taken into account in investors'
profit projections.
Originally enacted in 1978, the rehabilitation tax credit
was expanded in 1981, then scaled back in 1986. As currently
structured, the amount of the credit is equal to 20 percent of
the basis for qualifying expenditures with respect to certified
historic structures, and 10 percent of the basis for qualifying
expenditures with respect to nonresidential buildings first
placed in service before 1936. Property used predominantly to
furnish lodging is eligible for the credit only if a certified
historic structure.
-7Rehabilitation expenditures must be incurred in connection
with a "substantial rehabilitation," and must be recovered using
straight-line depreciation. The increase in the tax basis of a
building that would result from qualified rehabilitation expenditures is reduced by the amount of the allowable credit. Moreover, the rehabilitation tax credit is subject to recapture in
the event of disposition or other recapture event within five
years after the property is placed in service.
An individual may use the rehabilitation credit generated
from a passive activity to offset tax liability on his active
income up to a deduction equivalent of $25,000. The ability to
offset active income phases out ratably as a taxpayer's adjusted
gross income increases from $200,000 to $250,000. These rules
represent an exception to the passive activity rules, which
generally restrict the ability of credits generated by passive
activities to shelter tax liability from such active income
sources as wages, salaries, and investments.
Discussion
The preservation of historic structures has been an explicit
national goal since the National Historic Preservation Act of
1966. Congress perceived that there was a public benefit
associated with providing an incentive for the rehabilitation
of structures that were significant in American history and
culture.
The Federal incentive for the rehabilitation of old and
historic buildings is provided through an income tax credit,
rather than a direct expenditure program. Provision of this
incentive through the tax code results in its interaction with
general income tax provisions designed to ensure the perception
of a fair and equitable tax system. A major element of the Tax
Reform Act of 1986 (the "1986 Act") was the adoption of rules
relating to tax shelter and other passive activities that prevent
taxpayers from using deductions and credits to shelter unrelated
income. Any proposed modifications to the rehabilitation tax
credit must be evaluated in terms of their effect on the
reopening of new tax shelters and on the perceived fairness of
the tax system.
Projects utilizing the rehabilitation tax credit prior to
1987 commonly were structured as syndicated tax shelters targeted
to high income investors. The passive activity rules were
directed specifically at that type of tax shelter activity and
represent a critical shield against tax shelters. Losses or
credits from activities in which investors do not materially
participate can not be used to offset other income, but must be
deferred until disposition of the property or until the investor
has taxable income from passive activities. The passive activity
rules, however, do allow annually up to $25,000 of deductions (or
their credit equivalent) for active investors in real estate with
-8adjusted gross incomes below $100,000 (phasing out at $150,000).
This exception was allowed for moderate income taxpayers who may
invest in real estate for financial security, rather than tax
shelter, reasons and who might otherwise face cash flow problems.
Specific exceptions to the general passive activity rules
were made for the rehabilitation credit. These exceptions
enhance its value to more investors in recognition of its social
objectives, while at the same time ensuring that the rehabilitation credit is not subject to tax shelter manipulation. Investors earning the rehabilitation tax credit are deemed to be
active investors, regardless of their level of involvement in the
property. Further, taxpayers with adjusted gross incomes between
$100,000 and $200,000 (phasing out at $250,000) are eligible to
claim the $7,000 annual exception for the rehabilitation credit.
If the passive activity restrictions were further excepted for
the rehabilitation credit, the potential for undesirable
marketing of tax shelters would be renewed.
Some data are now available to begin assessing the effects of
the 1986 Act changes on rehabilitation expenditures for old and
historic structures. Interior Department data indicate that the
use of the credit for the rehabilitation of historic structures
has decreased since 1985. The number of projects approved by
the Interior Department for use with the credit decreased by
65 percent, from 3,100 in FY 1985 to 1,100 in FY 1988, and the
dollar investment associated with these projects decreased by
64 percent, from $2.4 billion in FY 1985 to $0.9 billion in
FY 1988 (See Table 4).
Recent IRS data also indicate that there has been a decrease
in the use of the rehabilitation credit by individuals since
enactment of the Tax Reform Act of 1986. The value of the credit
earned by individuals decreased from $1.05 billion in 1985 to
$708 million in 1986, and preliminary data indicate that the
value of the credit was $229 million in 1987 (See Table 5 ) . The
tax return data also indicate that in each of these years
approximately one-third of the value of the credit was claimed by
individuals with adjusted gross incomes of over $200,000.
Although the decrease in the number and value of
rehabilitations of older and historic structures with the credit
is clear, the causes of the decline are less clear. The 1986 Act
reduced the incentive value of the credit and the eligible nonhistoric structures. The credit rate for historic structures was
reduced from 25 percent to 20 percent. In addition, the 1986 Act
required full basis reduction by the amount of the credit. In
combination, the 1986 Act reduced the value of the historic
rehabilitation credit by 31 percent from 29 percent (25 percent
credit plus 4 percent credit-equivalent basis reduction) to 20
percent of rehabilitation expenditures. The 1986 Act also
-9reduced the value of the nonhistoric rehabilitation credit to 10
percent and restricted eligibility to structures originally
placed in service before 1936.
In addition, changes in the tax treatment of all real estate
affected the incentives for the rehabilitation of old and
historic structures. Accelerated depreciation was slowed down
for structures. Lower marginal tax rates reduced the value of
nominal interest deductions. Higher capital gains tax rates
increased the lock-in effect on existing owners. And the passive
activity limitations and the alternative minimum tax reduced the
value of tax incentives for high-income individuals to generate
tax shelter benefits or large tax preferences.
Additional data and analysis is required to determine how
much of the decline is attributable to the specific changes in
the rehabilitation credit, to the changes in the general tax
treatment of real estate, to a temporary restructuring of how the
rehabilitation credit is utilized by private investors, or to
general economic factors unrelated to the Internal Revenue Code.
In addition, an assessment is needed to determine whether the
decline in rehabilitations has resulted in a loss of public
benefits in excess of the additional revenue losses that would
have occurred.
There may be room for improving the effectiveness of the
rehabilitation credit, particularly as it applies to nonhistoric
buildings, by targeting it more precisely to those structures
providing the greatest public benefit. The credit currently may
provide incentives for the rehabilitation or preservation of
structures that are of a character or are in a location offering
no significant public benefit. The credit for the rehabilitation
of nonhistoric structures is independent of any standard of
public benefit, other than the fact that the structure is old.
There are some older buildings that provide private benefits to
their owners with little, if any, obvious public benefit. In
contrast, the credit for the preservation of historic structures
depends on an Interior Department determination that the structures are historically significant and that projects conform
to the Interior Secretary's standards for rehabilitation.
Similarly, the low-income housing tax credit is targeted to units
reserved for low-income families, subject to state volume caps
and approval by state housing authorities.
Conclusion
The Administration would not support any expansion of the
rehabilitation tax credit or any weakening in tax reform's
restrictions on tax shelters. Although the level of rehabilitation activity subsidized by the credit has declined, further
analysis is needed to identify the reasons for the decline, and
an assessment is needed to determine whether the decline
-10represents a loss of significant public benefits. In its review
of the credit, Congress may wish to consider whether Federal
incentives should be better targeted for the rehabilitation of
nonhistoric structures to ensure that they provide a public
benefit greater than the revenue cost.
This concludes my prepared remarks. I would be pleased to
respond to your questions.
TABLE 1
TARGETED JOBS TAX CREDIT CERTIFICATIONS ISSUED BY THE
DEPARTMENT OF LABOR IN 1988 BY TARGETED GROUP
Targeted Groups
Calendar
1988
Certifications
Percent
of
Certifications
Economically Disadvantaged
x
Youth Age 1 8 - 2 4
282,640
56.7
Economically Disadvantaged
Summer Youth
17,769
3.6
Economically Disadvantaged
Vietnam Veterans
16,366
3.3
Economically Disadvantaged
Ex-Convicts
22,404
4.5
Vocational Rehabilitation
Referrals
36,619
7.3
General Assistance Recipients 18,244 3.7
AFDC Recipients/WIN Registrants 97,276 19.5
Supplemental Security Income
Recipients
5,994
1.2
Economically Disadvantaged
Cooperative Education
1,277
0.3
Total 498,589 100.0
Department of the Treasury June 6, 1989
Office of Tax Analysis
Source: Department of Labor.
x
For targeted workers in this class hired after December 31,
1988, The Technical and Miscellaneous Revenue Act of 1988
restricted TJTC eligibility to persons aged 18 through 22.
2
The Education Department is responsible for certifying
eligible cooperative education students, but maintains no
records of certifications for this target group. The numbers
shown are for DOL "economic determinations" required for
certification. The number of certifications cannot exceed the
number of "economic determinations."
TABLE 2
TJTC CREDITS EARNED IN 1985 BY INDUSTRIAL CLASSIFICATION
Industry
TJTC
Credits
Earned
in 1985
in 1985
($ millions)
Percent
of
Total
Credits
Credits
Agriculture $ 3 0.6% 0.6%
Mining
6
1.1
Construction
11
1.9
Manufacturing
194
32.2
Transportation
10
1.6
Communications
3
0.4
Utilities
5
0.8
Trade
284
47.1
Financial
19
3.1
Services
67
11.2
Total 602 100.0% 1.0%
Department of the Treasury June 6, 1989
Office of Tax Analysis
Percent of
Corporations
Claiming the
Credit in 1985
0.3
0.7
3.4
0.6
0.6
0.6
1.5
0.2
0.5
Source: IRS Statistics of Income.
According to IRS data collected by the Statistics of Income
(SOI) program, individuals earned $58 million of TJTC credits in
1985. Data on the industrial breakdown of credits earned
by individuals is unavailable.
TABLE 3
REVENUE IMPACT OF ALTERNATIVE PERIODS OF EXTENSION
OF THE TARGETED JOBS TAX CREDIT
1990
Fiscal Years
1991
1992
1993
(S Millions)
1994
One-Year Extension
-43
-79
-52
-20
-11
Two-Year Extension
-43
-124
-132
-72
-32
Three-Year Extension
-43
-124
-180
-157
-87
Permanent Extension
-48
-139
-206
-257
-318
Department of the Treasury
Office of Tax Analysis
June 6, 1989
TABLE 4
NUMBER OF HISTORIC PRESERVATION TAX CREDIT PROJECTS
APPROVED AND AMOUNT INVESTED, 1978-1988
Fiscal Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
Total, FY 1978-88
Number of Projects
Approved
512
635
614
1,375
1,802
2,.572
3,214
3,117
2,964
1,931
1,092
140
300
346
738
1,128
2,165
2,123
2,416
1,661
1,084
866
19,828
12,967
Department of the Treasury
Office of Tax Analysis
Source:
Amount Invested
($ millions)
June 6, 1989
U.S. Department of the Interior, "Tax Incentives
for Rehabilitating Historic Buildings: Fiscal
Year 1988 Analysis," November 1988.
TABLE 5
AMOUNT OF REHABILITATION TAX CREDITS EARNED
BY YEAR AND CLASS OF PROPERTY, 1981-1987
($ Millions)
TsxsblsYpsrs
Property
1981
1982
1983
1984
198$
1986
l987p"
392
213
10
633
395
22
479
215
14
-
-
•
165
42
7
15
175
21
277
35
-
112
25
1
NA
NA
NA
563
327
39
1
NA
NA
NA
NA
Individuals
Historic
2
159
300
2
168
236
40 Year
*
13
17
30 Year
Pre-1936
Subtotal 4 341 553 615 1,051 708 229
Corporations
Historic 2 37 60 59 107 84 NA
40 Year
11
131
122
30 Year
2
27
32
Pre-1936
Subtotal 14 196 214 255 419 222 NA
Total
Historic
40 Year
30 Year
Pre-1936
3
14
2
197
299
41
360
358
49
451
388
32
740
672
58
-
-
-
-
-
Total 19 537 766 870 1,470 929 NA
Department of the Treasury June 6, 1989
Office of Tax Analysis
Source: IRS Statistics of Income.
Note: Detail may not add to totals due to rounding.
* Less than $500,000
N/A = Not available.
P = Preliminary
TREASURY IMEWS
ipartment of the Treasury • Washington, D.c. • Telephone 566-2041
June 6, 1989
Mary Catherine Sophos
Appointed Deputy Assistant Secretary
for Legislative Affairs
Secretary of the Treasury Nicholas F. Brady today announced
the appointment of Mary Catherine Sophos to serve as Deputy
Assistant Secretary for Legislative Affairs. Ms. Sophos will
serve as principal adviser to the Assistant Secretary for
Legislative Affairs on all issues related to the Department's
legislative initiatives and on the relations of the Department
with Members of Congress and the staffs of Congressional
Committees.
Before joining Treasury, Ms. Sophos had been Director of
Government Relations with McCamish, Martin, Brown & Loeffler, a
Texas-based law firm. Prior to that she had been Assistant
Minority Counsel and Budget Analyst for the Committee on Ways and
Means of the U. S. House of Representatives. Previously, Ms.
Sophos had been Budget Associate Staff and Legislative Director
to Congressman Tom Loeffler; Legislative Assistant to the
Director of the Office of Management and Budget; and a
Legislative Representative at the National Food Processors
Association.
Ms. Sophos received a B.S. in Political Studies (1976) from
Pitzer College, The Claremont Colleges, Claremont, California.
She resides in Washington, D.C.
NB-322
4+ ^, •
HT
/ (A
H
federal financing bank.
//
/
I'
V
x
—*.
N
\ ivL J/
1
WASHINGTON, D.C. 20220
iolO
June 6, 1989
FOR IMMEDIATE RELEASE
M
-• .1
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing
Bank (FFB), announced the following activity for the month
of March 1989.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $141.9 billion on
March 31, 1989, posting a decrease of $259 million from
the level on February 28, 1989. This net change was the
result of an increase in holdings of agency debt of
$572.2 million, and decreases in holdings of agency
assets of $652.9 million and in agency-guaranteed debt of
$178.4 million. FFB made 48 disbursements during March.
Attached to this release are tables presenting FFB
March loan activity and FFB holdings as of March 31, 1989.
NB-323
•<* 00
o
o
CM <
-t
(0
(0
in
w
0)
CVJ
<0
(D
IT)
CD
LL
0. li.
Page 2 of 4
FEDERAL FINANCING BANK
MARCH 1989 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST INTEREST
RATE
RATE
(other than
(semiannual) semi-annual)
3/1/99
9.449%
6/6/89
9.059%
AGENCY CEBT
EXPORT-IMPORT BANK
Note #77 3/1 $ 247,000,000.00
9.340% qtr.
NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
+Nbte #486 3/8 7,330,000.00
U. S. POSTAL SERVICE
Note #16
3/27
600,000,000.00
3/27/90
9.826%
3/6
3/10
3/13
3/16
3/16
3/16
3/20
3/27
3/31
3/31
3/16
138,000,000.00
815,000,000.00
162,000,000.00
36,000,000.00
29,000,000.00
36,000,000.00
147,000,000.00
127,000,000.00
130,000,000.00
57,000,000.00
700,000,000.00
3/13/89
3/16/89
3/20/89
3/21/89
3/22/89
3/23/89
3/27/89
4/03/89
4/06/89
4/10/89
8/16/04
9.061%
9.100%
9.178%
9.112%
9.112%
9.112%
9.294%
9.495%
9.407%
9.407%
9.377%
TENNESSEE VALUY ATmnRJiY
Advance #1006
Advance #1007
Advance #1008
Advance #1009
Advance #1010
Advance #1011
Advance #1012
Advance #1013
Advance #1014
Advance #1015
Power Bond 1989-A
AGENCY ASSETS
RTIRAT, ETFXTIRIFICATION ADMINISTRATION - Certificates of Beneficial Ownership
Certificate #29 3/31 4,800,000.00 9/30/89 9.729%
GOVERNMENT - GUARANTEED JftftfR
DEPARTMENT OF LfclllKE
Foreign Military Sales
Greece 17
Philippines 11
Philippines 9
Greece 16
•rollover
3/2
3/2
3/3
3/7
218,101.50
11,757.66
116,162.63
1,220,228.05
2/27/12
9/12/90
5/15/91
3/V13
9.355%
9.627%
9.626%
9.251%
fjge 3 of 4
FEDERAL FINANCING BANK
MARCH 1989 ACTIVITY
BORROWER
DATE
INTEREST
RATE
(other than
semi-annual)
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
.RATE.
(semiannual)
2,292,657.42
5,470.00
381,703.52
89,145.57
8,726.75
757,530.74
322,417.40
66,970.00
164,000.00
2/27/12
9/12/90
3/21/95
5/31/95
9/12/90
3/12/14
3/V13
5/31/95
3/31/94
9.258%
9.533%
9.439%
9.435%
9.568%
9.223%
9.285%
9.510%
9.780%
140,000.00
160,000.00
10/2/89
10/2/89
9.329%
9.329%
9.380% ann.
9.380% ann.
4/V91
1/2/18
4/V91
1/2/18
1/2/18
W 9 1
V2/1B
VV91
4/V91
4/V91
4/V91
4/V91
1/2/18
1/2/18
V2/18
1/2/18
1/2/18
9.668%
9.316%
9.779%
9.344%
9.344%
9.743%
9.397%
9.909%
9.909%
9.909%
9.909%
9.908%
9.333%
9.333%
9.333%
9.333%
9.333%
9.554% qtr.
9.210% qtr.
9.662% qtr.
9.237% qtr.
9.237% qtr.
9.627% qtr.
9.289% qtr.
9.789% qtr.
9.789% qtr.
9.789% qtr.
9.789% qtr.
9.788% qtr.
9.227% qtr.
9.227% qtr.
9.227% qtr.
9.227% qtr.
9.227% qtr.
Foreign Military Sales rcontinuedl
3/7
Greece 17
3/7
Philippines 11
3/10
Morocco 12
3/10
Morocco 13
3/10
Philippines 11
3/10
Turkey 18
3/16
Greece 16
3/17
Mororan 13
3/20
Morocco 9
DEPARTMENT OF HOUSING AND URBAN rfiYTTPPMENT
nnwtiinitv Development
Lincoln, NE
Lincoln, NE
3/10
3/10
nripAT- TrrrrTRTFICAnON ADMTNISTRATION
Oglethorpe Power #320 3/2
New Hampshire Electric #270
•Cajun Electric #197A
*Wabash Valley Power #104
•Wabash Valley Power #206
•Cooperative Power Assoc. #156A
New Hampshire Electric #270
•Colorado Ute-Electric #276
•Colorado Ute-Electric #276
•Colorado Ute-Electric #297
•Colorado Ute-Electric #297
•Cooperative Power Assoc. #130A
•New Hampshire Electric #270
•New Hampshire Electric #270
•New Hampshire Electric #270
•New Hampshire Electric #270
•New Hampshire Electric #270
TfrofFsm vftTTTV MTTHnrnv
3/3
3/13
3/13
3/13
3/16
3/29
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
5,801,000.00
360, 000.00
40,000,000.00
5,872,000.00
567, 000.00
1,950,000.00
304, 000.00
522, 979.76
1,439,393.92
3,499,873.20
4,708,780.48
6,272,727.30
1,997,000.00
453, 000.00
723, 000.00
2,851,000.00
247, 000.00
seven States Energy Corporation
Note A-89-06 3/31
•maturity extension
847,760,024.45
6/30/89
9.425%
Page 4 of 4
Program
March
Agency Debt:
Export-Import Bank
$
NCUA-Central Liquidity Facility
Tennessee Valley Authority
U.S. Postal Service
sub-total* 34,643.2
Agency Assets:
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
sub-total* 62,103.8
Government-Guaranteed Lending:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loan Guarantees
DHUD-Community Dev. Block Grant
DHUD-New Communities
DHUD-Public Housinq Notes +
General Services Administration +
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co. +
DON-Ship Lease Financing
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total* 45,11712
grand total* $ 141,864.2
•figures may not total due to rounding
+does not include capitalized interest
31. 1989
11,000.6
111.4
17,039.0
6,492.2
57,841.0
79.5
93.8
-04,076.0
13.4
11,646.7
4,910.0
-0314.0
-01,995.3
383.0
31.5
26.1
995.2
1,720.5
19,195.3
587.9
846.0
2,247.9
40.6
_ 177.0
FEDERAL FINANCING BANK HOLDINGS
(in millions)
FY '89 Net
February
28.Change
1989
3/1/89-3/31/89
$
$
11,027.2
111.7
17,040.0
5,892.2
-26.D
-0.3
-1.0
600.0
10/1/88-3/31/89
$
43.0
-6.8
-92.0
900.0
34,071.0
572.2
844.3
58,496.0
79.5
96.3
-04,071.2
13.6
-655.0
-0-2.5
-04.8
-0.2
-655.0
-0-2.6
-0-63.2
-2.0
62,756.7
-652.9
-722.7
11,731.7
4,910.0
49.6
314.8
-01,995.3
383.0
32.1
26.1
995.2
1,720.5
19,244.6
596.1
849.6
2,226.7
43.1
177.0
-85.0
-0-49.6
-0.8
-0-0-0-0.6
-0-0-0-49.3
-8.2
-3.6
21.2
-2.5
-0-
-4,365.0
-0-50.0
-4.0
-0-41.7
-4.4
-0.6
-0.5
96.4
-38.3
-10.0
-44.7
-24.9
85.6
-5.6
-0-
45,295.6
-178.4
-4,407.8
-259.0
$ ~-4,286.3
$ 142,123.3
$
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
"-.; 5510
Contact: Peter Hollenbach
(202) 376-4302
FOR RELEASE AT 3:OQ PM
June 6, 1989
9 U
TREASURY ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR MAY 1989
The Department of the Treasury announced activity figures for the
month of May 1989, of securities within the Separate Trading of
Registered Interest and Principal of Securities program, (STRIPS).
Dollar Amounts in Thousands
$346,648,320
Principal Outstanding
(Eligible Securities)
Held in Unstripped Form
$263,938,710
Held in Stripped Form
$82,709,610
Reconstituted in May
$8,133,020
The attached table gives a breakdown of STRIPS activity by
individual loan description.
The Treasury now reports reconstitution activity for the month
instead of the gross amount reconstituted to date. These monthly
figures are included in Table VI of the Monthly Statement of the
Public Debt, entitled "Holdings of Treasury Securities in Stripped
Form." These can also be obtained through a recorded message on
(202) 447-9873.
oOo
NB-324
TABLE VI—HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, MAY 31, 1989
(In thousands)
26
Principal Amount Outstanding
Loan Oaacription
Reconstituted
This Month'
Maturity Oats
Total
Unstnppsd Form
Stnppad Form
11-5/9% Not. C-1994
11/15/94
S9.959.554
SS.599.7S4
S1.096.900
11-1/4% N O W A-1995
2/15/95
9.933.991
6.179.291
757.600
26.890
11-1/4% Not* B-1995 .
5/15/95
7.127.099
5.406.929
1.720.160
64.640
$17,600
10-1/2% Not* C-199S
9/15/95
7.955.901
7.005.901
950.000
9.1/2% Not* 0-1995
11/15/95
7.319.550
6.411.350
907.200
-0-
9-7/9% N o w A-1999
2/15/99
5.411.319
8.105.719
305.600
4900
7-3/9% N O W C-1999
5/15/99
20.095.943
19.992.443
203.200
54.400
7-1/4% N O W 0-1999
11/15/95
20.259.910
20.025.210
233.600
39.000
9-1/2% N O W A-1997
5/15/97
9.921.237
9.779.037
145.200
-0-
9-5/9% N o w 8-1997
8/15/97
9.392.939
9.362.839
-0-
-0-
9-7/9% N O W C-1997 .
.11/15/97
9.909.329
9.792.329
16.000
-0-
9-1/9% Not. A-1999 .
2/15/99
9.159.099
9.159.429
9 % Not. 8-1999
5/15/99
9.195.397
9.165.397
-0-
-0-
9-1/4% N o w C-1999 .
8/15/99
11.342.949
11.341.049
1.600
-0-
9-7/9% N O W 0-1999 . .
11/15/95
9.902.975
9.902.975
-0-
-0-
9-7/9% N O W A-1999 .
2/15/99
9.719.929
9.719.629
-0-
-0-
9-1/9% N O W 8-1999
5/15/99
10.047.059
10.047.059
-0-
-0-
640
-0-
-0-
11-5/9% Bond 2004
11/15/04
9.301.909
2.799.209
5.513.600
1 2 % Bond 2005
V15/0S
4.290.759
1.734.909
2.525.850
9.300
1 0 0 / 4 % Bond 2009.
9/15/08
9.299.713
6.393.713
2.979.000
43.600
9-3/9% Bond 2009.
2/15/09
4.755.919
4.755.919
11-0/4% Bond 2009-14
11/15/14
9.005.594
1.393.994
4.641.600
11-1/4% Bond 2015
2/15/15
12.997.799
2.910.839
9.756.990
-0-
68.800
-0-0120.000
10-5/9% Bond 2015. .
an s/i 5
7.149.919
1.949.719
5.203.200
9-7/9% Bond 2015
11/15/15
9.999.959
2.911.959
4.099.000
9-1/4% Bond 2019.
2/15/19
7.299.954
5.319.854
1.949.000
188.000
7-1/4% Bond 2019
5/15/19
19.923.551
14.079.551
4.744.000
2.122.400
-0440.000
7-1/2% Bond 2019.
11/15/19
19.994.449
9.571.999
8.992.490
1.449.200
9-3/4% Bond 2017
5/15/17
19.194.199
7.752.249
10.441.920
692.000
9-7/9% Bond 2017
9/15/17
14.019.959
9.207.259
4809.900
507.200
9*1/9% Bond 2019
S/1S/19
8.709.639
5.046.239
3.662.400
571.200
9 % Bond 2019.
11/15/19
9.032.970
4.291.270
4.751.600
1.285.000
9-7/9% Bond 2019
2/15/19
19.250.792
19.805.992
2.444.800
432.000
349.949.320
293.939.710
82.709.610
8.133.020
Towt
' Effacov. May 1. 1997. sacurmaa h a w m stnppad form war. sfcgiPW for raeonawution to (new unatnppad i
Now: O n m . 4tn workday of aaeft rnontfi a racordinq of TaOW VI writ b . avaaaftto affar 3:00 p m Tha laiapfton. numoar ia (202) 447-9973.
The oaiancaa m trmi taoi. an suOtect to audtf and luoaaguant ad-uitmanfi.
rREASURY NEWS
ipartment of the Treasury • Washington, D.c. • Telephone 566
CONTACT: Office of Financing
FOR RELEASE AT 4:00 P.M.
June 6, 1989
TREASURY'S WEEKLY BILL OFFERING
202/376-4350
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$12,800 million, to be issued June 15, 1989.
This offering
will result in a paydown for the Treasury of about $ 2,350 million, as
the maturing bills are outstanding in the amount of $15,147 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, June 12, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,400
million, representing an additional amount of bills dated
March 16, 1989,
and to mature September 14, 1989 (CUSIP No.
912794 SX 3), currently outstanding in the amount of $7,725 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,400 million, to be dated
June 15, 1989,
and to mature December 14, 1989 (CUSIP No.
912794 TH 7 ).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing June 15, 1989.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities, to
the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them. Federal
Reserve Banks currently hold $1,420 million as agents for foreign
and international monetary authorities, and $4,550 million for their
own account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series)
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment
by an incorporated bank or trust company accompanies the
10/87
tenders.
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitivl bidders will be advised of the acceptance or rejection of
iheir tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000 000
or 17sl without stated yield from any one bidder will be accepted
!n fu!? at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
g T ^ S ? and the determinations of the Secretary of the Treasury
shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
in addition. Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
oersons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue
Copies
of the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the
Public Debt.
10/87
CL
AS
6^
* * * * * *
* * * * * * *
UNCLASSIFIED
* * * * * * * * * * * * *
MU.FORD,
* * * * * *
DALLA
<MCN>
39-396672
<MLN>
13457
<OAN>
402-117742
<PRECEDSNCE>
IMMEDIATE
<CLASSIFICATION>
JNCLAS3IFIED
< H A N D L E VIA>
<ACTIO*>
CSVCJ3EIC1>/DEI(->,IMI(1>
<IMFD>
** U N A S S I G N E D **
<ORI«INAT0R>
RUFHFR
< D A T E / T I M S GROUP>
0 5 1 6 5 2 2 JUN 39
< S T A T I 3 N SERIAL N U « 5 £ R >
6450
<I3>
PARIS 1 3 4 5 0
<F3RMAT>
ACP127
<TIME 3F R E C £ I P T >
89/06/05 14:53:23
<rOR>
00 R U E A T R S
3E RUFHFR *3450/01 1 5 6 1 6 5 3
INR UUJJJ ZZH
0 3 5 1 6 5 2 Z JUN 39
<FR3M> FM A M s M B A S S Y P A R I S
<T3> T3 R J t H l A / U S I A WASHDC I M M E D I A T E 6 1 1 3
R U t H C / S E C S T A T S N A S H D C IMMEDIATE 5925
R U E H D C / J S D O C WASHDC IMMEDIATE
R U E A D W W / W H I T E HOUSE IMMEDIATE
RUEHSS/CECD COLLECTIVE IMMEDIATE
BT
JNCLAS SECTION 01 OF 06 PARIS 1 S 4 5 3
USIS/USOECD
USIA F3R E U : a S H l N K M A N AND THOMSON,' P / G : I C C L E L L A N ;
P/PFO;
P/PFW
STATE F3R E, E 3 / EUR
T R E A S U R Y FOR S/ U/ A/ P, I, IT/ IM, IMI
STATE PASS ALSO TO CEA
STATE PASS A L S O TO USTR
WHITE
P A S S TO NSC
< S J 3 J E CHOUSE
T>
SU3JECT:
FINAL U . S . P R E S S C O N F E R E N C E AT T4E C O N C L U S I O N
OF THE 1 9 3 9 OECD M I N I S T E R I A L ON 0 6 / 0 1 / 8 9
REMARKS BY
S E C R E T A R Y OF THE T R E A S U R Y
N I C H O L A S F. BRADY
TO THE PRESS AT THE C O N C L U S I O N
OF T H E 1 9 8 9 OECD M I N I S T E R I A L
* * * * * * * * * * * * *
UNCLASSIFIED
* * * * * * * * * * * * * * * * * * * *
* * * * * * * *
* *
UNCLASSIFIED
* * *
* *
* * *
* *
P A R I S / FRANCE
J U N E 1/ 1 9 3 9
CM3DERAT0R)
I WOULD LIKE TO I N T R O D U C E S E C R E T A R Y OF T H E T R E A S U R Y
NICHOLAS BRADY/ OUR T R A D E N E G O T I A T O R A M 3 A S S A D 0 R CARLA
HILLS/ CHAIRMAN OF T H E C O U N C I L OF E C O N O M I C A D V I S E R S D R .
MICHAEL 3 0 S K I N / AND U N D E R S E C R E T A R Y OF S T A T E R I C H A R D
MCCORMACK.
S E C R E T A R Y bRADY WILL HA VE ™ O'ENXIJS
STATEMENT/ AFTER W H I C H HE AND THE D E L E G A T I O N WILL TAKE
fOJR Q U E S T I O N S .
„_„
(SECRETARY B R A D Y )
THANK Y O U . I'D LIKE TO S P E N D A VERY FEW M I N U T t S
REVIEWING SOME OF TH= KEY D E V E L O P M E N T S AT T H I S Y s A R ' S
OECD M I N I S T E R I A L M E E T I N G / AND THEN W£»LL BE GLAD TO
TA<E YOUR 0 U E S T I 0 N 5 .
WE HAD NEARLY T W O DAYS OF P R O D U C T I V E D I S C U S S I O N S ON
WIDE RANGE OF I M P O R T A N T I S S U E S . THESE I N C L U D E
COUNTRIES;
M A C R O E C O N O M I C T R E N D S IN T H E I N D U S T R I A L
POLICY P R I O R I T I E S TO A C H I E V E S U S T A I N E D 3RO».TH AND
CURRENT
FURTHER R E D U C T I O N OF T R A D E ANDDEBT S T R A T EAGCYC;O U NATN D / OF
IMBALANCES; THE S T R E N G T H E N E D
COJRSE/ T R H D E I S S U E S .
, „ B r..,„
AS THE
F I N A L C O M M U N I Q U E MAKES C L E A R / T H E R r W A S J * S I C
EEM=NT
ON T H E F U N D A M E N T A L I S S U E S / S E T T I N G THE S T A G E
ASR
A
S
U
C
C
E
S S F U L AND P R O D U C T I V E E C O N O M I C SUMMIT M c c T I N S
FOR
JF THE MAJOR I N D U S T R I A L C O U N T R I E S IN J U L Y .
ECONOMIC T R E N D S A N D P O L I C Y
PRIORITIES
ON THE M A C R O E C O N O M I C F R O N T / O E C D E X P A N S I O N IS N W INTO
ITS S E V E N T H Y E A R / AND M O D E R A T E G R O W T H IS " P E C T E D TO
C O N T I N U E . I N F L A T I O N IS 3EING C O N T A I N E D / AND P R O G R E S S
HAS BEEN MADE IN R E D U C I N G 'EXTERNAL I M B A L A N C E S .
OUR P O L I C Y P R I O R I T I E S
ARE
(1) TO FOSTER T H E W E L L - B A L A N C E D G R O W T H IN T H E
I N D U S T R I A L C O U N T R I E S THAT IS E S S E N T I A L TO P R O M O T I N G
C O N T I N U E D G L O B A L T R A D E AND C U R R E N T A C C O U N T A D J U S T M E N T ;
* *
UNCLASSIFIED
* * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * *
UNCLASSIFIED
* * * *
—
(2)
TO C R E A T E NEW O P P O R T U N I T I E S
jo3 CREATION;
* * *
FOR I N V E S T M E N T AND
AND
—
(3) TO P R O V I D E A S U P P O R T I V E
IMPLEMENTING T H E D E 3 T S T R A T E G Y .
E N V I R O N M E N T FOR
THE COMMUNIQUE REFLECTS THESE BASIC PRIORITIES.
ACHIEVING OUR OBJECTIVES REQUIRES COORDINATED ACTION/
P A R T I C U L A R L Y BY T H E L A R G E S T C O U N T R I E S .
FOR OUR P A R T /
WE ARE C O M M I T T E D TO FURTHER R E D U C T I O N S IN THE F E D E R A L
3UDGET D E F I C I T .
JAPAN AND GERMANY R E C O G N I Z E T H E NEED
TO PURSUE STRONG G R O W T H IN ORDER TO P R O M O T E R E D U C T I O N S
OF THEIR L A R G E E X T E R N A L S U R P L U S E S .
W* ARE P L E A S E D WITH T H E E M P H A S I S GIVEN IN THE
COMMUNIQUE TO T H E NEED FOR S T R U C T U R A L R E F O R M S . T A X
REFORM/ D E R E G U L A T I O N AND S U 3 S I D Y CUTS ARE E S S E N T I A L
JAuANCED L O N 3 - T E R M G R O W T H .
FOR
THE DEBT S T R A T E G Y
BT
»S453
<MSG>
MSG300234370630
<D*N>
<MCN> 89-096672 <MLN> 13453
<PRECED£NCE>
IMMEDIATE
<C-ASSIFICATION>
UNCLASSIFIED
<HANDLE VIA>
<ACTI0N>
C5VCDSEI(1)/DEI(-)/IMI(1)
<IMFO>
** U N A S S I G N E D **
<ORIGINATOR>
RUFHFR
O A T E / T I M E GROUP>
0 5 1 6 5 2 Z JUN 39
<STATI0N S E R I A L N U M 3 S R >
3450
<ID>
PARIS 1 5 4 5 0
<FORMAT>
ACP127
89/06/05 14:53:20
<TIME OF RECEIPT>
<HDR>
00 R U E A T R S
DE RUFHFR * 8 4 5 0 / 0 2 1 5 6 1 6 5 3
ZNR UUUUU ZZH
0 3 5 1 6 5 2 Z JUN 89
402-117753
* * * * * * * * * * * * * * *
UNCLASSIFIED
* * * * * * * * * * * * * * * * * *
* * *
* * * * * * * * *
UNCLASSIFIED
* * * * * * * * * * * * * * *
<FR0K> FM AMEM3ASSY PARIS
<T0> TO RUEHIA/USIA WASHDC IMMEDIATE 6114
RUEHC/SECSTATE WASHDC IMMEDIATE 5926
RUEHDC/USDOC WASHDC IMMEDIATE
RUEADWW/WHITE HOUSE IMMEDIATE
RUEHSS/OECD COLLECTIVE IMMEDIATE
;
3T
-JNCLAS SECTION 02 OF 06 PARIS 18450
USIS/USOECD
JSIA FOR EU:BSHINKMAN AND THOMSON; P/G:MCCLELLAN/
P/?FO;
P/PFW
STATE FOR E/ EB/ EUR
TREASURY FOR S/ U/ A/ P/ 1/ IT/ IM/ IMI
STATE PASS ALSO TO CEA
STATE PASS ALSO TO USTR
WHITE HOUSE PASS TO NSC
<SU3JECT>
SUBJECT:
FINAL
U . S . PRESS
W* ARE ALSO PLEASED
OF THE STRENGTHENED
CONFERENCE
AT THE
CONCLUSION
wITH T M E "INI S T E R I A L 1 S ENDORSEMENT
DE=T STRATEGY/ WITH ITS NEW
EMPHASIS ON DEBT AND DE3T SERVICE RSDJCTION AND
POLICIES TO PROMOTE INVESTMENT AND FLIGHT
REPATRIATION.
CAPITAL
IN RECENT WEEKS SUBSTANTIAL PROGRESS HAS BEEN MADE IN
IMPLEMENTING THE PROPOSALS THAT WE MADi THREE MONTHS
AGO.
THE IMF HAS AGREED ON A NUMBER OF IMPORTANT
CHANGES IN FUND POuICY TO ENABLE IT TO SUPPORT THE
STRATEGY.
AND WE ARE PARTICULARLY L E A S E D THAT JUST
LAST NIGHT THE WORLD SANK JOINED THE IMF BY AGREEING
THE NECESSARY POLICY CHANGES THAT WILL ENABLE IT TO
PLAY A CRUCIAL ROLE IN THE RENEWED STRATEGY.
TO
WE
THESE STEPS HAVE GIVEN THE PROCESS A NEW M ^ ^ T U M .
USE
NOW LOOK FOR THE DEBTOR COUNTRIES AND THE 3ANKS TO
THESE ARRANGEMENTS AS A CATALYST FOR AGREEMENT ON
SPECIFIC FINANCING P A C K A G E S .
TRADE
ISSUES
* * *
* * *
* * *
UNCLASSIFIED
* * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * *
UNCLASSIFIED
* *
AS YOU KNOW/ TRADE I S S U E S WERE ANOTHER I M P O R T A N T T H E M E
AT THE M I N I S T E R I A L .
WE ARE P L E A S E D WITH T H E O U T C O M E IN
THIS AREA/ P A R T I C U L A R L Y WITH T H E M I N I S T E R I A L ^ STRONG
=NDORSEMSNT OF A G R I C U L T U R A L REFORM AND A S U C C E S S F U L
COMPLETION OF THE U R U G U A Y R O U N D .
A M B A S S A D O R HILLS WILL
BE GLAD TO ANSWER YOUR Q U E S T I O N S O-N TRADE M A T T E R S .
WITH RESPECT TO THE ENVIRONMENT/ THE MINISTERIAL ALSO
SAVE C O N S I D E R A B L E E M P H A S I S TO E N V I R O N M E N T A L I S S U E S /
*HICH WILL AL>0 H A MAJOR T H E M E AT THE U P C O M I N G
ECONOMIC S U M M I T .
U N D E R S E C R E T A R Y M C C O R M A C K WOULD BE
PLEASED TO A D D R E S S THIS I S S U E .
THANK YOU/ AND NOW AMSASSADOR HILLS/ CHAIRMAN 30SKIN/
U N D E R S E C R E T A R Y M C C O R M A C K AND I WOULD BE GLAD TO ANSWER
ANY Q U E S T I O N S YOU M I G H T H A V E .
Q. COULD YOU PLEASE SAY/ AMBASSADOR HILLS/ WHAT
CONCRETE M E A S U R E S / IF ANY/ T H E U N I T E D STATES M I G H T TAKE
TO AMEND S U P E R 301 AND THE OTHER F E A T U R E S OF YOUR TRADE
L E G I S L A T I O N OR THE RECENT ACTION BASED ON THAT AS A
RESULT OF THE P R E S S U R E THAT Y O U ' V E COME UNDER HERE AND
THE C O M M U N I Q J E wHlCH Y O U ^ E S I 3 N E D ?
(AMBASSADOR HILLS)
THERE IS N O T H I N G IN T H E 331 S T A T U T E THAT »JNS C O N T R A R Y
AT THE C U R R E N T TIME WITH EITHER THE C O M M U N I Q U E OR THE
SPIRIT OF T H I S A S S E M B L Y .
OUR TRADE S T R A T E G Y / I HAVE
STATED OFTEN/ IS C L E A R .
IT IS TO OPEN MARKETS AND
EXPAND T R A D E .
AND NO C O U N T R Y COULD BE MORE D E V O T E D TO
M U L T I L A T E R A L I S M THAN THE UNITED S T A T E S . WE HAVE L I S T E D
OUR P R I O R I T I E S T H A T A R E C O N S I S T E N T WITH THE U R U G U A Y
ROJND AND WE HAVE EVERY H O P E T H A T IN D I S C U S S I O N S WITH
OUR T R A D E P A R T N E R S WE WILL BE ABLE TO FURTHER THE G O A L S
OF T H E U R U G U A Y R O U N D .
Q. IN THE PREVIOUS PRESS CONFERENCE/ THE OECD
S E C R E T A R Y G E N E R A L SAID T H A T HE T H O U G H T THERE WAS A NEED
TO R E A L I G N T H E E X C H A N G E RATES OF T H E OECD A N D / IN
P A R T I C U L A R / T H R E E BIG C U R R E N C Y 3 L 0 C S : THE D E U T S C H MARK/
THE YEN / AND T H E D O L L A R .
I W O N D E R IF YOU HAVE ANY
COMMENT ON T H A T S E C R E T A R Y B R A D Y ?
(SECRETARY BRADY)
* * * * * * * * * * * * * * * * * *
UNCLASSIFIED
* * * *'*
* * * * * * * * * * * * *
* *
* * *
* * * * * * * * *
* *
UNCLASSIFIED
* * *
A
WHAT WE'VE SAID IS T H E UPWARD RISE IN THE DOLLAR
? R = S C N T S A P R O B L E M FOR P O L I C Y C O O R D I N A T I O N .
AT T H E
S A l V u M E THIS IS JUST OtfE PART OF THE P R O C E S S AND
THERE ARE OTHER PARTS TO IT T H A T ARE S I M I L A R L Y
IMPORTANT.
3 THIS IS FOR UNDERSECRETARY MCCORMACK. WITH THE 3IG
EMPHASIS THAT OECD H A S P L A C E D ON T H E E N V I R O N M E N T / ARE
WE LIKELY TO SEE C H A N G E S IN U . S . E N V I R O N M E N T A L
POLICIES?
WILL THE E N V I R O N M E N T 3 E C O M E A BIGGER P O R T I O N
OF THE U . S . O V E R A L L G O V E R N M E N T POLICY OR WILL IT STILL
3£ LEFT TO THE STATES TO SET A LOT OF THEIR OWN
INDIVIDUAL P O L I C I E S ?
(UNDERSECRETARY M C C O R M A C K )
A. P R E S I D E N T BUSH HAS MADE VERY CLEAR THAT HE
3T
#5453
<MSG> MSG303234370693
<DAN>
402-120375
<MCN>
59-096672
<MLN>
1S466
<?RECEDENCE>
IMMEDIATE
<CLASSIFICATION>
UNCLASSIFIED
<HANDLE VIA>
<ACTION>
CSVC3SEI(1)/DEI(-)/IMI(1)
<INF0>
** U N A S S I G N E D **
<ORIGINATOR>
RUFfiFR .
< D A T E / T I M S GROUP>
0 5 1 6 5 2 Z JUN 89
KSTATION S E R I A L NUMc£R>
3453
<ID>
PARIS 1545U
<FDRMAT>
ACP127
89/06/05 14:53:20
<TIME OF R E C E I P T >
<HDR>
00 R U E A T R S # 3 4 5 0 / 0 3 1 5 6 1 6 5 4
t>i RUFHFR
2NR UUUUU ZZH
0 351652Z JUN 39
<FROM> FM AMEMBASSY P A R I S
<T0> TO R U E H I A / U S I A WASHDC I M M E D I A T E 6115
R U E H C / S E C S T A T E WASHDC I M M E D I A T E 5 9 2 7
R U E H D C / U S D O C WASHDC I M M E D I A T E
RUEAD*W/«HIT£ HOUSE IMMEDIATE
RUEHSS/OECD COLLECTIVE IMMEDIATE
3T
* * * * * * * * * * * * * * *
UNCLASSIFIED
* * * * * * * * * * * * * * * * * *
* *
* * * * * * * * * *
UNCLASSIFIED
* * * * * * * *
* *
* * *
* *
UNCLAS SECTION 03 OF 06 PARIS 13453
JSIS/USOECD
USIA FOR EU:3SHINKMAN AND THOMSON,* P/G: MCC LELLAN,
P/PFO;
P/PFW
STATE FOR E/ EB/ EUR
TREASURY FOR S/ U/ A/ P/ 1/ IT/ IM/ IMI
STATE PASS ALSO TO CEA
STATE PASS ALSO TO USTR
WHITE HOUSE PASS TO NSC
SU3J=CT:
FINAL U . S . PRESS CONFERENCE AT THE CONCLUSION
CONSIDERS THE ENVIRONMENT ONE OF HIS TOP P R I O R I T I E S .
H- HAS CALLED FOR A MEETING OF THE RESPONSE STRATEGIES
WORKING GROUP ON GLOBAL CLIMATE CHANGE WILL TAKE PLACE
THIS OCTOBER IN WASHINGTON.
IT IS OiVIOUSwY GOING TO
3= ONE OF THE MAJOR SUBJECTS OF THE SUMMIT. HE HAS
SUPPORTED CONSTRUCTIVE SOLUTIONS TO THE OZONE DEPLETION
PROBLEM.
HE IS VERY CONCERNED ABOUT THE ENVIRONMENT
AND IT IS REALLY VERY MUCH UP IN U . S . P R I O R I T I E S .
Q.
I UNDERSTAND WHAT YOU ARE SAYING 3UT/ AT THE SAME
TIME/ WE SEE IN THE PRESS THAT HE'S BEEN RELUCTANT TO
GO ALONG WITH SOME Of THE MAJOR DECISIONS THAT HAVE
BEEN MADE INTERNATIONALLY TO SAY O.K./ WE'RE GOING TO
UPSRADE STEPPING OUT CFC'S OR/ SIGNING ON AND SAYING/
HE HAS
YES/ WE ARE GOxNG TO DO SOMETHING S P E C I F I C .
HEDGED THE QUESTION SEVERAL TIMES •iHEN AE HAS BEEN
AS<=D TO SPECIFICALLY PUT HIS NAME ON SOMETHING.
AND
THEN GOING ALONG THAT WE CAN SAY/ YES/ « £ f / E 60XNS Tw
DO ALL OF THESE THINGS BUT IN TERMS 0? THE BASIC U . S .
A P P ^ I C H TO THEM/ WE'RE CAPITALISTIC/ VERY INDUSTRIAL.
INDIVIDUAL INDUSTRIES HAVE THEIR OWN " 3 H T S AND THINGS
LIKE T H A T .
HOW WILL THE U.S STEP UP OR MOVE INTO
-NFORCING MORE ENVIRONMENTAL AWARENESS WITHIN THE
INDUSTRIES WHERE THEY ARE SPECIFICALLY INDEPENDENT/
TN|ni|CTBTFS
NON-GOVERNMENT RUN AS MANY OF THc cUROPcAN INDUSTRIES
ARE?
(UNDERSECRETARY MCCORMACK)
*„*„*
TU*T
Tw
A.
WELL YOU HAVE ASKED MANY/ MANY QUESTIONS IN THAT
3RIPF INTERJECTION T H E R E .
3UT JUST LET ME SAY THAT
RI3HT NOW WITHIN THE WHITE HOUSE THERE ARE THREE MAJOR
POLICY REVIEW OPERATIONS THAT ARE DEVOTED TO REVIEWING
* * * *
* * * * * * * * * *
UNCLASSIFIED
* *
* * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * *
UNCLASSIFIED
* * * * * * * * * * * * * * * * * *
WHAT WE CAN DO TO ADDRESS ENVIRONMENTAL CONCERNS/
LOOKING AT O P T I O N S ON ACID RAIN/ L O O K I N G AT O P T I O N S ON
3L03AL C L I M A T E / L O O K I N G AT O P T I O N S ON E N E R G Y P O L I C Y .
MR. 3 0 S K I N CAN ADD A D D I T I O N A L D E T A I L S ON W H A T W E ' R E
DOING 3 E C A U S E H E ' S A T T E N D I N G T H E SAME M E E T I N G S THAT I
AM.
(CHAIRMAN BOSKIN)
A. LET ME JUST SAY T H A T / FIRST OF A L L / T H E P R E S I D E N T
HAS C O M M I T T E D H I M S E L F TO A FULL P H A S E - O U T OF CFC
PRODUCTION P E N D I N G THE A V A I L A B I L I T Y QF SAFE
S U B S T I T U T E S . SO I THINK YOUR FACTS WERE N O T A C C U R A T E
ON THAT O N E / NUMBER O N E . NUM3ER T W O / T H E R E IS A
DETAILED LOOK AT T H E C A B I N E T - L E V E L AT WHAT M I G H T BE
TERMED THE CLEAN AIR ACT D E A L I N G WITH ACID RAIN/ AIR
TOXICS/ AND N O N - A T T A I N M E N T .
AND T H E R E ARE A V A R I E T Y OF
OPTIONS THAT HAVE BEEN A N A L Y Z E D / THAT ARE GOING
THR0U6HT THE I N T E R - A 3 E N C Y P R O C E S S / AND THE P R E S I D E N T
HAS BEEN A C T I V E L Y I N V O L V E D IN T H A T .
AND IT IS VERY
CLEAR THAT T H E R E WILL BE AN E M E R G I N G P O L I C Y ON THIS B U T
IT IS P R E M A T U R E TO A N N O U N C E IT O B V I O U S L Y AT THIS T I M E .
SO I THINK YOU CAN REST A S S U R E D T H E P R E S I D E N T WILL
DELIVER ON HIS P R O M I S E TO dE AN E N V I R O N M E N T A L
P R E S I D E N T . A N D / I THINK THAT WE WILL HAVE P O L I C I E S IN
PLACE AND L E G I S L A T I O N P R O D U C E D IN THE COMING W E E K S AND
MOUTHS.
Q. AK3ASSAD0R HILLS/ CHAIRMAN SIGURDSSON SAID THAT HE
THOJGHT IN I M P L E M E N T I N G THE 301 L E G I S L A T I O N THE U . S .
WOULD P R O C E E D IN T H E S P I R I T OF THE M U L T I L A T E R A L TRADING
SYSTEM/ AND IN THE S P I R I T OF G A T T .
3UT HE SAID THAT HE
COULD NOT GIVE A S P E C I F I C E X A M P L E H I M S E L F OF HOW T H A T
SPIRIT WOULD BE M A N I F E S T E D .
HE S U G G E S T E D P E R H A P S T H E
AMERICAN SIDE C O U L D . SO C O U L D YOU T E L L US P L E A S E ?
(AMBASSADOR HILLS)
A. YOU N O T I C E D T H A T WHEN WE A N N O U N C E D OUR P R I O R I T I E S /
WE A N N O U N C E D G O A L S THAT HAVE A L R E A D Y BEEN I D E N T I F I E D IN
GATT.
OUR P R A C T I C E S FOCUS* ON I M P O R T R E S T R I C T I O N S AND
IMPORT L I C E N C I N G / ON P R 0 3 L E M S D E A L I N G WITH P R O C U R E M E N T /
ON S T A N D A R D S AND D I S C R I M I N A T I O N W I T H R E S P E C T TO
T E C H N I C A L S T A N D A R D S / ON BARS A G A I N S T S E R V I C E S / AND BANS
AGAINST I N V E S T M E N T .
IF WE ARE S U C C E S S F U L IN P E R S U A D I N G
OUR T R A D I N G P A R T N E R S TO L I B E R A L I Z E IN T H O S E A R E A S / I
S U G G E S T TO YOU THAT T H A T W I L L 30 A C O N S I D E R A B L E
******************
UNCLASSIFIED
* * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * *
UNCLASSIFIED
* * * * * * * * * * * * * * * * *
DISTANCE IN FURTHERING THE GOALS OF THE URUGUAY ROUND
AND HENCE A U G M E N T T H E G A T T .
Q. 3UT THE MECHANISM THAT YOU ARE PURSUING TO FOLLOW
WOULD CALL FOR R E T A L I A T I O N WITHIN A GIVEN NUMBER OF
MONTHS OR A S P E C I F I C T I M E .
IS THAT ALSO IN A C C O R D A N C E
WITH THE GATT P R O C E D U R E S ?
(AM3ASSAD0R HILLS)
3T
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WHITE HOUSE PASS TO NSC
<SJ3JECT>
3U3JECT:
FINAL U . S . PRESS
CONFERENCE
AT THE
CONCLUSION
A. MR. ROWEN/ YOU ASSUME THAT OU* NEGOTIATIONS WILL
FAIL WHEREAS I DO N O T .
Q. NO/ I AM NOT ASSUMING ANYTHING. I AM JUST
RECALLING YOU WHAT THE ELEMENTS 3F THE LAW
ARE ATTEMPTING TO FOLLOW T H R O U G H .
ARE THAT
YOU
(AMBASSADOR HILLS)
A.
FORGIVE ME/ BUT THE LAW DOES NOT MANDATE
RETALIATION.
IT PROVIDES DISCRETIONARY RETALIATION BUT
IT IS QUITE BROAD AND WE HAVE NEITHER STATED THAT WE
WOULD RETALIATE NOR IS THAT OUR GOAL AS WE COMMENCE OUR
QUEST FOR L I B E R A L I Z A T I O N .
Q. WELL/ IS THEN THE SPIRIT THAT HAS BEEN REFERRED TO
HERE TODAY/ DOES THAT MEAN THAT YOU WILL ATTEMPT
AVOID RETALIATION?
TO
(AMBASSADOR HILLS)
A. IT MEANS THAT WE WILL ATTEMPT TO OPEN MARKETS AND
EXPAND TRADE IN A MULTILATERAL SENSE AND HOW WE GO
ABOUT IT/ THE STRATEGY WE USE/ PROBABLY IS NOT BEST
SONE INTO DETAIL H E R E .
Q. AMBASSADOR HILLS/ IN YOU FIRST RESPONSE YOU SAID/
AND I QUOTE/ "AT THE MOMENT"/ THE UNITED STATES
IMPLEMENTATION/ INVOCATION OF SUPER 301 WAS CONSISTENT
WITH THE SPIRIT OF THIS MEETING AND OF THE MULTILATERAL
TRADING SYSTEM.
BY USING THE PHRASE "AT THE MOMENT"/
ARE YOU IMPLYING THAT THERE MIGHT BE S01E OTHER MOMENT/
PERHAPS 18 MONTHS FROM NOW/ WHEN THE UNITED STATES
MIGHT DO SOMETHING NOT IN THE SPIRIT OF THIS MEETING
AND OF THE GATT?
(AMBASSADOR
A.
NO.
HILLS)
Q. AMBASSADOR HILLS/ ON THAT SAME TOPIC/ YOU SAY WE
HAVE NEVER STATED WE WILL RETALIATE NOR IS THAT
OUR
* * * * * * * * * * * * * * * * * * * *
UNCLASSIFIED
* * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * *
UNCLASSIFIED
* * * * * * * * * * * * * * * * * * * *
GOAL.
ARE YOU WILLING TO STATE HERE THAT YOU WOULD NOT
RETALIATE/ THAT YOU WOULD NOT RETALIATE ON A UNILATERAL
JA3IS?
(AMBASSADOR
A.
NO.
HILLS)
3.
I'M NOT SURE WHO THIS WOULD 3E TO/ I THINK
SECRETARY BRADY.
ONE OF THE THINGS NOTED IN THE
COMMUNIQUE IS THAT THE PROCESS OF REDUCING THE CURRENT
ACCOUNT IMBALANCE HAS SLOWED OR STALLED AND THE
COMMUNIQUE CALLS FOR A STRENGTHENING OF EFFORTS TO
ADDRESS THOSE I M B A L A N C E S .
WHAT ARE THE FIRST SEVERAL
THINGS THAT YOU WOULD DC TO STRENGTHEN THE EFFORTS TO
REDUCE THE CURRENT ACCOUNT DEFICITS?
(SECRE TARY 3 RADY)
A.
WE LL/ TI M/ THE G-7/ PA RTICU LARLY AT MO MENTS LIKE
THIS W Aii\\ TH
E G-7 P ROCESS AND P O L I C Y COORD INATI ON
BECOME S MORE DIFFIC ULT/ TH E AMO UNT OF TIME THAT
MINIST ERS S? END TAL KINS A3 OUT I T INCR EASES .
AND THE
THINGS THAT HAVE BE EN PUT FORWA RD HER £ TOD AY AN D THE
ONES T HAT WE TALK A BOUT AL L THE TIME/ SUCH AS R EDUCING
SURPLU SES IN SURPLU S COUNT HIES/ PARTI CULAR LY JA PAN AND
3ERMAN Y> AND WORK I N THE U NITSD STATE S ON OUR 0 WN
FEDERA L DEFI CIT/ CO NTINUES •
I WOULD SAY T HAT W ITH
RESARD TO OU R OWN C OUNTRY WHICH WE CA N SPE AK AS OUT
FIRST- HAND/ THE BUD CET RES OLUTI ON/ JU ST AR RIVED AT A
MONTH OR SO AGO/ WH ILE NEI T*ER BOLD N OR HE ROIC, IS A
VERY I MPORTA NT FIRS T STEP.
IT IS IMP ORTAN T 3EC AUSE IT
INDICA TES TH AT THE DEMOCRA TS AN D THE REPU3 LICAN S/ THE
EXECUT IVE AN D THE L EGISLAT IVE B RANCH/ CAN SETTL E
DIFFER ENCES.
IT IS N'T THE ANSW ^R TO ALL T HE PR 03LEMS
TO EE SURE/ 3UT IT IS VERY IMPO RTANT IN TH E UNI TED
STATES TO SH OW THAT WE CAN HAVE MOVEM ENT 0 N ISS UES THAT
HAVE B EEN TH E SUBJE CT OF D IFFER E N C E S .
SO/ IT I S THAT
KIND 0 F THIN G THAT IS IMPO RTANT AND W E'LL WORK ON IT.
WE TAL K ABOU T IT.
Q.
MY QUESTION IS FOR AMBASSADOR H I L L S .
JAPAN AND
QUITE A FEW OF THE OTHER COUNTRIES HERE JOINED TOGETHER
IN THEIR CONDEMNATION OF THE U. S.'S USE OF SUPER 3 0 1 .
DO YOU EXPECT THAT JAPAN AND OR OTHER COUNTRIES WILL
FILE FORMAL COMPLAINTS WITH THE GATT AND/ IF SO/ HOW
WOULD THE U . S . RESPOND TO THAT?
* * *
* * *
* * * *
UNCLASSIFIED
* * * * * * * * * * * * * * * * * * *
•
* * * * * * * * * * * * * * * * * * *
JNCLASSIFIED
* * * * * * * * * * * * * * * * * * *
A. ALL WE HAVE DONE SO FAR IS TO POST A NOTICE OF WHAT
3T
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J N C L A S SECTION 35 OF O D PARIS 13453
#
USIS/USOECD
USIA FOR EU:BSHINKMAN AND THOMSON; P/G:MCCLELLAN;
P/PFO; P/PFW
STATE FOR E/ EB/ EUR
TREASURY FOR S/ U/ A/ P/ 1/ IT/ IM/ IMI
STATE PASS ALSO TO CEA
STATE PASS ALSO TO USTR
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<SJ3JECT>
SUBJECT:
FINAL U . S . PRESS CONFERENCE AT THE CONCLUSION
WE 3ELIEVE TO BE IMPORTANT TRADE PRIORITIES/ ALL OF
WHICH HAVE BEEN IDENTIFIED BY OJR TRADING PARTNERS IN
******************
JNCLASSIFIED
* * * * * * * * * * * * * * * * * *
* * * * * *
UNCLASSIFIED
* * * * * * * * *
* *
THE M U L T I L A T E R A L FORUM IN G E N E V A .
WE HAVE N O T DONE
ANYTHING THAT WOULD BE S U B J E C T TO AN A C T I O N AT G A T T .
WE HAVE S I M P L Y I D E N T I F I E D W H E R E WE THINK THE S Y S T E M
W E ' R E W O R K I N G VERY H A R D / WE
NEEDS TO BE L I B E R A L I Z E D .
S E . I E V E / AS A R E S P O N S I B L E LEADER IN T H E U R U G U A Y ROUND
IF WE WERE A SMALLER N A T I O N / WE COULD SIT 3Y P E R H A P S
AND W A T C H . BUT WE ARE T H E S T R O N G E S T N A T I O N IN T H E
WORLD AND WE HAVE H I S T O R I C A L L Y T A K E N A L E A D E R S H I P
ROLE. I B E L I E V E WE GET MUCH C R E D I T FOR T H E L O W E R I N G OF
TARIFFS IN T H E LAST *0 Y E A * S AT GATT 3 E C A U S E OF T H E
SIZE OF OUR MARKET AND T H E ENERGY WITH WHICH WE
A D D R E S S E D THAT S U B J E C T .
WE'RE T R Y I N G AGAIN TO TAKE A
L E A D E R S H I P R O L E / A.4D WHEN WE TALK WITH A T R A D I N G
PARTNER THAT C O N S I S T S OF T H E S E C O N D L A R G E S T M A R K E T IN
THE WORLD WITH R E S P E C T TO B A R R I E R S THAT ARE UP TO ALL
OF OUR TRADING P A R T N E R S / IF WE ARE S U C C E S S F U L IN OUR
T A L K S / WE WILL DO MUCH TO ADVANCE THE M U L T I L A T E R A L
SYSTEM.
MULTILATERAL
TRADING
SYSTEM.
Q. DO YOU I N T E R P R E T OR U N D E R S T A N D P A R A G R A P H 26 OF T H E
COMMUNIQUE — S P E C I F I C A L L Y ITS R E F E R E N C E TO NEW
I N T E R P R E T A T I O N S OF C E R T A I N T R A D E C O N C E P T S / SUCH AS
UNFAIR TRADE P R A C T I C E S / ON P A G E 9? YOU P R O B A B L Y KNOW
IT 3Y H E A R T . DO Y O U I N T E R P R E T THAT AS I M P L I E D
C R I T I C I S M OF R E C E N T U . S. T R A D E A C T I O N S ?
i DON'T THINK
IT CAN ONLY DRAW A Y E S OR NO A N S W E R .
I T ' S NOT I N T E N D E D
TO aRAW A YES OR N O .
(AM3ASSADOR H I L L S )
A. DO I C O R R E C T L Y READ YOUR S E N T E N C E W H I C H G O E S /
I N T E R P R E T A T I O N S OF C E R T A I N T R A D E C O N C E P T S SUCH AS
NEW
* * * * * * * * * * * * * * * * * *
UNCLASSIFIED
* * * * *
* * * * * * * * * * * * * * * * * * * *
UNCLASSIFIED
* * * * * * * * * * * * * * * * * * * *
•RECIPROCITY' AND 'UNFAIR TRADE PRACTICES' AS WELL AS
NEW APPROACHES IMPLYING A DEGREE OF BALANCED 3ILATERAL
TRADE ARE BEING INCREASINGLY ADVOCATED IN SOME
QUARTERS?"
QUESTIONER: YES.
(AMBASSADOR HILLS)
A. I DO NOT READ THAT SENTENCE TO 3E CRITICAL OF THE
TRADE STRATEGY OF THE UNITED STATES/ WHICH IS TO OPEN
MARKETS AND EXPAND T R A D E .
AND WE HAVE NEVER ADVOCATED
RECIPROCITY AND INSTEAD HAVE ARGUED AGAINST IT IN OTHER
SYSTEMS.
CONFLICT WITH
Q. IF I COULD FOLLOW UP. PERHAPS NOT IN
TRADE
TRADE POLICY/ BUT IN CONFLICT wITH RECENT
ACTIONS.
I TOOK SPECIFIC NOTE OF THE USE OF THE TERM
UNFAIR TRADE P R A C T I C E S .
A. WELL/ THE PRESS HAS IDENTIFIED THE PRACTICES THAT
«£ HAVE NAMED AS UNFAIR BUT I HAVE NOT.
I HAVE
ALLUDED TO THE PRACTICES THAT WE HAVE IDENTIFIED AS
BARRIERS TO TRADE THAT ARE PRIORITIES OF OUR TRADE
LIBERALIZATION STRATEGY.
Q. IF WE TAKE THE FOLLOWING SENTENCE/ MRS. HILLS/
WHERE MINISTERS FIRMLY REJECT THE TENDENCY TOWARDS
UNILATERALISM/ BILATERALISM/ ETC. WHICH THREATENS THE
MULTILATERAL SYSTEM AND UNDERMINE THE URUGUAY ROUND
NEGOTIATIONS.
NOW YOU HAVE STATED THAT YOJ ARE
STRONGLY IN FAVOR OF BOTH THE MULTILATERAL SYSTEM AND
THE URUGUAY R O J N D N E G O T I A T I O N S .
HOWEVER/ TNE
IDENTIFICATION OF THESE BARRIERS LEADING TO A DEADLINE/
WHICH YOU DO NOT DENY/ WOULD LEAD TO UNILATERAL
RETALIATION BY THE UNITED STATES WHICH YOU JUST POINTED
OUT IN RESPONSE TO MR. MURRAY'S QUESTION.
DO YOU
INTERPRET THIS SECOND SENTENCE
WHICH I'VE JUST ALLUDED
TO AS HAVING ANY RELATIONSHIP WHATSOEVER TO THE RECENT
ACTIONS OF THE UNITED STATES?
3T
»3450
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«HITE HOUSE PASS T O NSC
<SU3JECT>
S U B J E C T : FINAL U . S . P R E S S C O N F E R E N C E AT T H E C O N C L U S I O N
(AMBASSADOR H I L L S )
A. NOT IN MY MIND. THIS ALLUDES TO UNILATERALISM
WHICH T H R E A T E N S T H E M U L T I L A T E R A L SYSTEM AND I CAN ONLY
ASSURE YOU THAT IS NOT OUR I N T E N T TO DO A N Y T H I N G TO
T H R E A T E N T H E M U L T I L A T E R A L SYSTEM/ A U N I L A T E R A L I S M THAT
T H R E A T E N S T H E URUGUAY ROUND N E G O T I A T I O N S .
AND I T H I N K
THAT YOU WILL FIND NO COUNTRY THAT L E A D S MOPE IN T H E
URUGUAY ROUND THAN DOES THE U N I T E D S T A T E S . SO THE
********************
UNCLASSIFIED
* * * * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * *
JNCLASSIFIED
* * * * * * * * * * * * * * * * * * * *
ANSWER TO YOUR QUESTION/ THE SHORT ANSWER/ IS NO.
Q. CAN I ASK SECRETARY BRADY OR CHAIRMAN 30SKIN IF
THEY HAVE ANY R E A C T I O N W H A T S O E V E R ON T H E FACT THAT T H E
B U N D E S B A N K DID NOT TAKE ANY A C T I O N ON ITS I N T E R E S T
RATES THIS A F T E R N O O N ?
(SECRETARY BRADY)
A. N O .
(CHAIRMAN 30SKIN)
A. NOR I.
LADIES AND GENTLEMEN/ THIS CONCLUDES THE AMERICAN PRESS
CONFERENCE.
KENNEDY
3T
#3450
<MS3> MS3000234367665
<A*N0TATI0N>
MULFORD/ DALLARA/
BOLTON/
* * * * * * * * * * * * * * * * * * * *
UNCLASSIFIED
* * * * * * * * * * * * * * * * * * * *
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
5310
For Release Upon Delivery
Expected at 10 a.m.
June 8, 1989
STATEMENT OF
JOHN G. WILKINS
ACTING ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to present the Department of
the Treasury's views on H .R. 1761, a bill introduced by Chairman
Rostenkowski to simplify the alternat ive minimum tax ("AMT")
applicable to corporation s. Treasury recognizes the significant
complexities posed by cer tain aspects of the corporate AMT,
particularly for taxable years beginn ing after 1989. We agree
with Chairman Rostenkowsk i that simplification of the corporate
AMT is appropriate and de sirable. We are concerned, however,
that certain depreciation transition features of the bill in its
I would
likeresult
to stress
the outset
that this
testimony
signific
ant revenue
loss.
current
form may
i n aat
reflects our preliminary assessment of H.R. 1761. The issues
raised by this legislation are important ones and, as such, need
to be thoroughly reviewed before moving forward. We look forward
to working with you to achieve appropriate simplification of the
corporate AMT.
Section 702 of the Tax Reform Act of 1986 (the "1986 Act")
directed the Secretary of the Treasury to conduct a study of "the
operation and effect" of the book income and adjusted current
earnings ("ACE") provisions of the corporate AMT. Our final
report will be submitted shortly. Much of my testimony before
you today reflects the analysis and conclusions to be provided in
the report.
My statement today is divided into three parts. First, I
briefly describe the history of the minimum tax up to the
adoption of the current provisions as part of the 1986 Act and
the basic policies on which the minimum tax is premised. I then
discuss the provisions of current law, including the adjustments
NB-326
-2for book income and adjusted current earnings. Finally, I
analyze the changes that would be made by H.R. 1761 and their
effects on federal revenues.
I.
BACKGROUND AND POLICIES
The corporate minimum tax as originally enacted in the Tax
Reform Act of 1969 was a 10-percent additional, or add-on, tax on
the amount by which the aggregate of specifically identified tax
preferences exceeded the sum of a $30,000 exemption and a deduction for regular taxes. The items treated as tax preferences
included: (i) accelerated cost recovery in excess of straightline depreciation; (ii) percentage depletion in excess of basis;
(iii) a portion of net capital gains; and (iv) excess bad debt
reserves of financial institutions. The Tax Reform Act of 1976
strengthened the corporate minimum tax by: (i) increasing the
minimum tax rate from 10 percent to 15 percent; and (ii)
replacing the $30,000 exemption and deduction for regular taxes
with an exemption equal to the greater of $10,000 or regular
taxes.
To address increasing concerns about the equity of the tax
system with its numerous corporate tax preferences, Congress
enacted in the Tax Equity and Fiscal Responsibility Act of 1982 a
direct 15 percent cutback in certain corporate tax preferences.
Although these cutbacks, found in Code section 291, operated
independently of the minimum tax, adjustments were made to the
minimum tax to prevent the combination of that tax and the
cutback provisions from unduly reducing the benefits from a
preference. In light of large budget deficits, the Deficit
Reduction Act of 1984 increased the direct cutback of certain
corporate tax preferences from 15 percent to 20 percent and again
made corresponding adjustments to the corporate minimum tax.
The corporate minimum tax from its inception in the Tax
Reform Act of 1969 has attempted to ensure that corporations pay
some minimum amount of tax on their economic income. Congress
has regarded such a measure as necessary because many
corporations could otherwise avoid paying tax on substantial
economic income by pyramiding exclusions, deductions, and
credits.
The judgment that a minimum tax is necessary reflects an
ambivalence about the desirability and effectiveness of the tax
preferences subject to the tax. For example, percentage
depletion and accelerated methods of depreciation have
traditionally been allowed in part to subsidize the cost of
productive depreciable assets and mineral production activities.
Some were troubled, however, by the fact that corporations
engaged in activities, such as real estate or natural resource
production, that benefited from tax preferences were taxed at
relatively lower rates on economic income than taxpayers
receiving the bulk of their income from nonpreferred activities.
The ability of high-income taxpayers to pay little or no tax
-3undermines respect for the entire tax system and, thus, for the
incentive provisions themselves.
Much of the debate leading up to the 1986 Act focused on
real and perceived inequities in the tax system. The proposals
in the Treasury Department's 1984 tax reform recommendations to
President Reagan sought to redesign the income tax base to
closely approximate economic income and thereby eliminate the
need for the corporate minimum tax. Former President Reagan's
1985 tax reform proposals, however, retained certain incentive
provisions, but recognized that "the prospect of high-income
corporations paying little or no tax threatens public confidence
in the tax system." Consequently, the proposals he submitted to
Congress also included a minimum tax designed to limit the number
of high-income, low-tax returns.
Prior to the 1986 Act, it became apparent that the original
corporate add-on minimum tax did not adequately achieve the
primary objective of the minimum tax. The add-on tax was imposed
on preferences used by corporations even when the taxpayer was
taxed at a high effective rate under the regular tax. President
Reagan's 1985 tax reform proposals suggested that an
"alternative" minimum tax, imposed only to the extent a
taxpayer's regular effective tax rate falls below a minimum
acceptable level, is better designed to achieve the purpose of a
minimum tax. Moreover, the proposals noted that "an alternative
minimum tax limited to the tax preferences applicable to
corporations under [pre-1986 Act] law would be insufficient to
prevent many corporations from eliminating their regular tax on
economic income." Congress shared the view that the minimum tax
base had to be broadened to ensure that corporations with
substantial economic income would pay some tax.
In order to address these perceived deficiencies in the
corporate minimum tax, the 1986 Act repealed the add-on minimum
tax and created a new AMT for corporations. The AMT was designed
to ensure that, in each taxable year, the taxpayer generally must
pay a significant tax on an amount more nearly approximating
economic income.
In part, the debate over how to define the base subject to
the corporate AMT was influenced by widely publicized reports of
major companies having paid no taxes in years when they reported
substantial earnings, and may even have paid substantial
dividends to shareholders. The congressional reaction to these
reports is described by the staff of the Joint Committee on
Taxation as follows:
With respect to corporations, Congress concluded that the
goal of applying the minimum tax to all companies with
substantial economic incomes cannot be accomplished solely
by compiling a list of specific items to be treated as
preferences. In order to achieve both real and apparent
fairness, Congress concluded that there must be a reasonable
-4certainty that, whenever a company publicly reports
significant earnings, that company will pay some tax for the
year. General Explanation of the Tax Reform Act of 1986,
434 (19S7T:
For taxable years beginning in 1987, 1988, and 1989, the
1986 Act addressed this concern by including in the base subject
to the corporate AMT an adjustment based upon financial statement
or book income reported by the taxpayer pursuant to public
reporting requirements or in disclosures made for nontax reasons
to regulators, shareholders, or creditors (the "book income
adjustment"). The temporary book income adjustment was designed
specifically to improve the public perception of the fairness of
the tax system immediately following the 1986 Act.
For taxable years beginning after 1989, the book income
adjustment is replaced by an adjustment based on a broad, but
statutorily defined, measure of economic income known as adjusted
current earnings or "ACE." While this adjustment was a response
to anticipated problems with the book income adjustment, it was
contemplated that switching to this adjustment would not diminish
the corporate AMT base.
II. GENERAL DESCRIPTION OF THE CORPORATE AMT
UNDER CURRENT LAW
Generally, the tax base for the corporate AMT is the
corporation's taxable income, increased by tax preferences for
the year and adjusted in a manner designed to negate the deferral
of income or acceleration of deductions resulting from the
regular tax treatment of certain items. The resulting amount of
alternative minimum taxable income ("AMTI"), reduced by an
exemption amount, is subject to a 20-percent rate. The exemption
amount is $40,000, reduced (but not below zero) by 25 percent of
the amount by which AMTI exceeds $150,000. The amount of minimum
tax liability so determined may then be offset partially by the
minimum tax foreign tax credit, and to a limited extent by
investment tax credit carryovers. A corporation is effectively
required to pay the higher of the AMT or the regular tax for the
taxable year.
Corporations are allowed a minimum tax credit to the extent
the excess of the AMT over the regular tax is attributable to
preferences or adjustments (such as accelerated depreciation)
involving the timing of a deduction or income inclusion. This
credit is allowed as a reduction of regular tax liability of the
taxpayer in any subsequent taxable year, but may not be used to
reduce regular tax below AMT for the subsequent year.
The computation of corporate AMTI is generally a two-step
process. First, taxable income is adjusted to reflect specific
statutory adjustments and preferences. Second, the resulting
amount of AMTI ("unadjusted AMTI") is adjusted further to take
-5into account the book income adjustment for taxable years
beginning in 1987, 1988, and 1989, or the ACE adjustment for
taxable years beginning after 1989. Before discussing in detail
the book income and ACE adjustments, I will briefly describe the
more significant adjustments and preferences applicable in
computing unadjusted AMTI.
Depreciation. Depreciation on property placed in service
after 1986 generally is determined by using the applicable ADR
midpoint life as the period over which the cost is recovered.
Depreciation for most personal property is calculated using the
150 percent declining balance method while the straight-line
method is required for most real property. This depreciation
allowance is in lieu of the regular tax depreciation allowance
which generally is determined using a more accelerated method
over a shorter life. Thus, the net present value of the
depreciation deductions allowed for purposes of the AMT generally
is significantly lower than the net present value of the
depreciation deductions allowed for regular tax purposes. With
respect to certain property placed in service prior to 1987, AMTI
after 1986 includes the amount by which the regular tax
depreciation for the taxable year exceeds an amount determined
using straight-line depreciation. This preference is limited to
real property and leased personal property.
Depletion. AMTI is increased by the amount by which the
regular tax deduction allowable for depletion exceeds the
adjusted basis of the property at the end of the taxable year
(determined without regard to the depletion deduction for the
taxable year). For regular tax purposes, certain taxpayers are
allowed to use percentage depletion. Under this method, the
amount of depletion allowed over the life of the property may
exceed the cost basis of such property.
Intangible drilling costs. The amount by which "excess
intangible drilling costs" exceed 65 percent of the taxpayer's
net income from oil, gas, and geothermal properties is includible
in AMTI. The amount of excess intangible drilling costs is the
amount by which the taxpayer's regular tax deduction for such
costs exceeds the amount that would have been allowable if the
taxpayer had amortized the costs ratably over 120 months.
Generally, for regular tax purposes taxpayers are allowed to
expense their intangible drilling costs. Integrated oil
companies, however, must for regular tax purposes amortize 30
percent of their intangible drilling costs over 60 months.
Mining exploration and development costs. Mining
exploration and development costs are required to be recovered
through 120-month ratable amortization. For regular tax
purposes, 70 percent of mining exploration and development costs
may be expensed while the remaining 30 percent of such costs are
amortized over 60 months.
-6-
Long-term contracts. The percentage of completion method
must be used for all long-term contracts (other than certain home
construction contracts) entered into by the taxpayer on or after
March 1, 1986.
Installment sales. The installment method of accounting is
not available in computing AMTI with respect to dispositions of
property (other than timeshares and residential lots) held by the
taxpayer for sale to customers in the ordinary course of business
("dealer dispositions"). The installment method is available for
regular tax purposes with respect to dealer dispositions of
timeshares and residential lots and property used or produced in
the trade or business of farming. The installment method is
generally available for both regular tax and AMT purposes with
respect to nondealer dispositions. In most cases, however,
interest must be paid on a portion of the tax deferred by the use
of the installment method.
Tax-exempt interest. AMTI is increased by interest received
on most private activity bonds issued on or after August 8, 1986.
Private activity bonds are bonds issued by a state or local
governmental unit if: (1) an amount exceeding 10 percent of the
bond issuance proceeds is to be used in any trade or business
carried on by any person other than a governmental unit; and (2)
more than 10 percent of the payment of principal or interest on
the bond issue is to be made with respect to such trade or
business use, or is otherwise secured by payments or property
used in a trade or business. For regular tax purposes, such
interest is excluded from taxable income.
Charitable contributions. AMTI is also increased by the
amount by which a regular tax deduction for a corporation's
charitable contributions of appreciated capital gain property
exceed the adjusted basis of such property. For regular tax
purposes, the full fair market value of appreciated property
contributed to a charity is generally allowed as a deduction. In
addition, the appreciation in the property is not included in
taxable income.
Before turning to a description of the book income and ACE
adjustments, I would like to note that the AMT in many respects
is separate from, but parallel to, the regular tax. Accordingly,
the AMT treatment of an item in one year may have corollary
consequences with respect to the AMT treatment of other items or
the calculation of AMTI in subsequent years. This treatment is
particularly evident with respect to adjustments that relate to
the time at which items of income and deduction are taken into
account.
For example, the AMT depreciation allowance is controlling
for all AMT purposes with respect to which the amount of
depreciation claimed is relevant. Thus, the adjusted basis of
property may differ for regular tax and AMT purposes, giving rise
-7to differing amounts of gain between the two systems upon the
disposition of such property. Similarly, the amount of
depreciation that is capitalized as an inventory cost under the
uniform capitalization rules of section 263A may differ for
regular and AMT purposes.
In the case of a taxpayer that is required to include in
AMTI any interest that is tax exempt for regular tax purposes,
the regular tax provision denying deductions for interest paid
and other expenses relating to tax-exempt income does not apply
for purposes of the AMT. For regular tax purposes, however, the
application of the provision denying certain interest expense
deductions is unaffected by the fact that the related interest
income may be includible in income for AMT purposes.
A notable exception to the separate but parallel nature of
the AMT exists with respect to the preference for intangible
drilling costs. Excess intangible drilling costs are computed
for AMT purposes by reducing the intangible drilling costs
deductible for regular tax purposes by the amount of such costs
paid or incurred in the taxable year that would have been
deductible had those costs been capitalized and amortized over a
10-year period. The unamortized portion of such capitalized
intangible drilling costs, however, is essentially permanently
disallowed for AMT purposes, since it is not taken into account
in computing excess intangible drilling costs in subsequent
taxable years.
Net operating loss deductions under the AMT are determined
by using a separate computation of AMT net operating losses and
loss carryovers. Generally, this computation takes into account
the differences between the regular tax base and the AMT base.
The amount of the AMT net operating loss for any taxable year
generally is equal to the amount by which the deductions allowed
in computing AMTI for the taxable year (other than the deduction
for carryovers to the taxable year of AMT net operating losses)
exceed the gross income includible in AMTI for the taxable year.
In light of the parallel nature of the regular tax and AMT
systems, any limitations applying for regular tax purposes to the
use by a consolidated group of net operating losses or
current-year losses apply for AMT purposes as well.
Operation and Effect of the Book Income Adjustment
The computation of corporate AMTI for taxable years
beginning in 1987, 1988, and 1989 includes an adjustment for the
net book income of corporations. The book income adjustment is
computed by increasing AMTI by 50 percent of the amount by which
the net book income of a corporation exceeds unadjusted AMTI
(i.e., AMTI determined without regard to the book income
adjustment and the AMT net operating loss deduction) for the
taxable year. If net book income falls below unadjusted AMTI,
however, AMTI is not reduced by a negative book income
adjustment.
-8-
Generally, net book income for purposes of the book income
adjustment is the net income shown on the taxpayer's applicable
financial statement. Net book income takes into account all
items of revenue, expense, gain and loss for the taxable year,
and includes any extraordinary items, income or loss from
discontinued operations, and cumulative adjustments resulting
from accounting method changes. In general, a taxpayer's
applicable financial statement is its financial statement that
has the highest priority according to the following order: (1) a
financial statement required to be filed with the Securities and
Exchange Commission; (2) a certified audited financial statement
used for substantial nontax purposes; (3) a financial statement
required to be provided to federal or state regulators; or (4) an
unaudited financial statement used for substantial nontax
purposes. A corporation that does not have a financial statement
in categories (1), (2), or (3) may elect to treat its earnings
and profits as its net book income.
For purposes of the minimum tax credit, the book income
adjustment is treated entirely as a timing adjustment. As a
result, a minimum tax credit is allowed to the extent that the
amount by which the AMT exceeds the regular tax is attributable
to the book income adjustment.
Comments on Book Income Adjustment
The book income adjustment may be having a detrimental
effect on the quality of financial reporting. The linkage
between financial statement income and tax liability creates an
incentive for corporations potentially subject to the AMT to
apply generally accepted accounting principles ("GAAP") in a way
that reduces the amount of net book income subject to the book
income adjustment. Accordingly, general-purpose financial
statements may provide distorted financial data to investors,
creditors, and other nontax uses. While we have no hard data
from which to conclude that such distortions are being made in
any significant way, it is clearly undesirable for the tax system
to contain such perverse incentives.
The book income adjustment is also defective in that it
overtaxes corporations in certain situations. This result is
particularly evident in the case of items for which a deduction
is required sooner for financial statement purposes than for
regular tax purposes. The same is true of income items that are
included in taxable income before they are included in financial
statement income. These "reverse" timing differences are
generally attributable to the conservative nature of financial
accounting.
For example, a corporation may be required to reduce
financial earnings for a contingent liability in a taxable year
prior to the time such liability is deductible for tax purposes.
In the earlier year, the financial statement expense will reduce
-9net book income as compared to unadjusted AMTI. The corporation
generally derives no tax benefit for this reduction in book
income either currently or in later years. A current benefit is
derived only if (notwithstanding the reduction) the corporation's
net book income exceeds its unadjusted AMTI and the corporation's
AMT for the year exceeds its regular tax. In such cases, the
book income adjustment is partially determinative of the
taxpayer's tax liability for the year, and the fact that the
amount of this adjustment is reduced by the amount of the
contingent liability results in a current tax benefit.
When the amount subsequently becomes deductible for tax
purposes, AMTI will tend to be lower than book income causing a
book income adjustment to be required. Neither the book income
adjustment nor the amount by which AMT for the year exceeds
regular tax is reduced to take into account the fact that the net
book income subject to tax was previously taxed directly as
taxable income or AMTI.
The inequities caused by these reverse timing differences
are largely due to the fact that, as noted above, the book income
preference is only a positive adjustment, and never a negative
one. The "one-way street" nature of the book income preference
has been widely criticized, and justifiably so. Neither of the
policy goals underlying the AMT—ensuring that corporations pay a
minimum amount of tax on their economic income or eliminating the
so-called "perception problem"—provides support for this harsh
rule.
Another problem associated with the book income adjustment
is that the determination of a corporation's applicable financial
statement in some cases is unclear or controversial. For
example, the extent to which supplemental disclosures or footnote
disclosures are treated as part of the applicable financial
statement has been an issue with respect to the temporary and
proposed book income regulations. In addition, corporations
required to file financial data with governmental agencies may
disagree with an IRS agent as to whether such financial data
constitute a financial statement.
For all of the foregoing reasons, we would generally be
opposed to making the book income adjustment permanent.
Operation and Effect of the ACE Adjustment
For taxable years beginning after 1989, the book income
adjustment is replaced by an adjustment based on the
corporation's adjusted current earnings. The ACE adjustment is
equal to 75 percent of the amount by which the adjusted current
earnings of a corporation exceed unadjusted AMTI (i.e., AMTI
determined without regard to the ACE adjustment and the AMT net
operating loss deduction) for the taxable year. If unadjusted
AMTI exceeds the amount of ACE, then AMTI is reduced by 75
percent of such difference. This reduction, however, is limited
-10to the aggregate amount by which AMTI has been increased by the
ACE adjustment in prior years.
Generally, ACE is the corporation's unadjusted AMTI
increased by: (i) items includible in computing earnings and
profits but excluded from unadjusted AMTI; and (ii) items
deductible in determining unadjusted AMTI but not deductible in
determining earnings and profits. In addition, certain
adjustments to the computation of unadjusted AMTI are required in
computing ACE.
As described above, ACE is determined with respect to
certain items by treating them in the same manner as they are
treated for purposes of computing corporate earnings and profits.
The reliance on corporate earnings and profits in computing ACE
is limited, however, to items of income permanently excluded from
unadjusted AMTI and items permanently nondeductible in computing
earnings and profits as contrasted with mere "timing"
differences. For example, ACE includes interest earned on
obligations issued by state and local governments to the extent
such interest is excluded from unadjusted AMTI. In addition, the
dividends received deduction, allowed in computing unadjusted
AMTI, is generally disallowed for purposes of computing ACE.
Generally, ACE is not reduced by deductions allowed in
computing corporate earnings and profits if such amounts are not
deductible in computing unadjusted AMTI. An exception is
provided for items of expense related to items of income required
to be included in ACE. Thus, for example, ACE is reduced by
costs incurred to carry tax-exempt bonds if such costs would have
been deductible in computing unadjusted AMTI had the interest
income on such bonds been includible in gross income.
ACE also includes various rules governing the treatment of a
number of specific items. These include the following:
Depreciation. For purposes of computing ACE, the
depreciation allowance for property placed in service after 1989
is determined using whichever of the following methods yields
deductions with a smaller present value: (i) straight-line
recovery over the asset depreciation range ("ADR") midpoint life
(40 years for real property); or (ii) the method and life used
for financial statement purposes. Thus, for example, if the
useful life of an asset assumed for financial statement purposes
is longer than the ADR midpoint life for such asset, ACE
depreciation will likely be determined using such longer life.
The ACE depreciation allowance for property placed in
service before 1990 is determined under similar rules: The
unrecovered AMT basis of such property (as of the end of the last
taxable year beginning before 1990) is either ratably recovered
over the remainder of such property's ADR midpoint life or
recovered pursuant to the method and life used for financial
statement purposes. The applicable treatment is the one that
-11yields deductions for taxable years beginning after 1989 with a
smaller present value.
Depletion. The ACE depletion allowance is determined using
either cost depletion or the method used for financial statement
purposes, whichever yields depletion deductions with a smaller
present value.
Intangible drilling costs. For purposes of computing ACE,
intangible drilling costs are required to be capitalized and:
(i) amortized ratably over 60 months; or (ii) recovered pursuant
to the method used for financial statement purposes if such
method yields deductions with a smaller present value.
Construction period carrying charges. In computing ACE,
construction period carrying charges, such as interest and taxes,
must be capitalized and recovered as part of the asset to which
they relate. Such treatment is also generally required for
purposes of computing taxable income and unadjusted AMTI.
However, the regular tax and unadjusted AMTI exceptions (e.g.,
with respect to interest allocable to personal property with a
production period: (i) not exceeding 1 year; or (ii) exceeding 1
year but not exceeding 2 years if the cost of such property does
not exceed $1,000,000) do not apply for purposes of computing
ACE.
LIFO inventories. For corporations using the last-in,
first-out ("LIFO") inventory method, ACE is increased or
decreased by the amount of any increase or decrease in the LIFO
recapture amount as of the end of the taxable year. The "LIFO
recapture amount" is the amount by which a corporation's
inventory determined using the first-in, first-out ("FIFO")
inventory method exceeds its inventory using the LIFO method.
Thus, an increase in the LIFO recapture amount represents an
amount of current-year inventory costs deducted in computing
unadjusted AMTI that would have been included in ending inventory
had the FIFO method been used.
Long-term contracts. With respect to a corporation using
the completed contract method of accounting for long-term
contracts entered into on or after March 1, 1986, ACE is
determined by using the percentage of completion method. This
adjustment has no real effect because the percentage of
completion method is required for purposes of computing
unadjusted AMTI with respect to all long-term contracts entered
into on or after March 1, 1986, for which the completed contract
method is likely to be used for regular tax purposes.
Installment sales. The installment method is not allowed in
computing ACE for installment sales in taxable years beginning
after 1989. This adjustment affects the dispositions of property
for which the installment method was allowed for purposes of
computing unadjusted AMTI, i.e., dealer dispositions of
timeshares and residential lots and nondealer dispositions.
-12Installment treatment is effectively disallowed with respect to
nondealer dispositions, notwithstanding the fact that interest is
imposed on the entire deferred regular tax liability. This may
be inappropriate in light of the fact that a portion of such tax
liability may be "prepaid" by the operation of the ACE adjustment
to AMTI.
Ownership changes. For purposes of computing ACE, the basis
of assets of a corporation that has experienced a change of
ownership after October 22, 1986, may not exceed the allocable
portion of the value of the stock of the corporation. The
allocation is based on the respective fair market values of the
assets. The effect of this provision is to eliminate a net
built-in loss as of the date of the ownership change.
For purposes of the minimum tax credit, items included in
AMTI by reason of the ACE adjustment that otherwise would be
permanently excluded from AMTI (such as tax-exempt interest) are
not treated as timing adjustments for which a minimum tax credit
is allowed. In this regard, ACE is less generous than the book
income adjustment, all of which is deemed to result from timing
differences for purposes of the AMT credit. A minimum tax credit
is available, however, to the extent the ACE adjustment is
attributable to items for which the timing of a deduction or
inclusion gives rise to its special treatment for ACE purposes.
Examples of such items are depreciation and intangible drilling
costs.
Comments on ACE Adjustment
The AMT was enacted, in part, to ensure that taxpayers with
significant book income would pay a tax. Whether AMTI based on
ACE rather than book income would achieve a similar result is an
empirical question that we have tested. Preliminary results of
this analysis have not detected any significant groups of
taxpayers that would escape paying taxes under ACE or H.R. 1761.
However, isolated examples appear to exist.
In many respects, ACE requires computations that are
completely separate from the computations required in computing
unadjusted AMTI. Accordingly, the ACE treatment of an item in
one year may have corollary consequences on other items in that
same year of on that same item in subsequent years. This system
is separate from the computation of AMTI in a way similar to the
way that AMTI is separate from regular taxable income.
For example, the ACE depreciation allowance is controlling
for all ACE purposes with respect to which the amount of
depreciation claimed is relevant. Thus, the adjusted basis of
any corporate asset may differ for ACE and unadjusted AMTI
purposes, giving rise to differing amounts of gain between the
two systems upon the disposition of such property. Moreover, the
separate depreciation allowances applicable for purposes of
computing regular taxable income, unadjusted AMTI, and ACE result
-13in three separate sets of corollary computations with respect to
each corporate depreciable asset.
We believe that multiple sets of AMT cost recovery records
are not a prerequisite to achieving the objective of the
corporate minimum tax, namely to ensure that all corporations pay
a minimum effective rate of tax on their economic income. The
inordinate complexity imposed by the ACE adjustment is likely to
have the effect of significantly reducing general compliance with
the corporate AMT. As a practical matter, therefore, the present
law corporate AMT effective for taxable years beginning after
1989 may fail to adequately serve the underlying purpose of such
a tax, as well as undermine respect for the overall corporate tax
system.
We also believe that the provisions in ACE that rely on
financial statement cost recovery methods create unwarranted
complexity. Such provisions require two net present value
computations with respect to each corporate asset in order to
determine the operative cost recovery allowances for ACE
purposes. These provisions also require a determination of the
applicable financial statement from which to derive the financial
statement cost recovery methods. In addition, as with the book
income adjustment described above, the linkage between financial
statement cost recovery and tax liability may have an adverse
effect on the quality of financial reporting.
The uncertainty regarding the definition of corporate
earnings and profits adds to the complexity of the ACE
adjustment. As stated above, ACE, in part, is determined by
reference to corporate earnings and profits, a term that is not
clearly defined in the Internal Revenue Code or Treasury
regulations. Thus, the required inclusion, or disallowed
deduction, of significant items for purposes of computing ACE
often turns on general earnings and profits principles derived
from case law.
Effects of Transition to the ACE Adjustment
As a result of the ACE adjustment, capital costs will be
recovered for purposes of the corporate AMT more slowly after
1989. More specifically, this result is due to: (i) the ACE
provisions for depreciation, depletion, and intangible drilling
costs described above; and (ii) the inclusion in AMTI of 75
percent of the excess of ACE over unadjusted AMTI rather than 50
percent as in the case of the book income adjustment.
The effect of introducing slower cost recovery allowances is
that corporations with constant annual additions to capital costs
or constant growth in such additions will suffer a substantial
reduction in the total annual cost recovery allowances in the
years immediately following such a change. In later years,
however, the total annual cost recovery allowances will not
differ significantly from the total annual allowances available
-14prior to the change. This transitional effect, known as the
"transition spike," can be illustrated by the following example:
Example. Assume a corporation that began operations in 1985
makes annual additions to its depreciable property of $100.
For purposes of illustration only, assume that, prior to
1990, the cost of such property is recovered for AMT
purposes ratably over 3 years. Further, assume that the
cost of property placed in service after 1989 must be
recovered ratably over 5 years. For taxable years beginning
after 1989, the ACE adjustment to AMTI would require that
the unrecovered AMT basis of property placed in service
before 1990 also be recovered ratably over the remainder of
a 5-year recovery period.
The corporation's total annual cost recovery allowance for
1987, 1988, and 1989 is $100. In 1990, however, the total
annual cost recovery drops to $48 because deductions are
allowed for: (i) one-ninth (instead of one-third) of the
cost of property placed in service in 1988; (ii) one-sixth
(instead of one-third) of the cost of property placed in
service in 1989; and (iii) one-fifth of the cost of property
placed in service in 1990. After 1990, the total annual
cost recovery allowance increases as the old schedule phases
out and the new phases in. By 1994, the corporation's total
annual cost recovery allowance again reaches $100. See the
top half of Table 1.
III. H.R. 1761
In general, H.R. 1761 would incorporate the components of
ACE directly into the computation of AMTI and repeal the ACE
adjustment with the objective of making AMTI itself approximate
economic income and thereby eliminate the need for the book
income adjustment or the ACE adjustment. This general objective
is pursued by two mechanisms.
First, with respect to cost recovery items that are computed
in one manner to arrive at unadjusted AMTI and in a different
manner to arrive at ACE, the bill provides a single computation
of AMTI. Under H.R. 1761, the depreciation allowance for
property placed in service after 1989 would generally be
determined using straight-line recovery over the ADR midpoint (40
years for real property); the depletion allowance would be
determined using cost depletion; and the intangible drilling cost
allowance would be determined using ratable amortization over 60
months. H.R. 1761 would eliminate the present value comparisons
currently required in determining the ACE cost recovery
allowances as well as the need to refer to financial statement
cost recovery methods. With respect to property placed in
service prior to 1990, H.R. 1761 uses the same corporate
depreciation allowances that are used in computing current
unadjusted AMTI. Thus, the extension of the recovery period
required in computing ACE with respect to such property would be
-15eliminated under the bill, and the "transition spike" effect
discussed above would be avoided.
Second, the items includible in ACE under present law that
are not includible in unadjusted AMTI generally would be
incorporated directly into the computation of AMTI under
H.R. 1761. As a result, 100 percent of items such as interest on
state and local governmental obligations are made includible in
corporate AMTI (in contrast to the 75 percent of such items which
would be included under the ACE adjustment).
The bill would also make specific changes to the treatment
of several items. For example, in computing corporate AMTI,
circulation expenses would be amortized over 3 years. With
respect to nondealer installment sales, corporate AMTI would not
include deferred installment gain to the extent that the taxpayer
is required to pay interest on the tax deferred by reason of the
installment method. The bill would further repeal as unnecessary
the special ACE treatment of long-term contracts and corporateowned annuities.
Comments on H.R. 1761
Chairman Rostenkowski's bill would significantly simplify
the corporate AMT. By repealing the ACE adjustment, the bill
would eliminate the need to maintain two sets of cost recovery
records for purposes of the AMT. Moreover, corporations can
eliminate the need to maintain separate AMT and regular tax cost
recovery records by electing to use the AMT basis recovery rules
for regular tax purposes. H.R. 1761 would also eliminate the
complexity associated with the ACE present value comparisons to
financial statement cost recovery methods. This change would
eliminate potential conflicts associated with the definition of
applicable financial statement and would remove the possible
adverse impact on the quality of financial reporting.
Under H.R. 1761 the cost recovery methods for taxable years
beginning after 1989 would be slower than the methods under
present law for taxable years beginning before 1990. As a
result, the usual transition effect of switching to slower cost
recovery methods would apply under the bill. This transition
effect would, however, be much milder than the transition effects
of switching to ACE, as current law provides. The milder
transition effect is attributable to the fact that, unlike ACE,
H.R. 1761 does not require that the unrecovered cost of
depreciable property placed in service before 1990 be recovered
over a redetermined and extended recovery period. This
treatment, as compared with ACE, results in higher total annual
cost recovery allowances for the taxable years immediately
following 1989 and consequently lower AMT on affected taxpayers.
This contrast is illustrated by comparing the bottom half of
Table 1, which represents the transition'effects of H.R. 1761,
with the top half of Table 1, which represents the transition
effects of the ACE adjustment.
-16-
For the first several taxable years beginning after 1989,
capital intensive corporations adversely affected by the
transition effects of the ACE adjustment would pay significantly
lower amounts of AMT under H.R. 1761. Some of these
corporations, however, may pay higher amounts of AMT under the
bill in later years due to the inclusion of certain items at a
100 percent rate rather than the 75 percent rate applicable under
ACE. In contrast, corporations with large investments in assets
for which the financial statement cost recovery method is
significantly slower than straight-line over ADR midpoint life
would pay less AMT under H.R. 1761 even in later years. This
would occur in those cases where the AMT cost recovery method
under H.R. 1761 yields deductions with a higher present value
than the effective AMT cost recovery method under present law
after taking into account the ACE adjustment.
Corporations that are not capital intensive would tend to
pay higher amounts of AMT under H.R. 1761. Such corporations
would be adversely affected by the increased inclusion rate from
75 percent to 100 percent without receiving an offsetting benefit
associated with H.R. 1761's treatment of cost recovery.
Compared to current law, H.R. 1761 does not change
significantly the cost of capital for new investments. Some have
noted that because the AMT increases tax from levels that would
otherwise apply, the AMT may raise the cost of capital. An
increase in the cost of capital—the pre-tax rate of return on
new investment required to obtain a given post-tax rate of
return—suggests that investment will be lower, other things
remaining equal. This is an expected result of the AMT.
Analysis of the switch from a pre-1990 AMT based, in part,
on book income to a post-1989 AMT based, in part, on ACE shows no
material difference in the cost of capital for corporations
paying the AMT. Assuming an equal mix of debt and equity
financing, the cost of capital for a corporation permanently on
the AMT will be only slightly higher than for a corporation that
instead remains permanently on the regular tax; however, these
estimates do not materially change with the switch from the book
income adjustment to ACE. Nor do these cost of capital estimates
change significantly if H.R. 1761 is substituted for current law.
As stated at the outset, the Treasury believes that the
corporate AMT should be revised before 1990. We generally agree
with the manner in which Chairman Rostenkowski's bill reduces the
extreme complexity associated with the ACE adjustment of present
law. My remaining comments on the bill will focus first on
certain aspects of the bill which we believe should be modified,
and second on the revenue effects of the bill.
Oil and Gas Incentives. The corporate AMT under present law
and under H.R. 1761 significantly reduces the regular tax
incentives (such as percentage depletion and the deduction for
-17intangible drilling costs) available to independent producers of
oil and gas. As reflected in the President's FY 1990 budget
proposals, it is essential for both energy security and national
security reasons to encourage exploration for new oil and gas
fields. Accordingly, we believe H.R. 1761 should be amended to
permit independent producers to expense 80 percent of
"exploratory" intangible drilling costs for purposes of the
corporate AMT.
Dividends Received Deduction. We are opposed to the
disallowance of the dividends received deduction ("DRD") for
purposes of computing corporate AMTI. Although our tax system
fails to provide relief from the double taxation of income earned
through corporations, the system has since its inception provided
relief from multiple taxation of the same income within the
corporate sector. Any further erosion of the DRD may have a
number of significant consequences. First, by encouraging
corporations to rely on debt to the detriment of equity, the
existing bias in the tax system toward debt financing is
exacerbated. Second, by moving our system still further away
from an integrated corporate tax system, such effective repeal of
the dividends received deduction makes the price of achieving
integration in the future higher and increases the cost of
capital to the extent corporations rely on equity financing.
Finally, it bears reemphasizing that dividends have already borne
at least one level of corporate tax. Imposition of the AMT
represents a heavier burden on these amounts than is borne by any
other classes of income.
H.R. 1761 continues a trend to whittle away at the DRD
through the mechanism of the minimum tax. For regular tax
purposes, dividends received on portfolio stock investments are
taxed to corporations at an effective 10.2 percent rate. As a
result of the book income adjustment, corporations subject to the
corporate AMT in 1988 and 1989 are subject to an effective rate
of 13 percent on portfolio stock dividends. As a result of the
ACE adjustment applicable to taxable years beginning after 1989,
corporations subject to the AMT would pay an effective rate of
16.5 percent on portfolio stock dividends. Finally, under H.R.
1761, dividends on portfolio stock investments would be fully
included in AMTI and effectively subjected to a 20 percent tax
rate. We think that H.R. 1761 foregoes an opportunity to improve
the treatment of intercorporate dividends and instead moves
further in the wrong direction.
Discharge of Indebtedness of Insolvent Corporations. In
some cases, discharge of indebtedness income of bankrupt or
insolvent corporations is includible in ACE and, under H.R. 1761,
would be includible in corporate AMTI. This occurs if the
corporation does not qualify for the exception applicable for
debt-for-stock exchanges or where discharge of indebtedness
income is not applied to reduce the adjusted basis of depreciable
property. The inclusion of such income in corporate AMTI is
inconsistent with the Federal bankruptcy policy of not burdening
-18a debtor coming out of bankruptcy, or an insolvent debtor outside
of bankruptcy, with an immediate tax liability. For taxable
years beginning in 1987, 1988, and 1989, the book income
adjustment generally results in inclusion of 50 percent of
discharge of indebtedness income in corporate AMTI. In many
cases, however, corporations may exclude such amounts from net
book income, and therefore from AMTI, by accounting for the
discharge transaction as a quasi-reorganization as authorized by
Accounting Research Bulletin Number 43, chapter 7. Thus, the ACE
adjustment and H.R. 1761 significantly increase the likelihood
that insolvent or bankrupt corporations will be subject to the
AMT. Accordingly, we would urge the Committee to amend H.R. 1761
so that forgiveness of indebtedness income for insolvent or
bankrupt corporations will not be included in AMTI.
Regular Tax De Minimis Rules. The treatment of certain
items in computing ACE (under present law) and in computing AMTI
under H.R. 1761 runs counter to de minimis rules in the regular
tax provisions that are designed to reduce the complexity of the
tax system. For example, interest capitalization requirements
under the regular tax do not apply to the construction of certain
personal property with a relatively short production period.
This exception was intended to apply where the application of the
interest capitalization requirement might be unduly burdensome.
The AMT treatment of construction-period carrying costs,
including interest, however, provides no exception for personal
property with a short construction period. As a result, the
corporate AMT imposes the exact compliance burden that the
regular tax exception was specifically designed to avoid and
effectively eliminates any simplicity gains of the regular tax
rule. Similarly, one effect of the basis adjustment applicable
to ownership changes where the value of the target corporation's
assets is less than the price paid for the stock is to limit the
availability of built-in losses that are specifically not subject
to limitation under the regular tax. The purpose for the regular
tax de minimis rule, namely simplicity, is defeated by the
corporate AMT treatment. Accordingly, we recommend that
consideration be given to incorporating various de minimis rules
in the AMT to address problems of this sort.
Revenue Effects of H.R. 1761
The Department of the Treasury estimates that the transition
relief provided in H.R. 1761 with respect to depreciable property
placed in service before 1990 is the primary reason for the $2.8
billion revenue loss, which the Department of the Treasury
estimates as the cost of this bill for FY 1990-1994 (see
Table 2). Thus, if the bill is to be kept revenue neutral, some
modification is necessary. I would like to point out, however,
that, based on original revenue estimates of the corporate AMT
for FY 1990-1994, the revenue expected to be generated by the
transition effect of the ACE adjustment was significantly less
than the current revenue estimates. Table 2 also shows that the
current Treasury estimate for the AMT provision of present law is
-19$3.5 billion higher for FY 1990-1994 than was previously
estimated for receipts purposes in the President's budget.
Indeed, much of the revenue cost of H.R. 1761 is simply a loss of
revenue that was not anticipated in prior estimates, particularly
for this 1990-1991 ACE transition period.
Underlying the AMT changes in current-law receipts is the
availability of new data. It is only within the past few months
that the first post-Tax Reform tax returns have become available.
We have made a special effort to obtain information from these
1987 returns on an expedited basis. We also surveyed major
corporations concerning the expected 1988 use of 1987 AMT credits
and their expectations of being on this AMT in 1988 and 1989.
While the new data have not affected our fundamental
understanding of the way in which the AMT works, it has allowed
us to better quantify the various effects of this and related
provisions of Tax Reform.
The principal reason for the revenue increase is a revised
estimate of the relationship between the value of the adjustments
for book income and adjusted current earnings (ACE) for AMT
taxpayers in the aggregate. Post-1989 AMTI generally replaces 50
percent of book income in excess of unadjusted AMTI with 75
percent of ACE in excess of unadjusted AMTI. The underlying
assumption was that these values would be roughly equal because
it was thought that the book income adjustment would, on average,
be 150 percent of the ACE adjustment. Our current analysis,
based on a special sample of 1987 income tax returns obtained in
April, suggests that, instead of the book adjustment being 15 2
percent of the ACE, the two adjustments are more nearly equal for
AMT taxpayers during the 1990-1991 ACE transition period.
Depreciation is the major factor associated with this change
in the relationship between book and ACE adjustments for affected
taxpayers. The earlier assumption that depreciation lives for
book income purposes would be approximately equal in the
aggregate to depreciation lives prescribed by the ADR system has
been refined. It appears that depreciation lives used for book
income purposes typically are slightly longer than ADR lives, in
the aggregate, for AMT taxpayers. Since ACE requires taxpayers
to depreciate their assets under the slower of the straight-line
depreciation on ADR lives or book depreciation, it is now
expected that more corporate taxpayers will be required to use
longer lives for purposes of computing ACE, resulting in a higher
value for the ACE depreciation preference and consequently for
AMTI. In particular, property acquired prior to 1990 must, under
ACE, be depreciated over the longer of remaining book lives or
remaining ADR lives. The remaining life restatement for pre-1990
property magnifies the effects of ACE accounting for much of the
1990-1991 transition effect and for much of the change in cur
estimate of AMT in current receipts. Because of these changes in
the assumed relationship of the ACE and beck income adjustments,
we now estimate that the ACE-based AMT will generate more revenue
than the book income-based AMT during the 1990-1991 transition
years.
-20-
In the long run, H.R. 1761 will generate more revenue than
either the ACE or book income formulations. H.R. 1761 will raise
more revenues than ACE because H.R. 1761 generally includes all
items that ACE includes but at 100 percent rather than 75 percent
with the exception of pre-1990 property. The depreciation
adjustment required under ACE for pre-1990 property is not
required under H.R. 1761. As pre-1990 property is retired, the
ACE adjustment and revenues associated with that property also
disappear. For similar reasons, H.R. 1761 should produce more
revenues in the long run than the current book income adjustment.
These estimates are particularly sensitive to certain
elements of the macroeconomic forecast, especially growth in
corporate profits, and investment by the corporate sector of the
economy. Consequently, our estimates of the revenue consequences
of current law AMT as well as H.R. 1761 will be affected by the
Administration's macroeconomic forecast for the forthcoming
mid-session budget review. Congressional estimates will also be
affected by changes in macroeconomic assumptions.
The Treasury strongly endorses the significant
simplification effort reflected in H.R. 1761. Nonetheless,
budgetary constraints limit the freedom of action and may require
modification to achieve revenue neutrality. Two possible
alternatives that we have identified are:
1. A bill that eliminates the transition relief provided in
H.R. 1761 but retains its simplification measures. This
could be accomplished, for example, by adjusting the
depreciation allowance for purposes of computing
corporate AMTI for taxable years after 1989 with respect
to property placed in service prior to 1990. The
unrecovered tax basis of such property as of the close
of the last taxable year beginning before 1990 could be
amortized ratably over the remainder of the ADR midpoint
life of such property.
2. A bill that retains some of the transition relief of
H.R. 1761 but does not allow corporate AMT revenues for
the transition period to fall. This could be
accomplished by including in AMTI (as computed under
H.R. 1761) some percentage of the amount by which
financial statement income exceeds AMTI. Although we
generally oppose the book income adjustment for the
reasons stated above, a phaseout of the provision over a
relatively short period of time could cushion the impact
of the depreciation transition relief on revenues, while
assuring that desirable simplification is ultimately
achieved.
-21-
V.
CONCLUSION
We commend the Chairman of the Committee for the significant
simpUrica??on effort which H.R. 1761 " £ " " < * * • As the bill
movfs through the legislative Process, w « ^ a n d ready to work
with you to achieve a measure that is acceptable to all
concerned.
M,- rhairman that concludes my formal statement. I will be
happy lo ansieraquest?onCs°you and Ambers of the Subcommittee may
wish to ask.
TABLE 1
TRANSITION SPIKE EXAMPLE
ACE-type Spike Occuring when Asset Lives are Lengthened for Existing and N e w Property
Year
Investment
1985 1986
1985
100
33
33
1986
100
33
1987
100
100
1988
1989
100
1990
100
1991
100
100
1992
1993
100
1994
100
100
1995
1996
100
Total annual cost recovery....
67
33
Income spike (change in taxable income)
1987
33
33
33
100
0
1988
33
33
33
100
0
Deduction Allowed
1989 1990 1991
33
33
33
100
0
11
17
20
48
53
11
17
20
20
68
33
1992
11
17
20
20
20
88
13
1993
17
20
20
20
20
97
4
1994
20
20
20
20
20
100
0
1995
20
20
20
20
20
1996
100
0
20
20
20
20
20
100
0
1995
1996
H.R. 1761-type Spike Occuring When Asset Lives are LengthenedforN e w Property Only
Year
Investment
1985 1986
1985
100
33
33
1986
100
33
1987
100
1988
100
1989
100
1990
100
1991
100
1992
100
1993
100
1994
100
1995
100
1996
100
Total ammal cost recovery
67
33
Income spike (change in taxable incon<*)
1987
33
33
33
Deduction Allowed
1988 1989 1990 1991
33
33
33
100
0
1993
1994
20
20
20
20
20
20
20
20
20
20
20
20
60
40
80
20
100
0
33
33
33
33
33
20
100
0
1992
100
0
87
13
U.S. Department of the Treasury
Office of Tax Analysis
33
20
20
73
27
20
20
20
20
20
100
0
20
20
20
20
20
100
0
June 8, 1989
Details may not add due to rounding.
This simplified example is for expository purposes only. It is not intended to reflect say particular class of property under current law.
Under current law, most property would receive accelerated depreciation over longer lives.
TABLE 2
CORPORATE ALTERNATIVE MINIMUM TAX RECEIPTS, FY 1990 - 1994
($ billions)
Fiscal Year
1992
1993
1994
Total
0.8
0.7
6.7
Change in AMT receipts estimate 1.2 0.3 0.1
0.8
1.0
3.5
Current AMT receipts estimate 3.5 2.2 1.3
1.5
1.7
10.2
-0.1
-2.8
1990
F Y 1990 Budget A M T receipts estimate
Estimated change in receipts
as a result of H.R. 1761
2.2
-1.7
1991
1.8
-1.1
1.2
0.1
U.S. Department of the Treasury
Office of Tax Analysis
June 8, 1989
Details m a y not add due to rounding.
All estimates include both direct and indirect receipt effects of the alternative minimum
* Represents a revenue gain/loss of less than $50 million.
tax.
TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
June 7, 1989
ROBERT R. GLAUBER
APPOINTED UNDER SECRETARY FOR FINANCE
DEPARTMENT OF THE TREASURY
Robert R. Glauber was appointed by President Bush on May 22, 1989
to be Under Secretary of the Treasury for Finance. He was
confirmed by the United States Senate on May 17, 1989. Mr.
Glauber was sworn in by the Honorable Harrison L. Winter,
Circuit Judge, United States Court of Appeals for the Fourth
Circuit.
Prior to joining the Treasury Department, Mr. Glauber was
Chairman of the Advanced Management Program and a member of the
Finance Department at the Harvard Business School. Mr. Glauber
joined the Harvard faculty in 1964 and became a full professor
in 1973. He has also served as a visiting professor at Stanford
University's Graduate School of Business and Keio University
(Tokyo). Mr. Glauber also served as Executive Director of
President Reagan's Task Force on Market Mechanisms (1987-1988).
Mr. Glauber's publications include a co-authored book, Investment
Decisions. Economic Forecasting, and Public Policy, and he has
been an editor of several finance and economic journals. He has
served as director of Circuit City Stores, Inc., several of the
Dreyfus group of mutual funds, Cooke & Bieler, Inc. and Sunbelt
Coca-Cola, Inc. He has acted as consultant to a number of
corporations, financial institutions, and the U. S. Government.
Mr. Glauber received a bachelor of arts degree from Harvard
College in economics and his doctorate in finance from Harvard
Business School. He was born March 22, 1939, in New York City.
He is married and has two children and resides in Washington,D.C.
NB-327
TREASURY NEWS
EMBARGOED
UNTIL
DELIVERY • Washington, D.c. • Telephone 566-2041
isportmont
of the
Treasury
EXPECTED AT 9:30 A.M.
no
WEDNESDAY, JUNE 7, 1989
STATEMENT OF
KENNETH W. GIDEON
NOMINEE FOR ASSISTANT SECRETARY (TAX POLICY)
UNITED STATES DEPARTMENT OF THE TREASURY
BEFORE THE COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman. The President has honored me by nominating me for
the position of Assistant Secretary of the Treasury for Tax
Policy, and it is an honor to appear before this Committee today.
The re is clea rly much work to be done in Tax Policy and I am
anxious to get on with it. l b elieve that I can work together
with th e members of this Commit tee and members of the House Ways
and Mea ns Committ ee to fashion solutions consistent with the
Preside nt's progr am but reflect ing wisdom, insight, and concerns
of the Congress a s well. Achieving solutions will not be easy.
Budgeta ry constra ints, of cours e, limit all of our freedom of
action. There ar e significant disagreements about what ought to
But sol utions can be achieved, and I pledge to you that
be done
two issues, capital
to discuss,
very
brie fly
achieve
them.
I would
like -with
work hardyou—to
I will
gains and civil t ax penalty reform. I support the President's
capital gain prop osal. I believe that the impact of the American
business tax syst em on the competitive ness of American business
will become an in creasingly important part of the tax policy
debate. Capital gains proposals addre ss an important aspect of
that system in a positive way which I believe will have
significant long- term benefits for our economy and hence all
Americans. The r evenues associated wi th a capital gains proposal
would :o far towa rd allowing Congress to meet the budget
Yesterday, a Subcommit tee of the House Ways and Means
agreement.
Committee considered impor tant proposals to significantly reform
the civil tax penalty syst em to make it simpler and fairer. This
proposal enjoys bi-partisa n support in the House and I hope that
it will receive early cons ideration and similar support by this
Committee. Specifically, the bill consolidates many existing
penalties into a simplifie d structure. It provides, for the
first time, continuing inc entives to comply with information and
reporting deadlines even a fter the initial due date has been
missed. While the Treasur y Department has made suggestions for
improvement, I believe the bill deserves support and it has my
personal support.
- 2 I wish to thank President Bush for nominating me, Secretary
Brady for his confidence in me, and my wife, Carol, and our four
children present here today for their understanding and support.
This concludes my statement. I will be happy to answer
questions which members of the Committee may have.
TREASURY NEWS
Deportment of the Treasury • Washington, D.C. • Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 a.m., EST
June 12, 1989
STATEMENT OF
KENNETH W. GIDEON
ASSISTANT SECRETARY (TAX POLICY)
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
I am pleased to have this opportunity to present the
Administration's views on Chairman Bentsen's child and healthy
care proposal. Appearing with me today is Deputy Secretary o:
Labor Roderick DeArment. As you know, on April I*, ^yay,
Secretary of Labor Elizabeth H. Dole appeared before tnis
Committee to testify concerning the President's chud care
proposal, which was subsequently introduced in the Senate by
Senator Robert Dole as S. 601 and S. 602. I will not repeat that
testimony.
Following my testimony on Chairman Bentsen's child and
health care proposal, I will comment briefly on S. 1129 which
would replace current section 89 of the Internal Revenue Code and
defer the effective date of the new provision until next year.
Child Care
Child care is one of the key issues facing the nation. All
of us—business, labor, non-profit organizations, and governments
at all levels—must play a role in helping families meet this
important challenge. However, our policy must have the family as
its focus
We must put choices in the hands of parents and not
in the hands of government. Increasing the range of child care
options available to parents, particularly those who head
families of modest means, will benefit the nation's children,
their parents, and the country as a whole.
NB-329
-2-
Based on these ideals, the President has established four
fundamental principles which should guide the federal
government's role in child care:
First, parents are best able to make decisions about
their children, and should have the discretion to do so.
Assistance should go directly to parents. Parents (and
not the government) should choose the child care they
consider best for their children.
Second, federal policy should not discriminate against
two-parent families in which one parent works at home
caring for their children.
Th_i£d, federal policy should increase, not decrease, the
range of choices available to parents. Thus, the
federal government should encourage the widest array of
child care alternatives, including care by religious
groups, friends, neighbors, or relatives. We should not
reduce the supply and increase the costs of child care
by dictating—or linking federal support for child care
to—State licensing and regulatory decisions.
Fourth, federal support for child care should be
targeted to those most in need, low-income families,
particularly those with young children, because they
face the greatest difficulty meeting the needs of their
children.
The President's child care proposal embraces these principles
by making the current child and dependent care tax credit
refundable, by creating a new child tax credit, and by expanding
the Head Start Program by $250 million over the current funding
level. The President has also directed the Department of Labor
to undertake a study to determine the extent to which market
barriers or failures prevent employers from obtaining the
liability insurance necessary to provide child care on or near
their employees' worksites.
I will concentrate my remarks today on the tax provisions of
Chairman Bentsen's proposal. However, in the interest of giving
the Committee a fuller picture of the issues, my written
statement includes a more technical description of current law
and the tax provisions of the President's proposal.
Current Law
The Internal Revenue Code provides assistance to workina
families through five provisions: the personal and dependency
e
** m Ptions, the standard deduction, the earned income tax credit
(EITC), the child and dependent care tax credit (DCTC), and the
employee exclusion for employer-provided child care benefits
-3Two of these provisions, the EITC and the DCTC, provide enhanced
benefits for low-income families.
Personal and dependency exemptions and the standard
deduction. The sum of the personal and dependency exemptions and
the standard deduction establishes a threshold below which a
family's income is exempt from taxation. Families are allowed a
personal exemption for each parent and a dependency exemption for
each dependent. The amounts of the personal and dependency
exemptions are indexed for inflation. For 1989, each exemption
reduces a family's taxable income by $2,000. Families are also
allowed to take the higher of their itemized deductions or the
standard deduction. The amount of the standard deduction is also
indexed for inflation, and, for 1989, is $5,200 for families
filing a joint return. For a family of four, the combined effect
is to exempt the first $13,200 of income from the income tax in
1989.
Earned income tax credit. Low-income workers with minor
dependents may be eligible For a refundable income tax credit of
up to 14 percent of the first $6„500 in earned income. The
maximum amount of the EITC is $910. The credit is reduced by an
amount equal to 10 percent of the excess of adjusted gross income
(AGI) or earned income (whichever is greater) over $10,240. The
credit is not available to taxpayers with AGI over $19,340. Both
the maximum amount of earnings on which the credit may be taken
and the income level at which the phase-out region begins are
adjusted for inflation. The dollar figures I have cited are for
1989.
Earned income eligible for the credit includes wages,
salaries, tips and other employee compensation, plus the amount
of the taxpayer's net earnings from self-employment. Eligible
individuals may receive the benefit of the credit in their
paychecks throughout the year by electing advance payments.
Child and dependent care tax credit. Taxpayers also may be
eligible for a nonrefundable income tax credit if they incur
expenses for the care of a qualifying individual in order to
work. A qualifying individual is: (1) a dependent who is under
the age 13 for whom the taxpayer can claim a dependency
exemption; (2) the spouse of the taxpayer if the spouse is
physically or mentally incapable of caring for himself or
herself; or (3) a dependent of the taxpayer who is physically or
mentally incapacitated and for whom the taxpayer can claim a
dependency exemption (or could claim as a dependent except that
he or she has more than $1,500 in income).
To claim the DCTC, taxpayers must be married and filing a
joint return or be a head of household. Two-parent households
with only one earner do not qualify for the credit unless the
non-working spouse is disabled or a full-time student.
-4-
The amount of employment-related expenses eligible for the
credit is subject to both a dollar limit and an earned income
limit. Employment-related expenses are limited to $2,400 for one
qualifying individual and $4,800 for two or more qualifying
individuals. Further, employment-related expenses cannot exceed
the earned income of the taxpayer, if a head of household, or for
married couples, the earned income of the spouse with the lower
earnings. Employment-related expenses are expenses paid for the
qualifying individual's care while the taxpayer works or looks
for work. Amounts paid for food or schooling are generally not
included.
Taxpayers with AGI of $10,000 or less are allowed a credit
equal to 30 percent of eligible employment-related dependent care
expenses. For taxpayers with AGI of $10,000 to $28,000, the
credit is reduced by one percentage point for every $2,000 of
income, or fraction thereof, above $10,000. The credit is
limited to 20 percent of employment-related dependent care
expenses for taxpayers with AGI above $28,000.
Taxpayers can file for the DCTC on a simplified 1040A return,
which further helps low-income filers to take the credit.
Employee exclusion for employer-provided child care benefits.
If the employer has a dependent care assistance program,
employees are allowed to exclude from income amounts paid or
incurred by the employer for dependent care assistance provided
to the employee. The amount excluded from income may not exceed
$5,000 per year ($2,500 in the case of a separate return filed by
a married individual). An employee generally may not take
advantage of both the DCTC and this income exclusion.
Reasons for Change
Current law does not adequately provide for the child care
needs of low-income working families with young children. For
low-income families which rely on paid child care arrangements,
child care expenditures consume a large proportion of income. A
recent study by the Congressional Research Service examined the
child care expenditures of working mothers of preschool children.
According to this study, child care expenditures constituted
about 6 percent of family income for families which paid for
child care. However, for low-income families which paid for
child care, child care expenditures constituted about 20 percent
of income.
In addition, child care by family members and other
relatives—much of which is not paid for in cash—is especially
prevalent among low-income families. According to the
aforementioned Congressional Research Service study, about 60
percent of low-income families with working mothers depend
primarily on family members or other relatives to care for their
-5preschool children. Of course, care by family members and
relatives—particularly by those living outside the home—may not
be free. In this regard, the study also found that, not counting
care by parents or other relatives living in the home, over 50
percent of low-income families with preschool children do not
make cash expenditures for child care. Because these parents do
not make cash expenditures for child care, they cannot benefit
from the DCTC.
Further, because the current DCTC is not refundable, even
when low-income working families pay for child care, they cannot
benefit from this credit if they have no income tax liability.
Finally, preschool children require more extensive care than
do older children who are in school for much of the day. A study
conducted for the Department of Health and Human Services by
Dr. Lorelei Brush found that the most significant predictor of
child care expenditures was the number of preschool children.
The EITC, while refundable, does not adjust for differences among
working families in the age of the dependent child or the number
of dependent children.
Description of the President's Proposal
The following description is limited to the tax provisions of
the President's proposal.
Proposed child tax credit. Low-income families containing at
least one worker would be entitled to a new tax credit of up to
$1,000 for each dependent child under age four. For each child
under age four, families could receive a credit equal to 14
percent of earned income, with a maximum credit equal to $1,000
per child. Initially, the credit would be reduced by an amount
equal to 20 percent of the excess of AGI or earned income
(whichever is greater) over $8,000. As a consequence, the credit
would be available to families with AGI or earned income of
$13,000 or less. In subsequent years, both the starting and end
points of the phase-out range would be increased by $1,000
increments. By 1994, the credit would phase out between $15,000
and $20,000. The credit would be adjusted for inflation,
starting in 1995.
The credit would be refundable and would be effective for tax
years beginning January 1, 1990. Like the EITC, families would
have the option of receiving the refund in advance through a
payment added to their paychecks.
Refundable child and dependent care tax credit. The existing
DCTC would be made refundable. Families could not claim both the
new credit and the DCTC with respect to the same child but could
choose either. The refundable DCTC would be effective for tax
years beginning January 1, 1990.
-6Effects of the President's proposal. The President's
proposal would increase the funds available to low-income
families, better enabling them to choose the child care
arrangements which best suit their needs and correspond to their
personal values. The proposal does not mandate any particular
form of child care, trusting parents to make the best decisions
concerning the care of their children. About 2.5 million working
families with children under age 4 would initially be eligible
for the new child tax credit, when the proposal is fully
implemented, eligibility would be expanded to approximately 1
million additional families. These families would also have the
option of claiming the refundable DCTC, although they would not
be able to claim both credits with respect to the same child.
Parents of children between ages 4 and 12 would benefit from the
refundability of the DCTC if they incur child care expenses in
order to work, even if they do not owe any income tax. By making
the DCTC refundable, an additional 1 million families with
children age 4 and over would be able to benefit from it.
Consider, for example, a single working mother of two
children, ages 3 and 6. The mother earns $10,000 a year and has
no other sources of taxable income. She pays a relative $20 a
week to care for her younger child. Her older child is enrolled
in an after-school program during the school year and a
neighborhood park program during the summer at a total cost of
$500 per year. In total, she spends $1,540 a year for child care
in order to work. Under current law, at a 30 percent credit rate
on dependent care expenses, the potential DCTC would be $462.
However, because she has no tax liability as a consequence of the
standard deduction and personal exemptions, she cannot claim the
credit.
Under the proposal, the mother would be able to claim the
proposed child tax credit with respect to her younger child. In
1990, she would be entitled to a credit equal to $600. (A mother
in similar circumstances in 1992 would be entitled to the full
$1,000 credit.) In addition, because the DCTC would be made
refundable, the mother would be able to claim a credit of $150
Description
Chairmanassociated
Bentsen's with
Proposal
based on the of
expenses
the day care of her older
child.
In
total,
she
would
be
entitled
toproposal
a refund would
of $750,
Chairman Bentsen's child and health care
amend
which
is almost
of her First,
total child
carePresident's
expenses for the
the current
DCTC one-half
in two ways.
like the
year.
proposal, it would make the DCTC refundable. Second, it would
expand the scope of the DCTC to cover expenditures for health
insurance policies that include children. Families could receive
both credits. Unlike the President's proposal, the Bentsen
proposal does not include a separate child tax credit.
-7Refundable child and dependent care tax credit. The existing
DCTC would be made refundable. The refundable DCTC would be
effective for tax years beginning January 1, 1990. Families
would have the option of receiving the refund in advance through
a payment added to their paychecks.
Health insurance tax credit. To be eligible for the new
refundable health insurance tax credit, a family must have a
child under age 19. The health insurance policy purchased by the
family may cover the child only, or may also include the child's
parents.
The credit amount would be based on a percentage of
expenditures for the purchase of health insurance up to a maximum
expenditure of $1,000. For families with incomes of $12,000 or
less, the credit would be equal to 50 percent of qualified
expenditures, or up to $500. For each $1,000 (or fraction
thereof) in income above $12,000, the credit would be reduced by
5 percentage points. The credit would be phased out completely
for families with incomes above $21,000. This new credit would
be effective for tax years beginning January 1, 1991. Families
would have the option of receiving the refund in advance through
a payment added to their paychecks. Families in which either one
or both parents have earnings would be eligible for the credit.
Child health demonstration projects. $25 million a year for
5 years would be authorized to enable the Department of Health
and Human Services to conduct demonstration programs to extend
health coverage to uninsured children under age 19 and their
families. I defer to the Department of Health and Human Services
for comments on this provision.
Revenue offsets. There are three revenue offsets in the
proposal. The fi rst revenue offset is the repeal of the expiring
special tax provisions for troubled financial institutions, which
are currently scheduled to expire at the end of 1990, effective
as of May 10, 1989. May 10, 1989, is the effective date of this
same early sunset in the House Ways and Means Committee's
amendment to H. R. 1278, the Financial Institutions Reform,
Recovery and Enforcement Act of 1989. The second revenue offset
would make permanent the 3 percent telephone excise tax, which is
Discussion
scheduled to expire on January 1, 1991. The third revenue offset
would require S corporations to pay estimated tax on certain
I would like to note at the outset that our analysis of the
items of income taxable at the S corporation level.
health insurance tax credit is necessarily very preliminary since
we have had only a few days to review it. Based on this limited
analysis, we have a number of concerns about the design and
effectiveness of the credit, and we continue to believe strongly
that the President's proposal (S. 601 and S. 602) provides a
-8superior approach to assisting low-income families. Moreover, we
would also like to make clear that the Administration will not
support such tax credits as an addition to S. 5, the Act for
Better Child Care Services (the "ABC bill"). The Administration
remains strongly opposed to the ABC bill, since it is wholly
inconsistent with the President's four principles for child care.
The Bentsen proposal's new health insurance tax credit
singles cut health insurance expenditures for special treatment.
Because individual health insurance policies tend to be
expensive, low-income families which do not already have health
insurance through their employer or through some other group
arrangement may well be unable to afford to buy coverage, even
with this new credit. It is therefore unlikely that the credit
would help a significant proportion of those low-income families
which do not have access to group coverage. Indeed, by providing
the credit only to families which have such access, the proposal
would not target benefits to the neediest segment of low-income
families.
Moreover, the health insurance expenditures eligible for the
credit are not necessarily related to the cost of providing such
benefits to children. The credit would apply to both existing
and new health insurance policies and would not be limited to the
incremental cost of providing health insurance coverage for
children. This credit could, and often would, subsidize health
coverage for adults simply because they have children. For these
reasons, it is not clear that this credit would significantly
expand health insurance coverage for children of low-income
families as opposed to shifting to the federal budget the cost of
health insurance coverage already being provided. Although this
would free up some of the money that the eligible families now
spend on health insurance for other expenditures, including child
care, the President's proposal would provide this assistance more
directly and efficiently—without leaving out low-income families
with no access to low cost health insurance.
The advance payment feature of the Bentsen proposal is
intended to permit families to receive the benefits of the DCTC
and the new health insurance credit throughout the year.
However, the design of these credits is not well suited to
advance payment, and we are concerned that the implementation and
administration of this feature would be very difficult. For
example, it would be quite difficult for the IRS to draft "lookup
tables" for employers to determine the amount of the advance
payments because the amount of the payments would be a function
of four variables—earned income, family size, estimated
annual dependent care expenses, and estimated annual health
insurance expenses.
In addition, the existence of three different credits
eligible for advance payment and the resulting larger dollar
amounts of the advance payments could place substantial
additional administrative burdens on employers—particularly
-9small employers—and on the IRS, to the extent the feature were
actually utilized. In this regard, it should be noted that the
advance payment feature of the EITC is not widely used as only
about 10,000 taxpayers take advantage of it. We are sympathetic,
however, to the Chairman's desire to provide these benefits at
the earliest possible time and are willing to explore with the
Committee whether an administrable mechanism can be developed.
Further, consideration should be given to the time necessary
for the IRS to provide taxpayers with guidance and with new
forms. If the advance payment feature is to be effective for
1990, all of this would have to be in place before the end of the
year. This would be very difficult for the IRS if the provision
were enacted in the first quarter of fiscal 1990.
While we have concerns about the design and effectiveness of
the health insurance credit, we note that it has some positive
similarities to the President's child tax credit in that it is
targeted to low-income families and it is available to families
in which only one parent works.
We have previously testified in favor of the first two
revenue offsets contained in the Bentsen proposal. The extension
of
......
Y troubled financial
institutions in connection with the enactment of a thrift rescue
package and has no objection to the Committee choosing an
erfective date that corresponds to the House Ways and Means
Committee's amendment to H. R. 1278. We have no objection -- -he
third revenue offset with respect to S corporations.
Section 89
We have had even less time to analyze S. 1129 than Chairman
Bentsen's child and health care proposal. As a result, my
prepared statement will be brief and limited to the major design
features of the bill. As our analysis continues, we will provide
the Committee with further comments.
As we have testified before this Committee and others, the
Administration believes that section 89 is overly complex and
imposes undue compliance burdens on employers. The basic
objectives of the nondiscrimination rules of section 89, the
elimination of plans providing health benefits only to highiv
compensated employees and the promotion of coverage of nonhighly
compensated employees, should be achieved bv means of workable
tests that can be understood by employers and applied without
undue expense in a wide variety of circumstances.
.. °n June 6' 1989, Chairman Bentsen and others introduced 1129 which repeals section 89 and replaces it with significantly
-10simpler tests that may be satisfied by plan design. Briefly, the
bill provides that an employer must make available to at least 90
percent of its employees a plan providing primarily core health
coverage and that highly compensated employees cannot exclude the
cost of employer-provided health coverage from income to the
extent it exceeds 133 percent of the base benefit. The base
benefit generally is the employer-provided premium for the plan
that satisfies the 90 percent availability test. In addition, if
an employer's health plan and certain other welfare benefit plans
do not satisfy certain so-called qualification requirements
(i.e., the plan must be in writing, must be enforceable, etc.),
an excise tax equal to 34 percent of the employer-provided
premium is imposed on the employer.
The Administration favors the delay in the effective date
until plan years beginning after December 31, 1989. As you are
aware, the Secretary of the Treasury has already provided that
employers are not required to test their plans for compliance
with section 89 until October 1, 1989, and we believe that the
additional delay would allow better implementation of the new
provision.
In addition, the Administration favors the provision of S.
1129 requiring an employer to offer core health coverage to at
least 90 percent of its nonexcludable employees. This provision
is preferable to the provision in current section 89 requiring an
employer to make available certain health coverage to at least 90
percent of its nonhighly compensated employees in that the
provision does not require an employer to identify those of its
employees who are highly compensated within the meaning of
section 414(q) and the regulations thereunder.
Under S. 1129, an employer may require an employee to pay up
to 40 percent of the premium for a plan providing primarily core
health coverage. This "percentage cap" approach to availability
testing facilitates accommodation of geographic differences and
inflation. While we are aware of concerns that the percentage
cap approach could permit abuse in certain situations, for
example, where an employer makes available only very expensive
health coverage and thereby effectively excludes low-paid
employees, we have decided on grounds of simplification to
support a percentage cap approach. Should significant abuse
emerge, some further limitation may be appropriate.
Salary reduction contributions are subject to special rules.
First, such contributions are generally considered employer
contributions for highly compensated employees. Second, in
applying the 40 percent allowable cost test, salary reduction
contributions are generally treated as employee contributions.
Finally, for purposes of determining the base benefit to which
the 133 percent test is applied, salary reduction contributions
are treated as employer contributions to the extent such
contributions are matched dollar-for-dollar by employer
contributions that are not made by reason of a salary reduction
-11arrangement. Thus, if the employer pays $600 of a $1000 premium
for a plan meeting the availability test and the employee pays
$400 of the premium on a salary reduction basis, all of the
salary reduction contribution may be treated as employer-provided
for purposes of computing the base benefit under the 133 percent
benefits test. Under these facts, the result of this treatment
of salary reduction contributions is that a highly compensated
employee may receive on a tax-favored basis an employer-provided
health benefit that is equal to $1330. Although we support the
general treatment of salary reduction outlined above, we point
out to the Committee that the dollar-for-dollar rule results in
the substantial base benefit enhancement described in the
foregoing example.
If a salary reduction plan provides that an employee can
receive cash instead of employer-provided health coverage when
such employee certifies that he or she has other health coverage
(i.e., receives a "cashable credit"), more favorable treatment is
provided under the bill. "Cashable credits" are treated as
employer contributions rather than employee contributions for
purposes of the allowable cost test and are treated as
employer-provided benefits for purposes base benefit test without
regard to the dollar-for-dollar rule.
We are concerned that the special rule provided for cashable
credits as opposed to other salary reduction contributions could
be abused. Such a rule could result in a shift in plan design so
that many salary reduction contributions could be characterized
as cashable credits. As a result, we are not in a position to
endorse the cashable credit approach adopted in the bill.
Moreover, the certification requirement in the cashable credit
rule raises issues similar to those which caused many to object
to the sworn statement rules in current section 89.
The Administration commends the sponsors of S. 1129 for
considering the special circumstances faced by small businesses.
The bill provides that businesses with less than 20 employees
that are required to pay individually rated premiums to a third
party insurer may consider the cost of each employee's premium to
be the average of all of the premiums. In addition, the
employees who may be excluded from consideration when testing
plans for compliance with section 89 because they work less than
25 hours per week is phased-in over two years.
Finally, the bill provides that the sanction for failure to
satisfy the qualification rules is an excise tax equal to 34
percent of the employer-provided premium, with a grace period of
six months to correct any failures. The Administration believes
that the excise tax should be structured in a way that encourages
compliance. A smaller excise tax, perhaps 5 percent, should be
imposed initially. Only if the failure is not prospectively
corrected within a reasonable period after notification from the
IRS should the full 34 percent tax would be imposed.
This concludes my prepared remarks. I would be pleased to
respond to your questions.
Revenue Estimates
The following are Treasury's revenue estimates for the
Bentsen proposal, the President's proposal, and the revenue
offsets under consideration here today. Our estimates for the
repeal of the thrift and bank tax provisions assume current law.
Fiscal Year: 1989 1990 1991 1992 1993 1994 Total
(S bill ions)
Refundable child care credit
Refundable health credit
Bentsen proposal (total)
President's proposal (total)
Telephone excise tax
Thrift and bank tax repeal
S corp. estimated tax
Revenue offsets (total)
-0.9
0.0 -0.1
-0.8
-0.1
-0.9
-1.5
-2.4
-0.9
-1.4
-2.3
-1.0
-1.4
-2.4
-d.i
0.0
-0.2
-1.9
-2.2
-2.5
-2.8
-9.6
0.0
0.0
0.2
0.0
0.2
1.6
0.2
0.0
1.8
2.6
0.1
0.0
2.7
2.8
0.0
0.0
2.8
3.0
0.0
0.0
3.0
1i n
0.0
0.0
•
•
0.0
-0.1
•
-3.7
-4.4
0 .5
*
10.5
TREASURYNEWS
lepartment of tho Treasury • Washington, D.c. • Telephone 566-2041
'' Contact: Office of Financing
202/376-4350
FOR IMMEDIATE RELEASE
June 12, 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,425 million of 13-week bills and for $6,401 million
of 26-week bills, both to be issued on
June 15, 1989,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
26- week bills
maturing December 14 , 1989
Discount Investment
Price
Rate 1/
Rate
13--week bills
maturing September 14 , 1989
Discount Investment
Rate
Rate 1/
Price
8.12%
8.14%
8.13%
8.41%
8.43%
8.42%
97.947
97.942
97.945
7.77% 1/
7.80%
7.79%
:
:
8.20%
8.23%
8.22%
96.072
96.057
96.062
a/ Excepting 1 tender of $1,150,000.
Tenders at the high discount rate for the 13-week bills were allotted 12%
Tenders at the high discount rate for the 26-week bills were allotted 33%
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
Accepted
$
29,000
27,778,270
19,425
30,915
63,870
36,410
1,038,270
46,120
7,925
37,995
73,960
1,152,275
530,425
$
29,000
5,495,775
19,425
30,590
63,870
35,410
52,995
23,500
7,925
37,995
26,960
70,775
530,425
$
25,375
18,631,880
20,110
30,665
27,300
24,230
810,045
24,570
8,580
32,395
48,725
1,011,045
470,055
$
25,375
5,467,300
19,440
30,665
27,300
24,230
176,545
19,180
8,580
32,395
38,675
61,045
470,055
$30,844,860
$6,424,645
$21,164,975
$6,400,785
$27,092,055
1,258,635
$28,350,690
$2,671,840
1,258,635
$3,930,475
$16,811,905
956,685
$17,768,590
$2,047,715
956,685
$3,004,400
2,400,355
2,400,355
2,150,000
2,150,000
93,815
93,815
1,246,385
1,246,385
$30,844,860
$6,424,645
: $21,164,975
$6,400,785
:
:
An additional $11,685 thousand of 13-week bills and an additional $236,4 15
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
U Equivalent coupon-issue yield.
NB-3 30
TREASURY NEWS _
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 12, 1989
'Z10 CONTACT:
LARRY BATDORF
(202) 56"<5-2041
TUNISIA AND UNITED STATES INITIAL A SUPPLEMENTARY
PROTOCOL TO THE INCOME TAX CONVENTION
Delegations from Tunisia and the United States met in
Washington from May 23 through 26, 1989, to negotiate amendments
to the Convention for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income,
which was signed on June 17, 1985, but is not yet in effect.
The delegations agreed on the provisions of a supplementary
Protocol, which will form an integral part of the Convention and
will have the same force and effect. The Protocol reflects the
strong desire of both countries to promote investment and further
bilateral economic relations.
The delegations agreed to move expeditiously to transmit the
draft Protocol to the appropriate authorities for signature. The
Convention, as modified by the supplementary Protocol, will enter
into force after signature and the completion of the legal
requirements in both countries.
o 0o
NB-331
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
Cqntact: Office of Financing
-v
202/376-4350
FOR RELEASE AT 4:00 P.M.
June 13, 1989
MH •
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$12,800 million, to be issued June 22, 1989. This offering will
result in a paydown for the Treasury of about $1,725 million, as the
maturing bills are outstanding in the amount of $14,520 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, June 19, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,400
million, representing an additional amount of bills dated
March 23, 1989,
and to mature September 21, 1989 (CUSIP No.
912794 SY 1 ) , currently outstanding in the amount of $7,562 million,
the additional and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately $6,400
million, representing an additional amount of bills dated
December 22, 1988, and to mature December 21, 1989 (CUSIP No.
912794 SP 0), currently outstanding in the amount of $9,107 million,
the additional and original bills to be freely interchangeable.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing June 22, 1989. Tenders from Federal Reserve Banks for
their own account and as agents for foreign and international
monetary authorities will be accepted at the weighted average bank
discount rates of accepted competitive tenders. Additional amounts
of the bills may be issued to Federal Reserve Banks, as agents for
foreign and international monetary authorities, to the extent that
the aggregate amount of tenders for such accounts exceeds the
aggregate amount of maturing bills held by them. Federal Reserve
Banks currently hold $1,246 million as agents for foreign and international monetary authorities, and $3,651 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD
5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series)
NB-332
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
10/87
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations of the Secretary of the Treasury
shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
of the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the
Public Debt.
10/87
-*
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CM
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::ederal financing bank
mCO
CO
CD
J
WASHINGTON, D.C. 20220
a.
iJ
June 13, 1989
FOR IMMEDIATE RELEASE
JtlN 1
lEFARTMi/t
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing
Bank (FFB), announced the following activity for the month
of April 1989.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $141.2 billion on
April 30, 1989, posting a decrease of $702.4 million from the
level on March 31, 1989. This net change was the result of
increases in holdings of agency debt of $45.0 million and
in agency-guaranteed debt of $7.9 million, and a decrease in
holdings of agency assets of $755.2 million. FFB made
40 disbursements during April.
Attached to this release are tables presenting FFB
April loan activity and FFB holdings as of April 30, 1989.
NB-333
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Page 2 of 4
FEDERAL FINANCING BANK
APRIL 1989 ALTlvTIY
BORROWER
FINAL
MATURITY
INTEREST
RATE
(semiannual)
1,000,000.00
14,440,000.00
2,000,000.00
7/05/89
7/11/89
7/05/89
9.261%
9.182%
9.165%
59,000,000.00
140,000,000.00
126,000,000.00
39,000,000.00
90,000,000.00
109,000,000.00
46,000,000.00
85,000,000.00
85,000,000.00
35,000,000.00
12,000,000.00
142,000,000.00
4/10/89
4/13/89
4/17/89
4/18/89
4/20/89
4/24/89
4/28/89
5/02/89
5/02/89
5/05/89
5/03/89
5/05/89
9.347%
9.271%
9.241%
9.102%
9.102%
9.040%
8.858%
9.072%
8.835%
8.835%
8.829%
8.829%
52,346.36
693,286.45
2,645,318.97
2,936,453.45
10,812.00
2,094.00
29,220.50
9/21/95
5/31/95
3/V13
9/3/13
5/31/95
9/21/95
5/31/95
9.561%
9.571%
9.218%
9.303%
9.353%
9.202%
9.204%
AMOUNT
OF ADVANCE
DATE
NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
+Note #487
4Note #488
+Note #489
4/5
4/11
4/11
$
TENNESSFF] VAT.TPV AUTHORITY.
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#1016
#1017
#1018
#1019
#1020
#1021
#1022
#1023
#1024
#1025
#1026
#1027
4/3
4/6
4/10
4/13
4/13
4/17
4/20
4/24
4/28
4/28
4/30
4/30
GOVERNMENT - GUARANTPTTi THANR
DEPARTMENT OF DEFENSE
Foreign Milij-ary g^oo
Morocco 12
Morocco 13
Greece 16
Greece 16
Morocco 13
Morocco 12
Morocco 13
+rollover
4/3
4/3
4/4
4/14
4/24
4/28
4/28
INTEREST
RATE
(other than
semi-annual)
Page 3 of 4
FEDERAL FINANCING BANK
APRIL 1989 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST INTEREST
RATE
RATE
(other than
(semisemi-annual)
annual)
15,815,000.00
438,000.00
9,670,000.00
8,137,000.00
16,525,000.00
171,000.00
4,042,000.00
459,000.00
2,938,000.00
3,000,000.00
787,000.00
988,000.00
93,000.00
2,326,000.00
1,794,000.00
7/01/91
1/02/18
1/02/18
7/01/91
7/01/91
4/15/91
1/02/18
1/02/18
1/02/18
12/31/20
1/02/18
7/01/91
1/02/18
1/02/24
12/31/19
9.843%
9.298%
9.298%
9.560%
9.650%
9.713%
9.291%
9.291%
9.386%
9.186%
9.196%
9.424%
9.119%
9.137%
9.093%
160,000.00
110,000.00
4/01/14
4/01/04
9.264%
9.351%
679,698,747.06
7/31/89
8.982%
PURAT,TCTfy.'imM'CATICN ADMINISTRATICN
*Colorado-Ute Electric #168A
*Wabash Valley Power #206
*Wabash Valley Power #104
Cooperative Power Assoc. #240
Oglethorpe Power #320
Basin Electric #232
*Wabash Valley Power #206
*Wabash Valley Power #104
Corn Belt Power Coop. #292
Arizona Electric #242
•Wabash Valley Power #252
*Colorado-Ute Electric #203A
•Wabash Valley Power #206
Brazos Electric #230
Brazos Electric #332
•^MAT.Tt FTT5INESS ADMINISTRATION
4/3
4/3
4/3
4/6
4/7
4/13
4/13
4/13
4/14
4/17
4/17
4/20
4/20
4/25
4/28
$
State & Local Development Company Debentures
Evergreen Contra mity Dev. Assoc. 4/5
Greater Chicago Metro Dev. Corp. 4/5
TENNESSEE VATTPV AUTHORITY
Seven States Energy Corporation
Ndte^A-89-07 4/28
•maturity extension
9.725%
9.192%
9.192%
9.448%
9.536%
9.598%
9.186%
9.186%
9.278%
9.083%
9.093%
9.316%
9.017%
9.035%
8.992%
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
Page 4 of 4
Program
April 30, 1989
Agency Debt:
Export-Import Bank
NCUA-Central Liquidity Facility
Tennessee Valley Authority
U.S. Postal Service
sub-total* 34,688.2
Agency Assets: ^ ^nt.
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
sub-total* 61,348.5
Government-Guaranteed Lending:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loan Guarantees
DHUD-Community Dev. Block Grant
DHUD-New Communities
DHUD-Public Housing Notes +
General Services Administration +
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co. +
DON-Ship Lease Financing
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total* _i£li2~i
grand total* $ 141,161.9
•figures may not total due to rounding
fdoes not include capitalized interest
$
11,000.6
iil'i
17,084.0
6,492.2
57,086.0
79.5
93.8
-04,076.0
13.1
11,637.3
4,910.0
-0313.8
-01,995.3
383.0
31.5
„26.l
995.2
,i'Z?X«
19,230.0
5?7*?
Szi'r
2,236.1
,22 A
tLL'Jl
FEDERAL FINANCING BANK HOLDINGS
(in millions)
Net Change FY '89 Net Change
March 31. 1989
4/1/89-4730/89
$
$
11,000.6
111.4
17,039.0
6,492.2
-0-045.0
-0-
16/1/88-4/30/89
$
43. 0
-6. 8
-47. 0
900. 0
34,643.2
45.0
889. 3
57,841.0
79.5
93.8
-04,076.0
13.4
-755.0
-0-0-0-0-0.2
-1.,410. 0
-C1-2. 6
-0-63. 2
-2. 2
62,103.8
-755.2
-1,r 478. 0
-9.4
-0-0-0.2
-0-0-0-0-0-0-034.7
-0.7
-4.6
-11.9
-0-0-
"4,,374..4
-0-50..0
-4..2
-0-41..7
-4,.4
-0 .6
-0 .5
96 .4
-38 .3
24 .7
-45 .4
-29 .6
73 .7
-5 .6
—>i0-
7.9
-4 ,399 .9
11,646.7
4,910.0
-0314.0
-01,995.3
383.0
31.5
26.1
995.2
1,720.5
19,195.3'
587.9
846.0
2,247.9
40.6
177.0
45,117.2
$ 141,864.2
$
-702.4
$
"4 ,988 .6
Department of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 1 p.m. EST
June 14, 1989
STATEMENT OF
KENNETH W. GIDEON
ASSISTANT SECRETARY (TAX POLICY)
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear before you to discuss the views of
the Department of the Treasury regarding employer-provided
retiree health benefits. In response to the various questions
posed by the Subcommittee, my testimony will review: (1) the
factual background against which this issue arises; (2) the tax
incentives available to employers to prefund retiree health
benefits under current law (including the recent change in
position announced by the IRS regarding the computation of
section 401(h) contribution limits); and (3) the views of the
Department of the Treasury regarding the provision of additional
tax incentives beyond those already provided under current law
for such prefunding.
FACTUAL BACKGROUND
A significant number of employers, especially large- and
medium-sized employers, maintain plans to provide retiree health
benefits to their current and future retirees. The liability
these plans represent to individual employers depends on a number
of factors, including: (1) the type and level of benefits
promised; (2) the employer's ability legally and practically to
modify or terminate the benefits; and (3) the course of future
health care cost inflation. Although the Department of the
Treasury has not compiled independent data on the overall
magnitude of the liabilities, it is reasonable to believe they
are substantial.
-2A substantial share of the liabilities relate to retiree
health benefits promised to those who retire before age 65. Such
early retiree health benefit liabilities are substantial on a
present value basis because the benefits are paid out at an
earlier point in time and the employer-provided portion of
benefits shrinks substantially after age 65 when most retirees
become eligible for Medicare coverage from the Federal Government. This differential has recently been accentuated by the
expansion of Medicare benefits under the Medicare Catastrophic
Coverage Act of 1988 (P.L. 100-360).
Publicly traded companies subject to financial reporting
requirements under the federal securities laws and other
companies that provide certified financial statements to third
parties may soon be required to disclose in their financial
statements the amount of their retiree health benefit liabilities. The Financial Accounting Standards Board ("FASB") has
proposed to require such disclosure for fiscal years beginning
after December 15, 1991, subject to certain transition rules. A
number of employers have expressed concern that, in the absence
of dedicated reserves against retiree health liabilities, their
equity values CURRENT
and ability
to raise capital
may be adversely
TAX INCENTIVES
FOR PREFUNDING
affected.
*
Current law provides two arrangements through which an
employer may prefund retiree health benefits on a tax-favored
basis. The first of the two arrangements is the so-called 401(h)
account, which the employer may maintain in conjunction with
certain qualified retirement plans. Contributions made to a
section 401(h) account are currently deductible by the employer
and income earned in the account accumulates on a tax-free basis.
Section 401(h) of the Internal Revenue Code provides for
this tax-favored treatment only if the retiree health benefits
are "subordinate" to the pension benefits provided under the
plan. in general, the regulations provide that the health
benefits will be considered subordinate if the cumulative contripercent or ^totil^T^ ^ *°^ in time ^ono't L^ed^S
percent of the total cumulative contributions made to the retirement plan since the 401(h) benefit was first added to the olan
e x n ^ H p H 1 ^ o f . r e c e n * Private letter rulings, the IRS has P
expanded the circumstances in which 401(h) retiree health
benefits will be considered to meet the subordinate standard
detau'oeiSw? ^
" ^ ^ " " " o n . are discusslf in^rtater
The second arrangement permitted under current law en
prefund retiree health benefits on a tax-favored basis' is th*
speClal reserve for retiree medical benefits n r. H !
* e
welfare benefit fund, such as a VEBA
Sndel this arrfnoemLV
employer contributions are currently deductible but?ncome '
-3earned by the fund is subject to current taxation. In addition,
contributions to prefund retiree health benefits must be
calculated based on current costs, and thus may not take into
account future health cost inflation. Congress prescribed the
current level of tax incentives available for prefunding retiree
health benefits under a welfare benefit fund in the Deficit
Reduction Act of 1984. Prior to that Act, funds set aside in a
VEBA to provide retiree health benefits could accumulate on a
tax-free basis. The effect of this change was to limit full
tax-favored treatment to 401(h) accounts, where retiree health
benefits are preconditioned on the employer's provision of
proportionately greater regular retirement benefits.
Effect of Recent IRS Rulings Under 401(h). The recent IRS
private letter rulings mentioned above have expanded the
potential availability of section 401(h) to many employers as a
means of prefunding some portion of their retiree health
liabilities. The rulings do this by allowing an employer to
overlook the actual contributions made under the plan, and
instead to compare the hypothetical actuarial costs of funding
the retiree health and pension benefits available under the plan.
Under this new alternative, contributions to a 401(h) account
will be considered subordinate if the cumulative "cost" of the
retiree health benefits does not exceed 25 percent of the total
cumulative "cost" of the plan (including costs attributable to
both retiree health and pension benefits) since the 401(h)
benefit was first added to the plan. For this purpose, plan
costs must be determined pursuant to specified actuarial methods.
Under the traditional approach which looks to actual plan
contributions, an employer with a fully funded pension plan could
make no contributions to a newly established 401(h) account since
the employer would not be making contributions to fund the
pension benefits. Pursuant to the new IRS rulings, however, such
an employer could establish and prefund a 401(h) account despite
the pension plan being fully funded by using the actuarial cost
of the pension benefits to establish the limit on contributions
to the 401(h) account.
The IRS rulings may enable some employers to make their
retiree health promises financially more secure through
prefunding. The potential cost of these rulings, however, is
uncertain. Predicting the effect of the rulings is extremely
difficult because of the unsettled climate surrounding retiree
health benefits. First, it is difficult to predict how companies
will respond to a change in the 401(h) rules. In contrast to
pension benefits, there is no obligation to prefund retiree
health benefits, and some companies may choose to prefund while
others may choose not to prefund and instead invest their funds
in ongoing business operations. Second, the extent of retiree
health liabilities is uncertain both because future medical costs
are difficult to predict and because the specific terms of the
existing retiree health promises employers have made are
uncertain. That is, many employers may have generally promised
-4to provide retiree health benefits, but the exact types of
benefits may not be specified. Under current law, it is also
unclear whether and to what extent employers may modify their
existing retiree health promises. Indeed, some employers may be
concerned that by prefunding, they may lose the right to modify
the nature of the promises, and thus may choose not to prefund,
at least at this time. Finally, the effect of the FASB rules is
uncertain. Many employers might choose to prefund only if the
FASB rules require disclosure on their financial reports. The
FASB rules have not been finalized, with a first exposure draft
having been issued only this year, and it is difficult to predict
whether, when, and in what form those rules might finally take
effect.
For these reasons, we find it difficult to predict with any
degree of confidence the effect of the recent IRS rulings.
However, under a scenario under which (1) the FASB rules take
effect in their current proposed form in 1992, (2) employers do
not modify their existing retiree health promises to current
retirees, (3) pension plan funding and liabilities remain largely
unchanged, and (4) a significant number of employers elect to
prefund their retiree medical benefits, we believe that a reasonable ballpark estimate of the effect of the recent IRS rulings on
benefited taxpayers would be a reduction in federal tax
liabilities of approximately $500 million per year once employers
ADDITIONAL TAX INCENTIVES FOR PREFUNDING
begin prefunding on an ongoing basis. We do not expect this
All
of us
areimmediate.
concerned that the health care needs of
effect
to be
retirees be met both now and in the future. It is the view of
the Department of the Treasury that whether additional tax
incentives should be provided for prefunding retiree health
benefits should be the subject of careful consideration and
thorough debate of the many complex issues involved in health
care. The Congress should not rush to act on these important
issues without the benefit of that consideration and debate. As
a practical matter, a major tax expenditure program cannot be
undertaken without an adverse effect, at least ultimately, on the
federal deficit. In addition, much of employers' current
interest in prefunding is a result of the proposal to change in
the future the accounting rules for retiree health liabilities.
A full debate should consider the proper role of the federal
Government through entitlement programs, such as Medicare and
Medicaid, and through the tax system with tax incentives for
employer-provided health benefits and for individually purchased
health coverage. In addition, such debate should carefully
consider the protections that might be imposed on employersponsored retiree health plans. The debate should also address
many of the problems faced by our health care system, including
escalating costs and access to insurance, both on a group and
individual basis.
-5Perhaps the fundamental issue to consider is whether
employer-sponsored retiree health plans should be provided
additional tax incentives, or whether, assuming limited
government resources, these tax benefits should be provided in a
manner that is available to all individual retirees, regardless
of their employer. Although the employer-sponsored system has
achieved significant health and retirement coverages, it is still
the minority of employers that choose to provide retiree health
benefits, and accordingly the minority of employees that receive
such benefits. This is so even though the existing incentives
available to employers are not insubstantial; for example,
section 401(h) permits employers to prefund on a fully taxfavored basis for future health liabilities in conjunction with a
pension plan. The ability to prefund on a fully tax-favored
basis for potential future liabilities is almost without parallel
in the tax law.
Expanding tax incentives would redound to the benefit of
those employers, and their employees, that have already promised
to provide retiree health benefits, but would not necessarily
insure that others receive any benefits, thus potentially
expanding inequities between those individuals whose employers
choose to take advantage of the tax incentives and those whose
employers vdo not. In addition, we believe it would be
inappropriate for any additional tax incentives to be applied to
prefunding of retiree health benefits to be paid out before age
65. Such early retirement benefits are especially expensive to
prefund. and thus tend to spend down overall savings that might
better be reserved for later years when earning capacity is more
likely to be reduced. We do not believe that it is appropriate
for the tax system to provide additional tax incentives for early
retirement benefits.
A second important issue is the type of benefit promise to
which tax-favored prefunding should be extended; that is, whether
the tax system should encourage the promise of a defined health
benefit, such as indemnity insurance or membership in an HMO, or
a promise of a specified dollar amount intended to meet projected
costs of retiree health coverage, or a defined contribution plan
approach under which the employer obligates itself only to make a
specific contribution to an account dedicated to the provision of
retiree health coverage. These approaches have different
advantages and disadvantages. The defined health benefit
approach may provide employees with some protection from health
care inflation that the defined dollar and defined contribution
approaches do not. At the same time, we believe that a defined
dollar or defined contribution approach offers an important
degree of flexibility and individual choice that a defined health
benefit approach lacks. For example, a defined dollar or defined
contribution approach could be structured to permit individual
retirees to exercise individual choice in meeting their retirement needs. Some retirees might prefer to purchase long-term
care insurance rather than be provided with additional health
insurance. Other, alternative health care needs and programs may
-6evolve in the future, and we should be careful that the tax
system not create artificial preferences among alternative modes
of health care.
A third issue is what role the Federal Government should
play in increasing the security of the retiree health benefit
promises made by employers. As the members of the Subcommittee
are no doubt aware, current law provides few protections t 0
employees with regard to the retiree health care promises made by
their employers. Minimum standards regarding participation,
accrual, vesting, and funding that apply to qualified pension
plans under ERISA and the Code do not apply to retiree health
benefits promised by employers. It is the position of the
Treasury that similar minimum standards are a necessary
precondition to any additional tax incentives for employer
prefunding of retiree health benefits. Such standards may be
very difficult to construct, particularly if applied to a defined
benefit type retiree health plan, and should be carefully
considered before the tax system is forced to absorb the
additional regulation and complexity the implementation of such
standards would entail.
Excess Asset Transfers. Most of the points made in my
preceding testimony apply with equal force to the various proposals to permit transfers of excess pension assets to prefund
retiree health benefits. We understand that certain employersponsored estimates show such transfers producing a revenue gain
in the near term. The Treasury Department has only recently
obtained a written explanation of these estimates; however, the
Treasury's initial reaction is that the estimated revenue gain
may be a result of an accounting that focuses on a relatively
narrow set of all possible transactions. In fact, we are
concerned with a potential for
revenue loss in the near term when
CONCLUSION
all transactions are accounted for. In addition, we would note
This
concludes
my written
remarks.
I would
be happy
to than
that any
near-term
effect would
almost
certainly
be more
answer
any larger
questions
the members
of later
the Subcommittee
might have
offset by
revenue
losses in
years.
at this time.
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
v; 5 3 1 0
vluh
June 13, 1989
STATEMENT BY
SECRETARY OF THE TREASURY
NICHOLAS F. BRADY
When floor debate begins tanorrow in the House of Representatives on the
Administration's Savings & Loan proposal, amendments will be offered to
circumvent capital standards approved by the House Banking Committee.
We strongly urge the House to reject any amendments that would weaken the
capital standards. Only tangible capital — real, hard cash — provides
the deposit insurance fund and the taxpayers with protection necessary
to ensure a thrift crisis never happens again.
Another amendment will be offered to adopt the Ways and Means Carmittee's
financing alternative. History will show that busting Graitii^Rudman-Kollings
is a grave mistake and will affect markets. In addition, the Administration's
plan is the best method to lock up the thrift industry's contribution.
NB-335
TREASURY NEWS _
Department of the Treasury • Washington, D.c. • Telephone 566-2041
Statement by
The Honorable Nicholas F. Brady
Secretary of the Treasury
Before the
Subcommittee on Foreign Operations
Committee on Appropriations
United States Senate
June 15, 1989
Mr. Chairman and Members of the Committee:
I welcome this opportunity to discuss with you the
Administration's fiscal year 1990 budgetary proposals for the
Multilateral Development Banks (MDBs) and the IMF's Enhanced
Structural Adjustment Facility (ESAF).
I want to begin by commending the Committee and its staff
for your excellent work last year in passing a separate, standalone foreign assistance appropriations bill. As members of
this Committee know only too well, that was a signal achievement
The Administration attached considerable importance to that
legislation, and we recognize and very much appreciate the
constructive role played by this Committee. We also value
highly the frank and informative bipartisan dialogue that was
evident throughout the process leading up to enactment of the
legislation.
For fiscal year 1990, the Administration is requesting
$1,637 million in budget authority and $2,377 million under
program limitations for subscriptions to the MDBs. It is
worth emphasizing, Mr. Chairman, that exclusive of U.S. funding
shortfalls from previous years, which comprise $313 million of
this appropriation request, Administration requests for the
MDBs have not increased since FY 1985. Thus, one might say
that U.S. funding for the the MDBs has had its own nominal
freeze in place for the past four years, and we are proposing
to continue that this year.
For FY 1990 we are also seeking $150 million in budget
authority to fund U.S. participation in the International
Monetary Fund's Enhanced Structural Adjustment Facility (ESAF).
The specific requests for each MDB "window" and the ESAF are
presented in the annex at the end of my testimony.
THE STRENGTHENED INTERNATIONAL DEBT STRATEGY
As you know, we have proposed a new approach to strengthen
the debt strategy and to provide financial support for debtor
countries' efforts to reform their economies and achieve
NB-336
2
sustained economic growth. This strengthened strategy puts
emphasis on debt and debt service reduction as a complement
new lending, while also giving more attention to investment
flight capital repatriation as important sources of capital
debtor countries.
The key elements of this strategy are:
new
to
and
tor
adoption of sound economic policies, with stronger emphasis
on measures to increase foreign and domestic investment
and the repatriation of flight capital;
timely support from the IMF and World Bank for debtor
countries' reform programs, including through debt and
debt service reduction transactions; and
active participation by commercial banks in providing
debt reduction, debt service reduction, or new lending to
debtors implementing economic reforms.
Since the strategy was outlined in early March, we have
made significant progress in developing its operational details
and moving toward implementation.
The IMF and World Bank have recently adopted guidelines
governing their support for debt and debt service reduction.
For countries requesting such support, the IMF and World Bank
will set aside approximately one-fourth of their regular policybased lending programs to support debt reduction. The IMF will
provide additional resources of up to 40 percent of a country's
quota for interest support. The World Bank also will make
available additional resources to support interest payments in
connection with debt or debt service reduction transactions.
This financing will be available to countries with large
external bank debt which have adopted sound medium-term
adjustment programs and which can demonstrate a clear need for
debt and debt service reduction to accomplish medium-term growth
and development objectives. Sound adjustment programs will
include measures aimed at encouraging foreign investment and
flight capital repatriation and should, in our view, also
emphasize debt/equity swap programs.
Mexico, the Philippines and Costa Rica have already
received IMF Board approval for strong economic programs which
provide support for debt reduction. These countries have also
initiated discussions with the commercial banking community on
financing arrangements that could take advantage of the IMF and
World Bank policies and financing. Simultaneously, the Paris
Club has agreed to reschedule both outstanding principal and
interest obligations of these three countries. Japan, which
has
to provide
an additional
$4.5discussing
billion inwith
support
of
the agreed
strengthened
strategy,
is currently
Mexico
3
and the Philippines specific commitments to support their
programs.
In short, the official community has acted expeditiously
to clarify the nature and amount of support it will provide to
facilitate debt and debt service reduction. The official
community has also made clear the importance of sound economic
programs. It is important that commercial banks and debtor
countries now reach agreement on financing packages which
include debt reduction, debt service reduction, and new money
to help provide the external financial basis for sustained
growth.
The Role of the MDBs in the Debt Strategy
As you can see from the above, the World Bank is critical
to successful implementation of this debt strategy. In addition
to providing the financial support that I have outlined, the
World Bank has vital expertise and credibility which are
fundamental to helping design and implement reforms in the
various sectors of debtor economies. Debtor countries depend
on the Bank in their efforts to liberalize trade, reform labor
markets, develop financial markets, increase the role of the
private sector in improving employment and efficiency, and
liberalize their investment policies.
The World Bank's project lending activities are also
important to the debt strategy, since they affect policies at
the micro and sector levels which are key to stimulating growth.
Project loans still comprise about 75 percent of total lending.
These loans cover a wide range of sectoral and development
projects in borrowing countries, rehabilitating or restructuring
existing enterprises and expanding productive capacity. They
have financed country projects in agriculture and rural
development, transportation, education, industry, energy,
health and nutrition, water supply and sewerage, urban
development, and telecommunications. This type of capital
transfer complements, on a micro-level, the World Bank's efforts
to help countries implement broader-based structural reforms.
The regional development banks will also play an important
role in supporting the strengthened debt strategy. The
operations of the African, Asian, and Inter-American Development
Banks complement and support the policy reforms promoted by the
World Bank and the IMF. As the World Bank seeks to expand the
array of sectoral and structural adjustments targeted by its
lending, the regionally focused institutions can help reinforce
the incentives for debtor countries to implement policies that
will lead to sustainable growth and recovery. In particular,
we expect the Inter-American Development Bank, now that agreement
has been reached on a capital increase, will undertake lending
programs that encourage its borrowers to adopt policies that
will contribute to their economic recovery.
4
U.S. Commitment to the Debt Strategy
It is important for the United States to back up its
conceptual and policy leadership on this issue with funding for
all these institutions as they seek to make the strengthened
strategy work for debtor countries. The United States cannot
expect to maintain leadership if we do not participate actively
in new funding for these institutions and honor the payment
schedules agreed to during replenishment negotiations.
Unfortunately, in the 1980s, the United States has been
unable to meet its financial commitments to the MDBs on a
timely basis. As one example, the United States is over two
installments behind in its purchase of shares in a capital
increase for the International Finance Corporation (IFC) which
supports private sector development activities strongly endorsed
by the United States. We are also concerned that as the United
States arrears on funding for the World Bank GCI continues to
grow, we will not be able to meet our scheduled purchase of
shares in the Bank. As this occurs, it could place us in
jeopardy of losing our veto over changes in the Bank's Charter.
This would seriously undermine our leadership position in the
Bank and internationally.
Frankly, this is not good government and does not speak well
for the United States. We must do better in meeting our
commitments if we realistically expect the MDBs to work actively
to fulfill their policy commitments to us. Our credibility as
a leader in these institutions is at stake, and, therefore, I
urge full funding for the World Bank and each of the regional
development banks.
ENVIRONMENT
Debt, however, is not the only major issue that needs
U.S. leadership and the assistance of the MDBs. Global warming
and other environmental matters are now of major international
concern. The adverse effects of climate change and ozone
depletion will not stop at national boundaries. These issues
are global in nature, and we must develop new and cooperative
ways to deal with them more effectively.
Members of this committee have shown a great deal of
leadership in galvanizing the MDBs to action on these matters,
working closely with the Executive Branch. Congress, in fact^
has given the Executive Branch a substantial mandate under
current law to promote a heightened environmental awareness in
the MDBs and to assure that progress on this front is achieved
in the developing countries. Important headway on various levels
has been made over the past year and we are fully committed to
doing more in this important area. All of us are looking to
these institutions to play a critical role in helping to keep
this planet and our environment habitable.
5
Largely through U.S. efforts, the Development Committee
Communique of April 4 noted that members stressed the increasing
importance attached to environmental issues and to the timely
dissemination of environmental information on Bank-supported
operations. In addition, the Committee agreed to discuss at
its next meeting the Bank's efforts to support the environment,
including the integration of environmental concerns in Bank
operations and measures to increase public awareness of World
Bank environmental activities.
Again, as with the debt strategy, if we are to maintain a
leadership role, we must back up our policy initiatives with
financial support. To help convince you that such support is
warranted, I would like to review some of the reforms now under
way to strengthen the MDBs' effectiveness in addressing
environmental concerns.
Recent Reforms
The Inter-American Development Bank (IDB), as part of the
recently negotiated replenishment agreement, is to establish an
environmental line unit to assist in evaluating environmental
aspects of projects early in the project cycle. It was the
United States Government that called publicly for the
establishment of this unit, first at the Bank's Annual Meeting
in Caracas in 1988, and again at this year's Annual Meeting in
Amsterdam. The IDB has also held five environmental seminars
for members of its technical staff and estimates that 80 percent
of its operational staff has now completed the training.
The African Development Bank (AFDB) established its own
environmental line unit in 1988. This unit is headed by a
recently recruited African expert who is assisted by three
experts seconded from industrial countries, including one from
the United States seconded under the provisions of an AID
technical assistance program. The African Development Bank is
also working with the Sierra Club, the Natural Resources Defense
Council, and the American Farmland Trust to set up a conference
to increase cooperation between environmental agencies and nongovernmental organizations (NGOs) in four of its borrowing
countries. This initiative, which we encouraged at the AFDB's
Annual Meeting in Abidjan last year, is not proceeding as
rapidly as we had hoped. However, we look forward to the
conference taking place in the second half of this year.
The World Bank renewed and strengthened its pledge to
environmental reform in the Executive Directors Report on the
General Capital Increase that was negotiated in 1988. Language
in the report, that was agreed among both developed and
developing countries, called specifically for "better management
of natural resources and for integration of environmental work
into country development strategies, policies and programs; the
evaluation of environmental costs of projects, and mitigation
or elimination of adverse effects." Our job now is to see that
6
this pledge is fulfilled. This year, the Bank almost doubled
last year's administrative budget for environmental work,
increasing it to $9.4 million in FY 1989 compared with $4.8
million in FY 1988. We are working to assure that a further
increase dedicated to environmental work will be set aside for
next year, particularly in the regional units which monitor the
project appraisal process.
The Asian Development Bank (ADB) established an
environmental line unit in 1987. That unit was upgraded to
divisional status earlier this spring, and new staff are being
recruited. The Bank is continuing to work on refining the
participation of the unit in the project cycle. The role of
this unit is set out in the Bank's initial paper on "Preliminary
Environmental Screening of Loans and Technical Assistance
Projects." In addition, the Bank has published other papers
covering secondary screening procedures and provisions for
participation of environmental specialists in loan and technical
assistance appraisals. It is also focusing greater attention
on environmental protection measures in loan agreements and in
documents that give guidance to missions and to post-evaluation
and review operations.
I have provided only a very brief summary of some of the
progress we have made in the MDBs on environmental issues over
the past year. More information is included in the Annual
Report that we submitted to Congress earlier this year.
Tropical Forests
No environmental issue has engaged more public concern than
the destruction of tropical rain forests. The U.S. Government
is determined that the MDBs will adopt policies and procedures
for protective measures in the appraisal of projects that may
adversely affect these forests and other fragile eco-systems.
We have taken several steps to increase international
understanding of the importance of this issue and to build
greater support for measures to protect all such eco-systems
that may be threatened by development projects and programs.
In April of last year, Treasury released its own standards
for U.S. evaluation of MDB projects affecting tropical moist
forests. These standards, developed with support from more
than 50 environmental groups in this country, were immediately
made available to the management and staff of the World Bank
and to the regional development banks. They were also tabled
at an ad hoc meeting of environmental experts held under the
auspices of the Organization for Economic Cooperation and
Development (OECD) in Paris last May. We have made arrangements
to see that they will be discussed again at a follow-on meeting
of the OECD's Development Assistance Committee that is being
held in Paris this week.
7
Other Initiatives
We have also released U.S. standards for evaluating MDB
projects adversely affecting wetlands and Sub-Saharan savannas
and we are now working with the Natural Resources Defense
Council and other environmental organizations to complete
standards for protecting important marine areas such as coral
reefs and seagrasses.
In addition, Treasury has set up an informal working
group with Greenpeace to exchange views on more effective
measures to encourage integrated pest management. Another
group is being organized to help us address energy efficiency
and conservation issues. I am hopeful that we will have more
progress to report in both of these important areas by the
time of our next report.
Assessment of Environmental Impact
It is imperative that appropriate environmental impact
assessment procedures be established within the MDBs and in
borrowing countries. There is also a critical need for the
MDBs to provide environmental information on projects to the
public in advance of Board action. I stressed the importance
of environmental issues at the Annual Meeting of the World
Bank in Berlin last September. In March of this year, I wrote
a letter to President Conable emphasizing the importance we
attach to providing access to information and the need for the
Bank to act more quickly in this area. In April, we made a
statement to the World Bank's Development Committee highlighting
once more the importance of prompt action. I have urged mycolleagues in other developed countries to support these efforts,
and we will press hard in the months ahead to get international
agreement on appropriate procedures.
We will be most effective if we can mobilize international
support for environmental impact assessment procedures and access
to information, and work with our colleagues from other
countries, both developed and developing, in establishing
procedures that are acceptable to all member countries.
For that reason, we have highlighted these two elements
of environmental reform in U.S. speeches at the annual meetings
of the regional development banks this spring. We have taken
a similar tack at the ministerial meeting of the Organization
for Economic Cooperation and Development held earlier this
month in Paris, and we plan to raise these issues again at the
Summit meetings in July. These issues have also become key
conditions in our negotiations for replenishment of IDA
resources. We need to focus our efforts on bringing about the
changes that we think are important within the MDBs and in the
countries that borrow from them.
8
We have serious reservations regarding legislation to
extend National Environmental Policy Act (NEPA) procedures to
U.S. votes in the banks. Extension of NEPA would move the
focus of our efforts away from reform of MDB procedures, which
is the right focus, to internal U.S. Government procedures.
We are also concerned that extension of NEPA could be viewed as
a unilateral U.S. approach that would generate opposition to our
proposals and hold back our efforts to promote reform. On the
other hand, I would strongly support an initiative that seeks
to develop appropriate procedures within the MDBs. Such
procedures might well be based on other procedures already
established in member countries or accepted by international
organizations.
OTHER U.S. INTERESTS IN THE MDBs
I believe there is more than ample reason for the United
States to support the MDBs based on the international debt and
environmental considerations which I have just reviewed.
However, since U.S. interests in these organizations cover
many areas, as this Committee is well aware, let me quickly
review other dimensions of U.S. interests in fostering a strong
foundation for the multilateral development banks.
First, they support our geo-political and strategic
interests. The MDBs lend to countries that are strategically
important to the United States, such as Turkey, the Philippines,
and Mexico. MDB involvement leads to further cooperation on a
number of fronts, including controlling international migration,
and promoting democracy and human rights.
Second, the MDBs advance the broad U.S. economic objective
of promoting the growth of a free, open, and stable economic
and financial system. They do this by encouraging and supporting
developing country movement toward more open trade and capital
flows, including greater reliance on the private sector and
free-market pricing policies.
Third, the MDBs support U.S. objectives to improve the
quality of life for impoverished people throughout the
developing world. They provide, particularly through their
soft loan windows, special funding for social programs and
generally promote overall economic growth and productivity in
developing countries.
Finally, stronger, more stable, growing developing country
economies directly help the U.S. economy: they contribute to
an expansion of employment in the United States through increased
exports. Let me elaborate on this point to underscore just how
important this is for the U.S. economy.
9
Agriculture
The agriculture sector illustrates this vividly. Six out
of every ten people in developing countries depend on
agriculture and related pursuits for their livelihood. Hence,
the most direct way to increase incomes in these countries is
to assist agriculture. Indeed, the MDBs are a prime source of
project finance and technical advice in this key sector.
Overall, more MDB lending goes into the agriculture sector than
any other — roughly 25 percent annually.
In poorer countries, up to 60 percent of increased income
is spent on food and upgrading the quality of the diet, and
this virtually always translates into more animal protein in
the diet. Production of more animal protein, in turn, requires
more feed grains and soybean meal — products that U.S. farmers
produce more efficiently than any others in the world. In
fact, the output from one in four U.S. cropland acres enters
export markets, creating nearly one million farm and off-farm
jobs. Roughly 40 percent of U.S. agriculture exports is sold
in developing countries. Hence, living standards in the Third
World, where diets have ample room to grow, will probably play
a greater role than any other factor in determining whether
U.S. agriculture will stagnate or flourish.
South Korea's recent economic performance illustrates the
potential for increased U.S. exports. Since 1982, per capita
consumption of livestock products increased from 18 to 2 5
kilograms per year, a 39 percent increase, which is very high
compared to the relatively flat consumption patterns in the
United State.s and Europe. The quantity of U.S. feed grains and
soybean exports to Korea doubled in the period from 1980 to
1987. It is important to note in this connection that the MDBs
played a key role in Korea's economic success: MDB loans to
Korea have totaled over $8.7 billion.
Information Technology
A sector that is becoming increasingly pivotal to growth
in all countries is information technology. Within a matter
of decades, government and commerce in the industrialized
world have become dependent on rapidly changing computer
hardware and software and the new forms of telecommunications
— satellite transmission and optic-fiber cables — that link
computers, telephone, and television. But information
technology can also be invaluable in agricultural research,
health services, and other traditional development activities.
Proper utilization of these technologies can help economies
run much more efficiently. Microelectronics, for instance,
can help countries make better use of electric power, thus
limiting capital costs; and computerization of financial and
economic data increases their accuracy and utility for growth
and development several fold.
10
The MDBs can play a critical role in helping developing
countries gain access to information technology. Indeed, we
believe that this is an area in which there is considerable
scope for greater MDB activity, particularly by the World Bank.
Not only is strengthening the information technology
capability of developing countries in their self-interest, it
is in our self-interest as well. A growing, more productive
economy is a growing market for U.S. exports. But more
directly, the U.S. is a world leader in this sector. As the
developing countries grow and increase their purchases of
information technology hardware and software, U.S. producers
should be well poised to secure much of this business. In
recent years U.S. exports of computers and business equipment
to developing countries have jumped dramatically. Korea went
from importing $161 million in 1984 to $489 million in 1988, a
300 percent increase; and Mexico increased from $338 million
to $602 million, almost a 180 percent increase during a period
when their ability to import has been sharply curtailed.
U.S. Business Contracts
In this context, it is useful to note that business
contracts resulting from MDB projects are a direct and tangible
benefit stemming from U.S. participation in the MDBs. These
contracts are composed of three related elements. First, there
is the procurement stemming directly from MDB-provided finance.
U.S. businesses secured roughly $1.9 billion in contracts from
the MDBs last year. This compares with U.S. budget expenditures
for the MDBs averaging about $1.3 billion annually. Secondly,
since the MDBs only provide a portion of the finance needed for
a project, there are other procurement possibilities generated
by non-MDB finance for a project.
Finally, the business contacts established through U.S.
business participation in bidding on MDB projects leads to
follow-on business. For instance, Morrison-Knudsen, a U.S.
engineering and construction firm, and ECI International, a
U.S. firm specializing in the supply of educational and
vocational training equipment, have sent letters to Congress
noting that contacts established on an MDB project are helpful
in pursuing non-MDB opportunities. In sum, MDB projects are an
important nexus for the development of U.S. exports.
To assist U.S. businesses in competing for MDB contracts,
the Omnibus Trade Act required the appointment of commercial
officers to serve with each of the U.S. Executive Directors at
the MDBs. The Treasury Department is consulting with the
representatives of the International Trade Administration and
the Foreign and Commercial Service about these appointments.
It is expected that the positions at the Asian and African
Banks
of
is working
information
will with
be filled
about
the MDBs
contract
in the
to near
improve
awards
future.
the
on MDB
quality
In
projects.
addition,
and timeliness
Treasury
11
Burden-sharing
Fortunately, the burden of financing the operations of
these institutions is shared by all member countries.
Consequently, U.S. interests in developing countries can be
pursued through these institutions without the United States
bearing the full burden. This is particularly important during
periods of severe budgetary constraint.
We currently maintain a 34.5 percent share in the capital
of the Inter-American Development Bank. Our shares in the
other international financial institutions are much lower. In
recent years the contributions of other donor countries —
including some developing countries — to these institutions
have increased relative to the United States as their respective
economies have grown and prospered. This is particularly
important for MDB concessional lending operations where all
contributions are fully paid in.
For their market-related lending operations, the MDBs
leverage the callable capital guarantees of member countries
to borrow funds on private capital markets. Hence, the majority
of MDB loans are financed with relatively small cash outlays
from MDB members and are cost-effective when compared with
U.S. bilateral economic assistance.
In FY 1988 the United States provided $3.1 billion in
foreign economic assistance (Development Assistance and the
Economic Support Fund) to 75 countries, exclusive of Israel,
Spain, and a few other higher income countries. These countries
received U.S. assistance to engender close cooperation and
enhance our national interest through increased political,
economic, and military stability in the Third World. These
same countries received additional commitments of $18 billion
from the MDBs — but at a cost to the United States of only
$1.2 billion in budget authority. Hence, for about one-third
the budget cost of all our bilateral aid programs, U.S. payments
to the MDBs leverage lending programs that are almost six times
as large as our bilateral programs.
In addition, the MDBs provide considerable finance and
technical assistance to countries such as Argentina, Brazil,
and Mexico that are of considerable geo-political importance
to the United States — but which receive virtually no bilateral
U.S. economic assistance. The MDBs made commitments of over $5
billion to these countries in FY 1988.
ENHANCED STRUCTURAL ADJUSTMENT FACILITY (ESAF)
In addition to our requests for funding of the MDBs, the
Administration is seeking authorization and appropriation in
FY 1990 for a modest $150 million contribution to the Interest
Subsidy Account of the Enhanced Structural Adjustment Facility
(ESAF) of the International Monetary Fund (IMF).
12
In recent years, the international community has adopted
a comprehensive approach to help the poorest countries,
particularly those in Sub-Saharan Africa, to implement the
structural economic reforms which are essential for the
increased growth and development necessary to alleviate poverty
and improve basic human needs. This approach draws upon the
collective efforts of the IMF, World Bank, and official
creditors.
The ESAF represents the centerpiece of the Fund's efforts
to address the plight of the poorest countries. It was
established in 1987 to enable the IMF to provide financial
assistance on concessional terms to the poorest countries
experiencing protracted balance of payments problems and
prepared to undertake multi-year economic reforms. It builds
upon the IMF's Structural Adjustment Facility (SAF), which was
established in 1986 in response to U.S. proposals to assist the
low-income countries adopt growth-oriented reforms. The ESAF
is expected to provide new resources totaling $8 billion to
low-income countries engaged in economic and structural
adjustment. These resources will supplement the roughly $2.5
billion remaining to be disbursed under the SAF.
The ESAF is catalyzing significant additional resources
for the low-income countries through its association with the
Policy Framework Paper (PFP) process, a unique and historic
step forward in strengthening collaboration between the Fund
and World Bank. Under this process, the two institutions work
in a mutually constructive manner in helping resolve the special
problems in the poorest of the developing countries. Member
countries eligible to use the SAF and ESAF develop a mediumterm PFP — a joint document of the Fund and Bank — outlining
their structural and macroeconomic reform efforts and containing
an assessment of their financing needs, including possible IMF
and World Bank financing. The Fund and Bank are now conducting
joint staff missions to prepare the PFPs.
The World Bank agreed to earmark $3 to 3.5 billion of the
Eighth Replenishment of the International Development
Association (IDA) for adjustment programs related to PFPs.
Substantial donor support is also being catalyzed through cofinancing, in particular for Sub-Saharan Africa under the
Bank's Special Program of Assistance. Furthermore, at the
Toronto Summit, the Heads of State or Government agreed to
ease the debt servicing burdens of the poorest countries
undertaking internationally supported adjustment programs.
The mechanisms to address these debt service burdens have been
developed by the Paris Club, the institution responsible for
rescheduling debt owed to official creditors, and are working
smoothly.
The United States is the only major industrial country
that has not yet contributed to the ESAF. The IMF is the
central monetary pillar of U.S. international economic policy
13
and a key policy instrument to advance our economic and security
interests. A modest contribution to the ESAF would go far to
maintain our credibility in the IMF and provide the United
States with a voice on issues of central importance to our
national interests and the well-being of the world economy. It
would help many of the low-income countries to adopt necessary
growth-oriented reforms. Many of these countries, including
Pakistan, Bolivia, Zaire, and other key nations in Sub-Saharan
Africa are of significant strategic importance to the United
States.
Countries contributing to the ESAF are expected to provide
loans of about $8 billion. The United States is one of the
very few major member countries not providing loans. We have
consistently indicated that we could not provide loans due to
budget constraints, and we are not now proposing any U.S. loans
to the ESAF. The necessary size of such loans would, in my
view, be prohibitive.
We should, however, contribute modestly to an account
which will help subsidize ESAF loans to developing countries.
The proposal before you is to make a $150 million contribution
to an Interest Subsidy Account of the ESAF which would make
its loans concessional. It is critical that loans from the
ESAF be provided on realistic terms to these low-income
countries.
Budget authorization and appropriation of the full U.S.
contribution is being sought in FY 1990 to provide the IMF
with adequate assurance that resources will be available to
finance the interest subsidy. However, actual disbursements
from the U.S. contribution would occur over the period through
U.S. FY 2001, roughly the final date for interest payments on
ESAF loans. Consequently, actual budget outlays each year
will be small and would not exceed $3 million in FY 1990, with
the bulk of the outlays occurring in the latter part of the 12year period.
Such a contribution would be particularly cost-effective.
The U.S. contribution represents only one and one-half percent
of the total resources being provided to the facility, in
comparison with our IMF quota share of some 20 percent.
Moreover, the amount of resources the ESAF can bring to bear in
the poorest countries often far exceeds the amount that can be
mobilized through our bilateral assistance.
For these reasons, Mr. Chairman, I urge you to support
enactment of legislation providing for a contribution by the
United States of $150 million to the Interest Subsidy Account
of the IMF's Enhanced Structural Adjustment Facility.
14
INTERNATIONAL FINANCE CORPORATION (IFC)
As I mentioned earlier, U.S. support for the IFC has come
under question as a result of major shortfalls in our planned
purchases of shares. In 1985, we agreed to a capital increase
of $650 million for the IFC but have been able to pay for only
34 percent of our allotted 175,162 shares (at $1,000 each). We
are at a critical juncture, wherein we must pay our capital
arrears to allow the IFC to pursue a number of private sector
development activities. Otherwise, we risk a serious weakening
of the institution's financial well-being and a loss of U.S.
leadership in the institution.
The IFC is the arm of the World Bank that makes equity
investments in and loans to private sector enterprises in the
developing world. It operates without government guarantee
— thus reducing the role of governments in developing
economies. More significantly, equity investment by the IFC,
in tandem with its lending, allows enterprises to grow without
increasing their indebtedness. It has been an important catalyst
of investment funds, most recently attracting $7.50 from other
sources of capital for every $1 it lends and invests.
The IFC also plays an important role in advising
governments about how to improve the environment for investment
in their countries. It has contributed to the development of
capital markets through advice and investments. This work
allows countries to generate financing from institutional and
individual investors, both foreign and domestic, without the
intermediation of commercial banks.
I would like to describe for you some of the most important
initiatives under way at the IFC — programs that require U.S.
financial support for the institution to be carried out in full
over time.
Sub-Saharan Africa
As part of an overall plan to increase IFC's involvement
in Sub-Saharan Africa, the IFC has undertaken or participated
in three related programs: the African Project Development
Facility, the African Management Services Company, and the
Africa Enterprise Fund.
The African Project Development Facility was established
two years ago by the IFC with the African Development Bank and
the UNDP. Teams based in Abidjan and Nairobi provide advice to
companies planning investments and help them raise finance.
Their work is complemented by the African Management Services
Company (AMSC), which trains the personnel necessary to manage
companies. The IFC invested in the AMSC in 1988, as a logical
extension of its work in Sub-Saharan Africa. The AMSC provides
management
training
for newprivatization.
ventures, existing
private
companies
and parastatals
undergoing
The AMSC
also
provides
15
back-up in areas such as marketing, product development, and
improved productivity.
The IFC has rounded out its role in Sub-Saharan Africa
with the establishment of the Africa Enterprise Fund (AEF) to
promote IFC investment in small and medium-sized enterprises.
A large number of IFC professionals have been sent into the
field with authority to take decisions autonomously on much
smaller investments than those IFC normally makes. Despite
their small size — ranging from $100,000 to $750,000 — these
investments are subjected to the same standards of analysis
applied to larger investments. This extremely labor-intensive
program meets the financing needs of small African entrepreneurs
who would never be able to attract IFC investments without this
type of outreach. As the profits on this activity are much
lower than those from larger investments, the IFC's ability to
continue the program will be limited if U.S. funding shortfalls
are not paid.
Private Sector Development
Among other efforts to support development of the private
sector, the IFC pursues three main activities in capital markets
development: advising in the establishment and/or strengthening
of capital markets; investing or lending to domestic capital
market institutions in need of support; and improving the
access of companies and financial institutions to the global
financial markets.
We expect these efforts to pay substantial dividends over
the coming years. The most important effect will be lowering
the need for borrowing to finance investment. Other positive
effects will be liberalization of financial systems, opening of
companies to public control, and reduction of the role of
governments in capital investment.
The IFC',s Corporate Finance unit has pursued corporate
restructurings through a three-phase approach. It conducts an
intensive review of a company's finances and operations, followed
by the use of various techniques to achieve the optimum use of
the firm's internal resources. Companies may engage in debt
buy-backs, debt-equity conversions, or debt swaps and/or
exchanges. Finally, the IFC, the company, and its creditors
negotiate an agreement on the restructuring, which usually
involves an investment by the IFC. These negotiations are
settled on a case-by-case basis, using a market-oriented
approach.
Since 1985, the IFC has participated in about 50 corporate
restructurings, one half of which have been in Latin America
and the Caribbean. This type of fee-generating service is
increasingly provided by the IFC in its role as an "investment
bank for development." While this service is self-financing,
16
it does not generate the kind of profits that the IFC needs to
finance its growing investments.
INTER-AMERICAN DEVELOPMENT BANK (IDB)
As you are aware, Mr. Chairman, member countries of the
Inter-American Development Bank (IDB) have agreed to increase
the Bank's capital and replenish the resources of the
concessional window, the Fund for Special Operations (FSO).
Final agreement was reached during the Bank's annual meeting
in March. It calls for a $26.5 billion capital increase and a
$200 million replenishment of the FSO. The annual U.S. share
of the subscriptions to paid-in capital and contributions to
the FSO would be $77.9 million.
The agreement is a good and fair one that reflects the
needs and desires of both the donor and borrowing member
countries. The result will be a strengthened IDB that can
more effectively support the growth and development of Latin
America and the Caribbean. Under the agreement and with the
organizational and procedural reforms that are already under
way in the Bank, the IDB will:
lend $22.5 billion over the 1990 - 1993 period;
continue to seek ways to ensure that half of its
lending program benefits lower income groups;
provide up to $5.6 billion of fast-disbursing,
policy-based sector lending;
strengthen the country programming process to
ensure that all its lending will support policy
reform and self-sustaining growth;
adopt a loan approval mechanism that allows greater
weight to be given to the views of donor countries;
and
reorganize operating departments to implement
sector lending and country programming, and to
improve the overall efficiency of Bank operations.
This will include enhancing its environmental
analysis by establishing an environmental line
unit.
With the replenishment now agreed and the organizational
and procedural reforms being implemented, the Bank will also
be able to make its contribution to helping resolve Latin
America's debt problems. That contribution will encourage
borrowers to adopt policies that improve economic performance
stimulate new foreign investment, increase domestic savings '
and encourage the repatriation of flight capital. Private '
17
sector initiatives and the development of market-based economies
should be emphasized. It will be critical, therefore, that the
United States meet its funding obligations to the IDB —
both
ongoing replenishments and arrears — in order for this process
to be implemented fully.
CONCLUSION
In conclusion, Mr. Chairman, I want to emphasize the
Administration's commitment to, and full support for, the MDBs
and U.S. participation in the IMF Enhanced Structural Adjustment
Facility. These institutions are vital to our efforts to
strengthen the international debt strategy. It is critical
that we provide full funding for U.S. participation in order to
maintain U.S. leadership on debt issues, and to ensure that the
strengthened strategy is implemented.
These institutions also serve the United States in a
variety of other ways. We rely on the MDBs to promote policies
which protect the delicate global environment that we all
share. We depend on them to promote our security and
humanitarian interests.
Furthermore, the fate of MDB activities is important to
the U.S. economy, since success in promoting sustainable growth
will increase effective demand among developing countries for
U.S. exports and reduce the strains on the international
financial system. I also believe that successful operation of
overall MDB programs will make one additional contribution:
the promotion of peace and democracy among nations. I cannot
overemphasize the importance I attach to this.
I recognize fully that, even in the best of circumstances,
supporting foreign assistance is never popular. Now, at a
time of severe budget constraint, it will be even more
difficult. It is imperative that we support these institutions
in their important tasks, not only by participating actively
in new MDB replenishments, but also by honoring past-due
financial commitments to them.
1
ANNEX
Fiscal Year 1990 Budget Reouest
We are requesting $1.6 billion for the MDBs and $150
million for the IMF's Enhanced Structural Adjustment Facility
(ESAF) in FY 1990. These funding requests reflect both the
need for budgetary restraint and the financial requirements
for effective development programs. Our MDB request is
comprised of MDB funding requirements currently due for payment,
$1.3 billion, and $314 million of the $414 million in U.S.
funding shortfalls to the MDBs. The stringency of the budget
constraint on international affairs funding prevents the
Administration from requesting the entirety of U.S. funding
shortfalls on earlier scheduled MDB payments. These requests
are composed exclusively of funding commitments negotiated by
the Administration in close consultation with this Committee.
International Bank for Reconstruction and Development (IBRD)
For the IBRD (also known as the World Bank) in fiscal
year 1989, the Administration is requesting: 1) $20.1 million
in budget authority to complete the first installment to the
1988 GCI; and 2) $70.1 million in budget authority and $2,241.8
million under program limitations for subscription for the
second installment.
The Bank's principal role today is making long-term credit
available for productive projects, which will lead to economic
and social development in its less developed members. These
loans carry market interest rates.
In addition to project
finance, the IBRD provides policy advice and technical
assistance and financing in support of structural reform, and
serves as a financial catalyst and institution builder.
International Development Association (IDA)
For fiscal year 1990, the Administration is requesting:
1) $6.7 million to complete the second installment, and 2)
$958.3 for the third and final installment for the $2,875
million U.S. share of IDA-8. IDA, an affiliate of the World
Bank, is the single largest source of multilateral development
assistance for lending on concessional repayment terms to the
world's poorest countries. Over 96 percent of IDA lending
goes to countries with an annual per capita income of $400 or
less.
International Finance Corporation (IFC)
For fiscal year 1990, the Administration is requesting:
1) $79.9 million to fund the U.S. shortfalls in its
subscription to the $650 million IFC capital increase; and 2)
$35.0 million for the fifth and final installment. The IFC
provides risk capital as well as long-term loans; plays an
2
important role as a catalyst in attracting private capital;
and provides technical assistance to developing countries that
want to encourage domestic and foreign private investment.
Inter-American Development Bank (IDB)
For fiscal year 1990, the Administration is requesting
$31.6 million in budget authority to complete the U.S.
commitment to the sixth IDB capital increase.
Fund for Special Operations (FSO)
For fiscal year 1990, the Administration is requesting
$63.7 million in budget authority to complete the U.S.
commitment to the sixth increase in FSO resources. These
funds are required for the 1989 FSO lending program.
Inter-American Investment Corporation (IIC)
For fiscal year 1990, the Administration is requesting
$25.5 million in U.S. funding shortfalls to the IIC. These
funds, for the third and fourth of four installments to the
IIC, would complete the U.S. commitment to this institution.
The IIC is linked to the IDB, and is designed to support private
sector activities in Latin America through equity and loan
investments that focus primarily on small- and medium-scale
enterprises.
Asian Development Bank (ADB)
The ADB is currently making lending commitments on the
basis of capital stock that is fully subscribed by Bank member
countries, including the United States. Hence, there is no
need to request funding for the ADB in fiscal year 1990. The
Bank makes loans at market rates to developing member countries
in regions of key importance to U.S. strategic and economic
interests.
Asian Development Fund (ADF)
For fiscal year 1990, the Administration is requesting:
1) $84.6 million in U.S. funding shortfalls to the
first and second installments to the fourth replenishment of
ADF resources; and 2) $146.1 million for the third, regularly
scheduled installment. The stringent budget constraint on
funding for international affairs prevents us from requesting
the remaining funding shortfall of $100 million to the ADF
until FY 1991. However, because of exchange rate changes and
lower-than-expected lending levels, it is expected that the
total $230.7 million requested will be sufficient to complete
its project lending programs in calendar year 1989.
The ADF is a source of concessional finance to the poorest
3
member countries of the ADB. Pakistan, Bangladesh, Sri Lanka,
and Nepal are the major borrowers from the Fund.
African Development Bank (AFDB)
For fiscal year 1990, the Administration is requesting:
1) $1.6 million in budget authority to subscribe to paid-in
capital to complete the second of five installments to increase
the Bank's capital base; and 2) $9.0 million in budget authority
and $134.8 million under program limitations for the third U.S.
installment. The Bank makes loans on market terms for the
economic and social development of fifty African member
countries, individually and through regional cooperation. The
AFDB is an important part of the U.S. commitment to work with
the countries of Africa for the achievement of their long-term
development objectives.
African Development Fund (AFDF)
For fiscal year 1990, the Administration is seeking $105
million in budget authority for the second of three installments
of the U.S. contribution to the fifth replenishment of AFDF
resources. The Fund complements AFDB operations by providing
concessional financing for high priority development projects
in the poorest African countries. The United States has a
strong humanitarian interest in aiding the poorest countries of
the world's least developed continent through its support for
the AFDF.
IMF Enhanced Structural Adjustment Facility (ESAF)
For fiscal year 1990, the Administration is requesting
$150 million in budget authority for a one-time U.S.
contribution to the Interest Subsidy Account of the ESAF. The
ESAF provides financial assistance on concessional terms to the
poorest countries experiencing protracted balance of payments
problems.
TREASURY.NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 15, 1989
JUN
STATEMENT BY
SECRETARY OF THE TREASURY
NICHOLAS F. BRADY
The American taxpayers won a major victory today when the
House of Representatives voted for strong, tangible capital
requirements for the nation's savings and loans. We commend
the members of the House for their courageous action. They
have taken a very positive step toward ensuring the
resolution of the savings and loan crisis.
It is unfortunate, however, that the House voted to ignore
the budgetary discipline of Gramm-Rudman-Hollings in the
amount of $44 billion by voting against the Administration's
financing plan which was adopted by the Senate.
oOo
NB-337
TREASURYNEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
JUNE 15, 1989
STATEMENT BY
SECRETARY OF THE TREASURY
NICHOLAS F. BRADY
We commend Phil Gramm, Pete Domenici and the other senators who
have pledged their support to the Gramm-Rudman-Hollings budget
discipline by voicing their opposition to the so-called
"on-budget" financing plan for the Savings and Loan proposal. We
urge the rest of the Senate to join 'them.
These senators clearly see the attempt to exempt $44 billion from
the GRH mechanism for what it is — a direct attack on the
integrity of the GRH budget discipline. We join the senators in
urging the Congress to adopt the Administration's funding
proposal.
oOo
NB-338
TREASURY NEWS _
Department of the Treasury • Washington, D.c. • Telephone
CONTACT: Office of Financing
202/376-4350
FOR IMMEDIATE RELEASE
June 19, 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,415 million of 13-weelc bills and for $6,407 million
of 26-week bills, both to be issued on June 22, 1989,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
26-•week bills
maturing December 21, 1989
Discount Investment
Price
Rate 1/
Rate
13--week bills
maturing September 21 , 1989
Discount Investment
Price
Rate 1/
Rate
8.18%
8.22%
8.22%
8.47%
8.51%
8.51%
97.932 :
97.922 :
97.922 -
8.00%
8.09%
8.08%
8.45%
8.55%
8.54%
95.956
95.910
95.915
Tenders at the high discount rate for the 13-week bills were allotted 100%.
Tenders at the high discount rate for the 26-week bills were allotted 57%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Received
Accepted
$
30,085
21,305,520
21,695
36,245
37,620
32,720
1,178,245
41,495
4,940
41,505
20,770
912,855
321,450
$
29,335
5,737,015
21,695
36,245
37,620
32,720
51,495
21.495
4,940
41,505
20,760
58,355
321,450
19,770
: $
s 17,192,660
13,675
30,215
21,840
22,285
798,685
21,675
5,925
:
42,330
:
10,960
:
965,595
:
353,335
$
19,770
5,675,420
13,675
30,215
21,840
22,285
88,585
13,675
5,925
42,330
10,960
109,445
353,335
$23,985,145
$6,414,630
: $19,498,950
$6,407,460
$21,058,925
971,835
$22,030,760
$3,488,410
971,835
$4,460,245
: $16,106,760
:
758,795
: $16,865,555
$3,015,270
758,795
$3,774,065
1,851,380
1,851,380
:
1,800,000
1,800,000
103,005
103,005
:
833,395
833,395
$23,985,145
$6,414,630
: $19,498,950
$6,407,460
An additional $39,795 thousand of 13-week bills and an additional $265,605
thousand of 26-week bills will be issued Co foreign official institutions for
new cash.
y
Equivalent coupon-issue yield.
NB-339
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
-i 5310
June 20, 1989
Caroline Hopper Haynes
Appointed Deputy Assistant Secretary
for Legislative Affairs
Secretary of the Treasury Nicholas F. Brady today
announced the appointment of Caroline Hopper Haynes to serve
as Deputy Assistant Secretary for Legislative Affairs. Ms.
Haynes will serve as principal adviser to the Assistant
Secretary for Legislative Affairs on all issues related to
the Department's initiatives and on the relations of the
Department with Members of the U.S. Senate and the staffs of
Congressional Committees.
Ms. Haynes has been with the Treasury Department since
November 1988 in the position of Senior Legislative Manager.
Before joining Treasury, she was Legislative Assistant to
Senator Alan K. Simpson (R-WY).
Ms. Haynes received an M.B.A. in International Business
(1987) from George Washington University, Washington, D . C ,
and a B.A. in Economics and Political Science (1981) from the
University of the South, Sewanee, Tennessee. She is
originally from Denver, Colorado and now resides in
Arlington, Virginia.
NB-340
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 20, 1989
William J. Bremner
Deputy Assistant Secretary
(Federal Finance)
to Leave Treasury
Secretary of the Treasury Nicholas F. Brady announced that
William J. Bremner, Deputy Assistant Secretary for Federal
Finance, has resigned his post at the Treasury Department,
effective July 7, 1989.
Mr. Bremner has served as Deputy Assistant Secretary for Federal
Finance since April 1986, and has been responsible for the
management of the Federal debt, the Federal Financing Bank,
Federal credit program policy, and policy direction for the
government securities market.
Mr. Bremner directed the development of regulations for the
government securities market, the largest securities market in
the vorld and the primary source of funding the Federal debt.
He has maintained a leadership role throughout the
implementation of the Government Securities Act of 1986.
In announcing his departure, Secretary Brady commended
Mr. Bremner for his "dedication to public service" and noted
that he "has made invaluable contributions throughout his broad
range of responsibilities, and ve vish him success in his future
endeavors."
Before assuming his duties as Deputy Assistant Secretary,
Mr. Bremner vas a Vice President and Manager of a regional
office of Chase Manhattan. Prior to that he vas President of
Bremner Advisory Corp., an investment advisory and financial
consulting firm.
Mr. Bremner received his Bachelor of Arts degree from Marquette
University in 1965. He resides in Potomac, Maryland vith his
vife, Mary Lou, and sons, Joe and Tom. He is the son of
Mr. and Mrs. David F. Bremner of Louisville, Kentucky.
MB-341
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
'•=:,!.<)
June 20 , 1989
u
Jv ,1\ ^
»vs
Kenneth W. Gideon
Assistant Secretary of the Treasury
(Tax Policy)
Kenneth W. Gideon was confirmed by the United States Senate
as Assistant Secretary of the Treasury for Tax Policy on June 8,
1989 and appointed by President Bush on June 9.
As Assistant Secretary for Tax Policy, Mr. Gideon will serve
as the chief Treasury spokesman and advisor to the Secretary in
the formulation and execution of domestic and international tax
policies and programs.
Prior to his nomination to the Assistant Secretary post, Mr.
Gideon was a partner with the law firm of Fried, Frank, Harris,
Shriver and Jacobson in Washington, D . C , where his practice
included Federal tax planning and litigation. He served as Chief
Counsel for the Internal Revenue Service, 1981-1983.
Mr. Gideon graduated from Harvard University (B.A., 1968) and
Yale Law School (J.D., 1971).
Mr. Gideon, a native of Lubbock, Texas, is married to the
former Carol Almack. They have four children and reside in
McLean, Virginia.
NB-342
TREASURY NEWS _
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE - 'M 5310
June 20,
1989
THOMAS J. BERGER
DEPUTY ASSISTANT SECRETARY FOR INTERNATIONAL MONETARY AFFAIRS
TO LEAVE TREASURY
Deputy Assistant Secretary for International Monetary Affairs
Thomas J. Berger will leave the Treasury Department in June to
return to the private sector.
In announcing Mr. Berger's upcoming departure, Secretary of
the Treasury Nicholas F. Brady noted: "Tom has done an excellent
job on a wide range of complicated international issues. His
skills and abilities will be missed."
Under Secretary for International Affairs David C Mulford,
for whom Mr. Berger worked directly, said, "Since joining the
Treasury, Tom has played a key role in all of the Department's
major international initiatives. He did an outstanding job in
negotiating a landmark financial services agreement with Canada
during the U.S.-Canada Free Trade Agreement talks. In addition,
he has made continuing important contributions to the development
of the economic policy coordination process that is now used by
the Group of Seven industrial countries."
Mr. Berger was appointed to his current position on February
3, 1986 by Secretary of the Treasury James A. Baker III. Prior to
becoming Deputy Assistant Secretary, Mr. Berger served, since
1983, as an investment advisor to the Saudi Arabian Monetary
Agency (SAMA) and resided in Riyadh. His activities at SAMA
focused on the ongoing development and implementation of an
international investment program for the surplus oil revenues that
Saudi Arabia built up during the 1970s and early 1980s.
From 1977 to 1983, Mr. Berger was a Vice President in the
Investment Banking Division of Merrill Lynch Capital Markets in
New York. While at Merrill Lynch he worked with U.S. and foreign
corporations in arranging financings, both domestically and
abroad. From 1973 until 1975, Mr. Berger was a corporate lending
officer with Citibank, N.A. in New York.
Originally from Princeton, New Jersey, Mr. Berger holds a
bachelors degree cum laude from Harvard College and a masters
degree in business administration from the Harvard Business
School. He and his wife, Diane, reside in Washington, D.C.
NB-343
TREASURY NEWS ^
Department of the Treasury • Washington, D.c. • Telephone 566-2
CONTACT: Office of Financing
202/376-4350
FOR RELEASE AT 4:00 P.M.
June 20, 1989
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$12,800 million, to be issued June 29, 1989.
This offering
will result in a paydown for the Treasury of about $1,825 million, as
the maturing bills are outstanding in the amount of 314,627 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, June 26, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,400
million, representing an additional amount of bills dated
September 29, 19 88, and to mature September 28, 19 89 (CUSIP No.
912794 SL 9 ), currently outstanding in the amount of $16,678 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,400 million, to be dated
June 29, 19 89,
and to mature December 28, 1989 (CUSIP No.
912794 TJ 3 ) .
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing June 29, 1989.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities, to
the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them. Federal
Reserve Banks currently hold $1,437 million as agents for foreign
and international monetary authorities, and $3,501 million for their
own account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series).
NB-344
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
10/87
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations of the Secretary of the Treasury
shall be final *
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
of
the circulars, guidelines, and tender forms may be obtained
10/87
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.
TREASURY NEWS
B.partm.nt of th« Treasury • Washington. D.C. • T.Hption. 56«For Release Upon Delivery
Expected at 10:00 AM
June 21, 1989
JUN ?v "1 U "
STATEMENT OF
KENNETH W. GIDEON
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
I am pleased to have this opportunity to present the views of
the Treasury Department regarding the tax implications of two
bills dealing with the serious and recurring problem of spills of
crude oil and other products upon our nation's waterways. I will
start by discussing S. 1066, which proposes to set up a
cleanup fund as part of a comprehensive oil spill act. I will
then turn to S. 771, which would disallow deductions for costs
incurred in a cleanup program not found to be in good faith
compliance with certain federal standards.
S. 1066
The Administration strongly supports S. 1066, which would
enact the Comprehensive Oil Pollution Liability and Compensation
Act of 1989. S. 1066 has several components designed to achieve
a number of important goals, including assurance of fiscal
responsibility of crude oil shippers, implementation of
international conventions on oil spills, and activation of the
Oil Spill Liability Trust Fund. Today I would like to address
the provisions concerning the oil spill financing rate (the
"fee") and the Oil Spill Liability Trust Fund (the "Fund"). I
would like to start by briefly reviewing the purposes of the Fund
before turning to the amendments to the Internal Revenue Code of
1986 (the "Code") proposed by the bill.
Under S. 1066, the Fund would consolidate the functions of a
number of separate oil spill funds that have been established
over the years. The Fund would be available to cover costs of
cleanup and natural resource restoration which exceed the
liability limits of the polluter. The Fund would also provide .J
source of immediate money for such operations and would seek to
recover these amounts from liable polluters up to their liabilit.
NB-345
-2limits. In cases where a polluter proves financially unable to
satisfy its liabilities, the Fund would end up bearing all or
part of the cost of cleanup. Thus, the Fund would constitute a
measure of insurance, spreading the risk and providing a savings
fund for any future spills.
The bill provides three separate sources of money for the
Fund. Initially, the balances in two existing cleanup funds (the
Offshore Oil Pollution Compensation Fund and the Deepwater Port
Liability Fund) are to be rolled into the Fund when it becomes
operational. The balance in these funds is approximately $152
million. Secondly, the Fund is to receive the proceeds from a
1.3 cent per barrel fee to be levied upon all domestic and
imported oil. We estimate that the fee would generate revenue to
the Fund of $296 million, assuming an effective date of July 1,
1989 and a termination date of June 30, 1994. Thirdly, the Fund
would recoup cleanup and restoration costs from liable polluters.
I would like to now turn to the provisions of the Internal
Revenue Code that would be affected by S. 1066. The 1.3 cent per
barrel fee that would be collected under the bill is found in
section 4611(c) of the Code. It was enacted by the Omnibus
Budget Reconciliation Act of 1986. The fee would be collected on
the same base as the Hazardous Substance Superfund fee. Thus, it
would be generally imposed on all crude oil received at a US
refinery, domestic crude oil used in the United States or
exported before received at a US refinery, and upon imported
petroleum products. A credit against a taxpayer's liability
under Code section 4611(c) is provided by Code section 4612(d)
for amounts paid by the taxpayer prior to January 1, 1987 to the
Offshore Oil Pollution Compensation Fund and the Deepwater Port
Liability Fund. Code section 9509 establishes the Fund as part
of the Trust Fund Code, a subtitle of the Internal Revenue Code.
S. 1066 would make four changes to the provisions of the
Internal Revenue Code which currently control the fee and the
Fund. First, under current law, the Code section 4611(c) fee is
scheduled to expire at the end of 1991. However, that
termination date was selected in 1986, meaning that as originally
enacted the Fund would receive revenues from the fee for
approximately five years. Since the bill would start collection
of the fee 30 days after enactment, the bill extends the
termination date of the fee to June 30, 1994. The purpose of the
extension is to ensure that, assuming timely enactment, the Fund
receives approximately the amount of revenues contemplated in
1986 when the Fund was established.
Second, S. 1066 would amend Code section 9509(c)(1), which
currently contains specific rules concerning the uses of amounts
in the Fund. S. 1066 itself contains rules governing the uses of
the Fund. It would be confusing and unnecessary to have two set;.
of rules governing the permissible uses of the Fund. Therefore.
the bill amends Code section 9509(c)(1) to provide that the
amounts in the Fund may be used only for purposes specified by
-3the bill.
Third, S. 1066 modifies Code section 9509(c)(2), which
provides limitations on expenditures by the Fund. Under current
law, there is a maximum of $500 million per incident. The bill
would empower the President to waive this limit if he determines
it is necessary and in the best interests of the country. Also,
Code section 9509(c)(2)(B) currently limits natural resource
damage assessments and claims to $250 million per incident; this
limitation would be deleted under S. 1066. The Exxon Valdez
spill has demonstrated that natural resource restoration costs
can be very large; thus, the Adminstration does not believe a
separate $250 million per incident limit is appropriate.
Finally, under Code section 4611, in its current form,
collection of the fee does not commence until 30 days after the
passage of qualifying authorizing legislation, defined as any
legislation which is substantially identical to certain
legislation passed by the House of Representatives during the
99th Congress. The bill is similar in most respects to this
prior legislation, and we believe it constitutes "qualifying
authorizing legislation" within the meaning of Code section
4611(c). However, to avoid any question as to whether the Act
does indeed constitute "qualifying authorizing legislation", S.
1066 amends Code section 4611 to provide that collection of the
fee commences 30 days after enactment of S. 1066.
These are the only changes that S. 1066 would make to the
Internal Revenue Code. We believe they are generally consistent
with the intent of Congress when it initially enacted Code
sections 4611(c) and 9509. We also believe this legislation is
extremely important, and should be enacted quickly.
S. 771
S. 771 would amend the Internal Revenue Code to disallow a
deduction for any costs incurred in a cleanup of a spill of oil
or any hazardous substance, unless the Administrator of the
Environmental Protection Agency or the Commandant of the Coast
Guard certifies that the taxpayer has made a good faith effort to
comply with certain Federal laws. The bill would require the
Treasury Department to prepare an estimate of the total revenue
cost from 1970 to 1987 of deductions for cleanup costs that would
not have been deductible under the rules provided by the bill,
and would require the Treasury Department to prepare annual
reports in future years estimating revenue increases from
disallowed deductions. The stated purposes of the bill are (1)
that the public should not pay for discharges of oil or hazardous
substances, either directly through payment of cleanup cost or
indirectly through tax deductions; (2) that those injured by
discharges of oils or hazardous substances should be fully
compensated; (3) that all ecological damages from a discharge
should be mitigated; and (4) that a taxpayer should receive a ta:-.
-4deduction only if the cleanup meets federal standards. The bill
also states its intention that any increase in federal revenues
attributable to disallowed deductions should be dedicated to
cleanup of environmental damage.
We strongly oppose this bill for several reasons. The bill
would violate the fundamental principle of business taxation that
a taxpayer's ordinary and necessary business expenses may be
deducted in computing net income. Expenses incurred in cleanup
of an oil spill satisfy this standard. If a taxpayer fails to
satisfy applicable federal regulations, then the penalty should
be determined under and imposed by those regulations. The denial
of all deductions might bear little or no relation to the
severity of the violation. Denial of a deduction to a taxpayer
who refused to spend any money on a cleanup would be a
meaningless sanction. On the other hand, a taxpayer who spent
large sums in a cleanup effort that was determined after the fact
not to constitute a "good faith effort" to satisfy federal
standards would be denied a deduction, thereby imposing a
significant disincentive to incur any cost at all if it is feared
that the expenditures will be inadequate. Although we fully
agree that cleanup of spills should be conducted in accordance
with federal rules, we do not believe those rules should be
inserted into the tax code.
We believe that the objectives of S. 771 would be better
achieved by enactment of S. 1066. We also believe that the
provisions of S. 771 will result in undue complexity. A taxpayer
would frequently be unaware of whether deductions were allowable
at the time the tax return was filed, requiring amended returns.
Taxpayers would be required to list disallowed expenses on a
separate form. Such expenses would apparently be broadly
defined, resulting in controversy over whether an expense was
part of cleanup costs. Furthermore, the bill would require the
Treasury Department to prepare an estimate of the total revenue
cost from 1970 to 1987 of allowing deductions for cleanup costs,
and would require the Treasury Department to prepare annual
reports in future years estimating revenue increases from
disallowed deductions. We believe that these provisions would
result in unnecessary complexity and effort for taxpayers and the
government.
For these reasons we oppose the enactment of S. 771. This
concludes my prepared remarks. I would be glad to answer any
questions.
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
"'•' 5510
FOR IMMEDIATE RELEASE
June 21, 1989
Michael L. Williams
Appointed Deputy Assistant Secretary
For Enforcement
Secretary of the Treasury Nicholas F. Brady announced the
appointment of Michael L. Williams to serve as Deputy Assistant
Secretary for Enforcement. Mr. Williams will serve as a
principal advisor to the. Assistant Secretary for Enforcement,
with oversight responsibility for the Federal Law Enforcement
Training Center, the U.S. Secret Service, the U.S. Customs
Service, and the Bureau of Alcohol, Tobacco and Firearms. He
will supervise the Office of Law Enforcement, the coordinating
office for Operation Alliance, and the Office of Financial
Enforcement, the implementing agency for the Bank Secrecy Act.
Prior to joining Treasury, Mr Williams served as a Special
Assistant to the Attorney General. He is a former Federal and
state prosecuting attorney, having served at the Department of
Justice from 1984 to 1988 and as an Assistant District Attorney
in his hometown, Midland, Texas. He had also served as a
domestic policy analyst in the area of law enforcement for
BUSH-QUAYLE 88 and as an Economic Development Planner for the
Midland Chamber of Commerce.
Mr. Williams holds a B.A. (1975), an M.P.A. (1979), and a J.D.
(1979) from the University of Southern California. He now
resides in Falls Church, Virginia with his wife Donna.
NB-346
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
June 21, 1989
CONTACT:
Office of Financing
202/376-4350
TREASURY TO AUCTION 2-YEAR AND 4-YEAR NOTES
TOTALING $16,250 MILLION
The Treasury will auction $8,750 million of 2-year notes
and $7,500 million of 4-year notes to refund $17,379 million
of securities maturing June 30, 1989, and to paydown about $1,125
million. The $17,379 million of maturing securities are those
held by the public, including $2,258 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities.
The $16,250 million is being offered to the public, and
any amounts tendered by Federal Reserve Banks as agents for
foreign and international monetary authorities will be added
to that amount. Tenders »for such accounts will be accepted at
the average prices of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $1,434 million of the maturing
securities that may be refunded by issuing additional amounts of
the new securities at the average prices of accepted competitive
tenders.
Details about each of the new securities are given in the
attached highlights of the offerings and in the official offering
circulars.
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TREASURY NEWS
Deportment of the Treasury • Washington, D.c. • Telephone 500-2041;
June 22, 1989
FOR IMMEDIATE RELEASE
Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data
for the month of May 1989.
As indicated in this table, U.S. reserve assets amounted to
$54,976 million at the end of May, up from $50,303 million in April.
U.S . Reserve Assets
(in mi llions of dollars)
End
of
Month
Total
Reserve
Assets
Gold
Stock 1/
Special
Drawing
Rights 2/3/
Foreign
Currencies 4/
50,303
54,976
11,061
11,060
9,379
9,134
20,731
26,234
Reserve
Position
in IMF 2/
1989
Apr.
May
9,132
8,548
1/ Valued at $42.2222 per fine troy ounce.
2/ Beginning July 1974, the IMF adopted a technique for valuing the SDR
based on a weighted average of exchange rates for the currencies of
selected member countries. The U.S. SDR holdings and reserve
position in the IMF also are valued on this basis beginning July
1974.
3/ Includes allocations of SDRs by the IMF plus transactions in SDRs.
4/ Valued at current market exchange rates.
NB-348
TREASURY NEWS *&
Department of the Treasury • Washington, D.c. • Telephone 560-2041
CONTACT: Office of Financing
202/376-4350
FOR RELEASE AT 12:00 NOON
June 23, 1989
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $9,000
million of 364-day Treasury bills
to be dated
July 6, 1989,
and to mature July 5, 1990
(CUSIP No. 912794 UM 4). This issue will result in a paydown for
the Treasury of about $ 225 million, as the maturing 52-week bill
is outstanding in the amount of $9,234
million. Tenders will be
received at Federal Reserve Banks and Branches and at the Bureau
of the Public Debt, Washington, D. C. 20239, prior to 1:00 p.m.,
Eastern Daylight Saving time, Thursday, June 29, 1989.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. This series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing July 6, 1989.
In addition to the
maturing 52-week bills, there are $14,792 million of maturing bills
which were originally issued as 13-week and 26-week bills. The disposition of this latter amount will be announced next week. Federal
Reserve Banks currently hold $2,525 million as agents for foreign
and international monetary authorities, and $7,655 million for their
own account. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills. Tenders from Federal Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at the
weighted average bank discount rate of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
Banks, as agents for foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them. For
purposes of determining such additional amounts, foreign and international monetary authorities are considered to hold $292
million
of the original 52-week issue. Tenders for bills to be maintained
on the book-entry records of the Department of the Treasury should
be submitted on Form PD 5176-3.
NB-349
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
10/87
2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations of the Secretary of the Treasury
shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
of the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the Public Debt.
10/87
TREASURY NEWS
Office of Financing
lepartment of the Treasury • Washington, CONTACT:
D.c. • Telephone
566-2041
202/376-4350
FOR IMMEDIATE RELEASE
June 2 6 , 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
..irt
Tenders for $6,418 million of 13-week bills and for $6,418 million
of 26-week bills, both to be issued on June 29, 1989.
were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-•week bills
maturing September 28, 1989
Discount Investment
Rate 1/
Price
Rate
8.05%
8.08%
8.07%
8.33%
8.36%
8.35%
26--week bills
maturing December 28 , 1989
Discount Investment
Price
Rate
Rate 1/
7.72%
7.80%
7.78%
97.965
97.958
97.960
8.15%
8.23%
8.21%
96.097
96.057
96.067
Tenders at the high discount rate for the 13-week bills were allotted 30%.
Tenders at the high discount rate for the 26-week bills were allotted 52%.
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Received
Accepted
24,760
$
21 ,819.145
18,865
45,720
35,450
42,165
1,124,650
42,715
7,705
35,590
37,855
1,081,925
477,015
$
$24 793,560
Accepted
24,295
17,249,615
16,940
39,485
27,795
23,685
847,270
28,980
9,130
33,365
26,605
948,005
391,145
24,295
$
5 ,444,015
16,940
39,485
27,795
23.685
188,270
24,020
9, 130
33,365
24,205
172.005
391,145
$6,418,090
$19,666,365
$6 .413,405
$21 723,745
1 ,146,735
$22 870.480
$3,348,275
1,146,735
$4,495,010
$15,336,840
813,995
$16,650,335
$2 583,380
313,995
$3 .402,375
1 851,210
1,851,210
1,650.000
L,650,000
71,870
71,870
1,365,530
1,365,530
$24 793,560
$6,418,090
$19,666,365
$6 ,413,405
24,760
5,495.305
18,865
44,990
35.450
37,765
68.150
22,715
7,705
35,590
27,855
122,925
476,015
$
An additional $1,930 thousand of 13-week bills and an additional $123,070
thousand of 26-week bills will be issued Co foreign official institutions for
new cash.
y
Equivalent coupon-issue yield.
NB-350 .
TREASURYNEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT:
FOR IMMEDIATE RELEASE
June 27, 1989
Office of Financing
202/376-4350
RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $8,759 million
of $23,185 million of tenders received from the public for the
2-year notes, Series AB-1991, auctioned today. The notes will be
issued June 30, 1989, and mature June 30, 1991.
The interest rate on the notes will be 8-1/4%. The range
of accepted competitive bids, and the corresponding prices at the
8-1/4% rate are as follows:
Price
Held
Low
High
Average
8.,25%
8..27%
8.,26%
100..000
99..964
99..982
Tenders at the high yield were allotted 48%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Accepted
Received
43,,010
Boston
$
$ 43,010
20,,344,,900
New York
7,452,355
28,,965
Philadelphia
28,965
56,,030
Cleveland
56,030
59,,375
Richmond
59,375
30,,585
Atlanta
30,545
1,,142,,935
Chicago
437,935
88,,515
St. Louis
68,515
29,,465
Minneapolis
94,,330
29,465
31,,680
Kansas City
94,300
1,,080,,290
Dallas
24,080
154,,460
San Francisco
280,290
$23,184,540
Treasury
154,460
Totals
$8,759,325
The $8,759
million of accepted tenders includes $987
million of noncompetitive tenders and $7,772 million of competitive tenders from the public.
In addition to the $8,759 million of tenders accepted in
the auction process, $9 55
million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $9 3 4
million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-351
TREASURY NEWS
Department of the Treasury • Washington,
D.c.Office
• Telephone
566-2041
CONTACT:
of Financing
FOR RELEASE AT 4:00 P.M.
June 27, 1989
202/376-4350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$13,200 million, to be issued July 6, 1989.
This offering
will result in a paydown for the Treasury of about $1,600 million, as
the maturing bills are outstanding in the amount of $14,792 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, July 3, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,600
million, representing an additional amount of bills dated
April 6, 1989,
and to mature October 5, 1989
(CUSIP No.
912794 SZ 8), currently outstanding in the amount of $7,795 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $ 6,600 million, to be dated
July 6, 1989,
and to mature January 4, 1990
(CUSIP No.
912794 TK 0).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing July 6, 1989.
In addition to the maturing
13-week and 26-week bills, there are $9,234
million of maturing
52-week bills. The disposition of this latter amount was announced
last week. Tenders from Federal Reserve Banks for their own account
and as agents for foreign and international monetary authorities will
be accepted at the weighted average bank discount rates of accepted
competitive tenders. Additional amounts of the bills may be issued
to Federal Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that the aggregate amount of
tenders for such accounts exceeds the aggregate amount of maturing
bills held by them. For purposes of determining such additional
amounts, foreign and international monetary authorities are considered to hold $2,212 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $2,504 million as
agents for foreign and international monetary authorities, and $7,655
million for their own account. These amounts represent the combined
holdings
of such accounts for the three issues of maturing bills.
NB-352
Tenders for bills to be maintained on the book-entry records of the
Department
ofseries)
the Treasury
should
be submitted
on Form
PD 5176-1
(for 13-week
or Form
PD 5176-2
(for 26-week
series).
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
10/87
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations of the Secretary of the Treasury
shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
of the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the
Public Debt.
10/87
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE CONTACT: LARRY BATDORF
June 28, 1989
202/566-2041
UNITED STATES SIGNS CONVENTION ON MUTUAL ADMINISTRATIVE
ASSISTANCE IN TAX MATTERS
Ambassador Denis Lamb, the U.S. Permanent Representative to
the Organization for Economic Cooperation and Development (OECD),
signed the Convention on Mutual Administrative Assistance in Tax
Matters in Paris on June 28 , 1989. The Convention provides for
the exchange of tax information between any two parties to the
Convention.
The Convention, developed by the OECD and the
Council of Europe over a five-year period, will apply only to
OECD or Council of Europe member countries that agree to be bound
by it.
Exchange of information under the Convention will be similar
to information exchange taking place currently under a network of
bilateral tax treaties.
Although the Convention also provides
for assistance in collection of taxes and in the service of
documents, the United States will enter reservations on these
forms of assistance, as a party is permitted to do under the
Convention.
The United States will indicate that U.S. authorities may
inform
a U.S.
resident
or
national
before
transmitting
information concerning him under the Convention.
The United
States will issue an administrative procedure generally providing
for such notification to a U.S. resident or national in cases
where such notice is not required by law.
The Convention will be sent to the Senate for its advice and
consent to ratification.
The Convention will be effective for
the United States after U.S. ratification and ratification by
five member countries of the OECD or the Council of Europe.
oOo
NB-353
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT:
FOR IMMEDIATE RELEASE
June 28, 1989
Office of Financing
202/376-4350
RESULTS OF AUCTION OF 4-YEAR NOTES
The Department of the Treasury has accepted $7,527 million
of $20,348 million of tenders received from the public for the
4-year notes, Series P-1993, auctioned today. The notes will be
issued June 30, 1989, and mature June 30, 1993.
The interest rate on the notes will be 8-1/8%. The range
of accepted competitive bids, and the corresponding prices at the
8-1/8% rate are as follows:
Yield
Price
Low
High
Average
8.,19%
8..20%
8..19%
99..782
99..749
99..782
Tenders at the high yield were allotted 50%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
26 037
508 149
18 073
30 232
81 509
16 526
429 559
31 948
16 567
43 159
14 727
266 620
43 986
$7,527,092
26 037
Boston
17 971 649
New York
18 073
Philadelphia
30 232
Cleveland
136 509
Richmond
16 526
Atlanta
164
559
Chicago
56
948
St. Louis
16 569
Minneapolis
43 159
Kansas City
19 227
Dallas
804 122
San Francisco
43 986
Treasury
$20,347,596
Totals
The $7,527
million of accepted tenders includes $620
million of noncompetitive tenders and $6,907 million of competitive tenders from the public.
In addition to the $7,527 million of tenders accepted in
the auction process, $320 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $500 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-354
TREASURYMEWS
Department of the Treasury • Washington, D.c. • Telephone 566-204
FOR IMMEDIATE RELEASE
June 29, 1989
Robert M. Bestani
Appointed Deputy Assistant Secretary for
International Monetary Affairs
Secretary of the Treasury, Nicholas F. Brady, has announced the
appointment of Robert M. Bestani as Deputy Assistant Secretary of
the Treasury for Internationa- Monetary Affairs.
Mr. Bestani will play a key role in developing and implementing
U.S. international economic policies and will focus on U.S.
economic and financial relationships with the other industrial
countries. His responsibilities will also encompass the
International Monetary Fund, third world debt, international
banking issues "and foreign exchange operations.
Prior to becoming Deputy Assistant Secretary, Mr. Bestani was a
Vice President and Global Account Officer with the Bank of
America in New York. In this capacity, his activities included
the management, negotiation and development of the Bank's
relationships with a number of major multinational corporations.
In addition he was responsible for providing advice on corporate
funding in the domestic and international financial markets,
foreign exchange and interest rate risk management, corporate
financial planning and project finance.
Previously, Mr. Bestani was with the Treasury and Finance
Department of Texaco Inc., where he was involved in the domestic
and international money markets and strategic financial planning.
He also has had extensive international banking experience with
Citibank and the Irving Trust.
Living in Tenafly, New Jersey where he serves as an elected
member of the Board of Education, Mr. Bestani holds a M.B.A from
the University of Chicago and a B.A. in International Economics
from Rutgers University.
NB-355
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
....; 5310
FOR IMMEDIATE RELEASE
June 29, 1989
Statement of
Nicholas F. Brady
Secretary of the Treasury
The President has made a capital gains tax differential a
key element of the Administration's economic program.
It will
lower the cost of capital, create incentives for investment in
the long-term productive capacity of American industry, make
American firms more competitive internationally, and create new
job opportunities.
All Americans will benefit.
We will
emphasize these economic benefits as we work with Congress to
achieve enactment of the capital gains measure.
NB-356
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
June 29, 1989
202/376-4350
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $9,003 Million of 52-week bills to be issued
July 6, 1989,
and to mature July 5, 1990,
were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Investment Rate
Rate
(Equivalent Coupon-Issue Yield)
Low - 7.55% 8.12%
High
7.62%
8.20%
Average 7.58%
8.16%
Tenders at the high discount rate were allotted 79%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
MR-1^7
23 215
19 263 425
16 065
25 670
24 625
15 645
034 035
22 490
13 530
34 720
8 870
986 450
$21,714,425
245 685
$ 23,215
8,268,925
16,065
25,670
24,625
15,645
146,935
19,490
13,530
34,720
8,870
159,450
245,685
$9,002,825
$18,272,935
641,490
$18,914,425
2,800,000
$5,561,335
641,490
$6,202,825
2,800,000
-0$21,714,425
-0$9,002,825
Price
92.366
92.295
92.336
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
June 30, 1989
EMILY FORD COOKSEY
APPOINTED DEPUTY TREASURER OF THE UNITED STATES
Secretary of the Treasury, Nicholas F. Brady, has
named Emily Ford Cooksey as the Deputy Treasurer of the
United States.
Mrs. Cooksey has been with the Treasury Department
since 1985 serving as the Director, Office of Administrative
Operations. During this time, she also managed the administrative services for the 1987 Presidential Task Force on Market
Mechanisms in New York City. Prior to joining Treasury, she was
Director for Administrative Operations for the 1985 Presidential
Inaugural Committee after having served on the staff of the 1984
Republican National Convention in Dallas, Texas.
From 1981 to 198 5, Mrs. Cooksey served in the White House
as Executive Assistant to the Assistant to the President for
Management and Administration, except for a period in 1983 when
she helped organize the 1983 Economic Summit hosted by the
President in Williamsburg, Virginia.
Mrs. Cooksey served on the staff of the George Bush
for President Campaign in 1979 and 19 80. She then worked in
the Vice Presidential Scheduling Office in the 1980 Reagan-Bush
Campaign and in the Vice President's Office for the 1981
Presidential Inaugural Committee.
Mrs. Cooksey v/as born June 6, 195 8 and is from Houston,
Texas. She resides with her husband, Paul Cooksey, in
Alexandria, Virginia.
oOo
NB-358
2041
TREASURY, NEWS
Department of the Treasury • Washington,CONTACT:
D.C. • Office
Telephone
566-2041
of Financing
5310
202/376-4350
FOR IMMEDIATE RELEASE
July 3, 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,602 million of 13-week bills and for $6,610 million
of 26-week bills, both to be issued on
July 6, 1989,
were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-•week bills
maturing October 5, 1989
Discount Investment
Price
Rate
Rate 1/
7.90%
7.97%
7.96%
8.17%
8.25%
8.24%
26-•week bills
maturing January 4, 1990
Discount Investment
Rate
Rate 1/
Price
98.003
97.985
97.988
7.58%
7.64%
7.63%
7.99%
8.06%
8.05%
96.168
96.138
96.143
Tenders at the high discount rate for the 13-week bills were allotted 17%
Tenders at the high discount rate for the 26-week bills were allotted 57%
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
TENDERS RECEIVED AND ACC:EPTED
(In Thousands)
Received
Accepted
Received
$
31,615
23,096,125
16,205
47,365
47,460
36,400
928,970
24,970
11,270
44.195
32,765
727,850
547,625
$
31,615
5,558,830
16,205
47,365
47,460
36,400
87.470
24,970
11,270
44,195
32,765
115.850
547,625
$25,592,815
$
Accepted
29,015
19,693,930
14,645
35,030
37,850
32,410
1,369.620
28,595
10,110
44,935
21,285
719.400
514,945
$
29,015
5,113,570
14,645
35,030
37,850
32,410
555,320
28,595
10,110
44,935
21,285
172.400
514,945
$6,602,020
: $22,551,770
$6,610,110
$20,923,415
1,296,960
$22,220,375
$2,232,620
1,296,960
$3,529,580
: $17,611,935
:
1,105,540
: $18,717,475
$1,970,275
1,105,540
$3,075,815
2,455,435
2,155.435
:
2,400,000
2,100,000
917,005
917,005
:
1,434,295
1,434,295
$25,592,815
$6,602,020
: $22,551,770
$6,610,110
An additional $30,595 thousand of 13-week bills and an additional $48,205
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
TREASURY NEWS _
Department of the Treasury • Washington, D.c. • Telephone 566-2041
CONTACT: Office of Financing
202/376-4350
FOR RELEASE AT 4:00 P.M.
July 3, 1989
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$13,200 million, to be issued July 13, 1989.
This offering
will result in a paydown for the Treasury of about $1,800 million, as
the maturing bills are outstanding in the amount of $15,010 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, July 10, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,600
million, representing an additional amount of bills dated
April 13, 1989,
and to mature October 12, 1989
(CUSIP No.
912794 TA 2 ) , currently outstanding in the amount of $7,901 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,600 million, to be dated
July 13, 19 89,
and to mature January 11, 1990
(CUSIP No.
912794 TL 8 ) .
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing July 13, 19 89.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities, to
the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them. Federal
Reserve Banks currently hold $1,602 million as agents for foreign
and international monetary authorities, and $3,804 million for their
own account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series)
NB-360
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
10/87
2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations of the Secretary of the Treasury
shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
of the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
the
Public Debt.
10/87
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
July 5, 1989
CONTACT:
Office of Financing
202/376-4350
TREASURY TO AUCTION $7,250 MILLION OF 7-YEAR NOTES
The Department of the Treasury will auction $7,250 million
of 7-year notes to refund $4,437 million of 7-year notes maturing
July 15, 1989, and to raise about $2,825 million new cash. The
public holds $4,437 million of the maturing 7-year notes, including
$390 million currently held by Federal Reserve Banks as agents for
foreign and international monetary authorities.
The $7,250 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks as agents for foreign
and international monetary authorities vill be added to that
amount. Tenders for such accounts will be accepted at the
average price of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks for
their own accounts hold $286 million of the maturing securities
that may be refunded by issuing additional amounts of the new
notes at the average price of accepted competitive tenders.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
oOo
Attachment
NB-361
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 7-YEAR NOTES
TO BE ISSUED JULY 17, 1989
July 5, 1989
Amount Offered:
To the public
$7,250 million
Description of Security:
Term and type of security
7-year notes
Series and CUSIP designation .... G-1996
(CUSIP No. 912827 XT 4)
Maturity date
July 15, 1996
Interest rate
To be determined based on
the average of accepted bids
Investment yield
To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
January 15 and July 15
Minimum denomination available .. $1,000
Terms of Sale;
Method of sale
Yield auction
Competitive tenders
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders ......
Accepted in full at the average price up to $1,000,000
Accrued interest
payable by investor
None
Payment Terms:
Payment by noninstitutional investors
Full payment to be
submitted with tender
Payment through Treasury Tax
and Loan (TT&L) Note Accounts ... Acceptable for TT&L Note
Option Depositaries
Deposit guarantee by
designated institutions
Acceptable
Key Dates:
Receipt of tenders
Wednesday, July 12, 1989,
prior to 1:00 p.m., EDST
0 ...
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury .. Monday, July 17, 1989
b) readily-collectible check .. Thursday, July 13, 1989
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-204
FOR IMMEDIATE RELEASE
July $, 1989
Contact: Peter Hollenbach
(202) 376-4302
FINAL REGULATIONS PUBLISHED FOR STATE AND LOCAL
GOVERNMENT SERIES (SLGS)
U.S. TREASURY SECURITIES
The Treasury Department today announced the publication of final
regulations regarding its State and Local Government Series
securities (SLGS). The final regulations are effective August 1,
1989, for Demand Deposit securities and September 1, 1989, for
all other securities offered in the series.
SLGS are nonmarketable securities issued to state and local
governments and certain other entities as an investment medium
for the proceeds of tax exempt securities issues that are subject
to yield restrictions or arbitrage rebate requirements under the
Internal Revenue Code.
Time Deposit Securities
Treasury will issue a new SLGS interest rate table each day,
instead of weekly, for Time Deposit securities. Although the new
Time Deposit SLGS rates do not become effective until September 1,
they will be available on the Commerce Department Economic
Bulletin Board and at the Federal Reserve Banks beginning on
July 10. Call 202-377-3870 for information about the EBB.
The formula to calculate the redemption proceeds for Time Deposit
securities issued beginning on September 1 and redeemed before
maturity has been modified in a way that generally will result in
higher proceeds than under the formula for earlier issues of
SLGS. The certification requirements in place since October
1987, pertaining to investments of proceeds derived from the sale
of escrowed open market securities, have been incorporated in the
final regulations.
Demand Deposit Securities
The final regulations provide for an extension of the maturity of
Demand Deposit securities from overnight to 90 days in the event
the debt ceiling prevents the Treasury from issuing new 1-day
NB-362
securities. This change will assure that investors, who will
have the option to redeem their Demand Deposit SLGS earlier
without penalty, can continue to earn interest.
Interest rates on Demand Deposit securities will be calculated
using a formula based on the results of the most recent weekly 91
day (3- month) Treasury bill auction. Rates for these securities
were previously calculated using an adjustment to the federal
funds rate. In a separate notice, also released today, the
Treasury announced a reduction in the administrative cost
component and a small increase in the marginal tax rate component
of the rate formula. Investors in Demand Deposit securities will
be required to certify that neither the aggregate issue price nor
the stated redemption price at maturity of the tax exempt bonds
is in excess of $35 million.
Special Zero Interest Securities
The final regulations create special Zero Interest securities,
whose terms are similar to Time Deposit securities, except that
the subscriber need not certify that all the proceeds of a tax
exempt securities issue that are subject to yield restrictions
are being invested in SLGS. This new security is intended to
increase the flexibility of the SLGS program.
Approximately $155 billion of Time and Demand Deposit securities
are outstanding.
oOo
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
•K 5310
Contact: Peter Hollenbach
(202) 376-4302
FOR RELEASE AT 3:00 PM
July 7, 1989
TREASURY ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR JUNE 1989
The Department of the Treasury announced activity figures for the
month of June 1989, of securities within the Separate Trading of
Registered Interest and Principal of Securities program, (STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$346,648,566
Held in Unstripped Form
$264,058,156
Held in Stripped Form
$82,590,410
Reconstituted in June
$3,680,440
The attached table gives a breakdown of STRIPS activity by
individual loan description.
The Treasury now reports reconstitution activity for the month
instead of the gross amount reconstituted to date. These monthly
figures are included in Table VI of the Monthly Statement of the
Public Debt, entitled "Holdings of Treasury Securities in Stripped
Form." These can also be obtained through a recorded message on
(202) 447-9873.
oOo
IB-363
TABLE VI—HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, JUNE 30, 1989
(In thousands)
26
Principal Amount Outstanding
Loan O m c n p b o n
Raconstrtutad
This Month'
Maturity Data
Total
Unstnpoad Form
Stnppad Form
11-5/8% Nota C-1994
11/15/94
S6.658.554
S5.586.554
S1.072.000
11-1/4% Nota A-1995
2/15/95
6.933.861
6.184.101
749.760
11-1/4% Nota 8-1995
5/15/95
7.127.086
5.312.206
1.814.880
63.200
10-1/2% Nota C-1995
8/15/95
7.955.901
7.123.501
832.400
117.600
-0$7,840
9-1/2% Nota 0-1995
11/15/95.
7.318.550
6.431.750
886.800
58.400
8-7/8% Nota A-1998 .
2/15/96
8.411.519
8.109.119
302.400
3.200
7-3/8% Nota C-1996
5/15/96
20.085.643
19.882.443
203.200
7-1/4% Nota 0-1996
11/15/96
20.256.810
20.126.010
132,800
8-1/2% Nota A-1997
5/15/97
9.921.237
9.776.037 j
8-5/8% Nota 8-1997
8/15/97
9.362.836
9.362.836 '
-0-
145.200
-0100.800
-0-0-
8-7/8% Nota C-1997
11/15/97
9.806.329
9.773.129 j
35.200
-0-
8-1/8% Nota A-1998
2/15/96
9.159.068
9.158.428 i
640
-0-0-
9 % Nota 8-1998
5/15/98
9.165.387
9.135.387
30.000
9-1/4% Nota C-1998
8/15/96
11.342.646
11.253.046
89.600
-0-
9.902.875
9.902.875
-0-
-0-
8-7/8% Nolo 0-1998
• 11/15/98.
8-7/8% Nota A-1999
2/15/99
9.719.628
9.719.628
-0-
-0-
9-1/8% Nota 8-1999
5/15/99
10.047.103
10.047.103
-0-
-0-
11 -5/8% Bond 2004
11/15/04
8.301.806
3.266.608
5.035.200
1 2 % Bond 2005
5/1S/0S
4.260.758
1.800.908
2.459.850
66.000
10-3/4% Bond 2005.
a/15/05
9.269.713
6.467.313
2.802.400
165.600
9-3/8% Bond 2008
478.400
2/15/06
4.755.916
4.755.916
.11/15/14
6.005.584
1.378.384
11-1/4% Bond 2015
2/15/15
12.667.799
2.830.839
9.836.960
-0-
10-5/8% Bond 2015
8/15/15
7.149.916
1.847.516
5.302.400
40.000
-0-
11-3/4% Bond 2009-14
-04.627.200
-049.600
9-7/8% Bond 2015.
11/15/15
8.899.659
2.463.059
4436.800
9-1/4% Bond 2016.
2/15/16
7.266.854
5.164.454
2.102.400
7-1/4% Bond 2016.
S/1S/16
18.823.551
14.948.351
3.875.200
7-1/2% Bond 2016
11/15/16
18.864.448
9.719.988
9.144.460
46.000
8 0 / 4 % Bond 2017
5/15/17
18.194.169
7.592.729
10.601.440
284.800
8-7/8% Bond 2017
8/15/17
14.016.858 |
9-1/8% Bond 2018
5/15/18
9 % Bond 2018
11/15/18
8-7/8% Bond 2019
2/15/19
Total
8.708.639
!
9.032.870 !
19.250.793
14JI (LAM CAM
9.028.056
4.988.800
-0-
4.883.039
3.825.600
62.400
4.467.270
4.565.600
589.800
16.559.593
2.691.200
416.000
32.590.410
3.680.440
264.058.156 |
' Effactiva May i. 1967, aacuntiaa haw in stnopad formwara •hojoia for raconstitution to thaw unstnpoad form
Now: O n tha 4th workday of
Tha oaiancas m irna tai
-01.128.800
month a recording, of Taota VI wm oa avatiaOto aftar 3:00 p m Tha ialapnone numoar is (202) 447-9873
n tuotact to audit and suoaaquant adjustments.
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
Remarks by
Secretary of the Treasury
Nicholas F. Brady
at a Press Briefing
Washington, D.C.
July 10, 1989
Good afternoon. Before leaving to join the President at the
Economic Summit in Paris, I want to say something about the work
that will be going on here in Washington in the House-Senate
conference on the President's savings and loan reform plan.
We are on the brink of a major achievement. The Congress
has worked diligently on the President's plan and our hope is
that the conference will complete its deliberations in time for a
bill to be sent to the President for signature well before the
scheduled August Congressional recess.
When President Bush announced his plan back in February, he
urged the Congress to take steps to assure that such a crisis
could never happen again.
The most important reform was the
President's proposal that S&Ls be required to meet the same
capital standards that are applied to national banks.
As we
enter the conference, we're extremely optimistic that this is
exactly what will emerge. The Congress is to be commended for
standing up to significant S&L industry lobbying and adopting
capital standards that will require all thrift owners to put
their own money at risk ahead of the taxpayers'.
But in its eagerness to resolve the savings and loan crisis,
the House has adopted a financing plan that represents a
dangerous precedent.
As you know, the Administration, the
Congress, the Federal Deposit Insurance Corporation, and the
Federal Reserve all agree that $50 billion is needed to resolve
currently insolvent S&Ls and those likely to become insolvent
over the next three years.
How that money is raised is the
issue.
The President proposed creating a private company, the
Resolution Funding Corporation (REFCORP), which would issue bonds
to raise the $50 billion.
The Senate adopted the President's
proposal, but the House passed an alternative plan requiring the
Treasury to borrow the $50 billion directly.
NB-364
The Bush-Senate plan would back the REFCORP bonds with
Treasury bonds purchased with private funds from the S&L
industry. That would provide the money necessary to pay off the
REFCORP bonds, and it would lock the S&L industry funds into
REFCORP. A combination of industry and taxpayer funds would pay
the interest.
Under the House plan, on the other hand, the industry money
isn't locked in and there is no guarantee that the S&L industry
won't succeed in reclaiming these funds for its own uses in
future years. That is exactly what happened last year when Farm
Credit System member banks persuaded Congress to allow them to
reclaim a substantial portion of their funds that had been
pledged to the resolution of the farm credit crisis the previous
year.
Proponents of the House plan claim it will save the
taxpayers at least $125 million per year. But they are shortsighted in counting these savings, because they have failed to
think through the consequences of their proposal.
By issuing
Treasury bonds for direct government financing, the House plan
places the full burden of the $50 billion on the federal budget,
thereby exceeding Gramm-Rudman-Hollings deficit reduction
targets.
To make the plan work, therefore, they will need a
Gramm-Rudman-Hollings waiver.
Once it becomes clear to the
financial markets that we're no longer going to observe GrammRudman-Hollings budget discipline, we are likely to see interest
rates respond. An increase of only one-hundredth of one percent
would more than wipe out the House plan's anticipated savings.
So the President's plan is cheaper for the taxpayer: first
because it preserves Gramm-Rudman-Hollings, and second because
it locks industry money into the solution.
The Bush-Senate plan counts every dollar of taxpayer funds
in the budget deficit and within Gramm-Rudman-Hollings targets.
There is no waiver to future Gramm-Rudman-Hollings targets. Only
private funds are counted off-budget, as they should be. The
House plan claims to be on-budget, but the Gramm-Rudman waiver
makes the term "on-budget" meaningless.
Finally, the Bush-Senate plan would be harder for other
spending programs to duplicate. To qualify for this sort of a
program, a project would have to provide substantial private
funds up front. The House plan sets a precedent for seeking an
exemption from Gramm-Rudman-Hollings for every new spending
program that finds its way through Congress.
In closing, I'd like to congratulate the Congress for acting
wisely in insisting on strong capital standards to ensure that
the savings and loan crisis can never be repeated. And I urge
the Congress to act just as wisely by adopting a financing plan
that makes sure the industry pays its fair share and preserves
essential budget discipline.
TREASURY NEWS
Department of the Treasury • Washington,
D.c. •
Telephone
566-2041
CONTACT:
Office
of Financing
202/376-4350
FOR IMMEDIATE RELEASE
July 1 0 , 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,615 million of 13-week bills and for $6,603 million
of 26-week bills, both to be issued on July 13, 1989,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing October 12, 1989
Discount Investment
Rate
Rate 1/
Price
7.74%a/
7.77%
7.76%
8.00%
8.04%
8.03%
98.044
98.036
98.038
26-week bills
maturing January 11, 1990
Discount Investment
Price
Rate
Rate 1/
7.47%
7.52%
7.50%
7.87%
7.93%
7.90%
96.224
96.198
96.208
a/ Excepting 1 tender of $6,670,000.
Tenders at the high discount rate for the 13-week bills were allotted 68%.
Tenders at the high discount rate for the 26-week bills were allotted 25%.
Location
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
i
42,620
18,601,455
19,395
42,890
44,015
32,510
1,043,025
53,920
10,585
40,745
26,180
1,013,445
640,795
; 42,620
5,463 ,105
19 ,395
42 ,890
43 ,375
32 ,510
60 ,025
33 ,280
10 ,585
40 ,745
26 ,180
159 ,445
640 ,795
i
32,710
17,369,950
19,540
32,570
42,000
29,635
815,980
38,120
10,685
48,205
23,615
993,060
651,600
!
32,710
5,054 ,450
19 ,540
32 ,570
42 ,000
29 ,635
90 ,980
30 ,120
10 ,685
45 ,885
23 ,615
539 ,060
651 ,600
TOTALS
$21,611,580
$6,614,950
$20,107,670
$6,602,850
118,275,175
1,322,325
119,597,500
$3,578,545
1,322,325
$4,900,870
15,473,890
1,269,030
116,742,920
$2,269,070
1,269,030
$3,538,100
1,903,830
1,603,830
1,900,000
1,600,000
110,250
110,250
1,464,750
1,464,750
$6,614,950
$20,107,670
$6,602,850
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
$21,611,580
An additional $30,650 thousand of 13-week bills and an additional $359,850
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
TREASURY NEWS _,
Department of the Treasury • Washington, D.C. • Telephone 566-2041
S&L FINANCING PLAN
HOUSE
BUSH/SENATE
Preserves GRH fiscal discipline
o
o
GRH fiscal discipline
More expensive
Cheaper
— Only one basis point increase in
interest rates wipes out savings
-- Lower interest rates
o
Removes
Protects taxpayer by locking in
industry funds
Possible for industry to get money
back
Sound budget accounting
GRH waiver makes term "on-budget"
meaningless
Private money should be off
budget and is off-budget
Avoids precedent for other big
spending programs
o
Sets precedent for other budgetbusting programs
June 29, 1989
ADMINISTRATION'S LIST OF
MAJOR AND IMPORTANT ISSUES
IN THE FINANCIAL INSTITUTIONS REFORM,
RECOVERY AND ENFORCEMENT ACT OF 1989
MAJOR ISSUES
Thrift Capital Standards
a. Tangible capital
b.
Subsidiary capital deduction
c.
Capital standard for temporary suspension of insurance
at discretion of FDIC
d.
Mortgage servicing rights
Financing
a. Senate plan vs. House plan
b.
Cap on SAIF obligations
RTC
a. Streamlining
b.
Note cap
c.
"Right of first refusal"
d.
Appropriation for line of credit from Treasury
e.
Authority to establish Federal mutuals and bridge banks
f.
Open thrift assistance
Subsidized Housing
State-Chartered Thrift Regulator
IMPORTANT ISSUES
Legislative and Budgetary Bypass:
OCC and Thrift Regulator
Junk Bonds
State Thrift Powers
Qualified Thrift Lender Test
a. House version vs. Senate version
b.
Consequences of failure
c.
Eligibility of banks and credit unions to become FHL
Bank members
Continuation of Current Bank Board Chairman
Pay Cap Exemptions
Enforcement Issues
a. Approval of employment of senior financial institutions
officials by regulatory agencies
b.
Disposition of civil penalties
c.
Grand jury secrecy
d.
Civil penalty provisions
e.
Justice Department fraud field offices
f.
Civil statute of limitations
g.
FDIC as agency of the United States
h.
Priority of FDIC claims
i.
Litigating authority
FHL Banks' $300 Million Annual Contribution
a. Contribution for REFCORP principal
b.
Contribution for REFCORP interest
Exemptions from SAIF-BIF Conversion Moratorium
Interim Funding for New Agencies
FDIC Accountability
a. Reporting requirements
b.
FDIC note cap
Composition of Federal Housing Finance Board
Cost of Reviewing 1988 FSLIC Deals
Community Reinvestment Act Provisions
Studies of Government Sponsored Enterprises
a. Capital requirements
b.
Relationship between public debt and GSE activities
Appropriations/Authorizations
ADMINISTRATION POSITION OH ISSUES IH THE
FINANCIAL IH8TITUTIOH8 REFORM,
RECOVERY AMD BMFORCEMEMT ACT OF 1989
MAJOR ISSUES
^raa of Concern
1.
Senate
House
Administration
Position
Thrift capital
a. Tangible capital
b. subsidiary
capital deduction
National bank
tangible capital
standard by June
1, 1991 (probably
3 percent)•
Thrifts with
goodwill must
have only 1.5
percent tangible
capital by 1991
deadline, with a
maximum of 15
years to amortise
the goodwill.
(Seo. 301, HOLA
5<t), p. 260)
Thrifts must
deduct from
capital investments in, and
loans to,
subsidiaries
engaging in
activities not
allowed for
national banks
(with certain
exceptions)• 5year phase-in.
(Sec. 301, HOLA
In essence 3
percent tangible
capital is
required by June
1, 1990. Thrifts
with supervisory
goodwill and/or
certain MSRs must
have only 1.5
percent tangible
capital by 1990
deadline, with ±
1/2 years to
phase-up to 3
percent (January
1, 1995). (Seo.
314, p. 235)
Nominally
similar,
except extremely
broad grandfather
provision. Most
thrifts allowed to
maintain current
levels and types
of non-conforming
activities without
deduction from
capital, including
direct investment
in real estate.
(Sec. 314, p. 240)
Prefer House
provision.
Prefer Senate
provision.
Area of Concern
Senate
c. Capital standard
for temporary
suspension of
insurance at
discretion of FDIC
Zero tangible
capital, but some
additional
requirements for
thrifts with
goodwill. (Sec.
913, p. 445)
d. Mortgage
servicing rights
Accounting for
MSRs in thrifts
will be no less
stringent than
that for national
banks (OCC limits
purchased MSRs to
a max1mum of 25%
of core capital;
retained M8R a s not
allowed in
capital)• (Sec.
301, HOLA 5(t), p.
260)
2.
»<*»jin«Hnq
a. Senate plan vs.
House plan
$50 billion
borrowed by
REFCORP to ensure
industry
contributions and
maintain 6-R-H
process intact.
(Sec. 502, p. 375)
House
Zero tangible
capital and aero
risk-adjusted
capital (which
includes
supervisory
goodwill)• (Sec.
926, p. 654-655)
Accounting for
purchased and
retained M8R a s to
conform to FDIC
treatment of
purchased MSRs.
FDIC places no
limit on amount of
purchased MSRs
allowed in core
capital, but MSRs
are amortised over
15 years or their
useful life,
whichever is less.
(Sec. 314, p. 236)
$50 billion
borrowed by
Treasury, but is
exempted from 6-RH. (Sec. 502, p.
393)
Adm. Position
Prefer Senate
provision.
Prefer the Senate
provision,
especially for
retained mortgage
servicing rights.
No regulator
(including the
FHLBB) currently
permits retained
MSRs to be
included in
capital.
Prefer the Senate
version. The
large 6-R-H
exemption sets an
unacceptable
precedent.
Area of Concern
House
Senate
a\Om. Position
b. Cap on 8AIF
obligations
For thrifts that
fail from 1992-99,
Issues are what
amount of federal
funds is available
to 8AIF; whether
appropriation of
these amounts is
mandatory or
discretionary; and
whether a large
contribution could
be made in a singli
year.
Treasury funds
authorised for
contributions to
8AIF from FT
1991-99.
Uncertain whether
appropriations
would be mandatory
or discretionary.
In addition, 8AIF
obligations
(spending) are
subject to a $24
billion cap during
same period.
Appears that a
large Federal
contribution (up
to $24 billion)
could be made in
one year. (Sec.
211, p. 63)
Unlimited Treasury
funds authorised
for contributions
to 8AIF from FY
1992-99. But
appropriations
would be
discretionary.
(Seo. 212, p. 84)
3
(1) Should clarify
that
appropriation is
mandatory and that
a large amount
could be available
in a single year.
(2) The cap should
be on Treasury's
contribution to
8AIF spending
rather than on
8AIFas
obligations (which
would enable 8AIF
to spend resources
it has in excess
of the Treasury
funds, if it needs
to do so) •
Araa of Concern
Senate
House
Adm. Position
3. RTC
a. Streamlining
Numerous
provisions must be
added or deleted
from each bill in
order for RTC to
function
effectively.
Examples not
exhaustive.
Problem provisions
in Senate bill
include the
following (unless
otherwise noted,
all cites are to
subsections of new
section 211 of the
Federal Home Loan
Bank Act, which is
added by Section
501 of bill)s
requiring 12
Regional Advisory
Board districts
[(t), p. 3701;
distressed areas
defined and RTC
prohibited from
selling properties
below 95% of an
established market
value [(t), p.
372]; unnecessary
expansion of
membership of the
Oversight Board
[(d), p. 348];
submitting annual
and semiannual
reports to
Congress on the
operations.
Problem provisions
in House bill
includes
requiring both
national and 12
regional advisory
boards [(h), p.
326]; establishing
a real estate
asset division
with oversight for
all actions
involving real
property assets
[(g), P- 324];
unnecessary
expansion of the
membership of the
Oversight Board
[(o), p. 309];
submitting
detailed
employment plan
to Congress before
hiring any
employees [(t), p.
309]; extensive
reporting
requirements to
Congress [ (w) , p.
355]; making the
RTC a whollyowned government
Provisions must be
rewritten in
conference to
preserve 3 basic
goals: (1) the
R T C oversight
Board must
maintain broad
oversight
authority over the
RTC because of the
huge infusion of
taxpayer funds;
(2) the FDIC must
handle all the
basic operations
of the RTC without
micro-management;
and (3)
recognising
Congressional
concerns, neither
the RTC nor the
Oversight Board
should be
hamstrung with
specific,
inflexible rules
written into the
legislation and
overly burdensome
reports.
Senate
activities,
budget, etc.
[(s), p. 364];
lack of
enforcement
powers; not
authorising RTC to
organise Federal
mutuals or bridge
banks for thrifts.
corporation
[505]•
r;
Senate
No provision.
House
Contains two caps.
Taken together
they provide that
total RTC
obligations at
any time may not
exceed the sum of
amounts actually
received from
REFCORP and the
amounts actually
borrowed from the
Treasury ($5
billion maximum).
Guarantees would
be counted
according to
total potential
loss, rather than
expected loss.
(Sec. 501, p. 357)
Adm. Position
Oppose House
provision, because
it:
o severely
curtails RTC
working capital
financing;
o creates strong
pressure for asset
dumping;
o strongly
discourages
liquidations;
o assures that RTC
would get off to
slow start; and
o would require
Congress to
revisit issue and
provide more
working capital
although
RTC
would
Prefer cap
which
have
plenty
of
limits RTC"s
assets.
obligations to
REFCORP proceeds
authorised, amount
of outstanding
Treasury
borrowing, and the
market value of
assets held by
RTC. Expected
loss on
guarantees would
count toward the
cap.
Area of Concern
Senate
o. "Right of First No provision.
Refusal11
d. Appropriation
for line of credit
from Treasury
RTC authorised to
borrow and
Treasury directed
to lend up to $5
billion from
Treasury.
(Sec. 501, p.
363)
House
Mandates 3 month
"right of first
refusal" to public
agencies, nonprofit
organisations, or
low income
families on
eligible RTC
residential
property. RTC
required to sell
property at "below
the net
realisable market
value." RTC may
provide 100
percent financing
of purchase price,
and must provide
below market
interest rates
under certain
circumstances
•
RTC shall borrow,
(Seo.
501, p.
338)
as
provided
for
in
advance in
appropriations
acts, up to $5
billion from
Treasury* (Bee.
501, p. 338)
Adm. Position
Oppose House
version, because
the right of first
refusal provision
will significantly
increase cost of
entire program to
the taxpayers.
Prefer Senate
bill, because its
language makes
appropriations
unnecessary.
House bill would
require advance
Congressional
approval before
drawdown of line
of credit, which
defeats purpose of
emergency
availability.
Area of Concern
Senate
House
Adm. Position
e. Federal mutuals
and bridge banks
(1) Federal mutual No provision on
savings association
federal mutuals.
(2) Bridge banks
for failed thrifts
Permits FDIC to
form bridge banks
for insured banks
only. (Seo. 213,
p. 102)
Authorises RTC to
organise federal
mutuals, which
shall be chartered
by DOTS and
insured under
8AIF. (Seo. 501,
p. 321)
Same as Senate.
(Seo. 212, p. 132)
Prefer House
provision, but
needs technical
changes to make
sure RTC has
flexibility to
establish
institutions to
hold insured
deposits, which
may be sold as
core deposits,
rather than paying
off depositors
immediately.
Neither bill
permits the FDIC
to form a bridge
bank or new bank
to take over the
assets and
liabilities of a
failed thrift.
Both RTC and FDIC
should have
authority to form
such institutions
where desirable.
Area of Concern
f. Open thrift No provision.
assistance
4. Subs;
Housing
Senate
House
Requires the RTC
to consider
granting
assistance to open
thrifts with
negative tangible
capital in
economically
depressed areas.
Negative tangible
capital position
must be
substantially
attributable to
acquisition and
merger
transactions
instituted by the
FHLBB. (Seo. 215,
p. 173)
Requires FHLBanks
to subsidise
advances to
members engaged in
lending for lowand moderateincome housing.
Begins with $75
million per year
and escalates to
at least $150
million in 1995.
(Sec. 717, p. 447)
9
Adm. Position
Oppose House
provision. It
would be
inappropriate to
encourage RTC to
bailout managers
or shareholders of
tangible insolvent
thrifts. This is
almost certain to.
be more expensive
than other forms
of assistance.
Oppose House
provision, since
low-income housing
subsidies should
go through normal
Congressional
authorisation and
appropriation
process•
*
Area of Concern
5. State-Chartered
Thrift Regulator
Senate
Primary federal
regulator of
state-chartered
thrifts will be
the Chairman of
08A. (Seo. 301,
HOLA 4(a), p. 193)
House
Adm. Position
Primary federal
regulator of
state-chartered
thrifts will be
Chairman of FDIC.
(Sec. 201, p. 9)
Prefer Senate
provision.
The FDIC, would be
forced to assume
burden of
supervisory
responsibilities
for 1,200 statechartered thrifts
in addition to the
new authority for
thrift insurance
and RTC case
resolutions. Also
violates
underlying
principle in
FIRREA to separate
insurance and
regulatory
functions in order
to achieve two
different layers
of protection for
safety and
soundness.
Finally, should
not fragment
current integrated
thrift examination
and supervision
workforce between
two regulators.
IMPORTANT
Area of Concern
1. Legislative and
Budgetary Bypass: OCC
«nd Thrift Regulator
2.
Junk Bonds
Senate
Provides legislative
and budgetary
bypasses: OCC and
COSA would submit
legislative
recommendations
directly to Congress,
i.e., Treasury and
Executive branch
review would be
prohibited. Budget
estimates would be
sent to Congress and
the President
concurrently. (Sec.
301, HOLA 4(g), p.
196)
Retains
ability of
federal thrifts to
invest 11 percent of
assets in junk bonds.
State thrifts have
same limit unless
FDIC approves greater
amount within oneyear. Four-year
transition rule.
(Sec. 223, p. 173)
House
Adm. Position
OCC and DOTS, both
as Treasury bureaus,
would be subject to
Executive branch
review of legislative
recommendations and
budgets. (Seo. 302,
p. 204)
Prefer House
provision. Senate
provision is
unconstitutional.
A legislative bypass
for a subordinate
unit of a cabinet
department would be
unprecedented•
Prohibits all thrifts
from investing in
junk bonds, whether
directly or through a
subsidiary.
Overbroad definition
of "junk bond." Twoyear transition rule.
(Seo. 223, p. 198)
Junk bond
investments should
be permitted, but
only in subsidiaries
and only if thrift's
investment in the
subsidiary is
completely deducted
from thrift*s
capital. Definition
of "junk bond"
should be narrowed.
Area of Concern
3. state Thrift
Powers
(Restrictions on
state thrift
activities that are
engaged in directly,
rather than through a
subsidiary.)
Senate
House
Direct or equity
investments
prohibited.
Direct or equity
investments
prohibited.
State thrifts may
not engage in other
activities broader
than those permitted
for federal thrifts
unless they (1) meet
the fully phased-in
capital standards,
and (2) receive FDIC
approval that the
proposed activities
pose no significant
risk to the deposit
insurance fund.
(Seo. 223, p. 172)
Exception for
activities conducted
as agent, which are
riskless.
General FDIC
authority to prohibit
any activity that
poses a serious risk
to the deposit
insurance fund.
(Sec. 222, p. 168)
No specific
restriction on other
state powers that are
broader than federal
powers•
General FDIC
authority to prohibit
any activity that
poses a serious risk
to the deposit
insurance fund.
(Sec. 315, p. 249)
Adm. Position
House provision is
closer to original
Administration bill.
Area of Concern
Senate
House
n«im-
Position
4. Qualified Thrift
Lender Test
a. Test
(Current law requires
that 60 percent of
thrift assets must be
housing-related,
broadly defined, in
order to receive
certain special
benefits that apply
to thrifts and not
banks.)
b. Consequences of
failure
c. Eligibility of
banks and credit
unions to become
FHLBank members
Changes the
composition of the
numerator ("qualified
thrift investments")
and the denominator
("portfolio assets")
but maintains the 60
percent qualifying
level. The category
of qualified thrift
investments is
smaller than under
the current test.
(Sec. 303, p. 324)
Thrifts that fail the
QTL test must obtain
bank charters within
three years. (Sec.
303, p. 327).
Permits any insured
bank or credit union
to become FHLBank
member so long as it
satisfies QTL test.
(Seo. 703, p. 417)
Increases the QTL
test from 60 percent
of assets to 80
percent. But 80
percent includes much
broader array of
assets than current
test, including such
items as consumer
loans that have
nothing to do with
home lending. (Sec.
320, p. 263)
Deletes the provision
requiring thrifts
that fail QTL test
to obtain a bank
charter.
Any insured bank or
credit union can
become an FHLBank
member without
satisfying QTL test.
(Seo. 714, p. 443)
Prefer existing QTL
level. 80 percent
test is too high,
and includes so much
that is unrelated to
housing that it is
too lenient. Senate
definitions may be
too narrow.
Prefer Senate
provision.
Prefer Senate
version.
House
Senate
Current Chairman of
the FHLBB shall serve
out the remainder of
his term as COSA.
(Seo. 301, HOLA 4(b),
P. 193)
occ and
COSA
compensation
schedules could be
set without regard to
any laws or
regulations governing
federal employees.
No Treasury approval
reouired. NCUA would
also receive an
exemption. (Sec.
301, HOLA 4(d), p.
195 and Sec. 1402, p.
570)
The current FHLBB
Chairman may not
serve as DOTS, unless
nominated by the
President and
confirmed by the
Senate. (Sec. 302,
p. 205)
OCC, DOTS, NCUA, the
Farm Credit
Administration (FCA),
and the Federal
Housing Finance Board
(FHFB) would be able
to provide
compensation and
benefits if currently
offered, or
authorised to be
offered, by any other
bank regulatory
agency. OCC and DOTS
would consult with
the Treasury
Secretary, but would
still not need
Treasury approval.
(Sec. 302, p. 208)
14
Adm. Position
Prefer Senate
provision.
Prefer original
Administration
provision, in which
OCC and the new
thrift regulator
compensation
schedules would
require Treasury
Secretary approval.
NCUA, FCA, and FHFB
should remain
subject to Federal
salary caps.
Area of Concern
Senate
House
Ada. Position
7. Enforcement
Issues
a. Approval of
employment of senior
financial institution
officials by
regulatory agencies
No provision.
b. Disposition of
civil penalties
The Senate provisions
require that proceeds
of civil penalties
continue to be
deposited in the
Treasury general
fund. (Sec. 921, p.
459 and 930-931, p.
469-475)
Requires the agencies
to expressly approve
members of the board
and other senior
officials of new or
troubled institutions
or institutions that
have undergone a
change in control.
(Seo. 914, p. 607)
Several House
provisions allow
regulatory agencies
to keep the proceeds
of civil penalties
they assess for their
own use. (Sec.
907(a),(o),(e)-(k)
and 907(d), p. 528,
543, 552, 550)
15
Oppose House
provision, which _
would create
burdensome amount of
administrative work
and may create
barriers to future
enforcement action.
Oppose House
provisions allowing
retention of
penalties outside
the usual budget
process. It is also
inappropriate and
unnecessary to use
funding as an
"incentive" for
administrative
action.
Area of Concern
Senate
o. Grand jury
secrecy
Allows court ordered
disclosure to any
federal agency of
information developed
in a grand jury
investigation of any
type of crime upon
showing that the
agency has a
"substantial" need
for the information.
(Seo. 1004, p. 549).
d. Civil penalty
provisions
Provides the Attorney
General with summons
authority necessary
to develop civil
penalty oases and
sets the standard of
proof in any legal
action to recover
such a penalty as
"preponderance of the
evidence," the usual
standard for civil
litigation. (Sec.
1001, p. 506)
House
Allows court ordered
disclosure of grand
jury information only
to federal financial
institution
regulatory agencies,
and only of matters
relating to "banking
law violation" upon a
showing of
"particularised need"
(a higher standard
than "substantial
need"). (Sec. 964,
p. '687)
Provides no summons
authority for the
Attorney General and
sets the standard of
proof in any recovery
action as "clear and
convincing
evidence," which is a
higher standard than
preponderance of the
evidence. (Sec.
951, p. 671)
Ada. Position
Prefer the more
comprehensive Senate
version.
Prefer Senate
version. Summons
authority is
essential to use of
this new authority.
Also the
government*s burden
of proof for
recovery should not
be as high as in the
House version.
Area of Concern
Senate
House
e. Justice
Department fraud
field offices
No provision.
Directs establishment
of two specific field
offices. (Sec. 965,
p. 689)
f. Civil statute of
limitations
Permits the
regulators to proceed
against parties who
have removed
themselves from
financial
institutions, with no
statute of
limitations. (Seo.
928, p. 467)
Imposes a five-year
statute of
limitations on this
new authority. (Sec.
905, p. 521)
g. FDIC as agency of
the United States
No provision.
Provides that the
FDIC "in any
capacity" would be an
agency of the United
States. (Sec. 212,
p. 79)
1n
Ada. Position
Oppose House
provision.
Establishment or.
permanent field
offices is not the
most effective way
to deal with current
fraud caseload and
infringes on
Executive authority.
Prefer Senate bill.
Regulators require
extensive periods of
time to develop
cases, and five
years is too short.
Also, could lead to
anomalous result
that following a
criminal conviction,
no related
enforcement action
could be brought.
Oppose designation
of the FDIC as an
agency in its
capacity as receiver
or conservator.
This would expand
the liability of the
U.S. for actions the
FDIC takes on behalf
of private
entities.
of Concern
h. Priority of FDIC
claims
i• Litigating
authority
8. FHLBanks* S300
Million Annual
contribution
a. Contribution for
REFCORP principal
Senate
Grants the FDIC
priority over the
claims of certain
other government
agencies. (Sec. 212,
p. 71)
Same as
Administration bill
- preserves the right
of the Attorney
General to litigate
on behalf of U.S.
Government. However,
also provides
statutory litigating
authority for C08A.
(Sec. 1005, p. 552)
The FHLBanks*
contribution to
purchase REFCORP
stock is limited to a
maximum of
$2,995,800,000, less
amounts required to
be invested in the
capital stock of
FICO. Could be
interpreted to mean
that FHLBanks could
contribute less than
$300 million a year.
/fl»n
so?, n. 380)
House
Ada. Position
No provision.
Prefer House bill.
A heading suggests
that there is a
substantive grant of
litigating authority
to FDIC. (Sec. 210,
p. 76)
Prefer explicit
Senate language
preserving the right
of the Attorney
General to conduct
and coordinate
litigation on behalf
of the U.S.
Government. Oppose
COSA*s litigation
authority in Senate
bill and any
suggestion in House
bill that the FDIC
may have litigating
authority.
Prefer House bill.
If less than $300
million, taxpayers
pick up additional
cost.
In addition to
retained earnings,
guarantees $300
million during first
three years, without
cap. (Sec. 502, p.
379)
Area of Concern
Senate
House
b. REFCORP interest
After defeasing
REFCORP principal,
provides for $300
million per year
contribution from
the FHLBanks to
REFCORP interest
costs. (Sec. 502,
391)
Same as Senate, plus
inflation adjuster of
lower of CPI or
FHLBanks• earnings
growth; $600 million
annual cap. (Seo.
502, p. 379)
Prefer House
version.
9. Exemptions from
8AIF-BIF conversion
(1) Permits the
transfer of 20
percent of insured
liabilities during
the five-year
moratorium. (2) Also
permits conversions
during the five-year
moratorium that help
the transferring
Institution meet a
capital standard
agreed with its
Federal regulator
prior to enactment of
CBBA. (3) Permits
certain conversions
during the five year
moratorium for which
a letter of intent
was entered into
prior to 12/31/88.
(Sec. 206, p. 27)
(1) Permits the
transfer of 50
percent of insured
liabilities (10
percent per year)
during the five year
moratorium. (2)
Permits conversion of
a SAIF member to a
state savings bank if
the institution
agrees to remain a
SAIF member during
that period. (Sec.
206, p. 32)
Generally oppose
exceptions to
conversion
moratorium.
Particularly oppose
the House provision
regarding the
transfer of
liabilities, which
constitutes a
substantial
loophole. Also
oppose any attempt
to grandfather
current litigation
efforts to exit from
FSLIC, as was
proposed in
colloquy on House
floor.
Mft r » *ftr fling
o
Ada. Position
Area of Concern
10. jwterlm Funding
for Mew Agencies
No provision.
11. FDIC
Accountability
a. Reporting
requirements
House
Senate
Prior to the
beginning of each
fiscal quarter, FDIC
would submit reports
to the Treasury
Secretary and the
OMB Director. These
reports would
include financial
operating plans and
forecasts, and
information on
financial
commitments,
guarantees and other
contingent
liabilities. (Sec.
221, p. 160)
Adm. Position—
No provision. Hew thrift agencies
must have interim
funding. FHLBB \
proposes (1) to
authorise the
C08A/D0T8 to assess
the FHLBanks for
start-up funding
for the first 12
months; and (2) to
authorise the
FHLBA/FHFB to make
an interim
assessment against
the FHLBanks.
At the end of each
fiscal quarter, FDIC
would submit to the
Treasury Secretary a
report of FDIC*a
financial condition
and results of
operations• These
reports would
contain estimates
required to be made
under obligation
limitations. (Sec.
218, p. 182)
on
Prefer Senate
provision. Under
GRH, OMB determines
budget deficit and
need for sequester.
Direct access to
accurate budget
information is
critical for this
reason as well as to
develop the
President's budget.
Senate
.
FDIC may not issue
any note and shall
not incur any
liability under a
guarantee if the
estimated cost of
such action would
reduce the net worth
of BIF/8AIF below 15%
of assets. (Sec.
220, p. 157)
Creates FHLBank
Agency with threeperson board, all of
whom are appointed by
the President. (Sec.
702, p. 414)
House
Ada. Position
Limitations on
BIF/8AIF notes;
cannot exhaust 100%
of net worth. (Seo.
217, p. 180)
Prefer Senate
version, although
asset measure should
be tied to most
recent GAO audit.
Seven-person board
consisting of HUD
Secretary, two
FHLBank presidents
and four Presidential
appointees (two of
whom must be
consumer
representatives)•
(Sec. 702, p. 423)
Prefer Senate
version, although
President should be
free to designate
Cabinet members
(e.g. Secretary of
HUD) as such
appointees; House
version does not
appear to satisfy
constitutional
requirements because
of two FHLBank
presidents on Board
(board members of
independent agencies
in executive branch
must be Presidential
appointees).
Treasury should also
be required to
approve aggregate
amount of credit
extended by the
FHLBanks•
*
Area of Concern
Senate
House
Ada. Position
Prefer Senate
version because it
provides much more
flexibility except
authority should
rest with oversight
Board. Any amount
RTC pays will be
subtracted from
amount available for
new case
resolutions.
Oppose this
provision in the
House Bill.
(1) Bank regulators
are concerned that
the public will
confuse the
numerical rating
with the banks*
financial safety and
soundness rating,
and (2) bank
regulators want to
be able to give
confidential written
reporta to the
boards of banks
(without giving
them to the public)
that might warn them
that they need to
improve in this
area.
13. Cost of
Reviewing 1988 FSLIC
Deals
RTC decides if the
cost of, or income
from, restructuring
is borne by the RTC
or the FSLIC
Resolution Fund.
(Seo. 501, p. 358)
The cost of any
restructuring will
be a liability of
the RTC. (Seo. 501,
p. 323)
14. community
Reinvestment Act
provisions
No provision.
Amends the CRA to
require (1)
disclosure of the
regulators * numerical
rating for a bank*a
CRA activity, and (2)
requires regulators
to break the
examination report
into a public portion
to be given to the
institution and to
the public, and a
private portion kept
for the regulators*
files and not shared
with the institution.
(Sec. 1214, p. 760)
9.9
- ~# ^~-~-**-«
Area of "~~*•-*•»
House
senate
Ada. Position
15. study of
flovarnm***- sponsored
enterprises
(a) Capital
requirements
No comparable
provision.
(b) Relationship
between public debt
and G8E activities
No comparable
provision.
Requires the GAO to
study the appropriate
capital level and
risk exposure for
GSEs, including the
applicability of a
risk-based capital
requirement. (Sec.
725, p. 481)
Requires the Treasury
to conduct an annual
study analysing the
risk exposure to the
federal government of
G8B activities.
(Sec. 1404, p. 773)
03
Prefer the House
bill and the
application of a
risk-based capital
standard to GSEs.
Prefer House
provision, but
object to study
being conducted
annually*
Area of Concern
16. Appropriations/
Authorisations
Senate
Various provisions.
House
Various provisions.
Adm. Position
The authorisation
and appropriation
language differ in
many cases. There
must be
clarification
regarding those
provisions that have
discretionary and
mandatory
appropriations•
Proposed Organization and Management of the
tte^iirt-ion Trust Corporation
Oversight Responsibility
RTC OVERSIGHT BOARD
- Establish policy guidelines.
Secretary of Treasury (Chairman) - Review and monitor RTC activities.
Chairman of Federal Reserve
- Approve funding.
Attorney General
Professional Staff
Operating Responsibility
RESOLUTION TFDST CORPORATION
. FDIC as Exclusive Manager
- All responsibility for RTC
resolution and liquidation
activities.
- Subcontract with private
sector.
July 11, 1989
Administration's Substitute Proposal
for th?
Resolution Trust Corporation
As the Conference resumes on the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (FIRREA), the
Administration remains especially concerned about provisions in
both the House and Senate bills affecting the Resolution Trust
Corporation (RTC). The RTC will resolve hundreds of insolvent
thrifts over the next three years, and it must be provided the
tools necessary to function efficiently and expeditiously. The
RTC must also be subject to effective oversight because of the
size of its undertaking and because of the billions of taxpayer
dollars that it will use to resolve cases.
A number of legislative changes in both the Senate and
House have strengthened the Administration's original RTC
proposal to achieve both of these goals. But other changes to
both the structure and operations of the RTC and its Oversight
Board are likely to have the opposite effect. At the same time,
concerns have been expressed about the likelihood that the RTC
will become a huge bureaucracy that would compete directly with
the Federal Deposit Insurance Corporation (FDIC), or have
problems similar to FADA, which was never the intent of the
original Administration proposal.
The Administration believes that the RTC must be
streamlined in Conference so that it will achieve the goals of
efficiency and effective oversight while at the same time
addressing other important concerns. But rather than picking and
choosing from individual provisions in the House and Senate
bills, it would be preferable to substitute a new RTC title that
incorporates the best aspects of the Administration, Senate, and
House versions.
Accordingly, set forth below is an outline of the
Administration's substitute proposal for the RTC and the RTC
Oversight Board. Legislative language to implement the proposal
will be provided.
I. Basic Structure
The magnitude of the RTC's task is unprecedented, and
for the first time in history it will be necessary to use
taxpayer funds — in substantial amounts — to resolve failed
institutions. For these reasons, the following two principles
should govern the basic structure of the RTC:
2
(1) Operating Responsibility with the FDIC. The FDIC
should be responsible for carrying out the basic work
of the thrift clean-up because it has the most
experience of any government agency in this area.
(2) Oversight Responsibility with a Separate Oversight
Board. The Administration, which along with Congress
is directly responsible to the taxpayer, must have the
necessary tools to protect the taxpayer's interest by
exercising effective oversight over the thrift cleanup.
A. The Resolution Trust Corporation
The FDIC would be provided, by statute, direct
authority and responsibility for managing and carrying out all
the activities of the RTC ("exclusive manager"), subject to
policy direction by the RTC Oversight Board. Since the FDIC
would carry out its responsibilities under statutory mandate,
there would be greater clarity in the relationship between the
two entities and no need for a "contract" between them. The
FDIC's operational role would be carried out under the FDIC's
Board of Directors, and this role would be substantially broader
than is provided for under either the House or Senate bill.
The FDIC, under general policy guidance by the
Oversight Board, would be solely responsible for providing the
personnel, facilities, and other direct services needed for the
RTC to resolve insolvent institutions and undertake asset
disposition, including the sale or dissolution of FADA. The FDIC
would also have the authority and responsibility to subcontract
with private sector firms to carry out RTC asset disposition or
other functions.
In addition, the FDIC would be responsible for
submitting RTC operating plans and budget requests to the
Oversight Board on a periodic basis, as well as detailed
reporting on the financial results and overall performance of the
RTC. This would include actual and future cash needs and use of
notes, guarantees, or other contingent liabilities.
In short, the FDIC would conduct the day-to-day
operations of the RTC. As such, FDIC would be in charge of the
use of funds, operations, personnel, contracts, asset
dispositions, case resolutions, and legal matters involving the
RTC.
B. The RTC Oversight Board
Because the Administration will be accountable for the
substantial taxpayer funds that will be used, a completely
separate RTC Oversight Board will be established that will be
3
answerable to the President and Congress. The Oversight Board
would be responsible for establishing overall RTC strategy and
general policy guidelines, approving financial plans, and
assessing RTC performance against such guidelines and plans.
These would include the following:
o establishing broad policy guidelines for the management
and disposition of assets;
o reviewing and approving RTC strategic, budget and
financial plans;
o authorizing the use of REFCORP proceeds and RTC
obligations and guarantees;
o periodically evaluating and assessing the overall
performance of the RTC relative to approved budgets,
plans, and internal control procedures;
o reviewing and approving general standards governing the
use of liquidations vs. assisted mergers;
o evaluating audits by the RTC Inspector General and
other audits required by Congress;
o establishing general policy governing RTC contracts
with the private sector; and
o periodically updating policy guidelines.
The Oversight Board would also engage in liaison
activities with a national advisory board (discussed below) and,
in its oversight capacity, prepare appropriate reports and
responses to the President, Congress, and the public on the
progress and performance of the RTC.
To effectively perform its oversight function, it is
critical that the Oversight Board have an independent staff.
Nonetheless, Oversight Board staff would be kept as "lean" as
possible consistent with its responsibilities. It is expected
that a core staff would be employed, with member agencies of the
Oversight Board available on a reimbursable basis to provide
additional resources at its request. It would not become a large
parallel or competing bureaucracy with the FDIC.
The Oversight Board would not be involved in the
decision or approval process for any individual transactions;
that would remain the exclusive province of the RTC to be
carried out by the FDIC as the RTC's exclusive manager. There is
no intention for the Oversight Board to micromanage the basic
operations of the RTC. Rather, its charge would be to provide
4
policy guidance and oversight for the RTC as exclusively managed
by the FDIC.
While the Oversight Board vill fully share vith the
FDIC the objective of an efficient and cost-effective thrift
clean-up, the Board should be independent from the RTC and FDIC
in order both to carry out its oversight mission vith fully
independent judgment and to accept independent responsibility for
this mission. Therefore, the Oversight Board and the FDIC Board
should not have overlapping membership.
To include the Chairman or a member of the FDIC board
on the Oversight Board vould compromise that independent
judgment. It vould be awkward and difficult for the Oversight
Board to effectively oversee and evaluate the FDIC's managerial
stewardship of the RTC if the FDIC held Board membership. It
would also merge the responsibility for operations and oversight,
which should be kept separate. In short, this potential conflict
of interest should be avoided.
At the same time, however, the Administration
recognizes the important need for full consultation with the FDIC
in connection vith the Oversight Board's responsibility to set
policy. The proposed statutory language specifically requires
this consultation.
C. Intervention Under Extraordinary Circumstances
As outlined here the FDIC vould have day-to-day
managerial and operational control of the RTC, and the Oversight
Board vould have responsibility for establishing general
policies for RTC activities. Ultimately, hovever, the Oversight
Board and the Administration are accountable for the use of
taxpayer funds. Because of this, the Oversight Board vould
retain the right to appoint a new exclusive manager (with an
appropriate transition period) whenever it made the judgment
that any of the following extraordinary events had occurred:
o significant failure of the RTC to adhere to policy
guidelines;
o significant failure of the RTC to meet established
financial goals, including over-commitment of
financial resources;
o evidence of fraud, abuse, or gross mismanagement in RTC
programs or activities; or
o significant inability to realize proceeds from asset
disposition near appraised market values.
5
II. Other Concerns Addressed
The proposal specifically includes certain important
provisions that were added by either the House or the Senate, as
well as several nev provisions that address other important
concerns and that are not likely to be controversial. Examples
include the following:
A. Use of Private Sector Entities
The proposal expressly addresses the concern raised in
both the House and Senate bills that the RTC should use the
resources available in the private sector whenever that vould be
more efficient. The language specifically provides that the
FDIC, acting for the RTC, may enter into contracts vith any
persons, corporations, or other entities, including State Housing
Authorities and insured financial institutions, to carry out its
responsibilities under the Act. The FDIC is also expressly
encouraged to utilize the services of private persons and
entities for services, including real estate and loan portfolio
asset management, property management, and brokerage if such
services are determined to be practicable and efficient.
Finally, through its policy guidance the Oversight Board vill be
able to ensure the appropriate private sector involvement in RTC
plans.
B. National and Regional Advisory Boards
Both the House and Senate bills include different
provisions to establish private advisory boards to coordinate
vith and provide information to the Oversight Board and the RTC.
The proposal addresses this concern by requiring the Oversight
Board to establish a national advisory board to provide
information and to assist and advise the Oversight Board in
development of policies and programs for real property asset
disposition. In addition, the proposal authorizes the
establishment of up to six regional advisory boards, especially
from areas vhere RTC asset dispositions vill be significant.
These boards vill advise the RTC and the Oversight Board in the
creation and implementation of policies and programs for the sale
or other disposition of assets.
The Oversight Board vould appoint the members of the
regional advisory boards, vho vould vork directly vith the RTC.
The national advisory board, vhich vould report directly to the
Oversight Board, vould consist of the chairpersons of the
regional advisory boards and one person each as appointed by the
nev thrift regulator, the Comptroller of the Currency, and the
Chairman of the FDIC.
6
C. Minority Outreach Program
Consistent vith the provision in the House bill, the
proposal requires the RTC to establish and oversee a minority
outreach program to include minorities and women in contracts
entered into by the RTC, including contracts vith financial
institutions, investment banking firms, underwriters,
accountants, and providers of legal services.
D. Reports to Congress
The proposal streamlines the extensive reporting
requirements in both bills by requiring the Oversight Board to
submit a comprehensive annual report to Congress and the
President. This report is required to cover (1) the Oversight
Board's operations and activities; (2) the annual report of the
RTC to the Oversight Board; and (3) the results of the
Comptroller General's annual audit of the RTC. The first
comprehensive report would be due for the year ending December
31, 1989, less than six months after date of enactment, and would
provide details about start-up operations and initial strategic
decisions.
E. Inspector General
The proposal would include a provision that would
establish an Inspector General for the RTC that would report to
the Oversight Board. This would help ensure that the RTC
operates efficiently, impartially, and subject to all appropriate
ethical standards. Given the magnitude of the federal funds and
assets involved in the RTC's activities, the importance of an
Inspector General cannot be overemphasized.
F. RTC Borrowing Cap
The proposal would include a specific cap on the
borrowing authority of the RTC. Borrowing would be limited to
the RTC's tangible assets, marked down to fair market value, and
available proceeds from REFCORP bonds and RTC's line of credit
from Treasury. This cap would protect the taxpayer by
prohibiting the RTC from issuing commitments that exceed its
available resources, while maintaining critical flexibility to
use working capital during the real estate workout process.
G. Asset Disposition Guidelines
The proposal addresses the concerns raised in both the
House and Senate bills for asset disposition guidelines, but
without hamstringing the RTC or the Oversight Board with
inflexible limitations.
7
H. Conflicts of Interests Rules and Ethical Standards
Finally, employees and independent contractors of the
RTC vould be subject to the conflicts of interests rules and
ethical standards that apply under current lav to employees of
the FDIC.
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 17
Author(s):
Title:
Press Briefing with Secretary Nicholas Brady and Roger Bolton
Date:
1989-07-10
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
TREASURY NEWS .
Department of the Treasury • Washington,
D.c. • Telephone 560-2041
CONTACT: Office of Financing
FOR RELEASE AT 4:00 P.M.
July 11, 1989
202/376-4350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$13,200 million, to be issued July 20, 1989.
This offering
will result in a paydown for the Treasury of about $ 1,650 million, as
the maturing bills are outstanding in the amount of $14,853 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, July 17, 1989.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $6,600
million, representing an additional amount of bills dated
April 20, 1989,
and to mature October 19, 1989
(CUSIP No.
912794 TB 0 ) , currently outstanding in the amount of $7,242 million,
the additional and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately $6,600
million, representing an additional amount of bills dated
January 19, 1989,
and to mature January 18, 1990
(CUSIP No.
912794 TM 6), currently outstanding in the amount of $9,119 million,
the additional and original bills to be freely interchangeable.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing July 20, 1989.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international monetary authorities, to
the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them. Federal
Reserve Banks currently hold $1,345 million as agents for foreign
and international monetary authorities, and $3,941 million for their
own account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week series)
NB-366
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such securities may submit tenders for account of customers, if the names
of the customers and the amount for each customer are furnished.
Others are only permitted to submit tenders for their own account.
Each tender must state the amount of any net long position in the
bills being offered if such position is in excess of $200 million.
This information should reflect positions held as of one-half hour
prior to the closing time for receipt of tenders on the day of the
auction. Such positions would include bills acquired through "when
issued" trading, and futures and forward transactions as well as
holdings of outstanding bills with the same maturity date as the
new offering, e.g., bills with three months to maturity previously
offered as six-month bills. Dealers, who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities,
when submitting tenders for customers, must submit a separate tender
for each customer whose net long position in the bill being offered
exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained on
the book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit of
2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
10/87
tenders.
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $1,000,000
or less without stated yield from any one bidder will be accepted
in full at the weighted average bank discount rate (in two decimals)
of accepted competitive bids for the respective issues. The calculation of purchase prices for accepted bids will be carried to
three decimal places on the basis of price per hundred, e.g.,
99.923, and the determinations of the Secretary of the Treasury
shall be final.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. Cash adjustments
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. Accrual-basis taxpayers, banks, and other
persons designated in section 1281 of the Internal Revenue Code
must include in income the portion of the discount for the period
during the taxable year such holder held the bill. If the bill
is sold or otherwise disposed of before maturity, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, Treasury's single
bidder guidelines, and this notice prescribe the terms of these
Treasury bills and govern the conditions of their issue. Copies
of the circulars, guidelines, and tender forms may be obtained
from any Federal Reserve Bank or Branch, or from the Bureau of
10/87
the
Public Debt.
TREASURY NEWS
•partment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
July 12, 1989
CONTACT: Bob Levine
(202) 566-2041
BOLIVIAN BRIDGE LOAN
The Department of the Treasury today announced an agreement
with the Republic of Bolivia to provide a *100 million short-term
bridge financing facility. The proceeds of this loan are
expected to strengthen Bolivia's financial position as it
continues its program of comprehensive structural reform to lay
the basis for sustained economic growth. These funds will
complement on-going, longer-term financial assistance from the
International Monetary Fund, the World Bank, the Inter-American
Development Bank and bilateral donors.
The United States Government supports the determination of the
Bolivian Government to consolidate its success in reforming the
economy and achieving a dramatic reduction of inflation.
OOO
NB-367
• * •
CO
o co
CM
CO CNJ
CD CO
ID CO
CO m
• < *
::ederal financing bank
S
H
WASHINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
July 12, 1989
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing
Bank (FFB), announced the following activity for the month
of May 1989.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $140.2 billion on
May 31, 1989, posting a decrease of $942.0 million from the
level on April 30, 1989. This net change was the result of
decreases in holdings of agency debt of $143.7 million, in
agency assets of $775.4 million, and in agency-guaranteed
debt of $22.9 million. FFB made 51 disbursements during May,
Attached to this release are tables presenting FFB
May loan activity and FFB holdings as of May 31, 1989.
NB-368
CO
CD
m
LL
a. u.
Page 2 of 4
FEDERAL FINANCING BANK
MAY 1989 ACTIVITY
BORROWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST INTEREST
RATE
RATE
(semi(other than
annual)
semi-annual)
30,560,000.00
8,520,000.00
45,000,000.00
8/8/89
8/24/89
8/24/89
8.953%
8.788%
8.973%
5/10
5/15
5/15
5/18
5/18
5/22
5/24
5/24
5/30
5/31
5/31
106,000,000.00
186,000,000i00
269,000,000.00
194,000,000.00
6,000,000.00
222,000,000.00
7,000,000.00
212,000,000.00
194,000,000.00
156,000,000.00
45,000,000.00
79,000,000.00
44,000,000.00
347,000,000.00
5/8/89
5/10/89
5/15/89
5/18/89
5/19/89
5/22/89
5/23/89
5/24/89
5/30/89
5/31/89
6/1/89
6/5/89
6/5/89
6/7/89
9.048%
8.962%
8.850%
8.932%
8.618%
8.618%
8.699%
8.699%
8.765%
8.699%
8.699%
8.943%
9.004%
9.004%
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
24,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
36,000,000.00
5/31/97
5/31/98
5/31/99
5/31/00
5/31/01
5/31/02
5/31/03
5/31/04
5/31/05
5/31/06
5/31/07
5/31/08
5/31/09
5/31/10
5/31/H
5/31/12
5/31/13
8.795%
8.773%
8.762%
8.761%
8.760%
8.759%
8.758%
8.757%
8.756%
8.756%
8.755%
8.754%
8.754%
8.753%
8.753%
8.752%
8.752%
DATE
AGENCY DEBT
NATIONAL CREDIT UNION AEMINISTRATTON
Central Liauidity Facility
+Note #490
+Note #491
+Note #492
5/11
5/22
5/26
$
TENNESSEE VAIJEY AUIHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#1028
#1029
#1030
#1031
#1032
#1033
#1034
#1035
#1036
#1037
#1038
#1039
#1040
#1041
5/2
5/5
5/8
U.S. Postal Service
*Nbte
*Note
•Note
*Note
*Note
*Note
•Note
*Note
•Note
*Note
*Note
•Note
*Ndte
•Note
*Note
*Note
•Note
#16.1
#16.2
#16.3
#16.4
#16.5
#16.6
#16.7
#16.8
#16.9
#16.10
#16.11
#16.12
#16.13
#16.14
#16.15
#16.16
#16.17
+rollover
•maturity extension
Page 3 of 4
FEDERAL FINANCING BANK
MAY 1989 ACTIVITY
BORROWER
FINAL
MATURITY
INTEREST
RATE
(semiannual)
686,350.45
61,873.00
22,100,000.00
1,853,329.75
2,000,000.00
2,046,195.87
461,708.72
9/3/13
9/3/13
2/25/13
2/25/13
9/3/13
2/25/13
5/31/95
9.065%
8.964%
8.963%
8.839%
8.752%
8.752%
8.803%
5/3
5/4
5/8
5/8
5/10
5/11
5/11
5/11
5/31
406,000.00
2,288,000.00
620,000.00
1,239,000.00
1,600,000.00
1,325,000.00
365,000.00
5,722,000.00
2,000,000.00
1/2/18
7/1/91
7/1/91
12/31/19
7/V91
7/1/91
5/13/91
1/2/18
7/V91
9.128%
9.338%
9.165%
9.086%
9.352%
9.388%
9.392%
9.257%
8.995%
5/31
727,214,019.58
8/31/89
8.956%
AMOUNT
OF ADVANCE
DATE
INTEREST
RATE
(other than
semi-annual)
GOVERNMENT - GUARANIEED LOANS
DEPARTMENT OF DEFENSE
Foreian Military Sales
Greece 16
Greece 16
Greece 17
Greece 17
Greece 16
Greece 17
Morocco 13
5/1
5/16
5/16
5/22
5/31
5/31
5/31
$
^TBftL ^ECTRIfT^KriON ADMINISTRATION
New Hampshire Electric #270
Oglethorpe Power #320
•Colorado-Ute Electric #203A
•Western Farmer Elec. Coop. #196
Associated Electric #328
•United Power #159A
•United Power #212A
•Wabash Valley Power #206
Sho-Me Power Corp. #324
TFNNFRcnrF VATTFV AUTHORITY
Seven States Enerov Oorooration
Note A-89-08
•maturity extension
9.026% qtr.
9.231% qtr.
9.062% qtr.
8.985% qtr.
9.245% qtr.
9.280% qtr.
9.284% qtr.
9.152% qtr.
8.896% qtr.
Page 4 of 4
FEDERAL FINANCING BANK HOLDINGS
(in millions)
Program
May n , 198?
Agency Debt:
Export-Import Bank
$ 11,000.6
NCUA-Central Liquidity Facility
108.9
Tennessee Valley Authority
17,240.0
U.S. Postal Service
6,195.0
sub-total* 34,544.5
Agency Assets:
Farmers Home Administration
56,311.0
DHHS-Health Maintenance Org.
79.5
DHHS-Medical Facilities
93.8
Overseas Private Investment Corp.
-0Rural Electrification Admin.-CBO
4,076.0
Small Business Administration
12.7
sub-total* 60,573.1
Government-Guaranteed Lending:
DOD-Foreign Military Sales
11,604.8
DEd.-Student Loan Marketing Assn.
4,910.0
DOE-Geothermal Loan Guarantees
-0DHUD-Community Dev. Block Grant
311.5
DHUD-New Communities
-0DHUD-Public Housing Notes +
1,995.3
General Services Administration +
381.9
DOI-Guam Power Authority
31.5
DOI-Virgin Islands
26.1
NASA-Space Communications Co. +
995.2
DON-Ship Lease Financing
1,720.5
Rural Electrification Administration
19,236.3
SBA-Small Business Investment Cos.
583.2
SBA-State/Local Development Cos.
836.5
TVA-Seven States Energy Corp.
2,254.7
DOT-Section 511
37.6
DOT-WMATA
177.0
sub-total* A-L--2.!2.
grand total* $ 140,219.8
•figures may not total due to rounding
-fdoes not include capitalized interest
April ?Q.
$
I?B?
571/89-5731/89
11,000.6
111.4
17,084.0
6,492.2
$
-0-2.5
156.0
-297.2
16A/88-5/31/89
$
43.0
-9.3
109.0
602.8
34,688.2
-143.7
745.5
57,086.0
79.5
93.8
-04,076.0
13.1
-775.0
-0-0-0-0-0.4
-2,185.0
-0-2.6
-0-63.2
-2.6
61,348.5
-775.4
-2,253.4
11,637.3
4,910.0
-0313.8
-01,995.3
383.0
31.5
26.1
995.2
1,720.5
19,230.0
587.3
841.3
2,236.1
40.6
177.0
-32.5
-0-0-2.3
-0-0-1.1
-0-0-0-06.3
-4.1
-4.8
18.6
-3.0
-0-
-4,406.9
-0-50.0
-6.6
-0-41.7
-5.5
-0.6
-0.5
96.4
-38.3
31.0
-49.5
-34.4
92.3
-8.6
-0-
-22.9
========
-942.0
-4,422.8
=========
$ " -5,930.7
45,125.1
=========
$ 141,161.9
$
TREASURY NEWS
>epartment off the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
July 12, 1989
CONTACT:
Office of Financing
202/376-4350
RESULTS OF AUCTION OF 7-YEAR NOTES
The Department of the Treasury has accepted $7,289 million of
$20,456 million of tenders received from the public for the 7-year
notes, Series G-1996, auctioned today. The notes will be issued
July 17, 1989, and mature July 15, 1996.
The interest rate on the notes will be 7-7/8%. The range
of accepted competitive bids, and the corresponding prices at the
7-7/8% interest rate are as follows:
Yield
Price
Low
99.974
7.88%
High
7.90%
99.868
Average
7.89%
99.921
Tenders at the high yield were allotted 37%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location Received Accepted
Boston
$
17,632
$
17,632
New York
18,343,681
6,747,021
Philadelphia
4,266
4,266
Cleveland
8,043
8,043
Richmond
34,034
15,134
Atlanta
10,939
6,939
Chicago
1,242,259
331,779
St. Louis
27,531
19,531
Minneapolis
6,742
6,742
Kansas City
6,062
6,042
Dallas
9,450
6,190
San Francisco
744,841
118,441
Treasury
963
963
Totals
$20,456,443
$7,288,723
The $7,289
million of accepted tenders includes $338
million of noncompetitive tenders and $6,951
million of competitive tenders from the public.
In addition to the $7,289 million of tenders accepted in
the auction process, $150 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $286 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-369
TREASURY NEWS _
department off the Treasury • Washington, D.c. • Telephone 566-2041
EMBARGOED FOR RELEASE UNTIL DELIVERY
EXPECTED AT 10:00 A.M. EST
TESTIMONY OF KENNETH W. GIDEON
f
,j
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
uz.
BEFORE THE
COMMITTEE ON ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
WASHINGTON, D.C.
JULY 13, 1989
Mr. Chairman and Members of the Committee:
It is a pleasure to be here today on behalf of the
Administration, to discuss S. 712, a bill "To Provide for a
Referendum on the Political Status of Puerto Rico." This bill
would give the people of Puerto Rico an historic opportunity to
vote upon the status of that island. The bill would provide for
a referendum, to be held in 1991, in which the Puerto Rican
people could decide among the options of statehood, independence,
or commonwealth status.
The Administration strongly supports the right of the people
of Puerto Rico to decide for themselves on the status of the
island. Further, as the President has noted a number of times,
he favors the admission of Puerto Rico to the Union as a state,
thereby assuring the people of Puerto Rico an equal standing with
other United States citizens. However, by providing for a status
referendum, the United States Government would be assisting the
Puerto Rican people to exercise the basic political right to
determine the nature of their government.
The choice facing the people of Puerto Rico is fundamentally
a political one, with long-terra implications for their rights and
obligations as citizens. Each voter must determine for himself
or herself the type of political relationship that should exist
between Puerto Rico and the United States. By its very nature, a
status referendum determines a people's political future.
Individual voters must weigh the implications of their vote not
only for themselves but also for future generations.
The Administration firmly believes that the Puerto Rican
people should be given an opportunity to express their will in a
manner that recognizes the historic and fundamentally political
nature of their decision of self-determination. The importance
of the decision they face as a people transcends any narrow
concern about specific aspects of economic or fiscal structures.
For this reason, the Administration believes that the
discussion of Puerto Rico's future status should not be
NB-370
-2encumbered at this stage by the tax and financial provisions in
the current bill. The selection among the possible status
options should be a choice made by the people of Puerto Rico
unaffected by the bias which specific economic costs and benefits
could bring to the process. After that choice has been made,
appropriate tax and financial relationships between Puerto Rico
and the United States could be formed consistent with the choice
of the Puerto Rican people.
The Administration recognizes the difficulty of isolating the
impact of tax and financial issues from the question of Puerto
Rico's future status. Appropriate transition mechanisms will
ultimately have to be developed to.minimize economic disruption
to Puerto Rico resulting from any change from the current
commonwealth status. In addition, we believe that a transition
to statehood can be structured so that the Puerto Rican
government, after making appropriate use of its own resources,
would not be forced to incur a net revenue loss during this
transition. The Administration would support a "transition
grant" to Puerto Rico to assist in achieving that result. The
budgetary treatment of a transition to statehood should be
consistent with sound budget discipline. Finally, we believe
that.there should be a level economic playing field among
options.
The development of provisions which will properly achieve
these goals will require a careful cooperative analysis by the
Administration, Congress, and the government of Puerto Rico. The
resulting package would probably consist of interrelated
provisions affecting Puerto Rico's own tax system, the Federal
tax system, and direct Federal grants. Accordingly, depending on
the specific alternatives chosen, many will be involved in the
process, including, for example, the tax-writing committees of
the Congress.
The Administration looks forward to working with your
committee at the appropriate time in fashioning an integrated
economic package which meets the Administration's commitments to
Puerto Rico and which is fully acceptable to both Congress and
the Puerto Rican government. To lay a foundation for that
process, I would like to review with you today some of the
technical issues which are presented by the provisions in the
current bill. While not intended as either an endorsement or
rejection of these provisions, my comments will hopefully
highlight particular problems which the current language raises.
Each of the political options covered by the bill —
statehood, independence, and commonwealth status — raises
special issues that affect the tax systems of both Puerto Rico
and the United States. The following comments are limited to
those issues. They are not intended to reflect any views on the
desirability of any of the status options.
-3Regardless of the status option under consideration, we
believe that a primary goal of the bill in question should be to
ensure that the tax implications of the option are clearly
defined. Certainty in the application of the tax law is always a
goal of tax policy, and we believe that it is especially
important to strive for that certainty in these circumstances,
where the Puerto Rican people are facing the possibility of
fundamental changes to their government's structure. The focus
of my testimony, therefore, will be to identify the tax results
of this bill's provisions as drafted, to note those ambiguities
which the bill raises, and to highlight those issues which the
bill's tax provisions do not currently address.
I. GENERAL REVENUE EFFECTS OF S. 712
It is difficult to present very precise estimates of the
Federal revenue consequences of the various options described in
the bill, but it may be helpful for purposes of this discussion
to consider some rough guidelines.
Both the independence and the statehood options assume some
form of reduction of the tax incentives currently provided under
Internal Revenue Code ("Code") section 936. It should be noted
that even under the commonwealth option, Congress can continue to
review and revise section 936 and other tax benefits as
necessary.
We estimate that in FY 1989 the tax benefits received by
section 936 corporations amount to about $1.9 billion. If
section 936 benefits are phased out, some section 936
corporations may choose to leave Puerto Rico. However, the
nature of most section 936 company operations makes it unlikely
that they could find a good substitute for Puerto Rico in some
low-tax foreign location. Thus, if companies do leave the
island, it is most likely that they would move back to the
mainland where they would be subject to U.S. tax.
A phase-out of section 936 benefits would cause economic
dislocation on Puerto Rico, at least in the short run.
Employment in 936 companies now accounts for about 12 percent of
total Puerto Rican employment. However, it is very difficult to
project the extent to which Federal tax collections would be
affected by this dislocation. Under the statehood option,
collections of personal income tax may be somewhat reduced for a
time; but as discussed below, fully phased-in Federal personal
income tax collections from Puerto Rico can be expected to be
relatively modest.
The statehood option presents the issue of how a
newly-imposed Federal income tax will interact with a Puerto
Rican state tax system. The effects of this change must be
considered for both individual and business tax revenues.
-4The extension of Federal income tax to individuals in Puerto
Rico would perhaps raise some $500 million per year. In
comparison, the Puerto Rican government collected about $900
million in personal income taxes in their fiscal year ending June
30, 1989, or about 30 percent of total Puerto Rican revenue from
local sources. This amounted to only about 5 percent of personal
income in Puerto Rico.
As a state, Puerto Rico could design an income tax which
would maintain combined revenue levels. Under either the
commonwealth or independence options, Puerto Rico could continue
a system similar to the current Puerto Rican tax.
With respect to business taxation, the Puerto Rican
government now collects about $1.0 billion a year in taxes from
business, which represents about 10 percent of business income.
Since about 40 percent of this revenue is collected from exempt
section 936 corporations, Puerto Rico may experience some loss of
revenue if a phase-out of section 936 benefits causes any of
these companies to reduce their Puerto Rican operations.
Under statehood, Federal corporate tax would also apply to
Puerto Rican business that does not now benefit from section 936.
This includes locally incorporated, or foreign, companies as well
as section 936 corporations that do not receive a full or partial
exemption from Puerto Rican tax. This would increase Federal
revenues by about $300 million per year at 1989 levels.
Puerto Rico does not now pay Federal excise taxes. Assuming
that by virtue of its becoming a state, U.S. excise taxes became
applicable within Puerto Rico, this change would result in an
increase in revenues of approximately $150 million. In addition,
the Federal Government would gain approximately $100 million per
year in customs duties which are now collected and segregated for
the benefit of Puerto Rico.
Finally, Puerto Rico may choose to make adjustments on the
expenditure side instead of, or in addition to, adjustments on
the revenue side. Government employment now accounts for 23
percent of total employment in Puerto Rico. In addition, Puerto
Rican government enterprises play a very important role in the
Puerto Rican economy. A reduction of these expenditures, either
to reduce taxes or to provide incentives to business may,
therefore, be one of the consequences of any phase-out of current
provisions.
Under the independence option, a phase-out of section 936
benefits would increase Federal tax collections if 936
corporations remained in Puerto Rico as U.S. corporations or if
they moved back to the United States. However, some Puerto
Rico-oriented companies in routine industries, such as apparel or
food processing, may choose to reincorporate as Puerto Rican
companies. The Federal revenue gain may therefore not be quite
as large as under statehood. Under the independence option,
-5Federal excise taxes would only apply, as they do now, on imports
from Puerto Rico; and the Federal Government would not collect
any customs duties on goods imported into Puerto Rico. However,
this would be offset somewhat by increased customs collections on
imports from Puerto Rico. In addition, there might be a modest
revenue pickup from withholding taxes on dividends paid to Puerto
Rican residents, etc.
* * * *
With the above rough estimates in mind, I would now like to
turn to a technical review of bill as drafted. Before discussing
the bill's specific provisions, however, it may be useful to
briefly summarize the tax relationship that currently exists
between Puerto Rico and the United States.
II. SUMMARY OF EXISTING TAX LAWS
Generally speaking, the Commonwealth of Puerto Rico is not
considered part of the "United States", as that term is used in
the Internal Revenue Code ("Code") (see section 7701(a)(9) and
(d)). Thus, Puerto Rico has its own tax laws, and the U.S.
internal revenue laws do not extend fully to Puerto Rico.
Depending upon the nature of the tax involved, different methods
have been used to allocate taxing jurisdiction between the two
governments.
A. Income taxes
United States income tax. The United States generally
taxes the worldwide income of U.S. citizens, resident alien
individuals, and domestic corporations. It also taxes the U.S.
income of foreign corporations and nonresident alien individuals.
Two important provisions affect the U.S. taxation of U.S. persons
with Puerto Rican income.
First, under section 933 of the Code, the United States
exempts the Puerto Rican source income of individuals who are
bona fide residents of Puerto Rico. Consistent with section 933,
U.S. citizens resident in Puerto Rico may be exempted from the
withholding of Federal tax on their Puerto Rican source earnings
(see section 3401(a)(8)).
Second, section 936 provides an effective exemption for
certain Puerto Rican income of qualifying U.S. corporations that
elect its benefits and that are engaged in business in Puerto
Rico. The exemption is granted in the form of a "tax sparing"
credit, under which the company's U.S. tax liability on its
qualifying Puerto Rican income is reduced by a credit for a
hypothetical Puerto Rican tax equal to the amount of U.S. tax due
on that income. Because Puerto Rican tax law provides generous
exemptions to certain business operations there, section 936
corporations enjoy a very low aggregate effective tax rate.
-6Puerto Rican income tax. Puerto Rico is authorized by
Congress to enact its own income tax system. In 1954, the Puerto
Rican legislature adopted its present income tax system, which is
based on the U.S. Internal Revenue Code of 1939. In the absence
of a tax exemption grant, Puerto Rico taxes all Puerto Rican
source income earned by U.S. and foreign persons (including
corporations) and taxes the worldwide income of all Puerto Rican
resident individuals and Puerto Rican corporations.
The Puerto Rican individual income tax rates are somewhat
higher than corresponding U.S. rates, and the Puerto Rican
personal exemptions are somewhat lower than the U.S. exemptions.
This will remain true even after tax law changes enacted by the
Puerto Rican legislature in 1987 are fully phased in.
Under a series of industrial incentives laws, Puerto Rico has
granted generous exemptions to certain business and investment
income of qualifying businesses. Thus, while Puerto Rico's
nominal corporate tax rate is slightly higher than the U.S.
corporate tax rate, the exemption grants significantly reduce the
effective Puerto Rican corporate tax rate.
B. Estate and gift taxes
United States estate and gift taxes. The United States
taxes the worldwide estates of U.S. citizens and noncitizen
decedents domiciled in the United States, as well as the U.S.
situs estates of nondomiciliary aliens. The United States allows
a foreign tax credit for Puerto Rican estate taxes imposed on the
Puerto Rican situs estate of U.S. decedents (see section
2014(g)). Similarly, the U.S. gift tax applies to all gifts by
U.S. citizens and noncitizen domiciliaries, and to gifts of U.S.
situs property by nondomiciliary aliens. For purposes of the
U.S. estate and gift taxes, U.S. citizens resident in Puerto Rico
who are citizens solely because of being citizens of Puerto Rico
or because of their birth or residence in Puerto Rico are treated
as nondomiciliary aliens, taxable only on transfers of U.S. situs
property (see Sections 2208, 2209, 2501(b), and 2501(K)).
Puerto Rican estate and gift taxes. Puerto Rico
generally taxes the worldwide estate of Puerto Rican resident
decedents and the Puerto Rican situs estate of nonresident
decedents. The amount of Puerto Rican estate tax on the Puerto
Rican situs estate of a U.S. citizen resident in Puerto Rico can
depend upon whether the United States includes that property in
the U.S. gross estate. Puerto Rico allows a credit for U.S.
estate taxes paid, on the U.S. situs property of a Puerto Rican
resident decedent. Similarly, Puerto Rico taxes all gifts by
Puerto Rican resident donors and gifts of Puerto Rican situs
property by nonresident donors.
-7C.
Employment taxes
The various Federal employment taxes, including the
self-employment tax (section 1401), the social security or FICA
taxes (sections 3101 and 3111), and the unemployment insurance or
FUTA tax (section 3301), are fully applicable within Puerto Rico
as in the United States. (See sections 1402(b), 3121(e), and
3306(j ) ) .
D. Excise/sales taxes
U.S. excise taxes. The United States does not impose a
broad-based Federal sales tax. The Code does, however, impose a
wide variety of excise taxes, including retail taxes,
manufacturer taxes, services taxes, environmental taxes, alcohol
taxes, etc. Generally, these taxes do not apply within Puerto
Rico because of an exemption in the Puerto Rico Federal Relations
Act (48 U.S.C. sec. 734).
Code sections 7652 and 7653 provide special rules with
respect to taxes on articles manufactured in Puerto Rico and
shipped into the United States, and vice versa. Basically, these
rules treat such shipments as if they were imports from or
exports to a foreign country. Under section 7652, articles of
Puerto Rican manufacture shipped into the United States are
subjected to a Federal tax equal to the amount of the Federal tax
that would apply to similar articles manufactured in or imported
into the United States. For example, by virtue of section 7652,
the United States imposes a tax at the rate of $12.50 per proof
gallon on distilled spirits produced in Puerto Rico and shipped
into the United States, because that is the tax imposed on
U.S.-produced distilled spirits.
The special feature about these rules, however, is that
they call for a rebate or "cover-over" of these equalization
taxes to Puerto Rico. Section 7652(a) generally requires the
United States to cover over to the Puerto Rican Treasury the
amount of these Federal equalization taxes imposed on Puerto
Rican.articles shipped into the United States. In addition,
section 7652(e) generally requires the United States to cover
over to Puerto Rico (and, under a sharing arrangement, to the
Virgin Islands) the Federal tax collected on all rum imported
into the United States. By virtue of section 7652(f), however,
the amount of these alcohol taxes to be covered over to Puerto
Rico cannot exceed $10.50 per gallon.
Section 7653(b) provides that articles otherwise subject to
Federal taxes will be exempt from the normal taxes if they are
shipped into Puerto Rico. Instead, section 7653(a) imposes a tax
on such items equal to the amount of Puerto Rican tax applicable
to similar items manufactured in Puerto Rico.
-8Puerto Rican excise taxes. Pursuant to excise tax
amendments enacted in 1987, Puerto Rico imposes a 5 percent
excise tax on a broad range of commodities, transactions, and
occupations.
•
*
I would now like to turn to a review of the issues presented
by the tax provisions under each of the three political options
described in the bill.
III. COMMENTS ON STATEHOOD OPTION
A. In General
Status of pre-existing laws. Title II of S. 712,
relating to the statehood option, contains three sections which
are particularly relevant to the application of both the U.S. and
Puerto Rican tax laws. These sections are:
Section 9 (Laws in Effect), which provides that Puert o
Rico's territorial laws remain in force after stateho^
od
until amended or repealed by Puerto Rico, and that all
Federal laws will have the same force and effect withi n
Puerto Rico as elsewhere in the United States.
0
Section 14 (Repeal and Amendment of Inconsistent Laws),
which provides that all Puerto Rican or Federal laws or
parts thereof which are in conflict with S. 712 are
repealed or amended to conform with S. 712.
0
Section 16 (Economic Adjustment from Territory to State),
which provides a number of special rules relating to the
adjustment of Puerto Rico's tax status.
We are not at all sure how these three provisions are
intended to interact in the tax area. The ambiguity affects the
status of pre-existing laws of both Puerto Rico and the United
States.
For example, section 16(a) provides that Puerto Rico's income
tax laws shall stand repealed upon admission of the state.
Section 16 is silent about the remainder of Puerto Rico's tax
laws. This could mean that all of Puerto Rico's tax laws, other
than the income tax laws explicitly mentioned in section 16,
remain in effect as state taxes until amended, by virtue of
section 9. In other words, section 14 might be read narrowly to
repeal or amend only those Puerto Rican tax laws which are
manifestly inconsistent with S. 712 by virtue of being explicitly
repealed or amended by some other specific provision of S. 712.
Alternatively, one might read section 14 broadly to repeal or
amend those Puerto Rican tax provisions, in addition to the
-9income tax provisions explicitly mentioned in section 16, which
are inconsistent with.the general structure of a state tax system
(e.g., the provision granting a credit against Puerto Rican
estate tax liability for Federal estate taxes imposed on the U.S.
situs property of a Puerto Rican resident decedent).
Similarly, section 9 provides that Federal laws shall have
the same force and effect within Puerto Rico as elsewhere in the
United States. Section 16(a) generally reaffirms this approach
with respect to Federal income tax laws by providing that
"Federal Income Taxes" shall immediately apply to Puerto Rico.
However, section 16(b) requires Congress to make provision so
that "economic and fiscal exceptions of the Internal Revenue
Code, already granted, such as those allowed under Section 936 of
said code" shall remain in full effect for an unspecified number
of years. Section 16(b) does not provide further guidance on the
scope of the Federal tax exceptions that are to continue to apply
to Puerto Rico. It is therefore impossible to tell which
exceptions other than Code section 936 are intended to continue
to apply to Puerto Rico.
Thus, S. 712 as currently drafted does not provide clear
guidance as to the types of provisions of pre-existing Puerto
Rican or U.S. tax law that are intended either to continue or to
be repealed upon admission of the state. The draft bill
indicates that detailed additional provisions are expected to be
added to section 16 of Title II of the bill. Such additional
provisions could undoubtedly help to provide greater certainty to
both taxpayers and the revenue authorities on the tax
implications of the statehood option.
Each of the special tax arrangements which would apply to
Puerto Rico under the statehood option of S. 712 could be subject
to challenge under the uniformity clause of the Constitution
(Art. I, sec. 8, cl. 1), which broadly requires taxes to be
uniform throughout the United States. We recognize that the tax
committees would have to address the specific issues that could
be presented with respect to each particular tax arrangement.
Nevertheless, these issues must be fully addressed with respect
to such tax provisions before a definitive position on their
inclusion and effect can be developed.
Bearing in mind the fact that certain key provisions in the
bill's tax provisions remain incomplete at this time, I would
like to discuss certain implications of those provisions.
B. Specific Provisions of Section 16
1. Section 16(a)
Basic approach. Paragraph (a) of section 16 describes the
basic structure of the income tax changes that would take place
upon Puerto Rico's admission as a state. First, it provides that
Puerto Rico's income tax laws would stand repealed immediately.
-10Second, subject to certain exceptions to be discussed later, it
provides that Federal income tax laws would apply immediately to
Puerto Rico. Third, it provides that there would be some
cover-over of Federal income tax revenues to Puerto Rico for an
unspecified transitional period.
Repeal of Puerto Rican income tax laws. There are a few
points worth noting about the repeal of Puerto Rico's income tax
laws. First, as already noted, section 16(a) repeals only the
income tax laws of the Commonwealth of Puerto Rico. Accordingly,
the bill would apparently leave in place other Puerto Rican tax
laws (e.g., estate and gift taxes, excise taxes, property taxes,
etc.). Second, the repeal of the income tax laws would reduce
annual Puerto Rican tax collections by about $2 billion (based
upon the Governor's proposed fiscal 1989 budget). Finally, as a
technical matter, the bill seems to tie the effective date of the
repeal of the income tax laws to the date of admission of Puerto
Rico as a state, rather than to the beginning or end of a taxable
year. The bill does not indicate whether administrative
provisions of the Puerto Rican income tax law would remain in
effect to allow the Puerto Rican tax authorities to complete
processing of pre-admission taxable years. If Federal income
taxes were to become applicable on the January 1 following
admission, tax administration would be facilitated. The Puerto
Rican income tax law could be continued thereafter for the
limited purpose of allowing Puerto Rican authorities to continue
to process and collect liabilities under prior law. Moreover,
any such provision would explicitly acknowledge the power of the
Puerto Rican Commonwealth Legislature to provide an interim state
income tax should it choose to do so, pending enactment of a
permanent income tax system by the state legislature after
statehood.
Extension of Federal income taxes to Puerto Rico. There are
also several points worth noting about the immediate extension of
Federal income taxes to Puerto Rico. Again, as already noted,
the bill does not clearly indicate whether other Federal taxes
are meant to be extended fully to Puerto Rico.
With respect to U.S. citizens resident in Puerto Rico, the
extension of the income tax laws presumably means that they will
become subject to Federal taxes, rather than Puerto Rican taxes,
on their Puerto Rican source income. This will be the result as
long as the exclusion of Puerto Rican source income formerly
provided by Code section 933 is not preserved under section 16(b)
of the bill. The bill would also seem to require that these
individuals become subject to the withholding of Federal income
taxes on their Puerto Rican earnings.
With respect to non-U.S. citizens resident in Puerto Rico,
their U.S. income tax status would depend upon their
classification as either resident aliens or nonresident aliens,
-11taking into account the inclusion of Puerto Rico as part of the
United States for purposes of applying the resident alien
definition of Code section 7701(b).
The substitution of the Federal income tax regime for the
Puerto Rican income tax regime also raises a number of issues for
Puerto Rican corporations. Because of the inclusion of Puerto
Rico as part of the United States after admission, these
corporations, which are now treated as foreign corporations for
U.S. income tax purposes, would be treated as domestic
corporations. This would generally mean that Puerto Rican
corporations would-become subject to full U.S. income tax on
their worldwide income.
If the section 936 credit become available to these
corporations under the statehood option — because they would
become U.S. corporations — they might thereby preserve their
exemption from U.S. tax on their Puerto Rican income. The
availability of the section 936 exemption, combined with the
repeal of the Puerto Rican income tax, could result in a decrease
in the income tax liability of Puerto Rican corporations that pay
partial or full Puerto Rican income tax now (because they do not
qualify for full exemption under the Puerto Rican incentives tax
legislation). The section 936 benefit is potentially available
to a broader, or at least a different, class of companies than
the Puerto Rican incentives tax exemptions. In addition, Puerto
Rican locally incorporated companies that had been fully exempt
under the Puerto Rican tax system might become subject to tax
(for example, if they failed to qualify for exemption under
section 936).
The recharacterization of Puerto Rican corporations as
domestic corporations could have a number of corollary effects on
those corporations, their affiliates, shareholders, and lenders,
none of which are explicitly addressed by the draft bill. For
example, the change might or might not be treated as an inbound
reorganization triggering the provisions of Code section 367,
which could result in a taxable event. The change would raise
the question of whether various corporate tax attributes from the
Puerto Rican system would carry over for Federal income tax
purposes (e.g., net operating losses, earnings and profits,
method of accounting, etc.). The change could result in a Puerto
Rican corporation becoming eligible for the first time to join in
the consolidated return of its U.S. affiliated group, with
corresponding questions about its ability to use accumulated
losses against the income of such a group.
The Puerto Rican corporation could become eligible for the
first time to be treated as a small business ("S") corporation as
defined in Code section 1361, with the effect of eliminating its
corporate tax liability altogether. (This effect would be
independent of section 936 and would provide an alternative
exemption for qualifying corporations if section 936 also
remained in effect.) If the Puerto Rican corporation had been a
-12controlled foreign corporation under Subpart F of the Code, it
would presumably shed that status, although the impact of such a
change on matters such as its section 959 "previously taxed
income" account would have to be addressed. Interest and
dividends paid by the Puerto Rican corporation would become U.S.
source income, potentially ineligible for the section 936
exemption in the hands of recipient section 936 companies, but
eligible for the 70% or 100% deduction of dividends received
under Code section 243.
As indicated by the issues just discussed, the extension «f
the Federal income tax law to the state of Puerto Rico would
raise a myriad of highly complex tax questions. Accordingly,
careful consideration should be given to ensuring that there
would be a flexible mechanism for resolving such issues.
Cover-over of Federal income taxes to Puerto Rico. Section
16(a) also provides for the cover-over to the Puerto Rican
Treasury of certain Federal income taxes. The bill's language
raises a number of issues.
First, the bill does not clearly indicate how to measure the
amount of Federal income taxes that would be covered over to
Puerto Rico. A number of different measurement approaches and
combinations thereof are conceivable. For example, the
cover-over could be equal to the amount of Federal income taxes
collected on Puerto Rican source income of all U.S. taxpayers.
This would require all U.S. taxpayers to report separately the
amount of their Puerto Rican source income and their other
income, and to allocate an appropriate amount of deductions to
their Puerto Rican source income in order to determine the amount
of their Federal tax liability attributable to that income.
Alternatively, or in combination with that approach, the
cover-over could include the amount of Federal income taxes
collected on the worldwide income of Puerto Rican residents. For
purposes of this alternative, Puerto Rican residents could be
deemed to mean individuals resident in Puerto Rico and Puerto
Rican corporations. This alternative would require individuals
to report their status as residents of Puerto Rico under whatever
residency standard would be established for that purpose. The
calculation of the separate Federal tax liability of a Puerto
Rican corporation could be difficult where, for example, that
corporation is part of a U.S. consolidated group.
If the cover-over measure is intended to be linked to the
amount of income tax Puerto Rico would have collected if its
income tax law had remained in effect, the cover-over measures
just described could be limited by imposing as a cap the amount
©f Puerto Rican tax that would have been collected from the
taxpayer on the affected income if Puerto Rico's tax laws were
still in effect. Such an approach would require the additional
computation and reporting of the hypothetical Puerto Rican tax
liability under the principles of pre-statehood Puerto Rican law,
-13or some rough estimate based on actual Puerto Rican collections
in the last pre-statehood years.
The bill calls for a phase-down of the cover-over during an
unspecified number of years ("the proceeds of said taxes shall be
transferred to the Treasury of Puerto Rico in an amount to be
diminished by
% of the monies collected each year for a
year period"). Apparently, this language is intended to
result in a straight-line reduction of the cover-over during the
transitional period. The bill does not mention any other
adjustment to the cover-over amount. For example, the cover-over
amount apparently would not be adjusted to reflect in any way the
amount of state income tax revenues that Puerto Rico might
collect during the transition period by enacting state income tax
laws. In addition, the bill does not mention any adjustment that
might be made to the cover-over amount to reflect rebates or
other subsidies that Puerto Rico might grant to taxpayers whose
Federal income tax payments are being covered over to Puerto
Rico. The bill does not provide the rule enacted in 1984 (in
Code section 7652(c) and (d)) to limit certain Federal excise tax
cover-overs in cases where the Federal tax revenues attributable
to Puerto Rico are liable to be artificially inflated or
otherwise manipulated.
2. Section 16(b)
Section 16(b). calls upon Congress to make provision so that
"economic and fiscal exceptions of the Internal Revenue Code,
already granted, such as those allowed under Section 936" shall
be continued in full for an unspecified period after statehood,
to be phased out gradually thereafter. This provision raises a
number of questions. For example, it does not indicate which
"exceptions", other than section 936, are intended to be retained
during the transitional period. Thus, the provision does not
specify whether it is intended to cover section 243(b)(1)(C)
(relating to the 100 percent dividends received deduction for
certain dividends from section 936 companies) or section 933
(relating to the exemption from Federal tax for the Puerto Rican
source income of bona fide residents of Puerto Rico).
In addition, the bill does not clearly indicate when or how
Congress would make provision to continue section 936 or other
exceptions, nor does it indicate how long such exceptions would
continue. Moreover, the bill provides no guidance on whether
section 936, if it were to continue for Puerto Rico, would be
frozen in its current form, or whether Puerto Rico's version of
section 936 would be subject either to whatever amendments
Congress might subsequently make to section 936 as it applies to
other possessions, or to subsequent amendments specifically
applicable to Puerto Rico.
The bill appears to envision that section 936 .would remain in
effect not only for corporations which had elected its benefits
-14prior to statehood, but also those which might elect its benefits
after Puerto Rico becomes a state.
While most section 936 companies currently benefit from
Puerto Rican income tax exemptions under the industrial
incentives legislation, thereby paying very little income tax,
the effect of continuing section 936 while simultaneously
repealing Puerto Rico's income tax laws could mean that all
section 936 companies would enjoy a total elimination of their
income tax liability as a result of statehood.
The section 936 exemption applies not only to Puerto Rican
business profits of U.S. corporations, but also to their Puerto
Rican source investment income derived from qualifying
investments of those profits. The latter category of investment
income, known as QPSII ("qualified possession source investment
income"), can include income from lending section 936 funds
through a Puerto Rican financial institution to qualifying
borrowers in beneficiary countries of the Caribbean Basin
Initiative (CBI). The bill does not indicate whether the
transitional period during which section 936 would remain in
effect would be the same for both operating profits and the
income from investing those profits in QPSII investments.
3. Section 16(c)
Section 16(c) calls for Congress to enact an omnibus act to,
among other things, "assure appropriate continuity in the
treatment...of alcohol excise taxes". It is not clear whether
this provision contemplates a permanent continuation of the
cover-over of U.S. alcohol excise taxes that occurs under Code
section 7652 or a gradual phase-out similar to those mentioned in
sections 16(a) and 16(b).
The Federal excise tax cover-over method of providing funding
to the Puerto Rican Government has given rise to concerns about
equity relative to state governments. For example, the Senate
Finance Committee in 1984 expressed the view that the practice
should not be expanded without a thorough examination of that
issue. S. Rep. 98-169, 1-1000. Additional concerns have arisen
from the provision by Puerto Rico of subsidies to producers of
articles subject to the Federal excise tax.
IV. COMMENTS ON INDEPENDENCE OPTION
A. In General
Title III of S. 712 deals with the independence option,
and section 5.4 of Title III specifically addresses a number of
tax issues. More generally, however, section 4.1(a) deals with
the status of pre-existing law upon proclamation of independence.
Section 5.3 commits the United States not to impose trade
barriers or quotas on merchandise coming into the United States
-15from Puerto Rico until proclamation of independence and for
twenty years thereafter.
Status of pre-existing laws. Under section 4.1(a)(2), all
U.S. laws applicable to Puerto Rico immediately prior to
independence shall no longer apply in the Republic of Puerto
Rico. For purposes of U.S. tax laws, this provision presumably
means that those Federal tax laws that treat Puerto Rico either
as part of the United States or as a possession of the United
States shall no longer apply, and that Puerto Rico shall instead
be treated exclusively as a foreign country for U.S. tax
purposes. Thus, for example, U.S.. citizens living and working in
Puerto Rico could become eligible for the foreign earned income
exclusion under Code section 911. Generally, except for the
section 911 exclusion, income derived by U.S. citizens and
residents from foreign sources is subject to U.S. tax with a
credit for foreign income taxes. However, this system would be
substantially modified with respect to Puerto Rico by the bill's
proposal to continue section 936.
Under section 4.1(a)(3),
all laws and regulations of the Commonwealth of
Puerto Rico in force immediately before the
proclamation of independence shall continue in
force and shall be read with such modifications,
adaptions, qualifications, and exceptions as may
be necessary to bring them into conformity with
the Constitution of the Republic of Puerto Rico,
until such time as they shall be replaced with
new legislation . . . .
In other words, Puerto Rico's tax laws would generally remain in
effect as national tax laws in an independent Puerto Rico, until
changed by new legislation.
Both of these general conclusions are subject to the special
provisions of section 5.4, to which we now turn.
B. Section 5.4(a)
Continuation of section 936. Section 5.4(a) provides that
the section 936 credit currently allowed under the Code shall
remain in full force for 15 years after independence with respect
to corporations which now or at any time during that period meet
the requirements of section 936. There are several points to
note about this provision.
First, this language indicates that it is the present
intention of Congress that section 936 benefits, as currently
provided in the Code, would continue to apply without change to
companies doing business in Puerto Rico. Pursuant to this
language, this would seem to be the case regardless of whether
the basic 936 credit, as it applies to the remaining U.S.
-16possessions, might be changed by Congress after Puerto Rico's
independence. This feature of the bill is problematic in light
of the numerous amendments that have been made to section 936 in
recent years.
Second, the bill would not only preserve 936 benefits for
those companies which are currently receiving them, but would
also provide them to U.S. companies which might set up operations
in Puerto Rico at any time during the transition period.
Moreover, the proposed continuation of section 936 is not tied to
any continuation of the industrial incentives tax legislation of
Puerto Rico. In other words, the bill as drafted would require
the United States to continue to exempt the Puerto Rican income
of section 936 companies even if Puerto Rico substantially
increased its level of taxation on those companies.
Third, the proposed continuation of section 936 raises a
significant question about the bill's impact on understandings
reached with a number of U.S. income tax treaty partners
(including China, Korea, Barbados, Cyprus, Jamaica, Malta, and
Morocco) to the effect that those treaties would be renegotiated
or amended to include tax sparing provisions if the United States
ever gave tax sparing to any other foreign country. We have not
attempted to quantify the revenue cost of implementing those
changes in the event this provision triggers such changes.
However, it should be noted that it has been a cornerstone of
U.S. tax treaty policy, supported by both Congress and the
Executive Branch, that tax sparing credits (such as those
provided under section 936) will not be included in U.S. tax
treaties with other countries.
Finally, the bill is unclear with respect to the scope of the
U.S. tax benefits that are intended to be preserved along with
section 936. For example, section 5.4(a) does not mention the
100 percent dividends received deduction applicable to certain
dividends from 936 companies under section 243. However, the
language of section 5.4(b), to which we now turn, implies that
the dividends received deduction is intended to be preserved.
C. Section 5.4(b)
Phase-out of section 936. Section 5.4(b) contains a
number of provisions relating to the phase-out of the section 936
benefit after the initial 15-year period.
First, the section provides that in the tenth year after
independence, an joint Puerto Rican-U.S. commission shall be
established to recommend changes to the section 936 benefit to
take place at the end of the 15-year period. If this group
cannot agree on changing the credit, the bill provides that the
basic exemption shall remain in full force through the 25th year
after independence. In other words, Puerto Rico would have to
agree to give up the section 936 credit in order for it to
disappear before the.expiration of 25 years after independence.
-17In the absence of an agreement by the joint commission, the
only change that would be made during the period that is 15-25
years after independence would be to begin to subject "earnings
repatriations" (presumably referring to dividends) by section 936
companies to U.S. tax on a phased-in basis. This proposal seems
to assume that the section 243 one hundred percent dividends
received deduction had remained in effect after independence.
Even the U.S. taxation on the dividends is subjected to the
requirement that the United States grant a credit for Puerto
Rican taxes on the dividends. It is not clear how the drafters
intended this proposal to interact, with the provisions of the
U.S. corporate alternative minimum tax, which include some
portion of section 936 dividends in the alternative minimum
taxable income base.
D. Section 5.4(c)
Business profits/permanent establishment. Section'
5.4(c) contains a provision, commonly found in much more expanded
form in income tax treaties, which would exempt enterprises
resident in either Puerto Rico or the United States from taxation
by the other country on their business profits, unless those
profits are attributable to a permanent establishment in that
other country. This provision differs, however, from comparable
provisions in U.S. income tax treaties. For example, it does not
define either "business profits" or "permanent establishment",
both of which are commonly defined in tax treaties. It is not
accompanied by the kind of "anti-treaty-shopping" provision that
would prevent third country residents from abusing the
relationship between Puerto Rico and the United States by setting
up a Puerto Rican company to enjoy the U.S. tax benefit. It is
not accompanied by other provisions (e.g., nondiscrimination,
exchange of information, competent authority procedures, etc.)
which typically form part of the overall bargain in a treaty
relationship. Moreover, like the other treaty-type provisions in
section 5.4, this provision does not clearly indicate whether its
drafters intended it to create an obligation under international
law, which neither jurisdiction could change unilaterally.
We have asked the State Department for its views on this
question, and defer to its conclusions. We would also defer to
the State Department on the issue of whether these provisions,
including the part of section 5.4(f) which calls for a tax treaty
to be negotiated between Puerto Rico and the United States,
infringes in any way on the constitutional allocation of
treaty-making power to the President with the advice and consent
of the Senate.
E. Section 5.4(d)
Source/situs taxing jurisdiction. Section 5.4(d)
provides that both the United States and Puerto Rico shall have
taxing jurisdiction over income sourced within its territory and
-18earned by individuals resident in the other jurisdiction, over
property situated within its territory (including transfers of
such property by gift or at death), and over products consumed in
its territory. This provision seems designed to allocate taxing
jurisdiction between the United States and Puerto Rico for
purposes of income, estate, gift, and excise taxes. It is
unclear whether the provision is intended to allocate exclusive
(as opposed to merely primary) taxing jurisdiction to the source
or situs country. For example, it is unclear whether the
provision is suggesting that only Puerto Rico can tax the income
earned in Puerto Rico by U.S. resident individuals. We note that
section 5.4(f) provides that sourcing determinations shall be
made according to the terms of a tax treaty to be entered into
promptly upon Puerto Rico's independence, and meanwhile by the
laws of each country.
F. Section 5.4(e)
Foreign tax credit and tax sparing. Section 5.4(e)
contains two provisions. First, it guarantees taxpayers resident
in either the United States or Puerto Rico that they may take a
foreign tax credit for taxes payable to the other country in
accordance with the various provisions of section 5.4 In the
case of Puerto Rican taxes, the bill appears to guarantee a
credit without regard to the normal Code rules relating to the
creditability of foreign taxes.
Section 5.4(e) also gives Puerto Rico most favored nation
status in the event that the United States grants tax sparing
credits to any other country. It does this by saying that such
credits shall be available "ipso facto" to Puerto Rico in the
event that the United States amends its laws on the provision of
tax sparing credits or reaches an agreement on the provisions of
a tax sparing credit with any other nation. By contrast, most
understandings between the United States and its developing
country treaty partners referring to tax sparing would say that
tax sparing will be granted to them only by amendment of their
treaty in the event their most favored nation understanding on
tax sparing is triggered.
G. Section 5.4(f)
Treaty relationship. Section 5.4(f) provides that the
various source, situs, and other definitional determinations
required under section 5.4 shall be made according to the terms
of a tax treaty to be entered into promptly between the United
States and Puerto Rico. As indicated above, the provision
indicates that such determinations would be made, in the
meantime, under the "current" domestic laws of the two
jurisdictions. Here again, it is unclear whether the relevant
domestic laws could be unilaterally amended without violating
some international law agreement that might be deemed to arise
from this type of provision.
-19H.
Section 5.6(b)
Continuation of exemption for interest on Puerto Rican
government obligations. Section 5.6 of the independence option
contains a provision which would .require the United States to
continue to provide an exemption for 25 years after independence
for interest payments made on debt obligations issued by the
government of Puerto Rico, whether issued before or after
independence. This provision would be unique; the United States
does not provide such exemptions to U.S. taxpayers holding
foreign government obligations even in the context of income tax
treaties. Moreover, the exemption would apparently have to be
equivalent to that "currently provided by law" on Puerto Rican
bonds, raising the question whether any subsequent amendments to
the domestic tax exempt bond provisions would apply to Puerto
Rican bonds if this provision were enacted.
I. Section 5.3
Duty-free trade. While I defer to my USTR colleague to
comment on the trade aspects of this bill, I do want to
underscore an area of particular Treasury concern. Section 5.3
provides that the United States will not impose trade barriers
or quotas on articles coming into the United States from Puerto
Rico until proclamation of independence and for twenty years
thereafter.
This provision does not distinguish between (1) products of
Puerto Rico, that is, products that are either wholly obtained or
substantially processed in Puerto Rico, and (2) third-country
goods shipped through Puerto Rico. The consequences are
far-reaching, going beyond our bilateral trade relationship with
Puerto Rico, since third-country textiles and other goods could
circumvent U.S. quotas and tariffs.
A more effective and typical formulation is to specify that
duty-free treatment be accorded to "products of" Puerto Rico.
This narrows eligibility, excluding third-country goods in which
Puerto
Rico does
not COMMONWEALTH
have a significant
V.
COMMENTS
ON THE
OPTION economic stake.
Subpart 4 of the commonwealth option provides for an
amendment to section 9 of the Puerto Rico Federal Relations Act.
One part of that amendment would render Federal statutes
inapplicable in Puerto Rico unless they are consistent with the
policy established under subpart 3 of that option (i.e., to
enable the people of Puerto Rico, among other things, to
accelerate their economic and social development), and unless
they have proper regard for the economic, cultural, ecological,
geographic, demographic, and other local conditions of the
Commonwealth of Puerto Rico. It is not clear to us how that part
of the amendment would affect U.S. tax statutes currently
-20applicable in Puerto Rico, if at all. Indeed, it would seem
appropriate for the Congress to clarify that these provisions
would not be applicable to tax, customs, or similar revenue
measures.
In addition, we believe Congress should make clear that tax
benefits such as section 936 cannot be regarded as benefits that
will last indefinitely under commonwealth status, but rather as
incentives which Congress will continue to review and revise as
necessary.
A further part of the amendment to section 9 would provide
that the Commonwealth of Puerto Rico may "continue" to enter in
its own right into international cultural, commercial,
educational, and sports agreements, and other agreements of like
nature. In addition, the same amendment would authorize the
Governor of Puerto Rico to take "any official action" to promote
the international interests of Puerto Rico that requires the
consent of the United States Government and is not expressly
prohibited by law. The amendment appears to contemplate that
U.S. consent would be implicit unless the President objected to
the action on foreign relations or national defense grounds,
after being notified of the proposed action by the Governor.
Currently, Puerto Rico does not have the authority to negotiate
or enter into international double taxation or similar agreements
in its own right, and it is unclear how the proposed amendment
would affect that issue. It is certain, however, that the grant
of independent tax treaty authority to Puerto Rico would
significantly complicate the negotiations of United States
treaties and quite possibly undermine several existing
conventions.
TREASURY NEWS _
epartment off the Treasury • Washington, D.c. • Telephone 566-2041
10
Paris, France
July 13, 1989
FOR IMMEDIATE RELEASE
y^Art'i"-
STATEMENT BY
NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
Today, the Senate conferees offered a proposal to
resolve many of the outstanding differences between House and
Senate versions of the pending thrift legislation in a single
overall package. The Senate offer seems to embody the best
of both the House and Senate bills. I applaud the effort to
move the conference process forward rapidly.
We have not yet seen all the specific details, as well
as the specific implementing legislative language. However,
based on our understanding of the outline that has been
released, the Administration would strongly support this
proposal taken as a whole. It appears to contain excellent
provisions on many issues, including strong capital
requirements to protect against future risks, a financing
plan that would preserve the Gramm-Rudman-Hollings process
intact and lock in industry contributions, and a
substantially strengthened thrift supervisory structure. The
proposal also seeks to satisfy the objectives set forth by
the President for responsible action to prevent any
reoccurrence of this problem.
# # #
NB-371
SUMMIT OF THE ARCH
16 July 1989
ECONOMIC DECLARATION
1) We, the Heads of State or Government of seven
major industrial nations and the President of the Commission
of the European Communities, have met in Paris for the
fifteenth annual Economic Summit. The Summit of the Arch
initiates a new round of Summits to succeed those begun at
Rambouillet in 1975 and at Versailles in 1982. The round
beginning in 1982 has seen one of the longest periods of
sustained growth since the Second World War. These Summits
have permitted effective consultations and offered the
opportunity
to
launch
initiatives
and
to
strengthen
international cooperation.
2) This year's world economic situation presents
three main challenges!
- The choice and the implementation of measures
needed to maintain balanced and sustained growth, counter
inflation, create jobs and promote social justice. These
measures should also facilitate the adjustment of external
imbalances, promote international trade and investment, and
improve the economic situation of developing countries.
- 2 - The development and the further integration of
developing countries into the world economy. Whilst there has
been substantial progress in many developing countries,
particularly those implementing sound economic policies, the
debt burden and the persistence of poverty, often made worse
by natural disasters affecting hundreds of millions of people,
are problems of deep concern which we must continue to face in
a spirit of solidarity.
- The urgent need to safeguard the environment for
future generations.
Scientific studies have revealed the
existence of serious threats to our environment such as the
depletion of the stratospheric ozone layer and excessive
emissions of carbon dioxide and other greenhouse gases which
could lead to future climate changes.
Protecting the
environment calls for a determined and concerted international
response and for the early adoption, worldwide, of policies
based on sustainable development.
INTERNATIONAL ECONOMIC SITUATION
3) Growth has been sustained by focusing policies
on improving the efficiency and flexibility of our economies
and by strengthening our cooperative efforts and the
coordination process. In the medium term, the current buoyant
investment seen during this period should pave the way for an
increased supply of goods and services and help reduce the
dangers of inflation. The outlook is not, however, without
risks.
4) Until now, the threat of inflation in many
countries has been contained, thanks to the concerted efforts
of governments and monetary authorities. But continued
vigilance is required and inflation, where it has increased
will continue to receive a firm policy response so that it
will be put on a downward path.
5) While some progress has been made in reducing
external imbalances, the momentum of adjustment has recently
weakened markedly. There needs to be further progress in
adjusting external imbalances through cooperation.
6) In countries with fiscal and current account
deficits, including the United States of America, Canada and
Italy, further reductions in budget deficits are needed.
Action will be taken to bring them down. This may help reduce*
the saving-investment gap and external imbalances, contribute
to countering inflation and encourage greater exchange rate
stability in a context of decreasing interest rates.
7) Countries with external surpluses, including
Japan and Germany, should continue to pursue appropriate
macroeconomic policies and structural reforms that will
encourage non-inflationary growth of domestic demand and
facilitate external adjustment.
8) All our countries share the responsibility for
the sound development of the world economy. Over the medium
term, deficit countries have to play a key role in global
adjustment through their external adjustment and increased
exports; surplus countries have to contribute to sustaining
global expansion
through policies
providing
favourable
conditions for growth of domestic demand and imports.
9) The emergence of the newly industrializing
economies and the initiation of a dialogue with them are
welcome. We call on those with substantial surpluses to
contribute to the adjustment of external imbalances and the
open trade and payments system. To that end, they should
- 4 permit exchange rates to reflect their competitive position,
implement GATT commitments and reduce trade barriers.
INTERNATIONAL MONETARY DEVELOPMENTS AND COORDINATION
10) Under the Plaza and Louvre agreements, our
countries agreed to pursue, in a mutually reinforcing way,
policies of surveillance and coordination aimed at improving
their economic fundamentals and at fostering stability of
exchange rates consistent with those economic fundamentals.
There has been progress in the multilateral
surveillance and coordination of economic policies with a view
to ensuring internal consistency of domestic policies and
their international compatibility. The procedures to be used
have been more clearly defined and improved in cooperation
with the International Monetary Fund.
11) The coordination process has made a positive
contribution to world economic development and it has also
contributed greatly to improving the functioning of the
International Monetary System. There has also been continued
cooperation in exchange markets.
It is important to continue, and where appropriate,
to develop this cooperative and flexible approach to improve
the functioning and the stability of the International
Monetary System in a manner consistent with economic
fundamentals. We therefore ask the Finance Ministers to
continue to keep under review possible steps that could be
taken to improve the coordination process, exchange market
cooperation, and the functioning of the International Monetary
System.
12) We welcome the decision to complete the work on
the ninth review of the International Monetary Fund quotas
with a view to a decision on this matter before the end of the
year.
We note that the question of a resumption of S.D.R.
allocation remains under consideration in the Executive Board
of the International Monetary Fund.
13) Within the European Community, the European
Monetary System has contributed to a significant degree of
economic policy convergence and monetary stability.
IMPROVING ECONOMIC EFFICIENCY
14) We will continue to promote measures in order
to
remove
inefficiencies
in
our
economies.
These
inefficiencies affect many aspects of economic activity,
reduce potential growth rates and the prospects for job
creation, diminish the effectiveness of macroeconomic policies
and impede the external adjustment process. In this context,
tax reforms, modernization of financial markets, strengthening
of competition policies and reducing rigidities in all sectors
including energy, industry and agriculture are necessary. So
are the improvement of education and vocational training,
transportation and distribution systems and further policies
aimed at giving more flexibility and mobility to the labour
market and reducing unemployment. Within the European
Community, the steady progress towards the completion by the
end of 1992 of the program contained in the Single Act has
already given a strong momentum to economic efficiency.
15) The decline of saving in some of our countries
in this decade is a cause for concern. This lower level of
saving can contribute to high real interest rates and
therefore hamper growth. Inadequate saving and large fiscal
deficits are associated with large external deficits. We
recommend, within the framework of policy coordination,
policies to encourage saving and remove hindrances where they
exist.
16) Financial activities are being increasingly
carried out with new techniques on a worldwide basis. As
regards insider trading, which could hamper the credibility of
financial markets, regulations vary greatly among our
countries. These regulations have been recently, or are in the
process of being, strengthened. International cooperation
should be pursued and enhanced.
TRADE ISSUES
17) World trade developed rapidly last year. Yet
protectionism remains a real threat. We strongly reaffirm our
determination to fight it in all its forms. We shall fulfill
the Punta del Este standstill and rollback commitments which,
inter alia, require the avoidance of any trade restrictive or
distorting measure inconsistent with the provisions of the
General Agreement and its instruments. We agree to make
effective use of the improved GATT dispute settlement
mechanism and to make progress in negotiations for further
improvements. We will avoid any discriminatory or autonomous
actions, which undermine the principles of the GATT and the
integrity of the multilateral trading system. We also are
pledged
to oppose the tendency towards unilateralism,
bilateralism, sectoralisa and managed trade which threatens to
undermine the multilateral system and the Uruguay Round
negotiations•
- 7 18) The successful negotiation of the Trade
Negotiations Committee of the Uruguay Round in Geneva last
April, thereby completing the mid-term review, is a very
important achievement. It gives a clear framework for future
work in all sectors including the pursuit of agricultural
reform in the short term as well as in the long term. It also
gives the necessary, framework for substantive negotiations in
important sectors not yet fully included in GATT disciplines,
such as services, trade-related investment measures and
intellectual property.
Developing countries participated actively in these
negotiations and contributed to this success. All countries
should make their most constructive contribution possible.
We express our full commitment to making further
substantive progress in the Uruguay Round in order to complete
it by the end of 1990.
>
19) We note with satisfaction the entry into force of
the Free Trade Agreement between Canada and the US, as well as
more recent initiatives to intensify the close economic
relations between the European Community and EFTA countries.
It remains our policy that these and other developments in
regional
cooperation,
should
be
trade-creating
and
complementary to the multilateral liberalization process.
20) It is the firm intention • of the European
Community that the trade aspects of the single market program
should also be trade-creating and complementary to the
multilateral liberalization process.
21) We note with satisfaction the progress that has
been made in strengthening the multilateral disciplines on
trade and aid distorting export credit subsidies. This effort
must be pursued actively and completed in the competent bodies
of the OECD with a view to improving present guidelines at the
earliest possible date.
GENERAL PROBLEMS OF DEVELOPMENT
22) Development is a shared global challenge. We
shall help developing countries by opening the world trading
system and by supporting their structural adjustment.
We
shall encourage too economic diversification in commodity
dependent countries and the creation of a favourable
environment for transfers of technology and capital flows.
We underline the continuing importance of official
development assistance and. welcome the increased efforts of
Summit participants in this respect. We note the targets
already established by international organizations for the
future level of official development assistance and stress the ~
importance of overall financial flows to development.
We underline simultaneously the importance attached
to the quality of the aid and to the evaluation of the
projects and the programs financed.
23) We urge developing countries to implement sound
economic policies. A vital factor will be the adoption of
financial and fiscal policies which attract inward investment
and encourage growth and the return of flight capital.
24) We note with satisfaction that there has been
substantial progress in the multilateral aid initiative for
the Philippines that was given special attention in the
Toronto economic declaration.
- 9 25) Faced with the worrying economic situation of
Yugoslavia, we encourage its government to implement a strong
economic reform program that can command bilateral and
multilateral support.
THE SITUATION IN THE POOREST COUNTRIES
26) The enhancement of the International Monetary
Fund Structural Adjustment Facility, the World Bank special
program of assistance for the poorest and most indebted
countries and the fifth replenishment of the African
Development Fund are all important measures benefiting those
countries having embarked upon an adjustment process. We
stress the importance attached to a substantial replenishment
of International Development Association resources.
27) As we urged last' year in TORONTO, the Paris
Club reached a consensus in September 1988 on the conditions
of implementation of significant reduction of debt service
payments for the poorest countries. Thirteen countries have
already benefitted by this decision.
28) We welcome the increasing grant element in the
development assistance as well as the *. steps taken to convert
loans into grants and we urge further steps to this end.
Flexibility in development aid as much as in debt rescheduling
is required.
29) We attach great importance to the efficient and
successful preparation of the next general conference of the
United Nations on the least developed countries, which will
take place in Paris in 1990.
STRENGTHENED DEBT STRATEGY FOR THE HEAVILY INDEBTED COUNTRIES
- 10 30) Our approach to the debt problems has produced
significant results, but serious challenges remain: in many
countries the ratio of debt service to exports remains high,
financing for growth promoting investment is scarce, and
capital flight is a key problem. An improvement in the
investment climate must be a critical part of efforts to
achieve a sustainable level of growth without excessive levels
of debt. These improvements of the current situation depend
above all on sustained and effective adjustment policies in
the debtor countries.
31) To address these challenges, we are strongly
committed to the strengthened debt strategy. This will rely,
on a case-by-case basis, on the following actions:
- borrowing countries should implement, with the
assistance of the Fund and the Bank, sound economic policies,
particularly designed to mobilize savings, stimulate
investment and reverse capital flight;
- banks should increasingly focus on voluntary,
market-based debt and debt service reduction operations, as a
complement to new lending;
- the International Monetary Fund and World Bank will
support significant debt reduction by setting aside a portion
of policy-based loans;
- limited interest support will be provided, through
additional financing by the International Monetary Fund and
the World Bank, for transactions involving significant debt
and debt service reduction. For that purpose the use of escrow
accounts is agreed;
- 11 - continued Paris Club rescheduling and flexibility
of export-credit agencies;
- strengthening of the international financial
institutions capability for supporting medium-term
macroeconomic and structural adjustment programs and for
compensating the negative effects of export shortfalls and
external shocks.
32) In the framework of this strategy:
- we welcome the recent decisions taken by the two
institutions to encourage debt and debt service reduction
which provide adequate resources for these purposes;
- we urge debtor countries to move ahead promptly
to develop strong economic reform programs that may lead to
debt and debt service reductions in accordance with the ~
guidelines defined by the two Bretton Woods institutions;
- we urge banks to take realistic and constructive
approaches in their negotiations with the debtor countries and
to move promptly to conclude agreements on financial packages
including debt reduction, debt service reduction and new
money.
We stress that official creditors should not
substitute for private lenders. Our governments are prepared
to consider as appropriate tax, regulatory and accounting
practices with a view to eliminating unnecessary obstacles to
debt and debt service reductions.
- 12 ENVIRONMENT
33) There is growing awareness throughout the world
of the necessity to preserve better the global ecological
balance. This includes serious threats to the atmosphere,
which could lead to future climate changes. We note with great
concern the growing pollution of air, lakes, rivers, oceans
and seas; acid rain, dangerous substances; and the rapid
desertification
and
deforestation.
Such
environmental
degradation endangers species and undermines the well-being of
individuals and societies.
Decisive action is urgently needed to understand
and protect the earth's ecological balance. We will work
together to achieve the common goals of preserving a healthy
and balanced global environment in order to meet shared
economic and social objectives and to carry out obligations to
future generations.
'
34) We urge all countries to give further impetus
to scientific research on environmental issues, to develop
necessary technologies and to make clear evaluations of the
economic costs and benefits of environmental policies.
The persisting uncertainty on some of these issues
should not unduly delay our action.
In this connection, we ask all countries to combine
their efforts in order to improve observation and monitoring
on a global scale.
35) We believe that international cooperation also
needs to be enhanced in the field of technology and technology
transfer in order to reduce pollution or provide alternative
solutions.
- 13 36) We believe that industry has a crucial role in
preventing pollution at source, in waste minimization, in
energy conservation, and in the design and marketing of
cost-effective clean technologies. The agricultural sector
must also contribute to tackling problems such as water
pollution, soil erosion and desertification.
37) Environmental protection is integral to issues
such as trade, development, energy, transport, agriculture and
economic planning. Therefore, environmental considerations
must be taken into account in economic decision-making. In
fact good economic policies and good environmental policies
are mutually reinforcing.
In order to achieve sustainable development, we
shall ensure the compatibility of economic growth and
development
with
the
protection
of
the
environment.
Environmental
protection
and
related
investment
should
contribute to economic growth. In this respect, intensified
efforts for technological breakthrough are important to
reconcile economic growth and environmental policies.
Clear assessments of the costs, benefits and
resource implications of environmental protection should help
governments to take the necessary decisions on the mix of
price signals (e.g., taxes or expenditures) and regulatory
actions, reflecting where possible the full value of natural
resources.
- 14 We encourage
the
World
Bank and
regional
development banks to integrate environmental considerations
into their activities. International organizations such as the
OECD and the United Nations and its affiliated organizations,
will be asked to develop further techniques of analysis which
would help governments assess appropriate economic measures to
promote the quality of the environment. We ask the OECD,
within the context of its work on integrating environment and
economic
decision-making,
to
examine
how
selected
environmental indicators could be developed. We expect the
1992 UN Conference on Environment and Development to give
additional momentum
to the protection of the global
environment•
38) To help developing countries deal with past
damage and to encourage them to take environmentally desirable
action, economic incentives may include the use of aid
mechanisms and specific transfer of technology.. In special *.
cases, ODA debt forgiveness and debt for nature swaps can play
a useful role in environmental protection.
We also emphasize the necessity to take into
account the interests and needs of developing countries in
sustaining the growth of their economies and the financial and
technological requirements to meet environmental challenges.
39) The depletion of the stratospheric ozone layer
is alarming and calls for prompt action.
- 15 We welcome the HELSINKI conclusions related, among
other issues, to the complete abandonment of the production
and consumption of chloro-fluorocarbons covered by the
MONTREAL protocol as soon as possible and not later than the
end of the century. Specific attention must also be given to
those ozone-depleting substances not covered by the Montreal
protocol. We shall promote the development and use of suitable
substitute substances and technologies. More emphasis should
be
placed
on projects
that
provide
alternatives
to
chloro-fluorocarbons•
40) We strongly advocate common efforts to limit
emissions of carbon dioxide and other greenhouse gases, which
threaten to induce climate change, endangering the environment
and ultimately the economy. We strongly support the work
undertaken by the Intergovernmental Panel on Climate Change,
on this issue.
We need to strengthen the worldwide network of
observatories for greenhouse gases and support the World
Meteorological Organisation initiative to establish a global
climatological reference network to detect climate changes
41) We agree that increasing energy efficiency
could make a substantial contribution to these goals. We urge
international organizations concerned to encourage measures,
including economic measures, to improve energy conservation
and, more broadly, efficiency in the use • of energy of all
kinds and to promote relevant techniques and technologies.
- 16 We are committed to maintaining the highest safety
standards for nuclear power plants and to strengthening
international cooperation in safe operation of power plants
and waste management, and we recognize that nuclear power also
plays an important role in limiting output of greenhouse
gases.
42) Deforestation also damages the atmosphere and
must be reversed. We call for the adoption of sustainable
forest management practices, with a view to preserving the
scale
of
world
forests.
The
relevant
international
organizations will be asked to complete reports on the state
of the world's forests by 1990.
43) Preserving the tropical forests is an urgent
need for the world as a whole. While recognizing the sovereign
rights of developing countries to make use of their natural
resources, we encourage, through a sustainable use of tropical
forests, the protection of all the species therein and the
traditional rights to land and other resources of local
communities. We welcome the German initiative in this field as
a basis for progress.
To this end, we give strong support to rapid
implementation of the Tropical Forest Action Plan which was
adopted in 1986 in the framework of the Food and Agricultural
Organization. We appeal to both consumer and producer
countries, which are united in the International Tropical
Timber Organization, to join their efforts to ensure better
conservation of the forests. We express our readiness to
assist the efforts of nations with tropical forests through
financial and technical cooperation, and in international
organizations•
- 17 44) Temperate forests, lakes and rivers must be
protected against the effects of acid pollutants such as
sulphur dioxide and nitrogen oxides. It is necessary to pursue
actively the bilateral and multilateral efforts to this end.
45) The increasing complexity of the issues related
to the protection of the atmosphere calls for innovative
solutions. New instruments may be contemplated. We believe
that the conclusion of a framework or umbrella convention on
climate change to set out general principles or guidelines is
urgently required to mobilize and rationalize the efforts made
by the international community. We welcome the work under way
by the United Nations Environment Program, in cooperation with
the World Meteorological Organization, drawing on the work of
the Intergovernmental Panel on Climate Change and the results
of other international meetings. Specific protocols containing
concrete commitments could be fitted into the framework as
scientific evidence requires and permits.
46) We condemn indiscriminate use of oceans as
dumping grounds for polluting waste. There is a particular
problem with the deterioration of coastal waters. To ensure
the sustainable management of the marine environment, we
recognize the importance of international cooperation in
preserving it and conserving the living resources of the sea.
We call for relevant bodies of the United Nations to prepare a
report on the state of the world's oceans.
- 18 We express our concern that national, regional and
global capabilities to contain and alleviate the consequences
of maritime oil spills be improved. We urge all countries to
make better use of the latest monitoring and clean-up
technologies. We ask all countries to adhere to and implement
fully the international conventions for the prevention of oil
pollution of the oceans. We also ask the International
Maritime Organization to put forward proposals for further
preventive action.
47) We are committed to ensuring full
implementation of existing rules for the environment. In this
respect, we note with interest the initiative of the Italian
government to host in 1990 a forum on international law for
the environment with
scholars, scientific experts and
officials, to consider the need for a digest of existing rules
and to give in-depth consideration to the legal aspects of
environment at the international level.
48) We advocate that existing environment
institutions be strengthened within the United Nations system.
In particular, the United Nations Environment Program urgently
requires strengthening and increased financial support. Some
of us have agreed that the establishment within the United
Nations of a new institution may also be worth considering.
49) We have taken note of the report of the sixth
conference on bioethics held in Brussels which examined the
elaboration of a universal code of environmental ethics based
upon the concept of the "human stewardship of nature".
50) It is a matter of international concern that
Bangladesh, one of the poorest and most densely populated
countries in the world, is periodically devastated by
catastrophic floods.
- 19 We
stress
the
urgent
need
for effective,
coordinated action by the international community, in support
of the Government of Bangladesh, in order to find solutions to
this major problem which are technically, financially,
economically and environmentally sound. In that spirit, and
taking account of help already given, we take note of the
different studies concerning flood alleviation, initiated by
France, Japan, the US and the United Nations Development
Program, which have been reviewed by experts from all our
countries. We welcome the World Bank's agreement, following
those studies, to coordinate the efforts of the international
community so that a sound basis for achieving a real
improvement in alleviating the effects of flood can be
established. We also welcome the agreement of the World Bank
to chair, by the end of the year, a meeting to be held in the
United Kingdom by invitation of the Bangladesh Government, of
the countries willing to take an active part in such a
program.
<
51) We give political support to projects such as the
joint project to set up an observatory of the Saharan areas,
which answers the need to monitor the development of that
rapidly deteriorating, fragile, arid region, in order to
protect it more effectively.
DRUG ISSUES
52) The drug problem has reached devastating
proportions. We stress the urgent need for decisive action,
both on a national and an international basis. We urge all
countries, especially those where drug production, trading and
consumption are large, to join our efforts to counter drug
production, to reduce demand, and to carry forward the fight
- 20 against drug
proceeds•
trafficking itself
and the laundering of
its
53) Accordingly, we resolve to take the following
measures within relevant fora:
Give greater emphasis on bilateral and United Nations
programs for the conversion of illicit cultivation in the
producer countries. The United Nations Fund for Drug Abuse
Control
(UNFDAC),
and
other
United
Nations
and
multilateral
organizations
should
be
supported,
strengthened and made more effective. These efforts could
include particular support for the implementation of
effective programs to stop drug cultivation and trading as
well as developmental and technical assistance.
- Support the efforts of producing countries who ask for
assistance to counter illegal production or trafficking.
Strengthen the role of the United Nations in the war
against drugs through an increase in its resources and
through reinforced effectiveness of its operation.
Intensify the exchange of information on the prevention of
addiction, and rehabilitation of drug addicts.
- Support the international conference planned for 1990 on
cocaine and drug demand reduction.
- Strengthen the efficiency of the cooperative and mutual
assistance on these issues, the first steps being a prompt
adhesion to, ratification and implementation of the Vienna
Convention on illicit traffic in narcotic drugs and
psychotropic substances.
- 21
Conclude further bilateral or multilateral agreements and
support initiatives and cooperation, where appropriate,
which include measures to facilitate the identification,
tracing, freezing, seizure and forfeiture of drug crime
proceeds•
Convene a financial action task force from Summit
Participants and other countries interested in these
problems. Its mandate is to assess the results of
cooperation already undertaken in order to prevent the
utilization of the banking system and financial
institutions for the purpose of money laundering, and to
consider additional preventive efforts in this field,
including the adaptation of the legal and regulatory
systems so as to enhance multilateral judicial assistance.
The first meeting of this task force will be called by
France and its report will be completed by April 1990.
54) International cooperation against AIDS
We take note of the creation of an International Ethics
committee on AIDS which met in Paris in May 1989, as decided
at the Summit of Venice (June 1987). It assembled the Summit
Participants and the other members of the EC, together with
the active participation of the World Health Organization.
55) We take note of the representations that we
received from various Heads of State or Government and
organizations and we will study them with interest.
56) Next Economic Summit
We have accepted the invitation of the President of
the United States to meet next year in the United States of
America.
TREASURY NEWS
iportmont of the Treasury • Washington,
D.C. •Office
Telephone
566-2041
CONTACT:
of Financing
5310
FOR IMMEDIATE RELEASE
202/376-4350
July 17, 1989
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,626 million of 13-week,bills and for $6,602 million
of 26-week bills, both to be issued on July 20, 1989,
were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
26--week bills
maturing January 18, 1990
Discount Investment
Price
Rate 1/
Rate
13--week bills
maturing October 19, 1989
Discount Investment
Rate
Rate 1/
Price
7.87%a/
7.87%
7.87%
8.14%
8.14%
8.14%
98.011
7.62%
98.011 • 7.69%
98.011 : 7.67%
8.03%
8.11%
8.09%
96.148
96.112
96.122
a/ Excepting 1 tender of $5,300,000.
Tenders at the high discount rate for the 13-week bills were allotted 75
Tenders at the high discount rate for the 26-week bills were allotted 31!
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
TENDERS RECEIVED AND ACC:EPTED
(In Thousands)
Received
Accepted
Received
Accepted
$
36,730
21,927,415
24,155
56,160
45,635
30,925
1,337,550
50,590
10,540
38,690
31,010
1,071,120
417,510
$
36,730
5,811,370
23,995
56,160
42,635
30,925
46,040
27,090
10,540
38,690
21,010
63,120
417,510
:
:
:
:
35,995
17,957,015
13,130
60,315
41,200
33,045
842,100
38.170
7,125
41,985
26,430
1,067,825
389,920
$
35,995
5,769,765
13,130
60,315
41,200
33,045
88,650
34,790
7,125
41,985
21,430
64,445
389,920
$25,078,030
$6,625,815
: $20,554,255
$6,601,795
$21,762,180
1,230,300
$22,992,480
$3,609,965
1,230,300
$4,840,265
: $16,392,925
:
960,480
: $17,353,405
$2,740,465
960,480
$3,700,945
1,991,400
1,691,400
:
1,950,000
1,650,000
94,150
94,150
:
1,250,850
1,250,850
$25,078,030
$6,625,815
: $20,554,255
$6,601,795
$
An additional $22,650 thousand of 13-week bills and an additional $402,350
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
U
Equivalent coupon-issue yield
MP-IT?
TREASURY NEWS
lepartment off the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
STATEMENT BY
NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
MID-SESSION BUDGET REVIEW
July 18, 1989
Good morning. We've completed the Mid-Session Review of the
budget. This review provides an update on the economic outlook
that reflects changing conditions and policies.
The Mid-Session Review also revises the federal budget
estimates for fiscal 1989 and 1990 and provides a preliminary
look at fiscal years 1991 through 1994.
These estimates are particularly important in the context of
the Gramm-Rudman-Hollings law because they provide the analysis
needed by OMB to prepare its report to Congress on the mandatory
budget deficit targets. OMB is require^ to submit by August 25
its evaluation of the prospects for achieving the fiscal 1990
budget deficit target of $100 billion.
We believe the economy is healthy, and we predict that
growth will continue, but at a somewhat slower pace. We expect
real output this year, as measured from fourth quarter to fourth
quarter, to increase 2.7 percent (or 2.1 percent after adjusting
for last year's drought). In 1990, we expect moderate growth to
continue, with a 2.6 percent gain for the year. This compares to
the February estimates of 3.5 percent for 1989 and 3.4 percent
for 1990.
'
Personal income gains will support moderate consumer
spending, providing a solid base for the economy.- The growth
will come from good performances in business investment and net
exports, resulting from lower interest rates and a stable dollar.
I've just returned from the Economic Summit in Paris, where our
trading partners pledged further efforts to keep their economies
growing in ways that will support strong demand for our exports.
On the inflation front, we expect significant improvement
over the next few months over the figures earlier this year that
were distorted by large increases in energy and food prices.
Wages and salaries have not accelerated markedly. The producer
NB-373
price index already reflects this improvement and consumer prices
should begin to show better results shortly.
2
With respect to the budget, we are making progress in
meeting Gramm-Rudman-Hollings deficit reduction targets.
The
President reiterated at the Economic Summit our determination to
continue reducing the deficit. In that regard, I'd like to note
that the Senate conferees in the savings and loan legislation
conference have proposed a package that pulls together the best
of the House and Senate bills. It includes the financing plan
that will best preserve the Gramm-Rudman-Hollings fiscal
discipline and also save taxpayer dollars by locking in the
savings and loan industry contribution.
In conclusion, I would characterize our economic and budget
forecasts as being realistic and internally consistent. Economic
forecasting is not an exact science, but we believe our figures
are sound forecasts that are consistent with those of other
government and private forecasters.
Now, Mike Boskin will make some further comments on the
economic forecast and Dick Darman will give an explanation of the
budget implications of our estimates.
TREASURY NEWS
lepartment off the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
July 18, 1989
Contact: Peter Hollenbach
(202) 376-4302
TREASURY ESTABLISHES MATURITY SCHEDULE FOR U.S. SAVINGS BONDS
The Treasury Department established a schedule of final maturity
dates for U.S. Savings Bonds by announcing a series of extended
maturity periods for outstanding bonds and notes, as well as, new
issues of bonds. Treasury's action will significantly reduce
confusion for many of the millions of Americans who own bonds but
are unaware of when their bonds stop earning interest.
Financial institutions and savings bond and note owners will now
only have to recall an easy to remember "40-30-20" formula to
determine how long bonds will earn interest.
* Series E savings bonds issued before December 1965 will
stop earning interest exactly 40 years from their issue
dates.
* Series E bonds, Series EE bonds and Savings Notes (Freedom
Shares) issued after November 1965 will stop earning
interest exactly 30 years from their issue dates.
Outstanding Series H bonds, issued between 1959 and 1979,
also have a 30-year final maturity.
* Series HH bonds issued since 1980 will stop earning interest
20 years from their issue dates.
Savings bonds are sold with a designated "initial" maturity and
are then granted maturity extensions. Treasury's announcement
today means that new issues of Series EE bonds, in addition to
the current 12-year initial maturity, will be granted one 10-year
maturity extension, and one 8-year extension
resulting in a
final maturity of 30 years. Outstanding Series EE bonds having
initial maturities of 8, 10, 11, and 12 years will receive the
required number of 10-year and shorter extensions, when
appropriate, to provide a final maturity of 30 years.
NB-374
-2By announcing its policy on savings bond extensions and final
maturity, Treasury has taken another step in improving the
savings bond program. Bond owners will now be able to better
plan for their children's education, retirement and other longterm goals by knowing the final maturity of their savings bonds.
Treasury's administrative costs will also be reduced by
simplifying the program and significantly reducing the thousands
of inquiries received each year from bond owners asking when
their bonds will stop earning interest. Within the next year, as
new bonds are printed and issued, the final maturity, or interest
earning life, will appear on the face of the bonds.
Accompanying this release is a table that illustrates the
extensions that will be applied to outstanding bonds and notes,
as well as, new issues of bonds to effect the new policy.
oOo
MATURITY SCHEDULE FOR U. S. SAVINGS BONDS
ISSUE DATES
LIFE OF
BOND (YRS)
FINAL MATURITIES
40
40
40
40
40
May
Aug
May
Feb
Jun
3 yrs
4 yrs, 2 mos
5 yrs
30
30
30
Dec 1995 - May 1999
Jun 1999 - Nov 2003
Dec 2003 - Jun 2010
5 yrs, 6 mos
30
May 1997 - Oct 2000
11 yrs
9 yrs
8 yrs
10 yrs
12 yrs
bonds)
19
21
22
20
18
30
30
30
30
30
Jan
Nov
May
Nov
Nov
29 yrs, 8 mos
30 yrs
30 yrs
ISSUE MATURED
ISSUE MATURED
NONE
30
Feb 1982 - Sep 1986
Feb 1987 - Jul 1989
Aug 1989 - Dec 2009
@FedFRASER