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ROOM 5030

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Department of the Treasury
PRESS RELEASES

DEPARTMENT

OF

THE

TREASURY

NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
May 2, 1996

Contact:

Jon Murchinson
(202) 622-2960

MICROLENDING AWARDS PROGRAM ANNOUNCED
Treasury Secretary Robert Rubin and First Lady Hillary Rodham Clinton Thursday
announced details of a Presidential Award program to recognize five aspects of micro-lending
initiatives in the United States that broaden access to credit to lower-income Americans.
Created within the Treasury Department at the direction of President Clinton, the
awards program will honor undertakings that offer not only access to credit, but technical
assistance and training to micro-entrepreneurs. Awards will be presented for the first time
this fall.
"This nation will fall far short of its full economic potential for all Americans unless
our cities and distressed rural areas are healthy," Secretary Rubin said in video taped remarks
prepared for the Association for Enterprise Opportunity where the award details were
announced. "By helping poor people in the United States enter the economic mainstream, we
reduce the social costs of poverty, increase national productivity, and improve social
conditions for all of us ... We don't have a monopoly on good ideas in the United States.
This works overseas, and if adapted to our own economy, it can work in America."
Mrs. Clinton, who has encouraged micro-enterprise lending in the United States and
abroad as a development vehicle, added, "Whether it is for a milk cow in Bangladesh or a
computer in Chicago, women and men need help, encouragement -- and credit -- to make that
first investment. Here in the United States, we are working to build up a micro-enterprise
network. "
Secretary Rubin said awards will recognize outstanding and innovative programs that
provide access to credit, technical help and training. Four categories of awards to
development organizations will highlight excellence in program innovation, access to credit,
development of entrepreneurial skills, and poverty alleviation. A fifth category will reward
private sector, foundation and governmental support for these micro-development
organizations.
Microlending -- small loans, often just a few hundred dollars to budding entreprenuers
-- is centered in community-based banks, credit unions, community loan funds and other local
institutions. Interest rates are generally comparable to commercial lending rates and loan
repayment rates often exceed those in the commecial sector.
RR-I050
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT

OF

THE

'lREASURY (J.{;fj)
t~~)

TREASURY

NEW S

~~/789

....................

OFFICE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

FOR IMMEDIATE RELEASE
May 2, 1996
VIDEO REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
ASSOCIATION FOR ENTERPRISE OPPORTUNITY
Thank you, Mrs. Clinton, and thank you for lending your thinking and support to the
simple but important idea of using capital and capitalism to fight poverty and deprivation,
here and around the world. You have been a champion of microenterprise development, and
your involvement will help provide momentum to a program with a potential for a substantial
impact on poverty both in the United States and in developing nations around the world.
One of the objectives of economic policy must be lO bring the free market system to
bear on the problems of poverty both here and abro~d. This is in the self-interest of all
Americans.
By helping poor people in the United States enter the economic mainstream, we
reduce the social costs of poverty, increase national productivity, and improve social
conditions for all of us. By helping poor people abroad, we create new markets for
American exports and increase stability, thereby enhancing our national security. Helping the
poor is clearly in the interest of the poor, but it is equally clearly in the interest of all
Americans, no matter where they live or what their economic status may be.
That takes investment in education, in training, in skills. Toward these ends, the
President has expanded Head Start and has helped our nation's schools better prepare our
children for the 21 st century. He has expanded the Earned Income Tax Credit to help
families choose work over welfare and to make work pay.
And as you will be discllssing here today, that requires expanding capital access, an
important part of helping to reduce poverty in neighborhoods throughout the world. I saw it
working in Manila at a micro-project underwritten by the Asian Development Bank. There,
people in a poor neighborhood who couldn't possibly get capital in traditional channels are
borrowing to start very small businesses. Moreover, the loans are profitable and the
repayment rate is very high. This is micro-lending putting people to work.
-MORE-

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

We don't have a monopoly on good ideas in the United States. This works overseas,
and if adapted to our own economy, it can work in America to help people in distressed
communities better their lives and join the American economic mainstream.
In fact, as you well know, micro-enterprise development has begun in earnest here in
the United States. I have met people involved in these programs and the results are
encouraging. But we must expand the scale, and at the same time combine the availability of
capital with technical assistance and training for borrowers. Again, a lesson to be learned
from observing programs abroad.
Micro-enterprise lending is just one example of President Clinton's commitment to
increasing the flow of private capital to economically distressed areas. He has reduced
regulations and paperwork to make the Community Reinvestment Act more effective for
borrowers and less burdensome for banks, and he has successfully defended the Community
Reinvestment Act against Congressional efforts to undermine it.
He has also, and very importantly, launched the Community Development Financial
Institutions Fund, or CDFI, to provide seed and expansion capital to community-based banks,
credit unions, community loan funds, and micro-lenders. These institutions foster economic
growth and job creation in their neighborhoods. When we issued our first call for CDFls and
traditional financial institutions to apply for Fund assistance and incentives, community
requests exceeded current resources by 10 to I.
Now, as Mrs. Clinton said, the President has asked Treasury to create a Presidential
Awards program for excellence in micro-enterprise development. Today, I'm please to
announced that we are launching these awards, under the CDFI Fund.
The Presidential Awards will recognize outstanding and innovative programs that
provide access to credit, technical assistance, and training to micro-entrepreneurs. Four
categories of awards to micro-enterprise development organizations will highlight excellence
in program innovation, access to credit, development of entrepreneurii\\ s!<ills, <lnd poverty
all~viation. A fifth category will reward private sector, foundation, and governmental
support for these micro-development organizations.
These non-monetary awards will allow micro-enterprise development organizations to
compete for public recognition just as large American corporations now compete for the
Malcolm Baldridge Award. And in rewarding the best in the country, the awards program
will disseminate information to others about best practices, helping to advance microenterprise development more generally. Awards will be presented for the first time this fall.
On a broader front, let me say that these initiatives, from investing in human capital
to improving access to capital, are enormously in the interest of all Americans, looked at
from a purely hardheaded and business-like perspective. Simply put, I think this nation will
fall far short of its full economic potential for all Americans unless our cities and distressed
rural areas are healthy. And our social fabric will become weaker instead of stronger, again,
for all of us, unless we tackle these problems slIccessfully.

With strong public support for CDFI, the Community Reinvestment Act, the Low
Income Housing Tax Credit, and our new micro-enterprise programs, we now have a chance
to make locally driven, public-private partnerships reach communities across the land. We
can help rebuild neighborhoods, create jobs, and restore hope in neighborhoods long left
behind.
To accomplish this, all of us must meet our respective challenges. Our challenge, the
government's challenge, is to act as catalyst with investments in people, seed capital and a
helping start. Your challenge, and what this sixth annual AEO conference is all about, is
continually to improve and grow. The challenge to individuals is to take advantage of
educational opportunities and commit to hard work. The challenge to communities is to
organize themselves for change. And the challenge to the husiness sector is to see its long
term self-interest in bringing everyone into the economic mainstream.
It will take all of us rising to those challenges to succeed. But I believe that is the
only way the United States can reach its full potential in the years and decades to come.
Thank you. Keep up the good work. It is making a difference all across America.

-30-

DEPARTMENT

OF

THE

TREASURY

•••....:2]

1 789

OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
Remarks as prepared for delivery
May 2, 1996
VIDEO REMARKS OF FIRST LADY HTLLAR Y ROD HAM CLINTON
ASSOCIATION FOR ENTERPRISE OPPORTUNITY CONFERENCE

Good Morning. Although we can't join you in person, Secretary Rubin and I wanted
to take this opportunity to congratulate the Association for Enterprise Opportunity and all
your members on the important work you are doing to expand economic opportunity to all
Americans. This is a vital undertaking, and your gathering comes at a crucial time.
The basis for any long-term solution to poverty rests in a community's ability to help
those living in poverty raise their own incomes. Low-income Americans are capable and
hard-working. What they lack is not initiative, but opportunity and access to credit. As one
woman working to establish her small business in Colorado said to me, "Too many great
ideas die in the parking lots of banks. "
Members of AEO know the importance of microenterprise. You have provided
people across our country with opportunity -- the opportunity to borrow small amounts of
money and prove that all kinds of people are credit-worthy. You have given people the
opportunity to gain technical knowledge to start small businesses or to bring some great ideas
to life, and most important, to improve their own lives and th~ lives of their families.
In my travels th~oughout our country and around the worla, I have seen fir .}t-hano the
transforming effects small loans can have, especially for women and their families in both the
developing and developed world. At the Grameen Bank in Bangladesh, I met a woman who
used a small loan to buy a milk cow. After she paid off the loan with proceeds from the
lllilk, she took out a loan for another cow. After repaying that loan, she decided it was time
for her husband to help increase the family income. She took out a third loan to help him
buy a rickshaw.
And I met a woman in Chile whose whole outlook on life was changed by the fact
that someone took a risk and lent her money to buy a sewing machine. She said she felt like
"a bird freed from its cage" when she received her first loan.
-MORE-

For press releases, speeches, public schedules and official biographies, call our 24-1lOur fax line at (202) 622-2040

LIe DEBT NEWS
Department afthe Treasury •

Bureau of the Public Debt • Washington, DC 20239

CONTACT: Office of Financirq

FOR IMMEDIATE RELEASE
May 6, 1996

202-219-33~(

RESULTS OF TREASURY'S AUCTION (oF 13-WEEK BILLS
Tenders for $13,671 million of 13-wteek bills to be issued
May 9, 1996 and to mature August 8, 1996 were
accepted today (CUSIP: 9127943C6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.01%'
5.03%"
5.02%'

Investment
Rate
5.14%'
5.16%"
5.16%'

Price
98.734
98.729
98.731

Tenders at the high discount rate wo=:re allotted 12%".
The investment rate is the equivalert coupon-issue yield.
'
thousands)
TENDERS RECEIVED AND ACCEPTED \ J.n
/

Rec~ived

TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

RR-I051

A~ce12teg

$61,981/848

$13,670,968

$56,354,705
1,608,633
$57,963,338

$8,043,825
1,608,633
$9,652,458

3,948,010

3,948,010

70,500
$61,981,848

70,500
$13,670,968

LIe DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 6, 1996

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $13,525 million of 26-week bills to be issued
May 9, 1996 and to mature November 7, 1996 were
accepted today (CUSIP: 9127943N2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.13%
5.14%
5.14%

Investment
Rate
5.34%
5.35%
5.35%

Price
97.407
97.401
97.401

Tenders at the high discount rate were allotted 32%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

RR-I052

Received
$49,981,540

Accegted
$13,524,885

$42,383,045
1,342,695
$43,725,740

$5,926,390
1,342,695
$7,269,085

3,500,000

3,500,000

2,755,800
$49,981,540

2,75"5,800
$13,524,885

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR RELEASE AT 3:00 PM
May 6, 1996

Con:act: Peter Hollenbach
(202) 219-3302

PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR APRIL 1996

Treasury's Bureau of the Public Debt announced activity figures for the month of April 1996,
of securities within the Separate Trading of Registered Interest and Principal of Securities
program (STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)

$884,881,516

Held in Unstripped Form

$657,998,030

Held in Stripped Form

$226,883,486

Reconstituted in April

$12,497,534

The accompanying table gives a breakdown of STRIPS activity by individual loan description.
The balances in this table are subject to audit and subsequent revision. These monthly figures
are included in Table VI of the Monthlv Statement of the Public Debt, entitled "Holdings of
Treasury Securities in Stripped Form."
Information about "Holdings of Treasury Securities in Stripped Form" is now available on the
Department of Commerce's Economic Bulletin Board (EBB). The EBB, which can be
accessed using personal computers, is an inexpensive service provided by the Department of
Commerce. For more information concerning this service call 202-482-1986.

000

PA-220
(RR-I053)

I At::SI..t: III -

HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, APRIL 30, 1996
(In thousands)
PrinCipal Amount OIGtanding

Loan Description

3/8% Note C·1996 ..
1/4% Note 0-1996
112% Note A·1997
5/8% Note 8·1997
7/8% Note C·1997
1/8% Note A.1998
o Note 6-1998
1/4% Note C·1998
'/8% Note 0·1998
'/8% Note A·1999
1/8% Note 8·1999
) Note C·1999
'/8% Note 0·1999
12% Note A·2000
'/8% Note B·2000
1/4% Note C·2000.
12% Note 0·2000
>14% Note A·2001
, Note B·2001
18% Note C·2001
12% Note 0·2001
12% Note A·2002 ...
18% Note 6-2002 ..
14% Note A·2003 ..
14% Note 6-2003 ...
18% Note A·2004 .
/4% Note 8·2004
14% Note C·2004 ..
18% Note 0·2004 ..
12% Note A·2005
12% Note B·2005 ..
12% Note C-2005 ...
'8% Note 0-2005 ..
'8% Note A·2006 ...
5/8% Bond 2004.
"Bond 2005 ..
3/4% Bond 2005 ..
'8% Bond 2006 .
3/4% Bond 2009·14.
1/4% Bond 2015 ..
;/8% Bond 2015 ..
8% Bond 2015.
4% Bond 2016., ..
4% Bond 2016 ...
2% Bond 2016
4% Bond 2017 ...
3% Bond 2017
3% Bond 2018 .
30nd 2018 ..
3% Bond 2019 ..
3% Bond 2019 ...
2% Bond 2020 ....
~% Bond 2020 ...
1% Bond 2020 ..
1% Bond 2021 ...
1% Bond 2021
1% Bond 2021
30nd 2021 ...
1% Bond 2022
1% Bond 2022
1% Bond 2023
1% Bond 2023
'% Bond 2024 ...
% Bond 2025
% Bond 2025 ...
lond 2026

Maturity Date

05115196 ...
11115196 ..
05115197 ..
08/15197
11115197
02115198
05115/98 ..
08115198 ..
11115198...
02115199
05115199 ...
08115199 ...
11115199
02115/00 ..
05115100 ...
08/15100.
11115100 ....
02115101 ...
05115101 ...
08/15101 ...
11115101 ...
05115102...
08115102 .....
02115103......
08115103 ..
02115104 ...
05115104 ..
08115104....
11115/04.
02115105 ....
05/15105 .....
08115/05 ......
11115105 ..
02115106 ..
11115104 ....
05115105 ....
08/15105 ...
02115106" ..
11115/14 ......
02115115 ......
08/15115 ....
11/15115 ......
02115116 ......
05/15116 ......
11/15116 ....
05/15117 ....
08/15117 ......
05/15118 .... ,
11/15118 ......
02115/19 ....
08/15/19 ......
02115120 .....
05/15120 ......
08115120 ....
02115121 ..
05115121 .
08/15121 ...
11115121 ..
08/15122.
11/15122 ..
02/15123 ....
08/15123 ..
11/15124..
02/15125 ..
08/15125 ..
02/15126.

Portion Held in
Unstnpped Form

Total

20,085,643
20,258,810
9,921,237
9,362836
9,808.329
9,159,068
9,165,387
11,342,646
9,902,875
9,719,523
10,047,103
10,163,644
10,773,960
10,673,033
10,496,230
11,080,646
11,519,682
11,312,802
12,398,083
12,339,185
24,226102
11,714,397
23,859.015
23,562,691
28,011.028
12,955,077
14,440,372
13,346,467
14,373,760
13,834,754
14,739,504
15,002,580
15,209,920
15,513,587
8,301,806
4,260,758
9,269,713
4,755,916
6,005,584
12,667,799
7,149,916
6.899,859
7,266,854
18,823,551
18,864,448
18,194,169
14,016,858
8,708,639
9,032,870
19,250,798
20,213,832
10,228,868
10,158,883
21,418,606
11,113,373
11,958,888
12,163,482
32,798,394
10,352,790
10,699,626
18.374,361
22,909,044
11,469,662
11,725,170
12,602,007
12,904,916

16,020,043
16,526,010
8,328,837
7,084,436
6,817,929
7,802,268
7,062,587
8,672,246
6,789,275
8,346,823
7,083,903
7,561,019
7,319,560
7,967,033
5,755,430
7,035,046
7,388,882
8,026,402
8,872,508
9,705,585
21,309,302
10,058,397
22,780,615
23,073,987
27,785,428
12,953,477
14,435,572
13,312,867
14,373,760
13.834,354
14,739,504
15,002,580
15,209,920
15,513,587
4,157,806
2,208,208
7,079,313
4,750,604
2,062,384
9,313,079
2,313,116
4,034,259
6,666,054
18,584,351
17,974,528
9,710,649
9,349,658
2,660,639
3,144,470
5,409,198
17,073,352
6,268,068
4,209,923
5,247,406
10,273,373
5,036,328
3,673,242
6,420,794
8,306,390
3,594,026
14,638,361
22,402,164
4,627,982
6,920,370
12,373,847
12,904,916

884,881,516

657,998,030

Portion Held In
Stnpped Form

I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I.
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I

I
I
I
I

II
II
II
II

Reconstituted
This Month #1

4,065,600 II
3,732,800 II
1,592,400 II
2,278,400 I I
2,990,400 II
1,356,800 II
2,102,800 II
2,670,400 II
3,113,600 I I
1,372,800 I I
2,963,200 I I
2,602,625 II
3,454,400 I I
2,706,000 I I
4,740,800 II
4,045,600 I I
4,130,800 II
3,286,400 II
3,525,575 II
2,633,600 II
2,916,800 I I
1,656,000 II
1,078,400 II
488,704 II
225,600 II
1,600 II
4,800 II
33,600 II
011
400 II
011
011
011
011
4,144,000 I I
2,052,550 I I
2,190,400 II
5,312 II
3,943,200 II
3,354,720 II
4,836,800 II
2,865,600 I I
600,800 II
239,200 II
889,920 II
8,423,520 I I
4,667,200 I I
6,048,000 II
5,888,400 II
13,841,600 II
3,140,480 II
3,960,800 II
5,948,960 II
16,171,200 II
840,000 II
6,922,560 I I
8,490,240 I I
26,377,600 II
2,046,400 I I
7,105,600 II
3,736,000 II
506,880 II
6,841,680 II
4,804,800 I I
228,160 II
011

385,600
90,400
305,200
92,800
158,400
55,680
50,000
129,600
20,800
104,000
86,400
14,350
52,800
71,600
0
152,160
24,000
40,800
85,600
64,000
286,720
93,360
102,400
528,576
32,000
0
0
0
0
0
0
0
0
0
176,000
40,000
64,800
0
132,800
795,200
200,000
547,200
51,200
32,000
4,800
711,520
864,000
86,400
211,000
649,600
520,000
502,000
439,040

II

12,497,534

226,883,486

77~360

268,800
206,720
76,800
667,000
115,200
65,600
340,800
244,928
290,320
387,200
0
0

=================== === ========= === =======::;:=======:======= ::== ===;:====:======== === ==================== ======================
,ffectrve May 1. 1987. secuntles held In stnpped form were eligible for reconstitution to their unstnpped form

On me 4th workday of eaCh month Table VI Will be available after 3'00 p m eastem time on the Commerce Departmenrs
conomlc 8ulletln Board (EBB) The telephone number for more Information about EBB IS (202) 482·1986 The balances
thiS table are subject to audit and subsequent adjustments

D EPA R T MEN 'I

0 F

THE

T REA SUR Y

NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASlllNGTON, D.C. - 20220 - (202) 622-2960

ADV 7 P.M. EDT
Remarks as prepared for delivery
May 6, 1996

REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
RECIPIENT OF COLUMBIA UNIVERSITY'S BUSINESS SCHOOL
AWARD FOR DISTINGUISHED LEADERSHIP IN GOVERNMENT
NEW YORK, NEW YORK

Let me start by saying that I appreciate your giving me this award, but I'd like to
accept this award not just for me, hut for everyone in government service. Speaking for
myself, the past three and one-half years have given me the extraordinary opportunity to
take my experience of 26 years in the private sector, dealing with markets, the
international arena, and all the rest, and turn it to dealing with issues of the nation. It's
been challenging, at times frustrating, but rewarding in a special way. In a bigger sense,
I think this award is very important because you are doing something far too few people
in the country do, which is providing recognition for public service. And I'd like to use
this occasion to discuss with you, a very influence audience, the important subject of
government.
The oldest argument in the history of this country is over the appropriate role of
government. The political parties have often traded positions in their advocacy of more
versus less. But today, something different has happened. The national debate over the
role and scope of government has heen dominated by dero!:,ation of government and of
public service.
I am emphatically not saying we should not debate the role of government and
how to improve government. These are legitimate and critical areas of debate, and
central issues with respect to national policy. I believe every view should be heard, as
long as that is done within the confines of law.

RR-IOS4
http://www.ustreas.gov

(more)

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2

However, as I said a moment ago, today the debate is dominated by criticism and
derogation. Just think about the voices we hear. First, there are the political and
intellectual voices that argue that the scope of government and its role in society should
be very limited. Second, there are the popular voices on talk radio that disparage the
government and the people who serve in government. And third, there are the voices of
violence. Those are the voices of some in the militias and elsewhere who are actually
threatening federal employees way beyond what the public sees.
The Oklahoma City bomhing, ohviously, has received enormous publicity, but
there are many, many other instances you have not heard of. Last fall I visited
Treasury's our Bureau of Alcohol, Tobacco and Firearms office in St. Paul. They'd just
broken up a group suspected of planning to bomb an Internal Revenue Service office. I
was at an anti-violence event in Maryland a few months ago. A woman told me she'd
been working with a school to help convince youngsters not to use guns. She said
someone claiming to be from the Michigan Militia threatened her life, and she was
worried. The Interior Secretary has told me of case after case of Park Rangers and
others being threatened. For those of you who use the internet, try this one day: type
the word militia under a search area and stand hack, then start reading some of this
material.
What's completely missing in the p~blic discussion of government is balance, and
that has serious consequences. One result is that it becomes difficult to get public and
congressional support for the functions of government, such as forward-looking economic
policies that benefit all Americans. Another profoundly important result is that it goes
to the core of our social fahric.

In many ways we live in an era of great change, filled with hope and opportunity.
But this is also an age of anxiety, when families are concerned about economic
dislocation and social and moral issues. Too many Americans experiencing all these
uncertainties also believe the institutions of government they have historically looked to
to find solutions to their prohlems, are hroken. And then, they are more likely to turn to
these who offer harsher rhetoric and more extreme courses of action. All this feeds
extremism in our society, the extremism we see in some of the militias and hate groups
in this nation. At that point, the idea that America is a society where a Constitution and
government and people working together can produce progress for all Americans ceases
to be.
This negativism ahout government -- this lack of balance -- also makes it difficult
to get public and congressional support for the functions of government, whatever the
broader political judgment as to the appropriate scope of government at any given time.
I think it is imperative for the future of our country, that respect for government
and public service he re-estahlished, again, whatever the judgment as to the appropriate
scope.

3

In that spirit, I'd like to make three points.
First, government matters. Second, government has very large numbers of
talented people committed to public service. And third, government is deeply, broadly
and most importantly effectively involved in a reinventing program, just as any business
that wants to succeed must be in a constant mode of reinvention to be efficient, effective
and customer sensitive.

If I might elaborate.
First, government matters. I will not this evening discuss the wide array of
functions government performs that will not be performed in any other way in our
market economy and that matter greatly to Americans. But I woultl like to touch on a
few experiences that take this observation from the philosophical to the practical.
Five miles from here as the crow flies is the South Bronx. Those of you who
haven't been there lately shoultl go. You will see a vast area of attractive, rehabilitated
multi-family housing and new single family housing, and the beginnings of businesses
returning and jobs being created. Why? Businesses and communities are coming
together with the help of the Community Reinvestment act, the Community
Development Financial Institutions Fund, and the Low Income Housing Tax Credit.
Government is working, hand-in-hand with the private sector, as the catalyst in
addressing what may be our most critical domestic policy issue, the problems of the inner
city -- a job no other institution in our society can do.
The people who fish in our nation's streams, swim in our rivers, or for that matter
breathe New York City air, know that the air and water are clearer today than 20 years
ago. A few years ago, I was flying at low altitude over an area where I go fishing, and
you could see the undermining effects of massive developmental disregard of one of the
nation's most remarkahle natural treasures. And 20 years ago, then Mayor Lindsay
talked about not being comfortahle hreathing air he couldn't see. Today, that national
treasure is healing, and New York City's air is appropriately i.lVisible. Government
played the critical role in each case, and, in the final analysis, only through government -directly or as a catalyst -- will adequate environmental protection be accomplished,
though obviously this needs to be approached with sensible balance.
Finally, about two years ago, I was interviewed by a European weekly magazine.
In the middle of the interview the journalist said that the United States was doing well
now, but that 10 or 15 years from now we'd be a second tier economy because of our
problems with schools and the inner cities. These are issues that can only be successfully
addressed through effective government.

4

So, government matters. My second point was the people in government. I've
fl.ow spent almost three and one-half years in government, a year and a half of it at
treasury, and two years in the White House. When people ask me what I find most
surprising about government, I invariably say that one of the things that has most struck
me is the quality and commitment of so many people I've worked with. In my time at
Treasury the people who work with me have done the legal work on a $20 billion loan
guarantee for Mexico, fought extraordinarily hard to keep this country out of default,
protected the President of the United States, helped investigate the Oklahoma City
bombing, made it possible for millions of Americans to file their taxes by telephone, and
seized tons and tons and tons of dangerous drugs at our borders. I can tell you from
first-hand knowledge and with ahsolute certainty that the quality of the work and the
dedication of the personnel rivals that in any first-rate private sector firm.
My third point is that the federal government -- like the business world -- is now
deeply involved in reinvention to make government operate more efficiently and
effectively, and to be more customer sensitive.
The federal workforce is the smallest in a generation, and government is in the
process of turning from the kinds of institutions many of us have pictured over the years,
to agencies bound and determined to do better and, in fact, doing better.
These are the messages we need to carry to the skeptics and the cynics and the
people who no longer have confidence in the role of government and public service. We
must re-establish respect for the institution of government and for those who serve in
government, and for that to happen, the business and professional leadership of this
country can and must playa critical role as opinion leaders in our society.
The debate itself on the function and scope of government, and how to improve
government, must go on, but it mllst be conducted in the context of support and respect
for government and those in puhlic service, not in an atmosphere of derogation.
If we have your participation, we will honor the idea of public service and serve
our country in a far greater way and on a far larger scale than you have honored me this
evemng.

Thank you, and good night.
-30-

DEPARTMENT

OF

THE

TREASURY

NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C•• 20220. (202) 622-2960

Remarks by
Jeffrey R. Shafer
Under Secretary of the Treasury
Council of the Americas Washington Conference
May 6, 1996
INTRODUCTION
Thank you very much. I am delighted to be here this afternoon.
For the first time, the vision of a democratic. economically liberaL vibrant
community of nations stretching from Canada to Chile has become a real possibility. It was
to advance that shared vision that the 34 democratically elected leaders of this hemisphere
came together in December, 1994 at the Summit of the Americas. They pledged to work to
bolster the institutional, social. and political changes that must continue if progress in our
hemisphere is to be truly secure. and prosperity shared by all. To anchor economic and
social reform, they pledged to conclude negotiation of a Free Trade Area of the Americas by
2005.
To say that a new hemispheric society is within grasp is not to say that there are not
profound challenges on the road from here to there. The Mexican financial crisis last year
and its reverberations through Latin America reminded us that economic stability is not yet
assured. The possibility of political and social turmoil also cannot be dismissed. But a
resolute Mexican response to the crisis. supported by a U.S.-led international effort. turned
the situation around quickly. Things are different today in the hemisphere.
I would like to review the fundamental economic changes in the Americas leading up
to the December 1994 Summit in Miami. I would also like to discuss the crisis that occurred
in Mexico later that same month and what it has meant for our hemisphere. Finally, I would
like to look forward -- to the steps being taken to advance the Miami agenda, and
particularly the economic and financial priorities that Secretary Rubin and his counterparts in
the region will address when they meet next week in New Orleans.

RR-1055

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

:\IIAl\1I

SL~Il\IIT:

BUILDIl\G 0:\ PROGRESS 1:\ A REFORl\IING HEl\IISPHERE

There is no question that the past se\'eral years \\'itnessed a fundamental shift in Latin
America. Countries that for decades looked inward and sou!2ht
- to shelter themselves from the
world began to throw open and free up their economies, By doing so. Latin Americans took
on competition that they had long hid from and found within themselves the capacities and
energy that had not been tapped before.

~

The old policies of import substitution were discarded. replaced with a commitment to
trade liberalization -- often unilateral -- and privatization. Foreign investment has been
increasingly welcomed. rather than resisted or feared. as demonstrated by the decision in
Brazil last year to eliminate the constitutional distinction between foreign and domestic
companIes.
Fiscal and monetary restraint have become the hallmarks of responsible economic
management throughout the hemisphere. For the region. deficits fell from 6.0% of GDP in
1987 to just 0.2 % in 1995 and a projected surplus of over I r{ this year. At the same time,
inflation has been brought under control: by 1995. the numher of countries experiencing
inflation rates o\'er 40% dropped to four from ten in 1990, [n Peru and Nicaragua, four and
five digit inflation rates had been reduced to hclo\\ .20° () -- in ,\rgentina intlation has
dropped from over 2000% to under .2%,
While hemispheric policies progressed rapidly mer the past decade, deep problems
remain. Throughout the region. saving rates remain 1m\,. state-ownership of enterprises
continue to be a drain on efficiency and tinancial systems are still too narrow, shallow,
concentrated and weak. While economies were gro\\i ng. they \\eren' t grO\ving fast enough
and large portions of the population \\ere not sharing in the henetits of gro\\lh. It was clear
that deeper structural reforms \\'ould he required to address the roots of persistent poverty and
inequality in the hemisphere.

:vIEXICAN CRISIS AND RESPONSE
The crisis in Mexico demonstrated the tremendous \\ork still to be done. It put at risk
the progress that had already heen achie\ed. and it put to the test the region' s commitment to
a forward looking agenda.
The threat to the Lnited States \\as clear. Emerging market economies -- led by
\1exico -- support millions of LS. jobs. In 1995. Latin :\merica and the Caribbean alone
purchased S94 billion of L'.S. goods. almost as much as the European L:nion countries. At
the same time. our hopes for a strong \1exican partner on issues ranging from immigration to
combating narcotics to impro\ing our shared el1\ironment \\ere threatened by the likely
political and social fallout from protracted economic distress,
President Clinton recognized the threat to l ,S, interests and to the region as a whole.

2

He responded with leadership of an international emergclh:: support program for Mexico.
And with this support, Mexico and countries thwlIghulit thl' rcuiun ha\e met last .vear' s
challenge.
~

•

In Mexico. adherence to a strict adj ustment program has restored
economic stability and growth following a determined adjustment. Onh
7 months after the crisis began. the gOH?rnment of f',·texico regained
access to international financial markets and has since placed some $7
billion of medium-term debt. The o\'erhang of short-term tesobono debt
is gone. And. last week. Mexico concluded an exchange of Brady bonds for $1.75
billion in uncollateralized 30 year debt. yet another sign that confidence is coming
back.

•

In the region. Argentina was the next hardest hit by the Mexico crisis. suffering a test
of the currency regime. a steep rise in interest rates. and a withdrawal in bank deposits
of almost 20%. With lOB and World Bank support. Argentina is addressing its
banking crisis with a program for consolidation of commercial banks and privatization
of troubled provincial banks. The government also took steps to cut spending and
raise taxes to reinforce stability. all jLlst \\eeks ahead of a presidential election. The
depth of popular support for the government's anti-inflation policies was demonstrated
when President Menem was re-elected resoundingly,

MOVING FORWARD IN NEW ORLEANS

U.S. and international support for Mexico and the commitment to reform in this region
averted a backsliding from earlier economic reforms. It presened the opportunity to forge
ahead with a "second-generation" of needed reforms -- including il1\'estment in education.
health. and other basic social needs. protection of the cn\ironment. and improvement in the
institutional foundations for democratic go\'(~rnance llnd ci\ic society.
Next week in New Orleans. Secretary Ruhin and the region' s Finance Ministers will
explore ways to reinforce economic stability and hoost sustainable growth rates. They will
focus on means to promote the de\elopment or deeper and more di\ersitied financial markets
which are needed to raise savings and i\1\'est efticiently,
Two challenges for Latin America

To understand why financial market de\elopment is so essential. we need to
understand the core challenges that Latin America must address if progress. both economic
and sociaL is to be secured. Let me discuss t\\O (1f the challenges.
First is the need to lock in macroeconomic stahility and hoost grcmth rates. If
investors are to ha\'e conlidence. if husinesses arc to thri\e. ~lIld if \\orking Latin Americans
are to be able to save. prosper. and educate their children. eC()J1()mic \olatility and its causes 3

- excessi\'l;~ reliance on net resource transfers frnm ahwad tn tinance imestment and stop-go
policies -- must be woted out.
Second is the need to address persistent po\erty and income inequality in the region.
Latin America suffers from one of the \\orst records on income distribution in the world. In
Brazil. for example. the top 20% of the population earns ~2 times as much as the bottom
20%. This compares to a ratio of 11.7 in l\lalaysia. \\ ith a similar income le\"e1. and to ratios
of about 9 in the United States and -J..~ in Japan. Such inequality means large portions of the
population remain outside the formal economic sector and are excluded from the benefits of
economic grO\\1h.
Success in meeting the first challenge is a prerequisite to meeting the second. although
it won't be sufficient bv itself. C\"c1e of inflation and adjustment
ha\"e taken a terrible toll on
.
the poor of Latin America and the Caribbean. And po\'t~rty is likely only to be alleviated in
a context of sustained. rapid gro\\1h. Macroeconomic policies and financial market
development and integration are twin keys to growth and stahility. The right kind of financial
market development can also broaden economic participation.

..

Developing, Liberalizing and Integrating Financial \Iarkets
Where financial markets arc not de\"e1oped. money stays bottled up in small circles.
Capital resources quite simply cannot be channeled to many of the purposes for which they
are needed. Thus, electricity generating plants to power gro\\1h throughout an economy go
unbuilt. entrepreneurship is confined to those with personal resources or connections, and
home ownership is rare. \Vithout \"ehicles for long-term imestment of savings, the supply of
capital is constricted and must produce a quick payback. Ri~k-taking is limited in the absence
of the means to diversit\' risks. In sum. sa\ing and gro\\th \\ill t~lll short of potential.
Developed and integrated tinancial markets aI10\\ economies to derive more from its
capital resources even if saving behavior is not altered hy imprO\ed sa\"ing vehicles.
Cementing a vibrant financial infrastructure in Latin America will foster a virtuous cycle of
higher gro\\1h and saving and broaden opportunities for all citizens to meet their potential.
Throughout Latin America and the Caribbean the legacy of underdeveloped financial
markets has acted as a brake on economic acti\ity. The manifestations of this legacy are wide
rangll1g:
•

(her the past t\\·o years. \lexico. Argentina. \·enezuela and Brazil have paid dearly for
lax bank supervision and regulation. as \\ell as \ olatile economic environments, that
have produced crises in their banking sectors, These problems are being managed, but
at high fiscal costs.

•

The limited depth and di\crsity of markets has restricted access to capital and financial
sen'ices and thereby limited opportunities for gnmth. Small- and micro-entrepreneurs

pay the highest price for this failure. \\ ith nlll; ~()

<l

~Ihlc to access the capital they need.

•

Equity markets are underutili/ed as sources fIll' r~li"illg Ile" capital. \\'ith the
exception of Chile. the ratio of market capitali/atillll tn (;[)P i" on the order of onehalf or less than in the llnited States and Canada .. \nd in the region. the top ten
stocks account for between a third and a half of stlK/.: market capitalization.

•

Only relatively short maturities are <1\'ailablc ill Ilwst countries for debt securities.
including government issued securities. The absencL' uf medium and long-term debt
instruments means that the markets of Latin :\ll1eriC~l and the Caribbean are poorly
placed to contribute to the region's \ast infrastructure needs. estimated at between $50
- $60 billion a year.

But. throughout the hemisphere. a recognition of the importance of strengthening
financial markets is taking hold, For example:
•

Since 1990. at least 13 countries have established ne\\ ()f more modern bank la\\/s and
regulations. at least five others are implementing major reforms in commercial bank
supervision and eight are pri\'atizing state banks.

•

Important elements for support of long term linance. such as pri\'ate institutional
savings vehicles. are beginning to emerge. These \ehicles. which include pension
funds, mutual funds and life insurance products. create pools of professionallymanaged funds seeking long-term investment that allO\\/ for greater depth and liquidity
in capital markets, Chile has taken the lead in the de\elopment of privately managed
pension funds. \vith renowned success. and others. including Argentina. Bolivia.
Colombia. Peru and Mexico. are following suit.

In NeVi Orleans, the hemisphere's Finance \linisters \\ill e\amine means to accelerate
the pace of financial market de\"elopmcnt and integration. (iuiding their discussions \vill be a
recognition of the critical balance that must be struck bet\\een ensuring financial market
soundness and investor protection and rreser\"ing incenti\es fnr inno\ation.
Sound Macroeconomic policies to support increased growth and savings

A prerequisite to any etTecti\"e agenda for strengthening financial markets must be an
ongoing and fundamental commitment to sOLlnd macroeconnmic policies in the region.
Implementation of and adherence to fiscal and monetary policies that bring int1ation down to
low levels and keep it there. maintain sustainable fiscal and external balances. increase
domestic savings, promote financial stability and foster increased real economic grm'v1h must
be at the core of this rel!ion' s ~lI!enda, Lonl!-terlll linance Lines Ilnt take place in an
em'ironment of int1ation and lllacroeclmolllic uncertaint;.
~

~

~

Toda\·. sa\lng is the key challenge, Both s<.\\ in!..:

5

~Illd c.'.1"()\\ th

In Latin America arc too

rhe region grew at a ~. 7 Jlercent rate l)\ er the b~l declde -- a r~lte at \\ hich it \\i \I take
three generations to dl)uhle per capita incollle. Latin .\ll1l'rica·~ gwss domestic saving -- at
ahout 19 percent -- is harely half that l)f .\sia·s .:'7 Jlercent. Il1e resulting dependence on
.. large net foreign capital intlo\\s tn linance adequate in\estment makes economi~s ndnerahk
to external and internal shocks. Sa\ing rates in Canada and the l 'nited States an: even lower.
10\\.

Cil)\ernments hel'e it \\ithin their means tl) effect imprn\ements in sa\'ings rate hy
reducing gO\ernment dissaving. This includes the need to address the hidden deficits imposed
hy some social security systems -- \\here the pace of contrihutions is not keeping up with the
growth of future obligations. Chile' s experience pro\ide~ a ~trikillg example of the potential
resuits. Though there is some dehate o\"t~r the extent to \\ hich Chik's pension reform
changed private behavior. it is a t~lCt that national savings in Chile ha\e soared to current
levels of .?8% after the country instituted pri\ate pension funds and opened domestic stock
markets to these institutional funds.

Debt Reduction
[n some countries in the region. external deht hurdens can impair economic gro\V1h
and development. no matter ho\\ s~nsible current policies arl'. Ihe l'nited States Government
is working to alleviate these burdens along three fronts. I'llr the poorest countries. we are
reducing debts owed to governments by as much as t\\o-thirds \\ithin the Paris Club. Second.
under our new buy backiswap program. \\1..' \vill be ahle to reduce concessional debts owed by
the lower-income countries. [n return. th~y must be \\ illing to contribute local currency funds
to underwrite projects that will protect their emironm~nt and support child survival. Finally.
within the IMF, \Vorld Bank and lOB. w~ are pressing to address the multilateral debts of
heavily indebted. poorest countries. and \\e hope for linal decisions on a comprehensive
approach hy next fall.

Privatization
Privatization also pro\ides an enormous stimulus tn capital market development and
integration. as well as boosting efficiency in the economy. Cimernments in Latin America
ha\e shcd many state-owned enterprises. \\ith good rcsults. Pri\atized businesses have
deepened national securities markets dramatically. and the) ha\ e produced prime names to
attract global il1\'cstors through listings nn the \\Clrld's leading exchanges. But much is left to
be pri\'atized in the hemisphere. I-knce. there is reaSCln tll he cnncerncd ahout World Bank
estimates that the valuc of pri\atized ~lSsets has heen declining for se\eral ycars -- proceeds
from privatization in Latin America and the Carihhean peaked in 1991 at nearh S 18 billion
and fell to less than S7 hillion in 199.+.

\Iarket Integrity
Only go\ernments can undertake the crucial and demanding joh of creating the strong
regulator) infrastructure that must exist t~)r financial mclr\-;cts tn nourish. [mestors \vill seek

6

business in a climate \vhere property rights and rules \)n cllllllllercial transactions are clear and
the judicial system deli\'t~rs judgments s\\ i ftly and \\ itll illtegrit~ \\ hen disputes arise.
Strengthening prudential oversight and eX3min,ltion proceSSl'S tll ellsure the safety. soundness
-and integrity of banks: establishing clear guidelines I()r thl' issuance. trading and settlement of
securities: eliminating regulations that limit competition \)r the scupe for di\"\~rsification: and
training and support for the people that are charged \\ith making the system work on an
ongoing basis are all key elements to meeting this imperati\e.
A Culture of Transparency

Transparency -- by both public and pri\ate institutions -- is another essential element
to advancing this goal. In today's \\orld nr portfolio ill\eslJl1ent and securitized international
debt. governments that hold back information expose themse!\es to sudden shifts in market
sentiment because that sentiment is not deeply rooted in economic fundamentals. They are
increasingly likely to pay a price in the t~)rm of higher interest rates. In the wake of
Mexico's liquidity crisis. the IMF has dra\\n up a set of standards that provides a high
benchmark of disclosure \vell worth striving to meet.
The message to the private sector is the same. I ligh quality :.md transparent accounting
systems. accompanied by appropriate standards for disclosure. \,ill support the ability of
companies to attract investors and raise thi? funds l1i?eded to gn)\\. Likewise. by applying
rigorously enforced accounting standards. hank eX:':lIl1iners may l110re accurately evaluate and
detect earlier the emergence of serious banking difficulties. In con\ersatiol! after conversation
with business and financial people throughout the hemisphere. the absense of high. mutually
understandable accounting standards is identified as the ke) barrier to the development and
integration of equity and bond markets in the Americas.
Supporting Microenterprise Development

Improving the infrastructure and operations of tinancial markets will contribute to
reduction of poverty and inequality by expanding access to the capital for all of our nation's
citizens. Support for the development of microenterprise -- \\ hich account for a large
percentage of the employment of the poor. particular!) \\ "mer. -- must he a central focus in
our efforts to develop tinancial markets in the region.
Fighting Money Laundering

In this hemisphere. money laundering is a multibillion dollar problem that can
undermine financial markets. economic stahility and p~)litical institutions. !\t the Summit of
the Americas. the leaders of this region recognized this threat and committed to cooperative
efforts that \vould combat the scourge of narcotics tratlicking and money laundering. Last
December. Secretary Rubin chaired a meeting \)1' l'in~lI1ce \linisters and other high ranking
officials of the Summit nations in Buenos .\ires (() lklinl' ~l c\)\)rdinated hemispheric strategy
to combat money laundering. Since then. the l'll\)t·ts 1\1 (\)tllh~lt tinancial crime have
7

intl:nsi li~d \\ith lhl: pwposal. passed l)r adnrll:d kgislalil)11 ll) criminalize money laundering
and I:stahlish strict currl:nc~ and slisricil.1l1S transaclilH1S replH'ting ruks in many cOllntries in
lhl: rl:gion. including Chile. Boli\ia and Paraguay . .lust last \\eek. ~k:\ico passed new
-lL'uislation criminalizin!.! monl:\ iaunderin!.!.
~

~.

~

.\s more cOllntril:s makl: progrl:ss in gdting IL1\\ s on the books. it is important
to I:nsurc their sllcccssful implementation. through. for e:\3mpk. the creation of mechanisms
for monitoring financial acti\ities and thwugh training thl: pl:rsonnd nel:ded to operate these
systl:ms. Ckarly. cooperation among gml:rnml:nts. thn)ugh such means as information
I::\changes. is especially \·ita!' These initiati\l:s \\ill he more dfecti\'t~ due to the related
drorts in our hemisphere to combat corruption of go\ernmcnts. including the new
Inter-American Convention against Corruption.

V. Conclusion
Eighteen months ago. the leaders of our hl:misphere committed to cooperation in
pursuit of a forward looking agl:nda of l11arkl:t orienk'd ref()fJll. The crisis in Mexico put that
commitment to an immediate test. The abi lity of the n~ltions of this region to hold fast to
their commitments through this crisis speaks to the strength nf th~ foundation that has already
heen put in place. The region is nO\\ prepared to I11me heyond the crisis -- addressing the
kssons learned. taking steps to ameliorate future crises, and I11ming forward with a program
to liberate the resources that \\ill dri\t~ pri\ate sector led economic development. The stakes
are growth and prosperity for them and high paying .iohs for Americans as our best markets
expand,

-30-

8

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 7, 1996

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 3-YEAR NOTES
Tenders for $19,011 million of 3-year notes, Series X-1999,
to be issued May 15, 1996 and to mature May 15, 1999
were accepted today (CUSIP: 912827X72).
The interest rate on the notes will be 6 3/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

Yield
6.350%
6.400%
6.390%

Price
100.067
99.933
99.960

$5,000 was accepted at lower yields.
Tenders at the high yield were allotted 28%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS

Received
$38,625,422

Accepted
$19,011,302

The $19,011 million of accepted tenders includes $876
million of noncompetitive tenders and $18,135 million of
competitive tenders from the public.
In addition, $1,695 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $2,602 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.

RR-I056

DEPARTMENT

OF

THE

TREASURY

NEWS
OFFICE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. _ 20220 _ (202) 622.2960

FOR RELEASE AT 2:30 P.M.
May 7, 1996

CONTACT:

Office of Financing
202/219-3350

TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $27,000 million, to be issued May 16,
1996. This offering will result in a paydown for the Treasury of
about $1,650 million, as the maturing weekly bills are
outstanding in the amount of $28,653 million.
Federal Reserve Banks hold $7,015 ~illion of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $4,128 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average
discount rate of accepted competitive tenders. Additional
amounts may be issued for such accounts if the aggregate amount
of new bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C. This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given In the
attached offering highlights.
000

Attachment
RR-L057

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622.2040

HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED MAY 16, 1996

May 7, 1996
Offering Amount .

$13,500 million

$13,500 million

Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples .

91-day bill
912794 3D 4
May 13, 1996
May 16, 1996
August 15, 1996
February 15, 1996
$13,804 million
$10,000
$ 1,000

182-day bill
912794 2A 1
May 13, 1996
May 16, 1996
November 14, 1996
November 16, 1995
$18,870 million
$10,000
$ 1,000

The following rules apply to all securities mentioned above:

Submission of Bids:
Noncompetitive bids
Competitive bids

Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.

Maximum Recognized Bid
at a Single Yield

35% of public offering

Maximum Award .

35% of public offering

Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .

Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

CONTACT: Office of Financing
202-219-3350

FOR IMMEDIATE RELEASE
May 8, 1996

RESULTS OF TREASURY'S AUCTION OF 10-YEAR NOTES
Tenders for $14,002 million of 10-year notes, Series B-2006,
to be issued May 15, 1996 and to mature May 15, 2006
were accepted today (CUSIP: 912827X80).
The interest rate on the notes will be 6 7/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

Yield
6.890%
6.906%
6.902%

Price
99.893
99.779
99.807

Tenders at the high yield were allotted 97%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS

Received
$33,529,802

Accepted
$14,002,334

The $14,002 million of accepted tenders includes $413
million of noncompetitive tenders and $13,589 million of
competitive tenders from the public.
In addition, $300 million of tenders was,awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,700 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
The minimum par amount required for STRIPS is $320,000.
Larger amounts must be in multiples of that amount.

RR-I058

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IM:M:EDIATE RELEASE
May 8, 1996

Contact: Peter Hollenbach
(202) 219-3302

STUDENT ARTISTS TO BE HONORED BY TREASURY MAY 16

Treasury's Bureau of the Public Debt today announced that three student artists will be honored
Thursday, May 16, in Treasury Department ceremonies. The three, two-sixth graders and one
fifth grader from Iowa, New Jersey and Hawaii are the winners of the annual U.S. Savings
Bonds National Student Poster Contest for students in grades 4 though 6.
The first place winner, Dawn Larson, a sixth-grader from Charter Oak - Ute Community
School, Ute, Iowa, will receive a $5,000 U.S. Savings Bond and her poster will be used to
promote the sale of bonds nationwide in 1997.

"u.s. Savings Bonds - A Great Way To Save", the theme of this year's poster contest, also will
be the 1997 Savings Bonds Campaign slogan.
The second and third place winners, Gavin Gewecke, a fifth-grader at St. Joseph Regional
School, Newton, New Jersey and Lee Anne Mathews, a sixth-grader at Stevenson Intermediate
School, Honolulu, Hawaii, will receive $2,000 and $1000 in bonds respectively. Their work
will appear on special exhibits to be displayed in airports around the country.
'{reasurer of the United States Mary Ellen Withrow will entertain the winners at a luncheon
and will present the awards at a 1 p.m. ceremony in the Cash Room of the Main Treasury
BUildng.
Joseph T. Gorman, Chainnan and Chief Executive Officer of TRW Inc., Cleveland, Ohio, said
the contest "teaches children to save for the future and helps enhance the value of a long term
savings plan to help them reach future goals." Mr. Gorman chaired the 1995 U. S. Savings Bond
Volunteer Committee.
State winners were selected earlier this year. First place entries from each state and the District
of Columbia then were submitted to a panel of judges for selection of the national winners.
-morePA-221
(RR-I059)

The panel of judges included: Harry Rand, Senior Curator of Painting and Sculpture, National
Museum of American Art, Smithsonian Institution; Dr. Leslie King-Hammond, Dean of
Graduate Studies, Maryland Institute, College of Art; Ms. Toni McMahon, President and CEO,
Arts Council of Fairfax County, and Roger Tomhave, Art Curriculum Specialist, Fairfax County
Public Schools.
The three winners will be flown to Washington for the awards ceremony. They will tour the
city and visit their congressional representatives. First place posters from each State and the
District of Columbia will be displayed at the Treasury's Bureau of Engraving and Printing in
Washington during the summer.

-###-

DEPARTMENT

OF

THE

TREASURY

NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
May 9, 1996

u.s.

Contact:

Rebecca Lowenthal
(202) 622-2960

TREASURY CONFERENCE TO BRING MILLIONS IN CONTRACTS TO
SMALL, MINORITY & WOMEN-OWNED BUSINESSES
Sixth "Partnerships" Event in Three Years Focuses on Midwest

The U.S. Department of the Treasury will host a conference June 13 designed to bring
government business directly to historically underutilized businesses around the country.
PARTNERSHIPS '96 - Chicago will be held on June 13, 1996, at the Rosemont
Convention Center in Rosemont, Illinois, from 7:30 a.m. to 4 p.m.
Procurement personnel from Treasury's 12 bureaus will be on hand to discuss their
small business programs, as well as accept quotations in existing federal procurement
opportunities, the majority of which are expected to be for ADP equipment/supplies and office
supplies. Past PARTNERSHIPS conferences have offered from $1-3 million in immediate
procurement opportunities.
The conference will also feature seminars on: (1) how to do business with the federal
government; (2) large business partnerships; (3) professional support service requirements;
and (4) Treasury streamlining initiatives. The Department's prime contractors, large
ousinesses, and other federal, state and local government entities have been invited to bring
additional business opportunities as well as discuss prime and subcontracting procurement
onportunities on Treasury and other contracts.
Contracts of up to $25,000 may be awarded on-the-spot using the government VISA
purchase card. Business representatives prepared to do business may leave this conference
with awards from the Internal Revenue Service, U.S. Customs Service, Bureau of Alcohol,
Tobacco and Firearms and other Treasury bureaus. Additional contracts will be issued within
10 working days, demonstrating Treasury's commitment to faster, more efficient procurement
which makes it easier and more desirable to become a business partner with Treasury.
(more)
RR-I060

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-204-0

-2-

"Treasury's interest in a strong economy applies to our own contracting activities. We
support competitive bidding for our contracts, and encourage participation by small, minority
and women-owned businesses," said George Munoz, Treasury's Assistant Secretary for
Management and Chief Financial Officer.
The registration fee for small businesses is $75 per person if registered before May 31,
1996, and $100 per person thereafter. Companies wishing to attend the conference should
call U. S. Treasury at (202) 622-0530 for registration details. Businesses interested in
sponsoring a booth should contact Guiterrez Productions. Inc .. (312) 595-1955, for additional
information.
-30-

DEPARTMENT

OF

THE

TREASURY

NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIllNGTON, D.C.• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
MAY 9, 1996

CONTACT: Calvin Mitchell
202-622-2920 .

TREASURY ANNOUNCES PROPOSED SIMPLIFICATION
OF BUSINESS CLASSIFICATION RULES
The Treasury Department and the Internal Revenue Service announced today that they
were issuing a proposed regulation (commonly known as the "check-the-box" regulation) that
would replace the existing fact-intensive classification regulations with a simplified regime
that will generally allow unincorporated businesses simply to elect to be taxed as partnerships
or corporations. The proposed regulation will generally apply to domestic and foreign
unincorporated business entities, including limited liability companies (LLCs).
The Treasury Department and the Internal Revenue Service previously announced on
April 3, 1995, that they were considering a proposal that would greatly simplify the current
rules for classifying unincorporated business organizations either as partnerships or
associations taxable as corporations for federal tax purposes. (Notice 95-12, published in the
Internal Revenue Bulletin (1995-1 C.B. 297)). The proposal received widespread support,
both in written responses to the Notice and at a public hearing held on the proposal. The
proposed regulation represents the next step in implementing this proposal.
The new "check-the-box" regulation will replace the existing classification regulations
that attempt to classify business organizations based on the historical differences between
partnerships and corporations under local law. The existing regulations have become
extremely difficult to apply because many states have revised their statutes to allow
partnerships and other unincorporated entities to possess many of the characteristics that have
traditionally been associated only with corporations. As a result of these changes, there is no
longer any meaningful distinction for tax purposes between partnerships and corporations.
The IRS and thousands of taxpayers, however, continue to spend considerable resources in
determining the classification of business entities under the existing regulations. The proposed
regulation would eliminate this
RR-1061

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

- 2 burden, and in particular would greatly assist the many small unincorporated businesses that
cannot afford to commit the resources necessary to comply with the current regulations.
The proposed regulation represents an important step in the continuing effort of the
Administration to reinvent the regulatory process of the federal government. This regulation
reflects the Administration's commitment to simplifying the tax rules.
The proposed regulation will be published in the Federal Register on May 13, 1996.
The IRS is requesting views on the proposed regulation before it is finalized and will hold a
public hearing on the regulations on August 21, 1996, at 10:00 a.m. in the IRS auditorium at
1111 Constitution Ave. N.W., Washington, DC.
-30-

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 9, 1996

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 36-DAY BILLS
Tenders for $13,045 million of 36-day bills to be issued
May 15, 1996 and to mature June 20, 1996 were
accepted today (CUSIP: 912794Z49).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.04%
5.05%
5.05%

Investment
Rate
5.14%
5.15%
5.15%

Price
99.496
99.495
99.495

Tenders at the high discount rate were allotted 34%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

RR-I062

Received
$57,628,000

Acce:gted
$13,045,400

$57,625,000
3 1 000
$57,628,000

$13,042,400
3 1 000
$13,045,400

0

0

0
$57,628,000

0
$13,045,400

NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20220. (202) 622-2960

Update: May 8, 1996

MEDIA ADVISORY
Meeting of Western Hemisphere Finance Ministers
Hosted by the United States of America
New Orleans
Friday, May 17, and Saturday, May 18, 1996
The following is an updated schedule and additional press information on the meeting
of finance ministers from the 34 democratic countries in the Western Hemisphere that
U.S. Treasury Secretary Robert Rubin will host in New Orleans on Friday, May 17, and
Saturday, May 18.
This tentative press schedule and summary of press arrangements for the meeting is
for planning purposes only.
Unless otherwise noted, all events are at Gallier Hall, 545 St. Ch8rles Avenue.
This 2clvi30ry will be updated.
Wednesday, May 8
3-4 p.m.

Interactive Worldnet program on New Orleans conference with
Under Secretary for International Affairs Jeffrey Shafer from
Washington.
Worldnet contact: Yolanda Commodore. (202) 501-6624.

Wednesday, May 15
11 a.m.
Secretary Rubin press briefing on conference.
Location: U S. Treasury Department, Room 4121.
Thursday, May 16
9 a.m - 6 p.m.

Press credentials available for pickup at the New Orleans Marriott,
555 Canal Street.

RR-I063
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

Friday, May 17
8:30-10:30 a.m.

Riverboat tour and press briefing on international trade and Port of
New Orleans hosted by MetroVision Econom ic Development
Partnership.
Note: Space is limited to first 15 journalists to respond. A shuttle
will be available for transportation from Marriott to boa~ tour and
briefing, then from the briefing to Secretary Rubin's arrival
statement.
Contact: Tom Hohan of MetroVision at (504) 527-6951 by
Tuesday, May 14.

9 a.m.

International Press Center opens at Gallier Hall.
Press credentials available for pickup.

TBD

Arrival statement by Secretary Rubin.
Location: New Orleans International Airport.

2:30-5:30 p.m.

Inter-American Development Bank seminar on Liberalization,
Development and Integration of Financial Markets in the Americas.
Participants will include a group of finance ministers and private
sector representatives from throughout the Western Hemisphere.
Press: Open.
Location: Gallier Hall, 545 St. Charles Avenu8

6-7 p.fY1.

Reception hosted by the City of New Orleans and Louisiana
officials. This will include brief remarks by local officials and
Secretary Rubin.
Press: Credentialed press are invited to the reception; a riser area
will be provided for working press.
Location: New Orleans Museum of Art, City Park, 1 Collins Diboll
Circle.

Saturday, May 18

8 a.m.

Press Center opens

8:15 a.m.

Cameras set up at Gallier Hall for arrivals

9-9:30 a.m.

Delegation arrivals.

9:30 a.m.
-12:30 p.m.

Plenary session.
Press: Opening remarks only; may be pooled.
Media will be escorted from/to International Press Center
at 9:15 a.m.

12:40 p.m.

Group photo of finance ministers.
Press: Open.

2:30-3:45 p.m.

Plenary session.

3:15 p.m.

Setup for concluding press conference

4 p.m.

Concluding press conference.

5-7 p.m.

Reception hosted by World Trade Center and other New Orleans
business groups.
Location: World Trade Center, 2 Canal Street.
Press: Credentialed press are invited to the reception; a riser area
will be provided for working press.

8 p.m.

International Press Center closes.

Credentials. Press credentials are required for all media covering the meeting. An
application for press credentials is attached.
U.S. press based in the United States should apply for credentials through the Treasury
Public AffCJirs Office. International prAss based in the United States should apply
through the U.S. Information Agency's Foreign Press Cerlter in Washington. Press
based in countries other than the United States should apply through the USIS office in
that country.
International Press Center. The International Press Center will be open from 9 a. m.
Friday, May 17, until 8 p.m. Saturday, May 18, at Gallier Hall, ground floor. The press
center, open to credentialed reporters, will make available official schedules, press
releases, information on events open to press coverage, transcripts and background
information.
The press center will have a limited number of international credit and calling card
telephone lines. Reporters wishing to reserve a dedicated telephone line in the press
center should call Naomi Thomas of SouthCentral Bell at (504) 528-7508 or (504)
592-1317.
Shuttle buses. Shuttle buses will provide transportation between conference locations
for credentialed delegates, staff and press.

Accommodations. The New Orleans Marriott Hotel, the conference headquarters, is
booked. Press wishing to be placed on a waiting list for rooms at the Marriott should
return the attached form but should make alternate arrangements. New Orleans has
many hotels in all price ranges, although May is a popular time for the city and
available rooms are lim ited. The New Orleans Metropolitan Convention and Visitors
Bureau at (504) 566-5005 can help secure rooms.
Contacts.
U.S. Treasury/Washington
Chris Peacock, Michelle Smith or Phyllis Kayson at (202) 622-2960. fax: (202)
622-1999
U.S. Information Agency/Foreign Press Center
Jonathan Baker at (202) 724-0040, fax: (202) 724-0007
Peter Brennan at (202) 622-2854, fax (202) 622-2854, e-mail pbrennan@usia.gov

-30-

5/8

UBLIC DEBT NEWS
Department of the Treasury •

Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 13, 1996

CONT

~T:

Office of

Fin~~:ing

202-21~-..:35J

RESULTS OF TREASURY'S AUCTION

IF 13-WEEK BILLS

Tenders for $13,595 million of 13-w :ek bills to be iS8U~d
May 16, 1996 and to mature August 15, 19 16 were
accepted today (CUSIP: 9127943D4).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Discount
Rate
Low
High
Average

4.~8%-

5.02%5.02%

Investment
Rate
5.11%S.l!)?;;5.16%-

Price
:;8.741
98.731
.=18 .731

Tenders at the high discount rate w:re allotted 53%-.
The investment rate ig the equivale it coupon-i99ue yiel::.
TENDERS RECEIVED AND ACCEPTED ( in thousands)
TOTALS
Type
Competitive
Nor-competitive
Subtot-al, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

4.99

RR-1064

- - 98.739

5.uo

Received
$56,983,832

AcceI2ted
;13,595,836

$Sl,88S,518
1,442,129
$53,327,647

$8,4S7,522
1,442,129
$9,939,651

3,515,485

3,515,485

140,700
$56,983,832

140,700
;13,595,836

j8."l36

5.01 --

'8.134

UBLIC DEBT NEWS
Department of the Treasury - Bureau of the Public Debt - Washington. DC 20239

FOR IMMEDIATE RELEASE
May 13, 1996

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $13,683 million of 26-week bills to be issued
May 16, 1996 and to mature November 14, 1996 were
accepted today (CUSIP: 9127942A1).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.13%
5.14%
5.14%

Investment
Rate
5.34%
5.35%
5.35%

Price
97.407
97.401
97.401

Tenders at the high discount rate were allotted 21%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

RR-I065

Received
$59,078,191

AcceQted
$13,682,910

$51,538,815
1,249,476
$52,788,291

$6,143,534
1,249,476
$7,393,010

3,500,000

3,500,000

2,789,900
$59,078,191

2,78'9,900
$13,682,910

DEPARTMENT OF THE TREASURY
WASHINGTON. D.C.

May 7, 1996
UNDER SECRETARY

The Honorable James A. Leach
Chairman
Committee on Banking and Financial Services
United States House of Representatives
Washington, D. C. 20515
Dear Mr. Chairman:
The Administration is committed to increasing access to credit by
creditworthy borrowers in underserved communities across America. That is why
we reformed regulations under the Community Reinvestment Act and have
vigorously resisted attempts to weaken the CRA. In response to these and other
efforts, the private sector has made enormous strides in expanding lending to
underserved communities. Thus, for example, mortgage lending to minorities
increased markedly in 1994, the latest year for which data are available. The last
thing anyone should want to see happen is for abusive lenders to undermine these
gains by taking advantage of borrowers with unconscionable rates, terms, and
practices. Yet section of 537 of H.R. 2520, the Financial Services
Competitiveness and Regulatory Relief Act of 1995, would do just that.
In lengthy articles published on May 5 and May 6, The Washington Post has
highlighted the potential for abuse involved in aggressive high-rate lending to lowincome borrowers. Without commenting on the specific allegations of those
articles, I want to emphasize how section 537 would exacerbate that potential for
abuse. (I note that S. 650 contains no similar provision.)
The Riegle Community Development and Regulatory Improvement Act of
1994 sought to curb such abuses by requiring additional disclosure, and by limiting
such credit terms as balloon payments, negative amortization, and prepayment
penalties. The rules apply to certain mortgage transactions (1) with annual
percentage rates exceeding by more than 10 percentage points the yield on
Treasury securities with a comparable maturity (e.g., if the Treasury yield were 7
percent, the rules would apply only to mortgages with rates exceeding 17 percent)~
or (2) with points and fees exceeding the greater of 8 percent of the loan amount
(i.e., 800 basis points) or $400.

2
Section 537 of H.R. 2520 -- approved by the Committee and now pending
before the House -- would gravely weaken these protections. Specifically, it
would exempt first liens, even if those liens simply refinance existing indebtedness.
As I pointed out in a letter to you dated October 25, 1995 (copy enclosed), "the
refinancing of first mortgage loans was a fertile source of the very abuses the
[safeguards] were designed to prevent. Indeed, many of the scam artists' worst
abuses involved precisely such first mortgage refinancings, which are not generally
subject to usury laws. "
The Post articles refer to a lender's practice of usually requiring that
"existing mortgages or liens on the property . . . be paid off." and ensuring that
the lender obtains a first lien on the property. Section 537 would exempt such
transactions from the safeguards of current law.
The Post articles raise questions about the adequacy of existing safeguards,
and certainly underscore the importance of dropping section 537 from the bill.
More broadly, as you know from our earlier communications on this
legislation, we continue to have serious concerns about other aspects of the bill.
These other provisions would impair important protections for consumers and
communities, and for the safety and soundness of FDIC-insured depository
institutions, and in other respects would retard, rather than advance, financial
modernization. We share your desire to eliminate needless regulatory burdens,
and urge you to correct the provisions of the bill discussed in our October 25
lener.
Sincerely,

lL~"JdL
!

Jsf1n D. Hawke, Jr.
Under Secretary of the Treasury
for Domestic Finance
Enclosure
Identical letter sent to the Honorable Henry B. Gonzalez

}

(

DEPARiV,:::NT OF THE TREASURY
WASHINGTON

UNDER SECRETARY

October 25, 1995

The Honorable James A. Leach
Chairman
Committee on Banking and Financial Services
United States House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
I am writing to express the Administration's concerns about H.R. 2520, the
Financial Services Competitiveness and Regulatory Relief Act of 1995 (for simplicity,
"the bill"). The bill incorporates most of H.R. 1062 and H.R. 1858 as reported by
the Committee on Banking and Financial Services.
As Secretary Rubin has stated, the Administration strongly supports
modernizing and strengthening the competitiveness of our financial system and
eliminating needless regulatory burdens. Over the past three years, we have taken
numerous steps to eliminate barriers to financial innovation, promote open competition
in financial services, and reduce the costs -- and improve the quality -- of depository
institution regulation. We have relieved regulatory burdens without compromising
safety and soundness, jeopardizing the federal deposit insurance funds, or impairing
protections for consumers and communities.
We support repeal of the Glass-Steagall Act, just as we supported the
groundbreaking Interstate Banking and Branching Efficiency Act of 1994. We support
responsible regulatory-burden relief legislation, just as we supported such reforms in
the Community Development and Regulatory Improvement Act of 1994.
But we cannot support this bill in its current form.
On June 29, 1995, Secretary Rubin informed you that if H.R. 1858, now a
main component of this bill, were presented to the President in its current form, he
would recommend a veto.
Despite some mockst improvements in that component of H.R. 2520, the bill
remains deeply flawed, and the remainder of the package contains additional
provisions about which we have grave reservations and as to which we have
previously stated our strong opposition.

2

To begin with, the bill would burden Glass-Steagall repeal with rigid
micromanagement. It would:
•

impose arbitrary restrictions on the fonn in which banks can do business
- restrictions that would tend to:

•

create regulatory burdens without contributing meaningfully to
safety and soundness;

•
•
•
•

impede free-market competition;
hinder innovation in important and growing product areas;
draw capital out of banks; and
deprive banks of opportunities for diversification that, within
limits and subject to appropriate supervision, would strengthen
banks in the long term by lowering the variability of their returns
and thereby lowering their overall risk;

•

make a single federal agency the gatekeeper for much of the future
product innovation of the entire banking industry (whether nationally
chartered or state chartered);

•

discriminate against the national bank charter by allowing wholesale
financial institutions to have only state charters; and

•

not provide a real two-way street for :ompanies engaged in financial
activities to affiliate with banks.

Second, the bill would impose unwarranted and discriminatory restrictions on
national banks' insurance activities -- insurance activities that are safe, sound, and
good for consumers.
Third, the bill would weaken the Community Reinvestment Act (CRA). Far
from leaving the eRA essentially intact, the bill would do it real damage. To begin
with, the bill would prevent effective implementation of new rules that represent the
most significant refonns of the CRA process in the Act's 18-year history. These
rules, adopted after one of the most extensive rulemaking proceedings ever conducted
by the financial regulatory agencies, focus not on process but on depository
institutions' actual lending performance.

3
The bill would also sharply curtail existing opportunities for persons concerned
about a depository institution's record of serving its community to comment on
proposals by the institution's parent company to merge existing institutions or acquire
new ones. The bill would thus insulate from CRA review much of the expected wave
of interstate mergers and consolidations under the Interstate Banking and Branching
Efficiency Act of 1994. As long as certain modest criteria are met, these transactions
could follow expedited procedures giving interested persons no notice of the proposed
transaction and thus no timely opportunity to voice concerns and offer supporting
evidence. The Administration strongly opposes weakening the CRA.
Fourth, the bill could undermine infonnational safeguards against racial and
gender discrimination -- by substantially reducing (by at least one-third) the number of
financial institutions reporting on mortgage lending, and by authorizing regulators to
further reduce or even eliminate such reporting.
Fifth, the bill would undercut important protections for the safety and
soundness of FDIC-insured depository institutions. The bill would, for example:
•

exempt outside directors of FDIC-insured depository institutions from the
federal banking agencies' enforcement authority unless the directors were
shown to have acted knowingly or recklessly, thus hindering effective
enforcement and creating perverse incentives for outside directors to
overlook potential problems at their institutions;

•

permit FDIC-insured depository institutions to make preferential loans,
including loans with below-market interest rates or abnormal risks, to
directors and executive officers of affiliated companies; and

•

eviscerate the current requirement that all large FDIC-insured
institutions' boards of directors have audit committees independent of
their management.

Sixth, at a time when foreign bank supervision too often falls short of U.S.
norms, the bill would also potentially weaken the legal safeguards necessary to ensure
that foreign banks entering the United States receive adequate supervision from their
home countries.
We have set forth these and other concerns about the bill more specifically in
an appendix to this letter. A separate letter to you from the Department of Justice
addresses some of the matters discussed in this letter, as well as other concerns the
Administration has about H.R. 1858.

4
Without major revisions, H.R. 2520 will represent a lost opportunity to achieve
meaningful refonn. Instead of creating a truly forward-looking structure for financial
modernization, it would provide only limited Glass-Steagall relief, benefitting a
handful of large institutions, at the cost of imposing on most institutions rigid
organizational constraints not necessary for safety and soundness. Instead of striking a
careful balance between the costs and benefits of regulation, it would needlessly
undermine protections for communities, consumers, and safety and soundness.
We would be glad to work with you and other Members to resolve the
Administration's concerns about the bill. We continue to support constructive,
responsible legislation to modernize our financial system and reduce regulatory
burdens.
Finally, I want to re-emphasize the importance of prompt Congressional action
to resolve the problems of the Savings Association Insurance Fund and thereby protect
the taxpayers who stand behind that Fund. Both the House and the Senate Banking
Committees have approved essentially the same plan for recapitalizing SAIF and
paying interest on FICO bonds. That plan, which you have supported in the past,
should not be reopened at this late stage.
Sincerely,

~CU~U.\

f~ D. Hawke, Jr.

J

Under Secretary of the Treasury
for Domestic Fina'1ce
cc: The Honorable Newt Gingrich
The Honorable Richard K. Armey
The Honorable Tom DeLay

The Honorable Richard A. Gephardt
The Honorable David E. Bonior
Members of the Committee on Rules

Identical letter sent to the Honorable Henry B. Gonzalez

5
PRL~'CIPAL

CONCERNS ABOUT H.R. 2520

Glass-Steagall Repeal
The bill would have the effect of forcing currently permissible activities out of
banks and into nonbank affiliates. For example, a bank affiliated with a securities
affiliate could no longer underwrite or deal in any securities backed by the bank's own
assets. This would set bad~ the goal of enhancing small- and medium-sized
businesses' access to capital - which should be an important objective of this
legislation. Chairman Greenspan, among others, has stressed that securitizing assets
provides banks important flexibility that enhances their safety and soundness, including
their ability to manage their liquidity.
In addition, a bank would be forced to conduct municipal revenue bond
underwriting and dealing in an affiliate. This restriction is particularly detrimental to
States and local communities that would benefit most by bank competition for this
business. Further, all banks would be effectively required to move securities
brokerage activities out of the bank (with certain limited exceptions).
Forcing these activities out of the bank would not render it safer or sounder. It
would impede diversification, make asset and liability management more expensive
and cumbersome, and tend to divert income from securities activities from the bank to
its nondepository affiliates. The costs and operational problems raised by compelling
the use of a holding company structure would undennine the ability of many regional
and mid-sized banking organizations to engage in newly authorized activities on a
competitive basis, thus depriving these institutions of the benefits of the legislation,
and depriving the marketplace of the benefits of enhanced competition.
The bill would also hinder future product innovation by giving a single federal
regulator exclusive authority to control the development and offering of new financial
products by banking organizations. The Federal Reserve alone would, for example,
detennine for all banks what is a "banking product n eligible to remain in the bank and
which products would be forced into a nonbank affiliate. Under the bill, the Federal
Reserve need not even consult with the bank's primary federal or state regulator. All
told, the bill embodies the very approach that Chairman Greenspan warned against
only last year: a monolithic regulator that n would inevitably drift to increasing day-today control of banking organizations who would soon become less innovative and
competitive -- a severe loss to the nation."
We oppose the provision of the bill that would prohibit financial institutions
from countries that discriminate against U. S. financial institutions from qualifying as

6
investment bank holding companies or being exempt from firewalls. The provision
would not provide an appropriate role for the Administration in determining whether a
country is discriminating against U. S. firms, nor would it adequately accommodate
existing international obligations.

Insurance Powers of National Banks
We object to the provisions of the bill that roll back the lawful insurance
activities currently conducted by national banks and limit the Comptroller of the
Currency's authority to approve further insurance activities consistent with the
National Bank Act.
For three decades -- and eight Administrations, of both parties -- the Office of
the Comptroller of the Currency has permitted the gradual entry of banks into new
areas of insurance activity, consistent with the National Bank Act and as upheld
repeatedly by the courts. l'.1any states have long allowed state-chartered banks to
engage in insurance activities. Overall, bank insurance activities have strengthened
the banking system by diversifying bam' sources of earnings without increasing their
risk, and have benefitted consumers by enhancing market competition.
Restricting national bank insurance activities would undermine the dual banking
system and needlessly inject the government into the workings of the free market.
These provisions would neither further the safety and soundness of the banking system
nor promote competition.
Provisions of the bill that purportedly prevent discrimination against national
tar~ are illusory. Fer example, the bill would lea'/e ~ t.a.tes free to impose rules that
had the effect of discriminating against national banks. It would explicitly authorize
states to treat national banks differently than all other insurance brokers and agents if
the state could point to a "legitimate and reasonable" state regulatory purpose -- a
standard easily met. And it would let each state insurance regulator define what
constitutes "insurance products" for purposes of federal banking law, regulate the
activities in question, and leave the Comptroller unable to define those activities as
incidental to banking. The result would be a plethora of litigation and a 50-state
patchwork of legal requirements that would unjustifiably disadvantage national banks.
Including a sunset date in the bill does not render these discriminatory,
anticompetitive restraints on trade any more defensible. Short term fixes frequently
become long-term fixtures in federal law. In any event, the insurance restrictions
would breach a pledge Congress took in 1987 "not to renew or extend" similar
provisions. Public Law No. 100-86, § 203(b), 101 Stat. 552 (1987).

7

Community Reinvestment Act
There is no need to amend the Community Reinvestment Act. The federal
banking agencies, in comprehensively rewriting their CRA rules after the most
extensive rulemaking proceeding in their history, considered and resolved the
problems of the old CRA process -- the very problems that gave rise to the CRA
provisions of the bill. The carefully balanced reforms adopted by the agencies provide
incentives for depository institutions to serve all our communities, and a streamlined,
straightforward process for assessing their success. These regulatory reforms deserve
a chance to work.
The new rules eliminate the unproductive paperwork burden associated with the
old CRA rules. Eighty-one percent of banks and thrifts will have a streamlined
examination with no reporting requirements beyond those otherwise applicable and
virtually no documentation of performance beyond what the institutions would
otherwise do in the ordinary course of business. Special purpose institutions will have
examination procedures tailored to their business strategies. And any institution can
develop its own strategic plan providing for a customized CRA examination.
The new rules should reduce the likelihood of delays. The rules will encourage
community input during CRA examinations (and in the formulation of strategic plans),
and not just when applications are pending. And by focusing on hard data about
lending, services, and investments, the rules will narrow the issues over which
institutions, regulators, and community groups can disagree, and reduce the likelihood
that a protest will raise new information that delays application-processing.

Undercutting new

eRA

nIles

The new CRA rules -- stressing performance, not paperwork -- scrapped the
unproductive paperwork requirements of the old SUbjective, process-oriented CRA
system. But the rules do rely on certain modest data-collection provisions of current
law to provide some objective information about depository institutions' performance
The bill would destroy this balance -- and prevent effective implementation of
the new rules -- by effectively prohibiting the regulators from requiring institutions to
keep or report data for CRA purposes. In so doing, the bill would strike at the heart
of a performance-based eRA. It would be very difficult to evaluate institutions'
performance without analyzing data, for example, on small business or housing
lending.

8
De facto safe harbor
An institution's obligation under the CRA to meet the credit needs of its entire
community can be enforced only through the application process -- when regulators
consider depository institutions' record of serving their communities in the course of
reviewing their applications to engage in such major transactions as mergers. Unlike
many other banking laws, this CRA obligation cannot be enforced through cease-anddesist orders, civil money penalties, or the like.
Thus the bill would gravely weaken the CRA by dispensing with current
requirements for public notice and opportunity for comment on institutions' proposals
to engage in major transactions, such as most mergers and consolidatior.s under the
Interstate Banking and Branching Efficiency Act of 1994 -- in effect, insulating
institutions from meaningful review under the CRA. Persons concerned about an
institution's performance would have no notice of the proposed transaction, and thus
no timely opportunity to voice their concerns and offer supporting evidence. In this
respect, the bill would have much the same effect as section 124 of H. R. 1858 -- a
highly controversial provision omitted from this bill.
We support streamlining the process by which regulators review proposed
transactions. We would, however, give regulators 30 days to review notices of
proposed transactions and decide whether to require an application. The time periods
proposed in the bill are so unrealistically short that they could promote disrespect for
the law and confusion about what had or had not been approved.
To preserve current opportunities for review of an institution's record of
s~r. ing its community, we would retain existing publication requirements; give
interested persons an opportunity to comment on the institution's CRA record; and
require that the institution file an application if regulators receive a substantial CRA
protest.
The bill would exempt mergers of depository institutions controlled by the same
bank holding company from the Bank Merger Act. We support the opposite
approach: reviewing such mergers under the Bank Merger Act, and expressly
exempting them from review under the Bank Holding Company Act, consistent with
Federal Reserve regulations in effect since 1984. 12 C.F.R. §225.12(c). We would
not require Bank Merger Act review of competitive effects, since such mergers of
affiliated institutions do not affect competition.

9

Discrimination in Lending
The Home Mortgage Disclosure Act (HMDA) is a key tool for monitoring race
and gender discrimination and non-discrimination in mortgage lending and for alerting
financial institutions to possible discriminatory practices in their own operations.
HMDA requires institutions with $10 million or more in assets to report data related
to horne mortgage loans.
We strongly oppose increasing the reporting threshold to $50 million, which
would reduce by at least one-third the number of financial institutions reporting under
HMDA and could severely curtail data regarding nondepository mortgage lenders
(e.g., mortgage banks), which play an increasingly important role in mortgage finance
but which tend to be much smaller than banks and thrifts. This 400 percent increase
in the threshold would far outstrip inflation (176 percent since HMDA's enactment in
1975; 21 percent since HMDA's expansion to nondepository lenders in 1989). It
would, moreover, disregard the developments in computer technology that have
actually reduced the cost of compliance.
We even more strongly oppose a~thorizing the Federal Reserve to exempt
larger institutions from HMDA reporting. Regulators should not be free to exempt
out of existence this important tool against discrimination.

Safety and Soundness
The bill would, without justification, undercut imp0rtant safety-and-soundness
protections of current law.

Directors' and officers' responsibilities
The bill would exempt outside directors from the federal banking agencies'
enforcement authority (and from liability to the FDIC as deposit insurer) unless the
directors were shown to have acted knowingly or recklessly. This standard would
create perverse incentives for outside directors to overlook potential problems at their
institutions. Moreover, there is no sound basis for having different enforcement
standards for inside and outside directors.

Insider lending
The bill would make several unwarranted changes in current safeguards against
insider self-dealing. For example, it would give the Federal Reserve broad discretion
to permit any FDIC-insured depository institution to make preferential loans to

10
directors or executive officers of any subsidiary of the same holding company -- as
long as the insider is not a policymaker at the particular institution making the loan
and the subsidiary holds less than 10 percent of the holding company's consolidated
assets. Thus, Bank A could make preferential loans to top officers of Bank B, Bank B
could make preferential loans to top officers of Bank A, and both banks could make
preferential loans to top officers of the holding company's securities affiliate.
The bill would also repeal record-keeping requirements that facilitate scrutiny
of preferential lending to insiders of correspondent institutions. Thus, due to the
reduced risk of detection, there would be an increased probability that Bank C could
make preferential loans to Bank D's CEO, who could keep Bank D's cOlTespondent
balances at Bank C on terms favorable to Bank C. As the Banking Committee noted
when proposing the current requirements, "Many bank regulators and some U.S.
attorneys have been concerned for many years about the possible misuse of bank funds
through correspondent accounts. At times, such accounts have appeared to be little
more than a means of securing loans for bank insiders rather than being balances used
to provide check clearing and other services associated with the correspondent
relationship.· Financial Institwions RegulaJory Act of 1978, H. Rep. No. 1383, 95th
Cong., 2d Sess. 13 (1978).

Independent audit committee
Current law, as implemented by the FDIC, requires FDIC-insured institutions
with more than 5500 million in assets to have audit committees independent of their
management. The audit committee is typically the principal point of contact between
the institution's board of directors and its own internal auditors. Internal auditors -wh(j are, of course, employees of the institution -- must be able to communicate their
concerns and findings to the board without control by, or fear of reprisal from, the
very management whose actions they may be reviewing. Allowing management
directors to sit on the audit committee would compromise the effectiveness of this
process. Accordingly, the law requires that audit committees consist of outside
directors - independent of the institution's management.
Yet the bill would exempt well-capitalized and well-managed institutions from
this requirement -- without any showing that the requirement is not cost-effective or
that such institutions have been unable to find qualified outside directors.
We can support giving regulators some case-by-case discretion to make
hardship exceptions, under carefully defined circumstances, for a limited number of
positions on the audit committee. But the institution should have to make a true
showing of hardship (i .e., that it cannot find qualified outsiders to serve on the audit

11

committee), and the number of positions excepted should be no larger than strictly
necessary.

Foreign Banks
To help protect Americans from abuses such as those of BeC!, Congress
required that foreign banks entering the United States be subject to comprehensive
consolidated supervision by their home countries. The bill would literally give
regulators discretion to let a foreign bank enter the United States if its home-country
supervisor were merely ·working to establish arrangements· for such supervision -even if the foreign country made no actual progress towards achieving effective
SUpervIsIon.
The Administration supports striking an appropriate balance between preserving
prudently finn statutory standards and correcting unwarranted barriers to entry in the
current approval process. Thus the Administration has proposed authorizing the
Federal Reserve to permit entry by a foreign bank whose home country subjects it to
substantial consolidated supervision and is making demonstrable progress toward
achieving comprehensive consolidated supervision. Having once found that a country
provided such supervision, the Federal Reserve would not (as under current law) need
to repeat the exercise with similar banks from the same country.
In reviewing a foreign bank application, the Federal Reserve should be
expressly required to consider whether the foreign bank has adopted or is
implementing procedures to combat money laundering.

High-Cost Mortgages
The high-cost mortgage provisions of the Truth in Lending Act (enacted in
1994) respond to serious abuses involving aggressive home-mortgage lending that
harms unsophisticated borrowers through exorbitant rates and other sharp practices.
These rules require additional disclosure, and limit such credit terms as balloon
payments, negative amortization, and prepayment penalties. The rules apply only to
certain mortgage transactions (1) with annual percentage rates exceeding by more than
10 percenJage poinJs the yield on Treasury securities with a comparable maturity
(e.g., if the Treasury yield were 7 percent, the rules would apply only to mortgages
with rates exceeding 17 percent); or (2) with points and fees exceeding 8 percent of
the loan amount (i.e., 800 basis points).
The bill would exempt first mortgage loans from those modest rules. Yet the
refinancing of first mortgage loans was a fertile source of the very abuses the rules

12
were designed to prevent. Indeed, many of the scam artists' worst abuses involved
precisely such first mortgage refinancings, which are not generally subject to usury
laws.

Truth in Savings
The bill eliminates periodic disclosures under the Truth in Savings Act, but
continues to require initial disclosures as well as disclosures when account terms
change. Moreover, it eliminates the requirement that institutions disclose the annual
percentage yield. We see value in promoting clear and accurate disclosure of annual
percentage yields as well as account terms and applicable fees and penalties. We note
that the costs of complying with the Act have, to a significant degree, already been
expended. If disclosure rules remain stable, consumers can enjoy the benefits of
disclosure at only modest future costs to depository institutions.

Truth in Lending
We believe that the Federal Reserve should have some authority to exempt
transactions from the Truth in Lending Act requirements. But we oppose mandating
the agency to do so in every case unless it can quantify or measure the benefit to the
consumer. Many consumers benefits are simply not quantifiable, yet provide
important protection for the public. Requiring the Federal Reserve to exempt
provisions that provide benefits that are not quantifiable would undermine a major
purpose of the Act. And requiring the Federal Reserve to engage in speculative
research that attempts to measure such benefits cannot be justified.

Hold-in-Custody Repurchase Transactions
During the 19805, fraud-related failures of several government securities dealers
caused their customers large losses. Treasury regulations adopted in response to those
scandals require financial institutions to give their customers daily written
confirmations for transactions under overnight hold-in-custody sweep repurchase
agreements. Confirmations help customers verify that their transactions are properly
secured. Moreover, under the laws of most states, customers need daily confinnations
to perfect their security interest in the collateral. The bill would permit bank
customers, including some local governments that lack expertise in these matters, to
waive their right to receive confirmations. We are concerned that such waivers would
become standard, non-negotiable contract terms, leaving most customers (including
those who most need these protections) with no effective alternative. The Treasury
does plan to reexamine its regulations as more states move to let customers perfect
security interests without daily confirmations.

13
Environmental Liability
Lenders
We support clarifying the liability of lenders under federal environmental laws.
We would prefer legislation simply authorizing the Environmental Protection Agency
to issue regulations clarifying the liability of lenders. We nevertheless support the
sense-of-the-Congress provisions that are consistent with the EPA lender liability rule
that was invalidated for lack of statutory authority, and that clarify that a lender does
not incur environmental liability in connection with its lending activities unless it
panicipates in the management of its borrower.

Banking and lending agencies
We are seriously concerned that the bill does not seek to clarify the liability of
federal banking and lending agencies or to facilitate the sale of contaminated property
those agencies involuntarily acquire. We believe the legislation should address these
Issues.

DEPARTMENT

OF

THE

TREASURY

NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIllNGTON, D.C.. 20220. (202) 622-2960

REMARKS OF THE
HON. LESLIE B. SAMUELS
ASSISTANT SECRETARY (TAX POLICy)
U.S. DEPARTMENT OF THE TREASURY
ABA TAX SECTION'S MAY MEETING
MAY 11, 1996
INTRODUCTION

Thank you, Jerry, for the kind introduction. I am delighted to be here. And I am honored
to be on a program with Randolph Thrower. As many of you know, I will be leaving the
Government in June. So I would like to talk about a few issues on which we have been working
as well as issues that will be debated in the coming months and years.
But first let me say how pleased I am to report that, to the Nation's great fortune, Don
Lubick will be returning to Treasury to take my place. Also, we are very lucky to have Glen
Kohl as Deputy Assistant Secretary (Tax Policy) who will replace Cynthia Beerbower. And Mike
Thomson will be TLC. And with Joe Guttentag and Mark Iwry at Treasury and Peggy
Richardson and Stu Brown at the IRS and Loretta Argrett at Justice, we have an outstanding
team. I am sure that they will continue our policies under Secretary Rubin's direction. And I
hope that you will give all of them your support and help.
I came to Washington about 3Yz years ago, after 25 years in private practice. At the time,
we had a new President and Democrats held the majority in Congress. Since then, the leadership
of both chambers of Congress changed. As a result, differences in priorities became more
difficult to resolve. Consequently, the last 3 years have been a challenging and very interesting
period for tax policy and the tax system.
Some of the debate is healthy. For example, discussions over the type of tax system that
is best for the country is useful and important. And, of course, the argument over the appropriate
role of government is at the core of our political discussions. It has been since the beginning of
the Republic and will certainly continue.
But today something different has happened. As Secretary Rubin pointed out earlier this
week, the national debate over the role and scope of government has been dominated by
derogation of government and of public service. This negativism about government -- this lack
RR-I066
Fm- press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

-2of balance -- makes it difficult to get public and Congressional support for the functions of
government, whatever the broader political judgment as to the appropriate scope of government
at any given time.
In the context of the tax world, what does this mean? It means that we should have a
debate about our tax system, including how the system interacts with the taxpayer. But we can
all agree that whatever the nature of our tax system and the size of government, there will be a
tax agency. And we can debate how the IRS should be both efficient and responsive to
taxpayers. Improvements can be made to improve taxpayer service. The IRS isn't perfect and
it is committed to doing better.
What we don't need is derogation of government. Today what is destructive is those
voices that disparage the IRS and those who serve it. And, there are voices of violence. Those
are the voices of some in the militias and elsewhere who are actually threatening Federal
employees way beyond what the public sees.
What is needed now is balance. It is imperative that respect for government and public
service be re-established, whatever the judgment as to the appropriate scope of government.
In my public service in the last 3~ years, I have had the great privilege of dealing with
a large number of talented and dedicated people committed to government service. In many
cases, they work under difficult circumstances. They struggle with a tax Code that they are given
by Congress. They deserve our respect and support.
It is counterproductive and harmful, to bash the IRS and its employees'. Destructive
rhetoric is just plain wrong. It hurts the tax system and society. It should stop. And it should
stop now.
I understand that the Tax Section is considering a public education effort to explain better
the operation of the tax system. At this point in time, this could be your most important effort
and I encourage you to put your many resources into raising the level of public dialog.
Now, I would like to turn to a few substantive issues that I think are important to our tax
system.
SIMPLIFICATION

In thinking about fundamental tax reform as well as more immediate tax policy issues,
simplification is always on our mind. Complexity, real and perceived, in our system is a problem
for taxpayers, their advisers and the government. It is a issue that must be evaluated in every
proposal.
But simplification does not normally receive the weight it deserves, since other criteria
such as fairness, targeting and revenue considerations seem to crowd it out. And I would observe

-3 that among sophisticated taxpayers, the cost of complexity is balanced against tax savings. I have
yet to see these taxpayers accept a simple approach if it means a higher tax bill. So the forces
for simplification need substantial reinforcement. This is a point which has broad support. But
it is difficult to translate that support into results. So we must all be pushing this issue.
The Administration has proposed a pension simplification bill. This is an important
initiative and we hope that it will proceed on a bi-partisan basis.
Pension reform
The President's package is designed to increase retirement savings and security, and
promote portability. A key component is a proposal to establish a new simplified plan called the
NEST, a 401(k)-type plan. The lack of a simple pension plan for small businesses has led to a
disturbing situation: while 76% of workers in large businesses have employer-provided pensions,
only 24% of workers in small businesses do. The NEST could expand pension coverage to as
many as 10 million workers.
It was also recognized that in this increasingly mobile society, more workers change jobs.
Under the current rules, they face an obstacle course if they want to take their retirement savings
with them. The President's proposal will remove many of these obstacles to retirement benefits
portability. In addition, the proposed reforms would help workers save from the first day on the
job by encouraging employers to eliminate participation waiting periods.
Protection of pension benefits has also been as important an issue for us. For example,
an Administration proposal was passed by Congress in 1994 which protects the benefits of more
than 40 million American workers and retirees in traditional pension plans by increasing funding
of underfunded pension plans and by enhancing the PBGC's early warning and enforcement
powers.
Pension regulations and other administrative guidance
In the past year, we also published a series of administrative guidance that take significant
steps in the direction of making pension rules simpler and more workable. For examples, we
issued a revenue ruling resolving the decade-and-a-half conflict between the Labor Department
and IRS positions on the voting of uninstructed ESOP stock. And we issued final regulations
providing relief from the requirement that employers withhold as a condition of taking deductions
for section 83 stock transferred to employees.
Now unlike legislation, we have, as our efforts in the benefits area illustrate, somewhat
more control on the issue of simplification in the guidance process. Treasury and the IRS have
made a determined effort to provide guidance through clear and relatively simple rules, subject
of course to the statutory framework with which we must work.

-4 Entity classification
A good example of our simplification efforts is the proposed "check-the-box" regulations
in the area of classification of business organizations. We recognized that it has often been
difficult and cumbersome to apply the existing regulations and rulings in determining whether
an unincorporated entity is taxable as a partnership or corporation. In addition, many states
revised their statutes to allow partnerships to possess characteristics traditionally associated with
corporations. Consequently, we just issued proposed regulations that will replace the longstanding, fact-intensive classification regulations with a simple system that benefits both taxpayers
and the IRS.
Instead of devoting considerable resources to complex classification issues, such as
centralized management and free transferability, taxpayers will now be able to achieve certainty
in classification by doing no more than filing a simple election. This simplification stands as an
example of the great strides that can be made in this area and should serve as a model for future
reform.

Subchapter K simplification measures
While we are on the subject of partnerships, I want to highlight a few other ways in which
we have dealt with partnership taxation in the past few years. This has been an area generally
known for its complex and difficult provisions. There have been two underlying themes in our
approach: simplification; and consistency with statutory purpose.
Besides the "check-the-box" project, we have extended our goal of simplification to other
partnership concerns, such as the recently-issued proposed regulations under section 708(b)(1)(B).
As you know, this section provides that a partnership is terminated for tax purposes if 50 percent
or more of the interests are sold within a 12-month period. The existing regulations dating back
to the 1950s employed a fiction that resulted in untold complexity for taxpayers. The new
proposed regulation simplifies this area and resolves many outstanding issues.
Treasury and the IRS have also taken several important steps to preserve the integrity of
Subchapter K. The provisions of Subchapter K provide taxpayers with substantial flexibility.
This flexibility is important and beneficial in structuring business arrangements, but it was also
used to achieve unintended tax manipulation. In response to attempts to extend Subchapter K
beyond its intended boundaries, we issued the section 701 partnership anti-abuse regulation. This
regulation provides taxpayers with needed flexibility to structure their arrangements, while
preventing Subchapter K from becoming a source of unlimited tax manipulation.
This regulation generated an intense debate. One interesting part of the debate was
whether in fact any abuses needed to be curbed. Some suggested that the world was virus free,
or at least no vaccination was needed. Others thanked us for the regulation. Recently a
resourceful reporter gave the public a glimpse of the corporate tax shelter world. In response to

-5the public's concern about the fairness of the tax system and to protect the corporate tax base,
this will continue to be a very important issue.
Treasury and the IRS have also taken steps necessary to update the partnership area to
reflect changing conditions. We have issued final regulations under section 7704, the section that
treats most publicly traded partnerships as corporations for tax purposes. We believe that the
final regulations more accurately reflect the purpose and intent of section 7704.
While we have devoted considerable time and attention to the partnership area, much
remains to be done. Our next goal is to address the technical complexity of the section 704(b)
regulations.
These partnership projects have required great effort by many at the Treasury and IRS.
And I want to express my appreciation to Paul Kugler for his important leadership role, without
which this work would not have been completed. Thank you, Paul.
Research and experimentation expenses and technology
We have relied on the regulatory process to promote the Administration's policy of
encouraging research. In December last year, the Treasury issued final regulations on the
allocation of expenses for R&D conducted in the United States to income earned abroad. The
new regulations, which responded to a debate of almost 20 years, generally reduced the allocation
of domestic research expenses to foreign income by 25 percent compared to the prior regulations
issued in 1977.
In addition, in 1994, we amended the regulations under section 174 to liberalize the
definition of what constitutes R&E for purposes of section 174. This should reduce disputes as
well as encourage research.
Today's rapid change in technology is putting pressure on the tax system. Our tax rules
just have not kept pace with technology. We are in the process of preparing a paper that will
request comments in the area. We look forward to the Tax Section's participation in this process.

Corporate matters
In the corporate area, Treasury and the IRS made a major commitment to revising the
consolidated return regulations. I had a strong interest in the area dating back to 1965 when I
worked on a law review note on the then regs. We both proposed and finalized the deferred
intercompany transaction rules. And I would like to note that one of our important objectives
has been to propose and then finalize regs as quickly as we can. This facilitates closure on
difficult issues. In the case of the consolidated return regulations, this required enormous effort
from the IRS and Treasury. I am indebted to those who gave up evening after evening and
weekend after weekend to finish this project.

-6 Treasury has also tried to close the book on some long outstanding projects. We took on
and completed the triangular basis regulations. I believe this project started when Jerry Cohen
was Chief Counsel.
And in the exempt organization area, taxpayers have requested more published guidance.
In response, we have made an important commitment to publishing needed regs and rulings. We
plan to keep this goal on track.
In the international arena, we have had a very productive period. The transfer pricing and
penalty regulations were completed. And we reached a consensus on transfer pricing at the
OECD. We also recently proposed Section 1441 regulations that are intended to simplify the
rules and improve compliance.

Tax treaty activity
Finally, a few words about our tax treaty policy. We are committed to expanding and
updating our tax treaty network as part of our international economic policy to encourage trade
and investment. To achieve this goal, this Administration has been very active in developing its
U.S. bilateral tax treaty network. We have pursued treaty negotiations or discussions with dozens
of countries, and the Senate approved 13 separate tax treaties and protocols in the last 3 years.
We have continued in this effort and hope to have a new group of about 5 treaties to present to
the Senate this summer.
We recently signed a new tax treaty with Luxembourg as well as a treaty with Turkey.
We expect shortly to sign a new treaty with Austria.
Our 15 plus year effort to negotiate a new treaty with Switzerland has culminated in an
initialed draft of a new treaty this year. We expect to sign the treaty soon. Also we are in the
final stages of negotiating a new tax treaty with Ireland.
We are also actively engaged in tax treaty discussions or negotiations with several other
countries, especially in Southeast Asia and Latin America. While we face significant obstacles
in these regions, we plan to continue our active tax treaty program in the coming years. And we
appreciate your ideas and support in accomplishing this goal.
CONCLUSION
I feel truly honored to have served two outstanding Treasury Secretaries, Lloyd Bentsen
and Bob Rubin. When I discussed the Assistant Secretary job with Lloyd Bentsen, he told me
how meaningful it was for an individual to try to make a difference for Americans byway of
public service. And watching him and Bob Rubin at work proved the point. They have both
made enormous contributions and I feel lucky to have been on their teams.

-7The last 3 years have been an extraordinary professional and personal experience. I am
very grateful for the opportunity to serve the public. It has been a challenging and rewarding
time. We have tried to make a positive contribution. And as a bonus, it has been much more
interesting than I had anticipated at the beginning. Treasury and IRS are unique places, filled
with great people. The projects over the last 3 years involved many, many hard working and
talented individuals, some of whom I never met. They honor the idea of public service. I am
sure that they will give Don the same support and help that I have received.
Thank you.
-30-

DEPARTMENT

OF

THE

TREASURY

NEWS
OFFICE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622-2960

ADV 11 A.M. EST
Remarks as prepared for delivery
May 14, 1996

REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
COLUMBIA UNIVERSITY CLASS DAY
NEW YORK, N.Y.

Today, as the 70th Secretary of the Treasury, when I'm in my office I sit across
from a large portrait of our first Secretary of the Treasury, Alexander Hamilton, a
Columbia graduate and a principal author of the Federalist papers. He and the best
minds of his era were intensely involved in the debate about the scope and function of
the central government of our new republic. And while they often disagreed on these
matters, they did not disagree in their deep respect for democracy and the public
institutions which did the work of all the people.
Today, the debate of Hamilton and his peers goes on, but it is dominated by a
derogation of government and public service -- the antithesis of the attitudes at the
founding of our republic. That debate is changing the way the American people view
their government as evidenced by poll data. Polls 25 years ago showed that 75 percent
of Americans trusted the federal government. Polls today put that trust at under 25
percent. Distrust of government is well above the danger point.
Commencement speeches often deal with advice to graduates or reflections on the
past and present. I would like to use my time today for a most serious purpose -- to
discuss the debate about government, because I believe it is of the utmost seriousness to
the world in which you will live. And I believe that in your own lives -- no matter what
career you choose -- that you should get involved in Te-establishing a constructive
relationship between our people and our government.
I spent 26 years in investment banking. They were good years: I was captured by
the issues, the challenges and the excitement, and I was fortunate financially. But
throughout that period of my life, I also had an intense engagement and involvement in
public life and the political process. For you, as it did for me, that engagement can
contribute a greatly enriching additional dimension to your life, and contribute to your
country in an area of critical importance.
RR-I067

(more)

http' / /WWW !lstreas. goy

FQ1' press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

2

I would also urge that as you start out on your career paths, that you consider
spending at least part of your career in public service. For me, Washington has pruvided
a deeply rewarding opportunity to use the experience from the private sector to deal with
the issues of the nation, and it can be for you too. Unfortunately, in the environment
that exists today, appeals to public service are not often heard and often not well
received. And the reason is the negative atmosphere that has been created with respect
to government.
The oldest argument in the history of our republic is over the appropriate role of
government, and the political parties have often traded positions in their advocacy of
more versus less. But, as I said earlier, something has changed about the debate today,
and it is now dominated by derogation of government and public service.
I am emphatically not saying we should not dehate the role of government and
how to improve government. Just as there is a wide range of views about government
across the country, I'm sure that among the Columhia student body there is a full and
wide range of views on these issues. These are legitimate and critical areas of debate,
but today the dominant tone is hostility.
Think of the voices we hear: First, the political and intellectual voices who
helieve the scope of government and its role in society shollld he very limited; second,
the popular voices on talk radio and elsewhere that disparage the government and the
people who serve in Washington; and third, the voices of violence. Those are the voices
of some in the militias and elsewhere who are actually threatening federal employees
way heyond what the public sees.
The Oklahoma City bombing was the most vivid and violent example of domestic
terrorism in our country's history, but it is part of a disturbing and growing problem.
Last fall I visited Treasury's Bureau of Alcohol, Tobacco and Firearms office in St. Paul.
They'd just broken up a group suspected of planning to homb an Internal Revenue
Service office. In that same area, they made arrests in a suspected plot to spread lethal
toxins in the homes of judicial officers.
I was at an anti-violence event in Maryland a few months ago. A woman told me
she'd worked at a school to help convince youngsters not to use guns. She said someone
claiming to be from the Michigan Militia threatened her life. Park Rangers and Bureau
of Land Management employees are being threatened. Fur those of you who use the
Internet -- and I suspect that's a great many of you here today -- type the word militia
under a search area and stand back, then start reading some of this material.
What's completely missing in the public discussion of government is balance, and
that has serious consequences for the world you will live in.

3

In many ways, you are entering an era of great change -- arguably globalization
and technology are the most significant economic changes since the Industrial Revolution
-- and this era is filled with hope and opportunity.
But it is also an age of anxiety, and large numbers of American families are
anxious about wage stagnation, economic dislocation, and social and moral issues. Too
many Americans experiencing all these uncertainties also believe that the institutions of
government they have historically looked to for solutions to their problems, are broken.
And then, they are more likely to turn to those who offer harsher rhetoric and more
extreme courses of action. All this feeds extremism in our society, the extremism we see
in some of the militias and hate groups in this nation. If this continues, the idea that
America is a society where a Constitution and government and people working together
can produce progress for all Americans ceases to be.
I think it is imperative for the future of our country, that respect for government
and public service be re-established again, whatever the judgment as to the appropriate
scope. We as a nation, must begin talking about the critical role that government plays
and the important things that government -- and often only government -- can do.
In that spirit, I'd like to make three points.
First, government matters. I will not discuss at length the array of government
functions that can be performed in no other way and that matter greatly to Americans,
but you know what they are. They begin with a strong military, an impartial system of
justice, and rules and laws to protect the dignity of people, particularly the powerless, to
preserve the shared environment, and to provide for public education, welfare and
health.
These functions are under broad attack. It is unpopular to say, but many of them
are making an enormous difference in the lives of the American people. I can tell you
that in contrast to the cynics and extremists who say government does not work and
doesn't make a difference, it most certainly does.
To offer an example that's just a few miles from here, the South Bronx is making
enormous progress in its transformation from an urban wasteland.
Go there. You will see a vast area of attractive new and rehabilitated housing,
and the beginnings of businesses returning and jobs being created.
How did it change? Business and communities came together with the help the
Community Reinvestment Act, the Community Development Financial Institutions Fund,
and the Low Income Housing Tax Credit. Government, with the private sector, is the
catalyst in addressing what may be our most critical domestic policy issue, the problems
of the inner city -- a catalytic function no other institution in our society can or will do.

4

To change locales, a few years ago I was flying at low altitude over an area wherl
I go fishing, and you could see the undermining effects of massive developmental
disregard of one of the nation's most remarkable natural treasures. In the same vein,
about 25 years ago, then Mayor Lindsay quipped about not being comfortable breathing
air he couldn't see. Today, that national treasure is healing, and New York City's air is
appropriately invisible. Government played the critical role in each case and, in the fin;
analysis, only through government -- directly or as a catalyst -- will the environment in
which you live your lives and make your homes be adequately protected.
So government matters.
My second point is about the people in government. People ask me what I find
most surprising about Washington. I invariably say one of the things that has most
struck me is the commitment and quality of so many people with whom I've worked.
And that includes many younger people who, like you, have the advantage of an
outstanding education and then decided to spend a few years in public service.
Government takes on many of the most difficult issues in our society. The people
who I work with have done the legal and financial work on the $20 billion loan
guarantee for Mexico. They have fought extraordinarily hard and successfully to keep
this country out of default, to protect the President, to help pass an assault weapons ban
to investigate the Oklahoma City bombing, to develop tax and economic policy, to make
it possible for millions of Americans to file their taxes by telephone, to seize tons and
tons of dangerous drugs at our borders, and the myriad other things that make a
difference in the lives of Americans.
These people do this extraordinary work, despite the fact they are called
bureaucrats -- and worse -- by talk show hosts and irresponsible public officials, and the)
never receive the public support or recognition that their hard work deserves.
My third point is that the federal government -- like the business world -- is now
deeply involved in improving itself to make government operate more efficiently and
effectively, and to be more customer sensitive.
The federal workforce is the smallest in a
total work force in this nation, at its lowest level
government is in the process of turning from the
of us imagine to agencies bound and determined
highest value for their dollars.

generation, and as a percentage of the
in many many decades. Moreover,
kinds of hide-bound institutions many
to do better jobs that give taxpayers th

5

I deeply believe that the success of our country -- your country in the years and
decades ahead -- requires that faith in our public institutions be restored. And that
cannot happen unless there is a far broader -- and yes, far louder -- counterpoint to the
voices on talk radio, to the militias, to those who reject the notion of government and
the rule of law in this country.
And so, this is your challenge, not simply as Columbia graduates but as Americans
coming of age at a cross-roads in our nation's proud history. You must become a part of
the process of re-establishing respect for the institution of government and those who
work in public service.
Being part of a rational public discourse about where this nation is headed is one
of the most important things you can do. And to do that, you must reject the cynicism
and derogation that argues that society is incapable of improving itself through the
institution of government.
And, you must also take responsibility for making government better without
putting it down. You can do this by voting, by volunteering, by supporting candidates
you believe in, or by serving in government.
Throughout our history, new gener:ltions have met the challenges of the times.
Today, our country needs you to meet the challenges we have just discussed. By doing
so, you will honor the democratic principles on which this nation was built and take upon
yourselves the same task that was performed so ably by my predecessor and your fellow
alumnus, Alexander Hamilton.
Thank you and congratulations.
-30-

DEPARTMENT

OF

THE

TREASURY

NEWS

'IREASURY

omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20220. (202) 622-2960

EMBARGOED UNTIL 2:30 P.M.
May 14, 1996

CONTACT:

Office of Financing
202/219-3350

TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $27,000 million, to be issued May 23,
1996.
This offering will provide about $1,025 million of new
cash for the Treasury, as the maturing weekly bills are
outstanding in the amount of '~25,981 million.
Federal Reserve Banks hold $6,924 million of the maturing
bills for their own accounts, which may be refunded within the
offering amount at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $4,035 million as agents for
foreign and international monetary authorities, which may be
refunded within the offering amount at the weighted average .
discount rate of accepted competitive tenders. Additional
amounts may be issued for such accounts if the aggregate amount
of new bids exceeds the aggregate amount of maturing bills.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D. C.
This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000

Attachment
RR-I068

FlJr press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED MAY 23, 1996

May 14, 1996
Offering Amount .

$13,500 million

$13,500 million

Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples .

91-day bill
912794 Z7 2
May 20, 1996
May 23, 1996
August 22, 1996
August 24, 1995
$31,686 million
$10,000
$ 1,000

182-day bill
912794 3P 7
May 20, 1996
May 23, 1996
November 21, 1996
May 23, 1996
$10,000
$ 1,000

The following rules apply to all securities mentioned above:

Submission of Bids:
Noncompetitive bids
Competitive bids

Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.

Maximum Recognized Bid
at a Single Yield

35% of public offering

Maximum Award .

35% of public offering

Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .

Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date

D E P .\ R T \1 E

~

T

0 F

THE

T REA S II R Y

NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W• • WASIDNGTON, D.C.• 20220. (202) 622-2960

Update: May 14, 1996

MEDIA ADVISORY
Meeting of Westcrn Hemisphere Finance Ministers
Hosted by the United States of America
New Orleans
Friday, May 17, and Saturday, May 18, 1996
The following is an updated schcdule and additional press information on the meeting of
finance ministers from the 34 democratic cOWltries in the Western Hemisphere that U.S.
Treasury Secretary Robert Rubin will host in New Orleans on Friday, May 17, and Saturday,
May 18.
This tentative press schedule and summary of press arrangements for the meeting is for
planning purposes only.
Unless otherwise noted, all events are at Gallier Hall, 545 St. Charles Avenue.
Note: Signup deadline for the press boat tour of Lhe Port of New Orleans, scheduled for 8 :30
a.m., Thursday, is 5:00 p.m. Wednt!sday. Contact: Tom Hohan of MctroVision Economic
Development Parlnt!rship (504) 527-6951.
This advisory will bc updated.
VVednesday, May 8
3-4 p.m.

interactive Worldnet program on New Orleans conference with
Under Secretary for International Affairs Jeffrey Shafer from
Washington.

Wednesday, May 15
Secretary Rubin press briefing on conferem:e.
11 a.m.
Location: U.S. Treasury Department, Room 4121.
Worldnet will transmit taped feed of briefing internationally on
Wednesday at 1-2 p.m. ContaetWorldnet Newsfile contact Norman
Powell (202) 501-6266 or Elmy Martinez (202) 501-7777

RR-I069
For press releases, speeches, public schedules a7ld official biographies, call our 24-hour fax line at (202) 622-2040

Thursday, May 16
9 a.m - 6 p.m.

Press credentials availahle for pickup al the New Orleans Marriott, 555
Canal Street.

Friday, May 17
8:30-10:30 a.m.

Riverboat tour and press briefing on intt:rnational trade and Port of
New Orleans hosted by MetroVisiun Economic Development
Partnership.
Note: Space i~ lim.ited. A shuttle will be available for transportation
from Marriott to boat tour and briefing, Lhen from the tour to New
Orlt:ans International Airport for 11 :30 a.m. arrival statement with
Secretary Rubin and New Orleans Mayor Marc Moria!.
Contact: Tom Hohan of MetroVision at (504) 527-6951 by 5:00 p.m.,
Wednesday, May 1S.

9 a.m.

International Press Center opens at Gallier Hall.
Press credentials available for pickup.

11:30 a.m.

Ani val statement by Secretary Rubin with New Orleans Mayor Marc
Morial.
Location: New Orleans International Airport, Board Ruom.
Contact (Airport): Patricia T. Lotz at (504) 464-3547

2:30-5:30 p.m.

Inter-American Development Bank seminar on Liberalization,
Development and Integratiun of Financial Mnrkets in the Americas.
Pm1icipants will include Treasury Secretary Robert E. Rubin, Counselor
to the Presidt:nt, Thomas F. (Mack) McLarty, IDB President Enrique V.
Eglesias, and a group of finance minislers and private sector
representatives from throughout the Western Hemisphere.
Press: Open.
Location: Gallier Hall, 545 St. Charles Avenue.

6-7 p.m.

Receptiun hosted by the City of New Orleans and Louisiana officials.
This will include brief remarks by local officials and Secretary Rubin.
For planning purposes only: Arrivals scheduled Lo begin at 5:45 p.m.
Remarks lentatively scheduled for 6:15 p.m.
Press: Credentialed press are invited to the reception; a riser area will
be provided for working press.
Location: New Orleans Museum of Art, City Park, 1 Collins Diboll
Circle.

Saturday, May 18
8 a.m.

Press Center opens.

8:15 a.m.

Cameras set up at Gallier Hall for arrivals.

9-9;30 a.m.

Delegation arrivals.

9:30 a.m.
-12:30 p.m.

Plt:nary session.
Press: Opening remarks only; photo op at beginning of meeting; may
be pooled.
Media will be escorted from/to International Press Center at 9: 15 a.m.

12:40 p.m.

Group photo of finance ministers.
Press: Open.

2:30-3:45 p.m.

Plenary session.

3:15p.m.

Setup for concluding press conference

4 p.m.

Concluding press conference.

5-7 p.m.

Reception hosted by World Trade Center and other New Orleans
business groups.
Location: World Trade Center, 2 Canal Slreet.
Press: Credentialed press are invited to the reception; a riser area will
be provided [or working press.

8 p.m.

International Press Center closes.

Credentials. Press credentials are required for all media covering the meeting. An application
for press credentials is attached.

u.s. press based in the United States should apply for credentials through the Treasury Public
Athtirs Office. International press based in the Unilt:u States should apply through the U.S.
Tnformation Agency's Foreign Press Center in Washington. Press based in countries other
than the United States shoulu apply through the USTS office in that country.
International Press Center. The International Press Center will be open from 9 a.m. Friday,
May 17, until 8 p.m. Saturday, May 18, at Gallier Hall, grolmd floor. The press center, open
to credentialed reporters, will make available otticial schedules, press releases, information on
events open to press coverage, transcripts and background information.
The press center will have a limited number of inlernational credit and calling card telephone
lines. Reporters wishing to reserve a ut:uicated telephone line in the press center should call

Naomi Thomas ufBell South at (504) 528-7508 or (504) 592-1317
Shuttle buses. Shuttle buses will provide transportation between conference locations for
credentialed delegates, staff and press.
Acconunodations. The New Orleans Marriott Hotel, the conference headquarters, is booked.
Press wishing to be plact:d un a waiting list for rooms at the Marriott should return the
attached form hut should make alternate arrangements. New Orleans has many hotels in all
price ranges, although May is a popular time for the city and available rooms are limited.
The New Orleans Metropolitan Convention and Visitors I3ureau at (504) 566-5005 can help
secure rooms.
Conference Internet site: www.gnofn.org/mwhtin
Contacts.
U.S. Treasury/Washington
Chris Peacock, Michelle Smith or Phyllis Kayson at (202) 622-2960, fax: (202) 622-199Y
U.S. Information Agency/Foreign Press Center
Jonathan Baker at (202) 724-0040, fax: (202) 724-0007
Peter Brennan at (202) 622.2854, fax (202) 622-2854, e-mail pbrennan@usia.gov

-30-

5114

WESTERN HEMISPHERIC FINANCE MINISTERS !VIEETING
New Orleans, Louisiana

May 17-18, 1996
Application for press credentials
(Ple~~e

print or type)

All members of the press wishing to cover the Western Hemispheric Finance Mini::;ters
meeting must submit a completed credential application form by Wednesday, May!, 1qQ6

I,;},,;(

name

!ir;l

middle

Pre» org~niza(ion/affilia(iOIl

titk

Business address (in home country)

Office phone number

Date

0

FAX nLimber

pl~ce

f birth

Social Security number

U,S. news organizations

of hinh

national it)'

passport number

In

E-Mail

the U,S, should apply for credentials through:

Phyllis K<1ysun
U.S Department of the Treasury
Office of Public Affairs, Room 2315 MT
1500 Pennsylvania Ave, N. W.
Washington, D,C. 20220
Phone:

(202) 622-2960; fax (202) 622-1999

Foreign news organi7i~tions hased in the US, should apply for credentials through:
Arthur Green
USIA Foreign Press Center. Koom 8')8
National Press Rllilding
Washington, D.C 20045
Phone:

(202) 724-0049: tax (202) 724-0U07

All overseas press, whether arfil!<1teu With it US or fort'lgll lleW~ organi7atiol1, ,hOllld arply for credentIals
the Us. Information Service in that country

throu~h

Credential pickup will be In New Orleans

Date and locatIOn to be announced

Please FAX to:

Phyllis Kayson
Department of the Treasury

202/622-1999
MARRIOTT HOTEL REGISTRATION FORM
FOR WESTERN HEMISPHERIC FINANCE MINISTERS MEETING
Reservations must be made ASAP
Cancellations made no later than May 13 will incur no costs

NAME

COMPANY

ADDRESS

TYPE OF
ROOM*

,

FORM OF
PAYMENT

....

CHECK·IN
DATE

CHECK-OU-Y;
DATE (must

(approx .
time)

be out by
noon)

* Hotel accommodations and prices (do not incfude 11 % tax nor $3.00 per nighf city tax) arethetollowlng:
If space is available:
Single rcom for US $99.00. Indicate above with the letter R.
Double room for US $99.00. Indicate above with the letter D .
.. .. Form of payn:ent may be electronic transfer, charge card, cash, check, money order or traveler's :hecks.
In addition to the hotel rooms that have been arranged for you, do you wish to receive information about dedicated phone lines and work space
In the press center at Gallier Hall?
Please provide your fax _ _ _ _~________. and phone

number.

DEPARTMENT

OF

THE

TREASURY

NEWS
OffiCE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

EMBARGO TO BE SET AT BRIEFING
Remarks as prepared for delivery
May 15, 1996
REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
PRE-NEW ORLEANS MINISTERIAL PRESS CONFERENCE
This weekend in New Orleans finance ministers from the democracies in the
Western Hemisphere will meet to continue the Summit of the Americas process.
It is our first meeting since the Miami summit in December of 1994 -- other than

the special purpose meeting on money laundering in Buenos Aires -- and with the
problems that Mexico experienced receding, it is time to examine how we can sustain
and broaden the benefits of growth in our region.
The Latin American region has undergone a remarkable turnaround from the
1980s as the result of an initial round of reform. But there continues to be an important
need to raise and sustain growth rates, and a critical need to address the problems of
poverty. If the growth rate were to increase to say 5 or 6 percent a year, it will be a
major move toward addressing a second tier of problems -- poverty and a serious
inequity in income distribution.
There must be a continuation of economic reform in our region.
Therefore, our discussions will focus on three things: first, reinforcing
commitments to sound economic policies, including ones oriented toward the private
sector and which increase national savings; second, seeking agreement on a program for
developing, liberalizing and integrating financial markets, and institutionalizing the
consultative process in the Hemisphere; and third, strengthening efforts to combat
financial crime.
There are nearly three-quarters of a billion people in the Western Hemisphere,
many in well-developed areas. But there are places where there is no access to clean
water. There are places with insufficient infrastructure -- roads, power plants, telephone
systems. There are deeply serious poverty problems. There are countries paying dearly
now for lax financial supervisory and regulatory regimes, and a lack of transparency.
Both equity and debt markets are underdeveloped in much of the Hemisphere.
RR-I070
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

2

The prosperity Latin American can achieve through the initiatives we'll discuss in
New Orleans holds enormous promise for economic growth, jobs and higher wages for
Americans here at home, and will contribute to our national security.
The New Orleans ministerial will, I believe enable the economies in our region to
continue on the path of reform.
Thank you.
-30-

GROUP

OF

TEN

THE RESOLUTION OF SOVEREIGN LIQUIDITY CRISES

A report to the Ministers and Governors
prepared under the' auspices of the Deputies

Pre-publication version

May 1996

Copies of this publication can be obtained from the central banks and finance ministries of
the Group of Ten countries and from:
Bank for International Settlements

International Monetary Fund

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Switzerland

Washington, D.C. 20431

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ISBN: 92-9131-900-7

USA

GROUP

OF

TEN

THE RESOLUTION OF SOVEREIGN LIQUIDITY CRISES

A report to the Ministers and Governors
prepared under the auspices of the Deputies

May 1996

TABLE OF CONTENTS

EXECUTIVE SUMMARY ........................................................................................................... i
INTRODUCTION ........................................................................................................................ 1

1. FRAMEWORK ........................................................................................................................ 2
A. The changing envirorunent ............................................................................................. 3
B. Objectives and desirable features of orderly workout procedures.................................... .4

C. Coverage ........................................................................................................................ 5
II. CONCEPTUAL METHODS FOR DEALING WITH SOVEREIGN LIQUIDITY CRISES .... 7
A. Bankruptcy and other formal arrangements ..................................................................... 7

B. Relying on market solutions ........................................................................................... 9
C. Existing practices and procedures ................................................................................. 10
III. IMPROVING THE ENVIRONMENT FOR HANDLING CRISES ....................................... 12
A. Prevention ...................................................................................................... ,............. 12
B. Improving external debt data ........................................................................................ 13

C. Strengthening the financial system in debtor countries .................................................. 13
D. Developing contractual underpinnings: model clauses in international bond issues ....... 14
1. Collective representation ..................................................................................... 14
2. Qualified majority voting clauses ........................................................................ 15
3. Sharing and similar clauses ................................................................................. 15
4. Design and introduction ...................................................................................... 16
E. Improved coordination and communication .................................................................. 16
F. Early action by debtors ................................................................................................. 17
IV. CRISIS HANDLING ............................................................................................................ 17
A. The combination of adjustment and financing ............................................................... 17
B. The role of the debtor, creditors and the official community ......................................... 18

C. Temporary suspension of payments .............................................................................. 20
D. IMF lending policies .................................................................................................... 23
E. The cooperative strategy ............................................................................................... 24

ANNEX I
Deputies of the Group ofTen ...................................................................................................... 25

ANNEX II
List of members of the working party on the resolution of sovereign liquidity crises ................... 26

ANNEX III
Summary report on the survey of market participants .................................................................. 28

1. Pre-crisis conditions and market practices ..................................................................... 28
2. When a crisis emerges ................................................................................................... 32
3. The resolution process ................................................................................................... 35
Appendix. Survey of market participants: Questionnaire .......... :........................................ 39

ANNEX IV
Report on existing forms of collective representation applicable to debt instruments .................. .43
Scope and structure of the report ........................................................................................ 45
Part I. General findings ..................................................................................................... 45
Part II. Summaries of collective representation as described in national reports ................. 51

EXECUTIVE SUMMARY

1.

Following an invitation to the Ministers and Governors of the Group ofTen by the Heads of

State and Government of the Group of Seven in Halifax in June 1995, the Deputies of the Group of
Ten established a working party to consider the complex set of issues arising with respect to the
orderly resolution of sovereign liquidity crises. While taking a comprehensive view of the
problem, the Working Party focused its attention on those forms of debt to private creditors, such
as internationally traded securities, that have increased in importance in the new financial
environment but that in the past have usually been shielded from payments suspensions or
restructurings. In carrying out its work, the Working Party recognised that the highest priority
needs to be given to measures that will help prevent crises from occurring and endorsed efforts
underway in other forums to improve market discipline and strengthen the surveillance of
sovereign borrowers' economic performance. It attached particular -importance to the need for
sovereign borrowers to make timely changes in their economic policies if conditions change in
ways that may lead to reductions in capital inflows.
2.

After careful review of analyses of the full range of questions involved, and taking into

consideration surveys of the views of market participants and of legal practices relating to
collective representation of debt holders that were conducted by its members for this purpose, the
Working Party reached the following broad conclusions.
•

First, it is essential to maintain the basic principles that the terms and conditions of all debt
contracts are to be met in full and that market discipline must be preserved. However, in
exceptional cases, a temporary suspension of debt payments by the debtor may be
unavoidable as part of the process of crisis resolution and as a way of gaining time to put in
place a credible adjustment programme.

•

Second, neither debtor countries nor their creditors should expect to be insulated from
adverse financial consequences by the provision of large-scale official financing in the event
of a crisis. Markets are equipped, or should be equipped, to assess the risks involved in
lending to sovereign borrowers and to set the prices and other tenns of the instruments
accordingly. There should be no presumption that any type of debt will be exempt from
payments suspensions or restructurings in the event of a future sovereign liquidity crisis.

•

Third, current flexible, case-by-case practices and procedures, as they have evolved over the
years, are an appropriate starting point for approaches to sovereign liquidity crises. They
emphasise the importance of adjustment efforts of the debtor country and place principal
responsibility for workouts on the debtors and creditors, with the debtor country having

primary responsibility for setting the process on a co-operative footing. Improvements in
practices and procedures should continue to be evolutionary.
•

Fourth, international bankruptcy procedures and other formal arrangements do not appear to
provide, in current circumstances or in the foreseeable future, a feasible or appropriate way of
dealing with sovereign liquidity crises. However, further study by private sector entities may
be warranted.

•

Fifth, further consideration should be given in appropriate forwns to ways in which financial
systems in emerging market economies could be strengthened in order to reduce the risks
they might pose in the event of a sovereign liquidity crisis.

•

Sixth, a market-led process to develop for inclusion in sovereign debt instruments contractual
provisions that facilitate consultation and cooperation between debtors and their private
creditors, as well as within the creditor community, in the event of crisis would be desirable.
Market initiatives would deserve official support as appropriate.

•

And seventh, note was taken of current policies of the IMF that provide, under exceptional
circumstances, for lending in support of effective adjustment programmes prior to full and
final resolution of a sovereign borrower's arrears to private creditors. It would be advisable
for the IMF Executive Board to review existing policy in this area and to consider whether
the scope of its application should be extended to other forms of debt not now covered, while
remaining mindful of the need for prudence and the maintenance of strict conditionality.

3.

The thinking of the Working Party was influenced by three basic changes in the financial

environment bearing on the character of potential future sovereign liquidity crises. First, the
broader and stronger linkages among domestic and international financial markets mean that crises
can erupt much more quickly in today's markets and can be far larger in scope than in the past.
Second, flows of capital to emerging market economies in the form of purchases of securities have
increased greatly in size over the years and have substituted for other types of private capital.
Third, when a crisis occurs new finance is unlikely to be forthcoming from those who undertook
the original lending. These changes mean that financing available from official sources is less
likely to be sufficient to enable a sovereign debtor experiencing a crisis to meet fully its external
financing obligations. In any event, the Working Party stressed that provision of official funds to
limit private losses raises serious moral hazard risks and could interfere with market discipline.
4.

In considering means to deal with future sovereign liquidity crises, the Working Party was

of the view that no single pre-set procedure can be suitable in all cases. However, it identified a
broad set of desirable principles and features that provide a framework for the development of
procedures for handling sovereign liquidity crises in a flexible, case-by-case approach in light of
the conditions prevailing at the time, the nature and the intensity of the crises, and the
circumstances of the debtor. Any such procedure should have the following features.
•

It should foster sound economic policies by all debtors.

•

It should minimise moral hazard for both creditors and debtors.

•

It should rely on market forces and not interfere with the efficient operation of secondary
markets in relevant debt instruments.

•

It should limit contagion from one debtor's problems to other countries.

•

It should support credible and sustainable actions and., to this end, not impose excessive

social, political, or economic costs on the debtor.
•

It should seek to ensure that burdens associated with the provision of exceptional financing

are allocated fairly within and across different classes of creditors.
•

It should strengthen the ability of governments to resist pressures to assume_responsibility for

the extemalliabilities of their private sectors.
•

It should be suitable for quick and flexible use in a variety of different cases.

•

It should be cooperative and non-confrontational, and promote the adoption by debtors and

creditors of arrangements to facilitate resolution of liquidity crises should they occur.

•

It should build on existing contractual or other arrangements that facilitate the resolution of
crises.

•

It should make use of existing practices and institutions.

5.

The Working Party concluded that the establishment of a formal international bankruptcy

procedure would not be feasible or appropriate under present circumstances or in the foreseeable
future. Sovereign debtors have not in the past had a strong need for legal protection against their
creditors, nor could they be obligated to submit to the jurisdiction of a bankruptcy forum.
However, the Working Party noted that interested private parties might wish to continue to study
the merits of bankruptcy or other formal procedures. At the same time, the Working Party
concluded that it is not possible or desirable to preclude official involvement altogether in the
event of a serious crisis. The official

communi~'s

interest in containing systemic risk and its role

as a lender to sovereign borrowers mean that it is has a stake, and therefore a role to play, in
fostering cooperative efforts by debtors and creditors to contend with unexpected payments
problems.
6.

In considering specific ways to facilitate resolution of sovereign liquidity crises, the

Working Party took the view that current practices are an appropriate starting point. Current
practices were developed over the course of the past few decades to contend with real world
problems in a pragmatic and flexible manner. They are voluntary and make use of market
information and market forces. The practices recognise the distinct perspectives of the three main
actors involved in a crisis - the official community, private creditors, and the sovereign debtor - as
well as their common interest in the orderly resolution of the crisis. They involve national
authorities and multilateral institutions but place principal responsibility on the individual debtor
and its creditors. The practices are based on the implementation of an IMF-supported sustainable
adjustment programme as a major precondition for the cooperative resolution of a crisis.

111

7.

The Working Party recognised that structural weaknesses in the banking systems of debtor

countries could seriously aggravate liquidity crises and might pose difficulties for financial
systems in lender countries. The Working Party concluded that further work should be undertaken
in appropriate international forums to promote the strengthening of financial systems in emerging
market economies and thus help to reduce such risks.
8.

The Working Party took the view that certain contractual or statutory provisions governing

debt contracts can facilitate the resolution of a crisis by fostering dialogue and consultation
between the sovereign debtor and its creditors and among creditors, and by reducing the incentive
for, or ability of, a small number of dissident creditors to disrupt, delay or prevent arrangements to
support a credible adjustment programme that is acceptable to the vast majority of concerned
parties. Among such provisions are those that (a) provide for the collective representation of debt
holders in the event of crisis, (b) allow for qualified majority voting to alter the terms and
conditions of debt contracts, and (c) require the sharing among creditors of assets received from the
debtor. Such clauses have been employed in a limited set of debt contracts. The Working Party
emphasised that evolution of contractual arrangements between sovereign borrowers and their
creditors needs to be a market-led process if it is to be successful. Such efforts should receive
official support as appropriate.
9.

The Working Party strongly endorsed the fundamental principle that the terms and

conditions of all debt contracts are to be met in full and on time. At the same time, it recognised
that in certain exceptional cases the suspension of debt payments may be a necessary part of the
crisis resolution process. Such payment suspensions should be non-confrontational and
implemented in a way that does not hamper the operation of secondary markets. The Working
Party did not consider that it would be feasible to operate any formal mechanism for signalling the
official community's approval ofa suspension ofpayrnents by the debtor. Although the Working
Party rejected any formal international approval of a suspension of debt payments, it concluded
that it would be advisable for the IMF Executive Board to consider extending the scope of its
current policy of lending, in exceptional circumstances, to a country that faces the prospect of
continuing to accumulate arrears on some of its contractual debt-service obligations to private
sector creditors, in cases where the country is undertaking a strong adjustment programme and
making reasonable efforts to negotiate with its creditors. Such lending can both signal confidence

in the debtor country's policies and longer-term prospects and indicate to unpaid creditors that
their interests would best be served by quickly reaching an agreement with the debtor.
10.

The Working Party reached the overall conclusion that there is no need to change current

procedures for official bilateral credits and long-term bank claims. However, there is a need for the
principles and procedures for handling sovereign liquidity crises to take into account the new

importance of debt in the fonn of securities and the growing likelihood that some such debt may
have to be subject to renegotiation in the future. While the official community may be able to
facilitate dialogue and assist in data collection, market participants should make the decisions
regarding any innovations in contractual provisions. The official community's primary role in the
resolution of sovereign liquidity crises should remain centred on the promotion of strong and
effective adjustment by debtor countries in the context of IMF-supported programmes, which
would need to take into account any recourse to temporary suspensions of payments.

v

INTRODUCTION

1.

At their meeting in Halifax on 15th-17th June 1995 the Heads of State and Government of

the Group of Seven countries, " ... recognising the complex legal and other issues posed in debt
crisis situations by the wide variety of sources of international finance involved ... encouragerd]
further review by G-I0 Ministers and Governors of other procedures that might also usefully be
considered for their orderly resolution". Following this invitation, the Deputies of the Group of
Ten established a working party consisting of representatives of the ministries of finance and
central banks of the G-IO countries, with the participation of experts from key international
organisations, to examine the complex range of issues arising in this area. In October 1995 the
Deputies were asked by Ministers and Governors to continue this work and to report to them in
April 1996.
2.

This undertaking is complementary to other work under way to improve the ability of the

official community to deal with threats to the stability of the international financial system. In
response to a separate but related Halifax initiative, the Group of Ten has been exploring whether
its members and other countries with the capacity to support the system would be prepared to
double the resources currently available under the General Arrangements to Borrow (GAB) for
responding to financial emergencies. In addition, at its meeting in autumn 1995 the Interim
Committee endorsed the establishment of a new standing "Emergency Financing Mechanism"
which on the basis of strong conditionality would, when warranted, provide borrowers with faster
access to IMF arrangements and larger up-front disbursements.
3.

The rapid changes observed in the financial system and the increasing size and diversity of

financial flows to emerging market economies have given rise to questions whether existing
procedures for resolving sovereign liquidity crises would be adequate for dealing with future
crises, should preventive measures fail. As noted in the Halifax Communique and discussed later
in this report, the Mexican crisis provided the backdrop against which consideration of these issues
occurred. However, the Working Party did not focus on that particular case and took a broader
view of its mandate.
4.

The Working Party considered alternative approaches for dealing with sovereign liquidity

crises. While not wishing to discourage further exploration of other specific alternatives by
interested parties, the Working Party concluded that it should focus its attention on those
approaches that build on existing practices and institutions (e.g. those of the Paris and London
Clubs) and are designed to work to the greatest possible extent with the grain of the market.
5.

In most cases, three classes of actors are involved when a sovereign liquidity crisis erupts:

the government of the debtor COWltry, its private creditors and the official community (comprising
1

multilateral institutions and national authorities, both of which may be involved also in their
capacity as creditors). The balance of actions undertaken, and the burdens assumed, by each class
of actors in this trilateral process are of the utmost significance for containing moral hazard. Moral
hazard in this context refers to distorted incentive structures that induce borrowers and/or lenders
to engage in risky financial behaviour, or inadequately monitor the risks they assume, in the
expectation that they will be insulated from the adverse consequences of their activities by the
public authorities. The official community has several objectives in this respect, including:
(i) promoting adjustment by the debtor country, generally in the context of an IMF-supported
adjustment programme, (ii) minimising collective action problems, that is, problems which arise
when individual agents do not have sufficient incentive to cooperate but instead pursue their own
narrow objectives to the detriment of the common good, (iii) catalysing finance in support of
adjustment efforts, when the latter are credible, and (iv) discouraging expectations that large-scale
official financing packages will be available to meet debt service obligations to the private sector.
The Working Party has kept in mind the need to balance these considerations.
6.

The Working Party is of the view that no single preset procedure can be suitable for dealing

with every sovereign liquidity crisis. The appropriate course of action will depend on the nature
and intensity of the crisis, the circumstances of the debtor and the type of creditor. Therefore,
procedures should allow for flexible, case-by-case treatment. Nevertheless, arrangements for
handling sovereign liquidity crises should have a number of desirable features. After delineating a
broad set of such features, the report seeks to set out and widen the range of approaches available
to the three classes of actors.
7.

With the benefit of work done in the first half of 1995 by representatives ofG-lO central

banks under the auspices of the BIS, the Working Party set out to collect from national authorities
and international organisations a range of factual and analytical material relevant to the issues at
hand. It also carried out a survey of the views of market participants on many of these issues and
compiled information on legal practices relating to the collective representation of debt holders.
Summaries of these surveys are annexed to the report. The Working Party used the information
gathered to consider whether changes in current practices and procedures might be warranted and
to what extent they might be feasible.
8.

The Working Party's findings are presented below. The first section sets out the basic

framework for the analysis. The second considers various approaches for handling a crisis. The
third section discusses how the economic, legal and institutional environment for dealing with
crises can be improved. The fourth examines the management of a crisis.

I.

FRAMEWORK

9.

This section outlines the basic framework for the report. It begins by describing the

substantial changes in the international economic environment which have taken place over the
past decade under the impact of financial and technological innovation and the liberalisation of

2

cross-border capital flows and then assesses the implications of these changes for the nature and
severity of future sovereign liquidity crises and for the manner in which they could be handled. It
then goes on to list a few features that workout procedures should ideally possess if they are to
facilitate the orderly resolution of liquidity crises. It concludes with a discussion of the types of
crisis and types of debt that might have to be covered.

A.

The changing environment

10.

The considerable changes that have occurred in the international financial environment in

the past decade will have a major bearing on the speed, intensity and nature of any international
liquidity crisis that might occur in the future. Liberalisation of capital markets and financial and
technological innovation have greatly increased the size and volatility of cross-border positions.
They have been associated with a corresponding expansion of capital flows and massive growth in
the volume of transactions, reflecting in part greater market breadth and depth.
11.

While foreign direct investment flows to developing countries have surged over the past

decade, the most dramatic development has been the growing importance of bonds and other
securities, especially in the financing of emerging market economies. Net portfolio investment
flows to all developing countries increased from an average ofUS$ 6.5 billion per year in 1983-89
to over US$ 43 billion in 1990-94 (Table 1). The increase in net flows of portfolio investment to
the emerging economies of Asia and the western hemisphere has been even more pronounced, as
both governments and private entities in these economies have made heavy use of securities to
raise funds in the international capital market.

Table 1. Capital flows to developing countries
Annual averages, in billions of

Total net capital inflows
Net foreign direct investment
Net portfolio investment
Other

us dollars
1990-94

1977-82

1983-89

30.5

8.8

104.9

11.2

13.3

39.1

-10.5

6.5

43.6

29.8

-11.0

22.2

Source: IMF World Economic Outlook database.
12.

The changes in the nature and size of capital flows to developing countries have been

accompanied by significant changes in the composition of the investor community. Institutional
investors, including so-called emerging markets mutual funds, have become a notable source of
funds for borrowers in emerging market economies though their claims on these countries still
account for only a small proportion of their total assets. By contrast, commercial bank loans to
developing countries and emerging market economies, which were a main source of finance in the
1970s, have increased only slowly during the early 1990s. Relative to their capital, commercial
banks' exposure to these countries is considerably lower than in the 1980s. This reduces the

3

likelihood that the type of approach to debt problems that was followed in the 1980s could be
adopted again in the event of financial distress in an emerging market country.
The Mexican crisis of 1994/95 illustrated the potential size, speed and severity of sovereign

13.

liquidity crises in these new circumstances. The Mexican Government had a large stock of shortterm liabilities in the form of securities indexed to the US dollar (tesobonos), and Mexican banks
had extensive foreign-currency denominated international interbank lines as well as large
comparable liabilities to foreign non-banks. Rolling these liabilities over or refinancing them in the
market was very problematic.
14.

The increase in the importance of debt in the form of securities raises the question of

whether the liquidity problems of a troubled debtor can be resolved without including such
liabilities in workout procedures providing temporary relief for the debtor in support of its
adjustment efforts. It is worth noting that the risk premium on some emerging market debt
suggests that market participants realise that there is a non-negligible probability of debt service
payments being interrupted in some cases.
On balance, the change in the environment has had several significant consequences. The

15.

shift of sovereign borrowers away from commercial bank loans and towards increased reliance on
bond financing means that holdings are more dispersed and that a liquidity crisis is less likely to
threaten the international financial system. At the same time, however, it means that new finance is
unlikely to be forthcoming from those who undertook the original lending. Bondholders are in
general probably less likely than commercial banks to see any advantage in forming a long-term
relationship with the countries to which they lend, and many are likely to sell their holdings in
reaction to perceived payments difficulties. Securities can be traded more easily than bank loans.
The increasing integration of capital markets also means that crises may erupt quickly and can be
far larger in scope than they were in the past. In addition, they can be transmitted from the original
problem debtor to countries with stronger underlying economic fundamentals.

In light of these developments the Working Party drew two main policy conclusions.

16.

Firstly, approaches which stress prevention and enhance market discipline should be given the
greatest priority. Secondly, given the limitations on the availability of official finance, the need to
contain moral hazard and the desirability of equitable burden sharing, there can be no presumption
that any form of debt will be excluded from workout arrangements in the future. While the
provision of some official funds may be warranted in the case of a pure liquidity crisis, repeated
reliance on emergency finance would encourage imprudent behaviour by debtors and creditors
alike.

B.

Objectives and desirable features of orderly workout procedures

17.

After considering current and past arrangements, and taking into account the underlying

objectives of action to prevent, handle and resolve sovereign liquidity crises, the Working Party
concluded that any crisis management procedure should have certain basic features:
(a)

It should foster the pursuit of sound economic policies by all sovereign debtors. In this
context appropriate conditionality is essential for promoting economic adjustment by debtors

4

so as to enhance their capacity to repay their creditors and regain the confidence of the
markets.
(b)

It should minimise moral hazard for both creditors and debtors. This entails taking full

account of the risk of moral hazard for debtor behaviour implicit in any official action and
ensuring that creditors are not insulated from the effects of their own lending decisions.
Official financial support, if necessary, should be limited in amount.
(c)

It should work with the grain of the market and avoid measures that interfere with the

efficient operation of secondary debt markets. The smooth functioning of these markets can
foster the continued exercise of market discipline, the accurate pricing of risk and the
renewed flow of finance to emerging markets.
(d)

It should limit contagion effects, whereby a crisis in one country leads creditors to shift funds

out of other countries perceived to be in similar circumstances.
(e)

It should support credible and sustainable action, and to this end not impose excessive social,

political or economic costs on the debtor. Accordingly, some amount of financing may be
required for a successful economic adjustment programme.
It should seek to ensure that the burdens associated with the provision of exceptional

(t)

financing are shared fairly within and across different classes of creditors, with due account
being taken of de minimis l and other considerations.
(g)

It should strengthen the ability of governments to resist pressures to assume responsibility for

external liabilities of their private sectors.
(h)

It should be flexible enough to be applied quickly and suitable for use in a variety of different

cases.
(i)

It should be cooperative and non-confrontational, and promote the adoption by debtors and

creditors of arrangements to facilitate the resolution of liquidity crises should they occur.
It should build upon contractual or other arrangements that facilitate the resolution of

G)

international liquidity crises should they occur.
(k)

It should make use of existing practices and institutions, modified, if necessary, to make

them effective and quick to respond in new circumstances.

C.

Coverage

18.

One reason for seeking to develop procedures for handling sovereign liquidity crises is to

contend with threats to the international financial system. However, a range of views exists on
precisely what constitutes a systemic crisis, and it may often be difficult to tell early in the course
of a major crisis whether the crisis will remain contained or grow through contagion and other
effects. Moreover, there is good reason to reduce the cost of crises even when they do not have
systemic implications. Just as existing procedures provide for action in a variety of cases, so

1

The de minimis criterion provides for the exclusion of certain creditors on the grounds that their claims

are so small as not to be of material concern for either the debtor or other creditors.

5

should new procedures. Accordingly, the report considers procedures which could be used to
contend with sovereign liquidity crises irrespective of whether they are systemic.
19.

Multilateral institutions enjoy effective preferred status because of the seniority of thei~

claims. The Paris Club procedures for the resolution of sovereign debt problems cover bilateral
claims of the official sector. The more diffuse London Club process has been applied primarily to
long-term claims of the commercial banks. For a large and increasing class of debt instruments
such as bonds and other securities issued by sovereign borrowers, there are, however, no
established procedures for the use of payment suspensions or reschedulings for dealing with a
debtor's liquidity problems. Accordingly, these types of instruments were the main focus of the
Working Party's attention.
20.

Decisions on the items to be covered by the workout process must be made in light of the

size and composition of a country's liabilities and the prospective impact on its balance of
payments. For this reason, the Working Party's attention could not be restricted exclusively to
sovereign debt. Private sector debts might in extremis have to be considered in a sovereign
workout arrangement in order to ensure that it is successful in stabilising conditions. Also, the
distinction between external and internal debts may become progressively less meaningful as debt
instruments are increasingly tradable across national borders. International interbank lines
constitute a sizable portion of some emerging economies' total debt, and banks in these countries
fund long-term domestic claims in the international interbank market. However, since trade credits
and interbank lines are essential for retaining commercial and economic links with the world
economy, they have so far been excluded from most sovereign workout arrangements.
21.

Altogether, the liabilities not covered by existing arrangements for dealing with impaired

payment capacity amount on average to over half of the external claims on middle-income
countries. To the extent that particular forms of debt are shielded from any restructuring
arrangement, an incentive arises in favour of such financing channels (as may have been the case
with bonds and other securities in the 1980s and 1990s). To avoid this distortion, it is useful to
make it clear to market participants that: (i) no firm lines can be drawn ex ante between types of
debt to be covered by orderly workout arrangements, (ii) each crisis must be treated on a case-bycase basis, (iii) depending on the circumstances of the debtor, there will be a ranking of debts with
respect to servicing on their original terms, and (iv) the commitment to ongoing provision of new
credits could be one factor determining which debts are serviced on time.
22.

The liabilities of the private sector are not always immune from the effects of government
-

action. There may be pressure to "socialise" (i.e. for the public sector to take over) some liabilities
originally incurred by private sector entities. The Working Party is of the view that such pressures
should be resisted wherever possible because socialisation complicates the resolution of sovereign
liquidity problems and hampers the efficient operation of the market. However, it also recognises
that the banking system is one domain where the domestic authorities may not always be able to
avoid some responsibility for private debts if they are to avert a domestic banking crisis.

6

II.

CONCEPTUAL METHODS FOR DEALING WITH SOVEREIGN LIQUIDITY

CRISES
23.

As noted above, the Working Party expressed a distinct preference for an incremental

approach building on existing procedures and practices. Such a conclusion is the result of a
thorough review of some alternative conceptual approaches, to which the present section is
devoted. The Working Party agreed that the provision of large-scale official financial support for
sovereign debtors was warranted only in exceptional circumstances. Such an approach may involve
the use of official funds to enable the debtor country to service its debt to private creditors. This
result would obviously be inconsistent with the principle of equitable burden sharing and the
general aim of limiting demands on official resources. In addition, it would give rise to moral
hazard on the part of both debtors and creditors since official funds would be used to insulate them
from the consequences of deficient debt management or inadequate risk assessment. Therefore, this
section looks at other possible approaches. It begins with a brief discussion of bankruptcy
procedures and other formal arrangements and whether it would be appropriate and feasible to
apply them to sovereign debt in an international context. It then considers the option of minimal
official involvement, the so-called market solution. The section concludes with an examination of
the main features of existing arrangements.

A.

Bankruptcy and other formal arrangements

24.

There is no international bankruptcy code for private or public sector borrowers. In order to

consider whether such a code would help to contend with the liquidity problems of sovereign
borrowers, it is useful to examine the economic aims and operation of existing corporate
insolvency procedures. In a national context, bankruptcy arrangements provide court assistance for
the orderly treatment of the debts of insolvent private or, in some cases, local government entities.
25.

Although differing from one jurisdiction to another, notably in the balance of rights and

obligations of debtors and creditors, bankruptcy procedures can be said to have two basic
economic purposes. Firstly, by specifying ex ante rules for the distribution of partial or delayed
payments on impaired debt claims among different classes of creditor, they reduce uncertainty and
make it easier for markets to price risk. Bankruptcy procedures do not in this respect substantially
increase moral hazard on the part of the debtor if they do not significantly alleviate the pain for the
debtor that is associated with insolvency. Secondly, by providing the debtor with temporary
protection from its creditors and access to interim finance with some form of de facto seniority,
bankruptcy procedures enable an enterprise whose value as a going concern exceeds its break-up
value to continue to operate. To this end, it may be necessary to provide the debtor enterprise with
protection from creditors who wish to invoke remedies available to them individually as a result of
the non-performance of the debt contract, and at the same time to enable creditors to influence the
management of the company - or even replace the management. This latter threat helps to reduce
problems of moral hazard on the part of the debtor.

7

26.

Despite their advantages in a national context and some theoretical appeal by analogy in an

international context, formal insolvency procedures do not appear to be either appropriate or
feasible now or in the foreseeable future as a means of dealing with sovereign debt problems, for
the following main reasons:
•

The analogy does not apply in some crucial respects, as it would be neither appropriate nor
possible to replace the authorities responsible for the economic policies of a sovereign state
with a "new management", or to take possession of a state's non-commercial property.

•

The need for additional protection from creditors has not in the past been a serious problem
for sovereign debtors. Such debtors have few assets to seize and some of these benefit from
sovereign immunities.

•

Any international insolvency convention would inevitably involve a long and cumbersome
negotiation process as it would be necessary to narrow the gap between the currently diverse
objectives and philosophies of individual countries' bankruptcy legislation and practices and
to reach agreement on matters affecting countries' sovereign rights.

•

Many of the same results could in principle be achieved in more informal ways that would
not require such fundamental institutional reform.

27.

It has been suggested that existing international arbitration procedures, which can be used as

an alternative to court proceedings, might also provide some insight into how analogous
procedures could be developed for sovereign debtors. However, this approach does not seem 'viable
for workouts involving debt in the form of securities even though there is nothing in principle to
prevent arbitration being used by interested parties. Arbitration is a method of dispute resolution
which, unlike court proceedings, depends upon the consent of all the parties involved. Unless
arbitration is provided for in the original contract or is unanimously agreed to by all interested
parties after a dispute arises, the large, diffuse and changing community of creditors poses serious
practical difficulties for gaining unanimous consent, particularly when what is meant in law by
"consent" varies from one jurisdiction to another. Moreover, international arbitration procedures
were essentially devised for use in connection with bilateral contractual arrangements and could
not be easily adapted to resolve disputes that may arise from multi-party contract renegotiations
such as international debt offerings. However, no obstacles to the use of mutually agreed upon
arbitration by interested parties should be imposed.
28.

It has also been suggested that mediation andlor conciliation procedures might be used in

resolving sovereign liquidity crises. Although such procedures can be less confrontational than
arbitration or court proceedings, they do not result in binding or enforceable rewards. Accordingly,
existing mediation and conciliation procedural rules, which are in any case not widely used, could
not easily be applied to a dispute of the sort likely to result from a sovereign liquidity crisis.
Binding provisions requiring parties to a dispute to go through mediation and conciliation
sometimes also delay the resolution process.
29.

On balance, formal procedures suitable in a national context or those developed for dealing

with private international commercial disputes would not at present be a feasible way to resolve

8

the problems arising in connection with a sovereign liquidity crisis. While it was pointed out that
bankruptcy procedures may warrant further study by other interested parties, the Working Party
recognises that such procedures do not in current circumstances or in the foreseeable future provide
a feasible way of dealing with sovereign liquidity crises. In addition, as is discussed below, formal
mechanisms intended to provide explicit official approval of the suspension of debt payments are
not needed in the present circumstances. The Working Party therefore focused its attention on
procedures that do not require fundamental changes in international laws and conventions and
could be implemented more quickly.

B.

Relying on market solutions

30.

An alternative to large-scale institutional reform would be to let debtors and creditors work

out problems on their own, without any official involvement whatsoever. Clearly a major attraction
of this approach is its potential to deal effectively with the moral hazard problem. Many of the
market participants surveyed in the course of this work broadly supported this approach and
expressed a strong preference for it (see Annex III).
31.

Even though some respondents expressed the belief that certain large institutions would

have incurred sizable losses if the official sector had not provided support for Mexico, many
market participants saw no major or generalised risk to the creditor countries' financial systems
arising from losses that some institutions might suffer during a typical sovereign liquidity crisis.
This is because the re-emergence of bonds and other securities has increased the dispersion of debt
holdings, thus spreading the impact of the losses in the event of a crisis, compared with the past
when syndicated loans were concentrated in a smaller number of institutions.
32.

A separate concern expressed by market participants was that some of the proposed

innovations would interfere with their ability to sell freely the securities they hold. This concern
related in particular to the introduction of clauses in bond contracts that would provide more
explicitly for renegotiation in the event of default and the ex ante establishment of bondholders'
associations. The investor community, and especially those that favour a more arm's-length
relationship with the borrower, interpreted such innovations as implying that they would not be
able to transfer their holdings freely during any renegotiation period. However, none of the options
considered viable by the Working Party is expected to impede the transfer of creditors' claims.
33.

Against a background characterised by the absence of serious losses on bonds and other

securities during their professional lives, the interviewees were on balance broadly satisfied with
the status quo and in general did not favour major innovations, although some expressed an
interest in a clear statement of the "rules of the game" by the official community. In the view of
many market participants, bonds represent an arm's-length source of finance, and the obligation to
repay should be considered almost as "sacred" by the debtor. Private investors' aversion to official
sector intervention in the formation of a workout process appears to be rooted in the suspicion that
this intervention may tilt the balance too much in favour of the debtor. The arguments against
official sponsoring of new arrangements were that such arrangements would be invoked too early,
would be less favourable to creditors, would raise the cost of funds to borrowers, would narrow the

9

investor base and could potentially heighten the risks of contagion compared with the status quo.
Market participants were confident that the market is capable of devising any feasible valueenhancing innovation on its own.
34.

The reactions of the market participants - as suggested by the explicit indications provided

by some - may have been influenced by their expectation that the official sector would in fact
continue to playa very significant role in the management and resolution of a liquidity crisis. In
particular, given that voluntary private provision of fresh money to the debtor facing repayment
difficulties was considered unlikely, it may have been assumed that the necessary liquidity would
be provided by the official sector, especially in the most severe cases. However, other respondents
indicated that the awareness that official support would not be forthcoming in the event of a crisis
would tend to make market participants pay greater heed to risk assessment.
35.

The Working Party felt that, while there is much to say in favour of minimising interference

in the market process, the extent of public concerns likely to be at stake when a liquidity crisis
occurs provides sufficient justification for the authorities to look for ways to foster cooperative
efforts by debtors and creditors to contend with unexpected payments problems.

c.

Existing practices and procedures

36.

Current practices for handling sovereign liquidity crises were developed over the course of

the past few decades to contend with real-world problems in a pragmatic and flexible manner.
They involve national authorities and multilateral institutions, but are informal and take account of
conditions prevailing in the market. They allow the case-by-case application of a few broadly
accepted general principles and lend themselves to evolutionary development. However, the
changing financial and economic environment poses new challenges to the capacity of these
procedures to deal expeditiously with liquidity crises, as the coverage of various types of debt is
incomplete for countries with access to international capital markets.
37.

An articulated set of procedures and principles for dealing with bilateral official debt

problems has been developed within the context of the Paris Club. These procedures provide for
the rescheduling of payments due on long-term and medium-term credits granted or guaranteed by
national governments. In exceptional cases they are used for short-term debts. At present they are
used primarily in the case of sovereign debtors which do not have regular access to the
international capital market. Debt rescheduling alleviates liquidity problems that threaten to lead to
default, and the Paris Club has been largely successful in regularising the payments situation of
sovereign borrowers.
38.

The decision to seek a rescheduling rests with the debtor country. Since such a step has

consequences for the debtor's credit standing and for the cost and availability of finance from the
market in the future, it is exceptional and is not taken without exploring the alternatives. Before an
initiative is taken, estimates of both the financing gap and the need for the adjustment of the terms
on existing debt are made with the assistance of the IMF. In making such projections, considerable
thought is given to economic adjustment even before the negotiations are formally started. An IMF
programme must be in place before a rescheduling is agreed.

10

39.

Paris Club procedures are informal and based on consensus embodied in the agreed Minute.

In other words, there is no international statutory law which governs the procedures. The official
creditor community is small and cohesive. This has been a key factor in making these procedures
function.
40.

A second factor which has contributed to the success of the process has been the use of a set

of general principles which are broadly accepted by creditors and debtors alike. One principle is
that rescheduling should enhance the value of existing claims by promoting the pursuit of
sustainable economic policies and thereby fostering new money flows. Conditionality and
continued monitoring are therefore integral components of the process, with the IMF serving as the
key institution in this context. Because the circumstances in different countries vary, the terms and
conditions need to be agreed case by case. One feature characteristic of Paris Club rescheduling is
the use of a cut-off date, which provides some assurance that new credits will have seniority.
41.

Another broadly accepted principle is comparability of treatment with respect to both

creditors and other debtors. This takes a variety of forms. One is equal burden sharing among
participating creditor countries, with the burden being allocated according to exposure. In addition,
comparable treatment clauses enjoin the debtor country not to grant preferential treatment to
creditors which are not represented in the Paris Club. The use of various formulas, such as those
promulgated at Houston, Toronto, London and Naples, helps to ensure comparable treatment of
different classes of debtors based on their objective economic and financial situation.
42.

The London Club process for rescheduling sovereign debt owed to commercial banks is

considerably more diffuse than the Paris Club process, partly because the community of creditors
is both larger and more heterogeneous. Only a small proportion of the banks participate directly in
the negotiations by sitting on the ad hoc bank advisory or steering committees which are generally
set up after a debtor has suspended payments.
43.

Nevertheless, in its reliance on convention rather than statute and the use of various

contractual devices to foster equitable treatment and reduce free riding, the London Club resembles
the Paris Club. Under the bank advisory committee approach, a borrower reaches an agreement
with key creditors to endorse a set of terms that are then presented to the entire community of bank
creditors for their acceptance or rejection. One common set of terms (or menu of options) is
presented to all bank creditors simultaneously.
44.

The terms incorporated into some London Club agreements have been influenced by those

agreed upon in Paris Club reschedulings because the agreed Minute of tile Paris Club contains
comparable treatment clauses obliging debtors to seek similar terms with other creditors. It has
often taken considerable time to obtain the final agreement of the hundreds of creditor banks not
represented on the steering committee. In some cases, sales of debt by small creditor banks have
helped reduce the number of creditors and eased the process of reaching agreement.
45.

At present there are no permanent forums for other types of creditors or for groupings based

on the type of obligation. In the period prior to the Second World War, national groupings of
bondholders were formed, sometimes with the endorsement or support of the national authorities.

11

More recently, ad hoc groupings of other creditors, such as uninsured suppliers with substantial
claims on Russia, have eventually sprung up when it nas been in their interest. The problems of
communication and coordination are greater for non-bank creditors than for banks both because
this community is larger and more diffuse and because its membership is more likely to change
since some of the debt is negotiable. This issue is considered later in the report.
ill.

IMPROVING THE ENVIRONMENT FOR HANDLING CRISES

46.

Prevention is far better than ex post resolution. Since efforts are under way in other forums

to strengthen preventive mechanisms, the Working Party decided not to consider this matter in any
detail. It limited its analysis to the potential advantages, as well as costs, of certain specific
precautionary measures that could prove useful in the event of a crisis. Such measures include the
collection of more detailed statistics on international (sovereign) debt, the strengthening of the
financial systems in debtor countries and the possible incorporation into debt contracts of standard
clauses aimed at improving debt holder representation and reducing the scope for disruptive debt
holder behaviour in the event of a crisis. Rapid and effective crisis management will also require
cooperation and communication among the authorities with a stake in the process, and will be
facilitated if the debtor takes early action to deal with the problem.

A.

Prevention

47.

Prevention is the first and most fundamental element in crisis management, and the best

preventive measure is the pursuit of sound economic policies. In today's highly integrated markets,
reliable and comprehensive information about policies and economic conditions are particularly
important.
48.

At present, the IMF is seeking to refine its methods of surveillance, through which

governments can encourage one another to adopt sound macroeconomic, structural and debt
management policies. Greater detail is now available in press releases on IMF programmes and in
other published forms, and detailed factual information derived from Article IV reviews is
frequently released; these steps may help to enhance market discipline. In autumn 1995 the Interim
Committee endorsed the establishment of standards for the provision to the public of economic and
financial data that will permit the effective monitoring of countries' macroeconomic policies. An
agreement on the establishment of a voluntary set of standards for countries that attract significant
private external credit is expected shortly. Various committees and groupings meeting under the
umbrella of the BIS and other international organisations are developing procedures for promoting
the soundness of banks and other financial institutions and for strengthening financial markets so
that the inevitable shocks and disruptions are not amplified and their systemic repercussions are
contained. In order to avoid unnecessary duplication of this work, the Working Party welcomed
such efforts but did not dwell on these dimensions of crisis prevention.

12

B.

Improving external debt data

49.

There is close complementarity between the infonnation needed for the prevention of crises

and that needed for their handling and resolution. For both purposes it is desirable to have
accurate, timely and comprehensive information on economic conditions in the borrowing country.
Market participants were unanimous in their view that it would be desirable to have more and
better information, particularly with respect to the expected cashflows of the debtor government
and the currency, maturity and instrument composition of the debtor's obligations. Many investors
also mentioned that sufficient information should be available about the foreign assets and
liabilities of the domestic banking system, with particular attention paid to short-term liabilities.
Although understandable, market participants' views on their infonnation needs may be unrealistic,
given the cost of collecting such data. Moreover, it also appears that some market participants are
not aware of all the information that is currently available and do not use the available infonnation
adequately in their investment analysis.
50.

Some of the data that market participants desire could be collected from them, although at

some cost, and from debtor-supplied information, which will be increasingly available under the
voluntary standards referred to earlier. In some cases it may be more feasible to collect data on
debtors' extemalliabilities from information on the size and composition of creditors' claims. Any
increase in the coverage, timeliness or frequency of data compiled from the creditor side would add
to creditors' reporting burdens, but the creditors would also be the principal beneficiaries. The
Working Party endorses efforts under way to improve data on external indebtedness.

c.

Strengthening the financial system in debtor countries

51.

Structural weakness in the banking systems of debtor countries could seriously aggravate

sovereign liquidity crises. This is particularly the case when banks fund a sizable amount of
longer-term domestic lending by borrowing in the wholesale interbank markets of the main
international financial centres. The decision by these banks' creditors not to roll over such funding
could generate a severe domestic banking crisis. If the debtor country government provided
extensive support for the banking sector in such circumstances, its own financial position could
deteriorate significantly. If the foreign offices of such banks were affected, this could have
supervisory and regulatory implications in the host countries.
52.

Recognising the potential vulnerability of banking systems in many indebted countries, and

its implications for approaches to sovereign liquidity crises, the Working Party concluded that
further work should be undertaken on these issues in the appropriate international forums. This
work could consider (i) what further steps could be taken to strengthen financial systems in
emerging market countries, in particular banking systems, for example by devising and enforcing
strict prudential standards, including those relating to foreign borrowing, particularly when this
entails maturity mismatches and exchange rate risk, and (ii) how best to deal with potential
liquidity crises in the banking system arising from the loss of short-term funding.

13

D.

Developing contractual underpinnings: model clauses in international bond issues

53.

Certain contractual provisions, if broadly contained in international debt contracts, could

help to facilitate debt holders' decision-making and hence the resolution of a sovereign liquidity
crisis as well as have other benefits in fostering dialogue and consultation between a debtor and its
creditors. In addition they may promote cohesion among creditors and reduce the incentive for, or
ability of, a small number of dissident creditors to disrupt, delay or prevent arrangements
supporting a credible adjustment programme that are acceptable to the vast majority of the
interested parties. There is a wide range of such clauses. Some are already included in many
syndicated loan agreements and some bond contracts. Three clauses that might prove useful
regardless of whether they are explicitly linked to the resolution of sovereign liquidity crises
provide for (i) the collective representation of debt holders, (ii) qualified majority voting to alter
the terms and conditions of the debt contract, and (iii) the sharing of proceeds among creditors.
Other clauses with similar aims could be drafted by market participants as a substitute for or
complement to these clauses and incorporated into debt contracts in the light of the specific needs
of the parties to the contract
54.

There appears to be very little experience with such clauses in workouts involving

international bond issues, and consequently no solid information is available on precisely how they
would operate. Most of the market participants surveyed expressed some scepticism about the
usefulness of including this type of clause. However, some indicated that they were in favour of
the use of contractual clauses that would give them some assurance about how a crisis would be
resolved. There is no way of knowing, a priori, whether clauses facilitating the resolution of
sovereign liquidity crises would noticeably affect the cost of borrowing if they were to become
more prevalent and actually be invoked in workout situations. However, it is worth noting that
there are two potential effects on the cost of borrowing that work in opposite directions: (i) such
clauses might lead markets to expect that debt service interruptions and modifications would be
more likely; but (ii) they might also reduce the uncertainty surrounding the debt workout process
and increase the value of the obligations in a crisis situation. To the extent that the inclusion of
such clauses raised the cost of borrowing because the risks were more apparent, this could be seen
as a benefit rather than a drawback, although issuers are unlikely to share this view.

1.

Collective representation

55.

Providing holders of international securities with effective arrangements for communicating

with other holders and with debtors and, if desired, appointing representativ~s would be beneficial.
The existence of such arrangements could be expected to make international debt restructurings
proceed more quickly and smoothly in the event of a liquidity crisis. Where collective
"representation" clauses are incorporated in bond contracts, they typically provide procedures for
the organisation of bondholders and the designation of a representative. In general, debtors and
creditors are free, subject to statutory restrictions in certain jurisdictions, to include in their
contracts whatever provisions they choose concerning the representation of debt holders and the
coordination of debt holder action. Practices in this regard vary widely according to national
14

traditions and the particular circumstances of individual contracts. International bond issues rarely
provide for extensive forms of collective organisation or representation of debt holders. In many
cases they only make provision for an agent (such as a fiscal agent, which is not a representative of
the bondholders) authorised to call meetings and to issue notices. Where collective representation
of bondholders is provided for in advance by contract, the powers of the representative vary.
However, the representative rarely has the power to make significant decisions for the holders.
56.

Ad hoc arrangements for coordinating action by debt holders or appointing a representative

for them may also arise in response to a crisis. Indeed, this has happened on a number of
occasions. Such ad hoc arrangements may, however, take time to put in place.

2.

Qualified majority voting clauses

57.

Qualified majority voting clauses enable changes to be made in the terms ofa bond contract

. without the unanimous consent of the holders. Decisions made according to these arrangements are
binding on all holders of the debt. Such clauses could be expected to facilitate the workout process
in the event of a sovereign liquidity crisis, since they limit the scope for a small minority of
creditors to stall or block the process.
58.

Some bonds already have qualified majority voting clauses, such as some of the eurobonds

governed by English law, which allows issuers and originators to include such provisions. There is
no quantitative evidence that bonds with such clauses are priced much differently by the market.
Many investors may not even be aware that the debt instruments they hold contain these clauses.
59.

The resistance to qualified majority voting clauses expressed by market participants in some

countries may be attributed to a lack of familiarity with such clauses in their national context.
Increased public awareness of the extent to which qualified majority voting clauses are already
used in some bonds, and official support for efforts by the private sector to make greater use of
such clauses, should, over time, allow market participants to become more familiar and
comfortable with the clauses both in principle and in practice.

3.

Sharing and similar clauses

60.

Sharing, non-discrimination and comparable treatment clauses could facilitate the market

process by discouraging dissident creditors from engaging in disruptive action and by obliging
debtors to treat creditors in a fair and equitable manner. However, there is little experience with the
effects of such clauses when the community of creditors is large and dispersed, as in the case of
bonds. Sharing clauses are covenants among lenders and debtors for the lenders to "share"
payments received from a debtor on an issue-by-issue basis. Although the practice in drafting
sharing clauses varies across jurisdictions, the clauses may reduce the incentive for individual
creditors to take independent legal action against the debtor, as any successful creditor would have
to share any assets or payments received from the debtor with the other creditors. Limiting the
application of such clauses to the holders of a particular bond issue, rather than applying them to
the totality of creditors, would help to promote cohesion among creditors without unnecessarily
increasing the cumbersomeness of debt restructuring negotiations.

15

61.

Non-discrimination and comparable treatment clauses help to ensure equitable treatment of

creditors and, indirectly, to reduce free rider problems. A non-discrimination clause enjoins the
debtor not to grant more favourable treatment to other creditors which are party to the agreement.
If the debtor does so, the participating creditors can usually, inter alia, demand the acceleration of
the payments due to them. These clauses do not prevent the debtor from seeking better treatment
from creditors which are not party to the agreement. The comparable treatment condition requires
the debtor to seek comparable concessions from other creditors.

4.

Design and introduction

62.

Market participants are in the best position to assess which contract clauses would most

effectively promote speedy decision-making by bondholders without unnecessarily raising the cost
of capital for sovereign borrowers. More extensive use of such provisions should therefore be
based on a market-led process, with the initiative being taken and further developed by the private
sector, rather than enforced through a process of harmonisation of national legislation or the
negotiation and ratification of an international treaty. However, encouragement and support from
the authorities can be helpful, as was demonstrated in the development of standardised
documentation for swaps and other derivatives.
63.

Because new clauses would be included only in newly issued debt, it would take some years

before the bulk of any country's debt contracts would contain such provisions. Nonetheless,
general acceptance by the market of the desirability of such clauses could create a climate
conducive to cooperation between debt holders beyond the legal provisions presently incorporated
in contracts.
64.

New clauses designed to facilitate decision-making by bondholders would be most suitable

for contracts with borrowers whose access to capital markets is less well established. Individual
issuers might be reluctant to be the first to adopt new provisions because of the fear that this would
raise funding costs, although this reluctance might be less if the clauses were seen as providing for
general contingencies and not just for debt service interruptions. In addition, many countries with
well-established borrowing records will no doubt also be reluctant to adopt such clauses, thus
weakening their attraction for other borrowers. Use of the clauses could facilitate a workout
process, and it can be argued that these provisions should be potentially attractive to investors in
the case of issues of countries whose access to capital markets is less well established.
65.

The Working Party is of the view that it would be both natural and appropriate for the

private sector to take the lead in the development of new clauses and that such efforts should
receive official support as appropriate.

E.

Improved coordination and communication

66.

Rapid concerted action may be required, particularly at the time of a major crisis, in order to

limit adverse consequences for debtors, creditors or other parties. The Working Party stressed the
importance of quick and informal consultation among key public authorities. However, it refrained

16

from proposing institutional changes or detailed procedures, which might not be in line with the
need for a case-by-case handling of specific liquidity crises.
F.

Early action by debtors

67.

The willingness of debtors to provide information, to engage in dialogue with creditors and

with the official community and to make timely adjustments in their macroeconomic policies is
essential at the time of a crisis and for its ultimate resolution. Debtors must adopt sound
macroeconomic policies and remove structural distortions which have arisen. Avoiding the buildup of too much short-term debt is important in this context. Decisions regarding exchange rates are
crucial. There is the risk that the maintenance of an inappropriate exchange rate would convert any
entity's liquid domestic currency claims into a call on the foreign exchange assets of the country.

IV.

CRISIS HANDLING

68.

When a country encounters difficulties in meeting its debt payments, challenges arise for all

parties involved, namely the debtor country itself, its private creditors and the official community
of creditor governments and multilateral organisations, particularly the IMF. These three sets of
actors involved in a crisis have partially, but not always totally, different objectives and
responsibilities. All of them will gain from a smooth and cooperative crisis resolution process.
69.

Each party has a range of options, whose desirability and feasibility depend on the

circumstances prevailing. This section considers what steps might be taken that would accord with
the interests of the individual parties and foster compromises conducive to a speedy resolution of
the crisis. The relevant issues are discussed in the following order: (i) the combination of
adjustment and financing, (ii) the objectives and possible courses of action open to the debtors,
creditors and the official community, (iii) a possible suspension of payments, (iv) the possibility
for the IMF to approve an economic adjustment programme in cases where the debtor has not yet
restructured its debts to other creditors, and (v) the implementation of a cooperative strategy
involving all the parties concerned.
A.

The combination of adjustment and financing

70.

Typically, a country's inability to service its debt is associated with protracted balance-of-

payments difficulties and the virtual exhaustion of its reserves. In such situations some countries

will already have consulted the IMF on an appropriate economic adjustment programme, which is
crucial for the resolution of the problems. They will probably also have approached existing and
potential new creditors to ask about rolling over loans or obtaining additional finance. In these
cases many of the contacts essential for handling the crisis will have been established, though it
may be necessary to put them on a different footing. However, countries relying on international
financial markets for capital but suddenly affected by a sharp change in market sentiment may not
have been in close consultation with the IMF. Moreover, in some cases there may be a period
before the crisis when the country is unwilling to discuss its problems with the IMF for fear of

17

precipitating the very crisis whose imminence it is denying and when the financial markets and the
international official community fail to recognise the seriousness of the situation. In such cases, the
crisis is likely to be more abrupt and severe.
71.

At the time of a crisis the interested parties will each have to make judgements on the

appropriate combination of adjustment and finance and in what form and from which source
finance is likely to be available. At this time the debtor will have to determine whether and to what
extent a suspension of debt service payments may be unavoidable, in full awareness of the high
costs involved. Eventually the decisions will need to converge into a consistent set of actions
conducive to the speedy resolution of the crisis and allow any temporary initiatives to be replaced
by longer-term arrangements.
72.

In all cases economic adjustment programmes must be the pivot of the process. The stronger

such programmes are, the less will be the danger of moral hazard and the sooner the debtor country
will be likely to be able to regain access to capital markets. Such programmes will typically
include an immediate tightening of monetary policy, a credible fiscal package and possibly some
exchange rate action, which may have to be weighed against other considerations if the exchange
rate has been used as an anchor in the debtor's stabilisation efforts. Microeconomic measures also
have a role to play in restoring equilibrium to the balance of payments. In combination these
actions will help to stem capital flight and encourage lenders to keep normal lines of credit open.

B.

The role ofthe debtor, creditors and the official community

73.

The aim of the debtor is to promote the long-term economic development of the country.

This will entail minimising the impact of a crisis on the cost of capital and regaining access to the
international capital market, if interrupted. To do so it will have to adopt a set of policies which
will remedy the problems that gave rise to the liquidity crisis in the first place. However, since
excessively rapid adjustment may have unacceptably high economic, social and political costs or
may simply not be feasible, some appropriate combination of financing and rescheduling may be
needed to allow the debtor country to follow a sustainable adjustment path.
The aim of the private creditor is to maximise the value of its portfolio of assets. For

74.

creditors which have a long-term interest in the country, this may entail the provision of new
money and/or the adjustment of the terms on existing debt, as appropriate. For creditors with no
such commitment or substantial financial interests, it may involve readjustment of the composition
of investment portfolios through the sale of impaired assets. However, even those investors with
no long-term commitment may be able to increase the value of their claims _by not rushing for the
exit but instead accepting the adjustment of terms, thereby counteracting the tendency for
secondary markets to overreact and unduly to discount the claims on the debtor country.
75.

The aims of the official sector (governments of creditor countries and multilateral

institutions) are to minimise systemic risk, to contain contagion, to address market failures and to
restore prosperity to the debtor countries. As creditors, the official sector also seeks to restore the
payment capacity of the debtor while minimising reliance on official funds so as to reduce moral
hazard.

18

76.

Apart from having somewhat different goals, the three sets of actors have different

instruments and courses of action available to them. The debtor's instruments are the speed and
nature of the adjustment programme and the options of instituting capital controls andlor
suspending payments on its debt obligations. For banks and other private creditors, the main
instrument is the option to provide or withhold new loans, but creditors can also sell their claims,
seek legal recourse, decide to accept a suspension of payments declared by the debtor, or agree to
alter the terms of existing credit. The main instruments of the official sector are signalling
confidence in the good faith of the debtor and the economic soundness of its adjustment
programme and providing the prospect of limited finance, subject to conditionality, to foster the
resumption of spontaneous inflows.
77.

Because their objectives and responsibilities differ to some extent, the three sets of actors

may face collective action problems which can arise within as well as across the different
groupings. In these cases independent actions taken by individual actors for their short-term selfinterest could result in a reduction in overall economic welfare. Even if all three parties act in ways
that are appropriate to their own long-term best interests, there may remain a balance-of-payments
financing gap that requires exceptional financing. In such a case tripartite cooperation is essential.
There are difficult trade-offs between self-interest and burden sharing for the common good. The
moral hazard entailed in providing such financing creates future problems beyond the case at hand.
78.

In dealing with a crisis, it is important for all parties concerned to recognise that a non-

cooperative and confrontational approach, characterised by a prolonged stalemate, would not only
exacerbate the adjustment costs to be borne by the debtor country. In some circumstances it could
also pose a risk of disruption to world financial stability and jeopardise the ability of official and
private creditors to protect their claims. By contrast, a cooperative procedure would produce an
orderly and more expeditious resolution of the crisis and help contain any contagion and systemic
effects and minimise the costs of the crisis to all the principal parties involved. While the specific
measures implied by this cooperative approach, which underlies current procedures, will be
determined on a case-by-case basis, some basic principles are crucial and should also apply if the
approach is extended to new classes of debt.
79.

The debtor country has the primary responsibility for setting the process on a cooperative

footing, by informing the other parties of emerging difficulties, involving the IMF actively and
very early on in the resolution of its problems, and adopting strong domestic measures to deal with
the crisis ahead of any other action. The treatment of a debtor country by creditors should be
influenced by the debtor's economic record and past history of cooperation and consultation, by its
willingness to provide information and engage in dialogue at the time of a crisis and by its
readiness to accept an appropriate degree of conditionality ex post. Adjustment on the part of the
debtor is the central ingredient of any solution. Still, in the absence of new financing, the degree of
adjustment required to meet international obligations may impose such high costs that it is not in
the interest of either the debtor or the international community as a whole.

19

80.

Because private creditors are numerous and dispersed, the question arises as to how they can

be most effectively involved in the resolution of a crisis. Representative groupings may spring up
when a crisis occurs even if there are no ex ante provisions for collective representation, but the
process may be quicker and more orderly if there are provisions allowing for the appointment of a
debt holders' representative and the assignment, as appropriate, of powers and obligations to such a
representative. Private creditors can also contribute to an orderly process by voluntarily refraining
from exercising contractual or statutory rights whose primary purpose is to dissuade liquid and
solvent borrowers from delaying payment, but they will only do so if this improves the long-term
prospects that they will be repaid. Creditors must therefore be convinced both that the debtor is
genuinely unable to pay and that the likelihood of receiving payment will be increased by
voluntary restraint. If most of creditors are so convinced, they may wish to persuade dissident
creditors to refrain from disruptive behaviour without restricting individual creditors' legitimate
rights. Since some creditors may have no interest in a workout process, obstacles should not be
placed in the way of sales of distressed debt. In this way the creditor community may become
more homogeneous or at least more inclined to participate in debt restructurings and other aspects
of debt workouts.
81.

The role of the official community is complicated by the fact that it often has an existing or

prospective credit exposure to the debtor. National authorities may wish to pursue their interests as
creditors of the distressed country. Their aim will be to maximise the long-run value of their
claims on the debtor. But they also have a wider interest in ensuring that problems in one country
are contained and that threats to the stability of the world financial system are minimised. In some,
perhaps many, cases it may be advisable for the official sector to be restrained in its approach and
allow debtors and creditors to work out their differences on their own.
82.

The IMF has a special role to play in this context, acting both as adviser to the debtor and to

the creditor countries, and as the body best placed to make an informed assessment of the debtor's
capacity to pay. Agreement with the IMF on an adjustment programme as a precondition for debt
reorganisation is a way of containing the debtor's moral hazard. The IMF provides information to
the Paris and London Clubs, and could also offer to facilitate discussion with representatives of
bond holders, and other private creditors. An IMF-supported programme will generally entail the
extension of official finance and perhaps also presume some relief on outstanding debts to private
creditors. In exceptional circumstances as discussed later in this report, the IMF may decide to lend
to a debtor making strong adjustment efforts even when that debtor is likely to remain in arrears on
its debt obligations to certain private creditors.

c.

Temporary suspension of payments

83.

A fundamental principle underlying all contracts is that the terms and conditions are to be

met in full and on time. The Working Party strongly endorses this principle. At the same time it
recognises that in certain exceptional cases the suspension of debt payments may be part of the
crisis resolution process. Temporary payment suspensions are a way of gaining time when a crisis

20

occurs. Given the costs of such action, it will not normally be undertaken until all reasonable
alternatives have been explored.
84.

A distinction is sometimes made between payment suspensions occurring as a result of

unilateral action by debtors ("moratoria") and those undertaken with the explicit or implicit
agreement of the creditors ("standstills"). This distinction is, however, not hard and fast since an
initial moratorium may soon be accorded tacit agreement by the creditors. The more relevant
distinction, for the pwpose of achieving an orderly workout, is that between payment suspensions
which are part of a process of cooperative and non-confrontational debt renegotiation, and those
which are of a more adversarial nature. The latter are more likely than the former to generate
antagonistic reactions by creditors such as uncooperative confrontations, obstructive and disruptive
tactics, withdrawals of funding, and resort to legal remedies and attempts to seize assets.
85.

However, as discussed above, a suspension of payments, whatever form it takes, carries

risks for the debtor country itself and also raises a number of practical issues:
What range of claims should be covered by the suspension?
Can there be some formal or informal method of signalling that the debtor is acting in good
faith and making every effort to solve the underlying problems?
Assuming a non-confrontational process, should ways be devised to protect the debtor
against the behaviour of dissident creditors which are unwilling to refrain from obstructive
and disruptive tactics such as seeking legal remedies in spite of an agreed standstill?
86.

On the question of the spectrum of claims to be covered, a suspension of payments will in

general be applied uniformly to all claims in a particular class but will differ in scope depending on
the severity of the liquidity problem, the composition of the country's obligations, the prospective
contribution of a particular creditor class to the restoration of balance-of-payments equilibrium and
other considerations. In the case of obligations to multilateral institutions, which enjoy de facto
preferred creditor status, debt service payments are to be continued with the limited resources
available. It may no longer be possible to exempt bonds and other claims because of their
increased importance. Each case will have to be considered on its merits, taking account of the fact
that trade credits and interbank lines are crucial for maintaining links with the world economy.
87.

A distinction should be made between the suspension of scheduled interest payments and

principal payments. Ordinarily, missed interest payments are viewed more negatively by the
market than are missed principal payments.
88.

It must also be recognised that if the suspension of payments is extended to obligations of

the private sector, this may require the use of formal or informal exchange controls. However, the
resort to such controls, even temporarily, can have long-lasting adverse effects on a country's
access to international capital markets and may not be practicable once a country has completely
liberalised external payments and dismantled the machinery for imposing controls. Debtors may
nonetheless be tempted to resort to such controls to slow a "rush for the exit" by holders of claims,
including domestic holders, which have come to believe that a suspension of payments on their

21

claims can occur soon. 2 In the case of marketable claims, however, sales may be discouraged by
sharp falls in prices caused by the expectation that controls will be imposed; this effect can be
reinforced by a depreciation of the domestic currency. When appropriate, a degree of exchange rate
flexibility could help to conserve the country's remaining foreign exchange reserves and may even
obviate the need to obstruct the servicing of the private sector's obligations.
89.

On the question of signalling that the debtor is making every effort to resolve its problems,

the Working Party observed that there are no formal means for explicitly approving decisions by
sovereign debtors to suspend payments. National legislation in the main jurisdictions where
sovereign debt contracts are issued does not provide for such procedures. The question has been
raised whether one could contemplate the use of the Articles of Agreement of the IMF, most
notably Article VIII 2(b), for this purpose. National courts interpret this article in widely diverging
ways, and a harmonisation of interpretations on the basis of a formal IMF interpretation is not to
be expected For instance, the Article could not easily be construed as covering the case in which a
sovereign debtor interrupts its own payments. The Working Party is of the view that it is not
feasible to operate a formal international instrument of this kind
90.

It is important that the measures taken by the authorities not interfere with the liquidity of

the market for debt instruments. Investment fund managers and other similar agents may have a
fiduciary obligation to alter the composition of their portfolios when a sovereign liquidity crisis
arises, and need well-functioning markets in which to operate. Moreover, the transfer of claims to
those with specialised skills in the workout of impaired claims may facilitate the resolution of the
crisis. Authorities should also not be unduly concerned about sharp swings in the prices of debt
instruments of countries facing payments difficulties. Admittedly, market reactions are sometimes
excessive. Concern about the possible imposition of exchange controls may induce market
participants to "rush for the exit", which exacerbates price movements. However, overshooting
does ultimately lead to natural subsequent price corrections.
91.

On the question of the pursuit of individual legal remedies by dissident creditors, the

Working Party reached the conclusion that the seizure of assets has not been a serious problem in
the past. This is partly because sovereign debtors have few assets located outside their own
territories, and some of these benefit from sovereign immunity. In addition, uncertainty about what
decisions the courts will make and about how long it will take and how much it will cost to obtain
a final judgement discourages casual recourse to legal remedies. On the broader question of
obstructive or disruptive behaviour on the part of dissident creditors, the Working Party believes
that the resolution of sovereign debt problems would be facilitated if such behaviour was kept to a
minimum. Clauses developed by market participants to promote cohesiveness among creditors
might be helpful in this respect.

2
Restrictions on current payments are subject to IMF approval under Article VIII 2(a). The IMFs
defmition of current payments encompasses some capital transactions, including "all payments due in
connection with foreign trade" and "payments for a moderate amount of amortisation of loans" as well as
standard current account transactions.

22

D.

IMF lending policies

92.

In nonnal conditions the IMF extends official finance only in the context of a fully funded

adjustment programme and typically requires the clearance of arrears before disbursement or
according to a predefined schedule. In the case of arrears on debt due to official creditors, the IMF
considers that imminent agreement in the Paris Club in line with the programme's assumptions
amounts to the clearance of arrears. Similarly, for arrears to commercial banks, the IMF in
principle awaits actual or imminent agreement on the clearance of arrears before approving an
arrangement. In exceptional circumstances, however, the IMF may lend in advance of an
agreement with commercial bank creditors, while the debtor continues to accumulate new arrears
to such creditors, but only if it deems prompt support to be essential for programme
implementation, negotiations have begun with bank creditors and an agreement with these
creditors is expected within a reasonable period of time. In such cases, the financing of the
programme is subject to periodic reviews by the IMF.
93.

These cases should remain rare. They expose the official sector to the risk that the debtor

will not be able to implement its adjustment programme, and they thus increase the risks
associated with the extension of official assistance. Lending into arrears should therefore always be
conditioned on very strong adjustment efforts on the part of the debtor country and limited to cases
where the debtor country is making reasonable efforts to negotiate with its creditors.
94.

In the future, and subject to similar conditions, the IMF might be well advised to extend this

practice to debt owed to other groups of private creditors. Lending in such circumstances could
signal that the adjustment efforts of the debtor country are strong enough to warrant the support
both of the official community, through an IMF arrangement, and of private creditors through an
effective restructuring of payments on existing obligations. Such a policy is intended to prevent
failure to reach agreement with creditors from holding up implementation of an adjustment
programme. The provision of financial support by the IMF can improve the bargaining position of
the debtor substantially. Combined with the adjustment programme, this action can signal to the
unpaid creditors that their interests are best served by quickly reaching an agreement with the
debtor. Thus, a policy of IMF lending in such circumstances needs to be seen as part of a package
to give the debtor support in its efforts to implement a comprehensive and credible adjustment
programme and to increase the likelihood of agreement with creditors.
95.

A policy of lending into arrears potentially provides the IMF and the official community

with the opportunity to manage a crisis by signalling confidence in the de~tor country's policies
and longer-term prospects. The Working Party feels that it would be advisable for the IMF
Executive Board to review existing IMF policy in this area and to consider whether the scope of its
application should be extended, while remaining mindful of the need for prudence and the
maintenance of strict conditionality.

23

E.

The cooperative strategy

96.

The conclusion and implementation of an economic programme benefiting from IMF

support, irrespective of whether it involves lending into arrears, is part of the resolution of the
crisis, not merely part of the efforts to stem the effects of the crisis as it erupts.
97.

Indeed, success in reaching agreement on an IMF arrangement can be seen as the beginning

of a continuing partnership for the restoration of macroeconomic balance in the country concerned,
for the preservation or reopening of its access to capital markets, and more generally for the return
of confidence in its growth prospects.
98.

Depending on the circumstances, and particularly the size and nature of the financing gap,

the successful conclusion of an IMF arrangement in support of an economic adjustment
programme will, when relevant, open the way for meetings of creditor representatives such as the
Paris Club or the London Club. The Working Party sees no reason to suggest changes in this
flexible and cooperative approach, which deals in appropriate ways with official bilateral and
corrunercial bank debt and debt service.
99.

However, the principles and procedures that have been developed must take into account the

shift towards bonds and other securities, which has resulted in considerable amounts of debt in
instruments outside the scope of traditional restructurings. Markets are largely equipped to assess
the risks involved in such investments and to price them accordingly. However, the ,wide
dispersion and changing composition of the set of holders of these claims make it difficult to
establish mechanisms to serve their collective interests in a debt workout and to endow them with
effective means of upholding these interests.
100. The official community has a strong interest in avoiding disruptive adjustment of debtor
economies and unnecessary losses to creditors, while minimising recourse to official finance.
Accordingly, it should strive to encourage a timely resolution of any payment suspensions on debts
to private creditors that may arise, without interfering in the exercise of contractual rights. The
Working Party believes that this encouragement should extend to issues of primary concern to
debtors and private creditors such as the timely exchange of information and the development of
contractual provisions that reflect the growing likelihood that some of the debt in the form of
securities may be the subject of renegotiation in the future. While the official community might be
able to play a significant role in facilitating dialogue and assisting in data collection, it should
leave to market participants decisions regarding contractual provisions. Its primary role should
remain centred on the promotion of strong and effective adjustment by debtor economies in the
context of IMF progran1mes, which would need to take into account any ~ecourse to temporary
suspensions of payments.

24

ANNEX I

GROUP OF TEN

List of Deputies
Chairman: Mario Draghi

************
Belgium:

G. Brouhns
1.-1. Rey

Ministry of Finance
National Bank of Belgium

Canada:

T. Bernes
P. Jenkins

Department of Finance
Bank of Canada

France:

J. Lemierre

H. Hannoun

Ministry of Finance and Economy
Bank of France

Germany:

1. Stark
H. Schieber

Ministry of Finance
Deutsche Bundesbank

Italy:

A. Zodda
T. Padoa-Schioppa

Ministry of the Treasury
Bank of Italy

Japan:

T. Kato
A. Nagashima

Ministry of Finance
Bank of Japan

Netherlands:

H. Brouwer
A. Wellink

Ministry of Finance
Netherlands Bank

Sweden:

S. Oberg
S.Ingves

Ministry of Finance
Bank of Sweden

Switzerland:

J. Zwahlen
G. Colombo

Swiss National Bank
Federal Department of Finance

United Kingdom:

N. Wicks
M.A. King

HM Treasury
Bank of England

United States:

L. Summers
E. Kelley

Department of the Treasury
Board of Governors of the
Federal Reserve

Observers:
International Monetary Fund:

Deputy Managing Directors

Organisation for Economic Co-operation
and Development:

K. Shigehara

European Commission. Brussels

G. Ravasio

Bank for International Settlements:

W.R. White

Secretaries:

T.R.G. Bingham
C. Pigott
H. Vittas

25

ANNeX 11

GROUP OF TEN

Members of the Working Party on the Resolution of
Sovereign Liquidity Crises
Chainnan: Jean-Jacques Rey

************
Belgium:

P. Lemaire
1. Mont
D.Ooms

Ministry of Finance
National Bank of Belgium
National Bank of Belgium

Canada:

M. Kelly
1. Murray

Department of Finance
Bank of Canada

France:

J. Haas
P.-M. Fremann
T. Francq

Ministry of Finance and Economy
Bank of France
Ministry of Finance and Economy

Gennany:

G. M. Roskau
W. Fritsch
R. Wolfinger

Ministry of Finance
Deutsche Bundesbank
Ministry of Finance

Italy:

G. Vigliotti
C. Giannini
F. Costa

Ministry of the Treasury
Bank of Italy
Ministry of the Treasury

Japan:

T. Kitamura
M. Takeda
T. Yasui

Ministry of Finance
Bank of Japan
Ministry of Finance

Netherlands:

A. Deckers
G. Frankena

Ministry of Finance
Netherlands Bank

Sweden:

S.-O. Johansson
W. van der Hoeven
A. Sahlen

Ministry of Finance
Bank of Sweden
Ministry of Finance

Switzerland:

U. Schwarz
F. Zurbnigg

Swiss National Bank
Federal Department of Finance

United Kingdom:

J. Rutter
C. Atkinson
D. Lawton

HMTreasuly
Bank of England
HMTreasury

United States:

J. Shafer
E.M. Truman

Department of the Treasury
Board of Governors of the
Federal Reserve
Department of the Treasury
Board of Governors of the
Federal Reserve

J. Lister
D. Howard

26

International Monetary Fund:

1. Boorman
F. Gianviti
D. Williams
M. Allen
1. Ferran

Organisation for Economic Co-operation
and Development:

R. Pecchioli

European Commission, Brussels

M. Neilson

Bank for International Settlements:

W.R. White
M. Giovanoli
K. Tsatsaronis
M. Milford

Secretaries:

T.R.G. Bingham
C. Pigott
H. Vittas

27

C. Lluch
M. Kennedy

ANNEX III
GROUP OF TEN
WORKING PARTY ON
THE RESOLUllON OF SOVEREIGN UQUIDIlY
CRISES

SUMMARY REPORT ON THE SURVEY OF MARKET PARTICIPANTS

This report summarises the responses of a range of market participants in the main
financial centres in the Group of Ten (G-lO) countries to an inquiry into market practices and
attitudes towards sovereign liquidity crises. The surveys were conducted by officials from the G-IO
countries in the way each country considered most appropriate. The questionnaire on which the
survey was based is annexed to this document together with a list of the institutions surveyed in
each country. This summary of the national write-ups follows the sequence of questions in the
survey questionnaire and groups together the responses to questions of similar nature in order to
facilitate the exposition.

1. Pre-crisis conditions and market practices
This set of questions relates to ex ante arrangements and market practices which have a
bearing on the likelihood of a crisis and on how it unfolds when it occurs.

Questions 1-3: Nature of interviewees' involvement in the market for international debt and their

past experience with liquidity crises.
The market participants interviewed covered a large array of institutions involved in the
market for emerging market debt either as market-making traders, originators and underwriters or
as managers of clients' investments in the form of mutual and hedge funds. Only the commercial
banks among them had a well-defined institutional memory of the debt workouts in the 1980s.
However, many participants have been involved in the trading and handling of defaulted sovereign
debt, and some had personal experience of debt workouts in previous positions they held with
commercial banks.
The interviewees were active partiCipants in many types of securities traded in the markets
of their speciality. While there was a certain tendency for each country's institutions to focus on
international bonds denominated in their respective domestic currency, Brady bond issues were a
very popular instrument for all types of participants and many references were made to these

28

instruments. Also, most of the European institutions seemed to focus more generally on Londontraded eurobonds.
In terms of the types of securities they prefer to hold, many of the participants expressed a
slight preference for transferable bearer instruments. It was pointed out, however, that the
differences between bearer and registered instruments were becoming less and less important.
Institutional investors were in general more inclined than other types of investor to look into equity
investments in emerging markets. There was also a differentiation between bank and non-bank
institutions in terms of attitudes towards the emerging market clientele. Some suggested that
bankers were more likely to take the long view as they have an interest in maintaining business
relationships with the borrower, while other types of investors had a more short-term portfolio
investment view of their emerging market holdings and valued market liquidity greatly.

Questions 4-6: Risk management, information and credit ratings. Sovereigns vs. non-sovereigns

and the pricing of resolution uncertainty.
Although information furnished by the originators and underwriters as well as credit
rating agencies provides a valuable input, almost all the market participants relied heavily on inhouse analysis generated by their specialised teams. The need for more and better information that
would help improve the accuracy of this analysis was mentioned by nearly all the interviewees.
The participants place a premium on the availability of accurate and comparable data on the
external financial position of the emerging markets' private and public sectors that will enable them
to perform a cash-flow analysis. Some market participants felt that more information should be
available on the maturity, instrument and currency composition of the public debt and that some
emphasis should also be put on the external position of domestic financial institutions.
It is noteworthy that, without minimising the importance of broader coverage, many
respondents felt that at the moment greater gains could be made by improving the quality and
timeliness of the information that is already provided by the emerging market official sector and the
international financial institutions (IFIs). This information should be made available on a
comparable basis, be published regularly and reflect the latest developments. Some interviewees
also mentioned that in certain cases the failure on the part of some investors to foresee an upcoming
crisis could be attributed to inadequate analysis of the information that is alr~ady widely available.
Despite the fact that all the respondents said that they were using the credit ratings of
emerging market debt issues as an input for their analysis, many expressed doubts about the
timeliness with which ratings reflected changes in the riskiness of these assets. Their usefulness
was therefore mainly of a supplementary nature.
The participants noted a direct link between the perceived risk of sovereign and private
sector obligations in emerging markets. The majority subscribed to the view that no private issuer
could be perceived as being of lower risk than the corresponding sovereign (the only possible
exception being the local branches of multinationals), and some made the point that the financial

29

obligations of certain private entities (banks in particular) could easily be translated into
government liabilities if the authorities rushed to their assistance in the event of a crisis.

In

addition, as some respondents mentioned, the suspension of payments by the sovereign will have
severe repercussions for the market access by the private sector.
Most participants were of the view that the uncertainty surrounding the renegotiation
process and the difficulty of attaining a resolution in the event of a liquidity crisis, serves as a
disciplinary device for borrowers. Consequently, any arrangements that would make the resolution
less painful might increase the price of capital because of moral hazard effects. A few of the
participants conceded that reduced uncertainty might actually have some dampening effect on risk
premia for emerging market debt.

Questions 7-9: The role of the ex ante provisions in present contracts: credit enhancements, clauses

regarding default and renegotiation (negative pledge, arbitration etc.).
The respondents noted that the scope for increased use of collateralisation in sovereign
debt contracts is quite limited. They attributed this phenomenon to two factors. The first has to do
with the limited availability of collateralisable assets and the high legal costs that such provisions
entail for both the borrower who pledges the asset and the lender who will take possession of it. An
additional factor that further constrains its use is that collateral provisions in a contract are often
interpreted as a sign of the borrower's lack of confidence in its ability to pay in full.
Unlike collateral provisions, negative pledge and pari passu clauses in sovereign debt
contracts are common. Indeed, as some participants mentioned, even though sovereigns are in
certain cases exempt from the requirement to include such clauses in the bond they issue, they
usually waive their prerogative so as to avoid giving a bad signal to the market. However, a number
of participants expressed some concern regarding the enforceability of such clauses.
The majority of the respondents noted that sovereign bond contracts generally do not
allow for non-unanimous decisions by the bondholders to change the schedule of debt payments. A
few European participants noted that some eurobond issues include provisions for a qualified
bondholders' majority to agree to such a rescheduling. Even among those participants, however,
there was some degree of uncertainty regarding the typical size of the majority required.
A large proportion of the interviewees seemed not to favour such clauses because, in their
view, they represent serious infringements of their creditor rights. Another reason cited was the
perceived moral hazard effects of such provisions on the borrowers, who may be more likely to
suspend payments if the renegotiation process is less uncertain and drawn out. There were certain
types of market participant who were only interested in trading emerging market debt as part of a
global portfolio strategy. These portfolio investors were indifferent to such ex ante arrangements as
they are not interested in holding these securities and they expected to sell them well before the
issue of renegotiation became topical. Some participants noted that a successful renegotiation

30

process required the equality of treatment of all creditors and the standardisation of the process
itself.

Questions 10-12: Possible improvements in ex ante arrangements: collective representation of
bondholders, majority action clauses, and a "model contract".

Market participants opposed any attempt to change the present structure of bond
contracts. The general view among the respondents was that bonds represent a simple promise by
the borrower to pay, and their attractiveness as an investment vehicle reflects their character as
easily transferable, unencumbered and difficult-to-restructure securities. The respondents were
particularly opposed to any innovations in bond contracts that might interfere with their ability to
sell the securities they hold at any time they choose to do so.
In the market participants' view the essential difference between a loan and a bond is that

the latter represents an arm's-length financial relationship between the borrower and the lender, and
the respondents wanted this characteristic to be preserved. Bonds are'perceived as representing an
almost "sacred" (in the words of some interviewees) obligation by the borrower to pay and as such
should be very difficult to restructure. The uncertainty and the costs associated with the
renegotiation of bond provisions serve as a disciplinary mechanism for both parties that make
defaults less likely. Attempts to incorporate in bond contracts ex ante provisions that might
facilitate this workout process would alter the character of the security, and it was feared by many
participants that would increase moral hazard on the part of the borrower and consequently reduce
the security's attractiveness for the investor community.
Because of the perceived negative effects of such bond clauses on the borrower-lender
incentive structure and the liquidity of the instruments, the respondents argued that investors would
demand a higher premium as compensation for their inclusion in bond contracts. Some participants
also expressed the fear that this might discourage certain types of investor from participating in the
market altogether. Some interviewees were of the opinion that such clauses might well be resisted
by the debtor countries themselves because of the higher cost of capital that they might entail.
Such a reaction from the borrowers would effectively block their introduction.
With respect to the idea that contract formats could be proposed by the official
community, the market participants did not feel that model contracts could be imposed upon the
market and that such innovations could only be intr9duced if market players chose voluntarily to
use them.

Some respondents mentioned that assuring the sponsorship of the main trade

associations would be instrumental in persuading the market to adopt them. Even if "model
contracts" were to be used henceforth, the conversion of old bonds was considered not to be
feasible as the costs would be prohibitive.

31

2. When a crisis emerges
This section deals with the events precipitated by the outbreak of a crisis: the potential of
market overshooting, the externalities in the fonn of contagion effects on other debtors and the
issue of systemic disturbance. Market participants were also asked to comment on the worth of
suggested alternative methods for instituting a "sanctioned" standstill.

Questions 1-2: The factors influencing the behaviour of investors when a crisis emerges.

In the market participants' view, as expressed in their responses to questions 4-6 in the
previous section, up-to-date quantitative infonnation, which is necessary in order to perform cashflow analysis of the debtor's external position, should be available at all times. In this sense, the
respondents felt that there is no need for additional information of this type at the outbreak of a
liquidity crisis. The secondary market price of the securities is the only other piece of quantitative
information that investors require in order to make their assessment of the situation and plan their
actions.
The market participants did, however, stress the important role that information of a more
qualitative type plays in shaping investors' attitudes in the event of a crisis. This information
concerns the nature of the response by the borrower's authorities to the situation at hand, and the
plans of action, if any, of the official sector and the IFIs.
A very important factor that determines the behaviour of private investors in the event of
a liquidity crisis is the credibility that the borrower's authorities enjoy in the market and the
perceived willingness of these officials to be frank and cooperative. A number of interviewees
cited examples from the past in which the local authorities' attitude was instrumental in either
stopping a crisis from generalising or, on the contrary, worsened the impact of a crisis that was
already developing. One sign of such a cooperative and frank attitude, in the judgement of many
participants, is the early communication by the authorities to the investor community of adverse
news regarding the country's economic and financial prospects.
With regard to the official sector's announcements during a crisis, the market participants
favoured a clear statement of the nature and the extent of their intended response and the amount of
any support that might be provided by the international financial community. They noted that such
a statement would play a major role in reducing the unnecessary uncertainty that surrounds the
resolution of a crisis, and that it should be issued at a very early stage. Some participants also
mentioned that high-level channels of communication among officials of the major creditor
countries and the IFIs with the key private creditors and intennediaries should be established before
a crisis materialises.
It was the view of market participants that securities have to change hands in the event of
a crisis. It is the normal and natural way for the market to reallocate risk to the participants who are
better equipped and/or more willing to bear it. One factor that determines investors' decision to hold

32

or to sell is the expected magnitude of the price decline. Another factor, which seems to be of
greater importance to fund managers than to other types of actor, is the risk that liquidity might
evaporate in certain segments of the market. Investors may sell liquid assets of less risky sectors to
cover losses they sustain in the sectors that have been harder hit by the crisis. Institutional
constraints may lead to sales of certain securities by certain types of investor when this paper's
rating falls below some predetermined threshold. In general, fund managers seem to be the least
likely among the investor community to hold on to their portfolio, and can be expected to sell at
virtually any price.

Questions 3-6: The externalities associated with the market's reaction (overshooting, contagion,

systemic problems).
Overshooting is something that market participants very often observed in the market, but
it was their opinion that there is no scope for direct intervention by the official sector to reduce its
impact without at the same time distorting the market's equilibrium. They tended to treat this
phenomenon as the result of a quasi-natural behaviour of market players which helps the
reallocation of risk. According to most respondents price overshooting is a reflection of reduced
liquidity in the particular market, but it was not obvious how official action could counteract this
tendency in a way that would enhance the perfonnance of the market mechanism. It was
conjectured by some participants that, as the market for emerging country debt matures, such
phenomena will tend to be less and less pervasive. Another factor that in the opinion of some
participants might help reduce market overreactions would be a frank and credible assessment of
the situation by the official sector at a very early stage of the crisis.
The "contagion effect" of a crisis of one sovereign debtor on others was thought to be a
very common occurrence by almost all the market participants interviewed. It was attributed by
many either to demonstration effects arising from the reassessment of the value of the totality of
emerging market paper in light of the infonnation highlighted by the particular characteristics of the
crisis in one country, or to technicalities of the portfolio management methods used by many
investors or fund managers (rebalancing of the portfolio, closing-out of speculative positions,
increased liquidity needs in view of expected withdrawals, etc.). Again, the market participants
were of the opinion that direct official intervention to contain contagion would be of very limited
effectiveness. In fact, some respondents suggested that official intervention might actually have the
opposite result if it reduced the disciplinary effect of market pressures on the debtor country's
economic policy, postponing the time when bold corrective economic measures are taken. Another
danger pointed out by many market participants was that a workout procedure which made the
liquidation of a position difficult could exacerbate these contagion effects as investors might try to
get out of many markets at once, fearing that they will be locked in by other countries resorting to
similar procedures.

33

In the event of a crisis, different types of participant react in different ways, depending on

their institutional characteristics. In recent episodes retail investors tended to show confidence in
their fund manager's ability to manage their investments and did not react with mass withdrawals
from funds that specialise in emerging markets. In contrast, proprietary traders are more inclined to
sell immediately and indiscriminately, disposing not only of the paper of the sovereign in distress
but also that of all others thought to be in the same category - one respondent characterised this
behaviour as "sell now and look for bargains later".

The interviewees also gave conflicting

responses with regard to the treatment of different classes of borrower within a country. Some said
that the fate of the private borrowers could not be disentangled from that of the government, but a
few said that they could be treated independently.
The risks to creditor country financial institutions arising from the recent Mexican crisis
(had the official action not been what it was) were generally thought to have been relatively limited.
However, some participants advanced the view that a few large institutions (not necessarily banks)
did face severe difficulties because of their exposure in emerging country debt Some participants
noted in connection with this type of market externality, that official financial packages designed to
protect "innocent bystanders" - i.e. countries which experience an -adverse effect because of a
liquidity crisis in another country - might help in containing contagion and systemic risks. A few
participants mentioned that regulations aimed at curbing the practice of short-selling and highly
leveraged position-taking by some market players might also contribute to the reduction of the risk
of systemic disruption.

Questions 7-10: Standstills and stop-crisis measures, availability of fresh money.

Market participants contemplated the possibility of the institution of some form of a
payments standstill with feelings that ranged from indifferent to very negative. There was strong,
almost unanimous, opposition to the idea of a formalised standstill arrangement whereby the debtor
was in some way legally excused from continuing debt repayment until negotiations produced a

workout agreement. Such an arrangement was perceived as a major infringement of creditors' legal
rights. The alternative proposal that a payments stand$till could be "sanctioned" by the official
community but this characterisation would have no legal standing met with somewhat less negative
reactions from some of the market participants. These respondents were inclined to interpret such a
declaration, accompanied by an IMF programme, as a signal that some steps were being taken by
the debtor to correct the imbalances that brought about the crisis. Many other respondents,
however, had serious reservations as to whether such a declaration would positively affect creditors'
attitudes towards cooperating in a workout with the debtor.

Some participants also expressed the

concern that a standstill, in any form, might exacerbate the "rush for the exits" and contagion
effects, as many investors would attempt to liquidate their holdings in order to avoid being
"trapped" by a standstill.

34

.

The role of the IMF in a standstill arrangement was viewed with considerable suspicion
because of the perception that it would favour debtor governments (and especially those with
particular ties to major shareholders) over private sector creditors. They asserted that the Fund's
preferred creditor status leads to a conflict of interest if the IMF is also in charge of announcing a
standstill. Some general concern was also voiced by the interviewees regarding the ability of the
IMF to enforce strict conditionality - a necessary complement to any standstill arrangement - if the
same institution is also responsible for declaring the standstill. Since market participants saw very
little scope for the voluntary provision of fresh private money to the troubled debtor as part of a
workout after the crisis, some proposed that the most useful role for the Fund would be to provide
liquidity finance to qualified debtors when this was judged beneficial to an orderly resolution of the
crisis situation. In fact, the only cases where the idea of a standstill was not dismissed out of hand
were those in which a "reasonable financial involvement" by the IMF was also contemplated.
Market participants did not seem to be too concerned about the consequences that legal
action by the old creditors might have on the market's ability to extend fresh money after the crisis.
A major impediment to the voluntary provision of new private finance to the troubled country
seemed to be that market participants doubted the ability and/or willingness of the debtor to
credibly accord them preferential treatment over old debts. The announcement of a standstill,
whether "formal" or "informal", would not have a positive influence on participants' decisions to
lend new money.

3. The resolution process
This section refers to issues related to the complications of the renegotiation of the
original contract terms and the conclusion of a new agreement.

Questions 1-3: The experience with present renegotiation schemes (Paris and London Clubs).
Equitable treatment of all creditors and negotiating flexibility were viewed as the two
fundamental characteristics of a successful resolution process. The role that the official community
played in facilitating discussion and ensuring the circulation of informatio~ was generally viewed
as positive in the negotiations that followed the debt crisis of the 1980s, although the process itself
had tended to be rather long and drawn out. Some pointed out that the involvement of non-bank
creditors in such negotiations might have a negative effect on the speed with which an agreement
could be reached as these participants do not have established business relationships either with the
debtors or with each other. It was suggested that these investors might be well advised to build
Structures similar to those that currently exist for the bankers. Not much was said regarding the
Paris Club, process as the participants had no direct experience. Some participants mentioned,

35

however, that the Paris Club principle of comparable treatment should not be viewed as implying
strict equality.

Questions 4-6: Economic characteristics of the current workout process (multiplicity of creditors,

free riders and institutional constraints).
There was a range of views among the interviewees regarding the severity and likely
consequences of the problem posed by the diffused holding of securitised debt for the timely
resolution of a liquidity crisis. Some thought that the holders of the paper would naturally and
voluntarily step out and negotiate if this would be to their benefit, or just stay in the background
and either hold or sell the paper. Some others asserted that the identity of the major holders was
known (or could be discovered with relative ease) and that there were existing channels of
communication among the investors that could be used in the event of a crisis. There was
considerable resistance on the part of certain groups of participants, particularly fund managers, to
becoming involved in the negotiation process. Some originators felt that the market might look to
them as the natural candidates to coordinate the creditor community, but several of them expressed
serious reservations as to whether they were adequately equipped to perform this ta&k. The
importance of registered securities was downplayed by all participants.
The existence of free riders was viewed as an unavoidable nuisance by most market
participants. A few viewed free-riding as a feature of the 1980s crisis that would tend to be less of a
problem in the era of securitised debt. Free riders can be most damaging when they form a blocking
coalition that demands to be bought out before agreeing to any amendment to the terms of the
original contract and especially to the provision of fresh money. But at the same time concern was
expressed that any amendment to the present legal framework aimed at minimising the power of
minority holders would provoke strong legal challenges and would raise the cost of funds to
borrowers. Some participants mentioned that gentle arm-twisting by the IFls and the respective
national regulatory bodies could be helpful in persuading free riders to adopt a more collaborative
strategy.
The respondents mentioned two examples of institutional constraints that might impede
the ability of certain types of market player to participate in a workout process. The first was the
case of rules, often self-imposed, that prevents institutional investors from holding securities rated
below a certain minimUm grade. The second was that open-ended mutual ~ds which face liquidity
demands from their customers will need to maintain a liquid portfolio of assets and thus will be
unwilling to hold on to bonds that are being renegotiated. There are no general official restrictions
that forbid institutions to buy, hold and trade securities in default, other than higher capital
regulatory requirements. However, certain types of loan require the consent of the borrower in order
to be transferred when in default

36

Questions 7-8: Bondholder associations.

The market participants were not sympathetic to the establishment of bondholder
associations, but various groups gave different reasons to justify their position on this issue. Some
were very sceptical that such associations would expedite the workout process because the diversity
in the characteristics of the relationships between the debtor and different types of investor would
tend to complicate the renegotiation process. Some viewed the establishment of such associations
as an infringement of their right to sell the paper when a liquidity crisis occurred. In particular, fund
managers were strongly opposed to the notion that they would have no option but to participate in a
workout procedure since they do not consider this to be part of their business and do not have the
management resources to devote to these procedures. They prefer to use their discretion and either
sell and get out or "free ride" on the efforts of others and accept the negotiated workout agreement.
Only some large market-makers felt that their extensive holdings carried an implication that they
had some additional responsibility to maintain an orderly market (some drew parallels with the
establishment of the Emerging Markets Trade Association (EMTA).
Most participants saw no scope (or possibility) for discriminating among different types
of holder of debt instruments and mentioned that the evolving nature of the market and the
particularities of each case made it very difficult to establish general procedures to deal with
liquidity crises. Many stressed that local investors' flight had been instrumental in bringing about a
liquidity crisis that more often than not was triggered by problems in rolling over short-term debt.
It was in this connection that some suggested that it would be helpful if domestic investors as well

as holders of short-term trade credit were represented in analogous forums.

Question 9: International bankruptcy court.

This idea was almost unanimously rejected by the market participants as not being
feasible and maybe even counterproductive. They noted that, because of the vast differences in
national legislation in this area, a very broad political consensus would be necessary for any such
entity to come into existence. Even if legal judgements were legally binding, there was a general
problem of enforceability in the case of sovereign debtors. They were also concerned that such a
court might be inappropriately biased towards the debtors compared with p_resent arrangements. A
very small number of respondents noted, however, that such an innovation might bring some
uncertainty-reducing "order" into the liquidity crisis situation, but they also did not think that it
would be a feasible proposal.

37

Question 10: Access to capital markets after the crisis.

There was a significant divergence of opinion among the participants in the survey
regarding the time that it takes for a debtor in default to return to the markets, and the respondents
generally avoided offering precise conjectures. Some said a generation, but others commented that
the length of time that represents a generation in the market is gettir.g shorter and shorter. The few
speculative estimates offered ranged from ten years to no time at all. Several participants noted that
the circumstances of default and the behaviour of the borrower before and after the crisis were
crucial, but these factors were more likely to influence the behaviour of the institutional investors
and banks with longer-term investment horizons than the shorter-horizon investors who now make
up a significant share of the market. In any case, a borrower that defaults cannot expect to regain
full access to the markets before all issues regarding the old debts have been completely resolved.

38

GROUP OF TEN
WORKING PARTY ON
THE RESOLUTION OF SOVEREIGN LIQUIDITY
CRISES

APPENDIX
SURVEY OF MARKET PARTICIPANTS

Questionnaire
Interviews with participants in the market for international debt are being undertaken to
understand how they behave in the face of sovereign liquidity crises and to survey market views
about how, current procedures could or should be improved.
The questionnaire is broken down into three sections. The first section deals with the
operation of the market prior to the occurrence of a crisis and the ex ante conditions shaping the
unfolding of a crisis. The second considers what happens when a crisis occurs. The third looks at
procedures for resolving the crisis. Both current practices and possible new procedures are
considered in each of the three sections.

I. Pre-crisis conditions and market practices
This set of questions relates to ex ante arrangements and market practices which have a bearing on
the likelihood of a crisis and on how it unfolds when it occurs.

1. How would you characterise your firm's involvement in the market for international debt? Do
you usually trade on your own account or do you represent other market participants?
2. When you invest directly in the international debt market do you have a preference for holding
bearer securities as opposed to registered securities?
3. What has been your firm's experience with emerging market debt default?
4. When making investment decisions, what methods do investors use to assess and manage the
risk that a sovereign borrower may encounter debt-servicing difficulties? To what extent does
the existence of uncertainty about how such difficulties will be resolved influence both
investment and pricing decisions?
5. To what extent is there a connection between the investor's assessment of the attractiveness of
investments in the country in general and the investor's assessment of the sovereign borrower
itself? How helpful are the professional credit ratings in assessing country risk?
6. What information would be needed that is not at present available to improve investment
decision making and risk management?
7. What is role of credit enhancements, the such as collateral and guarantees, in a typical credit
contract to a sovereign borrower? Are these different between sovereign and non-sovereign
debtors? Would increased use of these mechanisms be desirable? If yes, what are the reasons
that they are not used more frequently?
8. What is the practice regarding negative pledge and other clauses that prevent the borrower
from contracting future debt in more favourable terms? How often are they used and how
effective are they?

39

9. What is the current practice with respect to ex-ante provisions dealing with the potential
problem of re-negotiation of the original contract tenns in cases of multiple lenders (e.g.
arbitration, provisions for protection from legal recourse by creditors in certain well-defined
circumstances, minimisation of the disruptive effect of hold-outs etc.)?
10. Would new clauses in debt contracts clearly stipulating procedures to be followed in the event
of debt-service interruptions (e.g. providing for a qualified majority of bondholders to be able
to approve a change in tenns applying to the entire group of bondholders) be helpful?
11. Would it be constructive for the official community to encourage the formulation of a "model
contract" that includes such new clauses? Would such an initiative make these provisions more
easily acceptable?
12. Even if such contract innovations become standard, they would only apply to new debt
agreements while the bulk of the existing debt would be under the old style contract. Is there a
case for converting these "old" debts? If yes, how could this be accomplished?

n. When a crisis emerges
This section deals with the events precipitated by the outbreak of a crisis'and the issues of potential
market overshooting, and externalities in the form of contagion effects on other debtors and
systemic disturbances. Market participants are also asked to comment on the worth of suggested
alternative methods for instituting a "sanctioned" standstill.

1. What types information of are most crucial for the investor community at the time a crisis
breaks? Could you identify any informational deficiencies which have been evident in recent
crises?
2. What considerations go into an investor's decision to liquidate claims on a troubled sovereign
debtor and other debtors in the country? In particular, is it just the natural reaction to a price
change, or is it exacerbated by fears that market liquidity would dry up fast because of large
scale retreat from market making and/or fear of imposition of exchange controls? What
impact, if any, do legal and regulatory considerations have on the decision whether to liquidate
claims or to participate in the re-negotiation with the debtor?
3. Do investors believe that the market value of claims on sovereign debtors always constitute an
accurate measure of the troubled borrower's ability to pay back or does excessive pessimism
unduly depress prices after the emergence of crisis? If the latter is the case, is this of concern?
4. It has been observed that sell-offs of emerging market debt obligations often occur in waves
and that countries with seemingly very different profiles are all affected at the same time. How
do market participants explain this phenomenon? Is this "contagion" something that could or
should be mitigated?
5. In the event that a crisis occurs in one country, how do investors differentiate between different
borrowers? Are differences in instruments important? If so which ones and why? Do retail and
wholesale investors react differently?
6. In general, how do private market participants view the risks that the debt-servicing difficulties
of a key sovereign borrower might have a severe, adverse impact on major creditors, and/or
international financial markets? What could be done to lower such systemic implications?

40

7. Would international approval, for example, by the IMF, of a suspension of payments by a
sovereign borrower under certain strict conditions, but with no legal standing, affect the
private market's attitudes towards the debtor and the price of the claims? What conditionality
should be attached to such an approval?
8. How would such a declaration influence the willingness of creditors to cooperate with the
borrower in a workout type of setting and the readiness with which private investors would
resume lending to the sovereign borrower?
9. Assuming for the moment that some mechanism existed for legally sanctioning temporary
payments standstills for sovereign debtors that met certain conditions, how would investor
behaviour change? How would debtor behaviour change? What would be the broader
implications of having such a mechanism?
10. Under what tenns and conditions would market participants extend fresh money to a sovereign
debtor for a short period to enable it to carry out essential activities until the process of
resolving the crisis could be initiated (if the crisis did not resolve itself)? What difference
would it make if a standstill which enjoyed some form of official blessing was in place? What
difference would it make if the debtor benefited from protection from certain legal action by
existing creditors for the period of the standstill?

m.

The resolution process

This group of issues relates to the complications of the renegotiation of the original contract terms
and the conclusion of a new agreement.

1. What has been the experience with existing arbitration schemes and conciliation procedures
(speed, equitable treatment of creditors, cost)? In what way has intervention by the official
community proved helpful to a speedy settlement? In what way has it been an obstacle?
2. How do market participants view the London Club process, and what are the lessons of the
London Club experience for the general question of workout arrangements? What
arrangements would be suitable in the case of debt owed to non-bank creditors?
3. How do market participants view the Paris Club process, and what are the lessons from this
experience for the general question of workout arrangements? In particular, in what way does
the comparability of treatment emphasised by the Paris Club influence other creditors?
4. To what extent is the process of resolving a crisis complicated by the difficulty of knowing
who are the other creditors in the same (implicit) seniority class, particularly when the claim is
in bearer form and traded in the secondary market?
5. To what extent is there concern about free riders in the current arrangements? Do they present
a serious obstacle to expedient voluntary workouts? If yes, then what could be done to contain
their disruptive influence?
6. What limitations or rules (legal, supervisory or self-imposed) apply to the acquisition, holding
and trading of debt which is in default or otherwise impaired?
.
7. To what extent would the formation of bondholder associations, to negotiate with troubled
debtors on behalf of individual bondholders and to agree on restructuring as necessary, be
helpful? Should these associations be formed on an ad hoc basis, or should they be standing
committees? Would it be desirable to have many such associations each representing a more
homogeneous class of claim holders? Would there be difficulties in defining the covered
"bonds" with sufficient precision? What could or should the authorities do to facilitate the
voluntary formation of such associations? Would such associations help speed up the
negotiation process to a degree that could contain spillovers and other externalities?

41

8. Ifbondholder associations, along with the Paris and London Clubs, were in place, would there
be concern about other types of assets not covered by these arrangements? Could the
bondholder association model be used in the case of other debt instruments, such as those of
shorter maturity and perhaps those held by domestic residents of the borrowing country as well
as international investors?
9. Some have gone as far as to advocate an international bankruptcy court, empowered in some
way to impose debt workout solutions, including debt re-structuring and perhaps debt
forgiveness, on both debtors and creditors. What is the private sector's opinion of such an
arrangement?
10. When a sovereign borrower interrupts debt servicing, what are the consequences for the
borrower's access to capital markets, and over what period of time? Do different classes of
creditors and potential creditors respond differently? To what extent do the circumstances
under which the borrower was forced to interrupt debt servicing affect the market
consequences of the action?

42

ANNEX IV

GROUP OF TEN
WORKING PARTY ON
THE RESOLUTION OF SOVEREIGN UQUIDITY CRISES

REPORT ON EXISTING FORMS OF COLLECTIVE
REPRESENTATION APPLICABLE TO DEBT INSTRUMENTS

43

TABLE OF CONTENTS

SCOPE AND STRUCTURE OF THE REPORT ........................................ ·· .. ····· ........... 45

PART I.

GENERAL FINDINGS ................................................................................. 45

1. Pwpose and sources of existing fonns of collective representation .............. .45
a) Purpose of existing fonns of collective representation ........................ 46

b) Sources of existing fonns of collective representation ....................... .46
(i)

Statutory fonns ofpennanent collective representation ..... .46

(ii) Optional use of statutory fonns of pennanent collective
representation ..................................................................... 47
(iii) Purely contractual fonns of collective representation ......... .47
2. Flexibility of current arrangements ..........................., .................................. 48

3. Potential weaknesses affecting how current collective representation
practices might help control a sovereign liquidity crisis .............................. .49

4. Potential generalisation of certain existing collective representation
practices ...................................................................................................... 50
PART II. SUMMARIES OF COLLECTIVE REPRESENTATION AS
DESCRIBED IN NATIONAL REPORTS .................................................... 51
1. Belgium....................................................................................................... 51

2. Canada ........................................................................................................ 51
3. France .......................................................................................................... 51
4. Gennany ...................................................................................................... 54

5. Italy ............................................................................................................. 55
6. Japan ........................................................................................................... 56
7. The Netherlands ........................................................................................... 58
8. Sweden ........................................................................................................ 58
9. Switzerland.................................................................................................. 59
10. UK .............................................................................................................. 61
a) Trustees ........................................................................................... 62
b) Fiscal agents .................................................................................... 63
c) Facility agents ................................................................................. 64
11. US................................................................. ................................................ 64
a) Trustees................ ...... ......... ........
65
b) Fiscal agents ................................ ··············· .. ··· .. ······ .. ······················68
c) Syndicate agents .......................... :::::::::::::::::::::::::::::::::::::::::::::::::::: 69

44

EXISTING FORMS OF COLLECTIVE REPRESENTATION
APPLICABLE TO DEBT INSTRUMENTS

SCOPE AND STRUCTURE OF THE REPORT
This report summarises general views on the law and practice relating to collective
representation of holders of debt instruments or claims generally (in particular, indebtedness taking
the form of securities) in Group of Ten countries, as those views were expressed by national
authorities in reports prepared for the Working Party.}
Part I of this report provides an overview of certain aspects of the rules or practices
relating to collective representation of debt holders as described by national authorities, highlights
certain potential weaknesses of existing arrangements as far as helping to control sovereign liquidity
crises and suggests some potential improvements to those existing arrangements. Part II summarises
selected aspects of the various national reports, with particular emphasis on collective representation
as it is used in international debt offerings.
Even though the national reports were prepared from materials believed to be accurate,
this report in no way purports to be an exhaustive or authoritative discussion of the relevant law or
practice. No representation is made concerning the accuracy or completeness of any statement
contained in this report. This report is in no way to be viewed as an official interpretation or as a
restatement of law or practice relating to collective representation.

PART I. GENERAL FINDINGS

1.

Purpose and sources of existing forms of collective representation
There is no clear definition of what a collective representative is or does: according to

national reports, the term "collective representation" can be understood to r~fer to various sorts of
"representatives", of either the debt holders or the debt issuer, although most of the representatives
described were permanent, as opposed to ad hoc, representatives. The forms of collective
representation described in national reports can, however, be classified, notably according to their (a)
purpose or (b) source, as described below.

1 This report has been drafted with the support of the BIS Legal Service.

45

a) Purpose of existing forms of collective representation
The purposes for which existing forms of collective representation are used can differ
considerably, ranging from: a representative of the debt issuer, such as a fiscal agent, which is
appointed to fulfil limited, administrative, debt-servicing functions on behalf of the debt issuer;2 to a
trustee which represents debt holders and can, in certain circumstances, sue on behalf of the debt
holders;3 to a representative appointed by a debt holders' assembly in response to a crisis, with
exceptional powers to represent the debt holders for the duration of the crisis. In addition, in
bankruptcy situations, a debt holders' representative will often be granted, by operation of domestic
statute law, exceptional powers to take action binding on all debt holders.
The purpose for which any collective representation is used can, to a large extent, be
chosen by the market participants, even though particular tasks sometimes are required by statute to
be accomplished by particular forms of collective representative. Thus, although some statutorily
required representatives, such as certain trustees in the US, may have an obligation to provide
information to debt holders, other functions or powers of the trustees can largely be determined by
market participants.

In general, however, it appears that any permanent collective "representative", whether
appointed by the debt holders or otherwise, may be in a privileged position to facilitate
communication between debt holders and debt issuers in the event of a crisis, notably by securing a
channel for information between the debt issuers and the debt holders.

b) Sources of existing forms of collective representation
The forms of collective representation described in national reports broadly fit into three
categories according to their source, as follows:
(i) Statutory forms of permanent collective representation;
(ii) Optional use of statutory forms of permanent collective representation; and
(iii) Contractual forms of collective representation.
The main features of these three categories are as follows:
(i) Statutory forms of permanent collective representation

Certain legal systems require, by statute, the use of particular forms of permanent
collective representation in connection with particular types of domestic debt offerings. This includes,
among others, trustees when required under the US Trust Indenture Act, 1939 ("TIA"), as well as the

"masse des creanciers" under French law, "leanri gaisha" under Japanese law, the "communaute des
creanciers" under Swiss law and bond holders' assemblies under German law.
2

See, in partiCUlar, Part IT, sections lOb) and lIb) below. Although fiscal agents under US or English law do not
represent debt holders, fiscal agency agreements often contain administrative provisions which could facilitate
collective action and decision making.

3

Stt, in particular, Part IT, sections lOa) and lla) below.

46

Although the details relating to these forms of collective representation are specific to the
legislation of particular countries, some general features are common to a number of legal systems.
Thus, appointments, by statute law, of collective representatives typically are permanent appointments
which last for the entire duration of the debt instrument. One of the main statutory purposes or
functions of these representatives generally appears to be to make information available to the debt
holders, although some may also actively represent the debt holders with respect to the debt issuer.

In most cases, the parties involved in debt offerings for which a statutory form of
collective representation is required can, at least at the time of the debt offering, adapt to their specific
needs certain aspects of the powers or duties of the collective representative they are required to use.
One general limit on a statutory representative's powers is that it is rarely, if ever, entitled to waive the
rights of the debt holders to receive timely payment of the full amount due under the debt instrument.
There are also limits as to the scope of application of a statute and therefore as to when
statutory forms of collective representation are required: in particular, statutes do not apply beyond the
jurisdiction for which they were enacted and many do not apply to debt instruments issued by
sovereign debtors. In fact, many statutory forms of collective representation only apply to debt
offerings by private issuers domiciled within the country for which they were enacted and therefore
are not generally applicable in connection with international debt offerings.
(ii) Optional use of statutory forms of permanent collective representation

Even though not required by statute, many, if not all, of the forms of permanent
collective representation which are sometimes required by statute are also used, by choice, by the
parties involved in debt offerings, with the powers and duties of the representative adapted, by
agreement, to suit the parties' needs. 4
In order to be valid under German consumer-protection legislation, any contractual
provision restricting or limiting debt holders' rights would probably have to comply with the basic
provisions of fairness and justice contained in the German Debenture Act, 1899, which sets out the
mandatory provisions on collective representation applicable to debt instruments issued in Germany
by certain German domiciled debt issuers. 5
(iii) Purely contractual forms of collective representation

Financial market participants also choose to use certain forms of collective representation
which do not resemble any statutory form and might be either:
(a) Permanent representatives provided for in the debt instrument and to last for the entire
duration of the debt instrument, such as collective representatives for debt issued, guaranteed or
otherwise available in the UK, where there is no statutory form of collective representation. This

4

It is not the practice in Germany to make optional use of statutory provisions, although there is nothing to prevent

market participants from doing so.
S

This Gennan legislation will shortly be supplemented by the entry into effect of an EU Directive on unfair terms in
consumer contracts.

47

category also includes fiscal agents used under US law in connection with Eurobonds and Brady
bonds. 6 Or,
(b) Ad hoc collective representatives which are set up and used only to respond to a crisis,

whether or not provision is made for the ad hoc representation in the underlying debt instrument
These ad hoc representatives, which often have exceptional powers, may be necessary to supplement
permanent representatives in the event of a crisis. Thus, for instance, under English law, bond holders'
meetings will frequently appoint a "representative" with the extended powers which are needed to
respond to a crisis, even though the bond documentation provides for a trustee with certain, limited,
powers to act for the bond holders over the entire duration of the bond.
In addition, ad hoc groupings of debt holders often arise as and when problems occur

with the performance of obligations in connection with a debt instrument. Many of these groupings do
not have a formal legal structure and do not provide much more than an ad hoc forum for negotiation
and a conduit for information. Nevertheless, during the debt crises of the 1980s, groupings such as socalled Bank Advisory Committees ("BACs"), which advised the debtor, played a leading role in renegotiations of sovereign debt: members of the BACs (normally,

majo~

bank creditors) would assist

the sovereign debtor in putting together a restructuring proposal and, typically, they would then
endorse the proposal before it was sent to all of the creditors. 7

2.

Flexibility of current arrangements
The national reports indicate that there is considerable flexibility in the collective

representation arrangements used in connection with international debt offerings. Many of the statutes
described in the national reports do not apply to foreign domiciled debt issuers, or to any sovereign
debt issuer. Furthermore, market participants can often select the governing law for an international
debt offering and therefore can opt for a legal system which allows them to adapt the form and powers
(and therefore pwpose) of any collective representative used in debt offerings, provided all applicable
mandatory provisions of statute law and "ordre public" are respected. 8 The use of collective
representation in international debt offerings is therefore largely market driven and the applicable
rules result principally from the contractual arrangements agreed among the debt issuer and the initial
debt holders (or trustee or agent, as applicable).
The flexibility which allows market participants (i.e. issuers and the financial institutions
arranging the issues) to choose how, if at all, to use collective representatives in connection with

6

Agents, whether fiscal agents under US law or facility agents under English law, provide essentially administrative
debt-servicing services to the issuer; they do not "represent" the debt holders, but act on behalf of the debt issuer.

7

Although BACs purported to be representative of the broader creditor community, they were not, from a legal point of
view, "representatives" of it.

8

Although market participants have considerable flexibility to determine whether to provide for any form of collective
representation and, if so, to adapt it to suit their specific needs, the proposed EU Directive on unfair terms in
consumer contracts may affect the market participants' freedom of contract in this regard.

48

international debt offerings, however, also allows market participants to circumvent, to a certain
extent, statutory provisions which are felt to be inappropriate or too oppressive or cumbersome:
market participants can notably select a governing law which will not prevent them from doing what
they would like to do.
In practice, most international debt offerings, particularly Eurobonds and Brady bonds, as
well as various other forms of sovereign debt issues, are subject to either English or US law, both of
which afford participants considerable freedom of contract. 9 In debt instruments governed by English
or US law, the two most prevalent forms of collective "representation" are trustee and agent. 10 The
choice, according to the US national report, between using a trustee or an agent (for bond issuances
governed by US law and exempted from the TIA) is largely driven by convenience, cost and various
marketing factors, but may also depend upon the type of debt instrument, such that, for instance, it
might be more appropriate to use a trustee, which can hold and deal with collateral, in the case of
collateralised bonds. 11

3.

Potential weaknesses affecting how current collective representation practices might
help control a sovereign liquidity crisis
The national reports suggest that there are certain potential weaknesses in how current

arrangements for collective representation may contribute to controlling a sovereign liquidity crisis,
including as follows:
a) Even where some form of permanent, debt holder, collective representation is provided
for in debt instrument documentation, the representatives appointed are rarely, if ever, accorded the
powers needed to cope with a supervening crisis.
b) For most securitised debt, there is no established forum (similar to the London or Paris
Clubs) for discussion, co-ordinated action and decision making by debt holders in the event of a
liquidity crisis of the issuer.
c) Ad hoc representatives with exceptional powers are frequently appointed under

contractual arrangements among debt holders when a crisis develops, even though some form of
permanent collective "representation" is provided for in the debt instrument documentation. Before
any ad hoc "representative" can operate effectively, however, time needs to be spent determining
essentially procedural matters, such as how that "representative" is to be appointed and how it is to
function.

9 New York governing law is specified for the majority of debt issues arranged or lead-managed by US commercial and
investment banks and is often chosen for offerings aimed primarily at the US market (particularly in US public debt
offerings, where New York law is invariably selected).
10 See Part II, secti ons 10 and 11.
11 Brady bonds have both a fiscal agent and a collateral agent, which is not a trustee.

49

4.

Potential generalisation of certain existing collective representation practices
It appears from the national reports that certain existing collective debt holder

representation arrangements could facilitate the resolution of a sovereign liquidity crisis. Market
participants might therefore consider developing and general ising the use of certain existing practices
which apply to collective debt holder representation in the event of a crisis, particularly in connection
with debt instruments lacking arrangements for collective representation or where arrangements for
collective representation do not foster rapid and efficient workouts.
A possible focus for developing existing practices

~ght

be to provide the procedural

framework necessary, for example, for:
(i) Constituting promptly an assembly12 of all holders of a particular debt instrument when a
crisis arises or, if appropriate, before a crisis develops (the "trigger" would need to be
carefully defined);
(ii) The designation by the assembly of debt holders of one or more collective
representatives, of the debt holders, to respond to a crisis; and
(iii) Forming, through the assembly, a forum for discussion and decision making among debt
holders and, if appropriate, among debt holders and debt issuers.
Market participants could effectively research what existing market practices could be
developed and harmonised, perhaps in co-ordination with the admission boards of stock exchanges
and the organisations which approve debt-offering documentation: these bodies could encourage the
generalised use of certain practices by the market. This process may ultimately lead to developing a
set of uniform international standards on collective debt holder representation.

12

In certain jurisdictions, e.g. the US, it may not be appropriate to form an "assembly" of debt holders, but effective
arrangements for these purposes may perhaps be achieved otherwise.

50

PART ll. SUMMARIES OF COLLECTIVE REPRESENTATION AS DESCRIBED IN
NATIONAL REPORTS
The following sections summarise the features of the forms of collective representation
described in the national reports which are most relevant to international debt offerings.

1.

Belgium
Belgian statute law does not contain specific proVISIons regulating collective

representation of holders of debt instruments issued on an international level.
The Commercial Companies Law, however, contains provisions relating to the
organisation and functioning of a "General Assembly of Bond Holders" ("assembIee generale des
creanciers obligataires") for bonds issued by companies established under Belgian law. Under certain

conditions, a qualified majority of this Assembly has the right, for example, to agree with the bond
issuer to a reduction of the interest rate or to a postponement of interest payments. The Assembly can
appoint a representative for executing its decisions.

2.

Canada
Trustees are typically appointed, under the terms of a trust indenture, to represent bond

holders with respect to the bond issuer in large ·corporate bond issues. Trustees represent the holders
of the debt instruments in respect of which the trust indenture was created and perform obligations
defined in the trust indenture according to the general law applicable to trustees. Unless otherwise
specified in the trust indenture, the trustee owes duties to the debt holders, who are the beneficiaries of
the trust.

3.

France
The French Companies Act l3 requires the formation of a grouping or "masse des

obligataires" of the holders of every bond from the same bond issuance, whether public or private, by

commercial companies, if governed by French law. 14 The same "masse" may be used to represent the
bond holders in successive debt issues, if this is provided for in the debt instruments for each issue
and all debt instruments provide that all bond holders enjoy the same rights.
Although French law does not require certain public sector issuers to use a "masse" in
connection with their debt instruments, public sector issuers frequently chose to do so, particularly

13 Law number 66/537 dated July 24, 1966 sur les societes commerciales, articles 293 through 339.
14

As collective representation is mandatory for all commercial companies issuing bonds, whether publicly or privately,
the rating of the issuer has no influence upon the form of collective representation to be used.

51

public entities in respect of domestic French issues. IS Similarly foreign issued debt, including foreign
issued Euro-currency debt sold in France, is not subject to the statutory requirement for there to be a
"masse". However, these debt instruments often provide for a "masse" to be constituted, even though

this is purely optional. 16
Upon issuance of the relevant debt instrument, the creditors fonn, by law, a "masse des
obligataires", which is in itself a legal entity with legal personality which only ceases to exist upon

full satisfaction of the bond holders' rights under the debt instrument. 17 This group, or "masse", of
creditors has two organs: a general assembly made up of all the debt holders of the relevant bond
issuances; and a committee of between one and three "representants" or representatives elected by the
general assembly. The chainnan of the general assembly is automatically one of the representatives. If
the bond issue is floated in a public offering (ltappel public

a l'epargne"), the representative(s) of the

general assembly of debt holders is/are sometimes designated in the bond issue documentation. The
appointment or designation of the representatives is published in a legal notice which appears, for
instance, in the BALO.
The representatives of the debt holders may either be

indi~duals

or other legal entities.

They must be domiciled, or at least registered, in French territory. There is no statutory requirement
for the representatives to be bond holders. 18 However, the issuer and persons with managerial
responsibilities within the issuer, or in companies with an interest in the capital or in the management
of the issuer and persons who are banned from exercising banking activities or from taking on
managerial responsibilities, cannot be appointed as a representative.
The "masse" and its organs represent solely and exclusively the interests of the bond
holders: once the "masse" exists, the bond holders have no individual right to supervise the issuers'
operations and management and cannot individually request communication of the issuer's accounts
and documentation. This supervision and communication of these items to the bond holders is solely
the responsibility of the representatives, and debt holders are only entitled to request documentation
from the representatives. 19
The general assembly of bond holders will deliberate on every proposed measure
involved in the representation of the bond holders and related to the execution of the debt contract,
including any proposed modification in connection with the debt instrument and proposals on the
following issues: 2o
IS French debt issued with a public guarantee by State or local authorities, or by public enterprises ("etablissements

publics") does not need to have a "masse".
16 The existence of a "masse" can facilitate an issuers' discussions with bond holders, including on amendments to the

terms of the debt instruments.
17 Article 293. Companies Act.
18 One of the representatives. who need not be bond holders, is the president of the general assembly.
19 The bond holders can take no individual action other than in connection with the exercise of their voting rights. See

Article 319. Companies Act.
20 Article 313. Companies Act.

52

(a) the modification of the memorandum of association of the issuer such as will affect the
object or form of the issuer;
(b) to settle any dispute or litigation;
(c) to merge or to break up the issuer;
(d) relating to a new issue of bonds benefiting from a guarantee or security making that new
issue rank above the rights of the bond holders already in the "masse";
(e) relating to any waiver or amendment of the guarantees or securities granted to the bond
holders;
(f) relating to the extension of the due date of interest instalments or modifications of the
redemption terms or the interest rate.
There are important limits on the powers of the general assembly, including that it cannot
increase the debt holders' expenses or treat debt holders of the same "masse" unequally. The
Companies Act contains a number of provisions relating to meetings of the general assembly,
including quorum requirements. 21
The representatives of the general assembly are empowered to do anything necessary for
the administration of the "masse" and in the common interests of the bond holders. The general
assembly can restrict certain of the powers granted to the representatives by statute. The
representatives can, if expressly authorised by the general assembly, commence legal proceedings on
behalf of the bond holders. The representatives can supervise the issuer, but may not intervene in its
management (the representatives will receive the same information as the shareholders of the issuer
and can attend general assemblies of the issuer, although they have no right to vote).
Furthermore, the representatives are responsible for supervising any guarantees and
securities connected to the debt instrument and for taking any necessary action in this regard. They
can receive all guarantees and securities which are regularly attached to the debt instrument after its
issue. They can waive partially, or in full, security clauses, when authorised to do so by the general
assembly, or when the debt instrument is reimbursed.
The representatives are potentially liable to the general assembly of bond holders in the
same way as agents in accordance with the agency provisions of the French Civil Code. The functions
of the representatives therefore end in the same way as for any agent. However, the general assembly
has the power to terminate the functions of the representatives. If a representative resigns, it will be
liable for any harm caused to bond holders by its resignation. Pending replacement by a new
representative, no-one can act in its stead. However, pending the designation of a new representative,
or in an emergency, any person who has a valid interest can request the president of the appropriate
court of first instance to designate a representative on an emergency basis.

21 On first convening. the bond holders present or represented must have title representing at least one quarter of the
voting rights; on the second convening of the assembly there is no quorum. Each bond gives the right to at least one
vote and each bond holder has voting rights proportional to the value of the loan its bonds amount to. The general
assembly's resolutions are adopted by a majority of the votes present or represented.

53

4.

Germany
Under Gennan law, a special act provides for an assembly of the holders of certain

domestic bonds having the same rights. The assembly has to be convened at the bond holders' request
(when holders of at least 5% of the nominal bond capital demand such convening) and the assembly
may, if the need arises, be represented by one or more representatives. These statutory provisions
apply to all domestic issues with two exceptions: issues below a specific threshold in terms of amount
and denomination are exempt from the act, as are issues by sovereign borrowers (such as federal
authorities, Lander governments and municipalities). However, the act may be made applicable to
municipal authorities through Under legislation. Moreover, similar rules may be implemented by
contract for domest\c issues not covered by statutory law and for foreign issues of private or sovereign
entities.
Where required by statute, the collective representation is governed by the German
Debenture Act of 1899 ("Debenture Act").22 In contrast, where collective representation is optional,
the relevant source of any obligation will be the terms and conditions of the bonds issued. 23 Provided
that any such contractual provisions complied with the basic requirements of fairness and justice (as is
the case with the provisions of the Debenture Act), they would be valid under the Gennan Standard
Contracts Act (AGB-Gesetz), which protects conswners.
Where the Debenture Act applies, representatives are elected by the general assembly of
bond holders, subject to respecting certain statutory criteria relating to their eligibility, including that
they must not be members of the issuer's or his creditors' executive or supervisory boards or creditors
of the issuer or otherwise able to exercise significant influence upon the issuer. The representative acts
as the bond holders' agent and has to safeguard the bond holders' interests. In principle, a
representative elected or appointed pursuant to the terms of the bond would be subject to the same
rules; however, other contractual arrangements might apply instead, e.g. endowing the representative
with the powers of a "trustee".
The Debenture Act contains detailed provisions specifying certain extraordinary powers
and functions which can be attributed to a representative, by a qualified majority vote of the general
assembly of bond holders, in the following areas: enforcing the bond holders' rights against the issuer
and thus preventing individual bond holders from commencing litigation, negotiating on and agreeing
to defer principal or interest payments or even to waive interest payments. However, the
representative cannot be authorised to waive the bond holders' rights to receive principal, unless
formal insolvency proceedings have been opened. Furthennore, the represen~tive is obliged to treat
bond holders equally.

22 Gesetz tiber die gemeinsamen Rechte der Besitzer von Schuldverschreibungen dated December 4, 1899, as amended
by the RegistrierverfahrensbescbIeunigungsgesetz dated December 20, 1993.
23 For collective representation to be available, the terms and conditions of a bond issued by a foreign sovereign issuer
would either have to refer explicitly to the Debenture Act or include particular provisions for bond holders' collective
representation.

54

Contractual representation clauses can, by concentrating powers with the general
assembly of bond holders, generally limit what a representative is entitled to do. Similarly, where the
Debenture Act applies, the general assembly might further limit the representatives' powers by
requiring the representative to consult, or obtain approval from, the general assembly before taking
any action.
Under the Debenture Act, the representative may be removed by the assembly at any time
by a qualified majority vote, but otherwise its functions will cease upon the completion of its duties.

5.

Italy

By Articles 2415/2418 of the Civil Code there is collective representation of the holders
of corporate debentures issued by joint stock companies, including public and state sector companies,
but excluding banks. The collective representation involves a permanent assembly of the debt holders
and a representative elected by the debt holders.
The assembly of the debt holders, as well as designating the representative, adopts
resolutions on: a) changes to the terms of the loan; b) motions for administration under supervision
and for composition; c) establishment of a fund for the expenses necessary for the protection of
common interests and related statements of account; d) other issues of common interest to bond
holders, e.g. plans to merge the issuer with another company. Validly determined resolutions of the
assembly are binding, even upon absent or dissenting bond holders. However, the power of the
assembly of bond holders to introduce substantial changes to the terms of the debt issue is not always
recognised in legal doctrine. It is generally thought that any total or partial waiver of the principal of a
debt must receive the consent of all individual creditors, and that therefore a majority decision in this
regard by the assembly is not binding on all bond holders.
The representative does not need to be a debt holder. Ifhe is not elected by the assembly,
he is appointed by the president of the tribunal with jurisdiction upon request by one or more bond
holders or of the directors of the company. He remains in office for a period of up to three years and
can be re-elected. The representative implements the decisions of the assembly, protects the common
interests of bond holders in relation to the company and attends the drawing of lots for the repayment
of bonds (certain issues in Italy involve bonds which are redeemed on a lottery basis). He is entitled to
attend meetings of the shareholders. He also represents the bond holders in bankruptcy proceedings;
however, the assembly has to vote on any proposal of composition or administration under
supervision; such resolutions are binding for all holders of bonds. Legal doctrine tends to regard the
representative as an agent of the debt holders, who is therefore subject to the Civil Code provisions
regarding agency.
There are no limits on what individual debt holders can do pending designation of the
representative. Debt holders can initiate individual actions even after the designation, provided that
such actions do not contradict resolutions validly adopted by the bond holders' assembly.

55

6.

Japau 24
The two fonns of collective bond holder representation most used in Japanese law are

"kanri gaisha" (bond management companies or commissioned companies) and bond holders'
meetings, both of which are explicitly provided for in the Japanese Commercial Code.
The collective representation provisions of the Japanese Commercial Code automatically
apply to all bonds issued in Japan by Japanese "corporate" type entities. In contrast, these provisions
do not automatically apply when non-Japanese sovereigns, quasi governmental and corporate type
entities issue yen-denOminated bonds (so-called "Samurai bonds") or other bonds in Japan. However,
most foreign issuers of bonds in Japan provide for kanri gaisha and bond holders' meetings by making
specific reference, in the transaction documents, to the relevant provisions of the Japanese
Commercial Code. 25
Where a foreign issuer provides for kanri gaisha and bond holders' meetings in debt
offerings under Japanese law, two situations need to be distinguished: when a corporate-type foreign
issuer chooses Japanese law as the governing law, it is generally believed that the statutory provisions
of the Japanese Commercial Code on kanri gaisha and bond holders' meeting apply. However, where
foreign sovereigns and non-corporate governmental entities choose to provide for kanri gaisha and
bond holders' meetings, the issuers would not generally be bound by, or subject to, all of the
provisions of the Commercial Code regarding kanri gaisha and bond holders' meetings. Instead, in this
latter situation, the arrangements for the kanri gaisha and bond holders' meetings are purely
contractual and accordingly the kanri gaisha's powers with respect to the bonds may differ from those
of a kanri gaisha appointed pursuant to the Japanese Commercial Code, or by a foreign "corporate"
issuer.26
As a matter of practice, both domestic and international bond issuers tend to utilise kanri
gaisha and bond holders' meetings as the fonns of collective representation for holders of bonds
issued in Japan. Even though foreign issuers are not, as a matter of law, obliged to appoint kanri
gaisha, one reason why they might choose to do so is that it enhances the marketability of the bonds
in Japan since the bonds will provide similar mechanisms to those applied, by law, to domestic
Japanese bonds.27

24 This summary is entirely based upon the analysis and views of the Bank of Japan and does not necessarily represent

the views of the Japanese Government

25 Foreign issuers frequently select Japanese law as the governing law for issues in Japan.
26 Where a "Samurai bond" issue in Japan is governed by a law other than Japanese law, the prevailing view is that the
specific provisions of the Commercial Code concerning kanri gaisha and bond holders meetings would not generally
apply. Therefore the foreign issuer would be free to provide for any type of collective bond holder representation
mechanism, provided that the mechanism was not contrary to Japanese public policy (e.g., if the law chosen by the
foreign issuer for the bond agreement did not provide for any type of protection of the bond holders, it might be
deemed to be contrary to Japanese public policy and, consequently, Japanese courts might not consider themselves to
be bound by the provisions of the relevant bond agreements).
27

Foreign issuers may thus appoint kanri gaisha to receive payments under the bonds, preserve the rights of the bond
holders and to handle certain administrative duties in relation to the bonds.

56

Statutory kanri gaisha are standing representatives (banks, trust companies or companies
specifically licensed by the MOF) appointed by the issuer at the time of the initial invitation for
subscription of the bonds. Where the Japanese Commercial Code does not apply, contractual
arrangements for the appointment of the kanri gaisha tend to follow the statutory scheme.
A statutory kanri gaisha has duties and powers which it can exercise directly, without
obtaining prior approval from the bond holders' meeting or a court, as well as powers which it can
only exercise if authorised by the bond holders' meeting and by a court and also any additional powers
accorded by contract which are not inconsistent with its statutory powers. The powers and duties of a
kanri gaisha appointed by contract will be set out in the bond documentation and are usually the same

as the powers described in the Japanese Commercial Code for statutory kanri gaisha. Many acts can
be performed directly by the kanri gaisha, although declaring an event of default, accelerating bonds
an'd acting on any matters "material to the interest of the bond holders" are deemed to be beyond the
kanri gaisha's discretion and therefore need the prior approval of the bond holders.
As a general rule, the existence of a kanri gaisha theoretically does not affect individual
bond holders' rights: an individual bondholder is entitled to take any action at any time in respect of
its own bonds, including commencing litigation against the issuer to recover the payment of principal
or interest in the event of a default. However, if a kanri gaisha sues the issuer for payment of the
bonds in respect of which it has been appointed, an individual bond holder would probably be
precluded from suing the issuer concurrently to obtain payments in respect of its own bonds.
Furthermore, if the issuer pays or compromises a claim by an individual bond holder in a way which
is "markedly unfair", the kanri gaisha has a statutory power to seek to avoid the payment or action.
Although a kanri gaisha cannot, in principle, generally restrict bond holders' rights, a
majority at a bond holders' meeting can pass a resolution which, if approved by a court as required by
the Japanese Commercial Code, will bind all bond holders, even those who voted against it. (The
Japanese Commercial Code does not apply to Samurai bonds issued by foreign States and therefore it
is generally believed that court approval is unnecessary for bond holder resolutions in respect of
them.) By obtaining a resolution from a bond holders' meeting authorising it, for instance, to approve
a standstill, a kanri gaisha can be involved in restricting bond holders' rights. This said, strict
procedural rules apply for convening bond holders' meetings and obtaining court approval, both of
which could take time.

57

7.

The Netherlands

The Dutch practice with regard to the collective representation of institutional creditors in
large syndicated financial transactions is based upon the UK market practice of using an agent. 28
Accordingly, by one of the transaction documents, the lenders will generally appoint an agent who
will act on their behalf as their exclusive representative. In the case of publicly placed bonds, it was
customary to appoint a trustee, but this is no longer the practice.
Whether a trustee or agent is used as a representative,29 it is usually designated in the
transaction documents, which will typically also set out the powers of the representative, as well as
the duration of its function. Transaction documents normally specify that the representative must
consult the debt holders it represents on any "important" issue. However, in "emergencies", a
representative may act to bind the debt holders, even if provisions in the transaction documents
require consultation of the debt holders.
Transaction documents also usually restrict when debt holders can take individual action,
although in an "emergency" situation an individual debt holder could conceivably act in the place and
on behalf of the representative, thereby binding itself, the representative and also the other debt
holders. 3o
A representative from a foreign country will be recognised in the Netherlands, provided
that its appointment and powers conform with the law governing its appointment and do not
contravene "ordre public" in the Netherlands.

8.

Sweden
Swedish law does not contain any specific prOVISIOns on collective representation

applicable to debt instruments. The Swedish market practice in this regard is, however, for companies,
mortgage institutions or local authorities issuing debt instruments (including all kinds of long term
loans traded on regulated markets, as well as commercial paper) sometimes to include, in the
transaction documents, provisions for the collective representation of the debt holders. The collective
representation used in Sweden is therefore contractual. Swedish issuers using the Euromarkets
generally provide for English law to apply to the debt instrument.
Generally, debt instruments will provide that the banks or investment firms acting as
dealers of the debt will act as the representatives of the holders of that debt in accordance with the

28

Since July I, 1994, it has been possible to take collective action under Article 305 a of Book 3 of the Netherlands
Civil Code. For recent case law on this Article, ~ for instance, Supreme Court, September 2, 1994, NJ 1995 no. 369
and December 2, 1994, R vdW 1994 no. 263 (ABN AMRO Bank v. Association of Holders Coopag).

29

An agent (which is normally part of the leader of a syndicate of debt holders) will generally act on behalf of the debt
holders in all circumstances. A trustee will normally only act in case of payment default or failure to provide security
when required by contract.

30 Under the "Zaakwaarneming" concept of Netherlands law, a person can validly bind a third party, in an emergency,

even without the knowledge of that third party.

58

powers and duties specified in the transaction documents. These powers may include agreeing with
the debt issuer to a standstill or, in certain circumstances, agreeing to amendments of terms and
conditions of the debt instrument, except in respect of the repayment of principal and the payment of
interest. The representatives act for the debt holders, but do not owe them any fiduciary duty.

9.

Switzerland
The Swiss Code of Obligations contains, in articles 1157 et seq., detailed provisions

relating to collective representation in connection with debt instruments governed by Swiss law. Two
main situations must be distinguished in connection with whether and, if so, how these articles of the
Swiss Code of Obligations apply: the articles apply, by law, in connection with any public offering of
bonds by an issuer who has its domicile or a business establishment in Switzerland. 31
In contrast, for private offerings of debt instruments or public offerings by issuers not
domiciled in Switzerland, some, or all, of the provisions of these articles may apply, in whole or in
part, by agreement among the issuer and the creditors. In practice, however, this rarely occurs. Where
a debt instrument is not, by law, subject to the provisions of the Swiss Code of Obligations, the rules
governing the form of collective representation are therefore essentially contractual and market driven.
Upon issuance of a debt instrument which is subject to the provisions of the Swis's Code
of Obligations, the holders of each specific issue of debt instruments constitute a "communaute des
creanciers", or group, which can have one or more representatives, although it is unusual to designate
several representatives. The representatives may be designated by the issuer in the debt instrument
documentation (and therefore accepted by the debt holders when they subscribe the debt instruments),
or elected by the general assembly of the group of debt holders at any time after the debt has been
subscribed.32
Where the representative is designated in the debt instrument documentation, it may, in
the absence of stipulations to the contrary, represent both the debt holders and the issuer. According to
prevailing legal theory, this does not mean that the representative has to safeguard the interests of both
the issuer and the debt holders; it merely means that the representative cannot be unilaterally
dismissed by the general assembly of debt holders and that its powers cannot be changed without the
consent of the issuer.
The market practice for issuers domiciled outside Switzerland (who are not subject, by
law, to the collective representation provisions of the Swiss Code of Obligations) is for the leadmanaging bank to be designated as the creditors' representative in the debt instrument documentation.

31 The place of issue of a debt instrument is not considered to be relevant to the application of these provisions of the
Swiss Code of Obligations.
32 A court can also, in certain circumstances, appoint a representative, where necessary.

59

Subject to respecting Swiss applicable legislation which may not be modified by
contract, ordre public, bonae mores, or basic personal rights,33 the powers accorded to the
representative may vary for different debt issues. As stated above, where there is a foreign domiciled
issuer, the lead-managing bank usually acts as the creditors' representative and its rights and
obligations to both the issuer and the debt holders are as setout in the debt instrument documentation.
In practice, the representative usually has considerable discretionary powers to exercise on behalf of

the debt holders, including certain special powers not available to a creditors' representative appointed
by law. The special powers typically granted to a creditors' representative where the Swiss Code of
Obligations does not apply might include: the power to accelerate debt repayment upon the occurrence
of an event of default (including the dissolution, sale, merger or reorganisation of the issuer) and the
power to agree with the issuer on minor, fonnal or technical amendments to the terms of the debt
instrument. 34
It would, however, be "unusual" to delegate to the representative more far-reaching
powers, such as agreeing to substantive changes in the terms of the issue, without a resolution of the
general assembly of creditors; "unusual" terms might not be enforced, by Swiss COurts. 35 It is not
common for debt instruments to contain clauses empowering the representative to commence court or
arbitration proceedings.
Debt instruments issued by debtors domiciled outside Switzerland generally do not
contain more than rudimentary procedural rules applicable to the measures or decisions taken by the
representative. Thus, the representative will usually be obliged to allow the issuer a certain amount of
time in which to cure any default, before the representative can call in the debt. Debt instruments,
however, generally contain procedural rules relating to the holding of debt holders' meetings, in
particular, rules for quorum.
Whether and, if so, to what extent, the existence of a representative can restrict or limit
the rights of individual creditors depends on the terms of the debt instrument. Accordingly, it appears
that where the terms of a debt instrument empower a representative to take certain actions upon the
occurrence of an event of default, the implication is that those actions are open to the representative
alone, unless the debt instrument expressly states that debt holders are entitled individually to take
such actions. The market practice, however, is that the representative is not granted, in the debt
instrument, the right to agree, for instance, to a moratorium with the issuer; instead, the general

33 Furthermore, in accordance with Swiss agency law principles, the representative is generalIy obliged to exercise due
care in comprehensively protecting the debt holders' interests.

34 In addition, the representative wilI be responsible for passing onto the debt holders indemnification, received from the
issuer, for any taxes introduced after the debt issue. The representative might also be responsible for verifying whether
any conditions for a change in the debtor are respected, if necessary.
3S The terms contained in any debt instrument will be interpreted in the same way as general business conditions and
therefore a court might refuse to allow the application of "unusual" terms which would operate to the detriment of
investors, including institutional investors.

60

assembly of debt holders may resolve to take this sort of measure, or any other measure "encroaching"
on the individual debt holders' rights and modifying any of the substantive terms of the issue.
In principle the representative's mandate lapses when the debt instrument (including all

interest) is repaid. Although debt instruments usually do not contain any provision allowing for the
termination of the representative's mandate, it appears likely that the

g~neral

assembly of debt holders

could resolve to terminate the representative's mandate, provided the issuer consented, because the
representative's mandate is based on a contract among the debt holders and the debt issuer. Similarly,
the general assembly of debt holders could probably, if necessary, appoint a replacement
representative, with the consent of the issuer.36
Swiss law is chosen as the governing law of the vast majority of Swiss franc bonds
issued in Switzerland by foreign issuers, principally because the rules governing the listing of
securities on Swiss stock exchanges only permit the selection of a foreign law as the governing law of
a debt instrument in "exceptional cases".37 Furthermore, the courts at the domicile of the leadmanaging bank are usually given non-exclusive jurisdiction over any disputes. 38 In contrast, nonSwiss franc denominated Eurocurrency bonds offered in Switzerland are usually issued and traded
outside Switzerland and governed by a law other than Swiss law.

10.

UK
English statute law does not reqUIre any specific form of collective creditors'

representation to be used in connection with debt instruments. However, in various debt offerings
governed by English law, the debt issuer and debt holders frequently agree upon some sort of formal
collective representation, notably the use of trustees or agents, as described below.
Holders of debt instruments (regardless of whether they provide for trustees or agents)
frequently resort to informal or ad hoc arrangements for collective representation as and when
problems arise with performance of obligations under the debt instruments. 39 Thus, bond
documentation may provide for collective decisions to be made by bond holders' assemblies. In the
event of a default by the issuer, the bond holders' assembly typically has the power to appoint a
representative with wide powers, including negotiating on behalf of the debt holders. The debt
holders' assembly can usually delegate to this representative any powers which the assembly could

36 Pending appointment of any replacement representative, individual debt holders c~uld probably petition the
appropriate courts in order to obtain an order for performance of any contractual right which would normally have
been exercised by the representative.

37 The Admission Board for Swiss Stock Exchanges allows exceptions for foreign sovereign issuers, provided, inter alia,
that the securities are deemed marketable from the Swiss perspective and the issuer waives its rights of sovereign
immunity from jurisdiction and enforcement.
38 Debt instrument terms often permit the debt holders to have recourse to the courts of the issuer's country of origin.

39 This solution is typically used also when problems arise with short-term instruments (which usually do not contain
provisions for collective representation) and commercial paper (which does not usually provide for meetings of note
holders, unless it is issued under a medium-term note programme).

61

have exercised by "Extraordinary Resolution" (as described in the debt documentation). Extraordinary
Resolutions by debt holders' assemblies are typically binding on all debt holders. Instruments such as
Brady bonds, which do not provide for debt holders' assemblies, do not permit any bond holders'
rights to be altered without their consent.40

a)

Trustees
Where a trustee is used, the debt offering is structured around the trustee and the bonds

(or other debt instruments) are constituted pursuant to a trust deed entered into between the trustee and
the debt issuer. The trustee is to function from the date of execution of the trust deed, which provides
that there must be one or more trustees during the life of the issue. Pursuant to the trust deed, the
issuer covenants with the trustee that it will comply with its obligations in respect of the bonds and
the trustee holds the benefit of this and the other covenants on trust (i.e. as a fiduciary) for the debt
holders: the trustee is legally an agent of the debt holders. The trust deed is binding on the debt
holders. The legal source for any arrangement using a trustee is contractual.
Trustees, if any, are standing permanent representatives appointed on signature of the
trust deed and are usually selected by the issuer. UK market participants stressed the caution exercised
in the appointment, such that trustees are usually selected from only among approximately half a
dozen recognised specialists (e.g. trust corporations or financial institutions) active in a particular
bond market. Furthermore, since the appointment of trustees is consensual, in that the debt holders
agree to accept the trustee selected by the issuer, it usually cannot be challenged by the debt-holders.
The involvement ofa trustee is usually extinguished upon repayment of the issue.
Where a debt offering makes provision for a trustee, the precise powers and obligations
of the trustee vary depending upon the terms agreed upon and contained in the relevant bond issue
documentation. However, the trustee typically has certain powers to act on behalf of the debt-holders.
Furthermore, the debt-holders are typically restrained from taking certain courses of action
independently of the trustee. Thus, for instance, upon an event of default, typically only the trustee is
able to exercise the debt holders' rights of acceleration. Typically, the trustee can do so at its
discretion, but will usually be obliged to accelerate if instructed to do so by one or more bond holders
representing a specified percentage (typically 20%) of the principal value of the outstanding debt
issue. 41 An individual debt holder holding less than that specified percentage does not usually have
any right to accelerate a claim where the debt has been issued with a trustee. However, a debt holder
would be permitted to accelerate the amount outstanding in respect of the debt it is holding if he can

40 Powers conferred upon a representative by a debt holders' assembly typically end by decision of the debt holders'

assembly.
41 The use of a trustee in connection with a debt issue will usually restrict the rights of individual bond holder to

accelerate their claims. if any: a bond holder will usually have no right to accelerate unless he or she can prove that
the trustee has been requested to accelerate by the required percentage of bond holders and has not done so.

62

prove that the trustee has omitted to accelerate upon instructions from the requisite percentage of debt
holders.
Rather than accelerate against a sovereign debt issuer, a trustee is often more likely to
exercise its right to call a meeting of debt holders before any possibility of a default becomes an issue.
Thus the trustee would pass responsibility for dealing with the act of default onto the debt holders,
who would get advance warning of problems before a crisis emerged. Furthermore the issuer might be
able to avoid a disorderly default.
Similarly, the trustee's intervention might be needed if an amendment or waiver is sought
by the debt issuer, or the trustee may have to enforce a collateralised debt, provided any predetermined majority of debt holders required the trustee to take action.
Even where a debt instrument has been issued with a trustee, in the event of a default by
the debt issuer, debt holders will sometimes appoint a representative, with more powers than the
trustee, to negotiate on their behalf with the issuer. Thus, a debt holders' meeting may appoint a
representative by passing an "Extraordinary Resolution" on a "Reserved Matter". This representative
(or committee of representatives) can have any powers delegated

t~

it which the debt holders

themselves could exercise by Extraordinary Resolution.

b)

Fiscal agents
Most Eurobonds are either governed by English law or by US law. Whereas US

Eurobond issues tend almost exclusively to use fiscal agents, UK Eurobonds are fairly evenly divided
between using either a trustee or a fiscal agent. 42
Fiscal agents, if any, are usually designated in fiscal agency agreement and selected by
the issuer. UK market participants stressed the caution exercised in the appointment such that (as with
trustees) names of fiscal agents are selected from among approximately half a dozen recognised
specialists. The fiscal agent has an administrative role in respect of the debt instrument and is legally
an agent of the issuer, with no or limited responsibility to the debt holders. However, the fiscal agent's
position at the centre of the debt holder's group can mean that fiscal agents find themselves playing a
role in co-ordinating action in any crisis.
Where a debt instrument has been issued with a fiscal agent and a crisis develops, the
debt holders might decide to appoint a "representative" or "committee of representatives" in much the
same way as a representative might be appointed to supplement the powers of a trustee. If a
representative is appointed, it might be the original lead manager or alternatively one of the larger
bond holders. 43 The process of acceleration seems to be less orderly in the case of debt issued with a

42 There is never a statutory obligation to use a fiscal agent.
43 It is difficult to appoint the fiscal agent as the representative without creating a conflict of interest as the fiscal agent

is an agent of the debt issuer.

63

fiscal agent. An individual debt holder may be permitted to accelerate its own debt and, subject to the
tenns of the issue documentation, could be able to accelerate the entire debt.
The involvement of a fiscal agent is extinguished with the repayment of the debt,
although the fiscal agent may still have some residual responsibilities, for instance where bearer
coupons have not been honoured. In practice, although a fiscal agency agreement usually provides for
the replacement of a fiscal agent during the life of the issue, this occurs only rarely.

c)

Facility agents

Most syndicated loans governed by English law call for a "facility agent" to represent
syndicate members for the duration of the loan.
The facility agent is a permanent representative, chosen by the borrower initially and
named in a facility agreement. The facility agent has a chiefly administrative role (e.g. it is the conduit
for payments and notices), but is an agent of the members of the syndicate rather than of the borrower.
Facility agents may have some discretion to act on behalf of the syndicate members on certain minor
issues and also a discretion to accelerate or to enforce repayment of a loan in the event of a default,
but rarely exercise these powers: most decisions on matters such as acceleration are usually taken by a
specified majority vote among the syndicate members (usually 66% or 75%). Syndicate members are
usually allowed independently to enforce their debt, when due and owing.
When problems arise, syndicates often set up on an ad hoc basis "advisory committees"
or "steering committees" which have similar functions to the debt holders' representatives described
above in connection with trustees. The steering committees have limited authority to act on behalf of
the syndicate during the period of default and may attempt to negotiate a rescheduling or compromise
with the borrower on behalf of the syndicate. Steering committees of banks have in the past had
considerable freedom of action and significant, although informal, powers to make decisions on behalf
of the rest of the syndicate.
Syndicated loan agreements in which financing is provided to sovereigns in emerging
markets tend not to provide for collective action by creditors. Each creditor can therefore
independently accelerate its own claims upon the occurrence of an event of default and can then sue
once payment is due and owing. Furthermore, no creditors can have their rights changed without their
express consent.

11.

US
Under US law, there are three main fonns of collective "representation" of debt holders:

trustees, fiscal agents and syndicate agents, all three of which are discussed separately below.

However, when a crisis arises, creditors often resort to various informal or ad hoc fonns of collective
representation, regardless of whether any fonnal collective representation is already in place. 44

a)

Trustees
Under the TIA, independent trustees with specific rights and duties must be appointed to

serve as debt holders' representatives in connection with certain debt offerings in the US market which
are subject to the registration requirements of the US Securities and Exchange Commission ("SEC").
These debt instruments generally include bonds, debentures and notes of foreign private issuers.45
However, bonds of (or guaranteed by) foreign official issuers, as well as bonds issued in private
placements or offshore (including bonds of foreign private issuers) even though governed by US law,
are exempt from the application of the TIA; although exempt, these bonds may also be issued with a
trustee.
Bonds issued with a trustee are issued under a contract known as an indenture, between
the debt issuer and the trustee, which sets out the terms under which, the trustee is to operate and
function. A trustee used in connection with a US issued debt instrument is therefore a pennanent
representative which is named in the transaction documents and is to function immediately from
signature of the transaction documents in accordance with the tenns of the indenture. The TIA sets out
certain criteria which apply to the identity of the trustee, including that there must always be one or
more trustees, at least one of which is an entity organised and doing business under the laws of the
United States, or a state of the United States or which is specifically authorised to act as a trustee by
the SEC.46
A trustee represents 47 the holders of the debt instruments issued under an indenture,
which may include bonds issued in more than one series. The trustee owes various duties, including
fiduciary duties, to the holders of the debt instruments covered by the indenture. When a trustee is
appointed as a result of the TIA, the TIA imposes certain mandatory powers and duties upon the
trustee. 48 Where the trustee is not appointed as a result of the TIA, the powers and duties ofthe trustee
will reflect the agreement negotiated by the parties, or the market practice and no terms will be
implied by operation of the TIA.49 This said, debt instrument provisions concerning bond holders'

44

Bankruptcy is not considered for present purposes.

45 The TIA applies to every note, bond, debenture, or evidence of indebtedness issued in the United States, whether or
not secured, which does not fall within a specific exemption.

46 The institutional trustee must have a combined capital and surplus in excess of US$ 150,000. No obligor upon the
indenture securities, nor any person controlling or controlled by the obligor is permitted to act as trustee.

47 The trustee's powers to "represent" the bond holders are limited.
48 The TIA also imposes certain duties upon the obligor.
49 In these circumstances, bondholder rights and collective representation arrangements are determined exclusively by
market practice and contract.

65

collective representation tend to follow a pattern, even where the TIA does not apply and there is
consequently no obligation to appoint a trustee.
The trustee is generally responsible for disseminating infonnation to the debt holders.
Thus, at least every 12 months, a trustee appointed under the TIA must provide the debt holders with
any infonnation it has regarding the following matters: 50
(a) any change in its eligibility to be trustee;

(b) the amount, interest rate and maturity date of all indebtedness owed to it, in its individual
capacity, by the obligor;
(c) any change in the property and funds physically in its possession as trustee;
(d) any change to any property subject to the lien of the indenture;
(e) any additional issue of indenture securities which it has not previously reported;

(f) any action taken by it in the performance of its duties under the indenture which it has
not previously reported and which materially affects the indenture securities or the trust
estate.

In addition, the trustee must, within 90 days, transmit to the debt holders a brief report with respect
10: 51

(a) the release of property subject to the lien of the indenture; or

(b) the character and amount of any advances made by it since the date of the last report
where the trustee itself claims a lien or charge, if such advances remaining unpaid at any
time aggregate to more than 10% of the principal amount of the indenture securities
outstanding.
Regardless of whether there is a trustee (either as a result of the TIA or otherwise), it is
the market practice in the United States for creditors to communicate on an infonnal and ad hoc basis
if the obligor encounters payment difficulties. In the event of a default, the trustee under an indenture
governed by the TIA must give notice of the default to the debt holders within 90 days. 52 The trustee
may also take certain actions upon the occurrence of an event of default: the trustee can accelerate
debt repayment in certain circumstances. 53 Furthermore, if a payment of principal or interest is
SO Furthermore, under the TIA, the trustee is obliged to keep a list of the holders of debt. Three or more holders of the
debt may request the trustee to supply them with a copy of this list so that they can communicate with the other
holders and discuss their rights under the indenture. If the trustee refuses to make the list available, which it may do if
it believes that disclosure "would be contrary to the best interests of the indenture security holders or would be a
violation of applicable law", the holders may request an order from the SEC to compel the trustee to allow access to
the list.
51 The trustee's reports must also be filed with the

SEC and the stock exchange on which the indenture securities are

listed.
52

However, if there has been a default in the payment of interest, principal or a sinking fund instalment, the trustee is
protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust
committee of directors and/or responsible officers, or the trustee in good faith determine that withholding of such
notice is in the interests of the indenture security holders.

53 Typically, either the trustee, or the holders of a fixed percentage of the debt (perhaps 25%), may accelerate, although

indentures generally provide that acceleration can be rescinded by a majority of debt holders.

overdue, the TIA provides that the trustee may, in its own name, sue the issuer for the whole amount
of the principal or interest remaining unpaid; a trustee will usually also have this right even where the
TIA does not apply.
Even though the trustee is entitled to sue on behalf of the debt holders, the holders of a
majority of the debt will usually direct the trustee as to the time, method and place for conducting any
proceeding for obtaining any remedy. Furthermore, in practice, a trustee is likely to consult individual
debt holders before taking any action, as it can shield itself from potential liability to the debt holders
for its actions or inactions by acting with the approval of at least 50% of the debt holders.
The existence of a trustee does little to restrict or limit the rights of individual debt
holders: the right ofindividual debt holders to sue for overdue principal or interest is nearly absolute 54
and, under the TlA, the consent of each debt holder must be obtained in order to allow the trustee to
alter the rights of that holder to receive principal and interest in the amounts originally agreed upon on
the stated due date. 55 This consent is almost always needed in practice for all debt instruments
governed by US law, even when the TIA does not apply. As a result, the trustee cannot, without the
consent of each affected holder, agree to a standstill or rescheduling, as ~his would result in payments
of interest or principal being made at times or in amounts other than those originally agreed.
Furthermore, a trustee cannot waive or amend significant indenture covenants, including negative
pledge clauses, without obtaining the consent of at least a majority of the debt holders by value. S6
Few formal, procedural rules apply to the actions of a trustee, whether appointed under
the TlA or otherwise. Generally, the trustee will seek guidance from the majority of debt holders on
any significant procedural matters, as it would arguably be imprudent for the trustee not to follow the
wishes of the debt holders which the trustee purports to represent. 57
There is generally no possibility of appealing against decisions taken by the trustee, even
though indenture contracts often provide that a stated percentage of the debt holders may rescind a
trustee's decision to accelerate. In addition, decisions taken by a majority of the debt holders can
reverse or effectively dictate the actions to be taken by a trustee, as the trustee can shield itself from
potential liability to the other debt holders if it acts in accordance with the majority, by principal
amount, of the holders.
A trustee appointed under the TIA may be disqualified from function if it has, or
acquires, a conflicting interest and does not either resign or eliminate the conflicting interest within
90 days. Any debt holder who has been a bona fide holder of debt instruments issued under an

54 There are some statutory exceptions.
55 The fact that a trustee is able to sue on behalf of the other holders may influence an individual debt holder's decision

over whether to sue, even though each individual holder retains its right to sue.
S6 The power of a trustee to act on behalf of bond holders outside of the United States is not subject to any specific limit,

except as might arise under any applicable non-US law.
57

The TIA generally allows the holders of at least a majority by principal amount of the debt to direct the actions of the
trustee. Furthermore, the trustee may be required to take certain actions upon the direction of a specified percentage of
bond holders by amount.

67

indenture for at least six months may, on behalf of himself and all other similarly situated debt
holders, petition any court of competent jurisdiction for the removal of the trustee and the
appointment of a successor, unless the trustee's duty to resign has been stayed. Furthennore,
indentures generally provide that the holders of a majority in principal amount of the outstanding debt
issued under an indenture may replace the trustee.

b)

Fiscal agents
When a trustee is not required by the TIA, debt instruments, including bonds, debentures

and notes issued or guaranteed by foreign sovereigns and other official entities, which are offered in
the US market, are often issued with a fiscal agent. 58
There is never a statutory requirement to use a fiscal agent. The decision to use a fiscal
agent, as opposed to a trustee (in situations where there is no statutory requirement to use a trustee), is
largely driven by convenience, cost and marketing factors. 59
Fiscal agents are usually standing or permanent representatives selected by the borrower
and named in a fiscal agency agreement entered into between the debt issuer and the fiscal agent,
which also usually sets out the powers and duties of the fiscal agent. Fiscal agency agreements
sometimes also contain provisions requiring notice to bond holders and providing for bond holders'
meetings which may facilitate collective decision making by bond holders. The fiscal agent is
typically a commercial bank, trust company or an affiliate thereof (although there is no formal
requirement in this regard) and will usually have to meet minimum size requirements in terms of its
capital and surplus. As the issuer usually appoints the fiscal agent, it is generally also free to remove
the fiscal agent, at any time, with or without cause and to replace it with a new agent of its choice. 6o
The fiscal agent performs limited, administrative, debt-servicing duties on behalf of the
issuer: unlike trustees, fiscal agents do not represent the debt holders, even if they can facilitate co-

S8 This also applies, inter alia, to debt instruments of foreign private issuers offered under an exemption from the

registration and disclosure requirements of the SEC.
S9

Several US practitioners claimed that the choice between a trustee and a fiscal agent makes little practical difference
in workouts of foreign debt governed by US law: trustees have no financial incentive to take independent action and,
as they are potentially liable to debt holders for any breach of their fiduciary duties, they are generally not inclined to
take any substantive decision concerning a bond workout without instruction from a large majority of debt holders.
Consequently, the major debt holders usually need to be at the table, or at least directly consulted, regardless of
whether there is a trustee. There may also be certain market preferences for using a trustee as opposed to a fiscal
agent, even where there is no statutory obligation to use a trustee. Thus, in the case of collateralised bonds, it may be
seen as advantageous to have a trustee hold and deal with the collateral.

60 The fiscal agency agreement sometimes provides that any new fiscal agent must comply with certain eligibility

requirements and also that a stated percentage of the debt holders must not object to the new fiscal agent. Fiscal
agents generally can resign at any time upon giving written notice to the issuer. Otherwise, the functions of a fiscal
agent will normally cease when the fiscal agency agreement expires, which typically will occur when the issuer
discharges the whole debt, or all of the debt is extinguished after exchange for other instruments not covered by the
fiscal agency agreement.

ordination of the debt holders. 61 Thus a fiscal agent receives payments of principal and interest from
the issuer and disperses those payments to the debt holders in the manner specified in the fiscal
agency agreement. When payment of the full principal amount is made, the fiscal agent often has to
cancel, retire or destroy the bonds and to certify to the issuer that it has done so or to request a
depository e.g. Euroclear or Cedel to cancel the instruments. 62
In addition, the fiscal agent generally has various duties for receiving and disseminating

information. For instance, if the issuer is contemplating not making a payment on time, it is generally
obliged to notify the fiscal agent who will in turn have to notify the debt holders. Similarly, the fiscal
agent may be designated to receive notice from a debt holder that an event of default has occurred and
that the debt holder wishes to accelerate; in this situation, the fiscal agent must notify the issuer.
However, the fiscal agent generally has no duty to the debt holders in the event of default, other than
giving notice of the event of default. 63
As the fiscal agent is the agent of the issuer and not of the debt holders, the fiscal agent
has no authority to take any action on behalf of the debt holders upon an event of default by the
issuer. The individual debt holders retain exclusive power to take

acti~n

in response to an event of

default, including suing the issuer. However, in a typical fiscal agency agreement, when a specified
percentage of the debt holders has determined to accelerate, the agent is required to so inform the
issuer and all the other debt holders.
Some fiscal agency agreements contain provisions which require the fiscal agent to
convene a meeting of the debt holders upon being requested to do so by a specified percentage of the
debt holders. When such a meeting has been validly called and a quorum is present, a majority of the
debt holders in attendance can, for instance, resolve to take action to bind the others, except that
changes in the basic economic terms of the debt instruments (including changes in the stated date of
maturity of principal or interest, or accepting a reduction of the principal or interest payments) require
the agreement of all debt holders. 64

61 As fiscal agents do not have a representational role, there is only rarely a challenge or appeal by debt holders against

any action or decision of a fiscal agent. However, the agents can be sued by debt-holders.
62 The fiscal agent is generally required to maintain the sums for making such payments in accounts separate from its
own monies.
63 In addition, the fiscal agent may have duties to maintain records of the outstanding debt instruments and to make these

records available to the issuer as well as also notifying the issuer of any changes in relevant law (especially tax law)
which might be to the detriment of the issuer.
64 This is common for fiscal agency agreements governed by US law which are entered into in connection with Brady

bonds.

69

c)

Syndicate agents
Syndicated bank loans, in favour of foreign private or foreign sovereign borrowers, which

are arranged or syndicated by US banks or offered on the US markets often feature a so-called
"syndicate agent" or "agent bank".65
A syndicate agent is a standing or permanent representative who is usually named in a

syndicate agreement among the debt issuer, the syndicate (of all the creditors under the syndicated
loan) and the syndicate agent itself and will generally have been selected as the result of informal
consultation among members of the syndicate. The syndicate agent will typically be a commercial
bank of at least a minimum size, which is usually specified in the syndicate agreement (as with fiscal
agents) and is often itself a member of the syndicate and therefore a creditor under the syndicated
loan.
Syndicate agents do not represent the syndicate or the holders of the syndicated debt. 66
Syndicate agents perform limited, debt-servicing administrative duties, similar to those performed by
a fiscal agent, in respect of the debt covered by the agreement which appoints them. Thus, among
other things, the syndicate agent receives, from the borrower, funds and documents and disperses or
distributes them to members of the syndicate. 67
A syndicate agent generally does not have an active duty to collect information on behalf

of the syndicate or to provide the syndicate members with any information it receives with respect to
the borrower andlor guarantor, if any, whether any such information comes into its possession before
or after the disbursement of the loan. Nor does the typical syndicate agent have any duty to enquire
into whether the borrower or guarantor has performed any of its obligations under the loan agreement,
guarantee or any other agreement. However, the typical syndicate agent must give prompt notice to
each member of the syndicate as soon as the agent itself receives notice of an event of default.
The typical syndicate agent has no power or obligation to sue in its own name on behalf
of the syndicate members (or to take any other action to protect the syndicate members' interests)
upon the occurrence of an event of default. However, as the syndicate agent is generally one of the
syndicate members, it may carry out, or consent to, any action in its capacity as a syndicate member.
Upon the occurrence of an event of default, each individual syndicate member will normally be
entitled to sue the debtor for any overdue amounts or other breaches of the terms of the loan
agreement, even though it is unlikely to do so without at least consulting other members of the
syndicate.

65 There is never a statutory requirement to use a syndicate agent.
66 Given the duties it has to perform, a typical syndicate agent is held to a low standard of care and will generally be
liable to the syndicate members only for gross negligence or wilful misconduct. Moreover, the syndicate agent is
allowed to rely on any document signed by the proper person and believed by it to be genuine. In the absence of bad
faith, the agent generally has no affmnative duty to make further enquiries about any information it receives.

67 However, unlike a fiscal agent, the syndicate agent performs its duties for the syndicate of lenders and not for the
borrower.

Most syndicate agreements specify that, upon occurrence of an event of default, the
syndicate agent must accelerate a loan, if it is requested to do so by a specified percentage of
syndicate members. However, although the terms of many syndicate agreements restrain individual
syndicate members from accelerating the loan, syndicate members can usually commence a lawsuit
upon any payment default or other event of default, thereby provoking acceleration. Although
commencement of a lawsuit may provoke creditors to accelerate the loan, this is not automatic.
Furthermore, unanimity of the syndicate members is generally required for changing any of the basic
economic terms of the debt, although lesser majorities, typically two-thirds, might be sufficient to
amend or waive other covenants, including negative pledge covenants. 68
The functions of a syndicate agent typically cease when the debt obligations are fully.
discharged by the borrower. A typical syndicate agent can usually be replaced, with or without cause,
by a fixed percentage of the syndicate members (often a majority by principal amount). A syndicate
agent may also resign at any time by giving written notice to the obligor and also to the syndicate
members. Upon either instance, the syndicate members may appoint a successor agent. If they do not
do so within a specified time, the former agent may be entitled to appoin~ a successor agent.

68 Most syndicate agreements do not contain any significant procedural rules specifying the way syndicate agents have to
operate, as agents generally cannot take independent action to alter the terms of the debt or control lawsuits with
respect to the debt, or to amend or waive any of the debt provisions.

71

NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C. • 20220. (202) 622-2960

May 15, 1996

Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data for the month of
April 1996.
As indicated in this table, U.S. reserve assets amounted to $83,710 million at the end
of April 1996, down from $84,212 million in March 1996.

End
of
Month

Total
Reserve
Assets

Gold
Stock 1/

Special
Drawing
RightsYl/

Foreign
Currencies

4/

Reserve
Position
in IMF 2/

1996
March

84,212

11,053

11,049

46,861

15,249

April

83,710

11,052

10,963

46,578

15,117

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.

J./

Includes allocations of SDRs by the IMF plus transactions in SDRs.

4/ Includes holdings of Treasury and Federal Reserve System; beginning November 1978,
these are valued at current market exchange rates or, where appropriate, at such other
rates as may be agreed upon by the parties to the transactions.
For P'1ss releases speechei_..,p.uiZ..f.ic schedules and official biograph it's. call our 24-hour fa.\ line at (202) 622-2040

DEPARTMENT

OF

THE

TREASURY

NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIDNGTON, D.C .• 20220. (202) 622-2960

Contact:

FOR IMMEDIATE RELEASE
May 16, 1996

Jon Murchinson
(202) 622-2960

TREASURY INTENDS TO ISSUE INFLATION-PROTECTION SECURITIES
Secretary Robert E. Rubin announced Thursday that the Treasury Department intends
to issue securities that provide protection against inflation as a multi-year experiment.
Inflation-protection securities are designed to strengthen national savings by offering
Americans an investment that guarantees a return in excess of inflation. These securities will
be available in denominations as low as $1,000 in order to make them available to individuals
saving for retirement, their children's education and other long-term goals. Individuals on
fixed-incomes seeking to protect the real return on their investments, pension funds and
insurance companies are also potential investors in inflation-protection securities. It is
anticipated that all taxpayers will benefit as these securities are expected to reduce Treasury's
financing costs.
The return on the new securities will be linked to inflation in prices or wages and
carry longer term maturities of 10 or 30 years. Treasury is considering using various
measures of inflation including the Consumer Price Index for All Urban Consumers (CPI-U),
the core CPI (CPI-U, excluding food and energy), the Employment Cost Index, which are all
published by the Bureau of Labor Statistics of the Labor Department, and the GDP deflator
published by the Bureau of Economic Analysis of the Commerce Department. Treasury is
also examining several different structures for the new securities. These include securities
that would provide some current income through two different structures and additionally a
zero-coupon inflation-protection security that would eliminate reinvestment risk.
Treasury is seeking comments from all interested parties on a number of the proposed
features .of inflation-protection securities. With this in mind, the Department will hold
meetings with potential investors in Washington, D.C., New York, Boston, Chicago, San
Francisco, London and Tokyo to present the details of the proposed security and gather
comments and suggestions.
Further details can be found in the Advance Notice of Proposed Rulemaking which is
publicly available today and will be published in the Federal Register next week.
-30RR-1071
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

From: TREASURY PUBLIC AFFAIRS

ZZUUU':l

I)

E It \ 10{ T 'I E '\ T

(} F

T II f

6-21-96

2: 39pm

p. 14 of 16

T I~ J.: \ S l i R Y

NEWS
OmaOFPUBUCAFFAIRS -1500 PENNSYLVANlAAVENUE, N.W. -WASHINGTON, D.C.- lotto - (202)6tt-2960

Contact:

FOR IMMEDIATE RELEASE

May 16, 1996

Jon Murchinson
(202) 622-2960

MEDIA ADVISORY

Treasury Secretary Robert E. Rubin will hold a press briefing on the department's
intention to issue inflation-protection bonds today at 11 am at the Treasury Department, MT
4121, 1500 Pennsylvania Avenue, NW.
Cameras may set up between 10 a.m. and 10:30 a.m. Media without Treasury, White
House, State, Defense or Congressional credentials wishing to attend should contact the
Office of Public Affairs at (202) 622-2960, with the following information: name, Social
Security number and date of birth, by 10:30 a.m. This information can be faxed to (202)
622-1999.
-30-

RR-I072

OFFICE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W•• WASIllNGTON, D.C. • 20220 • (202) 622-2960

ADY 11 A.M. EDT
Remarks as prepared for delivery
May 16, 1996

STATEMENT OF TREASURY SECRETARY ROBERT E. RUBIN
INFLATION INDEXED BONDS PRESS CONFERENCE
Helping the economy and raising incomes requires increasing productivity, and the
saving rate is central to that objective. The initiative we are announcing today has the
potential of raising our national saving rate as well as reducing the cost of capital to the
federal government. Today we are announcing our intention to issue securities that will
offer investors protection against inflation. Americans' retirement savings in their
pension plans or their own IRAs can have inflation protection, which can help ensure
their retirement security.
The Treasury Department intends to offer inflation protection bonds as part of
our ongoing program of debt finance. Each year the value of the security will keep pace
with inflation. The minimum denomination we propose is $1,000 -- well within the reach
of many savers. Individuals can buy them from brokers, directly from the Treasury
department through TREASURY DIRECT, and through mutual funds and other
intermediaries. Once the program is established, we expect to add inflation protection
securities to the savings bond program as well.
One type of indexed bond we are considering would work this way: Invest $1,000,
for example, on January 1st, and if inflation is 3 percent over the year, the security will
be valued at $1,030 at the' end of the year. Let's say the interest or coupon rate is also 3
percent. At that point, the security will be paying 3 percent interest on the higher value.
And that will continue on through maturity. We're looking at IO-year or 30-year
maturities. If someone bought a $1,000 10-year security for their child's college
education, and inflation averaged 3 percent, they would receive almost $1,350 back from
the Treasury, and the security would have been paying interest for a decade. If inflation
is less, the payout will be lower, and if inflation is higher, the payout will be higher.
We are also considering two -other structures -- a zero-coupon inflation-protection
bond, and an inflation-protection bond that would include periodic payments of interest
and principal. Further details on these are in the Advanced Notice we are releasing.
RR-I073
(more)
http://www.ustreas.go v
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2

We think the kinds of investors who will be most interested in these securities will
be individual Americans saving for their retirement or for other long term purposes,
including their children's education. In addition, financial institutions such as mutual
funds, insurance companies and pension funds that help individuals save should be
interested in these securities.
We believe these bonds will offer savers value-added in the form of protection
against inflation, plus a real rate of return backed by the full faith and credit of the
United States, and in return for offering that value-added, over time the cost of financing
to the federal government will be lower than it otherwise would be.
Our plans are at an early stage, and I cannot tell you today precisely when the
first quarterly auction could occur. As someone with extensive experience in securities
matters, I know that bringing a new product to market takes time and it doesn't happen
overnight. But I believe that in time this will become a well-used program that
Americans will value as a savings vehicle for retirement, education and other long-term
needs, and as a consequence the markets in these securities will grow in depth and
breadth.
The Treasury Department has through its history focused on the most costeffective ways to finance the federal debt. If you recall, in 1993 Treasury changed the
maturity mix of government securities, something that was initially looked on with some
skepticism, but which since has won considerable praise and is saving the taxpayers $7
billion. And today, we are announcing the intention to issue inflation protected bonds as
a further step in this direction, as well as a step we believe can help promote savings in
the country.
There are a number of decisions which must be made before the first securities
are issued. One of the issues to be resolved is what inflation index to use. At the
moment, the four we are examining most closely are the Consumer Price Index for
Urban areas, the Core CPI and the Employment Cost Index, all calculated by the Bureau
of Labor Statistics at the Labor Department, and the GDP deflator, calculated by the
Bureau of Economic Analys~s at the Commerce Department.
We are asking in the Federal Register for public comments on the proposal. In
addition, we want to go out and talk with investors and dealers who may have an interest
in these securities. Accordingly, we plan to hold a series of investor meetings in
Washington, New York, Chicago, Boston, San Francisco, Tokyo and London this month
and next to gather investor comments.
This is a common sense approach to government and an excellent example of
government reinvention -- protecting Americans from inflation with an innovative
investment method, and saving them money as taxpayers by holding down borrowing
costs.
Thank you.
-30-

QUESTIONS AND ANSWERS
ON HARXETABLE INFLATION-PROTECTIOB SECURITIES

Hay 16, 1996

General Information
Q:
Why does the Treasury intend to issue inflation-protection
securities?

A:
The Treasury intends to issue inflation-protection
securities in order to save on interest costs and to expand the
menu of financial assets available to investors in u.s. financial
markets. The Treasury believes that it would lower the burden of
servicing the federal debt by offering investors a security that
will not lose value because of inflation. The new security
should result in a broader market for Treasury securities and
eliminate the need for Treasury to pay investors for assuming
inflation risk.
For example, Treasury believes individuals saving for
retirement and other long-term goals, like college for their
children, could benefit from investing in these securities.
Other investors who may find inflation-protection securities
filling an investment need include pension plans and insurance
companies that offer annuities. In short, the Treasury expects
that inflation-protection securities would benefit both
taxpayers, by lowering government financing costs, and financial
markets generally, by providing investors a useful financial
instrument that has not previously been available. Treasury is
seeking comment from all interested parties on a number of
proposed features of inflation-protection securities.
Q:
Why is the Treasury asking for comments concerning
inflation-protection securities?
A:
The Treasury believes that inflation-protection securities
hold a lot of promise as a cost-effective way to borrow.
Nevertheless, we realize that this type of security is very
different from any other security the Treasury issues.
Consequently, we are specifically asking for comments from market
makers, potential investors, and other interested persons on the
choice of index, the structure of the security, auction
technique, offering sizes, and maturities. This is a prudent way
to proceed before issuing a completely new security.
Accordingly, we have delivered to the Federal Register an
Advance Notice of Proposed Rulemaking on inflation-protection
securities, which will be published in a few days and is now
publicly available. In this notice,_ the Treasury asks commenters
for advice both on general and highly technical issues concerning
inflation-protection securities.

2
In addition, the Treasury is also planning to hold a series
of investor meetings in New York, Washinqton, D.C., Chicago,
Boston, San Francisco, London, and Tokyo on inflation-protection
securities in late May and in June. For information about
attending these meetings, please contact the Office of Financing,
Bureau of the Public Debt, at 202-219-3350.

other Benefits
Are there other possible benefits to issuing inflationprotection securities?
Q:

A:
Yes. Inflation-protection securities reduce the sensitivity
of the budget to changes in real interest rates by enabling the
Treasury to lock in its real financing costs for a relatively
long time. Also, the prices at which inflation-protection
securities trade in the market may provide information concerning
real interest rates and inflationary expectations which monetary
policy officials at the Federal Reserve and others would find
useful.

Potential Xnvestors
Who does the Treasury anticipate would buy inflationprotection securities?

Q:

A:
We believe that inflation-protection securities would appeal
initially to investors saving for retirement in tax-deferred
retirement accounts and to entities such as pension funds whose
liabilities are sensitive to inflation. Once the market becomes
established, other institutional investors, such as insurance
companies, might become potential investors if they begin to
market new inflation-linked products, such as an inflationindexed annuity.
The design of the security and the specific index chosen may
affect which potential investors find the security most useful in
their portfolios. The Treasury is asking for comment on the
choice of index and structure of the security in its Advance
Notice of Proposed Rulemaking.
Q:
What advantages do inflation-protection securities present
to the average investor?

A:
For the average investor saving for retirement, inflationprotection securities would present them with the opportunity to
invest in an obligation backed by the full faith and credit of

3

the united states Government that guaranteed a return in excess
of inflation. We believe that this would be quite attractive.
Why is the Treasury targeting pension and retirement
savings?

Q:

A:
The Treasury believes that the large growth of pension funds
and other retirement accounts is a potential source of funding
that Treasury should tap. In addition, the large growth in both
absolute and relative terms of self-directed retirement accounts,
such as IRAs and 401(k)'s, provides a potentially large pool of
funds that might invest in these new securities. Individuals
saving for their retirement would have available to them for the
first time a conservative investment that guarantees them a
return above the inflation rate. Also, the Treasury believes
that providing an attractive vehicle for retirement savings may
encourage Americans to save more for their retirement and help
increase the Nation's savings rate.
Does the Treasury intend to offer inflation-protection
securities to small investors?

Q:

A:
Yes. The Treasury plans to offer inflation-protection
securities with a minimum denomination of $1000 (value of
principal at issuance) and to make them available through
TREASURY DIRECT for investors who want to have a direct account
with the Treasury.

structure of Inflation-Protection securities
Are there other countries which have successfully offered
securities linked to inflation?

Q:

A:
Yes. The most notable examples are the United Kingdom and
Canada. The U.K. has successfully offered marketable IndexLinked gilts since 1981, and last year the market value of these
securities comprised approximately 15 percent of the total market
value of outstanding gilts. The U.K. has saved money by issuing
these securities, since the actual rate of inflation has been
lower than the difference between the yields on conventional and
Index-Linked gilts. Canada began issuing marketable Real Return
Bonds in 1991, and currently, the difference between the yields
on their conventional and real return bonds is significantly
higher than the current inflation rate.
How would the coupon payments and adjustment to principal be
calculated for inflation-protection securities?

Q:

A:
Under one of the structures we are considering, the
principal amount of the inflation-protection security would be

4

adjusted for inflation, so that the adjusted value remains the
same in constant dollars. For example, if the price or wage
index to which the security is linked increases by 3 percent a
year after the issue date, the principal amount of the security
also increases by 3 percent. The interest paid on the security
is a fixed percentage of the current value of the principal.
Q:

Have any other countries issued a bond with this structure?

A:
Yes. The specific structure outlined in the answer to the
previous question and described in more detail in the Treasury's
Advance Notice of Proposed Rulemaking is based on the Real Return
Bonds issued by Canada. The Canadian bonds are in turn a
modification of the Index-Linked gilts issued by the united
Kingdom.
Q:
Is the Treasury considering other structures for inflationprotection securities in addition to the Canadian model?

A:
Yes. We are specifically asking in the Advance Notice of
Proposed Rulemaking for interested parties to comment on two
alternative structures.
One structure is a zero-coupon inflation-protection
security. The Treasury would only make one payment on this type
of security, which would be at maturity. This type of security
might appeal to investors who need funds at a specific time in
the future but do not need current income. For these investors,
a zero-coupon inflation-protection security would avoid the need
to reinvest coupon payments during the interim.
The second structure for which the Treasury is asking for
comment is designed for investors desiring current income. Under
this structure, the Treasury would make periodic payments of
principal and interest, similar to payments on a mortgage.
Ignoring lags in the indexation, each periodic payment would have
the same value when adjusted for inflation, though the
proportions of each payment representing principal and interest
would change. Potential investors in this type of security would
include those with a need for current income from their
investments.

Measuring Znflation
Q:

How would inflation be measured?

A:
The Treasury is asking for comments on the most appropriate
price or wage index for the new securities. The Treasury is
specifically asking for comments concerning the Consumer Price
Index, the core CPI (which excludes food and energy prices), the

5

Employment Cost Index, and the GOP deflator. After careful
consideration of all the comments, the Treasury will decide what
price or wage index would be the most appropriate to use for
measuring inflation for inflation-protection securities.
Q:
Will the recently announced changes in calculating the CPI
make the Treasury more likely to link the securities to an
alternative index?

A:
The Treasury has not decided ~at index to use and is asking
for comment from the public on this. The CPI is a possibility.
The recent changes that become effective this summer were made to
correct a technical problem known as "formula bias." These
changes make the CPI a better index and thus do not lessen the
possibility that we may decide to link the new securities to it.
If Treasury chooses the CPI index for inflation-protection
securities, would it be overpaying investors, since many
economists believe that the CPI overstates inflation?

Q:

A:
No. We do not believe that this would result in the federal
government giving investors too good a deal. Even if the CPI
overstates inflation, the total interest costs on this security
would not be too high. The reason is that the market would take
into account the extent to which it is perceived that the CPI
overstates inflation in its pricing of the securities and
competition in the market for "the securities would ensure that
the return on the securities would be at an appropriate level.
Q:

What if price or wage inflation goes through the roof?

A:
If price or wage inflation is very high for one year, or
over a longer period, then investors would have the inflation
protection they were seeking. The real value of their investment
would have been maintained. The federal government would not be
substantially more exposed to inflation than it already is. (The
large amount of debt that needs to be refinanced each year means
that a rise in interest rates, which happens when inflation
increases, is reflected in the Treasury's financing costs very
quickly.)
Q:

What if price or wage inflation is negative?

A:
There is a possibility that the federal government could
report deflation in prices or wages for anyone month, or even
over a longer period. In such an economic environment, the
nominal return on these securities would decrease, but then all
interest rates would be lower. Moreover, if the sum of all the
interest payments and the inflation-adjusted principal value at
maturity of the inflation-protection security is less than the
par value of the note or bond at issuance, the Treasury would
make "an additional payment at maturity for the difference. We do

6

not expect that such a prolonged decline will occur that this
minimum guarantee becomes meaningful.

Changes to the Inflation Index
Q:
What happens if the federal agency responsible for issuing
the price or wage index changes its methodology for calculating
the index?

A:
From time to time, federal agencies responsible for
calculating the various price and wage statistics revise their
methodologies in order to improve the accuracy of the indices.
If the revision is made on a forward-going basis and does not
affect previously published statistics, the Treasury would use
the modified series for future calculations of principal value
and interest payments. If the revisions are made on a backwardlooking basis, then the Treasury does not intend to use a revised
historical series to change its previous calculations of
principal value or interest payments. Finally, in the event that
the price or wage series is rebased, the Treasury would continue
using the price or wage index series with the base year that was
used when the security was first issued, as long as that series
is still published. The reason for this is to maintain precision
in the indexation of the security that may otherwise be lost due
to rounding.
Q:
What if the price or wage index used for inflationprotection securities is discontinued?

A:
If the inflation index for an inflation-protection security
is discontinued while that security is outstanding, the Treasury
would consult with the federal agency which publishes the index
in order for Treasury to select an appropriate substitute price
or wage index and methodology for linking the two series.
Determinations of the Secretary in this regard would be final.
There are no plans to discontinue the indices currently under
consideration.
.
Q:
What if the Federal Government starts to publish a new price
or wage index that is more accurate or appropriate for inflationprotection securities?

A:
The Treasury expects that it would use the new price or wage
series for indexing new inflation-protection securities.
outstanding securities would remain indexed to the original price
or wage series.
Q:
What happens if the federal agency responsible for the price
or wage index is late in reporting the index for a given month?

7

A:
If the price or wage index number for a particular month is
not reported by the time that it is needed for determining
accrued interest, the Treasury Department would announce by the
end of the next business day an index number based on the last
available twelve-month change in that index. This number would
be used for all subsequent calculations and would not be replaced
by the actual price or wage index number when it is reported.
The Department believes that this calculation would rarely, if
ever, be necessary.
Q:
Why is it necessary for there to be a lag in the indexation
of the security?
A:
For an inflation-protection security modeled after the
Canadian Real Return Bonds, the Treasury would choose a lag that
is sufficient f·or the market to determine accrued interest on the
security on a daily basis. For dates different from the ones for
which a reported index number becomes effective, this requires
that two index numbers be known so that a linear interpolation
can be made between the two most recently published index
numbers.

Amount of Issuance
Q:
What size of offerings is the Treasury considering at the
initial auctions of inflation-protection securities?
A:
Because this is a new product, the Treasury plans to
proceed cautiously, with initial offerings significantly smaller
than the current sizes of Treasury auctions of conventional
Treasury securities. We are specifically asking for comment on
this subject in the Advance Notice of Proposed Rulemaking.

Maturities Offered
Q:
What maturities does the Treasury intend to offer and what
would be the size of the initial auction of inflation-protection
securities?
A:
The Treasury is considering issuing either lO-year
inflation-protection notes or 30-year inflation-protection bonds.
The Department will consider carefu·lly- market comments on the
appropriate maturities and sizes of the auctions for inflationprotection securities.

8

Method of Sale
Q:

How would inflation-protection securities be sold?

A:
The Treasury would auction inflation-protection securities
on a regular quarterly schedule, with both competitive and
noncompetitive bidding.
Q:

How would the auctions work?"

A:
The Department is considering offering the inflationprotection notes or bonds through a single-price auction each
quarter. (Multiple-price auctions are also a possibility.)
options include two types of single-price auctions where the
Treasury asks for bids in terms of real yield to three decimal
places. Noncompetitive bids would be accepted up to $5 million.
Further details are available in the Advance Notice of Proposed
Rulemaking on inflation-protection securities.

Reopenings
Q:
Does Treasury plan to reopen an issue of inflationprotection notes or bonds?

A:
The Treasury might reopen an issue of inflation-protection
securities. However, the flexibility to do this under changing
market conditions is conditioned by tax issues involving the
original issue discount rules, as is true for other Treasury
securities.
Q:
If Treasury decides to reopen an issue of inflationprotection securities, how would the Treasury reopening proceed?

A:
A reopening would also be accomplished by an auction. For a
canadian-type security, investors would be asked to bid in
mul~iples of $1000 of the original, unadjusted principal value.
Treasury would announce the appropriate index ratio by the date
of auction, so that investors could make their own calculations
to derive the nominal, or current, principal value.

Savings Bonds
Q:
Is the Treasury considering offering inflation-protection
savings bonds?

A:
Yes. The Treasury is considering issuing a new series of
U.S. savings bonds that provides individual investors protection

9

against inflation after a market for inflation-protection
securities is established and market prices are readily
available.

Tax Issues
How would marketable inflation-protection securities be
taxed?

Q:

A:
Many potential investors, such as pension plans, individual
retirement accounts (IRAs), and 401(k) plans, do not pay tax on
current investment income. For a security structured similarly
to the U.K. and Canadian inflation-indexed bonds, other investors
would have to include in taxable income both the principal
appreciation due to the inflation adjustment and the interest
payments accrued or paid during the tax year. Both the
appreciation of principal and the interest payments would be
treated as interest income. The precise tax treatment in the
event the principal decreases because of a decline in the
applicable price or wage index has yet to be determined. Other
tax details would be announced before the first issue.

Book-Entry System
Would inflation-protection securities be available on the
commercial book-entry system operated by the Federal Reserve
Banks as the Treasury's fiscal agents?
Q:

A:
Yes. The inflation-protection securities would be offered
only in book-entry form, either through the commercial book-entry
system (TRADES) or through TREASURY DIRECT. For a canadian-type
security, the minimum to hold and transfer would be $1000 of
original par value; larger amounts would have to be in multiples
of $1000.

STRIPS
Would Treasury allow inflation-protection notes or bonds to
be stripped through the Treasury STRIPS program?

Q:

A:
For a Canadian-type inflation protection security, the
Treasury would make the inflation-protection securities eligible
for stripping on the commercial book-entry system sometime after
the program of issuing these securities was initiated. Stripping
on the commercial book-entry system would not be possible
initially, for operational reasons. Eligibility for stripping

10

might be limited to inflation-protection securities issued after
a future effective date.

IDf~atioD-ProtectioD

Securities and the Debt Liait

How would inflation-protection securities be treated for the
cal'culation of the debt limit?

Q:

A:
For canadian-type inflation-protection securities, at the
beginning of every month, Treasury would adjust its calculations
.for the total debt subject to limit to reflect the appreciation
of the principal value of inflation-protection securities due to
changes in the applicable price or wage index.

SELECTZON OF QUOTES BY GOVERNMENT OFFZCZALS, ACAD~C
AND PRZVATE SECTOR BCONOMZSTS
ON ZNDEXZNG TREASURY SECURZTZES TO ZHPLATZOB

Excerpt from the "Report to the Secretary of the Treasury" from
the Treasury Borrowing Advisory committee of the Public
Securities Association, May 3, 1995
"The committee recognized that there are conceptually sound
reasons for believing that the issuance of inflation-indexed debt
could lower the cost of borrowing over the longer term. Academic
research often cites the existence of some inflation risk premium
in the yields on conventional debt that the Treasury might
capture through the issuance of inflation-indexed debt. By
issuing both conventional and inflation-indexed securities, the
Treasury might be able to segment to its advantage the market for
its debt."
"The recent and prospective SUbstantial growth in selfdirected retirement plans, which to date have evidenced a strong
preference for safe, conservative investments, may offer the
potential of significant demand for inflation-indexed securities,
either in marketable or savings bond forms."
"Defined benefit pension plans might also be a source of
demand for inflation-indexed securities. An asset class with an
assured real return together, in all likelihood, with low
correlations with other standard asset classes is virtually
certain to permit attainment of a higher level of 'portfolio
optimality' and hence be an attractive investment to defined
benefit plans."
Excerpt from May 7, 1995 New York Times Cp-Ed Piece by James H.
Smalhout of the Hudson Institute
"Indexed bonds deserve a place in America's diversified
retirement saving. They could benefit millions of people who
otherwise would be left to rely on unduly risky investments to
keep up with inflation in their old age."
"Monetarists, like Milton Friedman, favor indexed bonds
because they remove the ability of the Government -- the only
borrower that can control the rate-af inflation -- to repudiate
its debts by inflating. And Keynesians, like James Tobin,
believe that indexed bonds are much more like real goods than

2

money. By trading indexed bonds, the Fed would have greater
power to regulate the pace of the economy."
Excerpt from statement by Alan Greenspan before the Commerce.
Consumer. and Monetary Affairs Subcommittee of the House
Committee on Government Operations. June 16. 1992
"The yields on bonds that protect purchasing power could be
considered measures of 'real' rates •••• For my own part, I am
attracted by the prospect of opening a-window on the market's
view of the path for inflation that potentially could provide
readings of price pressures being built into wages and of real
interest rates influencing spending decisions."
"A timely and accurate reading on inflation expectations
could considerably aid in economic forecasting by casting some
light on incipient wage and cost pressures and by helping to
divide changes in nominal asset values into their expected real
and price components.
"Also, by routinely monitoring the markets for the [indexed
and unindexed] debt instruments, the Federal Reserve could
extract the market's evaluation of the consequences of policy
operations."
"Nonetheless, I am confident that we would make use of new
market-based indicators of inflation and real interest rates that
would be made available by the issue of indexed bonds. Such
measures may not mark the way as unambiguously as promised by
their most vocal adherents, but they would help."
Excerpt from Column by Milton Friedman on Purchasing Power Bonds
in Newsweek. April 12. 1971
"The government, and the government alone, is responsible
for inflation. By inflation, it has expropriated the capital of
persons who bought government securities -- often at the urging
of high officials who eloquently proclaimed that patriotism and
self-interest went hand in hand.
"The right way to avoid this disgraceful shell game is for
the governme~t to borrow in the form of purchasing power
securities. Let the Treasury promise to pay not $1,000 but a sum
that will have the same purchasing power as $1,000 had when the
security was issued. Let it pay as interest each year not a
fixed number of dollars but that number adjusted for any rise in
prices."

3

Excerpts from James Tobin. Chapter 21. Essays in Economics,
Volume 1: Macroeconomics. (Chicago. Markham Publishing Company.
1971). pages 439-447
"A substantial part of the independence of risk between
current debt instruments and capital equity arises from their
difference in status with respect to uncertainties of the future
purchasing power of money. A purchasing power bond would share
the role of capital equity as a hedge against changes in the
price level. It would therefore be a much better substitute than
existing debt instruments for ownership of capital."
"The government should issue marketable and nonmarketable
bonds with purchasing power escalation, principal and interest
geared to the Consumer Price index. Marketable bonds of this
type would greatly improve the effectiveness of monetary control.
The Federal Reserve, by buying or selling these securities, would
be dealing in assets much closer ~ equity capital than
conventional public debt instruments. The monetary authorities
would thereby gain a much greater leverage over the supply price
of capital. At the same time, purchasing power bonds would fill,
either directly or through the intermediation of insurance
companies and other institutions, a shameful gap in the available
menu of financial assets. Savers of limited means and knowledge
should not be forced to gamble either on the price level or on
the stock market. Since investors will pay the government to
avoid such risks, purchasing power bonds would save the taxpayer
interest outlays."
Excerpt from an Editorial in the May 27. 1995 Issue of the
Economist
"So here is a simple idea. Let governments carry more of
the inflation risk themselves. That would not only help
investors and encourage saving, but also give governments a
strong new incentive to keep inflation under control •••• by using
[inflation indexed] bonds, governments would strengthen the
credibility of their anti-inflationary policies, as it would give
them a strong incentive to keep inflation down •••• A second
advantage of index-linked bonds is that they make it easier for
pension funds and other financial institutions to offer long-term
inflation-proofed savings products •••• Indeed, by offering a
guaranteed real return, they might encourage people to put aside
more of their own money for retirement, and so help to reduce the
crippling -- and unsustainable -- pension burden of governments
around the world."

4

Excerpts from "Fighting Inflation and Reducing the Deficit: the
Role of Inflation-Indexed Treasury Bonds." 23rd Report by the
House committee on Government Operations of the u.s. Congress.
October 29. 1992
"The Treasury's failure to issue indexed debt during the
1980's cost U.S. taxpayers many billions of dollars, possibly as
much as $100 billion."
"On the basis of the foregoing findings, the committee
concludes that selective issuance of properly designed indexed
debt securities by the u.s. Treasury would materially assist the
Federal Reserve in the management of monetary policy and would
most probably also reduce Treasury financing costs on the Federal
debt. The committee also believes that such a program would
produce other sUbstantive benefits for the economy and would
contribute generally to economic efficiency, productivity,
stability, and equity."
"Moreover, the broad economic benefits of such a program
would justify even a modest increase in Treasury financing costs,
if a cost increase should result."
"The committee therefore recommends immediate implementation
by the Treasury Department of a permanent ongoing program to fund
a portion of the Federal debt with indexed debt securities."
Excerpt from article entitled "Benefits and Limitations of
Inflation-Indexed Treasury Bonds" by Pu Shen in the Economic
Review of the Federal Reserve Bank of Kansas city. 199503 issue
"Inflation indexed Treasury bonds would be a valuable
innovation in u.s. financial markets, providing benefits to
investors, the Treasury, and policy-makers. Not only could they
protect both investors and issuers from inflation risk, but they
could also save the Treasury interest expense on its debt.
Moreover, combined with nominal bonds, indexed bonds would
provide policymakers with additional information on real interest
rates and inflation expectations •••• On balance, the conclusion
reached here is that inflation indexed Treasury bonds could be a
valuable addition to the spectrum of Treasury debt instruments."
Excerpts from Article by Alicia Munnell and Joseph B. Grolnic
entitled "Should the u.s. Government Issue Index Bonds" in the
New England Economic Review. September/October 1986
"The conclusion that emerges is that index bonds merit
serious consideration as an addition to this nation's arsenal of
financial instruments. They would allow people -- particularly
older people -- to fully protect themselves against the risk of

5

having their income eroded by inflation. At the same time,
government-issued index bonds should neither disrupt financial
markets nor substantially affect federal budget financing. In
short, these bonds would significantly enhance the array of
financial options at virtually no additional cost to the
government or the taxpayer."
"Anyone saving for a specific goal, such as purchasing a
house or sending children to college, should welcome the
opportunity to ensure that such savings will not be eroded by
inflation. other investors may simply prefer the lower
quaranteed positive return on index bonds to the risk of losing
money on their portfolios.
"Moreover, in the united states there may well be a niche
for index bonds that has not been adequately explored -- namely,
the financing of fully indexed annuities for retirees. These
annuities could play an important role in protecting elderly
people against the erosion of their pension income during their
retirement years."
"In summary, the long-run cost implications support the case
for index bonds: errors in investors' expectations should cancel
out and borrowing costs should be reduced by the elimination of
the inflation-risk premium. The fact that the government absorbs
the risks of unanticipated price changes need not be considered a
significant burden. The government's nominal outlays would
become less predictable, but its real outlays would become more
so. Since government revenues are quite responsive to inflation,
indexing the debt might reduce total budget uncertainty."
Excerct 'from Column in the Wall street Journal by Financial
Consultant Ernest J. Oppenheimer. February 28. 1975
"Thus the most important gain is intangible yet very real,
namely the restoration of justice to the dealings between the
government and its people. The past 30 years have been grossly
unfair to all those who have been prudent and saved their money.
Their losses have been the gains of the profligate spenders,
notably the government •
..... The procedure of linking government securities to rates
of inflation is so simple and sound that one may wonder why it
has not been implemented before in this country. The British
classical economist Alfred Marshall, in fact, pointed out about
100 years ago that money alone cannot fulfill the function of a
stable long-term standard of value. He recommended a procedure
analogous to the one suggested here as an essential step for
preserving the free enterprise system. Thirty Y7a~s of chronic
inflation have demonstrated beyond doubt the val~d~ty of
Marshall's analysis."

6

Excerpt from Paper by Stanley Fischer in the Journal of Political
Economy. 1975. Vol. 83. pp. 509-534
"The non-issuance of index bonds in the united states by
either the federal government or corporations is something of a
mystery •••• The existence of such an asset would be particularly
desirable on distributional grounds, since it would enable
consumers to provide themselves with an assured standard of
living for their retirements. Further, since there is an evident
demand for the hedge provided by such bonds, they could be sold
at a real interest rate below that on nominal bonds, so that no
real costs to the Treasury would be involved in the substitution
of some indexed bonds for outstanding non indexed bonds."
Excerpt from September 29. 1995 Wall Street Journal CD-Ed Piece
by Professor Robert J. Barro. Harvard University
"Long-term indexed debt avoids the sensitivity of real
financing costs to shifts in inflation (the problem with longterm nominal bonds) and also eliminates the sensitivity to shifts
in real interest rates (the problem with short-term nominal and
real bonds).
"Indexed bonds are a win-win proposition. The u.S.
government should introduce them now, when inflation is not a
problem, rather than waiting for the next inflation crisis."
Testimony of Michael J. Boskin. Chairman. President's Council of
Economic Advisers. Before the House Subcommittee on Commerce.
Consumer and Monetary Affairs. June 25. 1992
"Long-term indexed instruments would facilitate the creation
of privately issued liabilities that are fully indexed. For
instance, if indexed bonds were generally available, then
financial services companies would be better able to offer real
annuities which would guarantee retirees a real income stream."
"Indexed securities would also prove valuable as an
additional guide to monetary policy decisionmakers •••• An active
market in indexed bonds of different maturities alongside nominal
bonds of the same maturities would add a much more direct and
less noisy measure of expectations about inflation, which would
be a very useful tool for policymakers."

7

September 21. 1995 London Times CoLumn-Entitled "We Want More
Indexed Gilts" by Samuel Brittan
"It is not only the government that could benefit from more
indexed bonds. When I used to ask people in pension funds why
private-sector pensions were not indexed for inflation, the reply
used to be that they had no inflation-proofed asset to guarantee
such undertakings. 'You tell your friends in the [British]
Treasury to issue indexed gilts and then come back to us about
indexed pensions.' Well, they have and I have. Pension schemes
might not be able to afford pensions which are both inflationproofed and linked to final salary, but members could be given a
choice."
"Indexed bonds should be of interest not only for the
information they yield on inflation expectations when compared
with conventional bonds. They should also be useful in
themselves as a direct measure of the real rate of interest.
Moreover, to the extent that there is a single international
capital market, they should provide an estimate of the world real
rate of interest rather than that of any particular country."
Excerpt from Statement by Senator Dan Quayle in the Congressional
Record. May 7. 1985
"Mr. President, today Mr; Trible and I are introducing the
Price Indexed Bonds Act of 1985 •••• The Price Indexed Bonds Act
of 1985 would obligate the Department of the Treasury to issue,
within 90 days of enactment, a series of Treasury securities
indexed to the consumer price index."
"Mr. President, in the context of the Congress' struggle to
find ways to cut Federal spending I am tempted to advocate this
bill solely as a means of reducing Federal spending with no
offsetting pain •••• The bottom line is that we can expect the
interest costs associated with price indexed bonds to be about 20
to 40 percent less than under conventional bonds. Moreover, this
savings is practically a free lunch."
"Price-indexed bonds will be a valuable new financial
instrument -- of especially great service to and in great demand
by the elderly and others looking for a place to safeguard their
real earnings against the ravages of inflation •••• For instance,
the young couple saving for their child's education might prefer
an inflation-proof asset over a moore inflation sensitive risk,
such as conventional bonds, even if the former paid a lower
yield. Likewise, the middle-aged couple usually saves prudently,
rather than invests speculatively, for retirement."
"Price indexed bonds would eliminate one of the greatest
incentives to the Federal Government to increase inflation ••••

8

In effect, the Government expropriated billions of dollars from
investors in the sixties and seventies by selling bonds with
nominal fixed rates and then debasing the debt by inflating the
currency. This is the utmost in moral hazard."
Excerpt from "The concept of Indexatio·n in the History of
Economic Thought." Economic Review. Federal Reserve Bank of
Richmond. November/December 1974
"The practice of linking contractual payments to a specific
price has a long tradition extending back at least to Elizabethan
times. Thus, William Stanley Jevons remarks that during the
reign of Elizabeth I, the colleges of Oxford, Cambridge, and Eton
were required by law to lease out their lands for corn rents,
i.e., variable money rents linked to the price of corn."
Excerpt from Note by R.A •. Musgrave and G.L. Bach in the American
Economic Review. December 1941. pp. 823-845
"Stable purchasing power bonds may prove a helpful
contribution to the Treasury's endeavor to restrict the net
income contributing effects of defense financing, since the
offering of such bonds promises to increase the extent to which
Treasury borrowing may syphon funds from the active income stream
into defense outlays."
Excerpt from Comments Delivered by Stanley Fischer. Chief
Economist at the IMF. a Conference on Inflation-Indexed Bonds at
the National Press Club on April 21. 1995
"Just do it."

DEPARTMENT

,

OF

THE

TREASURY

NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960

Update: May 16, 1996

PRESS SCHEDULE
Meeting of Western Hemisphere Finance Ministers
Hosted by the United States of America
New Orleans
Friday, May 17, and Saturday, May 18, 1996
The following is an updated schedule and additional press information on the meeting of
finance ministers from the 34 democratic countries in the Western Hemisphere that U.S.
Treasury Secretary Robert Rubin will host in New Orleans on Friday, May 17, and Saturday,
May 18.
This tentative press schedule and summary of press arrangements for the meeting is for
planning purposes only.
Unless otherwise noted, all events are at Gallier Hall, 545 St. Charles A venue.
The New Orleans Marriott Hotel is the conference headquarters.
Note: Signup deadline for the press boat tour of the Port of New Orleans, scheduled for 8:30
a.m., Thursday, is 5:00 p.m. Wednesday. Contact: Tom Hohan of Metro Vision Economic
Development Partnership (504) 527-6951.
This advisory may be updated.

Friday, May 17
8:30-10:30 a.m.

Riverboat tour and press briefing on international trade and Port of
New Orleans hosted by Metro Vision Economic Development
Partnership.
Note: Space is limited. A shuttle will be available for transportation
from Marriott to boat tour and briefing, then from the tour to New

RR-I075
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2

Orleans International Airport for 11 :30 a.m. arrival statement with
Secretary Rubin and New Orleans Mayor Marc Morial.
Contact: Tom Hohan of MetroVision at (504) 527-6951.
9 a.m.

International Press Center opens at Gallier Hall.
Press credentials available for pickup.

11:30 a.m.

Arrival statement by Secretary Rubin with New Orleans Mayor Marc
Morial.
Location: New Orleans International Airport, Board Room.
Contact (Airport): Patricia T. Lotz at (504) 464-3547
Press Parking: At Oversize Vehicle Lot (ground lot adjacent to parking
garage)

2:30-5:30 p.m.

Inter-American Development Bank seminar on Liberalization,
Development and Integration of Financial Markets in the Americas.
Participants will include Treasury Secretary Robert E. Rubin, Counselor
to the President, Thomas F. (Mack) McLarty, IDB President Enrique V.
Eglesias, and a group of finance ministers and private sector
representatives from throughout the Western Hemisphere.
Press: Open.
Location: Gallier Hall, 545 St. Charles Avenue.

6-7 p.m.

Reception hosted by the City of New Orleans and Louisiana officials.
This will include brief remarks by local officials and Secretary Rubin.
For planning purposes only: Arrivals scheduled to begin at 5:45 p.m.
Remarks tentatively scheduled for 6: 15 p.m.
Press: Credentialed press are invited to the reception; a riser area will
be provided for working press.
Location: New Orleans Museum of Art City Park, 1 Collins Diboll
Circle.

Saturday, May 18
8 a.m.

Press Center opens.

8:15 a.m.

Cameras set up at Gallier Hall for arrivals.

9-9:30 a.m.

Delegation arrivals.

3
9:30 a.m.-12:30 p.m. Plenary session.
Press: Opening remarks only; photo op at beginning of meeting; may
be pooled.
Media will be escorted from/to International Press Center at 9: 15 a.m.
10:45 a.m.

Background press briefing on plenary session.
Location: Nord Theater briefing room, ground floor of Gallier Hall.

12:15 p.m.

Cameras setup for group photo of finance ministers.

12:40 p.m.

Group photo.
Location: To be announced at International Press Center.
Press: Open.

2:30-3:45 p.m.

Plenary session.

3:15 p.m.

Setup for concluding press conference

4 p.m.

Concluding press conference.

5-7 p.m.

Reception hosted by World Trade Center and other New Orleans
business groups.
Location: World Trade Center, 2 Canal Street.
Press: Credentialed press are invited to the reception; a riser area will
be provided for working press.

8 p.m.

International Press Center closes.

Credentials. Press credentials are required for all media covering the meeting. An application
for press credentials is attached.
International Press Center. The International Press Center will be open from 9 a.m. Friday,
May 17, until 8 p.m. Saturday, May 18, at Gallier Hall, ground floor. The press center, open
to credentialed reporters, will make available official schedules, press releases, information on
events open to press coverage, transcripts and background information.
The International Press Center Information Desk can be reached at (504) 525-6147 or
(504) 525-1165.
The press center will have a limited number of international credit and calling card telephone
lines. Reporters wishing to reserve a dedicated telephone line in the press center should call
Naomi Thomas of Bell South at (504) 528-7508 or (504) 592-1317.

4
Shuttle buses. Shuttle buses will provide transportation between conference locations for
credentialed delegates, staff and press.
Conference Internet site: www.gnofn.org/mwhfm
Contacts.
U.S. Treasury/Washington
(202) 622-2960, fax: (202) 622-1999
Chris Peacock or Michelle Smith at Press Staff Office, New Orleans at (504) 525-7173 or
(504) 525-7513
U.S. Information Agency/Foreign Press Center
Jonathan Baker at (202) 724-0040, fax: (202) 724-0007
Peter Brennan at (202) 622-2854, fax (202) 622-2854, e-mail pbrennan@usia.gov
-30-

5/16/96

DEPARTMENT

lREASURY

OF

THE

TREASURY

NEWS

OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
Remarks as prepared for delivery
May 17, 1996
ARRIVAL STATEMENT OF TREASURY SECRETARY ROBERT E. RUBIN
SUMMIT OF THE AMERICAS FINANCE MINISTERS MEETING
NEW ORLEANS, LOUISIANA
Tomorrow marks a major step toward a unified effort throughout our region to
raise and sustain economic growth that will benefit the three-quarters of a billion people
of the Western Hemisphere.
While finance ministers and others met in December to concentrate on the issue
of money laundering, this is the first time since President Clinton convened the Summit
of the Americas in Miami that finance ministers will meet to go over a broad array of
topics. I think that it's only fitting that we're here in New Orleans, a city that serves as a
gateway for the United States to Latin America and the Caribbean.
If I could put these meetings in context for the United States: Latin America is
vitally important to our economic and national security. It is our most natural trading
partner because of our physical proximity. Latin America has been deeply involved in
economic reforms for quite some time now, a process we both support and encourage,
purticularly the fact that there is now a consensus regarding the fact that it is the private
sector driving economies. Mexico is now coming back, and it is time to press on with
reforms. Our meetings this weekend are part of a process of working together, a
partnership, and the United States is very supportive of the reform process throughout
our region.
Over time, the issues we discuss will have a substantial impact, in our region and
in the United States. That is particularly true as we move forward from the important
economic steps from last year's Halifax summit -- reforms that will deepen and
strengthen financial markets.
Having said that, our aim this weekend is to forge a consensus on and
commitment to sound economic policies to sustain growth, raise savings rates and
strengthen the now-central role of the private sector. Moreover, I believe we will see
emerging a shared vision of ways to develop, liberalize and integrate the financial
markets of our Hemisphere, which are critical to supporting and sustaining growth.
RR-I076
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2

Additionaly, we have put the issue of fighting financial crime on our agenda.
Important progress was made last year in Buenos Aires on money laundering, and we
want to build upon that momentum so ministers can further advance this issue within
their own countries. Money laundering is not just an issue to be handled by justice
ministers. It has enormous repercussions for economies, the private sector and
governments, and finance ministers are rightly focussing on the issue.
As you know, there has been signficantly greater attention paid to issues

surrounding the international economy and global financial markets following the
problems Mexico experienced last year. The United States has pursued follow-on
measures in a number of fora, and these issues will arise this weekend as well. The
Summit of the Americas created a Committee on Hemispheric Financial Issues which
has been working at the deputy minister level in recent months to develop suggestions
for the ministers. One of my expectations is that the New Orleans Ministerial will
institutionalize the process of economic cooperation -- the partnership now operating in
our region and being developed within that committee.
The Summit of the Americas set in: motion a process which over the long term
will make an important contribution to improving lives throughout the Western
Hemisphere -- from negotiating a free trade agreement less than a decade from now, to
creating the conditions for sustained growth and addressing the critical problem of
income inequality and poverty
The New Orleans ministerial holds important benefits for Americans. The benefit
for Americans of stronger growth in Latin America will be greater exports, which will in
turn mean more jobs and higher living standards here in the United States. And growth
in Latin America also will contribute to our national security.
Just as Miami has become synonymous with a new commitment in this
Hemisphere to better economic conditions for our people, I believe New Orleans will
become synonymous with turning the vision of the Summit of the Americas into a reality
that draws our region closer together and brings the benefits of economic growth not just
to the citizens of the United States but to every person in this Hemisphere.
Thank you.
-30-

DEPARTMENT

OF

THE

TREASURY

NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. _ 20220 _ (202) 622.2960

EMBARGOED UNTIL 2:30 P.M.
May 17, 1996

CONTACT:

Office of Financing
202/219-3350

TREASURY'S 52-WEEK BILL OFFERING
The Treasury will auction approximately $19,250 million
of 52-week Treasury bills to be issued May 30, 1996. This
offering will provide about $675 million of new cash for the
Treasury, as the maturing 52-week bill is currently outstanding
in the amount of $18,580 million: In addition to the maturing
52 -wee,k bills, there are $26,508 million of maturing 13 -week and
26-week bills.
Federal Reserve Banks hold $12,485 million of bills for
their own accounts in the maturing issues. These may be refunded
at the weighted average discount rate of accepted competitive
tenders.
Federal Reserve Banks hold $6,916 million of the maturing
issues as agents for foreign and international monetary authorities. These may be refunded within the offering amount at the
weighted average discount rate of accepted competitive tenders.
Additional amounts may be issued for such accounts if the
aggregate amount of new bids exceeds the aggregate amount of
maturing bills. For purposes of determining such additional
amounts, foreign and international monetary authorities are
considered to hold $840 million of the maturing 52-week issue.
Tenders for the bills will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public
Debt, Washington, D.C.
This offering of Treasury securities
is governed by the terms and conditions set forth in the Uniform
Off~ring Circular ('31 CFR Part 356) for the sale and issue by
the Treasury to the public of marketable Treasury bills, notes,
and bonds.
Details about the new security are given in the attached
offering highlights.
000

Attachment
0-1077
F()J" press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622·2040

HIGHLIGHTS OF TREASURY OFFERING OF 52-WEEK BILLS
TO BE ISSUED MAY 30, 1996
May 17, 1996

Offering Amount .

$19,250 million

Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Maturing amount . . .
Minimum bid amount
..
Multiples.
...

364-day bill
912794 2Q 6
May 23, 1996
May 30, 1996
May 29, 1997
May 30, 1996
$18,580 million
$10,000
$1,000

Submission of Bids:
Noncompetitive bids
Competitive bids

Accepted in full up to $1,000,000
at the average discount rate of
accepted competitive bids
(1 ) Must be expressed as a discount rate
with two decimals, e.g., 7.10%
(2 ) Net long position for each bidder
must be reported when the sum of the
total bid amount, at all discount
rates, and the net long position are
$2 billion or greater.
(3 ) Net long position must be determined
as of one half-hour prior to the
closing time for receipt of
competitive tenders.

Maximum Recognized Bid
at a Single Yield

35% of public offering

Maximum Award .

35% of public offering

Receipt of Tenders:
Noncompetitive tenders
Competitive tenders .

Payment Terms .

Prior to 12:00 noon Eastern Daylight
Saving time on auction day
Prior to 1:00 p.m. Eastern Daylight
Saving time on auction day
Full payment with tender or by charg
to a funds account at a Federal
Reserve bank on issue date

DEPARTlVIENT

OF

THE

TREASURY

NEWS
omCE OF PUBliC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W•• WASHINGTON, D.C.· 20220· (202) 622-2960

ADV 11 A.M. EDT
Remarks as prepared for delivery
May 16, 1996

STATEMENT OF TREASURY SECRETARY ROBERT E. RUBIN
INFLATION INDEXED BONDS PRESS CONFERENCE
Helping the economy and raising incomes requires increasing productivity, and the
saving rate is central to that objective. The initiative we are announcing today has the
potential of raising our national saving rate as well as reducing the cost of capital to the
federal government. Today we are announcing our intention to issue securities that will
offer investors protection against inflation. Americans' retirement savings in their
pension plans or their own IRAs can have inflation protection, which can help ensure
their retirement security.
The Treasury Department intends to offer inflation protection bonds as part of
our ongoing program of debt finance. Each year the value of the security will keep pace
with inflation. The minimum denomination we propose is $1,000 -- well within the reach
of many savers. Individuals can buy th.em from brokers, directly from the Treasury
department through TREASURY DIRECT, and through mutual funds and other
intermediaries. Once the program is established, we expect to add inflation protection
securities to the savings bond program as well.
One type of indexed bond we are considering would work this way: Invest $1,000,
for example, on January 1st, and if inflation is 3 percent over the year, the security will
be valued at $1,030 at the end of the year. Let's say the interest or coupon rate is also 3
percent. At that point, the security will be paying 3 percent interest on the higher value.
And that will continue on through maturity. We're looking at IO-year or 30-year
maturities. If someone bought a $1,000 10-year security for their child's college
education, and inflation averaged 3 percent, they would receive almost $1,350 back from
the Treasury, and the security would have been paying interest for a decade. If inflation
is less, the payout will be lower, and if inflation is higher, the payout will be higher.
We are also considering two -other structures -- a zero-coupon inflation-protection
bond, and an inflation-protection bond that would include periodic payments of interest
and principal. Further details on these are in the Advanced Notice we are releasing.
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(more)
http://~.ustreas.gov

Fm- press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

2

We think the kinds of investors who will be most interested in these securities will
be individual Americans saving for their retirement or for other long term purposes,
including their children's education. In addition, financial institutions such as mutual
funds, insurance companies and pension funds that help individuals save should be
interested in these securities.
We believe these bonds will offer savers value-added in the form of protection
against inflation, plus a real rate of return backed by the full faith and credit of the
United States, and in return for offering that value-added, over time the cost of financing
to the federal government will be lower than it otherwise would be.
Our plans are at an early stage, and I cannot tell you today precisely when the
first quarterly auction could occur. As someone with extensive experience in securities
matters, I know that bringing a new product to market takes time and it doesn't happen
overnight. But I believe that in time this will become a well-used program that
Americans will value as a savings vehicle for retirement, education and other long-term
needs, and as a consequence the markets in these securities will grow in depth and
breadth.
The Treasury Department has through its history focused on the most costeffective ways to finance the federal debt. If you recall, in 1993 Treasury changed the
maturity mix of government securities, something that was initially looked on with some
skepticism, but which since has won considerable praise and is saving the taxpayers $7
billion. And today, we are announcing the intention to issue inflation protected bonds as
a further step in this direction, as well as a step we believe can help promote savings in
the country.
There are a number of decisions which must be made before the first securities
are issued. One of the issues to be resolved is what inflation index to use. At the
moment, the four we are examining most closely are the Consumer Price Index for
Urban areas, the Core CPI and the Employment Cost Index, all calculated by the Bureau
of Labor Statistics at the Labor Department, and the GDP deflator, calculated by the
Bureau of Economic Analys~s at the Commerce Department.
We are asking in the Federal Register for public comments on the proposal. In
addition, we want to go out and talk with investors and dealers who may have an interest
in these securities. Accordingly, we plan to hold a series of investor meetings in
Washington, New York, Chicago, Boston, San Francisco, Tokyo and London this month
and next to gather investor comments.
This is a common sense approach to government and an excellent example of
government reinvention -- protecting Americans from inflation with an innovative
investment method, and saving them money as taxpayers by holding down borrowing
costs.
Thank you.
-30-

ornCE OF PUBllC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
May 16. 1996

Contact:

Jon Murchinson
(202) 622-2960

TREASURY INTENDS TO ISSUE INFLATION-PROTECTION SECURITIES
Secretary Robert E. Rubin announced Thursday that the Treasury Department intends
to issue securities that provide protection against inflation as a multi-year experiment.
Inflation-protection securities are designed to strengthen national savings by offering
Americans an investment that guarantees a return in excess of inflation. These securities will
be available in denominations as low as $1.000 in order to make them available to individuals
saving for retirement, their children s education and other long-term goals. Individuals on
fixed-incomes seeking to protect the real return on their investments, pension funds and
insurance companies are also potential investors in inflation-protection securities. It is
anticipated that all taxpayers will benefit as these securities are expected to reduce Treasury's
financing costs.
I

The return on the new securities will be linked to inflation in prices or wages and
carry longer term maturities of 10 or 30 years. Treasury is considering using various
measures of inflation including the Consumer Price Inde~ for All Urban Consumers (CPI-U),
th~ core CPI (CPI-U, excluding food and energy). the EIT:ployment Cost Index. which are all
published by the Bureau of Labor Statistics of the Labor Department. and the GDP deflator
published by the Bureau of Economic Analysis of the Commerce Department. Treasury is
also examining several different structures for the new securities. These include securities
that would provide some current income through two different structures and additionally a
zero-coupon inflation-protection security that would eliminate reinvestment risk.
Treasury is seeking comments from all interested parties on a number of the proposed
features of inflation-protection securities. With this in mind. the Departmem will hold
meetings with potential investors in Washington. D.C .. New York. Boston. Chicago, San
Francisco, London and Tokyo to present the details of the proposed security and gather
comments and suggestions.
Further details can be found in the Advance Notice of Proposed Rulemaking which is
publicly available today and will be published in the Federal Register next week.
-30RR-I071

QUESTIONS AND ANSWERS
ON MARKETABLE INFLATION-PROTECTIOB SECURITIES

Hay 16, 1996

General Intormation
Q:
Why does the Treasury intend to issue inflation-protection
securities?

A:
The Treasury intends to issue inflation-protection
securities in order to save on interest costs and to expand the
menu of financial assets available to investors in u.s. financial
markets. The Treasury believes that it would lower the burden of
servicing the federal debt by offering investors a security that
will not lose value because of inflation. The new security
should result in a broader market for Treasury securities and
eliminate the need for Treasury to pay investors for assuming
inflation risk.
For example, Treasury believes individuals saving for
retirement and other long-term goals, like college for their
children, could benefit from investing in these securities.
Other investors who may find inflation-protection securities
filling an investment need include pension plans and insurance
companies that offer annuities. In short, the Treasury expects
that inflation-protection securities would benefit both
taxpayers, by lowering government financing costs, and financial
markets generally, by providing investors a useful fin~ncial
instrument that has not previously been available. Treasury is
seeking comment from all interested parties on a number of
proposed features of inflation-protection securities.
Q:
Why is the Treasury asking for comments concerning
inflation-protection securities?
A:
The Treasury believes that inflation-protection securities
hold a lot of promise as a cost-effective way to borrow.
Nevertheless, we realize that this type of security is very
different from any other security the Treasury issues.
Consequently, we are specifically asking for comments from market
makers, potential investors, and other interested persons on the
choice of index, the structure of the security, auction
technique, offering sizes, and maturities. This is a prudent way
to proceed before issuing a completely new security.
Accordingly, we have delivered to the Federal Register an
Advance Notice of Proposed Rulemaking on inflation-protection
securities, which will be published in a few days and is now
publicly available. In this notice,_ the Treasury asks commenters
for advice both on general and highly technical issues concerning
inflation-protection securities.

2
In addition, the Treasury is also planning to hold a series
of investor meetings in New York, Washington, D.C., Chicago,
Boston, San Francisco, London, and Tokyo on inflation-protection
securities in late May and in June. For information about
attending these meetings, please contact the Office of Financing,
Bureau of the Public Debt, at 202-219-3350.

other Benefits
g:
Are there other possible benefits to issuing inflationprotection securities?
A:
Yes. Inflation-protection securities reduce the sensitivity
of the budget to changes in real interest rates by enabling the
Treasury to lock in its real financing costs for a relatively
long time. Also, the prices at which inflation-protection
securities trade in the market may provide information concerning
real interest rates and inflationary expectations which monetary
policy officials at the Federal Reserve and others would find
useful.

Potential Xnvestors
g:
Who does the Treasury anticipate would buy inflationprotection securities?
A:
We believe that inflation-protection securities would appeal
initially to investors saving for retirement in tax-deferred
retirement accounts and to entities such as pension funds whose
liabilities are sensitive to inflation. Once the market becomes
established, other institutional investors, such as insurance
companies, might become potential investors if they begin to
market new inflation-linked products, such as an inflationindexed annuity.
The design of the security and the specific index chosen may
affect which potential investors find the security most useful in
their portfolios. The Treasury is asking for comment on the
choice of index and structure of the security in its Advance
Notice of Proposed Rulemaking.
g:
What advantages do inflation-protection securities present
to the average investor?
A:
For the average investor saving for retirement inflationprotection securities would present them with the opportunity to
invest in an obligation backed by the full faith and credit of

3

the united states Government that guaranteed a return in excess
of inflation. We believe that this would be quite attractive.
Why is the Treasury targeting pension and retirement
savings?

Q:

A:
The Treasury believes that the large growth of pension funds
and other retirement accounts is a potential source of funding
that Treasury should tap. In addition, the large growth in both
absolute and relative terms of self-directed retirement accounts,
such as IRAs and 401(k)'s, provides a potentially large pool of
funds that might invest in these new securities. Individuals
saving for their retirement would have available to them for the
first time a conservative investment that guarantees them a
return above the inflation rate. Also, the Treasury believes
that providing an attractive vehicle for retirement savings may
encourage Americans to save more for their retirement and help
increase the Nation's savings rate.
Does the Treasury intend to offer inflation-protection
securities to small investors?

Q:

A:
Yes. The Treasury plans to offer inflation-protection
securities with a minimum denomination of $1000 (value of
principal at issuance) and to make them available through
TREASURY DIRECT for investors who want to have a direct account
with the Treasury.

structure of Inflation-Protection securities
Are there other countries which have successfully offered
securities linked to inflation?

Q:

A:
Yes. The most notable examples are the united Kingdom and
Canada. The U.K. has successfully offered marketable IndexLinked gilts since 1981, and last year the market value of these
securities comprised approximately 15 percent of the total market
value of outstanding gilts. The U.K. has saved money by issuing
these securities, since the actual rate of inflation has been
lower than the difference between the yields on conventional and
Index-Linked gilts. Canada began issuing marketable Real Return
Bonds in 1991, and currently, the difference between the yields
on their conventional and real return bonds is significantly
higher than the current inflation rate.
How would the coupon payments and adjustment to principal be
calculated for inflation-protection securities?
Q:

A:
Under one of the structures we are considering, the
principal amount of the inflation-protection security would be

4

adjusted for inflation, so that the adjusted value remains the
same in constant dollars. For example, if the price or wage
index to which the security is linked increases by 3 percent a
year after the issue date, the principal amount of the security
also increases by 3 percent. The interest paid on the security
is a fixed percentage of the current value of the principal.
Q:

Have any other countries issued a bond with this structure?

A:
Yes. The specific structure outlined in the answer to the
previous question and described in more detail in the Treasury's
Advance Notice of Proposed Rulemaking is based on the Real Return
Bonds issued by Canada. The Canadian bonds are in turn a
modification of the Index-Linked gilts issued by the united
Kingdom.
Q:
Is the Treasury considering other structures for inflationprotection securities in addition to the Canadian model?

A:
Yes. We are specifically asking in the Advance Notice of
Proposed Rulemaking for interested parties to comment on two
alternative structures.
One structure is a zero-coupon inflation-protection
security. The Treasury would only make one payment on this type
of security, which would be at maturity. This type of security
might appeal to investors who need funds at a specific time in
the future but do not need current income. For these investors,
a zero-coupon inflation-protection security would avoid the need
to reinvest coupon payments during the interim.
The second structure for which the Treasury is asking for
comment is designed for investors desiring current income. Under
this structure, the Treasury would make periodic payments of
principal and interest, similar to payments on a mortgage.
Ignoring lags in the indexation, each periodic payment would have
the same value when adjusted for inflation, though the
proportions of each, payment representing principal and interest
would change. Potential investors in this type of security would
include those with a need for current income from their
investments.

Measuring Inflation
Q:

How would inflation be measured?

A:
The Treasury is asking for comments on the most appropriate
price or wage index for the new securities. The Treasury is
specifically asking for comments concerning the Consumer Price
Index, the core CPI (which excludes food and energy prices), the

5

Employment Cost Index, and the GOP deflator. After careful
consideration of all the comments, the Treasury will decide what
price or wage index would be the most appropriate to use for
measuring inflation for inflation-protection securities.

a:

will the recently announced changes in calculating the CPI
make the Treasury more likely to link the securities to an
alternative index?
A:
The Treasury has not decided ~at- index to use and is asking
for comment from the public on this. The CPI is a possibility.
The recent changes that become effective this summer were made to
correct a technical problem known as "formula bias." These
changes make the CPI a better index and thus do not lessen the
possibility that we may decide to link the new securities to it.

a:

If Treasury chooses the CPI index for inflation-protection
securities, would it be overpaying investors, since many
economists believe that the CPI overstates inflation?

A:
No. We do not believe that this would result in the federal
government giving investors too good a deal. Even if the CPI
overstates inflation, the total interest costs on this security
would not be too high. The reason is that the market would take
into account the extent to which it is perceived that the CPI
overstates inflation in its pricing of the securities and
competition in the market for "the securities would ensure that
the return on the securities would be at an appropriate level.

a:

What if price or wage inflation goes through the roof?

A:
If price or wage inflation is very high for one year, or
over a longer period, then investors would have the inflation
protection they were seeking. The real value of their investment
would have been maintained. The federal government would not be
substantially more exposed to inflation than it already is. (The
large amount of debt that needs to be refinanced each year means
that a rise in interest rates, which happens when inflation
increases, is reflected in the Treasury's financing costs very
quickly.)

a:

What if price or wage inflation is negative?

A:
There is a possibility that the federal government could
report deflation in prices or wages for anyone month, or even
over a longer period. In such an economic environment, the
nominal return on these securities would decrease, but then all
interest rates would be lower. Moreover, if the sum of all the
interest payments and the inflation-adjusted principal value at
maturity of the inflation-protection security is less than the
par value of the note or bond at issuance, the Treasury would
make 'an additional payment at maturity for the difference. We do

6

not expect that such a prolonged decline will occur that this
minimum guarantee becomes meaningful.

Changes to the Inflation Index
Q:
What happens if the federal agency responsible for issuing
the price or wage index changes its methodology for calculating
the index?

A:
From time to time, federal agencies responsible for
calculating the various price and wage statistics revise their
methodologies in order to improve the accuracy of the indices.
If the revision is made on a forward-going basis and does not
affect previously published statistics, the Treasury would use
the modified series for future calculations of principal value
and interest payments. If the revisions are made on a backwardlooking basis, then the Treasury does not intend to use a revised
historical series to change its previous calculations of
principal value or interest payments. Finally, in the event that
the price or wage series is rebased, the Treasury would continue
using the price or wage index series with the base year that was
used when the security was first issued, as long as that series
is still published. The reason for this is to maintain precision
in the indexation of the security that may otherwise be lost due
to rounding.
Q:
What if the price or wage index used for inflationprotection securities is discontinued?

A:
If the inflation index for an inflation-protection security
is discontinued while that security is outstanding, the Treasury
would consult with the federal agency which publishes the index
in order for Treasury to select an appropriate substitute price
or wage index and methodology for linking the two series.
Determinations of the Secretary in this regard would be final.
There are no plans to discontinue the indices currently under
consideration.
Q:
What if the Federal Government starts to publish a new price
or wage index that is more accurate or appropriate for inflationprotection securities?

A:
The Treasury expects that it would use the new price or wage
series for indexing new inflation-protection securities.
outstanding securities would remain indexed to the original price
or wage series.
Q:
What happens if the federal agency responsible for the price
or wage index is late in reporting the index for a given month?

7

A:
If the price or wage index number for a particular month is
not reported by the time that it is needed for determining
accrued interest, the Treasury Department would announce by the
end of the next business day an index number based on the last
available twelve-month change in that index. This number would
be used for all subsequent calculations and would not be replaced
by the actual price or wage index number when it is reported.
The Department believes that this calculation would rarely, if
ever, be necessary.
Why is it necessary for there to be a lag in the indexation
of the security?

Q:

A:
For an inflation-protection security modeled after the
Canadian Real Return Bonds, the Treasury would choose a lag that
is sufficient f·or the market to determine accrued interest on the
security on a daily basis. For dates different from the ones for
which a reported' index number becomes effective, this requires
that two index numbers be known so that a linear interpolation
can be made between the two most recently published index
numbers.

Amount of Issuance
What size of offerings is the Treasury considering at the
initial auctions of inflation-protection securities?

Q:

A:
Because this is a new product, the Treasury plans to
proceed cautiously, with initial offerings significantly smaller
than the current sizes of Treasury auctions of conventional
Treasury securities. We are specifically asking for comment on
this subject in the Advance Notice of Proposed Rulemaking.

Maturities Offered
Q:
What maturities does'the Treasury intend to offer and what
would be the size of the initial auction of inflation-protection
securities?

A:
The Treasury is considering issuing either lO-year
inflation-protection notes or 30-year inflation-protection bonds.
The Department will consider carefu-lly-market comments on the
appropriate maturities and sizes of the auctions for inflationprotection securities.

8

Hethod of Sale
Q:

How would inflation-protection securities be sold?

A:
The Treasury would auction inflation-protection securities
on a regular quarterly schedule, with both competitive and
noncompetitive bidding.
Q:

How would the auctions work?-

A:
The Department is considering offering the inflationprotection notes or bonds through a single-price auction each
quarter.
(Multiple-price auctions are also a possibility.)
options include two types of single-price auctions where the
Treasury asks for bids in terms of real yield to three decimal
places. Noncompetitive bids would be accepted up to $5 million.
Further details are available in the Advance Notice of Proposed
Rulemaking on inflation-protection securities.

Reopening's
Q:
Does Treasury plan to reopen an issue of inflationprotection notes or bonds?

A:
The Treasury might reopen an issue of inflation-protection
securities. However, the flexibility to do this under changing
market conditions is conditioned by tax issues involving the
original issue discount rules, as is true for other Treasury
securities.
Q:
If Treasury decides to reopen an issue of inflationprotection securities, how would the Treasury reopening proceed?

A:
A reopening would also be accomplished by an auction. For a
canadian-type security, investors would be asked to bid in
mul~iples of $1000 of the original, unadjusted principal value.
Treasury would announce the appropriate index ratio by the date
of auction, so that investors could make their own calculations
to derive the nominal, or current, principal value.

savings Bonds
Q:
Is the Treasury considering offering inflation-protection
savings bonds?

A:

u.s.

Yes. The Treasury is considering issuing a new series of
savings bonds that provides individual investors protection

9

against inflation after a market for inflation-protection
securities is established and market prices are readily
available.

Tax Issues
Q:
How would marketable inflation-protection securities be
taxed?

Many potential investors, such as pension plans, individual
retirement accounts (IRAs), and 401(k) plans, do not pay tax on
current investment income. For a security structured similarly
to the U.K. and Canadian inflation-indexed bonds, other investors
would have to include in taxable income both the principal
appreciation due to the inflation adjustment and the interest
payments accrued or paid during the tax year. Both the
appreciation of principal and the interest payments would be
treated as interest income. The precise tax treatment in the
event the principal decreases because of a decline in the
applicable price or wage index has yet to be determined. Other
tax details would be announced before the first issue.
A:

Book-Entry System
Would inflation-protection securities be available on the
commercial book-entry system operated by the Federal Reserve
Banks as the Treasury's fiscal agents?
Q:

Yes. The inflation-protection securities would be offered
only in book-entry form, either through the commercial book-entry
system (TRADES) or through TREASURY DIRECT. For a Canadian-type
security, the minimum to hold and transfer would be $1000 of
original par value; larger amounts would have to be in multiples
of $1000.

A:

STRIPS
Q:
Would Treasury allow inflation-protection notes or bonds to
be stripped through the Treasury STRIPS program?

For a Canadian-type inflation protection security, the
Treasury would make the inflation-protection securities eligible
for stripping on th7 commercial bo~k~entry s¥s~e~ sometime ~ft7r
the program of issu~ng these secur~t~es was ~n~t~ated: Str~pp~ng
on the commercial book-entry system would not be poss~ble
initially, for operational reasons. Eligibility for stripping
A:

10

might be limited to inflation-protection securities issued after
a future effective date.

Inflation-Protection Securities and the Debt Liait
Q:
How would inflation-protection securities be treated for the
calculation of the debt limit?

A:
For Canadian-type inflation-protection securities, at the
beginning of every month, Treasury would adjust its calculations
for the total debt subject to limit to reflect the appreciation
of the principal value of inflation-protection securities due to
changes in the applicable price or wage index.

SELECTION OF QUOTES BY GOVERNMENT OFFICIALS, ACADEMIC
AND PRIVATE SECTOR ECONOMISTS
ON INDEXING TREASURY SECURITIES TO INFLATION

Excerpt from the "Report to the Secretary of the Treasury" from
the Treasury Borrowing Advisory committee of the Public
Securities Association, May 3, 1995
,"The committee recognized that there are conceptually sound
reasons for believing that the issuance of inflation-indexed debt
could lower the cost of borrowing over the longer term. Academic
research often cites the existence of some inflation risk premium
in the yields on conventional debt that the Treasury might
capture through the issuance of inflation-indexed debt. By
issuing both conventional and inflation-indexed securities, the
Treasury might be able to segment to its advantage the market for
its debt."
"The recent and prospective substantial growth in selfdirected retirement plans, which to date have evidenced a strong
preference for safe, conservative investments, may offer the
potential of significant demand for inflation-indexed securities,
either in marketable or savings bond forms."
"Defined benefit pension plans might also be a source of
demand for inflation-indexed securities. An asset class with an
assured real return together, in all likelihood, with low
correlations with other standard asset classes is virtually
certain to permit attainment of a higher level of 'portfolio
optimality' and hence be an attractive investment to defined
benefit plans."
Excerpt from May 7, 1995 New York Times Op-Ed Piece by James H.
Smalhout of the Hudson Institute
"Indexed bonds deserve a place in America's diversified
retirement saving. They could benefit millions of people who
otherwise would be left to rely on unduly risky investments to
keep up with inflation in their old age."
"Monetarists, like Milton Friedman, favor indexed bonds
because they remove the ability of the Government -- the only
borrower that can control the rate-af inflation -- to repudiate
its debts by inflating. And Keynesians, like James Tobin,
believe that indexed bonds are much more like real goods than

2

money. By trading indexed bonds, the Fed would have greater
power to requlate the pace of the economy."
Excerpt from Statement by Alan Greenspan before the Commerce.
Consumer. and Monetary Affairs Subcommittee of the House
Committee on Government operations. June 16. 1992
"The yields on bonds that protect purchasing power could be
considered measures of 'real' rates •••• For my own part, I am
attracted by the prospect of opening a-window on the market's
view of the path for inflation that potentially could provide
readings of price pressures being built into wages and of real
interest rates influencing spending decisions."
"A timely and accurate reading on inflation expectations
could considerably aid in economic forecasting by casting some
light on incipient wage and cost pressures and by helping to
divide changes in nominal asset values into their expected real
and price components.
"Also, by routinely monitoring the markets for the [indexed
and unindexed] debt instruments, the Federal Reserve could
extract the market's evaluation of the consequences of policy
operations."
"Nonetheless, I am confident that we would make use of new
market-based indicators of inflation and real interest rates that
would be made available by the issue of indexed bonds. Such
measures may not mark the way as unambiquously as promised by
their most vocal adherents, but they would help."
Excerpt from Column by Milton Friedman on Purchasing Power Bonds
in Newsweek. April 12. 1971
"The government, and the government alone, is responsible
for inflation. By inflation, it has expropriated the capital of
persons who bought government securities -- often at the urging
of high officials who eloquently proclaimed that patriotism and
self-interest went hand in hand.
"The right way to avoid this disgraceful shell game is for
the government to borrow in the form of purchasing power
securities. Let the Treasury promise to pay not $1,000 but a sum
that will have the same purchasing power as $1,000 had when the
security was issued. Let it pay as interest each year not a
fixed number of dollars but that number adjusted for any rise in
prices."

3

Excerpts from James Tobin. Chapter 21. Essays in Economics,
Macroeconomics. (Chicago. Markham Publishing Company.
1971). pages 439-447

Volume~:

"A substantial part of the independence of risk between
current debt instruments and capital equity arises from their
difference in status with respect to uncertainties of the future
purchasing power of money. A purchasing power bond would share
the role of capital equity as a hedge against changes in the
price level. It would therefore be a much better substitute than
existing debt instruments for ownership of capital."
"The government should issue marketable and nonmarketable
bonds with purchasing power escalation, principal and interest
geared to the Consumer Price index. Marketable bonds of this
type would greatly improve the effectiveness of monetary control.
The Federal Reserve, by buying or selling these securities, would
be dealing in assets much closer ~ equity capital than
conventional public debt instruments. The monetary authorities
would thereby gain a much greater leverage over the supply price
of capital. At the same time, purchasing power bonds would fill,
either directly or through the intermediation of insurance
companies and other institutions, a shameful gap in the available
menu of financial assets. Savers of limited means and knowledge
should not be forced to gamble either on the price level or on
the stock market. Since investors will pay the government to
avoid such risks, purchasing power bonds would save the taxpayer
interest outlays."
Excerpt from an Editorial in the May 27. 1995 Issue of the
Economist
"So here is a simple idea. Let governments carry more of
the inflation risk themselves. That would not only help
investors and encourage saving, but also give governments a
strong new incentive to keep inflation under control •••• by using
[inflation indexed] bonds, governments would strengthen the
credibility of their anti-inflationary policies, as it would give
them a strong incentive to keep inflation down •••• A second
advantage of index-linked bonds is that they make it easier for
pension funds and other financial institutions to offer long-term
inflation-proofed savings products.... Indeed, by offering a
guaranteed real return, they might encourage people to put aside
more of their own money for retirement, and so help to reduce the
crippling -- and unsustainable -- pension burden of governments
around the world."

4

Excerpts from "Fighting Inflation and Reducing the Deficit: the
Role of Inflation-Indexed Treasury Bonds." 23rd Report by the
House committee on Government operations of the u.s. Congress,
October 29, 1992
"The Treasury's failure to issue indexed debt during the
1980's cost U.S. taxpayers many billions of dollars, possibly as
much as $100 billion."
"On the basis of the foregoing findings, the committee
concludes that selective issuance of properly designed indexed
debt securities by the u.s. Treasury would materially assist the
Federal Reserve in the management of monetary policy and would
most.probably also reduce Treasury financing costs on the Federal
debt. The committee also believes that such a program would
produce other substantive benefits for the economy and would
contribute generally to economic efficiency, productivity,
stability, and equity."
"Moreover, the broad economic benefits of such a program
would justify even a modest increase in Treasury financing costs,
if a cost increase should result."
"The committee therefore recommends immediate implementation
by the Treasury Department of a percmanent ongoing program to fund
a portion of the Federal debt with indexed debt securities."
Excerpt from article entitled "Benefits and Limitations of
Inflation-Indexed Treasury Bonds" by Pu Shen in the Economic
Review of the Federal Reserve" Bank of Kansas City, 199503 issue
"Inflation indexed Treasury bonds would be a valuable
innovation in u.s. financial markets, providing benefits to
investors, the Treasury, and policy-makers. Not only could they
protect both investors and issuers from inflation risk, but they
could also save the Treasury interest expense on its debt.
Moreover, combined with nominal bonds, indexed bonds would
provide policymakers with additional information on real interest
rates and inflation expectations •••• On balance, the conclusion
reached here is that inflation indexed Treasury bonds could be a
valuable addition to the spectrum of Treasury debt instruments."
Excerpts from Article by Alicia Munnell and Joseph B. Grolnic
entitled "Should the u.s. Government Issue Index Bonds" in the
New England Economic Review. September/October 1986
"The conclusion that emerges is that index bonds merit
serious consideration as an addition to this nation's arsenal of
financial instruments. They would allow people -- particularly
older people -- to fully protect themselves against the risk of

5

having their income eroded by inflation. At the same time,
government-issued index bonds should neither disrupt financial
markets nor substantially affect federal budget financing. In
short, these bonds would significantly enhance the array of
financial options at virtually no additional cost to the
government or the taxpayer."
"Anyone saving for a specific goal, such as purchasing a
house or sending children to college, should welcome the
opportunity to ensure that such savings will not be eroded by
inflation. Other investors may simply prefer the lower
guaranteed positive return on index bonds to the risk of losing
money on their portfolios.
"Moreover, in the united states there may well be a niche
for index bonds that has not been adequately explored -- namely,
the financing of fully indexed annuities for retirees. These
annuities could play an important role in protecting elderly
people against the erosion of their pension income during their
retirement years."
"In summary, the long-run cost implications support the case
for index bonds: errors in investors' expectations should cancel
out and borrowing costs should be reduced by the elimination of
the inflation-risk premium. The fact that the government absorbs
the risks of unanticipated price changes need not be considered a
significant burden. The government's nominal outlays would
become less predictable, but its real outlays would become more
so. Since government revenues are quite responsive to inflation,
indexing the debt might reduce total budget uncertainty."
Excerct from Column in the Wall street Journal by Financial
Consultant Ernest J. Oppenheimer. February 28. 1975
"Thus the most important gain is intangible yet very real,
namely the restoration of justice to the dealings between the
government and its people. The past 30 years have been grossly
unfair to all those who have been prudent and saved their money.
Their losses have been the gains of the profligate spenders,
notably the government.
" ••• The procedure of linking government securities to rates
of inflation is so simple and sound that one may wonder why it
has not been implemented before in this country. The British
classical economist Alfred Marshall, in fact, pointed out about
100 years ago that money alone cannot fulfill the function of a
stable long-term standard of value. He recommended a procedure
analogous to the one suggested here as an essential step for
preserving the free enterprise system. Thirty Y7 a : s of chronic
inflation have demonstrated beyond doubt the val1d1ty of
Marshall's analysis."

6

Excerpt from Paper by stanley Fischer in the Journal of Political
Economy. 1975. Vol. 83. pp. 509-534
"The non-issuance of index bonds in the united states by
either the federal government or corporations is something of a
mystery •••• The existence of such an asset would be particularly
desirable on distributional grounds, since it would enable
consumers to provide themselves with an assured standard of
living for their retirements. Further, since there is an evident
demand for the hedge provided by such bonds, they could be sold
at a real interest rate below that on nominal bonds, so that no
real costs to the Treasury would be involved in the substitution
of some indexed bonds for outstanding non indexed bonds."
Excerpt from september 29. 1995 Wall street Journal Cp-Ed Piece
by Professor Robert J. Barro. Harvard University
"Long-term indexed debt avoids the sensitivity of real
financing costs to shifts in inflation (the problem with longterm nominal bonds) and also eliminates the sensitivity to shifts
in real interest rates (the problem with short-term nominal and
real bonds).
"Indexed bonds are a win-win proposition. The U.S.
government should introduce them now, when inflation is not a
problem, rather than waiting for the next inflation crisis."
Testimonv of Michael J. Boskin. Chairman. President's Council of
Economic Advisers. Before the House Subcommittee on Commerce.
Consumer and Monetary Affairs. June 25. 1992
"Long-term indexed instruments would facilitate the creation
of privately issued liabilities that are fully indexed. For
instance, if indexed bonds were generally available, then
financial services companies would be better able to offer real
annuities which would guarantee retirees a real income stream."
"Indexed securities would also prove valuable as an
additional guide to monetary policy decisionmakers •••• An active
market in indexed bonds of different maturities alongside nominal
bonds of the same maturities would add a much more direct and
less noisy measure of expectations about inflation, which would
be a very useful tool for policymakers."

7

September 21. 1995 London Times Column-Entitled "We Want More
Indexed Gilts" by Samuel Brittan
"It is not only the government that could benefit from more
indexed bonds. When I used to ask people in pension funds why
private-sector pensions were not indexed for inflation, the reply
used to be that they had no inflation-proofed asset to guarantee
such undertakings.
'You tell your friends in the [British]
Treasury to issue indexed gilts and then come back to us about
indexed pensions.' Well, they have and I have. Pension schemes
might not be able to afford pensions which are both inflationproofed and linked to final salary, but members could be given a
choice."
"Indexed bonds should be of interest not only for the
information they yield on inflation expectations when compared
with conventional bonds. They should also be useful in
themselves as a direct measure of the real rate of interest.
Moreover, to the extent that there is a single international
capital market, they should provide an estimate of the world real
rate of interest rather than that of any particular country."
Excerpt from Statement by Senator Dan Quayle in the Congressional
Record. May 7. 1985
"Mr. President, today Mr. Trible and I are introducing the
Price Indexed Bonds Act of 1985 •••• The Price Indexed Bonds Act
of 1985 would obligate the Department of the Treasury to issue,
within 90 days of enactment, a series of Treasury securities
indexed to the consumer price index."
"Mr. President, in the context of the Congress' struggle to
find ways to cut Federal spending I am tempted to advocate this
bill solely as a means of reducing Federal spending with no
offsetting pain •••• The bottom line is that we can expect the
interest costs associated with price indexed bonds to be about 20
to 40 percent less than under conventional bonds. Moreover, this
savings is practically a free lunch."
"Price-indexed bonds will be a valuable new financial
instrument -- of especially great service to and in great demand
by the elderly and others looking for a place to safeguard their
real earnings against the ravages of inflation •••• For instance,
the young couple saving for their child's education might prefer
an inflation-proof asset over a more inflation sensitive risk,
such as conventional bonds, even if the former paid a lower
yield. Likewise, the middle-aged couple usually saves prudently,
rather than invests speculatively, for retirement."
"Price indexed bonds would eliminate one of the greatest
incentives to the Federal Government to increase inflation .••.

8

In effect, the Government expropriated billions of dollars from
investors in the sixties and seventies by selling bonds with
nominal fixed rates and then debasing the debt by inflating the
currency. This is the utmost in moral hazard."
Excerpt from "The Concept of Indexation in the History of
Economic Thought," Economic Review. Federal Reserve Bank of
Richmond. November/December 1974
"The practice of linking contractual payments to a specific
price has a long tradition extending back at least to Elizabethan
times. ThUS, William Stanley Jevons remarks that during the
reign of Elizabeth I, the colleges of Oxford, Cambridge, and Eton
were required by law to lease out their lands for corn rents,
i.e., variable money rents linked to the price of corn."
Excerpt from Note by R.A. Musgrave and G.L. Bach in the American
Economic Review. December 1941. pp. 823-845
"Stable purchasing power bonds may prove a helpful
contribution to the Treasury~s endeavor to restrict the net
income contributing effects of defense financing, since the
offering of such bonds promises to increase the extent to which
Treasury borrowing may syphon funds from the active income stream
into defense outlays."
Excerpt from Comments Delivered by stanley Fischer. Chief
Economist at the IMF. a Conference on Inflation-Indexed Bonds at
the National Press Club on April 21. 1995
"Just do it."

4810-39-W
DEPARTMENT OF THE TREASURY
Office of the Assistant secretary for Financial Markets

31 CFR Part 356
Amendments to the Uniform Offering Circular for the Sale and
Issue of Marketable Book-Entry Treasury Bills, Notes and
Bonds
AGENCY: Office of the Assistant Secretary for Financial
Markets, Treasury.
ACTION: Advance Notice of Proposed Rulemaking.
SUMMARY: The Secretary of the Treasury (Secretary) is
authorized under Chapter 31 of Title 31, United States Code,
to issue united states obligations and to offer them for
sale under such terms and conditions as the Secretary may
prescribe.

The Department of the Treasury (Department or

Treasury) is issuing this Advance Notice of Proposed
Rulemaking to solicit comments on the design details, terms
and conditions, and other features of a new type of
marketable book-entry security the Treasury intends to
issue, inflation-protection notes or bonds, with a return
linked to the inflation rate in prices or wages.

The

Treasury is specifically interested in comments concerning
choice of index, structure of the security, auction
technique, offering sizes, and maturities.

The Treasury

also invites comments on other specific issues raised, as

2

well as on any other issues relevant to the new type of
security.
DATE: Comments must be received on or before (insert date 30
days after publication in the Federal Register).
ADDRESSES: Comments should be sent to:

the Government

Securities Regulations Staff, Bureau of the Public Debt, 999
E Street, N.W., Room 515, Washington, D.C. 20239.

Comments

received will be available for public inspection and copying
at the Treasury Department Library, Room 5030, Main Treasury
Building, 1500 Pennsylvania Avenue, N.W., Washington, D.C.
20220.
FOR FURTHER INFORMATION CONTACT: Norman Carleton, Director,
Office of Federal Finance

Po~y

Analysis, Office of the

Assistant Secretary for Financial Markets, at 202-622-2680.
In addition, the Treasury plans to hold a series of investor
meetings in New York, Washington, D.C., Chicago, Boston, San
Francisco, and possibly other cities in late May and in June
1996 to discuss the new securities, answer questions, and
solicit comments.

To request information about attending

any of these meetings, contact the Office of Financing,
Bureau of the Public Debt, at 202-219-3350.
SUPPLEMENTARY INFORMATION: The Treasury Department intends
to issue a new type of marketable book-entry security with a
nominal return linked to the inflation rate in prices or
wages, as officially published by the United States
Government.

The Treasury is considering various indices for

3

this purpose, including the Consumer Price Index for All
Urban Consumers (CPI-U) published by the Bureau of Labor
statistics (BLS) of the Department of Labor, the core CPI
(CPI-U, excluding food and energy, as published by the BLS),
the Gross Domestic Product (GDP) deflator published by the
Bureau of Economic Analysis (BEA) of the Department of
Commerce, and the Employment Cost Index--Private Industry
(ECl) also published by BLS.

Through this notice, the

Treasury is soliciting comments on the design details of the
planned inflation-protection securities and on which index
(those mentioned above or another index) would be most
likely to result in the broadest market for the new
securities.

At the end of this notice is a hypothetical

term sheet with proposed formulas applicable to one of the
structures being considered for the new security.

This advance notice of proposed rulemakinq is not an
offerinq of securities, and any of the currently
contemplated features of inflation-protection securities
that are described in this notice may chanqe.

The terms and

conditions of particular securities that may be offered will
be set forth in the Uniform Offerinq Circular (31 CFR Part
356) and the applicable offerinq announcement.

The Department intends to issue inflation-protection notes
or bonds in order to save on interest costs and to broaden

4

the types of debt instruments available to investors in
financial markets.

u.s.

Because the Treasury, rather than the

investor, would bear the inflation risk on an inflationprotection security, the Department expects that the prices
at which it would sell this new type of security would
capture some or all of the inflation risk premium charged by
investors on conventional Treasury securities.

In other

words, investors should be willing to pay extra for a
security on which the issuer, rather than the investor,
bears the risk of higher than expected inflation.
consequently, the expected interest costs to the Treasury of
inflation-protection securities should be lower than those
on conventional Treasury securities.

In addition, inflation-protection securities may prove to be
attractive investments to investors who do not now invest in
Treasury securities to any significant extent.

For example,

certain pension funds that currently invest in bonds other
than Treasury securities because of the higher yields on
private fixed-income securities may find Treasury inflationprotection notes or bonds useful to include in their
portfolios.

The new securities would offer explicit

inflation protection to investors, which has heretofore been
unavailable in a Treasury debt instrument.

This inflation

protection could prove attractive for investments for
retirement.

Also, because the path of changes in market

5

prices of inflation-protection securities would be markedly
different from that of the market price of conventional
fixed-income instruments or equity investments, inflationprotection securities could be useful for achieving some
portfolio diversification.

This broadening of the market

for Treasury securities should also result in lower overall
interest costs for the Treasury over time.

Indexation Methodology.

A design of the inflation-

protection securities that is currently being considered is
modeled, with some modifications, on the Real Return Bonds
currently issued by the Government of Canada.

The

Department is soliciting comments about this choice of model
and the specific details described below and in the
hypothetical term sheet, as well as the formulas in the
appendix.

For this particular structure, the principal amount of the
inflation-protection security is adjusted for inflation, so
that the adjusted value remains the same in constant
dollars.

This is achieved by multiplying the principal

value of the security at issuance by an index ratio.

The

index ratio is the reference index number applicable for the
valuation day divided by the reference
applicable for the issue date.

~ndex

number

6

Because the reporting of a monthly price or wage series
index number for a particular month by necessity takes place
after the month has ended and because the market needs to
determine accrued interest on a daily basis, there has to be
a lag in the indexation of the security.

For this

structure, if it is based on a monthly index that is
reported in the following month, the indexation of the
principal on the first day of any month is based on the
index number for the third preceding month.

For example,

the index number applicable to the first day of December is
the one reported for September.

For other days of the

month, a linear interpolation is made between the index
number for the third preceding month and the one for the
second preceding month (in this example, October).

Using

the third preceding month as the reference month is the
minimum lag that enables interpolation between the index
number for that month and the following month.

Under this structure, interest is payable semiannually.
Interest payments are a fixed percentage of the value of the
inflation-adjusted principal, in current dollars, for the
date on which it is paid.

Alternative Structures.

The Treasury has given the most

study to the Canadian model for inflation-protection
securities, which in turn is a modification of the United

7

Kingdom's index-linked gilts.

However, alternative

structures are possible, and the Treasury is asking for
comment on whether alternative structures might be more
desirable for u.s. financial markets.

One alternative structure is a zero-coupon inflation-indexed
security.

This type of security could prove to be quite

volatile in price, but, if

~ld

to maturity, this structure

would provide the greatest certainty about its return, since
there would be no reinvestment risk associated with coupon
payments.

In addition to general comments concerning the market for a
zero-coupon inflation-protection security, the Treasury is
soliciting comments about the use for this structure of an
index, such as the GOP deflator, that is subject to
retroactive revisions.

since the Treasury would only make

one payment on a zero-coupon inflation-protection security,
revisions would be less of a problem from the cash flow
perspective than with a security that pays interest every
six months.

However, the use of an index that is revised

retroactively may cause some impediments to trading the
security and would complicate the applicable tax rules.

Another quite different structure is an inflation-protection
security that pays out principal and interest at periodic

8

intervals.

Ignoring the lags, under this structure, each

payment is equal in real terms, but the proportion of each
payment representing principal and interest changes.

In

other words, this structure is similar to the cash flows of
a home mortgage, and, more specifically, a price level
adjusted mortgage.

This structure may be appealing to

investors desiring a flow of periodic payments that stay
constant in real terms.

It is also possible that this

structure may be more appealing than a Canadian-type
security to taxable investors concerned about receiving
sufficient cash payments from the security to satisfy the
tax on the income from the security.

Price or Wage Indices.

The Treasury is requesting comments

on which price or wage index is likely to result in the
broadest market for inflation-protection securities.
Specifically, the Department is considering (1) the CPI-U,
(2) the core CPI,

(3) the GDP deflator, and (4) the ECI.

The Treasury also requests comments on whether another index
would serve the desired purpose better.

The CPI-U is the best known measure of inflation, and, as
such, is a logical candidate for indexing the securities.
However, the CPI-U may not be the best index for certain
investors.

For example, pension funds' liabilities are more

9

sensitive to change in wages than to changes in consumer
pr~ces.

The core CPI is a less volatile index than the CPI-U, and
this may be appealing to investors.

However, while energy

and food prices eventually influence other prices, the core
CPI could be criticized for not completely reflecting any
trend that may develop in prices in the energy and food
sectors.

The GDP deflator is a broad measure of price trends in the
economy.

As noted above, its use may be better suited to a

zero-coupon inflation-protection security than to a note or
bond paying semiannual coupons, because the GDP deflator,
unlike the other indices under-consideration, is subject to
periodic revision.

Periodic revisions of an index pose three potential
problems.

The first is the need for finality in determining

payment amounts'.

Second, the change in an index for a given

period could be based on an index number for a previous
period that has since been revised.

An indexation

methodology designed to correct for revisions in previous
values of the index would create additional complexity.
Finally, even for a zero-coupon security, revisions may
cause complications in the app~icable tax rules throughout

10

the life of the security.

Revisions may be less of a

problem for a security that makes only one payment at
maturity than for one that pays interest every six months.

The ECI may appeal to pension funds, whose liabilities are
more linked to wage, rather than price, inflation.

In this

regard, commenters are also asked to address whether the
total compensation or the wages and salaries series of the
ECI would be the most useful.

Since the Eel is a quarterly

index, the precise indexation methodology and the formulas
in the appendix, which assume a monthly index, would need to
be modified.

The Treasury is also requesting comments on whether a
seasonally adjusted or non-seasonally adjusted series would
be preferable.

Seasonal adjustment smoothes out

fluctuations, but seasonal factors are subject to revisions
for a considerable period of time.

Calculation of the Price or Wage Series.

From time to time,

government statistical agencies, such as the BLS and the
BEA, revise their methodology for calculating indices in
order to improve their accuracy.

Such revisions on a

forward-going basis may affect the inflation rate as
measured by the index and, therefore, the return to
investors.

11

For a Canadian-type or level real payment inflationprotection security, revisions of a price or wage index
number that has previously been reported, however, would not
be used for calculations of principal value or interest
payments.

This is in order for there to be finality in

determining payment amounts.

When a price or wage index is rebased to a different year,
the Treasury would use the price or wage index series with
the same base year(s) as when the security was first issued,
as long as that series continues to be published.

The

reason for this is to maintain precision in the indexation
of the security that may otherwise be lost due to rounding,
a problem that becomes more acute if the price or wage index
has increased significantly from the original base year(s)
to the new one.

The Department is specifically soliciting

comments on this point.

In the case of an index series reported on a monthly basis
in the following month, the Department is considering the
following procedure for the Canadian-type security if the
index is reported late.

If the index number for a

particular month is not reported by the last day of the
following month, the Department would announce by the end of
the next business day an index number based on the last
twelve-month change in the index available.

This number

12

would be used for

~ll

subsequent calculations and would not

be replaced by the actual price or wage index number when it
is reported.

Since the Treasury may use a price or wage

series that is not seasonally adjusted, the Treasury
welcomes comments on this procedure.

The Department

believes that this calculation would rarely, if ever, be
necessary.

If the price or wage index for an inflation-protection
security is discontinued while that security is outstanding,
the Treasury would consult with the agency responsible for
the index, and, based on such discussions, the Treasury
would select an appropriate substitute index and methodology
for linking the two series.

J)eterminations of the Secretary

in this regard would be final.

Finally, if the Federal Government commences publication of
a new version of the index that is more appropriate for
indexation than the one originally chosen, the Treasury
expects it would then use the new version for indexing new
inflation-protection securities.

Concerning the

introduction of a new version, the Treasury is requasting
commenters to address whether the Treasury should also index
outstanding inflation-protection securities to the new
version starting from its introduction or whether

13

outstanding securities should remain indexed to the original
series as long as that series continues to be published.

Auction Technique.

The Department is considering offering

inflation-protection securities through a single-price
auction.

The exact type of auction has yet to be

determined, and the Department is particularly interested in
input from potential auction participants, as well as
others, on this subject.

For a Canadian-type inflation-protection security, options
include two types of single-price auctions where the
Treasury asks for bids in terms of real yield to three
decimal places.

In the first case, the highest accepted

yield would become the coupon, and the inflation-protection
note or bond would be issued at par.

In the second case,

the Treasury would set a coupon after the auction in an
increment of 0.125%, and the price of the security would be
determined by the formulas in the appendix.

Also, the Treasury could announce a coupon on the security
and accept bids in terms of price.

However, this option

runs counter to the Department's auction practice for its
conventional Treasury securities, and, aL least initially,
it may be difficult to judge what would be the appropriate
coupon.

14

Noncompetitive bids up to $5 million per bidder would be
permitted for inflation-protection securities.

In order to

ensure that enough competitive bids are accepted to price
the security fairly, the Treasury is considering whether all
or part of the noncompetitive bids should be filled by
issuing more securities than the originally announced public
offering amount.

The Department is requesting comments on

this issue.

Given the pricing uncertainty inherent in any new type of
security, the Treasury is requesting comments on whether the
Treasury should announce prior to a single-price auction of
an inflation-protection security that it retains, and may
exercise, the option to award an amount greater or less than
the announced public offering amount.

The reason for

awarding less stems from the use of the single-price auction
technique and the unique nature of this new instrument.

If

there were an extremely long tail between the yield
necessary to sell, for example, 95 percent of the announced
size and the remaining 5 percent, awarding less would avoid
issuing the security with

an-~easonably

high real yield.

(In any case, the Secretary reserves the right, in any
auction, to award an amount of securities greater or less
than the offering amount.

See 31 CFR 356.33)

15

The Department also welcomes comments on whether a singleprice or a multiple-price auction-would be more appropriate
for inflation-protection securities.

The Treasury is also requesting commenters to address
whether any of the auction rules for conventional Treasury
securities are inappropriate for an offering of inflationprotection securities and specifically whether there should
be a limit to the amount recognized at a single yield from a
bidder or the amount awarded to a single bidder in an
auction of inflation-protection securities.

Frequency.

The Treasury contemplates issuance of inflation-

protection securities on a regular quarterly cycle.

Reopenings.

The Treasury could reopen an issue of an

inflation-protection note or bond, though the flexibility to
do this under changing market conditions is conditioned by
tax issues involving the original issue discount rules that
have yet to be decided.

A reopening would also be

accomplished by an auction.

The Department welcomes

comments on whether bids on an issue that is being reopened
should be in terms of real yield or price.

For a Canadian-type security, amounts bid at an auction for
a reopened inflation-protection security would be in terms

16

of original par amount, not the inflation-adjusted par
amount.

The Treasury would announce prior to the auction

the index ratio necessary to convert the original par amount
to the inflation-adjusted par value for the settlement date.
This means that if the index ratio for the settlement date
is 1.03, a $1,000 bid amount would translate into $1,030
inflation-adjusted par value.

The Treasury is requesting

comments on this procedure.

Also, the Treasury is requesting comments on whether
reopenings of an issue would be important for market
liquidity, or whether they would act as a constraint on
prices, given the possibility of additional supply of the
security in the next quarter.

Maturities.

The Department's current thinking is that 10-

year inflation-protection notes or 30-year inflationprotection bonds would be the most appropriate maturity
sectors for this instrument.
~omments

The Treasury is soliciting

on which maturity sectors would be most in demand

for inflation-protection notes or bonds.

Amounts.

The Department is requesting comments on the

appropriate size of the initial auctions of inflationprotection notes or bonds.

The Treasury intends to increase

the size of the auctions from the initial levels over time.

17
Book-Entry Form and Systems.

The inflation-protection

securities would be offered only in book-entry form.

They

would be issued and maintained in the commercial book-entry
system which is operated by the Federal Reserve Banks,
acting as fiscal agents for the Treasury Department.

The

Treasury also would make inflation-protection securities
available through TREASURY DIRECT, a system designed
primarily to enable investors who do not intend to trade
Treasury securities to hold theiLbook-entry securities
directly on the records of the Treasury.

Eligible amounts for holding and transferring would be in
multiples of $1000 of original par value for a Canadian-type
inflation-protection security.

The Treasury is soliciting

comments on any operational issues arising from the fact
that the amount of an inflation-protection security held and
transferred on the book-entry systems would be referred to
in terms of the original par value, not the inflationadjusted value.

Treasury Tax and Loan Accounts.

The Treasury intends to

make inflation-protection securities eligible as collateral
for Treasury Tax and Loan Accounts.

Valuation for

collateral purposes would depend on the precise structure of
the security.

18

Stripping.

For a Canadian-type security, the Treasury would

make inflation-protection securities eligible for stripping
on the commercial book-entry system at some point after
issuance of the new security had begun.
operationally possible initially.

This would not be

Eligibility for stripping

might extend only to inflation-protection securities issued
after a future effective date.

Taxation.

In general, a payment on an inflation-protection

security or an increase in the principal amount of the
security attributable to the inflation adjustment would be
includible in taxable income for the year in which it occurs
and would be treated as interest income.

Interest payments

on inflation-protection securities generally would have to
be included in the owner's taxable income when received or
as accrued, depending on the owner's method of accounting
for tax purposes.

For a zero-coupon inflation-protection

security, the difference between the issue price and the
original par amount would be interest that the holder would
include as taxable income on a constant yield basis.

The

precise tax treatment in the event the principal decreases
because of a decline in the price or wage index has yet to
be

determined.

Other tax issues, inclUding the reporting of

income on the securities by brokers and other intermediaries

(i.e., custodians), also remain to be determined.

Relevant

tax issues would be announced before the first issue.

19

Minimum Guarantee.

If the sum of all the interest payments

and the inflation-adjusted principal value at maturity of
the inflation-protection note or bond is less than the par
value of the note or bond at issuance, the Treasury would
make an additional payment at maturity for the difference.

After receipt and consideration of responses to this advance
notice of proposed rulemaking, the Department intends to
issue a final rule amending 31 CFR Part 356, "Sale and Issue
of Marketable Book-Entry Treasury Bills, Notes, and Bonds"
(Uniform Offering Circular).

Because the rule would relate

to public contracts and procedures for United states
securities, the notice, public comment, and delayed
effective date provisions of the Administrative Procedure
Act are inapplicable, pursuant to 5 U.S.C. 553(a) (2).

20

HYPOTHETICAL TERM SHEET
Note: This hypothetical term sheet assumes that an
inflation-protection note or bond would be linked to a
price or wage index reported monthly and that the index
number for each month is reported the following month.
ISSUER

United states Treasury

ISSUB

Inflation-protection note or bond

PAYMENT DATES

Inflation-adjusted principal on the
security will be paid on the maturity date
as specified in the offering announcement.
Interest on the security is payable on a
semiannual basis on the interest payment
dates specified in the offering
announcement through the date the principal
becomes payable. In the event any
principal or interest payment date is a
Saturday, Sunday or other day on which the
Federal Reserve Banks are not open for
business, the amount is payable (without
additional interest) on the next business
day.

MATURITIES

Ten or thirty years.

INDEXING
HETBODOLOGY

To calculate the value of the principal for
a particular valuation date, the value of
the principal at issuance is multiplied by
the index ratio applicable to that
valuation date. Semiannual coupon interest
is determined by multiplying the value of
the principal at issuance by the ir.'1ex
ratio for the coupon payment date by onehalf the stated rate of interest.

INDEX RATIO

The index ratio for any date is the ratio
of the reference index number (reference
INUM) applicable to such date to the
reference INUM applicable to the original
issue date.

21
REFERENCE INUH

The reference INUM for the first day of any
calendar month is the INUM for the third
preceding calendar month.
(For example,
the reference INUM for December 1 is the
INUM reported for September of the same
year, which is released in October.)
The
reference INUM for any other day of the
month is calculated by a linear
interpolation between the reference INUM
applicable to the first day of the month
and the reference INUM applicable to the
first day of the following month.
Any revisions that the agency responsible
for the index makes to any lNUM that has
been previously released shall not be used
in calculations of the value of Treasury
inflation-protection securities.
In the case that the INUM for a particular
month is not reported by the last day of
the fOllowing_month, the Treasury will
announce an index number based on the last
year-over-year inflation rate as measured
by the chosen index. Any calculations of
the Treasury's payment obligations on the
inflation-protection security that need
that month's INUM number will be based on
the index number that the Treasury has
announced.
If the applicable price or wage series is
discontinued during the period the
inflation-protection security is
outstanding, the Treasury will, in
conSUltation with the agency responsible
for the series, determine an appropriate
SUbstitute index and methodology for
linking the discontinued series with the
new price or wage index series.
Determinations of the Secretary in this
regard will be final.

STRIPS

Eligible for the STRIPS program at a future
date.

22
TAXATION

Appreciation of the principal will be taxed
as interest income in the period the
appreciation occurs. Interest payments
will be includible as interest income when
received or as they accrue, depending on
the taxpayer' s method of accounting. Other
tax detaiD>-rema~n to be determined.

AUCTION
TECHNIQUE

Single-price auction.

Options:

(1)

Bidders bid for coupon, with bids
expressed to three decimal places.
The highest accepted yield becomes the
coupon. Security is issued at par.

(2)

Bidders bid real yield, with bids
expressed to three decimal places.
Coupon is set near.the highest
accepted real yield in increments of
1/8 of 1 percent. Price is determined
by formula in the appendix using the
highest accepted yield.

(3)

Before the auction Treasury announces
a coupon, securities are issued at
lowest accepted price.

KINDmH
GUARANTEE

If the sum of all the interest payments and
the inflation-adjusted principal is less
than the par value of the security at time
of issuance, the Treasury will pay an
additional sum at maturity equal to the
difference.

KINDmKS AND

The minimum to bid, hold, and transfer is
$1000 original principal value. Larger
amounts must be in multiples of $1000.

KULTIPLES TO
BID, BOLD, AND
TRANSFER

23

Appendix - Formulas

I.

Reference lNUM:
Re f lNUMDat~ = Ref I~ +

II.

t - 1

D

+ 1

-

Ref I~]

Index Ratio:
Index RatiOnate

III.

[Ref I~

= Ref lNUMoate
Ref lNUMBase

Real Price:
A.

No initial partial semiannual coupon period:

=

RP

B.

(C/2) ~l + lOOvO

with initial partial semiannual coupon period:
RP

=

c/2 + (C/2)~l + lOOvo
1 + (rls) (i/2)
-

[(s-r) Is] (C/2)

IV. Settlement amount, including accrued interest, for $100
Original Principal:
SA

V.

=A

+

[Index RatiOoate

X

RP]

Accrued Interest:
A = [(s-r) Is] x (C/2) x Index RatiOnate

VI.

lNUM not reported timely for month M:
,Ref

I~ = I~-l

X[ I~-1J
I~-l] ;2

Generalizing for last reported
prior to month M:
Ref

I~

= I~_N

X

[

INL~

issued N months

I~_N
I~-N-12

N

] 12

24

Definitions
RP

=

real price

SA

=

settlement amount, including accrued interest, in
current dollars per $100 original principal

A

=

nominal accrued interest per $100 original
principal

r

=

days from settlement date to next coupon date

s

=

days in current semiannual coupon period

i

=

real interest rate, compounded semiannually

c

=

real annual coupon, payable semiannually, in terms
of real dollars paid on $100 initial, or real,
principal of the security
.

n

=

number of full semiannual periods from settlement
date to maturity date

vn

=

1/(1 + i/2)n

a n1

=

(1-vn)/(i/2) -V+v2+T+ •.• vn

Date

=

valuation date

D

=

the number of days in the month in which Date
falls

t

=

the calendar day corresponding to Date

lNUM =

index number

Ref I~ = reference lNUM for the first day of the calendar
month in which Date falls
Ref I~l = reference lNUM for the first day of the
calendar month immediately following Date

25
Example l
The Treasury issues a 30-year inflation-protection bond on
July 15, 1996. The bonds have a par value of $100 and are
issued at a discount to yield 3.1% (real). The bonds bear a
3% real coupon, parable on January 15 and July 15 of each
rear.
The base pr~ce or wage index applicable to this bond
~s 120.~ The settlement amount ~) is calculated using
real pr~ce formula III.A (for no partial initial semiannual
coupon period) in the appendix:
n

III.A

SA

=

60

=

1/(1 + i/2)n

=

0.39737847

=

(1 - vD) / (i/2)

=

(1 - 0.39737847)/(.031/2)

=

38.87880825

=

RP

=

(3/2) x 38.87880825 + 100 x 0.39737847

=

98.05605959

=

=

(C/2)~,

1/ (1 + . 03 1/ 2 ) 60

+ 100vn

April 15, 1997 is the settlement date for a reopening of
this bond. The reference wage or price index number for
this date is 132 and the additional supply is issued at a
real yield of 3.4%. The settlement amount is calculated by

The example shows the intermediate results rounded to
eight decimal places, although the calculations were performed
without intermediate rounding. In determining prices and accrued
interest in actual auctions of Treasury securities, the
Department rounds the final results. The price is rounded to
three decimal places and the accrued interest amount to six
decimal places, based on a par value of 100.
1

If this were a real example, this number would have been
derived using formula I. The index number for January 15 would
have been an interpolation between the index number reported for
October and the one reported for November.
2

26
first using formula V to calculate the nominal accrued interest since the last coupon payment, per $100 original
principal.

Ind ex

n

=

58

s

=
=
=
=
=

181

r

V.

.

Rat~Onate

A

Ref INUMoate
Ref INUM&aee

=

=

132
120

= 1.1

91
[(s-r)/s] x (C/2) x Index RatiOnat.e
[(181-91)/181] x (3/2) x 1.1
0.82044199

The real price is calculated using formula III.B (for an
initial partial semiannual coupon period):

III.B RP

RP

=

=

=

1/ (1 + .034/2) 58

=
=

(1 - 0.37617050)/(.034/2)

=

0.37617050

36.69585314

C/2 + (C/2) ~l + 100v
1 + (r/s) (i/2)

n
_

[(s _ r) Is] (C/2)

(3/2)+[{3/2) x 36.69585314]+{100 x 0.3761.7050)
1. + (91:/1.81.) x (.034/2)

-

[(181-91)/181] x (3/2)

92.61700426
The settlement amount is calculated using formula IV:
IV.

SA

=

A + [Index RatiOnat.e x RP]

=

0.82044199 + (1.1 x 92.61700426)

=

102.69914667

27
PART 356--SALE A!m l:SStJE 01' muutETABLJ: BOOK-DJ'rRY TREUtJItY
Bl:LLS, BOTES, AHD BONDS (DEPARTXENT OF 'rHE 'l'REJ.StmY
CmCULAR, PtJBLI:C DEBT SElUBS BO. 1-93)

Authority:
U.S.C. 391.

Date:

Darcy

S/ISIU
Bra~,.LoIIo

Assistant
4810-39-W

5 U.S.C. 301; 31 U.S.C. 3102, et seq.; 12

PUBLIC DEBT NEWS
Department of the Treasury •

Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 17, 1996

Contact: Peter Hollenbach
(202) 219-3302

STUDENTS TO BUY BONDS IN FIRST EVER SAVINGS BOND DAY
Students at six schools will, for the first time ever, have an opportunity to purchase a $50
Series EE savings bond with money they have saved in their school saving program. The
schools will all hold their Bond Days during the week of May 20, 1996. The Bureau of the
Public Debt and Save For America teamed up to offer students the opportunity to buy a
bond as part of the school savings program. Students and parents who don't have a school
savings account will also have an opportunity to buy a bond.
Mary Ellen Withrow, Treasurer of the United States said, "We have a critical need to teach
young Americans about the importance of saving for ourselves and our Nation. By offering
students a once a year opportunity to purchase a bond with the money they've saved we are,
once again, giving our children an opportunity to participate in.the Savings Bond Program."
Students who purchase bonds will each receive a special certificate commemorating their
participation.
Save For America operates a U.S. Department of Education model program which teams
up banks and other financial institutions that sponsor savings programs for· students at local
schools. Volunteers run the programs in each school. The Save For America program
seeks to educate young Americans about the importance of thrift and self reliance to
bu~lding personal security.
The six schools and five banks were selected to inaugurate Savings Bonds Day, which will
be expanded nation-wide during the 1996-1997 school year. Some 4,000 schools and 237
banks operate school savings programs under the auspices of Save for America.
According to Sherry Avena, Save For America President, "The Savings Bonds Program and
Save For America share a common interest in educating young Americans about the need
to save for their future."
A list of participating schools and banks accompany thi? release.
Treasury bureau that administers the Savings Bonds Program.
RR-I078

PA-223

000

Public Debt

IS

the

PARTICIPATING INSTITUTIONS FOR MAY 1996 SAVINGS BOND DAY

JACKSON\nLLE, FLORIDA
Barnett Bank of Jacksonville

MaIjorie K. Rawlings Elementary
School
Ponte VedraiPalm Valley Elementary
School

SPARKS, NEVADA
Bank of America

Huffaker Elementary School

COHOES, NEW YORK
Cohoes Savings Bank

Menands School

URBANA,OIDO
Peoples Savings Bank

Urbana Local School

CHARLESTON, WEST VIRGINIA
Huntington National Bank, WV

Belle Elementary School

omCE OF PUBUC AFFAIRS. 1500 PENNSYLVANlAAVENUE, N.W.• WASHINGTON, D.C•• 20220. (202) 622-2960

Update; May 17. 1996

f-lmSS SCHEDULE

Meeting of Westem Hemisphere Finance Ministers
Hosted by the United States of America
New Orleans
Friday, May 17~ IIld Suurday, May 18t 1996
Th. foUowina is an updated schedule and additional press information on the meeting of finance
ministers from the 34 democratic countries in the Western Hemisphere that U.S. Treasury
Secretary Robert Rubin will host in New Orleans on Friday.. May 17, and Saturday, May 18.

Tbi. tfIltative press schedule and summary of press artllnleIDems for the meetiaa is for planninS
purposes only.
Unless otherwise noted, all events arc at Gallier Hall, S4S St. Charles Avenue.
This advisory may be updated.

l.turday, May 11
8 a.m.

Press Center opens.

8:15 a.m.

Cameras set up at Gallier Hall for arrivals.

9-9:30 a.m.

Delegation arrivals.

9:30a.m.

-12:30 p.rn.

Plenary session.
l!re.n: R~oto op at besinnins of meeting; may be pooleU.
Media will be esconcd from International Peess Center at 9: 1S a.m.

10;45 Lm.

BacJcsroWlo prcu briefing: update on morDin" plenary sessions and
briefing on financial crime. issues.

RR-I079
Forprm releases, speeches, Pl4blic sch.eduJes and official biographies, call our 24-hour fax line at (202) 622-2040
~

t.Qeation: Nord Theater brieftn. rooDlt around lloor of Gallier Hall.
12:15 p.m.

Cameras setup for group photo ofSnanee ministers.
t.~cati04: Lafayette Square, laoSS from Gallier Hall.

12:40 p.m.

Group photo.
l{us: Open.

2:30·3 :4S p.m.

Plenary session.

3:15 p.m.

Setup for concludiDg pt... ~ODfa-enee
Preu will be OJQortecl ftom International Press Center

4p.m.

CoAClt.aelins ptCJSQOnfcrcnce
'L9cation: Third Ploor, Ballroom D, Oalller Hall

5-7 p.m.

RReption bosted by World Trade Center and other New Orleans business
group•.
~ation:

World Trade: Center, 2 Canal Streit.
tress: Credentialed proA are invited to the reception; & riser area will be

pfcmded for working press.
8 p.m.

lDtemational Presl Center closes.

Credentials. Press credantials are required for aU media coverina the mectini.

{utemationa! Prc:aa Center. The InterDational Press Cem~ will be open trom 9 a,m. Friday, May
17, until 8 p.m. Saturday, May 18, at GaIller Hall Found floor. The press center, open to
credentialed reporters, will make available officialachcdules, press releases, infonnation Oil evans
open to press coveraie. trmscripts and baclcaround information.

nl preu center has a limitecl number ofintcrnational credit and c&11ing card telephone linea.
Sbuttle buses. Shuttle buaea will provide transportation between conference loeationa for
credentialed delegates, staff and press.

eomerence Internet site: www.pofh.orWmwhftn

-30-

4810-39-W
DEPARTMENT OF THE TREASURY
Office of the Assistant Secretary for Financial Markets
31 CFR Part 356

Amendments to the Uniform Offering Circular for the Sale and
Issue of Marketable Book-Entry Treasury Bills, Notes and
Bonds
AGENCY: Office of the Assistant Secretary for Financial
Markets, Treasury.
ACTION: Advance Notice of Proposed Rulemaking.
SUMMARY: The Secretary of the Treasury (Secretary) is
authorized under Chapter 31 of Title 31, united States Code,
to issue united states obligations and to offer them for
sale under such terms and conditions as the Secretary may
prescribe.

The Department of the Treasury (Department or

Treasury) is issuing this Advance Notice of Proposed
Rulemaking to solicit comments on the design details, terms
and conditions, and other features of a new type of
marketable book-entry security the Treasury intends to
issue, inflation-protection notes or bonds, with a return
linked to the inflation rate in prices or wages.

The

Treasury is specifically interested in comments concerning
choice of index, structure of the security, auction
technique, offering sizes, and maturities.

The Treasury

also invites comments on other specific issues raised, as

2

well as on any other issues relevant to the new type of
security.
DATE: Comments must be received on or before (insert date 30
days after publication in the Federal Register).
ADDRESSES: Comments should be sent to:

the Government

Securities Regulations Staff, Bureau of the Public Debt, 999
E Street, N.W., Room 515, Washington, D.C. 20239.

Comments

received will be available for public inspection and copying
at the Treasury Department Library, Room 5030, Main Treasury
Building, 1500 Pennsylvania Avenue, N.W., Washington, D.C.
20220.
FOR FURTHER XNFORMATXON CONTACT: Norman Carleton, Director,
Office of Federal Finance PoLicy Analysis, Office of the
Assistant Secretary for Financial Markets, at 202-622-2680.
In addition, the Treasury plans to hold a series of investor
meetings in New York, Washington, D.C., Chicago, Boston, San
Francisco, and possibly other cities in late May and in June
1996 to discuss the new securities, answer questions, and
solicit comments.

To request information about attending

any of these meetings, contact the Office of Financing,
Bureau of the Public Debt, at 202-219-3350.
SUPPLEMENTARY XNFORHATXON: The Treasury Department intends
to issue a new type of marketable book-entry security with a
nominal return linked to the inflation rate in prices or
wages, as officially published by the United states
Government.

The Treasury is considering various indices for

3

this purpose, including the Consumer Price Index for All
Urban Consumers (CPI-U) published by the Bureau of Labor
statistics (BLS) of the Department of Labor, the core CPI
(CPI-U, excluding food and energy, as published by the BLS),
the Gross Domestic Product (GOP) deflator published by the
Bureau of Economic Analysis (BEA) of the Department of
Commerce, and the Employment Cost Index--Private Industry
(ECI) also published by BLS.

Through this notice, the

Treasury is soliciting comments on the design details of the
planned inflation-protection securities and on which index
(those mentioned above or another index) would be most
likely to result in the broadest market for the new
securities.

At the end of this notice is a hypothetical

term sheet with proposed formulas applicable to one of the
structures being considered for the new security.

This advance notice of proposed rulemaking is not an
offerinq of securities, and any of the currently
contemplated features of inflation-protection securities
that are described in this notice may change.

The terms and

conditions of particular securities that may be offered will
be set forth in the Uniform Offering Circular (31 CPR part
356) and the applicable offering announcement.

The Department intends to issue inflation-protection notes
or bonds in order to save on interest costs and to broaden

4

the types of debt instruments available to investors in
financial markets.

u.s.

Because the Treasury, rather than the

investor, would bear the inflation risk on an inflationprotection security, the Department expects that the prices
at which it would sell this new type of security would
capture some or all of the inflation risk premium charged by
investors on conventional Treasury securities.

In other

words, investors should be willing to pay extra for a
security on which the issuer, rather than the investor,
bears the risk of higher than expected inflation.
Consequently, the expected interest costs to the Treasury of
inflation-protection securities should be lower than those
on conventional Treasury securities.

In addition, inflation-protection securities may prove to be
attractive investments to investors who do not now invest in
Treasury securities to any significant extent.

For example,

certain pension funds that currently invest in bonds other
than Treasury securities because of the higher yields on
private fixed-income securities may find Treasury inflationprotection notes or bonds useful to include in their
portfolios.

The new securities would offer explicit

inflation protection to investors, which has heretofore been
unavailable in a Treasury debt instrument.

This inflation

protection could prove attractive for investments for
retirement.

Also, because the path of changes in market

5

prices of inflation-protection securities would be markedly
different from that of the market price of conventional
fixed-income instruments or equity investments, inflationprotection securities could be useful for achieving some
portfolio diversification.

This broadening of the market

for Treasury securities should also result in lower overall
interest costs for the Treasury over time.

Indexation Methodology.

A design of the inflation-

protection securities that is currently being considered is
modeled, with some modifications, on the Real Return Bonds
currently issued by the Government of Canada.

The

Department is soliciting comments about this choice of model
and the specific details described below and in the
hypothetical term sheet, as well as the formulas in the
appendix.

For this particular structure, the principal amount of the
inflation-protection security is adjusted for inflation, so
that the adjusted value remains the same in constant
dollars.

This is achieved by multiplying the principal

value of the security at issuance by an index ratio.

The

index ratio is the reference index number applicable for the
valuation day divided by the reference ~ndex number
applicable for the issue date.

6

Because the reporting of a monthly price or wage series
index number for a particular month by necessity takes place
after the month has ended and because the market needs to
determine accrued interest on a daily basis, there has to be
a lag in the indexation of the security.

For this

structure, if it is based on a monthly index that is
reported in the following month, the indexation of the
principal on the first day of any month is based on the
index number for the third preceding month.

For example,

the index number applicable to the first day of December is
the one reported for September.

For other days of the

month, a linear interpolation is made between the index
number for the third preceding month and the one for the
second preceding month (in this example, October).

Using

the third preceding month as the reference month is the
minimum lag that enables interpolation between the index
number for that month and the following month.

Under this structure, interest is payable semiannually.
Interest payments are a fixed percentage of the value of the
inflation-adjusted principal, in current dollars, for the
date on which it is paid.

Alternative structures.

The Treasury has given the most

study to the Canadian model for inflation-protection
securities, which in turn is a modification of the united

7

Kingdom's index-linked gilts.

However, alternative

structures are possible, and the Treasury is asking for
comment on whether alternative structures might be more
desirable for u.s. financial markets.

One alternative structure is a zero-coupon inflation-indexed
security.

This type of security could prove to be quite

volatile in price, but, if hald to maturity, this structure
would provide the greatest certainty about its return, since
there would be no reinvestment risk associated with coupon
payments.

In addition to general comments concerning the market for a
zero-coupon inflation-protection security, the Treasury is
soliciting comments about the use for this structure of an
index, such as the GOP deflator, that is subject to
retroactive revisions.

since the Treasury would only make

one payment on a zero-coupon inflation-protection security,
revisions would be less of a problem from the cash flow
perspective than with a security that pays interest every
six months.

However, the use of an index that is revised

retroactively may cause some impediments to trading the
security and would complicate the applicable tax rules.

Another quite different structure is an inflation-protection
security that pays out principal and interest at periodic

8

intervals.

Ignoring the lags, under this structure, each

payment is equal in real terms, but the proportion of each
payment representing principal and interest changes.

In

other words, this structure is similar to the cash flows of
a home mortgage, and, more specifically, a price level
adjusted mortgage.

This structure may be appealing to

investors desiring a flow of periodic payments that stay
constant in real terms.

It is also possible that this

structure may be more appealing than a Canadian-type
security to taxable investors concerned about receiving
sufficient cash payments from the security to satisfy the
tax on the income from the security.

Price or Wage Indices.

The Treasury is requesting comments

on which price or wage index is likely to result in the
broadest market for inflation-protection securities.
Specifically, the Department is considering (1) the CPl-U,
(2) the core CPI,

(3) the GOP deflator, and (4) the ECl.

The Treasury also requests comments on whether another index
would serve the desired purpose better.

The CPl-U is the best known measure of inflation, and, as
such, is a logical candidate for indexing the securities.
However, the CPI-U may not be the best index for certain
investors.

For example, pension funds' liabilities are more

9

sensitive to change in wages than to changes in consumer
prices.

The core

cpr

is a less volatile index than the

this may be appealing to investors.

cpr-u,

and

However, while energy

and food prices eventually influence other prices, the core

cpr

could be criticized for not completely reflecting any

trend that may develop in prices in the energy and food
sectors.

The GDP deflator is a broad measure of price trends in the
economy.

As noted above, its use may be better suited to a

zero-coupon inflation-protection security than to a note or
bond paying semiannual coupons, because the GDP deflator,
unlike the other indices under-consideration, is subject to
periodic revision.

Periodic revisions of an index pose three potential
problems.

The first is the need for finality in determining

payment amounts.

Second, the change in an index for a given

period could be based on an index number for a previous
period that has since been revised.

An indexation

methodology designed to correct for revisions in previous
values of the index would create additional complexity.
Finally, even for a zero-coupon security, revisions may
cause complications in the

app~icable

tax rules throughout

10

the life of the security.

Revisions may be less of a

problem for a security that makes only one payment at
maturity than for one that pays interest every six months.

The ECI may appeal to pension funds, whose liabilities are
more linked to wage, rather than price, inflation.

In this

regard, commenters are also asked to address whether the
total compensation or the wages and salaries series of the
ECI would be the most useful.

Since the Eel is a quarterly

index, the precise indexation methodology and the formulas
in the appendix, which assume a monthly index, would need to
be modified.

The Treasury is also requesting comments on whether a
seasonally adjusted or non-seasonally adjusted series would

be preferable.

Seasonal adjustment smoothes out

fluctuations, but seasonal factors are subject to revisions
for a considerable period of time.

Calculation of the Price or Wage Series.

From time to time,

government statistical agencies, such as the BLS and the
BEA, revise their methodology for calculating indices in
order to improve their accuracy.

Such revisions on a

forward-going basis may affect the inflation rate as
measured by the index and, therefore, the return to
investors.

11

For a Canadian-type or level real payment inflationprotection security, revisions of a price or wage index
number that has previously been reported, however, would not
be used for calculations of principal value or interest
payments.

This is in order for there to be finality in

determining payment amounts.

When a price or wage index is rebased to a different year,
the Treasury would use the price or wage index series with
the same base year(s) as when the security was first issued,
as long as that series continues to be published.

The

reason for this is to maintain precision in the indexation
of the security that may otherwise be lost due to rounding,
a problem that becomes more acute if the price or wage index
has increased significantly from the original base year(s)
to the new one.

The Department is specifically soliciting

comments on this point.

In the case of an index series reported on a monthly basis
in the following month, the Department is considering the
following procedure for the Canadian-type security if the
index is reported late.

If the index number for a

particular month is not reported by the last day of the
following month, the Department would announce by the end of
the next business day an index number based on the last
twelve-month change in the index available.

This number

12

would be used for

~ll

subsequent calculations and would not

be replaced by the actual price or wage index number when it
is reported.

Since the Treasury may use a price or wage

series that is not seasonally adjusted, the Treasury
welcomes comments on this procedure.

The Department

believes that this calculation would rarely, if ever, be
necessary.

If the price or wage index for an inflation-protection
security is discontinued while that security is outstanding,
the Treasury would consult with the agency responsible for
the index, and, based on such discussions, the Treasury
would select an appropriate substitute index and methodology
for linking the two series.

J)eterminations of the Secretary

in this regard would be final.

Finally, if the Federal Government commences publication of
a new version of the index that is more appropriate for
indexation than the one originally chosen, the Treasury
expects it would then use the new version for indexing new
inflation-protection securities.

Concerning the

introduction of a new version, the Treasury is requasting
commenters to address whether the Treasury should also index
outstanding inflation-protection securities to the new
version starting from its introduction or whether

13

outstanding securities should remain indexed to the original
series as long as that series continues to be published.

Auction Technique.

The Department is considering offering

inflation-protection securities through a single-price
auction.

The exact type of auction has yet to be

determined, and the Department is particularly interested in
input from potential auction participants, as well as
others, on this subject.

For a Canadian-type inflation-protection security, options
include two types of single-price auctions where the
Treasury asks for bids in terms of real yield to three
decimal places.

In the first case, the highest accepted

yield would become the coupon, and the inflation-protection
note or bond would be issued at par.

In the second case,

the Treasury would set a coupon after the auction in an
increment of 0.125%, and the price of the security would be
determined by the formulas in the appendix.

Also, the Treasury could announce a coupon on the security
and accept bids in terms of price.

However, this option

runs counter to the Department's auction practice for its
conventional Treasury securities, and,

a~

least initially,

i t may be difficult to judge what would be the appropriate
coupon.

14

Noncompetitive bids up to $5 million per bidder would be
permitted for inflation-protection securities.

In order to

ensure that enough competitive bids are accepted to price
the security fairly, the Treasury is considering whether all
or part of the noncompetitive bids should be filled by
issuing more securities than the originally announced public
offering amount.

The Department is requesting comments on

this issue.

Given the pricing uncertainty inherent in any new type of
security, the Treasury is requesting comments on whether the
Treasury should announce prior to a single-price auction of
an inflation-protection security that it retains, and may
exercise, the option to award an amount greater or less than
the announced public offering amount.

The reason for

awarding less stems from the use of the single-price auction
technique and the unique nature of this new instrument.

If

there were an extremely long tail between the yield
necessary to sell, for example, 95 percent of the announced
size and the remaining 5 percent, awarding less would avoid
issuing the security with

an-~easonably

high real yield.

(In any case, the Secretary reserves the right, in any
auction, to award an amount of securities greater or less
than the offering amount.

See 31 CFR 356.33)

15
The Department also welcomes comments on whether a singleprice or a multiple-price auction-would be more appropriate
for inflation-protection securities.

The Treasury is also requesting commenters to address
whether any of the auction rules for conventional Treasury
securities are inappropriate for an offering of inflationprotection securities and specifically whether there should
be a limit to the amount recognized at a single yield from a
bidder or the amount awarded to a single bidder in an
auction of inflation-protection securities.

Frequency.

The Treasury contemplates issuance of inflation-

protection securities on a regular quarterly cycle.

Reopenings.

The Treasury could reopen an issue of an

inflation-protection note or bond, though the flexibility to
do this under changing market conditions is conditioned by
tax issues involving the original issue discount rules that
have yet to be decided.

A reopening would also be

accomplished by an auction.

The Department welcomes

comments on whether bids on an issue that is being reopened
should be in terms of real yield or price.

For a Canadian-type security, amounts bid at an auction for
a reopened inflation-protection security would be in terms

16

of original par amount, not the inflation-adjusted par
amount.

The Treasury would announce prior to the auction

the index ratio necessary to convert the original par amount
to the inflation-adjusted par value for the settlement date.
This means that if the index ratio for the settlement date
is 1.03, a $1,000 bid amount would translate into $1,030
inflation-adjusted par value.

The Treasury is requesting

comments on this procedure.

Also, the Treasury is requesting comments on whether
reopenings of an issue would be important for market
liquidity, or whether they would act as a constraint on
prices, given the possibility of additional supply of the
security in the next quarter.

Maturities.

The Department's current thinking is that 10-

year inflation-protection notes or 30-year inflationprotection bonds would be the most appropriate maturity
sectors for this instrument.

The Treasury is soliciting

r.omments on which maturity sectors would be most in demand
for inflation-protection notes or bonds.

Amounts.

The Department is requesting comments on the

appropriate size of the initial auctions of inflationprotection notes or bonds.

The Treasury intends to increase

the size of the auctions from the initial levels over time.

17
Book-Entry Form and Systems.

The inflation-protection

securities would be offered only in book-entry form.

They

would be issued and maintained in the commercial book-entry
system which is operated by the Federal Reserve Banks,
acting as fiscal agents for the Treasury Department.

The

Treasury also would make inflation-protection securities
available through TREASURY DIRECT, a system designed
primarily to enable investors who do not intend to trade
Treasury securities to hold their book-entry securities
directly on the records of the Treasury.

Eligible amounts for holding and transferring would be in
multiples of $1000 of original par value for a Canadian-type
inflation-protection security.

The Treasury is soliciting

comments on any operational issues arising from the fact
that the amount of an inflation-protection security held and
transferred on the book-entry systems would be referred to
in terms of the original par value, not the inflationadjusted value.

Treasury Tax and Loan Accounts.

The Treasury intends to

make inflation-protection securities eligible as collateral
for Treasury Tax and Loan Accounts.

Valuation for

collateral purposes would depend on the precise structure of
the security.

18

Stripping.

For a Canadian-type security, the Treasury would

make inflation-protection securities eligible for stripping
on the commercial book-entry system at some point after
issuance of the new security had begun.
operationally possible initially.

This would not be

Eligibility for stripping

might extend only to inflation-protection securities issued
after a future effective date.

Taxation.

In general, a payment on an inflation-protection

security or an increase in the principal amount of the
security attributable to the inflation adjustment would be
includible in taxable income for the year in which it occurs
and would be treated as interest income.

Interest payments

on inflation-protection securities generally would have to
be included in the owner's taxable income when received or
as accrued, depending on the owner's method of accounting
for tax purposes.

For a zero-coupon inflation-protection

security, the difference between the issue price and the
original par amount would be interest that the holder would
include as taxable income on a constant yield basis.

The

precise tax treatment in the event the principal decreases
because of a decline in the price or wage index has yet to
be determined.

Other tax issues, including the reporting of

income on the securities by brokers and other intermediaries
(i.e., custodians), also remain to be determined.

Relevant

tax issues would be announced before the first issue.

19

Minimum Guarantee.

If the sum of all the interest payments

and the inflation-adjusted principal value at maturity of
the inflation-protection note or bond is less than the par
value of the note or bond at issuance, the Treasury would
make an additional payment at maturity for the difference.

After receipt and consideration of responses to this advance
notice of proposed rulemaking, the Department intends to
issue a final rule amending 31 CFR Part 356, "Sale and Issue
of Marketable Book-Entry Treasury Bills, Notes, and Bonds"
(Uniform Offering Circular).

Because the rule would relate

to public contracts and procedures for United States
securities, the notice, public comment, and delayed
effective date provisions of the Administrative Procedure
Act are inapplicable, pursuant to 5 U.S.C. 553(a) (2).

20

HYPOTHETICAL TERM SHEET
Note: This hypothetical term sheet assumes that an
inflation-protection note or bond would be linked to a
price or wage index reported monthly and that the index
number for each month is reported the following month.
ISSUER

United states Treasury

ISSUE

Inflation-protection note or bond

PAYMENT DATES

Inflation-adjusted principal on the
security will be paid on the maturity date
as specified in the offering announcement.
Interest on the security is payable on a
semiannual basis on the interest payment
dates specified in the offering
announcement through the date the principal
becomes payable. In the event any
principal or interest payment date is a
Saturday, Sunday or other day on which the
Federal Reserve Banks are not open for
business, the amount is payable (without
additional interest) on the next business
day.

HATURITIES

Ten or thirty years.

INDEXING
METHODOLOGY

To calculate the value of the principal for
a particular valuation date, the value of
the principal at issuance is multiplied by
the index ratio applicable to that
valuation date. Semiannual coupon interest
is determined by multiplying the value of
the principal at issuance by the ir.1.ex
ratio for the coupon payment date by onehalf the stated rate of interest.

INDEX RATIO

The index ratio for any date is the ratio
of the reference index number (reference
INUM) applicable to such date to the
reference lNUM applicable to the original
issue date.

21
REFERENCE INUH

The reference INUM for the first day of any
calendar month is the INUM for the third
preceding calendar month.
(For example,
the reference INUM for December 1 is the
INUM reported for September of the same
year, which is released in October.) The
reference INUM for any other day of the
month is calculated by a linear
interpolation between the reference INUM
applicable to the first day of the month
and the reference INUM applicable to the
first day of the following month.
Any revisions that the agency responsible
for the index makes to any INUM that has
been previously released shall not be used
in calculations of the value of Treasury
inflation-protection securities.
In the case that the INUM for a particular
month is not reported by the last day of
the following_month, the Treasury will
announce an index number based on the last
year-over-year inflation rate as measured
by the chosen index. Any calculations of
the Treasury's payment obligations on the
inflation-protection security that need
that month's INUM number will be based on
the index number that the Treasury has
announced.
If the applicable price or wage series is
discontinued during the period the
inflation-protection security is
outstanding, the Treasury will, in
conSUltation with the agency responsible
for the series, determine an appropriate
substitute index and methodology for
linking the discontinued series with the
new price or wage index series.
Determinations of the Secretary in this
regard will be final.

STRIPS

Eligible for the STRIPS program at a future
date.

22
TAXATION

Appreciation of the principal will be taxed
as interest income in the period the
appreciation occurs. Interest payments
will be includible as interest income when
received or as they accrue, depending on
the taxpayer I s method of accounting. Other
tax detail.s.--remai.n to be determined.

AUCTION
TECRNIQUE

Single-price auction.

options:

(1)

Bidders bid for coupon, with bids
expressed to three decimal places.
The highest accepted yield becomes the
coupon. security is issued at par.

(2)

Bidders bid real yield, with bids
expressed to three decimal places.
Coupon is set near.the highest
accepted real yield in increments of
1/8 of 1 percent. Price is determined
by formula in the appendix using the
highest accepted yield.

(3)

Before the auction Treasury announces
a coupon, securities are issued at
lowest accepted price.

KINDmK
GUARANTEE

If the sum of all the interest payments and
the inflation~adjusted principal is less
than the par value of the security at time
of issuance, the Treasury will pay an
additional sum at maturity equal to the
difference.

KINIKUHS AND

The minimum to bid, hold, and transfer is
$1000 original principal value. Larger
amounts must be in multiples of $1000.

JlULTIPLES TO
BID, HOLD, AND
TRANSFER

23

Appendix - Formulas

I.

Reference lNUM:
Ref lNUMDat~ = Ref lNUMx +

II.

t - 1

+ 1

-

Ref I~]

Index Ratio:
Index Ra tiOnate

III.

[Ref I~

D

= Ref lNUMoate
Ref lNUMsase

Real Price:
A.

No initial partial semiannual coupon period:

RP
B.

lOOv n

= (C/2) ~l +

with initial partial semiannual coupon period:

~C{:;:r~i;2~oovn

RP = c/2 ;

- [(s-r) Is] (C/2)

IV.
Settlement amount, including accrued interest, for $100
Original Principal:
SA

V.

=A

+

[Index RatiOoate

X

RP]

Accrued Interest:
A = [(s-r) Is] x (C/2) x Index RatiOnate

VI.

lNUM not reported timely for month M:
Ref

I~ = I~-l

X

I~-l

[

I~-1J

Generalizing for last reported
prior to month M:
Ref

I~ = I~_li

X

[

INl~

] 112

issued N months

I~_li

I~-li-12

]

~2

24

Definitions
RP

=

real price

SA

=

settlement amount, including accrued interest,
current dollars per $100 original principal

A

=

nominal accrued interest per $100 original
principal

r

=

days from settlement date to next coupon date

s

=

days in current semiannual coupon period

i

=

real interest rate, compounded semiannually

c

=

real annual coupon, payable semiannually, in terms
of real dollars paid on $100 initial, or real,
principal of the security
.

n

=

number of full semiannual periods from settlement
date to maturity date

~

=

1/(1 + i/2)Il

a Il1

=

(1 -

Date

=

valuation date

D

=

the number of days in the month in which Date
falls

t

=

the calendar day corresponding to Date

lNUM =

~)

I

(i/2)

-

v +

v2 + v3 + •••

~n

vn

index number

Ref I~ = reference lNUM for the first day of the calendar
month in which Date falls
Ref I~l = reference lNUM for the first day of the
calendar month immediately following Date

25
Example 1
The Treasury issues a 30-year inflation-protection bond on
July 15, 1996. The bonds have a par value of $100 and are
issued at a discount to yield 3.1% (real). The bonds bear a
3% real coupon, payable on January 15 and July 15 of each
year.
The base price or wage index applicable to this bond
is 120.~ The settlement amount ~) is calculated using
real pr1ce formula III.A (for no partial initial semiannual
coupon period) in the appendix:
n

III.A

SA

60

+ i/2)D

=

1/ (1

=

0.39737847

=

(1 - r ) / (i/2)

=

(1 - 0.39737847)/(.031/2)

-

38.87880825

=

RP

=

=

1/ (1 + • 03 1/ 2 ) 60

(C/2) ~1 + 100r

(3/2) x 38.87880825 + 100 x 0.39737847
98.05605959
April 15, 1997 is the settlement date for a reopening of
this bond. The reference wage or price index number for
this date is 132 and the additional supply is issued at a
real yield of 3.4%. The settlement amount is calculated by

The example shows the intermediate results rounded to
eight decimal places, although the calculations were performed
without intermediate rounding. In determining prices and accrued
interest in actual auctions of Treasury securities, the
Department rounds the final results. The price is rounded to
three decimal places and the accrued interest amount to six
decimal places, based on a par value of 100.
1

2 If this were a real example, this number would have been
derived using formula I. The index number for January 15 would
have been an interpolation between the index number reported for
October and the one reported for November.

26

first using formula V to calculate the nominal accrued interest since the last coupon payment, per $100 original
principal.
.

Ind ex Ra t10nate

V.

Ref INUMoate
= 132 = 1.1
120
Ref INUMsase

=

n

=

58

s

=

181

r

=

91

A

=

[(s-r)/s] x (C/2) x Index RatiOoat.e

=

[(181-91)/181] x (3/2) x 1.1

=

0.82044199

The real price is calculated using formula III.B (for an
initial partial semiannual coupon period):

Ciul

III.B RP

RP

=

=

=

1/ (1 + • 034 / 2 ) 58

=
=

(1 - 0.37617050)/(.034/2)

0.37617050

=

36.69585314

C / 2 + ( C / 2 ) ~l + 10 Ov n _ [( s _ :r::) / s] (C / 2 )
1 + (:r::/s) (i/2)

(3/2) + [(3/2) x 36.69585314] + (100 x 0.37617050)
1 + (-9""I/181) x (.034/2)

-

=

[(181-91)/181] x (3/2)

92.61700426

The settlement amount is calculated using formula IV:
IV.

SA

=

A + [Index RatiOnat.e

=

0.82044199 + (1.1 x 92.61700426)

=

102.69914667

x

RP]

27
PUT 356--SALE AND XSStrE OF DRltE'l'ABLB BOOK-DTRY TREASURY
BXLLS, )tOTES, AJJD BONDS (DEPuTXERT 01' 'lD nEASURY
CXRCULAR, PUBLXC DEBT SERIES BO. 1-93)

Authority:
U.S.C. 391.
Date:

Darcy

S//stu
Bra~

Assistant
4810-39-W

.._

5 U.S.C. 301; 31 U.S.C. 3102, et seq.; 12

DEPARTMENT

OF

THE

TREASURY

NEWS
OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
May 20, 1996

Contact:

Jon Murchinson
(202) 622-2960

TREASURY TO HOLD INFLATION-PROTECTION DEBT INFORMATION MEETINGS

The Treasury Department will hold a series of meetings to discuss its plans to issue
inflation-protection securities. These meetings will be an opportunity for investors and
dealers to provide comments to Treasury on the design details, possible terms and conditions
of the new securities. The meetings will take place in Washington, D.C., New York City,
Boston, Chicago, San Francisco, London and Tokyo. Press wishing to attend must call the
appropriate contact listed for each city. The dates and locations for each meeting are as
follows:

DATE

LOCATION

PRESS CONTACT

May 29

Treasury Department
1500 Pennsylvania Avenue, NW
Washington, D.C.

Jon Murchinson
(202) 622-2960

May 30

Federal Reserve Bank
33 Liberty Street
New York, N.Y.

Bart Sotnick
(212) 720-6143

June 4

Federal Reserve Bank
600 Atlantic Avenue
Boston, Massachusetts

Thomas L. Lavelle
(617) 973-3647

June 5-7

U.S. Embassy
24 Grosvenor Square
London, WIA

Dennis Wolf
(011) 441714995261

-MORERR-I081

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-204-0

DATE

LOCATION

PRESS CONTACT

June 5

Federal Reserve Bank
230 South LaSalle Street
Chicago, Illinois

Suzanne Hefner
(312) 322-5108

June 6

Federal Reserve Bank
101 Market Street
San Francisco, California

Sandra Conlan
(415) 974-3231

June 10, 11

U.S. Embassy
10-5, Akasaka 1-chome
Minato-ku, Tokyo (107)

Emi Yamauchi
(011) 81332245267

Times for all meetings will be announced at a later date. Non-press inquiries should
be directed to the Bureau of Public Debt, (202) 219-3350, or to the U.S. Treasury Attaches
in London, (011) 441714088069, or Tokyo, (011) 81332245486. To receive the Advance
Notice of Proposed Rulemaking from Treasury's automated fax system call (202) 622-2040
and request document 1080.

-30-

D E P .\ R T \1 E

~

T

0 F

THE

T R E :\ S II R Y

NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. • WASIDNGTON, D.C.· 20220 • (202) 622-2960

Hon. Robert E. Rubin
United States Secretary of the Treasury
Concluding Statement
[Remarks Prepared for Delivery)
Meeting of Western Hemisphere Finance Ministers
May 18, 1996
We have just concluded the first meeting of finance ministers
from this hemisphere since the Summit of the Americas.
We covered a
broad set of topics.
We set in motion steps we believe will
contribute greatly to the future prosperity of our region.
And we
have advanced the interests we Americans share in expanding growth,
private investment, jobs and the security of all of our people.
Speaking for myself, I have rarely seen as robust and wideranging a discussion as that which transpired at this meeting today.
I am bringing back home to Washington a long list of questions asked
and issues raised which represent, in my view, the agenda for
discussion and action in the years ahead.
They are matters which
will surely comprise the work ~e do in bilateral and multilateral
settings.
I believe all of us have broadened and deepened our
perspective and understanding of these issues.
That is why these meetings are important.
They permit the
Finance Ministers to learn from each other.
They force each nation
and each Minister to confront issues which rise above the day-to-day
challenges of our work, issues whose resolution will determine our
prosperity for de6ades to come. And they help us achieve and
reinforce good policy -- because all of us can return to our
respective nations, economies and ministries and say "this is what
our partners believe we all must do so that our entire region can
succeed."
We fashioned a communique that details our conclusions and
spells out directions we have given on specific actions.
Let me
summari zOe the communique in broad terms.
We state our common view of what is necessary both at the
macroeconomic level and the microeconomic level tc develop stronger
and more prosperous economies, policies that address the problems of
poverty and that strengthen and support the integration of our
markets.
We are committed to policies that will bring inflation down
and keep it low.
There is no dissent from the view that fiscal
discipline and monetary control is of the highest importance.

RR-IOB2
For press releases, speeches, public schedules and official biographies, call our 24.Jtour fax line at (202) 622-2040

vJe are also focused on what policies might increase domestic
savings and promote financial stability.
These are central to the
achievement of higher and more stable levels of real economic growth.

We have also agreed on a number of concrete steps that can help
achieve these goals.
One is expanding financial transparency -timely release of key data by governments, disclosure by issuers of
securities, and full dissemination of information on trading.
Because markets that mobilize and allocate savings efficiently
are central to growth and financial stability, our nations are
committing to developing and strengthening the laws, supervisory
institutions and enforcement mechanisms that help keep financial
markets sound and which help protect investors. At the same time, we
want to encourage innovation, and both these aims will require
removing regulations that are outmoded or disruptive to competition.
Reflecting these goals, we are taking several steps. Let me
mention four:
First, we have asked the IDB to develop programs to help
strengthen supervision; second, we have also asked the IDB to work
with us to list national financial market regulations that will
contribute to transparency as an initial step toward liberalization
and i~tegration; third, we've agreed to support work towards
accounting standards that are universally understood -- so an
investor in one country has no question about what the information in
ano~her country means; fourth,
we ask theIDB to establish an
institute to train bank and securities supervisors and examiners to
promote sounder financial institutions.
We also discussed the need to give opportunities to those who
There
have been left out of economic development to take part ,in it.
is a financial market dimension to this.
My colleagues agreed that
microe~terprise lending can be an important contributor to this
process.
The' third area we discussed was financial crimes.
We share a commitment to combat money laundering from drug
trafficking or any other illegal activity.
It's a threat to the
integrity of our financial markets, and our economic and political
systems.
Interest in attacking this problem has been increasing
since our money laundering conference in Buenos Aires late last year.
A number of countries have taken concrete actions to combat money
laundering since the Buenos Aires conference. \~hile others are
considering such measures, more work must be done.
2

3

In conjunction with the OAS effort to oversee the plans agreed
to in Buenos Aires, we will be exploring a coordinated, hemispheric
approach to training and technical assistance.
I'm pleased that so
many of my counterparts Vlant to speed up the process by err~racing the
training concept.
In each of the areas I have discussed -- macroeconomic policies,
financial market development, and fighting financial crime -- this
meeting fulfilled our objectives.
We learned from each other, we
focused on the long-term, and we have developed a shared vision to
bring home along with a shared commitment to bringing these ideas to
fruition.
This meeting was a success, and we are now determined to
institutionalize the consultations among the finance ministers of
this hemisphere.
We will meet again within two years (or perhaps
sooner) to review economic policy issues.
Between now and then, our
Deputies, supported by a new Technical Working Group on National
Financial Market Regulation, and the IDB will be busy with the work
we have assigned them. We intend to ask the private sector as we go
forward for their advice and guidance.
Today, we have taken critical steps that will, in time, assist
economies in this Hemisphere to have greater, more stable growth and
less poverty. There are three-quarters of a billion people in our
region, and in a very real sense, 'the work we have done here in New
Orleans will create jobs, lift incomes and raise living standards for
years and decades to come in this Hemisphere.
Thank you.
#####

3

SUMl\1IT OF THE AMERICAS
MEETING OF WESTERN HEMISPHERE FINANCE MINISTERS
NEW ORLEANS, LOUISIANA
l\1ay 18, 1996
JOINT COl\1MUNIQUE
INTRODUCTION
l.
We, the Finance Ministers of the countries participating in the Summit of the Americas
(SOA), met in New Orleans, Louisiana to address common challenges to achieve stable and
sustainable economic growth in our countries and to move forward on a program that fulfills the
commitment' of our Heads of State and Government to build more open, transparent and
integrated financial markets, Financial market development, liberalization and integration are
crucial components of our shared vision of rapidly expanding and increasingly integrated
economies in which all citizens can participate. They are also essential complements to the
development of a Free Trade Area of the Americas, which is scheduled to eliminate trade and
investment barriers by 2005. Our discussions today focused on three broad areas:
a.

Maintaining a sound policy environment for private investment

b.

Developing, liberalizing and integrating financial markets

c

Combating financial crimes

MAINTAINING A SOUND POLICY ENVIRONMENT FOR PRIVATE INVESTMENT
2.
We have a common vision of the policies needed to achieve macroeconomic strength,
recognizing that their implementation is a prerequisite to prosperity, to addressing poverty, and to
strong, integrated markets in the Americas. We recognize the progress governments are making
to put these policies in place.
a.

We are committed to developing and maintaining fiscal and monetary policies that bring
inflation down to low levels and keep it there, maintain sustainable fiscal and external
balances, increase domestic savings, promote financial stability and foster increased real
economic growth. We recognize that fiscal policies must be based on strong expenditure
control and effective tax administration. Monetary stability and confidence in the financial
system are fostered by independent central banks, transparent financial policies and
appropriate financial market regulation and supervision.

b.

We believe that open and competitive financial markets are instrumental to achieving
economic prosperity. Short-term capital flows present macroeconomic policy challenges.
Some of our countries have found direct measures useful in moderating these capital
flows. We all recognize that, fundamentally, these challenges need to be met through
sound macroeconomic and financial policies in recipient and source countries.

RR-I083

c.

Increased domestic saving throughout the region is a requirement for more rapid,
sustained growth. We acknowledge that meeting this objective will depend upon our
ability to contain inflation, control public dissaving, ensure the sustainability of social
security systems and implement structural reforms that facilitate and encourage the
creation of private sector savings vehicles.

3.
Privatization and liberalization, backed by prudential regulatory support, deepen the
efficiency of economic activity and promote capital market development and integration. We
recognize the importance of moving forward with privatization in the region by identifying and
addressing roadblocks to further progress.
4.
Although the debt burdens of many countries in the region have become manageable
through economic reform and adoption of measures to alleviate sizeable debt obligations, some of
our countries still face heavy burdens that will limit the prospects for growth.
a.

We encourage eligible countries to take full advantage of existing mechanisms for
addressing commercial bank and official bilateral debt problems.

b.

We welcome the recent initiative for deeper debt reduction now being impiemented by
bilateral creditors to the poorest countries.

c.

We also welcome the progress in addressing the multilateral debt problem of the highly
indebted, poorest countries at the spring Th1F and World Bank meetings, and strongly
urge these institutions to move promptly to finalize and implement the necessary
mechanisms. We recognize a continuing need for adequate flows of concessional funds in
the multilateral development banks for the poorest countries.

d.

We will continue to study this problem and to explore new mechanisms to address it
through our Deputies committee and in future meetings of Ministers.

5.
The publication of timely, high quality economic and financial data enhances access to
financial resources, supports stable financial markets by harnessing the ability of markets to
monitor economic performance, and promotes the sound conduct of economic policy.
a.

While recognizing that the appropriate pace of implementation will vary by country, we
support Th1F standards of public data disclosure.

b.

We also agree to work toward making key financial and economic data available on the
Internet.

DEVELOPING, LIDERALIZING AND INTEGRATING FINANCIAL l\1ARKETS
6.
Financial markets that mobilize and allocate savings efficiently are a cornerstone to
economic growth and financial stability.
a.

We commit to the development and reinforcement oflaws, supervisory institutions, and

enforcement mechanisms that ensure financial market soundness and investor protection
while preserving incentives for innovation. Doing so will require the removal of
regulations that are outmoded or disruptive to competition.
b.

We recognize the benefits of progressively integrating financial systems to support broader
and deeper financial opportunities for both borrowers and investors, and recognize that
sub-regional financial integration can be an intermediate step toward hemispheric
integration. This is especially promising for market development in groups of smaller
countries.

c.

We appreciate the importance of rigorously applied, high quality accounting standards for
enterprises. We will promote efforts to develop, revise and raise national standards to
reflect important market innovations. In addition, we support ongoing efforts by
securities regulators and the accounting profession to develop high quality standards that
are acceptable on a global basis. We will explore ways to encourage their use.

d.

We recognize the importance of the work of the Association of Latin American and
Caribbean Bank Supervisors to strengthen banking supervision systems in the hemisphere
and to establish comprehensive supervision on a fully consolidated basis for all
internationally active banking organizations.

e.

We encourage the Council of Securities Regulators of the Americas (COSRA) to maintain
its commitment to protect investors, and develop high quality and comparative regulatory
structures, and thereby further integrate financial markets in the hemisphere. We support
COSRA's 1996 work program to enhance capital formation, evaluate the impact of
market structures, and combat illicit payments.

f.

We encourage work within our countries to implement expeditiously the efforts of the
Association of Latin American and Caribbean Bank Supervisors and the Council of
Securities Regulators of the Americas.

g.

Our governments, in conjunction with the Inter-American Development Bank (IDB), have
begun to develop a listing of national financial market regulations, mandated by the
Summit leaders in December 1994, and intended to increase transparency as a first step
toward liberalization and integration.

7.
The development of microenterprises -- which account for a large percentage of the
employment of the poor, particularly women -- and broader access to financial services are
essential elements of sustainable and equitable development. This is an important way to broaden
participation in the benefits of economic grO\vth.
a.

We recognize that our program to improve the infrastructure and operations of financial
market are central to expanding small scale entrepreneurs' access to capital.

b.

We also recognize that effective microfinance institutions can facilitate the mobilization of
savings to fund investment and broaden economic participation.

8.
We recognize the important contributions of the Inter-American Development Bank, the
International Monetary Fund and the World Bank to our efforts to reform and develop our
financial systems through lending, policy advice, and technical assistance. We encourage these
institutions to strengthen further their programs to support banking and capital market supervision
and regulation. We also welcome the increasing efforts of the IDB and the World Bank to
catalyze private capital flows from domestic and foreign sources by such means as financing and
co-financing infrastructure facilities, assisting the privatization of state-owned enterprises, and
extending financial support for microenterprises.

COMBATING FINANCIAL CRIMES
9.
We reaffirm our shared commitment to intensified action to combat the laundering of
proceeds, properties and other instrumentalities of drug trafficking and other illegal activities,
recognizing the threat it presents to the integrity of financial markets, and our economic and
political systems.
a.

We welcome the fact that efforts to combat financial crime have intensified since the
December 1995 Ministerial Conference Concerning the Laundering of Proceeds and
Instrumentalities of Crime in Buenos Aires. Since then, a number of countries in our
region have proposed, passed or adopted legislation to criminalize money laundering and
establish strict currency and suspicious transactions reporting rules. This is in addition to
countries that already had legislation in place.

b.

Our governments recognized the need to go further by agreeing at the Buenos Aires
Ministerial to progress evaluations to identify vulnerabilities in each of our legislative,
legal and law enforcement systems. We welcome the efforts underway at the OAS to
oversee the implementation of the Plan of Action agreed in Buenos Aires. We
acknowledge the work of the OAS to study and agree on a coordinated, hemispheric
response, including the consideration of an Inter-American convention to combat
laundering of money and other assets, and to identify the priorities for basic harmonization
of national laws directed at the same purpose.

c.

We fully support the ongoing OAS assessments of the implementation of the Buenos Aires
Plan of Action, and encourage the IDB, in coordination with the OAS, to develop a
coordinated, hemispheric approach to providing training and technical assistance to lay the
groundwork for implementation.

10.
Recognizing that corruption in both the public and private sector weakens democracy and
undermines governance and the legitimacy of institutions, we reemphasize our commitment to
transparency and accountability in government, the necessity of strict enforcement measures and
the benefits of cooperation in the international investigation of corruption cases.
a.

We welcome the ongoing work of the OAS to develop a hemispheric approach to
combating corruption and applaud the recently concluded Inter-American Convention
Against Corruption. This Convention is the first legally enforceable international treaty on
corruption, and has alr-eady been signed by 21 countries in the hemisphere.

b.

We encourage the IDB, the World Bank and bilateral lenders to address prevention of
financial crimes in their operations, including support to official programs.

11.
We recognize that cooperation on tax and other financial information exchange is a
potentially valuable tool for our anti-money laundering and anti-corruption efforts, and agree to
explore ways to promote such exchanges.

WORK PROGRAM AND FUTURE MINISTERIAL MEETINGS
12.
The Committee on Hemispheric Financial Issues, established by Heads of State and
Government at the Summit of the Americas, met four times during the past 17 months at the
Deputies level to discuss recent development in hemispheric financial markets, identify steps to
strengthen them, and review the problems of debt in the hemisphere. This work has set the
groundwork for the concrete actions that we are authorizing today.
•

We call on the Committee Deputies to implement the mandate for future work outlined in
Annex A and to support the execution of the initiatives identified in Annex B.

13.
We will meet within two years to review economic policy issues and the recommendations
of the Conunittee on Hemispheric Financial Issues and determine what additional steps should be
taken to promote financial market development, liberalization and integration.
14.
We look forward to the Sustainable Development Sununit in Santa Cruz, Bolivia, on
December 6-8, 1996.

ANNEXA
MANDATES FOR FUTURE WORK
CoMMITTEE ON HEMISPHERIC FINANCIAL ISSUES:

16.
The Committee on Hemispheric Financial Issues meeting at the Deputies level will
continue its current mandate to pursue strong, open financial and capital markets consistent with
the Summit of the Americas goal of regional integration, and to review the problems of heavily
indebted countries in the hemisphere. The Committee is specifically directed to:
a.

Examine issues that affect the performance of our economies and financial markets, such
as improved analysis and dissemination of information concerning national economies by
the private sector and international financial institutions, possible ways to improve access
to medium and long-term financing, and the conduct of monetary policy in the context of
globalized markets.

b.

Oversee and build on the work of the newly established Technical Working Group on
National Financial Markets Regulations (see below) and identify priority actions to
strengthen and integrate financial markets.

c.

Ensure implementation of Th1F disclosure standards -- as appropriate for each country -and work toward making key economic arid financial information available on the Internet.

d.

Encourage the adoption and rigorous application of high quality national accounting and
disclosure standards by enterprises.

e.

Consider and, as appropriate, endorse recommendations from other sources, including
regional associations dealing with financial markets, the Meetings on Financial Market
Development and the reviews undertaken by private sector groups within our countries on
laws affecting the financing of the private sector (see Annex B).

f

Work with the Inter-American Development Bank, International Monetary Fund, and the
World Bank to develop new programs to strengthen and integrate regional financial
markets where needed.

g.

Explore ways to increase private sector savings, including private sector options for
financing and managing pension funds.

h.

Develop new recommendations, where appropriate, to address other financial issues of
regional concern -- including privatization, infrastructure investment, and microenterprise
development.
Examine the overall debt situation in the hemisphere and explore new mechanisms to deal
with it, in particular, measures to address the multilateral debt obligations of the poorest
countries.

J.

Complement the ongoing work of the OAS and of the hemispheric governments through
identification of specific initiatives, where appropriate, that Financial Ministries can pursue
to combat money laundering and corruption.

k.

Prepare recommendations for future work to be considered by the Ministerial meeting in
two years.

17.

By affirming the Committee's mandate for future work, we:

a.

Strengthen the network of finance officials in the hemisphere, facilitating discussion and
consensus on key economic issues in the hemisphere;

b.

Provide impetus to other organizations, including multilateral development banks and
banking and security regulators, to advance efforts important to the hemisphere; and

c.

Provide opportunities for mutual support and cross-validation of individual countries'
reform efforts.

TECHNICAL \VORKING GROUP ON NATIONAL FINANCIAL MARKET REGULATION:

18.

A technical working group on national financial market regulations is to be created to:
a.

complete, in conjunction with the Inter-American Development Bank, compilation
of a comprehensive list of national financial market regulations;

b.

determine the best mechanism for making this list publicly available, in order to
promote transparency and assist potential investors;

c.

develop procedures for informing and reviewing significant changes in these
regulations, to encourage transparency and keep the comprehensive list current;

d.

draw from the experiences of participating countries and policies contained in the
list of national financial market regulations to identify policies that encourage the
development, liberalization and integration of the region's financial markets; and

e.

identify ways that our countries can cooperate to advance this goal.

19.
The working group will be a dynamic vehicle to promote the development, liberalization
and integration of financial markets. It will provide periodic progress reports to the Committee
on Hemispheric Financial Issues meeting at the Deputies level and will issue a report of its
conclusions to the Committee within 18 months. The working group will be comprised of
officials with special knowledge about their country's policies and how they affect financial
markets.

ANNEX B:

INITIA TIVES

o

Training Program for Supervision and Examination

o

Identifying Priorities for Financial Market Development

o

Reviews of National Laws Affecting the Financing of the Private Sector

o

Technical Assistance for Combating Financial Crimes

TRAlNING PROGRAM FOR SUPERVISION AND EXAMINATION

Summary:
The Ministers called on the Inter-American Development Bank to establish a technical training
program to help develop and train more highly skilled bank and securities supervisors and examiners
as a means of promoting greater safety and soundness in Latin American financial systems.
Currently, no regional training programs of the type described below exist for financial market
regulators. The proposed training program will foster development in the region of an expanded
cadre of technically-skilled bank and securities market regulators and examim!rs and, by providing
common training, it will promote regulatory cooperation across countries and across markets. The
specific content of the program's courses should be based on an ongoing analysis of training needs
in the region.

Description of Program:
The program will sponsor short-duration courses in banking and securities market supervision and
examination. The courses will include opportunities for banking and securities examiners to focus
together on issues of common interest. The program will coordinate these courses with the
Association of Latin American and Caribbean Bank Supervisors and the Council of Securities
Regulators of the Americas.
Participating countries will send officials from their banking, securities and other financial regulatory
offices as appropriate (e.g., bank examiners, securities regulators, pension regulators and supervisors
of operations).
The IDB will be asked to fund the program.

IDENTIFYING PRlORITIES FOR FINANCIAL MARKET DEVELOPMENT

Summary:
In order to identify pnontles for policy action, the Ministers called on the Inter-American
Development Bank to host three meetings between policy-makers, regulators and market participants
to identify the main problems in the development of deep, liquid financial markets and to recommend
solutions. Key issues to be addressed will include the expansion of long-term financing options and
the creation of new opportunities for domestic savings. The Ministers further charged their Deputies
to review the recommendations and to propose next steps for action.

Description of Conferences:
The IDB will host several hemispheric-wide meetings, including one in the Caribbean, over an 18month period. Participating countries will send experts from their regulatory agencies that have
policy-level responsibility for financial market development. Private sector participants also will be
invited and will be asked to present papers on specific topics.
The meeting agendas will focus on practical steps that governments can take to facilitate greater
depth and liquidity in domestic financial markets. Topics will include
•

Ways to facilitate greater participation by institutional and retail investors in financial markets,
with special emphasis on practical steps that governments can take to widen and deepen
domestic institutional participation in financial markets.

•

Ways to improve the financial, legal, and regulatory environments so as to make the issuance
of medium- and long-tenn debt and equity instruments attractive to both issuers and investors.

•

Ways to improve financial market infrastructure (e.g., quicker and more assured payments
and settlement systems that use DVP (delivery versus payment); more efficient provision of
custodial services; development of computer-based trading systems).

•

Ways to improve financial disclosure and transparency on an internationally comparable basis
(e.g., issuer disclosure; investment prospectuses; fund management performance data;
transparency with respect to market transactions).

•

Development of legal infrastructure to establish property rights, the perfection of security
interests, and rules governing bankruptcy proceedings.

The IDB will be asked to provide funding for the meetings.

REVIEWS OF NATIONAL LAWS AFFECTING mE FINANCING OF mE PRIVATE SECTOR

Summary:
The Mnisters encouraged relevant national private sector organizations to propose recommendations
for improvements in their national laws, regulations and implementation that could enhance financing
for the private sector and to recommend practical solutions. The Ministers further charged their
Deputies to review the reports and recommendations and to propose next steps for action.
National laws and institutions that protect private property rights, including the rights of creditors,
and establish the conditions for innovation and competition are essential to a country's ability to
provide finance for the private sector and to sustain economic growth. Ministers have identified
reviews by national private sector organizations as an effective way to mobilize the private sector's
expertise on aspects of national laws, regulations and implementation which could be improved.

Description of Reviews:
The reviews will identify the most important aspects of laws, regulations and implementation that
affect a country's ability to provide finance for the private sector. The areas to be covered will
include:
•

Protection of private property rights (e.g., secured interests, expropriation issues, policy risk
issues)

•

Bankruptcy regimes

•

Commercial dispute resolution

•

Competition policy

Finance Ministries encourage appropriate private sector organizations in each country to conduct
reviews of these four areas. These organizations might include lawyers associations, accountancy
groups, trade unions, employer and business groups, financial market participants, Chambers of
Commerce and other professional organizations. The completed reviews would then be submitted
to the Deputies of the Committee on Hemispheric Financial Issues for consideration in 1997.

TECHNICAL ASSISTANCE FOR COMBATING FINANCIAL CRIMES

Summary:
The Ministers encouraged the IDB, in conjunction with the OAS, to establish a comprehensive
training and technical assistance program to support nations in their implementation of commitments
in the December 1995 Buenos Aires Ministerial Communique on Money Laundering. The program
will improve the integrity of the region's financial systems by addressing key legislative, legal and law
enforcement objectives.

Description of Technical Assistance Program:
The program will focus on the three core areas of legislation/regulation, investigation/prosecution,
and financial intelligence support. For each country that participates, it will entail the following
discrete steps:
Step 1: Training and technical needs assessment A consultative process incorporating the unique
legal, law enforcement, economic, banking sector and other conditions and needs of each nation
would be used to make country-specific recommendations for training and technical assistance.
Step 2: Training and technical assistance tailored to specific country needs. For each country,
the range of possible program modules includes:

•

Three-week core training program. The program will cover the three core areas of
legislation/regulation, investigation/prosecution, and financial intelligence support.

•

Train-the-trainer modules. The aim of these modules is to empower nations to undertake the
training of their own personnel.

•

Consultation modules. International consulting teams will assist with specific problems.

•

Self-instruction modules. Interactive computer-based programs will be created to provide
self-paced study of a broad range of topics.

•

Linkage to other international training programs. The program will support countries'
access to non-duplicative training provided by other organizations and initiatives.

•

Technology transfer. Where appropriate and subject to resource constraints, the program
may provide assistance in developing or procuring computer hardware and software.

The IDB will be asked to fund the training and technical needs assessments and, where appropriate,
to fund the training and technical assistance provided to specific countries. Other organizations may
also be asked to finance appropriate activities.

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 20, 1996

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $13,688 million of 13-week bills to be issued
May 23, 1996 and to mature August 22, 1996 were
accepted today (CUSIP: 912794Z72).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.00%
5.03%
5.03%

Investment
Rate
5.13%
5.16%
5.16%

Price
98.736
98.729
98.729

Tenders at the high discount rate were allotted 38%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.01

RR-I084

98.734

Received
$54,821,623

Accepted
$13,688,465

$49,850,037
1,415,822
$51,265,859

$8,716,879
1,415,822
$10,132,701

3,423,664

3,423,664

132,100
$54,821,623

132,100
$13,688,465

5.02

98.731

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 20, 1996

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $13,616 million of 26-week bills to be issued
May 23, 1996 and to mature November 21, 1996 were
accepted today (CUSIP: 9127943P7).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.10%5.12%5.11%-

Investment
Rate
5.31%5.33%
5.32%-

Price
97.422
97.412
97.417

Tenders at the high discount rate were allotted 1%-.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noneompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

RR-I085

Received
$63,904,158

Accented
$13,615,711

$56,292,765
1,208,793
$57,501,558

$6,004,318
1,208,793
$7,213,111

3,500,000

3,500,000

2,902,600
$63,904,158

2,902 1 600
$13,615,711

DEPARTlVIENT

OF

THE

TREASURY

NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIllNGTON, D.C. - 20220 - (202) 622.2960

ADV 10:30 A.M. EDT
Remarks as prepared for delivery
May 21,1996

ORAL TESTIMONY OF TREASURY SECRETARY ROBERT E. RUBIN
SENATE APPROPRIATIONS SUBCOMMITTEE ON FOREIGN OPERATIONS
Mr. Chairman and members of the Subcommittee -- this morning I want to
discuss our fiscal 1997 request for $1.4796 billion for the international financial
institutions (IFIs). I have a longer statement which I'd like to submit for the record.
The IFIs are crucial in shaping a world of growth and prosperity from which all
Americans can benefit. They effectively promote the growth, development and reform in
developing and transitional economies that creates new and growing markets for our
exports, and thereby better jobs and living standards for Americans, and that furthers our
national security. Forty percent of our exports, some $235 billion, go into developing
economies assisted by the IFIs. Some $20 billion of those exports go to nations now
borrowing from the International Development Association (IDA), and countries which
have completed IDA programs bought $48 billion in U.S. exports in 1994. It is
enormously in our self-interest that the programs of the IFIs be adequately funded.
Our participation in the IFls is at a crossroads. We cannot unilaterally set the
policies and priorities for the IFls. We must rely on leadership and persuasion to
advance our development agenda. The reductions made in FY 1996 funding for the IFls
are severely undermining U.S. credibility and leverage throughout the multilateral
financial system. We most honor our international commitments to continue to have the
ability to so greatly influence IFI policy. At the same time, we must also set priorities
since budget resources are scarce.
We are therefore presenting a lean funding request; one that honors our nation's
past commitments and reduces our contributions to the IFIs in the coming years -- in
order to reach a goal we all share, continuing to reduce the deficit.

RR-1086
http://www /ustreas.gov

(more)

Fqr press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622.2040

2

We are seeking just over $1 billion for the World Bank group, including $934.5
million to meet our outstanding and overdue commitments to the 10th replenishment of
the International Development Association (IDA), $100 million for the Global
Environment Facility and $6.7 million to meet an overdue commitment to the
International Finance Corporation. We seek $263.7 million for the regional development
banks -- for Africa, Eastern Europe and the former Soviet Union, and Latin America;
$127.7 million for other international financial institutions, including an important new
commitment to consolidating the peace process -- the Middle East Development Bank,
and $47 million for debt reduction programs.
Permit me to say a few words about IDA. For the three billion people living in
the world's poorest countries, IDA is the single most important provider of concessional
development assistance. IDA is the key to market-based reform in the poorest countries.
Fully one-quarter of IDA lending supports the structural policy changes necessary for
sustainable economic growth. IDA is also the world's largest lender for projects which
directly contribute to child survival, with some $4.5 billion in projects focussed on health,
primary education, nutrition, safe drinking water and proper sanitation currently under
preparation. And IDA also plays a vital role in restoring economic growth in countries,
such as Bosnia, trying to consolidate peace after civil conflict, and in supporting military
demobilization.
U.S. payments to IDA are currently being made in respect of the Bush
Administration's $3.75 billion, three-year commitment to IDA-lO. Our fiscal 1996
funding request, for the full amount of the final U.S. payment under IDA-lO, was, as you
are well aware, sharply reduced by the Congress. The $700 million finally appropriated
leaves $934.5 million still outstanding. These developments figured prominently in
international negotiations for a new multi-year replenishment of IDA (IDA-11), which
recently concluded. During these negotiations, we stressed that:
•
clearing the outstanding $934.5 million U.S. commitment to IDA would be our
first priority;
•
we would not make, any pledge to IDA-11 in advance on indications from
Congress of what it would be prepared to support; and,
•

any new U.S. commitment to IDA will be substantially below past commitments.

3

Therefore, for fiscal 1997 we are requesting the $934.5 million needed to fully
clear our outstanding IDA-I0 commitment. This would not include any U.S. funding for
IDA-ll, effectively delaying our participation beyond the fiscal 1997 start-up date
committed to by the institution and the other donors. We believe that a commitment of
$800 million to IDA-ll in each of 1998 and 1999 is consistent with congressional views.
This commitment of $1.6 billion for the 3-year IDA period is less than half our pledge
to IDA-IO. This amount would be the lowest U.S. pledge to IDA in nominal terms since
1980 and the lowest in real terms since 1965.
In the course of negotiations on IDA-II, other donors argued forcefully against
any disruption in IDA's operations by leaving a one-year gap in new funding. They
therefore agreed to establish a one-year Interim Fund of approximately $3 billion, to
help support IDA operations in fiscal 1997. Non-donors to this fund, including the
United States, will not have access to the procurement benefits of this fund. Mr.
Chairman, we have strongly opposed the procurement restructions and resisted their
inclusion in funds in which the U.S. participates.
I should point out that projects funded by "regular" IDA resources will not be
affected. None of the $934.5 million we are requesting for fiscal 1997 will be subject to
these procurement restrictions. Moreover, $18.7 billion -- or 85 percent -- of the $22
billion in IDA lending projected for fiscal years 1997 through 1999 will be fully accessible
to U.S. companies.
We've had discussions with a large number of U.S. private sector companies which
are involved in exports, and I was there for part of the meeting. While they don't like the
procurement limitation, they all recognize the much bigger issue is continuing to have
reform and growth in developing countries, because that creates the export markets for
our goods and services. I might also add that they have the same view we have, which is
that if we refuse to participate in IDA all that will do is badly hurt IDA which is not in
our interest and it will institutionalize our exclusion from procurement. They also
believe, as we do, such a development would harm long-term U.S. export opportunities
in emerging markets and give our global competitors an edge.
I also want to touch briefly on the subject of debt reduction. The $22 million we
have requested for debt reduction for the poorest countries is part of the international
community's efforts to help the poorest countries with unmanageable debt problems.
The goal is to clear out part of the old debts, and help put these countries back on their
feet. The $22 million requested could leverage as much as $9.5 billion in debt reduction
by all creditor governments. Full U.S. funding is essential to full participation by other
creditors. I believe the potential benefits of debt reduction in terms of growing
economies, export opportunities, and long-term enhanced political stability fully justify
U.S. participation in this important effort.

4

As Secretary Christopher has pointed out, these institutions further our key
foreign policy goals by directly contributing to economic and political stability in areas
important to our national security. They are the international community's economic
tools for times of crisis. And they are tools to create growth, open and integrate
markets, and address the global problems of endemic poverty, environmental
degradation, mass refugee flows, and unsustainable population growth which are too
large for anyone nation to address alone.

We agree with Congress that these institutions, for as much good as they are
doing, have their shortcomings, and we are using our leadership to remedy that and
ensure the best return on our investment. The IFls have been extremely responsive to
an ambitious, U.S.-inspired reform agenda. While more must be done, significant
progress has been made.
Mr. Chairman, the work of the international financial institutions has a broad
impact. Every American, directly or indirectly, benefits from these institutions and has
an interest in continuing to support them
Thank you.

-30-

D E P .-\ R T ,\1 E :\ T

0 F

THE

T REA SUR Y

omCE OF PUBilC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622·2960

ADV 10:30 AM. EDT
Remarks as prepared for delivery
May 21, 1996
RECORD TESTIMONY OF TREASURY SECRETARY ROBERT E. RUBIN
SENATE APPROPRIATIONS SUBCOMMII lEE ON FOREIGN OPERATIONS

Mr. Chairman and members of the Subcommittee: This morning I want to
discuss our fiscal 1997 request for $1.4796 billion for the international financial
institutions (IFIs). I have a longer statement which I'd like to subrrtit for the record.
The IFIs are crucial in shaping a world of growth and prosperity from which all
Americans can benefit. They effectively promote the grov.'th, development and reform in
developing and transitional econorrties that creates new and growing markets for our
exports, and thereby better jobs and living standards for Americans, and that furthers our
national security. Forty percent of our exports, some $235 billion, go into developing
economies assisted by the IFIs. Some $20 billion of those exports go to nations now
borrowing from the International Development Association (IDA), and countries which
have completed IDA programs bought $48 billion in C.S. exports in 1994. It is
enormously in our self-interest that the programs of the IFIs be adequately funded.
The IFIs are rebuilding shattered economies. In Bosnia, the World Bank has
been extraordinarily pro-active in assessing Bosnia's needs for postwar reconstruction.
Plans to construct and transform nine economic sectors are moving forward. The
European Bank for Reconstruction and Development is gearing up to help Bosnia's
private sector get back on its feet. Our Executive Director, Lee Jackson, gave his life in
that effort on Secretary Ron Brown's ill-fated mission. In a similar vein, the World Bank
is equally active supporting peace in the Middle East.
The ills help debt-saddled nations. A decade ago, many Latin nations were in
serious difficulty. The debt problem was immense. Today, after IFI support for budget
and financial market reform, privatization and liberalization, Latin America has come to
a new consensus to pursue market-based economies. Democracy has spread, U.S.
commercial interests have thrived, and it is the world's second fastest growing region.
That would not have happened without IFI support. The IFIs also now are at the
forefront in helping the region address its vast social development needs.
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2

The institutions support the transition from communism to free market democracy
and are taking the lead in reforming the legal, regulatory and financial systems that have
stifled entrepreneurship, investment, trade and efficiency.
The IFls protect the global environment. F or example, the North American
Development Bank is preparing to finance environmental infrastructure work on both
sides of the U.S. Mexico border. The IFls also help protect Americans from
deterioration of the global environment. At the urging of the United States, the IFls
have adopted strong environmental policies and significantly increased their investments
in environmentally oriented projects. This supports our trade and commercial interests
by raising developing countries' environmental standards as well as their use of
environmentally efficient technology, an important growth area for U.S. industry. The
Global Environment Facility is the primary institution for defining development
strategies that are both pro-growth and pro-environment.
And in area after area, the IFIs have an important impact on Americans, because
they directly influence growth, development and reform that means new and growing
markets for our goods, and better jobs and living standards for Americans.
Moreover, these institutions further our key foreign policy goals, and our
international economic policy aims, by directly contributing to economic and political
stability in areas important to our national security. They are the international
community's economic tools for times of crisis, and they also help fulfil U.S. obligations
under international agreements, such as the climate change convention. In Mexico, the
Middle East, Bosnia, Haiti, or wherever crisis lies around the corner, the institutions can
concentrate highly leveraged economic assistance -- to be blunt, a great deal of other
people's money and a little of ours. They can direct the long-term reforms that are
necessary. Beyond their role in crisis management, the IFIs are tools to create growth,
open and integrate markets, and address the global problems of endemic poverty,
environmental degradation, mass refugee flows, and unsustainable population growth
which are too large for anyone nation to address alone.
As the Clinton Administration exercises a policy of global leadership and

engagement in a period of unprecedented change and extraordinary opportunity, the IFls
make a difference for America. It is imperatively in our long-term economic,
environmental and national security interests to support these institutions vigorously.
Our participation in the IFIs is at a crossroads. We cannot unilaterally set the
policies and priorities for the IFls. We must rely on leadership and persuasion to
advance our development agenda. The reductions made in FY 1996 funding for the IFls
are severely undermining U.S. credibility and leverage throughout the multilateral
financial system. We most honor our international commitments to ensure our capacity
to continue to have the ability to so greatly influence IFI policy. At the same time, we
must also set priorities since budget resources are scarce.

3

1. Priority Objectives

The Administration's FY 1997 budget request of just under $1.48 billion for the
IFIs and debt reduction programs is a carefully crafted appro.ach intended to achieve five
priority objectives:

•

maintain a major and vital U.S. leadership role in system in which
we h.ave a major investment, and on which we increasingly rely;

•

build on an impressive record of success in shaping IFI lending
programs and priorities to serve critical U.S. economic,
political and commercial interests;

•

support cost-effective multilateral programs for poverty
reduction, sustainable growth and market-building, which pay high
long-term dividends both at home, in terms of jobs and higher
living standards for Americans, and abroad;

•

reinvigorate policy reform efforts and sustained economic growth
by extracting the poorest countries from the spiral of escalating
debt; and,

•

meet existing U.S. financial commitments to the IFIs with minimal
further delay.

The Administration is committed to achieving these goals with less budget
resources than in the past. We have framed a medium-term approach that reduces U.S.
expenditures on the IFls through FY 2002, without harming our interests or forcing a
budget-led withdrawal from the world. We recognize your concern that the United
States get the most for its investment in these institutions.
The United States, with voting shares ranging from less than 6 percent in the
African Development Bank to over 30 percent in the Inter-American Development
Bank, does not have the voting power unilaterally to set the policies and priorities that
influence IFI lending. This requires skillful U.S. leadership and persuasion to advance
our development agenda.
While financial support is not the only determining factor of member influence in
the IFIs, it is particularly important. The U.S. share of IFI financing has been declining,
and given our budget realities, this trend is likely to continue. Key European countries
and Japan have become aggressive in their efforts to increase their own policy influence
to a level more commensurate with the increased support they are providing to the
institutions. The significant funding reductions approved by the Congress in FY 1996
severely undermine U.S. credibility and leverage throughout the multilateral financial

4

system.

5

2. Responding to U.S. Policy Concerns
We recognize, as do you, that these institutions, for as much good as they are
doing, have their shortcomings, which we are using our leadership to remedy. The
institutions have been extremely responsive to an ambitious U.S.-inspired reform agenda.
While more must be done, significant progress has been made to: improve lending
quality and portfolio performance; strengthen efforts to promote private sector
development; deepening support for poverty reduction; increase transparency,
accountability and public participation; integrate environmental considerations into
development programs; and improve management efficiency and institutional
responsiveness.
For example, IFI operations and projects have adopted much higher standards for
transparency, accountability, public participation and environmental sustainability.
Ordinary citizens now have important new information about, and an important new
voice in, the development activities of their own governments.
Moreover, they are shifting the focus of development efforts to the private sector
wherever possible. They are sharpening attention on human resource investments rather
than infrastructure, establishing sensible environmental regulation, working to improve
primary education, especially for girls, to improve primary health care and to provide
safe water supplies. These are areas in which there is no realistic prospect, at least in
the medium term, for private sector or bilateral investments.
Other changes in IFI operations include the development of comprehensive policy
guidelines; restructuring for institutional efficiency; the preparation of detailed country
assistance strategies, including an examination of borrowers' spending priorities
encompassing military expenditures; the systematic incorporation of private sector
development objectives in operations; and the revision of procurement guidelines and
policies.
Mr. Chairman, no shareholder has pressed more aggressively than the United
States for the IFIs to address these important concerns and adapt their operations to new
realities.
Looking ahead, our priorities are to ensure effective implementation of the
reforms, to make further progress in reorienting the institutions toward private sector
development and social needs, and to encourage greater institutional activism in reducing
military expenditures, promoting basic worker rights, and combating bribery and
corruption. A continued forceful U.S. presence in the institutions -- both financially and
intellectually -- is central to continued success.

6

I would like to stress that there are clearly defined U.S. national interests for both
bilateral and multilateral lending programs. Each has different comparative advantages
depending on the U.S. objectives they are intended to meet. The efforts of these
programs to promote free markets and reduce poverty compl(!ment, rather than
substitute for, each other.
3. FY 1997 Request for the IFIs and Debt Programs
Three factors have shaped our budget request for FY 1997:
•

The first is the deep backlog in U.S. commitments -- some $1.5 billion, created by
deep funding cuts in MDB and debt reduction accounts. In the current fiscal
year, funding was 51% below the Administration's request and 38% below the FY
1995 appropriated level.

•

A commitment to meet our existing funding commitments to, and remain
effectively engaged in, the international financial institutions, and to deliver on
our pledge to participate in international debt relief efforts.

•

A commitment to lower future U.S. contributions to the institutions, leading to
substantial further reductions in the IFI/ debt accounts through FY 2002.

The Administration's budget request for FY 1997 is an effort to achieve these
objectives in a balanced, prudent and realistic manner that merits congressional support.
U.S. interests, U.S. credibility, and the future U.S. role in the international financial
system are all on the line. The specifics of our request are in an attached table.
World Bank Group -- $1041.2 million
•

$934.5 million to meet the full amount of outstanding and overdue U.S.
commitments to the IDA-lO replenishment.

•

$6.7 million to meet an outstanding and overdue U.S. commitment to the
International Finance Corporation (IFC).

•

$100 million for the Global Environment Facility (GEF), leaving overdue
commitments of $67.5 million.

7

Our investment in the GEF serves our short- and long-term economic and
environmental security interests both effectively and inexpensively. The bulk of future
threats to the global environment comes from developing countries, and the GEF plays a
key role in our efforts to avert those threats. The GEF also provides important
procurement opportunities for U.S. companies. U.S. firms dominate markets for many
cutting edge environmental technologies, and these are key growth sectors worldwide.
U.S. firms are major players in biotechnology and low-impact resource extraction. Our
firms will benefit from the GEF's portfolio of sustainable resource use projects.
Asian Development Bank Group -- $113.2 million
•

$100 million for the Asian Development Fund (ADF), a partial payment on a
1991 replenishment commitment, leaving an outstanding and overdue commitment
of $237 million.

•

$13.2 million for a scheduled capital subscription payment for the Asian
Development Bank (ADB) capital increase agreed in 1994.

It is imperative that we maintain the current level of funding for the Asian
Development Fund. The ADF operates in a region that is home to two-thirds of the
world's poor. The ADF faces its challenges by taking the lead, for example, in
developing strategies that enhance child nutrition and encourage governments in the
region to invest more in children, particularly education. We owe the ADF $337 million,
putting us fully two years behind schedule. Contributing to the ADF yields important
dividends. U.S. firms are number one among donor countries in winning ADB
procurement contracts. Last year, U.S. firms won $320 million in contracts. More
important is the follow-on business. The $2 trillion developing Asian economy -- a $1
trillion market for exports -- offers enormous opportunities for U.S. business, and U.S.
exports to developing Asia have virtually tripled since 1987.

Inter-American Development Bank Group -- $84.5 million
•

$31.4 million for the Inter-American Bank's Fund for Special Operations (FSO),
comprising a scheduled payment of $20.6 million and payment of overdue
commitments amounting to $10.8 million.

•

$27.5 million to the Inter-American Bank's Multilateral Investment Fund (MIF),
leaving outstanding and overdue commitments of $178.8 million.

•

$25.6 million for a scheduled capital subscription payment for the Inter-American
Development Bank (lOB) capital increase agreed in 1994.

8

The 1994 IDB capital increase has ensured that the Bank can meet the region's
needs by lending, at a sustainable level, over $7 billion a year. This includes
concessional lending to the region's poorest nations. This means that the IDB will soon
be able to operate without continued infusion of government funds, but still address U.S.
policy priorities into the next century.
African Development Bank Group -- $66 million
•

$50 million for the initial payment of a proposed $200 million U.S. share in the
replenishment of the African Development Fund (AfDF), now under negotiation.

•

$16 million for an initial payment of an approximately $135 million paid-in
portion of the U.S. capital subscription to an African Development Bank (AfDB)
capital increase, now under negotiation.

Other International Financial Institutions -- $127.7 million
•

$56.3 million for a scheduled capital subscription payment to the North American
Development Bank (NADBank).

•

$52.5 million for the first of five annual capital subscription payments to the new
Bank for Reconstruction and Development in the Middle East and North Africa
(MEDB).

•

$11.9 million for the overdue and outstanding U.S. commitments under the initial
European Development Bank (EBRD) capitalization agreed in 1990.

•

$7 million toward the $75 million outstanding U.S. commitment to the
International Monetary Fund's Enhanced Structural Adjustment Facility (ESAF).

Debt Reduction Programs -- $47 million
•

$47 million for debt reduction programs, including $22 million for the poorest
countries and $25 million for Jordan.
4. Discussion of Specific Requests

International Development Association (IDA).
For the United States, as well as the 3 billion people living in the world's poorest
countries, IDA is the single most important provider of concessional development
assistance, as well as technical assistance and policy guidance.

9

Established at President Eisenhower's initiative in 1960, IDA provides funding
and technical assistance primarily to promote open-market policy reform and to support
priority social and human development investments such as primary education and health
care, and critical infrastructure such as clean water and rural roads. IDA continues to
sharpen its focus on these broad priorities, on the poorest countries which do not have
access to alternative sources of finance, and on integrating environmental and marketbuilding considerations systematically into its operations.
U.S. payments to IDA are currently being made in respect of the Bush

Administration's $3.75 billion, three-year commitment to IDA's tenth replenishment
(IDA-10). This Administration's FY 1996 funding request was sharply reduced in the
legislative process. The $700 million appropriation for FY 1996 leaves $934.5 million
still outstanding under on our IDA-lO commitment.
These circumstances figured prominently in international negotiations for a new
multi-year replenishment of IDA (IDA-II), which were recently concluded. Our
emphasis throughout the negotiations on the three following fundamental positions,
developed in consultation with Congress, delayed the conclusion of the negotiations:
•

clearing the outstanding $934.5 million U.S. commitment to IDA would be our
first priority;

•

we would not make any pledge to IDA-II in advance of indications from
Congress of what it would be prepared to consider;

•

any new U.S. commitment to IDA will be substantially below past U.S.
commitments.

The Administration'S IDA request for FY 1997 and proposed approach for the
years ahead specifically incorporate these important considerations.
•

For FY 1997, we are requesting the $934.5 million needed to pay down fully the
existing and overdue IDA commitments. This would not include any new U.S.
funding for IDA-II, effectively delaying U.S. participation beyond the FY 1997
start-up date already committed by IDA's other donors. Other donors, however,
did not want to disrupt IDA's operations by leaving a one-year gap in new
funding. They therefore agreed to establish a one-year Interim Fund of
approximately $3 billion, to help support IDA operations during fiscal 1997.
These donors also agreed that procurement eligibility for IDA credits financed by
the Interim Trust Fund should be limited to nationals of countries contributing to
the fund and those member countries eligible to borrow from the World Bank.
Projects funded by "regular" IDA resources will not be affected.

10

Treasury and the U.S. Executive Director's office are working closely with the
World Bank to ensure that the selection of projects for Interim Trust Fund financing will
be random, transparent and open.
Prior to July 1, there will be a random drawing of all IDA projects scheduled
from Oct. 1, 1996, through June 30, 1997. The resulting list of projects selected for Trust
Fund financing will be disseminated in early July. Treasury, based on its dialogue with
U.S. private sector leaders, will ensure that this advance notification occurs. We will also
conduct a detailed briefing for U.S. companies during the next two weeks on the
administration of the Interim Trust Fund.
I should point out that projects funded by "regular" IDA resources will not be
affected. None of the $934.5 million we are requesting for fiscal 1997 will be subject to
these procurement restrictions. Moreover, $18.7 billion -- or 85 percent -- of the $22
billion in IDA lending projected for fiscal years 1997 through 1999 will be fully accessible
to U.S. companies.
We've had discussions with a large number of U.S. private sector companies which
are involved in exports, and I was there for part of the meeting. While they don't like the
procurement limitation, they all recognize the much bigger issue is continuing to have
reform and growth in developing countries, because that creates the export markets for
our goods and services. I might also add that they have the same view we have, which is
that if we refuse to participate in IDA all that will do is badly hurt IDA which is not in
our interest and it will institutionalize our exclusion from procurement. They also
believe, as we do, such a development would harm long-term U.S. export opportunities
in emerging markets and give our global competitors an edge.
We have strongly opposed procurement restrictions and resisted their inclusion in
funds in which the United States participates. Most donors participating in the Interim
Trust Fund confront budgetary pressures similar or more serious than our own. For
them, procurement restrictions are essential to generating domestic and political support
for their participation.
•

We are also seeking Congressional concurrence with Administration commitments
of $800 million to IDA-ll in each of FY 1998 and FY 1999. We believe that a
commitment of $800 million to IDA-ll in each of 1998 and 1999 is consistent
with congressional views. This commitment of $1.6 billion for the 3-year IDA
period is less than half our pledge to IDA-10. A new U.S. annual commitment of
$800 million to IDA would be the lowest such commitment in nominal terms since
1980, and the lowest commitment in real terms since 1974.

11

While this approach has weakened the U.S. leadership role, if this funding
proposal is implimented, IDA will continue and the United States will be able to
maintain an effective role. This approach is also consistent with congressional concerns
and budgetary realities.
Debt Reduction
Several years ago, the global community recognized that over the past two to
three decades many of the poorest countries in the world have accumulated external
debts which would prove impossible for them to service. To break this negative cycle,
and improve such countries' capacity to develop and grow, the United States and other
creditor governments have pledged to reduce debts owed them by the poorest countries
by as much as 67 percent, provided the debtor nation maintains its reform efforts. As in
a corporate workout, for that small group of countries with truly unmanageable debt
loads, the intent is to clear out part of the old debts, and help put these countries back
on their feet -- for their benefit and ours.
To date, we have participated in Paris Club bilateral debt reduction for seven of
the poorest countries whose outstanding debt we were holding. We expect others to
become eligible for Paris Club treatment both this year and next. The budgetary costs of
such programs will vary from year to year, but will remain extremely small, compared to
the debt reduction effected. The Administration has requested $22 million to cover
expected costs for FY 1997, which could leverage as much as $9.5 billion in debt
reduction by all creditor governments. The potential benefits of debt reduction in terms
of growing economies, export opportunities, long-term enhanced political stability, and
hope for the future far outweigh the near-term cost to the United States and others.
Indeed, our failure to act, if it leads to political turmoil and economic crisis, would be far
more costly.
For some 10 to 20 of the world's poorest countries, however, even 67 percent
reduction of debts owed to governments will not assure a manageable debt profile. For
them, additional action will be necessary -- including measures to ease the burden of
debt to international financial institutions. A comprehensive approach by creditor
governments and multilateral institutions is therefore necessary. Neither we nor the
multilateral institutions can afford to keep feeding a growing whirlpool of debt. We have
strongly advocated timely action to put debtor countries back on a manageable path.
We welcome the preliminary proposals of the World Bank and IMF, and seek more
specific proposals from them in the coming weeks for our heads of state to consider at
the G-7 Summit in Lyon, so that we can make final decisions as soon as possible.

12

In summary, U.S. participation in the International Financial Institutions deepens
our engagement in the global economy, opens and strengthens developing markets that
hold enormous prospect for our future economic growth, and contributes significantly to
our economic and security interests. Whether it is a direct benefit, such as an exportrelated job, or an indirect benefit such as broad growth in our economy as a function of
global growth, every American has a very important interest in vigorous U.S.
participation in the international financial institutions.
Thank you.

DEPARTMENT

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Testimony of James E. Johnson
Assistant Secretary (Enforcement)
Department of the Treasury
before the
United States House of Representatives
Committee on the Judiciary
May 21, 1996
Mr. Chairman, Mr. Conyers, and members of the Committee, thank you for inviting
me to testify about a series of investigations with which I have been personally involved.
The string of recent arson incidents in African American churches in the southeast United
States is of great concern to Treasury Secretary Robert Rubin, to me, to the Bureau of
Alcohol, Tobacco and Firearms (A TF), and to the entire Department. The arson of a place
of worship is repulsive to us as a society. These recent incidents are even more repugnant
because they recall a time not too long ago when many African American churches were
targeted by racists, and either dynamited or burned, to intimidate people and deprive them of
a pivotal part of their spiritual and community lives.
During the 1950s and '60s, there was no federal agency with the specialized skill
needed for investigating complex arson cases. We are fortunate today that ATF's expertise
is available to assist state and local law enforcement authorities to solve these crimes. As
Stl'retary Rubin has stated, bringing to justice each persorl who committed these atrocities is
our paramount concern, and we will not be satisfied until we have done so. This hearing
affords us the opportunity to discuss with the Congress and the American people the
substantial efforts we have made to solve these arsons, Wld to set forth what the ATF--the
federal government's primary arson investigator--is doing to accomplish this.
Before I proceed, however, I must make one point. As the Committee is aware,
information relative to ongoing criminal investigations may not be publicly released before
the investigation is concluded. ATF Director Magaw and I adhere, as all law enforcement
officers must, to this important requirement. It will necessarily cause us to be circumspect in
some of our statements and our answers to your questions. We will make every effort,
consistent with our obligations regarding ongoing investigations, to further this goal. As
these investigations are concluded and the perpetrators are brought to trial, we will be able to
provide all information relevant to these investigations.

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Main Treasury's Role
Since January 1995, there has been a significant and troubling increase in the number
of fires set at southern African American churches. The ATF has responded to many of
these fires and currently has 25 under investigation.
The Treasury Department has actively monitored these investigations since last year.
Since my recent confirmation, the ATF has provided at my request daily updates on the
status of the cases. I have visited the fire scenes of three of the burnings, received briefings
from the agents personally involved in the investigation and have visited with and worshiped
with the victims of these crimes. My staff and I meet regularly with the ATF managers who
are directing the investigatory effort. Secretary Rubin has requested that I keep him abreast
of all developments in these cases, and I brief him and his senior staff regularly on the status
of the investigations.
Main Treasury has also worked cooperatively with the Department of Justice, just as
the ATF and FBI have cooperated in the field. I have been in regular communication with
Assistant Attorney General Patrick and the office of Deputy Attorney General Gorelick
regarding these investigations, and I have worked to ensure that Treasury agents maintain
open lines of communications with FBI agents and with the local United States Attorney's
offices, as well as with state and local fire and law enforcement officials. By all reports
these investigations have been textbook examples of inter-departmental coordination.
The ATF is the premier arson investigatory agency in this country. My office has
reviewed the resources ATF has dedicated to these investigations. I anticipate that Director
Magaw will describe those resources in detail during his testimony. I am confident that this
level of resources is appropriate to solve these crimes and will not diminish ATF's ability to
meet other law enforcement responsibilities. We will continue to evaluate the level of
resources to make any appropriate adjustments as the investigations progress.
Recently, I traveled to Baker, Louisiana, whelc four churches were burned on one
night in February 1996. Baker is a community of 13,600, with 42 ministers and many,
many churches. The church is the institution at the heart of the community and it was clear
to me that the fires hurt the community at its core. Last Sunday, I traveled to Greelyville,
South Carolina, and worshiped with the congregation of Mount Zion A.M.E. Church. As
I'm sure Reverend Mackey will tell you when he testifies, the Church stood for 90 years on
the plot of land in the woods near Greelyville. All that was left when I visited Sunday was
an ash-covered scar on the ground. Each of these visits confirmed for me what I know
from my own experience, that the African American church is the cornerstone of its
community and the fires struck at the heart of each of the communities.
As the Director will testify, the ATF, in addition to working to solve the crimes, has
also mounted extensive outreach efforts. We understand that it is vitally important that we
solve these crimes and let the community know that we are seriously engaged in the effort.

2

President Clinton and this Administration have made law enforcement a top priority,
and we recognize the importance of this task when we sit down with those who have lost
their churches to crime. The American people must know that the federal government will
not allow such crimes to go unpunished. We will not allow people to be terrorized or
intimidated. This is both our job and our moral duty.
As we have proceeded with this investigation, questions have been raised about the
integrity of the investigation. Specifically, the question was raised about how a bureau that
had persons involved in the Good 0' Boys Roundup could be trusted to conduct these
investigations. I'd like to address these concerns here.
The ATF is not an organization run by or influenced by Good 0' Boys. Director
Magaw has done an excellent job of leading ATF into a new era. In my short time on the
job, I have personally benefitted from his insight and experience. I stand behind him and all
of our law enforcement agents in full support and recognition of the dangerous and difficult
work they do. The public must have similar confidence in our law enforcement agents, if
the agents are to function effectively. As we all are aware, last July the Secretary of the
Treasury heard of allegations that ATF agents had participated in what was described as a
racist event in Ocoee, Tennessee. Secretary Rubin's response was swi ft. He ordered two
reviews: facts/policy.
In early April, Treasury publicly released the results of its investigations into the
Good 0' Boys Roundups. The findings of the Department of the Treasury's Inspector
General were unequivocal: no federal employee, past or present, engaged in any racist act at
the Roundup. This finding was also reported by the Department of Justice's Inspector
General, who conducted a parallel investigation.
But we did not rest there. Racist acts did occur at the Roundups. And because some
of our agents--not only from the ATF but also from our other bureaus--witnessed such acts
or chose repeatedly to attend the event, Secretary Rubin directed each Treasury law
enfr>rc{;ment Bureau to review the findings of the Inspector Ge'1eral along with the personnel
file of each employee to determine whether discipline or counseling would be appropriate.
Along with the factfinding report of the Inspector General, the Department released a
major policy review of our hiring, training, evaluation, and disciplinary policies regarding
the off-duty behavior of our law enforcement personnel. Secretary Rubin, Director Magaw
and I fully supported the findings of this Review and endorsed its final report. The
overarching message of the Review is that racism has no place in Treasury law enforcement,
even if it is on off-duty time.
Still, we are committed not only to removing impropriety from our law enforcement
Bureaus, but also the appearance of impropriety. Consulting with the Department of Justice,
the Director determined that two agents who attended the Roundups in those years where
racist activity had occurred should not continue to work on church fire investigations. These

3

agents were reassigned even though the Inspector General found that they had not engaged in
any racist acts and all indications were that they had been dedicated, impartial and
professional in their work on these arson investigations. Moreover, we have monitored the
staffing of the cases to ensure that no agents whom the Secretary recommended for
disciplinary inquiry or counseling are assigned to any of these investigations.
We will continue doing everything possible to solve these arsons, and we will do so
with professionalism. Our agents are committed to pursuing the evidence and bringing those
responsible for such crimes to justice.
Thank you.
-30-

4

DEPARTMENT

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REMARKS BY DEPUTY SECRETARY OF THE U.S. TREASURY
LA WRENCE H. SUMMERS
PARIS CLUB 40TH ANNIVERSARY CELEBRATION
MAY 21, 1996

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TREASURY PR£SS RELEASE
RE~ BY
DEPUTY SECRETARY OF THE U. s. TREASURY
LAWRENCE H. SUMM£RS

PARIS CLUB 40TH ANNIVERSARY CELEBRATION
May 21, 1996

One of the first issues that I was confronted Vwith on the first working day of our Administration
was Russian debt and how it should be handled in the Paris Club.
Under the leadership, then, of lean-Claude Trichet and, since then, of Christian Noyer that issue
has now -- hopefully -- been resolved in a comprehensive way and I want to thank them both on
behalf of the United States for their efforts.
This "baptism-by-fire" was instructive -- even if it did make me think twice about what I was
getting into.
Just the vocabulary alone was intimidating -- "date butoir," "assiene," "PRD," "moratorium
interest," and on-and-on. It soon became apparent, however, that these terms were not meant to
confuse, but had precise meaning and content They formed a framework in which governments
were collectively and effectively addressing debt problems of countries that were not in a position
to honor their external obligations -- a failure that was jeopardizing the economic welfare of the
countries that owed the debt, v.;th possibJe repercussions for the international system as a whole.
Now, the Paris Club is 40-years old. This is slightly more than the half-life of the 3-score and 10
years oflife that we are promised biblically. As such, many people, especially those of us that
have passed that personal milestone, see such an occasion as one for introspection and an
assessment of where we have been and where we are going.
It is a time not merely to congratulate ourselves on the past, but to make adjustments and to chart
a course for the future.
The accomplishments of the Paris Club, particularly in the last 20-years under the 3 chairmen
present here today (Camdessus, Trichet, Noyer), are substantial:
65 countries have been treated;
there have been over 250 separate rescheduling agreements; and,
more than $275 billion

In

debt payments have been rescheduled or reduced.

But, rather than patting ourselves on the back for these achievements, we should look at what we
have learned and what it means for the direction of debt policy in the future These are the issues
that I want to address today

FirS4 policies matter and sound, consistent macroeconomic policies are essential in

-2-

avoiding, and if that is not possible, in solving debt problems.
The Paris Club has always recognized this through the econorn..ic conditionality of its agreements.
Our goal in the Paris Club has been not just to get some payments from debtor countries in the
short-tenn, but mainly to help the country itself to lay the ground-work for eventual repayment of
the maximum amount possible. Accordingly, we have stressed the explicit link between the Paris
Club and IMF-supported adjustment programs.

Second, the Paris Club, the international institutions, and the governments that participate
in them have been and must continue to be dynamic and adaptive in their practices on
debt.
The character of international debt has shifted dramatically over the last three decades -- from the
large run-up in commercial bank lending in the 1970s, to the shift to a larger role for official
institutions in the 19805 as banks reduced exposure and bilateral credit guarantees were exercised,
to the marked trend toward securitization in the 19905.
This has changed the basic nature of the debt rescheduling process and teclmiques that have been
successful in the past may not be in the future. The recent G-l 0 report on the resolurion of
sovereign liquidity crises is significant in this regard. It highlights very clearly that investors must
recognize and be prepared to deal with the risks of their investments.
Even in the absence of a new, generalized debt crisis, many countries .- including those that have
graduated from the Paris Club remain '.rulnerable to external imbalances .
. In particular:
Paris Club creditors should consider maintaining· - in cooperation with the IMF and
World Bank -- a continuing data base, even for countries that have graduated from
rescheduling, in order to be able to judge the full extent of their exposure and be ready to
respond quickly.
Creditors will need to reconsider the iterative process they have used in which some
countries return for successive rounds of rescheduling and the fundamental sustainability
of the debt is not addressed. The Paris Club needs more ultimate graduates. It is one
international organization where less activity is a sign of success.
Creditors will need to examine on a continuous basis the scope and breadth of their
actions.

Third, the Paris Club cannot act alone.
The Club is now at the brink of considering what steps should be taken when even our most dramatic

-3actions under Naples terms aren't enough to bring the debt of the poorest countries down to
sustainable levels.
During the past year and a half. the ThiF and the \Vorld Bank have undertaken a full review of the
external debt problems ofehe poorest countries. They found that a number of the poorest countries
will not achieve debt sustainability -- even after Club action on Naples Terms.
~-

According to Bank and Fund analysis, some 8 to 20 countr:.:.:; face this prospect.
The list includes countries that are on the right track and have demonstrated sustained refonn
effons.
For these countries, solid macro policies and aggressive Paris Club action just aren't enough.

A clear example is the case ofMoz.arnbique. This country now has a debtJexport ratio in net present
value terms which exceeds 1,000%. Yet even after 67% Paris Club debt reduction and an additional
10 years of sustained economic reforms, with very optimistic assumptions of real GDP growth of
mo:-e than 5% per year and export growth of 7-8% annually, Mozambique's debt burdens will still
exceed sustainable levels For a country undertaking major efforts of nation-building, additional
external support '..lIi1l be essential to assure that such efforts produce a sustainable debt profile within
a reasonable timeframe

The Bank and the Fund recognize that ttJs problem must be addressed This is a major step forward
by the IFIs. For too long, both we and they have focused on near term financing of balance of
payments needs, and have ignored the longer-term impact on future debt burdens. Without a
comprehensive effort to reduce debt to sustainable levels, the debt problems of the poorest countries
'vill continue to monopolize both monetary and human resources, to undermine initiative, and to
discourage investors.
Resources are monopolized when the benefits of reform efforts are siphoned off to service
external debts, rather than domestic groMh and incomes -- and when national officials have
to devote months of every year to negotiate annual reschedulings and new financing, rather
than focusing on developing and implementing sound policies at home.
Initiative is undennined when rontinuous adjustment programs don't produce light at the end
of the turmel the country may now be 10 rather than 20 feet under water, but it is still
drov"ning. .~suring a debt profile that \l,ill be manageable well into the future can provide
tangibJe proof of progress for the markets and foreign creditors.
Investors are discouraged when they have no cenainty that productive investments will result
in real returns, due to a shortage of foreign exchange and prior requirements to service
external debt.

·4-

The Bank and the Fund also recognize that it will take the joint efforts of creditor governments and
the multilateral institutions to solve this problem.

We have outlined five key principles that we believe should guide us in addressing the debt problem
of the poorest countries:
First, our objective should be to attain - and maintain - debt sustainability for these countries
through a combination of debt reliefand management of new debt Within the Paris Club, we
may need to consider both broader and deeper action f("lr these countries to assure debt
sustainability.
Second. eligible countries should receive debt reduction only in conjunction with a strong,
multi·year program of reform. We are contemplating dramatic steps These can only
come in concert with equally dramatic commitment to economic reform on the part of the
countries involved
Third, there must be clarity at the outset about the extent of debt relief and the time period
for its provision. If exceptional efforts produce exceptional results. debtor nations shouldn't
be penalized in terms of less debt reduction. Otherwise, the debtors will have no incentive
to implement difficult reform efforts.
F ounh, multilateral action should complement and be coordinated v.ith that of Paris Club
creditors. Once it is clear that the current implementation of Naples Terms is not enough for
an individual country, we must craft a course of action that coordinates multilateral and Paris
Club action.
A..nd, finally, multilateral institutions can and should depend heavily on their O\l.l1l resources
for the debt relief they provide. Development banks should practice what they preach to other
financial institutions and address loans that have gone bad.
In this vein, Jim Wolfensohn has placed a courageous proposal cn the table for a trust fund ••
administered by IDA -- that would prepay or service part of the multilateral obligations of eligible
countries. The United States endorses this proposal, and eagerly awaits its elaboration, as well as
the selective use of IDA grants where appropriate.
We encourage other multilateral institutions to contribute to this fund or to find other ways
to take comparable action This effort is not going to succeed unless they participate on an
equitable basis
The Th1F must also play an active role through strong conditionality, increased loans where
appropriate, and increased concessionality on ESAF loans for poorest countries with particularly
heavy multilateral debt burdens. ESAF loans with extended tenns of as long as 20 years could be

- 5-

used to refinance outstandir.g amounts of IMF debt This could go a long way to help meet the
debt relief needs of these countries.
Of course. the scope to provide improved terms cannot be considered in isolation of the the total
amount of resources available to carry the ESAF forward. Mobilizing sufficient resources will not
be an easy task, and it 'Will be essential to make more efficient use of resources already available to
the llviF. One such resource is gold, which does not now earn a return for the IMF. Proposals to
invest a portion of the IMF's gold and to direct the income earned to the ESAF merit our close
consideration. I am convinced this could be accomplished without impinging upon the IMF's
financial strength.
We all look forward to seeing proposals from the Bank and the Fund on the steps that they are
considering taking. The sooner the better. It truly would be a proud achievement if the Paris
Club's 40th year could also be the year that we all agreed to chart the course to true debt
sustainability for the most heavily indebted poor countries.
-30-

DEPARTMENT

OF

THE

TREASURY

NEWS

TREASURY

omCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

EMBARGOED UNTIL 2:30 P.M.
May 21, 1996

CONTACT:

Office of Financing
202/219-3350

TREASURY'S WEEKLY BILL OFFERING
The Treasury will auction two series of Treasury bills
totaling approximately $28,000 million, to be issued May 30,
1996. This offering will provide about $1,500 million of new
cash for the Treasury, as the maturing 13-week and 26-week bills
are outstanding in the amount of $26,508 million.
In addition to
the maturing 13-week and 26-week bills, there are $18,580 million
of maturing 52-week bills. The disposition of this latter amount
was announced last week.
Federal Reserve Banks hold $12,485 million of bills for
their own accounts in the three maturing issues. These may be
refunded at the weighted average discount rate of accepted
competitive tenders.
Federal Reserve Banks hold $6,454 million of the three
maturing issues as agents for foreign and international monetary
authorities.
These may be refunded within the offering amount
at the weighted average discount rate of accepted competitive
tenders. Additional amounts may be issued for such accounts if
the aggregate amount of new bids exceeds the aggregate amount
of maturing bills.
For purposes of determining such additional
amounts, foreign and international monetary authorities are
considered to hold $5,614 million of the original 13-week and
26-week issues.
Tenders for the bills will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C_
This offering of Treasury securities is
governed by the terms and conditions set forth in the Uniform
Offering Circular (31 CFR Part 356) for the sale and issue by the
Treasury to the public of marketable Treasury bills, notes, and
bonds.
Details about each of the new securities are given in the
attached offering highlights.
000

Attachment
RR-I090

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERINGS OF WEEKLY BILLS
TO BE ISSUED MAY 30, 1996

May 21, 1996
Offering Amount .

$14,000 million

$14,000 million

Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples .

91-day bill
912794 3E 2
May 28, 1996
May 30, 1996
August 29, 1996
February 29, 1996
$12,401 million
$10,000
$ 1,000

183-day bill
912794 3Q 5
May 28, 1996
May 30, 1996
November 29, 1996
May 30, 1996
$10,000
$ 1,000

The following rules apply to all securities mentioned above:

Submission of Bids:
Noncompetitive bids
Competitive bids

Accepted in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10%.
(2) Net long position for each bidder must be
reported when the sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.

Maximum Recognized Bid
at a Single Yield

35% of public offering

Maximum Award .

35% of public offering

Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms .

Prior to 12:00 noon Eastern Daylight Saving time
on auction day
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date

ERRATA

Monthly Treasury Statement
of Receipts and Outlays
of the United States Government
For Fiscal Year 1996 Through April 30, 1996, and Other Periods
Auention is called to the following corrections on the pages and colwuns indicated:

Table 3. Summary of R.eceipts and Outlays of the U.s. GovernDICnt
(S millions)

pageS

CQI'1"ent
Fiscal
Year to
Date

Badget Receipbi
Individual income taxes ........................................ .

401,196

should be ...............................•...................

401,096

Table 4. Receipts orlhe U.s. Government (5 miDIons)

page 6

Current

FfscalVear
to Date
Receipts

Total-Individual income taxes •.•••••••••••.••...••••••••••••••

should be ................•....•..................••.. · ..... .

Table 7. Receipts and Outla)"S of the u.s. Govemm~ut by Month
(5 milIioDs)
pagc26

401.196
401,096

Y__ l
Year

To
Date

Receipts:

Individual income taxes ...........•................••.....••.•..

401.196

should be ..•......••.............................••.........

401.096

Table 9. Summary of Receipts by Soul"a, and Oudays by Function of
the U.S. Govenlll1ent (S milliObJ)
Pagc29

FlscalYcar
To Date

RECEIPTS

Individual income taxes .......•......•......••.......•.•.....•..
should be .............. ·······•···················•········•

401.196
401,096

Monthly Treasury Statement
of Receipts and Outlays
of the United States Government
For Fiscal Year 1996 Through April 30, 1996, and Other Periods

Highlight

This month's publication has been realigned to the FY 1997 Budget, released'by the
Office of Management and Budget on March 19, 1996.

The impact of large individual tax deposits resulted in budget receiots of $203.4 billion and
a surplus of $72.4 billion, a record high for each category.

RECEIPTS, OUTLAYS, AND SURPLUS/DEFICIT
THROUGH APRIL 1996

B
I
L
L
I

0
N
S

1000
900
800
700
600
500
400
300
200
100
0
-100

Contents
Summary, page 2
Receipts, page 6
Outlays, page 7
Means of financing, page 20
Receipts/outlays by month, page 26
Federal trust funds/securities, page 28
Receipts by source/outlays by
function, page 29
Explanatory notes, page 30

Compiled and Published by

Department of the Treasury

Financial Management Service

Introduction
of receipts are treated as deductions from gross receipts; revolving and management fund receipts, reimbursements and refunds of monies previously expended are
treated as deductions from gross outlays; and interest on the public debt (public
issues) is recognized on the accrual basiS. Major information sources include
accounting data reported by Federal entities, disbursing officers, and Federal
Reserve banks.

The Monthly Treasury Statement of Receipts and Outlays of the United States
Government (MTS) IS prepared by the Financial Management Service, Department of
the Treasury, and after approval by the Fiscal Assistant Secretary of the Treasury, is
normally released on the 15th workday of the month following the reporting month.
The publication IS based on data provided by Federal entities, disbursing officers,
and Federal Reserve banks

Triad of Publications
The MTS is part of a triad of Treasury financial reports. The Daily Treasury
Statement is published each working day of the Federal Govemment. It provides
data on the cash and debt operations of the Treasury based upon reporting of the
Treasury account balances by Federal Reserve banks. The MTS is a report of
Government receipts and outlays, based on agency reporting. The US. Government
Annual Report is the official publication of the detailed receipts and outlays of the
Government. It is published annually in accordance with legislative mandates given
to the Secretary of the Treasury.

Audience
The MTS IS published to meet the needs of: Those responsible for or interested
in the cash position of the Treasury; Those who are responsible for or interested in
the Government's budget results; and individuals and businesses whose operations
depend upon or are related to the Govemment's financial operations.
Disclosure Statement
This statement summarizes the financial activities of the Federal Government
and off-budget Federal entities conducted in accordance with the Budget of the U.S.
Government, i.e., receipts and outlays of funds, the surplus or deficit, and the means
of financing the deficit or disposing of the surplus. Information is presented on a
modified cash basis: receipts are accounted for on the basiS of collections; refunds

Data Sources and Information
The Explanatory Notes section of this publication provides information conceming the flow of data into the MTS and sources of information relevant to the MTS.

Table 1. Summary of Receipts, Outlays, and the Deficit/Surplus of the U.S. Government, Fiscal Years 1995 and 1996,
by Month
[$ millions]
Period

FY 1995
October
November
December
January
February
March
April
May
June
July
August
September
Year-to-Dale ...... " .... " .... , ....... .
FY 1996
October
November
December
January
February
March
April
Year-Io-Dale .,', ..... " ..... " ... " .•..

Receipts

Outlays

Deficit/Surplus (-)

89,024
87,673
130,810
131,801
82,544
92,532
165,392
90,405
147,868
92,749
96,560
143,221

120,365
124,915
135,613
116,166
120,899
143,074
115,673
129,958
135,054
106,328
130,411
135,978

31,342
37,242
4,803
-15,635
38,355
50,543
-49,720
39,553
-12,814
13,579
33,851
-7,243

1,350,578

1,514,434

163,856

95,593
90,008
138,271
142,922
89,349
89,011
203,386

118,352
128,458
132,984
123,647
133,644
136,286
130,993

22,758
38,450
-5,286
-19,274
44,295
47,275
-72,393

848,540

904,365

55,825

'The recetpt. outlay and defiCit figures differ from the FY 1997 Budget. released by the Office
of Management and Budget on March 19. 1996 by $64 million due mainly to revisions in data
folloWing the release of the Final September Monthly Treasury Statement.

2

Table 2. Summary of Budget and Off-Budget Results and Financing of the U.S. Government, April 1996 and
Other Periods
[$ millions]

Total on-budget and off-budget results:
...................
Total receipts . . . . . . . . . .

Budget
Estimates
Next Fiscal
Year (1997)'

Prior
Fiscal Year
to Date
(1995)

Budget
Estimates
Full Fiscal
Year'

Current
Fiscal
Year to Date

This
Month

Classification

203.386

848.540

1.426.775

779.775

1.495.238

160.774
42.613

635.152
213.389

1.059.334
367.441

574.908
204.867

1.107.223
388.015

.............

130.993

904.365

1.572.411

876.706

1.635.329

.............
..................

105.131
25.863

732.935
171,431

1.270.292
302.119

712.142
164.564

1.317.655
317.674

..............

+72.393

-55.825

-145.636

-96.931

-140.091

On-budget surplus (+) or deficit (-) ................
Off-budget surplus (+) or deficit (-) ................

+55.643
+16.750

-97.783
+41.958

-210.958
+65.322

-137.233
+40.303

-210.432
+70.341

.............

-72.393

55.825

145.636

96.931

140.091

Means of financing:
Borrowing from the public ...........................
Reduction of operating cash. increase (-)
......................
By other means

-35.466
-26.449
-10.478

78.332
-10.374
-12.133

165.272
-2.051
-17.585

97.977
-2.127
1.081

164.326

.................

On-budget receipts
Off-budget receipts

...........

Total outlays .....
On-budget outlays
Off-budget outlays
Total surplus (+) or deficit (-)

Total on-budget and off-budget financing

'These figures are based on the FY 1997 Budget. released by the Office of Management and
Budget on March 19, 1996.

-24.235

... No Transactions.
Note: Details may not add to totals due to rounding.

Figure 1. Monthly Receipts, Outlays, and Budget Deficit/Surplus of the U.S. Government, Fiscal Years 1995 and 1996

$ billions

220
l
200-1
180
160
140
120
100
80
60
40
20

I

Outlays

/;

Ii
I

/ I

/
\

f

\ •• _."MM ......

J

Receipts

-2~~~~~~~ijii'~~~~~~~~~Ji~~~~ii~1
-40
-60

Deficit(-)/Surplus

-80~1~-.---,1---,--~1---,--~1---.---.1---r---r1---r---r1--'---'I---.r--'I---'---'I'

Oct.

Dec.

Feb.

Apr.

Jun.

Aug.

Oct.

FY

FY

95

96

3

Dec.

Feb.

Apr.

Figure 2.

Monthly Receipts of the U.S. Government, by Source, Fiscal Years 1995 and 1996

$ billions

200

ITotal Receipts I

1

1

Dec.

Feb.

Apr.

FY
96

FY
95

Figure 3. Monthly Outlays of the U.S. Government, by Function, Fiscal Years 1995 and 1996

$ billions
1RO-~--------------------------------------~

I Total Outlays

1

1

Social Security & Medicare

1

Iinterest

vet.

Dec.

Feb.

Apr.

Jun.

FY
95

I

Aug.

Oct.
FY
96

4

Dec.

Feb.

Apr.

Table 3. Summary of Receipts and Outlays of the U.S. Government, April 1996 and Other Periods
[$ millions]
This Month

Current
Fiscal
Year to Date

Individual income taxes ......................................... .
Corporation income taxes ....................................... .
Social insurance taxes and contributions:
Employment taxes and contributions (off-budget) ........... .
Employment taxes and contributions (on-budget) ............ .
Unemployment insurance ..................................... .
Other retirement contributions ................................ .
Excise taxes ..................................................... .
Estate and gift taxes ........................................... .
Customs duties .................................................. .
Miscellaneous receipts ........................................... .

107.513
24.937

401.196
89,142

351,121
80.132

630,873
167,108

42.613
14.002
3.628
346
4.577
2.704
1.388
1.680

213.389
63.655
11.889
2.640
31.736
10.110
10.671
14.212

204,867
59.617
11.632
2.629
32.282
8.559
11.214
17.723

367,441
105.745
29.810
4.539
53,886
15.924
19.313
32.136

Total Receipts ....•...•...•....•.•.••.••.....•.••...•...••••...

203,386

848,540

779,775

1,426,775

(On-budget) .•.••...•...••..••.....•••....••...•.••....•••••••

160,774

635,152

574,908

1,059,334

(Off-budget) •••••••••••••..•....••.••••••.........••••....•..

42,613

213,389

204,867

367,441

172
329
19
828
3.265
322
21,787
2.683
2,356
1.136
27.852
2.308
504
1.020
3.205
357
2.885

1.301
1.695
118
7.185
31.702
2.164
144,713
18.877
17,451
9,158
182.887
16,376
3.766
6,616
20.016
2.823
21,452

1.642
1.608
130
7.172
39.226
1.997
146.917
18.249
18.181
10.114
171,436
17.360
4.311
6.134
18.647
3.464
21.682

2.695
3.297
206
10.445
54.840
3.789
254.325
32.255
30.404
14.678
327,429
26,432
6.939
12.964
34,404
5,500
38.994

Classification

Comparable
Prior Period

Budget
Estimates
Full Fiscal Year'

Budget Receipts

Budget Outlays
Legislative Branch ............................................... .
The Judiciary .................................................... .
Executive Office of the President .............................. .
Funds Appropriated to the President ........................... .
Department of Agriculture ....................................... .
Department of Commerce ...................................... .
Department of Defense-Military ............................... .
Department of Defense-Civil .................................. .
Department of Education ....................................... .
Department of Energy ........................................... .
Department of Health and Human Services ................... .
Department of Housing and Urban Development .............. .
Department of the Interior ...................................... .
Department of Justice ........................................... .
Department of Labor ............................................ .
Department of State ............................................ .
Department of Transportation ................................... .
Department of the Treasury:
Interest on the Public Debt .................................. .
Other .......................................................... .
Department of Veterans Affairs ................................. .
Environmental Protection Agency ............................... .
General Services Administration ................................ .
National Aeronautics and Space Administration ................ .
Office of Personnel Management ............................... .
Small BUSiness Administration .................................. .
Social Security Administration ................................... .
Other independent agencies .................................... .
Allowances ....................................................... .
Undistributed offsetting receipts:
Interest ........................................................ .
Other .......................................................... .

21,481
2.939
2.951
494
-739
1.193
3.756
31
31,433
350

192,433
17,446
20.570
3.553
851
7.751
24.715
417
214.116
2,156

182.868
12.324
20.691
3.569
-58
7.499
23,754
525
204.856
-2.074

344.628
20.328
37.606
6.329
469
14.190
42.374
957
377.255
9.192
-647

-990
-2.932

-48.841
-19.102

-46.130
-19.391

-97,598
-42.268

Total outlays •••.......•....••....•..••....•.•.•••••••••...•...•

130,993

904,365

876,706

1,572,411

(On-budget) ••.......•••.....•......•.••.•.••........•........

105,131

732,935

712,142

1,270,292

164,564

302,119

(Off-budget) ..••..•.....•.......••••••••.....•..••.••••••..•.

25,863

171,431

Surplus (+) or deficit (-) ••••••••.•.••....•••••••.•.......•..

+72,393

-55,825

-96,931

-145,636

(On-budget) .....•••..•••.•••••••.....••...•••...........•••••

+55,643

-97,783

-137,233

-210,958

(Off-budget) ..•.••••••.••••••.....•.•..•••.....•...•••••••...

+16,750

+41,958

+40,303

+65,322

'These figures are based on the FY 1997 Budget, released by the Office of Management and
Budget on March 19, 1996.
Note: Details may not add to totals due to rounding.

5

Table 4. Receipts of the U.S. Government, April 1996 and Other Periods
[$ millions]

Classification

Gro~s

Receipts
..
Individual Income taxes:
Withheld
Presidential Election Campaign Fund
Other

Total-Individual income taxes ........................ .
Corporation income taxes ................................... .
Social insurance taxes and contributions:
Employment taxes and contributions:
Federal old-age and survivors ins. trust fund:
Federal Insurance Contributions Act taxes
Self-Employment Contributions Act taxes .. .
Deposits by States
.............. .
Other
.................. .
Total-FOASI trust fund
Federal disability insurance trust fund:
Federal Insurance Contributions Act taxes
Self-Employment Contributions Act taxes
Receipts from railroad retirement account
Deposits by States ...
Other
Total-FDI trust fund
Federal hospital insurance trust fund:
Federal Insurance Contributions Act taxes
Self-Employment Contributions Act taxes
Receipts from Railroad Retirement Board
Deposits by States
Total-FHI trust fund ..... .
Railroad retirement accounts:
Rail industry pension fund
Railroad Social Security equivalent benefit

I

Refunds
(Deduct)

Prior Fiscal Year to Date

Current Fiscal Year to Date

This Month

I

Receipts

Gross
Receipts

I

Refunds
(Deduct)

I .

Receipts

Gross
Receipts

Refunds
(Deduct)

I

R
.
ecelp's

296.124
40
109,667

320,297
38
140,622

'38,930
13
'89,392

I

128,335

20,822

107,513

460,957

59,861

401,196

405,831

54,711

351,121

26,912

1,975

24,937

101,706

12,564

89,142

92,726

12,595

80,132

171,462
10,203
1

643

-1

28,245
7,935
-1

170,819
10,203
1

149,097
10,920
1

36,179

36,179

181,665

643

181,022

160,019

160,019

'5,033
'1,400

5,033
1,400

30,544
1,942

119

30,424
1,942

42,310
2,538

42,310
2,538

..

)

(")

'28,245
'7,935

..

r .)

..

(

(

..

)

(

)

)

..

..

(

(

..

(

)

..

(

)

(

)

..

)

(

149,097
10,920
1

)

(")

6,433

6,433

32,486

119

32,367

44,848

44,848

'10,506
'3,106

10,506
3,106

57,171
4,094

-13

57,184
4,094

52,626
4,508

52,626
4,508

..

(

..)

)

13,612

..

..

(

(

..)

(")

13,612

61,265

-13

61,278

57,135

57,135

)

(

)

(

220
169

-1

221
169

1,339
1,125

87

1,252
1,125

1,362
1,130

10

1,353
1,130

56,613

-1

56,615

277,881

836

277,044

264,494

10

264,484

Unemployment insurance:
State taxes depositw:t in Treasury
Federal Unemployment Tax Act taxes
Railroad unemployment taxes ....
Railroad debt repayment

2,129
1,516
6

23

2,129
1,493
6

8,723
3,203
17

54

8,723
3,149

57

17

8,897
2,776
16

8,897
2,719
16

Total-Unemployment insurance

3,650

23

3,628

11,943

54

11,889

11,689

57

11,632

Total-Employment taxes and contributions

Other retirement contributions:
Federal employees retirement - employee
contributions
........... ..
Contributions for non-federal employees

354
2-8

354
-8

2,592
48

2,592
48

2,576
54

2,576
54

Total-Other retirement contributions

346

346

2,640

2,640

2,629

2,629

Total-Social insurance taxes and
contributions ....................................... .
Excise taxes:
Miscellaneous excise taxes3
Airport and airway trust fund
Highway trust fund
Black lung disability trust fund

60,609

21

60,588

292,463

890

291,573

278,812

67

278,745

2,413

-209

2,621

2,171
52

267

1,904
52

16,991
1,490
13,527
346

-60
16
662

17,052
1,474
12,865
346

16,222
3,019
13,643
360

521
21
421

15,702
2,998
13,222
360

32,354

618

31,736

33,245

963

32,282

Total-Excise taxes .................................... .

4,635

58

4,577

Estate and gift taxes ....................................... ..

2,746

42

2,704

10,350

240

10,110

8,787

229

8,559

Customs duties ................... , .................. , ...... ..

1,498

110

1,388

11,329

657

10,671

12,184

970

11,214

Miscellaneous Receipts:
Deposits of eamings by Federal Reserve banks
All other

1,421
260

1,421
259

11,765
2,453

6

11,765
2,447

15,270
2,461

8

15,270
2,453

Total -

Miscellaneous receipts ....................... .

1,681

1,680

14,218

6

14,212

17,731

8

17,723

Total -

Receipts ....................................... .

226,416

23,029

203,386

923,376

74,836

848,540

849,316

69,541

779,775

Total -

On-budget

183,803

23,029

160,774

709,225

74,074

635,152

644,449

69,541

Total -

Off-budget

42,613

42,613

214,151

763

213,389

204,867

'In accordance WIth the prOYISlonS of the Social Secunty Act as amended. "Indlyldual Income
Taxes Withheld" haYe been deCreased arid "Federal Insurance Contnbullons Act Taxes"
correspondIngly Increased by $5.217 mIllion to correct esbmates for the Quarter ending March 31.
1996 'IrldlYlduai Income Taxes. Other' haYe been deCreased and "Self Employment ConllibulionS Act T axes correspondIngly Increased by $358 mIllion to correct estimates for calendar year
1993 and pnor

'Includes a prior period adJustment.

~ndudes amounts for the windfall profits tax pursuant to P L. 96-223.
No TransactlOrls.
(. 'J Less than $500.000
Note: Details may not add to totals due to rounding

6

574,908
204,867

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods
[$ millions]

Classification

Legislative Branch:
Senate .............. ········································· .
House of Representatives .................................. .
Joint items .................................................. .
Congressional Budget Office ............................... .
Architect of the Capitol ..................................... .
Library of Congress .......................... . ............. .
Government Printing Office:
Revolving fund (net) .....
. ................... .
General fund appropriations ....
. .................... .
General Accounting Office ........
. ................. .
United States Tax Court
................................ .
Other Legislative Branch agencies ......................... .
Proprietary receipts from the public ........................ .
Intrabudgetary transactions ................................. .
Total-Legislative Branch ............................... .

This Month

Current Fiscal Year to Date

Prior Fiscal Year to Date

Gross IAPPlicablel
Outlays
Receipts
Outlays

Gross \APPlicablel
Receipts
Outlays
Outlays

Gross !APPlic.able\ Outla s
Outlays
Receipts
y

35
70

(")
(")

35
70

2
14
14

2
13
14

247
423
46
13
92
184

-11

-11

-9

9

9

35

35

2

2
2

57
241
18
15

6

6

2

5
-1

178

6

-5

4

10

-1

-12

172

1,317

2

16

317

1,614
67

3

10
329

1,698

3

4

23
32

16

248
424
45
12
104
481

245
422
46
13
88
184

249
425
45
12
108
481

-9
57
241
18
15
-10
-12
1,301

15
57
234
19
19
-8
1,658

16

15

1,611

1,529
67

3

1,527

67
1,695

1,611

3

1,608

33
76

22
33
76
130

5

8

15

15
57
234
19
19
-8
-8
1,642

The Judiciary:
Supreme Court of the United States ...................... .
Courts of Appeals, District Courts, and other judicial
services
............................................. .
Other ........................................................ .

317
10

(* *)

Total-The Judiciary .................................... .

329

(* *J

Executive Office of the President:
Compensation of the President and the White House
Office ....................................................... .
Office of Management and Budget ........................ .
Other ........................................................ .

4
5
9

5
9

63

23
32
63

19

19

118

118

130

91

-3
91

244
2,293

-83
2,293

523
2,563

68
5

68
5

1,735

2,195

2,195

4

~

49

4

1,735
30
16
-471
3,520

5,346

342

859
117
414
1,389

859
117
414
1,389

743
418
267
1,429

743
418
267
1,429

26

145
26

823
198

823
198

689
212

689
212

74
36
37

74
36
37

430
337
272

430
337

490
435
296

490
435
296

4

18

170

55

-55

Total-Executive Office of the President
Funds Appropriated to the President:
International Security Assistance:
Foreign military loan program ........................... ..
Foreign military financing program ....................... .
Economic support fund and International fund for
Ireland ................................................... .
Peacekeeping Operations ................................ ..
Other..........
.. .................................. .
Proprietary receipts from the public ..... .
Total-International Security Assistance
International Development Assistance:
Multilateral Assistance:
Contribution to the International Development
Association ............................................ .
International organizations and programs ............. .
Other .................
.. ............ ..
Total-Multilateral Assistance ....................... .

2

16

21

183

(")

Total-Agency for International Development ...... .

340

-21
143

232
32
78

145

327

30
16
471

4,318

798

272

44

23

5

Overseas Private Investment Corporation ............... .
Peace Corps .......
.. .................. .
Other ...................................................... .

-10

Total-International Development Assistance ......... .

696

Total-Funds Appropriated to the President ....•••....

40

232
32
78
342

Agency for International Development:
Sustainable development assistance program
Assistance for Eastern Europe and the Baltic States
ASSistance for the new independent States of the
Former Soviet Union ........................... .
Development fund for Africa ........ .
Operating expenses ............................ .
Payment to the Foreign Service retirement and
disability fund .......................................... .
Other .................................................... .
Proprietary receipts from the public ................... .
Intrabudgetary transactions ........................... .

International Monetary Programs ........................... .
Military Sales Programs:
Special defense acquisition fund ....... .
Foreign military sales trust fund
.... .
Kuwait civil reconstruction trust fund ...
. ......... .
Proprietary receipts from the public ..................... .
Other ........................................................ .

19

59
10

18
70

117

7

2

1,129
(* *)

2,134

45

157
2,324

496

1,828

27
131
52

129

-103
131
52

3,186

3,962

626

3,337

560

-909

-30
8,260

7,553

(* *)

(")

1,759

-5

45

156

18
-10

115
33

-111
115
33

626

3,856

671

8,260

(**)

(* *)

30

6

26

1,306

828

17,052

771

16
-415
4,575

470

515

-5
1,129

415

167
2,563

26

(")

2,274

560

356

45
131
-470

281

-1,189

7

44

(* *)

117

67

22

134
-478

(* *)

1,189
6

36
478

15

60

99

8,338

-8,338
26

15

9,867

7,185

16,066

-909
115

-17
7,553

7,381

-7,381

8,894

7,172

(' ')

15

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[$ millions)
This Month
Classification

Gross /APPlicable
Outlays
Receipts

Department of Agriculture:
Agricultural Research Service
Cooperative State Research Education and Extension
Service
Cooperative state research activities
Extension activities
Other
Animal and Plant Health Inspection Service
Food Safety and Inspection Service
Agricultural Marketing Service

I Outlays

Current Fiscal Year to Date

Prior Fiscal Year to Date

Gross /APPlic.ablel Outlays
Outlays
Receipts

Gross /APPlicable/ 0 tl
Outlays
Receipts
u aye

57

57

429

429

433

433

36
32
2
45
42
21

36
32
2
45
42
21

237
222
16
275
295
422

237
222
16
275
295
422

253
258
26
295
296
493

253
258
26
295
296
493

60
6
37

2

60
6
36

316
1,785
1.356

316
1,785
1,011

407
1,813
475

407
1,813
27

248

796

-548

4,886

77

-22

2,259
-1
-486
9

14,786
99
723
152

5,813

55

7,144
-1
372
9

407

874

-467

10,983

6,089

4,894

18,455

7,245

56
22
19

362
143
93

362
143
93

333
165
62

26
-143
63
-43

238
1,489
454
93

238
-829
159
-58

189
1,459
504
50

-120
41
53
75

1,729
277
-54
311

171
277
-54
311

2,079
248
-217
610

2,170
705
299
48

2,170
705
299
48

15,003
5,081
2,179
319

15,003
5,081
2,179
319

15,195
4,752
2,007
346

15,195
4,752
2,007
346

3,222

3,222

22,583

22,583

22,300

22,300

113
25
29
76

113
25
29
76

757
194
501
410

757
194
501
410

758
376
532
392

758
376
532
392

242

242

1,861

1,861

2.057

2,057

3
58

45
-58
-5

278

298

-50

256
-553
-50

1,761

3,265

42,689

10,988

31,702

38
36
29

38
36
29

272
182
187

6

180
30
12

1,211
302
50

6

3

179
30
10

Total-SCience and Technology

222

4

218

1,563

Other
Proprietary receipts from the public
Intrabudgetary transactions
Offsetting governmental receipts

12

12
-11

65

11

Farm Service Agency:
Salaries and expenses
Conservation programs
Federal crop insurance corporation fund
Commodity Credit Corporation:
Price support and related programs
National Wool Act Program
Agncultural credit insurance fund
Other
Total-Farm Service Agency
Natural Resources Conservation Service:
Conservation operations
Watershed and flood prevention operations
Other
Rural Utilities Service:
Rural water and waste disposal fund
Rural electrification and telephone fund
Rural development insurance fund
Other
Rural housing and Community Development Service:
Rural housing insurance fund
Rental assistance program
Other
Foreign Agricultural Service
Food and Consumer Service:
Food stamp program
State child nutrition programs
Women, infants and children programs
Other
Total-Food and Consumer Service
Forest Service:
NatIOnal forest system
Flreflghting and protection funds
Forest service permanent appropriations
Other
Total-Forest Service

Department
Economic
Bureau of
Promotion

154
41
53
75

451
54
48
273

-5

.......................

of Commerce:
Development Administration
the Census
of Industry and Commerce

SCience and Technology:
National Oceanic and Atmospheric Administration
National Institute of Standards and Technology
Other

Total-Department of Commerce

26
308
117
5

49

Other
Proprietary receipts from the public
Intrabudgetary transactions
Total-Department of Agriculture

56
22
19

5,026

.......................

338

15

8

858

2,319
295
151
1,559

23
553

449

8,973
99
-260
152

983

11,209
333
165
62
189
-260
238
-68

1,719
266
118
1,456

624
248
-217
610

22
593

276
-593

50,646

11,420

39,226

266
182
187

195
187
211

8

187
187
211

1,137
243
74

12

17

1,205
302
33

18

1,125
243
57

23

1,540

1,454

30

1,424

65
-75

62

)

62
-73

.. )

(

..)

75

322

2,267

104

(

(' ')

345

(' 0)

2,164

(' ')

..

(

.. )

73

2,108

111

(

n

..

( )

1,997

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[$ millions]
This Month

Current Fiscal Year to Date

Prior Fiscal Year to Date

Gross IAPPlicable I Outlays
Receipts
Outlays

Gross IAPPlicablel
Outlays
Receipts
Outlays

Gross IAPPlic.able I Outlays
Outlays
Receipts

Classification

Department of Defense-Military:
Military personnel:
Department of the Army
Department of the Navy
Department of the Air Force

1,980
1,995
1,546

1,980
1,995
1,546

13,394
13,481
10,253

13,394
13,481
10,253

13,819
14,457
10,418

13,819
14,457
10,418

5,522

5,522

37,127

37,127

38,694

38,694

1,933
1,871
1,840
1,954

1,933
1,871
1,840
1,954

12,722
12,763
13,349
11,571

12,722
12,763
13,349
11,571

12,833
13,189
13,975
11,174

12,833
13,189
13,975
11,174

7,598

7,598

50,404

50,404

51,172

51,172

686
1,537
1,723
254

686
1,537
1,723
254

4,046
11,038
10,374
2,070

4,046
11,038
10,374
2,070

4,343
14,202
12,563
2,264

4,343
14,202
12,563
2,264

4,201

4,201

27,529

27,529

33,371

33,371

Research, development, test, and evaluation:
. . .. . . . . . . .
Department of the Army ...
Department of the Navy
.. . .............
Department of the Air Force
...............
Defense agencies ..

404
904
1,094
777

404
904
1,094
777

2,991
5,220
7,339
4,929

2,991
5,220
7,339
4,929

2,892
5,606
7,188
4,465

2,892
5,606
7,188
4,465

Total-Research, development, test and evaluation

3,179

3,179

20,480

20,480

20,150

20,150

200
47
86
291

200
47
86
291

650
308
704
2,232

650
308
704
2,232

534
495
753
1,929

534
495
753
1,929

625

625

3,894

3,894

3,711

3,711

109
115
88
10

109
115
88
2

740
774
601
80

740
774
601
36

675
609
592
87

675
609
592
59

19
162

19
162

82
728

82
728

-29
123

296
5

296
4

2,272
-18

2,272
-22

-1,406
-102

(.o)

(" .)

(.o)

(.o)

(.o)

2
1
10

1

23
5
104

12

17

3

14

(.o)

(.o)

(.o)

(.o)

104

143

...........

Total-Military personnel

Operation and maintenance:
.............
Department of the Army
Department of the Navy ..
..................
..... . ......
Department of the Air Force
.................
Defense agencies
. . . . . .. . . . .
Total-Operation and maintenance ..
Procurement:
Department of the
Department of the
Department of the
Defense agencies

Army
...........
Navy
............
Air Force
...

Total-Procurement

Military construction:
Department of the
Department of the
Department of the
Defense agencies

............

Army
Navy
Air Force
...

...............
...........
............

Total-Military construction
Family housing:
Department of the Army
Department of the Navy
Department of the Air Force
Defense agencies .... ............
Revolving and management funds:
Department of the Army ...
Department of the Navy
Department of the Air Force
Defense agencies:
Defense business operations fund
Other ..
Trust funds:
Department of the Army
Department of the Navy
Department of the Air Force
Defense agencies ..
Proprietary receipts from the public:
Department of the Army ..
Department of the Navy
Department of the Air Force
Defense agencies
Intrabudgetary transactions:
Department of the Army
Department of the Navy
Department of the Air Force
Defense agencies
...........
Offsetting governmental receipts:
Department of the Army
.............
Defense agencies

.

.............

. . . . . . . . . . . . ..
.............

............

Total-Department of Defense-Military

8

(.o)

10
31
36
-2
47

.............

.............

21,909

122

9

21,787

3

11
5

241
113
175
101

-31
-36
2
-47
1
-3
-33

1
-3
-33

44

50
733
94
-289

145,413

-241
-113
-175
-101
50
733
94
-289

28

-29
123

2

(.o)

143
194
147
737
223

33
403
103
-96

-194
-147
-737
-223
33
403
103
-96

7

-7

1

(.o)

(.o)

(.o)

700

144,713

148,251

-1,406
-104

1,334

..-1

(

)

146,917

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[$ millions]
This Month

Current Fiscal Year to Date

Prior Fiscal Year to Date

Gross /APPlicabie/ Outla s
Outlays
Receipts
y

Gross IAPPlicablel 0 tI
Outlays
Receipts
u ays

Gross jAPPlicable/ 0 tI
Outlays
Receipts
u aya

Classification

Department of Defense-Civil
Corps of Engineers:
Construction. general
Operation and maintenance. general ..................
Other
.........., .
Proprietary receipts from the public
Total-Corps of Engineers

..................

240

...........

2,439

Military retirement:
Payment to military retirement fund
Military retirement fund
Intrabudgetary transactions
Education benefits
Other
Proprietary receipts from the public

598
616
1.018

17

73
69
98
-17

17

223

2,233

73
69
98

2,439

...........
16
6

Total-Department of Defense-Civil

...................

Department of Education:
Office of Elementary and Secondary Education:
Education for the disadvantaged
..............
Impact aid
School improvement programs
.................
Other
.. .............
Total-Office of Elementary and Secondary
Education

10,699
16,681
-10,699
28
42

616
795
818

95

598
616
1,018
-95

95

2,138

2,228

2
10

10,699
16,681
-10,699
28
40
-10

11,470
16,001
-11,470
57
46

107

18,877

18,332

73

616
795
818
-73

73

2,155

2
7

11,470
16,001
-11,470
57
44
-7

83

18,249

1

16
5
-1

18

2,683

18,984

690
287
130
35

690
287
130
35

4,195
583
793
207

4,195
583
793
207

4,057
638
844
66

4,057
638
844
66

1,142

1,142

5,777

5,777

5,605

5,605

2,701

(0 oJ

Office of Bilingual Education and Minority Languages
Affairs
Office of Special Education and Rehabilitative Services:
Special education
Rehabilitation services and disability research .....
Special institutions for persons with disabilities ..
Office of Vocational and Adult Education

25

25

111

111

125

125

343
189
10
143

343
189
10
143

2,050
1,392
64
959

2,050
1,392
64
959

1,940
1,349
84
940

1,940
1,349
84
940

Office of Postsecondary Education:
COllege housing loans
Student financial aSSistance
Higher education
.............
Howard University
Federal direct student loan program
Federal family education loans
Other

11

-11
476
52
18
17
-99
-1

5
4,548
455
102
420
1,115

35

-31
4,548
455
102
420
1,115
("J

14
4,685
456
127
317
2,146
-3

45

476
52
18
17
-99
-1

-31
4,685
456
127
317
2,146
-3

11

452

6,644

35

6,609

7,742

45

7,697

262
268
42

262
268
-42

239
250

15

38
30
-15

49

239
250
-49

26

2,356

17,528

77

17,451

18,274

93

18,181

904

904

6,902

6,902

6,972

6,972

98
239
14
33
52
19

98
239
14
33
52
19

623
1,783
71
268
379
137

623
1,783
71
268
379
137

851
1,906
62
254
368
124

851
1,906
62
254
368
124

14

14

127

127

194

194

("J

...........

462

Total-Office of Postsecondary Education
Office of Educational Research and Improvement
Departmental management
...........
Proprietary receipts from the public .....

38
30

........................

2,381

Total-Department of Education
Department of Energy:
Atomic energy defense actiVities

Energy programs:
General science and research activities
Energy supply. Rand D activities
Uranium supply and enrichment activities
Fossil energy research and development
Energy conservation
Strategic petroleum reserve
Clean coal teChnology
Nuclear waste disposal fund
Uranium enrichment decontamination and
decommiSSioning fund
Other

("J

...........

Total-Energy programs
Power Marketing Administration
Departmental administration
Proprietary receipts from the public
Intrabudgetary transactions
Offsetting governmental receipts
Total-Department of Energy .............•...... " •.....

24
54

("J

24
54

144
360

144
359

180
384

180
384

549

("J

549

3,891

3,890

4,325

4,324

129
50

204

74
50
-283
-9

844
243

1,043
282

4

-375
243
-1,145
-353
-4

2,369

9,158

12,348

283
-9
1,623

("J

("J

487

1,136

10

1,219
1,145

-353
11,527

9

-123
282
-1,059
-272
-9

2,234

10,114

1,166
1,059

-272

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[$ millions]

Classification

Department of Health and Human Services:
Public Health Service:
Food and Drug Administration .............. .............
Health Resources and Services Administration ..........
Indian Health Services ................................
Centers for Disease Control and Prevention ............
..................
National Institutes of Health ..........
Substance Abuse and Mental Health Services
. ..............
Administration ..
Agency for Health Care Policy and Research ...

This Month

Current Fiscal Year to Date

Gross !APPlicable! Outlays
Outlays
Receipts

Gross !APPlicabli
Outlays
Receipts
Outlays

75
427
196
180
907

(")

75
427
196
180
907

456
2,207
1,327
1,388
5,843

212
7

1,150
70

2,004

12,441

7,853
6,435

7,853
6,435

10,869
78

2

Prior Fiscal Year to Date
Gross
Outlays

IApplic.able
I Outlays
Receipts

484
1,472
1,259
1,037
6,103

1,150
70

1,393
70

12,438

11,818

51,805
41,061

51,805
41,061

51,084
27,792

51,084
27,792

10,869
78

70,839
650

70,839
650

63,088
763

63,088
763

10,947

10,947

71,489

71,489

63,851

63,851

Federal supplementary medical insurance trust fund:
............
Benefit payments .. ................
............................
Administrative expenses .

5,668
125

5,668
125

38,285
989

38,285
989

35,189
977

35,189
977

Total-FSMI trust fund .. .............................

5,793

5,793

39,273

39,273

36,167

36,167

15

15

23

23

-12

-12

31,043

31,043

203,652

203,652

178,882

178,882

1,532
121
31

1,532
121
31

10,156
775
209

10,156
775
209

10,143
1,079
205

10,143
1,079
205

115

115

566

566

563

563

70
202
427

70
202
427

565
1,596
2,969

565
1,596
2,969

535
1,660
2,950

535
1,660
2,950

262
'-32

262
-32

2,000
50

2,000
50

1,861
156

1,861
156

2,729

2,729

18,886

18,886

19,153

19,153

63
66

63
66
-1,618

445
347

445
347
-11,821

554
352

554
352
-11,529

-4,718

-4,718

-37,633

-37,633

-24,392

-24,392

-1,717

-1,717

-3,428

-3,428

-3,400

-3,400

27,852

194,710

182,887

182,968

Total-Public Health Service ....... ..............
Health Care Financing Administration:
Grants to States for Medicaid .....
Payments to health care trust funds

..

. ..... , .....

Federal hospital insurance trust fund:
Benefit payments ........ ............. ..................
............... ............
Administrative expenses .
Interest on normalized tax transfers
Total-FHI trust fund ....

Other

. . . . . . . . . . . .........................

...........

Total-Health Care Financing Administration ..
Administration for Children and Families:
Family support payments to States
Low income home energy assistance
Refugee and entrant assistance .................
Payments to States for the job opportunities and basic
skills training program ....
. ................
Payments to States for the child care and development
block grant
............. ........................
Social services block grant
Children and families services programs . . . . . . . . . . . . . . . .
Payments to States for foster care and adoption
assistance .. ...............................................
Other
...............................
Total-Administration for Children and Families
Administration on aging
Other
...............
. . . . . . . . . . . .. .
.............
Proprietary receipts from the public
Intrabudgetary transactions:
Payments for health insurance for the aged:
...........
Federal hospital insurance trust fund
Federal supplementary medical insurance trust fund
Payments for tax and other credits:
Federal hospital insurance trust fund
............
Other
Total-Department of Health and Human Services

212
7
2,004

(")

1,618

29,470

1,619

11

2

11,821

11,823

3

482
1,472
1,259
1,037
6,103

453
2,207
1,327
1,388
5,843

1,393
70
3

11,529

11,532

11,816

171,436

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[$ millions]

Classification

Department of Housing and Urban Development:
Housing programs:
Public enterprise funds
Credit accounts·
Federal housing administration fund
Housing for the elderly or handicapped fund
Other
Rent supplement payments
Homeownershlp assistance
Rental housing assistance
Rental housing development grants
Low-rent public housing
Public housing grants
College housing grants
Lower income housing assistance
Section 8 contract renewals
Other
Total-Housing programs
Public and Indian Housing programs:
Low-rent public housing-loans and other expenses
Payments for operation of low-income hOUSing
projects
Community Partnerships Against Crime
Other
Total-Public and Indian Housing programs
Government National Mortgage Association:
Management and liquidating functions fund
Guarantees of mortgage-backed securities
Total-Government National Mortgage Association
Community Planning and Development:
Community Development Grants
Home investment partnerships program
Other
Total-Community Planning and Development
Management and Administration
Other
Proprietary receipts from the public
Offsetting governmental receipts
Total-Department of Housing and Urban
Development .............................................

This Month

Current Fiscal Year to Date

Prior Fiscal Year to Date

Gross /APPlicable/ Outlays
Receipts
Outlays

Gross / Applic.able / Outlays
Receipts
Outlays

Gross /APPlicablei
Receipts
Outlays
Outlays

5

5

(' ')

68

41

27

105

75

30

1,136
272
59
5
8
47

1,551
55

~416

5,306
489
382
62
60
374

6,834
348

~1,528

217
59
5
8
47

141
382
62
60
374

3,793
543
332
95
68
380

3,561
378

232
165
332
95
68
380

47
312
1
814
506
39

444
2,322
10
5,257
3,422
213

444
2,322
10
5,257
3,422
213

461
2,086
10
5,790
2,890
97

1,611

1,638

18,409

7,223

11,185

16,652

4,013

12,639

..

2

246

187

59

257

197

60

229
19
9

1,616
133
50

1,616
133
50

1,544
92
12

258

2,045

187

1,858

1,905

197

..

(

47
312
814
506
39
3,250
2
229
19
9
259

(

)

..)

(

..

(

..

(

)

)

..

)

..)

(

..

(

1,544
92
12

..

(

)

)

461
2,086
10
5,790
2,890
97

..

)

( )

16

57

~41

119

454

~334

216

470

-254

16

57

~41

119

454

~335

216

471

~254

373
93
30

8

373
93
22

2,652
671
212

67

2,652
671
144

2,431
656
185

69

2,431
656
116

496

8

488

3,534

67

3,467

3,273

69

3,204

454
30

454
30

142

102
5
-142

302
35
267
5

302
35
-267
-5

5,023

17,360

102
5

4,127

1,819

2,308

24,592

46
21
53

322
162
375

(

1,708

278
6

~278

8,215

16,376

22,383

322
162
375

378
310
410

~6

Department of the Interior:
Land and Minerals Management:
Bureau of Land Management:
Management of lands and resources
Other
Minerals Management Service
Office of Surface Mining Reclamation and
Enforcement

22

22

198

198

187

187

Total-Land and Minerals Management

142

142

1,058

1,058

1,285

1,285

Water and Science:
Bureau of Reclamation:
Construction program
Operation and maintenance
Other
United States Geological Survey
Other

11
23
41
61
23

14

138
141
232
287
191

80
15

138
141
151
287
176

168
148
243
324
198

109

2

11
23
26
61
21

16

168
148
133
324
183

Total-Water and SCience

159

16

143

988

95

893

1,081

125

956

85
108

85
108

702
823

702
823

712
898

712
898

193

193

1,525

1,525

1,610

1,610

Fish and Wildlife and Parks:
United States Fish and Wildlife Service
NatIOnal Park Service
Total-Fish and Wildlife and Parks

46
21
53

12

378
310
410

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[$ millions]

This Month

Current Fiscal Year to Date

Classification
Gross !APPlicablel
Receipts
Outlays
Outlays
Department of the Interior:-Continued
Bureau of Indian Affairs:
Operation of Indian programs
................... .
Indian tribal funds .......... . .................... .
Other .................................................... ..

102
14
63

Total-Bureau of Indian Affairs ................ ..

179

Insular affairs ......................................... ..
Other departmental offices ................................ ..
Proprietary receipts from the public ....................... ..
Intrabudgetary transactions ..................
. ......... .
Offsetting governmental receipts ........................... .
Total-Department of the Interior
Department of Justice:
General Administration:
Community oriented policing services .................... .
Other ..................................................... ..
Legal activities ...
.. .................................. ..
Federal Bureau of Investigation ............................ .
Drug Enforcement Administration .......................... ..
Immigration and Naturalization Service ..................... .
Federal Prison System
............................ .
Office of Justice Programs ................................ ..
Other ........................................................ .
Intrabudgetary transactions ................................. .
Offsetting governmental receipts .................. .
Total-Department of Justice .......................... .
Department of Labor:
Employment and Training Administration:
Training and employment services ................... .
Community Service Employment for Older Americans
Federal unemployment benefits and allowances .....
State unemployment insurance and employment service
operations .... .. ........................................ .
Advances to the unemployment trust fund and other
funds ..................................................... .
Unemployment trust fund:
Federal-State unemployment insurance:
State unemployment benefits ........................ .
State administrative expenses ....................... .
Federal administrative expenses ..................... .
Veterans employment and training .................. .
Repayment of advances from the general fund .... .
Railroad unemployment insurance ..................... .
Other ......
. ............................... ..
Total-Unemployment trust fund
Other .......
Total-Employment and Training Administration

Gross
Outlays

2

102
14
61

832
153
227

2

177

1,212

21
18
-141
-49

195
73

21
18
141
-49

(. ')

159

504

4,882

135
92
1,565
1,307
450
1,181
1,773
641
82

103

21
73
243
196
92
165
223
93
20
-4
-103

116

1,020

7,204

342
28
28

342
28
28

-35

-35

21
73
243
196
92
165
236
93
20
-4
1,136

13

0 tl
u ays

Gross
Outlays

IAPPlic~blel
Receipts

Outlays

10

832
153
217

887
170
249

7

887
170
242

10

1,202

1,306

7

1,299

360
57

1,010

195
73
-1,010
-169

-169

(")

663

IAPPlicable~
Receipts

Prior Fiscal Year to Date

1,090
-162

(' ')

(' ')

1,116

3,766

5,536

135
92
1,565
1,307
450
1,181
1,694
641
82

212
174
1,495
1.214
561
973
1.603
351
118
-33

79

-22

-22

360
57
-1,090
-162

3

-3

1,225

4,311

74

212
174
1,495
1,214
561
973
1,529
351
118
-33

509

-509

588

6,616

6,668

2,334
230
176

2,334
230
176

2,443
222
113

2,443
222
113

50

50

6

6

619

619

460

-460

534

6,134

2,177
295
10
13

2,177
295
10
13

14,203
1,878
140
90

14,203
1,878
140
90

13,077
1,900
138
105

13,077
1,900
138
105

6

6

45

45
11

40

11

11

40
11
15,271

1

2,503

2,503

16,367

16,367

15,271

6

6

43

43

52

52

2,871

2,871

19,200

19,200

18,727

18,727

62

566

-177

860

125
218
316

125
218
316
80
161
144
263
-4
-310

141
-152
335

20,016

19,680

81

19

PenSion Benefit Guaranty Corporation ............. .
Employment Standards Administration:
Salaries and expenses ................................... .
Special benefits ........................................... .
Black lung disability trust fund ........................... .
Other ...........
.. ................................ .
Occupational Safety and Health Administration ............ .
Bureau of Labor Statistics ................................. .
Other ....................................................... ..
Proprietary receipts from the public ......
. ........... .
Intrabudgetary transactions ............................ .

17
127
45
10
24
18
40

17
127

-8

Total-Department of Labor ............................ .

3,225

45

21

13

10

80

24
18
40
-1

161
144
263

-8

-310

3,205

20,763

743

4

747

1,028

-168
141
-152
335

80

80

173
165
263

173
165
263
-5
-912

5

-912
1,033

18,647

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[S millions]

Classification

Department of State:
Administration of Foreign Affairs:
Diplomatic and consular programs
AcquIsition and maintenance of buildings abroad
Payment to Foreign Service retirement and disability
fund
..............
Foreign Service retirement and disability fund
Other

This Month

Current Fiscal Year to Date

Prior Fiscal Year to Date

Gross !ApPlicable! Outlays
Outlays
Receipts

Gross !APPlicable) Outla s
Outlays
Receipts
y

Gross !APPlicable)
tI
Outlays
Receipts
Ou aYI

133
44

133
44

1,044
315

1,044
315

906
309

906
309

15
40
39

15
40
39

71
268
223

71
268
223

129
263
291

129
263
291

271

271

1,920

1,920

1,897

1,897

35
50
17

35
50
17

556
332
131

556
332
131

1,269
415
64

1,269
415
64

-16

-16

-116

-116

-182

-182

357

357

2,823

2,823

3,464

3,464

Department of Transportation:
Federal Highway Administration:
Highway trust fund:
............
Federal-aid highways
Other
............
Other programs

1,396
18
16

1,396
18
16

10,485
111
124

10,485
111
124

9,967
99
107

9,967
99
107

Total-Federal Highway Administration

1,430

1,430

10,720

10,720

10,173

10,173

20

20

146

146

154

154

129
31

129
30

519
169

7

519
162

708
118

6

708
111

159

159

687

7

680

825

6

819

166
169

166
169

19

19

517
1,272
555
173

517
1,272
555
173

319
1,146
863
297

319
1,146
863
297

354

354

2,518

2,518

2,624

2,624

146

146

1,365

1,365

1,246

1,246

97
206
17
185

97
206
17
185

948
1,354
132
1,297

948
1,354
132
1,297

1,069
1,508
126
1,525

1,069
1,508
126
1,525

505

505

3,730

3,730

4.228

4,228

(" .)

-1

(" .)

2

-2

..

)

-1

Total-Federal Aviation Administration ...

651

650

5,096

2

5,094

5,474

5,473

Coast Guard:
Operating expenses
Acquisition. construction, and improvements
Retired pay
Other

211
30
43
11

(

)

211
30
43
11

1,420
203
325
117

3

1,420
203
325
114

1,420
148
310
170

3

1,420
148
310
167

294

(

)

294

2,064

3

2,061

2,048

3

2,044

89
1
2

355
195

249
5
4

182
5
3

229

65

106
190
-4
5
-65

411
211

26

-41
49
-2
-1
-26

38

-38

120

2,885

21,787

335

21,452

21,920

238

21,682

Total-Administration of Foreign Affairs
International organizations and Conferences
Migration and refugee assistance
..............
Other
Proprietary receipts from the public
.................
Intrabudgetary transactions
Offsetting governmental receipts
...........
Total-Department of State ..... ,', .. ,', ... " .... , .•.....

National Highway Traffic Safety Administration
Federal Railroad Administration:
Grants to National Railroad Passenger Corporation
Other
Total-Federal Railroad Administration
Federal Transit Administration:
Formula grants
Discretionary grants
Trust fund share of expenses
Other

............
..............
...........

Total-Federal Transit Administration
Federal Aviation Administration:
Operations
Airport and airway trust fund:
Grants-in-aid for airports
Facilities and equipment
Research, engineering and development
Trust fund share of operations
Total-Airport and airway trust fund
Other

Total-Coast Guard

48
50

Mantime Administration
Other
Propnetary receipts from the public
Intrabudgetary transactions
Offsetting governmental receipts
Total-Department of Transportation

..
..

-1

...................

3,005

14

5

(

..

(

)

206

..

-3
( )

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[$ millions]
This Month

Current Fiscal Year to Date

Prior Fiscal Year to Date

Gross !APPlicablel
Outlays
Outlays Receipts

Gross !APPlicablel
Outlays
Outlays Receipts

Gross !APPlic.ablej Outlays
Outlays
Receipts

Classification

Department of the Treasury:
Departmental offices:
Exchange stabilization fund .............................. .
Other ...................................................... .

-220
-14

18

-238
-14

-1.025
191

24
587
47

24
587
47

Total-Financial Management Service ""',.,"",',.,'

943

Federal Financing Bank '''"'''''''''''''''''',,'''''',,,''''
Bureau of Alcohol. Tobacco and Firearms:
Salaries and expenses "".",,,,,,,,,,,,,,,,,,,,,,,,,,,,,
Intemal revenue collections for Puerto Rico """.""",
United States Customs Service " " " " " " ' " " " " " " " "
Bureau of Engraving and Printing", .. """" .. """"""
United States Mint """,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.
Bureau of the Public Debt """,,,,,,,,,,,,,,

Financial Management Service:
Salaries and expenses ........................... ,',',""
Payment to the Resolution Funding Corporation "",,'"
Claims. judgements. and relief acts " " " " " " " " " " "
Net interest paid to loan guarantee financing accounts
Other '"''''''''''''''''''''''''''''''''''''''''''''''''''''

Internal Revenue Service:
Processing. assistance. and management "'."""".",
Tax law enforcement """,,,,,,,,,,,,,,,,.,,,,,,,,,,,,,,,
Information systems """"",,,,,,,,,,,,,,.,,,,,,,,,,,,,,
Payment where earned income credit exceeds liability
for tax ''''''''''''',,,,,,,,,,,,,,,,,,.,,,,,,,,,,,,,,,,,,,,
Refunding internal revenue collections. interest
Other ''''''''''''''''"""""""",,,,,,,,,,,,,,,,,,,,,,,

12

-1.712
126

-1.113
191

-1.700
126

284

143
1.751
487
48
584

143
1.751
487
48
584

152
1.751
428
766
60

152
1.751
428
766
60

943

3.014

3.014

3.158

3.158

-110

-110

-106

-106

-102

-102

34
11
153

34
11
153

193
125
1.071
26
304
165

193
125
1.071
26
-457
165

227
118
1.043
40
-91
177

227
118
1.043
40
-91
177
1.040
2,409
859

-7
35
14

-7
139

-104
14

88

761

133
312
178

133
312
178

837
2.399

837
2.399

872

872

1.040
2,409
859

2.766
137

2.766
137

16.593
1.282

16.593
1.282

11.221
1.768

(

(

..

)

(' ')

2

11.221
1.768
2

3.528

21.983

21.983

17.298

17.298

44
25
-14

311
238
100

311
-1

313
245
97

..

)

)

..

(

Total-Internal Revenue Service""""",,,,,,,,,,,,,,

3.528

United States Secret Service ",,,.,,,""""''''',,'''',,''
Comptroller of the Currency '''''''''',,'',,''''''''''',,''''
Office of Thrift Supervison """,,,,,,,,,,,,,,,,,,,,,,,,,,,,

44
51
10

Interest on the public debt:
Public issues (accrual basis) """""",,,,,,,,,,,,,,,,,,
Special issues (cash basis) '"'''',,'','''''''''''''''','''

20.084
1.397

20.084
1.397

141.013
51,420

141.013
51,420

133.924
48.944

133.924
48.944

Total-Interest on the public debt "".""""",,.,,'

21.481

21,481

192.433

192.433

182.868

182.868

Other ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
Proprietary receipts from the public"",." ... ".",.", .. "
Intrabudgetary transactions """"",,,,,,,,,,,,,,,,,,,,,,,,
Offsetting governmental receipts .""."""",.""""",.

11

54

651

54
-2.387
-4.994
-651

30

68

11
-310
-957
-68

587

24,420

4,204

209,879

Total-Department of the Treasury .....•........•......

26
25

310
-957
25,007

15

217
100

2.387
-4.994
214,082

22

197
80

579

30
-2.258
-5.529
-579

3,127

195,193

2.258
-5.529
198,319

313
47
17

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[$ millions]
Current Fiscal Year to Date

This Month
Classification

Department of Veterans Affairs;
Veterans Health Administration
Medical care
Other

1,339
37

Veterans Benefits Administration'
Public enterprise funds
Guaranty and Indemnity fund
Loan guaranty revolving fund
Other
Compensation and pensions
Readlustment benefits
Post-Vietnam era veterans education account
Insurance funds:
NallOnal service life
United States government life
Veterans special life
Other

1,634

3
102

1,339
21

9,184
346

-347
42
2
1,575
126
5

212
272
79
9,288
775
27

115
1
9
2

713
9
86
12

1,532

11,473

55
89

397
563

55
89
20

..

(

)

64
-1

.................

Environmental Protection Agency;
Program and research operations
Environmental programs and management
State and tribal assistance grants
Hazardous substance superfund
Other
Proprietary receipts from the public
Intrabudgetary transactions
Offsetting governmental receipts
Total-Environmental Protection Agency

...........

3,153
(

203

..)
13

-250

...............

508

14

-776
54
-18
(

..)
(

................

National Aeronautics and Space Administration;
Human space flight
SCience, aeronautics and technology
MISSion support
Research and development
Space flight, control and data communications
Construction of faCIlities
Research and program management
Other
Total-National Aeronautics and Space
Administration ............................................
Office of Personnel Management:
Government payment for annUitants, employees health
and life Insurance benefits
Payment to CIVil service retirement and disability fund
Civil service retirement and disability fund
Employees life Insurance fund
Employees and retired employees health benefits fund
Other
Intrabudgetary transactions
CIVil service retirement and disability fund:
General fund contributions
Other

...............

-739

..)

374
199
67

92
733

..)

(

)

-64
-1

-7

2,951

21,954

)

149
200
109
300
-13
-250
-1

44
995
1,538
778
583

-776
54
-18

605
-28
157
132

..)

(
(

..

)

9,121
401

-162
73
11
9,288
775
27

565
318
108
8,946
750
39

713
9
-6
12

728
10
86
16

10,739

11,566

396
563

380
654

-398
-7

-15

1,384

20,570

22,107

..)

516
862
1,338
778
510

6

44
995
1,538
778
583
-128
-250
-6

134

3,553

3,755
-292
29
125
79

15

605
-28
157
132
-15

15

851

-58

(

-250
3,688

9.184
231

398

128

494

Gross IAPPlicable lOti
Outlays
Receipts
u aya

-138

(

..

I Outla ys

..)

138

(

(

(

115

-20

..

..)

149
200
109
300

General Services Administration:
Real property activities
Supply and technology activities
Information Technology Service
Other
Proprietary receipts from the public

Total-Office of Personnel Management

61
30
8

115
1
12
2

Construction
Departmental administration
Proprietary receipts from the public
National service life
United States government life
Other
Intrabudgetary transactions

Total-General Services Administration

16

-286
72
10
1,575
126
5

Total-Veterans Benefits Administration

Total-Department of Veterans Affairs

Gross !APPlic.able
Outlays
Receipts

Gross !APPlicable! Outlays
Outlays
Receipts

Prior Fiscal Year to Date

..

(

160

285
240
66

92
682

..)

(

160

..

)

(

)

9,121
242

280
78
42
8,946
750
39
728
10
-6
16
10,884
380
654
-160

..)

(

415

-415
-15

1,416

20,691

..

5

516
862
1,338
778
510
-180
-250
-5

185

3,569

-1

-292
29
125
79
1

-1

-58

(

)

180
-250

-739

867

470
446
203
18
27
27

470
446
203
18
27
27

(

(

3,064
2,678
1,301
353
174
167
3
10

1,345
861
1,099
2,705
1.199
192
91
9

1,345
861
1,099
2,705
1,199
192
91
9

(* *)

2

2

3,064
2,678
1,301
353
174
167
3
10

1,193

1,193

7,751

7,751

7,499

7,499

350

350

2,083

2,083

2,320

2.320

3,371
136
1,383
8

204
1,286

3,371
-68
97
8

22,913
951
9,224
22

1,507
8,954

22,913
-557
270
22

22,220
938
8,996
29

-2

-16

-16

-19

1.490

3,756

35,176

10,461

24,715

34,483

.. )

-2
5,246

16

..

)

1,452
9.277

22,220
-514
-282
29

-19
10,729

23,754

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[$ millions]

Classification

Small Business Administration:
Public enterprise funds:
Business loan fund ....................................... .
Disaster loan fund ........................................ .
Other ............. , ........................................ .
Other

This Month

Current Fiscal Year to Date

Prior Fiscal Year to Date

Gross IAPPllcablel Outlays
Receipts
Outlays

Gross ·IAPPlicable! 0 tI
Outlays
Receipts
u ays

Gross !Applic.able I Outlays
Outlays
Receipts

34
28

41
28

-6

-3

209
143
9

280

206
324
13
343

(* *)

181
4
343

417

886

360

525

3

1

1

36

(* *)

36

353
251
9
280

101

70

31

892

1,675
56
2,390
2

1,675
56
2,390
2

4,376
394
14,017
6

4,376
394
14,017
6

3,840
424
13,148

3,840
424
13,148

Federal old-age and survivors insurance trust fund (offbudget):
Benefit payments ........................................ ..
Administrative expenses .................................. .
Payment to railroad retirement account ................. .
Quinquennial military service credit adjustment .......... .

25,154
188

25,154
188

173,843
1,016

173,843
1,016

167,028
980

167,028
980

129

129

Total-FOASI trust fund .............................. ..

25,342

25,342

174,988

174,988

168,008

168,008

3,678
73

3,678
73

24,764
586

24,764
586

23,020
645

23,020

203

203

3,751

3,751

25,553

25,553

23,665

23,665

Total-Small Business Administration
Social Security Administration:
Payments to Social Security trust funds .................. .
Special benefits for disabled coal miners .................. .
Supplemental security income program .................... .
Office of the Inspector General ............................ .

Federal disability insurance trust fund (off-budget):
Benefit payments ........................................ ..
Administrative expenses .................................. .
Payment to railroad retirement account ................. .
Quinquennial military service credit adjustment .......... .
Total-FDI trust fund ................................. ..
Proprietary receipts from the public:
On-budget ................................................ ..
Off-budget
......................................... .
Intrabudgetary transactions:
On-budget:
Quinquennial Adjustment for Military Service
Credits from FOASI and FDI: ....................... .
Off-budget3 ................................................ .
Total-Social Security Administration
Other independent agencies:
Appalachian Regional Commission ......................... .
Corporation for National and Community Service ......... .
Corporation for Public Broadcasting ....................... .
District of Columbia:
Federal payment .......................................... .
Other ...................................................... .
Equal Employment Opportunity Commission ............... .
Export-Import Bank of the United States .................. .
Federal Communications Commission ...................... .
Federal Deposit Insurance Corporation:
Bank insurance fund .................................... ..
Savings association insurance fund ...................... .
FSLlC resolution fund:
Resolution trust corporation closeout ................. .
Other ................................................... ..
Affordable housing and bank enterprise ................. .
Total-Federal Deposit Insurance Corporation ............. .
Federal Emergency Management Agency:
Public enterprise funds ................................... .
Disaster relief ............................................. .
Emergency management planning and assistance ...... .
Other .................................................... ..
Federal Trade Commission ................................. .
Legal Services Corporation ................................. .
National Archives and Records Administration ............. .
National Credit Union Administration:
Credit union share insurance fund ....................... .
Central liquidity facility ................................... ..
Other ..................................................... ..

104
4

-1,675

31,541

108

(00)

-104

271
196
8

81
55

(* *)

475

496
13

-4

-1,675

-332
-4,376

31,433

214,626

510

1

-496
-13

384
6

-332
-4,376

-3,839

214,116

205,246

69
265
275

95
243
286

712
-9
130
-540

714
5
143
883

81

92

8

8

45

45

69
265
275

255
2

255
2
26
-74
7

712
3
130
473
96

1,013
15

-132
-33

704
39

1,556
587

-852
-548

1,500

-370

-19

705
803

6,167
496

(* *)

1

-553

2,253

78

26

(* 0)

253

326
5

11

82
4

213

189

559
19

37

(* *)

275

828

103
152

25

152
20

20

17

17
10
23
19

(* *)

23
19

4

141

-136

10

(* *)

17

-24

-384

-6

-3,839
390

204,856
95
243
286
714

12

-7

(* *)

583
30

142
300
62

26

6,344
545

-4,844
-520

-5,462
307

3,292
1,188

9,825
661

1

3

-6,533
527
3

8,806

-6,553

6,010

17,376

-11,366

595
1,195
136
140
57
141
112

167

428
1,195
136
130

275
1,445
155
182

197

78

6

1,445
155
176

57

48

48

(* *)

141
112

261
130

(* *)

261
130

97

192

-95

-13

12
(* *)

10

5
-24

645

-38

3

-41

-8

196
5
3

-209
(* *)

-11

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[$ million.]
TIM. Month
Classification
Groa.
OutlaY'
Other independent agencies:-Continued
National Endowment for the Arts
...................
National Endowment for the Humanities
.................
........................
National Labor Relations Board
.........................
National Science Foundation .
.................
Nuclear Regulatory Commission
......................
Panama Canal Commission
Postal Service:
Public enterprise funds (off-budget) .. ....................
Payment to the Postal Service fund ......................

IAppka*I OutlaY'
R~

CUrNnt Flacel Vu, to Date

PrIor Flacel Veer to Date

/Appl
Ica*1
Rac:eipts

Groa•. )APPlica1
OutlaY'
Receipt.
Outlay.

Groat

OutlaY'

OutlaY'

86
82
94
1.579
-3
-37

105
94
104
1.462
311
323

-3.217
101

28.574
107

138
165

138
165

149
172

149
172

1.650

(" 0)

648
40
11
3

1.650
-648
648
40
11
3

1.634
-640
640
42
16
4

1.634
-640
640
42
16
4

-63

-63

-165

-165

-172

-172

7
22

7
22

51
22

51
22

53
1

53

418
-11

418
-11

2.860

(00)

(")

(0 0)

2.887
8
1

2.860

(0 0)

2.887
8
1

1

1

......................

685

685

4.812

4.812

4.760

4.760

. .......................................
Oversight Board ...
Securities and EXChange Commission ......................
Smithsonian Institution ...... .................................
.............................
Tennessee Valley AuthOrity
United States Enrichment Corporation Fund . . . . . . . . . . . . . . . .
United States Information Agency ...........................
..............................................
Other

(0 0)

(0 0)

709
128

-1
33
25
23

250

558
6
243
322
-131
679
490

-3
77
249
5.503
649
659
1.018

-3

-1
33
734
152

50,747

2,158

54,940

(00)

(0 0)

'"

Railroad Retirement Board:
Federal windfall subsidy
................................
Federal payments to the railroad retirement accounts ...
Rail industry pension fund:
..................................
Benefit payments
Advances from FOASDI fund ...........................
OASDI certifications ... ..................................
Administrative expenses .................................
Interest on refunds of taxes ............................
Other
.........................................
Intrabudgetary transactions:
Payments from other funds to the railroad
retirement trust funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
............. ..................................
Other
Supplemental annuity pension fund:
Benefit payments ........................................
Interest on refund of taxes .............................
Railroad Social Security equivalent benefit account:
Benefit payments ........................................
Interest on refund of taxes .............................
. . . . . . . . . .. . . . . . . . . .. . . . . . .. . . .. . .. . . . .. .. . . . .
Other

14
9
16
242
-10
-13

1.579
290
347

-721
21

30.534
101

63

19
63

235
-93
93
6
-11

235
-93
93
6
-11

(" 0)

14
9
16
242
47
49
4.053
21

58
61
44.773

19

86
82
94

293
385
33.750

-648

289
358
32.130

105
94
104
1.462
21
-35
-3.556
107

.

.

Total-Railroad Retirement Board

Total-Other independent agencies
Undistributed offsetting receipts:
............
Other interest

....................

94

(0 0)

94

68

12

56

558
6
243
5.298
742
679
740

7,417

7,087

350

52,803

......................

Employer share. employee retirement:
Legislative BranCh:
United States Tax Court:
Tax court judges survivors annuity fund ............
The Judiciary:
Judicial survivors annuity fund ..........................
Department of Defense-Civil:
Military retirement fund .............................
Department of Health and Human Services:
Federal hospital insurance trust fund:
Federal employer contributions ................
Postal Service employer contributions ...............
Payments for military service credits ................
Department of State:
Foreign Service retirement and disability fund
Office of Personnel Management:
Civil service retirement and disability fund ...
Social Security administration (off-budget):
Federal old-age and survivors insurance trust fund:
Federal employer contributionS .......................
Payments for military service credits ................
Federal disability insurance trust fund:
............
Federal employer contributionS
Payments for military service credits
Independent agenCies:
Court of veterans appeals retirement fund ............
Total-Employer share, employee retirement ..........

4.976
873
(0 0)

77

261

249
922
-338
659
757

57,014

-2,074

(0 0)

('.)

4.580
987
(* 0)

(* 0)

(0 0)

(* 0)

(0')

-920

-920

-6.472

-6.472

-7.135

-7.135

-144

-144

-43

-43

-1.054
-284

-1.054
-284

-1.061
-324

-1.061
-324

-8

-8

-63

-63

-64

-64

-800

-800

-5.826

-5.826

-5.623

-5.623

-436

-436

-2.879

-2.879

-2.960
17

-2.960

-529
-17

-529

-17.695

-17.695

-78

-78

2.428

2.428

18

-514

-:14

(0,

(0 0)

17.091

-17.091

17
-17

Table 5. Outlays of the U.S. Government, April 1996 and Other Periods-Continued
[$ millions]
This Month

Current Fiscal Year to Date

Gross \APPlicable, Outlays
Outlays
Receipts

Gross \APPlicabl1 0 tl
Outlays
Receipts
u ays

Prior Fiscal Year to Date

Classification

Undistributed offsetting receipts:-Continued
Interest received by trust funds:
The Judiciary:
Judicial survivors annuity fund
Department of Defense-Civil:
Corps of Engineers
............ .
Military retirement fund ............................... .
.................. .
Education benefits fund
Soldiers' and airmen's home permanent fund ........ .
Other ..
. ............................... .
Department of Health and Human Services:
Federal hospital insurance trust fund ............ .
Federal supplementary medical insurance trust fund ..
Department of Labor:
Unemployment trust fund .............................. .
Department of State:
Foreign Service retirement and disability fund ........ .
Department of Transportation:
Highway trust fund ...................... . ............. .
Airport and airway trust fund
Oil spill liability trust fund
Department of Veterans Affairs:
National service life insurance fund .....
United States government life Insurance Fund
Environmental Protection Agency .............. .
National Aeronautics and Space Administration ...
Office of Personnel Management:
Civil service retirement and disability fund ...... .
Social Security administration (off-budget):
Federal old-age and survivors insurance trust fund
Federal disability insurance trust fund ........... .
Independent agencies:
Railroad Retirement Board ....................... .
Other
Other

(")

Total outlays

0,000,000'

Total on-budget
Total off-budget

0,

0

0

00"

0

0

0

0

0

0

0

0

0"

0,

0

0

0"

0

0

0

0

0

0

0'

0

0

0

0

0

0

0

0'0000'

0'

0

0

0

Total surplus (+) or deficit ..
Total on-budget
Total off-budget

0

0

0

0

0

0

00

0

00

0

0

0

00

0

0

0

0'

0

0'

0

0

0'

0'

0

0

0'

0

0

00

0

0

0

0

00

00

0

0'

0

0

00

0

0

0

00

0

-13
-5,826
-19
-1

-13
-5,826
-19
-4
-1

-11
-5,782
-22
-5
-1

-11
-5,782
-22
-5
-1

-2
-138

(' ')
(")

(")
(")

-4

-21
-49

-21
-49

-5,253
-650

-5,253
-650

-5,396
-967

-5,396
-967

-23

-23

-1,727

-1,727

-1,392

-1,392

(")

(")

-312

-312

-300

-300

-4
-12

-4
-12

-609
-417

(")

(")

-4

-609
-417
-4

-577
-401
-4

-577
-401
-4

-537
-4
-1
-1

-537
-4
-1
-1

-2

-2

-529

(")
(")
(")

(")
(")
(")

-4
-1
-1

-529
-4
-1
-1

2-361

-361

-14,602

-14,602

-13,946

-13,946

-261
-56

-261
-56

-16,937
-1,174

-16,937
-1,174

-15,360
-860

-15,360
-860

-37

-37
-2
-21

-674
-18
-55

-674
-18
-55

-406
-12
-135

-406
-12
-135

-990

-48,841

-48,841

-46,130

-2
-21

-3,418

-46,130

499

-499

1,806

-1,806

1,086

-1,086

5

-5

205

-205

610

-610

504

-3,922

-65,933

2,011

-67,943

-63,826

1,696

-65,521

148,630

17,637

130,993 1,021,360

116,995

904,365

995,394

118,689

876,706

117,991

12,860

105,131

816,166

83,231

732,935

798,694

86,553

712,142

30,640

4,777

25,863

205,195

33,764

171,431

196,700

32,136

164,564

-55,825

-96,931

0

0

0

0

0

0

+55,643

-97,783

-137,233

'0000000000000000

+16,750

+41,958

+40,303

0

0

0

0

..

0

0

0

..

0

0

0'

0

0

0

0'

0

0

00

'0000000000'0000'

0

0

-9

0

..

0

0

0

0'

-9

00

0

0

0

0

-11

+72,393

0

000"

0'

0

0'

0

0

0

0'

0

0000000"

0

0

0'

0000000000000000

Outlays

-11

-2

Rents and royalties on the outer continental shelf lands ..
Sale of major assets
........... .
Spectrum auction proceeds ..... . .......................... .
Total-Undistributed offsetting receipts

I

(")

-138

-990

Total-Interest received by trust funds ..

Gross \APPlic:able
Outlays
Receipts

0

0"

0

0

0

0

00

..

0

0

00

0

0

0

MEMORANDUM
Receipts offset against outlays

Proprietary receipts ............................................... .
Intrabudgetary transactions ....................................... .
. ............................ .
Governmental receipts ......
Total receipts offset against outlays .............................. ..

[$ millions]

Current
Fiscal Year
to Date

Comparable Period
Prior Fiscal Year

28,507
128,585
~
158,847

28,456
114,314
2,005
144,775

'The Postal Service accounting is composed of thirteen 28-day periods. To conform with the
MTS calendar·month reporting basis used by all other Federal agencies, the MTS reflects USPS
results through April 26th and estimates for $352 million through April 30th.
(" 'J Less than $500.000
Note: Details may not add to totals due to rounding

'Includes a prior period adjustment.
'Includes $284 million for restitution of forgone interest to the "Civil Service Retirement and
Disability Fund", Office of Personnel Management.
'Includes FICA and SECA tax credits, non-contributory military service credits, special benefits
for the aged, and credit for unnegotiated OASI benefit checks.

19

Table 6. Means of Financing the Deficit or Disposition of Surplus by the U.S. Government, April 1996 and Other Periods
[$ millions]
Net Transactions
(-) denotes net reduction of either
liability or asset accounts

Assets and Liabilities
Directly Related to
Budget Off-budget Activity

Beginning of

Fiscal Year to Date
This Month
This Year

Liability accounts:
Borrowing from the public:
PubliC debt securities. issued under general Financing authorities:
Obligations of the United States. issued by:
United States Treasury '"
. . . .. . ....... . .. ... . ..... .
...............
. ........... .
Federal FinanCing Bank ......
Total. public debt securities ........................

Account Balances
Current Fiscal Year

.. ...... ..

I

Prior Year

This Year

I

Close of
This month

This Month

159,577

4,958,983
15.000
4,973,983

5,102,786
15,000
5,117,786

5.087.049
15.000
5.102.049

-15.738

128.066

159.577

-15.738

128.066

-8

Plus premium on public debt securities ................ . .... .
Less discount on public debt securities ...................... .

-80

-53
-1,653

-56
2,248

1.236
81.231

1,190
79,658

1.182
79.578

Total public debt securities net of Premium and
discount ................................................... .

-15.665

129.666

157.274

4.893.989

5,039,319

5,023.655

Agency securities. issued under special financing authOrities (see
Schedule B. for other Agency borrowing. see Schedule C) ... .

154

8,701

-1,723

26.962

35,508

35,663

Total federal securities ............................................... .

-15,511

138.367

155,550

4.920,950

5.074,828

5,059.317

Deduct:
Federal securities held as investments of government accounts
(see Schedule D) ........... .. .... . .......................... .
Less discount on federal securities held as investments of
government accounts ....................................... ..

20,500

61,332

58.132

1.320.800

1,361,632

1,382,132

545

1,298

558

3,188

3,940

4,485

19,955

60.034

57,573

1.317.612

1,357.692

1,377.647

Net federal securities held as investments of government
accounts ................................. .
Total borrowing from the public ......................... .

-35.466

78.332

97.977

3.603.338

3.717.136

3.681.670

Accrued interest payable to the public .................................. ..
Allocations of special drawing rights .................................... ..
Deposit funds .... . .. .. . .. .. .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .. . . . .... . ..... .
Miscellaneous liability accounts (includes checks Outstanding etc.) ..... .

-130
-55
498
-4,829

512
-276
-728
2.125

11.706
518
2.125
5.336

50,611
7.380
8.186
4.813

51.253
7.159
6,960
11,767

51.123
7,105
7,458
6.938

Total liability accounts ................................................... .

-39.982

79,965

117,662

3.674,329

3.794,276

3.754,294

4.020
22,429
26,449

2.422
7.952
10.374

1.393
734

8,620
29,329

7,021
14,853

11,042
37,281

2.127

37.949

21.874

48.323

-86

-72

1,772

11.049
-10,168

-86

-72

1,772

11,035
-10.168
867

881

10,963
-10,168
795

-296
-17

-1,493
997

2.803
1,233

3

-2

-2

31,762
8.196
-26.315
-105

31,762
6,999
-25,302
-110

31,762
6,703
-25,319
-107

179
131

932
434

-1.894

1,145
14,682

1,898

2,077

2.140

15.247

15.117

30.525

Asset accounts (deduct)
Cash and monetary assets:
U.S. Treasury operating CaSh:l
Federal Reserve account .... . ..................................... ..
Tax and loan note accounts ................. .. ..................... .
Balance .......................................................... .
Special drawing rights:
Total holdings . . ...................................................... .
SDR certificates issued to Federal Reserve banks ............... .
Balance .......................................................... .
Reserve position on the U.S. quota in the IMF:
U.S. subscription to International Monetary Fund:
Direct quota payments ............................................. .
Maintenance of value adjustments ............ , ....... , .... , ..... ..
Letter of credit issued to IMF .............................. . ....... .
Dollar deposits with the IMF ........................................ ..
Receivable/Payable (-) for interim maintenance of value
adjustments ......... ........................ .. .................... ..
Balance .......................................................... ..
Loans to International Monetary Fund ........................ .. ...... .
Other cash and monetary assets ......... ...
.. .. .. .. ... .. ...... ..

....

"0'

(

..

)

..

..

)

( )

30.216

36.099

(

5.883

5.574

8.242

32.116

16.311

14.282

84.023

68.219

100,334

.. ................ .
Net activity. guaranteed loan financing.......
Net activity. direct loan financlng ....................................... ..
Miscellaneous asset accounts ..................
. ................. .

173
775
-652

47
7.750
33

-988
3,656
4.164

-12,714
19,732
-1,725

-12,840
26.706
-1.040

-12,667
27,481
-1.692

Total asset accounts .................................................... .

32,411

24,140

21,113

89,316

81,045

113,451

Excess of liabilities (+) or assets (-) ................................... .

72,393

+55,825

+96,548

+3,585,012

+3,713,231

+3,640,837

+3,585,012

+3,113,231

+3,640,831

Total cash and monetary assets ........ .

TransactiOns not applied to current year's surplus or deficit (see
Schedule a for Details) ..
.. .......................... .

Total budget and off-budget federal entities (financing of deficit (+)
or disposition of surplus (-» ........................................... .

382
-72.393

'Major soun;es of information used to dete<mloo Treasury's operating cash income indude
Federal Reserve Banks. tt1e Treasury RegiOnal Finance Centers. tt1e Intemal Revenue ServIce
Centers. tt1e Bureau of tt1e Public Debt and various eleCtronic systems. Deposits are reflected as
received and wrthdraW8ls are reflected as processed.

+55,825

+96,931

.. No TransactiOns.

r .)

Less than $500.000

Note: Details may not add to totals due to rounding

20

=

Table 6, Schedule A-Analysis of Change in Excess of Liabilities of the U,S, Government, April 1996 and
Other Periods
[$ millions]
Fiscal Year to Date
Classification

This Month

I

This Year

.. .

Prior Year

Excess of liabIlitIes begInning of penod .
Based on composition of unified budget in preceding period
3,713,231
3,584,970
3,422,146
Adjustments during current fiscal year for changes in composition
of unified budget:
Revisions by federal agencies to the prior budget results ..... .
43
-268
--~~~------------~~
Excess of liabilities beginning of period (current basis) ............... .
3,713,231
3,585,012
3,421,878

====================

Budget surplus (-) or deficit:
Based on composition of unified budget in prior fiscal yr .......... .
Changes in composition of unified budget ........................... .

-72,393

55,825

96,931

----~~----~~--------

Total surplus (-) or deficit (Table 2) ................................... .

-72,393

55,825

96,931

==~~====~==~==

Total-on-budget (Table 2)
Total-oll-budget (Table 2)

-55,643

97,783

137,233

-16,750

-41,958

-40,303

Transactions not applied to current year's surplus or deficit:
Seigniorage ............................................................ .
~oo_cl~

-382

................................................. .

(")

------------------------~Total-transactions not applied to current year's Surplus or
deficit ............................................................... .
-382

Excess of liabilities close of period _................................ ..

====================
3,640,837
3,640,837
3,518,426

Table 6, Schedule 8-Securities Issued by Federal Agencies Under Special Financing Authorities, April 1996 and
Other Periods
[$ millions]
Net Transactions
(-) denotes net reduction of
liability accounts

Account Balances
Current Fiscal Year

Classification
Beginning of

Fiscal Year to Date
This Month
This Year
Agency securities, issued under special financing authorities:
Obligations of the United States, issued by:
Export-Import Bank of the United States ............................... .
Federal Deposit Insurance Corporation:
FSLlC resolution fund ................................................. .
Obligations guaranteed by the United States, issued by:
Department of Defense:
Family housing mortgages ............................................ .
Department of Housing and Urban Development:
Federal Housing Administration ....................................... .
Department of the Interior:
Bureau of Land Management ......................................... .
Department of Transportation:
Coast Guard:
Family housing mortgages .......................................... .
Obligations not guaranteed by the United States, issued by:
Legislative Branch:
Architect of the Capitol ............................................... .
Department of Defense:
Homeowners aSSistance mortgages .................................. .
Independent agencies:
Farm Credit System Financial Assistance Corporation ............... .
National Archives and Records Administration ....................... .
Postal Service ......................................................... .
Tennessee Valley Authority ........................................... .

-12

3

-44

-31

I Prior Year
-32

-42

This Year

(' ')

(' ')

(' 0)

158

126

114

6

6

6

87

52

56

13

13

13

(" 0)

(0 0)

(' 0)

182

181

183

(0 0)

(0 0)

1,261
293
4,665
29,072
35,663

(00)

162
154

Total, agency securities ..... " .................................. ..
... No Transactions.
(' 'j Less than $500,000.

Note: Details may not add to totals due to rounding.

21

I This Month

Close of
This month

-2
4,665
4,112

-2

1,261
295

-1,649

24,960

1,261
293
4,665
28,911

8,701

-1,723

26,962

35,508

Table 6. Schedule C (Memorandum)-Federal Agency Borrowing Financed Through the Issue of Public Debt Securities,
April 1996 and Other Periods
[S millions)
Account Balances
Current Fiscal Year

Transactions
Classification

Beginning of

Fiscal Year to Date
This Month

I Prior Year

This Year
Borrowing from the Treasury:
Funds Appropriated to the President:
International Security Assistance:
Foreign military loan program ........................ .
Agency for International Development:
International Debt Reduction ......................................... .
Housing and other credit guaranty programs ............. . ........ .
Private sector revolving fund ........................................ .
Overseas Private Investment Corporation .............................. .
Department of Agriculture:
Farm Service Agency:
Commodity Credit Corporation ....................................... .
Agricultural credit insurance fund .................................... .
Natural Resources Conservation Service .............................. .
Rural Utilities Service:
Rural electrification and telephone revolving fund ................... .
Rural Telephone Bank .................................... .
Rural development insurance fund ................................... .
Rural communication development fund ..................... .
Rural housing and Community Development Service:
Rural housing insurance fund .... . ........................ .
Self-help housing land development fund ........................... .
Rural Business and Cooperative Development Service:
Rural development loan fund ........................................ .
Rural economic development loan fund ................... . ........ .
Foreign Agricultural Service .. ...................
. . . . . . . . . . ... . ... .
Department of Education:
Federal direct student loan program
Federal family education loan program ...... . ........................ .
College housing and academic faCilities fund .......................... .
College housing loans
Department of Energy:
Isotope production and distribution fund ................. .
Bonneville power administration fund .......... .
Department of Housing and Urban Development:
Housing programs:
Federal HOUSing Administration
Housing for the ederly and handicapped .......... ...... . ......... .
PubliC and Indian housing:
Low-rent public housing
Department of the Interior:
Bureau of Reclamation Loans
Bureau of Mines. Helium Fund
Bureau of Indian Affairs:
Revolving funds for loans ................ .
Department of Justice:
Federal prison industries. incorporated .
Department of Transportation:
Federal Highway Administration:
High priority Quarters loan fund .............. .. ................... ..
Federal Railroad Administration:
Railroad rehabilitation and improvement
.......... .
financing funds
Amtrak corridor improvement loans .. .
Other
Federal Aviation Administration:
Aircraft purchase loan guarantee program
MinOrity business resource center fund
Department of the Treasury:
Federal FinanCing Bank revolving fund
Department of Veterans Affairs:
Guaranty and Indemnity fund
Loan guaranty revolving fund
Direct loan revolving fund
Native amencan veteran housing fund
VocallOnal rehabilitation revolving fund

343

5

This Year

337

j

Close 01
This month

This Month

788

1,131

1,131

335
125

335
125

335
125

1

1

1

21

22

52

73

73

-6,836
604

-7,529
-1,748

6,987
1,605
4

151
2,209
4

151
2,209
4

683
-20
220

723
85
715

8,666
664
2,806
25

9,344
644
3,026
25

9,349
644
3,026
25

951

1,192

5,353
r OJ

6,304

6,304

1

40
8
97

61
30
563

78
30
563

563

4,868

5,067
1,134
184
360

12,674
1,134
184
359

12,674
1,134
184
359

17

7,607

18
(H)

(H)

..

(

)

78
30

-14
-115

-5

2,563

2,448

2,448

-68
-805

-21

-770

1,647
7,714

1,579
6,909

1,579
6,909

-135

20

20

20

17
252

26
252

26
252

28

28

28

20

20

20

32

32

32

..3

(. OJ
3

n

(>0)

(

(

9
8

21
(H)

r OJ

-646

..

)

..

3
)

r 0)

(0 OJ

14

15

(. OJ
22

-18.218

-13,983

69,297

51,725

51,079

1,161
722

586
903

302
1,272

1,463
1,994

1,463
1,994

..

22

)

7

(

(>OJ

(

n

22

)

(H)

1

1

1

18

12

-1

7

25

(H)

2

25
1

2

Table 6. Schedule C (Memorandum)-Federal Agency Borrowing Financed Through the Issue of Public Debt Securities
April 1996 and Other Periods-Continued
'
[$ millions]
Account Balances
Current Fiscal Year

Transactions
Classification
Fiscal Year to Date
This Month
This Year
Borrowing from the Treasury. Continued
Environmental Protection Agency:
Abatement, control, and compliance loan program .................... .
Small Business Administration:
Business loan and revolving fund ...................................... .
Disaster loan fund ..................................................... ..
Independent agencies:
District of Columbia ..................................................... .
Export-Import Bank of the United States ............................ ..
Federal Emergency Management Agency:
National insurance development fund ................................ .
Disaster assistance loan fund ........................................ .
Pennsylvania Avenue Development Corporation:
Land aquisition and development fund .............................. .
Railroad Retirement Board:
Rail industry pension fund ........................................... .
Social Security equivalent benefit account .......................... .
Smithsonian Institution:
John F. Kennedy Center parking facilities .......................... .
Tennessee Valley Authority ............................................. .

10

I

Beginning of

Prior Year

11

-13

12
78

270

Total agency borrowing from the Treasury
financed through public debt securities issued
Borrowing from the Federal Financing Bank:
Funds Appropriated to the President:
Foreign military financing program ..................................... .
Department of Agriculture:
Farm Service Agency:
Agriculture credit insurance fund .................................... .
Rural Utilities Service:
Rural electrification and telephone revolving fund ................... .
Rural development insurance fund ................................... .
Rural housing and Community Development Service:
Rural housing insurance fund ........................................ .
Department of Defense:
Department of the Navy ................................................ .
Defense agencies ....................................................... .
Department of Health and Human Services:
Medical facilities guarantee and loan fund ............................ ..
Department of Housing and Urban Development:
Low rent housing loans and other expenses ........................ ..
Community Development Grants ....................................... .
Department of Interior:
Territorial and international affairs ...................................... .
Department of Transportation:
Federal Railroad Administration ........................................ .
Federal Transit Administration .......................................... .
General Services Administration:
Federal buildings fund .................................................. .
Small Business Administration:
Business loan fund ..................................................... .
Independent agencies:
Export-Import Bank of the United States ............................ ..
FSLlC resolution fund:
Resolution trust corporation closeout ................................ .
Pennsylvania Avenue Development Corporation ....................... .
Postal Service ........................................................... .
Tennessee Valley Authority ............................................. .

23

This Month

37

47

47

342
7,999

329
7,999

329
7,999

30

147
2,665

379
2,723

379
2,736

419
-37

169

268
222

609
185

687
185

85

85

85

2,128
2,828

2,128
4,374

2,128
4,644

20
150

20
150

20
150

1,817

1,784

-281

-11,201

-12,560

134,892

123,972

123,691

-6

-142

-156

3,493

3,357

3,351

-240

-295

-1,600

1,470

1,415

1,175

-108

-335

-17

21,875
3,675

21,648
3,675

21,539
3,675

-685

-760

21,700

21,015

21,015

-49

-47

1,624
-192

1,624
-242

1,624
-242

-23

33

33

33

-8

-58
-14

1,689
89

1,627
81

1,627
81

-1

-1

21

20

20

-1

-3
-665

14

13

13

3

-10

111

1,893

1,881

1,884

-3

-27

-81

361

337

334

-498

-777

2,506

2,008

2,008

-299

-6,003
55
-6,965
-3,200

-8,661
68
-1,100
-200

13,209
374
7,265
3,200

7,504
429
300

7,205
429
300

-653

-18,225

-13,984

84,298

66,726

66,073

No Transactions.
(' ') Less than $500,000
Note: Details may not add to totals due to rounding

Note: This table includes lending by the Federal Financing Bank accomplished by the purchase
of agency financial assets, by the acquisition of agency debt securities, and by direct loans on
behalf of an agency. The Federal Financing Bank borrows from Treasury and issues its own
securities and in tum may loan these funds to agencies In lieu of agencies borrowing directly
through Treasury or issuing their own securities.

I

232
71

-62

Total borrowing from the Federal Financing Bank •......••..••..•

This Year

Close of
This month

Table 6. Schedule D-Investments of Federal Government Accounts in Federal Securities, April 1996 and
Other Periods
[S millions]
Securities Held as Investments
Current Fiscal Year

Net Purchases or Sales (-)
Classification

Fiscal Year to Date

Beginning of

This Month

I Prior Year

This Year

This Year

I This Month

Close of
This month

Federal funds:
Department 01 Agriculture
Department 01 Commerce
Department 01 Defense-Military:
Delense cooperation account .......... .
Department 01 Energy ..................... .
Department 01 Housing and Urban Development:
Housing programs:
Federal housing administration lund ........................... .
Govemment National Mortgage Association:
Management and liquidating functions lund:
Agency securities ........................... .
Guarantees 01 mortgage-backed securities:
Public debt securities ...................... .
Agency securities ......................... .
Other .................................................... .
Department 01 the Interior ........................................ .
Department 01 Labor .......................................... .
Department of Transportation ............................ .
Department 01 the Treasury ........................................ .
Department 01 Veterans Affairs:
Canteen service revolving lund ................ .
Veterans reopened insurance lund ................... .
Servicemen's group lile insurance lund ...... ..
Independent agencies:
Export-Import Bank 01 the United States
Federal Deposit Insurance Corporation:
Bank insurance lund .............................. .
Savings association insurance lund .................. .
FSLlC resolution lund ............................... ..
Federal Emergency Management Agency:
National llood insurance lund ............. .. ........... .
National Credit Union Administration ............. .
Postal Service .......................................... .
Tennessee Valley Authority .............................. .
Other ............................................ ..
Other .............................................. .

-1

3

4

1
21

(. 'J

-4

1

1

1

70

624

419

4,951

5,504

5,575

2

824

70

6,678

7,500

7,502

4,496

4,539

209
3,431
5,796
481
2,559

188
3,445
5,975
409
4,105

188
3,637
5,921
412
4,386

42

329

15
285

-1

192
-54
2
281

-21
207
125
-70
1,826

4,210
1

-9
581
169
48
-4,387

2

6

-5
(. 'J

-1

38
526

40
531

-38

4

4

40
521
4

131

319

89

135

323

454

143
37
7

894
554
-185

4,903
524
-563

21,017
3,600
528

21,769
4,116
335

21,912
4,153
342

160
823
-16
8

127
1,346
368
186
261

-120
215
2,437
-2,701
204
296

3,325
1,249
1,242
1,422
2,978

3,291
1,772
1,626
1,600
3,249

3,452
2,596
1,609
1,608
3,240

-9

-9

Total Federal funds

2
18

(" .)

-15

Total public debt securities .................. .
Total agency securities .................... .

20

1,813

7,714
-16

2,429

64,399
16

70,300

72,113

1,813

7,698

2,429

64,415

70,300

72,113

8

14
5
32

27
32

Trust funds:
Legislative Branch:
Library 01 Congress ................................... .
United States Tax Court .................. ..
Other '"
The Judiciary:
Judicial retirement funds ..................... .
Department 01 Agriculture ...................... .
Department 01 Commerce ............ .
Department 01 Defense-Military:
Voluntary separation incentive lund ........... .
Other '"

13

(>OJ

(. 'J

1

5

13
5
31

-2

41
68

33
16

287
310

330
366

328
379

(>OJ

(>OJ

(>OJ

("")

12

5

1
("'J

200
-20

10
-65

685
88

885
69

886
68

-1,365
-18

5,249
111

9,070
36

112,963
1,495

119,577
1,624

118,212
1,606

............................................... .

Department 01 Delense-Civil:
Military retirement lund
Other

15

(. oJ

24

Table 6, Schedule D-Investments of Federal Government Accounts in Federal Securities, April 1996 and
Other Periods-Continued
[$ millions]
Securities Held as Investments
Current Fiscal Year

Net Purchases or Sales (-)
Classification

Fiscal Year to Date
This Month

I

This Year

Beginning of
This Year

Prior Year

I

Close of
This month

This Month

Trust Funds-Continued
Department of Health and Human Services:
Federal hospital insurance trust fund ................................. ..
Federal supplementary medical insurance trust fund .................. .
Other ....................................... " .......................... ..
Department of the Interior """""""""""'"''''''''''''''''''''''''
Department of Justice .. "''''''''''''''''''''''''''''''''''''''''''''''''
Department of Labor:
Unemployment trust fund ............................................... .
Other .................................................................... .
Department of State:
Foreign Service retirement and disability fund ......................... .
Other ....................................... , ........................... ..
Department of Transportation:
Highway trust fund .................................................... ..
Airport and airway trust fund '''"",,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
Other ....................................... " ........................... .
Department of the Treasury .............................................. .
Department of Veterans Affairs:
General post fund, national homes ................................... ..
National service life insurance ......................................... ..
United States government life Insurance Fund ........................ .
Veterans special life insurance fund ................................... .
Environmental Protection Agency ............ , ............................ .
National Aeronautics and Space Administration ......................... .
Office of Personnel Management:
Civil service retirement and disability fund:
Public debt securities '''''''''''''''''''''' ......................... , ..
Agency securities .................................................... ..
Employees life insurance fund ......................................... .
Employees and retired employees health benefits fund ............... .
Social Security Administration:
Federal old-age and survivors insurance trust fund ................... .
Federal disability insurance trust fund ................................. .
Independent agencies:
Harry S. Truman memorial scholarship trust fund .................... .
Japan-United States Friendship Commission .......................... .
Railroad Retirement Board ............................................. .
Other ............. , ...................................................... .

4,285
540
4
22

493
9,744
62
81
77

5,050
-614
97
110
56

129,864
13,513
992
315

126,072
22,718
1,050
374
77

130,357
23,258
1,055
396
77

169
-5

-2,849
-4

-1,686
-2

47,141
77

44,123
78

44,292
73

-13

241
-29

300
-15

7,801
29

8,055

8,042

(")

(")

(' .)

1,680
-1,773
26
-21

1 ,920
-1,002
199
-45

18,531
11,145
1,880
235

19,317
9,950
1,909
215

20,211
9,373
1,906
215

1
-105
-1
-10
11

1
-48
-5
5
145

-1
-20
-6
7
695

)

36
11,954
106
1,546
7,243
16

35
12,011
102
1,561
7,377
16

37
11,906
101
1,551
7,388
16

-28

366,126

71
-69

-8,345
7,865
559
-223

374
304

15,839
7,890

359,610
7,865
16,327
7,736

357,781
7,865
16,398
7,667

13,146
2,898

29,936
8,760

16,843
23,357

447,947
35,225

464,737
41,087

477,883
43,985

(* .)

(* .)
( )

..

55
18
15,413
542

54
16
16,030
544

894
-578
-4

..

(

)

-1,829

-2
617
2

..

(

)

..

..

(

1

1,589
-1

571
126

54
16
14,440
544

(

)

Total public debt securities ............. " ........................... .
Total agency securities ............................................... .

18,688

45,770
7,865

55,702

1,256,385

1,283,467
7,865

1,302,155
7,865

Total trust funds ............................................ , .. ..

18,688

53,635

55,702

1,256,385

1,291,332

1,310,020

Grand total ................................................................. .

20,500

61,332

58,132

1,320,800

1,361,632

1,382,132

Note: Investments are in public debt securities unless otherwise noted.
Note: Details may not add to totals due to rounding.

... No Transactions
(' 'j Less than $500.000.

25

Table 7. Receipts and Outlays of the U.S. Government by Month, Fiscal Year 1996
[$ mililonl)

March

April

May

June

July

Aug.

Sept.

Fiscal
Vear
To
Date

Comparable
Period
Prior
F.V.

Oct.

Nov.

Oec.

Jan.

Feb.

Individual Income taxes
Corporation Income taxes
Social Insurance taxes and
contnbutions:
Employment taxes and
.........
contnbutions
....
Unemployment insurance
Other retirement contributions
.......
Excise taxes
Estate and gift taxes
......
Customs duties
.......
Miscellaneous receipts "

51.840
2.180

39.524
1.694

53,179
38.021

86,192
5.158

40,327
1.692

22,523 107,513
15.460 24.937

401,196
89.142

351,121
80.132

30.549
1.214
342
4.453
1,160
1.786
2.070

34.919
2.940
340
5.154
1.349
1.593
2.496

37.123
223
416
4.870
1.383
1.439
1,618

40,742
1.081
374
4.241
1,288
1.482
2.364

36,011
2.546
403
4,308
1.090
1.456
1.517

41,086
258
419
4,133
1.137
1.528
2.467

56.615
3.628
346
4,577
2.704
1,388
1,680

277.044
11.889
2.640
31,736
10.110
10.671
14.212

264.484
11.632
2.629
32,282
8.559
11.214
17.723

...........

95.593

90.008 138.271 142.922

89,349

89.011 203,386

848.540

Classification

Receipts:

Total-Receipts this year

···.0.

......
......

(On·budget) ..................... ,"

72.200

63.651 110.322 110.615

60,913

56,677 160.774

635,152

(Off· budget) ' ...... "',., ... ,,.,""

23.393

26.357

32.307

28.437

32.334

42.613

213,389

TNa/-ReceipTs prior rear

89.024

87.673 130,810 131,801

82,544

92,532 165.392

779.775

(On budgerj

65,384

62.083 103,860 101.036

54.405

61.970 126./70

574.908

23.639

25.590

26.950

30.765

28.139

30.562

39.222

204.867

175
197
14

173
196
14

158
226
14

262
320
18

199
212
15

162
215
25

172
329
19

1,301
1.695
118

1,642
1,608
130

120

764

239

138

2,012

104

143

3,520

4,575

801
-199

256
183

240
-286

585
350

261
67

416
305

626
58

3.186
479

3,337

820
4,990
353

2.104
4.436
280

352
3.888
250

112
4.138
363

-31
3.713
307

-313
4.229
287

-473
3,738
322

2,570
29.132
2,164

9.681
29,545
1.997

3.033
5.957
3.616

5.927
6.721
3,250

8.009
7.265
3,924

3.325
7.723
4,579

5.760
7.579
3,396

5.552
7.562
4,562

5,522
7,598
4,201

37,127
50.404
27.529

38,694
51.172
33,371

2.645
535
307

2,689
611
287

2,905
635
296

2,985
543
337

2,878
429
283

3,199
517
327

3,179
625
314

20.480
3.894
2.151

20.150
3.711
1,936

796
381

1.105
-328

702
253

-145
24

182
-28

-61
-101

482
-133

3.061
67

-1.416
-701

17.270

20.262

23.988

19.371

20.478

21.556

21.787

144.713

146.917

2.660
2,056
1,495

2.707
2.336
1.383

2.593
1.891
1.498

2.718
3.624
1.139

2.853
2,568
1.285

2,664
2,620
1.222

2.683
2,356
1,136

18.877
17.451
9,158

18,249
18,181
10.114

1.873

1,672

1.453

1.616

1.789

2,032

2.004

12,438

11.816

7.252
9.082

8.071
9.869

6,702
10,302

6.730
10,169

7.411
10,709

7,787
10.410

7.853
10,947

51.805
71,489

51.084
63.851

5.367
3,934

5.913
3.792

6.032
3.577

5.758
6.161

5,043
4.814

5,367
12.356

5,793
6.450

39,273
41,084

36,167
27.780

2,426
-5,515

2.972
-5.462

2.607
-4,906

3.051
-8.033

2,795
2.306
-6,357 -13.892

2.729
-7.924

18.B86
-52,089

19.153
-38,416

1.087
641
809

2.350
477
985

VOl
499
838

2.646
536
1,112

2,162
624
933

3.122

16,376
3.766
6,616

17.360

920

2.308
504
1,020

1.786
730
531

1.864
957
341

2.133
298
439

2,872
661
300

2,596
-76
423

2,613
377
432

2,503
702
357

16.367
3.648
2.823

15.271
3.375
3,464

1,632,

1.873

1.492

1,315

1.401

1.471

1.414

10.597

10.066

(Off budget) ,

."

27.949

Outlays
Legislative Branch , .. . , .... " .. .....
. .....
.... .. ,
The Judiciary
Executive Office 01 the President ..
Funds Appropriated to the President:
Intemational Securily Assistance .....
Intemational Development
.....
. .....
Assistance
.... ........ . .. "
Other,
Department of Agriculture:
Commodily Credit Corporation and
Foreign Agricultural Service .........
....... .... ....
Other "
Department of Commerce " . .. .......

...

Department of Defense:
Military:
Military personnel ' ..... .... ....
Operation and maintenance
, ... , .. ,
....
Procurement
Research. development, test. and
.....
... ,
evaluation
.. , .... , ..
Military construction
.... , ...
Family housing
Revolving and management
. , . . ..
funds
........
Other

.

Total Military ,

...

Civil
Department of Education ,
Department of Energy
Department of Health and Human
Services
.... .......
Public Health Service
Health Care Financing Administration:
Grants to States for Medicaid ....
Federal hospital Ins. trust fund , "
Federal supp. med, ins. trust
..
fund
Other
Administration for children and
families
Other
De partment of HOUSing and Urban
Development
De partment 01 the Intenor
Department of JustIce
Department of Labor'
Unemployment trust fund
Other
Department of State
Department of Transportation'
Highway trust fund
'

26

485

-739

4,311
6,134

Table 7. Receipts and Outlays of the U.S. Government by Month, Fiscal Year 1996-Continued
[$ millions]

Oct_

Classification

Nov.

Dec.

Jan.

Feb.

March

April

May

June

July

Aug.

Sept.

Comparable
Period
Prior
F.Y.

Fiscal
Year
To
Date

Outlays-Continued
Other ..................................
Department of the Treasury:
Interest on the public debt ...........
Other ..................................
Department of Veterans Affairs:
Compensation and pensions ..........
National service life ...................
United States government life ........
Other ..................................
Environmental Protection Agency .......
General Services Administration .........
National Aeronautics and Space
Administration ..........................
Office of Personnel Management .......
Small Business Administration ..........
Social Security Administration:
Federal Old-age and survivors ins.
trust fund (off-budget) . .. . . . . . . . . . . . .
Federal disability ins. trust fund (offbudget) ...............................
Other ..................................
Independent agencies:
Fed. Deposit Ins. Corp:
Bank insurance fund .. . . . . . . . . . . . . .
Savings association insurance
fund ...............................
FSLlC resolution fund:
Rtc closeout .....................
Other .............................
Affordable housing and bank
enterprise ..........................
Postal Service:
Public enterprise funds (offbudget) . . . . . . . . . . . . . .. . . . . . . . . . . . . .
Payment to the Postal Service
fund ...............................
Oversight Board ......................
Tennessee Valley Authority ...........
Other independent agencies ..........
Undistributed offsetting receipts:
Employer share, employee
retirement ............................
Interest received by trust funds ......
Rents and royalties on outer
continental shelf lands ...............
Other ..................................

1,506

1,427

1.630

1,800

1.578

1,443

1,471

10,855

11,616

21,631
-30

26,006
-1,053

60.676
1,146

20,923
405

20,977
6.870

20,739
7,171

21,481
2,939

192,433
17,446

182,868
12,324

101
75
1
1,442
484
339

1,488
63
1
1,710
538
389

2,911
63
1
1,441
435
477

83
83
1
1,985
595
-393

1,561
91
1
1,231
526
382

1,569
105
2
1,612
481
396

1,575
95
1
1,279
494
-739

9,288
575
9
10,699
3,553
851

8,946
569
10
11,166
3,569
-58

1,128
3,576
16

1,119
3,418
238

973
3,576
76

1,208
3,379
-9

1,073
3,252
23

1,057
3,758
41

1,193
3,756
31

7,751
24,715
417

7,499
23,754
525

24,544

24,413

25,064

25,126

25,163

25,337

25,342

174,988

168,008

3,516
174

3,475
2,233

3,773
3,941

3,581
254

3,671
2,372

3,786
2,261

3,751
2,340

25,553
13,575

23,665
13,183

-609

-69

20

-110

-10

59

-132

-852

-4,844

-40

-14

-82

-235

-2

-142

-33

-548

-520

-1,502
407

-840
87

-638
-71

-797
-37

-676
-27

-638
-33

-370
-19

-5,462
307

-6,533
527

(>0)

......

(>0)

('")

(")

(.')

(>0)

1

3

-374

-618

333

-883

-280

-674

-721

-3,217

-3,556

55
556
123
2,026

......

..

..

)

. .....
( )

(

..2125

107
-3
922
11,822

-2,404
-415

. .....

( )

( )

(

186
1,792

96
1,069

106
1,408

-108
1,655

-106
1,417

1,577

101
558
322
10,945

-2,365 -2,562
-5,736 -40,465

-2,491
-65

-2,559
-1,028

-2,282
-143

-2,428
-990

-17,091
-48,841

-17,695
-46,130

..

-295

-8
-200

-499
-5

-1,806
-205

-1,086
-610

..

-200

-361

..

(

( )

..

..3

21

(")

)

-121

-322

......

( )

......

)

Totals this year:
Total outlays
(On-budget)

+504

+4,413 +16,750

+41.958

47,022

38,189 -35,466

78,332

97.977

118,352 128,458 132,984 123,647 133,644 136,286 130,993

904,365

........................

98,056 105,711 108,365 105,131

732,935

(Off-budget) ..•.••............•.....

.....
........................

Total-surplus (+) or deficit (-)
(On-budget)

......
......
......
......
......
......

.........................

92,151 101,767 121,753
26,691

26,201

25,863

171.431

+5,286 +19,274 -44,295 -47,275 +72,393

-55,825

11,231

25,591

-97,783

(Off-budget) •........••.•..•.....•••

-2,807

-334 +16,717

....

13,353

38,339 -18,358

-4,747

Total-outlays prior year .... .........

27,921

-22.758 -38,450
-19,951 -38,116 -11,431 +12,558 -44,799 -51,688 +55,643
+6,716

Total borrowing from the public

27,933

120,365 124,915 135,613 116,166 120.899 143,074 115,673

876.706

(On-budget) . . , . . . ..... . . . . . . . . .

95,307

99,464 124,316

90,883

94,421 117,123

90,628

712.142

(Off-budget) . . . . . . . . ........... ...

25,059

25.452

11,297

25.282

26,478

25,951

25,045

164.564

-4,803 +15,635 -38,355 -50,543 +49,720

-96.931

-29,922 -37,381 -20,456 +10,152 -40,016 -55,153 +35.542
+138 +15,653 +5.483 +1,661 +4,610 +14,178
-1,420

-137.233

,

Total-surplus (+) or deficit (-) prior
year. ...... ... . ... ....... .. . ...
(On-budget) ... .... . . . . . . . ......
(Off-budget) .... .......... .. .

-31,342 -37,242

,

... No transactions.
(. ') less than $500,000.
Note: Details may not add to totals due to rounding.

27

+40.303

Table 8.

Trust Fund Impact on Budget Results and Investment Holdings as of April 30, 1996
[$ millions]
Fiscal Year to Date

This Month
Classification

Securities held as Investments
Current Fiscal Year
Beginning of

Receipts

Outlays

Excess

Receipts

Outlays

Excess
This Year

Trust receipts. outlays, and Investments
held:
Airport and airway
Black lung disability
Federal disability insurance
Federal employees life and health ... .
Federal employees retirement ............... .
Federal hospital insurance .................. .
Federal old-age and survivors insurance ... .
Federal supplementary medical insurance .. .
Hazardous substance superfund ............ .
Highways
......................... .
Military advances ........................... .
Military retirement
......................... .
Railroad retirement
........................ .
Unemployment ............................... .
Veterans life insurance ...................... .
All other trust ................................ .

23.611
71.927
204.949
49.451
938
13.476
8.338
22.997
3.216
13.919
672
1.997

3.730
316
25.553
-287
23.191
71,489
174.988
39.273
778
12.612
8.260
16.681
4.673
16.367
716
2.061

-1.839
31
8.780
287
420
438
29.961
10.177
160
864
78
6.316
-1,457
-2.448
-44
-64

18,705

452,062
123,449

400,402
123.449

51,660

46.852

18.705

328.613

276.953

51.660

130,993

72,393

848,540

904,365

-55,825

1.531
15.632
38,462
6.287
270
1.909
1.189
1.058
489
3.657
22
238

505
45
3.751
30
3.413
10.947
25.342
5.793
109
1.657
1.129
2,439
666
2.503
126
311

-493
7
2.910
-30
-1.882
4.685
13.120
494
162
252
60
-1.382
-177
1.155
-104
-73

77,471
11.914

58,766
11.914

65.557

203,386

12
52
6.661

1.891
348
34.333

I

This Month

Close of
This Month

11.145

9.950

9.373

35.225
23.729
374.219
129.864
447.947
13.513
6.181
18.531

41.087
24.063
375.865
126.072
464.737
22.718
6.297
19.317

43.985
24.065
374.021
130.357
477.883
23.258
6.317
20.211

112.963
14,440
47.141
13.606
7.880

119.577
15,413
44.123
13.675
8.439

118.212
16.030
44.292
13.559
8.458

1,256,385

1,291,332

1,310,020

Total trust fund receipts and outlays
and investments held from Table 6-

o ......................................... .

Less: Interfund transactions ................... .
Trust fund receipts and outlays on the basis
of Tables 4 & 5 .... ... ....... ..... ..... .......

Total Federal fund receipts and outlays....
Less: Interfund transactions ..................
Federal fund receipts and outlays on the
basis of Table 4 & 5 .........................
Less: Offsetting proprietary receipts .......... .

Net budget receipts & outlays

===============================
140,758
87,068
53,688
541,040
648,525
-107,485
12
12
223
223
------------------------------------------------140.744
87.056
53.688
540.817
648.302
-107.485
===============================
2.915
2.915
20.890
20.890

... No transactions.
Note: Interfund receipts and outlays are transactions between Federal funds and trust funds
such as Federal payments and contributions. and interest and profits on investments in Federal
securities. They have no net effect on overall budget receipts and outlays since the receipts side of
such transactions is offset against bugdet outiays. In this table. Interfund receipts are shown as an
adjustment to arrive at total receipts and outlays of trust funds respectively.

Note: Details may not add to totals due to rounding.

28

Table 9. Summary of Receipts by Source, and Outlays by Function of the U.S. Government, April 1996
and Other Periods
[$ millions]
Classification

This Month

Fiscal Year
To Date

Comparable Period
Prior Fiscal Year

RECEIPTS
Individual income taxes ........................................... .
Corporation income taxes ........................ , ................ .
Social insurance taxes and contributions:
Employment taxes and contributions ........................... .
Unemployment insurance ""''''''''''''''''''''''''''''''''''''
Other retirement contributions ... , .............................. .
Excise taxes " " " " " " " " " ' ' ' ' ' ' ' ' ' ........... , ............... ..
Estate and gift taxes ............................................. .
Customs .' ......................................................... .
Miscellaneous ...................................................... .

107,513
24,937

401,196
89,142

351,121
80,132

56,615
3,628
346
4,577
2,704
1,388
1,680

277,044
11,889
2,640
31,736
10,110
10,671
14,212

264,484
11,632
2,629
32,282
8,559
11,214
17,723

Total ............................. , ....... " ............ , .... .

203,386

848,540

779,775

National defense ................................................... .
International affairs ''''''''''''''''''' ............ , ................ .
General science, space, and technology ........................ ..
Energy .............................. " ............................ ..
Natural resources and environment ............................... .
Agriculture ......................................................... .
Commerce and housing credit .................................... .
Transportation ..................................................... .
Community and Regional Development ........................... .
Education, training, employment and social services ............ .
Health .............................................................. .
Medicare .......................................................... ..
Income security ""'''''''''''''''''''' ........................ " .. .
Social Security .................................................... ..
Veterans benefits and services ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
Administration of justice ........................................... .
General government ............................................... .
Interest ................. , ........................................... .
Undistributed offsetting receipts .................................. .

22,725
988
1,534
17
1,660
-249
-1,741
2,864
1,026
4,014
10,458
15,124
21,417
29,092
2,974
1,585
-25
20,463
-2,932

152,102
9,194
9,952
992
13,730
4,477
-9,799
21,310
6,379
29,711
67,472
98,965
140,551
200,201
20,649
9,725
7,057
140,800
-19,102

154,418
10,548
9,812
2,772
13,968
10,902
-12,876
21,568
5,963
30,678
65,811
88,515
131,083
191,668
20,803
9,300
7,694
133,469
-19,391

Total .................. , .............. " ..................... .

130,993

904,365

876,706

NET OUTLAYS

Note: Details may not add to totals due to rounding.

29

Explanatory Notes
the employee and credits for whatever purpose the money was withheld
Outlays are stated net of offsetting collections (including receipts of
revolving and management funds) and of refunds. Interest on the public
debt (public issues) is recognized on the accrual basis. Federal credit
programs subject to the Federal Credit Reform Act of 1990 use the cash
basis of accounting and are divided into two components. The portion of
the credit activities that involve a cost to the Government (mainly
subsidies) is included within the budget program accounts. The remaining
portion of the credit activities are in non-budget financing accounts.
Outlays of off-budget Federal entities are excluded by law from budget
totals. However, they are shown separately and combined with the onbudget outlays to display total Federal outlays.

1. Flow of Data Into Monthly Treasury Statement
The Monthly Treasury Statement (MTS) is assembled from data in the
central accounting system. The major sources of data include monthly
accounting reports by Federal entities and disbursing officers, and daily
reports from the Federal Reserve banks. These reports detail accounting
transactions affecting receipts and outlays of the Federal Government
and off-budget Federal entities, and their related effect on the assets and
liabilities of the U.S. Government. Information is presented in the MTS on
a modified cash basis.

2. Notes on Receipts
Receipts included in the report are classified into the following major
categories: (1) budget receipts and (2) offsetting collections (also called
applicable receipts). Budget receipts are collections from the public that
result from the exercise of the Government's sovereign or governmental
powers, excluding receipts offset against outlays. These collections, also
called governmental receipts, consist mainly of tax receipts (including
social insurance taxes), receipts from court fines, certain licenses, and
depoSits of earnings by the Federal Reserve System. Refunds of receipts
are treated as deductions from gross receipts.
Offsetting collections are from other Government accounts or the
public that are of a business-type or market-oriented nature. They are
classified into two major categories: (1) offsetting collections credited to
appropriations or fund accounts, and (2) offsetting receipts (i.e., amounts
deposited in receipt accounts). Collections credited to appropriation or
fund accounts normally can be used without appropriation action by
Congress. These occur in two instances: (1) when authorized by law,
amounts collected for materials or services are treated as reimbursements to appropriations and (2) in the three types of revolving funds
(public enterprise, intragovernmental, and trust); collections are netted
against spending, and outlays are reported as the net amount.
Offsetting receipts in receipt accounts cannot be used without being
appropriated. They are subdivided into two categories: (1) proprietary
receipts-these collections are from the public and they are offset against
outlays by agency and by function, and (2) intragovernmental fundsthese are payments into receipt accounts from Governmental appropriation or funds accounts. They finance operations within and between
Government agencies and are credited with collections from other
Government accounts. The transactions may be intrabudgetary when the
payment and receipt both occur within the budget or from receipts from
off-budget Federal entities in those cases where payment is made by a
Federal entity whose budget authority and outlays are excluded from the
budget totals.
Intrabudgetary transactions are subdivided into three categories:
(1) interfund transactions, where the payments are from one fund group
(either Federal funds or trust funds) to a receipt account in the other fund
group; (2) Federal intrafund transactions, where the payments and
receipts both occur within the Federal fund group; and (3) trust intrafund
transactions, where the payments and receipts both occur within the trust
fund group.
Offsetting receipts are generally deducted from budget authority and
outlays by function, by subfunction, or by agency. There are four types of
receipts, however, that are deducted from budget totals as undistributed
offsetting receipts. They are: (1) agencies' payments (including payments
by off-budget Federal entities) as employers into employees retirement
funds, (2) interest received by trust funds, (3) rents and royalties on the
Outer Continental Shelf lands, and (4) other interest (i.e., interest collected
on Outer Continental Shelf money in deposit funds when such money is
transferred into the budget).

4. Processing
The data on payments and collections are reported by account symbol
into the central accounting system. In turn, the data are extracted from
this system for use in the preparation of the MTS.
There are two major checks which are conducted to assure the
consistency of the data reported:
1. Verification of payment data. The monthly payment activity reported by
Federal entities on their Statements of Transactions is compared to the
payment activity of Federal entities as reported by disbursing officers.
2. Verification of collection data. Reported collections appearing on
Statements of Transactions are compared to deposits as reported by
Federal Reserve banks.

5. Other Sources of Information About Federal Government
Financial Activities

• A Glossary of Terms Used in the Federal Budget Process, January
1993 (Available from the U.S. General Accounting Office, P.O. Box 6015,
Gaithersburg, Md. 20877). This glossary provides a basic reference
document of standardized definitions of terms used by the Federal
Government in the budgetmaking process.
• Daily Treasury Statement (Available from GPO, Washington, D.C.
20402, on a subscription basis only). The Daily Treasury Statement is
published each working day of the Federal Government and provides data
on the cash and debt operations of the Treasury.
• Monthly Statement of the Public Debt of the United States
(Available from GPO, Washington, D.C. 20402 on a subscription basis
only). This publication provides detailed information concerning the public
debt.
• Treasury Bulletin (Available from GPO, Washington, D.C. 20402, by
subscription or single copy). Quarterly. Contains a mix of narrative, tables,
and charts on Treasury issues, Federal financial operations, international
statistics, and special reports.
• Budget of the United States Government, Fiscal Year 19 _
(Available from GPO, Washington, D.C. 20402). This publication is a
single volume which provides budget information and contains:
-Appendix, The Budget of the United States Government, FY 19_
-The United States Budget in Brief, FY 19 _
-Special Analyses
-Historical Tables
-Management of the United States Government
-Major Policy Initiatives

3. Notes on Outlays
Outlays are generally accounted for on the basis of checks issued,
electronic funds transferred, or cash payments made. Certain outlays do
not require issuance of cash or checks. An example is charges made
against appropriations for that part of employees' salaries withheld for
taxes or savings bond allotments - these are counted as payments to

• United States Government Annual Report and Appendix (Available
from Financial Management Service, U.S. Department of the Treasury,
Washington, D.C. 20227). This annual report represents budgetary
results at the summary level. The appendix presents the individual receipt
and appropriation accounts at the detail level.

30

Scheduled R.I""

Th. r.i.a.. date for the April 1998 Stat.m.nt
will be 2:00 pm EST Jun. 21, 1996.

For sale by the Superintendent of Documents, U.S. Government Printing
Office, Washington, D.C. 20402 (202) 512-1800. The subscription price is
$35.00 per year (domestic), $43.75 per year (foreign).
No single copies are sOld.

The Monthly Treasury Statement is now available on the Department of Commerce's Economic Bulletin Board.
For information call (202)482-1986.

DEPARTMENT

OF

THE

TREASURY

NEWS

TREASURY

OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIDNGTON, D.C .• 20220. (202) 622-2960

ADV NOON EDT
Remarks as prepared for delivery
May 22, 1996
REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
YESIDV A UNIVERSITY COMMENCEMENT
NEW YORK, NEW YORK

I take the recognition you have given me not so much for myself, but as an
indication of your appreciation for the work of government and the role of public service
in our county. That respect for government is something that we, the Jewish people,
have an enormously important interest and stake in. Throughout history we -- and all
mankind -- have benefited from the rule of law. But when there is a breakdown in the
rule of law, we are almost always among those who suffer first. For this reason, your
honorary degree means a great deal to me.
I have the privilege of serving as the 70th Secretary of the Treasury. Near my
office is a portrait of one of my predecessors -- Henry Morganthau, the 52nd Treasury
Secretary.
Fifty-two years ago in January -- at the height of the war and the depths of the
Holocaust -- a very junior lawyer in Treasury's legal department discovered that the State
Department had conspired to keep news of the systematic killing of Jews from the
American people. The General Counsel at Treasury took the evidence to Morganthau,
and when Morganthau read it, it was so damning and so upsetting that he became
physically ill. Morganthau then walked a nine-page memo with the evidence across the
street to the White House and straight to the Oval Office. He sat there while Franklin
Roosevelt read it, and then gave Roosevelt a proposal for U.S. involvement in rescuing
Jews. Within days, Roosevelt established the War Refugee Board. This is an especially
meaningful and enduring example of what public service is and ought to be about.
Just as you have debated politics, ethics, and the meaning of Torah at Morg
Lounge and Koch Auditorium, there is a debate in this country that goes to the core of
this nation's future and its social fabric. I am speaking about the debate on the role and
scope of government.
RR-1091

(more)

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2

Over the years I developed a great deal of interest in the public policy. And for
the past three and a half years I've had the good fortune of having the deeply rewarding
opportunity to use the experiences I've had in the private sector to deal with the issues
of the nation. My challenge to you today is that in your own lives -- no matter what
career you choose -- you should be involved in helping to re-establish a constructive
relationship between our people and our government. That is not entirely popular today.
In some quarters, appeals to public service are not popular, rarely heard, and often not
well received.
Commencement speeches often deal with advice to graduates or reflections on the
past and present. I want to discuss something I believe is of enormous importance to the
nation and to you, and that is the debate about government.
The debate about the role and scope of government is as old as the republic
itself. But today that debate is dominated by a derogation of government and public
service. The constant derogation is taking its toll on the way Americans view their
government.
Twenty-five years ago 75 percent of Americans trusted the federal government.
Polls today put that trust at under 25 percent. Distrust of government is well above the
danger point. And that is a development that should concern all of us.
I am emphatically not saying we shouldn't have this debate. We should. But
today, the dominant tone is hostility.
Think of the voices we hear: First, the political and intellectual voices who
believe the scope of government and its role in society should be very limited; second,
the popular voices on talk radio and elsewhere that disparage the government and the
')cop~e who serve in Washington; and third, the voict"s Of :iolence. Those are the voices
of some in the militias and elsewhere who are actually threatening federal employees
way beyond what the public sees.
The Oklahoma City bombing was the most vivid and violent example of domestic
terrorism we've seen, but it is part of a disturbing and growing problem. Last fall I
visited Treasury's Bureau of Alcohol, Tobacco and Firearms office in St. Paul. They'd
just made some arrests in a suspected plot to bomb an IRS office, and thev'd arrested
people suspected of plotting to put lethal toxins in the humes ,of judicial employees.
A woman told me at an anti-violence event a few months ago that she'd worked a
school to help convince youngsters not to use guns but that someone claiming to be from
the Michigan Militia threatened her life. Park Rangers and Bureau of Land
Management employees are being threatened.

3

Those of you who use the internet ought to type in the word militia under a
search area and read some of this material. There are people out there who will tell you
that members of our military and our law enforcement community are, and I quote,
"enemies of freedom ... anti-constitution ... anti-Bill of Rights ... and therefore antiAmerican." They call our leaders "opportunistic tyrants." They say there's a "Shadow
Government" and believe, and I quote again "that during the last several decades the
U.S. Constitution has been effectively overthrown, and that is now observed only as a
facade to deceive and placate the masses."
The extremism we see not only manifests itself in attacks on the federal
government, it is manifesting itself more generally in our society, and let me give you an
example. I'm speaking about the church fires that have been occurring at black
congregations. You and I fully understand what it means when a house of worship
bums. Throughout history, our own people suffered acts of depraved violence that
began with the destruction of our Temple of Jerusalem, saw its worst in places like the
Warsaw Ghetto, and continues even in America with the hate crimes of today. Let us
never forget what it meant 30 years ago to civil rights marchers who were intimidated by
those who burned churches and who are still burning churches today.
Obviously this activity is at the outer edge of extremism and all responsible
Americans reject it. But acts against the rule of law, and calls to violence in this context,
signal those so inclined that that kind of activity is tolerated in society. It isn't, ~hould
not be, and cannot be tolerated.
Clearly, what is completely missing in the public dialogue is balance, and that has
serious consequences for the world you will live in.
In many ways, you are entering an era of great change -- arguably globalization
and technology are the most significant economic changes since the Industrial Revolution
-- and this era is filled with hope and opportunity.
But it is also an age of anxiety, and large numbers of American families are
anxious about wage stagnation, economic dislocation, and social and moral issues. Too
many Americans experiencing all these uncertainties also believe that the institutions of
government they have historically looked to for solutions to their problems, are broken.
And then, they are more likely to turn to those who offer harsher rhetoric and more
extreme courses of action I've discussed.
I think it is imperative for the future of our country that respect for government
and public service be re-established. We must begin talk::18 clbout the critical role that
government plays and the important things that government -- and often only
government -- can do.
In that spirit, I'd like to make three points.

4

First, gfwernment matters. There are functions that can be performed in no other
way. I will not list them all, but you know what they are -- a strong military, an impartial
system of justice, and rules and laws to protect the dignity of people, particularly the
powerless, to preserve the shared environment, and to provide for public education,
welfare and health.
As I've made clear today, these functions are under broad attack. They make an

enormous difference in the lives of Americans. Government does work, and government
does make a difference.
To offer an example that's just a few miles from her~, the South Bronx is making
enormous progress in its transformation from an urban wasteland. Go there. You will
see a vast area of attractive new and rehabilitated housing, and the beginnings of
businesses returning and jobs being created.
How did it change? Business and communities came together with the help the
Community Reinvestment Act, the Community Development Financial Institutions Fund,
and the Low Income Housing Tax Credit. Government, with the private sector, is the
catalyst in addressing what may be our most critical domestic policy issue, the problems
of the inner city -- a catalytic function no other institution in our society can or will do.
In the same vein, about 25 years ago, then Mayor Lindsay quipped about not
being comfortable breathing air he couldn't see. Today, New York City'S air is
appropriately invisible. Government played the critical role. In the final analysis, only
through government -- directly or as a catalyst -- will the environment in which you live
your lives and make your homes be adequately protected.
So government matters.
My second point is about the people in government. One of the things that has
most struck me is the commitment and quality of so many people with whom I've
worked. And that includes many younger people who, like you, have the advantage of
an outstanding education and then decided to spend a few years in public service.
Government takes on many of the most difficult issues in our society. The people
who I work with have done the legal and financial werk on the $20 billion loan
guarantee for Mexico. They have fought extraordinarily hard and successfully to keep
this country out of default, to protect the President, to help pass an assault weapons ban,
to investigate the Oklahoma City homhing, to make it possihle for millions of Americans
tc tile their taxes hy telephone, and to seize tons and tons of dangerous drugs at our
borders -- things that make a difference in the lives of Americans.

5

These people do this extraordinary work, despite the fact they are called
bureaucrats -- and worse -- by talk show hosts and irresponsible public officials, and they
never receive the public support or recognition that their hard work deserves.
My third point is that the federal government -- like the business world -- is now
deeply involved in improving itself to make government operate more efficiently and
effectively, and to be more customer sensitive.
The federal workforce is the smallest in a
total work force in this nation, at its lowest level
government is in the process of turning from the
of us imagine to agencies bound and determined
their dollars.

generation, and as a percentage of the
in many many decades. Moreover,
kinds of hide-bound institutions many
to give taxpayers the highest value for

I deeply believe that the success of our country requires that faith in our public
institutions be restored. And that cannot happen unless there is a far broader -- and yes,
far louder -- counterpoint to the voices on talk radio, to the militias, to those who reject
the notion of government and the rule of law in this country.
This is your challenge. You must he part of the process of re-establishing respect
for the institution of government and those who work in puhlic service.
Being part of a rational puhlic discourse about where this nation is headed is one
of the most important things you can do. And to do that, you must reject the cynicism
and derogation that argues that society is incapable of improving itself through the
institution of government.
And, you must also take responsibility for making government better -- by gettirig
ihvolved in civic and community organizations, by supporting candidates you believe in,
by getting involved in the political process, or by serving in government.
Throughout our history, new generations have met the challenges of the times.
Today, our country needs to meet the challenges we have just discussed, and you are th~
new generation. By meeting these challenges, you will honor the democratic principles
on which this nation was built and the values you've been taught at Yeshiva.
Thank you and congratulations.
-30-

D EPA R T 1\;1 E N T

0 F

THE

T REA SUR Y

NEWS
omCE OFPUBUCAFFAIRS e1500PENNSYLVANIAAVENUE, N.W. e WASHINGTON, D.C. e 20220 e (202) 622-2960

EMBARGOED UNTIL 2:30 P.M.
May 22, 1996

CONTACT:

Office of Financing
202/219-3350

TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $31,250 MILLION
The Treasury will auction $18,750 million of 2-year notes
and $12,500 million of 5-year notes to refund $27,398 million of
publicly-held securities maturing May 31, 1996, and to raise
about $3,850 million new cash.
In addition to the public holdings, Federal Reserve Banks
hold $1,146 million of the maturing securities for their own
accounts, which may be refunded by issuing additional amounts
of the new securities.
The maturing securities held by the public include $3,004
million held by Federal Reserve Banks as agents for foreign
and international monetary authorities. Amounts bid for these
accounts by Federal Reserve Banks will be added to the offering.
Both the 2-year and 5-year note auctions will be conducted
in the single-price auction format. All competitive and noncompetitive awards will be at the highest yield of accepted
competitive tenders.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
This offering of Treasury securities is governed by the terms
and conditions set forth in the Uniform Offering Circular (31 CFR
Part 356) for the sale and issue by the Treasury to the public of
marketable Treasury bills, notes, and bonds.
Details about each of the new securities are given in the
attached offering highlights.

000

Attachment
RR-I092

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC OF
2-YEAR AND 5-YEAR NOTES TO BE ISSUED MAY 31, 1996
May 22, 1996
Offering Amount .
Description of Offering:
Term and type of security
Series
CUSIP number
Auction date
Issue date
Dated date
Maturity date
Interest rate
Yield .
Interest payment dates
Minimum bid amount
Multiples .
Accrued interest
payable by investor
Premium or discount .

$18,750 million

$12,500 million

2-year notes
AF-1998
912827 X9 8
May 29, 1996
May 31, 1996
May 31, 1996
May 31, 1998
Determined based on the
highest accepted bid
Determined at auction
November 30 and May 31
$5,000
$1,000

5-year notes
J-2001
912827 Y2 2
May 30, 1996
May 31, 1996
May 31, 1996
May 31, 2001
Determined based on the
highest accepted bid
Determined at auction
November 30 and May 31
$1,000
$1,000

None
Determined at auction

None
Determined at auction

The followinq rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids
Accepted in full up to $5,000,000 at the highest accepted yield
Competitive bids
(1) Must be expressed as a yield with three decimals, e.g., 7.123%
(2) Net long position for each bidder must be reported when the
sum of the total bid amount, at all yields, and the net long
position is $2 billion or greater.
(3) Net long position must be 'determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Maximum Recognized Bid
at a Single Yield
35% of public offering
35% of public offering
Maximum Award .
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon Eastern Daylight Saving time on auction day
Competitive tenders
Prior to 1:00 p.m. Eastern Daylight Saving time on auction day
Payment Terms .
Full payment with tendeL or by charge to a funds account at a
Federal Reserve Bank on issue date

DEPARTMENT

OF

THE

TREASURY

NEWS

TREASURY

omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. _ 20220 _ (202) 622-2960

FOR IMMEDIATE RELEASE
Remarks as prepared for delivery
May 23, 1996

REMARKS OF TREASURY SECRETARY ROBERT E. RUBIN
PENSION PRESS CONFERENCE

I am pleased to join the House and Senate leaders in discussing a central tenet
of the President's economic agenda -- the idea that working Americans need better
pension coverage and security, and that American businesses need pension simplification.
Clearly, the House has taken an initial step, but there is more that needs to be
done to fully adopt the President's Retirement Savings and Security Act, which is a
comprehensive proposal to expand pension coverage, security and portability, and
simplify pensions.
There are two points I'd like to make. One, it is enormously important for
economic growth that we raise our net national savings rate and thereby provide more
capital for investment. We're doing that through deficit reduction, and I believe through
the program announced earlier this month on inflation indexed bonds. Improving the
nation's pension system clearly would contribute importantly towards increasing savings.
And two, this administration has been working on pension issues from the
moment we began turning the economy around in 1993. At the outset, we protected the
benefits of over 40 million workers who were endangered by pension underfunding.
And, the President vetoed legislation that would have encouraged corporations to
remove funds they previously put into the pension plans of Americans.
Our proposal for a National Employee Savings Trust (NEST) makes it far far
easier for small businesses to offer pensions through a simplified 401(k)-type plan that
could expand coverage to up to 10 million working Americans. This is enormously
important because today only one worker in four in small business is covered by an
employer pension.

RR-1093

(more)

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

2

We also want to expand IRAs for singles and married couples by doubling income
limits and by making IRA money available without penalty for education and training,
first home purchases, major medical expenses and during long-term unemployment.
And, our proposal would help pension-covered workers who change jobs but want
to move their retirement savings and continue to save. We're already adding one
innovation at the federal level, which is eliminating the 1-year waiting period before new
employees can enter the federal goveniment pension system. And in our proposal, we're
encouraging private sector employers to do the same -- allow employees to start saving
for retirement as soon as they're hired.
I'll leave it to Secretary Reich to discuss the issue of pension security. I'll just
summarize by saying I'm pleased to see the House moving toward the sensible plan the
President has laid out. If we work together, we can make the retirement years of
working Americans more secure and help keep our economy growing.
-30-

General Explanation
of the

Retirement Savings and Security Act

Department of the Treasury
Department of Labor
Office of Personnel Management
Mav 1996
.'

Table of Contents
TITLE
SUBTITLE A --

EXPANDED

PFNSI()~

I -- REVE:\lE PROVlSIO:\S

C< )\'1:1(\( d·\\.'))

SI\ll'l IIIL.\ III)\.'

C! L\PTER 1 -- TI IE ~EST\\.')) 0 llllR

Section
Section
Section
Section
Section
Section

« )\'11<.\(

ij

EXPA\.'SION

The ;-.JEST -- A Simple Retirement Plan for Small Business
Tax-exempt Organizations Eligible under Section -W I (k)
Simplified Nondiscrimination Testing for 401 (k) Plans
Repeal of the Family Aggregation Rules
Simplify Definition of Highly Compensated Elnployee
......
Repeal of Limitation in Case of Defined Benefit Plans and Defined Contribution
Plan for Same Employee
Section 1107 Disabled Employees
.........
Section 1108. Plans Maintained by Self-employed fndividuals
. . . . ..
Section 1109 Trust Requirement for Deferred Compensation Plans of State and Local
Governments
1101
1102
[103
1104.
1105.
1106.

CHAPTER 2 -- SI\1PLlFICr\TIuN AND COST

Section 1201
Section 1202
Section 1203
Section 1204
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section
Section

1205
1206
1207
1208.
1209.
1210.

1211.
1212.
1213.
1214
1215
1216
1217
12 I 8

1
8
.9
II

12
14
15

16
17

SA VINGS

Treatment of Governmental and \lultiemployer Plans under Section 415 and
19
Treatment of E,cess Benefit Plans
Definition of Compensation for Section 415 Purposes
21
Assumptions for Adjusting Cenain Benefits of Defined Benefit Plans for Early
..,..,
Retirees
Treatment of Deferred Compensation Plans of State and Local Governments and
Tax-exempt Organizations
23
No Required Distributions for Active Employees
25
Simplify Taxation of Annuity Distributions
26
Repeal Five-year Averaging for Lump Sum Distributions
27
Elimination of Half-year Requirements
28
Distributions under Rural Cooperative Plans
29
Modification of Additional Participation Requirements
. 30
Uniform Retirement Age
... 31
Treatment of Leased Employees
.32
Full Funding Limitation for \1ultiemployer Plans
33
Elimination of Partial Termination Rules for \lultiemployer Plans
34
Elective Deferrals under Section .W3(b)
35
Uniform Provisions to Apply to Certain Pension Reporting Requirements.
36
Tax on Prohibited Transactions
. 37
38
Date for Adoption of Plan Amendments

SUBTITLE

B --

EXPAf-..'DED INDIVf[jl'.\i RI'11l<1 \ 11'\1 AU,( )1'.;1" 1() !\iCRFt\SF COVERAGE AND

39

PORT Al3IL1TY
SUBTITLE

C -- OTHER EXPANSIONS (>F PI'.;\l{ 1\1 p( )l{ L\Bli

IIY

Section 140 l. Alternative Nondiscrimination Rules for Certain Plans that Provide for Early
Participation
Section 1402 Treatment of Certain Veterans Reemployment Rights
Section 1403. Elimination of Special Vesting Rule for Multiemployer Plans
TITLE

II -- ERISA

42
43
45

PRovrSIO:\,S

SUBTITLE A -- EXPANDED PENSION COVERAGE AND SIMPLIFICATION

Section 200 I Reporting and Fiduciary Requirements Relating to NESTs
Section 2002. ERlSA Summary Plan Description Filing Requirements
Section 2003. Investment ofIRAs in Qualified State Prepaid Tuition Programs

46
48
49

SUBTITLE B -- PORTABILITY

Section 20 II, PBGC ~lissing Participants Program
Section 2012 Elimination of Special Vesting Rules for \1ultiemployer Plans
Section 2013 Veterans' Reemployment
SUBTITLE

C --

EN1 lANCED SH.. 1 :RllY
CHAPTER

Section
Section
Section
Section
Section

2021.
2022.
2023.
2024.
2025

I -- GENERAL PROVlS[ONS

Multiemployer Plan Benefits Guaranteed
Reversion Report
Full Funding Limitation for Multiemployer Plans
Prohibited Transactions
Substantial Owner Rules Relating to Plan Terminations
CHAPTER

Section
Section
Section
Section

.. 50
51
.. 52

2 --

53
54
55

56
57

ERISA ENF()RCTt\lLNI

2032, Repeal of Limited Scope Audit
2033 Reporting and Enforcement Requirements tor J::mployee Benefit Plans
2034 Additional Requirements for Qualified Public Accountants
2035 Clarification of Fiduciary Penalties

( ii )

59
60
63
65

TITLE

III -- ADDITIONAL RETlRE:\lE~T

PARTICIPA TIO:\' A~D PAYMENT OPTIONS

FOR FEDERAL E:\IPLOYEES

Section 3001. Immediate Participation in the Thrift Savin\!.s Plan for Federal Employees.
Section 3002. Survivor Protection for SUr\iving and Former Spouses of Former Federal
Employees
Section 3003 Payment of Lump Sum Credit for Former Spouses of Federal Employees
TITLE

IV -- CONFORMING

RAILROAD RETIRE:\IE:"T BE:\,EFITS WITH SOCl.-\L
SECl'RITY

Conforming Railroad Retirement Benefits with Social Security.

( Iii)

68
70
71

TITLE 1-- REVE:-.tl'E PROVISIO:-.tS
SUBTITLE A -- EXPA!"DED PE:'-<SIO!" COVERAGE A:'-<D SIMPLIFICATION
CHAPTER t -- THE ~EST A:'-<D OTHER COVERAGE EXPANSION
THE NEST -- A SIMPLE RETIRE:\IE:ST PLA~ FOR S:\IALL BUSINESS

(Section 1101)
Current Law
Under current law, an individual may make deductible contributions to an individual
retirement account or individual retirement annuity (IRA) up to the lesser of$2,000 or compensation
(wages and self-employment income) (The dollar limit is $2,250 if the individual's spouse has no
compensation.) If the individual (or the indl\idual's spouse) is an active participant in an employer-sponsored retirement plan, the $2,000 limit on deductible contributions is phased out for couples
filing ajoint return with adjusted gross income (AGO between $40,000 and $50,000, and for single
taxpayers with AGI between $25,000 and $35,000 To the extent that an individual is not eligible
for deductible IRA contributions, he or she may make nondeductible IRA contributions (up to the
contribution limit)
The earnings on IRA account balances are not included in income until they are withdrawn.
Withdrawals from an IRA (other than withdravvals of nondeductible contributions) are includible in
income, and must begin by age 70 1/2 Amounts withdrawn before age 59 1/2 are generally subject to
an additional 10 percent tax The additional tax does not apply to distributions upon the death or
disability of the taxpayer or to substantially equal periodic payments over the life (or life expectancy)
of the IRA owner or over the joint lives (or life expectancies) of the IRA owner and his or her
beneficiary
Simplified employee pensions (SEPs) and, for employers \vith 25 or fewer employees, salary
reduction SEPs (SARSEPs), are employer-sponsored plans under \,,, hich employer contributions and,
in the case of SARSEPs, employee-elected salary reduction contributions are made to lRAs
established by employees. An employer that adopts a SEP must contribute to the SEP for every
employee who has attained age 21, has \vorked for the .:mployer during at least three of the
immediately preceding five years, and is paid at least S400 (for 1996, as adjusted for cost of living)
by the employer for the year Thus, for e\ample, an employer would have to make a SEP
contribution for an employee who worked for the employer one hour per year in the preceding three
years and worked 40 hours (and earned $-iOO) in the current year, if the employer was making
contributions for any other employee for the year SEPs do not allow employees to make elective
contributions through salary reduction
SARSEPs allow employees to make electi\c contributIons, bur cannot provide for employer
matching contributions SARSEPs are available only to for-profit employers that had 25 or fewer
employees at all times during the preceding year In addition, special eligibility and nondiscrimination
rules apply to SARSEPs If at least 50 percent of the eligible employees do not choose to make
elective contributions to a SARSEP in a year, then no employee can make elective contributions. An
employer with 25 or fewer employees may fall below the 50 percent threshold (and out of SARSEP
eligibility) from year to year.

SARSEPs are subject to the top-heavy rules A SARSEP is considered top-heavy if the
aggregate accounts of key employees in the plan exceed 60 percent of the aggregate accounts of all
employees in the plan If a SARSEP is top-hea\") and any key employee of the employer makes
elective contributions of at least 3 percent of pa\. then the employer must make minimum
contributions of 3 percent of pay for all non-key employees -- even If those non-key employees also
make elective contributions of 3 percent of pay
Reasons for Change,

The tax-favored employer retirement plans currently available under the Internal Revenue
Code have not been sufficiently successful in attracting small employers In 1993, for example, only
24 percent of full-time workers in private firms with fewer than 100 employees were covered by
employer retirement plans, In contrast, 73 percent of full-time workers in firms with 1,000 or more
workers were covered,
The administrative cost and complexity associated with traditional qualified retirement plans
often discourage small employers from sponsoring these plans For employers with few employees,
the cost of maintaining the plan may be large relative to the benefits provided to employees. As a
result. pension coverage of employees of small employers is signiticantly lower than the pension
coverage of employees of larger employers
SEPs and SARSEPs, \.. hich \\-'ere designed for small employers, are perceived by many
employers as overly complicated and impractical The nondiscrimination and eligibility rules
applicable to SARSEPs make It dit1icult for an eligible employer to maintain a SARSEP on an
ongoing baSIS An eligible employer cannot encourage employees to make elective contributions
through the incentive of otTering to match employee contributions dollar-for-dollar or otherwise,
The inability to offer matching contributions makes it difficult for the employer to satisfy the
SARSE~ nondiscrimination test Under this test. elective contributions for any highly compensated
employee are limited to 125 percent of the average elective contributions for all nonhighly
compensated employees for the year Thus, highly compensated employees are limited to very low
levels of elective contributions unless other employees make significant elective contributions -- which
they are less likely to make without the incentive of a matching contribution Concerns have also
been raised that, where SEPs and SARSEPs are used, there may be significant noncompliance with
the statutory requirements
Proposal

The proposal would allow employers", Ith 100 or fewer employees to adopt a new simple
retirement plan, The new plan would be known as the National Employee Savings Trust, or "NEST"
The \.'EST would operate through Individual IRA accounts for employees, and would
incorporate design-based nondiscrimination safe harbors sildilar to those the Administration is
proposing for 40 I (k) plans Like other IRA accounts, Investment in NEST accounts would be
directed by each employee By eliminating or greatly simplifying many of the rules that apply to other
qualified retirement plans, including 40 I(k) plans, the NEST would remove major obstacles that deter

many small employers rromsetting up retirement plans The current SEP and SARSEP rules would
not be eliminated or modified, but would remain in place
F/(I/dfll~

Through IRAs

Use of IRAs as the funding vehicle All employee and employer contributions to NESTs
would be made to IRAs, and the IRA rules \I,ould govern except \,:here otherwise specified.
Initial use of specific financial institution In order to simplify plan administration for
employers, an employer could require that all ofits participating employees use a designated financial
institution's IRAs as the recipient of NEST contributions -- but only if participants were notified in
writing that a participant could move his or her account balance (in a trustee-to-trustee transfer)
without charge to another IRA at any time This notification could be incorporated into the annual'
disclosure to employees regarding the ]\;EST (described below) or could be provided separately
F.mplol'er F.ligihiliry

100-employee limit Any employer. including a tax-exempt organization or governmental
entity, would be eligible to make a l'.'"EST program available to Its employees in a given year if the
employer had no more than 100 employees in the prior year For this purpose. employees would be
counted only if they had at least $5.000 of compensation (as reported on Form W-2) from the
employer The "employer" \I,ould be determined on a "controlled group" basis (i e . aggregating 80
percent affiliates)
Two-year grace period
If an eligible employer established a NEST program and,
subsequently. the number of employees grew to exceed 100 (based on the prior year's employment).
the employer would continue to be eligible to pro\ide a ~tST for the current and subsequent year
After that two-year "grace period." the employer would cease to be eligible unless the employee
count again dropped to I 00 or fewer (based on the prior year's employment) If an eligible employer
ceased to meet the I OO-employee test because of an acquisit:on. disposition or similar transaction.
the ~EST program could continue for the grace period only if no significant changes in coverage
occurred

Two-year eligibility Each employee who attained age 2 I and completed two consecutive
years of service with the employer generally would be eligible to participate in the NEST A "year
of ser.ice" would be defined as a calendar year dunng which an employee's W-2 compensation from
the employer was at least $5.000 An emplo~'er could choose to allo\\ all employees to participate
earlier than upon attainment of age 21 and completion of two \ears of ser.·ice Nonresident aliens
and emplo~'ees covered under a collectl\ e bargaining agreement \\ ould not have to be eligible to
partiCipate in a NEST
Participating employees who drop below the $5 001) threshold or whose employment
terminates mid-year Once an employee became eligible, the employee would be entitled to make
elective contributions and receive any employer matching contributions for a year without regard to
3

the emplo.ye~'s compensation during the year All eligible employees with at least .$5,?00 of
compensation from the employer for the year would receive a nonelective employer contnbutIon for
that year. However, no nonelective employer contributions would be required for eligible employees
with less than $5,000 of compensation for the year. unless the employer chose a lower compensation
threshold for all eligible employees
Portabilityll 00 percent vesting All contributions \\ould be 100 percent vested immediately
and would be fully portable, even during the two-year holding period (described below)
No /'y'(JIldiscnmma/IOIl TesflIlI!

Nondiscrimination tests not applicable i\'ESTs would not be subject to
•

the top-heavy rules,

•

the nondiscrimination rules that apply to elective contributions under a 401(k) plan
(the "ADP" test).

•

the nondiscrimination rules that apply

•

the nondiscrimination rules that apply to SEPs and SARSEPs (Thus, for example
there would be no 50 percent participation requirement. and no 125 percent test.)

to

matching contributions (the "ACP" test), or

HCE determinations irrelevant
Because NESTs would not be subject to any
nondiscnmination tests. an employer that offers a ~EST would not be required to determine which
employees are "highly compensated employees"
( 'ollfnhllf'()IIS

:\ ESTs would receive nonelective employer contributions and, depending on the option
selected by the employer. electl ,e contributions and employer matching contributions
Desi~n-based

safe harbors In lieu of top-heavy and nondiscrimination rules. every NEST
would be required to choose annually to satisfy one of the following two design-based safe harbors
(generally Similar to the Administration's proposed 401(k) safe harbors)
( I)

The employer makes a nonelective contribution of at least 3 percent of compensation C for
each eligible employee The employer may choose to allov,,' employee elective contributions

Any employee elective contributions to the \:EST would be included in compensation for this
purpose,
The $ I 50,0000 compensation limit that applies for purposes of the deduction and
contribution limits for qualified plans, SEPs and SARSEPs would also apply for purposes of the
~'EST contributions

in addition to the employer nonelective contributions (an employer who wants to combine
nonelective contributions with matching contributions may use the second safe harbor)

-

(2)

-

The employer makes a nonelective contribution of at least I percent of compensation for each
eligible employee and allows employee elective contributions The employer must provide
a 100 percent matching contribution on the employees' elective contributions up to 3 percent
of compensation and a matching contribution of at least 50 percent (and no greater than 100
percent) on the next 2 percent of employees' elective contributions. The employer may not
provide any other matching formula, including a more generous formula. Although this safe
harbor would require a I percent nonelective employer contribution, the top-heavy rules
would not apply, as noted above This means that those employers that otherwise would have
been required to make a 3 percent top-heavy minimum contribution for each non-key
employee would have to make only a I percent nonelecti\'e contribution In addition.
employers that offer a N"EST would be relieved of the requirement to test the NEST for topheavy status

Employee elective contributions The limit on an employee's annual elective contributions
(ie, salary reduction contributions) to a NEST would be $5,000 (Elective contributions to 401(k)
plans are currently limited to $9.500) The NEST limit \.. ould remain at $5,000 until the section
402(g) limit exceeded S I 0.000, then. the ".'EST limit \.. ould be Indexed to (and remain at) one half
of the section -W2(g) limit for each year
~onelective employer contributions A l\'EST could provide for discretionary nonelective
employer contributions in excess of the safe harbor minimums (I percent or 3 percent) from year to
year Any sllch nonelective employer contributions in excess of the I percent or 3 percent minimums
would have to be an equal percentage of compensation for all eligible employees Total nonelective
cuntributions (both the safe harbor minimums and discretionary contributions) could not exceed :;
percent of compensation

Section 404 deduction limit not applicable The employer \vould be permitted to deduct the
elective, matching, and nonelective contributions d~scribed abo\e (within the contribution limits
described) without regard to any separate percent-of-compensation limitation (ie, there would be
no limit comparable to that imposed by section 404(a)(3»
7,mlflf! o(CollfnhllllOl1s

Elective contributions Employee elective contnbutions , .. ould be required to be deposited
in employees' accounts by the time required under Title I of ERISA for elective contributions to a
40 I( k) plan
Ouanerly employer contributions Employer matching contributions would be required to
be deposited in employees' accounts (IRAs) no less frequently than quanerly Employer nonelective
contributions \. . ould also be required to be deposited no less frequently than quaI1erly -- but only for
employees who as of the end of the quaner were paid at least $5,000 (or any lower threshold adopted
by the employer) for that calendar year If an employee did not reach the threshold until the second,
third. or fOUI1h calendar quaI1er, the employer would be required, after the threshold had been

:;

reached, to make nonelective contributions for both the current and all preceding calendar quaners
in the year. Contributions for any calendar quaner \vould be required to be deposited within 45 days
.
after the end of that quaner
Disfrihllfions

Two-year holding period. NEST contributions (and attributable earnings) would be subject
to a two-year holding period beginning on the first day of the calendar year for which the contribution
was made. This two-year restriction on withdrawals would apply whether or not the participant had
incurred a termination of employment
I n all other respects, distributions from NEST IRAs would be subject to the same rules as
distributions from IRAs generally (as distinguished from 40 I(k) or other qualified plans) -- no other
restrictions would be imposed. The additional 10 percent tax on premature distributions would apply
to distributions before age 59 I/~. During the two-year holding period, contributions and earnings
could be rolled over to another IRA -- but the original two-year holding period would continue to
apply to the rolled-over amounts in the recipient IRA
Rollovers. :'\ESTs could Originate and receive transfers from other lRAs (whether NESTs,
SEPs, SARSEPs, or other IRAs) i':ESTs could also receive rollovers from qualified plans. All
movement of l'<'EST funds to other IRAs, whether or not during the two-year holding period, would
be required to be carried out in the form of a trustee-to-trustee trC1 .. ~.er Any amounts rolled over
or transferred to a :\"EST \\/ould not be subject to the two-year holding period unless they were
amounts transferred from a NEST for which the two-year holding period had not yet elapsed.
A/I\Ct:llaIlI!OllS
SEPs and other plans permitted An employer that maintains a NEST could also maintain taxqualified plans or SEPs, other than a plan that allows for elective contributions or matching
contributions For example, if the employer maintained a ... 0 !(k), salary reduction or matching
"'OJ(b), or SARSEP plan, and wished to establish a KEST, it would have to freeze (but not terminate)
the 40 I (k), "'03(b), or SARSEP plan
If an employer did maintain another plan, compliance of the NEST with the NEST
requirements would be determined v.ithout regard to the other plan The other plan would have to
take the l'iEST into account only for purposes of the section 404 deduction limits and the section 415
contribution and benefits limitations For example, the top-heavy rules and nondiscrimination rules
would apply to the other plan without regard to the :'\rEST
In the case of an employee who works for two employers, one of which sponsors a NEST and
the other of which sponsors a 40 I(k L 40J(b), or SARSEP plan, the section 402(g) elective deferral
limit for that employee would be coordinated Elective contributions to the NEST would have to be
taken into account in determining whether the $9,500 limit had been exceeded under the other plan.
but any elective contributions made to the other plan would not be taken into account in determining
whether the $5,000 ;-"':EST limit had been exceeded

6

Coordination \\'ith IRA deduction rules ~\rESTs would be treated as qualified plans for
purposes of the IRA deduction phase-out rules Thus. employees who participated in a ;-.JEST \vould
be subject to the phase-out rules for making deductible IRA contributions if they had. AGI in excess
of the applicable thresholds
.
IRS model fonn The IRS would be directed to issue a model :,(EST document, but vendors
and employers would have the option of using their own documents
Application of ERISA fiduciary rules Changes would also be made to ERISA to
accommodate the !\'EST Section 200 I of Title II of this Act would limit a plan sponsor's fiduciary
liability The sponsor would not be subject to fiduciary liability for the designation of the NEST
trustee or issuer, or the manner in which the i\'EST is invested. after the earliest of (I) an affirmative
employee election with respect to the initial investment of anv contributions. (2) a transfer to another
IRA. or (3) one year after the employee's r-...'EST is established, provided that the employee had been
properly notified that he or she has a right to transfer the l\'EST account balance without charge. The
assets held in the NEST would cease to be plan assets when transferred to another IRA or otherwise
distributed as benefits
Reporting. ERISA would also be amended by section 200 I of Title II of this Act to make
clear that an employer maintaining a :'\EST \\ould not be subject to any reporting requirements (eg.,
Form 5500 tiling) However. the :'\EST trustee or issuer \I.ould be required to report !\TEST
contributions on Form 5498. on which IRA contributions are reported
Disclosure Employees would be required to be notified annually in writing of their rights
under the plan. including. for example. the fight to a matching contribution and information from the
\:EST trustee or issuer S:milarly. if an employer \\.anted to change its safe harbor formula, the
employer ',-ould be required to notify eligible employees of the formula that would be used for a year
\\ ithin a reasonable period of time before the beginning of the annual election period (Employee
elections 10 defer would occur In the last 60 days of each calendar year)
Plan suspension
In order to provide flexibility to an employer that faced an unexpected
financial hardship. employers would generally be permitted to suspend all NEST contributions (i e.
all elective. matching, and nonelective contributions) at any tIIne during the year after notifying
eligible employees in writing at least 30 days before the suspension Only one suspension would be
allowed during any year The Secretary may prescnbe rules to prevent abuse. such as the repeated
suspension of a l\TEST in a manner that pre\ents seasonal \\orkers from receiving benefits
Calendar plan year The calendar year would be the plan year for all NESTs and would have
to be used in applying all :".;l:ST contrihutlon limits. ellgibilttv, and other l>..JEST requirements

This proposal \l,.'ould be etTec!l\ e tor years beginning after December 31. 1996

7

TAX-EXEMPT ORGAl\IZATIO:'liS ELIGIBLE l'~DER SECTION 401(k)
(Section I I O~)
Current Law

Except for cenain plans established before July 2, 1986, an organization exempt from income
tax is not allowed to maintain a section ~o I(k) plan
Reasons for Change

The limitation on maintaining a 401(k) plan prevents many tax-exempt organizations from
offering their employees retirement benefits on a salary reduction basis Although tax-sheltered
annuity programs can provide similar benefits, many types of tax-exempt organizations are also
precluded from offering those programs
Proposal

The proposal would allow organizations exempt from income tax (other than state or local
governments) and Indian tribes to maIntain a ·W Uk) plan This proposal would be effective for plan
years beginning after December 3 I, 1996

8

SI;\lPLlFIED ~ONDISCRIMI:\ATION TESTI:\G FOR "Ol(k) PLA~S
(Section 1103)

Current Law
The actual deferral percentage (ADP) test generally applies to the elective contributions
(typically made by salary reduction) of all employees eligible to participate in a 40 I (k) plan. The test
requires the calculation of each eligible employee's elective contributions as a percentage of the
employee's pay The ADP test is satisfied if the plan passes either of the following two tests (I) the
average percentage of elective contributions for highly compensated employees does not exceed 125
percent of the average percentage of elective contributions for nonhighly compensated employees,
or (2) the average percentage of elective contributions for highly compensated employees does not
exceed 200 percent of the average percentage of elective contributions for nonhighly compensated
employees, and does not exceed the percentage for nonhighly compensated employees by more than
two percentage points The actual contribution percentage (ACP) test is almost identical to the ADP
test, but generally applies to employer matching contributions and after-tax employee contributions
under any qualified employer retirement plan
Both the ADP test and the ACP test generally compare the a\erage contributions for highly
compensated employees for the year to the a\erage contnbutions for non highly compensated
employees for the same year
When the ADP or ACP test IS \ iolated, correction is made by reducing the excess
contributions of highly compensated employees beginning With employees who have deferred the
greatest percentage of pay
Reasons for Change

The annual application of these tests. and correcting \'lolations of these tests, can be
and costly
For example. because the current year average for the nonhighly
compensated employees is nut known until the end of the year. the tests commonly require either
n-,onltoring and adjustments of contributions over the course of the year or complicated correction
procedures and information reporttng after the end of the year
co:npli~ated

The current correction method often does not atTect the most highly paid of the highly
compensated employees their contributIOns. as a percentage of pay. are likely to be lower than the
percentage contributions of lower-paid high Iv compensated emplovees. even if the dollar amount of
. theIr contributions is higher For example. If an employee makes S85.000 and contributes $6,000
(7 05 percent of pay). his or her contnbutlon v.ould be reduced before that of a CEO who makes
S 150.000 and contributes S9.000 (6 percent of pa\)
Proposal
Dt!Slf.,'J,-hwt!J\O{t! harhors. The proposal \\.-ould provide tv"o alternative "design-based" safe
harbors If a plan were properly designed, the employer would avoid all ADP and ACP testing

9

Under the first safe harbor, the employer would have to make nonelective contributions of at least
3 percent of compensation for each nonhighly compensated employee eligible to participate in the
plan. Alternatively, under the second safe harbor, the employer would have to make a nonelective
contribution of at least I percent of compensation for each eligible nonhighly compensated employee,
a 100 percent matching contribution on an employee's elective contributions up to the first 3 percent
of compensation, and a matching contribution of at least 50 percent on the employee's elective
contributions up to the next 2 percent of compensation.
A more generous matching contribution formula would also be considered to satisfy the
matching contribution safe harbor, but only if the level of matching contributions did not increase as
employee elective contributions increased and the matching contributions at every level of
compensation were at least as great as they would have been under the safe harbor formula.'
However, for purposes of satisfying the matching contribution safe harbor with respect to the ACP
test (but not the ADP test), matching contributions could not be made with respect to employee
elective contributions in excess of 6 percent of compensation. The safe harbors could not be used
to satisfy the ACP test with respect to after-tax employee contributions, which would be tested
separately
Under both safe harbors, the nonelective employer contributions and the matching employer
contributions would be treated in a manner similar to "qualified nonelective contributions," including
being nonforfeitable immediately and generally not distributable prior to the participant's death,
disability, termination of employment, or attainment of age 59 1/: In addition, each employee eligible
to participate in the plan would have to be given notice of his or her rights and obligations under the
plan within a reasonable period before the beginning of any year
Simpl{ficallOllfO,. plans fha' chose 110110 lise (he des/~lI-hased safe harbors. The proposal
would also simplify the nondiscrimination rules for plans that chose not to use the design-based safe
harbors First, the proposal would modify the ADP and ACP tests to provide that, unless an
employer made an election to use current year data, the average contributions for highly compensated
employees fer the current year would be compared to the average contributions for nonhighly
compensated employees for the precedl11g year An election to use current year data could be
revoked only as provided by the Secretary For the first plan year of a 401 (k) plan, the average
percentage for nonhighly compensated employees would be deemed to be 3 percent or, at the
employer's election or (except to the extent provided by the Secretary) in the case of a successor plan,
the average percentage for that first plan year Second, a simplitied correction method would require
excess contributions to be distributed first to those highly compensated employees who deferred the
highest dollar amount (as opposed to the highest percentage of pay) for the year Under this
approach, the lower-paid highly compensated employees vvould no longer tend to bear the brunt of
the correction method

The design-based safe harbors would be effective for years beginning after December 31,
1998 The proposal relating to prior-year data and the correction procedures would be effective for
years beginning after December 3 I, 1996

10

REPEAL OF THE FA'lILY AGGREGATION RULES
(Section' II O-l)
Current Law

Ifan employee is a family member of either a more-than-5 percent owner of the employer or
one of the employer's ten highest-paid highly compensated employees. then any compensation paid
to the family member and any contribution or benefit under the plan on behalf of the family member
is aggregated with the compensation paid and contributions or benefits on behalf of the highly
compensated employee Therefore. the highly compensated employee and all family members are
treated as a single highly compensated employee For purposes of this rule. an employee's "family
member" is generally a spouse, parent. grandparent child, or grandchild (or the spouse of a parent,
grandparent, child. or grandchild)
A similar family aggregation rule applies with respect to the $150,000 annual limit on the
amount of compensation that may be ta\.;en into account under a qualified plan. (However, under
these pro\'isions, only the highly compensated employee's spouse and children and grandchildren
under age 19 are aggregated)
Reasons for Chall2e

The family aggregation rules ma\' unfairly reduce retirement benefits for family members who
are not highly compensated employees and greatl~· complicate the application of the nondiscrimination
tests. panicularlv for famih -0\\ ned or operated businesses
Proposal

The family aggregation rules \\ ould be repealed The proposal would be effective for years
beginning after December 3 I, 1996

II

SIMPLIFY DEFINITION OF HIGHLY COMPENSATED EMPLOYEE
(Section 1105)
Current Law

A qualified retirement plan must satisfY various nondiscrimination tests to ensure that it does
not discriminate in favor of "highly compensated employees" In order to apply these tests, the
employer must identifY its "highly compensated employees" This term is currently defined by
reference to a test with seven major pans Under this definition, an employee is treated as a highly
compensated employee for the current year, if, at any time during the current year or the preceding
year, the employee
( I)

owned more than 5 percent of the employer,

(2)

received more than $100,000 (as indexed for 1996) in annual compensation from the
employer,

(.3)

received more than $66,000 (as indexed for 1996) in annual compensation from the
employer and was one of the top-paid 20 percent of employees during the same year,
or

(4)

was an officer of the employer who received compensation greater than $60,000 (as
indexed for 1996)

These four rules are modified by three additional rules
(5)

An employee described in any of the last three categories for the current year but not
the preceding year is treated as a highly compensated employee for the current year
only if he or she was among the 100 highest paid employees for that year.

(6)

more than 50 employees or, if fewer, the greater of three employees or 10 percent
of employees are treated as officers

(7)

If no officer has compensation in excess of $60,000 (for 1996) for a year, then the
highest paid officer of the employer for the year is treated as a highly compensated
employee

Reasons for

;\0

Chan~e

The definition of highly compensated employee is not only complicated, it classifies many
middle-income workers as "highly compensated employees" ".:ho are then prohibited from receiving
higher levels of benefits

12

Proposal
T:I~ current seven-part test would be replaced by a simplified tv.o-part test an employee
would be a "highly compensated employee" for the curren: year only if the employee owned more
than 5 percent of the employer during the current or preceding year 01' had compensation from the
employer of more than $80,000 (indexed annually for changes in the cost of living after 1997) during
the preceding year This dollar threshold would mean that many middle-income Americans no longer
would be subject to nondiscrimination restrictions

The proposal would be effective for years beginning after December 3 I, 1996

13

REPEAL OF LIMITATION IN CASE OF DEFINED BENEFIT PLAN AND DEFINED
CONTRIBUTION PLAN FOR SA"E E.\IPLOYEE
(Section 1106)
Current Law

An employee who participates in a qualified defined benefit plan and a qualified .defined
contribution plan of the same employer must also satisfy a combined plan limit. This limit is satisfied
if the sum of the "defined benefit fraction" and the "defined contribution fraction" is no greater than
1.0.
The defined benefit fraction measures the portion of the maximum permitted defined benefit
that the employee actually uses. The numerator is the projected normal retirement benefit, and the
denominator is generally the lesser of 125 percent of the dollar limitation for the year, or 140 percent
of the employee's percent of pay limitation.
The defined contribution fraction measures the portion that the employee actually uses of the
maximum pennitted contributions to a defined contribution plan for the employee's entire career with
the employer The numerator is generally the total of the contributions and forfeitures allocated to
the employee's account for each of the employee's years of service with the employer. The
denominator is the sum of a calculated value for each of those years of service. The calculated value
is the lesser of 125 percent of the dollar limitation for that year of service, or 35 percent of the
participant's compensation Because of the historical nature of this fraction, its computation is
extremely cumbersome and requires the retention of various data for an employee's entire career
The combined plan limit is not the only Code provision that safeguards against an individual
accruing excessive retirement benefits on a tax-favored basis There are maximum limits for both
defined b~nefit and defined contribution plans In addition, a 15 percent "excess distribution" penalty
was enacted in 1986 to achieve many of the same goals as the combined plan limit. A distribution
is generally considered an "excess distribution" to the extent all distributions to an individual fr')m all
of the individual's qualified employer plans and IRAs exceed a specified dollar limit ($155,000 in
1996) during a calendar year The limit is multiplied by five (i e , $775,000 in 1996) for a lump sum
distribution Excess distributions made after death are subject to an additional estate tax of 15
percent Other rules also protect against tax-fa\'ored excessive benefits
Reasons for Chanee

Because other provisions of the Code. such as the excise tax on excess distributions, go far
toward ensuring that an individual cannot accrue excessive cetir~ment benefits on a tax-favored basis,
the complexity of the combined plan lilllit is not justitied
Proposal

The combined plan limit (Code section 415(e)) would be repealed This proposal would be
effective for years beginning after December 3 I. 1998
14

DISABLED E:\lPLOYEES
(Section 1107)
Current Law

An employer may elect to continue making deductible contributions to a defined contribution
plan on behalf of permanently and totally disabled emplovees who are not highly compensated
Reasons for Chanel"

Contributions for disabled employees should be encouraged In addition, contributions should
be allowed for highly compensateci disabled employees. as \vell as for nonhighly compensated disabled
employees, if the contributions are provided on a nondiscriminatory basis
Proposal

In order to simplif;.' the rules for permanently and totally disabled workers and to encourage
contributions for those disabled workers. an employer would not have to make an election in order
to make contributions for disabled employees. and plans \vould generally be allowed to provide for
contributions for disabled highly compensated employees. as well as for disabled nonhighly
compensated employ'ees
This proposal \'.ould be etTectiw for years beginning at1er December 31, 1996

PLANS MAINTAINED BY SELF-EMPLOYED INDIVIDUALS

(Section 1108)
Current Law
Prior to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), numerous special
rules applied to qualified retirement plans that covered self-employed individuals. Almost all of these
special rules were repealed by TEFRA However, special aggregation rules that do not apply to other
qualified retirement plans still apply to qualified plans that cover an "owner-employee" (i.e., a sole
proprietor of an unincorporated trade or business or a more-than- i 0 percent partner of a partnership).
These aggregation rules generally require affected plans to be treated as a single plan and affected
employers to be treated as a single employer For example, if an owner-employee controls more than
one trade or business, then any qualified plans maintained with respect to those trades or businesses
must be treated as a single plan and all employees of those trades or business must be treated as
employed by a single employer
Reasons for Change
The special aggregation rules afford plan participants little, if any, protection because they are
largely duplicative of the general aggregation rules that apply to all qualified employer plans,
including plans that cover self-employed individuals.
Proposal

The special aggregation rules for qualified plans that cover owner-employees would be
repealed. As under current law, these plans would be subject to the general plan aggregation rules
that apply to tax-qualified employer retirement plans.
This proposal would be effective for years bei5inning after December 31, 1996

16

TRUST REQliIRE:\IE~T FOR DEFERRED CO:\l PE~SA TION PLANS OF STATE A~D
LOCAL GO\TR,,\tE:\TS
(Section 1109)
Current Law

Section -t57 sets forth the tax rules applicable to nonqualified deferred compensation provided
by a State or local government or tax-exempt organization Lnder section 457, an employee \\ho
elects to defer the receipt of compensation under an "eligible plan" is taxed on the amounts deferred
when the amounts are paid or made available If a plan for the deferral of compensation is not an
"eligible plan," the deferred compensation is taxed to the participant in the first taxable year in which
the compensation is not subject to a substantial risk of forfeiture, even if the compensation is not paid
or otherwise made available to the participant until a later date
Amounts deferred under a section 457 plan. including all property purchased with such
amounts and all income attributable to such amounts, must remain solely the property of the
employer. subject to the claims of the employer's general creditors. until made available to the
participant or beneficiary Thus. compensation deferred by employees under a section 457 plan is not
protected from the employer's general creditors in the event of the employer's bankruptcy By
contrast, the assets of a qualified cash or deferred arrangement must be held in trust for the exclusive
benefit of participants and beneficiaries
Reasons for Change

Emplovers should be encouraged to provide benefits under a qualified retirement plan, but
a governmental employer may want to offer a section 457 plan However. employees ofa State or
local government could lose the portion of their retirement savings that is in a 457 plan in the event
that their employer became bankrupt
Proposal

Lnder the proposal. all amounts deferred (including amounts deferred prior to the effective
date of the change) under a section 457 plan maintained by a State or local government employer
would be required to be held in trust (or in a custodial account or annuity contract) for the exclusive
benefit of employees Consequently, the requirement that amounts deferred under a section 457 plan
be subject to the claims of the emplover's creditors would be repealed with respect to section 457
plans of a governmental employer The trust would be provided tax-exempt status As under current
\.IW. amounts would not be Includible in income until pa,d or made available to the employee.
not\\lthstanding any tax prOVisions relating to economiC benefit (e g. without regard to section 83
nr section 402( b))
Other present-Ia\\ requirements applicable to section 457 plans. including the annual limit on
the maximum amount of deferral. \\ ould continue to appl~ To the extent these requirements,

17

including the trust requirement, were not satisfied, amounts deferred would be includible in the
employee's income when there is no substantial risk of forfeiture
The proposal would not alter the present-law rules applicable to eligible section 457 plans of
tax-exempt employers or the rules applicable to ineligible plans of governmental or tax-exempt
employers.
The proposal would be effective for amounts under a section 457 plan on the date of
enactment, but amounts would not be required to be held in trust until the end of the first calendar
quarter beginning after the end of the first regular session (treating a two-year legislative session as
two separate one-year sessions) of the State legislature of the State in \vhich the governmental entity
maintaining the plan is located that begins after the date of enactment

18

CHAPTER

TREATMENT OF
SECTIO~

2 --

SI;\IPLlFIC.-\ TIO:\ .-\:\0 COST SAVINGS

GOVERNl\1E~TAL A~D .\IUL TIE.\IPLOYER PLANS UNDER
·US AND TREA T;\I E~T OF EXCESS BENEFIT PLANS
(Section 120 I )

Current Law

Annual benefits payable under a defined benefit plan are limited to the lesser of $120,000 (for
1996) or 100 percent of "three-year-high average compensation" (Reductions in the dollar or
percentage limit for defined benefit plans may be required if the employee has fewer than I 0 years of
plan panicipation or service) If benefits under a defined benefit plan begin before social security
retirement age, the dollar limit must be actuariallv reduced to compensate for the earlier
commencement Cenain special rules apply to governmental plans
The amount of reasonable compensation that may be pro\'ided to an employee under a
nonqualified deferred compensation arrangement maintained by a for-profit organization generally
is not subject to any limitation \lany such employers maintain a nonqualified "excess benefit plan"
that provides benefits for cenaIn employees In excess of the limitations on annual contributions and
benefits Imposed by section 415 of the Code The nonCJuallfied deferred compensation is not taxable
to the employee until it is paid or otherv.ise made a\ailable to the employee to draw upon at any time
Section 457 sets forth the tax rules applicable to nonCJualitled deferred compensation provided
bva State or local governments or tax-exempt organization Lnder section 457, an employee who
elects to defer the receipt of compensation under an "eligible plan" is taxed on the amounts deferred
when the amounts are paid or made available A section 457 plan is not an eligible plan unless.
among ather requirements. annual deferrals for an employee are limited to the lesser of$7,500 or 33
li3 percent of compensation If a plan for the deferral of compensation is not an "eligible plan," the
deferred compensation is taxed to the panlcipant in the first taxable year in which the compen!)ation
is not subject to a substantial mk of forfeiture. even if the compensation is not paid or otherwise
made available to the panlcipant until a later date
Reasons for Change

The qualified plan limitations are uniquely burdensome for governmental plans. which have
long-established benefits structures and practices that may conflict with the limitations In addition,
some State constitutions may significantly restrict the ability to make the changes needed to conform
the plans to these limitaticns
These limitations also present problellls for many Illultiemployer plans These plans typically
base benefits on years of credited service. not on a panicipant's .::ompensation In addition, the 100
percent-of-compensation limit is based on an employee's average compensation for the three highest
COIISt!CIIIII't! years
This rule often produces an anificially low limit for employees in certain
industries. such as buddIng and construction. where v., ages vary significantly from year to year
19

An excess benefit plan provides to certain employees -- those whose contributions or benefits
are reduced by the section 415 limits -- contributions or benefits that are already provided to other
employees under a qualified plan. Even though an excess benefit plan does not provide management
employees with disproportionately higher benefits than those provided to lower paid employees, the
restrictions of section 457 still apply to such a plan if it is maintained by a State or local government
or tax-exempt organization These employers are therefore at a disadvantage in attempting to provide
all employees with proportionate contributions or benefits
Proposal

The rules for governmental plans and multiemployer plans would be modified to eliminate the
100 percent-of-compensation limit (but not the $120,000 limit) for such plans, a,ld to exempt certain
survivor and disability benefits from the adjustments for early commencement and for participation
and service ofless than 10 years To the extent that governmental employers have previously made
elections that would prevent them from utilizing these simplification provisions, the proposal would
allow those employers to revoke their elections
The proposal would exempt excess benefit plans of State and local governments and taxexempt organizations from section 457 The exemption would not apply to an excess benefit plan
that also provided benefits in excess of qualified plan limitations other than the section 415 limits.
These proposals generally would be etTective for years beginning after December 3 I, 1996
The provisions relating to governments would be effective for years beginning after December 3 I,
1995

20

DEFINITION OF CO;\lPE~Sr\ TIO~ FOR SECTION 415 PURPOSES

(Section 1::0::)
Current Law

Annual additions to a defined contribution plan for any participant are limited to the lesser of
$30,000 (for 1996) or 25 percent of compensation Annual benefits payable under a defined benefit
plan are limited to the lesser of$120,000 (for 1996) or 100 percent of "three-year-high average
compensation" For purposes of the various compensation limits. compensation generally does not
include employer contributions (including elective deferrals) made to section 401 (k) plans, section
403(b) annuities, section 125 cafeteria plans. and certain other employee benefit plans
Reasons for Change

The exclusion of elective deferrals restricts the amount that employees can accrue under a
qualified plan Because the dollar limit is usually the operati\e limit for a highly compensated
employee, and the percent-of-compensatlon limit is usually the operative limit for nonhighly
compensated employees. the exclusion of electi\e contributions from the definition of compensation
is not only complicated. but it primaril\ limits benefits for nonhighly compensated employees.
Proposal

L'nder the proposal, elective contributions would be considered compensation for purposes
of the annual limits on contributions and benefits This proposal \-vould be effective for years
beginning after December 3 I. 1996

::1

ASSUMPTIONS FOR ADJUSTING CERTAI:\ BENEFITS OF DEFINED BENEFIT
PLANS FOR EARLY RETIREES
(Section 1203)

Current Law

Annual benefits payable under a defined benefit plan are limited to the lesser of $120,000 (for
1996) or 100 percent of "three-year-high average compensation. (Reductions in the dollar or
percentage limit for defined benefit plans may be required if the employee has fewer than 10 years of
plan participation or service.) Ifbenefits begin before social security retirement age, the dollar limit
must be actuarially reduced to compensate for the earlier commencement. Certain special rules apply
to governmental plans. In addition, if benefits are paid in a form other than a straight life annuity (or
a joint and survivor annuity), the benefits must be adjusted tc an actuarially equivalent straight life
annuity prior to comparison with the dollar limitation.
II

The reduction to the dollar limit for commencement between age 62 and social security
retirement age is based on the early commencement factors used for social security The interest rate
that must be used for the actuarial reductions for any commencement prior to age 62, and for
purposes of the benefit adjustment, depends on the form of the benetlt that is being paid. If the
benefit is being paid in an annuity distribution, the interest rate that must be used for both of these
adjustments is the greater of 5 percent or the interest rate lIsed for the parallel adjustments under the
plan. However, if the benefit is being paid in a nonannuity form (e g, a single sum distribution), the
interest rate that must be used for both of these adjustments is the greater of the interest rate
applicable under section 417(e)(3) or the interest rate lIsed for the parallel adjustments under the plan
Reasons for Change

The requirement that the interest rate used for the early commencement actuarial adjustment
vary depending on whether or not the benefit is payable in an annuity form adds complexity to the
calculation of the maximum benefit limitations that is not justified
Proposal

The actuarial assumptions to be used for adjusting the $120,000 limit for commencement prior
to age 62 would be based on the greater of 5 percent or the interest rate used for this purpose under
the plan, without regard to the form of benefit that is being paid. This proposal would be effective
as if it were included in the Retirement Protection Act of 1994

..,..,

TREATl'fENT OF DEFERRED COMPENSATION PLANS OF STATE AND LOCAL
GO\,ERN:\lElST A~D TAX-EXE:\IPT ORGANIZATIONS
(Section 120..+)
Current Law

The amount of reasonable compensation that may be provided to an employee under a
nonqualified deferred compensation arrangement maintained by a for-profit organization generally
is not subject to any limitation Many such employers maintain a nonqualified "excess benefit plan"
that provides benefits for certain employees in excess of the limitations on annual contributions and
benefits imposed by section 415 of the Code The nonqualified deterred compensation is not taxable
to the employee until it is paid or otheru;ise made available to the employee to draw upon at any time
Section 457 sets forth the tax rules applicable to nonqualified deferred compensation provided
by a State or local governments or tax-exempt organization Under section 457, an employee who
elects to defer the receipt of compensation under an "eligible plan" is taxed on the amounts deferred
when the amounts are paid or made available If a plan for the deferral of compensation is not an
"eligible plan," the deferred compensation IS ta.xed to the participant in the tirst taxable year in which
the compensation is not subject to a substantial risk of forfeiture, even if the compensation is not paid
or otherwise made available to the participant until a later date
A section 457 plan is not an eligible plan unless, among other requirements, annual deferrals
for an employee are limited to the lesser of $7,500 or 33 113 percent of compensation. In contrast
to other dollar limitations applicable to employee benefit plans, the $7,500 limit is not indexed for
cost of hing In addition, amounts deferred under an eligible plan may not be made available to a
panicipant before the earlier of the calendar year In ""hich the participant attains age 70 '/2, the
participant's separation from service, or an unforeseeable emergency Benefits under an eligible plan
are not considered made available if the participant may elect to receive a lump sum payable after
separation ITom service and within 60 day'S of the election Ho\\ever, this exception is available only
if the total amount payable to the participant under the plan does not exceed $3,500 and no additional
amounts may be deferred under the plan \\ ith re:;pect to the partiCipant
Reasons for Change

In order to maintain the value of deferrals under an eligible section ..+57 plan, the dollar limits
on deferrals should be indexed in a manner that IS consistent \" ith the way other plan dollar limits are
Indexed In addition. the eXisting constructl"e receipt rules that apply to section 457 plans are
unnecessarilv restrictive
Proposal

The proposal \>,Quld provide for Increases In the S-:-.500 limit, based on changes in the cost
of living since 199..+ The Indexed \alue \>,ould be rounded down to the next lower multiple of$500

The proposal would also permit the in-service distribution of a pa!1icipant's account if that account
did not exceed $3,500, no amount was deferred under the plan with respect to the pa!1icipant for two
years, and t!":~re was no prior distribution under this cash-out rule In addition, the proposal would
allow an additional election to be made v,'ith respect to the ti'ne distributions must begin under the
plan. The amount payable to a pa!1icipant under an eligible plan would not be treated as made
available merely because the participant could elect to defer' commencement of distributions under
the plan after amounts could be distributed under the plan but before the actual commencement of
benefits. Only one such additional election would be permitted
These proposals would be effective for taxable years beginning after December 3 I. 1996

24

NO REQUIRED DISTRIBUTIO~S FOR ACTIVE El\IPLOYEES
(Section 1205)
Current Law

Under current la\\, an employee who pal1icipates in a qualified employer retirement plan must
begin taking distributions of his or her benefit by the April I follo\~ ing the year in which he or she
reaches age 70 I/~ Generally, the so-called "minimum distribution" for any year is determined by
dividing the employee's account balance or accrued benetit by the ell1ploy'ee's life expectancy
Reasons for Change

If the employee is still working and accruing new benefits at age 70 1/:, the new benefits must
be taken into account to detennine the minimum amount required to be distributed for the same year
In effect, a portion of each year's nev" benefit accrual is required to be distributed in the same year
This pattern of contemporaneous contributions and required distributions causes considerable
complication and confUSion
Proposal

The requirement to distribute benefits before retirement \~ould be eliminated, except for
employees \\ho own more than 5 percent of the employer that sponsors the plan, Instead,
distnbutions would ha\'e to begin by the April I follo\\ing the /uft.!r nrthe year in which the employee
reaches age 70 I: or the year In \\ hich the emplo\ee rf'tires from service with the employer
maintaining the plan If pavment of an emplovee's benefits were delaved past age 70 1/: pursuant to
this rule, the benefits ultimately' paid at retirement \\ould have to be actuarially increased to take into
account the delay in pavment Without this Increase, the delay in payment could cause the employee
to "lose" the benefit pavlllents that \\ould otherwise ha\ e been paid bet\\ een age 70 1/: and retirement
The actuarial adjustment rule ann the 5 percent 0\\ ner rule would not apply to a governmental plan
(lr 2 church plan
The age-70 I requirement \\ ould continue to apply to IRAs Because an IRA is not
milintained by an employer, the Initial payment date for an IRA cannot be tied to retirement from the
employer maintaining the plan (\:ote that this Act also Includes a separate item that would change
the age-70 1/: rule to an age-70 rule)
The proposal would be etTectlw for years beginnIng after December 31, 1996

SIMPLIFY TAXATION OF ANN UITY DISTRIBUTIONS
(Section 1206)

Current Law
If an employee makes after-tax contributions to a qualified employer retirement plan or IRA,
those contributions (i e, the employee's "basis") are not taxed upon distribution. When the plan
distributions are in the fonn of an annuity, a portion of each payment is considered nontaxable return
of basis. This nontaxable portion is determined by multiplying the distribution by an exclusion ratio
The exclusion ratio generally is the employee's total after-tax contributions divided by the total
expected payments under the plan over the term of the annuity
Reasons for Change
The detennination of the total expected payments, which is based on the type of annuity being
paid, often involves complicated calculations that. are difficult for the average plan participant.
Because of the difficulty an individual may face in calculating the exclusion ratio, and in applying
other special tax rules that may be applicable, the IRS in 1988 provided a simplified alternative
method for detennining the nontaxable portion of an annuity payment. However, this alternative has
effectively added to the existing complexity because taxpayers feel compelled to calculate the
nontaxable portion of their payments under every possible method in order to ensure that they
maximize the nontaxable portion
Proposal
A simplified method for determining the nontaxable portion of an annuity payment, similar
to the c':lrrent simplified alternative, would become the required method Taxpayers would no longer
be compelled to do calculations under multiple methods in order to determine the most advantageous
approach
Under the simplified method, the portion of an annuity pay'ment that would be nontaxable is
generally equal to the employee's total after-tax employee contributions, divided by the number of
anticipated payments listed in a table (based on the employee's age as of the annuity starting date)
The proposal would be effective \\.ith respect to annuitv starting dates on or after January I.
1997

26

REPEAL FIVE-YEAR AVER.\GI~G FOR LUl\IP SUM DISTRIBUTIONS
(Section 1207)
Current Law

A distribution that satisfies the many requirements necessary to qualify as a "lump sum
distribution" is eligible for five-year forv.ard averaging Cnder this method, the tax that is owed on
the lump sum distribution is separately calculated and added to the individual's other income tax for
the year The separate tax is approximately equal to five times the tax that would apply to one-fifth
of the distribution, assuming the taxpayer had no other taxable income Because the tax on the
distribution is calculated separately from other income and because the distribution is taxed at the
marginal rate that would apply to one-fifth of the distribution, a recipient who receives a large
distribution in one taxable year may be able to benefit from a Ie wer marginal tax rate by using tiveyear forward averaging
Prior to the Tax Reform Act of 1986 (TRA 1986), lump sum distributions were eligible for
10-year averaging rather than five-year a\eraging In addition, the portion ofa lump sum distribution
attributable to pre-197-l services could be treated as capital gain These rules may be used currently
only if the employee attained age 50 before January I, 1986
Reasons for Change

Both the definition of a lump sum distribution Clnd the calculCltion of tax under the five-year
averaging method are complicated In addition, the problem that fi\e-year averaging addresses (i e ,
avoiding the bunching of income in one ~'ear, resulting in an unusually high tax rate for that year) can
be achieved by rolling over a lump sum distribution to an IRA without tax and taking periodic
payments from the IRA over five years or more In 1992, the availability of tax-free rollovers v.as
expanded and the rules for rollovers \\ere Simplified signiticantl~
Proposal

The fi\e-year averaging rules would be repealed, effective for lump sum distributions after
December 3 I, 1998 However, the grandfather proviSions of TRA 1986 that permit ten-year
averaging and capital gain treatment to be used by emplovees \\ho attained age SO before January I.
1986 would be retained

,-'

ELIMINATION OF HALF-YEAR REQUIREMENTS
(Section 1208)

Current Law
In general, distributions from qualified employer plans and IRAs prior to age 59 1/2 are subject
to a 10 percent penalty. In addition, under certain plans (such as section 401(k) plans), distributions
before age 59 1/2 are generally prohibited l\1inimum distributions from IRAs and qualified employer
plans are required to begin after attainment of age 70 1'2 (~ote that this Act also includes a separate
item that would eliminate the requirement that distributions from qualified employer plans begin by
age 70 1;2 for employees, other than more-than-5 percent owners, who have not yet retired)

Reasons for Change
Requirements based on half years are not as simple to apply or communicate as requirements
based on whole years. and may lead to confusion as to v.'hen distributions to IRA and qualified plan
participants must commence and when distributions may be subject to penalty The exact date on
which an individual reaches age 59 I;: or age 70 I;: may not be readily apparent, whereas an
individual's date of birth is obviously known to the individual and is typically included in plan and
employer records

Proposal
To simplify these provisions. all references to age 59
references to age 70 I;: would be changed to age 70

I;:

,.,ould be changed to age 59, and all

The proposal would be effective for years beginning after December 3 I, 1996

28

DISTRIBUTIONS U~DER RURAL COOPERATIVE PLANS
(Section 1209,
Current Law

Under a section -iOl(k) plan, distributions are generally only allowed after separation from
service, death, disability, attainment of age 59 I ~ , or hardship However, 40 I (k) plans that qualify
as "rural cooperative plans" (e.g, 401(k) plans maintained by rural electrical cooperatives or
cooperative telephone companies) are money purchase pension plans Therefore, in accordance with
the distribution restrictions generally applicable to pension plans, these plans cannot allow
distributions prior to the earlier of a panicipant's separation frolll service or normal retirement
Reasons for Change

It is appropriate to allow a 40 I (k) plan maintained by a rural cooperative to permit
distributions to plan panicipants under the same circumstances as a -W I (k) plan maintained by other
employers
Proposal

The rules governing distributions from a 40 I (k) plan of a rural cooperative would be
conformed to those that apply to other -i0 I (k) plans by allowing cistributions after attainment of age
59 I ; and upon financial hardships This proposal \\ould be effective for distributions after date of
enactment

29

MODIFICATION OF ADDITIONAL PARTICIPATION REQUIREMENTS
(Section 1210)
Current Law

Under current law, every qualified defined benefit plan or defined contribution plan is required
to cover at least 50 employees or, in smaller companies, 40 percent of all employees of the employer
This rule was intended primarily to prevent an employer from establishing individual defined benefit
plans for highly compensated employees in order to pro\'ide those employees with more favorable
benefits than those provided to lower paid employees under a separate pl2n. The rule prevents an
employer from favoring one small group ofpanicipants over another by, for example, covering them
under two separate plans and funding one plan better than the other
Reasons for Change

As applied to defined contribution plans, the minimum panicipation rule adds complexity for
employers without delivering commensurate benefits to the system. given that the nondiscrimination
rules also prevent qualified retirement plans from unduly favoring the top-paid group of employees.
The abuses intended to be addressed b!' the minimum panicipation requirement rarely arise in the
context of defined contribution plans Accordingly, this requiremelh .;Jds unnecessary administrative
burden and complexity \\:ith respect to these plans
Proposal

The minimUin panrcipation rule would be repealed for defined contribution plans In addition,
if an employer had only two employees. the rule for defined benetlt plans would be modified to
require any such plan to cover both employees
The proposal would be effective for plan vears beginning after December 31, 1996

30

UNIFORi\1 RETIREi\IE~T AGE

(Section 1211)
Current Law

Several of the statutory requirements for qualitied employer plans im'olve "normal retirement
age" Lnder most oftliese provisions, nonnal retirement age can be no later than age 65 However,
under cenain other provisions, normal retirement is t he social securi tv retirement age (currently age
65, but scheduled to increase)
Reasons for Change

Many retirement plans base benefits on social security age in order for .he benefits to
complement social security Yet, under current law, the use of social security retirement age (which
is not unifonn among panicipants) may cause the plan to fail applicable nondiscrimination tests, since
those tests generally require the use of a retirement age that is uniform among participants
Proposal

Lnder the proposal, the social security retirement age would be a uniform retirement age for
purposes of the nondiscrimination rules In addition, subsidized early retirement benefits and joint
and survivor annuities would not be treated as not being available to employees on the same terms
merelv because they \\ ere based on an emplovee's social security retirement age
This proposal \\ ould be etTectl\e for years beginning after December 3 I, 1996

31

TREATMENT OF LEASED EMPLOYEES
(Section 1212)
Current Law

Individuals who are "leased employees" of a service recipient are considered to be employees
of that recipient for qualified retirement plan and cenain other purposes A "leased employee" is any
person who is not a common-law employee of the recipient and who provides services to the recipient
if(l) the services are provided pursuant to an agreement bet\veen the recipient and the employer of
the service provider, (2) the person has perfonned the services for the recipient on a substantially fulltime basis for at least one year, and (3) the services are of a type historically performed, in the
business field of the recipient, by employees
Reasons for Change

The historically perfonned standard produces many unintended and inappropriate results For
example, under this standard, employees and panners of a law firm could be leased employees of a
client of the firm if they work a sufficient number of hours for the client, assuming that it is not
unusual for employers in the client's business to have in-house counsel.
Proposal

The "historically performed" test would be replaced by a test that considers whether the
services performed for the recipient are performed under significant direction or control by the
recIpIent
This proposal would generally be effective for years beginning after December 31, 1996, but
would not apply to relationships that have been previously determined by an IRS ruling not to involve
leased employees

FULL FUNDING LlMITA TIO!" FOR 'HI L TI E!\l PLaYER PLANS
(Section 1213)

Current Law

An employer's annual deduction for contributions to a defined benefit plan is generally limited
to the amount by which 150 percent of the plan's current liability (or, if less. 100 percent of the plan's
accrued liability) exceeds the value of the plan's assets The 150 percent-of-current-liability limit
restricts the extent to which an employer can deduct contributions for benefits that have not yet
accrued
.
Defined benefit plans are required
annually

to

have an actuarial valuation no less frequently than

Reasons for Change

An employer has little. if any. incenti\'e to mal.;e "e:\cess" contributions to a multiemployer
pbn The amount an elilplover contributes to a multlemplover plan is fiwd by the collective
bargaining agreement. and a particular employer's contributions are not set aside to pay benefits solely
to the employees of that employer
Proposal

The 150 percent IlInlt on deductible contributions would be eliminated for multiemployer
plans Therefore. the annual deduction for contributions to such a plan \vould be limited to the
amount by which the plan's accrued liability exceeds the value of the plan's assets. In addition,
actuarial valuations \'.ould be required under the Code no less frequently than every three years for
multiemployer plans Parallel changes would be made to ERISA
The proposal would be efTective for years beginning after December 3 I. 1996

33

ELIMINATION OF PARTIAL TERl\lINA TION RULES FOR MUL TIEMPLOYER
PL\~S

(Section 121-l)
Current Law

When a qualified retirement plan is terminated, all plan participants are required to become
100 percent vested in their accrued benefits to the extent those benefits are funded In the case of
certain "partial terminations" that are not actual plan terminations (e.g. a large reduction in the work
force), all affected employees must become 100 percent vested in their benefits accrued to the date
of the termination, to the extent the benefits are funded
Whether a partial termination has occurred in a particular situation is generally based on the
specific facts and circuillstances of that situation, including the exclusion from the plan of a group of
employees who have previously been covered by the plan. by reason of a plan amendment or
severance by the employer In addition, if a detined benetit plan stops or reduces future benefit
accruals under the plan. a partial termination is deemed to occur if. as a result, a potential reversion
of plan assets to the employer is created or increased
Reasons for Change

Over the years. court decisions have left unanswered many key questions as to how to apply
the partial termination rules. Accordingly. applying the rules can often be difficult and uncertain,
especially for muitieillployer plans
For example. Illultiernployer plans experience frequent
fluctuations in participation levels caused by the commencement and completion of projects that
involve significant numbers of union members i\fany of these terminated participants are soon
rehired for another project that resumes their active coverage under the plan In addition. it is
common for participants leaving one multiemployer plan's coverage to maintain service credit under
a reciprocal agreement if they move to the coverage of another plan sponsored by the same union
As a result. these participants do not suffer the interruption of their progress along the plan's vesting
schedule that ordinarily occurs when an employee stops being covered by a plan Given these factors,
and the related proposal to require multiemployer plans to \'est participants after five (instead of the
current ten) years of service. the difficulties associated \\ ith applying the partial termination rules to
multiemployer plans outweigh the benefits
Proposal

The requirement that affected participants become 100 percent vested in their accrued benefits
(to the extent funded) upon the partial termination of a qualitied employer retirement plan would be
repealed with respect to multiemployer plans
The proposal would be effective for partial terminations that begin on or after January I.
1997

3-l

ELECTIVE DEFERRALS lf~DER SECTION 403(b)
(Section 1:215)
Current Law

Annual elective deferrals made by an employee under a section 403(b) annuity plan generally
are limited to $9,500 Elective deferrals in excess of this limit may be corrected by distributing the
excess deferrals no later than April 15 of the year follO\\ing the year of deferral If the excess is not
timely corrected, the excess deferrals are includible in the employee's income in the year of deferral
and again in the year of distribution. In addition, a ~03(b) annuity plan must provide that elective
deferrals made under the plan may not exceed the annual limit Plans that do not comply with this
requirement may lose their tax-qualified status.
Reasons for Ch.tnge

Employees participating in a 403(b) annuity plan should not be adversely affected if other
employees violate the annual limit on elective contributions with respect to their individual contracts
or custodial accounts
Proposal

Under the proposal, each 403(b) annuity contract, not the 403(b) plan, must provide that
elective deferrals made under the contract may not exceed the annual limit
This proposal v,ould be effective for years beginning after December 3 I, 1996

35

UNIFORM PENALTY

PROVISIO~S

TO APPLY TO CERTAIN P.ENSION
REQtIRE;\IE:\TS
(Section 1216)

REPORTI~G

Current Law

The penalty structure for failure to pro\ ide information repons \\ ith respect to pension
payments is currently separate and ditTerent from the penalty structure that applies to information
reporting in other areas The penalty for failure to file a Fonn 1099-R repon of pension distributions
is currently $25 per day per return, up to a maximum of S 15,000 per year per return The penalty for
failure to file a Fonn 5498 IRA report is currently a tlat S50 per return, with no maximum, regardless
of the number of returns
In contrast, the penalty for failure to file any other information return is generally $50 per
return up to $250,000 per year, with lower penalties and maximums if the return is filed within
specified times. (The penalty is $15 per return filed late but within 30 days and $30 per return filed
late but on or before August I ) Lower maximums also apply to persons with gross receipts of no
more than 55 million The penalty for failure to furnish a payee statement is $50 per payee statement
up to $100,000 per year (L'nder a separate proposal. the general penalty amount would be increased
to the greater of $50 per return or five percent of the total amount required to be reported, unless the
aggregate amount reponed by the trustee for the calendar year is at least 97 percent of the amount
required to be reponed) Separate penalties apply in t~e case of intentional disregard of the
requirement to furnish a pay·ee statement
Reasons for Change

Confonning the infonnation reporting penalties that apply with respect to pension payments
to the general infonllatlon reporting penalty structure \\ ould simplify the overall penalty structure by
prO\idmg unlfomlity and v.ould pro\lde more appropriate penalties with respect to pension payments
Proposal

The penaltIes for failure to pro\lde informatIon reports with respect to pension payments
would be confonned to the general penalty structure Thus, the penalty for failure to file Form 1099R would generally be reduced (for anv return that \\as late by more than two days) The penalty for
failure to file Fonn 5498 v.ould generally remain the same as under current law, but would no longer
be unlimited In addition, for both Form I 099-R and Form 5498, the penalties would be reduced if
the forms were filed ·Iate but within specified times
The proposal would apply to returns and statements for v.hich the due date (determined
\\ithout regard to e:'\tensions) is after December 3 I. 1996

36

TAX ON PROHIBITED TRA~SACTIONS
(Section 1217)
Current Law

A "prohibited ~ransaction" under section 4975 is generally any transaction between a -plan and
a person who is considered a "disqualified person" with respect to the plan Unless exempt by statute
or by an individual or class exemption, a prohibited transaction gives rise to an excise tax (imposed
on the disqualified person) equal to 5 percent of the amount involved in the transaction. If the
transaction is not corrected, an additional 100 percent excise tax may be imposed. ERISA includes
a parallel civil penalty for any prohibited transactions involving a plan that is not subject to section
4975 of the Code
Reasons for Change

A 10 percent excise tax should be more effecti\e in discouraging prohibited transactions than
the current 5 percent excise tax
Proposal

The proposal would increase the initial excise tax on transactions from 5 percent to 10
percent, effective for transactions occurring after December 3 I, I Q96 A parallel change would be
made to the ERISA ci\il penalty

37

DATE FOR ADOPTIO\' OF PL.-\\' A'IE\,D'IE~TS
(Section I: IS)

Current Law

Plan amendments that are made to reflect amendments to the Internal Revenue Code must
generally be made bv the employer's income tax return due date for the employer's taxable year in
which the change in the law occurs
Reasons for

Chan~e

Plan sponsors should be given adequate time to amend plan documents following the
enactment of legislation that requires plans to be amended
Proposal

In order to ensure that plan sponsors have adequate time to amend plan documents, plan
amendments required b:- this Title ''.ould not be reC]LIIred to be made before the end of the first plan
year beginning on or after January 1. 1998, if the plan \'.ere operated in accordance with the
applicable pro\ ):;Ion (lnd the amendment were retroacti\ e to the efTective date of the applicable
provision Governmental employers \.. ould ha\e a later date

38

SUBTITLE

B ··EXPANDED INDIVIDUAL RETIREMENT ACCOUNTS TO

INCREASE

COVERAGE AND PORTABILITY

(Sections 130 I - 13 3 I)

Current Law
Under current law, an individual may make deductible contributions to an individual
retirement account or individual retirement annuity (IRA) up to the lesser of $2,000 or compensation
(wages and self-employment income) (The dollar limit is $2,250 if the individual's spouse has no
compensation.) If the individual (or the individual's spouse) is an active participant in an employer-sponsored retirement plan, the $2,000 limit on deductible contributions is phased out for couples
filing a joint return with adjusted gross income (AGI) between $40,000 and $50,000, and for single
taxpayers with AGI between $25,000 and $35,000. To the extent that an individual is not eligible
for deductible IRA contributions, he or she may make nondeductible IRA contributions (up to the
contribution limit)
The earnings on IRA account balances are not includable in gross income until they are
withdrawn Withdrawals from an IRA (other than \vithdrawals of nondeductible contributions) are
includable in income, and must begin by age 70'/~ Amounts withdrawn before age 59'/2 are generally
subject to an additional 10-percent tax This 10-percent early withdrawal tax does not apply to
distributions upon the death or disability of the taxpayer or to substantially equal periodic payments
over the life (or life expectancy) of the IRA owner or over the joint lives (or life expectancies) of the
IRA owner and his or her beneficiary. In general, an excess distribution tax of 15 percent applies to
the extent that an individual receives an aggregate amount of retirement distributions in excess of
$155,000 in any year
Reasons for Change

The Administration believes that individuals should be encouraged to save, both in order to
provide for long-term needs, such as retirement and education, and in order to sustain a sufficient
level of private investment to continue the healthy grmvth of the economy Targeted tax policies can
provide an important incentive for savings Under current law, however, savings incentives in the
form of deductible fRAs are not available to all middle-income taxpayers Furthermore, the presentlaw income thresholds for deductible IRA.s and the maximum contribution amount are not indexed
for inflation, so that fewer Americans are eligible to make a deduc:ible IRA contribution each year,
and the amount of the maximum contribution is declining in real terms over time. The Administration
also believes that providing taxpayers with the option of making IRA contributions that are
nondeductible but can be withdrawn tax free will provide an alternative savings vehicle that some
middle-income taxpayers may find more suitable for their savings needs
Individuals save for many purposes besides retirement Broadening the tax incentives for nonretirement saving can help increase the nation's savings rate IRAs that are flexible enough to meet
a variety of essential savings needs, such as first-time home purchases, higher education expenditures,
unemployment, and catastrophic medical and nursing home expenses, should prove to be more
attractive to many taxpayers than accounts that are limited to retirement savings

39

Proposal
Expand Dt!dllcllhle II?As

Under the proposal, the income thresholds and phase-out ranges for deductible IRAs would
bl;! doubled, in two stages Beginning in 1996, eligibility would be phased out for couples filing joint
returns with AGI between $70,000 and 590,000 and for single individuals with AGI between $45,000
and $65,000 Beginning in 1999, eligibility would be phased out for couples filing joint returns with
AGI bet\veen S80,000 and $100,000 and for single indi\'iduals with AGI between $50,000 and
$70,000 The income thresholds and the present-law annual contribution limit of $2,000 would be
indexed for inflation As under current law, any individuai who is not an active panicipant in an
employer-sponsored plan and whose spouse is also not an active panicipant would be eligible for
deductible IRAs regardless of income
Under the proposal, the IRA contribution limit would be coordinated with the current-law
limits on elective deferrals under qualified cash or deferred arrangements (section 40 I (k) plans), taxsheltered annuities (section 403(b) annuities), and similar plans The proposal also would provide that
the current-law exclusion from the 10-percent early withdrawal tax for IRA withdrawals after an
individual reaches age 591~ does not apply in the case of amounts attributable to contributions
(excluding roll overs from tax-qualified plans or tax-sheltered annuities) made during the previous five
years
SpeclGllIUs

Each indi\ldual eligible for a traditional deductible IRA would ha\ e the option of contributing
an amount up to the contribution limit ellher to a deductible IRA or to a new "Special IRA"
Contributions to this SpeCial IRA \\ ould not be tax deductible. but distnbutlons of the contributions
would be tax-free If the contributions remained in the account for at least five years, distributions
of the earnings on the contributions also would be tax-free Withdrawals of earnings from Special
IRAs during the tlve-year period after contribution "auld be subject to ordinary income tax In
addition, such withdrawals would be :>ubject to the 10-percent early withdrawal tax unless used for
one of the four purposes described below
The proposal would permit individuals whose AGI for a taxable year does not exceed the
upper end of the new income eligibility limits (S I 00.000 for couples filing joint returns and $70,000
for single indi\;duals) to cOn\'en balances in deductible IRAs into Special IRAs without being subject
to the early withdrawal tax. The amount comened from the deductible IRA to the Special IRA
generally would be includable in the indi\ldual's income in the year of the conversion However. if
a conversion was made before January I. 1998. the convened amount included in the individual's
income (and taken into account In applying the 15-percent excess distribution tax) would be spread
ewnl\ 0\ er four taxable years

Amounts "ithdra"n from deductible lR-\s and Special IRAs within the five-year period after
contribution "ould not be subject to the early "ithdrawal tax. if the taxpayer used the amounts to pay

40

post-secondary education costs, to buy or build a first home. to cover living costs if unemployed, or
to pay catastrophic medical expenses (including certain nursing home costs)
Education expenses. The early withdrawal tax would not apply to the extent the amount
withdrawn is used to pay qualified higher education expenses of the taxpayer, the taxpayer's spouse.
the taxpayer's dependent, or the taxpayer's child or grandchild (even if not a dependent). In general.
a withdrawal fN qualified higher education expenses would be subject to the same requirements as
the deduction for qualified educational expenses (e.g., the expenses are tuition and fees that are
charged by educational institutions and are directly related to an eligible student's course of study)
In addition, to further assist taxpayers who are saving to pay these qualified higher education
expenses, deductible [RAs and Special [RAs would be expressly permitted to invest in qualified State
prepaid tuition program instruments to the extent provided by the Secretary In general, a qualified
State prepaid tuition program instrument is one issued under a program established or maintained by
a State, that can be converted into a percentage of tuition expenses for an individual if :he funds are
used to pay tuition expenses, or can be redeemed for an amount not less than the purchase price (less
any reasonable administrative fees), if the funds are not used for education To the extent a qualified
instrument held by an IRA is converted into tuition and fees. the IRA owner wiIl be treated as having
received a distribution from the IRA to pay qualified higher education expenses. No inference is
intended as to the tax treatment of prepaid tuition programs under current law or for other purposes
of the Code.
First-time home purchasers. The early withdrawal tax would not apply to the extent the
amount withdrawn is used to pay qualified acquisition, construction. or reconstruction costs with
respect to a principal residence ofa first-time home buyer \\'ho is the taxpayer. the taxpayer's spouse.
or the taxpayer's child or grandchild
Unemployment Withdrawals would not be subject to the early withdrawal tax if (I) the
individual has separated !Tom employment, (2) the individual has received unemployment compensation for 12 consecutive weeks, and (3) the withdra\val is made during the taxable year in which the
unemployment compensation is received or the succeeding taxable year
Medical care expenses and nursing home costs The proposal would extend to IR.A.s the
present-law exception to the early withdrawal tax for distributions from qualified plans and
tax-sheltered annuities for certain medical care expenses (deductible medical expenses that are subject
to a floor of7.5 percent of AGI) and would expand the exception for [RAs to allow withdrawal for
medical care expenses (in excess of 7 5 percent of AGI) of the taxpayer's child, grandchild, parent
or grandparent, whether or not that person otherwise qualifies as the taxpayer's dependent
In addition. for purposes of the exclusion from the early withdrawal tax for distributions from
[RAs, the definition of medical care would include expenses for qualified long-term care services for
incapacitated individuals.
All of the proposed IRA provisions would be etTective January I, 1996 Conditions under
which the IRA provisions would continue or terminat-;;' after December 3 I, 2000 are generally
described in the Budget of the United States Government, Fiscal Year 1997, page 1.
41

SUBTITLE

C -- OTHER EXPANSIONS OF PENSION

PORTABILITY

AL TER.1\1ATIVE NONDISCRIMINATION RLlLES FOR CERTAIN PLANS THAT
PROVIDE FOR EARLY PARTICIPATION
(Section I-WI)

Current Law
The actual deferral percentage (ADP) test applicable to section 40 I (k) plans compares the
average rate of elective contributions for nonhighly employees who "benefit" under the plan with the
average rate of elective contributions for highly compensated employees who benefit under the plan
For this purpose, an employee is considered to benefit under the plan if the employee is eligible for
elective contributions A similar actual contribution percentage (ACP) test applies to employer
matching contributions and employee after-tax contributions under section 40 I (m)
In general, a plan need not pennit employees to enter a plan prior to the attainment of age 21
and the completion of I year of service. For purposes of testing nondiscrimination (including the
ACP and ADP tests), an employer that chooses less restricti\·e entry conditions (e.g., age 18 rather
than age 21) may choose "separate testing" under which all employees who have not met the statutory
age and service entry maximums are disregarded, provided that the plan satisfies the
nondiscrimination rules taking into account only those employees whose age and service are less than
the statutory age and service maximums Thus, such a plan \.,'ould apply one ADP test for employees
who are over age 21 with I year of service, under which the plan would disregard the rates of elective
contributions for other employees, and a second ADP test looking solely at the rates of elective
contribution for employees under age 21 or who have not completed 1 year of service.
Reasons for change

Many employers do not permit employees to make salary reduction contributions or receive
matching. contributions until the employees meet certain specified age and service requirements
(commonly age 21 and 1 year of service) Some employers are concerned that allowing these newly
hired employees to participate In the plan might cause the plan to fail the ADP or ACP tests, even
\\hen the plan chooses the separate testing option of current la\" However, if newly hired employees
are required to wait before payroll deductions can begin. they might not get into or continue the habit
of saving for retirement through payroll deduction
Proposal
The proposal provides an alternative method of applying the ADP test for a section 401(k)
plan that allows employees to participate before they ha\e completed one year of service and reached
age 21, if the plan satisfies the minimum coverage rules of section 41 O(b) using the option of section
41 O(b)( 4 )(B) Instead of apply;ng two separate ADP tests. such a plan could apply a single ADP test
that compares the average rate of elective contributions for all highly compensated employees who
are eligible to make elective contributions with the average rate of elective contributions for those
nonhighly compensated employees who are eligible to make elective contributions and who have
completed one year of service and reached age 21 Similar rules would apply for purposes of the
ACP test The pro\lsions would be effective for plan years
be!.!innin!.!
.
- after December 31 , 1996

TREATMENT OF CERTAIN VETERANS' REEMPLOYMENT RIGHTS
(Section 1402)
Current Law

Under the Uniformed Services Employment and Reemployment Rights Act of 1994
("USERRA"), which revised and restated the Federal la\" protecting veterans' reemployment rights,
a returning veteran generally is entitled to the restoration of cenain pension, profit sharing and similar
benefits that would have accrued but for the employee's absence due to the military service.
USERRA generally provides that service in the uniformed services is considered service with the
employer for retirement plan benefit accrual purposes USERRA also provides that the reemployed
veteran is entitled to any accrued benefits that are contingent on the making of. or derived from,
employee contributions or elective deferrals, but only to the extent the reemployed veteran makes
payment to the plan with respect to such contributions or deferrals. No such payment may exceed
the amount the reemployed veteran would have been permitted or required to contribute had the
person remained continuously employed by the employer throughout the period of uniformed service.
USERRA generally became effective with respect to reemployments initiated on or after
December 12, 1994. However, retirement plans not in compliance with the relevant provisions of
USERRA on the date of its enactment (October 13, 1994) have two years to come into compliance.
Under the Code, annual limits are provided on contributions and benefits under cenain
retirement plans For example, the maximum amount of elective deferrals that can be made by an
individual pursuant to a qualified cash or deferred arrangement in any taxable year is limited to $9,500
in 1996. Cenain other rules, such as rules relating to nondiscrimination, coverage, minimum
panicipation, and top-heavy plans, might limit the amount that can be contributed to a plan on behalf
of an employee There is no special provision under presenr law that permits contributions or
deferrals to exceed these limits for a reemployed veteran Violations of these rules can result in plan
disqualification The Code also imposes certain limits on deductible contributions to retirement plans
without any special provision for payments made on behalf of a r~employed veteran.
Reasons for Change

Amendments are needed to COnf0n11 the Code's qualified retirement plan rules with USERRA
Proposal

The proposal provides special rules in the case of c~nain contributions ("make-up
contributions") with respect to a reemployed veteran that are made pursuant to USERRA, so as to
confonll the rules contained in the Code with the rights of reemployed veterans under USERRA The
proposal applies to make-up contributions made by an employer or employee to an individual account
plan and to make-up contributions made by an employee to a defined benefIt plan that provides for
employee contributions

Under the proposal, a make-up contribution is subject to the generally applicable plan
contribution limits and the limit on deductible contributions for the year to which the contribution
relates. not for tr.~ year in which the contribution is made The proposal also provides that a plan
under which a make-up contribution is made \\ ill not be treated as failing to meet the qualified plan
nondiscrimination. co\erage. minimum panicipation. or top-heavy rules on account of the
contribution In addition. the proposal provides that cenain rules that apply to plan loans will not be
violated merely because a plan suspends the repayment of a loan during a period of uniformed service
The proposal \\ould be effective as of December 12. 1994. the effective date of the relevant
USERRA provisions

ELIMINATION OF SPECIAL VESTING RVLE FOR 1\IULTIEMPLOYER PLANS
(Section 1403)
Current Law

The accrued benefits of a collectively bargained employee under a multiemployer retirement
plan attributable to employer contributions are not currently required to become nonforfeitable (i.e.,
"vested") until the employee has completed I 0 years of service If the employee's employment
terminates before then, all benefits can be lost. Accrued benefits of all other employees (i e,
employees under all non-multiemployer plans and any noncollectively bargained employees u~der a
multiemployer plan) must vest after five years of service, or after seven years if panial vesting begins
after three years.
Reasons for Change

The 10-year vesting schedule for multiemployer plans adds to the complexity of the pension
law by providing different vesting schedules for different types of plans and for different people
covered by the same plan. In addition, conforming the Illultiemployer plan vesting rules to the vesting
rules for other plans would ensure that workers covered by multiemployer plans would become
entitled to pension benetits on the same basis as \vorkers covered by other plans
Proposal

The special ten-year vesting rule applicable to multiemployer plans under the Code would be
repealed. A parallel ch2nge to ERISA would be made
This proposal would be effective for plan years beginning on or after the earlier of ( I) the later
ofJanuary L 1997, or the date on which the last of the collective bargaining agreements pursuant to
which the plan is maintained tenninates. or (2) January I, 1999, v.ith respect to panicipants who have
at least one hour of service after the effective date

TITLE

II -- ERISA PROVISIO\S

SUBTITLE A -- EXPA:"DED PE:"SIO:" CO\'ERAGE A:"D
REPORTING

A~D

SI\IPLIFICATlO~

FIDUCIARY REQlqRE'IE~TS RELA TI\G TO NATIONAL
EMPLOYEE SA \'I\GS TRllSTS
(Section 200 I)

Current Law
Under the Employee Retirement Income Security Act of 197-l (ERISA). cenain pension and
welfare benefit plans are required to file an annual return/repon (the Form 5500 series) regarding
their financial condition. investments. and operations The Form 5500 Series is the pnmary source
of information concerning the operation. funding. assets. and investments of pension and other
employee benefit plans The Form 5500 Series is currently received and processed by the IRS
through three designated IRS Service Centers
Under ERISA. administrators of certain employee pension and v,:elfare benefit plans are
required to furnish each participant and beneticiary \vith a summary plan description (SPD),
summaries of material modifications (SMMs) to the SPD and. at specJ inten.'als. an updated SPD
Generally. these documents must also be filed with the Department of Labor The SPD is intended
" provide paniclpants and beneficiaries v.ith Important information concerning their plan. the benefits
prOVided by the plan, and their rights and obligations under the plan
Finally. ERISA sets forth certain fiduciary responsibilities that applv \\ ith respect to covered
pension and welfare benefit plans For tillS pUrpl)~e. a fidUCiary includes. among others, any person
who exercises any discretionary control respecting the management or disposition of plan assets
Generall\'. these rules reCjuire that fiduciaries discharge their duties prudently'. in accordance with plan
documents. that the, dlverslfv plan assets. and that the assets of the plan are used solely to provide
bl'n'~fits to participants and defray necessar. expenses of the plan

Reasons for

Chan~e

The tax-favored employer retirement pi:,"" currently available under the Internal Revenue
Code (Code) have not been suffiCiently successful In attracting small employers The administrative
cost and complexity associated With tradll10nal qualified retirement plans often discourages small
emplovers from sponsoring these plans

Proposal
As described In greater detail In Title l. Chapter 1 of this legislation. the proposal would
create a ne\l,. Simple retirement plan for emplo\ers \\ith 100 or fewer employees The new plan
\'-ould be known as the '\ational Employee Sa\ Ings Trust. or ":\EST "

This section describes the special ERISA Title I rules applicable to the NEST
Application of ERISA fiduciary rules: Under the )\;EST, the employer would be relieved from
fiduciary liability in certain circumstances After an applicable period, there would be no employer
liability resulting from the (A) designation of the trustee or issuer of the account or (B) the manner
in which the assets in the account are invested. The relief from fiduciary liability would apply after
the earlier of( I) an affirmative election by the employee with respect to the initial investment of any
contributions, (2) a rollover of contributions from an employee's NEST account to another IRA, or
(3) one year after the individual's NEST account is established, provided that the participant has been
properly notified that he or she had a right to direct investments, and a penalty-free right to roll over
the NEST contributions. The assets held in the NEST would cease to be plan assets when rolled over
to another IRA or otherwise distributed as benefits Also, employers would be required to forward
withheld participant contributions to the NEST trustee under the same rules applicable to section
40 I (k) plans.
Reportin2 Requirements: An employer maintaining a NEST would not be subject to any
ERISA reporting requirements (eg. Form 5500 tiling) However, the NEST trustee or custodian
would be required to report NEST contributions on Form 5498, on which IRA contributions are
reported
Disclosure Employees would be required to be notified annually in writing of their rights
under the plan, including. for example. the right to a matching contribution and information from the
NEST trustee or issuer Similarly. if an employer wanted to switch between safe harbor contribution
formulas, the employer \\'ould be required to notify eligible employees which formula would be used
for a year within a reasonable period of time before the beginning of the annual election period.
(Employee elections to defer would occur in the last 60 days of each calendar year.)

47

ERISA SU1\lMARY PLAN

DESCRIPTI0~ FILI~G

(Section

REQUIREl\1E;\ITS

~ClO~)

CUrI'ent Law

Under ERISA., administrators of employee pension and welfare benetit plans are generally required
to furnish each participant and beneficiary \\ith a summary plan descnption (SPD), summaries of material
modifications (Si\'L\1s) to the SPD and, at specified intervals, an updated SPD These documents generall)
must also be filed with the Department of Labor (DOL) Filed SPDs, SI\1T\.1s, and updated SPDs are required
to be made available for public disclosure These requirements are administered by the DOL's Pension and
Welfare Benefits Administration (P\VBA) The SPD is intended to provide participants and beneficiaries with
important information concerning their plan, the benefits provided by the plan, and their rights and obligations
under the plan. A penalty of up to $100 per day may be imposed by a court for failure to provide the
participant or beneficiary v,;ith the SPD or SI\11\1
Reasons for Change

The primary purpose of having SPDs filed with the DOL is to have them available for participants
and beneficiaries \vho are unable or reluctant to request them from their plan administrators. However,
because S\ 1\1s summarizing plan changes are not required to be filed with DOL until 210 days after the end
of the plan year, there is little, Ifany, certainty that the Information on tile \\ith the DOL at any given point
in time is up-to-date
P\\BA annuall~ reCel\eS appro'lll1atel~ :50,000 SPD and S\1\1 filings Although PWBA's cost for
maintaining a filtng. stor,1ge. and reme\ al system for SPDs IS relatively small (approximately $52.000
annually). compliance with the SPD filtng requirements costs plans approximately $2 5 million annually. In
add:tion to an annual impOSition of an estimated 150.000 burden hours On average, PWBA receives
requests annually for about ~ percent of the filed SPDs \1any of the requests for SPDs come from
researchers and others \\ho are not plan participants and beneficiaries While there is some limited benefit
from the Federal government receiving and storing SPDs. the costs to the public and plans outweigh the
benetits This conciusion IS consistent with the tindings of the ~ational Performance Review
Proposal

The proposal would amend ERISA to eliminate the requirement that SPDs and SMMs be filed v.ith
the DOL It \\ould, however. authorize the DOL to l)btain SPDs and other relevant documents from plan
admInistrators for purposes of respondIng to Indl\ldual requests or monitoring compliance with the SPD and
S\1\1 reqUIrements A plan 3dministrator \\ould be subJect to a civil p~nalty of no more than $100 per da\
(UP to.l nl.l,:n,um ofS1.0n n pe~ request) tor failure l0 furnish the documents requested by the DOL within
:10 G.l\:' The elimin3t1on of :he SPD and S\1\1 filing requirement \\ould substantiallv reduce costs and
burcen-; r'C'r rublic and pm :l!e plan administrators. \\ hilc preserving the ability of ~he DOL to assist
partlcip3i1ts "he 3re un3ble or reluctant to request SPDs trom their plan administrators
l

This pro\ision \\ould be etfectlve fer SPDs and S\1\1s that otherwi~e would be required
\\ Ith the DOL on or after the date of enactment

48

to

be filed

I

INVESTMENT OF INDIVIDUAL RETIREl\IENT ACCOUNTS IN QUALIFIED STATE
PREPAID TUIT(O~ PROGRA\IS
(Section 2003)
Current Law

Some States currently offer prepaid tuition programs to help families finance higher education
Certain lRAs constitute ERISA plans.
Reasons for Change

Some taxpayers may wish to invest IRA funds in State prepaid tuition programs to pay higher
education expenses and may want assurance that such investments do not constitute prohibited
transactions under ERISA Another provision of this Act proposal amends the Internal Revenue
Code to expressly permit rRAs to be invested in qualified State prepaid tuition program instruments,
to the extent provided by the Secretary of the Treasury
Proposal

The proposal makes a conforming change to Title I of ERISA by explicitly providing that IRA
investments in qualified State prepaid tuition program instruments that meet the Code requirements
would not be prohibited transactions

SUBTITLE

B -- PORTABILITY

PBGC MISSING PARTICIPA~T PROGRAM
(Section :0 I I )
Current Law

When a qualitied retirement plan is terminated, there may be plan participants who cannot
be located. If the plan is a detined benetit plan covered by the PBGC, the plan administrator must
generally distribute plan assets by purchasing irrevocable commitments from an insurer to satisfy
all benefit liabilities. If the plan is a detined contribution plan or other plan not covered by the
PBGC, plan assets still must be distributed to participants before the plan is considered termiMated.
Because of the problems that plan administrators and participants may face under these
rules when plan participants cannot be located, the Retirement Protection Act of 1994 (RPA)
provided special rules for the payment of benetits with respect to missing participants (including
benefits for beneficiaries of deceased participants) under a terminating single-employer defined
benefit plan covered by the PBGC. The rules require the plan administrator to (1) transfer the
missing participant's designated benefit to the PBGC or purchase an annuity from an insurer to
satisfy the benefit liability. and (~) provide the PBGC with such information and certifications
with respect to the benetits or annuity as the PBGC may specify.
Reasons for Change

As currently enacted. these RPA rules apply only to single-employer defined benefit plans
t~J.t are cowred by PBGC. Yet other detined benetit plans. as well as defined contribution plans,
face similar problems when they terminate and cannot locate missing participants.
Proposal

The PBGC's program for missing participants would be expanded to apply to
mL.lllemployer cietin~d benetit plans. to detined contnhution plans and to detined benefit plans not
covered by PBGC (such as plans of small profeSSIOnal service employers). The program would
not apply to governmental plans or to church plans not covered by the PBGC. If a plan covered
by the new program has mIssing participants when the plan terminates, it would be able to transfer
the missing participants' benefits to the PBGC along with related IJlformation. If the benefit of
a missing participant is not transferred to the PBGC or to another plan, the plan administrator
would give the PBGC information with respect to the missing participant's benefit. This would
provide administrators of terminating plans an entity (i.e., the PBGC) that would accept missing
partICipants' benefits and would provide missing pamclpants with a central repository for locating
theIr benefits after a plan has been terminated.
This proposal would be effective with respect to distributions from terminating plans that
occur after the PBGC has adopted final regulations implementing the provision.

ELIl\UNATION OF SPECIAL VESTING RULE FOR l\IULTIEMPLOYER PLANS
(Section 2012)
Current Law
The accrued benefits of a collectively bargained employee under a multiemployer pension
plan attributable to employer contributions are not currently required to become nonforfeitable (ie,
"vested") until the employee has completed 10 years of service. If the employee's employment
terminates before then, all such benefits can be lost Accrued b.enefits of all other employees (ie,
employees under all non-multiemployer plans and any noncollectively bargained employees under a
multiemployer plan) must vest after five years of sef\ice, or after seven years if partial vesting begins
after three years

Reasons for Chal11:t'
The IO-year vesting schedule for multiemployer plans adds to the complexity of the pension
law by providing different vesting schedules for different types of plans and for different people
covered by the same plan In addition, confonning the multiemployer plan vesting rules to the vesting
rules for other plans would ensure that workers covered by multiemployer plans would become
entitled to pension benefits on the same basis as workers covered by other plans

Proposal
The special I O-year vesting rule applicable to multiemplcyer plans under ERISA would be
repealed A parallel change to the Internal Revenue Code \vould be made
This proposal would be effective for plan years beginning on or after the earlier of ( I ) the later
of January 1, 1997, or the date on which the last of the collective bargaining agreements pursuant to
which the plan is maintained terminate~. or (2) January I, 1999, \vith respect to participants who have
at least one hour of service after the effective date

51

VETERANS' REEl\lPLOYMENT
(Section 2013)
Current Law

Under the Uniformed Services Employment Rights Act of 1994 (OIUSERRAOI), which revised
and restated the Federal law protecting veterans' reemployment rights, a returning veteran generally
is entitled to the restoration of cenain pension, profit sharing and similar benefits that would have
accrued but for the employee's absence due to the military service. USERRA generally provides that
serv'ice in the uniformed services is considered service with the employer for retirement plan benefit
accrual purposes USERRA also provides that the reemployed veteran is entitled to any accrued
benefits that are contingent on th~ making of, or derived from, employee contributions or elective
deferrals, but only to the extent the reemployed veteran makes payment to the plan with respect to
such contributions or deferrals
USERRA generally became effective with respect to reemployment initiated on or after
December 12, 1994. However, retirement plans not in compliance with the relevant provisions of
USERRA on the date of its enactment (October 13, 1994) have two years to come into compliance
The Internal Revenue Code and ERISA impose restrictions on loans from retirement plans
to cenain panicipants Ho\\ever, neither ERISA nor USERRA has any special provision concerning
a suspension of loan repayment by an individual who is absent from work during a period of
uniformed service
Reasons for Change

Another provision of this Act would amend the Internal Revenue Code to conform the Code's
qualified retirement plan rules with USERRA and to provide that cenain rules applicable to plan loans
will not be violated merely because the plan suspends the repayment of a loan during a period of
uniformed serv'ice The amendment would make a conforming change to Title I of ERISA concerning
the suspension of plan loan repayments
Proposal

The proposal pro\ides that cenain rules that apply to plan loans in ERISA will not be violated
merely because a plan suspends the repayment of a loan during a period of uniformed service. This
proposal would be effective as of December 12. 1994, the effective date of the relevant USERRA
provIsions

SUBTITLE C -- ENHANCED SECURITY
CHAPTER I -- GENERAL PROVISIONS
MUL TIEMPLOYER PLAN BENEFITS GUARANTEED
(Section 2021)
Current Law

The Pension Benefit Guaranty Corporation guarantees benefits of workers in multiemployer
plans. The monthly guarantee is equal to the participant's years of service multiplied by the sum
of (i) 100 percent of the first $5 of the monthly benefit accrual rate, and (ii) 75 percent of the next
$15 of the accrual rate.
Reasons for Cbange

The level of benefits guaranteed by the PBGC under the multiemployer program is modest
and has not increased since 1980. For a retiree with 30 years of service, the maximum guaranteed
annual benefit is $5,850. This compares to a maximum guaranteed annual benefit of about
$31,700 under the PBGC's single-employer program, a maximl;r:~ that is adjusted each year to
reflect changes in the social security wage index.
Proposal

The proposal adjusts the amount guaranteed in multiemployer plans to account for changes
in the social security wage index since 1980. Under the proposal, the PBGC would guarantee a
monthly benefit equal to the participant's years of service multiplied by the sum of (i) 100 percent
of the first $11 of the monthly benefit accrual rate, and (ii) 75 percent of the next $33 of the
accrual rate. The proposed change would increase the maximum annual guarantee for a retiree
with 30 years·of service to $12,870.
The proposal would be effective for plans that have not received assistance payments from
the PBGC during the I-year period ending on the date of enactment.

53

REVERSIO:\, REPORT
(Section 2022)
Current Law
Under present law. defined benefit pension plan assets generally may not revert to an
employer prior to the termination of the plan and the satisfaction of all plan liabilities. Any plan
assets that revert to the employer upon such termination are includable in the gross income of the
employer and subject to an excise tax. Employers that terminate defined benefit pension plans
covered by the Pension Benefit Guaranty Corporation must report the termination to the PBGe
and notify plan participants of their benefits.
Reasons for Change
During the 1980s, over $20 billion of pension assets reverted to corporations. The excise
taxes subsequently imposed on pension reversions successfully curtailed these activities.
However, the President and the Congress need to be informed regularly of any increase in
reversions in order to review in a timely manner whether current law needs to be strengthened.
Proposal
The proposal requires the Secretary of Labor, as Chairman of the PBGC, to report on
reversion activity annually to the President and the Congress.

5-1

FULL FUNDING LIMITATION FOR MUL TIEMPLOYER PLANS
(Section 1013)
Current Law

An employer's annual deduction for contributions to a defined benefit plan is generally limited
to the amount by which 150 percent of the plan's current liability (or, if less, 100 percent of the
plan's accrued liability) exceeds the value of the plan's assets. The 150 percent-of-current-liability
limit restricts the extent to which an employer can deduct contributions for benefits that have not yet
accrued.
Defined benefit plans are required by ERISA to have an actuarial valuation no less frequently
than annually.
Reasons for Chan2e
An employer has little, if any, incentive to make "excess" contributions to a multiemployer
plan The amount an employer contributes to a multiemployer plan is fixed by the collective
bargaining agreement, and a particular employer's contributions are not set aside to pay benefits solely
to the employees of that employer
Proposal
The 150 percent limit would be eliminated for multiemployer plans. Therefore, the annual
deduction for contributions to a multiemployer plan would be limited to the amount by which the
plan's accrued liability exceeds the value of the plan's assets. In addition, actuarial valuations would
be required under ERISA no less frequently than every three years for multiemployer plans. Parallel
changes would be made to the Internal Revenue Code.
These provisions would be effective for years beginning after December 3 I, 1996

55

PROHIBITED TR-\NSACTIONS
(Section :O:-t)
Current Law

A "prohibited transaction" under section 406 is generally any transaction between a plan and
a person who is considered a "party in interest" with respect to the plan Unless exempt by statute
or by an individual or class exemption or subject to an excise tax under section 4975 of the Internal
Revenue Code, a prohibited transaction gives rise to a civil penalty (imposed on the party in interest)
equal to 5 percent of the amount involved in the transaction If the transaction is not corrected, an
additional 100 percent civil penalty may be imposed
Reasons for Change

A 10 percent penalty should be more effective in discouraging prohibited transactions than
the current penalty of 5 percent
Proposal

The proposal would increase the initial civil penalty from 5 percent to 10 percent, effective
for transactions occurring after December 3 1, 1996
A parallel change would be made to the Internal Revenue Code

56

SUBSTANTIAL OWNER RULES RELATING TO PLAN TERl\fINATIONS
(Section 2025)
Current Law
ERISA contains very complicated rules for determining the benefits guaranteed by the
Pension Benefit Guaranty Corporation (PBGC) for an individual who owns more than ten percent
of a business (a "substantial owner") and who is a participant in the business's terminating plan.
These rules were designed to prevent a substantial owner from establishing a plan, underfunding
it, and terminating it in order to receive benefits from the PBGC. Under the rules, the PBGC
guarantee with respect to a participant who is not a substantial owner is generally phased in over
five years from the date of the plan's adoption or amendment. However, for a subs t 3.ntial owner,
the guarantee is generally phased in over 30 years from the date the substantial owner begins
participation in the plan. The substantial owner's benetit under each amendment within the 30
years before plan termination is separately phased in. A substantial owner's guaranteed benefit
also cannot exceed twice the amount guaranteed under the original plan provisions. In addition,
special rules apply for allocating assets with respect to substantial owners upon plan termination.

Reasons for Change
The substantial owner phase-in rules are complex and difficult to apply because of the need
to obtain plan documents going back up to 30 years. The reduced guarantee for employees with
less than a majority ownership ;nterest penalizes employees who may have little, if any, control
over plan benefit levels or funding decisions. It also unfairly penalizes substantial owners who
granted themselves low benefits when they entered the plan. The substantial owner allocation of
asset rules are confusing and complex to administer.

Proposal
The same five-year phase-in that currently applies to a participant who is not a substantial
owner would apply to a substantial owner with less than a 50 percent ownership interest. For a
substantial owner with a 50 percent or more ownership interest (a "majority owner"), the phase-in
would depend on the number of years the plan has been in effect, rather than on the number of
years the owner has been a participant and the initial plan benefit. Specifically, the guaranteeable
plan benefit for a majority owner would be 1/30 for each year the plan has been in effect and the
restriction that limits a substantial owner's guaranteed benefit to twice the amount guaranteed
under the original plan provisions would be eliminated. This approach would eliminate the need
for computations based on documents that are up to 30 years old. A majority owner's guaranteed
benefit would be limited so that it could not be more than the amount that would be guaranteed
under the regular five-year phase-in applicable to other participants. In addition the rules for
allocating plan" assets upon plan termination would be changed to treat substantial owners, other
than majority owners, in the same manner as other participants and to simplify, in certain cases,
the allocation with respect to majority owners.
57

The proposal would be effective for plan terminations for which notice6 of intent to
terminate are provided (or for which proceedings for termination are instituted by the PBGC) on
or after the date of enactment.

58

CHAPTER

2 -- ERISA ENFORCEMENT

REPEAL OF LIMITED SCOPE AUDIT
(Section 2032)
Current law
Current law generally requires the administrator of certain ERISA-covered plans with 100 or
more participants to engage an independent public accountant to conduct an audit of the financial
statements and of certain required schedules contained in the annual report to determine whether the
financial statements are prepared and presented in accordance with Generally Accepted Accounting
Principles (GAAP). Section 103(a)(3)(C) of ERISA contains the so-called "limited scope exemption"
which allows the exclusion of assets which are held by certain regulated financial institutions (e.g.,
banks or similar institutions, or insurance companies) from the scope of the required financial audit
if certain conditions are satisfied.

Reasons for Change
The limited scope audit provision has resulted in nearly half of pension plan assets, amounting
to approximately 1 trillion dollars, not being subject to audit

Proposal
The proposal would repeal the limited scope exemption The provision, by eliminating the
statutory scope limitation, would require inclusion of plan assets which are held by certain regulated
financial institutions within the accountant's audit of the plan. This provision is not meant to require
that the plan's accountant duplicate the work of the independent accountant who audits the financial
institution's books and records It is expected that, generally, the plan's accountant will encourage
the use of Reports on the Processing of Transactions Service Organizations under American Institute
of Certified Public Accountants Statement on Auditing Standards No 70 Under this "single audit
approach," affected banks and other institutions would instruct their independent auditors to prepare
a special report that, in essence, would speak to the reliability of information generated by the bank
and other financial institutions with respect to their actions regarding plan assets. Presently, plan
auditors routinely obtain SAS 70 reports in connection with their full scope audits of plans. Only
about half of plans subject to the audit requirement use limited scope audits. The remaining plans
conduct full scope audits and many of those are already utilizing the single audit approach.
This "single audit approach" would fulfill the purposes of the audit requirement without
imposing the additional cost of independently reviewing the financial institution's records. At the
same time, accountants would no longer be required to disclaim an opinion on their audit reports
Such a report fails to provide assurance regarding the security of plan assets.

This change would apply for plan years beginning on or after January I of the calendar year
immediately following the date of enactment.
59

REPORTING AND ENFORCEl\IENT REQUIREMENTS FOR EMPLOYEE BENEFIT
PLA~S

(Section 2033)
Current Law

Under current law. there is no specitic duty for an administrator of an employee benefit plan.
or an accountant who conducts a plan audit. to disclose promptly to the Secretary information
indicating that a crime involving the plan. such as embezzlement. bribery. or kickbacks. may have
occurred Termination of an accountant from an auditing engagement is reportable when annual
reports of plans with 100 or more participants are filed with the Secretary.
Reasons for Change
While plan accountants and auditors are often the first line of defense against fraud, current
rules create a time lag between the detection of serious irregularities (i.e, embezzlement, bribery or
kick backs) and the filing of an annual report \vith the government. This bill would require both plan
administrators and accountants auditing plans who discover serious fraud or other egregious
violations of lav.· to promptly report them to the Department of Labor.
Proposal
Reporting of certain infonnation This section would require the administrator of an employee
benefit plan to noti~' the Secretary of Labor \\ithin ti\e business days whenever the administrator has
detennined that there is evidence that an Irregularity may have occurred with respect to the plan. or
Ins received notice from the accountant that the accountant has similarly determined that there is
e\'idence that an irreb'Ularity may have occurred The administrator would also be required to furnish
J copy of such notification to the accountant engaged to audit the plan's financial statements
An accountant engaged to audit a plan's financial statements would be required to notify the
plan administrator within five business days when the accountant has determined that there is
evidence that an irregularity may have occurred with respect to the plan If the accountant has not
receiwd a copy of the administrator's notification to the Secretary ..vithin the required five-businessday period. the accountant must furnish the Secretary a copy of its notification to the plan
administrator within the next business day follOWIng such failure to receive notice. No change in
auditing procedures would be required by \irtue of this notification standard.
l'nder the bill. an administrator who gets notice from an accountant would report the
irregularity to the Department of Labor \\ithout being required to verify the information provided by
the accountant Administrators who independently discover evidence of serious problems, like the
ones listed in the bill. can fairly be expected to recognize them in exercising their normal
responsibilities as ERISA fiduciaries

60

At the same time, this standard does not require a report to the Department whenever the
administrator or accountant receives any infonnation concerning a possible irregularity. For example.
if for some reason the plan administrator believes that the person providing the information is not
trustworthy, the administrator would not be expected to file a report.
If the accountant determines that there is evidence that the irregularity may have involved an
individual who is the plan administrator or a senior official of the plan administrator, the accountant
shall not notifY the plan administrator but shall instead notifY the Secretary within five business days
It should be noted that accountants already have a responsibility to inform clients, including plan
administrators, if they discover during the course of an audit that a crime or other irregularity may
have occurred as a result of generally accepted auditing standards.
The requirement to repon within five business days is realistic for reporting such serious
violations. It should be noted that the "Private Securities Ligation Reform Act of 1995" imposes
similar reponing requirements where an audit committee has not acted on an accountant's repon.
For purposes of the notification requirements in the bill, the term "irregularity" means a theft,
embezzlement, extortion, bribery, kickback, or criminal reponing or recordkeeping violation
described in 18 USC §§ 664,1951, 1954, and 1027 or any comparable provisions of State criminal
law involving the plan or a violation of the criminal provisions of section 411, 50 I, and 511 of Title
I of ERISA. Under the bill, however, the term "irregularity" does not include any acts involving less
than one thousand dollars unless the accountant nas reason to believe that the violations may bear on
the integrity of plan management. It is not intended that de mmimis violations unrelated to the
integrity of the fund or plan management be reported This exclusion ensures that only serious
irregularities are to be reponed
The bill provides a "safe harbor" to protect from liability accountants and plan administrators
who repon an irregularity, provided that the reports were made in good faith.
Reporting of Auditor Termination If the administrator terminates the accountant's
engagement for auditing services, the administrator must, within five business days of the termination,
notifY the Secretary of the termination and of the reasons for the termination. and furnish a copy of
the notification to the accountant If the accountant has not received a copy of the notification, or
disagrees with the reasons for the termination, the accountant shall notify the Secretary within ten
business days after the termination, giving the reasons for the termination.
Civil Penalty: This proposal also amends ERISA to provide that the Secretary may impose
a civil penalty of up to $100,000 against any plan administrator who violates any requirement to
report information required under this proposal The penalty also applies to any accountant who
knowingly and willfully violates any requirement to report information to the Secretary. The penalty
applies separately to each accountant and administrator in any violat;on of these requirements. For
example, ifboth were involved in one violation, both the accountant and the administrator would be
subject to a penalty of up to $100,000 each. Noncompliance with the new reporting requirements
could, in egregious situations, also subject plan administrators and accountants to criminal penalties
61

under ERISA Because a willful violation of the provisions may result in criminal prosecution, it is
expected that the Secretary of Labor will consult \. . ith the Depanment of Justice in drafting
regulations to the extent appropriate
It is expected however, that the civil penalty provisions will be utilized primarily to ensure

compliance with the new reponing rules, and that implementing regulations would provide for
abatement or waiver of penalties in appropriate situations
The amendments made by this section shall apply with respect to any irregularity or
termination of engagement only if the five-day period described in such amendments commences at
least 90 days after the date of enactment

62

ADDITIONAL REQUIREMENTS FOR QUALIFIED PUBLIC ACCOUNTANTS
(Section 2034)

Current law

ERISA requires that certain plans obtain audits of the financial statements included in their
annual reports, This audit is required to be conducted by a "qualified public accountant" as defined
by section 103(a)(3)(D), The definition incorporates public accountants certified or licensed by a
regulatory authority of a State or certified by the Secretary of Labor
Reasons for Change

Federal law enforcement agencies, including the Pension and Welfare Benefits Administration
and the Inspector General, as well as reviewer determinations made by the General Accounting Office
on this issue, have found that current ERISA audits do not consistently meet professional standards.
The definition of "qualified public accountant" contained in the statute qualifies accountants solely
on the basis of licensing, or certification Accountants in many states need not participate in
continuing quality control and education programs to assure the quality of their work remains
sufficient to be licensed or that they are qualified to conduct employee benefit plan audits,
There is no external quality control review requirement for qualified public accountants under
current law Except with respect to accountants who practice in States without licensing
requirements, ERISA does not grant the Secretar\' authority to impose additional qualifications or
requirements on accountants necessary to protect the integrity of plan assets
ProDosal

This proposal amends ERISA's definition of "qualified public accountant" to include
regulatory requirements and qualifications that the Secretary deems necessary to ensure the quality
of plan audits This proposal includes a specific requirement that, to be a qualified public accountant,
a person must have in operation an appropriate internal quality control system and have participated
in an external quality control review of the accountant's accounting and auditing practices relevant
to employee benefit plans within the three-year period p,-ior to engagement to conduct an audit. In
addition, the accountant must also have completed, within the two-year period immediately preceding
such engagement, at least 80 hours of continuing education or training which contributes to the
accountant's professional proficiency, at least 20 hours of which have been completed during the oneyear period immediately preceding the engagement and at least 16 hours of which relate to employee
benefit plan matters, or has completed such continuing education or training requirements as the
Secretary may prescribe in regulations The external Cluality control reviews must be performed in
accordance \vith the requirements of the review programs of recognized auditing standard-setting
bodies ., as determined by the Secretar\' in regulations
~

--

63

Any such review must include the review of an appropriate number of plan audits in relation
to the scale of the qualified publIc accountant's auditing practice, but in no event less than one, unless
the accountant has condu·:tcd no employee plan :H1dits
Except for the Secretary's authority to issue additional regulatory requirements, the provisions
of this section are effective with respect to plan years beginning on or after three years from the date
of enactment of this Act This creates a minimum three-~'ear transition period \'vhich provides an
opportunity for the completion of initial external quality control to be conducted by recognized
auditing standard-setting bodies. The Secretary's authority to issue regulations is effective upon
enactment, although the regulation \\:ould not be effective until the statutory provision became
effective

64

CLARIFICATION OF FIDUCIARY PENALTIES
(Sections 1502 and 2035)
A.

MODIFICATION OF PROHIBITION OF ASSIG~!\1ENT OR ALIENATION

Current Law
ERISA and the Internal Revenue Code generally prohibit the assignment and alienation of
pension benefits. As a result of dicta in the Supreme Court's opinion in Guildry v Sheet Metal
Workers National Pension Fund, 493 U.S. 365 (1990) that "courts should be loath to anllounce
equitable exceptions to legislative requirements or prohibitions that are unqualified by statutory text".
courts have been divided in their interpretation of this prohibition. Some courts have ruled that there
is no equitable exception in ERISA for offset of a pai-ticipant's pension benefit to make a plan whole
for losses resulting from a fiduciary breach. Other courts have ruled that nothing in ERISA's
prohibition of assigning or alienating pension benefits was intended to limit the remedies under
ERISA and that the prohibition should be properly read only to shield pal1icipants' interests in pension
plans from third-pal1Y creditors
Reason for Change
The Administration believes that. because of the conflicting judicial decisions, this is an area
that needs clarification
Proposal
This proposal clarifies that the provisions of ERISA and the Internal Revenue Code, which
prohibit the assignment and alienation of pension benefits. would not be violated when the
participant's accrued benefits in the plan are offset against the amount owed to the plan by the
participant as a result of a breach of fiduciary duty to the plan or criminality involving the plan An
offset will be treated as a taxable distribution to the pal1icipanr
This section applies only to amounts required to be paid under criminal judgments; civil
judgments for violations of the fiduciary responsibility provisions of ERISA; or settlement agreements
of such VIolations with the Secretary of Labor or the PBGC. The participant's spouse retains the
right to receive the minimum survivor annuity protection to which the spouse is entitled, unless the
spouse consents to the otTset or is required to pay an amount to the plan under the judgment or
settlement agreement
B.

CIVIL PENALTIES FOR BREACH OF FIDLTIARY RESPONSIBILITY

Current Law
Section 502(1) was added to ERISA by the Omnibus Budget Reconciliation Act of 1989. In
its current form. section 502(1) requires the Secretary of Labor to assess a civil penalty against (1)
65

a fiduciary who breaches a fiduciary responsibility under, or commits a violation of. pan 4 of Title
I ofERIS:\ or (2) any other person who knowingly panicipates in such a breach or violation The
penalty is equal to 20 percent of the "applicable recovery amount" that is paid pursuant to a
settlement agreement \\ith the Secretary or that a coun orders to be paid in a judicial proceeding
brought by the Secreta)).' to enforce ERISA's fiduciary responsibility provisions. The Secretary may
waive or reduce the penalty only if the Secretary finds in writing that either (I) the fiduciary or other
person acted reasonably and in good faith, or (2) it is reasonable to expect that the fiduciary or other
person cannot restore all the losses without severe financial hardship unless the waiver or reduction
is granted.
Reason for Change

Since its enactment, section 502(1) has not resulted in the collection of significant revenues
and has been extremely difficult to administer. The principal problems are due to the mandatory
nature of the penalty and the requirement that there be a coun order or a settlement agreement. The
waiver or reduction provision is very narrow, and affords the Secretary little opponunity to adjust
the penalty based on the panicular circumstances of a case Especially in the settlement context, the
penalty may have the effect of paying money to the gO\'ernment that would otherwise be available to
offset a plan's losses \10reover, the requirement of a settlement agreement produces difficult
questions concerning \vhether a panicular payment \\as recovered pursuant to a settlement
agreement. lfthe fiduciary or other person repays the losses, but insists that there was no settlement
agreement, the Secretary may have a difficult time establishing the existence of a settlement
agreement As a result. the penalty actually creates a disincentive for panies to settle with the
Secretary The eXisting provision penalizes the fiduciary \vho settles with the Depanment and
restores a plan's losses. but it imposes no penalty on a similarly situated person who makes no
payment or who makes a payment without entering into a settlement with the Depanment.
Proposal
The proposal remo\es the current disincentive to settlement and encourage panies to quickly
settle claims of \ iolations that the Depanment brings to their attention The proposal makes two
principal changes to the current statutory scheme of section 502(1) First, section 502(1) is amended
tv make the assessment of the penalty discretionary \vith the Secretary of Labor, rather than
mandatory ThiS change wIll allo\'" the Secretary to retTam from imposing the penalty in cenain cases
as well as to assess a penalty of less than 20 percent of the applicable recovery amount Second, it
eliminates the requirement of a settlement agreement The applicable recovery amount would be any
amount reco\ered by a pi::J.n or by a panicipant or beneficiary rr.ore than 30 days after the fiduciary's
or other person's receipt of a \v:itten notice of the \iolation from the Depanment of Labor. This 30d,H gr dce period. \, hich the Secretary can extend. would serve as a strong incentive for panies to
qUick" reach a settlement with the Secretary to a\oid imposition of the penalty Payments made after
the grace period. \\ hether they are made pursuant to a settlement agreement, or simply to discourage
the Dep:mment from bringing a legal action. \\ ould be subject \0 the penalty, as would amounts
recovered pursuant to a coun order.

66

The proposal also amends section 502(1) to clarifY that the term "applicable recovery amount"
includes payments by third parties that are made on behalf of the relevant fiduciary or other person
These changes allow the Department to assess the penalty against all fiduciaries and other persons
who are liable for the amount that is recovered, including those who did not actually pay. These
changes also prevent avoidance of the penalty by having an unrelated third party pay the recovery
amount.
The proposal adds a new provision which is designed to avoid a problem of applying the
penalty to certain violations that begin before the effective date of enactment but that continue
afterwards, such as violations involving leases, loans and service agreements. Under the current
version of section 502(1), there is a need to make complex determinations regarding :'ow much of the
applicable recovery amount for such continuing violations should be attributed to the post enactment
part of the violation, which is the only part of the violation with respect to which the penalty may be
assessed. After giving fiduciaries six months to undo continuing violations without application of the
amendments, provision treats all such violations as having begun after the effective date of the
amendments for purposes of determining the applicable recovery amount
Finally, another new provision is added to section 502(1) It expressly provides that, when
a penalty is contested. Administrative Law Judges \\ill have the authority to decide both the existence
of the underlying violation and the applicable recovery amount.
This section applies to any breach of fiduciary
Title I of ERISA occurring on or after enactment

67

respon~ibility

or other violation of part 4 of

TITLE

I II --

FEDER.-\L TH RI FT SA \'1 :"GS PLAl\'

1;\I:\IEDIATE PARTICIPATIO~ I~ THE THRIFT SA VINGS PLAN FOR FEDERAL
E:\IPLOYEES
(Section 300 I)
Current Law

The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal and
Postal employees It offers employees the same type of before-tax savings and tax-deferred
investment earnings that many private corporations offer their employees under section 401 (k) plans
The TSP contribution rules vary for employees depending on their coverage under the Federal
Employees' Retirement System (FERS) or the Civil Service Retirement System (CSRS). FERS
employees may contribute up to 10 percent of basic pay each pay period If they make employee
contributions, they also receive agency matching contnbutlons according to a statutory schedule
Whether they contribute or not. they receive agency automatic contributions equal to 1 percent of
their basic pay each pav period
CSRS employees may contribute up to 5 percent of basic pay each pay period but do not
receive any agency contributions
Eligible emplo~:ees can sign up to contribute to the TSP only during tv.'o semi-annual election
periods established by law The etTect of this and other statutory limitations is that certain waiting
periods apply before employees may make employee contributions or receive agency automatic (I
percent) and agency matching contributions
~e\\ly hired employees are first eligible to paT1icipate in the second election period after being
hired under FERS ThL:s. these employees must wait frolll six to twelve months, depending on their
date of hire. before they may contribute their own funds or recei\e agency contributions Rehired
FERS or CSRS employees who v.·ere previously eligible to paT1icipate in the TSP program become
eligible in the first election period fol\ov'lng their rehir..: and. thus. wait up to six months

Reasons for Change

Allo\\ing \\orkers to begin contnbutlng to the TSP immediately makes it more likely that
\\ orkers will get into or continue the habit of Sil\ ing for retirement through payroll deduction
\h,rkers \\ ho are not allo\\ed to contnbute to the TSP Immediately lose valuable tax-savings for the
t> to 12 months they are not allowed to contribute -- amounts that cannot be made up later by larger
contributions

68

Proposal

All waiting periods for employee contributions to the TSP would be eliminated for new hires
and rehires. Workers who are hired or rehired \vould be eligible to contribute immediately. Agency
matching and automatic (I percent) contributions would remain subject to the waiting periods in
current law.

69

SURVIVOR PROTECTION FOR SURVIVI~G A~D FOR~IER SPOUSES OF
FEDERAL E:\'PLOYEES
(Section 300:::!)

FOR~IER

Current Law
Surviving spouses of Federal employees and retirees are generally entitled to receive a
survivor annuity, and former spouses may also be eligible to receive survivor benefits, if the divorce
court determines they should. However, under the Civil Service Retirement System (CSRS -applicable to most employees hired before 1983), when an employee leaves Federal government
employment before being eligible for an immediate annuity, and then dies before becoming eligible
for a deferred annuity (at age 62). no survivor annuity can be paid (except to a survivor ofa former
Member of Congress) This is unlike the Federal Employees' Retirement System (FERS -- applicable
to most employees hired since 1983). where a surviving spouse or former spouse of an employee who
left Federal government employment with potential eligibility for a deferred annuity can receive a
survivor.benefit even if the former employee dies before reaching eligibility for the deferred annuity
Reasons for Change
The lack of survivor protection for surviving spouses and for.""'''':" spouses of former employees
who die while eligible for a deferred annuity under CSRS is a significant gap in income protection for
a small but important group The a\·ailability of such benefits under FERS (and for spouses of
\lembers of Congress under CSRS) demonstrates the feasibility of providing such income protection
Proposal

The proposaL like FERS, would provide a benefit for surviving spouses and former spouses
of a former employee who died \vhile eligible for 3 deferred annuity under CSRS. The surviving
spouses i and former spouses, if 3\varded bv the di\orce decree) would be able to elect to receive
either (1) 55 p~rcent of the former employee's deferred annuity. commencing when the employee's
cd'erred annuity \"ould ha\e commenced, had the employee hed, (2) the actuarial equivalent of (I),
but commencing at the time of the former emplo\ee's death, or (3) a refund of the former employee's
retirement contributions

70

PA Yl\1ENT OF LUMP SUl\I CREDIT FOR FORMER SPOUSES OF FEDERAL
El\1PLOYEES
(Section 3003)
Current Law
Under current law, when an employee, former employee, or annuitant dies, any contribution
to his or her credit in the Civil Service Retirement and Disability Fund must be paid to whomever the
employee or annuitant designated to receive that contribution. If no designation was made, there is
a statutory order of precedence beginning with the surviving spouse. There is no provision in law that
permits a court order to interfere with these arrangements. If, for instance, an employee agreed in
a divorce settlement to designate a fonner spouse to receive these funds, and later designated another
individual, current law would require payment of the funds to the other individual.

Reasons for Change
The contributions on deposit in the Civil Service Retirement and Disability Fund can
constitute a significant ponion of the marital property, and there is no reason these funds should be
beyond the reach of a divorce proceeding or, worse, be subject to being redirected in defiance of a
judgment of a divorce coun

Proposal
This proposal would establish that the payment of contributions to the employee's credit in
the Retirement Fund would be subject to the judgment of a divorce court, in the same way the
employee's annuity and survivor benefits are Thus, a proper court order on file with the Office of
Personnel Management would supersede any designation of beneficiary by the employee or annuitant

71

TITLE I\r -- CONFORi\lI~G RAILROAD RETIRE:\IENT BENEFITS \VITH
SOCIAL SECl'RITY
CO~FOR'II~G

RA.ILROAD RETIRE"E:\T BE:\EFITS \\,ITH SOCIAL SECURITY
(Sections -lOO I - -l006)

Current Law

Annuities under the Railroad Retirement Act include a tier 1 benefit. which is generally equal
to the benefit that would have been payable under the Social Security Act if all of the employee's
ser\;ce had been covered under the Social Securitv Act The cost of these social security equivalent
benefits is borne by the financial interchange benveen the railroad retirement and social security
systems Under the financial interchange. the social security trust funds receive. in effect, the tax
revenues from railroad employment equal to the amount that would have been collected under the
Federal Insurance Contributions Act. and the railroad retirement trust funds receive from the social
security trust funds an amount equal to the benefits that \-vould have been paid under the Social
Security Act had the railroad employment been covered under that Act
Although the railroad retirement trust funds recei\e hmds based on the amount of benefits that
\-vould have been paid under the Social Security Act if railroad employment had been covered by that
Act. the Railroad Retirement Act does not provide benetits for certain classes of persons who would
ha\e recei\ ed benefits under the Social Securitv Act Accordingly. the funds transferred from the
social security trust funds exceed the amount of SOCIal security' equivalent benefits actually paid under
the Railroad Retirement .-\ct The largest group of persons who \>.,ould receive benefits under the
Soci}1 Security Act but \I.ho do not directly receive benefits under the Railroad Retirement Act are
children of living employee benefiCIaries Another sizable group of persons who do not receive
benefits under the Railroad Retirement Act includes sUr\'ivors where a residual lump sum benefit (i e.
a lump sum paid in lieu of future benefits under the Railroad Retirement Act) has been paid.
Re'lsons for Change

Cnder current law. the balance in the Social Security Equivalent Account, the account from
which railroad retirement social secumy equivalent benefits are paid. is increasing and the "surplus"
in that account \\ill not be used to pay SOCIal secunty equi\ alent benefits These funds should be used
to pay social security equivalent benefits in the same amounts and to the same persons as would have
been the case under the SOCIal Security Act
Proposal

The ditTerence In entitlement to social secumy equivalent benefits under the Railroad
Rellrement .-\ct and to benefIts under the Social Security Act would be eliminated Benefits would
be pro\lded to children of II\, mg employee annuitants In addition, the prohibition against payment
of survivor benefits \\ here a residual lump sum benefit has been elected and paid would be removed
\\ith respect to social security equi\alent benefits The legislation \\ould also conform the payment
of divorced spouse benefits under the RaIlroad Retirement Act to the Social Security Act and would

provide a social security equivalent benefit to a spouse of a disabled railroad employee prior to the
employee's attainment of age 62 or 60 with 30 years of service.
The proposal would be effective January I. 1997.

73

DEPARTMENT

OF

TREASURY
1789

THE

TREASURY

NEWS

OrnCE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
May 23, 1996

Contact: Michelle Smith
(202) 622-2960

STATEMENT BY TREASURY SECRETARY ROBERT E. RUBIN
"I welcome the agreement reached today in Paris to expand the resources available to the
IMF for dealing with financial crises. This is a sound and prudent agreement. It will bring
in new countries with the financial capacity to support the monetary system. It will help
strengthen the multilateral mechanisms in place to protect US interests in future financial
emergencies. The arrangements are expected to be used only in exceptional circumstances
and to support lending by the IMF only when borrowers are willing to take strong corrective
policy actions."

RR-1094

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

May 23,1996

PRESS RELEASE

Mr. Draghi, Director-General of the Italian Treasury and Chairman of the G-I0

Deputies, announced today on behalf of the G-IO countries and a number of other countries
with the capacity to support the international monetary system that agreement has been
reached both on the broad principles and on the key substantive points for new arrangements
to increase the resources available to the IMF to deal with international financial emergencies.
The new arrangements, which will double the resources now available under the GAB, will be
the first and principal recourse in the event of a need to provide supplementary resources to
the IMF. The GAB will continue to exist, but the combined amount drawn under the two
arrangements will at no time exceed SDR 34 billion. It was agreed that individual country
commitments would be based on relative economic strength as measured by actual IMF quotas
as a predominant criterion. Countries will participate on an equal footing with rights and
responsibilities commensurate with their commitments. Mr. Draghi also noted that a number
of details will need to be refined in coming months, with the aim of reaching final agreement
by the time of the Fall Annual Meetings of the Bretton Woods Institutions. He also indicated
that the new arrangements would have to be approved by the IMF Executive Board as well as
by national authorities.
-30-

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt - Washington. DC 20239

FOR IMMEDIATE RELEASE
May 23, 1996

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
Tenders for $19,301 million of 52-week bills to be issued
May 30, 1996 and to mature May 29, 1997 were
accepted today (CUSIP: 9127942Q6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.30%
5.32%
5.32%

Investment
Rate
5.60%
5.62%
5.62%

Price
94.641
94.621
94.621

Tenders at the high discount rate were allotted 66%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS

Received
$55,637,829

Accepted
$19,301,289

$49,187,375
1. 020« 454
$50,207,829

$12,850,835
1. 020,454
$13,871,289

5,150,000

5,150,000

280,000
$55,637,829

280.,000
$19,301,289

Type

Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.31 -- 94.631

RR-I095

DEPARTMENT

TREASURY

OF

THE

TREASURY

NEWS

omCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C •• 20220. (202) 622-2960

INTERNATIONAL FINANCIAL INSTITUTIONS AND THE UNITED STATES
ECONOMIC STRATEGY TOWARDS LOW INCOME COUNTRIES
Remarks by
Lawrence H. Summers
Deputy Secretary of the Treasury
Professional Banker's Association
Washington, DC
May 24,1996
Good afternoon. It is a pleasure to be here among a group which has played such a critical
role in fostering global development. I am happy to see so many friends and honored to be
in the presence of so much collective knowledge about international development.
Today I would like to talk about a subject of great concern: the challenge posed by low
income countries and the role of the United States and the International Financial Institutions
in meeting that challenge.
Let me be clear at the outset: President Clinton and his entire Administration recognize that
this country has everything to gain, and little to lose, from continuing its strategy of
international leadership. That is why, for example, the US made the review of the IFIs a
central priority at the meeting of the G-7 in Halifax. The active support of this
Administration for the international financial institutions is a crucial component of practicing
that leadership.
As I have often said, the international fmancial institutions are to the post-Cold War world
what world security organizations were to the pre-Cold War world -- institutions in which
nations come together not just to talk, but to act on their central priorities.
President Clinton made very clear the strength of his commitment to your institutions when
he said in his speech at last Fall's annual meetings "that the United States is committed to
helping the poorest nations of the World help themselves through our partnership in IDA. It
serves our fundamental values, as well as our economic interests, giving people a chance to
succeed. It's a top priority because it's the right thing to do".

RR-I096

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

2
Let me be very frank: upholding the tradition of American leadership in finance, in trade, in
development in coming years is not going to be easy. Those of us in the broad center -Democrats and Republicans alike -- have an obligation to educate an increasingly restive
public about the stake that we all have in this leadership. Increasingly, our ability to lead
internationally will depend on our ability to convince, not just traditional elites, but also the
broad public, of the benefits that it brings. Nobody "focus grouped" the Marshall Plan, but
the world of today is different and the approach that we take to explain and defend U.S.
leadership will have to be different as well.
It is vital that we spread the message of our stake in the success of nations overseas.
•

When the history of our era is written, I am convinced that the end of the Cold War
will be the second most important event recorded. The most important event will be
that 3 billion people boarded the escalator to modernity, a change comparable to the
Renaissance or the Industrial Revolution.

•

Already, 40% of America's trade is with developing countries which sustain millions
of U.S. jobs.

•

Yet while we stand to gain from prosperity abroad, we also stand to lose from
problems that we fail to address.

•

Poverty contributes to unrest and warfare which can easily spread across borders. It is
no coincidence that Haiti, before its recent problems was the poorest country in the
Western Hemisphere.

•

Environmental problems do not halt at the border. China, for example, has become
the largest global producer of gases.

•

Diseases that break out in one place soon spread to others. One in 150 people will
have AIDS in the year 2000, including 5 million children.

•

There is no hiding from what happens overseas.

From this perspective, I am deeply troubled by the pattern of legislative action on American
contributions to the IFIs:
•

It is wrong that the richest country in the world cannot meet its obligations and that

arrears to the IFIs now total $1.5 billion.
•

It is wrong that the IDA-lO agreement, entered into by President Bush with strong
bipartisan support, cannot receive full funding today.

3
I can assure you that my colleagues and I are well aware of the demoralizing effect that the
inadequate financial support of the world's richest country has had on the international
fmancial institutions. We are determined, now and in the future, to secure a better outcome.
One way to improve this outcome is to successfully communicate the links between support
for these institutions relates and our national security. Our contributions to the IFIs, as well
as other accounts in our international affairs budget, should be viewed as preventive security
measures. Ultimately, less blood will be shed in a stable world.
With the end of the Cold War, the United States has seen its military spending fall by about
$120 billion. If we took only one percent of that amount, we could pay our arrearage.
President Bush was right about many things, but he was wrong when he said we have more
will than wallet. In fact, we have more wallet than will.
It should be very clear by now to all my foreign friends in this room how disturbed I am by
the inadequacy of the American contribution in recent years. But I would say to my friends,
as serious as this problem is, it must be seen in a broad perspective.
The United States has nothing to apologize for in terms of our substantive contributions to a
more peaceful and prosperous world. Our contribution to the preservation of global security,
to the maintenance of open markets for the good of all countries, and to the creation of
international institutions, are unmatched in scale. From the Marshall Plan, to last year's
Mexico crisis and through a host of other events in between, the US has done its part. I
hope and trust that as we work through this difficult period we will not see the unravelling of
traditional international cooperation. Efforts to exclude the United States from procurement
opportunities, for example, only compound the already tough battle that we in this
Administration are fighting at home.
Let me tum now to the question posed in my introduction -- what should be the strategy of
the international fmancial institutions towards low-income countries.
Private capital is doing more and more of what needs to be done for the upper tier of
developing countries. Who would have thought a year ago when the Mexican crisis was so
salient in people's minds that total flows of capital to developing countries would be what
they were last year, a healthy $167 billion. But many countries still lack access to capital.
Only twelve nations absorb 80 percent of the private capital flows to all the developing
countries.
To help those countries most in need of assistance, there are three aspects of multilateral
development bank policy towards low-income countries that I would like to highlight today:
•

First, we must use scarce resources as effectively as possible;

4
•

Second, we must deal realistically with past failures and excessive debt; and

•

Third we must acknowledge the importance of reconstruction in development finance.

Using Scarce Resources Effectively
First, let me be very honest. Institutions must do everything they can to allocate the
resources they possess to run their development efforts more effectively. That means hiring
more staff and investing more money when there is a direct payoff. But it also means
practicing the kind of austerity backed with targets that many of those in this room preach so
well.
•
Frankly, I am troubled by the frequency with which I see old friends travelling well in
front of me when I fly coach.
Using resources effectively also means maximizing the financial efficiency of World Bank
projects and passing the benefits on to borrowers, especially to concessional borrowers.
Despite some important gains in development over the last half century, there are some
troubling facts that make it hard not to question this record. Consider, for example, that the
average African has received four times as much foreign aid as the average Asian. Yet:
•

Two decades ago, Nigeria was richer and less dependent on commodity exports than
Indonesia; Ghana was richer and had less debt than Thailand.

•

Today, there are fewer functioning roads and railways in Sub-Saharan Africa today
than in 1960.

•

Today, in parts of Africa, the odds of a child dying before the age of five and
entering secondary school are about equal.

Startling facts of this kind have generated some valuable soul-searching about the world's
development institutions and, I think, some extremely important lessons for going forward.
Thanks to the efforts of a task force that spent a year considering how the IFls can perform
better, we have several strong recommendations that each institution should take to heart.
These include:
•

maintaining a focus on poverty alleviation, which means looking at the composition
of public expenditure to ensure that a recipient country is willing to put a premium on
books over bombs. We need to do more, more quickly for countries willing to help
themselves and less, less often for those who are not.

•

improving collaboration among the IFls, an area where I believe President
Wolfensohn and Michel Camdessus have already demonstrated a strong commitment

•

measuring reSUlts, which means developing clear, specific and monitorable

5
performance indicators; and

•

supporting the creation of effective governments and a strong civil society, to curb
corruption and promote a participatory approach to development.

While the importance of getting countries to adopt the right policies is key, it is not enough
for us to say that failure has resulted because our policies have not been tried. And it is not
enough to keep preaching these policies over and over. We need to focus on making
adjustment programs as effective as possible in order to make them politically acceptable.
That means focusing on the gains, rather than the pain, they are going to produce. And, to
ensure these gains are realized, it is crucial to understand that austerity is no substitute for
adjustment: the quality of deficit reduction is just as important as the quantity. Similarly, it is
not enough to aim for an economic environment that is enabling -- it must be inviting as well.
Loans That Have Gone Bad
Concessional lending is a powerful development tool. But it alone is not sufficient. And
while the right policies are vital, they alone are not,enough. We must also help countries
deal with past loans that have gone bad and are beyond the capacity of governments to
service. One of the best ways we can do this is through a coordinated strategy of debt
reduction.
Consider the case of Uganda.
o

One of the world's poorest, most highly indebted countries, Uganda has faithfully
implemented a variety of reforms and has posted strong economic performance in
recent years.

o

Yet, even after receiving Naples Terms and posting a good track record, Uganda's
debt burden remains unsustainable -- due in part to its heavy debt to multilateral
creditors.

For countries like Uganda, action by the IFls will be an integral part of achieving debt
sustainability and sustained economic growth. At the Halifax Summit in July 1995, the G-7
heads of government encouraged the IMF and the World Bank to develop a comprehensive
approach to address the multilateral debt problems of the poorest countries.
For too long, both we and the multilateral institutions have focused on near term financing of
balance of payments needs, and have ignored the longer-term impact on future debt burdens.
Without a comprehensive effort to reduce debt to sustainable levels, the debt problems of the
poorest countries will continue to monopolize both monetary and human resources, to
undermine initiative, and to discourage investors.

6
During the Bank and Fund Executive Board discussions of this issue, the U.S. proposed some
key principles to help guide work on developing a specific comprehensive approach:
•
First, our objective should be to attain -- and maintain -- debt sustainability for these
countries through a combination of debt relief and management of new debt.
•
Second, eligible countries should receive debt reduction only in conjunction with a
strong, multi-year program of reform.
•
Third, there must be clarity at the outset about the extent of debt relief and the time
period for its provision.
•
Fourth, multilateral action should complement and be coordinated with that of Paris Club
creditors. For those countries where Naples Terms is insufficient to assure debt
sustainability, we must craft a course that coordinates multilateral and Paris Club action.
•
And, finally, multilateral institutions should depend primarily on their own resources for
the debt relief they provide. We cannot expect bilateral contributions to be a significant
source of funding for this purpose.
The Bank and Fund have proposed a framework generally in keeping with these principles,
and I want to salute President Wolfensohn and Michel Camdessus for the leadership they
have shown in moving this forward. We endorse the World Bank's trust fund proposal and
eagerly await its elaboration, as well as selective use of IDA grants where appropriate.
The IMF must also play an active role through strong conditionality, increased loans where
appropriate, and deeper concessionality on ESAF loans for these countries. Proposals to
invest a portion of the IMF's gold and to direct the income earned to the ESAF merit our
close consideration.
We all look forward to more detailed proposals from the Bank and the Fund on the steps that
they are considering taking, so that we can advance this effort further at the Lyon Summit.
A New Focus on Reconstruction
In directing resources selectively, we can not neglect one special category of countries: those
in dire need of help because of war, famine, or some special circumstances.
Let's remember what mRD stands for: the International Bank for Reconstruction and
Development. And reconstruction, which has not been central since the Bank's early days,
must again be a focus. There are three places in the world that desperately need this kind of
support:
•

in Bosnia, where we are working with our post-war allies and the IFIs to develop a
comprehensive package of international fmancial support including debt reduction and
large scale technical assistance;

•

in Haiti where we are working to develop an economic reform program which can be
supported by the IFIs;

7
•

in the Middle East where we are working with other donors, Israel, the Palestinians,
and the IFIs to advance the peace process by promoting economic stability.

We must appreciate that reconstruction situations are different, and pose special challenges.
In one respect, they may be easier if it is a matter of restoring a country to previously
attained standards of living. However, circumstances where military conflict is still a threat,
institutional capacity is virtually non-existent, and trust, a key fabric of economic life, is
absent, present special challenges:
•
•
•

we must be able to deal with poor absorption capacity;
we must be able to produce tangible results quickly;
our governments and the IFIs must work closely together and be willing to cut
through red tape to expedite delivery.

Let me conclude where I began. The world's economy is getting smaller. East and West
have come together. South and North, though still separated by a gulf in income are closer
together than ever before. Our stake in the progress of the poorest countries is greater than
ever.
The International Financial Institutions are our most potent and efficient tool for influencing
what will happen. They demand, deserve, and I believe will ultimately receive, our
continued and resolute support.

DEPARTMENT

OF

THE

TREASURY

NEWS

TREASURY

OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960

FOR IMMEDIATE RELEASE
May 24, 1996

Contact: Michelle Smith
(202) 622-2960

STATEMENT BY TREASURY SECRETARY ROBERT E. RUBIN
The House Appropriations Subcommittee on Foreign Operations on Wednesday marked up
the Administration's FY 1997 International Affairs budget request, including U. S.
contributions to the World Bank and other International Financial Institutions (lFls) and debt
programs. I am deeply concerned regarding the subcommittee mark which would impose
reductions of 46 percent in these programs from the President's request. These reductions, if
ultimately enacted, would threaten substantial American economic and security interests in the
post-Cold War world.
The IPIs playa crucial role in fostering political stability in key regions of the world, and
with it, our own national security. They expand the opportunities for trade and investment
that anchor our prosperity as well as advance our most important humanitarian goals, by
encouraging the economic and social progress of millions of the world's citizens.
Last year Congress reduced U.S. funding to the IPIs by 38 percent from FY95 levels. The
House Subcommittee now proposes a further cut of 31 percent cut from FY96 numbers.
The Administration is fully committed to strong U.S. participation in and leadership of the
international financial system. We will work closely with the Congress in the months ahead
to maintain support for these key institutions, and to protect important long-term national
interests.
-30-

RR-1097
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DEPARTMENT

OF

THE

TREASURY

NEWS

TREASURY

omCE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
May 28, 1996

Contact:

Jon Murchinson
(202) 622-2960

UPDATED SCHEDULE FOR MEETINGS ON INFLATION-PROTECTION SECURITIES

The following is an updated schedule for the Treasury Department's information
meetings and press roundtables on plans to issue inflation-protection securities. Press wishing
to attend must call the appropriate contact listed for each city. All times are local and subject
to change.

DATE AND TIME

EVENT AND LOCATION

PRESS CONTACT

May 29
10 a.m.

Investor Meeting
Treasury Department
1500 Pennsylvania Avenue, NW
Washington, D.C.

Jon Murchinson
(202) 622-2960

May 30
2 p.m.

Investor Meeting
Federal Reserve Bank
33 Liberty Street
New York, N. Y.

Bart Sotnick
(212) 720-6143

June 4
10 a.m.

Investor Meeting
Federal Reserve Bank
600 Atlantic Avenue
Boston, Massachusetts

Thomas L. Lavelle
(617) 973-3647

June 5
10 a.m.

Investor Meeting
Federal Reserve Bank
230 South LaSalle Street
Chicago, Illinois

Suzanne Heffner
(312) 322-5108

-MORERR-1098

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

DA TE AND TIME

EVENT AND LOCATION

PRESS CONTACT

June 5
2:30 p.m.

Press Roundtable
U.S. Embassy
24 Grosvenor Square
London, WIA

Dennis Wolf
(Oil) 441714995261

June 6
2:30 p.m.

Investor Meeting
U.S. Embassy
24 Grosvenor Square
London, WIA

Dennis Wolf
(Oil) 441714995261

June 6
9:30 a.m.

Investor Meeting
Federal Reserve Bank
101 Market Street
San Francisco, California

Sandra Conlan
(415) 974-3231

June 10
Time TBD

Press Roundtable
U.S. Embassy
10-5 Akasaka I-chome
Minato-ku, Tokyo 107

Emi Yamauchi
(0 I I) 81332245271

Investors wishing to attend should call the Bureau of Public Debt, (202) 219-3350, or
the U.S. Treasury Attache in London, (011) 441714088069, or Tokyo, (Oil) 81332245486.
To receive the Advance Notice of Proposed Rulemaking from Treasury's automated fax
system call (202) 622-2040 and request document 1080.

-30-

DEPARTlVIENT

OF

THE

TREASURY

NEWS

TREASURY

omCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

FOR IMMEDIATE RELEASE
May 28,1996

Contact: Darren McKinney
(202) 622-2960

POLICY ADDS FLEXIBILITY FOR STATE, LOCAL LAW ENFORCEMENT
Treasury Secretary Robert Rubin Tuesday ordered a change in policy that will
help state and local law enforcement pay for additional officers.
Rubin changed the equitable sharing policy that determines how local, state and
federal law enforcement agencies may utilize their share of property and assets acquired
by criminals through illegal activity.
Now, state and local authorities will have the option of using their shares to pay
for officer overtime as well as the salaries of officers hired to replace other officers
assigned to federal task forces, some temporary officers, and special duty officers like
those assigned to the Drug Awareness and Resistance Education program (DARE). The
new policy also will allow expenditures for the Community Oriented Policing Services
(COPS) program established by the 1994 Crime Bill and designed to improve police and
community relations by assigning more officers to neighborhood foot patrols.
"This is common sense government that further improves cooperation between
local, state and federal authorities," said Rubin. "State and local law enforcement must
have as much flexibility as possible to do the difficult and important work they do within
their jurisdictions."
Rubin said this change came about in part because of the interest and support of
Senators Dianne Feinstein and Barbara Boxer, Congressman Howard Berman,
Congresswoman Jane Harman and Los Angeles Mayor Richard Riordan.
The revised policy will take effect immediately.
-30-

RR-1099

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 28, 1996

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $14,104 million of 13-week bills to be issued
May 30, 1996 and to mature August 29, 1996 were
accepted today (CUSIP: 9127943E2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.02%'
5.03%'
5.03%'

Investment
Rate
5.16%'
5. Hi%'
5.16%'

Price
98.731
98.729
98.729

$2,510,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 40%'.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
4.96 -- 98.746

RR-UOO

Received
$60,395,729

Accepted
$14,104,092

$55,233,855
1. 341. 694
$56,575,549

$8,942,218
1. 341. 694
$10,283,912

3,635,180

3,635,180

185,000

185.000
$14,104,092

5.00 -- 98.736

UBLIC DEBT NEWS
Department of the Treasury - Bureau of the Public Debt - Washington, DC 20239

FOR IMMEDIATE RELEASE
May 28, 1996

CONTACT: Office of Financir.
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $14,070 million of 26-week bills to be issued
May 30, 1996 and to mature November 29, 1996 were
accepted today (CUSIP: 9127943Q5).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.11%5.14905.14%-

Investment
Rate
5.32%5.35%5.35%-

Price
97.402
97.387
97.387

Tenders at the high discount rate were allotted 18%-.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.12 - 97.397

RR-IIOI

Received
$54,673,288

Accepted
$14,069,991

$46,841,990
1,113,698
$47,955,688

$6,238,693
1,113,698
$7,352,391

3,700,000

3,700,000

3,017,600
$54,673,288

3,017,600
$14,069,991

5.13 - 97.392

DEPARTMENT

OF

THE

TREASURY

NEWS

TREASURY

OFFICE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIllNGTON,, D.C. - 20220 - (202) 622-2960

Embargoed
May 29,

u~t~l

CONTACT:

2:30 P.M.

1996

Office of Finar.cir.g
202/219-3350

TREASURY'S WEEKLY BILL OFFERING
The T=easury will auc~ion two series of Treasu=y bills
totaling approxima~ely $29,000 million, c:o be issued ';une 6, 1995.
This offering will result in a paydow~ for tr.e Treasu=y of abc~t
$300 millicn, as ~he maturing weekly bills are outstancing in t~e
amount of S29,296 ~illion.
rede=al Rese=7e Sanks

hol~

~f :~e macu=i~g
~e =efun~ed w~c:hin t~e
discc~~t ra:: of a=ce~~=~

S5,803 million

bills for the~r cwn accounts, which may
offering amount at t~e weig~ted average
compe~itive tenders.

Feceral Reserle Banks hold $4,171 ~illicn as a~ents fer
foreign anc internaticnal mon~ta~! aut~orities, ~tic~ may be
refunced w~:hin the cffering amount at :l1e ·. . eis-::tec. a"leraqe
discount rate of accepted com~etitive tenders. A~di:ior.al amou~:s
may be issued fer such accounts if the aggregate a~cu~~ of r.2W
bids exceeds the aggrega:e amcu~t of maturing c:ll~.
Tenders for t~e bills will be 're=eived at rcderal
Reser've Banks and Sranc:"es and at the Bureau 0: the P,_:':::lic
Debt, Was hi:-.g t'on , D. C. This 0 f Eeri:lg of Treas~~ se=u::-ities
is governed by the te~s and ccndi~ions set for~h in the Unifo~
Offering ei~c~lar (31 eFR Part 356) for t:"e sale and issue by the
Treasury to t~e ~ublic of marketable Treasur/ bills, notes, and
bonds.
Cetails abc~t e~ch ~f tr.e ne'N
attached o::eri~g ~igh:~gh~~.

.

a ,... ...-

oCo
Attachment

RR-1102

Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

HIGHLIGHTS OF TREASURY OFFERIUGS OF WEEKLY BILLS
TO BE ISSUED JUNE 6, 1996
t1a y

$14,500 million
Offering Amount .
Description of Offeringl
91-day bill
Tel"l1\ and type of security
912794 3F 9
ClISIP number
June 3, 1996
Auction date
June 6, 1996
JGsue date
September 5, 1996
to1atul-ity dat~
March 7, 1996
ori~indl immc date S15,392 million
currently outstanding
$10,000
Minimum bid amoul1t
$ 1,000
~1111tiples The followir.q rules apply to all securities mentioned above:
Bubmission of Bids;
Noncompetit.ive bids
competitive bids

Max imllID Recogn i zerl Bid

at a Single Yield
M3ximllm Awal-d

Receipt of Tenders:
Noncompetitive tenders
Competitive tenders
Payment Terms

28

I,

19 96

$14,500 million
182-day bill
912794 3R 3

June 3, 1996'
June 6, 1996
December 5, 1996
June 6, 1996
$10,000
$ 1,000

Accept.ed in full up to $1,000,000 at the average
discount rate of accepted competitive bids
(1) Must be expressed as a discount rate with
two decimals, e.g., 7.10\.
(2) Net long position for each bidder must be
reported when t.he sum of the total bid
amount, at all discount rates, and the net
long position is $2 billion or greater.
(3) Net long position must be determined as of
one half-hour prior to the closing time for
receipt of competitive tenders.
35\ of puhlic offering

35% of public offering
Prior to 12:00 noon Eastern Daylight Saving time
on auction day
.
Prior to 1:00 p.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by char~e to a funds
account at a Pederal Reserve Bank on issue date

DEPARTMENT

OF

THE

TREASURY

NEWS

TREASURY

omCE OF PUBliC AFFAIRS • 1500 PEN~YLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220 • (202) 622-2960

Embargoed Until 2:30 P.M.
May 28,

CONTACT:

1996

TREASURY TO AUCTION CASH

Of:ice of Financing
202/219-33S0

MANAGEME~~

e:LLS

The T=easury will auc:ion approximacely S7,000 million of
10-day and S23,000 million. of lS-day 7reasur! cash management
bills to be issued June 3,· 1396. The lO-da" and l~-dav bill
auctions wil~ be held on Thursday, May 3D, i99€, wi:~ .
noncompetitive and competitive closing ci~es of 11:00 a.m. and
11:30 a.m. ~asc~r~ Daylight Saving cime, :espec:ively.
Compeci~ive and nor-compecitive tenders will be received at
all Federal Rese~~e Banks and Brar.ch~s. Tende=s wil: no; be
accepted fc= bills to be maincained on the book-ent:y =ecords of
the Oepar:~ent of the Treasury (TREASURY OI~£CT). Tenders will
~ be rece~ved a~ :he Bureau of the Public Debt, wash~ngton,
D.C.

Additional amounts of the bills may be issued tQ Federal
Reserve Bpnks as agents for foreign and ince:national mcnetar/
authorities a: the average pric~ of accepted co~petitive tenders.
This o:fering of Treasury securities is governed by the
terms and cor.ditions se~ forth ~4 the Uniform Offering Circular
(31 CFR Pa~~ 356) for the sale and issue by the Treasury to the
public cf carketable Treasury bills, notes, and bonds.
Decails about the new securities are given in the a-::ached
.
h'l.~.;._!~
1. l '
1.
o ff e~l.ng
... ts .
000

Attach:nent

RR-II03

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

HIgHLIGHTS OF TREASURY OFFERINGS OF CASH MANAGEMENT BILLS
TO BE ISSUED JUNB 3, 1996

May 28,
Offering

~ount

. . . .

Description of Offering:
. Term and type of security
CUSIP number
Auction date
Issue date
Naturity date
Original issue date
Currently outstanding
Minimum bid amount
Multiples . . . . . .
Mini~um to hold amount
t'1u 1 t iples to hold . . .

$7,000 million

$23,000 million

10-day bill
912794 Z3 1
May 30, 1996
June J, 1996
June 13, 1996
December 14, 1995
$26,861 millior'
$10,000
$1,000
$10,000
$1,000

15-day bill

The following rules apply tQ all aecuritiea mentioned
suhmission of Bids:
Noncompetitive bids

6V 1

t-1a y ) 0 , 1996
June 3, 1996
June 18, 1996
June 3,1996
$10,000
$1,000
$10,000
$1,000
abov~:

Accepted in full up to $1,000,000 at the average discoullt
rate of accepted competitive bids

Maximum Recognized Bid
at a Single Yjeld

35\ of public offering

~imum Awar~

35\ of public offering

.

. . .

Receipt of Tenders:
Noncompetitive tenders
Competitiye tenders .
Payment TermS

91279'1

(1) Must be expressed as a discount rate with two decimals,
e.g., 7.10\.
(2) Net long position for each bidder must be reported when
the sum of the total bid amount, at all discount rates,
and the net long position is $2 billion or greater.
( 3 ) Net long position must be determined as of one halfhour prior to the closing time for receipt of
competitive tenders.

Competitive bids

.

1996

Prior to 11:00 a.m. Eastern Daylight Saving time
on auction day
Prior to 11:30 a.m. Eastern Daylight Saving time
on auction day
Full payment with tender or by charge to a funds
account at a Federal Reserve Bank on issue date

UBLIC DEBT NEWS
Dcpartmcnl of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 29, 1996
RESUL~S

CONTACT: Office of Financing
202-219-3350

OF TREASURY'S AUCTION OF 2-YEAR NOTES

Tenders for $18,751 million of 2-year notes, Series AF-1998,
to be issued May 31, 1996 and to mature May 31, 1998
were accepted today (CUSIP: 912827X98).
The interest rate on the notes will be 6%. All
competitive tenders at yields lower than 6.053% were accepted in
full.
Tenders at 6.053%" were allotted 74%". All noncompetitive and
successful competitive bidders were allotted securities at the yield
of 6.053%, with an equivalent price of 99.902. The median yield
was 6.035%"; that is, so%" of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 5.990%;
that is, 5% of the amount of accepted competitive bids were
tendered at or below that yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS

Received
$44,267,423

Accepted
$18,750,923

The $18,751 million of accepted tenders includes $1,546
million of noncompetitive tenders and $17,·205 million of
competitive tenders from the public.
In addition, $1,720 million of
high yield to Federal Reserve Banks
international monetary authorities.
of tenders was also accepted at the
Reserve Banks for their own account
securities.

RR-l104

tenders was awarded at the
as agents for foreign and
An additional $596 million
high yield from Federal
in exchange for maturing

DEPARTMENT

OF

THE

TREASURY

NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622·2960

The Benefits of Inflation-Protection Securities
Remarks by
La\Wence H. Summers
Deputy Secretary of the Treasury
Federal Reserve Bank of New York
New York, NY
Ivfay 30, 1996

I am happy to be here today to talk about the Treasury's plans to issue inflation-protection
securities. The introduction of inflation protection securities represents the most significant
innovation in US debt management policy in several decades. So far we have been very pleased
with the response since Secretary Rubin announced our intention to issue these securities several
weeks ago. But we have important design work to do before the first securities can be issued.
This meeting is an important stage in our process of consultation with the investment community.
The idea of inflation protection securities is not a new one. In fact the famous economist
Irving Fisher, \Witing in 1913, described notes indexed to the price of specified amounts of corn,
beef, wool and leather that were engraved by Paul Revere and issued by the State of
Ivfassachusetts in 1780. Over the last 15 years, the governments of the United Kingdom, Canada,
Australia, New Zealand Sweden have all embarked on programs of indexed bond issuance. And
a wide variety of American economists of all political stripes including Nobel laureates Milton
Friedman and James Tobin have in recent years called for indexed bonds.
Our decision to issue inflation-protection securities represents the culmination of several
years of study initiated soon after President Clinton came into office. We are convinced that
indexed bonds have the potential to help American savers, to reduce the government's cost of
borrowing, to support sound macroeconomic policy and to improve the functioning of our capital
markets. While inflation-protection securities would represent an important fmancial innovation,
we believe that the present moment is particularly propitious because of the increasing need to
help American families save and because of the increasing evidence that inflation has been
brought under control.
RR-l105

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

2

This afternoon I want to briefly consider the various advantages of inflation protected
debt. Along the way, I will also try to respond to some of the concerns that have been raised
about our plans.
To be clear at the outset, by inflation protection securities. I refer to securities whose
coupons and/or principal is tied to a measure of overall prices in such a way that the security's
real return is not affected by the rate of inflation. As my colleagues ,,\-ill suggest, there are a
number of ways in which this can be done., and it will be important to fmd the ways which best
meet the needs of potential purchasers and marketers of these securities. I will concentrate in
my remarks on the generic benefits that come from having a market for inflation protection
securities.
How Inflation-Protection Securities Benefit Savers
Let me first examine how these new instruments can benefit American savers ..
Our economy has changed profoundly over the last generation.
As longer life
expectancies have led to longer periods of retirement. as the cost of sending kids to college has
risen and as accelerating economic change has made dislocation a new possibility, savings has
become more important for American families. For a typical American who enters the labor
force at age 22 and retires at age 62, the period of retirement is likely to be nearly as long as the
period of working life. The issue of saving is becoming especially pressing as the baby boom
generation matures--this year will be the first in which it is eligible to join the AARP. Less than
half of Americans workers have pensions.

What all savers want, whether they are saving for their retirement. hope to send their kids
to college or want to prepare for some other contingency is to insure sufficient purchasing power
at some point in the future. Given uncertainty about inflation and volatile fmancial returns
achieving assured future purchasing power is currently not possible.
•

The strength of fmancial markets in recent years should not cause us to forget the
fluctuations in returns that can occur even over quite long periods of time.
•
•
•

•

For example, an investor in 10 year bonds bought in 1972, earned over the
succeeding ten year period a real return of negative 2.52 percent.
An investor who starting in 1970 rolled over three month Treasurv bills earned a
ten year real return of ;egative 0.89 percent.
And an investor who purchased the S&P500 index in 1965, earned dividend
inclusive real return of negative 3.67 percent over the succeeding decade.

Each of these periods was quite extraordinary. but they make an important point.
Ordinary investors do not have available to them an asset that provides protection against
inflation.

3

Long tenn, inflation-protection securities will for the first time provide savers with an
inflation protected long term return. This is especially important at a time when more and more
Americans are providing directly for their retirement with their 0'M1 private saving through
IRA's, Keogh plans, 401k plans and defmed contribution pension plans. Indexed bonds are ideal
candidates for inclusion in such portfolios.
Of course any decision about purchasing inflation protection securities needs to be made
in the context of an overall portfolio strategy. Many investors would not and should not choose
to invest all their assets in bonds--nominal or indexed--because they desire to accept more risk
in order to eam higher expected returns. The crucial point is that whatever the fraction of a
portfolio an investor desires to invest safely for the long term, indexed bonds represent a safer
asset than any others now available. As Sanford Bernstein has recently noted by making the safe
part of a portfolio safer, indexed bonds can actually promote investments in stocks or other risky
assets.
I stress the long term because inflation protection securities would be subject to near term
price risk as the real interest rate fluctuated. But even for investors concerned only with the
short-om, there is a case for holding indexed bonds as part of a portfolio. Experience suggests
that indexed bond returns have very different correlation properties than stocks or nominal bonds
and so are attractive as a diversification tool.
I have stressed the benefits of inflation protection securities for individuals and for
intermediaries managing individual accounts. They should also be attractive to institutions.
Many non-profit institutions that spend out of endowments have as their goal maintaining a
constant stream of purchasing power. Providers of defined benefit pension funds need to hedge
against the risk that inflation will raise the fmal salaries and hence the pension benefits of their
beneficiaries. And inflation protection securities can provide as basis for pension funds to
provide their beneficiaries with constant purchasing power annuities that escalate with inflation
just as Social Security does.
In sum, the introduction of inflation protection securities will help secure the saving of
American families. It should also serve to encourage more saving--a crucial national priority
since only through more saving can we have more American o'M1ed capital in America, and a
crucial personal priority at a time when it is becoming ever more important for American families
to provide for their own economic security.

Reducing Government Bonowing O>sts
Let me turn now to another benefit that inflation protection securities offer. They have
the potential to reduce both the level and variability of real government borrowing costs.
It is important to recognize, that inflation-indexed bonds remove risk from private
investors without causing the government to assume extra risk.

4

Much of the revenue stream consisting of taxes and tees. is c10selv matched to the level
of prices. If prices rise, then revenues ris~ as well and it is the re~enue base on which
government ultimately depends to meet its debt obligations. The burden of nominal fixed rate
debt relative to the government's capacity to bear it will vary with inflation-declining if inflation
is unexpectedly high, and rising if it is unexpectedly low. Inflation prot.ection securities remove
this source of tmcertainty and hence in a real sense reduce government risk.
At the same time, because inflation protection securities remove the risk of inflation,
investors will not demand the same risk premium on them as they do on conventional bonds.
This will be especially ttue of the most inflation averse or pessimistic investors--the group that
is likely to gravitate towards inflation protection securities.
To put the point differently, by selling inflation insurance the government can reduce the
expected cost of financing its debt. This is not just a theoretical possibility. Careful econometric
studies have shown that the risk premium on long term nominal US bonds due to uncertain
inflation may well be as high as 50 to 100 basis points. Similarly, a substantial body of work
at the Bank of England has suggested that inflation protection securities are in an expected value
sense 50 or more basis points cheaper as a source of finance than conventional debt instruments.
Of course, because inflation fell much more rapidly than the market anticipated following the
United Kingdom's issuance of indexed bonds. the realized cost savings were on some issues as
much as 500 basis points. The economic environment changes continually. While I see good
reason to expect cost savings for the United States as well. quantitative estimates would be
premature.
The basic point here that inflation protection secuntles reduce expected costs by
eliminating the risk premium is illustrated by considering UK and Canadian securities. In the
UK right now, some long term indexed bonds carry a yield of 3.84 percent, 443 basis points less
than the yield on equivalent nominal securities. This is considerably greater than most long term
inflation expectations. Consensus Economics for example has a British 10 year average inflatiop
expectation of 3.25 percent. Similarly, in Canada the spread between comparable nominal and
indexed yields is 3.27, significantly above the Consensus Economics long term inflation
expectation of 1.88 percent.
I am convinced that the avoidance of the need to pay an inflation risk premium would be
the dominant impact of the issuance of inflation protection securities on government borrowing
costs.
There are to be sure concerns that diversifying the' mix of instruments used by the
government in funding its obligations will reduce liquidity which will in tum translate into higher
borrowing costs. I reeard as fanciful the suggestion made bv a fev.' commentators that the
modest is-;uance of ind~xed securities will dry ~p liquidity to ~y significant degree in the over
three trillion dollar market for nominal government bonds.
A more serious but in my vie\\' also overblown concern is the possibility that particularly

5

in the beginning the inflation protection security market "viII lack liquidity. This will not be
serious for the many purchasers of these securities who choose to hold them to maturity.
Additionally, the entrance of the US Treasury into this market is expected to broaden interest in
these securities and improve liquidity over time. Finally. even if these new securities are not as
liquid as our more established securities, they are likely to be substantially more liquid than the
typical corporate or municipal bond which is so widely held by individual and instiMional
investors. I can assure you that we plan to manage our program of issuance carefully, credibly
and for the long tenn so as to assure that our securities have the most liquid possible markets.
Before leaving the subject of the impact of inflation protection securities on government
borrowing costs, let me comment on the fear expressed by a number of journalists that inflation
protection securities impose a costly contingent liability for future inflation on the government.
As I have already noted this argument ignores the fact that inflation protection securities improve
the match between the government's revenue stream and its debt obligations. Furthermore,
government already nms the risk of any inflation-induced increase in short tenn interest rates.
Right now one-third of Federal debt roles over every year. Short-tenn obligations which must
be rolled over and are therefore already subject to inflation and interest rate risk.
1be Effect of Inflation Protection Securities on Inflation
It is an empirical fact that in the industrial countries where index bonds have been
introduced, inflation has fallen rather than risen. Comparing periods before the issuance of
inflation protection securities with a comparable period subsequent to their issuance, the rate of
inflation fell by about 6 percentage points in the United Kingdom. 3 percentage points in Canada,
5 percentage points in Australia and one and one half percentage points in Sweden.

In large part, the consistent tendency of inflation to fall reflects the fact that as in the
United States today, governments issue inflation protection securities when they are confident that
inflation is under control. There are also at least two reasons to believe that inflation protection
securities contribute to bringing inflation down and keeping it down.
First, inflation protection securities reduce government incentives to inflate. They create
a dynamic whereby increases in inflation will translate directly into increases in the budget deficit
and where it is impossible to inflate away at least a portion of outstanding debt. They also
enable government to signal its commitment to disinflation.
Second, inflation protection securities also create natural market-based measures of
inflation expectations. Significant movements in the spread between real and nominal yields will
serve as an important proxy for general expectations of inflation.
Indeed, real and nominal yields and spread between them are used as monetary policy
indicators in the United Kingdom. Of course, there will be many factors pushing yields around
including changing risk preemie these spreads won't be totally accurate gages of inflation or
even of inflationary sentiment.

6

However, I share Chainnan Greenspan' s view that inflation protection securities will
provide important infonnation that ""ill contribute to more accurate conduct of monetary policy.
If one considers the tremendous stake that ~e as a nation have in avoiding increases in inflation
or in avoiding any needless sacrifices in output from false inflationary indications, then even a
small increase in the accuracy of monetary policy would yield large benefits.
I have, of course, heard the argument made by some that indexation could prove to be
a self fulfilling prophecy, that indexing would weaken political resolve to fight inflation.
This has not happened in England, Canada or Australia and I think the argument should
be subjected to rational analysis. Certainly, a rational government planning to inflate its currency
would do the opposite of issuing index bonds. Rather. it would borrow nominally for as long
a time frame as possible.
There is one other argument sometimes made that inflation protection securities would
create a political constituency in favor of inflation, or at least would erode political pressure for
disinflation. The experience of disinflation in each of the countries that issued inflation
protection securities following their issuance runs counter to this argument.
Moreover, the argument's premise that inflation protection securities would have a
significant impact on public attitudes towards inflation is doubtful. There is currently over 5
trillion dollars in nominal bonds outstanding as well as countless other fmancial assets whose
value is threatened by inflation. There are as welL tens of millions of Americans who live on
fixed nominal pensions. Inflation is ""idely and rightly seen as robbing workers' purchasing
power.
These anti-inflation constituencies would seem to likely to dominate the political debate
regardless of what position is taken by a small fraction of government bondholders whose view
might be affected by their ownership of inflation protection securities.
On balance, my judgment is that the issuance of inflation protection securities will
probably not have a very large effect one way or the other. Any effect it does have is likely to
work to reduce inflation.
Just as those who sell life insurance, hope for the health of their customers and those who
sell fire insurance hope that their customers ""ill not play with matches. those who sell inflation
insurance ""ill do everything they can to reduce inflation.
The American Capitll MaJkets
Finally, I would like to comment on how these new securities could over time improve
the functioning of the American capital markets and provide impetus to significant and profitable
fmancial innovation. Beyond their basic role in individual and institutional portfolios, I have
heard the following intriguing suggestions since Secretary Rubin announced our intention to issue
inflation protection securities:

7

-Inflation protection securities would be ideal for infrastructure finance where the revenue stream
is likely to rise with overall prices. Think of a toll road or an electric utility.
--Inflation protection securities could provide a backing for inflation linked mortgages. Because
such mortgages would involve a constant real but rising nominal payment, they would tend to
make housing more affordable for young families.
-Inflation protection securities could be stripped to provide on the one hand a constant real
annuity over the life of the security such as might be ideal for retirees, and on the other a zero
coupon security such as might be ideal for those planning to retire or to meet a fixed
commitment such as college education.
-Inflation protection securities could be combined with stock market investments or options so
as to create securities that guaranteed maintenance of purchasing power but also provided an
opportunity to share in positive returns earned on the stock market.
--Inflation protection securities could be used to hedge or take positions on movements in real
exchange rates which have an important impact on companies involved in international trade.
The presentation you are going to receive will cover many important issues including the index
we ultimately use and the lengths of maturity we choose.

Conclmiom
Inflation protection securities, I have argued will help savers. reduce costs, reduce inflationary
pressures and promote fmancial innovation. It is doubtful that it would be possible to reap these
gains without Federal government action.
Your input will be critical to the success of these new financial instruments.
History has shown that it often takes longer than expected for financial innovation to take hold
but that a successful innovation often spreads far faster than ever expected.
It is difficult to know what path these instruments will take. Nevertheless, we believe, they are
a step in the right direction. One of the tasks of government is to innovate. We hope this
innovation will prove successful and that it may, indeed. be only the first step on a long path of
innovation as retool our fmancial markets for the 21st century.

INFLATION AND INDEXED BONDS
Australia

Canada

20ri------------------------~----------~

14r---------....,..--12

15

10

8
10

6
4

5

2

o" ,
65

'!I

I· I

70

75

80

85

~:[!~~~-------------------------l:~l~ll~,

90

65

95

,

70

Sweden

75

80

85

90

:

!

I

95

United Kingdom

20ri--------------------------~--

30~,--------------------~----------------~
25

15

20

10

15
10

5
5

o 65

70

75

80

85

90

95

0

65

70

Year over year percent change in consumer prices.
•••••••••••••••••••••••••

Indexed bonds first issued.

75

80

85

90

95

EX-POST REAL RATES OF RETURN OVER 10 YEARS
ANNUAL AVERAGES, ADJUSTED BY THE CPI-U
15

115

I

S&P Stock
Price Index
10

,. . ....

,,
,
,,

,

,

5

,
''

10
"" ",
,

"
""
\'
"

5
.. ....

oI

3-Month
T-Bills

"'\" ~ --

,

...........

,

I0

~..n: =---./ 10-Year
It..

~

,
,,

,,
,
,

t

Constant
Maturities

-511960

'19'65

'19'70

'19'75

'1980

'1918~-5

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 30, 1996

CONTACT: Office of Financing
202-219-3'350

RESULTS OF TREASURY'S AVCTION OF 10-DAY BILLS
Tenders for $7,011 million of 10-day bills to be issued
June 3, 1996 and to mature June 13, 1996 were
accepted today (CUSIP: 912794Z31).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.14%
5.20%
5.17%

Investment
Rate
5.23%
5.26%
5.26%

Price
99.857
99.856
99.856

Tenders at the high discount rate were allotted 67%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.15 - 99.857
5.19 - 99.856

RR-U06

Received
$29,435,000

Accepted
$7,010,500

$29,435,000

$7,010,500

$29,435,000

$7,010,500

o

o

o

o

o

o

$29,435,000

$7,010,500

5.16 - 99.857

5.18 - 99.856

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 30, 1996

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 15-DAY BILLS
Tenders for $23,086 million of 15-day bills to be issued
June 3, 1996 and to mature June 18, 1996 were
accepted today (CUSIP: 9127946V1).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.159"
5.239"
5.209"

Investment
Rate
5.249"
5.329"
5.29%

Price
99.785
99.782
99.783

Tenders at the high discount rate were allotted 369".
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
5.17 - 99.785
5.21 - 99.783

RR-ll07

Received
$52,006,000

Accepted
$23,086,200

$52,006,000

$23,086,200

o

o

$52,006,000

$23,086,200

o

o

o

o

$52,006,000

$23,086,200

5.18 - 99.784
5.22 - 99.783

5.19 - 99.784

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
May 30, 1996

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Tenders for $12,501 million of 5-year notes, Series J-2001,
to be issued May 31, 1996 and to mature May 31, 2001
were accepted today (CUSIP: 912827Y22).
The interest rate on the notes will be 6 1/2%. All
competitive tenders at yields lower than 6.565% were accepted in
full.
Tenders at 6.565% were allotted 22%. All noncompetitive and
successful competitive bidders were allotted securities at the yield
of 6.565%, with an equivalent price of 99.727. The median yield
was 6.540%; that is, 50% of the amount of accepted competitive bids
were tendered at or below that yield. The low yield was 6.500%;
that is, 5% of the amount of accepted competitive ~ids were
tendered at or below that yiel~.
TENDERS RECEIVED AND ACCEPTED (in thousands)
TOTALS

Received
$32,527,250

Accepted
$12,500,550

The $12,501 million of accepted tenders includes $559
million of noncompetitive tenders and $11,942 million of
competitive tenders from the public.
In addition, $650 million of tenders was awarded at the
high 'yield to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $550 million
of tenders was also accepted at the high yield from Federal
Reserve Banks for their own account in exchange, for maturing
securities.

RR-U08

DEPARTMENT

TREASURY

OF

THE

TREASURY

NEWS

omCE OFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960

FOR IMMEDIATE RELEASE
May 31, 1996

UNITED STATES AND AUSTRIA SIGN NEW
INCOME TAX CONVENTION
The Treasury Department announced today that a new income tax Convention with
Austria was signed in Vienna. The Convention was signed for the United States by Ambassador Swanee Hunt and for Austria by Austrian State Secretary for Foreign Affairs Dr. Benita
Ferrero-Vvaldner. Notes were exchanged at the time of the signing giving effect to a Memorandum of Understanding interpreting a number of provisions of the new Convention. The
new Convention will replace the existing Convention between the United States and Austria,
which was signed in 1956 and has been in effect, unamended, since 1957. The new Convention will enter into force after the countries have exchanged the instruments of ratification.
The new Convention generally follows the pattern of the OECD Model Convention
and of recent U.S. treaties with other developed countries. The withholding rates on
investment income in the proposed Convention are generally the same as those in the present
U.S.- Austria treaty. Anti-abuse rules, however, are provided for certain classes of investment
income, including dividends paid by non-taxable conduit entities, such as U.S. RICs and
REITs and their Austrian equivalents. The proposed Convention preserves the U.S. right to
impose its branch tax on U.S. branches of Austrian corporations, which is not preserved under
the present treaty. In other respects, the taxation of business income and various forms of
personal services income under the proposed Convention substantially follows the pattern of
recent U.S. treaties and the OECD Model.
Like other recently concluded U.S. treaties, the new Convention contains limitation on
benefits rules intended to prevent third-country residents from benefitting inappropriately from
the Convention. The limitation on benefits article lists a series of attributes, ~, the
ownership and base erosion test, the publicly traded test, and the active trade or business and
substantiality test, that entitle residents of the Contracting

RR-I109

Fm- press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040

-2States to obtain some or all of the benefits of the Convention. The article also contains a
provision allowing the competent authorities certain discretionary powers to grant benefits.
The present Convention contains no such limitation on benefits rules. A major objective of
the United States in updating existing Conventions is to curtail the forms of treaty abuse dealt
with by these provisions.
The new Convention contains standard mutual agreement rules. These rules provide
for cooperation between the competent authorities to resolve disputes that may arise under the
Convention and cases of double taxation not provided for in the Convention. This latter
provision allows the competent authorities to implement the Convention in particular cases in
a manner consistent with its expressed general purposes, even though the cases are not
specifically covered by the Convention.
The exchange of information provisions in the new Convention are somewhat more
limited than under most U.S. tax treaties, because they limit access to bank information to that
relating to cases in the penal investigation stage or subsequent stages. The treaty does, however, clarify that under Austrian law, bank information can be provided for purposes of a
pending penal investigation. The new Convention confirms the understanding that the
commencement of a criminal investigation by the Criminal Investigation Division of the U.S.
Internal Revenue Service constitutes a pending penal investigation. Also, as under the estate
tax treaty, exchanged information may be used in court. For exchange of information purposes, the Convention applies to taxes of every kind imposed by a Contracting State.
The new Convention will be transmitted to the Senate for its advice and consent to
ratification. The new Convention will enter into force on the first day of the second month
following the exchange of instruments of ratification. The Convention will have effect with
respect to taxes payable at source for payments made or credited on or after the first day of
the second month following entry into force. In other cases it will take effect with respect to
taxable years beginning on or after the first day of January following entry into force. Thus,
for example, if instruments are exchanged on October 15, 1996, the treaty will enter into
force on December 1, 1996. It will have effect for withholding tax purposes for payments
made or credited on or after February 1, 1997. For other purposes, it will have effect for
taxable years beginning on or after January 1, 1997. Where the present Convention affords a
more favorable result for a taxpayer than the new Convention, the taxpayer may elect to
continue to apply the provisions of the present Convention, in its entirety, for one additional
year.
Copies of the new Convention, along with the notes and Memorandum of Understanding, are available from the Office of Public Affairs, Treasury Department, Room 2315, Washington, D.C. 20220. Telephone: (202) 622-2960.
-30-

o

(0

C1l
C\I

federal financing
WASHINGTON, D.C.

20220

May 31, 1996

FEDERAL FINANCING BANK

Charles D. Haworth, Secretary, Federal Financing Bank (FFB) ,
announced the following activity for the month of April 1996.
FFB holdings of obligations issued, sold or guarant~ed by
other Federal agencies totaled $66.1 billion on April 30, 1996,
posting a decrease of $646.1 million from the level on
March 31, 1996. This net change was the result of a decrease in
holdings of agency debt of $299.1 million, in agency assets of
$240.0 million, and in agency guaranteed loans of $107.0 million.
FFB made 17 disbursements, extended the maturity or reset the
interest rate on 79 loans, and, under section 306C, refinanced 17
loans guaranteed by the Rural utilities Service, during the month
of April. FFB also received 12 prepayments in April.
Attached to this release are tables presenting FFB April
loan activity and FFB holdings as of April 30, 1996.

RR-lllO

0
L()
~

N C\I
~
~
N (0
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CIl

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Il.

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Page 2 of
FEDERAL FINANCING BANK
APRIL 1996 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL

MATURITY

INTEREST
RATE

AGENCY DEBT
RESOLUTION TRUST CORPORATION
Note 29 /Advance #1

7/1/96

5.259% S/A

$2,135.42
$101,993.00
$158,498.00
$72,673.73
$2,753.43
$417,756.00
$962,193.95
$1,403.86
$145,386.00
$733.38
$546,876.02
$130,237.00

9/2/25
7/1/25
7/1/25
7/1/25
7/1/25
7/1/25
4/1/97
1/3/22
7/31/25
7/1/25
1/2/25
7/31/25

6.765%
6.765%
6.765%
6.765%
6.765%
6.804%
5.754%
7.066%
7.114%
6.942%
6.964%
6.975%

4/5

$7,265,837.57

11/2/26

6.805% S/A

4/1
4/1
4/1
4/1
4/1
4/1
4/1
4/1

$3,666,481.20
$5,238,483.92
$994,511.30
$4,667,764.72
$2,772,000.00
$3,486,226.96
$2,667,425.11
$2,174,188.63

9/30/96
9/30/96
9/30/96
9/30/96
9/30/96
7/1/96
7/1/96
7/1/96

5.292%
5.292%
5.169%
5.292%
5.292%
5.134%
5.134%
5.134%

4/1

$7,504,456,257.30

GOVERNMENT - GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Atlanta CDC Office Bldg.
HCFA Services
HCFA Services
HCFA Services
HCFA Headquarters
HCFA Headquarters
Chamblee Office Building
Miami Law Enforcement
Foley Square Office Bldg.
HCFA Headquarters
Memphis IRS Service Cent.
Foley Square Courthouse

4/4
4/4
4/4
4/4
4/4
4/5
4/11
4/11
4/12
4/16
4/22
4/26

S/A
S/A

S/A
S/A
S/A

S/A

S/A

S/A
S/A

S/A
S/A

S/A

GSA/PADC
ICTC Building
RURAL UTILITIES SERVICE
*Alleqheny Electric #255
*Alleqheny Electric #255
*Allegheny Electric #908
*Allegheny Electric #908
*Allegheny Electric #908
*Brazos Electric #917
*Brazos Electric #917
*Brazos Electric #917

S/A is a semi-annual rate: Qtr. is a Quarterly rate.
* maturity extension or interest rate reset

Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.

v

Page 3 of 6
FEDERAL FINANCING BANK
APRIL 1996 ACTIVITY

DATE

BORROWER

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE

GOVERNMENT - GUARANTEED LOANS
RURAL UTILITIES SERVICE (continued)
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
*Brazos
+Brazos
+Brazos
+Brazos
+Brazos
+Brazos
+Brazos
+Brazos
+Brazos
+Brazos
+Brazos
*Brazos
*Brazos
+Brazos
+Brazos
+Brazos
+Brazos