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Treas.
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Department of the Treasury
PRESS RELEASES
The following numbers were not used:
2997,3005,3042,3054,3059,3095
The following numbers are unavailable:
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NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.• 20220. (202) 622-2960
EMBARGOED UNTIL I :OOPM EST
Text as Prepared for Delivery
March L 1999
Testimony of Treasury Deput)' Secretary Lawrence H. Summers
Senate Special Aging Committee
Mr. Chairman. Members of the Committee. I appreciate the opportunity to appear today to
discuss President Clinton's proposal to ensure the financial security of our aged population. The
demographic challenge that we as a nation face today is a critical issue to all Americans and to
the future of our economy. As you know. it is in direct response to this challenge that President
Clinton has offered his frame\vork for preserving the financIal well-being of the Social Security
and Medicare programs and improving the retirement security of all Americans. Let me applaud
this Committee for its contribution in addresslIlg ~lI1d focusing attention on these issues.
The adwnt of an era of surpluses rather than de/lclts hJS radically transformed our national
debate about entitlements. The terms of all 01 the e;lrlicr tradeoffs in the entitlements debate
have been eased -- prO\ided \\1.' seize the opp(ll"tunities now avaIlable to us. The President's
framework for Social Security both recognizes thc hrighter present reality. and moves us \\ell
along the road toward seizing the opportunities currently available. if we can \\'ork together on a
bipartisan basis.
This afternoon. I \\ill first hriefly descrIhe the Pre\IUL'llt'S program Then. I \\ill devote the hulk
of my remarks to addressing some or the issuL'-; th~lt hd\ c arisen ahout our approach to retirement
security policy.
The President's Proposal
Accordini!..... to the Office ()r i\lal1J.i!cl11ent ~IIlU BlId~L·1. the lllllileu hudl'et
of the kderal
.....
government is no\\ projected to accumulak Illorc thdl1 'S-L~ trillion in surpluses O\'er the nc'..:!
15 years. The operational question 110\\ lIdore u" I:' hp\\ \\e should use these surpluses.
'-
'-
The President" s framl'\\ork dn'otes 6~ percellt or tile:,c surpluses to the Social Securit\" s\·stem.
Of the roughly S2.8 trillion in surpluses th~lt \\111 gu lu Social Sccurity, about four-lifths \\ill he
used to purchase Treasury securities. the sal11e securities Ihat the Social SecurIty system has
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'<
invested in since its inception. The remaining one-fifth \vill be invested in an index of privatesector equities. which should on average yield a higher rate of return for the program' s
investments. These two actions will reduce the 75-year actuarial gap from its current level of
2.19 percent of payroll by about two-thirds. to 0.76 percent of payroll. And they push the date at
which the Social Security trust fund is projected to be exhausted from 2032 back tu 2055.
Substantial as that accomplishment would be. it is critical that we do more. Historically. the
traditional standard for long-tern1 solvency of the Social Security system has been the 75-year
actuarial balance. A 75-year horizon makes sense because it is long enough to ensure that
virtually everyone currently participating in the system can expect to receive full payment of
current-law benefits. Attaining this objective \\ill require additional tough choices. But the
objective is both important and obtainable. To reach it. the President has called for a bipartisan
process. We believe that the best way to achieve this type of common objective is to work
together, eliminating the need for either side to "go first."
In the context of that process. we should also find room to eliminate the earnings test. which is
widely misunderstood. difficult to administer. and perceived by many older citizens as providing
a significant disincentive to work. In addition. it is critical that we not lose sight of the important
role that Social Security plays as an insurance program for widows and children. and for the
disabled. As President Clinton said last month: "We also have to plan for a future in which we
recognize our shared responsibility to care for one another and to give each other the chance to
do well, or as well as possible when accidents occur. when diseases develop. and when the
unforeseen occurs." That is why the President has proposed that the eventual bipartisan
agreement for saving Social Security should also take steps to reduce poverty among elderly
women. particularly widows. who are more than one and one-half times as likely as all other
retirement age beneficiaries to fall helm\' the pmerty line
In addition to shoring up Social Security. the President's pbn would transfer an additional
15 percent of the surpluses to :v1edicare. e\tending the lik of that Trust Fund to 2020. A
bipartisan process will also he re4ulrcJ tu Cllnsidcr structural reforms in this program. This
process will be informed by the impurtant \\ or~ of Ch~lIrman Breau\ and the other members of
the Medicare Commission. and wc look fo[\\ard to their report.
Finally. the President would use 12 pen.:ent ()f the surpluses to create retirement savings accounts
- Universal Savings Accounts or l ;S:\ accounts - and the remaining 11 percent for defense.
education. and other critical investments. Ihe Prl'Sldent \\ ill he announcing further details
regarding the USAs soon.
Benefits of the President's Approach
In essence. the President is proposing that \\e use the Social Security and Medicare trust funds to
lock away about three-quarters of the surpluses for deht reduction and equity purchase. and
ensure that they are not used for other purposes. This would have three key effects:
•
First it would greatly strengthen the financial position of the government. If we follow
this plan, by 2014, we will have the lowest debt-to-GOP ratio since 1917 and will free up
a tremendous amount of fiscal capacity. The reduction in publicly held debt will reduce
net interest outlays from about 13 cents per dollar of outlays in FY99 to about 2 cents per
dollar of outlays in 2014. Under the President's program, the reduction in interest due to
debt reduction will exceed the increase in the Social Security burden through the middle
of the next century.
•
Second, it would strengthen significantly the financial condition of the Social Security
and Medicare Trust Funds. Indeed, it would extend the life of the Social Security Trust
fund by more than 20 years. to 2055. and extend the life of the Medicare Hospital
Insurance Trust Fund to 2020. Meeting our obligation to the next generation of seniors
should be the number one priority in allocating the surpluses.
•
And third. it would substantially increase national saving, which must be a priority in
advance of the coming demographic shift. By paying down debt held by the public and
investing in equities, the President's program will create $3.5 trillion more room in
private portfolios for productive capital in place of the sterile asset of government paper.
In effect. this will be the reverse of the "crowding out" that occurred during the era of big
deficits. With government taking a smaller share of total credit in the economy. interest
rates will be lower than othernise would be the case. The implications of lower interest
rates will be profound. Not only will individuals be able to borrow for mortgages, school
loans. and other purposes at lower rates. but importantly. businesses will be able to
finance investments in productive plant and equipment at the lower rates. And the
resulting larger private capital stock is the key to increasing productivity. incomes. and
standards of living. Ultimately. one reason \\hy this program is sound economically is
that it will result in a more robust private economy. which will expand our capacity to
make good on our Social Security and Medicare promises.
The President's proposal also specifically aims to deal more broadly with the challenges of an
aging society by expanding individual access to retirement saving. As I noted earlier. the
President proposes to devote 12 percent of the surpluses to establishing a new system of
Universal Savings Accounts. These accounts would provide a tax credit to millions of American
workers to help them save for their retirement. A majority of workers would receive an
automatic contribution structured as a flat dollar amount regardless of income. In addition. many
of those who make voluntary contributions would receive a matching contribution from the
government to their USA account. Overall. the program would be considerably more
progressive than the current tax subsidies for retirement savings -- where higher bracket
taxpayers get higher subsidies.
At the same time. the President proposes to strengthen employer-sponsored retirement plans in a
variety of ways. The President's budget addresses the low rate of pension coverage among the
40 million Americans who work for employers with fev,;er than 100 employees by proposing a
tax credit for start-up administrative and educational costs of establishing a retirement plan and
proposing a new simplified defined benefit-type plan for small businesses. Workers who change
jobs would benefit from the budget proposals to improve vesting and to facilitate portability of
pensions. In addition, the retirement security of surviving spouses would be enhanced by the
President's proposal to give pension participants the right to elect a form of annuity that provides
a larger continuing benefit to a surviving spouse and to improve the disclosure of spousal rights
under the pension law.
Additional revenues
Mr. Chairman. in your letter of invitation. you asked that I address the merits of various possible
ways of bringing additional revenues into the system. A wide variety of such options have been
included in the plans that have been put forward in the last few months. As you know, the
President has expressed his belief and determination that we should be able to put Social Security
on a sound long-term financial foundation without increasing the payroll tax rate. The payroll
tax hits all workers and it hits the low and middle of the earning scale proportionately harder than
more affluent individuals. Partly because of this. the President believes that other ways of
closing the gap are preferable.
With regard to most other ways of increasing the revenues of the system, the Administration has
striven to maintain an open mind. We have emphasized that individual proposals should not be
judged in isolation, but rather in the context of complete plans. And the President strongly
believes. as I noted before, that the way to achieve final agreement is for both parties to work
together. avoiding in the meantime actions that would polarize the debate. For that very reason,
it would be counterproductive for me to discuss specific alternatives -- regardless of their merits
or demerits. The time for us to exchange such views will come, but. in my judgement is not
here today.
Investing in Equities
As I noted above. an important element of the President's framework is the proposal to invest
part of the transferred surpluses in equities. Historically. the Trust Fund has been invested
exclusively in government bonds. While these bonds are essentially risk-free, they have the
corresponding downside that they have historically earned a lower rate of return, on average.
than other potential investments. Between 1959 and 1996. the average annual rate of return
earned on stocks was 3.84 percent higher than the rate earned on bonds held by the Trust Fund.
Raising the rate of return on the Trust Pund would substantially alleviate the need to bring
additional revenues into the system. Even in the President's program. in which the proposed
equity investment is modest, the impact on the actuarial balance is significant: It would reduce
the actuarial gap by an estimated 0.45 percent of taxable payroll -- roughly one-fifth of the
overall problem we face today. Put another way. the proposed investment in equities achieves as
much, in terms of improving the 75-year actuarial balance as a 5 percent across-the-board cut in
benefits beginning in 2030. Or. to put it still another way. the equity investment in the
President's package achieves as much for the financial soundness of the system as would moving
the normal retirement age up by an extra year-and-a-half. Given the magnitude of what the
equity investment will accomplish. I believe that the President's proposal should receive serious
consideration as a means of. in effect. bringing new resources into the system.
Addressing Issues
Since the President unveiled his plan in the State of the Union Address, a number of important
issues have been raised. Let me briefly address a few of them here.
Is the President '5 frame work based on sOllnd accounting?
One issue is whether the President' s framework is based on sound accounting methods. In this
regard. the framework is grounded in two essential ideas:
•
First. the framework should speak to the disposition of the whole of the unified surplus.
which encompasses both the Social Security and non-Social Security portions of the
budget. As I outlined earlier. the President proposes to reserve the bulk of the unified
surplus for the purpose of paying down the debt held by the public and for acquisition of
assets. Some have criticized the framework for proposing a disposition of the whole of
the unified surplus. but in doing so the framework follows squarely in the tradition of
Republican and Democratic administrations alike for each of the past 30 years.
I'vloreover. any time a competing proposal is cast in terms of how it would use the unified
surplus. the validity of our fundamental approach is reinforced.
•
Second. the framev·:ork should ensure. to the greatest extent possible. that the surpluses
that have been transferred to the Social Security and Medicare Trust Funds may not be
used for any purpose other than to pay down the debt held by the public or to acquire
assets. In short. these transfers must constitute afl/II use of those resources. It is clear to
us that current budgetary methods are inadequate in this regard because they would not
sufficiently wall off the transferred amounts and protect them from being used either to
finance additional spending or tax reductions. \\'c are looking forward to working with
the members of this Committee and the rest of the Congress to devise new methods for
achieving this fundamentally important objecti\'C.
Debate about accounting arcana threatens to obscure one crucial point: that -- as Secretary Rubin
stated in his budget testimony -- at the core of this budget is fiscal discipline. We must not lose
sight of the fact that this budget is possibly most notable for the fact that it lays the groundwork
for paying off the debt held by the pUblic. That is the most prudent budget accounting of all.
Can equity inl'estment in the Trust Fund he undertaken in a sound prudent manner!
Another issue concerns the potential for political interference in the investment of a portion of
the transferred surpluses in equities. We take this issue seriously. Accordingly, we have devoted
a good deal of effort to dewloping an institutional framework aimed at isolating these
investment decisions from political pressures. With this framework -- or one like it -.., we are
confident that the concerns that have been expressed can be overcome.
Under the President's plan, an apolitical. independent board would select private-sector
investment managers through a competitive bidding process similar to the one used by the
Federal Retirement Thrift Investment Board. Investments would be limited to broad-based.
widely-used index funds, eliminating the possibility of individual stock p'icking. Purchases and
sales will be dictated by the cash needs of the Social Security system and by the requirement to
maintain equities as 15 percent of the Trust Fund. eliminating the possibility of investment
decisions based on market timing. In addition. our proposal limits the share of Trust Fund assets
that could be invested in equities. so as to ensure that these funds never account for more than a
small fraction of the stock market.
Why does the President's plan cause Rrossfederal debt to rise faster than it otherwise ll'ould!
A third issue concerns the fact that. under the President's framework. gross Federal debt v\'ould
rise by more than otherwise would occur. even as debt held by the public is being paid down.
Doesn't this signal an expansion of the obligations of the Federal government?
Debt held by the public and debt held by the Trust Funds do have equal legal standing. Both are
obligations of the United States Treasury. But there are important distinctions that must be
recognized. It is debt held by the public that best captures the Federal government's pressure on
credit markets. and hence this measure of the debt that is most relevant for determining whether
interest rates are high or low, whether private investment in productive capital is strong or weak.
and whether we have to borrow much or little from abroad.
While the debt held by the Trust Funds is a liability of one part of the government, it is at the
same time an asset of another part of the go\·ernment. On a consolidated basis. then. it is a \'.ash.
By contrast. the debt held by the public is a liability of the entire government: it is, therefore, the
better measure of the fiscal burden we are passing on to future generations. The Congressional
Budget Office has long held this \·iew. and reiterated it in their testimony before the Senate
Budget Committee on February 23rd of this year.
Looking at the situation from the perspecti\'(: of the non-Social Security portion of the
government only, the President's program in effect converts an implicit commitment (in the fornl
of promised future Social Security and Medicare benefIts) into an explicit one (in the fOffil of the
Special-issue securities, or "Specials", held by the Trust Funds). Putting Specials into the Trust
Funds does not increase the amount that we will owe in the future for Social Security benefits
and debt. Again, this point was made ckar in CBO's February 23rd testimony.
What i!the pro/eeted surpluses do
l10t m({(cri(/Ii~(')
A fourth issue concerns the prudence of committing today to transfers for as long as 15 years into
the future, given the huge uncertainty surrounding budgetary projections. To be clear, the
President is proposing that \\'c make the specified transfers into the Trust Funds regardless of
whether our current forecast of the budgetary outcome proves accurate. We did not make this
policy choice ignoring forecast uncertainty. On the contrary, we fully recognize and appreciate
the extent of uncertainty surrounding any economic projection, much less one purporting to peer
out 15 years into the future. Indeed, that uncertainty is a primary reason why we believe that a
more prudent way to run our fiscal affairs is to substantially payoff the debt held by the public
over the next 15 years and, rather than commit today to the consumption of those surpluses over
the next 15 years rather than commit today to reduce taxes or raise spending. Under our
approach, the real uncertainty concerns whether the debt reduction we actually achieve will be
less or more than we currently project. Under an alternative approach, in which government
saving is reduced by spending increases or tax cuts, the remaining uncertainty would not concern
how much debt reduction occurs in the future, but rather whether there is debt reduction in the
future.
Do the bonds we propose placing in the TrllSI Funds make real provision for rhe/iJture olSocial
Securitv and Medicare?
A fifth issue concerns the question of whether we have made real provision for the future of
Social Security and Medicare by placing additional assets in their respective Trust Funds. We
believe that we have, in two respects.
•
First, we have ensured that a corresponding amount of debt held by the public is taken out
of circulation. This is a crucial step toward creating the fiscal capacity to meet our
benefit obligations to Social Security and Medicare beneficiaries. Given that we take this
step. long-term projections by the Office of Management and Budget illustrate this fiscal
capacity by showing unified budget surpluses into the middle of the next century. The
overwhelming consensus of economists recommends paying down the debt held by the
public as one of the most important contributions the government can make in advance of
the retirement of the baby boom generation.
•
Second. having created new/iseal capacity to meet our obligations, the President's
framework provides new legal capacity. hy assigning the proceeds of the debt reduction
to the Social Security and Medicare programs. Absent this action. Social Security would
be unable to pay current-law benefits heyond ~03~. not\vithstanding that we would have
the fiscal capacity to do so. Medicare also would become insolvent early in the next
century. To be clear. the assignmt:nt of the deht-reduction dividend to Social Security
and Medicare does not expand our ohligations under those two programs -- it merely
expands our capacity to meet existing ohl igations in a timely manner.
Is it desirable
10
commit general revenues
/0
5;ocia! Security"!
Finally. a sixth issue concerns the desirahility of committing gent:ral revenues to Social Security
and Medicare. From the beginning. Social Security has been mainly financed out of a dedicated
payroll tax. and a substantial body of opinion has held that the long-term integrity and durability
of the programs would best be upheld by severely limiting. if not prohibiting. the use of general
revenues.
The President's framework proposes something quite different from general revenue financing as
it has historically been contemplated. The framework proposes to tap, for a limited time only,
the unprecedented surpluses now in prospect. Importantly, the President's framework is a
mechanism for ensuring that the surplus general revenue is used to pay down the national debt.
and thus is a vehicle for ensuring fiscal discipline, not fiscal laxity. Such a temporary use of the
surplus can be justified by the need for help in the transition of the retirement of the baby boom
generation. This is far different from any approach that would either use general revenues in
perpetuity, or that would expand benefit obligations.
Concluding Remarks
Mr. Chairman, it is difficult to overemphasize the significance of the changes achieved through
the fiscal responsibility of the past six years. It is indeed remarkable that we can sit here today
and debate how best to use budget surpluses. I believe it is worthwhile to take a minute to
consider how recent economic changes have lifted the weight of an era of deficits off the nation's
shoulders to make a new era of surpluses possible.
During the 1980s, the nation's fiscal status quo pointed only to a future of growing budget
deficits. As deficits expanded throughout that decade, the vol ume of our nation's debt grew,
meaning that the government's interest payment obligations were put on a path of continued
gro\\'th. At the same time. health care costs of the federal government were rising relative to the
size of the economy.
Today. by contrast, the situation has heen re\·ersed. and the basic momentum is toward improved
budgetary performance. Important kgislati\(: steps toward deficit reduction were taken in the
1993 Omnibus Budget Reconciliation Act and the 1997 Balanced Budget Act. And over the past
several years. health care costs have been rising more slowly. As a result, today's basic fiscal
setting involves large and rising unified surpluses. which -- provided they are preserved -- will
allow us to pay down the debt held by the public.
When President Clinton took office. the liscal trajectory our nation was on suggested that by
2014. the government would be devoting ~7 ccnts of C\'cry dollar it spent to interest payments on
the federal debt. Instead, as a result of thc coursc wc ha\'e charted. only 2 cents of every dollar of
outlays will be needed to cover interest expenses 15 years from now - a savings of about $1
trillion in that year alone. The challenge \\e face in allocating the surpluses to the best possible
use is to ensure that the underlying momentum toward fiscal control is maintained. By devoting
the lion's share of the surpl uses to deht reduction and preserving Social Security and Medicare,
the President is ensuring that we de\ote the surpluses to the best possible use to help cushion the
impact on future budgets as the population agcs. Thank you. I would now welcome any
questions.
-}()-
DEPARTMENT
OF
THE
lREASURY fg)
TREASURY
NEW S
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENVE. N.W .• WASHINGTON. D.C.. 20220. (202) 622-2960
EMBARGOED UNTIL 2 P.M. EST
Text as Prepared for Delivery
March 2, 1999
TREASURY FISCAL ASSISTANT SECRETARY DONALD V. HAMMOND
TESTIMONY BEFORE THE HOUSE SUBCOl\1MITTEE ON GENERAL OVERSIGHT
Al\TI INVESTIGATIONS
Chairman King and Members of the Subcommittee, thank you for the opportunity to
appear before you today to discuss Treasury's efforts to implement the Electronic Funds
Transfer (EFT) requirement of the Debt Collection Improvement Act of 1996 (the Act). The
Act requires the Federal government to issue most payments, except tax refunds, via EFT after
January 1, 1999 and gives the Secretary of the Treasury the authority to prescribe regulations
and to grant waivers from the requirement to receive payments electronically. The Act also
directs Treasury to ensure that recipients required to receive payment electronically will have
access to an account at a financial institution at a reasonable cost and with the same consumer
protections as other account holders at the same financial institution_ We have had
considerable success in implementing the statute.
I commend the Subcommittee for its interest in carrying out what we refer to as the
"EFT 99" program. in a manner that hendits all Federal payment recipients and American
taxpayers. We share these interests as we proceed through the implementation process_ In
implementing EFT 99. we have been guided hy four principles:
•
•
The transition from a paper-baseo system to an electronic transfer system should be
accomplished with the interests of recipients ranking of paramount importance.
Private sector competition for the huslness of handling Federal payments should be
maximized.
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/
">
•
•
All recipients, and especially those recipients having special n~s - the el~e~ly, .
individuals with physical, mental, educational or language bamers, thO~. hvmg 10
remote or rural communities - should not be disadvantaged by the transition to
electronic payments.
.
.,
The EFT 99 program is an opportunity, to the maximum extent poSSible, to b.n~g mto
the mainstream of our financial system those millions of Federal payment recipIents
who currently do not have bank accounts.
In implementing the EFT 99 program, we have consulted extensively with all
stakeholders and especially the Congress and believe that this consultation has been
instrumental in developing a successful program.
EFT 99 Implementation Progress-Achievements to Date
As a result of the Act and Treasury's public education and outreach programs, we are
seeing significant progress in the conversion of check payments to EFT. In FY 1998,
Treasury's Financial Management Service (FMS) issued more than 860 million payments on
behalf of non-defense agencies, including benefit, salary and vendor payments as well as tax
refunds, grants, and loans. Sixty-eight percent of the FY98 payments, not including tax
refunds, were made electron icaJJ y. Today, almost three-quarters (73 %) of these payments are
being made electronically, compared to 55 % made electronically in FY95. Since FY95, total
Treasury-disbursed check volume has decreased by 110 miJJion checks resulting in significant
recurring savings. to the government.
Federal benefit, salary, and retirement payments are being made by EFT in impressive
numbers today: more than 75 % of SSA and Veterans Administration benefit payments, 90%
of Federal retirement payments and 97% of aJJ Federal salary payments are made by EFT.
AdditionaJJy, newly eligible SSA beneficiaries are signing up for EFT, through the Direct
Deposit program, at a rate of slightly more than 90%. The percent of vendor payments made
electronically since FY 1995 has grown from 10% to 50%, with many agencies making more
than 80% of their vendor payments electronically.
On September 25, 1998, Treasury published a final rule in the Federal Register (31
CFR Part 208 (EFT rule» prescribing the: implementation of the EFT 99 program effective
January 2, 1999. The EFT rule was issued after consideration of the testimony received at
four public hearings around the country and the 111 comment letters received from financial
institutions, consumer and community ba~d-organizations, Federal payment recipients, and
other key stakeholders. The EFT rule establishes the circumstances under which waivers are
available for payment to recipients, provides the requirements of accounts to which Federal
payments may be sent by EFT, and sets forth the responsibilities of Federal agencies and
recipients under the regulation. The regulation also provides that any individual who receives
a Federal benefit, wage, salary, or retirement payment is eligible to open a low-cost Treasury2
designated account, called an Electronic Transfer Account (ETA SM), at a financial institution
that offers such accounts. Additionally, Treasury remains committed to working with
interested States to combine federal EFT payments with State Electronic Benefits Transfer
programs. I will be discussing the ETA SM in more detail later in my remarks.
The EFT rule emphasizes recipient choice through an accommodative waiver policy
formulated for the purpose of minimizing hardships to Federal payment recipients. While we
view the program as an opportunity to bring as many people as possible into a relationship
with a depository financial institution, we wanted to ensure that any individual receiving a
Federal payment may invoke a hardship waiver based on the recipient's assessment of his
eligibility and continue receiving a check. Treasury is confidant that this approach will
support the goals of the program as more and more individuals become familiar with EFT over
time. Indeed, the widespread utilization of EFT by Social Security recipients and other
Federal benefit recipients already indicates the general acceptance of EFT by the public.
One of the most important considerations in implementing EFT 99 is to ensure that
Federal payment recipients, particularly recipients of Federal benefit, salary, and retirement
payments, are aware of and understand their options and choices under the program. Federal
agencies are required under the EFT rule to notify current check recipients of their option to
have their Federal payment deposited into an account at the financial institution of their choice,
wait for the availability of the ETAs M if they have no account, or invoke a hardship waiver
and continue to receive a check. We continue to work closely with the major benefit agencies;
Social Security Administration, Veterans Administration and Office of Personnel Management,
to ensure that this information is available. Agencies are not authorized to withhold, suspend,
or delay a payment if a recipient does not respond to a request for a waiver notification under
the rule. We are ensuring that full disclosure of these options is being made.
We continue to work closely with the Federal Reserve and organizations such as
National Automated Clearing Housing Association (NACHA) to expand the flexibility for
corporations to receive payments electronically including innovation such as FedLine ED!.
We believe these efforts will support increased utilization of EFT for vendor payments
Public Educat ion
Treasury has committed extensIve resources to an innovative grass roots approach to
public education.
We have conducted extensive market research to learn more about recipients of Federal
payments. and we are using that information to develop an effective. nationwide public
education campaign. Studies were cond ucted on the characteristics of Federal check
recipients, on the needs of those recipients. and on how best to educate this population on the
advantages of electronic payments. One such study. which utilized focus groups around the
country, tested various EFT 99 messages that could be used in the public education campaign.
3
We recognize that a key to the success of EFT 99 is providing clear and easy to ~nderstand
information to stakeholder groups and the public about available options.
Treasury has undertaken extensive outreach efforts including meetings with various
interest groups, such as consumer and community-based organizations, government vendors,
financial trade associations, and financial services providers. We have placed a heavy
emphasis on consumer and community organizations in our public education efforts, as these
groups represent and interact directly with payment recipients on an ongoing basis. We have
established partnerships with literally hundreds of local community organizations to assist us in
our efforts to reach current check recipients. I believe this grassroots effort is critical to the
success of converting check recipients to electronic payments.
Components of the public education campaign include messages to current check
recipients about the program to convert to EFT payments, options available under the EFT
rule, the safety and convenience of EFT, and how to sign up for Direct Deposit. Another key
aspect of the campaign is helping those check recipients make the most informed choices by
educating them on basic financial literacy, such as how to obtain and maintain a bank account.
Agencies are notifying payment recipients that they have choices: they have the option to open
an account at a financial institution of their choice, to wait for the availability of the ETA SM if
they do not have an account at a financial institution, or to invoke a hardship waiver and
continue to receive a check. Recipients will continue to receive a check unless and until they
provide to the paying agency banking information required for an EFT payment. We do not
want to force recipients into choices that are not right for them, and this message will be key
to the campaign and included in any literature that we distribute.
Whatever choice is made, recipients' payments will continue to be made on time and
without interruption. I would like to emphasize that no payment will be withheld or delayed
for any reason related to the implementation of EFT 99, and that any Federal payment
recipient who does not sign up for Direct Deposit will continue to receive his or her benefits
by paper check.
Additionally, Treasury continues to meet with Federal agencies to assist them with EFT
implementatio.n issues. Treasury also maintains an ongoing dialogue with agencies through
~ell attended Interagency policy workgroups that were formed to address EFT conversion
Issues.
.
In summary, we will continue to work closely with the grassroots community, the
~nvate sector.. and other Federal agencies to educate consumers so that they can make well
Informed chOices and to minimize disruption to recipients of Federal payments.
ETASM Status
One of the most complex and challenging issues confronting us in the EFT 99 program
4
is how to meet the needs of the millions of Federal payment recipients who do not have an
account at a financial institution. Treasury is committed to exploring ways to provide greater
access to financial institutions for consumers. In response to the requirement that Treasury
ensure access to an account to those who are required to have an account to receive electronic
payments, Treasury is currently designing the ETA SM, which can be offered by any federallyinsured financial institution that chooses to offer the account under the terms prescribed by
Treasury.
Secretary Rubin is committed to providing opportunities to those individuals without an
account at a financial institution to join the financial services mainstream. Financial
institutions offer many services that are critically important to many families in America
including access to mortgage, business, and other loans. Individuals establish personal credit
by maintaining an account at a financial institution. We consider the ETA SM to be an
important stepping stone to more full service banking relationships while providing a safe,
reliable, and low-cost alternative to recipients who receive and cash checks. Our efforts to
implement the ETA SM are well underway. but significant work remains.
On November 23, 1998. Treasury published in the Federal Register for a 45-day public
comment period proposed ETAsM features. The ETAsM, as proposed, will be available to all
recipients of Federal benefit, salary. wage. and retirement payments at reasonable cost and
with comparable consumer protections available to other account holders at the financial
institution offering the account. Under the proposal, the ETA SM would accept only electronic
Federal payments; be subject to a maximum price of $3.00 per month; have a minimum of
four cash withdrawals per month included in the monthly fee; allow point-of-sale transactions;
require no minimum balance; and provide a monthly statement. Treasury proposes to
compensate financial institutions for each account established. The account may be offered
only by federally-insured depository institutions and may not involve linkages between the
depository institution and a payment service provider (e.g. check casher).
Treasury took extensive steps to seek public comment on the proposal through use of
the Internet and by ensuring that every financial institution in the country and Members of
Congress were provided a copy of the ETA SM Notice. The Notice was posted on the Financial
Management Service website (www.fms.trea::d!(w.) along with other information related to
the ETA SM. FMS received 198 comment letters in response to the notice. The comments
were received primarily from financial Institutions. financial institution trade associations, and
consumer and community-based organiZdtions. Others submitting comments included Federal
agencies. Federal payment recipients. non-financial institution trade associations, and nonfinancial institution payment service proViders.
The majority of comments on the proposed ETA SM features were generally supportive
of Treasury's efforts to design a low-cost account for those recipients without accounts at
financial institutions in order to transition them more fully into the financial services
mainstream. However. the comments retlected divergent views on some proposed ETAsM
features, including account eligibility, the set off prohibition, the monthly fee, the number of
cash withdrawals methods of access, and the monthly statement. Comments were also
divided on the qu~stion of whether to allow financial institutions the option of offering .
additional features at an additional cost, if any, to the recipient, and whether compensatIng
financial institutions for one-time set-up costs would incent them to offer the ETA SM.
Comments on ETAsM Features
Comments from consumer and community-based organizations were particularly
supportive of the proposed requirement that no eligible recipient could be denied an ETA SM by
an ETA SM provider and of the level of consumer protections on the account. Consumer
organizations were divided on the reasonableness of the $3.00 monthly fee. In addition, a
majority of these commenters felt that the minimum of four cash withdrawals should be
increased.
Comments from financial institutions indicate that they are concerned about the
potential for a heightened risk of offering the ETA SM relative to other accounts offered by
financial institutions. The particular concerns cited by financial institutions include: inability
to control the risk of loss by screening applicants prior to opening an account; the lack of
discretion to close accounts; and how to manage the account's financial exposure.
In evaluating the comments received. Treasury is considering measures that would
mitigate risk to financial institutions that offer the ETA SM while remaining cognizant of the
need to ensure thilt the account remains available to individual federal payment recipients and
that costs to recipients and consumer protections on the account remain substantially
unchanged.
Comments on Additional. Optional Features
Treasury also solicited comments on whether Treasury should allow ETAsM providers
to offer three additional features at the option of the financial institution and at an additional
fee. if any, to the recipient. The features are interest payments on account balances, deposits
of other electronic funds. and pre-authOrized ACH debit capability for recurring bill payment.
Most cornrnenters believed that interest paid on the account would be too little to be
meaningful. A majority of comments supported allowing additional non-Federal deposits into
the ETAsM. Approximately half of both large and small financial institutions, and most
consumer o~g.anizations. commented that other electronic deposits should be allOWed, citing
enhanced utility to the recipient and the inability of some financial institutions to distinguish
between types of deposits. Comments were divided over whether Treasury should alIow
ETAsM providers to offer ACH debit capability. Supporters of the feature pointed to
increased utility to the recipient. including lower bill paying expenses. Financial institutions
and consumer organizations that opposed the inclusion of this feature pointed to the potential
for fraud against the account holder and the increased potential for overdrafts and erroneous
transactions.
Compensation to Financial Institutions
In addition to seeking comment on proposed basic and optional ETAsM account
features, Treasury sought comment on whether the proposed compensation of $12.60 for each
ETAsM opened would incent financial institutions to offer the account, and whether the
proposed compensation should be paid for ETAsSM opened by recipients with existing
accounts. Treasury derived this compensation amount with the aid of independent financial
analysis. There was concern expressed by many financial institutions over the adequacy of this
compensation to fully cover their account setup costs.
Financial institutions commenting on the question of compensation for existing account
holders indicated that the compensation should not depend on whether the customer is
currently "unbanked" or has an account already, pointing out that the costs of opening an
account are the same in either circumstance. Consumer organizations also favored not
distinguishing, for compensation purposes, between recipients who have and do not have
existing accounts.
ETAS M Next Steps
Our analysis of the public comments is well underway, and we are striving to strike a
balance between ensuring that a large number of banks will offer the account and ensuring that
the objective of providing a low-cost account with full consumer protections is achieved. At
this time, we estimate that the final ETA SM account features will be released this spring. As
we finalize the attributes, we are aggressively working to obtain commitments from financial
institutions to offer the ETA SM. We currentl y esti mate that financial institutions will begin
enrolling in the program beginning early thiS summer with the ETAs M being available to
recipients in late summer of this year. Our public education program for recipients and
financial institutions will be cmica! to the succe~~ of the ETA sM .
Conclusion
In conclusion, EFT 99 implementation is proceedmg very successfully. Implementing
the EFT 99 program provides us an tmp()~lnt opponunlty to deliver the high quality of service
that our customers deserve, to help to bnn~ federal payment recipients into the financial
mainstream and at the same time to lower the cost of government to American taxpayers.
Thank you, once again, for the oprortunity to report on the progress of EFT 99. I will
be glad to answer any questions the Subcommittee may have.
-)07
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
March 01, 1999
Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
March 04, 1999
June 03, 1999
912795BNO
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
4.570%
4.700%
Investment Rate1/:
Price:
98.845
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. All tenders at lower rates were accepted in full.
Tenders at the high discount rate were allotted
97%.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive_
$
PUBLIC SUBTOTAL
21,729,161
1,396,018
Federal Reserve
Foreign Official Add-On
s
TOTAL
7,050,114
456,520
456,520
23,581,699
7,506,634
4,174,955
24,280
4,174,955
24,280
27,780,934
$
Median rate
4.550%: 50% of the amount of accepted competitive
tenders was tendered at or below that rate.
5% of the amount of accepted competitive
Low rate
4.460%:
tenders was tendered at or below that rate.
3id-to-Cover Ratio
II
=
23,125,179 I 7,050,114
3.28
Equivalent coupon-issue yield.
RR-2986
5,654,096
1,396,018
23,125,179
Foreign Official Refunded
SUBTOTAL
$
http://www.publicdebt.treas.gov
11,705,869
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
March 01, 1999
Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
March 04, 1999
September 02, 1999
912795CM1
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
4.585%
4.772%
Investment Rate1/:
Price:
97.682
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
All tenders at lower rates were accepted in full.
Tenders at the high discount rate were allotted
98%.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive,
$
PUBLIC SUBTOTAL
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
TOTAL
$
20,436,217
1, 106, 726
$
21,542,943
5,154,226
2,349,380
2,349,380
23,892,323
7,503,606
3,875,000
125,620
3,875,000
125,620
27,892,943
$
Median rate
4.560%: 50% of the amount of accepted competitive
tenders was tendered at or below that rate.
5% of the amount of accepted competitive
Low rate
4.480%:
tenders was tendered at or below that rate.
Bid-to-Cover Ratio
II
=
21,542,943 / 5,154,226
4.18
Equivalent coupon-issue yield.
http://www.publicdebt.treas.gov
RR-2987
4,047,500
1,106,726
11,504,226
DEPARTl\1ENT
OF
THE
TREASURY
NEWS
omCE OF PUBUC AFFAIRS. 1500 PENNSYLVANIA AVENUE, N.W.• WASlflNGTON, D.C .• 20220. (202) 622-2960
For Immediate Release
Text as Prepared for Delivery
March 8. 1999
TREASURY SECRETARY ROBERT E. RUBIN REMARKS AT NATIONAL
ACADEMY OF FINANCE AND WILSON HIGH SCHOOL PARTNERSHIP
I am pleased to return to \Vilson High School on the occasion of the signing of a
memorandum of understanding creating a national partnership between the National Academy
Foundation (NAF) and the Treasury Department. Let me begin by recognizing the presence here
of some of the people who have made this partnership possible. Sam Golden and Ed Hanley from
Treasury's Office of the Comptroller of the Currency. Mint Director Phillip DiehL the many
distinguished people who will serve on the Advisory Board for the Finance Academy. and. of
course. Sandy Weill ofCitigroup. Sandy is founder of the NAF. and one of the great leaders of
the American financial industry, His presence here and involvement in this partnership is a
testament to his commitment to education I \\ould also like to welcome back to Wilson. Nina
Hurwitz. a former teacher. and \vife of our consultant on education issues. Sol Hurwitz, She is
returning to Wilson for the first time since her graduation from Wilson nearly 45 years ago,
Treasury has had a close and producti\c partnership with Wilson High School over the
last three years, In that time. more than 100 \\'i Ison students have interned in Treasury offices.
and in the last two years, Treasury has supported the Business and finance Academy. which.
under this partnership \\'ill no\\ he called thl' \\'i!SOI1 Academy of finance,
Today. I would like to say just a fe\\ \\ords about the importance of education. and how
the Federal gO\l~rnment and the business community can help,
One thing I have learned 111 Illy [<lreef. hoth during my twenty-six years in business and
finance on \Vall Street. and then at llK \\hilt: Ilouse and as Secretary of the Treasury. is the
importance of education in achie\'ing one' S GlrCer goals. (ictting a good education has always
been a key to prosperity. but education is C\'CI1 l11orL' important no\\. In today's global economy.
information and kno\\lcdge are fundamenLti requlsltcs fur success.
RR-2988
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
Studying hard is up to you. However, while government and business cannot study for
you, there are things we can do: we can enhance your educational opportunities through support
for efforts such as this academy; we can provide you with internships and jobs if you do well in
school; and we in the Federal government can make higher education more affordable through
Pell Grants. Hope Scholarships, tuition deductions. and the national service program.
As I mentioned earlier, at Treasury we try to assist students by offering internships to high
school students which provide students substantial and valuable work experience as they pursue
their career goals. I would encourage you to consider applying for an internship next summer.
Our Partnership in Education program also supports the Wilson Academy of Finance through
donations of computers and through workshops on college preparation and personal finances, and
by providing speakers so that you can learn more about specific career areas. I would also
encourage you to take advantage of these opportunities. Career academies such as the Academy
of Finance here at Wilson can play an important role in helping you gain the skills you will need
to further your educational and career plans. After all. I would like to remind you that Warren
Buffet, the second wealthiest person in the country by most estimates, is a graduate of Wilson.
The agreement we are signing today builds on the existing affiliation between Treasury
and Wilson by launching the partnership between NAF and Treasury. This partnership signifies
NAF's support for the Wilson Academy of Finance, and lays the foundation for broader
cooperation between NAF and Treasury. NAF assists almost 300 academies around the country
and provides schools with industry validated and structured curricula. NAF's sponsorship of the
Academy of Finance will strengthen and solidify the Academy, help your teachers better measure
your performance, and it will therefore, help each of you be better prepared for the future.
Let me conclude by wishing you all the best as you continue your education. Sandy and I
would now welcome any questions the students may have. Thank you very much.
- 30 -
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFlCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20220. (202) 622-2960
Weekly Release of U.S. Reserve Assets
March 2, 1999
The Treasury Department today released U.S. reserve assets data for the week ending
February 26, 1999.
As indicated in this table, U.S. reserve assets totaled $75,316 million as of February 26,
1999, down from $75,459 million as of February 19, 1999.
1999
Total
Reserve
Week Ending
Assets
Special
Gold
Stock
Drawing
II
Foreign
.
C urrencles
Reserve
JI
R Ig ht S 21
ESF
SOMA
Position in
IMF
2/41
February 19, 1999
75,459
11,048
9,588
11,734
18,586
24,505
February 26, 1999
75,316
11,048
9,474
11,893
18,624
24,277
11 Gold stock is valued monthly at $42.2222 per fine troy ounce. Values shown are as of January 31, 1999. The
December 31, 1998 value was $11,046 million.
2/ SDR holdings and (he reserve position in the IMF are based on IMF data and revalued in dollar terms at the official
SDR/dollar exchange rate. Consistent with current reporting practices, IMF data for February 19, 1999 are finaL Data for
SDR holdings and the reserve position in the IMF shown as of February 26, 1999 (in italics) reflect prelimInary
adjustments by the Treasury to the February 19, 1999 IMF data in light of US sales of SDR to other IMF member
countnes.
3/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) Jnd the Federal Reserve's System Open ivhrket
Account (SOMA). These holdings are valued at current m,uket exchange rates or, ",·here appropn,llC, ,1l slich other rates as
may be agreed upon by the parties to the transactions.
4/ Includes SDR 361 million loan to the IMF under the Gener.ll Arr:tngements to !)orrow (GAB) In July 1998 .
SDR 619 million loan ro the IMF under the New Arrangements to Borro"" (NAB) In December 1998
.111(j
,\n
RR-2989
Far press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
~iJ78~q~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
..............................
OFFlCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED FOR RELEASE AT 1:30 p.m. EST
Text as Prepared for Delivery
March 2, 1999
"The United States and the Challenge of Global Growth"
Remarks by Lawrence H. Summers
Deputy Secretary of the Treasury
National Association for Business Economics
This is a profoundly new era for all of us. With the rise of information technology. with the
general spread of market forces. with the rise of emerging markets. with ever-greater global
integration -- the world is being changed in fundamental ways. But ironically. for all that is ne\\.
in many ways the problems that are becoming paramount in the late 1990s are traditional ones:
dealing effectively with financial crises and ensuring adequate global economic demand.
Against that backdrop I would like today to reflect on the economic situation in each of the major
parts of the world economy. hefore bringing the pieces together to talk about what it means for
global economic gro\Nth.
I. The \\'orld's Locomotive
The United States still stands out as a beacon of strength. The recovery is now the longest
peacetime expansion in history. The things that should be LIp arc up. and the things that should be
down are down:
almost 18 million new jobs ha\"e been created sll1ce President Clinton took office. and
redl \\ages arc grcming at their fastest rate In llll)rC than twenty years
•
inflatioll. unemployment. \illknt crime and the \\elfare rolls -- all are lower than they
ha\'e heen in a generation.
and the burden of tile deficit has at last heen litkd. At the start of the first Clinton
Administration the deticit for 1998 \\as projected to be $357 billion. Instead. \\c had a surplus of
$70 billion. And the eBO and OMB arc both predicting surpluses for years to come.
RR-2990
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
As a result of the deficit cuts we have seen in this decade. more than one trillion dollars in capital
that would otherwise have been invested in the sterile asset of government paper has instead been
invested in America's future: in our productive businesses. in our workers, in our cities and in our
homes.
That prudence will stand us in good stead as the 21 st century approaches. But -- as Goethe once
said. the time when the light is brightest is also when the shadows are darkest. On the other side
of some of our successes it is possible to see important points of vulnerability:
•
cutting the deficit has helped raise our rate of national saving -- from 3.4 percent of
national income in 1992 to 7.5 percent in the first three quarters oflast year. But this is
still well below the rates we achieved in the 1950s and 1960s. And during this same
period the rate of personal savings has fallen to a 55-year low.
•
we are growing faster than any other country in the world -- accounting for more than
two-thirds of industrial country growth last year and probably a similar proportion in the
year to come. But that very success is taking its toll on our external position. Private
sector forecasts suggest that the United States current account deficit rose more than $80
billion. to $235 billion in 1998. and predict it will rise further in the year to come.
•
complacency is another potential source of vulnerability. Experience suggests that great
mistakes of optimism -- whether they be in asset valuations. the creation of new capacity.
or the acceptance of leverage -- come in good times.
All of these concerns bring out two points in sharp relief.
First. they confirm the importance of using today' s good economic times to invest in the future.
All the signs suggest that the recovery can and will continue -- albeit at a slower pace than we
have seen in recent months. But experience teaches that the best kind of insurance is freedom to
maneuver. By addressing the long-term problems facing Social Security and reducing the
national debt we can leave the fiscal cannon well-loaded to face the future. With that fiscal
prudence and today's low expectations of inflation the United States is well-positioned to
respond on all fronts if trouble comes.
Second. they underline the United States' heightened stake in restoring strong sustainable growth
abroad. And here. to be sure. there are now important reasons for concern.
II. The Risks Beyond Our Borders
1. Developing Asia
I have just returned from a five-nation trip through Asia and I must admit that the experience was
a sobering one.
To be sure, there are important points of light. Several countries in the region worst hit by crisis - notably the Philippines, Thailand, and Korea -- have made important strides toward stabilizing
their economies and making the changes needed to revive confidence and gro\\1h over the long
term. Visiting Korea -- a country that a little a over a year ago stood on the brink of a general
default and certainly faces a great many challenges in the future -- I was particularly impressed
by the progress that a year's decisive leadership and strong policies had achieved.
However, casting a shadow over these countries' prospects are the continued problems of their
neighbors. While Indonesia's recent success in implementing parts of its macroeconomic
adjustment program has done much to stabilize the economy, political uncertainties are a major
barrier to long-term renewal of confidence and growth. Malaysia, too, is in a state of flux.
China has been a major source of regional stability these past eighteen months. And talking once
again with Zhu Rhongji, the Chinese Premier, in Beijing I was happy to hear him reaftirm his
desire to see China play that role in future. But as the leadership recognize, recent events
heighten the need to address China's long-tem1 problems -- especially the problems of the stateowned-enterprise sector and mounting levels of financial sector debt. Those reforms, in tum, will
pose an even greater challenge to policy makers in an environment of declining regional -- and
global -- gromh.
2. Japan
By far the most important factor in determining how the next months play out in Asia will be
what happens in Japan. All now recognize that there has recently been an important evolution in
the Japanese authorities' response to the crisis. Moves to implement two large supplementary
stimulus budgets and ambitious plans to strengthen the financial sector have been particularly
welcome. But for all that. the uncertainties facing the economy have almost certainly increased
since last fall and gro\\1h forecasts have been revised further downward.
We all agree on the importance of price stability -- but it is important to recognize that the goal of
price stability means avoiding deflation as well as inflation. Considering the risks it faces,
Japan's promised fiscal stimulus needs to be fully implemented and sustained over the next few
years. Its boost to the economy should also he accommodated by monetary policy.
Going forward. it will be critical to the stahility and gro\\1h of the entire region that the exchange
rate does not become a substitute for policy -- and for Japan to think creatively about the best use
of all the tools of fiscal and monetary policy to create an expectation of confidence and renewed
growth.
3. Western Europe
In Europe, too, inflation and gro\\1h forecasts are being revised downwards. As the G7
reaffirmed last week, appropriate European macroeconomic policies and structural measures will
both be important for promoting employment and investment and supporting global gromh. It is
3
a striking reflection of the weakness of domestic demand that, despite the Asian crisis, Europe's
current account surplus -- at nearly 2 percent of GDP -- is expected to be little changed in 1998,
at around $110 billion.
With the advent of the single currency, the members of "Euroland" no longer have the same
capacity to respond to shocks with the traditional domestic monetary and exchange rate levers.
Nor do they have much room to respond through fiscal policy. Thus, as an important complement
to a supportive macroeconomic policy stance, success in pursuing structural reforms will be
essential to give Europe's product and labor markets the flexibility and dynamism to grow
rapidly and better adjust to shocks.
Here the European countries' own need to raise investment and employment coincides precisely
with the global need for stronger growth. It is perhaps no accident that the countries in the Euro
area that have made the deepest structural reforms -- such as the Netherlands, Ireland and
Portugal -- have also recently enjoyed the most vigorous recoveries.
-I. Latin America
For a while, it appeared that the storms of crisis might largely pass by Latin America. In
Argentina and Mexico, especially, important steps were taken to respond to the market
turbulence and tackle long-standing weaknesses. But more recently Brazil has faced mounting
market pressures that the government -- supported by the IMF and the international community -has not entirely been able to contain. These troubles, in tum, have posed risks to Brazil's
neighbors.
Argentina. Mexico. and others will need to continue to buttress their defenses in the months
ahead. But most important of all will be the actions taken by Brazil. The Brazilian authorities
have taken important steps to reduce their fiscal deficit. In the context of a revised economic
program supported by the IMF, the authorities must persevere with those fiscal efforts if they are
to inspire confidence. Equally vital will be establishing a new. credible and transparent monetary
regime that can preserve the financial stability that the real plan achieved. President Cardoso
remains committed to these objectives. But given recent events it may take time and
perseverance to convince investors that Brazil has turned the corner.
5. Russia and Eastern Europe
If there is a more pleasant surprise in recent events it has been among the Central and Eastern
Europe economies. So far. at least, they have largely emerged unscathed from the crisis in Russia
and general downturn in emerging market confidence, although larger-than-expected external
imbalances have put downward pressure on exchange rates in recent weeks. Poland and Hungary
stand out as star performers. But nearly all the countries in the region have made progress in the
past eighteen months. This could provide some valuable protection against further shocks.
4
Yet the storm clouds to their East are still all too apparent, as Russia continues to face the
consequences of the abandonment of its macroeconomic and exchange rate regime last August.
With the government still unable to raise the revenues to pay its bills -- or service all of its debts - and with inflation and political uncertainty both on the rise, it is far from clear that the period of
danger in Russia has passed. As we have said throughout, the United States and the international
community stand ready to support Russia in putting in place a credible strategy for resolving
these issues. But the choice is for Russia and Russia alone to make.
6. The Poorest Countries
Nor can we afford to forget -- in these fast-moving times -- the parts of the world where the story
cannot change fast enough. The 1990s have shown that market economics works in Sub-Saharan
Africa, just as it does anywhere else. In several countries, we have seen 7 percent growth rates
after years of stagnation and decline, and rising capital inflows from the lowest of low bases. But
there is a long way to go yet.
Even committed reformers can find that a legacy of bad policy and aid dependence is a heavy
burden to shake off. That is why the budget presented last month to Congress proposes
significant additional funding for debt relief for poor, highly-indebted nations who are making
strides toward reform. We hope that the international financial institutions will also play their
part. But by far the most important contribution that the world community can make to these
countries' prospects will be to create the conditions for strong and sustainable global growth.
III. The Big Picture -- Key Challenges
In this disturbing global picture two major challenges stand out.
First, there is too little gro\\1h in the global economy. The risks around the world are still very
much tilted toward lack of growth, spare capacity, and slowdown -- rather than toward economic
overheating. Concerns are about excess supply not excess demand. And in many places worries
about rising prices have given way to concern about falling prices.
Second. there is too little balance in global gro\\1h. As I have said. growth in the United States has
accounted for the bulk of industrial country growth -- but at 4 percent, it is very likely above what
would be considered a long run sustainable trend and is giving rise to very substantial imbalances.
An effective strategy for addressing these challenges will have three components.
First, strengthened policy in the industrial countries centered around the need for faster global
growth. We in the United States will do everything we can to keep our economy growing strongly.
But we cannot assume that the global economy will be able to fly permanently on a single engine.
As the G7 affirmed in Bonn, the shift in the balance of global risks puts the burden of
responsi bili ty on all of the industrial economies to pursue policies aimed at creating strong
5
domestically generated growth. The fragile state of confidence and recovery in Asian markets
makes this an especially important priority for Japan.
Second, effective policies to build confidence and growth in the emerging market economies.,
While a strong case can be made that excessive capital inflows may have contributed importantly
to the crises, it seems clear that the problem for the next few years will be increasing confidence
in these countries and ensuring that flows to these continue. It is the irony of financial crises that
while they are usually caused by there being too much lending, they are prolonged by there being
too little.
As long as confidence -- and the lending that it engenders -- remains weak, so too will the
prospects for achieving a rapid recovery across the developing world and further costly
adjustments being avoided. Economies with greater systemic significance -- notably Brazil and
Russia -- bear a particular responsibility here to put in place policies and reforms that will stick.
Third, concerted action to raise long-term confidence in the international financial system as a
whole. The history of past financial crises -- indeed, the United States' own Savings and Loan
crises -- suggests strongly that the global market system has the capacity to emerge stronger out of
the events of the past eighteen months. But only if the experience is truly taken to heart.
The United States and the rest of the G7, key emerging market economies, the international
financial institutions and the international community are all now involved in a major effort to
limit and better contain financial crises such as those we have seen in Asia and elsewhere.
•
we need to find ways to help countries build the intangible infrastructure of a modern
financial system -- a system built on high levels of transparency and disclosure, a true
private sector credit culture. and effective supervision and regulation. And we need to find
ways to monitor that progress and drive it forward.
•
V·ie
•
and we need more effective ways to respond to modern crises: first, by having an
improved capacity to respond quickly. with large volumes of very short-term conditioned
finance. and second, by devising better mechanisms for ensuring that private sector
creditors bear their share of the burden.
need to help emerging market economies pace their entry into the global capital market
\vith the development of their domestic financial systems -- and we need. in this context,
to have more effective means of international surveillance to discourage them from taking
excessive risks.
None of these "architectural" challenges poses easy simple answers. And several involve solutions
that it would not be wise or appropriate to implement immediately. But in the significant recent
strengthening of the IMF's data disclosure standards for countries; in the agreement in Bonn to
create a new Financial Stability Forum for improving global coordination of national and
6
international financial regulatory bodies; and in the creation of the IMF's new fast-disbursing,
higher-interest contingent credit line for countries suffering from contagion -- in these and other
changes, very important progress has been made.
Much has been done. Much remains to be done. As we go forward we can and must continue this
work. Most important of all, we must work to ensure that it takes place in a climate of
strengthened, truly global, growth. Thank you.
-30-
7
DEPARTl\lENT
OF
THE
TREASURY
1789
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 10 A.M. EST
Text as Prepared for Delivery
March 3, 1999
TREASURY DEPUTY ASSISTANT SECRETARY
(GOVERNMENT FINANCIAL POLICY)
LEWIS A. SACHS
HOUSE BANKING SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES AND
GOVERNMENT SPONSORED ENTERPRISES
Mr. Chairman, members of the Subcommittee. I am pleased to testifY today on behalf of
the Treasury Department. In my statement, I will address three topics: first, I will provide a brief
background on hedge funds and their role in the financial system Second, I will discuss the issues
arising out of the near-collapse of Long Term Capital Management last fall, and the market
developments since that time; and finally, the status of the President's Working Group on
Financial Markets study on hedge funds
Following the LTCM episode, Secretary Rubin called for a study of the potential
implications of the operations of firms such as Long-Term Capital and their relationships with
their creditors. Since that time, staffs from the Working Group agencies have been working
diligently on the study. As we have conducted this study, we have focused on excessive leverage
in complex financial institutions in general and, importantly, how it relates to systemic risk.
At the outset, Mr Chairman, I would like to emphasize that the Working Group has not
completed its study, and that the matters I will discuss today are still under consideration by the
Group. Neither Treasury nor the Working Group is prepared at this time to present final
recommendations concerning these matters. However, all the members of the Working Group
look forward to sharing their conclusions regarding the hedge fund study with you in the near
future.
RR-2991
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What is a "Hedge Fund"?
The tenn "hedge fund" is often used to characterize a variety of different types of
investment vehicles. Broadly speaking, a hedge fund can be defined to include any pooled
investment vehicle that is privately organized and not generally available to the public. Most
commonly, hedge funds are organized as limited partnerships or limited liability corporations, and
are often engaged in active trading of securities, commodities, currencies, and related derivatives.
The primary investors in hedge funds are wealthy individuals and institutions, although many
hedge fund managers tend to have significant financial interests in the fund as well.
Hedge funds are not new, but rather have existed for nearly 50 years. During the past two
decades, however, the hedge fund industry has grown significantly. Although there are no precise
figures as to the size of the industry, a number of estimates indicate that as of mid-1998 there
were between 2,500 and 3,500 hedge funds managing between $200 and $300 billion in capital.
The hedge fund industry remains relatively small, however, when compared to other sectors of the
financial markets. For instance, at the end of 1998, the approximately 7,300 mutual funds in the
u.s. had net assets of$5.5 trillion and the top 1000 U.S. public and private pension funds had
assets exceeding $4 trillion. 1
With $200 - $300 billion spread among approximately 3,000 hedge funds, most hedge
funds are relatively small, with the vast majority controlling less than $100 million in invested
capital. In fact, according to filings with the Commodity Futures Trading Commission (CFTC),
there are perhaps only a few dozen hedge funds today that have a capital base larger than $1
billion, and only a small handful that exceed $5 billion.
Although individually and as an industry, hedge funds represent a relatively small segment
of the market, their impact is greatly magnified by their highly active trading strategies and by the
leverage obtained through their use of repurchase agreements and derivative contracts.
What Role do Hedge Funds Play in the Financial Markets?
In general, active market participants such as hedge funds can provide benefits to financial
~arket~ by enhancing liquidity and efficiency Additionally, they can playa role in financial
l~novatlon and the real~oc~tio.n o~ financial risk However, some hedge funds, like other large
highly. leveraged finanCIal mStltutlons, also have the potential to disrupt the functioning of
finanCIal markets, as was demonstrated by the events surrounding the L TCM incident ofIast fall.
Analysis of the Implications of the L TCM Episode
I
Sources In\'cslmenl Company inSIJ[Ulc and PellSlolls & Investments, respectively.
2
While this committee has already heard the details of the LTCM episode, it may be helpful
to identify and underscore some of the key concerns that arise from LTCM's near-collapse, and
the issues the Working Group has been addressing in its hedge fund study.
L TCM appears to have been unique among hedge funds in terms of its combination of size
and leverage. At year-end 1997, L TCM had total assets of nearly $130 billion, including
derivatives contracts with a current market value of $3 billion. 2 With capital at the time of around
$4.7 billion, LTCM's gross leverage ratio was around 28 to 1. While a more meaningful riskbased measure of leverage is unavailable, it appears that no other hedge fund filing with the CFTC
was nearly so large and highly leveraged In fact, most hedge funds filing with the CFTC had
total assets of under $100 million and leverage ratios ofless than 2 to 1.
While the L TCM episode does not necessarily suggest that there are problems with the
entire industry, it does raise significant concerns. That a single firm with a relatively modest
capital base could finance positions so large that their unwinding might have significantly
disrupted financial markets around the globe is disturbing. This episode demands that both
market participants and financial regulators, both here and abroad, understand how L TCM
became so highly leveraged and what market practices and disciplines contributed to this incident.
It is excessive leverage of this nature, and the practices which allowed the accumulation of such
leverage, which has the potential to lead or contribute to systemic risk in the future.
Leverage
Therefore, the Working Group is spending a great deal of time examining a number of
issues related to leverage and how the leverage of firms like LTCM can be constrained more
effectively. This is the central public policy issue raised by the LTCM episode. The Working
Group is evaluating the costs and benefits of potential policy options including: relying on market
discipline, enhanced by greater regulatory scrutiny of and guidance for regulated suppliers of
credit, such as banks; resorting to more direct forms of regulation such as expanded use of margin
requirements; and, finally, imposing direct regulation on some currently unregulated market
participants. Although we have not yet come to any conclusions, we are carefully studying the
potential impact of various proposals in this area
While we have been conducting this study, renewed market discipline has begun to have a
positive effect in, at least temporarily. reducing excessive leverage. Though it proved an
inadequate constraint in the L TCM case, we have seen some tightening of market discipline since
last fall. Importantly, there is some evidence that banks and other suppliers of credit to highly
leveraged financial institutions are demanding more collateral or requiring larger "haircuts"
(effectively margin) on their repurchase agreements and derivative transactions. Again, while
these are positive developments, the Working Group is continuing to study what further steps
may be necessary.
2
These denvatlves contracts had a nolltmal pnnclple \'alue of nearl~' $1.3 trillion
3
Transparency and Disclosure
A related issue, and a key concern of the Working Group, is the adequacy of tran~parency
and disclosure. There is a broad consensus among the Working Group members that credItors
must reexamine how they make credit decisions to highly leveraged financial institutions. We
believe that creditors must demand and borrowers must provide more relevant and up-to-date
information than they have in the past. It is equally important for these creditors to report and
disclose the extent of their exposures to such highly leveraged financial institutions.
The Working Group is examining a number of proposals aimed at addressing enhanced
disclosure and transparency, including ways to encourage increased voluntary disclosure. The
Group is also examining the possibility of increasing certain regulatory disclosure requirements
and is carefully weighing the costs and benefits of all such proposals.
Again, while we have been studying the various options, there have been some positive
developments in the marketplace. There is some evidence that banks and other suppliers of credit
to highly leveraged institutions are requesting and receiving more detailed and relevant
information for making credit judgements. They are demanding greater transparency and are
more strenuously attempting to understand the nature of the risks their clients are taking.
Risk Management
Another major concern being examined by the Working Group in addressing excessive
leverage is the sufficiency of risk management practices at both the lending institutions and at the
hedge funds themselves. The LTCM episode demonstrated that the risk management systems of
some market participants were flawed and that the credit controls of even some highly regulated
institutions such as commercial banks had material weaknesses. These weaknesses have the
potential to contribute to excessive leverage and to systemic risk if not addressed.
In addition to regulators, many market participants are concerned about the adequacy of
risk management practices and are beginning to take steps to address those concerns. For
example, twelve major banks and investment banks have formed the Counterparty Risk
Management Policy Group with the purpose of developing industry standards for strengthened
risk management practices. I understand that you will be hearing from representatives of this
group later today.
Clearly, a large par. of the renewed discipline displayed by many market practitioners since
LTCM is driven by self interest and preservation -- two of the strongest incentives in the financial
markets. However, it is also in part the result of swift and appropriate action taken by bank
regulators at the acc and the Fed. These regulators have been updating their guidance to banks
and b~k exam~ners concerning exposures to highly leveraged entities such as hedge funds and are
effectIvely puttIng banks on notice that they expect to see improvements made in this area. The
4
guidance requires bankers to upgrade their credit risk management processes relating to lending
and trading transactions involving highly leveraged entities and other major trading .
counterparties. This includes obtaining adequate financial information regarding their
counterparties' on- and off-balance sheet positions, and information on business strategies,
leverage, and risk concentrations, and developing methodologies to stress test their counterparty
credit exposures.
International Initiatives
In addition to working with market participants and a variety of regulatory bodies here in
the U. S., Treasury is working closely with our major international colleagues to address the issues
raised by highly leveraged institutions, including hedge funds. Among the concerns raised by
some members of the international community is the possible influence these institutions may have
in the currency and various local capital markets. While it is difficult to assess the extent of such
influence, Treasury is involved in a number of international initiatives relevant to this and other
concerns. On February 20, the G7 Finance Ministers and Central Bank Governors agreed that
they will consider the implications arising from the operations of hedge funds and of offshore
centers, including whether additional reporting and disclosure by highly leveraged institutions
themselves is warranted or feasible. The Basle Committee on Banking Supervision has already
produced a report that identifies sound practices for bank creditors of hedge funds. Additionally,
the International Organization of Securities Commissions (IOSCO) has established a task force to
study the advisability and feasibility of imposing transparency and disclosure requirements on
highly leveraged institutions and to review current practices regarding internal controls of such
institutions.
Clearly, it will be important to continue to work closely with the various international
organizations since, as Chairman Leach and others have pointed out, hedge funds can easily move
from the United States to other jurisdictions, thus diluting some of the positive effects of any
regulatory adjustments the U.S. might consider.
Summary
As the Working Group addresses the key issues of leverage, disclosure and transparency,
and risk management, we are considering a broad universe of possible responses in order to arrive
at the most effective recommendations. The range of possibilities includes increased supervisory
oversight of the regulated providers of credit, enhanced market practices (or the establishment of
minimum standards) and possibly, increased regulation. As market discipline may not be adequate
to address these issues, we must carefully weigh the costs and benefits of adopting some
additional regulatory constraints in an effort to further mitigate systemic risks.
Additionally, we should continue to encourage the initiatives of the U.S. bank regulators
and private sector groups aimed at improving risk management practices and reducing excessive
leverage. We must also continue to work with the various international groups, such as the Basle
5
Committee on Banking Supervision and others, who will help to fonnulate a coordinated
international response to the issue of excessive leverage in world financial markets.
Mr. Chainnan and members of the Subcommittee, I appreciate the opportunity to appear
here today. We at the Treasury Department, along with the other members of the Working
Group, look forward to presenting you with our conclusions and recommendations and to
working with you to address these important issues. I would be happy to answer any questions
that you may have. Thank you.
6
NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622·2960
EMBARGOED UNTIL 10 A.M. EST
Text as Prepared for Delivery
March 3, I 999
TREASURY DEPUTY SECRETARY LA \VRENCE H. SllMMERS
HOUSE WAYS AND MEAl\S SlTBCO:\lMITTEE ON SOCIAL SEClfRITY
Mr. Chainnan. Members of the COlllmittee, [ appreciate the opportunity to appear today to
discuss President Clinton's proposal to ensure the financial \\ell-being of the Social Security and
Medicare programs and improw the retirement securit:- nf' QII .\mericans,
The advent of an era of surpl uses rather than dL'fic ih Ius radically transformed our national
debate about entitlements. The terms pf all of'the l'arl il'r traLieotls in the entitlements debate have
been eased -- provided \\e seize the oppnrtunities 11(l\\ ~l\ ~lllahk tll us, The President's framework
for Social Security both recognizes the brightlT prl'sl'l1t rl'~t!it:, ~lI1d Ill(wes us well Qlong the roQd
toward seizing the opportunities currentl:- ~l\ ~liLlhle. it' \\ e can \\or~ together on a hipartisan basis.
Today I will first hriefly describe the Prl'sident' s pl"llgral11 , I \\ ill then de\ote the hulk of my
remarks to the issue of the Prl'sidl,nt's prnp(ls~t1 tll r,lisl' thl' r~lll' or return earned by the Social
Security trust funds hy inwsting part llfthl' 'ourplu'o Il1l'ljuitil'S.
The President's Proposal
According to the Office ot' \bl1~l~l'l1ll'nt ~llld Bud~l'l, thl' surpluses il1 the unified hudget of
the federal government will tolal Illllrl' tlUll 'S-U'; trillion ll\ l'J' thl' Ill::\t 15 yeQrs, This presents us
with a tremendous opportunity. At thL' S<lllll' tll11l'. \\l' ~lrl' Jls(l J:lcing a tremendous chQllenge: the
aging of the "babyboomers" is proi~ct~d tll put L'lll 1rt111 Ills str~lill'o Oil tlte Social Security and Medicare
systems. on which so mQny rrtire~s d~pelld,
The natural approach "mild he tn t~lh' ~ld\ ~lllt~l~l' nt' this opportunity to meet the challenges
facing us. This is the objectin: of thl' Prl''ollknt'" 1'''111
RR-2992
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The President's framework devotes 6~ pcrcent of Ihese projccted hudget surpluses to the
Social Security system. Of the roughly $~,X trillion in surplusl's that \\ill go to Social Security.
about four-fifths will be used to purchasl' Trcasllr) sl'clII'i Iies, Ihe same securities that the Social
Security system has invested in since its inceptinn, The reillailling ollc-titih \vill he invested in an
index of private-sector equities. These t\\O actions \\ ill I't'llucl' the 75-year actuarial gap from its
current level of2.19 percent of payroll hy ahout t\\n-thirds, to. 0,75 percent of payroll. And they
push back the date at which the Social Security trust funds ;Irc projected to he exhausted. from ~032
to 2055.
Substantial as that accomplishmcllt \\ ould hl'. it is critictl Ihat \\c do more, Historically. the
traditional standard for long-term solvelln- (If the Soci;II Sl'curit\- sYstem
has heen the 75-vear
.
.actuarial balance, A 75-year horizon makes sense hl'CIUSl' it i, II lllg cnough to ensure that virtually
everyone currently participating in the S) Stl'll1 call l'\I1LTt tIl J"l'Cl'i\ e full payment of current-law
benefits. Attaining this objectiw \\ill n:quire additi()nal tpugh clwices. But the ohjective is both
important and obtainable. To reach it. the Presidcllt has ctlkd for a hipartisan process. We believe
that the best way to achieve this type OfC(lIllmOn ohjectin:, is to \\oIl together. eliminating the need
for either side to "go first."
In the context of that process. \\e should also lind J'l lllnltll climinate the earnings test. which
is widely misunderstood. difficult to administer. ;ll1d percci\ l'd h) l11any older citizens as providing
a significant disincentive to \\ork, In adJilillll. il is critil'~11 tklt \\C Ilot lose sight of the important
role that Social Security plays as all illSllr~ll1Cl' I'rt 1gl.1111 11\1 1\ illl1\\s and children. and for the
disabled. As President Clinton said I~I'-,t 1l1ll1lih "\\ l' .11"1\ ILI\ l' Itl plan for a future in which we
recognize our shared responsihilit) tll call' Illl' Pill' ~llltlll1l'l ;llhill\ gi\e each other the chance to do
well. or as well as possible \\ hen accidl'nts pccm. \\ hl'l1 di"'l';ISl'" dl'\clop. and \\hen the unforeseen
occurs," That is \\"hy the President ha" 1'l'l1rn'-,l'd th~lt till' l'\ l'l1tllJI hipartisan agreement for saving
Social Security should also take stcrs tp rl,dul'l' Pl\\ lTt) ~lllll\11C2 l'ldlT" \\(1l11en. particularly \\ido\\'s.
who are more than one and onc-h~tlltiml'''' .1" II~l'l) .10., .111 lliill'lIl'IIICl11ent age heneficiaries to fall
below the poverty line.
In addition to shoring lIjl StlciJi Sl'ClIIII). till' I'!l'''I,klll " Ill;11l \\ould transfer an additional
15 percent of the surpluses to \kdic~lrl'.l"\lL'Ildll1:,c Iill' Ilk (11 IIl.11 IIlISt fUl1ds to 2()2(). :\ hipartisan
process will also he requin.:d tp l'lll1"Ilkl "tnll·IUI.11 Il'!I'rJlI . . 111 this program, The ]\'1edicare
Commission is expected to repllrt ,,(\(111 tlll Ilh,>l' IIlII'1 \11.1111 1""lll''''
The President would also lI"e 12 plTl'l'1l1 1\1 1ill' "11f'plthl'S tll crcate retirement savings
accounts - Uni\crsal Sayings :\Cl'lllIl1h PI' I S \ ;ICCtlllllt" - .ll1d the remaining II percent for
defense. education. and other critical 111\ l'..,ll1ll'1l1" I hl' I\l'''i~klll \\ ill hl' announcing further details
regarding the USAs soon.
At the same time. the PrcsiLil'nl rn 11'1 "l'.., Itl "I rl'II:,clill'lll'llII,lm IT-Spl1nsored retirement plans
in a variety of ways, The Presidel1t', hudgl't .Iddrl"'ol''o till' II \\\ Llll' III pcnsion cmerage alllong the
40 million Americans \\ho \\l1r~ Illr l'm!,11 \\ l'r.., \\ i lil k\\ IT Iil.ll1 II)() l'll1pll1yees hy propnsing a tax
credit for start-up administrative and educational costs or establishing a retirement plan and
proposing a new simplified defined benetit-type plan It)r slllall businesses. Workers \\ho change
jobs would benefit from the budget proposals to imprO\ e \('sting and to facilitate portability of
pensions. In addition. the retirement security of suni\ing spuuses \\ould be enhanced by the
President's proposal to give pension participants the right to ('Iect ;1 form of annuity that provides
a larger continuing benefit to a survi\'ing spoLlse and to illlprnn~ the disclosure of spousal rights
under the pension law.
Benefits of the President's Approach
In essence. the President is proposing that \\e use the Social Security and Medicare trust
funds to lock away about three-quarters of the surpluses for debt reduction and equity purchase. and
ensure that they are not used for other purposes. This \\ould ha\e three key effects:
•
First. it would greatly strengthen the financial position orthe go\"ernment. [f\\e follow this
plan. by 2014, we will ha\'e the lo\\est debt-tn-<iDP ratio since 1917 and \yill free up a
tremendous amount oftiscal capacit:. The reductitln in puhlicly held debt \\'ill reduce net
interest outlays from about 13 cents per dollar of out Ia\ sill FY99 to about :2 cents per dollar
of outlays in 2014. Under the President's program. the decline in interest expense resulting
from debt reduction \""ill exceed the increase in Social Security expense through the middle
of the next century.
•
Second. it would strengthen significantly the flnallci;\I c()l1ditil1l1 of the Social Security and
Medicare trust funds. Indeed. it \\ould extend the Iill.' \lrtllL' Social Security trust funds by
more than 20 years, to 2055. ~lI1d extend the lik III till' \kdicare Iinspital Insurance trust
funds to 2020. i\1eeting Ollr (lnligatioll In till' ne.\l ::,:eller~ltion of seniors should be the
numbcr one priority in allucating thl' SurplllSl'S.
•
And third. it \\'ould suhstantial h increase national S;\\ In::,:. \\ hich Illust be a priority in
advance of the coming delllogr~lphic shi rt. B) 1';\:\ In::,: do\\ 11 debt held by the public and
im'esting in equities, the Presidellt' s progr~\1ll \\ i II Crl'~\ll' J"(lonl for anout S3.5 trillion more
il1\'estmcnt in producti\e capiLiI. IllelIL'C1. this \\ ill hI.: Ilk' ll'\ erse of the "crowding out" that
occurred during the era or nig lk'IICils. \\Ith gO\ l'rllllk'llt t;\king a smaller share of total
credit in the economy. interest rate~ \\ ill hl' IO\\L'1 lil;1ll otilel"\\ise would be the casco The
implications of lower interest rates \\ ill hl' plolplIlld. \(It (lnl) \\ill individuals be able to
borrow for mortgages. schoul loallS. and (ltill'r plllplSl'S ;It lo\\er rates. hut importantly.
businesses wi II be able to Ii nance III \ es tIllellts in pn ld lIl' t1\ l' pLlIlt and equi rment at the lower
rates. And the resulting larger pri\;\!L' capital st\ld IS till' h'y to increasing productivity.
incomes. and standards or li\ing. l'ltilllall:l:, Pill' rl'a~oll \\hy this program is sound
economically is that it will result in a IlWrl' rohuc;t I,rl\ ;\!L' l'COIHlllly. which will expand our
capacity to make good on our Social Securit\ ;\Ild \ kdlL'are promises. This increase in
public saving also has bencilciallillplicati()ns Itll (llll- h;ti;lllce ot"paymcnts side. Reduced
government borrowing would lead to a reduced dcpclllknce on f()reign financing. and an
improvement in our status as a net debtor to thc rcst () f thc \\orl<.1.
Benefits of USA Accounts
Social Security. strengthening employer-spoIlsorcd retircment plans. and creating USA
accounts are key pillars of the President" s proposal to pnnjdc tin~lIlcial security to retirees. We
believe that USA accounts will pflnide a signiticant stimulus to private sanngs. by enabling
millions of Americans to begin to set aside some money for rctircment.
The President's proposal aims to deal more hroadl: \\ith thc challenges oran aging society
by expanding individual access to retirement sa\·ing. :\s I notcd earlier. the President proposes to
devote 12 percent of the surpluses to estahlishing a nl'\\ s: stcm of llnin:rsal Savings Accounts.
These accounts would provide a tax credit to millions of :\lllericLln \\'orkers to help them save for
their retirement. Workers would qualify for a progrcssi\ e ta'-.: credit match against their own
contributions. For example. a IO\\-incoml' \\orker may n:cei\c a dollar for dollar match up to a cap.
In addition. low- and moderate-income \\orkers \\ill qualit·: Il)r an additional tax credit. even if they
make no contribution themselves.
Overall. the USA program \\ould he considcrahly morc progressiw than the current tax
subsidies for retirement savings --\\here higher hrackct ta\lxl: crs get higher subsidies. This proposal
would contribute significantly to national s3\ings. hccausc it \\ ill produce n:tin:ment savings for
millions of low- and moderate-incomc pCl)pk \\ 110 lin Iwt ha\ c acccss to pensioIls. Thc tax credit
match will pro\'ide a strong illCl:ntiyc for \\orkcrs to ddd till'ir 0\\11 saying to accounts.
Investing Part ofthe Surplus in Equities Wfluld Raise the Ratt' of Rcturn Earned hy the Social
Securit)1 Trust Funds
As I hone mentioned. thc Prl'sidcnl has pr(lp(l~l'd tJ'dl1slt.'rring 6.2 perccnl or projected
surpluses to Social Security. and il1\ c"til1S ~I pnrtiol1 (\I'thl'~l' tr;lll~klTcd surpluses in equities.
To d3te. the trust funds ha\c hl'CIlII1\l'~lL'd C\Clll"l\l'[\ Il1t.S. (,mCrIlmcnt bonds. While
these bonds 3rc essentially ri"k-Ircl'. till': ha\l' thl' UIJTl'''ll(lllding do\\nsiuc that thcy haw
historically p3id a lower rate 01 rel U I'll. (111 ~I\ cr~ISc. lh;111 \qlll'! Il\lll'lltial il1\cstmcnts. Betwcen ]959
and 1996. the nverage annual ratc of retulIl e~lrncd Oil stock" \\ ;IS _~.~-+o () higher than thc rnte earned
on bonds held by the trust funds.
Currently. the pension S3\ ings (\1111:111: uppl'r illL'(lllll' \llllT1ClIl1S arc ilwCStcu in private plans
that earn these higher equity returns. I Ill' highcr l'ljuit\ rl'lllrn" C;1I1 potenti311y make it possible for
these Americans to have morc upon retiremcnt. \\l' hl,[il'\l' that it is important to give all
Americans. even those of lo\\' and modl.'st Illl'ans. thl' (lpp(1rtlillit~ to enjoy these potcntial benefits
from stock market performancc.
Raising the rate of return on the trust funds \\ ould mea n t h~lt the Social Securi tv sYstem could
be brought into long-term actuarial balance \vith smaller rcductions in benefits. smaller increases in
revenue, and/or less transfer of surplus. The President's plan Illr ill\'esting in equities \vill reduce
the actuarial gap by an estimated 0.46 percent ofw:-.:ublc p:l:Toll -- and thus \\ill close roughly onefifth of the problem we face over the ne:-.:t 75 years. Ifonc \\cre to try tn achieve the same actuarial
impact of equity investments through alternati\'e measurcs. \\C \\ould ha\'e to immediately reduce
the COLA on Social Security benefits hy O.~ perccntage points. The equity investment in the
President's package achieves as much for the financial soundness of the system as would moving
the normal retirement age up by about an extra year and onc-hal Uor participants who reach age 67
in 2022. Ifwe delayed until 2030 to make the changes ncccssary tn set Social Security back on a
sound actuarial footing. the required across-thc-board Cllt ill hL'nL'lits \\ould be 5(;'0.
Investing part of the trust funds ill equities \\ould :lisn hring Social Security into line with
the "best practice" of both private and public sector pcnsion rl:1ns. Among large private-sector
defined benefit plans (those \vith more than 100 rarticipants)' more than 40% of total assets were
invested in equities in 1993; this number has risen significantly since then. Nearly all state pension
plans also now invest in equities, In 1007. state and local go\'Crnment plans invested 64% of their
portfolios in equities.
Would Equity Investments Add Risk to the Trust Funds'?
I see two broad concerns regarding trust fund ill\ L'stl1lCllt in cquities. These concerns arc
legitimate. but we believe they arc mana:;cahlc, and should nut ~t(lll LIS from achieving the potential
enhanced returns of equities.
First. stock returns are morc \olatik thallthL' rL'tUrI1S (lJl thc go\ernment bonds held by the
trust funds. However. the trust funds :lrL' \\ell-situatcd tu hL\lr L'ljUil\ risk. hecause they have long-or indefinite -- time horizons. The trust I'unds \\ nuld hL' CclP~lhk (11' riding out the ups and downs of
the market. because they recei\e thc cash 11(1\\ l'r()111 11:1:- r(l" 1:1'.L'S, :lI1d hecause of the cushion
provided by the trust funds' bond holding~.
More specifically. in\'t?sting onl: 1~ I1LTL'L'nl Il1l'LjllltIL'" "l'L'lllS tOllS to he a prudent balance
bet\',:een receiving the potential I: grL'ater return 11'11111 L'qllilic" ~lI1d kccping the iI1\estment small
enough so that the trust funds arc not 0\ LTI:- L'\p(l~L'd, I ill" I" 11LTccnt allocation to equities is much
smallerthan the customary allocation to eljllillL'~ in cithLT puhlic ur pri\~lte pension plans. Moreover.
85% of the trust funds will still he ill\csteJ a~ hcl'ulc in risk-I'rL'L' Trcasury securities.
In addition. the equity ill\cstl11cnls and disil1\ cstlllcnts th~lt we are proposing will be
smoothed in incremental additions (HCr I ~ : L'ar~ In :1Il:- :- L':II. il1\ cstmcnts or disinvestments are
projected to be less than 0,5% of the stock nwrkct. InnL'I11L'lll:1I i11\ estmcnts and disinvestments -rather than total divestiture at one time -- \\ill ilL'lp !p Illlll~~IlL' thc risk from adverse price
movements.
Finally, in the near term. all benefits will continue to he paid out of payroll and other taxes,
Furthermore, under current law. even in :203:2 payroll and othcr ta:-..:cs \\i II be sufficient to pay for the
lion's share -- about 72% -- of Social Security henefits, Thc rcmaining :28% of he netits will be paid
out using the assets of the trust funds, As only 15% ofthc trust funds' assets would be invested in
equities, only about one sixth of this 28% would he hacked by equities, In short. even in :2032. only
about 4-5% of payments from the trust funds will he bad.:ed by private sector il1\'estments,
Ensuring the Integrity of Investment Decisions
The second concern is that of political influence Oil trust fund il1\'estment decisions, Any
system of collective investment can and must addrcss these concerns. We helie\e that we can
successfully work with Congress to design a system that is tree from political influence, We need
to strike the right balance. so that \\e can earn the higher potential returns to equities. hy finding a
way to take care of these legitimate concerns.
That is why we will work \\ith Congress to design d system that ohsen'es five core
principles, These five core principles \\i II estahl ish se\eral k\cl s of protection.
First. the share of trust fund assets inwsted ill eljUilil's ought to he kept at a \'Cry limited
level. We have proposed that equity im'estment he limited to 15 pcrcent of trust fund halances, This
will be important to limit the trust funds' e:-..:posure to price ll1()\ell1ents from equity investments. and
to ensure that collective investments ne\ er aCCllunt tor nwrl' than a small fraction of the stock
market. During the first years of the program. frl11l1 ~()() I to ~() I-I-. Social Security would own. on
average. only 2% of the stock market. ()n a\ erage thr(lu~h ~()~(), Social Security would own
approximately a 4% share of the towl stoch ll1arhet.
Second. the investments should hl' illlkllL'lldelllh 1l1,lJl:l~l'd and non-political. \\'e suggest
that trust fund managers be dra\\n frnm the pri\ ate Sl'ct()r thr()lI~h competitive bidding and that the
trust fund managers be overseen b) an independent h(\:II'd I hlTl' should he \\holly independent
oversight of investment. in order te shield the trll"t IUlld" Ir(lll1 r~()litlC:d inlluence.
Third. the sale responsihilit~ pI" the indepelllklll hl),lrLi \\(\uld be to select private sector
managers through competiti\'e hiddll1~. Pri\ :l!c Sl'l·tm 1l1d1LI~l'1l1C111 \\ ill pnnide a further degree of
political insulation, Moreover. Social Securrt) hellelici:lI"Il'" lksl'r\ e thl' same efficient management
and market returns that people recei\c for their pri\;lte Ill'11Siolls ,llld personal savings.
Fourth. equity investments should be hr(l:ld-h'ISl'll. nelltral and non-discretionarv. Assets
should be invested proportionately in the broaLkst ;lrr:l: (llplIhlicl:- listed equities. with no room for
discretion in adding or deleting compLmies LlIld 11(\ rOI )111 IPI" ;Iet i \l' iJl\oh ell1cnt in corporate
decisions, We have proposed that the funds he ill\ l'sted III a total marhct index. \\'hich would
encompass a broad range of stochs. In addition. till' lllall;)~lTS shllldd he on autopilot in investing
the funds: they should have little or no discn:tioll ill till' 111\ l'stll1ent of trust fund assets. so they
cannot "time the market" or pick indi\ idual "t(lcb.
As a shareholder the trust funds should he entireh passin.? One way to accomplish this
might be to mandate that proxies be voted in the same proporti(lns as other shareholders.
Fifth and finally, collective iJ1\'estment needs to Ill' achic\ed at the lowest cost available.
This will be important both to obtain the highcst possihle rl·turns and to further cnhalll:e the system's
transparency and independence. Indexcd inH?stmcllt is less l'\pl'nsi\e than actiw management. In
addition, given the large size of the potential equity i11\ cstll1cnts h~ Social Security. \\e would expect
to pay very low asset management fees.
Let me emphasize our belief that thcrc should hc ICro gm'crnment im'olvement in the
investment. We will work with Congress to design a s~ stcm that is completely insulated from
political pressures.
The Experience of State and Local Governments
As I mentioned earlier. virtually all statc pcnsioll funds 11\)\\ il1\cst in equities. In 1997. state
and local government plans invested 6-l 1l 0 ofthcir portt(llio.s ill eLluitics. up from 56(10 in 1996. State
and local pension plans now hold fully 1() pcrcl'nl of thL' \)\crall stock market. By contrast. the
Social Security trust fund equity il1\estments \\(luld t(lLlI pnl: I )Il() of the trust funds. and would
represent. on average. about a 4% of the equity market.
Some have suggested that the trust funds migilt r~dl slwn of carning market returns. based
on the experience of state and local pensinn plans. I \\ (luld L'll1phasize first that the experience of
state plans is really not directly comparahle tp \\11;11 \\l' drl' pr(lp()sing for Social Security. State
plans do not generally operate under thc kind" (II I\.'"lriclinlls Ih<\t arc ellyisioncd under the
President's proposal. That is. the sl;llUle-.. gm l'll1il1~ -.;LI[l· 1,l;ll1s do not gcnerally require that
inyestments be made only through IIlliL'\L'd IlInd .... \\ itll .1 L"k,ll j1r(lhihilillIl <l[.!aillst adding or
subtracting equities from the inoe\. \ lan~ stalL' j1L'll~I(11] 1,1;111-. drL' ,Il'[ 1\ el: managed. and some have
explicit im'estment goals. As a rl'sult. thl' l'\j1L'liL'Il(l' (1Illll· . . L· 1,1;1I1s m:l: not he re!e\'ant as a guide
for what Social Security's expcriencc \\(luld hl·.
Our preliminary anal:- sis PI" the <\\ dli;lhk lLtl;l "lI",~L'"h tlul. ( l \ n the period 1990-1995.
public plans actually recci\ed returns tl1:11 d\ cr~l~l'd 1\\ (1 h~I"I'" 1'\ )lI1ts 11Ighcr than pri\ate plan returns
(this difference is statistically inoistin[.!ui"h;lhk Ir\ 1111 IL'I( I I \ Itl1(1ugh ill earlier periods (from 1968
to 1983) the perfonnance ofpuhli( [len"I(l1l l·lInd . . \\;1 ...... 11~ll1h inll:rior tn that of private pension
funds. this difference is also not swtisll(all~ "i~nilil",ll][ \111Il' importantly. this very slight
difference in performance during earlier pcrl(,d" (,II] I'l' L'\I,I,llllCd h~ thc fact that puhlic pension
funds generally allocated a far smal kr !,(lr\ I( 1n (11 1l1l·i r 1'( IrIll III (1 . . II) l'q U itics. and in some cases were
statutorily prohibited from huying all~ eLjuitiL'''.
The returns to trust fund in\esI1l1enh!l1 11m d~ltl' \\ (lldd Iwt stack up \\'ell in this comparison
of earnings of public and pri\ate pensipn lund" Ik(.IU"l· Ihl' tlUSt funds haw heen invested
7
exclusively in government securities untillll)\\. hoth puhlic and pri\'o.te pension funds would likely
have outperformed the rate of return earned on trust fund ill\cstments.
Advantages of Collective Investment of Social Security
There are three key advantages to ha\ing the trust funds imest collectively in equities for the
American people. These advantages relate to the abilit~ ot'detined henctit plans to bear market risk.
minimize administrative costs. and achieve progressi\it~, Defincd contribution plans. such as the
proposals for individual accounts. are less ahle to realize these ohjectives. In addition. the potential
political risk from collective investment in equities through the trust funds is not very different from
the political risk that could arise from il1\esting in equitie,-,; through dctined contribution plans.
An advantage of collectiH~ ill\ estment in cquitle'; tilrough the trust funds is that periods of
poor equity performance could be spread O\W many generation'; otcurrent and future Social Security
participants. By contrast during a market do\\ntllrn. particip~lI1ts in 0. defined contribution system
could be forced to choose between postponing retirement ~lI1d ~l se\ erely reduced retirement income.
For example. for the year that ended \\ith the third qllartlT (lj' I <n·L the S&P500 declined by 54
percent in real terms. By placing the risk ot' a market dll\\ ntum in the trust funds. we can greatly
reduce this risk to beneficiaries. Additionall~. \\ e ha\ e Ilf"()posed limiting Social Security's equity
holdings to 15% of the trust funds. ,\s I noted earlier. this Il1l'anS tlwt only 4°;;) of benefits payments
would be backed by the perfOnllanCe of equitie,;,
The second advantaL!e of Ctllkcti\ l' ill' l,,,tllll'nt ill L'lJllltIL'-'; is that the returns to trust fund
investments in equities would likel~ hL' hi~hl'r th~11l till' IL'turn" to equities held in indi\idual
accounts. This is primarily ht:cau,;e it \\()uld hl' 1l11I(il 1l1Prl' c()stl: to administer a defined
contribution plan than it would be to ali 111 III I,;lL'r J lklillL'd hL'lll'lit 11LIIl, The trust funds would expect
to pay very low asset management kl'.'-,. hl'c~lu,;e (lltill' 1,lr~L' "I/L' (lIthe trust fund asset pool. These
asset management fees could he cnJl1r~lrahk II). pr Ip\\L'I. tll,11l tilL' I h~lSis point (0.01(/0) currently
paid by the federal employees' lSI> plall li)r pri\ ,IlL' IlldILI~L'llll'lll pi tile equity-indexed "C Fund."
By contrast. administrati\ L' Uht" li)r ,I ,,~ "ll'lll \lIck-Ii 11L'lllt )Iltrihutinn plans held in the private
sector could be comparable to thl' ((\1111111,,"II)lh ~llld kl'" lll,I'~L'd h\ l'l\lIit: mutual funds todo.y. The
average equity mutual fund currentl: cll;lI~l'" hL't \\ l'L'll 1111 , ,lllll 1.';;( , Iw,is points tt)f administrative
and investment manal!emcnt Sl'f\ icc';, ('p"t" llitill" 1l1,I~Jlltllck
,uld.
,;i~niticanth. reduce the balance
- .It.
that could be accumulated in an inLii\ Idu~lI ,llT(1l1llt. \U:t "dlll~ tt) ()urcstimates. administrativc costs
of 100 basis points would reduce h~ 2( I pnCl'llt till' toLJi ,ILU '[lilt ~ICcL"lllllations at the end of a 40·
year career. Collecti\e imestl11ent tbnlu~h thl' tru"l IlIIlll" \\(lldd a\oid the need to pay the
administratiw costs associated \\ itb il1di\ Idu,II dl'(IIlJllh
~
The experience ofindi\idual acc(ll1llh ill 13rrt~I"1 ~[Ild ( hik illustrates how significant these
risks and costs can he. In Briuill. 11l;1Jl: Pl',,,\lILJ! I)L'll"lllll 1)1,111'-, t~lke 1110re tlwl1 5 rercent of
contributions in administrati\(: chare:l''-"
Chile also has had high administratiw costs. According to the Congressional Budget Office
(CBO), fees and commissions of the Chilean pension system amounted to 23.6 percent of
contributions in 1995. As a result. according to the CBO. (. hi lean \\orkers who invested their money
in an individual account in 1981 received an internal real rate of return of 7.4 percent on that
investment through 1995, despite average real returns of 12.7 percent to pension fund investments.
Even in the best of circumstances, however. costs \\ill he higher If)r a system of individual accounts
than for collectively investing trust fund assets.
The third advantage of collective investment is that it is prngressi\'e. This is one of the most
important features of Social Security: benefits are greater. as ~l percentage of wages. for low-income
workers than high-income workers. 8y investing in equities. \\ c are able to maintain this critical
feature of progressivity and avail Americans of modest means of the higher returns that have
historically accrued to equities.
In addition to these key advantages. one might note that. with regard to the concern about
political influence, this concern also exists for indi\'idual accounts. Most individual account
proposals have suggested some centralized plan structurc. hoth in order to reduce administrative
costs and to help familiarize tens of millions of Americans \\ith the range of possible investment
vehicles. These individual account plans would create a Imge pool of money under a single
manager. or a handful of managers. This pool of money \\ould not look very different from the
Social Security trust funds. With any centralized pool oj' assets there is the potential for those
pursuing a political agenda to try to influence it.
We can all be encouraged hy the history of the Thrift ~a\ings Plan (ISP). whose investments
have not been subject to political intluence. We helie\ c that SOllll' of the features that have protected
the TSP system so well are \\'orth emubting. Thcse include the TSP system's independent board,
its private sector managers. and the rule that equit:-. il1\ l'<"Ul1Cnts can only he made by tracking an
index.
Conclusion
In conclusion, it will be critical tn h~l\ e the :\dlllinlstl'atilln and Congress work together to
address the needs of future generations. \\'e neeJ to hCl'P till' promises that we haw made to retirees,
without unduly burdening youngt:r generations. \\'c \\ant tn \\nl'h \\ ith you. on a bipartisan basis,
to implement the President's program.
I believe that we can find a saIC and prudcnt \\~l~ t(1 participate in the enhanced returns in
equity markets.
Thank you. I would welcome al1\ questiolls.
- ~ ()-
NEWS
ornCE OF PUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 1:30 P.M. EST
Text as Prepared for Delivery
March 3, 1999
TREASURY DEPUTY SECRETARY LAWRENCE H. SUMMERS
HOUSE COMMERCE SUBCOIVIMITTEE ON
FINANCE AND HAZARDOUS MATERIALS
Mr. Chairman, Mr. Ranking Member. and Members of the Committee, I appreciate the
opportunity to appear today to discuss President Clinton's proposal to ensure the financial well-being
of the Social Security and Medicare programs and imprO\'e the retirement security of all Americans.
The advent of an era of surpluses rather than deficits has radically transfomled our national
debate about entitlements. The temlS of all of the earlier tradeoff's in the entitlements debate have
been eased -- provided we seize the opportunities no\\ Q\'ailahle to liS. The President's framework
for Social Security both recognizes the brighter present reality. and mows us well along the road
toward seizing the opportunities currently available, if we can \\ork together on a bipartisan basis.
Today I will first briefly describe the President's program. I \\ill then devote the bulk of my
remarks to the issue of the President's proposal to raise the rate of return earned by the Social
Security trust funds by investing part of the surplus in equities.
The President's Proposal
According to the Office of Management and Budget. the surpluses in the unified budget of
the federal government will total more than S. U~ trillion O\er the next 15 years. This presents us
with a tremendous opportunity. At the same time, \\e are also bcing a tremendous challenge: the
aging of the "babyboomers" is projected to put enormous strains nn the Social Security and Medicare
systems, on which so many retirees depend.
The natural approach would be to take a(h-antage of thi s opportunity to meet the challenges
facing us. This is the objective of the President' s plan.
RR-2993
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
[he President's framework devotes 62 percent of these projected budget surpluses to the
Social Security system. Of the roughly $2.8 trillion in surpluses that will go to Social Security,
about four-fifths will be used to purchase Treasury securities. the same securities that the Social
Security system has invested in since its inception. The remaining one-fifth will be invested in an
index of private-sector equities. These t\\'o actions \vill n:uuce the 75-year actuarial gap from its
current level of 2.19 percent of payroll by about two-thirds. to 0.75 percent of payroll. And they
push back the date at which the Social Security trust funds are projected to be exhausted. from 2032
to 2055.
Substantial as that accomplishment would be. it is critical that we do more. Historically. the
traditional standard for long-term solvency of the Social Security system has been the 75-year
actuarial balance. A 75-year horizon makes sense because it is long enough to ensure that virtually
everyone currently participating in the system can expect to recei\'e full payment of current-law
benefits. Attaining this objective will require additional tough choices. But the objective is both
important and obtainable. To reach it. the President has called for a bipartisan process. We believe
that the best way to achieve this type of common objectiw is to work together. eliminating the need
for either side to "go first."
In the context of that process. we should also tind room to eliminate the earnings test. which
is widely misunderstood, difficult to administer. and percei\l~d by many older citizens as providing
a significant disincentive to work. In addition. it is critical that \\e not lose sight of the important
role that Social Security plays as an insurance program for \\idO\\s and children. and for the
disabled. As President Clinton said last month: "\\' e also ha\l.~ to plan for a future in which we
recognize our shared responsibility to care for one another and tn gi\e each other the chance to do
well, or as well as possible when accidents occur. \\hen diseases de\elop. and when the unforeseen
occurs." That is why the President has proposed that the e\entual bipartisan agreement for saving
Social Security should also take steps to reduce p()\erty among elderly women. particularly widows.
who are more than one and one-halftimes as likely as all other retirement age beneficiaries to fall
below the poverty line.
In addition to shoring up Social Security. the President's plan would transfer an additional
15 percent of the surpluses to Medicare. extending the life olthat trLlst funds to 2020. A bipartisan
process will also be required to consider structural rl'fnrms in this program. The Medicare
Commission is expected to report soon on these important issLles.
The President would also use 12 percent of the surpluses to create retirement savings
accounts - Universal Savings Accounts or US,\ accounts - and the remaining 11 percent for
defense, education, and other critical im·estments. The President \\ill he announcing further details
regarding the USAs soon.
At the same time. the President proposes to strengthen employer-sponsored retirement plans
in a variety of ways. The President's budget addresses the 10\\ r,\te of pension coverage among the
40 million Americans who work for employers \\ith fewer than I O() employees by proposing a tax
credit for start-up administrative and educational costs of establishing a retirement plan and
proposing a new simplified defined benefit-type plan for small husinesses. Workers who change
jobs would benefit from the budget proposals to impro\e \esting and to facilitate portability of
pensions. In addition, the retirement security of suni\ing spouses would be enhanced by the
President's proposal to give pension participants the right to clect a form of annuity that provides
a larger continuing benefit to a surviving spouse and to imprc)\e the disclosure of spousal rights
under the pension law.
Benefits of the President's Approach
In essence, the President is proposing that \\e usc the Social Security and Medicare trust
funds to lock away about three-quarters of the surpluses for deht reduction and equity purchase. and
ensure that they are not used for other purposes, This \\ould ha\'t~ three key effects:
•
First, it would greatly strengthen the financial position of the government. Ifwe follow this
plan, by 2014, we will have the lowest deht-to-GDP ratio since 1917 and will free up a
tremendous amount of fiscal capacity. The reduction in puhlicly held debt will reduce net
interest outlays from about 13 cents per dollar of outlays in FY99 to about 2 cents per dollar
of outlays in 2014. Under the President's program. the decline in interest expense resulting
from debt reduction will exceed the increase in Social Security expense through the middle
of the next century.
•
Second. it would strengthen significantly the tinancial condition of the Social Security and
Medicare trust funds. Indeed. it \\ould extend the Ii k of the Social Security trust funds by
more than 20 years. to 20.55. and extend the lite of the t\1edicare Hospital Insurance trust
funds to 2020. Meeting our ohligation to the Ile"t gelleration of seniors should be the
number one priority in allocating the surpl uses,
•
And third. it would suhstantially increase mti(lll~ll S~l\Illg. which must he a priority in
advance of the coming demographic shi 1'1. B) I'~l: ill,!; d()\\Il deht held by the public and
investing in equities. the Pn:sident's prugrall1 \\ ill cre~lle wpm for about $3.5 trillion more
investment in productiw capital. In dkct. this \\ ill bl' thl' I\~\erse of the "crowding out" that
occurred during the era of hig dclicits, \\ith gll\ l'l'lllllellt taking a smaller share of total
credit in the economy. interest rates \\ ill hl' ](\\\l'i" lh~111 (I I he 1"\\ ise would he the case. The
implications of lower interest rates \\ i II he pro!\\LlI1d \.(It only \\ill individuals be able to
borrow for mortgages. school loans, and (lther Plll'llOSl'S at lo\\'er rates. but importantly.
businesses will be able to finance i n\estlllCilts ill Pfll(.lllct i \ e plant and equipment at the lower
rates. And the resulting larger pri\atc capital sll)ck is the key to increasing productivity.
incomes. and standards of li\ing, ['ltil11atl'I:, ()Ill' Il\lSOIl \\hy this program is sound
economically is that it \\'ill result ill a IlHlrl' r(\hll~l pl'I\ ate ecollomy. \vhich \\'ill expand our
capacity to make good on our S(lcial Securit: alld \ Icdlcare promises, This increase in
public saving also has heneficial impl icaliolls 1(\1' our halance of payments side. Reduced
government borrov-;ing would lead to a reduced dcpl'mkllce on foreign financing. and an
improvement in our status as a Ilet dehtor t() the ll'sl oi'lhe \\orld .
..,
)
Benefits of USA Accounts
Social Security, strengthening employer-sponsored retirement plans. and creating USA
accounts are key pillars of the President's proposal to provide financial security to retirees. We
believe that USA accounts will provide a signiticant stimulus to private savings. by enabling
millions of Americans to begin to set aside some money for retirement.
The President's proposal aims to deal more broadly \"ith the challenges of an aging society
by expanding individual access to retirement saving. As I noted earlier. the President proposes to
devote 12 percent of the surpluses to establishing a new system of Universal Savings Accounts.
These accounts would provide a tax credit to millions of American workers to help them save for
their retirement. Workers would qualify for a progressi,'e tax credit match against their own
contributions. For example, a low-income worker may receive a dollar for dollar match up to a cap.
In addition, low- and moderate-income workers will qualify for an additional tax credit. even if they
make no contribution themselves.
Overall, the USA program would be considerahly morc progressive than the current tax
subsidies for retirement savings --where higher bracket taxpayers get higher subsidies. This proposal
would contribute significantly to national savings. hecause it \\ill produce retirement savings for
millions of low- and moderate-income people who do not han~ access to pensions. The tax credit
match will provide a strong incentive for workers to add their own saving to accounts.
Investing Part of the Surplus in Equities \Vould Raise the
Security Trust Funds
R~lte
of Return Earned hy the Social
As I have mentioned. the President has proposed transferring 62 percent of projected
surpluses to Social Security. and investing a portion of tllL'se tr~lI1sfcrred surpluses in equities.
To date. the trust funds haw been il1\ested excILlsi\el~ in l J .S. Government bonds. While
these bonds are essentially risk-free. they haH.' the corrcsponding downside that they have
historically paid a lower rate of return. on avcragc. than othcr pntenticd in\'estments. Between 1959
and 1996. the average annual rate of return carncd on stllChs \\ as ~. X~(~'o higher than the rate earned
on bonds held by the trust funds.
Currently. the pension savings of many upper incol11c ,\mcricans are invested in private plans
that earn these higher equity returns. Thc hig.her equit) rcturns can potentially make it possible for
these Americans to have more upon retircmcnt. \h' hclic\c that it is important to give all
Americans. even those oflow and modest means. thc opportunity to enjoy these potential benefits
from stock market performance.
Raising the rate of return on the trust funds \\ould mcan that the Social Security system could
be brought into long-term actuarial balance \\ith smaller rcductions in henefits. smaller increases in
revenue. and/or less transfer of surplus. The Pn:sident" s plan for ill\esting in equities will reduce
the actuarial gap by an estimated 0.46 percent oftaxahlc payroll -- and thus will close roughly onefifth of the problem we face over the next 75 years. I r one \\cre to try to achieve the same actuarial
impact of equity investments through alternative measures. \\e \\ould have to immediately reduce
the COLA on Social Security benefits by 0.3 percentage points. The equity investment in the
President's package achieves as much for the financial soundness or the system as would moving
the normal retirement age up by about an extra year and one-half tl1r participants \vho reach age 67
in 2022. If we delayed until 2030 to make the changes necessary to set Social Security back on a
sound actuarial footing, the required across-the-board cut in bendits would be 5%.
Investing part of the trust funds in equities \vould also bring Social Security into line with
the "best practice" of both private and public sector pension plans. Among large private-sector
defined benefit plans (those with more than 100 participants). more than 40% of total assets were
invested in equities in 1993; this number has risen signiticantly since then. Nearly all state pension
plans also now invest in equities. In 1997. stale and local g(l\ernment plans invested 64% of their
portfolios in equities.
I want to take a moment to applaud the efforts and leadership of Congressman Markey,
Congressman Bartlett and Congressman Pomeroy. \\'ho haw introduced a bill authorizing the
investment ofa portion of the trust funds in equities. \Ve \\e!come their commitment to ensuring
that trust fund investments are insulated from political pressures.
Would Equity Investments Add Risk to the Trust Funds?
I see two broad concerns regarding trust fund ill\ estll1ent in equities. These concerns are
legitimate, but we believe they are manageable. and should not stop liS from achieving the potential
enhanced returns of equities.
First, stock returns are more \olatile than the returns on the gOYernment bonds held by the
trust funds. However, the trust funds arc \\cll-situated tn hear equity risk. because they have long-or indefinite -- time horizons. The trust funds would he capahk of riding out the ups and downs of
the market, because they receive the cash tlow from payroll taxes. and hecause of the cushion
provided by the trust funds' bond holdings.
More specifically, investing only 15 percellt in equities seel11s to us to be a prudent balance
between receiving the potentially greater return from equities and keeping the investment small
enough so that the trust funds are not o\erly e\poscd. This 15 Ill'rcent allocation to equities is much
smaller than the customary allocation to equities in either puhl ic or private pension plans. Moreover,
85% of the trust funds will still be il1\'ested as bcfl)J'e in risk-free Treasury securities.
In addition, the equity il1\'estments and disil1\estmcnts that we are proposing will be
smoothed in incremental additions mer 15 years. In any year. in\'estmcnts or disinvestments are
projected to be less than 0.5% of the stock market. Incremental inYestments and disinvestments-rather than total divestiture at one timc -- \\ill help t(l mitigate the risk from adverse price
movements.
Finally, in the near term, all benefits will continue to he paid out of payroll and other taxes.
Furthermore, under current law. even in 2032 payroll and other ta\cs wi II he sufficient to pay for the
5
lion's share -- about 72% -- of Social Security henefits. The remllining 28% of benefits will be paid
out using the assets of the trust funds. As only 15% of the trust funds' assets would be invested in
equities, only about one sixth of this 28% would he backed hy equities. In short. even in 2032. only
about 4-5% of payments from the trust funds wi 11 be hacked hy pri vate sector investments.
Ensuring the Integrity of Investment Decisions
The second concern is that of political influence on trust fund investment decisions. Any
system of collective investment can and must address these concerns. We believe that we can
successfully work with Congress to design a system that is t!'ce from political influence. We need
to strike the right balance, so that we can earn the higher potential returns to equities. hy finding a
way to take care of these legitimate concerns.
That is why we will work with Congress to design a system that observes five core
principles. Tnese five core principles \vill establish several lewis of protection.
First, the share of trust fund assets il1\'ested in equities ought to be kept at a very limited
level. We have proposed that equity investment he limited to 1:\ percent of trust fund balances. This
will be important to limit the tn 1st funds' exposure to price movements from equity investments. and
to ensure that collective investments never account for more than a small fraction of the stock
market. During the first years of the program. from 2001 to 2014. Social Security would own. on
average, only 2% of the stock market. On a\'erage through 2030. Social Security would own
approximately a 4% share of the total stock market.
Second. the investments should he independent" m;}n;}!.!ed and non-political. We suggest
that trust fund managers be drawn from the pri\'ate sector thwugh competitive bidding and that the
trust fund managers be overseen by an independent board. There should be wholly independent
oversight of investment. in order to shield the trust funds from political influence.
Third. the sole responsibility of the inuependent hoard \\ould be to select private sector
managers through competitive hiddin!.!. Pri\Jtc scctnr ll1alla~clllcnt will provide a further degree of
political insulation. Moreover. Social Security hcncticlarics dcscrn: the same efficient management
and market returns that people recei\'e fl.))' their pri\atc pcnsions and personal savings,
Fourth, equity investments should he broad-bascd. neutral Jnd non-discretionarv. Assets
should be invested proportionately in the broadest array of publicly listed equities. with no room for
discretion in adding or deleting companies and no room for active involvement in corporate
decisions. We have proposed that the funds hc ill\cstcd ina total market index. which would
encompass a broad range of stocks. In addition. the J11ana~ers should he on autopilot in investing
the funds; they should have little or no discretion in the in\'Cstlllcnt of trust fund assets. so they
cannot "time the market" or pick indi\idual stocks.
As a shareholder the trust funds should he entirl'l) passi\c. One \vay to accomplish this
might be to mandate that proxies be \oted in the sallle proportions as other shareholders.
Fifth and finally, collective investment needs to hc achie\'l~d at the 100\'est cost available.
This will be important both to obtain the highest possible returns and to further enhance the system's
transparency and independence. Indexed investment is less cxpensiw than active management. In
addition, given the large size of the potential cquity investments by Social Security, we would expect
to pay very low asset management fees.
Let me emphasize our belief that there should be zero government involvement in the
investment. We will work with Congress to design a systcm that is completely insulated from
political pressures.
The Experience of State and Local Governments
As I mentioned earlier, virtually all state pension funds 110\\ invcst in equities. In 1997, state
and local government plans invested 64% of their portfolios in equities, up from 56% in 1996. State
and local pension plans now hold fully 10 percent of the oH?rall stock market. By contrast. the
Social Security trust fund equity investments \\ould total only 15% of the trust funds, and would
represent, on average, about a 4% of the equity market.
Some have suggested that the trust funds might t~lll short of earning market returns, based
on the experience of state and local pension plans. I \\ould emphasize first that the experience of
state plans is really not directly comparable to what \\e are proposing for Social Security. State
plans do not generally operate under the kinds of rcstrictions that arc envisioned under the
President's proposal. That is, the statutes gowrning state plans do not generally require that
investments be made only through indexed ti.lI1ds. "ith a clear prohibition against adding or
subtracting equities from the index. Many state pension plans arc acti\'ely managed, and some have
explicit investment goals. As a result. the e\periencc nfthesl' plans may not be relevant as a guide
for what Social Security's experience would be.
Our preliminary analysis of the a\ailahle data suggests that. m'er the period 1990-1995,
public plans actually received returns that a\eraged t\\O hasis points higher than private plan returns
(this difference is statistically indistinguishable from zcro). :\Itlwugh in earlier periods (from 1968
to 1983) the performance of public pension !'unds \\as slighll~ inferior to that of private pension
funds, this difference is also not statisticall~ significant. ~ lorc importantly, this very slight
difference in performance during earlier periods can hc e:\plained by the ract that public pension
funds generally allocated a far smaller portion of thci r portfol ins to cqui ties. and in some cases were
statutorily prohibited from buying any equities.
The returns to trust fund investments to this date \\ (luld not stack up well in this comparison
of earnings of public and private pension funds. Because thc trust funds have been invested
exclusively in government securities untilno\\. both puhllc and privatc pension funds would likely
have outperformed the rate of return earncd on trust fund ill\cstlllcnts.
7
Advantages of Collective Investment of Social Secu rio'
There are three key advantages to having the trust funds in\t~st collectively in equities for the
American people. These advantages relate to the ahility ofdetined henefit plans to hear market risk.
minimize administrative costs, and achieve progressi\'ity. Detined contrihution plans. such as the
proposals for individual accounts. are less able to realize these objectives. In addition. the potential
political risk from collective investment in equities through the trust funds is not very different from
the political risk that could arise from im'esting in equities through defined contribution plans.
An advantage of collective investment in equities through the trust funds is that periods of
poor equity performance could be spread over many generations of cur rent and future Social Security
participants. By contrast. during a market downturn. participants ill a defined contribution system
could be forced to choose between postponing retirement and a severely reduced retirement income.
For example, for the year that ended with the third quarter of 1974. the S&P500 declined by 54
percent in real terms. By placing the risk of a market downturn in the trust funds. we can greatly
reduce this risk to beneficiaries. Additionally. \\e hel\e proposed limiting Social Security's equity
holdings to 15% of the trust funds. As I noted earlier. this means that only 4% ofhenefits payments
would be backed by the performance of equities.
The second advantage of collecti\'e investment in equities is that the returns to trust fund
investments in equities would likely he higher than the returns to equities held in individual
accounts. This is primarily because it would hc much lllorC costly to administer a defined
contribution plan than it would be to administer a defined henetit plan. The trust funds \vould expect
to pay very low asset management fees. hecause of the larg.e sile of the trust fund asset pool. These
asset management fees could be comparahle to. or lo\\cr. than the I basis point (0.01 %) currently
paid by the federal employees' TSP plan for pri\atc lll~lI1~lgcll1ent t)fthe equity-indexed lie Fund."
By contrast, administrati\'e costs for a systel1l11fdelined contrihution plans held in the private
sector could be comparable to the commissions and ICes ch~lrged by equity mutual funds today. The
average equity mutual fund currently charges het\\een I (lO and 150 hasis points for administrative
and investment management services. Costs of this I1lLlg.nitudc could signiticantly reduce the balance
that could be accumulated in an indi\"idual account. :\ccordi ng to our estimates. administrative costs
of 100 basis points would reduce hy 20 percent thl' total account accumulations at the end of a 40year career. Collective investment through the trust fUllds \\ (luld avoid the need to pay the
administrative costs associated with indi\idual accounts.
The experience of individual accounts in Britain and ('11Ik illustrates how significant these
risks and costs can be. In Britain. many personal pellsipn plans take more than 5 percent of
contributions in administrative charges.
Chile also has had high administrati\'e costs. ,.\ccordillg to the Congressional Budget Office
(CBO), fees and commissions of the Chilean pension S) stem amounted to 23.6 percent of
contributions in 1995. As a result. according to the C BO. Chi lean \\orkers who invested their money
in an individual account in 1981 recei\ed an internal re~tI rate of return of 7.4 percent on that
investment through 1995, despite average real returns of I~. 7 percent to pension fund investments.
Even in the best of circumstances. however. costs wi II he higher for a system of i ndi vid ual accounts
than for collectively investing trust fund assets.
The third advantage of collective investment is that it is progressive. This is one of the most
important features of Social Security: benefits are greater. as a percentage of wages. for low-income
workers than high-income workers. By investing in equities. \\e arc able to maintain this critical
feature of progressivity and avail Americans of modest means of the higher returns that have
historically accrued to equities.
In addition to these key advantages. one might note that. \\'ith regard to the concern about
political influence, this concern also exists for individual Clccounts. Most individual account
proposals have suggested some centralized plan structure. both in order to reduce administrative
costs and to help familiarize tens of millions of Americans \yith the range of possible investment
vehicles. These individual account plans would create a large pool of money under a single
manager, or a handful of managers. This pool of money \\()uld not look very different from the
Social Security trust funds. With any centralized rool of assets there is the potential for those
pursuing a political agenda to try to influence it.
We can all be encouraged by the history of the Thrift Sayings Plan (TSP). whose investments
have not been subject to political influence. We believe that somc of the features that have protected
the TSP system so well are worth emulating. These include the TSP system's independent board,
its private sector managers. and the rule that equity il1\cstl11ellts can only be made by tracking an
index.
Conclusion
In conclusion, it will be critical to han: the Administratioll and Congress work together to
address the needs of future generations. Wc need to keer till' prnllliscs that we have made to retirees.
without unduly burdening younger generations. We \\Lllll tn \\ork "ith you. on a bipartisan basis,
to implement the President's program.
I believe that we can find a safe and rrUdCl11 \\<'1:
equity markets.
Thank you. I would welcomc
an~ lJlI~stiol1s.
-~()-
to p<'lrticipat~
in the enhanced returns in
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
R IMMEDIATE RELEASE
rch 02, 1999
Office of Fina~cing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
364-Day Bill
March 04, 1999
March 02, 2000
912795DK4
Term:
Issue Date:
Maturity Date:
CUSIP Number:
4.665%
High Rate:
Investment Rate1/:
4.918%
Price:
95.283
All noncompetitive and successful competitive bidders were awarded
:urities at the high rate.
All tenders at lower rates were accepted in full.
Tenders at the high discount rate were allotted
12%.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
$
PUBLIC SUBTOTAL
Foreign Official Refunded
SUBTOTA::"
Federal Reserve
Foreign Official Add-On
TOTAL
$
28,144,487
1,020,904
$
29,165,391
8,567,191
1,440,000
1,440,000
30,605,391
10,08 7 ,191
5,165,000
172,400
5,165,000
172,400
35,942,791
$
Median rate
4.650%: 50% of the amount of accepted competitive
lders was tendered at or below that rate.
Low rate
4.560%:
5% of the amou~t of accepted competitive
lders was tendered at or below that rate.
I-to-Cover Ratio
=
29,165,391 / 8,567,191
3. sO
EquivaJent coupon-issue yield.
RR-2994
7,546,287
1,020,904
http://www.publicdebt.treas.gov
15,344,591
o
<0
sderal financing
WASHINGTON, D.c. 20220
bankNEWS
FEDERAL FINANCING BANK
January 30, J_999
Paula Farrell, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of December 1998.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $4.18 billion on December 31,
1998, posting a decrease of $695.4 million from the level on
November 30, 1998. This net change was the result of decreases
in holdings of agency debt of $537.3 million and in hOldings of
agency guaranteed loans of $158.1 million.
FFB made 89
disbursements during the month of December, and extended the
maturities of 90 Rural utilities Service-guaranteed loans.
FFB
also received 17 prepayments in December.
Attached to this release are tables presenting FFB December
loan activity and FFB holdings as of December 31, 1998.
RR-2995
Ol
0
It")
N
V
N
N
N
<0
N
C';J
N
<0
o
N
(/)
N
CL
u.
N
0
(/) co
e! u.
Page 2 of 7
FEDERAL FINANCING BANK
DECEMBER 1999 ACTIVITY
DATE
OWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
$76,900,000.00
$1,925,000,000.00
$100,000,000.00
$50,000,000.00
$82,500,000.00
$1,750,000,000.00
$100,000,000.00
$50,000,000.00
$161,400,000.00
$1,500,000,000.00
$100,000,000.00
$50,000,000.00
$158,600,000.00
$1,700,000,000.00
$100,000,000.00
$147,100,000.00
$1,250,000,000.00
$100,000,000.00
$50,000,000.00
$26,600,000.00
$1,050,000,000.00
$100,000,000.00
$50,000,000.00
$138,300,000.00
$975,000,000.00
$157,400,000.00
$700,000,000.00
$75,000,000.00
$206,500,000.00
$1,500,000,000.00
$75,000,000.00
$196,000,000.00
$1,900,000,000.00
$75,000,000.00
$118,600,000.00
$1,725,000,000.00
$75,000,000.00
$143,700,000.00
$1,500,000,000.00
$85,000,000.00
$91,100,000.00
$1,370,000,000.00
$75,000,000.00
12/2/98
12/2/98
12/2/98
12/2/98
12/3/98
12/3/98
12/3/98
12/3/98
12/4/98
12/4/98
12/4/98
12/4/98
12/7/98
12/7/98
12/7/98
12/8/98
12/8/98
12/8/98
12/8/98
12/9/98
12/9/98
12/9/98
12/9/98
12/10/98
12/10/98
12/11/98
12/11/98
12/11/98
12/14/98
12/14/98
12/14/98
12/15/98
12/15/98
12/15/98
12/16/98
12/16/98
12/16/98
12/17/98
12/17/98
12/17/98
12/18/98
12/18/98
12/18/98
INTEREST
RATE
:Y DEBT
· POSTAL SERVICE
·
·
·
·
·
·
·
·
·
·
·
,
postal
Postal
postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
is a Semi-annual rate.
12/1
12/1
12/1
12/1
12/2
12/2
12/2
12/2
12/3
12/3
12/3
12/3
12/4
12/4
12/4
12/7
12/7
12/7
12/7
12/8
12/8
12/8
12/8
12/9
12/9
12/10
12/10
12/10
12/11
12/11
12/11
12/14
12/14
12/14
12/15
12/15
12/15
12/16
12/16
12/16
12/17
12/17
12/17
4.616%
4.699%
4.699%
4.699%
4.605%
4.616%
4.616%
4.616%
4.574%
4.605%
4.605%
4.605%
4.603%
4.574%
4.574%
4.584%
4.603%
4.603%
4.603%
4.553%
4.584%
4.584%
4.584%
4.553%
4.553%
4.605%
4.553%
4.553%
4.624%
4.605%
4.605%
4.616%
4.624%
4.624%
4.616%
4.616%
4.616%
4.584%
4.616%
4.616%
4.584%
4.584%
4.584%
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
Page 3 of 7
FEDERAL FINANCING BANK
DECEMBER 1999 ACTIVITY
DATE
.oWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
$66,900,000.00
$1,200,000,000.00
$75,000,000.00
$18,500,000.00
$1,175,000,000.00
$55,300,000.00
$825,000,000.00
$25,200,000.00
$590,000,000.00
$75,000,000.00
$45,000,000.00
$1,470,000,000.00
$97,400,000.00
$1,725,000,000.00
$100,000,000.00
$265,000,000.00
$1,600,000,000.00
$275,000,000.00
$1,300,000,000.00
$100,000,000.00
$150,000,000.00
$285,700,000.00
$1,400,000,000.00
$100,000,000.00
$75,000,000.00
12/21/98
12/21/98
12/21/98
12/22/98
12/22/98
12/23/98
12/23/98
12/24/98
12/24/98
12/24/98
12/28/98
12/28/98
12/29/98
12/29/98
12/29/98
12/30/98
12/30/98
12/31/98
12/31/98
12/31/98
12/31/98
1/4/99
1/4/99
1/4/99
1/4/99
4.613%
4.584%
4.584%
4.636%
4.613%
4.626%
4.636%
4.626%
4.626%
4.626%
4.696%
4.709%
4.688%
4.696%
4.696%
4.719%
4.688%
4.678%
4.719%
4.719%
4.719%
4.603%
4.678%
4.678%
4.678%
1/2/25
7/31/25
11/2/26
5.136% S/A
5.208% S/A
5.198% S/A
9/1/26
9/1/26
9/1/26
9/1/27
5.193%
5.190%
5.208%
5.200%
CY DEBT
· POSTAL SERVICE
· Postal Service
· Postal Service
· Postal Service
Postal Service
· Postal Service
Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
· Postal Service
Postal Service
Postal Service
· Postal Service
12/18
12/18
12/18
12/21
12/21
12/22
12/22
12/23
12/23
12/23
12/24
12/24
12/28
12/28
12/28
12/29
12/29
12/30
12/30
12/30
12/30
12/31
12/31
12/31
12/31
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
lliMENT - GUARANTEED LOANS
~RAL
SERVICES ADMINISTRATION
~is
IRS Service Cent. 12/11
Contract
12/14
12/18
~y Services
~ Building
~TMENT
$2,915.01
$112,691.36
$3,390,976.90
OF EDUCATION
State College
State College
I. State College
lune Cookman
I.
I.
is a Semi-annual rate.
12/3
12/4
12/14
12/21
$435,857.40
$98,171.55
$180,932.40
$297,121.43
S/A
S/A
S/A
S/A
Page 4 of 7
FEDERAL FINANCING BANK
DECEMBER 1999 ACTIVITY
JWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
$1,263,000.00
$360,000.00
$1,000,000.00
$3,575,000.00
$2,209,000.00
$493,000.00
$14,793,000.00
$1,500,000.00
$1,700,000.00
$3,778,900.00
$1,000,000.00
$8,500,000.00
$75,000.00
$3,372,711.44
$1,227,978.07
$982,947.35
$5,029,534.08
$1,732,866.35
$901,561.04
$2,758,709.25
$4,013,958.94
$1,304,524.34
$1,603,159.38
$4,432,938.51
$4,278,864.43
$5,378,489.57
$3,560,583.94
$1,581,461.22
$390,578.15
$900,892.29
$1,176,286.20
$783,332.62
$450,374.11
$842,010.98
$1,007,830.65
$324,993.96
$235,867.80
$401,807.84
$235,493.13
$168,724.26
$146,992.24
$80,532.97
$121,692.82
1/3/33
12/31/31
1/3/06
1/3/06
12/31/25
1/2/24
12/31/25
1/3/33
1/2/29
1/3/33
12/31/08
1/3/33
1/2/18
6/30/99
6/30/99
6/30/99
6/30/99
6/30/99
3/31/99
3/31/99
3/31/99
6/30/99
6/30/99
6/30/99
6/30/99
6/30/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
INTEREST
RATE
RNMENT - GUARANTEED LOANS
~L
UTILITIES SERVICE
{e-David Elec. #494
;tal Electric #460
ter Elec. #485
fenoke Rural Elec. #48
-state #439
-state #440
-state #475
:heastern Indiana #496
:-en Elec. Coop. #477
:hern Pine Elec. #493
new-Wayne Elec. #455
:-ens Elec. #497
;halls Energy Co. #458
~gheny Electric #255
~gheny Electric #255
~gheny Electric #255
~gheny Electric #255
~gheny Electric #255
~gheny Electric #908
~gheny Electric #908
~gheny Electric #908
~gheny Electric #908
~gheny Electric #908
~gheny Electric #908
~gheny Electric #908
!gheny Electric #908
:os Electric #917
:os Electric #917
:os Electric #917
:os Electric #917
:os Electric #917
:os Electric #917
:os Electric #917
:os Electric #917
:os Electric #917
:os Electric #917
:os Electric #917
os Electric #917
os Electric #917
os Electric #917
os Electric #917
os Electric #917
os Electric #917
12/1
12/7
12/7
12/8
12/9
12/9
12/9
12/11
12/11
12/24
12/28
12/28
12/28
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
is a Quarterly rate.
urity extension or interest rate reset
5.205%
5.175%
4.699%
4.790%
5.150%
5.141%
5.150%
5.043%
5.098%
5.340%
4.950%
5.369%
6.596%
4.691%
4.691%
4.691%
4.691%
4.691%
4.553%
4.553%
4.553%
4.691%
4.691%
4.691%
4.691%
4.691%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
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Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Page 5 of 7
FEDERAL FINANCING BANK
DECEMBER 1999 ACTIVITY
)WER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
$39,168.07
$1,286,383.68
$432,130.51
$394,556.71
$258,663.19
$971,014.31
$2,908,587.43
$1,741,874.16
$1,043,904.56
$630,284.15
$447,180.27
$1,199,789.76
$1,558,920.44
$2,562,944.20
$2,743,350.77
$1,452,344.50
$329,432.70
$10,701,818.16
$6,188,623.84
$5,059,973.54
$5,438,688.48
$1,456,460.64
$2,356,110.00
$6,983,004.96
$3,556,347.12
$7,248,024.00
$1,829,774.88
$30,508,623.84
$24,944,613.55
$5,452,126.78
$9,236,545.73
$6,661,354.72
$6,777,583.36
$5,430,572.22
$2,833,914.99
$842,725.14
$1,541,764.45
$549,065.69
$1,342,772.35
$9,208,767.81
$9,669,313.92
$2,000,000.00
$9,952,489.24
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
12/31/18
1/2/24
1/2/24
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
1/2/01
1/2/01
12/31/14
1/3/17
1/3/17
1/3/17
1/2/18
12/31/18
1/2/18
1/3/22
1/3/23
3/31/99
3/31/99
3/31/99
1/3/33
1/2/18
INTEREST
RATE
lliMENT - GUARANTEED LOANS
~L
UTILITIES SERVICE
Electric #917
Electric #917
~os Electric #917
~os Electric #917
~os Electric #917
~os Electric #917
~os Electric #917
~os Electric #917
~os Electric #917
lOS Electric #917
:os Electric #917
:os Electric #917
:os Electric #917
:os Electric #917
:os Electric #917
:os Electric #437
:os Electric #437
yland Power #388
~ia Trans. Corp. #446
~ia Trans. Corp. #446
Horizon Elec. #473
Horizon Elec. #473
Horizon Elec. #473
Horizon Elec. #473
Horizon Elec. #473
Horizon Elec. #473
Horizon Elec. #473
thorpe Power #445
thorpe Power #445
ns Elec. #918
ns Elec. #918
ns Elec. #918
ns Elec. #918
ns Elec. #918
ns Elec. #918
ns Elec. #918
ns Elec. #918
ns Elec. #918
da River Elec. #472
Miguel Electric #919
~iguel Electric #919
heastern Indiana #496
~ole Electric #905
~os
~os
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
is a Quarterly rate.
lrity extension or interest rate reset
4.553%
4.553%
4.553%
4.579%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.678%
4.678%
5.040%
5.238%
5.238%
4.678%
4.678%
4.678%
4.678%
4.678%
4.678%
4.678%
4.657%
4.657%
4.772%
4.880%
4.880%
4.880%
4.934%
4.982%
4.934%
5.082%
5.100%
4.678%
4.553%
4.553%
5.182%
4.934%
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
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Qtr.
Qtr.
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Qtr.
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Page 6 of 7
FEDERAL FINANCING BANK
DECEMBER 1999 ACTIVITY
OWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
$2,718,456.19
$28,455,919.34
$3,685,600.74
$15,804,715.86
$28,456,521.45
$25,425,619.19
$12,699,390.35
$844,773.77
$10,137,284.39
$3,277,655.19
$2,761,816.23
$3,278,660.67
$3,490,470.67
$3,868,792.42
$1,084,875.90
$825,656.83
$502,040.48
$1,038,011.95
1/2/18
1/2/18
1/2/18
1/2/18
1/2/18
1/2/18
12/31/18
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
3/31/99
INTEREST
RATE
RNMENT - GUARANTEED LOANS
AL UTILITIES SERVICE
inole Electric #905
inole Electric #905
inole Electric #905
inole Electric #905
ino1e Electric #905
inole Electric #905
inole Electric #905
ted Power Assoc. #911
ted Power Assoc. #911
ted Power Assoc. #911
ted Power Assoc. #911
ted Power Assoc. #911
ted Power Assoc. #911
ted Power Assoc. #911
ted Power Assoc. #911
ted Power Assoc. #911
ted Power Assoc. #911
ted Power Assoc. #911
. is
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
a Quarterly rate .
:urity extension or interest rate reset
4.934%
4.934%
4.934%
4.934%
4.934%
4.934%
4.982%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
4.553%
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
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Page 7 of 7
FEDERAL FINANCING BANK HOLDINGS
(in millions)
Program
Net Change
12/1-12/31/98
Fiscal Year
Net Change
10/1/98-12/31/98
December 31, 1998
November 30, 1998
$4,110.7
$4,648.0
($537.3)
($1,585.4)
sub-total*
$4,110.7
$4,648.0
($537.3)
($1,585.4)
Agency Assets:
FmHA-RDIF
FmHA-RHIF
DHHS-HMO
DHHS-Medical Facilities
Rural Utilities Service-CBO
$3,675.0
$9,500.0
$3.1
$7.2
$4,598.9
$3,675.0
$9,500.0
$3.1
$7.2
$4,598.9
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$17,784.2
$17,784.2
$0.0
$0.0
$2,782.3
$6.2
$15.4
$1,420.0
$2,448.1
$17.5
$1,224.9
$14,091.2
$224.0
$3.8
$2,813.4
$5.2
$15.5
$1,420.0
$2,465.0
$17.5
$1,224.9
$14,199.5
$226.7
$3.8
($31.1)
$1.0
($0.1)
$0.0
($16.9)
$0.0
$0.0
($108.2)
($2.7)
($0.0)
Agency Debt:
USPS
sub-total*
Government-Guaranteed Lending:
DOD-FMS
DoEd-HBCU+
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOI-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-StatelLocal Development Cos.
DOT-Section 511
sub-total *
grand total*
* figures may not total due to rounding
+ does not include capitalized interest
$22,233.4
$22,391.5
--------------
---------------
$44,128.3
$44,823.7
($158.1)
---------------
($695.4)
($46.7)
$1.6
($15.0)
($71.4)
($25.0)
$0.0
$0.0
($75.2) I
($9.4)
($0.0)
($241.3) \
---------------
($1,826.7)
3deral financing
WASHINGTON, 0
c.
20220
bankNEWS
FEDERAL FINANCING BANK
February 26, 1999
Paula Farrell, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of January 1999.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $43.8 billion on January 31, 1999,
posting a decrease of $325.4 million from the level on
December 31, 1998. This net change was the result of decreases
in holdings of agency debt of $236.1 million and in holdings of
agency guaranteed loans of $89.3 million.
FFB made 83
disbursements during the month of January, and also executed
eight buydowns and 12 refinancings on behalf of Rural utilities
Service-guaranteed borrowers.
FFB received 26 prepayments in
January.
Attached to this release are tables presenting FFB January
loan activity and FFB holdings as of January 31, 1998.
RR-2996
Page 2 of 5
FEDERAL FINANCING BANK
JANUARY 1999 ACTIVITY
DATE
OWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
CY DEBT
POSTAL SERVICE
· Postal
Postal
· postal
· postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
· Postal
Postal
· Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
·
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
is a Semi-annual rate.
1/4
1/4
1/4
1/4
1/5
1/5
1/5
1/5
1/6
1/6
1/6
1/7
1/7
1/7
1/8
1/8
1/8
1/11
1/11
1/11
1/11
1/12
1/12
1/12
1/13
1/13
1/13
1/13
1/14
1/14
1/14
1/14
1/15
1/15
1/15
1/19
1/19
1/19
1/19
1/20
1/20
1/20
1/20
1/21
$151,200,000.00
$1,235,000,000.00
$100,000,000.00
$75,000,000.00
$93,100,000.00
$1,000,000,000.00
$100,000,000.00
$75,000,000.00
$84,500,000.00
$800,000,000.00
$150,000,000.00
$40,300,000.00
$715,000,000.00
$100,000,000.00
$182,700,000.00
$1,500,000,000.00
$50,000,000.00
$166,800,000.00
$1,800,000,000.00
$100,000,000.00
$50,000,000.00
$158,700,000.00
$1,650,000,000.00
$100,000,000.00
$195,100,000.00
$1,425,000,000.00
$100,000,000.00
$50,000,000.00
$93,800,000.00
$1,335,000,000.00
$100,000,000.00
$50,000,000.00
$177,700,000.00
$1,235,000,000.00
$50,000,000.00
$124,300,000.00
$1,050,000,000.00
$100,000,000.00
$50,000,000.00
$98,300,000.00
$775,000,000.00
$100,000,000.00
$50,000,000.00
$142,800,000.00
1/5/99
1/5/99
1/5/99
1/5/99
1/6/99
1/6/99
1/6/99
1/6/99
1/7/99
1/7/99
1/7/99
1/8/99
1/8/99
1/8/99
1/11/99
1/11/99
1/11/99
1/12/99
1/12/99
1/12/99
1/12/99
1/13/99
1/13/99
1/13/99
1/14/99
1/14/99
1/14/99
1/14/99
1/15/99
1/15/99
1/15/99
1/15/99
1/19/99
1/19/99
1/19/99
1/20/99
1/20/99
1/20/99
1/20/99
1/21/99
1/21/99
1/21/99
1/21/99
1/22/99
4.616%
4.603%
4.603%
4.603%
4.605%
4.616%
4.616%
4.616%
4.595%
4.605%
4.605%
4.563%
4.595%
4.595%
4.603%
4.563%
4.563%
4.636%
4.603%
4.603%
4.603%
4.605%
4.636%
4.636%
4.574%
4.605%
4.605%
4.605%
4.563%
4.574%
4.574%
4.574%
4.561%
4.563%
4.563%
4.533%
4.561%
4.561%
4.561%
4.491%
4.533%
4.533%
4.533%
4.449%
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
Page 3 of 5
FEDERAL FINANCING BANK
JANUARY 1999 ACTIVITY
DATE
OWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
CY DEBT
· POSTAL SERVICE
·
·
·
·
·
··
·
·
·
·
·
·
·
·
·
·
·
·
Postal
postal
Postal
postal
postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Postal
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
Service
$535,000,000.00
$100,000,000.00
$50,000,000.00
$208,200,000.00
$1,350,000,000.00
$100,000,000.00
$50,000,000.00
$135,100,000.00
$1,750,000,000.00
$100,000,000.00
$50,000,000.00
$84,200,000.00
$100,000,000.00
$1,600,000,000.00
$50,000,000.00
$73,600,000.00
$1,475,000,000.00
$100,000,000.00
$50,000,000.00
$75,500,000.00
$1,350,000,000.00
$100,000,000.00
$54,600,000.00
$1,470,000,000.00
$100,000,000.00
1/22/99
1/22/99
1/22/99
1/25/99
1/25/99
1/25/99
1/25/99
1/26/99
1/26/99
1/26/99
1/26/99
1/27/99
1/27/99
1/27/99
1/27/99
1/28/99
1/28/99
1/28/99
1/28/99
1/29/99
1/29/99
1/29/99
2/1/99
2/1/99
2/1/99
4.491%
4.491%
4.491%
4.489%
4.449%
4.449%
4.449%
4.564%
4.489%
4.489%
4.489%
4.584%
4.564%
4.564%
4.564%
4.595%
4.584%
4.584%
4.584%
4.615%
4.595%
4.595%
4.603%
4.615%
4.615%
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
S/A
1/4
1/19
1/22
1/29
$10,251.57
$102,198.16
$1,646.29
$4,289,425.23
7/1/25
4/1/99
7/1/25
11/2/26
5.275%
4.561%
5.301%
5.272%
S/A
S/A
S/A
S/A
1/14
1/15
$402,454.80
$2,750.00
9/1/26
9/1/26
5.369% S/A
5.266% S/A
1/21
1/21
1/21
1/22
1/22
1/22
1/22
1/25
1/25
1/25
1/25
1/26
1/26
1/26
1/26
1/27
1/27
1/27
1/27
1/28
1/28
1/28
1/29
1/29
1/29
rnMENT - GUARANTEED LOANS
~RAL
SERVICES ADMINISTRATION
~ Headquarters
ililee Office Building
I Headquarters
: Building
~TMENT
.
OF EDUCATION
State College
State College
is a Semi-annual rate.
Page 4 of 5
FEDERAL FINANCING BANK
JANUARY 1999 ACTIVITY
OWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
RNMENT - GUARANTEED LOANS
I\L
UTILITIES SERVICE
zos Electric #917
zos Electric #917
zos Electric #917
zos Electric #917
t Kentucky Power #140
t Kentucky Power #140
t Kentucky Power #140
t Kentucky Power #140
~thorpe Power #445
~thorpe Power #445
~thorpe Power #445
th Miss. Elec. #171
inole Electric #905
inole Electric #905
)ochee Elec. #461
1son County Elec. #482
ilIa Tele. Co. #420
n Telephone #407
:h Texas Electric #200
~ Texas Electric #200
:h Texas Electric #200
·state #915
'State #915
'State #915
:enoke Elec. #486
: Plains Elec. #501
ilialls Energy Co. #458
is a Semi-annual rate,
:erest rate buydown
iC ref inancing
1/4
1/4
1/4
1/4
1/4
1/4
1/4
1/4
1/4
1/4
1/4
1/4
1/4
1/4
1/5
1/6
1/8
1/8
1/11
1/11
1/11
1/11
1/11
1/11
1/19
1/22
1/27
$973,089.62
$528,661.32
$1,525,415.84
$1,837,930.78
$1,757,055.44
$173,253.85
$2,304,587.37
$4,681,530.65
$53,979,531.53
$13,187,599.82
$22,149,137.71
$14,130,098.87
$3,673,404.91
$8,056,132.99
$730,000.00
$4,000,000.00
$1,284,851.00
$405,000.00
$278,483.10
$502,953.26
$293,206.37
$1,758,186.22
$2,362,418.61
$3,283,155.46
$1,000,000.00
$1,052,000.00
$95,000.00
Qtr. is a Quarterly rate.
3/31/99
3/31/99
3/31/99
3/31/99
12/31/20
12/31/20
12/31/20
12/31/20
12/31/20
12/31/20
12/31/20
12/31/20
12/31/20
12/31/20
12/31/31
12/31/31
12/31/14
12/31/14
12/31/20
12/31/20
12/31/20
12/31/20
12/31/20
12/31/20
3/31/06
1/3/33
1/2/18
4.553%
4.553%
4.553%
4.553%
5.177%
5.177%
5.177%
5.177%
5.056%
5.056%
5.056%
5.177%
5.056%
5.056%
5.269%
5.328%
4.994%
4.841%
5.363%
5.363%
5.363%
5.147%
5.147%
5.147%
4.849%
5.260%
5.655%
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Page 5 of 5
FEDERAL FINANCING BANK HOLDINGS
(in millions)
Program
Agency Debt:
USPS
sub-total*
Agency Assets:
FmHA-RDIF
FmHA-RHIF
DHHS-HMO
DHHS-Medical Facilities
Rural Utilities Service-CBO
sub-total*
Government-Guaranteed Lending:
DOD-FMS
DoEd-HBCU+
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOI-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-StatelLocal Development Cos.
DOT-Section 511
sub-total *
grand total *
* figures may not total due to rounding
+ does not include capitalized interest
Net Change
0111-0113 1/99
Fiscal Year
Net Change
10/1198-01131199
January 31, 1999
December 31, 1998
$3,874.6
$4,110.7
($236.1)
($1,821.5)
$3,874.6
$4,110.7
($236.1)
($1,821.5)
$3,675.0
$9,500.0
$3.1
$7.2
$4,598.9
-$17,784.2
$3,675.0
$9,500.0
$3.1
$7.2
$4,598.9
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$17,784.2
$0.0
$0.0
$2,770.1
$6.6
$15.2
$1,419.9
$2,452.1
$16.5
$1,138.7
$14,100.9
$220.2
$3.8
$2,782.3
$6.2
$15.4
$1,420.0
$2,448.1
$17.5
$1,224.9
$14,091.2
$224.0
$3.8
($12.2)
$0.4
($0.2)
($0.1 )
$4.0
($1.0)
($86.2)
$9.7
($3.8)
$0.0
($58.9)
$2.0
($15.2)
($71.5)
($21.1)
($1.0)
($86.2)
($65.5)
($13.2)
($0.0)
($89.3)
$22,144.1
$22,233.4
--------------
---------------
$43,802.9
$44,128.3
========
($325.4)
($330.6)
---------------
($2,152.1)
lREASURY
NEWS
OffiCE OF PUBUC AFFAIRS .1500 PENNSYLVANIA AVENUE, N.W.• WASlllNGTON, D.C .• 20220. (202) 622-2960
EMBARGOED UNTIL 1 P.M. EST
STATEMENT FOR THE RECORD
March 4, 1999
TREASURY DEPUTY ASSISTANT SECRETARY
(GOVERNMENT FINANCIAL POLICY)
LEWIS A. SACHS
HOUSE SUBCOMMITTEE ON THE POSTAL SERVICE
Chairman McHugh and distinguished Members of the Subcommittee, I am pleased to
have the opportunity to submit this written statement on behalf of the Treasury Department
with respect to H.R. 22, the "Postal Modernization Act of 1999."
The financial provisions in Title II of the current version of H.R. 22 are similar to
those in earlier versions of the bill, which Treasury reviewed in letters dated September 24 and
April 10, 1998. These provisions would segregate the finances and operations of the Postal
Service into three distinct components: (1) Non-Competitive Postal, which would continue to
be financed through the existing Postal Service Fund; (2) Competitive Postal, which would be
financed through a newly created Competitive Products Fund in the Treasury; and (3) NonPostal, which would be financed by a newly created corporation, the shares of which would be
owned by the Competitive Products Fund.
The current bill includes new provisions designed to strengthen the proposed fire walls
between the three proposed Postal Service components and to minimize the risks posed by the
Competitive Products Fund. For example, under the bill, the proposed Competitive Products
Fund would no longer be authorized to borrow from the Postal Service Fund. In addition, the
Postal Service would be required to submit to the Secretary of the Treasury and the proposed
new Postal Regulatory Commission an annual report that would address such matters as risk
limitations, reserve balances, allocations of monies, liquidity requirements, and measures to
safeguard against losses.
RR-2998
For press releases, speeches, public schedules and official biographies, call our 24Jiour fax line at (202) 622-2040
While we support the new provisions and appreciate the Subcommittee's efforts to
address Treasury's concerns, we continue to object to the financial provisions in Title II of the
bill. Our concerns are as follows:
Borrowing. H.R. 22 would permit the Postal Service to borrow money for its
Competitive Products Fund from the market, rather than continuing to borrow from the
Federal Financing Bank (FFB). We object to this provision because we believe it
would result in increased borrowing costs to the Postal Service. In accordance with
longstanding Federal financial policies, Federal entities, such as the Postal Service,
should borrow solely from the Treasury or the FFB because that is the least expensive,
most efficient method of financing such debt. In fact, we have been receiving very
positive feedback from the Postal Service about its borrowing relationship with the
FFB.
Investment. The bill would permit the Postal Service to borrow on behalf of the
Competitive Products Fund from the market at preferential rates due to perceived
Government backing of the debt. The Competitive Products Fund could then invest
any excess monies in the "Non-Postal" corporation; that corporation, in tum, could
then invest in individual private companies. This scenario ultimately would allow the
Postal Service to borrow at preferential rates and invest at potentially higher rates.
Although the bill attempts to limit investment in private equities to the Non-Postal
corporation, the corporation's ownership by the Competitive Products Fund and its
financial links to the Postal Service create a situation in which the increased risks
undertaken by the Non-Postal corporation could ultimately be borne by taxpayers.
Banking. The bill would permit the Postal Service to deposit funds from the
Competitive Products Fund outside of the Treasury, without the Secretary of the
Treasury's approval. In addition, the Postal Service would be permitted to move its
funds in and out of the Competitive Products Fund at its sole discretion. Under
existing law, the Postal Service banks at the Treasury and may not deposit funds
outside of the Treasury without the Secretary of the Treasury's approval. As a matter
of sound Government fiscal policy, this arrangement is necessary to allow centralized
management of the Government's cash balances. If the financial exemptions and
privileges proposed for the Postal Service were to become a precedent for all Federal
agencies, Treasury's borrowing costs would be increased, and its cash management and
forecasting abilities would be weakened. The Postal Service provisions cannot be
considered in isolation. If other Federal entities were granted similar authorities as
sought for the Postal Service, the adverse consequences on Treasury's management of
Government funds would be severe. Additionally, the financing costs borne by those
entities would be greater.
Non-Postal Corporation. Although the bill classifies the new Non-Postal corporation as
a private corporation, we view that entity as an on-budget Federal agency. As such, it
2
should be required to borrow, bank, and invest with the Treasury and should be subject
to the Federal oversight and regulations that govern such agencies. The Non-Postal
corporation should be viewed as a Federal agency because it would be solely owned by
the Competitive Products Fund, and thereby, would have strong links to the Postal
Service, which is a Government entity. (Non-Governmental ownership is not
contemplated for the corporation.) Moreover, the Non-Postal corporation would have
a Federal charter and would be authorized to conduct postal business, which is
perceived as a Governmental function.
In conclusion, Treasury cannot support the financial provisions in Title II of H.R. 22,
as they are currently drafted. However, we look forward to working closely with the
Subcommittee and the Postal Service to find ways to resolve our concerns with these
provisions.
The Office of Management and Budget has advised that there is no objection from the
standpoint of the Administration's program to the presentation of this statement.
-30-
3
D EPA R T 1\'1 E N T
0 F
THE
T REA SUR Y
NEWS
TREASURY
~/78~9C.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1II
......................................
OFFlCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
March 4, 1999
Contact: Office of Public Affairs
(202) 622-2960
MEDIA ADVISORY
Treasury Secretary Robert E Rubin will announce and will formally administer the oath of
office today to the next Director of the United States Secret Service at II a.ffi. in Room 3311 of
the Treasury Department.
Media without Treasury, White House, Defense, State or Congressional press credentials
planning to attend should contact Treasury's Office of Public Affairs at (202) 622-2960 with the
following information name, social security number and date of birth. This information may be
faxed to (202) 622-1999. The room will be open to pre-set at lOa. m.
-30-
RR-2999
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
~178~q~. . . . . . . . . . . . . . . . . . . . . .. .
........................
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE. N.W .• WASHINGTON. D.C.. 20220. (202) 622·2960
Contact: Office of Public Affairs
(202) 622-2960
FOR IMMEDIATE RELEASE
March 4. 1999
SECRETARY RUBIN ANNOUNCES NEW SECRET SERVICE HEAD
Treasury Secretary Robert E. Rubin on Thursday administered the oath of office to the 20th
Director of the Secret Service, Brian L Stafford
"Brian has distinguished himself and the Secret Service through his professionalism, integrity
and commitment to duty," Secretary Rubin said "As we look ahead, the Secret Service will remain
keenly focused on all threats falling within its jurisdiction -- around the world, within the United
States and right here around the White House complex"
Stafford, who has been in the Secret Service for 28 years, currently serves as the Assistant
Director of the Office of Protective Operations Before that, he was the Special Agent in Charge of
the Presidential Protective Division from February 1997 until February 1998. Stafford began his
tenure with the Secret Service as a special agent assigned to the Cleveland Field Office He also
served in a variety of other capacities with the Secret Service including: the Assistant to the Special
Agent in Charge of the Presidential Protecti,e Division, and the Assistant Special Agent in Charge
of the Office of Protective Operations, the Special Investigations and Security Division, the Technical
Security Division, and the Miami Field OHice Prior to his tenure with the Secret Service, Stafford
served in the United States Arm~' from )96q to 1971 and completed a tour of duty in Vietnam.
Stafford, a graduate of Mount Union College in Ohio and a native of Sharpsville, Penn, was
born in 1948, and has received numerous achievement and performance awards throughout his
distinguished law enforcement career StatTord replaces former Secret Service Director Lewis C
Merletti who retired in January
-30-
RR-3000
For press releases, speeches. public schedules ami official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
'-.
NEWS
omCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C .• 20220. (202) 622·2960
Contact: Public Affairs
(202) 622-2960
FOR IMMEDIATE RELEASE
March 4, 1999
MEDIA ADVISORY
TREASURY, NATIONAL ACADEMY FOUNDATION ANNOUNCE PARTNERSHIP
WITH WOODROW WILSON HIGH SCHOOL
Treasury Secretary Robert E. Rubin and Citigroup Chairman and Co-Chief Executive
Officer Sanford 1. Weill will announce a partnership bet"een Treasury. the National Academy
Foundation (NAF) and Woodrow Wilson Senior High School. at 8:30 a.m. Monday, March 8
at the school library located at 3950 Chesapeake Street. N. W. (at Chesapeake St. and Nebraska
Ave.) in Washington, D.C.
At the announcement, Rubin and Weill \\ill he joined hy {l.S. Mint Director Philip Diehl,
Woodrow Wilson Principal Dr. Steven Tarason. more than 100 students from the Wilson
Academy of Finance, as well as local business and community leaders for the announcement.
- 30 RR-3001
For press release:), speeches, public schedules and official biographies, call our 2~/'flOurfax line at (202) 622-2040
....
---~"--~-.-
-~---'-'--'------
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
~/78~q~. . . . . . . . . . . . . . . . . .. .
....................
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
March 8, 1999
Cllntact: Maria Ibanez
(202) 622-2960
RUBIN, WEILL ANNOUNCE PARTNERSHIP AT \VILSON HIGH SCHOOL
Treasury Secretary Robert E. Rubin and ('itigrollp ('hairll1an Sanford I. Weill on Monday
announced a partnership between Treasury and the National /\ccldemy Foundation (NAF) at
Woodrow Wilson Senior High School in Washington. D.C. Wi Ison' s Academy of Finance \vill
be the first academy to benefit from the new partnership.
Under the partnership agreement. Treasury will support NAF academies at public schools
by providing internships to academy students. Treasury \\ill coordinate the internships through
its Partnership in Education (PIE) Program. which began in I C)C)5. Treasury will also work with
NAF through its bureaus nationwide to prepare students for college and careers in both the
private and public sectors.
"Today's partnership with the National Academy l'oull(btion is an important step for the
Wilson Academy of Finance and \ve look forward to \\orking with N AF on other similar school
partnerships in the future," Secretary Rubin said. "/\t \Vilson tlnd other public schools across the
nation, Treasury and the NAF will provide students \\ith the opportunity to learn skills that will
prepare them for the workplace."
NAF was established in 1989 to unite business. school and government leaders in the
education of public high school students. NAF is the largest CClreer academy program in the
nation, operating nearly 300 academies in the areas nf liIlClI1CC. tl'd\el and tourism.
"This unique public-private partnership further eIlh~lllce,..; till' National Academy's 17-ycar
effort to promote practical financial career cd llcat ion amI col k;.2e preparation for hi gh school
students around the country." said Sandy I. Weill. Citigrollp ('lwirlllCln and current NAF Chair.
"Now thousands more young people \\ill gain lirsthand c:\posurc to opportunities in both
government and private business as they make important decisions dhout their futures'-'
Rubin and \Veill were joined by D,C Mayor :\nthOIl) \\'illi~1ll1s. ll.S f\!lint Director
Philip DiehL Woodrow Wilson I ligh School Principal Dr. Stc\l'n lamson. District Schools
Superintendent Arlene Ackerman. and local husiness and cOlllmunit) kadel'S for signing nr the
Memorandum of Understanding.
- j ()-
RR-3002
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2 (}-I 0
PUBLIC DEBT N-EWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
EMBARGOED FOR RELEASE AT 3 :00 PM
March 4, 1999
Contact: Peter Hollenbach
(202) 219-3302
PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR FEBRUARY 1999
The Bureau of the Public Debt announced activity figures for the month of February 1999, of
securities within the Separate Trading of Registered Interest and Principal of Securities program
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$1,656,965,719
Held in Unstripped Form
$1,438,321,876
$218,643,843
Held in Stripped Form
$11.842.788
Reconstituted in February
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 MOn/hly Slatement Offill' Puhlic Deht. entitled "Holdings of Treasury Securities in
Stripped Form."
The STRIPS data along with the new Afonth Iy Statement oflhe Public Debt, is available on Public
Debt's Internet homepage at: www.publicdebt.treas.gO\,: A v,'ide range of information about the
public debt and Treasury securities is also available on the homepage.
RR-3003
000
J.H"..,.II~ .publicdebt.treas.gov
TABLE V - HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, FEBRUARY 28,1999
Pronclpal Amount Outstanding In Thousands
Corpus
Loan Descnptlon
Treasury Bonds
CUSIP
9t2810 DM7
DQ8
DR6
DU9
DNS
OPO
DS4
DT2
DV7
DW5
DX3
DYI
DZ8
EA2
EBO
EC8
ED6
EE4
EFI
EG9
EH7
EJ3
EKO
El8
EM6
EN4
EP9
E07
ES3
ETI
EV6
EW4
EX2
EYO
En
FAI
FB9
FE3
FFO
FG8
9
Interest Rate
11·5/8
12
10-3/4
9-3/8
11·3/4
11·1/4
10-5/8
9-7/8
9-1/4
7-1/4
7·1/2
8-314
8-7/8
9-1/8
9
8-7/8
8-1/8
8·112
8·3/4
8·3/4
7·7/8
6·11B
8-118
8
7·1/4
7·5/6
7-1/8
6-1/4
7·112
7·5/8
6-7/8
6
6-3/4
6-112
6-518
6-318
6-118
5-1/2
5-1/4
5-1/4
Maturity Date
STRIP
CUSIP
Total
Outstandm<l
11115/04
05/15/05
OB/15/05
02115/06
11/15/14
02115/15
08115/15
11115/15
02l15/t 6
05/15/16
11/15/t6
05115/17
08115/17
05/15/18
11/15/18
02115/19
08115/19
02/15/20
05/15/20
08115/20
02115121
05115121
08/15/21
11/15/21
08115:22
11115/22
02115/23
08/15/23
11/15124
02115,25
08/15125
02115126
08/t 5125
11/15:25
02115/27
08/15,2,
11/15,27
08115,29
11115,28
02/15,29
912803 AB9
ADS
AGB
AJ2
912800 AA7
912803AAI
AC7
AE3
AFO
AH6
AK9
Al7
AM5
AN3
AP8
A06
AR4
AS2
ATD
AU7
AV5
AW3
AXl
AY9
AZ6
BAD
BB8
BC6
804
BE2
BF9
BG7
BH5
BJI
BK8
Bl6
BM4
BP7
BV4
BV,'2
Total Treasury Bonds
Treasury Inflatlon·lndexed Notes
CUSiP
Series Interest Rate
9128273A8
J
3-5/8
2M3
A
3-3/8
A
3T7
3-518
A
4Y5
3-7/8
912620 BZ9
Bval
CL91
DN4
07115.02
01115.C7
01/15.08
01/15,09
Tolallnflatlon·lndexed Notes
Treasury Inflation-Indexed Bonds
CUSIP
Interest Rate
912810 FD5
3-5/8
Total I"natlon-Indexed Bonds
Portion Held In
Unstnpped Form
Reconstituted
This Month
Portion Held In
Stropped Form
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
10352.790
10.699.626
18.374.361
22.909044
11.469.662
11.725.t70
12602007
12904.916
10.893.818
11.493.177
10456071
10735.756
22.518539
t 1.776 201
to 947 052
11 350422
4,074,606
2.063.558
6.382,513
4,747.916
2.675.184
10,865,719
6,961.756
4,675.859
7.118.854
18.162.751
17.889.568
9.571.929
10,960,858
3,371.039
2.536.070
6.372.398
19.251.592
6.397.268
2.900.963
5881.006
10.172.573
6.779048
9.751.002
12.630.319
8.819.190
2.970.026
11.356.761
19.003.732
2.469.662
2.853.170
8.156.567
12.541.316
8.655.418
8.636.777
8.043.271
10.188.556
22.099.339
11.773.801
10.946.252
11.350.422
4.227.200
2.197.200
2,BB7.200
8.000
3.330,400
1.802.080
188.160
2.224.000
148.000
660.eOO
974.880
8.622,240
3.056,000
5.337.600
6.496.800
12.878,400
962,240
3.831.600
7.257.920
15.537.600
940.800
5.179.840
2.412.480
20.168.075
1.533.600
7.729.600
7.017.600
3.905.312
9.000.000
8.872.000
4.445.440
363.600
2.238.400
2.856400
2.412.800
547.200
419.200
2.400
800
0
36.800
58.100
93,600
0
25.600
481.760
70.720
219.200
79.200
120.800
32.000
895.680
550.400
27.200
80.600
920.000
257.280
717.600
176.960
797.120
115.200
299.640
1.072.960
1.090.100
183.200
179.200
353.600
419.968
203.280
315.200
65.280
0
299.200
458.000
11.200
163.200
0
0
0
0
514732476
352.058.609
162.673.867
1O.B7D.048
17211.050
16301 779
17055990
8 532 287
17.211.050
16.301 779
t 7.055990
8.532.287
0
0
0
0
0
0
0
0
59101 106
59101.106
0
0
17 033 375
17.033.375
0
0
17 033375
17.033.375
0
0
I
912803 BN2
04/15:28
TABLE V • HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, FEBRUARY 28,1999 - Continued
Corpus
STRIP
CUSIP
loan DescnptlOn
Treasury Notes:
Senes: Interest Rate
CUSIP
g.1/8
9t2827 XN7
B
8
C
XWl
5-3/4
AK
3H3
5-5/8
3K6
Al
7·7/8
YE6
D
5-5/8
3P5
AM
AN
5-518
3Rl
5-3/8
Y
3U4
A
8·112
YN6
5-1/2
3Y6
Z
5-112
4A7
AB
5-5/8
AC
4C3
8·7/8
YW6
B
4G4
AD
5-1/2
5·3/8
4J8
AE
AF
5-3/8
4Ml
8·3/4
ZE5
C
AG
5-118
402
4RO
AH
4-112
4T6
AJ
4
D
8·112
ZN5
X
5-3/4
3M2
41/1/9
AK
4-5/8
4X7
Al
4-5/8
4-112
4Z2
U
A
7·3/4
ZX3
3WO
S
5·3/8
A85
B
8
4E9
T
5-5/8
B92
C
7·7/8
D25
D
7·1/2
F49
A
7·112
G55
B
6-3/8
3J9
M
5-7/8
314
N
5-3/4
P
5-3/4
303
3S9
5·5/8
0
3V2
C
5·1/2
J78
A
6-1/4
3Z3
D
5-1/2
4B5
E
5-1/2
4Dl
F
5·3/4
4H2
5·1/2
G
4K5
H
5·3/8
L83
5·3/4
B
4N9
5·1/4
J
4U3
K
4-1/4
N81
A
5-7/8
5A6
4·3/4
E
P89
7·1/4
B
088
C
7·1/4
R87
D
7·7/8
A
S86
7·1/2
T85
B
6-1/2
U83
C
6-112
D
5-7/8
V82
weI
A
5-5/8
X80
B
6·7/8
Y55
C
7
Z62
D
6-1/2
2JO
6-1/4
B
2U5
C
6-5/8
3EO
D
6-118
3X8
B
5-112
4F6
C
5-5/8
4Vl
D
4·3/4
Total Treasury Notes
912820 AS6
AT4
CBl
CD7
AUI
CGO
CJ4
CM7
AV9
CR6
CT2
CV7
AWT
I
I
CZ8
DBO
DD6
AX5
DFI
DG9
DH7
AY3
CF2
Dl8
DM6
DP9
AZO
CPO
BA4
CX3
BB2
BCO
BD8
BE6
CC9
CE5
CH8
CKI
CN5
BF3
CS4
CU9
CW5
DA2
DC8
BGI
DE4
DJ3
BH9
D07
BJ5
BK2
BlO
BM8
BN6
BPI
B09
BR7
BS5
BT3
BUO
BW6
BX4
CA3
C08
CYI
DKO
-
Principal Amount Outstanding in Thousands
Reconstituted
Maturity Date
Total
Outstanding
05/15/99
08/15199
09/30199
10131199
11115199
11/30199
12131199
01131/00
02115/00
02129/00
03131100
04130/00
05115/00
05/31/00
06130/00
07/31/00
08115/00
08/31/00
09130/00
10131100
11115100
11115/00
11130/00
12131/00
01131/01
02115/01
02115/01
05/15/01
05/15/01
08115/01
11115/01
05/15/02
08/15/02
09130/02
10/31/02
11/30/02
12131/02
01131/03
02115/03
02128/03
03/31/03
04130/03
05131103
06130/03
08115/03
08115/03
11/15/03
02/15/04
02115/04
05115/04
08115/04
11115/04
02115/05
05/15/05
08/15/05
11/15105
02/15/06
05115/06
07/15/06
10"5/06
02/15/07
05/15/07
08/15/07
02/15/08
05/15/08
11115/08
Portion Held in
UnSlripped Form
10.047.103
10.163.644
17.487.287
16.823.947
10.773.960
17.051.198
16.747.060
17.502.026
10.673.033
17.776.125
17.206.376
15.633.855
10.496.230
16,580.032
14.939.057
18.683.295
11.080.646
20.028.533
19.268.508
20.524.986
11,519.682
16.036.088
20.157.568
19.474.772
19.777.278
11.312.802
15.367.153
12.398.083
12.873.752
12.339.185
24.226.102
11.714.397
23.859.015
12.806.814
1 I .737.284
12.120.580
12.052.433
13.100.640
23.562.691
13.670.354
14.172.892
12.573.248
13.132.243
13.126.779
28.01 I .028
19.852.263
18.625.785
12.955.077
17.823.168
14.440.372
13346.467
14.373.760
13834.754
14.739.504
15.002.580
15.209.920
15,513.587
16.015.475
22.740.446
22.459.675
13.103,678
13.958.186
25.636.803
13.583.412
27,190.961
25.083.125
4.659.903
5.740.944
17,269.687
16.604.747
5.713.160
16,865.598
16.647.860
17,502.026
7.420.233
17,776.125
17.203.576
15,630.655
5.045,030
16,580,032
14.939,057
18.683.295
6.879,846
20.028.533
19.268.508
20.496.986
6.908.082
16.036,088
20.157.568
19.474.772
19,m.278
7.836.802
15.367.153
8.324.183
12.873.752
9.009.585
19.845.862
8.821.517
22.180.615
12.771.614
11.675.684
11,919.780
12.052.433
13.100.640
22.854,019
13.626.354
14.172.892
. ~ 2,573.248
13.132.243
13.126.779
27.439.828
19.852.263
18.625.785
12.734.277
17.823.168
14.373.972
12.416.867
14.373.760
13.806.914
14.739.504
15.002.580
15,205,120
15,509.427
16,015.475
22.740,446
22,459.675
13,043,294
13,924,586
25,609,603
13.583.412
27.190.961
25,083,125
1.066.098.762
1,010,128,786
This Month
Portion Held in
Stripped Form
..
5.387,200
4.422.700
217,600
219.200
5.060.800
185.600
99.200
'0
3.252.800
0
2.800
3.200
5.451.200
0
0
0
4.200.800
0
0
28.000
4.611.600
0
0
0
0
3.476.000
0
4.073.900
0
3.329.600
4.380,240
2.892.880
1.678.400
35.200
61.600
200.800
0
0
708.672
44.000
0
0
0
0
571.200
0
0
220.800
0
66.400
929.600
0
27.840
0
0
4,800
4.160
0
0
0
60.384
33.600
27.200
0
0
0
55.969,976
30,400
82.100
0
0
83,200
0
0
0
40,000
0
0
0
30.400
0
0
0
13.600
0
0
0
8,000
0
0
0
0
13,600
0
0
0
83.200
290,240
76,000
38,400
0
0
0
0
0
3,200
0
0
0
0
0
16.800
0
0
1.600
0
152.000
0
0
10.000
0
0
0
0
0
0
0
0
0
0
0
0
0
.
.
I
972.740
Grand Total
1.656.965.719
1.438.321,876
218,643.843
11,842,788
Note On the 4th workca y of eaCl1 m0 nth la.le
" V will be available after 3 00 p m eastem time on the Commerce EconomiC Bulletin Board (EBB) and the Bureau of the Pubhc
Debt's webSite at http/lwwwpubl,cCebttreas gov For more Informalion about EBB. call (202) 482-1966. The balances in thiS table are subject to audit and subsequent adjustment
D E P .\ R T \) F ~ T
0 F
THE
T REA St.: H. Y
NEWS
TREASURY
OFFICE OF PUBLIC AFfAIRS - lIeo PENNSYLVANIA AVENUE, N.W .• WASJUNGTON. D.C.- ZOll •• (282) 622.Z,,1
EMBUGOBD tmTXL 2: 30 P.M.
March 4, 1999
CONTACT:
Office of F:inanc!ng
~02/2l9-33S0
'l'RBAStTRY OPnRS 13-WBn AND 26-WEBK BrLLS
The Treasury will auction two series of Treasury bills totaling
approximately $15,000 million to refund $15,757 million of publicly beld
securities maturing March 11, 1999, and to pay down about $757 million.
In addition to the public holdings, Federal Reserve Sanks for their own
accounts hold $7,592 million of the maturing bills, which may be refunded at
the higbest discount rate of accepted oompetitive tenders. Amounts issued to
these accounts will be in addition to the offering amount.
The maturing bills held by the pUblic include $2,578 million held by
'ederal Reserve Banks as agenta for foreign and international monetary authorities, which may be refuncied within the offering amount at tlJ.e bigh.at discount
rate of accepted competitive tenders. Additional amounts may be issued for
8uch accounts if the aggregate amount of new bids exceeds the aggregate amount
of maturing bills.
Tenders for the bills will be receive4at Pederal Reserve Banks and
Branches and at the Bureau of the Public Debt. Washington, D.C. This offering
of Treasury securities 18 governe~ by the ter.ms and conditions set forth i~
the Uniform Offering Cireular for the Sale and Issue of Marketable Book-Entry
Treasury Bills; Notes, and Bonds (31 CPR Part 35i, as amended).
Details about each of the new securities are given in tbe attached offering' bighlights.
000
Attachment
RR-3004
Fo, press reluses, speecAu. public ,cltedlliu "IId olflcilll biogr"pldes. t:(ll/ o'IF'14-ho", I(lx line III (102) 621-:;)40--
HIGHLXGHTS OP TRBASURY OFFBRXNGS
TO BB XSSUBD MARCK 11.
o~
B~LLS
~999
March 4, 199'
Offering Amount ••••.••......•.•.•••..••• $7,500 .illion
pesoriRtion of Of Cering I
Term and type of .ecurity ..••...••••.••• 91-day bill
CUSIP number •...••.••••••••••.•••••..... 912795 BP 5
Auction data ••••••...•..•...••••••••.••• March 8, 1999
rlsue date .••••••••.•••..•••••.•••••.••• March 11, 1999
Maturity date .....••...............•.•.• June 10, 1999
Original issue dat ••••••....••••••••.•.• D.c.mber 10, 199B
Currently outBtanding .•..•..•......•...• $12,614 million
Minimum bid amount and .ultiples .......• $1.000
Tbe following rule. apply to all securiti"
$7,500 million
lal-day bill
913795 CN 9
March 9, 1999
March II, 1999
September 9, 1999
March 11. 1999
$1,000
mentioned ahove:
§Wbmission of Bids:
Noncompetitive bids ••....••.. Accepted in full up to $1,000,000 at the highest discount rate of
acoepted competitive bids.
Competitive bids .••.•.••••.•. (1) Must be expressed as a discount rate with three decimals in
inorements of .005\, e.g., 7.100\, 7.105\.
(2) Net long position for each bidder must be reported when the sum
of the total bid amount, at all disoount rates. and the net long
position is $1 billion or greater.
(3) Net long position must be determined as of one half-hour prior
to the closIng time for rec~ipt of competitive tenders.
Ma¥imum Recognized Bid
at a Bingle yield ..•..•..••.. 35\ of public offering
Maximum Award ..•....•....•..••.. 35\ of public offering
Receipt of Tender~:
Noncompetitive tenders ....... Prior to 12100 noon Bastern Standard time on auction day
Competitive tenders .......... Prior to 1,00 p.m. Eastern Standard time on auction day
ffym~nt Termsl
By oharge to a funds account at a Pederal Reserve Bank on iSBue date, or payment
of full par amount with tender. TreasuryDirect customers can use the Pay Direct feature which
authorizes a charge to their account of record at their financial institution on isoue date.
DEPARTlVlENT
OF
THE
TREASURY
1789
OffiCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIllNGTON, D.C.- 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
March 8, 1999
Contact Dan Israel
(202) 622-2960
STATEMENT BY TREASURY SECRETARY ROBERT E. RUBIN ON BRAZIL
We welcome today's important agreement between Brazil and the International Monetary
Fund on a strengthened economic program. Brazil intends to exceed both the fiscal and debt
reduction targets agreed with the Fund last year, and has taken important steps since then to meet
its objectives. We believe that firm and sustained implementation of this program can preserve
financial stability, safeguard the significant results achieved under the Real Plan, and lay a solid
basis for restored confidence and renewed growth.
Brazil is in the process of discussing with private international financial institutions
voluntary arrangements to help secure support for the program by the private sector. Substantial
participation by Brazil's private sector creditors is important to Brazil's economic program. In this
context, we are prepared to join with the II\1F and other countries to make available substantial
additional financing from the international support program arranged last year
Brazil's success in preserving stability and laying the foundation for growth is of critical
importance to the United States, other regional economies and the international community
-30RR-3006
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
March 08, 1999
Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
March 11, 1999
June 10, 1999
912795BP5
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
4.510%
Ratel!:
Investme~t
4.638%
Price:
98.860
All noncompetitive and successful competitive bidders were a'IJarded
securities at the high rate. All tenders at lower rates were accepted in
Tenders at the high discount rate were allotted
f~ll.
24%.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered
Tender Type
Competitive
Noncompetitive
$
PUBLIC SlTBTOT.:'..L
26,659,636
1,344,204
Federal Reserve
Foreign Official Add-On
TOTAL
$
$
7,160,080
340,788
340,788
28,344,628
7,500,868
3,956,780
69,212
3,956,780
32,370,620
69,212
s
Median rate
4.500%: 50% of the amount of accepted competitive
tenders was tendered at or below that rate.
5% of the amount of accepted
Low rate
4.410%:
tenders was tendered at or below that rate.
Bid-to-Cover Ratio
1/
= 28,003,840 ! 7,160,080
competi::~e
3.91
Equivalent coupon-issue yield.
RR-3007
5,815,876
1,344,204
28,003,840
Foreign Official Refunded
SUBTOTAL
Acceptec
http://www .pu blicdebt. treas.gov
11,526,860
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt· Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
FOR IMMEDIATE RELEASE
March 08, 1999
Office of Financi~g
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
March 11, 1999
September 09, 1999
912795CN9
Term:
Issue Date:
Maturity Date:
CUSIP Numbe~:
4.540%
High Rate:
4.724%
Investment Rate1!:
Price:
97.705
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
All tenders at lower rates were accepted in full.
Tenders at the high discount rate were allotted
41%.
AMOUNTS TENDERED AND ACCEPTED (in tr.ousands)
Acceptec
Tenderec
Tender Type
Competitive
Noncompetitive
$
PUB:"IC SUBTOTAL
Foreign Official Refunded
SUB~OT.?;'L
Federal Reserve
Foreign Official Add-On
TOTAL
$
23,618,092
1,120,247
$
24,738,339
5,450,509
2,069,312
2,059,3::;
25,80-:, ::52.
7,S~9/3=~
3,635,000
420,688
3,635,000
420,688
30,863,339
$
Median rate
4.530%: 50% of the amount of accepted competitive
enders was tendered at or below that rate.
5% of the amount of accepted competitive
4.450%:
Low rate
enders was tendered at or below that rate.
id-to-Cove~
Ratio
Equivale~t
RR-3008
=
24,738,339 ! 5,460,509
4,340,262
1,120,247
4,53
coupon-issue yield.
http://www.publicdcbt.treas.go\'
11,585,509
DEPARTMENT
OF
THE
TREASURY
omCE OFPUBUC AFFAIRS· 1500 PENNSYLVANlAAVENUE, N.W.• WASlllNGTON, D.C .• 20220. (202) 622-2960
EMBARGOED UNTIL 10:30 a.m EST
Text as Prepared for Delivery
March 9, 1999
TREASURY UNDER SECRETARY (INTERNATIONAL AFFAIRS)
TIMOTHY F. GEITHNER
SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SUBCOMMITTEE ON INTERNATIONAL TRADE AND FINANCE
Mr. Chairman, I welcome the opportunity to testify before your subcommittee today on reform of
the International Monetary Fund
We reached a strong, bipartisan consensus last year on a series of important objectives for change at
the IMF. That consensus on refom1, and the substantial replenishment of the IMF's resources it made
possible, made a significant contribution to our efforts late last year to address the risks to U.S.
interests presented by the global financial crisis.
I am pleased to report on the progress we have made in encouraging the IMF to implement the
reforms called for in the legislation.
The Mission of the IlVIF
It is useful to start by reviewing the core mission of the IMF, and the broad objectives that have
guided our efforts to improve its effectiveness
When the IMF was created more than 50 years ago, its founders gave it two key roles:
First, to conduct so-called "surveillance" of the economic policies and performance of its
members' countries. This involves a process of consultation to promote appropriate policies
that contribute to faster economic growth and that help make economies less vulnerable to
shocks
Second, to provide financial assistance to countries in crisis in support of policies designed
to help restore stability and growth as quickly as possible.
RR-3009
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
As the world economy and financial system have changed over this period, member countries have
supported a wide range of changes to how the IMF carries out these two missions. The IMF's
surveillance process has been expanded to promote a broader range of open, market-oriented
economic reforms and institutional arrangements -- strong financial systems, for example -- that are
important to how economies perform. The IMF's financial facilities have been expanded and
adapted to meet the more complicated mix of challenges that its members face in today's world. The
reforms outlined in the legislation support both these objectives.
In the past two years, the United States has strongly supported the IMF as the central institution in
the effort to resolve the financial crises that began in Asia. The IMF is the right institution to be at
the center of this effort for three important reasons. First, it has the expertise to shape effective
reform programs. Second, it can-obtain reforms in crisis countries that no assisting nation could
obtain. Finally, the IMF internationalizes the burden.
But, it is important to recognize that there are limits to the IMF's mission and powers. The IMF does
not have the power to compel its members to adopt and implement the policies necessary to avert
crisis. And although the Fund can have considerable influence over the policies countries pursue as
a condition for financial assistance, it cannot by its actions alone ensure that countries are able to
restore confidence and growth. Furthermore, when countries experience crises, the IMF cannot fully
insulate these countries from the disruption that necessarily accompanies economic adjustment.
The IMF can make an important contribution, often decisive in some respects, to how economies fare
in our more integrated world economy and financial system. Ultimately, however, sovereign
governments are responsible for the decisions that shape the performance of their economies.
IMF Reform
The 1998 IMF legislation, passed in October, outlined a number of important reforms to the IMF,
and we have already begun to make some progress in advancing these reforms. Let me focus on our
efforts in the following three broad areas
•
increasing transparency and accountability~
•
sharpening the terms of the IMF's financial support to make it more market-based; and
•
improving the design of IMF poliCies and programs.
1.
Transparency and Accountabilit),
When the IMF was founded in 1945, its operations were largely cloaked in secrecy, The basic
approach which the Fund followed for most of the past 50 years is no longer tenable today. In recent
years, largely at U.S. urging, significant changes have taken place that make the IMF a more
transparent and accountable institution Let me highlight the most important ones.
2
•
The IMF now releases summaries of Board discussions, in a form called Public Information
Notices, on its annual reviews of the policies in its member countries (so-called "Article IV"
reviews) and on an increasingly broad range of policy issues as well. Just two years ago
summaries of board discussions were rarely if ever released. Today, this is becoming the rule,
with summaries now published on the annual reviews of nearly 100 countries.
•
The IMF's members now release key documents on I~ programs, such as the "Letters of
Intent" detailing the policy conditions associated with borrowing from the IMF, much more
systematically than in the past. Indeed, for all of the recent major I~ programs in Thailand,
Indonesia, Korea, Russia, and Brazil the letters of intent were published and available to the
public.
•
The IMF now releases on a monthly and quarterly basis much more comprehensive
information on its financial position in a form that is more accessible to the public, including
a liquidity table and summary of countries' accounts with the Fund and all IMF loans.
The IMF has now begun to release key policy papers, including the recent comprehensive
review of the Fund's recent programs in Asia, and will be publishing summaries of Executive
Board meetings on major policy issues
The IMF now is subject to more frequent extemal evaluations of its programs. The first such
evaluation, assessing the IMF's Enhanced Structural Adjustment Facility, was published last
year. Extemal reviews of IMF surveillance of economic conditions in member countries, as
well as the IMF's research program, are now in progress.
These changes are important because they will subject both the nviF' and the policies of its member
governments to much greater scrutiny by the citizens of its member countries, by the academic
community, by the taxpayers of those countries which are the major creditors to the IMF, and by the
financial markets. As these changes become policy in the institution, analysts everywhere will be able
to assess the quality and effectiveness of the IMF's advice and the degree to which governments
deliver on the commitments they make as a condition for IMF assistance. These changes will make
Congressional oversight much easier than it has been in the past And we believe they will make the
JMF a stronger and more effective institution. with broader support and appreciation for its role in
the international financial system
2. More Market-Based Terms for IMF Financial Support
As the world economy has grown and the scale of the global financial markets has expanded, it was
both necessary and appropriate for the IMF to develop the capacity to provide finance exceptionally
on a larger scale than had been possible in the past.
To help reduce the risk that the availabilit\ of exceptional amounts of official finance could
discourage governments from pursuing prudent economic policies, we believe it is important for the
3
terms of such finance to be more expensive relative to the IMF's normal lending terms. The IMF
legislation reinforced this objective, stating that in cases where exceptional amounts of IMF assistance
are provided, the terms of that finance should be designed to limit recourse to that support and to
encourage an early return to the private markets.
In the fall of 1997 the United States led an important innovation in this area with the creation of a
new IMF facility -- the Supplemental Reserve Facility. This marked a fundamental change in the
terms and conditions of IMF lending -- financing on shorter terms at premium rates of interest.
Since the creation of this new capacity, a substantial portion of all IMF lending in large programs has
been provided on so-called "SRF terms" -- interest rates that are at least 3 percentage points above
short-term market interest rates, and maturities of 2112 years or less. In the three large programs that
came after this facility was established, for Korea, Russia, and Brazil, 62 percent of IMF assistance
carried these terms. I expect that this will be the case in future large programs as well.
Looking ahead, any use of the new contingent credit line for combating financial market contagion,
which the U.S. and the G-7 proposed last fall, will also carry premium rates of interest and short
maturities.
3. Improving Design of IMF Policies and Programs.
The IMF funding legislation also set out a number of important objectives for changing the design
ofIMF programs. The committee's letter of invitation to this hearing asked me to address the extent
to which IMF programs in a number of recent cases reflected these and a list of other objectives.
Trade Liberalization
The legislation included various provisions aimed at encouraging the liberalization of restrictions on
trade in goods and services, consistent with international agreements.
In fact, the IMF has moved quite substantially on this front, both with respect to broad policies that
encourage trade liberalization and in specific programs. Let me cite a few examples of how the IMF
has supported trade and investment liberalization in the key countries cited by the Committee.
•
indonesia. Indonesia, pursuant to its Fund program, has removed restrictions on foreign
investment in wholesale and resale trade; allowed foreign banks to buy domestic banks;
terminated government support for Indonesia's national airplane project; discontinued special
privileges for the national car project, which had given rise to serious WTO concerns; abolished
import monopolies for such products as soybeans, sugar and wheat; cut tariffs on a range of
products; agreed to phase out all quantitative import restrictions and other non-tariff barriers;
and dissolved all cartels for plywood, cement and paper.
•
Korea. As part of its IMF program, the Korean government has undertaken a wide-range of
policy measures to liberalize its trade and investment regimes. Among these measures are
4
substantial reductions in the number of items subject to adjustment tariffs, elimination of export
subsidies, and simplification and harmonization of import certification procedures to WTO
standards. In addition, restrictions on foreign investment in Korean equity, bond and money
markets have been significantly reduced or eliminated, while restrictions on foreign direct
investment have been substantially eased. As discussed below, two of Korea's major banks are
now being privatized with foreign investor involvement. The Fund's efforts to restructure
Korea's financial and corporate systems, along with the opening of the economy to foreign
participation, should help create a stronger free market system that conducts transactions on the
basis of arms-length practice.
•
Thailand. Trade-related conditionality was a less important part of Thailand·s IMF program
given its relatively greater openness to foreign trade and capital. The Thai government has
nonetheless moved to further liberalize foreign investment through a new draft foreign
investment law, which opens up the brokerage, wholesale and retail trade, construction and hotel
industries to foreign investment
•
Brazil. In recent years, Brazil has made critical progress in restructuring its economy through
de-indexation, a major privatization program which was open to foreign investors, and beginning
to liberalize import restrictions by joining Mercosur But there is still more to be done. During
discussions leading up to a program with Brazil, the U. S. Executive Director stressed to the
Brazilian authorities and to the IMF Board and management that Brazil needed to meet its
international trade obligations The USED also ascertained, informally, that there were no
intentions to raise tariffs as part of the government's fiscal adjustment program. At our urging,
the text of Brazil's agreement with the IMF included a pledge to continue its policy of trade
liberalization and integration. Further, the agreement just reached between Brazil and the I1v1F
provides for major cuts in Brazilian export subsidies.
Notwithstanding this progress, the IMF continues to search for ways to go further. Many analysts
have felt that the IMF at times was prone to accept trade restrictive actions, such as import duty
hikes, as a means of protecting fiscal positions On February 3, 1999 the Executive Board held a
seminar to consider its approach to trade reform and its fiscal ramifications. The Board's discussion
revealed a fairly strong consensus on the benefits of trade liberalization. Indeed, the Board noted that
there was ample empirical evidence that trade liberalization was not correlated with lower trade tax
revenues, that the presence of adverse revenue consequences from trade liberalization should not
delay trade reform, that the actual revenue costs of trade reform have not proven overly burdensome,
and that countries needed to act to complement trade reforms with growth supporting domestic tax
reforms and macroeconomic policies.
Directed Lending
The IMF legislation called for policies aimed at eliminating the systemic practice of governmentdirected lending on noncommercial terms and of subsidies. Some examples of progress in this area
include:
5
•
The Korean authorities have expressed a commitment to desist from their practice of directing
commercial bank lending decisions. This commitment was formally incorporated into the
provisions of the standby arrangement by setting structural performance criteria intended to
advance reform of the banking sector. During the most recent quarterly review in December,
IMF staff confirmed that all but one of the structural performance criteria had been observed.
This condition was subsequently met as scheduled by the end of January. We will continue to
monitor this issue closely.
•
In Indonesia, the focus is on the more prevalent practice of connected lending through the
banking system and the inappropriate use of off-budget government accounts. The IMP, in
cooperation with the World Bank, is addressing the problem in its financial sector restructuring
program. This includes the issuance of new prudential regulations that tighten restrictions on
connected lending and the requirement that former owners of banks that have been closed or
taken over by the government repay losses arising from connected lending. Lending on
noncommercial terms is also being addressed through the phased elimination of preferential
access to bank credit. Also, off-budget accounts, such as the so-called Reforestation Fund, that
were used to siphon off funds for pet projects or connected individuals are being audited by
international firms and are now included in the Indonesian budget.
Bankruptcy Reform
The legislation included provisions aimed at promoting bankruptcy reform -- to be precise, a legal
basis for nondiscriminatory treatment in insolvency proceedings between domestic and foreign
creditors, and for debtors and other concerned persons. The IMF is sharpening its efforts in this area,
focusing on the development of effective, nondiscriminatory bankruptcy laws and procedures. For
example:
•
In Indonesia, the IMF has been actively involved in helping to develop more effective national
bankruptcy laws and procedures, as well as providing support for the training of judges.
•
As part of its IMF program, Korea has amended its bankruptcy law to facilitate more rapid
resolution of bankruptcy procedures and has increased staffing and resource levels to resolve
bankruptcy claims more quickly.
•
In Thailand, the Fund has been active in promoting legislation to facilitate bankruptcy
proceedings, foreclosures and mergers, and faster disposal of assets. Progress in these areas will
not only promote orderly, nondiscriminatory insolvency proceedings, but will also help
encourage private sector resolution of debt problems before a crisis strikes.
It is important to recognize, however, that merely passing new laws is not enough to create an
effective bankruptcy regime. This also requires institution building, a process which the IMF, the
World Bank, and regional development banks are also working to support.
6
Reduction of Unproductive Spending
The so-called voice and vote provisions of the IMF legislation called for, among other objectives, the
curtailing of excessive military spending, and the reduction of spending by governments on "showcase" projects. The United States has strongly urged the IMF to devote increased attention and effort
in this area, and we are seeing some indications that our efforts are paying off:
•
In countries with an IMF program, military spending has fallen from 5 Y2 percent of GDP in
1990 to 2 1/4 percent presently.
•
Recently, the Fund's membership endorsed a code of good practices on fiscal transparency,
aimed at enhancing the transparency of fiscal policy, and reducing or eliminating off-budget
transactions and accounts, which are often the source of unproductive government spending.
There are also specific examples of the USED using the voice, and the vote, of the United States to
oppose unproductive spending For example, on January 14 the United States abstained on a review
of Pakistan's ESAF program in part because of concerns over the composition of government
spending, including military spending
Privatization of State-Owned Enterprises
The IMF legislation called for progress in a number of areas intended to enhance the establishment
of market-based economies, for example through privatization of state-owned enterprises.
Privatization figures prominently in many IMF programs as part of the Fund's efforts to help
countries restore fiscal stability, rationalize the role of government in the economy, and expand the
scope for private-sector led growth. A full accounting of the IMF's efforts in this area, strongly
encouraged by the United States, would take much more time than we have today, therefore, I would
like to cite just a few recent examples:
In Indonesia, the IMF program, in cooperation with the World Bank, includes a major
privatization effort aimed at divesting the vast bulk of state enterprises over the next decade.
Between 1999-2001, the privatization effort will focus on hotels, trading, construction, mining
and civil engineering firms and fertilizer producers As part of the program to strengthen the
financial sector, four state owned banks are being merged with a view to privatization in this
period
•
In Korea, changes in the legal regime have facilitated a growing number of privatizations.
By January 1999, the government had completed the sale of stakes in four enterprises
(Narnhae Chemical Corporation, National Textbook Company, Pohang Iron & Steel
Corporation, and Korea Technology Banking Corp.) for a total of 760 billion won
($620 million).
Memorandums of understanding have now been signed to sell two banks nationalized
by the Korean government in December 1997 to foreign investors. A majority stake
7
in Korea First Bank will be sold to an investor group led by two U.S. firms,
Newbridge Capital and GE Capital, and HSBC, a U.K.-based bank recently reached
an agreement with the Korean government on the purchase of a 70 percent stake in
Seoul Bank, and subsequently announced its intention to increase its stake to 100
percent.
•
Thailand has also sold its stakes in several companies in the energy sector, while the privatization
of the Ratchaburi Power Plant is scheduled to occur this year. The privatization program will
be expanded this year with the scheduled sales in the telecommunications, transportation and
banking sectors.
The Social Dimension of IMF Programs
The IMF legislation recognized, appropriately, the importance of ensuring that IMF programs take
into account, in ways consistent \vith the IMF' s mandate, the social dimensions of economic
adjustment We have pushed hard, with some success, to encourage the Fund to pay greater attention
to the composition of fiscal spending in countries and to the need to cut unproductive spending and
shift resources toward the most vulnerable segments of society. We have also emphasized that the
fiscal adjustments countries make as part of IMF programs should be structured in a way that does
not undermine environmental protection, enforcement oflabor laws, or come at the expense of the
most vulnerable members of society That means not only strengthening social safety nets for those
in greatest need and promoting core labor standards around the world, but also increasing investment
in education and health care, where there are high social rates of return, to provide all citizens with
the requisites for economic success
The IMF programs for Indonesia, Korea and Thailand reflect some success in these areas. As the
severity of the crisis became apparent, fiscal deficit targets agreed to between these countries and the
IMF were substantially eased in order to allow for greater government social spending on social
safety net programs designed to alleviate poverty and protect the unemployed. The World Bank and
Asian Development Bank have played a critical role in designing and helping to fund these programs.
Indonesia is the best example of this It had broadly maintained a balanced fiscal position for decades.
As the depth of the crisis and its massiH' toll on poverty became evident - growth may have
contracted 15% in Indonesia last year with PO\crt\' shooting up by as many as 6 million people - the
Fund helped redesign Indonesia's tiscal stratcg\ and mobilize international support to allow for a
large fiscal deficit that accommodated baSIC ~oClal spending for the poor, including subsidies for basic
goods such as rice, oil, and fuel More recently Indonesia has developed a massive targeted program
to provide rice to the truly needy
Labor rights and environmental concerns have also been addressed in the IMF's discussions and
programs with these Asian countries For example, in response to the urging of the international
community, particularly the United States and the IMF, the Indonesian government released a
prominent independent union leader, Muchtar Pakpahan, from prison, ratified International Labor
Organization (lLO) conventions on Freedom of Association, and announced its intention to ratify
Q
conventions on forced labor, employment discrimination and child labor. In coordination with the
World Bank, the IMF program has also included a number of critical environmental policy measures,
such as introducing special resource taxes, drafting of a new environmental law, and raising stumpage
fees.
The IMF programs for Brazil have also reflected concerns over the environment and labor issues.
•
With respect to the environment, the U. S. Executive Director emphasized to IMF staff and
the Brazilian authorities the importance of protecting environmental expenditures from
needed fiscal cuts. When evidence emerged that key pilot programs for environmental
protection could suffer deep cuts, the U. S government and the international financial
institutions raised concerns with the Brazilian government and the funds were restored.
•
Similarly, the United States vigorously used its voice to stress the importance of insulating
from fiscal cuts programs to enforce labor laws - especially prohibitions against child labor
and forced labor - and programs to enforce laws protecting the rights of Brazil's indigenous
populations.
Assessment of IMF Programs in Asia
It should be clear from the forgoing review that the programs are broadly consistent with the
objectives of the IMF reform legislation passed in October 1998, despite the fact that the programs
for the Asian countries were initially drafted in 1997 While the IMF has recently completed and
publicly released its own assessment of its programs in Asia, I would like to note several key issues
as we reflect on the appropriateness and success of these programs
•
First, these programs were designed to address the specific underlying causes of the crisis that
applied in each specific case While the IMF has been accused of adopting a uniform orthodoxy
to every country, these programs demonstrate that this is not the case. The heavy emphasis on
structural reform measures in both Indonesia and Korea reflects the nature of the weaknesses
that helped precipitate and intensify the crises in these countries. This is also true of the
emphasis on restructuring and strengthening of the financial systems in all three Asian countries.
•
The IMF has also demonstrated conSiderable flexibility in adjusting these programs as both
domestic and external circumstances have changed. Although the IMF, along with almost
everyone else, failed to anticipate the severity of the economic contraction that would
accompany the crisis, the IMF has moved quickly to work with the governments in the region
to adjust their reform programs to reflect these developments.
•
IMF programs, when implemented fully and consistently by governments in the region, have
been quite successful in achieving their objectives. In trying to overcome a financial crisis of the
type that began in Asia in 1997, the critical first step must be to reestablish macroeconomic and
financial stability. This is a necessary precondition for arresting high-or hyper-inflation -- the
9
cruelest tax on people; for stabilizing exchange rates; and for bringing down interest rates to
levels that will support sustained growth Macroeconomic stability is also a prerequisite for the
success of structural reforms and other measures to address the underlying causes of the crisis,
as well as efforts to mitigate associated human suffering. Despite an extraordinarily difficult
external environment, IMF-supported reform programs have helped countries such as Korea and
Thailand to move forward on the path of recovery.
•
Some private sector forecasters now expect the Korean economy to grow in excess of 2% this
year, while the Thai government projects its economy will return to positive growth in the
second half of this year. After peaking at the beginning of last year, short-term interest rates
have fallen back to pre-crisis levels, or lower, in both Thailand and Korea. This does not mean
that the cost of the crisis has not been high or that the governments and people of Korea and
Thailand do not still face immense challenges. But it demonstrates that continued, forceful
implementation of economic reforms continues to represent the surest and fastest road to
recovery.
•
The case of Indonesia , which has suffered the greatest deterioration in economic conditions in
the region, also demonstrates the benefits of consistent implementation of strong policies. A
significant relaxation of monetary policy in late 1997 helped produce a sharp plunge in the value
of the rupiah, a rapid acceleration of inflation and a marked deterioration in the condition of
many companies overburdened with foreign debt Since June of 1998, Indonesia has been able
to bring inflation under control and has strengthened the rupiah, all owing interest rates to fall
sharply from their high levels It has begun the difficult and painstaking processes of bank and
corporate restructuring that are essential to any sustained recovery. While the challenges for
Indonesia remain daunting, particularly in light of the political uncertainty surrounding elections
this year, the need for, and benefits of, continued implementation of economic reforms are clear.
~
Looking Forward
Recent lMF programs have been broadly consistent with the key agenda items reflected in the IMF
reform legislation, and they have been reasonably successful in helping countries take the difficult
steps to recover from their economic crises Nonetheless, the Treasury wiIl continue to strengthen
the process by \vhich we identify opportunities to advance the agenda outlined in the IMF reform
legislation, coordinate with other U S government agencies, and attempt to build consensus
internationalIy for this agenda
Treasury Task Force. Within the Treasury, we have created a new task force composed of
country specialists and officials knowledgeable in particular issue areas, such as banking, trade,
labor, and the environment Other US. government agencies, such as the U.S. Trade
Representative, the Labor Department, the Commerce Department, and the State Department,
will provide input into the work of the task force. The objective of this group is to promote a
mechanism for early insight into the IMF's dialogue with its member countries and the design
of its programs
In temlS of international cooperation, we are working hard to strengthen and, over time, expand the
consensus exemplified by the October 30, 1998, statement by G- 7 Executive Directors on reforms
10
set out in section 601 of the IMF funding legislation. Our basic objective in this regard has two
dimensions:
at a general level, to continue to advance and refine our arguments in the IMF policymaking process with the goal of bringing appropriate proposals to the IMF Board and
management for consideration; and
an incremental case-by-case approach whereby we try to further our progress in
specific programs to encourage a more systematic application of these reforms.
Concluding Remarks
We take the issues before us today seriously and will continue to work hard to advance the reforms
set out in the legislation. We have made significant progress in a number of areas The cumulative
impact of the changes that are taking place is quite meaningful and probably more significant in scope
and importance than anything that has happened in the IMF for some time.
In many ways, however, we are still at an early stage of the process. I think we can take
encouragement from the fact that the IMF has shown a willingness and capacity to adapt. I also
believe that current IMF management is making a good-faith effort to work with us, as are our G-7
partners and a number of other IMF members. We hope to build on that foundation.
Thank you. I would be happy to try to answer questions.
-30-
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C. • 20220 • (202) 622·2960
March 9. 1999
Weekly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data for the week ending
March 5, 1999.
As indicated in this table, U.S. reserve assets totaled $74,300 million as of March 5, 1999,
down from $75,322 million as of February 26, 1999.
U.S. Reserve Assets
(millions of US dollars)
1999
Total
Reserve
Special
Foreign
Currencies
Reserve
31
Assets
Gold
Stock II
Drawing
R'Ig ht S 21
ESF
SOMA
Position in
IMF 2/41
February 26, 1999
75,322
11,048
9,474
11,893
18,624
24,283
March 5, 1999
74,325
11,048
9,389
11,565
18,258
24,064
Week Ending
1/ Gold stock is valued monthly at $42.2222 per fine troy ounce. Values shown are as ofJanuary 31, 1999. The December 31,
1998 value was $11,046 million.
2/ SDR holdings and the reserve position ill the L\IF are based on nvfF data and revalued In dollar terms at the offiC1al
SDR/ dollar exchange rate. ConSIstent with current reporting practices, IMF data for February 26, 1999 are final. Data for SDR
holdings and the reserve position in the II\fF shown as of March 5, 1999 (in1talics) reflect preliffi1I1an' adjustments by the Treasun'
to the February 26, 1999 IMF data in light of U.S sales of SDR to other Ii\fF member countnes.
3/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Resnve's System Open i\farket
A.ccount (SOl\L-\). These holdings are yalued at current market exchange rates or, where appropnate, at such other rates as may be
agreed upon by the parties to the transactions.
4/ Includes SDR 361 million loan to the L\IF under the General .-\rrangements to Borrow (C. \13) 111.1 ulr 1998, and an SDR 619
million loan to the IMF under the New .-\rrangements to Borrow (N.'l.B) 111 December 1')'JR
-30-
RR-3010
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
D EPA R T \\1 E N T
'IREASURY
0 F
THE
T REA SUR Y
NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIDNGTON, D.C .• 20220. (202) 622-2960
EMBARGOED UNTIL II :30 A.M.
Text as Prepared
March 10. 1999
ASSISTANT TREASURY SECRETARY (TAX POLICY) DONALD LUBICK
HOUSE COMMITTEE ON \\-'A YS AND MEANS
Mr. Chairman. Mr. RangeL and members of this committee. it is a pleasure to speak with
you today about the President's FY 2000 bUdget.
The nation has moved from an era of large annual budget deficits to an era of budget
surpluses for many years to come. This has resulted from the fiscal policy of the last six years,
the economy it helped produce. and the ongoing interaction bet \\een the two. Rather than facing
an annual requirement to reduce the deficit. we now han? bel()J'e us the opportunity to face the
serious challenges for generations to come by making wise policy choices. These challenges lie
primarily in the area of the economic and fiscal pressures created hy the retirement of the baby
boom generation. Meeting those challenges is exactly what the President's budget does. The
core of this budget is fiscal discipline. and therehy increased national savings. in order to
promote continuing economic growth and retirement security in the years ahead.
In 1992. the deficit reached a record of $290 hillion. the Federal debt had quadrupled
during the preceding twelve years. and hoth the deficit and debt \\ere projected to rise
substantially. The deficit binge has left us with publicly held deht of $3.7 trillion. and an annual
debt service requirement that amounts to 15 percent of the budget. Now however. for the next 15
years. OMB forecasts cumulative unified surpluses of o\'Cr $4.X5 trillion.
It is important to note that transformation from de1icits to surpluses has come about
concurrent with tax burdens on typical working families heing at record lows for recent decades.
For a family of four with a median income. the federal income and payroll tax burden is at its
lowest level in 21 years. in part because of the child tax credit enacted in the 1997 balanced
budget plan. For a family of four with half the median incoille. the income and payroll tax
burden is at its lowest level in 31 years. in part hecause oi'tlll' I()ln expansion of the Earned
RR-3011
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
Income Tax Credit for fifteen million families as well as the ll)ln enactment of the child tax
credit. And for a family of four with double the median income. the federal income tax burden
is at its lowest level since 1973. While overall tax revenues ha\t~ risen as a percentage of GOP.
that is in part because higher income individuals have had large increases in incomes. resulting
from. among other things. bonuses based on high stock prices and increased realizations of
capital gains. and in part because of increased corporate L'arnings.
The President's proposal is to commit 62 percent nfthe unitied surplus for the next 15
years to Social Security. This is an infusion 01'$2.8 trillion to the trust fund in addition to the
$2.7 trillion of forecast off-budget surpluses generated h) payroll taxes in excess of benefit
payments. This infusion. including increased rates of return from in\'l?sting one-fifth of the 62
percent of the unified surplus in equities. will push back the date of trust fund exhaustion from
2032 to 2055. Closing the remaining gap and thus assuring so\\enc) over 75 years will require
tough decisions to be made jointly by the President and Congress.
An additional 15 percent of the surplus \vould he allocated to Medicare. The President
also proposes to devote 12 percent of the unilied surplus to estahlishing a new system of
Universal Savings Accounts. These accounts \vould pn)\'ide a tax credit to millions of American
workers to help them save for their retirement. /\ maiority of \\orkers could receive an automatic
contribution. In addition. those who make voluntary contrihutions could receive a matching
contribution to their USA account. The matching contrihution would be more progressive than
current tax subsidies for retirement savings -- helping most the \\orkers who most need to
increase retirement savings. By creating a retirement savings program for working Americans
with individual and government contributions. all Americans wi II become savers and enjoy a
more financially secure retirement.
The remaining 11 percent would be allocated to other priorities. including increased
defense spending. Finally. the budget insists that none of the surpluses be used at all until we
have put Social Security on sound financial footing for the long-term.
When President Clinton was elected. publicly held deht equaled 50 percent of GOP. As a
result of the President's plan. by 2014. publicly held debt \\ill decline to about 7 percent ofGDP.
This reduction in debt will have three effects. First. the gmunment will not have to refinance as
much federal debt and thereby will consume less of national savings. thus making capital more
readily available to the private sector. That in turn. \vill reduce interest rates and increase
confidence in the economy. increasing economic growth.joh CITation and standards of living.
Second. debt service costs will decline dramatically. When the President came into office debt
service costs of the federal government in 2014 were projected to constitute 27 percent of the
federal budget. Under the President's proposal. and hecause of the progress we have made to
date. we estimate the debt service costs will be 2 percent of the tCderal budget in 2014. Third, the
decrease in debt means the federal go\'Crnment will ha\e a greatly improved capacity to access
external capital should the need arise.
This is not the time, with the economy running so \\ell. Illl' major tax cuts that are not
offset by other measures. Public debt reduction is an opportunity that we should not squander,
and it will reap broader and more permanent economic prosperity than any tax cut could. Public
debt reduction has many of the economic effects ofa tax cut. hut maintains the fiscal discipline
necessary to meet future challenges. It is the only responsihle course to take.
Targeted incentives
Thus, the President's Budget also proposes a fully funded package of about $34 billion in
targeted tax reductions, including provisions to rebuild the nation's schools, make child and
health care more affordable, revitalize communities. prO\ide incentives for energy efficiency.
promote retirement savings. provide for tax simplification. and extend expiring provisions.
More specifically. to enhance productivity and maintain our country's competitive
position in the years ahead, and to provide relief for working 1~II11ilies. the Administration
proposes:
•
increased funding for education. including tax credit hond programs totaling $25 billion
to spur State and local government investment in elementary and secondary schools,
expansion of the current-law tax incentive for employer-provided educational assistance,
simplification and expansion of the deduction allowed for student loan interest payments.
tax-free treatment for certain education awards. and a tax credit for certain workplace
literacy and basic education programs:
•
measures to make child care more affordable. hy expanding the current-law child and
dependent care tax credit and by providing a new employer credit to promote employee
child care;
•
providing tax relief (in the form of a $1.000 crcdit) to individuals with long-term care
needs, or who care for others with such needs. and to \vorkers with disabilities:
•
measures to promote health insurance coverage for employees of small businesses;
•
incentives to promote the livability and revitalization of urhan and rural communities,
including a tax credit bond program totaling $9.5 hillion to help States and local
governments finance environmental projects. a tax credit to attract new capital to
businesses located in low-income communities. expansion of the current-law low-income
housing tax credit program. and $3.6 billion in tax inccntives to promote energy
efficiency and reduce greenhouse gases:
•
several provisions to expand. simplify. and increase the portability of retirement savings
mechanisms, and to make it easier for individuals to sa\e for retirement on their own: and
...
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extension ofa recently enacted pw\'ision that allo\\s imli\idllals to claim nonrefundable
tax credits -- such as the education credits and the S:,()() child credit -- without being
affected by the alternatin? minimum tax: and
•
extension of sewral tax provisions that are scheduled to expire. including the R&E tax
credit work opportunity and welfare-to-work tax credits. ~\l1d the so-called "hrownfields"
expenSIng provIsion.
The President's plan also includes a package ofprm isions that would simplify the
adm inistration of the Federal tax laws.
The following is a more detailed summary of the tax Incentive provisions included in the
President's plan.
I. MAKE HEALTH CARE MORE AFFORDABU:
Long-term care and disabled workers credits,--Deductions a\ailable under current law for
long-term care and work-related impairment expenses do not henefit taxpayers who claim the
standard deduction and, even if a taxpayer itemizes deductions. do not cover all formal and
informal costs of providing assistance to individuals with long-term care needs or to disabled
individuals who work. In recognition of such formal and i11 fllrm:1i long-term care costs and their
effect on a taxpayer's ability to pay taxes. the President's plan \\ould allO\v taxpayers to claim a
new long-term care credit of $1.000 if the taxpayer. a sJlollse. or an individual receiving support
from (or residing with) the taxpayer has "long-term care needs." ,\n individual generally would
have "long-term care needs" if unable for at least six months to perform at least three activities of
daily living without substantial assistance from another indi\idual. or if unable to perform at
least one activity of daily living or certain age appropriate acti\ities due to severe cognitive
impairment.
In addition. the President's plan would help compensllte taxpayers with disabilities for
costs associated with work (e.g .. personal assistance or speci~tI transportation) by allowing
taxpayers with earned income to claim a $1.0()() credit if the taxpayer is unable for at least 12
months to perform at least one activity of daily living \\ithout suhstantial assistance from another
individual.
To claim one (or possibly both) of the credits. taxpayers \\ould he required to obtain a
physician's certification to demonstrate the required level 0 r long-term care needs, but would not
be required to substantiate any particular out-of-pocket expenses, The proposed credits would be
phased out -- in combination with the current-Ia\\ $50() child credit -- for certain higher-income
taxpayers.
Small business health plans.--The President's plan \\ ()lild make health care costs more
affordable by assisting small businesses in their efforts to prm ide health insurance to employees.
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Small businesses generally face higher costs than do larger l'mployers in providing health plans
to their employees, which has led to a significantly higher percentagc of small business
employees being uninsured compared to the national average. I kalth henctit purchasing
coalitions pool employer workforces and provide an opportunity to purchase health insurance at
a reduced cost, but such coalitions have heen hindered hy limited access to capital. In response,
the President's plan includes a speciaL temporary rule that \\ould allow tax-exempt private
foundations to make grants or loans prior to January]. :20()4. to qualified health henefit
purchasing coalitions to support the coalition's initial operating c\penses.
Moreover, the President's plan would allow employers that havc fewer than 50
employees and that did not have an employee health plan during ]997 or ]998 to claim a 10percent credit for certain premium payments made for employee health insurance purchased
through a qualified coalition. The proposed credit would he allowed for health plans established
before January 1, 2004, and would be allowed for contrihutions made during the first 24 months
that an employer purchases health insurance through a qual ified coal ition.
2. EXPAND EDUCATION INITIATIVES
School construction and modernization .--Because many school systems lack sufficient
fiscal capacity to respond to aging school buildings and growing enrollments. the President's
plan includes a new tax credit bond program that would Ie\crage Federal support to spur new
State and local investment in elementary and secondary schoo] modernization. Under this
program, State and local governments (including U.S. possessions) would be authorized to issue
up to $22 billion of "qualified school modernization bonds" ($] ] billion in each of 2000 and
2001). One half of the $22 billion cap would be allocated among the 100 school districts with
the largest number of children living in poverty and up to :25 additional school districts with
particular needs of assistance. The remaining half of the $:2:2 hi II ion cap would be allocated
among the States and Puerto Rico. In addition. $400 million of' honds ($200 million in each of
2000 and 2001) would be allocated for construction and renovation of Bureau oflndian Affairs
funded schools.
A holder of these bonds would receive annual Federal income tax credits. set according to
market interest rates by the Treasury Department. in lieu of interest heing paid by the State or
local government. At least 95 percent of the bond proceeds of a qualified school modernization
bond must be used (generally within 3 years of the date of issuancc) to finance public school
construction or rehabilitation pursuant to a plan appnwcd h) thc Dcpartment of Education.
Issuers would be responsible for repayment of principal ann a maximum term of 15 years,
The President's plan also provides for expansion of the current-law "qualified zone
academy bond" program, by authorizing the issuance of an additional $2.4 billion of such bonds
and allowing the bond proceeds to be used for new school construction,
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Other education incenti\'t~s,--To expand educational ()pportllnities throughout a taxpayer's
lifetime. the President's budget plan also includes the follo\\ ill~ prmisions that build on currentlaw tax incentives for education: (1) extend section 127 L'XClllSiol1 for employer-provided
educational assistance through the end of the year 2()() 1 and exp;lIld the exclusion to apply to
graduate-len:1 courses (currently. the exclusion is limited to undcrgraduate courses beginning
before .Iune 1.2000): (2) eliminate the current-Ia\\ rule under section 221 that limits deductible
student loan interest to interest paid only during the tirst ()() nwntils that interest payments are
required on a loan (this will simplify greatly the student IOdn interest deduction provision): (3)
eliminate tax liability when Federal student loan halances arc G11H.:eled aner the student finishes
making income-contingent payments on the loan: (4) pnnide tax-free treatment for certain
awards under the National Health Service Corps scholarship and loan repayment programs, the
Armed Forces Health Professions scholarship and loan repayment programs. and the Americorps
loan repayment program: (5) provide for an allocated tax credit to cncourage corporate
sponsorship of qualified zone academies in designated em!,,(m erment zones and enterprise
communities: and (6) allow employers to claim a 1O-pcrccllt credit (up to $525 per eligible
employee) for certain workplace literacy programs that PI'\)\ ilk h;lsic skills instruction at or
below the Ie\'el of a high school degree or English literac},
3. MAKING CHILD CARE MORE AFFORDABLE
Increase. expand and simplifv the child and dependent care tax credit.--Many working
parents cannot find affordable and safe child care, The needs of moderate-income families can
best be served through an expansion of the current-law child ;lIld dependent care tax credit,
which was last increased in 1982. The President's plan \\ould increase the maximum credit rate
from 30 percent to 50 percent. and would extend eligibility "or the maximum credit rate to
taxpayers with adjusted gross incomes of $]0.000 (rather than S 1O.O()() as under current law).
The new 50-percent credit rate would be phased dlm'n gradually It)!' taxpayers with adjusted
gross incomes between $]0.000 and S59.000. The credit rate \\ould be 20 percent for taxpayers
\vith adjusted gross incomes over $59.000.
In addition. to enable parents to make the best choices for caring for their infants, who
require special care and attention. the President" s plan \\ould further expand the eligibility for the
child and dependent care tax credit. Parents with inhll1ts under the age of one would be eligible
for an additional credit amount, ewn if the parent stays at hOll1e to care for the infant rather than
\vorking outside the home and incurring out-or-pocket child C;lre e\:penses. Under the proposal,
a taxpayer who resides with his or her infant under the age (Ii' (1m: \\ ould be deemed to have child
care expenses of $500 ($ LOOO for two or more infants under the age of one). Taxpayers residing
with children under the age of one \\ho also incur out-or-pocket child care expenses in order to
work would simply add such out-of-pocket expenses to the deemed $500 (or $1,000) of child
care expenses. and would then calculate the section 21 credit hy multiplying deemed and actual
out-of-pocket child care expenses by the applicahle 2()- to ~()-percent credit rate.
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The President's plan would simplify eligibility lin the credit hy eliminating the
complicated household maintenance test under current la\\ (L'xeept that a married taxpayer filing
a separate return would still have to meet the current-Ia\\ household maintenance test in order to
qualify for the credit). In addition. to ensure that the credit retains its value over time. certain
credit parameters would be indexed for inflation.
Emplover-provided child care credit.--As part oCthe /\dlllinistration's comprehensive
initiative to address child care needs of working families. the President's plan would allow
employers to claim a credit equal to 25 percent of expenses incurred to build or acquire a child
care facility for employee use. or to provide child care sen ices It) children of employees directly
or through a third party. Employers also would be entitled to d credit equal to 10 percent of
expenses incurred to provide employees with chi Id care resource and referral services. A
taxpayer's total credit could not exceed $150.000 per taxahle year.
4. INCENTIVES TO REVITALIZE COMMUNITIES
Better America Bonds.--Conventional tax-exempt honds Illay not provide a deep enough
subsidy to induce State and local governments to undertake ell\ironmental projects with diffuse
public benefits. Accordingly. the President's plan includes a ne\\ tax credit bond program. under
which States and local governments (including U.S. possessions and Native American tribal
governments) would be authorized to issue an aggregate oj' ~(>'5 hillion of "Better America
Bonds." Similar to the President's school modernization bond proposal (discussed above) and
the current-law qualified zone academy bonds. holders of such bonds would receive annual
Federal income tax credits in lieu of interest being paid hy the State or local government. At
least 95 percent of the bond proceeds must be used (generally \\ithin 3 years of the date of
issuance) to finance projects to protect open spaces or accomplish certain other qualified
environmental purposes. The Environmental Protection Agency would allocate bond authority
to particular environmental projects based on a competitin? application process. Issuers of the
bonds would be responsible for repayment of principal aner a maximum term of 15 years.
New Markets Tax Credit.--Businesses located in lo\\-incollle urban and rural
communities often lack access to sufficient equity capitaL I 0 attract new capital to these
businesses, taxpayers would be allowed a credit against Federal income taxes for certain
investments made to acquire stock (or other equity interests) in a community development
investment entity selected by the Treasury Department to recei\l~ a credit allocation. The
Treasury Department would authorize selected community dC\'elopment entities to issue up to a
total of $6 billion of equity interests with respect to which investors could claim a credit equal to
approximately 25 percent (in present-value terms) of the il1\estment.
Under the proposal. selected community den:lopment il1\estment entities. in turn. would
be required to use the investment proceeds to pro\'ide loans or equity capital to qualified active
business located in low-income communities. Such husinesses generally would be required to
satisfy the requirements for "enterprise zone businesses" under current lav. and must be located
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in census tracts with either ( I ) PO\l;-rty rates of at kast ~() Jl(TCellt or (~) median family income
which does not exceed 80 percent ofmetrnpolitan area Llmil.' income (or SO percent of nonmetropolitan statewide family income in the case 01':1 non-ml'tropolitan census tract). There
would be no requirement that employees of a qualified acti\e husiness be residents of a lowincome community.
Increase low-income housinu tax credit per capita C~lp.--\ Illst State agencies receive more
qualified proposals for low-income rental housing than C~lIl hL' undertaken with the current-law
State limitation for the low-income housing tax credit. This limitation has not changed since it
was established in 1986. Accordingly. the President's plan \\(luld increase the current-law $1.25
per capita limitation for the lov... -income housing tax credit III ~ 17) per capita. This increase
would allow additional low-income housing to be pnl\ided hut still \\ould require that State
agencies choose projects that meet specific housing needs.
Other provisions.--As additional incentiws to re\italile cOlllmunities. the President's
plan would (1) enhance the current-law provisions that allll\\ certain investment gains to be
rolled over on a tax-free basis to purchase stock in a special iled small business investment
company (SSBIC) and that provide a partial capital gains L'\clusilln for the sale of such stock
held for more than five years: and (2) provide that husinesses l(lcated in the two new
empowerment zones. with respect to \vhich the zone designatinn takes eflect on January L 2000
(i.e .. Cleveland and Los Angeles). will be eligible to claim the ell1po\\erment zone wage credit
for the full, ten-year period of zone designation. as is the case \\ ith the original nine
empowerment zones designated in 1994.
5. ENERGY EFFICIENCY AND ENVIRONMENTAL Il\1PROVEMENT
In an effort to improve the environment. the President's hudget proposes $3.6 billion in
tax incentives to promote energy efficiency and to reduce emissions of greenhouse gases.
Energy-efficient buildings \\ould he encouraged h: ~I t:I'\ credit of up to $2.000 for the
purchase of highly energy-efficient new homes. and b: a I () m ~() percent credit (subject to a
cap) for the purchase of certain energy-etTicient huilding equ ipment (fuel cells. electric heat
pump water heaters. natural gas heat pumps. electric heat pumps. natural gas water heaters, and
advanced central air conditioners). The credit for energy-enicient homes would apply to
purchases in calendar years 2000 through 2004 and the credit I()r energy-efficient building
equipment would apply to purchases in calendar years 20{)() thmugh 2003.
Transportation-related incenti\'es would encourage thL' purchase of electric vehicles and
highly energy-efficient hybrid vehicles. The current-Ia\\ credit oJ'up to $4.000 for the purchase
of a qualifying electric vehicle would be extended through 2()()(1, and a ne\v credit of up to
$4.000 would be allowed in calendar years 2003 through ~()()() Ill!' purchases of fuel-efficient
hybrid vehicles.
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The Administration's budget proposals would also promo[c increased energy efTiciency
through the use of combined heat and power (CHP) technolo~ics hy allowing an 8-percent
investment tax credit for qualifying CHI> equipment placed in senice in calendar years 2000
through 2002.
Finally, tax incentives would be provided for the increased use of renewable energy
sources: a credit of up to $2.000 would be allowed f()r soldr plwtmoitaic equipment placed in
service during calendar years 2000 through 2006 and of up to i; I.()O() for solar hot water heating
systems placed in service during calendar years 2000 thr()u~h 20()5. In addition. the current-law
tax credit for electricity produced from wind or hiomass \\ oltld he extended for five years. For
this purpose, eligible biomass sources would he expanded to include certain biomass derived
from forest-related resources and agricultural sources. and d reduced credit would be allowed for
co-firing biomass in coal plants.
6. EXPANDED RETIREMENT SAVINGS. SECURITY .. \j\;D PORTABILITY
With changing demographics. it is especially important to increase retirement savings.
Much of the legislation enacted in recent years has oeen successful in expanding retirement
savings, providing incentives to individuals and employers. Approximately two-thirds of the
retirement savings in this country (exclusive of annuity contracts) is employer-provided
retirement savings. Employer-provided pensions currently hendit 50 million workers. The
President's budget encourages savings through employer-prmided plans.
While the employer system is strong. we cannot he content. Iialf of all American workers
-- more than 50 million people -- have no pension plan at all. \\'omen have less pension coverage
than men. Only 30 percent of all women aged 65 or older \\cre rcceiving a pension in 1994
(either worker or survivor benefits) compared to 48 percent oj' Illen. An increasingly mobile
workforce makes accumulating and managing retirement henefits more difficult. Workers
frustrated by keeping track of their various retirement accounts are tempted to cash out their
retirement benefits and spend these all important savings on current consumption. Two-thirds of
workers receiving a lump sum distribution from a pension plan do not roll over the distribution
into retirement savings.
We need to continue to promote retirement sa\'ings h~ enacting pension legislation to
expand the number of people who will have employer-prmided pensions. hy simplifying the
pension laws for business. by improving pension fundin~ <lIld making pensions more secure and
portable for workers.
The President's budget includes several incenti\'Cs to encourage the provision of
retirement benefits by small business. First. a three-year tax credit is provided to encourage
small businesses to set up retirement programs. Second. to make it easier for workers to make
contributions to Individual Retirement Accounts (I R;\S). eIllJlI()~crs would he encouraged to
offer payroll deduction programs. Third. the President's pLIIl prmides a simplified defined
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henefit-type plan for small business. knl)\\n as the" S \ 1\ I~I P 1~1I1." Thc :\dministration' s
proposal is similar in many respects to the hipartisan "S:\IT 1~1~1I1" proposal of Representatives
Earl Pomeroy and Nancy Johnson. The St\l:\Rl (Securc 1\1()nc) .\nnuit) or Retirement Trust)
plan combines many of the best features of detined henelit ~lI1d delined contrihution plans and
provides another easy-to-administer pension option 1(,)r small husinesses. Most
nondiscrimination rules and a numher of other pension plan requirements \yould be waived for
this new plan. SMART plans would he an option for nwst slll~d I husinesses with 100 or fewer
employees that do not offer (and haw not offered during till' LIst:" ycars) a defined benefit or
money purchase plan. Employers choosing a St\lART plan \\ mild make contrihutions for all
eligible workers (over 21 with at least $5.0()() in W-:: earnings \\ ith the employer in that year and
in two preceding consecutive years). Participants \\ould hL' ~L1aranteed a minimum annual
benefit upon retirement. but could receiw a larger henetit i I' the return on plan investments
exceeds specified conservative assumptions (i.e .. a ) percellt r~lte of return). The SMART benefit
would generally be guaranteed by the Pension lknctit (illdrallt) (·nrporation. at a reduced
premIUm.
To make it easier to consolidate retirement sa\ings. thc President's budget provides rules
to permit eligible rollover distributions from a qualified rctircment plan to he rolled over into a
Section 403(b) tax-sheltered annuity or \isa wrsa: to allO\\ mlln\crs from non qualified deferred
compensation plans of state or local gowrnment (Section .+) 7 plans) to be rolled over into an
IRA; to permit rollovers of IRAs into workplace retirement plans: to allo\', rollovers of after-tax
contributions to new employer's detined contri bution plan ()I' all IRA ir separate tracking of
after-tax contribution is provided: to allo\\ the Thrift Sayings Pbn (a retirement savings plan for
federal government employees) to accept tax-free wlll)\ers i'rnlll pri\ate plans: and to allow
employees of state and local governments to use funds in their retirement plans to purchase
service credits in new plans without a taxable distrihution. This allows teachers who often move
between state and school districts in the course of their careers to Illore easily earn a pension
reflecting a full career of employment in the state in which the) end their career.
7. EXTENSION OF EXPIRING PROVISIO\lS
The President's plan includes the extension of se\er~tI important tax incentive provisions
that are scheduled to expire in 1999. including (1) <I unc-yl'ar extension of the R&E tax credit to
apply to qualified research conducted before July 1. 20()() (<lnd extension of the credit to qualified
research conducted in Puerto Rico). and (2) one-year extensions urthe work opportunity tax
credit and welfare-to-work tax credit to co\'er employees \\ ho hegin work before July 1. 2000.
The President's plan also proposes e\tendin!.! throu!.!h the \ear 2001 the recently enacted
tax credit for the first-time purchase of a principal residencc in thl' District of Columbia (which
currently is scheduled to expire at the end of the year ::O()()).
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In addition. the President's plan would make pl'rlll<lncilt the so-called "browntields"
provision. which allows taxpayers to treat certain em ironmL'lltal rcmediation expenditures that
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would otherwise be chargeable to capital account as deductihk in the year paid or incurred. The
"brownfields" provision currently is scheduled to expire at the end orthe year 2000.
AMT Relief
Of particular importance to individual taxpayers. the, \dm i nistration proposes to extend.
for two years. the provision enacted in 199X that all()\\s lin indi\ idllal to offset his or her regular
tax liability hy nonrefundable tax credits--such as the CdUGltioll credits and the child credit-regardless of the amount of the individual's tentati\'e minimlllll Ul:\. The Administration is
concerned that the individual alternativc minimum ta:\ (,\ \ IT) Illlly impose financial and
compliance hurdens upon taxpayers that haw fe\\ ta:\ prell:rencl' items and were not the
originally intended targets of the AMT. In particular. the /\dll1inistration is concerned that the
individual AMT may act to erode the henefits of nonrefundahle tax crcdits that are intended to
provide relief for middle-income taxpayers. During the proposed ntension period. the
Administration hopes to work with Congress to de\clop a longl'l"-term solution to the individual
AMT prohlem.
8. SIMPLIFICATION PROVISIONS
The President's plan includes several other provisions that would simplify the
administration of Federal tax laws. These provisions would: (1) e:\tend the current-law rule for
farmers to all self-employed individuals that allows indi\'iduals to elect to increase their seIfemployment income for purposes of obtaining social security cO\erage: (2) provide statutory
hedging and other rules (generally codifying rules previously promulgated by the Treasury
Department) to ensure that business property is treated as ord inllry property: (3) clarify rules
relating to certain disclaimers by donees of gins or bequests: (~) simplify the foreign tax credit
limitation for dividends from so-called" 10/50 companies": (~) l'liminate the U.S. withholding
tax on distributions from U.S. mutual funds that hold suhsulIltiall) all of their assets in cash or
U.S. debt securities (or foreign deht securities that are not suhject to withholding tax under
foreign law); (6) expand the declaratory judgment relief ~l\ailllhk under current-law to charities
to all organizations seeking tax-exempt status under section )() I (c): and (6) simplify the active
trade or business requirement for tax-free corporate spin-oils. The Administration hopes to work
with the Congress to develop and enact additional. appropriate simplification measures.
9. MISCELLANEOUS PROVISIONS
Other targeted tax incentives included in the President' s plan include a proposed
extension and modification of the current-law Pucrto Rico l'l'olllllllic-acti\,ity credit. to provide a
more efficient and effective tax incentive for thc cconolllic de\elopmcnt of Puerto Rico.
In addition. to reduce the hurdens faced hy displaced \\ollers. the President's plan would
exclude up to $2,000 of certain severance payments from the incollle of the recipient. This
exclusion would apply to payments reccived hy an indi\idlllli \\ Iw \\as scparated from service in
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connection with a reduction in the employer's \\ork force. hut nl1l: if the individual does not
attain employment within six months of the separation from sen ice at a compensation level that
is at least 95 percent of the compensation the indi\idual rL'cL'i\ L'd hdore the separation from
service and only if total severance payments received hy tilL' indi\ idual do not exceed $75.000.
To address the financial troubles of the steel industry. tile President's plan would extend
to 5 years the carryback period for the net operating loss (\I()I ) llf a steel company. An eligible
taxpayer could elect to forgo the 5-year carryback and appl:- the current-law carryback rules.
The benefit proposed would feed directly into a tinancially twuhlcd steel company's cash flow.
providing immediate needed relief.
10. ELECTRICITY RESTRUCTURING
Restructuring the electric industry to encourage ret~li I Cllllll"lL'tition promises significant
economic benefits to both business and household consumers lll' electricity. In order to reap the
benefits of restructuring. steps must be taken to pnwide ~I Ie\L'1 pl~l:- ing field for investor-owned
and publicly-owned electric systems as well as to prmide relief from the rules governing private
use of tax-exempt bond-financed electric facilities in appropriate circumstances. The President's
plan provides that no new facilities for electric generation or transmission may be financed with
tax-exempt bonds. Distribution facilities may continue to he financed with tax-exempt bonds
subject to existing private use rules. Distribution bcilities are f~lcilities operating at 69 kilovolts
or less (including functionally related and subordinate property). In order to develop efficient
nondiscriminatory transmission services. publicly-mviled electric utility companies may be
required to tum the operation of their transmission t~lCilities ()\LT to independent systems
operators or use those facilities in a manner that may \iol~lte the pri\ute use rules. In addition. as
traditional service areas of both investor-owned and puhlicIY-(l\\ned systems are opened to retail
competition, the latter may tind it necessary to enter into cOlltracts \\ith private users of
electricity in order to prevent their generation facilities ti'om hecoming stranded costs. Without
relief from the private use rules. publicly-owned electric systems may not choose to open their
service areas to competition or to alkw; their transmissioll facilities to be operated by a private
party.
In response. the President's plan prmides that h()llds issued to tinance transmission
facilities prior to the enactment of legislation to implement restructuring would continue their
tax-exempt status if private use results from action pursuallt to ~I h~<.kral order requiring nondiscriminatory open access to those facilities. In addition. hunds issued to finance generation or
distribution facilities issued prior to enactment of such legislation \\()uld continue their taxexempt status if private use results from retail competition. m if pri\"ate use results from the
issuer entering into a contract for the sale of electricity or usc of its distribution property that will
become effective after implementation of retail competition. S~de of facilities financed with taxexempt bonds to private entities would continue to cOllstitute ~I change in use. Bonds issued to
refund. but not advance refund. bonds issued before enactment of' legislation implementing
restructuring would be permitted.
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Finally, the President's plan would amend thc rules ~lpplic~lhle to nuclear
decommissioning funds in order to address issues raiscd hy t hl' rcstructuring of the electric
industry.
Revenue offsets
Our revenue offsets would curtail corporate tax shcltcrs. ~lIld close loopholes in the tax
law in the areas of financial products. corporate taxcs. pass-through entities. tax accounting, cost
recovery, insurance, exempt organizations. estate and gi Ii t;lx~lti()n. taxation of international
transactions, pensions, compliance. and others. Thcsc olTsCh gcncrally would he effective with
respect to a future date (e.g .. date of first committee action. or ddtC of cnactment). We look
forward to working with the committee to develop grandl;lthcr rules where appropriate.
Corporate Tax Shelters
The Administration believes there has been an increasl' in thc use of corporate tax shelters
and is concerned about this proliferation for several rcasons. First. corporate tax shelters reduce
the corporate tax base. Congress intended corporations to he a sourcc of Federal revenue in
enacting the various provisions of the corporate income tax. ()lIcstionable transactions that
reduce corporate tax liability frustrate this intent. Moremcr. corporatc tax shelters erode the
integrity of the tax system as a whole. A view that \\ell-ad\iscd corporations can and do avoid
their legal tax liabilities by engaging in transactions ulw\ai 1;lhle to most other taxpayers may
lead to a perception of unfairness and, if unabated. may lead to ;1 dccrease in voluntary
compliance. Finally, the significant resources used to create. illlplement and defend complex
sheltering transactions are better used in productive acti\·ities. Similarly. the IRS must expend
significant resources to combat such transactions.
To date, most attacks on corporate tax shelters ha\e heen targeted at specific transactions
and have occurred on an ad-hoc, after-the-fact basis -- through legislative proposals,
administrative guidance, and litigation. At the Treasury Departll1cnt. a number of actions have
been taken to address corporate tax shelters. For example. \\ l'\C made legislative proposals
aimed at section 357© basis creation abuses. which has ;Jcl\;lIlced in hoth chambers. and
liquidating REITs, which was enacted last year. On the reguLltory front. we have issued
guidance, such as the notice on stepped-down preferred. f;lst-p;IY. slow-pay transactions, and in
litigation, we've won two important cases -- ACM and AS/\. But \\e otten hear that we are only
hitting the tip of the iceberg.
Addressing corporate tax shelters on a transaction-h~ -transaction. ({(j hoc basis, however,
raises certain concerns. First, it is not possible to identit~ ;lIld address all current and future
sheltering transactions. Taxpayers with an appetite I()r corpor;lte tax shelters will simply move
from those transactions that are specifically prohihitcd hy thl' nl'\\ legislation to other
transactions the treatment of which is less clear. Second. legislating on a piecemeal basis further
complicates the Code and seemingly calls into question the \ iahilit:- of common law tax
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doctrines such as sham transaction. husiness purpose. ecolwlllic suhstance and suhstance over
form. Finally. using a transactional legislation approach to cmporate tax shelters may embolden
some promoters and participants to rush shelter products to Illdr!.,:et on the helief that any
retroactive legislation would be applied only on a prospect in' h~lSis.
The primary goal of any corporate tax shelter is to el iIII i n~lte. reduce. or defer corporate
income tax. To achieve this goal. corporate tax shelters ;lll' dl'sl.!2I11'd to manufacture tax benefits
that can be used to offset unrelated income of the t;1:\I1;l:- l'l nl III create tax-fa\'ored or tax-exempt
economic income. Most corporate tax shelters rely on ()ne or ll111re discontinuities in the tax law.
or exploit a provision in the Code or Treasury regulations in d lll;lIlnCr not intended by Congress
or the Treasury Department.
Corporate tax shelters may take several forms. For this re~lson. they are hard to define.
However. corporate tax shelters often share certain com mOil ch;lractcristics. For example.
through hedges. circular cash flO\vs. defeasements. or other dl'\ ices. corporate participants in a
shelter often are insulated from any risk of economic loss 01 (lpportunity for economic gain with
respect to the sheltering transaction. Thus. corporate tax shl'lll'rs ~lrl' transactions without
significant economic substance. entered into principally t(l achil'\ l' a desired tax result.
Similarly. the financial accounting treatment of a shelter gl'ncrally is signiticantly more favorable
than the corresponding tax treatment: that is. the shelter produces a tax "loss" that is not reflected
as a book loss. However. the corporate tax shelter may produce a hook earnings benefit by
reducing the corporation' s effecti ve tax rate.
Corporate tax shelter schemes often are marketed hy their designers or promoters to
multiple corporate taxpayers and often involve property or transactions unrelated to the corporate
participant's core business. These two features may distinguish corporate tax shelters from
traditional tax planning.
Many corporate tax shelters il1\olve arrangements het \\ccn corporate taxpayers and
persons not subject to U.S. tax such that these tax indilTcrl'nt p;lrties absorb the taxable income
from the transaction. leaving tax losses to be allocated to the corporation. The tax indifferent
parties in effect "rent" their tax exempt status in return ItH a aCClllllmodation fee or an abovemarket return on investment. Tax indifferent parties include ItHeign persons. tax-exempt
organizations. Native American tribal organizations. :.1I1d ta\:payers with loss or credit
cam·forwards.
Taxpayers entering into corporate tax shelter transdcti(ll1S onen \ievv such transactions as
risky because the expected tax benefits may be sllccesst"ull) ch~t1 lenged. To protect against such
risk. purchasers of corporate tax shelters often require tht sl'l ieI' (lr a counterparty to enter into a
tax benefit protection arrangement. Thus. corporate ta\ shelters ~lre orten associated with high
transactions costs. contingent or refundahle fees. un\\ inti clduses. or insured results.
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These themes run through our budget proposals and. \\C hope. help us to focus on finding
broader, ex ante solutions to the corporate tax shelter prohlem.
The Administration therefore proposes se\cr~d rClllcd il'S to curh the growth of corporate
tax shelters. We propose more general remedies to detcr cmpor;ltions from entering into any
sheltering transactions. These proposals would disallo\\ ;lIlY LL\ henetit created in a corporate
tax shelter, as so defined, and would address common ch~lr~lctcristics f()Und in corporate tax
shelters as described above. Also. all the parties to a structurcd transaction would have an
incentive, under our proposals. to assure that the transactinn cOlllports with established
principles.
The Treasury Department recognizes that this morc gcner;d approach to corporate tax
shelters raises certain concerns. Applying various suhstanti\l' ;lIld procedural rules to a
"corporate tax shelter" or a "tax avoidance transaction" requires definitions of such terms. As
described in greater detail below, the Administration's prnpo:--,;t/s define these terms. Critics of
the proposals have suggested that these definitions are too hr();ld or Illay create too much
uncertainty and thus may inhibit otherwise legitimate trans~lction:--,. The Treasury Department
does not intend to affect legitimate business transactions and looks f()J"\vard to working with the
tax-writing committees in refining the corporate tax shelter proposals. However. some level of
uncertainty is unavoidable with respect to complex transactions. In addition. the definition of
corporate tax shelter as used in our proposals is narrower and therefore less uncertain than other
definitions and formulations used in the Code. Moreover. thc dc!inition we have proposed is
similar to existing articulations of various judicial doctrines and may he viewed as largely
enforcing the judicially-created concept of economic suhswnce of current law. Finally. some
amount of uncertainty may be useful in discouraging taxpayers from vcnturing to the edge,
thereby risking going over the edge, of established principles.
The Administration's proposals that generally would apply to corporate tax shelters are:
Deny certain tax benefits in tax avoidance transactions.--( ;nder current law. if a person acquires
control of a corporation or a corporation acquires carry{wer hasis property of a corporation not
controlled by the acquiring corporation or its shareholders. and the principal purpose for such
acquisition is evasion or avoidance of Federal income tax h) sccuring certain tax benefits, the
Secretary may disallow such benefits to the extent necessary to l'liminate such evasion or
avoidance of tax. However. this current rule has been intcrprctcd narrowly. The Administration
proposes to expand the current rules to authorize the Secretary tn disallow a deduction, credit,
exclusion, or other allowance obtained by a corporation in II tax a\oidance transaction.
For this purpose, a tax avoidance transaction would he defined as any transaction in
which the reasonably expected pre-tax profit (determined on a present value basis. after taking
into account foreign taxes as expenses and transaction costs) nf the transaction is insignificant
relative to the reasonably expected tax benefits (i.e .. tax henelits incxcess ufthe tax liability
arising from the transaction. determined on a present v~dllc h~lsis) or such transaction. In
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addition, a tax avoidance transaction would he dctined to CO\ L'r transactions invoh'ing the
improper elimination or significant reduction of tax on L'C()lllllllic income. The proposal would
not apply to tax benefits clearly contemplated hy the applicahk L'uITent-la\\ pnnision (e.g., the
low-income housing tax credit).
Modifv substantial understatement penalt\' for cnrpnrate t;I'\ shelters.--The current ~O-percent
substantial understatement penalty imposed on corporate t;\:\ shelter items can be avoided if the
corporate taxpayer had reasonable cause for the tax treatment ()I the item and good faith. The
Administration proposes to increase the suhstantial underst;lIement penalty on corporate tax
shelter items to 40 percent. The penalty will he reduced tn ~() percent if the corporate taxpayer
discloses to the National Office of the Internal Re\enue ~L'1'\icl' \\ ithin :10 days of the closing of
the transaction appropriate documents describing the corpor;llL' t;I'\ shelter and tiles a statement
with. and provides adequate disclosure on. its tax return. Ihe penalty could not be avoided by a
showing of reasonable cause and good faith. For this purpOSl'. ;1 corporate tax shelter would be
defined as any entity, plan, or arrangement (to he determined hased on all the facts and
circumstances) in which a direct or indirect corporate particip;l1lt attempts to obtain a tax benefit
in a tax avoidance transaction.
Deny deductions for certain tax advice and impose an excise tax on certain fees received.--The
proposal would deny a deduction for fees paid or accrued in connection with the promotion of
corporate tax shelters and the rendering of certain tax alhiel' related to corporate tax shelters.
The proposal would also impose a 25-percent excise tax on ICes received in connection with the
promotion of corporate tax shelters and the rendering or cert;lin tax advice related to corporate
tax shelters.
Impose excise tax on certain rescission provisions and pn)\isions guaranteeing tax benefits.--The
Administration proposes to impose on the purchaser of ,I corporate tax shelter an excise tax of25
percent on the maximum payment to he made under the arrangement. For this purpose, a tax
benefit protection arrangement \VOlild include certain rescission cl'luses. guarantee of tax benefits
arrangement or any other arrangement that has the same l'COllOlllic cftCct (e.g., insurance
purchased with respect to the transaction).
Preclude taxpayers from taking tax positions inconsistellt \\ ith the t(l1'I11 of their transactions.-Under current law, if a taxpayer enters into a transaction in \\ hich the economic substance and
the legal form are different. the taxpayer may take the positioll that. notwithstanding the form of
the transaction, the substance is controlling for Federal inco1l1c tax purposes. Many taxpayers
enter into such transactions in order to arbitrage tax and regulatory laws. Under the proposal,
except to the extent the taxpayer discloses the inconsistent position on its tax return, a corporate
taxpayer. but not the Internal Revenue Service. would he precluded from taking any position (on
a tax return or otherwise) that the Federal income tax tre;ltlllcnt or a transaction is different from
that dictated by its form. if a tax indifferent person has ,I direct ()r indirect interest in such
transaction.
Tax income from corporate tax shelters involving tax-il1lli IlerL'nt parlies.--The proposal would
provide that any income received by a tax-indifferent person \\ ith respect to a corporate tax
shelter would be taxable, either to the tax-indifferent part: Ill' to the corporate participant.
"1\\
The Administration also proposes to amend the suhstanti\e
related to specific
transactions that the Treasury Department has identified as t!i\ing rise to corporate tax shelters.
No inference is intended as to the treatment of any of thcsL' trdl1sactions under current law.
Require accrual of income on fomard sale of corporate stod.--J here is little substantive
difference between a corporate issuer's current sale of its stod I<l!' ;\ deferred payment and an
issuer's forward sale of the same stock. In hoth cases. a porti()n of the deferred payment
compensates the issuer for the time-\'alue of money durint! the term of the contract. Under
current law, the issuer must recognize the time-\'alue clement or the deferred payment as interest
if the transaction is a current sale for deferred payment hut not if the transaction is a forward
contract. Under the proposal, the issuer ",:ould be required to recognize the time-value element
of the forward contract as well.
Modify treatment of built-in losses and other attribute trarlickin!.2.--l l mler current law. a taxpayer
that becomes subject to U.S. taxation may take the position that it determines its beginning bases
in its assets under U.S. tax principles as if the taxpayer had historically been subject to U.S. tax.
Other tax attributes are computed similarly. A taxpayer m~\: thus "import'" built-in losses or
other favorable tax attributes incurred outside U.S. taxing jurisdiction (e.g .. from foreign or taxexempt parties) to offset income or gain that would othen\ise he suhject to U.S. tax. The
proposal would prevent the importation of attributes by eliminating tax attributes (including
built-in items) and marking to market bases when an entity or ~1Il asset becomes relevant for U.S.
tax purposes. This proposal would be effective for transactions in \\hich assets or entities
become relevant for U.S. tax purposes on or after the date of enactment.
Modify treatment of ESOP as S corporation shareholder.--J>ursuant to provisions enacted in 1996
and 1997, an employee stock ownership plan (ESOP) m;l) hl' ~\ shareholder of an S corporation
and the ESOP's share of the income of the S corporation is not suhject to tax until distributed to
the plan beneficiaries. The Administration proposes to require an ESOP to pay tax on S
corporation income (including capital gains on the sale oJ' stock) as the income is earned and to
allow the ESOP a deduction for distributions of such incollle to plan beneficiaries.
Prevent serial liquidation of U.S. subsidiaries of foreign corporations.--Dividends from a U.S.
subsidiary to its foreign parent corporation are suhject to I !.S. \\ithholding tax. In contrast if a
domestic corporation distributes earnings in a tax-free liquidation. the foreign shareholder
generally is not subject to any withholding tax. SOllle fnreit!11 corporations attempt to avoid
dividend withholding by serially forming and liquidating holding companies for their U.S.
subsidiaries. The proposal would impose \vithholding tax ()n ;IIlY distribution made to a foreign
corporation in complete liquidation of a l ].S. holding COlllpal1: iI the holding company was in
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J
7-
existence for less than five years. The proposal \\ould <lJ:.;u <IchiL'\L' a similar result with respect
to serial terminations of L' .S. branches.
Prewnt capital gains avoidance through hasis shin transacti(lns il1\ uhim.'. foreign shareholders.-To prevent taxpayers from attempting tl) offset capit<ll gains h: ~L'nerating artificial capital losses
through basis shift transactions imohing foreign shareholdL'rs. thL' /\dlllinistration proposes to
treat the portion of a di\idend that is not subject to current l .. ~. t~l:\ as a nontaxed portion and
thus subject to the basis reduction rules applicahle to e:\tr~H'rdin~lr: di\idends. Similar rules
\\ould apply in the event that the foreign shareholder is nut ~I c('rporation.
Limit inappropriate tax benefits for lessors of ta:\-e:\empt use propertv.-- The Administration is
concerned that certain structures involving tax-exempt use pmpL'rty arc being used to generate
inappropriate tax benefits for lessors. The proposal \\Oldd dell~ ;\ lessor the ability to recognize a
net loss from a leasing transaction invohing ta:\-exelllpt USL' propLTty during the lease term. A
lessor would bl' able to carry forward a net loss from a ic;\sing tr;\Ilsaction and usc it to offset net
gains from thl' transaction in subsequent years. This prol'n:.,;1i \\(lull! he effective for leasing
transactions entered into on or after the date of I'nactmL'Ilt.
Prevent mismatching of deductions and income inclusions in tr;lns,lctions with related foreign
persons.-- The Treasury Department has learned of certai n structured transactions designed to
allow taxpayers inappropriately to take advantage of the cLTt:lin current-law rules by accruing
deductions to related foreign personal holding COIllP,lIlY (FPIIC·). controlled foreign corporation
(CFC) or passive foreign investment company (PFIC) \\ithout the t :.S. owners of such related
entities taking into account for U.S. tax purposes an amount of income appropriate to the accrual.
This results in an improper mismatch of deductions ,1I1d income. Thl' proposal would provide
that deductions for amounts accrued but unpaid to relatl'd j()rL'i~11 (,FCs. PFles or FPHCs would
be allowable only to the extent the amounts accrued hy the p~l~ ()J' arc. for U.S. tax purposes,
reflected in the income of the direct or indirl'ct t· .S. ()\\ ners ()j' tilL' related foreign person. The
proposal would contain an exception for certain short krill transactions entered into in the
ordinary course of business.
Restrict basis creation through section 357(c).--:-\ transtCror ~enerally is required to recognize
gain on a transfer of property in certain tax-free exchanges to the l'xtent that the sum of the
liabilities assumed. plus those to which the transfel'lui propert~ is suhject. exceeds the basis in
the property. This gain recognition to the transferor genl'r~d I: incrl'ases the basis of the
transferred property in the hands of the transferee. Ir L1 reco lll'SL' Ii~l hi Iity is secured by multiple
assets. it is unclear under current la\\ \\hether a transfer or nne ~lsset where the transferor remains
liable is a transfer of property "subject to the liahility." ~il1lilar issues exist with respect to
nonrecourse liabilities. Under the Administration's proros~d. the distinction between the
assumption of a liability and the acquisition of an asset suhjl'et to a liability generally would be
eliminated. The transferor's recognition of gain as a result oj ~\ssull1ption of liability would not
increase the transferee's basis in the transferred asset to an amuunt in excess of its fair market
\'alue. Moreo\'er. ifno person is suhject to ll.S. ta:\ Oil gain recogllizl'd as the result of the
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assumption ofa nonrecourse liability. then the transkree's h~lsis in the transferred assets would
be increased only to the extent such hasis would he incre~lsL'd i I the transferee had assumed only
a ratable portion of the liability. hased on the relatiH t~lir 11l~lrkL't \ ~lIues of all assets subject to
such nonrecourse liability.
Modify anti-abuse rule related to assumption of liahilitiL's.--lhc assumption of a liahility in an
otherwise tax-free transaction is treated as hoot to the tr~lIls lemr i I the principal purpose of
having the transferee assume the liahility was the a\oidancc 01 t~l\ on the exchange. The current
language is inadequate to address the avoidance conccrns th~lt underlie the provision. The
Administration proposes to modify the anti-ahuse rule hy deleting the limitation that it only
applies to tax avoidance on the exchange itself. and chanl,!inl,! "tilL' principal purpose" standard to
"a principal purpose."
Modifv corporate-owned life insurance (COLI) rules.--lnl,!L'nL'r~li. interest on policy loans or
other indebtedness with respect to life insurance. el1(itmlllent or annuity contracts is not
deductible unless the insurance contract insures the lik ol~1 "kL'\ person" ofa business. In
addition. the interest deductions ofa business generall:- arc rL'duccd under a proration rule if the
business owns or is a direct or indirect beneficiary with respcct to certain insurance contracts.
The COLI proration rules generally do not apply if the contract coyers an individual who is a 20percent owner of the business or is an oflicer. director. or cmployce of such business. These
exceptions under current law still permit leveraged husinesses to fund significant amounts of
deductible interest and other expenses with tax-exempt or t:l\-dderred inside buildup on
contracts insuring certain classes of individuals. The Administration proposes to repeal the
exception under the COLI proration rules for contracts insuring employees. officers o~ directors
(other than 20-percent owners) of the business. The proposa I ~lIso \\ould conform the key person
exception for disallowed interest deductions attrihutahle to pol icy loans and other indebtedness
with respect to life insurance contracts to the lO-percent o\\ner e\ception iri the COLI proration
rules.
Other Revenue Provisions
In addition to the general and specific corporate ta\ sllL'lter proposals. the
Administration's budget contains other revenue raising prop(\s~lIs that are designed to remove
unwarranted tax benefits, ameliorate discontinuities of current la\\. prO\ide simplification and
improve compliance. Some of these proposals arc descrihed hel(l\\.
Proposals Relatinl: to Financial Products
The proposals relating to financial products nalTO\\ly t~lrget certain transactions and
business practices that inappropriately exploit existing ta\ rules. Three of the proposals address
the timing of income from debt instruments. Other propos~lis ~Iddress specific financial products
transactions that are designed to achieve tax results that arL' siC'.ni lieantl;, better than the results
that would be obtained by entering into economicall:- cLJlIi\ ;Ilent transactions. At the same time.
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a number of these proposals contain pnnisions that arL' lksi~nL'd III silllplit\ existing law and
provide relief for taxpayers in cases \\here the literal applic~llilln Ill' the existing rules can produce
an uneconomic result,
Mismeasurement of economic income,-- The tax rules th~ll ~lppl: III debt instruments generally
require both the issuer and the holder of a debt instrumenl 10 rec()gnize interest income and
expense over the term of the instrument regardless 0 r \\ hen Ihe interest is paid, If the debt
instrument is issued at a discount (that is, it is issued ror dn ~lI1Hlunt that is less than the amount
that must be repaid), the discount functions as interest--ds clllllpensatiun t()r the use of money,
Recognizing this facL the existing tax rules require hotll p~lrliL's III ~lccount for this discount as
interest over the life of the debt instrument.
The Administration's budget contains three prop(ls~lIs lildl are designed to reduce the
mismeasurement of economic income on debt instruments: ( I ) ;l rule that requires cash-method
banks to accrue interest income on short-term obligations. (.2) rules that require accrual method
taxpayers to accrue market discount and (J) a rule that requirL's tilL' issuer in a debt-for-debt
exchange to spread the interest expense incurred in the eXCkll1~L' (l\ er the term of the newlyissued debt instrument.
Specific transactions designed to exploit current ruies,--IIlLTe ~lre ~l number of strategies
involving financial products that are designed to give ~l taxp;!: er Ihe "economics" of a particular
transaction without the tax consequences of the transaction ilscll. Fur example, so-called "hedge
fund swaps" are designed to give an investor the "ecOlwlllics" Ill' (l\\ning a partnership interest in
a hedge fund without the tax consequences of being a partner, These swaps purportedly allow
investors to defer the recognition of income until the end or the S\\ ap term and to convert
ordinary income into long-term capital gain,
Another strategy involves the used of structured lin~lI1cidl products that allow investors to
monetize appreciated financial positions without recogni/ing g~lill, II' a taxpayer holds an
appreciated financial position in personal property and enlers inlo ~l structured financial product
that substantially reduces the taxpayer's risk of loss in tilL' dPprL'ci~lted position. the taxpayer may
be able to borrow against the combined position without rec(lgnizing gain. Under current law,
unless the borrowing is "incurred to purchase or carry" IhL' slructured financial product. the
taxpayer may deduct its interest expense on the borrowing L'\ell Ihough the taxpayer has not
included the gain from the appreciated position,
The Administration' s budget contains proposals thllt ~lrL' designed to eliminate the
inappropriate tax benefit these transactions create. The "conslrllcti\c ownership" proposal would
limit the amount of long-term capital gain a taxpayer cnuld recogni/,e from a hedge fund swap to
the amount of long-term capital gain that would haw heen recngnized if the investor had
inwsted in the hedge fund directly. Another prop()s~ll \\ !lllid cLlri 1\ that a taxpayer cannot
currently deduct expenses (included interest expenses) l'rolll;1 Ir~lIls11ction that monetizes an
appreciated financial position without triggering currenl g~lin rL'cllgnition.
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Proposals Relatina: to Pass-through Entities
There are five coordinated proposals relating to hasis adjustments and gain recognition in
the partnership area. The proposals have three purposes: silllpi i lication. rationalization. and
prevention of tax avoidance. The proposals accomplish these go~lis through a variety of means.
In one proposal, the ability of taxpayers to elect whether or not to ~Idjust the hasis of partnership
assets is eliminated in a situation \vhere the election is 1e~lding to t;l\ ahuses. [n another proposaL
we would limit basis adjustments with respect to particLlI~lI' t:- pes 01 property. which enables us.
in a different proposal, to repeal a provision that has hL'L'1l \\ idL'iy criticized as overly complex
and irrational.
In addition to the partnership proposals. two RITI proposals arL' included in the budget.
One proposal allows REITs to conduct expanded husiness acti\itiL's in situations where a
corporate level tax will be collected with respect to such acti\itiL's. The other REIT proposal
limits closely held REITs, which have heen the primary \chicle I()!' carrying out such corporate
tax shelters as step-down preferred stock and the liquidating RIOII' transactions.
A final proposal in the pass-through area would iIllpOSl'
corporation converts to an S corporation.
;1
lax on gain when a large C
Proposals Relatina: to Corporate Provisions
The corporate proposals focus on a developing trend in structuring dispositions of assets
or stock that technically qualify as tax-free transactions. hut circull1vent the repeal of General
Utilities by allowing corporations to "sell" appreciated propL'rty "ithout recognizing any gain.
There has been a proliferation of highly publicized transactions in which corporations exploit the
purposes of the tax-free reorganization provisions. (i.e .. to ~lilo" ;1 corporation to change its form
when the taxpayer's investment remains in corporate solution). to maximize their ability to cash
out of their investments and minimize the amount of ta\ paid. i n ~l<Jdition. the corporate
proposals attempt to simplify the law and prevent \\hips~l\\ 01' tlK' gon~rnll1ent in certain tax-free
transactions.
Modify tax-free treatment for mere adj ustments inform. --I n orlkr I'or an acquisition or
distribution of appreciated assets to qualify as wholly or partly ta\-li·ee. the transaction must
satisfy a series of relatively stringent requirements. If the transaction bils to satisfy the
requirements, it will be taxed in accordance with the genL'r;1i rl'cognition principles of the Code.
After the repeal of General Utilities. there are fe\\ opportullitiL's to dispose of appreciated assets
without a tax liability, and our proposals would help to enSllll' til;lt those remaining exceptions to
the repeal of General Utilities are not circumvented. I'hc pr()\ isions of the Code that allow for
tax-free treatment date back to the early years of the t;IX systL'nl ;lIld did not contemplate the
creative tax planning that has taken place in the last sL'\L'ral ycal"S. ;\s a result. many of the
corporate tax provisions have been manipulated. resulting in <i\oidance of tax.
The Administration's budget contains se\eral prnpos,lis th,1I arc designed to eliminate
opportunities under current law fClr corporations (() achie\ L' t,l:\-lrL'L' treatment fiJI" transactions
that should be taxable. The proposals include (1) Illodit:\ ill~ tlk' "c()lltrol" test for purposes of
tax-free incorporations. distributions and reorgallilati()lls It) incllIdL' a \<llue component so that
corporations may not "sell" a significant amount of the \ ,li lIL' 111 thL' corporation \vhile continuing
to satisfy the current law control test that focuses solel:- ()Il \ oting po\\er. (~) requiring gain
recognition upon the issuance of "tracking stock" or a rL'C,q1iuli/ation of stock or securities into
tracking stock, and (3) requiring gain recognition in do\\ IlstrL',1Il1 transactions in which a
corporation that holds stock in another corporation transkrs Its assets to that corporation in
exchange f()r stock.
Preventing taxpayers from taking inconsistent positions in cntain nonrecognition transactions.-No gain or loss is recognized upon the transfer of propert:- It) ,1 cOlltrolled corporation in
exchange for stock. There is an inconsistency in the tre;llmL'l1t h:- the Internal Revenue Service
and the Claims Court as to the treatment of a transfer 01' kss Ih;ll1 ;111 suhstantial rights to use
intangible property. Accordingly. transferor and transkrL'e c()I"\ or,ltions have taken the position
'
that best achieves their tax goals. The proposal \\ould eliminate this \\hipsa\\' potential by
treating any transfer of an interest in intangihle property as d t;I,\-I'ree transfer and requiring
allocation of basis between the retained rights and the transkrred rights hased upon respective
fair market values.
Proposals Relatinl! to Tax Accounting and Cost Rcconry
The Administration's budget contains measures th,lt ,In.' principally designed to improve
measurement of income by eliminating methods of accountil1~ that result in a mismeasurement
of economic income or provide disparate treatment among simi larl:- situated taxpayers.
Repeal installment method for accrual hasis taxpa\ers.--lllL' prop()sal would repeal the
installment method of accounting tl)r accrual method taxpayers (other that those taxpayers that
benefit from dealer disposition exceptions under current la\\ ) ,md eliminate inadequacies in the
installment method pledging rules in order to better retlect the economic results of a taxpayer's
business during the taxable year.
Apply uniform capitalization rules to tollers.--To eliminate till' disparate treatment between
manufacturers and toilers and better reflect the income ol't(1lkrs. the proposal would require
toilers (other than small businesses) to capitalize their direct C()sts and an allocable portion of
their indirect costs to property tolled.
Provide consistent amortization periods for intanuihles.--To encourage the formation of new
businesses. the proposal would allO\\ a taxpayer to elect to deduct lip to $5.000 each of start-up
and organizational expenditures. Start-up and organizational e\:Jlenditures not currently
deductible would be amortized oYer a IS-year period consistent \\ ith the amortization period for
acquired intangibles.
Clarify recovery period of utility grading costs.--The propos;i1 \\(lliid clarifv and rationalize
current law by assigning electric and gas utility ckaring ;lIld gr;\ding costs incurred to locate
transmission and distribution lines and pipelines to the ci;\ss lill: ~\ssil!lH.:d to the hcnefitted assets ,
giving these costs a recovery period of 20 years and I:=; }l'ars. rl'specti\ely. The class life
assigned to the benefitted assets is a more appropriate estill1~\te 01 the uscfullifc of these costs,
and thus will improve measurement of the utilitv's incollle.
~
Deny change in method treatment to tax-free formations.- Ihl' proposal \\ould eliminate abuses
with respect to changes in accounting methods by exp~ll1ding till' transactions to which the
carryover of method of accounting rules appl y to inc lude t~\\ -Irl'l' contri hutions to corporations
and partnerships.
Deny deduction for punitive damages.--The deductibil ity 01 pllnitin: damage payments under
current law undermines the role of such damages in discollraging and penalizing certain
undesirable actions or activities. The proposal would dis;i1lo\\ ;111) deduction for punitive
damages to conform the tax treatment to that of other payments. such as penalties and tines, that
are also intended to discourage violations ofpuhlic policy.
Disallow interest on debt allocable to tax-exempt ohligatiolls.nllm\er current law. security
dealers and financial intermediaries other than hanks are ahk to reduce their tax liabilities
inappropriately through double Federal tax benefits of interest e\pense deductions and taxexempt interest income, notwithstanding that they operate similarly to hanks. The proposal
would eliminate the disparate treatment between hanks and Ii nancial intermediaries, such as
security dealers and other financial intermediaries. by pnl\iding tilat a financial intermediary
investing in tax-exempt obligations would be disallO\vcd deductions ft)r a portion of its interest
expense equal to the portion of its total assets that is comprised of tax-exempt investments.
Eliminate the income recognition exception for accrual method sen'ice providers.--Under current
law, accrual method service providers are provided a special e\ception to the general accrual
rules that permit them, in effect to reduce current taxahle incomc by an estimate of future bad
debt losses. This method of estimation results in a mismcasurement ofa taxpayer"s economic
income and, because this tax benefit only applies to amollnts to he received for the performance
of services, discriminates in favor of service prO\·iders. Ihe proposal would repeal the special
exception for accrual method service providers.
Repeallower-of-cost-or-market inventorv accounting method. n . rhe allowance of write-downs
under the lower-of-cost or market (LCM) method or suhnormal goods method is an inappropriate
exception from the realization principle and is essentially ;\ one-\\ay mark-to-market method that
understates taxable income. The proposal would rereal the I( '(-,1 and subnormal goods methods.
,"
- --'
-
Proposals Relatin2 to Insurance
The Administration' s budget contains proposal s t( 1 IlWl"l' lIccurate Iy measure the
economic income of insurance companies by updating and l1lodernizing certain pfl)\'isions of
current law. The proposals would ( 1 ) require recapture oj" polic~ holder surplus accounts. (2)
modify rules for capitalizing policy acquisition costs or lik insur:lnce companies. and (3)
increase the proration percentage for property casualt:- (P8J') insurance companies.
Between 1959 and 1984. stock lite insurancl' Clll1lll:lIlil's lkkrred tax on a portion of their
profits. These untaxed profits were added to a rnlicylwldel"s surplus account (PSA). In 1984.
Congress precluded life insurance companies Ii'om contilluill~ to dekr tax on future profits
through PSAs. However. companies \\ere permitted tn cOlltillUl' to defer tax on their existing
PSAs. Most pre-1984 policies have terminated so there is nll remaining justification for allowing
these companies to continue to defer tax on profits they e:lmed het\\een 1959 and 1984.
Under current law. pursuant to a provision enacted ill 1l)()O. insurance companies
capitalize varying percentages of their net premiums ttlr cl'rt:lin t: pes of insurance contracts. and
generally amortize these amounts mer 1() years (ti\c ~ e:II"S I'l 11" sl1l~t11 companies). These
capitalized amounts are intended to serw as proxies t(ll" l'ach cOl1lpllny's actual commissions and
other policy acquisition expenses. However. data reported h:- insurance companies to State
insurance regulators each year indicates that the insur:lIlce industl": is capitalizing less than half
of its policy acquisition costs. which results in a mismatch 01 income and deductions. The
Administration proposes that insurance companies he I"equil"ed to capitalize modified percentages
of their net premiums for certain lines of business.
In computing their underwriting income. P&C insurance companies deduct reserves for
losses and loss expenses incurred. These loss resenes arc I'undcd in rart with the company's
investment income. In 1986. Congress reduced the resenl' dcductions of P&C insurance
companies by 15 percent of the tax-exempt interest nl" the lbluctihle portion of certain dividends
received. In 1997. Congress expanded the IS-percent pror:llillll rule to apply to the inside buildup
on certain insurance contracts. The existing IS-percent proration rule still enables P&C insurance
companies to fund a substantial portion of their deductihk rCSl'1"\ es with tax-exempt or taxdeferred income. Other financial intermediaries. SLich as Ii k insurance companies. banks and
brokerage firms. are subject to more stringent proration rules that suhstantially reduce or
eliminate their ability to use tax-exempt or tax-deferred ill\cstlllcnts to fund currently deductible
reserves or deductible interest expense.
Proposals Relatin2 to International Provisions
The Administration's budget contains rropos:t1s dcsi~ncd to ensure that economically
similar international transactions are taxed in a similar manncr. prc\ent manipulation and
inappropriate use of exemptions from l ;.S. tax, allocate inClllllC hcl\\een l! .S. and foreign sources
in a more appropriate manner, and determine the Ii.)feign t<l\ credit in a more accurate manner.
Specific proposals include:
Expand section 864(c)(4)(B) to interest and dividend equi\;!lellls.--{ Imler U.S. domestic law, a
foreign person is subject to taxation in the llnited States Oil ;1 Ilet illcome basis with respect to
income that is effectively connected with a U.S. trade or husilless (U·/). The test liJr
determining whether income is effectively connected to ;1 { IS tr;\(.Ic or business differs
depending on whether the income at issue is l J.S. source or Illl'l'ign source. Only enumerated
types of foreign source income -- rents. royalties. di\·idends. inll'rest. gains from the sale of
inventory property, and insurance income -- constitute IT/, ;lIld only in certain circumstances.
The proposal would expand the categories of 1i.H'eign-source incoille that could constitute ECI to
include interest equivalents (including letter of credit fees) <lnd di\idend equivalents in order to
eliminate arbitrary distinctions between economically equivalent transactions.
Recapture overall foreign losses upon disposition of ('Fe stock .__ 1r deductions against foreign
income result in (or increase) an overall foreign loss \\hich is tlll'll set against U.S. income.
current law has recapture rules that require subsequent I(lreign illCOllle or gain to be
recharacterized as domestic. Recapture can take place "hell directly-owned foreign assets are
disposed of However, there may be no recapture v.. hen stod~ in ;1 controlled foreign corporation
(CFC) is disposed of The proposal would correct that asymmetry hy providing that property
subject to the recapture rules upon disposition would include stock in a CFe.
Amend 80/20 company rules.-Interest or dividends paid h) ;1 so-called "R0/20 company"
generally are partially or fully exempt from U.S. withholding tax. ;\ U.S. corporation is treated
as an 80/20 company if at least 80 percent of the gross i nCOllll' (l r t he corporation for the three
year period preceding the year of a dividend is foreign source incoille attributable to the active
conduct of a foreign trade or business (or the foreign business 01';1 subsidiary). Certain foreign
multinationals improperly seek to exploit the rules applicahle to XO/20 companies in order to
avoid U.S. withholding tax liability on earnings ofll.S. suhsidi;lries that are distributed abroad.
The proposal would prevent taxpayers hom avoiding \\ithholding tax through manipulations of
these rules.
Modify foreign office material participation exception.--In the Glse of a sale of inventory
property that is attributable to a nonresident's office or other li\l'd place ofhusiness within the
United States, the sales income is generally treated as [I.S. S(lllrce. The income is treated as
foreign source, however, if the inventory is sold for usc. disposition. tH' consumption outside the
United States and the nonresident's foreign oftict.' or other li\cd place ofhusiness materially
participates in the sale. Income that is treated as foreign SOlll'Cl' llnder this rule is not treated as
effectively connected with a U.S. trade or husiness and is not suhject to ll.S. tax. The proposal
would provide that the foreign source exception shall apply oni) if an income tax equal to at least
10 percent of the income from the sale is actually paid to;1 I(lreign country with respect to such
Income.
- -=-- ')
Stop abuses ofCFC exception under section g~~,-,-\ I(Hei~1l l'()l"p()l"ati(lll is subject to a fourpercent tax on its United States source gross transport<.lti(lll illl'(lllll', The tax will not apply if the
corporation is organized in a country (an "cxcmption cOllllt!":-- ") lil;lt grallts an equivalent tax
cxemption to U.S. shipping companies or is a controlkd li1l"l'igll c()rporatioll (the "CFC
exception"). The premise for the CFC exception is that till' I ,S. shareholders of a CFe will be
subject to current U.S. income taxation on thcir share 01" till' Il1rl'ign corporation's shipping
income and. thus. the four-percent tax should nut apply ii' thl' corporation is organized in an
cxemption country. Residents of non-exemption cOllntries. h( l\\ l'\ cr. can achieve CFC status for
their shipping companies simply by O\\'J1ing the corporati(lils through ll.S. partnerships. The
proposal would stop this abuse by narrowing the eFC exceptioll,
Replace sales-source rules with activity-hased rules.--I I" ill\elltory is manufactured in the United
States and sold abroad. Treasury regulations prmide that ~() 11l'ln.'nt of the income from such
sales is treated as earned by production acti\'ities and )() Pl'l"Cl'1l1 h:-- sales activities, The income
from the production activities is sourced on the hasis of thl' l(lcati()1l 01" assets held or used to
produce the income, The income from the sales acti\ ity (Ihl' I'l'lllaining)o percent) is sourced
based on where title to the inventory transters, Ifill\entor) IS purchased in the United States and
sold abroad. 100 percent of the sales income generally is deeilled to be foreign source, These
rules generally produce more foreign source income for I 'Ilites States tax purposes than is subject
to foreign tax and thereby allow U.S. exporters that operate in high-tax foreign countries to credit
tax in excess of the U.S. rate against their l'.S, tax liabilit). Thl' proposal would require that the
allocation between production activities and sales activities k hased on actual economic activity.
Modify rules relating to foreign oil and gas extractioll in((lllle.--I(l he eligible for the U.S.
foreign tax credit. a foreign levy must be the suhstantial l'LllIi\;i1ellt nfan income tax in the U.S.
sense. regardless of the label the foreign government attlehes tn It. Current law recognizes the
distinction between creditable taxes and non-creditahle pa) ments for specific economic benefit
but fails to achieve the appropriate split het\veen the t\\() in ;1 GISC \\here a foreign country
imposes a levy on. for example. oil and gas incomc onl). hut has 110 generally imposed income
tax. The proposal would treat as taxes payments hy a dual-eap<lcity taxpayer to a foreign country
that \vould otherwise qualify as income taxcs or "ill lieLi 01" \;Ixes. only if there is a "generally
applicable income tax" in that country. \\'here the j()I"Cigll cOlilltl') docs generally impose an
income tax. as under present law. credits would hc all()\\ed lip I(l the le\'el of taxation that would
be imposed under that general tax. so long as the tax satislies the IlC\\ statutory definition of a
"generally applicable income tax." The proposal also \\(luld cre;ltc a new foreign tax credit
basket for foreign oil and gas income,
:v1iscellaneous revenue proposals
The President's budget also includes miscellaneoLl~ 1\.'\ t'IlLIC proposals. many of which
were proposed in prior budgets. Some of these proposals are: (I) taxing the investment income
of trade associations. (2) the repeal of the percentage depict iOIl I(ll' Ilon-fuel minerals mined on
Federal lands. (3) the reinstatement of the oil spill cxcisl' U'\. "ith <Ill incrcase in the full funding
limitation from $1 billion to $5 billion. (4) a modilicatiol1 (ll till' It ;1/\ deposit requirement, (5)
simplification of the foster child definition for purposes 01 till' l'arned income tax credit. (6) an
excise tax on the purchase of structured settlements. (7) se\ l'r,t1 proposals to improve
compliance, (8) repeal of the de minimis rental income rule. ,lI1d
certain pension and
compensation-related provisions. The hudget proposals also include \'arious other provisions
that affect receipts. These are the reinstatemcnt of the ell\i r<ll1llll'ntal tax imposed on corporate
taxable income ($2.7 billion). reinstatement of the Superl'lInd l'xcise taxcs ($3.8 hillion), and
receipts from tobacco legislation ($34.5 hi II ion). Tile hudgl't ,t1 so converts a portion of the
aviation excise taxes into cost-based user fees and repl,lcl's tllL' 11,lrhor Maintenance Tax with a
user fee.
«»
In conclusion, Mr. Chairman and Mr. Rangel. and Illeillhers (If this committee. the
Administration looks forward to working with you as Y(lll l'X,lllline our proposals. We want to
thank you for your comments about our corporate tax shelter propos~lIs. and your willingness to
listen.
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DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
March 10, 1999
Contact Office of Public Affairs
(202) 622-2960
SECRETARY RUBIN ANNOUNCES NEW FINCEN DIRECTOR
Treasury Secretary Robert E. Rubin on Wednesday announced the third Director of the
Financial Crimes Enforcement Network (FinCEN), James F. Sloan.
"Jim Sloan's long and distinguished career with the Secret Service has prepared him well
to lead Treasury's Financial Crimes Enforcement Network," Secretary Rubin said. "FinCEN
serves as a critical link among the law enforcement, financial and regulatory communities and
maximizes the information-sharing network to prevent and detect financial crime."
Sloan, 52, currently serves as the Deputy Assistant Director of the Office of Protective
Operations with the Secret Service. Sloan began his 21-year tenure with the Secret Service in
1978 as a special agent in the New Yark Field Office. He has served in several investigative and
managerial positions including as Special Agent in Charge (Boston Field Office); Special Agent in
Charge of the Office oflnvestigations, Assistant Special Agent in Charge (Baltimore Field
Office); Assistant to the Special Agent in Charge of the Presidential Protective Division and
Assistant Special Agent in Charge of the Office of Administration. Prior to joining the Secret
Service, he served in the United States Army from 1966 to 1969 and as a police officer in Union
County, N.J. from 1970 to 1978.
A native of Springfield, Mass., Sloan received his Bachelor of Arts in Political Science
from Kean College of New Jersey and is a Senior Executive Fellow with Harvard University'S
Kennedy School of Government Sloan has received numerous achievement and performance
awards throughout his distinguished law enforcement career.
Established in 1990, FinCEN supports the Administration's anti-money laundering efforts
by supporting law enforcement investigations and operations through collection and analysis of
data, including Bank Secrecy Act filings. FinCEN assists Treasury and other government
agencies by providing trend analysis and threat assessments, regulating financial and other
institutions under the Bank Secrecy Act, and fostering international cooperation in efforts to deter
and detect money laundering.
-30-
RR-3013
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2(}40
DEPARTMENT
OF
THE.
TREASURY
NEWS
'IREASURY
('()l1tact: Maria Iballcz
(202) (,22-2960
FOR IMMEDIATE RELEASE
March 11, 1999
STATEMENT BY TREASURY SECRETARY ROBERT E. RUBIN ON LILO Rl;LING
Today's Lease-IniLease-Out (LILO) ruling is another imp(lrt~lllt step in our erforts to curb the use
oftax shelters and restore fairness and rationality to the tax s\stem
We believe that the LILO transaction is deliberately desl!:-,l1l'd to l'\ploit a tax rule that
mischaracterizes prepaid rent to produce significant ta.\ hl'lll'!lt'; \\ ith little or no real busll1ess
risk. The LILO transaction allows U.S. taxpayers to dekr or <\\ (lId tax on substantial amounts of
income through the use of back-to-back leasing arrangements \\ ith foreign parties, often
municipalities, The revenue ruling states that these transactions lack economic substance and
therefore do not generate the tax benefits as promised by it'; promoters.
- ] () -
RR-3014
Far press releases, speeches, public sdledules and official biographies, call our 24-hour fax line at (202) 622·2(}40
DEPARTMENT
OF
THE
_______
TREASURY
TREASURY
NEWS
~178Q::..-------
OFFlCE OF PUBUC AFFAIRS • 1500 PE.r\NSnXANL;\ AVENl'E, ;-";.W .• WA5iHINGTO', D.c:.. 20220.12021622-2960
FOR IMMEDIATE RELEASE
Text as Prepared for Delivery
March 11, 1999
COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS FUND DIRECTOR
ELLEN W. LAZAR
TESTIMONY BEFORE THE SENATE SUBCOMMITTEE ON VA, HUD, AND
INDEPENDENT AGENCIES
Chairman Bond, Senator Mikulski and distinguished Members of the Subcommittee, it
is a pleasure to be before you today to represent the Community Development Financial
Institutions (CDFI) Fund. I am Ellen Lazar, the Director of the Fund. Before I begin my
testimony, I would like to introduce you to two other key members of the Fund who are with
me today: Paul Gentille, Deputy Director for Management/Chief Financial Officer of the
Fund, and Maurice Jones, Deputy Director for Policy and Programs at the Fund.
STRONG AND EFFECTIVE MANAGEMENT
When I testified before this Subcommittee this time last year, I described key steps that
the Community Development Financial Institutions Fund (the CDFI Fund or the Fund) would
take to develop and implement necessary improvements to the Fund's financial and program
management, reporting systems, internal controls, operating procedures, and awards
monitoring. I am very pleased to report to the Subcommittee that over the past twelve months
we have made great progress in these areas.
In the Fund's financial audit for Fiscal Years 1995 through 1997, our independent
auditors, KPMG Peat Marwick, LLP (KPMG), provided an unqualified opinion, affirming
that our financial statements fairly presented the financial position of the Fund as of September
30, 1997, 1996, and 1995. KPMG also confirmed our identification of material weaknesses
that we needed to correct.
KPMG recently completed the Fund's fiscal year 1998 audit, and I am pleased to report
that we have again received an unqualified opinion. In addition, KPMG verified that we have
RR-3015
For press release.l, speeches, public schedules and official biographie." call our 24-hour/ax line at (202) 622-2040
successfully corrected all material weaknesses identified in last year's audit. They have
reported no new material weaknesses for this year's audit.
We are in compliance with the Federal Managers' Financial Integrity Act (FMFIA).
Our system of internal management, accounting and administrative control has been
strengthened and is operating effectively. Our enhanced policies and procedures ensure that
our programs achieve their intended results; our resources continue to be used in a manner that
is consistent with our mission; and our programs and resources are protected from waste,
fraud, and mismanagement.
As evidenced by our auditor's report, the Fund has taken critical steps to strengthen
and build its infrastructure and hire staff. During FY 1998, a Deputy Director for
Management/Chief Financial Officer, Awards Manager and Financial Manager were hired -critical positions for ensuring proper internal controls and accountability. In addition, a
Deputy Director for Policy and Programs was appointed and program managers for each
program were hired. The Fund's legal department was substantially increased and additional
staff have been hired to help carry out the Fund's many programs. Our enhanced internal
procedures and staff capacity has helped us to deliver more effectively our award dollars to the
institutions selected to receive awards. For example, with respect to our Core Component
CDFI Program, all of our 1996 awardees have received disbursements and 84 percent of our
1997 awardees has received disbursements. We are currently disbursing the 1998 awards,
which were announced in late September of last year. We anticipate disbursing funds to all
1998 awardees by August of this year. Our 1999 awards have not been determined yet.
As I discussed with the Subcommittee last year, the Fund is committed to managing for
results. We have undertaken a rigorous review of the Fund's five-year strategic plan, goals,
and performance measures. I am happy to report that we have completed this process and
have forwarded to you a draft of our revised strategic plan for your consultation and
consideration.
STRENGTHENING COMMUNITIES: PROVIDING ACCESS TO CAPITAL
Overview
The Fund's mission is to promote access to capital and local economic growth by
directly investing in and supporting community development financial institutions (CDFIs) and
expanding banks' and thrifts' lending, investment, and services within underserved markets.
Currently, the CDFI Fund pursues its mission primarily through five initiatives: the
CDFI Program, which includes the Core, Technical Assistance and Intermediary Components;
the Bank Enterprise Award (BEA) Program; the Presidential Awards for Excellence in
Microenterprise Development; the Native American Lending Study and Action Plan; and our
Policy and Research Programs. The CDFI Fund also administers a Certification Program for
community development financial institutions.
2
CDFI Program and Certification
The CDFI Program has three funding components: Core, Intermediary and Technical
Assistance. These three components promote the CDFI Fund's goal, articulated in its strategic
plan, of strengthening the expertise and the financial and organizational capacity of CDFIs to
address the needs of the communities that they serve. CDFIs include community development
banks, community development credit unions, non-profit loan funds, micro-enterprise loan
funds, and community development venture capital funds.
The Core Component builds the financial capacity of CDFIs by providing equity
investments, grants, loans or deposits to enhance the capital base the underlying financial
strength of these organizations so that they can better address the unmet community
development needs of their target markets. In addition, under the Core Component, the Fund
provides technical assistance grants in conjunction with loans and investments in order to
maximize the community development impact of the Fund's awards.
The Fund selects awardees that clearly demonstrate private sector market discipline and
the capacity to positively impact underserved communities. The Core Component leverage
encourages additional private and public sector investments into these same organizations
through its one-to-one non-federal match requirement.
The lntennediary Component allows the Fund to invest in additional CDFIs indirectly,
through intermediary organizations that support CDFIs. These intermediary entities, which
are also CDFIs, generally provide intensive financial and technical assistance to small and
growing CDFIs, thereby strengthening the industry's financial and institutional capacity.
Since inception, under the Core and Intermediary Components, the Fund has made 123
awards totaling $122 million.
The Technical Assistance (TA) Component of the CDFI Program is the Fund's newest
funding program. Introduced in 1998, this component builds the capacity of startup, young
and small institutions. The TA Component allows the Fund to direct relatively small amounts
of funds to CDFIs that demonstrate significant potential for generating community
development impact but whose institutional capacity needs to be strengthened before they can
fully realize this potential.
In the first T A Component round held in 1998, the Fund awarded $3 million to 70
institutions.
In 1998, the Fund awarded a total $47 million to 112 institutions through its CDFI
Program. In 1998 as in all previous years, demand for CDFI Program funding far exceeded
3
the funding we announced as available. Under the Core and Technical Assistance Components
we announced the availability of approximately $45 million. We received requests for more
than $176 million.
For 1999, with the help of the $95 million appropriated to the Fund for FY 99, we
anticipate that we will make $62 million in awards to 130 institutions under the CDFI
Program. In October, the Fund published the FY 99 Notice of Funds Availability (NOFA) for
both the Core and Intermediary Components, announcing a total of $57.5 million available,
$50 million for the Core Component and $7.5 million for the Intermediary Component. We
received 153 Core applications requesting a total of $184 million. We anticipate making
approximately 55 Core awards. We received eight Intermediary applications requesting a total
of $16 million. We anticipate making five Intermediary awards. In January, we published the
FY 99 NOF A for the Technical Assistance Component. With the $5 million available for T A
awards, we anticipate making 75 awards.
To date, institutions in 43 states plus Puerto Rico and the District of Columbia have
received CDFI Program awards. To encourage applications from a diverse pool of applicants,
the Fund is conducting a record number of informational workshops. Among the nineteen
Core and Intermediary workshops conducted in 1998, five were located in States that have not
had previous Core or Intermediary Awardees. This month the Fund will hold eighteen
informational workshops on the Technical Assistance Component around the country, again
selecting several regions in which there are no current awardees.
To further our goal of building the institutional capacity of the CDFI field, we provide
debriefings to applicants that were not selected for an award. To date in fiscal year 1999, the
Fund is responding to 92 requests for debriefings. Applicants are given valuable feedback
about strengths and weaknesses of their applications as observed by those community
development professionals involved in reviewing their requests for funding. Many of these
applicants use the information gathered from the debriefing to build the strength of their
operations and to improve their performance.
In addition to our CDFI funding programs, the Fund administers a CDFI Certification
Program. CDFI certification increases the credibility of community lending organizations in
the eyes of potential funders and investors. An organization that is certified is better able to
attract private sector investments from local banks, corporations, foundations, and individuals.
To date, we have certified a total of 280 organizations in 45 states, plus the District of
Columbia and Puerto Rico. New applications arrive each month. Currently, applications are
pending for the Virgin Islands, plus two of the five states that do not currently have any
certified CDFIs.
Bank Enterprise Award Program
The Bank Enterprise Award (BEA) Program is the Fund's primary tool for pursuing its
strategic plan goal of expanding banks' and thrifts' community development lending and
4
investment activity. By providing incentives to these mainstream financial institutions, the
Fund encourages them to increase their investments in underserved communities. These
financial institutions do this in two ways: by providing loans, investments and services directly
to the communities in need; and indirectly, by investing in local CDFIs or other community
development programs, that then provide financial and development services to the
communities.
The leveraging involved in this program is impressive. To date, 124 banks and thrifts
in 30 states have received $58 million in BEA funding. This $58 million actually translates
into investments in underserved communities of $983 million, seventeen times the amount of
the CDFI Fund's investment. The awardees have invested $712 million in direct loans,
investments and services to the community, and $271 million into CDFI's.
The Fund dramatically increased our BEA awards in 1998 when we made 79 awards
totaling $28 million. In 1996, we made 38 awards totaling $13.1 million; in 1997 we made 54
awards totaling $16.5 million. The three-year total for the 171 BEA awards is $57.5 million.
For the FY 99 funding round, we conducted twelve informational workshops around the
country and received 139 applications. The Fund anticipates selecting approximately 80 of
these institutions to receive awards totaling $25 million.
Presidential Awards for Excellence in Microenterprise Development
The Presidential Awards for Excellence in Microenterprise Development is a nonmonetary program administered by the Fund that recognizes and seeks to bring attention to
organizations that have demonstrated excellence in promoting micro-entrepreneurship. By
recognizing outstanding microenterprise organizations, the Presidential Awards seek to
promote best practices and bring wider public attention to the important role and successes of
microenterprise development especially in enhancing economic opportunities among women,
low income people and minorities who have historically lacked access to traditional sources of
credit. This program is one of the ways that the Fund is promoting performance best practices
in the industry.
In February of this year, the President presented awards to six organizations for their
work in the microenterprise industry.
Native American Lending Study and Action Plan
Our Native American Lending Study and Action Plan is intended to stimulate private
investment on Indian Reservations and other land held in trust by the United States. The first
step in accomplishing this goal is identifying the barriers to private financing in these areas. In
1998, we launched an action plan that will examine lending and investment practices on Native
American lands, identify lending and investment barriers and their impacts, and make
recommendations for removing them. As part of that plan, we will be holding workshops in
13 cities across the country this year. The workshops will involve the Native American
5
community, financial institutions, state agencies and community development organizations.
With the assistance of the participants in these workshops, we anticipate that the study will be
completed in fiscal year 2000.
Policy and Research
The Fund is perhaps the largest single source of capital available to the CDFI industry
nationwide. It has access to data from hundreds of community development financial
institutions nationwide. This includes information about the institutions as well as their target
markets. In addition to baseline data derived from the process of certifying or funding
applicants, the Fund collects longitudinal data on all of its awardees over at least a five-year
period. Our policy and research goals include: measuring and reporting on the performance
and outcomes of the Fund and its awardees and seeking to advance the CDFI industry as a
whole through involvement in industry-wide research and development efforts.
In 1998, we moved forward on the first of these, measuring and reporting on the
performance and outcomes of Fund awardees. As you know, the Fund invests in CDFls to
promote their long-term viability and ability to serve distressed communities. Today, I am
pleased to be able to report some preliminary findings of our efforts thus far with respect to
the accomplishments of our awardees.
PERFORMANCE AND IMPACT
Surveys
Using surveys, the Fund collected performance and outcome data on 30 of our 31 firstround CDFI Core Component awardees. These awardees were chosen in 1996. We began our
evaluation on only first round awardees because they have had at least a year to absorb the
Fund's investments and put them to work. Our sample of 30 first round awardees includes six
credit unions, fourteen loan funds, three community development banks, three venture capital
funds, two microenterprise programs, and two multifaceted CDFIs. Together, they received
$34 million in CDFI awards. What has our $34 million helped these institutions to
accomplish?
Our preliminary findings demonstrate that these awardees have accomplished
significant community development impact over the past three years. For example, they have
made $565 million in community development loans and investments. These loans and
investments have helped to create or expand 1,895 microenterprises and 1,148 businesses;
create or retain 12,412 jobs; develop 8,617 units of affordable housing, 98 childcare centers
serving 7,168 children, 17 health care facilities serving 32,723 clients and 170 additional
community, cultural, human services and educational facilities.
Further, these awardees have provided business training, credit counseling, home buyer
training and other development services to 10,641 individuals.
6
Based on our sample, 70 percent of the clients of the average 1996 awardees are lowincome individuals. Sixty percent are minority individuals. Fifty percent are women. Fiftythree percent live in the inner city. Eleven percent live in rural communities. Thirty-six
percent live in suburban areas.
Since receiving their Fund awards, the 1996 awardees in our sample have strengthened
their capacities to deliver products and services to their target communities. Their total assets
have increased by 122 percent, growing from $473 million in the aggregate before they
received their awards to $1.05 billion in the aggregate in 1998.
Case Studies
In addition to the outcomes surveys, the Fund is conducting in-depth case studies of a
sample of awardees. The case studies include on site evaluations by the Fund to examine the
CDFI's activities within the local economic development context. To date, we have completed
three case studies. We anticipate completing several more in the coming year. The three case
studies that have been completed thus far have been in Boston, Massachusetts, San Antonio,
Texas and Santa Cruz, California. Our initial research suggests how CDFIs are positively
affecting their communities.
In Boston, many of the city's poorer neighborhoods did not benefit from the economic
growth in the 1980s; their conditions actually worsened during that period. Yet these same
neighborhoods have experienced notable improvements in the past 10 years, thanks in no small
part to the work of CDFIs such as the Boston Community Loan Fund and the Local Initiatives
Support Corporation, two CDFI Fund awardees. These CDFIs have been critical behind-thescenes actors. They have provided badly needed financial and technical support to two of the
city'S most effective community development corporations (CDCs), enabling the groups to
develop the scale necessary to carry out affordable housing and commercial projects that have
revitalized long-declining communities such as East Boston and Egleston Square. Since the
mid-1980s, the CDFIs have provided over $7.5 million to the CDCs, which in turn have: built
or rehabbed over 800 units of affordable housing; managed an additional 900 apartments and
commercial properties; and operated after-school and other programs for 150 neighborhood
youths. The CDFIs have also played a crucial intermediary role, working with bankers, city
officials, and corporate and foundation leaders to encourage additional targeted investment in
these neighborhoods. A number of bankers view the CDFIs as important partners in their
community development work, crediting the CDFIs with effectively serving organizations and
individuals that the banks cannot afford to serve.
All around San Antonio, public and private sector institutions recognize the important
work of ACCION Texas, a CDFI Fund Awardee. From the city's Economic Development
Office to local Chambers of Commerce to banks ranging in size from local independent banks
to Chase Manhattan, ACCION is viewed as the source of financial services for a previously
neglected B yet significant B segment of the population: the low- and moderate-income micro
entrepreneurs who live and work in some of the city's poorest neighborhoods. ACCION is
7
seen as the organization that can get loan capital into the hands of this underserved population
B and just as important -- get it back. ACCION's 400 clients include plumbers, electricians,
seamstresses, independent taxi drivers, and street vendors. They are primarily Hispanic.
Without ACCION, they would not have access to credit for their businesses. The stories are
by now familiar: these micro entrepreneurs do not have sufficient collateral; they don't have
good business records; or they don't need enough money to make them attractive to a bank.
With ACCION, they are able to get the financial and technical assistance they need to grow
their businesses and to make them more prosperous through better business management.
ACCION's success in San Antonio has led it to begin opening offices around the state, in the
Rio Grande Valley, Houston, Dallas, Austin, and Fort Worth.
In Santa Cruz county in California, the third largest community credit union in the
nation, the Santa Cruz Community Credit Union (SCCCU), offers a wide range of financial
products and services designed to meet the financial needs of a predominantly rural low
income population. The need is perhaps greatest in Watsonville, where the unemployment rate
is 15.8 percent B more than three times the national average. This area has been hard hit by
recent plant closings resulting from import competition from Mexico. Adding to the
unemployment rate are the once-migrant agricultural workers who are settling in the area in
increasing numbers, even though agricultural work remains seasonal. The employment and
income figures highlighted the importance of focusing on the Watsonville population. With
the help of its CDFI Fund award, the Santa Cruz Community Credit Union opened a branch in
Watsonville so that it could ensure credit and banking access for all citizens, especially the
Latino population which had historically distrusted traditional banking enterprises due to
discrimination and neglect.
THE YEAR AHEAD: FY 2000
The President's FY 2000 budget requests $125 million in appropriations for the Fund.
This request is $30 million above FY 1999 funding levels. The Fund proposes to use $15
million of the increase to enhance its core programs; thus, $110 million will be used to
administer the CDFI, BEA, Training, Policy and Research and Secondary Market Programs
and the Native American Lending Study and Action Plan. The remaining $15 million will be
used to launch a new initiative, the Program for Investment in Microentrepreneurs (PRIME).
In FY 2000 and beyond, the CDFI Program will continue to focus on building the
capacity of the CDFI industry to facilitate access to capital in underserved and low-income
markets. I believe the Fund will be able to build on its previous years' experience and
findings from its first outcomes surveys to inform our practice in identifying organizations that
can maximize impact in needy communities. We will also seek to enhance the performance
and impact of the industry through our Technical Assistance Program. Through the BEA
Program, the Fund will continue its efforts to facilitate community reinvestment by providing
incentives for banks and thrifts to reach new markets through partnerships with CDFIs and by
targeting lending, investment and services in the most distressed neighborhoods. Finally, the
8
Fund will seek to enhance the effectiveness and impact of CDFIs, banks, thrifts and others
engaged in community development finance through its Training Program.
In FY 2000, the Fund will complete its Native American Lending Study. We plan to
make recommendations to the President and Congress on needed statutory and regulatory
amendments to existing Federal programs and other needed policy changes to improve access
to capital for Native Americans.
Based on a feasibility study to be conducted in FY 99, in FY 2000, the Fund plans to
launch a secondary market program for loans made by CDFIs and examine the potential role
of the Fund in creating and sustaining these efforts.
I believe one of the most exciting proposals in the President's budget is the creation of
the Program for Investment in Microentrepreneurs (PRIME). The $15 million PRIME Act was
introduced in the Senate on February 10 of this year. Senator Kennedy introduced the bill.
Senators Domenici, Reid, Grassley, Abraham, Robb, Collins, Boxer, Santorum, Sarbanes and
Snowe are also sponsors of the bill. The bill was introduced in the House on January 19 of this
year by Congressman Bobby Rush. House Banking Chairman James Leach and Ranking
Member John LaFalce are among the bill's sponsors.
This program will allow the Fund to meet a growing need that we currently cannot
address. This is the need to strengthen organizations that are providing critical training and
technical assistance to the most vulnerable population of entrepreneurs: low-income and
disadvantaged microentrepreneurs. One of the clearest lessons that has emerged from the first
decade of microenterprise development in the United States is that provision of training and
technical assistance is a necessary ingredient for building successful entrepreneurs. In the
~lghly developed U.S. economy, starting and running a successful business requires a solid
understanding of business regulations, tax issues, record keeping, and marketing. Many of the
thousands of people who have started microenterprises to make ends meet do not have these
skills.
Many of the organizations that provide training and technical assistance to
microentrepreneurs are not currently eligible for Fund assistance because they do not meet our
financing entity test under the CDFI Program. PRIME will allow the Fund to reach these
organizations. The PRIME Act first, provides training and technical assistance to low income
and disadvantaged microentrepreneurs; second, builds the capacity of microenterprise
organizations so that they can better serve their low-income clients; and third, supports best
practices research and development. I believe that PRIME complements the Fund's existing
programs and will be a key tool for creating opportunity for low-income people.
CONCLUSION
Mr. Chairman, Members of the Committee, thank you for giving me the opportunity to
provide you with this information on the Fund's current activities and its plans for the future.
I look forward to working with you over the course of this year's appropriations process. I
would be happy to respond to any questions you may have.
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n EPA R T 'I E
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T
0 F
T 1-1 E
TREASURY
T R E .-\ S l. R Y
NEWS
OFJo'ICE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE. N.W. - WASHINGTON. D.C •• l0210. (202) 6ll-19'O
:MBA]tGOBD UNTIL 2: 3 0 P. M.
CONTACT:
larch 11, 1999
Office of Financing
202/219-3350
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury ~ll auctio~ two series of Treasury bills totaling
Lpproximately $15,000 million to refund $15,559 million of publicly held
lecurities maturing March 18, 1999, and to pay down about $559 million.
In addition to the public holdings, Federal Reserve Banks for their own
LCCOunts hold S7,3~4 million of the maturing bills, which may be refunded at
:he highest discount rate of accepted compeeieive tenders. Amounts issued to
~ese accounts will be in addition to the offering amount.
The maturing bills held by the public include $2,391 million held by
'ederal Reserve Banks as agents for. foreign and international monetary authori:ies, which may be refunded within the offering amount at the highest discount
~ate of accepted competitive tenders.
Additional amounts may be issued for
luch accounts if the aggregate amount of new bids exceeda the aggregate amount
If maturing bills.
TreasuryOirect customers requ •• ted that we reinvest their maturing
~lding. of approximately $910 million into the 13-week bill and $712 million
,nto the 26-week Dill.
Tenders for the billa will be received at Federal Reserve Banks and
~he Bureau of ~he PUblic Deb~, Kashing~on, D.C.
This offering
If Treasury securities is governed by the terms and conditions set forth in
he Oniform Offering Circ~&r for the Sal. and Issue of Marketable Book-Entry
Teasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Iranches and ae
Detaila about .ach of the new •• eurities are given in the attached offerng highlight ••
000
RR-3016
•
For P'~ss 'd~lIsa, Ipe~cha, pllblle sch~illI/~J IInil official biographies, call Oil' 14-ho1iT flU line at (101) 611-1040
HIGHLXGHrS OF TREASURY OFFSRINGS OF BILLS
TO DB ISSUED MARCH 18, 1999
Marcb 11, 1999
Offering Amount •••••.••••..••••••..•.••• $7 ,500 .lilion
Description of Offering;
Term and type of security •.••••..••.•••• 91-day bill
CUSIP number ••••.•.•.•...•••••.••.•.•••. 912795 DQ 3
Allction date •....•......•.•...•••.••.... March 15, 1999
X'su. dat ••.••••.•......•..••••.•••..••• Narcb 18,1999
Maturity date ••..•......• , •..••••.•••••• June 17, 1999
Original issue date •..•.•.•••••.••••••.• December 17,1998
Currently outatanding .•.•...•.•.•.••.... $12,121 Dillion
Minimum bid amount and multlples •.•••.•. $l,OOO
The following rul"
$7,500 million
18~-day
91~795
bill
CD 5
March 15, 1999
March 18, 1999
September 16, 1999
September 17, 1998
$15.440 million
$1,000
apply to all securities mentioned above I
Submission of Bid"
Noncompetitive bids .....••.•. Aocepted in full up to ,1,000,000 at the high.st dtacount rate ot
accepted competitive bid •.
Competitive bids ..........•.. (1) NUat b. expr•• sed a. a di.count rate with three deoimals in
inorementa of .005\, e.g .• 7.100\, 7.105\.
12) Net long p08ition for .aoh bidder mu.t be report.d when the .um
of the total bid amount, at all discount rat •• , snd the net long
position i . $1 billion or greater.
(3) Net long position must be determined .s of one half-hour prior
to the closing time for receipt of coapetitive tenders.
Maximum Recognized Bid
at , Single yield ...••.•••••. 35\ of public offering
Award •••.........••....• 35\ of publio offering
Receipt of Tenders:
Noncompetitive tenders ..•.•.. Prior to 12100 noon Bastern Standard tI.e on auction day
Competitive tenders .....•••.. Prior to 1;00 p.m. Bastern Standard tiae on auotion day
~ximum
Payment Terms. By charge to a funds account at a Federal Reserve Bank on i.sue date, or payment
of full par amount with tender. TreaBuryDjcect oustomera oan use the Pay Direot feature whioh
authorizes a charge to their account of record at their financial institution on i •• u. date.
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
FOR IMMEDIATE RELEASE
March 14, 1999
Contact: Public Affairs
(202) 622-2960
UNITED STATES, CHILE INITIATE INCOME TAX TREA TV NEGOTIATIONS
Treasury Deputy Secretary Lawrence H. Summers and Chilean Finance Minister Eduardo
Aninat met during the Inter-American Development Bank annual meetings in Paris on March
14th to discuss the prospects for an income tax treaty between Chile and the United States.
The two affirmed their mutual commitment to initiate formal negotiation of such a treaty
in late May 1999. They remarked on the need to create and maintain favorable conditions for
trade and investment between Chile and the United States and agreed that the envisioned tax
treaty would help foster increased economic ties by reducing double taxation and preventing
fiscal evasion. Minister Aninat and Deputy Secretary Summers aftirmed their intention to work
toward a successful result of these negotiations.
- 30 RR-3017
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t~14
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OEJDARTM~NT OF' THE TREASURY
wAsH' .... aToN, C).c. 20UO
"Overcoming Volatility; Latin America and the IDB"
Remarks by Lawrencc H. Summers
Dcputy Secretary of the Treasury
Inter-American Development Bank Annual Mietings
Paris, France
March fS, 1999
Distinguished Governors, Mr. President, dt"legates !lnr.1 trienc1!;. "".nrique. COIl2I'atulations on
mother year of your successfullead~hip - with the hank's prompt and successful response to
:finmc¥ crises, the llC back on mr:k' lmci the ...·sn funds ~ement finally resolved. Burke,
welcome. We jook tbrw:m1 tn worlringwith you.
It i~ good that our bank is strong because the challenges it must meet are fomlillablc. Iul,;l~i \It;;
prosperity that works for all, integration that supports gro"Nih md brin~:; uur hcw.i:ljJherc
toiether and. strengthening each of our democracic:::; -lh~c w~,e our central challc:ngc$ in
Guadalajara and they are our cenlral Challcll~~ lQday. But to meet those goals our immediatc,
priority afttrr the even~ u[ Lhe p~l yCaL must be to maintain our forward momentum. So, mtlik
than :;lrC:;~ ili~c ImJad¢l themes today I want to focU3 o;l the IWrower fu:umcilll aspect.
SLablc Li.uauce will not alon~ =duca.t~ our children, protect our environment or build our ,,~riollS.
But thc~= things cannot happen without stable :6m.nee that tames the cycle of financial boom md
bust that has been part of this region's history far too often -- for for too long. Now more thu
ever, if the gains of the put dccade arc to be preserved, we must work together to build Latini
American confidence in fimmoe -- and build finmcial confidence in Latin America.
'W'Mt will this require? Above all, it will mean planning for the long term. If envemments live
day by !day, so will investors. The best meneial managers hope tor The nest •• but plan for the
worst. Finance ministers and MOBs need to take the same ~ppl"na.ch. They need policies that will
serve them in bad times as well ~ good. This past year, m:tny;n T.atin America have again been
le~ this lesson the hard 'Way.
L The Return "f Vnlatility
A year~ago in Cartaiena we all took cautious good cheer fruw lhe fact that the first six monthis of
the ASian crisis had mainly passed Latin Ameril,;ii 'Uy. Looking around the hcmi3phcre to~y:We
can see that our caution was wcll·~u1.lrukd.
1
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•
lQ!1i
we have seen events in Brozil ~ eh:1l1enged the region's l~gest economy in it; vib!
, commitment to low inflation 3Ild steady growth 3Ild sent unwelcome tremors through.
several of the resion', markets;
•
we have seen the return of roller eoaster inflows of foreign capital. In 1997 around $37
billion in net lending flowed into the eight largest economies in the region and wa.c
runnlnS at an even fa.ster pace until the R.ussian erisislast suzmner. Today, one prominent
private forecaster is predicting a net inflow of a just SSbn this y~_
•
we have seen another dramatic downward 5prral in commodity prices, This has inflicted
maj or tenns of trade shocks on Chile, Venezuela. Mexico, Ecuador and others - costing,
in some cases. more than S percent of GnP.
•
and we have seen major narural disasters in countries tha! had already seen more than'
their share: with hunicanes hitting Honduras. Nicaragua. El Salvador, G~a. the
Dominican Republic md Haiti, floods from El N"mo and 4Wo\he;r LICl~1,; c;arlhl.luake; in,
CUlUlllUia. W~ ill the US a!¢ ve.y aW'aLe that a disaster of comparable: scale to Hlll'ricalle:
Mitch in our own country would do mlm than $J trillion-worth of damage and cost
2II'Ound 500,000 lives: more than the: number lo~ in all of our w~ thi3 CCll~ combined.
Th~e
major shocks will take their toll on the region for some time to come o.nd no country Will
be lcft untouched. But pA3t policies made some countries more vulnerable to these shocks th.:an
others. And the decisions govemments Wee today will shape their capacity to contain them:
•
in Mexico, Argentina md Chile, a. steady commitment to sta.ble macroeconomic polie:y,
strengthened finaneial markets and careful plamring have provided some important
resilience to contagion and helped contain its effeets. Further steps to build up tht'se
economies' defenses will only help them continue to ride 1;1111: the ~tnTTl'l.
•
Hn7.l1 ct!." ~llcceed on Iy w;!h re."olute pursuit of sound and mong fiscal ane! monetarY
l"olicies. 'But these steps. along with the removal. of past exchange rate pressures and,the
return of capital as normal conditions arc restored. shoule! provide a basis for the
reestablishment of confidence and growth in a COUJlttY thaI, on some measures. achieved
the fasteSt average rate of iI'Owth in the world in the bundred years before 1980, In this
context the indications of support for sound policies in Brazil that have bc=n rCl,;ci vc;U ill
recent days from both the private and the public sector have; bc;c;n CUWW'j1gj.ug,
uilicr ~IJLl.o.Lllies, llotably Ecuador, v.ill face; pcllaps ~ven steeper challenges in the ,
months ah~ as they work to achieve stability. What will be critical will be to resist ¢isdiagnosis. It would be a mistake uthc external clement allowed the more important and
fixable dom~e roob of the eD3is to go unOOdr~ed.
for the countries where the destruction ~ been greatest, help
2
~annot
come too soon, WII!
F-.4 ,
can all take pride in the fact that, among other things, the FSO funds agreement has
allowcd the IDB to commit major new funds to rebuilding Central America. Let me
recognize and applaud the solidarity mown byborrowctS, whose conversion ofFSO local
currency will we this commitment IL reu1ity. For ib port the United States is willinG' to
increase the pace of enc3cllments of its FSO contnoution to further eupport theGe end:.
n.
Building Financi21 Confidence
At this time when the global economy is weak and growth is imbalanced, the goal of sustaimng
financial confidence - and the flow of capital that confidence can bring - is a goal for Latin '
Ammea that is a g~al that all can share,
However. in this region ~ecially. our goal mtl~ not and cannot he to play the same record nvp.r.
It is not enough for us to act to revive confidence today, this time we must show we have the,
means to maintain that confidence tomorrow.
What will this require? I would focus on four core elements;
The first is adapting countries' financial policies to Ihe cballcng<: of bena developed .financIal
marh."Cts than we have ever had globally before. Thai m'an3 govcrmnen~ guarding ag~ the
risks that the !peed and dynamism ofthc~c markets can create. And it means their taking bctter
advantage of the oPPOrtlmitiC3 for better ~rcad.ins and Z%lIllUlging those risks th~t hnye been
crctl.tcd at the .same time.
That means more prudent debt management. We now know that countries are courting trouble
when they reach for cheap mort-teml capital. We saw it in Mexieo, with the increasing resort f,O
isstting dollar-denominated Ttsobonos in 1994 - anti we ,~w it mKu.~~;a mthe encouragement of
tnreign rnmi'lac:e.c: nf rlmne~c (:;Kn~. C(\unnie.~ in this reSion need to think lo~ and hard about
the strUcture of their liabilities, 'their exposure to rollover and other risks; and abOUt new strUCtIlIes
that share more risk With lenders. And they need to recall that lon2eI' tenn debt is the simplest and
best kind of insurance orall.
At the'.same time we need to recognize thai. while:: muulOIll fuuw\,;i~ uuuke~ offca'less rooUl to
en, they C:lJ.uallv proviUt: ~eatcr ~cupe Lo plcw aud prepare. A modern financial planner looks to
tlle L'utwes waJcets whe.u lookillg to rtducc the company's exposure to priee swings. &pecially
in Latin American countries so exposed to interest rate, foreign exchmgc and commodity price
swings, finance ministries should be thinking along the 3U1ne lines - 1001cins for w~ys to ~te~
or hedge a.gaWt the risks to which government budgets iUld the economy as a whole are
CXpo3cd. And nowhere will mnovntion be more welcome thm when it comes to mechcisms to
dampen the effects of fen3t-to-f~e swings in commodity markets. The crude stockpiling or
price control appro3Ches tha.t wert tried in the p:i£t have long since been discredited, .Rnt
3
NQ137
P.s
comm9dity pric:e-based fiscal stabilization funds, such as Chile's CODELCO, mark a different
and more promising approach which other commodity dependent nations should explore.
The IDBs and other mult:iUteral development banks can help countries efforts in all these are,as:
first. by providing greater technical assistance to public officials to heolp them analyze.
llnd~lI"c1l1"t1 Tf'-~onr.l to the risks in their IUltlon:ll b:l.hmr.p. ~hf!et.~ A"ct $iecond, hy helping
govemmen~ overcome c1omp_~tie reluctAnce tn I"ay the rTice of mch insurance - by SUPportinf
appropriate public debt management and hedging programs in MDB lenctinz operations. The
IDB's work in Venezuela exemplifies this idea. So does the World Bank's recent work to iive
countries the opportUnity to enter into hedges to Offset cenain types of exposure created by
World Bank project lending.
B. Deeper Flows ojCaptlal
Buil~g .resiliellce to
Cl."ises ~ lJilL tly about better managcmc:n.t of public: ba1ant.~ sh~cts. But
c;qually important ~ the resili~m;~ of the domestic financial nurket. Notably:
eOtmtri~ need to
•
punuc pCIl3ion and other reforms that promote higher domestic Stl.~3
md more efficient domestic investment. While we think of the global capital market
when we think tlbout Latin America, the most importont eapit3l market is the one at
I
•
home. A c:ountry with Q broD.der, deeper domestic hnaneial ma.rket is less prone to
extemal risk.!: and less dependent OD. external funds. In all of our nations, more domestic
savings, better channeled, is the best route to faster growth and greater stability.
th!'!y n~c1 tn ;!C'.celP.rnT.P. the plI.r.e nt· creatme a domemc financial infrastructure that is more
conducive to absorbing the right kind ot capital. That means developini a sound finanCIal
infrastructure built on effective supervision and regulation and <lPproprUuc pruc.lc:nLial
management. And it means transpan:nl accuUIlLiug ~U 1.:U1J.lOlate governance and cff~tive
;domestic bauhuptcy H:gi.w.es.
Private foreign financial seetor particip~on cm zmd alreD.dy docs support these i03!G in Latin·
America. Todny fully 50 percent of the bonking sector, 70 percent of private banks, in Arsen~a
ue foreign·controlled, compared to 30 percent in 1994. In Menco more than one fifth ofban1cing
seetor :assets are foreign-<:onttolled. As these ,oonmes are leaming, the res1Jlt is A dAP.pP.T, mnre
efficient financial m.1Irket - and a"tem1l1 inv~(ll:~ with a greater stake in staying put.
And the International Financial Instirutions have their own critieal role to play. Lel me applau.cl LLc
IDB and MIF's suppon for the Vw·ork of the CommiLlc:c: un Hc:mi::iphClic Fin.ancialls~cs created at
Ihe Sw.uw.il uf Lh~ Aw¢J.ic~ W Mlallli .i.Il1994. And let me urge them to c:ontinue with their effDrts
to lfuse m i nate application of the BasIc Core Principles for bmking 3Upcrvisors ncroS3 the region
and help develop key puts of the infrasttucturc for stronger, more efficient national financial
mGrk;ct".
Apprcpriats TDD/s jC7' Crisis R.tJspcns~
4
l'rcparing for cri3is is abo about prcpmns effective: W8."j3 to fC!pond to crise:;. Governments in
Lntin Americn - end the intemntionlll community Q.S Q. whole . need to be sure they have
modem tools to respond to modem crises, and, critically, more effective tools to protect people
from their effects.
The rD,B, in line with similar innovations by the IMF 2nd the World Bank, has taken an
imporUnt step here with the creation of conditioned, fast-disbursing premium interest rate
emergency loans - for Argentina., Colombia and most recently, Brazil- to help defend agamst
the r.J..ri» on confidence that modern capital markets can produce. Looking torward, the IDB and
other MDBs need to think about further ~anding their lending instrt1ml'!1'lr~. ;n twn w~y(.
F;m, they could fuTther encounge moni policies - before crisis mikes - by pro"ic1ini some
backstOP for private COntlnient facilities that countries develop to protect against conIaiion such
as thoS,e pioneered by Mexico and Argentina. Any MDB participation in such i'adlilic:s will ncc:u
to be appropriately designed and priced, and will n~ to be llPPruci\;htd c3J.'efully, and with an
eye to the headroom and reserve requin:mmlls lhall.:uwd cause it to crowd out other lending. But
the IDB's support for Argt:n!.ina's rq>urclu1:se Cl~WCllts with a consortium ofprivatc banks ~
surely a welcome new u~ar\.urc.
Secoud, we are .cou"inced that credit cnhmccmcnts, used !1l'atcgic:ally, enn help to reduce the
damage that a sud.d.en loss of market acceS3 can bring. !hi! will be 1m imporUnt area of
innovation for the future. The usc of such enhmcements should be guided by a number of
principles:
•
they should be conditioned on strong policies;.
•
they should be used to maintain a well balanced structure of
•
they should be for countries trying to regain market !lcef'_~~).notjust to reduce borrowing
costs;
•
anct once again_ they need to be appropriately designed and priced, so they lc:v=r4~=
significant private capital without compromising the Banks' bahw~c ~h~~Ls.
gOVeIDm.P.I\t:U Jiahll;tie~~
These are imponant ideas for preventing and resohing crist:s in\'ul v iug the private ~cttor, Other
ideas are also under discussion in the international communily - ClllU the voluntary agreements
entered into by Korea's private creditors and the different voluntary ag!'eements that have been
reached in Brazil's case are very welcome.
It will be important as we work. LbrUI.l~ 1h~c issues going forward to remember the centr.1l irony
uf limWl,;iisll,;.(i~~ - that while they arc usually ca~d by there being too much lending, they' are
~!olongcd by there being too little. To be sure, ,xcC3sive flows of capit31 were no doubt an
important element in these erls,:s., But CXCC33 confidence in emerging markets is not a problem
5
we fn.e,e today or likely will fuce in the very near futUre. If the risk not so long .. go Wa." that
investors were undertaking too many bad loans - the risk today is that they will tai I to make
enough good ones.
There is another, perhaps evm more important aspect to MDBs' role in responrling to crises:
mjnjmizing the destructive jmpact of crises en the crucial mission of enslIrinz the development
:md prosperity of all ourpeople. The best - the primary - reason for w:mting to respond. better to
crises is to lesien the economic: md soci2l distress that crise-.s bril'le- Hut then preparing for crises
has to mem preparing every mem.ber of 01lI' l'r.onomy tn cope w;th their effects.
Effective social sarety netc; are morally nght because they provide a floor below which nu-one
should be permiTtM to drop. And they make sense in nmow economic tenns: bC\;'d,u:ie !hey C"dIl
act as :mtomalic mbilizers for the economy in a downturn; and becau:ic ac.liu:;lll1ell.ts that ale l~~
painftll fnr I'eople are more likely to be made in good time.
The IDB bas heeded President Clinton's call last ScplcuWer fo1' all MDB~ to step up their cff.ons
to build effective social safety nets amI prumule COle labor riglm in this hemisphere - but we
can and must do more. A,:) Lhc Pr~ideat said, "if~'e want eountri;~ to do tough things, we have
to protect the: mO::il dcfcuseless p~ple in the ~ciety and we have to protect people who get hurt
when !hey Uldu't do anything wrong."
D. Entluritlg exchange rate regimes
No govcmment' oS search for better wny:; to prevent crises can overlook the place whel'e so many
past ~ses have begun - in the Illllrket for foreign exchange. To sustain confidence in thE! Mnure,
Latin America, perllaps more thm mo~ will need exc:hange rate regimes that C:::In r.nmmand.the
trwt of domestic eitizem :md of foreign investors, accommodate regit:lnal and global inte~tion,
and stmd the t~ct of time.
The merits affixed versus floating exc,hmee Tates are forever debated and surely vlSI'y ~atly
from situation to situation. Hllt tn,P. allure of stability in this reiion is strong cwu. iu that context
the subject has !e-.cently ~ri~P.T1 whether counnies should dollanze.
The decision to malee another country's currency oJ1.e·s own would be: hugely cOIlScquCUtial For
any cOllntry that has to be considered in a careM and extended maUl1t:1-. On the one hand,
dOl I::ui 7.ati on offers the attractive promise of enhancinx :;Labilily i.u the dollarizing country by
adding to the credibility and discipline of its own I:I,;QLlOullC and financial policies and gdv~lCing
its integration with the world econumy. Ou tUe other hand, the country abo mu:rt be prep3l'ed to
embrace that discipline; - aud accept thc potentially 3ignificant consequences of doing without
the indept:Ilde;n~c; to adj~ the cxchang~ rate or the direction of dome.tic: 'interest rates_
While: there arc; many issues, possibilities end nppro:lche€, it would not be appro~riate for United
States authorities to adjU3t their bQnk GUper.-U:0IY retporwcilities, access to the Federal Restrve
6
discount window, or the procedures or orientmion of U.S. monetuy policy in light of another
country's decision to dol1arlze its monetmy' system. Any country contemplating doll3rization will
have to weigh carefully these cODSiderntioIlS :md many others. It will surely be appropriate that
its representatives do so in consultation with the United States authorities so that we can jomtly
think through the implications fer both of our economies.
m. The Enduring .Agenda
There are tht)~e who My that to call nn the lADB - and the Intcmat10nal Financial InstiIUtions.
more generally - to focus on crisis re5P.onse is te? distract them from their primary development
mission. On the contrary, Stable capiIal flows and sound :fiDaIlce are ncct:SSary lo the: lii.eaUy
economic growth on which the primary trevelopmt:Ill mh;~iUll urhigh~r li villg staudards aud
widening opportuniu~ UcpI:llU:s.
The platfonn of stable finance is one upon which 30 much CAn be laid GO much that will.Nrther
the goals for the Americas that we lllid do'Wn in our ~j3r3. meeting in 1994 md the
Santiago end Minmi Summit:;. Even 3S the storms of crisei are overhead. we must not forget
those goals -- the goals of inclusion, integration, inereased prosperity and strengthened
democracies. Nor must we forget the important steps we have already taken toward them.
Looking aeross our hemisphere tochy, I am confident that a quiet dyn~mjr. of I'rngre.~~ has taken
root in the last years orUris 'entuty that will not easily be revmen. After twelve months that
have seen President Clinton go to Latin Amerie~ three tim~. vi~ting six countries, no one
should doubt the United States continued $~e in - and commitment to - this reiion's success.
And we look iOI'W;!rd to r.elelm.ting nur shared proiI'ess and cooperation on home ground next
year - wMn we meet ;n New Orleans. BUE every intenuption is an intmuption our citiztm:scan
ill afford. If the 21st eentuIY is to be the century of the Americas -lhcn il:; liual decade must
continue to be the decade of Latin American reform. 'I'hal:Jk YULl
7
·UBLIC DEBT NEWS
partment of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
IMMEDIATE RELEASE
15, 1999
Office of Financing
202-219-3350
1
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
March 18, 1999
June 17, 1999
912795BQ3
rerm:
Issue Date:
1aturi ty Date:
:USIP Number:
4.470%
High Rate:
Investment Rate 1/:
4.597%
Price:
98.870
\11 noncompetitive and successful competitive bidders were awarded
:ities at the high rate.
Tenders at the high discount rate were
:ted 68%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
$
28,717,577
1,348,660
$
161,630
161,630
30,227,867
7,519,886
4,039,310
23,370
4,039,310
23,370
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$
6,009,596
1,348,660
7,358,256 2/
30,066,237
PUBLIC SUBTOTAL
TOTAL
Accepted
Tendered
Tender Type
34,290,547
$
11,582,566
edian rate
4.460%: 50% of the amount of accepted competitive tenders
endered at or below that rate.
Low rate
4.440%:
5% of the amount
cepted competitive tenders was tendered at or below that rate.
o-Cover Ratio
= 30,066,237 / 7,358,256 = 4.09
uivalent coupon-issue yield.
~rds to TREASURY DIRECT = $1,008,339,000
-3019
http://www.publicdebt.treas.gov
'UBLIC DEBT NEWS
epartment of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
IMMEDIATE RELEASE
h 15, 1999
CONTACT:
Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
March 18, 1999
September 16, 1999
912795CB5
Term:
Issue Date:
Maturity Date:
CUSIP Number:
4.530%
High Rate:
Investment Rate 1/:
4.713%
Price:
97.710
~11
noncompetitive and successful competitive bidders were awarded
rities at the high rate.
Tenders at the high discount rate were
tted 92%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered
Tender Type
Competitive
Noncompetitive
$
$
23,055,144
PUBLIC SUBTOTAL
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
TOTAL
21,938,553
1,116,591
Accepted
$
4,172,622
1,116,591
5,289,213 21
2,229,340
2,229,340
25,284,484
7,518,553
3,265,000
320,660
3,265,000
320,660
28,870,144
$
11,104,213
ledian rate
4.530%: 50% of the amount of accepted competitive tenders
endered at or below that rate.
Low rate
4.500%:
5% of the amount
cepted competitive tenders was tendered at or below that rate.
O-Cover Ratio = 23,055,144 / 5,289,213 = 4.36
uivalent coupon-issue yield.
ards to TREASURY DIRECT = $778,743,000
http://www.publicdebt.treas.gov
·3020
From: TREASURY PUBLIC AFFAIRS
Ie AFFAIRS CALLER
[) E I' ART 1\1 E N T
0 F
3-31-99 4:35pm
TilE
p. 1 of B
T REA S lJ R Y
NEWS
omC! OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W•• WASHINGTON, D.C. • i0220 • (202) 622.2960
Weekly Release of U.S. Reserve Assets
March 16,1999
The Treasury Department today released U.S. reserve assets daC2 (or the week ending
March 12, 1999.
As indicated in this [able, U.S. reserve assets totaled $73,292 million as of March 12, 1999.
down from $73,788 million as of March 5, 1999.
U.S. Reserve Assets
(millions of US dollarsl
1999
Total
Reserve
Foreign
Reserve
Currencles
. 3/
Position in
Special
Assets
Gold
Stock 11
Drawing
Rights ']j
ESF
SOMA
IMF 1/J1
March 5, 1999
73,788
11,048
9,389
11,565
18,258
23,528
March 12, 1999
73,292
11,048
9.416
11,861
18,556
22.4ll
Week Ending
Gold sroek i~ valued monrhly
98 value was $1 t .046 rni.l1on.
lit
$42.2222 per fine [toy
Ounc;~.
V:uues shown are
:l~
of J:lnllary 31, 1999. Tnt! Dc:cc:mbcr 31.
SDR holdings and rhe rCliC[\'(: position in the TMP :lie based on IM~ d:lt;\ ;md revalued in dollar tcnns ;n the official
IR/doUilr cxchange r:ltc. Consistcnc wich current reporting pracc.iee~, IMF data for March 5. 1999 IICC final. Data ior SDR
ldill~ ;lnci the: reserve poslljnn in thc IMF shown :l~ of Much 12, t 999 (in italics) reflcct prelimularr adJustme:nc~ b)' the Trca~u0'
[he March 5. 1999 IMP d:lt:1.
Includes holrlin.C:s of thl! Trcasury'~ Exeh~ngc St"bilizatiol1 Fund (ESI') and (he F~Jetal Rescrvc's Systcm Open Market
(SOMA.). These holdings :ICC valued at current m:lrkct exchangt: rllCtS OC, where appr()pri!l[c. at slIch other ratC5 :15 nl:l\' be
~cd upon by rhe P:lctic~ to the transactions.
:OLJilI
In addition to thl! reV:llu;ltion referred to in foomote 2 above, the rcst![\'l! position In thc Il\IF for rht: wtTk ending \larch 1:;.
? ~Iso reflects prclimlO:II)' :ldlu~tmerH$ for the repayment of IO:lns (0 tile IMP of SOR 361 million under thc General
lngcmnm [0 Uorrow ((;,\H) in July 1998, and SDR 619 million undcr lhl! Nl~W Arrangements [0 13()rrow (NAB) in Dtcl'm:;' .. ~
~.
1R-3021
It Press
release$, speeches, public schedules aJld official biographies, caU our 24-hour fax line at (202) 622·2040
TDTO!
0
01
DEPARTMENT
OF
THE
TREASURY
NEWS
~~/78~q~. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
....................................
OmCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C.- 20220 - (202) 622-2960
EMBARGOED UNTIL lOAM. EST
Text as Prepared for Delivery
March 17, 1999
TREASURY SECRETARY ROBERT E. RUBIN
TESTIMONY BEFORE THE HOUSE COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON FOREIGN OPERATIONS, EXPORT FINANCING, AND
RELATED PROGRAMS
Mr. Chairman, Ms. Pelosi, I appreciate the opportunity to testify today about the
Administration's FY 2000 budget request for Treasury's international programs. Last year, the
leadership of this Committee was critical in approving the increase in our quota to the
International Monetary Fund and our participation in the NAB, and that, in turn, was critical to
dealing with the financial instability abroad that could so affect our own economy. This year,
continued support of Treasury's international programs, which are central to the ongoing
response to the financial crisis and to the overall effort to foster a healthy global economy, will
promote the economic well-being of American workers, farmers and businesses.
Our FY2000 request for these programs totals $1523 billion, an increase ofless than one
percent from FY1999. Our investment in these programs supports the international financial
institutions -- the World Bank, the International Monetary Fund and the regional development
banks -- in helping to restore financial stability where needed, in promoting long term sustainable
growth in developing countries, and in working with developing countries committed to economic
reform to reduce unsustainable levels of debt.
With respect to the financial crisis, the International Monetary Fund, in close collaboration
with the World Bank and the regional development banks, has developed new programs to bolster
needed structural and policy reforms in the countries experiencing crisis, while at the same time
helping protect the most vulnerable
I believe that, on balance: the IFls have made sensible judgments in confronting the
enormously complex and, in many ways, unprecedented issues posed by the financial crisis, and
have adjusted their judgments when appropriate.
RR-3022
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In those countries that have taken ownership of reform, for example, Korea and Thailand,
there has been considerable progress toward a return to stability. Korea, which had $4 billion in
usable reserves when the crisis came to a head in December of 1997, now has $52 billion. Short
tenn interest rates, which were as high as 35 percent at the end of 1997, now are at 5 percent.
But despite this progress, much remains to be done. The problems that gave rise to the
crisis took a long time to develop, and they will take time to work through.
Here at home, while the most likely scenario remains solid growth and low inflation -subject to the usual ups and downs -- certain sectors have been impacted by the crisis, some
because of increased imports, and others because of decreased exports. Moreover, problems in
the global economy do constitute a risk to our overall economic well being. That is why we have
been enormously focused on the effort to restore stability and growth to troubled parts of the
world, and the IFIs are at the center of this effort.
Now, let me make several observations with respect to why the IFIs are at the center of
our efforts to promote growth in the developing and transitional countries, as well as being at the
center of our work to deal with the financial crisis.
First, they internationalize the burden. In 1998, $1.4 billion in U.S. appropriations gave
us great influence with respect to $57.1 billion in total MDB lending.
Second, our FY 2000 request for the IFIs is about 5.5 percent below last year's
appropriation, with both years having included funds to pay arrears. On-going U. S. financial
commitments to MDBs have been negotiated down by $700 million dollars per annum, or more
than one-third since the mid-1990s, without a reduction in our influence. The United States has
been a leader in shaping policies in the MDBs and most of our key developmental objectives are
now broadly shared by other members.
Third, because they are multilateral, these institutions have the ability to induce recipient
countries to accept conditions that no assisting nation could obtain on its own.
Fourth, each institution has expertise special to itself to shape effective reform programs.
The United States, in concert with the international community, has worked forcefully
with these institutions to reform their operations, reduce overhead, become more open, do more
to prevent corruption, promote the private sector, and become more sensitive to environmental
concerns, core labor standards and human rights. Under the leadership of Jim Wolfensohn, the
World Bank has taken significant steps to improve operations. The United States and the
international community are also looking very closely at the role of these institutions in the future
international architecture.
2
Mr. Chairman, let me now comment briefly on long term growth promotion in the
developing world.
The IFIs have been instrumental in helping countries throughout the developing world
embrace market-based economic systems and become more fully integrated into the global
economy. As a result, even taking into account the adverse impacts of the recent crisis, the last
few decades have witnessed substantial improvements in living standards in most of the
developing world. Infant mortality rates fell by nearly 50 percent from the early 1970s to the mid1990s and life expectancy has risen by four months on average each year since 1970. Adult
literacy has risen from 46 to 70 percent. As they have grown, these nations have turned into new
markets for U.S. goods and services. In 1997, before the recent crisis, the developing world
absorbed somewhat over 40 percent of U. S. exports.
As an example of the IFI role, IDA is the world's largest lender of concessional resources
for projects in areas such as health, primary education, nutrition, safe drinking water, and proper
sanitation. For every dollar the U.S. contributes, IDA lends about 8.5 dollars for programs that
promote higher standards ofliving and foster stability.
Even so, the vast economic and human potential of the developing world has barely been
tapped. Just last summer, for example, I visited Africa, a continent with enormous potential and
enormous challenges and still largely left behind in the global economy. Clearly, in Africa, and
elsewhere, the need for -- and the importance of -- the IFIs helping to bring developing nations
into the economic mainstream has not abated.
However, Mr. Chairman, bringing these countries into the economic mainstream often
requires us to review the debt burden that they have accumulated over the years. Yesterday, the
President announced a major debt reduction initiative to help promote the integration of the
poorest countries into the world economy. It includes components providing for deeper or
accelerated debt reduction, and inclusion of additional countries into existing debt reduction
programs, both multilateral and bilateral. Our policy tries to strike an economically sensible
balance between competing considerations with respect to debt reduction. Firstly, debt reduction
is unlikely to have lasting benefit if not accompanied by meaningful economic reform, so that the
resources freed up by debt reduction are used for good purpose. And as the President said
yesterday, "the more debtor nations take responsibility for pursuing sound economic policy, the
more creditor nations must be willing to provide debt relief" Secondly, our approach is designed
to support substantial reductions in debt service payments and total debt burdens to levels
consistent with what these countries can reasonably be expected to afford. And, here, there is a
tension with respect to debt relief, and we have tried to find sensible balance. On the one hand,
many developing countries are simply overwhelmed by unsustainable debt burdens. On the other
hand, if the private sector does not believe that a country has a culture of credit in which there is a
commitment to repaying debt, private sector capital probably won't flow to that country, and
private sector capital is an absolute requisite for economic growth over time. In addition, if
3
borrowers feel they are not going to have to pay back debt, it may result in unsound borrowing,
which will then lead to future problems.
In line with this analysis, our budget request includes $120 million for debt programs,
broken out as follows: $50 million for the Initiative for Heavily Indebted Poor Countries, which
was launched by the W orId Bank and the IMF in September 1996, to reduce debts to sustainable
levels for those poor countries prepared to pursue economic and social policy reforms; $20
million for the traditional Paris Club mechanism to reduce debt; and $50 million to finance Debt
Relief for tropical rainforest countries, as called for under the Tropical Forest Conservation Act of
1998.
Before concluding, let me note that, with the leadership of this Committee, we have made
great progress in clearing our arrears to the Multilateral Development Banks. If the FY2000
request is fully funded, our arrears will be reduced to $141.9 million. Delays in paying US.
commitments on internationally negotiated agreements come at a high price in terms of our
influence and effectiveness with the institutions and their members. We want to continue working
closely with this Committee and the Congress to fully meet U.S. financial commitments.
With respect to US. financial commitments, let me say a word about the proposal before
Congress to rescind appropriated US. callable capital. If enacted, the rescission of US. callable
capital could be perceived as a major reduction in US. political support for the institutions, and
could lead to a serious market reassessment of the likely US response to a call on MDB capital
should one ever occur. Such a reassessment could increase borrowing costs for the institutions,
costs which would then be passed on to the developing countries they are mandated to help. At a
time when the global economy is facing difficult new challenges every day, I believe that a
rescission of callable capital would be an extremely negative message.
I would also like to bring to your attention an item that has been of great interest to this
Subcommittee in previous years. We have worked hard to make the domestic window of the
North American Development Bank fully productive. It is fulfilling its mission, and I urge you to
support this year's request.
Mr. Chairman, Ms. Pelosi, let me conclude by reiterating that our strong support for the
international financial institutions -- as well as the United Nations, I would like to note - strongly
promotes America's economic well being and national security interests. This Committee is
central to providing that support, and we look forward to continuing our good working
relationship as we deal with this budget request.
-30-
4
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
~/78~9~. . . . . . . . . . . . . . . . . . . . . ..
........................
OFFICE OF PUBUCAFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960
EMBARGOED UNTIL 11 :00 A.M. EST
Text as Prepared for Delivery
March 18, 1999
TREASURY SECRETARY ROBERT E. RUBIN TESTIMONY BEFORE
THE SUBCOMMITTEE ON TREASURY, POSTAL SERVICE AND GOVERNMENT
Mr. Chairman, members of the Committee. I appreciate the opportunity to testify on the
Treasury Department's fiscal year 2000 budget request.
Mr. Chairman, for FY 2000, Treasury is proposing a program level that totals $12.659
billion for all operations. This level is offset by $454 million from proposed fees as \\ell as the
use of Treasury Forfeiture Fund, resulting in a net appropriation request of $12.205 billion. Our
request is critical to supporting Treasury's important and \\ide-ranging mission.
As you know, the Treasury plays a key role in the core functions of government.
including tax administration, revenue collection. Lm enforcement. linancialmanagement. tax
policy, banking policy, international economic policy and domestic economic policy. Our budget
supports Treasury's core current service requirements. maintaining a balance of restrained
staffing growth with enhanced technological investments and capital support to strengthen
Treasury's ability to manage its programs efficiently ane! ctlecti\cly.
We have provided the Committee detailed presentation materials on our fiscal year 2000
budget request. Let me now highlight five major priorities in the hudget: reforming the Internal
Revenue Service; exercising leadership in international economic albirs; strengthening our
ability to fight drugs and crime; modernizing our linancial systems: and Y2K cOI1\'ersion.
Let me begin by discussing the IRS.
RR-3023
Far press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
Last year, Congress passed the IRS Restructuring and R.el(lrIl1 Act building on the
process of reform the Administration began nearly I(llir ye~lrs ago. This legislation mandates
changes to tax laws and procedures, and the modernization 01 IRS' organization and systems. In
addition, in this spirit, IRS, Congress and the Administration have pledged to the American
people to reform the IRS and give taxpayers the service they deserve and have come to expect
from the private sector. To follow through on this commitment and to implement the Act, the
IRS budget supports a major investment of $197M to meet the rej(lI"Ill and restructuring goals.
IRS restructuring and reform is centered on j(llir areas.
First, protecting the taxpayer: The Reform legislation includes more than 70 tax law
changes to improve taxpayer protections. The Act also strengthens the Taxpayer Advocate's
organization and has provisions to help ensure internal accountahility and integrity.
Second, improving customer service: The Reform Aet mandates efforts to increase
electronic filing and improve assistance to taxpayers. This hudget supports 24 hour-7 days a
week phone access, expanded walk-in service, enhanced service to small business, and Spanish
language telephone assistance.
Third, transforming the organization: The IRS has in place a new management team
with a new mission and vision. In 1998, the IRS Commissioner unveiled a new IRS structure
which focuses on service from the taxpayer's point of view. IRS will be organized around
specific taxpayer groups, consistent with the mandates 01 the Reform Act. In addition, the
Restructure and Reform legislation established the Treasury Inspector General for Tax
Administration. The budget supports the independence of this organization through transfer of
funding from the IRS, as directed by the legislation.
Fourth, modernizing information systems: In December 1998. IRS awarded its PRIME
systems contract for systems modernization. IRS is currently working in partnership with the
PRIME contractor to revamp the systems modernization blueprint to renect organizational
changes and business process re-engineering.
Concerning technological needs at the I RS, the IRS req uest lunds the continuation of the
Y2K program. Recognizing the difficult funding restraints present this fiscal year. we are also
foregoing a deposit into the IRS Technology Account in FY 2()()() hecause we belie\e we have
sufficient funds in this account to fund system modernization through FY 2000. Instead, we are
asking for an advance appropriation for FY 2001 01$]25 million to continue funding for this
multiple year program of systems modernization.
The second major priority in the budget is to continue exercising leadership in
international economic matters. Treasury plays a critical role in dOlllestic and world economic
affairs by providing expertise and analysis vital to j(lI"IllLliating sound economic policy. Never
has this role been more important than during the last year ;lI1d a hal L when we at Treasury have
been enormously focused on and involved in the effort to restore stahility and growth in countries
affected by the international financial crisis B which in turn very much af/ccts our own economic
well being. To strengthen these efforts, this budget expands the market analysis capability in the
Office of International Affairs.
Our third major priority in the budget is to strengthen our ability to fight drugs and crime.
As this committee well knows, Treasury has critical and e:-.:[ensive law enforcement
responsibilities in a number of agencies including Customs. the Secret Service. the Bureau of
Alcohol, Tobacco and Firearms, the IRS, FINCEN, and the Federal Law Enforcement Training
Center.
To strengthen these critical eflorts, our budget requests moderate increases to support the
Administration's major law enforcement policy emphases. Specifically. our budget is focused on
four key law enforcement areas.
The first key area is the reduction oftrafticking. smuggling and use of illicit drugs. The
Customs Service is committed to improving the efficiency and effectiveness of its drug
interdiction at U.S. ports. This budget supports additional '(-ray and telecommunications
equipment to examine suspected drug couriers in a less intrusive and more effective fashion. In
addition, the request of Customs. the IRS, and FINCEN all support efforts to combat money
laundering, which often provides an eflective means for prosecuting drug traffickers. Customs
continues to improve its interdiction of the illicit proceeds of drug sales and the budget funds
additional x-ray inspection equipment for use at border crossings to prevent the exit of drug
proceeds.
Second is the integrity of law enforcement operations. As part of Treasury's ongoing
effort to improve law enforcement effectiveness. this budget supports Customs' goal of
strengthening its integrity awareness and operational oversight activities. The Customs request
also supports the establishment of a comprehensive cducation. training. and workforce
development program which covers the entire cadre of Customs personnel. with a special
emphasis on law enforcement personnel. Furthermore. this budget also supports strengthening of
Treasury's Inspector General's investigative unit.
Third is protection of high-level U.S. and foreign officials. The Secret Service continues
efforts to ensure that protectees are safe from increasing threats of counter-terrorism. This budget
supports protection for candidates and nominees in the 20()() campaign and additional security
measures at the White House complex.
The fourth key area is the reduction of the criminal misllse of firearms. The budget
continues to build on Departmental and A TF initiatives started during the past two years to
prevent violent firearms crimes, including those committed h:' the nation's youth. This effort
includes expansion ofATF's Youth Crimc Gun Intcrdiction Initiati\'c; full implcmentation of the
Brady Law; and strengthened efforts to investigate and hl'lp prosecute persons who illegally
attempt to purchase firearms at gun shows and simi lar \l'nUeS,
Let me mention two other features of our hudget related to la\\ enforcement. For several
years, Treasury has understood the need to provide a sak headquarters building for ATF
employees and the budget supports funding in (;SA for this eii()Jt. In addition, funding is also
included in this budget to shore up Customs' current system ()J' commercial proccssing, which is
struggling to meet the needs oftoda(s modern trade COll1lllLlllit}, \\'c support the need to replace
Customs' aging system and intend to use FY 20()() to de\elop an integrated plan for a new
system, and then launching implementation of that plan in 2()() I,
Our fourth major priority in the budget is Illoderni/ing g(l\l.'rnment financial systems,
including re-targeting and realigning existing resources to Il1l'l't \\ orkload changes at the
Financial Management Service, and upgrading financial technol()g~ and systems infrastructure at
the Bureau of Public Debt.
The final major priority in the hudget is completing system conversion to operate
smoothly in the Year 2000.
As the agency responsible for the distribution of ll10st gmerIlmcnt payments, the
collection of most government revenue, and with operations that aftCct virtually every aspect of
government and the private sector, we at Treasury arc enormously focused on the Y2K problem.
We have made a great deal of progress; February, for example. marked the fifth month in a row
that distribution of Social Security payments were Y2K cOll1pli'lIlt.
However, there is still much to do. At Treasury. l'\cry Illission critical system is being
upgraded or replaced to ensure smooth operations in the year 2()()(). The IRS is the largest part of
the date conversion effort. The bulk of its FY 2()()() activities \\ill il1\'olve the completion of its
data center consolidation and the last three months of preparation hefore the end of the century,
including end-to-end system testing, as well as any contingencies that must be implemented to
deal with potential but unexpected failures,
I would like to bring to your attention to one tincd itelll th,lt has been of great interest to
the Department, and that is the North American [)C\'elopml'lit Blink, Vie have been working hard
to make the domestic window orthe North American [)l'\elol'lllent 1~,ll1k rully productive and,
while this may not come directly be/(He the suhcommitlL'. I lll'gl' \ ou to support this year's
request.
Mr. Chairman, let me conclude on ~l personal noll', Ih("()uglwut my four years as
Secretary of the Treasury, I have been continually impressed h: the intelligence. professionalism
and dedication of the Treasury people with \\holll l\e 11lld the opportunity to work. I think that
4
that should give you and the Committee confidence in the uses that arc being made of taxpayer's
funds. In that spirit, I ask that you approve our FY :2000 hudget rcquest to support the work of
the Treasury Department in fulfilling its wide range or responsihilities in serving the American
people. The Treasury Department has had a very productivl' rel~lti(lnship with this Committee
and we look forward to working with you throughout this ye~lr.
Thank you very much.
- 30 -
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
OFFICE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C. • 20220 • (202) 622-2960
EMBARGOED UNTIL 1:00 PM EST
Text as Prepared for Delivery
March 18, 1999
TREASURY INTERNAL AFFAIRS ADVISOR
(ENFORCEMENT)VINCENT J.PAROLISI
HOUSE APPROPRIATIONS SUBCOMMITTEE ON TREASURY,
POSTAL SERVICE AND GENERAL GOVERNMENT
Thank you Mr. Chairman, Congressman Hoyer, and members of the Subcommittee. I
welcome this opportunity today to discuss the findings and recommendations
contained in the Office of Professional Responsibility's (OPR) report: "An
Assessment of Vulnerabilities to Corruption and Effectiveness of the OffiCe of
Internal Affairs, U.S. Customs Service."
As you know, the Treasury and General Government Appropriations Act, Fiscal Year
1998, in bill language, directed that the Under Secretary (Enforcement) task OPR
to conduct "a comprehensive review of integrity issues and other matters related
to the potential vulnerability of the United States Customs Service to
corruption, to include an examination of charges of professional misconduct and
corruption as well as analysis of the efficacy of departmental and bureau
internal affairs systems." OPR's report responds to that mandate.
OPR's review commenced under the direction of Raymond W. Kelly, then Under
Secretary for Enforcement at the Department of the Treasury. While Under
Secretary, Mr. Kelly recognized many management deficiencies within Customs, and
took action to improve the level of integrity and professionalism within the
organization. During the course of the integrity review, President Clinton
nominated Mr. Kelly to be the Commissioner of the U.S. Customs Service, and he
was subsequently confirmed by the Senate for that position in August 1998. On
that same day, James E. Johnson was confirmed as the new Under Secretary
(Enforcement) and continued to direct OPR's review. After moving to Customs,
Commissioner Kelly remained involved in the review process. Over the past few
months, Commissioner Kelly has acknowledged many of the findings and
recommendations in this report, and has ~mplemented changes consistent with
OPR's recommendations. OPR believes Commissioner Kelly's strong leadership will
have a last~ng, positive impact on the U.S. Customs Service.
In March of 1998, OPR began its review of vulnerabilities to corruption ·at
Customs by obtaining and reviewing relevant publications, commission reports,
and studies o~ corruption to gain a broad perspective on the subject matter.
OPR conducted mor~ than 50 interviews with Customs employees, including senior
headquarters management personnel, and made several field visits to
RR-3024
For press releases, speeches, public schedules and official tiographies, call our 24-hour fax line at (202) 622-2040
·U S Government Pnntlnq Office 1998· 619·559
Internal Affairs offices along, the Southwest border.
OPR also consulted with
other federal and local law enforcement agency personnel, including several U.S.
Attorney's offices experienced in antl-corruption operations and strategies. In
addition, OPR analyzed pertlnent statistical data for Fiscal Years 1995, 1996
and 1997 covering: stafflng, levels; number of allegations received; types and
categorles of allegatlons; number 0: investigatlons opened and closed; sources
of the allegatlons; SUbJects of the allegations; and disciplinary results.
Flnally, OPR revlewed and evaluated 36 randomly selected closed internal
lnvestlgatlons conducted by the Offlce of Internal Affairs to determine the
level of lnvestlgatlve proflclency.
OPR dld not uncover any eVldence of an organlzed network of corruption within
Customs.
It dld conclude, however, that the most threatening and formidable
corruptio~ threat faclng,
Customs lS the illegal drug trade.
OPR also concluded
tnat the Offlce of Interna~ Affalrs lS more reactionary than proactlve in
aetecting and comnatlng corruption.
At the concluslo~ o! lt5 reVlew, OPF ldentlfled elght factors which have
weakened Customs' ab:.l1t~ tc canfront lssues of corruptlon.
The following is a
brief overVlew 0: tnos~ f1na1ngs anc recommendatlons:
Organ~zat~onal
Al~gnment
of Internal Affairs
Until recently, th~ Off:.ce c~ !nterna: Affalrs was on the same organizational
level as =~stom5' other te~. Asslstant =Or.'::-.lssloner off:.ces, reporting to the
=ommissloile: tnrougr. tn~ [)e;::;;,;ty :::om:r.lssloner.
::;lven th~ confldential and
sensltlv~ nature of th~ ",·arl. performec 0'1' lnter"a: Affalrs, it lS imperative
trlat thl': c:flce re;::;or: :::lrect.y tc '::he ::::o:n:r.lssla"er.
Furthermare, a direct
reecrtl'.::: re';'atlc~sr.lr: :Jer..::;:-:stra'::es a~. a:Je~c::"::: ca~.::-.ltment to the investigative
:...:r.ctlOr. c: lnter"a. A::alr~. an::: assure5 tnat the ::::Omr..lsslaner receives all
pertinent lnfarmat~or. ccr.cerr.ln~ 1ntegrlt~ aperatlans wlthout any restrictions.
o-~ recom.-;,e"aec tria: the :ar.,::-.:,sslaner rea.lgr. thE-' Offlce of Internal Affairs to
:J:.ve the Asslstan: Car.'::-..:.5s:.a"er 0: !nterna: Affalrs dlrect access to the
-=-:J:;,...~iss.l one: .
.:--, _ = re=2~.:;.e:--.:1a:.:. 0:-. r,d~
d':' ready beer. l.rnplemented by Commissioner
~E::~~Y·
Leadersh1p W1th1n the Off1ce of Internal Affairs
7~e
relS510r.
6~gresslve
0:
:nterna. A::alr5 15 corep.ex an::: aemandlng, which requires
~?F :ounc toat tn~ ~...:sto~s' Offlce of Internal Affairs
~eaders~lr:.
:--:ee::Je:: :;e\fl. ~eaaers;.:r-.
,,_r :-e20r!'..rnen:le::: :;.0: :;i~ =OrTL'T.1.ss.:.oner select a new
f..ss.:.stan: COrnr.'.lss':'O:le:- c! :r.:erna':' A~~a~=-s.
Ir. [Je2ember 1998, Commissioner
K
l'
. e,;,,;,y,
Wl':: ..h the autnarl:at::J,. ana appro'v'a: o~ Unaer Secretary Johnson, selected
~.: r. W1 1 L. a rr. Ke e fer. 6 ! C r mer f e a era ~ ~ r :J 5 ~ C:..; tor, a ~ the new Ass i s tan t
~~~~~sslone~ c: l~:e=nd_ K::a~~s.
...,
Conflict Between the Office of Investigations and the Office of Internal. Affairs
Ongoing, animosity between the Office of Investigations and the Office of
Internal Affairs has significantly interfered with the successful performance of
Internal Affairs' operations. OPR obtained corroborative information that
illustrated the seriousness of the hostility and its impact on Customs. OPR
recommended that the Commissioner establish conflict resolution strategic that
include team building and other interactive exercises to rebuild positive
relationships between the employees in these two offices. Customs is in the
process of implementing this recommendation.
Racrui. tment and Hiring Practices of Customs Inspectors and Periodic Raview
Investigations of All CUstoms Employees
A uniform nationwide prDcess is needed to assure conSistency in the recruitment
and hiring of Customs inspectors. Customs has implemented a Quality Recruitment
and Hiring initiative to address these and other related problems. Shortcomings
in monitoring practices have resulted in a backlog of approximately 5,600
Periodic Review Investigations of employee background reinvestigations. These
investigations are an important tool in assessing the appropriateness of
continued employment and the potential for corruption. OPR recommended that
Customs continue its work with the Quality Recruitment and Hiring initiative and
take affirmative action to resolve the backlog of Periodic Review
Investigations. In response to OPR's recommendations, Customs has appointed a
National Recruitment manager, and is also devising a plan to address the
Periodic Review Investigations backlog.
Integrity Training
Integrity training for Customs employees is inadequate for deterring corruption.
OPR recommended that Customs create an Office of Training to coordinate and
implement agencywide training and that the Assistant Commissioner of Internal
Affairs should work cooperatively with this new office to ensure that adequate
integrity training becomes a priority for all Customs' employees. To address
this concern, Commissioner Kelly has created the Office of Training at the
Assistant Commissioner level and is currently seeking a qualified candidate for
that appointment.
Application and Adainistration of Discipline
Customs' disciplinary system is fragmented, resulting in perceived inequities in
the application of disCipline. Currently, there are three separate internal
processes for adjudicating discipline based on the organizational assignment of
the offending employee. Furthermore, the database used to record and track
disciplinary cases does not allow for comparisons or analysis of disciplinary
matters. OPR recommended that Customs redesign its disciplinary database system
to provide information for evaluation and comparisons, and that it establish a
uniform internal mechanism for the adjudication of administrative discipline.
Customs is currently ~n the process of instituting short-term improvements to
its databases, with mid- and long-term improvements being developed.
3
Use of Customs and INS Personnel at Primary Inspection Lanes
on the Southwest Border
Since 1979, Customs and the Immigration and Naturalization Service (INS) have
shared the commitment to staff primary inspection lanes at various Southwest
border ports of entry. This shared responsibility can present a corruption
vulnerability to both agencies. The lack of direct supervisory control and
accountability by supervisory personnel over inspectors outs1de of their
respective agencies can be a weakness in the overall management and integrity
efforts on the Southwest border. To address thIS and other concerns, the
Comm1SS1oner of Customs and the Commissioner of INS 1mplemented the Border
Coord1natlon Initiative (BCI). OPR recommended that the Comm~ssioners of
Customs and INS build upon the strong foundatIon of BCl to minim1ze the
InCIdents of corruption. Customs is plann1ng to work closely w1th INS to
aggressively 1mplement further areas of JOInt coordlnat1on under the BCI
Initiative.
Assessment of the Office of Internal
Affa~rs
OPR also conducted a quantitative and qualItatIve assessment of the Office of
Internal Affairs and found that Internal AffaIrs IS not fOCUSIng ItS attention
on more serious criminal investigations and IS not effectively using its
investIgative resources. A significant numbe!" of recommer:dat~ons have been made
to correct these deficlencies.
These include: cer:trall=lng the operation of
Interna: Affairs' Case Management System to heaaqua!"te!"s; establ1sh1ng
guidellnes to prevent the downgrading of allegatlons :ro~ a hlgher class to a
lower class; conducting more self-initiatea (p!"oactlvel ,;,r:ternal InvestIgatIons;
greate!" use of confidentlal informants; and ttle creatlO'. of a QualIty Assurance
Unlt wIthl~ Internal Affairs to monltor and reVle~ eac~ completed Investlgatlon
to ensure compllance with Investlgative standaras set D~ tne Asslstar:t
:ommlssloner of Internal Affairs.
As noted In OPR's report, there 1S no one strateg~ 0: sc_~t,;,or: tc the problem of
corruptIon.
There must be a synergistic app!"oacr, : C CO"'Ld t,;, n:::: corrupt lon;
tnerefore, OPR's recommendatlons should be Vlewe:J do cc",,:::.e:ne,.ta!"J' strategIes to
enhance Customs' abill:y to perform its a'.:~-cc!"!"-..;r;:,;,c" ::-,_s~,;,o,.,
:: IS also
lmportant that Customs undertake an agency~la~ In:tldt:V~ -, :nc!"ease the level
of corruptlon awareness of a':'':' Customs err.~_cyees s~ t;,d: tr.e'. ca" pa!"tlcIpate
an::: have a role l~ preventlng and combatln-: CC!"!"t,;ptlO;, , :'?:' c::::"'~'Tlenas Customs'
recent efforts to become proactlve In prever:t,;,ng ane aete:::::n:::: posslble
corruptIon.
':'he lssuance of OPR's report represents ttle Deq.:.n,.,;,ng ratr.':': t~.ar. the end cf
s Involvement and commltment to asslst Treasurj.' a •. d C-.lsto",.~ In the flght
against corruption. OPR will continue to wor~: w.:.th Custo:ns to tlelp Identify
needed chances to strengthen and Improve Customs' ab,;,l.:.t)' tc prevent. detect,
and InvestIgate the inCIdents of corruptlon. Tn.:.s pa!":r:e!"s~l~ between OPP and
Customs Should, and must. continue to ensure tna: the r.l'Jnes':. aeqree cf
lntegrlty, professlonallsm, and commItment to the pucl,;,::: ::;"':5t a!"e maIntaIned.
I)~R'
fie appreClate the sUbcommlttee's Interes: l" ti.l':: ve:'} :"',pc!"ta;.: lssue.
In
auQl:Ion, we appreclate ttle support provlaee fc!" the 8fflce 0: Professlonal
?espon51bll~ ty.
4
This concludes my formal statement, and I would be happy to answer any
questions.
Thank you.
-30-
5
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
March 17, 1999
:RETARY OF THE TREASURY
The Honorable Thomas Daschle
Minority Leader
United States Senate
Washington, D.C. 20510
Dear Tom:
Thank you for inquiring about the impact of the new debt limits contained in the Social Security
Surplus Preservation Act. I appreciate the opportunity to respond to your question. In brief, I
am deeply concerned that these limits could preclude the United States from meeting its future
financial obligations to repay maturing debt and to honor payments -- including benefit payments
- and could also nul the risk of worsening a future economic downturn.
It has been this Administration's view that fiscal restraint is best exercised through the tools of
the budget process. Existing enforcement tools such as the pay-go rules and the discretionary
spending limits in the Budget Enforcement Act have been key elements in maintaining fiscal
discipline in the 1990's. Debt limits should not be used as an additional means of imposing
restraint. Debt is incurred solely to pay expenditures that have previously been authorized by the
Congress and for the investment of the Federal trust funds. By the time the debt limit is reached,
the Government is obligated to make payments and must have enough money to do so.
If Treasury were prohibited from issuing any new debt to honor the Government's obligations,
there could be permanent damage to our credit standing. The debt obligations of the United
States are recognized as having the least credit risk of any investment in the world. That credit
standing is a precious asset of the American people. Even the appearance of a risk that the
United States of America might not meet its obligations because of the absence of necessary debt
authority would be likely to impose significant additional costs on American taxpayers. Yet, in
November 1995, a debt crisis was precipitated when Government borrowing reached the debt
limit and in January Moody's credit rating service placed Treasury securities on review for
possible downgrade.
As you know, there is currently a statutory limit on the amount of money that Treasury can
borrow in total from both the public and from Federal trust funds. The proposed "lockbox"
provision would add a new statutory limit on debt to the public.
The proposed new debt limit nms the risk of precipitating additional debt crises in the future.
Although the proposal adjusts the debt ceiling for discrepancies between the actual and projected
RR-302S
Social Security surpluses, it does not make similar corrections for unanticipated developments on
the non-Social Security side of the budget. \Vhile our forecasts have been conservative, the
current forecast of the non-Social Security budget could prove too optimistic because of changes
in the economy, demographics, or countless other factors. This could cause the publicly held
debt to exceed the new debt limit.
Furthermore, even if the debt limit appears sufficient because it covers the annual debt level -measured from end-of-year to end-of-year - it could easily be inadequate for the Government to
meet its obligations at a given point during the year. Under normal circumstances, every
business day, Treasury makes payments - including Social Security payments on certain days.
In any given week, Treasury receives revenues, makes payments, and refinances maturing debt.
Weekly and monthly swings in cash flow can easily exceed on-hand cash balances. 'When this
occurs, Treasury then borrows from the public to meet its obligations. If the amount of publicly
held debt were to reach the level of the debt limit - or if the debt limit were to decline to below
the level of publicly held debt -- Treasury could be precluded from borro\\-ing additional amounts
from the pUblic. If Treasury could not borrow to raise cash, it is possible that it could simply
have to stop honoring any payments - including Social Security payments.
In this case, Treasury could be prohibited from issuing any new debt to redeem maturing debt.
Every Thursday, approximately $20-23 billion of weekly Treasury bills mature and, every
month: an additional $60-85 billion in debt matures. These securities must either be paid off in
cash or refinanced by issuing new debt. Treasury could be put in the position of having to
default for the first time in our nation's history.
Congress could defuse the debt limit problems by immediately voting to raise the debt ceiling.
Under the "lockbox" proposal, however, it would take sixty votes in the Senate to do so. As past
experience indicates, obtaining a super-majority for this purpose is often time-consuming and
difficult. Moreover, this requirement would greatly enhance the power of a determined minority
to use the debt limit to impose their views on unrelated issues.
Finally, the proposed debt limits could run the risk of worsening an economic downturn. If the
economy were to slow unexpectedly, the budget balance would worsen. Absent a super-majority
vote to raise the debt limit, Congress would need to reduce other spending or raise taxes. Either
cutting spending or raising taxes in a slowing economy could aggravate the economic slowdo\\-TI
and substantially raise the risk of a significant recession. And even those measures would not
guarantee that the debt limit would be not be exceeded. A deepening recession would add further
to revenue losses and increases in outlays. The tax increases and spending cuts could turn out to
be inadequate to satisfy all existing payment obligations and keep the debt under the limit,
worsening a crisis.
2
To summarize, these new debt limits could create uncertainty about the Federal government's
ability to honor its future obligations and should not be used as a instrument of fiscal policy.
While we certainly share the goal of preserving Social Security, this legislation does nothing to
extend the solvency of the Social Security trust funds, while potentially threatening the ability to
make Social Security payments to millions of Americans. I ~ill recommend that the President
veto the bill if it contains the debt limit provisions. If you have any additional questions, please
do not hesitate to contact me.
Robert E. Rubin
3
Identical letters were sent to the following Senators and Representatives:
Senator Kent Conrad
Senator Frank R. Lautenberg
Senator Daniel Patrick Moynihan
Rep. Richard A. Gephardt
Rep. Charles B. Rangel
Rep. John M. Spratt Jr.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDlATE RELEASE
March 18, 1999
Contact: Office of Financing
(202) 219-3350
TREASURY'S INFLATION-INDEXED SECURITIES
APRIL REFERENCE CPI NUMBERS AND DAILY INDEX RATIOS
Public Debt announced today the reference Consumer Price Index (CPI) numbers and daily
index ratios for the month of April for the following Treasury inflation-indexed securities:
(1) the 3-3/8% 100year notes due January 15,2007, (2) the 3-5/8% 5-year notes due July 15, 2002,
(3) the 3-5/8% lO-year notes due January 15, 20()8, (4) the 3-5/8% 30-year bonds due April 15,
2028, and (5) the 3-7/8% lO-year notes due January 15, 2009. This infonnation is based on the nonseasonally adjusted U.S. City Average All Ttem, Consumer Price Index for All Urban Consumers (CPI-U)
published by the Bureau of Labor Statistics of rh¢ U.S. Department of Labor.
In addition to the publication of the reference cpr s (Ref CPr) and index ratios, this
release provides the non-seasonally adjusted CPI-U for the prior three-month period.
This infonnation is available through the Treasury's Office of Public Affairs automated fax.
system by calling 202-622-2040 and requesting Jocument number 3026. The information is
also available on the Internet at Public Debt's wl·bsite (http://www.publicdebt.treas.gov).
The information for May is expected to l>~ released on April 13, 1999.
000
Attachment
PA-398
h np :J/www.puhlicdebt.treas.gov
RR-3026
TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
April 1999
Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date:
3-3/8% 10-Year Notes
Series A-2007
9128272M3
January 15, 1997
February 6,1997
April 15, 1997
3-5/8% 5-Year Notes
Series J-2002
9128273A8
July 15, 1997
July 15, 1997
October 15, 1997
3-5/8% 10-Year Notes
Series A-2008
9128273D
January 15, 1998
January 15, 1998
October 15, 1998
3-5/8% 30-Year Bonds
Bonds of April 2028
912810FD5
April 15, 1998
April 15, 1998
July 15, 1998
Matu rity Date:
Ref CPI on Dated Date:
January 15, 2007
158.43548
July 15, 2002
160.15484
January 15, 2008
161.55484
April 15, 2028
161.74000
Date
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
CPI-U (NSA) for:
Ref CPI
Index Ratio
Index Ratio
Index Ratio
Index Ratio
164.30000
164.30667
164.31333
164.32000
164.32667
164.33333
164.34000
164.34667
164.35333
164.36000
164.36667
164.37333
164.38000
164.38667
164.39333
164.40000
164.40667
164.41333
164.42000
164.42667
164.43333
164.44000
164.44667
164.45333
164.46000
164.46667
164.47333
164.48000
164.48667
164.49333
1.03702
1.03706
1.03710
1.03714
1.03718
1.03723
1.03727
1.03731
1.03735
1.03739
1.03744
1.03748
1.03752
1.03756
1.03760
1.03765
1.03769
1.03773
1.03777
1.03781
1.03786
1.03790
1-03794
1.03798
1.03803
1.03807
1.03811
1.03815
1.03819
1.03824
1.02588
1.02592
1.02597
1.02601
1.02605
1.02609
1.02613
1.02617
1.02622
1.02626
1.02630
1.02634
1.02638
1.02642
1.02646
1.02651
1.02655
1.02659
1.02663
1.02667
1.02671
1.02676
1.02680
1.02684
1.02688
1.02692
1.02696
1.02701
1.02705
1.02709
1.01699
1.01703
1.01707
1.01712
1.01716
1.01720
1.01724
1.01728
1.01732
1.01736
1.01740
1.01745
1.01749
1.01753
1.01757
1.01761
1.01765
1.01769
1.01773
1.01778
1.01782
1.01786
1.01790
1.01794
1.01798
1.01802
1.01807
1.01811
1.01815
1.01819
1.01583
1.01587
1.01591
1.01595
1.01599
1.01603
1.01608
1.01612
1.01616
1.01620
1.01624
1.01628
1.01632
1.01636
1.01640
1.01645
1.01649
1.01653
1.01657
1.01661
1.01665
1.01669
1.01673
1.01678
1.01682
1.01686
1.01690
1.01694
1.01698
1.01702
December 1998
163.9
January 1999
-
164.3
--
February 1999
164.5
TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
April 1999
Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date:
3-7/8% 10-Year Notes
Series A-2009
9128274Y5
January 15, 1999
January 15,1999
Maturity Date:
Ref CPI on Dated Date:
January 15, 2009
164.00000
Date
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
April
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
CPI-U (NSA) for:
Ref CPI
Index Ratio
164.30000
164.30667
164.31333
164.32000
164.32667
164.33333
164.34000
164.34667
164.35333
164.36000
164.36667
164.37333
164.38000
164.38667
164.39333
164.40000
164.40667
164.41333
164.42000
164.42667
164.43333
164.44000
164.44667
164.45333
164.46000
164.46667
164.47333
164.48000
164.48667
164.49333
1.00183
1.00187
1.00191
1.00195
1.00199
1.00203
1.00207
1.00211
1.00215
1.00220
1.00224
1.00228
1.00232
1.00236
1.00240
1.00244
1.00248
1.00252
1.00256
1.00260
1.00264
1.00268
1.00272
1.00276
1.00280
1.00285
1.00289
1.00293
1.00297
1.00301
December 1998
163.9
January 1999
164.3
February 1999
164.5
DEPARTMENT
TREASURY
OF
_ _ _ _ _ _ _ _""':1
THE
78
TREASURY
NEWS
: . . -_ _ _ _ _ _ _•
Q
OFFlCE OF PUBUC AFFAIRS • 1500 PE.r\NSnXANL;\ AVENl'E, ;-";.W .• WA5iHINGTO', D.c:.. 20220.12021622-2960
EMBARGOED UNTIL 2: 30 P. M_
CONTACT:
March 17, 1999
Office of Financing
202/219-3350
TREASURY TO AUCTION $15,000 MILLION OF 2-YEAR NOTES
The Treasury will auction $15,000 million of 2-year notes to refund
$29,193 million of publicly held securities maturing March 31, 1999, and
to pay down about $14,193 million.
In addition to the public holdings, Federal Reserve Banks hold $3,385
million of the maturing securities for their own accounts, which may be
refunded by issuing an additional amount of the new security.
The maturing securities beld by the public include $4,298 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.
TreasuryDirect customers requested that we reinvest approximately
$751 million into the 2-year note.
The auction will be conducted in the single-price auction format.
All competitive and noncompetitive awards will be at the highest yield of
accepted competitive tenders.
The notes being offered today are eligible for the STRIPS program.
Tenders will be received at Federal Reserve Banks
the Bureau of the Public Debt, Washington, D. C. This
securities is governed by the terms and conditions set
Offering Circular for the Sale and Issue of Marketable
Bills, Notes, and Bonds (31 CFR Part 356, as amended).
and Branches and at
offering of Treasury
forth in the Unifor.m
Book-Entry Treasury
D.taila about tb. n.w aecurity are given in the attacbed offering
highlights.
000
Attachment
RR-3027
For press release.l, speeches, public schedules and official biographie.\, call our 24-hour/ax line at (202) 622-2040
HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
2-YEAR NOTES TO BE ISSUED MARCH 31, 1999
March 17, 1999
Oftc::
--_
....
~:..T:"",?\~nt ••..••.••...••.••••••••.••• $15,000 million
peacrip.l:J01}_of. _9f f _eJiE.9::
Terlli and ty~~ of security ..........•......
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CUSIP nwnber .•..•............ ······· ......
Auction date . . . . . . . . . . . . . . . . . . . . . · · · · . · · · ·
Issue date . . . . . . . . . . . . . . . . . . . . • . . . . • . . . ···
Dated date . . . . . . . . . . . . . • . . . . . . . . . . . • . . . . . •
Maturity date . . . . . . . • . . • . . . . . . . . . . . . . . . . . .
Interest rate . . . . . . . • . . . . . . . . . . . . • . . . . . . . .
2-year notes
W-2001
912827 5D 0
March 24, 1999
March 31,1999
March 31, 1999
March 31 , 2001
Determined baaed on the highest
accepted competitive bid
Yield ••••.••...•.......•..•••....•.•.••••• Determined at auctioIl
Interest payment dates ...••.•....•..•...•• September 30 and March 31
Min~ bid amount and multiples . . . . . . . . . . $l,OO?
Accrued interest payable by investor •..... None
Premium or discount ....•••.........•..•... Determined at auction
STRIPS Information:
MinLmum amount required . . . . . . . . . . . . . . . . . . . Determined at auction
Corpus CUSIP number .•.•.....•.....•.•...• 912820 DS 3
Due date(s) and CUSIP number(s)
for additional TINT(s) ..•..........•.... Not applicable
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 balf-hour prior to
the c10aing t~e for receipt of competitive tenders.
Maximum ¥ecognized Bid at a Single Yield . . . . . . 35% of public offering
MaXimum Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% of public offering
Receipt of Tenders:
Noncompetitive tenders: Prior to 12:00 noon Eastern Standard time on
auction day.
Competitive tenders:
Prior to 1:00 p.m. Eastern Standard time on
auction day.
fayment Terms:
i.ssue
-",te,
By charge to a funds account at a Federal Reserve Bank on
or pa.yment of full par amount with tender.
TreasuryD.irec!:
customers can use the Pay Direct feature which authorizes a charge to their
account of record at their financial institution on issue date.
D EPA R T lVl E N T
0 F
THE
T REA SUR Y
NEWS
omCEOFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASffiNGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 1:00 P.M.
Text as Prepared
March 18, 1999
TREASURY TAX LEGISLATIVE COUNSEL JOSEPH M. MIKRUT TESTIMONY
BEFORE THE SUBCOMMITTEE ON OVERSIGHT OF WAYS AND MEANS
Mr. Chairman, Mr. Coyne, and Members of this Subcommittee, it is a pleasure to speak
with you today about the current-law tax treatment of structured settlement arrangements and
legislative proposals to impose an excise tax on the purchase of structured settlement payment
streams.
As you know, the Administration has proposed in its fiscal year 2000 budget to impose an
excise tax on structured settlement factoring transactions. The Administration believes that the
proposed tax, which is intended to act as a deterrent to factoring transactions, is necessary to
preserve the integrity of the structured settlement tax regime and the underlying policy objective
of protecting and providing for the long-term financial needs of injured persons. Our budget
proposal is very similar to H.R. 263, the "Structured Settlement Protection Act of 1999," as
introduced by Messrs. Shaw and Stark and other Members of the Subcommittee and full
Committee.
Following is an overview of the tax treatment of structured settlements under current law,
a discussion of the rationale for these favorable rules. an analysis of the potential impact of a
factoring transaction, and an explanation of how the proposed excise tax would operate in
support of the legislative purpose underlying current lav,·.
Tax Treatment of Structured Settlements
Since 1983, section 130 and other provisions of the Internal Revenue Code have
contained a series of special tax rules intended to facilitate the use of structured settlements to
resolve physical injury damage claims.
RR-3028
-1For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
Structured settlements that qualify for this favorable tax treatment typically have the
following characteristics: A tortfeasor who is required (whether by suit or agreement) to pay
damages to a physically injured person enters into a structured settlement agreement with the
injured person and a structured settlement company ("SSe'). under which terms the sse is to
pay the inj ured person specified amounts for a number of years or for the life of the inj ured
person. Pursuant to the agreement, the tortfeasor pays a lump sum to a structured settlement
company ("sse"), which assumes the tortfeasor's liability to the injured person. The sse
purchases an annuity contract to fund the liability, and uses the annuity payments received under
the annuity contract to pay the amounts due to the injured person.
The tax results of the structured settlement arrangement are as follows: The tortfeasor is
permitted immediately to deduct the lump sum paid to the SSC. but the sse does not include in
income the amount received from the tortfeasor to the extent that such funds are used to purchase
the annuity contract. The earnings on the annuity contract are taxed to the sse according to the
favorable rules generally applicable only to individual annuity holders. These rules generally
defer taxation of income under the annuity contract until such time that the sse actually receives
annuity payments, at which time the SSC is eligible for a corresponding offsetting deduction for
the amounts paid to the injured person. Furthermore. the injured person is not taxed on any
amounts received from the SSC, even though significant portions of such payments are funded
through the sse's investment earnings. Taken together. these rules effectively provide that the
earnings on funds set aside for the injured person are never subject to tax.
Prior to 1983, the Treasury Department and Internal Revenue Service had taken an
administrative position similarly exempting the injured person from tax on the earnings on
certain funds set aside on his or her behalf. See, e.g., Rev. Rul. 79-313, 1979-2 C.B. 75. The
legislative history to the rules enacted in 1983 explains that the statutory changes were intended,
at least in part, to provide statutory certainty that the injured person was not subject to tax on the
earnings from qualified structured settlements. In addition. the legislation removed potential tax
impediments with respect to SSCs. See H. Rpt. No. 97-831, 9Th Cong., 2d Sess. 4 (1982); S.
th
Rpt. No. 97-646, 97 Cong., 2d Sess. 4 (1982). Congress conditioned the favorable rules on a
requirement that the periodic payments cannot be accelerated, deferred, increased or decreased by
the injured person. Both the House Ways and Means and Senate Finance Committee Reports
stated that "the periodic payments as personal injury damages are still excludable from income
only if the recipient taxpayer is not in constructive receipt of or does not have the current
economic benefit of the sum required to produce the periodic payments."
Although the non-tax policy considerations underlying the favorable statutory
clarifications are not discussed in these reports. Senator Max Baucus (D-Mont.) described these
considerations in introducing the legislation that led to the favorable tax rules. Senator Baucus
explained that the recipients of structured settlements are less likely than recipients of lump sum
awards to consume their awards too quickly and require public assistance:
-2-
In the past these awards have typically been paid by defendants to
successful plaintiffs in the fonn of a single payment settlement. This
approach has proven unsatisfactory. however. in many cases because it
assumes that injured parties will wisely manage large sums of money so as
to provide for their lifetime needs. In fact. many of these successful
litigants, particularly minors, have dissipated their awards in a few years
and are then without means of support.
Periodic payments settlements, on the other hand. provide plaintiffs
with a steady income over a long period of time and insulate them
from pressures to squander their awards ....
[Congressional Record (daily ed.) 12/10/81. at SI5005.]
Since 1983, Congress has further expressed its support of structured settlement
arrangements. In the Taxpayer Relief Act of 1997. Congress extended the section 130 exclusion
to cover qualified assignments of liabilities arising under workmen's compensation acts. In
deciding to extend such favorable tax treatment, "the Committee was persuaded that additional
economic security would be provided to workmen's compensation claimants who receive
periodic payments if the payments are made through a structured settlement arrangement. where
the payor generally is subject to State insurance company regulation that is aimed at maintaining
solvency of the company, in lieu of being made directly by self-insuring employers that may not
be subject to comparable solvency-related regulation." See H. Rpt. No. 105- 148, 105 lh Cong., 1st
Sess. 410-11 (1997).
The Factoring Issue
Many injured persons are willing to accept heavily discounted lump sum payments from
certain "factoring companies" in exchange for their future payment streams from structured
settlements. These factoring transactions directly undermine the policy objective underlying the
structured settlement tax regime, that of protecting the long-term financial needs of injured
persons. The factoring transactions also effectively contravene the statutory requirement
conditioning favorable tax treatment to the various parties to the arrangement on the injured
person's inability to accelerate such payments.
The same policy considerations expressed in introducing the structured settlement tax
legislation in 1981 remain relevant today. Dissipation of an award by an injured person who is
unable to earn money because of his or her injury or illness may result in the need for welfare
payments or other public assistance. By replacing structured settlements with a lump sum in the
hands of the injured person, the factoring transaction facilitates potential dissipation.
Factoring transactions are prevalent today. According to recent press reports, one large
factoring company has completed more than 15,000 structured settlement transactions with an
approximate total value of $370 million. The company broadcast more than 90.000 television
commercials in a period of less than two years. See Margaret Mannix. "Settling for Less," US
News & World Report, p. 63 (January 25. 1999); Vanessa O'ConnelL "Thriving Industry Buys
Insurance Settlements from Injured Plaintiffs:' The Wall Street Journal, p. A8 (February 25,
1998).
We understand that almost all structured settlement arrangements contain anti-assignment
clauses that are intended to satisfy the section 130 statutory requirements. The fact that only
companies able and willing to contravene these anti-assignment clauses can engage in factoring
transactions allows such companies to pay heavily discounted amounts for payment rights.
While one large factoring company reports an average discount rate of 16%. there have been
reports of rates that in some cases have exceeded 75%. See US News & World Report, id. at 66;
see also Gail Diane Cox, "Selling Out Structured Settlements: Abuses in Secondary Market
Leads to Reform Legislation," The National Law JournaL p. B 1 (August 18, 1997).
In sum, the Administration believes that the factoring transaction undermines the purpose
of the special favorable tax rules applicable to structured settlements. In fact, the combination of
the existing statutory requirements and the willingness of certain companies to ignore those
requirements (but to exact heavy discounts in so doing) leaves injured persons potentially more
vulnerable than before the enactment of the 1983 changes. The current state of affairs affords
favorable tax treatment without ensuring that the legislatively-intended conditions for such
treatment are satisfied -- thereby costing federal revenues without ensuring that the goal of longterm income protection for injured persons is achieved.
The Proposed Factoring Transaction Excise Tax
Both the President, in his fiscal year 2000 budget. and Representatives Shaw and Stark, in
H.R. 263, have proposed the imposition of a substantial excise tax on the difference between the
amount paid by the factoring company and the undiscounted value of the acquired payment
stream. The excise tax would not be imposed where the purchase is pursuant to a court (or
administrative) order finding that certain extraordinary and unanticipated needs of the original
intended recipient render such a transaction desirable. H.R. 263 also would provide that
factoring transactions would not retroactively affect the tax treatment of the original parties to the
structured settlement transaction.
The imposition of a substantial excise tax should make it far less likely that factoring
transactions will occur, because the transactions would become less profitable. To the extent that
the market for such purchases is reduced or eliminated. far fewer injured persons would be
approached or convinced to assign their future income rights. and the integrity of the structured
settlement tax regime would be preserved. This will help ensure that the tax benefits conferred
by section 130 accomplish their legislative purpose.
The Administration recognizes that the policy concern underlying the proposed tax -- the
-4-
long-term financial protection of injured persons -- could also be addressed outside the Internal
Revenue Code. However, such policy concern already underlies the favorable tax rules
applicable to structured settlements. The proposed excise tax is intended to ensure the continued
effectiveness of the existing tax rules in protecting the long-term tinancial security of injured
persons. In addition, as of the close of calendar year 1998. we are aware of only three states -Illinois, Connecticut and Kentucky -- that have passed laws requiring court approval of and fuller
disclosure in connection with factoring transactions, and it is unclear whether and when other
states might pass similar consumer protection laws.
In conclusion, Mr. Chairman and Mr. Coyne, and Members of this Subcommittee, the
Administration looks forward to working with you and other Members of Congress in addressing
this problem. We thank you for your interest in this issue. and for inviting us to participate in
today's hearing.
- 30 -
-5-
o
F. l' ART :\1 E N T
(.) F
THE
T R E .-\ S L R Y
NEWS
TREASURY
OFFICE OF PUBLIC AFFAIRS 11500 PENNSYLVANIA AVENUE. N.W.• WASHINGTON, D.C •• 10220. (201)
CONTACT:
EMBARGOED UNTIL 2:30 P.M.
March 18, 1999
'l2~l~O
Office of Financing
202/219-3350
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction two series of Treasury bills totaling
$14,000 million to refund $15,552 million of publicly held
securities maturing March ~5. 1999, and to pay down about $1,552 million.
approx~~ely
In addition ~o the public holdings, Federal Reserve Banks for their own
accounts hold $6.954 million of the maturing bills, which may be refunded at
the highest discount rate of accepted competitive tenders.
Amounts issued to
these accounts will be in addition to the offering amount.
The maturing bills held by the public include $3,159 ~llion held by
Federal Reserve Banks as agents for foreign and international monetary authorities, which may be refunded vi~hin the offering amount at the highest discount
rate of accepted competitive tanders. Additional amounts may be issued for
such accounts if the aggregate &mOUnt of new bids exceeds the aggregate amount
of maturing bill •.
TreasuryDirect c~comers requested that we reinves~ tbeir macuring
holdings of approximately $891 million Ln~o the 13-week bill and $78~ million
in~ the 26-week bill.
Tenders for the bill. viII b. received at Federal Reserve Banks and
Branches and at che Bureau of the Public Debt, WaShington, D.C.
This offering
of Treasury securities i . governed by the terms and conditions set forth in
the Uniform Offering Circular tor the Sale and Issue of Marketable Book-Entry
Treayury Bills, Notes, and Bond. (31 CFR Part 356, as amended).
Details about each of the new •• curi~ies are given in the attached offering highlights.
000
Attachment
RR-3029
Fl" p'~ss ,..I.IIIIS, spuchn, public Ichdulu Qlld oJ/lcla.1
blot'Qpht~s,
call o'u )4-lrour fax line
fit
(J01) 6]]-1040
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED MARCH ~5, 1999
March 18, 1999
Qffering Amount . . . . . . . . . . . . . . . . . . . . . . . . . $6,500 million
$7,500 million
Description of Offering:
Ter.m and type of aecurity . . . . . . . . . . . . . . . 91-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912795 BY 6
Auction date . . . . . . . . . . . . . . . . . . . . . . . . . . . . March ~2, 1999
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 25, 1999
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . June 24, 1999
Original issue date . . . . . . . . . . . . . . . . . . . . . June 25. 1998
Currently outstanding . . . . . . . . . . . . . . . . . . . $25,647 million
Minimum bid amount and multiples . . . . . . . . $1,000
182-day bill
912795 CP 4
March 22, 1999
March 25, 1999
September 23, 1999
March 25, 1999
$1.000
The following rules apply to all securities mentioned aboy,:
Submission of Bidsl
Noncompetitive bids . . . . . . . . . . Accepted in full up to $1,000,000 at the highe.t discount rate of
accepted competitive b1~.
Competitive bids . . . . . . . . . . . . . (1) Must be expre •• ed a. a diacount rate with three decimals i.
incrementa of .OOS\, e.g., 7.100\, 7.105\.
(2) Net long position for each bidder DU.t be reported when the SUD
of the total bid amount, at all d1.count rata., and tha net long
position 1a $1 billion or greatar.
(3) Net long position ~ust be determined a. of one half-hour prior
to the closing ti~e tor receipt of competitive tenders.
Maximum Recognized Bid
at a Bingle Yield . . . . . . . . . . . . 35\ of publio offering
Maximum Awarg . . . . . . . . . . . . . . . . . . . 35\ of public oftering
Receipt of Tendersl
Noncompetitive tenders . . . . . . . Prior to 12:00 noon !astern Standard t1~ On auction day
competitive tenders . . . . . . . . . . Prior to 1:00 p .•. Bastern Standard ti •• on Auotion day
yayment Term@1
By charge to a funds aooount at a Federal Reserve Bank on i.aue date, or payment
of full par amount with tender.
TreasuryDlreot customer. oan us. the Pay Direct featuTe whioh
authorizes a charge to their account of record at their financial institution on issue date.
DEPARTlVIENT
OF
TREASURY
THE
TREASURY
NEWS
............................~~8f9~............................
OFFICE OF PUBUC AFFAIRS .. 1500 PENNSYLVANIA AVENUE, N.W." WASHINGTON, D.C." 20220" (202) 622-2960
EMBARGOED FOR RELEASE AT X A.M.
March 22, 1999
"A Better Tax Service and a Bettl'J' Tax System"
Remarks hy Lawrence H. Summers
Deputy Secretary of the Treasury
Tax Executives Institute, Washington, D.C.
Thank you. It is a pleasure to be here among tax prokssi()nals to disCllSS in greater detail some of
the Administration I s plans for fiscal ::W()O. Speeitically. I intend to cover two topics this
morning: first, the substantial progress we have made mer (his past year at the IRS. and second.
in more detai I, our concern ovcr the recent pro Ii i'eratioll u r II hus i\ e corporate tax she Iters and our
plans to combat them.
I. The IRS: A Successful Period of Reform
Speaking here at the TEl two years ago. I laid ou( Treasur~"s iln'-point plan for huilding a bettcr
. IRS. Our goals were: to strengthen leadership; to increase m;magerial tlexibility; to enhance
oversight; to improve IRS budgeting: and to \vork Illr a ,simpler. i:lirer t<l:\ code.
Two years on, with thc passagc of the hipartisan ]l)<)X IRS Rl's(rllcturing and Rcl()J'Il1 Act and
with the hard work ofthe I RS, led by its ne\v Commissioner. ( 'h;lrks Rossotti. vvorking closely
with the President and with the Vice-President's National Perl(lrIll;ll1ce Review. we have seen
real progress on all five honts. Most importll1t oral!. (,I\pa~LTS ;ll"l' seeing results, in the form of
a more modern, efficient, cuslol11er-li'iendly IRS:
•
two years ago, taxpayers dialing the IRS (oll-rree I1Un]hl'l" had ahout a 20 percent chance
of getting through. Today telephonc access rates arl' rUl1ning at Illore than <)0 percent.
And the filing season help lines have heen opel] 2-+ hums ,I da). 7 days a week since
January I.
RR-3030
For press releases, speeches, public schedules and official hi(},;rajJl/ies, call our 24-!wur fax line at (202) 622·2MO
•
nonpaper tiling methods -- e-lik, ()n-I ,illl' ,md Il'klik -- ,1I"l' up 15 percent this year. And
about 8 million households \vho calculate. hilt do Illlt lik their taxes electronically have
been invited to join a pilot progral11 ror entirel~' p;lperkss liling in I (Nc).
•
"hits" to the IRS hOlllepage have more than douhbl. to Ill'arly 5()() million. A recent
Washington Post article waxed lyrical ahout its "\\l'hhy hl"l'l'/.iness" and asked: "Who
would have thought that the IRS web site would 11l' so thorough. so acccssible. so useful
and -- can this be true'? -- so coo!."
•
and alternative payment methods arc on thc risc: p;l~ ment hy direct deposit is LIp 22
percent in 1999. And a number ol'taxpayers arc ,tire;ld) taking advantage ()I'the new
ability to pay their taxes by credit card.
I am also glad to report that all mission critical systems ,It tIll' IRS have been made Y2K
compliant and placed back into production I'or the I l)l)() Illing Sl'ason.
Commissioner Rossotti will be talking to you later on abollt his plans ror the IRS this year. He
knows -- as do we all -- that the IRS has a great deal more to do to hecome the tax c()lIection
agency for the 21st century that the country needs and ;\meric,lI1 citi/,ens deserve. But we can
surely take pride in the tremendous changes that han: already 11l'l'll achieved. For our part, the
Administration has complete conlidence that ('harks ,llld his team will build on these successes
in the months and years to come.
II. The Administration's Plans for Corporate Tax Shelters
I would like to spend the rcst of my time today discussing the Administration's plans for
combating a problem that has been a continuing conccrn inside ~lIld outside the Administration in
recent years -- and which Treasury ol"licials have becil discllssing "ith the TEl and others for
some time. This is the growing problem or ahusiH' corpor~lll' tll\ shclll'rs.
In the past few years alone:
•
Congress has been forced to pass two prmisiolls \0 PI'l"l'llt the abuse ror tax purposes of
corporate-owned lire insurance. As Ken Kies. till'll ('ilicr or Stall or the Joint Committee
on Taxation, stated alterwards. "When you haH' II corporLltion wiring out a billion dollars
of premium in the morning and thcn horrowing it h,ICk hy wire in the alternoon and
instantly creating with each year another $:15 million or perpetual tax savings, that's a
problem .... I think we were looking at a potential lill" ;1 sllhstantial erosion or thc corporate
tax base if something hadn't bcen done."
•
our Office o/'Tax Policy has Ullc()\'cred sC\lTal tCl\ "Illtldllets" that would havc cost the
government tens of billions (lrdollars il"ldt lIIICill'ckl'(1. Imll-l'lI. tile Office ot'Tax
Analysis estimated that legislation last year to climill'lll' (\Ill' sucil pmduct -- liquidating
REITs - would save the tax system IIp\v;mls 0'1 ~j() hilli()11 mcr thc next tell years.
•
most recently, we have hrought to light lease-im. leasl'-ollt transactions, or so-called
"LILO" schemes. Like COLI, these trallsactiOlus. throllgh circulttr property and cash
flows, offered participants millions ill tax hClldlts \\ ith 110 rcal economic risk. The notion
ofa U.S. multinational. leasing a town Iwll rrolli a S\\iss I11l1llicipality and then
immediately leasing it hack to the mlillicipalit} is. sllrl'ly. odd Oil its t~lce.
I
Because these transactions arc marketed in secret allll till' m;lin thing wc know about them is that
there is much that we do not know about them it is dirlicult (0 cstimate how much they cost the
government each year. There seems to he little douht amollg till' cognoscenti that the transactions
we have caught which cost hillions a year represent only till' (ip or (he iceberg. Professor Joe
Bankman of Stanford University has recently estim;lted thc total C()st at more than $10 billion a
year. This seems in line with the judgement or other pr;lctitiollcrs:
•
testifying recently hefore Congress, the Americlll I~ar /\ssociation noted its "growing
alarm [all the aggressive lise by large corporate t;lxp;lycrs or (;lX 'products' that have little
or no purpose other than the n:duction or h.~deral incomc taxcs", and its concern at the
"blatant, yet secretive markding" or such products.
•
for his part, House Ways and Means Committec Chairl11;l11 Hill Archer signaled at a
hearing a couple of weeks ago that Vie \Vas \villing tojoill thc Administration's efforts in
this area, saying that the area or corporate tax shclters "llll'l'its rcview."
•
a recent cover story in Forhes magazinc was dc\olL'd to thl' "thriving industry of hustling
corporate tax shelters." This quoted a partncr ill (\ 11ldjl)1' ;lccoUlltillg linn des.cribing thc
development and highly selective marketing or "hlack hox" strategies for tax avoidance
that can save its purchasers -- and cost liS taxpayers -- dllything rrom tens or millions, to
hundreds or millions of dollars.
•
in that same article, John "Buck" Chapoton, thc /\ssis\;lnt Sccretary ror Tax Policy in the
Reagan Administration, said that he, wcre he still at thl' Trcdsury. would be making a
speech every week ahout the prohlem or Corpor;ltC tax slll'ltcrs.
Members of the TEL and others in the corporatc co 111 ll1 Ull it y h;\ \'l' l'l )111C to us complai n ing,
generically, of these developments and conccrncd ahollt till' ~ro\\ illt! pressurc they feel
themselves to be under to purchasc such pwducts in orcin to SUI} l'oillpetitivc with others. Many
have asked for the help ofthc Treasury Dcpart111cnt -- hclp tll;}t \\l' \l'ry llluch intend to providc,
1. Defining the Problem
Let me assure you at the outset that \ve, at Ireasury, ulllklst;ll1d thc dii'llculty of our task. Thc
line between legitimate and illegitimate c!lur[s [0 l1lillillli/l' [;I:\CS l'an he a very line lillc indeed.
We wcll remember the words of Learned Iland: "/\11) (JIll' 11l;1~C;(1 arr;lI1ge his an~lirs that his
taxes shall be as low as possible: he is Ilot bound to ch(H)Sl' til;!t pattern which \vill hest pay the
Treasury; there is not even a patriotic duty to incre;lse OIlC's LI:\cs."
Also, we are well aware that the vast majority or ta\:p;lyer~; ;tIL' Iwnest. When we go aner abusive
corporate tax shelters our aim is not merely to protect rl'\enUl'S. hut also to protect those who
willingly pay their fair share. Otherwise, cOl1lpetiti\'e pressures tlwt come from the suspicion that
others are avoiding their share of tax may force;1 "racc to the h(Jttol1l." Onc is reminded of the
proverbial situation in which everyone is hetter oil sitting in a I(lothall game than standing -- but
the fact that some are standing obliges others to do the sanll'.
Provisions which provide certain incentives and cOllkr certain hellelits on taxpayers will always
be debatable as will the proper measuremcnt ofeconol1lic incolllc. I~ut there should be little
doubt about transactions with no real content \\hOSl' (lldy (lhjl'cti\l' is to reduce ta\: liabilitics. It
is these transactions we havc in mind \vhcn \\e speak oj' cOrp(lr,lte Ll\: shelters.
Common characteristics that arc often indicati\e or a ta\: shelter include:
major discrepancies between "book" prolits and [;I:\;thk proltts,
•
•
the use of non-taxpaying parties -- such as rorl'ign (lI' ta\.-l':\l~I1lPt entities - \VI1O
participate in the transaction soldy to ahs(lrb ta:\dbk iIlC(lIllC or othcrwise det1ect tax
liability from the taxable party:
•
the use of contingent fees, unwind clauscs. or (ltilcr l'(1I1tr~lctllal conditions such that the
transaction is insulated b'om an advcrsejudgl11el1t h~ till' II~~.
2. The Limits a/Past Approaches
Of course, corporate tax shelters have long been a COl1certl 1'( 11 I I'l'asury and we have not been
idle these past years in seeking to combat thcm. Wlll'l1 \\l' 1];1\ l' ilicl1tilied corporate ta\: shelters
we have acted and will continue to act to addless thl'lll lI-;ill~ :"1 "ppropriate legal and regulatory
means at our disposal. However, experience is illcrcasil1~l) I,(lillting up the prohlems with this
ad hoc -- and necessari Iy piecemeal apprnac h.
First, perhaps inevitably, it leaves LIS barely scratching till' SIll'I~ll'l' (J\ [he problem. One is
reminded of painting thc Brooklyn Bridge: no sooner is (jIll' scct iOI1 painted over, than anothcr
appears needing work, Taxpayers with an appetite I'or curpm:lll' t;t\: shelters will simply move
from thosc transactions that are specifically prohihitcd by tl1l' Ill'\\ k~islation to other
transactions the treatmcnt or which is less clear.
Second, piecemcallegislation ends lip silting lip tilL' cock ~ll1d, ~tlll]()st 11\ ddinition, calls into
question the viability of common law tax doctrinL's, III tilL' p~lsI Il'\\ \e~;rs alolJe, Ken Kies notes,
in his recent testimony, that 29 provisions have 11L'L'11 atioplL'd I'l'sponding to perceived abuses.
Third, a transaction-by-transaction approach to corporalL' t~l\ sllL'ilL'rs risks encouraging some of
the promoters of -- and participants in -- ta\ shelter products to rllsh them Oil to the market, on
the grounds that any reactive legislatiol1 will hc applied ()II a prospective basis ollly, long after
the product has been sold and put to usc.
It is noteworthy that Administrations or hoth parties encollIllL'red sOllle ol'the same problems in
working to reverse the growth or individual tax shelll'rs \\ hich tilreall'l1ed the crfieacy Or the
individual income tax system in the I 97()s and I ()X()s. 1() sl i Ill' Illl' growth or these shelters, the
IRS and Justice Dcpartment aggressively sought out ta\-shL'ilL'r pr()llloters and their clients, and
challenged questionable cases. But ent<.H'cement ellorts l'\l'l1tll;tliy turned to a more global
approach, which culminated in success in the Ta\ Rdorlll ;\ct 01' I ()X6 with passage or the
passive loss rules.
For similar reasons, we believe it is time for LIS to tllrn our <lttention to linding a more global
solution to corporate tax shelters in the llnited Stall's t()ti<l).
3. The Administration 's A/JProuch
You may take it as a given that Treasury will continlle to \\Oll t() take steps to combat particular
tax shelters as and when these are discovered. ()lIr prop(lS~tls l()r this year's budget contain a
l1umber of such specific proposals aimed at addressing p;lrt iClIiar t;l\ shelters or which we are
aware. But the concerns mentioned above have convinced liS or the need for a new approach -- an
approach that we hope will ultimately make the \'ast majority or these piecemeal efforts
unnecessary.
Trcasury's work in the corporate t<1\ shelter area \vill hL'nl'l'I()rth ha\e as its main priority the
cultivation of a more general culture of compliallce ill \\hieh (;1\ shelters are more seldom
created.
This new approach has rour core clements:
First, to reducc the incentive to create new t;IX shelters \\hL'ne\'l'r ;\11 oid one is hloeked and
simplify anti-avoidance efforts in the futun.\ \\e are proposin1,C. Ilew penalties to ensure that the
search carries real financial risks for all involved. We ha\e SL'ell repeatedly in the financial
sphere in this country -- and, more recently, ill !\Si~1 -- the L!;II11at!L' that can C0111e from situations
where businesses can operate on a basis where the:. g;llllhk ;1I1d \\ in i r things turll out their way,
but don't lose anything if things go wrong. Without an illl11rmL'li penalty regime the temptation
for taxpayers to play the audit lottery is too great.
We are proposing to change the dynamics Oil hOlh Ihe Sllppl~ ,llld lklll:lIld side of this 'market' making it a less attractive one f()r all participanls -- 'illerclwills' Ol:lhusive tax shelters. their
customers, and thosc who facilitate the transactions. /\s Ihl' /\I~/\ put it ill ils recent testimony:
"all essential parties to a tax-driven transaction should h;[\e ;[11 illcenti\"L~ to make certain that thc
transaction is within thc law."
Our proposed penalties include:
•
increased, strict liability pcnalties II)r suhstalltiallllHkrsLllcl11ellt whcrc it is (1)l\l1d that tax
shelters have been used.
•
excise taxes on "tax-indifferent" parties in
•
a 25 percent excise tax on promoter and la\\yer kl'S so Ih:lI Ihey. too. pay a nonnegligible price for their activities.
•
new excise taxes on contingent fees. lIn\\illll pw\isions or 1;1.\ indemnity clauses that
make a positive ruling by the IRS a condition Illr IIll' Ir,lIlS;lction itself.
UL\
shelkrs.
Second, we will issue administrative guidance which. ;IS l'xi!:2encil's demand. luoks to the past as
well as the future. In recent years -- in cases where. to plll it i"r'lI1kly. those involved should have
known better -- we have issued guidance \vith rclro;[cti\l~ L'ITert: Ill!' example. in the case of stepdown preferred stock and tht: recent L1LO reyenue ruling. i\!:tny have seen these decisions as
setting a precedent. They were right. That was the intent. (i(ling Illr\\'ard we will continue to
issue additional administrative guidance to address speci lic tr;lllsdctions as appropriate. And
these will have retroactive effect if this isjudged neceSS;lr: Illr till' rulings to have their desired
effect.
As Fred Goldberg, former Assistant 'Secretary Ill!- I ax Pulicy III thl' I~ush Administration, pointed
out several years ago, without the ability to issue guidal1L'l' rl'lro;lcti\ely. \vithout that threat,
some taxpayers. and their "well-hceled" advisors might "simpl: \\ rill' down as many zeroes as
they wish on a page" - effectively printing Illoney through I.ISL' ul' corpurate tax shelters.
Third, we will work with the IRS to step up compliance l'l/ilrts -- hl'L<lUSe all thc guidancc in the
world will not reduce avoidance if IRS agents themselws du Iwt Illllow it up on the ground. The
IRS has had some important victories in the courts recently_ \\ ith judges upholding its allegations
of abusive transactions in the recent ACM & AS/\ cases.
Commissioner Rossotti will later be describing his pl;lI1s I(lr rL'orgalli/ing the IRS. I,cl me .iust
note here that I expect that the move ;l\vay from a gl'ogr;lphic;li hdsis to a Illore functional
approach -- including divisiolls focused on particul,lr sllhsets oll'orpor:ltc activities -- will make
for a bettcr understanding of these husinesses oil till' p"rt ()III~S dgl'lltS. ;lnd. I lim cOldident,
more effective enforcement of the provisions urthe [a,\ cOlk llwl pcrt;lin
[0
thelll.
fourth, I spoke earlier orthe importance o/" huilding;1 cullllrL' o/" l'(lmpliance. The Secretary. Don
Lubick, Jon Talisman and I intend an intensi\'l' ,1l1d e'\lL'mi\ L' di;ilogul' with practitioner groups __
the tax bar, the accounting proICssion. ,1l1d corpol"<lll' [<IX l'XL'l'1I1i\L'S stich as yourselves -- so that
we can come to common understandings o/" the norms oj <lppropri;llL' hehavior in this area.
Among the issues that can be considered in this L'llmt <Ire [ilL' prol(:ssional rules o/" conduct that
presently guide sueh groups in their interactiolls \vith thc IRS. lor our part Secretary Rubin and r
have asked the Office of Tax Policy and IRS to consider \\hethL'I" ()I" not any changes in its
standards of conduct in these areas may hc appropriate.
Any tax administration system in conli'onting shelters C,l\l hl' il11perll'ct in two different ways. It
can allow abusive transactions to go undetected. m it C,l\l nlisl<lhl'l legitimate transactions as
shelters and unfairly go after them. We want a systel1l tlLI[ 11l;!I,l'S Ileither o/" these mistakes -that, as the IRS mission statement makes clear. "applies thL' t<lX I;m \\ith integrity and I~lirness to
all", And that is what we will seek to create. 'Ne \\ill (lilly SlIcl'l:cd i/"\\e can count on the advice
and cooperation of the tax community in \vorking throllgil tilL'sl' di !"IIcult prohlems.
As you may already know, in order to carry the dehalL' I()m ,ll"ll \\C are in the process or
developing a White Paper on corporate tax shelters -- which I l''\pect to he released within the
next month or so. Let me underline that \ve vie\v it more ,IS ,I discussion dralt. With the help of
interested members of Congress. practitioners such as YollrsL'h l·S. ami other groups \ve look
forward to refining our proposals to ensure that they rise tll thl' clwllenge they are intended to
meet.
III. Concluding Remarks
We have long seen great debates abuut the illlportance (lILIX compliance \erSLIS service to
taxpayers. People talk about the pendulum swinging rwm o Ill' t(l the othl'l". I helieve that the
distinction is ill-drawn.
Rational businessmen recognize that the apparL'nt trade-oil" hl't\\ l'ell nw'\il11izing profits and
making high quality products is illusory. Rather. the succl'ssrllll'(Jll1p,ll1Y is SUCl'l:ssl"ul because it
achieves both. Similarly, at the Treasury and the IRS \\l' mL' l'llll\illeL,d that treating in a I~lir and
appropriate way all taxpayers -- - those wilo pay thcir 1";lil" shal"l' ;1Ilt! those whu reach ror
advantage beyond the law _. is right I()r all Alllcricans ;1I1d light Itlr the nation I S revenue
service.
That is our objective. And it is not an objecti\'e th,ltthe puhlil' Sl'l"tor CallC\Cr fullill alone. That
is why I am so grateful for having this opportunity to discuss (Jllr proposals with groups such as
this one and why wc will continue to seek your help and .support <IS lllllch <IS possihle in tile
months ahead. Thank you.
- .")() -
7
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU Of THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
~R IMMEDIATE RELEASE
1arch 22, 1999
Office of Financing
202-219-3350
RESULTS Of TRE:ASURY' S AUCT [ON OF' 1 ]-WEF:K B1 LL3
91-Day Bill
March 25, 1999
June 24, 1999
912795BY6
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
4. TIS
Investment Rate 1/:
4.498';,
Price:
lJ8.894
All noncompetitive and successful competitive bidders were awarded
lecurities at the high rate.
Tenders at the high discount rate were
l110tted
39,.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
$
.
23,244,597
1, 313, 973
$
6,079,320 2/
24,558,570
PUBLIC SUBTOTAL
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
423,649
423,649
24,982,219
6, SCl2, 969
3,434,73':')
6,351
3, 434,r-l':')
28,4/./,B()')
TOTAL
4,765,347
1,313,973
6,351
$
Median rate
4.350~: SO~ of ttle amount ot accepted competitive tenders
tendered at or below that rate.
Low rate
4.270\\:
("j'i, of the amount
)f accepted competitive tenders was tendered at: or below that rate.
vas
lid-to-Cover Ratio
~
24,558,570 / 6,0/9,320
4.04
/ Equivalent coupon-issu0 yirld.
/ Award::: to TRF,AS(JRY DTRECT
$971,297,O()()
RR-3031
http://www.publicdebt.treas.gov
PUBLIC
AFFA~S
From: TREASURY PUBLIC AFFAIRS
CALLER
3-23-99 9:57am
p. 1 of 1
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt· Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
'OR IMMEDIATE RELEASE
Office of Financing
202-219-3350
larch 22, 1999
RESULTS OF TREASURY'S AUCTION OF 26-WE8K BILLS
182-Day Bill
March 25, 1999
September 23, 1999
Term:
Issue Date:
Maturity Date:
CUSIP Number:
912795cP4
High Rate!
4.420%
Investment Rate 1/:
Price:
4 .597 %
97.765
All noncompetitive and successf~l competitive bidders were awarded
:ecurities 'at the high rate.
Tenders at the high discount rate were
lilotted 66%.
All tenders at lower rates were accepted in full.
AMOUNTS TEND8RED AND ACCEPTED (in thousands)
Tender
Accepted
Tendered
Typ~
Competitive
Noncompet i ti ve
$
22,061,930
1,126,667
$
3,652,636
1,126,667
.'
----------~~----
Foreign Official Refunded
SUBTOTAL
Federal Reserve
foreign Official Add-On
TOTAL
Median rate
4,779,303 2/
23,188,5~7
PUBLIC SUBTOTAL
$
2,735;551
2,735,551
25,924,148
7,514,854
3,520,000
40,649
3,520,000
29,484,797
40,649
$
11,075,503
4.420%: 50% of the amount of occepted competitive tenders
~s tendered at Or below that
rate.
Low rate
4.330%:
5% of the emount
f accepted competitive tenders was tendered at or below that rate.
id-to-Cover Ratio
~ 23,188,597
/
4,779,303 = 4.85
I Equivalent coupon-issue yield.
I Awards to TREASURY DIRECT ~ $854,861,000
RR-3032
http://www.publicdebt.treas.gov
TOTAL P.01
D E P ;\
f{
T MEN T
0 F
T II E
TREASURY
_------~/71l~
T REA SUR Y
NEWS _
______
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W .• WASHINGTON, D.C.. 20220. (202) 622-2960
Text as Prepared I'or Del ivery
March 18. 1999
TREASURY SECRETARY ROBERT K RUBIN
REMARKS TO THE ASSOCIATION OF AMERICAN PlJBLISHERS
It is a pleasure to speak with you today. I would like to make a few comments about the
state of the global economy. and what we need to do to position our country ('or strong economic
conditions in the years ~ll1d decades ahead.
The backdrop for my remarks is an environment of uncertainty and challenge in the
global economy, which is now well into the second year of a financial crisis that first erupted in
Thailand in July 1997. To be sure. there have been some important positive developments in the
last six months, including actions to promote growth in some industrialized countries, the
reduction of leverage in the global capital markets, and the real progress towards recovery in a
number of emerging market economics that have experienced crises, such as Korea and Thailand.
However, the fundamental situation remains the same: The problems that gave rise to the crisis
took a long time to develop, and they will take a long time to work through.
The crisis continues to have profound effects around the globc. Emerging markets from
Asia to Europe to Latin America have been severely aflCcted and their governments f~lce
tremendous challengcs in pursuing ret(Jrm programs to achieve financial stability and promote
growth. Industrialized nations t~lce serious challenges too -- the IMF has reduced its growth
forecasts for Europe, to low levels, and Japan is expected to f~lce flat or negative growth.
Ilere at hOllle, the most likely scenario in the U.S. economy remains solid growth and low
inllation, subject to the usual lipS and downs. The President's economic strategy of maintaining
fiscal discipline, equipping people for the future and opening markets at home and abroad, in
combination with renewed competitiveness by America's industries. has contributed to what
many consider to be the bt:st economic conditions in recent memory -- the longest peacetime
economic expansion in our history, a very high rate of job creation, the lowest unemployment
rate in decades. and real increases in income across all incollle strata.
RR-30:n
For press releases, '\Pecc/ies, public schedules and official biowaphies, mil our 24-hour fax line at (202) 622-2040
The President's strategy is rooted in his underlying view that we benelit enormously lI'om
an economy that is open to change, and so he has consistently supported open markets at home
and abroad, technological development, and Ilexihle lahor and competed markets. In this type of
modern economy, knowledge and information are key As puhlishers, you know better than
anyone how hlst our information economy is shining -- and the flexihility and skills it takes to
increase your growth while serving your ever-increasil1g audience. In that context, I want to
focLls on three challenges that we in the public sector v:nd you in the private sector must meet to
sllstain a strong economy as we look forward.
First, we must maintain our leadership on the issues of the global economy and our
traditional commitment to open markets at home and ahroad.
There is no doubt increased trade has played a significant role in the strong economy this
cOllntry has enjoyed for the last six years. And while there is the almost universal tendency to
extol the bendit of exports, we tend to ignore the benefit of imports. Imports contribute to lower
prices and increase choice for consumers, as well as for producers, which should lead to greater
job creation and higher wages. Imports increase competition and productivity, and, for all these
reasons, reduce inllation and generally lower market interest rates.
The adverse effects of imports are concentrated, and the voices ofthose adversely
affected are loud. But the benctits of trade openness arc more widely dispersed -- indeed, those
who benefit are onen unaware that they arc doing so -- and the result is fewer, binter voices for
open markets. As a result, we Llce increased domestic pressures to close our markets. I believe
that we must strongly resist those pressures. One need only recall the example of Smoot Hawley
and the competitive devaluations of the 1930s to understand the folly of such a course.
A second major challenge we face in this country is to continue the successful economic
strategy of the last six years of promoting fiscal discipline which has been so indispensable to
today's strong economic conditions.
It is worth stopping for a moment to sec how far we have come on liscal discipline,
because we do tend to forget. Between 1980 and 1992, the Federal deht had quadrupled, and in
1992 the deficit was $290 hillion and projected to continue growing. Now -- heginning with the
deficit program of 1993 -- we have moved ji'OI11 an era of endless hudget deficits, to a budget
surplus, and projected hudget surpluses for a long time to come.
The consequence of that, I believe, is an historic opportunity to position Ollr nation for the
decades ahead, and President Clinton has put forth a plan to seize that opportunity. The
President's plan would preserve the preponderance of the surplus to pay down the puhlicly held
debt of the ["ederal Government rather than eliminating the surplus through consllmptiolloriented tax cuts or spending and would greatly promote retirement security by strengthening
Social Security and Medicare. Using the surplus for tax cuts or spending may he more popular,
but in our view promoting liscal responsibility and national savings is the right path for our
future.
The third challenge we must !~lCC, although within the context of fiscal discipline, is to
continue to invest in areas that are key to future productivity, such as education, health care, and
I would argue, providing those who live in the inner cities and other economically distressed
areas a real opportunity to enter the economic mainstream. I believe this latter is not only a
social issue, but an economic issue, as well. Just think of the difference it would make in terms
of productivity and reduced social costs i I' we could bring all Americans into the economic
mainstream.
The importance of investing in our people is made all the more critical by the rapid
changes taking place in the information economy. In this regard, let me say a few words about
electronic commerce, which I know is an issuc that is having a profound impact on your
business.
Since the very beginning of this Administration, the President and the Vice President
have understood the vital importance of technology to our economy. When the Internct was still
largely the preserve of scientists and professors, the President and Vice President had the
foresight to see its tremendous economic potential. As you well know, the Internet presents
enormous opportunities for businesses to reach customers, here and around the world, more
etliciently and more effectively. And the converse, of course, is that customers should have
broader and less expensive access to goods and services. But as with all things in life, with these
new benefits come new challenges.
The Administration has approached electronic commerce with the bdief that the private
sector should lead and that government's role should be to create a framework that allows the
market to flourish. Our goal has been to establish a set of principles that put consumers, choice
and the private sector !irst. We have promoted the principle both here and abroad that commerce
over the Internet should receive the same treatment as traditional commerce. Our work led last
year to the passage of the Internet Tax Freedom AcL which provides for a three-year moratorium
on new or discriminatory taxes during which representatives of state and local governments, the
federal government and the pri vate sector can develop ways to tax commerce over the Internet in
the same ways as traditional commerce. The President also fought for and signed into law the
Digital Millennium Copyright Act to protect copyright in a digital age and implement the World
Intellectual Property Organization treaties on intellectual property. As we approach a new
century, we are committed to doing whatever is sensible to promote conditions where American
husinesses and consumers can realize the full potential of new technology.
In conclusion, let me say that I believe our country is very well positioned economically
for the long term, in part as a result of the choices that have made in the public sector -- sLlch as
restoring liscal discipline and maintaining open markets -- in part because of the extraordinary
job the private sector has done over the last decade to restore its cOll1petitivcness~ and in part for
a whole host of other culturaL pol itical and economic bctors. Yet there are also enormous
challenges ahead, both internationally and domestically, and to reali/.e our strong potential !t)r
the long 1.I:rm, we l1Iust continue to make the right choices -- in both the public and the private
sectors.
- :-)0-
,
D EPA R T 1\1 E N T
TREASURY
0 F
T 1-1 E
T REA SUR Y
NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C." 20220 - (202) 622-2960
Text as Prepared For Delivery
March 19, 1999
REMARKS HEFORE THE SHORENSTEIN CENTER
SECRETARY ROBERT E. RUBIN
It is a pleasure to speak with you today and I would like to thank Marvin Kalb for the
invitation. This afternoon, I would like to make a few observations about the dramatic
transformation of the financial services industry in this country over the last couple of decades,
and what that has meant -- and will mean -- for users and providers of capita\, policy makers and
the press.
As most or you know, I worked on Wall Street for 26 years, before joining the Clinton
Administration six years ago. In those 32 years I have participated in, as have many of you,
remarkable changes in the economy at large and the financial services industry specifically,
changes that could fairly and without hyperbole, be called revolutionary. For example, when]
first started at Goldman Sachs accounts were still kept by ledger and we followed the economies
of only a very small handful of countries. I remember one instance early on when an institutional
client asked what stocks we were recommending. We sent him ollr research reports, and a year
lakr he came back and said that he liked one of our n:coml11endations and would buy some.
Today, a recommendation that is a few days old may be considered stale, and traders who hold a
stock overnight consider it a long term investment. That is just one example o/" how dramatically
the nation's financial services industry has changed.
What I'd like to do now is take a somewhat closer look at three or the fundamental
changes that have occurred.
The first has been the globalization of markets. As all of you know, rinancialmarkets are
now integrated across national borders, in many ways, with large volumes traded across horders
around the clock with large numbers of securities of many different nations trading in each major
market center and with events in one market affecting other markets around the world almost
instantly. In fact. the financial services industry was either the first or almost the first major
industry to become highly globalized. When I started at (ioldman Sachs, if a company wanted to
raise money, it would ask for the yield on lJ .S. securities of variolls maturities. But as early as the
mid '80s, that same company would ask for the yields ill capital markets allover the world. net of
cost for foreign exchangc hedging, in order to finance thcmselves most eniciently.
RR-3OJ4
For press releases, ,\Peecl/cs, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
'U S GovernrTH:f11 Prilitlllq UltlC8
l(Jtli~· bl~l-~~)q
The second major change has been financial innovation. Thirty years ago a portfolio
consisted of stocks and bonds. Today even small inveF>tors can choose any combination of
characteristics he or she wants involving equities, debt, or commodities, and you can own
everything from floating rate bonds to options on futur'Cs, currency swaps, income warrants or
esoteric combinations of commodities, interest rates and equities. Financial innovation has
meant lower costs and greater tlexibility for providers and users of capital, but has also created
new risks and new challenges, which have received hlr too little focus.
The third and final change has been technology, which has been indispensable with
respect to both globalization and financial innovation. Technology has brought all global
markets into real time connection with each other, through instantaneous information sharing and
instantaneous trading capability between market centers all over the world. And technology has
provided the mathematical calculation power necessary for the creation and the trading of
complicated derivatives.
The modern financial services industry, transformed by these changes, has created great
opp0l1unities for people in this country and around the globe, including the developing world.
Even taking into account the global financial crisis of the last year and a half, emerging markets
around the world attracted vast amounts of private capital over the last twenty-live years, fueling
investment that hclpedlift millions out of poverty.
However, just as the transformation of the financial services industry has created great
opportunitics, so too has it created significant challenges and risks. Let me say a few words
about /<.mr in particular.
First are the questions of portfolio and systemic risk. All of the changes I just described
have led to enormous complications with respect to risk management. Onc of the great
challenges for any financial institution is the fact that models - no matter how sophisticated -cannot capture all possihle outcomes. That is to say, the totality of reality is simply too complex
to be captured by even the most highly developed model, and that will always be the case. So it
is impossihle for firms, even the most sophisticated ones, to understand fully the risks to which
they are exposed. LTCM is the most recent example of this. And once you go beyond the most
sophisticated organizations, I certainly felt when I was on the Street, and I doubt i r this has
changed much, that the understanding of thc embedded option, and possihle unexpected noncorrelating moves in derivative portfolios, is, in many cases, quite limited.
Moving from the investor to the global financial markets, systemic risk fi'om prohlems in
one large institution or one country - that is, risk of broad contagion effects elsewhere in the
global economy - increased greatly as a result of all the changes in the industry that 1 have jllst
discussed. And that is precisely why we at the Treasury, working with the i"edcral Reserve
Board and our counterparts around the world, have heen so intensely focused in thc last ICw years
-- but especially the last year and a half -- on reforming the international linancial architecture.
Our goal has been clear: to have a system less prone to financial crisis, and better able to manage
a crisis when one occurs. Our efforts have included, til'st, ways to induce structural reform and
sound macroeconomic policy in developing countries; second, ways to reduce excess credit
extension due to inadequate risk focus in industrial country banks; third, transparency; and
fourth, appropriate private sector burden sharing in crisis response. We are making concrete
progress in each of these areas, but these are extremely complex issues, both practically and
analytically, and, beyond that, developing international consensus is not and will not be easy.
Thus, change to the system, which has started, will happen in pieces over time. Also, there are a
whole host of proposals that on the surface seem sensible and have great political appeal, but
which, upon closer inspection, are deeply tlawed. It is easy to make dramatic statements; it takes
a lot of hard work to produce sensible proposals. We have a two part focus: one, developing and
putting in place those reforms that are sensible; and two, preventing measures that do not make
sense.
The second ramification of the transl<'mnation of the financial services industry is the
greatly increased speed with which problems can now spread. Last August, Russia defaulted on
its debt and the ruble collapsed. Almost instantaneously, markets around the world were
substantially affected. Because markets' reactions are so tied together -- due to instant
transmission of int<'mnation, instant global trading capability, global portf<')lio diversification, and
other factors -- the problem of contagion has vastly increased. The turmoil in markets affected
by a shock can quickly create instability in markets that are totally unaffected by that shock, if
investors decide to seek liquidity where they find it or develop a herd mentality as f<')r example in
a sudden aversion to developing countries or a sudden aversion to risk.
The third ramification is the exacerbating impact on the divide hetween rich and poor
countries.
There are many countries in the world with largely under-developed financial markets;
for example, most of the countries of AII-ica, a region with great problems but also great
opportunities. And that paucity reduces thc relative likelihood of attracting capital, which in
turn, increases the economic differences amongst countries.
(Trowing differences in financial sophistication arc also increasing the income divides in
our own country. More amuent people, as users or providers of capita\, have access to ever more
sophisticated financial instruments, while part of the population, mostly in the inner cities and
other economically distressed areas, has very little access to financial services and capital, even
when this is judged on a risk adjusted basis. And that growing gap feeds the already too large
gap in incomes. Expanding access to capital in economically distressed areas has been a high
priority of this Administration. One of our most effective tools in this regard has heen the
Community Reinvestment Act, which f~lces recurrent efforts to Cllt it hack, including efforts this
year that arc central in the debate over financial modernization legislation. eRA encourages a
bank to serve creditworthy borrowers throughout communities in which it operates. It docs not
require a bank to lend to anyone who is not a credit worthy borrower. Since 1993, a greatly
invigorated and reformed eRA has been a key tool in the effort to create jobs and rebuild low
and moderate income communities. Since 1993, the number of home mortgage loans extended
to African Americans increased by 58 percent, to Hispanics by 62 percent, and to low- and
moderate-income borrowers by 38 percent, figures all well above the overall market increase.
A fourth and final ramification of this transformation is the increasing concentration of
economic activity. When I first came to Wall Street, there were a large number of brokerage and
investment banking firms that could provide full service to clients, and so too with commercial
banks. With the vast amounts of capital needed to compete in the global marketplace, and the
need for strong presence in major market centers ahroad, there has been a great shrinkage in the
number of firms. And that shrinkage is continuing with mergers among major American banks,
and cross sectoral acquisitions such as the Citigroup purchase of Travelers. These giant
institutions do provide enhanced service, but these opportunities also may raise legitimate
concerns about systemic risk, conccntration of power, and the needs of local communities.
The changes and the ramifications I have discussed today speak to the issue of reforming
the architecturc of the global financial markets, which I have already discussed, and updating our
nation's financial services legislation. Let me touch on that for a moment. Financial
modernization is occurring already in the marketplace. With the lessening of regulatory barriers,
financial services firms are o1Tering customers a wide range of financial products and merging
across sectoral lines. With good legislation, we believe that process could occur in a more
orderly fashion. But we believe that if this is going to be done, it needs to be done right. We
believe that good legislation would include breaking down the barriers between the various
-sectors in the industry, maintaining the effectiveness ofCRA, not expanding the mixturc of
banking and commercc, guaranteeing consumer protections and allowing companies to choose
the structure that makes the most business sense to them.
Let 1m: conclude with this thought. The subjects I have discussed today arc very important
to the future economic well being of the American people, more so than ever before. One of the
obscrvations I would make, having been in the government six years now, is that as we address
complex economic issues such as the global financial crisis, the future of the international trading
system, tradc liberalization or protectionism -- a critical and very troubling issue which I'll touch
on in a moment -- or a whole host of other matters, it is more important than ever to have an
economically literate public. And all my experience suggests that there is hir, f~lr too little
understanding of the economic issucs that will be critical to our future. Fifteen years ago, very
few could name the currency in Thailand: Now this mattcrs a great deal to us. A br more
troubling instance is thc lack of public understanding of the benefits of open markets in the
United States to our economic health, through lower costs, lower inl1ation, and greater
competitiveness and efficiency, and the threat that protectionism raises to all this, plus the threat
that protectionism in our own thriving country contributes to fueling protectionism abroad when
virtually all countries arc doing less well and protectionist pressure arc in many cases growing
and the threat to the recovery of countries that have been affected by the financial crisis of the
4
last year and half. Explaining economic issues will be increasingly critical in the years and
decades ahead, and thus your role in our society will becoIne even more important. Sound
economic policy is almost always politically difficult, and we need to have an informed public if
we are going to have the political support for the economic policies that will best promote our
economic well being in the global economy of the 21 st century.
-30-
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
EMBARGOED FOR RELEASE AT 8:00 A.M.
March 23, 1999
Remarks Hon. Donald C. Lubick
Treasury Assistant Secretary of Tax Policy
Tax Executives Institute. Washington, D.C.
I'm here today first to continue the discussion that Larry Summers began yesterday in his
speech on corporate tax shelters by going into greater detail: and then I would like to discuss our
project reviewing the treatment of income derived from activities of U.S.-controlled foreign
subsidiaries.
I.
Corporate Tax Shelters
Deputy Secretary Summers yesterday laid out for you our concerns about corporate tax
shelters. He alluded to the administrative actions we have taken recently against particular
abusive transactions - for example, against step-down preferred by notice and then by regulation,
against lease-in, lease-out transactions by revenue ruling, Notice 98-5, dealing with foreign tax
credit abuses - and to the passage at our instance of a number of specific provisions over the
same time period, for instance with COLI (ajob waiting to be finished), and with liquidating
REITs. This year we have proposed both general legislation, aimed at deterring all parties from
entering into tax avoidance transactions. and specific amendments to deal with particular abuses
that we have been able to identify.
We at Treasury appreciate that numerous eminent tax practitioners and representatives of
Fortune 500 companies have expressed to us their support for taking action against corporate tax
shelters, and affinned our view that there is a serious problem that needs to be addressed. We
must staunch the revenue losses, but more importantly we must preserve the system's integrity in
which we all have a stake. A view that well-advised corporations can and do avoid their legal tax
liabilities by engaging in transactions unavailable to most other taxpayers may lead to a
perception of unfairness and, if unabated, may lead to a decrease in voluntary compliance.
RR-3035
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We think your support is critical. and that the corpl1rate community \.... ill benetit from
changes to the system that provide for a more level playill~ tield. hetween those who are
consumers of tax shelter products and those who are not. changes that \.... ill help to steer resources
away from non-economic use - both in the private sector and in the Government.
To date, most attacks on corporate tax shelters ha\e heen targeted at specitic transactions
and have occurred on an ad hoc, after-the-fact basis - through legislative proposals,
administrative guidance, and litigation. Yet we are hearing that these signiticant efforts only
scratch the surface. It is not possible to identify and address specitically all current and future
sheltering transactions. Second, legislating on a piecemeal hasis not only complicates the Code
but encourages the promoters to ignore and downplay the viahility of common law tax doctrines
such as sham transaction, business purpose, economic suhstance and substance over form. And
of course, using a transactional legislation approach to corporate tax shelters emboldens some
promoters and participants to rush shelter products to market on the belief that in most cases, any
fix will be applied on a prospective basis.
Corporate tax shelters are designed to manufacture tax henetits that can be used to offset
unrelated income of the taxpayer or to create tax-favored or tax-exempt economic income. Most
corporate tax shelters rely on one or more discontinuities in the tax law, or exploit a provision in
the Code or Treasury regulations by a literal reading in a manner otherwise not intended by
Congress or the Treasury Department. [n doing so it appears that they have forgotten what was
basic truth in my years of practice, as articulated by Learned Hand 65 years ago in Gregory:
It is quite true ... tbat as the articulation of a statute increases, the room for
interpretation must contract; but the meaning of a sentence may be more tban tbat
of tbe separate words, as a melody is more than the notes, and no degree of
particularity can ever obviate recourse to the setting in which all appear, and wbicb
all collectively create.
Corporate tax shelters may take several forms, and any detinition must be carefully
constructed not to be over inclusive or to fall short of the mark. It must not include benefits
which Congress intended. We can, however. identify certain common characteristics that
corporate tax shelters typically share. For example, through hedges, circular cash flows,
defeasements, or other devices, corporate participants in a shelter often are insulated from any
significant risk of economic loss or opportunity for economic gain with respect to the sheltering
transaction. Thus, corporate tax shelters are transactions without genuine economic substance.
Frequently, the financial accounting treatment of a shelter is signiticantly more favorable than the
corresponding tax treatment, such as when the shelter produces a tax "loss" that is not reflected
as a book loss.
We see corporate tax shelter schemes that are marketed as an off the rack product sold by
their designers or promoters to multiple corporate taxpayers and that involve property or
structures created that are wholly unrelated to the corporate participant's core business. These
-2-
features distinguish corporate tax shelters from traditional ta\ plannin1! that set the business
objective first and only then the arrangement most favorahk ta\\\ise L7nder the law.
Many c~rporate tax shelters involve arrangements hct\\ccn corporate taxpayers and
persons not subject to U.S. tax such that these ta\ indifferent parties absorb the taxable income
from the transaction, leaving tax losses to be allocated to the ta\lxlying corporation. The tax
indifferent parties in effect "rent" their tax exempt status in return for an accommodation fee or
an above-market return on investment. Tax indifferent parties include foreign persons. taxexempt organizations, Native American tribal organizations. and taxpayers with loss or credit
carry forwards.
Taxpayers entering into corporate tax shelter transactions often view such transactions as
risky because the expected tax benefits may be successfully challenged. To protect against such
risk, purchasers of corporate tax shelters often require the seller or a counterparty to enter into a
tax benefit protection arrangement. Thus, corporate tax shelters arc often associated with
contingent or refundable fees, unwind clauses, or insured results.
Our proposals target transactions that make use of these common indicia in an effort to
deter tax shelter transactions. This, we hope, will provide an ex ante solution to the corporate tax
shelter problem.
Consistent with the shared responsibility of the users. the abettors and expediters, the
proposals don't just apply to the taxpayer, but are designed so that all the players bear the risk if
the transaction fails unreasonably to comport with established principles.
Under our proposed definition a corporate tax shelter includes transactions for which:
a.
the reasonably expected pre-tax profit (on a present value basis) is insignificant
relative to the reasonably expected net tax benetits. or
b.
the result would improperly eliminate or significantly reduce tax on economic
Income.
Our basic definition excludes benefits intended by Congress. Thus, for example, lowincome housing partnerships whose viability depends upon tax benetits are not within our
definition, nor are traditional financial leases that meet the contours of established rulings and
case law.
Critics of our proposals have suggested that our detinitions are too broad or may create
too much uncertainty and thus may penalize otherwise legitimate transactions. We have
announced, and repeat here, that we will work with Congress and the corporate community to
refine our definition in a manner that will protect from penalty any legitimate, normal-course-ofbusiness transactions. We also invite descriptions of specitic cases that require clarification. We
..,
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j
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have attempted a definition of corporate tax shelter that is narn)\\ cr and therefore less uncertain
than other detinitions and fonnulations used in the Code. SlHlle examples of imprecise. but well
understood fonnulae, already in the law are:
I.
section 482. which grants authority to reallocate income. deductions etc .. between
organizations if necessary to prewnt evasion of tax or clearly to reflect income;
2.
section 446, which prescribes a change of method of accounting if necessary to
clearly reflect income: and
3.
sections 269 and 357. to pick at random two sections that contain as a test. a
purpose of tax avoidance or evasion.
Also our definition builds on a finn foundation in court decisions articulated in cases such as
ACM and Sheldon.
Thus we strike no new ground in detining the nature of tax shelters. Taxpayers and
practitioners have lived with the concepts our definitions embody as they have been enunciated
by the courts since the 1920's. Whatever uncertainty is inherent in the law today has been well
tolerated. This is really no more than a debate on rules vs. standards. Bright-line/safe-harbor
tests, although appropriate in some circumstances. encourage aggressive positions and playing
the examination lottery. As Professor James Eustice wrote in 1976. "I personally have viewed
some transactions that seem to me to fly only by principles of levitation .... excessive
concentration on technical matters to the exclusion of the broader issues has obviously raised the
level of complexity throughout the entire tax system." Standards. in contrast, require the
application of common olfactory sense. Moreover some uncertainty may be useful in
discouraging taxpayers from venturing too close to the edge. and thereby going over the edge, of
established principles.
Our first proposal would modify the substantial understatement penalty for corporate tax
shelters. The current 20-percent substantial understatement penalty imposed on corporate tax
shelter items can be avoided if the corporate taxpayer had reasonable cause for the tax treatment
of the item and good faith. The reasonable cause exception would be deleted and we propose to
increase the substantial understatement penalty on corporate tax shelter items to 40 percent,
unless the taxpayer:
a)
discloses to the National Office of the Internal Revenue Service within 30 days of
the closing of the tax shelter transaction appropriate documents describing the
transaction; and
b)
files a statement with its tax return verifVinl!
. that such disclosure has been made',
and
~
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c)
provides adequate disclosure on its tax returns as to the hook/tax differences
resulting from the corporate tax shelter itcm I()r thc taxable vears in \vhich the tax
shelter transaction applies.
-
Despite today's heightened substantial understatement penalty for corporate tax shelters.
there continues to be a significant number of abusive tax shelter transactions involving corporate
taxpayers. The more narrow reasonable cause exception for corporate tax shelters does not
appear to adequately deter such transactions. Moreover wc arc hard pressed to determine a
reasonable cause for entering into a corporate tax shelter.
Some have suggested that advance disclosure to the IRS should be sutlicient to avoid the
penalty and have asked us to consider the establishment of an advance ruling procedure. Under
such a procedure, if a transaction is fully disclosed to the [RS in advance. it would be made
possible to obtain an expedited ruling from the Service on the tax shelter penalty question
without determining the underlying substantive liability questions. Others have suggested a
coordinated review process of corporate tax shelters. This could be facilitated by the in-process
reorganization of the IRS. We are considering these suggestions. Certainly many of the
transactions we seek to eliminate cannot tolerate sunlight.
The next general proposal would also apply at the taxpayer level and would disallow a
deduction, credit, exclusion or other allowance obtained in a tax avoidance transaction. Section
269 currently disallows deductions in transactions with a principal purpose of tax avoidance.
The provision, as currently applied. has proven insufficient to address many corporate tax shelter
schemes, since the courts have allowed taxpayers with some ingenuity to contrive some
semblance of business purpose.
A third proposal would affect the promoters and expediters. It would deny deductions for
tax advice in implementing a corporate tax shelter and it would impose a 25 percent excise tax on
fees received in connection with the purchase and implementation of corporate tax shelters
(including fees related to the underwriting). It would. of course. not apply to advice that a
transaction would not stand scrutiny. but only to fees in implementation of a shelter.
Many reputable practitioners have advised us that to control the proliferation of tax
shelters, the promoter needs to suffer the consequences. as well as the taxpayer. As the ABA put
it in its recent testimony: "all essential parties to a tax-driven transaction should have an
incentive to make certain that the transaction is within the la\v."
Another proposal aimed at discouraging overly aggressive promotion would impose on
the corporate purchaser of a corporate tax shelter an excise tax of 25 percent on the maximum
payment under a tax benefit protection arrangement at the time the arrangement is entered into.
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A tax benetit protection arrangement \\ould inclulk ,I rescissil)n clause. guarantee of tax
benetits arrangement or any other arrangement that has the ,,~ll11e eCl)lwmic effect (~ .. insurance
purchased v.;ith respect to the transaction).
If the taxpayer is unwilling to hear the risk of the k.'~itil11'IC:\ of its transaction. tax benefit
protection arrangements permit even the timid to gIl fOr\\;lrd nil ,I "Ilothing ventured. nothing
gained" theory.
We have been discussing provisions affecting taxpayers. their advisors. and tax shelter
promoters. A measure of responsibility also lies with those \\ ho peddle their tax-advantaged
status to aid and abet tax avoidance. We propose that income allocable to a tax indifferent party
with respect to a corporate tax shelter would be taxable to such rarty. This will help ensure that
all parties to the transaction will monitor its propriety. The tax 011 the income allocable to the tax
indifferent party would be determined without regard to any statutory. regulatory. or treaty
exclusion or exception. All other participants of the corporate tax shelter (i.e .. any participant
other than the tax indifferent party in question) \\ould be jointl: and severally liable for the tax.
•
Many corporate tax shelters involve a mismatch or separation of income or gains from
losses or deductions. In these transactions. the tax indifferent party absorbs the income or
gain generated in the transaction. leaving the corresponding loss or deductions for the
taxable corporate participants. Tax inditTerent parties often agree to engage in such
transaction in exchange for an enhanced return on il1\·estment or for an accommodation
fee.
•
The freedom of taxation of tax indi fferent parties should not be a commodity to sell to
parties engaged in avoidance through tax sheltering.
The next proposal of general applicability would preclude corporations from taking any
position (on any return or refund claim) that the Federal income tax treatment ofa transaction is
different from that dictated by its form if a tax inditTerent party has a direct or indirect interest in
such transaction.
Exceptions to this rule would apply in cases of tax return disclosure and otherwise as
appropriately provided in regulations.
Taxpayers have control over the form of their transactions. It is thus appropriate to
impose restrictions on the taxpayer's ability to argue against the t()rm it has chosen in order to
\\hipsaw the fisc.
In addition to the generic proposals I have just summarized. our budget also addresses a
number of specific tax-engineered transactions that require suhstantive fixes.
-6-
II.
U.S.-Controlled Foreign Suhsidiaries
Frequently related to the tax shelter discussion. hllt pi C(lllI"Se. ill\ol\ing much broader
issues is our review of taxation of foreign source income .. \:--, Ill<ln\ ot' \OU know. this summer
we hope to release for comment our study of Suhpart F issues. <llo;1g with the proposed
regulations under Notice 98-35 dealing with hybrid entities.
We are conducting this study in a comprehensi\(.~ manner. relying on evidence and
thorough analysis and without a preconceived agenda. We shall neither be bound to. nor ignore.
the policies that have guided us for the past three decades. l: pon completion. we expect to set
forth whatever conclusions a tabula rasa review of the e\'idence leads us to. We intend to release
our study for public comment as the basis for an organized discussion of views on the issues. Of
course, taxpayers will also have the opportunity for puhlic cOll1ment on the regulations that we
indicated in the Notice would be proposed. No formal decisions will he made before review of
such comment or before Congress has had adequate opportunity to review the matters involved.
There are a number of principles that seem to have long guided policymakers in
determining the appropriate taxation of international income and that will have to be considered
in the study. Although there are ditTerences over the application and relative weight to be given
to them, these policy goals in the international tax area ha\e heen generally recognized.
1.
Meet the revenue needs determined hy Congress in a fair manner
11.
Minimize compliance and administrati\'e hurdens
111.
Minimize distortion by. and maintain neutrality o[ tax considerations in
making of investment decisions
IV.
Take due account of the competiti\'e needs of U,S, multinational business,
and
v.
Conform with international norms. to the extent possible.
The first three goals apply to income taxation in general.
Raising Revenue Fairly. The first goal is of primary importance. The credibility of our
tax system depends upon the perception that revenue is heing raised fairly and that the intended
tax base is protected from avoidance.
Application of the concept of fairness. however. inevitahly produces disagreement. For
example, what is a fair tax burden on foreign business income compared to the tax burden on
business income from domestic investment? And should there he a lower rate of tax imposed on
income from business activities than the rate of tax imposed on income from labor'? These
-7-
fairness questions must be answered \\ ith signiticant r()plll~lr satisbction of some signiticant
majority.
Minimizing Compliance and Administrative Burdens. The second goaL minimizing
compliance and administrative burdens and avoiding complexity. receives universal acceptance,
or at least lip service. The trouble is that simplitication frequently comes with a cost.
For example, we might be able to drastically simplit~ suhpart F. by adopting an
alternative rule which eliminates the need to distinguish rassi\t~ husiness income from active
business income and mobile income from non-mobile income. rt) accomplish this. subpart F
could be limited to situations where the effective rate of ti)reign tax on foreign business income
is below a threshold, and would not apply if the income is suhject to foreign tax at or in excess of
the threshold. We recognize that the attractiveness of this relative simplification would largely
depend upon the threshold rate.
Neutrality and Competitiveness. The goals of neutrality and competitiveness call for
particular attention, because much of the debate about suhpart F has revolved around these
objectives. The objectives are sometimes in contlict. for example if reducing undue burdens on
competitiveness requires reducing tax on foreign income. Tn what extent can this be
accomplished without distorting investment decisions by favoring foreign investment over
domestic investment? At the recent hearing before the Senate Finance Committee on taxation of
foreign source income, a number of Members bridled at suggestions that moving corporate situs
offshore to minimize involvement with U.S. taxation was a tolerable option. And arguments that
investment location decisions are determined by factors other than taxation are at first blush at
least inconsistent with suggestions that U.S. taxes are strangling the competitive position of our
companIes.
Thus we note that, "competitiveness" means different things to different people. To quote
a 1991 Joint Committee on Taxation Report. "although the term competitiveness is used
frequently, it does not have a consistent detini tion."
Conforming to International Norms. Similarly. the goal of conforming with international
norms is one that can mean different things to ditTerent people. As traditionally conceived,
conformity requires, not rigid conformity of rates and base among countries, but that we adopt
policies, such as a foreign tax credit. that have historically heen adopted by developed countries
to avoid double taxation. Some, however. would interpret conformity as requiring that we adopt
policies that would facilitate world-wide escape from taxation. We do not accept the lowest
common denominator as setting the standard in the areas 0 f hri hery. environmental regulation or
fair labor laws, and we should not accept it in the tax area either.
Before I close, I'd like to address a topic that is of great concern to us in the Government
and, from what we are learning, is of growing concern to you: Disclosure of Advance Pricing
Agreements.
-8-
As most of you know, the IRS recently took thc position in litigation that although APAs
contain return information that is protected from disclosurc undcr ~61 03. thev are also "written
determinations" subject to disclosure in redacted form undcr ~h I I fl. This po~ition has raised the
concerns of some that their confidential information \\()uld hc disclosed by the IRS.
Although this matter is still in litigation and. thcrc!ill·c. Ill) comments must be limited, let
me say a few things about it. First \\e at the Treasury. as \\ cll as those at the IRS, from
Commissioner Rossotti and Chief Counsel Brown on do\\ n. carc deeply about the APA program
and its success, and all of the decisions in this matter are hci ng l11ade with due regard to the
viability of the program. Second, we at Treasury have contidcnce that with respect to any given
APA, if we put the taxpayer and the IRS in a room, an appropriately redacted APA could be
agreed that would satisfy the public's reasonable need to know. Third, for purposes of analyzing
the disclosure issue, we believe that there may be a distinction to he made between APAs
themselves and background files. It appears that the background tiles contemplated for
disclosure under §6110, for example the background tiles relating to private letter rulings are far
more limited in factual disclosure by the taxpayer from the hackground files relating to APAs.
There is some question about whether the current law adequately recognizes such a distinction
and, if it does not, legislation to do so may be necessary. And although the Treasury has not
formulated a position on any such legislation, those who Illay he thinking that broader legislation
is appropriate, such as legislation to prohibit any disclosure of any contents even of the APA
itself, may not be acting in the best long-term interests of the program and may need to refine
their analysis.
III.
Conclusion
Focusing on corporate tax shelters and on the appropriateness of the current-law rules
under Subpart F are major undertakings for the Office of Tax Policy, the Treasury, and the
Administration. In important ways, each is a part of a more general set of concerns, not confined
to tax shelters per se alone nor to principles of international taxation, but lying in the general
ground of the effects of the globalization of the economy on our system of corporate taxation.
Your participation, criticism, and suggestions are all critical to the success of these projects. We
look forward to working with you in the coming months.
- 30 -
-9-
DEPARTMENT
OF
TREASURY
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 3 :00 P.M.
Text Prepared for Delivery
March 23, 1999
TREASURY ASSISTANT SECRETARY (TAX POLICy)
DONALD C. LUBICK
HOUSE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
Mr. Chainnan and Members of the Subcommittee:
It is a pleasure to speak with you today regarding pension issues. In accordance with the
focus of this hearing, as described in the Subcommittee's announcement, our testimony will
address issues relating to pension coverage and participation, particularly for low-income and
part-time workers, women, and others who may not be adequately served by current law; ways to
improve retirement benefits for workers; portability of pension benefits; and simplification of
regulatory requirements. We will also describe the President's proposals to further these goals,
strengthen the private pension system, and increase pension security.
The Nation's private pension system has accomplished a great deal for many Americans.
Pension benefits have helped millions of people maintain their standard of living in retirement.
More than $4 trillion in assets are now held in private retirement accounts. These assets are
about 20 times greater than they were when ERISA was enacted in 1974. (Over $2 trillion more
are held in plans of state and local governments.) Approximately 47 million workers in the
private sector are earning pension benefits in their current jobs, and about two of three families
will reach retirement with at least some private pension benefits.
Enhancing pension coverage and security, improving retirement benefits for workers,
improving portability, and simplifying the pension laws has been a major focus of the Clinton
Administration. Working together in a bipartisan fashion over the past six years, the
Administration and Congress have enacted important legislation that has furthered these
RR-3036
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
'U S Government Pflntmq Ottoce 1998 - 619-559
objectiyes. We look forward to working with Congress and especially with this Committee to
build on these past accomplishments. Before proceeding further, it is worth noting several of
these accomplishments.
I. Past legislative accomplishments
In 1993, the Administration submitted legislation that was enacted as the Retirement
Protection Act of 1994, to protect the benefits of workers and retirees in traditional pension plans
by increasing funding of underfunded defined benefit plans and by enhancing the Pension Benefit
Guaranty Corporation's (PBGC) early warning and enforcement powers.
In 1995, the President introduced a package of pension simplification proposals at the
White House Conference on Small Business. These proposals were targeted toward expanding
coverage, with the particular goal of increasing the number of small businesses that offer
retirement plans for their employees, and increasing pension portability. Many of these proposals
-- or variations on them -- ultimately were enacted as part of the 1996 Small Business Job
Protection Act. These pension provisions, the end product of seven years of bipartisan efforts,
represented the most significant changes to the pension laws since the 1986 Tax Reform Act.
Among the most important of these changes were
•
creation of a new, highly simplified 401(k)-type retirement savings plan for small
business (the "SIMPLE"), which is proving to be quite popular with small employers;
•
simplification ofthe nondiscrimination testing for 401(k) plans and the development ofa
design-based safe harbor permitting employers an alternative to 401(k) nondiscrimination
testing;
•
expansion of 401(k) plans to nongovernmental tax-exempt entities;
•
elimination of the "family aggregation" rules that unduly restricted the ability of family
members of small business owners and of other highly compensated employees to save
for their own retirement; and
•
elimination of the section 415( e) combined limits on benefits and contributions applicable
to employees who participate in both defined benefit and defined contribution plans.
In 1997, the Taxpayer Relief Act included a number of other provisions that expanded the
tax incentives for retirement savings, including
•
expansions of individual retirement accounts (IRAs),
•
repeal of the 15 percent excise tax on very large retirement distributions from qualified
plans and IRAs, and
•
an increase in the full funding limitation applicable to defined benefit pension plans.
2
We can take further steps to promote retirement savings and improve and strengthen our
pension system by enacting legislation that will expand the number of people who will have
retirement savings (particularly moderate- and lower-income workers not currently covered by
employer-sponsored plans), improve workers' retirement benefits, and make pensions more
secure and portable. Our focus should be on covering those who are left out of the current
system and on improving the level of benefits of those whose current benefits are very modest.
II. Retirement Savings and Tax Policy
Background
Under our pension system, qualified plans are accorded special favorable tax treatment.
A sponsoring employer is allowed a current tax deduction for plan contributions, subject to
limits, while participating employees do not include contributions and earnings in gross income
until they are distributed from the plan. Trust earnings accumulate tax free in the plan.
These important tax preferences for qualified plans are designed to encourage employers
to sponsor retirement plans and to encourage participation by moderate- and lower-paid workers.
It is often noted that pension coverage reduces the need for public assistance among retirees and
reduces pressure on the Social Security system. See, e.g., Joint Committee on Taxation,
Overview ofPresent-Law Tax Rules and Issues Relating to Employer-Sponsored Retirement
Plans (JCX-16-99), March 22, 1999.
To ensure that benefits are provided by employers to moderate- and lower-income
workers, qualified plans are subject to nondiscrimination rules. Any new pension proposals
should be consistent with securing broad retirement coverage and nondiscriminatory benefits in
employer-provided plans.
Standards for evaluating retirement savings proposals
It is important that any new or additional tax subsidies for retirement savings satisfy
several key principles.
First, tax preferences should create incentives for expanded coverage and new saving,
rather than merely encouraging individuals to reduce taxable savings or increase borrowing to
finance saving in tax-preferred form. Targeting incentives at getting benefits to moderate- and
lower-income people is likely to be more effective at generating new saving. In response to
additional tax incentives, higher-income individuals are more likely to shift their savings from
one vehicle to another, or offset savings with increased borrowing -- instead of actually saving
more. People who save less and have fewer financial resources to shift may be more likely to
respond by actually increasing their saving.
Second, any new incentive should be progressive, i.e., it should be targeted toward
helping the millions of hardworking moderate- and lower-income Americans for whom saving is
3
most difficult and for whom pension coverage is currently most lacking. Incentives that are
targeted toward helping moderate- and lower-income people are consistent with the intent of the
pension tax preference and serve the goal of fundamental fairness in the allocation of public
funds. The aim of national policy in this area should not be the simple pursuit of more plans,
without regard to the resulting distribution of pension and tax benefits and their contribution to
retirement security. The object ofthese tax preferences should not be to deliver the bulk of the
benefits to those who need them least.
Third, pension tax policy must take into account the quality of coverage: Which
employees benefit and to what extent? Will retirement benefits actually be delivered to all
eligible workers, whether or not they individually choose to save by reducing their take-home
pay? It is desirable to encourage measures that promote participation by lower- and moderateincome workers, such as employer-funded defined benefit or defined contribution plans, in
addition to elective salary reduction arrangements.
Finally, any new or additional tax preferences must not undermine our fiscal discipline.
The President's Proposals
The President has made clear that in this era of surpluses we must save Social Security
first. He proposes to commit 62 percent of the unified surplus for the next 15 years to Social
Security and an additional 15 percent of the surplus to Medicare to assist retired workers in
maintaining their health security.
While protecting the integrity of Social Security is our first priority, it should be possible
to take other steps to enhance the retirement security of American workers by promoting new
retirement savings for moderate- and lower-income workers many of whom currently lack
coverage. The President proposes to devote 12 percent of the unified surplus to establishing a
new system of Universal Savings Accounts (USAs) focused especially on those workers.
The President's fiscal year 2000 budget also includes a number of proposals that satisfy
the principles outlined earlier and that will promote further expansion of workplace-based
savings opportunities, particularly for moderate and lower-income workers not currently covered
by employer-sponsored plans. These proposals, which are spelled out in greater detail below,
include:
•
a small business tax credit for expenses of starting a new retirement plan,
•
the SMART -- a simplified defined benefit-type plan for small business,
•
IRA contributions through payroll deduction,
•
improved portability among different types of plans, and
4
Improvements in the vesting and annuity options to enhance retirement security for
women.
The USA account proposal and the pension proposals in the fiscal year 2000 budget
reflect the principle that any new tax subsidies for retirement savings should be carefully
targeted. To the extent possible, we should avoid providing additional tax subsidies for saving
that would occur in any event -- shifting of savings -- which is often the case when the incentives
are directed to higher-income individuals.
With this background in mind, I would now like to address the issues identified in the
Subcommittee's announcement as the focus of this hearing.
III. Improving Portability of Retirement Savings
Over the years, the Administration and Congress have worked together on a bipartisan
basis to greatly improve retirement savings portability for workers. The President's budget
clearly reflects the Administration's desire to work with Congress to accomplish even more in
this area. We must remember that there are at least two important elements in improving
portability: accelerating vesting and making it easier to consolidate retirement savings. We
commend Representatives Portman and Cardin and the other co-sponsors ofH.R. 1102 for their
leadership in promoting improvements in portability.
Accelerated Vesting for Matching Contributions
Currently, employer contributions to a plan, including matching contributions to a 401(k)
plan, are required to become vested only after five years (or seven years if vesting is phased in).
If an employee switches jobs after four years, all employer matching contributions could be
forfeited. Under the President's budget, all employees must be fully vested in the employer's
matching contributions after three years of service (or six years if vesting is phased in).
Consolidation of Retirement Savings
Under current law, there are many barriers to consolidating retirement savings. The
President's budget takes significant steps toward eliminating these barriers, while balancing the
need to prevent increased leakage from the retirement system. Leakage is a serious concern.
Two thirds of workers who receive a lump sum distribution from a pension plan do not roll over
the distribution to another retirement savings vehicle. Under the President's budget proposals
•
A participant with an eligible rollover distribution from a qualified retirement plan would
be able to roll the distribution into a section 403(b) tax-sheltered annuity, or vice versa.
Under the proposal, such a rollover could occur directly or through an IRA.
•
Amounts held in a deductible IRA also could be rolled over to an individual's workplace
retirement plan. In addition to providing more opportunities to consolidate retirement
5
savings, this proposal would help to simplify the existing "conduit IRA" rules.
•
A participant in a state or local government section 457 plan would be able to roll a
distribution from that plan into an IRA. This proposal would greatly increase payment
flexibility for participants in these plans.
•
A participant with after-tax contributions in a qualified plan would be able to roll those
contributions into a new employer's defined contribution plan or into an IRA. Allowing
these distributions to be rolled over would increase the chances that these amounts will be
retained until needed for retirement.
•
A new hire in the Federal government would be able to roll over a distribution from a
prior employer's plan to the Federal Thrift Savings Plan. We think it is important for the
Federal government to set an example for all retirement plan sponsors in this regard.
•
An employee of a state or local government would be able to use funds in other
retirement plans to purchase service credits in the state or local government's defined
benefit plan without a taxable distribution. This provision would be particularly helpful
in allowing teachers, who often move between different states and school districts in the
course of their careers, to more easily earn a pension reflecting a full career of
employment in the state in which they end their career.
We believe these proposals represent a significant step forward in the process of
developing bipartisan consensus in the pension area. As noted, these proposals are substantially
similar to those included in H.R. 1102 and have benefitted from discussion of these issues in this
Subcommittee last year. We look forward to working with members and their staffs to resolve
the remaining differences between these proposals.
IV. Improving coverage and participation. particularly for low-income and part-time
workers and women
While private pension coverage continues to grow, half of all American workers -- more
than 50 million people -- have no pension plan at all. The bulk of the uncovered workers fall into
one of three overlapping categories: lower wage workers, employees of small business, and
women. The President proposes to address this low rate of coverage with a number of measures
that are targeted to these three groups and that satisfy the principles we have identified.
Coverage of lower-wage workers and Universal Savings Accounts
Lower-wage workers are far less likely to be covered by a pension plan than higher
income individuals. Over 80 percent of individuals with earnings over $50,000 a year are
covered by an employer retirement plan. In marked contrast, fewer than 40 percent of
indi.v~duals with incomes under $25,000 a year are covered by an employer retirement plan. In
addItIOn, the qualified plan rules do not require coverage of many part-time workers.
6
The President proposes to address these problems by devoting 12 percent of the unified
surplus to establishing a new system of Universal Savings Accounts. While the specifics of this
proposal are not the subject of this hearing, we expect these accounts to provide a tax credit to
millions oflower- and middle-income workers, including many part-time workers, to help them
save for their retirement. Millions of workers would receive an automatic contribution. Those
who contributed additional amounts also would receive a matching contribution to their USA
account. The matching contribution would be more progressive than current tax subsidies for
retirement savings -- helping most the workers who most need to increase retirement savings.
By creating a retirement savings program for working Americans with individual and
government contributions, we will help all Americans to become savers and enjoy a more
financially secure retirement.
USA accounts are intended to help provide retirement savings to the millions of workers
who are not covered by employer-sponsored pensions. In so doing, we expect USAs to be
structured in such a way as to complement and strengthen employer-sponsored plans instead of
substitute for them.
Small business tax credit for expenses of starting a new retirement plan
Although businesses with fewer than 100 workers provide 40 million jobs, only 20
percent -- about 8 million of these employees -- have pension coverage from their employer. In
comparison, 62 percent of workers in firms with 100 or more employees have pension coverage.
The President's budget provides a three-year tax credit to encourage small businesses to
set up retirement programs. The credit would be available to employers that did not employ, in
the preceding year, more than 100 employees with compensation in excess of $5,000, but only if
the employer did not have a plan or payroll deduction IRA arrangement during any part of 1997.
In order for an employer to get the credit, the plan would have to cover two or more individuals.
For the first year of the plan, small businesses would be entitled to a credit, in lieu of a
deduction, equal to 50 percent of up to $2,000 in administrative and retirement education
expenses associated with a defined benefit plan (including the new SMART plan described
below), 401(k), SIMPLE or other pension plan or payroll deduction IRA arrangement. For each
of the second and third years, the credit would be 50 percent of up to $1,000 in such costs. The
credit covers the expense of retirement education as well as administrative expenses because
informed employees save more.
Promoting IRA contributions through payroll deduction
To make it easier for workers to contribute to IRAs, employers would be encouraged to
offer payroll deduction. Contributions of up to $2,000 to an IRA through payroll deduction
generally would be excluded from an employee's income, and, accordingly, would not be
reported as income on the employee's Form W-2. Some employees would be able to use simpler
t<LX fOnTIs. As evidenced by the rising participation rates in 401(k) plans, the greater convenience
of savina through payroll deduction encourages lower- and moderate-wage earners to save more
for retir:ment. Small businesses establishing such arrangements would be eligible for the new
pension program start-up tax credit, provided the arrangement is made available to all employees
of the employer who have worked with the employer for at least three months.
The SMART -- a simplified defined benefit-type plan for small business
In 1996, the Administration and Congress created the SIMPLE plan -- an easy-toadminister defined contribution plan for small businesses. However, there is no comparable taxfavored defined benefit pension plan that avoids the need for complex actuarial calculations, with
the attendant administrative costs and unpredictability of funding requirements.
The President's budget proposes a simplified defined benefit-type plan for small business,
the SMART plan (Secure Money Annuity or Retirement Trust). SMART combines many of the
best features of defined benefit and defined contribution plans and provides another easy-toadminister pension option for small businesses. Because the SMART does not involve many
employer choices regarding plan design or funding, many of the rules that govern these choices
in defined benefit plans will not apply to the SMART. For example, the SMART Plans would
not be subject to the nondiscrimination or top-heavy rules applicable to qualified retirement
plans. SMART Plans also would not be subject to the limitations on benefits under section 415.
Similarly, because SMART Plans do not have complex actuarial calculations, they would be
subject to simplified reporting requirements. The minimum guaranteed benefit under the
SMART Trust, described below, would be guaranteed by the PBGC - with a reduced premium of
$5 per participant.
A business would be eligible to adopt a SMART Plan ifit employed 100 or fewer
employees with W-2 earnings over $5,000 and did not offer (and had not offered during the last
five years) a defined benefit or money purchase plan. An employer that maintained a SMART
Plan could not maintain additional tax-qualified plans, other than a SIMPLE plan, or a 401(k)
plan or 403(b) tax-sheltered annuity plan under which the only contributions that are permitted
are elective contributions and matching contributions that are not greater than those provided for
under the design-based safe harbor for 401(k) plans.
SMART Plans would provide a fully funded minimum defined benefit, with a possible
higher benefit if cumulative investment returns exceed 5 percent. Each year the employee
participates, all eligible employees (employees with at least $5,000 in W-2 earnings with the
employer in that year and in two preceding consecutive years) would earn a minimum annual
benefit at retirement equal to 1 percent or 2 percent of compensation for that year. Moreover, an
employer could elect, for each of the first 5 years the SMART Plan is in existence, to provide all
employees with a benefit equal to 3 percent of compensation (in lieu of 1 percent or 2 percent of
compensation). The maximum compensation that could be taken into account in determining an
employee's benefit for a year would be $100,000 (indexed for inflation). Benefits would be fully
vested.
8
Under the SMART, an employer would be required to contribute each year an amount
sufficient to provide the annual benefit accrued for that year payable at age 65, using actuarial
assumptions specified in the statute (including a five percent annual interest rate). The
contributions would be allocated to a separate account to which actual investment returns would
be credited for each employee. If a participant's account balance were less than the total of past
employer contributions credited with five percent interest per year, the employer would be
required to contribute an additional amount for the year to make up for any shortfall. Moreover,
the employer would be required to contribute an additional amount for the year to make up for
any shortfall between the balance in the employee's account and the purchase price of an annuity
paying the minimum guaranteed benefit when an employee retires and takes a life annuity. On
the other hand, if the investment returns exceeded the five percent assumption, the employee
would be entitled to the larger account balance. If the employee elected to receive an annuity, the
larger account balance would translate to a larger annuity.
If an employer did not wish to take on the risk that the cumulative investment return will
be less than 5 percent or that the employee will choose an annuity when the insurance market is
unfavorable, the employer could choose to purchase a SMART annuity instead. In the case of a
SMART Annuity, each year an employer would be required to contribute the amount necessary
to purchase an annuity that provides the benefit accrual for that year on a guaranteed basis.
SMART Plans would be subject to the qualified joint and survivor annuity rules that
apply to qualified defined benefit pension plans. Lump sum payments also could be made
available. No distributions would be allowed from a SMART Plan prior to an employee's
attainment of age 65, except in the event of death or disability, or where the account balance of a
terminated employee was not more than $5,000. However, an employer could allow a terminated
employee who has not yet attained age 65 to directly transfer the individual's account balance
from a SMART Trust to either a SMART Annuity or a special individual retirement account
("SMART Account") that is subject to the same distribution restrictions as the SMART Trust.
If a terminated employee's account balance did not exceed $5,000, the SMART Plan
would be allowed to make a cashout of the account balance. The employee would be allowed to
make a tax-free transfer of any such distribution to a SMART Annuity, a SMART Account, or a
regular IRA.
Distributions from SMART Plans would be subject to tax under current rules applicable
to the taxation of annuities. A 20 percent additional tax would be imposed for violating the preage 65 distribution restrictions under a SMART Annuity or SMART Account.
Enhanced retirement security for women
Women receive lower pension benefits than men. Only 30 percent of all women age 65
or older were receiving a pension in 1994 (either worker or survivor benefits), compared to 48
percent of men. Women's pensions are typically smaller than those received by men. Among
new private sector pension annuity recipients in 1993-94, the median annual benefit for women
was $4,800, or only half of the median benefit of $9,600 received by men.
9
The President's proposals include a number of provisions that -- while gender neutral -would have the primary effect of benefitting women. For example, workers who take time off
under the Family and Medical Leave Act (FMLA) would be able to count that time toward
retirement plan vesting and eligibility requirements. In some cases, counting time taken under
FMLA can make the difference between receiving or not receiving credit toward minimum
pension vesting requirements.
The budget would make a 75 percent (or higher) joint and survivor annuity universally
available in plans that are subject to the joint and survivor rules. Having higher survivor
annuities could reduce the number of elderly widows living in poverty. Under current law,
workers are given the option of a single life annuity, which pays only during the life of the
covered employee, or a "joint and survivor annuity" which typically pays a lower pension benefit
during the lifetime of the retiree, but continues to pay 50 percent of the amount to a retiree's
surviving spouse. Unfortunately, the income a surviving spouse needs to live on is often more
than 50 percent of the pension payable while the worker is alive. Many couples may prefer an
option that pays a somewhat smaller benefit to the couple while both are alive, but provides a
larger benefit -- 75 percent of the joint annuity amount -- to the surviving spouse. In addition,
the spouse would be required to receive the same explanation of the worker's choices that the
worker receives.
Plan vesting requirements have an especially adverse impact on female employees who
tend to have shorter job tenure. As described above, under the President's budget, all employees
must be fully vested in the employer's matching contributions after three years of service (or six
years if vesting is phased in).
Retirement Savings Education
One key to improving coverage and participation by workers is to address the relative
lack of employee demand. Even among workers whose employers offer plans, many fail to take
advantage of the retirement savings opportunities available. Nearly 40 percent of employees
earning less than $50,000 a year who are eligible to save through a 40 1(k) plan fail to participate.
Educating workers about the importance of saving for retirement and about investment
and financial choices may be quite helpful. A recent study, for example, found that education in
the workplace tended to increase participation of workers in 401(k) plans. The role of education
in this area and the educational efforts that have been undertaken by the Administration will be
addressed by the Department of Labor in its testimony before this Subcommittee today.
v. Improving Benefits for Workers
We share with the Committee the goal of increasing workers' retirement income security.
Of course, the nondiscrimination and top-heavy safeguards play an important role in directing
adequate benefits to moderate- and lower-income workers under tax-qualified retirement plans,
and changes to these rules should be considered only to the extent that this objective is not
10
compromised. We also believe it is important to encourage employers to adopt plans that
provide retirement benefits to all covered employees, in addition to salary reduction
arrangements (which may not benefit workers who are unable to save). As noted, the President's
budget also proposes to improve benefits by accelerating vesting.
Nondiscrimination Rules
The nondiscrimination standards benefit the majority of employees by requiring the
employer to provide benefits to them as a condition of receiving tax-favored status for its
retirement plans. Higher paid employees are typically very interested in saving for their
retirement, and many of them would save even in the absence of an employer plan. On the other
hand, many lower-paid employees understandably prefer receiving a larger portion of their total
compensation package in the form of current pay, rather than in retirement plan benefits, given
scarce resources to meet current expenses. However, it is just these types of lower-paid
employees -- who are unable to save on their own -- who need the most help in saving for
retirement.
If the nondiscrimination rules were relaxed, some employers could respond by increasing
the benefits provided to their higher paid employees without increasing the benefits provided to
the rest of their employees. Alternatively, the employer could maintain the current contribution
level for the higher paid employees and respond to other employees' desire to shift their
compensation package to cash compensation by reducing their retirement benefits. Further
reductions in the already low rate of savings for lower-paid employees would have consequences
for our entire society.
Top-Heavy Safeguards
The top-heavy safeguards serve as a safety net for lower- and moderate-wage workers,
delivering benefits to those workers when the nondiscrimination rules are not adequate to the
task. A tax-qualified plan is considered top-heavy whenever 60 percent of the value of the
benefits provided under the plan inure to key employees (i.e., certain owners and officers). If a
plan is top-heavy, it must provide certain minimum benefits or contributions and must accelerate
vesting.
Some pension practitioners have traditionally used their ingenuity to find gaps in the
nondiscrimination rules in order to allow plan sponsors to save costs by minimizing the benefits
provided to moderate- and lower-paid employees. Some of the more aggressive approaches have
resulted in very large disparities in benefits between key and non-key employees. For example,
without top-heavy safeguards, some plans could provide as much as $30,000 of annual taxfavored contributions to key employees and as little as one percent of pay to younger non-key
employees. The top-heavy rules fill a portion of those gaps by requiring a minimum contribution
for all non-key employees that is generally equal to three percent of pay.
As noted, the top-heavy rules apply only when more than 60 percent of the benefits in a
plan are concentrated among a limited group of key employees -- often as a result of non-key
11
employees tenninating without vesting or because an employer's demographics accommodate a
plan design that takes advantage of the pennitted disparity in the nondiscrimination rules in order
to provide more benefits to higher paid employees. By requiring at least a minimum level of
benefits for all employees and accelerating vesting, the top-heavy rules playa very important role
in leveling the playing field for workers in these cases.
We do, however, believe that some elements of proposals to simplify the top-heavy rules
warrant serious consideration, and we would be pleased to work with this Committee in that
regard. However, we have serious concerns about various elements of current top-heavy
simplification proposals, particularly provisions that would undermine the ownership attribution
rules, which apply not only for purposes of the top-heavy rules, but for purposes of the other
pension nondiscrimination rules as well.
A fundamental principle underlying the Internal Revenue Code is that tax rules should not
be avoided by simply shifting ownership of a business among family members. Proposed
changes in the ownership attribution rules would virtually eliminate the obligation to provide fair
benefits to non-family member employees in small business retirement plans. For example,
under a proposed change, a business run by two spouses who also employed a full-time nonfamily member would be able to exclude that employee from a retirement plan covering the two
spouses as long as the business was legally owned solely by either spouse. Obviously, such a
proposal could reduce coverage substantially among workers in small businesses and is
inconsistent with our efforts to expand coverage of those workers.
The top-heavy and nondiscrimination protections benefit the American taxpayer and
protect the integrity of the pension tax preference by ensuring that the tax preference is utilized
by workers throughout the income spectrum and does not serve primarily as a tax shelter for
higher-income individuals. Any modifications that might be made to the top-heavy or
nondiscrimination protections must not result in moderate- or lower-income workers receiving
smaller benefits or in a larger number of short-service workers forfeiting their benefits.
401 (k) Safe Harbor
The President's budget proposes to improve the benefits of workers by modifying the
rules applicable to the safe harbor 401(k) plan. Under this plan design, an employer is not
required to detennine the rate at which nonhighly compensated employees are participating in
the plan, if the employer provides a specified matching contribution formula. To increase the
participation rate of nonhighly compensated employees, the budget would specify a minimum
period following the receipt of an explanation of the plan during which employees could choose
to participate in the plan for the upcoming year and would require that all employees covered
under a safe harbor 401(k) plan receive a small nonelective contribution equal to one percent of
pay. Receiving account statements showing this contribution and the tax-free compounding of
interest would stimulate the saving habit among current nonsavers and encourage vendors to
market savings to those workers and their families.
12
Effect ofIncreased Dollar Limits on Moderate- and Lower-Income Workers
We share the concern that percentage-of-pay limitations under defined contribution plans
may inappropriately restrict retirement savings opportunities for some moderate- and lowerincome workers, including those who have spent an extended period out of the workforce. We
would be pleased to work with the Committee on targeted approaches to address these issues.
For example, while a wholesale repeal of these limits may not be necessary, a more targeted
approach may be to explore whether there is some minimum dollar level of contribution that
could address these concerns, similar to the minimum dollar benefit accrual allowed for defined
benefit plans. In addition, it is important to ensure that any changes to percentage of pay
limitations avoid weakening nondiscrimination tests that are based on employee percentage of
pay averages.
Some also suggest increasing maximum dollar limits for tax-qualified plans, on the
theory that this would align the interests of decision makers with the rest of the plan participants.
They suggest that this would encourage more coverage while the nondiscrimination rules would
provide moderate- and lower-paid workers with their fair share. We have several concerns about
such an approach, especially if not part of a significantly broader legislative strategy that ensures
meaningful benefits for moderate- and lower-income workers. It would need to be demonstrated
in each case that the particular proposal would function as an effective incentive for new
coverage and new saving, given that a very small percentage of retirement plan participants is
affected by the current statutory limits, and the individuals affected tend to be among the
wealthiest of Americans. To date, there is no reliable evidence to indicate that these additional
tax preferences will result in any appreciable increase in new plan coverage.
Moreover, recent changes in law, such as the repeal of the 15 percent excise tax on very
large retirement distributions from qualified plans and IRAs, have already increased the amount
that higher-income individuals can save on a tax-favored basis. Some of the 1996 and 1997
provisions have only recently become effective, and the repeal of the combined maximum limits
on tax-qualified benefits and contributions -- a major simplification that could increase
significantly the ability of higher-income individuals to accumulate tax-qualified benefits -- will
not become effective until next year. It is still too early to assess the impact of these expanded
tax incentives to establish plans.
In addition, if the nondiscrimination rules (and the limit on considered compensation
under section 401(a)(17)) were weakened at the same time maximum dollar limits were
increased, the limit increases would be correspondingly less likely to improve coverage or
benefits for moderate- and lower-income workers who are currently covered under retirement
plans. In fact, an increase in the considered compensation limit from $160,000 to $235,000
increases the relative share of plan benefits that go to higher paid employees. For example,
simultaneous increase in the compensation and contribution limits will not require an
improvement in a plan contribution formula in order for individuals whose compensation
exceeds $160,000 to take advantage of a section 415(c) contribution limit increase from $30,000
to $45,000. Where the highly paid are satisfied with current benefit levels, an increase in
considered compensation may even provide an opportunity to reduce benefit levels for most
13
employees \vithout affecting benefits for the highly paid.
Of course the overall impact of any legislative changes of this particular type would need
to be assessed in the context of other provisions that might be enacted at the same time,
especially broad initiatives to deliver significant additional retirement savings to lower- and
moderate-income workers. I would like to reiterate that we will be happy to work with the
Committee on appropriate means of expanding retirement savings opportunities for these
workers.
Increases in IRA and Salan' Reduction Contribution Limits
We share the goal of increasing retirement savings. At the same time, proposed increases
in contribution limits for IRAs and for SIMPLE, 401(k), and other salary reduction plans must
be scrutinized carefully to assess their effect on sound pension policy. We should examine the
efficiency of such proposals in terms of increasing retirement savings, and their effect on
coverage for moderate- and lower-income workers. For example, increases in the 401(k)
contribution limit would benefit a relatively small number of taxpayers who have the ability to
set aside these amounts in a 401(k) plan, and who may well only shift existing savings to their
401(k) plan.
Increases in IRA limits are likely to attract additional deposits by higher-income
taxpayers who are already saving for retirement, and who may merely shift their additional IRA
contributions from other savings. Currently, a small business owner who wants to save $5,000
or more for retirement on a tax-favored basis generally would choose to adopt an employer plan.
However, if the IRA limit were raised to $5,000, the owner could save that amount -- or jointly
with the owner's spouse, $10,000 -- on a tax-preferred basis without adopting a plan for
employees. Therefore, higher IRA limits could reduce interest in employer retirement plans,
particularly among owners of small businesses. If this happens, higher IRA limits would work at
cross purposes with other proposals that attempt to increase coverage among employees of small
business.
Similarly, if the owner wants to save, say, $15,000 a year in a qualified plan (as opposed
to the $10,000 that can currently be saved via 401 (k) salary reduction), the owner has an
incentive to adopt a plan that provides employer contributions to employees. The limit on 401(k)
contributions and the resulting pressure to provide employer contributions serves a useful
purpose in our system. Increasing the 401(k) limit may prompt employers to substitute expanded
voluntary salary reduction opportunities for employer contributions. While 401(k) plans are
highly desirable, defined benefit and employer-funded defined contribution plans play -- and
should continue to play -- a central role in our pension system. These plans provide benefits to
lower-paid workers regardless of whether they individually choose to save by reducing their
take-home pay. Fewer employer-funded benefits and contributions may mean less retirement
savings by the lower- and moderate-income workers who have the greatest difficulty saving for
retirement.
14
Some may respond to this concern by contending that employers will not reduce
employer-funded contributions in favor oflRAs or voluntary salary reduction elective
arrangements if maximum dollar limits for employer-funded plans are also increased when limits
are increased for IRA and 401(k) contributions. However, whatever the relative levels of
permissible tax-favored contributions might be among different types of plans, the absolute
amount of IRA plus salary reduction contributions that would be permitted ifboth of those limits
were increased [combination of higher IRA contribution limits and higher salary reduction
contribution limits] may be enough to satisfy the desire for tax-favored retirement savings on the
part of many decision-makers, including many small business owners.
Similar concerns are raised by proposals for a $5,000 SIMPLE plan that provides for no
employer contributions. Surveys suggest that the popularity of SIMPLE plans with small
businesses is already exceeding expectations in the two years since SIMPLEs became available.
The SIMPLE plan requires only a modest, but important, employer matching or automatic
contribution. A proposal that allows $5,000 of employee pretax contributions without either
nondiscrimination testing or employer contributions would certainly undermine the SIMPLE
plan. Furthermore, in combination with a $5,000 IRA contribution limit proposal, there could
be substantial displacement of not only SIMPLE plans but also 401(k) plans (which have
nondiscrimination standards or safe harbor employer contributions) and other employer plans.
The Administration's payroll deduction IRA proposal, which is based on current law IRA limits,
is a better approach to addressing small businesses' concerns about financial commitment,
without undermining the success of SIMPLE plans.
Similar considerations apply to proposals to add Roth-IRA type "designated plus
accounts" to 401(k) plans and 403(b) annuities. Treating pre-tax contributions as "designated
plus contributions" would effectively increase the limit on 401 (k) and 403(b) pre-tax
contributions. They would eliminate or relax the income and contribution limits for Roth IRAs,
and would have other serious consequences.
Catch-up Contributions
Weare sympathetic to concerns that those who have spent extended periods out of the
workforce may encounter obstacles to "catching up" on retirement savings needs. Obviously, the
most important obstacle in this regard is an individual's own financial ability to increase savings.
With respect to the employer plan system, evidence suggests that nonstatutory limits imposed by
plans or employers (e.g., limiting salary reduction contributions to ten percent of pay) are a
significantly greater barrier to catch-up contributions than the statutory $10,000 401(k)
contribution limit. In fact, only a small percentage of participants over the age of 50 are actually
affected by the $10,000 contribution limit, and those tend to be among the highest-income
individuals.
We think it is worth exploring ways to address barriers to increasing savings, particularly
for those over the age of 50. In so doing, it may be more appropriate to focus on percentage-ofpay limitations, particularly as applied to lower-income workers, as discussed earlier.
15
VI. Simplifving Regulatory Requirements
Another area of bipartisan accomplishment has been pension simplification, particularly
as part of the 1996 Small Business Job Protection Act. Further improvements can be made to
promote simplification, provided that there is an appropriate balance between simplifying rules
and protecting workers, so that moderate- and lower-income workers receive a fair share of
retirement benefits.
For example, the President's budget includes a proposal to simplify the definition of a
highly compensated employee. The definition would be modified to eliminate the complex
option to treat all employees earning below the 80th percentile in an employer's workforce as
nonhighly compensated employees. This will ensure that all employees earning over $80,000 are
classified as highly compensated employees for qualified plan nondiscrimination testing
purposes. This would not only make the law simpler, it would also make it more fair. Under
current law, an executive or professional earning hundreds of thousands of dollars can be
classified as a nonhighly compensated employee for nondiscrimination testing if the individual is
below the 80th percentile (which can occur in a small firm with several highly paid executives or
professionals) unless the person is a five-percent owner of the business.
Some have proposed allowing employers a deduction for dividends paid to an employee
stock ownership plan (ESOP) when employees elect to leave the dividends in the ESOP. Current
law allows employers to deduct ESOP dividends if they are distributed from the plan or used to
pay certain ESOP indebtedness. Proponents argue that this proposal would simplify
administration by making it unnecessary for a participant to make an offsetting 401(k) plan
election if the participant prefers to defer tax on income equal to the amount of the dividend.
However, the proposal would need to be modified to treat the employee's election to leave
dividends in the ESOP in the same manner as any other cash or deferred election. Otherwise the
provision would allow ESOP participants 401 (k)-type cash-or-deferred elections that are not
subject to the $10,000 limit and that are not subject to nondiscrimination standards. Further,
unless the election is subject to the 401 (k) rules, the proposal might make it easier for C
corporations that are substantially owned by ESOP participants to effectively avoid federal taxes
on all corporate earnings.
Simplicity Versus Flexibility
Complexity of pension rules is often attributable to employers' desire for certainty while
at the same time accommodating a wide range of plan designs and practices to satisfy various
corporate objectives. Accordingly, major simplification of the pension rules is likely to come
only at the price of curtailing the extensive flexibility employers currently enjoy.
The pension nondiscrimination regulations reflect the effort to combine certainty with
flexibility. These regulations, which were finalized in 1993, were the product of an
unprecedented amount of dialogue between the government and plan sponsors, following
16
multiple rounds of comment, discussion, and revision. Plans have long since been amended to
reflect the regulations.
These regulations address the complexity issue by providing a set of safe harbors that
allow employers to avoid nondiscrimination testing by retaining or adopting straightforward plan
designs that provide uniform benefits to participants. These plans pass the nondiscrimination
tests regardless of the characteristics of the employer's workforce. Today, well over 90 percent
of qualified plans use these safe harbor designs.
Compliance Programs
Another example of easing regulatory burdens without weakening worker protections
may be found in the compliance programs maintained by the Internal Revenue Service. Since
1990, the Service has maintained a number of compliance programs to enable correction of
retirement plans that fail to meet tax-qualification requirements. These programs have evolved
over the years in response to taxpayer suggestions, and there has been widespread appreciation
for how successful the programs have been.
Some legislative proposals would effectively undermine these programs and would
adversely affect compliance. The programs reflect the principle that plan sponsors need a
carefully graduated series of stages in the process to make sure that the sponsor always has the
incentive to avoid delaying correction to a later date -- especially an incentive to correct shortly
after the error has occurred when correction is easy and before participants have been harmed.
The incentive structure should also ensure that if the error has not been corrected within a
specified time, the sponsor will have a further incentive to correct at the next stage in the process.
Pending legislative proposals would restrict the flexibility that is currently essential to the
administrative compliance programs. Some proposals, for example, would fail to require full
correction of qualification errors, even in the case of significant violations. For instance, if a plan
discovered it had failed to pay 401(k) benefits to 20 retired participants, the current programs
would encourage prompt correction after discovery of the failure. By contrast, under legislative
proposals, the sponsor would not be required to take any corrective action unless and until the
audit notice cycle began, and then would be required to correct only for most of the participants.
These proposals would not allow the IRS to require that benefits ever be paid to the remaining
participants, even if the plan could easily pay the benefits and even after audit. These legislative
proposals also would dramatically revise the tax consequences for disqualification, removing the
primary compliance incentive for plans that cover predominantly nonhighly compensated
employees, such as multi-employer plans or plans of businesses in financial distress for which
loss of an income tax deduction or a tax on trust earnings is not important. Such changes could
undermine the IRS administrative compliance and correction programs, which have been widely
recognized as improving plan compliance.
To protect participants while lessening regulatory burdens, we need to continue
developing and improving flexible programs, such as the Employee Plans Compliance
Resolution System, that create appropriate incentives, as opposed to enacting legislation that
17
might impede innovation and flexibility. The productive administrative process that has
developed and expanded these compliance programs requires maximum flexibility, feedback,
and adaptation. These favorable results can best be achieved through the kind of administrative
approach involving the pension community that has been undertaken in recent years.
The Treasury Department appreciates the opportunity to discuss these important issues
with Members of this Subcommittee, and we would be pleased to explore these issues further.
Mr. Chainnan, this concludes my fonnal statement. I will be pleased to answer any
questions you or other Members may wish to ask.
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18
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
Weekly Release of U.S. Reserve Assets
March 23, 1999
The Treasury Department today released U.S. reserve assets data for the week ending
March 19, 1999.
As indicated in this table, U.S. reserve assets totaled $74,988 million as of March 19,
1999, up from $74,639 million as of March 12, 1999.
U.S. Reserve Assets
(millions of US dollars)
1999
Total
Resenre
Week Ending
Assets
Special
Gold
Stock
II
Foreign
Reserve
3/41
Drawing
Currencies
R'Ig htS 21
ESF
SOMA
IMF
Position in
2/
March 12, 1999
74,639
11,047
9,846
11,861
18,556
23,329
March 19, 1999
74,988
11,047
9,826
15,352
15,337
23, Fl-:'
Gold stock is valued monthly at $42.2222 per fine troy ounce. Values shown are as of February 28,1999. The
nuary 31,1999 value was $11,048 million.
SDR holdings and the reserve position in the IMF are based on IMF data and rev.llued in dollar terms
,H
the offici.ll
)RI dollar exchange rate. Consistent with current reporting practices, IMF data for March 12, 1999 .lre fln,l!. D.lta for
)R holdings and the reserve position in the IMF shown as of March 19, 1999 (in italics) reflect prelimm,lry ,1djustments
the Treasury to the March 12, 1999 IMF data.
Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
:coum (SOMA). These holdings are valued at current market exchange rates or, where appropnate, ,H such other rates as
ly be agreed upon by the parties to the transactions.
The increase in the foreign currency assets of the ESF and decrease in the foreign currency assets of the SOMA reflect
nsaction between the two to even out their respective foreIgn currency holdings.
.1
-3037
This Information Can Be Found On Our Website:
www.treas.gov/press/
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
DEPARTMENT
OF
TREASURY
THE
TREASURY
NEWS
EMBARGOED UNTIL 9:30 A.M. EST
Text as Prepared for Delivery
March 25, 1999
TREASURY SECRETARY ROBERT E. RUBIN
TESTIMONY BEFORE THE SENATE APPROPRIATIONS SUBCOMMITTEE
ON TREASURY AND GENERAL GOVERNMENT
Mr. Chairman, Senator Dorgan, and members of the Conunittee, I appreciate the opportunity
to testifY on the Treasury Department's fiscal year 2000 budget request.
Mr. Chairman, for FY 2000, Treasury is proposing a program level that totals $12.659 billion
for all operations. This level is offset by $454 million from proposed fees as welt as the use of
Treasury Forfeiture Fund, resulting in a net appropriation request of $12.205 billion. OUT request is
critical to supporting Treasury's important and wide-ranging mission.
As you know, the Treasury plays a key role in the core functions of government, including
tax administration, revenue collection, law enforcement, financial management, tax policy, banking
policy, international economic policy and domestic economic policy. Our budget supports Treasury's
core current service requirements, maintaining a balance of restrained staffing growth with enhanced
technological investments and capital support to strengthen Treasury's ability to manage its programs
efficiently and effectively.
We have provided the Committee detailed presentation materials on our fiscal year 2000
budget request. Let me now highlight five major priorities in the budget: reforming the Internal
Revenue Service; exercising leadership in international economic affairs; strengthening our ability to
fight drugs and crime; modernizing our financial systems; and Y2K conversion.
Let me begin by discussing the IRS.
Last year, Congress passed the IRS Restructuring and Reform Act, building on the process
of reform the Administration began nearly four years ago. This legislation mandates changes to tax
laws and procedures, and the modernization ofmS's organization and systems. In addition, in this
spirit, IRS, Congress and the Administration have pledged to the American people to reform the IRS
RR-3038
For press releases, speeches, public schedules and official biographies, call our 24~our fax line at (202) 622-2040
From: TREASURY PUBLIC AFFAIRS
4-22-99 10:40am
p. 18 Df 24
and give taXpayers the service they deserve and have come to expect from the private sector. To
follow through on this commitment and to implement the Act, the IRS budget supports a major
investment of$197M to meet the refonn and restructuring goals.
IRS restructuring and refonn is centered on four areas.
First. protecting the taxpayer: 'The Reform legislation includes more than 70 tax la~ changes
to improve taxpayer protections. The Act also strengthens the Taxpayer Advocate's organization
and has provisions to help ensure internal accountability and integrity.
Second, improving a.lstomer service: 'The Refonn Act mandates efforts to increase electronic
filing and improve assistance to taxpayers. This budget supports 24 hour-7 days a week phone
access, expanded walk-in service, enhanced service to small business, and Spanish language telephone
assistance.
Third. transforming the organization: The IRS has in place a new management team with
a new mission and vision. In 1998, the IRS Commissioner unveiled a new IRS structure which
focuses on service from the taxpayer's point of view. IRS will be organized around specific taxpayer
groups, consistent with the mandates of the Refonn Act. In addition. the Restructure and Refonn
legislation established the Treasury Inspector General for Tax Administration. The budget supports
the independence of this organization through transfer of funding from the lRS, as directed by the
legislation.
Fourth~
modernizing information systems: In December 1998, IRS awarded its PRIME
contract for systems modernization. IRS is culTently working in partnership with the PRJ1vffi
contractor to revamp the systems modernization blueprint to reflect organizational changes and
business process re-engineering.
~stems
Concerning teclmological needs at the IRS, the IRS request funds the continuation of the Y2K
program. Recognizing the difficult funding restraints present this fiscal year, we are also foregoing
a deposit into the IRS Technology Account in FY 2000 because we believe we have sufficient funds
in this account to fund system modernization through FY 2000. Instead, we are asking for an
advance appropriation for FY 2001 of$325 million to continue funding for this multiple year program
of systems modernization.
The second major priority in the budget is to continue exercising leadership in international
economic matters. Treasury plays a critical role in domestic and world economic affairs by providing
expertise and analysis vital to formulating sound economic policy. Never has this role been more
important than during the last year and a hal( when we at Treasury have been enormously focused
on and involved in the effort to restore stability and growth in countries affected by the international
financial crisis B which in rum very much affects our own economic well being. To strengthen these
efforts. this budget expands the market analysis capability in the Office ofIntemational Affairs.
2
From: TREASURY PUBLIC AFFAIRS
4-22-99 10:41am
p. 19 of 24
Our third major priority in the budget is to strengthen our ability to fight drugs and crime.
As this committee well knows, Treasury has critical and extensive law enforcement responsibilities
in a number of agencies including Customs, the Secret Service, the Bureau of Alcohol, Tobacco and
Firearms, the IRS, FINCEN, and the Federal Law Enforcement Training Center.
To strengthen these critical efforts, our budget requests moderate increases to 5Upport the
Administration's major law enforcement policy emphases. Specifically, our budget is focused on four
key law enforcement areas.
The :first key area is the reduction of trafficking, smuggling and use of illicit drugs. The
Customs Service is committed to improving the efficiency and effectiveness of its drug interdiction
at U.S. ports. This budget supports additional x-ray and telecommunications equipment to examine
suspected drug couriers in a less intrusive and more effective fashion. In addition, the request of
Customs, the TItS, and FINCEN all support efforts to combat money laundering, which often
provides an effective means for prosecuting drug traffickers. Customs continues to improve its
interdiction of the illicit proceeds of drug sales and the budget funds additional x-ray inspection
equipment for use at border crossings to prevent the exit of drug proceeds.
Second is the integrity of law enforcement operations. As part of Treasury's ongoing effort
to improve law enforcement effectiveness, this budget supports Customs' goal of strengthening its
integrity awareness and operational oversight activities. The Customs request also supports the
establislunent of a comprehensive education, training, and workforce development program which
covers the entire cadre of Customs persoMel, with a special emphasis on law enforcement personnel.
Furthermore, this budget also supports strengthening of Treasury's Inspector General's investigative
unit.
Third is protection of high-level U, S, and foreign officials. The Secret Service continues
efforts to ensure that protectees are safe from increasing threats of counter-terrorism. This budget
supports protection for candidates and nominees in the 2000 campaign and additional security
measures at the White House complex.
The fourth key area is the reduction of the criminal misuse of firearms. The budget continues
to build on Departmental and ATF initiatives started during the past two years to prevent violent
firearms crimes, including those committed by the nation's youth. This efforts include expansion of
ATF's Youth Crime Gun Interdiction Initiative; full implementation of the Brady Law; and
strengthened efforts to investigate and help prosecute persons who illegally attempt to purchase
fireanns at gun shows and similar venues.
Let me mention two other features of our budget related to law enforcement. For several
years, Treasury has understood the need to provide a safe headquarters building for ATF employees
and the budget supports funding in GSA for this effort. In addition. funding is also included in this
budget to shore up Customsl current system for commercial processing. which is stroggling to meet
3
the needs of to day's modem trade community. We support the need to replace Customs' aging
system and intend to use FY 2000 to develop an integrated plan for a new system, and then launching
implementation of that plan in 2001.
Our fowth major priority in the budget is modernizing government financial systems, including
re-targeting and realigning existing resources to meet workload changes at the Financial Management
Service, and upgrading financial technology and systems infrastructure at the Bureau ofP~bIic Debt.
The final major priority in the budget is completing system conversion to operate smoothly
in the Year 2000.
As the agency responsible for .thedistribution of most government payments, the collection
of most government revenue, and with operations that affect virtually every aspect of government and
the private sector, we at Treasury are enormously focused on the Y2K problem. We have made a
great deal of progress; February, for example, marked the fifth month in a row that distribution of
Social Security payments were Y2K compliant.
However, there is still much to do. At Treasury, every mission critical system is being
upgraded or replaced to ensure smooth operations in the year 2000. The m.S is the largest part of
the date conversion effort. The bulk of its FY 2000 activities will involve the completion of its data
center consolidation and the last three months of preparation before the end of the century, including
end-to-end system testin~ as well as any contingencies that must be implemented to deal with
potential but unexpected failures.
'
I would like to bring to your attention to one final item that has been of great interest to the
Department, and that is the North American Development Bank. We have been working hard to
make the domestic window of the North American Development Bank fully productive, and I urge
you to support this year's request.
Mr. Chairman, let me conclude on a personal note. Throughout my four years as Secretary
of the Treasury, I have been continually impressed by the intelligence. professionalism and dedication
of the Treasury people with whom I've had the opportunity to work. I think this should give you and
the Corrunittee confidence in the uses that are being made of taxpayer's funds. In that spirit, I ask that
you approve our FY 2000 budget request to support the work of the Treasury Department in fulfilling
its wide range of responsibilities in serving the American people. The Treasury Department has had
a very productive relationship with this Committee and we look forward to working with you
throughout this year. Thank you very much,
-30-
4
TOTAL P.04
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
FOR IMMEDIATE RELEASE
EMBARGOED UNTIL 1:30 P.M. EST
March 24, 1999
TREASURY SECRETARY ROBERT E. RUBIN
1999 GREATER NEW YORK SAVINGS BONDS CAMPAIGN KICK-OFF
NEW YORK, NEW YORK
Thank you for that introduction. I'd like to say a few words about the overall economy
and the importance of boosting savings both for individuals and for the country at large.
The United States continues to enjoy what many consider to be the best economic
conditions in recent memory -- the longest peacetime economic expansion in our history, a very
high rate of job creation, the lowest unemployment rate in decades, and real increases in income
across all income strata. The most likely scenario in the U.S. economy continues to be solid
growth and low inflation, subject to the usual ups and downs. The essential strength of our
economy has helped insulate us from the international financial crisis, now well into its second
year, although there have been some sectoral effects from the crisis, both from increased imports
and decreased exports.
Many factors have contributed to this success -- including the private sector's restoration
of competitiveness in a broad array of industries. But in my view, the key and indispensable
factor has been a sound economic strategy grounded in investing in people, opening markets, and
especially fiscal responsibility, beginning with the deficit reduction act of 1993.
Despite this progress, we still face difficult challenges in promoting the productivity gains
that are critical to long-term prosperity. There are several priorities we must address to achieve
that goal -- we must invest in education, and address the conditions in the inner cities and other
economically distressed areas, for example. But today I want to focus on three: maintaining our
leadership on the issues of the global economy; continuing the policy of fiscal discipline, and
finally, raising our savings rate, which I would note is close related to the issue of fiscal discipline.
First, we must maintain our leadership on the issues of the global economy and our
traditional commitment to open markets at home and abroad. There is no doubt increased trade
has played a significant role in the strong economy this country has enjoyed for the last six years,
RR- 3039
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what many have called the strongest economy in a generation. Today there is the almost universal
tendency to extol the benefit of exports, and to ignore the benefit of imports or even disparage
them. That leads to distorted trade policy. Imports reduce prices and increase choice for
consumers; reduce prices and increase choice for producers, which should lead to greater job
creation and higher wages; increase competition and productivity; and, for all these reasons,
reduce inflation and presumably reduce market interest rates.
Having said that, one consequence of the current global economic situation is that the
United States has a large and growing trade deficit and with the business problems and job losses
to some that are the cost of the benefits of imports to many, we face increased domestic pressures
to close our markets. I believe that we must strongly resist those pressures. What we must not
do is pull away from the global economy, and the greatest threat to that right now is by restricting
access to our markets. The adverse effects of imports are concentrated, and the voices of those
adversely affected are loud. But the benefits of trade openness are more widely dispersed -indeed, those who benefit are often unaware that they are doing so -- and the result is fewer,
fainter voices for open markets. All of us need to work together to make the case that open
markets here and opening markets abroad are critical to business profitability, job growth, and
increased standards of living. And business is uniquely situated with the understanding, the
interests, and the means to make that case.
The second major challenge we face in this country is to continue to promote fiscal
discipline and thereby national savings, even though that means forgoing broad-based tax cuts or
spending we might prefer in the short run. Its worth stopping for a moment to see how far we
have come on fiscal discipline, because we do tend to forget. Between 1980 and 1992, the
Federal debt had quadrupled, and in 1992 the deficit was $290 billion and projected to continue
growing. Now -- beginning with the deficit program of 1993 -- we have moved from an era of
endless budget deficits, to an era of budget surpluses.
The consequence of that, I believe, is an historic opportunity to position our nation for the
decades ahead, and President Clinton has put forth a sound plan to seize that opportunity. His
plan would achieve two basic goals. First, it preserves the preponderance of the surplus to pay
down the publicly held debt of the Federal Government rather than eliminating the surplus
through consumption-oriented tax cuts or spending. This can be looked at as increasing national
savings, or reducing the Federal Government's use of our national savings. In either case, there is
more capital available for the private sector -- the reverse of doing what used to be called
crowding out private credit. Over fifteen years, the publicly held debt would be reduced by twothirds, to the lowest percent ofGDP since before World War I. Second, it greatly promotes
retirement security by strengthening Social Security and Medicare. Using the surplus for tax cuts
or spending may be more popular, but in our view promoting fiscal responsibility and national
savings is the right path for our future.
The final challenge I wish to discuss is the importance of making it easier for families to
save. Our personal savings rate is still too low in this country. Last year, it averaged less than one
2
percent of after-tax personal income, ranking with Canada as the lowest by far of the G-7
countries, and lower than many developing countries. Increasing that rate has been a high priority
for President Clinton. We have instituted pension reforms to make pensions portable for workers
and simplified the pension laws for businesses~ expanded access to Individual Retirement
Accounts~ and introduced inflation indexed securities. In addition, the President has recently
presented a proposal for Universal Savings Accounts, designed to provide additional incentives
for American workers to save.
We have also made Savings Bonds easier to understand -- and easier to buy. Last
November, we introduced our new EasySaver Plan for Savings Bonds, to make buying savings
bonds easier for the more than 100 million Americans who don't have access to payroll savings
plans where they work. Initial response to the plan has been strong.
We have also made Savings Bonds more attractive as investments. Last July, Vice
President Gore introduced the new inflation-indexed savings bond. Now Americans have a safe
way to save that guarantees the purchasing power of their principal and offers them a fixed, real
rate of return over and above inflation. Since they went on sale last September, American have
invested more than $220 million in these bonds. The average bond sold has been more than $850,
more than 8 time the average for EE bonds, showing the burgeoning popularity of the I Bonds. I
encourage all of you to help us get the word out about the I Bond.
One of the most important ways we can raise savings, of course, is through payroll savings
campaigns in which all of you here play such an important role. Clearly, there is a cultural
phenomenon in this country that resists saving. Having said that, studies have shown that
workers who receive education about savings are far more likely to save than those who don't.
That is why payroll savings campaigns are so important. They offer a convenient way for your
employees to save, especially for low and middle income workers, for whom Savings Bonds can
offer an affordable way to save, or younger employees. For many young people just starting out,
saving for retirement is seen as a luxury they can little afford, and don't need to worry about yet
anyway. But, of course, the earlier one starts saving, the easier it is to save and the more
substantial the savings in the long run. Americans of all ages and income levels face a bewildering
choice of investment opportunities these days and education about the benefits of Savings Bonds
is key. That is why the work you do is so critical in helping Americans save and prepare for the
future.
To reiterate, all of the issues I mentioned -- leadership in the global economy, fiscal
discipline, and raising the savings rate -- are critical to the increasing productivity and fostering
long term growth in this country. And if we meet these challenges -- which will require hard work
in both the private and public sectors -- we can have higher growth and foster strong economic
conditions for years and decades to come. Thank you very much.
-30-
3
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 9:30 A.M. EST
Text as Prepared for Delivery
March 25, 1999
DEPUTY ASSISTANT SECRETARY (MICRO ECONOMIC ANALYSIS)
MARK McCLELLAN
TESTIMONY BEFORE THE SENATE COMMITTEE ON BANKING, HOUSING
Al\'D URBAN AFFAIRS
Thank you Mr. Chairman. Senator Sarbanes, and other Members of the Committee for
the opportunity to provide Treasury's views on issues related to bankruptcy reform. As you
know, last year the Administration supported the balanced bankruptcy bill that you and your
colleagues in the Senate approved by an overwhelming bipartisan majority. We look forward
to working with the Congress this year to craft bankruptcy legislation that the President can
enthusiastical1y sign.
It is important to consider bankruptcy reform in the context of the dynamic financial
services industry. The changes occurring In financial services-the result of competition,
innovation, and new technologies In such areas as information management and electronic
commerce-have had enormous benefits for consumers and the economy, and offer potentially
even greater benefits in the future. Howevcr. thcse changes have also increased the
complexity of consumer financial services and business financial transactions, and have
implications for putting consllmers and the economy at risk.
In the remainder of my tcsllllwny. I hIghlight some particular concerns we have about
proposed bankruptcy reforms.
Consumer bankruptcy refonn
One motivation for consumer bankruptcy reform is the growth in consumer
bankruptcies in recent years. despite very healthy economic growth and low unemployment.
Experts have offered a large number of competing explanations for this trend, which increases
the cost of credit to al1 consumers. and It IS likely that many factors are responsible.
RR-3040
For press releases, speeches, public scht'dllin a1/d ()fficial biographies, call our 24.1zour fax line at (202) 622-2040
Balanced reform of consumer bankruptcy law is essential to address the multiple
causes. There is evidence of abuses by creditors as well as debtors that:
•
•
may allow some debtors who are able to repay a substantial share of their debt to evade
responsibility for repayment; and
. .
. .
may prevent some debtors, especially those with hmited means for obtammg
sophisticated advice, from having equal opportunities for the "fresh start" of the
bankruptcy system.
Bankruptcy reform should not take indiscriminate aim at either side alone, and should not treat
only the symptom rather than the underlying causes of the rise in bankruptcies. Furthermore,
it is essential that reforms to the bankruptcy system address these problems in ways that do not
jeopardize the repayment of debts with very high policy priority, including family support .
The essential features of a balanced reform bill include the following:
COfL'lumer Prorecrion. Consumers need better and more relevant information on their
credit opportunities in order to manage their finances effectively and to get the most benefit
from the diverse credit-related services now available. In the last decade, there has been an
explosion in the kinds and amounts of financial services available to consumers. These
changes have had many benefIcial effects-making it easier for consumers to obtain the credit
needed to start a household. pay college tuition, and make other investments to achieve their
financial goals. But they have also made personal fInancial planning much more complex.
The evidence indicates that. with limited time and resources, many households are not able to
make many of the calculations and informed judgments needed in this new financial era to
develop and follow a fInancial plan effectively.
Fair and effecrire Je{cmllfw{iof1.\ (!f access ro Chaprer 7 debr relief The balance
between requiring debtors responsibly to honor their contracts with creditors, and providing
debtors a fresh start sufficient to ensure their return to economic health, is critical to
maximizing the benefIts of bankruptcy law to our society and economy. It is also important to
minimize the administrative. judicial, and personal costs of achieving this balance.
The President believes that a means test should deny access to Chapter 7 debt relief
only for those who genuinely have the ability to repay a portion of their debts successfully
under a Chapter 13 plan. The Administration is strongly opposed to a rigid and arbitrary
approach to determining whether a debtor can use the relief offered in Chapter 7, which would
not allow debtors an opportunity to have their specific circumstances considered adequately by
bankruptcy courts with discretion to determine whether they genuinely have the capacity to
repay a portion of their debts.
Consideration must also be gIven to cost in implementing a means test. There is little
to be gaIned by requiring debtors who have little ability to repay to present detailed evidence
2
and justification for an inflexible means test that must be reviewed at substantial additional cost
by trustees and courts. More costs are added if debtors with little capacity to repay are
inappropriatel y referred to Chapter 13 proceedings to set up repayment plans destined to fail.
We believe that it is possible to draft legislation that will work significantly better than HR
833-to try to identify at relatively low cost the small fraction of potential Chapter 7 filers who
have a reasonable chance of successfully repaying their debts under a Chapter 13 plan.
Curbs on predatory creditor practices. Bankruptcy reform should curb abuses by
creditors as well as debtors. For example, debtors should be protected against predatory
creditor tactics to coerce inappropriate and unwise reaffirmations of debt. Last year's Senate
bill took laudable steps in this di recti on.
Protection of priority dehts after bankruptcy. Bankruptcy reform should not create
substantial new categories of nondischargeable debt that could compete, post-bankruptcy, with
child support, alimony, taxes, or other debt with high public priority. If new categories of
nondischargeable debt are to be created, they should be narrowly tailored for situations where
the debtor is clearly abusing the system.
We and the rest of the Administration stand ready to work with you in the days ahead
to craft a consumer bankruptcy bill that achieves needed and balanced improvements in the
bankruptcy system, and that helps consumers manage their debts more effectively.
Netting and termination of certain financial contracts in insolvencies
I would now like to turn to our views on the netting and termination of certain financial
contracts in business bankruptcies. The increasing significance of certain financial transactions
has motivated the President's Working Group on Financial Markets to examine the U.S. legal
regime governing netting and termination of certain financial contracts in insolvencies. On
March 16, 1998, as Chairman of the Working Group, Secretary Rubin sent the Group's
legislative proposals to Congress.
Since its adoption in 1978, the Bankruptcy Code has been amended several time in
order to provide that certain financial transactions, including securities contracts, commodities
and forward contracts, repurchase and swap agreements, are excepted from the automatic stay
that bankruptcy imposes for general commercial contracts. In each of these cases, the
exception from the stay is justified to minimize systemic risk to financial markets that could
result if such contracts were not permitted to be enforced.
The amendments that the Working Group has proposed are designed to strengthen the
provisions of the Code relating to termination and close-out netting and related provisions for
certain financial agreements and transactions. These provisions include clarifying that crossproduct close-out netting is permitted for positions in securities contracts, commodity
contracts, forward contracts, repurchase agreements and swaps; and that the provisions are
3
applicable in the case of a municipality filing. We have attempted to limit the provisions to
areas in which public policy goals are clearly served; we are seeking to protect markets, not
particular types of creditors.
In addition, the Working Group proposed amendments to the banking laws that, along
with the proposed amendments to the Bankruptcy Code, harmonize the definitions of financial
contracts receiving the special treatment and provide protection for the federal deposit
insurance funds with exposure in the case of a depository institution insolvency. Under the
proposed amendments, exercise of the right of counter parties to terminate or net qualified
financial contracts is suspended for a short grace period, to allow receivers of failed depository
institutions to transfer financial contracts to another institution.
Cross-border insolvencies and bankruptcy tax provisions
Reform of cross-border insolvency laws and bankruptcy tax issues are germane to
bankruptcy reform but may not fall within the jurisdiction of the Banking Committee. Title
VIII of S. 625 would add a new chapter 15 to the Bankruptcy Code to address insolvencies
that cut across international borders. These provisions are based on a model law on
cross-border insolvency that was adopted on May 30, 1998 by the United Nations Commission
on International Trade Law. Title VII of S. 625 makes amendments to bankruptcy tax
provIsions.
Conclusion
Thank you again for thiS opportunity to discuss issues related to bankruptcy reform.
The revolution in technology and increased competition in financial services are giving
AmerIcans more numerous and complex financial choices than ever before, and are making
!,ossible larger and more complex bUSiness financial transactions than ever before. We look
foru'ard to working with you and others in Congress to construct balanced bankruptcy
legislation that keeps pace with these changes in financial services. I am happy to answer any
questIons you may have.
4
DEPARTMENT OF THE TREASURY
WASHINGTON. D.C.
March 23, 1999
The Honorable C.W. Bill Young
Ch~
Committee on Appropriations
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
I am very concerned that the House is considering rescinding previously appropriated and
subscribed funds for callable capital of three multilateral development banks (MDBs) in order to
provide budget authority offsets for the FY 1999 emergency supplemental budget request. I
strongly believe that such a step is ill-advised. carries with it major risks, and should be reversed
as this legislation moves forward.
Fundamentany, what is at risk is the standing of these institutions in the international capital
markets. That standing. and the Triple A credit rating these MDBs have earned, are direetly a
function of the support provided to the institutions by their major shareholders. Inde~ we
understand that in their annual assessments of the financial condition of the MDBs, the rating
agencies consider the presence of appropriated or immediately available callable capital
subsaiptions as a key factor.
The rescission offunds appropriated to pay for U.S. callable capital could be perceived as a
significant reduction in U.S. political support for the institutions and their borrowers and could
lead to a serious market reassessment of the likely U.S. response to a call on MDB capital should
one ever occur. In these circumstances, the borrowing costs of the MDBs could increase as a
result of this proposal. In addition, a ratings downgrade is a possibility. A downgrade would lead
to even greater borrowing costs for the institutions, which costs would then need to be passed on
to the developing countries the MOBs are mandated to help.
An increase in the borrowing costs of the Banks could also reduce their net income.: - Net income
is a key source of funding for concessionaJ programs such as the Heavily Indebted Poor Countries
Initiative and the International Development Association, and any loss of such funding from net
income undoubtodly would increase the demand to fund these programs from scarce bilateral
resources Of, in the absence of such action, would reduce concessionalloans to developing
countries. mtimately, the higher borrowing costs and reduced capital flows to the developing
countries that could result from this proposal would only hinder growth and recovery in the
developing world, which in tum would hurt U.S. fanners, workers and businesses. This is
evidenced by the fact that before the recent crisis, the developing world absorbed over 40 percent
of U.S. expons.
RR-3041
Some have cited a 1994 rescission as a precedent for this proposal. The 1994 action and the
current proposal are not analogous. In 1994, the U.S. had not subscribed the paid-in and callable
capital which were rescinded. The current proposal, however, would reach back to capital to
which we have formally subscribed. and on the basis of which we have exercised voting rights for
many years. This proposal has rightly become a concern of the markets.
I hope you will agree with me, Mr. Chairman, that the proposal to rescind appropriated and
subscribed U.S. callable capital of the MDBs would raise questions in the markets about U.S.
commitment to the MDBs and could have negative consequences beyond the current budetary
horizon for the developing World and our economy. As OMS Director Jack Lew has already
infonned the Committee, if the supplemental bill is presented to the President with this and the
other objectionable offsets ~cluded, the President's senior advisers would recommend a veto. I
would be happy to discuss this matter with you. further.
Sincerely.
~~
Robert E. Rubin
PUBLIC DEBT NEWS
Department of the Treasury· Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU or THE PUBLIC DEBT - WASHINGTON DC
Office of rinancing
202-219-3350
CONTACT:
FOR IMMEDIATE RELEASE
March 24, 1999
RESULTS or TREASURY'S AUCTION or 2-YEAR NOTES
Interest Rate:
Series:
CUSIP No:
STRIPS Minimum:
Issue Date:
Dated Date:
Maturity Date:
4 7/8%
W-2001
912827500
$1, 600, 000
High Yield:
Price:
4.995%
March 31, 1999
March 31, 1999
March 31, 2001
99.774
All noncompetitive and successful competitive bidders were awarded
securities at the high yield.
Tenders at the high yield were
allotted 20%.
All tenders at lower yields were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
$
Competitive
Noncompetitive
31,662,100
1,416,952
$
15,002,982 11
33,079,052
PUBLIC SUBTOTAL
3,385,000
3,200,000
3,385,000
3,200,000
Federal Reserve
roreign Official Inst.
$
TOTAL
39,664,052
13,586,030
1,416,952
$
21,587,982
Median yield
4.968%:
50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low yield
4.901%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 33,079,052 / 15,002,982 = 2.20
1/ Awards to TREASURY DIRECT
=
$936,216,000
http://www.publicdebt.treas.gov
RR-~o4~
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
FOR IMMEDIATE RELEASE
March 25, 1999
Contact: Public Affairs
(202) 622-2960
TREASURY ANNOUNCES CHD...D LABOR ADVISORY COMMITIEE
The Department of the Treasury announced today the membership of the Advisory
Committee on International Child Labor Enforcement.
The Advisory Committee, created by President Clinton's Child Labor Action Plan, is a
partnership among key Federal agencies, human rights advocacy groups, industry representatives
and the pUblic, which will promote effective enforcement of U.S. trade law restrictions against
imports manufacturered with forced or indentured child labor.
Secretary Robert E. Rubin pledged to pursue international child labor as a top law
enforcement priority of the Treasury Department and the U.S. Customs Service. The US.
Customs Service is the Treasury bureau responsible for enforcing the import restrictions on
products manufactured with forced or indentured child labor.
"The private sector members of the Advisory Committee on International Child Labor
Enforcement are an exemplary group of individuals, many of whom have dedicated much of their
lives to human rights issues," said Assistant Secretary for Enforcement Elisabeth A. Bresee.
"Treasury is committed to vigorously pursuing this important initiative."
Among the organizations with representatives on the new Committee are the Child Labor
Coalition, the International Labor Rights Fund, the RUGMARK Foundation US.A., the National
Retail Federation, the International Mass Retail Association, the Oriental Rug Importers
Association, the International Brotherhood of Teamsters, Reebok International and the National
Child Labor Committee. In addition to Treasury and Customs officials, representatives of the
Departments of Labor, State and Commerce, as well as the National Economic Council, the US.
Trade Representative and House and Senate staffs will participate in the Advisory Committee's
deliberations.
The Advisory Committee, chaired by Assistant Secretary Bresee, will meet quarterly at the
Treasury Department in Washington. The first meeting is scheduled for April 9, 1999.
-30RR-3044
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
Members of the Treasury Advisory Committee on International Child Labor Enforcement
Mr. Erik O. Autor, Vice President and International Trade Counsel, National Retail Federation;
fonner Senior International Trade Counsel, Senate Committee on Finance
Mr. Claude Brown, Director of the Office of Corporate Affairs and Strategic Initiatives,
International Brotherhood of Teamsters; Co-Chair of the Teamsters Human Rights Commission,
President of the Teamsters National Black Caucus
Mr. Douglas Cahn, Senior Director of Human Rights Programs, Reebok International Ltd.;
corporate representative to the White House Apparel Industry Partnership; former assistant to
Congressman Barney Frank and Congressman Robert Drinan
Mr. Terry Collingsworth, Secretary-Treasurer, Rugmark Foundation - USA; General Counsel,
International Labor Rights Fund; former country director for the Asian-American Free Labor
Institute
Mr. Thomas J. Cove, Vice President of Government Relations, Sporting Goods Manufacturers
Association; prior service with the U.S. Drug Enforcement Administration, Foreign Operations
Office
Ms. Linda F. Golodner, President, National Consumers League; Co-Chair White House
Apparel Industry Partnership and the Child Labor Coalition; former Chair of the Department of
Labor Child Labor Advisory Committee
Mr. Pharis J. Harvey, Executive Director, International Labor Rights Fund; Co-Chair of the
Child Labor Coalition and member of the Apparel Industry Partnership; U.S. Coordinator for the
Global March Against Child Labor
Ms. Robin W. Lanier, Senior Vice President for Industry Affairs and Trade Development,
International Mass Retail Association; former Chair, Joint Industry Group's Legislative
Committee; former Chair, Industry Sector Advisory Committee on Retailing and Wholesaling
Ms. Lucille J. Laufer, Executive Director, Oriental Rug Importers Association, Inc.; former
Import Manager at Masterlooms, Inc.
Ms. L. Diane Mull, Executive Director, Association of Farmworker Opportunity Programs; head
of the Children in the Fields Campaign of the Child Labor Coalition; active in the Global March
Against Child Labor
Mr. Jeffrey F. Newman, President and Executive Director, National Child Labor Committee;
National Chairman, National Youth Employment Coalition; National Chairman, Farmworker
Health and Education Coalition
Mr. Elliot J. Schrage, Professor, Columbia University Graduate School of Business; Managing
Director, Clark & Weinstock, Inc.; adviser to the global soccer industry in the creation of the
Project to Eliminate Child Labor in Pakistan's Soccer Ball Industry
Amb. Sandy Vogelgesang, President, Everest Associates; former U.S. Ambassador to Nepal;
former service on Policy Planning Staff for Secretaries of State Kissinger and Vance. Author,
American Dream/Global Nightmare: The Dilemma of u.s. Human Rights Policy
Steven S. Weiser, Esq., Partner, Graham & James LLP; associated with the Hong Kong
Apparel Trade & Transportation Conference, the U.S. Association of Importers of Textiles and
Apparel, and the American Association of Exporters and Importers Joint Conference with U.S.
Customs Service on Customs Modernization and Informed Compliance.
Ms. Lisa M. Woll, Director, Convention on the Rights of the Child Impact Study; Founder and
Board President of Suited for Change; former adviser to the Foul Ball Campaign; former
Legislative Assistant to Congressman Lee Hamilton
Representatives of the following entities of the Federal Government will participate as ex officio
members: Department of Labor, Department of State, Department of Commerce, U.S. Trade
Representative, National Economic Council, staffs of the U.S. Senate and U.S. House of
Representatives
March-25, 1999
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
EMBARGOED UNTIL 2: 30 P. M.
March 2S, 1999
CONTACT:
Office of Financing
202/219-3350
TREASURY OFFERS 13-WBEX, 26-WEBK, AND 52-WEEK BILLS
The Treasury will auction three series of Treasury bills totaling
approximately $24,000 million to refund $26,829 million of publicly held
securities maturing April 1, 1999, ~d to pay down about $2,829 million.
In addition to the public holdings, Pederal Reserve Banks for their own
accounts hold $12,662 million of the maturing bills, which ~ay be refunded at
the highest discount rate of accepted competitive tenders. Amounts issued to
these accounts will be in addition to the offering amount.
The maturing bills held by the public include $4,991 million held by
l.d'E.1 ••• ery. Bask. al agepts for foreign and international mpneta£Y
authorities. OP to S3,OOO million of these securities may be refunded within
the offering amount in each of the auctions of 13-, 26-, and 52-week bills at
the highest discount rate of accepted competitive tenders. Additional amounts
may be issued in each auction for such accounts to the extent that the amount
of new bids exceeds $3,000 million. Foreign and international monetary
authorities are considered to hold $3,551 million of the original 13- and
26-week issues and $1,440 million of the original 52-week issue.
TreasuryDjrect customers requested that we reinvest their maturing
holdings of approxLmately $885 million into the 13-week bill, $746 million
into the 26-week bill, and $579 million into the 52-week bill.
Tenders for the bills will be received at Pederal 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 for the Sale and Issue of Marketable BookKntry Treasury Bills, Notes, and Bonds (31 CFR Part 350, as amended).
~.~.£l. &DO~~ •• c~ gf th. Dew •• au~1t1..
Offering highlights.
RR-3045
.~. ~1V.D
in the attached
000
For prus relelUes, speeches, public scllldules and official biographies, call OIlT U-hour /IIX line at (202) 622-2040
-
HXOHLXOHTB OF TREASURY OFPBRXNOS OP BILLS
TO BB ISSUED APRIL 1, 1999
March 25, 1999
Offering Amount ......••••.....•.••• $6,500 million
Description of Offering:
Term and type of security ••••.•..•• 91-day bill
CUSIP m.Ulber ••••••••.•••••••••••••• 912795 BR 1
Auction date ............•....•••.•• March 29, 1999
Issue date .•......•..•......•...•.• April 1, 1999
Maturity date ...............••..••. July 1, 1999
Original issue date •.•.•....•.••••• December 31, 1998
Currently outstanding ..•..........• $11,059 million
Minimum bid amount and multiples .•• $l,OOO
$7,500 million
$10,000 million
182-day bill
March 29, 1999
April 1, 1999
September 30, 1999
April 1, 1999
364-day bill
912795 DP 3
March lO, 1999
April 1, 1999
March 30, 2000
April 1, 1999
$1,000
$1,000
912795 CQ 2
The following rules apply to all securities mentioned above:
Submission of Bids:
Nonco~etitive bids ...... Accepted in full up to $1,000,000 at the highest discount rate of accepted
competitive bids.
Competitive bids . . . . . . . . (1) Must be expressed as a discount rate with three decimals in increments
of .005', e.g., 7.100\. 7.105%.
(2) Net long position for each bidder must be reported when the sum of the
tota~ bid amount, at all discount rates, and the net long position is
$1 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.
~aximum
Recognized Bid
at a Single Yield ....... 35% of public offering
Maximum Award . . . . . . . . . . . . . . 15' of public offering
Receipt of Tenders:
Noncocpetitive tenders .. Prior to 12:00 noon Bastern Standard time on auction day
Competitive tenders ..... Prior to 1:00 p.m. Eastern Standard time on auction day
~ent
Terms . . . . . . . . . . . . . . . By charge to a funds account at a Federal Reserve Bank on issue date, or
payuent of full par amount with tender.
TreasuryDlrect customers can use the
Pay Direct feature which authorizes a charge to their account of record at
their financial institution on issue date.
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
~~/78~9~. . . . . . . . . . . . . . . .. .
..................
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 2: 30 P.M.
Contact:
MarCh 25, 1999
Office of Financing
202/219-3350
TREASURY TO AUCTION CASE MANAGEMENT BILLS
The Treasury will auction approximately $20,000 million of 19-day
Treasury cash management bills to be issued March 31, 1999.
Competitive and noncompetitive te~ders will be received at all Federal
Reserve Banks aDd Branches. Tenders will BeS be accepted for bills to be
.maintained on the book-entry records of the Department of the Treasury
(Treas~Direct).
Tenders will ~ be received at the Bureau of the Public
Debt, Washington, D.C.
Additional amcuats of the bills may be issued to Federal Reserve Banks
as agents for foreign and international monetary authorities at the highest
discount rate of accepted competitive tenders.
The auction being announced today will be conducted in the single-price
auction for.mat. All competitive and noncompetitive awards will be at the
highest discount rate of accepted competitive tenders.
·This offerin~ of Treasury securities is governed by the ter.ms and conditioDs .et forth in the OUiform Offering Circular for the Sale and Iss~e of
Marketable Book-Entry Treasury Bills, Notes, and Bonds (31 CPR Part 356, as
amended) .
~:
Competitive bids in cash management bill auctions must be
expressed as a discount rate with two decimals, e.g., 7.10\.
Details about the new security are given in the attached offering
tlighlights.
The Treasury expects to
bill on March 31, 1999.
m-3046
~ounce
another short-ter.= cash management
000
For pr~" '~ltlls~s. sp~~clla, publiC sclt,dlll~s "lid ollie/,ll biogr"phiu, clIll ou, 24-hollr llUJint
lit
(202) 62:2.2040
HIGHLIGHTS OF TREASURY OFFERING
OF 19-DAY CASH MANAGEMENT BILL
March 25, 1999
Offering Amount ........•............ $20,000 million
Description of Offering:
Term and type of security ........... 19-day Cas h Managemen t Bill
cus~p number .•.••.•.•••.•.••••.•••.• 912795 Sf 2
Auction date ....•.....•...•.•......• March 30, 1999
Issue date ••.•......•.....•......•.. March 31, 1999
Maturity date ............•......••.. April 19, 1999
Original issue date .•...........••.. Karch 31, 1999
Minimum bid amount and multiples •.•• $1,000
Submission of Bida:
Noncompetitive bids
Accepted in full up to $1,000,000 at
the highest accepted discount rate.
Competitive bids .••••.. (1) Must be expressed as a discount rate with
twe 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 i8 $1 bi ,ion or
greater.
(3) Net long position must be determined as
of one half-hour prior to the closing
time for receipt of campecitive tenders.
Max~um
Recognized Bid
at a Single Yield ......•.. 35\ of public offering
Maximum Award ....•...•....... 35\ of public offering
Receipt of Tenders:
Noncompetitive tenders
Prior to 11:00 a.m. Eastern Standard time
on auction day
Competitive tenders ••..•... Prior to 11:30 a.m. Eastern Standard time
on auction day
Payment Terms .•...•.......... By aharge to a funds account at a Pederal
Reserve Bank on issue date, or payment of
full par amount with Cender.
DEPARTMENT
TREASURY
FOR [MMEDIA TE RELEASE
March 29, 1999
OF
THE
TREASURY
NEWS
Contact: Public Affairs
(20.?) 622-2960
TRUSTEES TO RELEASE MEDICARE AND SOCIAL SECURITY REPORTS
Treasury Secretary Robert E. Rubin, I Iealth and Human Senices Secretary Donna
Shalala, Labor Secretary Alexis Herman, and Social Secllrit) (Oul1ll1lissionCl" Kenneth Apfel will
release the Medicare and Social Security Trustees Reports dt II :00 a.m. Tuesday, March 30 in
the Diplomatic Reception Room, Room 3311 of the Main lreasllrv l)uilding at 1500
Pennsylvania Avenue, N.W.
Media without Treasury, White House, Defense, State or Congressional press credentials
planning to attend should contact Treasury's Office of Public Alh1irs at (202) 622-2960 with the
following information: name, social security and date or hirth. I"his information may be faxed to
(202) 622-1999. The Diplomatic Room will be open for pre-set at 1O:()O a.111.
- 30 RR-3047
For press releases, speeches, public schedules and official biographies, call our 24-hollr fax line at (202) 622-2040
DEPARTMENT
OF
THE
TREASURY
NEWS
..--------~~~8~9~--..--~~~
TREASURY
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
CONTACT:
POR IHMEOUTE RBLEASB
March 26, 1999
Office of F.inancing
202/219-3350
TREASURY AMENDS BILL ANNOUNCEMENTS
The March 25, 1999. offering announcements have been amended as
indicated below.
In the I3-. 26-, and 52-week bill announcement,
the third paragraph
has been eh.anged to read as follows:
The mpturing bills held by the public include $4.991 million
held by Federal Reserve Banks as agents for foreign and international
monetary authorities. Up to S3.000 million of these securities may
be refunded within the Qffer~ amOunt in each of the auctiqps of 13ap4 2§-w.ek bills at thl higheet discoupt rate of accepted competitiyg
tenders. Additional .mOunt. maY bl issued in each auction for such
aeeounts to the extent that thl amount of new bids exceeds $3.000
million.
Foreign and international monetary authorities are considered to hold $1,440 million of the orig~al 52-week issue; additional
amounts may be issued in the 52-week bill auction for such accounts
to the extent that tbe amount of pew hids exeeds that amount.
In the original announcement, $3,000 million had been announced
a8 the limit amount for accept.ing tenders for such accounts within the
offering amounts in all three auctions.
Alao, the 'pnounORlGt oflAotber short-term cash management
bill is expected to be made on MArch 30, 1999, at 10:00 a.m. EST,
rather than on March 31
preyiou.ly stated in the last paragraph
of the cash m,paqement bill announcement-
a,
All other
RR-3048
par~icular.
of the &DDounoementa remain unchanged.
000
'UBLIC DEBT NEWS
epartment of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
IMMEDIATE RELEASE
:h 29, 1999
Office of Financing
202-2l9-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
April 01, 1999
July 01, 1999
912795BR1
-
Term:
Issue Date:
Maturity Date:
CUSIP Number:
4.380%
High Rate:
Investment Rate 1/:
4.502%
Price:
98.893
All noncompetitive and successful competitive bidders were awarded
lrities at the high rate.
Tenders at the high discount rate were
)tted 46%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
$
22,499,299
1,278,546
$
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
4,671,250
1,278,546
5,949,796 2/
23,777,845
PUBLIC SUBTOTAL
TOTAL
Accepted
Tendered
Tender Type
556,200
556,200
24,334,045
6,505,996
3,667,430
3,667,430
o
$
28,001,475
o
$
10,173,426
Median rate
4.370%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
4.280%:
5% of the amount
ccepted competitive tenders was tendered at or below that rate.
to-Cover Ratio = 23,777,845 / 5,949,796 = 4.00
qui valent coupon-issue yield.
wards to TREASURY DIRECT = $969,811,000
·3049
http://www.publicdebt.treas.gov
)UBLIC DEBT NEWS
epartment of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
IMMEDIATE RELEASE
:h 29, 1999
CONTACT:
Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
April 01, 1999
September 30, 1999
9127 95CQ2
Term:
Issue Date:
Maturity Date:
CUSIP Number:
4.340%
High Rate:
Investment Rate 1/:
Price:
4.511%
97.806
All noncompetitive and successful competitive bidders were awarded
lrities at the high rate.
Tenders at the high discount rate were
ltted 79%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
$
20,145,895
1,099,724
$
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$
3,406,890
1,099,724
4,506,6142/
21,245,619
PUBLIC SUBTOTAL
TOTAL
Accepted
Tendered
Tender Type
3,000,000
3,000,000
24,245,619
7,506,614
3,855,000
277,900
3,855,000
277,900
28,378,519
$
11,639,514
~edian rate
4.340%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
4.260%:
5% of the amount
:cepted competitive tenders was tendered at or below that rate.
:o-Cover Ratio = 21,245,619 /
4,506,614 = 4.71
1uiv alent coupon-issue yield.
vards to TREASURY DIRECT = $804,643,000
3050
http://www.publicdebt.treas.gov
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
FOR IMMEDIATE RELEASE
March 30, 1999
TREASURY SECRETARY ROBERT E. RUBIN
REMARKS AT THE MEDICARE AND SOCIAL SECURITY TRUSTEES
PRESS CONFERENCE
Today, the boards of Trustees of the Medicare and Social Security Trust Funds met to
complete our annual review of the financial status of the Trust Funds and to send a report to
Congress on each of them.
The financial status of both programs has improved since last year's report. With respect
to Medicare, the long-term actuarial gap has been reduced significantly, and the year in which the
Trust Fund is projected to be exhausted has been pushed back seven years to 2015. With respect
to Social Security, there was some improvement in the long-term actuarial gap and a two-year
postponement of the projected exhaustion date to 2034.
Much of the progress in strengthening the Trust Funds comes as a result of our current
strong economic conditions, what many consider to be the best in recent memory. Many factors
contributed to these conditions, including absolutely critically, the President's economic strategy
of restoring fiscal responsibility, leadership on international economic issues - including open
markets here and abroad - and investing in our people.
Notwithstanding the improvement in the financial outlook of both programs shown in this
years reports, hard work remains to be done to put them on a sound footing for the long term.
The President has proposed that we use the bulk of the projected unified surpluses over the next
15 years to very substantially pay down the publicly held debt of the Federal Government. The
President has further proposed that we enhance both Trust Funds' ability to pay currently
promised benefits under these programs.
With respect to Social Security, the President also proposes that we diversify the portfolio of
securities held by the Trust Fund to include private equities. Finally, the President proposes
RR-3051
For press releases, speeches, public schedules and official biographies, call our 24.1zour fax line at (202) 622-2040
that we finish the job of putting the Social Security system in 75-year balance by engaging in a
bipartisan process to make the tough, but achievable, required choices. Today's report will make
those choices slightly easier, but no less necessary.
With respect to Medicare, the President has committed to release a plan to reform
Medicare. When President Clinton took office, the Hospital Insurance Trust Fund was projected
to be exhausted in 1999. Now, the Trust Fund is projected to be solvent until 2015. But we
should take the further steps necessary to extend the solvency of this program and to modernize it
for the 21 51 century.
This remarkable transformation, from an era oflarge budget deficits to budget surpluses
now, and projected for a long time to come, has created an historic opportunity to promote fiscal
discipline, increase national savings, and strengthen the financial position of the Social Security
and Medicare programs.
-30-
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OFFICE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
March 30, 1999
Weekly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data for the week ending
March 26. 1999.
As indicated in this table. U.S. reserve assets totaled $74,102 million as of March 26, 1999,
down from $74,997 million as of March 19,1999.
U.S. Reserve Assets
imillions QfUS dollars)
1999
Total
Reserve
Special
Foreign
Currencies
Reserve
31
Assets
Gold
Stock 11
Drawing
Rights 21
ESF
SOMA
IMF21
March 19, 1999
74,997
1l,047
9,828
15,352
15,337
23,434
March 26, 1999
74,102
11,047
9,708
15,035
15,017
23,295
WeekEnding
Position in
Gold stock is valued monthly at $42.2222 per fine tIoy OWlce. Values shown are as of February 28, 1999. The January 31,
99 value was $11,048 million.
SDR holdings and the reserve position in the I'MF are based on IlYIF data and revalued in dollar terms at the official
)R/ dollar exchange rate. Consistent with current reporting practices, IMF data for March 19, 1999 are flnal. Data for SDR
ldings and the reserve position in the IMP shown as of March 26, 1999 (in italics) reflect preliminary adjustments by the Treasury
the March 19, 1999 IMF data.
Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market
count (SOMA). These holdings are valued at current market exchange rates or, where appropriate, at such other rates as may be
eed upon by the parties to the transactions.
·3052
Or press releases, speeChes, public schedules and official biographies, caU our 24-hUUT fax line at (202) 622·2040
From: TREASURV PUBLIC AFFAIRS
109
.u
OFFICE OF PUBLIC A'fAIRS .1SOt PENNSYLVANIA AVENUE,
30~
Contact:
1999
office of
Finane~g
202/219 .. :USO
The T~ea.ury w~11 .uet1o~ approximately $~6rOOO ~~11on of
Treasury caah ~gemeDt bi~la to ~. i~~u.d Ap~il 1, 1999.
C~et1t!ve
p. 1 of 34
N.W.• WASlflNCTON. D.C •• 20220. (202) ~:Zl.251'O
BHSARGOED UNTIL 10: 00 A. H •
March
5-11-99 4:Z0pm
and Doneompetitive teDdera
a•• erve Banka and. Brauc.b.ea
wil~
ce
~8c.1v.4
~4-day
at .11 F.4.ra1
"ill RQt ~e acc;opt.ci. £o%" 1:>:111. to be
M1nta:inec! OD. ~b. !)ook.-~ery !:'ecorda Qf t.b. 1).part:lllen~ of. the orra••ury
(T.r.a.W']"D.trec~).
"renc:lers vill ~ b. rec:.:i.V'ed. ae the lSur. ." of t:b. Publ.ic
P.-bt., WUhingotODI D.C.
o
•
M4itioJal UIOuuta of
'1'81=40:'.
~.
bill. . .y be issuer! to Fedual
.a... e:""Te
BazaJc,.
as ageDts fo~ foreign &Ad iDt.~.t1oD.l monetary authoritt •• at ~e high•• t
discount rat. of accepted eompetit1ve tender••
The auet10A being &DDDu~c.d today will Qa cond~~ted in ebe .~ng~e-p~1ce
auctiOn ~or.mat.A1~ comp.titive &ft4noDd~etitive .war~ -ill be at the
h1ghe5t discount rat. of accepeed c~etitiv. t.Q4er••
TA1. of.feri1sg of oT%. . .w:y .eQUr1t:1.•• ia SJo'V'.~e4 DY the ta:=a and CODdit:1on•••t tor~ ~ ~.UDifor.m Off.r~g Circular !or the Sal. aQd Isaua of
M&%k.tabl. Book-~t~ ~e.aury Billa. Hg~ •• r aDd Bond. (3l'erR Part 356, ••
meDded).
m2a:
cc=potitive b:i.d.a in caah management hil~ auotiou. muat be
& ciiaco1.U:l.: zoat. nth E!2 cS.ci.lt4al., •• g., 1.1Q'II.
~etails about ~e D.W .ecur:1ty ar. giv~ in the .tt.cbe~ oft.r~~
.zpr......d as
highlights.
RR-3053
000
From: TREASURY PUBLIC
HlGaLIGB~S
OP
5-11-99 4:20pm
AFFA1~J
p. 2 of 34
~~y OFFBR~G
01' 14-DAY CASR
~
BIIJ:.
March
30~
l$99
gff.rinq bmoUQt ....••..•...••.•.•.•. $26,000 million
gescription of ~':.riug!
Ter.a ~ type Qf security ..••••••••• 14-~y Ca.h ~nagem.n~
ctJSl;P number •••.••.••.••••.••••.••.• 9l2795 BH 3
Auction dace ••••.••••••••••••••••••• MArch 31, 1999
B~ll
I_sue data •.••••••••••••••••••••. _ •• April 1, 1.999
xatur1~
date •••.•.•••..•••••••••••. Apr1~ lS,
Ot'i~Ua.al
iaau. dat:.e •••••.•.••••••••• Oct,ol)er 15, l~98
•••••.••••••••• $23,719 million
~999
~~.~t1y outatandin~
~:t.JIN;al
bid
UlQUQt
4A4 3INltiplee •••• $1., 000
Bubmi"iOB
of Biga;
Honcompetit!Ye bida .••••••• Aocepted ~n f~ll up to ~1,OOO,OOO a~
tho hi;he.t accepted ~~.eo~t r~t ••
eamp.tit1~. bidS ••••••• (1) Must b. *¥p~.a.ed &8 & Qi.~ount ~&to with
two d.C~l., •• ~., 7.10'.
(2) Ket lOn9 ~O.it~OA for . .ch bidd~ mUlt
be repo~ted. whalt Cbe awn 0: the total bid
amount, ~t; all C!:1.acO\U1.t :ra.e"., &Ad the
net lon~ position ia $1 ~illion or
Flat.%'.
(3) Net long pOl1~~on mu.~ ~e d.~.rmi:e4 aD
o~
hal!-bour p~1or to th. elo.ing
time !O~ r.ceipt of comp.t~tive taQ4e~••
0=.
~mum
n
B,epga;ie4 lid
%1,14 •• ~ •• - •• " lS\ elf pu!=lj,c: of:.r:L.a.g
~;pqle
Mtad me Anri ..............•.
be.iDt
g,
1tnc!.q:
NOA~titiv.
teno.ra
. . . &- • •
Prio~
to 12.00 no~ EaDe.~ Standard eima
on auctioEl. day
Prior to 1,00 p.m. Ba.ce~A S~aadard tim_
OD &uc:t:.:10Z\ clay
By aharg. to & fUDda aecount at & Pederal
&•• ~ aa:k Oft i ••u. da~" O~
~11l1 par amoun'C with t.ud..~.
P4ymaD~ o~
TOTRL P.02
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE
March 30, 1999
CONTACT:
Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 19-DAY BILLS
19-Day Bill
March 31, 1999
April 19, 1999
91279SEP2
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
4.83 %
Investment Rate 1/:
Price:
4.92 %
99.745
All noncompetitive and successful competitive bidders were awarded
securities at the high rate.
Tenders at the high discount rate were
allotted 93%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
$
43,115,000
$
20,025,000
TOTAL
$
43,115,000
$
20,025,000
o
o
Median rate
4.82 %: 50% of the amount of accepted competitive tenders
was tendered at or below that rate.
Low rate
4.74 %:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 43,115,000 / 20,025,000 = 2.15
1/ Equivalent coupon-issue yield.
RR-3055
http://www.publicdebt.treas.gov
PUBLIC DEBT NEWS
Jepartmeut of the Treasury -Bureau of the Public Debt .Wasbi;-gton, DC 20239
TREASURY
S~CURITY
AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
IMMEDIATE RELEASE
CONTACT:
Office of Financing
202-219-3350
ch 30, 1999
RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number:
364-Day Bill
April 01, 1999
March 30, 2000
912795DP3
4.495%
High Rat.e:
Invest.ment Rate 1/:
4.732%
Price:
95.455
All noncompetitive an~ successful competitive bidders were awarded
urities at the high rats. Tenders at the high discount rate were
otted 82%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEpTED (in thousands)
Tender Type
Tendered
Competitive
Noncompetitive
7,491,099
1,079,130
24,148,797
1,079,130
PUBLIC SUBTOTAL
25,227,927
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
TOTAL
Accepted
$
8,570,229 2/
1,440,000
1,440,000
26,667,927
10,010,229
5,140,000
734,000
5,140,000
32,541,927
734,000
$
15,984,229
Median rate
4.485%: 50% of the amount of accepted competitive tenders
tendered ~t or below that rate. Low rats
4.400%:
5% of the amount
ccepted competitive tenders was tendered at or below that rate.
to-Cover Ratio = 25,227,927 / 8,570,229 = 2.94
quivalent coupon-issue yield.
wards to TREASURY DIRECT = $707,612,000
:ffi-3056
http://www.publicdebt.treas.gov
TOTAL P.01
DEPARTMENT
TREASURY
OF
THE
TREASURY
NEWS
EMBARGOED UNTIL 11 :30AM EST
Remarks as Prepared for Delivery
March 31, 1999
TREASURY SECRETARY ROBERT E. RUBIN
REMARKS TO NORTH CAROLINA STATE'S EMERGING ISSUES FORUM
It is a pleasure to speak with you today and I would like to thank Governor Hunt
and Erskine Bowles for the invitation. North Carolina has made many important
contributions to our nation's well being since the founding of the Republic, and I think it
would be fair to say that sending Erskine to Washington to serve as the President's Chief
of Staff is certainly one of them. He was centrally involved in accomplishments of great
importance, without developing any sense of self-importance; that is a not inconsiderable
achievement in any place, and certainly in Washington.
This morning I would like to make a few observations about the dramatic
transformation of the global financial markets and global economy over the last couple of
decades, the opportunities and risks that this has created including the global financial
crisis of the last year and a half, and how we can best position our country to succeed
economically in the new century.
As many of you may know, I worked on Wall Street for 26 years, before joining
the Clinton Administration six years ago. In those 32 years I have participated, as have
many of you, in remarkable changes in our economy and in the global economy and global
financial markets -- changes that could sensibly, and without hyperbole, be called
revolutionary. For example, when I first started on Wall Street accounts were still kept by
ledger, and I used a slide rule to calculate yields. And I remember one instance early on
when an institutional client asked what stocks we were recommending. We sent him our
research reports, and a year later he came back and said that he liked one of our
recommendations and would buy some. Today, a recommendation that is a few days old
may be considered stale, and day traders who hold a stock overnight consider that long
term. These are just a few examples of how dramatically different the financial and
economic worlds are today.
What I would like to do now is take a somewhat closer look at four of the
fundamental changes that have occurred: globalization; financial innovation; advances in
technology; and the place of developing nations in the global economy.
RR-3Q57
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First is globalization. Financial markets now function in many ways as one integral
whole covering the globe, with large volumes trading across borders, with large numbers
of securities of many different nations trading in each major market center, and with
events in one market affecting other markets around the world almost instantly. When I
started on Wall Street, if a company wanted to raise debt or equity, it would look only at
the possibilities in the US. markets. But, by the mid 1980s, that same company would
look at the possibilities in capital markets all over the world, and then issue in whatever
market centers the opportunities were most cost effective. Similarly, two or three decades
ago, US. investors invested almost entirely in US. securities, and US. banks and other
creditors extended credit predominately to American entities and a relatively small number
offoreign countries and foreign private sector borrowers. Today, both investors and
creditors are involved in a vast number of countries, including many developing countries
around the globe.
The second major change has been financial innovation. Thirty years ago, a
portfolio consisted of stocks and bonds. Today, investors can buy securities with virtually
any desired combination of debt, equity, commodity, or foreign exchange futures, from
floating rate bonds in any major currency to options on futures in debt or equity, currency
swaps, income warrants or oil futures denominated in the currency of choice. Financial
innovation has meant greater efficiency and precision in serving the purposes of providers
and users of capital, but has also created new risks and new challenges, which I will return
to in a moment.
The third change has been the great advances in technology without which today's
globalization and financial innovation could not have occurred. Technological
development has led to instantaneous information sharing and instantaneous trading
between market centers all over the world. And technology has provided the calculation
power necessary to create and trade complicated derivatives. I might add that this impact
on financial markets is just one aspect of the much broader effect of technological
development on productivity throughout our economy, and one of the great debates now
raging is whether the technological development of the information age has significantly
increased the basic rate of productivity growth of the American economy. I will not be
addressing this issue this morning, but the answer either way could profoundly affect our
economic future.
The fourth change that I will focus on is the place of developing countries in the
global economy. When I started on Wall Street, developing countries were economically
irrelevant, except as sources ofraw materials and recipients of foreign aid. They certainly
were totally off the radar screen of the financial markets, except for limited bank lending,
mostly to sovereign borrowers. In recent years, developing countries have been major
markets for the United States, buying roughly 40% of our exports, and have become the
recipients of large investment and credit flows. Twenty years ago, virtually no one in the
United States had ever heard of the Thai baht or, for that matter, the Korean won.
Starting about a year and a half ago, they were on the front pages of daily newspapers
with some frequency, and events in Thailand and Korea affected countries around the
2
world, including our own, and during the last week of 1997, events in Korea, posed a real
threat to the global system.
All of these changes have created great opportunities for our country and for many
around the globe, including in the developing world. Even taking into account the global
financial crisis of the last year and a half, emerging markets around the world attracted
vast amounts of private capital over the last twenty-five years, fueling investment that
helped lift millions out of poverty.
However, just as these changes created great opportunities, so too have they
created significant risks and challenges. Let me say a few words about four in particular.
First are the questions of portfolio risk and what is often referred to as systemic
risk. Let me start with portfolio risk. The changes I just described have led to enormous
complications with respect to risk management. One of the great challenges for any
financial institution is the fact that risk management models -- no matter how
sophisticated -- cannot capture the full complexities of the real world and its uncertainties.
Consequently, it is impossible for even the most sophisticated institutional investors to
fully understand, measure and judge the risks of a complex portfolio, which many of them
have these days. The collapse of the hedge fund, L TCM, is a recent example of this. And
once you go beyond the most sophisticated organizations, understanding of these risks -for example, of embedded options and possible unexpected noncorrelating moves in
derivative portfolios -- probably diminishes quite considerably.
Systemic risk from problems in one large institution or one country -- that is, risk
of broad contagion or spreading effects elsewhere in the global economy -- has increased
greatly as a result of all the changes that I have just discussed. And that is precisely why
we at the Treasury, working with the Federal Reserve Board and our counterparts around
the world, have been so intensely focused in the last few years -- but especially in the last
year and a half -- on reforming the architecture or framework of the global financial
markets.
Our goal has been clear: to have a system less prone to financial crisis, and better
able to manage a crisis when one occurs. Our efforts have included: first, ways to induce
structural reform and sound macroeconomic policy in developing countries; second, ways
to reduce excessive investment, excessive credit from industrial country banks and
investors due to inadequate focus on risk during good times, which was a major cause of
the crisis of the last year and a half; third, greater disclosure and transparency; fourth,
appropriate private sector burden sharing in crisis response; and fifth, greater support in
crisis countries for those most in need.
We are making concrete progress in each of these areas, but the issues are
extremely complex, both practically and analytically, often involving powerful competing
considerations. For example, private sector creditors should bear the consequences of
their decisions in a market-based system when there is a crisis, and that is the principle
lying behind private sector burden sharing. On the other hand, borrowers should be held
3
accountable to pay their debts or bear heavy consequences, otherwise no one will extend
credit. The challenge is to find an approach that best combines these two competing
principles, and I think we have begun to do that in the handling of actual situations.
Beyond the complexities, there is also the need to develop international consensus,
and that is no simple matter. Thus, change to the system, which has started, will happen in
.pieces over time, rather than in one dramatic moment. In my view, however, the effects
will be substantial.
Let me also say that there are a whole host of proposals out there that on the
surface seem sensible and have great political appeal, but which, when carefully analyzed,
are deeply flawed. It is easy to make dramatic statements; it takes a lot of hard work to
produce sensible proposals. We have a two part focus: one, developing and putting in
place those reforms that are sensible; and two, preventing measures that do not make
sense.
The second challenge -- which is related to the contagion issue I just discussed -- is
the greatly increased speed with which problems can now spread. Last August, Russia
defaulted on its debt and the ruble collapsed. Almost instantaneously, markets around the
world were sharply affected, due to instant transmission of information, instant global
trading capability, and global portfolio diversification. More generally, the turmoil in
markets affected by a shock can quickly create instability in markets that are totally
unaffected by that shock, if for example, investors decide to seek liquidity where they can
find it or develop a herd mentality, as in a sudden aversion to developing countries or a
sudden aversion to risk. The increased speed of interaction greatly increases the risk of
contagion, because it increases the potential for acting in the heat of the moment or simply
for getting out of harms way until there is time to sort matters out, and reduces the
potential for considered judgment of all the relevant information before acting.
The third challenge is to continue dealing with the financial crisis that first erupted
in Thailand close to two years ago, and is still significantly affecting almost all countries
around the world, including our own.
This crisis did not start in Thailand, as often portrayed, but, in my view, was a
product of problems that had developed over many years. In developing countries, those
problems included weak financial systems, various other structural weaknesses, and a
variety of combinations of unsound fiscal, monetary, exchange rate, and debt management
policies. In industrial countries, the problems included -- as I mentioned earlier in
discussing financial architecture -- large excesses in capital flows into developing countries
due to a failure to fully analyze and weigh risk in decision making when times were good.
That, I might add, is not unusual in markets. When the crisis first hit Korea, I remember a
call to a bank that had substantial credit exposure in Korea, to get some additional
information for our own work, and I was astounded at how little they knew about a
country to which they had extended so much credit.
4
The work of the international community in response to the crisis has been
centered around the IMF, a critically important but relatively unknown institution until the
last couple of years. In my view, the IMF has on balance made sensible judgements in
structuring and providing its loan support programs to countries in crisis, in the face of
unprecedented and highly complex circumstances. And the IMF has been flexible in
adjusting those judgements when circumstances warranted. However, in the final analysis,
these programs for recovery from crisis can only work, when the country involved takes
ownership of reform and implements reform on a consistent basis through the inevitably
difficult process of recovery.
Thus, in Korea, where the government did exactly that, foreign exchange reserves
have increased from 4 billion in December 1997, when the peak of the Korean crisis posed
real threat of an enormously heightened world-wide impact, to 53 billion now; and
overnight call rates have fallen from 35% to 5% on Korean short-term government
securities. In both Korea and Thailand, much has been accomplished, though much
certainly remains to be done. In Russia, where the government did not proceed with
reform, economic conditions have deteriorated substantially.
Looking forward, on the one hand, there has been real progress in dealing with the
crisis -- though substantial uncertainties and much work lies ahead -- on the other hand,
partly due to the crisis and partly for other reasons, the global economy aside from the
United States is generally viewed by private sector forecasters as looking soft. Japan,
despite some important steps, still faces great challenges and is generally thought likely to
have negative to zero growth this year; Western Europe has seen private sector growth
forecasts declining to relatively low levels, and Latin America is experiencing negative
growth in Brazil and Argentina. Our own economy is the one major bright spot, and
looks very likely to have solid growth and low inflation in the time ahead, although some
sectors clearly have been badly affected by reduced exports or increased imports due to
the crisis, and we are subject to being affected overall by problems elsewhere in the global
economy.
Fourth, and finally, we must continue in our own country, in both the private
sector and the public sector, to continue on the tracks that have contributed so much to
the healthy economic conditions of the past six years. In the private sector, that means
continuing to effectively focus on the increased productivity and competitiveness that has
brought our private sector back over the past ten to fifteen years from a position of global
laggard to a position of great competitive leadership. In the public sector, that means:
continuing on the path offiscal responsibility, investing in our people to promote future
productivity through education, heaIthcare, real economic opportunity for the residents of
our inner cities and other distressed areas, and the like; and leadership on the issues of the
global economy that so much affect our economic well being, such as responding to the
current crisis, reforming the architecture of the global financial markets, and maintaining
our own open trading markets while working to open markets aboard.
Let me expand for a few moments on two of these areas.
5
As to fiscal responsibility, with our current surplus and with surpluses projected
for a long time to come, we have an historic opportunity to increase national savings, and
that is what the President has proposed to use roughly 77% of the surplus to pay down the
publicly held debt of the Federal government, to strengthen the Social Security and
Medicare Trust Funds, and to promote private savings through a tax cut incentive to save.
Using the surplus for a large tax cut or fiscal spending might be more popular, but
promoting fiscal responsibility and national savings is the right path for our future.
As to open markets, there is no doubt in my mind that our open markets have
contributed greatly to the healthy economic conditions of the past six years, through lower
prices for both consumers and producers, increased competitiveness and therefore
increased productivity, and for all these reasons lower inflation and lower interest rates.
It is worth noting that Continental Europe, with its less open markets, has
persistent 10-12% unemployment, and virtually no new job creation, and the United
States, with its relatively open markets, has 4.3% unemployment and six years of vigorous
job creation.
Moreover, restricting access to our markets now, would hamper the recovery in
crisis countries that are so important to our own economic well being, and could
strengthen the voices of protectionism in industrial and developing countries around the
world, which in tum could severely effect our export industries.
Having said that, one consequence of the current global economic situation is that
the United States has a large and growing trade deficit, and with the business problems
and job losses to some that are the cost of the benefits of imports to many, we face
increased domestic pressures to close our markets. I believe that we must strongly resist
those pressures. The adverse effects of imports are concentrated, and the voices of those
adversely affected are loud. The benefits of trade openness are more widely dispersed -indeed, those who benefit are often unaware that they are doing so -- and the result is
fewer, fainter voices for open markets. All of us need to work together to increase the
awareness that open markets here and opening markets abroad are critical to business
profitability, job growth and increased standards of living. We must also enforce our trade
laws vigorously against unfair trade practices and we must help those dislocated by change
-- whether from trade, or technological development, or any other source -- reenter the
economy successfully and as quickly as practical.
To conclude, I think the United States is very well positioned for success in the
global economy of the 2 pI century. However, to realize that potential, we must -- in both
the private and public sectors -- meet the challenges that the greatly changed global
economy poses.
This conference, in tum, is a good example of what needs to be done to promote
the broad based discussion of the great changes that have occurred and the challenges we
6
face, in order to have support necessary for the difficult decisions involved in meeting
these challenges.
Again, Governor Hunt and Erskine, I appreciate this opportunity to be with you
and to discuss these important issues. Thank you.
-30-
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
BMBARGOlmUNTIL 2: 30 P. M.
March 31, 1999
CONTACT:
Office of Financing
202/219-3350
TREASURY TO AUCTION $7,000 ~LLZON OF
30-YEAR INFLATION-INDEXED BONDS
The Treasury will auction $7,000 million of 30-year inflation-indexed
bonda to rai.e cash.
Amounts bid by Federal Reserve Banks for their own accounts and as
agents for foreign and ~~ernational monetary authorities will be added
to the offering.
The auction will be conducted in the Single-price auction format.
&Dd noncompetitive awards will be at the highest yield of
accepted competitive tenders.
All
compe~itive
The bonds being offered today are eligible for the STRIPS program. As
previously announced in the Federal Register on June 30, 1998, today is the
first day that interest payments on Treasury inflation-indexed securities are
fungible.
Tenders will be received at Federal Reserve Banks
the Bureau of the Public Debt. Washington, D.C. This
.ecuritie. is governed by the terms and condition • • et
Offa~ing Circ~.r for the Sale and Issue of Marketable
Bille, Notas, and Bonds (31 CPR Part 356, as amended).
Details about the security
a~e
and Branches and at
offering of Treasury
torth in the Uniform
Book-Bntry Tre••ury
giveD iA the aetached offering
hig~ights.
000
Attachment
RR-3058
For p'us ,eleGIes, $p~~c"e$. pllblk schedules tllld offlcltll bID,rtlpllla. ella OU, l4-hou, !IIZ. IllIe tit (102) 621-2040
HIGHLIGHTS OF TREASURY OFFERING TO THE PUBLIC OF
30-YEAR INPLATION-INDEXED BONDS TO BE ISSUED APRIL lS, 1999
March 31, 1999
Offering Amount . . . . . . . . . . . . . . . . • . . . . • . • • • . $7.000 million
Description of Offering:
Term and type of security ...•.... ···· ....• 30-year inflation-indexed bonds
Bonds of April 2029
912810 P1I 6
April 7, 1999
April 15. 1999
April lS, 1399
April IS, 2029
Determined based on the highest
accepted competitive bid
Determined
at auetion
Real yield .................••.•.••.....•..
October
15
and April 15
Interest payment dates ••.••••.•..•...•....
l4inimum bid amount and multiples . . . . . . . . . . $1,000
Accrued ~tere8t payable
by investor . . . . . . . . . . . . . . . • . . . . . . . . • . . • None
Premium or discount . . . . . . . . . . . . . . . . . . . . . . . Determdned at auction
Series ............••..••.•••..............
CUSIP number . . . . . . . . . . . . • . . . . . . . . . . . . . . . . •
Auction date . • . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.8 sue date . . . . . . . . . . . . . . • • . . • • . . . . . . . . . . . .
Dated date .•...........•..............••.•
Ma turi ty date . . . . . . . . . . . . . . . . • • . . . . . . . . . . .
Interest rate . . . . . . . . . . . . . . . • . . . . • . . . . . . . .
STRIPS Information:
Minimum amount required .••••••.•.•....•.•• Sl,OOO
Corpus COSIP number ...•..•.•.............• 912803 CF 8
COSIP numbers for interest payments due october 15, 1999, through April 15, 2029,
are provided in a separate press release published today.
Submission of Bids:
Noncompetitive bids: Accepted in full up to $5.000,000 at ehe hlghest accepted yield.
Competitive bids:
(1) Must be expressed as a real yield with three decimals, e.g., 3.123%.
(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 dete~ned as of one half-bour prior to the closing
t~ for receipt of competitive tendera.
Maximum Recognized Bid
at a Single Yield ...• 35% of public offering
Max~um Award .•.•...•.. 35% of public offering
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 t~e on ~uction ~y
Payment
payment
feature
tion on
Terms: By charge to a funds account at a Vederal Reserve Bank on issue data, ~
of full par amount with tender.
TreasuryD.irect customers can use the Pay Direct
which authorizes a charge to their account of record at: their financial institu'
issue date.
Indaxing Information:
CPI Base Reference Period
1982-1984
Ref CPI 04/15/1999 .....•..•..• 164.39333
Index Ratio 4/15/1999 .. " " ' " 1. 00000
~UBLIC
DEBT NEWS
.epartment of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
IMMEDIATE RELEASE
ch 31, 1999
Office of Financlng
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 14-DAY BILLS
14-Day Bill
April 01, 1999
April 15, 1999
912795BH3
Term:
Issue Date:
Maturi ty Date:
CUSIP Number:
4.85 %
High Rate:
Investment Rate 1/:
Price:
4.95 %
99.811
All noncompetitive and successful competitive bidders were awarded
lrities at the high rate.
Tenders at the high discount rate were
)tted 83%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
$
42,823,200
1,009
$
26,022,700
1,009
TOTAL
$
42,824,209
$
26,023,709
Median rate
4.80 %: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
4.73 %:
5% of the amount
ccepted competitive tenders was tendered at or below that rate.
-to-Cover Ratio = 42,824,209 / 26,023,709 = 1.65
:quivalent coupon-issue yield.
http://www.publicdebt.treas.gov
3060
DEPARTMENT
OF
THE
NEWS
TREASURY
~QOED
~dl
TREASURY
CON'1'AC'l' :
tJJJTXL 12: 00 BOON
1, 1'"
Offieeof 7inancing
:202/219-3350
The Tre • .ury will auction two .eries of Treaaury billa totaling
ppro~tely $1',000 ~l11on to refund $15,562 .lllioD of publicly held
ecuritiea maturing April., 1"'. &Ad to pay down about $1.562 ~llioA.
ID additioD to ~e public beldings. Federal Reaerve Banks for their own
ccounca hold $7,739 adllion of the aaLuring billa. which may be refunded at
b. highe.t discount rat:e of accepted co.pet1t:ive ttmdera.
b••• account. will be in addition to tbe offering amount.
JUDaw1ta i •• ued to
The m&curing bill. held by ~e public include $2.783 million held by
a••• rve Banka . . .genta for foreign aDd 1nternac1o:&1 monetary author1which may be refunde4 wi t.h1D the off.ring amount at the highest diacount
lte of accepted co.petit:i...e taoder..
Additional &mO'W1t:a may be iasued tor
lcb account. if the eggrowat. a.cNnt of Aew bids exceeda the aggregate amount
aaturing bill ...
l...
Ideral
~r. . . ~ireet
CU8eo-ara requ •• ted that we reinv.st their maturing
Ilc!1Dga of approxiaately 'tOl aJ.llion 1Dto the 13-week bill and $786 million
lto the l6 - •• elt bill.
Ten4era tor the bllla will be r.ce1'Ye4 at Pederal Reaerve Banks and
ancb •• aneS at th. a1.l.r'e&\I of the hhllc t)e,bt • •a.hingtoD. D.C. "this ottering
TZ'. . . u..ry •• curltie. i . 9O""erlled by lb. terzu &Ad conC!itio~ eet forth in
• Unitora Otfering Circular for u.. Sale &Dd Ia.ue of Marketabl.e Book-Bn~ry
••• ury 8111a, .ote., aDd 8oD4. (ll era Part 356, a8 amended).
Detaila &bout each of
~. Aew .~1t1 ••
il h1ghligbta.
000
·3061
are given in the attached o!!er-
HIGHLIGHTS OF TRBASURY opr~RINas or BILLS
TO BB ISSUED APRIL 8, 199.
April 1, 1999
Oftering AmQunt •.•..•.............•...•• $6.500 million
De@cription of Offeringl
Term .nd type of security ..•••••.•.••..• 91-d.y bill
CUS~P numb.r ••.•...•.•.•..••••..••.•.•.• 912795 CF 6
Auotion dat •••.••••••••••••••••••••••••• April 5, 1999
I.aue d.t ••••••••••••••••••••••••••••••• April 8. 1999
Maturity d.te •.••••••••••..•••••.••••••. July I, 1999
Original l ••
dat •••••.••••••.••••••..• Janu.ry 7, 1999
CUrrently outstanding .••••.•••.•.•..••.. $11,361 million
Minimum bid .mount .nd multipl ••••.••... $l,OOO
u.
Tb.
~911owing
",500 million
le2-d.y bill
9127'5 CR 0
AprilS, 1999
April 8, 1999
October 7, 1999
April', 1999
$1,000
rule • •pply to III ,ecuriti •• m.ntioned .boy,.
Submisslon of BId.,
Nonco~pet1tlve
bid •.....•.... Accept.d in full up to $1,000,000 at tb. high •• t diacount rat. of
acc.pt.d cODp4titlv. bid•.
Competitive bide •..••..•.••.• (1) Muat b •••pr •••• d a. a dl.count rat. with thr •• d.cl . . l. il
incr.ment. of .005', •. g., 7.100', 7.105'.
(2) N.t long poaition for .ach bidd.r DU8t b. r.port.d wh.n tb, aum
of the total bid anount, at all di.count rat •• , and the n.t long
poaition ia
billion or gr.at.r.
(3) N.t long po.ition muat b. d.t.rmin.d a. of on. half-bour prior
to the olo.ing tim. for r.o.ipt of oo~.t1tiv. t.nd.r ••
,1
Maximum 8'90gn1,.4 Bid
at a Sipgl, yield .•..•••••.•• 35\ of publio off.ring
Maximum Aw.rd ••••••••••••••••••• 35\ of publio off.ring
aeeeipt of Tenders.
Nonooap.titive tender ••••••.• Prior to 12.00 Doon aa.t.rn Day11ght Sa.ing tl . . on auction day
Competit1ve tend.r ••.•••••••• Pr10r to 1100 p ••• B•• t.rn Dayligbt BaYing tim. on auction day
Payment ,era,:
of
ful~
By charg' to a fund. account . t • r.d.r.l R••• r • • • ank on ia.u. dat •• or paym.nt
Tr •• auryDlrect ou.toaer. can u •• the •• y Direct f.atur. wbicb
par .-ount with t.nd.r.
_uthor~ •••
_ oharge to
tbe~r
account o£ r.eor4 at th.ir £lnaDol.1 lu.titution on i.au. dat ••
PUBLIC DEBT NEWS
Department of tbe Treasury • Bureau of tbe Public Debt • Washington, DC 20239
CONTACT:
FOR IMMEDIATE RELEASE
March 31, 1999
Office of Financing
202-219-3350
TREASURY ANNOUNCES INFLATION-INDEXED INTEREST COMPONENTS
ARE NOW INTERCHANGEABLE (FUNGIBLE)
Effective March 31, 1999, the Treasury has implemented changes
that will allow for all Treasury inflation-indexed securities (TIIS)
interest components with the same maturity date to be interchangeable
(i.e., fungible).
This innovation is designed to promote liquid markets for stripped
interest components of inflation-indexed securities, and could increase
demand for the underlying inflation-indexed securities.
Treasury is assigning a generic CUSIP number to each interest
payment date for TIIS interest components. Lists of the newly assigned
CUSIP numbers and dates, and of the retired CUSIP numbers, are attached.
For further details, see the Uniform Offering Circular for Treasury
securities (31 CFR Part 356 and Appendix B to Part 356, as amended).
000
~7\ttachments
(2)
~R-3062
http://www.publicdebt.treas.gov
The new (fungLble) CUSIP numbers for interest payment dates on inflation-indexed
asury notes and bonds are given below:
CUSIP NUMBERS FOR STRIPS INTEREST COMPONENTS
** INFLATION-INDEXED SEC~TIES **
lSUry In teres t
(TIIN) Due
r 15, 1999
lary 15, 2000
r 15, 2000
lary 15, 2001
, 15, 2001
lary 15, 2002
. 15, 2002
,ary 15, 2003
, 15, 2003
ary 15, 2004
15, 2004
ary 15, 2005
15, 2005
ary 15, 2006
15, 2006
ary 15, 2007
15, 2007
lry 15, 2008
15, 2008
lry 15, 2009
L 15, 1999
)er 15, 1999
~ 15, 2000
)er 15, 2000
. 15, 2001
ler 15, 2001
. 15, 2002
,er 15, 2002
15, 2003
,er 15, 2003
15, 2004
er 15, 2004
15, 2005
er 15, 2005
15, 2006
er 15, 2006
15, 2007
9r 15, 2007
15, 2008
:!r 15, 2008
!
CUSIP Number
912833
D2
D3
D4
D5
D6
D7
D8
D9
E2
E3
E4
E5
E6
E7
E8
E9
F2
F3
F4
F5
F6
F7
F8
F9
G2
G3
G4
G5
G6
G7
G8
G9
3
1
9
6
4
2
0
8
2
0
8
5
3
1
9
7
1
9
7
4
2
0
8
6
0
8
6
3
1
9
7
5
H2 9
H3 7
H4
H5
H6
H7
5
2
0
8
H8 6
H9 4
Treasury Interest
(TIIN) Due
April 15, 2009
October 15, 2009
April 15, 2010
October 15, 2010
April 15, 2011
October 15, 2011
April 15, 2012
October 15, 2012
April 15, 2013
October 15, 2013
April 15, 2014
October 15, 2014
April 15, 2015
October 15, 2015
April 15, 2016
October 15, 2016
April 15, 2017
October 15, 2017
April 15, 2018
October 15, 2018
April 15, 2019
October 15, 2019
April 15, 2020
October 15, 2020
April 15, 2021
October 15, 2021
April 15, 2022
October 15, 2022
April 15, 2023
October 15, 2023
April 15, 2024
October 15, 2024
April 15, 2025
October 15, 2025
April 15, 2026
Octobe~ 15, 2026
April 15, 2027
October 15, 2027
April 15, 2028
October 15, 2028
April 15, 2029
of Financing, Bureau of the Public Debt
Treasury Department, Washington, D. C. 20239
CUSIP Number
912833
J2
J3
J4
J5
J6
J7
J8
J9
7
5
3
0
8
6
4
2
K25
K3 3
K4 1
KS 8
K6 6
K7 4
K8 2
K9 0
L2
L3
L4
LS
L6
L7
L8
L9
4
2
0
7
5
3
1
9
M23
M3 1
M4 9
MS 6
M6 4
M7 2
M8 0
M9 8
N2
N3
N4
N5
2
0
8
5
N6 3
N7 1
N8 9
N9 7
P2 0
The eUSIP numbers listed below, which were formerly assigned to interest
Dents on inflation-indexed securities, are being retired, and will not be use.
er March 30, 1999:
912833
SA
SB
se
SD
SE
SF
SG
SH
SJ
SIt
SL
SM
SN
SP
SO
SR
SS
ST
SU
SV
SW
SX
SY
SZ
TA
TB
Te
9
7
5
3
1
8
6
4
0
7
5
3
1
6
4
2
0
8
5
3
1
9
7
4
8
6
4
TO 2
912833
912833
6
TL 4
TM 2
UU
TN 0
TP 5
TO 3
TR 1
TS 9
TT 7
TO 4
TV 2
TW 0
TX8
TK
TY 6
TZ 3
UA 6
US 4
ue 2
912833
2
WD 8
UV 0
OW 8
WE 6
WF 3
6
UY 4
UZ 1
VA 5
WG 1
WJ 5
WK 2
VB 3
WL 0
ve 1
WM 8
VD 9
VE 7
VF 4
WN
VG 2
WT 3
WU 0
WV 8
WW 6
WX 4
WY 2
OX
VH 0
VJ 6
3
1
9
7
WH 9
6
WP 1
WS 5
CD 0
UE 8
VK
VL
VM
VN
VP
UP 5
UG 3
UH 1
UJ 7
VS 6
VT 4
XA 3
XB 1
XC 9
XD 7
XE 5
VU 1
VV 9
XF 2
XG 0
VW 7
VX 5
VY 3
VZ 0
XH 8
UK 4
UL 2
OM 0
UN 8
TE 0
TF 7
TG 5
UP 3
UO 1
TH 3
US 7
TJ 9
UT 5
UR 9
2
VO 0
VR 8
WA 4
WB 2
we 0
WZ 9
XJ 4
XK 1
XL 9
XM 7
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
202-2l9-3350
CONTACT:
R IMMEDIATE RELEASE
ril OS, 1999
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
Ap r i I 08, 1999
July 08, 1999
912795CF6
Term:
Issue Date:
Maturity Date:
CUSIP Number:
4.265%
High Rate:
Investment Rate 1/:
Price:
4.383'%
98.922
All noncompetitive and successful competitive bidders were awarded
curities at the high rate.
Tenders at the high discount rate were
lotted 28%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
$
25,623,065
1,335,891
$
150,000
150,000
27,108,956
6,500,556
3,759,320
3,759,320
Foreign Official Refunded
SUBTOTAL
5,014,665
1,335,891
6,350,556 2/
26,958,956
PUBLIC SUBTOTAL
Federal Reserve
Foreign Official Add-On
TOTAL
Accepted
Tendered
Tender Type
o
o
$
30,868,276
$
10,259,876
Median rate
4.240%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
4.170%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
i-to-Cover Ratio = 26,958,956 /
6,350,556
=
4.25
Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $974,941,000
3063
http://www.publicdebt.treas.gov
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU Of THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
\ IMMEDIATE RELEASE
~il OS, 1999
Office of financing
202-219-3350
RESULTS Of TREASURY'S AUCTION Of 26-WEEK BILLS
182-Day Bill
April 08, 1999
October 07, 1999
912795CRO
Term:
Issue Date:
Maturi ty Date:
C(JSIP Number:
4.345%
High Rate:
Investment Rate 1/:
Price:
4.517%
97.803
All noncompetitive and successful competitive bidders were awarded
:urities at the high rate.
Tenders at the high discount rate were
_otted 44%.
All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
$
20,467,139
1,103,687
$
5,352,026 2/
2,165,000
2,165,000
23,735,826
7,517,026
3,980,000
3,980,000
Foreign Official Refunded
SUBTOTAL
4,248,339
1, 103, 687
21,570,826
PUBLIC SUBTOTAL
Federal Reserve
Foreign Official Add-On
TOTAL
Accepted
Tendered
Tender Type
o
o
$
27,715,826
$
11,497,026
Median rate
4.340%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
4.150%:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
-to-Cover Ratio = 21,570,826 /
5,352,026
=
4.03
Equivalent coupon-issue yield.
Awards to TREASURY DIRECT = $848,783,000
R-3064
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EMBARGOED FOR RELEASE UNTIL 11 a.m. EST
Remarks as Prepared for Delivery
April 6, 1999
"THE SINGLE CURRENCY AND EUROPE'S ROLE IN THE WORLD ECONOIHY"
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS EDWIN M. TRUMAN
REl\1ARKS TO THE WORLD AFFAIRS COUNCIL
As Europe embarks upon the era of the euro, it is interesting to step back and ask "what
does this really change?" Is the single currency important in its own right or is it merely
shorthand for describing more important issues of economic policy and performance in Europe?
For the rest of the world, is the "euro area" more important than the sum of its parts?
It is important to note, before] ofTer you my perspective on these questions, that the US.
Government has not had a grand "oflicial policy" or "viewpoint" on European monetary union
precisely because we have had no direct role in the project This has always been a European
endeavor in which we are very interested observers At the same time, we have an important
stake in the economic and financial sllccess of monetary union because a prosperous Europe is
good for American prosperity and for the world economy
From mv personal perspecti\\? tile real importance of the single currency lies with how it
affects the cohesion of the policv proccss and the quality of economic performance in the euro
area Certainly, the effort to qualit\ fU1 !-\1t membership catalvzed the macroeconomic
policymaking process in man\' COllntrrl'~ 111 d beneficial manner Spurred on by the incentive of
EMU membership, a Illlmber of COLJIHIll'S Illadl' lung·overdue adjustments that contributed to
reduced government deficits, intlation rale". and Interest rates Regardless of the motives, from
the American perspective these \'.'erc p0'.ltl\ l' dl'\cloplllcl1ts that would have been in each
country's interest even without the pro'.pl'(t oflllonctary unioll In that sense, the single currency
has already been a beneficial force for challse Ilo\\c\'cr, some in the markets have quite
reasonably asked whether the fiscal adJLlstmcnt went far enough to free up automatic stabilizers
and potentially to allow a more fleXible ml\ or monetary and fiscal policy in Europe
RR-3065
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The single currency is now a fact, and Europe's policy choices i~creasingly wil.l a~ect.not
only Europe, but the rest of the world. Euroland's aggregate ~conomy IS of~oughly similar size
as the U.S. economy, and its external trade as a share ofGDP IS roughly eqUIvalent. In the
United States we are used to the consequences of our size and the economic and financial
responsibilitie's as well, at least in the sense that we are used to being criticized for not being
sufficiently sensitive to the effects of our policy decisions on the rest of the world. Although
Euroland as a whole is not more important in the world merely as a result of EMU, its policy
decisions henceforth will have greater repercussions because they will apply to all member
countries simultaneously, and the constituent economies will increasingly expand and contract
together.
An example of an appropriate area for adjustment in policy orientation is the degree of
Europe's reliance on export-led growth. As part of a move toward external balance, or during
periods of worldwide inflationary pressures, export-led growth can have beneficial effects for a
country as well as for its trading partners. For a small economy, reliance on export-led growth
may have a minimal impact on other countries regardless of global economic conditions.
However, for a large economy, when the balance of risks has shifted to concern about global
deflationary forces, reliance on export-led growth in Euroland imposes economic burdens on
others. The U. S. current account deficit has increased by almost $100 billion from 1996 to 1998
largely as part of the adjustment in the crisis-affected countries in Asia. Europe and Japan have
added an additional $60 billion to their already large external surpluses over the same period -- $5
billion for Euroland and $55 billion for Japan. Europe and Japan appear to be reluctant or unable
to move back toward balance. In this context, recent expressions of concern in Europe about a
prospective slowdown in export growth are disturbing; it is more appropriate for Europe and
Japan to promote growth led by domestic demand In this connection, the new German
government's stated endorsement of policies to promote domestic demand led growth is welcome
It is important to recognize that Europe does have superior poiicy alternatives available to
promote growth structural reforms oflabor, goods, and financial markets and tax policies that are
more conducive to investment and employment The United States and those members of the
Eu~opean Union ~- such as Denmark, the Netherlands, the United Kingdom, and Portugal -which have taken Important structural measures, have been able to achieve solid growth in recent
years without undue reliance on exports
It is disconcertin~ t.hat many of Europe' s most persistent and troubling problems are, to
borrow a term.from medlcme. -- talFOl?I!/lfC-- physician induced. No matter how well intentioned,
Europe has relJed too much and too long on policies that to some extent have aggravated the very
problems they \~'er~ m~ant to address As many Europeans have acknowledged, Europe-wide
unempl.oym~nt IS high m ~art because of policies il1tended to alleviate the pain of unemployment.
Reductions m legal workmg hours, early retirement programs, and restrictions on layoffs have
exacerbated structural problems To make the same point in another way, I was reminded of the
words. of the
.
" late CBS news commentator Eric Sevarel'd "The ch'Ie f cause 0 f pro bl ems IS
so IutlOns
2
Many believe that these issues are too politically sensitive to be addressed directly.
However, I would note in this connection the recent observation by Bank of Finland Governor
Matti Vanhala, "If the structural measures needed to absorb unemployment are politically difficult
it is the same thing as saying that it doesn't have the political priority." Certainly it is true that the
benefits from these reforms may appear only after a lag, while the adjustment costs are felt more
immediately, On the other hand, the longer the inevitable reforms are delayed, the longer the
benefits also will be delayed
It is useful, when considering these issues, to reflect on Europe's economic performance
during this decade. It took until 1998 for the absolute level of real investment in the Euro-II to
reach its previous-£yclical high in 1991. By contrast, in the United States, the 1998 level of
private investment was 54 percent greater than the previous cyclical peak in 1989. Similarly, in
Europe, total employment levels are only now clawing their way back to previous cyclical peaks,
while the unemployment rate remains high When firms wish to produce additional goods or
services, it seems that they are reluctant to hire Europeans to make them. These aggregate
numbers mask large differences in experiences across EU countries Investment and employment
outcomes are worse in the large core countries, Germany, France, and Italy, which have lagged
behind on reforms They are best in the countries that I mentioned earlier that have done the most
to improve product and labor markets
Europe's investment climate will be critical to its playing a constructive role in the world
economy with a reliance on investment-led, rather than export-led, growth Persistent low levels
of domestic European investment have resulted in capital outflows and weak aggregate demand
Last year, it seemed that the Euroland economy \vas finally embarking upon a period of robust
growth. However, it now appears that disturbances in the world economy may be slowing
Europe's recovery. As exports decline and investment opportunities outside Europe are
reassessed, investment demand in Europe is not now positioned to absorb fully the increased
supply of savings
This weak investment climate has deprived Euroland and the world of many of the benefits
of its other policy reforms The fiscal consolidation carried out in Europe to comply with EMU
membership requirements has not led to all the benefits that had been anticipated ]n theory,
government deficits soak up available sa\'ings and constrain productive investment Reducing
deficits should frec up resources for invcstment and boost long-term growth and employment
However, in Europe's less attractive investment climate, the response to deficit reduction and
lower interest rates has not been higher 111\ cstmcnt, but larger trade and current account
surpluses
A stronger European investment climate would slow or reverse capital outflows At the
same time it would contribute to global economic grOv'i1h and help move Europe's current
account back toward balance This would be the ideal outcome for both Europe and the world
economy
3
Europe as a whole has made impressive progress on its overall macroeconomic framework
over the past several years in the run-up to the birth of the euro. What the world needs from
Europe, and what monetary union by itself does not automatically provide, are policies that will
stimulate employment and domestic investment. Europeans should embrace such outcomes;
indeed, many of their leaders recently have called attention to their desirability. Our hope is that
active, pro-growth policies in Euroland as a more unified whole will contribute to more rapid
European growth and a stronger world economy.
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6~~.2960
'"
FOR IM:MEDIATE RELEASE
April 7, 1999
Contact: Public Affairs
(202) 622-2960
TREASURY WARNS BANKS ON TRANSACTIONS WITH ANTIGUA AND BARBUDA
The Treasury Department on Wednesday advised U.S. banks and other financial
institutions to give enhanced scrutiny to all financial transactions routed into or out of Antigua
and Barbuda.
The advisory, issued by Treasury's Financial Crimes Enforcement Network, stems from
heightened concerns over recent actions by the government of Antigua and Barbuda that significantly
weaken its anti-money laundering laws and supervision of its offshore banks. U.S. regulators and
enforcement officials, concerned for some time with the operation of Antigua and Barbuda's offshore
financial sector, believe these changes further erode supervision, stiffen bank secrecy and weaken
international law enforcement and judicial cooperation.
~e believe that
recent actions taken by Antigua and Barbuda will undermine U.S. efforts to
crack down On international money laundering through its offshore accounts," said Under Secretary
for Enforcement James E. Johnson. "It is important for U.S. financial institutions to give enhanced
scrutiny to all transactions into or out of Antigua and Barbuda to guard against the laundering of
criminal proceeds."
In November 1998, the government of Antigua and Barbuda amended its Money Laundering
(Prevention) Act in a manner that significantly weakened that Act. The amendments had the effect
of strengthening bank secrecy, inhibiting the scope of investigations and infringing on intematiomil
cooperation. In addition, the govemment Changed the supervision of its offshore financial services
sector by vesting authority in a new International Financial Sector Authority, whose board includes
representatives from the offshore banks the Authority is supposed to regulate, This violates the
"Basle Principles," the generally accepted international principles for bank supervision.
The Treasury advisory is available through the Internet at www.treas,gov/press,
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RR-3066
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TOTRL P.01
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Weekly Release of U.S. Reserve Assets
April 6, 1999
The Treasury Department today released U.S. resen"e assets data for the week ending
l\pril 2, 1999.
As indicated in t!us table, U.S. resenTe assets totaled $73,979 million as of :\pril 2, 1999,
down from $74,251 million as of.l\1arch 26,1999.
U.S. Reserve Assets
(millions of US dollars)
1999
Total
Reserve
Special
Foreign
Currencies
Reserve
31
Assets
Gold
Stock II
Drawing
Rights 21
ESF
SOMA
Position in
IMF 21
March 26, 1999
74,251
11,047
9,752
15,035
15,0l7
23,400
April 2, 1999
73,979
11,047
9.665
15,045
15,032
23,191
Week Ending
1/ Gold stock is valued mOn!hly at 542.2222 per fine troy ounce. Values shown are as of February 28, 1999. The January 31.
1999 value was 511,048 million.
2/ SDR holdings and the reserve positlon in the IMF are based on Ii\!F data and revalued In doUar terms at the offiCIal
SDR/doUar exchange rate. ConSl5tenr WIth current reporting practlces, IMF data for [',!arch 26,1999 are finaL Data for SOH.
holdings and the reserye posmon In the I~!F shown as of April 2, 1999 (10 Italics) refleer prelimlOan· adJustments bl' the Tn:asun [()
[he March 26, 1999 IMF data.
3/ Includes holdtngs of the Treasun··s Exchange Stablhzauon Fund (ESI~ and the Federal Rcsen'c's System Open Market
,'\CCOUnt (SOi\L\). These holdtngs are \"alued at curren! markct exchange ratcs or, where appropnatc. at such other ratcs as mal bc
19reed upon b\· the parties to the transactIons.
RR-3067
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Text as Prepared for Delivery
April 6, 1999
"Investing Today's Fiscal Virtue in Meeting the Challenges of Tomorrow"
Remarks by Lawrence H Summers,
Deputy Secretary of the Treasury
Business Roundtable Symposium on Social Security
I am very pleased to have this opportunity to discuss the President' s plans for ensuring
the long-term health of Social Security and Medicare and its implications for the American
economy.
The responsible fiscal choices we have made over the past six years have helped put the
American economy on a path of unrivaled economic performance -- and now a new era of
surpluses. But the need for difficult choices does not stop here. At a time of looming
demographic challenges, how we decide to use those surpluses today will determine the future of
our most important social programs, the choices available to future policy makers, and in no
small part the future of the economy as a whole.
The President has made his choice clear: we should invest the surpluses in a way that
supports our highest priorities: saving Social Security and Medicare and improving the
productive potential of the economy. What matters now is that we all work to achieve that goal.
I would like to spend most of my time today describing the President's proposal and its
strengths relative to other suggestions that have been put forward in recent weeks. I will end by
addressing several concerns that have been raised with regard to our plan.
RR-3068
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I. The President's Proposal
According to forecasts from the Office of Management and Budget, the federal
government will accumulate more than $4.5 trillion in surpluses over the next 15 years. The
president's budget proposal devotes 62% of these surpluses to the Social Security system; 15%
to Medicare; 12% towards the creation of retirement savings accounts for American workers; and
the remaining 11 % for defense and other high priority investments. Of the roughly $2.8 trillion in
surpluses that will go to Social Security, four-fifths will be used to purchase Treasury securities
and one-fifth will be invested in an index of private-sector equities.
Substantial as that accomplishment would be, it is critical that we do more. Historically.
the traditional standard for long-term solvency of the Social Security system has been the 75-year
actuarial balance. A 75-year horizon makes sense because it is long enough to ensure that
virtually everyone currently participating in the system can expect to receive full payment of
current-law benefits.
Attaining this objective will require additional tough choices. But the objective is both
important and obtainable. To reach it, the President has called for a bipartisan process. We need
to work together, eliminating the need for either side to go first.
The solution that we reach through this process needs to ensure the health of Social
Security in the future -- in a way that preserves its core strengths today. In partiCUlar, while all
elderly Americans benefit from Social Security, it will be vital to remember the particular
support it provides those with low incomes. More than three-quarters of the money income of
households in the bottom two income quintiles comes from Social Security. More than 40
percent of those over 65 would be in poverty in the absence of Social Security. And, rightly,
Social Security benefits are progressive: those with lower incomes get higher replacement rates.
The eventual bipartisan agreement for saving Social Security should also find room to
eliminate the earnings test, which is widely misunderstood. difficult to administer, and perceived
by many older citizens as providing a significant disincentive to work. And it must not lose sight
of the important role that Social Security plays as an insurance program for widows and children,
and for the disabled. That is why the President has proposed that the agreement should also take
steps to reduce poverty among elderly women, particularly widows, who are more than one and
one-half times as likely as all other retirement age beneficiaries to fall below the poverty line.
Although much of the attention on retirement savings focuses on Social Security, it is
important to remember that Social Security is only gne - albeit an indispensable one -- leg of the
three-legged stool on which the security of our retired population sits. Improved pension
2
coverage and increased private savings will also have a critical role to play in meeting the
demographic challenges ahead.
The president's plan addresses directly the broader challenge of expanding individual
access to retirement saving, with the proposal to devote 12 percent of the surpluses to
establishing a new system of Universal Savings Accounts - or USA accounts. These accounts
would provide a tax credit to millions of American workers to help them save for their
retirement, and provide added momentum to the push to raise personal savings as the population
ages.
II. Core Strengths of the President's Proposal
In effect, the president is proposing to use the Social Security and Medicare Trust Funds
as lock-boxes, storing away about three-quarters of the surpluses for debt reduction or asset
accumulation, and ensuring that they are not used for other purposes. Under the president's plan,
publicly held debt would fall to about 7 percent of GDP by 2014 -- the lowest level since the
United States entered World War I. Before 2020, we will have retired every dollar of that debt.
Paying down debt in this way will bring three critical benefits:
•
It will relieve future generations of the burden of servicing yesterday's debts.
•
It builds a direct link between fiscal virtue today and increased capacity to meet our Social
Security and Medicare commitments in the future.
•
It builds a politically sustainable framework for ensuring that the surpluses actually
materialize.
Benefits of debt reduction
When President Clinton took office, interest payments on the federal debt were projected
to eat up 27 cents of every budget dollar by the year 20] 5. As a result of the course we have
charted, only 2 cents of every dollar of outlays will be needed to cover interest expenses 15 years
from now -- a saving of about $1 trillion in that year alone. Indeed, the reduction in interest
expense will more than offset the demographically induced rise in Social Security benefit
payments through the first half of the next century.
No one here needs to be reminded of the beQefits to our economy of paying down the
debt and thus freeing up room in investor portfolios to hold productive private capital. It is no
3
accident that these 6 years of renaissance for American business and the economy at large have
been a period of unprecedented fiscal responsibility.
As a result of the deficit reductions we have seen in this decade, more than one trillion
dollars in capital that would otherwise have been absorbed in public borrowing has instead been
invested in our country's future: in our productive businesses, in our workers, in our cities and in
our homes. This has been reflected in a more than doubling in our net national saving rate.
Un the other hand, even today' s higher net savings rate, of 7.5 percent, is still low: low
relative to the rates that the United States achieved in the 1950s and 1960s, low relative to the
majority of other industrial countries today, and, critically, low relative to the long-term needs of
an aging population.
By paying down debt held by the public and investing in equities, the president's program
will create $3.5 trillion more room in private portfolios for productive capital in place of
government paper. The effect will be to "crowd in" private capital instead of crowding it out as
was the norm in the 1980s.
As a result, interest rates will be lower than they otherwise would have been: indeed, a
rough estimate is that the difference in our fiscal position today compared to 1992 may be worth
as much as a 2 and a half percentage point decline in long-term Treasury rates. Lower interest
rates mean lower mortgage rates, cheaper school loans -- and lower borrowing costs for
businesses to continue the high level of investment in plant and equipment and other critical
resources that has been such a hallmark of this present recovery. And that, in turn means a larger
private capital stock, higher productivity, reduced budgetary pressures and higher standards of
living for the nation as a whole.
A direct link between fiscal virtue and meeting future commitments
It is a mark of how far our national debate on these issues has come that there is now
broad agreement -- as reflected in recent House and Senate budget resolutions -- with the critical
thrust of the president's plan. Namely, that we should not fritter away the coming surpluses but
use the bulk of them to lower the burden of servicing the national debt.
The consensus that now exists on this principle is no small achievement. But good
intentions are one thing. The critical thing is to create a realistic and sustainable framework for
ensuring that they translate into practice.
This brings me to the second core strength of the president's plan - one that is not
contained in other proposals that focus solely on drawing down debt. By paying down the debt,
4
we create the fiscal capacity to help meet future commitments. But it is by placing Treasury
securities in the Trust Funds that we ensure that Social Security and Medicare benefit from that
increased capacity -- so that we meet our existing obligations before developing any new uses for
these funds.
The President's proposal -- when applied to the latest estimates of their respective Boards
of Trustees -- would extend the lives of the Social Security and Medicare trust funds until 2059
and 2015, respectively. By contrast, the House and Senate-passed budget resolutions do not
improve the solvency of the Social Security and Medicare by one cent.
A politically sustainable recipe for ensuring the deficits materialize
By more directly linking the maintenance of the surpluses to the long-term health of
Social Security and Medicare, the president's plan would also greatly increase the probability
that the projected surpluses will actually materialize.
This point needs to be taken to heart. Already we have seen in recent budget debates that
surpluses almost invite their own dissipation in demands for new spending and tax cuts. The
direct link between the surpluses and the continued health of our most important social programs
adds a crucial political underpinning to the goal of ensuring that the surpluses are not squandered
as soon as they appear.
III. Response to Recent Questions about the President's Plan
In the weeks since the president's proposals were put forward there have been a number
of important questions raised about them. Let me comment briefly on some of these.
Do the benefits of equity investment in the Trust Fund outweigh possible risks?
As I noted earlier, an important element of the president's framework is the proposal to
invest part of the transferred surpluses in equities. This offers the prospect of raising the rate of
return on the Trust Fund relative to the past practice of investing every cent in government
bonds.
This is important because any step that raises the rate of return on the Trust Fund directly
reduces the need to meet future demands on the system in other ways. Even the modest equity
investment proposed in the president's plan would achieve as much, in terms of improving the 75
year actuarial balance of the Fund, as a 5 percent crgss-the-board cut in benefits starting in 2030,
or raising the normal retirement age by an additional year and a half.
5
We believe equity investment in the Trust Fund should be part of any overall framework
for saving Social Security. On the other hand, we recognize that -- carelessly structured - - such
investment could raise the possibility of political interference or abuse. That is why we have
developed an institutional framework with a number of important safeguards.
Notably:
•
With an apolitical independent board that would select private sector investment managers
through competitive bidding;
•
With investments limited to broad-based, widely-used funds;
•
With purchases and sales strictly dictated by the cash needs of the Social Security system and
no scope for market timing;
•
And by limiting the share of Trust Fund assets that could be invested in equities so that they
never account for more than a small fraction of the stock market;
With this overall framework of constraints, or one like it, we are confident that these
concerns can be overcome and the benefits of a higher rate of return can be realized.
Counting Your Chickens?
We all know that boom-times are times for mistakes of over-optimism and historically
governments have scarcely been immune to this risk. This has led some to question whether, by
making plans for investing future surpluses today, we are counting our chickens before they are
hatched. To be clear: the President is proposing that we make the specified transfers into the
Trust Funds regardless of whether our current forecast of the budgetary outcome proves accurate.
In fact, it is precisely because of the uncertainty of budget forecasts, especially those
which extend several years into the future, that we believe we should substantially payoff the
debt held by the public over the next 15 years rather than commit today to consuming them.
Put simply, in the event of any shock down the line, we will much better off having
committed ourselves to saving the surpluses rather than committing ourselves to spend them or
give them away in tax cuts. In addition, as I mentioned earlier, we believe that by tying the
maintenance of the surpluses so directly to the future of Social Security and Medicare we can
significantly raise the prospects of the predicted surpluses actually materializing.
6
Or Yesterday's Problem?
Ironically, perhaps, in recent weeks we have been beginning to hear doubts from the other
direction: along the lines that the president's plan is being excessively pessimistic in calling for
action to save Social Security and Medicare, where none is needed.
To be sure, with the federal surpluses now predicted, and particularly with the recent
good news from the Boards of Trustees of the Medicare and Social Security Trust Funds -suggesting that the lives of these Trust Funds have been extended several more years -- there will
be a growing temptation to believe that we do not need to act to secure these programs for the
future. But we cannot delude ourselves that the danger is passed or the challenge of preparing
for an older society has been overcome.
As President Clinton has said, the correct lesson of these reports is precisely the opposite
-- that with tough disciplined action we can extend the life of both these programs at the least
cost to future workers and recipients. Now is the time to finish the job -- by dedicating today's
surpl uses to tomorrow's Social Security and Medicare needs. The desirability of the goals cannot
be in question. Nor is our capacity to meet them. But we will all need to work together to make it
happen. Thank you.
- 30-
7
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
EMBARGOED FOR RELEASE AT 3 :00 PM
April 6, 1999
Contact: Peter Hollenbach
(202) 219-3302
PUBLIC DEBT ANNOUNCES ACTIVITY FOR
SECURITIES IN THE STRIPS PROGRAM FOR MARCH 1999
The Bureau of the Public Debt announced activity figures for the month of March 1999. of securities
within the Separate Trading of Registered Interest and Principal of Securities program (STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$1,698,332,657
Held in Unstripped Form
$1,476,193,287
$222,l~9,370
Held in Stripped Form
$10,609.433
Reconstituted in March
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 A10nthly Statement o/the Public Debt. entitled "Holdings of Treasury Securities in
Stripped Fonn."
The STRIPS data along with the new lvfonthly Statement of the Public Debt, is available on Public
Debt's Internet homepage at: www.publicdebt.treas.gov.Awide range of information about the
public debt and Treasury securities is also available on the homepage.
-
-
000
RR-3069
http://www.publicdebt.treas.ROV
TABLE V· HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, MARCH 31,1999
Corpus
loan DeSCription
STRIP
CUSIP
PrinCIpal Amount OutstandIng in ThousandS
Maturity Date
Total
Outstandl~
Treasury Bonds
CUSIP
9128100M7
008
DR6
DU9
ON5
OPO
OS4
OT2
0V7
OW5
OX3
OYI
OZ8
EA2
EBO
EC8
ED6
EE4
EFI
EG9
EH7
EJ3
EKO
EL8
EM6
EN4
EP9
E07
ES3
ETI
EV6
EW4
EX2
EYO
EZ7
FAI
FB9
FE3
FFO
FG8
Tot~1
PortIon Held In
Unstropped Form
ReconstItuted
ThIs Month
PortIon Held In
Stropped Form
Interest Rate
11·518
12
1()-3/4
9-3/8
11-3/4
11·1/4
I ()-5/8
9-7/8
9-114
7·1/4
7-1/2
8·3/4
8-718
9-1/8
9
8-7/B
8-1/8
8-112
8-3/4
8-3/4
7-7/8
8-1/8
8-118
8
7-1/4
7-5/8
7-118
6-1/4
7-1/2
7-5/8
6-718
6
6-3/4
6-112
6-518
6-31B
6-1/8
5-1/2
5-114
5-1/4
912803 A89
ADS
AG8
AJ2
912800 AA7
912803 AAI
AC7
AE3
AFO
AH6
AK9
Al7
AM5
AN3
AP8
A06
AR4
AS2
ATO
AU7
AV5
AW3
AXI
AY9
AZ6
BAD
BB8
8C6
804
8E2
BF9
BG7
8H5
BJI
8K8
Bl6
BM4
BP7
BV4
BW2
11/15/04
05/15/05
08115/05
02115/06
11/15/14
02115/15
08115/15
11/15/15
02115/16
05115/16
11115/16
05115/17
08/15/17
05/15/18
11/15/18
02115/19
08115/19
02115/20
05115/20
08115120
02115/21
05/15/21
08/15121
11115/21
08115/22
11115122
02115/23
08/15/23
11115/24
02115125
08/15/25
02115126
08115/26
11115126
02115/27
08115127
11115/27
08115/28
11/15128
02115129
Treasury Bonds
Treasury Inflation-Indexed Notes
CUSIP
Senes Interest Rate
9128273A8
J
3-5/8
2M3
A
3-318
3T7
A
3-518
4Y5
A
3-7/8
912820 BZ9
BV8
Cl9
DN4
07115102
01115/07
01115/08
01/15109
Total Inflation-Indexed Notes ..
Treasury Inflation-Indexed Bonds:
CUSIP
Interest Rate
912810 FD5
3-518
Total Inflation-Indexed Bonds ...
912803 BN2
04/15/28
8,301,805
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
10,893,818
11,493,177
10,456,071
10,735,756
22,518,539
11,776,201
10,947.052
11,350,391
3,961.006
2,013,608
6,292,913
4,747,980
2,709,584
10,829,B79
6.881,756
4,343.059
7,144,454
18,131,551
17,703,088
9,585,209
11,029658
3.212,639
2,533.670
6,269998
19,222,152
6,903,268
2.788,323
6010,766
10.266.973
6,917,608
9,768,282
12.235.919
8,850,390
3,122.026
11,351,961
18,935.188
3,174,062
2,853,170
8,302.167
12.363.416
8,302.61B
8,007,177
7,236.871
10,068.556
20,896139
11,773 BOI
10,946252
11,350.391
4,340,800
2,247,150
2.976.800
7,936
3,296,000
1,837,920
268,160
2,556,800
122,400
692,000
1,161,360
8,608,960
2,987,200
5,496,000
6,499,200
12,980,800
991,680
3,325,600
7,370,560
15,407.840
846,400
5,041,280
2,395,200
20,562,475
1,502,400
7,577,600
7,022,400
3,973,856
8,295,600
8,872,000
4,299.840
541,500
2,591,200
3,4B6000
3,219,200
567,200
1,622.400
2,400
800
0
514.732,445
349,037.528
165,694,917
9,016598
17,251,244
15.339,913
17.095,833
8.547,219
17,251.244
16,339913
17,095.833
8.547,219
0
0
0
0
0
0
0
0
59.234,208
59,234,208
0
0
17073,212
17,073212
0
0
17,073212
17,073212
0
0
24,000
4,000
146,400
64
207,200
91,680
112,640
75,200
25,600
65,600
104,960
806,880
526,400
0
109.000
644,800
334,720
550,800
298.880
521,440
272,000
607,040
381,120
427,150
264,000
196,800
139,200
88,544
1,053,440
217,600
413,440
12,000
53,600
219,600
0
0
20,800
0
a
0
TABLE V. HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM.
Corpus
STRIP
CUSIP
Loan Descriptoon
MARC~ 5 i. iSSS
C!UIIEd
Prinap81 Amount Outstanding in Thousands
Reconstituted
This Month
Maturity Date
Total
outstandi ll9
Portion Held in
Unstripped F onn
Portton Held in
StnDDed Fonn
Treasury Notes:
CUSIP
912B27 XN7
XW7
3H3
3K6
YE6
3P5
3Rl
3U4
YN6
3Y6
4A7
4C3
YW6
4G4
4JB
4Ml
ZE5
402
4RO
4T6
ZN5
3M2
4VV9
4X7
4Z2
ZX3
3WO
5C2
500
A85
4E9
B92
025
F49
G55
3J9
314
303
359
3V2
J78
3Z3
4B5
401
4H2
4K5
lB3
4N9
4U3
N81
5A6
P89
08B
R87
586
T85
U83
va2
VV81
X80
Y55
Z62
2JO
2US
3EO
3X8
4F6
4Vl
Series
B
C
AK
Al
0
AM
AN
Y
A
Z
AB
AC
B
AD
AE
AF
C
AG
AH
AJ
0
X
AK
Al
U
A
5
V
W
B
T
C
0
A
B
M
N
P
0
C
A
0
E
F
G
H
B
J
K
A
E
B
C
0
A
B
C
0
A
B
C
0
B
C
0
B
C
0
Total Treasury Notes ......
Grand Total
Interest Rate
9-118
B
>314
>518
7·7/8
>518
>518
>318
8-112
>112
>112
>5/8
8-7/8
>112
>3IB
>3/8
8-314
>1/8
4-1/2
4
8-112
>314
4-518
4-518
4-112
7·314
>3/8
5
4-7/8
8
>5/8
7·7/8
7·112
7·112
6-318
>718
>3/4
>3/4
>5/8
>1/2
6-1/4
>1/2
>1/2
>3/4
>112
>3/B
>3/4
>114
4-1/4
>7/8
4-314
7·114
7·1/4
7·7/8
7·1/2
6-1/2
6-112
>7/8
>518
6-7/8
7
6-112
6-1/4
6-518
6-118
>1/2
>518
4-314
.......
912B20A56
AT4
CBl
C07
AUl
CGO
CJ4
CM7
AV9
CR6
CT2
CV7
AW7
CZ8
OBO
006
AX5
OFI
OG9
OH7
AY3
CF2
OL8
OM6
OP9
AlO
CPO
DRS
053
BA4
CX3
BB2
BCO
B08
BE6
CC9
CE5
CHB
CKl
CN5
BF3
C54
CU9
CW5
OA2
OCB
BGI
OE4
OJ3
BH9
007
BJ5
BK2
BlO
BM8
eN6
BPl
B09
BR7
B55
BT3
BUO
BW6
BX4
CA3
C08
CY1
OKO
05115199
OB/15199
09/30/99
10131/99
11115199
11/30199
12131199
01131100
02115/00
02129/00
03131/00
04l30I00
05115/00
05131100
06130100
07131100
08115/00
08131100
09130100
10131100
11/15/00
11115100
11130100
12131100
01131101
02115/01
02115/01
02128/01
03131101
05115/01
05/15/01
08115101
11115101
05/15102
08115102
09130102
10131102
11/30/02
12131102
01/31103
02115/03
02128/03
03131/03
04130/03
05131103
06130103
OB/15/03
OB/15/03
11115/03
02115104
02115/04
05/15104
08115104
11115/04
02115/05
05115/05
08/15/05
11115105
02115106
05/15106
07115106
10/15/06
02115/07
05/15107
08/15107
02115108
05/15/08
11/15/08
10.047.103
10.163.644
17.487.287
16.823.947
10.773.960
17.051.198
16.747.060
17.502.026
10.673.033
17.776.125
17.206.376
15.633.855
10.496.230
16.580.032
14.939.057
18.683.295
11.080.646
20.02B.533
19.268.50B
20.524.986
11.519.682
16.036.0BB
20.157.568
19.474.772
19.777.278
11.312.802
15.367.153
19.586.633
21.607.362
12.398.083
12.873.752
12.339.185
24.226.102
11.714.397
23.859.015
12.806.814
11.737.284
12.120.580
12.052.433
13.100.640
23.562.691
13.670.354
14. 172.B92
12.573.248
13.132.243
13.126.779
2B.01'.02B
19.852.263
18.625,785
12.955.077
17.823.203
14.440.372
13.346.467
14.373.760
13.834.754
14.739,504
15.002,580
15.209.920
15.513.587
16.015.475
22.740.446
22.459,675
13.103,678
13,95/f186
25.636.803
13.583.412
27.190.961
25.083,125
4.751.103
5.75B.769
17.269.687
16.604.747
5.695.560
16.865.598
16.647.860
17.502.026
7.251.833
17.776.125
17.203.576
15.630.655
4.992.230
16.326.432
14.683.057
18.680.095
6.836.166
20.023.733
19.268.508
20.496.986
6.900.082
16.036.088
20.157.568
19.474.772
19.777.278
7.880.002
15.367.153
19.586.633
21.607.362
8.333.433
12.873.752
9.161.585
19.951.942
8.687.197
22.206.215
12.771.614
11.675.684
11.919.780
12.052.433
13.100.640
22.859.107
13.626.354
14.172.B92
12.573.248
13.132.243
13.126.779
27.499.828
19.852.263
lB.624.985
12.676.677
17.823.203
14.369.172
12.437.667
14.373.760
13.806.994
14.739.504
15.002.580
15.205.120
15.509.427
16.015.475
22.740.446
22.459.675
13.043.294
13924.586
25.609.603
13.583.412
27.190.961
25.0B3.125
5.296.000
4.404.875
217.600
219.200
5.078.400
185.600
99.200
0
3.421.200
0
2.800
3.200
5.504.000
253.600
256.000
3.200
4.244.480
4.800
0
28.000
4.619.600
0
0
0
0
3.432.800
0
0
0
4.064.650
1.107.292.792
1.050.848.339
56.444.453
0
3.177.600
4.274.160
3.027.200
1.652.800
35.200
61.600
200.800
0
0
703.584
44.000
0
0
0
0
511.200
0
800
278.400
0
71.200
908.800
0
27.760
0
0
4.800
4.160
0
0
0
60.384
33.600
27.200
0
0
0
91.200
67.400
0
0
25.600
0
0
0
80.400
0
0
0
36.BOO
0
0
0
33.760
0
0
0
0
0
0
0
0
86.400
0
0
0
72.075
0
164.800
130.080
499.440
35.200
0
0
0
0
0
107.200
0
0
0
0
0
81.600
0
0
0
0
44.BOO
36.000
0
80
0
0
0
0
0
0
0
0
0
0
0
0
0
1.592.835
. . . . . . . . . . . . . . . ............................
1.698 332 657
1.476.193.287
222.139.370
10.609.433
NOle. On the 41n workday of eacl'l monlh Table V w~1 be available after 3 00 p m. easlem II~e .
Debl 5 webs~e al hltp l/www pubhcdebl.lreas gov F
nf
on !he Commerce EconomIC Bulletlfl Board (EBB) and the Bureau of the PublIC
or more I ormallon about EBB, call (202) 482·1966. The balances in this !able are subject to audd and subsequent adjuslmel1ll
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
IMMEDIATE RELEASE
)ril 07, 1999
CONTACT:
)R
Offic~
of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 30-YEAR INFLATION-INDEXED EONDS
lterest Rate:
3 7/8%
!ries:
~IP No:
912810FH6
'RIPS Minimum: $1,000
Issue Date:
April 15, 1999
Dated Date:
April 15, lSSS
Maturity Date:
April 15, 2029
TINT Conversion Factor per $1,000
11.785757974 1/
High Yield:
3.899%-
Price:
99.578
All noncompet iti ve and success ful competitive bidders were a·,..;a:c::i'2'i
curities at the high yield.
Tenders at the high yield were
lotted 24%-. All tenders at lower yields were accepted in full.
F~OUNTS
TENDERED AND ACCEPTED (in thousands)
Tendered
Tende:c Type
Competitive
Noncompetitive
$
PUBLIC SUBTOTAL
Fede~al
Rese~ve
TOTAL
$
14,666,311
28,398
$
5,~;2,OlO
:: S, 3::5
14,694,709
/,C·';O,406
350,000
:3::0,000
15,0~-i,709
$
7,:3::0,408
Median yield
3.829%:
50% of the amount of accepted competi~:.':e ~-2::de:cs
at or below that rate.
Low yield
3.750%:
5% of t:-.e a::-,cunt.
accepted competitive tenders was tendered at or below that rate.
'3 tende~ed
i-to-cover Ratio = 14,694,709 /
7,000,408 = 2.10
This factor is used to calculate the Adjusted Values for any T:NT faCe
amount and will be maintained to 2-decimals on Book-entry syste,ls.
Awards to TREASuKY DIRECT = $7,862,000
RR-3070
http://www.publlcdebt.treas.gov
2'
DEPARTMENT
OF
THE
TREASURY
NEWS
TREASURY
OffiCE OF PUBLIC AFFAIRS -1500 PENNSYLVANIA AVENUE, I".W .• WASHINGTON, D.C.- 20220 _ (202) 622·2960
~GOED
~ril
UNTIL 2:30 P.M.
8, 1999
CONTACT:
Office of Financing
202/219.-3350
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction two series of Treasury bills totaling
$14,000 million to refund $41,666 million of publicly held
!curities maturing April 15, 1999, and to pay down about $27,666 million.
le amount of maturing publicly held securities includes the 14-day cash
lnagement bills issued April 1, 1999, in the amount of $26,024 million.
~roximately
In addition to tbe public boldings, Federal Reserve Banks for their own
counts bold $8,077 million of the maturing bills, wbicb may be refunded at
.e higbest discount rate of accepted competitive tenders. Amounts issued to
ese accounts will be in addition to the offering amount.
The maturing bills beld by the public include $6,974 million held
Federal Reserve Banks as agents for foreign and international monetary
thorities. Up to $3,000 million of these securities may be refunded within
e offering amount in each of the auctions of I3-week bills and 26-week bills
the highest discount rate of accepted competitive tenders. Additional
~unts may be issued in each auction for such accounts to the extent that
3 amount of new bids exceeds $3,000 million.
TreasuryDirect customers requested that we reinvest their maturing
Ldings of approximately $959 million into the 13-week bill and $708 million
:0 the 26 -week bill.
Tenders for the bills will be received at Federal Reserve Banks and
lnches and at the Bureau of the Public Debt, Washington, D.C. This offering
Treasury securities is governed by the terms and conditions set forth in
! Uniform Offering Circular
for the Sale and Issue of Marketable Book-Entry
asury Bills, Notes, and Bonds (31 CFR ~art 356, as amended).
Details about each of the new securities are given in the attached offerhighlights.
000
071
3chment
For press release.l. speeches. public schedules and official biographie\, call our 24-hour/ax line at (202) 622-2040
RZGBLZGHTS OF TRBASURY OFFBRZNGS OF BXLLS
TO BB ZSSUBD APRZL 15, 1999
April 8, 1999
Offering
Amount.~
••••••••••••••••••••.•• $6,500 million
Description of Offering:
Term and type of security ••••••••••••••• 91-day bill
CUSIP number •••••.••••••••••••••••.••••• 912795 CG 4
Auction date ••••..•••••••.••••••••.••••• April 12, 1999
Issue date •••.•••.••••••••.••••••••••••• April 15, 1999
Maturity date ••••••••••••••••••••••••••. July 15, 1999
Original issue date ••••••.•••••••••••••• January 14, 1999
Currently outstanding ••••••••••••••.•••• $11,583 million
Minimum bid amount and multiples ••••••.• $l,OOO
$7,500 million
182-day bill
912795 CC 3
April 12, 1999
April 15, 1999
October 14, 1999
October 15, 1998
$16,670 million
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids •••••••••• Accepted in full up to $1,000,000 at the highest discount rate of
accepted competitive bids.
Competitive bids •••••.••••••• (1) Must be expressed as a discount rate with three decimals in
increments of .005\, e.g., 7.100\, 7.105\.
(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 $1 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 •.••••• 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: By charge to a funds account at a Federal Reserve Bank on issue date, or payment
of full par amount with tender. TreasuryDirect customers can use the Pay Direct feature which
authorizes a charge to their account of record at their financial institution on issue date.
~UBLIC
~partment
DEBT NEWS
of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
April 13, 1999
Contact: Office of Financing
(202) 219-3350
TREASURY'S INFLATION-INDEXED SECURITIES
MA Y REFERENCE CPI NUMBERS AND DAILY INDEX RATIOS
Public Debt announced today the reference Consumer Price Index (CPI) numbers and
daily Index ratios for the month of May for the following Treasury inflation-indexed securities:
(1) the 3-3/8% lO-year notes due January 15,2007, (2) the 3-5/8% 5-year notes due July 15,
2002, (3) the 3-5/8% lO-year notes due January 15,2008, (4) the 3-5/8% 30-year bonds due
April 15, 2028, (5) the 3-7/8% 10-year notes due January 15,2009, and (6) the 3-7/8%
30-year bonds due April 15, 2029. This information is based on the non-seasonally
adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers
(CPI-U) published by the Bureau of Labor Statistics of the U.S. Department of Labor.
In addition to the publication of the reference CPI's (Ref CPI) and index ratios, this
release provides the non-seasonally adjusted CPI-U for the prior three-month period.
This information is available through the Treasury's Office of Public Affairs automated
fax system by calling 202-622-2040 and requesting document number 3072. The information is
also available on the Internet at Public Debt's website (http://\\IWW.pubJicdebureas.gov).
The information for June is expected to be released on May 14, 1999.
000
Attachment
PA-401
RR-3072
http://www.publicdebt.treas.gov
TREASURY INFLATION-INDEXED SECURITIES
Ref CPI and Index Ratios for
May 1999
Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date:
3-3/8% 10-Year Notes
Series A-2007
9128272M3
January 15, 1997
February 6, 1997
April 15, 1997
3-5/8% 5-Year Notes
Series J-2002
9128273A8
July 15, 1997
July 15,1997
October 15, 1997
3-5/8% 10-Year Notes
Series A-2008
9128273T7
January 15, 1998
January 15, 1998
October 15, 1998
3-5/8% 30-Year Bonds
Bonds of April 2028
912810FDS
April 15, 1998
April 15, 1998
July 15, 1998
Maturity Date:
Ref CPI on Dated Date:
January 15, 2007
158.43548
July 15, 2002
160.15484
January 15, 2008
161.55484
April 15, 2028
161.74000
Date
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
CPI-U (NSA) for:
RefCPI
Index Ratio
Index Ratio
Index Ratio
Index Ratio
164.50000
164.51613
164.53226
164.54839
164.56452
164.58065
164.59677
164.61290
164.62903
164.64516
164.66129
164.67742
164.69355
164.70968
164.72581
164.74194
164.75806
164.77419
164.79032
164.80645
164.82258
164.83871
164.85484
164.87097
164.88710
164.90323
164.91935
164.93548
164.95161
164.96774
164.98387
1.03828
1.03838
1.03848
1.03858
1.03868
1.03879
1.03889
1.03899
1.03909
1.03919
1.03930
1.03940
1.03950
1.03960
1.03970
1.03980
1.03991
1.04001
1.04011
1.04021
1.04031
1.04042
1.04052
1.04062
1.04072
1.04082
1.04092
1.04103
1.04113
1.04123
1.04133
1.02713
1.02723
1.02733
1.02743
1.02753
1.02763
1.02774
1.02784
1.02794
1.02804
1.02814
1.02824
1.02834
1.02844
1.02854
1.02864
1.02874
1.02884
1.02894
1.02904
1.02915
1.02925
1.02935
1.02945
1.02955
1.02965
1.02975
1.02985
1.02995
1.03005
1.03015
1.01823
1.01833
1.01843
1.01853
1.01863
1.01873
1.01883
1.01893
1.01903
1.01913
1.01923
1.01933
1.01943
1.01953
1.01963
1.01973
1.01983
1.01993
1.02003
1.02013
1.02023
1.02033
1.02043
1.02053
1.02063
1.02073
1.02083
1.02093
1.02103
1.02113
1.02123
1.01706
1.01716
1.01726
1.01736
1.01746
1.01756
1.01766
1.01776
1.01786
1.01796
1.01806
1.01816
1.01826
1.01836
1.01846
1.01856
1.01866
1.01876
1.01886
1.01896
1.01906
1.01916
1.01926
1.01936
1.01946
1.01956
1.01966
1.01976
1.01986
1.01996
1.02006
January 1999
164.3
February 1999
164.5
- -
March 1999
,
,
165.0
TREASURY INFLATION·INDEXED SECURITIES
Ref CPI and Index Ratios for
May 1999
Security:
Description:
CUSIP Number:
Dated Date:
Original Issue Date:
Additional Issue Date:
Series A·2009
9128274Y5
January 15. 1999
January 15.1999
3-7/8% 30·Year Bonds
Bonds of April 2029
912810FH6
April 15. 1999
April 15. 1999
Maturity Date:
Ref CPI on Dated Date:
January 15. 2009
164.00000
April 15. 2029
164.39333
3·7/8% 10-Year Notes
Date
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
May
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
1999
CPI-U (NSA) for:
--
RefCPI
Index Ratio
Index Ratio
164.50000
164.51613
164.53226
164.54839
164.56452
164.58065
164.59677
164.61290
164.62903
164.64516
164.66129
164.67742
164.69355
164.70968
164.72581
164.74194
164.75806
164.77419
164.79032
164.80645
164.82258
164.83871
164.85484
164.87097
164.88710
164.90323
164.91935
164.93548
164.95161
164.96774
164.98387
1.00305
1.00315
1.00325
1.00334
1.00344
1.00354
1.00364
1.00374
1.00384
1.00393
1.00403
1.00413
1.00423
1.00433
1.00443
1.00452
1.00462
1.00472
1.00482
1.00492
1.00502
1.00511
1.00521
1.00531
1.00541
1.00551
1.00561
1.00570
1.00580
1.00590
1.00600
1.00065
1.00075
1.00085
1.00094
1.00104
1.00114
1.00124
1.00134
1.00143
1.00153
1.00163
1.00173
1.00183
1.00192
1.00202
1.00212
1.00222
1.00232
1.00241
1.00251
1.00261
1.00271
1.00281
1.00291
1.00300
1.00310
1.00320
1.00330
1.00340
1.00349
1.00359
January 1999
--
- - -
164.3
February 1999
I
I
164.5
--
March 1999
165.0
DEPARTMENT
OF
THE
TREASURY
NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622·2960
EMBARGOED UNTIL 11 :00 AM EDT
APRIL 13, 1999
Text as prepared for delivery
TREASURY DEPUTY ASSISTANT SECRETARY JOHN P. SIMPSON
HOUSE WAYS AND MEANS SUBCOMMITTEE ON TRADE
Mr. Chairman, on behalf of the Treasury Department and all of the agencies of the federal
government who are working together to create an international trade data system I want to thank
you and the members of the Subcommittee for giving us the opportunity to appear here today.
THE ENVIRONMENT
Let me begin by describing to you the environment in which we are working. The United
States is the world's largest exporter and its largest importer. On the export side, the US.
economy depends heavily on world markets to support a higher rate of growth. Although exports
in 1998 were down slightly from the previous year. largc;;ly because of the Asian financial crisis,
they were up by a little over 70 percent from 1990 About one of every ten US. jobs, and one of
every five manufacturing jobs. is supported by exports
The U.S economy IS also he~l\ d~ dependent on Imports The competitiveness of U.S.
manufacturers and the quality' of life for C S consumers depend on having access to materials and
goods from around the world Indicative of thiS. the value of Imports mto the United States in
1998 was up by about 85 percent 0\ er 1990
Because international trade IS so Important to the U.S economy, the cost of government
procedural requirements affecting InternatIOnal trade. and speCifically information reporting
requirements Imposed on Import and expon transactIOns. IS a burden on the performance of the
economy as a whole
ThiS burden IS not Imposed as a matter of conscIOus policy. Rather, as laws have been
enacted to Implement trade agreements: prevent unfair trade practices; protect the environment,
RR-3073
For press releases. speeches. public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
consumers, animal and plant health, and endangered species; ensure highway, rail, and air safety;
better regulate immigration; impose economic sanctions on hostile regimes; and prevent export of
sensitive technologies to inappropriate destinations, new requirements for reporting have been
superimposed one on top of another, despite efforts to limit the cumulative burden.
Although there are no reliable cost figures for the United States alone, the United Nations
Council on Trade and Development estimates that worldwide the cost of documentation
requirements for international trade accounts for 4 to 6 percent of the cost of goods traded. In
other words, the cost of preparing documentation is equivalent to a tax of 4 to 6 percent on the
value of goods.
Today, separate reporting and data systems are maintained by U.S. federal government
agencies involved in all aspects of the international trade process, including regulation of goods,
transportation, and immigration. Exporters and importers deal with numerous paper and
electronic systems, and are confronted with duplicative, incompatible, and non-uniform data
reporting and record-keeping requirements.
These multiple information collection systems are not only costly and burdensome for both
government and the trade community, they also limit the effectiveness of individual agencies in
carrying our their enforcement and regulatory responsibilities at the border. Agencies generally
do not have access to information that other agencies collect, or have the benefit of knowing what
enforcement or regulatory actions other agencies have taken in response to that information.
They act in isolation rather than in concert with each other.
Finally, those who need access to statistical data on international trade, including
Congressional committees that enact trade policy into law, must often research several potentially
incompatible sources because the systems do not use standard data or technology.
The International Trade Data S~'stem (ITDS) is intended to rationalize the federal
government's collection and use of international trade data ITOS is aimed at
(I) reducing the cost and burden of processing. international trade transactions and transport for
both government and the private trade community by substituting standard electronic messages
for the multiple and redundant reporting. - often on paper forms - that occurs today,
(2) improving enforcement of and compliance with laws and regulations that apply at the border
to carriers (for example, highway safet~' and vessel clearance), people (drivers and crews of
commercial conveyances), and goods (several hundred laws including those addressing public
health and safety, animal and plant health, consumer protection, enforcement of trade agreements,
etc.); and
-2-
(3) providing convenient access for Congress, Executive Branch agencies, and the public to
international trade data that are more accurate, complete, and timely.
The lIDS will serve many agency automated systems, including Customs' Automated
Commercial Environment (ACE), by distributing to those systems information collected
electronically from importers, exporters, carriers, and other parties to international trade. The
information collected will consist of a standard set of data that meets the needs of all U. S.
Government agencies.
lIDS will also serve as a common payment point for taxes and fees paid to multiple
government agencies, much as American Express or VISA provides a single billing and collection
point for a variety of charges incurred by its customers.
Finally, ITDS will serve as a custodian of records for information it collects, and as a
convenient, single point of access to all Federal government data international trade bases for
persons - who will have different levels of access - seeking information about U.S. international
trade.
The International Trade Data System (lTDS) Project Office has been established at the
Department of the Treasury in accordance with the Vice President's memorandum of September
15. 1995. The need for the implementation of the ITDS to be managed by an inter-agency board
was the recommendation of a government-wide task force representing fifty-three of those
agencies. The board was to be given the authority to "recommend and, if necessary. direct
individual agencies to modifY their processes and systems to conform with the principles for an
integrated International Trade Data System" The task force report concludes that "authority to
make cross-agency decisions that would be vested in this Board is the only way possible to obtain
the multi-agency re-engineering of the international trade processes that will be required to make
the International Trade Data System a reality" Agencies represented on the Board include
Treasury, the Customs Service. the Food and Drug Administration. the Immigration and
Naturalization Service. the Transportation Department. the Agriculture Department, the
Commerce Department. the U S Trade Representative. and the U S. International Trade
Commission.
ITDS DEVELOPMENT
Initially. it was envisioned that there would be three principal tasks to construction of an
lIDS: (I) creation of a standard set of data to satisfy the needs of all users without redundancy,
(2) design of a single point of collection from which data would be distributed to all agencies
requiring them, (3) and design of a single point for accessing all data collected by the system,
regardless of where they are stored.
However, as the project developed, participants have taken advantage of opportunities created by
the project to address other objectives. For example, a module for data on trade in services will
be included in the ITDS, certain processes for clearing trucks and trains entering the U.S. will be
re-engineered to take advantage of dedicated short-range communications technology
(transponder readers) being deployed by the Department of Transportation, and data definitions
will be developed with an eye toward the possibility of future harmonization of U.S. trade data
with data collected by our major trading partners, particularly the G7 countries and Mexico.
Much of the ground work has been accomplished. With the participation of all the
involved agencies, an effort to identifY their international trade data requirements was completed
in 1997. Those data requirements are being converged with harmonized data sets being
developed by the G7 countries so that we will be closer to the vision of having a "passport" for
goods that will be universally accepted for both export and import purposes.
The ITDS information architecture, or design report, was completed in September 1998
and presented for public review and comment on the Internet through http://www.itds.treas.gov,
and at a public hearing on November 5, 1998. Key sections of the report are the Project
Summary, the Concept of Operations. the Project Implementation and Transition Plan, and the
Cost Eelleji! Alla~r.'iis These can be found at the above Internet address.
PILOT PROJECTS
ITDS pilots are being deployed this year at the Ambassador Bridge in Detroit, the Peace
Bridge in Buffalo, and at the rail crossing at Laredo. Texas The current plan is for the Customs
Service, the Immigration and Naturalization Service. the Federal Highway Administration, and the
Food and Drug Administration to be the initial panicipating federal agencies However, in order
for the pilot to succeed. the Customs Service must agree to process the electronic message
received from ITDS through Customs' border cargo selectivity system We are hopeful that we
can complete arrangements with Customs in time to keep to the schedule for beginning the pilots
this year
-4-
THE WAY FORWARD
At this time, no decision has been made to advance the lIDS beyond completion of the
Design Report, although the project is funded at the level of $5.4 million in FY 1999, with a
similar amount proposed in FY 2000, in order to conduct pilots and to continue testing. If a
decision is made to deploy the lIDS, full system functionality could be achieved in three years,
and full deployment to all ports and all agencies could be achieved in a fourth year (although
major ports and major users would be served at an earlier time). The full four-year cost for
deploying the system would be $268 million. This cost projection assumes that all ports of entry
will be provided with equal capabilities. However, alternative deployment strategies are being
analyzed that may significantly reduce this cost estimate.
There are a number of actions that are needed for the lIDS to proceed. These include
providing for the long-tenn interagency management of the ITDS, removing any statutory or
regulatory obstacles to sharing of a single collection of data among the agencies that need them,
and working on outsourcing of operation of the system to the private sector under government
ownership and supervision.
Allow me again to thank you and your colleagues, Mr. Chainnan, for your interest in the
International Trade Data System Project, and for giving us an opportunity to appear here today. I
shall be happy to answer any questions you may have and to provide any written material you may
want.
Thank you.
-30-
-5-
D EPA R T 1\1 E N T
0 F
THE
T REA SUR Y
NEWS
omCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE. N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
April 12, 1999
Contact: Maria Ibanez
(202) 622-2960
STATEMENT OF TREASURY SECRETARY ROBERT E. RUBIN
I am greatly disturbed by this act of violence on Friday night against the IRS office in
Colorado Springs. Investigating this criminal act will be a top priority for IRS Commissioner
Rossotti and me.
I want to reassure IRS employees that Commissioner Rossotti and I are committed to
providing a safe working environment for them. I was pleased to learn that IRS employees
showed up for work on Saturday morning to direct taxpayers to alternate volunteer sites. By
doing so, these employees showed they represent the finest and highest traditions of public
sefYlce.
- 30RR-3074
~or press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
~
.com Top stories
Gazette
'rado Springs
ay, April II, 1999
IRS office fire deliberately set
Investigators fmd evidence of second arson in 2 years
# . . . . . . . . . . . . . . . . . . . . . . . . __ • • • • • • • • • _ - - • • • • • • • • • • • • • • • • • • • • • • • • • • • ____ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . u
.................... u
. . . . . . . . . . __ • __ • • • • • • • • • • • • • • _____ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
By Eric Gorski/The Gazette
Story editor Todd Hegert; headline by Jeanne Davant
A nondescript red-brick building where hundreds of Colorado Springs residents tum for tax help was
cordoned off as a crime scene Saturday.
Investigators ruled Saturday that a Friday night fire atthe Colorado Springs office of the Internal Revenue
Service was arson. It was the second time in less than two years that someone torched the local ms office.
While picking through the gutted first-floor office of the building Saturday, federal agents and city fire
investigators thought they smelled an accelerant, said Rich Marianos, resident agent in charge of the
federal Bureau of Alcohol, Tobacco and Fireanns in Colorado Springs. A Labrador retriever trained to
sniff out fire scenes continned their suspicions.
Samples of wood, carpet, book material and other debris were hauled out in empty paint cans and will be
sent to a federal lab in Rockville, Md., to detennine what exactly was used to start the fire, Marianas said.
"This is a serious thing in the community we have to address, and we have to address aggressively," he
said. "This is the second time this has happened to these people. Once is enough. Twice is much, much
more than we want to deal with, and we want to end this."
On Saturday, May 3, 1997, someone set fire to the IRS office on North Academy Boulevard, causing $1
million in damage to the building and forcing the relocation of the agency and other businesses. The case
has never been solved.
At 11:14 p.m. Friday, Springs firefighters were called to a two-alann structure fire at 1259 Lake Plaza
Drive, near Venetucci Boulevard and Lake Avenue. Only later did they learn the IRS office had burned
again.
The fire was confined to one large room where the reception desk, revenue agents and office library are
located, according to firefighters and Kathy Strom, ms district director representative.
When firefighters arrived, flames were pouring from a shattered ground-floor window, said Damon Davis,
supervisor of the Colorado Springs Fire Department investigations team. The fire was contained at about
midnight and completely under control within three hours.
VIarianos said investigators were trying to pinpoint where glass shards fell in an effort to detennine
4/12/997'53 AM
whether someone broke the window to enter the building or whether the fire blew out the window. Either
is possible, he said .
.. -No~one~claimed responsibility for starting the fire, Marianos said. He said that to his knowledge, no threats
were made against the office beforehand.
IRS officials declined to describe security measures at the office, citing safety concerns.
The 44,000-square-foot building, built in 1982 as headquarters for Mitre Corp., a defense contractor, is
owned by homebuilder Henry Norman, and his wife, Julie, records show. The building is for sale for $3.5
million.
The IRS occupies about 10,000 square feet on the south end of the first floor, said Ted Link, a leasing
agent with Fidelity Real Estate Inc., which is handling the property. Colorado Springs Health Partners
leases about 13,000 square feet on the first and second floors of the north side. The space above the IRS is
vacant.
Even before arson was confirmed, Marianos said Friday's fire bore similarities to the 1997 blaze, which
caused more damage. Both targeted the same agency, and the acts are separated by 25 months, to the day.
In the 1997 fire, the letters "AAR" were spray-painted on the IRS walls. No such graffiti were found after
Friday's fire, Marianos said. Investigators never learned what the letters meant, he said.
Speculation about who started the 1997 fire centered on anti-government activists, though the ATF never
said it believed such people were to blame.
That year, the Associated Press reported that anti-government activists Linda June Tebedo Cleaver,
daughter of state Sen. MaryAnne Tebedo, R-Colorado Springs, and Cleaver's husband, Jim Cleaver, were
subpoenaed to appear before a grand jury investigating the fire. Neither was charged with anything.
Friday's fire carne at the worst possible time for the IRS, which is preparing for Thursday's deadline for
filing federal income taxes. The office, in fact, was to be open Saturday for people seeking last-minute
help.
Kate Gregg, an IRS spokeswoman in Denver, said agency officials had not been inside the building
Saturday, so it was impossible to say whether it would reopen there. She said the agency hopes to
announce a temporary move Monday.
Gregg said that compared with other IRS field offices, the Colorado Springs branch is a busy one,
handling as many as 300 customers each day. The 45- to 50-employee office investigates tax fraud,
conducts audits, pursues tax collections and answers tax questions.
There is no visible IRS sign on the building, but Gregg said the IRS advertises the address, especially
during tax time, "so it's not about making the place private," she said.
Mike Slamkowski, 39, drove with his son, Brian, 11, to the office Saturday to pick up a special tax form
and information manual he couldn't find anywhere else.
Instead, he was politely turned away by an ATF agent in a windbreaker.
"Ifsome idiot wants to take the office out, all he's going to achieve is all of us having a difficult time," said
4/]2/997:53 AM
Slamkowski, who works for a packaging company.
Anyone having any information about either Friday's fire or the unsolved fire two years ago is asked to call
the ATF at 473-0166 or the FBI at 633-3852.
Eric Gorski may be reached at 636-0304 or gorski@gazette.com. Scott Thomsen contributed information
to this report.
Copyright © 1998-1999, The Gazette
.com Loc:aI Stories
http://www.gazette.comldailylloc5.html
Gazette
)rado Spr i
lay, April
~;Lj~lI~~"~'V'~
g·~~m
__----------------_________ localnevws
IRS will reopen in temporary location
By Eric GorskilThe Gazette
The Colorado Springs office of the Internal Revenue Service is scheduled to reopen in temporary space
today as authorities continue to investigate a Friday night arson fire that gutted the agency's office
building.
The IRS office plans to open to the public at 1 p.m. at 212 N. Wahsatch Ave., Suite 102, at the northwest
corner ofWahsatch Avenue and Bijou Street. The building houses a U.S. District courtroom and other
federal offices.
At the temporary location, taxpayers can pick up standard IRS forms and publications, ask filing
questions of agents, access information about their accounts and make payments, said Gretchen Mitterer,
an IRS spokeswoman in Denver. The agency rushed to reopen because Thursday is the deadline for filing
1998 income-tax forms.
"We're hoping to get things running so taxpayers should get almost exactly the same service they got at
the other office," Mitterer said.
Because IRS officials have not been allowed to thoroughly assess the damage at its fire-scorched office at
1259 Lake Plaza Drive, the fate offiles and documents is unknown.
Ted Lydigsen, chief of the collections division in the IRS Rocky Mountain Region, said an arson fire in
May 1997 at the IRS office on North Academy Boulevard did not severely damage records kept there.
Federal agents and city fire investigators are looking at whether the two blazes are connected.
Rich Marianos, resident agent in charge of the federal Bureau of Alcohol, Tobacco and Firearms in
Colorado Springs, said investigators today will follow up tips from the weekend, interview IRS
employees and look again at leads from the 1997 fire, which remains unsolved.
The 45 to 50 IRS employees in Colorado Springs, meanwhile, will go to work at their third office in less
than two years.
'We're just going on business as usual," said Kathy Strom, the office manager. "I've talked to a lot of the
)eople, and they're like, 'OK, let's press on.'tI
'iric Gorski covers religion and nonprofit organizations and may be reached at 636-0304 or
Wski@gazette.com
4112/99947 AM
~UBLIC
DEBT NEWS
)epartment of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
IMMEDIATE RELEASE
i l 12, 1999
Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
91-Day Bill
April 15, 1999
July 15, 1999
912795CG4
Term:
Issue Date:
Maturity Date:
CUSIP Number:
4.190%
High Rate:
Price:
4.305%
Investment Rate 1/:
98.941
All noncompetitive and successful competitive bidders were awarded
urities at the high rate.
Tenders at the high discount rate were
otted 34%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Competitive
Noncompetitive
$
25,711,667
1,370,636
$
4,000
4,000
27,086,303
6,511,318
3,756,860
3,756,860
Foreign Official Refunded
SUBTOTAL
5,136,682
1,370,636
6,507,318 2/
27,082,303
PUBLIC SUBTOTAL
Federal Reserve
Foreign Official Add-On
TOTAL
Accepted
Tendered
Tender Type
°
°
$
30,843,163
$
10,268,178
Median rate
4.180%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
4.100%:
5% of the amount
Iccepted competitive tenders was tendered at or below that rate.
to-Cover Ratio = 27,082,303 / 6,507,318 = 4.16
:quivalent coupon-issue yield.
-wards to TREASURY DIRECT = $1,046,527,000
-3075
http://www.publicdebt.treas.gov
~UBLIC
DEBT NEWS
)epartment of the Treasury • Bureau of the Pu blic Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
IMMEDIATE RELEASE
i l 12, 1999
Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182 -Day Bill
April 15, 1999
October 14, 1999
912795CC3
Term:
Issue Date:
Maturity Date:
CUSIP Number:
High Rate:
4.320%
Investment Rate 1/:
Price:
4.490%
97.816
All noncompetitive and successful competitive bidders were awarded
urities at the high rate.
Tenders at the high discount rate were
otted
B%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
Competitive
Noncompetitive
$
23,424,794
$
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
TOTAL
5,304,899 2/
24,501,899
PUBLIC SUBTOTAL
$
4,227,794
1,077,105
1,077,105
2,200,000
2,200,000
26,701,B99
7,504,899
4,320,000
4,320,000
o
o
31,021,899
$
11,824,899
Median rate
4.300%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
4.220%;
5% of the amount
lccepted competitive tenders was tendered at or below that rate.
to-Cover Ratio
~
24,501,899 /
5,304,899
= 4.62
:quivalent coupon- issue yield .
.wards to TREASURY DIRECT = $776,190,000
l076
http://www . pu blicdebt. treas.gov
NEWS
OFFICEOFPUBUCAFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASIDNGTON, D.C. - 20220 - (202) 622-2960
Weekly Release of U.S. Reserve Assets
April 13, 1999
The Treasury Depanment today released U.S. reserve assets data for the week ending
April 9, 1999.
As indicated in this table, U.S. reserve assets totaled $73,895 million as of April 9,
1999, down from $74,047 million as of April 2, 1999.
u.s. Reserve Assets
(millions of US dollars)
1999
Total
Resen'e
Week Ending
Assets
Special
Gold
Stock
Drawing
II
Rights
21
Reserye
Foreign
Currencies
Ji
ESF
SOMA
Position in
IMF 21
April 2, 1999
74,047
11.047
9.682
15.045
15.032
23.242
April 9. 1999
73,895
11.047
Y,652
15,019
15.006
23,1 ~()
[I Gold stock is valued monthly at $42.2222 per fine
!rOY
ounce. Values shown arc as of February 28, 1999. The
anuary 31,1999 value was $11,048 million.
!I SDR holdings and the reserve position in the IMF are based on IMF data J.nd ren.lued in dolbr terms .n the official
;DR/dollar exchange rate. Consistent with current reporting practices, IMF data for April 2, 1999 are final. Data for SDR
IOldings and the reserve position in the IMF shown as of Apn19, 1999 (in italIcs) reflect preliminary J.d,ustmems bv the
rreasury to the April 2, 1999 1Jv1F data.
,I Includes holdings of the Treasury's Exchange SLlhdlZltIOn fund ([SF) .1lld the FeJer.ll Reserve's Svstelll Open l\!.uket
i.CCOUnt
(SOMA). These holdings are \'alueJ Jt current m.lfket exch.lllge ratcs or, where .1pproprIate, at such other rates .l..'
nay be agreed upon by the parties to the transactIOns.
RR-3078
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
D EPA R T 1\1 E N T
0 F
THE
T REA SUR Y
omCE OF PUBliC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 2 p.m. EDT
Text as Prepared for Delivery
April 13, 1999
TREASURY DEPUTY ASSISTANT SECRETARY FOR INTERNATIONAL
DEVELOPMENT, DEBT AND ENVIRONMENTAL POLICY
WILLIAM E. SCHUERCH
HOUSE INTERNATIONAL RELATIONS COMMITTEE
SUBCOMMITTEE ON AFRICA
Mr. Chairman, Ranking Member Payne, and Members of the Committee, it is a pleasure to testifY
before you on international debt issues with principal emphasis on the countries of Sub Saharan
Africa. The international policy response to the issues of excessive indebtedness is still evolving,
and we very much welcome the participation of this Subcommittee.
I have worked on these issues for many years. Here in Congress, I was on the Appropriations
Committee staff for over 14 years and was involved in developing much of the current legislation
and in suggesting funding levels. Now, in the Treasury, I continue to have an advisory role on
these matters as the Office of International Debt Policy reports to me I appreciate this
opportunity to discuss this rather complex issue with you, particularly in a year in which it is
receiving so much focus.
Mr. Chairman, today my comments will be structured around three components: first, to provide
information on the President's debt initiative presented here in Washington at the Conference on
U.S-Africa Ministerial on March 16 1h , second, to provide some overview and history; and, third,
to review the Administration's FY 2000 budget request.
Debt Policy Initiative
The Administration is pressing for significant improvements in debt-related programs. At the
March 16 US.-Africa Ministerial, President Clinton outlined our approach saying "Today, I ask
the international community to take actions which could result in forgiving $70 billion
Our
goal is to ensure that no country committed to fundamental reform is left with a debt burden that
keeps it from meeting its people's basic human needs and spurring growth We should provide
extraordinary relief for countries making extraordinary efforts to build working economies"
RR-3079
Forpress releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
To this end, the President said that the United States will press for substantial changes in the
Heavily Indebted Poor Countries (HIPC) initiative In consultation with Congress and within the
framework of our balanced budget, the Administration will press for:
00
First, a new focus on early relief by international financial institutions, which now reduce
debt only at the end of the HIPC program;
00
Second, the complete forgiveness of all bilateral concessional loans to the poorest
countries;
00
Third, deeper and broader reduction of bilateral debts, raising the amount to 90%;
00
Fourth, to avoid recurring debt problems, donor countries should commit to provide at
least 90% of new development assistance on a grant basis to countries eligible for debt
reduction;
00
Fifth, new approaches to help countries emerging from conflicts that have not had the
chance to establish reform records, and need immediate relief and concessional finance;
and,
00
Sixth, support for HvIF gold sales to do its part, and additional contributions by the U. S
and other countries to the World Bank Trust Fund to help meet the cost of this initiative.
The President also stated that "We should be prepared to provide even greater relief in
exceptional cases where it could make a real difference."
The President summed up his remarks stating, "What I am proposing is debt reduction that is
deeper and faster. It is demanding, but to put it simply, the more debtor nations take
responsibility for pursuing sound economic policies, the more creditor nations must be willing to
provide debt relief'.
U.S. Policy on International Debt
Let me step back for a moment and make a few broad comments. The subject of international
debt is particularly complex and raises a broad range of considerations. Nevertheless, I think it is
fair to say that U.S. policies on international debt generally have been bipartisan. It should be
observed that historically the primary interest of U S legislation has been collection of debts to
the maximum extent possible; borrowers should pay their debts General legislation permits the
Executive Branch to reschedule debts only in circumstance of "imminent default" Debt collection
for all but the poorest remains the rule today Over the past decade or more, special purpose
legislation on occasion has passed Congress permitting international debt rescheduling or
reduction in defined circumstances.
These special circumstances have focused on either the poorest economically reforming countries
or on countries with unique political circumstances. Since 1989, they include: concessional
2
official development assistance and agriculture assistance for the poorest countries undergoing
economic reforms, Egyptian military debt, Polish debt, Jordanian debt, some concessionalloans in
Latin America under the Enterprise for the Americas Initiative and finally reductions permitted
under the Highly Indebted Poor Countries (HIPC) debt initiative and its precursors. Additionally,
since the passage of credit reform legislation in 1993, we have included in the budget a specific
debt account which provides for the appropriation of an estimated value of reductions that we
anticipate will take place during that year.
Attached to my testimony is a table that summarizes U.S. Government Public Sector International
Debt Reduction activities from 1989 through 1998. It shows that during this period we have
granted debt reduction totaling in face value $14.4 billion.
President Clinton's Economic Initiative for Africa assigns high priority to helping reduce the
burdens of countries in the region to manageable levels. In terms of broadly held views, it is this
Administration'S, and prior Administrations', overall debt policy that the poorest most indebted
countries committed to basic economic reforms should be provided substantial reductions in debt
service payments and where necessary in total debt stock to levels consistent with what they can
reasonably be expected to afford to service. The view that excessive indebtedness in many of the
poorest countries is one of the significant barriers to economic growth and to rationalization of
expenditure toward social and developmental priorities has not changed over the past 10 years
It is clear that this is a complex policy area which requires that a balance be reached. We require
collection, but in certain circumstances, we permit rescheduling to achieve that end In other
circumstances, for the poorest and most burdened, we embrace debt reduction. Still, we
recognize that debt relief minus other economic policy actions and conditions will achieve little to
improve the lives of a country's citizens.
As Secretary Rubin recently commented to his African colleagues when the Finance Ministers
were here in Washington, "Debt reduction has no lasting benefit if not accompanied by meaningful
economic reform. The country itself must act to address the underlying causes of poverty and
under development or the funds freed up by debt forgiveness will not have long lasting effect."
To achieve long term growth, countries must develop institutions - independent central banks,
judiciary, and media and must create transparent, participatory and decentralized governance
Simply put, individuals and companies both inside and outside a country must feel secure that
their persons and property will be respected and that an economy will be well managed before
they will provide the private savings and investment that is necessary to ensure long term growth.
We recognize that public foreign assistance resources are insufficient to provide the kind of
investment that is needed to make Sub-Saharan Africa prosper at the level we all desire. If the
private sector does not believe there is a culture of credit in which there is a commitment to
repaying debt, the necessary private capital to support that growth cannot be mobilized.
In the context of proposals for unilateral US. debt action, and calls for US. leadership we have
to recognize that such action in the poorest Sub-Saharan African countries would achieve little,
simply because we do not hold a high portion of the exposure. Further, a coordinated and
3
concerted action among virtually all creditors is needed to ensure that benefits flow to debtors -rather than enhancing the prospect of repayment of debt owed to other creditors.
I would like to add one important point of information: I remarked that the relative share of SubSaharan debt owed to the United States is relatively modest. This is because, since 1985 and in
some cases earlier, the U.S. has provided its concessional agricultural and development assistance
to the poorest African countries primarily in the from of grants. These grants total well over $14
billion for the most heavily indebted Sub-Saharan countries from 1985 to 1997.
As the committee knows, there is a cost to debt relief programs and therefore budgetary trade offs
to consider. As we all know, in the budget process, once budgetary caps and Subcommittee
spending allocations are set, increases in one program must be achieved either by reduction or by
less growth in other programs. There is a tension between funding debt relief and funding other
foreign assistance grant or lending programs. We would argue that, in the case of reforming
overburdened poorest countries, debt reduction can be a good investment.
Finally, the international community has yet to fully fund the current HIPC program and the
existing shortfall is estimated at approximately $1.7 billion.
Let me comment briefly on indebtedness levels of poorest countries. There are several tables
attached to my testimony, so I can be very brief First, the multilateral, bilateral and private debt
owed by Sub-Saharan African Countries totals some $227 billion. Of that $227 billion, the U.S.
share is about 3% or $6.8 billion.
Looking at the list of 41 poor countries around the world potentially eligible for the HIPC
program we see that the total debt owed to the United States by these 41 countries is just a hair
over $6 billion. 25 of these countries are in Sub-Saharan Africa and together these 25 potentially
HIPC eligible African countries owe the United States about $5.5 billion.
In order to provide some perspective on the evolution of the international debt policy let me give
a little history. The U. S. and other international creditors in the late 1980's, moved from policies
which aimed at repetitive rescheduling of debt, in order to buy time for countries to regain the
capacity to service their debts, to recognizing that reduction of debt stocks was necessary in order
to return some countries to economic growth and sustainable debt servicing That realization has
evolved further over time to recognition that it would require deeper and deeper levels of stock
reduction in some countries to achieve that growth
The programs have evolved from Toronto terms of 33% reduction of eligible debt payments in
1988, to Naples terms of 50-67% reduction in 1994, to HIPC terms of up to 80% in 1997. The
I-ilPC program uniquely marks the first point at which proportionate action was required by the
International Monetary Fund (IMF), the Multilateral Development Banks (MOBs) and other
multilateral organizations
Here, I want to make a claritying point The HIPe program is being criticized in some quarters
for being structured as a rigid formula which fails to respond to changing circumstances in a
4
country. In fact, it has been implemented in a very flexible manner. Attached to my testimony is a
table which summarizes the actions to date under this program. It shows that six of the seven
countries determined eligible at the decision point have been given less than three years to the
completion point, indeed five of these countries have had this period shortened to about one year
or slightly more. It also should be noted that in these seven cases the targets, which have been
treated flexibly, have been set overwhelmingly at the low end of the range, which is what the U.S.
has urged.
FY 2000 Budget Request
The FY2000 Administration budget contains important new debt initiatives as well as
continuation of funding requests for ongoing programs, these include:
00
A first ever request for a US. contribution to the World Bank HIPC Trust Fund --$50
million;
00
The first year of implementation of the debt for rainforest legislation which passed
Congress last year-$50 million;
00
Two authorization requests which would permit us to support IMF gold sales and the use
of resources in the IMF SCA2 trust fund for increases in IMF concessionallending and
HIPC debt reduction activities for the poorest countries;
00
The second year of implementation of debt reduction under the Mrica Initiative, and the
regular debt rescheduling and reduction activities of the Paris Club including the Naples
and HIPC programs;
In total, these requests amount to $120 million in budget authority.
While debt relief can be an important instrument to help promote economic growth in SubSaharan Africa, it is a complement for other more traditional forms of financial and development
assistance. The International Development Association (IDA) and the African Development Bank
and Fund playa central role Both IDA and the African Bank and Fund are carrying through on
institutional reforms and in the last replenishments agreed to allocate resources increasingly to
issues of health with strong attention to AIDS. primary education, nutrition, safe drinking water,
infectious disease, proper sanitation and to an extent, disaster recovery. We are working with
these institutions to develop an effective program for dealing with the very difficult and unique
issues faced by the poorest countries which are emerging from conflict
To help carry out this essential work of the international financial institutions in Sub-Saharan
Africa, the Administration is seeking Authorizing and Appropriation legislation in FY 2000 for
both the African Development Bank and Fund and the International Development Association
5
Conclusion
Mr Chairman, I would like to take a moment to review the Sub-Saharan Africa economic
position. I would say that here we can find cause for both encouragement and concern. The
immediate road ahead presents a formidable challenge and we need to see a sharp reversal in
many trends if positive growth is to be sustained. Africa remains the most protectionist region in
the world. In many cases the process of fundamental reform has just begun. Low investment is a
chronic problem with investment rates still only about 18% compared to 25% in low income
countries on average. The re-emergence of conflict has been devastating. Some 20% of Africans
live in countries formally at war or disrupted by war, according to World Bank estimates
Corruption is a serious economic cost -- an area where the World Bank is making a strong push
But some underlying trends are the basis for optimism. There has been significant progress in
improving social indicators such as education and infant mortality. While there was some
weakening in overall economic performance in 1998 it reflected primarily declines in prices of key
commodities including oil, cocoa and copper and economic crisis in many of Africa's Asian
markets. But overall, given the events and forces which have buffeted African economies in the
last two years, economic growth proved surprisingly resilient. We believe this resilience reflects
the level of basic and continuing economic reform in many countries -- including gains in fiscal
stability, decontrol of prices, and liberalization of exchange rates.
Mr Chairman, despite great challenges, Africa has accomplished a great deal. We have seen
some major advances in economics and politics. Public participation is spreading Countries that
have pursued sound economic programs along with good governance are the ones registering the
highest sustained growth. It is this backdrop that sustains our determination to work for Africa's
economic growth and sustainable development African growth and stability is essential not only
for Africans, but to future U.S. and global prospects.
-30-
Attachments
1. US. Debt Reduction 1989-1998
2. Africa and International Debt Exposure Table
3. RIPC Summary of Current Cases
4. William E. Schuerch resume
6
US Debt Reduction 1989-1998
(S i"lillioD3)
,
Country
Bilateral
Dare
or Action
;r"ope &
iddlc
-st
1998
1990
1995
1991
snia
ypt
'dan
land
Concessiona!
~IiOD
TObl
1
2
3
"
(1+2+3+4)
llJl
!!Jl
l!l..ll21JI
1M21...8
-
-
-
6,998.1
635.0
2,464.7
0.0
6,998.1
635.0
2,464.7
-
-
livia
ilc
lambia
)aJvador
yana
.Ii
1993
1991
1991
1992
1992
1992
1991
1991
1991
1991
1991
.-
~duras
I3ica
aragua
IIt\I3Y
ica
1989-91
1991
1991
lin
kinaFaso
~eroon
-
nal Africa Republic
Igo
: d'lvoire
na
~ea
ya
Iagascar
awi
i
:arnbique
:r
:ria
IIlda
:gaJ
,
ada
:
bia
8:M.S
II.ll
l.lli..1
-
3.&
30.7
30.6
31.0
463.9
3.8
370.3
30.6
31.0
463.9
116.6
98.9
442.8
310.8
284.3
3.7
-
310.8
-
-
3.7
nJU
!U..6..l
il..Q
0Jl
l...U6.J
29.8
2.4
61.4
-
-
-
-
--
29.8
2.4
61.4
0.0
0.0
17.9
179.5
4.5
187.9
59.0
31.7
5.1
52.9
2,063.3
64.8
0.0
34.5
138.8
7.4
24.9
54-1
172.8
22l...6
!lJl
!!Jl
lLJl
22l...6
291.6
-
-
-
291.6
W.t..Q
~.2..l
SH.5
l.Q..Q.2U
13~
-
-
-
-
76.3
40.3
98.9
108.9
259.5
24.8
333.9
-
-
-
-
17.9
83.7
4.5
85.9
5.6
29.5
5.1
-
6.9
64.8
79.7
7.4
8.6
54.1
172.8
-
95.8
102.0
53.4
2.2
-
52.9
-
34.5
59.1
16.3
-
!
6
I
I
1998
-
7
(5+6)
~
l.llJ:L.S
36.7
36.7
6,998.1
635.0
2,464.7
-
I
m.2
-
Tot:1i
WPCIJ
.'
-
1990
1990-1
1989
1989
1990-1
1990-1
1990-1
1989
1995
1990-1
1989
1991
1989
1991
1990-1
1989
~ia
-
339.6
Date o( Actio.
5
lLJl
-
Grand
P.,.uO.bf
411 Debe
l.DW
~entina
Special
572lnbt
.'
tin America &
ribbe2n
Multilatenl
LU
-
-
-
-
llU
-
-
-
3.8
428.9
30.6
31.0
463.9
126.5
106.8
519.8
310.8
·3442
3.7
:l81.l
.l.AJ.8A
-
1995
5S.6
1996
1995
1996
9.9
7.9
77.0
1998
59.9
-
-
-
U1.!Wl
1996
1994-6
47.4
8.5'
1998
1994-5
1997
0.9
10.2
18.9
1998
0.9
1996
107.8
29.8
2.4
81.7
7.0
10.7
238.3
179.5
8.8
187.9
83.S
31.7
5.1
100.3
2,071.8
64.8
0.9
44.7
157.7
7.4
25.8
54.1
280.6
ll..Q
Z2lJi
-
291.6
-
1998
1994-8
1996
1998
20.3
7.0
10.7
220.4
1997
4.3
1997
-
-
-
-
24.8
-
-
I
~adesh
~d Tot~1
1991
,j
I
I
-
T.U..l
,
l.!!.:lli..SJ
ce: Treasury data supplied by USG creditor agencies at the date of USG conunionent to reduce USG debt
sa debt reduction under Paris ClublHIPC is on a commitrrient basis.
IS
With the exception of Bolivia. which
received a 67% stock reduction, USG debt has not yet been reduced.
04112/99,04:20 PM, US8998.wK4
Debt owed by m~r:I Afrio Cou.atrie
Tot:ll
lla
n
10.612
9,400
1,594
1,469
607
1,170
1,081
8,213
202
S44
938
193
9,162
4,685
14,358
230
613
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ina Faso
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1,294
1.117
9,515
211
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206
12,326
5,240
19,713
241
282
46
10,077
4,213
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6,.202
3,240
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6,393
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2,107
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4,175
2,312
3,020
2,363
1,818
5,842
222
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9,504
3,906
412
'4,995
2,981
859
6,058
612
1,110
3,609
2,114
2,306
2,094
l.399
5,494
1,5S7
1,414
31,407
1,034
25,131
261
230
3,117
138
901
3,663
148
1,167
2,643
23,590
m
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2,721
6,460
0
543
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0
432
139
134
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3,118
1,486
383
2,936
466
424
1.609
1,170
1.462
926
253
1.488
894
4,493
833
162
1,850
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203.5
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2,580
2,134
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486
1,900
299
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2,284
5.005
3,766
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468
764
220
Debt R.lnos ('Yo)
,
Total Debt/ Totll Dc:bt/ Debt Servic::!
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218
902
5,692
90
2,838
16,972
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123.5
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26.4
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27.5
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18.6
17.9
21.7
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109.9
512.4
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467.4
116.3
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3,559
496
364
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536.1
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491.9
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22.6
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4.4
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215.9
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•
HIPC Status
1997
~J>V
Decision Point
Completion
Point
Uganda
April 1997
April 1998
196%
$337.6m
Benin
sustainable debt
Bolivia
September 19~7
S,epiember
1998
218%
$448m
Burkina Faso
September 1997
April 2000
205%
$122.1m
Guyana
December 1997
December
1998
107.1%
(280% fiscal)
$252.7m
Mozambique
March 1998
Final doc. 417
June 1999
200%
$.1442m
Mali
September 1998
Prelim. doc. 3119
end 1999
200%
$128m
Cote d'Ivoire
March 1998
Final doc. 3117
3 year
141%
(280% fiscal)
$345m
Senegal
Sustainable 4/98
Guinea-Bissau
Prelim.doc. 4/98
postponed
3 year
Ethiopia
Prelim.. doc. 10/98
dec. pt. 4/99
3 year
Mauritania
by end of 1998
3 year
Toao
Sustainable?
Target
Tota1 NPV
Assistance
1998
l:)
131% in 1998
after Naples
200-230%
$300m
WILLIAlVI E. SCHUERCH
DEPUTY ASSISTANT SECRETARY FOR ThTERNATIONAL
DEVELOP~IENT, DEBT AND ENVIRONl\'IENT POLICY
William E. Schuerch'was '~amed Dq,~~istant Secretary of the Treasury for
International Development, Debt and Environment Policy on March 15, 1998, after acting in that
capacity since September 16, 1996. He serves as policy adviser to both the Assistant and Under
Secretaries of International Affairs. :Mr. Schuerch has responsibility for fonnulation of
intenfational debt policy and of a wide range of economic, financial and environmental policy
issues pertaining to U.S. participation in the :MDBs.
Prior to joining the Department of the Treasury,:Mr. Schuerch served in USAID as
Acting Director, Office of Policy Coordination and as Policy Coordinator for Central and Eastern·
Europe and the New Independent States of the Former Soviet Union.
From 1931-1995, Mr . Schuerch served as a professional staffmember of the
Appropriations Committee, House ofRepresentatives and worked with the Foreign Operations,
Export Financing and Related Programs Subcommittee throughout that period. There he was
primarily responsible for issues related to funding for the International Financial Institutions,
Eastern and Central Europe, New Independent States of the former Soviet Union, Trade and
Exports programs and international economic and debt policies.
Prior to 1980, :Mr. Schuerch worked for Booz-Allen and Hamilton, Inc. as a senior
management consultant in the Energy and Environmental Division and as a project leader. He
worked on management planning, organization, evaluation and budgeting tasks. He also served
as Senior Financial Analyst with the State of VIrginia House Appropriations Committee where
he was responsible for the Human Resources, Commerce and Resources and capital outlay areas
and where he staffed the Legislative Commission on Mental Health and Mental Retardation. He
previously served as an Assistant Legislative Analyst for the State of VIrginia Joint Legislative
Audit and Review Commission contributing to a variety of legislative evaluation actiVities.
Mr. Schuerch received his Masters degree in Public Administration from the !vlaxwell
School of Citizenship and Public Affairs in 1976 and his AB. in Philosophy and Political
Science ~ 1974 from Syracuse University.
April 9, 1999
NEWS
omCE OFPUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE. N.W. - WASlDNGTON. D.C. - 20220 - (202) 622-2960
EMBARGOED UNTIL 9:30 A.M. EDT
Text as Prepared for Delivery
April 15, 1999
TREASUR Y UNDER SECRETARY (ENFORCEMENT) JAMES E. JOHNSON
SENATE SUBCOMMITTEE ON TREASURY, GENERAL GOVERNMENT
AND CIVIL SERVICE
Thank you Mr. Chairman, Senator Dorgan, and members of the Subcommittee. It is a
pleasure for me to be here today to support the FY 2000 budget for Treasury's law enforcement
bureaus and offices.
With me today are the heads of the Treasury law enforcement bureaus: John W. Magaw,
Director of the Bureau of Alcohol, Tobacco and Firearms (ATF); Raymond W. Kelly,
Commissioner of the United States Customs Service (USCS), and W. Ralph Basham, Director of
the Federal Law Enforcement Training Center (FLETC). We are pleased to be joined by two new
members of the Treasury Enforcement Team: Brian L. Stafford, Director of the United States
Secret Service (USSS), and James F. Sloan, Director of the Financial Crimes Enforcement
Network (FinCEN). Both were appointed by Secretary Rubin last month. Both bring a wealth of
law enforcement experience to the challenges of their new roles.
I welcome this opportunity to share with you my thoughts on Treasury Enforcement's
mission today and into the 21'1 century, and on how President Clinton's FY 2000 budget request
supports us in achieving this mission.
Each year, as the world becomes a more complex place, Treasury's law enforcement
mission grows in complexity, scope and importance Secretary Rubin has repeatedly noted that
our bureaus must continue to meet these challenges as they perform their critical role in advancing
America's law enforcement priorities, which include, but are not limited to, protecting our
leaders, protecting our borders from drug traffickers and our streets from the threat of bombs,
arson, and gun violence, safeguarding our financial institutions from money launderers and fraud,
and collecting revenue
To ensure excellence in achieving these missions, and in keeping with the spirit of the
National Performance Review and the Government Performance and Results Act, Treasury
RR-3080
:Or press relmscs. spcechc,\. public schedlllc,~ arid official biographies, call our 24~our fax line at (202) 622-2040
continues to engage in a comprehensive strategic management process to enhance and improve
the results we deliver to the American people. Overall, the bureaus' perfonnances against
established strategic plans were excellent. And while not every goal was met our results were
very significant.
With the objective in mind of continuing to perfonn our mission at the highest level of
excellence, the President's FY 2000 budget seeks a Treasury Enforcement program level of$3.5
billion and 27,422 direct FTE, excluding the Internal Revenue Service Criminal Investigation
Division (IRS/CID). IRS/CID, however, does play an integral role in Treasury law enforcement
efforts with its FY 2000 $384.3 million and 4,049 FTE request. We believe the President's
budget request takes a pragmatic approach to two goals. On one hand, it pennits Treasury to
contribute substantially towards balancing the federal budget. On the other, it supports effective
approaches to law enforcement. Also, it is important to note that the requested Treasury program
level allows us to combat crime while depositing more than $34 billion in revenues and collections
into the U.S. Treasury. This is a tremendous return on investment.
My remarks today will focus on two things: the role of the Office of Enforcement and the
goals of our five-part strategic plan that was developed by the bureaus working with the Office of
Enforcement. This fonnat highlights our bureaus~ specific areas of expertise, activities and budget
requests, as well as our cross-cutting expertise on financial crimes matters. During my testimony,
I will highlight several key initiatives that Treasury is undertaking in the law enforcement context.
Office of Enforcement
We recognize that the role of our enforcement bureaus is enhanced through the support,
oversight and policy guidance provided at the Departmental level. In this regard, I am pleased to
report that the Office of Enforcement has worked diligently over the past year to fulfill these
responsibilities, and has a plan in place for maximizing such efforts over the nex~ year.
Support
Over the past year, we have worked to support each of our bureaus' individual goals, as
well as for the advancement of issues of significance to all of the enforcement bureaus. We have
often done this by bringing together working groups including bureau personnel, to work on
challenging issues Many of these efforts are led by bureau personnel either dedicated to the
project or detailed to the Office of Enforcement to work on such matters
For example, working groups consisting of personnel from the Office of Enforcement, the
Office of Management and the enforcement bureaus developed a fleet management policy that
balances the needs oflaw enforcement with Congressional concern for assurance that vehicles are
being used in conformity with sound management principles A combined team of Enforcement
and Management staff recently reported to the Subcommittee on the results of those efforts.
Similarly. a working group was formed to develop an implementation plan for the demonstration
2
pay project. It is our hope that the use of personnel interventions identified by this working group
will enable us to improve our capacity to recruit, develop, and retain high-caliber employees.
Finally, the Office of Enforcement, Office of Management, and enforcement bureau
representatives have jointly undertaken a major effort to respond to the Congressional request
that we analyze the implications of the imminent agent retirements.
Oversight
Over the last year we have worked with our bureaus to identify issues before they become
problems, and work on problems before they become crises. The Office of Professional
Responsibility (OPR) is helping us to meet this goal. Since receiving funds in the FY 1998
appropriations bill, we have made considerable progress in staffing this unit, which assists in the
provision of oversight on such important issues as internal affairs, training and inspection. Among
other things, OPR has carried on work begun by former Under Secretary Kelly, by continuing to
make integrity a priority. Indeed, last February, fulfilling a Congressional request, the Office of
Enforcement issued an OPR report on Customs' Office ofInternal Affairs. This study represents
a thorough and comprehensive analysis and reflects the important oversight role envisioned for
OPR.
Additionally, during the past year, OPR has worked with ATF to improve enforcement of
the firearms laws and operations at the National Tracing Center, analyzed EEO and diversity
issues at the Treasury bureaus, and participated in the Implementation Committee overseeing
renewal of the FLETC. OPR also conducted an assessment of training at the Customs Service.
Its findings and recommendations fully support Commissioner Kelly's decision to establish an
Office of Training at the Assistant Commissioner level.
Policy Guidance
A third major function of the Office of Enforcement is to provide leaders.hip in the
formulation and coordination of policy for Treasury Enforcement. In this regard, in the past year,
we convened the Financial Crimes Policy Steering Committee which consists of representatives
from all of the Treasury Bureaus and offices. at the Assistant Director level, who are tasked with
helping to formulate policy in the area of Treasury's financial crimes jurisdiction. Among other
things, I have tasked this group with the development of a strategic response to what we believe
to be an insidious money laundering system. the Black Market Peso Exchange, which is a process
by which Colombian narcotraffickers convert their ill-gotten dollars into ostensibly clean pesos
On a broader level, this group is the primary vehicle by which the Office of Enforcement is leading
the development of a nationwide strategy against money laundering.
As a former prosecutor, I understand that the effectiveness of our bureaus is constrained
by the legal and administrative infrastructure under which they operate. We are working to
ensure that those rules function to make our bureaus work as effectively as possible. For
example, the impact of successful investigation may be undercut by Sentencing Guidelines that do
not adequately reflect the severity of the cnme The Office of Enforcement and General Counsel
3
within Treasury have been working with our bureaus to fonnulate and recommend to the
Sentencing Commission certain changes in the Guidelines.
The Office of Enforcement also has taken other steps to enhance its support and oversight
missions. Among other activities, we continue to work closely with Customs, ONDCP, and
others to ensure close cooperation on anti-narcotics matters; we have maintained a lead role
within the Administration on the National Church Arson Task Force; and in conjunction with ATF
and the Department of Justice, we have responded to the President's directive to analyze the
problem of the gun show loophole, and remain at the forefront on fireanns issues.
On the trade and regulatory side, the Office of Enforcement has taken the lead in
initiatives to streamline and modernize the regulatory and trade law enforcement operations of the
enforcement bureaus. In recent years, Treasury has been a major force behind changes to the way
the alcoholic beverage industry and the fireanns industry are regulated by ATF, re-organization of
the Customs Service to provide better service to the public, re-invention of Customs' business
processes for both import and export transactions, and Customs' enforcement of intellectual
property laws.
More globally, the Office of Enforcement represents the United States in an initiative by
the G7 governments to develop standard electronic documentation for trade among the G7
countries. This initiative will greatly simplity the experience of exporting for small u.s.
companies, and it will reduce the expense of international transactions for all U.S. businesses.
Providing key support, sensible oversight, and sound policy guidance are the principles
that govern the work of the Office of Enforcement. I trust they will become clear as we discuss
in greater detail the implementation of Treasury Enforcement's strategic plan.
Goal: Reduce the Trafficking, Smuggling and Use of Illicit Drugs
Treasury brings essential counter-narcotics and money laundering expertise to the
implementation of all aspects of the President's comprehensive anti-drug strategy. Customs plays
a leading role in the fight against illicit drugs through our anti-smuggling efforts at the border and
our substantial air support to interdict illegal narcotics at the source. Treasury's anti-narcotics
role is also pursued through anti-money laundering activities. efforts to reduce narcotics-related
violent crime. and demand reduction programs The following examples highlight in greater detail
the roles our individual bureaus play in Treasury's efforts to achieve the goal of reducing
trafficking, smuggling. and use of illicit drugs
The Customs Service has the primary role for the Treasury Department -- and one of the
primary roles for the United States -- in interdicting drugs and other contraband at the border, and
in ensuring that all goods and persons entering and exiting the United States do so in accordance
with the law. The Customs Service discovers or seizes more illegal drugs than all federal
authorities in the United States combined each year.
4
Customs has tremendous responsibilities. As you know, Customs must deal with
significant challenges in its efforts to execute its drug interdiction mission. For example, the
Customs Service processed over 460 million people, over 139 million land, air and sea carriers,
and $955 billion worth of imported merchandise. Customs performed the initial checks,
processes, and enforcement functions for over 40 federal agencies and applied hundreds of laws
and regulations. It performed these tasks by servicing more than 300 ports of entry sprawled
across 7,000 miles ofland border, and also provided air support to the U.S. Government's source
control efforts in South and Central America. Customs pursued all of these enforcement missions
while collecting approximately $22 billion in revenue for the United States in the fonn of duties,
taxes, and fees.
Customs constantly strives to improve its ability to stem the flow of drugs while dealing
with the increasing volumes of cargo and passengers into and out of the United States. Indeed,
the number one operational priority for the Customs Service is preventing the smuggling of
narcotics into the United States. It pursues this mission through interdiction, intelligence and
investigative capabilities that disrupt and dismantle smuggling organizations. Customs seized
1,116,000 pounds of illegal drugs in FY 1998, exceeding its target of953,000 pounds. Customs
increase in seizures resulted, in large measure, from Operation Brass Ring, a six month effort to
increase the amount of narcotics seized.
Customs will continue to develop the capabilities to meet the ongoing smuggling threats
on our southwest land border, in the Caribbean, and at all borders and ports of entry across the
country. Customs also remains an active participant in multi-agency criminal investigations, and
continues to strengthen its partnerships with the private sector, cooperative foreign governments
and other federal agencies in order to continue its active role to counter narcotics smuggling
Customs' FY 2000 budget proposal includes increases for integrity awareness and training
initiatives, and non-intrusive inspection technology and automation, all of which will help us
achieve our goal of maintaining the best possible workforce while reducing the trafficking and
smuggling of illicit drugs in an effective and efficient manner
We also are proud of such efforts as ATF's campaign against armed narcotics traffickers,
through its Achilles Program, and Youth Crime Gun Interdiction Initiative, the work of all of our
bureaus on HIDT A and ICDE task forces, the use of our financial crimes expertise to attack the
financial underpinnings of the drug trade, and valuable prevention efforts such as ATF's GREAT
program.
Goal: Combat Financial Crimes and Money Laundering
One of the Treasury Department's most important missions is the fight against money
laundering and financial crimes. Treasury's unique structure permits us to use both our regulatory
and investigative expertise to follow the money trail and thus undermine criminal enterprises. Since
our last appearance before you, there have been several developments in this area. For example, as
5
mentioned earlier, the Treasury Oepartment, in conjunction with federal, state, local and private
sector entities, is now in the final stages of developing a national money laundering strategy as
directed by the Money Laundering and Financial Crimes Strategy Act of 1998. The Office of
Enforcement has taken the lead role in this effort. We have reached out to other agencies as we have
worked to develop the strategy, and we look forward to continuing work on its further refinement
and, ultimately, its implementation. Indeed, we believe that the strategy will make an important
contribution to the battle against money laundering.
We have continued to press forward with international efforts against money laundering.
Last May, President Clinton announced the Administration's International Crime Control Strategy
(ICCS), which includes as one of its goals countering international financial crime. Treasury's Office
of Enforcement and its law enforcement bureaus played an active role in the development of the
ICCS and continue to play important roles in its implementation. As advances in technology and the
removal of other barriers allow money to move with increasing speed among nations, an effective,
long-term anti-money laundering strategy will require other nations to adopt strong anti-money
laundering measures in the legal, regulatory, and law enforcement areas. This, too, is a component
part of the ICCS and an area in which FinCEN, in particular, is actively involved.
Also, we have continued to strengthen the capability of our bureaus to fight money laundering in a
coordinated fashion. Treasury Enforcement's Financial Crimes Steering Committee, established in
1998, brings together the full spectrum of Treasury agencies that playa role in efforts to combat
financial crime. This group currently oversees an interagency working group that is developing an
action plan to combat an insidious form of drug money laundering - the Colombian Black Market
Peso Exchange.
In furtherance of our goal of protecting the integrity of our nation's financial systems, we are
also focused on continuing to develop anti-counterfeiting strategies that employ all appropriate
technological and investigatory methods to combat designers and traffickers in counterfeit currency
and instruments Working with the State Department, we are expanding the Secret Service's
overseas presence to combat more effectively the burgeoning international criminal threat to our
financial systems. We are also enhancing our leadership role by continuing to develop partnerships
with the financial community and others in the private and public sectors. Recognizing the
importance of our combined efforts to combat this problem, in 1998, Secretary Rubin asked
Attorney General Reno and the Justice Department to coordinate with Treasury in working with the
Sentencing Commission to review and enhance the guideline ranges for imprisonment in
counterfeiting cases
Some of our bureaus' individual efforts in the fight against money laundering and financial
crimes include
Customs Service
In addition to its substantial efforts to counter illicit drugs, Customs also plays a vitally
important role in combating money laundering During FY 1998, Customs' money laundering
6
investigations resulted in 1,035 arrests and 928 criminal indictments. Its investigative strategy is
focused on disrupting two key business functions that are necessary for sophisticated international
money laundering operations to function: laundering profits and investing the proceeds of their
criminal activity. In this context, I note the significance of Operation Casablanca, the largest drug
money laundering investigation in U. S. history, which to date has resulted in the arrests of 168
individuals. While I will defer to Commissioner Kelly to discuss the public details of this ongoing
investigation, I note that this case represents a fine example of the important work that Customs is
doing to eliminate the scourge of money laundering.
Secret Service
The Secret Service is the nation's lead agency in investigating counterfeiting, forgery, and
access device fraud. As the nation's counterfeiting expert, the Secret Service has investigated
fictitious financial instruments, counterfeit currency and credit card schemes both domestically
and internationally. Because United States currency is counterfeited around the globe-approximately 70 percent of all counterfeit currency detected domestically is of foreign origin -- the
Secret Service devotes a large portion of its investigative resources to battling international
counterfeiting issues.
The Secret Service has learned through experience that the best method to manage this
problem is to address counterfeit issues at their source, with the permanent stationing of Secret
Service agents at foreign posts. In addition, the Secret Service leverages its resources by enlisting
international law enforcement agencies to identify counterfeit currency and suppress counterfeiting
plates. These efforts, primarily carried out through counterfeit detection seminars, have promoted a
cooperative international law enforcement effort to detect suppress and prosecute counterfeit
violations.
Moreover, to prevent financial fraud schemes. the Secret Service has dev.eloped and
implemented longstanding and effective partnerships with private industry to better understand
various financial systems and combat significant losses. Assisting the industry and their financial
systems with "systemic fixes," aggressive analysis, and proactive security enhancement measures has
increased the overall security of these financial systems. Proactive joint initiatives with the industry,
such as public awareness campaigns. media programs, speeches, seminars, and security training are
having a positive impact. These partnerships have reduced the ability of criminal organizations to
target financial institutions.
In addition to its work with the private sector. the Secret Service plays an active role in law
enforcement task forces aimed at identifying and targeting fraud schemes intended to victimize
individuals, banks, credit card issuers, or other financial institutions
7
FinCEN
While Customs, Secret Service and IRS-CID are the financial crime investigators, the
Financial Crimes Enforcement Network serves as Treasury's principal support arm for such
investigative efforts. As its name states, FinCEN is a network, a link between the law enforcement,
financial, and regulatory communities. It brings together government agencies and the private
sector, in this country and around the world, to maximize information-sharing among these
communities, and thereby further efforts to prevent and detect money laundering activities.
FinCEN's FY 2000 budget request focuses on those programs that are at the core of its
support to law enforcement: the Gateway system~ direct case support to law enforcement;
sophisticated research and analysis support to the regulatory and law enforcement communities;
expanding the use of technology tools to research Bank Secrecy Act databases; expansion of secure
communications; financial intelligence unit development; and a study to gauge the magnitude of
money laundering. Your support for FinCEN's FY 2000 budget request -- which reflects a
commitment to essential programs rather than an expansion into new·initiatives -- will strengthen the
quality of the support that it provides to law enforcement.
IRs-cm
Although IRS-CID is not a part of this appropriations hearing, I want to say a few words
about its important contribution to Treasury's law enforcement efforts. Fighting financial crime is a
job well-suited for the special agents oflRS-CID They are known for their ability to "follow the
money trail" and stop the criminal when no one else can. IRS-CID agents are financial experts in
combating money laundering and tax evasion. Their expertise is sought in investigations of all types
of financial crimes, including health care fraud, pension fraud, insurance fraud, bankruptcy fraud,
telemarketing fraud, gaming, narcotics, and public corruption IRS-CID continues to play an
invaluable role in Treasury Enforcement's efforts to combat the range of financial crimes facing us,
and we look forward to our continued pannership with them
Goal: Fight Violent Crime
One of the goals of the Clinton Administration has been to reduce violent crime in our
nation's streets Treasury is working to tight violent crime by arresting the most violent armed
offenders, denying criminals and juveniles access tCl firearms, reducing the risk of violent crime in our
communities, safeguarding the public from arson and explosive incidents and strengthening our
capability to fight terrorist threats to the UOlted States During FY 1998, ATF received over
180,000 gun trace requests from federal. state. local and international law enforcement agencies It
also expanded its Youth Crime Gun Interdiction Initiative (YCGII) from 17 to 27 cities, focusing on
the sources of firearms recovered from juvenile and youthful otTenders
To safeguard the public from arson and explosives incidents, ATF maintains the highest
standards of investigative expenise and state-of-the-an technology to respond most effectively to
8
those incidents. We endeavor to prevent criminal misuse of explosives in crimes of arson through
enforcement. regulation. and community outreach and investigate thefts and illegal diversion of
explosives.
On the international front. we continue to work to maintain appropriate firearms
importation and international illegal firearms trafficking policies and to share crime gun tracing and
anti-smuggling expertise with the international community in order to combat illegal firearms
trafficking.
As will be clear from Director Magaw's testimony, A TF plays the leading role for Treasury
-- indeed for the entire federal government -- in the fight against armed violent crime. A TF is
responsible for enforcement of the federal firearms laws as well as for regulation of the firearms
and explosives industries. It investigates some of the most destructive, dangerous, and
controversial crimes in the United States. including bombings of abortion and family planning
clinics. church arsons, illegal firearms trafficking. and other firearms and explosives violations.
In an effort to reduce violent crime, ATF focuses its investigative efforts on violent
criminals, career criminals, armed narcotics traffickers, violent gang offenders, and domestic and
international firearms traffickers that supply the illegal firearms market. It strives to deny criminals,
gang members and juveniles access to firearms, safeguard the public from bombings and arson, and
imprison violent criminals.
Through its Violent Crime Coordinators (VCCs), ATF is focusing its investigations on
armed recidivist and violent career criminals The VCCs will continue to assist in removing the
armed criminals that pose the greatest threat to society by identifying and investigating the most
violent offenders, analyzing the best route to prosecution and working closely with the United
States Attorneys' Offices to maximize the effectiveness of our investigative efforts.
Through its YCGII, which was launched by President Clinton, ATF continues its efforts to
further reduce the illegal trafficking of firearms to gang offenders and juveniles. As we reported to
you last year, due to the positive reception of the program in the 17 pilot cities and to ATF's first
comprehensive trace analysis report designed for agents and police departments, the I 0 additional
cities were added to the program in FY 1998 We are grateful for the support you have already
provided to this program, which is designed to supplement and strengthen ATF's illegal firearms
trafficking program, and ask you to support expansion of the program for an additional 10 cities
(total of 37) in FY 2000
In addition, as recently announced. the Administration is working to deny prohibited
persons access to firearms, including those sold at gun shows The President's FY 2000 budget
includes additional resources for enhanced overall firearms law enforcement.
9
ATF is also renowned for its expertise in the areas of arson and explosives. Through its
certified fire investigators, National and International Response Teams, accelerant and explosives
detection canine program, its accredited laboratory, its arson and explosives repository, and
numerous other programs, ATF maintains its role as the leader and innovator in these areas. Its
expert work on the National Church Arson Task Force has helped produce a 34 percent clearance
rate for the arsons under investigation, a rate that is more than twice the average rate for arson
'crimes in general. In late 1998, the Attorney General established the National Task Force on
Violence Against Health Care Providers. This joint effort is required to effectively address the
recent increase of violence against women's health care clinics and their providers nationwide.
ATF, having the largest contingency on the Task Force, contributes its expertise in arson,
explosives and firearms and brings 16 years of investigating abortion clinic bombings and arson
incidents. It is also an active participant in the Southeast Bombing Task Force, which is
investigating, among other things, the 1996 bombing at Olympic Park in Atlanta.
ATF assists state and local authorities with arson investigations falling under federal
jurisdiction and having a significant impact on their community, particularly when the nature or
extent of the problem extends beyond the available resources or expertise of the locale involved.
ATF also provides training to other federal, state, and local enforcement agencies in the detection
and investigation of arson, particularly arson-for-profit, and post-blast bombing investigation.
To ensure that its vital work continues in as safe and secure an environment as possible, the
President's budget supports the proposed new ATF headquarters building. We ask you to support this
request. Overall, the President's FY 2000 budget request will enable ATF to continue its critical work
in the battle against violent crime.
Counterterrorism
One essential aspect of our anti-violent crime efforts is Treasury's contribution to our nation's
antiterrorism fight. Treasury enforcement bureaus have the legal authority and the essential expertise
to perform missions that are critical to the success of the counterterrorism effort. Treasury's
counterterrorist activities are not new, but derive from authority that Treasury has exercised for
decades and from expertise developed in the course of Treasury's longstanding performance of its
mIssIons.
Treasury enforcement bureaus provide immediate and effective response to terrorist attacks,
guard against the smuggling of weapons of mass destruction, enforce laws directed at the most
common instruments of terror, protect potential terrorist targets, and enforce economic sanctions
against countries and groups that promote terrorism Treasury bureaus are equipped not only to
respond to specific threats and attacks, but also to conduct the proactive operations within their areas
of expertise that help defeat terrorist plans
10
Treasury's central role in the counterterrorism effort is perfonned by ATF. Customs. the Secret
Service. the Office of Foreign Assets Control (OFAC), the FinCEN and the FLETC. As set forth
above. ATF investigates bombing and arson cases. Customs. as the lead agency responsible for
enforcement of anti-smuggling laws, is charged with preventing the illegal import or export of nuclear,
hazardous. or otherwise illegal materials. OF AC enforces sanctions laws. including those directed at
governments that sponsor terrorism. The Secret Service is responsible for protecting the President.
the Vice President, foreign dignitaries, and other designated protectees.
In addition, Treasury's unrivaled expertise on financial crime investigations provides an
invaluable mechanism for sanctioning those who commit terrorist acts. The IRs/cm. the Secret
Service and FinCEN figure prominently in the discovery and analysis of financial infonnation about
terrorists and their organizations. The IRS is also the sole agency responsible for investigating income
tax violations. commonly committed by groups that advocate violence against the U.S. Government.
Coordination among agencies is crucial to the fight against terrorism. and law enforcement
agencies throughout the federal government have always recognized and relied upon the essential
work of Treasury's law enforcement bureaus. As evidenced by the response to the World Trade Center
bombing. Oklahoma City bombing, and Unabomber investigation. Treasury closely coordinates with
Justice and other federal. state. and local law enforcement. This coordination continues into the policy
making arena, where Treasury works closely with Justice on the Attorney General's Core Agency
Group against terrorism, and participates actively in the NSC's coordination groups on Weapons of
Mass Destruction and counterterrorism.
Goal: Protect Our Nations Leaders and Visiting World Leaders
As I noted at the outset of my testimony, as the world becomes an increasingly more complex
and dangerous place, Treasury's law enforcement mission grows in complexity as well. Treasury is
striving to manage the ever-changing nature of threats by developing, acquiring and deploying
necessary countermeasures. The Secret Service, as described below, continues to carry out its critical
responsibility of protecting the President, the Vice President and other specially designated protectees
against any potential threat.
Secret Service
The Secret Service must accomplish its protective and investigative missions in an increasingly
dangerous society--and it has done so quite effectively During FY 1998, the Service successfully
managed protective security for its protectees as well as for several major events. Importantly, last
year. the President signed Presidential DeCision Directive 62, which names the Secret Service as the
lead agency for security design, planning and implementation at designated national special security
events
II
The Service has also continued its efforts to combat the increasing threat from weapons of
mass destruction, and is working to develop measures to ensure the safety of the President and other
protectees against the threat of such weapons. In FY 2000, the Secret Service looks forward to
training additional chemicallbiological teams to support its protective responsibilities.
Also during FY 2000, the Service will continue its preparations for the 2000 Presidential
campaign and has budgeted $35,247,000 to come from the Department's Asset Forfeiture Fund to
cover the costs of providing protection for the candidates and nominees involved in the campaign and
the two national party conventions. The Secret Service's budget request will further advance its
ability to maintain the highest level of physical protection possible for its protectees through the
effective use of human resources, protective intelligence, risk assessment and technology.
Goal: Provide High Quality Training for Law Enforcement Personnel
Assuring the excellence of training of federal law enforcement is of vital importance to the
future effectiveness of our law enforcement efforts. As the training agent for the majority of all federal
law enforcement agencies, we currently have 71 agencies participating in training programs at the
FLETe. We are committed to enhancing basic and in-service training programs to meet the changing
needs and increasing demands of federal law enforcement as we combat increasingly sophisticated,
technologically advanced and globally linked crime. Our objective is to develop and operate state-ofthe-art facilities and systems responsive to interagency training needs.
To meet the goal of quality training while keeping within a limited budget, to meet current
training needs and to prepare for the future, we will maintain and improve FLETC's physical plant by
implementing the master plan to guide the expansion of facilities to meet projected training needs. We
will also develop alternative training delivery systems, such as distance learning capabilities, thereby
effecting long term cost savings. Additionally, the Office of Enforcement is working with FLETC to
expand the use of advanced technology in training and support, especially in the ~reas of computerbased training and simulation, to provide not only state-of-the-art training but long-term budget
savings as well. We will also continue to provide international training in support of the International
Law Enforcement Academies.
FLETC
One of the reasons that Treasury law enforcement is so successful is the quality of training that
its agents and inspectors receive at the FLETC Since its establishment by a memorandum of
understanding in 1970, FLETC has built a reputation for providing high quality, cost effective law
enforcement training. As you know, there are many advantages to consolidated training for federal
law enforcement personnel, not the least of which is an enormous cost savings to the government.
Currently, 71 agencies participate in more than 200 different training programs at FLETC.
Additionally, FLETC has been involved in providing law enforcement training overseas for over 20
years and has trained more than 5,000 foreign law enforcement officials from more than 102 different
countries. We expect this growth to continue as more agencies recognize the many benefits of
12
consolidated training. Through the National Center for State and Local Law Enforcement Training,
FLETC also has been an excellent resource for providing over 50 highly specialized advanced
training programs to State and local law enforcement officers within the United States. These
programs include training related to hate-bias crime issues, computer and financial fraud and rural drug
enforcement matters.
Over the last several years, the FLETC has seen an unprecedented increase in its workload.
Current projections indicate continued workload growth for several more years. During FY 1998,
FLETC graduated 25,762 students representing 120,399 student-weeks of training, the largest
workload in the history of the Center. In FY 1999 the workload is expected to grow to 35,315
students. As Director Basham notes in his testimony, the majority of this increase is attributable to
recent Congressional and Administration initiatives to control immigration along our nation's borders.
Other contributing factors include counter-terrorism activity and security enhancements at federal
facilities and new federal prisons coming on line.
To pennit FLETC to train the law enforcement agents in the skiUs needed for the future, it has
continued to implement its master plan for facilities. This plan was first introduced in 1989 and when
fully implemented, will pennit FLETC to achieve its goal of further developing, operating, and
maintaining state-of-the-art facilities and systems responsive to interagency training needs.
In addition to relying on temporary training facilities to accommodate the increased workload,
the Center has also implemented a dual-shift schedule at Glynco in order to accommodate the training
being requested in FY 1999.
In addition to its domestic training responsibilities, the FLETC is also being called upon to play
a larger and more important role in support of the Administration's and Congress' foreign policy
initiatives involving the training of foreign law enforcement officials. Indeed, as Director
Basham reports, foreign training requests have grown substantially in recent years, with student weeks
of training increasing by almost 200 percent since 1994.
Conclusion
In summary, the Treasury Department is proud of the contributions that its law enforcement
bureaus have made and continue to make to this nation Treasury and its bureaus have defined goals
and objectives to ensure our excellence in protecting our borders, fighting violent crime, defeating
financial crimes and training our law enforcement agents for the challenges of countering increasingly
sophisticated criminals. The FY 2000 President's budget request will enable Treasury's law
enforcement bureaus to meet the current challenges and to begin preparations for the challenges of the
21st century. I am confident you will find this to be a responsible budget, as it considers the growing
demands oflaw enforcement in a constrained budget environment
I would like to express my appreciation for all the support the Subcommittee has provided us.
With your permission Mr. Chairman, I would like to ask the Directors of the Treasury law
enforcement bureaus to describe in more detail those strategies and goals we see as playing a key role
in the coming fiscal year, as well as our recent accomplishments. After which we would be pleased to
answer any questions you or Members of this Subcommittee may have. Thank you.
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T I~ J.: :\ S II R Y
NEWS
omCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C•• 20220 • (202) 622.2960
EMBARGOED UNTIL 10:00 A.M. EDT
Text as Prepared for Delivery
April 15, 1999
TREASURY ASSISTANT SECRETARY (ENFORCEMENT) ELISABETH A. BRESEE
HOUSE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
and HOUSE SUBCOMlvlITTEE ON GENERAL OVERSIGHT AND INVESTIGATIONS
Chairwoman Roukema, Chairman King, and Members of the Financial Institutions and
General Oversight Subcommittees, I am Elisabeth Bresee, the Assistant Secretary for
Enforcement of the Department of the Treasury. Seated beside me is William F. Baity, Deputy
Director of TreasurYs Financial Crimes Enforcement Network. As you know, Under Secretary
Johnson cannot be here because he is testifying at this hour before the Treasury and General
Government Subcommittee of the Senate Appropriations Committee_
The Department of the Treasury welcomes these hearings and the continued interest of the
House COllll1llttee on Banking and Financial Services in our efforts to fight money laundering.
The range of issues you are scheduled to consider is a broad one, as befits this difficult and manysided subject.
You have asked the Department of the Treasury to discuss the amount of money
laundering in the United States, the Treasury's development of a national anti-money laundering
strategy, the status of the Treasury Department's "money services businesses" roles, and emerging
trends in money laundering generally. ! will address each of those subjects in the course of my
testimony.
Money Laundering.Threat
As you recognize, money laundering is anything but a "technical crime," Criminal activity
and the subsequent laundering of the illicit proceeds it generates pose grave threats to societies,
free market economies, and democratic institutions. Just as drug lords and criminal organizations
endanger the security of our people. drug money and other illicit income endanger our financial
institutions and damage our economies.
RR-308J
"'press releases, speeches, public schedules and official biQgraphies~
call our 24.JJqur fax line at (202) 622·2040
·u.s, Govetnmen' Printing Oillce, '998 -
B'~559
But, the steps which criminal groups must take to lend the appearance of legitimacy to
their illicit profits, also provide us with an invaluable opportunity to attack the criminal
organizations themselves. As Secretary Rubin has stated:
Criminals try to separate themselves from their illegal operations, but they cannot
separate themselves from their illegal profits. That means that money laundering
gives us a powerful vantage point from which we can address both the threats
posed to our financial system from illegal profits and the criminal activities that
produce those profits.
While money laundering is the life blood of sophisticated international criminal enterprises,
the actual acts through which laundering occurs are themselves, in isolation, not only legal but
commonplace ... opening bank accounts, wiring funds, and exchanging currencies in international
trade. It is often only the funds and motives involved that criminalize the activity. That means
that our enforcement efforts must consider the costs we impose on legitimate transactions in order
to find illegal ones. and the impact of our efforts on the citizen's perception of the privacy of
financial information.
The Bank SecreC<)' Act
For the past 30 years, a pillar of our efforts has been a careful use of the authority the
Congress gave us in 1970 to limit the ability of criminals to cover their financial trails. The
authority is contained in a statute popularly called the "Bank Se.crecy Act" (or "BSA") to signify
its emphasis on the "transparency" that criminals rightly fear.
The BSA focuses on financial institutions because criminals must go to financial
institutions to get their earnings into the financial system. It would be virtually impossible to build
an effective system to deter. detect, and prosecute money laundering -- or for that matter any
financial crime - without measures of the sort with which the BSA is concerned.
The statute and its implementing rules require standardized record keeping oftransaction
and aCcount data _. including information relating to funds transfers .- and the reporting of certain
benclunark transactions to the TreasUJY. The original reportable transactions are familiar to you:
currency deposits or withdrawals (and similar currency transactions) of more than $10,000, which
must be reported by the financial institution involved, the transportation of currency and bearer
instruments of more than $10,000 into or out of the United States, and the maintenance by U.S.
citizens of bank or other financial accounts outside the U.S. that hold more than $10,000.
All of these requirements stem from the original legislation. In 1986 t Congress made
money laundering itself a crime, and two anti-money laundering acts during this decade have
strengthened the BSA to complement the Title 18 provisions. The Annunzio-Wylie Anti-Money
Laundering Act (" Annunzio-Wylie "), in 1992. authorized the Treasury to require reporting of
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suspicious transactions. among other important steps.' Treasury responded by issuing rules
requiring depository institutions, begi.n.ning three years ago, to report suspicious transactions __
the fourth category ofBSA reports.
The Money Laundering Suppression Act of 1994 (the uMLSA") asked Treasury to
increase its focus on non-bank financial institutions and to ease the burden of currency -f"eporting
placed on legitimate businesses that required large amounts of currency in their daily operations.2
I'n return to the MLSA provisions later in my testimony.
Mainitude of Money Launderina
I'd like to turn now to the specific questions posed by the Subconunittees. The first is the
amount of money laundering occurring annually in the United States.
Partial figures can give one some idea of the size of the problem. The Office of National
Drug Control Policy estimates that approximately $60 billion is now expended in the purchase of
illegal narcotics each year. If 80 percent of that represents profit, the sales generate $48 billion to
be laundered each year, simply on account of narcotics sales, without taking into account all of
the other crimes whose proceeds require laundering. And even a fraction of that number,
reinvested year after year, generates a sizable and frightening war chest of criminal capital.
Given numbers of this magnitude, it is tempting simply to say that whatever the precise
number is, it is too much. But we know we need to do better than that. We are working to
fonnulate a methodology and build the statistical set to provide a hard number to measure the
"criminal capitaJ markets tl as a whole. Such a measurement would indude not only the proceeds
of street or back-room criminal transactions in the United States, but also the movement into the
United States of funds from crimes committed abroad -- say, narcotics sales in Europe or
terrorism in Afiica. It would also include the recycling (called "layering" and "integration") back
into the United States of narcotics and other funds smuggled out of the United States in the first
stage of their movement through the international financial system.
Annunzio-Wylie also required, for example, the issuance of standardized rules (now found at 31
CFR 103.33). for record-keeping for funds transfer transactions, authorized penalties for negligent
violation of the BSA, and made the operation of illegal money transmitting businesses a crime. Under
the statute's tenns, federal financial supervisors must commence proceedings to terminate the charter
of any depository institution convicted of money laundering.
2 The .MLSA also expanded Treasury's authority to require reporting of cross-border
transportation of negotiable instruments, codified Treasurys authority to treat casinos as financial
institutions, and expressed a "sense of the Congress l1 that the states should create a uniform
regime to regulate money transmitters, check cashers, currency exchange houses, and the money
order and traveler's check businesses.
1
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As part of our effort to measure the magnitude of money laundering, in January ofthjs
year, I chaired a meeting with representatives from aU relevant federal agencies to begin this
process. We have established two committees of experts from a wide variety of federal law
enforcement and economic policy agencies to identifY available data sources and analytical
approaches to the study. In addition, FinCEN has asked for additional funding in its FY 2000
Appropriation to support this effort It is our expectation that the early estimate of th~magnitude
will need to be refined with greater precision over time.
Additionally, we are coordinating our efforts with the 26-nation Financial Action Task
Force, which ha5 created a working group, chaired by the United States, to examine the
difficulties of estimating the magnitude of money laundering worldwide. We will continue to keep
the Conunittee informed about progress on this difficult but necessary effort.
Money Laundering Stratw
As we have begun to visualize money laundering as an organized, systemic, activity, we
have corne to see that effective government responses must address a number of different
circumstances using different tools, in a coordinated and mutually re-enforcing manner. That is
why the Money Laundering and Financial Crimes Strategy Act of 1998 -- also called the
"Velazquez Act ll in honor of its sponsor, Representative Nydia Velazquez of New York -represents an important step, and an important responsibility for the Treasury.
Enacted in October 1998, the Act directs Treasury to develop and implement a national
anti-money laundering strategy, in consultation with the Justice Department and other entities.
While not dictating a precise format, the statute identifies several elements that the strategy must
include each year. Those elements include goals. objectives, and priorities to combat money
laundering and related financial crime; initiatives to prevent money laundering; initiatives to
enhance the role of the private sector; enhancement ofintergoverMlentaJ cooperation; project and
budget priorities; and the designation of high risk money laundering and related financial crime
areas.
In addition, the legislation authorizes Treasury to develop a grant program making
resources available to state and local law enforcement agencies for anti-money laundering
enforcement. The grant program would aid state and local law enforcement who may lack time
and resources to sufficiently develop money laundering investigations, It also helps provide
incentives for state and local law enforcement agencies to participate in joint money laundering
investigations with federal authorities. As demonstrated by the El Dorado task force in the New
York area, such collaboration between federal, state, and local authorities is crucial to this fight.
Since passage of the Act, Treasury's Office of Enforcement has worked diligently to fuLfill
its mandates. Beginning with an initial planning meeting of its Financial Crime Steering
Committee in October, Enforcement has brought together many of the agencies with a role in the
anti-money laundering fight. By early this year, the Treasury and lustice Departments had
compiled an initial set of material for possible inclusion in the strategy. Since then. Treasury,
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Justice) and other federal entities have reviewed and expanded this material in an effort to produce
a document addressing the full range of issues required under the statute and a set of concrete
action items to fulfill during the year of the strategy.
Beyond our work with the Justice Department, we have met the Act's other consultative
mandates. First. in response to the Act, and as a reflection of the close working relationships that
already exist on this issue, we have consulted with, among others, the Federal ReserveAhe
Securities and Exchange Commission; the Commodity Futures Trading Commission; the U.S.
Postal Inspection Service; and the Office of National Drug Control Policy (9n issues specifically
relating to drug money laundering).
Similarly, we have reached out to state and local law enforcement by requesting input
from the National District Attorneys Association, as well as the state law enforcement
coordinators for FinCEN's Gateway Program. The Gateway Program allows state and local Jaw
enforcement agencies to access FinCEN's infonnation resources to support investigations and
prosecutions. State law enforcement officials serve as coordinators and points of contact for law
enforcement agencies in their state. Accordingly, they are in a unique position to provide input
conceming how the federal government can enhance its support for state and local anti-money
laundering enforcement.
In addition, responding to the threat of money laundering also requires the support of the
private sector and regulatory agencies. To canvas the private sector concerning the Strategy, we
have turned chiefly to Treasury's Bank Secrecy Act Advisory Group. This Advisory Group was
established in 1994 to provide a mechanism for the financial services industry to infonn the
government of ways to improve and strengthen its anti-money laundering programs as wen as
reduce unnecessary regulatory burden. Representatives from the banking, securities, money
transfer, casino, insurance and other financial service industries serve on this group, along with
representatives from the Department of Justice, the National Association of Attorneys General,
and regulatory agencies. TJu-ough the BSA outreach, we have attempted to hear from all of these
groups, as well as their individual components.
Based largely on this type of outreach, we believe that we have made significant progress
toward completion of the Strategy. While subject to further review and comment within the
Department and by other agencies, the current draft of the Strategy sets forth the essential legal,
regulatory, and investigative components to our attack on money laundering, along with a set of
initiatives that will further improve our efforts. It includes:
A statement strongly in support of essential reporting requirements under the BankSecrecy
Act and other anti-money laundering legislation; efforts to make such reporting systems
more efficient and effective; and improved feedback to the financial conununity on the
utility of such reports;
A summary of vital detection and investigation initiatives, such as the El Dorado task
force and Operation Casablanca, as we]] as the need to adopt better information sharing
and targeting of emerging money laundering schemes (such as the Black Market Peso
Exchange): and
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A discussion of efforts to improve intergovernmental cooperation and effectiveness
through establishment of a grant program and designation of high intensity financial crime
areas, as well as through improved infonnation based on enhancements to FinCEN's
Gateway Program.
We also are pleased to report that the Presidenfs FY 2000 budget includes a $3 million
request to commence this program. In response to the Act's requirements, we will work closely
with the Justice Department to prepare an implementation plan for the grant mechanism, review
the appointment of an administrator, and develop appropriate procedures for administering the
funds. The Strategy will include a discussion of the process for completing these activities in
order to be in position to commence the program in FY 2000.
We have had many meetings and discussions with staff members of the Banking
Conunittee in order to keep the Committee informed of our progress. We appreciate the
Committee's support in this area and we will continue our close consultation with Congress on
the Strategy, which we hope to have cleared through the interagency community and deJivered to
Congress in the near future.
MSB ReiYlatioos
As I noted, the Strategy recognizes the work of the joint Customs-IRS El Dorado Task
Force in New York. El Dorado's work also played an important part in the formulation of the
Treasury's proposed rules relating to the application of the BSA to what we have come to call
"money services businesses" or "MSBs." I'd like to tum to that subject.
"Money services business" is a newly-coined tenn that refers to five distinctive types of
financial service providers: money transmitters, currency exchangers, check cashers. and issuers
and sellers of money orders and traveler's checks.3 (The five businesses are often linked, because
they provide a complementary set offinancial services.) These businesses are quite numerous;
they comprise at least 200,000 locations (when one counts the nation's 40,000 post offices, at
which postal money orders can be purchased), and provide financial services involving at least
$200 billion annually. To a significant extent, the customer base for such businesses lies in that
part of the population that does not use, either in whole or in part, traditional financial institutions,
primarily banks.
Money services businesses can be large or small. It is estimated that approximately eight
business enterprises account for the bulk of money service business financial products (that is,
money remittances, money orders, traveler's checks, and check cashing and currency exchange
availability) so1d within the United States, and also account, through systems of agents, for the
bulk oflocations at which these financial products are sold. Most of the members of this first and
~ The MLSA provisions refer to all of these businesses as "money transmitting businesses."
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largest group are large, relatively well-capitalized, finns that are publicly traded on major
securities exchanges, as well as the Postal Service.
A far larger group of (on average) smaller enterprises compete with the eight largest finns
in a highly bifurcated market for money services. In some cases, these smalJ enterprises are based
in one location with two to four employees. Moreover, the members of this second graup may
provide fmancial services and unrelated products or services' to the same sets of customers. Far
less is known about this second tier offinns than about the major providers of money service
products.
We are still learning about the size, extent, and operating patterns in the United States of
money services businesses as a whole. While, as a simple example, the Secretary of the Treasury
could likely obtain. within hours if not minutes, a list of every bank or every broker-dealer in the
United States, no one could provide any government authority with a list of all of the businesses
that, even as principals, offer to send funds abroad or to exchange currency.
Three notices of proposed rule-making relating to money services businesses under the
BSA were issued on May 21, 1997. The first rule would revise the definition of certain of the
non-bank financial institutions within the MSB class, and would require MSBs to register with the
Department of the Treasury, as Congress mandated in section 408 of the MLSA. Following the
tenns of the statute the proposed rule would create a national comprehensive registry of the
names and addresses of money services businesses (together with other important infonnation
about the businesses and their agents), providing an important tool for tracing financial
transactions through, and combating money laundering at, these businesses. As part of the
registration obligation. such businesses would be required to maintain and update periodically a
list of their agents that would be available to regulators and investigators upon request.
The second of the three proposed rules would require money transmitters, and issuers,
sellers, and redeemers of money orders and traveler's checks, to report suspicious transactions to
the Department of the Treasury. Some of those who submitted comments asked us to recognize
that implementation Of such a rule at every outlet at which these services or instruments ~re sold
involves issues not found when dealing with banks. They therefore sought a significant upward
adjustment in the thresholds at which reporting is required.
The third proposed rule contained a special currency transaction reponing requirement -and related customer verification requirements - for money transmitters involved in the
transmission or other transfer of funds to persons outside of the United States. This rule has
drawn perhaps the most criticism, even in light of the infonnation about criminal conduct of a
portion oFthe money transmission industry in New York and some other parts of the nation.
4, as a travel agency, courier service, convenience store~ grocery or liquor store.
7
The Subcommittee on Financial Institutions held a hearing on the proposed roles in July
1997 and I don't want to cover unnecessarily ground covered at that and subsequent hearings.
But I know you are concerned about the status of the rules.
j
When the comment period closed at the end of September 1997) FinCEN had received
over 80 comments on the rules, a number of which were extensive. It had held five public
meetings. which had themselves generated several thousand pages of transcript that required
review_ But most important, everyone involved in working on and reviewing the rules insisted
that the rules strike a balance between law enforcement and business concerns and implement the
Congressional directive in a reasonable and cost-effective way.
Thus, to take the first of the three rules -- definitions and registration -- as an example, we
have studied ways to modify, where appropriate, the breadth of the original proposaJ's definition
of money transmitter, to adjust various thresholds for registration, to re~examine the treatment of
stored value in the proposal, to see if the I'agent business list" requirement of the statute could be
made less burdensome, and to provide a long "compliance period lt so that registration does not
become a trap for the unwary.
We have a1so been cautious in finaHzing the rules until we are certain that they can be
implemented successfully_ As you know, the BSA rules are generally administered on a day-to~
day basis in part by FinCEN but in pan by the federal regulatory and supervisory agencies that
have primary responsibility for the businesses involved, whether in the banking or securities
sector. No comparable national structure exists, or has ever existed, to deal with the tens of
thousands of businesses that will be affected in some way by the final MSB rules_
The tasks involved in implementation are of course extensive and wide-ranging. Fonns
must be designed, printed, and distributed, probably in several languages; the requirements must
be explained (again. in many cases in communities where English is not the operating language),
and personnel must be available around the nation to answer specific questions. Magnetic filing
protocols must be designed, processing and data base systems will have to be constructed, and the
new data bases will have to be linked to law enforcement and regulatoTyagencies throughout the
nation.
Finally, resources must be avaiJable and secured for enforcement and compliance. The
experience of Treasury's enforcement bureaus in dealing with money services business abuses has
been a positive one. However that experience has also shown that effective enforcement work
requires on-the-ground thorough surveillance and audit; all of these tasks are resource intensive.
I know the Subcommittees would like to know when the rules will be finalized. All three
rules were proposed together, to give the industry, and the public, some idea of the range of
issues we were considering and the range of problems about which we were concerned. We have
tried to recognize both what we knew and what we didn1t yet know in dealing with this industry.
In light of the balance we are attempting to achieve among competing interests, it may be that the
rules will not be finalized at the same time. I would expect the registration rule, naturaI1y, to be
finalized first, in the near future.
8
Money Launderini Landscape
I would like to conclude my testimony by speaking for a moment about other issues that
are of concern to the Treasury as we survey the "money laundering landscape" at the end of the
century-
When we look at money laundering as a phenomenon, I think we are struck most of all by
how much we still have to learn, Money laundering is not a series of isolated crimes or
transactions. Instead, entire money laundering systems have been established to move and
dispose of criminal proceeds. For example, bulk cash smuggling is not designed simply to get
criminal cash out of the U.S. It is part ofa system in which funds taken out of the United States
are then brought back into the U.S_ so that they can be further disposed of or reinvested. Unless
we can attack a system comprehensively, our effons may stop some money launderers but
ultimately won't make money laundering more difficult or more expensive.
We are thus committed to attacking not only individuals involved in money laundering, but
to working to dismantle entire money laundering systems, Our most recent comprehensive attack
has been aimed at the Colombian Black Market Peso Exchange_ This system works as follows:
Cocaine is shipped from Colombia to the United States where it is sold. The narcotics proceeds
are then deposited by the Colombian drug cartels into U.S. bank accounts belonging to a black
market peso broker in Colombia. The peso broker then sells these dollars to Colombian
businessmen for pesos which are paid to the drug trafficker in exchange for the dolJars_ The
Colombian businessmen use the dollars to purchase goods in the U.S. which are shipped to
Colombia"; This method permits the drug trafficker to convert dirty money •• the drug proceeds - into clean money -- the Colombian pesos .. • which can be spent legitimately.
Treasury has fonned a working group of Treasury and Justice bureaus to develop a
comprehensive attack on this system that exploits its various points of vulnerability. It includes:
gathering and analyzing intelligence and information, investigating and prosecuting individuals
involved in the system, using regulatory tools to cut off' access to businesses and financial
institutions, and reaching out to private industry for assistance.
While we have had a number of successes in identifYing and attacking money laundering
systems, we continue to build our knowledge base about the means and effect of the movement of
criminal proceeds around the nation and the world. We are beginning to learn a great deal from
the mining of suspicious activity reports, for example, not only about particular schemes, but
about the system these schemes reflects. Targeting these systems is the source of our greatest
rewards.
I want to end by again commending the Subcommittees for their continuing interest in the
crucial law enforcement issues raised by money laundering. We look forward to working with
you in examining our programs, evaluating our progress, and making corrections where necessary
in our strategies and tactics. Mr. Baity and I would be glad to answer your questions.
-30-
TOTAL P.09
D EPA R T 1\1 E N T
TREASURY
0 F
THE
T REA SUR Y
NEWS
omCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W. • WASHINGTON, D.C .• 20220 • (202) 622·2960
Text as prepared for delivery
April 14, 1999
Contact: Public Affairs
(202) 622-2960
TREASURY SECRETARY ROBERT E. RlJBIN REMARKS 01\ USA ACCOUNTS
It is a pleasure to join you all today to talk with you about the President's proposal to help
Americans save for retirement through new Universal Savings Accounts.
As a result of President Clinton's strong leadership in restoring fiscal discipline to our
country, we have moved from an era of large and growing budget deficits to actual budget
surpluses now and projected budget surpluses well into the future and to what is almost
universally considered the best economic conditions in many decades. The consequence of that.
I believe, is an historic opportunity to increase national savings for the long term and to improve
retirement security. The President has put forward a strong plan to realize exactly that
opportunity.
President Clinton's budget plan would reduce the publicly held debt of the federal
government by over two thirds to its lowest level as a percentage of the total economy since
before World War I. That use of the projected surplus is a powerful contribution to impro\'ing
national savings. In addition, the President's plan would extend the solvency or exhaustion datcs
of the Social Security and Medicare trust funds. To further increase national savings. he has
proposed a strong new incentive for personal savings which we are discussing today. Uni\'ersal
Savings Accounts. The reduction of the federal debt and the Universal Savings Accounts. taken
together, would apply roughly 89 percent of the projected budget surpluses to increasing national
savings. That. in turn. should result in lower interest rates. more investment. greater job creation.
and higher standards of living. Other uses of these surpluses might be more popular. but just as
deficit reduction and the restoration of fiscal discipline. beginning with the President" s po\\erful
deficit reduction program of 1993, have been central to the strong economic performance of the
last six years, so too will fiscal discipline be critical to promoting strong economic conditions in
the years and decades ahead.
RR-3082
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'U S Gove<nment Pnnl,r0':l Ott,ce 1998· 61,..559
With respect to USA Accounts, let me make a couple of observations. These accounts
will be separate from Social Security, and as such, offer an innovative way to promote savings
with contributions from the government while at the same time maintaining Social Security as
the bedrock of our nation's retirement system. They will especially benefit the 50 percent of
Americans who do not have an employer-provided retirement saving vehicle.
Let me close by saying once again that I believe that we have a historic opportunity to use
the fruits of the fiscal discipline of the last six years and the economic growth it helped produce
to best position our country for growth and economic well being the years ahead through
increasing national savings and retirement security.
Now it is my pleasure to introduce Andrew Goldschmidt and his wife Theresa, from
Drexel Hill, Pennsylvania, who can explain how USA Accounts will benefit their family.
- 30 -
NEWS
OFFICE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIllNGTON, D.C .• 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
April 15. 1999
Contact: Public Affairs
(202) 622-2960
TREASURY ANNOUNCES CIVIL PENALTIES FOR CUBA TRAVEL VIOLATIONS
The Treasury Department's Office of Foreign Assets Control (OFAC) recently settled
claims for embargo travel violations to Cuba by two Miami airline charter companies and a
national magazine.
•
C&T Charters, Inc., paid a $125,000 penalty settlement to OFAC for allegations of acting as
the operator of charter flights between Nassau, Bahamas and Havana, Cuba, without OFAC
authorization. and for record keeping deficiencies found during compliance audits by OF AC. Wilson
International Services, Inc., paid $61,000 to settle alleged record keeping deficiencies found during
OFAC audits. In September, 1998 following an investigation, OF AC suspended the licenses of both
companies to provide travel-related services to Cuba.
•
Harper's Bazaar paid $31,000 in settlement of allegations that it engaged in unlicensed
payments for travel expenses in 1998 for a photo shoot in Cuba.
"These penalty settlements serve to emphasize our strong commitment to fully enforce travel
restrictions to Cuba, even as we work to implement new humanitarian measures under the embargo
in support of the Cuban people," said OFAC Director Richard Newcomb.
All travel-related transactions involving Cuba by persons subject to U.S. jurisdiction remain
highly regulated and travel for tourism and unlicensed business purposes remains strictly prohibited.
OFAC investigates several hundred reports of unlicensed travel to Cuba each year, with many of these
cases resulting in a civil penalty proceeding.
Economic sanctions were imposed against Cuba in 1963 to exert financial pressure against
Fidel Castro's regime. Most economic transactions are prohibited, unless otherwise authorized by
OF AC. Criminal penalties for violation of these sanctions range up to 10 years in prison,
$1 million in corporate fines and $250,000 in individual fines. Civil penalties of up to $55,000 per
violation may also be imposed. Since October 1992, the effective date of OF AC's civil penalty
authority, Treasury has collected more than $2 million in civil monetary penalties for Cuba embargo
violations.
-30-
-
RR-3083
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-
DEPARTMENT
OF
THE
TREASURY
NEWS
OFFICE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
TENTATIVE PRESS SCHEDlJLE FOR THE
APRIL G-7 MEETING AND THE SEMINAR ON INTERNATIONAL
FINANCIAL ARCHITECTURE
NOT FOR RELEASE OR PUBLICATION, for news planning only.
Times are tentative and subject to change.
Tgpe cleared into April 26press conference:
Phyllis Kayson (202) 622-2960
Treasury Department Contact:
Daniel Israel (202) 622-2960
** All Treasury. White J IOllse, Congn:ssionaL :-:itntc and Defense Department credentials will he admitted tll the
Treasury press roOIll from Apnl 21 thrOllgh April 2X and to the (;-7 press conferellce The TreasUlY press
is Room 1027 Main Treasury. 1500 Pellllsy1v(llll;) A\'CIlIIC, NW. If )'OU do not have one of these
crcdentiah, pleasl~ call (202l (,22-2l)(JliuI 1~1'.; your n:II11C, orgallll.:ltioll, date of birth and s(lew1 security
room
number 1(1 (202) (,22 I ()l)9
Oil (ll
bc.:~t()rl~
/\pril 2()
**
Wednesday, April21, 1999
SECRETARY ROBERT E RU131N SPEECH
School of Advanced International Studies, Kenney Auditorium
Nitze Building, 1740 Massachusetts Avenue N.W.
Washington, D C.
Remarks: International financial architecture
II a.m. EDT
OPEN PRESS
Sunday, April 25
SEMINAR ON INTERNATIONAL FINANCIAL ARCllITECTURE
Westin Failfax
2100 Massachusetts Avenue, N W.
Washington, D.C
(Please note: the seminar itself is closed to the press.)
ARRIVALS
Westin Fairfax. Massachusetts Avenlle entrance
945 a.m. EDT
OPEN PRESS
NOT fOR
R/~L"-'A')'''-'
OR !)UHUCA TION, jiJl' nell'S planning only
tllllC.I'
orc
/('/'I/(/liv('
RR-3084
For press releasel, speeches, public schedules and official biographie\, call our 24.fzour/ax line at (202) 622-2040
2
Monday, April 26
MEETING OF G-7 FTNANCE MINISTERS AND CENTRAL BANK GOVERNORS
Meridian House, 1630 Crescent Place, N.W.
Washington, D C.
(Please note: parking is quite limited in the an'a sUlToullding Meridian Bouse.)
ARRIVALS
Driveway of the White-Meyer House, 1624 Crescent Place, N.W.
Noon EDT
OPEN PRESS
CLASS PHOTO
Finance Ministers and Central Bank Governors
Meridian House, 17th Street gate
130 p.m. EDT
CAMERAS ONLY
(Please note: nlin site inside Meridian HOllse will be pool coverage only.)
G-7 MEETTNG
Meridian House
1:45 p.m. EDT
POOL SPRA Y AT TOP OF WORKING SESSION
(Please Ilote: Pool coverag{' only. See pool details at end of schedule.)
SECRETARY RUBTN POST-G-7 PRESS CONFERENCE
Treasury Department, Cash Room
1500 Pennsylvania Ave, N.W.
Washington, D.C.
6 p.m EDT (time tentative, dependent upon the conclusion of the G-7 meeting)
Pre-set 4:30 p.m.
OPEN PRESS
(Please note: an embargo will be sd at the end of the press ('onference.)
POOL INFORMATION:
Network TV Pool: TBD (Will be distributed
event)
hOlll
the White HOLise immediately following the
Independent/International TV Pool: Reuters Financial Television (Cieorge Tamcrlani,
898-0056)
Print/wire Pool: Bloomberg Business News. (Any verbal pool reports will be given at the
Treasury press room immediately following the event.)
Photo Pool: High resolution JOO dpi jpeg photos available at
11'11'11'. lr('({.\.,1,'() I , press
NOT FOR RFfYASE OR PUBLICA nON, ji)r news pianl1lllg ollly.
j'jI/lCS
are tcntatlve
DEPARTMENT
OF
THE
NEWS
TREASURY
OFFICE
or
TREASURY
PUBLIC AFFAIRS. 1500 PENNSYLVANIA A\,DIUE, :". W.• WASHINGTON. D.C .• 20220. (202) 622-2960
UNTIL 2:30 P.M.
April 15, 1999
~ARGOED
CONTACT:
Office of Financing
202/219-3350
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction two series of Treasury bills totaling
approximately $15,000 million to refund $65,561 million of publicly held
securities maturing April 22, 1999, and to pay down about $50,561 million.
The amount of maturing publicly held securities includes the 65-day cash
management bills issued February 16, 1999, in the amount of $8,027 million, and
the 52-day cash management bills issued March 1, 1999, in the amount of $42,000
million.
In addition to the public holdings, Federal Reserve Banks for their own
accounts hold $7,446 million of the maturing bills, which may be refunded at
the highest discount rate of accepted competitive tenders. Amounts issued to
these accounts will be in addition to the offering amount.
The maturing bills held by the public include $6,283 million held
by Federal Reserve Banks as agents for foreign and international monetary
authorities.
Up to $3,000 million of these securities may be refunded within
the offering amount in each of the auctions of 13-week bills and 26-week bills
at the highest discount rate of accepted competitive tenders. Additional
amounts may be issued in each auction for such accounts to the extent that
the amount of new bids exceeds $3,000 million.
TreasuryDirect customers requested that we reinvest their maturing
holdings of approximately $781 million into the 13-week bill and $587 million
into the 26-week bill.
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
~f Treasury securities is governed by the terms and conditions set forth in
the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
rreasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offerLng highlights.
RR-3085
000
For press releases, speeches, public schedules and official biographies, caJl our 14-11 Oil r fax lin/!
01
(101) 622-2040
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED APRIL 22, 1999
April 15, 1999
Offering Amount . . . . . . . . . . . . . . . . . . . . . . . . . $7,500 million
Description of Offering:
Term and type of security . . . . . . . . . . . . . . . 91-day bill
CUSIP number . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912795 BZ 3
Auction date ............................. April 19, 1999
Issue date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 22, 1999
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . July 22, 1999
Original issue date . . . . . . . . . . . . . . . . . . . . . July 23, 1998
Currently outstanding . . . . . . . . . . . . . . . . . . . $26,593 million
Minimum bid amount and multiples ........ $1,000
$7,500 million
182-day bill
912795 CS 8
April 19, 1999
April 22, 1999
October 21, 1999
April 22, 1999
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids .......... Accepted in full up to $1,000,000 at the highest discount rate of
accepted competitive bids.
Competitive bids . . . . . . . . . . . . . (1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 7.100%, 7.105%.
(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 $1 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 ....... 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: By charge to a funds account at a Federal Reserve Bank on issue date, or payment
of full par amount with tender. TreasuryDirect customers can use the Pay Direct feature which
authorizes a charge to their account of record at their financial institution on issue date.
NEWS
TREASURY
OFFICE OF PUBUCAFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
April 16, 1999
Contact: John Longbrake
(202) 622-2960
TREASURY ANNOUNCES $600,000 COMMUNITY ADJUSTMENT GRANT TO
NEW MEXICO BORDER AUTHORITY
The Treasury Department announced Friday that the Community Adjustment and
Investment Program (CAIP), an affiliate of the North American Development Bank, awarded a
$600,000 grant to the New Mexico Border Authority for job training in Dona Ana county. The
grant is the first award of the CArp's new grant and technical assistance program.
Working with the New Mexico Border Authority, the CAIP developed both short- and
long-term strategies to assist workers in Dona Ana county. The CAIP grant will be used to
begin training workers immediately for jobs that are being created by the private sector at the
rate of approximately two each day, thereby helping to ensure continued expansion of new and
existing industry along the New Mexico border. In the first year, the program plans to train
approximately 900 workers to fill new jobs and retrain 400 currently employed workers.
Additionally, the program will assess the skills of unemployed and underemployed workers in
the region to develop a long-term training program.
The CAIP is providing its grant as seed money and is working with the Department of
Labor, the Economic Development Administration and local private entities to expand the job
training program over the next few years. The planned expansion includes an apprentice
program for local youth and ultimately the establishment of a permanent job training center to
service the entire New Mexico border region.
The CArp encourages and fosters economic opportunities within communities that have
experienced temporary job displacements related to implementation of North American Free
Trade Agreement. To date, the program has facilitated more than $155 million in loans and
loan guarantees in 25 states, helping to create or preserve over 5,100 jobs.
The CArp is a domestic program affiliated with the North American Development
Bank (NADBank), an international financial institution jointly capitalized and governed by the
United States and Mexico to finance environmental projects along the U .S./Mexico border and
to provide financial assistance for domestic community adjustment and investment in both
countries. Approximately 10 percent of the U.S. contribution to the NADBank is earmarked
for domestic needs which are addressed by the CAIP.
-30RR-3086
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D EPA R T 1'1 E N T
0 F
THE
T REA SUR Y
~/78~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . ..
............................
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASlDNGTON, D.C. • 20220. (202) 622.2960
Text as Prepared for Delivery
April 19,1999
ASSISTANT SECRETARY OF THE TREASURY FOR INTERNATIONAL AFFAIRS
EDWIN M. TRUMAN
REMARKS TO THE EBRD ANNUAL MEETING
LONDON, ENGLAND
I am pleased to attend the Annual Meeting of the EBRD Board of Governors for the first
time. I am delighted to use this occasion to extend a warm welcome to President Koehler and to
express appreciation to Charles Frank for filling in during the search for a new president. We
have been colleagues in the past and, as a personal matter, it is a pleasure to work with them
agam.
Although the EBRD's management transition now is complete, the past year has been one
of dramatic change for the Bank involving difficult setbacks for many of its borrowers. We call
on the EBRD and its borrowers to rise to these challenges: to promote sound governance, to
move reforms forward because of, not in spite of, current economic difficulties, and to help the
people of Southeast Europe cope with the crisis in Kosovo. Thoughtful and proactive
approaches to these issues today will advance the region's transition, a process essential to
improving the quality of life in borrowing countries to the benefit of us all.
Now I will reflect on the relevant lessons of recent developments for the EBRD's
borrowers, as well as on how the EBRD can best help its borrowers respond.
Re~ional
Developments and Lessons
It is difficult to avoid the conclusion that the environment for economic transition in
which the EBRD operates has become more unforgiving. Investor jitters about emerging market
economies have led to increased scrutiny of financial vulnerabilities and economic risks in the
region served by the EBRD, as well as elsewhere. Events in Russia have rocked markets and
continue to introduce significant uncertainties in investors' assessments of other countries in the
region.
RR-3087
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"Il S Government Pfln!lnr] Office 1998· 619·5SQ
The external financial environment is not the only one which has hardened. There is
increasing evidence that where reforms have been delayed the tolerance for ongoing hardships is
diminished. The risk is that the citizens in these countries will blame reform for what is really
the consequence of a failure to reform, or to reform more completely. Change brings dislocation
and uncertainty~ unless it produces tangible positive results for broad segments of society. it will
be met with increasing resistance.
Half-reforms themselves create entrenched interests and political and economic barriers
to further reform. For example. when privatization shifts ownership to former state managers
intent, at best, on preserving old ways and, at worst, on asset stripping. The result of half reforms
is resistance to: market-opening measures, increased competition, better corporate governance.
protection of the rights of minority shareholders, accountability for managerial performance. and
improvements in firm accounting and disclosure. In sum, the battle that emerges is one between
rent-seekers and reformers, and. in many ways, it becomes easier for rent-seekers to gain political
support.
In this regard, countries face the challenge not only of designing the reform program
itself, but also the challenge of designing an effective political strategy. Looking around the
region, increased effort should be focused on political strategy. This means. for example.
devising politically saleable tax reforms which trade off lower rates for broader coverage~ making
explicit linkages between increased spending on health and education and cuts in subsidies to
loss-making enterprises; pursuing financial reforms which help to make more capital available to
small and medium-size enterprises while making less available to large nonviable enterprises. In
the most fundamental sense, it means working toward a more responsible and responsive
political system, where the executive branch discusses the merits of economic reforms with the
parliament.
There is no substitute for political systems that are transparent and accountable, and
institutions headed by people with the political authority to act. Countries can import financial
structures and technical expertise to some degree, but they cannot import political will.
Do the recent crises demonstrate the failure of the market transition model or that it is
inapplicable to some countries? I would argue that recent experience instead forces economists
to look at the deeper context in which economic and financial policies are formulated and
implemented. Is the slow transition progress of some countries in the region as being due to the
absence of experience with capitalism, weak rule of law, or fragile market institutions? Does it
point to historical and cultural factors as well? We should look to an even more basic deficit: the
absence of a broadly shared and well functioning social contract. At all levels, trust of
government is built on whether it can deliver the goods. This basic trust must be established if
corruption and cronyism are to be overcome. This is what President Koehler referred to as
building a strong state.
I also would like to highlight some bright spots in the region. JUdging by the relatively
brief and mild contagion effects on Poland and Hungary, I am encouraged that investors have
placed these, and some other countries in the region in fundamentally better risk categories.
These assessments have survived both financial and civil unrest in the region. Bulgaria has
continued to move from crisis to the establishment of real credibility. Meanwhile, the Slovakian
authorities are beginning to focus on needed fiscal and external adjustments and structural
reforms.
We hope that with the intensive engagement of the IMF and the World Bank the
Romanian government can launch a new program combining both fiscal and structural reforms.
Ukraine's government has also addressed fiscal reform more resolutely. This momentum must
spread to embrace structural reforms.
More recently, the brutal expulsion of the Kosovar Albanians has created a humanitarian
catastrophe of enormous proportions in Southeastern Europe and sent an economic shock wave
through the region. It is self-evident that neighboring countries cannot manage these multiple
challenges, but need substantial outside assistance. In this context, the Clinton Administration
intends to make a request to Congress for a supplemental budget increase for neighboring
countries. It includes funds for refugee and security assistance, as well as emergency balance of
payments support for those countries strongly impacted by these events. Our support, combined
with that of the European Union, other donors, and importantly the international financial
institutions, should provide substantial help in dealing with pressing problems that threaten to
overwhelm the capacity of these governments to cope. Continued commitment to, and
implementation of, economic and financial reform is essential to the reestablishment of stability
and growth. Kosovo' s neighbors must not add a failure to deliver on the promise of reform to
the immense costs of this conflict.
This crisis also raises the pressing question of how the EBRD can help. Although
EBRD's activities are not aimed at providing humanitarian assistance, we look to Management to
think creatively about how it can help the people of Southeast Europe -- by accelerating its
project pipeline; supporting infrastructure projects that enable providers of humanitarian
assistance to better reach affected peoples; and creating micro and small lending and trade
facilities.
EBRD Operational Priorities
Turning to the EBRD's own operational priorities, we believe EBRD's original
conception -- as an instrument of democratization -- remains its principal source of value-added.
The EBRD must seek transparency and accountability from its borrowers, both public and
private.
For the public sector, transparent economic governance instills accountability, promotes
the efficient allocation of a country's resources, and fosters market confidence. Transparency
allows a society to construct the necessary checks and balances which can help prevent cronyism,
directed credit mechanisms, wasteful budgetary expenditures, and acute financing problems.
Reliable and available economic, financial and budgetary data are essential elements of
transparent governance. The intense financial pressures facing Russia, Ukraine, and Romania
highlight that sound fiscal choices, made transparently, and that prioritize productive government
spending over unproductive spending, are essential to promoting the transition to a market-based
economy. Goverrunents should recognize that sovereign borrowings are never a substitute for
adequate tax collection systems. Key to creating a culture of voluntary tax compliance is
confidence on the part of the public that fiscal choices are transparent and contribute to the
material well-being of the population. Thus, sound and transparent governance is critical to a
country's economic development. For this reason, we believe the Bank must exercise selectivity
in its choice of public sector borrowers.
The U.S. vision of the EBRD is an institution principally focused on private sector
development to foster the transition of the countries in the region to democratic and marketoriented societies. To this end the EBRD should:
•
continue to focus on high-impact projects, especially in early transition countries:
•
engage goverrunents in clear dialogue about the underpinnings necessary for a strong
investment climate;
•
enhance coordination with other IFls and bilateral donors to strengthen institutional and
governance frameworks; and
•
seek to raise standards of corporate governance through its investments.
In fulfilling its mandate, the Bank, for its part, also must be transparent with the public,
member goverrunents, and other IFls about its own operations. The EBRD should be a model for
openness, improve its own information disclosure policy, and provide more information on its
country assistance and sector strategies as well as on projects in its pipeline. However.
promoting public participation is only part of the process, the EBRD must also seek to
incorporate, as appropriate, public feedback into project design.
The Bank must focus on areas where it can provide both positive transition impact and
additionality, such as financial sector reform, capital market development, and corporate
governance. We recognize EU accession is an important objective in most Central European
countries, which affects these countries' investment decisions and priorities. However, as
aspiring members of the European Union, these countries should, in theory, enjoy access to
international capital markets; infrastructure projects in advanced transition countries are more
properly financed through market borrowings.
Core Labor Standards and Environment
We would like the EBRD to focus on two other issues in the coming year: supporting
core labor standards and promoting cleaner, more efficient energy production and use through
out the region. First, we ask that the Bank follow through on the U.S. request to assess labor
issues and reforms, including core labor standards, as part of its country strategies. The World
Bank has committed to do this pursuant to the IDA-12 replenishment agreement as has the
African Development Bank. The U.S. supports the Declaration on Fundamental Principles and
Rights at Work, ratified by the ILO in 1998. The Declaration commits all ILO members to
support the core labor standards of free association and collective bargaining and prohibitions
against exploitative child labor, forced labor. and discrimination in employment. Given that all
EBRD
member countries voted in favor of the Declaration. the Bank should develop an internal
screening mechanism to ensure that its projects do not violate core labor standards.
Second. the EBRD needs to take better account of local and regional environmental
impacts of energy use in its project selection and development. At the end of the day. it does not
make sense to cut comers on power plant emission standards only to face higher health care
costs. To this end, the Bank should promote investments in: supply-side and demand-side energy
efficiency. cleaner fossil fuels and combustion processes, and renewable energy to combat global
climate change.
Conclusion:
In sum, we urge the Bank to remain engaged and its borrowers to move reforms forward
even in difficult times. Together we can build market economies and democratic societies that
provide people in the region with the opportunities to improve their lives. We have confidence
in President Koehler's ability to guide the EBRD in moving us closer to this goal.
-30-
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
t IMMEDIATE RELEASE
~il
Office of Financing
202-219-3350
19, 1999
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term:
91-Day Bill
April 22, 1999
July 22, 1999
912795BZ3
Issue Date:
Maturi ty Date:
CUS I P Nurnbe r :
4.230%
High Rate:
Investment Rate 1/:
4.346%
Price:
98.931
All noncompetitive and successful competitive bidders were awarded
at the high rate. Tenders at the high discount rate were
ctted
9%. All tenders at lower rates were accepted in full.
~urities
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered
Tender Type
Ccmpet i t i ve
Noncompetitive
$
23,913,942
1,186,770
$
25,100,712
PUBLIC SUBTOTAL
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
TOTAL
Accepted
$
6,223,907
1,186,770
7,410,677 2/
105,000
105,000
25,205,712
7,515,677
3,790,500
3,790,500
o
o
28,996,212
$
11,306,177
Median rate
4.210%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
4.160%:
5% of the amount
lccepted competitive tenders was tendered at or below that rate.
to-Cover Ratio
=
25,100,712 / 7,410,677 = 3.39
:quivalent coupon-issue yield .
.wards to TREASURY DIRECT = $864,095,000
3088
http://www.publlcdebt.treas.gov
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
t IMMEDIATE RELEASE
~il
CONTACT:
Office of Financing
202-219-3350
19, 1999
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
April 22, 1999
October 21, 1999
912795CS8
Term:
Issue Date:
Maturi ty Date:
CUSIP Number:
4.370%
High Rate:
Investment Rate 1/:
4.543%
Price:
97.791
All noncompetitive and successful competitive bidders were awarded
urities at the high rate.
Tenders at the high discount rate were
atted 54%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tendered
Tender Type
Compet i t i ve
Noncompetitive
$
22,089,022
959,891
23,048,913
PUBLIC SUBTOTAL
SUBTOTAL
Federal Reserve
Foreign Official Add-On
$
3,984,502
959,891
4,944,393 2/
2,561. 200
2,561,200
25,610,113
7,505,593
3,655,000
3,655,000
o
o
Foreign Official Refunded
TOTAL
$
29,265,113
$
11,160,593
Median rate
4.360%: 50% of the amount of accepted competitive tenders
tendered at or below that rate.
Low rate
4.260%:
5% of the amount
ccepted competitive tenders was tendered at or below that rate.
to-Cover Ratio
=
23,048,913 / 4,944,393
=
4.66
quivalent coupon-issue yield.
wards to TREASURY DIRECT = $656,532,000
R-3089
http://www.publlcdebt.treas.gov
D EPA R T 1\1 E N T
0 F
THE
T REA SUR Y
NEWS
TREASURY
ornCE OF PUBUC AFFAIRS -1500 PENNSYLVANIA AVENUE, N.W. - WASHINGTON, D.C. - 20220 - (202) 622.2960
Weekly Release of U.S. Reserve Assets
April 20, 1999
The TreasulV' Department today released LJ .S. reserve assets data for the week end10g
April 16, 1999.
As 10chcated 10 tills table, C.S. reserve assets totaled $74,270 million as of ApnJ 16, 1999, up
from $73,917 rrulbon as of April 9, 1999.
U.S. Reserve Assets
(millions of US dollars)
1999
Total
Reserve
Week Ending
Assets
Special
Gold
Stock
1/
Foreign
Currencies
Reserve
31
Drawing
R"Ig ht S 21
ESF
SOMA
Position in
IMF 21
April 9, 1999
73,917
11,047
9,660
15,019
15,006
23,184
April 16, 1999
74,270
11,047
9,674
15,161
15,172
23,216
15 valued monthly at $42.2222 per fille troy ounce. Values shown are as of Fe bruary 28, 1999. 11le Januarl 31,
1999 value was $11,048 million.
1/ Gold stock
2/ SDR holillngs and the reserve pOSItion in the IMF are based on I~fF data and revalued ill dollar terms at the offlclal
SDR/ dollar exchange rate ConsIstent with current reporting practices, IMF data for Apnl 9, 1999 are filla!' Data for SDR
holdings and the reserve posmon in the IMF shown as of Apnl 1G, 1999 (in italics) reflect prelurunary adJustments bl the Treasury
to the April 9, 1999 Ii\fF data.
3/ Includes holdmgs of the Treasury's Exchange StabilizaTIon Fund (ESF) and the Federal Reserve's System Open \[arket
Account (SOMA). These holillngs are valued at current market exchange rates or, where appropnate, at such other rates as rna\
oe
agreed upon by the parnes to the transactlOns.
,\R-3090
For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
·U S Governrnen: Prlntln~.J OHtce 'j98
6 19-:'.:1
TREASURY
NEWS
~8~q~. . . . . . . . . . . . . ..
..............
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20220. (202) 622-2960
EMBARGOED UNTIL 2:00 P.M. EDT
Text as Prepared for Delivery
April 20, 1999
TREASURY UNDER SECRETARY (ENFORCEMENT) JAMES E. JOHNSON
HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
AND SUBCOMMITTEE ON GENERAL OVERSIGHT AND INVESTIGATIONS
Mr. Chairman, Madam Chairwoman, ranking members, indeed all members of the General
Oversight and Financial Institutions Subcommittees, good morning. I welcome the opportunity to
discuss one of the most critical issues facing law enforcement today: the role of the Bank Secrecy
Act (BSA) in the fight against financial crimes, particularly money laundering.
Combating money laundering is a key law enforcement priority within the Treasury
Department. As Secretary Rubin has noted more than once, criminals will try every means to
separate themselves from their illegal operations, but they cannot -- will not -- separate
themselves from their illegal profits. These profits are both the root and fuel for organized crime - for the drug trafficker as well as the terrorist. The criminal's inability to separate himself from
his profits means, therefore, gives us a powerful point to attack both money laundering and the
underlying criminal activities. Both Chairs took note of this fact last Thursday when they
observed that money laundering is the life blood of criminal organizations that flood our streets
with illegal drugs and guns, and enables the financial criminal, the tax cheat and fraudster, to
thrive.
I appreciate having this opportunity to discuss the Bank Secrecy Act -- the foundation for
our anti-money laundering efforts. To those who suggest that we return to the days before the
BSA, before currency transaction reports were required, before suspicious activity reports were
authorized, I say this: Those days were not good. They were not good for the banks. They were
not good for law enforcement. They were not good for the nation. We cannot risk a return to
the days before the BSA when criminals could stroll into our financial institutions with bags full of
cash to be laundered and fuel their continuing criminal schemes.
I thank the members of both subcommittees for their longstanding support of the BSA as a
powerful law enforcement tool and a safeguard for the integrity of our financial institutions
against financial crime, generally, and, in particular, money laundering. The BSA is a powerful
RR-3091
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/
and effective law enforcement tool because it addresses each of the three stages of the money
laundering process: the "placement" stage in which funds are introduced into the financial system
in order to move them away from direct association with the crime that generated them; the
"layering" stage involving complex financial transactions to disguise origin, ownership and
destination and,thus, to foil pursuit; and, the "integration" stage in which the money is made
available to the criminal once again with its criminal origin hidden from view.
BSA -- Foundation for Our Attack
Treasury's comprehensive attack on money laundering is built upon the foundation
provided by the BSA which, among other things, authorizes the Secretary to require of financial
institutions adequate records to assure that the details of financial transactions can be traced when
necessary, as well as reports on large transactions in currency and suspicious activities.
Building on this foundation over the last five years, and looking at US. Customs and IRS
alone in the last year, we have made tremendous strides against money launderers. Through
effective use of the regulatory tools provided by the BSA, with close interagency cooperation,
and with close collaboration with bank regulators and financial institutions, law enforcement has
made significant cases against money laundering organizations. For example, IRS - Criminal
Investigation Division (CID) alone initiated a total of 1059 (373 fraud related; 686 narcotics
related) money laundering investigations. The total "provable" amount of money laundered in
these cases amounted to $1.6 billion. IRS-CID seizures in 1998 amounted to $120 million.
Meanwhile, US. Customs seized $426.6 million in 1998, a substantial increase over seizures of
$240.5 million for 1997 and $281.5 million for 1996. A measure of the effects of this law
enforcement activity is the greater cut demanded by money launderers for their services.
Anecdotal evidence from Customs and IRS informants indicates, for example, that the fees
charged by money launderers avoiding US. financial institutions and working through Mexican
casas de cambio increased by approximately four percentage points, while fees charged by illicit
casas de cambio have almost tripled.
The Challenge
Notwithstanding these successes, our efforts must continue. As the Office of National
Drug Control Policy reports in its National Drug Control Strategy for 1999, Americans spend $57
billion each year on illegal drugs alone. I Law enforcement experts have estimated that illicit
drug traffickers enjoy an 80% profit margin. That being the case, illegal drug sales in the U.S.
generate an estimated $45.6 billion in profits. With these profits in hand, criminals have at their
immediate disposal the best tools that money can buy, the best lawyers and accountants, the latest
in computer, communications, and banking technology. Our vast semi-permeable borders and the
globally interlinked financial systems would create for the money launderer a seamless
environment for his crime which, in any event, neither respects nor knows any borders.
I
Office of National Drug Control Policy, National Drug Control Strategy for 1999, at p. 17.
-2-
Meeting the Challenge
How do we meet this challenge? Due to the BSA reporting and record keeping
requirements, the U. S. financial system has become more transparent and, accordingly, more
inhospitable to money launderers. These facts, coupled with the federal governments' success in
bringing tougher cases has driven narcotics traffickers and their money launderers increasingly
away from u.s. financial institutions.
Indeed, recent trends point to a marked increase in bulk smuggling of cash. Seizures of
bulk cash shipments at U. S. ports of entry have become almost routine at major air and seaports
in the United States. Large bulk cash seizures have been reported in the past year in New York,
New Jersey, Chicago, Miami, Los Angeles and across the Southwest Border.
Just last year, the United States Customs Service, working with Assistant US Attorneys
around the country, concluded Operation Casablanca, the largest drug money laundering
investigation in U.S. history. In Casablanca, investigators targeted both the infrastructure of the
Juarez and Cali cartels and the financial systems they used to launder their U.S. drug proceeds.
To date, Operation Casablanca has resulted in guilty pleas from, among others, two Mexican
banks and eighteen Mexican bankers and their associates. As Assistant Commissioner Tischler
points out in her statement, Customs used BSA information to complement its other investigative
techniques. Moreover, this operation highlights the synergies from collaboration between
investigative bureaus and regulatory agencies. In addition to providing technical support, the
Federal Reserve coordinated enforcement actions against selected financial institutions to coincide
with the release of Casablanca indictments.
These and other anti-money laundering successes are the direct result of our three part
strategy. First, and building upon the foundation established by the BSA, Treasury and bank
regulators have worked vigorously to ensure the transparency of the U. S. financial system and,
simultaneously, to make it inhospitable to money launderers. Second, through vigorous law
enforcement use of the tools provided by the BSA and the enhanced investigations these enable,
federal law enforcement has been able to score big successes against organized crime in cases like
Casablanca. Third, through close cooperation with our overseas partners Treasury has made
great strides in establishing and securing effective implementation of universally accepted
minimum standards for anti-money laundering regimes instituted by governments' worldwide. The
BSA helps set the standard against money laundering worldwide.
The BSA coupled with vigorous enforcement and effective use ofBSA information and
other tools help level the playing field. Without it, law enforcement would be forced to play John
Henry to the steam engine run by organized criminals.
-3-
Using the BSA
For nearly thirty years, the BSA has provided an important foundation for our strategy.
The two most important reporting rules authorized in 1970 were the reporting by financial
institutions oftr~msactions in currency in excess of$10,000 (using the Currency Transaction
Report, or "CTR") and the reporting of the transportation of currency and bearer instruments (in
amounts initially in excess of $5,000--now in excess of $10,000) into or out of the United States
(using the Report oflnternational Transportation of Currency or Monetary Instruments, or
"eMIR").
These BSA reporting requirements were enhanced by the 1992 Annuzio-Wylie Act, which
provided for reporting of transactions that -- notwithstanding the failure to trigger any automatic
reporting event or threshold -- create the suspicion of potentially illegal activity. The suspicious
activity reporting regime was, in tum, refined by the provisions of the 1994 Money Laundering
Suppression Act and by related regulatory measures taken by the Treasury Department that led to
the development of the current Suspicious Activity Reporting System (SARS). All of these
provisions are vitally important to our anti-money laundering mission.
Without the information provided through the CTR, CMIR, and SAR requirements, law
enforcement would have neither the resources nor the legal authority it requires to obtain
sufficient information regarding transactions and activities related to money laundering and other
financial crimes. Additionally, through the BSA reporting regime, an effective partnership is
formed between law enforcement and u.s. financial institutions. It bears repeating that banks are
our most effective allies in the fight against money laundering. Banks and other financial
institutions are far better able to identify a transaction or patterns of transaction that are
suspicious, that have no apparent economic motive or rational relationship to the customer's usual
pattern of business conduct.
By engaging the expertise of such individuals through the BSA, law enforcement is
provided with an invaluable tool in the attack on the underlying criminal schemes and
organizations, while protecting the integrity of financial institutions and financial payment
systems. Without this partnership, the essential trails for use by law enforcement and the essential
protection of the integrity of financial institutions would be jeopardized.
As a "roadmap," SARs and CTRs may serve an equally crucial function of confirming
investigators' suspicions or broadening investigators' knowledge of a particular criminal
organization. The added knowledge can reveal additional associates, pinpoint new bank accounts,
or create a more focused picture of the size or operating methods of the suspects. The knowledge
provided by SARs can focus attention on new parts of the "money trail;" or it can confirm
investigators' judgments and shorten the time and effort necessary to track down evidence of
wrongdoing provided by that trail. In still other cases, the SARs and CTRs may point out that a
new investigation is not properly focused.
-4-
Examples of BSA Usefulness
I would like to give the Committee two examples of cases which were made as a result of
BSA reports.
In U.S. v. Festus Nwankwo. et al., BSA reports and a related investigation revealed that
Nwankwo, a New Jersey phannacist defrauded the Medicaid program of approximately $5.5
million by fraudulently obtaining Medicaid numbers and prescription slips and then falsely billing
federal and state medical assistance programs for non-existent prescriptions. The Newark U.S.
Attorney's Office and IRS used BSA reports filed in connection with this criminal scheme to help
build the largest Medicaid fraud case in the nation to date. Once the phannacist in this case
became a cooperating defendant, investigators were also able to bring to culmination three other
associated cases. Using the forfeiture procedures available in money laundering cases, the
Government has recovered a total of$5.5 million in this case, money which had been laundered
through various bank and investment accounts.
In a second case U.S. v. Arlynn E. Knudsen. et aI., a SAR filed by a credit union in Rapid
City, South Dakota, indicated certain persons were trying to avoid currency reporting
requirements by structuring deposits in amounts under $10,000. This SAR and the investigation
that followed uncovered a scheme to embezzle approximately $2.7 million from a South Dakota
College and resulted in a case where seven individuals were charged in a 125-count indictment
with money laundering, structuring, conspiracy, obstructing of justice, and tax evasion. The
primary defendant in the case received a sentence of 10 years in custody and was ordered to pay
restitution in the amount of $2.6 million. The co-defendants received sentences ranging from 24
months to 97 months in custody. The investigation was conducted by IRS-CID, FBI. the
Department of the Interior, and the Department of Education.
In addition to providing a financial trail to underlying illegal conduct, the BSA reporting
requirements provide an important deterrent effect that push criminals to attempt other methods
to launder their money -- and thereby provide law enforcement with additional opportunities to
detect and arrest them. This is one of the chieflessons of Geographical Targeting Order (GTO)
that resulted from the work of Customs' EI Dorado Task Force. Once El Dorado established
that the Cali Cartel was using certain money transmitting services in the New York area to wire
drug profits back to Colombia, Treasury issued a GTO requiring the transmitters and their agents
to report detailed infonnation about the senders and recipients of all cash-purchased transmissions
to Colombia of $750 or more. The likelihood that such transactions would be reported to federal
authorities - and possibly create a paper trail to the underlying narcotics trafficking - led the
Cartel to move toward riskier bulk cash shipments to Colombia. The result was a large increase
in illegal outbound cash seizures and related arrests by U. S Customs.
In addition, as noted, BSA reporting requirements support important safety and soundness
principles. It is axiomatic that financial institutions capitalized with dirty money, as well as
payment systems employed to move such money, are at greater risk than those dealing with
-5-
legitimate assets. BSA reporting requirements help keep such institutions and systems free from
the taint of criminal proceeds.
Another benefit to financial institutions is its help in detecting illegal activity directed at
financial institutions themselves. As Deputy Assistant Attorney General Mary Lee Warren will
testify, the FBI's Financial Crimes Section uses SARs to add value to their investigation of crimes
occurring within financial institutions. In Fiscal Year 1997, the FBI alone reported 2,536 federal
convictions in financial institution fraud matters. The FBI estimates that approximately 98% of
these cases, which resulted in $537 million in restitution, were initiated or enhanced through one
or more Suspicious Activity Reports.
BSA vs. Know Your Customer
In order to make appropriate judgments about the BSA. it is essential to understand that
the recently withdrawn Know Your Customer (KYC) rules were very different from and far more
intrusive than the BSA. in particular SAR reporting requirements. First, and generally, the BSA's
eTR CMIR and SAR requirements are narrow and targeted. They apply to information held not
by the individual, but by a commercial institution.
Turning to SARS specifically, these rules require the reporting of particular transactions
that a bank should know or have reason to suspect can involve illegal activity. This would include
transactions that have no visible or apparent lawful purpose. The SAR rules thus require a bank
to make a particular inquiry only in cases that it knows, suspects, or has reason to suspect a given
transaction may involve illegal activity. The SAR rules do not require that a bank examine the
affairs of every customer.
The KYC proposed rules, in contrast, could be read to mandate a general program to
create a "baseline" for determining if a given customer's affairs vary from the norm. Moreover, a
bank would have to put that baseline in place all at once. The proposed KYC program would
have required systems to determine the identity of new customers, to monitor their transactions,
and to identify transactions inconsistent with the normal and expected transactions for that
customer. As noted by John D. Hawke, Jr., Comptroller of the Currency, in his March 4
testimony before the Subcommittee on Commercial and Administrative Law and the Committee
on the Judiciary, "the proposed regulation ... could have a profoundly adverse effect on the nature
of the relationship banks have with their customers, and consequently, on the banking system as a
whole. Law abiding citizens -- who make up the overwhelming proportion of bank customers -are likely to have serious concerns that their everyday relationships with their banks will be
routinely scrutinized for evidence of misconduct. They will be understandably apprehensive that
their banks will report any transactions that ... don't meet some predetermined customer "profile"
established by a faceless bank employee or some computer program, as a "suspicious activity."
Finally, the proposed KYC rule would also have required greater internal controls and testing of
the program, as well as the designation and training of individuals responsible for monitoring
compliance.
-6-
The Importance of Privacy
I am also aware that concerns have been raised about the privacy implications of the Bank
Secrecy Act. It is not enough simply to state that its provisions have been found by the Supreme
Court to be constitutional. Of course that does not end the discussion, as the Right to Financial
Privacy Act illustrates.
I want, however, to emphasize three things: First, the Department of the Treasury
recognizes the absolute necessity for citizens' faith in the legitimacy of the financial system in all
of its aspects, including the protection of financial infonnation from misuse of any sort. Second,
BSA infonnation is limited to specific categories set by statute, based on law enforcement
experience. Third,.all of the data received by Treasury under the BSA is held in secure fonn and
open for use only by criminal and regulatory officials for use in the course of investigations in
discharge of their legal responsibilities. In the BSA regulations we have struck the right balance
between the needs oflaw enforcement and the interests of the banking public in privacy.
In closing, I would like to thank the Subcommittees and the full Committee for their
support of the BSA and the law enforcement and regulatory personnel who rely upon it.
Thank you, Mr. Chainnan and Madam Chainnan. I would be happy to take any questions
you or the members of the Subcommittees may have.
-30-
-7-
() E P .-\ R T :\. E N T
0 F
TilE
T REA SUR Y
~~178~9~. . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
............................
OffiCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C.• 20220. (202) 622-2960
EMBARGOED UNTIL 10 a.m. EDT
Text as Prepared for Delivery
April 2 1. 1999
DEPUTY TREASURY SECRETARY LAWRENCE H. SUMMERS TESTIMONY
BEFORE THE HOUSE BANKING AND FINANCIAL INSTITUTIONS COMMITTEE
SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL MONETARY POLICY
Mr. Chainnan, Representative Waters, Members of this Committee, I am pleased to have this
opportunity to testify today on the Administration's FY 2000 budget request for Treasury's
international programs, with particular reference to the requests pertaining to the Multilateral
Development Banks and official debt reduction for the poorest countries.
Last year. the leadership of this committee was vital in approving the increases in our quota to
the International Monetary Fund and our participation in the New Arrangements to Borrow.
Your continued leadership is critical again this year to ensure that the international community
remains in a position to respond effectively to financial crises such as those of the past two years
- and contain their effects on the United States and the global economy as a whole.
The financial crises and their costly implications for the countries most affected, and the rest of
the international financial system, have understandably seized the headlines in recent months.
But we must remember that the crises are not and must not be the only focus of the international
financial community at this time.
Looking around the world, there are still very important development needs to be addressed especially in countries that have not so far managed to join the group of emerging market
economies to any significant degree. It is these development needs - and the best means of
addressing of them - which are the focus of my testimony today. But first, let me say a few
words about the background for the Administration's requests in this area.
RR-3092
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'U 5 Governmenl P"nlong Otke 1998 - 619-559
I. Introduction: The United States Approach
The United States' engagement with the global economy is increasingly important to our
economic and national well-being. And the developing world's importance to the global
economy is destined to grow considerably in the future.
More than 90 percent of the world's consumers live outside of the United States. All of the
growth in the world's population over the next 25 years -- and the lion's share of its growth in
productivity -- will take place in the developing world. That gives us an immense and growing
stake in developing countries putting in place policies that will promote market-based,
democratic, and self-sufficient growth.
We know that countries shape their own destiny. Neither the United States, nor the international
community as a whole, can be more committed to growth and market reform than the countries
themselves. Where supported by sound policies, official foreign assistance can be an important
catalyst for market-led development: but our goal must always be to support, and not to supplant
private finance.
In a few moments, I will discuss the very important role that debt reduction can play in this
context. But our requests for the MDBs should be seen as growing out of the same basic
philosophy. To put it bluntly: our requests for these institutions are not about charity or foreign
aid. They are about the way these institutions serve core United States economic and security
interests.
In the past year alone:
•
The MDBs have mobilized more than $25 billion in response to the financial crises in Asia
that is now working to help these countries restore economic stability and market-led growth.
•
They have spearheaded an unprecedented international response to natural disasters in
Central America and Colombia. The World Bank and the InterAmerican Development Bank
have provided $212 million to support relief and reconstruction in the wake of Hurricane
Mitch. and a further $600 million to others in the region suffering the impact ofEI Nino.
•
And they have played. and will continue to play, an integral part in helping to deal with the
immediate and longer-term consequences of recent crisis in the Balkans. World Bank
lending to the Balkan frontline states was $338 million in 1998. Looking forward, it will
soon approve a $30 million fast disbursing IDA operation to Albania, and a $40 million
emergency IDA credit to Macedonia.
2
Support for MDBs delivers maximum United States leverage over development outcOf""'es at
minimum cost to the taxpayer. A few years ago, the United States' participation in these
institutions cost us approximately $1.9 billion a year. Today, after negotiating a more than onethird reduction, our annual obligations to the entire MDB system are around $1.2 billion. Under
the Bush Administration, the United States' annual commitment to the World Bank's
International Development Association alone was $1.25 billion.
Our contribution is levered two ways: first, because every dollar we contribute unlocks many
more from other countries; and second, because it makes possible the release of resources worth
many times the institutions' paid-in capital in the form of project and program loans.
All told, our $1.4 billion contribution buys enormous influence over some $57.1 billion in MDB
lending. Put it another way, each $1 we contribute directly leverages an additional $40 for
economic development that will critically serve United States interests in the future.
While the absolute size of our contribution has declined in recent years, we have successfully
maintained the United States' formal and informal leverage within these institutions. And let me
add that Congress has played an important part in this, by helping to make possible major
progress toward reducing United States arrears.
Back in 1996. the Administration and Congress worked together to chart a course for clearing all
of our arrears to the MDBs. Thanks to the support that has been provided by Congress, we are
now well in sight of that goal and United States leadership in these institutions is as strong as
ever. In FY 1997. when the 3·year arrears clearance plan was initiated, United States arrears to
the MDBs stood at $862 million. At the end of this year (and if Congress approves the FY2000
appropriation in full), arrears will be around $140 million.
OUT requests this year will continue this critical work as well as advancing core United States
economic and strategic interests, including several priorities of particular concern to many in
Congress. We greatly value the constructive and bipartisan dialogue we have had with Members
on the full range of U.S. policy priorities. And we intend to maintain and deepen that dialogue,
including through the regular reporting we have been providing on our negotiating objectives and
key institutional operational issues such as on environment, transparency, and integration of core
labor standards.
However. before turning to the details of our proposals let me highlight one critical issue that
risks casting a shadow over this year's requests: the proposals presently before Congress to
rescind appropriated United States callable capital. If enacted, the rescission of U.S. callable
capital could be perceived as a major reduction in United States' support for these institutions,
and could lead to a serious market reassessment of the likely United States response tea calIon
MDB capital should one ever occur.
Such a reassessment could increase borrowing costs for the MDBs, costs which then be passed
on to the developing countries it is their mandate to help. At a time of such uncertainty in global
3
fmancial markets, and the emerging market economies in particular, this would be a peculiarly
unfortunate message to send, and is a step that I very much hope Congress will resist.
II.. Authorization Requests for MDBs
Last year was one of significant U.S. achievements in the MDBs. Negotiations were completed
to replenish the resources of the African Development Bank (AIDB), the African Development
Fund (AfDF), the International Development Association (IDA), and the Multilateral Investment
Guarantee Agency (MIGA). And we are near completion of negotiations for a replenishment of
the Inter-American Investment Corporation (lIC).
While the institutional details of these negotiations - some of which I will be highlighting in a
moment - will vary, it is fair to say that the outcomes will advance three crucial United States'
priori ties:
•
An improved focus on basic economic and social priorities that are central to long-term
growth, including education and basic social services.
•
Modernization and renewal of international financial institutions to make them more
transparent, accountable and responsive.
•
An increased emphasis on the private sector as the key to growth in the developing world in
the years ahead.
With this by way of backdrop let us just offer some highlights of our specific MDB authorization
requests for FY 2000 and the concrete benefits they will afford for these institutions' clients and
for the United States.
iDA Twelfth Replenishment
Continuing our record of more effectively targeting IDA's resources, we have successfully
pressed in this replenishment for:
•
A much greater emphasis on direct human resource investments for poverty reduction particularly education investments - within IDA.
•
"Graduation" of China from IDA, with no new lending after June '99; and the earmarking of up
to 50 percent of this replenishment of $21 billion for loans in Sub-Saharan Africa.
•
New, specific linkages between new lending and governance indicators, anti-corruption
measures, and portfolio performance; and a major increase in IDA transparency, notably in
the breakthrough agreement to publish Country Assistance Strategies from June of this year.
4
In all this, we }: "ve husbanded well our resources. The new United States commitment has been
held to the level of the previous one - at around $800 million per year for 3 years. When
combined with other donors' funding and "re-flows" from old loans, this means that every dollar
of United States resources that is committed to IDA will leverage another $8 from other sources.
African Bank and Fund Requests
In recent years, the African Development Bank has faced real problems of governance,
accountability, and appropriate performance of its institutions that have raised real concerns
among its creditors and clients and across the development community. In these negotiations,
we see the successful culmination of a major United States effort to restructure and restore the
credibility and effectiveness of the institution -- and put it firmly back on track.
The results are:
•
A program of reform and renewal at the AIDB that is almost certainly the most ambitious in
the history of any International Financial Institution. The result will be finally to position the
AIDB to make an enduring contribution to reducing poverty in Africa at an especially critical
time in the region's history.
•
A capital increase of $680.8 million, calling for United States payments of just over $5
million per year for 8 years, that will restore key financial ratios at the same time as
achieving a major revision in voting rules will protect our interests in -- and influence over -over the institution for the future.
•
A replenishment of the AIDF - calling for annual United States contributions of $1 00 million
for 3 years, in return for which we obtained a full slate ofIDA-12 type commitments:
including the clear linkage of lending decisions to past performance; making good
governance, or its absence, an explicit criterion in lending; and making poverty reduction a
priority focus of programs, especially in rural areas.
Capital increases for MIGA and Ihe
lIe
Our other MDB authorization requests, which cover capital increases for MIGA and the soon to
be agreed capital increase for the IIC, are for institutions that are both explicitly engaged in
attracting private capital to for investments in developing countries. These will:
•
Dramatically increase MIGA's capacity to help catalyze private capital flows to would-be
emerging economies through the provision of political risk insurance to private investors.
This, in return for annual United States contributions of $25 million for five years.
• Help the IIC to expand its extremely successful work providing loans and equity investments
to small and medium-sized enterprises in under-served -and under-developed - Latin
markets. The annual United States contribution would be $25 million for 5 years and would
5
be levered many times over by the
~(mtributions
of other shareholders.
III. Highlights of Debt Account Requests
Our policy with respect to debt reduction for the poorest economies starts from two basic
propositions.
The first is that the single most important element in achieving growth and poverty reduction is
attracting private capital. That, in tum means, developing policies and institutions for
transparent, participatory and decentralized governance. Individuals and companies both inside
and outside a country must feel secure that their persons and property will be respected, disputes
will be fairly adjudicated, and that an economy will be well managed before they will provide the
private savings and investment that is necessary to ensure long term growth. They must also
have the basic confidence that debts undertaken will be repaid on time and in full.
On the other hand, we have learned that an excessive overhang of debt, for countries as for
companies, can stifle growth and investment to such an extent that an economy will never be
able to grow out from under it. In that case, discharging or reducing that burden of debt that will
never be repaid stands to benefit debtor and creditor alike.
The proper balance between these two considerations lies in a policy that rewards good policies
just as it reduces the burden of bad debts. It is this approach that has informed United States
support for successive programs of targeted official debt reduction for the most indebted
economies in recent years, including the most recent HIPC initiative, which we are hoping to
strengthen and expand with this year's requests.
We recognize that unilateral U.S. debt action in the poorest Sub-Saharan African countries will
achieve little, simply because we hold a relatively small proportion of the total debt. If we act on
our O\Vfl. our actions could result only in enhanced repayments to other creditors rather than
relief to debtors. A coordinated and concerted action among virtually all creditors is needed to
ensure that benefits flow to debtors.
We also recognize that there are difficult budgetary trade-offs involved. As we all know, in the
budget process, once budgetary caps and Subcommittee spending allocations are set, increases in
one program must be achieved either by reduction or by less growth in other programs. There is
thus a tension between funding debt relief and funding other foreign assistance grant or lending
programs. Targeted effectively, however, we believe that targeted debt reduction for the poorest,
most severely indebted reforming economies can be money well spent.
All of these considerations come together in President Clinton's call for a major new
international effort on debt-related programs at the March 16 United States-African Ministerial.
At that time, the President asked the international community to take actions which could result .
in forgiving $70 billion. The goal would be "to ensure that no country committed to fundamental
reform is left with a debt burden that keeps it from meeting its people's basic human needs and
6
spurring growth. We should provide extraordinary relief for cc"mtries making extraordinary
efforts to build working economies."
As part of this effort, the United States is now pressing, in consultation with Congress and within
the framework of our balanced budget, for substantial changes in the Heavily Indebted Poor
Countries (HIPC) initiative, which currently faces an estimated funding shortfall of around $1.7
billion.
These changes would include:
•
First, a new focus on early relief by international financial institutions, which now reduce
debt only at the end of the HIPC program;
•
Second, the complete forgiveness of all bilateral concessionalloans to the poorest countries;
•
Third, deeper and broader reduction of bilateral debts, raising the amount to 90%;
•
Fourth, to avoid recurring debt problems, donor countries should commit to provide at least
90% of new development assistance on a grant basis to countries eligible for debt reduction;
•
Fifth, new approaches to help countries emerging from conflicts that have not had the chance
to establish reform records, and need immediate relief and concessional finance; and,
•
And sixth. an adequately funded program for relieving debt owed to official institutions,
which in the case of a number of countries may be predominantly owed to the IMF.
The thrust of the President's program is simple and compelling: "the more debtor nations take
responsibility for pursuing sound economic policies, the more creditor nations must be willing to
provide debt relief." As I have said, such a program cannot be the work of the United States
alone. But we can and must do our part. In this context, the FY2000 request contains a number of
new debt-related initiatives:
•
A first ever authorization request for a United States contribution to the World Bank HIPC
Trust Fund of $50 million;
•
The first year of implementation of the debt for rainforest legislation which passed Congress
last year of $50 million;
•
The second year of implementation of debt reduction under the Africa Initiative, and the
regular debt reduction activities of the Paris Club, including the Naples and HIPC programs;
and,
•
Two further authorization requests which would permit us to support IMF gold sales and the.
use of resources in the IMF SCA2 reserve account for the continuation of IMF concessional
lending and HIPC debt reduction activities for the poorest countries.
7
In total, these requests amount to $120 million in budget authority: an extremely modest amount
relative to the scale of the resources that these actions will mobilize. For example. the $50
million contribution to the World Bank HIPC Trust (in addition to authorization not requiring
budget authority for our consent to mobilization of some of the IMF's gold and SCA2, of which
our share is $300 million). will unlock some $12 billion of debt to the international institutions.
Let me say a little about this request relating to IMP gold sales, which has been the focus of
some attention inside and outside of Congress.
Mr. Chairman, we want to ensure that the IMF is able to continue its support for the world's
poorest countries, especially those burdened by unsustainable debt. For these purposes, we
believe it is reasonable for the IMF to use income from the investment of profits on the sale of a
small portion of its gold reserves. The principal amount of the profits on such a sale would
remain part of the IMF's resources.
In the event Congress authorizes a decision to go forward with this approach. the IMF would
take steps aimed at ensuring that any gold sales be conducted in a manner that limits any adverse
impact on gold holders, producers, and the gold market. However, we believe that, at worst.
such effects will be extremely modest.
•
Gold sales on the scale currently under consideration would be dwarfed by the amounts of
gold that will typically come on to the market in a given year. The London gold market
alone has a daily turnover of the order of 850-1 ,200 tons. Against this the sale of 150-300
tons. over the space of quite a number of years, would be small fry indeed.
•
Experience of gold sales by the IMF in the 1970s that were many times as large as any
contemplated here provide further grounds for believing the impact would be extremely
modest: 150-300 tons represents only about 6-12 percent of total gold mine production in
1998. and only around 4-7 percent of total global demand for gold.
•
Further, market movements on the modest scale we would anticipate can be expected to have
already been significantly discounted by market participants. This would further reduce the
potential for the sale to have lasting market effects.
We think that mobilizing a modest amount of the IMF's gold in this way is a sensible and
prudent approach. Other gold-producing countries support this view. This approach to funding
IMF support for heavily indebted poor countries is far preferable to an even greater reliance on
bilateral contributions from IMF members. Such contributions have fallen far short of needs in
recent years, and. in our view, it would be unrealistic to count on such contributions to finance
adequately the IMF's participation in this area.
8
IV. Concluding Remarks
Mr. Chainnan, in the past few years the Administration and Congress - working together -- have
achieved major refonn and change at the MDBs, change that has directly served United States
interests and those of their clients. Every one of these institutions is today more focused on basic
development priorities and market-oriented refonns, more transparent and accountable, and more
responsive to critical concerns such as the sustainability of development and good governance.
Our requests for FY2000 reflect our desire to continue this progress in the years to come. I look
forward to working with this Committee and with others in Congress as we work to achieve this.
Thank you. I would now welcome any questions that you might have.
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T R E. ;\ S l; I{ \'
NEWS
omCE OF PUBLIC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W•• WASHINGTON. D.C•• 20220 • (~02) 6U..2960
EMBARGOED UNTIL 11 a.m. EDT
Text as Prepared for Delivery
Apri121, 1999
TREASURY SECRETARY ROBERT E. RUBIN REMARKS ON REFORM OF THE
INTERNA TIONAL FINANCIAL ARCIDTECTURE
TO THE SCHOOL OF ADVANCED INTERNATIONAL STUDIES
I am here today to discuss the United States' agenda for the future global financial
architecture: the actions we have taken already and are in the process of taking, and our
proposals for further change.
In the past two years, the international community has mobilized enormous official
resources in response to the financial crisis that has adversely affected a large number of nations
and peoples around the world. This crisis has heightened the broad-based awareness -- in both
developed and developing countries ~- of the risks and opportunities ofa global economy. While
our own economy has remained strong. American workers, businessmen and farmers have been
affected by the crisis. Certain sectors have been hit severely, and the crisis has created additional
risks to the economy overall That is why Americans have a critical stake in an effective response
to this crisis, as well as in building a stronger, more stable international financial system for the
future. And that is why the United States, and so many nations, have been intensely focused on
international financial reform, and must continue to be intensely focused on refonn for a long time
to come.
Our approach to this work has been informed by the fundamental belief that a marketbased system provides the best prospect for creating jobs, spurring economic activity, and raising
living standards in the U.S. and around the world. But we have an equally strong belief that
government action is needed for markets to produce the best results. There are certain purposes,
for example, universal education, that markets by their nature cannot meet. And markets, by
". jIress releases. speechw, public schedule$ cmd official biogmphi~,
ron our 24.hourfox line at (202) 622-2040
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themselves, do not necessarily create the conditions needed for them to function well, for
example. the provision offull and adequate information.
President Clinton's approach to international financial reform is built on these two beliefs.
Our overall goal is to build an international financial system that best promotes global growth,
that best contributes to broadly sharing that growth, that is less prone to crisis, and that is better
able to manage crises when they OCCUL We want to equip all countries to be able to participate
effectively in the global financial system. Achieving those objectives means both working with
developing countries to identifY the policies they need to realize most effectively the benefits of
globa] finance and integration while limiting its potential risks, and creating stronger incentives for
developing countries to put those policies in place. It also means acting to induce creditors and
investors in industrial countries to weigh risk more appropriately, so as to help avoid the excesses
in capital flows and leverage that contributed significantly to the crisis. And it means equipping
the international community to more effectively deal with those crises that occur.
Let me spend just one minute on the causes of the recent crisis, because the experience of
the past two years has provided important insights on how we can best go forward. The crisis
that first erupted in Thailand did not have a single, simple cause. Weak policies and institutions in
many developing countries, and an inadequate focus on risk on the part of banks and investors in
industrial countries, combined together to produce vulnerabilities in these economies. It was this
combination that led ultimately to the abrupt collapse in confidence that spread through Asia and
other emerging economies from the summer of 1997 onwards. And after confidence was lost, the
collapse risked become self-fulfilling, as investors who had previously extended excessive credit
to developing countries over-reacted in the opposite direction, and began to pull out of
developing countries indiscriminately.
Just as the causes of the crisis were complex, so too are the issues we face in reforming
the architecture of the global financial markets. There are no simple answers or magic wands.
There are often powerful competing considerations that need to be reconciled. And there are
some problems to which there is not currently a completely satisfactory solution. The
consequence is that refonn is not going to involve a single dramatic announcement but a
collection-nfactions over time. Some of these have already b\;Cii taken or are in th;; .tJ!ccess of
happening. Others will take shape going forward.
We have helped to build a broad-based international consensus on the appropriate
framework for reform. This consensus has made possible concrete progress in a number of critical
areas:
•
There is a dramatic improvement underway in the quality of the information available to
markets about the risks in emerging market economies.
•
A set of more powerful tools is now or soon will be in place to equip the international
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community to respond more effectively to crises, including the [MF's Supplemental
Reserve Facility -- which bas been used in all of the IMF's recent major programs - and
the proposed Contingent Credit Line. The Contingent Credit Line is designed to reduce
the risk of contagion to countries with strong polices and institutions. It will be structured
so as to help induce a range of policies to reduce a country's vulnerability to crisis,
including the adoption of sound debt management practices, efforts to develop strong
bankruptcy and supervisory regimes and the maintenance of sound macroecononnc
policies and sustainable exchange rate regimes.
•
Substantial progress has been made toward developing a much broader set of standards
and best practices, based on the model of the Basle Core Principles, in areas that are
essential to making financial systems work in today's global economy, be it an effective
legal system, elements of sound monetary and fiscal policies) or internationally agreed
principles of good corporate governance.
To continue to build a market-based system that is less susceptible to crisis, a critical
challenge is to develop better inducements for deveJoping economies to adopt sound policies and
for industrial country creditors and investors to weigh risks more appropriately in decision
making. These range from better transparency and disclosure for both developing countries and
industrial country financial institutions to better employ the pressure for market discipline; to the
conditions we place on official finance -- including the new Contingent Credit Line in the IMF; to
changes in capital standards and an improved focus on risk management in industrial countries.
In all of these areas. OUf work must be done with full respect far and recognition of the
differences among nations. Different countries may implement the same principles in different
ways. Yet we all must recognize that the costs of weak policies and poor credit decisions,
whether in developing or developed economies, are not just borne by the countries themselves
and their creditors. In an interdependent world, as we have learned; these mistakes can wen spill
over and affect their neighbors and the rest of the world. This growing interdependence has given
all nations a greater stake in avoiding each others' problems and being successful, and creates a
responsibility for all nations to pursue sound polices.
Our framework for reform involves changes in a great many areas. What r would like to
do today is focus on concrete further steps we support iIi five particularly difficult areas of the
agenda:
•
,
,
•
the role of the private sector in resoJving crises;
exchange rate regimes;
how developing countries deal with capital flows;
excesses in capital flows and leverage on the part of creditors and investors in industrial
countries; and
greater support for those most in need in crisis countries.
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The role of the private sector in resolving crises
The role of the private sector in resolving crises is one of the most complex issues that we
currently confront. involving powerful competing considerations. The steps we take must not
undennine the obligation of countries to meet their debts in full and on time. Otherwise; the
private investment and financial flows that are critical to trade and growth will diminish, and the
risk of contagion will increase. Yet market discipline will work only if creditors bear the
consequences of the risks that they take. The high yields on many emerging market debts indicate
1
private creditors expectations that some of these debts will not be paid in full or on time.
Striking the right balance between these considerations will always be difficult and must
proceed on a case-by-case basis. There can be no one-size-fits-all approach. What we need to
work toward is a system in which countries can address debt problems in a market-based~
cooperative and orderly way, which mayor may not be accompanied by official finance, and that
does not threaten the health of the system as a whole.
The practical approaches the international community has .taken in recent cases are
establishing a growing set of examples about the right balance, and about how the relevant parties
should interact with each other. The international community should continue to make these
judgments in the context of this overall framework, and work towards refining these approaches
over time.
When a government's capacity to pay its debts on time and in full may depend on the
provision of official resources, we believe that the international community will need always to
consider carefully whether there is a role for the private sector in sharing the burden of
adjustment. But, as I have just discussed, the question of what this role should be in a given case
is extraordinarily complicated. In some cases it may be appropriate to seek maintenance of
exposure levels or to seek a restructuring or refinancing of a country's private debt obligations.
In other -- truly exceptional -- cases) negotiations may break down and it may not be possible to
avoid a temporary interruption in some debt payme~ts. "V\'hen a country is nonetheless
implementing a strong program of policy reform, the door to official finance should be kept open
even if cooperative efforts to clear outstanding arrears with private creditors have yet to be
concluded. More broadly, there is no reason why one category of unsecured private creditors
should be regarded as inherently privileged relative to others in a similar position. When both are
material, claims of bondholders should not be viewed as necessarily senior to claims of banks.
Going forward, we believe the international community should continue to encourage the
broader use of provisions in bond contracts of clauses that can facilitate creditor coordination.
These clauses are desirable for both borrowers and lenders. We also support steps to strengthen
national insolvency codes and to strengthen the operation of insolvency regimes, since these can
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help prevent private debt problems from accumulating and ultimately spilling over to the
sovereign.
Exchange rate regimes
Second, choice of exchange rate regimes for emerging market economies. No exchange
rate, fixed or floating, can remain stable unless it is backed by sound policies. Flexible rates
generally allow more monetary policy independence and greater flexibility in response to shocks.
But countries with a history of extreme volatility understandably may show a preference for
greater exchange rate stability. Countries that choose fixed rates must recognize the costs and
tradeoff's. They must be willing, as necessary. to subordinate other policy goals to that offixing
the rate. Recent history suggests that institutionalizing that subordination may be essential or
close to essential for sustaining a credible commitment to fixed rates; and in some cases, where
the conditions are right, currency boards appear to have been effective toward that end. But these
institutional mechanisms will work only when backed by a real political commitment to reform
and sound policy.
The right exchange rate regime is a choice for the individual country. Yet at the center
of each recent crisis has been a rigid exchange rate regime that proved ultimately unsustainable.
The costs offailed regimes can be significant, not only for the countries involved but also for
other countries and for the system as a whole. We believe that, under the circumstances, the
international community' 5 judgments about how to respond to the recent crisis were right. Yet it
is also important to shape expectations about the official response going forward, as this will have
an important impact on policy choices and we want to strengthen incentives for the adoption and
maintenance of sustainable exchange rate regimes. As a matter of policy, we believe that the
international community should not provide exceptional large scale official finance to countries
intelVening heavily to defend an exchange rate peg, except where the peg is judged sustainable
and certain exceptional conditions have been met, such as when the necessary disciplines have
been institutionalized or when an immediate shift away from a fixed exchange rate is judged to
pose systemic risks.
Some countries have recently considered making another country's currency their own: in
adopting the dollar. This is a highly consequential step for any country, one that has to
be considered very carefully and, in our view, should not be done without consultation with
United States authorities. On one hand, dollarization offers the attractive promise of enhancing
stability. On the other hand, the country also must be prepared to accept the potentially
significant consequences of doing without the capacity independently to adjust the exchange rate
or the direction of domestic interest rates. The implications for the United States are also
consequential. We do not have an a priori view as to our reaction to the concept of doll arizat ion.
We would also observe that there are a variety of possible ways for a country to dollarize. But it
would not. in our judgment, be appropriate for United States authorities to extend the net of bank
supervisio~ to provide access to the Federal Reserve discount window, or to adjust bank
particular~
5
supervisory responsibilities or the procedures or orientation of U.S. monetary policy in light of
another country's decision to dollarize its monetary system.
Dealing with capital flows
Third, dealing with capital flows, including the issues of debt management and capital
controls. One of the striking elements of the recent crisis was the extent to which countric;s
actually reached for short-term capital, and thereby greatly increased their vulnerability to crises
down the road. The lesson of these experiences is that the greater protection provided by longterm borrowing is worth paying for_
Countries' own interest in avoiding the costs of crises provides a strong incentive to
protect themselves better against market volatility in the future. But the costs of inappropriately
reaching for short-term capital are borne not just by the countries and creditors concerned -- the
international community has a large stake in these decisions. That is why we support the
development of international guidelines for sound debt management to discourage countries from
taking too many risks.
These guidelines would aim to encourage both a greater reliance on long-term rather than
short-tenn borrowing and the development of domestic debt markets that allow governments and
corporations to borrow at longer maturities in their own currencies. It may be cheaper to borrow
at short maturities, and it is often easier than making the sometimes difficult policy changes
needed to be able to borrow long-term, and to attract more investment tlows_ But the benefits of
short-term borrowing, even if substantial, are often more than offset by the benefits of a debt
profile better insulated from periods of market volatility_
Going forward, the recent crisis has shown equally clearly that it not enough for
governments to do a better job of managing their own debt. They also should resist tax regimes,
restraints on long-term investment. and special facilities that distort private flows toward shortterm borrowing. Where financial systems and supervisory regimes are underdeveloped, steps are
probably needed to limit banks' foreign currency exposures. especially their short~tenn foreign
borrowing. The limits of governmental guarantees for the external obligations of domestic
borrowers -- especially banks -- should be made clear, and the nature and scope ofthe domestic
financial safety nets clearly defined.
Some countries may deem more comprehensive measures -- such as Chilean-style taxes on
short-tenn capital inflows -- to be appropriate. Like all controls, they can be difficult to
administer and can decline in effectiveness over time. This suggests that if they are adopted, they
should be seen as transitional measures. What is most important is that they not be a substitute
for fundamental refonn to strengthen and liberalize financial systems_
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When crisis strikes, countries may be tempted to introduce controls On capital outflows in
an ad hoc response. But the bulk of experience suggests that controls on capital outflows become
ineffective over time. Most important, they can do long-term damage to a country's capacity to
attract foreign investment, and are often used to avoid or delay fundamental refonns.
Excesses in capital flows and excesses in leverage
Founh, we must take steps in industrial countries to address excesses in capital flows and
excesses in leverage. Excesses in capital flows and excesses in leverage are separate but related
problems. Excessive leverage can at times fuel excessive capital flows. In addition, both
excessive capital flows and excessive leverage can be indicative of broader failures in transparency
and risk management. While creditors and debtors now may be unduly withdrawing capital from
developing countries, there is still a need to address the weaknesses in risk assessment that
contributed to the recent crisis.
Our market-based economy relies on market participants to provide discipline. But
market discipline can break down, and market history indicates that even painful lessons recede
from memory with time. That is why we support mechanisms to induce a much stronger focus on
risk management during good times, because reducing the excesses of the booms will reduce the
likelihood and severity of busts.
In this context we believe it critical to create the right incentives for prudent bank credit
judgments and lending decisions. This is why we consider it very important that the Basle
Committee work quickly to complete its updating of the Basle Capital Accord, by expanding the
number of credit-risk categories and revising the current all-or-nothing system for classifying
loans to sovereign borrowers. We also strongly support actions that are being taken by the
international community and within the United States to focus supervisors much more strongly on
banks' assessment of market risk and their systems for evaluating that risk. With respect to both
of these concerns) the President's Working Group on Financial Markets) which includes the
chairpersons of the principal federal regulatory bodies in the United States and the Secretary of
the Treasury, will soon be releasing proposals to require more disclosure ofthe exposure of
financial institutions to other financial institutions. This will increase market. scrutiny over the
interbank market _w including the market for interbank lending to developing countries -- as weil
as increase scrutiny of exposure to highly leveraged market participants.
As we strengthen risk management in the major financial centers, we also need to do
more to make sure that these efforts are not undercut by lax practices in offshore financial centers.
A variety of incentives could be used to press offshore centers to improve their standards,
including a higher risk weighting on bank lending to counterparties operating out of an offshore
jurisdiction that does not adhere to the regulatory standards of major market centers or provide
adequate supervision.
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Beyond these measures, we need to take additional steps to address excessive leverage.
N events in global financial markets in the summer and fall of 1998 demonstrated, the amount of
leverage in the financial system. combined with aggressive risk taking, can greatly magnify the
negative effects of any shock. Additionally, the near-collapse of Long Term Capital Management
highlighted the possibility that excessive leverage in one financial institution could increase the
likelihood of a general breakdown in the functioning of financial markets.
In this context, hedge funds have generated a great deal of attention. But excessive
leverage is not limited to hedge funds. Other fmanciaJ institutions, including some banks and
securities finns, are larger, and generaUy more highly Leveraged, than hedge funds. That is why
there is a strong case for improving public reporting and disclosure by financial institutions and
their creditors and for tightening risk management practices more generally. The President's
Working Group on Financial Markets will soon be releasing detailed, concrete proposals in these
areas.
Concerns have been expressed about the impact of such highly-leveraged and other large
institutional investors on market dynamics generally, and on vulnerable economies in particular.
While we believe that such activity can affect markets in some circumstances and for limited
periods, we do not believe that it was a basic cause of the financial market crises of the past two
years.
Greater support/or those most in need in crisis countries
Buildjng a system that is less prone to crisis and better able to address crises when they
occur is one of the best things that we can do to see that the benefits of growth are shared more
broadly in the world. The recent crisis threatened or reversed the middle income ascendency of
many and worsened the hardships of the poor. The international community should take
additional steps to help prevent crises from having undue effects On the most vulnerable, and to
help countries put into pIace~ before crisis strikes, the. kind of policies that can make them more
resilient if it does occur.
To help protect the vulnerable during times of crisis, the tvIDBs should rearrange their
lending priorities and make available fast-disbursing emergency lending to help suppon safety
nets, basic health care and education. Special programs to help create jobs for the most
vulnerable may also have a role. The Tht1F should take into consideration the impact of its
prescribed fiscal stance on social spending, and make sure that budgets for core social programs
like health and education are maintained, or at least not disproportionately cut, even during
periods of needed fiscal consolidation.
More broadly, an open international financial system works best if all countries equip their
people to prosper in a modem economy. Such policies are the responsibility of individual
governments. But ·the international community can help, by identifying and helping to finance the
8
ji
or
j't
from: TREASURY PUBLIC AFFAIRS
5-11-99 4:40pm
p. 33 of 34
implementation of the policies needed to provide this foundation for broad-based growth, from
the provision of basic education and public health, to support for core labor standards that
promote worker participation in the benefits of growth.
Conclusion
Market-based economic systems, and global capital flows, offer great promise for the
global economy, but we can and must greatly reduce the disruptions that can occur, with all the
hardship that they produce. The issues involved in this refonn are complex and pose difficult
questions balancing strong competing factors_ As I have said, there are no magic wands. But
over time) the steps we have taken and those we propose constitute a very powerful program of
reform -- one that will have an increasingly powerful effect on the way the global financial system
functions. The result should be a more robust global economy ~- one less susceptible to crises.
one better equipped to deal with crises and one with greater growth, more broadly shared. And
the continued strong engagement by the United States, working with the rest of the international
community, will be essential if this outcome is to be achieved. Thank you very much.
-30-
9
TDTRL P.09
I)
EPA R T
1\(
E N T
0 F
THE
(J
R Y
NEWS
TREASURY
-
T R E .\ S
OFFICE OF PUBLIC AFFAIKS. 1500 PEp.lp.lSYLVA.NIA A.VENUE. N. W•• WASHINCTON. D.C.- 20120. (202) Ul-1960
Contact;
EMBARGOED tmTIL 2: 30 P.K.
April
~l,
Offic'. of FizlanciDg
202/219-3350
1999
TREASORY TO AUCTION CASEI MAHAGEXBNT BILLS
The Treasury will auction approximately $8,000 million of 1-day
Trea.ury ca.h management bill. to be iaa~.dApril 22, 1999.
Competitive tenders will be received at all Federal Reserve Banks and
Branchea. Noncompetitive tenders will·~ be accepted. Tenders will ~
be accepted for Dills to be maintained on the book-entry records of the
Department of the Treaaury (Trea.ury.D1reet). Tenders will ~ be received
at the Bureau of the Public Debt, Wa.hiDgton, D.C.
Tender. for the bills will
~
b. accepted from Pederal Reserve
Banka
for foreign aDd iDternational -anetary authorities.
The auction beiDg announoed today will be conducted in the aingle-price
auction foraat. Al.l compeeitiYe awarct. will be at the highest discount
rate of accepted competitive tender ••
This offeriDg of Trea.ury .ecuritie. is governed by the terms and COndit1on• • et forth ~ the Dniform Offering Circular for the Sale aDd ~ssue of
Karketable Book-Entry Treasury Billa, Notea, and BODds (31 CFR Part 356, aa
amended) •
Campetitive bida in ca.h management bill auctions must be
ezpr ••• ad. a. a di.aount raee with ~ decimals, e.g., 7.10\.
I!QII:
Detail. about the new .ecuriey are given in the attached offering
highlight ••
RR-3096
000
HIGHLIGHTS OF 'rRBAStmy OrFDING
OF l-DAY CASK IIANAGEIIBRT BILL
April 21, lIlt
Offeripg !MQUAt ••••••••••••••••••••• $8,000 million
Description of Offeripq:
Term and type of security ••••••••••• 1-day Casb MaDagemeDt Bill
COSXP number •••••••••••••••••••••••• 912795 BO 0
Auction date •••••••••••• ~ ••••••••••• April 22, 1999
Issue date •••••••••••••••••••••••••• April 22, 1999
Maturity date ••••••••••••••••••••••• April 23, 1999
Original iaBu. date ••••••••••••••••• April 22, 1999
Minimum bid amount azld mu1tip1ea •••• $1, 000
$'hp1,.iop of Bi4s:
Honcampetiti"e bicSa ......... Rot acceptecl
CoIIpetiti". bids ••••••• (1) Nuat be expressed as a discount rate with
two ciecimala, e.g., 7.10'.
(2) •• t 1cmg poaition for each bidder .use
b. reported ~h8D the SUIIl of the total l:)icS
amount, at all discount rate., and the
Det long position is $1 billion or
greater.
(3) .et long positioD mu.t be deteZ1ll1n.ed .,
ot ODe half-hour prior to the c1o,iDg
ttm. tor receipt of competiti"e tender••
1113 1 PDP 'ecoqpizec1 Bid
at a S¥pqle Yield ••••••••• 35'
N'z 1m
l
•
o~
public
offerin~
A. .~d •••••••••••••••• 35' of public offering
B.;eips of Tender.z
Honcompetitive tencler•••••• Rot accepted
eo.petitive tenders •••••••• Prior to 11z00 a.m. Baatern Daylight
.av1Dg time OD auction day
'ayp.ent 'rerma •••••••••••••••• ay charge to a fUDda account at • ,.eder.l.
ae,erYe Bank on ialNe elate, or payment 'of
full par amcnmt with tender.
OFFICE 0' ,vaLlC An-Alas. 1500 '~""'YLV4NIA. "VENUE. ".W•• WASJUJ'IIICTON. D.C.e JU2D. (212) cJ2-n~
•
CaAtact,
EMlUc;oJm tnnTL 2: 3 0 1'.11.
April ~1. 1'99
Tbe
~.a.ury
Office of pinencicg
202/~1'-3350
W111 auction approximately $8,000 a111ion of 1-day
tr •••ury c •• b management billa to b. i •• ~~,April 22,1999.
C~e~itive tender. will be ~.cei~ed at
Bruc:lu... NODC::CllllPetit~Ye ~udar. vill·~ be
be accepted for ]:,111. ~o be aaintaiDecl OIl the
J)op&Z'tmaA~ of the Treasury (2'rea8&U)11).thc::t).
.t the ~.u of the' ~lte liebe, v . .hU;tcIl"
TaDders for
~B
bl11.
~ll ~
all Peda%al RaaerYe Sank. and
accepted.. Tenders vill D2t
'!)oot-ecry recorcu of the
'render. rill nllt b. r.o.iv.d
D.C.
b. acc-'pced fro- P.daral Reserve
.~
lor foreign aQ4 iDterAatiDAal .aDBtary autborit1 •••
The auc:t1oa. ltelag aJmO\IAced t:od&y Wi.ll b. cODd\Sct-.4 iD the .ingle.price
~oZ'a&t.
Al.l. c:c.peCJ.t:lYa a~ wil.l b • • t the h.:l.gh.e.t cU..count
rate of acceptM ccmrp.titi~ teDders.
1\Lc:tion
-rhi. .. offaring of Tr••aury .ecuriti •• ia governed by the term. iIUld c:ondit:1ona •• t fOJ:'th :l...Q ~ll. D'Ilifora Off.ring Circular for t.h.I!I a ..le &Del :Xsau. of
Xarket.al)le 800Jc-BDtzy lfrea8ury Bill •• lifottuJ. and Bonds (31 en part 35', ...
--=.4) .
12IJ:
ca.petit.1ve biliY ill c.ah aa.nag*2DlU1t ):)i~~ auotioDS muat b4a
&Xp%e •• ecl . . . . cU.aGOUAt rate with ~ decia.a1 •• e.Sf." 7.1o,.
Detail. about,tbe new •• curity are given in the attached offering
hig~igllt ••
RR-3096
-
000
FIr,1WU ,.",~, ~JlftldI.a, ,.,~ ,d._In ""~ .fflt:laI AhtHplliu, ~.II
II'"
J4-J, • .uJ~ u"• ., (l(J~ ~J-J(uD
BIcmLIcmTS OF ftlAStm'l' OPl'DIHC
~
OF l ...llAY CASE
BILL
April 21, 19'9
Offoripg !mount ••••••••••••••••••••• $8.000 million
po.eript1oD of O:CeriAg3
T~
and type of •• cuity ••••••••.•• 1-day Ca.h Xanagaellt Bill
nu.ber •••••••••••••••••••••••• t12?J5 BO
Auct1o: data •• _•••••• _ ••••••••• _ ••• _Apri~ 22,
I • .ue dat• • ___ •••• _ ••••••••••••••••• Apr11 ~~,
Ha~1ty date ••••••••••••••••••••••• April 23,
OrigiDal i.aue date ••••••••••••••••• April ~2,
CO$%~
IliniwlJI bi4 amount
~
0
1999
1"j
l'J'
19"
.all.tipl. . . . . . $1.000
!tn., •• iop pr Ilda:
.00cc:apet!1ei~. biq ......... IIot accepted
c:o.p.ti~1"'" bl"- ••••••• (1) llu.at be ~•••• d .a • diaooUDt. rat. w1t.b
~wo d.oimal.., e.sr .• 7.10\.
(2)
•• t loas poait,1oD tor each bidder .u.t
be nported ~hen ~8 aUlD of the total bid
aaou:At., .t: ~11 di.coWlt :rat•• , and the
lo~
Det
gr•• tar.
(3) •• t l=;
o~
po.l~1C1l
au..t. be .setemined ••
prior to the clo.ing
for receipt o~ co=p.~it.iye t~~••
ODe
t~
po.ition i . $1 billion or
half-~
Nyi mm l.coqDilie4 li4
It • ,~pql. X~d •••••.••• 35' 01 public
"sima
An;4 ........... _ •••••
35~
o~foring
of pW)lic: gffering
l.e.1R> pf T!!d_r••
Ilono~tit.l~
c:a.p.titi.....
teACMZO•••••••at acc*pt.d
PrioZ' to U.OO •• m. Ba..t&rxl Dayligbt
.....iDg t:iae CD anet.toll day
~eDder•••••••••
b)'IHDt TerN •••••••••••••••• ay Gbarg. to .. !uncbJ account . t • Federa.l
. . . .:'99 B&.Il.k OIl !.8'U. dat., O~ pay.maJ1t 'o~
full pax- aJDOUl1t with ttmdar.
OFFICE OF PUAUC AFFAIRS elSOO PEI"INSYl.VANIA AVENUE, N. W•• WASHINGTON. D.C.e
mmARGOED tmTIL 2 c 30 P.K.
April 21, 1.999
CONTAC'l':
IU~20
e (202) 621.2"0
Office 9f FinanciDg
202/219-3350
TREASlJ'RY TO AUCTION $15,000 MILLION OP 2-YEAR NOTES
The Treasury will auction $1.5,000 million ot 2-year notes to refund
$28,625 million of publicly held securities aaturing April 30, 1999, and
to pay down about $1.3,625 million.
In addition to the public holdings, Federal Reserve ~anks hold $3,020
million of the maturing aecuri tie. for -their OWD accow:r.ts, which may be
refunded by i.suing an additional amount of the new securi~y.
The maturing securities held by the public Lnclude $4,701. million held
by rederal ae.erYe BaDk. •• agent. for foreign and international monetary
&~thorit1e..
AmoUDt. bid for th•• e accounts by Federal Reserve Banks will
be added to the offering.
customers reque.ted that we reinvest their maturing
hol4iDg. of approximately $657 million into the 2 -year note.
Trea.~jrect
The auction ~ll be con4ucted in the single-price auction for.mat.
All competitive and noncompetitive a. . ~ will be at the higheat yield of
accepted competitive teDder••
Th. not.. beiDg offered today are
Tender. will
~e
e1.i~ible
for the STRXPS program.
received at Federal ae.erve Banks
the Bureau of the Public Debt, W•• bington, D. C. This
'.cur1t1ee 1. governed by the term. aDd conditions set
Offering Circular for the Sale and I.aue of Marketable
8111., Mot •• , aDd BoDda (31 erR Part 356, as amended) •
and Branches and at
offering of Treasury
forth in the Onifor.m
Book-Bntry Treasury
Detail. about the new security ar. given in the attached offering
highlight••
RR-3097·
IGB'l"S OF -ra8ASUJlY OI'PBRDIC '.rO TO P'DBL%C OF
KX~_DAa
NOTBS TO BB XSSUB!) URXL 30, 1119
'-pril 21, 1 ••,
g#f.r;nq Apeupt ••••••••••••••••••••••••••• $15,000 ~llion
Descr1P&ipp of Offering:
Ter.a aDa type of security •••••••••••• ••••• 2-year DOtes
S.r1, •••••••••• •••••••••••••••••••• •••••••• %-2001
, S2 8
""STP number ••••••••••••••••••••• ••••••• e·. 91282
~w •
'1 28 1999
Auction da.te ••••••••••••.•••••••• ••·•••••• Apr.
,
April 30, 1999
%••ue date •••.•• ••••••••••••••·•••••••••••
Daee<! date •.••••••••••••••••••••••• ••••••• April 30, 1999
Maturity dat ••.••••••••••••••••••• ·.······April 30.2001
Determined ~ased OD the highest
Inter•• t rate ..••••••• ······••••·•·••·····
..
.
accepted compet~t1ve b~d
Yield
•••••••••••••••••••••• Determined at auction
Int.r~~~·;;~~·~~ea •••••••••••.•••••••• OctOber 31 &Ad April 30
XiDimua bid amcun~ and multiple ••••••••••• $1.000
Accrue4 interest p.yable by 1nv•• tor •••••• Hon.
Petermined at auction
Premium or discount •••••••••••••••••
·!····
STRIps ISformation:
Nin~ amount requir.d •••••••••••••••••••
CO%pU8 CUSIP number ••••••••••••••••••••••
Determined at auction
912820 DT 1
Due ate(.) and ct7SIP number(.)
for additional TINT(a) •••••••••••••••••• Hot applicable
Submi •• ioA of Bid.:
Honco.p.titive bid.:
Accepted in ~ll up to $5,000,000. at the highe.t
accepted yield.
Competitive bide:
(1) Muse be e.xpre •• ed a • • yielcS wit.b three c!eciaall, e.g •• 7.123'.
(2) • • t lODg pe.ition for .ach bidd.r_lIIl.t be reported "heu the sum
of the total bid amount, at all yi.lda. and the net long position
1. $2 billion or gr.ater.
(3) 1II.t lc=g po.ition au.t b. det.ndned as of one half-hour prior to
the clo.~g e~ for r.c.ipt of competitive eender8.
MII1,am •• cognized li4 at a Single Yi.ld •••••• 35' of public offeriDg
.·'i'V. Avard.·.·.!·.·· ••••••• ··· ...••••••••••
'.ge1pt of
35' of public o££ering
TSA4".1
ROAComp.t1t1 v e tender.: Prior to 12.00 noon Bastern Daylight SaviDg
ttme.OA auction day.
Competitive tender.: Prior to 1:00 p.m. Ba.tern Daylight SaviDg
time OR auction day.
By charg. to a f1m4a account at a :r.deral Reserve laDk 011
1.sue c1ate, or payme.nc or ~u11 pal: aao\&A~ wj,~ ~CA4e:,. rzoe"uzyP~r.c:;r;
Payment Tema:
cu..~CIII.rs can US8 the Pay Direct feature which authoriz •• a charge
accOUDt of record at their fiDaDcial institution on issue date.
to thail
() E P .\ R T \1 E :\ T
() F
T II E
T REA SUR Y
NEWS
~/78~9~. . . . . . . . . . . .. .
. . . ._ _ . . . . . . . .
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASIDNGTON, D.C.• 20220 • (202) 622-2960
EMBARGOED UNTIL 10 A.M. EDT
Text as Prepared for Delivery
April 22, 1999
DEPUTY TREASURY SECRETARY LAWRENCE H. SUMMERS
SENATE BANKING COMMITTEE
SUBCOMMITTEE ON ECONOMIC POLICY
AND
SUBCOMMITTEE ON INTERNATIONAL TRADE AND FINANCE
I am pleased to have this opportunity to reflect alongside Chairman Greenspan on the issues
raised by recent discussions in a number of Latin American countries about the possible
dollarization of their economies.
The recent traumatic events in emerging market economies have provoked a reassessment of the
international financial system, here in the United States and across the international community.
A great deal has been learned -- and a number of important reforms have been or are in the
process of being put in place. But clearly, important and difficult questions remain.
As Secretary Rubin noted yesterday, one especially important issue arising out of these crises indeed, many crises in recent years - is the difficulty of successfully maintaining fixed, or semifixed exchange rate regimes. Where these were present and proved impossible to defend in
Thailand, Russia. Brazil and other countries, this has clearly created difficulties - not merely for
the countries concerned but for the international community as a whole.
These experiences, coupled with the advent of European economic and monetary union, have
sparked renewed discussion of a possible reduction in the number of the world's currencies. In
particular, in Latin America, the issue of dollarization has been raised in a number of countries.
To make another country's currency one's own is a momentous decision for any country and will
need to be considered with a very careful eye to the potential costs and benefits. But before
turning to these issues, we should remember that sound fundamentals are needed to underpin any
RR-3098
lor press releases, speeches, public schedules and official biographies, call aur 24~aur fax line at (202) 622-2040
·U.S. Govemment PClntrng Office: 1998· 619-559
credible choice. A sustainable fiscal position, well-functioning labor and capital markets, and an
environment in which private property is respected and contracts are enforced - with these things
in place it is probably possible to make a success of a number of different exchange rate regimes.
Where one or all of these things are lacking, it is probably impossible to make a success of any.
With this basic proviso in mind, let me now turn to some of most important considerations that
would need to enter a country's decision to dollarize; and some of the considerations that might
arise for the United States.
Considerations For Economies Considering Dollarization
Two sets of issues can usefully be distinguished in this area: first, the decision to maintain a
fixed exchange rate system rather than a floating one; and second, the decision to create a
stronger sense of irrevocability around that fixed rate system, as, for example, in the decision to
dollarize.
Even economists who agree on most aspects of economic theory and practice will often be
divided on the relative merits of fixed versus floating exchange rates. For some, such as Milton
Friedman, exchange rates are a price: a price that should be flexible for the same reasons that
others are. For others, it is a promise, one that should be firm and that should not be broken or
devalued.
The right choice between these two options poses enormous questions and does not yield any
simple answers.
On the one hand, a fixed nominal exchange rate provides stability to exporters and importers and
can help to anchor domestic inflation expectations. These benefits will be especially attractive to
countries with a record of financial instability and domestic monetary policy-making that has
failed to keep inflation in check.
On the other hand, maintaining a permanently fixed exchange rate regime means accepting the
loss of domestic monetary independence that goes with it. The domestic monetary authorities
are ceding the capacity to use monetary or exchange rate policy to cushion the economy against
external shocks. This, in turn could mean greater volatility in output and employment where
domestic prices and wages cannot adjust rapidly in response to such shocks.
Where a country has already made a strong commitment to a permanently fixed exchange rate, it
is clear that the trade-off is somewhat different. Notably: the traditional margins of adjustment
working through the exchange rate or domestic monetary policy, theoretically, at least, are no
longer available.
This has been said to make the case for dollarization, in such circumstances, somewhat stronger.
But even here countries will need to consider the benefits against the potential costs:
2
•
On the one hand, the presumed irrevocability of dollarization holds the promise of lower
interest rates, greater stability and possibly deeper financial markets, by adding to the
credibility and discipline of its own policies and advancing its integration with the world
economy. It is striking that dollarized Panama is the only country in Latin America with an
active 30-year fixed rate mortgage market.
•
On the other hand, the country must also be prepared to embrace an equally irrevocable
subordination of domestic monetary policy to that discipline. In addition, a dollarizing
government will have to accept losing the seigniorage revenue that domestic currency
creation produces.
In this context, it is worth noting that President Menem of Argentina has discussed the possibility
of fully dollarizing the Argentine economy, and Argentine financial officials have had informal
discussions of issues relating to dollarization with Treasury and Federal Reserve officials. Those
who favor this step in Argentina believe, among other things, that under their currency board
system, they have already borne most of the costs of dollarization, but they are not yet enjoying
dollarization's full benefits. For example, interest rates on Argentine peso-denominated deposits
have been nearly 1Y2 percentage points higher on average over past two years than on their
dollar-denominated equivalents, and the spread has widened to more than 4 percentage points on
occasion. In their view, dollarization, in addition to the other potential benefits, would result in
substantially lower and less volatile interest rates.
Once again, for Argentina as for any other nation, the decision to adopt another country's currency
is an enormously consequential one that would need to be considered in a careful and extended
manner. Countries can obviously choose to adopt the dollar as legal tender without our assent.
However, such a decision has some consequences for the United States, and we hope and expect that
countries would consult with us in advance.
Let me turn now to the potential implications of broader dollarization for the United States,
which I know to be of great interest to members of this Committee and others in Congress.
Possible Considerations for the United States
Speaking as an analyst, the question of the impact of dollarization by other economies on the
United States economy raises a number of considerations.
If a country - or countries - decide to adopt the dollar, the United States can expect to benefit in
a number of ways:
•
Most obvious, but perhaps least consequential over the long-term, by acquiring dollars for
use in their domestic economies, dollarizing countries would be extending an interest-free
loan to the United States. (Although the added revenues accruing as a result of anyone
country adopting the dollar would be extremely modest relative to the revenues earned
globally already.)
3
•
Of potentially greater importance would be the increase in economic links that might be
associated with the creation of a broader dollar area. The fact of sharing the same currency
would reduce the cost of doing business with the dollarizing country and reduce uncertainty
about future exchange rate changes. There might be greater capacity for capital and trade
flows in both directions as a result.
The desire to deepen economic integration was an important motivating factor behind the single
currency project in Europe. The currently modest extent of trade between the United States and
individual Latin American countries - other than Mexico - would limit the short-term
implications for the United States unless dollarization were to become a regional trend.
Excluding Mexico, Latin America accounts for 7 percent of United States trade - more than any
single country except Canada, Japan, and Mexico. But no single Latin American country
accounts for more than 2 percent of the United States total.
That said. by and large these are economies whose tradable sectors - with governments opening
up after years of protection -- are growing much faster than the economy as a whole. United
States exporters have also generally enjoyed a much higher share of Latin American markets that
they have in those of most other emerging market economies. To the extent that dollarization
helped to consolidate or expand our large role in Latin American markets, it might help to ensure
that we continued to benefit disproportionately from their future growth.
As I noted earlier, experience with discretionary monetary policy in a number of countries in
Latin America has been that its potential benefits have not been fully realized. If dollarization
helped to achieve greater economic stability and growth in countries in our hemisphere which
have suffered so much instability in the past, it would clearly be in the economic and broader
national interest of the United States.
Looking beyond the immediate economic implications, analysts have raised a number of other
potential implications of broader dollarization for the United States that would have to be very
carefully considered in the event of any major country in the region choosing to adopt the dollar.
In this context, there has of course been concern that dollarization by an economy would give
rise to pressure to use United States economic and regulatory policy tools to support that
country's economic or financial stability. Our stake in the region's economic stability has meant
that we have sometimes acted to support strong adjustments in policies in the wake of financial
crises. Some argue that dollarized economies achieved greater stability, thereby limiting the
chances of such involvement in the future. However, an opposing concern has also been raised,
that dollarized economies, and their potential creditors, might believe they had a stronger claim
on United States support.
Questions have likewise been raised about the possible impact of dollarization on the broader
attitude of that country and its citizens toward the United States. To the extent that it furthered
economic and other ties, this would clearly be a benefit to the United States and that country.
4
But there would be the opposing risk that in difficult times, the loss of domestic monetary
sovereignty would foster resentment and encourage policy makers to deflect blame for problems
onto the United States.
As Secretary Rubin said yesterday, we do not have an a priori view as to our reaction to the
concept of dollarization. There are a variety of means and modalities for achieving it and we
would expect to discuss these with any government seriously considering taking such a
momentous step. But there are certain limits on the steps that the United States would be
prepared to take in the context of such a decision. Specifically, it would not, in our judgment, be
appropriate for United States authorities to extend the net of bank supervision, to provide access
to the Federal Reserve discount window, or to adjust bank supervisory responsibilities or the
procedures or orientation of U.S. monetary policy in light of another country deciding to adopt
the dollar.
Concluding Remarks
All of these dimensions - both for countries considering dollarization and for the United States will no doubt playa role in future discussions of this issue going forward. As I have said, the
choice of which currency regime best suits them is a choice for countries to make themselves and
not one for the United States to prescribe. But if any country desires to consider adopting our
currency, we would welcome discussions between our respective authorities on the various
issues involved. Thank you. I would now welcome any questions that you might have.
-30-
5
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
CONTACT:
JR IMMEDIATE RELEASE
Office of Financing
202-219-3350
::lril 22, 1999
RESULTS OF TREASURY'S AUCTION OF I-DAY BILLS
I-Day Bill
April 22, 1999
April 23, 1999
912795EQO
Term:
Issue Date:
Maturity Date:
CUSIP Number:
4.51 %
High Rate:
Investment Rate 1/:
4.76 %
Price:
99.987
All successful competitive bidders were awarded securities at the
.gh rate.
Tenders at the high discount rate were allotted 22% .
.1 tenders at lower rates were accepted in full.
AMOUNTS TENDERED
~~
ACCEPTED (in thousands)
Tendered
Tender Type
Accepted
Competi t i ve
$
35,695,000
$
8,020,C·OO
,
$
35,695,000
$
8,020,000
TOTAL
Median rate
4.45 %: 50% of t::'e amount of accepted competitive tende:-s
s tendered at or below that rate.
Low rate
4.25 %:
5% of the amount
accepted competitive tenders was tendered at or below that rate.
j-to-cover Ratio
=
35,895,000 / 8,020,000
=
4.48
Equivalent coupon-issue yield.
RR-3099
~ttp:llwww .publlcdebttreas.gov
DEPARTMENT
OF
THE
TREASCRY
NEWS
TREASURY
OFfiCE OF POBLIC AFi'AIRS e1500 PINNSYLVANIA AVENUE. N.W•• WASHINGTON. D.C.e 20110 e (201) 612·19"
COmTACT:
EMBUOOEI) OIlI'rXL :2, 30 P .11.
Office of Financing
~Ol/21.9-33S0
April 22, 1999
~ ~ will auction ~.. .eries of Treasury bills totaliD~
ap,proximately $25,000 mi1liDD to re~UA4 $l5,708 million of publicly held
••curiti•• aatur1M Apri1 29, 1999, and to pay down about $708 m.i~lion.
XD addition to the public holc!i.Dg., Federal Reserve Banks for their own
ac:cCNAts bold $12,218 millicm of the -aturU1.g bills, whic:b may be refun.d.eci at
the highe.t ciiacou.nt rate of accepted ccapetitive teDClezs.
Amounts issued to
theae a.ecoun.t. will be in add! tion to 1:ha offeziAg amount.
t"he JDIlturiJ1SJ bi1ls helcl ~ tU pul)lic include $',6'2 million held
by Feder&! Reserve BADka a. agenta for foreign aDd iDterDAticmal JDODetary
authorities, which may be ref1m4ec! within the offering 8.JIlOUnt at the highest
cU..count rate of accepted ccapetiti"e teDdera. Additional amounts
be
iaRed . ~or such accounts if the aggregate amount of Dew bic:ls ezceecla the
a;gregate a.cNIlt of maturiDQ billa. Por purposes of d.et~ such adcli-
may
iCDal ~t., foreign and international monetary authorities are cODaidere4
to l:ao14 $3,387 ai1.1ion of tU orisriAal 13- &Dc! 26-week i.lNe., &AC! $1,l55 .
aillion of the origiDal 52~ i.au..
c:u..tc:aar. r~e.te<l th&t we rei.nvest their maturing
holciiDg. of approximately $900 aillicm ate ~ 1.3-week bill, $723 millicm
2"reallUyD.irect
into the 26 ___ 0
bill, AD4 $f09 m11.ioD into the 52-waek bill.
TaDCler. for t:he bi1.1. will be rec:ei..-.4 at Pe4eral Reserve Banks aDd
1razLC:ha. &J:lc! at the 8\&Zeau of the Public Debt, Washington, D.C. '!'hi. offcu:ing of Trea.ury .ecuritie. i . goverDe4 by the cerma and c:cmditicma sec forth
in the UZUfona OfferiDg C1rcul.&r for Che 8&1e and zasue of Marketable BookIzltry Treaauzy ai1l •• 1Jo~., &D4 »oD4. (31 Cl"1l Part 356, as amended).
J)etail.. about e&Cb O~ tU IWW .ecuriti.. are given in the attached
offulDg high1ipt ••
RR~oe-~ '00
000
H:r:OHLl:GIII'8 01P' -ra.a8URY
TO
l:S.UBD
a.
o...... mta.
01P' Bu.r.a
&pan. at, 11tt
J\p~11
Off.rl!!1 AnGant ••••••••-.............. 7,500 ml11ioB
D••cciptloD of Off.ring_
~.~ an4 type of ••curlty •••••••••• 91-d.y bill
CUSX, awmb.r ••••••••••••••••••••••• 912795 CH 2
&uatioDdat •••••••••••••••••••••••• Apri126, 1999
1 ••0. 4't•••••••••••••••••••••••••• Aprll 29, 1999
. .turity 4at••••••••••••••••••••••• JUly 29, 1999
Original i ••u. 4.t ••••••••••••••••• J.nu.r,v 21, 1999
Curr.Dtly out.tandlng •••••••••••••• $11,083 million
Mini.unbld amount and .ultipl••••• $l,OOO
22, 1'"
$7,500 million
$10,000 mLllion
112-d.y bill
912795 C'l' 6
April 26,
April 29, 199'
October 28, 199t
April 29, 1999
364-day bll1
91271S DT 5
April 27, 1"9
April 29, 1'99
April 27, 2000
April 29, 1999
$1,000
$1,000
1'"
~h.
followinp rul.s apply to all s.curitle. mentioned abov••
~1.sLon of Bla ••
HODC~.titiv. bid ••••••• Accept.d in full'up to $1,000,000 at the higb •• t di.count rat. of .cc.pt.d
conp.titiv. ~ia ••
C~.titlv. bld•••••••••• (1) MU.t b • •~r •••• d a. a di.count ~.t. with thr •• d.clmal. in iDcr...nt.
of .005%, •• g., 7.100%, 7.105%.
(2) N.t long position for . .ch bidd.r mu.t b. r.poete4 when tb. sw. of the
total bid &mOUnt, at .11 di.count rat •• , and the n.t long po.ltion i .
$1 billion or ge.at.r.
(3) H.t long position .u.t be a.t.ralne4 a. of ODe balf-hour prior to th.
clo.ing tim. foe r.c.ipt of ca.petitiv. t.Dd.r ••
Kax~R.copni ••d
Bid
at • Sinpl. Yl.ld •••••••• 35% of public oft.ring
N&ximumAw.rd ••••••••••••••• 35% of public off.ring
a.c.ipt of T.n4.rs.
Honc~.titlv. t.nd.r •••• Peior to 12100 noon ~a.t.rn Daylight Baving tl. . OD auction 4.v
Comp~itiv. t.nder ••••••• Prior to 1100 p . . . . . . t.rn Daylight Baving tl. . on auction d~
.aJ!!nt ~.cma ••••••••••••••• By charg. to a fund. account at a r.d.ral a •••rve aank OD l •• u. dat., or
paym.nt of full par amount with t.nd.r. ~r••• ur.rDlrect cu.ta.are can u •• the
Pay Die.ct feetur. which autbo~i... a cha~g. to th.lr account of r.cord at
th.ir fin.Dcial ia.titutioD on l •• u. dat ••
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington. DC 20239
FOR IMMEDIATE RELEASE
April 23, 1999
Contact: Lori DeRose
(202) 219-3302
CEREMONY HONORS NEZ PERCE CHIEF JOSEPH FEATURED
ON NEW U.S. TREASURY INFLATION-INDEXED I BOND
The U.S. Treasury's Bureau of the Public Debt today unveiled the new Chief Joseph $200
denomination series I inflation-indexed savings bond at a ceremony in Lewiston, Idaho. The
new $200 I Bond will go on sale May 1:; 1999. The bond features a portrait of Chief Joseph
and a background vignette of him mounted on an Appaloosa horse, known for being bred by
the Nez Perce. Participating in today's event are Van Zeck, Commissioner of the Public Debt
from Washington, D.C., Governor Dirk Kempthorne of Idaho, and Samuel Penney, Chairman
of the Nez Perce Tribal Executive Committee.
Chief Joseph is one of eight distinguished Americans featured on the new I Bond. Though he
consistently opposed war, when conflict became inevitable, Chief Joseph and other leaders led
the Nez Perce on a courageous retreat in 1877 for more than a thousand miles through
Montana and Idaho. After a five-day battle during freezing weather conditions with no food or
blankets, only 30 miles from safety at the Canadian border, he surrendered out of concern for
the women and children. In his final years, Chief Joseph spoke eloquently of the injustice of
United States policy toward his people and held out hope that one day freedom and equality
would come for Native Americans.
"Chief Joseph's strong leadership and his belief-in what was right for Native Americans
represents an important part of this country's history and diverse strength," said Commissioner
Zeek. "We are proud to be able to honor the country's past and at the same time help
Americans save for their future,"
Treasury's new inflation-indexed savings bond is designed for Americans seeking to protect
the purchasing power of their investments from inflation. I Bonds offer a guaranteed real rate
of return over and above inflation. I Bonds are sold at face value -- you pay $200 for a $200
bond --and they grow in value with inflation-indexed earnings for up to 30 years. The I Bond
earnings rate is a combination of two separate rates: a fixed rate of return, .currentl y 3. g %,
which remains the same throughout the life of the bond and a variable semi-annual inflation
rate based on changes in the Consumer Price Index for all urban consumers announced every
six months.
RR~ ~ \ ~\
-more-
lAt.tp://www.publicd.ebt.treas.gov
-2-
Honored on the eight I Bond denominations are the following great Americans:
• Helen Keller ($50) - author and advocate for individuals with disabilities;
• Dr. Hector Garcia ($75) - advocate for Mexican-American rights;
• Dr. Martin Luther King, Jr. ($100) - prominent civil rights leader;
• Chief Joseph ($200) - Nez Perce Chief & Native American leader;
• General George Marshall ($500) - author of Marshall Plan & Nobel Peace Prize recipient;
• Albert Einstein ($1,000) - creator of Theory of Relativity & Nobel Prize recipient;
• Marian Anderson ($5,000) - world renowned African-American vocalist;
• Spark Matsunaga ($10,000) - former U.S. Senator & Congressman, World War II hero.
The $200 and $10,000 I Bond denominations go on sale May 1, 1999; the other six
denominations went on sale September 1, 1998. I Bonds can be purchased from financial
institutions. through a payroll savings plan where you work or the new U.S. Savings Bonds
EasySaver Plan. For more information on I Bonds and other new initiatives in the savings
bond program visit: www.savingsbonds.gov.
000
PA - 402
.-,'"
"
.. '
~
. a.·"
~
• Bonds
Everyone Needs a Safe Place to Grow.
QUESTIONS AND ANSWERS ABOUT NEW I BONDS
Features
1.
What are I Bonds?
I Bonds are a new type of bond
designed for investors seeking to
protect the purchasing power of their
investment along with a guaranteed
real rate of return. I Bonds are an
accrual-type security-meaning
interest is added to the bond monthly
and paid when the bond is cashed. I
Bonds are sold at face value-you pay
$50 for a $50 bond-and they grow in
value with inflation-indexed earnings
for up to 30 years.
2.
Why is the Treasury offering the I
Bond and will it replace Series EE
bonds?
The Treasury is offering the I Bond to
provide more Americans with the
opportunity to protect the purchasing
power of their savings from inflation.
Investors are being offered a bond
with a fixed rate combined with
semiannual inflation adjustments that
will help protect purchasing power.
No, the I Bond will not replace Series
EE bonds; both will be on sale to give
investors a choice.
3.
How are the earnings rates of I
Bonds determined?
The earnings rates of I Bonds are a
combination of two separate rates: a
fixed rate of return and a variable
semiannual inflation rate. The fixed
rate remains the same throughout the
life of the I Bond, while the
semiannual inflation rate can vary
every six months.
The fixed rate of return is announced
by the Treasury Department each
May 1 and November 1. The fixed
rate of return announced on May 1 of
a given year is the same over the
entire life of the I Bonds you purchase
between May 1, and October 31 of
that year. Likewise, the fixed rate of
return announced on November 1 of
a given year, applies to the entire life
of an I Bond purchased between
November 1 and April 30 of the
following year.
The semiannual inflation rate is also
announced each May 1 and
November 1 by the Treasury
Department. The semiannual inflation
rate is based on changes in the
Consumer Price Index for all Urban
consumers (CPI-U), which is reported
by the Bureau of Labor Statistics. The
semiannual inflation ra'te announced
in May is a measure of inflation over
the preceding October through
March; the inflation rate announced in
November is a measure of inflation
over the preceding April through
September.
wW'W.savi ngsbonds.gov
The semiannual inflation rate is combined with the
fixed rate of an I Bond to determine the I Bond's
earning rate for the next six months.
4. When are earnings added to the I Bond?
I Bond earnings are added each month, and
interest is compounded semiannually. I Bonds
increase in value on the first day of the month. An
I Bond's issue date is the month and year when full
payment is received by an I Bond issuing agent.
5. Can I ever lose money in I Bonds?
No. I Bonds are U.S. Treasury securities backed by
the U.S. Government. I Bonds even protect you
from the effects of deflation. In the rare event that
the CPI-U is negative during a period of deflation
and the amount of the decline in the CPI-U is
greater than the fixed rate, the redemption value of
your I Bonds will remain the same until the period
of deflation ends.
6. How long will my bond earn interest?
I Bonds earn interest for up to 30 years.
7. What are the tax advantages of the I Bond?
Earnings are exempt from state and local income
taxes. Federal income taxes can be deferred for up
to thirty years, or until redemption or other taxable
disposition, whichever comes first.
8. Is there a tax advantage for I Bonds used for
college tuition?
10. How much do I Bonds cost?
I Bonds fit all budgets. They will be sold at face
value in denominations of $50, $75, $100, 5200.
$500, $1,000, $5,000, and $10,000. ThiS makes it
easy to keep track of the growth of your bond's
value.
11. Is there a limit on how much can be invested
each year in I Bonds?
Yes. You can buy up to $30,000 worth of I Bonds
each calendar year. The purchase limitation for
Series I Bonds is not affected by purchases of
Series EE bonds.
12. Where can I buy I Bonds?
You can order I Bonds at most local financial
institutions. You just fill out a simple purchase
order, pay for the bond, and your I Bond will be
mailed to you within three weeks. I Bonds will also
be available through employer-sponsored payroll
savings plans. Check with your employer to see if I
Bonds will be available where you work. If not, let
them know you are interested.
13. Can I Bonds be purchased as gifts?
I Bonds are great gifts for all occasions. An I Bond
can be sent to you so that you can present it
personally or'it can be sent directly to the person
receiving the gift. When you buy the I Bond, ask for
a free gift certificate. The word "gift" will not appear
on the I Bond.
14. Who can buy I Bonds?
Yes. If you qualify, you can exclude all or part of
the interest on I Bonds from income as long as the
proceeds are used to pay for tuition and fees at
eligible post-secondary educational institutions.
This tax advantage is the same one available for
Series EE bonds. Details are available in IRS
Publication 550, "Investment Income and
Expenses." Contact your nearest Internal Revenue
Service District Office to get this publication.
U.S. citizens and residents of any age with a social
security number can buy I Bonds.
15. How can I Bonds be registered?
There are three primary ways to register I Bonds:
• Single ownership: Only the registered owner
can cash the I Bond.
• Coownership: Two individuals' names appear on
Investing and Redeeming
9. When will the I Bond be available?
On September 1, 1998 six denominations ($50,
S75, $100, $500, $1,000, $5,000) will be available
for purchase through financial institutions across
the country. Two additional denominations ($200
and $10,000) will be available in May 1999,
the I Bond; either person may'cash the I Bond
without the knowledge or approval of the other.
Upon the death of one coowner, the other
becomes the sole owner of the I Bond.
• Beneficiary: Only the owner may cash the I Bond
during his or her lifetime. The beneficiary
automatically becomes the sole owner of the I
Bond when the original owner dies.
The registration on an I Bond can be changed but
there are some restrictions. Check with your bank.
This information will also be on our web site
(www.savingsbonds.gov).
Where Can I Bonds be redeemed?
Most financial institutions serve as paying agents
for I Bonds and Series EE bonds. If they redeem
Series EE bonds, they redeem I Bonds.
When can an I Bond be cashed in (redeemed) if
I need the money?
An I Bond can be cashed in (redeemed) six months
after the issue date to get the original investment
plus the eamings. However, I Bonds are meant to
be longer term investments. So, if you redeem an I
Bond within the first five years, there is a 3-month
earnings penalty. For example, if you redeem an I
Bond after 18-months your will get 15 months of
c·
earnings.
20. Which Americans will appear on the I Bonds?
Eight Americans are honored on the I Bonds,
representing the diversity that built this country,
made it what it is today, and wi" take it into the
future. Portraits of the following prominent
Americans will appear on the eight I Bond
denominations.
• $50 - Helen Keller - Noted author and advocate
for people with disabilities; responsible for Brai"e
becoming the standard for printed
communications with the blind.
• $75 - Dr. Hector P Garcia - Physician; leading
advocate for Mexican-American veterans' rights;
activist in Latino civil rights movement and
founder of the American G.!. Forum.
• $100 - Dr. Martin Luther King*, Jr. - Prominent
Civil Rights Leader; Minister; Nobel Peace Prize
Recipient.
How are lost, stolen, or destroyed I Bonds
replaced?
• $200 - Chief Joseph - Nez Perce Chief; a great
Native American leader."
The Bureau of the Public Debt is authorized to
replace lost, stolen, or destroyed I Bonds. You can
file a claim by writing to: Bureau of the Public Debt,
Parkersburg, West Virginia 26106-1328. You will
need to complete Form PO F 1048. This form is
available at most financial institutions, or you can
download it from our web site:
www.savingsbonds.gov.
• $500 - General George C. Marshall - U.S. Army
Chief of Staft during World War II; Secretary of
State; Secretary of Defense; Nobel Peace Prize
Recipient.
Keep records of your I Bond serial numbers, issue
dates, and the social security or taxpayer
identification numbers in a safe place. This
information will help speed up the replacement
process. The Savings Bond Wizard (free software
available on our web site) is a great way to keep
track of your savings bond inventory (see
question 22).
• $5,000 - Marian Anderson - World-Renowned
Vocalist (Contralto); first African-American to sing
with the Metropolitan Opera.
loring Great Americans
What is new about the appearance of the I
Bond?
The I Bond's physical dimensions and the
placement of the information will be the same as
for the Series EE bonds. However, each I Bond
:lenomination will feature a prominent American
Nho has contributed to the history of this country;
~Iso the background and colors will be new and
jifferent from the Series EE bonds.
• $1,000 - Albert Einstein - Physicist; Author of the
Theory of Relativity; Nobel Prize Recipient for
Physics.
• $10,000" Spark Matsunaga - U.S. Senator and
Congressman; World War II Hero; obtained
redress for survivors of World War II internment
camps.**
'lIcense granted by Inte:lectual Properties Management. Inc .. as Manager of
the Estate of Martin Lut~er King. Jr,"
··The $200 and $10.000 cenomlnatlons will not be available pnor to May 1999
~or More Information
1. Is there information on the Internet about I
Bonds?
Yes. Visit our web site on the Internet at:
www.savingsbonds.gov. It has information on the
new I Bond, as well as general information about
savings bonds, and other Treasury securities. You
can request order forms and e-mail question and
comments.
2. What is the Savings Bond Wizard?
The savings Bond Wizard is a free computer
program developed by Treasury's Bureau of the
Public Debt. It lets you keep an inventory and an
up-to-date record of the current value of your
savings bonds (Series EE and I Bonds when
available for purchase). You can download the
Wizard from our web site: www.savingsbonds.gov.
~3.
Can I write or call for more information?
For more information write: Bureau of the Public
Debt, Savings Bond Operations Office,
Parkersburg, WV 26106-1328. To get current rate
information on savings bonds, call:
1-800-4US-BOND (1-800-487-2663). You can also
get detailed rate information by looking at the
United States Savings BondslNotes Earnings
Report. The Earnings Report is available on our
web site (www.savingsbonds.gov), or you can send
a post card to the above address.
The official Offering Circular (31 CFR 359) and
Regulations Governing I Bonds (31 CFR 360) will
be available via our web site before the first day of
sale on September 1, 1998,
(www.savingsbonds.gov) or you can write to the
above Parkersburg, WV address.
S8-2267
$200
Chief Joseph
N(I840-1904)
-Nez Perce Chief Chier Joseph, a Native American leader, is best known for his principled resistance to the U.S.
government's attempts to force the Nez Perce onto a reservation. An 1863 treaty took away their
lands and forced the Nez Perce and their leader into a position of resistance. Though he consistently
opposed war, when conflict became inevitable Chief Joseph and other leaders led the Nez Perce on a
courageous retreat in 1877 for more tban a thousand miles through Montana and Idaho. After a
flVe-day siege only 30 miles from safety, he surrendered. In his final years, Chief Joseph spoke
eloquently of the injustice of United States policy toward bis people and held out hope that one day
freedom and equality might come for native Americans.
Chief Joseph was born in Oregon in 1840. He was given the name Hinmaton·Yalaktit (Hin·mah-too-yahlat-kekt) or Thunder Rolling Down the Mountain but was known as Joseph, or Joseph the Younger,
because his father had been baptized Joseph by a Christian missionary in 1838.
In 1871, Chief Joseph succeeded his father as Chief of the Wallowa band of Nez Perce. He inherited a
volatile situation because some Nez Perce resisted the federal government's efforts to force them into a
small Idaho reservation one tenth the size of their native lands. In 1877, after the cavalry threatened to
attack, Chief Joseph and other leaders began the journey to the reservation. On a night that Chief Joseph
was away from camp, a young Nez Perce man and his friends, avenging the killing of his father, attacked
and killed a white settler. Immediately, the cavalry began to pursue Chief Joseph and other Nez Perce, and
although he opposed war, he sided with the war leaders.
In a valiant series of battles which took place over three months, the Indian tribe of 700 with fewer than
200 warriors fought 2,000 U.S. soldiers in four major battles and several smaller ones. General Howard,
leading the opposing cavalry, was impressed with the skill with which they fougbt using advance and rear
guard, skirmish lines and field fortifications. Finally, after a devastating five-day battle during freezing
weather conditions with no food or blankets, Chief Joseph formally surrendered on October 5, 1877.
After surrendering, Chief Joseph and his people were taken to Kansas and present-day Oklahoma. It was
not until 1885 that they were returned to the Pacific Northwest, and even then Chief Joseph and others
were taken to non-Nez Perce territory. Chief Joseph died in 1904, still in exile, on the Colville Reservation
in Washington.
MEDIA ADVISORY
CEREMONY TO HONOR SPARK MATSUNAGA FEATURED
ON NEW U.S. TREASURY SAVINGS BOND
WHO:
Mary Ellen Withrow, Treasurer of the United States
Matthew M. Matsunaga, Hawaii State Senator
loichi Saito, Chairman & CEO, Central Pacific Bank and President,
Hawaii Bankers Association
WHAT:
Unveiling of the Spark M. Matsunaga $10,000 series I inflation-indexed
Savings Bond.
WHEN!
The media are cordially invited to cover the 30-minute formal unveiling
ceremony beginning at 9:00am, Monday, May 3, at the Japanese Cultural
Center of Hawaii, 2454 S. Beretania St., Manoa Grand Ballroom, 5th flr.
WHERE:
WHY:
Spark Matsunaga is one of eight Americans honored on the new I Bond
chosen for their significant contributions to America's past, present and
future. From a Treasury Department statement: "Spark Matsunaga, a war
hero who became a United States Senator, dedicated his career to
promoting peace and achieving justice. He was a champion of civil rights
for all Americans and he fought for redress for survivors of World War II
Internment camps."
CONTACTS: Lance Tomasu, Public Relations Officer, Central Pacific Bank, for local
media support and ceremony details: (808)544-0685.
Robert Sudderth for Treasury Department media support: (510) 337-5039.
BACKGROUND-THE I BOND:
The Spark M. Matsunaga I Bond is one of eight denominations seeking to
protect the purchasing power of Americans with a real rate of return. They grow
in value with inflation-indexed earnings for up to 30 years. I Bonds are sold at
face value. Other great Americans honored on I Bond denominations are: $50Helen Keller; $75 - Dr. Hector Garcia; $100 - Dr. Martin Luther King, lr.; $200
- Chief Joseph; $500 - General George Marshall; $1,000 - Albert Einstein;
$5,000 - Marian Anderson.
BACKGROUND - TREASURER WITHROW:
Mary Ellen Withrow was confirmed unanimously by the U.S. Senate as the 40th
Treasurer of the United States. She is the first person to have held the post of
treasurer at all three levels of government - local, state and national. Withrow
began her public service career in Ohio. She is an inductee into the Ohio
Women's Hall of Fame and a recipient ofa Women Executives in State
Government fellowship to Harvard University.
lREASURY
NEWS
~8~q. . . . . . . . . . . . . .. .
. . . . . . . . . . . . . .
-
OmCE OF PUBUC AFFAIRS • 1500 PENNSYLVANIA AVENUE. N.W.• WASHINGTON, D.C.. 20220. (202) 622-2960
FOR IMMEDIATE RELEASE
April 25, 1999
"Roots of the 'Asian' Crises and the Road to a Stronger Global Financial System"
Remarks by Lawrence H. Summers
Deputy Secretary of the Treasury
Institute of International Finance
Washington. DC
Thank you. We come together at an important moment. While much of what was feared when the
international financial community came together in Washington 6 months ago has not materialized
and there are signs of increasing confidence in a number of countries, huge challenges remain.
Rather than focus on current developments. this e\t~ning I want to reflect on the profound challenges
that a more global capital market presents to the international financial community: the threats that it
poses. and the opportunities it offers to all of the \\orld's people.
There arc fe\\ things \\ ith as great a potential to rai~e human welfare than the creation of a safe and
sustainable S) stem for the flo\, of capital from the de\eloped world to the developing one. The major
industrial nations are crossing the threshold intl) an era of rising rates of retirement and much lower
rates of labor force gro\\ th. Negati\ c population growth is already a fact in some European countries
and the iO\cstmcnt of n~tirement sa\ ing is becoming a critical concern.
All of the \\l)r1d·s population gro",th over the next 25 )ears - and the lion's share of its growth in
producti\ it) - \\ ill take place in the de\eloping (ountries. The upshot is that we are heading into a
period "hen there \\ill be exceptional global benefits to successful economic development in the
developing \\orld. And make no mistake: a health) (apacity to mobilize capital in these economiesbecause of the trade that it finances. because ()f the technology it brings, and because of the
opportunities it olTers - has a \ er) important part to play in that development.
That said. fe\\ \,ould deny that the experience of developed country investment in developing ones
has been decidedly mixed. In principle. ne\\ finan(ial technologies and instruments offer
considerabk potential for better allocating global im estment and managing its risks. But it would
perhaps be a fair verdict on the ups and do\\ns of emerging markets during the 1990s to say that this
potential has yel to be realized.
RR-3102
For prf?ss rf?/f?Cllf's. lpef'cht·s. public scht'dult'S and offinal biographies. call our 24-hour fax line at (202) 622-2040
>(
The financial crises that began in Thailand in the summer of 1997 have to be a major concern for all
of those who care about the global development effort and those who care about the global financial
system. They are crises that have had grave human consequences in the economies worst affected,
and whose effects have been felt in financial markets around the world.
This evening I would Iike to reflect on the roots of some of these crises and on some of the most
important elements of what has come to be called the reform of the international financial
architecture. This is not an undertaking that will finish at these meetings or at the Cologne Summit or indeed, at any future meeting. It is a continuing task and one that is impossible without close
consultation and cooperation between lenders and borrowers in particular situations and the public
and private sectors more generally. In this regard, I would observe that all of us in the public sector
have benefited enormously from the work of the Institute of International Finance.
I.
Key Sources of The Crises
Tolstoy once said that happy families are all alike, but every unhappy family is unhappy in its own
way. The s~me can perhaps be said of financial crises: no diagnosis will ever quite fit all. At the
broadest level, however, these crises can be said to have been marked by the combustion of two
factors: weak underlying fundamentals along with imprudent lending, and sharp, self-fulfilling
declines in confidence.
Deep macro-economic imbalances. untenable exchange rate regimes, widespread micro-economic
distortions - including too many implicit public guarantees for too many investors and institutionsand deep weaknesses in financial systems: all of these are central to understanding the roots of the
crises in Asia and elsewhere. The result was the same problem at the root of nearly all financial
crises: too much money borrowed. and invested in \\ays that generated too little capacity to repay.
Serious though they were. in each case these weaknesses might possibly have been fixable in some
time period. But when trouble came. these problems were compounded by the second factor: a selfperpetuating decline in market confidence. After a period of credit that was perhaps too easy, and
too cheap. a kind of bank run psychology took hold. \\ ith investors thinking less about the
fundamentals and more about what other investors \\cre doing and \.. ho was going to be the last out.
As the psychology of the market shifted. investors began to weigh the level of foreign reserves
against the likely incipient demands to take hard currcncy out of the country in the succeeding
months. And the opportunity to fix the fundamentals \\ ithout up-ending the economy drained away.
The rest, you might say. is history.
The novelty of these crises - and others that \\ t: ha\ c ~t:cn in recent years - is that they have been
what might be called capital account crises. The dominant source of pressure has been less economic
contraction caused by the reluctance to finance expenditure in excess of national incomes than it has
been pressure to withdraw a large amount of capital. caused by domestic and foreign investors alike.
Crises are. in a sense. accidents. As with accidents. crises will never be eliminated and are not
amenable to silver bullet solutions. Think of auto accidents. If one looks back at any auto accident
there are always many things that could have combined to produce greater safety. If the driver had
been driving less recklessly - or wearing a seat belt - it might not have happened. If the road had
2
been better designed the markings clearer - it might not have happened. If other drivers had been
more attentive. or the weather less treacherous - it might not have happened.
Accident prevention is inherently an ongoing and multifaceted matter. It is good because it reduces
the cost of accidents. and because it is essential to building a transportation system that gets people
where they want to go. In the same way, creating a safer, healthier financial system will be valuable
because it reduces the number and cost of financial accidents, and because it will enable capital
markets to make a larger contribution to grow1h and development in the developing countries and
investment diversification in the industrial ones.
Effective efforts to improve safety will comprise two broad elements: strong national policies in
emerging market economies: and improved policies at the international level, both for preventing
crises and for resolving them when they occur.
II.
Strong National Policies in the De\'eloping Economies
The grandest schemes of global financial architects will achieve little without a major commitment to
building safer. stronger systems for allocating capital in the developing countries. The international
community cannot want stability in any country more than its own citizens and government. No
amount of international support will build stability if the domestic will to reform is lacking.
Building safer national financial systems will mean getting the basics right: pursuing strong,
mutuall) consistent monetary. fiscal and exchange rate policies. And it will mean governments
putting in place legal and regulatory underpinnings for markets that lessen the probability that
financial imbalances will arise. and can help contain the effects when they do occur.
Let me focus on three challenges for polic) makers in emerging market economies whose importance
has been especial!) highlighted by the e\ents of the 1990s.
I .ill Ftkcrl\'l' Fillallcialln{rasrrucrure
Ifont: \\cn: \Hiting a history of the American capital market I think one would conclude that the
single mu~t important innu\ atiun shaping that market was the idea of generally accepted accounting
principle, CiA:\P are nClt a single institution. The) are not a single magic bullet. They are an
llngl.llng pn~e"" that rcall) i~ \\ hat makes our capital m<.lrket work and makes it as stable as it is.
Ve~ much the same kind of thing is needed in the emerging economies.
Among other things. an effective infrastructure means:
•
Creating the right kind of super\iso~ regime: including tough nondiscriminatory entry
n:quirements: prudential norms for capital. Ilquidit) and currency exposure; limits on directed
lending: strict rules governing income recognition. classification and provisioning; reporting and
disclosure requirements: a risk-based regime for remedial actions; consolidated supervision; an
efTecti,e frame .... ork for dealing with insolvent institutions; and strict and transparent rules about
the extent of depositor safety nets.
3
•
Developing a true credit culture within individual institutions and firms and the financial system
as a whole, buttressed norms of accounting, transparency and effective corporate governance.
•
And it means all of these rules and practices being rooted in a rule of law and all that that implies,
including independent judiciaries and bank supervisors and effective bankruptcy regimes.
Describing the ingredients for stronger domestic financial systems is one thing. The challenge for the
international community is to find ways to induce countries to put them in place. Concrete steps
toward this end include:
•
Efforts to expand and reinforce norms o/tramparen(v in economic andjinancial data, including
the development and expansion of the IMF's Special Data Dissemination Standard (SDDS). This
has now been widely adopted by industrial and emerging market economies and will incorporate
full details on reserves, and any claims against them, from April 2000.
•
Development 0/ new codes to help im'cstors and the official community judge national policies
beller and sel "best practice" standards/or K0\,ernments themselves. The IMF's new Code on
Fiscal Policy has now been adopted, and a Code on Monetary and Financial Policy is expected to
be formally adopted in October. International groups have now endorsed new standards on
insolvency and debtor-creditor regimes.
•
Development 0/ stronr,er standards and .,Ium:d principles/or the jinancial and corporale sec/or
lI'orldll·ide. the Basle Committee on Banking Supervision, the International Organization of
Securities Commissions. and the OECD ha\c adopted -- or will soon adopt -- new standards or
principles for the financial sector. regulators. and corporations .
., The RighI .\/olch of Capt/ol InflOlI\
/I! /)oml'\lI~' (
'opaclt\'
We have seen, once again. in these crises. the ri~J...s that global capital flows can bring. Properly
paced li~ralilation of the capital account is es~ential. as the damage that premature. patchwork
liberalization can do is nil too c1cnr. It is nlso important to recognize that countries that have got into
troublc ha\ e t~ picall~ had major pol ic~ biases in 1';1\ or of short-term capital.
•
We sa\\ this in \1c:\ico. \\ ith the increasing reS\lrt to issuing dollar-denominated Tesohol1os in the
lead-up ttl CriSIS.
•
We sa\\ it in Thailand. in the ta:\. hn:ak~ pn pfhhllre I~lrcign borrowing and the government's
decision to mortgage all of its resenes lIn fllf'\\ard markets.
•
We saw it in Korea. \\here
tenn capital in.
•
And \\ e sa" it in Russia. in the go\t:rnmcnt's Jctcrmined efforts to attract international investors
to the market for ruble-denominated GKOs.
discriminJhH·~
c\lntwls kept long-tenn capital out, and ushered short-
4
There are reasons why governments were drawn into this kind of behavior: the interest cost of shorttenn debt is usually lower, and such flows are attractive compared to putting in place the reforms
needed to attract longer-term investment flows. But as Secretary Rubin noted last week, the lesson of
these experiences is surely that the price of longer term and less risky types of borrowing in such
economies is a price worth paying.
Governments need to take this lesson to heart in their own debt management policies, and they need
also to apply it in the design of tax and regulatory regimes, resisting tax incentives or special
schemes that distort capital flows into the riskier forms of debt. As I will discuss later, among other
things, provision of the IMF's new Contingency Credit Line will be structured around encouraging
countries to adopt safer practices in this area.
3. Appropriate Exchange Rate Regime
Even economists who agree on most aspects of economic theory and practice will often be divided
on the relative merits of fixed and floating exchange rates. For some, such as Milton Friedman.
exchange rates are a price that should be flexible for the same reasons that others are. For others, it is
a promise. one that should be firm and that should not be broken or devalued.
The choice between these two poses enormous difliculties and permits no easy answers. But history
- and economic theory - do tell us that the three objectives of free capital mobility, an independent
monetary policy and the maintenance of a fixed exchange rate objective will ultimately prove to be
mutually incompatible. I suspect this means that as capital market integration increases, countries
will be forced increasingly to more flexible or more purely fixed regimes.
While regimes in between these two extremes ha\ e had successes in a number of countries. the
problem of the exit strategy is not one to v.hich many governments have found a satisfactory
solution. Irone delays until there is no choice. the results arc usually calamitous. But acting while the
choice still exists can be tremendously diflicult politicJlly Jnd may threaten to lose hard-won
stability.
Once again. there is no single answer to these dilemmas and the right exchange rate regime is a
choice for the individual country. But \\e have to recognize that the contagion caused by failed
regimes gives the \\orld an increasingly large stake in the right choices being made.
At the center of almost every recent crisis "as a rigid. but not heavily institutionalized exchange rate
regime that pro\ ed to be unsustainable. As SecretaI') Rubin has said, we believe that, under the
circumstances. the international communit~ . s judgments in responding to these crises were the right
ones. But the goal for the future cannot be simpl~ t() react appropriately to difficulties as they arise. It
must also be to improve the quality of the optilms.
We believe that the international community needs to \\ork to shape expectations about the official
response to financial problems going fomard. in order to strengthen the incentive to pursue
sustainable regimes. As a matter of policy, we in the United States therefore believe that the
international community should not provide exceptional large scale official finance to countries
intervening heavily to defend an exchange rate peg. except where the peg is judged sustainable and
where certain exceptional conditions have been met, such as when the necessary disciplines for
5
policy makers have been institutionalized. or when an immediate shift away from a fixed rate is
judged to pose systemic risks.
Recent events. along with the advent of European economic and monetary union, have sparked
renewed discussion of dollarization in several Latin American countries. This would be a highly
consequential step for any country, one that has to be considered with a careful eye to various
potential costs and benefits.
As Secretary Rubin has said, we do not have an a priori view as to our reaction to the concept of
dollarization. There are a variety of means and modalities for achieving it and we would expect to
discuss these with any government seriously considering taking such a momentous step. There are.
however, certain limits on the steps that the United States would be prepared to take in the context of
such a decision: specifically, it would not, in our judgment, be appropriate for United States
authorities to extend the net of bank supervision. to provide access to the Federal Reserve discount
window, or to adjust bank supervisory responsibilities or the procedures or orientation of United
States monetary pol icy in light of another country deciding to adopt the dollar.
An effective financial infrastructure. not reaching for short-term capital, more appropriate exchange
rate regimes: taken together. these things. could have important implications. How different history
might have been if Thailand and Korea had not invisibly mortgaged their reserves; if Russia and
Indonesia had depended less on short-term capital and developed a credit culture with secure
property rights and credible contract enforcement: if all the countries that experienced crises since
Mexico in 1994 had either been able to harden and ultimately defend their exchange rate regime or
pursued a more effective exit strategy.
III.
Proper Intcrnational Systcms for PrcHnting and Resolving Crises
Beyond the encouragement of stronger national policies. there is much that the major industrial
countries. lenders within those countries. and the international community as a whole can do to create
an environment in v.hich financial problems and crises an: less likely to arise, and emerging market
economies have the best possible prospects for successful gro'Wlh.
l. SlronX fv/tdes ill the .\lajor industrial Econcmlll's
Industrial countries can make an enormous contribution to gro\\th and stability in the developing
world simpl~ b~ I-.ecping their economies gro\.. ing and their markets open. If the external economic
climate had not deteriorated as sharpl) as it did in 1997 - led by the rapidly declining performance of
Japan - it is fair to say that the \\ ider Asian crisis might not have erupted at the time that it did. or
with the same kind of severity.
Strong policies in the industrial economies to support gro\\lh and open markets are needed over the
long term and they are needed today. The risks globally are still very much tilted toward lack of
gro\\lh. spare capacity. and slowdown. Concerns arc about excess supply not excess demand. And in
many places \\orries about rising prices have given way to concern about falling prices.
We in the United States will do everything \\e can to preserve solid growth in our economy and keep
our own markets open to the emerging economies. But the shift in the balance of global risks puts the
6
burden of responsibility on all of the industrial economies - in Europe and in Asia - to pursue'
policies aimed at creating strong domestically generated growth and preserving open markets.
Just as financial events have been very important to what happens to global trade flows these past
two years, it is likely that the reverse will be true in the months ahead. A crisis in the global financial
system must not be permitted to give rise to a crisis in the world trading system
2. More Effective Inducements For Sound Practices Globally
It is important to remember that every ill-judged credit has both a lender and a borrower. Steps to
induce bener risk management and prudent dec ision-making on the part of financial institutions in
the industrial economies must also be part of the reform effort going forward. Encouraging more
prudent practices will be important for the flow of capital to the developing world, and more
generally for avoiding the kind of systemic risk we faced last fall in the wake of the collapse of
LTCM.
Here. concrete changes are in progress on a variety of fronts, including:
•
Encouragement of stronger international regula/of)' cooperation: a new Financial Stability
Forum. which met for the first time on April l-t. brings together national authorities. international
financial institutions. and regulatory bodies to consider how best to strengthen supervision and
reduce systemic risk. Going forn'ard it will be important to reach out to involve a broad range of
relevant countries in this effort.
•
SlrenKthened Kloha/ incen/iws for prudent risk assessment and lending decisions: in this regard
we believe it especially important that the Basle Committee complete its updating of the Baste
Capital Accord. by expanding the number of credit-risk categories and revising the current all-ornothing system for classifying loans to sovercign borrowers busts.
•
Improved puhlIc reporllnK and di.\closure hyfinancwl Instilutions and their credilOrs: to this end.
the President's Working Group on Financial Markets. chaired jointly by the principal federal
regulatory bodies in the United States and Secretary Rubin. will soon be releasing proposals to
require more disclosure of the exposure of financial institutions to other financial institutions and
to hea\il~ le\craged market participants.
J
,\furL' Effafll'l! Remllilion (~rCri.\n
Capital account crises of the modern type havc man~ elements. But once they are upon us, they are
centrally problems of confidence. It is then in the mutual interest of creditors and debtors that
confidence be restored. Without the right national policies, any amount of external official support or
extension of private debt obligations will be in vain. But as we saw in Korea in a particularly
powerful "ay. "here the refonn commitment is present, conditioned provision of finance and private
sector coordination may both be needed to create an environment of confidence.
The challenge we face is to devise mechanisms for responding to these new kinds of crisis, and the
bank run psychology that can drive them. In this regard the Supplemental Reserve Facility, created in
7
the fall of 1997, was a major innovation. We have now taken a very important further step with the
development of the CCL.
Like the SRF, the CCl will carry premium interest rates and shorter maturities, to maximize
countries' incentive to seek alternative, private sources of finance. It is designed to reduce the risk of
contagion to countries with strong polices and institutions and directly encourage countries to reduce
their vulnerability to crisis before lhe worst happens. through the adoption of sounder policies and
practices.
The question of the appropriate private sector role in resolving such crises is a delicate one. We are
very much aware that debt is an obligation which must be honored whenever possible; that growth
depends on the continued flow of pri vate sector capital, wh ich in tum depends on meeting
obligations; and that confidence is the mirror image of moral hazard. It is the irony of financial crises
that while they are usually caused by too much lending. they are ended by lending more.
At the same time. private sector coordination in its mutual interest can playa crucial role in crisis
resolution. Going forward. where countries are unable to service their debts in their entirety, public
sector financing of private sector credit is neither effective nor appropriate. And instruments that
were issued carrying spreads of many hundreds of basis points cannot be counted on with absolute
certainty to be repaid on time.
As Secretary Rubin said last week. there is no reason why one category of unsecured private
creditors should be regarded as inherently privileged relative to others in a similar position. When
both are material. claims of bondholders should not be viewed as necessarily senior to claims of
banks.
I am convinced that cookie-cutter fonnulae or preset procedures can never be pre-designed to
respond 0 he various circumstances that will arise. A case-by-case approach, based on the interests of
the country involved. its creditors. and the system as a \I,hole. will work best.
As part of an evolving international financial market. there is case based on the mutual interests of all
affected. for the voluntary adoption of provisions in bond contracts of clauses that can facilitate
creditor coordination. There is understandable concern that to prepare for an organized approach to
debt problems is to invite one. On the other hand. accidents will happen, and when they do creditors
and debtors need to be free to reach a cooperative solutions without being held hostage to a'
recalcitrant fe".
IV.
Conclusion
As Secretary Rubin has said many times as this elTort has proceeded. building a stronger more stable
global financial architecture for the next century poses immensely complex issues. They will not
permit of magic bullets or grand solutions. But let there be no doubt about the basic ends or means: a
strong and sustainable. truly global financial system is what we should all want to see. And with your
help. that is what we are working to build. Thank you.
-30·
Press Notice
- 1Y
'9 0~
A pn·1"":'),
2nd Seminar on the International Financial Architecture
Washington, D.C.
Senior officials from the finance ministries and central banks of thirty-three economies l __
exchanged views at a meeting today on key issues related to the international fmancial architecture.
Three broad topics were the subject oftoday's discussions:
[J
Prudential Oversight for Financial Market Participants in Industrial Countries
o
Strengthening Financial Systems in Emerging Market Economies
r
Minimizing the Human Cost of Crises and Encouraging the Adoption of Policies that
Better Protect the Most Vulnerable in Society
The meeting, co-hosted by L:nvrence H. Summers. Deputy Secretary, U.S. Treasury
Department. and Alice Rivlin, Vice Chair. Board of Governors, U.S. Federal Reserve System. was
the second such meeting convened at the initiative of the Finance Ministers and Central Bank
Governors of the Group of Seven. The first was hosted by Germany in Bonn on March 11th of this
year.
RR-3103
IArgentina, Australia, Belgium, Brazil, Canada, Chile, China, Cote D'Ivoire, Egypt, France,
Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, Morocco,
Netherlands, Poland, Russia, Saudi Ara.bia, Singapore, South Africa, Spain, Sweden, Switzerland,
Thailand, Turkey, United Kingdom and United States. Also attending as observers were representatives of
the Bank of International Settlements, the European Central Bank. the International Monetary Fund, the
Organization for Economic Cooperation and Development and the World Bank.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TRRASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
'OR IMMEDIATE RELEASE
,pril 26, 1999
Office of Financing
CONTACT:
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term:
Issue Date:
Maturity Date:
CUSIP Number-:
High Rate:
91-Day Bill
April 29, 1999
July 29, 1999
91279SCH2
4.335%
Investment Rate 1/:
Price;
4.45n
98.904
All noncompetitive and successful competitive bidders wer-e awarded
ecurities at the high rate. Tenders at the high discount ·rate we!:"e
llotted 59%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tende:r;ed
Tender Type
Competi ti ve
Noncompeti ti ve
$
21,350,596
Accepted
$
1,293,914
6,916,4102/
22,644,510
PUBLIC SUBTOTAL
Foreign Official Refunded
SUBTOTAL
Federal Reserve
Foreign Official Add-On
TOTAL
$
5,622,490
1,293,914
589,767
589,767
23,234,277
7,506,177
3,722,815
91,633
3,722,B13
91,633
27,048,725
$
11/320,625
Median rate
4.310~: 50~ of the amount of accepted competitlve tenders
s tendered at or below that rate. Low rate
4 _220%:
5% of ~he arr,ount
accepted competitive tenders was tendered a.t or below that race.
d-to-cover Ratio = 22,644,510 /
6.916,410 ~ 3_27
Equivalent coupon-issue yield.
Awards to TREASURY DIRECT - $975,559.000
RR-3104
~ttp!llwww .pubUcdcbt,trelU.gov
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public
Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
Office of Financing
CONTACT:
'OR IMMEDIATE RELEASE
.pril 26, 1999
202-219-33'30
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
182-Day Bill
Term:
April 29, 1999
Issue Date:
Maturity Date;
October 28, 1999
91279SCT6
CUS I P Numbe r :
·4-410%
High Rate:
Investment Rate 1/:
Price;
4.585't"
97.771
All noncompetitive and successful competitive bidders were awarded
:ecurities at the high rate. Tenders at the high discount rate were
.llatted 12%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Accepted
Tendered
Tender Type
u
_ _ _ _ -----~------
$
competitive
Noncompetitive
21,173,l76
1,067,546
22,240,722
PUBLIC SUBTOTAL
---~-------------
3,7~5,362
1,067,54.6
----------------4,812,908 2/
2,697,673
2,697,673
Foreign Official Refunded
...
--------------
....
24,938,395
7,510,581
3,640,000
420,127
3,6-iO.OOO
420,127
-----------------
---------------~-
SUBTOTAL
Federal Reserve
Foreign Official Add-on
$
TOTAL
----~----------.-
$
28,998.522
$
11,570,708
Median race
4.380~: 50~ of the amount of accepted competitlve tenders
as tendered at or below that rate.
Low rate
4.310%:
5~ of the amcunc
f accepted compe~i~ive tenders was tendered at or below that rate.
id-tc-Cover Ratio
=
22,240,722 / 4,812,908 = 4.62
/ Equivalent coupon- issue yield.
/ Awards to TREASURY DIRECT = $784,997,000
RR.3105·
http://'WWVtI.DubllcdebUre4.1.1l0Y
Statement of G-7 Finance Ministers and Central Bank Go\'ernors
April 26, 1999
Washington, DC
1.
We, the Finance Ministers and Central Bank Governors of the G- 7 countries, and the
President of the European Central Bank met today with the Managing Director of the
International Monetary Fund to review recent developments in the world economy.
Ministers and Governors also discussed international financial architecture issues.
Developments in the World Economy
2.
We discussed developments in our own economies and in the rest of the world. In recent
months, there have been improvements in some areas, reflecting both signs of better
performance in some emerging market economies and the policy response in G-7 countries
to the shift in the risks that we called attention to last year. A number of serious
challenges remain, however, that will take time to resolve.
3.
Open and competitive international trade markets continue to be an important
underpinning for world growth. prosperity, and stability. We remain committed to
achieving further trade liberalization and market transparency through the launch of a new
round of multilateral trade negotiations in November which is responsive to the concerns
of citizens throughout the world.
G-7 Economies
4.
We remain committed to a growth strategy based on strengthening domestic demand that
contributes to achieving more balanced growth among our countries to reduce external
imbalances and continue to support recovery in emerging market economies. The
favorable outlook for continued price stability in our countries remains.
5.
In view of the challenges facing each of oUf economies we pledge ourselves to continued
efforts to work cooperatively to strengthen conditions for financial stability and to
improve the economic outlook.
The United States and Canada have continued to enjoy strong growth and job creation,
and prospects are favorable for another year of strong economic activity. In these
countries policies should be directed to sustaining growth over the long term.
In the United Kingdom growth and inflation pressures weakened over the course of 1998.
Interest rates have continued to fall. Growth is forecast to be lower this year than last.
before strengthening into 2000. Under these conditions economic policies should continue
to aim at fostering non-inflationary growth, supported by continued adherence to the
symmetric inflation target.
RR-3106
In the euro area, growth prospects have weakened. although to a differing extent across
countries. We agreed on the importance of pursuing an appropriate mix of
macroeconomic policies and structural measures aimed at strengthening prospects for
improved growth and higher employment over the medium term.
Japan has taken important steps in response to its economic difficulties. Despite some
improvement, short-term prospects remain uncertain. It is therefore essential that Japan
implement stimulus measures until growth is restored, using all available tools to support
strong domestic-demand-Ied growth. It is also recognized that structural measures to
enhance the economy's efficiency and competitiveness in both financial and non-financial
sectors, including by encouraging banks to dispose more actively of non-performing
assets, are crucial at this stage.
The international monetary system and exchange rates
6.
We reaffirmed that we will maintain strong cooperation to promote stability of the
international monetary system and exchange rates among major currencies that are in line
with fundamentals.
7.
We discussed developments in our exchange and financial markets since our last meeting.
We reaffirmed our view on the importance of pursuing policies to promote sound
economic fundamentals and more balanced growth among key economies and thereby help
avoid excess volatility and significant misalignments of exchange rates of major
economies. We will continue to monitor developments in exchange markets and
cooperate as appropriate.
Emerging Market Countries
8.
We discussed financial and economic developments in emerging markets. We welcome
the return of more stable conditions and early signs of economic growth in many Asian
nations. We support the shift in macroeconomic focus toward fostering economic
recovery while fully implementing reforms in the financial and corporate sectors to
promote a resumption of strong sustainable growth. In other regions, notably Latin
America, the outlook for growth has deteriorated since last falI while the external
financing environment. though improved in some countries, still presents some difficulties.
It is crucial for the countries in the region to pursue appropriate policies, including
institutional, structural. macroeconomic and exchange rate policies, such as by reinforcing
existing economic programs, as the best way to respond to financial markets pressure.
Brazil
9.
We welcomed the commitment of the Brazilian authorities to a strengthened economic
program, including measures to control inflation and a strong program of fiscal
3
adjustment. Recent developments relating to inflation, the exchange rate, and international
capital flows offer grounds for encouragement. It is essential that Brazil persevere with
the implementation of its adjustment program in order to ensure that the positive
momentum continues and to promote investor confidence. We also urge the Brazilian
authorities to pay due attention to social needs. We reaffirm our commitment to bilateral
and multilateral support for a strong reform program and to the importance of a strong
involvement of private sector creditors in restoring financial stability in Brazil.
Russia
10.
We met with representatives of the Russian Federation to discuss recent developments in
Russia. We remain concerned about the country's ongoing financial and macroeconomic
instability. Russia's return to macroeconomic stability and growth is possible only in the
context of a viable fiscal program, significant improvement in government revenues, and
progress in institutional and structural reforms. We welcomed the progress Russia has
made in its dialogue with the llv1F, and we urge the Russian authorities to take all
necessary steps to reach agreement on, and effectively implement, a credible economic
program. We reiterated that such an IMF agreement is a precondition for Paris Club
consideration of any rescheduling of Russia's debt.
Debt of the Poorest
II.
We agreed on the need further to implement and develop the Heavily Indebted Poor
Country (IDPC) initiative to provide enhanced debt relief so as to promote the objective
supporting permanent exit from unsustainable debt and support poverty alleviation. We
reviewed the proposals made by a number of G- 7 partners to improve the HIPC debt
initiative with a view to reaching a consensus by the time of the Koln Summit in June. We
agreed that creditors should make greater efforts to reward reform. We also recognized
the need for appropriate burden-sharing among creditors We urged all bilateral creditors
to make future official development assistance primarily in the form of grants to HIPCs to
ensure they do not face new debt problems in the future. We reaffirmed the call at
Birmingham for all eligible countries to embark on the process as soon as possible, and to
take steps to ensure that all can be in the process by the year 2000
Strengthening the international financial and monetary system
12.
We reviewed the ongoing work on strengthening the international financial architecture as
we work towards agreement on further specific proposals that we will present to the G· 7
heads of state or government for their consideration at the Koln summit in June. Since we
last met in February there has been significant progress in a number of areas, including
agreement on the Th1F's Contingent Credit Line, measures to promote greater
transparency, codes and standards of best practice, and the establishment of the Financial
Stability Forum. They are noted in detail at the attached annex.
4
13.
We will continue to work to ensure implementation of all the reforms which we agreed in
our Declaration of October 30, 1998. Our work between now and the Keln summit will
continue to focus on the scope for strengthened prudential regulation and supervision in
industrial countries; further strengthening financial systems in emerging market economies;
sustainable exchange rate regimes in emerging market economies; crises prevention and
response through, when appropriate, the use of the new IMF's Contingent Credit Line and
greater participation by the private sector in crisis containment and resolution; proposals
for ways to improve the IMF programs and procedures in crisis prevention and
resolution, and appropriate institutional reforms, including of the Interim and
Development Committees; and minimizing the human cost of as well as improving the
social policy response to financial crisis.
Year 2000 Problem
14.
We agreed that governments, central banks, regulatory bodies and private sectors need to
continue to press forward with renovating and testing their computer systems in
preparation for the Year 2000. Moreover, with the century date change now less than one
year away, efforts should also be directed toward planning for any contingencies that may
arise. The public and private sectors are also encouraged to disclose the status of their
preparations for the Year 2000. The Ministers and Governors requested that each G-7
country prepare a short statement for the Economic Summit in June reporting on the
status of renovation, testing, and contingency arrangements of its critical sectors.
Anti-Corruption'
15.
We noted with satisfaction the increased attention being given in key international
organizations to governance and corruption issues. We agree that corruption is a serious
impediment to effective macroeconomic policy and economic development and growth.
We will strengthen our efforts - both through our domestic policies and through the IFls,
OECD, World Customs Organization (WCO) and WTO - to combat corruption, including
the financial channels of bribery, and improve governance.
Financial Crime
16.
We remain concerned about the threat that money laundering and financial crime more
broadly pose to the integrity and stability of global financial systems and markets. We will
ensure that our financial crime experts stay abreast of and coordinate our ongoing efforts
to fight these problems. In particular, we commend the efforts of the Financial Action
Task Force to broaden adherence to the FATF 40 Recommendations, and we urge it to
identify countries or territories, including offshore financial centers as appropriate, that fail
to cooperate in the fight against money laundering and take action as necessary to remedy
these obstacles.
5
Harmful Tax Competition and International Tax Evasion
17.
We welcome the establishment of the GECD's Forum on harmful tax competition and the
actual start of implementing the guidelines and recommendations adopted by the GECD
with respect to the harmful effects of unfair tax practices. We strongly endorse ~he
current work program of the Forum, in particular the efforts to identitY tax havens. We
also support the Forum's intention to engage in a dialogue with jurisdictions identified
through this process. We urge that this work be given a high priority. We also note the
ongoing work to implement the code of conduct within the ED.
We welcome the progress made by the GECD's Fiscal Committee and the FATF to
explore further the links between tax evasion and avoidance and money laundering, and in
particular to ensure the effective flow of information to tax authorities without
undermining the effectiveness of anti-money laundering systems. We encourage each
group to continue working on their respective responsibilities.
We urge the GECD to continue to address the barriers limiting effective exchange of
information between tax authorities, in particular those which arise from excessive bank
secrecy rules.
Countries Affected by the Kosovo Crisis
18.
The brutal violence against the ethnic Albanians of Kosovo and their expulsion have
caused an enormous human tragedy, an overwhelming flow of refugees. and serious
economic consequences for the neighboring countries. Bilateral and multilateral donors
are responding to the humanitarian crisis The international community must also help the
affected countries address the damage done to their economies and sustain the economic
reform efforts which are vital to their long-term economic prospects. The international
financial institutions (the IMF, the World Bank, and the EBRD) will playa critical role in
this effort. We call upon the international financial institutions to develop a
comprehensive assessment of the economic and financial effects of the conflict, to
formulate strategies for dealing with both the immediate and longer-term economic
challenges facing the countries in this region. and to participate actively in the common
effort to help these countries as they address these challenges.
6
Annex
G-7 Finance Ministers and Central Bank Governors took stock of progress made so far on the
broad agenda outlined by Leaders last October and agreed the following:
Transparency and Disclosure
1.
We welcome the IMF's adoption of a comprehensive format for disclosure of full
information on reserves as part of the strengthening of its Special Data Dissemination
Standard (SDDS). This enhanced reporting of reserves and related liabilities on a monthly
basis with a lag of no more than a month will go into effect on April 1, 2000. Disclosure
of this information on a weekly basis with a lag of no more than a week is encouraged,
though not required, under the SDDS. To strengthen the SDDS further, we calion the
IMF to enhance the requirements for disclosure of external debt data and for release of
information on financial sector soundness. These steps should be taken by the end of this
year, when the third review of the SODS takes place.
2.
We welcome the steps taken by the IMF to become a more open and transparent
institution. In particular, we value the decisions to create a strong presumption in favor of
the release of Letters of Intent, undertake a pilot project for the voluntary release of
Article IV staff reports, release a short Chairman's statement when programs are
discussed and approved, and adopt procedures for release as appropriate of a summary of
Board discussions of major policy changes. We call on the IMF to maintain the
momentum it has built in implementing a presumption in favor of the release of
information. We encourage the IMF to continue undertaking systematic evaluation, both
internal and external, of the effectiveness of selected operations, programs, policies and
procedures.
Strengthened Prudential Systems
3.
We encouraged the Basle Committee on Banking Supervision to finalize quickly and
publish its work on reviewing the Basle Capital Accord so that it better reflects risk. We
discussed and endorsed the recommendations by the Basle Committee on Banking
Supervision on how to mitigate risks involved in dealing with Highly-Leveraged
Institutions (HLls) including hedge funds. We agreed with the Basle Committee that
adequate risk management by financial institutions is particularly important when they deal
with lals. We also look forward to reviewing the IOSCO report on lals, along with
other work by public and private sector bodies studying issues related to lfl..Is.
4.
We welcomed the first meeting of the Financial Stability Forum earlier this month, which
among other things will provide a vehicle for the regular exchange of information on
systemic vulnerabilities in the financial system. We look forward to results of the working
groups it is forming on highly leveraged institutions, to address implications from their
7
role as both lender and borrower; offshore financial centers and short-term capital flows'
effect on global financial stability. It will be important that this work include
representation from a broad range of relevant countries.
Internationally-agreed standards and codes
5.
We support work being undertaken at the IMF and in various fora - including die Basle
Committee, IOSCO, and IAIS - to develop codes and standards of best principles and
practices and of greater transparency. We urge the Fund to undertake wide consultations
on the Code of Good Practices on Transparency in Monetary and Financial Policies so
that it can be approved and adopted by the Interim Committee at the Annual Meetings.
Ministers welcomed the completion of the work of the OECD task force on corporate
governance, and support adoption of the set of core principles on corporate governance.
We encourage the World Bank to continue to work with the OECD and other
international institutions to encourage the broadest possible adoption and implementation
of the OECD principles in emerging market and industrial countries. We encourage
countries to work to meet these new and existing standards and calIon the IMF and
World Bank: to support their efforts to do so, in conjunction with relevant experts from
other institutions.
6.
We encourage the Fund to develop a system for surveillance of all relevant codes and
standards, centered on the IMF Article IV process, but involving close collaboration with
other standard setting bodies. In this respect, we welcome the completion and publication
of the pilot IMF transparency reports and encourage the Fund to make them a part of its
surveillance.
Crisis Prevention and Response
-
7.
We reaffirm our commitment to promote cooperation between countries, the private
sector and the international financial institutions aimed at enhanced crisis prevention and
resolution. We encourage all emerging market economies to maintain appropriate
communication with their private creditors. We support wider use of market-based
contingent financing mechanisms and collective action clauses in bond contracts. We
remain committed to involving the private sector, as appropriate, in the prevention and
resolution of financial crises. Some constructive proposals have been discussed in a
number of international fora. We urge all parties concerned to come forward with
concrete recommendations in this area by the time of the next annual meetings.
8.
We welcomed the Board's agreement to establish a contingency credit line, which will
help countries with sound policies insulate themselves from contagion. We believe that this
measure will help to encourage prompt and effective measures to ward off contagion, with
appropriate private-sector involvement, and promote adoption of sound policies in areas
that we see as crucial for avoiding susceptibility to crisis, notably, debt management,
8
sustainable exchange rate regimes, transparency, a strong financial sector, and adherence
to the internationally agreed codes and standards.
Institutional Issues and Coordination
9.
We agree that the international financial institutions must playa prominent role in
facilitating cooperation among all countries, especially in the area of macroeconomic and
monetary issues that are at the center of the IMF's mandate as stated in Aniele 1 of its
Artieles of Agreement. We welcomed the continued discussions on institutional issues,
including possible reform of the Interim and Development Committees. We welcome the
initiative taken by the Chairman of the Interim Committee, Mr. Ciampi, to hold a meeting
of Deputies on April 13, given the particular importance and complexity of the work at
this juncture. We calion the international financial institutions to continue their
deliberations on ways to enhance their operations and, in particular, coordination and
cooperation between them, especially in the financial sector. As a first step to reduce
overlap between the two Committees, while improving mutual information, we welcome
the decision to give the President of the World Bank a greater role in the deliberations of
the Interim Committee.
10.
Our Deputies held two seminars, on March 11 and on April 25, to exchange ideas on
economic architecture issues with a diverse group of economies. Representatives of33
governments and central banks participated in the discussions, at which we discussed a
broad range of ideas and initiatives. We agreed that these seminars have been of great
value and emphasized the need for inclusive dialogue and broad consultation on issues of
systemic importance.
Social principles
11.
Recent events have emphasized the important link between economic and social
development. We welcome the World Bank's progress in distilling a set of general
principles of good practice in social policy that are relevant to its core competencies.
These principles aim to promote social cohesion, make economies more robust and
provide a structure to make countries more resilient to financial crisis. We encourage the
World Bank to take forward its work, in cooperation with the IMF, to develop a set of
policies and practices that can be drawn upon, by donors and borrowers alike, in the
design of adjustment programs to ensure protection of the most vulnerable, particularly
during crisis periods. To support this etTort, we urged strengthened collaboration between
the World Bank and IMF on public expenditure work which analyzes the impacts of fiscal
choices.
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D E P :\ R T 1'1 E N T
() F
THE
T REA SUR Y
I
NEWS
omCE OF PUBliC AFFAIRS • 1500 PENNSYLVANIA AVENUE, N.W.• WASHINGTON, D.C .• 20220. (202) 622-2960
EMBARGOED UNTIL CONCLUSION
OF PRESS CONFERENCE
Remarks as Prepared for Delivery
April 26, 1999
TREASURY SECRETARY ROBERT E. RUBIN
POST-G-7 PRESS STATEMENT
I would like just to say a few words about today's meeting, and then I will be happy to
respond to questions.
First, I would like to say that it was a very interesting and, I believe, valuable meeting.
This is really a unique forum where Finance Ministers and Governors can get together on a
regular, and rather informal, basis and talk through together the key issues and challenges that we
face.
We focused on three main topics in today's meeting: first, the outlook for growth in our
own economies, and in the world economy more generally; second, the key issue of global
financial architecture; and third, the very difficult situation in Kosovo and its ramifications for
neighboring countries. We also discussed Russia.
On the first, we all agreed that while there have been some improvements in recent
months--reflecting both signs of better performance in some emerging market economies and
policy responses in G- 7 countries-- most areas of the global economy are experiencing low or
negative growth, so serious challenges lie ahead, that will take some time to resolve. The most
important contribution that we in the G-7 can make to improving the overall global outlook will
be to promote sustainable domestic growth in our own economies, bearing in mind the favorable
outlook for price stability in our countries. As far as the United States is concerned, prospects
are favorable for another year of strong economic activity. But it is very important that Europe
and Japan also get on track for solid and balanced growth.
As always, we discussed exchange rates. Let me read for you the language that
summarizes our discussion: "We reaffirmed our view on the importance of pursuing policies to
promote sound economic fundamentals and more balanced growth among key economies and
thereby help avoid excess volatility and significant misalignments of exchange rates of major
economies. We will continue to monitor developments in exchange markets and cooperate as
appropriate. "
RR-3107
::::press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040
As far as emerging market countries are concerned, we welcomed the return of more
stable conditions and early signs of recovery in Asia -- particularly where the commitment to
economic reform is strong. We noted that serious challenges remain both in those countries that
have made progress, and elsewhere.
Second, we discussed at length the reform of the international financial architecture. This
is an issue that has been under consideration for some time in a variety of fora. As I indicated in
my speech on this topic last week, reform in this area will not involve a single dramatic
announcement but a collection of actio!ls over time, some of which have already been taken.
This afterno
@FedFRASER