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Department of the Treasury
PRESS RELEASES
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JS-2341 and 2392
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Ubrary
D.partment
AUG 2 6 2005
JS-:D 1(,. Slzttcment by Secretary 01" the Treasury .lohn Snow on the Death of<br> John Li...
Page I of I
FROM THE OFFICE OF PUBLIC AFFAIRS
MiJrch 16. 2005
JS-23Hi
Statement by Secretary of the Treasury John Snow on the Death of
John Linton
Oil behalf of the Treasury Department, I offer the deepest condolences to the family
of John Linton. a veteran of nearly 17 years of service to the U S Treasury. John
served honorably In Treasury's Office of Tax POliCY, and news of his death came as
a blow to that office, as well as to the extended Treasury family.
Among his many accomplishments al Treasury, John's work on tax-related
database and modeling projects helped save and preserve over 30 years' worth of
Invaluable tax and economic data
We wish his family comfor-t; John will be profoundly missed
http://www.treas.gov/presslreleases/js2316.htm
4/2512005
.JS-2J 17. Testimony of Robert .I. Carroll·br~·lkpllty Assistant Secretary (Tax Analysis)<...
Page 1 of 3
FROM THE OFFICE OF PUBLIC AFFAIRS
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JS-2317
Testimony of Robert J. Carroll
Deputy Assistant Secretary (Tax Analysis)
United States Department of the Treasury
Before the Senate Finance Committee
United States Senate
Mr. Chairman, Senator Baucus, and distinguished members of the Committee.
Thank you fm the opportunity to discuss the Administration's proposals to extend
expiring tax provisions
Expiring provIsions vary Widely In intent and purpose from the higher expensing
limits fm small businesses and the research and experimentation credit to the work
opportunity and welfare-to-work tax credits to the higher exemption fm AMT
taxpayers. As you know, many of the expiring provisions were extended through
the end of 2005 by Congressional action last fall as pan of the Working Families
Tax Relief Act of 2004 and the American Jobs Creation Act of 2004.
The choices made with respect to expiring provIsions inevitably reflect a balancing
of the various and sometimes competing goals of fiscal discipline, providing a stable
tax code on which households and businesses can make clear and well-infOl'med
decisions, and reevaluation of the effectiveness of speCial tax prOVisions. The
President has proposed to extend many of these expiring proviSions in his FY 2006
Budget.
Whether to extend these provisions and for how long IS a multi-faceted and
complex deCISion. Some of these provIsions Irlvolve substantial revenue cost
Others are relatively new provisions whose temporary nature is by design to give
policy makers an opportunity to evaluate their effectiveness. Still others are fully
intended to be temporary. such as the prOVision providing 50 percent bonus
depreciation. to allow the economic recovery to strengthen and provide the needed
Incentive for new corporate Irlvestment at Just the right time.
I would like to spend a few moments providing some Irlsights on how the
Administration approached the choices With respect to expiring provisions for the
FY 2006 Budget. Three factors were considered in making decisions about
expiring provISions, as well as some of the othel' budget proposals:
2.
3.
Is the provision central to the President's program for promoting economic
growth and creating Jobs?
Should the provision be more broadly considered With reform of the tax
system, a key domestic priority of the President?
Does the prOVision otherwise serve an important policy objective?
Although not the subject of thiS hearing, the 2001 and 2003 tax cuts were essential
to the robust economic growth that we now enJoy. The tax cuts increased after-tax
rewards from working and reduced taxes paid by entrepreneurs thereby increasing
their rewards to innovation and risk-taking The cost of equity capital and investing
were reduced. Mme risk-taking, Investment and innovation mean higher
productiVity, greater capital formation, and, ultimately, higher living standards.
Permanent extension of these tax cuts is a key component of the President's
economic agenda to ensure that taxes do not Increase for millions of Americans
http://www_treas.gov/prcsslrclcascs/js2317.htl11
4/25/2005
.lS-:2_~ 17. Testimony of Robert .I. Carroll~br'lkpllty Assistant Secretary (Tax Analysis)<...
Huusciluilb clllL! UUSIIH;SSL'S cllsu Ilt'cd
Hley call rely to make soulld declsiuns.
,I
Page 2 of 3
IJI,!rJlctable and stable tax code on which
Thele ,He several other provIsions tilZlt f<111 Irltu tile first c<Jte~Jory of explrJrlg
provisions, <JIHlOugll IlOt IleCeSSilrily core elemellts of ti18 2001 and 2003 tax cuts
which are also Important to acillevlrlg tile IICltlon's full potential for economic
growth The l'ese<1rcil emu eXperimelltatlon (R&E) t<JX credit provides a substalltlal
II1celltive for buslrlesses to IIIVest III technology development <JllcJ encourages
IIlnOvatloll In the ecollol11Y The COllgress <Jcteri thiS past fall Irl the Worklrlg
Families T<Jx Relief Act to extend tlie R&E creult tilrougil 2005. However,
busillesses need tile certalrlty and assuI'<Jnce of thiS credits' availability over the
1011~1-terlll to make R&D plans alld commitments tliat can Involve slgnlflcal1t lead
tlilles. The Presldellt's FY 2006 Budget ollce agalll proposes permallent
extel1Sl011
The PreSident has mClde reforllllllg our tax system a key priority The tax code IS
extl'emely complex is perceived by mallY as unfair, and the compliance costs place
a huge drag on our ecollomy CompleXity arises from the myriad prOVISions With
illcome phase-Ins and phase-outs, numerous definitions and overlapping and
duplicative purposes. ThiS compleXity translates to total compliance costs of the tax
system of what experts estll11ate to be roughly $125 billion per year and 3.5 billion
homs spent by IIldivlduals to malrltalll records and understand and comply with the
tax system The economic costs are even greater, with some eslimates suggestlrlg
that fundamental reform could ultimately add $200 billion to $400 billion Irl output to
our economy annually.
The President's AdVISory Panel on Federal Tax Reform, named by the PreSident
earlier this year, Will develop options to reform our tax system to make It simpler,
fairer and more pro-growth. A number of proviSions were excluded from the Budget
in anticipation of thiS panel's work and to prOVide the panel With greater fleXibility
and latitude
Examples of tax provIsions that fall into thiS second category are the provisions to
Increase the AMT exemption and allow all personal credits to be claimed against
the AMT - the so-called "AMT patch" - both of which remain In effect through
2005. These provisions were excluded from the FY 2006 Budget In anticipalion of
the tax panel developing a long-term solution to ttle AMT problem.
Similarly, extensions of the low- and moderate-Illcome savers credit and the
deduction for higher education expenses were not Included as In deference to the
panel's work. In last year's Budget submission, the Administration included a
simplification proposal to collapse the four eXisting education proviSions into the
HOPE Scholarship and Lifelime Learning Credits. These duplicative and
overlapPing provisions require taxpayers to understand all four proviSions to
determlrle which they should claim. The Administration anticipates that all of these
education proVisions will be considered by the panel as it considers option for how
the tax code can best provide appropriate IIlCentlves for Irldlvlduals to invest in
education
The tax code also includes numerous provisions that allow Irldividuals to save
through tax-preferred accounts. The FY 2006 Budget again includes a proposal to
consolidate many of these savings vehicles into the Lifetime Savings Accounts
(LSAs) and Retirement Savings Accounts (RSAs). Similar to the education
proviSions, the Administration anticipates that the tax panel will broadly consider
options that promote savlrlgs.
The third category of expiring proviSions are those With certain poliCy objectives that
need to be extended at least for several years to provide taxpayers a basis for
plannlrlg, but that also need to remalrl temporary, to allow the Congress and the
Administration to continue to reevaluate and monitor their effectiveness 011 a
periodiC baSIS. The Admlrlistration has proposed to extend many of these
prOVisions, which are varied In their purposes, through 2007 (see Table below)
One consideration in determinlrlg whether to extend these and other prOVisions
permanently is whether the benefits they provide exceed the costs associated With
their complexity.
Thank you again, Mr. Chairman, Senator Baucus, and members of the Committee
for the opportunity to appear before you today. We look forward to worklllg
together with this Committee and others in the Congress on this and other issues
http://www.treas.gov!press!rclcascs/js2317.htm
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JS-~_), 17: Te~itimony of r~()bt'rt .I. Carroll- hr ·1 kputy Assistant Secretary (Tax Analysis)<...
Page 3 of 3
REPORTS
•
Tax Provisions that Expire Through FY 2006 Proposed to be Extended
http://www.trctltJ.gov!prl;;bb!releases/js2317.htm
4/25/2005
Tax Provisions That Expire Through FY 2006 Proposed to be Extended
Revenue
Estimate 2
Tax Provision
EXQiration
Date
ProQosed
EXQiration
Date
-
Leaking Underground Storage Tank Trust Fund excise tax
03/31/2005
0313112007
229
Various Vehicle Tax Provisions
09/30/2005
09/30/2011
65
IRS Authority for Undercover Operations
12/31/2005
12/31/2010
Credit for research and experimentation
12/31/2005
permanent
-76,225
Deduction for Elementary and Secondary School Teachers
12/31/2005
permanent
-2,630
Corporate Contributions of Computers to Schools
Donations
Brownfields Remediation
12/31/2005
12/31/2006
-122
12/31/2005
permanent
-1,743
Credit for Electricity Production from Renewable Sources
12/3112005
12/31/2007
-1,779
Combat Pay Included as Income for EITC Purposes
12/31/2005
12/31/2006
--
Work Opportunity and Welfare-to-Work Tax Credits
12/31/2005
12/31/2006
-383
Qualified Zone Academy Bonds
12/31/2005
12/31/2007
-162
Tax credit for first-time DC homebuyers
12/31/2005
12/31/2006
-19
Tax infornlation for Employment Tax Reporting and to
Inform Officials of Terrorist Activity
Disclosure of tax return information for student loans
12/31/2005
12/31/2006
--
12/31/2005
-
--
2006-20015
(in millions}
-
Tax Provisions That Expire Through FY 2006 Proposed to be Extended
Pro~osed
Revenue
Estimate l
Ex~iration
Ex~iration
2006-20015
Date
-
Date
-
(in millions}
Leaking Underground Storage Tank Trust Fund excise tax
03/31/2005
03/31/2007
229
Various Vehicle Tax Provisions
09/30/2005
09/30/2011
65
IRS Authority for Undercover Operations
12/31/2005
12/31/2010
Credit for research and experimentation
12/31/2005
permanent
-76,225
Deduction for Elementary and Secondary School Teachers
12/3112005
permanent
-2,630
Corporate Contributions of Computers to Schools
Donations
Brownfields Remediation
12/31/2005
12/3112006
-122
12/3112005
permanent
-1,743
Credit for Electricity Production from Renewable Sources
12/3112005
12/31/2007
-1,779
Combat Pay Included as Income for EITC Purposes
12/3112005
12/31/2006
--
Work Opportunity and Welfare-to-Work Tax Credits
12/3112005
12/3112006
-383
Qualified Zone Academy Bonds
12/3112005
12/3112007
-162
Tax credit for first-time DC homebuyers
12/3112005
12/3112006
-19
Tax information for Employment Tax Reporting and to
Inform Officials of Terrorist Activity
Disclosure of tax return information for student loans
12/3112005
12/3112006
--
12/3112005
-
--
Tax Provision
-
JS-~j I H. T e5timol'\y of Rohert Werner, Director-br 'Office of Foreign Assets Control<br...
Page 1 of 4
FROM THE OFFICE OF PUBLIC AFFAIRS
March 16, 2005
JS-2318
Testimony of Robert Werner, Director
Office of Foreign Assets Control
U.S. Department of the Treasury
Before the House Committee on Agriculture
Introduction
Good mornlllg Chairman Goodlatte: Ranklllg Member Peterson, and Members of
the Committee I am pleased to have been invited here today to discuss the Issue
of payments for United States agricultural exports to Cuba
As you know. the Department of the Treasury's Office of Foreign Assets Control
("OFAC") IS responsible for administering and enforcing economiC embargoes and
sanctions programs, including the embargo of Cuba. In performing its mission,
OFAC relies principally on delegations of authority made pursuant to the
President's broad powers under the Tradlllg With the Enemy Act ("TWEA") and the
International Emergency Economic Powers Act ("IEEPA") to prohibit or regulate
commercial or financial transactions involving specific foreign countries, entities, or
individuals. OFAC exercises an array of responsibilities in administering and
enforcing numerous economic sanctions and embargo programs, including
rulemaking: licensing: compliance-oriented outreach and education; civil penalties;
referrals for criminal enforcement actions: the blocking of assets in the United
States III which foreign states or persons have an IIlterest: and required
recordkeeplllg and reportillg. We also conduct Investigations and analysis in
preparation for designations and draftlllg or implementation of new sanctions
programs.
In admlllistering and enforcing economic sanctions and embargo programs, OFAC
maintalils a close worklllg relationship with numerous other federal departments
and agencies to ensure that these programs are implemented properly and
enforced effectively. Among the agencies OFAC works with outside the Treasury
Department are the Department of State ("State") for foreign policy guidance in
promulgatlllg regulations and III considering sensitive license applications: the
Department of Commerce ("Commerce") on Issues regarding exports and
reexports: US Customs and Border Protection and U.S. Immigration and Customs
Enforcement for assistance in the many enforcement matters Involving exports,
Imports, transportation, and travel: the bank regulatory agencies to assure bank
compliance With fillancial restrictions: the Department of Justice 011 legal issues and
matters In litigation, and numerous law enforcement agencies.
II
The Cuba Embargo and the Trade Sanctions Reform and Export
Enhancement Act of 2000
On July 8, 1963, the United States imposed an economic embargo against Cuba in
response to hostile actions by the Cuban government. The embargo was
Implemented by OFAC through promulgation of the Cuban Assets Control
Regulations (31 CFR Part 515). Cuba IS also presently listed as a state sponsor of
terrorism by the Department of State.
Most relevant to today's hearing, however, is the fact that in 2000, Congress
enacted the Trade Sanctions Reform and Export Enhancement Act of 2000
("TSRA") Among other things, this legislation directed the adjustment of
restrictions on the export of agricultural commodities to countries subject to U.S
unilateral controls.
http://\\!ww.l!eas.guv/press/rel~~ases/js2318.htm
4/25/2005
JS-:2~~ 18: T eslilllulIY ur RulJert \Verner, Director' hr 'Office of Foreign Assets Contro\<bL,
Page 2 of 4
111 uldel tu IIllplelllellt T:::;!\A, UII JUly' ~ 1, :..'uu 1, OFAC published amendments to the
Cuban Assets Control Regulatlolls, as well as amenoments to the Sudanese
SanctlollS Regulations (31 CFR Pal't 538). the Libyan Sanctions Regulations (31
CFR Pcu1 550), clild tile Iranian Trclilsactions Regulations (31 CFR Part 560)
OFAC believes that tilese amendments. which were produced In consultation With
other govemment a~Jencles. ale consistent With both the statutory language of
TSRA amj tile Intellt of Its drclfters We also believe tllat the amemjments provlcJe
exporters With all offlclellt ill1CJ expedited process for elHJiHJlllg III authorized exports
of ClgrlculturClI COllllllodltles
Wlttl respect to Cuba. OFAC's Impleillelltation of TSRA focused on methods of
payment for agricultural exports licensed by the Commerce Department
The Cuban Assets Control Regulations. prior to the passage of TSRA, already
provided a general Ilcellse for trallsactlons. Including payments. Illcldent to
exportations that were Ilcellsed or otherwise authorized by the Commerce
Department TillS meant that an exporter who hacJ received a Commerce license to
export goods to Cuba did not need to seek fur1her authorization from OFAC ThiS
provISion. found In §515.533 of the regulations. was amended, however. In order to
Implement the finanCing restrictions contaliled In TSRA OFAC also amended
§515 533 to clarify that reexpor1s of U S -orlglll Items by persons subject to the
Jurisdiction of the United States were also covered by the general license (§515.533
(a)) and that speCifiC licenses would be Issued for travel engaged In for the purpose
of arranging licensed sales (§515533(e))
III
Fillanclllg Expor1s to Cuba
Mirroring the lallguage In the statute. OFAC's 2001 amendment to §515533
prOVides that licensed agrrcultural sales are authorized as long as they are financed
by payment of cash In advance or through finanCing by a third country financial
Illstitution With respect to third country finanCing. the regulation permits U S
financlalillstitutions to confirm or adVise such finanCing. These provIsions are
reflected III §515.533(a)(2) and prOVide speCifically that
Only the follOWing payment or finanCing terms may be used.
(I)
Payment of cash In advance:
(II)
For authorized sales of agrrculturalltems, finanCing by a banking Institution
located in a third country prOVided the banking Instltutioll IS not a deSignated
national. United States citizen. United States permanent reSident allen. or an entity
organized under the laws of the United States or any Jurrsdictlon Within the United
States (Including foreign branches). Such finanCing may be confirmed or adVised
by a United States banking institution
It IS Impor1ant to emphaSize that finanCing through letters of credit. by a non-target
bank In a third country. has always been authorized under these proVISions. That IS
as true today as It was when the TSRA amendments were Introduced Letters of
credit are a recognized method of payment In International trade, including
agriculture. When a bank Issues a letter of credit, It IS creating ItS own obligation to
pay a seller. as long as the seller submits documents In accordance With the terms
of the letter of credit Such flnancrng prOVides a "buffer" between the buyer and the
seller With a bank substituting ItS name and credit for that of the buyer In the case
of OFAC's regulations. the payment to the U S exporter may even be guaranteed
and expedited by a U S bank based on a credit faCility With a legitimate non-target
foreign i)ank In terms of accommodating sales contracts. goods are often shipped
before documents can be presented In letter of credit transactions: paymellt from a
third country bank may well be received after silipment
IV
Interpreting Section 515533(a)(2)(I)
The term "payment of cash In advance" found In §515.533(a)(2)(1) IS not defined In
either TSRA. or ItS legislative history Similarly. OFAC's regulations do not contain
a separate definition of thiS term OFAC's research indicates. however, that the
commonly understood meaning of the term In the International trade frnance
community IS that full payment for the goods IS received by the expor1er before the
goods are shipped And thiS. as Will be discussed further, is the construction that
OFAC applies to thiS term
http://w\\rw.trcas.gov/prc~~/f.~leascs/js2318.htm
4/2512005
JS-~j l~:
Tet;timony
t)f
Robert Werner, Director-hI' 'Oflice of Foreign Assets Control<bL.
Page 3 of 4
A compllcdll11\j IdClOilwll! IS llkllllll! \jl!lll!lLlIIICense provisions of §515533 made
monitoring payments for agricultural shipments to Cuba difficult since, under a
general license, the parties involved In the transaction had no obligation to file
reports with OFAC. It IS now apparent that this allowed a discrepancy to develop
between OFAC's expectation of how cash III advance payments would be
processed and 110W mclllY exporters actually Implemented tillS finanCing option
In 2003, however, at the IHlllest of the Stelte Dep;cntment, OFAC did send out a
survey to a r1lJrnber of U S exporters, <1sklng tllem to certify that they wer'e In
cornpllClllce With the payment Plovlslons of §515.533 Virtually all of the letters
received In response to OFAC's mqulry merely certified that the expor1ers were m
compliance with the "payment of cash In advance" provIsions of §515.533.
A recent review of these responses has revealed that there were a handful of letters
that Indicated that, despite the commonly understood meaning of "payment of cash
In advance" as described above, some exporters were Interpreting the term to allow
for the Shipping of goods to Cuba prOVided cash payment was received prior to
delivery of title to the goods ThiS method of payment more closely resembles a
fmarlCing mechanism known In the International trade as documentary collection A
further review of these responses was not conducted
V
Clarrflcatlon of Section 515.533(a)(2)(i)
In tile summer of 2004, OFAC's Compliance DIVISion began receiving speCific
rnqulrles from U S finanCial institutions seeking gUidance on the question of
whether or not the shipment of goods prior to receipt of payment by US exporters
was permitted under §515533(a)(2)(i)
OFAC IS not certain what triggered the Inqulrres. We believe it may have been an
article concerning agricultural trade With Cuba and methods of payment, which was
published m late July (Economic Eye on Cuba, 26 July-15 August 2004). OFAC
Compliance actually referred two of these cases to OFAC's Enforcement DIVision
for rnvestigatlon and notified senior OFAC management about the issue, However,
OFAC found Itself In the position of being unable to provide definitive gUidance and
began extensive consultations within Treasury and With other executive branch
agencies on the interpretation of the term "payment of cash in advance." These
consultations took a number of months.
As an Interim step, in order to mitigate any disruption of licensed agricultural
exports to Cuba, OFAC adopted a temporary policy of issuing specific licenses
permitting cash payment against documents to exporters whose transactions
occurred while gUidance was pending. OFAC created the interim specifiC licensing
poliCy to ensure that US exporters received payment for goods already shipped to
Cuba and the Cuban people did not see a disruption In agrrcultural shipments to the
Island
On February 22, 2005, follOWing the completion of the interagency consultations,
OFAC announced a clarification of the term "payment of cash in advance," as set
forth In §515.533(a)(2)(1), that conforms to the common understanding of the term in
International trade finance described above, SpeCifically, OFAC confirmed that
"payment of cash in advance" with regard to Commerce-licensed shipments of
agricultural items to Cuba means payment of cash prior to shipment of goods, This
clarification of "payment of cash in advance" had no effect on payments financed
through letters of credit under §515.533(a)(2)(ii).
VI
Tl'ansition Period
The final rule on this payment poliCY went Into effect on the day It was announced.
In order to provide a transition period, the language In the final rule prOVides a 30day Window (March 24, 2005) for exporters to engage In transactions under
flnancrng terms resembling "cash against documents," but requires payment for
such transactions to be completed Within that 30-day period, Exporters will
continue to need to obtain authorization from Commerce to ship the goods.
After the 30-day "cash against documents" financing period ends, any transactions
under finanCing terms resembling "cash against documents" will be prohibited, To
the extent an exporter has an existing contract that requires "cash against
documents" financing transactions to occur after the 30-day period, the payment
httpPwww.trcas.gov/prC33/reIcases/js2318.htlll
4/25/2005
JS-23 i X:
Te~itimony
of Roheri Werner, Director<br >Office of Foreign Assets Control<br...
Page 4 of 4
tCllllS of ttlJt COlltlJct woulu 11CCU tu bc rCllcS:jotiated to allow for cash in advance of
shipment or a letter of credit issued by a third-country bank. It is consistent with the
President's authority and with OFAC's PClSt plactice In other sanctions programs,
such as the SClnctlons Clgalnst Iran and Sudan, to provide for a limited grace period
for export transactions under pre-exlstlllg contracts
VII.
Conclusion
OFAC believes the clarification announced on February 22,2005, Implements
TSRA III a manner that IS most consistent with the plain meaning of the statutory
language.
It IS also Important to emphaSize that the provIsions allowing for payment through
letters of credit Issued by third countl·y banks remalll unaffected by the clarrflcatlon
of "cash payment in advance."
Thank you for the OPPOrtUlllty to address the Committee on this Important topic.
http:lhvww.trcfl3.gov!pre33/re 1cases/js2318.htm
4/25/2005
JS-2J I Y.
Rc"IIl<ll
bur U.S. Treasurer Anna Escobedo Cahral<BR>Go Direct Partnership ...
Page 1 of 3
FROM THE OFFICE OF PUBLIC AFFAIRS
March 16, 2005
JS-2319
Remarks of U.S. Treasurer Anna Escobedo Cabral
Go Direct Partnership Recognition Event
Chicago, Illinois
Good morning ancl welcome to all of you It's a pleasure to be here It IS such an
hOllor to Jom III thallkmg you for all you have clone to help us launch the Go Direct
campaign here in Chicago I applaud the efforts of each and everyone of you.
Before I get Into that further, I'd like to talk for Just a minute about another event
gOing on here In Chicago today - a meeting of the President's Tax Reform Panel at
the UniverSity of Chicago's Graduate School of Business Gleacher Center. In
recogllltloll of Hie need to change our tax system, to make It fairer, Simpler, and
more pm-growth, the PreSident earlier tillS year, created an Advisory Panel on
Federal Tax Reform.
Given the fact that It'S tax filing season, thiS may not surprise many of you, but
conSider this there are over one million words in our tax code and the number of
pages has doubled over the last 20 years; In 1940, it took only two pages of
Instructions to explain how to fill out the regular Form 1040; today, there are 36
pages of Instructions accompanying the 1040 EZ or "short" form, and it takes the
average taxpayer 11 hours to complete It. All in all, Americans spend upwards of
S 125 billion each year Just to comply With their tax obligations.
Our current tax code is a complex and cluttered mess that discourages economic
growth and Vitality Our tax laws penalize hard work, discourage savings and
Investment, and hinder the competitiveness of American bUSinesses abroad.
Compliance With the tax code IS complicated and burdensome. Nobody likes paying
taxes. But instead of making It as easy as pOSSible, our tax code is an obstacle for
those who want to pay their fair share.
The Panel's mandate IS to propose options to reform our cumbersome tax code into
something that IS Simpler, fairer, and more conducive to economic growth
After holding a few meetings m Washington, the panel IS now beginning to travel
around the country. They Intend to take a comprehenSive look at our current system
- making sure that we understand all of the headaches, burden, and distortions in It.
They Will hear from academiCS, economists, lawyers, accountants, Individual
taxpayers, and busilless owners.
ThiS morning, the panel is meeting here in Chicago to get additional perspectives
on the Impact of the tax laws on Important taxpayer deCISions and how the tax
system treats investment alternatives
The Panel IS In the early stages of their work - but we are confident that by July 31,
2005, they Will accomplish their goal of delivering options to reform thiS outdated
and overly complex system Taxpayers everywhere deserve a tax code that is fair,
easy to understand, and allows them to grow and flOUrish
Now let me turn back to why I'm here today. I was confirmed by the Senate as the
Treasurer of the United States m November of last year, and the Go Direct
campaign was one of the first projects III which I became Involved, shortly after
being sworn In. And It has been, without question, a very positive experience I look
forward to continuing to work to convert people to direct deposit In the future.
http://\'y WW .lreas.guv /pl e~s/rcl~ascs/j s23 19 .htll1
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JS-2J 19: Rcmark~~ of lU:. Trc.lsurer Anna Escobedo Cabral<BR>Go Direct Partnership ...
Page 2 of 3
As yuu elll welll--Iluw dlllllS PUIIll, 11iUVIIlSj [IUIII cllecks 10 direct depOSit Ilas been a
focus of the Treasury for many yeals. As the federal government's money manager,
the TI'easury Departmellt ilas worked ilard to Increase tile efflclellcy wIlil which
payments are made and improve lIle service we fJrovlde to belleflt recIpients
TreasuI'y issues almost one bllllOll payments a year. Illcluding Social Securrty.
veterans' benefits. federal government salaries and retirement, and tax refunds.
While tile vast majority of these payments are already Issued electronically. almost
250 mlilioll, rncludlng about 160 million benefit payments. are paid With checks - at
no small cost to the taxpayel
That IS why we started down tillS road, and It IS why we reached out to the Federal
Reserve and to you for your support. The Federal Reserve's strong support and the
expertise they bring to tile table as well as your cOlltributlons have been absolutely
critical III my view. tile success of tillS campalgll IS that It IS locally drrven and
locally supported The Idea Illay ilave been hatched by Treasury and the Fed. but
It'S people like YOll who have brollght It home.
We know tilat direct depOSit IS better for belleflt recIpients and YOll ilave ilelped us
get tilat message out to IIlousands of people. That's the key. We need to make
sure people al'e aware that direct depOSit IS safe. secure, fast and reliable - while It
also enables Treasury to be a better, more efficient steward of taxpayer money
today alld for future generations - a factor IIlat IS very Important as the first wave of
"Baby Boomers" reaches retirement age In the next few years.
We have learned that despite all the merrts, the growth rate for direct deposit has
fallen In recent years, down to less than one percent annually - even while many
people who receive checks are elderly, disabled. or low-rncome IndiViduals who
would benefit greatly from direct depOSIt.
That IS why your support has been so important. Working slde-by-side with you,
we've been able to test outreach strategies, and the work we've done together over
the last several months is really beginning to reveal which approaches work the
best
As you know. before we started working together, we at Treasury and the Fed
realized that we needed to better understand why the direct depOSit growth rate
wasn't more robust. We needed some inSight into why some benefit recipients are
so resistant to switching. And we needed to determine how we might be able to
overcome thiS resistance. The results of the research we did, which I'll speak to In a
moment, are gUiding the Go Direct marketing campaign
One of the things the research rndlcated was that a Sizable percentage of check
recipients do see the appeal of direct depOSIt. In fact, about 31 percent were
Inclined to move to direct deposit, if properly motivated
In addition. the research found that many Individuals will react more POSitively to
direct depOSit if ItS benefits are presented to them by entities that they know and
trust - SUCll as community organizations. faith-based groups and local financial
Institutions And. of course. that's where you came in
We recognize that day In and day out. you work With exactly the people we are
trying to reach You work tirelessly to make the lives of these IndiViduals better. You
play such an Important role In your communities
With your help, we have already made great strides. We have reached literally
thousands of benefit reCipients.
And let there be no doubt - your involvement has been pivotal Your contributions of
time, access. expertise and entilusiasm truly have been Invaluable. This has been a
uniquely collaborative effort. And I am pleased to say that the response we have
received to this effort in the communities you serve has been very pOSitive.
The Chicago pilot was the first to be launched and really, the outpouring of support
has been tremendous. PartiCipation has been extraordinary. We have 80 partner
organizations in the Illinois pilot area, including several hundred volunteers working
on the ground. And there have been close to 100 events relating to the Go Direct
http://www.tJeas.gov/prcss/rcie;lscs/js2319.htm
4/25/2005
JS-2J Ilj:
RCI'l'la1"b
of lU;. Treasurer Anna ';scobedo Cabral<BR>Go Direct Partnership ...
Page 3 of 3
CdlllfJdl911. Close to 14,000 fJeofJle Ilave attelllJeu these events.
You and your fellow Chicagoans have made remarkable progress
Speaklllg on l)ellalf of the Treasury DefJartment and the entire Go Direct team, I
wzmt everyone III tills room to know tilClt we truly appreciate wilat you Ilave done
tilese last few Illontils We couldn't be more pleased tilat you were Willing to give so
mucll of your tlille Clnd energy to tillS effort. Your participation and Ilelp Ilave
all·eady Illade a very Important difference Thank you
http://wvvw.treas.gov/prcss/rclc~~ses/js2319.htl11
4/25/2005
JS-~.3~(,.
Tlt:"d::;Uly"
SCC\'ctary Lluds Choice or Paul Wolrowitz <br> to Lead World Bank
Page I of I
FROM THE OFFICE OF PUBLIC AFFAIRS
Marcil 16, 2005
JS-2320
Treasury Secretary Lauds Choice of Paul Wolfowitz
to Lead World Bank
Treasury Secretary Joiln Snow today praised tile President's nomination of Paul
Wolfowltz to be tile next World Bank President. "The tremendously Important
mission of the World Bank demands tilat It be led by an outstanding person;
sOllleone with proven leadership Skills, management experience in large
organizations, international diplomatic experience, real VISion, a commitment and
passion for development, and the knowledge of how to make It ilappen. Paul
Wolfowltz meets and exceeds each and all of these criteria. He IS a highly qualified
candidate for tillS post, which IS one of great magnitude and far-reaching
consequences I am proud to Join the President in advanCing this recommendation.
"As the leading international Institution charged with reducing poverty, the World
Bank's purpose IS noble and unique It represents the hope of Impoverished people
across the globe. In conSidering candidates fm this position, we consulted
extensively with the Bank's Executive Board and Development Committee to come
to a consensus on the esselltlal qualifications of a World Bank leader as well as the
timing of thiS selection We wanted to find a person with the ability to build on Jim
Wolfensohn's outstanding leadership and Invaluable contributions. Mr. Wolfensohn
has been a faithful, ardent and inspiring World Bank PreSident: he IS a tough act to
follow, but I believe we have found the man who can do so and continue Jim's
distinguished record of accomplishment
"The timing of thiS nom Illation will also allow for a smooth transition, well In advance
of the Spllng Meetings of the World Bank and International Monetary Fund (IMF)
"We evaluated many exceptional candidates and have recommended an individual
that more than meets the standards of excellence for thiS position. Paul Wolfowitz IS
a proven leader, manager and diplomat He is the light man for the Job, and the
World Bank will benefit from his unique set of skills and great passion for tile Bank's
cause."
http://W\\lw.lLeas.govlpress/rclcn.3cs/js2.320.htm
4/25/2005
JS-~~~ 1: Trea:mry Joined by i\.,kll1bCh of Cont!rc:-,~ and Lcnders to <BR>Discuss Financi...
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
1\1arcli 14.2005
JS-2321
Treasury Joined by Members of Congress and Lenders to
Discuss Financial Education
Treasury's Deputy Assistant Secretary for FinanCial Education Dall lallnlcola. Jr
\\as today JOilled 011 Capitol Hili by Sen Dailiel Akaka (HI) Rep Judy Blggen (IL)
Rep David DI-eler (CA) alld members of tlie lelldlng community at tlie flftli In a
series of SIX Informatlon-gatlierlng meetings to develop a national strategy for
finanCial education
"Today's meetings reflect all Imponant pannerslilp for financial literacy between
tlie prl\ate alld public sector. between Congress and tlie Administration and among
Ilumerous federal agencies" said lanilicoia "No one agency. entity or pollcymaker
lias all tlie rlglit answers. but i)y talking and working togetlier we're confident we
can learn ',v Ii at we Ileed to know to Improve financial literacy In America"
Rep Blggen spoke about tlie new House Financial Economic Literacy Caucus.
wlilcli slie launclled In February With Rep Ruben HinOjosa (TX) Rep. Dreier
commended the effons of those organizations providing financial education at the
grass roots level. as well as the work of the FinanCial Economic Literacy Caucus
and the FinanCial Literacy and Education CommiSSion Sen Akaka underscored
that while Improving financial education amollg young people IS Imponant. adult
finanCial literacy needs must also be a priority
Today's meeting \NaS pan of tile Financial Literacy and Education Commission's
effons to develop a natlollal strategy for finanCial education. The Commission was
established by the Fair and Accurate Credit Transactions Act. wlilcli was signed
Into law by Presldellt BuSIi III December of 2003 The meetings. whlcli have
Included federal. state and local government. nonproflts. lending Institutions.
academiC organizations and Individuals. are to gather Information about best
practices for Improving finanCial literacy among all Americans PrevIous sectorspecific meetings liave been hosted by the Federal Deposit Insurance Corporation.
the Securities and Exchange Commission. the United States Mint and the Office of
Personnel ~.1anagement With suppon from the Office of tlie Comptroller of the
Currency. the Federal Reserve Board and the Depanment of Defense. The final
meeting Will take place on March 17 at the Depanment of Health and Human
Services
4/25/2005
JS-:232~:
Slaleillelll of Paul Wolrowitz Candidale ror President of World Bank
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
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March 16, 2005
JS-2322
Statement of Paul Wolfowitz Candidate for President of World Bank
REPORTS
•
(PDF) Statement of Paul Wolfowitz Candidate for President of World Bank
http://www.trea6.goV/pn~ss/rcleascs/js2322.htm
4/25/2005
Statement of Paul \Volfowitz
Candidate for President of World Bank
I appreciate Secretary Snow's counsel as I look forward to this remarkable
opportunity. I have met with the President and Vice President, and am deeply grateful
for their expressions of support and confidence.
Yesterday, I had an excellent conversation with Jim Wolfensohn. I know Jim
well and think he's done a remarkable job. He leaves an impressive legacy and it is
humbling to contemplate following in his footsteps.
I am deeply grateful to have had the chance to serve the President and the nation
in my present job for the last four years. If approved by the Board, I look forward to
being an international civil servant with the responsibility for heading the world's leading
institution of economic development-an institution whose aim is reducing poverty and
developing opportunities for all the people of the world to achieve their full potential.
People who don't know me may not understand why I am so eager to take on this
challenge.
In fact, I believe deeply in the mission of the World Bank. Helping people to lift
themselves out of poverty is both a noble mission and it is also a maHer of enlightened
self-interest. Nothing is more gratifying than being able to help people in need-as I
experienced once again when 1 witnessed the tsunami relief operations in Indonesia and
Sri Lanka. It is also a critical part of making the world a better place for all of us. It is
not just poor people who benefit when poverty is reduced; we all do. It is not just the
material side of life that improves: Peace and freedom are also advanced when more
people can enjoy the benefits of prosperity and human dignity.
I experienced this closely and personally twenty years ago working with the
Philippine people in their remarkable transition to democracy, where economic
development was as critical as political development. I then spent three years in
Indonesia where economic development was the most important issue on the agenda. 1
saw first-hand what the World Bank could accomplish, working in support of dedicated
development professionals in the Indonesian government and from many donor countries.
I also saw first-hand the harm that corruption and weak institutions can int1ict to
defeat development and poverty reduction. That is one of many reasons why I applaud
the legacy that Jim \Volfensohn will be leaving at the World Bank. He has deepened the
Bank's commitment to poverty reduction, emphasizing such key factors in development
as education, heallh-pmticularly HIV/AIDS, women. youth. and the environment. Jim
Wolfensohn has also brought an important focus on issues of transparency, accountability
and governance as critical elements of the economic development agenda-and indeed as
critical elements of human progress more broadly.
1 also look forward to working with the extraordinary group of professionals who
work at the World Bank. The World Bank is the repository of the deepest understanding
of development issues assemhled in one place. It's truly exciting for me to contemplate
\vorking with such diverse talents, whose noble pursuit is nothing less than improving life
opportunities for all humanity.
So, I want to extend these words to the staff of the World Bank, and its related
organizations: If my nomination should be approved, I look forward to working with
you. I have the highest regard for you as individuals. I have the deepest respect for all
you have accomplished. And together I think we can do great things for the less
fortunate of the world, and for economic development across the globe.
I also look forward to hearing the views of the many constituencies of the World
Bank, hOITowers and donors, govemrncnts and NGOs, as we shape a common vision of
how to continue the noble work of this important institution. In order to develop my own
vision, I intend to rely on a lot of listening and improving my understanding of the views
of those who have served the world's poor with skill, devotion and compassion.
js-23~3. Key Note Addles:'; t-,f Assistant Secretary ·BR>Juan C. Zarate<BR>Securities In...
Page 1 of 4
FROM THE OFFICE OF PUBLIC AFFAIRS
Marcil 17, 2005
Js-2323
Key Note Address of Assistant Secretary
Juan C. Zarate
Securities Industry Association Anti-Money
Laundering Compliance Conference
NEW YORK, NY - Thank you for invltlllg me and other Treasury officials Including FinCEN Director Bill Fox and Office of Foreign Assets Control (OFAC)
Director Bob Werner - to speak today with you We all recognize that the Securities
Industry Association is an important partner of ours on a series of critical issuesespecially on the matters related to money laundering and terrorist financillg. With
an employee base of over 790,000 personnel, which manages accounts of nearly
93 million Investors, the securities IIldustry finds itself, along with Its private sector
aSSOCiates, on the front lines in the defense of the financial system.
This discussion today comes amidst important changes underway in how the
private sector and the government view their roles and responsibilities in preventing
money laundering and terrorist financing The tragic events of 9/11 catalyzed
serious paradigmatiC shifts tllat have required a rethinklllg of how the private sector
and government IIlteract - and in particular how we at the Treasury Department
ensure the security of our financial system.
The fundamental premise of this shift IS that the fillancial system is less vulnerable
to abuse If there IS greater domestic and international accountability and
transparency in financial transactions and dealings. Whether it is in the securities
sector or in the money service business context, the anti-money laundering regime
must now be applied - judiciously and in a balanced manner - but applied
nonetheless. Our ability to prevent flows of capital from reaching the hands of
terrorists, organized criminals and rogue international actors not only affects our
national security but also our direct economic interests.
As Secretary Snow has remarked, application and enforcement of the Bank
Secrecy Act is a critical part of that responsibility. Though the transition to a higher
level of due diligence and practices may sometimes be challenging, its purpose - to
better protect us and our financial system from the talilt of terrorist financing, money
laundering, and financial Crime - is an essential one. Certainly, we know that the
private sector is hard at work adjusting to the expansion and deepening of the Bank
Secrecy Act and the anti-money laundering laws and expectations.
There IS no question that these responsibilities bring With them new costs and
burdens. These are issues that we must consistently monitor and balance With the
benefits IIlcurred by reqUiring financial institutions to engage In due diligence and
reporting. This balancing IS at the heart of what the Treasury Department must do,
and It is an assignment that requires the direct engagement of the private sector.
This is precisely why Secretary Snow has directed us to ensure that the Bank
Secrecy Act IS not only being enforced aggressively, but also that we are doing so
fairly and JudiCiously.
At the end of the day, we know that the true guardians of the financial system do
not work In the halls of the Treasury buildlllg, but they are working in the brokerage
houses, at teller windows and in casas de cambio. The private sector is the prime
gatekeeper of the financial system. That's why this conference, and others like it, is
extremely Important as we talk about evolving trends in money laundering and
terrorist financing and the expanded requirements under the law.
ThiS recasting of responsibilities - for the government and the private sector - has
taken shape in the context of our overarching war against terrorist financing.
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js-2323: Key Note Address of Assistant Secretary <BR>Juan C. Zarate<BR>Securities In... Page 2 of 4
Terrorist !jIOUiJS clild networks, like or!jcHIILed criminal enterprises, need money to
exist. They are dependent on resources to finance everything from day-to-day
necessities, like food and shelter, to long-term activities, including recruitment,
training and ultimately acts of terror. This IS a war where we have successfully
disl'upted and dismantled the financial infrastructure of terrorist operations We
have choked off money channels depended on by terrorist supporters, captured or
killed key terrorist facilitators and deterred donors from supporting al Oalda and
other like-minded terrorist groups All in all, we have made it harder and costlier for
al Oalda and other telTorist groups to raise and move money around the world
These are accomplishments credited to the private sector as well as government
agencies The due diligence and elltries to barrier of tainted capital have made It
harder and costlier to move money in the formal financial system. The private
sector has had much to do with this success You can be confident that the
IIlformatlon provided to us by the financial community - pursuant to the Bank
Secrecy Act - IS extremely valuable. We use It every day around the country. It
helps those of us in the government to find leads, develop cases, understand
trends, inform our regulations and educate the regulators and the public. That's
why proper filing of SARs - without defensive filing - is an important Issue for us
and one which we frequently address. The publication by FIllCEN of SAR Activity
Reviews gives a clear sense of the valuable Information we see III what your
Institutions and others produce
The responsibilities of the private sector to ensure compliance with our anti-money
laundering laws and OFAC sanctions are issues we take seriously. The
enforcement actions that we have seen over the past few months are a reflection of
this. However, it IS Important to note that these have resulted not simply because
there IS a heightened environment for monitoring of such activities. Instead, we
have seen institutions with fundamental, systemic failures to apply the basic
standards of anti-money laundering systems. This was certainly the case with
Riggs, where the lax or non-existent anti-money laundering controls and practices
led to a record fine of $25 million. With UBS, we saw a straightforward decision to
ignore ItS obligation to honor OFAC related regulations and restrictions - resulting
III a $100 million fine and punitive action by Swiss authorities.
That is why we have worked very hard, through FinCEN, to make certalll that the
regulatory community and the Treasury are working together to ensure consistent
examinations and enforcement. This is also why Secretary Snow has called upon
us to work with the Department of Justice on these matters as well. Diligence In
FinCEN and OFAC compliance matters must be taken seriously. This relates not
only to sound practices, but also to fundamental Issues of national security.
In this new environment, we, as the government, have critical responsibilities, too.
Because terrorist finanCing transactions may bear no inherent suspicious or
Identifying trademarks, It is particularly important that we share more information
With the fillancial sector, so as to allow it to recognize accounts and transactions of
Interest. ThiS will be especially useful as we expand the reach of our regulations to
new segments of the financial sector. ThiS will not be an easy task, however.
Much of the IIlformation relevant to terrorist financing IS classified. Moreover, law
enforcement IS correctly reticent about sharing information that could compromise
an IIlvestlgation. We also need to be acutely sensitive to the privacy and
reputatlonal interests of our citizens and ensure that appropriate controls are in
place to safeguard Information
Specific USA PATRIOT Act provisions have given us new tools to help thoughtfully
fulfill our obligations to the private sector and the American public at large. With
Section 314 of the PA TRIO T Act, we are mandated to share information with and
wlthlll the financial sector; that is, both vertically - between the government and the
Industry - and horizontally - providing a safe harbor that allows industry members
to share with each other. Treasury has implemented this section by creating a
"pointer" system for law enforcement. The system gives the appropriate authorities,
In the right Circumstances, the ability to work with FinCEN to transmit the names of
persons of Interest to the financial sector to determine whether those IIlstltutlons
possess any relevant transaction or account information
The system has been successful, and law enforcement has affirmed its value. You
have seen the statistics we publish about the number of cases that have been
helped using this tool. Given its importance, FinCEN recently announced the
establishment of a secure web-based 314a communications system. ThiS IS an
http://wVolw.treas.gov/press/ reJe ases/js2323.htm
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js-2J23: Key Note Address of Assistant Secretary <BR>Juan C. Zarate<BR>Securities In...
Page 3 of 4
IIllJ)ortc:lllt mechanism tllat will allow us to share even more Information - more
quickly and freely - to allow you to make better risk-based decisions.
We are also now III a position to use powers under the authorities of Section 311 of
the PA TRIOT Act - not only to protect the US financial system, but also to notify
the financial community of the concerns we have regarding money laundering
risks It is Important to remember that the movement of money In the 21 st century
knows no borders, and that terrorist financing and money laundering have global
reach. Financial transparency worldwide is required If we are to be effective in
combating these scourges
Section 311, which we have now used on eight occasions, allows us to protect our
financial system from illicit funds emanating from Jurisdictions that do not retain
internationally I'ecognized standards of anti-money laundering and counter-terrorist
financlllg Section 311 gives the Secretary of tile Treasury the authority to prevent
JUrisdictions and foreign financial institutions found to be of "primary money
laundering concern" from dOing bUSiness with the United States. Importantly, it also
sounds an alarm with banks and governments worldwide, alerting them to
deSignated parties and their Illicit actiVities.
Our responsibilities for greater IIlfmmatlon sharing apply in the OFAC context as
well. Our policies, standards and relevant infmmation regarding the application of
our sanctions poliCies - in the trade and financial contexts - need to be elUCidated
well for all industries. Compliance with OFAC programs is a cornerstone of our
ability to affect access to the US. markets and flows of dollars to rogue elements In
the International community. That is why Director Werner has launched an outreach
effort with the private sector to ensure a close working relationship that enhances
the effectiveness of all of OFAC's sanctions programs.
Thus, we have a responsibility to the private sector to provide as much information
and gUidance as possible to ensure the proper application of these preventative
systems. The Treasury - through FinCEN and OFAC - must help drive this
process, along with our regulatory brethren at the federal and state levels.
In addition, the expansion of our anti-money laundering regime to new financial
sectors has played a critical role in insulating our financial system against the
movement of tainted capital from Within the U.S. and abroad. The PATRIOT Act
has prOVided us with numerous mechanisms to assist In this effort, such as those
found In Sections 313, 319 and 326. The first two sections are aimed at preventing
money laundering and terrorist financing through correspondent accounts
maintained by US banks and seCUrities brokers on behalf of foreign banks.
Specifically, Section 313 expressly prohibits shell banks from participating in the
U.S. financial system and insists upon strict record-keeping regarding the
ownership of each non-U.S. bank that maintains a correspondent account with a
U.S institution. Section 319 allows the U.S. to seize criminal assets through interbank accounts when foreign bank secrecy laws prevent law enforcement
cooperation
In addition, the application of Section 326 requirements to ensure that proper
customer Identification and due diligence requirements are implemented by the
financial sector is important in ensuring legitimate entry into the finanCial system.
Beyond determined implementation of BSA and PA TRIOT Act proviSions, It is
essential that we establish an embedded ethos as we move forward on efforts such
as Information sharing between finanCial institutions and government authorities,
and directly between IIldlvldual financial Institutions With this In mind, Treasury
relies heavily on the Bank Secrecy Act Advisory Group (BSAAG) as a forum In
which to discuss controverSial issues and emerglllg threats. BSAAG is comprised
of high-level representatives from finanCial institutions, federal law enforcement
agencies, regulatory authOrities and others from the private and public sectors.
Through the BSAAG and other regulatory and educational seminars and programs,
Treasury maintains a close relationship with U.S financial Institutions to ensure a
smooth exchange of information related to money laundering and terrorist
finanCing We will continue to use this forum and opportunities such as this to talk
about concerns the financial community has and steps we can take together to
address emerging threats to all of us.
We are also improving our information sharing and collaboration internationally
through the establishment of the "Buddy Bank" initiative ThiS program's goal is to
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is-2323: Key Note Address of Assistant Secretary <BR>Juan C. Zarate<BR>Securities In... Page 4 of 4
create a culture of anti-money laundering compliance Internationally in the private
sector - through private sector mentoring. We are in the process of developing
such projects in Latin American and Africa, so as to ensure that the private sector
around the world IS fully capable to deal with and engage In the anti-money
laundering campaign We are glad to have strong partners within the private sector
who are exploring the constructive and creative roles they can play Internationally.
All of this represents the evolution of the post-9/11 enVIronment - where the publiC
and private sectors have to work hand in glove and share responsibility for the
issues of money laundering and terrorist finanCing. In this new enVironment, you
and your colleagues In the financial community are the guardians of the financial
system Your role of witneSSing and monitoring the entry and movement of capital
around the world comes with great responsibility. Your role and ours has evolved,
and we IllUSt continue to work together to ensure full accountability.
Much IS at stake In the battle against money laundering and terrorist finanCing.
thank you for your help in meeting the Important challenges we face and for the
opportunity to speak With you today.
http://www.trcu3.gov/pr~ss/releases/js2323.htm
4/26/2005
JS-2324: lrcasury LJeslgnatlon Targets North Valle Drug Cartel Leader
Page 1 of2
FROM THE OFFICE OF PUBLIC AFFAIRS
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March 17, 2005
JS-2324
Treasury Designation Targets North Valle Drug Cartel Leader
In another step aimed at depriVing Colombian narcotics traffickers of capital, the
US Department of tile Treasury today added tile name of North Valle drug cartel
leader Carlos Alberto Renteria Mantilla ("Beto Renteria") to Its list of Specially
Deslgrlated Narcotics Traffickers (SDNTs), along with 11 front companies and
IndiViduals operating on his behalf.
"Designating Beto Renteria as a leader of North Valle cartel is a fundamental step
In our battle to undermine the financial network of this notorious Colombian drug
cartel," said Robert Werner. Director of the Treasury's Office of Foreign Assets
Control (OFAC). "The North Valle drug cartel depends on its financial network to
stay in bUSinesses, and actions like today's can deal a serious blow to those
resources'"
Beto Renteria IS a leading member of the North Valle drug cartel, and hiS
Involvement In narcotics trafficking has been documented back to the late 1970s
Beto Renteria IS the subject of two federal crrmlnal Indictments in the United States.
In 2004, the District Court for the District of Columbia charged Beto Renterra with
Violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). Ten
years prior, an Indictment was filed In the Southern District of Florida charging Beto
Renterra With conspiracy to import, possess and distribute cocaine in the United
States. The United States is offering up to $5 million for information leading to his
arrest.
ThiS action also targets a fillancial network of 11 front companies and individuals
that act for or on behalf of Beto Renteria. The four Colombian businesses identified
today are Dlmabe Ltda, Inverslones Agroindustriales del Occidente Ltda,
Companla Agropecuarra del Sur Ltda and Colombo Andino Comercial Coalsa Ltda.
All four bUSinesses are located in Bogota, Colombia. The seven Colombian
IndiViduals deSignated today Include Beto Renteria's wife, Marra Nury Caicedo
Gallego, and their key financial front man, Mauricio Pardo Ojeda.
Today's announcement IS a result of OFAC's close working relationship with U.S.
law enforcement authorities. and particularly in this case, the Drug Enforcement
Administration (DEA).
SDNTs are subject to the economic sanctions imposed against Colombian drug
cartels in Executive Order 12978. Today's action freezes any assets found in the
United States and prohibits all financial and commerCial transactions between the
deSignees and any US person.
The US Government continues to work With and support the Colombian
government In attacking the finances of Colombia's drug cartels. In February 2005,
the Colombian government seized the airline Intercontinental de Aviacion, which
had been designated by OFAC in October 2004 because it was owned and
controlled by North Valle cartel leaders Gabriel Puerta Parra and Luis Hernandez
Zea.
The assets of a total of 1,159 busilless and individuals in Colombia, Costa Rica,
Ecuador, Panama, Peru, Spain, Vanuatu, Venezuela, the Bahamas, the British
Virgin Islands and the Cayman Islands are now blocked under E.O 12978. The 428
SDNT businesses include agricultural, aviation, consulting, construction,
http://www.treas.gov/press/relc.~ases/js2324.htm
4/26/2005
JS-2324: Treasury Designation Targets North Valle Drug Cartel Leader
Page 2 of2
ulstrlbutlon, financial, Investment, manufacturing, mining, offshore, pharmaceutical,
real estate and service firms. The SDNT list includes 17 kingpins from the Cali,
Nmth Valle, and North Coast drug cartels In Colombia, including North Valle cartel
leader Carlos Alberto Renteria Mantilla
A complete list of the entities Identified today can be found at
http://www .treas. gov/offices/enforcement/ofac/actions/.
REPORTS
•
Renteria Chart
http://www.trea5.gov/pre~sJrdeases/js2324.htm
4/26/2005
Department of the Treasury
Office of Foreign Assets Control
North Valle Drug Cartel
Financial Network
March 2005
~
~
1<
)
~
~
U.S. Federal Indictment
May 2004
Racketeering Influenced and Corrupt OrganIZations (RICO)
U.S. Federal Indictment
July 1995
Narcotics Trafficking
Carlos Alberto RENTERIA MANTILLA
a.k.a. Beto RENTERIA
a.k.a. Don Beto
c.c. 6494208
DOB 11 Mar 1945
FAMIL Y and COMPANY SHAREHOLDERS
n
n
(')
~--"/~l
I
(-'.../"".
I·~\.../·-"'I
Beat'" RENTERIA CAICEDO
Marla Nury CAICEDO GALLEGO
c.c. 31191388
Marla RENTERIA CAICEDO
c.c. 52410645
DaB 16 Nov 1956
DaB 27 May 1981
c.c.
52424737
DOB 30 Nov 1977
FRONT COMPANIES
t2:
Colombo Andina Comemal
Coalsa Ltda.
NIT 800084516-0
L._........
,+;:
lr~"
fv-..,,+
t2:
:
Companla Agropecuaria del Sur Ltda.
Coagrosur Ltda.
NIT 80107990-1
Inverslones Agrolndustnales
del OCCIdente Ltda.
a.k.a. Inagroccldente
NIT 800107993-1
~
Dlmabe Ltda.
NIT 800107988-4
FRONTMEN
e.
e.
~
~
.~~~:>,
~~;':;-
1~7-y~~7;,:
-~T~~~-
Mauricio PARDO OJEDA
19445690
DOB 27 Jul 1961
Javier CAMACHO VALLEJO
16614154
Luis Mario CEDENO HERRERA
16637213
Jairo Camilo COLLAZOS TELLO
14998261
DOB 9 Dec 1953
c.c.
c.c.
c.c.
c.c.
JS-2325: Statement by Rob Nichols, Assistant Secretary of the <br>Treasury for Public A ... Page I of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
March 17, 2005
JS-2325
Statement by Rob Nichols, Assistant Secretary of the
Treasury for Public Affairs
Treasury Secretary John Snow, Chair of the Boards of Trustees of
the Social Security and Medicare Trust Funds, has convened the
sprmg 2005 meeting of the Boards of Trustees for Wednesday,
March 23, 2005 at the Treasury Department.
http://www.treas.gov/press/rcleases/js2325.htm
4/26/2005
JS-2326: New Treasury Data Shows Tax Cuts Providing Benefits to Millions of Taxpayers
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Ado/Je"9 AcroIJaW0 Reader@.
Mal'ch 17, 2005
JS-2326
New Treasury Data Shows Tax Cuts Providing Benefits to Millions of
Taxpayers
WASHINGTON, DC - New Department of the Treasury estimates released today
show that over 105 million Amerrcans will have a lighter tax bill thanks to the
EconomiC Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and
Growth Tax Relief Reconciliation Act of 2003 Nearly 94 million Amerrcans benefit
from the new 10% rate, 27 million families benefit from the increase In the child tax
credit, and over 32 million married couples enjoy a lower tax burden thanks to the
reduction of the marriage penalty.
"While no one looks forward to paying taxes, thanks to President Bush's tax cuts
this tax day Will be far less painful for millions of Americans," Treasury Secretary
John Snow stated. "Tax relief has resulted in a growing economy that is producing
Jobs and creating a better standard of living for Amerrcans. Now IS the time to make
tax relief permanent so that we can extend this period of economic growth and
allow families to plan for their future without worrying that their taxes might be
raised ."
The attached table contains national and state estimates of the number of filers that
benefit from tax relief.
REPORTS
•
TY2003
http://www.treas.go v/ prcss/rcleases/js2326.htm
4/26/2005
COI\IBINEI> EFFECT OF TIlE
ECONOMIC GIU)WTlI ANI> TAX RELIEF RECONCILIATION ACT OF 20111 (EGTlUU) &
JOBS ANI> GROWTII TAX RELIEF RECONCILIATION ACT OF 2tJ1I3 (.JGTRRA)
STATE-BY -STATE I>ISTlHBUTlON
BASEl> ON NUMBER OF I{ETURNS FILEI> IN ZII1I4 TIIAT WOULD IIA VE BENEFITED FlH)M TIlE ACTS
(in thousands)
Entire
EGTRRA
and
JGTRRA
l
Acts
Silecific Provisions of the Acts
New
\0% Bracket
I{eduction in
Top
Rates
Reduction of
l\Iarria~e
Penaltv
Increase in
Child Tax
Credit
Reduction in
Rates on
Capital Gains
and Dividends'
Addendum:
Returns with
Business
Income I
Benefiting
from Acts
105,607
93,925
25,615
32,655
27,205
22,116
24,I4X
1.474
26X
I,X72
868
12,473
1,270
246
1,659
748
11,034
268
72
420
133
3,48Y
461
82
587
284
3,744
440
63
499
253
3,OXO
268
59
376
153
2,775
311
206
3,149
Colorado
Connecticut
Delaware
Florida
Georgia
1,712
1,382
323
6,24Y
2,972
1,548
1,247
21.)2
5,492
2,602
465
4(,1
87
1,3 II
691
55Y
445
99
1,788
XYO
420
383
483
324
X2
348
70
1,214
596
329
61
1,399
694
Uawaii
Idaho
Illinois
Indiana
Iowa
485
457
4,640
440
405
4,151
2,037
969
114
75
1,250
473
199
148
166
1,437
751
371
United States
Alabama
Alaska
Arilona
Arkansas
California
2,261
1,070
160
125
549
516
481
2,044
2,958
239
641
878
:-;ew Hampshire
j\;C\\ Jersey
:'iew 'Iexico
New York
Ohio
528
3,386
62X
6,907
4,415
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
1,137
Y93
1,270
I.I38
4,174
279
2,030
7,356
779
243
249
303
323
132
660
!\Iissouri
North Carolina
North Dakota
Nebraska
Nevada
South Dakota
Tennessee
Texas
Utah
Vermont
211
262
370
429
712
2,555
3,654
4,633
410
1,430
284
1,013
474
288
1,206
1,238
446
199
247
258
338
459
412
2.323
817
787
565
618
3,291
1.799
291
751
934
515
50
133
1,202
663
947
]x5
485
440
622
737
490
84
2n
60
145
106
182
1,825
418
597
663
543
404
936
38
579
121
206
79
217
254
225
571
45
126
178
449
685
216
837
60
168
179
1,065
IX5
128
X23
2,595
791
484
142
3,023
548
6,127
1,132
117
1,954
1,022
4,003
373
1,252
190
277
1,071
107
264
107
251
1,883
1,242
381
417
1,480
123
426
31X
209
296
325
923
97
259
967
88
409
261
250
43
92
73
376
642
1,619
143
2,305
2X7
77
570
2,043
52
382
1,460
21X
155
932
49
657
602
515
537
443
105
39
534
453
505
172
39
65
156
50
DC
Other Areas
234
210
612
81
142
33
157
124
Notes and footnotes appear on followlIIg page.
X6
70X
587
191
727
94
301
5Y
575
201
869
455
1,730
202
70
2,114
Wisconsin
773
707
140
325
1.169
West Virginia
Wyoming
2,336
127
731
1,576
1.781
6,392
696
221
50
173
1,515
878
XI9
614
478
89
2,861
120
836
115
74
169
170
1,695
1,038
2,570
2,115
1,931
Virginia
Washington
132
I.YY2
M assac h usetts
Michigan
!\linnesota
!\Iontana
!\Iississippi
X88
99
87
1,017
453
117
91
975
1,365
1.444
4Y4
2,200
328
123
128
1,200
611
198
260
255
96
874
Kansas
Kentucky
Louisiana
!\Iaine
!\Iar~ land
I.%Y
1,5n
838
71
396
45
53
150
III
55
47
115
3-/4-(}5
The ligures in the table arc based l)Jl tabulations of all individual inL'Ol1le tax return, tiled and proce,sed through the IRS Individual Master
File (IMF) during calendar year 2004. Most rdurns filed In 2004 were Il)r tax year 2003.
Classification by state was based on the address usc'd on the return. Usually this address is the taxpayer's hOl11e address. However. sOl11e
taxpayc'rs may have used the address of a t;l\ attorney or ac'Cl>untant, or a place of business, "nd that addre" could be In a ditkrent state
than the taxpayer's hOl11e.
, The number Dfrcturns bcncliting from each Dfthe specilic provisions shown may nDt add to the number bencliting from the entire
package because some rellJrns will benefit IrDin more than one provisiDn. In additlDn to the provisions shown separately, the Acts included
a tempDrary increase 111 exemptlDn levels I'Dr the alternative minimum tax (AMT).
, Only returns with capital gains Jnd dividend IllCDmC are included
Returns repDrllIlg nD sllch IIlCDme can also benefit from the provisiDn
because they will receive higher returns on other Investments.
, Returns with business income are those that report at least one dollar of income or loss trom a sole proprietorship, farm proprietorship,
partnership, S corporation. andlor rental income.
js-2327: Deputy Assistant Secretary for Critical inll'astrllcture Protection <br>D. Scott Pa...
Page i of 3
FROM THE OFFICE OF PUBLIC AFFAIRS
March 21, 2005
IS-2327
Deputy Assistant Secretary for Critical Infrastructure Protection
D. Scott Parsons Prepared Remarks
America's Community Bankers
2005 National Operations, Security & Technology Conference
Orlando, Florida
Thank you, it's a pleasure and honor to be here tOday representing the Bush
Adlllinistration and the Treasury. I appreciate the opportunity to talk about the
Illlportant role that cOlllmunity banks have In protectlllg the financial critical
IIlfrastructure.
One of the hallmarks of the Admlllistration is the effort to strengthen our country,
and that effort has been productive Our economy is strong today and growing
stronger. Last month, 262,000 new Jobs were created. There are more people
worklllg in America than ever before In our nation's history And economic growth IS
healthy: the Bureau of Economic AnalYSIS last month reported a 3.8 percent
increase In the gross domestic product for the fourth quarter of 2004.
The President has led the effort to protect our country against those who wish to do
us harm by strengthening our borders, reforming our intelligence programs, and
creating the Department of Homeland Security. He strengthened and improved the
quality of education And the President is working to strengthen retirement.
I want to spend Just a moment on this because the President has made Social
Security reform a priority In his second term agenda. The Social Security system IS
a pay-as-you-go system, which means that the payroll taxes paid by today's
workers support benefits paid to today's seniors. In 1950, there were 16 workers
to support everyone beneficiary. Today, that number has dropped to 3.3 workers,
and by the time today's young workers turn 65, there will only be 2 workers to
support each beneficiary In 2008, the baby boomer generation will begin to retire,
and the number of retirees will continue to rise rapidly
Americans are also gettlllg older - by 2035, 20 percent of all Americans will be over
the age of 65. And people are living longer - life expectancy has hit a high of 78
years. These demographic shifts have created significant challenges for Social
Security and threaten its solvency.
Accordlllg to the 2004 Social Security Trustees Report, the cost of doing nothing to
fix the system has reached $10.4 trillion - that's twice the com billed wages and
salaries of every working American last year. In 2018, Social Security will beglll to
payout more than it takes in. The shortfalls will grow larger With each passing year
until the system is bankrupt in 2042
The President believes this is a problem that has to be addressed now so that our
children, and future generations, will not have to face these same fiscal challenges
down the road. The President has put forth some basic prinCiples for Social
Security reform.
•
•
There will be no benefit changes for those born before 1950. Social Security
will not change for those 55 or older.
The President has ruled out an increase in tax rates. We will not jeopardize
the economic strength of our nation by raislllg payroll tax rates. The Social
Security payroll tax, which was once 2 percent, is now 12.4 percent - that's
$1 out of every $8 we earn.
http://www .treas.g ov Ipress/reicascs/j s23 2 7. htll1
4/26/2005
js-2327: Deputy AssIstant Secretary for Critical Infr-astrllcture Protection <br>D. Scott Pa... Page 2 of 3
•
•
Anotller fJrlllClfJle IS fdllne::.::.. We IllU::.t ellsure that lower-income Americans
get the help they need to have dignity and peace of mind In their retirement.
Reform should malntalll the progresslvlty of the system
The President has also called for the establishment of personal retirement
accounts. This wrll allow younger workers to bUild a nest-egg for retirement
that the govemment cannot take away Personal accounts offer a chance to
receive a higher rate of return from sound, long-term investing beyond
anything the current system can deliver. The accounts would be voluntary
and offer workers various low-cost options Similar to those available through
the retirement system available to federal workers.
With this framework guiding us, the Administration looks forward to working With
Congress to fix Social Security once and for all for future generations I believe that
a fair examination of the President's Ideas Will demonstrate that they will be good
for all Americans and will ensure the strength of the Social Security system for
future generations.
Cntlcallnfrastructure Protection
In addition to the strength of our Social Securrty system, the President and
Secretary Snow are concemed, as you are, With protecling the resilience and
strength of our economy and financial system At the Department of Treasury, we
develop and implement policies that enhance the reSilience of the economy,
minimize economic damage, speed economic recovery from any adverse
circumstance, and promote the protection of our critical financial infrastructure. Our
process is to first Identify the systemically critical infrastructures, assess
vulnerabilities Within those Infrastructures, remediate the vulnerabilities, and
measure the results. My office is responsible for protecting the critical infrastructure
of the financial services sector.
America's Community Bankers are an important part of the financial infrastructure.
The economy relies upon the strength and resilience of the financial system.
Secretary Snow has said that "the financial system is the engine of our economy."
A key insight into the strategy to protect our critical infrastructures IS that the private
sector owns over 90 percent of that Infrastructure, and protecting the infrastructure
is best accomplished through a public/private partnership. The govemment and the
financial services sector are working together to protect our nation's critical
Infrastructure on both the physical and cyber front.
On the physical front. we face threats from terrorists whose objective is to create
devastation, measured In the loss of lives and the destruction of property. Their
techniques Include the use of car bombs and homicide bombers. On the cyber
front, we face threats from hackers and Identity thieves who want to disrupt systems
and steal from our customers and Citizens.
Recently, their have been several well publiCized Incidents that Involve the theft
personal information. It IS Important that financial institutions continue to safeguard
their customer's assets and their personal information, such as their Social Security
numbers. I believe that the financial sector does a good job in this area. But I
encourage you to continue to work to Increase your protections, because the
thieves who want to steal this information are sophisticated, adaptive, and in many
cases organized Our challenge IS to work together to address these threats and
make our institutions stronger With the old adage that a chain IS only as strong as
ItS weakest link, our goal is to protect all financial institutions.
Our strategy to protect our Infrastructure is burlt on two prllars. We have a publiC
sector pillar, known as the Financial and Banking Information Infrastructure
Committee (FBIIC), which is comprised of the federal and state financial regulators
and chaired by Treasury. We also have created a private sector pillar, the Financial
Services Sector Coordinating Council (FSSCC) that is comprised of the leading
financial Industry trade associations and financial institutions. Treasury appoints the
chair of the FSSCC, and we work closely together to form policies that advance
preparedness and proteclion Information sharing between the govemment and
private sector channels is the cornerstone of our strategy. Generating accurate and
timely information about threats to our physical and cyber infrastructure and then
sharing that information are essential outcomes of thiS commullicatlon. One
mechanism for disseminating vital threat information IS the FinanCial Services
Information Sharing and AnalySIS Center (FS-ISAC) We've invested to Improve the
ISAC, and if you aren't already a member, I encourage you to JOin
http://www.tr~as.gov/press/relcases/js2327.htm
4/26/2005
js-232"!: Deputy AssIstant Secretary for Critical Infrastructure Protection <br>D. Scott Pa... Page 3 of 3
Four f..JrIf)cljJles gUided our dCtiOI1S III tile dfterrlldth of September 11 and they
continue to guide our actions today These principles form the bedrock of our
collaboration with the financial sector While we have a strong regulatory regime in
place that ensures the safety and soundness of financial institutions, I believe that
protecting critical IIlfrastructure is really a IIsk management problem, and that there
IS no "one size fits all solution" to be achieved through additional regulation.
The first pl'lnciple IS the protection of people. We depend on people - tellers,
technicians, loan officers - to operate the financial system and to see the system
through during times of stress. Indeed, it was the cornmitment of these
profeSSionals to their institutions, customers, and colleagues that helped the
financial system recover from the September 11 attacks.
The second pllnclple IS maintainlllg confidence in the nation's flllancial system. We
rely on financial serVices, such as those provided by thousands of community
banks, to process our paychecks, buy groceries, purchase a house, flllance our
children's education, or save for retirement. We must ensure that consumers trust
in the flllancial system And thiS III turn produces confidence.
The third pllnclple is to ensure that the flllancial system remallls accessible and
helps keep America "open for business." When a disaster strikes, investors rely on
markets to pllce the Impact of the disruption on assets. The longer markets are
closed, the longer investors must go without knowing the effects of the disaster.
This uncertainty can itself be harmful to the economy, compounding the impact of
any disruption Opening financial institutions quickly reduces uncertainty, enabling
us to moderate the effect of the disruption and hasten recovery.
Fourth, we encourage decentralized deciSion-making and swift, responsible action
by the private sector. In general, finanCial institutions should engage in problemsolVing and make appropriate decisions without waiting for guidance from
Washlllgton. The private sector owns and operates the majority of the financial
systems, and therefore knows best how to mend these systems after a disruption.
As government and private industry share more and better information, financial
institutions become better prepared to estimate the risks they bear and better
equipped to effectively reduce the likelihood of a disruption through strategic
investments. Furthermore, as more institutions enhance secullty and reliability, the
IIlcentive increases for competitors to invest In innovative solutions as well. In
some firms, it may shift IIlfrastructure protection from a corporate liability to an
asset. Finally, an industry that responSibly protects Itself reduces the need for the
government to impose costly, inflexible, and potentially ineffective regulation
The four pllnclples - protectlllg people, mallltallling confidence, maintaining access
to finanCial IIlstitutlons, and promoting de-centralized decision-making and
responSibility - shape our poliCies to enhance the resilience of the US economy. I
thank you for your time and attention today.
-30-
http://www.tn~as.gov/prcss/releases/js2327.htm
4/26/2005
js-23=:S: Treasury and IRS Issue Regulations on the Reduction of Consolidated Attributes
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
March 21,2005
IS-2328
Treasury and IRS Issue Regulations on the Reduction of Consolidated
Attributes
WASHINGTON -- Today the Treasury Department and the Internal Revenue
Service issued final regulations tilat provide rules for reducing tax attributes (e.g,
net operating losses, tax credit carryovers) when the debt of a member of a
consolidated group is forgiven. The final regulations are similar to temporary
regulations that were Issued in August of 2003. They provide that all of the
consolidated attnbutes of the group are available for reduction when the debt of a
member of the group is discharged In addition, they provide a methodology for
red uClllg attn butes.
The text of the regulations is attached
REPORTS
•
Regulation Text (TD9192)
http://www.trea.gov/press/rclcascs/js2328.htm
4/26/2005
[4830-0 I-p]
DEPARTMENT OF THE TREASURY
Intemal Revenue Service
26 CFR Part 1
[TO 9192]
RIN 1545-BC38; RIN 1545-BC74; RIN 1545-BC95
Guidance Under Section 1502; Application of Section 108 to Members of a Consolidated Group
AGENCY: Intemal Revenue Service (IRS), Treasury.
ACTION: Final regulations, temporary regulations, and removal of temporary regulations.
SUMMARY: This document contains final regulations under section 1502 of the Intemal
Revenue Code that govem the application of section 108 when a member of a consolidated
group realizes discharge of indebtedness income. These final regulations affect corporations
filing consolidated retums.
DA TES: Effective Date: These regulations are effective March 21,2005.
Applicability Dates: For dates of applicability, see § 1.1502-11 (c )(7), § 1.150213(g)(3)(i)(A) and (ii)(C), §1.1502-19(h)(2)(ii), §1.1502-2l(h)(6), §1.1502-28(d), and §1.150232(h)(7).
FOR FURTHER INFORMATION CONTACT: Conceming § 1.1502-11 of the final regulations,
Candace B. Ewell at (202) 622-7530 (not a toll-free number), conceming all other sections of the
final regulations, Amber R. Cook at (202) 622-7530 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
This document contains amendments to 26 CFR part I under section 1502 of the Internal
Revenue Code (Code). On September 4,2003, temporary regulations (TO 9089) (the first
temporary regulations) relating to the application of section 108 to members of a consolidated
group were published in the Federal Register (68 FR 52487). A notice of proposed rulemaking
(REG-132760-03) cross-referencing the first temporary regulations was published in the Federal
Register for the same day (68 FR 52542). The first temporary regulations added § I. I 502-28T,
which provides guidance regarding the determination of the attributes that are available for
reduction when a member of a consolidated group realizes discharge of indebtedness income that
is excluded from gross income (excluded COD income) and the method for reducing those
attributes. Section 1.1502-28T reflects a consolidated approach that is intended to reduce all
attributes that are available to the debtor member.
Because the first temporary regulations may not have provided for the reduction of all the
attributes that are available to the debtor member, on December II, 2003, the IRS and Treasury
Department published in the Federal Register (68 FR 69024) temporary regulations (TO 9098)
(the second temporary regulations) under section 1502 amending § 1.1502-28T. A notice of
proposed rulemaking (REG-153319-03) cross-referencing the second temporary regulations was
published in the Federal Register for the same day (68 FR 69062). The second temporary
regulations clarify that certain attributes that arise (or are treated as arising) in a separate return
year are subject to reduction when no SRL Y limitation applies to the use of such attributes.
On March 15, 2004, the IRS and Treasury Department published in the Federal Register
(69 FR 12069) temporary regulations (TO 9117) (the third temporary regulations) under section
1502 amending §§ 1.1502-13 and 1. I 502-28T. A notice of proposed rulemaking (REG-16726503) (the 2004 proposed regulations) cross-referencing the third temporary regulations was
2
published in the Federal Register for the same day (69 FR 12091). The third temporary
regulations address certain technical issues relating to the application of excluded COD income
to reduce attributes under sections 108 and 1017 and
~ 1.1502-28T.
The 2004 proposed regulations, in addition to cross-referencing the third temporary
regulations, proposed amendments to
~~
1.1502-28T and 1.1502-11 to provide a methodology for
computing consolidated taxable income and for effecting attribute reduction when there is a
disposition of the stock of a member in a year during which any member realizes excluded COD
J11come.
No public hearing was requested or held for any of the regulations described above.
Written and electronic comments responding to the notices of proposed rulemaking were
received. After consideration of all the comments, the proposed regulations are adopted as
revised by this Treasury decision, and the affected provisions in the corresponding temporary
regulations are removed. The more significant revisions are discussed below.
A.
Apportionment of Net Operating Losses
In addition to adding § 1.1502-28T, the first temporary regulations added several
provisions to § 1.1502-21 T. Sections 1.1502-21 and 1.1502-21 T include rules relating to the
amount of consolidated net operating losses apportioned to a subsidiary when a subsidiary
departs from the group. The provisions added to § 1.1502-21 T require a recomputation of the
percentage of a consolidated net operating loss attributable to a member when a portion of the
loss is carried back to a separate return year or is reduced in respect of excluded COD income, or
when a member departs. Questions have arisen regarding the timing of the recomputation of the
percentage of a consolidated net operating loss attributable to a member in cases in which a
portion of a consolidated net operating loss is carried back to a separate return year or a portion
3
is reduced in respect of excluded COD incomc. Thereforc, these final regulations clarify the
timing of the recomputation in these cases.
B.
Timing of Asset Basis Reduction
Section 108(b)(4)(A) requires the reduction of the tax attributes listed in section
108(b )(2), including basis in property, in respect of excluded COD income after the
determination of the tax imposed for the taxable year of the discharge. Section 10 17(a) provides
that when any portion of excluded COD income is to be applied to reduce basis, then such
portion is applied to reduce the basis of any property held by the taxpayer at the beginning of the
taxable year following the taxable year in which the discharge occurs. As a result of the
reference in section 10 17( a) to the property held by the taxpayer at the beginning of the taxable
year following the taxable year in which the discharge occurs, questions have arisen regarding
the appropriate time to reduce the basis of property of the taxpayer.
The IRS and Treasury Department believe that the reference in section 1017 to the
property held by the taxpayer at the beginning of the taxable year following the taxable year in
which the discharge occurs merely identifies those properties the basis of which are subject to
reduction. It does not prescribe that basis of property should not be reduced unti I the beginning
of the taxable year following the taxable year in which the discharge occurs. Accordingly, these
regulations clarify that basis of property is subject to reduction pursuant to the rules of sections
108 and 1017 and § 1.1502-28 after the determination of tax for the year during which the
member realizes excluded COD income (and any prior years) and coincident with the reduction
of other attributes pursuant to section 108 and § 1.1502-28. However, only the basis of property
held as of the beginning of the taxable year following the taxable year during which the excluded
COD income is realized is available for reduction.
4
C.
Application of Look-Through Rule
The first temporary regulations include a look-through rule that applies if the attribute of
the debtor member reduced is the basis of stock of another member of the group. In these cases,
corresponding reductions must be made to the attributes attributable to the lower-tier member.
To effect those corresponding reductions, the lower-tier member is treated as realizing excluded
COD income in the amount of the stock basis reduction. Questions have arisen regarding
whether the look-through rule applies when there is a reduction in the basis of stock of a
corporation that is a member of the group on the last day of the debtor's taxable year during
which the excluded COD income is realized, but is not a member of the group on the first day of
the debtor's following taxable year. For example, suppose PI owns all of the stock of S 1 and S I
owns all of the stock of S2. PI, S 1, and S2 file a consolidated return. In Year 1, PI realizes
excluded COD income. On the last day of Year 1, PI sells 50 percent of the stock of S 1 to P2.
PI reduces its basis in the 50 percent of the S 1 stock that it owns on the first day of Year 2 in
respect of its excluded COD income. Commentators have questioned whether the look-through
rule applies to reduce S 1's attributes.
The IRS and Treasury Department believe that because Sl and S2 were members of the
same group on the last day of the debtor's taxable year during which the excluded COD income
was realized, it is appropriate to apply the single entity principles reflected in the look-through
rule. The IRS and Treasury Department have also considered whether the look-through rule
applies when there is a reduction in the basis of stock of a corporation that is not a member of the
group on the last day of the debtor's taxable year during which the excluded COD income is
realized (by reason of the application of the next day rule of § 1.1502-76), but is a member of the
group on the first day of the debtor's following taxable year. In these cases too, the IRS and
5
Treasury Department believe that it is appropriate to apply the single entity principles reflected
in the look-through rule. Therefore, these regulations provide that, if the basis of stock ofa
corporation (the lower-tier member) that is owned by another corporation (the higher-tier
member) is reduced and both of such corporations are members of the same consolidated group
on the last day of the higher-tier member's taxable year that includes the date on which the
excluded COD income is realized or the first day of the higher-tier member's taxable year that
follows the taxable year that includes the date on which the excluded COD income is realized,
the look-through rule will apply to reduce the attributes of the lower-tier member.
D.
Attributes Available for Reduction on Departure of Debtor Member
Questions have arisen regarding the identification of the attributes available for reduction
in cases in which the member that realizes the excluded COD income leaves the group (for
example, by reason of a stock acquisition) or the assets of the member are acquired by a
corporation that is not a member of the group in a transaction to which section 381(a) applies on
or prior to the last day of the consolidated return year during which the excluded COD income is
realized. At least one commentator has questioned whether the attributes of other members of
the group from which the debtor member departs are available for reduction in these cases.
These final regulations confirm that, in such cases, the tax attributes that remain after the
determination of the tax imposed on the group that belong to members of the group are available
for reduction.
E.
Intragroup Reorganizations and Group Structure Changes
Questions have also arisen regarding the application of the attribute reduction rules when
a taxpayer that is a member of a consolidated group realizes excluded COD income during the
same consolidated return year during which it transfers assets in a transaction to which section
6
381 (a) applies to a corporation that is a member of the group immediately after the transaction.
Section 1.108-7 provides that if a taxpayer realizes excluded COD income either during or after a
taxable year in which the taxpayer is the distributor or transferor of assets in a transaction
described in section 381 (a), any tax attributes to which the acquiring corporation succeeds,
including the basis of property acquired by the acquiring corporation in the transaction, must
reflect the reductions required by section 108(b). Ifa member of the group transfers assets in a
transaction to which section 381(a) applies to a corporation that is a member of the group
immediately after the transaction and, as a result, the taxable year of the transferor member ends
prior to the end of the consolidated return year, the basis of the transferred property following the
transfer may generate depreciation deductions that are allowed in computing the group's
co~solidated
taxable income for the entire consolidated return year that includes the date of the
discharge. Requiring the basis of the transferred property to reflect a reduction in respect of the
excluded COD income immediately after the transfer could arguably violate the directive of
section I 08(b)( 4)(A) that attributes (including basis) be reduced only after the determination of
tax for the taxable year of the discharge. However, if attributes were reduced after the
determination of the group's tax for the taxable year of the discharge, it may be difficult to
determine which attributes of the combined entity are attributable to the debtor member and
available for reduction. For example, if after the transaction to which section 381 (a) applies the
acquiring corporation purchases property, it may be difficult to determine whether that property
is property of the debtor the basis of which is available for reduction or property of the acquiring
corporation the basis of which may not be available for reduction. Similar issues may arise with
respect to other attributes of the transferor.
7
To address this issue, these final regulations provide that, if the taxable year of a member
during which such member realizes excluded COD income ends prior to the last day of the
consolidated return year and, on the first day of the taxable year of such member that follows the
taxable year during which such member realizes excluded COD income, such member has a
successor member, the successor member is treated as if it had realized the excluded COD
income. Accordingly, all attributes of the successor member listed in section 108(b)(2)
(including attributes that were attributable to the successor member prior to the date such
member became a successor member) are subject to reduction prior to the attributes attributable
to other members of the group. For this purpose, a successor member means a person to which
the member that realizes excluded COD income transfers its assets in a transaction to which
section 381 (a) applies if such transferee is a member of the group immediately after the
transaction. This rule avoids the difficulty of tracing attributes and property of the debtor
member once the debtor member has been acquired by another member and recognizes that the
direction of a transaction to which section 381 (a) applies in a group may not be meaningful.
These regulations provide a similar rule for cases in which a member of the group acquires the
assets of another member in a transaction to which section 381 (a) applies that is also a group
structure change.
F.
Application of Next Day Rule
Under § 1.1502-76, a consolidated return must include the common parent's items of
income, gain, deduction, loss, and credit for the entire consolidated return year, and each
subsidiary's items for the portion of the year for which it is a member. A corporation that leaves
a consolidated group during the tax year must generally file a short period separate return (or join
in the consolidated return of another group) for the portion of the year not included in the
8
consolidated return. If a corporation ceases to be a member during a consolidated return year, it
ceases to be a member at the end of the day on which its status as a member changes, and its tax
year ends at the end of that day. Under the next day rule, however, any transaction that occurs
on the day the member ceases to be affiliated with the group that is properly allocable to the
portion of the subsidiary's day after the event terminating affiliation must be treated as occurring
at the beginning of the following day. Commentators have questioned whether the next day rule
can be applied when the debt of a subsidiary is discharged in exchange for stock of the
subsidiary and, as a result of the issuance of the subsidiary's stock to the creditor, the subsidiary
ceases to be a member of the group. As a result of the application of that rule, the excluded COD
income would be treated as realized at the beginning of the day following the day the subsidiary
ceases to be a member of the group, rather than on the day it ceases to be a member of the group.
The IRS and Treasury Department believe that because the excluded COD income
accrued in the group, it is not appropriate to apply the next day rule in these cases. Therefore,
these regulations provide that the next day rule cannot be applied to treat excluded COD income
as realized at the beginning of the day following the day on which it is realized.
G.
Timing of Investment Adjustments
Under § 1.1502-32, excluded COD income of a subsidiary results in a positive basis
adjustment to the extent it is applied to reduce attributes and the reduction of the subsidiary's
attributes (other than credits) in respect of excluded COD income will generally result in a
negative basis adjustment. Commentators have requested clarification regarding when these
basis adjustments are effective in cases in which a subsidiary ceases to be a member of the group
on or prior to the end of the consolidated return year during which a member realizes excluded
COD income. Therefore, these regulations clarify that, in those cases, basis adjustments
9
resulting from the realization of excluded COD income and from the reduction of attributes in
respect thereof are made immediately after the determination of tax for the group for the
consolidated return year during which the excluded COD income is realized (and any prior
years) and are effective immediately before the beginning of the day following the day the
member departs from the group. Therefore, if the departing member becomes a member of
another group (the new group), the adjustments to the basis of the departing member's stock in
respect of the excluded COD income will not cause stock basis adjustments in the new group.
H.
Elimination of Circular Stock Basis on Disposition of Member Stock
The 2004 proposed regulations provide a methodology for computing consolidated
taxable income and for effecting attribute reduction when there is a disposition of member stock
during the same taxable year in which any member realizes excluded COD income. The
methodology is intended to prevent the reduction of tax attributes from affecting the basis of the
member stock that is sold, which would affect the tax liability of the group for the taxable year of
the discharge. Accordingly, the methodology limits the actual reduction of tax attributes to the
amount of tax attributes available for reduction following the tentative computation of taxable
income (or loss).
Commentators have noted, however, that pursuant to section I 08(b)( 4 )(A), attributes are
reduced only after the determination of tax for the taxable year of the discharge. Computing the
limitation on attribute reduction based on the tax attributes remaining after a tentative
computation of taxable income (or loss) does not account for the use of credits in the
computation of the group's tax liability for the taxable year of the discharge. Therefore, in
response to these comments, the final regulations provide for the computation of the limitation
10
on attribute reduction after the computation of the tax imposed by chapter I of the Code, rather
than after the computation of taxable income (or loss).
I.
Transactions Designed to Avoid the Application of the Attribute Reduction Rules
The preamble to the first temporary regulations stated that the IRS and Treasury
Department are considering adopting rules under section 1502 (and possibly other Code sections)
to address the effect of transitory transactions and other transactions designed to avoid the
application of the rules concerning attribute reduction. The IRS and Treasury Department
continue to believe that general principles (including step transaction doctrine) could be applied
to disregard certain transactions that have the effect of changing the result of the application of
the attribute reduction rules. Therefore, the IRS and Treasury Department have decided not to
adopt any additional rules at this time.
1.
Elective Retroactive Application of Final Regulation
The portion of these regulations finalizing the rules contained in § 1.1502-28T apply to
discharges of indebtedness that occur after March 21, 2005. Groups, however, may apply those
rules in whole, but not in part, to discharges of indebtedness that occur on or before March 21,
2005 and after August 29, 2003.
These regulations also permit further retroactive application of a rule included in the third
temporary regulations that prevents the potential duplication of ordinary income recapture under
section 1245 that could be caused by reason of the application of both section 1245 and either
section I 017(b)(3)(D) (which permits subsidiary stock to be treated as depreciable property to
the extent that the subsidiary consents to a corresponding reduction in the basis of its depreciable
property) or the look-through rule. This section 1245 rule provides that a reduction of the basis
of subsidiary stock is treated as a deduction allowed for depreciation only to the extent that the
11
amount by which the basis of the subsidiary stock is reduced exceeds the total amount of the
attributes attributable to such subsidiary that are reduced pursuant to the subsidiary's consent
under section 1017(b)(3)(D) or as a result of the application of the look-through rule. The third
temporary regulations made this special rule effective for discharges of indebtedness that occur
after August 29,2003, the effective date of the look-through rule. The IRS and Treasury
Department are aware that the problem addressed by this special rule could have occurred in
cases of discharges of indebtedness that occurred before August 29, 2003, if section
1017(b)(3)(D) was applied. Accordingly, these final regulations provide that groups may apply
this special rule to discharges of indebtedness that occur on or before August 29, 2003, in cases
in which section 1017(b)(3)(D) was applied.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as
defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Further,
it is hereby certified that these regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on the fact that these regulations
will primarily affect affiliated groups of corporations that have elected to file a consolidated
return, which tend to be larger businesses. Accordingly, a regulatory flexibility analysis under
the Regulatory Flexibility Act (5 U.S.c. chapter 6) is not required. Pursuant to section 7805(0
of the Code, the notices of proposed rulemaking preceding these regulations were submitted to
the Chief Counsel for Advocacy of the Small Business Administration for comment on their
impact on small business.
Drafting Information
12
The principal author of these regulations is Amber R. Cook of the Office of Associate
Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART I--INCOME TAXES
Paragraph I. The authority citation for part 1 is amended by removing the entries for
§§ 1.1502-13T, 1.1502-19T, and 1.1502-28T and adding the following entry in numerical order
to read, in part, as follows:
Authority: 26 U.S.c. 7805.
***
Section 1.1502-28 also issued under 26 U .S.c. 1502.
***
Par. 2. Section 1.1502-11 is amended as follows:
I. Paragraph (b)( I) is revised.
2. Paragraph (c) is redesignated as paragraph (d).
3. New paragraph (c) is added.
The revision and addition read as follows:
§ 1.1502-11 Consolidated taxable income.
*****
(b) Elimination of circular stock basis adjustments when there is no excluded COD
income--(l) In general. If one member (P) disposes of the stock of another member (S), this
paragraph (b) limits the use of S's deductions and losses in the year of disposition and the
13
carryback of items to prior years. The purpose of the limitation is to prevent P'S income or gain
from the disposition of S's stock from increasing the absorption of S's deductions and losses,
because the increased absorption would reduce P'S basis (or increase its excess loss account) in
S's stock under § 1.1502-32 and, in tum, increase P'S income or gain. See paragraph (b)(3) of this
section for the application of these principles to P'S deduction or loss from the disposition of S's
stock, and paragraph (b)( 4) of this section for the application of these principles to multiple stock
dispositions. This paragraph (b) applies only when no member realizes discharge of
indebtedness income that is excluded from gross income under section I 08(a) (excluded COD
income) during the taxable year of the disposition. See paragraph (c) of this section for rules that
apply when a member realizes excluded COD income during the taxable year of the disposition.
See § 1.1502-19( c) for the definition of disposition.
*****
(c) Elimination of circular stock basis adjustments when there is excluded COD income-(I) In general. If one member (P) disposes of the stock of another member (S) in a year during
which any member realizes excluded COD income, this paragraph (c) limits the use of S's
deductions and losses in the year of disposition and the carryback of items to prior years, the
amount of the attributes of certain members that can be reduced in respect of excluded COD
income of certain other members, and the attributes that can be used to offset an excess loss
account taken into account by reason of the application of§1.1502-19(c)(l)(iii)(B). In addition
to the purpose set forth in paragraph (b)(1) of this section, the purpose of these limitations is to
prevent the reduction of tax attributes in respect of excluded COD income from affecting P's
income, gain, or loss on the disposition of S stock (including a disposition of S stock that results
from the application of § 1.1502-19( c)( I )(iii)(B» and, in tum, affecting the attributes available
14
for reduction pursuant to sections 108 and 1017 and ~ 1.1502-28. See ~ 1.1502-19( c) for the
definition of disposition.
(2) Computation of tax liability, reduction of attributes, and computation of limits on
absorption and reduction of attributes. If a member realizes excluded COD income in the taxable
year during which P disposes of S stock, the steps used to compute tax liability, to effect the
reduction of attributes, and to compute the limitations on the absorption and reduction of
attributes are as follows. These steps also apply to determine whether and to what extent an
excess loss account must be taken into account as a result of the appl ication of § 1.1502-19(b)( 1)
and (c)( 1)(iii)(B).
(i) Limitation on deductions and losses to offset income or gain. First, the determination
of the extent to which S's deductions and losses for the tax year of the disposition (and its
deductions and losses carried over from prior years) may offset income and gain is made
pursuant to paragraphs (b )(2) and (3) of this section.
(ii) Tentative adjustment of stock basis. Second, § 1.1502-32 is tentatively applied to
adjust the basis of the S stock to reflect the amount ofS's income and gain included, and
unlimited deductions and losses that are absorbed, in the tentative computation of taxable income
or loss for the year of the disposition (and any prior years) that is made pursuant to paragraph
(b)(2) of this section, but not to reflect the realization of excluded COD income and the reduction
of attributes in respect thereof.
(iii) Tentative computation of stock gain or loss. Third, in the case of a disposition of S
stock that does not result from the application of § 1.1502-19( c)( 1)(iii)(B), P's income, gain, or
loss from the disposition of S stock is computed. For this purpose, the result of the computation
pursuant to paragraph (c)(2)(ii) of this section is treated as the basis of such stock.
15
(iv) Tentative computation of tax imposed. Fourth, the tax imposed by chapter I of the
Intemal Revenue Code for the year of disposition (and any prior years) is tentatively computed.
For this purpose, in the case of a disposition of S stock that does not result from the application
of§1.1502-19(c)(I)(iii)(8), the tentative computation of tax imposed takes into account P's
income, gain, or loss from the disposition ofS stock computed pursuant to paragraph (c)(2)(iii)
of this section. The tentative computation of tax imposed is made without regard to whether all
or a portion of an excess loss account in a share of S stock is required to be taken into account
pursuant to §1.1502-19(b)(l) and (c)(I)(iii)(8).
(v) Tentative reduction of attributes. Fifth, the rules of sections 108 and 1017 and
§ 1.1502-28 are tentatively applied to reduce the attributes remaining after the tentative
computation of tax imposed pursuant to paragraph (c)(2)(iv) of this section.
(vi) Actual adjustment of stock basis. Sixth, § 1.1502-32 is applied to reflect the amount
of S's income and gain included, and unlimited deductions and losses that are absorbed, in the
tentative computation of tax imposed for the year of the disposition (and any prior years) made
pursuant to paragraph (c)(2)(iv) of this section, and the excluded COD income applied to reduce
attributes and the attributes tentatively reduced in respect of the excluded COD income pursuant
to paragraph (c)(2)(v) of this section.
(vii) Actual computation of stock gain or loss. Seventh, the group's actual gain or loss on
the disposition of S stock (including a disposition that results from the application of § 1.150219( c)(1 )(iii)(B» is computed. The result of the computation pursuant to paragraph (c )(2)(vi) of
this section is treated as the basis of such stock.
(viii) Actual computation of tax imposed. Eighth, the tax imposed by chapter I of the
Intemal Revenue Code for the year of the disposition (and any prior years) is computed. The
16
actual tax imposed on the group for the year of the disposition is computed by applying the
limitation computed pursuant to paragraph (c)(2)(i) of this section, and by including the gain or
loss recognized on the disposition ofS stock computed pursuant to paragraph (c)(2)(vii) of this
section. However, attributes that were tentatively used in the computation of tax imposed
pursuant to paragraph (c)(2)(iv) of this section and attributes that were tentatively reduced
pursuant to paragraph (c )(2)( v) of this section cannot offset any excess loss account taken into
account as a result of the application of § 1.1502-19(b)(I) and (c)( I )(iii)(8).
(ix) Actual reduction of attributes. Ninth, the rules of sections 108 and 1017 and
§ 1.1502-28 are actually applied to reduce the attributes remaining after the actual computation of
tax imposed pursuant to paragraph (c)(2)(viii) of this section.
(A) S or a lower-tier corporation realizes excluded COD income. IfS or a lower-tier
corporation of S realizes excluded COD income, the aggregate amount of excluded COD income
that is applied to reduce attributes attributable to members other than S and any lower-tier
corporation of S pursuant to this paragraph (c)(2)(ix) shall not exceed the aggregate amount of
excluded COD income that was tentatively applied to reduce attributes attributable to members
other than S and any lower-tier corporation ofS pursuant to paragraph (c)(2)(v) of this section.
The amount of the actual reduction of attributes attributable to S and any lower-tier corporation
of S that may be reduced in respect of the excluded COD income of S or a lower-tier corporation
of S shall not be so limited.
(8) A member other than S or a lower-tier corporation realizes excluded COD income. If
a member other than S or a lower-tier corporation of S realizes excluded COD income, the
aggregate amount of excluded COD income that is applied to reduce attributes (other than
credits) attributable to S and any lower-tier corporation ofS pursuant to this paragraph (c)(2)(ix)
17
shall not exceed the aggregate amount of excluded COD income that was tentatively applied to
reduce attributes (other than credits) attributable to S and any lower-tier corporation of S
pursuant to paragraph (c)(2)(v) of this section. The amount of the actual reduction of attributes
attributable to any member other than S and any lower-tier corporation of S that may be reduced
in respect of the excluded COD income of S or a lower-tier corporation of S shall not be so
limited.
(3) Special rules. (i) If the reduction of attributes attributable to a member is prevented as
a result of a limitation described in paragraph (c)(2)(ix)(8) of this section, the excluded COD
income that would have otherwise been applied to reduce such attributes is applied to reduce the
remaining attributes of the same type that are available for reduction under § 1. 1502-28(a)(4), on
a pro rata basis, prior to reducing attributes of a different type. The reduction of such remaining
attributes, however, is subject to any applicable limitation described in paragraph (c )(2)(ix)(8) of
this section.
(ii) To the extent S' s deductions and losses in the year of disposition (or those of a lowertier corporation of S) cannot offset income or gain because of the limitation under paragraph (b)
of this section or this paragraph (c) and are not reduced pursuant to sections 108 and 1017 and
§ 1.1502-28, such items are carried to other years under the applicable provisions of the Internal
Revenue Code and regulations as if they were the only items incurred by S (or a lower-tier
corporation of S) in the year of disposition. For example, to the extent S incurs an operating loss
in the year of disposition that is limited and is not reduced pursuant to section 108 and § 1.150228, the loss is treated as a separate net operating loss attributable to S arising in that year.
(4) Definition of lower-tier corporation. A corporation is a lower-tier corporation ofS if
all of its items of income, gain, deduction, and loss (including the absorption of deduction or loss
18
and the reduction of attributes other than credits) would be fully reflected in P's basis in S's
stock under § 1.1502-32.
(5) Examples. For purposes of the examples in this paragraph (c), unless otherwise
stated, the tax year of all persons is the calendar year, all persons use the accrual method of
accounting, the facts set forth the only corporate activity, all transactions are between unrelated
persons, tax liabilities are disregarded, and no election under section 108(b)(5) is made. The
principles of this paragraph (c) are illustrated by the following examples:
Example I. Departing member realizes excluded COD income. (i) Facts. P owns all of
S's stock with a $90 basis. For Year 1, P has ordinary income of $30, and S has an $80 ordinary
loss and $100 of excluded COD income from the discharge of non-intercompany indebtedness.
P sells the S stock for $20 at the close of Year 1. As of the beginning of Year 2, S has Asset A
with a basis of $0 and a fair market value of $20.
(ii) Analysis. The steps used to compute the tax imposed on the group, to effect the
reduction of attributes, and to compute the limitations on the use and reduction of attributes are
as follows:
(A) Computation of limitation on deductions and losses to offset income or gain. To
determine the amount of the limitation under paragraph (c)(2)(i) of this section on S's loss and
the effect of the absorption of S's loss on P's basis in S's stock under § 1. 1502-32(b ), P's gain or
loss from the disposition of S' s stock is not taken into account. The group is tentatively treated
as having a consolidated net operating loss of $50 (P's $30 of income minus S's $80 loss). Thus,
$30 ofS's loss is unlimited and $50 ofS's loss is limited under paragraph (c)(2)(i) of this
section. Under the principles of § 1.1502-21(b)(2)(iv), all of the consolidated net operating loss
is attributable to S.
(B) Tentative adjustment of stock basis. Then, pursuant to paragraph (c)(2)(ii) of this
section, § 1.1502-32 is tentatively applied to adjust the basis of S stock. For this purpose,
however, adjustments attributable to the excluded COD income and the reduction of attributes in
respect thereof are not taken into account. Under § 1.1502-32(b), the absorption of $30 of S's
loss decreases P's basis in S's stock by $30 to $60.
(C) Tentative computation of stock gain or loss. Then, P'S income, gain, or loss from the
sale of S stock is computed pursuant to paragraph (c)(2)(iii) of this section using the basis
computed in the previous step. Thus, P is treated as recognizing a $40 loss from the sale of S
stock.
(D) Tentative computation of tax imposed. Pursuant to paragraph (c)(2)(iv) of this
section, the tax imposed for the year of disposition is then tentatively computed, taking into
19
account p's $40 loss on the sale of the S stock computed pursuant to paragraph (c)(2)(iii) of this
section. The group has a $50 consolidated net operating loss for Year I that, under the principles
of § 1.1502-21 (b )(2)(iv), is wholly attributable to S and a consolidated capital loss of $40 that,
under the principles of § 1.1502-21 (b )(2)( iv), is wholly attributable to P.
(E) Tentative reduction of attributes. Next, pursuant to paragraph (c)(2)(v) of this
section, the rules of sections 108 and 1017 and § 1.1502-28 are tentatively applied to reduce
attributes remaining after the tentative computation of the tax imposed. Pursuant to § 1.150228(a)(2), the tax attributes attributable to S would first be reduced to take into account its $100 of
excluded COD income. Accordingly, the consolidated net operating loss for Year I would be
reduced by $50, the portion of that consolidated net operating loss attributable to S under the
principles of§1.1502-21(b)(2)(iv), to $0. Then, pursuant to §1.1502-28(a)(4), S's remaining $50
of excluded COD income would reduce the consolidated capital loss attributable to P of $40 by
$40 to $0. The remaining $10 of excluded COD income would have no effect.
(F) Actual adjustment of stock basis. Pursuant to paragraph (c )(2)( vi) of this section,
§ 1.1502-32 is applied to reflect the amount of S's income and gain included, and unlimited
deductions and losses that are absorbed, in the tentative computation of the tax imposed for the
year of the disposition and the excluded COD income tentatively applied to reduce attributes and
the attributes reduced in respect of the excluded COD income pursuant to the previous step.
Under §1.1502-32(b), the absorption of$30 ofS's loss, the application of$90 ofS's excluded
COD income to reduce attributes of P and S, and the reduction of the $50 loss attributable to S in
respect of the excluded COD income results in a positive adjustment of$IO to P's basis in the S
stock. P's basis in the S stock, therefore, is $100.
(G) Actual computation of stock gain or loss. Pursuant to paragraph (c)(2)(vii) of this
section, P's actual gain or loss on the sale of the S stock is computed using the basis computed in
the previous step. Accordingly, P recognizes an $80 loss on the disposition of the S stock.
(H) Actual computation of tax imposed. Pursuant to paragraph (c)(2)(viii) of this section,
the tax imposed is computed by taking into account P's $80 loss from the sale of S stock. Before
the application of § 1.1502-28, therefore, the group has a consolidated net operating loss of $50
that is wholly attributable to S under the principles of § 1.1502-21 (b )(2)(iv), and a consolidated
capital loss of $80 that is wholly attributable to P under the principles of § 1.1502-21 (b )(2)(iv).
(I) Actual reduction of attributes. Pursuant to paragraph (c )(2)(ix) of this section,
sections 108 and 1017 and § 1.1502-28 are then actually applied to reduce attributes remaining
after the actual computation of the tax imposed. Pursuant to § 1.1502-28(a)(2), the tax attributes
attributable to S must first be reduced to take into account its $100 of excluded COD income.
Accordingly, the consolidated net operating loss for Year I is reduced by $50, the portion of that
consolidated net operating loss attributable to S under the principles of § 1.1502-21 (b )(2)(iv), to
$0. Then, pursuant to § I. I 502-28(a)(4), S's remaining $50 of excluded COD income reduces
consolidated tax attributes. In particular, without regard to the limitation imposed by paragraph
(c)(2)(ix)(A) of this section, the $80 consolidated capital loss, which under the principles of
§ 1.1502-21 (b )(2)(iv) is attributable to P, would be reduced by $50 from $80 to $30. However,
the limitation imposed by paragraph (c)(2)(ix)(A) of this section prevents the reduction of the
20
consolidated capital loss attributable to P by more than $40. Therefore, the consolidated capital
loss attributable to P is reduced by only $40 in respect of S's excluded COD income. The
remaining $10 of excluded COD income has no effect.
Example 2. Member other than departing member realizes excluded COD income. (i)
Facts. P owns all ofSI 's and S2's stock. P's basis in S2's stock is $600. For Year I, P has
ordinary income of $30, S 1 has a $100 ordinary loss and $100 of excluded COD income from
the discharge of non-intercompany indebtedness, and S2 has $200 of ordinary loss. P sells the
S2 stock for $600 at the close of Year 1. As of the beginning of Year 2, S 1 has Asset A with a
basis of $0 and a fair market value of $1 O.
(ii) Analysis. The steps used to compute the tax imposed on the group, to effect the
reduction of attributes, and to compute the limitations on the use and reduction of attributes are
as follows:
(A) Computation of limitation on deductions and losses to offset income or gain. To
determine the amount of the limitation under paragraph (c)(2)(i) of this section on S2's loss and
the effect of the absorption ofS2's loss on P's basis in S2's stock under §1.1502-32(b), P's gain
or loss from the sale ofS2's stock is not taken into account. The group is tentatively treated as
having a consolidated net operating loss of $270 (P's $30 of income minus S 1's $100 loss and
S2's $200 loss). Consequently, $20 ofS2's loss from Year 1 is unlimited and $180 ofS2's loss
from Year 1 is limited under paragraph (c )(2 )(i) of this section. Under the principles of § 1.150221(b)(2)(iv), $90 of the consolidated net operating loss is attributable to SI and $180 of the
consolidated net operating loss is attributable to S2.
(B) Tentative adjustment of stock basis. Then, pursuant to paragraph (c)(2)(ii) of this
section, § 1.1502-32 is tentatively applied to adjust the basis ofS2's stock. For this purpose,
however, adjustments to the basis of S2' s stock attributable to the reduction of attributes in
respect of S 1's excluded COD income are not taken into account. Under § 1. 1502-32(b ), the
absorption of$20 ofS2's loss decreases P's basis in S2's stock by $20 to $580.
(C) Tentative computation of stock gain or loss. Then, P'S income, gain, or loss from the
disposition of S2 stock is computed pursuant to paragraph (c )(2)( iii) of this section using the
basis computed in the previous step. Thus, P is treated as recognizing a $20 gain from the sale of
the S2 stock.
(D) Tentative computation of tax imposed. Pursuant to paragraph (c)(2)(iv) of this
section, the tax imposed for the year of disposition is then tentatively computed, taking into
account P'S $20 gain from the sale ofS2 stock computed pursuant to paragraph (c)(2)(iii) of this
section. Although S2's limited loss cannot be used to offset P's $20 gain from the sale ofS2's
stock under the rules of this section, SI 's loss will offset that gain. Therefore, the group is
tentatively treated as having a consolidated net operating loss of $250, $70 of which is
attributable to S 1 and $180 of which is attributable to S2 under the principles of § 1.150221(b)(2)(iv).
21
(E) Tentative reduction of attributes. Next, pursuant to paragraph (c)(2)(v) of this
section, the rules of sections 108 and 1017 and ~ 1.1502-28 are tentatively applied to reduce
attributes remaining after the tentative computation of the tax imposed. Pursuant to § 1.150228(a)(2), the tax attributes attributable to S I would first be reduced to take into account its $100
of excluded COD income. Accordingly, the consolidated net operating loss for Year I would be
reduced by $70, the portion of that consolidated net operating loss attributable to S I under the
principles of § 1.1502-21 (b )(2)( iv), to $0. Then, pursuant to ~ I. I 502-28(a)( 4), S I 's remaining
$30 of excluded COD income would reduce the consolidated net operating loss for Year I
attributable to S2 of $180 by $30 to $150.
(F) Actual adjustment of stock basis. Pursuant to paragraph (c )(2)(vi) of this section,
§ 1.1502-32 is applied to reflect the amount of S2's income and gain included, and unlimited
deductions and losses that are absorbed, in the tentative computation of the tax imposed for the
year of the disposition and the excluded COD income tentatively applied to reduce attributes and
the attributes reduced in respect of the excluded COD income pursuant to the previous step.
Under §1.1502-32(b), the absorption of$20 ofS2's loss to offset a portion ofP's income and the
application of $30 of S I 's excluded COD income to reduce attributes attributable to S2 results in
a negative adjustment of $50 to p's basis in the S2 stock. P's basis in the S2 stock, therefore, is
$550.
(G) Actual computation of stock gain or loss. Pursuant to paragraph (c)(2)(vii) of this
section, P's actual gain or loss on the sale of the S2 stock is computed using the basis computed
in the previous step. Therefore, P recognizes a $50 gain on the disposition of the S2 stock.
(H) Actual computation of tax imposed. Pursuant to paragraph (c)(2)(viii) of this section,
the tax imposed is computed by taking into account P's $50 gain from the disposition of the S2
stock. Before the application of § 1.1502-28, therefore, the group has a consolidated net
operating loss of $220, $40 of which is attributable to S I and $180 of which is attributable to S2
under the principles of § 1.1502-21 (b )(2 )(iv).
(I) Actual reduction of attributes. Pursuant to paragraph (c)(2)(ix) of this section,
sections 108 and 1017 and § 1.1502-28 are then actually applied to reduce attributes remaining
after the actual computation of the tax imposed. Pursuant to § 1.1502-28(a)(2), the tax attributes
attributable to S 1 must first be reduced to take into account its $100 of excluded COD income.
Accordingly, the consolidated net operating loss for Year I is reduced by $40, the portion of that
consolidated net operating loss attributable to Slunder the principles of § 1.1502-21 (b )(2)(iv), to
$0. Then, pursuant to § I. 1502-28(a)(4), without regard to the limitation imposed by paragraph
(c)(2)(ix)(B) of this section, S 1's remaining $60 of excluded COD income would reduce S2's net
operating loss of$180 to $120. However, the limitation imposed by paragraph (c)(2)(ix)(B) of
this section prevents the reduction ofS2's loss by more than $30. Therefore, S2's loss of$180 is
reduced by $30 to $150 in respect of S 1's excluded COD income. The remaining $30 of
excluded COD income has no effect.
Example 3. Lower-tier corporation of departing member realizes excluded COD income.
(i) Facts. P owns all ofSl's stock, S2's stock, and S3's stock. SI owns all ofS4's stock. P's
basis in S I 's stock is $50 and S 1's basis in S4 's stock is $50. For Year 1, P has $50 of ordinary
22
loss, S I has $100 of ordinary loss, S2 has $150 of ordinary loss, S3 has $50 of ordinary loss, and
S4 has $50 of ordinary loss and $80 of excluded COD income from the discharge of nonintercompany indebtedness. P sells the S I stock for $100 at the close of Year I. As of the
beginning of Year 2, S4 has Asset A with a fair market value of $1 O. After the computation of
tax imposed for Year I and before the application of sections 108 and 1017 and § 1.1502-28,
Asset A has a basis of $0.
(ii) Analysis. The steps used to compute the tax imposed on the group, to effect the
reduction of attributes, and to compute the limitations on the use and reduction of attributes are
as follows:
(A) Computation of limitation on deductions and losses to offset income or gain. To
determine the amount of the limitation under paragraph (c)(2)(i) of this section on SI 's and S4's
losses and the effect of the absorption ofSI 's and S4's losses on P's basis in SI's stock under
§ 1. 1502-32(b ), P's gain or loss from the sale of S I 's stock is not taken into account. The group
is tentatively treated as having a consolidated net operating loss of $400. Consequently, $ 100 of
S I 's loss and $50 of S4's loss is limited under paragraph (c )(2)(i) of this section.
(8) Tentative adjustment of stock basis. Then, pursuant to paragraph (c)(2)(ii) of this
section, § 1.1502-32 is tentatively applied to adjust the basis of S 1's stock. For this purpose,
adjustments to the basis of S 1's stock attributable to S4's realization of excluded COO income
and the reduction of attributes in respect of such excluded COO income are not taken into
account. There is no adjustment under § 1.1502-32 to the basis of the S I stock. Therefore, P's
basis in the S I stock for this purpose is $50.
(C) Tentative computation of stock gain or loss. Then, P'S income, gain, or loss from the
sale of S 1 stock is computed pursuant to paragraph (c)(2)(iii) of this section using the basis
computed in the previous step. Thus, P is treated as recognizing a $50 gain from the sale of the
S 1 stock.
(D) Tentative computation of tax imposed. Pursuant to paragraph (c)(2)(iv) of this
section, the tax imposed for the year of disposition is then tentatively computed, taking into
account P's $50 gain from the sale of the S I stock computed pursuant to paragraph (c)(2)(iii) of
this section. Although S 1's and S4's limited losses cannot be used to offset P's $50 gain from
the sale ofSl's stock under the rules of this section, $10 ofP's loss, $30 ofS2's loss, and $10 of
S3's loss will offset that gain. Therefore, the group is tentatively treated as having a
consolidated net operating loss of$350, $40 of which is attributable to P, $100 of which is
attributable to S I, $120 of which is attributable to S2, $40 of which is attributable to S3, and $50
of which is attributable to S4 under the principles of § 1.1502-21 (b )(2)(iv).
(E) Tentative reduction of attributes. Next, pursuant to paragraph (c)(2)(v) of this
section, the rules of sections 108 and 1017 and § 1.1502-28 are tentatively applied to reduce
attributes remaining after the tentative computation of the tax imposed. Pursuant to § 1.150228( a)(2), the tax attributes attributable to S4 would first be reduced to take into account its $80 of
excluded COD. Accordingly, the consolidated net operating loss for Year I would be reduced
by $50, the portion of the consolidated net operating loss attributable to S4 under the principles
23
of§1.1502-21(b)(2)(iv), to $300. Then, pursuant to §1.1502-28(a)(4), S4's remaining $30 of
excluded COD income would reduce the consolidated net operating loss for Year I that is
attributable to other members. Therefore, the consolidated net operating loss for Year I would
be reduced by $30. Of that amount, $4 is attributable to P, $10 is attributable to SI, $12 is
attributable to S2, and $4 is attributable to S3.
(F) Actual adjustment of stock basis. Pursuant to paragraph (c )(2 )(vi) of this section,
§ 1.1502-32 is applied to reflect the amount of S 1's and S4 's income and gain included, and
unlimited deductions and losses that are absorbed, in the tentative computation of tax imposed
for the year of the disposition and the excluded COD income tentatively applied to reduce
attributes and the attributes reduced in respect of the excluded COD income pursuant to the
previous step. Under § 1.1502-32(b), the application of $80 of S4's excluded COD income to
reduce attributes, and the reduction of S4 's loss in the amount of $50 and S I 's loss in the amount
of $1 0 in respect of the excluded COD income results in a positive adjustment of $20 to P's basis
in the S 1 stock. Accordingly, P's basis in S 1 stock is $70.
(G) Actual computation of stock gain or loss. Pursuant to paragraph (c)(2)(vii) of this
section, P's actual gain or loss on the sale of the SI stock is computed using the basis computed
in the previous step. Accordingly, P recognizes a $30 gain on the disposition of the S 1 stock.
(H) Actual computation of tax imposed. Pursuant to paragraph (c)(2)(viii) of this section,
the tax imposed is computed by taking into account P's $30 gain from the sale of S 1 stock.
Before the application of § 1.1502-28, therefore, the group has a consolidated net operating loss
of $370, $44 of which is attributable to P, $100 of which is attributable to S 1, $132 of which is
attributable to S2, $44 of which is attributable to S3, and $50 of which is attributable to S4.
(I) Actual reduction of attributes. Pursuant to paragraph (c )(2)(ix) of this section,
sections 108 and 1017 and § 1.1502-28 are then actually applied to reduce attributes remaining
after the actual computation of the tax imposed. Pursuant to § 1.1502-28(a)(2), the tax attributes
attributable to S4 must first be reduced to take into account its $80 of excluded COD income.
Accordingly, the consolidated net operating loss for Year 1 is reduced by $50, the portion of that
consolidated net operating loss attributable to S4 under the principles of § 1.1502-21 (b )(2)(iv), to
$320. Then, pursuant to § 1. 1502-28(a)( 4), without regard to the limitation imposed by
paragraph (c)(2)(ix)(A) of this section, S4's remaining $30 of excluded COD income would
reduce the consolidated net operating loss for Year 1 by $30 ($4.12 of the consolidated net
operating loss attributable to P, $9.38 of the consolidated net operating loss attributable to S 1,
$12.38 of the consolidated net operating loss attributable to S2, and $4.12 of the consolidated net
operating loss attributable to S3) to $290. However, the limitation imposed by paragraph
(c)(2)(ix)(A) of this section prevents the reduction of the consolidated net operating loss
attributable to P, S2, and S3 by more than $4, $12, and $4 respectively. The $.62 of excluded
COD income that would have otherwise reduced the consolidated net operating loss attributable
to P, S2, and S3 is applied to reduce the consolidated net operating loss attributable to S 1.
Therefore, S 1 carries forward $90 of loss.
Example 4. Excess loss account taken into account. (i) Facts. P is the common parent of
a consolidated group. On Day 1 of Year 2, P acquired all of the stock of S 1. As of the beginning
24
of Year 2, S 1 had a $30 net operating loss carryover from Year 1, a separate return limitation
year. A limitation under § 1.1502-21 (c) applies to the use of that loss by the P group. For Years
I and 2, the P group had no consolidated taxable income or loss. On Day I of Year 3, S 1
acquired all of the stock of S2 for $10. In Year 3, P had ordinary income of $1 0, S 1 had ordinary
income of $25, and S2 had an ordinary loss of $50. In addition, in Year 3, S2 realized $20 of
excluded COD income from the discharge of non-intercompany indebtedness. After the
discharge of this indebtedness, S2 had no liabilities. As of the beginning of Year 4, S2 had Asset
A with a fair market value of $10. After the computation of tax imposed for Year 3 and before
the application of sections 108 and 1017 and § 1.1502-28, Asset A has a basis of $0. S2 had no
taxable income (or loss) for Year 1 and Year 2.
(ii) Analysis. The steps used to compute the tax imposed on the group, to effect the
reduction of attributes, and to compute the limitations on the use and reduction of attributes are
as follows:
(A) Computation of limitation on deductions and losses to offset income or gain, tentative
basis adjustments, tentative computation of stock gain or loss. Because it is not initially apparent
that there has been a disposition of stock, paragraph (c)(2)(i) of this section does not limit the use
of deductions to offset income or gain, no adjustments to the basis are required pursuant to
paragraph (c)(2)(ii) of this section, and no stock gain or loss is computed pursuant to paragraph
(c)(2)(iii) of this section or taken into account in the tentative computation of tax imposed
pursuant to paragraph (c)(2)(iv) of this section.
(B) Tentative computation of tax imposed. Pursuant to paragraph (c)(2)(iv) of this
section, the tax imposed for Year 3 is tentatively computed. For Year 3, the P group has a
consolidated taxable loss of $15, all of which is attributable to S2 under the principles of
§ 1.1502-21 (b )(2)(iv).
(C) Tentative reduction of attributes. Next, pursuant to paragraph (c )(2)( v) of this
section, the rules of sections 108 and 1017 and § 1.1502-28 are tentatively applied to reduce
attributes remaining after the tentative computation of tax imposed. Pursuant to § 1.150228(a)(2), the tax attributes attributable to S2 would first be reduced to take into account its $20 of
excluded COD income. Accordingly, the consolidated net operating loss for Year 3 is reduced
by $15, the portion of that consolidated net operating loss attributable to S2 under the principles
of§1.1502-21(b)(2)(iv), to $0. The remaining $5 of excluded COD income is not applied to
reduce attributes as there are no remaining attributes that are subject to reduction.
(D) Actual adjustment of stock basis. Pursuant to paragraph (c )(2)(vi) of this section,
§ 1.1502-32 is applied to reflect the amount of S2 's income and gain included, and unlimited
deductions and losses that are absorbed, in the tentative computation of tax imposed for the year
of the disposition and the excluded COD income tentatively applied to reduce attributes and the
attributes reduced in respect of the excluded COD income pursuant to the previous step. Under
§ 1.1502-32, the absorption of $35 of S2's loss, the application of $15 in respect of S2's excluded
COD income to reduce attributes, and the reduction of $15 in respect of the loss attributable to
S2 reduced in respect of the excluded COD income results in a negative adjustment of$35 to the
basis of the S2 stock. Therefore, S 1 has an excess loss account of $25 in the S2 stock.
25
(E) Actual computation of stock gain or loss. Pursuant to paragraph (c)(2)(vii) of this
section, S 1's actual gain or loss, if any, on the S2 stock is computed. Because S2 realized $5 of
excluded COD income that was not applied to reduce attributes, pursuant to § 1.1502-19(b)( I)
and (c)(I)(iii)(B), SI is required to take into account $5 of its excess loss account in the S2 stock.
(F) Actual computation of tax imposed. Pursuant to paragraph (c)(2)(viii) of this section,
the tax imposed is computed by taking into account the $5 of the excess loss account in the S2
stock required to be taken into account. See §1.1502-28(b)(6) (requiring an excess loss account
that is required to be taken into account as a result of the application of § 1.1502-19( c)(1 )(iii)(B)
to be included in the group's tax return for the year that includes the date of the debt discharge).
However, pursuant to paragraph (c)(2)(viii) of this section, such amount may not be offset by
any of the consolidated net operating loss attributable to S2. It may, however, subject to
applicable limitations, be offset by the separate net operating loss of S 1 from Year I.
(G) Actual reduction of attributes. Pursuant to paragraph (c )(2 )(ix) of this section,
sections 108 and 1017 and § 1.1502-28 are then actually applied to reduce attributes remaining
after the actual computation of the tax imposed. Attributes will be actually reduced in the same
way that they were tentatively reduced.
(6) Additional rules for multiple dispositions. [Reserved]
(7) Effective date. This paragraph (c) applies to dispositions of subsidiary stock that
occur after March 22, 2005. Taxpayers may apply §1.1502-II(c) ofREG-167265-03 (2004-15
IRB 730) (see §601.601(d)(2) of this chapter) in whole, but not in part, to any disposition of
subsidiary stock that occurs on or before March 22, 2005, if a member of the group realized
excluded COD income after August 29, 2003, in the taxable year that includes the date of the
disposition of such subsidiary stock.
*****
Par. 3. Section 1.1502-13 is amended as follows:
I. Three sentences are added at the end of paragraph (g)(3)(i)(A).
2. Paragraph (g)(3 )(ii)(B) is revised.
3. Paragraph (g)(3)(ii)(C) is added.
The revision and additions read as follows:
26
§ 1.1502-13 Intercompany transactions.
*****
(g) * * *
(3) * * *
(i) * * *
(A) * * * For purposes of the preceding sentence, a reduction of the basis of an
intercompany obligation pursuant to sections 108 and 1017 and 1.1502-28 is not a comparable
transaction. Notwithstanding paragraph (I) of this section, the preceding sentence applies to
transactions or events occurring during a taxable year the original return for which is due
(without regard to extensions) after March 21,2005. For transactions or events occurring during
a taxable year the original return for which is due (without regard to extensions) on or before
March 21,2005 and after March 12,2004, see § 1.1502-13T(g)(3 )(ii)(B)(}) as contained in 26
CFR part 1 revised as of April 1, 2004.
*****
(ii)***
(B) Timing and attributes. For purposes of applying the matching rule and the
acceleration rule -(I) Paragraph (c)(6)(ii) of this section (limitation on treatment of intercompany income or
gain as excluded from gross income) does not apply to prevent any intercompany income or gain
from being excluded from gross income;
(2) Paragraph (c)(6)(i) of this section (treatment of intercompany items if corresponding
items are excluded or nondeductible) will not apply to exclude any amount of income or gain
27
attributable to a reduction of the basis of an intercompany obligation pursuant to sections 108
and 1017 and § 1.1502-28; and
CD Any gain or loss from an
intercompany obligation is not subject to section 108(a),
section 354 or section 1091.
(C) Effective date. Notwithstanding paragraph (I) of this section, paragraph (g)(3)(ii)(8)
of this section applies to transactions or events occurring during a taxable year the original return
for which is due (without regard to extensions) after March 12,2004. For transactions or events
occurring during a taxable year the original return for which is due (without regard to extensions)
on or before March 12,2004, see § 1.1502-13(g)(3)(ii)(8) as contained in 26 CFR part I revised
as of April 1,2003.
*****
§1.1502-13T (Removed)
Par. 4. Section 1.1502-13T is removed.
Par. 5. Section 1.1502-19 is amended as follows:
I. Paragraph (b)( I ) is revised.
2. Paragraph (h)(2)(ii) is revised.
The revisions read as follows:
§ 1.1502-19 Excess loss accounts.
*****
(b)
***
(1 ) Operating rules--( i) General rule. Except as provided in paragraph (b)( 1)( ii) of this
section, if P is treated under this section as disposing of a share of S's stock, P takes into account
its excess loss account in the share as income or gain from the disposition.
28
(ii) Special limitation on amount taken into account. Notwithstanding paragraph (b)(1 )(i)
of this section, if P is treated as disposing of a share of S's stock as a result of the application of
paragraph (c)(1 )(iii)(B) of this section, the aggregate amount of its excess loss account in the
shares of S's stock that P takes into account as income or gain from the disposition shall not
exceed the amount of S's indebtedness that is discharged that is neither included in gross income
nor treated as tax-exempt income under § 1.IS02-32(b )(3)( ii )(C)(l). If more than one share of
S's stock has an excess loss account, such excess loss accounts shall be taken into account
pursuant to the preceding sentence, to the extent possible, in a manner that equalizes the excess
loss accounts in S' s shares that have an excess loss account.
(iii) Treatment of disposition. Except as provided in paragraph (b)( 4) of this section, the
disposition is treated as a sale or exchange for purposes of determining the character of the
.
.
mcome or gam.
*****
(h)
***
(2)
***
(ii) Application of special limitation. If P was treated as disposing of stock of S because
S was treated as worthless as a result of the application of paragraph (c)(l)(iii)(B) of this section
after August 29, 2003, the amount of P's income, gain, deduction, or loss, and the stock basis
reflected in that amount, are determined or redetermined with regard to paragraph (b)( 1)(ii) of
this section. If P was treated as disposing of stock of S because S was treated as worthless as a
result of the application of paragraph (c)(l)(iii)(B) of this section on or before August 29,2003,
the group may determine or redetermine the amount of P's income, gain, deduction, or loss, and
the stock basis reflected in that amount with regard to paragraph (b)(l)(ii) of this section.
29
*****
§t.lS02-19T IRemovedJ
Par. 6. Section I. 1502-19T is removed.
Par. 7. In § 1.1502-21, paragraphs (b)( I), (b)(2)(ii)(A), (b)(2)(iv), (c)(2)(vii), and (h)(6)
are revised to read as follows:
§ 1.1502-21 Net operating losses.
*****
(b) * * *
(1) Carryovers and carrybacks generalIy. The net operating loss carryovers and
carrybacks to a taxable year are determined under the principles of section 172 and this section.
Thus, losses permitted to be absorbed in a consolidated return year generally are absorbed in the
order of the taxable years in which they arose, and losses carried from taxable years ending on
the same date, and which are available to offset consolidated taxable income for the year,
generally are absorbed on a pro rata basis. In addition, the amount of any CNOL absorbed by the
group in any year is apportioned among members based on the percentage of the CNOL
attributable to each member as of the beginning of the year. The percentage of the CNOL
attributable to a member is determined pursuant to paragraph (b)(2)(iv)(B) of this section.
Additional rules provided under the Internal Revenue Code or regulations also apply. See, e.g.,
section 382(1)(2)(B) (iflosses are carried from the same taxable year, losses subject to limitation
under section 382 are absorbed before losses that are not subject to limitation under section 382).
See paragraph (c)(l)(iii) of this section, Example 2, for an illustration of pro rata absorption of
losses subject to a SRLY limitation. See §1.1502-21T(b)(3)(v) regarding the treatment of any
loss that is treated as expired under § 1.1502-35T(f)( I).
30
(2)
***
(ii) Special rules--(A) Year of departure from group. If a corporation ceases to be a
member during a consolidated return year, net operating loss carryovers attributable to the
corporation are first carried to the consolidated return year, and then are subject to reduction
under section 108 and § 1.1502-28 in respect of discharge of indebtedness income that is realized
by a member of the group and that is excluded from gross income under section 108(a). Only
the amount so attributable that is not absorbed by the group in that year or reduced under section
108 and § 1.1502-28 is carried to the corporation's first separate return year. For rules
concerning a member departing a subgroup, see paragraph (c)(2)(vii) of this section.
*****
(iv) Operating rules--(A) Amount ofCNOL attributable to a member. The amount ofa
CNOL that is attributable to a member shall equal the product of the CNOL and the percentage
of the CNOL attributable to such member.
(B) Percentage of CNOL attributable to a member--(l) In general. Except as provided in
paragraph (b)(2)(iv)(B)(2) of this section, the percentage of the CNOL attributable to a member
shall equal the separate net operating loss of the member for the year of the loss divided by the
sum of the separate net operating losses for that year of all members having such losses. For this
purpose, the separate net operating loss of a member is determined by computing the CNOL by
reference to only the member's items of income, gain, deduction, and loss, including the
member's losses and deductions actually absorbed by the group in the taxable year (whether or
not absorbed by the member).
(2) Special rules--(i) Carryback to a separate return year. If a portion of the CNOL
attributable to a member for a taxable year is carried back to a separate return year, the
31
percentage of the CNOl attributable to each member as of immediately after such portion of the
CNOl is carried back shall be recomputed pursuant to paragraph (b)(2)(iv)(B)(2)(iv) of this
section.
(ii) Excluded discharge of indebtedness income. If during a taxable year a member
realizes discharge of indebtedness income that is excluded from gross income under section
108(a) and such amount reduces any portion of the eNOL attributable to any member pursuant
to section 108 and § 1.1502-28, the percentage of the eNOL attributable to each member as of
immediately after the reduction of attributes pursuant to sections 108 and 1017 and § 1.1502-28
shall be recomputed pursuant to paragraph (b)(2)(iv)(B)(2)(iv) of this section.
(iii) Departing member. If during a taxable year a member that had a separate net
operating loss for the year of the eNOL ceases to be a member, the percentage of the eNOL
attributable to each member as of the first day of the following consolidated return year shall be
recomputed pursuant to paragraph (b)(2)(iv)(B)(2)(iv) of this section.
(iv) Recomputed percentage. The recomputed percentage of the eNOL attributable to
each member shall equal the unabsorbed eNOL attributable to the member at the time of the
recomputation divided by the sum of the unabsorbed eNOL attributable to all of the members at
the time of the recomputation. For purposes of the preceding sentence, a eNOL that is reduced
pursuant to section 108 and § 1.1502-28 or that is otherwise permanently disallowed or
eliminated shall be treated as absorbed.
*****
(c)
***
(2)
***
32
(vii) Corporations that leave a SRL Y subgroup. If a loss member ceases to be affiliated
with a SRL Y subgroup, the amount of the member's remaining SRLY loss from a specific year
is determined pursuant to the principles of paragraphs (b)(2)(ii)(A) and (b)(2)(iv) of this section.
*****
(h)
***
(6) Certain prior periods. Paragraphs (b)(l), (b)(2)(ii)(A), (b)(2)(iv), and (c)(2)(vii) of
this section shall apply to taxable years the original return for which the due date (without regard
to extensions) is after March 21, 2005. Paragraph (b )(2)(ii)(A) of this section and § 1.15022IT(b)(I), (b)(2)(iv), and (c)(2)(vii) as contained in 26 CFR part 1 revised as of April 1,2004,
shall apply to taxable years the original return for which the due date (without regard to
extensions) is on or before March 21, 2005 and after August 29, 2003. For taxable years the
original return for which the due date (without regard to extensions) is on or before August 29,
2003, see paragraphs (b)(I), (b)(2)(ii)(A), (b)(2)(iv), and (c)(2)(vii) of this section and §1.IS0221 T(b)(1 ) as contained in 26 CFR part 1 revised as of April I, 2003.
*****
Par. 8. Section 1.1502-21 T is amended as follows:
1. Paragraphs (a) through (b)(2)(v) are revised.
2. Paragraphs (c)(I) through (h)(7) are revised.
The revisions read as follows:
§ 1.1502-21 T Net operating losses (temporary).
(a) through (b)(2)(v) [Reserved]. For further guidance, see § 1.IS02-21(a) through
(b)(2)(v).
*****
33
(c)( I ) through (h )(7) [Reserved]. For further guidance, see ~ 1. 1502-21 (c)( I ) through
(h)(7).
*****
Par. 9. Section 1.1502-28 is added to read as follows:
§ 1.1502-28 Consolidated section 108.
(a) In general. This section sets forth rules for the application of section I 08(a) and the
reduction of tax attributes pursuant to section I 08(b) when a member of the group realizes
discharge of indebtedness income that is excluded from gross income under section 108(a)
(excluded COD income).
(I) Application of section 108(a). Section I 08(a)(l )(A) and (B) is applied separately to
each member that realizes excluded COO income. Therefore, the limitation of section I 08(a)(3)
on the amount of discharge of indebtedness income that is treated as excluded COD income is
determined based on the assets (including stock and securities of other members) and liabilities
(including liabilities to other members) of only the member that realizes excluded COD income.
(2) Reduction of tax attributes attributable to the debtor--(i) In general. With respect to a
member that realizes excluded COD income in a taxable year, the tax attributes attributable to
that member (and its direct and indirect subsidiaries to the extent required by section
1017(b)(3)(D) and paragraph (a)(3) of this section), including basis of assets and losses and
credits arising in separate return limitation years, shall be reduced as provided in sections 108
and 1017 and this section. Basis of subsidiary stock, however, shall not be reduced below zero
pursuant to paragraph (a)(2) of this section (including when subsidiary stock is treated as
depreciable property under section 10 17(b)(3 )(0) when there is an election under section
108(b)(5».
34
(ii) Consolidated tax attributes attributable to a member. For purposes of this section, the
amount of a consolidated tax attribute (e.g., a consolidated net operating loss) that is attributable
to a member shall be determined pursuant to the principles of ~ 1.1502-21 (b)(2)(iv). In addition,
if the member is a member ofa separate return limitation year subgroup, the amount ofa tax
attribute that arose in a separate return limitation year that is attributable to that member shall
also be deternlined pursuant to the principles of ~ 1.1502-21 (b )(2)(iv).
(3) Look-through rules--(i) Priority of section 10 17(b )(3 )(0). If a member treats stock of
a subsidiary as depreciable property pursuant to section 10 17(b)( 3)( D), the basis of the
depreciable property of such subsidiary shall be reduced pursuant to section 10 17(b )(3 )(0) prior
to the application of paragraph (a)(3)(ii) of this section.
(ii) Application of additional look-through rule. If the basis of stock of a corporation (the
lower-tier member) that is owned by another corporation (the higher-tier member) is reduced
pursuant to sections 108 and 1017 and paragraph (a)(2) of this section (but not as a result of
treating subsidiary stock as depreciable property pursuant to section 10 17(b )(3)(0», and both of
such corporations are members of the same consolidated group on the last day of the higher-tier
member's taxable year that includes the date on which the excluded COO income is realized or
the first day of the higher-tier member's taxable year that follows the taxable year that includes
the date on which the excluded CO 0 income is realized, solely for purposes of sections 108 and
10 17 and this section other than paragraphs (a)( 4) and (b)(1 ) of this section, the lower-tier
member shall be treated as realizing excluded COD income on the last day of the taxable year of
the higher-tier member that includes the date on which the higher-tier member realized the
excluded COD income. The amount of such excluded COD income shall be the amount of such
basis reduction. Accordingly, the tax attributes attributable to such lower-tier member shall be
3S
reduced as provided in sections 108 and 1017 and this section. To the extent that the excluded
COD income realized by the lower-tier member pursuant to this paragraph (a)(3) does not reduce
a tax attribute attributable to the lower-tier member, such excluded COD income shall not be
applied to reduce tax attributes attributable to any member under paragraph (a)( 4) of this section
and shall not cause an excess loss account to be taken into account under § 1.1502-19(b)( I) and
(c)( I )(iii)(B).
(4) Reduction of certain tax attributes attributable to other members. To the extent that,
pursuant to paragraph (a)(2) of this section, the excluded COD income is not applied to reduce
the tax attributes attributable to the member that realizes the excluded COD income, after the
application of paragraph (a)( 3) of this section, such amount shall be applied to reduce the
remaining consolidated tax attributes of the group, other than consolidated tax attributes to which
a SRL Y limitation applies, as provided in section 108 and this section. Such amount also shall
be applied to reduce the tax attributes attributable to members that arose (or are treated as
arising) in a separate return limitation year to the extent that the member that realizes excluded
COD income is a member of the separate return limitation year subgroup with respect to such
attribute if a SRL Y limitation applies to the use of such attribute. In addition, such amount shall
be applied to reduce the tax attributes attributable to members that arose in a separate return year
or that arose (or are treated as arising) in a separate return limitation year if no SRL Y limitation
applies to the use of such attribute. The reduction of each tax attribute pursuant to the three
preceding sentences shall be made in the order prescribed in section 108(b )(2) and pursuant to
the principles of § 1.1502-21 (b)( I). Except as otherwise provided in this paragraph (a)( 4), a tax
attribute that arose in a separate return year or that arose (or is treated as arising) in a separate
return limitation year is not subject to reduction pursuant to this paragraph (a)( 4). Basis in assets
36
is not subject to reduction pursuant to this paragraph (a)( 4). Finally, to the extent that the
realization of excluded COD income by a member pursuant to paragraph (a)(3) does not reduce a
tax attribute attributable to such lower-tier member, such excess shall not be applied to reduce
tax attributes attributable to any member pursuant to this paragraph (a)( 4).
(b) Special rules--( 1) Multiple debtor members--(i) Reduction of tax attributes
attributable to debtor members prior to reduction of consolidated tax attributes. If in a single
taxable year multiple members realize excluded COD income, paragraphs (a)(2) and (3) of this
section shall apply with respect to the excluded COD income of each such member before the
application of paragraph (a)( 4) of this section.
(ii) Reduction of higher-tier debtor's tax attributes. Ifin a single taxable year multiple
members realize excluded COD income and one such member is a higher-tier member of another
such member, paragraphs (a)(2) and (3) of this section shall be applied with respect to the
excluded COD income of the higher-tier member before such paragraphs are applied to the
excluded COD income of the other such member. In applying the rules of paragraph (a)(2) and
(3) of this section with respect to the excluded COD income of the higher-tier member, the
liabilities that give rise to the excluded COD income of the other such member shall not be
treated as discharged for purposes of computing the limitation on basis reduction under section
10 17(b )(2). A member (the first member) is a higher-tier member of another member (the
second member) if the first member is the common parent or investment adjustments under
§ 1.1502-32 with respect to the stock of the second member would affect investment adjustments
with respect to the stock of the first member.
(iii) Reduction of additional tax attributes. Ifmore than one member realizes excluded
COD income that has not been applied to reduce a tax attribute attributable to such member (the
37
remaining COD amount) and the remaining tax attributes available for reduction under paragraph
(a)(4) of this section are less than the aggregate of the remaining COD amounts, after the
application of paragraph (a)(2) of this section, each such member's remaining COD amount shall
be applied on a pro rata basis (based on the relative remaining COD amounts), pursuant to
paragraph (a)( 4) of this section, to reduce such remaining available tax attributes.
(iv) Ownership of lower-tier member by multiple higher-tier members. If stock of a
corporation is held by more than one higher-tier member of the group and more than one such
higher-tier member reduces its basis in such stock, then under paragraph (a)(3) of this section the
excluded COD income resulting from the stock basis reductions shall be applied on a pro rata
basis (based on the amount of excluded COD income caused by each basis reduction) to reduce
the attributes of the corporation.
(v) Ownership of lower-tier member by multiple higher-tier members in multiple groups.
Ifa corporation is a member of one group (the first group) on the last day of the first group's
higher-tier member's taxable year that includes the date on which that higher-tier member
realizes excluded COD income and is a member of another group (the second group) on the
following day and the first group's higher-tier member and the second group's higher-tier
member both reduce their basis in the stock of such corporation pursuant to sections 108 and
1017 and this section, paragraph (a)(3) of this section shall first be applied in respect of the
excluded COD income that results from the reduction of the basis of the corporation's stock
owned by the first group's higher-tier member and then shall be applied in respect of the
excluded COD income that results from the reduction of the basis of the corporation's stock
owned by the second group's higher-tier member.
38
(2) Election under section 108(b)(5)--(i) Availability of election. The group may make
the election described in section 108(b)(5) for any member that realizes excluded COD income.
The election is made separately for each member. Therefore, an election may be made for one
member that realizes excluded COD income (either actually or pursuant to paragraph (a)(3) of
this section) while another election, or no election, may be made for another member that
realizes excluded COD income (either actually or pursuant to paragraph (a)(3) of this section).
See § 1.108-4 for rules relating to the procedure for making an election under section 108(b )(5).
(ii) Treatment of shares with an excess loss account. For purposes of applying section
108(b)(5)(B), the basis of stock ofa subsidiary that has an excess loss account shall be treated as
zero.
(3) Application of section 1017--(i) Timing of basis reduction. Basis of property shall be
subject to reduction pursuant to the rules of sections 108 and 1017 and this section after the
determination of the tax imposed by chapter I of the Internal Revenue Code for the taxable year
during which the member realizes excluded COD income and any prior years and coincident
with the reduction of other attributes pursuant to section 108 and this section. However, only the
basis of property held as of the beginning of the taxable year following the taxable year during
which the excluded COD income is realized is subject to reduction pursuant to sections 108 and
1017 and this section.
(ii) Limitation of section 1017(b)(2). The limitation of section 1017(b)(2) on the
reduction in basis of property shall be applied by reference to the aggregate of the basis of the
property held by the member that realizes excluded COD income, not the aggregate of the basis
of the property held by all of the members of the group, and the liabilities of such member, not
the aggregate liabilities of all of the members of the group.
39
(iii) Treatment of shares with an excess loss account. For purposes of applying section
101 7(b)( 2) and ~ 1. 1017 -I, the basis of stock of a subsidiary that has an excess loss account shall
be treated as zero.
(4) Application of section 1245. Notwithstanding section 1017(d)(I)(B), a reduction of
the basis of subsidiary stock is treated as a deduction allowed for depreciation only to the extent
that the amount by which the basis of the subsidiary stock is reduced exceeds the total amount of
the attributes attributable to such subsidiary that are reduced pursuant to the subsidiary's consent
under section 1017(b)(3)(D) or as a result of the application of paragraph (a)(3)(ii) of this
section.
(5) Reduction of basis of intercompany obligations and former intercompany obligations-(i) Intercompany obligations that cease to be intercompany obligations. If excluded COD
income is realized in a consolidated return year in which an intercompany obligation becomes an
obligation that is not an intercompany obligation because the debtor or the creditor becomes a
nonmember or because the assets of the creditor are acquired by a nonmember in a transaction to
which section 381 (a) applies, the basis of such intercompany obligation is not available for
reduction in respect of such excluded COD income pursuant to sections 108 and 10 17 and this
section. However, in such cases, the basis of the debt treated as new debt issued under § 1.150213(g)(3) is available for reduction in respect of such excluded COD income pursuant to sections
108 and 1017 and this section.
(ii) Intercompany obligations. The reduction of the basis of an intercompany obligation
pursuant to sections 108 and 1017 and this section shall not result in the satisfaction and
reissuance of the obligation under § 1.1502-13(g). Therefore, any income or gain (or reduction of
loss or deduction) attributable to a reduction of the basis of an intercompany obligation will be
40
taken into account when § 1.1502-13(g)(3) applies to such obligation. Furthermore, § 1.150213(c)(6)(i) (regarding the treatment of intercompany items if corresponding items are excluded
or nondeductible) will not apply to exclude any amount of income or gain attributable to a
reduction of the basis of an intercompany obligation pursuant to sections 108 and 1017 and this
section. See § 1.1502-13(g)(3)(i)(A) and
(ii)(B)(~).
(6) Taking into account of excess loss account--(i) Determination of inclusion. The
deternlination of whether any portion of an excess loss account in a share of stock of a subsidiary
that realizes excluded COD income is required to be taken into account as a result of the
application of § 1.1502-19(c)(l )(iii)(B) is made after the determination of the tax imposed by
chapter 1 of the Internal Revenue Code for the year during which the member realizes excluded
COD income (without regard to whether any portion of an excess loss account in a share of stock
of the subsidiary is required to be taken into account) and any prior years, after the reduction of
tax attributes pursuant to sections 108 and 1017 and this section, and after the adjustment of the
basis of the share of stock of the subsidiary pursuant to § 1.1502-32 to reflect the amount of the
subsidiary's deductions and losses that are absorbed in the computation of taxable income (or
loss) for the year of the disposition and any prior years, and the excluded COD income applied to
reduce attributes and the attributes reduced in respect thereof. See § 1.1502-11 (c) for special
rules related to the computation of tax that apply when an excess loss account is required to be
taken into account.
(ii) Timing of inclusion. To the extent an excess loss account in a share of stock of a
subsidiary that realizes excluded COD income is required to be taken into account as a result of
the application of § 1.1502-19(c)(l )(iii)(B), such amount shall be included on the group's tax
41
return for the taxable year that includes the date on which the subsidiary realizes such excluded
COD income.
(7) Dispositions of stock. See ~ 1.1502-1 I (c) for limitations on the reduction of tax
attributes when a member disposes of stock of another member (including dispositions that result
from the application of ~ 1.1502-19( c)(1 )(iii)(B)) during a taxable year in which any member
realizes excluded COD income.
(8) Departure of member. If the taxable year ofa member (the departing member) during
which such member realizes excluded COD income ends on or prior to the last day of the
consolidated return year and, on the first day of the taxable year of such member that follows the
taxable year during which such member realizes excluded COD income, such member is not a
member of the group and does not have a successor member (within the meaning of paragraph
(b)( 10) of this section), all tax attributes listed in section I 08(b )(2) that remain after the
determination of the tax imposed that belong to members of the group (including the departing
member and subsidiaries of the departing member) shall be subject to reduction as provided in
section 108 and the regulations promulgated thereunder (including § 1.1 08-7( c), if applicable)
and this section.
(9) Intragroup reorganization--(i) In general. If the taxable year ofa member during
which such member realizes excluded COD income ends prior to the last day of the consolidated
return year and, on the first day that follows the taxable year of such member during which such
member realizes excluded COD income, such member has a successor member, for purposes of
applying the rules of sections 108 and 1017 and this section, notwithstanding § 1.1 08-7, the
successor member shall be treated as the member that realized the excluded COD income. Thus,
all attributes attributable to the successor member listed in section 108(b )(2) (including attributes
42
that were attributable to the successor member prior to the date such member became a successor
member) are available for reduction under paragraph (a)(2) of this section.
(ii) Group structure change. If a member that realizes excluded COD income acquires
the assets of the common parent of the consolidated group in a transaction to which section
381 (a) applies and succeeds such common parent under the principles of § 1. 1502-75(d)(2) as the
common parent of the consolidated group, the member's attributes that remain after the
detern1ination of tax for the group for the consolidated return year during which the excluded
COD income is realized (and any prior years) (including attributes that were attributable to the
former common parent prior to the date of the transaction to which section 381 (a) applies) shall
be available for reduction under paragraph (a)(2) of this section.
(10) Definition of successor member. A successor member means a person to which the
member that realizes excluded COD income (or a successor member) transfers its assets in a
transaction to which section 381(a) applies ifsuch transferee is a member of the group
immediately after the transaction.
(11) Non-application of next day rule. For purposes of applying the rules of sections 108
and 10 17 and this section, the next day rule of § l.I502-76(b)(1 )(ii)(B) shall not apply to treat a
member's excluded COD income as realized at the beginning of the day following the day on
which such member's status as a member changes.
(c) Examples. The principles of paragraphs (a) and (b) of this section are illustrated by
the following examples. Unless otherwise indicated, no election under section 108(b )(5) has
been made and the taxable year of all consolidated groups is the calendar year. The examples are
as follows:
Example 1. (i) Facts. P is the common parent of a consolidated group that includes
subsidiary S 1. P owns 80 percent of the stock of S 1. In Year 1, the P group sustained a $250
43
consolidated net operating loss. Under the principles of ~ 1.1502-21 (b)(2)(iv), of that amount,
$125 was attributable to P and $125 was attributable to S I. On Day I of Year 2, P acquired 100
percent of the stock of S2, and S2 joined the P group. As of the beginning of Year 2, S2 had a
$50 net operating loss carryover from Year I, a separate return limitation year. In Year 2, the P
group sustained a $200 consolidated net operating loss. Under the principles of § 1.150221(b)(2)(iv), of that amount, $90 was attributable to P, $70 was attributable to SI, and $40 was
attributable to S2. In Year 3, S2 realized $200 of excluded COD income from the discharge of
non-intercompany indebtedness. In that same year, the P group sustained a $50 consolidated net
operating loss, of which $40 was attributable to S I and $10 was attributable to S2 under the
principles of § 1.1502-21 (b )(2)(iv). As of the beginning of Year 4, S2 had Asset A with a fair
market value of $1 O. After the computation of tax imposed for Year 3 and before the application
of sections 108 and 1017 and this section, Asset A had a basis of $40 and S2 had no liabilities.
(ii) Analysis--(A) Reduction of tax attributes attributable to debtor. Pursuant to
paragraph (a)(2) of this section, the tax attributes attributable to S2 must first be reduced to take
into account its excluded COD income in the amount of$200.
(1) Reduction of net operating losses. Pursuant to section 108(b )(2)(A) and paragraph (a)
of this section, the net operating loss and the net operating loss carryovers attributable to S2
under the principles of § 1.1502-21 (b )(2)(iv) are reduced in the order prescribed by section
I 08(b)( 4 )(8). Accordingly, the consolidated net operating loss for Year 3 is reduced by $10, the
portion of the consolidated net operating loss attributable to S2, to $40. Then, again pursuant to
section 108(b)(4)(8), S2's net operating loss carryover of$50 from its separate return limitation
year is reduced to $0. Finally, the consolidated net operating loss carryover from Year 2 is
reduced by $40, the portion of that consolidated net operating loss carryover attributable to S2, to
$160.
(~)
Reduction of basis. Following the reduction of the net operating loss and the net
operating loss carryovers attributable to S2, S2 reduces its basis in its assets pursuant to section
10 17 and § 1.1 0 17 -1. Accordingly, S2 reduces its basis in Asset A by $40, from $40 to $0.
(8) Reduction of remaining consolidated tax attributes. The remaining $60 of excluded
COD income then reduces consolidated tax attributes pursuant to paragraph (a)(4) of this section.
In particular, the remaining $40 consolidated net operating loss for Year 3 is reduced to $0.
Then, the consolidated net operating loss carryover from Year I is reduced by $20 from $250 to
$230. Pursuant to paragraph (a)(4) of this section, a pro rata amount of the consolidated net
operating loss carryover from Year I that is attributable to each of P and S 1 is treated as reduced.
Therefore, $10 of the consolidated net operating loss carryover from Year 1 that is attributable to
each of P and S 1 is treated as reduced.
Example 2. (i) Facts. P is the common parent of a consolidated group that includes
subsidiaries S 1 and S2. P owns 100 percent of the stock of S 1 and S I owns 100 percent of the
stock of S2. None of P, S 1, or S2 has a separate return limitation year. In Year 1, the P group
sustained a $50 consolidated net operating loss. Under the principles of § 1.1502-21 (b )(2)(iv), of
that amount, $10 was attributable to P, $20 was attributable to S 1, and $20 was attributable to
S2. In Year 2, the P group sustained a $70 consolidated net operating loss. Under the principles
44
of § 1.1502-21 (b )(2)(iv), of that amount, $30 was attributable to P, $30 was attributable to S I,
and $ 10 was attributable to S2. In Year 3, S 1 realized $170 of excluded COD income from the
discharge of non-intercompany indebtedness. In that same year, the P group sustained a $50
consolidated net operating loss, of which $10 was attributable to S I and $40 was attributable to
S2 under the principles of § 1.1502-21 (b )(2)(iv). As of the beginning of Year 4, S I 's sole asset
was the stock ofS2, and S2 had Asset A with a $10 value. After the computation of tax imposed
for Year 3 and before the application of sections 108 and 1017 and this section, S I had a $80
basis in the S2 stock, Asset A had a basis of $0, and neither S I nor S2 had any liabilities.
(ii) Analysis--(A) Reduction of tax attributes attributable to debtor. Pursuant to
paragraph (a)(2) of this section, the tax attributes attributable to S I must first be reduced to take
into account its excluded COD income in the amount of $170.
(1) Reduction of net operating losses. Pursuant to section I 08(b )(2)(A) and paragraph (a)
of this section, the net operating loss and the net operating loss carryovers attributable to S I
under the principles of § 1.1502-21 (b )(2)(iv) are reduced in the order prescribed by section
108(b)(4)(B). Accordingly, the consolidated net operating loss for Year 3 is reduced by $10, the
portion of the consolidated net operating loss for Year 3 attributable to S I, to $40. Then, the
consolidated net operating loss carryover from Year I is reduced by $20, the portion of that
consolidated net operating loss carryover attributable to S I, to $30, and the consolidated net
operating loss carryover from Year 2 is reduced by $30, the portion of that consolidated net
operating loss carryover attributable to S I, to $40.
(~)
Reduction of basis. Following the reduction of the net operating loss and the net
operating loss carryovers attributable to S I, S I reduces its basis in its assets pursuant to section
1017 and § 1. 1017-1. Accordingly, SI reduces its basis in the stock ofS2 by $80, from $80 to
$0.
(J) Tiering down of stock basis reduction. Pursuant to paragraph (a)(3) of this section,
for purposes of sections 108 and 1017 and this section, S2 is treated as realizing $80 of excluded
COD income. Pursuant to section 108(b)(2)(A) and paragraph (a) of this section, therefore, the
net operating loss and net operating loss carryovers attributable to S2 under the principles of
§1.1502-21(b)(2)(iv) are reduced in the order prescribed by section 108(b)(4)(B). Accordingly,
the consolidated net operating loss for Year 3 is reduced by an additional $40, the portion of the
consolidated net operating loss for Year 3 attributable to S2, to $0. Then, the consolidated net
operating loss carryover from Year 1 is reduced by $20, the portion of that consolidated net
operating loss carryover attributable to S2, to $10. Then, the consolidated net operating loss
carryover from Year 2 is reduced by $ 10, the portion of that consolidated net operating loss
carryover attributable to S2, to $30. S2's remaining $10 of excluded COD income does not
reduce consolidated tax attributes attributable to P or SI under paragraph (a)(4) of this section.
(B) Reduction of remaining consolidated tax attributes. Finally, pursuant to paragraph
(a)( 4) of this section, S I 's remaining $30 of excluded COD income reduces the remaining
consolidated tax attributes. In particular, the remaining $10 consolidated net operating loss
carryover from Year I is reduced by $10 to $0, and the remaining $30 consolidated net operating
loss carryover from Year 2 is reduced by $20 to $10.
45
Example 3. (i) Facts. P is the common parent of a consolidated group that includes
subsidiaries SI, S2, and S3. P owns 100 percent of the stock ofSI, SI owns 100 percent of the
stock of S2, and S2 owns 100 percent of the stock of S3. None of P, S 1, S2, or S3 had a separate
return limitation year prior to Year I. In Year 1, the P group sustained a $150 consolidated net
operating loss. Under the principles of § 1.1502-21 (b )(2 )(iv), of that amount, $50 was
attributable to S2, and $100 was attributable to S3. In Year 2, the P group sustained a $50
consolidated net operating loss. Under the principles of § 1.1502-21 (b )(2)(iv), of that amount,
$40 was attributable to S I and $10 was attributable to S2. In Year 3, S I realized $170 of
excluded COD income from the discharge of non-intercompany indebtedness. In that same year,
the P group sustained a $50 consolidated net operating loss, of which $10 was attributable to S 1,
$20 was attributable to S2, and $20 was attributable to S3 under the principles of § 1.150221 (b )(2)(iv). At the beginning of Year 4, S 1's only asset was the stock of S2, and S2's only asset
was the stock ofS3 with a value of$IO. After the computation of tax imposed for Year 3 and
before the application of sections 108 and 1017 and this section, S 1's stock of S2 had a basis of
$120 and S2's stock ofS3 had a basis of$180. In addition, none ofSI, S2, and S3 had any
liabilities.
(ii) Analysis--(A) Reduction of tax attributes attributable to debtor. Pursuant to
paragraph (a)(2) of this section, the tax attributes attributable to S I must first be reduced to take
into account its excluded COD income in the amount of $170.
(1) Reduction of net operating losses. Pursuant to section 108(b )(2)(A) and paragraph (a)
of this section, the net operating loss and the net operating loss carryovers attributable to S 1
under the principles of § 1.1502-21 (b )(2)(iv) are reduced in the order prescribed by section
108(b)(4)(B). Accordingly, the consolidated net operating loss for Year 3 is reduced by $10, the
portion of the consolidated net operating loss attributable to S 1, to $40. Then, the consolidated
net operating loss carryover from Year 2 is reduced by $40, the portion of that consolidated net
operating loss carryover attributable to S 1, to $10.
(2.) Reduction of basis. Following the reduction of the net operating loss and the net
operating loss carryovers attributable to S 1, S 1 reduces its basis in its assets pursuant to section
1017 and § 1.10 17 -1. Accordingly, S I reduces its basis in the stock of S2 by $120, from $120 to
$0.
(B) Tiering down of stock basis reduction to S2. Pursuant to paragraph (a)(3) of this
section, for purposes of sections 108 and 1017 and this section, S2 is treated as realizing $120 of
excluded COD income. Pursuant to section 108(b )(2)(A) and paragraph (a) of this section,
therefore, the net operating loss and net operating loss carryovers attributable to S2 under the
principles of § 1.1502-21 (b )(2)(iv) are reduced in the order prescribed by section 108(b)( 4 )(B).
Accordingly, the consolidated net operating loss for Year 3 is further reduced by $20, the portion
of the consolidated net operating loss attributable to S2, to $20. Then, the consolidated net
operating loss carryover from Year 1 is reduced by $50, the portion of that consolidated net
operating loss carryover attributable to S2, to $100. Then, the consolidated net operating loss
carryover from Year 2 is further reduced by $10, the portion of that consolidated net operating
loss carryover attributable to S2, to $0. Following the reduction of the net operating loss and the
46
net operating loss carryovers attributable to S2, S2 reduces its basis in its assets pursuant to
section 1017 and §1.1017-1. Accordingly, S2 reduces its basis in its S3 stock by $40 to $140.
(C) Tiering down of stock basis reduction to S3. Pursuant to paragraph (a)(3) of this
section, for purposes of sections 108 and 1017 and this section, S3 is treated as realizing $40 of
excluded COD income. Pursuant to section 108(b)(2)(A) and paragraph (a) of this section,
therefore, the net operating loss and the net operating loss carryovers attributable to S3 under the
principles of § 1.1502-21 (b )(2)(iv) are reduced in the order prescribed by section 108(b)(4 )(8).
Accordingly, the consolidated net operating loss for Year 3 is further reduced by $20, the portion
of the consolidated net operating loss attributable to S3, to $0. Then, the consolidated net
operating loss carryover from Year I is reduced by $20, the lesser of the portion of that
consolidated net operating loss carryover attributable to S3 and the remaining excluded COD
income, to $80.
Example 4. (i) Facts. P is the common parent of a consolidated group that includes
subsidiaries SI, S2, and S3. P owns 100 percent of the stock of each ofSI and S2. Each ofSI
and S2 owns stock of S3 that represents 50 percent of the value of the stock of S3. None of P,
S I, S2, or S3 had a separate return limitation year prior to Year 1. In Year 1, the P group
sustained a $160 consolidated net operating loss. Under the principles of § 1.1502-21 (b )(2)(iv),
of that amount, $10 was attributable to P, $50 was attributable to S2, and $100 was attributable
to S3. In Year 2, the P group sustained a $110 consolidated net operating loss. Under the
principles of § 1.1502-21 (b )(2)(iv), of that amount, $40 was attributable to S 1 and $70 was
attributable to S2. In Year 3, S 1 realized $200 of excluded COD income from the discharge of
non-intercompany indebtedness, and S2 realized $270 of excluded COD income from the
discharge of non-intercompany indebtedness. In that same year, the P group sustained a $50
consolidated net operating loss, of which $10 was attributable to S 1, $20 was attributable to S2,
and $20 was attributable to S3 under the principles of § 1.1502-21 (b )(2)(iv). At the beginning of
Year 4, S3 had one asset with a value of $1 O. After the computation of tax imposed for Year 3
and before the application of sections 108 and 1017 and this section, S l's basis in its S3 stock
was $60, S2's basis in its S3 stock was $120, and S3' s asset had a basis of $200. In addition,
none of S I, S2, and S3 had any liabilities.
(ii) Analysis--(A) Reduction of tax attributes attributable to debtors. Pursuant to
paragraph (b)(I)(i) of this section, the tax attributes attributable to each ofSl and S2 are reduced
pursuant to paragraph (a)(2) of this section. Then, pursuant to paragraph (a)(3) of this section,
the tax attributes attributable to S3 are reduced so as to reflect a reduction of S l's and S2's basis
in the stock ofS3. Then, paragraph (a)(4) is applied to reduce additional tax attributes.
(1) Reduction of net operating losses generally. Pursuant to section 108(b )(2)(A) and
paragraph (a) of this section, the net operating losses and the net operating loss carryovers
attributable to S 1 and S2 under the principles of § 1.1502-21 (b )(2)(iv) are reduced in the order
prescribed by section 108(b)( 4 )(8).
(~) Reduction of net operating losses attributable to S 1. The consolidated net operating
loss for Year 3 is reduced by $10, the portion of the consolidated net operating loss attributable
47
to S 1, to $40. Then, the consolidated net operating loss carryover from Year 2 is reduced by
$40, the portion of that consolidated net operating loss carryover attributable to S 1, to $70.
OJ Reduction of net operating losses attributable to S2. The consolidated net operating
loss for Year 3 is also reduced by $20, the portion of the consolidated net operating loss
attributable to S2, to $20. Then, the consolidated net operating loss carryover from Year 1 is
reduced by $50, the portion of that consolidated net operating loss carryover attributable to S2, to
$110. Then, the consolidated net operating loss carryover from Year 2 is reduced by $70, the
portion of that consolidated net operating loss carryover attributable to S2, to $0.
(1) Reduction of basis. Following the reduction of the net operating losses and the net
operating loss carryovers attributable to S 1 and S2, S 1 and S2 must reduce their basis in their
assets pursuant to section 1017 and § 1.1017 -1. Accordingly, S 1 reduces its basis in the stock of
S3 by $60, from $60 to $0, and S2 reduces its basis in the stock of S3 by $120, from $120 to $0.
(B) Tiering down of basis reduction. Pursuant to paragraph (a)(3) of this section, for
purposes of sections 108 and 1017 and this section, S3 is treated as realizing $180 of excluded
COD income. Pursuant to section 108(b)(2)(A) and paragraph (a) of this section, therefore, the
net operating loss and the net operating loss carryovers attributable to S3 under the principles of
§1.1502-21(b)(2)(iv) are reduced in the order prescribed by section 108(b)(4)(B). Accordingly,
the consolidated net operating loss for Year 3 is further reduced by $20, the portion of the
consolidated net operating loss attributable to S3, to $0. Then, the consolidated net operating
loss carryover from Year 1 is reduced by $100, the portion of that consolidated net operating loss
carryover attributable to S3, to $10. Following the reduction of the net operating loss and the net
operating loss carryover attributable to S3, S3 reduces its basis in its asset pursuant to section
10 17 and § 1.1017 -1. Accordingly, S3 reduces its basis in its asset by $60, from $200 to $140.
(C) Reduction of remaining consolidated tax attributes. Finally, pursuant to paragraph
(a)(4) of this section, the remaining $90 ofSl's excluded COD income and the remaining $10 of
S2's excluded COD income reduce the remaining consolidated tax attributes. In particular, the
remaining $10 consolidated net operating loss carryover from Year 1 is reduced by $10 to $0.
Because that amount is less than the aggregate amount of remaining excluded COD income, such
income is applied on a pro rata basis to reduce the remaining consolidated tax attributes.
Accordingly, $9 of S l's remaining excluded COD income and $1 of S2's remaining excluded
COD income is applied to reduce the remaining consolidated net operating loss carryover from
Year 1. Consequently, of S l's excluded COD income of $200, only $119 is applied to reduce tax
attributes, and, of S2's excluded COD income of $270, only $261 is applied to reduce tax
attributes.
Example 5. (i) Facts. P is the common parent of a consolidated group that includes
subsidiaries S 1, S2, and S3. P owns 100 percent of the stock of S 1 and S2, and S 1 owns 100
percent of the stock of S3. None of P, S 1, S2, or S3 has a separate return limitation year prior to
Year 1. In Year 1, the P group sustained a $90 consolidated net operating loss. Under the
principles of § 1.1502-21 (b )(2 )(iv), of that amount, $10 was attributable to P, $15 was
attributable to S 1, $20 was attributable to S2, and $45 was attributable to S3. On January 1 of
Year 2, P realized $140 of excluded COD income from the discharge of non-intercompany
48
indebtedness. On December 31 of Year 2, S I issued stock representing 50 percent of the vote
and value of its outstanding stock to a person that was not a member of the group. As a result of
the issuance of stock, S I and S3 ceased to be members of the P group. For the consolidated
return year of Year 2, the P group sustained a $60 consolidated net operating loss, of which $5
was attributable to S I, $40 was attributable to S2, and $15 was attributable to S3 under the
principles of§1.1502-21(b)(2)(iv). As of the beginning of Year 3, P's only assets were the stock
of S I and S2, S I 's sole asset was the stock of S3, S2 had Asset A with a value of $10, and S3
had Asset 8 with a value of $1 O. After the computation of tax imposed for Year 2 and before the
application of sections 108 and 1017 and this section, P had a $80 basis in the S I stock and a $50
basis in the S2 stock, S I had a $80 basis in the S3 stock, and Asset A and 8 each had a basis of
$10. In addition, none of P, S I, S2, and S3 had any liabilities.
(ii) Analysis. Pursuant to paragraph (a)(2) of this section, the tax attributes attributable to
P must first be reduced to take into account its excluded COD income in the amount of $140.
(A) Reduction of net operating losses. Pursuant to section 108(b )(2)(A) and paragraph
(a) of this section, the net operating loss and the net operating loss carryover attributable to P
under the principles of § 1.1502-21 (b )(2)(iv) are reduced in the order prescribed by section
108(b)(4)(8). Accordingly, the consolidated net operating loss carryover from Year 1 is reduced
by $10, the portion of that consolidated net operating loss carryover attributable to P, to $80.
(8) Reduction of basis. Following the reduction of the net operating loss and the net
operating loss carryover attributable to P, P reduces its basis in its assets pursuant to section 10 17
and § 1.1017 -1. Accordingly, P reduces its basis in the stock of S I by $80, from $80 to $0, and
its basis in the stock of S2 by $50, from $50 to $0.
(C) Tiering down of stock basis reduction to SI. Pursuant to paragraph (a)(3) of this
section, for purposes of sections 108 and 1017 and this section, S I is treated as realizing $80 of
excluded COD income, despite the fact that it ceases to be a member of the group at the end of
the day on December 31 of Year 2. Pursuant to section 108(b)(2)(A) and paragraph (a) of this
section, therefore, the net operating loss and net operating loss carryovers attributable to S I
under the principles of § 1.1502-21 (b )(2)(iv) are reduced in the order prescribed by section
108(b)(4)(8). Accordingly, the consolidated net operating loss for Year 2 is reduced by $5, the
portion of the consolidated net operating loss for Year 2 attributable to SI, to $55. Then, the
consolidated net operating loss carryover from Year I is reduced by an additional $15, the
portion of that consolidated net operating loss carryover attributable to S I, to $65. Following the
reduction of the net operating loss and the net operating loss carryover attributable to S I, S I
reduces its basis in its assets pursuant to section 1017 and § 1.1017-1. Accordingly, S I reduces
its basis in the stock of S3 by $60, from $80 to $20.
(D) Tiering down of stock basis reduction to S2. Pursuant to paragraph (a)(3) of this
section, for purposes of sections 108 and 1017 and this section, S2 is treated as realizing $50 of
excluded COD income. Pursuant to section 108(b)(2)(A) and paragraph (a) of this section,
therefore, the net operating loss and net operating loss carryovers attributable to S2 under the
principles of§1.1502-21(b)(2)(iv) are reduced in the order prescribed by section 108(b)(4)(8).
Accordingly, the consolidated net operating loss for Year 2 is reduced by an additional $40, the
49
portion of the consolidated net operating loss for Year 2 attributable to S2, to $15. Then, the
consolidated net operating loss carryover from Year I is reduced by an additional $10, a portion
of the consolidated net operating loss carryover attributable to S2, to $55.
(E) Tiering down of stock basis reduction to S3. Pursuant to paragraph (a)(3) of this
section, for purposes of sections 108 and 1017 and this section, S3 is treated as realizing $60 of
excluded COD income (by reason of S I 's reduction in its basis of its S3 stock). Pursuant to
section 108(b)(2)(A) and paragraph (a) of this section, therefore, the net operating loss and net
operating loss carryovers attributable to S3 under the principles of § 1.1502-21 (b )(2)(iv) are
reduced in the order prescribed by section 108(b)(4)(B). Accordingly, the consolidated net
operating loss for Year 2 is reduced by an additional $15, the portion of the consolidated net
operating loss for Year 2 attributable to S3, to $0. Then, the consolidated net operating loss
carryover from Year I is reduced by an additional $45, the portion of that consolidated net
operating loss carryover attributable to S3, to $10.
Example 6. (i) Facts. PI is the common parent ofa consolidated group that includes
subsidiaries S I, S2, and S3. P I owns 100 percent of the stock of S I and S2. S I owns 100
percent of the stock of S3. None of PI, S I, S2, or S3 has a separate return limitation year prior
to Year I. In Year I, the P I group sustained a $120 consolidated net operating loss. Under the
principles of§1.1502-21(b)(2)(iv), of that amount, $40 was attributable to PI, $35 was
attributable to S I, $30 was attributable to S2, and $15 was attributable to S3. On January I of
Year 2, S3 realized $65 of excluded COD income from the discharge of non-intercompany
indebtedness. On June 30 of Year 2, S3 issued stock representing 80 percent of the vote and
value of its outstanding stock to P2, the common parent of another group. As a result of the
issuance of stock, S3 ceased to be a member of the P I group and became a member of the P2
group. For the consolidated return year of Year 2, the PI group sustained a $50 consolidated net
operating loss, of which $5 was attributable to S I, $40 was attributable to S2, and $5 was
attributable to S3 under the principles of § 1.1502-21 (b )(2)(iv). As of the beginning of its taxable
year beginning on July I of Year 2, S3's sole asset was Asset A with a $10 value. After the
computation of tax imposed for Year 2 on the P I group and before the application of sections
108 and 1017 and this section and the computation of tax imposed for Year 2 on the P2 group,
Asset A had a basis of $0. In addition, S3 had no liabilities. On January I of Year 3, P I sold all
of its stock of S I.
(ii) Analysis--(A) Reduction of tax attributes attributable to debtor. Pursuant to
paragraph (a)(2) of this section, the tax attributes attributable to S3 must first be reduced to take
into account its excluded COD income in the amount of $65. Pursuant to section I 08(b )(2)(A)
and paragraph (a) of this section, the net operating loss and the net operating loss carryover
attributable to S3 under the principles of § 1.1502-21 (b )(2)(iv) are reduced in the order prescribed
by section 108(b)(4)(B). Accordingly, the consolidated net operating loss for Year 2 is reduced
by $5, the portion of the consolidated net operating loss for Year 2 attributable to S3, to $45.
Then, the consolidated net operating loss carryover from Year I is reduced by $15, the portion of
that consolidated net operating loss carryover attributable to S3, to $105.
(B) Reduction of remaining consolidated tax attributes. Pursuant to paragraphs (a)(4) and
(b)(8) of this section, S3's remaining $45 of excluded COD income reduces the remaining
50
consolidated tax attributes in the P I group. In particular, the remaining $45 consolidated net
operating loss for Year 2 is reduced by an additional $45 to $0.
(C) Basis Adjustments. For purposes of computing PI's gain or loss on the sale of the SI
stock in Year 3, PI's basis in its S 1 stock will reflect a net positive adjustment of $40, which is
the excess of the amount ofS3's excluded COD income that is applied to reduce attributes ($65)
over the reduction of S 1's and S3's attributes in respect of such excluded COD income ($25).
Example 7. (i) Facts. P is the common parent of a consolidated group that includes
subsidiaries S 1 and S2. P owns 100 percent of the stock of S I, and S 1 owns 100 percent of the
stock of S2. None of P, S 1, or S2 has a separate return limitation year prior to Year 1. In Year 1,
the P group sustained a $50 consolidated net operating loss. Under the principles of § 1.15022 I (b)(2)(iv), of that amount, $10 was attributable to P, $20 was attributable to SI, and $20 was
attributable to S2. On January I of Year 2, S 1 realized $55 of excluded COD income from the
discharge of non-intercompany indebtedness. On June 30 of Year 2, P transferred all of its assets
to S I in a transaction to which section 381 (a) applied. As a result of that transaction, pursuant to
§ 1.1502-75(d)(2)(ii), S I succeeded P as the common parent of the group. Pursuant to § 1.150275(d)(2)(iii), S 1's taxable year closed on the date of the acquisition. However, P's taxable year
did not close. On the consolidated return for Year 2, the group sustained a $50 consolidated net
operating loss. Under the principles of § 1.1502-21 (b )(2)(iv), of that amount, $10 was
attributable to S 1 for its taxable year that ended on June 30, $15 was attributable to S 1 as the
successor of P, and $25 was attributable to S2.
(ii) Analysis. Pursuant to paragraph (a)(2) of this section, the tax attributes attributable to
S I must first be reduced to take into account its excluded COD income in the amount of $55.
For this purpose, SI's attributes that remain after the determination of tax for the group for Year
2 are subject to reduction. Pursuant to section 108(b)(2)(A) and paragraph (a) of this section, the
net operating loss and the net operating loss carryover attributable to Slunder the principles of
§ 1.1502-21 (b )(2)(iv) are reduced. Accordingly, the consolidated net operating loss for Year 2 is
reduced by $25, the portion of the consolidated net operating loss for Year 2 attributable to S 1, to
$25. Then, the consolidated net operating loss carryover from Year I is reduced by $30, the
portion of that consolidated net operating loss carryover attributable to SI (which includes the
portion attributable to P), to $20.
(d) Effective dates. This section applies to discharges of indebtedness that occur after
March 21,2005. Groups, however, may apply this section in whole, but not in part, to
discharges of indebtedness that occur on or before March 21, 2005 and after August 29, 2003.
For discharges of indebtedness occurring on or before March 21,2005 and after August 29,
2003, with respect to which a group chooses not to apply this section, see § 1.1502-28T as
contained in 26 CFR part I revised as of April I, 2004. Furthermore, groups may apply
51
paragraph (b)( 4) of this section to discharges of indebtedness that occur on or before August 29,
2003, in cases in which section 1017(b)(3)(D) was applied.
§1.1502-28T (RemovedJ
Par. 10. Section 1.1502-28T is removed.
Par. II. Section 1.1502-32 is amended as follows:
1. Paragraph (b)( I )(ii) is redesignated as paragraph (b)( I )(iii).
2. New paragraph (b)( 1)(ii) is added.
3. Paragraphs (b)(3)(ii)(C)(1) and (b)(3)(iii)(A) are revised.
4. Paragraph (b)(5)(ii), Example 4, paragraphs (a), (b), and (c) are revised.
5. Paragraph (h)(7) is revised.
The addition and revisions read as follows:
§ 1.1502-32 Investment adjustments.
*****
(b)
***
(1)***
(ii) Special rule for discharge of indebtedness income. Adjustments under this section
resulting from the realization of discharge of indebtedness income of a member that is excluded
from gross income under section 108(a) (excluded COD income) and from the reduction of
attributes in respect thereof pursuant to sections 108 and 1017 and § 1.1502-28 (including
reductions in the basis of property) when a member (the departing member) ceases to be a
member of the group on or prior to the last day of the consolidated return year that includes the
date the excluded COD income is realized are made immediately after the determination of tax
for the group for the taxable year during which the excluded COD income is realized (and any
52
prior years) and are effective immediately before the beginning of the taxable year of the
departing member following the taxable year during which the excluded COD income is
realized. Such adjustments when a corporation (the new member) is not a member of the group
on the last day of the consolidated return year that includes the date the excluded COD income is
realized but is a member of the group at the beginning of the following consolidated return year
are also made immediately after the determination of tax for the group for the taxable year during
which the excluded COD income is realized (and any prior years) and are effective immediately
before the beginning of the taxable year of the new member following the taxable year during
which the excluded COD income is realized. If the new member was a member of another group
immediately before it became a member of the group, such adjustments are treated as occurring
immediately after it ceases to be a member of the prior group.
*****
(3) * * *
(ii)***
(C) * * *
(1) In general. Excluded COD income is treated as tax-exempt income only to the extent
the discharge is applied to reduce tax attributes attributable to any member of the group under
section 108, section 1017 or § 1.1502-28. However, if S is treated as realizing excluded COD
income pursuant to § 1.1502-28(a)(3), S shall not be treated as realizing excluded COD income
for purposes of the preceding sentence.
*****
... ) * * *
(111
53
(A) In general. S's noncapital, nondeductible expenses are its deductions and losses that
are taken into account but permanently disallowed or eliminated under applicable law in
detem1ining its taxable income or loss, and that decrease, directly or indirectly, the basis of its
assets (or an equivalent amount). For example, S's Federal taxes described in section 275 and
loss not recognized under section 3 I I (a) are noncapital, nondeductible expenses. Similarly, if a
loss carryover (e.g., under section 172 or 1212) attributable to S expires or is reduced under
section I 08(b) and ~ I. I 502-28, it becomes a noncapital, nondeductible expense at the close of
the last tax year to which it may be carried. However, when a tax attribute attributable to S is
reduced as required pursuant to ~ 1. I 502-28( a)( 3), the reduction of the tax attribute is not treated
as a noncapital, nondeductible expense of S. Finally, if S seIls and repurchases a security subject
to section 109 I, the disaIlowed loss is not a noncapital, nondeductible expense because the
corresponding basis adjustments under section 109 I (d) prevent the disallowance from being
permanent.
*****
(5) * * *
(ii)***
Example 4. Discharge of indebtedness. (a) Facts. P forms S on January I of Year I and
S borrows $200. During Year I, S's assets decline in value and the P group has a $ I 00
consolidated net operating loss. Of that amount, $ lOis attributable to P and $90 is attributable to
S under the principles of § I. I 502-2 I (b )(2)(iv). None of the loss is absorbed by the group in
Year I, and S is discharged from $ I 00 of indebtedness at the close of Year I. P has a $0 basis in
the S stock. P and S have no attributes other than the consolidated net operating loss. Under
section 108(a), S's $100 of discharge of indebtedness income is excluded from gross income
because of insolvency. Under section I 08(b) and § I . 1502-28, the consolidated net operating loss
is reduced to $0.
(b) Analysis. Under paragraph (b)(3)(iii)(A) of this section, the reduction of$90 of the
consolidated net operating loss attributable to S is treated as a noncapital, nondeductible expense
in Year I because that loss is permanently disallowed by section I 08(b) and § 1. I 502-28. Under
paragraph (b)(3)(ii)(C)(l) of this section, all $100 ofS's discharge of indebtedness income is
54
treated as tax-exempt income in Year I because the discharge results in a $100 reduction to the
consolidated net operating loss. Consequently, the loss and the cancellation of the indebtedness
result in a net positive $10 adjustment to P'S basis in its S stock.
(c) Insufficient attributes. The facts are the same as in paragraph (a) of this Example 4,
except that S is discharged from $120 of indebtedness at the close of Year I. Under section
108(a), S's $120 of discharge of indebtedness income is excluded from gross income because of
insolvency. Under section I 08(b) and § 1.1502-28, the consolidated net operating loss is reduced
by $100 to $0 after the determination of tax for Year I. Under paragraph (b)(3)(iii)(A) of this
section, the reduction of $90 of the consolidated net operating loss attributable to S is treated as a
noncapital, nondeductible expense. Under paragraph (b)(3)(ii)(C)(l) of this section, only $100
of the discharge is treated as tax-exempt income because only that amount is applied to reduce
tax attributes. The remaining $20 of discharge of indebtedness income excluded from gross
income under section 108(a) has no effect on P's basis in S's stock.
*****
(h)
***
(7) Rules related to discharge of indebtedness income excluded from gross income.
Paragraphs (b)(I)(ii), (b)(3)(ii)(C)(1), (b)(3)(iii)(A), and (b)(5)(ii), Example 4, paragraphs (a),
(b), and (c) of this section apply with respect to determinations of the basis of the stock of a
subsidiary in consolidated return years the original return for which is due (without regard to
extensions) after March 21,2005. However, groups may apply those provisions with respect to
determinations of the basis of the stock of a subsidiary in consolidated return years the original
return for which is due (without regard to extensions) on or before March 21, 2005 and after
August 29, 2003. For determinations of the basis of the stock of a subsidiary in consolidated
return years the original return for which is due (without regard to extensions) on or before
March 21,2005 and after August 29, 2003, with respect to which a group chooses not to apply
paragraphs (b)(1 )(ii), (b)(3)(ii)(C)(l), (b)(3)(iii)(A), and (b)(5)(ii), Example 4, paragraphs (a),
(b), and (c) of this section, see § I. I 502-32T(b)(3)(ii)(C)(l), (b)(3)(iii)(A), and (b)(5)(ii),
Example 4, paragraphs (a), (b), and (c) as contained in 26 CFR part I revised as of April 1,2004.
Par. 12. Section 1.1502-32T is amended as follows:
55
1. Paragraph (a)( 3) is added.
2. Paragraphs (b) through (b)(3)(iii)(8) are revised.
3. Paragraphs (b)(5)(i) through (h)(5)(ii) are revised.
4. Paragraph (h)(7) is revised.
The revisions read as follows:
§ 1.1502-32T Investment adjustments (temporary).
*****
(a)(3) through (b)(3)(iii)(8) [Reserved]. For further guidance, see §1.1502-32(a)(3)
through (b)(3)(iii)(8).
*****
(b)(5)(i) through (h)(5)(ii) [Reserved]. For further guidance, see § 1.1502-32(b)(5)(i)
through (h)(5)(ii).
*****
(h)(7) [Reserved]. For further guidance, see § 1.1502-32(h)(7).
Par. 13. In §1.1502-76, paragraph (b)(I)(ii)(B)(l) is revised to read as follows:
§ 1.1502-76 Taxable year of members of group.
*****
(b) * * *
(1)***
(ii)***
(B)
***
(J) Whether the allocation is inconsistent with other requirements under the Internal
Revenue Code and regulations promulgated thereunder (e.g., if a section 338(g) election is made
56
in connection with a group's acquisition of S, the deemed asset sale must take place before S
becomes a member and S's gain or loss with respect to its assets must be taken into account by S
as a nonmember (but see
~
1.338-1 (d», or if S realizes discharge of indebtedness income that is
excluded from gross income under section 108( a) on the day it becomes a nonmember, the
discharge of indebtedness income must be treated as realized by S as a member (see ~ 1.IS022S(b)(II»); and
*****
Par. 14. In § I.IS02-80, the second sentence of paragraph (c) is revised to read as
follows:
§ 1.1S02-S0 Applicability of other provisions oflaw.
*****
(c) * * * See §§ I.IS02-ll(d) and I.IS02-3ST for additional rules relating to stock
loss. * * *
*****
Par. IS. In §1.1S02-S0T, the third sentence of paragraph (c) is revised to read as follows:
57
§ 1.1502-80T Applicability of other provisions of law (temporary).
*****
(c)
loss.
* * * See ~~ 1.1502-1 1(d) and
1.1502-35T for additional rules relating to stock
***
*****
Deputy Commissioner for Services and Enforcement.
Approved:
Acting Assistant Secretary of the Treasury.
JS-:~3~l): Statcmcnt of Trcasury Sccretary John W. Snow On the Departure of Treasury U ...
Page I of2
FROM THE OFFICE OF PUBLIC AFFAIRS
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March 21, 2005
JS-2329
Statement of Treasury Secretary John W. Snow On the Departure of Treasury
Under Secretary John Taylor
Since the spnng of 2001. Or. John Taylor has served brilliantly and honorably as
Treasury's Under Secretary for International Affairs. As he prepares to leave us and
return to private life, we can't help but reflect on the size and scope of his service to
our country over these past four years.
Of particular note and historic value, was John's participation in the Bush
Administration's efforts to fight terror and spread freedom around the world John
was part of the creation of an international coalition to freeze terrorist assets in the
weeks following September 11,2001 He played a key role in the successful
creation of a new currency in Iraq. He also helped shepherd international
agreements to reduce Iraq's debt by 80 percent and led efforts to establish an
histonc new economic engagement with the Broader Middle East and North African
countries.
John has always felt strongly that the President's call for greater integration of
economic issues into the traditional political and security parts of foreign policy is
having, and will have, enormous payoffs for freedom and prosperity around the
globe.
Though he dealt with issues of global significance every hour of every day, John's
greatest pride and pleasure at the Treasury Department was his interaction with the
highly skilled people of Treasury's Office of International Affairs.
John has been a moral and intellectual leader in this Department, across the federal
government, and in economic circles throughout the world. In fact, every central
banker and finance minister I have met has been a student of John Taylor's work -some have even been students in his classrooms. His wisdom and guidance will be
sorely missed, and I speak on behalf of the entire department when I say we were
extremely fortunate to have him serve in our ranks.
John will always be remembered at Treasury for both his fine mind and his friendly
demeanor. He was a valued counselor to me and a valued professor to staff across
the Department. His vision for economic growth around the globe is grounded in
ethiCS and backed by economic understanding of the highest degree His
contributions to the Treasury and to the broader economic world in his Treasury
role were invaluable.
The Treasury bids a fond farewell to a gentleman and a scholar: we thank him for
his contributions and wish him all the best In all future endeavors.
- 30 REPORTS
http://ww~·.treas.gov/press/rclcn~es0s2329.htm
4/2612005
JS-2329: Statement of Treasury Secretary John W. Snow On the Departure of Treasury U...
•
Page 2 of 2
Dr. Taylor's Resignation Letter To The President
http://wwVo·.treas.gov/press/relea~cs.Jis2329.htm
4/26/2005
DEPARTMENT OF THE TREASURY
WASHINGTON
0 C
UNDER SECRETARY
March 21, 2005
The President
The White House
Washington, D.C. 20500
Dear Mr. President,
It has been an honor and a privilege to Serve you and the country during the first tenn of
your Administration. As you know, in order to ensure a smooth transition, I have been
flexible about the date of my return to the private sector, and, having consulted with
Secretary Snow, I would now like to set April 22 as the effective date of my resignation.
I thank you for giving me the opportunity to be part of your economic team. I am pleased
to have participated during your first presidential campaign in developing economic
plans, including the tax rate cuts, which helped restore economic growth. I am also
pleased to have helped forge several international agreements to refonn the intemational
monetary system, including the grants and measurable results initiatives at the World
Bank, the new limits on exceptional finance at the International Monetary Fund, and a
market~oriented process for sovereign debt workouts. I have enjoyed working closely
with finance and central bank officiaJs in other countries on policies to raise growth and
deal with financial crises. It is a reflection of better economic policies that there are now
no major financial crises and that global growth is higher than it has been in decades.
But most of all I am pleased to have been part of your historic efforts to fight terror and
spread freedom around the world. I am proud of the international coalition we put
together to freeze terrorist assets in the weeks after September 11, 200 1, of the expedited
economic reconstruction effort in Afghanistan, of the successful creation 0 f a new
currency in Iraq, of the international agreement to reduce Iraq's debt by 80 percent, and
our historic new economic engagement with the Broader Middle East and North African
countries. I believe that your call for greater integration of economic issues into the
traditional political and security parts of foreign policy is already having huge payoffs.
I am particularly honored to have led the dedicated and highly skilled people of Treasury
International Affairs who work to promote economic freedom around the world and who
playa vital role in the successful operation of U.S. foreign policy.
Very respectfully,
lCr
Under Secretary of Treasury for
International Affairs
JS-2330: UPDATED<BR>MEDIA ADVISORY'br<'Secrctary Snow Visits Delaware an...
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
Marctl 22, 2005
JS-2330
UPDATED
MEDIA ADVISORY
Secretary Snow Visits Delaware and Pennsylvania This Week
to Discuss Strengthening and Preserving Social Security
U S Treasury Secretary John W Snow will travel to Wilmington, Delaware and
Chester County. Pennsylvania on Thursday. March 24 to discuss the President's
efforts to strengthen and preserve the U.S Social Security system.
"The President is committed to saving Social Security," said Secretary Snow.
"Social Security IS sound for today's retirees, but the system must be fixed to keep
the promise of SOCial Security for our children and grandchildren.
"Social Security faces real problems that must be addressed today," said Secretary
Snow. "The President has laid out basic principles that must gUide reform and
vOluntary personal retirement accounts are an important part of comprehensive
reform"
The following events are open to credentialed media with photo identification
Thursday, March 24
Roundtable With Local Business Leaders
The Wilmlllgton Club
1103 Market Street
Wilmington, DE
8:30 am EST
** Media must RSVP to Jeanne Mell at 302-576-6571
** Media must arrive by 8:00 am EST
** A brief media availability will be held immediately following the event
Remarks to Chester County Chamber of Business and Industry
Exelon Corporation
300 Exelon Way
Kennett Square, PA
1 :00 pm EST ** UPDATED TIME **
** Media must RSVP to Mary Rucci at 610-765-6925
** Media must arrive by 12:30 am EST
** A brief media availability will be held immediately following the event
http://www.treas.gov/pn~ss/rcleases/js2330.ht111
4/26/2005
JS-23.3I: Statement by Treasury Assistant Secretary Rob Nichols
Page I of I
FROM THE OFFICE OF PUBLIC AFFAIRS
March 22, 2005
JS-2331
Statement by Treasury Assistant Secretary Rob Nichols
The Administration respects the Independence of the Federal Reserve In making
decIsions about our nation's monetary policy. We sllare the Federal Reserve's
goals of maintaining healthy econOllllC growth while preserving low inflation
http://www.treao.80v/rresslrcleases/js23.3I.htm
4/26/2005
FROM THE OFFICE OF PUBLIC AFFAIRS
March 22, 2005
2005-3-22-17 -20-52-11171
U.S. International Reserve Position
The Treasury Department today released US I'eserve assets data for the latest week. As indicated in this table, US reserve assets
totaled $80,349 million as of the end of that week, compared to $80,869 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US milltons)
TOTAL
1. Foreign Currency Reserves
1
a. Securities
March 11, 2005
March 18, 2005
80,869
80,349
Euro
Yen
TOTAL
Euro
Yen
TOTAL
12,346
15,135
27.481
12,203
15,024
27,227
Of which. issuer headquartered in the US
0
0
b. Total deposits with:
b.i. Other central banks and BIS
12,118
3,042
15,160
11,983
3,020
15,003
the US
0
0
b.li. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the US
0
0
b.iii. Of which, banks located in the US
b.ii. Banks headquartered
117
0
0
2. IMF Reserve Position .'
15.406
15,345
3. Special Drawing Rights (SDRs) ~
11,780
11,733
11,042
11,042
0
0
4. Gold Stock
l
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
March 11, 2005
Euro
1. Foreign currency loans and securrtles
Yen
March 18, 2005
TOTAL
Euro
0
Yen
TOTAL
o
2. Aggregate short and long positions In forwards and futures In foreign currencies vis-a-VIs the U.S dollar:
2.8. Short positions
0
2.b. Long postflons
o
3. Other
o
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
March 11, 2005
Euro
1. Contingent liabililies in foreign currency
Yen
March 18, 2005
TOTAL
Euro
Yen
TOTAL
o
o
2. Foreign currency securities with embedded options
o
3. Undrawn, unconditional credit lines
o
o
o
o
o
1a. Collateral guarantees on debt due withlll 1 year
1.b. Other contingent liabilities
Ja. With other centra/ banks
Jb. With banks and other finaneia/lnstitutions
Headquartered in the US.
Jc With banks and other finaneia/lI1stltutlOns
Headquartered outside the US
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vIs the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRldollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce
JS-2332: Treasury Secretary John W. Snow Statement on the 2005 Social Security and M... Page 1 of 3
FROM THE OFFICE OF PUBLIC AFFAIRS
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Malch 23, 2005
JS-2332
Treasury Secretary John W. Snow Statement on the 2005 Social Security and
Medicare Trust Fund Reports
Welcome to the TI-easury The Social Security and Medicare Board of Trustees met
here earlier today to complete the annual financial review of the trust funds and to
transmit the Trustees' Reports to Congress
The numbers published today leave no question that Social Security reform is
needed, and it IS needed soon Reform of this system, for the sake of our children,
grandchildren and the financial future of our country, is a very real and pressing
matter.
For Social Security, this year's report shows a small deterioration from last year's
report. It once again demonstrates that the Social Securrty program IS seriously
under-funded and financially unsustainable in the long run. Cash flows peak in 2008
and turn negative In 2017, and the trust fund itself will be exhausted In 2041. The
latter two dates are one year earlier than last year's report due to slightly higher
benefit expenditures and slightly lower revenue than anticipated. The unfunded
obligation, that is, the difference between the present values of Social Security
inflows and outflows plus the existing trust fund, IS $11.1 trillion on a permanent
basIs, and $4.0 trillion over the next 75 years. The actuarial imbalance as a percent
of taxable payroll is -1.92 percent over 75 years and -3.5 percent over the indefinite
future. This means that taxes would have to be raised immediately by 3.5
percentage pornts, or benefits reduced Immediately by 22 percent, to make the
system whole on a permanent basis.
As you well know, the President has called for bipartisan efforts to create a
permanently sustainable system HIs leadership has been the catalyst for a terrific
national dialogue. Ideas are coming forward. As the President has continued to say,
we can preserve benefits for current and near retirees and offer great hope to
younger workers without raising the payroll tax rate. And we need to enact these
reforms this year.
Since March 3rd, Administration officials - from President Bush and Vice President
Cheney to Cabinet members and policy experts - have been traveling throughout
the country as part of a coordinated 60-day tour of at least 60 stops to discuss the
President's message of strengthening SOCial Security with the American people.
We passed the 20 day mark this week, and so far Administration officials have
traveled to 52 events in 22 states to talk about the need for a permanent fix to save
Social Securrty for future generations. We'll hit the 60 stop mark this week - after
less than 30 days on the road - and the final number of stops will be much Iligher
than anticipated
Since the President started this national dialogue, membership of both parties have
agreed that a permanent solution is needed Both parties are discussing possible
approaches to reform and substantial progress IS being made.
I look forward to sharing the news of today's report when I am on the road
tomorrow, and for the next several weeks. Because this report once again confirms
that the sooner action is taken, the better for all concerned Each year that passes
without reform makes the ultimate resolution more difficult and the required
changes more severe
http://www.treas.gov/rress/rclc~es/js23.32.htm
4/26/2005
JS-23j2: Treasury Secretary John W. Snow Statement on the 2005 Social Security and M...
Page 2 of 3
As this report shows, a j~ percent payroll tax rate increase would achieve longtelm balance. But we don t think that's the way to go because it IS an economically
damaging solution. Payroll taxes have been raised some 20 times since Social
Security was established and those Iflcreases have failed to make the system
solvent. Ralslrlg the payroll tax will harm our economy and hurt job growth Even
the most resilient economy can be devastated by dramatic tax Increases
For future generations of retirees, the Presidellt believes an awful lot of hope lies In
personal accounts - somethlflg that would allow younger workers to build a nest
egg that they OWll and control, something the government could never take away
from them, and that would tap Into the great force of compound Interest.
Albert Einstein believed, and the PreSident and I agree, that compound interest is
one of the most powerful forces In the universe. It's why a persollal account nest
egg would give workers the prospect of a retirement that IS far better than the
rapldly-weakenlflg promise of SOCial Security benefits.
The national dialogue on SOCial Security has put Wind in the salls of reform. The
stark numbers IrI thiS report I'emind us that we need to stay the course. Now IS the
time to take the steps necessary to preserve and protect SOCial Security so that
commitments to our seniors are kept and the retirement prospects for our children
and grandchildren can be Improved
Let me now offer a few words on the 2005 Medicare Trustees' Report. Although the
2005 Medicare Report shows a slight Improvement over last year's report, more
fundamentally It reveals even greater challenges. While Medicare faces the same
demographiC challenges as SOCial Security, It is additionally burdened by sharp
increases in underlYlrig health care costs.
Cash flow for the Hospital Insurance (HI) Trust Fund is prOjected to be negative
again this year, as In 2004. Taking interest Into account, total trust fund income IS
prOjected to exceed expenditures through 2012. The Hospital Insurance Trust Fund
is prOjected to become insolvent in 2020, one year later than prOjected in last year's
report and the 75-year actuarial imbalance as a percent of payroll IS -3.09, a 0.03
percent Improvement from last year's report.
The Supplementary Medical Insurance (SMI) Trust Fund, including expenditures
assOCiated With the prescription drug program, is financed in large part by general
revenues. SMI expenditures are prOjected to IrIcrease rapidly, resulting In
Increasing pressures on future federal budgets. General revenue financing for SMI
is expected to increase from 0.9 percent of GDP Ifl 2004 to 6.2 percellt in 2079.
The prOjected growth In SMI expenditures poses serious issues for the federal
budget and, In turn, the US economy.
Controlling health care costs is the real key to the long run fiscal sustainability of
both Medicare and in turn the federal budget. Indeed, according to this year's
Trustees' Report, reduclflg the projected growth in per beneficiary health care costs
to one percentage point lower would reduce the 75-year actuarial imbalance for the
HI program by two thirds.
The Administration is addresslrlg tile Issue of rising health care costs through the
creation of Health Savings Accounts (HSAs) - already available and gaining in
popularity - reduclrlg the laWSUit abuse that Iflcreases costs and reduces access to
necessary medical services, creatlflg Association Health Plans to increase the
affordability and availability of health Insurance for small-business owners and their
employees, and moderniZing medical technology With new investments in health
information technology It is estllnated that a national health IrIformatlon network, for
example, could save about $140 billion per year through Improved care and
reduced duplication of medical tests.
Starting IrI 2006, for the first time all seniors will be guaranteed access to affordable
preScription drug coverage under Medicare Further reforms to Medicare should be
considered In light of experience With other reforms contained the 2003 Act which
are just starting to be implemented.
The weighty concerns raised by the Trustees' Repolis demand the attention of
America's policymakers and the public. Those who depend on SOCial Security and
Medicare urgently need the best efforts of those of us in public life and In the private
http://www.treas.gov/rress/releases/js2332.htm
4/26/2005
JS-23J2: Treasury Secretary John W. Snow Statement on the 2005 Social Security and M ...
Page 3 of3
sector to address the long-tel'n] funding Issues. Successful I'eform of these
programs should be seen as a shared responsibility, not an opportunity to engage
in partisan politics.
-30-
LINKS
•
•
The 2005 OASDI TI'ustees Report (SSA website)
The 2005 HI and SMI Trustees Report (eMS website)
REPORTS
•
•
•
Summary document of reports
Social Security Trustees' report
Medicare Trustees' report
http://w.vvvv-.trcas.gov/prc33/rcle;lscs/js2332.htm
4/26/2005
A MESSAGE TO THE PUBLIC:
Each year the Trustees ql the Social Security and Medicare trust funds
report on the Cllrrent status and projected condition (~l the funds over the
next 75 years. This message sllIllmarizes the 2005 Annual Reports.
The fundamentals (~l the jlncillcial stattls of Social Security and Medicare
remain problematic under the intermediate economic and demographic
assumptions. Social Security s current annual cash surpluses will soon
begin to decline and will be followed by deficits that begin to grow rapidly toward the end of the next decade as the baby boom generation
retires. The Medicare Hospital Insurance (HI) Trust Fund that pays hospital benefits had negative cash flows ill 2004 and annual cash flow deficits are expected to continue and to grow rapidly after 2010 as baby
boomers begin to retire. The growing deficits in both programs will lead
to exhaustion in trust fund reserves for HI in 2020 andfor Social Security
in 2041. In addition, the Medicare Supplementary Medical Insurance
(SMI) Trust Fund that pays for physician services and the new prescription drug benefit will require substantial increases over time in both general revenue financing and premium charges. As the reserves in Social
Security and HI are drawn down and SMI general revenue financing
requirements continue to grow, the pressure on the Federal budget will
intensify. We do not believe the currently projected long run growth rates
of Social Security and Medicare are sustainable under current financing
arrangements.
Social Security
The annual cost of Social Security benefits represents 4.3 percent of Gross
Domestic Product (GDP) today and is projected to rise to 6.4 percent of
GDP in 2079. The projected 75-year actuarial deficit in the combined
Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI)
Trust Funds is 1.92 percent of taxable payroll, up slightly from 1.89 percent in last year's report. The program continues to fail our long-range
test of close actuarial balance by a wide margin. Projected OASDI tax
income will begin to fall short of outlays in 2017 and will be sufficient to
finance only 74 percent of scheduled annual benefits by 2041, when the
combined OASDI trust fund is projected to be exhausted.
Social Security could be brought into actuarial balance over the next 75
years in various ways, including an immediate increase of 15 percent in
the amount of payroll taxes or an immediate reduction in benefits of 13
percent (or some combination of the two). To the extent that changes are
delayed or phased in gradually, greater adjustments in scheduled benefits
and revenues would be required. Ensuring that the system is solvent on a
sllstainable basis over the next 75 years and beyond would also require
larger changes.
Medicare
As we reported last year, Medicare:~ financial difficulties come soonerand are much more severe-than those confronting Social Security. While
both programs face essentially the same demographic challenge, underlying health care costs per enrollee are projected to rise faster than the
wages per worker on which the payroll tax is paid and on which Social
Security benefits are based. As a result, while Medicare's annual costs are
currently 2.6 percent of CD?, or about 60 percent of Social Security 5,
they are now projected to surpass Social Security expenditures in 2024
and reach almost 14 percent ofCDP in 2079.
The projected 75-year actuarial deficit in the Hospital Insurance (HI)
Trust Fund is now 3.09 percent of taxable payroll, down slightly from 3.12
percent in last year 5 report due primarily to slightly greater income in
2004, and slightly lower costs, than estimated in last year 5 report. The
fund again fails our test of short-range financial adequacy, as assets drop
below the level of the next year's projected expenditures within 10 yearsin 2014. The fund also continues to fail our long-range test of close actuarial balance by a wide margin. Though the projected date of HI Trust
Fund exhaustion moved back slightly to 2020, from 2019 in last year 5
report, projected HI tax income falls short of outlays in this and all future
years. HI could be brought into actuarial balance over the next 75 years
by an immediate 107 percent increase in program income or an immediate 48 percent reduction in program outlays (or some combination of the
two). However, as with Social Security, adjustments offar greater magnitude would be necessary to the extent changes are delayed or phased in
gradually, or to make the prograrn solvent on a sustainable basis over the
next 75 years and beyond.
Part B of the Supplementary Medical Insurance (SMI) Trust Fund, which
pays doctors' bills and other outpatient expenses, and the new Part D,
which pays for access to prescription drug coverage, are both projected
to remain financed into the indefinite future because current law automatically sets financing each year to meet next year 5 expected costs. However, expected rapid cost increases will result in a rapidly growing
amount of general revenue financing-projected to rise from just under
1 percent ofCDP today to 6.2 percellt in 2079-as well as substantial
increases over time ill beneficiary premiulll charges.
Conclusion
Though highly challenging, the financial difficulties facing Social Securitv and Medicare are not insurmoulltable. But we must take action to
address them in a timely manner. The sooner they are addressed the more
varied and less disruptive can be their solutions. With informed public
discllssion and creative thinking that relates the principles underlying
these programs to the economic and demographic realities, as well as to
the changing needs and preferences of working and retired households,
Social Security and Medicare can continue to playa critical role in the
lives of all Americans.
By the Trustees:
John W Snow,
Secretary of the Treasury,
and Managing Trustee
Elaine L. Chao,
Secretary of Labor,
and Trustee
Michael O. Leavitt,
Secretary of Health
and Human Services,
and Trustee
Jo Anne B. Barnhart,
Commissioner of
Social Security,
and Trustee
John L. Palmer,
Trustee
Thomas R. Saving,
Trustee
A SUMMARY OF THE 2005 ANNUAL SOCIAL SECURITY
AND MEDICARE TRUST FUND REPORTS
Who Are the Trustees? There are six Trustees: the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services,
the Commissioner of Social Security and two members appointed by the
President and confirmed by the Senate to represent the pUblic. The Public
Trustees are John L. Palmer, University Professor and Dean Emeritus of
the Maxwell School of Citizenship and Public Affairs at Syracuse University, and Thomas R. Saving, Director of the Private Enterprise Research
Center and Professor of Economics at Texas A & M University.
What Are the Trust Funds? The trust funds were created in the U.S.
Treasury to account for all program income and disbursements. Social
Security and Medicare taxes, premiums and other income are credited to
the funds. Benefit payments and program administrative costs are the
only purposes for which disbursements from the funds can be made. Program revenues not needed in the current year to pay benefits and administrative costs are invested in special non-negotiable securities of the U.S.
Government on which a market rate of interest is credited. Thus, the trust
funds represent the accumulated value, including interest, of all prior program annual surpluses, and provide automatic authority to pay benefits.
There are four separate trust funds. For Social Security, the Old-Age and
Survivors Insurance (OASI) Trust Fund pays retirement and survivors
benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits. (The combined trust funds are described as OASDI.) For Medicare,
the Hospital Insurance (HI) Trust Fund pays for inpatient hospital and
related care. The Supplementary Medical Insurance (SMI) Trust Fund is
composed of Part B, which pays for physician and outpatient services,
and effective in 2004, Part D, which provides a prescription drug benefit
that begins in 2006. Medicare benefits are provided to most people age 65
and over and to most workers who are receiving Social Security disability
benefits.
What Were the Trust Fund Results in 2004? In December 2004,
39.7 million people were receiving OASI benefits, 7.9 million were
receiving DI benefits, and 4l.7 million were covered under Medicare.
Trust fund operations, in billions of dollars, are shown below (totals may
not add due to rounding).
Assets (end of 2003) ..............
Income during 2004 . . . . . . . . . . . . . .
Outgo during 2004 . . . . . . . . . . . . . . .
Net increase in assets. . . . . . . . .
Assets (end of 2004) . . . . . . . . . . . . ..
OASI
$1,355.3
566.3
421.0
145.3
1,500.6
DI
$175.4
91.4
80.6
10.8
186.2
HI
$256.0
183.9
170.6
13.3
269.3
SMI
$24.0
133.8
138.3
-4.5
19.4
How Has the Outlook for the Trust Funds Changed Since Last Year?
During the past year there has been no important change in the financial
outlook for either Social Security or Medicare. Under the intermediate
assumptions, the combined OASDI Trust Funds show a 75-year actuarial
deficit equal to 1.92 percent of taxable payroll, slightly larger than last
year's estimate of 1.89 percent. That change is largely attributable to
moving the valuation period forward a year from 2004-78 to 2005-79,
which adds a year (2079) with a large projected deficit into the estimate of
long-range funding adequacy. The OASDI Trust Funds, separately and
combined, are adequately financed over the next 10 years under the intermediate assumptions.
Medicare's HI Trust Fund now has a projected 75-year actuarial deficit
equal to 3.09 percent of payroll compared with last year's estimate of
3.12 percent under the intermediate assumptions. That change results primarily from slightly lower expenditures and slightly higher income in
2004 than previously estimated. The HI Trust Fund is inadequately
funded over the next 10 years, with trust fund assets falling short of 100
percent of expenditures in 2014. That represents a small improvement
from last year's estimate of 2012. The SMI Trust Fund is adequately
financed in both the short and long term because of the automatic financing established for Medicare Parts Band D.
How Are Social Security and Medicare Financed? For OASDI and HI,
the major source of financing is payroll taxes on earnings that are paid by
employees and their employers and by the self-employed (157 million for
OASDI and 160 million for HI in 2004). The self-employed are charged
the equivalent of the combined employer and employee tax rates. The
payroll tax rates are set by law and for OASDI apply to earnings up to an
annual maximum that rises as average wages increase ($90,000 in 2005).
HI taxes are paid on total earnings. The tax rates (in percent) for 2005 and
later are:
OASI
5.30
Employees ......
Employers ......
5.30
Combined total ... 10.60
DI
0.90
0.90
1.80
OASDI
6.20
6.20
12.40
HI
1.45
1.45
2.90
Total
7.65
7.65
15.30
Within SMI both Part B and Part D are financed largely (about 75 percent) by payments from Federal general fund revenues supplemented by
monthly premiums charged beneficiaries ($78.20 in 2005 for Part B; Part
D premiums begin in 2006). Part D also will receive payments from
States beginning in 2006 for Federal assumption of Medicaid responsibilities for premium and cost-sharing subsidies for individuals eligible for
both Medicare and Medicaid. Part B and Part D premium amounts are
based on methods defined in law and increase as the estimated costs of
2
those programs rise. Income to each trust fund by source in 2004 is shown
in the table below (totals may not add due to rounding).
Source (in billions)
Payroll taxes ...........
General fund revenue ....
Interest earnings .........
Beneficiary premiums ....
Taxes on benefits ........
Other .................
Total ..................
OASI
$472.8
OI
$80.3
79.0
10.0
14.6
l.1
*
566.3
9l.4
HI
$156.7
.6
15.0
1.9
8.6
l.2
183.9
SMI
$100.9
1.5
31.4
*
133.8
* Less than $50 million.
What Were the Administrative Expenses in 2004? Administrative
expenses, as a percentage of total expenditures, were:
OASI
Administrative expenses 2004. "
0.6
01
2.7
HI
l.8
SMI
2.1
How Are Estimates of the Trust Funds' Future Status Made?
Short-range (lO-year) and long-range (7S-year) estimates are reported for
all funds. The estimates are based on current law and assumptions about
all of the factors that affect the income and outgo of each trust fund.
Assumptions include economic growth, wage growth, inflation, unemployment, fertility, immigration, and mortality, as well as factors relating
to disability incidence and the cost of hospital, medical, and prescription
drug services.
Because the future is inherently uncertain, three alternative sets of economic and demographic assumptions are used to show a range of possibilities. The intermediate assumptions (alternative II) reflect the Trustees'
best estimate of future experience. The low-cost alternative I is more optimistic for trust fund financing, and the high-cost alternative III is more
pessimistic; they show trust fund projections for more and less favorable
economic and demographic conditions for trust fund financing than the
best estimate. The assumptions are reexamined each year in light of
recent experience and new information about future trends, and are
revised as warranted. In general, greater confidence can be placed in the
assumptions and estimates for earlier projection years than for later years.
What is the Short-Range Outlook (2005-2014) for the Trust Funds?
For the short range, we measure the adequacy of the OASI, 01, and HI
Trust Funds by comparing their assets at the beginning of a year to projected costs for that year (the "trust fund ratio"). A trust fund ratio of 100
percent or more-that is, assets at least equal to projected benefit payments for a year-is considered a good indicator of a fund's short-term
3
adequacy. This level
expenditures exceed
annual tax revenues,
years, allowing time
of projected assets for any year means that even if
income, the trust fund reserves, combined with
would be sufficient to pay full benefits for several
for legislative action to restore financial adequacy.
By this measure, the OASI and OI funds are considered financially adequate throughout the short range because the assets of each fund exceed
the 100 percent level through the year 2014. The HI fund does not meet
the short-range test of financial adequacy because its assets fall below the
100 percent level of one year's outgo during 2014. Chart A shows these
trust fund ratios under the intermediate assumptions through 2025.
Chart A-OASI, DI, and HI Trust Fund Ratios
/Assets ({s (/ I}creelltage otal/lIlial expellditllres/
550%
. Estimated
Historical
500%
450%
--OASI
- - - DI
400%
350%
HI
300%
250%
, ---- ....
200%
150%
100%
50%
0%
, -, ,
"'
. I
..
.. ,
I
.... .. ..
.. . ..
.. . ...
..
..
..
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Calendar year
For SMI, a less stringent annual "contingency reserve" asset test applies
to both Part B and Part 0 because the financing of each of those accounts
is provided by beneficiary premiums and Federal general fund revenue
payments automatically adjusted each year to meet expected costs. Thus,
under current law both SMI accounts are fully financed throughout the
75-year projection period no matter what the costs may be.
The following table shows the projected income and outgo, and the
change in the balance of each trust fund except SMI, over the next 10
years. Note the separation of SMI income and expenditures into columns
for Parts Band O. The change in SMI is not shown because of its automatic annual adjustments in income to meet the next year's projected
expenditures.
4
ESTIMATED OPERATIONS OF TRUST FUNDS
(In billions-fofo/s
/I/O\'
nof ([dd dll£' fo rollnding)
Income
Ex pendi tures
SMI
Change in fund
SMI
B
D GASI DI
HI
HI
DI
Year GASI DI HI
B
D GASI --------------$7 $440 $86 $183 $153
$594 $96 $195 $155
2005
$7 $154 $9 $12
12
634 102 207 174 82
457 92 195 161
2006
178 10
82
90
477 98 208 170 90
10
671 107 218 177
2007
195
9
714 112 231 182 99
501 104 219 179 99
11
2008
212
8
205
9
243
109
531
2009
755 117
113 233 187 109
224
5
800
849
897
947
998
2010
2011
2012
2013
2014
123
129
135
140
146
254
268
282
295
308
182
209
226
249
273
116
128
142
158
175
564
602
643
689
739
118
124
132
140
147
248 197
265 207
283 223
303 245
324 268
116
128
142
158
175
236
247
254
258
259
5
5
2
1
-1
6
3
-1
-8
-15
What is the Long-Range (2005-2079) Outlook for Social Security and
Medicare Costs? Costs for both programs increase steeply between 2010
and 2030 because the number of people receiving benefits will increase
rapidly as the large baby boom generation retires. Thereafter, Social Security costs grow slowly due primarily to projected increasing life expectancy. Medicare costs continue to grow rapidly due to expected increases
in the use and cost of health care. In particular, the continued development
of new technology is expected to cause per capita health care expenditures to continue to grow faster in the long term, as they have in the past,
than the economy as a whole.
Chart B-Social Security and Medicare Cost as a Percentage of GDP
14%
HI+SMI
(including Part D)
12%
10%
Historical
Estimated
8%
6%
OASI + DI
2%
0%
1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080
Calendar year
5
Thus, a good way to view the projected cost of Social Security and Medicare is in relation to gross domestic product (GOP), the most frequently
used measure of the total U.S. economy (Chart B). Medicare's cost will
first exceed Social Security's in 2024. Social Security outgo amounted to
4.3 percent of GOP in 2004 and is projected to increase to 6.4 percent of
GOP in 2079. Medicare's cost was smaller in 2004, 2.6 percent of GOP,
but is projected to grow more than fivefold to 13.6 percent of GOP in
2079, when it will be more than twice that of Social Security.
What is the Outlook for OASDI and HI Costs Relative to Tax
Income? Although Medicare's and Social Security's costs are projected
to grow substantially faster than the economy over the next several
decades, tax income to the HI and OASOI Trust Funds is not. Because
their primary source of income is the payroll tax, it is customary to compare HI and Social Security income and cost rates as a percentage of taxable payroll, as in Chart C. Note that the income rate lines do not rise
substantially over the long run. This is because payroll tax rates are not
scheduled to change and income from the other tax source to these programs, taxation of OASOI benefits, will rise only gradually from a greater
proportion of beneficiaries being subject to taxation in future years.
Chart C-Income and Cost Rates
[Percent([ge
(~lt(lx([h/e
payroll]
25%
Historical
Estimated
20% .
15%
10%
5%
-
Income rates
-
Cost rates
, cO
....
0%
1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080
Calendar year
What is the Long-Range Actuarial Balance of the OASI, DI, and HI
Trust Funds? The traditional way to view the outlook of the payroll
tax-financed trust funds is in terms of their actuarial balances for the
75-year valuation period. The actuarial balance of a fund is essentially the
difference between annual income and costs, expressed as a percentage of
taxable payroll, summarized over the 75-year projection period. Because
6
SMI is brought into balance annually through premium increases and general revenue transfers, actuarial balance is not a useful concept for that
program.
The OASI, 01, and HI Trust Funds each have an actuarial deficit under
the intermediate assumptions, as shown below. Each actuarial deficit can
be interpreted as the percentage that could be either added to the current
law income rate or subtracted from the cost rate for each of the next
75 years to bring the funds into actuarial balance. However, such uniform
changes, while adequate for this period as a whole, would close less than
one-third of the gap for 2079 between the annual income and cost rates
for OASOI and HI shown in Chart C.
LONG-RANGE ACTUARIAL DEFICIT OF THE
OASI, DI, AND HI TRUST FUNDS
(As ([ perCell{(lf,;e (~lt([xable payroll)
OASI
Actuarial
Deficit. . . . . . . . . . . . . . . . .. 1.60
DI
OASDI
HI
0.32
1.92
3.09
What Are Key Dates in Long-Range OASI, DI, and HI Financing?
When costs exceed tax income (shown in Chart C), use of trust fund
assets occurs in stages. For HI the process began in 2004, when interest
earnings had to be used to help pay benefits. Beginning in 2012 assets
will have to be redeemed each year until the trust fund is exhausted in
2020. At that time, tax income is estimated to be sufficient to pay 79 percent of HI costs-and by 2079 only 27 percent. OASOI first needs to utilize interest in 2017 and to begin redeeming assets in 2027. OASOI assets
are projected to be exhausted in 2041, when tax income would cover
74 percent of costs-and by 2079 only 68 percent. The key dates regarding cash flows are shown below.
KEY DATES FOR THE TRUST
OASI
First year outgo exceeds income
excluding interest .................... 2018
First year outgo exceeds income
including interest .................... 2028
Year trust fund assets are exhausted ...... 2043
FUNDS
DI
OASDI
HI
2005
2017
2004
2014
2027
2027
2041
2012
2020
How Do the Sources of Medicare Financing Change? As Medicare
costs grow over time, general revenues and beneficiary premiums will
playa larger role in financing the program. Chart 0 shows expenditures
and current law non-interest revenue sources for HI and SMI combined as
a percentage of GOP. The total expenditure line is the same as shown in
Chart B and shows Medicare costs rising to 13.6 percent of GOP by 2079.
Revenues from taxes are expected to remain just over 1.4 percent of GOP,
7
while general fund revenue contributions are projected to rise from
1.0 percent in 2005 to 6.2 percent in 2079, and beneficiary premiums
from 0.3 to 1.7 percent of GOP. Thus, revenues from taxes will fall substantially as a share of total non-interest Medicare income (from 53 percent to 15 percent) while general fund revenues will rise (from 35 to
64 percent), as will premiums (from 12 percent to 18 percent). The gap
between total non-interest income and expenditures steadily widens due
to growing annual HI deficits, which reach 4 percent of GOP by 2079.
Medicare law now requires a determination in future reports of whether
the difference between total outlays and earmarked revenues (the first
four layers in Chart 0) exceeds 45 percent of total Medicare outlays
within the first 7 years of the 75-year projection period. That threshold is
now expected to be reached in 2012.
Chart D-Medicare Expenditures and Non-Interest Income by Source
as a Percent of GDP
14%
Historical
Estimated
12%
HI
10%
Deficit
~/~~J1
/"
I
8%
/~
6%
--
~'
-
4%
L_~
State
--I'
~-~-----
-l
o
§.
--------
l
d
Premiums
2%
::>
I
(')
~
I
,I
J
!
,
Payroll Taxes I",
Tax on Benefi ts I
0%
- --
~General Revenue
/'
_
_
_
o
3
(1)
1969 1979 1989 1999 2009 2019 2029 2039 2049 2059 2069 2079
Calendar year
Why is Reform to Improve the Medicare and Social Security Financial Imbalance Needed? Public concern about the financial status of
Medicare and Social Security tends to focus on the HI and OASOI Trust
Fund exhaustion dates when benefits scheduled under current law can no
longer be paid in full. But there are more immediate and fundamental reasons why Medicare and Social Security financing reform is needed. The
two programs together will place greater demands on Federal general
fund revenues long before trust fund exhaustion, and their financing in the
long term is more problematic than suggested by the 75-year actuarial
deficits for HI and OASOI.
8
The mounting financial shortfall in these programs is illustrated in Chart
E. It shows, as a percentage of GDP, the gap between annual HI and
OASDI tax income and the cost of scheduled benefits, plus the 75 percent
general fund revenue contributions to SMI's Part B and Part D. The initial
negative amounts for OASDI in 2005 and for more than a decade thereafter represent net revenues to the Treasury that result in the issuance of
Treasury bonds to the trust funds in years of annual cash flow surpluses.
Conversely, the positive amounts for OASDI and HI initially represent
payments the Treasury must make to the funds when assets are redeemed
to help pay benefits in the years leading up to exhaustion of the funds.
After the exhaustion date, the positive amounts depict growing shortfalls
in program finances.
In 2005 the Social Security tax income surplus is estimated to be more
than offset by the shortfall in tax and premium income for Medicare,
resulting in a small overall cash shortfall that must be covered by transfers
from general fund revenues. The combined shortfall is projected to grow
each year such that by 2017 net revenue flows from the general fund to
the trust funds will total $515 billion, or 2.3 percent of GDP. Since neither
the interest paid on the Treasury bonds held in the HI and OASDI Trust
Funds, nor their redemption, provides any net new income to the Treasury, the full amount of the required Treasury payments to these trust
funds must be financed by some combination of increased taxation,
increased Federal borrowing and debt, or a reduction in other government
expenditures. Thus, these payments along with the 75 percent general
fund revenue contributions to SMI will add greatly to pressures on Federal general fund revenues much sooner than is generally appreciated.
Chart E-OASDI and HI Income Shortfall to Pay Scheduled Benefits,
and the 75 Percent General Fund Revenue Contribution to SMI
(Percenfage o{ CDP)
14%
12%
SMI (B&D)
10%
.HI
8%
OASDI
6%
-•
I
I
I
II
2020
2040
2050
2060
2070
4%
2%
0%
-2%
2005
2010
2030
Calendar year
9
2079
It is also evident from Chart E that currently projected benefit costs for
Medicare and Social Security pose a far more serious long-term financing
problem than is often recognized. There is a big increase in the shortfall
of dedicated payroll tax and premium income in the 2010 to 2030 period
as the baby boom generation reaches retirement age, but this shortfall
continues to grow rapidly after that point due to health care costs that are
expected to grow faster than GOP and to the increasing life expectancy of
beneficiaries. In 2004 the combined annual cost of HI, SMI, and OASOI
was about 7 percent of GOP, or two-fifths of total Federal revenues. It is
projected to double to 14 percent of GOP by 2040 and then to rise further
to 20 percent of GOP in 2079, at which time it would exceed total Federal
revenues at their historic share of 19 percent of GOP. We do not believe
such a long-term rate of growth for the two programs can be sustained.
In summary, the projections for Medicare and Social Security under current law manifest mounting draws on Federal general fund revenues,
exhaustion of trust funds beginning in 15 years (for HI) that would not
permit full payment of currently scheduled benefits, and unsustainable
long-term growth in costs. The sooner these problems are addressed, the
more varied and less disruptive will be their solutions.
10
A MESSAGE FROM THE PUBLIC TRUSTEES
These are the fifth annual Trustees Reports in which we have participated,
and our extended terms end upon the issuance of these reports. Our goal
as Public Trustees has been to ensure the integrity of the process by which
these reports are prepared and the credibility of the information they contain. We believe that the Public Trustees' role is important and urge the
President to nominate, and the Senate to confirm, Public Trustees for new
terms as soon as possible, so that they can be full participants in the process leading up to next year s reports.
Challees ill Outlook Over the Past Five Years
The long-term financial outlooks for Medicare and for Social Security
have changed little from last year s reports. Therefore, we focus here on
how those outlooks have altered during our watch over the last five years,
and on some lessons we have learned during that time in helping determine the annual Trustees' projections.
The financial outlookfor Social Security has improved marginally since
2000 due to a myriad offactors, including updated information on immigration, a better economic outlook and improvements in projection methodology. Annual cash-flow deficits for the combined OASDI Trust Funds
are now projected to begin two years later (2017 rather than the 2015
date projected five years ago), the exhaustion of trust fund assets is projected to occur four years later (2041 rather than 2037), and Social Security's cost as a percentage of gross domestic product (GDP) at the end of
the 75-year period has decreased from 6.8 to 6.4. However, once they
begin, the program s annual cash-flow deficits are still projected to grow
rapidly through mid-century-and then more slowly thereafter-with trust
fund income sufficient to pay only 74 percent of scheduled benefits at the
time of asset exhaustion and 68 percent at the end of the 75-year projection pe riod.
In sharp contrast, Medicare sfinancial outlook has deteriorated dramatically over the past five years and is now much worse than Social Security's. This is due primarily to a major change in the projected long-term
growth rate of Medicare costs relative to that of the economy and, secondarily, to more rapid expenditure growth so far this decade than previously
anticipated. In 2000 annual cash-flow deficits were projected to first
appear for HI in 2010. But these deficits actually began last year, resulting in the projected exhaustion date for H1 Trust Fund reserves moving
forward from 2025 to 2020-at which time trust fund income would be
sufficient to pay only 79 percent of HI costs. HI costs are expected to rise
so rapidly therea.fier that trust jlllld income will be adequate to cover only
27 percent of program costs by the end of the 75-year period.
The change in the outlook is equally stark for SMI, where Part B is now
joined by the new Part D Prescription Drug Benefit. Annual income to the
SMI Trllst Fund is always projected to be sufficient to cover costs, since
general revenue transfers and beneficiary premiums are automatically
adjusted each year to achieve this outcome. But the required rate of
growth of such revenues is far more than previously anticipated. With the
retirement of the baby boom generation, SMI costs (as a percent ofCDP)
are now projected to nearly quadruple from 1.2 to 4.6 over the next 30
years and to continue to increase rapidly thereafter. As a result, total
Medicare expenditures are now projected to increase from 2.6 to 5.7 percent of CDP by 2024, when Medicare expenses will first exceed those of
Social Security. By the end of the 75-year period, the cost of Medicare is
now expected to approach 14 percent ofCDP. In contrast, in 2000 the
cost was projected to be less than 4 percent of CDP in 2024 and to reach
only 5.3 percent ofCDP by the end of the 75-year period.
A notable addition to the Trustees Reports during our tenure has been the
inclusion of new measures that summarize program finances for a period
extending beyond the traditional 75 years and indicate whether those
finances can be expected to improve in this extended time frame. These
measures indicate that both Social Security and Medicare will be subject
to increasing deficits into the indefinite future under current policies.
Two important observations follow from an examination of the 2000-2005
Trustees Reports projections. First, Medicare s costs are expected to grow
at a much faster rate than those of Social Security. The impending retirement of the baby boom generation, continued lower birth rates, and further increases in life expectancy thereafter will cause the costs of both
programs to grow faster than the economy. But Medicare s costs are also
fueled by ever increasing scientific knowledge, medical technology incorporating that knowledge, and per capita utilization of the resulting health
care capabilities. The second observation follows from the first: there is
considerable inherent uncertainty in the future path of costs under current
law for both programs, with projections for Medicare being a less reliable
guide than those for Social Security the further out in time they go. In the
balance of this message we briefly examine the reasons for the uncertainty inherent in these projections and the relevance to policy discussions.
What are the Major Sources of Uncertainty in the Projections?
There are tl-'VO major sources of uncertainty inherent in the long-term projections for Medicare and Social Security.
First, the projections for both programs depend all many common factors,
including the size and characteristics of the population receiving program
benefits, the size of the American workforce, and the level of workers'
earnings. The projections therefore require assumptions about future
birth rates, death rates by age, immigration, marriage and divorce rates,
retirement-age patterlls, productivity gains, wage increases, inflation, and
many other demographic and economic factors. Although historical experience is generally a good guide for the likely future courses of these factors, these courses cannot be known with certainty. When substantial
change occurs in a factor in a concentrated period of time, it is particularly difficult to sort out how much of it is simply a movement to a new
level of related activity and how much represents a change in a long-term
trend. For example, expert economic opinion remains divided on whether
the revolution in information technology, which has contributed to the
recent productivity surge, will provide continuing year-to-year productivity increases for only another decade or so, or for many more decades
into the future (as did the spread of the steam engine and then electric
power in the past).
Minor variations in assurnptions about the future paths of important factors can lead to significant differences in expected program costs and revenues over many decades. This is illustrated in the differences between
the long-term projections for Social Security done by the Trustees and
those done by the Congressional Budget Office (CBO) for the first time
last year. CBO utilizes the same demographic assumptions as the Trustees
but somewhat more optimistic economic assumptions. While the fundamental character of the financial future portrayed for the program under
the two sets of projections is quite similar, there are substantial differences in the details of the projections-most notably in the expected date
of trust fund exhaustion.
There are also sources of uncertainty specific to the long-term Medicare
projections beyond those inherent in the economic and demographic
assumptions common to both programs: for example, the rate of scientific
breakthroughs, the frequency of release of "blockbuster" drugs, new diseases or widespread recurrence of older ones, and new medical treatment
techniques that improve the quality of or prolong life. Such factors have
beell a principal reason that per capita health care costs have grown well
over two percent more rapidly thall has per capita CDP over the past
half-century. The intermediate projections of the Medicare Trustees prior
to 2001 assumed the difference in the two growth rates would gradually
decline to 2ero over the subsequent 25 years. But this seemed an increasingly unrealistic expectation during the 1990s as evidence mounted for a
persistent one to t}1'O percent differential due to the increasing use of new
technologies. Pursuant to the recommendation of the 2000 Medicare
Technical Panel, Trustees Reports since then have assumed this differential would decline to one percent after 25 years and rernain at that level
thereafter. While clearly an improvement, the current assumption is still
subject to considerable uncertainty and reflects our relative ignorance
about the forces at work in determining the long-tenn growth rate of
health care costs. We strongly encourage further work on this important
Issue.
The Trustees have traditionally reported projections based on intermediate, low cost, and high cost assumptions for the important factors determining the future financial status of Medicare and Social Security. The
low and high cost alternatives assume that these factors vary individually,
as well as collectively, in a direction resulting in an outcome that is either
less or more costly, than the intermediate assumptions. While it may be
reasonable for all these factors to vary together in a cost-increasing or
cost-decreasing direction for several years in a row, as the length of the
projection period expands, the likelihood that they will continue to do so
declines dramatically. Thus, the low and high cost alternatives reflect
very low probability outcomes.
Since 2003 the Trustees Reports have included a presentation based on
stochastic modeling techniques in order to communicate the uncertainty
involved in the projections more effectively. An important advantage of
such techniques is that they assign probabilities to possible outcomes that
can be displayed in graphic form to illustrate the uncertainty surrounding
the intermediate assumptions more clearly. The chart shows the probability distribution of year-by -year Social Security costs as a percentage of
taxable payroll. (The income rate also is shown for comparison but as a
single line as it is set largely by law.) The blue area surrounding the
median cost rate denotes a 90% confidence interval (i.e., the probability
of the actual cost rate lying within this area is projected to be 90%). The
widening of the confidence interval as the projection extends further into
the future provides a strong visual impression of the increasing uncertainty over time. But it is important to recognize that the stochastic results
are sensitive to many technical choices made by forecasters and, at this
juncture, are more lIsefit! as illustrative devices than precise depictions.
Annual OASDI Cost Rates Under Intermediate Assumptions
(Perc(,l1/age of'Ta.wh/c Payroll)
30%
!S<:rJ
25%
IMedian cost rate I
~_~_----_~so%r
20%
15';'0
Income Rate
10%
Numhers indicate the
probability that the actl/al
cost rate will lie above the
re~jJective lines
5%
0%
2005
2020
2035
2050
2065
2080
Projection year
Conclusion
The economy has strong equilibrating mechanisms over long periods of
time. Despite the uncertainties discussed above, we believe that the central tendencies of the long-run projections for Medicare and Social Security are robust: demographics are driving both and nearly unimaginable
changes in expected rates offertility, mortality, and immigration would be
required to dramatically alter the long-term financial outlooks for the two
programs for the better or worse. Furthermore, the costs of Medicare
under current policies will continue to be strongly influenced by the fact
that, as incomes increase, so does the value of health care. Thus, expenditure on health care can be expected to rise faster than non-health care
consumption for the foreseeable future. Prudence dictates action sooner
rather than later to address the challenges posed by the financial outlook
for both Medicare and Social Security.
John L. Palmer,
Trustee
Thomas R. Saving,
Trustee
JS-2333: Secretary John W. Snow<BR ·Prepared Remarks: The Wilmington Club<BR>".
Page 1 of3
FROM THE OFFICE OF PUBLIC AFFAIRS
March 24, 2005
JS-2333
Secretary John W. Snow
Prepared Remarks: The Wilmington Club
Wilmington, DE
Thank you so much for having me here; It's great to be in Wilmington
I appreciate the chance to talk With you about strengthening the nation's Social
Security system The Presldellt's leadership on this Issue is providing our country
With a tremendous opportunity to save SOCial Security for current and near retirees
and Improve it for younger generations Conversations like this are an Important
part of reaching decisions as to what. exactly. should be done.
Since March 3rd. Administration offiCials - from President Bush and Vice President
Cheney to Cabinet members like me and policy experts - have been traveling
throughout the country as part of a coordinated 60-day tour of at least 60 stops to
discuss the President's message of strengthening SOCial Security with the
American people
We passed the 20 day mark this week. and so far we have traveled to 58 events in
24 states to talk about the need for a permanent fix to save SOCial Security for
future generations We'll hit the 60 stop mark this afternoon - after less than 30
days on the road - and the final number of stops will be much higher than
anticipated
We were reminded of the serious nature of the Social Security problem yesterday,
back in Washington, DC, when the Social Security and Medicare Trustees - for
whom I serve as Board Chairman - issued our annual report on the financial health
if the programs' trust funds. The numbers contained in the Social Security report
leave little doubt that the system is financially unsustainable, and in need of
expeditious and lasting change.
The Trustees' report showed that Social Security cash flows peak in 2008 and turn
negative In 2017, and the trust fund itself will be exhausted in 2041, The unfunded
obligation. that IS, the difference between the present values of Social Security
inflows (plus the trust fund) and outflows, IS $11 1 trillion on a permanent basis, and
$40 trillion over the next 75 years.
Now, the PreSident doesn't believe that we should make up that shortfall with tax
Increases. The report showed Just how much we would have to raise taxes to
achieve long-term balance the payroll tax rate would have to be raised immediately
by 3.5 percentage POints to make the system whole on a permanent basis. In other
words, the payroll tax would have to be increased by nearly 30 percent
That kind of tax increase would have significant, negative economic repercussions.
Americans would start taking home less pay, and that's bad for countless facets of
our economy. I imagine that. as bUSiness owners. you appreciate what I'm saying
After all. you would shoulder half of that tax increase - because you pay that tax on
all of your employees. For the smallest of employers I fear that much of a tax
Increase would force you to make terrible chOices. from lay-offs to health benefit
cuts. And it would make hiring new people even more difficult Am I right?
Increasing payroll taxes hurts the economy and it hurts Job creation, period We
know this from talking to business leaders like you, and that's why the President IS
aaainst it
http://wv·w.tleas.gov/prc33/releases/js2333.htm
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JS-2333: Secretary John W. Snow<BR:>i>repared Remarks: The Wilmington Club<BR> ...
Page 2 of3
It is also worth noting that payroll tax Increases have been the standard "solution" to
Social Security's problems, and they have never solved the problem I Payroll taxes
have been raised some 20 times since SOCial Security was established - and it has
failed to make the system solvent
Tax increases aren't the answer, so the President has encouraged the Congress to
propose a variety of ideas that might be, and he has put a number of ideas on the
table as well.
When the President took this issue to the country in his State of the Union Address,
he said his objective was to engender a broad national dialogue to get people
talking about this issue. He wanted Americans to talk about Social Security, and a
national conversation has begun as a direct result
Today, people are talklllg about the Issue from the halls of Congress to the halls of
local shopping malls l The PreSident's leadership has drawn critical attention to the
problem and IS creatlllg movement Progress, real progress, is being made.
Over lunch counters, over breakfast and dinner tables all over America ... the topic
IS SOCial Security reform. It's the front page story III virtually every newspaper. It's
on the evening news. And It'S there because of the PreSident of the United States.
It's there because of the courage that he's had to directly confront and deal with
what so many in political life call the "third rail"
The American people respect leaders who call a spade a spade. The President
touched the "third rail" without fear, and now we're moving forward. Neighbors and
co-workers are talklllg about it; families are talking about it: Congress is talking
about it
We've seen a clear shift in the course of the last month or so from the question· "Is
there a problem?" to the question: "How do we fiX it?"
I imagille that you are talking about it with your spouse and family members, your
business partners, customers and employees. Those conversations are critical, and
I hope our meetlllg here today can help make them even more lively, more
prod uctive.
I know that you understand that If you are 55 or older your Social Security benefits
are solid. They will not change. You know that you don't need to change your
retirement plan or strategy because of Social Security reform, period.
But now I'll ask how many of you have children or grandchildren? It's those children
and grandchildren, those young workers and future workers, who we need to be
worried about They are the ones for whom we need to fix this system.
The issue of Social Security is really a matter of basic arithmetic, and the threat to
Social Security in the near future makes more sense when you look at the simple
arithmetic. Social Security has enough money now because for decades we have
had more than enough workers paying into the system, supporting the retirees
drawing benefits.
In 1950, there were 16 workers to support every beneficiary of Social Security - a
very comfortable ratio of those paying In versus those drawing benefits. Today
there are only 3.3 workers supporting every beneficiary. By the time today's
youngest workers - many of you have children In that age group - turn 65, there
will only be two workers supporting each retiree.
Just three years from now, III 2008, the first baby boomers will begin to retire.
Accordlllg to the new Trustees' report, the government will begin to payout more In
Social Security benefits than It collects In payroll taxes In 2017 - that's Just 12 years
from now. By 2041, when younger workers beglll to retire, the system Will be
bankrupt
We must make Social Security better for those younger workers.
Raising their payroll taxes won't make It better. What the President would like to
http://www.tlea~.gov/prc33/releases/js2333.htl11
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2333: Secretary John W. Sl1o\V'~BR>Prcparcd Remarks: The Wilmington Club<BR> ...
Page 3 of 3
see, IIlsteaJ, lor luture ~el)elatlorls IS an ability to save some of their payroll taxes,
to build a nest egg that belongs to them, not to the government Something they
could pass on to their heirs. A nest egg that would give workers the prospect of a
retirement that is far better than the rapidly-weakening promise of Social Security
benefits.
Albert Elflstelil believed. and Ole President and I agree. that compound interest IS
one of the most powerful forces in the universe.
With voluntary pel'sonal accounts. younger workers would have the chance to learn
about their financial choices. bUild a nest egg and benefit from sound long-term
Investment In the free market system Without disrupting the system of benefits for
today's retired benefiCiaries.
For the life of me, I can't Imagine why anybody would argue agalflst young workers
having the ability to invest and build a better retirement for their future. It costs the
Social Security system nothing to do so, it will cost current and near-retirees
nothlflg. it gives our children and grandchildren a better retirement, and it helps our
country create a larger pool of savlflgs. And as the president has said the
retirement seCLlrlty of our young people IS too Important for partisan politics. Why
wouldn't we do thiS? I have not heard one good reason not to and it's hard to figure
out why anybody would oppose it
Additionally. as former Democratic Congressmen Tim Penny and Charlie Stenholm
wrote in an op-ed recently, "opposlflg personal accounts is not a substitute for
offering a positive solution for dealing with the challenges that face Social Security'"
They went on to say, astutely, that they "believe that if Social Security were being
created from scratch today, Americans would want to include a way to help
everyone build up a nest egg." The President and I couldn't agree more.
Social Security reform that doesn't raise payroll tax rates, that protects benefits for
today's seniors, and that improves the system dramatically for our children and
grandchildren can iJe achieved.
We are part of an excitlflg moment in American history. where a President's
courageous leadership has inspired a national discussion and, I'm confident, will
lead to historic results. I encourage you to be involved, whether it's talking about the
issue with your colleagues, with your children, or writing a letter to your Members of
Congress.
Many of you In thiS room may want to pass your buslfless on to your children or
grandchildren. I know you'll want your business to be in top shape, financially, when
that time comes.
Let's make sure we do the same With Social Security. If we act now, we can make
sure that Social Security, and our economy, are on sound financial footing for our
children and grandchildren.
Thanks so much for having me here today.
Ilwwv'f'. treatl.gov/prC$s/rel(~ases/j s23 3 3. ht111
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Page 1 of3
FROM THE OFFICE OF PUBLIC AFFAIRS
March 24, 2005
JS-2334
Secretary John W. Snow
Prepared Remarks
Chester County Chamber of Business and Industry
at Exelon Corporation
Kennett Square, PA
Thank you so much for having me here; it's great to be In Kennett Square,and I'm
delighted to be able to visit Exelon.
I appreciate the chance to talk with you about strengthening the nation's Social
Security system The President's leadership on this Issue IS providing our country
with a tremendous opportunity to save Social Security for current and near retirees
and Improve it for younger generations Conversations like this are an important
part of reaching decisions as to what, exactly, should be done.
Since March 3rd, Administration offiCials - from President Bush and Vice President
Cheney to Cabinet members like me and policy experts - have been traveling
throughout the country as part of a coordinated 50-day tour of at least 50 stops to
discuss the President's message of strengthening Social Security with the
AmeriCall people.
We passed the 20 day mark of thiS tour this week, and I'm proud to announce that
this stop, here at Exelon, is number 601 We've hit this mark after less than 30 days
on the road - and the final number of stops Will be much higher than anticipated.
We were reminded of the serious nature of the SOCial Security problem yesterday,
back in Washington, DC, when the SOCial Security and Medicare Trustees - for
whom I serve as Board Chairman - issued our annual report on the financial health
if the programs' trust funds. The numbers contained in the Social Security report
leave little doubt that the system IS financially unsustainable, and in need of
expeditious and lasting change.
The Trustees' report showed that SOCial Security cash flows peak In 2008 and turn
negative in 2017, and the trust fund itself will be exhausted in 2041. The unfunded
obligation, that IS, the difference between the present values of Social Security
inflows (plus the trust fund) and outflows, is $11.1 trillion on a permanent basis, and
$40 trillion over the next 75 years.
Now, the PreSident doesn't believe that we should make up that shortfall with tax
increases. The report showed Just how much we would have to raise taxes to
achieve long-term balance: the payroll tax rate would have to be raised immediately
by 3.5 percentage points to make the system whole on a permanent basis. In other
words, the payroll tax would have to be increased by nearly 30 percent.
That kind of tax Increase would have significant, negative economic repercussions
Americans would start taking home less pay, and that's bad for countless facets of
our economy. I imagine that, as business owners, you appreciate what I'm saying.
After all, you would shoulder half of that tax increase - because you pay that tax on
all of your employees. For the smallest of employers I fear that much of a tax
Increase would force you to make terrible choices, from lay-offs to health benefit
cuts. And it would make hiring new people even more difficult. Am I right?
IncreaSing payroll taxes hurts the economy and it hurts Job creation, period. We
know this from talking to business leaders like you, and that's why the President IS
against it.
http://www.lreas.gov/prc33/rcleuses/js2334.htm
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Page 2 of 3
It IS also worth noting that payroll tax Increases have been the standard "solution" to
Social Security's problems, and ttley have never solved the problem I Payroll taxes
have been raised some 20 times since Social Security was established - and it has
failed to make the system solvent.
Tax increases aren't the answer, so the Presicient has encouraged the Congress to
propose a variety of ideas that might be, and he has put a number of Ideas on the
table as well.
When the President took thiS issue to the country in his State of the Union Address,
he said hiS objective was to engender a broad national dialogue to get people
talking about this issue. He wanted Americans to talk about Social Security, and a
national conversation has begun as a direct result.
Today, people are talking about the Issue from the halls of Congress to the halls of
local shopping malls I The President's leadership has drawn critical attention to the
problem and is creating movement. Progress, real progress, is being made.
Over lunch counters, over breakfast and dinner tables allover America .. the topic
IS SOCial Security reform. It's the front page story in virtually every newspaper. It's
on the evening news. And it's there because of the President of the United States.
It's there because of the courage that he's had to directly confront and deal with
what so many in political life call the "third rail."
The American people respect leaders who call a spade a spade. The President
touched the "third rail" without fear, and now we're moving forward. Neighbors and
co-workers are talking about it; families are talking about it; Congress is talking
about it.
We've seen a clear shift in the course of the last month or so from the question: "Is
there a problem?" to the question "How do we fix iP"
I imagine that you are talking about it with your spouse and family members, your
bUSiness partners, customers and employees. Those conversations are critical, and
I hope our meeting here today can help make them even more lively, more
productive.
I know that you understand that If you are 55 or older your Social Security benefits
are solid. They will not change. You know that you don't need to change your
retirement plan or strategy because of Social Security reform, period.
But now I'll ask: how many of you have children or grandchildren? It's those children
and grandchildren, those young workers and future workers, who we need to be
worried about. They are the ones for whom we need to fix this system.
The issue of Social Security IS really a matter of basic arithmetic, and the threat to
SOCIal Security In the near future makes more sense when you look at the simple
arithmetic. Social Security has enough money now because for decades we have
had more than enough workers paying into the system, supporting the retirees
drawing benefits.
In 1950, there were 16 workers to support every benefiCiary of Social Security - a
very comfortable ratio of those paying in versus those drawing benefits. Today
there are only 3.3 workers supporting every beneficiary. By the time today's
youngest workers - many of you have children in that age group - turn 65, there
will only be two workers supporting each retiree.
Just three years from now, in 2008, the first baby boomers will begin to retire.
According to the new Trustees' report, the government will begin to payout more in
Social Security benefits than It collects in payroll taxes In 2017 - that's Just 12 years
from now. By 2041, when younger workers begin to retire, the system Will be
bankrupt.
We must make Social Security better for those younger workers.
Raising their payroll taxes won't make it better. What the President would like to
http://www.treas.guv/prcs3/rclcfl:.;~s/js2334.htm
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Page 3 of 3
see, Instead, for future ~elleratlons IS an ability to save some of their payroll taxes,
to build a nest egg that belongs to them, not to the government Something they
could pass on to their tleirs. A nest egg that would give workers the prospect of a
retirement that is far better than the rapidly-weakening promise of Social Security
benefits.
Albert Einstein believed, and the PreSident and I agree, that compound Interest is
one of the most poweliul forces in the universe.
With voluntary pel·sonal accounts, younger workers would have the chance to learn
about their finanCial choices, build a nest egg and benefit from sound long-term
investment In the free market system without disruptll1g the system of benefits for
today's retired benefiCiaries.
For the life of me, I can't imagine why anybody would argue against young workers
having the ability to invest and build a better retirement for their future. It costs the
SOCial Security system nothll1g to do so, it Will cost current and near-retirees
nothing, it gives our children and grandchildren a better retirement, and It helps our
country create a larger pool of savings And as the president has said the
retirement security of our young people IS too important for partisan politiCS. Why
wouldn't we do thiS? I have not heard one good reason not to and It'S hard to figure
out why anybody would oppose it
Additionally, as former Democratic Congressmen Tim Penny and Charlie Stenholm
wrote in an op-ed recently, "opposing personal accounts is not a substitute for
offering a positive solution for dealing with the challenges that face Social Security'"
They went on to say, astutely, that they "believe that if SOCial Security were being
created from scratch today, Americans would want to Include a way to help
everyone build up a nest egg" The President and I couldn't agree more.
SOCial Security reform that doesn't raise payroll tax rates, that protects benefits for
today's seniors, and that improves the system dramatically for our children and
grandchildren can be achieved.
We are part of an exciting moment in American history, where a President's
courageous leadership has inspired a national discussion and, I'm confident, will
lead to historic results. I encourage you to be involved, whether it's talking about the
issue with your colleagues, with your children, or writing a letter to your Members of
Congress.
Many of you in this room may want to pass your business on to your children or
grandchildren I know you'll want your business to be in top shape, financially, when
that time comes.
Let's make sure we do the same with Social Security. If we act now, we can make
sure that Social Security, and our economy, are on sound financial footing for our
children and grandchildren.
Thanks so much for having me here today.
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4/26/2005
JS-2335: Assistant Treasury Secretary Mark Warshawsky's <BR>Remarks to the Americ...
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FROM THE OFFICE OF PUBLIC AFFAIRS
March 25. 2005
JS-2335
Assistant Treasury Secretary Mark Warshawsky's
Remarks to the American Enterprise Institute
on the Urgent Need for Social Security Reform
Ttlank you for the killd Introduction It's both an honor and a pleasure to be
speaklllg here at the American Enterprise Institute. which is so well known and
highly regarded for Its careful and thoughtful analysis of public policy Issues.
This morning. I'm sure Mark McClellan. Rick Foster and Steve Goss did able jobs of
brlnglllg you up to date on the financial outlooks for Medicare and Social Security
as documented III the latest Trustees' Reports So my remarks today will cover
different ground I will begin by giving praise to the process that generates the
reports. I will then turn to my main topic--why it is important that responsible Social
Security reform occur now, and why one element of a successful reform plan must
be personal retirement accounts. Finally. I will say a few words about Medicare.
The Process Generating the Trustees' Reports
As eVidenced by thiS conference. the Trustees' Reports get a lot of attention and
are extremely IIlfluentlal And well they should in my opllllon i The reports have
consistently provided a wealth of IIlformation in a clear and Impartial formal. No
doubt many of the numbers in this year's Social Security report will be commonly
referenced III the ongoing reform debate; for example. 2017 as the first year with
negative projected cash-flows, 2041 as the year of trust fund exhaustion. $4.0
trillion as the 75-year unfunded obligation. and $11.1 trillion as the infinite horizon
unfunded obligation.
My experience tells me that four important factors underlie the credibility and
objectivity of the Trustees Reports. First is the composition of the Board of
Trustees. which since 1984 includes two members from the private sector. the socalled "public" members. in addition to the four ex-officIo members. The public
members. who cannot both be from the same political party. have served the
purpose espoused by the 1983 Greenspan Commission. which is to IIlcrease the
public "confidence in the integrity of the trust funds." Sillce 1984 the Boards have
had four sets of public trustees. includlllg the most recent members Professors Tom
Saving and John Palmer. All have served admirably.
The second factor contributlllg to the integrity of the Trustees' reports is the periodic
review by external experts of the methods and assumptions underlying the
projections These reviews result in widely disseminated reports. Most recently. the
assumptions and methods underlying the 2004 Medicare report and the 2003
Social Security report were reviewed by separate technical panels. Both Panels
made important contributions For example. the Social Security Panel ratified the
Trustees' decision to include in the Trustee Report the IIlfinite-horizon unfunded
obligation estimates and uncertainty estimates based on stochastic simulations and
the Medicare Panel endorsed the Medicare actuaries' methods for projecting
prescription drug benefit costs.
The third factor contributing to the integrity of the Trustees' reports are the
Actuaries' opinions at the end of the Reports. The Actuaries have fully endorsed the
assumptions and methods underlying the projections.
The fourth and final factor contributlllg to the integrity of the Trustees' reports is a
recent Innovation to the report-generatlllg process of which I am especially proud
Preparation of the Trustees reports is now a year-round effort. IIlvolvlllg
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professionals from each ot the IIlteresteo agencies that bring to the table an
enormous amount of knowledge and experience Each year, startlllg soon after the
spring Trustees' meeting, the Trustees' staffs along with the Actuaries and the
Public Trustees examine ways to improve both the presentation and the substance
of the reports. This IS a top-to-bottom evaluation that ranges from potential
language changes in the reports to background studies of the economic and
demographic underpinnings of the projections Agreed-upon Improvements are
I'ecomillended to the Board at the fall meetlllg I am espeCially heartened at the
deep Involvement in this process of the Public Tlustees, the Actuaries, and their
respective staffs.
As a result of these annual reViews, several substantive additions have been made
to the reports in the past couple of years Among these additions are an appendix
to the Social Security report presenting stochastic simulations of trust fund
prOjections. an appendix to the Medicare report describing the relationship between
the trust funds and the federal budget (a detailed version can be found on
Treasury's webSite), and. In both reports, estimates of unfunded obligations over
the IIlfinite horizon. A large number of presentational improvements have also been
made. With some jusllfication, we could add the words "New and Improved" to the
litIe page of each annual report
SOCIAL SECURITY REFORM
Now. let me turn to my main topic, Social Security reform. As you are aware,
President Bush has made SOCial Security reform a major priority of his second
term Today I'll explalll why It is so Important that responSible Social Security reform
occur now, and why one element of a successful reform plan must be personal
retirement accounts that give Individuals more control over their finanCial futures.
The Size of Social Security's Financial Shortfall
How big is SOCial Security's current fundlllg gap? The most widely cited measure of
that gap is the 75-year actuarial imbalance, which is now estimated at $4.3 trillion or
1.92 percent of taxable payroll. This measure suggests that immediately raising the
payroll tax rate by 1.92 percentage POllltS. to 14.32 percent, would fix Social
Security. But as many of you are aware, that is not true. If the payroll tax rate was
raised in that manner, a large Trust Fund balance would be accumulated in the
short-term that would peak III about 2060, and would then commence a steady
declllle to complete exhaustion at the end of the 75-year prOjection period. This
type of reform would therefore not make the system permanently solvent. With each
passlllg year, the Trustees would report an ever larger financial imbalance as the
75-year scoring wllldow is moved forward to include years with ever larger gaps
between expected system costs and income.
As thiS example makes clear, estimates made over a 75 year horizon do not fully
capture the finanCial status of the Social Security program In fact, no finite forecast
period completely embodies the financial status of the program because people pay
taxes in advance of receiving benefits: at any finite cutoff date, people will have
accrued benefits that have not yet been paid. For example, the current 75 year
projections Include nearly all of the 2010 birth cohort's taxes but virtually none of
their benefits. In order to get a complete picture of Social Security's permanent
finanCial problem, the time horizon for calculating income and costs must be
extended to the indefinite future. Such a calculation is provided in the 2005
Trustees Report: it is estimated there that for the entire past and future of the
program, the present value of scheduled benefits exceeds the present value of
scheduled tax Income by $11.1 trillion. This is the financing gap that program
reforms must uilimately close. To put this In perspective, elimlllating the permanent
deficit could be accomplished With an Immediate and permanent 3.5 percentage
point Increase in the payroll tax rate (to 15.9 percent), or with a 22 percent
reduction In all current and future benefits. In both cases, there would be massive
near-term Trust Fund accumulations.
The Administration insists that reform make Social Security permanently solvent.
75-year solvency is not sufficient. The permanent solvency goal was recently
unanimously endorsed by the Senate in an amendment to the Senate Budget
Resolution. That amendment states that "the American people including seniors,
workers, women, mlllorities, and disabled persons should work together at the
earliest opportunity to enact legislation to achieve a solvent and permanently
sustainable Social Security system"
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Intergenerational Equity: Why Social Security Must be Reformed Now
It is clear that tile Social Security system IS not financially viable and must be fixed
How to close the permanent financing gap raises difficult questions over how the
net benefits of Social Security should be shared across generallons In this context,
It IS Important to recognize that the large unfunded obligations in the system are
primarily the consequence of the past system generosity to generations that are
now either dead or retired. Of COLJI"Se, those early generations are beyond reform's
reach, so the entitlement reforms needed to close the flnanclllg gap must fall
entirely on later generations.
Viewing Social SeCLJI"ity from the perspective of how it affects generations and
indiViduals explains why it IS imperative that Social SecLJI"ity be reformed now.
DelaYing reform only reduces the options for fairly distributing the benefits of Social
Security across generations Most people agree that It would not be fair to alter
Social SeCLJrlty's promises to retirees and near retirees The longer reform is
delayed, the fewer generations that are left to participate In a reforilled entitlement
system so as to close SOCIal Security's funding gap, and the more severe those
reforills will be.
To make this POlilt more concretely, consider a policy of closing Social Security's
permanent financing gap by immediately increasing the payroll tax rate by 3.5
percentage POints. If the tax Increase were instead delayed until 2041 when the
trust fund is depleted, the requisite tax Increase would be 6.3 percentage points
Clearly, I do not advocate any of these policies. My point is that there is no doubt
that fairness to future generations requires that aClion be taken now.
I would also point out that purely pay-as-you go financing of Social Security would
be grossly unfair to future generations For example, one way to make Social
Security solvent would be to leave benefits unChanged and to raise payroll taxes
year by year beginning when the Trust Fund is exhausted According to current
prOJections, tile payroll tax rate under that policy would steadily rise beginning in
2041 and reach 19 percent at the end of the 75-year prOjection period. No
reasonable person would view that as a fair poliCy. I conclude that any reform that
IS fair would at least partially pre-fund Social Security benefits.
Fixing the System
Fortunately, the current untenable situation of Social Security is fixable. President
Bush has said that "Social Security IS one of the greatest achievements of the
American government, and one of the deepest COlllmltments to the American
people." The President supports social security reform that increases the power of
the Individual, does not Increase the tax burden, and provides economic opportunity
for more Americans. The President has issued guiding principles for reforming
Social Security.
One very important principle is that the benefits of seniors at or near retirement
should be protected, and that payroll taxes should not be increased.
Another prinCiple is that personal retirement accounts (PRAs) should be made
available for younger workers to build a nest egg for retirement that they own and
control, and which they can pass on to their children and grandchildren.
Additionally, we must pursue the goal of a permanently sustainable system,
eschewing halfway measures that would necessitate further reforms in the future.
Personal Retirement Accounts
I would like to focus on the advantages of PRAs. PRAs provide individual control,
ownership, and offer indiViduals the opportunity to partake In the benefits of
Investing in private-sector markets. Individual control and ownership means that
people would be free to pass the value of accounts to their heirs (bequests).
Personal retirement accounts will be voluntary. At any time a worker can "opt In" by
making a one-time election to put a portion of hiS or her payroll taxes Into a
personal retirement account. A worker who chooses not to opt In will receive
traditional Social Security benefits, reformed so as to make the system permanently
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solvent.
Perhaps most Importantly, the retirement security of our current young and future
workel's depends on PRAs. PRAs allow individuals to save now to help fund their
retirement incomes. In principle, that could be done with reforms that save tax
revenues in the Social Security Trust Fund But such "saving" would almost
certainly be undone by political pressures to Increase government spending and
hence produce larger deficits outside of Social Security. The only way to truly save
for our retirement and give our children and grandchildren a fair deal IS with
personal accounts. Pel'sollal accounts serve as private and therefore effective "lock
boxes". When pre-funding is done using a personal account, there is no pressure to
Increase government spending, because thiS pl'e-funding belongs to individuals and
does not appear on the government balance sheet as budget surpluses.
MEDICARE
Some have questioned the policy focus on Social Security when the financial
shortfalls facing Medicare are so much larger than those facing Social Security.
One reason is Simply that much more analyllcal groundwork needs to be done and
experience gathered before we as a society can begin to coalesce around options
that completely address the unsustainable growth In Medicare and other health
care expenditures. The same is not true of Social Security. Ever since the release
of the 1994-96 Social Security AdVISory CounCil report, the research and policy
communities here in Washington and elsewhere have put a tremendous amount of
thought and effort into exhaustively identifying and analyzing the possibilities for
effective Social Security reform. Unlike with Medicare, we know our options very
well.
But I assure you that the Admillistration is aware of the important issues with
Medicare's fillances, and, as I'll point out, has already begun to lay the necessary
policy groundwork.
Medicare fillances are projected to get out of hand not only because of an aging
society, but more importantly because of rapidly increasing health care costs. High
health cost growth IS not a Medicare-specific problem, but an economy-wide
problem The same projections that show the Medicare program consuming 13.5
percent of GOP III 2079 also show health care consuming well over 40 percent of
GOP that same year. So, efforts to confront unsustainable trends In Medicare
expenditure growth must coincide With efforts to deal with unsustainable economywide health expenditure growth.
Indeed, the Administration has promoted incremental policies to make health care
chOices better Informed and more responsive to costs and benefits. Several such
poliCies were Included in the Medicare Modernization Act (MMAl· To promote
consumer cost-consciousness, the MMA introduced health savings accounts, or
HSAs, to the commercial health insurance market. The MMA also expanded the
role of private plans in Medicare, and increased price competition between those
plans.
Also, Medicare is Just now beginning to collect data on hospital quality. We expect
thiS data will lead to future reimbursement policies that reward not just utilization,
but good outcomes as well. In addition, the Administrallon is currently exploring
ways to encourage the adoption of health care information technology, which shows
the promise of redUCing errors and waste
CONCLUSION
To conclude, let me say that I am encouraged that Social Security reform is finally
being earnestly debated, and that all parties are motivated to make SOCial Security
fair and permanently solvent Today, my small contribution to this debate consists
of four major points
1. Social Security as currently designed cannot be sustained We know with
absolute certainty that Social Security Will ultimately be reformed. The only question
IS when and how.
2. Social Security reform is urgent The longer reform IS delayed, the more unfair
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JS-2335: Assistant Treasury Secretary Mark Warshawsky's <BR>Remarks to the Americ...
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reform willlJe to futule gelleratlolls, dilU tile IIiOle uifficult it will be for individuals to
plan their financial futures
3. Social Security reform must make Social Security permanently solvent. Half
measures ensure that further reforms will be necessary, and amount to a delay of
reform that would be unfair to future generations.
4. Making SOCial Security permanently solvent requires that retirement incomes be
pre-funded in PRAs rather than the SOCial Security Trust Fund Any attempt to prefund retirement incomes In the Trust Fund would be undone by excessive
government spending outside of SOCial Security
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JS2336: MEDIA ADVISORY<BR>Sccrc1ary Snow Visits Oregon, Montana and North D ... Page 1 of2
FROM THE OFFICE OF PUBLIC AFFAIRS
March 25, 2005
JS2336
MEDIA ADVISORY
Secretary Snow Visits Oregon, Montana and North Dakota Next Week
to Discuss Strengthening and Preserving Social Security
us Treasury Secretary John W Snow will travel to Portland, Oregon: Bozeman,
Montana; and Bismarck, North Dakota on March 28-31 to discuss the President's
efforts to str'engthen and preserve the US Social Security system
FollOWing the release of the Social Security and Medicare Trustees' reports on
March 23, Secretary Snow, the Managing Trustee of the Social Security and
Medicare Trust Funds, said, "The numbers published today leave no question that
Social Security reform is needed, and It is needed soon Reform of this system, for
the sake of our children, grandchildren and the financial future of our country, IS a
very real and pressrng matter,
"The President IS committed to saving Social Security and has laid out some basic
principles," he said, "He wants to preserve benefits for current and near-retirees
while savrng and strengthening the system for future generations. For future
generations of retirees, the President believes an awful lot of hope lies in personal
accounts - somethlllg that would allow younger workers to build a nest egg that
they own and control."
The follOWing events are open to credentialed media With photo identification
(credentials must be visible at all times)
Monday, March 28
Remarks and DiSCUSSion with FLiR System, Inc. Employees
FLiR Systems, Inc.
16505 SW 72nd Avenue
Portland, OR
2:00 p.m. PST
** Media must RSVP to Doug Badger, (503) 260-3235
** Media must arrive by 1 :15 p,m. PST
** A brief media availability will be held immediately following the event
Wednesday, March 30
Remarks to Local Community Leaders
Holiday Inn
5 E Baxter Lane
Bozeman, MT
9:00 a.m, MST
** Media must arrive by 8:30 a,m. MST
** A brief media availability will be held immediately following the event
Thursday, March 31
Breakfast Roundtable with Local Business Leaders
University of Mary
Harold Schafer Leadership Center Board Room
7500 University Drive
Bismarck, NO
7:30 a.m. CST
** Media must RSVP to Tom Ackerman, 701- 471-5698
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** Media must arrive by 7:00 a.m. CST
** A brief media availability will be held immediately following the event
Remarks to Government Class at Bismarck High School
Bismarck High School
800 North 8th Street
Bismarck. NO
10:30 a.m. CST
** Media must RSVP to Renae Walker, 701-258-2507
** Media must arrive by 10:00 a.m. CST
** A brief media availability will be held immediately following the event
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FROM THE OFFICE OF PUBLIC AFFAIRS
March 25, 2005
JS-2337
Prepared Remarks of Assistant Secretary Juan Zarate
Islamic Society of North America's Sixth
Annual Education Event
Assalamualalkum. Dear frrends, I am honored to be here today to continue our
engagement on Important terrorrst financing issues facing all of us, and to discuss
the critical role of the American Muslim and Arab communities in protecting and
promoting our collective interests in charitable giving.
Let me begin by thanking our hosts, the Islamic Society of North America and the
Muslim Public Affairs Council, for inviting me to be a part of this weekend's
gathering The Treasury Department and the U.S Government are committed to
strengthening our relationship with the Islamic and Arab American communities to
protect the interests that we all share as a free, tolerant and charitable society, and
I am grateful for this opportunity to be with you today.
As we gather today, I am pleased to recognize many familiar faces. Such familiarity
bears testimony to our sustained efforts and shared commitment to work together in
protecting and promoting charitable giving, not just over the course of a weekend
conference, but rather, on an ongoing basis to achieve meaningful and significant
progress. The importance of our dialogue and cooperation in our collective mission
cannot be overstated. In this sense, continuity is a welcome sign, and I view our
gatherrng today as an opportunistic pOint along a progressive continuum of
engagement to advance our efforts.
The Muslim and Arab American communities are essential elements of our great
country's eclectic fabric. As all Americans unite in the fight against terrorism and
terrorrst financing, constructive engagement between your community and the U.S.
Government IS a vital aspect of the overall strategy to overcome those aiming to
destroy the liberties we enJoy every day as Americans.
Over the last several years, the US. Treasury has established an important
relationship and dialogue with the Muslim and Arab American communities as we
work together to deal with the corrosive effects and threat of terrorist financing to
the United States and the Muslim and Arab worlds. ThiS relationship is acutely
necessary as we work to protect and preserve the sanctity of charitable giving and
Zakat from terrorrst groups like al Qalda, which have purposely usurped the
goodwill and donations of Muslims around the world to fuel their terrorist agenda. It
IS also critical to advancing our collective mission of promoting charitable relief and
development around the world to those most in need of our assistance.
The American Muslim and Arab communities are uniquely situated to advance
these interests. You all have the powers of the purse and persuasion to affect
global practices and perceptions that are essential to protecting and promoting
charrtable giVing and winning the long-term battle against terrorism.
Today's gathering is especially important, as diverse representatives from the
American Muslim leadership join forces and minds to create a National Council of
American Muslim Non-Profits. Your decision to establish the Council as a forum for
developing and Implementing best practices to ensure the effective and safe
delivery of charitable funds and services creates tremendous opportunity opportunity to effect positive and meaningful change at a time of great importance
in the development of the IslamiC and Arab worlds.
This development comes at an important crossroads - where the need to protect
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and promote charity around the world faces the challenge of terrorist abuse and
corruption. We must combat this abuse and advance our charitable mission by
working independently, and by working together. The development of a National
Council for American Muslim Non-Profits represents a significant step forward in
dealing with these challenges and In provldlllg your community With a vehicle for
promoting change. I am pal-ticularly excited about the opportunities that the Council
will have to advance the interests we share.
Let me talk for a moment about how we view charity and the Importance we ascribe
to it Charitable giVing is a proud alld vlblant component of virtually every
community In America, regardless of religion, culture or background. This is
especially true in the case of Islam, where Zakat - or charity - IS a pillar of the faith.
Charitable givlllg and the benevolent work of non-profits within the American
Muslim community are dignified characteristics of your faith We appreciate and
respect the importance Z in the Muslim community, Just as we encourage the
charitable nature of all Americans.
The US Govemment is also devoted to altrUistiC works. PreSident Bush, at the
begillning of this month, announced that we had awarded $2 billion in grants in
2004 to SOCial programs operated by churches, mosques and synagogues The
President also announced in the State of the Union that he would ask Congress for
$350 million for the Palestinians to support - both immediately and in the long-term political, economic and security reforms. Additionally, since 1993 the Palestinian
people have received more than $1.5 billion III US economic assistance via USAID
projects - more than from any other donor country. These commitments reflect the
generous and philanthropic culture that defilles America.
We need look no further than the recent tsunami disaster in South Asia for evidence
of the importance of charitable glvlllg - as both a humane response to disaster and
as a compassionate face of our foreign policy. During the tsunami aftermath, the
benevolence of all Americans took center stage, as private donations linked with
US. Government resources from the aid community and military were delivered to
thousands in desperate need. Importantly, the tsunami also highlighted the need to
enhance our capabilities to rapidly transmit money and other assistance to those in
desperate need.
Often, however, money is most needed III places where we encounter high levels of
risk that charitable relief may be diverted from intended recipients and end up into
the hands of terrorists or other criminals. We must recognize the Importance of
ensuring that humanitarian aid and other charitable giving originates from and is
delivered through legitimate channels and to valid recipients. This is not easy, yet
remains an essential part of our work
In the dangerous environment we face in parts of the world that have the greatest
need, we must make every effort to protect our charitable interests so donors can
be assured that their well intentioned contributions are delivered safely and
effectively to legitimate benefiCiaries and recIpients. Simply put, we must protect
charitable giving In order to promote the continued support of our charitable
communities to those who need it most.
The unfortunate reality of the post-9/11 world is that al-Oaida, Hamas and likeminded terrorist groups have abused non-profits to support their terrorist agendas,
often misappropriatlllg religion to Justify their actions. Terrorists establish charitable
fronts and seek out corrupt or vulnerable charities to raise and move money, to
transport operatives and material, to recruit and indoctrinate new members, and to
support family members of operatives or deceased SUicide bombers.
To my great frustration, there are some that hold onto the erroneous belief that the
threat of terrorist financing through non-profits IS not very real and not terribly
dangerous. Such thinking Ignores the critical role that corrupted charities have
played in supporting the terrorist operations of groups like al Oalda.
AI Oalda has historically employed a deliberate strategy of IIlfiltratlllg eXisting
charities and establishing charitable fronts to expand its presence and to raise and
move funds, in addition to operatives and material, III support of terrorist operations.
As reported by the National Commission on the Terrorist Attacks upon the United
States, "charities [for al Oaida] were a source of money and also provided
significant cover, which enabled operatives to travel undetected under the gUise of
working for a humanitarian organization"
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Unfortunately. this strategy of abusing charity to support terrorist activity has proven
to be effective for organlzatlolls like al Oaida AI Oalda's success In executing the
bombings of U.S. embaSSies In Nairobi and Dar es Salaam In 1998 relied in part on
the terronst organization's ability to infiltrate and establish chanties to support
development of the terronst cells that eventually executed these attacks. AI Oaida
has also used charitable networks to finance terrorist organizations, such as those
operating in the Philippines and Southeast Asia These examples underscore the
Importance that groups like al Oaida place upon the charitable sector as a critical
means of supporting direct terronst activity and other terrorist groups
Other terrorist groups, such as Hamas and Hlzballah, hold fundralslng events and
operate chantable olganlzatlons that prOVide relief to those In need, but for a
telrollst ransom that IS unacceptable Chantable operations by terronst groups such
as Hamas and Hlzballah manipulate vulnerable populations in a destructive pattern
of terrorist support. A key example of this is the policy of such terrorist groups to
reward the surviVing family members of terrorist suicide bombers. Such a deliberate
strategy of terrorist manipulation creates a vicious cycle that encourages more
violence, death, and hatred. It also threatens the integrity of charitable giving, and
often misappropriates religion as a Justification for such atrocities.
A family starving for resources does not have to sacrifice a son or daughter to
receive economic assistance. More importantly, economic need can never justify
the deliberate and targeted killing of innocent civilians. And perhaps most
Importantly, terronsm can never be defended In the name of any religion, be it
Islam, Catholicism, Judaism, or any other faith In this sense, terronst organizations
that defend their actions under the proclaimed banner of religion perpetrate a
double injustice of murder and a perverse corrosion of religious values common to
all faiths that value the sanctity of human life.
Recently, this fundamental pOint was underscored by the Crown Prince of Saudi
Arabia in his Inaugural address at a counter terrorism conference hosted earlier this
year in Riyadh The Crown Pnnce declared that Islam is the religion of wisdom,
adding that false slogans raised by deviant groups run counter to the teachings of
Islam. Allow me to quote Crown Prince Abdullah when he stated, "Mohammed, the
Prophet of Islam (Peace be upon him) IS the prophet of mercy, and Islam is the
religion of mercy, and It is impossible to link Islam With terronsm'"
As we work together to overcome the deliberate terrorist infiltration and
manipulation of charity, we must remember these words of wisdom. Our war
against terronsm and our efforts to combat terrorist abuse of charity must never be
confused as a war against Islam. AI Oaida, Hamas, Hizballah and other such
terronst groups do not represent or speak for Islam, Just as the Irish Republican
Army does not represent or speak for Catholicism, and just as Kahane Chai and
KACH do not represent or speak for Judaism. In our nghteous practice of our great
faiths, let us never confuse the true nature of our religions with the perversion of
those terronst groups that attempt to usurp our great faiths.
To defeat the continued abuse of chanty by these terrorist groups, we must first and
foremost recognize the ongoing threat these groups present to our way of life and
to our noble chantable intentions. The corruption of terrorist organizations falsely
acting in the name religion IS particularly acute when terronsm is supported by
funds intended for chanty. We can and we must take steps to combat this abuse.
Since President Bush Signed Executive Order 13224, the US Government has
identified, deSignated and ordered the freezing of assets of 398 individuals and
entities - 40 of which are charities that support terrorist activity and organizations
Although some react critically to the use of deSignations, I want to make clear that
the deSignation process entails exhaustive research and labor to ensure it is fair
and Informed by factual eVidence - and all challenges to date in federal court have
failed There is no doubt that the designations we have issued against chanties
established or corrupted by terrorist organizations are a necessary tool In our
campaign to combat terronst financing and protect the charitable sector from
continued abuse.
Designations not only freeze the assets of corrupt individuals and organizations that
financially support terrorism but they also serve to inform innocent donors of
abusive organizations that divert well-intentioned funds to terrorist groups. In
addition, designations sound an alarm Within both the chantable and finanCial
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communities, informing them of the dangerous environment created by terrorist
abuse of charity, thereby encouraging greater diligence to ensure the transparency
and accountability of charitable funds and services. Finally, designations deter
would-be terrorist supporters from financing or otherwise supporting terrorist activity
or groups by signaling that such beilavlor will not be tolerated
I fully recognize and understand tilat Illany charities corrupted or abused by terronst
organizations have solicited funds frolll well-Intentioned donors. Most, if not all, of
the chanties that we have designated on account of their support for terrorism also
administered some form of ci1alltable relief Tile administration of chanty, however,
can never excuse tile Simultaneous diversion of funds to support terrorism.
It is painful to realize that funds and sel'vices donated with the intention of providing
legitimate chantable I'elief do not reach intended and needy beneficiaries. In thiS
sense, I can understand the frustration of legitimate employees and donors who
provide valuable time and ilard-earned funds for charity, only to have those funds
frozen in the possession of an organization designated on account of ItS support for
terronsm. But that frustration must be directed at those who have corrupted the very
chanties that have - through either willfulness or Willful blindness - been used to
support terrorism.
Another way to understand the value of designations is to compare the frustration of
having well-intentioned donor funds frozen pursuant to the designation of a
corrupted or abused Chanty, with the horror of having well-intentioned donor funds
finance terrorism Given this choice, I have confidence that every single one of us
here today would prefer the understandable frustration at having his or her funds
frozen to the incomprehensible horror of financing a terrorist agenda with funds
Intended to help those in need. This is the choice that we in the Government make
when we designate charities corrupted or abused by terrorist groups. And it is a
choice that we will continue to make in order to save the lives of those victimized by
terrorist activity and the ongoing violence that terrorism breeds.
If you are a person who IS frustrated by the designations that we have issued
against chanties corrupted by terronst organizations, I ask you to carefully consider
my words today. I ask you to recognize the fact that freezing funds intended for
legitimate chanty but destined for terronst support is a better outcome than allowing
even a percentage of those funds to finance terrorist activity. I ask you to reevaluate any frustration that you may have with our deSignations against the
unacceptable alternative of turning a blind eye towards terrorist financing,
regardless of whether such terrorist support is coupled with legitimate relief efforts.
ask you to check your skepticism With public information sllch as the evidence that
has come to light In the conviction of the CEO of Benevolence International
Foundation and In the indictments of those who have defrauded your community.
Most Importantly, I ask YOll to understand that by working together, we can help
prevent the need for sllch actions. By raiSing the Vigilance of the donor and
charitable community, we can take steps to prevent terrorists from preymg on
donors and charities In the first place. ThiS IS the key to eradicating terrorist
financing from the charitable sector, and this must be the focus of our energy and
efforts.
This is why the National Council is an important development on your part. Through
this body, you can empower the American Muslim and Arab communities to
establish and implement a global standard of accountability and effectiveness in
charitable giving You can also lead a national demonstration of American concern
and support for improving the condition of the Muslim and Arab worlds. You can
prove to the world that the Amencan Muslim and Arab commitment to charity is
stronger than the attempts of terrorist organizations to corrupt II. And you can
demonstrate the true beauty and power of your faith through the noble pillar of
Zakal. These opportunities are Within your grasp, and Will greatly benefit the efforts
and interests of Americans, Muslims, Arabs and people everywhere to promote
global charity, peace and security.
In order to be as effective as possible, it IS Important to acknowledge and
encourage the ability of the National Council of American Muslim Non-Profits to
expand its reach beyond charities. In addition to promoting the development and
implementation of safeguards against abuse In Islamic and Arab American
charities, the Council can also take steps to protect Islamic schools, mosques and
other non-profit ventures from infiltration and abuse by terrorist groups and
ideologies.
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Realizing such an ambitious vIsion will requll'e the active participation, cooperation
and dedication of the entire Islamic and Arab American community. The Council
must be driven by you, the Islamic and Arab American people. to be truly effective,
and the US Government must pledge ItS support
This is WilY we will cOlltinue to wOI'k with you and the cllarltable community on
refllllllg our best praclices for cilclrltles. We will also continue to make as much
information known to the public as we can about the abuse of cllarltles. We will
further wOI'k collaboratively to deterrnille how best to get aid safely into crisis
regions
The US Government will cOlltlllue to promote development and charity in regions
of the world In need of tile hope and aid of America. Americans and the U S
Government have always been generous. giving billions of dollars of charity each
year. ThiS aid IS often dll'ected to the Arab and Muslim worlds. Notably. we have
demollstrated our strong and true commltmellt of proViding aid to Muslims by
allocatlllg $7 billion Ifl USAID money to Muslim nations.
The Muslim American community IS an essential fabric III the patchwork of America
alld a vital vOice as we confront the cacophony of hatred ill certain extremist
corners of the world. All Amencans must unite to the fight against terrorism and the
extremism that fuels it The dialogue and work between the American Muslim and
Arab communities and the US Government are Important elements of thiS
collective effort to overcome those aimlllg to corrupt our charitable values and
destroy the liberties we enJoy every day as Americans.
I look forward to contlnuillg our work together. and am proud of the progress we are
achieving. Let us not rest, but rather seize the opportunities presented by the
announcement and prospective development of the National Council of American
Muslim Non-Profits. I thank you for Inviting me to be an active part of this critical
dialogue. I espeCially thank you for your partiCipation, concern. understanding and
leadership in moving thiS dialogue forward.
-30-
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FROM THE OFFICE OF PUBLIC AFFAIRS
March 28, 2005
JS-2338
Statement by Treasury Secretary John W. Snow
On Brazil's Announcement concerning the International Monetary Fund
I was pleased to hear the announcement by my counterpart in Brazil, Finance
Minister Antonio Paloccl, that Brazil has deCided It does not need a new IMF
program This deCision reflects the strength of Brazil's economy and of Its economic
policies. It is terrific news, a hallmark of financial accomplishment for the country,
and great credit goes to President Lula for this success. I want to congratulate
President Lula and Finance Minister Palocci on their stewardship of the Brazilian
economy which has made this milestone possible.
Under President Lula's leadership, Brazil's good macroeconomic policies have
brought down inflalion, reduced the country's debt, and provided the foundation for
solid economic growth in the wake of the 2002 finanCial criSIS. Last year, Brazil's
GDP growth was 5.2%-the fastest growth rate in ten years-while its debt-to-GDP
ratio registered the first decline since 2000 and Inflation fell to 7.6 percent, within
the central bank's target band. Brazil has harnessed the opportunities of trade and
strong global growth to increase exports by 32% last year.
I am impressed by the agenda that the Lula Administration has laid out for further
reducing vulnerabilities and sustaining robust growth. Building on his achievements
in reforming the bankruptcy code and JudiCial sector, the Lula Administration is
pursuing mlcroeconomic reforms aimed at streamlining business regulation,
SimplifYing the tax code, and promoting infrastructure development.
Today's good news shows the results that can be aChieved when good policies are
implemented and adhered to. I'm delighted for our Brazilian friends and look
forward to continuing our work together in forums such as the U.S.-Brazil Group for
Growth to identify policies for Increasing prosperity in both of our countries.
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JS-2~i3l): Statement o/Treasury Secretary John W. Sno\\,' br>On the Departure ofTreasu...
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FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Ado/Je(P.) Acro/Jat® Reader®.
March 28. 2005
JS-2339
Statement of Treasury Secretary John W. Snow
On the Departure of Treasury Assistant Secretary John Duncan
Today the Treasury Department says farewell and offers best wishes to one of the
most dedicated. skilled public servants I've had the honor to work with John
Duncan. Treasury's ASSistant Secretary for Legislative Affairs. IS leavlllg our team
after four years of exemplary service
Sillce Joining the Bush Administration In 2001, Treasury's legislative calendar has
been full. and John Duncan was involved in numerous legislative successes, each
and every year of hiS tenure.
In 2001. he helped pass the President's landmark tax cuts and ensured that the
Patriot Act would expand Treasury's authorities to freeze terrorist assets.
In 2002, John was part of a team to successfully structure and pass Department of
Homeland Security transfer legislation He also shepherded the Terrorism Risk
Insurance bill. WhlCll proVided a stable and guaranteed IIlsurance market for United
States Industries labOring under the threat of terrorist attack.
In 2003. John was once agalll part of a successful effort to reduce taxes. Since the
enactment of that bill, the American economy has expanded and grown at a terrific,
steady rate, creatlllg over three million new Jobs since May of 2003. In 2004, John
helped persuade Congress to extend those beneficial tax cuts.
The year 2003 also saw the creation of Treasury's Office of Terrorism and FinanCial
Intelligence (TFI) - a new weapon agaillst terror - as well as the passage and
signlllg of the Fair and Accurate Credit Transactions Act (FACT Act).
Beyond the specific legislative victories - and there were plenty of them - we will all
look back on John's contributions as, more broadly, four-plus years of sound,
mature adVice for Treasury officials on everything from testifying before Congress,
to negotlatlllg With Members and staff, to silently securing four years of domestic
and IIlternatlonal appropriations to pay Treasury's bills and salaries.
All thiS was done Without fanfare. and With tremendous grace HIS counsel was
sought and valued on matters far beyond the Congress because he always offered
an IIltelilgent, fair perspective as well as fresh Ideas that never failed to renew our
passion for the policy battle of the day.
On behalf of the Treasury team, we wish John very well In his future endeavors; we
know how fortunate we were to work by hiS Side, and he will be deeply missed.
REPORTS
•
J. Duncan's Letter of Resignation
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4/26/2005
Monday, March 28, 2005
The President
The White House
Washington, DC 20500
Dear Mr. President:
The purpose of this letter is to announce my decision to resign effective at the end of this
month as Assistant Secretary of the Treasury.
It has been a special honor to have held this post for the last four years. I greatly
appreciate the confidence you have shown in me and am very pleased to have been part
of an administration that has so squarely addressed the pressing issues of our time.
The last four years have passed quickly. As I reflect back on them I am impressed by the
breadth of issues and the number of accomplishments. Among those accomplishments
are tax cuts that kept the economy from recession and took it on to healthy growth
following He attacks of 9111; accounting reforms that improved the integrity of financial
data for investors following the collapse of Enron; new tools to fight the growing
problem of identity theft; improvements in World Bank operations to reduce poverty; and
new enforcement powers to dry up the money that funds terrorism. Your current agenda
to reform Government Sponsored Enterprises, make personal accounts part of the Social
Security program, reform the tax code and make pension promises reliable are well
launched and I expect will become a reality.
Success in Washington is the work of many. I appreciate the support I have received
from the White House Office of Legislative Affairs in advancing initiatives on Capitol
Hill, from the Presidential Personnel Office in recruiting so many talented and capable
colleagues, and Treasury appointees and career employees who made working in the
Department such a pleasure.
Sincerely,
John Duncan
js-2340: Secretary John W. Snow Prepared Remarks: '-,[J R Systems Portland, OR
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FROM THE OFFICE OF PUBLIC AFFAIRS
March 28. 2005
IS-2340
Secretary John W. Snow Prepared Remarks: FLiR Systems Portland, OR
Thank you so much for having me hele; it's great to be In Portland. and I'm
delighted to be able to VISit FLiR Systems I want to thank FLiR Senior Vice
President Jim Fitzhenry In particular for making thiS viSit so enjoyable.
It has been a priVilege to learn more about Infrared imaging technology from the
men and women who make the systems Your work helps keep the men and
women in our armed forces. federal law enforcement and Secret Service safer. and
I certainly appreciate the work you do.
I also appreciate the chance to talk With you today about strengthening the nation's
Social Security system The President's leadership on this issue is providing our
country With a tremendous opportunity to save Social Security for current and near
retirees and Improve It for younger generations Conversations like thiS are an
important part of reaching decisions as to what, exactly. should be done.
Since March 3rd. Administration offiCials - from President Bush and Vice President
Cheney to Cabinet members like me and poliCy experts - have been traveling
throughout the country as part of a coordinated 50-day tour of at least 50 stops to
discuss the President's message of strengthening Social Security with the
American people.
I was in Pennsylvania last Thursday. meeting with business leaders to discuss
SOCIal Security and that Visit marked the 50 stop mark. after less than 30 days on
the road. So we know that the final number of stops will be much higher than
anticipated
Right before that triP to Pennsylvania. we were reminded of the serious nature of
the Social Security problem yesterday. back In WaShington. DC. when the Social
Security and Medicare Trustees - for whom I serve as Board Chairman - issued
our annual report on the financial health if the programs' trust funds. The numbers
contained In the Social Security report leave little doubt that the system is financially
unsustainable, and in need of expeditious and lasting change.
The Trustees' report showed that Social Security cash flows peak in 2008 and turn
negative in 2017. and the trust fund Itself will be exhausted in 2041 The unfunded
obligation, that is. the difference between the present values of Social Security
inflows (plus the trust fund) and outflows. IS $11 1 trillion on a permanent basIs, and
$40 trillion over the next 75 years.
Now, the President doesn't believe that we should make up that shortfall with tax
increases. The report showed just how much we would have to raise taxes to
achieve long-term balance the payroll tax rate would have to be raised immediately
by 3.5 percentage points to make the system whole on a permanent basis. In other
words, the payroll tax would have to be Increased by nearly 30 percent
That kind of tax increase would have Significant, negative economic repercussions.
Every worker - everyone of you in thiS room today - would start taking home less
pay. and that's bad for you. It'S bad for your families. and it's bad for countless
facets of our economy.
FLiR systems would bear a Significant cost. as well. Employers would shoulder half
of the payroll tax Increase because they pay that tax on all of their employees.
http://www.treas.gov/prc33!relea6(~s/js2340.htm
4/26/2005
js-2340: Secretary John W. Snow Preparcd Rcmarks: I,'UR Systems Portland, OR
Page 2 of 3
For very small employers, I tear that much of a tax increase would force them to
make terrible choices, from lay-offs to health benefit cuts. And It would make hiring
new people even more difficult. which IS worrisome since small business creates
most of our nation's new Jobs
Increasing payroll taxes hurts the economy and II hurts Job creation, period That's
why the President IS against It.
It is also worth noting that payroll tax increases have been the standard "solution" to
Social Security's problems, and they have never solved the problem I Payroll taxes
have been raised some 20 times since Social Security was established - and it has
failed to make the system solvent.
Tax Increases aren't the answer, so the President has encouraged the Congress to
propose a variety of Ideas that might be, and he has put a number of ideas on the
table as well
When the President took tillS issue to the country In his State of the Union Address,
he said his objective was to engender a broad national dialogue to get people
talking about this Issue. He wanted Americans to talk about Social Security, and a
national corwersatlon has begun as a direct result.
Today, people are talking about the issue from the halls of Congress to the halls of
local shopping malls l The President's leadership has drawn critical attention to the
problem and is creating movement. Progress. real progress, is being made.
Over lunch counters, over breakfast and dinner tables allover America .. the tOPIC
is SOCial Security reform. It's the front page story in virtually every newspaper. It's
on the evening news. And it's there because of the President of the United States.
It's there because of the courage that he's had to directly confront and deal with
what so many in political life call the "third raiL"
The American people respect leaders who call a spade a spade. The President
touched the "third rail" Without fear, and now we're moving forward. Neighbors and
co-workers are talking about it; families are talking about it; Congress is talking
about It.
We've seen a clear shift in the course of the last month or so from the question: "Is
there a problem?" to the question: "How do we fix iP"
I Imagine that you are talking about it with your spouse and family members, your
colleagues and neighbors. Those conversations are critical, and I hope our meeting
here today can help make them even more lively, more productive
I know that you understand that if you are 55 or older your Social Security benefits
are solid. They wrll not change. You know that you don't need to change your
retirement plan or strategy because of SOCial Security reform, period.
But now I'll ask how many of you have children or grandchildren? It's those children
and grandchildren, those young workers and future workers, who we need to be
worried about. They are the ones for whom we need to fix this system
The issue of Social Security is really a matter of basic arithmetic. and the threat to
Social Security In the near future makes more sense when you look at the Simple
arithmetic. SOCial Security has enough money now because for decades we have
had more than enough workers paying into the system, supporting the retirees
drawing benefits.
In 1950, there were 16 workers to support every beneficiary of Social Security - a
very comfortable ratio of those paying in versus those drawing benefits. Today
there are only 3.3 workers supporting every beneficiary. By the time today's
youngest workers - many of you have children In that age group - turn 65, there
will only be two workers supporting each retiree.
Just three years from now, in 2008, the first baby boomers will begin to retire.
According to the new Trustees' report, the government will begin to payout Illore in
http://www.lI eas.gov/pres5/rel~a~es/js2340.htll1
4/26/2005
js-2340: Secretary John W. Snow Prepared Remarks: FUR Systems Portland, OR
Page 3 of 3
Social Security benefits thelrl It collects In payroll taxes in 2017 - that's Just 12 years
from now. By 2041, when younger wor-kel's begin to retire, the system will be
bankrupt.
We must make Social SecLJI'ity bettel' for those younger workers
Raising their payroll taxes won't make It better. What the President would like to
see, Instead, for future generations IS an ability to save some of their payroll taxes,
to bUild a nest egg that belongs to them, not to the government Something they
could pass on to their heirs. A nest egg that would draw on the powerful force of
compound interest to give workers the prospect of a retirement that is far better
than the rapidly-weakening promise of SOCial Securrty benefits.
With voluntary personal accounts, younger workers would have the chance to learn
about their finanCial chOices, build a nest egg and benefit from sound long-term
IIwestment III the f,'ee market system without disrupting the system of benefits for
today's retired benef'ciarres.
For IIle life of me, I can't Imagine why anybody would argue against young workers
haVing the ability to invest and build a better retirement for their future. It costs the
Social Security system nollling to do so, it will cost current and near-retirees
nothing, It gives our children and grandchildren a better retirement, and It helps our
country create a larger pool of savings. And as the president has said the
retirement security of our young people is too important for partisan politics. Why
wouldn't we do this? I have not heard one good reason not to and it's hard to figure
out why anybody would oppose it
Additionally, as former Democratic Congressmen Tim Penny and Charlie Stenholm
wrote In an op-ed recently, "opposing personal accounts IS not a substitute for
offering a POSitive solution for dealing With the challenges that face SOCial Security."
They went on to say, astutely, that they "believe that if Social Security were being
created from scratch today, Amerrcans would want to include a way to help
everyone build up a nest egg" The President and I couldn't agree more.
Social Securrty reform that doesn't raise payroll tax rates, ttlat protects benefits for
today's seniors, and that Improves the system dramatically for our children and
grandChildren can be achieved.
We are part of an exciting moment In Amerrcan history, where a PreSident's
courageous leadership has Inspired a national discussion and, I'm confident, will
lead to historiC results. I encourage you to be Involved, whether it's talking about the
issue With your colleagues, With your children, or writing a letter to your Members of
Congress.
If we act now, we can make sure that Social Securrty, and our economy, are on
sound finanCial footing for our children and grandChildren.
Thanks so much, again, for having me here today.
-30-
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4/26/2005
FROM THE OFFICE OF PUBLIC AFFAIRS
March 29, 2005
2005-3-29-15-13-59-16007
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated In this table, US. reserve assets
totaled $79,029 million as of the end of that week. compared to $80,349 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves
1
a. Securities
Of which. issuer headquartered
It]
March 18, 2005
March 25, 2005
80,349
79,029
Euro
Yen
TOTAL
Euro
Yen
TOTAL
12.203
15,024
27.227
11.875
14,795
26.670
the US
0
0
b. Total deposits with:
b.i. Other central banks and BIS
11,983
3,020
15.003
11.667
2.974
14,641
b.ii. Banks headquartered in the US
0
0
b.ii. Of which. banks located abroad
0
0
b.iii. Banks headquartered outside the US.
0
0
b.iii. Of which. banks located in the US
0
0
15.345
15,117
11.733
11.559
11.042
11,042
0
0
2. IMF Reserve Position "
3. Special Drawing Rights (SDRs)
4. Gold Stock
;>
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
March 18, 2005
Euro
1. Foreign currency loans and securities
Yen
March 25, 2005
TOTAL
Euro
0
Yen
TOTAL
o
2. Aggregate short and long positions In forwards and futures in foreign currencies vis-a-vis the US dollar
2.a. Short positions
0
o
2.b. Long postiions
o
3. Other
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
March 18, 2005
Euro
Yen
March 25, 2005
TOTAL
Euro
Yen
TOTAL
o
o
2 Foreign currency securities with embedded options
o
o
3. Undrawn, unconditional credit lines
o
o
o
o
1. Contingent liabilities In foreign currency
1.a. Collateral guarantees on debt due wlthlll 1 year
1.b. Other contingent liabilities
Ja. With other central banks
Jb. With banks and other financial institutions
Headquartered in the US
Jc. With banks and other financla/lllstltutions
Headquartered outside the US.
4. Aggregate short and long positions of options in
foreign
Currencies Vis-a-VIS the U S dollar
4.a. Short positIOns
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positIOns
4.b.1 Bought calls
4.b.2. Wntten puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA). valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2IThe items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the offiCial SDR/dollar exchange rate for the reporting date. The entnes for the latest week reflect any
necessary adjustments, including revaluation, by the U.S Treasury to IMF data for the pnor month end.
31 Gold stock IS valued monthly at $42.2222 per fine troy ounce.
js-2342: Prepared Statement by World Bank President NOl11inee<br> Paul Wolfowitz in B ... Page I of2
FROM THE OFFICE OF PUBLIC AFFAIRS
March 30, 2005
Js-2342
Prepared Statement by World Bank President Nominee
Paul Wolfowitz in Brussels
I have Just had the opportunity to exchange views with some articulate and wellInformed European leadel'S who are strongly conllllitted to the Important work of the
World Bank.
We have had a constructive and encouraging talk about our shared goals of poverty
reduction and IIlternatlonal development I appreciate the invitation to this meetlllg
and I'm grateful to those who participated In today's helpful dialogue.
On a personal note, let me Just add that if approved by the World Bank Board as
President, I look forward to being an international civil servant with the responsibility
for heading the world's leadlllg Institution of economic development, an institution
whose aim is reducing poverty and developing opportunities for all the people of the
world to aChieve their full potential
People who don't know me may not appreciate why I am eager to take on this
challenge, so let me explalll I believe deeply in the mission of the World Bank.
Helping people to 11ft themselves out of poverty IS a noble mission. Nothing is more
gratifying than belllg able to help people in need, as I experienced once again when
I witnessed the tsunami relief operations in Indonesia and Sri Lanka. It is also a
critical part of making the world a better place for all of us. It is not just the material
side of life that improves; peace and freedom are also advanced when more people
can enJoy the benefits of prosperity and human dignity.
I have experienced tillS closely and personally. for example, as Ambassador to
Indonesia where economiC development was the most important issue on the
agenda. I saw first-hand what the World Bank could accomplish, working in support
of dedicated development profeSSionals In the Indonesian government and from
many donor countries.
I also saw first-hand the obstacles that corruption and weak institutions present to
efforts at development and poverty reduction. That is one of many reasons why I
applaud the legacy that Jim Wolfensohn will be leavlllg at the World Bank. He has
deepened the Bank's commitment to poverty reduction. Among his many lastlllg
contributions, Jim Wolfensohn has brought an Important focus on issues of
transparency, accountability and governance as critical elements of the economic
development agenda, and of human progress more broadly.
If approved, I look forward to worklllg With the extraordinary group of professionals
at the World Bank. It IS excltlllg to contemplate working With such diverse talents
drawn from across Europe and around the world. I look forward to continuing and
strengthening their important work for the less fortunate of the world and for
economic development across the globe.
I also look forward to hearing the views of the many constituencies of the World
Bank, borrowers and donors, governments and NGOs, as we shape a common
Vision of how to contlllue the noble work of thiS important IIlstitutlon I plan to
continue listening and consultlllg with those who have served the world's poor with
Skill, devotion and compassion like the officials I met with today.
In closing, let me again thank my hosts from the European community for making
thiS meeting pOSSible This has been a very short VISIt, but I look forward to many
more visits to Europe and to the opportunity to enJoy Brussels and the hospitality of
http://wwv.·.lleas.gov/prc33/releatie5/j52342.htm
4/26/2005
js-23-l2: Prepared Statement by World Bank President NOlllinee<br> Paul Wolfowitz in B ... Page 2 of2
this historic city.
http://wv·w.treas.gov/jJIess/rckfi:~s/j52342.htm
4/26/2005
js-2343: Remarks by the Honorable Rob Nichols Assistant Secretary of the Treasury for P... Page 1 of 2
FROM THE OFFICE OF PUBLIC AFFAIRS
March 30, 2005
IS-2343
Remarks by the Honorable Rob Nichols Assistant Secretary of the Treasury
for Public Affairs At a Town Hall meeting with Congressman Dave Reichert
Bellevue, Washington March 29, 2005
It's great to be home in the Pacific Northwest. Thank you Congressman Reichert for
InVltlllg me here today and for your leadership In Congress
I very much appreciate the chance to talk with you about strengthening the nation's
Social Security system. Workshops like thiS are an important part of the national
dialogue.
Last Wednesday, the Social Security and Medicare Trustees issued their annual
reports on the financial health of the programs' trust funds. The numbers contallled
in the Social Security report left little doubt that the system is financially
unsustainable, and In need of repair
The Trustees' report showed that Social Security cash flows peak In 2008 and turn
negative In 2017, and the trust fund itself will be exhausted In 2041. The unfunded
obligation, that IS, the difference between the present values of Social Security
Inflows (plus the trust fund) and outflows, IS $11.1 trillion on a permanent baSIS, and
$4.0 trillion over the next 75 years.
Now, the President doesn't believe that we should make up that shortfall With tax
Increases The report showed just how much we would have to raise taxes to
achieve long-term balance: the payroll tax rate would have to be raised immediately
by 3.5 percentage points to make the system whole on a permanent basis. In other
words, the payroll tax would have to be increased by nearly 30 percent.
That kind of tax increase would have significant, negative economic repercussions.
Americans would start taking horne less pay, and that's bad for countless facets of
our economy. Small employers would be hit especially hard since they pay payroll
taxes on each of their employees. A big tax increase could force them to make
terrible choices, from lay-offs to health benefit cuts. And it would make hiring new
people even more difficult. That's troublesome since most new jobs are created by
small firms.
It is also worth noting that payroll tax increases have been the standard "solution" to
Social Security's problems, and they have never solved the problem. Payroll taxes
have been raised some 20 times since Social Security was established - and it has
failed to make the system solvent.
When the President took this issue to the country in his State of the Union Address,
he said hiS objective was to engender a broad national dialogue to get people
talking about thiS Issue. He wanted Americans to talk about Social Security, and a
national conversation has begun as a direct result. ThiS workshop today is a
perfect example of the sort of nonpartisan dialogue the President envisioned.
We've seen a clear shift In the course of the last month or so from the question: "Is
there a problem?" to the question "How do we fix it?"
Let me point out the key elements of the President's architecture for reform.
If you are 55 or older your Social Security benefits are solid. They Will not change.
You know that you don't need to change your retirement plan or strategy because
http://www.trca3.gov/pre6F>/r~le<lses/js2343.htm
4/26/2005
js-23.f3: Remarks by the Honorable Rob Nichols Assistant Secretary of the Treasury for P... Page 2 of2
of Socldl Secullty reforlll, jJellod. If you'le ~~ or oilier, it's your children and
grandchildren that you need to be thinking about. They are the ones for whom we
need to fix this system.
The issue of Social Secul"lty is really Just a matter of basIc math, and the threat to
Social Security in the near futLJI"e makes Illore sellse when you look at the Simple
arithmetic. Social Security has enough mOlley IlOW because for decades we have
had more than enough workers paying illto the system, supportlllg the retirees
drawing benefits.
In 1950, there were 16 workers to support every beneficiary of SOCIal Security - a
very comfortable ratio of those paylllg In versus those drawing benefits. Today
there are only 3.3 workers supportlllg every benefiCiary By the time today's
youngest workers - many of you have children ill that age group - tum 65, there will
only be two workers s upportlllg each retiree ThiS Issue IS one of demography, not
Ideology
Just three years from now, III 2008, the first baby boomers Will beglll to retire.
Accordlllg to the new Trustees' report, the government will begin to payout more in
Social Security benefits than It collects In payroll taxes In 2017 - that's Just 12 years
from now. By 2041, when younger workers begin to retire, the system will be
bankrupt
We must make Social Security better for those younger workers.
Raising their payroll taxes won't make it better. What the President would like to
see, instead, for future generations is an ability to save some of their payroll taxes,
in a safe and secure nest egg Something they could pass on to their heirs. A nest
egg that would give workers the prospect of a retirement that is far better than the
rapidly-weakening promise of Social Security benefits. These safe and secure nest
eggs would give younger workers a chance to earn a better rate of return on their
money.
With voluntary personal accounts, younger workers would have the chance to learn
about their fillancial chOices, bUild a safe and secure nest egg and benefit from
sound long-term investment III the free market system without disrupting the system
of benefits for today's retired beneficiaries.
Additionally, as former Democratic Congressmen Tim Penny and Charlie Stenholm
wrote III an op-ed recently, "opposlllg personal accounts IS not a substitute for
offering a pOSitive solution for dealing With the challenges that face Social Security."
They went on to say, astutely, that they "believe that if Social Security were being
created from scratch today, Americans would want to include a way to help
everyone build up a nest egg"
SOCial Security reform that doesn't raise payroll tax rates, that protects benefits for
today's seniors, and that Improves the system dramatically for our children and
grandchildren can be achieved
If we act now, we can make sure that Social Security, and our economy, IS on
sound fillancial footlllg for our children and grandchildren
I am absolutely convinced we can preserve and protect SOCial security for today's
youth through a thoughtful bipartisan dialogue with Congress. Further, I am
convillced we can achieve bipartisan results this year.
Congressman Reichert, thank you agalll for having me here today. I look forward to
your questions.
- 30-
http://www'. trcU3.gov /pr~~~/rclcases/j s234 3. h till
4/26/2005
JS-2344: Treasury and IRS Issue Ciuidancc
011
Spousal I;lcction <BR>Rights and Charita...
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
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March 30, 2005
JS-2344
Treasury and IRS Issue Guidance on Spousal Election
Rights and Charitable Remainder Trusts
WASHINGTON, DC -- The Treasury Department and Internal Revenue Service
Issued guidance today to provide a safe harbor procedure to avoid the
disquallflcallon of a charitable remainder trust by reason of the eXistence of a
spousal right of election under state law
The eXistence of a surviving spouse's right to elect to receive a statutory share of
the estate of the grantor of a charitable remainder trust has not been widely
recognized by taxpayers as potentially disqualifying the trust. The safe harbor In
the revenue procedure issued today provides a method of aVOiding the adverse tax
consequences arising from such a right under state law. The revenue procedure
issued today also provides transition relief for trusts created before June 28, 2005.
A problem eXists under current law only If applicable state law gives the grantor's
spouse the right to receive a statutory share of the grantor's estate that could be
paid from the trust's assets. For trusts created on or after June 28, 2005, this
problem can be avoided if the grantor's spouse waives the right of election against
trust assets as described in the revenue procedure.
Trusts created before June 28, 2005, may also benefit from this safe harbor
procedure However, as long as the spousal right of election is not actually
exerCised, the Service will not challenge the qualification of a pre-June 28, 2005,
trust solely by reason of the existence of that right. even if such a waiver is not
obtained.
REPORTS
•
A copy of Revenue Procedure 2005-24
http://wv:w.treas.guv/prc33ireieases/js2344.htm
4/26/2005
Part III
Administrative, Procedural, and Miscellaneous
26 CFR § 601.105: Examination of returns and claims for refund, credit, or
abatement; determination of correct tax liability.
(Also Part I, §§ 664; 1.664-1, 1.664-2, 1.664-3.)
Rev. Proc. 2005-24
SECTION 1. PURPOSE AND SCOPE
.01 This revenue procedure applies to any charitable remainder annuity
trust (CRAT) or charitable remainder unitrust (CRUT) that is created by the
grantor, G, if, under applicable state law, G's surviving spouse, S, has a right
of election exercisable on G's death to receive an elective, statutory share of
G's estate, and such share could be satisfied in whole or in part from assets of
the CRAT or CRUT in violation of § 664(d)(1 )(S) or (d)(2)(S) of the Internal
Revenue Code. In general, only inter vivos CRATs or CRUTs are within the
scope of this revenue procedure .
.02 This revenue procedure provides a safe harbor procedure under
which the Internal Revenue Service will disregard the right of election for
purposes of determining whether the CRAT or CRUT meets the requirements
of § 664(d)(1 )(S) or (d)(2)(S) continuously since its creation if S irrevocably
waives the right of election in the manner prescribed in this revenue
procedure. For trusts created before June 28, 2005, the Service will disregard
the right of election, even without a waiver, but only if S does not exercise the
right of election .
.03 The safe harbor procedure provided by this revenue procedure is
not available to a CRAT or CRUT if S exercises the right of election.
SECTION 2. BACKGROUND
.01 In general, a testator is free to dispose of property in accordance
with the testator's own wishes. However, in most jurisdictions, state statutes
protect S from disinheritance. In most common law jurisdictions, these
statutes are in the form of elective share provisions, many of which are based
on the elective share provisions of the Uniform Probate Code (UPC), §§ 2201- 2-214 (amended 1993). Elective share statutes provide S the right to
elect to receive a statutory share of G's estate, regardless of whether G made
any bequests to S. For purposes of this revenue procedure, S's statutory
share of G's estate will be referred to as an "elective share" and the right to
elect to receive an elective share will be referred to as a "right of election",
regardless of what terms different jurisdictions may use to describe these
concepts .
.02 In some states, the elective share is based solely on the probate
estate but, in others, G's estate is defined more broadly for purposes of
computing the elective share and may include assets of the CRAT or CRUT.
In states that have adopted the elective share provisions of the UPC, S has
the right of election to take a percentage (generally determined by the duration
2
of the marriage, but subject to a minimum dollar amount in some cases) of the
"augmented estate" provided that certain requirements are met. UPC § 2-202.
The augmented estate includes G's net probate estate, as well as certain
non probate assets of G, certain property transferred by G to others (including
to S) during life, and certain other property. UPC §§ 2-202 and 2-207. The
assets of the CRAT or CRUT may be included in the augmented estate and,
therefore, may be used to determine and satisfy the elective share amount.
UPC § 2-209. In some states, the CRAT or CRUT assets may be used to
satisfy the elective share only after other property in the augmented estate first
has been exhausted .
.03 Sections 664(d)(1)(8) (in the case of a CRAT) and (d)(2)(8) (in the
case of a CRUT) provide that no amount other than the annuity payments
described in § 664(d)(1 )(A) or the unitrust payments described in §
664(d)(2)(A), respectively, (other than qualified gratuitous payments described
in §§ 664(d)(1 )(C) and (d)(2)(C)) may be paid to or for the use of any person
other than an organization described in § 170(c). The requirements of §§
664(d)(1 )(8) and (d)(2)(8) are not satisfied in situations in which S may
exercise the right of election to receive an elective share and the share could
include assets of the CRAT or CRUT, because the mere existence of the right
of election under applicable law, whether or not exercised, and the resulting
possibility that the CRAT or CRUT may be invaded for the benefit of S ,
causes the trust to fail to qualify under § 664(d) .
.04 The Service believes that, in the interest of sound tax
3
administration and to reduce the burden on taxpayers, it is appropriate to
provide a safe harbor procedure that, if followed, will cause the right of election
to be disregarded for purposes of determining whether a CRAT or CRUT that
is within the scope of this revenue procedure meets the requirements of §
664(d) continuously from the date the trust is created. This procedure
generally requires that S irrevocably waive the right of election with regard to
the assets of the CRAT or CRUT to ensure that no part of the trust will be used
to satisfy the elective share .
.05 No waiver of the right of election is required if the applicable state
law does not provide S with a right of election, exercisable at the time of G's
death, to receive an elective share of G's estate. For example, in community
property jurisdictions, elective share provisions are generally unnecessary
because S typically has vested ownership in one-half of the community
property. Additionally, no waiver is required if, under applicable state law, S's
elective share of G's estate may not include any assets of the CRAT or CRUT
(other than the annuity or unitrust interest payable to S as the named
recipient). For example, no waiver is required if, under applicable state law,
the trust's property is excluded from the base for computing the elective share
by reason of G's receipt of adequate and full consideration for the transfer or
the written consent to or joinder in the transfer by S and, in fact, the
consideration is paid or the consent or joinder is given.
SECTION 3. APPLICATION OF SAFE HARBOR
.01 In General. With respect to any CRAT or CRUT within the scope of
4
this revenue procedure, S's right of election to receive an elective share of G's
estate, if the share could include any assets of a CRAT or CRUT created or
funded by G, will be disregarded for purposes of determining whether the
CRAT or CRUT has met the requirements of § 664(d)(1 )(8) or (d)(2)(8)
continuously since its creation if all of the requirements of section 3 of this
revenue procedure are satisfied. For CRATs and CRUTs within the scope of
this revenue procedure created by G on or after June 28, 2005, the failure of S
to waive the right of election in accordance with the requirements of this
revenue procedure will result in the CRAT or CRUT failing to qualify under §
664(d) continuously since its creation, whether or not S exercises the right of
election. For CRATs and CRUTs within the scope of this revenue procedure
created by G before June 28, 2005, the failure of S to waive the right of
election, combined with S's exercise of that right of election, will result in the
CRAT or CRUT failing to qualify under § 664(d) continuously since its creation.
Thus, for all CRATs and CRUTs, regardless of when they were created, a
waiver under this revenue procedure of S's right of election will provide
certainty that the right of election will not cause the trust to fail to qualify under
§ 664(d) continuously since its creation .
.02 Waiver Effective Under State Law. S must irrevocably waive the
right of election to whatever extent necessary to ensure that no part of the trust
(other than the annuity or unitrust interest of which S is the named recipient
under the terms of the trust) may be used to satisfy the elective share. A valid
waiver of the elective share or right of election will satisfy the requirements of
5
the preceding sentence if the waiver is valid under applicable state law, in
writing, and signed and dated by S. This revenue procedure does not require
a waiver of S's right as the named recipient to receive the annuity or unitrust
payment from the CRAT or CRUT .
.03 Timing of Waiver. For CRATs or CRUTs created by G on or after
June 28, 2005, section 3.02 of this revenue procedure must be satisfied on or
before the date that is 6 months after the due date (excluding extensions of
time to file actually granted) of Form 5227, Split-Interest Trust Information
Return, for the year in which the later of the following occurs:
(1) the creation of the trust;
(2) the date of G's marriage to §;
(3) the date G first becomes domiciled or resident in a jurisdiction
whose law provides a right of election that could be satisfied from
assets of the trust; or
(4) the effective date of applicable state law creating a right of
election .
.04 Trustee To Retain Copy. A copy of the signed waiver must be
provided to the trustee of the CRAT or CRUT. The trustee must retain the
copy in the official records of the trust so long as the contents thereof may
become material in the administration of any internal revenue law. See §
1.6001-1 (e) of the Income Tax Regulations.
SECTION 4. EXAMPLES
In each of the following examples, G created a CRAT that provides an
6
annuity to G for G's life. Upon G's death, the remainder of the trust will pass to
an organization that meets the requirements of § 170(c). In each example
(except Example 3), at the time the CRAT is created, applicable state law
provides 5 a right of election to receive an elective share of G's estate and the
share would include (and could be satisfied from) assets of the trust.
.01 Example 1. G creates the trust in 2007 while married to S. On or
before the date that is 6 months after the due date (excluding extensions of
time to file actually granted) of the Form 5227 for the trust for calendar year
2007, S irrevocably waives 5's right of election to receive an elective share
with regard to the assets in the trust (but does not waive the right of election
with regard to G's probate estate) .
.02 Example 2. G creates the trust in 2006, and is unmarried on the
date the trust is created. On May 1, 2007, G marries 5. On or before the date
that is 6 months after the due date (excluding extensions of time to file actually
granted) of the Form 5227 for the trust for calendar year 2007, 5 irrevocably
waives the right of election to receive an elective share with regard to the
assets in the trust (but does not waive the right of election with regard to G's
probate estate) .
.03 Example 3. G creates the trust in 2008 while married to 5. Under
applicable state law in effect on the date that G creates the trust, the elective
share does not include the assets in the trust. Effective on March 1, 2009,
applicable state law is amended to give S the right of election to receive an
elective share of the "augmented estate," which, by definition, includes the
7
assets of the trust. On or before the date that is 6 months after the due date
(excluding extensions of time to file actually granted) of the Form 5227 for the
trust for calendar year 2009, S irrevocably waives the right of election to
receive an elective share with regard to the assets in the trust (but does not
waive the right of election with regard to G's probate estate).
In each of Examples 1 through 3, assuming that S's timely waiver of the
right of election is valid under applicable state law and satisfies the other
requirements of this revenue procedure, the existence of the right of election
will be disregarded for the purpose of determining whether the trust has
qualified continuously since its creation as a CRAT under § 664( d)( 1)(8).
Further, in each of Examples 1 through 3, the result would be the same if,
instead of executing only a partial waiver, S had waived the full right of election
with respect to all assets in G's augmented estate .
.04 Example 4. G creates the trust in 2007 while married to S. Under
applicable state law in effect on the date that G creates the trust, the elective
share includes the assets in the trust. Later in the same year, applicable state
law is amended to provide that the augmented estate does not include the
assets of a CRAT or CRUT and the amendment applies retroactively to
include the trust created by G. Accordingly, no waiver of the right of election is
required with respect to the assets of the trust in order for the trust to continue
to qualify as a CRAT.
.05 Example 5. The facts are the same as in Example 2 except that the
waiver is contained in, or is signed pursuant to the requirements of, a
8
prenuptial agreement. Unless the agreement as a whole (or only the waiver)
is subsequently found to be invalid or unenforceable, the waiver will satisfy the
requirements of this revenue procedure .
.06 Example 6. The facts are the same as in Example 1, except that S
dies in 2010. In 2012, G marries S2. S2 refuses to waive S2's right to receive
an elective share with regard to the assets in the trust. The existence of S's
right of election will be disregarded for the purpose of determining whether the
trust has qualified continuously since its creation up until G's marriage to S2,
as a CRAT under § 664(d)(1 )(B). However, because S2 did not timely and
irrevocably waive S2's right to receive an elective share with regard to the
assets in the trust, the trust does not qualify as a CRAT under § 664(d)(1)(B).
If, in these examples, G had instead created a CRUT, the results would
be the same for purposes of § 664(d)(2)(B).
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective as of March 30, 2005.
SECTION 6. PAPERWORK REDUCTION ACT
The collection of information contained in this revenue procedure has
been reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control
number 1545-1936.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless the collection of information
displays a valid OMB control number.
9
The collection of information in this revenue procedure is in section 3.
This information is required to be collected and retained in order to ensure that
a trust meets the requirements of § 664(d)(1) or (d)(2). This information will be
used to determine whether the eligibility requirements under those statutes for
treatment as a CRAT or CRUT have been met. The collection of information is
required to obtain a benefit. The likely respondents are individuals.
The estimated total annual reporting burden is 150,000 hours.
The estimated annual burden per respondent varies from 1 hour to 2
hours, depending on individual circumstances, with an estimated average
burden of 1 112 hours to complete the statements required under this revenue
procedure. The estimated number of respondents is 100,000.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained
as long as their contents may become material in the administration of any
Internal Revenue law. Generally, tax returns and tax return information are
confidential, as required by 26 U.S.C. 6103.
SECTION 7. DRAFTING INFORMATION
The principal author of this revenue procedure is Susan H. Levy. For
further information regarding this revenue procedure contact Susan H. Levy on
(202) 622-3090 (not a toll free call) or Bradford R. Poston on (202) 622-3060
(neither a toll free call).
10
JS-234S: Under Secretary Levey Remarks on Providing <br>Banking Services to <br>M...
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
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March 30. 2005
JS-2345
Under Secretary Levey Remarks on Providing
Banking Services to
Money Service Businesses
Stuart Levey, the US. Department of the Treasury's Under Secretary for the Office
of Terrorism and Financial Intelligence (TFI), made the following remarks today in
response to a statement issued earlier today by the Financial Crimes Enforcement
Network (FinCEN) and the Federal Banking Agencies on prOViding banking
services to money service busillesses (MSBs):
"The policy statement released today is an important step in ensuring that money
service businesses (MSBs) have access to banking services and In protecting our
financial sector against underground and Illicit money flows.
"MSBs provide valuable services to those without ready access to the formal
banking sector. As Secretary John Snow has stated on a number of occasions,
these businesses are a part of a healthy financial sector and must have access to
banking services. As we continue our efforts to combat money laundering and
terrorist fillanclng, it IS critical that the MSB industry remain within the formal
financial sector and not be driven underground.
"We believe that this clear statement of policy, as well as the forthcoming guidance,
will help ensure that MSBs have access to banking services and that our financial
sector IS best protected against Illicit money flows. We look forward to the issuance
of this guidance and to continuing our strong partnership with U.S. financial
Institulions," said Levey.
A copy of the statement Issued today by FinCEN and the Federal Banking Agencies
may be accessed here: http://www.fincen.gov/bsamsbrevisedstatement.pdf.
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JS-2346: Secretary John W. Snow<BR >Prepared Remarks to Bozeman Community Lead...
Page 1 of 3
FROM THE OFFICE OF PUBLIC AFFAIRS
March 30, 2005
JS-2346
Secretary John W. Snow
Prepared Remarks to Bozeman Community Leaders
Bozeman, MT
Thank you so much for having me here, it's great to be in Bozeman l
I really appreciate the chance to talk With you today about strengthening the
nation's Social Security system The President's leadership on this Issue is
providing our country With a tremendous opportunity to save SOCial Security for
current and near retirees and improve It for younger generations. Conversations like
this are an Important part of reaching decisions as to what, exactly, should be done.
Since March 3rd, Administration officials - from PreSident Bush and Vice President
Cheney to Cabinet members like me and policy experts - have been traveling
throughout the country as part of a coordinated 60-day tour of at least 60 stops to
discuss the President's message of strengthening Social Security with the
American people.
I was In Pennsylvania last Thursday, meeting With business leaders to discuss
SOCial Security and that Visit marked the 60 stop mark, after less than 30 days on
the road. So we know that the final number of stops will be much higher than
antiCipated
Right befOl'e that trip to Pennsylvania, we were reminded of the serious nature of
the Social Security problem yesterday, back in WaShington, DC, when the Social
Security and Medicare Trustees - for whom I serve as Board Chairman - issued our
annual repOl't on the financial health If the programs' trust funds. The numbers
contained In the SOCial Security report leave little doubt that the system is financially
unsustainable, and In need of expeditious and lasting change.
The Trustees' report showed that Social Security cash flows peak In 2008 and turn
negative In 2017, and the trust fund Itself will be exhausted in 2041. The unfunded
obligation, that IS, the difference between the present values of Social Security
inflows (plus the trust fund) and outflows, is $11.1 trillion on a permanent basis, and
$40 trillion over the next 75 years
Now. the President doesn't believe that we should make up that shortfall with tax
increases. The report showed Just how much we would have to raise taxes to
achieve long-term balance the payroll tax rate would have to be raised immediately
by 3.5 percentage pOints to make the system whole on a permanent basis. In other
words, the payroll tax would have to be increased by nearly 30 percent.
That kind of tax increase would have Significant, negative economic repercussions
Every worker In America would start taking home less pay, and that's bad for you,
It'S bad for your families, and it's bad fOl' countless facets of our economy.
Employers would bear a significant cost, as well Employers would shoulder half of
the payroll tax Increase because they pay that tax on all of their employees.
For very small employers, I fear that much of a tax Increase would force them to
make terrible choices, from lay-offs to health benefit cuts. And It would make hiring
new people even more difficult.. which IS WOrrisome since small bUSiness creates
most of our nation's new Jobs
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4/26/2005
JS-2346: Secretary John W. Snow<BR>Prepared Remarks to Bozeman Community Lead...
Irlcredsrrl~ iJdyrollldxes hurls lile ecullullIY
why the President is against It.
dliU
Page 2 of 3
Ilhurts Job creation, perrod That's
It is also worth noting that payroll tax Increases have been the standard "solution" to
Social Security's problems, and they have never solved the problem I Payroll taxes
have been raised some 20 times since Social Security was established - and It has
failed to make the system solvent.
Tax Increases aren't the answer, so the President has encouraged the Congress to
propose a variety of Ideas that might be, and he has put a number of Ideas on the
table as well.
When the President took this Issue to the country In his State of the Union Address,
he said his objective was to engender a broad national dialogue to get people
talking about this Issue He wanted Amerrcans to talk about Social Security, and a
national conversation has begun as a direct result.
Today, people are talking about the Issue from the halls of Congress to the halls of
local shopping malls I The President's leadership has drawn critical attention to the
problem and is creating movement. Progress, real progress, is being made.
Over lunch counters, over breakfast and dinner tables allover America ... the topic
is Social Security reform It's the front page story in virtually every newspaper. It's
on the evening news. And it's there because of the President of the United States.
It's there because of the courage that he's had to directly confront and deal with
what so many in political life call the "third raiL"
The American people respect leaders who call a spade a spade. The President
touched the "third rail" without fear, and now we're moving forward. Neighbors and
co-workers are talking about it: families are talking about it: Congress is talking
about it.
We've seen a clear shift in the course of the last month or so from the question: "Is
there a problem?" to the question. "How do we fix it?"
I imagine that you are talking about it with your spouse and family members, your
colleagues and neighbors. Those conversations are critical, and I hope our meeting
here today can help make them even more lively, more productive.
I know that you understand that if you are 55 or older your Social Securrty benefits
are solid. They will not change. You know that you don't need to change your
retirement plan or strategy because of Social Securrty reform, period.
But now I'll ask. how many of you have children or grandchildren? It's those children
and grandchildren, those young workers and future workers, who we need to be
worned about. They are the ones for whom we need to fix this system
The issue of Social Security IS really a matter of baSIC arithmetiC, and the threat to
SOCial Security rn the near future makes more sense when you look at the simple
arrthmetic. Social Securrty has enough money now because for decades we have
had more than enough workers paying Into the system, supporting the retirees
drawing benefits.
In 1950, there were 16 workers to support every beneficiary of SOCial Security - a
very comfortable ratio of those paying in versus those drawrng benefits. Today
there are only 3.3 workers supporting every beneficiary. By the time today's
youngest workers - many of you have children in that age group - turn 65, there will
only be two workers supporting each retiree.
Just three years from now, in 2008, the first baby boomers Will begin to retire
According to the new Trustees' report, the government will begin to payout more in
Social Security benefits than it collects in payroll taxes in 2017 - that's Just 12 years
from now. By 2041, when younger workers begin to retire, the system will be
bankrupt.
We must make Social Securrty better for those younger workers.
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JS-2346: Secrctary John W. Snow<BR>Prcparcd Rcmarks to Bozeman Community Lead...
Page 3 of 3
Raising their payroll taxes won't make It better. What the President would like to
see, instead, for future generations is an ability to save some of their payroll taxes,
to build a nest egg that belongs to them, not to the government Something they
could pass on to their heirs. A nest egg that would draw on the powerful force of
compound IIltelest to give workel'S the prospect of a retirement that IS far better
than the rapidly-weakenlllg promise of Social Security benefits.
With voluntary personal accounts. younger workers would have the chance to learn
about their fillancial choices. bUild a nest egg and benefit from sound long-term
investment In the free market system Without disrupting the system of benefits for
today's retired beneficiaries.
For the life of me. I can't imagille why anybody would argue agalilst young workers
having the ability to Invest and build a better retirement for their future It costs the
SOCial Security system nothing to do so. it will cost current and near-retirees
nothing. It gives our children and grandChildren a better retirement. and It helps our
country create a larger pool of savings. And as the preSident has said the
retirement security of our young people IS too Important for partisan politics. Why
wouldn't we do this? I have not heard one good reason not to and it's hard to figure
out why anybody would oppose It
Additionally. as former Democratic Congressmen Tim Penny and Charlie Stenholm
wrote In an op-ed recently. "opposing personal accounts IS not a substitute for
offering a positive solution for dealing with the challenges that face Social Security."
They went on to say. astutely. that they "believe that if Social Security were being
created from scratch today. Americans would want to include a way to help
everyone build up a nest egg." The PreSident and I couldn't agree more.
Social Security reform that doesn't raise payroll tax rates. that protects benefits for
today's seniors. and that improves the system dramatically for our children and
grandchildren can be achieved.
We are part of an exciting moment in American history, where a President's
courageous leadership has inspired a national discussion and, I'm confident, will
lead to historic results. I encourage you to be involved, whether it's talking about the
issue With your colleagues. with your children, or writing a letter to your Members of
Congress.
If we act now, we can make sure that Social Security, and our economy. are on
sound finanCial footing for our children and grandchildren.
Thanks so much. agaill. for having me here today.
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JS-2347: Secretary John W. Snow.;:br- 'Prepared Remarks to Government Students at Bis ...
Page I of 3
FROM THE OFFICE OF PUBLIC AFFAIRS
March 31, 2005
JS-2347
Secretary John W. Snow
Prepared Remarks to Government Students at Bismarck High School
Bismarck, ND
Thank you so much for havillg me here at Bismarck High School. It's terrtflc to be in
the great state of North Dakota. and I'm very happy to be able to talk with you
today: spending time with sharp students like you is a real pleasure
I want to commend you for studYing government, and for your academic
achievements. I know that you study very hard. But even with a lot of studYing,
sometimes It can be difficult to see the real-life importance of what you are learning.
My hope is that our discussion today Will help make what you've learned in class
more "real."
I know you're studying the political parties right now - Isn't it interesting how each
party started and evolved 7
For so many decades, the parties have fought each other, battled for power and
engaged In fascinating philosophical debates. But some of the greatest
achievements of the two-party system have occurred when the two parties really
work together, without animosity, to achieve great reforms, great good for our
country.
Today, President Bush IS encouraging the political parties to put aSide their partisan
bickering for the sake of your generation .. specifically, so that we can strengthen
and preserve the Social Security system for your benefit.
I know that retirement and SOCial Security must seem like such far-away parts of
your life that you barely think about them. And I understand that: It'S very natural.
But I also hope you know that the national debate, the national dialogue about
Social Security reform is really about you l The youngest generations of Americans
stand to benefit so much from this debate .. so I encourage you to read the
newspaper and talk to your parents and teachers about it.
Your grandparents are the ones who receive SOCial Security benefits now .. but
reforming the system actually won't Impact them. For anyone at or over the age of
55, the President has pledged that the system and its benefits won't change at all.
It could change for you It must change for you. And it must change for the better.
The results of this reform effort will Impact the Amerrcan economy, the amount of
taxes you'll pay when you're older. and whether you will be able to look forward to a
comfortable retirement when you are done working.
Here's where we are right now As your parents can tell you, part of each of their
paychecks goes to fund Social Securrty. Workers pay half of the tax, and their
employers pay the other half. If they are self-employed, they pay the whole tax
themselves. That money goes to pay the Social Security benefits of their parents that's your grandparents' generation
Right now, this works pretty well because there are more than three people paying
that tax for everyone person collectrng the benefits (receiving a Social Security
check)
As you know from buying things to share with your friends - like splitting the cost of
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4/26/2005
JS-2347: Secretary John W. Snow<br>Prepared Remarks to Government Students at Bis ...
Page 2 of 3
a pizza - the more people chipping In. the less each person pays.
When your generation is working and paylflg those taxes, there will only be two of
you paying for the belleflts of evel'y retiree. Unless each of you pays a lot more In
taxes - something the President doesn't thlflk would be fair - then tllere won't be
enough money to pay tile full, promised benefits for your parents
You see, wilen your parents' generation - called the baby boomers because there
are so many of them - beglfls to retire, It will dramatically increase the cash flow
demands of the system By the year 2041 - when some of your parents are stili
collecting benefits and when you yourselves are beglflning to approach retirement If nothing is done to change the system, benefits would have to be cut, abruptly, by
26 percent and would continue to fall thereafter.
The problem only gets worse wltll every passing year, as generations get smaller In
number and people live longer lives. Ttlrougllout the future of tile system it Will be
more than $11 trillion short.
TillS is serious stuff. It can be downright frightening. But the good news is that we
don't Ilave to accept that as our future .. it doesn't have to be your future.
The PreSident wants to work with the Congress to make Social Security solvent - so
that it runs "in the black," not in debt. He also wants to see your generation have
the ability to save your own money in a personal account. That means you'd be
able to build a nest egg of your very own that wouldn't belong to the government.
And, very Importantly, tile PreSident wants to make sure tllat the taxes you pay
wilen you are working full-time aren't too high. He wants workers to keep as much
of the money they earn as pOSSible. That's good for workers and it's good for our
economy, for our prosperity.
I know you are learning in thiS class that government affects everyone. ThiS issue of
Social Security IS a very good example of that fact. The decisions made by your
government - that means your locally elected leaders, your state legislators, your
governor, Congress and the President - really do impact your life. They Impact your
present and, In this case, they profoundly impact your future.
So while your retirement seems to be a million years away right now .. take it from
me, the time will go by quickly and it's never too early to think about saving money
for the future. I hope that you'll follow the Social Security debate and think about
what type of reform would make the future brighter for you
We are all part of an exciting moment In American history, wllere a President's
courageous leadership Ilas inspired a national discussion and, I'm confident, will
lead to historic results. I encourage you to be involved, wllether it's talking about the
Issue With your parents and teachers, or writing a letter to your Members of
Congress.
If we act now, we can make sure that SOCial Security, and our economy, are on
sound finanCial footing for your generation
I really appreciate the chance to talk With you about this important Issue, and would
be happy to take your questions. Thanks again for hosting me here in Bismarck.
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4/26/2005
JS-2348: Treasury Secretary Snow Congratulates Paul Wol fowitz <br>on Election to Lea...
Page I of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
March 31, 2005
JS-2348
Treasury Secretary Snow Congratulates Paul Wolfowitz
on Election to Lead World Bank
Treasury Secretary John Snow today congratulated Paul Wolfowltz on his election,
by the World Bank's Executive Board, to be World Bank President. "I am
tremendously pleased for Secretary Wolfowitz and for the people the Bank serves
allover the world. The exceptional mission of the World Bank demands that it be
led by an outstanding leader; someone with proven management skills,
IIlternatlonal diplomatic experience, real vision and, above all, a commitment and
passion for development. Paul Wolfowitz is that leader. He will do a terrific Job
leading an institution whose purpose is noble, unique and represents the hope of
impoverished people across the globe. I commend the Board on their selection and
look forward to working with President-designate Wolfowitz and the finance
ministers and development millisters around the world in our efforts to meet our
International development goals."
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JS-2349: Statements on Confirmation or,BR
>
Palll D. Wolfowitz as Tenth World Bank Po>. Page 1 of2
FROM THE OFFICE OF PUBLIC AFFAIRS
March 31, 2005
JS-2349
Statements on Confirmation of
Paul D. Wolfowitz as Tenth World Bank President
WASHINGTON, MARCH 31, 2005--The World Bank's Board of Executive Directors
today unanimously confirmed the nom illation of Paul D. Wolfowltz to be President
of the World Bank. In response to the Board's decision, Mr. Wolfowitz made the
following stateillent
"I want to thank the Board for their vote of confidence It is hUlllbllllg to be
entrusted with the leadel'shlp of this critically Important IIlternatlonal institution.
Fortunately, I already know I will have a great deal of help from the many people
who are deeply committed to the mission of the World Bank. Since my nomination,
I have had the opportunity to listen and talk with all 24 Executive Directors, who
themselves possess deep knowledge across the broad range of issues facing the
Bank.
Yesterday, in Brussels, I had discussions on the Bank's future with the
Development Ministers from Denillark, Germany, the Netherlands, Norway,
Sweden and the UK. This was followed by a broader meetlllg hosted by Prime
Minister Juncker of Luxembourg with more than 25 European Union
representatives Their adVice and questions were constructive, and I know they Will
continue to prOVide valuable gUidance as I begin my tenure as an international CIVil
servant.
I have also exchanged views with dozens of mlllisters, ambassadors and even
PreSidents and Prime MlIllsters, from every continent. I appreciate their support
and their comlllitment to the Vision of the World Bank. As I have said frequently,
that mission - helping the poorest of the world to lift themselves out of poverty - is
a noble mission or, as former Secretary of State George Shultz said, "a beautiful
mission"
I believe deeply III that miSSion Nothlllg IS more gratifYlllg than being able to help
people In need and developlllg opportunities for all the people of the world to
achieve their full potential.
I would like to take this opportunity to express my appreciation to Jim Wolfensohn
who has been extremely helpful to me. HIS commitment to the Bank's mission will
be a hard act to follow and I will be counting on his continued advice and support.
I look forward now to deepening my understanding of the challenges faCing the
Bank through exchanging views with two key groups the civil society organizations
whose adVice and views have become increaslllgly important in Bank deliberations;
and the extraordillary profeSSional staff of the Bank, who constitute the richest body
of expertise In the world on the problems of economic development and poverty
reduction
The next SIX months are a key period of deciSion making on International
development POliCY, particularly leadlllg up to the UN Summit III September on the
Millennium Development Goals.
Beyond the Development Goals, I have been prOVided with a wealth of advice and
IIlformation. I have a new appreciation for the urgent need for debt relief,
IIlfrastructure and regional integration If poverty is to be reduced My new
colleagues have recommended I review the right balance between loans and
grants; the Bank's role as lender versus technical advisor: lending to middle Income
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JS-2349: Statements on Confirmation of<BR> Paul D. Wolfowitz as Tenth World Bank P ... Page 2 of2
countries versus support for the poorest nations; and timely, high quality delivery of
financial support versus the need for conditions, accountability and safeguards
Finally, many of my colleagues have pointed out that reducing poverty involves
more than the commitment of the Bank's loans and grants. Trade polices and
subsidies along With positive conditions for private sector investment are all key
factors influenclllg prospects for the pOOl
These are Just a few of ttle challenges which lie ahead As we take on these
concerns, I am excited about the stlong contribution the Bank can and must make if
we are to create a new era of opportunity for the world's poor.
I look forward to working With the talented Bank staff, all shareholders and
sUPPol1ers as we Join together in our noble mission"
Current World Bank PreSident James Wolfensohn also commented.
"I welcome the decision of the Board to apPoint Paul Wolfowitz as the next
President of the World Bank Group He is a friend, and I know him to be a person of
immense talent and high intellect. He will be an extremely dedicated and strong
leader of the Bank. Paul has a long and respected background in academia,
diplomacy and International affairs. and hiS work in the developing world has
afforded him a deep understanding of the many challenges of development. He
knows what a remarkable Institution this is, he appreciates its outstanding team of
development profeSSionals, and I know he will bring continuity to its programs and
its miSSion of fighting poverty. I will make every effort to ensure that our transition
period is successful, so Paul can hit the ground running on June
1 ."
http://wv:w.treas.gov/pIess/rclca:.:.cs/js2349.htm
4/26/2005
JS-2350: Report on U.S. Holdings of Forcign Sccurities' BR>at End-Year 2003
Page I of2
FROM THE OFFICE OF PUBLIC AFFAIRS
To view 01 printtllo PDF e()J)/ont un /Ill.'; /Jd()f'. (/()wn/oaci tile frue Ac/ol)e(k) Acro/Ja/G:) Readerfly
March 31, 2005
JS-2350
Report on U.S. Holdings of Foreign Securities
at End-Year 2003
The findings from an annual survey of US portfolio holdings of foreign seCUrities at
year-end 2003 are released today and posted on the US. Treasury web site at
(www.treasgov/tic/fpis.html).
The survey was undertaken jointly by the U.S Treasury, the Federal Reserve Bank
of New York, and the Board of Governors of the Federal Reserve System. The
previous survey was for year-end 2001, and some reVisions of that survey are
reported In thiS release. Future surveys are scheduled to be carried out annually
and the next report will present results from the survey for year-end 2004.
A complementary survey measLJrlng foreign holdings of U.S securities is also
earned out annually. Data from the most recent such survey, which reports on
securities held on June 30, 2004, are currently being processed Prellmillary results
are expected to be reported by April 30, 2005.
Overall Results
The survey measured US. holdings of foreign securities at year-end 2003 of
approximately $3,152 billion, with $2,079 billion held In foreign equities, $874 billion
In foreign long-term debt securities (Original term-to-maturity III excess of one year),
and $199 billion in foreign short-term debt securities. The previous survey,
conducted as of year-end 2001, measured US holdings of approximately $2,317
billion, With $1,613 billion held III foreign eqUities, $557 billion In foreign long-term
debt securities (revised from $502 billion), and $147 billion III foreign short-term
debt securities (see Table 1)
The surveys are part of an Internationally coordinated effort under the auspices of
the International Monetary Fund (IMF) to improve the measurement of portfolio
asset holdlllgs.
Table 1. U.S. holdings of foreign securities, by type of security, as of survey
dates
(Billions of dollars, except as noted)
Type of Security
Dec, 31, 2001
Dec, 31, 2003
Long-term Securities
2,170
2,954
equity
1,613
2,079
long-term debt
557
874
Short-term debt securities
147
199
2,317
3,152
Total
U.S, Portfolio Investment by Country
Table 2, U.S. holdings of foreign securities, by country and type of security,
for the countries attracting the most U.S. investment, as of December 31,
http://www.treu3.gov/preshlrdt.:<lses/js2350.htl1l
4/26/2005
JS-2350: Report on U.S. Holdings of Foreign Securities' BR>at End-Year 2003
Page 2 of2
2003
(Billions of dollars)
Debt securities:
I
Tota'i
EqUitiesl
Longterm
Short-term
1 United Kingdom
663
421
143
99
2 Japan
307
255
37
14
3 Canada
301
149
139
12
4 Germany
189
103
71
15
5 France
185
131
43
11
6 Netherlands
182
116
58
8
7 Cayman Islands
125
45
76
4
8 SWitzerland
120
118
1
1
9 Bermuda
116
108
9
0
10 Australia
91
56
29
5
11 Italy
67
39
25
3
12 Mexico
56
29
28
0
13 South Korea
53
49
4
0
14 Spain
52
44
6
1
15 Brazil
50
32
18
0
16 Sweden
45
28
13
5
17 Finland
41
35
6
0
18 Hong Kong, SAR
38
36
1
0
19 Ireland
33
22
8
3
20 Israel
29
16
12
0
21 Taiwan
27
27
0
0
22 Singapore
25
22
3
0
23 Netherlands Antilles
25
23
1
0
24 Luxembourg
23
6
15
2
25 Denmark
22
10
10
2
Rest of world
287
159
116
12
Total value of
Investment
3,152
2,079
874\
199
I
The stock of foreign securities for December 31,2003 reported in this survey does
not, for a number or reasons, correspond to the stock of foreign securities on
December 31, 2001 plus cumulative flows reported in Treasury's transactions
reporting system. An analysis of the relation between the stock and flow data is
available in Table 5 and the associated text of the fill a I report on U.S. holdings of
foreign securities at end-year 2003.
- 30 -
REPORTS
•
Report on U.S. Holdings of Foreign Securities at End-Year 2003
http://www.treas.guv/press/rclcfixs/js2350.htm
4/26/2005
REPORT ON U.S. HOLDINGS OF FOREIGN SECURITIES
AT END-YEAR 2003
The findings from an annual survey of U.S. portfolio holdings of foreign securities at year-end
2003 are released today and posted on the U.S. Treasury web site at
(http://www.treas.gov/ticltl)is.html).
The survey was undertaken jointly by the U.S. Treasury, the Federal Reserve Bank of New York,
and the Board of Governors of the Federal Reserve System. The previous survey was for yearend 2001, and some revisions of that survey are reported in this release. Future surveys are
scheduled to be carried out annually and the next report will present results from the survey for
year-end 2004.
A complementary survey measuring foreign holdings of U.S. securities is also carried out
annually. Data from the most recent such survey, which reports on securities held on June 30,
2004, are currently being processed. Preliminary results are expected to be reported by April 30,
2005.
Overall Results
The survey measured U.S. holdings of foreign securities at year-end 2003 of approximately
$3,152 billion, with $2,079 billion held in foreign equities, $874 billion in foreign long-term debt
securities (original term- to- maturity in excess of one year), and $199 billion in foreign short-term
debt securities. The previous survey, conducted as of year-end 200 I, measured U.S. holdings of
approximately $2,317 billion, with $1,613 billion held in foreign equities, $557 billion in foreign
long-term debt securities (revised from $502 billion), and $147 billion in foreign short-term debt
securities (see Table 1).
The surveys are part of an internationally coordinated effort under the auspices of the
International Monetary Fund (lMF) to improve the measurement ofportfoIio asset holdings.
Table 1. U.S. holdings of foreign securities, by type of security, as of survey dates)
(Billions of dollars, except as noted)
Type of Security
Long-term Securities
equity
long-term debt
Short-term debt securities
Total
U.S. Portfolio Investment by Country
Dec. 31. 200 I
Dec. 31, 2003
2,170
1,613
557
2,954
2,079
874
147
199
2,317
3,152
Table 2. U.S. holdings of foreign securities, by country and type of security, for the
countries attracting the most U.S. investment, as of December 31, 2003
(Billions of dollars)
Debt seCUrities:
Lonf\-tcrm
Short -teml
Tlltal
Equities
United Kingdom
Japan
11113
421
255
143
37
99
14
3
4
Canada
Germany
France
301
I Xl)
149
IOJ
131
139
71
43
12
15
(>
Netherlands
Cayman Islands
Swit/erland
IX2
125
120
11(,
116
45
II};
5X
76
8
4
I
lOX
5(,
0
5
3
;>
7
8
9
307
IX5
II
II
Bennuda
Australia
Italy
39
9
29
25
12
13
14
Mcxico
South Korea
Spain
56
53
52
29
49
44
2X
4
6
0
0
IS
1(,
50
45
41
32
28
35
18
13
6
()
17
Brazil
Sweden
Finland
18
19
20
Hong Kong, S.A.R.
Ireland
Isracl
38
33
29
I
8
12
0
3
0
21
Taiwan
Singapore
Netherlands Antilles
25
25
27
22
23
0
3
0
I
(J
n7
6
10
159
15
10
116
2
2
12
3,152
2,079
874
199
10
22
23
24
25
Luxembourg
Denmark
Rest of world
Total value of investment
91
67
3(,
22
16
27
23
22
5
(J
()
I The stock of foreign securities for December 31,2003 reported in this survey does not, for a number or reasons,
correspond to the stock of foreign securities on December 31,2001 plus cumulative flows reported in Treasury's
transactions reporting system. An analysis of the relation between the stock and flow data is available in Table 5
and the associated text of the final report on U.S. holdings of foreign securities at end-year 2003.
2
JS-235\ : Statement of Treasury Secrdary John W. Snow on March Employment Report
Page I of I
FROM THE OFFICE OF PUBLIC AFFAIRS
April 1.2005
JS-2351
Statement of Treasury Secretary John W. Snow on March Employment Report
This week, ttle announcement of two Vital economic llldicators continues to show
America's economy IS on the nght path Today's announcement that the
unemployment rate fell to 52% and 110,000 new Jobs have been created IS good
news fOI' the direction of Amenca's economy That makes for over 3 million new
lobs Sillce May 2003. For 2004, the Gross Domeslic Product was 3.9 percent,
which IS yet another Sign that Amenca's economy IS flourishing
President Bush IS committed to keeping the economy on the path of healthy growth
by cuttlllg the deficit In half, enactlllg an energy policy, and strengthenlllg SOCial
secunty. The PreSident's leadership on economic policy IS clearly moving the
economy in the nght direction
http://ww\'y.treas.guv/vress/rclcu:1es/js2351.htrn
4/28/2005
JS-2352: Remarks by Anna Escobedo Cabral, Treasurer
or the <BR>United States<BR>b...
Page I of 4
FROM THE OFFICE OF PUBLIC AFFAIRS
Aprtl 1,2005
JS-2352
Remarks by Anna Escobedo Cabral, Treasurer of the
United States
before the MANA Annual Conference and Latina Style
Business Series
On behalf of the Treasury Department, I am thrilled to be here with you today. It is
truly a pleasure to join you for such a magnificent event. It is great to be in a room
with so many Intelligent, hard-working, and accomplished Latlnas - women who
have undoubtedly surpassed many hardships to get to where you find yourselves
today. Congratulations to all of you
We, as Hispanic women, have come a very long way In our achievements To
illustrate that point, consider these statistics from the Center for Women's Business
Research For instance, did you know that as of 2004, there are an estimated
553,618 majonty-owned. privately-held Hispanic women owned firms In the US
generating nearly $444 billion In sales? Between 1997 and 2004, the number of
Hispanic women-owned firms has Increased by 63.9 percent. Isn't that amazing?
Another striking fact is that four in ten firms majority-owned by women of color are
owned by HispaniCS. And firms owned by Hispanic women now represent 8.3
percent of all privately-held, majority women-owned firms In the United States. We
have become a vital part of our economy as well as the future of our country. We
have an undeniable ability to shape and change our nation today and for future
generations.
A CrItical component to this success, one that I cannot stress enough. is the
importance of an education. Education IS what will ultimately advance our
community as a whole. We need to get more of our kids Into the ranks of the
college-educated I congratulate MANA for their programs and Initiatives like
AvanAmos and Hermanltas for encouraging our young people to further their
education In order to better their careers and lives. These younger generations after
all are the future of our country. We need to work together in achieving thiS,
because no one person can do It alone
An educated community IS also an economically prosperous community. FinanCial
literacy IS crucial to the HispaniC community. One Important challenge we share is
helping Latlllo families to become fully Integrated in our economic systems. The
Treasury Department, together with other agencies, has been working to coordinate
flllancial literacy efforts across the federal government and to identify private-public
partnership opportunities Let me share with you a few facts to put the challenge
IIlto perspective
•
•
•
When a group of Americans was given a 14-question test of their financial
literacy, they answered less than half the questions correctly.
40 percent of the so-called "unbanked" are HispaniC - we are not 40
percent of the population.
75 percent of HispaniCs have not accumulated enough savings for
retirement. They rely exclUSively on Social SecLility for their retil'ement.
According to recent fllldings, HispaniC women's knowledge about savings and
retirement is significantly less than other groups and their retirement confidence
level IS less than workers overall They are most likely to rely on Social Security for
retirement as well as support from their children and family. ThiS is why Social
Security is so important to the future of our community.
The President in his State of the Union Address called on Congress and the
Amencan people to work together to fix Social Security It's a system in desperate
http://wwv•. treas.guv/prcss/rclcu3es/js2352.htm
4/28/2005
JS-2352: Remarks by Anna Escobedo Cabral, Treasurer
or the <BR>United States<BR>b...
Page 2 of 4
need of repair It was created In 1935 for a world that IS very different from today.
In 1935, most women did not work outSide the hOllle - today, about 60 percent of
us do. In 1935, the avel'age American did not live long enough to collect retirement
benefits Today, average life expectzHlcy is now 78 years The system designed 70
years ago simply does not fit the needs of the 21 "I Century If It'S not fixed now, we
Will end up saddling our clliidien and grandchildren With an enormous financial
burden
Changing our SOCial Secullty system IS a tremendous task that can only be done If
we JOIlI together to make It happen We all know that "en la union esta la fureza "
One will not make a difference but many Will
It is Important for each of you to know and understand this debate and what IS at
stake. Strong, Independent women like you today can change tile course of thiS
cOlilltry and can make thiS happen by JOllllllg together to better the lives of YOllr
families and futlllc generations
As highly successful and influential women who hold a number of competlllg titles
busilless owner, mother. daughter, Wife. Sister, friend, comlllitted Citizen and
community leader, and the many oUlers that follow, each of you lays the ground
work for the generations to come We share a strong commitment to family and
community, across generations
I, like you, wear a number of those hats as well. Among them, IS my current
position as Treasurer of the United States which affords me the opportunity to work
to make the PreSident's viSion of an ownership society a reality. I believe in that
viSion and the promise it holds for Latlllo families.
The President has said that If you own somethlllg, you have a Vital stake III the
future of our country. He believes that the federal government should change to
help meet the challenges of our times. And strengUlenlng SOCial Secullty for future
generations IS one major contllbutlon that he is committed to.
When he talks about an ownership society, I believe the President IS speaklllg
directly to the heart of Latinos. We have enormous faith and commitment In the
Amellcan dream - to work hard and produce a bounty to share With your family, to
own a home, a buslIless, to get our children through college, have access to quality
healthcare, to see our parents retire with dignity, and know that our children will be
able to do the same
SOCial Secullty prOVides a clltlcal foundation of IIlcome for retired and disabled
workers - people we know and care about. Perhaps your mother and father, or an
uncle or friend Indeed, for one third of Amellcans over age 65, SOCial Security
benefits constitute 90 percent of their total income. Hispanics, African-Amellcans,
and unmarried elderly women are even more reliant on Social Security. As I
mentioned earlier, more than 40 percent of LatinOS rely on SOCial Secullty as their
sale source of revenue for retirement.
We know two thlllgs - Social Secullty IS safe for today's seniors, but It IS in serious
danger for our children and grandchildren.
As you may know, SOCial Security IS a pay-as-you-go system With today's workers
paying to support today's retirees. But each year, there are more retirees taking
money out, and not enough additional workers to support them. In the 1950s there
were about 16 workers paying for every benefiCiary Today, there are about 3.
Eventually, when today's younger workers retire, there Will only be two to support
each person on Social Security. Add to this the fact that the first members of the
Baby Boom generation turn 60 next year, In 2006, and It becomes clear that thiS is
not a distant problem. It's Just around the corner.
By 2017, the government will begin to payout more in SOCial Security benefits than
it collects In payroll taxes, and shortfalls then grow larger With eactl passing year If
we don't act now, future generations will face a comblnatioll of Significant IIlcreases
In taxes and huge cuts III benefits In order to make up the shortages.
One of the tests of leaderShip IS to confront problems before they become a criSIS
President Bush came to Washlllgton to solve problems, not pass them on to future
http://wwv.·.LIeas.gov/prc33/rcleuse.)/js2352.htm
4/28/2005
JS-2352: Remarks by Anna Escobedo Cabral, Treasurer of the <BR>United States<BR>b... Page 3 of 4
Presidents and future generations. He knows that the longer we walt to take action,
the more difficult and the expensive the changes will be. And dOlllg nothing will
cost the most in the long run
Any fix Will require bipartisanship There al·e a vanety of good Ideas that have been
proposed in the past to fix SOCial Secunty The President Will work with Congress
to detelmille the best elell1ents of the proposals tllat have been put forward
TtllS nation must always strive to leave behll1Cl a better America for our children and
grandctltldren If we invest now and work to fix the problem, we can leave them
With a more secure retirement trl the future.
There are sevel·al prinCiples essential to the Preslclent as he works With Congress
to find a solution He is committed to protecting current and near retirees. For
those born before January 1, 1950, there will be no changes. Let me be very clear
about thiS ttlere are 45 million Amencans receiving SOCial Secunty benefits now
and ntllliollS more nearing retirement For these Amencans, SOCial Securrty benefits
are secure and will not change In any way.
The President has also said that he Will not raise paYI·oll tax rates because higher
taxes Will slow economic growth We all know too well the potential dampenlllg
effect of IIlcreased taxes
And the PreSident believes that voluntary personal accounts must be a part of the
solution because they give younger workers the option to build a nest egg they can
call their own
Personal retirement accounts are a better deal for younger workers who would be
able to choose from a conservative mix of bonds and stocks that would prOVide a
greater opportunity to earn a higher rate of return than anything the current system
could provide. A young person who earns an average of $35,000 a year over hiS or
her working career that elects to participate In the personal account option, based
on conservative prOJections, would have nearly $250,000 saved In the account at
retirement That's the power of compound Interest
That money would prOVide a nest egg for the owner of the account and would
supplement their SOCial Security retirement Income. It IS money that they can pass
on to their loved ones
You know, my father worked hard all hiS life, and paid Into the Social Security
system. He filed the paperwork necessary to begin receiving benefits, but died
before receivlllg his first check. He died the same month the checks were
scheduled to start comtrlg He died too young, of course We corne from a very
modest home. He worked hard all hiS life, but could never really get ahead enough
to save money. SOCial Security was all he had to support himself in retirement But
he died before receiving a srngle check. He would have given anything to be able
to pass those funds on to his children Instead, the government kept that money.
I know I am constantly telling my kids to "save your money." "Stop spending money
on things you don't need" because "el que guarda siempre encuentra " You never
know when there will be a rarny day. And It'S the same wltll the SOCial Securrty
reform. Personal retirement accounts would ensure that Latino families have a
chance to save and grow their hard earned money In an account that belongs to
them, that they could pass on to their children.
Yes, we are all worned about change, but as we learned durrng the course of our
lives and careers, "para nadar hay que tlrarse al agua." I know that you all have
had to Jump in the water a few times. Here's your opportunity to jump In and make
a real difference for your parents, yourselves, and your children I am very proud of
being among so many young, bnght, and committed Latinas, because I know that
together, we can accomplish remarkable things
The President has faith in you as well He is working hard to ensure that all
Amerrcans share in his vISion of an ownership society and that Vision holds great
promise for our community.
Thank you to each and everyone of you for the hard work you do. I encourage you
http://www.lleas.gov/prc~3/releaS£:s/js2352.htm
4/28/2005
JS-23S:':: Remarks by Anna Escobedo Cabral, Treasurer of the <BR>United States<BR>b ... Page 4 of 4
to continue
In
your efforts to better the LatinO community.
http://ww\v.trcus.goy/pr..:ss/relp.3ses/js2352.htm
4/28/2005
JS-2353: Taxpaycr Advocacy Pancl RCLTuitlllcnt<br /Applications Now Being Accepted< ... Page 1 of2
FROM THE OFFICE OF PUBLIC AFFAIRS
April 1,2005
JS-2353
Taxpayer Advocacy Panel Recruitment
Applications Now Being Accepted
Deadline to Apply is April 29, 2005
WASHINGTON, DC-- The Department of Treasury, along with the Internal Revenue
Service, IS inviting IIldlviduals to help improve the nation's tax agency by applying to
be members of the Taxpayer Advocacy Panel, The mission of the Panel is to
prOVide citizen input Into enhancing IRS customer satisfaction and service by
Identifying problems and making recommendations for Improvement with IRS
systems and procedures; elevating the identified problems to the appropriate IRS
official, and referring individual taxpayers to the appropriate IRS office for
assistance In resolving their problems, The Panel's subcommittees will consist of
10-19 volunteer members who serve at the pleasure of the Secretary of Treasury
and will function solely as advisory bodies,
The TAP program works directly with the National Taxpayer Advocate's Office on
Issues Identified by the IRS and the Taxpayer Advocacy Panel, The National
Taxpayer Advocate IS the taxpayers' representative within the IRS and reports
directly to the Commissioner Internal Revenue and to Congress through an annual
report,
"We are committed to working with taxpayers to improve the customer-service
focus of the IRS," stated Nina Olson, National Taxpayer Advocate, "Working with
taxpayers directly helps us identify issues that may not be on the IRS radar screen
We can also hear their concerns about issues the IRS is already addressing,"
Taxpayer Advocacy Panel (TAP) members:
• Get direct input from taxpayers about their experiences with the IRS,
• Identify and prioritize issues of greatest concern to taxpayers,
• Make recommendations to the IRS and Treasury on customer-service Issues,
• Work With the IRS to help taxpayers address key Issues and concerns,
• Report annually to Treasury, the Commissioner Internal Revenue and the
National Taxpayer Advocate,
To qualify as a TAP member, applicants must be U,S Citizens, be able to make a
Significant time comlllltment to the panel, and meet certain other eligibility
requirements, Further details and the application are available on-line at
wwwlmprovel(s,orgor by calling 1-888-912-1227 You can apply on-line or
download the form and mail it to
Milwaukee TAP Office
Stop 1006MIL
310 West WisconSin Avenue
Milwaukee, WI 53203-2221
Applications must be received by the TAP Office by April 29, 2004
http://wV.·w.trC21s.gov/presslreleases/js2353.htm
4/28/2005
js-2354: John B. Taylor, Treasury Under Secretary for International Affairs to visit Cairo,... Page 1 of I
FROM THE OFFICE OF PUBLIC AFFAIRS
April 1,2005
IS-2354
John B. Taylor, Treasury Under Secretary for International Affairs to visit
Cairo, Egypt; Islamabad, Pakistan; and Okinawa, Japan
John Taylor. Treasury Under Secretary for International Affairs, will VISit Egypt April
4-5 He will meet with the cabinet's economic team Including Finance Minister
Boutros Gilali. Investment Minister Mohieldill. Trade Mllllster Rachld. and Central
Bank Governor el-Okdah. He will also meet With American and Egyptian bUSiness
leaders. VISit a USAID-financed enterprise development proJect, and make a
speech at the Egyptian Center for Economic Studies.
The Visit provides an opportunity to discuss the market-Oriented reforms being
pursued by the Egyptian government and review the economic challenges facing
Egypt. In particular, he will diSCUSS the government's Impressive initiatives to
reduce trade barriers. Increase exchange rate flexibility, improve the investment
climate and reform the financial sector. He will also examine efforts to reduce the
fiscal deficit, control spending, and boost the role of the private sector In economic
growth All these measures are Vital to producing the sustained. robust growth
necessary to reduce unemployment and raise liVing standards. Under Secretary
Taylor's visit underlines the United States' support for Egypt's economy and
espeCially for these reform efforts.
Under Secretary Taylor Will visit Pakistan April 6-7. He will meet with Prime
Minister AZIZ, Finance AdVISor Shah, and State Bank Governor Husain. He will
also Visit a microflflance project financed by the ASian Development Bank, and Will
meet with other development and finance experts in the country. The visit
highlights the strong US support for Pakistan's economic reform efforts, which
helped Pakistan achieve strong economic growth In recent years. The visit
underscores our bilateral cooperation on important regional issues such as
reconstruction efforts In Afghanistan, the G8 Broader Middle East and North Africa
(BMENA) Initiative, and global efforts to combat money laundering and financial
crime
Under Secretary Taylor will then travel to Okinawa, Japan, on April 8-10 to
represent the United States at the Annual Meetings of the Inter-American
Development Bank. Further details on Under Secretary Taylor participation in
these meetings next week.
-30-
http://wwvv·.trcus.gov/pre:>s/relcases/js2354.htm
4/28/2005
js-2355: Air Transportation Stabilization Board Aloha Airlines Repays ATSB Guaranteed ... Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
Aprtl4,2005
IS-2355
Air Transportation Stabilization Board Aloha Airlines Repays ATSB
Guaranteed Loan
Ttle Air T ransportallon StabillzCltion Board (A TSB) announced today that Aloha
Airlines tlas fully repaid the remaining balance of Its ATSB guaranteed loan of $45
million, which was made on December 23,2002 The loan was backed by a $405
million guarantee issued under the AII' Transportation Safety and System
Stabilization Act. The remaining balance on the loan at the time It was paid off was
S241 million; the guaranteed portion was $21 7 million
"The loan guarantee program served Its purpose to support Aloha over the past two
years when credit was not otherwise reasonably available and the Board is pleased
that the company has secured private financing and IS now proceeding toward a
successful reorganization and exit from bankruptcy," said ATSB Executive Director
Mark Dayton
http://ww\v.trcu3.gov!pr..;hl)/relc..a~es/js2355.htm
4/28/2005
JS-2356: Secretary John W. Snow<br>Prcparcd Rcmarks to the Tax Executives Institute<... Page 1 of 4
FROM THE OFFICE OF PUBLIC AFFAIRS
April 4, 2005
JS-2356
Secretary John W. Snow
Prepared Remarks to the Tax Executives Institute
Washington, DC
Thank you so much for having me here, and for belrlg so accommodating with my
schedule. I know we've tried to make this work a few times, and I'm thrilled that
today worked out .. especially since we have so many important things to discuss.
want to share with you the Administration's progress on tax cut permanency, tax
code reform and Social Security reform.
I'd like to start out with a qUick look at our economy, because It'S dOlrlg very well
and I know that its success is closely tied to good tax policy.
Well-timed tax cuts, combined With sound monetary policy set by the Federal
Reserve Board, have resulted Irl very good economic growth and, most importantly,
contlrlual job creation. The economy has created over three million jobs since May
of 2003. And while job growth can never be fast enough for those looking for work,
the steady pace of job creation has been an unmistakable sign of an economy that
has recovered from very tough times, and is now expanding.
In addition to continued job growth, we've also seen new jobless claims decllrle and
productiVity continue to expand. GOP growth for 2004 was 3.9 percent The
unemployment rate is down to 5.2 percent - lower than the average rate of the
1970s, 1980s and 1990s. Inflation, interest rates, and mortgage rates remain at low
levels. Homeownership rates are at record highs.
ThiS IS good news, but Important work is stili ahead. We need to work on keeping
the path clear and solid for an economic future that is as good, or better, than the
present To do that, we've got to keep taxes low; we've got to make the President's
tax cuts permanent so that families and small buslrlesses can plan With confidence
for their future. Beyond that, we've got to make fundamental, lasting improvements
to our tax code. We've got to cut the deficit in half and enact an energy policy. And
we've got to save SOCIal Security; I'll get back to that topic shortly.
This country has a wonderfully dynamic, resilient and powerful economy It IS an
economy IIlat is ever-changlrlg to keep up With developments in technology,
International trade and world events. Unfortunately, our tax code has not kept up
with the changlrlg times.
While America remalrls known for its economic flexibility and dynamism, our tax
code has grown larger, bulkier, more burdensome and lethargiC With every passlrlg
year. No one knows that fact better than the people here In this room today.
The tax code is dreadfully murky in its complexity, but its size IS clear and easy to
see. More than a million words long, the Internal Revenue Code and regulations
has more than doubled in terms of page-length over the past twenty years and
today's "short" income tax form takes more than 11 hours to prepare - about the
same as the "long form" did a decade ago.
The code IS so filled with loopholes, exceptions and lengthy explanations that
Irldividuals and buslrlesses spend more than SIX billion hours every year on
paperwork and other tax headaches. Total compliance costs of the income tax are
roughly $125 billion annually - about 13 cents for every dollar in income tax
revenues collected, Of this $125 billion, individuals have born the brunt. spending
about $85 billion trying to comply with our maze of a tax code. In fact. the average
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Js-nS6: Secretary John W. Snow<br>Prepared Remarks to the Tax Executives Institute<... Page 2 of 4
American spends around L5 Ilours preparing ttleir tax return.
Imagine what thiS great country could do If we could get a few billion hours back
and a few billion dollars in lower compliance costs as well And that's why we're
here today to talk about how we can take those billions of hours and dollars away
from the tax code niglltmare ami give them back to the terrific productivity and
creativity of the American people.
As you know, (t,e Presldellt has asked thaI a bipartisan panel work togetiler to
come up With some options for tax leform He has asked that the fine people on
that panel be gUided by the goals of increased fairness, simplicity anel ease of
understanding, and economic growth and Job oeatlon The PreSident has also
asserted that any reform proposal should carryon the good traditions of recognizing
the Impol-tance of homeownershlp and Chanty in our society.
The panel has held six meetings so far two here in Washington and one apiece In
Tampa, Chicago, New Orleans and San FranCISco. They are hearing expert
testimony at each meeting, and receiving a wide I-ange of critiques and ideas from
all over the country. The Panel's executive director, Jeff Kupfer, IS looktrlg forward
to betrlg here tomorrow to give you more detail on the panel's actiVities. They're
doing great work, and I am looking forward to receiving their recommendations by
the end of July.
In the mean time, the nation is moving closer to achieving meaningful reform of our
SOCial Security system.
The President's leadership on this issue IS providing our country with a tremendous
opportunity to save Social Security for current and near retirees and improve it for
younger generations Since March 3rd, Administration officials - from PreSident
Bush and Vice PreSident Cheney to Cabinet members like me and policy experts have been traveling throughout the country as part of a coordinated 60-day tour of
at least 60 stops to discuss the PreSident's message of strengthening SOCial
Security With the American people.
We were almost at the half-way mark of the 60 days, and were about to achieve 60
stops far ahead of schedule, when the Social Security and Medicare Trustees
Report was released - another important milestone. This annual report on the
financial health of the programs' trust funds left little doubt that the system is
financially unsustainable, and in need of expeditious and lasting change.
The Trustees' report showed that Social Security cash flows peak in 2008 and turn
negative In 2017, and the trust fund Itself will be exhausted in 2041 The unfunded
obligation, that is, the difference between the present values of SOCial Security
Inflows (plus the trust fund) and outflows, IS $11.1 trillion on a permanent basis, and
$4.0 trillion over the next 75 years.
The Issue of Social Security IS really a matter of basic anthmetic, and the threat to
Social Security in the near future makes more sense when you look at the simple
math. SOCial Security has enough money now because for decades we have had
more than enough workers paying into the system, supporting the retirees draWing
benefits
In 1950, there were 16 workers to support every beneficiary of Social Security - a
very comfortable ratio of those paying in versus those drawing benefits. Today
there are only 3.3 workers supporting every beneficiary. By the time today's
youngest workers - many of you have children In that age group - turn 65, there
will only be two workers supporting each retiree
Now, the President doesn't believe that we should make up the Social Security
shortfall With tax increases. The Trustees' report showed Just how much we would
have to raise taxes to achieve long-term balance the payroll tax rate would have to
be raised immediately by 3.5 percentage points to make the system whole on a
permanent basis. In other words, the payroll tax would have to be trlcreased by
nearly 30 percent.
I know you appreciate how that kind of tax Increase would have Significant, negative
economic repercussions: it would be bad for countless facets of our economy.
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Both workers and employers would bear a significant cost. For very small
employers, I fear that much of a tax Increase would force them to make terrible
choices, from lay-offs to health benefit cuts. And it would make hll-ing new people
even more difficult - which IS wOlTlsome since small business creates most of our
nation's new Jobs
Increasing payroll taxes hurts the economy and It hurts Job creation, period That's
why the President IS against it.
It is also worth noting that payroll tax increases have been the standard "solution" to
Social Security's problems, and they have never solved the problem I Payroll taxes
have been raised some 20 times since SOCIal Security was established ~ and it has
failed to make the system solvent.
Tax Increases aren't the answer, so the President has encouraged the Congress to
propose a variety of Ideas that might be, and he has put a number of ideas on the
table as well
When the President took thiS Issue to the country in his State of the Union Address,
he said his objective was to engender a broad national dialogue to get people
talking about this Issue_ He wanted Americans to talk about Social Security, and a
national conversation has begun as a direct result.
Today, people are talking about the Issue from the halls of Congress to the halls of
local shoPPlllg malls l The President's leadership has drawn critical attention to the
problem and is creating movement. Progress, real progress, is being made_
Over lunch counters, over breakfast and dinner tables allover America_. the tOPIC
IS SOCial Security reform It's the front page story in virtually every newspaper. It's
on the evening news_ And it's there because of the President of the United States_
It's there because of the courage that he's had to directly confront and deal with
what so many in political life call the "third rai!."
The American people respect leaders who call a spade a spade. The President
touched the "third rail" Without fear, and now we're moving forward. Neighbors and
co-workers are talking about it: families are talking about it: Congress IS talking
about it.
We've seen a clear shift in the course of the last month or so from the question: "Is
there a problem?" to the question "How do we fix it?"
The full question, of course, is "how do we fix It for our children and grandchildren?"
Because for Americans 55 or older, of course, the system Will not change. It's the
young workers and future workers, who will be impacted, who will, I hope, benefit.
They are the ones for whom we need to fix this system
RaiSing their payroll taxes won't make it better. What the PreSident would like to
see, Instead, for future generations is an ability to save some of their payroll taxes,
to build a nest egg that belongs to them, not to the government. Something they
could pass on to their heirs. A nest egg that would draw on the powerful force of
compound IIlterest to give workers the prospect of a retirement that IS far better
than the rapidly-weakening promise of SOCial Security benefits.
With voluntary personal accounts, younger workers would have the chance to learn
about their financial choices, build a nest egg and benefit from sound long-term
investment in the free market system Without disrupting the system of benefits for
today's retired beneficiaries.
For the life of me, I can't Imagine why anybody would argue against young workers
haVing the ability to invest and bUild a better retirement for their future In fact, it IS
the only way to make sure that Social Security reform and putting Social Security
on a sound fiscal basis IS fair to young workers and future generations. It costs the
Social Security system nothing to do so, it will cost current and near-retirees
nothing, it gives our children and grandchildren a better retirement. and it helps our
country create a larger pool of savings over time.
Additionally, as former Democratic Congressmen Tim Penny and Charlie Stenholm
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wrote In an op-ed recently. "opposlllg personal accounts IS not a substitute for
offering a positive solution fOl" dealing with the challenges that face Social Security"
They went on to say. astutely. that they "believe that if Social Secunty were being
created from scratch today. Amencans would want to Include a way to help
everyone build up a nest egg"
The President and I couldn't agree mOl"e with Congressmen Penny and Stenholm
SOCial Security reform that (Ioesn't raise payroll tax rates. that protects benefits for
today's seniors. and that improves the system dramatically for our children and
grandchildren can be achieved
We are part of an eXCiting moment In American history. where a PreSident's
courageous leadership has inspired a national discussion and, I'm confident. Will
lead to hlStOIlC results. I encourage you to be involved. whether It'S talking about the
Issue With your colleagues. With your families. or your Members of Congress l
If we act now. we can make sure that Social Security, and our economy, are on
sound financial footll1g for our children and grandchildren.
Thanks so much. again. for having me here today. I'd love to take your questions
now.
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JS-2357: Harold Dame1in Sworn in as Treasury Inspector (ieneral
Page 1 of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
April 4,2005
JS-2357
Harold Damelin Sworn in as Treasury Inspector General
Harold Damelin, a Washington, D.C attorney and graduate of Boston College Law
School, was sworn III today as the Inspector General of the Department of the
Treasury. President Bush nominated him for thiS position on January 24, 2005, and
the Senate confllilled him on March 17, 2005
As Inspector General, Damelill will lead the efforts of the Office of Inspector
General to keep the Secretary and the Congress informed on the effectiveness and
effiCiency of Treasury programs and operations, to conduct audits and to
Investigate allegations of waste, fraud and abuse.
Prior to becomlllg the Inspector General of the Department of the Treasury,
Damelill served as Inspector General of the Small Business Administration for the
past two years. Damelill came to the Inspector General community with over thirty
years of litigation experience in the Federal government and in private practice.
Before entering private practice In 1986, Damelin served for thirteen years as a
Federal prosecutor with both the Criminal Division of the Department of Justice, and
as an Assistant United States Attorney III the District of Columbia From 1986 to
1995, he was a partller III two law firms where he specialized in white collar criminal
defense.
In 1995 Damelin rejoined the public sector, serving for two years as Staff Director
and Chief Counsel for the U S Senate Permanent Subcommittee on
Investigations, and then for a year as Senior Counsel to the U S. Senate's Special
Investigation Committee which examined allegations of wrongdoing surrounding the
1996 federal election campaigns In 1999, Damelill returned to private practice for
five years With the WaShington, D.C. firm of Powers, Pyles, Sutter and Verville,
where he headed the firm's fraud and abuse practice group. He left that firm in 2003
to become the Inspector General at the Small Busilless Administration
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FROM THE OFFICE OF PUBLIC AFFAIRS
April 4, 2005
2005-4-4-16-1-47-3443
U.S. International Reserve Position
The Treasury Department today released U.S reserve assets data for the latest week. As indicated in this table, US. reserve assets
totaled $78,759 million as of the end of that week, compared to $79,029 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
TOTAL
1. Foreign Currency Reserves
1
a. Securities
March 25, 2005
AQril 1, 2005
79,029
78,759
Euro
Yen
TOTAL
Euro
Yen
TOTAL
11,875
14,795
26,670
11,851
14,623
26,474
Of which. issuer headquartered in the US
0
0
b. Total deposits with:
bJ Other central banks and BIS
11,667
2,974
14,641
11,619
2,939
14,558
b.ii. Banks headquartered in the US.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the US.
0
0
b.iii. Of which, banks located in the U.S.
0
0
15,117
15,122
11,559
11,563
11,042
11,042
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
March 25, 2005
Euro
1. Foreign currency loans and securities
Yen
AQril 1, 2005
TOTAL
Euro
0
Yen
TOTAL
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
0
o
2.b. Long positions
o
o
o
o
3. Other
III. Contingent Short-Term Net Drains on Foreign Currency Assets
March 25, 2005
Euro
Yen
April 1, 2005
TOTAL
Euro
Yen
TOTAL
o
o
2. Foreign currency securities with embedded options
o
3. Undrawn, unconditional credit lines
o
o
o
o
o
1. Contingent liabilities In foreign currency
1.a Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
Ja. With other central banks
Jb. With banks and other financial institutions
Headquartered in the US.
Jc. With banks and other financial msUtutions
Headquartered outside the US.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the US. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are fillal.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDRldoliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-2358: Monctary Policy in Emcrging Market COLintries with Implications for Egypt<B ...
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JS-2358
Monetary Policy in Emerging Market Countries with Implications for Egypt
Remarks at the Egyptian Center for Economic Studies
John B. Taylor
Under Secretary for International Affairs
United States Treasury
Cairo
April 5, 2005
Thank you for inviting me to speak today about monetary policy in emerging market
countries and the implications for Egypt One of the most rewarding parts of my Job
as US Treasury Under Secretary has been working with officials in emerging
market countries on the formulation and implementation of monetary policy. I
particularly welcome the opportunity to speak here in Egypt today, because Egypt is
not only making noteworthy changes on economic reforms in redUCing tariffs and
taxes, but also on monetary poliCy operations
In recent years, a number of other countries have adopted monetary policies similar
to those which Egypt IS headlllg toward, and their experience is very encouraging
First, Inflation has come down significantly in countries that have followed these
policies Instead of spiraling upwards, nearly out of control, prices have become
much more stable. We can call this the new era of price stability.
Second, recessions have become less frequent and milder and economic
expansions have gotten longer. In other words, the new era of price stability has
been accompanied by a new era of overall economic growtll and stability.
I began studying this connection between price stability and economic stability back
when I was a professor in the mid 1990s and I concluded that this connection is
causal, not accidental. Why? Simply put, the improvement in price stability has
virtually flattened the boom-bust cycles in which inflationary booms inevitably were
followed by recessionary busts. In any case, by studying the experiences in other
countries, I believe one can find important implications for Egypt.
Improvements in Price Stability
Figure 1 shows thiS reduction in inflation, or, in other words, the increase in price
stability. Starting about 20 years ago, and then gaining momentum, the rate of
inflation has fallen in every region of the world. This contrasts With the much higher
inflation around the world from the late 1960s through the 1970s. The reduction in
inflation in the United States in the late 1970s and early 1980s was one of the first
successful attempts to move toward price stability and It ushered in a period of price
stability that has been the subject of an enormous amount of research.
But while the movement toward price stability may have begun in the United States,
the movement is clearly not confined to the United States, as Figure 1 shows.
Inflation has declined for every region. Moreover, if you look at data for Individual
countries within the regions, you see the same phenomena. For example, looking at
the data for countries in the Middle East, we see trends toward price stability III
many countries in recent years. In 1990, six of the 12 countries in the Middle East,
for which data are available, had inflation rates in double digits; and now, according
to the most recent data, only three of 16 countries had inflation in double digits.
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What brought about thiS reuuctlon In Illflation'; I believe It can be traced to two
factors. First, central banks began to focus more seriously on the goal of price
stability, or low inflation. Second, and equally Important. they developed more
effective and systematic procedures for changing the Instruments of monetary
policy to brrng about the price stability goal Consider each of these factors In more
detail
Price Stability Goals
The Increased emphasIs on price stability fllSt began In the late 1970s and early
1980s and now commands worldWide respect ThiS emphasis followed from the
growlllg consensus that no long-run trade-off exists between inflation and
unemployment or economic growth In the 1960s and 1970s, economists thought a
trade-off existed. The more recent view IS that Inflation is harmful to economic
growth It creates volatility, raises real Interest rates, and reduces private
Investment. Inflation also hurts the poor, who are least able to hedge.
I recall best tile change III focus In the United States. Tile Intellectual forces
Included Milton Frredman's work on the inflation-unemployment trade off and the
new rational expectations school of monetary POliCY, which lowered the estimated
costs of reducing inflation. The practical implementation was, of course, the Job of
the Federal Reserve, and under Paul Volker's leadership polices were put III place
to bring inflation down by radically changing how the Instruments of policy
responded to inflation Since then, under Alan Greenspan's leadership, price
stability has remained the goal. While not setting a speCific numerical definition of
price stability, Chairman Greenspan's statements that price stability occurs at a
level of inflation at which inflation does not distort deCISions suggest an inflation
level of around two percent. Indeed. two percent was the target Inflation rate I
suggested as a benchmark in designing tile Taylor rule.
As the Importance of the goal of price stability spread around the world, a number
of countries found setting a numerical target, or target ranges, to be useful. For
example In the early 1990s Chile and New Zealand adopted specific numerical
targets for inflation In New Zealand, they even used the target as part of an offiCial
performance agreement between the governor of the central bank and the minister
of finance. The Bank of England adopted numerical inflation targets in the mid1990s. Since then, a number of other central banks--Canada, BraZil, Turkey, for
example--have found setting numerrcal targets for inflation to be useful. Except for
transition periods, the target for inflation IS in all cases very low, and not too far from
the two percent benchmark.
There has been some debate about whether setting a formal numerical target for
Inflation IS useful. Clearly It IS possible to achieve the goal of low inflation Without
setting a numerical target, as the Federal Reserve has shown, so the answer
depends on circumstances In each country. Whether a numerical target is used or
not, it is essential that the central bank takes the goal seriously and that It is
understood to be a very low rate of inflation. It is easy to say that the goal is price
stability, or to post such a goal on a central bank web page, but It is much different
to actually make the deCisions that will brrng it about.
Systematic, Transparent Procedures for Setting Policy Instruments
A second Important change in monetary poliCy IS in the way central banks set their
Instruments of poliCy as they endeavor to achieve the goal of price stability. There
are two main chOices for the instrument of monetary policy the interest rate, or a
monetary aggregate such as the monetary base. Either type of Instrument can be
used to achieve an inflation target, but in recent years there has been an increased
focus on the Interest rate.
Increased focus on the interest rate has encouraged policy makers and economists
to think more systematically and transparently about central bank decisions. They
need to consider whether the change In the Interest rate Instrument IS large enough.
or too large. For example. they need to decide how much to raise interest rates
when Inflation picks up. and they need to know whether lowering Interest rates
when there is a recession is consistent with the goal of price stability. Furthermore,
each adjustment decision and the policy instrument should not be viewed as an
isolated one-time adjustment. but rather as part of a multi-period strategy taking
expectations and their long-term effects into account. This is where the use of
policy rules can be helpful.
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The Taylor rule, for example, sets out certain principles that help policy makers
determine whether the Instruments are changed in a way that will achieve price
stability. For example, It calls for increasing the Interest rate instrument IJY more
than an increase in inflation. This principle, which IS Imbedded III the Taylor rule,
alms at Increaslllg the rea/Illtel'est rate in the face of an increase in inflation. The
Taylor rule also calls for lowering interest rates when there is a recession. And the
use of such a policy rule emphasizes the importance of transparency and clear
communications because It implies that these same prlllcipies will be applied in
future decisions.
Experience has shown that central banks that have been successful in lowering
IIlflation have followed these principles, and central banks that have not been
successful in achieving price stability have not followed these principles. For
example, during the late 1960s and 1970s when the Fed was not successful In
achieving price stability, Interest rates did not rise by more than increases in the
rate of inflation.
As part of the effort to be more systematic and transparent, central banks now
reveal much more information about how they arrive at their policies and what
effects those policies have. They now release information about monetary policy
meetings more quickly, and communicate to the public through speeches and press
releases more than ever before. Effective central banks use these channels of
information to inform the public of their strategy for monetary policy. It is especially
useful for the public to know that the central bank remains committed to a long-term
strategy for achieving price stability in the face of temporary ups and downs in
inflation.
An important aspect of a transparent monetary policy is a unified exchange rate. A
unified rate sends the clearest market signal and is far likelier than dual or multiple
rates to be free of corruption and other distorting influences. In 2001, Egypt
established a unified official rate. More recently, it eliminated differences between
the offiCial rate and the unoffiCial parallel rate. These are praiseworthy steps.
The Exchange Rate Question
When capital markets are open internationally the interest rate decisions described
above have obvious implications for the exchange rate and exchange rate policy.
There are two viable approaches to exchange rate policy. One is to adopt a flexible
exchange rate so that the central bank is free to make the interest rate decisions
according to the policy prinCiples discussed above that are needed for prrce
stability. The other choice, more relevant to small countries, is to Join a currency
union or adopt the currency of another central bank that follows good poliCy
prinCiples. An Intermediate case is to adopt a pegged exchange rate, which does
not create a permanent tie to another currency. But the lack of permanence has led
to credibility problems and the frequent collapse of such pegs. The Bretton Woods
system was based on such pegs and it indeed collapsed.
More recently there has been movement away from such intermediate exchange
rate arrangements so that now many countries have fleXible exchange rates.
Among them are the United States, the United Kingdom, the euro area as a whole,
as well as large emerging market economies such as Brazil and South Africa. The
movement away from intermediate exchange rate arrangements is also visible to
some extent In the Middle East. Egypt, Yemen, and Turkey have flexible exchange
rates. Alternatively, some other countries have dollarized, adopting a foreign
currency as their offiCial national currency. By the IMF's count, 46 countries had
flexible exchange rates at the end of 2003. There are also 50 countries and 30 or
more territories that have monetary unions, dollarization, currency boards, or
currency board-like systems.
Some Implications for Monetary Policy in Egypt
Having considered the principles of price stability and exchange rate regimes, how
could these lessons be applied to Egypt? In 2004, inflation in consumer prices was
11.3 percent in Egypt. The rise in inflation from the low single digits that prevailed
for several years previously IS related to two factors. One factor is the gradual
passing through of higher prices resulting from the depreCiation of the Egyptian
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PUUIlO III 2003. rile utilel Idcluf IS tile reVISion of the consumer price Index III 2004
to reflect prices more accurately. Appropriate monetary policy--emphaslzlng the
principles that have worked in other countrles--can ensure that these factors remain
one-time occurrences But, as our review of the experiences of other countries has
shown, this requires (1) a strong commitment to price stability and (2) a policy for
the instruments to achieve price stability.
Egypt is following a flexible exchaflge rate route, so It should be able to adjust
Interest rates by the right amount to achieve price stability. In thiS regard the
change the Egyptian government undertook In the second half of 2004 to make
Egypt's foreign exchallge market more efflclellt are most welcome The deCISions to
rescilld the foreign exchallge surrender requirement and to launch an IIlterbank
foreign exchange market have boosted foreign currency liquidity Delays In
obtalfllng foreign exchange for Imports or profit remittances were a staple of the
Egyptian busilless enviroflmellt in recent years They have disappeared, as has the
parallel market for foreign currency RemOVing these distortions will do much to
promote sustained growth The Egyptian pound has appreciated by seven percent
against the dollar and by 12 percent against the euro since late December. It IS the
first appreciation since the pound broke ItS ten-year peg to the dollar In 2000.
Confidence in the Egyptian pound reflects increased confidence in Egypt's
economic policymakillg.
The Central Bank of Egypt, under the leaderstllp of Governor el-Okdah, has
Introduced more coherence Into monetary management. Interest rates on Treasury
bills and other savings Instruments have been raised In an effort to counter inflation.
And later this month, for tile first time, the Monetary Policy Committee will meet to
diSCUSS a monetary policy framework, including goals and strategies to achieve
those goals. Here It is important to state publicly a clear goal for price stability or
low inflation whether stipulated as a formal numerical target of not. Here also is the
time to be specific that the policy Instruments--whether an interest rate or a
monetary aggregate--be set in a way that will achieve this goal. There is no reason
to postpone such actions while preparations to get better measures of inflation or
better ways to forecast are underway. It may be suffiCient for now to state what the
Instrument of policy will be and if it is the Interest rate that it should change by
enough to aVOid red uClng real interest rates when inflation rises.
To be sure, Implementing a coherent monetary policy framework is particularly
challenging In an emerging market country like Egypt. I reviewed some of these
challenges In a paper I presented at a conference at the Bank of MeXICO several
years ago. It is often difficult to estimate the potential growth rate, the output gap, or
the equilibrium interest rate. These challenges are greater where the informal
sector IS large and statistical coverage is limited. But none of the obstaCles need be
fatal to implementing a monetary policy framework oriented toward price stability,
as I have discussed here.
Measures of inflation such as the consumer price Index are never perfect. They are
measures of wtlere inflation has been rather than where it is going, and therefore
need to be supplemented with forecasts of futures data Judiciously used, these
Indicators offer Information about the direction prices more generally are likely to
take. Another way of dealing with lack of a reliable measure of inflation is to widen
the target range for inflation, if an expliCit numerical target for the rate of inflation is
being used.
Fiscal dominance can also be a problem if the central bank is reluctant to raise
interest rates when necessary because the government relies heaVily on debt
finance. There are two main ways to address the problem. One is to reduce
government debt. Egypt's debt to GDP ratio IS high. Restraint on spending
combined With faster growth would reduce the ratio to a more comfortable level
The other way to address the problem IS to make the central bank more
Independent. Changes to the banking law in Egypt in 2003 moved in that direction,
but a more Independent central bank would have a greater ability to make interest
rate changes when appropriate.
To reduce government debt, and enhance economic growth, Egypt must focus on
reforming its banking system. Like many other countries, Egypt nationalized its
banking system, and it has paid a heavy price. Directed lending channeled funds to
state-owned enterprises, depriving viable private sector firms of credit. Almost
everywhere, government-dominated banking systems have been a hindrance rather
than a help to economic growth. The government recently adopted a plan to reform
http://,,,ww.lIeas.gov/prc~3/rekascs/js2358.htl1l
4/28/2005
JS-235~:
ivlolletary Policy in Emerging Market COllntries with Implications for Egypt<B ...
Page 5 of 5
tile fllldllCldl sectul PldllS tu leuuce Ilullfjellulllllng loans at the state banks, the
commitment to privatize the Bank of Alexandria by the end of thiS year, and the sale
of state shal'es in some joint venture banks are t;,:mglble signs of the government's
belief that the state's role in the financial sector must be reduced, Privatizing other
state banks would also be benefiCial By prOViding greater efficiency In prOViding
credit, a liberalized financial system Will spur growth It will also help mOlletary
poliCY by providing market-based Information that IS crrtlcal for helpin~l the central
bank to make good decIsions.
Other Recent Economic Reforms in Egypt
Moreovel', the changes in monetary policy that I have focused on here serve as part
of a bmader set of reforms now being undertaken In Egypt. The United States
supports Presldellt Mubarak and Prrille Minister Nazif's JOint VISion of a more
competitive, dynamic economy that meets the growing employment needs of the
Egyptian population The Prrme Minister and his cabinet Ilave already established
tlleir reform credentials by enacting a number of Significant measures, Includmg
trade and tariff I'eform: foreign exchange market reform, and adjustments In
administered prices. These Illarket-orrented reforms have already paid dividends by
boosting investor confidence In Egypt. Foreign direct Investment III Egypt and
portfolio inflows are on the rrse, The Egyptian stock market has outperformed
almost every other equity market In the world, rising more than 100 percent In the
last nine months.
The reforms enacted to date are just the first stage of those necessary to bring
about the growth Egypt needs. Nor Will reform be quick and painless, Fulfilling
Prlille Minister Nazlf's vIsion will require sustained strong, and at times difficult,
actions by the cabinet and the People's Assembly, Plans to reduce personal and
corporate income tax rates, reform the financial sector, and privatize many stateowned flrills are welcome. The subSidies distort the economy and place a heavy
burden on government finances, which also need sustained reform. Carrying out
reforms will further improve Investor confidence In Egypt and improve the nation's
ability to compete in the global economy.
Conclusion
Other countries have faced challenges similar to Egypt's and have addressed them
As I mentioned, price stability is being achieved In many countrres around he
world Price stability has proved to be a robust framework capable of operating in a
variety of environments. So, even though Egypt faces a variety of challenges in
implementing monetary POliCY, it can employ solutions successfully applied
elsewhere. And, success In monetary policy will contribute enormously to Egypt's
fundamental economic challenges of economic growth, job creation and raising
liVing standards.
REPORTS
•
Regional Inflation Averages
http://v.-ww.Lreas.guv/press/rcleases/js2358.htm
4/28/2005
Figure 1
Regional inflation averages (%)
220
200
180
160
~
-
140
:;
ns
;;::::
120
0
c::
0
c::
Q)
Ij)
...ns
100
Q)
>
<{
80
60
Eastern
Europe
Industrialized
(solid) and
Asia (dotted)
40
-
~
Middle
East
Africa
I
- . -
20
...
o
--_ ..
-_
..
-
...
+-----~------~------~----~------~----~----~
19691973
19741978
19791983
19841988
19891993
19941998
19992003
Source: International Monetary Fund, International Financial Statistics database, March
2004.
js-23)l): MtUIA ADVISORY: Social Security Radio Day Schedule for Treasury Officials
Page I of3
FROM THE OFFICE OF PUBLIC AFFAIRS
April 6, 2005
js-2359
MEDIA ADVISORY: Social Security Radio Day Schedule for Treasury Officials
Secretary of Treasury John Snow
8:00am - 9:00am, 3:15pm - 4:15pm
800am
KVI-AM - Seattle, WA
LIVE
815am
Fox News Radio
Taped
830am
CNN En Espanol
Taped
845am
WTOP
WTOP-AM - Washington, DC
Taped
315pm
WPTT - Pittsburgh, PA
LIVE
3 30pm
Radio One/XM
Taped
345pm
Radio America
Taped
400pm
WNDA/WNDB - FL, TN, VA
LIVE
Assistant Secretary of Treasury Tim Bitsberger
1 0:00am - 11 :OOam
1000am
WDEV-AM - Vermont
Taped
10.15am
KVI-AM - Seattle, WA
LIVE
1030am
1045am
WFOB - Bowling Green, OH
LIVE
Radio Blllngue/Latlno USA (NPR)
Taped
U.S. Treasurer Anna Cabral
12:00pm - 2:00pm
1200pm
Univislon Radio
Taped
http://www.treas.gov/pre~s/releases/js2359.htm
4/28/2005
js-2359: \lLDI:\ :\D\TTSOR Y: Social
1': 15pm
Sl'CLlrIt~
Radi() Day Schedule for Treasury Officials
Page 2 of 3
La Ivlegd
Taped
1230pm
Radio One,Xl\l
Taped
12 45pm
WTOP
WTOP-Al\l - l/JasrilliCJton DC
Taped
1 OOpm
Nue'/o Vida
Taped
1 15pm
Fox Ne':ls Radio
Taped
1 30pm
KVI-Af,l - Seattle 'liA
LlI/E
145pm
Capitol 730 AU
Taped
Assistant Secretary of Treasury Rob Nichols
11:00am -12:45pm
11 80am
'!/oU~~-Af.1
- Atlanta GA
LI'/E
11 15am
'NFOB - Bmvllng Green. OH
LIVE
1130am
MetronelJs - f,lorgantoNn. WV
LIVE
11 45am
Radio America
LIVE
1200pm
Radio Bilingue/Latino USA (NPR)
Taped
12 15pm
Fox News Radio
Taped
12 30pm
'II/TOP
WTOP-MJ1 - Washington DC
Taped
Assistant Secretary of Treasury Mark Warshawsky
9:00am - 10:45am
900am
INoUN-AM - Atlanta. GA
LIVE
915am
'NFOB - Bowling Green. OH
LIVE
930am
UnlVISlon Radio
Taped
945am
WOE V-AM - Vermont
Taped
1000am
Metronews - Morgantown WV
LIVE
http://'vvww.trcas.gov/pre55/releases/js2359.htm
4/28/2005
js-2359: MEDIA ADVISORY: Social Security Radio Day Schedule for Treasury Officials
10. 15dlll
WNDA/WNDll - fCL, TN, VA
LIVE
1030alll
WHO-AM - Des MOll1es, IA
LIVE
http://www.trcas.gov/press/releases/js2359.htm
Page 3 of 3
4/28/2005
js-.236li: Financial Services Working Group to ;\ id Efforts of SPP
Page 1 of2
FROM THE OFFICE OF PUBLIC AFFAIRS
April 6, 2005
IS-2360
Financial Services Working Group to Aid Efforts of SPP
Plesldent George W. Bushlolned Canadian Prime Minister Paul Martin and
MexIco's President, Vicente Fox, on March 23, 2005 to announce the Security and
Prosperity Pal1nersilip of NOI-th Amerrca (SPP), a trilateral effort to Increase securrty
and to enhance prosperrty among the United States, Canada and Mexico through
greater coopelatlon and inforillation-sharrng.
The SPP IS based on the principle that prosperrty IS dependent on securrty, and
recognizes that these three great nations are bound by a shared belief III freedom,
economic opportunity and strong democratic institutions.
The SPP Will help Integrate security efforts to better protect citizens from terrorrsm
and promote the safe and effiCient movement of people and goods. Additionally, the
SPP Will expand econoillic opportunities for the people of the U.S, Canada and
MexIco by making businesses and the business environillent more competitive in
the global market place. It Will also enhance mutual efforts to protect the
environment, improve food safety and consumer choice, Improve abilities to combat
Infectious disease and develop responses to cross-border man-made or natural
disasters.
The SPP Will complement ongoing efforts, such as the Partnership for Prosperity
and the Smart Border Accord, and will help promote the safe moveillent of people
and goods within North Aillerica. The Partnership also helps protect our continent
from transnational threats, such as terrorism, organized crrme, smuggling and
trafficking
Agencies throughout the U.S Government, including the Departments of Treasury,
Commerce and State, the United States Trade Representative and US financial
regulatory agencies will playa critical role In the SPP Notably, Randy Quarles, the
Treasury's Assistant Secretary for International Affairs, has been selected to chair
the SPP's Financial Services Working Group (FSWG)
The FSWG Will focus on enhanCing processes fOI- addressing banking, securities
and insurance Issues. US representatives of the FSWG Will first Illeet among
themselves to further develop these Views, and ttlen with their Canadian and
Mexican counterparts to expand and move forward on these efforts. Tile FSWG Will
reach out to the private sectors and legislatures In the three countries to ensure
their Interests and concerns are approprrately reflected in the working plan compiled
by the FSWG.
The FSWG has already achieved consensus on several areas critical to all three
countries, Including
· Well-developed, effiCient capital markets are essential for economic
growth and national security;
· The Identification and discussion of issues In regard to banking,
securities and Insurance Will further facilitate the free flow of capital
and the efficient provIsion of financial services throughout the three
countries; and
· Financial regulators play an important role in addressing many
issues Important to the FSWG, and therefore participation by the
http://www.treas.gov/press/releases/js2360.htm
4/28/2005
js-2360: FlIlancial Services Working Group to Aid FITorts of SPP
Page 2 of2
regulatols IS ClltlCJI,
The Financial Services Working Group, together with other tl'llateral working
groups, Will develop a work plall by June 23, 2005 to begin moving forward orl Its
important duties to help bolster the ovelall sLiccess of the SPP,
-30-
http://www.trcu3.goy/press/releases/js2360.htm
4/28/2005
JS-2361:
Trc~lsllry ~lI1d
,
".:.",
IRS Issuc Ncw <br>Regulations Relating to U.S<br>Possessions
Page 1 of 1
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page. download the free At/oil,:"'! Auni),J/':) R,.~,iljf'I{").
April 6, 2005
JS-2361
Treasury and IRS Issue New
Regulations Relating to U.S
Possessions
WASHINGTON, DC - Today the Treasury Department and IRS announced
temporary and proposed regulations to provide guidance relating to U.S.
possessions under section 937 and other Code sections to reflect amendments
made by the American Jobs Creation Act of 2004 (AJCA) and the Tax Reform Act
of 1986. The income tax laws of the United States have long contained special
provisions for the taxation of individuals residing in US. possessions and
corporations created or organized in U.S. possessions. The Tax Reform Act of
1986 substantially revised these provisions. AJCA further revised certain aspects
of these provisions to prevent individuals who live and work in the United States
from taking advantage of these provisions to inappropriately reduce their combined
U.S. and possessions tax.
The regulations update the existing regulations to conform with the new laws and
provide additional guidance on the proper application of the statutory provisions.
The regulations provide guidance under section 937(a) for determining whether an
individual is a bona fide resident of the following U.S. possessions: American
Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin
Islands. The regulations also provide rules under section 937(b) for determining
whether income is derived from sources within the above-mentioned US.
possessions, and whether income is effectively connected with the conduct of a
trade or business within such a U.S. possession. Lastly, the regulations provide
updated guidance under various other Code sections to reflect changes made by
the Tax Reform Act of 1986 and AJCA.
REPORTS
•
•
•
Final Possession Fact Sheet 46
RIN 1545-BC86
RIN 1545-BE22
http://Y9·Yv·w.trea5,gov/pr~ss/rcleases/js2361.htm
4/28/2005
DEPARTMENT OF THE TREASURY
Office of Public Affairs
April 6, 2005
FACT SHEET:
New Temporary and Proposed Regulations on U.S. Possessions Residency and Source Rules
Overview
In the American Jobs Creation Act of2004 (AJCA), Congress clarified and supplemented
the U.S. tax rules dealing with U.S. possessions in particular the determination of: (1)
residency in a possession, and (2) whether income is possession source or effectively
connected with the conduct of a possession trade or business.
The temporary and proposed regulations generally provide guidance with respect to
American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin
Islands under the new possession rules in AJCA and update guidance under other
sections of the Internal Revenue Code to reflect amendments made by AJCA and the Tax
Reform Act of 1986.
Residency Rules
~
Under the regulations announced today, an individual is generally considered a
bona fide resident of a possession if (1) he or she is physically present in the
possession for 183 days during the taxable year and (2) meets certain other
conditions.
~
The regulations provide certain exceptions to the 183-day test. Individuals who
meet the following requirements will be considered to have met the 183-day test:
o
o
o
~
Individuals who spend no more than 90 days in the United States during the
taxable year;
Individuals who spend more time in a possession than in the United States
and do not have any U.S. earned income; or
Individuals who have no permanent connection to the United States.
There are days of presence in the United States that are not counted for purposes
of these three exceptions. For example, time spent in the U. S. as part of an
individual's official duties as a government official or employee of a possession is
not counted.
Effective date: These regulations generally apply to taxable years ending after
October 22, 2004. However, the 183-day test and the exceptions to it are effective for
taxable years beginning after October 22,2004.
**MORE**
Source Rules
•
Generally, the regulations provide that the principles for detennining whether
income is U.S. source are applicable for detennining whether income is
possession source. Similarly, the principles for detennining whether income is
effectively connected with the conduct of a U.S. trade or business are applicable
for purposes of detennining whether income is effectively connected to a
possession trade or business. However, the regulations also generally provide
that:
1. Income from U.S. sources is not considered income that is possession
source or effectively connected with the conduct of a possession trade or
business; and
2. Income that is effectively connected with the conduct of a U.S. trade or
business is not treated as possession source income or effectively
connected with the conduct of a trade or business in a possession (the U.S.
income rule).
•
The regulations provide the following exceptions to these rules:
o
o
o
The regulations preserve the existing treatment of income from the sale of
goods manufactured in a possession, which provide for the allocation of this
income between U.S. and possession sources;
The regulations provide rules to prevent U.S. citizens and residents from
avoiding U.S. tax on appreciated property by becoming resident in a
possession prior to the property's disposition in certain instances;
The regulations also provide certain anti-abuse rules for detennining the
source of dividends and interest from possession corporations.
Effective date: These regulations are generally effective for income earned after
October 22, 2004 or after the publication of the regulations. The U.S. income
rule is effective for income earned after December 31, 2004.
**END**
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
REG-159243-03
RIN 1545-BC86
Residence and Source Rules Involving U.S. Possessions and Other Conforming
Changes
AGENCY:
Internal Revenue Service (IRS), Treasury.
ACTION:
Notice of proposed rulemaking, notice of proposed rulemaking by
cross-reference to temporary regulations, and notice of public hearing.
SUMMARY: In the Rules and Regulations section of this issue of the Federal
Register, the IRS is issuing temporary regulations that provide rules under
section 937(a) of the Internal Revenue Code (Code) for determining whether an
individual is a bona fide resident of the following U.S. possessions: American
Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the United States
Virgin Islands. The temporary regulations also provide rules under section
937(b) for determining whether income is derived from sources within a U.S.
possession and whether income is effectively connected with the conduct of a
trade or business within a U.S. possession. Section 937 was added to the Code
by section 908 of the American Jobs Creation Act of 2004 (2004 Act).
The temporary regulations also provide updated guidance under sections
1,876, 881,884,931,932,933,934,935,957, and 6688 of the Code to reflect
amendments made by the Tax Reform Act of 1986 (1986 Act) and the 2004 Act.
Conforming changes are also made to regulations under sections 170A, 861,
871, 901, 1402,6038,6046, and 7701 of the Code. The text of the temporary
regulations on this subject in this issue of the Federal Register also generally
serves as the text of these proposed regulations set forth in this cross-referenced
notice of proposed rulemaking.
This notice of proposed rulemaking also contains proposed regulations
that are in addition to the text of the temporary regulations. These provisions that
are issued only as proposed regulations contain additional conforming changes
to the regulations under sections 1,861,871, and 7701.
DATES: Written or electronic comments must be received by July 11, 2005.
Requests to speak and outlines of topics to be discussed at the public hearing
scheduled for July 21, 2005, at 10:00 a.m., must be received by June 30, 2005.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-159243-03) room
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered between the hours
of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-159243-03), Courier's Desk,
Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC, or
sent electronically, via the IRS Internet site at www.irs.gov/regs or via the Federal
eRulemaking Portal at www.regulations.gov (IRS and REG-159243-03).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, J. David Varley at (202) 435-5165; concerning submissions, Treena
Garrett at (202) 622-3401 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
2
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget for
review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collection of information should be sent to the Office
of Management and Budget, Attn: Desk Officer for the Department of the
Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503,
with copies to the Internal Revenue Service, Attn: IRS Reports Clearance
Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the
collection of information should be received by July 11,2005. Comments are
specifically requested concerning:
Whether the proposed collection of information is necessary for the proper
performance of the functions of the Internal Revenue Service, including whether
the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (see below);
How the quality, utility, and clarity of the information to be collected may
be enhanced;
How the burden of complying with the proposed collection of information
may be minimized, including through the application of automated collection
techniques or other forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance,
and purchase of service to provide information.
3
The collection of information in the proposed and temporary regulations is
in §1.937-1T. Section 937(a) of the Code provides rules for determining whether
an individual is a bona fide resident of Guam, Puerto Rico, American Samoa, the
USVI, or the Northern Mariana Islands. Section 937(c) requires an individual
who claims to become, or cease to be, a resident of a U.S. possession to file
notice of such claim in such manner as the Secretary prescribes.
Accordingly, §1.937-1T(g) requires individuals claiming to become, or
cease to be, a resident of a U.S. possession to file notice of such claim with the
Internal Revenue Service in accordance with section 937(c) of the Code.
Individuals subject to this reporting requirement must retain information to
establish their residency as required by section 937(c) of the Code and 1.937-1T.
The collection of information is mandatory. The likely respondents are
individuals who become (or cease to be) bona fide residents of a U.S.
possession.
Estimated total annual reporting burden: 75,000 hours.
Estimated average annual burden hours per respondent: 1.5 hours.
Estimated number of respondents: 50,000
Estimated annual frequency of responses: annually
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a valid control number
assigned by the Office of Management and Budget.
Background and Explanation of Provisions
Temporary regulations in the Rules and Regulations section of this issue
4
of the Federal Register amend 26 CFR parts 1, 301, and 602. The temporary
regulations provide rules concerning issues relating to U.S. possessions,
including rules for determining whether an individual is a bona fide resident of a
U.S. possession under section 937(a). The temporary regulations also provide
rules under section 937(b) for determining whether income is derived from
sources within a U.S. possession and whether income is effectively connected
with the conduct of a trade or business in a U.S. possession and rules under
section 937(c) pertaining to certain reporting requirements for individuals who
become (or cease to be) bona fide residents of a U.S. possession. Further, a
number of sections in the Code relating to possessions were substantially
revised by the 1986 Act. The temporary regulations amend regulations under
affected and related sections to conform them to statutory revisions enacted by
the 1986 Act and to other legislative amendments. Except as otherwise specified
in this notice of proposed rulemaking, the text of the temporary regulations also
serves as the text of these proposed regulations. This notice of proposed
rulemaking also contains proposed regulations that are in addition to the text of
the temporary regulations. These provisions that are issued only as proposed
regulations contain additional conforming changes. The preamble to the
temporary regulations explains the temporary regulations and these proposed
regulations.
Proposed Effective Date
These regulations are generally proposed to apply for taxable years
ending after October 22, 2004. For specific applicability dates, see the
5
temporary regulations in the Rules and Regulations section of this issue of the
Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a
significant regulatory action as defined in Executive Order 12866. Therefore, a
regulatory assessment is not required. It also has been determined that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations, and because the regulations do not impose a collection of
information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact on
small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight (8) copies)
or electronic comments that are submitted timely to the IRS. The IRS and
Treasury Department request comments on the clarity of the proposed rules and
how they can be made easier to understand. All comments will be available for
public inspection and copying. A public hearing has been scheduled for July 21,
2005, at 10 a.m. in the auditorium of the Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In addition,
6
all visitors must present photo identification to enter the building. Because of
access restrictions, visitors will not be admitted beyond the immediate entrance
area more than 30 minutes before the hearing starts. For information about
having your name placed on the building access list to attend the hearing, see
the "FOR FU RTHER IN FORMATION CONTACT" section of this preamble.
The rules of 26 CFR 601.601 (a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written or electronic
comments and an outline of the topics to be discussed and the time to be
devoted to each topic (signed original and eight (8) copies) by June 30, 2005. A
period of 10 minutes will be allotted to each person for making comments. An
agenda showing the scheduling of the speakers will be prepared after the
deadline for receiving outlines has passed. Copies of the agenda will be
available free of charge at the hearing.
Comments are requested on all aspects of the proposed regulations,
including those aspects for which specific requests for comments are set forth
above.
Drafting Information
The principal authors of these regulations are W. Edward Williams and J.
David Varley, Office of the Associate Chief Counsel (International), IRS.
However, other personnel from the IRS and Treasury Department participated in
their development.
List of Subjects
26 CFR Part 1
7
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as
follows:
PART 1 -- INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section
Section
Section
Section
Section
Section
Section
1.931-1 also
1.932-1 also
1.935-1 also
1.937-1 also
1.937-2 also
1.937-3 also
1.957-3 also
issued
issued
issued
issued
issued
issued
issued
under 26
under 26
under 26
under 26
under 26
under 26
under 26
U.S.C.
U.S.C.
U.S.C.
U.S.C.
U.S.C.
U.S.C.
U.S.C.
7654(e).
7654(e).
7654(e). * * *
937(a).
937(b).
937(b). * * *
957(c). * * *
Par. 2. In §1.1-1, the second sentence of paragraph (b) is revised to read
as follows:
§ 1.1-1 Income tax on individuals.
*****
(b) * * * Pursuant to section 876, a nonresident alien individual who is a
bona fide resident of a section 931 possession (as defined in §1.931-1T(c)(1) of
this chapter) or Puerto Rico during the entire taxable year is, except as provided
in section 931 or 933 with respect to income from sources within such
8
possessions, subject to taxation in the same manner as a resident alien
individual. * * *
*****
Par. 3. In §1.170A-1, paragraph 0)(9) is revised to read as follows:
§1.170A-1 Charitable. etc., contributions and gifts; allowance of deduction.
*****
0) * * *
(9) [The text of the proposed amendment to §1.170A-1 0)(9) is the same
as the text of §1.170-1 TU)(9) published elsewhere in this issue of the Federal
Register].
Par. 4. In §1.861-3, paragraph (a)(2) is revised to read as follows:
§1.861-3 Dividends.
*****
(a) * * *
(2) [The text of the proposed amendment to § 1.861-3 is the same as the
text of §1.861-3T(a)(2) published elsewhere in this issue of the Federal
Register].
Par. 5. In §1.861-8, paragraphs (f)(1 )(vi)(E), (F) and (H) are revised to
read as follows:
§ 1.861-8 Computation of taxable income from sources within the United States
and from other sources and activities.
*****
(f) * * *
9
(1) * * *
(vi) * * *
(E) The tax base for individuals entitled to the benefits of section 931 and
the section 936 tax credit of a domestic corporation which has an election in
effect under section 936;
(F) The exclusion for income from Puerto Rico for bona fide residents of
Puerto Rico under section 933;
*****
(H) The income derived from the U.S. Virgin Islands or from a section 935
possession (as defined in §1.935-1T(a)(3)(i)).
*****
Par. 6. Section 1.871-1 is amended as follows:
1. Revise paragraph (b)(1 )(iii).
2. Revise the last two sentences of the undesignated paragraph following
paragraph (b)(1 )(iii).
The revisions are as follows:
§1.871-1 Classification and manner of taxing alien individuals.
*****
(b) * * *
(1) * * *
(iii) Nonresident alien individuals who are bona fide residents of a section
931 possession (as defined in §1.931-1T(c)(1) of this chapter) or Puerto Rico
during the entire taxable year.
10
* * * The provisions of subpart A do not apply to individuals described in
paragraph (b)(1 )(iii) of this section, but such individuals, except as provided in
section 931 or 933, are subject to the tax imposed by section 1 or 55. See
§1.876-1.
Par. 7. Section 1.876-1 is revised to read as follows:
§1.876-1 Alien residents of Puerto Rico, Guam. American Samoa, or the
Northern Mariana Islands.
[The text of the proposed amendment to §1.876-1 is the same as the text
of §1.876-1T published elsewhere in this issue of the Federal Register].
Par. 8. Section 1.881-5 is added to read as follows:
§1.881-5 Exception for certain possessions corporations.
[The text of the proposed §1.881-5 is the same as the text of §1.881-5T
published elsewhere in this issue of the Federal Register].
Par. 9. In §1.884-0, paragraph (b) is redesignated as paragraph (c), and a
new paragraph (b) is added to read as follows:
§ 1.884-0 Overview of regulation provisions for section 884.
*****
(b) [The text of the proposed amendment to §1.884-0 is the same as the
text of §1.884-0T published elsewhere in this issue of the Federal Register].
Par. 10. In §1.901-1, paragraph (g) is revised to read as follows:
§1.901-1 Allowance of credit for taxes.
(g) [The text of the proposed amendment to §1.901-1(g) is the same as
the text of §1.901-1T(g) published elsewhere in this issue of the Federal
11
Register].
Par. 11. Section 1.931-1 is revised to read as follows:
§1.931-1 Exclusion of certain income from sources within Guam, American
Samoa. or the Northern Mariana Islands.
[The text of the proposed amendment to §1. 931-1 is the same as the text
of §1.931-1T published elsewhere in this issue of the Federal Register].
Par. 12. Section 1.932-1 is revised to read as follows:
§1.932-1 Coordination of United States and Virgin Islands income taxes.
[The text of the proposed amendment to §1.932-1 is the same as the
text of §1.932-1 T published elsewhere in this issue of the Federal Register].
Par. 13. Section 1.933-1 is amended by revising paragraphs (a) and (c)
and adding paragraphs (d) and (e) to read as follows:
§1.933-1 Exclusion of certain income from sources within Puerto Rico.
(a) [The text of the proposed amendment to §1.933-1 (a) is the same as
the text of §1.933-1T(a) published elsewhere in this issue of the Federal
Register].
*****
(c) [The text of the proposed amendment to §1.933-1 (c) is the same as
the text of §1.933-1T(c) published elsewhere in this issue of the Federal
Register].
(d) [The text of the proposed amendment to §1.933-1 (d) is the same as
the text of §1.933-1T(d) published elsewhere in this issue of the Federal
Register].
12
(e) [The text of the proposed amendment to §1.933-1 (e) is the same as
the text of §1.933-1 T(e) published elsewhere in this issue of the Federal
Register].
Par. 14. Section 1.934-1 is revised to read as follows:
§1.934-1 Limitation on reduction in income tax liability incurred to the Virgin
Islands.
[The text of the proposed amendment to § 1.934-1 is the same as the
text of §1.934-1T published elsewhere in this issue of the Federal Register].
Par. 15. Section 1.935-1 is amended is amended as follows:
1. Revise paragraphs (a)(1) through (a)(3).
2. Revise paragraphs (b)(1) and (b)(3), and add paragraphs (b)(5)
through (b)(7).
3. Revise paragraphs (c) through (f).
4. Add paragraph (g).
The revisions and additions are as follows:
§1.935-1 Coordination of individual income taxes with Guam and the Northern
Mariana Islands.
(a)(1) through (a)(3) [The text of the proposed amendment to §1.9351(a)(1) through (3) is the same as the text of §1.935-1T(a)(1) through (a)(3)
published elsewhere in this issue of the Federal Register).
(b)(1) [The text of the proposed amendment to §1.935-1 (b)(1) is the same
as the text of §1.935-1T(b)(1) published elsewhere in this issue of the Federal
Register).
13
*****
(b)(3) [The text of the proposed amendment to §1.935-1(b)(3) is the same
as the text of §1.935-1T(b)(3) published elsewhere in this issue of the Federal
Register].
*****
(b )(5) through (b )(7) [The text of the proposed §1.935-1 (b )(5) through
(b)(7) is the same as the text of §1.935-1T(b)(5) through (b)(7) published
elsewhere in this issue of the Federal Register].
(c) [The text of the proposed amendment to §1.935-1 (c) is the same as
the text of §1.935-1T(c) published elsewhere in this issue of the Federal
Register].
(d) [The text of the proposed amendment to §1.935-1(d) is the same as
the text of §1.935-1 T(d) published elsewhere in this issue of the Federal
Register].
(e) [The text of the proposed amendment to §1. 935-1 (e) is the same as
the text of §1.935-1T(e) published elsewhere in this issue of the Federal
Register].
(f) [The text of the proposed amendment to §1.935-1 (f) is the same as the
text of §1.935-1T(f) published elsewhere in this issue of the Federal Register].
(g) [The text of the proposed §1.935-1 (g) is the same as the text of
§1.935-1T(g) published elsewhere in this issue of the Federal Register].
Par. 16. Section 1.937-1 is added to read as follows:
§1.937-1 Bona fide residency in a possession.
14
[The text of the proposed §1.937-1 is the same as the text of §1.937-1T
published elsewhere in this issue of the Federal Register].
Par. 17. Section 1.937-2 is added as follows:
§1.937-2 Income from sources within a possession.
[The text of the proposed §1.937-2 is the same as the text of §1.937-2T
published elsewhere in this issue of the Federal Register].
Par. 18. Section 1.937-3 is added to read as follows:
§1.937-3 Income effectively connected with the conduct of a trade or business in
a possession.
[The text of the proposed §1.937-3 is the same as the text of §1.937-3T
published elsewhere in this issue of the Federal Register].
Par. 19. Section 1.957-3 is revised to read as follows:
§1.957-3 United States person defined.
[The text of the proposed amendment to §1.957-3 is the same as the text
of §1.957-3T published elsewhere in this issue of the Federal Register].
Par. 20. Section 1.1402(a)-12 is revised to read as follows:
§1.1402(a)-12 Continental shelf and possessions of the United States.
[The text of the proposed amendment to §1.1402(a)-12 is the same as the
text of §1.1402(a)-12T pu blished elsewhere in this issue of the Federal
Register].
Par. 21. In §1.6038-2, paragraph (d) is revised to read as follows:
§1.6038-2 Information returns required of United States persons with respect to
annual accounting periods of certain foreign corporations.
15
*****
(d) [The text of the proposed amendment to §1.6038-2(d) is the same as
the text of §1.6038-2T(d) published elsewhere in this issue of the Federal
Register).
Par. 22. In §1.6046-1, paragraph (f)(3) is revised to read as follows:
§1.6046-1 Returns as to organization or reorganization of foreign corporations
and as to acquisitions of their stock.
*****
(f) * * *
(3) [The text of the proposed amendment to §1.6046-1 (f)(3) is the same as
the text of §1.6046-1T(f)(3) published elsewhere in this issue of the Federal
Register].
PART 301 •• PROCEDURE AND ADMINISTRATION
Par. 23. The authority citation for part 301 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 24. Section 301.6688-1 is revised to read as follows:
§301.6688-1 Assessable penalties with respect to information required to be
furnished with respect to possessions.
[The text of the proposed amendment to §301.6688-1 is the same as the
text of §301.6688-1 T published elsewhere in this issue of the Federal Register].
Par. 25. In §301.7701-3, paragraph (c)(1 )(i) is amended by adding a final
sentence to read as follows:
16
§301.7701-3 Classification of certain business entities.
*****
(c) * * *
(1) * * *
(i) * * * For entity status consistency rules with respect to certain
possessions of the United States, see §§1.932-1T(h) and 1.935-1T(e).
*****
Par. 26. In §301.7701 (b)-1, paragraph (d) is revised to read as follows:
§301.7701(b)-1 Resident alien.
*****
(d) [The text of the proposed amendment to §301.7701 (b)-1 (d) is the
17
same as the text of §301.7701 (b)-1T(d) published elsewhere in this issue of the
Federal Register].
/s/ Linda M. Kroening
Deputy Commissioner for Services and Enforcement.
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
[TO 9194]
RIN 1545-BE22
Residence and Source Rules Involving U.S. Possessions and Other Conforming
Changes
AGENCY:
Internal Revenue Service (IRS), Treasury.
ACTION:
Final and temporary regulations.
SUMMARY: This document contains temporary regulations that provide rules
under section 937(a) of the Internal Revenue Code (Code) for determining
whether an individual is a bona fide resident of the following U.S. possessions:
American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the
United States Virgin Islands. The temporary regulations also provide rules under
section 937(b) for determining whether income is derived from sources within a
U.S. possession and whether income is effectively connected with the conduct of
a trade or business within a U.S. possession. Section 937 was added to the
Code by section 908 of the American Jobs Creation Act (2004 Act).
The temporary regulations also provide updated guidance under sections
876,881,884,931,932,933,934,935,957, and 6688 of the Code to reflect
amendments made by the Tax Reform Act of 1986 (1986 Act) and the 2004 Act.
Conforming changes are also made to regulations under sections 170A, 243,
702,861,863, 871, 901, 1402,6038,6046, and 7701 of the Code. The text of
1
JS-2362: Testimony of Secretary John W. Snow<BR>Before the<BR>U.S. Senate Comm ... Page 1 of 6
,
,.:.",
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 7, 2005
JS-2362
Testimony of Secretary John W. Snow
Before the
U.S. Senate Committee on Banking, Housing and Urban
Affairs
Proposals for Housing GSE Reform
Thank you Chairman Shelby, Ranking Member Sarbanes, and members of the
Committee for inviting me to appear before you today.
The United States has the broadest, deepest, most successful housing markets in
the world, supported by an interdependent financial services infrastructure, That
financial services infrastructure includes institutions such as federally insured
depositories, mortgage banks, private mortgage insurers, and Wall Street
investment banking firms. And a unique and prominent role in that infrastructure is
performed by the housing government-sponsored enterprises (GSEs) - Fannie
Mae, Freddie Mac, and the Federal Home Loan Bank System (FHLB).
With the aid of these financial institutions, Americans have ready access to a wide
array of mortgage finance options. Our national system of housing finance plays an
important role in promoting home ownership - a key priority of this Administration.
We have seen tremendous progress in increasing home ownership in America,
which now stands at 69 percent. Secretary Jackson and I share the commitment
made by the President to expand home ownership to 5.5 million more minority
homeowners by the end of the decade.
Our national system of housing finance needs to remain strong and healthy so that
it can continue to make mortgage credit available and provide financing
opportunities for new homeowners. Secretary Jackson and I are here today to
discuss reforms for the GSEs that will achieve these objectives. These reforms are
intended to ensure greater regulatory oversight, enhanced market discipline, and
appropriate capital requirements for the GSEs. As we consider these reforms, we
are guided by two core objectives: the need for a sound and resilient financial
system and increased opportunities for home ownership, especially for less
advantaged Americans.
Secretary Jackson will describe in greater detail the role that the GSEs were
created to perform, and the home ownership goals we have set forth for them.
Allow me to state succinctly why the Administration is so committed to bring about
real reform. The risks undertaken by the GSEs, if not properly managed, may pose
a threat to their solvency, the stClbility of other financial institutions and the strength
of our economy.
Essential Elements of GSE Regulatory Reform
In 2003, the Administration set forth what we consider to be essential elements for
creating a new, stronger, more credible regulatory system for the GSEs. The
Administration's position is that without these essential reforms, any new regulatory
system would be little improved from the inadequate system we have today. In light
of the recent events at the GSEs, the need for meaningful reform has become even
more clear. Half-measures will only exacerbate the risks to our financial system.
As we outlined in detail in 2003, the regulator for the GSEs should have powers
comparable in scope and force to those of other world-class financial supervisors
and fully sufficient to carry out the agency's mandate. The regulator must have
clear general regulatory, supervisory, and enforcement powers with respect to the
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GSEs. These powers must include the authority to set both minimum capital
standards and risk-based capital standards; the power to assess the entities for
independent funding outside of the appropriations process; and the ability to place a
failed GSE in receivership, An effective receivership mechanism, similar to that
held by other safety-and-soundness regulators, should help bring about critical
market discipline to ward off the prospect of a GSE falling into significant financial
distress. In addition, I wish to note the interplay between an effective FDIC-like
receivership mechanism and the so-called line of credit that exists between the
Treasury and the GSEs. As members of this Committee are aware, the Treasury
Secretary has discretion to issue debt in the amount of $2.25 billion to each of
Fannie Mae and Freddie Mac and $4 billion to the FHLBs. Some commentators
believe that this credit availability reinforces the perception that the Federal
government backs the debt obligations of the Enterprises, This perception is false.
In fact, I would exercise the line of credit (which pales in comparison to the size of
the debt obligations of the GSEs today) only in the event that a GSE was in
significant financial distress and needed the capital to emerge successfully through
the receivership process. Congress may wish to consider reforms in this area as
well.
As I said in my testimony of September 10, 2003 before the House Committee on
Financial Services, in order to address the unique mission of these enterprises as
chartered by Congress, an effective regulator must have an integrated package of
authorities. The package must empower the regulator to address problems that
may arise (like those which we have witnessed in the last two years) before they
cause damage to the financial system.
Another key power for the new regulator is the ability to review the activities of a
regulated entity, whether they be new activities or those in which the regulated
entity already participates. We need to strengthen the activity review process,
including greater public participation through notice and comment rulemaking.
Meaningful reform will also give greater clarity to the types of activities that fall
within the GSEs' mission, thus ensuring that new and existing activities focus the
GSEs on promoting housing opportunities. These tools should be a meaningful
part of the oversight of the housing GSEs.
Events that have transpired since I testified before this Committee in 2003 reinforce
concerns over the systemic risks posed by the GSEs and further highlight the need
for real GSE reform to ensure that our housing finance system remains a strong
and vibrant source of funding for expanding homeownership opportunities in
America. The Administration remains troubled that neither Fannie Mae nor Freddie
Mac has financial statements filed with the SEC that can be relied upon. Freddie
Mac has yet to file any financial statements in conformity with the securities laws,
and Fannie Mae is not expected to be able to issue financial restatements for many
months or even years. We recognize some of the unique characteristics of the
GSEs, but believe strongly that they, as well as the Federal Home Loan Banks,
should be held to public reporting requirements with the SEC comparable to other
large, complex public companies.
We believe that reform legislation must provide the regulator with the authority,
tools, and guidance from Congress as to what is expected of the GSEs going
forward. Consistent with the Administration's vision for strong and effective
regulatory and market discipline, I would like to expand on some other key
elements that are needed in order to adequately protect the stability of our housing
markets, our financial system, and our overall economy. Most notably, I would like
to describe the need to control the size and scope of the GSEs' investment
portfolios.
Financial and Accounting Problems at the Housing GSEs
The Administration's proposal in 2003 was presented against the background of
serious financial and accounting problems at the housing GSEs, including the June
2003 Freddie Mac announcement that it would restate its 2000-2001 financial
statements and further delay the release of its 2002 financial statements. Since the
last time I appeared before you, the following events have transpired:
•
•
OFHEO released a report of initial findings on Fannie Mae in September
2004 citing improper accounting procedures and practices, internal control
deficiencies and questionable management oversight.
The SEC concurred in the findings of inappropriate accounting practices,
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•
•
•
and directed Fannie Mae to restate its earnings for 2001-2003. Fannie
Mae, then, estimated that it would be forced to recognize $9 billion in
losses.
OFHEO concluded in December 2004 that Fannie Mae was "significantly
undercapitalized" in the third quarter of 2004, and demanded that the
minimum capital requirement be increased by 30 percent to ensure that the
Enterprise strengthened its financial position.
And just three weeks ago, Fannie Mae disclosed to the SEC that it could be
forced to recognize an additional $2.4 billion of losses, stating that it is
unable to reasonably estimate the effect of these issues on reported results
of operations.
In 2004 the FHLBanks of Chicago and Seattle entered into written
agreements with their regulator, the Federal Housing Finance Board
(Finance Board), to implement changes to enhance their risk management,
capital structure, governance and other practices and procedures. In March
of 2005, ten FHLBanks implemented new risk-based and leverage
requirements. The others are expected to comply soon.
These events demonstrate that the GSEs do not have reliable financial controls to
manage their operations risk. Such failures in controls, particularly in such highly
leveraged institutions, jeopardizes not only the GSEs' safety and soundness, but
also poses risks to the entire financial system.
Limitations on the GSEs' Debt-Financed Portfolio Investments
As additional financial and accounting problems have surfaced with the GSEs, and
as the Administration has continued to evaluate the overall structure of the GSEs'
operations in relation to their misSion, we believe that meaningful reform of the
regulatory structure of the GSEs must include mechanisms to protect our broader
financial markets from unnecessary risks. More than six out of ten institutions in the
banking industry hold as assets GSE debt in excess of 50 percent of their capital.
We share the view expressed by Chairman Greenspan and others that the sheer
size of the mortgage-based investment portfolios of the GSEs has grown well
beyond anything needed in carrying out their housing mission. As Chairman
Greenspan has stated:
" ... these institutions, if they continue to grow, continue to have the low capital that
they have, continue to engage in the dynamic hedging of their portfolios, which they
need to do for interest rate risk aversion, ... create ever growing potential risks
down the road."
Fannie Mae and Freddie Mac operate two independent main business lines today:
(1) a credit guarantee business associated with securitizing mortgages; and (2) a
portfolio investment business that involves purchasing mortgages and various
mortgage-related securities (including their own mortgage-backed securities) and
non-mission related assets. The first of these--the guarantee and securitization of
mortgages--is integral to the operation of an effective secondary market for
mortgages. The business of investing and holding an investment portfolio of
mortgages and other higher-risk assets for its own proprietary trading account and
inventory, however, has a much more tenuous connection to the housing mission of
the GSEs.
Freddie Mac and Fannie Mae, as we know them, were largely a product of the
turbulent financial period of the late 1960s and early 1970s. One of the primary
goals of creating Fannie Mae and Freddie Mac was " ... to provide supplementary
assistance to the secondary market for home mortgages by providing a degree of
liquidity for mortgage investments, thereby improving the distribution of investment
capital available for home mortgage financing." Initially, Fannie Mae provided this
assistance primarily by buying mortgages while Freddie Mac concentrated on
securitizing mortgages, a pattern that continued throughout the 1980s.
Since 1990, however, the mortgage portfolio business of both of the housing GSEs
has grown rapidly, much to the financial benefit of the Enterprises' management
and shareholders. From 1990 through 2003, Fannie Mae's mortgage investments
increased from $114 billion to $902 billion, and the ratio of mortgage investments to
outstanding guaranteed mortgage-backed securities increased from 40 percent to
69 percent. Freddie Mac's growth in mortgage investments was even more
dramatic. From 1990 through 2003, Freddie Mac's mortgage investments increased
from $22 billion to $660 billion, and the ratio of mortgage investments to
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outstanding guaranteed mortgage-backed securities increased from 7 percent to 88
percent.
In general, the risks of the mortgage investment business are more complex to
manage than the risks of the credit guarantee business. For example, with the
rising interest rates in the early 1980s, Fannie Mae's cost of funds rose above the
interest rate it was earning on its long-term, fixed-rate mortgages. This interest rate
mismatch was similar to that faced by the savings and loan industry, and Fannie
Mae became insolvent on a mark-to-market basis. Only a combination of legislative
tax relief, regulatory forbearance, and a decline in interest rates allowed Fannie
Mae to grow out of its problem.
The mortgage investment portfolio of the housing GSEs has grown rapidly,
beginning in the 1990s, motivated by high profit margins and made possible by a
substantial debt funding advantage. This funding advantage arises because
markets incorrectly assume that the Federal government provides some form of
guarantee to GSE debt. This rapid growth has created a new dimension of risk,
one that not only involves our national system of housing finance, but the potential
for systemic risk to financial markets in general. The potential for systemic risk is
associated with Fannie Mae's and Freddie Mac's large portfolios of mortgages and
mortgage-backed securities and other non-related assets, funded at extremely high
rates of leverage. The GSEs hold less than one-half the capital of similarly sized
financial institutions. The value of these large portfolios can fall dramatically when
interest rates change because individuals can prepay their mortgages.
Some of this risk can be hedged through the use of derivatives and other risk
transfer mechanisms. Nevertheless, the risk does not disappear altogether, and in
the event of an unforeseen problem, the GSEs might not have the funds to payoff
their debtholders, which could lead to ripple effects throughout our entire financial
system. For example, GSE debt is widely held by banks, so that if this debt
declined in value, some banks could find their solvency endangered. Concerns
about the GSEs' hedging strategies are reinforced by the regulatory enforcement
actions of recent months. Neither Fannie Mae nor Freddie Mac has been able to
put forth fair and accurate financial statements. Given this lack of accurate and
reliable information, Congress and the Administration are correct in worrying
whether the risks that have been undertaken by the GSEs are properly understood,
measured, and made public.
These portfoliO holdings thus raise fundamental concerns. Are there benefits that
outweigh the potential costs? Neither the Treasury nor the Federal Reserve has
found evidence that these portfolio holdings (above some minimum threshold)
provide meaningful benefits to borrowers. We believe that Congress could usefully
consider whether there are meaningful benefits to such holdings, and whether such
benefits outweigh the costs.
In order to protect against the systemic risks posed by the GSEs' mortgage
investment business, the Administration recommends that limitations be placed on
the size of the GSEs' retained mortgage investment portfolios. An appropriate
phase-in period for the reduction of the existing portfolios would be needed so as
not to disrupt mortgage or financial markets. After the appropriate phase-in period,
given the overall advances in securitization, the large amount of data available on
mortgages, and the increased sophistication of mortgage investors, we believe that
our capital markets could adjust to a significant reduction in the presence of the
GSEs as mortgage investors.
In addition to protecting our financial system against potential systemic risk, it is
also very important that our national housing finance system continues to function
smoothly and that the GSEs are able to accomplish their missions - in particular
their support for affordable housing. Our recommendation to limit the investment
portfolios of Fannie Mae and Freddie Mac does not in any way limit their ability to
guarantee mortgage-backed securities. In that regard, it is worth noting that
Freddie Mac operated a successful credit guarantee business throughout the 1980s
with a retained mortgage portfolio that was only a small fraction of its current size.
Therefore, given that these core functions of the GSEs are preserved, we see no
reason why limits on the GSEs' retained mortgage portfoliOS should impair their
ability to provide support for affordable housing, including the ability of Fannie Mae
and Freddie Mac to meet their affordable housing goals set by HUD.
Location of the New Regulatory Agency
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While the powers and authorities of the new regulator remain of paramount
importance to the Administration, Congress should also continue to consider the
location of the new regulator. In 2003, the Administration said it was open to
making the new regulatory agency a part of the Treasury Department, provided that
there were adequate elements of policy accountability to the Secretary of the
Treasury. The advantages of placing the new regulator within the Treasury should
not be overlooked. First, the start-up time and transition issues related to setting up
the new agency would be lessened; housing another agency within Treasury, which
is familiar with such relationships, is less time consuming than creating an entirely
new agency, which would facilitate effectively transferring existing OFHEO and
Federal Housing Finance Board operations to Treasury. Second, addressing
issues associated with systemic risk is an important aspect of our proposal, and the
Treasury Department is the Executive Branch agency with responsibility to adopt a
holistic approach to systemic risk and oversee the proper functioning of financial
markets. Third, improving market discipline is important, and the Treasury
Department is in the best position to monitor the new regulator's activities while
ensuring that investors have a proper understanding of GSE securities. Finally, we
believe that there would be less opportunity for regulatory capture were the new
regulator housed in Treasury, given the diversity and size of the interests which
regularly appear before the Department
However, as we described in detail last year, there are conditions that need to be
met in order for the Administration to support establishing the new regulator as a
part of Treasury. The new agency should be required to clear new regulations and
policy statements to Congress through the Treasury Department. The Treasury
Department and OMB should also have review authority over the new agency's
budget to ensure that resources are being properly allocated. Nevertheless, in any
such arrangement, the new regulatory agency should have independent
responsibility over specific matters of supervision, enforcement, and access to the
Federal courts. By housing the new regulator in Treasury with adequate oversight
authority, we can achieve the best of both worlds: ensuring a strong, independent
regulator while providing for accountability and expertise from the Executive
Branch.
The Appropriate Role of the Federal Home Loan Banks
Over the last decade the Federal Home Loan Bank System has undergone
considerable change. Membership in the System was extended to commercial
banks and they now make up the overwhelming number of members of the
System. The Federal Home Loan Banks greatly expanded their investment
portfolios and some Banks aggressively moved into the mortgage investment
business, types of activities that moved the Banks away from their traditional
wholesale funding activities for members. And while perhaps not particularly new,
large financial institutions account for the bulk of borrowing from many of the
Federal Home Loan Banks.
The Administration continues to believe that the Federal Home Loan Banks should
be placed under the same regulator with Fannie Mae and Freddie Mac, and that
this new regulatory regime should be structured to take into account certain special
differences between the Federal Home Loan Banks and the other GSEs.
Consistent with the primary goal of creating an effective regulatory regime for
Fannie Mae and Freddie Mac, I believe constructive steps can be taken in this
context toward also improving the regulation of the Federal Home Loan Banks. To
reach that goal, the regulatory structure of the system should be examined with a
careful eye to converging regulation of all of the GSEs to the same extent that their
operations (and the risks they present) have likewise converged. In particular, the
Administration believes regulation of the Federal Home Loan Banks would be
enhanced if Congress were to delineate an explicit mission for them. In addition,
we believe that Congress should consider reforming the appointment of directors to
the boards of the banks to ensure that the best corporate governance practices are
employed. And while progress is being made to ensure that the Federal Home
Loan Banks file their financial statements with the SEC much like other large
financial institutions with outstanding public debt, Congress should formalize such
obligations by statute.
Conclusion
In conclusion, our primary goals in developing our GSE reform proposal are to
promote the strength and resilience of our housing finance markets, lessen the
http://www.treas.gov/press/r~le~lses/js2362.htm
4/2812005
JS-2362: Testimony of Secretary John W. Snow<BR>Before the<BR>U .S. Senate Comm ... Page 6 of 6
potential for systemic risk, and continue our progress in meeting the mortgage
credit needs of all our Nation's homebuyers. To accomplish those purposes, the
fundamental elements of reform that the Administration has proposed are
essential.
In addition, events at the GSEs over the course of the last year reinforce the need
for a strengthened regulatory regime. There are a range of other reforms which
would also advance our common interest in ensuring the resiliency of the financial
system and the robustness of the housing finance system. The Administration is
open to consider additional ideas for reform.
I look forward to working with you on this important issue.
http://wv..W.treas.gov/pre5s/releases/js2362.htm
4/28/2005
JS-2363: Deputy Assistant Secretary lannicola Speaks to Savings <br>Group about<br>S... Page 1 of 1
:
,.:.",
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 6, 2005
JS-2363
Deputy Assistant Secretary lannicola Speaks to Savings
Group about
Strengthening Social Security
Deputy Assistant Secretary for Financial Education Dan lannicola, Jr. today spoke
to financial education public policy leaders at the American Savings Education
Council (ASEC) General Meeting in Washington, D.C. lannicola told today's
participants that the President's efforts to strengthen the Social Security system are
consistent with the group's work to increase personal financial security through
increased savings.
"For many years the American Savings Education Council has encouraged
Americans to plan for their financial futures," said lannicola. "By working to
strengthen Social Security the President is also looking ahead to help Americans
secure their financial futures."
Dallas Salisbury, President and CEO of the Employment Benefit Research Institute,
introduced lannicola and also unveiled a new Choose to Save public service
announcement, which will feature the www.rnyrnoney.gov Web site and 1-888mymoney toll-free number recently launched by the Financial Literacy and
Education Comrnission. lannicola praised ASEC and its partners' dedication to
improving financial education across the country. He also updated the participants
on the progress of the commission to develop a national strategy for financial
education, which will be released in June of 2005. Rep. Judy Biggert (IL) also
participated in today's event to help promote the month of April as Financial
Literacy Month.
ASEC is a nonprofit national coalition of public- and private-sector institutions
undertaking initiatives to raise public awareness about what is needed to ensure
long-term personal financial independence. ASEC's goal is to make saving and
planning a vital concern of all Americans.
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education in May of 2002. The Office
works to promote access to the financial education tools that can help all Americans
make wiser choices in all areas of personal financial management, with a special
emphasis on saving, credit management, home ownership and retirement
planning. The Office also coordinates the efforts of the Financial Literacy and
Education Commission, a group chaired by the Secretary of Treasury and
composed of representatives from 20 federal departments, agencies and
commissions, which works to improve financial literacy and education for people
throughout the United States. For more information about the Office of Financial
Education visit: wwwtreasgovlfinanc1aleducation.
http://ww·w.tr~aS·80v/rn~ss/releases/js2363.htm
4/2812005
js-236.:J.: Prepared Remarks from thc<br>General Counsel and Acting Deputy Secretary 0...
,
".:.",
Page 1 of 3
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 8, 2005
jS-2364
Prepared Remarks from the
General Counsel and Acting Deputy Secretary of the Treasury Arnold I.
Havens
Committee of 100 14th Annual Conference
Good afternoon. It's wonderful to be with you today. I bring with me the greetings
and best wishes of Secretary Snow, who is sorry he couldn't be here himself. It's a
great honor and privilege to serve the President and Secretary Snow as the
General Counsel and Acting Deputy Secretary of the Treasury.
And of course I am honored to speak before the Committee of 100 at your 14th
annual conference. The Chinese-American experience has been an authentic
American Dream. and the members and leaders of this organization are true
success stories. Many of you here today may be first or second generation
Americans. Like so many others who have come to America, your parents and
grandparents--and many of you--found in this country a new opportunity to build
better lives for themselves, their children, and grandchildren. In that sense, the
American Dream is a gift to the future.
I would like to talk about two opportunities we all have to give gifts to future
generations of Americans. I'd like to share with you the President's visionary ideas
to reform our tax code and strengthen Social Security.
Need for Comprehensive Tax Reform
While the American economy remains known for its flexibility, resiliency, and
dynamism, our tax code has grown longer, bulkier, and more burdensome every
year.
The tax code is dreadful in its complexity. More than a million words long, the
Internal Revenue Code and regulations have more than doubled in terms of pagelength over the past twenty years. The code is so filled with exceptions and lengthy
explanations that individuals and businesses spend more than six billion hours
every year on paperwork and other tax headaches. Total compliance costs of the
income tax are estimated at roughly $125 billion annually.
Imagine, if you would, a tax system that was less complicated. Imagine what this
great country could do if we could get back a few billion hours, or a few billion
dollars, every year! Next Friday is tax day, so you I know you can relate to what I'm
talking about.
To help advance this worthwhile goal, the President created a bipartisan panel
earlier this year to develop revenue neutral policy options. The President asked the
panel to be guided by a few core principles: increased fairness, simplicity, and ease
of understanding, and economic growth and job creation.
The panel is preparing recommendations that will be delivered to the Secretary of
the Treasury by July 31. Tax reform is a key priority for the President, and
simplifying the tax code is a key to lasting reform.
In addition to achieving fundamental reform, taxes also need to remain low for our
continued economic growth. We know this from recent experience. Well-timed tax
cuts, combined with sound monetary policy set by the Federal Reserve Board, have
produced good economic growth and continual job creation. The economy has
http://'v''ww.Lleas.gov/prc33/releases/j s2364 .htm
4/28/2005
js-2364: Prepared Remarks from thc<br>General Counsel and Acting Deputy Secretary 0... Page 2 of 3
created over three million jobs since May 2003. In addition to continued job growth,
productivity continues to expand GOP growth for 2004 was 3.9 percent.
Our economy is dynamic and resilient - the envy of the world. We need to keep
taxes low and stay on this path of economic growth and job creation. We also need
to continue looking down the field and make sure that our economy is not disrupted
by things that we can avoid -- things that we can fix, today.
Need for Social Security Reform
Of course, in this regard, I'm talking about Social Security. Let me be clear: the
current Social Security system is financially unsustainable, and in need of
expeditious and lasting change. On March 23, the Board of Trustees of Social
Security and Medicare issued its annual report. This report showed that Social
Security cash flows will peak in 2008 and turn negative in 2017. The trust fund
itself will be exhausted in 2041, when today's younger workers are beginning to
retire. The unfunded obligation--that is, the difference between Social Security's
income and assets on the one hand, and its outflows on the other--is $11.1 trillion
on a permanent basis. and $4.0 trillion over the next 75 years.
President Bush has shown real leadership on this issue. For many years, the
conventional wisdom in Washington was that Social Security reform was a
conversation stopper, the "third rail" of politics. The President had the courage to
touch the "third rail," and now we're moving forward. People recognize there is a
problem in our Social Security system. The President has called on Congress to
help find a permanent fix.
Fixing it is quite simply our responsibility to our children and grandchildren. This is
a matter of simple arithmetic. Social Security has enough money now because for
decades we have had more than enough workers paying into the system and
supporting the retirees who draw benefits. But you know the demographic trends.
In 1950, there were 16 workers to support every beneficiary of Social Security.
Today there are only 3.3 workers per beneficiary. By the time one of today's
youngest workers turns 65, there will be Just two workers to support his or her
benefits. That's why we're facing the multitrillion dollar shortfall identified in the
recent Trustees' report.
For those of us who are 55 or older, the President has made clear that our Social
Security benefits are solid. They will not change. We don't need to change our
retirement plans or strategy because of Social Security reform, period. But it's
those children and grandchildren, those young workers and future workers, who we
need to worry about. They are the ones for whom we need to save and strengthen
this system.
The President would like younger workers and future generations to have the ability
to save some of their payroll taxes they're already paying, to build a nest egg that
belongs to them, not to the government. With voluntary personal accounts,
younger workers would have the chance to learn about their financial choices, build
a nest egg and benefit from sound long-term investment in the free market system
without disrupting the system of benefits for today's retired beneficiaries.
Personal accounts would give young workers more options to invest and build a
better retirement for their future. Personal accounts can be implemented in a way
that costs the current Social Security system nothing; current and near-retirees
would not be affected. But they would give our children and grandchildren the
promise of a better retirement, and they would help our country create a larger pool
of savings.
Some have argued that we can save the system by increasing the payroll tax. But
this multi-trillion dollar shortfall cannot be reasonably fixed by raising taxes. The
recent trustees' report showed that the payroll tax would have to be increased by
nearly 30 percent to achieve long-term balance. A 30 percent hike in the payroll tax
would of course have significant, negative economic consequences. American
workers would be taking home less pay, and we mustn't forget that their employers
would shoulder half of that tax increase. For small businesses especially, a tax
increase of that size could require terrible choices, from lay-offs to cuts in health
benefits. And it would make hiring new people even more difficult. Quite simply,
increasing payroll taxes hurts the economy and it hurts job creation. That's why the
http://www.treas.gQv!rr~ss/rcleases/js2364.htm
4128/2005
js-2364: Prepared Remarks from thc~br>General Counsel and Acting Deputy Secretary 0... Page 3 of 3
President is against it.
We're making progress. We believe that Social Security reform that doesn't raise
payroll tax rates, that protects benefits for today's seniors, and that improves the
system dramatically for our children and grandchildren can be achieved. I
encourage you to become involved in this national discussion.
Conclusion
I would like to close with an analogy I recently heard Secretary Snow use. Many of
you in this room own your own businesses, and you probably worked hard over
your lives to build them up. You probably want to pass your business on to your
children or grandchildren. And you'll want your business to be in top shape,
financially, when that time comes.
Let's do the same with our tax system and Social Security system. If we make
responsible decisions now, we can make sure that Social Security, and our broader
economy, are on sound financial footing for our children and grandchildren.
Thanks again for giving me the opportunity to speak with you today.
I would be pleased to take your questions.
http://www.tn~;1 ... ~ov/prcss/releascs/js2364.htm
4128/2005
JS-2365: Remarks of <BR>Trcasury Acting Deputy Secretary Arnold I. Havens <BR>on Tax Reform an ... Page 1 of 3
,
".:.",
PRESS
'".
ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 11, 2005
JS-2365
Remarks of
Treasury Acting Deputy Secretary Arnold I. Havens
on Tax Reform and Social Security Reform
Rotary Club
Aiken, South Carolina
Good afternoon. It's wonderful to be with you today here in Aiken. I'd like to speak
with you about the President's leadership on two matters of long-term importance to
our economy: reforming the tax code, and strengthening Social Security.
Need for Comprehensive Tax Reform
While the American economy remains known for its flexibility, resiliency, and
dynamism, our tax code has grown longer, bulkier, and more burdensome every
year.
The tax code is dreadful in its complexity. More than a million words long, the
Internal Revenue Code and regulations have more than doubled in terms of pagelength over the past twenty years. The code is so filled with exceptions and lengthy
explanations that individuals and businesses spend more than six billion hours
every year on paperwork and other tax headaches. Total compliance costs of the
income tax are estimated at roughly $125 billion annually.
Imagine, if you WOUld, a tax system that was less complicated. Imagine what this
great country could do if we could get back a few billion hours, or a few billion
dollars, every year. Friday is tax day, so I know you can relate to what I'm talking
about.
To help advance this worthwhile goal, the President created a bipartisan panel
earlier this year to develop revenue neutral policy options. The President asked the
panel to be guided by a few core principles: increased fairness, simplicity, and ease
of understanding, and economic growth and job creation.
The panel is preparing recommendations that will be delivered to the Secretary of
the Treasury by July 31. Tax reform is a key priority for the President, and
simplifying the tax code is a key to lasting reform.
In addition to achieving fundamental reform, taxes also need to remain low for our
continued economic growth. We know this from recent experience. Well-timed tax
cuts, combined with sound monetary policy set by the Federal Reserve Board, have
produced good economic growth and continual job creation. The economy has
created over three million jobs since May 2003. In addition to continued job growth,
productivity continues to expand. GOP growth for 2004 was 3.9 percent.
Our economy is dynamic and resilient - the envy of the world. We need to keep
taxes low and stay on this path of economic growth and job creation. We also need
to continue looking down the field and make sure that our economy is not disrupted
by things that we can avoid -- things that we can fix, today.
Need for Social Security Reform
http://www.tr.~~s.{Jov/nress/releases/isl3.65.htm
7/5/2005
S-236S: Remarks of <BR>Trcasury Acting Deputy Secretary Arnold 1. Havens <BR>on Tax Reform an ... Page 2 of 3
Of course, in this regard, I'm talking about Social Security. Let me be clear: the
current Social Security system is financially unsustainable, and in need of
expeditious and lasting change. On March 23, the Board of Trustees of Social
Security and Medicare issued its annual report. This report showed that Social
Security cash flows will peak in 2008 and turn negative in 2017. The trust fund itself
will be exhausted in 2041, when today's younger workers are beginning to retire.
The unfunded obligation--that is, the difference between Social Security's income
and assets on the one hand, and its outflows on the other--is $11.1 trillion on a
permanent basis, and $4.0 trillion over the next 75 years.
President Bush has shown real leadership on this issue. For many years, the
conventional wisdom in Washington was that Social Security reform was a
conversation stopper, the "third rail" of politics. The President had the courage to
touch the "third rail," and now we're moving forward. People recognize there is a
problem in our Social Security system. The President has called on Congress to
help find a permanent fix.
Some Members of Congress have put some ideas on the table already. The people
of South Carolina are lucky in that your delegation has taken a real interest in
Social Security reform and offered some serious proposals. I know Congressmen
Gresham Barrett and Joe Wilson recently hosted a series of town hall meetings
here in Aiken and in other communities in this part of the state. Senator Lindsey
Graham has experienced firsthand the benefits of our Social Security system and
he has helpfully contributed to the national conversation on this issue by starting a
dialogue with his Senate colleagues. Senator Jim DeMint also has been a leading
voice in the Senate on the importance of fixing the Social Security system.
Fixing it is quite simply our responsibility to our children and grandchildren. This is a
matter of simple arithmetic. Social Security has enough money now because for
decades we have had more than enough workers paying into the system and
supporting the retirees who draw benefits. But you know the demographic trends. In
1950, there were 16 workers to support every beneficiary of Social Security. Today
there are only 3.3 workers per beneficiary. By the time one of today's youngest
workers turns 65, there will be just two workers to support his or her benefits. That's
why we're facing the multi-trillion dollar shortfall identified in the recent Trustees'
report.
For those of us who are 55 or older, the President has made clear that our Social
Security benefits are solid. They will not change. We don't need to change our
retirement plans or strategy because of Social Security reform, period. But it's those
children and grandchildren, those young workers and future workers, who we need
to worry about. They are the ones for whom we need to save and strengthen this
system.
The President would like younger workers and future generations to have the ability
to save some of their payroll taxes they're already paying, to build a nest egg that
belongs to them, not to the government. With voluntary personal accounts, younger
workers would have the chance to learn about their financial choices, build a nest
egg and benefit from sound long-term investment in the free market system without
disrupting the system of benefits for today's retired beneficiaries.
Personal accounts would give young workers more options to invest and build a
better retirement for their future. Personal accounts can be implemented in a way
that costs the current Social Security system nothing; current and near-retirees
would not be affected. But they would give our children and grandchildren the
promise of a better retirement, and they would help our country create a larger pool
of savings.
Some have argued that we can save the system by increasing the payroll tax. But
this multi-trillion dollar shortfall cannot be reasonably fixed by raising taxes. The
recent trustees' report showed that the payroll tax would have to be increased by
nearly 30 percent to achieve long-term balance. A 30 percent hike in the payroll tax
would of course have significant, negative economic consequences. American
workers would be taking home less pay, and we mustn't forget that their employers
would shoulder half of that tax increase. For small businesses especially, a tax
http://www.tr~as.gov/press/releases/js2?r65.htm
7/5/2005
JS-236S: Remarks of <BR>Trcasury Acting Deputy Secretary Arnold I. Havens <BR>on Tax Refonn an ... Page 3 of 3
increase of that size could require terrible choices, trom lay-ofts to cuts in health
benefits. And it would make hiring new people even more difficult. Quite simply,
increasing payroll taxes hurts the economy and it hurts job creation. That's why the
President is against it.
We're making progress. We believe that Social Security reform that doesn't raise
payroll tax rates, that protects benefits for today's seniors, and that improves the
system dramatically for our children and grandchildren can be achieved. I
encourage you to become involved in this national discussion.
Conclusion
I would like to close with an analogy I recently heard Secretary Snow use. Many of
you in this room may own your own businesses, and you probably worked hard
over your lives to build them up. You probably want to pass your business on to
your children or grandchildren. And you'll want your business to be in top shape,
financially, when that time comes.
Let's do the same with our tax system and Social Security system. If we make
responsible decisions now, we can make sure that Social Security and our broader
economy are on sound financial footing for our children and grandchildren.
Thanks again for giving me the opportunity to speak with you today.
I would be pleased to take your questions.
http://www.trcas.!lov/oresslreleases/Js2:165.htm
7/5/2005
1S-2366: Remarks ot <BR>Trcasliry Acting Deputy Secretary Arnold I. Havens <BR>bef... Page 1 of 4
,
".:.",
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 11, 2005
JS-2366
Remarks of
Treasury Acting Deputy Secretary Arnold I. Havens
before the School of Business Administration
University of South Carolina Aiken
Good afternoon, and thank you for inviting me to be here with you today. It is
always wonderful to visit a university in the springtime, because there is a palpable
sense of freedom and possibility in the air. Many of you are preparing to graduate
in a few weeks. Others are gearing up for summer jobs, summer internships, and
summer travels. And virtually all of you are dreaming big dreams--which is exactly
what you should be doing-- about what you will eventually accomplish in the big
world beyond this campus.
That kind of freedom - to follow your dreams, and to do what you want -- is at the
core of our democracy and our economic system. But as we have heard many
times, real freedom comes hand-in-hand with a sense of responsibility. When
people are not responsible about exerCising their freedoms, there can be tragic
consequences for individuals, companies, and even the broader economy.
I am encouraged that the organizers of this event--Dr. Ralph Byington and Dr. Rich
Waugh--have asked me to speak about corporate responsibility and business
. ethics. I also have a few remarks about Social Security reform, an important
current topic that implicates our collective responsibilities to society and to future
generations, and I will return to that subject in a few moments.
In recent years, we have seen a series of very serious abuses of our freedoms in
the world of business. Corporate scandals erupted in the headlines in late 2001
and early 2002, starting with Enron and followed quickly by Worldcom, Global
Crossing and others. Those headlines exposed a serious problem in our free
market system. Chairman Greenspan coined the term "infectious greed" to
describe the attitude that had led some of our corporate leaders to falsify and inflate
corporate results for their own substantial personal gain.
By doing so, they violated a sacred trust that is so important for leaders to maintain
in all walks of life, whether they have the privilege of serving as I do at this level of
government or they hold important responsibilities in the private sector.
One response to the wave of corporate scandals--as all of you Business School
students know--was the Sarbanes-Oxley Act of 2002, which was passed by an
overwhelming vote of the United States Congress and signed into law by President
Bush on July 30 of that year. At the risk of over-generalizing, Sarbanes-Oxley did
two important things. First, it significantly increased the criminal penalties for
anyone who perpetrates a fraud on the securities market. The second thing it did
was to create a vigorous and robust system for auditing and reporting on corporate
conduct, designed to insure that the financial information furnished to our securities
markets is honest and reliable.
Another major response also occurred in July 2002, and that was when President
Bush created the Corporate Fraud Task Force chaired by the Deputy Attorney
General. The Treasury Department contributes to this task force, which
coordinates the investigation and prosecution of crimes like securities and
accounting fraud committed by businesses and their executives. Under the
leadership of the task force, the Justice Department has obtained over 500
corporate fraud convictions or guilty pleas since its inception. About 1000 people
have been charged, including almost 100 corporate CEOs and preSidents.
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I don't want to risk overstating the problem. Even at the worst of the crisis, the vast
majority of corporate leaders were honest and ethical. They worked hard to earn
and deserve the trust of employees and shareholders. But selfish irresponsibility
caught up with the few who perpetrated these high-profile frauds, and many
innocent parties suffered the consequences. Some were affected directly, such as
the rank-and-file employees of companies like Enron who lost both their jobs and in
some cases much of the value of their pensions as inflated stock values
plummeted. Others were hit indirectly as the scandals caused ripples throughout
our economy. Confidence in our markets was shaken, and, with over 50 percent of
Americans owning stock, that was significant.
Coming just months after the tragic events of September 11 th, which had their own
negative impact on our economy, the corporate scandals shook Americans' trust in
the capital markets, in corporate leadership, and in the whole system of corporate
governance.
That's why the Congress and the President moved so quickly to take the kind of
corrective action that was needed. Not only did we have a need to address the
immediate problems, but perhaps more importantly, we needed to restore
confidence and faith in our system of corporate governance. The Sarbanes-Oxley
Act and the Corporate Fraud Task Force showed every executive in every board
room in America that none were above or beyond the law.
Today, the law holds accountants more accountable, and it subjects auditors to
audit. It gives shareholders greater confidence that the financial information they
receive from a company is reliable, because CEOs and financial managers who
fudge the numbers will be held accountable.
Sarbanes-Oxley and the Corporate Fraud Task Force sent a message to every
American: that there cannot be a different ethical standard for corporate America.
Business executives are expected to operate with the same high level of honesty
and accountability as any small business, family, or community.
I don't want to pretend that this increased vigilance does not come with a cost. The
very substantial effort and expense that goes into monitoring and reporting on
corporate activity is effort and expense that is not available for more productive
uses. But the ultimate costs of letting the public's confidence in our economic
system be eroded would be even greater.
This Administration takes corporate governance and responsibility seriously. One
aspect of corporate responsibility that is particularly important to those of us in the
Treasury Department is the misuse of our tax code.
Aggressive and improper tax shelters have been a problem for years. Some
taxpayers thought they could engage in these transactions with little risk of
detection. And if they were caught, some thought there was little risk of owing
anything more than the correct tax payment plus interest.
The Bush Administration's approach to tax shelters has changed that risk-reward
calculus. We have made it harder for taxpayers and shelter promoters to avoid
detection. The Treasury Department and the IRS are continuing to take the steps
neGessary to shut down tax shelters -- including appropriate but aggressive
enforcement action against taxpayers and promoters -- as they are identified.
And these efforts are working. In March, the IRS announced that it had collected
$3.2 billion in taxes, interest, and penalties from about 1100 taxpayers who took
part in just one form of bogus tax shelter, known as "Son of Boss." As I'm sure you
business students already calculated in your heads, that works out to an average
payment of $2.7 million per tax cheat. And of course responsibility wasn't
distributed evenly--one individual paid a $100 million settlement in that case, and 18
people paid about $20 million apiece.
In another example, the Internal Revenue Service recently publicly announced a
settlement offer to corporate executives who had used a popular scheme in which
the executives tried to realize the economic benefits of stock options while delaying
the tax on those benefits, sometimes for up to 30 years. To accept the IRS offer,
taxpayers will need to pay the full tax on the whole amount, plus all interest, plus a
10 percent penalty, which is one-half of the normal 20 percent penalty that could be
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imposed if the cases were litigated. The offer is still open, so we don't have final
figures on the number of taxpayers who will ultimately accept, but preliminary
numbers indicate that it will be a very SUbstantial percentage.
But government enforcement cannot be the only solution to problems in business
ethics and corporate responsibility. We cannot impose ethics and good behavior by
legislation or prosecution. To help solve these problems at their root, we depend
on citizens who know the difference between right and wrong and who decide to do
what's right. Treasury Secretary Snow once observed, "there is earning, and there
is stealing. There isn't a whole lot of gray in between ... and we all know it, in our
hearts and our guts. So never stop listening to those places inside yourself."
Ethics is not simply a set of rules written in a book, but rather a sense of character
you carry in your heart. It is a sense of moral duty that one individual owes to the
greater community. Most of us would agree that this is a moral duty owed not only
to ourselves but to future generations. In that sense, America is facing a moral and
ethical issue with regard to our Social Security system. We cannot continue to
simply operate a system that benefits ourselves at the expense of those coming
into the workforce, including most of you. It isn't sound economics, but more
importantly, it isn't honest and it isn't fair.
In Washington right now, your elected leaders have a real opportunity to give a gift
to future generations, and I would like to spend just a few moments to talk with you
about strengthening the nation's Social Security system.
Let me be clear: the current Social Security system is financially unsustainable, and
in need of expeditious and lasting change. On March 23, the Board of Trustees of
Social Security and Medicare issued its annual report. This report showed that
Social Security cash flows will peak in 2008 and turn negative in 2017. The trust
fund itself will be exhausted in 2041, when today's younger workers--including
many of you--are beginning to retire. The unfunded obligation--that is, the
difference between Social Security's income and assets on the one hand, and its
outflows on the other--is $11.1 trillion on a permanent basis, and $4.0 trillion over
the next 75 years.
President Bush has shown real leadership on this issue. For many years, the
conventional wisdom in Washington was that Social Security reform was a
conversation stopper, the "third rail" of politics. The President had the courage to
touch the "third rail," and now we're moving forward. People recognize there is a
problem in our Social Security system. The President has called on Congress to
help find a permanent fix.
Some Members of Congress have put some ideas on the table already. The
people of South Carolina are lucky in that your delegation has taken a real interest
in Social Security reform and offered some serious proposals. I know
Congressmen Gresham Barrett and Joe Wilson recently hosted a series of town
hall meetings here in Aiken and in other communities in this part of the state.
Senator Lindsey Graham has experienced firsthand the benefits of our Social
Security system and he has helpfully contributed to the national conversation on
this issue by starting a dialogue with his Senate colleagues. Senator Jim DeMint
also has been a leading voice in the Senate on the importance of fixing the Social
Security system.
The details of the different ideas that have been raised to date--and their pros and
cons--will be fleshed out in the weeks and months ahead. As the President said
when he raised this issue to the country in his State of the Union Address, his first
objective was to start a broad national dialogue to get people talking creatively
about this issue.
And Americans are talking about Social Security, from the National Mall in
Washington to the local shopping mall. It's in the local newspapers and on the TV
news. People have moved beyond the first question--"Is there really a problem?"-to the more important one--"How do we fix iP"
Fixing it is quite simply our responsibility to the next generation and beyond. This is
a matter of simple arithmetic. Social Security has enough money now because for
decades we have had more than enough workers paying into the system and
supporting the retirees who draw benefits. But you know the demographic trends.
http://www.lreas.gov/prc33/reieases/js2366.htl11
4/28/2005
JS-2366: Remarks of <BR>Treasury Acting Deputy Secretary Arnold I. Havens <BR>bef... Page 4 of 4
In 1950, there were 16 workers to support every beneficiary of Social Security.
Today there are only 3.3 workers per beneficiary. By the time one of you students
turns 65, there will be just two workers to support your benefits. That's why we're
facin9 the multi-trillion dollar shortfall identified in the recent trustees' report.
For those of us who are 55 or older, the President has made clear that our Social
Security benefits are solid. They will not change. We don't need to change our
retirement plans or strategy because of Social Security reform, period. But it's you,
the young workers and future workers, who we need to worry about. You are the
ones for whom we need to save and strengthen this system.
The President would like younger workers and future generations to have the ability
to save some of their payroll taxes they're already paying, to build a nest egg that
belongs to them, not to the government. With voluntary personal accounts,
younger workers would have the chance to learn about their financial choices, build
a nest egg and benefit from sound long-term investment in the free market system
without disrupting the system of benefits for today's retired beneficiaries.
Personal accounts would give young workers more options to invest and build a
better retirement for their future. Personal accounts can be implemented in a way
that costs the current Social Security system nothing; current and near-retirees
would not be affected. But they would give the next generation the promise of a
better retirement, and they would help our country create a larger pool of savings.
Some have argued that we can save the system by increasing the payroll tax. But
this multi-trillion dollar shortfall cannot be reasonably fixed by raising taxes. The
recent trustees' report showed that the payroll tax would have to be increased by
nearly 30 percent to achieve long-term balance. A 30 percent hike in the payroll tax
would of course have significant, negative economic consequences. American
workers would be taking home less pay, and we mustn't forget that their employers
would shoulder half of that tax increase. For small businesses especially, a tax
increase of that size could require terrible choices, from lay-ofts to cuts in health
benefits. And it would make hiring new people even more difficult. Quite simply,
increasing payroll taxes hurts the economy and it hurts job creation. That's why the
President is against it.
We're making progress. We believe that Social Security reform that doesn't raise
payroll tax rates, that protects benefits for today's seniors, and that improves the
system dramatically for the next generation of workers can be achieved.
I would like to close with an analogy I recently heard Secretary Snow use.
Someday, many of you in this room will own your own businesses, and you can
expect to work hard over your lives to build them up. It may seem a long way away,
but I bet you probably want to pass your business on to your own children or
grandchildren. And you'll want your business to be in top shape, financially, when
that time comes.
Let's do the same with our Social Security system. If we make responsible
decisions now, we can make sure that Social Security, and our broader economy,
are on sound financial footing for the next generation.
Thank you for having me here today. I'd be happy to take your questions now.
http://wwv•. treas.gu v/prcss/rcleoses/j s23 66.htlll
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JS-2367: Testimony of Assistant Secretary of Treasury<BR> Mark J. Warshawsky<BR>before the<BR...
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Page 1 of 1
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
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April 12, 2005
JS-2367
Testimony of Assistant Secretary of Treasury
Mark J. Warshawsky
before the
United States Senate Special Committee on Aging
Good afternoon Chairman Smith, Ranking Member Kohl and members of the
Committee. I appreciate the opportunity to discuss the Administration's proposal to
reform and strengthen the single-employer defined benefit pension system against
the background of the larger issue of promoting national saving.
As far back as 1776, Adam Smith identified capital accumulation as the key force in
promoting growth in the wealth of nations. Smith also identified the key force in
capital accumulation: increasing national savings. Since Smith's time, almost all
economists have come to understand the vital nature of national saving, and
increasing saving has become a standard policy prescription for enhancing
economic growth and raising living standards.
REPORTS
•
Testimony of Assistant Secretary of Treasury Mark J. Warshawsky
http://www.treCls.gov/press/releases/j~2~67.htm
7/5/2005
Testimony of Assistant Secretary of Treasury Mark J. Warshawsky
before the
United States Senate Special Committee on Aging
Good afternoon Chairman Smith, Ranking Member Kohl and members of the
Committee. I appreciate the opportunity to discuss the Administration's proposal to
reform and strengthen the single-employer defined benefit pension system against the
background of the larger issue of promoting national saving.
As far back as 1776, Adam Smith identified capital accumulation as the key force in
promoting growth in the wealth of nations. Smith also identified the key force in capital
accumulation: increasing national savings. Since Smith's time, almost all economists
have come to understand the vital nature of national saving, and increasing saving has
become a standard policy prescription for enhancing economic growth and raising living
standards.
We know the U.S. faces a challenge as the economy works through the implications of
the retirement of the Baby Boom generation. With the growth in the workforce set to
slow and the average age of the population rising, maintaining steady growth in the
standard of living will become more difficult. The Smith prescription shows the way out.
Increase our savings, which will increase our accumulated capital, which will give each
worker more and better tools to work with, which will raise productivity and secure a
growing standard of living.
Despite the fact that this prescription is well-known, the evidence suggests it is
exceptionally hard to follow. Net private saving (gross private saving less depreciation
on plant, equipment, and housing stock) as a share of national income averaged about 11
percent from 1955 through 1985, but since then has trended steadily down. Over the past
ten years, it has averaged about 5-112 percent of GDP, or about 5 percentage points below
where it was during the decades of the 1950s, 60s, 70s, and most of the 80s.
One reason the saving prescription is difficult to follow is that incentives work against it.
Our tax system, for example, has, for a long time, encouraged Americans to spend first
and save second. To reverse, this, the Administration has worked hard to set in place the
incentives that encourage saving. The Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA) cut the top tax rates which raised the after-tax rate of return on
capital income - encouraging savings. The Jobs and Growth Tax Relief Reconciliation
Act of 2003 (JGTRRA) cut taxes on capital income.
But even with these positive changes, the Federal income tax code still discourages
saving. To combat this, the President has proposed Retirement Savings Accounts, which
would replace the complex array of retirement saving incentives currently in the tax code,
such as IRAs, Roth IRAs, and similar saving vehicles. The President has also proposed
Employer Retirement Savings Accounts to simplify the saving opportunities individuals
have through their employers. The President's Lifetime Savings Accounts would, for the
first time, allow individuals to save on a tax-preferred basis for any purpose. This can be
especially important to low-income individuals and families who need to save, but cannot
afford to lock up funds for retirement that may be needed for an emerge ncy in the nearterm. The President also proposed Individual Development Accounts that would give
extra financial incentive to certain low-income families to set aside funds for major
purchases, such as a first home.
Pensions also playa critical role in saving. Accumulating financial assets for future
retirement is one of the main reasons households save at all. If individuals and
households believe they will receive a pension in retirement, that influences their saving
and asset accumulation behavior. If, in fact, those promised benefits not available
because of pension underfunding, then the household's saving, and aggregate national
saving, is less than it otherwise would have been had their pension been adequately
funded.
I am pleased to have this opportunity to address you here today to discuss the
Administration's pension reform proposal for single-employer defined benefit plans.
Today I'll provide an overview of the pension reform proposal and describe how it fits
into an agenda for enhancing national saving. I'll also address some recent criticism and
discuss how, contrary to that criticism, the proposal is unlikely to have any negative
short-term macroeconomic consequences.
The Administration's proposal
The single-employer defined benefit pension system is in serious financial trouble. Many
plans are badly underfunded, jeopardizing the pensions of millions of American workers.
The insurance system protecting these workers in the event that their own pension plans
fail has a substantial deficit. Such a deficit means that although the PBGC has sufficient
cash to make payments in the near-term, without corrective action the insurance system
ultimately will have inadequate resources to pay all future benefits owed to participants
of failed plans. Currently, the PBGC is responsible for making benefit payments to more
than one million participants of such plans.
The Administration believes that current problems in the system are not transitory, nor
can they be dismissed as simply the result of restructuring in a few industries. These
problems have been caused by the regulatory structure of the defined benefit system
itself. Correcting these problems and securing the retirement benefits of workers and
retirees requires that the system be restructured. If we want to retain defined benefit
plans as a viable option for employers and employees, fundamental changes must be
made to the system's regulatory structure to make it financially sound. Minor tinkering
with existing rules will not be sufficient.
A defined benefit pension plan is a trusteed arrangement under which an employer makes
a financial commitment to provide a reliable stream of pension payments to employees in
exchange for their service to the firm. One cannot expect that such obligations will be
honored consistently if they are allowed to remain chronically underfunded as they are
under current law. The incentives for financially sound plan funding must be improved
or we will continue to see pension plans terminating with massive amounts of unfunded
benefits.
When pension plans default on their obligations participants often suffer lost benefits.
For many retirees and near retirees these losses come at a time when they are unable to
make up the shortfall through other means. In all cases, this Administration is committed
to ensuring that pension promises made are pension promises kept. The goal of the
Administration's proposed defined benefit pension reform is to enhance retirement
security. The reforms are designed to ensure that plans have sufficient funds to meet
accurately and meaningfully measured accrued obligations to participants and to ensure
the financial solvency of the PBGC.
The current defined benefit pension funding rules - which focus on micromanaging
annual cash flows to the pension fund -- are in need of a complete overhaul. These rules
are needlessly complex and fail to ensure that many pension plans remain prudently
funded. The current rules:
•
•
•
•
•
•
•
•
Measure plan assets and liabilities inaccurately.
Fail to ensure adequate plan funding.
Fail to allow sufficient contributions by plans in good economic times, making
minimum required contributions rise sharply in bad economic times.
Permit excessive risk of loss to workers.
Are burdensome and unnecessarily opaque and complex.
Do not provide participants or investors with timely, meaningful information on
funding levels.
Do not generate sufficient premium revenues to sustain the PBGC.
Create a moral hazard by permitting financially troubled companies with
underfunded plans to make benefit promises they cannot keep.
The President's solution to these issues is to fundamentally reform the rules governing
pension plan funding, disclosure and PBGC premiums, based on the following three
simple principles:
•
•
•
Funding rules should ensure pension promises are kept by improving incentives to
fund plans adequately.
Workers, investors and pension regulators should be fully aware of pension plan
funding status.
Premiums should reflect a plan's risk and ensure the pension insurance system's
financial solvency.
Such changes will increase the likelihood that workers and retirees actually receive the
benefits that they have earned and will moderate future insurance costs borne by sound
plan sponsors. Today I am going to discuss how the Administration's initiative improves
incentives for adequate plan funding.
Meaningful and Accurate Measures of Assets and Liabilities
Some argue that the best way to enhance retirement security is to create the appearance of
well funded pension plans through the use of asset and liability smoothing and increased
amortization periods for actuarial losses.
Our view is there are significant risks associated with masking the underlying financial
and economic reality of underfunded pension plans. Failure to recognize risk because of
the use of smoothing mechanisms results in transfers of risk among parties, in particular
from plan sponsors to plan participants and the PBGC. One need only look at the losses
incurred by many steel and airline plan participants and PBGC's net position to see this is
so.
The first step in improving funding incentives, therefore, is to measure plan assets and
liabilities accurately. We propose measuring liabilities on an accrual basis using a single
standard liability measurement concept with minimal smoothing. The measure of
accrued liability reflects whether plans are likely to remain ongoing or pose a risk of
termination.
Ongoing liability is defined as the present value on the valuation date of all benefits that
the sponsor is obligated to pay. Salary projections would not be used in determining the
level of accrued benefits. Expected benefit payments would be discounted using the
corporate bond spot yield curve that will be published by the Treasury Department based
on market bond rates. Retirement assumptions will be developed using reasonable
methodologies, based on the plan's or other relevant recent historical experience.
Finally, unlike the current liability measure under current law, plans would be required to
recognize expected lump sum payments in computing their liabilities.
At-risk liability measures liabilities that would accrue as a plan heads towards
termination. At-risk liability would include accrued benefits for an ongoing plan, plus
additional costs that arise when a plan terminates. These costs include acceleration in
early retirements, increases in lump sum elections when available and the administrative
costs associated with terminating the plan.
The following table provides a summary overview of the critical differences between the
ongoing and at-risk liability assumptions.
At-Risk Liabilit
Discount Rate
Mortality Assumptions
Retirement Assumptions
-------------- Yield Curve --------------------------- Set by Law -------------Developed using relevant
Acceleration in retirement rates - individuals retire at
recent historical experience.
the earliest early retirement opportunity.
Lump Sum Payments
Developed using relevant
recent historical experience.
Acceleration in lump -sum election.
Transaction Costs
Not included
Included. Calculated by formula.
Under our proposal, asset values used in determining minimum required and maximum
allowable contributions will be based on market prices on the valuation date. No
smoothed actuarial values of assets will be used as they mask the true financial status of
the pension plan.
One aspect of our liability measurement approach that has received a fair amount of
attention is the use of the yield curve to discount pension plan liabilities. Accuracy
requires that the discount rates used in calculating the present value of a plan's benefit
obligations satisfy two criteria: they must reflect the timing of the future payments, and
they should be based on current market-determined interest rates for similar obligations.
The Administration proposes to replace the current law method with a schedule of rates
drawn from a spot yield curve of high grade (AA) corporate bonds averaged over 90
business days. Discounting future benefit cash flows using the rates from the spot yield
curve is the most accurate way to measure a plan's liability because, by matching the
maturity of the discount rate with the timing of the obligation, it properly computes
today's cost of meeting that obligation. Use of a yield curve is a prudent and common
practice; yield curves are regularly used in valuing other financial instruments including
mortgages, certificates of deposit, etc.
The Treasury Department has developed a corporate bond yield curve that is appropriate
for this purpose. Our methodology allows spot yield curves to be estimated directly from
data on corporate AA bonds. The process incorporates statistically unbiased adjustments
for bonds with embedded call options, and allows for statistically unbiased projections of
yields beyond a 30-year maturity. We recently published a white paper detailing our
methodology (Creating a Corporate Bond Spot Yield Curve for Pension Discounting
Department of The Treasury, Office of Economic Policy, White Paper, February 7, 2005)
that is available on the Treasury Department web site.
Our budget proposal to reform the calculation of lump-sum benefits also uses the yield
curve for calculating the minimum lump sums. We propose to replace the 30- year
Treasury rates used in determining lump sum settlements under qualified plans. Using
the yield curve to compute lumps sums and the funding required for an annuity eliminates
any distortions that would bias the participant's payout decision. Under our proposal,
lump sum settlements would be calculated using the same interest rates that are used in
discounting pension liabilities: interest rates that are drawn from a zero-coupon corporate
bond yield curve based on the interest rates for high quality corporate bonds. This reform
includes a transition period, so that employees who are expecting to retire in the near
future are not subject to an abrupt change in the amount of their lump sums as a result of
changes in law. The new basis would not apply to distributions in 2005 and 2006 and
would be phased in for distributions in 2007 and 2008, with full implementation
beginning only in 2009.1[1]
Funding Targets
Under the Administration's proposal, the appropriately measured accrued liability serves
as a plan's funding target. A plan's target funding level for minimum required
contributions will depend on the financial health of the plan sponsor. Plans sponsored by
financially healthy firms (investment grade rated) will have a funding target of 100
percent of ongoing liability. Less healthy plan sponsors (below investment grade rated)
will have a funding target of 100 percent of at-risk liability.
A sponsor is considered financially weak if the plan sponsor OR any significant member
of the sponsor's controlled group has NO senior unsecured debt that is classified as
investment grade by at least one of the nationally recognized rating agencies.
Because at risk funding targets are likely to be significantly higher than ongoing targets,
we provide a five year phase in period to the higher target for any plan whose sponsor
becomes financially weak. The funding target during the phase- in period will be a
weighted average of the ongoing and at-risk targets. 2[2]
Accrued Benefits Funded
Under the proposal, sponsors tha t fall below minimum funding levels would be required
to fund up towards their appropriate target in a timely manner. If the market value of
plan assets is less than the funding target for the year, the minimum required contribution
for the year would be equal to the sum of the applicable normal cost for the year and the
amortization payments for the shortfall. Amortization payments would be required in
amounts that amortize the funding shortfall over a 7-year period. The initial amortization
base is established as of the valuation date for the first plan year and is equal to the
excess, if any, of the funding target over the market value of assets as of the valuation
date. The shortfall is amortized in 7 annual level payments. For each subsequent plan
year, if the sum of the market value of assets and the present value of future amortization
payments is less than the funding target, that shortfall is amortized over the following 7
1[1] This is a different yield curve phase-in schedule than proposed for the use of the yield curve in
discounting pension liabilities for minimum funding purposes.
2[2] The proposal includes a detailed description of the transition rules that govern the phase-in ofthe
higher funding target when a plan changes status from ongoing to at-risk. See the Treasury Blue Book for
more information at hltp:l/ww\\ .[reas. gov!olTicesitax Dolin!1 loran/hi L1chk()S .pt! r.
years. If the sum of the market value of assets and the present value of future
amortization payments exceeds the funding target, no new amortization base would be
established for that year and the total amortization payments for the next year would be
the same as in the prior year. When, on a valuation date, the market value of the plan's
assets equals or exceeds the funding target, then the amortization charges would cease
and all existing amortization bases would be eliminated.3[3]
Benefit Limitations
The reform proposal will include benefit limitations for seriously and severely
underfunded plans. Benefit restrictions serve three critical purposes. First, they will limit
liability growth as a plan becomes progressively underfunded relative to its funding
target. It is important to arrest the growth of unfunded liabilities in order to ensure that
plan participants will collect benefits that they accrue. Under current law, sponsors of all
but the most severely underfunded plans can allow additional benefits to accrue and in
many situations, even make benefit improvements. Plan sponsors in financial trouble
have an incentive to provide generous pension benefits, rather than increase current
wages, and employees may go along because of the PBGC guarantee. This increases the
likely losses faced by participants and large claims to the PBGC. The second purpose of
benefit restrictions is to guard against this type of moral hazard. Third, but certainly not
least importantly, I believe benefit restrictions will serve as a very powerful incentive for
plan sponsors to maintain well funded plans.
Plans with financially weak sponsors that are funded at a level of between 60 and 80
percent of their targets will be prohibited from offering lump sums or increasing benefits.
If funding falls below 60 percent of target liabilities accruals will also stop and there will
be no preferential funding of executive compensation. Plans with healthy sponsors will
be prohibited from increasing benefits or providing lump sum payments if they are
funded at less than 60 percent of their target. Underfunded plans with sponsors in
bankruptcy will also be subject to benefit limits.
Increased Deductibility
The Administration proposed reforms provide real and meaningful incentives for plans to
adequately fund their accrued pension obligations. The Administration plan matches
these new funding responsibilities with new opportunities - an enhanced ability to prefund obligations on a tax-preferred basis. Under the Administration's proposal, plans
will be able to build two separate funding cushions. The first is equal to 30 percent of
ongoing liability and the second allows for prefunding of some expected salary increases
for final pay plans, and expected future plan amendments, based on the amendment
experience of the last six years, ror flat dollar plans. In addition, plans will always be
able to deduct contributions that bring a plan's funding level up to at-risk liability.
3[3] This description draws on the description in the Treasury Blue
Higher limits for deductible contributions, along with existing authority to allocate plan
assets and hedge investment and interest rate risk, will provide sponsors with the tools
they need to smooth contributions over time. We believe that providing sponsors these
tools will not only allow for more effective contribution smoothing than is accomplished
using tre mechanisms embodied in current law, but it will also allow sponsors to
optimally balance contribution smoothing with other investment objectives.
Disclosure
The financial health of defined benefit plans must be transparent and fully disclosed to
the participants and their families who rely on the promised benefits. While ERISA
includes a number of reporting and disclosure requirements that provide workers with
information about their employee benefits, the timeliness and usefulness of that
information must be improved.
The President's proposal would change the disclosures required on the annual report filed
with the government, Form 5500 and the Summary Annual Report provided to
participants (SAR). On the Form 5500, plans would be required to disclose the plan's
ongoing liability and at-risk liability whether or not the plan sponsor is financially weak.
The Schedule B actuarial statement would show the market value of the plan's assets, its
ongoing liability and its at-risk liability.
Information provided in the SAR to workers and retirees would be more meaningful and
timely. It would include a presentation of the funding status of the plan for each of the
last three years. The funding status would be shown as a percentage based on the ratio of
the value of the plan's assets to its funding target. In addition, the SAR would include
information on the company's financial health and on the PBGC guarantee. The due date
for furnishing the SAR for all plans would be accelerated to 15 days after the filing date
for the Form 5500.
The proposal also would provide for more timely disclosure of Schedule B information
for plans that cover more than 100 participants and that are subject to the requirement to
make quarterly contributions for a plan year (i.e., a plan that had assets less than the
funding target as of the prior valuation date). The deadline for the Schedule B report of
th
the actuarial statement would be shortened for those plans to the 15 day of the second
month following the close ofthe plan year, or February 15 for a calendar year plan. If
any contribution is subsequently made for the plan year, the additional contribution
would be reflected in an amended Schedule B that would be filed with the Form 5500.
Another important aspect of the proposal is allowing broader access to data submitted to
PBGC. Under our proposal, the Section 40 I 0 information filed with the PBGC would be
made public, except for the information stbject to Freedom of Information Act
protections for corporate financial information, which includes confidential "trade secrets
and commercial or financial information."
PBGC Premiums
The pension insurance premium structure also is in need of reform. Our plan increases
incentives for plan funding and provides the pension insurance system with adequate
revenues to eventually restore it to financial health. The flat rate premium will be
immediately increased from $19 to $30 per participant to reflect wage growth since 1991
when the $19 rate was set. In the future, the flat premium rate will be updated annually
using the same index that is used to update PBGC's maximum guarantee limits. This
provision will allow the price and level of insurance coverage to grow at the same rate in
the future.
The proposal will also introduce a more robust system of risk-based premiums. Risk
based premiums will be charges levied on unfunded target liabilities for all plans. Two
key differences distinguish risk-based premiums under the proposal from the variable rate
premiums of current law. First, the liability on which underfunding is measured for
premium purposes is the same liability measure used for the plan's funding target.
Second, all plans with unfunded liabilities will pay risk-based premiums. This feature of
risk-based premiums should provide a much stronger incentive to maintain adequately
funded plans.
Credit Balances
I'd like to say a few words about credit balances. Credit balances are created when a plan
makes a contribution that is greater than the required minimum. Under current law, the
credit balance, plus an assumed rate of return, can be drawn down to satisfy future
minimum contribution requirements. Credit balances that allow underfunded plaIN are
undesirable and dangerous because they create funding holidays as plans become
increasingly underfunded and prolong the amount of time that such plans can remain
below their funding targets, leaving participants at greater risk. One need only consider
the case of Bethlehem Steel to see how significant an issue this is. Just marking credit
balances to market is not sufficient to solve the problem if underfunded plans are still
able to take funding holidays.
It is critical to note that while our proposal does away with "credit balances" as currently
construed, it does not reduce the incentives for plan sponsors to contribute above the
minimum. In the Administration's proposal, the focus of the reformed funding rules on
assets and accrued liabilities means that pre- funding pays off in a reduction in future
required minimum payments. Plans that have made higher than minimum contributions
in past years do not lose the value of such contributions. These contributions increase the
value of plans assets relative to liabilities and, other things equal, reduce plan
underfunding and decreases future amortization payments. In combination with the rest
of the proposal, there is more than adequate incentive for plan sponsors to fund above the
minimum. In fact here are four other reasons that employers might choose to contribute
more than the minimum: (1) The increased deductibility provisions allow sponsors to
accumulate on a pre-tax basis; (2) Disclosure of funded status to workers will encourage
better funding; (3) A better funded status results in lower PBGC premiums, and (4) A
better funded status make benefit restrictions less likely.
Saving and Macroeconomic Effects
National Saving
As I have described, one important goal of the Administration's proposal is to ensure that
plans have sufficient funds on hand to meet accurately and meaningfully measured
accrued obligations to participants.
The current rules often fail to ensure adequate plan funding - recent history has made this
obvious. Formally we might say that the current set of rules has created a partially payas-you go private pension system by allowing some accrued liabilities to be unfunded.
That is, in general, because when plans are not fully funded, the system basically operates
by transferring contributions associated with younger workers to the current retired
workers.
The funding rules proposed by the Administration, whereby sponsors that fall below the
accurately measured minimum funding levels are required to fund up towards their target
in a timely manner, move the system in the direction of being fully -funded. In a fullyfunded system the contributions associated with each generation of workers are invested
and fund their own retirements. A basic result in macroeconomics is that a pa y-as-yougo system results in less saving, a slower rate of capital accumulation, and a lower steady
state capital stock. Therefore the Administration's proposal - through the move towards
more fully funded private defined benefit pensions - is consistent with the Administration
goal of increasing saving and greater capital accumulation.
Macroeconomic Effects
Recently some analysts have expressed concern that the Administration pension funding
proposal could have negative macroeconomic effects. They suggest these effects will
come through depressed business investment by underfunded plan sponsors, some of
whom will face higher contributions under the Administration's proposal.
I understand that these concerns may be widely held - and are likely to be repeated by the
proposals detractors. In fact, in my opinion, sound economic analysis strongly suggests
that there are no short- or long-term macroeconomic risks associated with reforming
pension funding rules. Quite the contrary, the proposal's long-term economic effects will
be positive.
Well-functioning capital markets allow companies to finance attractive investments even
if they face short-term demands on their current cash flows. For that reason, many
economists believe that there is little link between a company's cash flows - including its
pension funding requirements - and its investment decisions. This suggests that as a
general matter, pension contributions are unlikely to cause a reduction in the plan
sponsor's investment pattern.
There is a strand of economic literature that suggests there is a link between short-term
cash flow demands and investment decisions. However, I believe that some of the
analysts who have referenced this literature in analyzing a highly stylized and in many
respects inaccurate version of the Administration's proposal have misused the literature's
results and overstated the effects - if any - of the proposal on plan sponsor investment
behavior.
More importantly, it is critical to recognize that pension cortributions finance investment
throughout the economy. The monies directed into pension accounts are invested in
stocks and bonds, thereby deploying these resources throughout the economy. I believe
some analysts who have expressed concern about the macroeconomic effects of the
Administration's proposal are mistakenly considering only investment by affected plan
sponsors, and thus fail capture this additional investment. This may lead them to
mistakenly attribute negative macroeconomic effects to the Administration's proposal.
As I have described, I believe there will be no negative short-term macroeconomic effects
of the Administration's pension proposal. If there were effects, I am confident that these
de minimus short-term effects of the proposal would be outweighed by its long-term
beneficial effects of increasing saving and capital accumulation.
Conclusion
Defined benefit plans are a vital source of retirement income for millions of Americans.
The Administration is committed to ensuring that these plans remain a viable retirement
option for those firms that wish to offer them to their employees. The long run viability
of the system, however, depends on ensuring that it is financially sound. The
Administration's proposal is designed to put the s)Stem on secure financial footing in
order to safeguard the benefits that plan participants have earned and will earn in the
future. We are committed to working with Congress to ensure that effective defined
benefit pension reforms that protect worker's pensions are enacted into law.
It has been my pleasure to provide this discussion of the proposal. I look forward to
discussing the proposal and the motivations for the proposal further and answering any
additional questions you may have.
JS-2368: Treasury and IRS IsslIe Ruling on Contributions of <BR>Spouses to HSA Aeeo... Page I of I
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adolle(") Acro/JaiU Reader''').
April 13, 2005
JS-2368
Treasury and IRS Issue Ruling on Contributions of
Spouses to HSA Accounts
WASHINGTON, DC -- The Treasury Department and IRS today announced a ruling
confirming that an individual can be eligible to contribute to a Health Savings
Account (HSA) even if his or her spouse has nonqualifying family coverage,
provided the spouse's coverage does not cover the individual. In addition, the
ruling clarifies how much the eligible spouse can contribute to an HSA in such a
situation.
For example, Steve and Mary Jones are married with three children. Steve has a
low deductible family health plan that covers him and the Jones children. His plan
does not qualify for an HSA. The ruling clarifies that Mary, who is not covered
under Steve's family plan, may have her own separate high-deductible health plan
that does qualify for an HSA.
HSAs were created by the Medicare bill signed by President Bush on December 8,
2003, and are designed to expand access to health care by helping individuals save
for future qualified medical and retiree health expenses on a tax-free basis. An
individual who is covered by a high deductible health plan can make a taxdeductible contribution to an HSA, and use it to pay for out-of-pocket medical
expenses. This will help more American families get the health care they need at a
price they can afford. More information about HSAs is available at Treasury's HSA
web site: www.treas.gov/offices/public-affairs/hsa/
REPORTS
• A copy of the ruling
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Part I
Section 223 - Health Savings Accounts-HDHP Family Coverage
Rev. Rul. 2005-25
ISSUES
1. Is a married individual who otherwise qualifies as an "eligible individual"
eligible to contribute to a Health Savings Account (HSA) under section 223 of the
Internal Revenue Code (the Code) if the individual's spouse has non-HDHP family
coverage that does not cover the individual?
2. If the individual is eligible to contribute to an HSA, what is the maximum
contribution limit?
FACTS
Situation 1
Hand Ware a married couple and both are age 35. Throughout 2005, H has
self-only coverage under a high deductible health plan (HDHP) as defined in section
223(c)(2) with an annual deductible of $2,000. H has no other health coverage, is not
enrolled in Medicare and may not be claimed as a dependent on another taxpayer's
return. W has non-HDHP family coverage for Wand H's and W's two dependents, but
H is excluded from W's coverage.
Situation 2
The same facts as Situation 1, except that H has HDHP family coverage as
defined in section 223(c)(2) for H and one of H's and W's dependents with an annual
deductible of $5,000. W has non-HDHP family coverage for Wand H's and W's other
dependent. H is excluded from W's coverage.
Situation 3
The same facts as Situation 1, except that H has HDHP family coverage for H
and H's and W's two dependents with an annual deductible of $5,000. W is not
covered under H's health plan and has no other health plan coverage.
LAW AND ANALYSIS
Section 223(a) allows a deduction for contributions to an HSA for an "eligible
individual." Section 223(c)(1 )(A) defines "eligible individual" with respect to any month,
as an individual who, in addition to other requirements, is covered under an HDHP on
the first day of such month and is not, while covered under an HDHP, "covered under
any health plan which is not a high deductible health plan, and which provides coverage
for any benefit which is covered under the high deductible health plan." An eligible
individual may also have permitted insurance, and certain disregarded coverage in
addition to an HDHP. A plan does not fail to be treated as an HDHP merely because it
covers preventive care without a deductible.
An HDHP is a health plan that satisfies certain requirements with respect to
minimum annual deductibles and maximum annual out-of-pocket expenses. Section
223(c)(2)(A). Family coverage is any coverage other than self-only coverage (e.g., an
HDHP covering one eligible individual and at least one other individual (whether or not
the other individual is an eligible individual)). Section 223(c)(4); Q&A-12 of Notice 200450, 2004-33 I.R.S. 196.
Only eligible individuals may contribute to an HSA. The maximum annual
contribution limit is the sum of the limits determined separately for each month. For an
individual who is eligible during the entire calendar year 2005, the contribution limit is
2
the lesser of the annual deductible under the HDHP (minimum of $1 ,000 for self-only
coverage and $2,000 for family coverage) or $2,650 for self-only coverage and $5,250
for family coverage. Rev. Proc. 2004-71 § 3.22, 2004-49 I.R.B. 1184.
Section 223(b)(5) provides special rules for married individuals. In general, if
either spouse has family coverage, both spouses are treated as having only such family
coverage. Also, if each spouse has family coverage under different health plans, both
spouses are treated as having family coverage under the plan with the lowest
deductible. However, if a spouse has HDHP family coverage and the other spouse has
non-HDHP self-only coverage, the spouse with the HDHP family coverage is an eligible
individual and may contribute to an HSA up to the amount of the annual contribution
limit. Because the other spouse is covered by a non-HDHP and is therefore not an
eligible individual, the other spouse may not contribute to an HSA, notwithstanding the
special rule in section 223(b)(5) treating both spouses as having family coverage. Q&A31 of Notice 2004-50.
An eligible individual who attains age 55 before the close of the calendar year
may make a catch-up HSA contribution (up to $600 in 2005). Section 223(b)(3).
In Situation 1, H has HDHP self-only coverage and no other health coverage, is
not enrolled in Medicare and may not be claimed as a dependent on another taxpayer's
return. Although W has non-HDHP family coverage, H is not covered under that health
plan. H is therefore an eligible individual as defined in section 223(c)(1). The special
rules for married individuals under section 223(b)(5) do not apply because W's nonHDHP family coverage does not cover H. Thus, H remains an eligible individual and H
may contribute up to $2,000 to an HSA {lesser of the HDHP deductible for self-only
3
coverage or $2,650) for 2005. H may not make the catch-up contribution under section
223(b)(3) because H is not age 55 in 2005. W has non-HDHP coverage and is
therefore not an eligible individual.
In Situation 2, H has HDHP family coverage for one of H's and W's dependents
and W has non-HDHP family coverage for Wand H's and W's other dependent.
Because the non-HDHP family coverage does not cover H, the special rules in section
223(b)(5) do not affect H's eligibility to make HSA contributions up to H's annual HSA
contribution limit. H may therefore contribute up to $5,000 to an HSA (the lesser of the
family HDHP deductible or $5,250). W has non-HDHP coverage and is therefore not an
eligible individual.
In Situation 3, H has HDHP family coverage for Hand H's and W's two
dependents. H may contribute to up to $5,000 to an HSA (the lesser of the family
HDHP deductible or $5,250). Because H's family coverage does not cover W, the
special rules under section 223(b)(5) do not apply to treat W as having family coverage.
W has no health plan coverage and is therefore not an eligible individual.
HOLDINGS
1. An individual who otherwise qualifies as an eligible individual does not fail to
be an eligible individual merely because the individual's spouse has non-HDHP family
coverage, if the spouse's non-HDHP does not cover the individual. Accordingly, that
individual may contribute to an HSA.
2. The maximum amount under section 223(b) that an eligible individual may
contribute to an HSA is based on whether the individual has self-only or family HDHP
coverage.
4
DRAFTING INFORMATION
The principal author of this revenue ruling is Elizabeth Purcell of the Office of
Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For
further information regarding this revenue ruling, contact Ms. Purcell at (202) 622-6080
(not a toll-free call).
5
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 13, 2005
JS-2369
Testimony of Secretary John W. Snow
Before the
U.S. House Financial Services Committee
Proposals for Housing GSE Reform
Thank you Chairman Oxley, Ranking Member Frank, and members of the
Committee for inviting me to appear before you today.
The United States has the broadest, deepest, most successful housing markets in
the world, supported by an interdependent financial services infrastructure. That
financial services infrastructure includes institutions such as federally insured
depositories, mortgage banks, private mortgage insurers, and Wall Street
investment banking firms. And a unique and prominent role in that infrastructure is
performed by the housing government-sponsored enterprises (GSEs) - Fannie
Mae, Freddie Mac, and the Federal Home Loan Bank System (FHLB).
With the aid of these financial institutions, Americans have ready access to a wide
array of mortgage finance options. Our national system of housing finance plays an
important role in promoting home ownership - a key priority of this Administration.
We have seen tremendous progress in increasing home ownership in America,
which now stands at 69 percent. Secretary Jackson and I share the commitment
made by the President to expand home ownership to 5.5 million more minority
homeowners by the end of the decade.
Our national system of housing finance needs to remain strong and healthy so that
it can continue to make mortgage credit available and provide financing
opportunities for new homeowners. Secretary Jackson and I are here today to
discuss reforms for the GSEs that will achieve these objectives. These reforms are
intended to ensure greater regulatory oversight, enhanced market discipline, and
appropriate capital requirements for the GSEs. As we consider these reforms, we
are guided by two core objectives: the need for a sound and resilient financial
system and increased opportunities for home ownership, especially for less
advantaged Americans.
Secretary Jackson will describe in greater detail the role that the GSEs were
created to perform, and the home ownership goals we have set forth for them.
Allow me to state succinctly why the Administration is so committed to bring about
real reform. The risks undertaken by the GSEs, if not properly managed, may pose
a threat to their solvency, the stability of other financial institutions and the strength
of our economy.
Essential Elements of GSE Regulatory Reform
In 2003, the Administration set forth what we consider to be essential elements for
creating a new, stronger, more credible regulatory system for the GSEs. The
Administration's position is that without these essential reforms, any new regulatory
system would be little improved from the inadequate system we have today. In light
of the recent events at the GSEs, the need for meaningful reform has become even
more clear. Half-measures will only exacerbate the risks to our financial system.
As we outlined in detail in 2003, the regulator for the GSEs should have powers
comparable in scope and force to those of other world-class financial supervisors
and fully sufficient to carry out the agency's mandate. The regulator must have
clear general regulatory, supervisory, and enforcement powers with respect to the
GSEs. These powers must include the authority to set both minimum capital
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standards and risk-based capital standards; the power to assess the entities for
independent funding outside of the appropriations process; and the ability to place a
failed GSE in receivership. An effective receivership mechanism, similar to that
held by other safety-and-soundness regulators, should help bring about critical
market discipline to ward off the prospect of a GSE falling into significant financial
distress. In addition, I wish to note the interplay between an effective FDIC-like
receivership mechanism and the so-called line of credit that exists between the
Treasury and the GSEs. As members of this Committee are aware, the Treasury
Secretary has discretion to issue debt in the amount of $2.25 billion to each of
Fannie Mae and Freddie Mac and $4 billion to the FHLBs. Some commentators
believe that this credit availability reinforces the perception that the Federal
government backs the debt obligations of the Enterprises. This perception is false.
In fact, I would exercise the line of credit (which pales in comparison to the size of
the debt obligations of the GSEs today) only in the event that a GSE was in
significant financial distress and needed the capital to emerge successfully through
the receivership process. Congress may wish to consider reforms in this area as
well.
As I said in my testimony of September 10, 2003 before this Committee, in order to
address the unique mission of these enterprises as chartered by Congress, an
effective regulator must have an integrated package of authorities. The package
must empower the regulator to address problems that may arise (like those which
we have witnessed in the last two years) before they cause damage to the financial
system.
Another key power for the new regulator is the ability to review the activities of a
regulated entity, whether they be new activities or those in which the regulated
entity already participates. We need to strengthen the activity review process,
including greater public participation through notice and comment rulemaking.
Meaningful reform will also give greater clarity to the types of activities that fall
within the GSEs' mission, thus ensuring that new and existing activities focus the
GSEs on promoting housing opportunities. These tools should be a meaningful
part of the oversight of the housing GSEs.
Events that have transpired since I testified before this Committee in 2003 reinforce
concerns over the systemic risks posed by the GSEs and further highlight the need
for real GSE reform to ensure that our housing finance system remains a strong
and vibrant source of funding for expanding homeownership opportunities in
America. The Administration remains troubled that neither Fannie Mae nor Freddie
Mac has financial statements filed with the SEC that can be relied upon. Freddie
Mac has yet to file any financial statements in conformity with the securities laws,
and Fannie Mae is not expected to be able to issue financial restatements for many
months or even years. We recognize some of the unique characteristics of the
GSEs, but believe strongly that they, as well as the Federal Home Loan Banks,
should be held to public reporting requirements with the SEC comparable to other
large, complex public companies.
We believe that reform legislation must provide the regulator with the authority,
tools, and guidance from Congress as to what is expected of the GSEs going
forward. Consistent with the Administration's vision for strong and effective
regulatory and market discipline, I would like to expand on some other key
elements that are needed in order to adequately protect the stability of our housing
markets, our financial system, and our overall economy. Most notably, I would like
to describe the need to control the size and scope of the GSEs' investment
portfolios.
Financial and Accounting Problems at the Housing GSEs
The Administration's proposal in 2003 was presented against the background of
serious financial and accounting problems at the housing GSEs, including the June
2003 Freddie Mac announcement that it would restate its 2000-2001 financial
statements and further delay the release of its 2002 financial statements. Since the
last time I appeared before you, the following events have transpired:
•
•
OFHEO released a report of initial findings on Fannie Mae in September
2004 citing improper accounting procedures and practices, internal control
deficiencies and questionable management oversight.
The SEC concurred in the findings of inappropriate accounting practices,
and directed Fannie Mae to restate its earnings for 2001-2003. Fannie
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Mae, then, estimated that it would be forced to recognize $9 billion in
losses.
• OFHEO concluded in December 2004 that Fannie Mae was "significantly
undercapitalized" in the third quarter of 2004, and demanded that the
minimum capital requirement be increased by 30 percent to ensure that the
Enterprise strengthened its financial position.
• And just a few weeks ago, Fannie Mae disclosed to the SEC that it could be
forced to recognize an additional $2.4 billion of losses, stating that it is
unable to reasonably estimate the effect of these issues on reported results
of operations.
• In 2004 the FHLBanks of Chicago and Seattle entered into written
agreements with their regulator, the Federal Housing Finance Board
(Finance Board), to implement changes to enhance their risk management,
capital structure, governance and other practices and procedures. In March
of 2005, ten FHLBanks implemented new risk-based and leverage
requirements. The others are expected to comply soon.
These events demonstrate that the GSEs do not have reliable financial controls to
manage their operations risk. Such failures in controls, particularly in such highly
leveraged institutions, jeopardizes not only the GSEs' safety and soundness, but
also poses risks to the entire financial system.
Limitations on the GSEs' Debt-Financed Portfolio Investments
As additional financial and accounting problems have surfaced with the GSEs, and
as the Administration has continued to evaluate the overall structure of the GSEs'
operations in relation to their mission, we believe that meaningful reform of the
regulatory structure of the GSEs must include mechanisms to protect our broader
financial markets from unnecessary risks. More than six out of ten institutions in the
banking industry hold as assets GSE debt in excess of 50 percent of their capital.
We share the view expressed by Chairman Greenspan and others that the sheer
size of the mortgage-based investment portfolios of the GSEs has grown well
beyond anything needed in carrying out their housing mission. As Chairman
Greenspan has stated:
" ... these institutions, if they continue to grow, continue to have the low capital that
they have, continue to engage in the dynamic hedging of their portfolios, which they
need to do for interest rate risk aversion, ... create ever growing potential risks
down the road."
Fannie Mae and Freddie Mac operate two independent main business lines today:
(1) a credit guarantee business associated with securitizing mortgages; and (2) a
portfolio investment business that involves purchasing mortgages and various
mortgage-related securities (including their own mortgage-backed securities) and
non-mission related assets. The first of these--the guarantee and securitization of
mortgages--is integral to the operation of an effective secondary market for
mortgages. The business of investing and holding an investment portfolio of
mortgages and other higher-risk assets for its own proprietary trading account and
inventory, however, has a much more tenuous connection to the housing mission of
the GSEs.
Freddie Mac and Fannie Mae, as we know them, were largely a product of the
turbulent financial period of the late 1960s and early 1970s. One of the primary
goals of creating Fannie Mae and Freddie Mac was " ... to provide supplementary
assistance to the secondary market for home mortgages by providing a degree of
liquidity for mortgage investments, thereby improving the distribution of investment
capital available for home mortgage financing." Initially, Fannie Mae provided this
assistance primarily by buying mortgages while Freddie Mac concentrated on
securitizing mortgages, a pattern that continued throughout the 1980s.
Since 1990, however, the mortgage portfoliO business of both of the housing GSEs
has grown rapidly, much to the financial benefit of the Enterprises' management
and shareholders. From 1990 through 2003, Fannie Mae's mortgage investments
increased from $114 billion to $902 billion, and the ratio of mortgage investments to
outstanding guaranteed mortgage-backed securities increased from 40 percent to
69 percent. Freddie Mac's growth in mortgage investments was even more
dramatic. From 1990 through 2003, Freddie Mac's mortgage investments increased
from $22 billion to $660 billion, and the ratio of mortgage investments to
outstanding guaranteed mortgage-backed securities increased from 7 percent to 88
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percent.
In general, the risks of the mortgage investment business are more complex to
manage than the risks of the credit guarantee business. For example, with the
rising interest rates in the early 19805, Fannie Mae's cost of funds rose above the
interest rate it was earning on its long-term, fixed-rate mortgages. This interest rate
mismatch was similar to that faced by the savings and loan industry, and Fannie
Mae became insolvent on a mark-to-market basis. Only a combination of legislative
tax relief, regulatory forbearance, and a decline in interest rates allowed Fannie
Mae to grow out of its problem.
The mortgage investment portfolio of the housing GSEs has grown rapidly,
beginning in the 1990s, motivated by high profit margins and made possible by a
sUbstantial debt funding advantage. This funding advantage arises because
markets incorrectly assume that the Federal government provides some form of
guarantee to GSE debt. This rapid growth has created a new dimension of risk,
one that not only involves our national system of housing finance, but the potential
for systemic risk to financial markets in general. The potential for systemic risk is
associated with Fannie Mae's and Freddie Mac's large portfolios of mortgages and
mortgage-backed securities and other non-related assets, funded at extremely high
rates of leverage. The GSEs hold less than one-half the capital of similarly sized
financial institutions. The value of these large portfolios can fall dramatically when
interest rates change because individuals can prepay their mortgages.
Some of this risk can be hedged through the use of derivatives and other risk
transfer mechanisms. Nevertheless, the risk does not disappear altogether, and in
the event of an unforeseen problem, the GSEs might not have the funds to payoff
their debtholders, which could lead to ripple effects throughout our entire financial
system. For example, GSE debt is widely held by banks, so that if this debt
declined in value, some banks could find their solvency endangered. Concerns
about the GSEs' hedging strategies are reinforced by the regulatory enforcement
actions of recent months. Neither Fannie Mae nor Freddie Mac has been able to
put forth fair and accurate financial statements. Given this lack of accurate and
reliable information, Congress and the Administration are correct in worrying
whether the risks that have been undertaken by the GSEs are properly understood,
measured, and made public.
These portfolio holdings thus raise fundamental concerns. Are there benefits that
outweigh the potential costs? Neither the Treasury nor the Federal Reserve has
found evidence that these portfolio holdings (above some minimum threshold)
provide meaningful benefits to borrowers. We believe that Congress could usefully
consider whether there are meaningful benefits to such holdings, and whether such
benefits outweigh the costs.
In order to protect against the systemic risks posed by the GSEs' mortgage
investment business, the Administration recommends that limitations be placed on
the size of the GSEs' retained mortgage investment portfolios. An appropriate
phase-in period for the reduction of the existing portfolios would be needed so as
not to disrupt mortgage or financial markets. After the appropriate phase-in period,
given the overall advances in securitization, the large amount of data available on
mortgages, and the increased sophistication of mortgage investors, we believe that
our capital markets could adjust to a significant reduction in the presence of the
GSEs as mortgage investors.
In addition to protecting our financial system against potential systemic risk, it is
also very important that our national housing finance system continues to function
smoothly and that the GSEs are able to accomplish their missions - in particular
their support for affordable housing. Our recommendation to limit the investment
portfolios of Fannie Mae and Freddie Mac does not in any way limit their ability to
guarantee mortgage-backed securities. In that regard, it is worth noting that
Freddie Mac operated a successful credit guarantee business throughout the 1980s
with a retained mortgage portfolio that was only a small fraction of its current size.
Therefore, given that these core functions of the GSEs are preserved, we see no
reason why limits on the GSEs' retained mortgage portfolios should impair their
ability to provide support for affordable housing, including the ability of Fannie Mae
and Freddie Mac to meet their affordable housing goals set by HUD,
Location of the New Regulatory Agency
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While the powers and authorities of the new regulator remain of paramount
importance to the Administration, Congress should also continue to consider the
location of the new regulator. In 2003, the Administration said it was open to
making the new regulatory agency a part of the Treasury Department, provided that
there were adequate elements of policy accountability to the Secretary of the
Treasury. The advantages of placing the new regulator within the Treasury should
not be overlooked. First, the start-up time and transition issues related to setting up
the new agency would be lessened; housing another agency within Treasury, which
is familiar with such relationships, is less time consuming than creating an entirely
new agency, which would facilitate effectively transferring existing OFHEO and
Federal Housing Finance Board operations to Treasury. Second, addressing
issues associated with systemic risk is an important aspect of our proposal, and the
Treasury Department is the Executive Branch agency with responsibility to adopt a
holistic approach to systemic risk and oversee the proper functioning of financial
markets. Third, improving market discipline is important, and the Treasury
Department is in the best position to monitor the new regulator's activities while
ensuring that investors have a proper understanding of GSE securities. Finally, we
believe that there would be less opportunity for regulatory capture were the new
regulator housed in Treasury, given the diversity and size of the interests which
regularly appear before the Department.
However, as we described in detail last year, there are conditions that need to be
met in order for the Administration to support establishing the new regulator as a
part of Treasury. The new agency should be required to clear new regulations and
policy statements to Congress through the Treasury Department. The Treasury
Department and OMB should also have review authority over the new agency's
budget to ensure that resources are being properly allocated. Nevertheless, in any
such arrangement, the new regulatory agency should have independent
responsibility over specific matters of supervision, enforcement, and access to the
Federal courts. By housing the new regulator in Treasury with adequate oversight
authority, we can achieve the best of both worlds: ensuring a strong, independent
regulator while providing for accountability and expertise from the Executive
Branch.
The Appropriate Role of the Federal Home Loan Banks
Over the last decade the Federal Home Loan Bank System has undergone
considerable change. Membership in the System was extended to commercial
banks and they now make up the overwhelming number of members of the
System. The Federal Home Loan Banks greatly expanded their investment
portfolios and some Banks aggressively moved into the mortgage investment
business, types of activities that moved the Banks away from their traditional
wholesale funding activities for members. And while perhaps not particularly new,
large financial institutions account for the bulk of borrowing from many of the
Federal Home Loan Banks.
The Administration continues to believe that the Federal Home Loan Banks should
be placed under the same regulator with Fannie Mae and Freddie Mac, and that
this new regulatory regime should be structured to take into account certain special
differences between the Federal Home Loan Banks and the other GSEs.
Consistent with the primary goal of creating an effective regulatory regime for
Fannie Mae and Freddie Mac, I believe constructive steps can be taken in this
context toward also improving the regulation of the Federal Home Loan Banks. To
reach that goal, the regulatory structure of the system should be examined with a
careful eye to converging regulation of all of the GSEs to the same extent that their
operations (and the risks they present) have likewise converged. In particular, the
Administration believes regulation of the Federal Home Loan Banks would be
enhanced if Congress were to delineate an explicit mission for them. In addition,
we believe that Congress should consider reforming the appointment of directors to
the boards of the banks to ensure that the best corporate governance practices are
employed. And while progress is being made to ensure that the Federal Home
Loan Banks file their financial statements with the SEC much like other large
financial institutions with outstanding public debt, Congress should formalize such
obligations by statute.
Conclusion
In conclusion, our primary goals in developing our GSE reform proposal are to
promote the strength and resilience of our housing finance markets, lessen the
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potential for systemic risk, and continue our progress in meeting the mortgage
credit needs of all our Nation's homebuyers. To accomplish those purposes, the
fundamental elements of reform that the Administration has proposed are
essential.
In addition, events at the GSEs over the course of the last year reinforce the need
for a strengthened regulatory regime. There are a range of other reforms which
would also advance our common interest in ensuring the resiliency of the financial
system and the robustness of the housing finance system. The Administration is
open to consider additional ideas for reform.
I look forward to working with you on this important issue.
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JS-2370: AI-Zarq(lwi Fimlllciel' Designated by the Treasury
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 13, 2005
JS-2370
AI-Zarqawi Financier DeSignated by the Treasury
The U.S. Department of the Treasury today designated Bilal Mansur AI-Hiyari for
providing financial support to the Zarqawi Network, an al Qaida-affiliated terrorist
group active in the insurgency in Iraq.
"By designating financiers like AI-Hiyari, we're making it harder and riskier for the
Zarqawi Network to raise and move money in support of its brutal attacks against
U.S. troops, coalition partners and the Iraqi people," said Robert Werner, Director of
the Treasury's Office of Foreign Assets Control (OFAC). "Today's action is the third
in a series of strikes by the U.S. Government to undercut the financial foundations
of the Zarqawi Network."
The U.S. and Iraq are submitting AI-Hiyari to the United Nations 1267 Committee,
which will consider adding him to the consolidated list of terrorists tied to al Qaida,
UBL and the Taliban.
AI-Hiyari became acquainted with Abu Mus'ab al-Zarqawi, the Zarqawi Network's
notorious leader, in 1989 when they met in Afghanistan. According to information
available to the U.S. Government, their relationship continued through the mid1990s, when AI-Hiyari returned to Jordan where al-Zarqawi was serving out a
sentence in Jordanian prison.
According to information available to the U.S. Government, AI-Hiyari traveled to Iraq
in 2003 where he sent funds to support al-Zarqawi's operations through several of
al-Zarqawi's messengers.
In October 2004, the State Security Court of Jordan convicted AI-Hiyari of providing
funds to the Zarqawi Network. At the conclusion of his trial, however, he was
released from prison.
AI-Zarqawi was named a Specially DeSignated Global Terrorist (SDGT) on
September 23, 2003. The Zarqawi Network, also know as Jama'at al Tawhid wal
Jihad and Tanzim Qa'idat ai-Jihad fi Bilad al-Rafidayn, was designated as a Foreign
Terrorist Organization (FTO) and a SDGT on October 15, 2004.
Identifying Information
Bilal Mansur AI-Hiyari
AKA: Bilal Mansur Mahmud AI-Khayari
DOB: Circa 1969
POB: ai-Salt. Jordan
Nationality: Jordanian
Address: Suwaylah, Jordan
AI-Hiyari was deSignated today pursuant to Executive Order 13224 chiefly pursuant
to paragraphs (d)(i) and (d)(ii) based on a determination that he assists In, sponsors
or provides financial, material, or technological support for, or financial or other
services to or in support of, or is otherwise associated with, persons listed as
subject to E.O. 13224. This individual also meets the standard for inclusion in the
UN 1267 Sanctions Committee's consolidated list because of the support provided
to UBL, al Qaida or the Taliban.
Inclusion on the 1267 Committee's list triggers international obligations on all
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member countries. requiring them to freeze the assets and prevent the travel of
listed individuals and to block the sale of arms and military equipment. Publicly
identifying these supporters of terrorism is a critical part of the international
campaign to counter terrorism. Additionally. other organizations and individuals are
put on notice that they are prohibited from doing business with them.
Blocking actions are critical to combating the financing of terrorism. When an
action is put into place. any assets existing in the formal financial system at the time
of the order are to be frozen. Blocking actions serve additional functions as well.
acting as a deterrent for non-designated parties who might otherwise be willing to
finance terrorist activity; exposing terrorist financing "money trails" that may
generate leads to previously unknown terrorist cells and financiers; disrupting
terrorist financing networks by encouraging designated terrorist supporters to
disassociate themselves from terrorist activity and renounce their affiliation with
terrorist groups; terminating terrorist cash flows by shutting down the pipelines used
to move terrorist-related assets; forcing terrorists to use alternative, more costly and
higher-risk means of financing their activities; and engendering international
cooperation and compliance with obligations under UN Security Council
Resolutions.
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a
RESS HOOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 13, 2005
2005-4-13-16-31-35-26262
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $78,528 million as of the end of that week, compared to $78,759 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
A~ril
TOTAL
1. Foreign Currency Reserves
1
a. Securities
A~ril
1, 2005
8, 2005
78,528
78,759
Euro
Yen
TOTAL
Euro
Yen
TOTAL
11,851
14,623
26,474
11,881
14,530
26,411
Of which, issuer headquartered in the U. S.
0
0
b. Total deposits with:
bJ Other central banks and BIS
11,619
2,939
14,558
2,921
11,638
14,559
b.il. Banks headquartered in the U. S.
0
0
b.iL Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U. S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
15,122
15,027
11,563
11,490
11,042
11,041
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
A~ril
Euro
1. Foreign currency loans and securities
A~ril8,
1, 2005
Yen
TOTAL
Euro
o
2005
Yen
TOTAL
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
0
2.b. Long positions
0
3. Other
0
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
April 1, 2005
Euro
1. Contingent liabilities in foreign currency
Yen
April 8, 2005
TOTAL
Euro
Yen
TOTAL
o
o
o
o
o
o
o
o
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b With banks and other financial institutions
Headquartered in the U. S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-2371: ELOn(Jmic Gt"owth find Friclldship<BR>Address at the Annual Meeting of the In... Page I of 3
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 10, 2005
JS-2371
Economic Growth and Friendship
Address at the Annual Meeting of the Inter-American Development Bank
John B. Taylor
Under Secretary for International Affairs
United States Treasury
Okinawa, Japan April 10, 2005
President Iglesias, fellow Governors, ladies and gentlemen: on behalf of President
Bush and Secretary Snow, I would like to thank the people of Japan for hosting our
meeting. It is fitting that Okinawa is the site for these meetings, showcasing the
increasing integration of Latin America and the Caribbean with Asia, and the role of
migration and remittances in economic development, as many Japanese migrants
to Latin America came from Okinawa.
I join President Iglesias and the other Governors in welcoming the Republic of
Korea into the Bank. Korea's rich economic growth experience and renowned
leadership in technology will be a tremendous benefit to the countries of Latin
America and the Caribbean.
U.S. Engagement with the Hemisphere
Much has changed since the last meeting hosted by Japan in 1991 in Nagoya. At
that time, some economies were reeling from the effects of raging triple-digit
inflation and economic and financial strains were inevitably reflected in U.S.
relations with countries of the region.
Economic conditions are much better now. Growth has been close to six percent
during the last year, the fastest growth in twenty-five years. Inflation is only a small
fraction of what it was then and economic stability is the rule rather than the
exception. Moreover, regional integration has increased significantly. U.S. exports
and imports with the countries of Latin America and the Caribbean now account for
nineteen percent of total U.S. trade. We also share an ambitious trade liberalization
agenda based on a growing consensus that such integration is critical economic
growth.
The United States remains strongly committed to economic development in the
region. Through the lOB and many bilateral dialogues such as the U.S.-Mexico
Partnership for Prosperity and the U.S.-Brazil Group for Growth, we work together
on issues ranging from remittance flows, to financial market integration, to lending
to small businesses.
We are delighted to be working with some of the poorest countries - Bolivia,
Honduras and Nicaragua -- on the new Millennium Challenge Account. The theme
of ensuring measurable results that improve people's lives has been a common
focus of our efforts. And we will work hard to ensure that the Summit of the
Americas in November in Argentina also yields measurable results. We hope to
see real progress on small business lending, remittances, reducing the time to start
a business, and promoting high-return infrastructure projects.
Strong Economic Growth in the Region
Improved economic policies and strong economic leadership in Latin America is
clearly the reason for the improvement in economic growth and economic stability.
Improvements in fiscal policies have reduced debt levels. Monetary authorities are
pursuing price stability and exchange rate regimes that better reflect fundamentals.
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Friclldship<BR>Address at the Annual Meeting of the In ... Page 2 of 3
These reforms build financial stability and confidence, leading to increasing capital
flows, higher levels of investment, and rapid export growth.
And economic expansion is expected to continue. Private forecasters are
expecting growth of 4 percent this year. This is good news, but we all know the
region can and should do better. Decades of sustained high growth are needed to
bring down poverty rates.
I see two major challenges for sustained growth. The first challenge is to lock-in the
recent improvements in macroeconomic policy by putting in place fiscal
responsibility regimes that discipline budget planning and execution and by
supporting the successful low inflation monetary policies. The second challenge is
to build on the macroeconomic foundation and concentrate on microeconomic
reform including trade liberalization and the reduction of burdensome regulation in
order to unleash job creation by entrepreneurs both small and large.
Progress at the 10
The lOB plays a critical role in the region. I am delighted with the replenishment of
the MIF and the major improvements in procurement and internal controls. As I
said at the signing ceremony, MIF is taking the lead in remittances, which are a
source for investment in the region. I welcome the new Private Sector Coordinator,
who is off to a fast start in his work to help us improve the Bank group's private
sector efforts. And we are very pleased to have reached agreement on a New
Lending Framework, which provides needed resources while committing to results
measurement, robust fiduciary controls, and sound macroeconomic policies.
The new procurement policies adopted by the lOB this year represent an important
reform, as do increasing transparency, improving efficiency by promoting
competition, aligning the Bank with best practices. In addition, the Bank has made
commendable progress in improving information disclosure, internal and external
audits, and internal controls. The lOB led the way among the multilateral
development banks with the disclosure of Board minutes. The United States will
continue to urge for more progress in other areas, such as the prior disclosure of
Board documents.
The Private Sector
We believe that the role of the Bank in supporting economic growth in Latin
America and the Caribbean must focus even more on the private sector to remain
relevant. The Bank must continue with vigor the efforts begun last year to improve
the coordination, efficiency and effectiveness of the Group's private sector
activities.
Within the private sector small and medium businesses create the most jobs, but
small business growth is frequently undermined by inadequate access to the credit
needed for investment or startup. The leaders at the 2004 Summit of Americas
urged the lOB to help triple credit for small business. The MOU between the IIC
and the MIF was signed to facilitate the achievement of this goal. We strongly
support expanded MIF efforts in microfinance and urge the IIC to work with its
commercial bank partners to help them profitably make smaller loans to smaller
clients.
A flourishing private sector requires a pro-business microeconomic environment
unencumbered by the barriers of corruption. I welcome the lOB's Business Climate
Initiative and the private sector focus in Country Strategies. We also support lOB's
work on countries' governance reform efforts.
Conclusion
In conclusion let me say that I have greatly enjoyed working with the lOB and the
people in the region during the past four years. In our mutual quest for higher
growth and poverty reduction, I have renewed old friendships and made new ones.
As I reflect on what we as a hemisphere have experienced together, the lOB has
been a constant and active participant in both word and deed. Its willingness to
engage in challenging situations is widely recognized and I appreciate the important
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changes, especially the greater focus on economic growth through economic
freedom. The United States will continue to work with our regional partners and the
lOB. The lOB is critical to the success of the region, and its active engagement and
leadership is fundamental during the upcoming period of political transition and
economic expansion.
Thank you.
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JS-2372: u.s. Applauds MIF Rcplinishll1cnt<BR>"A model for effective private sector d...
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 10, 2005
JS-2372
U.S. Applauds MIF Replinishment
"A model for effective private sector development."
John Taylor, U.S. Under Secretary of the Treasury, today hailed the Signing of an
agreement to reform and substantially increase funding for private sector
development in Latin America and highlighted the large contribution from the United
States.
"President Bush recognizes how essential the private sector is to development in
Latin America and that's why the United States is making such a substantial
commitment to this fund," said Taylor. "The United States is deeply committed to
increasing economic opportunity and freedom and improving living conditions in the
entire hemisphere. Business development is essential to this goal because
businesses create jobs. With the new reforms and increased funding, I believe that
we will see important improvements in job creation and greater economic
opportunity for many people in Latin America."
Under Secretary Taylor and the other Governors of the Inter-American
Development Bank signed the Multilateral Investment Fund II (MIF II) agreements
at the Bank Group's annual meeting in Okinawa, Japan. The agreement
replenishes the fund by more than $500m while at the same time strengthening the
institution to make it a more effective tool for the assistance of the private sector in
Latin America and the Caribbean. The U.S. is the largest donor to the
replenishment, pledging $150m to the fund. In recognition of MIF's successful
results, a number of new donors, including the United Kingdom, France,
Switzerland, and Korea, are joining MIF II.
The Multilateral Investment Fund was established in 1993 under the auspices of
Japan and the United States who donated one billion out of the initial $1.2b
funding. The MIF was established as part of President George H.W. Bush's
Enterprise for Americas Initiative. The MIF has demonstrated its effectiveness in
promoting the creation and growth of micro and small and medium enterprises
(SMEs) throughout Latin America and the Caribbean. Providing 75% of its
assistance in grants, it has shown innovation, creativity, and nimbleness in its work
with private firms, banks, public-sector entities, and NGOs to foster an environment
where the private sector can flourish.
A very important example of MIF's innovation is its identification of remittances as a
source of economic growth and development in the region. Under Secretary Taylor
highlighted the importance of action on remittances:
"Remittance flows are a very essential factor in economic development in the
region because they come directly from Americans working in the United States to
people who can really use the money in central and south America and the
Caribbean. If we can make it easier and cheaper to allow these huge flows of funds
from the United States get to families in the region, millions of people will helped."
More than $45 billion of remittances now flow annually to the region and MIF has
pioneered efforts to harness these flows for growth through efforts to reduce
transaction costs, channel them into the formal financial system. and provide
recipients to options to use them to finance job and growth producing activities.
A constant focus of MIF's work is micro and small business. Last year, in response
to the region's commitment to SMEs at the Nuevo Leon summit in 2003, MIF
entered an agreement with the Inter-American Investment Corporation (IIC) to help
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the IDB Group meet its goal of tripling credit for SMEs by 2007. The agreement will
allow MIF to fund technical assistance for lie SME financing, thereby increasing the
impact and likelihood of success.
The MIF II agreements continue to build on the success of MIF I, and in so doing
reflects many of the key tenets of the Bush Administrations core principles of
development. It includes a set of twelve concrete, time-bound commitments to
fortify and expand MIF's results measurement mechanisms and requirements, to be
implemented within a year. The agreements retains the focus on grants at MIF I
historical levels (75%) while also permitting it to continue other innovative financing
modalities - including equity investments - that stimulate and build the private
sector. MIF II also contains a sunset clause, reflecting the conviction that
development institutions should always focus on the ultimate objective: the day
when their success will make them obsolete.
In all, this is a very positive development in the effort to provide focused, effective
aid designed to create the foundations of lasting, private sector led growth that is
the only sure way to lift people permanently out of poverty. President Bush's
pledge to MIF II represents its continued strong commitment to the region.
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PRESS ROOM
FROM THE OFFICE OF PUBUC AFFAIRS
April 9, 2005
JS-2373
Press Statement by John B. Taylor
United States Under Secretary of the Treasury for International Affairs
Annual Meetings of the Inter·American Development Bank
Okinawa, Japan
April 9, 2005
I would like to begin today by thanking the Minister Tanigaki, the government of
Japan, and our hosts here in Okinawa. All of the governors and staff in attendance
are impressed with the hospitality we've received on this beautiful island.
For President Bush, the economic achievement of countries in our hemisphere is and will continue to be - among the highest international priorities of the United
States. During the past four years I have had the opportunity to represent the
President's commitment to the region as the United States has provided growing
support for development funding, collaborative efforts to support sound economic
policies, and critical assistance when countries have experienced acute times of
need.
There is a great deal of positive economic news in our hemisphere. The U.S.
economy continues to post strong, steady growth and job creation, which we know
is very important for economic growth in the hemisphere. And it's exciting to see
that Latin America last year posted the most rapid economic growth in decades,
thanks to strong leadership and good economic policies in a number of countries.
There are other examples, but this improved environment can be highlighted by
Brazil's recent announcement that it does not need to renew its IMF program.
The lOB plays a critical role in helping countries in the region reach their economic
potential and improve the standards of living for their people, and so I will be very
happy to report back to the President and Treasury Secretary Snow that the Bank,
the donors, and - most importantly - the countries themselves are demonstrating a
strong commitment to achieve these goals. There exists a consensus on the most
effective ways for development institutions like the lOB to help countries achieve
growth: increased development assistance; the use of grants; and emphasis on
measurable results; and a stronger focus on development of the private sector,
particularly small businesses. I am pleased that each of these principles is
embedded in the recent successful replenishment of the Multilateral Investment
Fund (MIF). The United States is proud to be the largest donor of the MIF because
we appreciate the valuable contribution of business development.
This weekend I also have bilateral meetings with representatives from a number of
countries. I was fortunate to meet with President Uribe of Colombia and I look
forward to my meetings with President Mesa of Bolivia, and President Madura of
Honduras. I appreciate the chance to discuss their achievements and their
continued efforts to improve economic opportunities in their respective countries.
On behalf of President Bush I renew the commitment of the United States people to
helping them raise living standards and reduce poverty.
President Bush's focus on economic development has been to provide extra
assistance to for poor countries that are working to put in place good policies investing in its people, enforcing the rule of law, and promoting economic freedom.
These principles define President Bush's Millennium Challenge Account (MCA)
program. Nicaragua, Honduras and Bolivia have qualified for the program and are
developing their proposals for funding. I look forward to discussing the program in
my meetings here.
The best time to implement and lock-in economic reforms is when economies are
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strong, so we must be vigilant in forging ahead with this agenda now, and not let
the seeds of complacency take root. Despite recent success there is still much to
accomplish in institutionalizing macroeconomic improvements and strengthening
the environment for entrepreneurs and investment. The United States looks
forward to continued cooperation with our partners at the lOB and with economic
leaders in the hemisphere to achieve economic growth and opportunity for our
citizens.
I'll be happy to take your questions.
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JS-2374: Latll1 America: From Crisis to Growth<br>John B. Tay\or<br> Under Secretary... Page 1 of 4
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 9, 2005
JS-2374
Latin America: From Crisis to Growth
John B. Taylor
Under Secretary of Treasury for International Affairs
Remarks to Investors at the Annual Meetings of the Inter-American
Development Bank
Okinawa, Japan
April 9-10, 2005
I am very pleased to be here to discuss financial and economic developments in
Latin America. There has been a lot of good news lately on the economic front in
Latin America, and indeed for the global economy as a whole. I would like to
discuss some of the reasons for this strong performance and how the United States
is working with the countries of the region to sustain it and translate it into
substantial reductions in poverty in the coming years.
Restoring Economic and Financial Stability
When I first started in this job in 2001-2002, the news in Latin America was not so
good. Leaders in Argentina struggled to contain an expanding financial crisis,
Brazil's high debt levels combined with electoral uncertainties generated growing
market concerns, Uruguay's banking system faced a run sparked by the turbulence
in Argentina, and Colombia lost market access as investors anticipated imminent
fiscal gaps. Of course these difficulties came in the wake of the turbulent 1990s,
when Mexico and Brazil experienced full-blown crises of the kind that buffeted
emerging markets from East Asia to Russia.
Periodic crises and financial market instability in the region have had profound
effects in terms of social dislocation and lost economic growth. Firms have scaled
back investment and financial markets demanded higher risk premia, discouraging
innovation and retarding productivity growth that is the engine of sustained
improvements in living standards. The stresses of crisis management also distract
policy makers from addressing the critical microeconomic impediments to higher
growth.
I am pleased to say that there are no financial crises in the region today. Risk
spreads for the region have fallen sharply and remain near their seven-year lows,
capital flows have risen, and investment is growing. Foreign direct investment
increased by $16 billion last year. I am also pleased to see that there is less
contagion. Following Argentina's default at the end of 2001, we did not see a
repeat of the contagion that afflicted global capital markets following the East Asia
and Russia crises.
Economic growth has responded vigorously. Real GOP for the region as a whole
grew almost 6 percent in 2004--the fastest rate in a quarter century. This has
translated into millions of new jobs and higher incomes for workers and their
families.
What accounts for this turnaround? First and foremost. macroeconomic policies
are better. Countries are resisting the tendency to overspend during the fat years.
Strong political and economic leadership has enabled countries to improve their
fiscal balances to bring down debt levels. Improvements in debt management
poliCies lowered foreign currency-denominated and exchange linked-debt in
countries like Brazil and Mexico. Many countries have taken advantage of
favorable market conditions to pre-finance a large portion of their obligations
coming due in 2005 and build foreign exchange reserves as a cushion against
future financial market turbulence.
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We have seen a virtual revolution in monetary policy in the region. The last time
the lOB annual meetings were in Japan in 1991, regional inflation was raging in the
triple digits. In many countries, monetary policies are more focused on price
stability combined with either flexible exchange rates or dollarization. During my
visits to the region, I have seen first-hand the technical improvements in the
operational tools used to conduct monetary and exchange rate policy in countries
like Peru and Chile. Dollarized Ecuador enjoyed a sharp drop in inflation last year
following several years of inflationary inertia.
These good economic policies have positioned Latin America to seize the
opportunities of strong global growth--which, I might add, was also the product of
well-timed fiscal and monetary policies in the United States. The rapid export
growth we have seen in the region is not just a commodity price phenomenon;
export volumes were up a robust 11 percent last year. Strong improvements in
trade balances led to the second consecutive year with a current account surplus
for the region as a whole.
Better policies--defined and implemented by political leaders across the region-have been the key to restoring economic stability and setting the stage for the rapid
economic growth we are now witnessing.
At the same time, the United States has played an important role in bolstering these
policies and helping countries improve stability through assistance from the
international financial institutions. We strongly supported Brazil's IMF program in
2002 to back the solid economic program endorsed by the leading candidates
during the lead-up to the presidential elections in the fall. This gave President Lula
and his economic team the opportunity to show their leadership, and through a solid
economic strategy, pull Brazil back from the brink and lay the basis for the rapid
growth and large improvements in indicators of financial vulnerability. Last year
Brazil turned in the strongest growth performance in a decade. As Secretary Snow
recently noted, Brazil's announcement that it does not need a new IMF agreement
represents the hallmark of financial accomplishment.
There are other examples. When Uruguay experienced a run on deposits
associated with the crisis in neighboring Argentina, we worked to coordinate an
assistance package from the IMF, World Bank, and lOB and provided a short-term
bridge loan from Treasury's Exchange Stabilization Fund to help Uruguayan
authorities implement a strategy for halting the bank run and restoring growth. We
also backed an IMF program and rapid multilateral development bank assistance
for Colombia, when that country faced financial turbulence in 2002 but outlined a
solid fiscal program--including important structural fiscal reforms--to stabilize the
situation. In Bolivia, we supported an IMF program that has helped the government
achieve Significant reductions in the fiscal deficit and shore up the financial sector
during a period of political uncertainty.
In all of these instances, U.S. and international assistance was used to support
good economic policies. Because there was tangible policy progress, the support
could have a real confidence-building effect, and it helped the governments quickly
restore economic stability and generate a return to robust growth. They are clear
examples of the U.S. commitment to Latin America and the Bush Administration's
commitment to working closely with the governments in the region to implement
policies that improve stability and increase prosperity.
Sustaining Economic Growth and Reducing Poverty
A focus on microeconomic reforms to clear the way for higher levels of productivity
growth is critical to the long-term prospects for the region. Private forecasters are
expecting growth of just 4 percent in 2005. The region can do beUer--it should aim
to sustain the 2004 performance. Decades of high growth are needed to bring
down the poverty rates that are polarizing societies.
I see two major challenges for turning economic stability into sustained growth.
They are, first, institutionalizing the important improvements in macroeconomic
policy that have been achieved recently and, second, addressing the business
climate problems needed to spur higher productivity growth.
While the fiscal improvements in the last several years have been instrumental to
the region's stability and recent growth, continued strong fiscal performance is
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needed bring down debt levels further and build a stronger buffer against shocks.
Overall debt levels are still too high and represent a continued vulnerability for the
region.
Countries can do this by institutionalizing structural fiscal reforms in order to lock-in
a continued strong fiscal effort. This means improving the efficiency of tax policies-for example, by streamlining complicated systems of rates and exemptions--and
strengthening tax administration to reduce evasion. Broadening the tax base and
improving compliance produces tax systems that are fairer and allow scope for rate
reductions that improve incentives. It means improving the flexibility of public
finances by reforming outmoded pension systems and reducing automatic revenue
earmarking, so that limited government resources can be channeled to the highest
priority uses.
Particularly important for long-term fiscal stability is putting in place strong fiscal
responsibility regimes that discipline budget planning and execution, including at
the sUb-national level where deficit spending and debt accumulation has
undermined national governments' efforts at fiscal consolidation. The clearest
example here is Argentina, where the provincial overborrowing in the 1990s and the
federal government's bailout of the provinces contributed significantly to the
country's ultimate default in 2001.
In the area of monetary policy, countries can further bolster the institutional
underpinnings of good policy by increasing central bank independence in order to
lend greater credibility to their price stability mandates--as countries like Mexico,
Chile, and Peru have done.
The other main challenge is to tackle the microeconomic impediments to sustained
economic growth. The key to higher growth and living standards is productivity
growth, which leads to higher wages and decreases in poverty. However,
productivity growth in Latin America has been far too low, especially when
compared with the productivity growth that has enabled such large reductions in
poverty that we have seen in East Asia. As the lOB points out in its "The Business
of Growth" study, Latin America's productivity growth averaged only 0.7 percent of
GOP in the 1990s, compared to 1.7 percent in developed countries and 2.7 percent
in East Asia.
The reasons for this disappointing performance are clear. Low trade integration
with the rest of the world--total trade was only 45 percent of the region's GOP,
compared to nearly 80 percent in East Asia--rigid labor markets, weak property
rights and judicial systems, and lack of access to credit particularly for small
businesses all hold the region back.
As a result of these distortions, a disproportionately high share of the region's
economy operates in the informal sector. According to the World Bank's "Doing
Business" survey, the informal sector accounts for 42 percent of the region's gross
national income, compared to 24 percent in East Asia and 17 percent in the OECD
countries. This is hugely inefficient, as fewer new businesses are created, and the
firms that do exist are less likely to expand, hire more people, and become engines
of growth. Resources are wasted evading overly burdensome regulations, and tax
bases are overly concentrated and narrow. According to the World Bank's
indicators, the 70 days in Latin America is the longest amount of time to start a
business in any other region of the world.
We know the agenda that must be pursued to address the impediments to higher
productivity growth. It basically involves attacking the problems that prevent
investors from risking their capital. Markets for products, labor, and capital have to
be open and competitive. Governments and the private sector have to invest in
high-return projects to build infrastructure and widen access to education. Property
rights have to be protected. And citizens have to be protected from corruption.
Experience in this region and elsewhere shows that, when these elements are in
place, entrepreneurs will invest and create jobs.
U.S. Commitment to Latin America
Just as the United States has played a strong leadership role in assisting the region
through its difficulties of the last several years, we are committed to helping
translate the current economic recovery into the sustained growth that the region is
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capable of.
As I described earlier, trade has played a significant role in the recent strong
economic performance in the region. The United States continues to advance an
ambitious agenda for reducing barriers to trade in this hemisphere, so that trade
can continue to serve as a driver of economic growth for years to come. The free
trade agreements (FT As) that we have concluded or are in the process of
concluding will cover 90 percent of U.S. trade with the region. These include the
U.S.-Chile FTA, the Dominican Republic-Central American Free Trade Agreement
(DR-CAFTA) as well as Panama and the Andean region that are under negotiation.
Our efforts also continue toward a Free Trade Area of the Americas that would
encompass all countries in the Hemisphere in an integrated market.
We are also using multilateral fora to advance a bold development agenda. At the
2004 Special Summit of the Americas, the hemisphere's leaders launched a broad
array of initiatives to achieve objectives such as halving the cost of remittance
transfers, tripling bank lending to small businesses, and significantly reducing the
time and cost of starting a new business. We continue our bilateral efforts and
cooperation with the lOB to implement these initiatives and achieve the ambitious
goals the leaders have laid out. As the 2005 Summit of the Americas approaches-to be held in November 2005 in Argentina--we look forward to working with others
to launch new initiatives to increase economic growth, for example, by promoting
more productive investment in infrastructure. We also continue to work intensively
with the World Bank and lOB to continue with their efforts to show measurable
results in their activities by demonstrating that their budget and project lending is
reaching quantifiable targets, while strong controls are in place to track where the
money goes.
In our bilateral dialogues with individual countries we have advanced ideas for
raising productivity growth and launched joint efforts in particular areas. Through
the U.S.-Mexico Partnership for Prosperity launched in 2001, we have seen the
cost of sending remittances between the U.S. and Mexico fall substantially.
Through the U.S.-Brazil Group for Growth, we have targeted areas like small
business lending and business regulation and yielded concrete results our
Brazilian counterparts told us that the Group's discussions have helped shape
legislation submitted to the Brazilian Congress that reduces taxation and
streamlines labor and pension regulations for Brazilian small business. Most
recently, we launched the Security and Prosperity Partnership of North America
with Mexico and Canada, which will improve the legitimate flow of people and cargo
at our shared borders and improve productivity through regulatory cooperation to
generate growth.
I would like to see a further deepening of this type of dialogue with the other
countries in the hemisphere. There is certainly a large agenda to discuss for a
broader Latin American group focused on economic growth.
Finally, through the Millennium Challenge Account (MCA) we are working with
countries to help the poorest countries increase growth and productivity. This Bush
Administration initiative is aimed at countries advancing the right policies--in the
areas of ruling justly, investing in people, and promoting economic freedom. MCA
assistance is designed to boost their efforts through well-targeted financial support.
I am pleased that three countries in Latin America, Bolivia, Honduras, and
Nicaragua, have the opportunity to benefit from MCA assistance this year by
developing proposals for use of MCA funds.
Conclusion
I am proud to have had to the opportunity to work on challenging economic and
financial issues, as well as with my regional colleagues, over the past four years.
Together, we have gone from crisis to growth. That growth will help reinforce the
merits of good policy. I am confident that in its second term the Bush
Administration is focused on the type of engagement with the region needed to
build on this success, help the region and substantially raise its living standards and
lay the groundwork for deeper cooperation between the U.S. and Latin America.
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js-2375:
Mt~UIA
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ADVISORY: Public Schedule for Secretary John W. Snow During the ...
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free /Irlo/w(') Ar:miJat(l-j Rearf(,r"}.
April 13, 2005
js-2375
MEDIA ADVISORY: Public Schedule for Secretary John W. Snow During the
G7 Meeting of Finance Ministers and Central Bank Governors, IMF and World
Bank Annual Meeting, and Related Events
REPORTS
•
Secretary Snow's Public Schedule for G7 -Related Events
http://wwvv..trea5.gov/prcs<;/n~lcases/js2375.htm
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Thursday, April 14
11 :30 AM
Under Secretary for International Affairs John Taylor
Pre-G7 Press Briefing
Treasury Department
Room 4121 (Media Room)
1500 Pennsylvania Ave., NW
Washington, DC
* Open Press - pre-set may begin at lOam
* Media without Treasury press credentials must contact Frances Anderson at
202-622-2960 or e-mail their name, organization, date of birth and Social
Security number to (rances.anderson@do.treas.gov for clearance by 9 AM on
411412005
Friday, April 15
Secretary Snow's bilateral meetings: Brazil, France, Japan, Russia, United Kingdom
Treasury Department
1500 Pennsylvania Ave., NW
Washington, DC
* Pool photo at top of meetings, if requested
African Roundtable
Treasury Department
1500 Pennsylvania Ave., NW
Washington, DC
* Pool photo at top of meeting,
if requested
Saturday, April 16
Secretary Snow's bilateral meetings: Canada, India, Iraq, Mexico
IMF Building
700 19th Street, NW
Washington, DC
* Pool photo at top of meetings, if requested
7:00AM
Stake-out begins for photos of arriving officials
Daughters of the American Revolution (DAR) Headquarters
1i h Street entrance - circular driveway
lih & D Sts., NW
Washington, DC
7:45 - 11:00 AM
Meetings ofG7 Finance Ministers and Central Bank Governors
Daughters of the American Revolution (DAR) Headquarters
17 & D Sts., NW
Washington, DC
9:00AM
G7 Group Photo
Daughters of the American Revolution (DAR) Headquarters
National Officers Club Assembly Room
1776 D St., NW
Washington, DC
*Open photo, pool reporter.
*Photographers should arrive at DAR loading dock on D St. no later than
8:00 AM for security sweep and escort to Assembly Room.
*Treasury, White House, IMFIWB Annual Meetings press credentials
accepted - no additional clearance is needed.
11:00 AM
G7 communique released; will be posted on www.Treasury.gov
11:15 AM
Treasury Secretary John W. Snow
Post G7 Press Conference
Daughters of the American Revolution (DAR) Headquarters
National Officers Club Assembly Room
1776 D St., NW
Washington, DC
*Open Press
* Media should arrive at DAR loading dock on D St. no later than 10: 15 am for
security sweep and escort to Assembly Room.
*Textfor release; will be posted on www.Treasury.gov
*Treasury, White House, IMFIWB Annual Meetings press credentials
accepted - no additional clearance is needed.
Sunday, April 17
9:00 AM - 1:00 PM
Secretary John Snow
Meetings of Development Committee
World Bank
th
701 18 Street, NW
Washington, DC
*Textfor release; will be posted on www.Treasury.gov
-30-
JS-1376: IJcputy Assistant Secretary lannicola Promotes Financial <BR>Literacy Month ... Page I of I
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April 13, 2005
JS-2376
Deputy Assistant Secretary lannicola Promotes Financial
Literacy Month in Rhode Island
Treasury's Deputy Assistant Secretary for Financial Education, Dan lannicola, Jr.,
today participated in several financial education events in Providence, Rhode
Island, to promote April as Financial Literacy Month. lannicola keynoted at the
Rhode Island Financial Literacy Leaders' Luncheon, delivering a presentation to
state policymakers and community leaders. While in Providence, lannicola also
delivered remarks at the Financial Literacy Month Proclamation Ceremony
alongside Governor Donald Carcieri and several other state dignitaries.
At the luncheon, lannicola thanked financial education leaders for their hard work.
"Your grassroots involvement in financial education is making a difference here in
Rhode Island," said lannicola.
At the proclamation ceremony, he also thanked Governor Carcieri and Rhode
Island Jump$tart staff for encouraging financial education efforts in the state year
round. "Today's impressive showing by so many state-wide office holders reflects a
true commitment to raise financial literacy across the state."
Today's financial education events were organized by the Rhode Island Jump$tart
for Personal Financial Literacy with the purpose of increasing awareness among
policy makers and the public about significant personal finance issues in the
marketplace, and informing people about financial education resources available
free from the government. The Jump$tart Coalition for Personal Financial Literacy
seeks to improve the personal financial literacy of young adults.
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education in May of 2002. The Office
works to promote access to the financial education tools that can help all Americans
make wiser choices in all areas of personal financial management, with a special
emphasis on saving, credit management, home ownership and retirement
planning. The Office also coordinates the efforts of the Financial Literacy and
Education CommiSSion, a group chaired by the Secretary of Treasury and
composed of representatives from 20 federal departments, agencies and
commissions, which works to improve financial literacy and education for people
throughout the United States. For more information about the Office of Financial
Education visit: www.treas.gov/financialeducation.
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JS-2Ji'r: FACT SHE~T: Millions of American Families Are Benefiting from Tax Relief
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April 14, 2005
JS-2377
FACT SHEET: Millions of American Families Are Benefiting from Tax Relief
"No one looks forward to tax day, but for millions of taxpayers across the country,
this April 15 will be less painful thanks to the President's tax cuts. Nationwide, 110
million taxpayers will see their tax bill reduced thanks to the tax relief supported by
President Bush and enacted by Congress. That extra money in the hands of
America's families has helped to fuel the economic recovery. Now, to continue this
period of economic growth, we must make tax relief permanent so families can plan
ahead for the future. We must also reform the tax code to make it simpler, fairer
and more growth oriented. "
-- Secretary of the Treasury John Snow
Background: The President's Tax Relief is Benefiting Millions of American
Families
As a result of the President's Economic Growth and Tax Relief Reconciliation Act of
2001, the Jobs & Growth Tax Relief Reconciliation Act of 2003, and the Working
Families Tax Relief Act of 2004 every taxpayer who paid income taxes will get tax
relief this year.
•
•
•
•
•
•
•
•
110 million American taxpayers will see their taxes decline by an average of
$1,716.
A family of four earning $40,000 will receive tax relief of $1 ,985.
Over 5 million individuals and families will see their income tax liabilities
completely eliminated.
44 million families with children will receive an average tax cut of $2,300.
14 million elderly individuals will receive an average tax cut of $1 ,879.
25 million small business owners will save an average of $3,235.
24 million investors will save an average of $947 from lower rates on
dividends and capital gains, including 7 million seniors who will save an
average of $1 ,231.
Low-income families will also benefit from provisions that make the child
credit refundable for more families and reduce marriage penalties.
President Bush has called on Congress to act now to prevent tax increases. If
Congress does not act, failure to extend these tax cuts permanently would
raise taxes on American taxpayers in future years:
•
In 2006, the small business expensing limit will shrink from $100,000 to just
$25,000, increasing the cost of capital investments for America's small
businesses;
• In 2009, the top tax rate on dividends will increase from 15 to 35 percent,
while the tax on capital gains will climb from 15 to 20 percent, raising the tax
burden on retirees and families investing for their future; and
• In 2011, the tax rate relief, new 1O-percent tax bracket, death tax repeal,
marriage penalty relief, small business expensing, and all the remaining tax
relief enacted over the past few years will sunset, resulting in tax increases
for every individual American man or woman who pays income taxes.
The economy is stronger today because of the timely tax relief measures
enacted during President Bush's administration. The success of the
President's economic program, including tax relief, can be seen throughout
the economy.
•
Economic growth has averaged more than 4 percent during the last two
years.
• The economy has generated 2.1 million net new jobs in the year ending
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March 2005 and more than 3 million since May 2003, when the last tax relief
package was enacted.
At 5.2 percent, the unemployment rate remains below its average of the
19705, 19805, and 1990s.
Real after-tax incomes are up more than 12 percent since December 2000,
and are up more than 3 percent in the last year alone.
Aided by a recovering stock market and strong home values, household
wealth is at a record high.
Homeownership is at an all-time high at more than 69 percent.
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FROM THE OFFICE OF PUBLIC AFFAIRS
April 14, 2005
JS-2378
Hearing Testimony
the Honorable Timothy S. Bitsberger
assistant Secretary of the Treasury for
Financial Markets
on Reform of the United States Postal Service
Before the
committee on Homeland Security and
GovernmentAL Affairs
United States Senate
Madam Chairman and distinguished Members of the Committee, thank you for the
opportunity to testify today on the need for comprehensive postal reform. I
welcome this opportunity to underscore the Administration's strong interest in
enacting comprehensive legislation to reform the United States Postal Service.
The Administration Supports Enactment of Postal Reform
The President has consistently articulated the need for comprehensive reform to set
the Postal Service on sound, long-term operational and financial footing. The
Administration has been holding regular meetings with Congress and many
stakeholders to ensure that we hear everyone's perspective and that our message
is heard as well. I would like to extend the Administration's thanks to the Members
and leadership of this Committee for working with us on postal reform legislation
and we look forward to continuing that productive dialogue going forward. The
Administration also appreciates Postmaster General Jack Potter's strong leadership
and hard work to drive change within the Postal Service, and we have enjoyed
working closely with him and his staff.
I would like to begin my testimony by outlining the five principles of reform that the
Administration has supported. These principles are as follows:
•
•
•
•
Self-Financing - The Postal Service should be self-financed. This was the
intent of the 1970 Postal Reorganization Act, but thus far it has never been
accomplished. Today we are at a point, due in no small part to the Postal
Civil Service Retirement System Funding Reform Act of 2003 (hereafter "the
Postal CSRS Funding Reform Act"), P.L. 108-18, where we can ensure that
the Postal Service covers all of its costs, including its massive unfunded
liabilities, without potentially crippling effects on ratepayers.
Transparency - The Postal Service should be a model of transparency. The
past few years have highlighted the necessity for financial transparency in
our nation's capital markets. We are all familiar with the limitations of the
accounting standards that have been brought to light through the corporate
accounting issues of the late 1990's and the collective responses from
Congress, the Administration, regulators, and self-regulatory organizations
over the past three years. While the Postal Service is a governmental
entity, it operates as a monopoly. It has an enormous public trust and thus
must not be exempt from the financial transparency requirements that we
place on investor owned corporations. The public trust that the Postal
Service holds demands a higher standard.
Flexibility - The Postal Service should have the flexibility to operate as a
business, including the ability to set prices, reduce costs, and adjust key
aspects of its business in order to meet the challenges of a dynamic
marketplace.
Accountability - The Postal Service should be more accountable to all
stakeholders. In order to protect ratepayers, mail recipients, taxpayers and
universal mail service, there is a vital need for greater independent
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•
oversight given that the Postal Service is a monopoly that would be
operating with greater commercial flexibility.
Corporate Best Practices - The Postal Service should implement best
practices of the corporate sector. This includes ensuring that the governing
board is equipped to meet the responsibilities and objectives of an
enterprise of its size and scope.
To more clearly outline the Administration's position in these areas, we provided a
white paper in the lOSth Congress listing a number of crucial long-term reforms. In
this Congress, we took the further step of offering proposed legislative language to
implement some of the more technical proposals. The Administration appreciates
the Committee's willingness to address many of our concerns and include a number
of our reform principles, and we look forward to working with you to further refine
aspects of postal reform legislation consistent with these principles.
Reform must be Comprehensive
The Administration has always believed that reform must focus on the long-term
health and viability of the Postal Service. There is an understandable temptation by
some to tailor reform around the next rate case, but our horizon must be longer.
Recognizing the importance of the Postal Service to our nation's citizens and
commercial enterprises, the Administration is committed to ensuring the long-term
financial and operational success of the Postal Service. We also recognize the
systemic and structural challenges that the Postal Service faces in its business and
believe that long-term reform will assist with both. The Postal Service faces an era
of great change in which many believe that declining first-class volumes are unlikely
to return. However, through reform and other initiatives collaboratively involving the
Postal Service and mailers, it is entirely possible that new mail streams can be
generated that provide a high value proposition to mailers. It is clear that the Postal
Service must have a governing body, management team, and employees that are
capable of recognizing the challenges and opportunities ahead with the insight,
flexibility and skill to capitalize on them.
Flexibility
Pricing is a key part of the flexibility that the Administration believes the Postal
Service needs. We support a hard rate cap, which provides that rates for any class
of mail cannot rise more than the Consumer Price Index ("CPI") in any given year.
The decision to support CPI as opposed to some other index was, in part, grounded
on four factors:
1.
the knowledge that overall postage rates have basically tracked CPI since
1972;
2.
that productivity at the Postal Service has lagged the private sector by large
margins since 1972 and therefore significant opportunities for a more productive
Postal Service exists and this would enable it to operate within CPI;
3.
to give the Postal Service stronger incentives to control its costs by
discouraging it from simply passing costs on to ratepayers through a cost-based
regulatory structure; and
4.
that wages generally rise faster than prices over time. This is largely due to
increases in labor productivity. This difference in productivity allows firms to raise
real wages without passing along costs to consumers through price increases.
Generally, productivity improvements are expected to reduce prices.
We support the Committee's intent to establish a hard cap at CPI, and further
support the Senate's version of an "escape clause," or exigency rate case, which
establishes a very high bar to increase rates above CPI. This pricing flexibility will
undo the current practice of irregular and lengthy rate cases that offer the Postal
Service little managerial discretion and little or no predictability for the ratepayers.
We also seek to provide the Postal Service with flexibility on its cost side as well.
We note that the Postal Service's $66 billion cost base provides significant
opportunity for cost reductions without jeopardizing service quality or its universal
service obligation. While some may dispute the absolute size of the potential
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reductions, it is indisputable that productivity at the Postal Service has lagged the
private sector by large margins and that more effective management practices
should be able to make significant progress in this area. One opportunity is in the
underlying processing and distribution network and the potential to use this network
in a more efficient manner.
Flexibility is not a blank check though. The Postal Service currently has the ability
to negotiate its portion of the premiums for health and life insurance for its
employees. The Postal Service has taken advantage of this ability and negotiated
benefits beyond those offered by the U.S. Government. For instance, the Federal
government pays 72 percent of an employee's health insurance premium while the
Postal Service pays 85 percent of an employee's health insurance premium.
Through this flexibility, the Postal Service has increased its costs by an additional
$734 million. With respect to Basic life insurance, the Federal government pays 33
percent of an employee's Basic life insurance premium while the Postal Service
pays 100 percent of an employee's Basic life insurance premium. Combined, the
Postal Service has increased its costs for health and life insurance premiums by
over $870 million annually above what the Federal government pays for most of its
other employees.
We believe that it would be counter-productive to provide a list of specific cost
reductions in statute, and instead have focused on a model where management
has the flexibility to operate as a business within the constraints of a rate cap. This
provides the right incentives for management without Congress or the Executive
Branch micro-managing the business. In this way, the rate cap also drives greater
board and management accountability, which is an important principle for the
Administration.
Ensuring Self-Financing - Unfunded Liabilities
The Administration believes that comprehensive postal reform must require the
Postal Service to cover all of its financial obligations, including its on and offbalance sheet unfunded liabilities. This is consistent with the statutory requirement
that the Postal Service meet its responsibilities in a businesslike fashion by
ensuring that revenues from the sale of products and services are sufficient to
cover all operating costs. This concept of self-financing ensures that the Postal
Service will operate in a manner that strengthens the financial and operational
health of the Postal Service. It is important to recognize that since the 1970 Postal
Reorganization Act, the Postal Service has never satisfied the statutory mandate of
being fully self-financed. The Postal Service has accumulated approximately $75
billion of unfunded post-retirement health, pension and workers' compensation
liabilities. Additionally, the Postal Service received approximately $27 billion of
taxpayer funded appropriations since the 1970 Postal Reorganization Act.
While this may seem to paint a bleak picture of Postal finances, the Postal CSRS
Funding Reform Act has provided a unique opportunity to substantially improve the
financial health of the Postal Service. Specifically, the Administration has proposed
to dedicate all the escrow created by the Postal CSRS Funding Reform Act to fund
the unfunded post-retirement health obligations, which are approximately $64
billion. Without action, these unfunded liabilities grow to almost $100 billion in
2011, $208 billion in 2022, $422 billion in 2032 and over $1 trillion in 2045. We
believe that the Postal Service should have a financing plan in place to ensure it
can cover its post-retirement healthcare costs, and our proposal does that.
Some have said that the private sector does not pre-fund post-retirement health
liabilities in the manner that we have proposed. We agree that the private sector
generally has not fully pre-funded these liabilities, but note two important
distinctions. First, in recent years, many firms that offer post-retirement health
benefits have in fact established dedicated trusts to fund these liabilities as the
seriousness of these obligations became apparent. More importantly, we recognize
that the private sector has the ability to eliminate these, and other obligations either
voluntarily or through a bankruptcy proceeding. These changes generally take the
form of reduced or eliminated benefits.
We also recognize concerns from ratepayers over the 2006 rate case. The Postal
Service has indicated that the need for the 2006 rate case is necessitated by the
escrow established by the Postal CSRS Funding Reform Act and that without
access to the escrow, rates must rise to compensate.
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We believe that this analysis excludes the real reasons for the 2006 rate case. The
reality is that any additional financial requirements of the Postal Service can be
directly attributed to its inability to sufficiently reduce its costs since 2002, which is
the date of the last rate increase. It is interesting to note that, if the Postal Service
had the authority to raise rates under the CPI cap being proposed, the rates that
would be in place today and in 2006 would be higher than what the Postal Service
is currently proposing. While there are a lot of "puts" and "takes" in a business
plan, I would like to address two components. Personnel will cost the Postal
Service over $6.9 billion more in 2006 than it did in 2002 despite lower headcounts.
This is based on actual results from 2002 and the Postal Service's projections
included in its 2005 rate case filing. Fuel is also a significant component. We note
that fuel costs for 2006 are projected to be over $700 million higher than in 2001,
when the Postal Service filed its last completed rate case. The point of highlighting
these two line items, which combined are well over two times the $3.1 billion rate
increase that the Postal Service is asking for, is to demonstrate that the rate
increase has its roots in the Postal Service's general cost structure and not linked to
the escrow.
It is also important to realize that the Postal Service has already factored into rates,
through the CSRS funding formula, the amounts that constitute the escrow, and
therefore these amounts do not represent a "new" cost to be recovered. In other
words, our reform proposal essentially replaces the "CSRS" expense line item with
a new expense line item named "post-retirement health liabilities."
The Administration understands the concern over the 2006 rate case, but we also
believe that all escrow funds should be committed to paying down unfunded
liabilities rather than diverted in order to minimize a near-term rate increase. But
the Administration does not view this as an either/or proposition, and we should
consider exploring other alternatives to fully achieve both objectives. Before such
alternatives can be considered, however, the Administration needs to see a clear
path to enactment of postal reform legislation that includes the fundamental reforms
that we have advocated.
Ensuring Self-Financing - Military Service
There has been a great deal of discussion about the Administration's position on
the military service issue, and this hearing provides an opportunity to set the record
straight. The decision in the Postal CSRS Funding Reform Act to allocate the $27
billion in retirement costs for the military service of the Postal Service retirees was
justified for many reasons which are being addressed by OPM's Acting Director
Blair in his testimony.
In addition to the arguments that Acting Director Blair addresses in his testimony, I
would also like to note that the allocation of military service retirement costs is fair
and equitable because the Postal Service has been the beneficiary of significant
taxpayer funded appropriations, which more than cover any perceived "unfair"
attribution of the $27 billion of military retirement costs to the Postal Service. In
addition to the $78 billion credited to the Postal Service through the Postal CSRS
Funding Reform Act, the Postal Service has received approximately $27 billion in
taxpayer-funded appropriations from the Federal government since enactment of
the 1970 Postal Reorganization Act. If the goal is to revisit all of the assumptions
that were the underpinnings of the 1970 Postal Reorganization Act and decades of
Congressional decisions, it would be fair and equitable to revisit the
appropriateness of the taxpayer-funded appropriations that the Postal Service has
received. Using the same investment rates that OPM used in calculating the figure
for CSRS over-funding, and based on the timing of these yearly Federal
government transfers to the Postal Service, Treasury has calculated that the Postal
Service would owe more than $200 billion to the Treasury for the use of the
appropriations through FY 2003. We could elaborate on many other unique
benefits the Postal Service accrues as a result of its special relationship with the
Federal government, which include the ability to borrow up to $15 billion from the
Department of the Treasury at below-market rates; exemption from federal income
taxes, exemption from state and local taxation, and the power of eminent domain.
So, during a period when the Postal Service has a statutory mandate to be selffinancing, the Postal Service's cumulative performance has been bolstered
enormously and in an extraordinary way by U.S. taxpayers, and as a direct benefit
to ratepayers. I do not raise this point to call these transfers into question.
However, I bring up this fact to further underscore the point that the Postal Service
has benefited greatly during the past three decades, in an amount far exceeding the
$27 billion currently under debate.
http://wvv.W.trca~l.goy/press/releases/js237~.htm
4/28/2005
Js-nn: Hearing Trstimony,BR>thl' Honorable Timothy S. Bitsberger<BR>assistant Se...
Page 5 of 6
Transparency
The Administration believes that real financial and operational transparency is
essential to postal reform. In the case of the Postal Service, the public interest and
trust demands a very high level of transparency. We seek to obtain this enhanced
transparency through SEC reporting standards and a robust, independent
regulator. We are pleased that the Senate has seen fit to adopt many of the
Administration's recommendations in this area.
Financial transparency is important for ratepayers, taxpayers, competitors,
employees and management. The Administration believes that the Postal Service
should be given great flexibility to set prices and to provide work-sharing discounts
and enter into negotiated service agreements. While the Administration has
dropped its requirement for audited product-line financial statements, we do believe
that the Postal Service needs to develop and instill a culture that measures and
understands its costs at a very fine level, which is consistent with the best practices
in the private sector. While it is true that private sector companies generally do not
issue product-line financial statements, they do in fact have them for internal
purposes, which include performance measurement and the pricing of products,
services and contracts. With the expanded flexibility that the Postal Service has on
pricing, discounts and service agreements, the Postal Service needs to fully
understand the true financial implications of its decisions.
In lieu of product-line financial statements, we have sought segment reporting
which is consistent with SEC requirements. Given the uniqueness of the Postal
Service, we have sought to define the segments. We believe that five segments
represent a reasonable requirement based on today's business and would lead to
segment reporting on First Class Mail, Standard Mail, Competitive Products,
Periodicals, and Other. It is important to note that our language, while defining the
segments, narrowed the reportable information by eliminating the SEC requirement
to report "total assets." We did this because of recognition of the difficulty that this
would pose for the Postal Service to establish what assets belong to which
segments. Beyond the narrow issues that we have addressed, we are comfortable
that the SEC's requirements and the exceptions that it provides for all registrants
when items do not apply are sufficient for the Postal Service. It is unnecessary and
unwise to allow the regulator to relax the SEC requirements.
Another aspect of financial transparency is the recognition of all of the Postal
Service's liabilities, including those that are currently not on the balance sheet. The
post-retirement health liability is the single largest liability excluded from the Postal
Service's financial statements and the one that causes the most concern. This is
because the Postal Service has excluded approximately $64 billion in costs from
the rate base. We are also concerned by the Postal Service's acknowledgement
that it has included the workers' compensation liabilities in its rate base yet it still
has $7.6 billion of unfunded workers' compensation liabilities. The Postal Service
has used funds that were part of its workers' compensation expense requirements
in previous rate cases for non-workers' compensation related expenses.
The issue of what information is confidential and who determines whether it is
confidential is an important issue of transparency. We fully understand that certain
information of the Postal Service is confidential as is common in both the
government and private sectors. We agree with the Senate's approach to this
matter: to allow the regulator to be the final arbiter of what materials should be
confidential rather than the regulated entity.
Accountability
Accountability will result in many ways through our reform efforts. A hard rate cap
that has a strict escape mechanism will drive management accountability. A strong
regulator will drive accountability, and real financial transparency will drive
accountability.
We also believe that a revised compensation structure for senior management will
help drive accountability. It is critical to provide flexibility to the Board of Governors
to fairly compensate senior executives in a manner that will help attract and retain
the very best. We all recognize that even with this flexibility, it is not possible to
provide the same private sector compensation opportunities. But it is a step in the
right direction as we demand a more private sector like focus on business
operations, productivity and financial performance. In another accountability
http://wv~-w.trcas.gov/pre~lS/rele(lses/js237g.htm
4/28/2005
JS-237~. Ilcar;n~ Tc:-,(irrloTly~BR>thc
lIonorable Timothy S. Bitsberger<BR>assistant Se ... Page 6 of6
measure, we believe that the regulator should have a review role in the new
compensation flexibility.
Conclusion
Congress now has a unique opportunity to take decisive action on a comprehensive
postal reform bill that will set the Postal Service on the course to financial and
operational stability. We believe that the five principles discussed will align the
incentives, create a performance oriented culture. and ensure the proper
accountability for the largest monopoly in the world. Thank you for the attention you
are paying to this critical aspect of our country's economy. The Administration
remains prepared to actively work with you to craft a comprehensive reform bill that
will stand the test of time in an enormously dynamic market. We believe it critical
that reform legislation result in a sharing of sacrifice with all stakeholders, and
characterized by the five principles we have articulated.
Once again, I thank you for your kind invitation to appear today.
http://www.treaS·80v/presslr~leases/js2378.htm
4/28/2005
JS-2379: Treasury Releases State by State Fact Sheets on the Benefits of the President's T. .. Page 1 of 1
,
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the Microsoft Word content on this page, (iow{]/rli](/ tile free MlclOsofl Weir!
Vlew81.
April 14, 2005
JS-2379
Treasury Releases State by State Fact Sheets on the Benefits of the
President's Tax Relief
WASHINGTON, DC - The Treasury Department today released state specific data
illustrating the benefits of the tax relief on all Americans. Millions of taxpayers will
feel a lighter burden on tax day thanks to the Economic Growth and Tax Relief
Reconciliation Act Of 2001 (EGTRRA) and The Jobs and Growth Tax Relief
Reconciliation Act Of 2003 (JGTRRA).
"No one looks forward to tax day, but for millions of taxpayers across the country,
this April 15 will be less painful thanks to the President's tax cuts," stated Treasury
Secretary John Snow. "Nationwide, 110 million taxpayers will see their tax bill
reduced thanks to the tax relief supported by President Bush and enacted by
Congress. That extra money in the hands of America's families has helped to fuel
the economic recovery. Now, to continue this period of economic growth, we must
make tax relief permanent so families can plan ahead for the future. We must also
reform the tax code to make it simpler, fairer and more growth oriented."
State by State Fact Sheets on the
Benefits of the President's Tax Relief
•
•
•
•
•
•
•
•
• AK
•
AL
•
AR
•
AZ
•
•
CA
CT
•
•
•
•
•
•
•
DC
DE
FL
GA
HI
IA
10
•
IL
• co
•
IN
•
KS
• NV
• NY
•
LA
•
•
•
•
•
•
MA
MO
ME
MI
MN
MO
OH
• OK
•
•
•
•
•
•
• KY
•
MS
MT
NC
NO
NE
NH
NJ
NM
OR
PA
RI
SC
SO
TN
• TX
• UT
• VA
•
VT
•
•
WA
WI
• wv
•
WY
- 30-
http://w·v"W.trcas.gov/press/reieases/js2379.htm
4/28/2005
.•••••••••••••••••••••••••••.•••••••••••••.
1S-2380 - Treasury International Capital Data for February
Page 1 of2
'~ ..
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.,'~~C,
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file below.
To view or print the PDF content on this page, download the free Ac/uix'(R) Aero/)al(f" Rf.'clcJeIIFJ.
April 15, 2005
JS-2380
Treasury International Capital Data for February
Treasury International Capital (TIC) data for February are released today and posted on the U.S. Treasury web site (I
which will report on data for March, is scheduled for May 16,2005.
Long·Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,376.3 billion in February, exceeding gross sales of don
billion during the same month.
Foreign purchases of domestic securities reached $98.3 billion on a net basis in February, relative to $91,8 billion dur
reached $79.7 billion in February. Net private purchases of Treasury Bonds and Notes increased to $31.2 billion from
private purchases of Government Agency Bonds were $11.0 billion, down from $19.9 billion the previous month. Net
were $30.0 billion, up from $17.3 billion the previous month. Net private purchases of Equities were $7.4 billion down
Official net purchases of U.S. securities were $18.6 billion in February, relative to $14.4 billion in January. Official net
of $11.3 billion accounted for the bulk of official inflows in February, up from $7.6 billion the previous month.
Long.Term Foreign Securities
Gross purchases of foreign securities owned by U.S. residents were $281.1 billion in February, relative to gross sale~
$294.9 billion during the same month.
Gross sales of foreign securities to U.S. residents exceeded purchases by $13.8 billion, highlighting a net U.S. acqui,
and net U.S. sales of $1.5 billion in Foreign Bonds.
Net Long-Term Securities Flows
Net foreign purchases of both domestic and foreign long-term securities from U.S. residents were $84.5 billion in Feb
January. Net foreign purchases of long-term securities were $830.6 billion in the twelve months through February 20(
the twelve months through February 2004.
The full data set, including adjustments for repayments of principal on asset-backed securities, as well as historical
httpl/www.treas.gov/ticl.
Sf
Foreigners' Transactions in Long·Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
Foreigners' Transactions in Long-Term Securities with U.S. R
(Billions of dollars, not seasonally adjusted)
2004
12 Months Through
Feb-04 Feb-OS
14,383.6 15,269.8
13,644.9 14,365.8
14,805.7 15,642.3
13,970.7 14,708.8
2003
1 Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (line 1 less line
http://www.trcu3.goy/pr~ss/rele~scsijs2380.htm
738.8
904.0
835.0
933.5
4/28/2005
JS-2380 - Treasury International Capital Data for February
Page 2 of2
4
5
6
7
8
Private, net /2
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
595.7
163.2
135.1
261.5
35.9
669.9
150.9
206.1
286.5
26.4
657.5
197.7
151.1
254.5
54.1
718.9
177.7
198.4
305.1
37.7
9
10
11
12
13
Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
143.1
113.5
24.3
5.6
-0.3
234.1
201.1
20.3
11.4
1.4
177.6
151.1
21.8
5.5
-0.8
214.5
175.4
23.8
14.1
1.2
2,893.8
2,959.7
3,119.1
3,228.6
3,039.1
3,114.8
3,108.5
3,211.4
-65.9
-109.5
-75.8
-102.9
18.9
-84.8
-26.1
-83.4
14.0
-89.8
-15.1
-87.8
672.9
794.6
759.3
830.6
14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
16 Foreign Securities Purchased, net (line 14 less line
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
17
18
19
11
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)
/2
/3
Source: U.S. Department of the Treasury
REPORTS
•
(PDF) Foreigners' Transactions in Long-Term Securities with U.S. Residents (Billions of dollars, not seasolli:lll
http://WYv·w.trca3.gov!pre~s/relcascs/js2380.htm
4/2812005
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
April 15, 2005
EMBARGOED UNTIL 9:00 AM
Contact:
Tony Fratto
202-622-2910
Treasury International Capital Data for February
Treasury International Capital (TIC) data for February are released today and posted on the U.S.
Treasury web site (www.treas.gov/tic). The next release date, which will report on data for
March, is scheduled for May 16,2005.
Long-Term Domestic Securities
Gross purchases of domestic securities by foreigners were $1,376.3 billion in February,
exceeding gross sales of domestic securities by foreigners of $1 ,278.0 billion during the same
month.
Foreign purchases of domestic securities reached $98.3 billion on a net basis in February,
relative to $91.8 billion during the previous month. Private net flows reached $79.7 billion in
February. Net private purchases of Treasury Bonds and Notes increased to $31.2 billion from
$23.1 billion the preceding month. Net private purchases of Government Agency Bonds were
$11.0 billion, down from $19.9 billion the previous month. Net private purchases of Corporate
Bonds were $30.0 billion, up from $17.3 billion the previous month. Net private purchases of
Equities were $7.4 billion down from $17.1 billion.
Official net purchases of U.S. securities were $18.6 billion in February, relative to $14.4 billion
in January. Official net purchases of Treasury Bonds and Notes of $11.3 billion accounted for
the bulk of official inflows in February, up from $7.6 billion the previous month.
Long-Term Foreign Securities
Gross purchases of foreign securities owned by U. S. residents were $281.1 billion in February,
relative to gross sales of foreign securities to U.S. residents of $294.9 billion during the same
month.
Gross sales of foreign securities to U.S. residents exceeded purchases by $13.8 billion,
highlighting a net U.S. acquisition of$15.3 billion in Foreign Equities and net U.S. sales of$1.5
billion in Foreign Bonds.
Net Long-Term Securities Flows
Net foreign purchases of both domestic and foreign long-term securities from U.S. residents
were $84.5 billion in February compared with $92.5 billion in January. Net foreign purchases of
long-term securities were $830.6 billion in the twelve months through February 2005 as
compared to $759.3 billion during the twelve months through February 2004.
The full data set, including adjustments for repayments of principal on asset-backed securities, as
well as historical series, can be found on the TIC web site, http://www.treas.gov/tic/.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
2004
12 Months Through
Feb·04 Feb-OS
Nov-04
Dec-04
Jan-OS
Feb-05
14,383.6 15.269.8
13,644.9 14,365.8
738.8
904.0
14.805.7 15,642.3
13,970.7 14,708.8
835.0
933.5
1,409.9
1,308.9
101.0
1,318.1
1,234.7
83.5
1.305.3
1,213.5
91.8
1,376.3
1,278.0
98.3
2003
I Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
3 Domestic Securities Purchased, net (line 1 less line 2) /1
Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds. net
Equities. net
595.7
163.2
135.1
261.5
35.9
669.9
150.9
206.1
286.5
26.4
657.5
197.7
151.1
254.5
54.1
718.9
177.7
198.4
305.1
37.7
73.1
12.7
24.3
23.6
12.5
73.2
1.4
25.6
39.2
7.0
77.5
23.1
19.9
17.3
17.1
79.7
31.2
11.0
30.0
7.4
Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds. net
Corporate Bonds, net
Equities. net
143.1
113.5
24.3
5.6
-0.3
234.1
201.1
20.3
11.4
1.4
177.6
151.1
21.8
5.5
-0.8
214.5
175.4
23.8
14.1
1.2
27.9
21.0
3.5
1.9
1.5
10.2
7.0
1.0
1.6
0.6
14.4
7.6
6.1
1.3
-0.7
18.6
11.3
5.2
2.1
0.0
2,893.8
2,959.7
-65.9
3,119.1
3,228.6
-109.5
3,039.1
3,114.8
-75.8
3,\08.5
3,211.4
-102.9
272.2
277.9
-5.7
261.5
282.6
-21.1
250.6
249.9
0.7
281.1
294.9
-13.8
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
18.9
-84.8
-26.1
-83.4
14.0
-89.8
-15.1
-87.8
2.0
-7.7
-7.0
-14.0
5.8
-5.1
1.5
-15.3
19 Net Long-Term Flows (line 3 plus line 161
672.9
794.6
759.3
830.6
95.3
62.4
92.5
84.5
4
5
6
7
8
9
10
11
12
13
14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
16 Foreign Securities Purchased, net (line 14 less line 15) /3
17
18
/1
/2
/3
Net foreign purchases ofV.S. securities (+)
Includes International and Regional Organizations
Net V.S. acquisitions of foreign securities (-)
Source: V.S. Department of the Treasury
2
Js-ns i: Assistant Secretary for Intl?rnational AtTairs Randal K. Quarles <BR>U.S.-Russi...
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".:.",
Page 1 of 4
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 15, 2005
JS-2381
Assistant Secretary for International Affairs Randal K. Quarles
U.S.-Russia Banking Conference
Washington, D.C
"Russian Integration in the Global Financial System"
I would like to thank the U.S.-Russia Business Council and the Russian Banking
Association for sponsoring this timely and useful conference. Russia needs a high
quality financial sector, which is integrated into the global financial system, to
sustain its prosperity over the long term. An event like this can help Russia's
banking system move closer to that goal.
Why Russia Needs A Top-Notch Financial Sector
To be sure, Russia's strong growth in recent years has come without a substantial
contribution from the financial sector, so it may not be obvious why a first-class
banking sector is so important. But we should not forget that the commodity export
boom of recent years has obscured Russia's relatively low investment level - just
18 percent of GDP (i.e., gross fixed capital formation) - compared to 25-30 percent
of GDP in other dynamic emerging markets. Moreover, the high proportion of
natural resource exports makes the economy vulnerable to commodity price swings
and, in the current high oil price environment, to Dutch disease, with real exchange
rate appreciation sapping the competitiveness of the non-oil sector.
To reduce vulnerability and increase investment and growth rates, the economy
needs greater economic diversification. A sound, competitive, and private financial
sector open to foreign participation is the most efficient means for reallocating
natural resource profits and household savings to the most productive uses outside
of the oil sector. It is also important for getting credit to small and medium-sized
businesses. Economic research has found that an open financial sector is
associated with increased lending to small- and medium-sized enterprises, with the
larger foreign presence associated with better access to credit.[1] The crucial role
of small business in a country's economic success is well documented, accounting
for roughly 50% of GDP and 50% of employment in developed economies. Not
surprisingly, the more advanced transition economies in Central Europe, which
have implemented successful banking reform, also enjoy a higher contribution of
small businesses to economic output.
[1] See, for example, George R. G. Clarke, Robert Cull and Maria Soledad Martinez
Peria, World Bank Development Research Group.
Reform Effort to Date
The importance of a vibrant banking sector that meets international standards of
transparency and governance has not been lost on the Russian authorities. At their
summit in September 2001, Presidents Putin and Bush launched the U.S.-Russia
Banking Dialogue to solicit reform recommendations from private Russian, U.S. and
other bankers. With these recommendations in hand, the current team of Chairman
Sergei Ignatiev and Deputy Governor Andrei Kozlov at the Central Bank of Russia
initiated important reforms. In particular, the creation of the deposit insurance
system has elevated the regulatory and supervisory standards of the banking
system. With the initial round of deposit insurance entry complete, the results are
encouraging. Still, the full benefit of the reform will be realized only if it continues to
encourage further consolidation of the sector and helps level the playing field
between public and private banks.
Separately, the Russian government, led by the Financial Monitoring Service, has
http://w......y.treas.gov/pre~s/rP.!eases/js2381.htm
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JS-1381: AssIstant Secretary for International Affairs Randal K. Quarles <BR>U.S.-Russi ... Page 2 of 4
made significant strides in establishing a robust anti-money laundering regime in a
relatively short period. Russia went from the Financial Action Task Force (FATF)
blacklist in June 2000 to FATF member in June 2003. This "conversion" was real.
Between January 2002 and April 2003 alone, over 1,405 money laundering cases
resulted in the seizure of funds and property worth over 1 billion rubles (-$33
million). From October 2002 to June 2003, Russia detected 369 cases of terrorist
financing, freezing over 500 million rubles (-$16 million) in related funds and
property. And now Russia is becoming a regional leader by establishing a FATFstyle regional body in Central Asia, which will build standards and capacity in a
region crucial to the fight against money laundering and terrorist financing.
Assessment of Banking Sector Performance
The authorities should be commended for their efforts in the last several years,
which have helped foster the rapid growth of the banking sector (assets grew on
average 31 %; deposits 40% since 2002) However, a quick snapshot of the sector
reveals that much work remains. Particularly striking features are:
•
•
•
Out of more than 1,200 banks, just 400 have authorized capital above $6
million (Euro 5 million), or the minimum required by the EU.
Foreign participation is low at an estimated 10-12% of total sector capital.
That compares to well over 50% in Central Europe.
Not surprisingly, the banking sector fails to intermediate savings and
investment effectively, providing just 5% of total capital investment for the
economy. In the more advanced transition economies, banks provide closer
to 40% of investment finance.
Five state banks control over 40% of sector assets. State-owned Sberbank
accounts for roughly 25% of sector assets, controls an estimated 60% of the retail
deposit market and is responsible for around a third of all the bank branches in the
system. State-owned Vneshtorgbank (VTB), the second largest bank, is the largest
commercial lender in the country. Again, in Central Europe, the state bank share of
assets ranges from 1.5% in Slovakia to 25% in Poland.
•
Despite strong growth over the last several years, deposits and credit to the
private sector are just under 20% of GOP. This compares unfavorably to
the more advanced transition economies in Central Europe where deposit
and credit levels are at least twice as high as a share of GOP.
All this suggests that the Russian banking sector is functioning well below its
potential. Moreover, confidence remains fragile. The closure of two small banks
because of anti-money laundering regulations in June 2004 sparked deposit runs
on healthy domestic banks. While the Central Bank did its best to contain the
fallout, the episode raised questions about the capacity of the authorities to facilitate
a much needed consolidation of the sector. Not surprisingly, the state banks enjoying a blanket deposit guarantee at the time - appeared to have benefited.
Banking Reform and WTO Accession
Part of the weakness of the banking sector can be attributed to its lack of
integration with the global economy. The agenda going forward, therefore, should
focus on closing the gap. In the view of the U.S., this should include openness to
foreign participation, elimination of state ownership and the continued development
of anti-money laundering and terrorist financing standards.
Foreign banks bring best practices, technology, and competition. It stands to
reason that if Russia wants a world class economy, it needs world class companies
that have access to the same financial services available to their competitors in
other countries. The best means to secure this resource for Russia's businesses
and households is the completion of WTO financial services negotiations on
standards comparable to industrial nations and other recent WTO members. In this
context, removing limits on foreign bank branching has become a standard for WTO
accession. Foreign bank branches with their direct access to a more global pool of
capital can have a stabilizing effect on the domestic economy during a downturn.
For example, the share of commercial lending attributable to branches of foreign
banks in the U.S. is normally around 20%, but rose to 25% during the savings and
loan crisis in the late-1980's.
Reforms needed for WTO membership require adjustment and some costs to
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uncompetitive parts of the economy. However, the benefits for Russian households
and businesses are potentially huge. In a report issued last month, the World Bank
estimated that 99% of Russian households will see as much as an 18%
consumption gain over the medium-term as result of WTO membership. This
translates into total income growth of $64 billion per year. A separate 2003 study
suggests that about a third of these gains will result from financial services
liberalization alone.
Much of the Russian leadership understands the tremendous gains involved with
WTO membership and have made accession a top priority. It is important,
therefore, that the priorities of the Russian leadership are reflected at the
negotiation table, particularly in financial services. The U.S. stands ready to admit
Russia on the same terms applied to everyone else. Those terms include removing
limits on foreign participation in financial service sectors.
We are aware that the specter of greater foreign competition in the financial sector
has drawn concerns from some domestic interests in Russia. However, it is our
firm belief that worries about a lack of Russian competitiveness in the financial
sector are exaggerated and, ultimately, misplaced. Rather, state banks are the
greatest single obstacle to the international competitiveness of Russian domestic
banks. International experience shows that state-owned banks cannot become the
basis for building a world-class banking system. State banks are less efficient and
less effective at intermediating savings and investment. They distort financial
sector development by providing subsidized credit or politically directed lending or
weakening judgments of creditworthiness. The longer-term health of the sector is
hampered by the accumulation of contingent liabilities arising from explicit
guarantees or the implicit assumption that these banks are "too big to fail". For
these reasons, various researchers have found a negative correlation between the
level of state ownership in the banking sector and a country's rate of economic
growth.[2] Notably, efforts by governments to improve state bank performance
have not succeeded while privatization has led to greatly improved performance.
Fighting Money Laundering and Terrorist Financing
Russia's anti-money laundering regime is still relatively new while Russia's
reputation for under-regulation in this area was many years in the making. We are
aware that this often has real practical consequences to the business environment
in which Russian banks operate. It will take time and aggressive implementation of
Russia's laws and regulations on money laundering and terrorist financing to
overcome. Russian financial institutions themselves have a strong interest in taking
all appropriate steps to ensure that they are not being abused for illicit purposes.
This involves instituting world-beating standards of transparency and corporate
governance.
Moving forward, the U.S. is committed to continued cooperation with Russia. There
are many opportunities to take bilateral and multilateral actions to attack money
laundering and terrorist financing. For example, the U.S. has targeted corrupt
financial institutions, especially in Eastern Europe. In August 2004, the Treasury
Department designated Infobank of Belarus under Section 311 of the USA
PATRIOT Act as a "primary money laundering concern". These types of actions
would certainly be more powerful if done in concert with our partner nations, and in
particular with Russia, which has such financial and political importance in the
region.
Conclusion
It is important to applaud the authorities for the progress they have made over the
last few years on banking reform and the fight against money laundering, which
have brought the Russian financial sector closer to best international practice.
However, without additional reforms, the full benefits of integration will not be
realized and Russia's banking sector will contribute little to Russia's growth and
living standards. WTO membership is within Russia's reach. International
experience has shown that the most competitive economies are underpinned by a
sound, competitive and private financial sector. Anti-money laundering standards
must continue to evolve such that Russia's regime is second-to-none. These
efforts present tough challenges, no doubt, and will require strong leadership. But,
at the end of the day, Russian households and businesses will be the big winners
as they gain access to the best financial services the world has to offer.
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[2] For example. see Caprio. Fiechter. Lilan. Pomerleano. eds. (2004). The Future
of State-Owned Financial Institutions. Brookings Institution Press.
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FROM THE OFFICE OF PUBLIC AFFAIRS
April 15, 2005
JS-2382
Statement by Treasury Secretary John Snow
on Tax Day
"No one looks forward to tax day, but for millions of taxpayers across the country,
today will be less painful thanks to the President's tax cuts. Nationwide, 110 million
taxpayers will see their tax bill reduced thanks to the tax relief supported by
President Bush and enacted by Congress. That extra money in the hands of
America's families has helped to fuel the economic recovery. Now, to continue this
period of economic growth, we must make tax relief permanent so families can plan
ahead for the future. We must also reform the tax code to make it Simpler, fairer
and more growth oriented."
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js-238~~:
Statement by U-'/ Finance Ministers and Central Bank Governors
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April 16, 2005
js-2383
Statement by G-7 Finance Ministers and Central Bank Governors
Since our meeting in February, the global expansion has remained robust and the
outlook continues to point to solid growth for 2005. Subdued inflationary pressures,
appropriate monetary policies and favorable financing conditions are supporting the
outlook. But challenges remain. Higher oil prices are a headwind and the expansion
is less balanced than before. We welcome efforts to improve oil market data,
increase medium-term energy supply and efficiency. We will review the progress
made at our next meeting. Vigorous action is needed to address global imbalances
and foster growth: fiscal consolidation in the United States; further structural
reforms in Europe; and further structural reforms, including fiscal consolidation, in
Japan.
We reaffirm that exchange rates should reflect economic fundamentals. Excess
volatility and disorderly movements in exchange rates are undesirable for economic
growth. We continue to monitor exchange markets closely and cooperate as
appropriate. In this context, we emphasize that more flexibility in exchange rates is
desirable for major countries or economic areas that lack such flexibility to promote
smooth and widespread adjustments in the international financial system, based on
market mechanisms.
Building on the way forward on development we agreed in London, we made
progress in preparation for the Gleneagles Summit, including on a case-by-case
analysis of HIPC countries, based on our willingness to provide as much as 100%
reduction of HIPC countries' IDA and African Fund debt without reducing the
resources available to the poorest countries through these institutions. We thank
the Managing Director for his papers exploring the role of the IMF related to debt
relief and we look forward to discussing this with the full membership. We
discussed the work program initiated in London on the IFF and its pilot, the IFF for
immunization; some of the revenue proposals from the Landau Report brought
forward by France and Germany which could also refinance the IFF; the Millennium
Challenge Account; and other financing measures. We agree that the IMF and the
World Bank have a role to play in helping developing countries address the impact
of higher energy prices.
We reviewed progress of the Strategic Review of the Bretton Woods Institutions.
We support the creation of a policy monitoring arrangement in the IMF to allow low
income countries to engage the Fund when they do not need Fund finance,
alongside the PRGF which is the IMF's principal instrument for providing resources
to low-income countries. The PRGF should be adequately equipped to meet future
demand as assessed by the IMF and be responsive to short-term adjustment
needs. We believe rapid progress can be made to improve IMF surveillance,
including through independence of debt sustainability analysis from lending
decisions. Prioritization of work and strict budget discipline are critical for the
effectiveness of all IFls.
We thank Jim Wolfensohn for his extraordinary service as President of the World
Bank. We welcome Paul Wolfowitz as the new President. We look forward to
working with him to: reinforce the Bank's implementation of country-led poverty
reduction programs, including building public financial management and anticorruption capacity; mobilize increased resources for development; increase the
focus on growth strategies; and enhance accountability and incentives through
results management, reform of the budget process to control costs, and greater
transparency.
We commend the Brazilian authorities for their able economic stewardship and
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Page 2 of2
successful cooperation with the IMF, and we welcome their recent decision to
continue these strong policies without an additional IMF program. Following the
debt exchange, Argentina needs to address the remaining defaulted debt, in line
with the lending into arrears policy of the IMF, and undertake structural reforms to
ensure sustainable growth. We welcome the efforts of donor countries to help the
reconstruction of tsunami-ravaged countries and urge all donors to move quickly
from pledges to action. We look forward to meeting our counterparts from the
Broader Middle East and North Africa later today.
An ambitious result of the Doha Development Round is key for global growth.
Countries with open and well-supervised financial services sectors, especially
emerging markets and developing countries, have achieved significantly higher
growth rates. A strong WTO agreement on financial services at the Hong Kong
ministerial is in the best interests of the global community.
In our fight against terrorist financing, we agreed on the importance of improving the
process of freezing terrorist assets in line with UN resolutions; improving
information sharing between jurisdictions and with the private sector; and exploring
the possibility of extending financial tools to disrupt criminality and terrorism.
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April 16, 2005
js-2384
Secretary John W. Snow Prepared Statement following the Meeting of the G-7
Finance Ministers and Central Bank Governors
I was delighted to host G-7 Finance Ministers and Central Bank Governors
over the last two days; we've had a very successful meeting.
We are pleased to see the global economy continuing its expansion. The
outlook continues to be favorable for 2005, despite the unwelcome news of
oil prices, and we all agreed that improving growth must be our top
priority.
The United States remains a leading contributor to the global expansion.
Real GOP rose 4.4 percent in 2004 on an average annual basis, the largest in
five years. Evidence so far on the first quarter points to continued
strength. Job growth has been revitalized, with the economy creating 3.1
million new jobs since the employment trough of May 2003. Inflation remains
moderate. These achievements reflect well-timed execution of
carefully-designed monetary and fiscal policies.
The U.S. is strongly committed to reducing the budget deficit. We recognize
that this is vital for continued robust growth for the U.S. economy as well
as for the international financial system. We are also committed to
reducing the longer term deficit which reflects our unsustainable, unfunded
obligations such as Social Security.
The Administration expects a deficit of $427 billion this fiscal year. At
3.5 percent of GOP, this is substantially lower than the 4.5 - 6 percent
experienced at times in the 1980s and 1990s, but still too large. Deficits
matter, they are unwelcome, and must come down. And with tight controls on
discretionary spending and increased revenue stemming from the expanding
economy, we expect to cut the deficit in half to well under 2% of GOP by
2009.
Colleagues have asked me about the President's effort to reform our
retirement system. The President's initiative to reform the Social
Security system is an important part of the United States' economic future.
We must plan for the future and that means dealing with looming financial
threats when we see them. In the case of Social Security, there is no
denying the demographic reality that will lead to insolvency of the system.
The President has initiated a national dialogue that we hope will encourage
the Congress to enact swift and meaningful reform to preserve, protect and
strengthen Social Security for all generations of American workers.
The Bush Administration is also pursuing reform of the U.S. tax code, which
has grown too long, complicated and cumbersome - a poor match for our
flexible, free-market economy. The President has appointed an advisory panel
to study the problems of the current code and propose potential solutions,
keeping in mind that any new system of taxation must achieve increased
fairness, simplicity and ease of understanding, as well as promote economic
growth and job creation.
We each face our own challenges and responsibilities, like Social Security
and tax code reform, but global adjustment is a shared responsibility. The
United States is doing its part to reduce the fiscal deficit. Growth in
parts of Europe and in Japan remain modest, leaving the global recovery less
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balanced than it had been. Europe and Japan must step up to the challenges
of structural reform in order to build up the foundation for growth. The G7
Ministers agree on the need for greater growth in the world economy
particularly among the large industrialized economies. We are committed to
reducing the barriers to growth which we find in each of our economies as
reflected in our Agenda for Growth. This is an action-oriented program for
reforms to which we are all committed.
I want to comment specifically on China in this context. China's strong
economic growth has made a tremendous contribution to the global economy.
China has taken numerous steps over the last few years, including preparing
for greater flexibility in their exchange rate, introducing foreign exchange
market financial products and strengthening banks and bank supervision
With this groundwork in place, China is ready now to adopt a more flexible
exchange rate.
Energy issues were a subject of intense discussion during our meetings. High
energy prices act as a drag on the global expansion. In the United States,
President Bush is concerned about the impact of high gas prices on American
families and our economy. We feel strongly that the U.S. Congress must act
to pass comprehensive energy legislation. President Bush put forth a
national energy policy four years ago that addresses both supply and demand,
and America has waited long enough for Congress to act. It is time to put
partisanship aside and enact energy legislation.
Extending the benefits of growth to all the world's citizens remains a key
priority for the United States and for the G-7. The U.S. commitment is
clear - for instance, we have nearly doubled our development assistance
since 2000 to help boost growth and reduce poverty in developing countries
and tripled aid to sub-Saharan Africa. The next step, in our view, is to
extend 100 percent reduction of HIPC countries' IDA and African Fund debt.
We believe that the tide is shifting in favor of such a cancellation
approach.
For its part, the IMF needs to substantially improve its engagement in
low-income countries. A major step forward in this regard is the agreement
among the G-7 this weekend to support a new policy monitoring arrangement in
the IMF. This type of facility would allow low income countries to engage
intenSively with the Fund, even when they do not face balance of payments
financing needs and without increasing their debt. I urge the IMFC to move
forward on this important step later today. We also called for the IMF to
make its low income lending more responsive to short-term adjustment needs.
More broadly with respect to the Bretton Woods institutions, we had the
opportunity to assess progress under the Strategic Review that was initiated
in the G-7 and that is now being carried through in the institutions
themselves. Fundamental for both institutions is the need to clarify the
underlying missions, to set priorities in line with their missions so that
they can deliver results while avoiding budget creep. In the IMF,
surveillance can and must be further improved, and we all agreed to work
together to accomplish this in particular by pushing for the IMF to provide
debt sustainability assessments separately from proposed lending programs.
In the World Bank, key concerns are enhancing transparency and
accountability, particularly with respect to internal controls, and
implementing improvements in results measurement.
We are grateful to Jim Wolfensohn for the extraordinary leadership he has
provided for the World Bank. I was pleased by the welcome my colleagues
extended to Paul Wolfowitz as the new President. Paul is an outstanding
leader whose proven management skills, vision and commitment to development
I believe can and will take the Bank and the international effort to promote
development to a new level. We laid out some shared priorities today that we
believe provide an ambitious agenda for the Bank.
Another key item on our agenda was fighting the financing of terrorism. We
agreed on the importance of strengthening the process of multilateral asset
freezing, in line with UN resolutions, improving information sharing, and
exploring the possibility of broadening the application of new financial
tools to disrupt all illicit activity.
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Before closing, I want to note that I look forward to meeting later today
with G-7 Ministers and our counterparts from Russia and the Broader Middle
East and North Africa. This is an important initiative that has generated
promising energy. I expect that we will continue our constructive dialogue
on how the G8/BMENA partnership can promote job creation, private
investment. and economic prosperity.
Thank you.
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FROM THE OFFICE OF PUBLIC AFFAIRS
April 16, 2005
js-2385
Statement by the Honorable John W. Snow U.S. Secretary of the Treasury
International Monetary and Financial Committee Meeting
As we meet today, the global economic expansion remains on track and the outlook
is favorable. Growth remains strong overall, and inflation is moderate. But the world
economy faces challenges: high oil prices are a headwind, and global growth is not
sufficiently broad-based. This is a time of opportunity for all of us - to act to
strengthen growth in our own economies and the international financial system as
well.
The United States continues to do its part. Economic growth was 4.4 percent last
year, the strongest in five years. The economy has created 3.1 million new jobs
since May 2003. Manufacturing production is on the upswing, and a revival in U.S.
exports begun in mid-2003 is also contributing to rising output.
The President has made clear the US. commitment to strengthen our economy
further. This includes reducing the budget deficit - as well as reforming Social
Security and the tax system, reducing the regulatory burden on business, and
passing energy legislation. We expect the deficit to total 3.5 percent of GOP this
fiscal year. Tight controls on discretionary spending and increased revenue as a
result of economic expansion are expected to cut the deficit by more than half, to
1.5 percent of GOP, by fiscal year 2009.
But the challenge of strengthening growth is one that we all must take up. The
major economies, particularly continental Europe and Japan, need to act more
resolutely to increase economic potential. The G-7 Agenda for Growth has helped
boost the priority on structural reforms and supply-side policies. Progress is being
made, but far more remains to be done. Such steps to increase growth, along with
deficit reduction in the United States, and greater and more widespread exchange
rate flexibility, particularly in emerging Asia, are key to fulfilling the international
community's shared responsibility to promote global adjustment. In this latter
regard, through its mandate to exercise surveillance over members' exchange rate
policies, the IMF has a continuing central role to play.
Free trade is an essential component of the drive for stronger global economic
growth. Completion of the Doha Development Round before the end of 2006 is an
important, though challenging, goal. We need to intensify the pace of the
negotiations and commit to meeting key milestones along the way. Developed and
developing countries alike need to be prepared to reduce their trade barriers and
subsidies. Financial services liberalization offers particular promise, and I look for
good offers in this area as a key ingredient for a successful conclusion of the
Round.
The IMF's Strategic Direction
We are very pleased to see the IMF undertaking a review of its role and strategy for
the medium-term. Like any other institution, maintaining the Fund's vitality depends
on self-assessment and planning to ensure that it remains sharp and well-focused
on its core competencies. The IMF's mission is clear - to foster international
monetary cooperation and balance of payments adjustment to support international
financial stability and economic growth.
The IMF has a unique opportunity through its surveillance to assess risks, influence
policy and prevent crises. The IMF can and must do better in carrying out this
function. Surveillance needs to be more focused on the Fund's core areas of
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expertise - monetary policy, fiscal policy, the balance of payments, exchange rates,
and the financial sector. Integrating capital market and financial sector analysis
more fully into the daily life of the Fund will also be important to executing more
effective surveillance. And for the debt sustainability assessment framework to
make its full contribution, this analysis must be separate and distinct from lending
decisions.
The United States strongly believes that there is a need for a new tool between
surveillance and funded programs to provide for structured engagement with the
IMF in the absence of a need for borrowing. Such a policy monitoring arrangement
would be voluntary and country-led and would allow for close engagement between
IMF staff and authorities as they work to enhance the macroeconomic policy
framework and strengthen macroeconomic institutions. I understand a number of
countries have expressed interest in such a tool and urge the Committee to
endorse creation of a policy monitoring arrangement today.
The IMF and World Bank's Financial Sector Assessment Program (FSAP) has been
very successful, helping authorities become better aware of potential vulnerabilities
and contributing to improved financial sector supervision in a number of countries.
We look forward to further improvements in coordination on this issue. We also
underscore the importance of the ongoing work on standards and codes, including
the provision of technical assistance to facilitate adherence, as part of the work to
strengthen surveillance. We welcome the recent review of remittances issues in the
World Economic Outlook. Remittances provide a stable flow of funds that impact
development, and we urge continued Fund attention to this issue.
The strategic review is an important exercise for refining the IMF's role and
priorities. This will help guide the effort to modernize the IMF's operations and help
align its limited resources to deliver results. We welcome the progress being made
in updating the IMF's compensation and personnel management systems and look
forward to further work in this area. The review of IMF finances that is now
underway is also critical to our shared goal of equipping the Fund for the future.
Accelerated accumulation of IMF reserves remains appropriate, given today's
modern capital markets Increased incentives for rapid repayment of the Fund
would be a step forward.
The IMF's Role in Low-Income Countries
The Bush Administration believes that good economic policy is the fundamental
prerequisite for economic growth and poverty reduction, and we are committed to
working with low-income countries to develop strong policies. All of us support
these goals. The international debate should focus on how to achieve results.
We are convinced that the IMF has a critical role to play in low-income countries.
Macroeconomic stability is a necessary but not sufficient condition for growth, and
engaging low-income countries to achieve this goal - through policy advice,
technical assistance, surveillance, and lending - is a vital part of the IMF's mission.
However, we believe that the rationale for IMF engagement in low-income countries
needs to be better articulated with a view to achieving better results. The standards
for reform need to be higher. Moreover, the distinction between macroeconomic
support and development finance must be far better clarified, for example to permit
the PRGF to address short-term adjustment needs, as the General Resources
Account meets such needs for middle-income country borrowers. The IMF's
existing financing facilities could be sufficient to meet the diverse needs of lowincome borrowers if the PRGF were made more flexible. We believe that the
proposed policy monitoring arrangement could be particularly helpful for low-income
countries that have progressed through stabilization and no longer need to rely on
IMF financing. Countries with a PMA would be well-positioned to have access to
PRGF financing should country circumstances change.
Helping low-income countries depends on ending the lend-and-forgive cycle and
moving into an era of sustainable debt We applaud the implementation of the new
debt suslainability framework (DSA), and encourage the Fund and other lenders to
consider how to integrate the goals of the new framework into their own operations.
Effective implementation of the new DSA framework, along with increased use of
grants in IDA and the AfDF, as well as further bilateral and multilateral debt relief in
those institutions for the HIPC countries, can provide a clear path to end the cycle
of repeat lending and debt problems holding back the poorest countries. We are not
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persuaded by arguments for IMF debt relief, and we do not believe market or "offmarket" gold sales are necessary or warranted.
Modernizing the IMF's Governance
Last fall in my statement to this group I emphasized that the IMF is a financial and
shareholder institution whose governance should evolve along with the world
economy so that countries' positions better reflect their global weights and so that
all members are more effectively represented, At that time, I underscored the reality
that change in the world economy has outpaced that at the IMF, particularly given
fast-paced GDP growth in emerging market economies and the advent of currency
union in Europe, The IMF should recognize the enormous strides made by many
fast-growing countries, particularly in Asia,
We believe the time is ripe to start considering how to address these inter-related
issues, The IMF's liquidity is at an all-time high, But the fact that the IMF does not
need an increase in its resources need not impede change. A rebalancing of quotas
from "over-represented" countries to the "under-represented" within the existing
total could yield substantial progress, This will not be an easy task, but it can be
achieved with boldness and vision to help modernize the Fund,
These are clearly complex issues, and careful consideration and consultation is
needed to address the full range of concerns. This is important to preserving the
global character of the IMF, so that all countries feel they have a rightful stake in the
institution.
Thank you.
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Secretary Snow CR/BMEN;\ statement
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FROM THE OFFICE OF PUBLIC AFFAIRS
April 16, 2005
JS-2386
Secretary Snow G8JBMENA statement
Today I attended a meeting with my colleagues from the G8, the Broader Middle
East and North Africa (BMENA) and key international institutions. We continued
what has developed into an energetic dialogue on how we can harness more
economic freedom to bring greater prosperity in the region. More than ever, I was
impressed by the consensus that the region must lead the reform effort and
encouraged by the building momentum for market-oriented reform. Many countries
spoke of new reforms and plans; Egypt's Minister Moheildin spoke particularly
impressively.
Our discussion also focused on the progress on the several pragmatic initiatives of
the G8/BMENA partnership. Ministers welcomed the first meeting of the Network of
Funds -- a collaborative initiative amongst multilateral and regional financial
institutions to better coordinate development finance and provide policy advice to
governments. I joined my colleagues in thanking the Arab Monetary Fund for
leading the initiative and in looking forward to a concrete work program for these
efforts at our next meeting.
My fellow ministers and I were pleased to hear about the progress made on the
Private Enterprise Partnership facility of the International Finance Corporation. This
initiative is already providing valuable technical assistance to governments,
financial institutions and small businesses in support of more vibrant private sectors
in BMENA countries. The region's governments stress that private sector growth is
the best means to meet the job aspirations of their growing young populations. The
IFC is setting measurable output targets for itself in the implementation of its project
activities. I supported this and encouraged the IFC to achieve these targets. I am
also very encouraged by the financial support for this initiative coming from the
region; I thanked Kuwait and the Islamic Development Bank in particular.
We recognized the good work of the Consultative Group to Assist the Poor (CGAP)
in promoting best-practice microfinance in the region through programs supported
by the G8/BMENA partnership. CGAP is continuing with assessment missions
throughout the region and has established a microfinance training center in Jordan.
The World Bank presented its excellent work on the investment climate in the
region. Doing more to welcome private investment - both domestic and foreign - is
a key to more rapid growth and job creation. This presentation was complemented
by a presentation by Mr. Shafik Gabr, an Egyptian businessman and head of the
Arab Business Council. This Council is also spearheading a private sector and
G8/BMENA initiative - the Investment Task Force. Together with the regional
governments and the OECD, the task force is working on investment policy reform.
Ministers look forward to continuing our dialogue on these issues.
We agreed to come together again later this year. Our next meeting will be another
opportunity to review progress of all these initiatives towards promoting economic
prosperity in the region. It is very encouraging to partner with the region and my G8
colleagues in these eXCIting initiatives.
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April 17, 2005
JS-2387
U.S. Treasury Secretary John W. Snow World Bank Development Committee
Statement
We come together at an important moment in the history of the World Bank. The
transition in the leadership of this institution is occurring at a time of tremendous
gains in living standards around the world, the depth and breadth of which we have
not witnessed in decades. Yet the challenges before us, particularly with respect to
Sub-Saharan Africa, have never been clearer. The reports provided to the
Development Committee this year, in particular the Global Monitoring Report,
reflect the enormity, complexity and profundity of the road ahead.
The Primacy of Growth
Economic growth, led by the private sector, is the most effective means of
promoting sustainable development and reducing poverty. Therefore, with the
United States and China leading the way, 2004 was enormously important to the
development aspirations of the world's poor, with growth of 5.1 %. Moreover, world
economic growth continues to be strong overall and the outlook for this year and
next is very positive. We are particularly pleased to see the strong results in
emerging market and sub-Saharan African economies and a strong recovery in
Latin America led by private consumption and business investment. We note that
while increased growth rates in sub-Saharan Africa are welcome, high and
sustained growth rates are needed over an extended period of time to reduce
poverty significantly.
The Role of ODA
We recognize that official development assistance can playa critical role in
economic and social development, particularly in assisting those who have shown
the capacity and willingness to use aid effectively. The Monterrey Consensus
exemplifies this approach for it recognizes that aid can complement other sources
of financing for development, especially in those countries with the least capacity to
attract private direct investment and other sources of financing.
The United States has already followed through on our Monterrey promise to
increase official development assistance by 50 percent over the 2000 levels by
2006. This commitment was met in 2003, three years ahead of schedule. In 2004,
our aDA increased another $2.7 billion to reach $19 billion, a near doubling since
2000. These dramatic increases illustrate that we do not need to resort to
innovative financing mechanisms to deliver critical resources to developing
countries. Moreover, our assistance to sub-Saharan Africa has tripled over this
period and it is on track to increase even further. The first Millennium Challenge
Corporation compact, with Madagascar, has been approved and another seven of
the other 16 eligible countries are from sub-Saharan Africa. With respect to
HIV/AIDS, President Bush has requested nearly $3.2 billion in FY06 from our
Congress, which would represent the third year of steadily increasing funding
toward the President's pledge of $15 billion in 5 years. We are committed to reach
our goals of preventing 7 million new infections, supporting treatment for 2 million
people, and caring for 10 million people, including orphans and vulnerable children.
With respect to the multilateral development banks, we are pleased to have
participated in the successful conclusions to the IDA-14, AsDF-9 and AfDF-10
replenishments. We are particularly pleased with donors' leadership in: improving
transparency and accountability at the World Bank; implementing a robust
measurable results system; and substantially increasing grant financing for poor
countries which will have lasting effects. In this manner, these replenishments will
strengthen the institutions not just in terms of financial capacity, but also in terms of
delivering effective assistance on the ground.
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Aid is most effective when it is aligned with recipients' priorities, when it reduces
transaction costs through harmonized procedures and donor coordination, and
when there is a clearer focus on managing for results. The Paris High Level Forum
was a significant step toward action on harmonization and alignment, and we look
forward to further progress on aid effectiveness as donors implement the Paris
Declaration. We also welcome the IDA-14 results measurement framework and
believe it can serve as a model for bilateral and multilateral donors alike.
Other Financial Flows
While aDA can playa critical role in advancing efforts to attain our common
development goals, it is just one part of the total picture. In fact, private sector
resources - both domestic and international - dwarf traditional development
assistance. From an international policy perspective, two areas in particular hold
great promise for developing countries, trade and remittances.
The U.S. government strongly supports multilateral, reciprocal trade liberalization
under the Doha Development Agenda and is working toward that goal. An
ambitious result to liberalize agriculture, industrial and consumer goods, and
services would promote growth and development. We believe the Bank and the
Fund should continue to emphasize the gains from liberalizing trade, not only with
respect to the policies and practices of developed countries, but also the benefits'
accruing to developing countries from taking action to liberalizing their own barriers.
In today's global economy, an internationally competitive services sector, including
financial services, is essential. A World Bank study found that countries with fully
open financial services sectors grow 1.0% faster, on average. than other countries.
Another study suggests that financial development alleviates poverty beyond its
affect on aggregate growth. Thus, financial sector liberalization can have a
disproportionately positive effect on the poor and should be a primary component of
national development strategies. There is also an urgent need for greater support
for trade capacity building. The U.S. has provided substantial bilateral assistance
for trade-related capacity building, and we would like to see more mainstreaming of
such support by the World Bank and other international organizations.
As we have noted before, remittance flows can be a critical contributor to poverty
reduction and locally-driven private sector-led growth. Global remittances have
grown dramatically in recent years, climbing to an estimated $126 billion in 2004.
Despite technological advances, the vast majority of remittance flows continue to
travel through slow and/or expensive formal channels or informal networks. The
World Bank has been leading the international effort to improve remittance
statistics, identify barriers to the provision of competitive remittance services,
develop strategies to address those impediments, and enhance the development
impact of remittance flows. We urge the Bank to continue its leading role and work
closely with member clients, other MDBs and the private sector on this important
cross-cutting issue.
Policy Reform
From a domestic perspective, financial flows, official or private, will provide little
benefit without the proper foundation for economic growth and prosperity. It is
private sector investment, both domestic and foreign, that has historically been the
factor that has ensured sustainable growth in developing countries. Firms create
jobs, provide goods and services, and contribute to the tax revenues that provide
public funding for health and education. The Bank's 2005 World Development
Report provided clear evidence that the lack of a conducive climate has been the
main impediment to investment in most parts of the developing world. We are
pleased that the World Bank is giving increased attention to this issue through its
analytical work such as the Doing Business series, and its lending and policy
advice. We urge that this issue be given even greater priority in the future.
A number of recent reports have stressed the importance of improved public sector
management to development in general, and Sub-Saharan Africa's development in
particular. As we have repeatedly stressed in terms of the Bank's internal
operations, increased transparency with respect to both fiscal revenues and
expenditures, when coupled with increased participation, can help to make
institutions more accountable and public spending more responsive to public
demand. More attention to this issue IS needed. In addition to further information on
measurable development results, we suggest a sharply focused Global Monitoring
Report for next year devoted to public sector financial management and combating
corruption.
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Debt Forgiveness
We believe the international community needs to take prudent and appropriate
steps to ensure long term debt sustainability for low-income countries. The shift to
greater use of grant financing by IDA and the AfDF will help to reduce the continued
accumulation of unsustainable debts However, the existing debt burdens in Heavily
Indebted Poor Countries (HIPCs) remain high and will continue to act as a
constraint on economic growth for years to come. Consequently, the international
community needs to go further by providing up to 100 percent debt stock relief of
IDA and AfDF obligations for HIPCs. In addition, those bilateral creditors not
providing 100 percent relief on pre-Cologne Summit (June 20, 1999) debt should
take steps immediately to do so.
These actions, combined with the new increases in grants going forward, will put
these poor countries on a sustainable path immediately. Our proposal not only
drops the debt of yesterday, but prevents debt from burdening countries again well
into the future. Furthermore, it does so without risking the IFls' capacity to provide
net resource transfers to deserving countries going forward. However, in providing
this much needed relief, we must be careful not to divert resources that would
otherwise have gone to increase direct aid flows. We must also be careful not to
subvert the performance based allocation of resources, which would reduce the
delivery of resources to countries where they could be used most effectively.
Sub-Saharan Africa
We strongly support the increased focus of the international development
community on the challenges faced in sub-Saharan Africa. This region typifies
many of the development challenges that the international community is seeking to
remedy. We recognize and support the commendable recent strides made by many
of Africa's countries. The average of 5% growth, represents an eight-year high, and
2005 is expected to be at a similar level. Single digit inflation across the continent is
another welcome accomplishment which will help create a more stabile macroenvironment. These results are the product of improved policies, but also
exogenous impacts such as high commodity prices. Given that growth rates higher
than 5% are needed to make the desired significant impact in poverty, we urge
countries to further deepen reforms and continue efforts underway at
macroeconomic stabilization so that higher rates can be achieved in coming years.
Regarding some of the specific changes needed for Africa's growth to accelerate
and poverty levels to fall significantly, we strongly support the attention the Global
Monitoring Report and the International Financial Institutions have directed towards
fiscal management improvements and the structure and quality of public spending,
improvements in the enabling business environment - Africa's economic output
could increase by more than $70 billion over the next ten years if the average
African country's quality of business regulations equaled that of the average OECD
country -- and public sector governance. We also welcome the increased attention
being paid by a number of African countries to managing for results.
The African Peer Review Mechanism is an important effort designed to catalyze an
ownership and accountability culture in all of Africa. Its success depends on all
countries taking it seriously. Africa's recent improved growth is also the result of a
decrease in conflicts on the continent. The overall trend in reduction in conflict
means that businesses can restart, governments should have more funds available
for social services and donors will be more inclined to provide assistance. While the
trend is positive, continued progress is still needed to make Africa conflict-free.
While some of the news in Africa is very positive, it remains a very poor continent,
very vulnerable to many types of shocks. While we all would like change in Africa to
be as rapid as possible, as the Commission for Africa report states, donors must
recognize that in most African countries change will be long, slow and complicated.
Voice and Participation
Governance of the IFls is a very important issue. The United States attaches a high
priority to preserving the global character of these institutions. Careful consideration
and consultation is needed to address the complex issues involved and we believe
the time is ripe.
Transition
In closing, I would like to praise President Wolfensohn for his extraordinary service
during his tenure as President of the World Bank. HIS many accomplishments from dealing early-on and forcefully with corruption to hiS steadfast Interest In
increasing the focus on the results of the Bank's operations - will have a lasting and
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positive impact. We look forward to working with President-designate Wolfowitz as
he leads the institution in the fight against poverty through economic growth in
furtherance of our common development goals.
- 30 -
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JS-2)g~:
Treasury and IRS Provide (iuidance <BR>on Pension Plan Amendments
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Page 1 of 1
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PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free
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April 18, 2005
JS-2388
Treasury and IRS Provide Guidance
on Pension Plan Amendments
The IRS issued a revenue procedure today that addresses the application of a
recent Supreme Court decision relating to pension benefits, Central Laborers'
Pension Fund v. Heinz, 541 U.S 739 (June 7, 2004). This case held that ERISA
generally prohibits an amendment that imposes additional conditions on the right to
receive early retirement benefits for benefits accrued before the amendment.
However, there may be a number of retirement plans that have adopted such an
amendment and the retroactive application of the Supreme Court's opinion would
put these plans' tax-qualified status in jeopardy as a result of violating the parallel
tax-qualification requirement. Recognizing this, the Supreme Court recommended
that the IRS use its authority under Internal Revenue Code section 7805(b)(8) to
provide relief to plans in order for them to avoid disqualification. The revenue
procedure issued today generally provides relief from the risk of disqualification for
a suspension of benefits amendment that is not permissible under the Supreme
Court decision, assuming that the plan takes corrective action for early and normal
retirement benefits retroactive to the June 7, 2004 date of the case.
The text of the revenue procedure is attached. In addition, a detailed example that
illustrates compliance with the revenue procedure has been posted on the IRS
website at http://wwwirsgov/retirementiarticie/0 .. id=137638.00.html
REPORTS
•
Rev. Proc.2005-25
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Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.201: Rulings and determination letters.
(Also Part I, §§ 411, 7805; §§ 1.411 (d}-4, 301.7805-1.)
Rev. Proc. 2005-23
SECTION 1. PURPOSE
.01 In general. The purpose of this revenue procedure is to limit the
retroactive application of the decision in Central Laborers' Pension Fund v.
Heinz, 124 S.Ct. 2230 (June 7, 2004) for retirement plans qualified under
§ 401 (a) of the Internal Revenue Code (Code) .
.02 Scope of treatment. With regard to qualified retirement plans that
adopted certain amendments before June 7, 2004, section 3 of this revenue
procedure generally provides that the Service will not disqualify a plan solely on
account of a plan amendment adding or expanding a suspension of benefit
provision, as prohibited under Central Laborers'. The treatment under this
revenue procedure applies only with respect to amendments described in section
3.01 and not to other plan amendments that may violate § 411(d)(6). The
limitation on the retroactive application of Central Laborers' under this revenue
procedure has no effect on the rights of any party under section 204(g) of the
Employee Retirement Income Security Act of 1974 (ERISA) or any other law.
SECTION 2. BACKGROUND
Section 411 requires a qualified plan to meet certain minimum vesting
standards. Under § 411 (a), an employee's right to the accrued benefit derived
from employer contributions must become nonforfeitable within a specified period
of service, and certain other conditions must also be met. Section 411 (a)(3)
provides circumstances under which an employee's benefit is permitted to be
forfeited without violating § 411 (a). In particular, § 411 (a)(3)(B) provides that a
right to an accrued benefit derived from employer contributions is not treated as
forfeitable solely because the plan provides that the payment of benefits is
suspended for such period as the employee is employed, subsequent to the
commencement of payment of such benefits-
1
(i) in the case of a plan other than a multiemployer plan, by the employer who
maintains the plan under which such benefits were being paid; and
(ii) in the case of a multiemployer plan, in the same industry, the same trade or
craft, and the same geographic area covered by the plan as when such benefits
commenced.
This definition of employment for which benefit payments are permitted to
be suspended is further described in 29 CFR § 2530.203-3, which interprets
section 203(a)(3)(8) of ERISA, the counterpart to § 411(a)(3)(8) of the Code.
Employment that satisfies the conditions described in the statute and regulations
is referred to as "section 203(a)(3)(8} service." See 29 CFR § 2530.203-3(c).
Section 411 (d)(6)(A) generally provides that a plan is not treated as
satisfying the requirements of § 411 if the accrued benefit of a participant is
decreased by a plan amendment. Under § 411 (d)(6)(8) and regulations
thereunder, a plan amendment that has the effect of eliminating or reducing an
early retirement benefit, a retirement-type subsidy, or an optional form of benefit,
with respect to benefits attributable to service before the amendment, is treated
as reducing accrued benefits for any employee who satisfies the pre-amendment
conditions for that benefit (either before or after the amendment).
Under § 7805(b )(8), the Commissioner is authorized to prescribe the
extent, if any, to which a judiCial decision relating to the internal revenue laws is
to be applied without retroactive effect.
In Central Laborers', the plaintiffs were two inactive participants in the
Central Laborers' Pension Fund, a multiemployer pension plan. The two
participants commenced payment of their benefits in 1996 after accruing enough
pension credits to qualify for early retirement payments under a plan provision
that paid them the same monthly benefit they would have received had they
commenced payment at normal retirement age. The plan terms required that
payments be suspended if a participant engaged in "disqualifying employment."
At the time the two participants commenced payment, the plan defined
disqualifying employment to include only employment covered by the plan. At
that time, employment covered by the plan (and thus, disqualifying employment)
did not include work as a construction supervisor, the position in which the two
participants were employed after they commenced benefits. Accordingly, the
partiCipants' benefit payments were not suspended in 1996. However, in 1998,
the plan was amended to expand its definition of disqualifying employment to
include any employment in the construction industry in the geographic area
covered by the plan, and the plan stopped payments to the two participants on
account of their disqualifying employment as construction supervisors. The two
participants sued to recover the suspended payments, claiming that the
amendment expanding the plan's suspension provisions violated section 204(g)
2
of ERISA (the counterpart to § 411 (d)(6) of the Code).
The Supreme Court, holding for the two participants, ruled that section
204(g) prohibits a plan amendment expanding the categories of post-retirement
employment that results in suspension of the payment of early retirement
benefits already accrued. The Court found that while ERISA permits certain
conditions that are elements of the benefit itself (such as suspensions under
§ 411 (a)(3)(8) of the Code or section 203(a)(3)(8) of ERISA), such a condition
may not be imposed after a benefit has accrued and that the right to receive
benefit payments on a certain date may not be limited by a new condition
narrowing that right. The Court agreed with the ih Circuit that "[a] participant's
benefits cannot be understood without reference to the conditions imposed on
receiving those benefits, and an amendment placing materially greater
restrictions on the receipt of the benefit 'reduces' the benefit just as surely as a
decrease in the size of the monthly benefit payment." Central Laborers', 124
S.Ct. at 2235-36, quoting Heinz v. Central Laborers' Pension Fund, 303 F.3d
802,805 (7 th Cir. 2002). However, the Court stated:
Nothing we hold today requires the IRS to revisit the tax-exempt
status in past years of plans that were amended in reliance on
the agency's representations in its manual by expanding the
categories of work that would trigger suspension of benefit
payments as to already-accrued benefits. The Internal Revenue
Code gives the Commissioner discretion to decline to apply
decisions of this Court retroactively. 26 U.S.C. § 7805(b)(8) ...
This would doubtless be an appropriate occasion for exercise of
that discretion.
Central Laborers', 124 S.Ct. at 2238, n.4.
SECTION 3. EXERCISE OF AUTHORITY UNDER § 7805(b)(8)
.01 In general. Pursuant to the Commissioner's authority under
§ 7805(b)(8), a plan will not be treated as having failed to satisfy the
requirements of § 401(a) merely because an amendment adopted before June 7,
2004, violated § 411 (d)(6) by adding or expanding a provision under which a
suspension of benefits occurs on account of section 203(a)(3)(8) service. This
treatment applies only if a reforming amendment, as described in section 3.02, is
adopted and the plan complies operationally with that amendment, as described
in sections 3.02, 3.03, and 3.04. For purposes of this revenue procedure, an
amendment adopted before June 7,2004, that violated § 411 (d)(6) by adding or
expanding a provision under which a suspension of benefits occurs on account of
section 203(a)(3)(8) service is referred to as the original amendment, and the
amendment required under section 3.02 is referred to as the reforming
amendment. This section 3.01 applies to any such original amendment
3
regardless of whether the amendment provided for a suspension of payment of
the accrued benefit or for a suspension of the payment of early retirement
benefits or retirement-type subsidies such as those at issue in Central Laborers',
and regardless of whether the plan as amended by the original amendment
provided that subsequent benefit payments under the plan were actuarially
adjusted to take into account the fact that benefits were not paid during the
suspension period. For purposes of this revenue procedure, a provision under
which a suspension of benefits occurs on account of section 203(a}(3)(8} service
includes a provision that results in a plan not providing actuarial increases as a
result of such service after normal retirement age. If a plan has more than one
original amendment that violated § 411 (d}(6) by adding or expanding a provision
under which a suspension of benefits occurs on account of section 203(a)(3)(8)
service, this revenue procedure applies separately to each amendment.
.02 Reforming amendment. (1) General requirements. The reforming
amendment must provide that, beginning on June 7,2004, the provisions of the
original amendment that suspend benefits do not apply with respect to benefits
that had accrued as of the applicable amendment date for the original
amendment and must provide certain participants with an option to commence
payment of their benefits, as described in section 3.04. For purposes of this
revenue procedure, the applicable amendment date for a plan amendment is the
later of the effective date of the amendment or the date the amendment is
adopted. However, the reforming amendment is permitted to provide that the
suspension of benefit provisions of the original amendment will continue to apply
with respect to benefits that had accrued after the applicable amendment date for
the original amendment. Further, a plan may continue to apply the suspension of
benefit provision as in effect immediately prior to the original amendment with
respect to all accrued benefits (accruing both before and after the original
amendment).
(2) 8roader reforming amendments permitted. The reforming
amendment is permitted to provide greater benefits to participants than the
minimum required under section 3.02(1}. For example, in addition to satisfying
the minimum requirements of this section 3, a reforming amendment might
provide that the suspension of benefit provisions of the original amendment
cease to apply beginning on a date earlier than June 7, 2004, and might also
provide a corresponding opportunity for participants to apply for retroactive
benefits commencing on that earlier date. Similarly, the reforming amendment
might apply to the entire accrued benefit of those participants with an accrued
benefit on the applicable amendment date of the original amendment, rather than
just to benefits that had accrued as of the applicable amendment date, so that
the suspension of benefit provisions of the original amendment as reformed only
apply to those participants who commence partiCipation after that applicable
amendment date.
4
(3) Effective date and remedial amendment period. The reforming
amendment must be effective as of a date not later than June 7, 2004. Section 4
provides a remedial amendment period for the reforming amendment.
.03 Payment of retroactive benefits requirement. (1) In general. In order
for a plan to obtain the treatment provided in section 3.01, the reforming
amendment described in section 3.02 must provide for the payment of retroactive
benefits (beginning as of June 7, 2004, or such earlier date on which the
reforming amendment is made effective pursuant to section 3.02(3)) to an
affected plan participant (including any appropriate interest or actuarial increase)
with respect to benefits that had accrued as of the applicable amendment date
for the original amendment. For purposes of this section 3.03, an affected plan
participant means (a) a participant who commenced receipt of benefits and
whose benefits were suspended on account of the original amendment or (b) a
participant who applied to commence benefits, whose application (including the
form of payment) was approved, and whose benefits were suspended before
payments commenced.
(2) Effective date for retroactive payment of benefits for affected
participants. The plan must provide for the payment of retroactive benefits
described in section 3.03(1) effective not later than January 1,2006. The plan
must be in operational compliance with the reforming amendment by January 1,
2006, with respect to benefits payable through December 31,2005, and must
maintain compliance for all periods on or after that date .
.04 Option to commence payment. (1) In general. In order for a plan to
obtain the treatment provided in section 3.01, a participant described in section
3.04(2) must be given an opportunity to elect retroactively the commencement of
payment of benefits as of the first date on which (a) the reforming amendment is
made effective and (b) the participant was eligible to commence receipt of
benefits. See § 1.417(e)-1 for rules relating to retroactive annuity starting dates.
(2) Eligibility for option. A participant who is eligible for the option
described in section 3.04(1) is one who -(a) at any time after the applicable amendment date of the original
amendment, was eligible to commence the receipt of benefits under the plan,
determined without regard to the suspension of benefit provisions of the original
amendment,
(b) at the same time, engaged in section 203(a)(3)(8) service for
which benefits were not permitted to commence, as determined taking into
account the original amendment, and
(c) is not an affected participant as defined in section 3.03 (e.g., is a
partiCipant who did not apply for benefits).
5
(3) Election period. The election period for the option set forth in
section 3.04(1) begins within a reasonable time period after participants
described in section 3.04(2) have received notification of the option in
accordance with section 3.04(4) and ends no sooner than six months after
notification. Reasonable efforts must be taken to notify all such participants. For
those participants not located after a mailing to the last known address,
reasonable efforts include the use of the Internal Revenue Service Letter
Forwarding Program (see Rev. Proc. 94-22, 1994-1 C.B. 608) or the Social
Security Administration Employer Reporting Service.
(4) Notification requirement. The plan must provide notice of the option
set forth in section 3.04(1) to each participant described in section 3.04(2). In
addition to satisfying any generally applicable notice requirements, the notice of
the option to commence payment of benefits must be designed to be readily
understandable by the average plan participant. The notice must explain the
option to commence retroactive payment of benefits, as described in section
3.04(1), and the period for making the election, as described in section 3.04(3).
The notice must be sent on or before January 1, 2006 .
.05 Terminated plans. A plan that was terminated with a termination date
before June 7, 2004, is not required to adopt a reforming plan amendment or
take the actions required in sections 3.02 through 3.05 in order to receive the
treatment provided in section 3.01.
SECTION 4. EFFECT ON DETERMINATION LETTERS AND REMEDIAL
AMENDMENT PERIOD
For purposes of any previously issued determination letter and for
purposes of applying the rules in § 401(b), the Central Laborers' decision
constitutes a change in law under § 401 (a) that is effective on June 7,2004 (the
date of the Central Laborers' decision). Thus, if a favorable determination letter
was issued with respect to a plan amendment that is adversely affected by the
Central Laborers' decision, the plan sponsor cannot rely on the determination
letter from and after June 7, 2004. 1 Further, a plan provision that is an original
amendment as defined in section 3.01 is designated under § 1.401 (b)-1 (b)(3)(i)
as a disqualifying provision resulting from a change in the qualification
requirements under § 401 (a). The last day of the remedial amendment period for
this disqualifying provision is the same as the last day of the EGTRRA remedial
amendment period for the plan. 2
See section 21 of Rev. Proc. 2005-6, 2005-1 I.R.B.200.
Pursuant to Notice 2001-42, 2001-2 C.B. 70, the EGTRRA remedial amendment period will not
end earlier than December 31,2005. Announcement 2004-71,2004-40 I.R.B. 569, includes a
proposed revenue procedure which, if finalized, would extend this remedial amendment period.
1
2
6
SECTION 5. PROPOSED REGULATION
The Treasury Department and the Service intend to propose regulations
that reflect the holding in Central Laborers'. It is expected that the proposed
regulations will provide guidance on when an amendment may add a benefit
entitlement condition that is permitted under the vesting rules (e.g., a condition
described in § 411 (a)(3)) with respect to benefits accrued before the date of the
amendment. It is further expected that, with respect to the types of benefits
protected under § 411 (d)(6), the proposed regulations will provide that such an
amendment is not permitted with respect to benefits accrued before the
applicable amendment date, but is permitted to the extent that the amendment
applies with respect to benefits accrued after the applicable amendment date.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective April 18, 2005.
SECTION 7. PAPERWORK REDUCTION ACT
The collection of information contained in this revenue procedure has
been reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control
number 1545-1938.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless the collection of information
displays a valid OMB control number.
The collection of information in this revenue procedure is in section
3.04(4). This information is required to notify certain participants of the
opportunity to elect retroactively the commencement of benefits. The collection
of information is required to obtain a benefit. The likely respondents are
retirement plan sponsors, administrators, and trustees.
The estimated total annual reporting and/or record keeping burden is
142,500 hours.
The estimated annual burden per respondentlrecordkeeper varies from
250 hours to 750 hours, depending on individual circumstances, with an
estimated average of 500 hours. The estimated number of respondents and/or
record keepers is 285.
7
The estimated annual frequency of responses (used for reporting
requirements only) is one.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and tax return information are confidential,
as required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal authors of this revenue procedure are Kathleen J. Herrmann
and Diane S. Bloom of the Employee Plans, Tax Exempt and Government
Entities Division. Ms. Herrmann may be reached at (202) 283-9888 (not a tollfree number).
8
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WASHINGTON, D.C. 20220
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FEDERAL FINANCING BANK April2005
Brian D. Jackson, Chief Financial Officer, Federal Financing
Bank (FFB) announced the following activity for the month of
March 2005.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $27.4 billion on March 31, 2005,
posting a decrease of $716.8 million from the level on February
28, 2005. This net change was the result of decreases in
holdings of agency assets of $535.0 million and in net holdings
of government-guaranteed loans of $181.8 million. The FFB made
31 disbursements and received 35 prepayments during the month of
March. The FFB also extended the maturities of 210 loans
guaranteed by the Rural Utilities Service ("RUS") during the
month.
Attached to this release are tables presenting FFB March
loan activity and FFB holdings as of March 31, 2005.
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FEDERAL FINANCING BANK
MARCH 2005 ACTIVITY
Borrower
Date
Amount
of Advance
Final
Maturity
Interest
Rate
GOVERNMENT - GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
San
San
San
San
Francisco
Francisco
Francisco
Francisco
R~
OB
OB
OB
OB
3/01
3/09
3/11
3/18
$55,897.68
$34,363.79
$49,363.79
$146,865.36
8/01/05
8/01/05
8/01/05
8/01/05
3.086%
3.058%
3.061%
3.073%
S/A
S/A
S/A
S/A
3/01
3/01
3/03
3/03
3/07
3/07
3/08
3/10
3/10
3/11
3/11
3/11
3/15
3/16
3/17
3/18
3/21
3/21
3/24
3/25
3/25
3/28
3/28
3/28
3/28
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
$2,779,000.00
$3,830,197.00
$6,888,386.33
$500,000.00
$2,000,000.00
$2,500,000.00
$2,200,000.00
$333,000.00
$500,000.00
$9,450,000.00
$1,187,000.00
$964,800.00
$500,000.00
$6,000,000.00
$1,400,000.00
$4,753,000.00
$400,000.00
$560,000.00
$1,000,000.00
$1,500,000.00
$1,000,000.00
$2,000,000.00
$1,362,000.00
$164,000.00
$3,100,000.00
$480,467.74
$480,673.68
$623,214.31
$4,685,699.48
$6,507,986.80
$5,395,898.42
$1,839,111.04
$596,547.11
$727,634.04
6/30/10
1/02/29
12/31/15
12/31/36
12/31/36
12/31/36
12/31/36
6/30/05
12/31/36
6/30/05
1/02/35
12/31/29
12/31/36
12/31/30
12/31/37
1/02/29
1/03/39
6/30/05
12/31/37
12/31/31
1/03/39
12/31/36
12/31/37
1/03/39
12/31/31
6/30/05
6/30/05
6/30/05
1/02/35
1/02/35
6/30/05
6/30/05
6/30/05
6/30/05
4.003%
4.720%
4.135%
4.670%
4.597%
4.596%
4.573%
2.822%
4.781%
2.804%
4.705%
4.680%
4.746%
4.706%
4.756%
4.683%
4.726%
2.838%
4.836%
4.765%
4.818%
4.819%
4.818%
4.782%
4.816%
2.828%
2.828%
2.828%
4.776%
4.776%
2.828%
2.828%
2.828%
2.828%
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
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Qtr.
Qtr.
UTILITIES SERVICE
central Georgia Elec. #2010
West Carolina Tele. #406
Baldwin Telecom, Inc. #2192
Roanoke Electric Mem. #820
Decatur County #2188
Valley Rural Elec. Coop. #884
Little Ocmulgee Electric #816
Darien Telephone Co. #719
Pemiscot-Dunklin Elec. #853
Brazos Electric #2086
Northern Electric #666
Ravalli #641
Gunnison County Electric #2036
United Power Assoc. #721
Hamilton County Elec. #2129
Minnkota Power #2115
Missouri Rural Elec. #2120
Red River Rural Tel. #2113
Johnson County Elec. #2085
Central Iowa Power Coop. #2094
Cental Virginia Elec. #2126
Blue Ridge Elec. #897
Cotton Electric Coop #2038
Oneida-Madison Elec. #2144
York Electric Coop. #848
*Adams Rural Electric #706
*Adams Rural Electric #706
*Adams Rural Electric #706
*Amicalola Electric #664
*Amicalola Electric #664
*Atlantic Telephone Mem. #805
*Bailey County Elec. #856
*Bailey County Elec. #856
*Bailey County Elec. #856
Page 3
FEDERAL FINANCING BANK
MARCH 2005 ACTIVITY
Borrower
*Big Sand Elec. #540
*Big Sand Elec. #540
*Big Sand Elec. #540
*Big Sand Elec. #540
*Big Sand Elec. #540
*Blue Grass Energy #674
*Blue Grass Energy #674
*Blue Grass Energy #674
*Blue Grass Energy #674
*Blue Grass Energy #674
*Brazos Electric #561
*Brazos Electric #2086
*BrazoS Electric #2086
*Brazos Electric #2086
*Brazos Electric #2086
*Brazos Electric #2086
*Brazos Electric #2086
*Brazos Electric #2181
*Brazos Electric #2181
*Brazos Electric #2182
*Brazos Electric #2182
*Brown County Elec. #687
*Brown County El ec . # 687
*Brown County Elec. #687
*Brown County Elec. #687
*Brown County Elec. #687
*Central Texas Elec. #523
*Citizens Tel (VA) #680
*Citizens Tel (VA) #680
*Clark Energy Coop. #611
*Clark Energy Coop. #611
*Clark Energy Coop. #611
*Clark Energy Coop. #611
*Clark Energy Coop. #611
*Clark Energy Coop. #2087
*Clark Energy Coop. #2087
*Clark Energy Coop. #2087
*ClarkEnergy Coop. #2087
*Cumberland Valley #668
*Cumberland Valley #668
*Cumberland Valley #2118
*Cooper Valley Tel. #648
*Cooper Valley Tel .. #648
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
Date
Amount
of Advance
Final
Maturity
Interest
Rate
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
$727,928.57
$545,946.41
$912,703.84
$2,122,708.67
$2,651,742.86
$4,688,545.66
$1,873,086.10
$4,773,015.29
$4,871,789.35
$2,832,990.86
$9,418,184.41
$5,000,000.00
$5,000,000.00
$5,000,000.00
$5,000,000.00
$5,000,000.00
$3,200,000.00
$20,000,000.00
$8,186,000.00
$5,000,000.00
$2,180,000.00
$232,755.60
$558,613.50
$279,351.76
$438,484.91
$345,673.97
$469,101.25
$1,404,877.89
$691,292.68
$2,738,111.54
$1,819,544.08
$4,060,671.09
$3,395,922.06
$2,459,816.75
$2,500,000.00
$2,500,000.00
$1,000,000.00
$1,845,000.00
$3,910,294.50
$4,696,258.12
$2,200,000.00
$897,352.21
$204,191.74
$1,588,579.34
$365,947.96
$176,380.34
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
12/31/24
4/02/35
4/02/35
4/02/35
4/02/35
4/02/35
4/02/35
3/31/25
3/31/25
4/02/35
4/02/35
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
1/03/33
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
4.679%
4.770%
4.770%
4.770%
4.770%
4.770%
4.770%
4.708%
4.708%
4.770%
4.770%
2.828%
2.828%
2.828%
2.828%
2.828%
4.778%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
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Qtr.
Qtr.
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Qtr.
Page 4
FEDERAL FINANCING BANK
MARCH 2005 ACTIVITY
Borrower
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien· Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*Darien Telephone Co. #719
*East River Power #453
*East River Power #453
*East River Power #601
*East River Power #793
*Fairfield Elec. #684
*Fairfield Elec. #684
*Farmer's Rural Elec. #2046
*Farmer's Rural Elec. #2046
*Farmer's Rural Elec. #2046
*Farmer's Rural Elec. #2046
*Farmer's Telephone #459
*Farmer's Telephone #459
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Fleming-Mason Energy #644
*Farmers Telephone #476
*Farmers Telephone #476
*Farmers Telephone #476
*Farmers Telephone #476
*FTC Communications #709
*FTC Communications #709
*FTC Communications #709
*FTC Communications #709
*FTC Communications #2101
*Georgia Trans. Corp. #446
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
Date
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
Amount
of Advance
$208,524.41
$151,654.10
$225,008.56
$185,283.61
$1,259,112.46
$234,902.12
$463,522.68
$337,621.91
$418,411. 88
$587,452.04
$658,324.64
$705,385.22
$538,790.30
$350,265.49
$172,740.28
$2,954,879.41
$600,041.72
$3,010,682.98
$88,292.64
$5,000,000.00
$1,000,000.00
$1,000,000.00
$2,000,000.00
$19,034.66
$179,627.46
$2,373,030.00
$1,277,785.35
$1,369,055.78
$2,007,948.46
$1,277,785.35
$2,768,742.09
$2,743,847.19
$2,899,174.67
$2,407,405.73
$8,360,801.25
$6,228,200.14
$4,836,535.08
$4,320,816.01
$2,312,864.46
$2,957,940.31
$1,042,378.13
$1,241,989.22
$425,179.00
$9,098,723.51
$1,095,244.63
$547,622.32
Final
Maturity
Interest
Rate
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
12/31/19
1/02/35
6/30/05
6/30/05
12/31/37
12/31/37
12/31/37
12/31/37
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
1/02/18
6/30/05
6/30/05
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.953%
2.953%
4.521%
4.776%
2.828%
2.828%
4.770%
4.770%
4.770%
4.770%
2.953%
2.953%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.953%
2.953%
2.953%
2.953%
2.828%
2.828%
2.828%
2.828%
2.828%
4.446%
2.828%
2.828%
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.
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Page 5
FEDERAL FINANCING BANK
MARCH 2005 ACTIVITY
Borrower
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Grayson Rural Elec. #619
*Greenbel t Elec. #743
*Greenbelt Elec. #743
*Greenbelt Elec. #743
*Grundy Elec.Coop. #744
*Grundy Elec.Coop. #744
*Grundy Elec.Coop. #744
*Grundy Elec. Coop. #744
*Grundy County Elec. #689
*Harrison County #532
*Harrison County #532
*Harrison County #532
*Harrison County #532
*Harrison County #532
*Hudson Valley Datanet #833
*Hudson Valley Datanet #833
*Hudson Valley Datanet #833
*Inter-County Energy #592
*Inter-County Energy #592
*Inter-County Energy #592
*Inter-County Energy #592
*Inter-County Energy #850
*Inter-County Energy #850
*Inter-County Energy #850
*Inter-County Energy #850
*Ironton Telephone Co. #888
*Ironton Telephone Co. #2051
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #794
*Jackson Energy #2133
*Jackson Energy #2133
*Karnes Elec. #568
*Kenergy Corp. #2068
*Kenergy Corp. #2068
*Licking Valley Elec. #522
Date
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
Amount
of Advance
$912,703.84
$1,182,435.93
$934,002.49
$2,365,382.05
$966,391.57
$987,150.88
$1,663,911.58
$1,652,056.93
$476,901.99
$698,925.28
$1,180,135.41
$944,235.45
$481,216.17
$487,683.47
$193,531.81
$908,992.16
$818,092.96
$915,124.84
$1,492,257.93
$1,606,597.72
$4,739 1 718.35
$3 1 454,200.00
$1,895,887.34
$1,363,488.23
$1,817,984.33
$2,369,742.55
$201,707.54
$3,879,981.11
$1,939,990.54
$1 1 940 1 112.42
$3,442,070.62
$3 1 065 1 606.99
$2,956,000.00
$3,800,015.98
$2,850,011.98
$4,465,018.77
$1,900,007.98
$2,375,009.97
$1 1 900,065.62
$7 1 073 1 400.68
$3,000 000.00
$5 1 000 1 000.00
$1,319 1 091.34
$6 1 000 1 000.00
$5,000,000.00
$2,498,819.45
1
Final
Maturity
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
1/03/34
6/30/05
6/30/05
6/30/05
Interest
Rate
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
4.777%
2.828%
2.828%
2.828%
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.
Qtr.
Qtr.
Qtr.
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Qtr.
Qtr.
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Qtr.
Page 6
FEDERAL FINANCING BANK
MARCH 2005 ACTIVITY
Borrower
*Licking Valley Elec. #854
*Magnolia Electric #560
*North Carolina RSA 3 Tel #2009
*North Carolina RSA 3 Tel #2009
*North Carolina RSA 3 Tel #2009
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*New Horizon Elec. #791
*Nolin Rural Elec. #528
*Nolin Rural Elec. #577
*Nolin Rural Elec. #577
*Nolin Rural Elec. #840
*Nolin Rural Elec. #840
*Northstar Technology #811
*Northstar Technology #811
*Owen Electric #525
*Owen Electric #525
*Owen Electric #525
*Owen Electric #525
*Owen Electric #525
*Owen Electric #525
*Pennyrile Elec. #513
*Pennyrile Elec. #513
*Piedmont Rural Telephone #2002
*PRTCommunications #798
*PRTCommunications #798
*PRTCommunications #798
*PRTCommunications #798
*Red River Valley Elec. #2095
*Red River Rural Tel. #2113
*Runestone Electric Ass. #886
*Runestone Electric Ass. #886
*Runestone Electric Ass. #886
Runestone Electric Ass. #886
*San Miguel Electric #919
*San Miguel Electric #919
*Southeastern Indiana #2062
*Southeastern Indiana #2062
*Southeastern Indiana #2062
*Southeastern Indiana #2062
*Socorro Elec. #869
Date
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
Amount
of Advance
$1,952,656.14
$4,555,150.26
$9,280,597.96
$4,586,262.69
$5,374,845.73
$1,960,524.78
$1,325,809.50
$1,625,279.55
$996,760.99
$970,898.72
$1,456,369.33
$978,984.19
$2,680,543.91
$1,720,722.13
$2,347,926.77
$2,347,926.77
$3,879,981.11
$2,859,546.07
$1,656,885.05
$903,677.27
$1,820,522.55
$1,816,845.96
$916,631.74
$1,848,491.57
$1,883,427.11
$3,111,909.06
$5,561,468.46
$5,264,595.47
$2,286,217.57
$4,338,870.44
$1,626,398.75
$722,608.47
$966,666.67
$3,000,000.00
$400,000.00
$1,464,492.11
$341,727.59
$988,696.52
$750,000.00
$6,539,720.39
$6,866,782.93
$2,650,000.00
$2,650,000.00
$3,700,000.00
$2,000,000.00
$1,254,579.18
Final
Maturity
Interest
Rate
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
12/31/37
1/03/23
12/31/36
12/31/36
12/31/36
12/31/36
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
2.828%
2.953%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.953%
2.953%
2.828%
2.828%
2.828%
2.828%
2.828%
4.770%
4.623%
4.772%
4.772%
4.772%
4.772%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
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.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Page 7
FEDERAL FINANCING BANK
MARCH 2005 ACTIVITY
Borrower
3urry-Yadkin Elec. #534
;urry-Yadkin Elec. #534
surry-Yadkin Elec. #534
surry- Yadkin Elec. #534
surry-Yadkin Elec. #534
surry- Yadkin Elec. #534
surry- Yadkin Elec. #534
surry- Yadkin Elec. #534
Surry- Yadkin Elec. #852
'Surry-Yadkin Elec. #852
:Surry-Yadkin Elec. #852
'surry-Yadkin Elec. #852
'Tri-County Electric Ass. #830
ITri-County Electric Ass. #830
ITwin Valley-Ulen Tel. #2177
~Virgin Islands Telephone #2089
W. Farmers Elec. Coop. #701
tWebster Electric #705
tWest Plains Elec. #501
Date
Amount
of Advance
Final
Maturity
Interest
Rate
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
$888,691.95
$888,691.95
$444,345.99
$888,691. 95
$888,691. 95
$903,262.58
$909,142.81
$2,100,202.65
$976,328.07
$1,952,656.14
$488,164.03
$1,988,722.34
$488,415.76
$499,582.89
$8,164,237.63
$64,655,000.00
$615,000.00
$2,050,749.10
$2,139,063.17
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
6/30/05
12/31/25
6/30/05
6/30/05
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
2.828%
4.703%
2.828%
2.953%
S/A is a Semiannual rate.
Qtr. is a Quarterly rate.
* maturity extension or interest rate reset
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Qtr.
Page 8
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)
Program
March 31, 2005
SOT
Agency Debt:
U.S. Postal Service
February 28. 2005
Monthly
Net Change
Fiscal Year
Net Change
3/1/05- 3/31/05
10/1/04- 3/31/05
Subtotal *
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
-$1.800.0
-$1.800.0
Agency Assets:
FmHA-RDIF
FmHA-RHIF
Rural Utilities Service-CBO
Subtotal *
$85.0
$230.0
$4.270.2
$4.585.2
$170.0
$680.0
$4.270.2
$5.120.2
-$85.0
-$450.0
$0.0
-$535.0
-$115.0
-$450.0
$0.0
-$565.0
Government-Guaranteed Lending:
DOD· Foreign Military Sales
DoEd-HBCU+
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes
General Services Administration+
DOl-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-State/Local Development Cos.
DOT·Section 511
Subtotal*
$1.354.7
$119.5
$0.2
$971.9
$2.139.4
$6.1
$487.7
$17.693.0
$47.1
$2.8
$22.822.5
$1.365.6
$119.7
$0.2
$971.9
$2.141.9
$6.1
$487.7
$17.859.9
$48.5
$2.8
$23.004.3
·$10.9
-$0.2
$0.0
$0.0
-$2.5
$0.0
$0.0
-$166.8
-$1.4
$0.0
-$181.8
-$110.2
$1.5
-$0.2
-$82.9
-$1.9
-$1. 5
-$10.9
$732.0
-$9.5
-$0.1
$516.3
Grand total*
$27.407.7
$28.124.6
-$716.8
-$1.848.7
* figures may not total due to rounding
+ does not include capitalized interest
JS-239G:
DC~iign{ltion
,
".:.",
PRESS
of Acting (iLl1Lral Counsel
Page 1 of 1
'".
ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 8, 2005
JS-2390
Designation of Acting General Counsel
Treasury Secretary John Snow today designated Deputy General Counsel Jim
Carroll to act as General Counsel of the Treasury Department. The designation of
Mr. Carroll shall be effective immediately and shall continue until Arnie Havens,
who is acting as Deputy Secretary of the Treasury, returns to his duties as the
General Counsel.
http://w··l\.l/.trea~.gov/press/releases/js2390.htm
4/2812005
JS-239 i. Statement of TreasUlY Secretary John W. Snow<br>On the Departure of Acting... Page 1 of 1
,
".:.",
',,-
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Ado/Je(") Acro/},,/(I'} Rpn(/pri~).
April 18, 2005
JS-2391
Statement of Treasury Secretary John W. Snow
On the Departure of Acting Treasury Assistant Secretary
for Management
Jesus H. Delgado-Jenkins
In a few days, the Treasury Department will bid farewell to one of its most admired
leaders and dedicated servants. Since May of 2003, Jesus Delgado-Jenkins has
served the Treasury Department, and his country, well and honorably.
Jesus' work to help realize the President's management vision for the federal
government through the President's Management Agenda was invaluable, and he
will be missed by his Treasury colleagues.
Of his many accomplishments at Treasury, Jesus' assistance with the creation of
the new Office of Terrorism and Financial Intelligence (TFI) stands out as one that
presented special challenges and great rewards. I know that Jesus is proud to have
played a part in protecting our country through the successful launch of this new
office.
Dedicated to promoting economic opportunity and ownership and to building an
effective, results-driven government, Jesus has been a valued member of the Bush
Administration. Under his management leadership, the Office of Management and
Budget designated Treasury as a Center of Excellence for the Financial Services
Line of Business - a reflection of the leadership and skill demonstrated by the
financial and accounting professionals at the department, and the successful
guidance that Jesus provided them with. In addition, he renewed our budgeting and
financial management strategies as well as our acquisition strategies to improve the
Department's cost of operations.
Jesus has much to be proud of as he leaves this department for the private sector.
On behalf of my Treasury colleagues, I extend gratitude for his service and best
wishes for the future to Jesus.
REPORTS
•
Acting Asst. Secretary Delgado-Jenkins' Resignation Letter"
http://v,,,','','dreas.gov/pre~5.>/releases/js2391.htm
4/28/2005
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C,
ASSISTANT SECRETARY
The President
The Whitehouse
Washington, D.C. 20500
Dear Mr. President,
It has been my honor and privilege to serve you and our country at the Department of Treasury since
May 2003. It is with mixed emotions that I now tender my resignation to return home to my family
in Chicago and the private sector. To ensure a smooth transition, I have consulted with Secretary
Snow over the last few months to effect my resignation on April 29th.
I thank you for giving me the opportunity to be a part of your management team and help realize your
management vision in the federal government through the President's Management Agenda. With
the help of many dedicated political and career civil servants, I was pleased to lead the management
and CFO functions at the department in support of your priorities to protect America, promote
economic opportunity and 'ownership, and build an effective results-driven government. I was
especially honored to have the opportunity to contribute to the defense of our nation by supporting the
creation of the new Office of Terrorism and Financial Intelligence (TFI).
During my service, I was very honored and fortunate to have the support and confidence of
Secretary Snow and Secretary Bodman. With their leadership, and the hard work of my Treasury
coUeagues, we helped build an improved, more responsive and transparent management platform.
From this platform the Department will continue to make progress on important management
chalJenges with successful programs. These include a new Human Capital Strategy which links
executive compensation with results; continued financial integrity through successive unqualified
audit opinions; initiatives to move Treasury's Financial Controls toward Sarbanes Oxley
standards; budget and Capital Investment formulations aligning expenditures with programs that
demonstrate results; successes in E-Government with more than 70 Million taxpayers filing online; the use of Competitive Sourcing as a way to explore and enable new business models for
getting our work done; and developing new procurement strategies to effect category spend
controls that deliver significant value.
Of particular note, I was pleased to learn that OMB recently designated Treasury as a Center of
Excellence in 2004 for the Financial Services Line of Business. This achievement is a reflection
of the leadership and skill demonstrated by the financial and accounting professionals at the
Department. Beginning with the Treasury Franchise Fund and Administrative Resource Center,
the Department demonstrated that new and innovative business models can thrive in the public
sector and provide Centers of Excellence to serve other agencies without duplicative time and
capital.
I have truJy enjoyed the privilege, honor and responsibility of public service under your
leadership, and I thank you for the opportunity to have served America in support of Treasury's
vital mission.
Very Respectfully,
___ ~_......
;',
I
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;jsus H. Delgad -Jenk}ns
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,A'ssistant Secretary for Manag~ment
,(Acting)
/
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JS-23jJ:
~tatement
,
by
,.:.",
Sccrt',t~ry
Snow on James Gilleran
Page I of 1
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 18, 2005
JS-2393
Statement by Secretary Snow on James Gilleran
James Gilleran has been a dedicated leader at the Office of Thrift Supervision for
over three years as well as an outstanding Chairman for the Federal Financial
Institutions Examination Council for the past two years. His efforts in both capacities
have gone a long way toward strengthening the U.S. banking system. He has
worked diligently to maintain safety and soundness at the nation's banking
institutions and to ensure the industry's ability to meet the financial needs of
Americans. A dedicated public servant, Director Gilleran has made innumerable
contributions to the Treasury Department during his tenure here. His colleagues
and I wish him well in his future endeavors. He departs with the sincere
appreciation and best wishes of all of us here at Treasury.
http://w.yvw.trcus.gov/press/rekases/js2393.htm
4/28/2005
JS-23l.14. Deputy
,
Amli~;tant
".:.",
Secretary Iannicola Addresses <br>State Legislators on Finan...
Page 1 of 1
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 15, 2005
JS-2394
Deputy Assistant Secretary lannicola Addresses
State Legislators on Financial Literacy
Treasury's Deputy Assistant Secretary for Financial Education, Dan lannicola,
spoke today to state legislators and staff at the National Conference of State
Legislators Spring Forum in Washington, D.C. about the Treasury's and the
Financial Literacy and Education Commission's initiatives to improve financial
education across the country. During a panel discussion entitled Money +
Knowledge Financial Literacy, lannicola asked the participants' to encourage
Financial education in their states.
=
"Improving the financial literacy of the people in your states is not easy, but we can
help," said lannicola. He told the legislators about the broad array of financial
education resources available from the federal government through the MyMoney
Web site and hotline (www.mymoney.gov and 1-888-mymoney), in both English
and Spanish. "MyMoney puts the best the federal government has to offer in one
place. It's all here and it's all free."
The National Conference of State Legislators (NCSL) is a bipartisan organization
serving the legislators and staffs of the nation's 50 states, its commonwealths and
territories. The NCSL provides research, technical assistance and opportunities for
policymakers to exchange ideas on the most pressing state issues. Today's panel
discussion on financial literacy constitutes part of a broader NCSL financial
education effort.
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education in May of 2002. The Office
works to promote access to the financial education tools that can help all Americans
make wiser choices in all areas of personal financial management, with a special
emphasis on saving, credit management, home ownership and retirement
planning. The Office also coordinates the efforts of the Financial Literacy and
Education Commission, a group chaired by the Secretary of Treasury and
composed of representatives from 20 federal departments, agencies and
commissions, which works to improve financial literacy and education for people
throughout the United States. For more information about the Office of Financial
Education visit: www.treas gov!financialcducation.
http://w·vYw.trcu3.gov/press/rekases/js2394.htm
4/28/2005
2005-~-1 g
17 21-56-8161:
,
".:.",
PRESS
f~lkral
Reserve Board Chairman Alan Greenspan, Treasury S... Page 1 of 1
'".
ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 18, 2005
2005-4-18-17 -21-56-8262
Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary John
Snow and Treasury Under Secretary John Taylor
Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary John Snow
and Treasury Under Secretary John Taylor participate in a meeting of the G-7
finance ministers and Central Bank governors, April 16
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image
http://www.trC1l3.gov/pretls/reie:lses/200S4181721S68262.htm
4/28/2005
200)-4-18-17 28 37 )\)\70: G-7 Finance Ministers pose for the traditional group photo, A...
:
".:.".
Page 1 of 1
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 18, 2005
2005-4-18-17-28-37-8870
G-7 Finance Ministers pose for the traditional group photo, April 16
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image
http://w·.yw.treas.gov/press/releases!20054181728378870.htm
4/28/2005
2005-4-1 H-17-J2-55-9279: Secretary John Snow takes media questions at the post- G-7 pr ... Page 1 of I
....
..:.".
PRESS
'".
ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 18, 2005
2005-4-18-17 -32-55-9279
Secretary John Snow takes media questions at the post- G-? press
conference, April 16
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image
http://wwvv·.trcu3.gov!pre5s/releasesI20054181732559279.htm
4/2812005
JS-2395: :"lccrctary John W. Snow<hr>Prepared Remarks<br>Mortgage Bankers Associat... Page 1 of 4
,
".:.",
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 19, 2005
JS-2395
Secretary John W. Snow
Prepared Remarks
Mortgage Bankers Association
Washington, DC
Thank you so much for having me here today; I hope you're having a great meeting
and are going to have some time to spend on the Hill with your Congressional
Representatives. They need to hear from you! You're a very important part of the
free-market system that makes this great American economy so strong, and your
perspective on financial policy issues is invaluable.
In recent years your industry played a key role in some really terrific economic
recovery and growth. Despite today's numbers, the housing market has been
strong, with 1.2 million new homes and 6.8 million existing homes sold over the
past year alone.
You should be very proud of your success for two important reasons: first, housing
market activity is an important part of economic strength and growth, which has led
to steady job creation; and second that nearly 70 percent of Americans today own
their own homes - more than ever before.
Well-timed tax cuts, combined with sound monetary policy set by the Federal
Reserve Board, got our economy moving when we needed it most. They gave
industries like yours the room you needed to grow, and you took over from there.
As a result, economic growth was 4.4 percent last year, the strongest in five years.
The economy has created 3.1 million new jobs since May 2003.
Manufacturing production is on the upswing, and a revival in U.S. exports begun in
mid-2003 is also contributing to riSing output.
The President has made clear his commitment to strengthen our economy further.
This includes reducing the budget deficit - as well as reforming Social Security and
the tax system, reducing the regulatory burden on business, and passing energy
legislation. We expect the deficit to total 3.5 percent of GOP this fiscal year. Tight
controls on discretionary spending and increased revenue as a result of economic
expansion are expected to cut the deficit by more than half, to well under two
percent of GOP, by fiscal year 2009.
Reducing the tax burden proved to be a successful economic stimulus. Today, high
energy prices are acting like a tax on our economy, and relieving that burden is
extremely important. The first order of business for Congress in the coming days
and weeks needs to be passage of an energy policy that reflects the demands of a
new century.
The President has called on Congress to send him a bill that meets four important
objectives: First, the energy bill must encourage the use of technology to improve
conservation. Second, it must encourage more production at home in
environmentally sensitive ways. Third, the bill must diversify our energy supply by
developing alternative sources of energy like ethanol or bio-diesel. Promoting safe,
clean nuclear power, providing tax credits for renewable power sources such as
wind, solar, and landfill gas and continuing our clean coal technology projects are
all part of that essential diversification The bill must also support pollution-free cars
and trucks, powered by hydrogen fuel cells instead of gasoline.
Finally, the energy bill must help us find better, more reliable ways to deliver energy
http://w·.vw.trca~.gov/press/releases/js2395.htm
4/2812005
JS-L395. St'ud<uy John W. Snl)\v~br>Prepared Remarks<br>Mortgage Bankers Associat... Page 2 of 4
to consumers. We must modernize our infrastructure to make America's energy
more secure and reliable.
The job of keeping our economy unencumbered is a never-ending one, indeed.
From tax cuts to regulations and energy policy, we need to work on it every day,
and we need to work on keeping it strong for the future, for the long-term.
Reforming our Social Security and tax systems addresses some critical long-term
economic issues.
For example, the President's Advisory Panel on Tax Reform is working right now to
come up with some options that will encourage growth and save Americans much
of the time and headache that they currently spend complying with the tax code.
American taxpayers and businesses spend an estimated $130 billion dollars in lost
time and money trying to comply with our increasingly unwieldy tax code. That's
$130 billion in resources that could be used to create jobs, invest in new business,
or spur consumer spending. The $130 billion burden our code places on the
American people is a drag on economic growth and an unnecessary headache for
Americans.
The President has asked that the fine people on the advisory panel be guided by
the goals of increased fairness, simplicity and ease of understanding, and economic
growth and job creation. He has also asserted that any reform proposal should
carry on the good traditions of recognizing the importance of homeownership and
charity in our society.
The panel has held seven meetings so far ... two here in Washington, one
yesterday at the University of Maryland, and one apiece in Tampa, Chicago, New
Orleans and San Francisco. They are hearing expert testimony at each meeting,
and receiving a wide range of critiques and ideas from all over the country. They're
doing great work, and I am looking forward to receiving their recommendations by
the end of July.
You should also know that the panel recently asked the public to submit proposals
for reform. Those proposals are due next Friday, April 29th. Please take a look at
their website for more information. The site, www.taxreform.gov, includes
instructions on where comments can be mailed or e-mailed. There is also a great
new summary of the issues and key themes the panel is considering.
I appreciate the President's leadership on tax reform, and I deeply admire his
leadership when it comes to the national discussion on Social Security reform.
Social Security is sound for today's retirees, but the system must be fixed to keep
the promise of Social Security for our children and grandchildren. Because of the
President's leadership, the national dialogue on Social Security is ubiquitous.
Saving and strengthening Social Security is the topic at lunch counters and kitchen
tables, college dining halls and office water coolers all over the country.
Ideas are coming forward, and this is an important time to remember that reform of
the Social Security system must be lasting, permanent, not just a temporary 'bandaid.'
It takes courage to do more than patch up a system that affects every citizen's life.
But it's what Americans expect of their leaders; they expect elected officials like the
President and the Congress to really solve problems, not just tinker with them.
That's why the President has said that Social Security must be put on solid financial
ground permanently, for the long haul. He believes that it would be an injustice to
the American people if Washington, DC simply put a band-aid on the problem.
Because then the whole country would be back at the starting line in a few years.
So if someone promises you a 75-year fix, I encourage you to read the fine print. In
1983 we were promised a "75-year fix" - but 2 years later, the system was headed
out of balance again.
Americans born before 1950 won't be affected by any reform that we achieve, but
that doesn't mean they shouldn't be involved in this critical debate. In fact, current
and near-retirees have an incredible opportunity: to be the ones to usher in a new
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generation of shareholders in the American Dream.
President Bush has established some basic principles for Social Security reform,
and I'd like to go over them with you quickly today.
He wants a permanent solution, as I mentioned already, not a band-aid
He wants to preserve benefits for current and near-retirees while saving and
strengthening the system for future generations. Specifically, Social Security will not
be changed for those 55 or older (born before 1950). For the more than 45 million
Americans who are currently receiving Social Security benefits, and those nearing
retirement, benefits are secure and will not change in any way, period.
The President has also said that he won't raise the payroll tax rate. Payroll taxes
have been raised some 20 times since Social Security was established - and it has
failed to make Social Security solvent. Raising the payroll tax will harm our
economy, hurt job growth and fail to achieve the President's goal to create a
permanent fix for Social Security. As you well know, even the most resilient
economy can be devastated by dramatic tax increases.
For future generations of retirees, the President believes an awful lot of hope lies in
personal accounts - something that would allow younger workers to build a nest
egg that they own and control, something the government could never take away
from them, and that would tap into the great force of compound interestsomething you, as bankers, understand very well.
Albert Einstein believed, and the President and I agree, that compound interest is
one of the most powerful forces in the universe. It's why a personal account nest
egg would have a real return on investment that is far better than the rapidlyweakening promise of Social Security benefits.
Former Democratic Congressmen Tim Penny and Charlie Stenholm wrote in an oped a few weeks ago that "opposing personal accounts is not a substitute for offering
a positive solution for dealing with the challenges that face Social Security." They
went on to say, astutely, that they "believe that if Social Security were being created
from scratch today, Americans would want to include a way to help everyone build
up a nest egg." The President and I couldn't agree more.
I know that this audience understands and appreciates what I'm saying here today.
You understand the value of ownership, and how sound investments and savings
lead to a financially independent future.
You've seen your customers improve the quality of their lives as well as their
financial futures through investing in their homes. The goal of owning your own
retirement savings speaks to the same benefits as owning your own home, and it's
exciting to see a national dialogue on such a promising issue.
It would be impossible to talk about increasing ownership, and homeownership,
without discussing the current activity surrounding government-sponsored
enterprises (GSEs). Fannie Mae, Freddie Mac, and the Federal Home Loan Bank
System (FHLB) playa unique and prominent role in the market in which you all
operate, so I want to talk a little bit about the Administration's proposals to
strengthen their regulation. We're having an ongoing conversation with the
Congress about this matter - I imagine you heard about that from Senator Hagel
earlier, and we appreciate his efforts to move reform forward. For now, I'd like to tell
you a little bit about what we're asking of Congress.
Our national system of housing finance needs to remain strong and healthy so that
it can continue to make mortgage credit available and provide financing
opportunities for new homeowners. The Administration's proposed reforms are
intended to ensure greater regulatory oversight, enhanced market discipline, and
appropriate capital requirements for the GSEs. As we consider these reforms, we
are guided by two core objectives: the need for a sound and resilient financial
system and increased opportunities for home ownership, especially for less
advantaged Americans.
In light of the recent events at the GSEs, the need for meaningful reform has
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become even more clear. We believe strongly that half-measures will only
exacerbate the risks to our financial system.
As we originally outlined in detail in 2003, the regulator for the GSEs should have
powers comparable in scope and force to those of other world-class financial
supervisors and fully sufficient to carry out the agency's mandate. The regulator
must have clear general regulatory. supervisory. and enforcement powers with
respect to the GSEs. These powers must include the authority to set both minimum
capital standards and risk-based capital standards; the power to assess the entities
for independent funding outside of the appropriations process: and the ability to
place a failed GSE in receivership.
In order to protect against the systemic risk posed by the housing GSEs' mortgage
investment business, the Administration also recommends that limitations be placed
on the size of the housing GSEs' retained mortgage investment portfolios. After the
appropriate phase-in period, given the overall advances in securitization, the large
amount of data available on mortgages, and the increased sophistication of
mortgage investors, we believe that our capital markets could adjust to a significant
reduction in the presence of the GSEs as mortgage investors.
Our primary goals in developing our GSE reform proposal are to promote the
strength and resilience of our housing finance markets, lessen the potential for
systemic risk, and continue our progress in meeting the mortgage credit needs of all
our Nation's homebuyers. To accomplish those purposes, the fundamental
elements of reform that the Administration has proposed are essential.
Thank you so much for having me here today to talk about this set of really historic
policy efforts that are underway right now. This is an exciting time to be in
government, and I'm extremely proud to be helping the President as we seek to
achieve a safe and promising financial future for all Americans.
Thank you again; have a great meeting.
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a
Pfj[SS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 19, 2005
2005-4-19-14-37-35-26878
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $78,711 million as of the end of that week, compared to $78,528 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
A~ril
TOTAL
1. Foreign Currency Reserves
1
a. Securities
A~riI15. 2005
8, 2005
78,711
78,528
Euro
Yen
TOTAL
Euro
Yen
TOTAL
11,881
14,530
26,411
11,914
14,612
26,526
0
0
Of which, issuer headquartered in the U. S.
b. Total deposits with:
11,638
b.i. Other central banks and B/S
2,921
14,559
2,937
11,657
14,554
b.ii. Banks headquartered in the U. S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U. S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
15,027
15,045
11,490
11,504
11,041
11,041
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
A~ril
April 8, 2005
Euro
1. Foreign currency loans and securities
Yen
TOTAL
Euro
o
15, 2005
Yen
TOTAL
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2a. Short positions
2b. Long positions
3. Other
0
o
o
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
April 8, 2005
Euro
1. Contingent liabilities in foreign currency
Yen
April 15, 2005
TOTAL
Euro
Yen
TOTAL
o
o
o
o
o
o
o
o
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
2. Foreign currency securities with embedded options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4b.1. Bought calls
4.b.2. Written puts
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-239b. JUIIlI W. Sno\V<..BR>Sccrctary of the Treasury<BR>Testimony Before the Hous...
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'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 19, 2005
JS-2396
John W. Snow
Secretary of the Treasury
Testimony Before the House Committee on Financial Services
The State of the International Economy
Thank you, Chairman Oxley, Ranking Member Frank, and other members of the
Committee.
Let me begin with the goals of the Bush Administration's international economic
policy. They are threefold:
•
•
•
Increasing economic growth, because strong growth creates jobs, raises
incomes. and reduces poverty over time,
Increasing economic stability, because financial crises and recessions
cause hardship and suffering, and impede economic progress,
Advancing U.S. foreign policy--in coordination with our international political
and security policy--because this will make America and the world safer and
more secure.
Our international economic agenda includes opening markets and integrating the
global economy, and the Treasury has a key role in formulating and implementing
this agenda. That is why the Congress has required this annual testimony by the
Secretary of the Treasury, and it is a pleasure to be here again today.
How are we doing in achieving these goals? I am happy to report that as a whole
the global economy is performing very well:
Global economic growth is as strong as it has been in thirty years, and, with
inflation historically low, the expansion is expected to continue this year and
beyond.
• The news about economic stability is equally good: there are no major
recessions, no financial crises, and interest rate spreads, which measure
risk, are historically low.
• And on the foreign policy front, our economic efforts are achieving important
successes in combating terrorist financing, in the financial reconstruction in
countries such as Afghanistan and Iraq, and in promoting economic
freedom in the Broader Middle East and North Africa and other regions.
•
What are the reasons for this excellent economic performance? In my view good
economic policies in the United States and other countries deserve much of the
credit. To show this, I will highlight important events in three areas: (1) the
developed economies, (2) the emerging market economies, and (3) the
international financial system as a whole. In doing so it becomes clear that, despite
the remarkable policy accomplishments of the last several years, this is no time to
be complacent. There are challenges to address if we are to continue to see more
growth, stability, and economic freedom around the world.
1. The Developed Economies
Among the large industrial economies, the United States is leading the way.
Economic growth was 4.4 percent last year, the strongest in five years. The
addition of 2.4 million jobs in the last twelve months alone attests to the continuing
recovery from the slowdown of 2000-2001.
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I believe that the first and most important part of an international economic policy is
good policy at home, and here we have been successful. Well-timed fiscal policy
changes--including the tax cuts of 2001 and 2003--and well-timed monetary policy
changes restored stability, made the recession one of the shortest and mildest in
United States history, and created the right incentives for strengthening the private
sector led expansion. With inflation low, the expansion is expected to continue,
even though oil prices remain a drag on the rate on economic growth. To make
economic growth stronger, we must reduce the budget deficit, reform Social
Security and the tax system, reduce the regulatory burden on business, and pass
energy legislation--all high priorities of President Bush in his second term. Our
efforts to reduce the fiscal deficit will be important for promoting greater stability of
the international financial system.
The second largest economy, Japan, has also shown important improvements. The
1990s in Japan is frequently called the lost decade because of near zero economic
growth, persistent deflation, and instability. Thus it is good news that Japan grew at
about 2-112 percent on average in 2003 and 2004, and, despite the pause in the
later part of last year, Japan's economic recovery appears to be continuing. As in
the United States policy changes in Japan have been an important factor, including
a monetary policy aimed at ending deflation and a large reduction in non-performing
loans. Despite these improvements, however, Japan's longer-term economic
growth is being held back by structural rigidities, which must be addressed if Japan
is to reach its full potential
Unfortunately, economic recovery has not yet taken hold in the Euro area as a
whole. Economic growth in the Euro area was less than 2 percent last year, close to
the low average of the last ten years While growth remains strong in the U.K. and
the Scandinavian countries, it is very low in Germany and Italy. These important
industrial economies confront the task of generating economic growth in the face of
changing demographics and structural impediments.
Current Account Imbalances
With the United States growing more rapidly than other industrial countries, exports
have grown less rapidly than imports, and our current account deficit has therefore
risen over the years. In 1990 it was 1 percent of GOP. By 2000 it had increased to 4
percent. And in 2004 it was about 6 percent. At its most fundamental level, the
current account deficit reflects the excess of investment opportunities in the United
States over the level of savings in our economy. Reducing the budget deficit in the
United States--which, as I said, is a very high priority--will help reduce the current
account deficit by reducing the gap between investment and saving. But reducing
the growth deficit between the United States and other countries is also essential.
And this brings me to our G7 Agenda for Growth initiative.
The G7 Agenda for Growth
From the start of his Administration, President Bush called for close economic
engagement with our allies, emphasizing candid discussions based on mutual
respect and cooperation rather than antagonism. Our successful economic
engagement with Japan is an example. From the first Camp David meeting
between President Bush and Prime Minister Koizumi in June 2001 to my frequent
discussions with Finance Minister Tanigaki, we have discussed the key issues such
as restoring health to the Japanese banking system and maintaining a
macroeconomic policy stance to support Japanese growth and end deflation.
With the G-? Agenda for Growth we brought this approach to all G? industrial
countries. The goal, of course, is increased economic growth among the G7,
especially those where growth is lagging. The Agenda for Growth focuses on
structural reforms needed to increase flexibility, raise productivity, and bolster job
creation. This initiative is proving very fruitful. It has permanently expanded the
traditional focus of the G? beyond monetary and fiscal policies to supply-side
policies. During the U.S. chairmanship last year, we delved into key areas for
reform each time we met - including tax reform, labor market reform, and health
care reform. At our final meeting in 2004, we agreed to make supply-side,
structural reform issues a regular focus of the G? meetings. And indeed this has
continued as planned under the UK chairmanship.
Beyond the Agenda for Growth
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As the Agenda for Growth has taken hold within the G-7, we have sought to extend
the pro-growth focus to other multilateral fora. For example, a group of finance and
central bank officials that Treasury Under Secretary for International Affairs John
Taylor chairs at the OECD has significantly shifted its emphasis to pro-growth
supply-side policies and their impact on the current account. Last year the G20
endorsed its analogous "G20 Accord for Sustained Growth". And to help
understand the divergence between U.S. and European productivity growth, the
Treasury staff has been engaging with their counterparts at European Commission
Presidency.
I believe that change is underway. Germany, for example, recently implemented
labor market reforms that provide incentives for the unemployed to return to work.
Italy passed a pension reform law in July, raiSing the retirement age France has
relaxed the 35-hour workweek restriction. The Japanese are working on privatizing
mail delivery and its huge postal financial institutions
These are important achievements, but there is much more to do. Structural reform
is difficult. Supply side policies take time to work. But as has been clearly
demonstrated in Ireland, they work amazingly well. Last November I met in Warsaw
with the Finance Ministers of Poland, Hungary, the Czech Republic, and Slovakia. I
was greatly impressed with the speed and depth of their structural reforms, from
lowering marginal tax rates to reducing barriers to investment. I am hopeful that
these new members to the European Union will be a helpful force for change for the
industrial countries, and our engagement with the EU will reflect that hope.
2. The Emerging Market Countries
As we all remember, the 1990s produced a series of damaging financial crises in
emerging markets--from Mexico, to East Asia, to Russia, to Brazil. These crises
rolled back hard-won economic gains, created profound social disruptions, and left
many asking whether the international financial system was a source of instability
rather than stability.
The most notable feature of emerging markets today is strong economic growth and
the absence of financial crises. Economic growth in Latin America was 6 percent
last year. In emerging market Asia it was 7-1/2 percent. In emerging market Europe
it was 6-112 percent. In South Africa it was nearly 4 percent. Capital flows to
emerging markets are again rising following the sudden stop after the Russia crisis
in 1998.
Improved Policies and the Role of the United States
In my view these positive outcomes are primarily the result of better economic
policies in emerging market countries themselves. Many countries have improved
their fiscal policies and strengthened financial supervision. Many have adopted
monetary policies that focus on price stability, and have moved from unsustainable
fixed exchange rate pegs to flexible exchange rates, or have joined currency
unions, or have adopted another country's currency. As a result emerging market
inflation has been cut dramatically.
The United States has helped by assisting countries that are pursuing good
policies. In fact, when the Bush Administration came into office, there was an
urgent need for a comprehensive strategy to promote greater economic stability in
emerging markets. This meant not only creating a policy environment that made
financial crises less likely, but also setting out to ensure that international
assistance, including from the International Monetary Fund (which I discuss later),
was used to support countries with good policies, rather than provided in large
amounts to countries with flawed policies. And we created new forms of U.S.
engagement--such as the Group for Growth with Brazil and the Partnership for
Prosperity with Mexico--to share experiences on how to tackle impediments to
higher economic growth.
For example, when Brazil neared a full-blown financial crisis during its election in
2002, the United States supported a loan from the International Monetary Fund
(IMF) to bolster the government's sound fiscal program, which was supported by
the major candidates in the election. Then, when President Lula won the election
and his government strengthened the fiscal program, risk spreads fell sharply.
Brazil's economy grew more rapidly last year than it has in ten years.
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At the same time, the Administration acted quickly to head off the spread of crises.
For example, when Uruguay experienced a bank run sparked by its neighbor
Argentina's crisis, the United States mobilized an assistance package that included
a $1.5 billion five-day bridge loan from the Exchange Stabilization Fund to a loan
from the IMF to support a plan to back dollar deposits in the banking system. The
strategy enabled Uruguay to end the bank run, restore economic growth, and repay
the loan in four days.
Financial support worked in Brazil and Uruguay because it was used to bolster
good policies. Large amounts of international assistance--such as from the IMF-cannot buy success or avoid crises in countries with poor economic policies Too
often in the past large assistance packages simply underwrote flawed economic
policies and artificially shielded investors from reckless risks until it was too late to
avoid a crisis.
China, the Exchange Rate, and the G7
Reform of the currency exchange regime in China is one of the highest priorities for
our international economic policy. While many large emerging market countries
have moved to more flexible exchange regimes, China has maintained an
exchange rate peg for over a decade. This impairs adjustment throughout the
international financial system and prevents China from using its monetary policy to
control inflation as other central banks in the world do.
Along with our G7 partners we have urged China to move to a flexible exchange
rate. We take this issue very seriously and have devoted considerable time and
attention - at all levels - to working with the Chinese to prepare them for a change
During the past year we have seen progress. A very important development was
when Chinese officials met with the G7 Finance Ministers and Central Bank
Governors for the first time, and this has continued this year. Engagement with
China contributes to global economic stability because of the size of China's
economy, and its rapid growth means that it is now an essential participant in the
international financial system.
China has not only indicated that it will introduce more flexibility, it has taken the
practical steps needed to do so. As members of the G7 have recognized, the time
has now come for China to introduce flexibility into its exchange rate. The Chinese
are now ready to adopt a more flexible exchange rate, they have sufficiently
prepared their financial system to live in a world of greater flexibility and need to
take action now.
Economic Freedom in the Broader Middle East and North Africa
Another historically significant new engagement on economic policy has been
among the countries of the Broader Middle East, North Africa, and the G8. In the
economic sphere this new engagement began in September 2003 at a meeting I
chaired in Dubai; we have met four additional times since that time, most recently
last weekend in Washington.
This engagement brings together the finance ministers from Morocco to Pakistan,
including Turkey, Afghanistan, and Iraq. Our discussions are about their homegrown economic reforms and how the G8 can help. The engagement has already
spanned several initiatives, including a new IFC small business facility for the
region. By joining with the foreign ministers as we did in the Forum for the Future
meeting in Morocco, we hope to exploit the synergy between economic freedom
and political freedom that we are seeing in the region.
3. Supporting Poverty-Reduction and Economic Growth in Developing
Countries
The Bush Administration's approach to developing countries is based on the
principle that good economic policy in the countries is a prerequisite for economic
growth and poverty reduction, and that we should work with countries to develop
their policies. Official development assistance can be far more effective within such
a good policy environment, and indeed it has frequently been wasted when such a
policy environment is not in place.
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Improving the overall investment climate is particularly important for promoting
private sector development and job creation, and access to finance for small
businesses is an important component of our development policy.
Based on this principle the Bush Administration launched several initiatives
including our reform efforts in the World Bank (which I discuss below) and the
Millennium Challenge Account, which will provide development assistance to
countries that follow policies that lead to economic growth. The United States has
nearly doubled development assistance since 2000. This increase -- which has
raised our development assistance by about $10 billion annually -- represents
roughly one-third of the increase in aid from all donor countries combined. U.S.
annual assistance to sub-Saharan African countries alone has more than tripled
since 2000, with over 30 sub-Saharan countries receiving increases of greater than
50 percent.
These new initiatives, combined with our existing activities, will further promote
greater economic growth in developing countries. Given the truly astounding power
of growth to reduce poverty, we remain fixated on promoting it. If sub-Saharan
African economies expanded by 5 percent in 2005 and 2006, then nearly 30 million
people would be lifted out of poverty. The Bush Administration will continue to work
vigorously to achieve such ambitious results.
There have been important success stories where poor economies such as India
and China have developed into fast growing emerging market countries, but many
poor countries have failed to achieve sufficient growth on a sustained basis to lift
their people out of poverty. For instance, in the 1990s sub-Saharan African
economies grew by only about 2 percent annually, which is less than population
growth, so per capita income declined.
Fortunately, during the last two years economic growth has picked up in many of
the poorest countries. For example, in sub-Saharan Africa, growth is now estimated
to have been about 4-1/2 percent in 2004. This increase clearly reflects the strong
world economy overall, but it also is due to some improvements in economic policy
especially greater inflation control in many countries. These higher rates of
economic growth are raising per capita incomes and bringing tens of millions of
people out of poverty in the poorest countries each year. But there are still billions
in poverty and economic growth has to be increased further and be sustained if
poverty is to be reduced significantly.
4. The International Financial System and Institutions
So far I have focused on the importance of economic policies undertaken by
governments relating mainly to their own countries. Another important part of
international policy relates to the international financial system and the international
financial institutions. DUring the first term of the Bush Administration, important
reforms were achieved at the IMF, the World Bank, and the other Multilateral
Development Banks on which I serve as Governor. And we have made progress in
the international financial services and tax areas. These changes are already being
implemented and are factor in improved economic performance. And one of the
key parts of U.S. foreign policy is our work on combating terrorist financing and
supporting reconstruction efforts in Afghanistan, Iraq, and the Palestine Authority.
Reforms at the International Monetary Fund
These reforms set out to clarify the limits on exceptional access to IMF lending and
to focus IMF programs and conditions on core macroeconomic areas of expertise.
These reforms are now in place. Requests for exceptional access now face new
procedures, including a higher burden of proof in the form of a special report that
documents how IMF resources will support strong policies. The IMF's work--both
with respect to its lending programs and surveillance--is more tightly focused and it
now relies on more robust analytical tools.
A closely related achievement in the area of crisis prevention and resolution was
the Administration's initiative to make the process of restructuring sovereign bonds
more orderly through the use of collective action clauses (CACs) so that
restructurings are less disruptive and more predictable. One year after the launch
of this initiative, Mexico became the first country to include CACs in its New Yorklaw governed bonds. Brazil, Korea, South Africa, and Turkey soon followed, as
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inclusion of CACs quickly became standard market practice.
Reforms at the World Bank and other Multilateral Development Banks (MOBs)
The MOBs serve a critical role in promoting global economic growth and stability,
especially in countries and regions where poverty is most acute. From the outset,
the Bush Administration has pursued an aggressive reform agenda in an effort to
maximize the MOBs' effectiveness and achieve better results on the ground. These
institutions were found by many to be lacking in: measurable results; institutional
transparency and accountability; promotion of private sector-led growth; and
lending policies that reflected debt sustainability problems in poor countries. As a
result of recent reforms, considerable progress has been achieved in measuring
results, increasing grants, focusing on private-sector led growth, fighting corruption,
and improving transparency and accountability.
In 2001, President Bush called on the MDBs to provide 50 percent of their
assistance to the poorest countries in the form of grants. Due to strong U.S.
leadership in replenishment negotiations, IDA and the African Development Fund
(AfDF) will provide approximately 45 percent of their assistance to the poorest
countries in the form of grants. In addition, the Asian Development Fund (AsDF)
agreed in 2004 to institute a 30 percent grants program for the poorest countries in
Asia. Before President Bush's initiative, nearly all MOB assistance was provided as
loans. These landmark achievements represent a crucial step toward ending the
lend-and-forgive approach to multilateral assistance and ensuring long-term debt
sustainability.
Because of its success in reforming the institutions to deliver assistance more
effectively, the Bush Administration was able to justify a reversal of the trend in the
1990s of declining U.S. contributions to the MOBs. Displaying our strong
commitment to these important institutions - based on their commitment to reform during the Bush Administration the U.S. has delivered double-digit increases in
funding for IDA, the AfDF and the AsDF, which provide consessional resources to
the world's poorest countries.
Further Reforms at the IMF and World Bank
More also needs to be done to ensure that the IMF and World Bank are positioned
to assist countries in taking on the economic challenges they face in the 21 st
century. The United States, in partnership with its G-7 partners and others, has
called for a Strategic Review of the Bretton Woods institutions to identify the
changes needed to make these organizations more responsive, relevant, and
helpful to their members. The Bush Administration is committed to seeing this
review through and working with the managements of the IMF and World Bank to
implement the required reforms.
A bold debt proposa/. The shift to greater use of grant financing will reduce
unsustainable debt burdens over the long-term. However, debt will continue to act
as a constraint on economic growth in the interim. To address this problem, the
Bush Administration has put forth a bold debt proposal that would relieve the debt
burdens of poor countries without additional cost. The proposal calls for immediate
action to provide up to 100 percent relief on IDA and AfDF loans to the Heavily
Indebted Poor Countries (HIPCs). These actions, combined with the new increases
in grants going forward, will put these poor countries on a sustainable path.
A new non-borrowing program. We are also focusing on how the IMF's work in the
poorest countries can be more effective. We have proposed a new non-borrowing
program for countries that don't need IMF loans but still can benefit from their IMF's
macroeconomic policy advice. Economic needs of the low-income countries are
vast; we believe the IMF can playa constructive role in poor countries primarily
through surveillance and policy advice and, when needed for balance of payments
purposes, financial assistance. Last weekend, the G-7 Finance Ministers
expressed their backing for the creation of a non-borrowing program.
These additional reforms will further the division of labor and exploit the
comparative advantage of the IMF and the World Bank, with the IMF focusing on
monetary, fiscal, exchange rate, and banking supervision issues, and the World
Bank focusing on economic development.
http://wv:w.treas.gov/press/rdc215ies/js2396.htm
4/28/2005
JS-23~o.
Jull11 W. Sl1ow<BR>Sccrctary of the Treasury<BR>Testimony Before the Hous...
Page 7 of 8
International Trade, Financial Services, and Investment
Completion of the Doha Development Agenda is vital to spurring global economic
growth, stability, and is an important part of U.S. foreign policy. As part of the Doha
Agenda the United States has proposed the elimination of all global tariffs on
consumer and industrial goods by 2015 and substantial cuts in farm tariffs and
trade distorting subsidies. Trade liberalization on such a grand scale would deliver
benefits of roughly $500 billion annually to the world's poor. This is more than
double the size of current official development assistance flows to developing
countries.
The Treasury has a particular responsibility in the financial services talks, which are
an integral part of the broader Doha negotiation. We are working to draw greater
attention to the services component of the Doha discussions and with other finance
ministries on the financial services issues in particular.
Treasury is also active in the progress on free trade agreements (FTAs). The FTAs
with Chile, Singapore and Australia entered into force in the past year, and we
have concluded FTAs with Central AmericalDominican Republic, Morocco, and
Bahrain. In addition to liberalizing trade in goods and services, these FTAs provide
protection for the free flow of capital, so that emerging markets can attract the funds
they need to expand the productive potential of their economies. We plan to
advance our negotiations on additional free trade agreements in Africa (Southern
African Customs Union), Asia (Thailand), Latin America (Andean countries,
Panama, Free Trade Area of the Americas), and the Middle East (United Arab
Emirates, Oman).
Financial Regulatory Talks Between the United States, Japan, and the Europe
For the past three years, the United States and the European Commission have
been discussing a range of finanCial regulatory issues. The agenda has included
Europe's Financial Services Action Plan, the Sarbanes Oxley Act, the Basel II
Capital Accord, and convergence of accounting standards. International issues
arise because the United States and the European Union have different legal,
cultural, and historical traditions. Actions by each may have unintended spillover
effects for the other, which our discussions helped to manage. For similar reasons,
we have also conducted annual meetings between Japanese and American
financial regulators.
Progress on International Tax Treaties
Treasury has been very active pursuing tax treaties in the Bush Administration. This
past year we fulfilled another long-standing goal with the conclusion of a new,
modern tax treaty with Japan that entered into force on March 30, 2004 The new
treaty provides for significantly reduced withholding rates on cross-border payments
of dividends, interest and royalties as well as modernizing a number of other rules.
The new treaty significantly reduced existing tax barriers to investment and trade in
both directions, enhancing the global competitiveness of our businesses and
creating new opportunities for international trade and investment.
The Global Fight Against Terrorist Financing
Since September 11, 2001 we have accomplished much in our global fight to
disrupt the flow of funds that support terror - a critical component of the overall
effort to keep America safe. Worldwide efforts have shut down channels terrorists
and their sympathizers depended on to transfer funds. led to the capturing or killing
of key terrorist facilitators and deterred donors from supporting al Qalda and other
like-minded terrorist groups. We continue to work with our G7 and other
international partners to coordinate these efforts. This past year Treasury was
pleased to welcome Under Secretary Stuart Levey who oversees our new Office of
Terrorism and Financial Intelligence, which is focused on safeguarding the financial
system against illicit use and combating rogue nations, terrorist facilitators, money
launderers. drug kingpins, and other national security threats.
Mr. Chairman, I think you can see we have accomplished much in international
economic policy during the first term of the Bush Administration from reform of the
international financial institutions, to a major increase in development assistance, to
new forms of cooperation with our allies. We are pleased that the world economy is
hUp://www.tIeas.guv/press/rciciises/js2396.htm
4/28/2005
JS-239LJ. Juhl"! \V. ~,now--::BR>-Sccn:tary of the Treasury<BR>Testimony Before the HOlls...
Page 8 of 8
performing so well, and that global economic growth and stability have both
increased so much. But as I have indicated, we have an ambitious agenda for the
second term. I look forward to working with your committee and would be happy to
answer any questions.
http://wv;w.trcas.gov/pre~l5/releCl-ses/js2396.htm
4/28/2005
)S-2397: The Challenges Before Us: Defined Benefit Pension Plans and <br>Social Security<br>Addres... Page 1 of 1
,
".:.",
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free AdolJe® Acrobal@ Reader®.
April 6, 2005
JS-2397
The Challenges Before Us: Defined Benefit Pension Plans and
Social Security
Address by The Honorable Mark J Warshawsky
To the 2005 Meeting of Enrolled Actuaries
April 6, 2005
Good morning and thank you for the kind introduction. I am pleased to have this
opportunity to address the 2005 Enrolled Actuaries meeting to discuss the
Administration's pension reform proposal for single employer defined benefit plans.
Although the Administration is also considering the problems in the multiemployer
system, all my remarks today pertain only to single employer plans.
What, you might ask, would an economist contribute in an address to a meeting of
actuaries? In part I appear as the spokesman for an important Administrative
initiative. But I also have a long-standing interest and background in pensions and
pension policy. Prior to joining the current Administration, I oversaw pension
research for TIAA-CREF and was a Senior Economist on the staff of the Assistant
Commissioner for Employee Plans and Exempt Organizations at the Internal
Revenue Service responsible for a study of underfunded pension plans. I have also
written a number of academic articles and books on pensions and annuities.
Although my duties at the Treasury Department cover a wide range of topics, my
interest in pensions has made my work on the Administration's defined benefit
pension and Social Security reform proposals particularly satisfying.
REPORTS
• Assistant Secretary Mark Warshawsky's Speech to the 2005 Meeting of
Enrolled Actuaries
http://www.trt.as.gov/press/releases/js2397.htm
7/5/2005
Good morning and thank you for tre kind introduction. I am pleased to have this opportunity to
address the 2005 Enrolled Actuaries meeting to discuss the Administration's pension reform
proposal for single employer defined benefit plans. Although the Administration is also
considering the problems in the multiemployer system, all my remarks today pertain only to
single employer plans.
What, you might ask, would an economist contribute in an address to a meeting of actuaries? In
part I appear as the spokesman for an important Administrative initiative. But I also have a longstanding interest and background in pensions and pension policy. Prior to joining the current
Administration, I oversaw pension research for TIAA-CREF and was a Senior Economist on the
staff of the Assistant Commissioner for Employee Plans and Exempt Organizations at the
Internal Revenue Service responsible for a study of underfunded pension plans. I have also
written a number of academic articles and books on pensions and annuities. Although my duties
at the Treasury Department cover a wide range of topics, my interest in pensions has made my
work on the Administration's defined benefit pension and Social Security reform proposals
particularly satisfying.
Before I outline the basic structure of the Administration's pension proposal and discuss some
modeling results of the impact that the proposal will have on the pension system, I'd like to say a
few words about Social Security. As you are all aware, the Social Security system clearly is not
financially viable and must be fixed. How to close the permanent financing gap raises difficult
questions over how the net benefits of Social Security should be shared across generations. In
this context, it is important to recognize that the large unfunded obligations in the system are
primarily the consequence of the past system generosity to generations that are now either dead
or retired. Of course, those early generations are beyond reform's reach, so the entitlement
reforms needed to close the financing gap must fall entirely on later generations.
Viewing Social Security from the perspective of how it affects generations and individuals
explains why it is imperative that Social Security be reformed now. Delaying reform only
reduces the options for fairly distributing the benefits of Social Security across generations.
Most people agree that it would not be fair to alter Social Security's promises to retirees and near
retirees. The longer reform is delayed, the fewer generations that are left to participate in a
reformed entitlement system so as to close Social Security's funding gap, and the more severe
those reforms will be. Fairness to future generations requires that we act now.
Estimates made by the Social Security actuary nicely illustrate this point. According to those
estimates, one policy that would close Social Security's permanent financing gap is to
immediately raise the payroll tax rate by 3.5 percentage points. But if the tax increase were
instead delayed until 2041 when the trust fund is depleted, numbers reported in the Trustee
Report imply that the requisite tax increase would be 6.3 percentage points. Clearly, I do not
advocate either of these policies. My point, once again, is that fairness to future generations
requires that action be taken now.
In order to make Social Security fair to future generations, not only must reform occur now, it is
essential that reform make Social Security permanently solvent. Permanent solvency means that
our best estimates show the system needing no further reforms in the future. Anything short of
penn anent solvency amounts to a delay of refonn that would be unfair to future generations.
Testing for permanent solvency requires that we look be}Ond 75 years. For example, the
estimated 75-year Social Security financial imbalance suggests that raising the payroll tax rate by
1.92 percentage points, to 14.32 percent, would fix the system. But as many of you are aware,
that is not true. If the payroll tax rate was raised in that manner, a large Trust Fund balance
would be accumulated in the short-term that would peak in about 2060, and would then
commence a steady decline to complete exhaustion at the end of the 75-year projection period.
This type of reform would therefore not make the system permanently solvent. With each
passing year, the Trustees would report an ever larger financial imbalance as the 75- year scoring
window is moved forward to include years with ever larger gaps between expected system costs
and income.
A reformed Social Security system that is truly permanently solvent must include personal
retirement accounts (PRAs). PRAs allow individuals to save now to help fund their retirement
incomes. In principle, that could be done with refonns that save tax revenues in the Social
Security Trust Fund. But such "saving" would almost certainly be undone by political pressures
to increase government spending and hence produce larger deficits outside of Social Security
that would ultimately lead to crisis in the non-Social Security budget. There is no guarantee that
the solution to any such fiscal crisis would not include a lowering of Social Security benefits.
Hence, the only way to truly save for our retirement and give our children and grandchildren a
fair deal is with personal accounts. Personal accounts serve as private and therefore effective
"lock boxes". When pre- funding is done using a personal account, there is no pressure to
increase government spending, because this pre- funding belongs to individuals and does not
appear on the government balance sheet as budget surpluses.
Now on to my main topic, Defined Benefit Pension refonn.
At the outset I want to address an issue that I know is of great importance to this group. I want
to ensure to you that the Administration is committed to the future of the defined benefit system.
I believe DB plans are valuable to many employees and employers. One of the motivations
behind our proposal is to create a set of rules that will allow for a sustainable defined benefit
system. I believe the Administration's proposal would revitalize the system by placing both the
PBGC and individual pension plans on a sound financial footing.
I think that nearly all us who are interested in defined benefit plans recognize that the system is
undergoing severe financial stress. Evidence of that stress is abundant. Underfunded plans have
a collective $450 billion in unfunded liabilities with $100 billion of that total concentrated in
plans with financ ially weak sponsors. Many of these sponsors, after ef!ioying a period of low or
no contributions during the boom years of the 1990s, now face very substantial near term
contribution burdens.
Claims on the pension insurance system have accelerated dramatically in recent years. After
averaging $451 million annually between 1990 and 2001, average claims for the years 2002,
2003 and 2004 were $9.8 billion. Such unprecedented losses to the insurance fund resulted in a
2
change in the single employer system's net position from a $7.7 billion surplus at the end of
2001 to a $23.3 billion deficit at the end of 2004. Such a deficit, if allowed to persist, threatern
the pension benefit payments of more than 1 million participants of failed defined benefit plans
taken over by PBGC.
Recent financial market performance exposed the fact that existing pension funding and
insurance rules fail to provide adequate incentives for plans to maintain responsible funding
levels. Pension rules need to be fundamentally reformed to provide such incentives. Rules
should be sufficiently robust to encourage adequate plan funding of accrued liabilities under the
widest possible range of financial market conditions, while also providing the tools plan sponsors
need to assure themselves a smooth and predictable contribution pattern.
When pension plans default on their obligations participants typically suffer by losing benefits.
For many retirees and near retirees these losses often come at a time when they are unable to
make up the shortfall through other means. In all cases, this Administration is committed to
ensuring that pension promises made are pension promises kept. That is why our reform
proposal stress adequate and timely funding of accurately measured pension liabilities, real
consequences of severe underfunding, improved disclosure, and ensuring the financial solvency
of the PBGC.
Today I'll discuss some of the important features of the Administration proposal to reform the
existing funding rules and insurance system in order to create proper funding incentives. I'll also
provide a "sneak preview", if you will, of some PBGC simulation results that will provide a first
look at how the proposed rule work in some stylized economic environments. As I'll note again
later, these results are not predictions of what funding levels and claims are likely; they are
simply simulations of how the proposal operates in some hypothetical economies.
Measurement
But before we discuss results, I'll describe the proposal in a bit of detail. Our plan ensures that
both assets and liabilities are measured on a timely basis and that measurements reflect market
values. That means marking assets to market and reducing smoothing in liability measurement
to a minimum Liabilities will be computed by discounting future benefit payments using an AA
corporate bond yield curve. The yield curve matcres future benefit payments to interest rates of
bonds that mature when those payments become due. This is the most accurate method of
measuring liabilities because it explicitly recognizes the time structure of benefit payments.
We also eliminate the confusing array of largely unrelated, special purpose, liability measures
that have been added in ERISA over the years. Under the reform proposal there are two
logically related liability measures that will be used for all funding and premium purposes. The
first, called ongoing liability would measure benefits accrued under the plan and is appropriate
for an ongoing plan with a financially health plan sponsor. Ongoing liability is computed using
the yield curve, a specified mortality table, and reasonable assumptions about retirement rates
and the take up rates on retirement subsidies. Ongoing liability - unlike current liability - will
reflect expected lump sum take up rates.
3
The second measure, at-risk liability is designed to measure accrued benefits in a mmner
appropriate for a plan that is "at-risk" of termination because the plan sponsor is less financially
healthy. At-risk is basically the same as ongoing with four critical assumption changes,
reflecting behavioral changes that are observed when a plan approaches termination. At risk
liability would assume that participants retire as early as possible and take advantage of any early
retirement subsidy that might be available to them. At risk liability will also reflect costs
associated with closing out a plan. These costs include a load of 4 percent of liabilities plus a
$700 per participant charge.
Funding Targets
These liability measures are used as funding targets. These funding targets are meaningful and
reflect the risk of plan termination Financially healthy sponsors will fund to ongoing liability
and less-healthy sponsors will be required to fund to at-risk liability.
A sponsor is considered financially weak if the plan sponsor 0 R any significant member of the
sponsor's controlled group has NO senior unsecured debt that is classified as investment grade
by at least one of the nationally recognized rating agencies.
Because at-risk funding targets are likely to be higher than ongoing targets, we provide a five
year phase- in period to the higher target for any plan that has a financially weak sponsor
subsequent to enactment. The funding target during the phase in period will be a weighted
average of the ongoing and at risk targets. The phase in period includes a look back provision
for plans with sponsors that are classified as financially weak on the date of enactment. The
phase in period will be reduced for each year a sponsor was classified as weak prior to the
effective date of the new funding rules.
Funding
Under the proposal, sponsors that fall below minimum funding levels would be required to fund
up towards their appropriate target in a timely manner. In general, if the market value of plan
assets is less than the funding target for the year, the minimum required contribution for the year
would be equal to the sum of the applicable normal cost for the year and the amortization
payments for the shortfall plus any ongoing amortizations of prior year shortfalls. Amortization
payments would be required in amounts that amortize the funding shortfall over a 7-year period.
The initial amortization base is established as of the valuation date for the first plan year and is
equal to the excess, if any, of the funding target over the market value of assets as of the
valuation date. The shortfall is amortized in 7 annual level payments.
Here it is important to note that this is the same amortization regardless of the source of the
funding deficiency. It is also worthwhile noting that this element of the plan is likely to provide
immediate funding relief for many plan sponsors currently facing the prospect of Deficit
Reduction Contributions with amortization periods as short as four years.
4
For each subsequent plan year, if the sum of the market value of assets and the present value of
future amortization payments is less than the funding target, that shortfall is amortized over the
following 7 years. If the sum of the matket value of assets and the present value of future
amortization payments exceeds the funding target, no new amortization base would be
established for that year and the total amortization payments for the next year would be the same
as in the prior year. When, on a valuation date, the market value of the plan's assets equals or
exceeds the funding target, then the amortization charges would cease and all existing
amortization bases would be eliminated.
Credit Balances
I'd like to say a few words about credit balances. Many of the critiques of the Administration
proposal note that we will eliminate the use of credit balances as currently allowed. I am proud
to tell you that is correct. Credit balances that allow underfunded plan are undesirable and
dangerous because they create funding holidays as plans become increasing by underfunded and
prolong the amount of time that such plans can remain below their funding targets, leaving
participants at greater risk. One need only consider the case of Bethlehem Steel to see how
significant an issue this is.
That said, it is important to understand that contributions above the minimum are accounted for
in the Administration proposal. Plans that have made higher than minimum contributions in past
years do not lose the value of such contributions. These contributions increase the value of plans
assets relative to liabilities and, other things equal, reduce plan underfunding and decrease future
amortization payments. In combination with the rest of the proposal, there is more than adequate
incentive for plan sponsors to fund above the minimum.
Benefit Limitations
The reform proposal will include benefit limitations for seriously and severely underfunded
plans. Benefit restrictions serve three critical purposes. First, they will limit liability growth as a
plan becomes progressively underfunded relative to its funding target. It is important to arrest
the growth of liabilities when plans are becoming dangerously underfunded in order to ensure
that plan participants will collect benefit that they accrue. Under current law, sponsors of
underfunded plans can continue to provide for additional accruals and, in many situations, even
make benefit improvements. Plan sponsors in financial trouble have an incentive to provide
generous pension benefits, rather than increase current wages, and employees may go along
because of the PBGC guaranty. This increases the likely losses faced by participants and large
claims to the PBGC. Hence, the second purpose of benefit restrictions is to guard against this
type of moral hazard. Third, but certainly not least importantly, I believe benefit restrictions will
serve as a very powerful incentive for plan sponsors to maintain well funded plans. As I describe
the limitations, I am sure you will recognize that most of the plan sponsors you work for would
be loathe to explain to their employees that, due to the severe underfunding of their pension plan,
these limitations had been put in place.
Plans with financially weak sponsors that are funded at a level of between 60 and 80 percent of
their targets will be prohibited from paying lump sums or increas ing benefits. If funding falls
5
below 60 percent of target liabilities accruals will also stop and there will be no preferential
funding of executive compensations. Plans with healthy sponsors will be prohibited from
increasing benefits or making lump sum payments if they are funded at less than 60 percent of
their target. Underfunded plans with sponsors in bankruptcy will also be subject to benefit
limits.
Increased Deductibility
As I noted above, our proposal asks more of plan sponsors than current law - we insist that plans
reach and maintain a responsible level of plan funding. Along with these new responsibilities we
provide enhanced tools to maintain adequately funded plans while maintaining a smooth pattern
of contributions if they desire. One important tool is that the level of pennissible deductible
contributions will be raised. Under the Administration's proposal, plans will be able to build two
separate funding cushions. The first is equal to 30 percent of ongoing liability and the second
allows for prefunding of expected salary increases for final pay plans, and expected future plan
amendments, based on the amendment experience ofthe last six years, for flat dollar plans. In
addition, plans will always be able to deduct contributions that bring a plan's funding level up to
at risk liability.
Higher limits for deductible contributions, along with existing authority to allocate plan assets
and hedge investment and interest rate risk, will provide sponsors with the tools they need to
smooth contributions over time. We believe that providing sponsors these tools will not only
allow for more effective contribution smoothing than is accomplished using the mechanisms
embodied in current law, but it will also allow sponsors to optimally balance contribution
smoothing with other investment objectives.
We also think that under the new more flexible funding structure the actuary's role as plan
advisor will be enhanced. Funding decisions under this system will require the use of sound
judgment rather than being an exercise in following rules.
Premiums
The PBGC insurance premium structure also is in need of refonn. Our proposal increases
incentives for plan funding and provides the pension insurance system with adequate revenues to
eventually restore it to solvency. The flat rate premium will be immediately increased from $19
to $30 per participant to reflect wage growth since 1991 when the $19 rate was set. In the future,
the flat premium rate will be updated annually using the same index that is used to update
PBGC's maximum guarantee limits. This provision will allow the price and level of insurance
coverage to grow at the same rate in the future.
The proposal will also introduce risk based premiums. Risk-based premiums will be charges
levied on unfunded target liabilities for all plans. Two key differences distinguish risk based
premiums under the proposal from the variable rate premiums of current law. First, the liability
on which underfunding is measured for premium purposes is the same liability measure used as a
plan's funding target. Second, all plans with unfunded liabilities will pay risk-based premiums at
6
the same rate. This feature of risk-based premiums should provide a much stronger incentive to
maintain adequately funded plans.
Disclosure
The final element of the proposal is increasing pension funding disclosures to plan participants,
investors and regulators. I don't have time here to discuss all of the changes in detail, but the
intent is to provide participants in all plans with more current and accurate information on
funding levels.
Results
Our colleagues at the PBGC have taken the basic structure of the proposed funding rules and
simulated the ir effects on the single employer system under a range of assumptions about future
economic and financial market activity. I'd like to share some of these results with you.
It is important to note that the results we will talk about today reflect only the funding rules.
These results do not reflect the effects of some critical components of the proposal including the
direct and incentive effects of benefit restrictions and the incentive effects of the proposed
system of PBGC premiums. More broadly, the focus on minimum required contributions, while
useful, fails to capture an essential feature of the proposal; we provide plan sponsors with both
the tools and incentives to smooth contributions by funding above the minimum during good
times. Projected minimum contributions do not reflect this behavior. I will discuss a stylized
example of how a plan sponsor might use the additional flexibility provided in our proposal to
maintain smooth contributions.
The simulations assume that the reform proposal is implemented fully in 2006. All slides that
depict estimated future cla ims and contributions express those amounts not in dollar terms but as
index numbers. We have taken this approach because we want to highlight the fact that these are
not predictions but rather simulations designed to show the different outcomes generated by the
proposal and current law. The base of the index is the estimated level of contributions or claims
in 2005, as appropriate, under current law, assuming that liabilities are discounted using 105
percent of the 30 year Treasury bond rate.
While I'll just be running through a few key slides here, a more complete analysis is available at
http://www .pbgc. gov!publications!white_papers!wp_ 040605. pdf
I'll begin by showing how the mechanics of the proposal work compared to current law. This is
best demonstrated by holding all financial and economic variables fixed and simulating funding
ratios, contributions, and claims under each set of funding rules. In this set of simulations,
equities are assumed to have a nominal 9 percent annual return, the 30-year Treasury bond rate is
5 percent, inflation is 2.5 percent and wage and benefit growth rates are 4.2 percent.
First we'll look at funding ratios relative to termination liability. One of the problems with
current law is that sponsors are permitted to stop funding plans while there are significant
unfunded accrued liabilities.
7
This is demonstrated in the graph [Figure 1] on the screen. Under current law, aggregate plan
funding ratios reach a maximum of 82 percent of termination liability and remain there. This is
only a modest improvement over the 77 percent funding ratio of 2003 even though in this
scenario interest rates are constant and equity returns are constant at their long-run average
value. Note that in this scenario the assumptions that interest rates are constant and equity prices
are increasing steadily over time mean that plan funding levels reflect the operation of the
funding rules rather than changes in asset or liability values. Such an outcome suggests that
current law is ineffective in moving plan sponsors to adequate levels of funding. (Under current
law using the corporate bond rate, funding reaches a peak of only 80 percent.)
By contrast under the Administration's funding proposal, aggregate funding improves steadily
during the 2006 to 2012 period as plans fund to their new targets. Funding is significantly higher
under the proposal than under current law by 2015 reaching a peak of 95 percent. All other
things equal the proposal would appear to succeed in improving plan funding. Higher plan
funding levels significantly increase the security of benefits for plan participants.
FIGURE 1
Current rules do not lead to better-funded plans.
The funding proposal improves funded ratios over time.
130%
120%
Funded Ratio (termination basis at year-end)
Baseline economy
All Plans
110%
100%
90%
80%
70%
~
.
~
60%
50%
2005
2006
2!JU7
I-+- Funding Prq:x:lsaI
2008
-1iii-
2IlO9
2010
2011
2012
2013
2014
2015
Current Law wi Corp Bond Forever--*- Current
8
LaVIJ
As you might expect, a set of funding rules that produces higher funding ratios in a steady state
economy will require higher contributions. As my next slide [FIGURE 2] shows, during the
first seven years of the proposal, 2006 to 2011, minimum contributions are higher under the
proposal than under current law as plans fund to their new higher targets over a seven year
amortization period. Thereafter contributions under current law and the funding proposal
converge and by the end of the forecast period in 2015 are the same.
FIGURE 2
Under the proposal, required contributions
continue until accrued benefits are funded.
C/l
350~~--~--~~----------------------------------.
Projected contributions
Baseline economy
t::
o
All Plans
~ 300+---------------------------------------------~
.D
.~
C
8250+---------------------------------------------~
LO
o
~200+-------------------~~~~~~~------------__1
C/l
C
ea. 150t---~~~~~~~--------~----~~~~~~~
Q)
Q)
~ 100+-~~--------------~------------------------~
o
~
50
'0
C
O~--------------------------------------------~
2005
2006
2007
1...- Funding Proposal
2008
-1ij-
2009
2010
2011
2012
2013
Current Law wI Corp Bond Forever
9
2014
2015
-a- Current Law
I
The critical measure of the effectiveness of a plan funding proposal is its effect on claims.
Claims projections under the funding proposal are significantly lower than under current law,
because the proposal's new funding rules require plans to be significantly better funded The
next slide [FIGURE 3] shows - under the proposal and under current law - the mean claims
against the pension insurance program from the 500 randomly chosen economic scenarios.
Claims represent the amount of underfunding in terminated plans that would be guaranteed by
the PBGC. (Of course, as explained above, participants also often suffer major losses in their
pension benefits upon termination due to statutory limits on PBGC's guaranty.)
It is important to focus on the relative differences between the scenarios and not the values
shown under each scenario. As noted above, the amounts shown represent the mean result of
500 economic scenarios. It is not intended to forecast what claims will actually be. One large
distress termination could change the numbers significantly. However, the relationship among
the lines would not change.
FIGURE 3
Better funded plans reduce losses to
participants and burden on premium payers.
120~------------------------------------------------,
(/)
E
C\l
o
Claims against the Pension Insurance Program
All Plans
Mean of 500 scenarios under stochastic model
100+-~--------------------------------------------~
(ij
£
~
o
80+----4~----------------------------------------__i
.!!l
~
60+---------~~~----------------------~------~~
N
(/)
~
~ 401-----------------~~~~==~~~~~~-=~~--~
o
o
.
~
20
'C
C
O~----------------------------------------~~
2007
2008
2009
2010
2011
2012
2013
2014
2015
2005
2006
I~ Funding Proposal
--- Current Law wI Corp Bond Forever ...- Current Law
10
I
The next slide [FIGURE 4] provides a different and fuller picture of how the funding proposal
performs against current law in reducing claims. The graph shows instances of lower claims
under current law (the pink squares) and under the funding proposal (blue diamonds) plotted on
average 30-year bond yields and the average equity return in the stochastic simulations. The
funding proposal resulted in lower claims in 95 percent of the simulations. The few scenarios in
which the proposal results in higher claims were almost all scenarios characterized by rising
interest rates, as the current low interest rate 4-year smoothing artificially increases
contributions.
FIGURE 4
The proposal results in lower losses in
950/0 of the scenarios modeled.
-0
•
Q)
>=....
C1l
All Plans
•
10%
o
-
Median Equity Return 9.4%
8%
Q)
>I
C"')
Q)
C)
6%
•
....
Q)
C1l
>
«
•
0
0
4%
•
• •
0
• •
:
•
••••••
•
•
2%
-15%
-5%
15%
5%
25%
Average Equity Return (nominal)
• Funding Proposal
o Current Law wi Corp Bond Forever
11
35%
Finally, I want to address the issue of contribution volatility. To see how the proposal would
have operated in the recent past, we will also look at the proposal's performance during in the
econo mic environment of the most recent 10 year period 1995 to 2004 - a good choice for
discussing volatility! Current funding numbers were used as a starting point to estimate funding
ratios, contributions and claims.
This slide [FIGURE 5] shows that Contributions are volatile under both current law and the
funding proposal reflecting significant changes in interest rates and equity market values over the
period; volatility, however, is actually lower under the funding proposal than under current law.
That said, no one would want to experience this type of contribution volatility on a regular basis.
FIGURE 5
In a "perfect storm" economy, current law
smoothing leads to weaker funding.
(/)
c:
o
3
.0
350~----------~-------------------------------------,
Projected contributions
All Plans
1995-2004 economy
300+--------------------------------------r---7~----_i
·c
c
8 250+------------------------------------r--~~------_i
I.D
o
~ 200+---------------------------------~--~L---------_i
(/)
c:
Q)
(/)
~
150+----,~--~~~----------------~--~~----------_i
a.
~
o
100+-~~_v~~~~--~----------~--~~------------~
~
50+-------------~r---~~--~~--~----------------_i
o
..,
"0
c:
o~--------------~~==~~------------------~
2005
2006
-+- Funding
2007
Proposal
2008
2009
2010
2011
2012
2013
...,.... Current Law wI Corp Bond Forever
12
2014
2015
....... Current Law
One feature of the proposal that will enable sponsors to control the type of funding volatility that
occurs in the environments like that of the 1995 to 2004 period is the ability to make higher tax
deductible contributions. In the next slide, [FIGURE 6] is a stylized example of how this new
ability might be used by a sponsor to smooth contributions over this period. A smoothing
contributor is assumed to contribute 25% above the required amount in 2006. In each
subsequent year, contributions are assumed to be the greater of98% of the prior year's
contribution or the minimum required amount. The graph depicts the smoothed contribution
path and compares it to tre path under the proposal in which the sponsor makes only the
minimum required contribution each year. This is a clear demonstration that using the features
of the proposal, plan sponsors, guided by the wise counsel of the consulting actuary, can manage
the volatility of their required contributions.
FIGURE 6
The proposal permits a less volatile
pattern of contributions.
~
350~------------------------------------------------.
§
Projected contributions
All Plans
~ 300+-------------------------------------+---------~
·c
1995-2004 economy
1:
8250+-----------------------------------+__
III
o
o
N
200+--------------------------------~~------------~
~
1:
<I>
~
~
150+----~~----~~----------------r---------------~
0.
~
o
100+-~~------------~~--------~~----------------~
o
I
~
50
-0
c:::
O~----------------------------------------------~
2005
2006
~ Minimum
2007
2008
2009
2010
Required Contributions
2011
2012
2013
2014
2015
Less Volatile Contributions
Conclusion
The results of these simulations suggest that the Administration's single employer defined
benefit funding proposal will accomplish its primary goals of increasing the retirement security
of defined benefit participants and decreasing losses to the pension insurance fund. Stochastic
modeling indicates that benefit losses and claims are likely to be lower under the proposal than
current law under a wide range of economic environments. Weare proud of this proposal and
feel that its enactment will improve and help maintain the defined berefit system
13
js-239R: Statement following meeting or Secretary Snow and<13R> EU Commissioner M...
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..., '
Page 1 of J
'"
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 20, 2005
js-2398
Statement following meeting of Secretary Snow and
EU Commissioner McCreevy in New York
U.S. Treasury Secretary John Snow and EU Commissioner for Internal Market,
Charles McCreevy, met today to discuss issues facing the U.S. and EU in the areas
of capital markets and financial regulation. Secretary Snow commended the EU for
its vision of creating an integrated European capital market, which will contribute to
a stronger global economy, and urged that Europe undertake strong efforts to
implement the measures It has already adopted to create a liberal and open single
financial market. He pledged that the Administration will continue its close
cooperation with Europe through the US-EU Financial Market and Regulatory
Dialogue in addressing issues of mutual concern with the aim of building a strong
Transatlantic financial market anchored in the global system.
Commissioner McCreevy thanked Secretary Snow for Treasury's leadership of the
dialogue and expressed satisfaction with the spirit of cooperation that has been
forged. He committed to continue to discuss financial issues with the United States
in the informal and cooperative manner that is the basis of the dialogue and has
achieved important successes to date.
5
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JS-239'1: The Honorable John W. Snow<br>Prepared Remarks to<br> The Bond Market ... Page 1 of 3
,
".:.",
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 20, 2005
JS-2399
The Honorable John W. Snow
Prepared Remarks to
The Bond Market Association
New York, NY
Good afternoon. It's great to be here in New York, and I appreciate the opportunity
to speak with you today. We share important concerns, including the one at the top
of the President's agenda: the long-range fiscal health of the nation's Social
Security system, and the implications of both reform and of inaction.
My trip to New York is an important stop on the Administration's "60 Stops in 60
D,ays" tour on Social Security. This is week seven of that tour, and Administration
officials like me - not to mention the President and Vice President - have made
over 130 stops in 39 states so far. We're dedicated to achieving the President's
vision for a national dialogue on Social Security, and I think we've been very
successful. There really is a terrific, vibrant national dialogue going on. From Wall
Street to Main Street, from lunch counters to family dinner tables to college dining
halls ... this conversation is taking place and that means we're making progress on
saving and strengthening the system for all generations.
I know that reforming Social Security is an important topic for the members of this
association and for the broader financial industry here in New York. You are
obviously aware of the problems that the Social Security program faces. You
understand what an enormous impact Social Security can have on our economy
overall, and I know that you are interested in seeing the system successfully
reformed in a way that protects beneficiaries as well as our economy - for the near
term as well as for long term.
You are sharply aware of the fact that if those of us in the government don't pursue
and enact meaningful changes now, the Social Security system would eventually
need to be propped up with massive tax increases, which would send terrible
shockwaves through our economy.
The American economy is the most dynamic and resilient in the world, but we
cannot take that for granted, and this is something uniquely understood by financial
leaders like you, who watch and participate in our markets every day. I have a
message for you from our President: he understands that the government must
plan for the future and deal with looming financial threats when we see them ... and
that's exactly what he is doing.
The President doesn't believe in ignoring the reality. He doesn't think it would be
wise to turn a blind eye to the reports of the non-partisan Social Security actuaries,
which tell us that the program faces a long-term deficit of $11 trillion. The President
doesn't believe in costly procrastination - in this case to the tune of $700 billion
every year that we wait to act.
The President is too intellectually honest to ignore the irrefutable facts, the
undeniable fact that the Social Security system is on an unsustainable path. The
demographics, the arithmetic, cannot be denied: Cash flows peak in 2008 and turn
negative in 2017, and the trust fund itself will be exhausted in 2041. People are
living longer and having fewer children, so there are fewer workers to support
retirees. We had 16 workers paying into a system for every one beneficiary in 1950,
and today we only have about three workers for every beneficiary. That ratio will
drop to two-to-one by the time today's young workers retire.
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When those young workers retire, in 2041, the system will be exhausted, bankrupt.
Today's 30-year-old can expect a nearly 30 percent benefit cut from the current
system when he/she reaches retirement age. Without action, our children and
grandchildren will be faced with huge benefit cuts or massive tax increases.
The President doesn't want that future for America's younger workers. His
leadership on Social Security reform displays his great courage as well as his
dedication to doing what is right for the American people, for generations to come.
For the current generation of retirees, and near retirees - those who are 55 or older
today - there will, of course, be no change. Those Americans still have an interest,
a stake in the issue - but more because they care about the financial future of their
children and grandchildren and want them to have a Social Security benefit they
can count on when they retire.
I appreciate the support of this organization for the creation of personal retirement
accounts for younger generations of workers. The President believes that it is a
critical part of any Social Security reform that younger workers are given the
opportunity to build a nest egg and benefit from sound long-term investment in the
free market system. The power of compound interest is a mighty one; including
personal retirement accounts in Social Security reform will mean opening a door to
that force for people who would not have had the opportunity otherwise. This is an
exciting and empowering proposition, and best of all we know that it can be done
without disrupting the system of benefits for their parents and other generations of
retired beneficiaries.
Social Security has been patched up in the past. We've raised taxes to take us
through a few more generations of retirees. But the patches don't last because our
demographics are working increasingly against us. We need lasting, meaningful
reform. Part of lasting reform ought to be this option, for younger workers, to build a
nest egg and I'm excited to be talking with this group about how to make that
opportunity a reality in a fiscally responsible way that will not unsettle our financial
markets. The President believes that a gradual approach to the establishment of
personal retirement accounts - phasing in account participation and slowly phasing
up the amount of allowable contributions - is the way to achieve those goals.
While Social Security reform addresses critical long-term deficits, I also want to
share with you the action that the Administration is taking on the short-term budget
deficit. A combination of spending restraint and economic growth - which increases
Treasury receipts - is well underway and achieving results. We expect the 2005
deficit to be 3.5 percent of GOP; this is substantially lower than the 4.5 - 6 percent
experienced at times in the 1980s and 1990s. The deficit is still but still too large,
but with tight controls on discretionary spending and increased revenue stemming
from the expanding economy, we expect to cut the deficit in half to well under 2% of
GOP by 2009.
Ongoing budget deficit reduction must be accompanied by a recognition of, and
plan for, the long-term unfunded liability that is the reality of the Social Security
system's current structure. Insisting on the first while ignoring the second would be
hypocritical and irresponsible. Dealing with both, head-on, is the fiscally responsible
thing to do, and the President is fully dedicated to both.
It has been a pleasure to spend time with you, talking about an issue that is so
important to all Americans. I am looking forward to seeing a bi-partisan bill in
Congress that will bring us to the next stage of the Social Security reform
movement. Any effort to improve something that impacts so many Americans must
be bi-partisan, and I think we will see legislation that will save Social Security and
strengthen it so that it offers a better deal to younger generations.
I look forward to continuing this dialogue with you as we move forward on this
historic reform effort.
Thank you.
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'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 21, 2005
JS-2400
Testimony of Secretary John W. Snow
before the
House Appropriations Subcommittee on the
Departments of Transportation, Treasury, Housing and
Urban Development, the Judiciary, District of
Columbia, and Independent Agencies
Chairman Knollenberg, Mr. Olver, and Members of the Subcommittee, I appreciate
the opportunity to appear before you today to discuss the President's fiscal year
2006 budget for the Department of the Treasury.
The Department's budget reflects the President's top priorities for fiscal year 2006:
fighting the financial war on terror while ensuring America's economic strength, and
demonstrating the fiscal responsibility necessary to reduce the deficit. The fiscal
year 2006 request of $11.6 billion also supports Treasury's longer term core
strategic missions: promoting national prosperity through economic growth and job
creation; maintaining public trust and confidence in our economic and financial
systems; and ensuring the Treasury organization has the workforce, technology,
and business practices to meet the nation's needs effectively and efficiently. This
budget request focuses on the President's belief that the budget be fair while
holding the government accountable. It adheres to the principle that "taxpayer
dollars must be spent wisely, or not at all."
Mr. Chairman, we provided the Committee with a detailed breakdown and
justification for President's fiscal year 2006 budget request for Treasury. I would like
to take the opportunity today to point out some highlights of our request and then I'd
be happy to take any questions you may have.
STRENGTHEN NATIONAL SECURITY
Treasury's budget reinforces the President's commitment to combating terrorist
financing and safeguarding the U.S. financial system. Since September 11 th, we
have leveraged the relationships, resources, and expertise that we have acquired
over the past several years in combating money laundering to address terrorist
financing and protecting our financial systems. Our efforts in both attacking terrorist
financing and protecting the financial system are complementary and are effecting
the changes required to protect the integrity of our financial systems by identifying,
disrupting and dismantling sources, flows, and uses of tainted capital within those
systems. To support these efforts, the President requests $351.3 million for fiscal
year 2006.
The Office of Terrorism and Financial Intelligence (TFI) leads Treasury's efforts to
sever the lines of financial support to international terrorists and serves as a critical
component of the Administration's overall effort to keep America safe from terrorist
plots. The establishment of TFI unifies leadership for the functions of the Office of
Intelligence Analysis (OIA), the Office of Terrorist Financing and Financial Crimes
(TFFC), the Financial Crimes Enforcement Network (FinCEN), the Office of Foreign
Assets Control (OFAC), and the Treasury Executive Office for Asset Forfeiture
(TEOAF). The objectives of unifying this leadership are better coordination of
Treasury's array of economic tools against terrorist and national security threats. To
safeguard financial systems both at home and abroad, TFI draws upon a range of
capabilities that cut across various categories, including financial sanctions,
financial regulation and supervision, international initiatives, private sector outreach,
and law enforcement support. TFI consolidates the policy, enforcement, regulatory,
international, and analytical functions of the Treasury and adds to them critical
intelligence components. OIA provides focused and operable intelligence in
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support of the Department's mission and policies. TFl's enforcement responsibilities
are executed by the TFFC, OFAC, and FinCEN. Finally. TFI provides policy
guidance for the IRS-Criminal Investigation Division (IRS-CI) in their anti-money
laundering. terrorist financing, and financial crimes cases.
Since September 2001, the «United States» and its allies have designated 399
terrorist related entities and frozen over $147 million in terrorist assets. TFI has
designated and frozen the assets of prominent terrorist financiers and
organizations, including Adel Batterjee, a Saudi financier of al Qaida, and the
Islamic African Relief Agency, a corrupt global charity that supported Usama bin
Laden and HAMAS. Thanks to collaborative efforts by TFI and other agencies, the
U.S. has facilitated the finding and freezing of nearly $6 billion in Iraqi assets
outside of Iraq, the return of over $2.7 billion of those funds, and the recovery of
more than $1 billion in cash inside Iraq.
Treasury's fiscal year 2006 request includes increases for resources to enhance
Treasury's analytical capability so that senior officials have access to actionable
financial intelligence. The request also supports TFI creating a 21 st century
information technology infrastructure to assist in the global fight against terror.
The Financial Crimes Enforcement Network has a major role in supporting TFI's
enforcement responsibilities. The President's request includes $73.6 million for
FinCEN to support its mission to safeguard the financial system from abuses of
financial crime, including terrorist financing, money laundering and other illicit
activity. This increase will provide FinCEN with the funding needed to enhance its
outreach efforts to financial institutions newly covered by Bank Secrecy Act
regulations and strengthen examination and enforcement activities; strengthen
analytical support services; and expand FinCEN's support to other international
financial intelligence units to facilitate information exchange.
The IRS-CI also plays a key role in investigating financial crimes. The request
supports the unique skills and expertise of IRS-CI agents in investigating tax fraud
and financial crimes not only to support tax compliance, but also benefit the war on
terror and our efforts to root out financial crimes. These agents apply their training,
skills, and expertise to support the national effort to combat terrorism and
participate in the Joint Terrorism Task Force and other similar interagency efforts
focused on disrupting and dismantling terrorist financing.
In addition. the Office of Critical Infrastructure Protection and Compliance Policy
leads our efforts to safeguard the financial infrastructure. This Office works closely
with other federal agencies and the private sector to safeguard our infrastructure.
That is essential, given that the majority of the critical financial infrastructure of the
United States is owned and operated by the private sector.
Finally, an essential aspect of ensuring our national security is to secure fragile
states and foster sustainable development in the world's poorest nations. The
Office of International Affairs uses bilateral diplomacy and its role as steward of the
international financial institutions, including the World Bank and International
Monetary Fund--to create the economic growth that will reduce conflict and the
conditions that favor terrorism in the developing world.
ENSURE FINANCIAL SECURITY
Treasury's strategic goal to manage the U.S. Government's finances effectively is
the largest part of the President's fiscal year 2006 request for the Department. The
budget request of $11 billion -- the majority of which is for the Internal Revenue
Service -- underscores our commitment to provide quality service to taxpayers and
enforce America's tax laws in a balanced manner. The request includes a 7.8
percent increase in enforcement funding over fiscal year 2005. The increase will
provide additional resources to examine more tax returns, collect past due taxes
and investigate cases of tax evasion.
It is important that these enforcement investments be fully funded, therefore the
Administration is proposing to fund them as contingent appropriations. The
Administration proposes to employ a budget enforcement mechanism that allows
for an adjustment by the Budget Committees to the section 302(a) allocation to the
Appropriations Committees found in the concurrent resolution on the budget. In
addition, the Administration will also seek to establish statutory spending limits, as
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defined by section 251 of the Balanced Budget and Emergency Deficit Control Act
of 1985, and to adjust them for this purpose. To ensure full funding of the program
and inflationary cost increases, either of these adjustments would only be
permissible if the Congress funded the base level for IRS enforcement at $6.4
billion and restricted the use of the funds. The maximum allowable adjustment to
the 302(a) allocation and/or the statutory spending limit would be $446 million for
fiscal year 2006, bringing the total enforcement level in the IRS to $6.9 billion.
The proposed fiscal year 2006 budget makes a strong commitment to a sound
system of tax administration. The IRS collects $2 trillion annually; however, billions
continue to go uncollected every year. The increase in enforcement funding will be
used to bolster audit coverage of corporations and high-income individuals who try
to evade taxes as well as to expand collection and criminal investigation efforts.
These investments will pay for themselves several times over.
The President's request also provides $199 million to continue efforts to modernize
the tax system through investments in IRS' Business Systems Modernization
(BSM). The modernization program is providing real business benefits to taxpayers
and IRS employees by delivering several modernized systems. For example, the
Service implemented the Integrated Financial System that replaces its
administrative accounting system. BSM funding allowed IRS to fully deploy online
e-Services functionality for tax practitioners and other third parties, such as banks
and brokerage firms allowing improved and faster interactions for transactions such
as the application for e-filing, requests for Preparer Tax Information Number and
Secure Electronic Return Originator applications, among many other products. The
IRS also deployed Modernized e-File, which provides e-filing for the first time to
large corporations and tax-exempt organizations. Replacing the outdated legacy
system, the Customer Account Data Engine, which began processing the simplest
1040 EZ returns in July of last year, is a modern database that will eventually house
tax information for more than 200 million tax returns per year.
The IRS also administers a refundable tax credit for the cost of health insurance for
both qualified individual and family members. The request provides $20.2 million to
continue implementation and operation of the Health Insurance Tax Credit
Program. The annual cost of this program is reduced by over $15 million due to
IRS' active program oversight and cost-cutting initiatives.
The Alcohol and Tobacco Tax and Trade Bureau (TTB) is responsible for the
regulation of the alcohol and tobacco industries, and the collection of $14.7 billion
annually in alcohol, tobacco, firearms, and ammunition excise taxes at a cost of $1
for every $368 collected. Our fiscal year 2006 request includes $91.1 million for
TTB. The budget proposes to establish user fees to cover a portion of the costs of
TTB's regulatory functions under its Protect the Public line-of-business.
The budget also includes a $236.2 million request for the Financial Management
Service (FMS), which administers the government's payments and collections
systems. In FY 2004, FMS issued more than 940 million non-Defense payments,
705 million electronic payments and 235 million paper checks, FMS annually issues
more than 940 million non-Defense payments valued at $1.5 trillion. The Budget
provides funding for FMS' electronic initiatives, such as: Pay.gov, which is a
Government-wide web portal to collect non-tax revenue electronically; Paper Check
Conversion, which converts checks into electronic debits thereby moving funds
more quickly; and Stored Value Cards, which directly support military operations
overseas. The fiscal year 2006 request also includes legislative proposals to
improve and enhance opportunities to collect delinquent debt through FMS' debt
collection program.
The Bureau of the Public Debt (BPD) continues its management and improvement
of federal borrowing and debt accounting processes. The budget requests $179.9
million in direct appropriations for BPD which includes $3 million in user fees. The
funding will allow BPD to continue improving the efficiency of the securities services
to customers by expanding TreasuryDirect, an investment system that will enable
Treasury customers to manage their investment accounts online.
The functions of the United States Mint and the Bureau of Engraving and Printing
(BEP) are vital to the health of our nation's economy. These two agencies fulfill the
Treasury Department's responsibility of meeting global demand for the world's most
accepted coins and currency. The United States Mint also continues to
manufacture and market popular numismatic products, while BEP also continues to
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develop new designs of next generation currency to guard against counterfeiting.
PROMOTE ECONOMIC OPPORTUNITY
The Treasury Department works to ensure that U.S. and world economies perform
at full economic potential. To reach this potential, the economy must increase its
rate of growth and create new, high quality jobs for all Americans The legal and
regulatory framework must also support this growth by providing an environment
where businesses and individuals can grow and prosper without the burdens and
costs of unnecessary rules and regulations.
Our budget requests $1.6 billion to support these strategic goals. The request
includes funds for policy offices that guide domestic economic development, tax
programs, financial institutions and other fiscal matters. These policies are
essential as Treasury works to simplify the U.S. tax code and create a legal and
regulatory framework that allows the nation's businesses to thrive.
Treasury's international programs and three Treasury bureaus, the Community
Development Financial Institutions Fund, the Office of the Comptroller of Currency
and the Office of Thrift Supervision play diverse roles in fostering economic growth
and prosperity. From serving as the President's principal economic advisor to
maintaining the health of the national banking and thrift system, the Treasury has a
significant influence on creating the conditions for a robust economy. Through the
Office of International Affairs, the Treasury also pursues diplomacy to create the
conditions for global growth, which creates economic opportunity at home and
overseas, by a range of actions, including the reduction of undue barriers to trade
and investment and the establishment of stability in the international financial
system.
Treasury's international assistance programs request of $1.5 billion for fiscal year
2006 is part of the Foreign Operations, Export Financing, and Related Program
Appropriations Act. These programs include multilateral development banks
(MDBs), debt reduction, and technical assistance -- all critical instruments to
promote the Administration's international economic agenda. MDBs promote global
economic growth and poverty reduction, and help create stronger markets for U.S.
goods and services. Debt reduction helps poor countries move to a sustainable
level of debt and remove debt overhang that inhibits growth. Our technical
assistance programs help countries institute the sound budget and financial
systems needed for economic growth.
MANAGE FOR RESULTS
The President requests $211.8 million to protect the integrity and effectively
manage the resources of the Department of Treasury, and ensure that it remains a
world class organization. Included in this request is $16.7 million to fund the
Department's Office of Inspector General (OIG) and augment audit and
investigative capabilities.
This portion of the budget also includes $133.3 million for the Inspector General for
Tax Administration (TIGT A) and its efforts to oversee the nation's tax
administration. TIGT A continues to playa significant role in providing independent
oversight, which promotes efficiency and integrity in the IRS' ability to collect $2
trillion annually. TIGTA aggressively combats any identified attempts to disrupt
and/or interfere with tax administration. The nation's voluntary tax compliance
system is supported and protected by TIGTA agents who participate in the Joint
Terrorism Task Force and proactively seek to identify individuals or groups who
pose a threat to effective tax administration. Critical information is shared with the
IRS and allows the leaders of the IRS to make effective business decisions, which
promote efficient tax administration and support IRS employee safety.
The proposed budget request includes $7.9 million in new funding to provide for an
improved technology infrastructure, essential for keeping pace with the
Department's needs to enhance productivity, improve communication, interact
effectively with the world-wide financial community, and meet other management
needs. Funding will be used to improve the Department's information technology
infrastructure to ensure the effectiveness of the Department in managing federal
finances and combating financial crimes and terrorist financing. The request also
ensures that the Department will continue its major facilities projects and services
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for the Main Treasury and Treasury Annex buildings to ensure the safety and health
of occupants and perform structural repairs and improvements. Additional funds will
allow Treasury to complete the project during fiscal year 2006 and reoccupy the
restored office space.
THE PRESIDENT'S MANAGEMENT AGENDA
Treasury has focused its management initiatives around the goals of the
President's Management Agenda (PMA). Under guidance from the PMA, the
Treasury has grasped tangible results in managing the nation's finances, taking
advantage of new opportunities and opposing threats. The Department is
committed to defining desired results for each area and managing to achieve them,
at acceptable cost levels.
In fiscal year 2004, Treasury achieved significant milestones in implementing the
President's Management Agenda, improving three of our five status scores for the
PMA over the prior year.
Treasury managed for results as we implemented a new performance appraisal
system for our Senior Executive Service that links managers' performance
assessments to accomplishing the Department's top priorities. We are also
focusing on recruiting and retaining a world-class workforce, and have started
implementing a new Human Capital Strategic Plan. This plan is the Department's
road map for molding a workforce of engaged, highly competent, and businessaligned employees.
The Department is making good progress on using competition to improve
efficiency. This past year, we completed five public-private competitions, and as a
result, expect savings of $200 million over the next five years. Our efficiency
initiatives have received national recognition, winning the President's Quality Award
for Management Innovation at the IRS for our Area Distribution Center competition.
Treasury continues to be a leader in making financial information available in a
timely manner through a three-day close of its books at the end of each month, and
for the fifth consecutive year we received a clean audit opinion. The Department
continues to work at securing our information systems. Our systems are more
secure now than at any other time, with 86 percent certified and accredited as
secure at the end of 2004.
CONCLUSION
Mr. Chairman, I look forward to working with you, members of the Committee, and
your staff to maximize Treasury's resources in the best interest of the American
people and our country as we move into fiscal year 2006. We have hard work
ahead of us and I am hopeful that together we can work to make the Treasury a
model for management and service to the American people, and continue to
generate economic growth, increase the number of jobs for our citizens, and keep
our financial systems strong and secure.
Thank you again for the opportunity to present the Treasury Department's budget
today. I would be pleased to answer your questions.
http://w\vw.trcu~.gov/pre5s/reh3ases/js2400.htm
4128/2005
JS-2401: TrOlH;ury \Vielth;
,
".:.",
P/\Tl~I()T
Act Powers<BR> to Isolate Two Latvian Banks<B...
Page 10f2
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 21, 2005
JS-2401
Treasury Wields PATRIOT Act Powers
to Isolate Two Latvian Banks
Financial Institutions Identified as
"Primary Money Laundering Concerns
The U.S. Department of the Treasury today utilized USA PA TRIOT Act powers to
designate two Latvian financial institutions as "primary money laundering
concerns." Multibanka and VEF Bank were named pursuant to Section 311 of the
Act for money laundering activities and financial abuse by account holders and
owners.
"The Treasury has judiciously and strategically utilized the power of Section 311 to
isolate rogue actors that present money laundering concerns and risks to the U.S.
financial sector," said Treasury Secretary John W. Snow. "Our use of this authority
also alerts our global counterparts of specific concerns about real threats to the
integrity of the international financial system."
In conjunction with this designation, Treasury's Financial Crimes Enforcement
Network (FinCEN) issued proposed rules that when made final will prohibit U.S.
financial institutions from establishing, maintaining, administering or managing any
correspondent account in the United States for or on behalf of these two banks.
"These two Latvian banks represent a danger to the international community
because they facilitate the placement and movement of dirty money in the global
financial system," said Daniel Glaser, the Treasury's Deputy Assistant Secretary for
Terrorist Financing and Financial Crimes. "We will continue to work closely with the
Latvian government to crack down on crimes in their financial sector."
Multibanka
Headquartered in Riga, Multibanka is the oldest commercial bank in Latvia and is
among the smaller of Latvia's 23 banks. Multibanka has four foreign offices (Russia,
Ukraine and Belarus), five domestic branches and one leasing subsidiary called
Multilizings. The Notice of Proposed Rulemaking issued today identifies several
reasons for the designation of Multibanka as a primary money laundering concern:
•
•
•
Multibanka offers confidential banking services and numbered accounts for
non-Latvian customers. Reports sUbstantiate that a significant portion of its
business involves wiring money out of the country on behalf of its
accountholders.
Information available to the U.S. Government shows Multibanka has been
used by Russian and other shell companies to facilitate financial crime by
allowing criminals to disguise illegal proceeds in countries known for lax
enforcement of anti-money laundering laws.
According to information available to the U.S. Government, certain criminals
use accounts at Multibanka to facilitate financial fraud schemes.
Specifically, an individual involved in financial fraud reported carrying out
large sum transactions through his account at Multibanka. In addition, an
individual arrested in 2004 for his involvement in an access device fraud
ring used an account at Multibanka to launder proceeds of his criminal
activities.
VEF Bank
Headquartered in Riga, VEF is one of the smallest of Latvia's 23 banks. It has one
http://www.trcas.gov/pre5~/releases/js240I.htm
4/28/2005
JS-2.J.0 1: Trenlalry
Wi~llh;
PATRiOT Act Powers<BR> to Isolate Two Latvian Banks<B...
Page 2 of 2
subsidiary, Veiksmes lizings, which offers financial leasing and factoring services.
In addition to its headquarters in Riga, VEF has one branch in Riga, and one
representative office in the Czech Republic. The Notice of Proposed Rulemaking
issued today identifies several reasons for the designation of VEF Bank as a
primary money laundering concern:
•
VEF Bank lacks adequate controls and procedures to detect and combat
money laundering. These deficiencies, coupled with the bank's dealings
with foreign shell companies and provision of confidential banking services,
make VEF vulnerable to money laundering and other financial crimes.
• VEF Bank offers confidential banking services for non-Latvian customers.
Less than 20 percent of these deposits are from individuals or companies
located in Latvia, an indicator that a bank may be used to launder money.
Title III of the USA PATRIOT Act amends the anti-money laundering provisions of
the Bank Secrecy Act (BSA) to promote the prevention, detection and prosecution
of international money laundering and the financing of terrorism. Section 311
authorizes the Secretary of the Treasury - in consultation with the Departments of
Justice and State and appropriate Federal financial regulators - to designate a
foreign jurisdiction, institution, class of transactions or type of account to be of
"primary money laundering concern" and to require U.S. financial institutions to take
certain "special measures" against the designee.
These special measures range from enhanced record keeping or reporting
obligations to a requirement to terminate correspondent banking relationships with
the designated entity. The measures are meant to provide Treasury with a range of
options to most effectively target specific money laundering and terrorist financing.
The Treasury Department has previously identified the following financial
institutions as "primary money laundering concerns," pursuant to Section 311:
•
The First Merchant Bank of the "Turkish Republic of Northern
Cyprus" ("TRNC") and Infobank of Belarus in August 2004;
• The Commercial Bank of Syria and its subsidiary Syrian Lebanese
Commercial Bank in May 2004; and
• Myanmar Mayflower Bank and Asia Wealth Bank in November 2003.
The Bush Administration has also taken action, pursuant to Section 311, against
the foreign jurisdictions of Burma, Nauru and the Ukraine. The designation of the
Ukraine was lifted after Ukrainian authorities took subsequent and aggressive steps
to address the concerns and risks identified in the 311 action.
http://www.trcZls.gov/prc33/releases/js2401.htm
4/2812005
JS-2-W2: U.S. nnd Bulgnriu to
,
".:.",
PRESS
N~gotiatc
Income Tax Treaty
Page I of I
'".
ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 21, 2005
JS-2402
U.S. and Bulgaria to Negotiate Income Tax Treaty
WASHINGTON, DC -- The United States and Bulgaria announced today that they
plan to begin negotiation of a bilateral income tax treaty. The first round of
negotiations are expected to take place in the autumn of 2005. The treaty would be
the first tax treaty between the two countries.
The Treasury Department invites written comments from the public regarding the
upcoming negotiations. Comments should be sent to Patricia Brown, Acting
International Tax Counsel, Room 5064C Main Treasury Building, 1500
Pennsylvania Avenue, NW, Washington, DC 20220.
Comments also may be sent by fax to (202) 622-1772, or bye-mail to
Patricla.A.Brown@do.treas·9 0v .
###
http://WWW.trCllS.gov/pre33 i relea£esj52402.htm
4/28/2005
JS-2403.
~tutl::lmtmt
,
by Secretary of the Treasury John Snow
".:.",
PRESS
Page 1 of I
'".
ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 21, 2005
JS-2403
Statement by Secretary of the Treasury John Snow
I am pleased that the House has passed energy legislation that will provide the
reliable supplies of energy we need for a growing economy. A dependable energy
supply will reduce our reliance on foreign oil and spur economic growth. One of the
best things we can do for our economy is to get an energy bill enacted.
http://ww.llv.trcfi3.goV/f.fe33/r-eieases/js2403.ht111
4/28/2005
JS-2404:
T,\~a~mry
,
Omcialg to Join Bankers in Schools Across the Country for 9th <br>A... Page 1 of 4
".:.",
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 22, 2005
JS-2404
Treasury Officials to Join Bankers in Schools Across the Country for 9th
Annual Teach Children to Save Day
Treasury is teaming up with the American Bankers Association Education
Foundation next week for the ninth annual Teach Children to Save Day. More than
20 Treasury officials will join local bankers across the country on April 26 to visit
primary, elementary, middle and high schools to teach students the importance of
saving.
"Teach Children to Save Day is an opportunity for us to highlight what teachers,
parents, community leaders and so many other dedicated groups and individuals
are hard at work on all year long - providing today's children with the knowledge
they need to make sound financial decisions throughout their lifetimes," said
Treasury Secretary John W. Snow. "Knowing the facts has a way of opening doors,
and when it comes to a secure economic future, we want to make sure that the
doors of opportunity are wide open for America's youth."
Secretary Snow and Treasurer Anna Escobedo Cabral will join ABA Chairman
Elizabeth A. Duke to kick off the nationwide efforts with fifth-graders from Seaton
Elementary at Treasury's Bureau of Engraving and Printing (located at 14th and C
Streets, S.w. in Washington, DC) at 1:30 p.m. EDT on April 26. All attending press
must call (202) 874-2778 by 3 p.m. April 25, with name, media organization, and
phone number for security clearance. Media should use the 14th and C Streets
S.W. (tour) entrance. Media will be asked to show press credentials.
Across the country, a total of 23 Treasury officials will be joining bankers in
classrooms to teach lessons including games and activities that illustrate the value
of saving, budgeting and the power of interest. For more information on National
Teach Children to Save Day, please visit www.aba.com and click on "Consumer
Connection."
Media interested in covering the following events should contact Treasury's Public
Affairs Office at (202) 622-2960 or Laura Fisher with the ABA at (202) 663-5466.
The following events scheduled for Tuesday, April 26, are open to the press:
Bobbie Gray, Office of Financial Education
•
Glenn Dale Elementary School
6700 Glenn Dale Road
Glenn Dale, MD
8:30 a.m. EDT
Luke Bernstein, Office of Financial Education
•
Valley Elementary School
100 Rock Glen Rd
Sugarloaf, PA
9:20 a.m. AND 10:05 a.m. EDT
Bobby Pittman, Deputy Assistant Secretary for International Development
Finance and Debt
•
Fulton Elementary School
11600 Scaggsville Road
http://ww.vv.trcas.gov/prC33/reieases/js2404.htm
4/28/2005
JS-2404:
rrou~;ury
Officials to Join Bankers in Schools Across the Country for 9th <br>A... Page 2 of 4
Fulton, MD
9:30 a.m. EDT
Ed Christovich, Office of Financial Education
•
St. Peters Interparish School
422 Third Street, S.E.
Washington, DC
9:30 a.m. EDT
Jean Card, Senior Writer
•
Kipp DC KEY Academy (Knowledge Empowers You)
770 M Street, S.E.
Washington, DC
10:00 a.m. EDT
Madelyn Simmons Marchessault, United States Mint
Robert Robidoux, Philadelphia Mint Plant Manager
•
151 North Independence Mall East
Philadelphia, PA
10:00 a.m. EDT
Don Hammond, Acting Under Secretary for Domestic Finance
•
Key School
5001 Dana Place, N.W.
Washington, DC
10:00 a.m. EDT
Paul Curry, Executive Secretary
•
Just Elementary
1315 Spruce Street
Tampa, FL
10:30 a.m. EDT
•
Bauder Elementary
12755 86th Ave
Seminole, FL
2:00 p.m. EDT
Robert Carroll, Deputy Assistant Secretary for Tax Analysis
•
Maury Elementary
600 Russell Road
Alexandria, VA
10:30 a.m. EDT
Dan lannicola, Deputy Assistant Secretary for Financial Education
•
Indian Land High School
8361 Charlotte Highway
Fort Mill, SC
12:00 p.m. EDT
Sandra Pedroarias, Office of Financial Education
•
Buzz Aldrin Elementary
11375 Center Harbor Road
Reston, VA
1:00 p.m. EDT
Greg Zerzan, Acting Assistant Secretary for Financial Institutions
http://ww\v.trcu3.gov/pre5tl/r~leaf;.es/js2404.htm
4/2812005
JS-2404:
ll'Clll;ury Officitll~;
•
to Joiil Bankers in Schools Across the Country for 9th <br>A... Page 3 of 4
Mt. Elden Middle School
3223 North Fourth Street
Flagstaff, AZ
8:45 a.m. MDT
D.J. Vogt, Office of Legislative Affairs
•
Henderson Elementary
2820 Henderson Drive
Cheyenne, WY
9:00 a.m. MDT
Roger Kodat, Deputy Assistant Secretary for Government Financial Policy
• Cheyenne-Eagle Butte High School
Cheyenne River Sioux Tribal Reservation
Eagle Butte, SD
10:25 a.m. AND 12 p.m. MDT
• Tiospaye Tapa School
Cheyenne River Sioux Tribal Reservation
La Plante, SD
1:30 p.m. AND 2:30 p.m. MDT
Kimberly Reed, Senior Advisor to the Secretary
•
Rossiter Elementary School
1497 Sierra Road East
Helena, MT
10:30 a.m. AND 2 p.m. MDT
Troy Stang, Community Development Financial Institutions Fund
•
Sunrise Elementary
14603 East 24th Avenue
Spokane, WA
10:45 a.m. PDT
Jesse Villarreal, Office of Domestic Finance
•
Parrish Middle School
802 Capitol Street N.E.
Salem, OR
11:15 a.m. PDT
D. Scott Parsons, Deputy Assistant Secretary for Critical Infrastructure
Protection
•
Mabel Hoggard Elementary
950 N. Tonopah Drive
Las Vegas, Nevada
12:00 p.m. PDT
Mike Garcia, Office of Domestic Finance
• Cordoba Lane Elementary
2460 Cordoba Lane
Rancho Cordoba, CA
1 :00 p.m. PDT
http://ww\y.treas.gov/press/reie.ases/js2404.htm
4/28/2005
js-240S: Secretary Sno\.v to Join T1casurcr to Unveil Currency <br>Signed by Cabral
,
".:.",
Page 1 of 1
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 22, 2005
js-2405
Secretary Snow to Join Treasurer to Unveil Currency
Signed by Cabral
Treasury Secretary John W. Snow will join Treasurer Anna Escobedo Cabral next
week at the Bureau of Engraving and Printing (BEP) for the unveiling of the first
paper currency with the new Treasurer's signature. The Secretary and Treasurer
will witness the final stages of the printing process of the first notes with Treasurer
Cabral's signature at 1:30 p.m. on April 26 at the BEP's printing facilities located at
14th and C Streets S.W. in Washington, D.C.
"Having my signature on the U.S. currency is a tremendous honor; sharing that
honor with Anna Cabral is priceless. Like the bills that her signature will grace,
Anna is a representation of that which makes America great. She is an enormously
accomplished woman and one of the finest leaders we have in government today.
I'm thrilled to see her signature on the currency, and I know the President is
delighted to have her serving in his Administration. She is an invaluable asset to the
Treasury and to her country," said Secretary Snow.
Immediately following the unveiling of the new notes, the Secretary and Treasurer
will kick off Treasury's participation in a nationwide effort to teach children the
importance of saving. Partnering with the American Bankers Association Education
Foundation, more than 20 Treasury officials will join local bankers in classrooms
across the country for the ninth annual Teach Children to Save Day on April 26.
Secretary Snow and Treasurer Cabral will highlight these efforts by speaking to a
group of fifth-graders from Seaton Elementary in Washington, D.C at the BEP
about the importance of financial education. For more information on this event, go
to: http!/www.treasurygov/press/releases/js2404.hlm.
The currency unveiling will be pool coverage only.
All media are welcome to cover the financial education lesson at the BEP.
Press wishing to attend this portion of the event must call (202) 874·2778 by 3
p.m. EST, Monday, April 25 with name, media organization, and phone
number for security clearance.
The signatures of Secretary Snow and Treasurer Cabral were transferred by the
BEP's engravers to steel plates, which will be used to print all new U.S. paper
currency. Since the introduction of the smaller-size notes in 1929, the Signatures of
24 Treasury Secretaries and 16 Treasurers - including Secretary Snow and
Treasurer Cabral - have appeared on U.S. paper currency.
The new $1 Series 2003 A Snow-Cabral notes are expected to be sent to the
Federal Reserve by the end of April for distribution as needed.
Each business day, the BEP produces roughly 38 million notes with a face value of
approximately $696 million. An estimated $719 billion in U.S. paper currency IS
currently in circulation worldwide.
http://ww~v.trcu3.gov/press/r~leases!js2405.htm
4/28/2005
js-2406:
llLa~ury DC8ignlltc~i
,
".:.",
Vik(or Bnut's International Arn1s Trafficking Network
Page 1 of 2
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free AclolJe(l:! Aero/lilt')}
PRAdA/fRI.
April 26, 2005
js-2406
Treasury Designates Viktor Bout's International Arms Trafficking Network
The U.S. Department of the Treasury today identified 30 companies and four
individuals linked to Viktor Bout, an international arms dealer and war profiteer.
Today's action took place pursuant to Executive Order 13348, which targets family
members and associates of former Liberian President Charles Ghankay Taylor.
Bout himself was designated under the same authority in July 2004 because of his
association with Taylor.
"Our targeted sanctions are exposing and isolating the core elements of the Bout
financial empire and illicit arms pipeline," said Juan Zarate, the Treasury's Assistant
Secretary for Terrorist Financing and Financial Crimes. "The Treasury remains
committed to fulfilling our international obligations to sanction the former Charles
Taylor regime by taking aggressive action against Bout front companies and
agents."
The U.S. is submitting the 30 companies and four individuals to a Sanctions
Committee established by United Nations Security Council Resolution 1521, which
will consider adding them to the consolidated list of individuals and entities tied to
Taylor.
This designation is the result of close coordination with the Departments of Justice
and State, federal law enforcement agencies and UN officials.
"Today's announcement is an excellent example of how the Treasury's Office of
Terrorism and Financial Intelligence (TFI) works hand-in~hand with our counterparts
in the U.S. Government to maximize the effectiveness of our financial tools, in this
case, OFAC's designation authority, to isolate rogue actors," said Stuart Levey, the
Treasury's Under Secretary for TFI.
Bout runs a network of air cargo companies that are based in various countries in
the Middle East, Africa, Eastern Europe and the United States. Additionally, Bout
controls what is reputed to be the largest private fleet of Soviet-era cargo aircraft in
the world.
Shortly after the breakup of the Soviet Union, Bout, a former Soviet air force officer
with a gift for languages, was able to acquire surplus or obsolete airplanes which he
used to deliver arms and ammunition from old Soviet stockpiles. The high profits he
garnered supplying military equipment to rebel groups and sanctioned regimes
allowed him to expand his business. Notably, information available to the U.S.
Government shows that Bout profited $50 million from supplying the Taliban with
military equipment when they ruled Afghanistan.
Today, Bout has the capacity to transport tanks, helicopters and weapons by the
tons to virtually any point in the world. The arms he has sold or brokered has
helped fuel conflicts and support UN sanctioned regimes in Afghanistan, Angola,
the Democratic Republic of Congo, Liberia, Rwanda, Sierra Leone and Sudan.
The firms deSignated today include Bout's flagship entity, Air Cess. This company
first appeared in Belgium in 1996 although it was registered In MonrOVia, liberia
with Bout as its head. Other key major firms in the network Include Centrafncan
Airlines, San Air General Trading, Air Bas, CET Aviation, Irbis, Trans~via Travel,
and Santa Cruz Imperial. San Air and Centrafrican played a key role In supplYing
http://ww~v.trC215.gov/pre3s/releas.es/js2406.htm
4/28/2005
js-2406: 1 t'cmmry DCliignlltel; VII\-(or Bout's International Anns Trafficking Network
Page 2 of2
arms to Charles Taylor's regime in Liberia and the Sierra Leone rebel group, the
Revolutionary United Front (RUF). In exchange for these supplies, Bout received
payment from the Liberia's international ship registry as well as diamonds and other
valuable commodities acquired illegally by Taylor's associates and the RUF.
Individuals named today include Bout's older brother Sergei, two senior Bout
managers - Serguei Denissenko and Valeriy Naydo - and Bout's U.S.-based chief
financial officer, Richard Chichakli.
Today's action prohibits any transactions between U.S. persons and the designated
entities and also freezes any assets of the designated persons that are within U.S
jurisdiction.
The 34 new names bring the total number of individuals and entities designated
under E.O. 13348 thus far to 62. For a complete list of entities designated today,
please visit: http/lwww.trea s. gov/offices/ellforcementfofac/actions/20050426 .shtml.
-30-
REPORTS
•
Please find attached a diagrarn of the entities designated today.
http://ww..v.trca3.gov/press/rel~a£es/js2406.htm
4/28/2005
LIBERIA/CHARLES TAYLOR E.O.
u.s. Department of Treasury
Office of Foreign Assets Control
VIKTOR BOUT
BUSINESS EMPIRE
April 2005
VIKTOR BOUT
DOB: 13 JANUARY 1967
Currently resides in Russia
(designated 23 July 2004)
AIR CARGO COMPANIES
~
AIR CESS
Malabo, Equatorial Guinea
Sharjah, U.A.E.
Islamabad, Pakistan
Entebbe, Uganda
~
~
~
~
~
~
AIRBAS TRANSPORTATION
Sharjah, UAE
Richardson, Texas, USA
CENTRAFRICAN AIRLINES
Bangui, Central African Republic
Sharjah, UAE
Ajman, UAE
Ras al Khalmah, UAE
Kigali, Rwanda
SAN AIR GENERAL TRADING
Ajman,UAE
Richardson, Texas, USA
SANTA CRUZ IMPERIAL
Dubai, UAE
Sharjah, UAE
TRANSAVIA NETWORK
Sharjah, UAE
Ajman UAE
Ostende, Belgium
~
ABIDJAN FREIGHT
Abidjan, Ivory Coast
AIRZORY
Sofia, Bulgaria
Nicosia, Cyprus
~
~
...
~
....
MANAGERS/ ASSOCIATES
~
~
....
~
~
SERGEI ANA TOL YIEVICH BOUT
SERGUEI DENISSENKO
Sharlah, UAE
Alman, UAE
Sofia, Bulgaria
RICHARD A. CHICHAKLI Richardson, TX, USA
Moscow, Russia
DOB: 1961
Richardson, TX, USA
DOB: 27 August 1961
DOB: 29 March 1959
VALERIY NAYDO
Ajman,UAE
DOB: 10 August 1957
(~
ATC LTD.
Gibraltar
~
CET AVIATION ENTERPRISE
Alman, UAE
Equatorial Guinea
@l!
~
SOUTHBOUND LTD.
Gibraltar
~
CENTRAL AFRICA DEVELOPMENT CHICHAKLI &. ASSOCIATES PLLC
FUND
~
~,
-!!
DHH ENTERPRISE, INC.
~
CONTINUE PROFESSIONAL
EDUCATION INC.
~
IB OF AMERICA HOLDINGS, INC
?
~
~
ORIENT STAR CORPORATION
RICHARD A, CHICHAKU, P,C,
TRANS AVIATION GLOBAL
GROUP INC•
• a.LL SIIARI! THI-SAMI ADDRISS IN ,ueH .. RDSOIII, TIXA5, lUiiA IU(;I.1 '0'" DAYTONA POOLS
~
ODESSA AIR
Entebbe, Uganda
HOLDING/SHELL COMPANIES
CHICHAKLI-CONTROLLED FIRMS*
DAYTONA POOLS, INC.
~
~
MOLDTRANSAVIA SRL
BUKAVU AVIATION TRANSPORT
GAMBIA NEW MILLENIUM AIR COMPAN'!
Chislnau, Moldova
Banjul, Gambia
Democratic Republic of Congo
IRBIS
AIR
COMPANY
BUSINESS AIR SERVICES
Almaty, Khazahkstan
Democratic Republic of Congo
t~
/;:....
/.~.
L~
NORDIC, LTD.
Sofia, Bulgaria
VIAL COMPANY
Delaware, USA
~
ROCKMAN LTD.
Sofia, Bulgaria
/~
WESTBOUND LTD.
Gibraltar
js-2407: Testimony of Sccrctnry John W. Snow<br>before the<br>Senate Appropriations... Page 1 of 7
: .:
': :;:"
;" '''-
"
:'.:."
~.:. ,.
p~~ss ~OOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 26, 2005
js-2407
Testimony of Secretary John W. Snow
before the
Senate Appropriations Subcommittee on Transportation, Treasury, the
Judiciary,
Housing and Urban Development, and Related Agencies
Chairman Bond, Senator Murray, and Members of the Subcommittee, I appreciate
the opportunity to appear before you today to discuss the President's fiscal year
2006 budget for the Department of the Treasury.
The Department's budget reflects the President's top priorities for fiscal year 2006:
fighting the financial war on terror while ensuring America's economic strength, and
demonstrating the fiscal responsibility necessary to reduce the deficit. The fiscal
year 2006 request of $11.6 billion also supports Treasury's longer term core
strategic missions: promoting national prosperity through economic growth and job
creation; maintaining public trust and confidence in our economic and financial
systems; and ensuring the Treasury organization has the workforce, technology,
and business practices to meet the nation's needs effectively and effiCiently. This
budget request focuses on the President's belief that the budget be fair while
holding the government accountable. It adheres to the principle that "taxpayer
dollars must be spent wisely, or not at all."
Mr. Chairman, we provided the Committee with a detailed breakdown and
justification for President's fiscal year 2006 budget request for Treasury. I would like
to take the opportunity today to point out some highlights of our request and then I'd
be happy to take any questions you may have.
STRENGTHEN NATIONAL SECURITY
Treasury's budget reinforces the President's commitment to combating terrorist
financing and safeguarding the U.S. financial system. Since September 11th, we
have leveraged the relationships, resources, and expertise that we have acquired
over the past several years in combating money laundering to address terrorist
financing and protecting our financial systems. Our efforts in both attacking terrorist
financing and protecting the finanCial system are complementary and are effecting
the changes required to protect the integrity of our financial systems by identifying,
disrupting and dismantling sources, flows, and uses of tainted capital within those
systems. To support these efforts, the President requests $351.3 million for fiscal
year 2006.
The Office of Terrorism and Financial Intelligence (TFI) leads Treasury's efforts to
sever the lines of financial support to international terrorists and serves as a critical
component of the Administration's overall effort to keep America safe from te:rorist
plots. The establishment of TFI unifies leadership for the functions of the Office of
http://ww'v.trca3.gov/press!rel~ases!js2407.htrn
4/28/2005
js-2407: Ttiltimony of Secrt:ltary Jdhn W. Snow<br>before the<br>Senate Appropriations... Page 2 of 7
Intelligence A~alysi.s (OIA), the Office ofTerrorist Financing and Financial Crimes
(TFFC), the Financial Cnmes Enforcement Network (FinCEN), the Office of Foreign
Assets Control (OFAC), and the Treasury Executive Office for Asset Forfeiture
(TEOAF). The objectives of unifying this leadership are better coordination of
Treasury's array of economic tools against terrorist and national security threats. To
safeguard financial systems both at home and abroad, TFI draws upon a range of
capabilities that cut across various categories, including financial sanctions,
financial regulation and supervision, international initiatives, private sector outreach,
and law enforcement support. TFI consolidates the policy, enforcement, regulatory,
international, and analytical functions of the Treasury and adds to them critical
intelligence components. OIA provides focused and operable intelligence in
support of the Department's mission and policies. TFI's enforcement responsibilities
are executed by the TFFC, OFAC, and FinCEN. Finally, TFI provides policy
guidance for the IRS-Criminal Investigation Division (IRS-CI) in their anti-money
laundering, terrorist financing, and financial crimes cases.
Since September 2001, the «United States» and its allies have designated 399
terrorist related entities and frozen over $147 million in terrorist assets. TFI has
designated and frozen the assets of prominent terrorist financiers and
organizations, including Adel Batterjee, a Saudi financier of al Qaida, and the
Islamic African Relief Agency, a corrupt global charity that supported Usama bin
Laden and HAMAS. Thanks to collaborative efforts by TFI and other agencies, the
U.S. has facilitated the finding and freezing of nearly $6 billion in Iraqi assets
outside of Iraq, the return of over $2.7 billion of those funds, and the recovery of
more than $1 billion in cash inside Iraq.
Treasury's fiscal year 2006 request includes increases for resources to enhance
Treasury's analytical capability so that senior officials have access to actionable
financial intelligence. The request also supports TFI creating a 21 sl century
information technology infrastructure to assist in the global fight against terror.
The Financial Crimes Enforcement Network has a major role in supporting TFI's
enforcement responsibilities. The President's request includes $73.6 million for
FinCEN to support its mission to safeguard the financial sy~tem from abuses of
financial crime, including terrorist financing, money laundering and other illiCit .
activity. This increase will provide FinCEN with the funding needed to enhance Its
outreach efforts to financial institutions newly covered by Bank Secrecy Act
regulations and strengthen examination and enforcement activities;. strengthen
analytical support services; and expand FinCEN's support to other International
financial intelligence units to facilitate information exchange.
The IRS-CI also plays a key role in investigating financial cri~es. The request
supports the unique skills and expertise of IRS-CI agents In Investlgatl~g tax fraud
and financial crimes not only to support tax compliance, but also benefit ~he war on
terror and our efforts to root out financial crimes. These agents apply their training,
skills, and expertise to support the national effort to combat terrorism and
participate in the Joint Terrorism Task Force. and other Similar Interagency efforts
focused on disrupting and dismantling terrorist financing.
In addition, the Office of Critical Infrastructure Protection and Compliance Policy
leads our efforts to safeguard the financial infrastructure. ThiS Offlc~ works closely
with other federal agencies and the private sector .to s~feguardour Infrastructure.
That is essential, given that the majority of the Critical financial Infrastructure of the
United States is owned and operated by the private sector.
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Finally, an essential aspect of ensuring our national security is to secure fragile
states and fostersustalnable development in the world's poorest nations. The
~fflce of Inter~atlonal Mf~lrs. uses bilateral diplomacy and its role as steward of the
International financial institutions, Including the World Bank and International
Monetary Fund--to create the economic growth that will reduce conflict and the
conditions that favor terrorism in the developing world.
ENSURE FINANCIAL SECURITY
Treasury's strategic goal to manage the U.S. Government's finances effectively is
the largest part of the President's fiscal year 2006 request for the Department The
budget request of $11 billion -- the majority of which is for the Internal Revenue
Service -- underscores our commitment to provide quality service to taxpayers and
enforce America's tax laws in a balanced manner. The request includes a 7.8
percent increase in enforcement funding over fiscal year 2005. The increase will
provide additional resources to examine more tax returns, collect past due taxes
and investigate cases of tax evasion.
It is important that these enforcement investments be fully funded, therefore the
Administration proposes to employ a budget enforcement mechanism used
commonly in the 1990's for spending items that contribute to increased revenues or
reductions in improper payments. Under the proposal, an adjustment for IRS
enforcement would be made by the Budget Committees to the section 302(a)
allocation to the Appropriations Committees found in the concurrent resolution on
the budget. In addition, the Administration will also seek to establish statutory
spending limits, as defined by section 251 of the Balanced Budget and Emergency
Deficit Control Act of 1985, and to adjust them for this purpose. To ensure full
funding of the program and inflationary cost increases, either of these adjustments
would only be permissible if the Congress funded the base level for IRS
enforcement at $6.4 billion and restricted the use of the funds. The maximum
allowable adjustment to the 302(a) allocation and/or the statutory spending limit
would be $446 million for fiscal year 2006, bringing the total enforcement level in
the IRS to $6.9 billion. This entire amount is included in the overall discretionary
spending total sought by the Administration and is fully accounted for in the budget.
The proposed fiscal year 2006 budget makes a strong commitment to a sound
system of tax administration. The IRS collects $2 trillion annually; however, billions
continue to go uncollected every year. The increase in enforcement funding will be
used to bolster audit coverage of corporations and high-income individuals who try
to evade taxes as well as to expand collection and criminal investigation efforts.
These investments will pay for themselves several times over.
The President's request also provides $199 million to continue efforts to modernize
the tax system through investments in IRS' Business Systems MOd~rnization
(SSM). The modernization program is providing real business benefits to taxpayers
and IRS employees by delivering several modernized systems. Forexample, the
Service implemented the Integrated Financial System that replaces Its
.
administrative accounting system. BSM funding allowed IRS to fully deploy online
e-Services functionality for tax practitioners and other third parties, such a~ banks
and brokerage firms allowing improved and faster interactions for transactions such
as the application for e-filing, requests for Preparer Tax Information Number and
Secure Electronic Return Originator applications, among many other products. The
IRS also deployed Modernized e-File, which provides e-filing for the first time to
large corporations and tax-exempt organizations. Replacing the outdated I~gacy
system, the Customer Account Data Engine, which began processing the Simplest
1040 EZ returns in July of last year, is a modern database that Will eventually house
tax information for more than 200 million tax returns per year.
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Finally, an essential aspect of ensuring our national security is to secure fragile
states and foster. sustalna?le development in the world's poorest nations. The
~fflce of Inter~atlonal.Affalrs uses bilateral diplomacy and its role as steward of the
international financial institutions, including the World Bank and International
Mon~~ary Fund--to create the economic growth that will reduce conflict and the
conditions that favor terrorism in the developing world.
ENSURE FINANCIAL SECURITY
Treasury's strategic goal to manage the U.S. Government's finances effectively is
the largest part of the President's fiscal year 2006 request for the Department. The
budget request of $11 billion -- the majority of which is for the Internal Revenue
Service -- under~cores our commitment to provide quality service to taxpayers and
enforce America s tax laws In a balanced manner. The request includes a 7.8
percent Increase In enforcement funding over fiscal year 2005. The increase will
prov!de ad.ditional resources to examine more tax returns, collect past due taxes
and investigate cases of tax evasion.
It is important that these enforcement investments be fully funded, therefore the
Administration proposes to employ a budget enforcement mechanisrn used
comrnonly in the 1990's for spending items that contribute to increased revenues or
reductions in improper payments. Under the proposal, an adjustment for IRS
enforcement would be made by the Budget Committees to the section 302(a)
allocation to the Appropriations Committees found in the concurrent resolution on
the budget. In addition, the Administration will also seek to establish statutory
spending limits, as defined by section 251 of the Balanced Budget and Emergency
Deficit Control Act of 1985, and to adjust them for this purpose. To ensure full
funding of the program and inflationary cost increases, either of these adjustments
would only be permissible if the Congress funded the base level for IRS
enforcement at $6.4 billion and restricted the use of the funds. The maximum
allowable adjustment to the 302(a) allocation and/or the statutory spending limit
would be $446 million for fiscal year 2006, bringing the total enforcement level in
the IRS to $6.9 billion. This entire amount is included in the overall discretionary
spending total sought by the Administration and is fully accounted for in the budget.
The proposed fiscal year 2006 budget makes a strong commitment to a sound
system of tax administration. The IRS collects $2 trillion annually; however, billions
continue to go uncollected every year. The increase in enforcement funding will be
used to bolster audit coverage of corporations and high-income individuals who try
to evade taxes as well as to expand collection and criminal investigation efforts.
These investments will pay for themselves several times over.
The President's request also provides $199 million to continue efforts to modernize
the tax system through investments in IRS' Business Systems Modernization
(8SM). The modernization program is providing real business benefits to taxpayers
and IRS employees by delivering several modernized systems. Forexample, the
Service implemented the Integrated Financial System that replaces Its
administrative accounting system. 8SM funding allowed IRS to fully deploy online
e-Services functionality for tax practitioners and other third parties, such as banks
and brokerage firms allowing improved and faster interactions for transactions such
as the application for e-filing, requests for Preparer Tax Information Number and
Secure Electronic Return Originator applications, among many other products. The
IRS also deployed Modernized e-File, which provides e-fi.ling for the first time to
large corporations and tax-exempt organization~. ReplaCing the outdated I~gacy
system, the Customer Account Data Engine, which began processing the Simplest
1040 EZ returns in July of last year, is a modern database that Will eventually house
tax information for more than 200 million tax returns per year.
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The IRS also administers a refundable tax credit for the cost of health insurance for
both qualified individual and family members. The request provides $20.2 million to
continue Implementation and operation of the Health Insurance Tax Credit
Program. The annual cost of this program is reduced by over $15 million due to
IRS' active program oversight and cost-cutting initiatives.
The Alcohol and Tobacco Tax and Trade Bureau (TTB) is responsible for the
regulation of the alcohol and tobacco industries, and the collection of $14.7 billion
annually in alcohol, tobacco, firearms, and ammunition excise taxes at a cost of $1
for every $368 collected. Our fiscal year 2006 request includes $91.1 million for
TTB. The budget proposes to establish user fees to cover a portion of the costs of
TTB's regulatory functions under its Protect the Public line-of-business.
The budget also includes a $236.2 million request for the Financial Management
Service (FMS), which administers the government's payments and collections
systems. In FY 2004, FMS issued more than 940 million non-Defense payments,
705 million electronic payments and 235 million paper checks, FMS annually issues
more than 940 million non-Defense payments valued at $1.5 trillion. The Budget
provides funding for FMS' electronic initiatives, such as: Pay.gov, which is a
Government-wide web portal to collect non-tax revenue electronically; Paper Check
Conversion, which converts checks into electronic debits thereby moving funds
more quickly; and Stored Value Cards, which directly support military operations
overseas. The fiscal year 2006 request also includes legislative proposals to
improve and enhance opportunities to collect delinquent debt through FMS' debt
collection program.
The Bureau of the Public Debt (BPD) continues its management and improvement
of federal borrowing and debt accounting processes. The budget requests $179.9
million in direct appropriations for BPD which includes $3 million in user fees. The
funding will allow BPD to continue improving the efficiency of the securities services
to customers by expanding TreasuryDirect, an investment system that will enable
Treasury customers to manage their investment accounts online.
The functions of the United States Mint and the Bureau of Engraving and Printing
(BEP) are vital to the health of our nation's economy. These two agencies fulfill the
Treasury Department's responsibility of meeting global demand for the world's most
accepted coins and currency. The United States Mint also continues to
manufacture and market popular numismatic products, while BEP also continues to
develop new designs of next generation currency to guard against counterfeiting.
PROMOTE ECONOMIC OPPORTUNITY
The Treasury Department works to ensure that U.S. and world economies perf?rm
at full economic potential. To reach this potential, the economy must Increase Its
rate of growth and create new, high quality jobs for all Amer.lc.ans. The legal and
regulatory framework must also support this growth by prOViding an environment
where businesses and individuals can grow and prosper Without the burdens and
costs of unnecessary rules and regulations.
Our budget requests $1.6 billion to support these strategic goals. The request
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includes funds for policy offices that guide domestic economic development, tax
programs, financial institutions and other fiscal matters. These policies are
essential as Treasury works to simplify the U.S. tax code and create a legal and
regulatory framework that allows the nation's businesses to thrive.
Treasury's international programs and three Treasury bureaus, the Community
Development Financial Institutions Fund, the Office of the Comptroller of Currency
and the Office of Thrift Supervision play diverse roles in fostering economic growth
and prosperity. From serving as the President's principal economic advisor to
maintaining the health of the national banking and thrift system, the Treasury has a
significant influence on creating the conditions for a robust economy. Through the
Office of International Affairs, the Treasury also pursues diplomacy to create the
conditions for global growth, which creates economic opportunity at home and
overseas, by a range of actions, including the reduction of undue barriers to trade
and investment and the establishment of stability in the international financial
system.
Treasury's international assistance programs request of $1.5 billion for fiscal year
2006 is part of the Foreign Operations, Export Financing, and Related Program
Appropriations Act. These programs include multilateral development banks
(MDBs), debt reduction, and technical assistance -- all critical instruments to
promote the Administration's international economic agenda. MOBs promote global
economic growth and poverty reduction, and help create stronger markets for U.S.
goods and services. Debt reduction helps poor countries move to a sustainable
level of debt and remove debt overhang that inhibits growth. Our technical
assistance programs help countries institute the sound budget and financial
systems needed for economic growth.
MANAGE FOR RESULTS
The President requests $211.8 million to protect the integrity and effectively
manage the resources of the Department of Treasury, and ensure that it remains a
world class organization. Included in this request is $16.7 million to fund the
Department's Office of Inspector General (OIG) and augment audit and
investigative capabilities.
This portion of the budget also includes $133.3 million for the Inspector General for
Tax Administration (TIGTA) and its efforts to oversee the nation's tax
administration. TIGTA continues to playa significant role in providing independent
oversight, which promotes efficiency and integrity in the IRS' ability to collect $2
trillion annually. TIGTA aggressively combats any identified attempts to disrupt
and/or interfere with tax administration. The nation's voluntary tax compliance
system is supported and protected by TIGT A agents who participate in the Joint
Terrorism Task Force and proactively seek to identify individuals or groups who
pose a threat to effective tax administration. Critical information is shared with the
IRS and allows the leaders of the IRS to make effective business decisions, which
promote efficient tax administration and support IRS employee safety.
The proposed budget request includes $7.9 million in new funding to provide for an
improved technology infrastructure, essential for keeping pace with the
Department's needs to enhance productivity, improve communication, interact
effectively with the world-wide financial community, and meet other management
needs. Funding will be used to improve the Department's information technology
infrastructure to ensure the effectiveness of the Department in managing federal
finances and combating financial crimes and terrorist financing. The request also
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ur Sec! elary John W. Snow<br>before the<br>Senate Appropriations...
Page 6 of 7
ensures that the Department will continue its major facilities projects and services
for the Main Treasury and Treasury Annex buildings to ensure the safety and health
of occupants and perform structural repairs and improvements. Additional funds will
allow Treasury to complete the project during fiscal year 2006 and reoccupy the
restored office space.
THE PRESIDENT'S MANAGEMENT AGENDA
Treasury has focused its management initiatives around the goals of the
President's Management Agenda (PMA). Under guidance from the PMA, the
Treasury has grasped tangible results in managing the nation's finances, taking
advantage of new opportunities and opposing threats. The Department is
committed to defining desired results for each area and managing to achieve them,
at acceptable cost levels.
In fiscal year 2004, Treasury achieved significant milestones in implementing the
President's Management Agenda, improving three of our five status scores for the
PMA over the prior year.
Treasury managed for results as we implemented a new performance appraisal
system for our Senior Executive Service that links managers' performance
assessments to accomplishing the Department's top priorities. We are also
focusing on recruiting and retaining a world-class workforce, and have started
implementing a new Human Capital Strategic Plan. This plan is the Department's
roadmap for molding a workforce of engaged, highly competent, and businessaligned employees.
The Department is making good progress on using competition to improve
efficiency. This past year, we completed five public-private competitions, and as a
result, expect savings of $200 million over the next five years. Our efficiency
initiatives have received national recognition, winning the President's Quality Award
for Management Innovation at the IRS for our Area Distribution Center competition.
Treasury continues to be a leader in making financial information available in a
timely manner through a three-day close of its books at the end of each month, and
for the fifth consecutive year we received a clean audit opinion. The Department
continues to work at securing our information systems. Our systems are more
secure now than at any other time, with 86 percent certified and accredited as
secure at the end of 2004.
CONCLUSION
Mr. Chairman, I look forward to working with you, members of the Committee, and
your staff to maximize Treasury's resources in the best interest of the American
people and our country as we move into fiscal year 2006. We have hard work
ahead of us and I am hopeful that together we can work to make the Treasury a
model for management and service to the American people, and continue to
generate economic growth, increase the number of jobs for our citizens, and keep
our financial systems strong and secure.
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Tc~t;mony
of ~eerutury John W. Snow<br>before the<br>Senate Appropriations... Page 7 of 7
Thank you again for the opportunity to present the Treasury Department's budget
today. I would be pleased to answer your questions.
-30-
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,
of Scct'ctary John W. Snow<br>before the<br>Senate Appropriations... Page 1 of 5
, ..: . " ,
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 26, 2005
js-2408
Testimony of Secretary John W. Snow
before the
Senate Appropriations Subcommittee on
Transportation, Treasury, the Judiciary,
Housing and Urban Development, and Related Agencies
Chairman Bond, Senator Murray, and Members of the Subcommittee, I appreciate
the opportunity to appear before you today to discuss the President's fiscal year
2006 budget for the Department of the Treasury.
The Department's budget reflects the President's top priorities for fiscal year 2006:
fighting the financial war on terror while ensuring America's economic strength, and
demonstrating the fiscal responsibility necessary to reduce the deficit. The fiscal
year 2006 request of $11.6 billion also supports Treasury's longer term core
strategic missions: promoting national prosperity through economic growth and job
creation; maintaining public trust and confidence in our economic and financial
systems; and ensuring the Treasury organization has the workforce, technology,
and business practices to meet the nation's needs effectively and efficiently. This
budget request focuses on the President's belief that the budget be fair while
holding the government accountable. It adheres to the principle that "taxpayer
dollars must be spent wisely, or not at all."
Mr. Chairman, we provided the Committee with a detailed breakdown and
justification for President's fiscal year 2006 budget request for Treasury. I would like
to take the opportunity today to point out some highlights of our request and then I'd
be happy to take any questions you may have.
STRENGTHEN NATIONAL SECURITY
Treasury's budget reinforces the President's commitment to combating terrorist
financing and safeguarding the U.S. financial system. Since September 11th, we
have leveraged the relationships, resources, and expertise that we have acquired
over the past several years in combating money laundering to address terrorist
financing and protecting our financial systems. Our efforts in both attacking terrorist
financing and protecting the financial system are complementary and are effecting
the changes required to protect the integrity of our financial systems by identifying,
disrupting and dismantling sources, flows, and uses of tainted capital within those
systems. To support these efforts, the President requests $351.3 million for fiscal
year 2006.
The Office of Terrorism and Financial Intelligence (TFI) leads Treasury's efforts to
sever the lines of financial support to international terrorists and serves as a critical
component of the Administration's overall effort to keep America safe from terrorist
plots. The establishment of TFI unifies leadership for the functions of the Office of
Intelligence Analysis (OIA), the Office of Terrorist Financing and Financial Crimes
(TFFC), the Financial Crimes Enforcement Network (FinCEN), the Office of Foreign
Assets Control (OFAC), and the Treasury Executive Office for Asset Forfeiture
(TEOAF). The objectives of unifying this leadership are better coordination of
Treasury's array of economic tools against terrorist and national security threats. To
safeguard financial systems both at home and abroad, TFI draws upon a range of
capabilities that cut across various categories, including financial sanctions,
financial regulation and supervision, international initiatives, private sector outreach,
and law enforcement support. TFI consolidates the policy, enforcement, regulatory,
international, and analytical functions of the Treasury and adds to them critical
intelligence components. OIA provides focused and operable intelligence in
support of the Department's mission and policies. TFl's enforcement responsibilities
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are executed by the TFFC, OFAC, and FinCEN. Finally, TFI provides policy
guidance for the IRS-Criminal Investigation Division (IRS-Cll in their anti-money
laundering, terrorist financing, and financial crimes cases.
Since September 2001, the «United States» and its allies have designated 399
terrorist related entities and frozen over $147 million in terrorist assets. TFI has
designated and frozen the assets of prominent terrorist financiers and
organizations, including Adel Batterjee, a Saudi financier of al Qaida, and the
Islamic African Relief Agency, a corrupt global charity that supported Usama bin
Laden and HAMAS. Thanks to collaborative efforts by TFI and other agencies, the
U.S. has facilitated the finding and freezing of nearly $6 billion in Iraqi assets
outside of Iraq, the return of over $2.7 billion of those funds, and the recovery of
more than $1 billion in cash inside Iraq.
Treasury's fiscal year 2006 request includes increases for resources to enhance
Treasury's analytical capability so that senior officials have access to actionable
financial intelligence. The request also supports TFI creating a 21 51 century
information technology infrastructure to assist in the global fight against terror.
The Financial Crimes Enforcement Network has a major role in supporting TFI's
enforcement responsibilities. The President's request includes $73.6 million for
FinCEN to support its mission to safeguard the financial system from abuses of
financial crime, including terrorist financing, money laundering and other illicit
activity. This increase will provide FinCEN with the funding needed to enhance its
outreach efforts to financial institutions newly covered by Bank Secrecy Act
regulations and strengthen examination and enforcement activities; strengthen
analytical support services; and expand FinCEN's support to other international
financial intelligence units to facilitate information exchange.
The IRS-CI also plays a key role in investigating financial crimes. The request
supports the unique skills and expertise of IRS-CI agents in investigating tax fraud
and financial crimes not only to support tax compliance, but also benefit the war on
terror and our efforts to root out financial crimes. These agents apply their training,
skills, and expertise to support the national effort to combat terrorism and
participate in the Joint Terrorism Task Force and other similar interagency efforts
focused on disrupting and dismantling terrorist financing.
In addition, the Office of Critical Infrastructure Protection and Compliance Policy
leads our efforts to safeguard the financial infrastructure. This Office works closely
with other federal agencies and the private sector to safeguard our infrastructure.
That is essential, given that the majority of the critical financial infrastructure of the
United States is owned and operated by the private sector.
Finally, an essential aspect of ensuring our national security is to secure fragile
states and foster sustainable development in the world's poorest nations. The
Office of International Affairs uses bilateral diplomacy and its role as steward of the
international financial institutions, including the World Bank and International
Monetary Fund--to create the economic growth that will reduce conflict and the
conditions that favor terrorism in the developing world.
ENSURE FINANCIAL SECURITY
Treasury's strategic goal to manage the U.S. Government's finances effectively is
the largest part of the President's fiscal year 2006 request for the Department. The
budget request of $11 billion -- the majority of which is for the Internal Revenue
Service -- underscores our commitment to provide quality service to taxpayers and
enforce America's tax laws in a balanced manner. The request includes a 7.8
percent increase in enforcement funding over fiscal year 2005. The increase will
provide additional resources to examine more tax returns, collect past due taxes
and investigate cases of tax evasion.
It is important that these enforcement investments be fully funded, therefore the
Administration proposes to employ a budget enforcement mechanism used
commonly in the 1990's for spending items that contribute to increased revenues or
reductions in improper payments. Under the proposal, an adjustment for IRS
enforcement would be made by the Budget Committees to the section 302(a)
allocation to the Appropriations Committees found in the concurrent resolution on
the budget. In addition, the Administration will also seek to establish statutory
http://www.trea3.gov/press/rele~ses/js2408.htm
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js-240S: Tc~timony of Se~retuy John W. Snow<br>before the<br>Senate Appropriations... Page 3 of 5
spe.n?ing limits, as defined by section 251 of the Balanced Budget and Emergency
Deficit Control Act of 1985, and to adjust them for this purpose. To ensure full
funding of the program and inflationary cost increases, either of these adjustments
would only be permissible if the Congress funded the base level for IRS
enforcement at $6.4 billion and restricted the use of the funds. The maximum
allowable adjustment to the 302(a) allocation and/or the statutory spending limit
would be $446 million for fiscal year 2006, bringing the total enforcement level in
the IRS to $6.9 billion This entire amount is included in the overall discretionary
spending total sought by the Administration and is fully accounted for in the
budget.
The proposed fiscal year 2006 budget makes a strong commitment to a sound
system of tax administration. The IRS collects $2 trillion annually; however, billions
continue to go uncollected every year. The increase in enforcement funding will be
used to bolster audit coverage of corporations and high-income individuals who try
to evade taxes as well as to expand collection and criminal investigation efforts.
These investments will pay for themselves several times over.
The President's request also provides $199 million to continue efforts to modernize
the tax system through investments in IRS' Business Systems Modernization
(BSM). The modernization program is providing real business benefits to taxpayers
and IRS employees by delivering several modernized systems. For example, the
Service implemented the Integrated Financial System that replaces its
administrative accounting system. BSM funding allowed IRS to fully deploy online
e-Services functionality for tax practitioners and other third parties, such as banks
and brokerage firms allowing improved and faster interactions for transactions such
as the application for e-filing, requests for Preparer Tax Information Number and
Secure Electronic Return Originator applications, among many other products. The
IRS also deployed Modernized e-File, which provides e-filing for the first time to
large corporations and tax-exempt organizations. Replacing the outdated legacy
system, the Customer Account Data Engine, which began processing the simplest
1040 EZ returns in July of last year, is a modern database that will eventually house
tax information for more than 200 million tax returns per year.
The IRS also administers a refundable tax credit for the cost of health insurance for
both qualified individual and family members. The request provides $20.2 million to
continue implementation and operation of the Health Insurance Tax Credit
Program. The annual cost of this program IS reduced by over $15 million due to
IRS' active program oversight and cost-cutting initiatives.
The Alcohol and Tobacco Tax and Trade Bureau (TTB) is responsible for the
regulation of the alcohol and tobacco industries, and the collection of $14.7 billion
annually in alcohol, tobacco, firearms, and ammunition excise taxes at a cost of $1
for every $368 collected. Our fiscal year 2006 request includes $91.1 million for
TTB. The budget proposes to establish user fees to cover a portion of the costs of
TTB's regulatory functions under its Protect the Public line-of-business.
The budget also includes a $236.2 million request for the Financial Management
Service (FMS), which administers the government's payments and collections
systems. In FY 2004, FMS issued more than 940 million non-Defense payments,
705 million electronic payments and 235 million paper checks, FMS annually issues
more than 940 million non-Defense payments valued at $1.5 trillion. The Budget
provides funding for FMS' electronic initiatives, such as: Pay.gov, which is a
Government-wide web portal to collect non-tax revenue electronically; Paper Check
Conversion, which converts checks into electronic debits thereby moving funds
more quickly; and Stored Value Cards, which directly support military operations
overseas. The fiscal year 2006 request also includes legislative proposals to
improve and enhance opportunities to collect delinquent debt through FMS' debt
collection program.
The Bureau of the Public Debt (BPD) continues its management and improvement
of federal borrowing and debt accounting processes. The budget requests $179.9
million in direct appropriations for BPD which includes $3 million In user fees. The
funding will allow BPD to continue improving the efficiency of the secuntles services
to customers by expanding TreasuryDirect, an investment system that Will enable
Treasury customers to manage their investment accounts online.
The functions of the United States Mint and the Bureau of Engraving and Printing
(BEP) are vital to the health of our nation's economy. These two agencies fulfill the
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Treasury Department's responsibility of meeting global demand for the world's most
accepted coins and currency. The United States Mint also continues to
manufacture and market popular numismatic products, while BEP also continues to
develop new designs of next generation currency to guard against counterfeiting.
PROMOTE ECONOMIC OPPORTUNITY
The Treasury Department works to ensure that U.S and world economies perform
at full economic potential. To reach this potential, the economy must increase its
rate of growth and create new, high quality jobs for all Americans. The legal and
regulatory framework must also support this growth by providing an environment
where businesses and individuals can grow and prosper without the burdens and
costs of unnecessary rules and regulations.
Our budget requests $1.6 billion to support these strategic goals. The request
includes funds for policy offices that guide domestic economic development, tax
programs, financial institutions and other fiscal matters. These policies are
essential as Treasury works to simplify the U.S. tax code and create a legal and
regulatory framework that allows the nation's businesses to thrive.
Treasury's international programs and three Treasury bureaus, the Community
Development Financial Institutions Fund, the Office of the Comptroller of Currency
and the Office of Thrift Supervision play diverse roles in fostering economic growth
and prosperity. From serving as the President's principal economic advisor to
maintaining the health of the national banking and thrift system, the Treasury has a
significant influence on creating the conditions for a robust economy. Through the
Office of International Affairs, the Treasury also pursues diplomacy to create the
conditions for global growth, which creates economic opportunity at home and
overseas, by a range of actions, including the reduction of undue barriers to trade
and investment and the establishment of stability in the international financial
system.
Treasury's international assistance programs request of $1.5 billion for fiscal year
2006 is part of the Foreign Operations, Export Financing, and Related Program
Appropriations Act. These programs include multilateral development banks
(MOBs), debt reduction, and technical assistance -- all critical instruments to
promote the Administration's international economic agenda. MOBs promote global
economic growth and poverty reduction, and help create stronger markets for U.S.
goods and services. Debt reduction helps poor countries move to a sustainable
level of debt and remove debt overhang that inhibits growth. Our technical
assistance programs help countries institute the sound budget and financial
systems needed for economic growth.
MANAGE FOR RESULTS
The President requests $211.8 million to protect the integrity and effectively
manage the resources of the Department of Treasury, and ensure that it remains a
world class organization Included in this request is $16.7 million to fund the
Department's Office of Inspector General (OIG) and augment audit and
investigative capabilities.
This portion of the budget also includes $133.3 million for the Inspector General for
Tax Administration (TIGTA) and its efforts to oversee the nation's tax
administration. TIGTA continues to playa significant role in providing independent
oversight, which promotes efficiency and integrity in the IRS' ability to coll~ct $2
trillion annually. TIGTA aggressively combats any identified attempts to disrupt
and/or interfere with tax administration. The nation's voluntary tax compliance
system is supported and protected by TIGTA agents who participate in the Joint
Terrorism Task Force and proactively seek to identify individuals or groups who
pose a threat to effective tax administration. Critical inform~tion is shared with the
IRS and allows the leaders of the IRS to make effective business decIsions, which
promote efficient tax administration and support IRS employee safety.
The proposed budget request includes $7.9 million in new funding to provide for an
improved technology infrastructure, essential for keeping pace with the
Department's needs to enhance productivity, improve communication, interact
effectively with the world-wide financial community, and meet other management
needs. Funding will be used to improve the Department's information technology
http://www.trcas.gov/press/Hllea~es/js2408.htm
4/28/2005
js-2.+0S: Testimony of Secretary John W. Snow<br>before the<br>Senate Appropriations... Page 5 of 5
infrastructure to ensure the effectiveness of the Department in managing federal
finances and combating financial crimes and terrorist financing. The request also
ensures that the Department will continue its major facilities projects and services
for the Main Treasury and Treasury Annex buildings to ensure the safety and health
of occupants and perform structural repairs and improvements. Additional funds will
allow Treasury to complete the project during fiscal year 2006 and reoccupy the
restored office space.
THE PRESIDENT'S MANAGEMENT AGENDA
Treasury has focused its management initiatives around the goals of the
President's Management Agenda (PMA). Under guidance from the PMA, the
Treasury has grasped tangible results in managing the nation's finances, taking
advantage of new opportunities and opposing threats. The Department is
committed to defining desired results for each area and managing to achieve them,
at acceptable cost levels.
In fiscal year 2004, Treasury achieved significant milestones in implementing the
President's Management Agenda, improving three of our five status scores for the
PMA over the prior year.
Treasury managed for results as we implemented a new performance appraisal
system for our Senior Executive Service that links managers' performance
assessments to accomplishing the Department's top priorities. We are also
focusing on recruiting and retaining a world-class workforce, and have started
implementing a new Human Capital Strategic Plan. This plan is the Department's
roadmap for molding a workforce of engaged, highly competent, and businessaligned employees.
The Department is making good progress on using competition to improve
efficiency. This past year, we completed five public-private competitions, and as a
result, expect savings of $200 million over the next five years. Our efficiency
initiatives have received national recognition, winning the President's Quality Award
for Management Innovation at the IRS for our Area Distribution Center competition.
Treasury continues to be a leader in making financial Information available in a
timely manner through a three-day close of its books at the end of each month, and
for the fifth consecutive year we received a clean audit opinion. The Department
continues to work at securing our information systems. Our systems are more
secure now than at any other time, with 86 percent certified and accredited as
secure at the end of 2004.
CONCLUSION
Mr. Chairman, I look forward to working with you, members of the Committee, and
your staff to maximize Treasury's resources in the best interest of the American
people and our country as we move into fiscal year 2006. We have hard work
ahead of us and I am hopeful that together we can work to make the Treasury a
model for management and service to the American people, and continue to
generate economic growth, increase the number of jobs for our citizens, and keep
our financial systems strong and secure.
Thank you again for the opportunity to present the Treasury Department's budget
today. I would be pleased to answer your questions.
-30-
http://www.treu~.gov/prt;.~..;:/relcases/js240~.htm
4/28/2005
s
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 26, 2005
2005-4-26-10-46-46-25031
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $79,577 million as of the end of that week, compared to $78,711 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
A~riI15,
TOTAL
1. Foreign Currency Reserves
1
a Securities
A~ril
2005
22, 2005
79,577
78,711
Euro
Yen
TOTAL
Euro
Yen
TOTAL
11,914
14,612
26,526
12,056
14,861
26,917
0
0
Of which, issuer headquartered in the US.
b. Total deposits with:
11,657
b.i. Other central banks and BIS
2,937
14,594
2,987
11,788
14,775
b.ii. Banks headquartered in the US.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the US.
0
0
b.iii. Of which, banks located in the U.S.
0
0
15,045
15,212
11,504
11,632
11,041
11,041
0
0
2. IMF Reserve Position
2
3. Special Drawing Rights (SDRs)
4. Gold Stock
2
3
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
A~ril
Euro
1. Foreign currency loans and securities
April 22, 2005
15, 2005
Yen
TOTAL
Euro
o
Yen
TOTAL
o
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
2.a. Short positions
0
2.b. Long positions
0
3. Other
0
o
o
o
III. Contingent Short-Term Net Drains on Foreign Currency Assets
April 15, 2005
Euro
1 Contingent liabilities in foreign currency
Yen
April 22, 2005
TOTAL
Euro
Yen
TOTAL
o
o
2. Foreign currency securities with embedded options
o
3. Undrawn, unconditional credit lines
o
o
o
o
o
1.a. Collateral guarantees on debt due within 1 year
1.b. Other contingent liabilities
Ja. With other central banks
Jb. With banks and other financial institutions
Headquartered in the U. S.
Jc. With banks and other financial institutions
Headquartered outside the U. S.
4. Aggregate short and long positions of options in
foreign
Currencies vis-a-vis the U.S. dollar
4.a. Short positions
4.a.1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-1409: MEDTA ALJVlSURY: A/S Zarate and Rep. Royce Discuss Treasury's Designati ... Page 1 of 1
,
".:.",
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 26, 2005
JS-2409
MEDIA ADVISORY: A/S Zarate and Rep. Royce Discuss Treasury's
Designation of Viktor Bout's International Arms Trafficking Network
**NOTE TIME CHANGE**
Treasury Assistant Secretary Juan Zarate and Congressman Ed Royce (CA-40) will
hold a pen-and-pad briefing to discuss the Treasury's designation of Viktor Bout's
financial network (http//wwwtreasurygov/pressireleases/js2406htm). Bout is a
notorious international arms dealer and war profiteer.
WHO:
Juan C. Zarate, Assistant Secretary
Terrorist Financing and Financial Crimes
U.S. Department of the Treasury
Rep. Ed Royce, Vice Chairman Africa, Global Human Rights and International
Operations Subcommittee Committee on International Relations U.S. House of
Representatives
WHAT:
Pen-and-pad briefing
WHEN:
Wednesday, April 27, 2005
11:45 am EST
WHERE:
Department of the Treasury, Media Room 4121
Media without Treasury press credentials (including media with White House
credentials) planning to attend should contact Frances Anderson in Treasury's
Office of Public Affairs at (202) 528-9086 or FrancesAnderson@do.treas.gov.
Please be prepared to provide her with the following information: full name, social
security number and date of birth by 9:00 am on 4/27/05.
-30-
http://wvli·w.treas.gov/pn~ssjreleases/js2409.htm
4/28/2005
js-2410: Treasury Secretary and U.S. Treasurer Join ABA to Kick Off 9th Annual "Teach ... Page 1 of 1
,
".:.",
PRESS
'".
ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 26, 2005
js-2410
Treasury Secretary and U.S. Treasurer Join ABA to Kick Off 9th Annual
"Teach Children to Save Day
The Treasury Department today teamed up with the American Bankers Association
(ABA) Education Foundation for the 9th Annual "Teach Children to Save Day."
Treasury officials joined local bankers across the country to visit primary,
elementary, middle and high schools to teach students the importance of saving.
Secretary John W. Snow and U.S. Treasurer Anna Escobedo Cabral joined ABA
Chairman Elizabeth A. Duke to kick off the nationwide efforts with fifth-graders from
WaShington O.C.'s Seaton Elementary at Treasury's Bureau of Engraving and
Printing (BEP). Across the country, a total of 23 Treasury officials joined bankers in
classrooms from Spokane, Washington to Tampa, Florida to teach lessons that
illustrate the value of saving, budgeting and the power of interest.
In addition to the financial education lesson, Secretary Snow and Treasurer Cabral
witnessed the printing of the first paper currency with the new Treasurer's signature
today at the BEP.
"I am grateful for the opportunity to serve as Treasurer and honored to have my
name on the U.S. currency, along with that of Secretary Snow, a truly gifted and
committed leader," said Treasurer Cabral. "I am also pleased to have been able to
share today with students from Seaton Elementary. They remind us how important
it is to teach children how to use their money to create opportunity and prosperity. It
is crucial that we provide them the knowledge and resources they'll need to make
educated decisions about their finances. I commend everyone that joined us across
the country for Teach Children to Save Day, as well as the teachers, parents and
community leaders who are hard at work to provide financial education all year
long."
The ABA Education Foundation was founded in 1925 to support the banking
industry's efforts to teach personal finance skills in schools and communities. Its
programs help children, teenagers and adults develop the skills they need to
budget, save, and manage credit. Since the ABA Education Foundation began
"Teach Children to Save Day" in 1997, more than 18,300 bankers have reached out
to nearly 1.2 million students. This year, 4,100 bankers from across the country
taught money skills to an estimated 180,000 students. For more information on
"Teach Children to Save Day," please visit hllp:l/www.aba.com and click on
"Consumer Connection."
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http://www.treas.gQv/press/reieascs/js2410.htm
4/2812005
2005-.f-~7-1 R-13-3-))~6:
Treasurer Cabral Unveil "Snow-Cabral" Paper Currency
Page I of 1
FROM THE OFFICE OF PUBLIC AFFAIRS
April 27, 2005
2005-4-27 -18-13-3-5586
Treasurer Cabral Unveil "Snow-Cabral" Paper Currency
Secretary John Snow and U.S. Treasurer Anna Escobedo Cabral unveiled the first
$1 notes with the new Treasurer's signature on Tuesday, April 26 at the Treasury's
Bureau of Engraving and Printing in Washington, DC. "Having my signature on the
U.S. currency is a tremendous honor; sharing that honor with Anna Cabral is
priceless," said Secretary Snow.
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image
http://www.treus.gov/press/ rde ases/2005427181335586.htm
4/2812005
Page 1 of 1
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".:.",
'",
PRESS ROOM
April 28, 2005
js-2411
Treasury's Deputy Assistant Secretary lannicola Encourages Financial
Education Efforts in Native Communities
Treasury's Deputy Assistant Secretary for Financial Education Dan lannicola, Jr.
today discussed the importance of financial education at a policy briefing sponsored
by the Native Financial Education Coalition in Washington, D.C. The meeting
attendees included Congressional staff, federal agency personnel, tribal leaders
and other policymakers.
lannicola told the participants that spreading financial education in Native
communities should be a high priority. "Native communities often deal with unique
challenges, both in the reservation and off-reservation contexts," said lannicola.
"Financial education can help people overcome these challenges and achieve a
secure financial future."
The Native Financial Education Coalition (NFEC) is a group of local, regional and
national organizations and government agencies working together to promote
financial education in Native communities. Started by the Treasury Department in
2000, the now independent Native Financial Education Coalition seeks to exchange
information, forge partnerships, identify and develop strategies for outreach and
training, as well as identify gaps in information about financial education needs.
NFEC has trained nearly 800 instructors to teach financial education courses in
Native communities using the Building Native Communities: Financial Skills for
Families curriculum.
The Department of the Treasury is a leader in promoting financial education.
Treasury established the Office of Financial Education in May of 2002. The Office
works to promote access to the financial education tools that can help all Americans
make wiser choices in all areas of personal financial management, with a special
emphasis on saving, credit management, home ownership and retirement
planning. The Office also coordinates the efforts of the Financial Literacy and
Education Commission, a group chaired by the Secretary of Treasury and
composed of representatives from 20 federal departments, agencies and
commissions, which works to improve financial literacy and education for people
throughout the United States. For more information about the Office of Financial
Education visit: http://www.treas.gov/financlaleducation.
-30-
http://www.tre~s.gov/presslreleases/js2411.htll1
7/512005
1S-2412: Preliminary Annual Report on Foreign Holdings Of U.S. Securities At End-June 2004
,
".:
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Page 1 of2
'".
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
April 29, 2005
JS-2412
Preliminary Annual Report on Foreign Holdings Of U.S. Securities At EndJune 2004
Preliminary data from an annual survey of foreign portfolio holdings of U.S.
securities at end-June 2004 are released today and posted on the U.S. Treasury
web site at (htlpllwww.treas.gov/lic/fpis.hlml). Final survey results, which will
include additional detail as well as revisions to the preliminary data, will be reported
by June 30, 2005.
The survey was undertaken jointly by the U.S Treasury, the Federal Reserve Bank
of New York, and the Board of Governors of the Federal Reserve System. The
most recent survey was for end-June 2003. Future surveys are scheduled to be
carried out annually, and the next survey will be for end-June 2005.
A complementary survey measuring U.S. portfolio holdings of foreign securities will
also be carried out annually. Data from the most recent such survey, which reports
on securities held at year-end 2004, are currently being processed. Preliminary
results are expected to be reported by September 30, 2005.
Overall Preliminary Results
The survey measured foreign holdings as of June 30, 2004, of $6,006 billion, with
$1,904 billion held in U.S. equities, $3,515 billion in U.S. long-term debt securities
(securities with an original term-to-maturity in excess of one year), and $588 billion
in U.S. short-term debt securities. The previous such survey, conducted as of June
30,2003, measured foreign holdings of $4,979 billion, with $1,564 billion in U.S.
equities, $2,939 billion in U.S. long-term debt securities, and $475 billion in shortterm U.S. debt securities (see Table 1).
Table 1. Foreign holdings of U.S. securities, by type of security, as of survey
dates
(Billions of dollars, except as noted)
Type of Security
June 30, 2003
June 30, 2004
Long-term Securities
4,503
5,418
Equity
1,564
1,904
Long-term Debt
2,939
3,515
475
588
4,9791
6,006
Short-term Debt Securities
Total
Foreign Portfolio Investment in the U.S. by Economy
Table 2. Foreign holdings of U.S. secur~ti~s, by econo.my and type of security,
for the economies having major portfoliO Investment In the U.S., as of June
30,2004
(Billions of dollars)
http://www.tr -:as.gov/DressJreleases/js)412.htm
7/512005
JS-2412: Preliminary Annual Report on hm:ign Holdings Of U.S. Securities At End-June 2004
Total
1 Japan
Equities
1,019 162
Long-term
Short-term
736
121
2 United Kingdom
488
250
221
16
3 Luxembourg
392
130
230
31
4 Cayman Islands
375
115
230
31
5 China, Mainland
341
3
320
18
6 Belgium
308
18
285
5
7 Canada
291
210
67
15
8 Netherlands
203
127
70
6
9 Switzerland
199
120
68
11
10 Germany
190
76
107
8
11 Bermuda
180
52
113
15
12 Ireland
164
52
66
46
13 Taiwan
124
9
113
2
14 Middle East Oilexporters 11
121
69
34
18
15 Singapore
120
72
42
6
16 France
117
62
41
15
90
1
81
8
17 South Korea
18 Hong Kong
89
22
43
23
19 Australia
74
47
21
6
20 Sweden
73
46
26
1
21 British Virgin Islands
65
36
27
3
22 Mexico
65
9
30
25
23 Norway
59
29
29
2
24 Italy
58
35
20
3
25 Russia
48
0
8
48
Country Unknown
224
3
218
3
Rest of world
528
151
269
109
6,006
1,904
3,515
588
Total
Page 2 of2
11 Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab
Emirates.
- 30-
http://www. t.-eas.gov/press!releases/J!..24l2.htm
7/5/2005
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