Staff Summary of Testimony to the PCSCB: Gensler, Department of the Treasury
Gary Gensler, Assistant Secretary for Financial Markets, Department of the Treasury (appearance on April 24, 1998)

Testimony: Mr. Gensler, accompanied by Roger Anderson, Deputy Assistant Secretary for Federal Finance, explained Treasury debt management, the relationship between municipal finance and capital budgeting, and the differences between Federal and municipal finance. He discussed whether municipal capital budget financing methods could be adopted to Federal debt management. Mr. Gensler concluded that while some aspects of capital budgeting may be applicable to the Federal government, this would not include any form of segregated financing.

Mr. Gensler discussed the three principal goals of Treasury debt management: 1) to assure that Treasury cash balances are sufficient at all times through sound cash management, 2) to achieve the lowest cost financing for the taxpayers, and 3) to promote efficient capital markets. A number of interrelated principles guide Treasury in achieving these goals including maintaining the "risk free" status of Treasury securities, maintaining the consistency and predictability in Treasury's financing program, ensuring market liquidity, and financing across the yield curve. To promote these goals and follow these principles, Treasury engages in unitary financing. It aggregates all its financing needs and uses debt proceeds interchangeably with tax receipts to fund all governmental activities.

Many States and localities have both a capital budget and an operating budget. Capital budgets are funded with bond proceeds (the debt service - principal and interest - is an operating expense) and contain capital spending not included in the operating budget. They allow municipalities to fund capital projects outside the annual balance constraints of their operating budgets. The debt issued is subject to caps that can usually only be changed by voter referendums.

In comparing Federal and municipal finance, Mr. Gensler said that States and localities share the goals of sound cash management and lowest cost borrowing. They use segregated borrowing to pursue these goals due to the legal framework in which they operate. This legal framework is not relevant to the Federal government. The promotion of efficient capital markets is a goal of the Federal government alone, and the market for Treasury securities is the deepest, most liquid, most efficient market in the world.

Questions from the Commissioners:

Q.    At the State and local level, how are the caps on debt determined?
A.    Often the caps are set by statute and can only be changed by a referendum approved by the legislature and the public. In some cases, such as New York State, the cap is set at a percent of real property values, which is seen as a measure of a jurisdiction's ability to repay debt.

Q.    At the State and local level, is there a statutory definition of capital expenditures?
A.    There is often a statutory definition. In New York State, for example, the capital budget is limited to physical capital and a capital expenditure must meet certain accounting standards and the requirements regarding its useful life as determined by the State legislature.

President's Commission to Study Capital Budgeting

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