In achieving these goals, five interrelated principles guide us (Exhibit B).

The first principle is maintaining the "risk-free" status of Treasury securities. This is accomplished through prudent fiscal discipline and timely increases in the debt limit. Ready market access at the lowest cost to the Government is an essential component of debt management.

Second, is maintaining consistency and predictability in our financing program. Treasury issues securities on a regular schedule with set auction procedures. This reduces uncertainty in the market and helps minimize our overall cost of borrowing. In keeping with this principle, Treasury does not seek to time markets; that is, we do not act opportunistically to issue debt when market conditions appear favorable.

Third, Treasury is committed to ensuring market liquidity. The U.S. capital markets are the largest and most efficient in the world. Treasury securities are the principal hedging instruments used by investors across the markets. Liquidity promotes both efficient capital markets and lower Treasury borrowing costs.

Fourth, Treasury finances across the yield curve, appealing to the broadest range of investors. A balanced maturity structure also mitigates refunding risks. In addition, providing a pricing mechanism for interest rates across the yield curve further promotes efficient capital markets.

Fifth, Treasury employs unitary financing. We aggregate all of the Government's financing needs and borrow as one nation. Thus, all programs of the Federal Government can benefit from Treasury's low borrowing rate. Otherwise, separate programs with smaller, less liquid issues, would compete with one another in the market. Paul Volcker, then Under Secretary of the Treasury, proposed to promote the concept of unitary financing by establishing the Federal Financing Bank. He brought that idea before this Committee 27 years ago. The Administration continues to vigorously endorse this principle.

2. Changing Financing Needs

As we experience the first budget surplus in almost 30 years, we are responding to dramatic changes in our financing needs. Exhibit C shows the components of outstanding Federal debt. Privately held debt totals just under $3.4 trillion. Baseline estimates made just prior to the Clinton Administration projected that today's level of privately held debt would be greater by roughly $1.1 trillion, or approximately 32 percent. This remarkable accomplishment has benefitted all Americans through a higher national savings rate and lower interest rates.

Exhibit D shows how the components of our financing needs have changed over the last several years. Unified budget deficits, which historically drove our net borrowing needs, decreased dramatically and finally became a surplus. Net Federal lending activities that are not included in the unified budget have added to our financing needs. (This is largely represented by the direct student loan program.)

Another significant change is that we have been filling an increasing share of our financing needs by issuing nonmarketable securities. Upon the redesign two years ago of the nonmarketable securities issued to state and local governments ("SLGS"), we have seen a sharp increase in this type of financing. This year, we anticipate more than $50 billion in net SLGS issuance.

All of these factors lead to an anticipated $79 billion pay down in marketable debt this fiscal year. This compares to $169 billion in net market borrowing just three years ago. Treasury will still be the largest issuer in the market, however, as we need to raise the monies to pay off our maturing securities. This year, $510 billion of our longer term debt, known as "coupon" securities, will mature. In addition, there are $450 billion in Treasury bills outstanding which need to be refinanced on average several times a year. Treasury bills are our shortest term offerings, with maturities of less than one year.

3. May Announcements

To achieve the goals and to promote the principles that I described above, Treasury has a variety of financing tools at its disposal. These include issue sizes, offering schedules, instruments offered, auction rules and possible debt repurchases.

In May of this year, we used several of these financing tools to address the exciting challenge brought on by the new environment of budget surpluses. First, we discontinued issuance of 3-year notes. Second, we reduced the frequency of new issues of 5-year notes, shifting to a schedule of quarterly issuances instead of monthly issuances. I will discuss in some detail the actions that we took, as they best demonstrate how Treasury's debt management goals and principles guide our policy decision making.

In light of our lower borrowing requirements, we needed to develop a strategy for decreasing our issuances of Treasury securities. The first question we faced was whether to further decrease the issuance of Treasury bills. Over the last two years, we had been reducing the amounts of Treasury bills offered. Consequently, the market in privately held Treasury bills had declined in overall size by $135 billion, or 23 percent. Due to this change, the bill market had become less liquid. In addition, our previous reductions in bill issuances had caused the average life of our marketable debt to increase modestly. If left unaddressed, this would raise our borrowing costs because over long periods of time, interest rates on shorter term borrowings tend to be lower than on longer term borrowings. Moreover, Treasury bills, which are issued weekly, allow us flexibility to best manage Treasury's fluctuating cash needs. For all of these reasons, we decided to reduce our issuance of coupon debt, rather than further reduce issuance of Treasury bills.

The second question we faced was whether to make cuts across all of the existing types of coupon debt, or to eliminate specific issues or maturities. The current issue sizes had already been reduced to levels in existence in 1992. The size of the U.S. capital markets have expanded significantly since that time. Accordingly, we decided to concentrate our borrowing in fewer but larger debt offerings. By reducing the total number of yearly coupon issues from 39 to 27, we will promote market liquidity and efficiency, and best achieve lowest cost financing for taxpayers.

The next question we faced was which issues or maturities to eliminate. The discontinuation of a maturity is not unusual we discontinued 20-year bonds in 1986, 4-year notes in 1991, and 7-year notes in 1993. The 3-year note was chosen for elimination in response to market demands. It is closest in maturity to another of Treasury's coupon offerings, the 2-year note. In addition, the elimination of the 3-year note allows us to maintain financing across the yield curve. We chose to reduce the frequency of new issues of 5-year notes, shifting to a schedule of quarterly issuances to further concentrate our issuance. That change fits our cash management needs by providing us with the cash we need in the middle of fiscal quarters.

In sum, the debt management changes that we announced in May promoted the achievement of Treasury's debt management goals. We reduced the Treasury offering schedule to align new Treasury security issuance with the Government's need for financing. By concentrating our financing on larger, more liquid issues, we are promoting capital markets as well as lowest cost financing for the taxpayers.

4. Recent Innovations

The changes that we instituted in May are just one example of the innovations in debt management that have been achieved during the Clinton Administration.

One of our most significant innovations has been the development of inflation-indexed securities. These securities, first offered in January 1997, diversify the Government's financing sources. We believe that this will lower Treasury's borrowing costs over the long term. They also provide an important diversification tool for investors. Moreover, by providing inflation protection, we believe that inflation-indexed securities promote savings. In addition, U.S. capital markets now have securities that price inflation risk. Treasury has made a long-term commitment to develop the inflation indexed market further.

In 1996, Treasury made it easier and less costly for state and local governments to refinance and invest in Treasuries. We redesigned SLGS and made them more flexible. As noted, we are now experiencing record net new borrowing in the form of SLGS.

In 1997, Treasury took steps to make savings bonds more attractive for American savers. We began to calculate the savings bond interest rate using a different formula, which raised the rate. We also began to accrue the interest on a monthly basis, instead of every six months. Later this year, we will be introducing inflation-indexed savings bonds. These bonds will protect hard-earned savings from inflation. They will be issued in denominations as low as $50, making them affordable for all Americans.

We are also introducing some new services designed to make our securities more accessible to investors. For example, later this year, we expect to offer savings bonds over the Internet. In addition, we've made improvements to the Treasury DIRECT book-entry system. The changes to Treasury DIRECT make it easier for investors to sell and to pay for Treasury securities, and to reinvest proceeds.

5. Year 2000 Problem

Before I conclude, I would like to take a moment to discuss the steps we are taking to address the Year 2000 computer problem as it relates to the functioning of the market for Treasury securities.

On Friday, December 31, 1999, the Treasury Department is scheduled to make principal and interest payments of $35 billion. We are also scheduled to issue securities on that day. On Monday, January 3, in the year 2000, we currently plan to conduct our usual weekly Treasury bill auctions. Treasury is committed to taking all the necessary steps to avoid any significant disruption on that first trading day of the new millennium.

Our efforts in this area are both internal and external. Internally, the Treasury and the Federal Reserve have identified 14 critical securities-related systems, and are in the process of ensuring that all of those systems are Year 2000 compliant. The critical systems include the national book entry system, which maintains and transfers marketable Treasury securities; and our auction and trading systems, which receive and process auction tender information. We expect to complete coding and testing for all but one of the systems by the end of 1998.

Externally, Treasury has been reaching out to Treasury market participants to encourage them to engage in Year 2000 readiness testing. Just last week, we co-sponsored a conference on readiness testing in New York. In addition, we have been engaging with other members of the Working Group on Financial Markets, both at the principal level and at the staff level, to address this important issue.

6. Conclusion

As I stated earlier, the Administration welcomes the challenge of managing a surplus rather than financing a deficit. I will be happy to answer any questions you may have regarding Treasury debt management in this new era of budget surpluses.