Federal arbitrage regulations are designed to achieve all of the following except:

Federal arbitrage regulations are primarily focused on controlling the financial aspects of tax-exempt bonds to ensure fairness and compliance with federal tax laws. One of the key objectives is to limit the ability of governments to invest the proceeds from tax-exempt bonds in higher-yielding taxable securities. This is because such practices could undermine the purpose of issuing tax-exempt bonds, which is to finance public projects at a lower cost to the issuer and, ultimately, to taxpayers.

Additionally, these regulations impose timelines for spending bond proceeds, preventing the over-issuance of tax-exempt bonds, and ensuring that the tax benefits of these bonds are not exploited through excessive investment activities that could lead to arbitrage profits.

The correct answer regarding preserving flexibility for state and local governments in meeting capital needs is not aligned with the core purpose of these regulations since their focus is more on controlling financial practices rather than enhancing flexibility. While governments certainly need flexibility in their capital planning, the arbitrage regulations are not intended to support that flexibility when it could potentially lead to misuse of tax-exempt bond proceeds.