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Our Government’s operations, financial results, and satisfaction of its customers are subject to various risks and uncertainties, including those described below.
The Centers for Disease Control (CDC) is responding to a worldwide pandemic of respiratory disease spreading from person-to-person caused by a novel (new) coronavirus. The disease has been named “coronavirus disease 2019” (abbreviated “COVID-19”). On March 11, 2020, the COVID-19 outbreak was characterized as a pandemic by the World Health Organization (WHO). At the time of this filing, the US is in the acceleration phase of the pandemic, and all 50 states have reported cases to the CDC. This situation poses a serious public health risk.
The complete clinical picture with regard to COVID-19 is not fully known. Reported illnesses have ranged from very mild (including some with no reported symptoms) to severe, including illness resulting in death. As of April 13, 2020, there have been 22,492 related deaths and 578,476 confirmed cases of COVID-19 in the US. For current data visit the USAFacts.org website. At this time, there is no vaccine to protect against COVID-19 and no medications approved to treat it. Nonpharmaceutical interventions will be the most important response strategy to try to delay the spread of the virus and reduce the impact of the disease.
The CDC expects that widespread transmission of COVID-19 in the United States will occur. In the coming months, most of the US population will be exposed to this virus. Widespread transmission of COVID-19 could translate into large numbers of people needing medical care at the same time. Schools, childcare centers, and workplaces may experience more absenteeism. Unemployment insurance claims reached more than 10 million for the two weeks preceding March 28, 2020, compared to 217,000 for the week of March 14, 2020. Mass gatherings may be sparsely attended or postponed. Public health and healthcare systems may become overloaded, with elevated rates of hospitalizations and deaths. Other critical infrastructure, such as law enforcement, emergency medical services, and sectors of the transportation industry may also be affected. Healthcare providers and hospitals may be overwhelmed.
On March 16, 2020, the White House announced a program called “15 Days to Slow the Spread,” which is a nationwide effort to slow the spread of COVID-19 through the implementation of social distancing at all levels of society. The social distancing guidelines were subsequently extended beyond 15 days and are now recommended through April 30.
These circumstances and our response to them may have a significant negative impact on the health and well-being of the US population, as well as on the US economy. On March 27, 2020, the “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act” was passed into law. This bill attempts to address economic impacts of, and otherwise respond to, the COVID-19 outbreak by:
This pandemic will impact most facets of Our Government and our population. Nearly all government agencies are responding, and many have issued related statements. You can review the responses from each federal agency at https://www.usa.gov/government-coronavirus-response. However, Our Government will face challenges in responding. The GAO reports that “Recent hurricanes, wildfires, and other events have highlighted the challenges the federal government faces in responding effectively to natural and man-made disasters—both in terms of immediate response and for long-term recovery efforts.”33 For ongoing analysis of the impact of COVID-19, please see USAFacts’ Coronavirus hub at https://usafacts.org/issues/coronavirus/.
Unlike information about a corporation, the data for our Government come from numerous and varied sources. The current state of this data poses significant challenges, including:
This lack of availability and comparability of data makes analysis of our Government challenging, hampering the knowledge and decision-making capability of our leaders, regulators, citizens, and all other interested parties. We have highlighted these and other key data challenges for this 10-K in Exhibits 99.12 and 99.13 to this report.
Our Government provides services, promulgates regulations, and enacts legislation intended to make progress towards our Constitutional objectives; however, citizens are responsible for making their own choices as to employment, healthcare, education, and the like. They may choose wisely or poorly, and they may or may not take advantage of the opportunities open to them. For example:
A high-quality and timely government-wide personnel security clearance process is essential to minimize the risks of unauthorized disclosures of classified information and to identify and assess individuals with criminal histories or other questionable behavior. As of October 1, 2015, the latest date for which data are available, approximately 4.2 million government and contractor employees, at nearly 80 executive branch agencies, were eligible to hold a personnel security clearance. Current challenges in the personnel security clearance process include:
Our Government and our nation’s critical infrastructures—such as energy, transportation systems, communications, and financial services—are dependent on computerized (cyber) information systems and electronic data to carry out operations and to process, maintain, and report essential information. Ineffectively protecting cyber assets can facilitate security incidents and cyberattacks that disrupt critical operations; lead to inappropriate access to and disclosure, modification, or destruction of sensitive information; and threaten national security, economic well-being, and public health and safety. We are seeing steady advances in the sophistication of cyber-attack technology and the emergence of new and more destructive attacks. Since 2010, the US Government Accountability Office (GAO) has made over 3,000 recommendations to agencies aimed at addressing cybersecurity challenges facing the government. Nevertheless, many agencies face challenges in safeguarding their information systems and information, in part because many of these recommendations have not been fully implemented, and as of December 2018, nearly 700 of the GAO’s information security–related recommendations had not been fully implemented.
Our Government’s ability to deliver services to citizens is influenced by the state of the economy. Indeed, maintaining economic growth, full employment, and low and stable inflation are among its top priorities, at least in part because these conditions both foster the prosperity and well-being of its citizens and provide tax revenue that funds Government services.
An economic downturn could result in business failures and job losses, with a resulting decline in corporate and personal income-tax revenue. At the same time, spending would rise as government increases outlays for services such as unemployment insurance, Temporary Assistance to Needy Families, and the Supplemental Nutrition Assistance Program.
On the federal level, the combination of lower revenue and higher spending would widen the budget deficit, which would have to be financed either by raising taxes, selling government assets, or issuing debt. The increase of our national debt raises interest costs and constrains our Government’s ability to provide services in the future.
An economic downturn could be caused by policy errors, the vagaries of the business cycle, and exogenous factors. In the longer term, the economy could succumb to a slowing pace of growth as an aging society reduces the size of the labor force as a proportion of the total population.
The state of the economy also depends on factors beyond our Government’s control, including:
Federal debt held by the public is now at its highest level since shortly after World War II. Without a change in current laws and policies, federal spending, especially for Social Security and Medicare, is forecast to outstrip revenue over the next decade, widening the national debt to 92% of GDP in 2029 from 78% in 2019, according to the Congressional Budget Office. In 30 years, the Congressional Budget Office projects the debt will rise to 144% of GDP. That amount would be the highest in the nation’s history by far. As a result, there is a risk that interest payments on the debt could consume a growing portion of the budget, possibly limiting the federal government’s ability to provide other services unless taxes are raised or revenue is otherwise increased. A rising debt also risks pushing up interest rates, reducing savings and investment, and increasing the chances of a fiscal crisis.
On December 22, 2017, H.R.1, also known as the Tax Cuts and Jobs Act, became law. Effective January 1, 2018, H.R. 1 reduces the top individual income tax rate from 39.6% to 37%, changes the income tax brackets associated with each tax rate, increases the child tax credit, and provides for a 20% deduction of qualified business income and certain dividends for individuals, among other provisions. The Joint Committee on Taxation, a nonpartisan committee of the US Congress, estimates that H.R.1 will reduce federal income tax revenue by $1.5 trillion between 2018 and 2027, including $1.1 trillion between 2018 and 2022. The estimated impacts on annual tax revenues range from a gain of $33 billion in 2027 to a loss of $280 billion of revenue in 2019. This works out to an average estimated annual revenue loss of $146 billion, or about 3% of our Government’s annual revenue.
Enforcement of tax laws helps fund our Government. Internal Revenue Service (IRS) enforcement collects revenue from noncompliant taxpayers and, perhaps more importantly, promotes voluntary compliance by giving taxpayers confidence that others are paying their fair share. The IRS’s capacity to implement new initiatives, carry out ongoing enforcement and taxpayer service programs, and combat identity theft (IDT) refund fraud under an uncertain budgetary environment remains a challenge. In 2016, the IRS estimated that the average annual gross tax gap—the difference between taxes owed and taxes paid on time—was $441 billion for tax years 2011-2013, of which it estimates it may collect only $60 billion (14%). In addition, the IRS estimates that at least $12.2 billion in individual IDT tax refund fraud was attempted in 2016, of which it prevented at least $10.5 billion (86%).
Gross federal debt, or the sum of the debt held by the public and debt held by government entities (such as the Social Security trust fund) is subject to a statutory ceiling set by Congress. The ceiling, known as the debt limit, has been suspended (there is no limit) through July 31, 2021. The Treasury must take extraordinary measures to continue funding government activities after August 1, 2020. Even then, it will be able to continue borrowing only for a limited time. Once the limit is reached, the Treasury may not issue new debt to pay bills already incurred by Congress. Since 1960, Congress has raised, extended, or altered the definition of the debt ceiling or suspended it numerous times, most recently effective August 2, 2019. Failure to raise the ceiling when needed could prompt an unprecedented default on Treasury securities, which are generally considered the world’s safest government debt and form a foundation for the global financial system. A US default, in turn, could trigger a financial crisis and throw the nation into a recession.
Following massive bailouts of financial firms during the 2007-2008 crisis, in 2010, the federal government enacted the Dodd-Frank Act, which was intended to strengthen oversight of the financial system and reduce the risk of another crisis. In May 2018, the Financial CHOICE Act rolled back a number of provisions of the Dodd-Frank Act. This act, as amended, has not been tested, and it’s unclear whether it is adequate to prevent future financial crises that would involve the use of government funds to rescue financial institutions.
As a reaction to the financial crisis, our Government also took over two housing-finance agencies, Fannie Mae and Freddie Mac, which guarantee about half of the new mortgages in the US and have combined assets of about $5 trillion. Our Government’s role in housing finance could require the use of significant government funds.
Changes in our environment may pose risk to agriculture, infrastructure, and the health of citizens. Possible effects include coastal flooding as a result of rising sea levels, changes to the productivity of farms, and more intense and frequent weather events, according to our Government Accountability Office. Drought and diminishing water supplies are also risks. Our Government is the owner and operator of infrastructure that is vulnerable to changes in our environment, insures crops that could be damaged, and provides disaster aid in emergencies.
The federal government is also financially liable for cleaning up areas where federal activities have contaminated the environment. Various federal laws, agreements with states, and court decisions require the federal government to clean up environmental hazards at federal sites and facilities—such as nuclear weapons production facilities and military installations. Such sites are contaminated by many types of waste. The GAO reports that the federal government's environmental liability has been growing for the past 20 years and is likely to continue to increase. For fiscal year 2017, the federal government's estimated environmental liability was $465 billion—up from $212 billion for fiscal year 1997. However, this estimate does not reflect all of the future cleanup responsibilities federal agencies may face. The GAO has found that federal agencies cannot always address their environmental liabilities in ways that maximize the reduction of health and safety risks to the public and the environment in a cost-effective manner, and that some agencies do not take a holistic, risk-informed approach to environmental cleanup that aligns limited funds with the greatest risks to human health and the environment.
Establishing justice and ensuring domestic tranquility have been top priorities since the adoption of the Constitution in 1787. If there is civil unrest, most inputs and outcomes of our Government are affected.
Domestic tranquility has periodically been disrupted by localized rebellions, criminal gangs, labor actions, riots, and mass protests. In 1794, President George Washington raised a militia to suppress the “Whisky Rebellion,” an uprising by farmers in western Pennsylvania resisting the imposition of an excise tax on whiskey. In 1932, President Herbert Hoover ordered the army to disperse the so-called “bonus army,” a group of more than 40,000 veterans, family members and supporters who gathered in Washington to demand cash redemption for bonus certificates awarded for service in World War I. In 1968, the assassination of civil rights leader Martin Luther King, Jr. sparked a wave of riots across American cities, including Washington D.C., Chicago, Baltimore, Detroit, and Kansas City, causing dozens of deaths, more than 10,000 arrests, and widespread property damage. President Lyndon B. Johnson mobilized more than 10,000 federal troops and national guardsmen to quell the disturbances in Washington. The 1960s also saw mass demonstrations to protest the war in Vietnam, including one in 1969 that drew an estimated half a million protesters to the capital. Most significantly, a dispute between southern and northern states over the institution of slavery resulted in the secession of 11 southern states from the union, followed by a civil war to restore the union that lasted from 1861 to 1865, costing the lives of 620,000 soldiers.
Today, cities, counties, and states operate police forces and court systems responsible for enforcing local laws and maintaining public order; prisons to accommodate those who have been convicted of breaking the law and sentenced to incarceration; and fire departments to prevent and fight fires. The federal government also operates a number of law-enforcement agencies, including the Federal Bureau of Investigation and the Drug Enforcement Administration. Our Government also seeks to ensure the safety of consumer products, food and pharmaceuticals, and transportation systems; protect the environment; and protect the population against natural disasters.
Our Government’s ability to maintain order and protect the population from a variety of threats faces a number of risks and challenges, including:
Cultivating friendly relations with foreign powers that share our values as well as improving relations or avoiding conflicts with actual and potential adversaries are essential to providing for the common defense. When necessary, we go to war to protect our vital national interests. Threats to our national security include:
The cost of providing Social Security and disability benefits is rising faster than revenue generated by the payroll tax. Reserves of the DI Trust Fund may be depleted as early as 2025, and reserves of the OASI Trust Fund may be depleted as early as 2030, according to projections by the funds’ trustees. See Exhibit 99.06 for more information. The Pension Benefit Guaranty Corporation (PBGC), which backs the pension benefits of over 35 million Americans through insurance programs that guarantee pension benefits when plans fail, may not be able to meet its long-term obligations, due in part to a long-term decline in the number of traditional defined benefit plans and the collective financial risk of the many underfunded pension plans that PBGC insures. According to the PBGC’s 2019 Annual Report, the PBGC’s deficit was $57 billion as of September 30, 2019. Its projections show that the multiemployer program continues to show a very high likelihood of insolvency during 2025, and that insolvency is a near certainty by the end of 2026. When the program becomes insolvent, PBGC will be unable to provide financial assistance to pay the current level of guaranteed benefits in insolvent plans. At that time, the only money available to provide financial assistance will be incoming multiemployer premiums and thus PBGC will be only able to pay financial assistance to the extent of PBGC’s multiemployer premium income.
First, the Medicare Hospital Insurance Trust Fund is forecast to be depleted as early as 2023, reflecting rising health-care costs and a relative decline in the number of workers paying payroll taxes. See Exhibit 99.07 for more information. Second, epidemics, such as those caused by the Ebola or Zika viruses, and pandemics, such as the one caused by COVID-19, could bring about widespread illness and loss of life. Third, every day, nearly 130 people in the US die after overdosing on opioids. The misuse of and addiction to opioids—including prescription pain relievers, heroin, and synthetic opioids such as fentanyl—is a serious national crisis that affects public health as well as social and economic welfare. The Centers for Disease Control and Prevention estimates that the total "economic burden" of prescription opioid misuse alone in the United States is $78.5 billion a year, including the costs of healthcare, lost productivity, addiction treatment, and criminal justice involvement.
The nation’s highways, mass transit, and rail systems are under growing strain, reflecting increasing congestion and freight demand, and traditional funding sources are eroding. For example, federal taxes on gasoline haven’t been raised since 1993. Inflation-adjusted revenue from motor fuel taxes that support the Highway Trust Fund, a major source of federal surface transportation funding, is declining, according to the Government Accountability Office, and our Government has been using general revenues to maintain spending levels. This trend is forecast to continue as consumers turn to vehicles that are more fuel efficient or that use alternative energy sources. The Congressional Budget Office estimates that $159 billion in additional funding would be needed between 2022 and 2029 to maintain inflation adjusted spending on current levels.
High levels of training and education are required to address complex challenges such as disaster response, national and homeland security, and rapidly evolving technology and privacy-security issues. However, current budget and long-term fiscal pressures, declining levels of federal employee satisfaction, and a potential wave of employee retirements could produce gaps in leadership and institutional knowledge.