Financial condition

Financial condition⁴⁴

Liquidity and capital resources

Cash and other monetary assets

Our Government’s cash and other monetary assets increased $253 billion or 24% in 2018 to $1,310 billion, including $508 billion of federal funds and $802 billion of state and local funds.

Cash and other monetary assets increased $237 billion or 87% at the federal level, primarily relating to operating cash held by the Treasury, which fluctuates due to Treasury’s management of the balance and timing of our Government’s cash position, including investment and borrowing decisions.

Cash and other monetary assets increased $16 billion or 2% at the state and local government level, primarily reflecting a $14 billion or 2% increase in non-pension cash and other monetary asset balances.

Our Government holds cash and monetary assets primarily to fund near-term operations and existing obligations and where otherwise required by law. It also holds international monetary assets in the International Monetary Fund (IMF). The IMF promotes international monetary cooperation and a stable payments system to facilitate growth in the world economy. Further discussion of the federal government’s IMF related assets can be found in Part II, Item 8. Financial Statements and Supplementary Data, Notes to financial statements, Note 2 – Cash and other monetary assets.

Debt and equity securities

Our Government’s debt and equity securities comprise mainly corporate equities, corporate and foreign bonds, and agency and government-sponsored enterprise (GSE)-backed securities, primarily held at the state and local level. These securities are predominantly US dollar-denominated securities, but also include foreign currency-denominated securities.

Government debt and equity securities increased $330 billion or 7% in 2018 to $5,075 billion. Of the total increase, state and local investments increased $334 billion, while federal investments decreased $4 billion. At the state and local level, there was a $276 billion increase in investments of pension assets, which are not considered liquid assets our Government can use for general operations, as well as an increase of $58 billion related to non-pension assets, reflecting increases in agency and GSE-backed securities of $33 billion and corporate equities of $14 billion.

Off balance sheet assets, liabilities, and other arrangements

There are significant resources available to our Government that extend beyond the assets reflected in the accompanying balance sheets. Those resources include stewardship land (e.g. national parks, wildlife refuges, national forests, and other lands of national and historical significance) and heritage assets (e.g. national monuments and historical sites of historical, natural, cultural, educational, or artistic significance) in addition to our Government’s sovereign powers to tax and set monetary policy.

The federal government states that stewardship land and heritage assets are not expected to be used to meet the obligations of the federal government, and as such, they are not recorded as assets on the balance sheet. However, our Government does generate revenues from these assets. See Part II, Item. 8, Financial Statements and Supplementary Data, Note 22 – Stewardship land and heritage assets within this annual report for more information.

The primary cash inflows of our Government come from its ability to tax and set monetary policy, for which there are no assets recorded on the balance sheet. Tax revenue comprised 88% and 87% of our Government’s total revenues for 2018 and 2017, respectively.

Our Government has certain obligations and rights related to its relationship with GSEs that may not be recorded on the balance sheet. See Note 8 – Investments in government-sponsored enterprises in Part II, Item 8. Financial Statements and Supplementary Data, Notes to financial statements within this annual report for more information.

Our Government also has certain other obligations that are not legal liabilities in our balance sheets. See Note 18 –Contingencies and Note 19 – Commitments for more information.

Debt

Total Government debt held by the public increased $990 billion, or 6%, in 2018 to $17,798 billion.

Federal government

The unified federal budget surplus or deficit is the difference between total federal spending and receipts (e.g. taxes) in a given year. Our Government borrows from the public (increases federal debt levels) to finance deficits by issuing Treasury bills, bonds, and notes. During a budget surplus (i.e. when receipts exceed spending), our Government typically uses those excess funds to reduce the debt held by the public. Total federal government debt held by the public was $14,721 billion at September 30, 2018.

Foreign governments and other overseas entities top the list of holders of federal debt securities, owning $6,270 billion or 39% of the total federal debt held by the public at September 30, 2018. That proportion has fluctuated over the years and was 48% in 2008 (the first year discussed in this MD&A). The biggest foreign holders of our federal government’s debt in 2018 were China, holding $1,124 billion or 7%, and Japan with $1,040 billion or 6%, of the balance.

The second-largest category of holders of federal debt securities are American households and businesses, which owned $6,117 billion at September 30, 2018, or 38% of the total federal debt held by the public.

The third-largest holder of federal debt is the Federal Reserve, the US central bank. The Federal Reserve’s holdings jumped to $2,595 billion at September 30, 2018 from $476 billion at September 30, 2008, comprising 16% and 7%, respectively, of the total federal debt held by the public, as it sought to bring the country out of the Great Recession and keep the economy growing afterwards. To do that, the Federal Reserve bought large amounts of Treasury securities to keep long-term interest rates low. Buying Treasury securities pushes up their price, which in turn lowers the interest rate, or yield. That makes it cheaper for companies and individuals to borrow, since many types of loans, including home mortgages, are linked to Treasury yields.

State and local government

State and local governments generally borrow to finance construction projects, including schools, hospitals, and roads. When these governments borrow, they sell bonds, which represent money that must later be repaid with interest. The state and local government debt balance was $3,077 billion at September 30, 2018.

We are not aware of an aggregated source for a listing of holders of the state and local government debt held by the public.

Intergovernmental debt

In addition to debt held by the public, our federal government had $5,825 billion in federal intergovernmental debt outstanding at September 30, 2018, which arose when one part of our federal government borrowed from another. This amount represents debt issued by the Treasury and held by federal government accounts, including the Social Security ($2,896 billion) and Medicare ($302 billion) trust funds. Because these amounts are both liabilities of the Treasury and assets of federal government trust funds, they are eliminated as part of the consolidation process for the federal government financial statements. However, when those securities are redeemed, for example, to pay future Social Security benefits, the Treasury will need to obtain the resources necessary to reimburse the trust funds.

There is also intergovernmental debt between the federal and the state and local governments, which generally arises when state and local governments invest in Treasury securities. We eliminated the state and local government holdings of Treasury securities when preparing our combined balance sheets. See Item 8. Financial Statements and Supplementary Data, Notes to financial statements, Note 23 – Intergovernmental transfers for more information.

Contractual obligations

The following table summarizes the payments due by fiscal year for our Government’s outstanding contractual obligations as of September 30, 2018:

Companies are also required to report in the table above within their Form 10-Ks future capital lease obligation payments. We are not aware of a federal or state and local aggregated source for this data and as such, the table above omits this information.

Other expected uses of capital

We expect our Government will continue to invest in major government functions and programs, such as Social Security, Medicare, infrastructure, education, and training, to name a few, in alignment with its overall objectives.

Social insurance

The largest outlays of the federal government are the various social insurance programs (e.g. Social Security and Medicare) and grants to the states for Medicaid. Our Government records liabilities for social insurance programs when payments are due and payable to beneficiaries or service providers. These liabilities do not encompass total expected future expenditures.

The Treasury, in its Financial Report of the United States (the Financial Report), provides Statements of Social Insurance (SOSI). The SOSI provide estimates of the potential future obligations for the most significant social insurance programs – Social Security, Medicare, Railroad Retirement, and Black Lung. The estimates represent the actuarial present values of the projected future net expenditures for the programs, generally based on continuation of then-current program provisions and economic and demographic assumptions from the respective programs’ trustees over the following 75 years. The estimates at September 30, 2018 show net present values of estimated then-future net expenditures for Social Security, Medicare, and other social insurance programs of $16.1 trillion, $37.6 trillion, and $0.1 trillion, respectively. More information on these programs and the related fiscal projections can be found at Exhibit 99.06 and Exhibit 99.07 of this Form 10-K.

Deferred maintenance and repairs

Deferred maintenance and repairs result from maintenance not being performed on assets on a timely basis. The consequences of not performing regular maintenance and repairs could include increased safety hazards, poor service to the public, higher costs in the future, and inefficient operations. The federal government estimates the cost to bring its property, plant, and equipment to an acceptable condition. These estimates exclude the cost of expanding the capacity of assets or upgrading them to serve needs beyond those originally intended. The federal government estimated that the deferred maintenance and repairs on its buildings, structures, and land was $167 billion as of September 30, 2018. Estimated deferred maintenance and repairs costs are not recognized as a liability on the balance sheets.

Sustainability

Federal

Our federal government operates at a deficit nearly every year, with cash outflows exceeding inflows. We do not expect existing cash, cash equivalents, short-term investments, and cash flows from operations to be sufficient to fund federal government operations. Rather, we rely on our federal government’s ability to issue debt securities or to adjust tax and other revenues to fund its activities. This is true for at least the next 12 months and thereafter for the foreseeable future.

Our federal government’s ability to issue debt securities is subject to a statutory debt limit (the Debt Limit) and is impacted by its credit rating. The sum of debt held by the public and intergovernmental debt equals gross federal debt, which (with some adjustments) is the amount subject to the Debt Limit. At both September 30, 2017 and 2018, the debt subject to the Debt Limit was $21.5 trillion, but there was no Debt Limit due to Congress’ temporary suspension of it. During both fiscal years 2017 and 2018, delays in raising the debt limit resulted in the Treasury implementing “extraordinary measures” on a temporary basis, to enable the federal government to protect the full faith and credit of the US by continuing to pay the nation’s bills. These extraordinary measures permit the federal government to continue to honor pre-existing commitments; they do not increase spending or authorize new spending. As of September 30, 2018, and 2017, the federal government had the top two highest possible ratings among the largest credit rating agencies in the US. See Item 7A. – Quantitative and Qualitative Disclosures about Market Risk, Sovereign credit rating for further information.

According to the Treasury, an important item for citizens to understand is the current fiscal policy and the importance and magnitude of policy reforms necessary to make it sustainable. According to the Treasury, a sustainable policy is one where the ratio of debt held by the public to Gross Domestic Product (GDP) (the debt-to-GDP ratio) is stable or declining over the long term. GDP measures the size of the nation’s economy in terms of the total value of all final goods and services that are produced in a year. The debt-to-GDP ratio is a measure commonly used to gauge a nation’s ability to pay its debt, as GDP is one measure of a country’s ability to generate the financial resources needed to service its debt. Total Government debt (federal and state and local) held by the public (excluding intergovernmental debt) was $17,798 billion at September 30, 2018, or 85% of GDP, down from 84% of GDP at September 30, 2017. Total federal debt (including intergovernmental debt) was 76% of GDP, while federal debt held by the public (excluding intergovernmental debt) was 70% of GDP, at September 30, 2018.

The projections in the Financial Report at the end of 2018 indicate that the debt-to-GDP ratio was projected to reach 530% in 2093 and to rise continuously thereafter. The debt-to-GDP ratio rises at an accelerating rate despite primary deficits (the total budget deficit excluding net payments) that flatten out because higher levels of debt lead to higher net interest expenditures, and higher net interest expenditures lead to higher debt. Preventing the debt-to-GDP ratio from rising over the 75 years following 2018 was estimated by the Treasury to require some combination of spending reductions and revenue increases that amount to 4% of GDP over the projection period, an increase of 2 percentage points from their 2017 estimates. While this estimate of the “75-year fiscal gap” is highly uncertain, the Treasury believes it is nevertheless nearly certain that then-current fiscal policies cannot be sustained indefinitely.

State and local

We are not aware of a consolidated state and local government source that analyzes its financial sustainability.