Why this shutdown could be even more significant for states and localities

Liz Farmer is fiscal policy expert, co-host of the Public Money Pod and author of Route Fifty’s biweekly Public Finance Update. This is an excerpt from her Long Story Short newsletter. To read the rest of this article, receive new posts and support her work, please subscribe here.

Hours away from a federal government shutdown, a deal is looking less and less likely. House Speaker Kevin McCarthy will hold a vote on a stopgap spending bill today that would vastly reduce government funding and impose stringent immigration restrictions. It is considered dead on arrival in the Senate.

With a shutdown seeming more and more inevitable, the questions now are just how long it will last and what (if any) stopgap funding measures will be put in place for social programs.

This week’s newsletter seeks to give some context for the current shutdown, the historical impact of previous shutdowns and why this one could be even more significant for states and localities. 

Worse than last time?

The Congressional Budget Office has estimated that the 35-day shutdown between December 2018 and January 2019—the longest in history—reduced national economic output by a total of $11 billion. That figure includes $3 billion that will never be recovered. 

That was a “partial” shutdown because Congress had previously passed five of the 12 appropriation bills.

This time, we’re looking at a complete shutdown. If it drags on, the economic impact could be even more devastating, particularly for certain states and localities.

What won’t shut down?

There are two ways to look at this. First, there are programs that are categorized as mandatory spending. These programs, such as for Social Security, Medicare, and Medicaid, are not subject to annual appropriations.

The next are essential workers. They will have to stay on the job (without pay). In prior shutdowns, that has included border protection, hospital care, air traffic control, law enforcement and power grid maintenance workers, along with some legislative and judicial staff.

The state and local programs at stake

States and localities administer most federally funded social programs for low-income households and that money stops flowing when the government shuts down. In prior shutdowns, states have kept most programs and services running and later been paid back by the feds. But sometimes, they aren't fully or quickly reimbursed.

The most immediate concern is the Special Supplemental Nutrition Program for Women, Infants, and Children. WIC is already facing a shortage of funding amid the rising cost of food and more women than expected signing up for a program. A spokesperson for the U.S. Department of Agriculture told Route Fifty earlier this week that the agency “likely does not have sufficient funding to support normal WIC operations beyond a few days into a shutdown.” 

The two assistance programs are only funded through October and states would have to decide whether to pick up the tab: Temporary Assistance for Needy Families and Special Supplemental Nutrition Program.

During the 2013 government shutdown, every state but Arizona opted to cover the costs of the welfare program, and during the last shutdown, food stamp funding was temporarily halted until a deal was reached to fund benefits through February 2019.

The places that will feel it most

States and localities with lots of public land will feel the impact the most. National parks stayed open during the last shutdown but were not staffed, leading to trash build up and damage at many sites. Emily Brock of the Government Finance Officers Association told the Public Money Pod that in the event of an extended shutdown, municipalities reliant on tourism revenue from parks and public lands may have to consider municipal or business tax grace periods.

The governors of Arizona, Colorado and Utah have already announced they will pay to keep national parks open in the event of a shutdown to avoid any loss of tourism spending. 

Base personnel in military communities, meanwhile, will still be required to work but they will stop receiving the support they rely on—a paycheck, childcare and WIC. 

Hawaii faces the double-whammy of having a lot of military personnel and major national parks that draw tourists. The state’s tourism industry has been struggling since the Kilauea eruptions began in May, but so far, no plans have been announced to keep parks open.

And wherever there are a lot of federal workers, the impact will be felt. 

More than 400,000 people in “the DMV”—the District, Maryland, Virginia—work for the federal government, and that doesn’t include contractors who also make up a notable chunk of the workforce in Maryland and Virginia.

California is also one of the top states for most federal workers. But other than in Susanville, home to a federal prison and not much else, they make up a small share of regional workforces.

Other ways a shutdown could impair state and local operations

A shutdown would halt federally required environmental reviews and reviews of grant applications for funding from the Infrastructure Investment and Jobs Act (IIJA). Rulemaking for the IIJA and the Inflation Reduction Act may also be paused. The status of Community Block Development Grant funding beyond October is also in question, as is whether the newly created Office of Recovery Programs—which liaises with states and localities on their recovery funding financial reports—will stay open.

Commercial airports, which are owned by municipalities or districts, would be affected. Transportation Secretary Pete Buttigieg said this week that a shutdown “could potentially disrupt the training of new air traffic controllers, which could lead to further disruption to an airline industry that has struggled to handle a crush of passengers in the wake of the pandemic.” 

During the 2018-2019 shutdown, according to the Committee for a Responsible Federal Budget,  air travel was strained as a result of fewer air traffic controllers and TSA agents, who were all working without pay. Travelers faced longer lines at security checkpoints while the absence of 10 air traffic controllers temporarily stopped travel at LaGuardia Airport and caused delays at several major airports.