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The Federal Shutdown's Impact on States and Localities

Programs that help the most vulnerable populations -- including food stamps, cash welfare and child care -- are most affected.

Funding is in doubt for Child Care Development Fund programs.
(AP/Gene J. Puskar)
Last Updated Jan. 9 at 2:42 p.m. ET



  • In prior shutdowns, states have kept most programs and services running and been reimbursed by the feds. But sometimes, they aren't fully or quickly reimbursed.
  • Programs that help the most vulnerable populations will be most affected.
  • About two-thirds of federal grant funding to states is considered mandatory and is generally not impacted by a shutdown.
As the federal government shutdown wears on, millions of low-income families are increasingly at risk, and state and local governments may not have the resources to pick up the tab.

On Tuesday, Trump administration officials announced that food stamp recipients are guaranteed access to their benefits only through the end of February. But beyond that, funding for the nutrition program run by the now-shuttered U.S. Department of Agriculture is questionable.

The same is true for WIC, the women, infants and children program.

The announcement came as available reserves for other programs that help the poor are increasingly in doubt. Despite the fact that the Department of Health and Human Services is not part of the partial shutdown, Congress failed to reauthorize two key programs before the Dec. 21 deadline: the cash welfare program (officially called Temporary Assistance for Needy Families) and Child Care Development Fund programs.

Such funds "are expected to run out soon, at different times for different states," according to the Center for Law and Social Policy. 

With no immediate end in sight, states and localities -- and the economy at large -- could start to encounter serious challenges. S&P Global Ratings estimates that the shutdown could shave $1.2 billion off real GDP for each week that part of the government is closed.

“A protracted federal shutdown,” it warns “would compound the effects of fading fiscal stimulus and act as a drag on an economy already experiencing decelerating growth.”

This shutdown is the third and the longest of President Donald Trump’s tenure. As with the first shutdown of his administration, immigration is the focus of the dispute. Trump is calling for $5.6 billion in funding for a border wall between the U.S. and Mexico, but the idea lacks the necessary support in Congress.


The Cost of Covering Services During a Shutdown

In prior shutdowns, states have generally put up their own money to keep most programs and services running. That’s a calculated risk because the feds have generally reimbursed the states for such expenses in the past.

National Association of State Budget Officers’ John Hicks told Governing previously that it is “comforting” to states that they have been reimbursed after previous shutdowns.

“The best example people have in their recent memory is that it hasn’t caused financial pain to states for continuing to provide services,” he added.

That said, there’s no guarantee states will be fully reimbursed or that it will be in a timely manner. For instance, nearly four years after the 2013 shutdown, Arizona, Colorado, New York, South Dakota, Tennessee and Utah were still waiting to get all their money back.


What's Impacted by the Shutdown and What's Not

The key to determining the shutdown's impact on a particular government program is whether funding is mandatory or discretionary. Generally, mandatory programs -- such as Medicaid -- aren't affected. About two-thirds of federal grant funding to states is considered mandatory.

Furthermore, a fair amount of discretionary programs are safe because of previously passed measures that cover a full year of funding. Nearly all programs funded through the departments of Defense, Education, Health and Human Services, Labor, and Veterans Affairs have funding so the shutdown affects about one-quarter of the federal government. That means programs like the Low Income Home Energy Assistance Program or Head Start preschool -- which have ran out of funds in previous shutdowns -- will be able to stay open. The Children’s Health Insurance Program -- a victim of previous shutdowns -- is also safe thanks to a six-year funding deal reached last year.

That said, a wide swath of programs are feeling the hurt.

In addition to programs that help low-income children and families, major mass transit systems are likely to feel financial strain. Federal grants provide up to 20 percent of operating revenues and a majority of capital funding for some systems.

Moody's Investors Services noted this week that "mass transit systems have temporarily lost financial aid that supports a wide range of needs, from daily maintenance and service to ongoing repair and expansion projects."

Meanwhile, the absence of federal workers commuting to the office is expected to hurt transit ridership and revenue, particularly for the Washington, D.C.-based rail system.

Highway programs, however, are largely funded by a special account called the Highway Trust Fund -- not the general fund -- so they are generally spared. 

In the event of a prolonged shutdown, the bond market could slow down. That’s because governments preparing to issue bonds may delay their borrowing, especially for projects that have significant federal funding components.

As a result, it's possible that some construction on transportation infrastructure will come to a halt. Elsewhere, some projects rely on federal funding to make payments to bondholders -- governments' ability to make those payments could be in doubt if the shutdown wears on.

When it comes to state employees whose positions are funded by federal grants, which includes some local housing authorities, governments might pick up the difference -- at least for a time. But they may have to make tough decisions in the event of a longer shutdown.

Meanwhile, furloughed workers are starting to file for unemployment.

The District of Columbia, Maryland and Virginia are home to thousands of federal workers and contractors and are among the states most affected by the federal work stoppage. According to the Baltimore Sun, unemployment insurance applications have started to spike in Maryland. The state labor department had 169 new applications as of Dec. 27, but that number is expected to grow. Unlike previous shutdowns, federal funding has already been appropriated to cover the cost of these offices staying open to take claims.

Still, the uptick is not quite as dramatic, so far, as it was in 2013 when state unemployment offices were flooded with requests from temporarily laid off federal employees. That's in part due to the fewer number of federal workers affected. Also, employees who receive backpay when the government reopens will have to refund employment offices any benefits they received. 

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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