5 Insights to Help States Navigate a Federal Shutdown

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Mar 06, 2024, 10:15 ET

WASHINGTON, March 6, 2024 /PRNewswire/ -- The following article is provided by Rebecca Thiess, Justin Theal, and Peter Muller of The Pew Charitable Trusts.

As the federal government faces another potential shutdown, state policymakers need to understand how a closure could affect their budgets and operations. Here are five considerations to keep in mind.

1. Funding expires at different times for different programs.

States receive federal funds from hundreds of grant programs which collectively make up about a third of state budgets. The continued operation of some programs depends on the timing of their expiration, availability of unused reserves, or presence of advanced appropriations. State programs will not run out of federal funding on a single date, but instead have a rolling calendar of potential shutdown impacts.

For example, the Temporary Assistance for Needy Families program (TANF) requires reauthorization at multi-year intervals. If the program's expiration coincides with a shutdown, state policymakers would immediately lose access to new funds. On the other hand, many education programs are prefunded through the end of fiscal year 2024 and so are not likely to run out of funding even if a shutdown persisted for months.

2. Disruptions go beyond lost funding.

Federal shutdowns affect more than just dollars for programs. Other government functions—like rulemaking, grantmaking, and technical assistance or administration—can come to a halt as well and lead to wide-ranging challenges.

For example, because new grant programs often require corresponding rulemaking, a pause in non-emergency federal rulemaking could delay decisions and hold up a program's start even if funding is available. During the 2018-2019 shutdown, the Office of Information and Regulatory Affairs, which reviews many new rules, was largely furloughed, hampering state agencies' efforts to start running new programs.

Furloughs of federal employees could also limit access to help with grant applications, application processing, and the negotiating of terms. And technical assistance, which communities with fewer resources often rely on, can also become limited or unavailable. For example, in a Department of Housing and Urban Development FAQ memo, the agency noted that any scheduled technical assistance visits by agency employees would be canceled in the event of a shutdown.

3. Policymakers can continue providing services at the state level during a shutdown.

When it comes to managing the effects a federal shutdown will have on their operations, state policymakers have some flexibility; however, the longer a shutdown persists, the harder it is for them to continue services without federal support.

A number of state policymakers, for example, have indicated an interest in keeping popular national parks open during a shutdown. In the lead-up to the September 2023 shutdown threat, policymakers in Utah, Arizona, and Colorado committed to funding the operation of national parks that draw a lot of tourists. This can come at a cost though: Utah spent around $1 million of its own funds to keep parks open for 35 days during the 2013 federal shutdown.

4. Considerations should include national- and state-level economic impacts.

Federal government shutdowns can have wide-ranging effects on both national and state economies. While the exact disruptions depend on each shutdown's scope and duration, at the national level federal shutdowns interrupt government services, delay payments to contractors, and halt various programs. Shutdowns also create uncertainty in financial markets and dampen consumer and business confidence, affecting investments and spending decisions.

These economic effects are not equally distributed across states; some endure disproportionate effects, including:

The Washington D.C. region, plus California, Texas, and other states with many federal employees.
North Carolina, Utah, Tennessee, and similar states with large tourism economies around national parks and monuments.
Hawaii, Alaska, Washington, and other states with large military communities.

In the case of a prolonged shutdown, many of these economic impacts would also lead to declines in state tax revenue.

5. Planning can help states navigate federal shutdowns.

State governments can take proactive measures to prepare for and mitigate the fiscal effects of shutdowns.

State policymakers should assess the impact federal discretionary funding has on their economies and budgets and identify areas of potential vulnerability. For example, the Utah Governor's Office of Planning and Budget released an outline of the projected near-term impacts to the state and a 30-day mitigation plan. Alaska and New Hampshire completed similar assessments.
Establishing robust rainy day funds or other reserve accounts may enable states to continue essential services despite federal funding delays. However, policymakers should review rainy day fund withdrawal rules; some states have rules requiring specific measures of economic or fiscal stress—like a decline in personal income or state revenue—before allowing for withdrawals.

By learning from past shutdowns and engaging in proactive actions, policymakers can fortify their state's economies against federal funding uncertainties, safeguard essential services, and promote fiscal stability.

For more information, please visit pewtrusts.org/projects/state-fiscal-policy

Contact: Catherine An, [email protected]

SOURCE The Pew Charitable Trusts