5 Insights to Help States Navigate a Federal Shutdown

As the federal government faces another potential shutdown, state policymakers need to understand the many ways a closure could affect their budgets and operations. State and federal budgets are inseparably linked, so any disruption in federal funding comes with significant risks for a state’s finances. And with an increase in threats and occurrences of federal shutdowns in recent decades, it is more important than ever that state decision-makers take steps to prepare. Here are five considerations they should keep in mind.

1. Funding expires at different times for different programs.

States receive federal funds from hundreds of different grant programs which collectively make up about a third of state budgets. These grants are governed by a wide variety of funding structures and a shutdown doesn’t affect them in a uniform manner.

Some programs, like the federal share for the Child Care and Development Fund, bypass the annual appropriations process and shouldn’t be affected by a shutdown, but the fate of other programs is less clear. 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 and be limited to using unspent reserves. 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 multiple months. Additionally, some programs without advanced appropriations may be able to keep operating using leftover prior-year funding (for however long the funds last).

Given the sheer number of programs and the range of potential effects, it’s essential that state decision-makers understand which programs are at risk of funding lapses—and when those would occur—so they can make informed decisions.

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 important decisions and thus 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 administrative help with grant applications, application processing, and the negotiating of terms. And technical assistance, which communities with fewer resources often heavily rely on, can also become limited or unavailable during a shutdown. 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. In prior shutdowns, policymakers have chosen to keep some programs operational, but once the shutdown ends some have experienced delays in—or lower levels of—federal reimbursement than they may have expected.

A number of state policymakers, for example, have indicated an interest in keeping their most popular national parks—operated by the U.S. Department of the Interior—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, and the federal government didn’t reimburse the state.

Federal reimbursements to states that continue program operation during a shutdown are not guaranteed, and even when such reimbursements are expected, unforeseen delays could jeopardize program operations or add to state costs.

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. Federal government shutdowns create uncertainty in financial markets and dampen consumer and business confidence, affecting investments and spending decisions. Additionally, federal employees who aren’t receiving paychecks are likely to tighten their spending, further constraining economic growth.

For example, during the 35-day partial shutdown that ended in January 2019, the Congressional Budget Office estimated that the projected level of inflation-adjusted gross domestic product in the first quarter decreased by $8 billion, or 0.2%.

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 government 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 and mitigation 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 in September 2023, ahead of an expected federal government shutdown. Alaska and New Hampshire completed similar assessments.
• Establishing robust rainy day funds or other reserve accounts may enable states to continue essential services without interruption despite federal funding delays. However, policymakers should review rainy day fund withdrawal rules if they intend to use funds for this purpose. Some states have rules requiring specific measures of economic or fiscal stress—such as a decline in personal income or state revenue—before allowing for rainy day fund withdrawals. These restrictions may make it hard for states to use these funds to maintain services during a shutdown.

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

Rebecca Thiess is a manager and Peter Muller is an officer with The Pew Charitable Trusts’ fiscal federalism initiative. Justin Theal is an officer with Pew’s state fiscal health project.