States Don’t See Crisis in Federal Shutdown — Yet

For the second time in two weeks, a congressional budget impasse threatens to shut down much of the federal government this weekend. So far, the reaction in state capitols is muted, but that could change if a protracted showdown comes to pass and the feds close shop for a significant length of time.

States rely on the federal government for huge sums of money to pay for programs such as Medicaid, food stamps and unemployment benefits. But federal funding for the most crucial social safety net programs is unlikely to be interrupted in the event of a shutdown, according to federal officials who oversee the funds.

Two of the biggest pots of federal money for state-run health care, for instance, would remain accessible even if a government shutdown happens. Medicaid and the Children’s Health Insurance Program — which together insure nearly 60 million low-income people nationwide — are considered “essential” and would not be suspended, according to Mary Kahn of the federal Centers for Medicare and Medicaid Services. “If a state were to run out of money and needed an infusion of cash,” Kahn says, “we would give them that.”

States aren’t fretting over funding streams that are not considered “essential,” either — at least not yet. While federal dollars do make up a sizeable portion of states’ cash flow, states usually do not transfer federal funds to their own accounts on a daily basis. In other words, a federal shutdown would not amount to the federal spigot suddenly turning off for states. 

In general, any political standoff over spending in the halls of Congress would have to drag on for several weeks before it would become a serious problem for states, experts say. The longest federal shutdown in history lasted 20 days. Even that did not dramatically affect state finances, although it did have important consequences that states are likely to watch closely this time around.

The extent to which a federal shutdown affects states “is directly related to the length of the shutdown,” according to a February issue brief issued by the National Association of State Budget Officers. “A shutdown that lasts for a couple of weeks, while inconvenient, would not cause significant harm to states.” 

One major difference between the current political standoff in Washington and the last federal shutdown 15 years ago is the fragile condition of state budgets and the national economy today. Then, state budgets were flush with revenues from the budding dot-com boom. Today, state budgets are in their fourth and worst year of a revenue crisis.

So it is the economic ripple effects of a federal shutdown, rather than short-term cash flow, that states are most worried about. That is especially true in states with a lot of federal workers who may be about to miss part of their paychecks, or where federal contracts play a large role in the private-sector economy. The Washington, D.C., region, in particular, is vulnerable, as are states such as Alaska, Hawaii, Montana and New Mexico ( see graphic ).

In the record-long shutdown that occurred between December 15, 1995 and January 6, 1996, a total of 284,000 federal workers across the nation were furloughed, while another 475,000 “continued to work in nonpay status,” according to a Congressional Research Service report . During a six-day shutdown a few weeks earlier, 800,000 federal workers were furloughed. In both cases, those furloughed were “non-essential” employees, with active-duty military, law enforcement and other core workers exempt.

In Maryland, which has a far higher share of federal employees than most other states because of its proximity to Washington, revenue estimators took the possibility of a federal shutdown into account when they issued their latest forecast, according to Joseph Shapiro, a spokesman for the state comptroller. State income and sales tax collections easily could be affected by a deadlock on Capitol Hill, Shapiro says, noting that Maryland is home not only to thousands of federal workers and contractors but those who serve them in the hospitality industry, as well.

Another potential shutdown concern for states is the stress placed on their unemployment insurance systems. Many of the federal workers who were furloughed in the 1990s sought jobless benefits. A new surge in demand could become an administrative headache for states, as well as a fiscal strain: Collectively, states already owe the federal government billion in loans taken out to pay unemployment benefits, and interest on those debts is coming due soon .

Meanwhile, thousands of state employees nationwide are partially paid with federal funds. That could force states to make their own determinations about which employees are “essential” — and to pick up the federal share of salaries for those who are. That happened in Maryland, Nebraska and other states during the back-to-back shutdowns of the mid-1990s.

One of the most visible effects of the last federal shutdown was the closure of national parks around the country, something that states also are monitoring closely this time around because of the potential hit to tourism.

The closure of the Grand Canyon National Park in Arizona during the last shutdown became a major point of contention between the state and the federal government. At one point, then-Governor Fife Symington even sent the National Guard in an unsuccessful effort to operate the park. Later, Symington’s administration negotiated a deal with the U.S. Interior Department in which the state paid $17,000 a day to keep two popular parts of the park open, according to newspaper accounts.

This time around, Arizona is struggling to find the money to keep its own state parks open, let alone national parks. At one point amid Arizona’s recent budget woes, two-thirds of the state’s parks were threatened with closure. Now, 10 state parks are open only because local communities rallied to their rescue, according to Renee Bahl, the state parks director.

Bahl says she has not yet had discussions about the potential closure of the Grand Canyon. But she’s keenly aware of the economic impact such a closure would cause. “The Grand Canyon is a huge tourist draw for the state of Arizona,” Bahl says. “We are the Grand Canyon State.”