Research & Analysis

How States Are Coping With the Federal Shutdown

When the partial shutdown of the U.S. government began Oct. 1, it did not affect only federal agencies. The shutdown also is having direct impact on state and local governments. States with high concentrations of furloughed workers or federal contractors, national parks and monuments that typically draw tourists, and residents affected by the suspension of assistance programs are already feeling economic pressure and are also considering the possibility of diminished tax collections. The potential impact on state budgets is significant as well, considering that the federal government provides one-third of state revenue. 

If the current impasse continues, state leaders will be faced with more tough choices: allowing their residents to go without services, tapping their own budget reserves, or undertaking other measures—such as cutting spending or raising revenue in a different way. In many cases, states have a few weeks of financial cushion, but the choices will become more difficult if the shutdown persists. For example, states are likely to run out of emergency funds for nutritional support for women and children, the WIC program, by the end of October.1

While states may not have anticipated the shutdown when they passed their own budgets, a handful—particularly those most vulnerable to any potential changes to federal fiscal decisions—have policies in place that may help ease the pressure they face now. Here’s how a few states are managing federal funding uncertainty:

  • Virginia receives more federal procurement dollars than any other state.2 In August 2011, after witnessing the federal debt ceiling debate, state officials established a special trust fund to provide assistance to military bases, localities, and other organizations that would face federal cuts. Virginia’s primary rainy day fund can only be used for mid-year revenue shortfalls, and would not have allowed for this sort of economic assistance.3 Maryland also put in place policies to strengthen its reserve levels in 2011 in anticipation of cuts from sequestration.4 These funds are welcome now that the state estimates a loss of $5 million per day from the shutdown.5
  • Utah lawmakers during the 2013 legislative session added a provision to the state’s legislatively-mandated revenue volatility study, which is performed every three years, to consider the uncertainty of federal funds.6 The state also requires contingency plans for every federal grant it receives, outlining policies in case those funds dry up.7
  • Vermont’s Legislative Joint Fiscal office and Department of Finance and Management prepared a detailed estimate of the impacts of sequestration.8 The state allocated a portion of the fiscal 2013 surplus ($4 million of the $16 million realized) to manage spending cuts from federal sequestration and future uncertainties.9 This fund is set aside for the Emergency Board to allocate if unexpected reductions arise.10
  • The District of Columbia faced particularly significant challenges during the 1996 federal government shutdown, when all city services except for basic public safety were halted.11  Now, Mayor Vincent C. Gray has sought approval from the federal Office of Management and Budget to designate all city employees “essential,” exempting them from furlough. While awaiting a decision, local leaders have turned to a $144 million reserve fund that will keep money flowing for about two weeks. But city officials may face tougher choices as that fund is depleted.12

As other states consider tapping reserves to fill the gap left by the shutdown, there may be restrictions on their options.  For instance, 10 states—Alaska, Delaware, Hawaii, Louisiana, Missouri, Oklahoma, Oregon, Pennsylvania, South Dakota, and Texas—require approval from a supermajority in the legislature before they can draw on their rainy day funds.13  Other states, such as Arizona, Indiana, Michigan, and New Mexico, have funds that only permit withdrawals during a revenue shortfall or other specific situation.14 These states may look to examples such as Virginia, where lawmakers worked with a similar constraint, for guidance.


Notes

1 http://www.usda.gov/documents/usda-fns-shutdown-plan.pdf
2  http://www.pewstates.org/news-room/press-releases/economic-importance-of-federal-spending-varies-widely-across-states-85899505890
3  www.finance.virginia.gov/KeyDocuments/FINALVAFACTFundFactSheetSummary_5-3-13.pdf
4  Spring State Budget Update 2013, NCSL
5  http://articles.washingtonpost.com/2013-09-26/local/42407609_1_federal-shutdown-memo-tax-revenue
6  HB 195 Enroller, Budgetary Procedures Act Revisions 2013 General Session, State of Utah  
   http://www.trendtrack.com/texis/tt/utwalk/+/http://le.utah.gov/~2013/bills/hbillenr/hb0195.htm.
7  Spring State Budget Update 2013, NCSL
8  Spring State Budget Update 2013, NCSL; Memorandum, April 4, 2013.
9  Shumlin, Legislative Leaders: No New Tax Package Necessary, Budget to Get $10 Million Scrubbing, May 7, 2013.
http://vtdigger.org/2013/05/07/shumlin-legislative-leaders-no-new-tax-package-necessary-budget-to-get-10-million-scrubbing/
10  Spring State Budget Update 2013, NCSL
11  Due to the capital’s fiscal ties to the federal budget process, D.C. is the only subnational government prevented from    using locally-raised tax dollars during a government shutdown.
12  http://www.washingtonpost.com/blogs/dc-wire/post/many-dc-agencies-would-close-under-federal-shutdown-mayor-says/2011/04/06/AFmvP5pC_blog.html
13  CBPP 2011 http://www.cbpp.org/files/2-3-11sfp.pdf
14  CBPP 2011, Arizona Revised Statutes - Title 35 Public Finances - Section 35-144 Budget stabilization fund; definitions; Burns Indiana Statutes Annotated, 4-10-18  The Counter-Cyclical Revenue and Economic Stabilization Fund; Michigan Combined Law Service, Section 18.1358.  Emergency appropriation from fund; conditions; amounts. 

Date:
October 8, 2013
Contact:
Sarah Leiseca | 202.540.6369
Project:
States' Fiscal Health , Fiscal Federalism Initiative
Issues:
Budget, Federal Impact
 
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