In the Shadow of a Shutdown
Congress is barreling toward the first full-government shutdown in roughly five years after repeated attempts to enact short-term funding stopgaps stalled or failed. Existing levels of government funding expire at midnight on Saturday, Sept. 30. Despite the rapidly approaching funding cliff, the House and Senate continue to pursue different paths. The Senate embraced a bipartisan 45-day continuing resolution (CR), despite some opposition from conservative members over the inclusion of $6 billion in Ukraine aid. While Ukraine aid retains strong bipartisan support, some lawmakers favor enacting a clean CR and later passing a stand-alone Ukraine aid package. The Senate bill also includes $6 billion for the Federal Emergency Management Agency’s (FEMA) disaster relief fund. House Speaker Kevin McCarthy (R-CA) said the House will take up a last-ditch CR on Friday after failing to advance earlier versions last week. However, Speaker McCarthy said the House-version will include border security provisions that Democrats oppose as a concession to conservatives, essentially guaranteeing the bill will not be taken up in the Senate. Speaker McCarthy also said he would not bring the Senate’s CR to the House floor, setting up an impasse on the eve of the shutdown.
This logjam is a continuation of the debt ceiling drama that consumed Washington earlier this year. In early June, President Biden signed into law the Fiscal Responsibility Act (FRA), which lifted the federal debt ceiling and established thresholds for annual appropriations spending for Fiscal Year (FY) 2024 and FY 2025. The agreement President Biden and Speaker McCarthy struck called for the House and Senate to follow the traditional appropriations process and enact all 12 appropriations bills at the agreed-upon funding levels. Additionally, if Congress does not pass all 12 appropriations bills by the end of December, the FRA requires automatic spending caps to take effect at levels 1% below the FY 2023 appropriations amount for both defense and non-defense spending.
Conservative members in the House Freedom Caucus were displeased with the agreement, calling for steeper cuts to discretionary spending. Their disagreements with Speaker McCarthy and his leadership team have slowed the House’s appropriations process and were a contributing factor to House Appropriations Committee’s decision to draft funding bills at levels below the agreed-upon spending caps. So far, the House Appropriations Committee has approved 10 of the annual appropriations bills; the full chamber has voted to pass only one of the bills (Military Construction-Veterans Affairs), but four are being considered on the floor this week. Meanwhile, the Senate Appropriations Committee has approved all 12 annual appropriations bills, though none have advanced through the full Senate. As drafted, there is a $140 billion difference between the two chambers’ appropriations bills.
The Mechanics of a Shutdown
If the House and Senate fail to enact a funding agreement by midnight on Sept. 30, all federal agencies will have to stop non-essential work. Each agency will follow its individualized shutdown plan, but at a minimum, non-essential workers will be furloughed and federal workers will not receive paychecks for the duration of the shutdown. Agency operations considered non-essential will come to a halt, meaning that pending rulemakings will face delays and litigation may be put on hold. In general, expect major reductions in staffing and operations at agencies funded by the congressional appropriations process. Shutdowns lasting only hours or days are minimally impactful, but the longer they continue the more heavily agency operations will be curtailed.
There are several key exceptions to the shutdown’s impacts. Mandatory spending programs not subject to the annual appropriations process, such as Social Security, Medicare and Medicaid, will also continue to function as normal. Additionally, services funded through user fees, such as immigration services funded by visa fees, will continue to operate while funds last. Some agencies may also temporarily make use of other previously appropriated funds that they have yet to fully deplete.
At a high level, discussed below is how a shutdown will impact various sectors:
- Health Care. The Department of Health and Human Services (HHS) will be strained to support many vital programs, as the agency expects to furlough about 42% of its workforce, including support staff and grant processors, although many mandatory programs would not be directly impacted. The Centers for Medicare & Medicaid Services (CMS) will retain 49% of its staff and continue to keep essential services running, such as the Medicare program, but enrollees will be unable to get replacement Medicare cards. Additionally, CMS will have sufficient funding for Medicaid payments to doctors, hospitals and beneficiaries to fund the first quarter of FY24. COVID-19 supplemental funding, including vaccine and therapeutic development, would still be carried out under the Department of Health and Human Services (HHS). Pandemic research and response at the Centers for Disease Control and Prevention (CDC), including the President’s Emergency Plan for AIDS Relief (PEPFAR), would continue. The Food and Drug Administration (FDA) will also be able to conduct emergency use authorizations, mitigation efforts related to potential drug shortages or supply chain disruptions, and drug and medical device reviews, although with limited staff. HHS will also maintain the grants application system operational but with reduced federal support staff presence. The National Institutes of Health (NIH) will also likely have to postpone new clinical trials, which may impact cancer and Alzheimer’s research.
- Housing and Financial Services. The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) will struggle to fulfill their market oversight responsibilities, though trading would not be directly impacted by a shutdown. The Federal Emergency Management Agency (FEMA) will be unable to issue flood insurance, leaving agencies like the National Credit Union Administration (NCUA) and Federal Deposit Insurance Corporation (FDIC) to provide guidance on the ability of their regulated entities to issue loans during the lapse. Some financial agencies operate independent of the congressional appropriations process and will not be directly impacted, including the Public Company Accounting Oversight Board (PCAOB), the Consumer Financial Protection Bureau (CFPB), the Federal Housing Finance Agency (FHFA), the National Credit Union Administration (NCUA), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, among others. As indicated above, major programs at the Department of Housing and Urban Development (HUD) that have already been funded will function normally, as will the bulk of its monthly subsidy programs (while funding lasts), health and safety programs, and activities in the mortgage markets; conversely, most of the agency’s fair housing activities will halt.
- Taxation. The Treasury Department announced that while the Internal Revenue Service (IRS) will furlough some of its workforce, about one-third of agency employees will continue to perform services. About half of those are paid for outside of appropriations funding and about 10% of non-furloughed employees will be supporting Inflation Reduction Act of 2022 initiatives. IRS personnel in the Criminal Investigation unit will also continue to report to work, as would employees of the Taxpayer Advocate Service. Similarly, about 5,000 IT workers and 10,000 customer service representatives would also work through the shutdown. The agency published a full list of activities that would continue during the shutdown, including completion and testing of the upcoming Filing Year programs; processing disaster relief transcripts; and responding to taxpayer filing season questions. Separately, the politics around funding the government may complicate lawmakers’ plans to reach a sought-after end of year tax deal. With key provisions of the Tax Cuts and Jobs Act of 2017 either having expired or soon expiring, lawmakers are eager to strike a deal. However, a potential package hinges on whether Democrats and Republicans can agree to an extension and expansion of the child tax credit (CTC) to balance the extension of several business-related provisions, with a focus on the research and development (R&D) amortization deduction, bonus depreciation and the net business interest deduction.
- Energy, Environment and Interior. The Department of Energy (DOE) announced that it anticipates no disruption to DOE operations if a shutdown is fewer than five days, due to available funding from previous years that would keep the agency functioning. After those funds are expended, DOE will only carry out operations involving the safety of human life or the protection of property, namely activities related to nuclear weapons or public power. Depending on how long a shutdown lasts, announcements on DOE’s $8 billion hydrogen hub program could also be delayed. The Environmental Protection Agency (EPA) will pause certain Superfund activities, agency-led inspections and oversight of some water and air regulations during a shutdown. At its discretion, the Department of the Interior (DOI) will pause work on pending applications and reviews, including on the environmental analyses and assessments needed to permit energy projects on federal lands. Anticipated action on rulemakings and regulations, like the Bureau of Land Management’s (BLM) proposed rule on venting and flaring for oil and gas operations on federal lands, would be postponed.
- Education and Labor. Student loan repayments are set to restart on Oct. 1 after a more than three-year pause, and loan servicers have already begun to feel the impact of insufficient resources to meet the volume of borrowers. The Department of Education’s most recent contingency plan from 2021 does not include a plan for managing Federal Student Aid’s operation without funding, though it does state that the disbursement and servicing of federal student loans “could continue for a very limited time.” The longer the shutdown, the more severe the effects will be for borrowers on their ability to pay back loans, and on servicers to meet the needs of borrowers. Additionally, federally supported early childhood education services, specifically Head Start, will lose access to funding if there is a shutdown. The White House estimates an immediate loss of 10,000 slots, with impacts worsening over time. Of note, the presumptive shutdown date coincides with the expiration of pandemic-era child care stabilization funding. The Department of Labor (DOL) will retain 27% of its employees full-time. Within the Occupational Safety and Health Administration (OSHA), 56% of employees would remain on the job. Activities that will continue include certain worker-protection activities; work for other agencies funded by resources other than annual appropriations, including the United States Mexico-Canada Agreement (USMCA) and the American Rescue Plan Act (ARPA); and the provision of certain benefits under entitlement programs.
- Agriculture and Nutrition. The U.S. Department of Agriculture’s (USDA) plan has not been updated since 2020, but USDA Secretary Tom Vilsack said the “vast majority” of the 7 million participants in the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) program would see an immediate reduction in benefits after a shutdown starts. Funding for the Supplemental Nutrition Assistance Program (SNAP) is mandatory, but USDA’s ability to issue benefits could be significantly diminished; disbursements will continue as normal for the month of October but could be affected afterward. The agency’s State Meat and Poultry Inspection, Cooperative Interstate Shipment and Talmadge-Aiken programs are excepted and will continue to operate, as will a variety of food safety surveillance and investigation operations. Vilsack has also indicated that farmers applying for marketing loans could see delays due to the closures of Farm Service Agency offices, while USDA could experience similar difficulties processing homebuyer loans.
- Transportation. Approximately 33.5% of Department of Transportation (DOT) employees will be furloughed, the vast majority of which are members of the Federal Aviation Administration (FAA). Despite the furloughing of a third of its workforce, major FAA operations such as air traffic controller services are expected to continue, though the agency will be unable to continue training new controllers for the duration of the shutdown. Some of the smaller DOT agencies’ workforces will remain intact due to advanced appropriations and user fees, including the Federal Highway Safety Administration (FHWA), Federal Motor Carrier Safety Administration (FMCSA) and National Highway Transit Safety Administration (NHTSA), while furloughs and suspended operations are set to occur at the Pipelines and Hazardous Materials Safety Administration (PHMSA), Maritime Administration (MARAD) and Federal Railroad Administration (FRA). FRA will continue to carry out its safety operations, but it will be unable to execute grants, cooperative agreements, contracts, purchase orders, travel authorizations or other documents obligating funds.
- Defense and National Security. Military personnel will continue to perform their official duties, including those related to counterterrorism activities, safety, medical care and military schools to ensure that readiness can be maintained. However, certain civilian personnel and/or contractors such as military technicians, are expected to be furloughed because some of their duties will not be necessary to carry out or support expected activities. The activities deemed essential are primarily focused for those pertaining to national security and other activities relating to safety of human life or protection of property, essential or emergency medical care, the continuation of projects from previous funding years and limited activities relating to acquisition and logistic support, legislative and public affairs support, legal activities and financial management. No civilian members will be allowed to perform certain governmental work during the shutdown, and they will not be permitted to participate in activities of appointed individuals. Pay for members of the military would be impacted as of Oct. 15, but it is likely to cause issues for military families who live paycheck-to-paycheck if the shutdown is particularly long.
- International Affairs. The State Department will continue operations at foreign embassies and consulates, consular activities and diplomatic and cyber security operations from residual balances. Non-essential official travel, speeches and representational events and new obligations for grants and contracts will cease. The Office of the U.S. Trade Representative (USTR) will use residual funds to continue World Trade Organization (WTO) disputes and economically important trade negotiations, among other critical activities. Activities deemed non-essential will cease, including routine meetings with foreign trading partners on existing Bilateral Investment Treaties. The U.S. Agency for International Development (USAID) will continue to make new obligations using FY23 and prior-year funds under multiyear foreign assistance programs, including multiyear Ukraine supplemental funds. However, USAID will not make obligations to new assistance programs for the duration of the shutdown, barring circumstances where doing so would protect life and property.
With a shutdown all but certain, the main variable at play in determining the impacts of the lapse will be how long it lasts. Shutdowns can drag on, and the longer a shutdown is, the more impactful it will be for individuals who rely on government services. In the short-term, congressional and agency officials are likely to cancel or decline most meetings and appearances as the resources that remain are concentrated on key operations.
Once a shutdown begins, the House and Senate will need to agree on a CR to reopen the government and continue negotiations on a year-long funding deal. That means the same political drama around short-term funding could play out again at least once more before the end of the year. A final deal on full-year funding may not be reached until December. In the House, Speaker McCarthy’s negotiations are made more perilous by the constant threat of a motion to vacate, which would force a snap vote on his speakership unless the motion is tabled. The White House has largely stayed out of the funding negotiations to date, but President Biden and his advisors may become directly involved in the coming days.