April 5, 2011

States Fear Local Effects if Shutdown Cuts Off Cash

By MICHAEL COOPER

Already straining to make ends meet as the longest downturn since the Great Depression grinds on, state and local governments are now facing a new, unwelcome question: What would a shutdown of the federal government mean for their struggles to balance their budgets?

If a shutdown were to happen, the federal money that helps states pay the administrative costs of their stretched unemployment programs could dry up, forcing states to advance the money to keep the programs running. Federal grants for a variety of programs — including research, higher education and training local law enforcement officers — could be delayed.

Furloughing nonessential federal workers and halting payments to federal contractors could have a domino effect as local tax collections plummet in the Washington area and other places with many federal workers. And if national parks were closed, some states could lose tourism business, and the local tax revenues they generate.

“It all comes down to timing,” said Scott D. Pattison, the executive director of the National Association of State Budget Officers, which has been fielding calls this week from nervous state officials. “If it’s just a few days, you can deal with it. But if it’s over a week or two, the financial management people’s foreheads start to get a little sweaty.”

The impact of a short federal shutdown would be minimal, the association wrote in a recent briefing paper. A longer shutdown could pose problems. Even if many of the potential fiscal effects are relatively small, they could create cash-flow problems for some states already operating on tight budgets.

Illinois, for example, is currently trying to pay off a $4.5 billion backlog of bills to vendors going back to October. Bradley C. Hahn, a spokesman for the Illinois comptroller, Judy Baar Topinka, said, “A shutdown would be particularly devastating for states like ours that have no margins to cover the costs.”

Most of the largest federal programs that states rely on — for crucial safety net programs like Medicaid and food stamps, among other things — would most likely continue to function in the event of a shutdown.

But interruptions of smaller programs could still strain states in the short run, as they find themselves forced to pay the salaries of workers normally paid with federal funds.

The budget officers’ association noted that during the shutdown in 1995, Maryland spent $1.4 million a day to keep its federally paid employees at work.

While those kinds of expenses would probably be reimbursed, they are coming as many states are unusually vulnerable.

Some states have been preparing for a possible shutdown. Massachusetts estimates that it has roughly 4,500 full-time workers who are paid from various federal sources. State budget officials sent a memo to all department heads last month, urging them to identify any concerns “as they relate to their ability to make bi-weekly payroll for employees currently paid from federal sources.”

A shutdown could lead to the loss of tax revenues for a city like Washington, where an estimated 69,700 federal workers live and pay taxes. All told, more than 200,000 federal civilian employees work there, and support the local economy every time they go to lunch.

Washington is already considering tax increases and service cuts to close a $322 million deficit next year. A federal shutdown, by some calculations, could cost the city as much as $6 million a week in lost tax revenue.

But the impact of shutdowns is not always dire.

Virginia officials said the 1995 shutdown had little effect on state tax collections: many of Virginia’s federal and military workers were deemed essential, and its nonessential federal workers who were furloughed were reimbursed for their lost wages.

Mr. Pattison, of the budget officers association, said states seemed much more nervous this year than in the past. “They have so much on their plate,” he said. “Anything that might have an impact, no matter how small, they’re worried about.”