Rinse And Repeat?

Unless Congress passes--and the President signs into law--a continuing resolution by midnight on Sept. 30, 2023, a government shutdown will begin at the start of federal fiscal 2024 on Oct. 1, 2023. None of the 12 different appropriation bills setting discretionary spending levels have passed the U.S. House of Representatives, much less been reconciled with the 12 appropriation bills already passed by the Senate. Could 2023 be a repeat of 'the 2019 government shutdown, which lasted a record 35 days? Or could it last longer, given the political landscape?

This situation was set up by June 2023's Fiscal Responsibility Act, which raised the federal debt ceiling while also setting limits on annual appropriated spending amounts. However, dissatisfaction with those previously agreed-upon spending levels by some House lawmakers has resulted in the current stalemate. While a stop-gap funding measure could stave off a shutdown in the near term (there have been a total of 47 CRs since 2010), provisions in the Fiscal Responsibility Act require that if a CR were still in effect on Jan. 1, 2024, it would trigger implementation of spending limits 1% below fiscal 2023 levels and enforce caps for defense and non-defense spending through sequestration--an outcome most stakeholders would prefer to avoid.

In terms of GDP growth, our most current economic forecast assumes the impact from a government shutdown would be minimal, with longer term effects associated with an changes in discretionary spending initiatives. (See "Economic Outlook U.S. Q4 2023: Slowdown Delayed, Not Averted," published Sept. 25, 2023, on RatingsDirect.)

Not All Federal Government Spending Is Affected

A federal government shutdown does not result in a halt to all federal spending, but rather only in those discretionary and certain mandatory spending categories subject to appropriation. Some multiyear (children's health insurance and supplemental nutrition assistance programs) and permanent (Social Security, Medicaid, and Medicare) mandatory spending programs are not interrupted by shutdowns. Additionally, spending required for essential services and the associated federal employees and activities funded by revenues outside of the appropriation, like user fees, are not affected. Spending also continues by federal agencies with certain categories not reliant on federal appropriations, such as programs funded with advanced appropriations. Every federal agency has developed plans for a government shutdown, outlining those programs and employees that are deemed essential or have funding streams not dependent on annual appropriations.

Transportation Grant Program Spending Is Protected

The U.S. Department of Transportation (USDOT) oversees allocation of federal formula-driven and discretionary funding through its agencies (Federal Highway Administration [FHWA] and Federal Transit Administration [FTA]) to states and regional infrastructure providers who, in turn, pledge a portion of that revenue to secure grant anticipation revenue vehicle (GARVEE) bonds. S&P Global Ratings evaluates 30 GARVEE bond program ratings for highway and transit in 29 states and territories using different security structures that leverage federal transportation grants; some programs also benefit from additional state support. (See "Reliable Funding Continues To Support Stable GARVEE Sector View Amid Stubborn Construction Cost Inflation," published April 27, 2023, on RatingsDirect).

A primary benefit of federal aid programs in transportation--both for state and local governments, and for bondholders--has been the reliability, relative stability, and predictability of funding. These characteristics provide certainty needed for long-term planning associated with large transportation projects while the source of funding--money in the federal Highway Trust Fund (HTF)--is outside the annual congressional appropriation process and give federal transportation agencies mandatory contract authority, allowing projects to incur obligations in advance of appropriations. Cognizant of the vagaries associated with congressional appropriations, issuers of GARVEE debt instruments also typically incorporate a variety of features that allow transaction structures to withstand delays, usually including very strong coverage levels, debt service reserves, backup credit support, and funding mechanics that fund principal or interest payments well in advance of debt service due dates.

Whereas we previously viewed transit grants as somewhat more exposed because nearly all FTA employees (including those staff responsible for administering disbursement of all grant payments) were deemed nonessential, the published USDOT contingency plans for federal shutdowns updated in August 2023 indicates that all operations of both the FHWA and FTA would continue as normal during a lapse in funding. In particular, the Infrastructure Investment and Jobs Act specifically provides funding from the HTF to the FTA to pay for the personnel to administer its programs and activities through 2026. Current cash balances of the FHWA and FTA are not available; however, during previous shutdowns they had sufficient liquidity to support several months of reimbursements to states without interruption. As a result, and given the other structural features like debt service coverage and liquidity protections embedded in GARVEE issuers, we believe credit quality will be unaffected by a short federal government shutdown.

For Housing, Duration Matters

The Department of Housing and Urban Development (HUD) provides operating and capital funds to public housing authorities (PHAs) to support operations and maintenance of their property portfolios, which are at risk if a government shutdown occurs and lingers. We currently maintain 26 PHA issuer credit ratings and 36 ratings on Capital Fund Financing Program issues, which are supported by PHAs' capital funds. Funding for Section 8 rental assistance is also a component of the HUD budget; 25 rental housing bond ratings are supported by project-based Section 8 contracts. While military housing transactions were not at risk in the last government shutdown, we do not expect any ratings impact in this situation due to their strong credit quality and substantial reserves.

For public housing authorities and multifamily housing supported in whole or part by Section 8 revenues, the duration of any shutdown could determine if ratings will be affected. We expect a shutdown of short duration will not pressure ratings. Of the Department of Housing and Urban Development's 8,528 employees, approximately 1,500 have been identified as necessary to continue their work during a shutdown. While Federal Housing Administration (FHA) mortgage insurance and Government National Mortgage Association (GNMA) activities that have been deemed vital will continue, programs reliant on continued funding such as PHA operating subsidies and Section 8 rent subsidies may run out of funds if the shutdown is prolonged.

The duration of the 2019 shutdown did not affect ratings; at that time, owners and PHAs were signaling they had several months of revenues on which to rely. As of their latest audits, PHAs reported median cash on hand of 169 days. If revenues on hand are insufficient, HUD indicates its intent to identify other legally available funds but notes in its Contingency Plan for Possible Lapse in Appropriations 2023, "that only no-year or multiyear amounts appropriated in a prior year will be legally available for this purpose, and no amounts made available by now-expired Continuing Resolutions (CRs), can be utilized".

State And Related Agencies Have Flexibility

In our view, a short-term shutdown (of no more than a few weeks) is unlikely to have a significant impact on states' credit quality. We believe the primary impacts could be a temporary delay in receiving some federal funds, and more importantly, it is likely to result in modestly weaker economic expansion. We believe most states' revenue and economic forecasts account for this possibility. Although states rely on federal funding for many programs, we note that the states' above-average credit profile and stability reflect their autonomy to make budget adjustments as needed. States have built reserves over the past few years to be at or near all-time highs, and revenues continue to come in at or just below fiscal 2024 budgetary targets. In our view, states' improved liquidity positions them to manage any temporary delays. If a shutdown extends past a month, states will likely be able to retain credit quality, but the longer-term economic impact becomes less clear.

Other Public Finance Ratings Are Largely Isolated From Short-Term Shutdown

We view the credit implications for other U.S. public finance sectors from a short-term government shutdown to be isolated, with any discernable impacts related to employment reductions, tax collections associated with economic activity, and federal spending linked more to a prolonged shutdown. Federal funding for Medicare and Medicaid would not be affected by a shutdown and any federal payments that may be delayed to hospital systems, local governments, public schools, utilities, higher education institutions or not-for-profits, can be accommodated by current cash positions or access to other sources of liquidity. We do not currently rate any obligations secured solely by federal funds in these sectors.

Related Research

• Sector Review: Despite The Risk Of Shutdowns, GARVEE Bonds Continue Benefiting From Government Support, Feb. 28, 2019
• Credit FAQ: How The Federal Government Shutdown Will Likely Affect Ratings On U.S. State, Local Government, Transportation, And Housing Debt, Oct. 03, 2013
• Where U.S. Public Finance Ratings Could Head In The Wake Of The Federal Fiscal Crisis, July 21, 2011