OUR THOUGHTS ON:

Should We Fear a Government Shutdown?

Tax

By Ron Kramer

The current war over government spending among House Republicans and Senate Democrats and President Obama hints of a possible federal government shutdown at midnight on March 4. If both sides fail to compromise on new stop-gap funding for federal government operations by then, the current continuing budget resolution will expire, forcing the government to shut down.

Neither side wants to be blamed for causing the federal government to shutdown, but what does a government shut down really mean?

What Causes a Government Shutdown?

The federal government’s fiscal year ends on September 30. Accordingly, Congress must pass, and the President must sign, the necessary appropriations bills before October 1 to continue the funding of government activities. When Congress and the President disagree on budget items and spending levels, the necessary appropriations might be delayed. In these cases, Congress generally passes a continuing appropriations act (referred to as continuing resolutions) to keep the federal government going during the delays.

Thus, a federal government shutdown can occur, and has occurred in the past, due to failures to:

(1) pass regular appropriations bills by October 1,
(2) reach agreement on stop-gap funding through a continuing resolution, and/or,
(3) reach an agreement to raise the federal debt ceiling (i.e., borrow more money). 

A government shutdown beginning March 5 would be caused by the lack of agreement on a continuing budget resolution, but could be closely followed (or continued) by the pending need to raise the federal debt ceiling. The debt ceiling battle is the next looming budget crisis and is only weeks away.

The Effect of a Federal Government Shutdown

Generally, during periods of lapsed appropriations, the federal government is prohibited from spending, entering into contracts or other obligations, and providing government services and employees beyond those essential “to emergency situations, where the failure to perform those functions would result in an imminent threat to the safety of human life or the protection of property." Emergency situations under which federal employees may work, without compensation, do not include ongoing, regular functions of government, the suspension of which would not imminently threaten the safety of human life or the protection of property.

Thus, the immediate effect of a shutdown is the furloughing (placing in a temporary, non-duty, non-pay status) of federal employees. However, exempted from furloughs are presidential appointees (like the Czars), Members of Congress, uniformed military personnel, and federal employees rated “essential.” “Essential” employees, required to work during a shutdown, are those performing duties vital to national defense, public health and safety, or other crucial operations.

Those employees deemed “essential” are required to continue to work without pay during the shutdown, but are guaranteed to be paid retroactively when funding for their agencies is restored. And generally, even nonessential federal employees who have been affected by the shutdown have received their salaries retroactively after funding has been restored even though they did not work.

The Office of Management and Budget (OMB) defines “essential” government services and “essential” employees as those:

  • Providing for the national security (i.e., armed forces and certain Defense Department personnel), including the conduct of foreign relations essential to the national security or the safety of life and property; 
  • Providing for benefit payments (i.e., social security and veterans benefits) and the performance of contract obligations under no-year or multi-year or other funds remaining available for those purposes;
  • Conducting essential activities to the extent that they protect life and property, including:
    • Medical care of inpatients and emergency outpatient care;
    • Activities essential to ensure continued public health and safety, including safe use of food, drugs and hazardous materials;
    • Continuance of air traffic control and other transportation safety functions and the protection of transport property;
    • Border and coastal protection and surveillance;
    • Protection of federal lands, buildings, waterways, equipment and other property owned by the United States;
    • Care of prisoners and other persons in the custody of the United States;
    • Law enforcement and criminal investigations;
    • Emergency and disaster assistance;
    • Activities that ensure production of power and maintenance of the power distribution system;
    • Activities essential to the preservation of the essential elements of the money and banking system of the United States, including borrowing and tax collection activities of the Treasury; and
    • Activities necessary to maintain protection of research property.

Thus, the federal employees who provide us with these “essential” services will remain on the job throughout any government shutdown.

Recent Government Shutdowns

The U.S. experienced two government shutdowns during the fiscal year ended September 30, 1996. These shutdowns resulted from the budget battles between President Clinton and then-Speaker of the House, Newt Gingrich. The first shutdown occurred from November 14 – 19, 1995. During that shutdown, approximately 800,000 nonessential government employees were furloughed. The second shutdown, and the longest in history, began on December 16, 1995 and ended on January 6, 1996. The second shutdown was a partial shutdown, since some agencies had been funded in the interim period between shutdowns. Therefore, only an estimated 284,000 nonessential government employees were furloughed during the second shutdown.

How did the American public suffer during these government shutdowns? The Clinton administration published some of the following as its estimates of the effects of one or both of the government shutdowns on the American public: 

  • Medicare: 400,000 newly eligible participants were delayed in enrolling.
  • Social Security: Claims from 112,000 applicants were not processed. 212,000 new or replacement Social Security cards were not issued. 360,000 office visits were denied. 800,000 toll-free calls for information were not answered.
  • State Department: 80,000 passport applications delayed. 80,000 visas delayed. The resulting postponement or cancellation of travel hurt US.. airlines, hotels and tourist industry.
  • National Parks: 2 million visitors turned away from national museums and monuments.
  • IRS Enforcement: The Treasury Department lost $400 million of revenue from the shutdown of the IRS Enforcement Division. 

The loss of these services to the American public during the brief government shutdown can hardly be considered to be a matter of life or death.

What Will a Shutdown Mean?

Despite the rhetoric coming from some on Capitol Hill and the White House, the consequences of a potential shutdown of the federal government are not as dire as they make them sound. Sure, there will be major inconveniences to the public, but the following essential services will be little affected:

  • Social Security: Checks will probably keep coming, but no new applications would be accepted or processed.
  • Welfare: Checks will continue, but new recipients might be delayed.
  • Mail: The U.S. Postal Service supports itself, so mail deliveries would continue as usual.
  • National Defense: All active duty members of all branches of all armed services would continue duty as usual. The Defense Department’s essential civilian employees would also work. Border Patrol will continue.
  • Justice System: Federal courts should be open. Criminals will be pursued and prosecuted, and federal prisons should still be operating.
  • Farms/USDA: Food safety inspections will probably continue, but rural development, and farm credit and loan program will probably close down.
  • Transportation: Air traffic controllers, safety personnel and the Coast Guard will remain on the job.
  • National Parks/Tourism: Parks and forests will be open, but visitor and interpretive centers will be closed. Non-volunteer rescue and fire control services might be shut down. National monuments and most historic sites will be closed.

Thus, most of the American public should not be terribly inconvenienced by a temporary federal government shutdown. Unfortunately, the people who will immediately feel the effects of the government shutdown are the hundreds of thousands of nonessential government employees who will be immediately furloughed. However, if history is any indication, they will not suffer lasting severe hardship since, as we previously noted, in the 1995 and 1996 shutdown, these nonessential government employees were eventually paid not to work.

Summary

Understanding the real facts about a potential government shutdown and how it might affect essential services should help cut through the political rhetoric to understand that a brief shutdown will not be a matter of life and death as some politicians are trying to make the American public believe. After all, the U.S. survived the 1995 and 1996 shutdowns. The real matter is getting Government spending under control. We’ll see who blinks first next week.


Schneider Downs provides accountingtax, wealth management, technology and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH. 

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

 

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