Key Takeaways
- The last government shutdown occurred in late 2018 and early 2019. Since then, bipartisan agreements have been struck, in many instances at the last minute, to fund the government.
- When a shutdown occurs, the most immediate exposure for U.S. public finance issuers is principal and interest payments on debt issued by state or regional agencies that is secured by federal revenue.
- Although a longer shutdown could introduce budgetary pressure as funding and reimbursement delays flow down to public finance entities, even the last shutdown did not result in negative credit events.
Why It Matters
Historically, partial government shutdowns were typically averted through bipartisan negotiation. Federal government funding extensions have resulted in the passage of a continuing resolution (CR), individual appropriation bills, or some combination. However, heightened discord across party lines regarding some of the Trump administration's spending initiatives could challenge timely passage of a stop-gap funding measure. Because each shutdown is different in terms of which departments are deemed essential, and because usually some functionality remains, we will analyze potential credit impacts once shutdown details are clear.
Not All Federal Government Spending Is Affected
A federal government shutdown does not halt all federal spending, but only in discretionary and certain mandatory spending categories subject to appropriation. Funding for mandatory programs, including both multiyear programs (e.g., children's health insurance and supplemental nutrition assistance programs) and permanent programs (e.g., Social Security, Medicaid, and Medicare), is not generally interrupted by shutdowns. Also, employees who are deemed essential and continue working, as well as furloughed employees, will not be paid during a shutdown but will receive back pay once funding is restored, according to the law passed in 2019 that helped end the 35-day shutdown.
Spending also continues for federal agencies in certain categories that are not reliant on federal appropriations, such as programs funded with advanced appropriations (e.g., some federal transportation programs). However, spending for essential services and associated federal employees, as well as for activities funded by revenues outside of appropriation, such as user fees, is generally determined by the president.
Transportation Grant Program Spending Historically Protected
The U.S. Department of Transportation (USDOT) oversees allocation of federal formula-driven and discretionary funding through its agencies (the Federal Highway Administration [FHWA] and the Federal Transit Administration [FTA]) to states and regional infrastructure providers. These, in turn, pledge a portion of that revenue to secure grant anticipation revenue vehicle (GARVEE) bonds.
S&P Global Ratings evaluates 31 public and private GARVEE bond program ratings for highway and transit in both states and territories using different security structures that leverage federal transportation grants; some programs also benefit from additional state support. (See "U.S. Transportation GARVEEs Are Stable, Much Like Sector Funding," published June 6, 2024, on RatingsDirect.) Given the programmatic strengths and other structural features of GARVEE transactions, such as debt service coverage and liquidity protections, we believe credit quality will be unaffected by a short-term federal government shutdown.
A primary benefit of federal aid programs in transportation, for both state and local governments and for bondholders, has been the reliability, relative stability, and predictability of funding. These characteristics provide the certainty needed for long-term planning associated with large transportation projects. In addition, the source of funding, money in the federal Highway Trust Fund (HTF), is outside the annual congressional appropriation process. This has allowed federal transportation agencies to award mandatory contract authority to state, regional, and local governments to proceed with multi-year projects and to incur obligations in advance of appropriations.
In addition, because of uncertainties associated with congressional appropriations, issuers of GARVEE debt instruments 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.
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 29 PHA issuer credit ratings and 22 ratings on Capital Fund Financing Program issues, which are supported by PHAs' capital funds. HUD also funds Section 8 rental assistance, and we are monitoring credit impacts to 18 ratings on stand-alone properties rated under our rental housing bond methodology and supported by Section 8 contracts. Military housing transactions were not at risk in the last government shutdown, and we do not expect any ratings impact in this situation due to their strong credit quality and substantial reserves.
While Federal Housing Administration mortgage insurance and Government National Mortgage Assn. 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 in a prolonged shutdown.
The 2019 shutdown, which lasted 35 days, did not affect ratings; at that time, owners and PHAs signaled that they had several months of revenues on which to rely, and as of their latest audits, PHAs reported median cash on hand of 209 days.
State And Related Agencies Have Flexibility
U.S. states have built reserves over the past few years to at or near all-time highs, and revenues continue to come in at or just below fiscal 2025 budgetary targets. Therefore, in our view, states' improved liquidity and high reserves position them to manage any temporary delays and sustain operations. Furthermore, although states rely on federal funding for many programs, their above-average credit profiles and stability reflect their autonomy to make budget adjustments as needed.
We believe the primary effects would be temporary delays in the receipt of some federal funds and, more importantly, modestly weaker economic expansion. In general, most states' revenue and economic forecasts account for this possibility.
Other Public Finance Ratings Largely Isolated From Short-Term Shutdown
We believe the credit implications for other U.S. public finance sectors from a temporary government shutdown should be isolated, and that any significant effects on employment, tax collections associated with economic activity, and federal spending would likely be the result of a more prolonged shutdown. Federal funding for Medicare and Medicaid could be unaffected 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, could largely 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
Where U.S. Public Finance Ratings Could Head In The Wake Of The Federal Fiscal Crisis, July 21, 2011
This report does not constitute a rating action.
| Primary Credit Analysts: | Geoffrey E Buswick, Boston + 1 (617) 530 8311; geoffrey.buswick@spglobal.com |
| Kurt E Forsgren, Boston + 1 (617) 530 8308; kurt.forsgren@spglobal.com | |
| Hannah Blitzer, New York; hannah.blitzer@spglobal.com | |
| Secondary Contact: | Nora G Wittstruck, New York + (212) 438-8589; nora.wittstruck@spglobal.com |
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