Issues Raised by a Federal Government Shutdown: Grants to State and Local Governments and the COVID-19 Pandemic

Issues Raised by a Federal Government Shutdown: Grants to State and Local Governments and the COVID-19 Pandemic

INSIGHTi
Issues Raised by a Federal Government
Shutdown: Grants to State and Local
Governments and the COVID-19 Pandemic
Updated September 29, 2021
Midnight September 30, 2021, wil be the end of FY2021. In the absence of new funding legislation for
FY2022, funding for federal agencies and activities funded through al 12 of the regular annual
appropriations acts wil lapse. The resulting lapse in appropriations wil require a shutdown of most
federal agency operations, including those necessary to administer federal aid to state and local
governments.
On previous occasions, federal agency shutdown procedures have followed guidance provided by the
Office of Management and Budget. This guidance directed federal agencies to implement contingency
plans designed to guide operations during a government shutdown. Federal agency operations include
administration of over 1,500 active congressional y authorized federal grant programs.
As shown in Table 12.3 of the OMB Historical Tables, the federal government currently provides over
$829 bil ion annual y in outlays to state and local governments through federal grants. Since March 2020,
COVID-19 pandemic response legislation has provided additional funding for federal grant programs to
state and local governments. According to the Pandemic Response Accountability Committee, $582.3
bil ion has been provided to state, local, and tribal governments for pandemic response, not including
additional grant funding provided under the American Rescue Plan Act of 2021 (American Rescue Plan,
P.L. 117-2, enacted March 11, 2021). The American Rescue Plan provided an additional $360 bil ion, of
which $219.8 bil ion was appropriated for the Coronavirus State Fiscal Recovery Fund, $130.2 bil ion for
the Coronavirus Local Fiscal Recovery Fund, and $10 bil ion for the Coronavirus Capital Projects Fund.
A federal government shutdown may cause disruption to, or cessation of, grant administration activities
for normal grant program appropriations, as wel as pandemic-related supplemental funding, depending
on the following factors:
 the timing and duration of a federal government shutdown; and
 the choices made by federal, state, and local officials in anticipation of, or during, a
shutdown regarding grant program administration.
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Timing and Duration of the Lapse in Federal Funding
Delays in Providing Technical Assistance to States on Pandemic Funding
The timing of a government shutdown could have an impact on the ability of state and local governments
to use pandemic-related funding. For example, significant funding to state and local governments was
provided through direct payments under the CARES Act’s Coronavirus Relief Fund (CRF) and the
American Rescue Plan’s State and Local Fiscal Recovery Funds. Under current law, states must expend
the CRF direct payments by December 30, 2021. However, states have faced uncertainty regarding what
expenses would be considered al owable under the CRF and may have similar uncertainty concerning
American Rescue Plan funding. Because the Treasury Department (Treasury) has revised guidance on
al owable expenses several times, states continue to be cautious about expending pandemic-related direct
payments. Given the December 30, 2021,x deadline for the CRF, and the more recent funding provided
under the American Recuse Plan, there may be a need for uninterrupted technical assistance from
Treasury and other federal agencies administering grant programs supplemented by pandemic response
legislation. It is unclear whether key federal grant personnel would be furloughed during a government
shutdown, and thus be unable to provide the technical assistance needed by the states and local
governments in assessing eligible use of the pandemic funding.
Delays in Awarding New Grants and Renewing Existing Awards
The timing of a government shutdown may determine the impact on new and existing grant awards. If a
shutdown occurs at the beginning of a fiscal year, when new grant awards are traditional y being
processed or current grant awards are in the process of being renewed, uncertainty about final funding can
cause delays in awards to state and local governments. During a shutdown, an agency may also furlough
grant personnel and/or lack authority to undertake preliminary grant administration actions including
establishment of funding priorities, revision of grant program regulations and guidelines, review of grant
applications, and calculation of formula al ocations. The lack of personnel and possible lack of authority
to approve changes in existing grant awards may also prevent grantees from mitigating the impact of the
shutdown, and impair the ability of state and local governments to address urgent financial needs during
the pandemic due to uncertainty about when funding wil resume and the eligible use of funds.
Delays in Payments for Existing Grant Awards
Though there are variations across states and federal grant programs, the longer the federal government is
shut down, the greater the impact on federal grant program payments. OMB guidance indicates that grant
management activities at the federal agency level for those agencies experiencing a lapse in
appropriations would not continue during a shutdown, except in very limited circumstances. These
activities include payment processing, routine oversight, inspection, accounting, administration, and other
grant management activities.
State predictions on how long federal y funded/state-administered programs can operate during a
shutdown hinge, in part, on how much the state retained in advance payments (including direct payments
provided under the Coronavirus Relief Fund and the State and Local Fiscal Recovery Funds), how many
reimbursement payments they received prior to the shutdown, and whether other sources of program
funding can be used during the federal funding gap. General y grant recipients that have smal er operating
budgets, such as those in rural communities, may face more hardship as they may have limited resources
to cover federal funding gaps. However, given the financial impact of the pandemic on many state and
local budgets, more grant recipients may be chal enged by scarce and limited resources.

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Grant Administration Choices at the Federal, State, and
Local Levels
In anticipation of, or during, a shutdown, federal, state, and local stakeholders make choices in
administering grant programs. For some programs, these choices may include whether to:
 cover gaps in federal grant funding using state or local funds without guarantee of
reimbursement after appropriations are provided;
 furlough grant administration personnel at al levels of government, regardless of whether
the positions are grant-funded or funded from normal operating budgets; and
 designate grant administration personnel as essential or nonessential in contingency
planning.
During a funding lapse, certain program activities at the state and local level funded under existing grant
awards may continue, but may face limitations based upon state cash flow. Grantees may continue normal
activities until federal advance funding is depleted and then must decide whether to use other funding
sources until additional advance or reimbursement payments are received. This decision may be based on
the cash flow chal enges of the state and the policy priorities of state elected officials. The fiscal strain
placed on states due to the pandemic may create additional chal enges for states to be able to cover federal
funding shortfal s, particularly if the federal government shutdown is prolonged.

Author Information

Natalie Keegan

Analyst in American Federalism and Emergency
Management Policy

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