Understanding the Significance of a Federal Shutdown
One of the advantages of American federalism is that the formal and functional division of responsibilities between the national, state, and local governments helps to insulate citizens from dysfunction or disruption in one of the other levels. Even when the federal government goes partially offline, as during a shutdown, states and localities continue functioning. From the public’s perspective, the consequences of the federal shutdown are therefore often masked by our system of federalism. But, while any federal shutdown is potentially significant from a state and local perspective, the dynamics of the 2025 shutdown should be considered particularly worrisome for states and localities.
The Shutdown’s Impact on State and Local Governments
In some ways, the federal shutdown may not initially seem like a major problem for states and localities. The potential ramifications are, to some degree, hidden by the complex operation of our federal system for a number of reasons.
First, a federal shutdown is generally only a partial shutdown in which many critical federal services and responsibilities are maintained without significant disruption.1 Programs with appropriations established by statute do not require annual reauthorization. The public, therefore, does not typically see a significant disruption in many services or benefits (including the distribution of Social Security and Medicare benefits).
Second, during a federal shutdown, critical services like postal delivery, homeland security, airport security, and weather forecasting are maintained. This continuation of major federal services, along with the fact that most day-to-day services (police, fire, sewer, public safety) are provided by states and localities, means that many people will go about their routine business only mildly inconvenienced by the fact that portions of the federal government are not operational.
Third, some agencies and programs tend to have sufficient funding through the end of the fiscal year, or even into the first quarter of the next. That is, they will not immediately experience a funding lapse. Federal agencies all have contingency plans to prioritize disbursements and reallocate the available monies to mitigate service impacts. Moreover, to blunt the political fallout, resources can be redirected (by congressional or executive order) to fund select operations (at least on a temporary basis). Thus, the severity of service and funding lapses varies across programs and does not all fully “hit” at the same time. Fourth, we’ve had federal shutdowns before where policy and spending disagreements created an impasse. In such cases, shutting down the government becomes political leverage in the underlying negotiations. The government eventually reopens when a majority of Congress reaches a compromise or else recognizes the mounting cost and political blame of a prolonged closure outweighs the leverage of a shutdown.
But even a short shutdown (lasting only a few days) has immediate ramifications for state and local governments and their residents. Some federal sites (parks, museums) will be closed. Visitors to many federal agency websites will be greeted by messages advising that websites are not monitored or maintained, that inquiries may not receive a response, and that new applications for program enrollment and grants are suspended. Agencies (even those administering mandatory programs) will cease some non-essential activities. For example, while Social Security benefits will still be disbursed, the Social Security administration is not currently conducting benefit verification; while the Small Business Administration will continue to provide assistance for disaster and emergency preparation, it will temporarily cease processing new loan applications; while the Labor Department will continue to provide unemployment benefits, it will cease providing monthly data reports and labor statistics.
Thus, even for protected federally administered programs, beneficiaries may struggle with application processes and assistance. When federal offices are shuttered, citizens may instead turn to their congressional representatives and to state and local governments for help. Municipal organizations, like the National Association of Counties and the National League of Cities, have provided checklists to state and local officials to assist them in navigating program closures and disruptions.
In short, the shutdown is adding to an already growing list of uncertainties and difficult decisions confronting state and local officials as they navigate the next few weeks and look over the horizon in anticipation of their own budgeting priorities and needs.
States and localities with greater reliance on federal dollars or a large federal presence will also experience the effects of federal closures to a greater degree. As a recent case study focused on primary healthcare in Virginia noted, the shutdown is “not an abstract fiscal standoff,” it is a “stress-test” on state and local services with “cascading impacts: frozen grant flows, shrinking services, stressed staff, and worsening access for vulnerable communities.”
In terms of the balance of payments (the net difference between federal revenues generated and received by states), New York, for example, ranks near the bottom. Yet, even though New York is less reliant than other states on federal dollars, there are some 116,000 federal employees (as well as some 17,900 military members), many of whom may be furloughed (temporarily suspended) or else required to work without pay. The percentage of federal employees who will continue to work with pay or be furloughed varies both by agency and state. The long lines of federal employees queued up to receive assistance from local food banks in Maryland provided a vivid, if bleak, illustration of federal employees turning to state and local assistance.
The impacts go far beyond federal workers, however. Indeed, many governmental programs and social services cross the boundaries of federal, state, and local government. Many federal programs (like Medicaid, Temporary Aid for Needy Families [TANF], and disaster management) are jointly administered and co-funded by the states. And many state-level programs (particularly in the areas of education, healthcare, transportation, and social welfare) are supported by substantial federal funding. When federal funding in support of these programs is reduced or lapses (even temporarily), it puts a strain on states and localities to try to maintain services and benefits in the interim. A federal shutdown thus reveals (1) the complex interdependence of intergovernmental finance and management and (2) the extent to which state and locally delivered programs are dependent on crucial federal supports (financial and technical).
The Office of the State Comptroller details the federal funding that comes to New York State and New York City, noting that “New Yorkers rely on federal funding for everything from paving the highways they drive on to work to bolstering the schools their children attend to helping to put food on their tables.” In New York State, for example, federal funding constituted 39% of New York State’s revenue receipts in 2025 (up slightly from a pre-pandemic 37%). Almost 87% of that funding supports the state’s social safety net programs.
When that funding is interrupted, state and local officials must quickly assess where the funding gaps, service demands, and greatest needs are likely to emerge, absorbing any corresponding increase in state and local contributions into their current and future budgets, and on a different budgetary timeline (only Alabama and Michigan follow the federal government’s October 1 through September 30 fiscal year, forty-six states start June 1, Texas and New York start September 1 and April 1, respectively). Determining where federal authorizations will expire is an important part of the puzzle, but one that has been complicated this time around by mixed guidance from the Office of Management and Budget on the allowable use of advanced appropriations or unspent (carried over or reallocated) funds and allowed state maintenance-of-effort (MOE) funds. Localities, in particular, may not have sufficient staff or expertise to sufficiently monitor changes in the federal agency contingency plans and guidelines, to assess financial risk, or to strategically formulate budgeting responses.
Even smaller units of government are at risk of impacts as they and their residents deal with disruptions and delays in applications for and receipt of federal grants and services. For example, as the New York School Board Business Association (NYSSBA) reports, while major federal programs—Title I, Title II, the Individuals with Disabilities Education Act (IDEA), and Career and Technical Education grants—are currently funded, their final disbursements may be delayed due to federal Department of Education activity suspensions and understaffing. Other, targeted educational funding programs have, or may soon, run out of funding. For example, Impact Aid (Title VII of the Every Student Succeeds Act), which provides targeted aid to nearly 1,200 school districts with tax-exempt federal properties or large populations of federally-connected students, is not forward-funded. According to the National Association of Federally Impacted Schools, twenty-two districts in New York receive this funding, amounting to $17.2 million in 2025. For these districts, the interruption or loss of this funding would be devastating.
Key Dates in the October 2025 Shutdown
| October 1 | Shutdown begins |
| October 22 | Shutdown becomes the second longest in history |
| October 24 | First missed military paychecks averted; federal workers miss first paychecks |
| October 31 | Next military paychecks due |
| November 1 | SNAP, TANF, WIC, and Head Start funds due to expire |
| November 5 | Shutdown will become longest in history |
| January 1, 2026 | Centers for Medicare & Medicaid Services could run out of Medicaid funding |
In addition, Head Start programs (administered by the Office of Head Start (OHS), within the Administration for Children and Families, US Department of Health and Human Services), and Child Care Development Block grants, currently funded through November 1, are similarly vulnerable to the effects of a prolonged shutdown. In New York, for example, an estimated 150,749 children receive Child Care Assistance Program services funded by transfers from Federal TANF and Community Development block grants.
As noted, such lapses may be temporarily averted by selective political intervention. For example, the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), which was anticipated to exhaust its ability to carry over available funding by mid-October, was given a reprieve by the president’s decision to dedicate $300 million in tariff revenues to maintain its program benefits. Similarly, the government’s inability to meet military payroll on October 15, 2025, was delayed by a temporary allocation of $8 billion and private donations. These are, however, impermanent fixes, though they may blunt public reactions and experiences for some. No one yet knows what will be in the continuing resolution to fund the government. In short, the shutdown is adding to an already growing list of uncertainties and difficult decisions confronting state and local officials as they navigate the next few weeks and look over the horizon in anticipation of their own budgeting priorities and needs.
Why the 2025 Shutdown May Be Particularly Worrisome for States and Localities
A combination of factors makes the dynamics of the current shutdown particularly worrisome for state and local governments. The shutdown is not the cause of underlying uncertainty, but rather one more wrinkle in an already complex story of a shifting federal-state partnership. In the broader context, there is little to no discernible upside for states and localities resulting from the shutdown—the prolonged federal closure generally only worsens their already challenging reality.
The Expiration of Federal Pandemic and Cost-Shifts to the States
State and local governments were already confronting the expiration of federal pandemic assistance—the infusion of major federal support to respond to the COVID-19 pandemic and the related economic consequences. Moreover, the impacts of the One Big Beautiful Bill Act (OBBBA) (H.R.1 – 119th Congress) are, as of yet, still not fully realized. Yet, state and local governments have already been bracing for budgeting challenges. As summarized by the bipartisan National Association of Counties, these federal cuts in OBBBA will nationally translate to a “downstream effect approaching $1 trillion over ten years.” They warn that the “federal cost shift represents a fundamental swing in the intergovernmental partnership, potentially pushing counties to choose between cutting services or raising local taxes.”
The impact of OBBBA for New York State is expected to be $750 million in FY 2026, with future projections “in the range of $3 billion to $5 billion for State and local governments absent any programmatic, service, coverage, or funding modifications that may be necessary.” Medicaid constitutes the bulk of federal assistance to New York State. The governor and healthcare organizations have predicted the devastating effects of the resulting shift in Medicaid costs. The Division of the Budget (DOB) has indicated that immediate costs will be addressed through “the remainder of the fiscal year and long-term costs will be integrated into the FY 2027 Executive Budget process.” New York State will either need to cut other services to fund the loss of federal Medicaid dollars or reduce Medicaid services and plans.
… states were already facing challenges to the provision of healthcare and social services even before the additional pressures of the shutdown. States must now grapple with these impending shortfalls while making difficult decisions about how to best protect vulnerable populations as critical federal dollars are delayed.
Similarly, under OBBBA, a significant portion of the costs of the Supplemental Nutrition Assistance Program (SNAP) were also transferred from the federal government to states, along with the imposition of new administrative burdens. According to the Office of the State Comptroller, “[i]n January 2025, nearly 3 million New Yorkers received $655.9 million of SNAP benefits for the month and approximately $7.35 billion total benefits in Federal Fiscal Year (FFY) 2024.” Thus, even pre-shutdown, an estimated 300,000 New Yorkers were at risk of losing SNAP benefits. Because SNAP is a discretionary spending program, federal funding is not secured past November. The situation regarding the Temporary Aid to Needy Families (TANF) program is the same. According to the New York State’s Office of the State Comptroller (OSC), in “January 2025, 204,974 people received federally funded Temporary Assistance benefits totaling $56.4 million for the month. Seventy-four percent of recipients (151,971) were in New York City, receiving $34.3 million in benefits. Outside of New York City, Erie County had the largest number of recipients (7,836), receiving $1.8 million in benefits.” As the level of local government that administers these federal programs, county governments are particularly bracing for the downward pressure. In a recent interview, Stephen Acquario, the executive director of the New York State Association of Counties explained, “counties are on the frontlines of service delivery,” and are faced with the difficult decisions of whether to “use our own local resources to keep essential programs running…with uncertainty about when or if federal reimbursements will be made once the government reopens.” He noted that “the longer this goes on, the more these types of programs are put in jeopardy.”
In other words, states were already facing challenges to the provision of healthcare and social services even before the additional pressures of the shutdown. States must now grapple with these impending shortfalls while making difficult decisions about how to best protect vulnerable populations as critical federal dollars are delayed.
Federal Downsizing
Even prior to the shutdown, the Trump Administration prioritized downscaling of federal agencies and the federal workforce. Through deferred resignation program, reduction-in-force (RIF), and other similar workforce realignment efforts, the federal workforce had already been diminished with concentrated effects in key areas of state and local concern, like social welfare, education, environmental protections, and public health.
Per the Office of Management and Budget guidance, agencies were directed to “consider issuing RIF notices to all employees in programs, projects, or activities (PPAs)” that have funding lapses and are “not consistent with the President’s priorities.” The strain on the federal workforce thus has been exacerbated by additional firings, something that has not happened in previous shutdowns. According to federal court filings, the Office of Management and Budget has indicated that the Trump Administration has plans to fire even more federal workers. The president’s targeting of what he calls “Democrat-oriented” (read social safety net) programs, ongoing litigation challenges and resulting stays, along with sporadic rehiring, has created a sense of turmoil for federal employees.
These aggressive efforts to reduce the size of the federal workforce only add to the pressure on states and localities to try to stopgap and back-fill the loss of federal capacity and support. Because the administrative management of governmental programs and services crosses the boundaries of federal, state, and local governments, any diminution of federal expertise and capacity could have deleterious downstream effects. And, because the needs behind those programs do not go away, state and local governments will need to assess how they can best continue to assist their residents within the limits of state resources. In other words, as federal support contracts within the areas of social services (education, health, transportation) and safety net programs (food security, welfare programs, healthcare, and health insurance assistance), the pressures will only ratchet up on state and local governments.
Punitive Spending Recissions
There traditionally has been a high level of confidence that federal operations will resume once the federal budgeting impasse is resolved and the shutdown is ended. This time, recent executive recissions of federal appropriations punitively aimed at states and localities has state and local governments operating in a condition of heightened uncertainty. Because the president has halted (or threatened to halt) the expenditure of dollars appropriated by Congress, there is less confidence that the reimbursement of state and local outlays to offset the federal closure will be as timely or automatic. Acting on fears that the administration “could try to permanently cancel projects whose funding ended Sept. 30, if the administration believes they don’t align with its agenda,” some states have halted or canceled projects. Some community health centers have released staff over reimbursement concerns, and medical professional associations have warned members that “the extent of retroactive relief, if any,” is not guaranteed. Whereas in the past the “states temporarily fronted program costs, expecting federal repayment after the shutdown ended,” municipal financial advisors have warned that “the active review and rescission of awarded grants for the 2025 shutdown raises doubts about whether such backfill funding will again be automatic.”
The Trump administration has, additionally, challenged a 2019 law mandating back-pay for all federal workers, further suggesting the potential for selective reimbursement. Recent presidential rhetoric and actions, moreover, have conditioned the receipt of federal monies and back-pay to cross-cutting compliance with presidential policy demands. The unpredictable aspects of what scholars have termed “punitive federalism,” has generated post-shutdown uncertainty that was absent in shutdowns past.
… while any federal shutdown is potentially significant from a state and local perspective, the dynamics of the 2025 shutdown should be considered particularly worrisome for states and localities.
Worries of an Economic Downturn or Recession
The fiscal impact of past federal shutdowns on the overall economy has generally been regarded as minimal. Traditionally, federal workers receive back pay, state and local outlays are reimbursed by the federal government, and the federal government returns to full capacity once the shutdown is over. Because the losses to the national gross domestic product (GDP) have typically been erased by the resulting rebound when the government reopens, the consequences have been neither severe nor long-lasting. For example, the Congressional Budget Office detailed the direct effects of the 34-day shutdown in 2018-2019 as minimal and temporary in terms of the real loss to the national GDP, although it recognized that not all costs could be directly captured.
The White House provides state-by-state summaries of the shutdown impact based on the Council of Economic Advisers (CEA) estimates. For New York State, for example, the “CEA estimates New York’s Gross State Product will decline by approximately $1.2 billion for each week the shutdown extends, the equivalent of $5.3 billion per month while the government is shut down.” Combining the impacts of the loss of federal funding for safety net programs, the costs to small businesses, and “federal employees going unpaid,” the CEA predicts that “consumer spending from lost wages will fall by an estimated $1.2 billion in New York each month the government shutdown extends.”
A 2019 US Senate report concluded, “Rather than saving taxpayer money, shutdowns produce significant costs to the American taxpayer.” The national Chamber of Commerce has similarly warned, there are significant “micro-costs,” to individuals harmed by the disruption of federal services and funding. In other words, residents and businesses are negatively impacted in ways not accounted for in the macroeconomic view. The impact, of course, hits some industry sectors, such as small business, tourism, travel, and aviation, harder than others.
The prospect of lasting economic effects raises worries of the shutdown’s longer-term financial implications, creating a sort of “triple whammy” for state and local governments that are already trying to make up for federal revenue reductions (from OBBBA) and diminished federal capacity (from downsizing and workforce turmoil). On top of an already fragile economy, a prolonged shutdown has the potential to drag on the national economy, compounding state and local financial woes. Indeed, municipal organizations at the national and state levels have already been issuing warnings and offering advice to state and local officials, as well as nonprofit organizations supporting their services, as to how to plan and prepare in the face of growing fiscal uncertainty.
Worries of Federal Deficit Reduction Plans
States are looking ahead with recognition that the growing federal budget deficit will have ramifications for states and localities. The Congressional Budget Office’s report outlining the various options for addressing the federal deficit includes reductions in non-defense related discretionary spending: “under this option, the reduction would be achieved by decreasing by one-third funding for two of the largest areas of nondefense discretionary spending: grants to state and local governments for transportation programs and for education programs.” Other options outlined included the elimination of state and local tax deductions (SALT provisions) and ending the exemption for new qualified private activity bonds. The latter exemption currently allows “state and local governments to finance certain projects by issuing bonds whose interest payments are exempt from federal income taxes” and are used for “the construction of infrastructure, such as roads, airports, broadband networks, and carbon dioxide capture facilities, as well as certain activities undertaken by nonprofit organizations, such as building schools and hospitals.”
Moreover, under the Pay-As-You-Go-Act of 2010 (PAYGO), rising deficits will trigger mandatory sequestration (automatic, across-the-board spending reductions) in January 2026 (although these have not been implemented in the past). This law requires that new spending be offset by mandatory reductions (although there are many federal expenditures that are exempted or limited from these requirements). The CBO estimated that, with the cap limitations on sequestration of mandatory funding (like Medicaid), the amount available for sequestration would be insufficient to cover PAYGO’s statutory obligation. Some states, like Montana, are already anticipating that state and local level cuts will be required by the need to alleviate the national debt.
The Bottom Line
The combination of factors around the current shutdown, which appears to be shaping up to be the longest on record, has elevated the uncertainty for state and local governments. Among a myriad of their own governing and budgetary challenges, states and localities must grapple with reduced federal funding, allocating stopgap funding where possible, and mitigating service disruptions created by the federal shutdown. Indeed, the greatest uncertainty is how long the federal impasse might last, and concerns over the restoration of federal capacity and partnership that support the complex array of federal-state financing and management of critical programs on which millions of residents rely. States and localities that choose to adopt a “wait-and-see” position, rather than proactively assess and develop strategic responses, are arguably less likely to fare well. Perhaps the greatest cause for concern by state and local officials is that, where federal support falters or is diminished, it becomes the responsibility or choice of states and localities to step in to support community well-being and maintain quality services. The federal shutdown highlights the interdependence of intergovernmental finance and management and the significant extent to which state and local programs are dependent on federal assistance.
ABOUT THE AUTHOR(S)
Lisa Parshall is a fellow at the Rockefeller Institute of Government and a distinguished professor of political science at Daemen University
[1] The Antideficiency Act (31 U.S.C. 1341-1342, 1511-1519) generally bars the obligation of funds in the absence of appropriations, requiring that when Congress cannot pass the necessary annual appropriation bills, governmental operations must cease. However, the law provides for exceptions for activities involving “the safety of human life or the protection of property.”