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Regulation and Compliance > Federal Regulation

The Shutdown's Bad, and It Could Get Much Worse

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Airport security screeners could quit en masse, grounding flights. The federal courts could stop hearing civil cases. City buses could stop running.

And 38 million Americans could stop getting food stamps.

Officials from Washington to Wall Street are pondering nightmare scenarios if the partial U.S. government shutdown that is already the longest on record extends into spring — or beyond.

“Shutdowns don’t get bad linearly; they get bad exponentially,” said Sam Berger, a senior adviser at the Center for American Progress, who worked at the Office of Management and Budget under President Barack Obama.

President Donald Trump’s administration has found creative means to blunt some of the shutdown’s effects — figuring out ways to process tax refunds, for example. Yet agencies that have been able to dip into user fees, leftover funds and other revenue streams are running out of those reserves.

Lawsuits are already testing the administration’s ability to keep on the job unpaid workers, hundreds of thousands of whom missed their first paycheck last week.

Efforts by Republicans such as Senator Lindsey Graham of South Carolina to cut an immigration deal to resolve the impasse have failed, and Trump on Monday rejected his latest proposal. An administration official said the White House is game-planning for the shutdown to continue through at least the end of February.

Beyond its direct effects on businesses, economists say the shutdown threatens to shake consumer confidence and chip away at retail sales, particularly as unpaid federal workers and contractors forgo spending on cars, new homes and even entertainment.

To be sure, three-quarters of the government was funded by appropriations enacted before the standoff began. Departments such as Defense, Labor and Health and Human Services remain in business. Still others, like the U.S. Postal Service and U.S. Federal Reserve, have funding streams separate from what Congress provides.

But the shuttering of more than a dozen departments and agencies — from Homeland Security to the Environmental Protection Agency — is being felt across the country, threatening the economy, public safety, businesses and people’s wallets.

And it’s only going to get worse.

Safety Net

The U.S. Department of Agriculture said there may not be enough money to keep food stamp benefits flowing to 38 million recipients past February.

That spending accounts for about 10 percent of the food U.S. families buy for their homes, with purchases spread across some 260,000 retailers, according to the Center on Budget and Policy Priorities.

Joe Brusuelas, chief economist with financial consultant RSM US LLP, estimates the loss of food stamp funding alone would strip at least 0.53 percent from the GDP.

Other portions of the safety net are also at risk. The Department of Housing and Urban Development has said it can’t renew 1,150 rental assistance contracts with private landlords that expired in December or will expire in January, accounting for some 40,000 low-income households.

Another 550 rental assistance contracts expire in February, affecting an additional 16,000 households. And if the shutdown stretches into March, subsidies for the great majority of contracts will end, along with all subsidy payments for the largest rental assistance program, jeopardizing the vouchers used by 2.2 million low-income households, said Sharon Parrott, a senior fellow at the Center on Budget and Policy Priorities.

Landlords nationwide may then face an increasingly dire choice, possibly forcing tenants to pay full monthly rent or evicting them.

Work Without Pay

An extended shutdown will also test the limits of how long government employees and contractors will keep working without pay — an issue for those designated as “essential” and told to remain on the job even though paychecks have been suspended. While most workers have complied so far, an extended shutdown, combined with employers eager to hire in the tight labor market, could challenge both their loyalty and savings.

Transportation Security Administration security officers are already calling in sick at twice the usual rate, forcing airports in Miami, Houston and Virginia to consolidate security lanes. Hydrick Thomas, TSA council president for the American Federation of Government Employees, said in a statement that if the government continues to ask employees to work without pay, “we’re risking losing them.”

If TSA officers leave in large numbers, the government would struggle to replace them during a shutdown, potentially crippling air travel and exposing passengers to greater risk.

That danger goes beyond the TSA. Federal workers considered essential include border patrol agents, air-traffic controllers and the firefighters who battled some of California’s wildfires last year along with correctional officers at federal prisons.

At the U.S. Penitentiary, Hazelton in West Virginia, absenteeism is already at triple the normal rate and that’s diminishing safety and working conditions, said Rick Heldreth, president of the local American Federation of Government Employees union that represents federal workers at the prison.

“The further this goes and the less gas money, and childcare money and food money people have, it’s going to fuel the absenteeism even more,” he said.

Even furloughed government workers who aren’t considered essential could begin drifting away, creating openings that will have to be filled when the shutdown ends.

“Now is the time when people are going to start looking for other options,” said Steve Lenkart, executive director of the 110,000-member National Federation of Federal Employees. “The rent is due, and a lot of these feds live paycheck to paycheck.”

Federal Leases

The federal government may stop paying its own rent because there is no one to process the checks.

The drop in revenue would hit property owners as soon as the end of this month, when the General Services Administration would usually send out its January payments, according to Darian LeBlanc, director of the government services group at Cushman & Wakefield PLC.

The GSA leased more than 190 million square feet in nearly 7,000 buildings nationwide at the start of its 2018 fiscal year, representing roughly $5.6 billion in annual rent payments, according to an agency report. That means landlords could be out some $460 million a month if the agency stops issuing checks.

And even if the GSA were to designate the staff who process those rent checks as essential, making them work without pay, there’s another risk: The Federal Buildings Fund, which is the source of the GSA’s rent payments, could go broke, as other closed-down federal agencies stop paying the GSA for using its buildings.

“It is just a function of time before that happens,” LeBlanc said in a phone interview.

Can’t Evict

If the government stops paying its rent, landlords have no good options. The law prevents them from evicting federal tenants; their only recourse is to sue. In the meantime, landlords must continue to honor their commitments under the lease, such as servicing the property.

“It becomes a very, very bad situation for these lessors,” LeBlanc said. “They’ve got debt payments and all the things that they have to meet. It could become very problematic.”

Douglas Development Corp, which rents almost 1 million square feet of space to the GSA, has set aside money in case the government stops paying, according to Norman Jemal, a principal and senior vice president.

“We’re in a position to sustain it for multiple months, but not in perpetuity,” Jemal said in a phone interview. “There would be a lot of very substantial ripple effects to many owners throughout the country that would be affected by the lack of payment.”

A GSA spokeswoman, Amanda Osborn, referred questions about rental payments to the agency’s shutdown web page, which says the agency “is aware of concerns from the Lessor community regarding GSA’s ability to make timely rent payments,” and “is diligently exploring all available options.”

City Buses

In Tennessee, the Chattanooga Area Regional Transportation Authority may have to reduce bus service if the shutdown lasts long enough, said Lisa Maragnano, the agency’s executive director.

Federal funding accounted for about 16 percent of the agency’s roughly $22 million annual budget in its 2017 fiscal year, she said. The City of Chattanooga is willing to advance funding for transit budgeted through June 30, roughly $450,000 per month, but that won’t fully cover the shortfall in federal financing.

“It will get us through February maybe, maybe some of March,” she said. “But again, it’s just the unknown. I can’t sit here and tell you definitively that that will cover everything that we need because I don’t know how long this is going to go on for.”

The problem for cities like Chattanooga stems from the shuttering of the Federal Transit Administration, which helps finance both major projects and some operating expenses, especially at smaller agencies. The FTA workers responsible for releasing funds aren’t on the job and public transportation advocates say systems nationwide are already in the early stages of a cash crunch.

“It’s not just the federal employees that will be affected now,” Maragnano said. “It’s going to be all their constituents and folks who rely on transit to get to work and to their medical appointments.”

Court Cases

Another worry is the federal court system. The Administrative Office of the U.S. Courts said in a statement Tuesday that it estimates federal courts “can sustain paid operations through Jan. 25.” At that point, the courts will run on an “essential work’’ basis. The office had previous estimated it would run out of money on Jan. 18.

Individual courts would be responsible for deciding what essential work means. Appellate, district and bankruptcy courts will reduce operations, the office said. Criminal cases should proceed uninterrupted.

Some courts have already suspended civil cases involving the federal government, in part because so many government lawyers have been furloughed. About 30,000 public defenders, court clerks as well as people working in probation and pretrial services offices and in other roles for the federal judiciary will stop receiving paychecks on Feb. 8.

The Food and Drug Administration says high-risk food surveillance — of products like seafood, soft cheeses and unpasteurized juice — will restart Tuesday but some routine food safety inspections are already suspended.

The work is “being done by an inspectorate that’s largely going unpaid,” during the government shutdown, FDA Commissioner Scott Gottlieb said via Twitter.

Breweries have been unable to roll out new craft beers because applications are piling up at a Treasury Department agency responsible for approving labels before the products can be sold. The stall hits an industry with at least 7,000 breweries across the U.S. — and the consequences threaten to ripple to the suppliers of their hops, barley and other ingredients.

Washington brewer Atlas Brew Work, LLC filed a lawsuit Tuesday against the government because it hasn’t gotten clearance for the labels on an apricot-infused India pale ale called The Precious One.

FDA Reviews

Because it can’t collect fees that pay for pharmaceutical reviews, the FDA isn’t accepting new applications for medicines. And it’s weeks away from running out of funds it uses to review new medical products.

The effects of the shutdown are now extending to drugmakers that submitted filings for review before the beginning of the impasse. Aimmune Therapeutics Inc. announced in a filing that the FDA will not begin to review the application for its peanut allergy pill, AR101. The Brisbane, California-based company submitted an application for the medicine on Dec. 21.

The U.S. Patent and Trademark Office, which is funded exclusively through user fees, has continued to operate under previous year funds, and agency spokesman Paul Fucito had no comment on when that money might run out.

If the agency is forced to shut down, it would delay the examination of tens of thousands of patent applications, as well as reviews of issued patents that can affect the outcome of district court cases and royalty disputes between companies.

IPOs Halted

Wall Street has already felt the impact in market gyrations, but a long-term shutdown promises to trigger a cascading effect through businesses and the economy.

Among the risks: No new initial public offerings on U.S. public exchanges.

Until the Securities and Exchanges Commission reopens, companies that want to file their listing plans — including huge private companies like Uber Technologies Inc. and Lyft Inc. –aren’t getting any feedback from the agency to help them move forward with the process.

That gets critical on Feb. 14, when financial statements provided by companies waiting to launch their IPOs go stale and must be updated — and audited — for the whole of 2018.

“The window to price by Feb. 14 is closing,” said David Goldschmidt, global head of capital markets at law firm Skadden Arps Slate Meagher & Flom LLP. “If people aren’t able to do their deals by then there’s a chance we could lose a good part of the first quarter for IPOs.”

Uber and Lyft, both of which had been targeting their IPOs for the first half of the year, believe the shutdown could slow the timeline of their listings, people familiar with the matter said last week.

Mobile networking company Pareteum Corp. warned that its acquisition of Wi-Fi network provider iPass Inc. won’t be done by Jan. 31, “as a result of the government shutdown” — a key deadline for iPass to avoid being delisted from Nasdaq.

“IPass is in the process of requesting an extension from Nasdaq to the extraordinary circumstances resulting from the government shutdown,” Pareteum said in a Jan. 11 filing, but if iPass doesn’t get the extension, the trading of its common stock will be suspended and the delisting process will begin anew.

Truck Delays

Some companies may not be able to introduce new products or complete mergers that requires government approval. Fiat Chrysler Automobiles NV, for example, is awaiting EPA emissions certification to sell new heavy-duty Ram pickups.

“I am concerned, very concerned, because if it continues, it will have an impact on on the launch,” Fiat Chrysler Chief Executive Officer Mike Manley told reporters this week at the North American International Auto Show in Detroit.

Southwest Airlines Co. had expected to begin selling tickets for flights to Hawaii in late 2018 and to start service this quarter. Likewise, American Airlines and Delta Air Lines say they have new a number of new airplanes they want to add to their fleets. But the carriers can’t move forward without approval from the Federal Aviation Administration.

The Department of Transportation issued a revised shutdown plan Monday saying it will bring more than 3,100 aviation-safety specialists back onto the job without pay, which could begin to alleviate some of the backlog.

Likewise, T-Mobile US Inc.’s $26.5 billion proposed purchase of fellow mobile carrier Sprint Corp. can’t go forward without a sign-off from the Federal Communications Commission, which is mostly shut. And FCC employees charged with approving new technologies and devices — including equipment needed for the 5G wireless upgrade — are furloughed.

“We’re falling behind the rest of the world,” Jessica Rosenworcel, a Democratic FCC commissioner, said in an interview. “That’s going to be a problem.”

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