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Lack of Consensus, Lapse in Appropriations: Anatomy of a Federal Government Shutdown
Wednesday, September 20, 2023

The US Constitution provides that “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law” (Article I, Section 9, Clause 7). Congress maintains the power of the purse, and federal government agencies and programs reliant on discretionary budget authority experience funding gaps if appropriations expire prior to the enactment of new appropriations measures. With limited exceptions, the Antideficiency Act, court and Department of Justice opinions, and associated guidance generally prohibit continued agency and program operations when funding gaps occur. Should a funding gap last for a day or longer, federal government agencies and programs impacted by the lack of discretionary funds may shut down.

With just a few days left on the Congressional calendar before September 30 — the end of fiscal year (FY) 2023 — and none of the 12 FY 2024 spending bills yet passed by both chambers, there is growing interest in understanding whether the federal government will shut down and what impacts would result from such an outcome. Here is what we know.

  • The annual appropriations process for the government’s upcoming fiscal year, set to begin on October 1, is far from finished.

Congressional appropriators aim to provide discretionary funds through 12 annual spending measures, running from October 1 through September 30 of the following calendar year. This process is an opportunity for lawmakers to consider and modify the previous year’s funding levels and the specific terms controlling how funds are spent.

This year, however, the appropriations process has been mired in a political and policy logjam that includes significant intraparty disagreement among House Republicans, leaving Congress just weeks from a government shutdown without a clear path forward. With the end of the fiscal year fast approaching, barring a compromise that has eluded lawmakers to date, the government will begin to experience funding gaps on October 1. One caveat: Congress often works best under deadline pressure, so a shutdown is by no means certain.

Part of the struggle this year is that the House of Representatives and Senate are taking divergent approaches toward the budget agreement Speaker Kevin McCarthy (R-CA) and President Joe Biden negotiated as part of their debt ceiling deal, the Fiscal Responsibility Act of 2023 (FRA). The FRA budget caps were, by most interpretations, viewed as the funding levels to which the FY 2024 spending bills would be drafted. The Senate has largely adhered to these levels and has taken a bipartisan approach to annual appropriations, moving all 12 bills out of committee through regular order. Majority Leader Chuck Schumer (D-NY) has expressed optimism that at least some appropriations bills will be passed by the full Senate this month with a wide, bipartisan margin. The Senate, however, is presently working through some unanticipated disagreements and delays regarding the current three-bill spending package Leader Schumer sought to consider first on the floor.

House appropriators, under pressure from the House Freedom Caucus (HFC), have treated the agreed-upon topline spending limits as a ceiling, not a floor. As a result, the House GOP has proposed significant cuts to annual funding below the Biden/McCarthy agreement and has alienated House Democrats and even some Republicans in the process. According to some members of the HFC, proposed House spending bills have not gone far enough in reducing spending. Specifically, the HFC has cried foul at the House Committee on Appropriations achieving a significant portion of its funding reductions through rescissions (eliminating funds appropriated in previous years that have not been spent) and is insisting on “real cuts” in government spending. Complicating negotiations further, House Republicans have also included a number of partisan policy riders addressing hot-button issues including abortion, immigration, gender affirming care, and others. HFC members appear willing to shut down the government to secure these and other policy and funding changes.

Because of the partisan nature of House Republicans’ proposed spending cuts and policy riders, the chamber is not on the same trajectory towards passage as the Senate. To date, not all House bills have advanced out of the House Committee on Appropriations; concerns over both funding levels and policy provisions have prevented the House Labor-HHS spending bill and the Commerce-Justice-Science spending bill from advancing through Committee. Prior to the August recess, only the Military Construction and Veterans Affairs spending bill was able to muster enough votes to narrowly pass the House.  Agreement within the House GOP majority on additional funding bills remains elusive.

Even in the increasingly unlikely event that the House and Senate can pass all 12 of their respective appropriations bills by the end of the month, the bills vary significantly between the two chambers in funding levels and policy. The House and Senate would need to iron out their differences – either through formal bipartisan, bicameral conference negotiations or through the less formal back-room negotiations that have become the norm in recent years – before sending compromise legislation to the President’s desk for his signature.

  • The path forward to even a short-term spending bill remains uncertain.

A shutdown can be averted without the enactment of 12 full-year appropriations bills. Majority Leader Schumer and Speaker McCarthy have both advocated publicly for the passage of a continuing resolution (CR) – a short-term, stopgap measure that extends the previous year’s funding levels, and associated authorities and conditions – to keep the wheels of government turning while Congress finalizes FY 2024 spending beyond midnight on September 30.

Due to the slim Republican majority in the House chamber, Speaker McCarthy faces two options for passing stopgap spending legislation: he can push for bipartisan legislation, thus relying on Democratic votes for passage, or he can craft a bill his Conference will support with near-complete Republican unity, thus passing more partisan legislation and avoiding the need for Democratic votes. With the second option, Speaker McCarthy must unify various factions within the House GOP, including more moderate members and the HFC, who at times have shown more loyalty to their MAGA base and former President Donald Trump than to the Speaker.  

The HFC has made it clear it will oppose a “clean CR,” or a CR that simply extends funding at current levels. These far-right Members are demanding steep funding cuts. HFC member Ralph Norman (R-SC) explained: “We got rolled on the debt ceiling [and] we’re not going to get rolled again.” He noted HFC members would vote to defund as many accounts as they could, including funding for Ukraine and some critical federal programs.

Further complicating matters are the many concessions Speaker McCarthy reportedly made to secure his leadership gavel in January. Speaker McCarthy agreed to allow just one House member to offer a motion to vacate the speaker’s chair, which can trigger a floor vote to remove the gavel from Speaker McCarthy’s hands. Members of the HFC have threatened a motion to vacate the chair if their demands are not included in a CR, and some Democrats may not come to Speaker McCarthy’s aid on a clean CR.   

On Sunday, September 17, members of the Republican Main Street Caucus and HFC reached a deal on a proposed 30-day CR. The measure would reduce spending by 8 percent from current levels through October, exempting the Departments of Defense and Veterans Affairs and disaster relief, and includes various border security provisions. While the legislation was originally set for consideration on the House floor this week, its chances for approval are now in doubt as a key procedural vote was cancelled due to lack of support.  Any Republican-only CR would be a reputational win for Speaker McCarthy but dead on arrival in the Senate, which would undoubtedly replace the text with its own bipartisan version and send it back to the House.

  • During a shutdown, programs across the government are affected differently.

Should Congress fail to appropriate funds via a CR or annual spending bills, funding gaps can occur; should a funding gap last for a day or longer, federal government agencies and programs impacted by the lack of discretionary funds may shut down and non-excepted employees may be furloughed.

The Office of Management and Budget (OMB) at the White House annually revises Circular No. A-11, a document which gives instructions to agencies on preparations for, and operations during, a funding gap. Circular No. A-11 instructs each agency head, in consultation with their general counsels, to develop and maintain a plan for an orderly shutdown; these plans are then placed on file with OMB and are publicly available here. OMB also provides information on “Frequently Asked Questions During a Lapse in Appropriations” and “Government Reopening Check List – Items for Consideration.”

Federally funded programs experience a range of impacts. Those deemed essential to public safety generally continue unaffected – although federal employees working in these programs may be uncompensated until after federal spending legislation is enacted. The Committee for a Responsible Federal Budget describes the main categories of programs that continue during a shutdown caused by a lack of annual spending legislation:

Essential services – many of which are related to public safety – continue to operate, with payments covering any obligations incurred only when appropriations are enacted. In prior shutdowns, border protection, in-hospital medical care, air traffic control, law enforcement, and power grid maintenance have been among the services classified as essential, while some legislative and judicial staff have also been largely protected. [Air travel can continue during a shutdown, with Federal Aviation Administration air traffic controllers and Transportation Security Administration screeners remaining on duty.] Mandatory spending not subject to annual appropriations, such as for Social Security, Medicare, and Medicaid, also continues. Other examples of activities that continue are those funded by permanent user fees that are not subject to appropriations, such as immigration services funded by visa fees. Certain programs that are funded through advance appropriations, such as those within the Veterans Health Administration, have been minimally affected during recent shutdowns. [Emphasis added]

Another category of programs that continue during a lapse in appropriation are surface transportation programs funded out of the Highway Trust Fund, because such funding is a form of Contract Authority under which funds are available upon authorization (and appropriators can only limit the rate of spending through annual obligation limitations). Highway, highway safety, and transit grant programs can continue; additionally, the salaries of federal employees responsible for oversight of these programs are also paid from the Highway Trust Fund, enabling project sponsors to continue to be reimbursed under federal grant agreements for highway and transit projects.

According to the Congressional Research Service, the longest government shutdown occurred in FY 2019, beginning on December 21, 2018, and lasting for a full 34 days (until January 25, 2019).  That shutdown was due in part to a dispute between President Trump and Congressional Democrats over funding for a southern border wall; it ended when President Trump backed down on this funding demand. Following this shutdown, Congress passed, and the President signed, the Government Employee Fair Treatment Act of 2019 (P.L. 116-1), which provides retroactive compensation to furloughed employees and employees required to work during a lapse in funding once the lapse ends.

  • A shutdown could affect government contracts.

In the event of a government shutdown, contractors need to keep on their radar the following items related to government contracts:

  • closure of government facilities, which could affect contractors’ ability to perform if employees perform work at government facilities;

  • unavailability of nonessential government employees due to furloughs, which could include contracting officers; and

  • delayed payments or unpaid invoices without an extension of deadlines for filing claims.

Contractors should communicate with contracting officers early and often to determine how a shutdown may affect the ability to continue work under the contracts before the contracting officers become unavailable. This communication is vital to avoid working without clear guidance because contractors risk not being reimbursed for costs not approved by contracting officers. Contractors should anticipate receiving from contracting officers stop work orders/suspensions of work pursuant to Federal Acquisition Regulation clauses §§ 52.242-14, 52.242-15 and 52.242-17. These clauses entitle contractors to pursue an equitable adjustment for any increased costs and schedule adjustments arising from the stoppage or suspension of work. Contractors must track costs incurred due to a stop work orders/suspensions of work in order to support any claims against the government.

If subcontractors are supporting any government contracts, contractors should give clear written guidance to subcontractors on subcontract performance during a shutdown.

On the employee-front, contractors should provide clear written communication to employees supporting the contracts to avoid employee uncertainty or disagreements in the future. If employees are not able to continue to work during a shutdown, contractors will need to decide whether to lay off such employees. If they are able, contractors should develop alternative work plans for employees such as assigning them to other projects or having them work on other matters such as training.

Once the shutdown comes to an end, contractors (and the government) will expect employees to immediately restart contract work. Contractors should conduct advanced planning on how they will notify and update employees regarding their work status. Contractors need to ensure that any proposed plans with respect to employees during a shutdown do not adversely trigger employment law consequences.

  • The Biden/McCarthy debt ceiling deal includes an incentive for enacting all 12 appropriations bills.

President Biden and Speaker McCarthy built a provision into the FRA “[i]n order to incentivize a successful appropriations process,” according to the House Committee on Financial Services Republicans’ summary document of the debt ceiling deal. Under the agreement, “if all 12 appropriations bills are not enacted by January 1 of the following year [in 2024 or 2025], discretionary spending will temporarily operate at a maximum of 99% of current levels.” In other words, this provision would automatically revise both defense and non-defense spending levels unless the 12 bills are passed by December 31. If this mechanism is triggered, it would impose overall budget caps equal to FY 2023-enacted levels minus 1 percent, applied to almost all discretionary spending accounts. (As a practical matter, the automatic cuts triggered on January 1 would not take effect until April 30, creating a lengthy “grace period” for Congress to reverse the impending cuts.)

If lawmakers were to operate under a CR and trigger these cuts, Republican defense hawks may be particularly unhappy.  Sen. Tom Cotton (R-AR) described the debt ceiling deal with this provision: “Worst of all, this bill contains an automatic 1 percent sequester based on last year’s budget. That means that domestic spending will go up but defense spending will go down if the sequester kicks in. Who thinks the Democratic leader will be dissatisfied with this result?”

The next few weeks will showcase a lot of back-and-forth – among House Republicans, between Republicans and Democrats, and between Congress and the Administration. As lawmakers debate their views and stances in the House and Senate, and through the media, the outcome of the FY 2024 budget process remains far from certain — with high-stakes implications on spending and policy throughout the federal government. 

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