A Brief History of U.S. Federal Government Shutdowns

Since the Congressional Budget Act was passed in 1976, there have been 21 federal shutdowns of varying lengths. They occur when Congress fails to pass funding bills or the president refuses to sign them, typically due to disputes over policy priorities, resulting in the suspension of non-essential federal services. The average duration to date is six days. However, the most recent shutdown, which occurred during the last Trump administration, lasted 35 days (December 22, 2018 – January 25, 2019).

At the Heart of the Matter: Healthcare Subsidies

The current shutdown is in its seventh day and appears likely to extend further as, in an era of increased polarization, both parties are far apart in their positions. At stake is the future of the enhanced Affordable Care Act (ACA) Premium Tax Credits, which were introduced during the pandemic and are set to expire at the end 2025. These credits serve as subsidies for 22 million Americans who purchase health insurance on the government-run ACA Marketplace as they cap the cost of coverage as a percentage of income. The Congressional Budget Office (CBO) estimates that extending the subsidies, which Republicans oppose, would cost $350 billion over 10 years and that allowing them to expire would result in over 4 million Americans becoming uninsured.

Implications for Municipal Credit

The effect of reduced ACA tax credits on hospital finances would be negligible, at least initially. The Urban Institute estimates that the nation’s 6,093 hospitals would collectively incur a $2 billion increase in uncompensated care. Over the medium term, however, as the healthcare measures of the One Big Beautiful Bill Act go into effect and more Americans lose Medicaid coverage, availability of affordable health insurance on the ACA marketplace would become more meaningful to hospital finances.

More broadly, the implications of the shutdown on public finance issuers will be correlated with its duration and the extent to which issuers rely on federal funds or employment. Both mass transit and public housing authorities depend on federal capital grants that will not be disbursed until the government reopens. Capital projects can be suspended until the flow of funds resumes and most issuers benefit from reserves or have set aside funds for debt service that provide cushion in the interim. States also rely on federal funding for the Supplemental Nutrition Assistance Program (SNAP). Importantly, the U.S. Department of Agriculture (USDA), which administers the SNAP program, has contingency reserves and other mechanisms it can utilize to keep the program operating while it awaits funding.

In contrast to past shutdowns, the federal employment picture is less clear. Non-essential federal workers have historically been furloughed only to receive backpay at the conclusion of the shutdown. Thus, the disruption to income tax collections has been merely temporary. If the Trump administration proceeds with layoffs in lieu of furloughs as it has signaled, cities and counties with federal employment concentration would see more permanent revenue loss along with increased spending for social services. Earlier this year during the Department of Government Efficiency (DOGE) cuts, our team stress tested our portfolios for federal employment loss. We expect the economic effects will be manageable.

Infrastructure Funding Fights: Timing is Key

On October 1^st, the White House paused $18 billion of New York’s infrastructure funding while the U.S. Department of Transportation (DOT) reviews Diversity, Equity, and Inclusion (DEI) policies in construction contracts. The main funding recipients are the Metropolitan Transportation Authority’s (MTA) Second Avenue extension and the Hudson Tunnel project. Subsequently, the administration halted a $2 billion federal grant disbursement for a Chicago transit expansion project for similar reasons. As the U.S. DOT previously approved the grants, a permanent claw back would likely be litigated. The timing of the announcements and a statement from the U.S. DOT suggest they may be a part of a broader effort to bring senators to the table to end the shutdown. Nonetheless, we expect these freezes to be only marginally credit negative in that a delayed construction timeline could increase project costs over the long term.

Bottom Line: Previous shutdowns have had a minimal effect on municipal credit, which we expect to be the case this time. Revenue disruptions have been temporary and bridged by issuers’ internal sources of liquidity. However, as political brinkmanship has increased, so has the potential for a prolonged shutdown. We continue to monitor credits whose economies and funding structures rely on the federal government.