Fitch Ratings cautions that while governments can manage a short shutdown, a lengthier disruption could ripple through housing, healthcare, higher education, transportation, local revenues, and economic growth — with potential negative credit consequences.
Fitch Ratings released a new analysis this week, warning that a prolonged shutdown could erode public finance credit strength, straining budgets and weakening the long-term fiscal outlook for governments and nonprofits most reliant on federal support.
A protracted shutdown could even trigger credit rating downgrades, raising borrowing costs and limiting the flexibility of governments and nonprofits that rely on federal dollars.
As previously reported on Conduit Street, shutdowns carry outsized risks in Maryland, where federal jobs, contracts, and funding streams drive local economies.
Counties must manage both the surge in resident service needs and the fiscal strain driven by disruptions to federal funding and support. Fitch’s warning emphasizes how those same pressures can ripple through public finance.
Essential Programs Continue
Medicaid and Medicare are not tied to annual appropriations and remain funded during a shutdown. According to Fitch, these programs, when combined, account for roughly one-third of state budgets and more than half of the revenue mix for many hospitals. Federal highway dollars also continue flowing from the Highway Trust Fund, protecting state transportation programs and GARVEE bonds.
Where Risks Build
If the shutdown drags on, risks rise for entities tied to discretionary federal spending. Housing, public transit, and higher education could see cash flow interruptions. Airports may face delays in capital projects if federal grants are frozen, though daily operations remain stable.
Federal workers face furloughs or unpaid work assignments. While federal law guarantees back pay, permanent reductions in force would impact local tax bases, particularly in regions with a high concentration of federal employment. That risk is especially acute in Maryland, where hundreds of thousands of federal workers and contractors drive the local economy, and where contractors often never recover lost income, creating ripple effects for local businesses.
Fiscal Resilience and Limits
Most state and local governments enter this shutdown with adequate reserves and liquidity. Fitch notes that those cushions can blunt temporary shocks, but a more prolonged disruption would force governments with thinner margins to cut spending or backfill federal support with local revenues. Local governments also face downstream pressure if states trim their budgets in response to federal reductions.
Bottom Line
Fitch views the immediate macroeconomic impact as limited. However, if federal spending remains frozen for weeks or months, state and local governments could face rising service demands, revenue losses, and reserve drawdowns — adding new uncertainty on top of already tight fiscal conditions.
Stay tuned to Conduit Street for more information.
Useful Links
Fitch Ratings: Prolonged US Government Shutdown Could Strain Public Finance Credits
Previous Conduit Street Coverage: Shutdown Countdown: State Leaders Outline Risks and Response
Conduit Street Podcast: Revenues, Roads, and Rising Risks
Previous Conduit Street Coverage: Federal Government Shutdown Odds Rise, Maryland Faces Big Risks