Understanding the Ripple Effects of the October 2025 Federal Government Shutdown on State and Local Governments

Partisan disagreements over issues such as Medicaid cuts, health insurance subsidies, and foreign aid rescissions triggered the October 2025 shutdown. With no continuing resolution or enacted FY 2026 appropriations bills in place, agencies have not only suspended many grant and contract activities but are also revising or canceling existing awards. Some agencies have issued Reduction-in-Force (RIF) notices, a common signal of deeper operational strain than seen in prior shutdowns. This heightened uncertainty amplifies the risk to states and localities that rely on consistent federal coordination and cash flow to maintain essential services. 

Key Takeaways 

• The October 2025 federal government shutdown, spurred by partisan disagreements, has led to the suspension and revision of grants, RIF notices, and heightened uncertainty, significantly impacting state and local governments that rely on federal support for essential services. 
• The shutdown disrupts many functions, including payment processes, federal technical reviews, administrative compliance, workforce continuity, and economic activities, putting immense pressure on state and local programs and finances. 
• State and local governments can mitigate the shutdown's impacts by maintaining proactive communication with federal counterparts, establishing reserve funds, documenting all disruptions, and collaborating across jurisdictions for collective advocacy and support. 

What Does a Federal Shutdown Mean? 

A federal government shutdown, sometimes called a “lapse in appropriations,” occurs when Congress fails to pass an annual government spending bill by the start of the new fiscal year (October 1). Under the Antideficiency Act, federal agencies must cease nonessential operations until funding is restored. This results in many agencies pausing or reducing operations and sending employees home without pay until funding resumes. Essential (“excepted”) functions that protect life, property, or national security generally continue, but typically with fewer resources. Programs like Medicare and Social Security generally maintain some functionality, but these programs often face delays in routine processing. 

How the Shutdown Affects State and Local Governments 

Even though the lapse in appropriations occurs at the federal level, its effects ripple quickly through the federal–state partnership system of governance. Based on the impacts experienced during the 2018–2019 federal shutdown, which lasted 35 days, and current 2025 conditions, the following impacts will likely become more prevalent if the shutdown continues: 

Payment and Reimbursement Disruptions

Discretionary federal grants (including those for transportation, housing, and public health) often face delays when agency staff cannot process drawdowns or approvals. In 2019, Vermont’s Legislative Joint Fiscal Office found that over 60% of federally funded state programs experienced funding reimbursement delays resulting from the shutdown. Many states temporarily fronted program costs, expecting federal repayment after the shutdown ended, a framework that may be outdated today. The active review and rescission of awarded grants for the 2025 shutdown raises doubts about whether such backfill funding will again be automatic. 

Delays in Federal Technical Reviews, Oversight, and Permitting 

Many state infrastructure and environmental projects depend on day-to-day coordination with federal staff. During a shutdown, furloughs disrupt those technical reviews, thus delaying environmental assessments, federal highway approvals, and other required steps. This can stall construction timelines, increase project costs, and jeopardize compliance with federal funding conditions.  

Administrative and Compliance Slowdowns

Even for programs with ongoing funding, administrative functions such as audits, data validation, and performance reporting can pause. Research on the 2018–2019 shutdown found that furloughed federal oversight delayed performance reporting for over 40% of intergovernmental grant programs. Those lapses create downstream bottlenecks when states later attempt to reconcile program expenditures. 

Federal Workforce Disruptions and Loss of Institutional Knowledge

The 2018–2019 shutdown demonstrated a lasting human capital effect: agencies with higher furlough rates later faced greater staff turnover and reduced program continuity. ([Resh et al.]) For state and local governments, this erosion of experienced federal partners weakens coordination long after appropriations resume. Coordination challenges can have significant second-order impacts, including delayed future grant approvals, policy guidance gaps, and stalled cross-agency initiatives. 

Fiscal and Economic Spillovers 

The Congressional Budget Office estimated that the 2018–2019 shutdown cost the U.S. economy $11 billion, largely due to delayed paychecks and reduced spending. Reduced economic activity and federal purchasing can suppress state and local revenues while simultaneously increasing service demand for unemployment or social programs.  

The Central Role of Federal–State Coordination 

While funding delays draw headlines, one softer consequence of a shutdown is the breakdown in ongoing collaboration between federal and state program staff. Most federal programs rely on a continuous exchange of communication, data, approvals, compliance guidance, and joint problem-solving. When federal agency staff are furloughed, those coordination pipelines collapse. States lose access to key liaisons, technical specialists, and reviewers, which can impede their ability to meet federal performance and reporting requirements. 

During the 2018–2019 federal shutdown, the GAO states administering SNAP, WIC, and housing assistance reported “information vacuums” that hampered decision-making for weeks, even after federal staff returned. Similarly, infrastructure programs experienced backlogs in environmental and procurement reviews, which extended project timelines by several months. Restoring coordination after such disruptions takes significant administrative effort, particularly if federal workforce turnover leaves institutional gaps. Robust, ongoing relationships with federal program officers and clear documentation of state impacts are critical safeguards. States that maintain proactive communication lines and escalate issues through designated contacts tend to recover more quickly once operations resume.  

When a Shutdown Overlaps with Natural Disasters or Emergencies 

A federal shutdown compounds risks for states and local governments responding to natural disasters or emergencies. While life-safety operations continue under “excepted” status, many critical coordination, reimbursement, and logistical functions can be impaired. 

During shutdowns, the Federal Emergency Management Agency (FEMA) typically maintains operations for ongoing disaster relief through its Disaster Relief Fund (DRF), but staffing and administrative capacity may be constrained. For example, during the 2018–2019 shutdown, FEMA continued field operations for California wildfire recovery but postponed hazard mitigation grant processing and some long-term recovery reimbursements. ([GAO 2020]) Similar delays in 2025 could slow reimbursements to state emergency management agencies and local governments, which are already incurring significant response costs. 

Disaster response often relies on interagency collaboration, often between FEMA, HUD, DOT, and the U.S. Army Corps of Engineers. Staffing furloughs or RIFs within these agencies can delay approvals for temporary housing, infrastructure repair, and debris removal. States dealing with hurricanes, wildfires, or flooding during the 2025 shutdown may experience incomplete federal situational awareness and slower mission assignments. As seen in prior disasters, this can increase pressure on state emergency funds and local first responders. 

Strategies for State and Local Leaders 

While it can feel daunting to take action during such uncertain times, especially when it’s impossible to project the ultimate duration, government officials should strive to embrace proactive solutions. General tactics for non-federal governments navigating this shutdown may include, but are not limited to: 

• Audit Near-Term Federal Draws and Build Temporary Cash Bridges:  
  Identify vulnerable programs and establish short-term reserve mechanisms to sustain critical operations until reimbursements resume. Unassigned fund balances, rainy-day reserves, and any short-term borrowing mechanisms may provide liquidity or sources of funds for continuation of the federal program until the shutdown ends. 
• Designate and Empower Federal Coordination Leads:  
  Maintain internal staff who understand each federal partner agency’s contingency plan and escalation chain to preserve communication during furloughs.
• Document All Delays, Costs, and Communications: Maintain contemporaneous records of missed payments, approvals, or correspondence. This documentation will be essential for reimbursement or Congressional reporting post-shutdown. 
• Phase Program Adjustments with Clear Criteria:  
  Implement tiered suspension plans that protect mandated services first and defer projects dependent on federal approval or oversight.
• Collaborate Across Jurisdictions for Collective Advocacy: Work through and across regional or state associations, municipal leagues, and intergovernmental coalitions to advocate for expedited appropriations and disaster funding relief where applicable. 

Unlock Support with Accounting Firms 

While the federal shutdown remains a Washington event, its fallout can cascade across every layer of public administration. States and local governments sit at the front lines of implementation, where delayed grants, absent federal counterparts, and disrupted coordination directly affect communities. Those who act early are often most effective in risk mitigation objectives. By strengthening collaboration, building financial resilience, and preparing for disaster-response contingencies, governments may be better positioned to sustain operations, protect public welfare, and recover efficiently once federal appropriations resume. 

Accounting firms play a vital role in helping clients assess financial risks, develop contingency strategies, and maintain transparency during uncertain times. If your organization needs help evaluating the risks associated with the federal shutdown to your agency or developing a shutdown response plan, contact our team.