U.S. Government Shutdown Threatens 800,000 People As Obama Seeks Solution

In the event of a government shutdown, the National Institutes of Health won’t admit new patients, some taxpayers will wait longer for refunds and any furloughed civil servants with federally issued BlackBerrys must turn them off.

A failure by Congress to extend the government’s spending authority, which expires tomorrow, would force the closure of national parks, monuments and museums. Federal agencies -- such as the National Labor Relations Board -- that don’t protect lives, property or national security also would be shuttered.

As Democratic and Republican leaders in Congress seek agreement on a spending measure for the rest of the 2011 fiscal year, the Obama administration has warned of economic disruption from even a short shutdown. More than 800,000 “non-essential” federal workers -- out of a civilian workforce of 2.1 million -- would be furloughed until new spending legislation was passed. Agencies have drafted contingency plans for who would work and who wouldn’t.

The prospect of a government shutdown, however limited it may be, has placed pressure on the Obama administration and congressional leaders to settle their dispute over $30 billion or more in cuts from the federal budget through September before a suspension -- as of midnight tomorrow -- of all but essential federal services. Leaders of both parties are bracing for the blame that will be attached to their failure to resolve what the White House has described as minimal differences.

“People are going to have to understand that a shutdown would have real effects on everyday Americans,” President Barack Obama said last night after a meeting with congressional leaders at the White House, where he expressed confidence that a shutdown can be averted.

Elected Officials

Elected officials, including members of Congress and the president, would get paid during a shutdown unless Congress changes the law. Unlike the president and legislators, though, military personnel and federal employees who are deemed “essential” would receive no paychecks.

Although troops and the civilian employees who continue to work would get paid for their service after government financing is restored, there is no guarantee that Congress would make furloughed workers whole.

“You should plan accordingly,” says a sample letter to non-essential employees prepared by the House Administration Committee that also advises furloughed workers not to log on to government e-mail and to turn off their government-issued BlackBerrys.

$174 Million Per Day

The cost of back pay for furloughed government workers would be $174 million for each day the government is closed, according to data compiled by Bloomberg Government analyst Scott Anchin.

The U.S. military’s operations in Afghanistan, Iraq and Libya would continue under the Feed and Forage Act, which guarantees payment of its expenses. The 1861 law “was designed for the cavalry troop that was going through Dodge City and needed to get ammunition for its rifles and food for men and horses,” said John F. Cooney, a former government budget official. It’s “a standing promise” by Congress to “fund any bill troops run up” to defend themselves, he said.

Medicare, Social Security

Medicare and Social Security would continue to pay benefits to elderly Americans because they don’t depend on year-to-year spending measures from Congress, said Cooney, who was deputy general counsel of the Office of Management and Budget under President Ronald Reagan.

The Social Security Administration plans to continue sending checks during a shutdown and accept new applications for benefits, said spokesman Mark Hinkle.

As long as there is money in the Medicare trust fund, Medicare beneficiaries would continue to receive checks, said an administration official who briefed reporters yesterday. The trust fund would only be depleted if there is a lengthy government shutdown, said the official, who spoke on condition of anonymity.

The Internal Revenue Service will continue sending refunds to taxpayers who file their returns electronically, Commissioner Douglas Shulman said yesterday. Online filings accounted for 70 percent of all tax returns last year, he said.

Taxpayers who filed by mail may have to wait longer to get their money because Shulman says the IRS won’t process their refunds during a shutdown.

The IRS would also suspend tax audits, said the administration official.

Financial Markets

The political drama in Washington has not disrupted the prevailing calm in financial markets. Yields on two-year Treasury securities rose 2 basis points yesterday to 0.83 percent. That is still below the average yield of 2.59 percent in the last decade, according to Bloomberg Bond Trade prices.

Those prices reflect expectations by investors that when political leaders “come to the edge of the precipice, a more rational approach should prevail,” said John Lonski, chief economist at Moody’s Capital Markets Group.

As White House officials warned of devastating economic consequences, some Republicans attempted to downplay the impact of a shutdown.

“There is no such thing as an actual government shutdown,” Representative Michele Bachmann of Minnesota told a crowd of Tea Party protesters outside the Capitol yesterday. “It is a government slowdown.”

Economic Impact

The economic impact would depend on its duration and whether government workers are repaid.

“If they’re not losing their income or some of it is made up, then you have a situation where impacts are minor, relatively,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

There is no precedent for Congress reimbursing the hundreds of thousands of federal contractors or their employees who may be laid off during a shutdown.

“A government shutdown would be devastating to small businesses, their employees and their communities,” said Terry Williams, a spokesman for the National Association of Small Business Contractors in Washington.

Contractors such as SAIC Inc. (SAI), AeroVironment Inc. (AVAV) and Comtech Telecommunications Corp. (CMTL) face greater financial risk than rivals because they must report earnings after April 30, according to a Lazard Capital Markets LLC report.

It will be difficult for such companies to “pick up all that lost revenue” by April 30, Michael Lewis, the report’s author, said in a telephone interview.

Economic Data Delay

A shutdown would delay release of U.S. economic data, such as the scheduled April 12 release of Labor Department figures on March import prices, Commerce Department numbers on the February trade balance and the Treasury’s budget for last month.

Closures of the Small Business Administration and the Federal Housing Administration would suspend processing of business loans and government-insured home mortgages, the administration official said. FHA-insured mortgages account for about 30 percent of the home-loan market, compared with 12 percent during the last two shutdowns in late 1995 and early 1996.

And researchers at the National Institutes of Health would not be allowed to start new clinical trials of experimental treatments or admit new patients, said the administration official.

Open for Business

The Treasury Department will conduct its regular schedule of securities auctions, a government official said yesterday on condition of anonymity. The Federal Reserve Board and its 12 regional banks will continue to operate because the Fed finances its operations from its bond portfolio.

Also unaffected would be air-traffic control operations, airplane safety inspections and maintenance of airport communications, Randy Babbitt, head of the Federal Aviation Administration, told a congressional subcommittee.

The FBI’s criminal investigations will likely be “unhindered,” though a shutdown would force the bureau to postpone training and new initiatives, director Robert Mueller told a House subcommittee yesterday.

All 116 federal prisons would remain open and criminal investigations and prosecutions would continue, said Justice Department spokeswoman Jessica Smith in an e-mail. The agency would be forced to “stop or significantly curtail” civil litigation, outreach to crime victims and managing grants.

The federal court system will use fees paid by litigants and criminal defendants to remain open for about two weeks, said spokesman Dick Carelli.

The State Department’s passport and visa services will likely be curtailed, said spokesman Mark Toner. U.S. embassies “will continue to provide services” of an emergency nature to Americans abroad, he said.

National parks, monuments and Smithsonian Institution museums would close to visitors. The National Zoo in Washington would continue to employ keepers and veterinarians to care for the animals.

The animals “need to have their keepers” for food and “vets on duty” in case they get sick, said spokeswoman Linda St. Thomas. “What they won’t have is visitors.”

To contact the reporter on this story: James Rowley in Washington at jarowley@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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