Opinion: How Much Will MoCo Suffer from the Federal Shutdown?

The current partial federal government shutdown is now the longest in U.S. history.

Federal employees in affected departments and agencies have now missed a payday whether they are working as essential employees or not.  Some federal services and benefits have been suspended although the situation is fluid.  What’s becoming clear is that the longer the shutdown lasts, the more damage it will do to the economy.

What does this mean for Montgomery County?

In the short term, much attention has focused on the plight of federal employees.  (Disclosure: my family includes federal employees.)  These folks, some of whom continue to work despite not getting paid, may have to rely on credit and/or savings to pay for living expenses. As bad as that is, federal employees have been paid after past shutdowns and Congress has passed legislation to do so again.

The situation faced by federal contractors is even worse.  While the Congressional Budget Office has said that the number of federal contract workers is unknown, an estimate by New York University professor Paul Light holds that they substantially outnumber federal employees.

The financial circumstances of contract employers who work for unfunded federal agencies are precarious at best as they face dire choices between paying employees when revenues are lacking or laying them off.  As for the contract employees, many will not be paid at all for work lost during the shutdown, meaning that their income losses are permanent.

To gauge the impact of lost contract spending, I accessed contract data for the nine affected federal departments from USASpending.gov.  The table below shows fiscal 2018 contract volume by department for recipients located in each jurisdiction in the Washington-Arlington-Alexandria metropolitan area.  Fiscal 2019 contract data was not used because it is incomplete.

A few facts stand out.

1. In the Washington area, the biggest contract disbursing departments among those affected by the shutdown were Homeland Security ($8.9 billion in fiscal 2018), Transportation ($6.9 billion) and state ($6.6 billion). As big as those contract volumes were, the Washington area is fortunate that the Department of Defense and most of the Department of Health and Human Services – the latter being absolutely critical to Montgomery County – are currently funded.
2. Montgomery County’s largest contract awards came from Homeland Security ($1.1 billion) and Transportation ($769 million). Contract recipients in MoCo accounted for 11 percent of contract awards in the region.
3. As exposed as MoCo is to contract stoppages, other jurisdictions will be hit harder. The District of Columbia, which has about two-thirds of MoCo’s population, gets roughly double the contract volume from the departments affected by the shutdown. Fairfax County, Virginia, which is slightly larger than MoCo, gets about four times the contract volume of MoCo.
4. The nine affected departments disbursed $673 million a week in contracts to Washington area jurisdictions in fiscal 2018. They disbursed $71 million a week to contract recipients in MoCo. That’s the scale of money that is now at risk from the shutdown.

What does this mean for Montgomery County’s budget?

That’s a hard question to answer because it is subject to numerous uncertainties.

First, while the contract volume awarded to recipients located in MoCo is known, the number of contract employees in the county and their incomes is unknown.  Many contract employees live in one jurisdiction and work in another.

Second, contract volume includes costs for goods and services provided by others.  Those vendors may not be located in the county or even in the region.

Third, there is a multiplier effect on government spending that applies to ripple effects throughout the economy.  That means a change in contract volume will have an even larger impact on the total economy.

A 2017 working paper published by the Federal Reserve Bank of Richmond estimates that negative multiplier effects from government spending cuts are significantly greater than positive multiplier effects from government spending increases, thereby making a strong case against austerity programs.  Fourth, local economies in the Washington region affect each other.

Even if MoCo is not hit as hard directly as D.C. or Fairfax, the losses in those neighboring jurisdictions and others will reduce economic activity here.  And finally, the above table does not include contracts from numerous smaller independent agencies that are affected by the shutdown, thereby understating the impact on the region.

All of the above said, if MoCo’s federal contractors are indeed losing up to $70 million in contract volume a week and are not reimbursed for it, it’s easy to imagine a negative impact on the county’s budget of at least a couple million dollars a week in lost income taxes alone.  That’s bad news for a county government which is now considering its third mid-year savings plan in the last year.

For the good of the county’s budget, economy and residents – not to mention those of the nation – the shutdown must end as soon as possible.

Adam Pagnucco is a writer, researcher and consultant who is a former chief of staff at the County Council. He has worked in the labor movement and has had clients in labor, business and politics.