WASHINGTON — The prospect for a federal government shutdown grew more ominous Thursday, leaving state and local groups with unanswered questions about whether federal payments will be halted if lawmakers fail to reach agreement on a fiscal 2011 budget compromise before midnight Friday.

The governmental groups were concerned about everything from Internal Revenue Service Build America Bond payments and sales of state and local government series securities to issuers, to temporary assistance for needy families and housing assistance, sources said.

Cecilia Munoz, director of the White House’s Office of Intergovernmental Affairs, and an Office of Management and Budget official fielded questions about the implications of a shutdown from representatives of the government groups on Wednesday via a teleconference call.

But the administration officials could not respond to many questions about specific payments or programs. The groups were told that each agency will make decisions about its programs and then provide that information to employees and the public if it becomes clear the government must shut down.

“There’s no 'governmentclosedown.com’ site to go to,” lamented one source.

Additional discussions between the governmental groups and federal agency officials were scheduled for Thursday afternoon.  OMB director Jacob Lew sent executive agencies a 16-page memorandum on Thursday saying that unless it is apparent late Friday or early Saturday that a new continuing resolution is likely to be enacted, the office will send shutdown instructions to agencies.

House and Senate leaders grew more pessimistic Thursday as the House passed a week-long continuing resolution to fund the government that included $12 billion in spending cuts but funding for the Defense Department for the rest of the fiscal year, and President Obama vowed to veto the bill. The fiscal year ends Sept. 30.

Obama, House Speaker John Boehner, R-Ohio, and Senate Majority Leader Harry Reid, D-Nev. were scheduled to meet again Thursday evening.

Representatives of governmental groups said a brief government shutdown and delay of payments will not hurt states and localities. Even municipal governments in the most perilous cash position could survive a temporary shutdown, they said.

“Are we going to have draconian effects at the state or local level if the federal government shuts down for a few days? No,” said one source. “But the longer the shutdown the greater the risk of loss of reputation, of the belief that governments will be there to meet their obligations.”

“The main issue is cash flow,” said Michael Bird, federal affairs counsel for the National Conference of State Legislatures. “That’s really the biggest issue. How long can [states] go without getting that reimbursement” from the federal government, he said.

County governments also said the cash crunch won’t hurt them unless the shutdown draws on for weeks. They would face “a new wave of stress” if individual entitlement program payments were delayed for that long, said Jim Philipps, a spokesman for the National Association of Counties.

Sources said it is unclear how the American Recovery and Reinvestment Act programs and their related funds fit into the equation. Specifically, they are questioning whether Build America Bond payments to issuers might be delayed if the federal government closes.  Some market participants wonder if BAB payments would be treated like tax refunds or if enough federal personnel would be working to send the payments out to issuers.

Eric Chatman, chief financial officer at the Iowa Finance Authority, which issued BABs in November, said the subsidy payment is not critical at this point.

“If there is a prolonged shutdown we may be affected” but in the short-term “I don’t think that will be an issue for us,” he said. “I don’t anticipate it being a long shutdown.”

The last government shutdown occurred from December 2005 to January 2006. The 21-day gap in federal appropriations, the longest in history, resulted in the furlough of an estimated 284,000 federal workers while another 475,000 federal employees deemed “essential” continued to work on a non-pay status, according to a Congressional Research Service report. The employees designated as essential did not get paid until funding was restored to their agencies.

During that shutdown, municipal governments were in better financial shape to weather any funding disruptions. The margin for error may be thinner now as they recover from the longest recession since the Great Depression.

“You can’t compare this time to 1995 and 1996 [when] states were flush with money,” Bird said.

It was also unclear on Thursday the fate of the SLGS program, under which the Treasury sells specially-tailored securities to municipal issuers for their advance refunding escrows to ensure the yield of the escrowed securities is below the bond yield and they do not run afoul of arbitrage restrictions. A Treasury spokesman was unavailable for comment.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.