Pressing Pause: A Survey of Regulatory Recovery After the Government Shutdown

Diana Akmakjian

Associate Editor

Loyola University Chicago School of Law, 2020

Although the nation’s longest-ever government shutdown has ended, agencies forced to furlough employees and shutter temporarily are still facing the effects of the funding gap. On January 25th, President Trump agreed to sign a continuing resolution that will reopen and fund the federal government through February 15th. The government reboot means that the roughly 800,000 federal employees furloughed or forced to work without pay should expect to receive their back pay soon, but the thirty-five-day suspension of government functions comes with significant aftershock. While various regulatory agencies scramble to address their backlog of work, life for Americans who interact with these agencies has been hindered indefinitely.

Disruptions extend past employee pay

Recent news cycles provided us with an overview of some of the most dramatic consequences of the shutdown. Just to name a few: IRS backlogs are delaying tax refunds, the cancellation of roughly 40,000 immigration cases may take years to reschedule, there have been catastrophic monetary losses for Native American tribes, and numerous national parks have suffered from vandalism and neglect. The broader regulatory obstruction caused by the shutdown extends far greater than simply providing stop-gap funding to return operations to business-as-usual. Agencies are now charged with continuing regulatory review over submissions prior to the shutdown, in addition to launching or re-launching large-scale investigations into any possible misconduct or violations that may have occurred during the thirty-five days without regulatory oversight.

Because all “non-essential” functions were halted during the shutdown, agencies were relying on skeleton staffs. Without full funding, agencies like the Securities and Exchange Commission (SEC) were operating with bare-bones personnel of only 286 employees who were permitted to work out of the 4,722 total workers employed by the SEC. Of the law enforcement division, only 110 of the office’s 1,344 employees were carrying out their duties. Constricting an organization with the breadth of responsibility like the SEC leaves a wide-open avenue for investment and securities fraud, and insider trading.

Investment fraud is once again on the rise, meaning that without oversight and policing, Ponzi schemes could continue to operate and insider trading would remain unchecked. Stripping the SEC of its police powers at this pivotal time came with huge, potentially-destabilizing economic implications for investors, as the SEC returned nearly $800 million dollars to investors in 2018 alone. Fraud and insider trading cases are extremely complex and often take many years to bring to trial, so when an investigation is halted for any amount of time, the statute of limitation issues begin to loom as there is a five year statute of limitations on collecting fines for these crimes. Presumably after the SEC has completed its work backlog, new investigations into any fraud that may have occurred during the shutdown will start, but the timeframe of the path forward is uncertain.

The impact of the shutdown is not limited to the regulation of finance or even industry. Other regulatory functions affecting the lives of ordinary people have been impacted by the shutdown. The Department of Health and Human Services [HHS] outlined their contingency plan prior to the shutdown which delineated the “vital” functions pursuant to the protection of public health and safety.

Specific agencies, like the Food and Drug Administration, were permitted to continue “maintaining core functions to handle and respond to emergencies.” This included “supporting high-risk food and medical product recalls, [and] addressing other critical public health issues that involve imminent threats to the safety of human life.” However, the FDA was unable to “support some routine regulatory and compliance activities,” including “some…animal drug, and most food-related activities.”  As a result, the FDA “pause[d] routine establishment inspections, cosmetics and nutrition work, and many ongoing research activities.” Considering the agency is charged with the protection of public health, the FDA’s inability to conduct routine inspections of domestic food-processing facilities is worrisome, especially given the shocking number of outbreaks and contamination in every-day food items. Further, under the HHS contingency plan, the Center for Disease Control (CDC) would be unable to support this year’s influenza program, meaning it could not use its powers to monitor and detect influenza outbreaks and transmit the data across state lines. The same limitations were also imposed on its non-communicable disease prevention programs, which address HIV, TB, STDs, and hepatitis.

Unexpected costs of the shutdown begin to mount 

S&P Global estimated the economic cost of the thirty-five day shutdown as approximately $6 billion as of January 26th, 2019. This cost includes the lost productivity of furloughed government workers, costs to the agencies for starting back up, and many other costs.  These include costs to the economy, such as delays in newly public companies filing initial public offerings. Further, the National Taxpayer Advocate, a watchdog group reporting to Congress, estimates that the IRS will need a full year to recover from the effects of the shutdown. While there are definite economic costs on the overall loss of function from the government during this time, the cost of future regulatory debacles resulting from the brief lack of oversight has yet to be determined.

 

 

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