What Does a Potential Federal Funding Freeze Mean for Grantees?

(Editor's note: As of 1 p.m. on Jan. 29, the order discussed in this blog post has now been rescinded in a two-sentence memorandum (OMB Memorandum M-25-14) from the Office of Managment and Budget.)

In light of White House efforts this week that sparked fears of a freeze on all federal funding, state and local governments, as well as all other types of grantee organizations, should take proactive steps to fully assess the coverage of their programs and their funding source to, as best as possible, plan for the prospect of changes to program operations going forward.

The Trump administration created confusion Jan. 27 when the Office of Management and Budget (OMB) released OMB Memorandum M-25-13, a vague memo that required federal agencies, “to the extent permissible under applicable law,” temporarily pause all activities related to obligation or disbursement of all federal financial assistance. The administration stated that the temporary pause, which was set to begin Jan. 28 at 5 p.m. Eastern time, would provide an opportunity for federal agencies to review programs and determine the best uses of the program funding consistent with the law and President Trump’s priorities. OMB also directed federal agencies to pause all activities associated with open notices of funding opportunities, such as conducting merit review panels.

The unprecedented memo came on the heels of several executive orders (EOs) that the White House issued last week aiming to stop funding on various federal programs in opposition to the administration’s priorities. It further stated that no later than Feb. 10, agencies shall submit to OMB detailed information on any programs, projects or activities subject to this pause. Each agency must temporarily halt: (i) issuance of new awards; (ii) disbursement of federal funds under all open awards; and (iii) other relevant agency actions that may be implicated by the EOs, to the extent permissible by law, until OMB has reviewed and provided guidance to an agency with respect to the information submitted.

Also, the memo stated that agencies must, for each federal financial assistance program: (i) assign responsibility and oversight to a senior political appointee to ensure federal financial assistance conforms to administration priorities; (ii) review currently pending federal financial assistance announcements to ensure administration priorities are addressed, and, subject to program statutory authority, modify unpublished federal financial assistance announcements, withdraw any announcements already published, and, to the extent permissible by law, cancel awards already awarded that are in conflict with administration priorities; and (iii) ensure adequate oversight of federal financial assistance programs and initiate investigations when warranted to identify underperforming recipients, and address identified issues with remedies up to and including cancellation of awards.

The scope of the funding freeze created chaos among recipients of federal funding nationwide, as well as those who rely on continued government services. Certain key websites, such as Medicaid payment portals and other federal funding sites, reportedly had temporarily shut down prior to the 5 p.m. start time under the memo. The memo had the effect of pausing billions in federal spending, for unclear reasons and with an unclear time frame.

Second OMB Document

The administration later in the day attempted to clarify certain questions received related to the initial memo. This memo stated that programs not implicated by the EOs that Trump issued the prior week were not subject to the pause. These executive orders included funding related to, among others, diversity, equity and inclusion; foreign aid; climate and electric vehicles; and certain research programs under EOs entitled Protecting the American People Against Invasion (Jan. 20, 2025), Reevaluating and Realigning United States Foreign Aid (Jan. 20, 2025), Putting America First in International Environmental Agreements (Jan. 20, 2025), Unleashing American Energy (Jan. 20, 2025), Ending Radical and Wasteful Government DEI Programs and Preferencing (Jan. 20, 2025), Defending Women from Gender Ideology Extremism and Restoring Biological Truth to the Federal Government (Jan. 20, 2025) and Enforcing the Hyde Amendment (Jan. 24, 2025).

This memo added that any program that provides direct benefits to individuals is not subject to the pause, such as Medicaid and Supplemental Nutrition Assistance Program benefits. Funds for small businesses, farmers, Pell grants, Head Start, rental assistance and other similar programs will not be paused. Meanwhile, OMB sent federal agencies a spreadsheet for federal agency officials to complete by Feb. 7 to denote if some 2,500 programs are impacted by the EOs.

Still, legal experts and congressional Democrats criticized the federal funding freeze as illegal. As amended over time, the Impoundment Control Act of 1974 (Pub. L. 93-344) limits the executive branch’s authority to decline to spend, or refuse to commit to spending, funds that Congress has appropriated. The White House, however, continued to claim that its action was not an impoundment under the Impoundment Control Act, adding that “it is a temporary pause to give agencies time to ensure that financial assistance conforms to the policies set out in the president’s executive orders, to the extent permitted by law.”

For a president to pause federal funding already approved by Congress is unconstitutional. Each federal grant program is authorized by statute, referred to as authorizing legislation (see ¶310 in the Federal Grants Management Module). These statutes establish the requirements for federal agencies to implement in their regulations. Essentially, once Congress has obligated the funding for federal award programs, the president cannot shut down these existing programs or their funding stream.

While some federal agencies were establishing websites (e.g., National Science Foundation) addressing the funding freeze for their recipients, a federal judge late on Jan. 28 issued a stay until Monday, Feb. 3, that temporarily blocks the pause on programs currently spending federal funds, although it did not halt the freeze for funding for programs not yet awarded. This stay will provide time for other groups, including a group of at least 22 state attorney generals that are currently suing the Trump administration over the federal funding freeze to act.

Advice for Grant Recipients

So what should grantees do short-term to adjust to any threats to their federal funding? A recent alert issued by consulting firm Capital Edge cited the following valuable first steps:

• review your federally funded programs to determine if they are implicated by recent EOs;
• understand both the status of, and your funding agency’s rights to stop work, pause funding and terminate programs based on applicable terms and conditions and/or federal agency regulatory requirements governing termination;
• negotiate activities that can and cannot be stopped with your agreement officer to demonstrate efforts to reasonably limit costs incurred; and
• establish a means to segregate continuation and termination costs.

Here are some other bullet points as to potential short-term steps grant recipients and subrecipients can take to prepare for a funding freeze:

• Take an assessment (financial and programmatic) of all federally funded grants, including any grants that are pass-through grants that include federal funds. Know the amount of federal funds that are on hand. Identify what activities or deliverables have been completed to date and what activities/deliverables (at a minimum) are needed to complete work. Be prepared to submit a synopsis, update or current status report of the grant.
• Determine which obligations need to be paid by the end of the month or within the next 30 days or so.
• Try and make a drawdown of funds between now and Feb. 3. Determine if cost sharing funds can be used for a period of time and what adjustments would have to be made to the grant to operate under a reduced funding level.
• Prepare to adjust a grant’s scope of work, modify activities and adjust funding levels to accommodate any federally directed changes to a funded grant. The grant should be amended by the federal program to adjust funding or performance levels.
• Suggest recipients identify logical stopping points for funded grant activities and note when that would occur. The idea is to find logical points to be able to submit final performance and financial reports, and to closeout a grant. Stakeholders should be notified of any changes to a program.

Overall, recipients are advised to be able to provide their current financial information and status of grant activities should funding be halted. And as changes affect their programs, recipients should maintain timely and accurate documentation of actions taken inresponse. They should also endeavor to stay abreast of near-term changes in federal grants policy.

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