Trump's Federal Funding Pause Threatens State Financials
Laura Nahmias, Shruti Date Singh and Sri Taylor
6 min read
(Bloomberg) -- President Donald Trump’s federal funding pause threatens more than $1 trillion that flows to states, cities and other local governments, putting everything from transit infrastructure to housing projects at risk.
Trump’s acting budget director issued a memo directing all agencies to temporarily halt federal financial assistance while the government reviews if the spending complies with an onslaught of recent executive orders. The pause was expected to take effect on Tuesday at 5 p.m. Eastern Time, although a federal judge in Washington temporarily blocked the directive.
Freezing payments would be an unprecedented step and likely ripple across the country because states, cities and jurisdictions such as school districts rely on the federal government for significant amounts of cash.
“A review of spending is fine, but a blanket pause in spending is just grossly irresponsible and has real consequences for people,” said Allison Russo, a Ohio state Democratic representative, in a post on X. She estimates the state receives nearly 30% of its operating budget from Washington.
The memo filed late Monday is a striking missive by the White House sent panic through city halls, statehouses and congressional offices. In the directive, agencies were instructed to “pause all activities related to obligation or disbursement of all Federal financial assistance” though the order doesn’t impact Social Security and Medicare benefits.
US Senate Appropriations Committee Vice Chair Patty Murray and House Appropriations Committee Ranking Member Rosa DeLauro said the scope of the order is “breathtaking, unprecedented, and will have devastating consequences,” according to a Jan. 27 letter the lawmakers sent to the Office of Management and Budget. The lawmakers, both Democrats, said the move has sown confusion across the country.
In 2023, federal grants to state and local governments totaled $1.1 trillion, or 18% of all DC outlays, according to an April report from the Peter G. Peterson Foundation, a research group founded by the former US Secretary of Commerce and Blackstone Inc. co-founder. And over the last four decades, such grants to states and local governments accounted for roughly 17% of their total revenues.
New York to San Francisco
The impact could be widespread. New York City anticipates receiving $9.6 billion in federal grants in the 2025 fiscal year which ends on July 1, according to Comptroller Brad Lander. That money — amounting to about 8.3% of the budget — includes $3.5 billion of assistance to the city’s public schools, CUNY institutions and early-childhood education programs and $4.1 billion in social services grants. As of the end of November, New York has received just 13.5% of its total federal grant funding, according to a monthly cash-flow report.
“President Trump’s illegal order to freeze hundreds of billions of dollars that Americans rely on risks throwing cities, states, and families across the country into chaos,” Lander said in a statement.
There isn’t a standard formula for how municipalities get their funding and some local agencies would be impacted more than others. New York City’s Administration for Children’s Services, which runs the city’s child welfare programs, receives 50% of its overall budget from federal funds, while almost one-quarter of the city’s Department of Emergency Management is federally financed, Lander’s office said.
In San Francisco, roughly 11% of the city’s $15.9 billion budget came from federal funding, including streams that were received directly from Washington and those that were passed through the state. And in Texas, Dallas County Judge Clay Jenkins said that health and transportation departments are large recipients of federal dollars.
“This is a wide ranging threat that impacts every city around the country in the most basic services that are offered,” said Boston Mayor Michelle Wu in a Tuesday press briefing. “Funding for police, fire, housing, addressing homelessness. It affects blue states, it affects red states - every single person in the country is impacted in some way here.”
Wu also said she’s in touch with other mayors and that they’re “experiencing a similar sense of chaos and destabilization right now,” she added.
Governors, mayors and other officials across the country are scrambling to figure out the breadth of the edict and how quickly the funds could stop flowing. When reached for comment, officials in several localities said they were reviewing the order but didn’t have insight on what programs or how much funding could be subject to the pause.
“There is a huge potential for blowback,” said David Schleicher, a professor of urban law who focuses on muni issues at Yale Law School. “The pause is extremely broad. It’s likely to engender some pretty substantial pushback.”
Legal Pushback
This isn’t the first time Trump has used the federal purse-strings to forward his policy agenda.
Shortly after taking office in 2017, Trump released a budget that would have slashed $190 million in federal aid for anti-terrorism and homeland security grants used by the New York Police Department, but Congress largely failed to approve those cuts.
In 2020, he threatened to strip federal aid to what he called “anarchist jurisdictions” like New York and other Democratic-controlled cities where racial justice protests proliferated in the wake of the murder of George Floyd. Several courts had also blocked his first administration from withholding federal funds to so-called sanctuary cities, though the Justice Department had some success limiting the reach of those court orders.
The pause is already getting challenged in court. The National Council of Nonprofits and the American Public Health Association are among those that filed a suit on Tuesday seeking to block the fund freeze until the court can evaluate what they called the “illegality of OMB’s actions.”
OMB’s plan “will have a devastating impact on hundreds of thousands of grant recipients who depend on the inflow of grant money (money already obligated and already awarded) to fulfill their missions, pay their employees, pay their rent—and, indeed, improve the day-to-day lives of the many people they work so hard to serve,” according to a copy of the suit filed in federal court in Washington.
More lawsuits are expected. New York Attorney General Letitia James said in a post on X that her office is planning “imminent legal action” against what she called the “unconstitutional pause,” and her Connecticut counterpart William Tong derided the Trump administration’s “devastating memo.”
--With assistance from Julie Fine, Cameron Baker, Zoe Tillman, Steve Stroth, Amanda Albright, Erin Hudson, Miranda Davis, Joe Lovinger, Maxwell Adler and Michelle Kaske.
(Updates with judge temporarily halting freeze on funding in second paragraph.)
