In a significant development affecting federal funding, the Office of Management and Budget (OMB) issued Memorandum M-25-13 on January 27, 2025, directing a temporary suspension of obligations and disbursements of federal financial assistance. This action aligns with several executive orders from President Donald J. Trump, aimed at realigning federal spending with administration priorities such as energy independence, inflation reduction, and the elimination of funding for initiatives inconsistent with these goals. Although rescinded by Memorandum M-25-14 on January 29, 2025, the implications of this pause continue to reverberate across nonprofit and state and local government industries.
Detailed Overview for CFOs
The temporary funding pause has introduced a complex landscape for CFOs to navigate, with several key areas of impact:
- Uncertainty in Federal Funding:
- Review of Federal Programs: Federal grants, loans, and other assistance programs are under scrutiny, impacting cash flows for both existing and pending awards. This review process may delay disbursements and create uncertainty around future funding availability to many organizations.
- Legal Challenges: Despite the rescission of the initial memorandum, legal challenges have resulted in temporary restraining orders from judges in Rhode Island and D.C., highlighting ongoing access issues for some groups. Entities need to continue to follow these legal proceedings and assess the impact on their organization.
- Impact on Program Operations:
- Disruptions in Funded Activities: Programs in areas such as Diversity, Equity, and Inclusion (DEI), environmental initiatives, and foreign aid may face interruptions or cancellations. CFOs must assess the operational and financial impact and prepare for potential program adjustments.
- Agency Analysis and Realignment:
- Executive Order Mandates: Agencies are required to conduct thorough analyses of foreign assistance programs under the Executive Order on Reevaluating and Realigning United States Foreign Aid. This involves reviewing each program's alignment with administration priorities and making determinations within 90 days on whether to continue, modify, or cease operations.
- Immediate Administrative Actions:
- Pausing New Awards and Disbursements: Agencies must halt the issuance of new awards, disbursements under open awards, and activities related to open Notices of Funding Opportunities (NOFOs). This pause necessitates careful cash flow management and strategic planning by CFOs.
- Exceptions and Waivers:
- Case-by-Case Exceptions: The OMB may grant exceptions for legally mandated actions or deadlines on a case-by-case basis. CFOs should closely monitor communications from federal agencies to identify potential exceptions relevant to their operations.
Who is Impacted
The funding pause affects a wide range of sectors and organizations, including:
- Healthcare Providers: Organizations receiving federal grants for research, public health programs, and healthcare workforce development may experience significant disruptions.
- Educational Institutions: Universities and colleges reliant on federal research funding and infrastructure grants face potential impacts, though direct student aid remains unaffected.
- Nonprofit Organizations: Those dependent on federal grants for community development, social services, and cultural programs may encounter cash flow challenges and program delivery issues.
- State and Local Governments: Entities relying on federal grants for infrastructure, economic development, and public safety initiatives must navigate potential funding delays and compliance obligations. Additionally, the Department of Justice issued a memorandum on February 5, 2025, stating that consistent with the law they will ensure that "sanctuary jurisdictions" do not receive federal funds from the department, pausing distribution and terminating agreements that violate laws or compliance. For the most part a relatively small share of funding flows from the Department of Justice to state and local governments, but the declaration could further pinch budgets and could be the start of a trend from other federal agencies.
- Tribal Organizations: Essential services and development programs funded by federal assistance may see disruptions, requiring proactive engagement with federal agencies.
- Public-Private Partnerships: Projects utilizing federal assistance, particularly in community development and environmental conservation, may face funding uncertainties.
Who is Not Impacted
Despite the broad scope of OMB's temporary funding pause, certain programs and sectors remain unaffected. Notably, direct individual benefits such as Medicare, Social Security, and Supplemental Nutrition Assistance Program (SNAP) benefits are explicitly exempt from the pause, ensuring that these critical safety nets continue without interruption. Additionally, student loans and other mandatory programs providing direct benefits to individuals are not subject to the funding freeze. This exemption helps maintain stability for millions of Americans who rely on these essential services. Furthermore, federal funds for small businesses, farmers, Pell grants, and Head Start programs are also excluded from the pause, allowing these vital initiatives to proceed uninterrupted. These exemptions provide a measure of continuity and assurance for individuals and sectors that depend on these specific federal assistance programs.
Strategic Action Steps for CFOs
Given the evolving situation, CFOs should take proactive measures to mitigate risks and ensure operational continuity including:
- Assess Funding Risk: Conduct a comprehensive review of programs reliant on federal assistance to identify potential impacts and develop contingency plans for delays or reductions in funding.
- Monitor Agency Communications: Stay informed about updates and exceptions issued by federal agencies or the OMB. This includes tracking legal developments and understanding their implications for funding access.
- Engage with Funders: Proactively reach out to federal and pass-through funders for guidance specific to your organization's scenario. Establish clear communication channels to stay updated on funding status and requirements.
- Inform Key Stakeholders: Keep leadership and program teams informed about potential delays or changes in federal funding availability. This ensures alignment and preparedness across the organization.
- Coordinate Reporting and Compliance: Prepare for increased oversight and potential investigations into the use of federal funds. Ensure compliance with administration priorities and enhance documentation procedures for reporting and audits.
Conclusion
The OMB's temporary funding pause presents significant challenges and uncertainties for federally funded programs. As the situation continues to develop, CFOs must remain vigilant and adaptable, leveraging strategic planning and proactive engagement to navigate this complex landscape. By staying informed and prepared, organizations can maintain operational integrity and stakeholder confidence during this period of fiscal uncertainty.