Big Changes on the Horizon for Federal Grants
Late last month the White House Office of Management and Budget (OMB) proposed new rules for federal grants, which total more than $1 trillion annually. While many of the individual revisions of the Code of Federal Relations (CFR) appear technical, taken together they point to a significant shift in how the federal government awards, oversees and manages grants. If adopted, the changes would affect everything from transportation and housing to public health, workforce development and public safety programs.
For state and local governments, this amounts to a fundamental transformation of how agencies receive and manage federal funds. The new rules would tie federal funding more directly to Trump administration priorities, particularly those relating to diversity initiatives, and subject it to greater ongoing federal oversight with stronger requirements for documenting accountability throughout the funding chain.
Historically, the uniform grants guidance (also known as 2 CFR Part 200) has set the rules of the road for federal grants by defining the governmentwide standards for everything from procurement and financial management to subrecipient oversight, audits and grant closeout. It is the bible that every state and local government grants manager lives by when managing federal funds. While the proposed new rules contain dozens of individual changes, three themes stand out.
First, federal grants have always reflected a combination of congressional intent, presidential priorities and agency discretion. But the traditional model has generally relied on career civil servants, peer reviewers and technical evaluation processes to make many day-to-day grant decisions. The new rules would move more of that authority closer to political leadership.
An August 2025 White House directive on political involvement in grants reappears in the proposed regulations, with the new rules requiring senior political appointees to review discretionary awards before they are issued (in the OMB draft at 2 CFR 200.205). The result would be a more formal role for political leadership in determining which projects receive federal support and how federal priorities are reflected in grantmaking decisions. For state and local governments, this means that while technical merit, compliance capacity and performance outcomes will remain important, applicants pursuing discretionary grants may increasingly need to demonstrate how their projects support current federal political priorities as well.
In the new rule, OMB also asserts that agencies have increasingly attached requirements and activities to grant programs that were never specifically authorized in law, particularly involving diversity, equity and inclusion (DEI) initiatives, equity plans and other cross-cutting policy objectives. To address this, OMB has proposed revisions to program design requirements (2 CFR 200.202) that would require agencies to ensure that federal funds support only activities that are directly tied to purposes authorized by Congress.
This builds on an executive order issued on inauguration day in 2025, “Ending Radical and Wasteful Government DEI Programs and Preferencing,” and would have the practical effect of narrowing the range of activities that can be supported using federal funds. Activities that agencies have often viewed as helping implement programs, improve outcomes or expand participation could face greater scrutiny if they are not explicitly connected to the statutory purpose of the grant.
Revisiting Existing Grants
The new rules would also expand federal discretion after an award has already been made. Historically, once a grant was awarded, recipients generally focused on compliance, performance and financial management. Barring significant problems, many recipients could reasonably expect funding to continue throughout the award period.
But over the past year and a half, the administration has signaled a new approach, one that makes it easier to cancel grants at a moment’s notice. The new rules would give federal agencies additional tools to reassess projects after they are underway, with perhaps the most consequential example being a proposed expansion of termination authority (2 CFR 200.340). This would allow federal agencies to terminate grants when a project no longer advances agency priorities or what it considers the national interest. The new rules would also create a temporary suspension authority allowing agencies to pause grants while issues are reviewed (2 CFR 200.340).
In addition, OMB would expand the factors agencies may consider when evaluating applicants and recipients (2 CFR 200.206), moving beyond traditional evaluation factors such as financial stability, management systems and audit findings. This would allow agencies to consider a broader range of institutional practices, affiliations and risk indicators when reviewing grant applications.
The practical implications of these changes are significant. State and local governments may become more cautious about building long-term programs around discretionary federal grants. They may need to think more carefully about hiring staff whose positions depend entirely on grant funding, entering into multiyear agreements that assume federal funding will continue unchanged or launching initiatives that would be difficult to scale back if a grant is paused or terminated. The new rules do not make federal funding unavailable, but they do suggest a future in which some grants become seen less as a source of consistent funding and more as a political lever.
More Intensive Oversight
A third theme running throughout the proposal is a stronger emphasis on oversight and accountability, especially as they relate to waste, fraud and abuse. In its review of state programs, scrutiny of grant recipients, investigations of alleged misuse of federal funds and targeting of fraud, the administration has repeatedly argued that government should exercise more active oversight of how taxpayer dollars are spent. The proposed revisions would enshrine that philosophy in federal grantmaking rules.
For example, the new rules would expand subaward reporting requirements (2 CFR 200.329), strengthen oversight expectations for pass-through entities such as state governments that re-grant funds to nonprofits (2 CFR 200.332), add payment verification requirements (2 CFR 200.305) and increase documentation requirements for internal controls (2 CFR 200.303).
The cumulative effect is not simply more reporting. It is a tightening of oversight throughout the grants ecosystem. Federal agencies would exercise greater oversight of recipients. Recipients would be expected to exercise greater oversight of subrecipients. States would face stronger expectations regarding payment verification and monitoring. Pass-through entities would face greater scrutiny regarding how funds move through affiliated organizations and downstream partners.
Codifying Changes Already Underway
In many respects, the new rules from OMB would formalize changes that state and local governments have already experienced during the first 18 months of the second Trump administration, during which federal agencies have attempted to pause, terminate or modify grants they view as inconsistent with administration priorities. Many of those actions have resulted in litigation, with courts being asked to rule on whether agencies possessed the authority to take those actions and whether required procedures have been followed, including the Administrative Procedure Act requirement that agencies give adequate notice and receive public comments for major changes to federal rules.
The newly proposed rules seek to lay those questions to rest by providing a stronger legal and administrative foundation for moving from governmentwide guidance to governmentwide regulation. The distinction may sound technical, but it reflects OMB’s desire for greater consistency and uniformity across agencies while also placing many of these policies on firmer legal footing by following the Administrative Procedure Act’s notice-and-comment process.
It is tempting to view the proposed grants regulation framework as a collection of technical amendments to grants management rules. That would be a mistake. The new rules reflect a broader vision of how federal funds should be administered. Political leadership would play a larger role in shaping grant decisions. Federal agencies would gain greater authority to revisit those decisions after awards are made. Oversight would become more intensive throughout the funding chain.
Whether the final rule ultimately resembles the current proposal remains to be seen. But state and local governments should not dismiss the proposal as a technical grants management exercise. If finalized, the proposed changes could reshape not only how grants are administered but also how governments compete for, manage and sustain federal funding in the years ahead.