Federal Funding Freeze: What It Means for Municipalities and Nonprofits

An update to this article has been published here. A new policy announced by the Trump administration to suspend federal grants and loans has shocked local governments, nonprofits, and many community projects. This suspension of federal funding has left many wondering how critical services and ongoing projects in towns and cities nationwide will be impacted.

What Happened?

On January 27, 2025, the White House issued an order temporarily halting all federal grants, loans, and financial assistance programs. The Office of Management and Budget (OMB) sent a memo informing agencies to stop financial assistance until further review reveals conformity with "administrative guidelines."

In fiscal year 2024, more than $3 trillion was allocated for grants and loans, accounting for nearly $10 trillion of the total federal budget last year. Over the past year, agencies have also devoted attention to several areas that receive federal funding — from disaster relief and education to transportation, small business loans, and nonprofit organizations.

Immediate Impacts on Municipalities

Infrastructure Delays

Many cities and counties rely on federal grants to fix roads, build bridges, and maintain public transit systems. While big cities can manage a short funding block, small towns may be in trouble. For example, in Juneau, Alaska, officials stated that while they may be able to manage brief funding gaps, communities with limited financial resources do not have the same reserve level.

Threats to Public Services

Flood prevention or public safety may be put on hold when funds are frozen. Juneau's Deputy City Manager Robert Barr explained that smaller communities suffer most because they don't always have another way to pay for a project when federal dollars are unavailable.

Cash Flow Concerns

Certain local governments operate under reimbursement grants, where they spend money first and then get back from the federal government. But with this freeze, those repayments could be delayed, creating a cash flow problem. It could be felt more in the smaller cities, but in the long run, they may weather it better than the larger cities if the pause extends.

Effect on Nonprofits

Nonprofit organizations that greatly depend on federal funding are likely to feel vulnerable:

Disruption of Essential Services

Nonprofit organizations run domestic violence shelters, suicide hotlines, food banks, and services for people experiencing homelessness. When funding suddenly dries up, these groups can face major crises. Diane Yentel, president of the National Council of Nonprofits, explained that even a brief funding pause could be a problem for thousands of nonprofits, impacting the people they help.

Staffing Issues

Many nonprofits may have to make tough choices about furloughs or layoffs without guaranteeing the federal funds. Reducing staff further limits their capacity to provide vital services.

Increased Demand, Reduced Resources

If economic uncertainty increases, more people may need help from nonprofits, as nonprofits' resources shrink at the same time.

Long-Term Risks

This freeze could have effects that linger well beyond the immediate crisis:

Economic Ripples

Those companies and organizations that receive federal money may have to shut down or lay-off employees, which could harm local economies.

Strained Federal-Local Partnerships

Repeating funding freezes could cause municipalities and nonprofits to question whether they want to apply for federal grants in the future. Trust is fragile, and multiple disruptions can complicate long-term planning.

Legal Questions

Some have criticized this funding freeze for going against the Impoundment Control Act, which prevents the executive branch from blocking funds that Congress has approved. Any legal issues that arise from this could extend the uncertainty for the programs involved.

Who Is Most Affected?

These impacts are likely to be felt most severely in rural towns and areas because they have limited access to many different funding sources that larger, more urban areas may have. Here's an example:

Alaska's Heavy Dependence on Federal Funding

In 2024, 37.3 percent of Alaska's $16.3 billion state budget was from federal sources. With this funding now on hold, state leaders must determine which programs can continue and which might have to shut down due to the lack of funding.

Rural Nonprofits on Shaky Ground

These organizations are not always as fortunate to have big donors or state grants to fall back on. This funding freeze poses a significant threat to their day-to-day operations.

What Happens Next?

The length of this freeze remains uncertain; however, immediate action is expected. Some politicians have already criticized the move as counterproductive and potentially illegal, calling for Congress to act. According to Senate Minority Leader Chuck Schumer, the freeze exemplifies "lawlessness" because the executive branch can't withhold funds that Congress has already appropriated.

In the meantime, municipal governments and nonprofits should prepare for possible funding delays while they wait for Congress to act.

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This article contains the following sources: The Juneau Empire,  CBS News, and The Washington Post, all reported on January 28, 2025.

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