Federal Funding for States on Shaky Ground
We skipped last week’s edition while many of us were together in New Orleans at SPN Annual Meeting, but we’re back on track. Congress is also back in Washington this week, in the midst of the typical year-end budget battle. Lawmakers are working against the September 30 deadline to keep the government funded, and with rumors of a possible shutdown swirling, the uncertainty in DC feels like standard operating procedure.
This edition reworks the remarks I shared at Annual Meeting about shifting federal funding dynamics and what they mean for the states. We’re also spotlighting the SNAP reforms in the One Big Beautiful Bill (OBBB), changes that will carry major fiscal consequences for state budgets. States have this fiscal year to clean up their act and drive down error rates before the new cost-sharing requirements begin to bite.
Federal Funding: From Surge to Squeeze
Close to fifteen years ago, Utah became the pioneer in protecting its state finances against the risk of abrupt federal funding shifts. The legislature passed a contingency-planning law to ensure the state could keep functioning if Washington’s dollars ever slowed or stopped. From that model came SPN’s early federalism work, carrying this idea to other states with a warning: federal money would not always flow as promised.
Unfortunately, during COVID and the years that followed, states became even more dependent on Washington. Successive funding bills, from pandemic relief to infrastructure and green energy, drove federal aid to historic levels, climbing from 31.4% of total state spending in 2019 to over 36% in 2021.
That warning is no longer theoretical. It is happening now. The Trump administration is actively rewriting the federal–state funding map through clawbacks, freezes, and new conditions:
Unspent dollars frozen: The House Democratic Appropriations Committee estimates more than $425 billion in congressionally authorized funds have yet to go out the door, much of it now under review or blocked.
OBBB cost pressures: The new law rolls back Medicaid financing gimmicks in expansion states and shifts billions in SNAP costs onto states through higher administrative matches and benefit cost-sharing tied to error rates.
Strings attached: Infrastructure and other discretionary grants are increasingly tied to Trump administration priorities, including immigration enforcement.
And the spigot is tightening even further. Last month, President Trump signed the Improving Oversight of Federal Grantmaking Executive Order 14332, which hardwires new rules into every federal grant, including:
Termination-for-convenience clauses allowing agencies to cancel awards midstream.
Tighter drawdown rules requiring written justification and agency sign-off for every disbursement.
Political appointees screening all funding opportunities so they align with presidential priorities and steer money away from DEI, immigration services, and similar programs.
Uniform Guidance update to so these new policies apply to all federal agencies.
States Should Take Action Now
As states prepare to deal with a shifting federal landscape, now is the time to hardwire policies that reduce dependency and strengthen resilience. Washington’s volatility is the new normal, the question is whether states are positioned to withstand it.
Our Federalism Scorecard provides a benchmark, showing where states are most vulnerable to federal leverage and what tools they can adopt to protect themselves. Some examples already in use:
Legislative oversight of federal grants: A handful of states require legislative approval before agencies can even apply for or accept certain federal funds. This ensures elected representatives, not bureaucrats, weigh the costs and conditions.
Contingency planning: States like Utah and Ohio require agencies to plan for the potential loss of federal dollars, protecting budgets from sudden disruptions.
Transparency rules: Tennessee now requires agencies to disclose federal education guidance to legislators, shining light on “dark matter” that often drives policy without public debate.
Judicial non-deference: More states, including Nebraska and Indiana, have passed laws limiting courts from deferring to agency interpretations, restoring legislative authority.
States can’t afford to sit still. The best defense is preparation. Use the Federalism Scorecard to benchmark where your state stands, identify vulnerabilities, and pursue reforms that keep decision-making closer to the people. With foresight and planning, states can seize this moment to strengthen fiscal independence and ensure self-governance, no matter who is in Washington.
Spotlight: SNAP Reforms in the One Big Beautiful Bill
One of the most significant provisions of OBBB is its overhaul of the Supplemental Nutrition Assistance Program (SNAP). For decades, SNAP benefits were fully federally funded, with states only splitting administrative costs. That model is ending.
Beginning in FY 2027, states’ share of SNAP administrative costs will climb from 50% to 75%, adding more than $3.5 billion in annual obligations. Then, in FY 2028, states with payment error rates of 6% or higher must begin paying a share of SNAP benefits directly. The brackets are:
6.0%–7.99% error rate = 5% state share of benefits
8.0%–9.99% error rate = 10% state share
10% or higher = 15% state share
To determine their initial bracket, states may choose either their FY 2025 or FY 2026 error rate, whichever is lower. This provides a short window to bring down errors and lock in a more favorable baseline before cost-sharing begins.
States with the very highest error rates, above 13%, are granted an additional year. Instead of starting in FY 2028, their benefit cost-sharing does not begin until FY 2029, giving them one more year to drive down errors before the penalties take hold.
Based on 2024 data, twenty states plus the District of Columbia fall into the highest bracket, with an estimated $15 billion shifted annually from federal to state budgets. California alone would face nearly $2.74 billion in new annual costs, New York $1.37 billion, and Florida more than $1 billion. Even smaller states like Mississippi and Arkansas will see over $90–145 million in additional costs.
OBBB also included other SNAP policy changes:
Able-Bodied Adults Without Dependents (ABAWD) age 49 to 64 (previously 49) and parents of children aged 14 or older must now meet an 80-hours-per-month requirement for work, education, or community service.
Eliminates the previous work requirements exemptions for individuals that have aged out of foster care, veterans, and the homeless.
Many of the discretionary state-level waivers used to exempt counties or areas from ABAWD work requirements are phased out.
Eligibility is narrowed by requiring more documentation for lawful permanent residents and ending certain categorical eligibility practices for mixed-status households.
Taken together, these are the most sweeping SNAP changes in decades. States now are incentivized to keep error rates low and get people back to work. This fiscal year is the runway to prepare, modernizing eligibility systems, improving compliance, and strengthening oversight before the new rules take effect.