Shutdown Stalemate—Both Sides Dig In
We are on Day 15 of the federal shutdown, and Republicans appear to be holding firm. What’s striking this time is how little political pain has surfaced...at least so far. The typical flashpoints that tend to erode GOP resolve, unpaid troops and shuttered state programs, have been largely muted.
Over the weekend, President Trump directed the Pentagon to ensure military paychecks went out as scheduled, with Homeland Security Secretary Kristi Noem confirming that Coast Guard personnel were covered through redirected One Big Beautiful Bill Act (OBBB) funds. State WIC programs, which typically face early funding shortfalls during shutdowns, are being temporarily sustained through tariff-derived revenues.
For now, the administration’s creative accounting has helped delay the worst pain, but only temporarily. If the shutdown extends deeper into October, state-administered programs could begin to feel budget stress.
For state leaders...
This moment underscores why fiscal resilience and federal independence matter. A prolonged shutdown is inconvenient for Washington but destabilizing for states that have grown reliant on federal transfers. Now is the perfect time to advance policies that hard-wire your state against the inevitable ebbs and flows of federal funding.
Our newly updated Federalism Scorecard, released earlier this month, highlights how each state stacks up in terms of fiscal autonomy, dependency ratios, and readiness for federal disruptions; view it here.
And while Washington remains gridlocked, the flow of federal impact hasn’t stopped, especially with ongoing OBBB implementation reshaping state-federal fiscal dynamics. So while DC is at a standstill, this edition turns to what’s next—our latest OBBB Spotlight.
OBBB Spotlight: Medicaid Payment-Error Penalties Coming for States
Buried deep in the One Big Beautiful Bill Act (OBBB) is a provision that could have major fiscal consequences for states starting later this decade. Section 71106 strengthens the long-dormant penalty mechanism in Section 1903(u) of the Social Security Act, which governs federal reimbursement for erroneous Medicaid payments.
Under current law, if a state’s “erroneous excess payments” exceed 3 percent of total Medicaid spending, the Secretary of Health and Human Services may reduce that state’s federal medical assistance percentage (FMAP) by the excess amount. The rule has existed on paper since 1983 but has rarely been enforced.
The OBBB updates that language to give the Secretary new audit flexibility (“audits conducted by the Secretary, or, at the option of the Secretary, by the State”) and limits the scope of any waiver that states can seek. It also explicitly counts payments made with “insufficient information to confirm eligibility” as errors, an expansion that could capture far more cases than before.
While the provision doesn’t take effect until FY 2030, states will begin feeling its weight much sooner. Because Medicaid error-rate reviews are conducted on a rotating basis, covering about one-third of states each year, the “most recent available” rate will be used. That means audits conducted in FY 2027 (covering spending beginning October 1, 2026) will set the baseline for the first round of penalties.
With the national Medicaid error rate currently exceeding 5 percent, more than half of states could face reductions in their FMAP unless corrective actions are taken. A 1-point FMAP cut for an average-sized state translates to tens or hundreds of millions in lost federal funds. The good news for states is that OBBB also includes several program-integrity provisions, such as enhanced eligibility verification tools and data-sharing requirements, that could help states reduce error rates over time.
Expect the Centers for Medicare & Medicaid Services (CMS) to issue guidance on how it intends to calculate and apply the new thresholds as part of the rulemaking process for OBBB implementation. In the meantime, states should begin reviewing eligibility systems, vendor oversight, and data integrity controls now to avoid painful FMAP reductions later. We’ll continue to monitor OBBB implementation closely and share CMS related materials as soon as they are released.