Federal Reforms to Grants and Assistance Regulation: What States Should Know

Key Takeaways

The Office of Management and Budget (OMB) released a proposed rule on May 29, titled Regulation for Federal Financial Assistance, that would significantly overhaul the federal grants and assistance process, with major implications for states. The government-wide initiative would revamp the rules governing federal grants, cooperative agreements, and other forms of assistance-commonly known as the "Uniform Guidance" (2 C.F.R. Part 200). According to the OMB, the proposal aims to improve transparency, accountability, oversight and consistency across federal grant programs while reducing unnecessary administrative burden on recipients. This proposed rule may impose significant implementation costs on states and limit their ability to manage state-administered programs and joint federal-state initiatives.

Key Issues and Proposed Changes:

• Major overhaul of federal grant regulations. The proposal represents the most significant revision to the federal grant-management framework since the Uniform Guidance was established in 2013 and would affect all federal grant recipients, including states, local governments, universities, nonprofits and tribal governments.
• Conversion of guidance into regulation. The OMB proposes changing the status of the Uniform Guidance from government-wide guidance to a more formal government-wide regulation, rebranded the "Uniform Grants Regulation," with a stated goal of creating greater consistency across agencies and simplifying future updates.
• Expanded federal oversight and accountability. The proposal would increase agency authority to monitor compliance, impose award conditions, suspend funding or terminate awards under specified circumstances, reflecting a broader emphasis on oversight of taxpayer-funded activities.
• Changes to award review and approval processes. The rule would require additional review of discretionary awards by senior politically appointed agency officials. It also clarifies that expert peer-review recommendations are advisory rather than binding in funding decisions.
• Emphasis on legal compliance and nondiscrimination requirements. The OMB states that recipients would be expected to ensure activities funded by federal awards comply with applicable laws and policies, including requirements related to equal opportunity and unlawful discrimination.
• Broader authority to terminate or modify awards. Federal agencies would have greater discretion to modify, suspend or terminate grants that are determined not to align with agency priorities, statutory purposes or other specified national interests.Revisions to allowable costs and award administration. The proposal updates numerous provisions governing what grant expenses are allowable, how awards are structured and administered, and how recipients demonstrate compliance with federal requirements. It also eliminates fixed-amount awards (lump-sum instruments), requiring a shift to cost-reimbursable models.

Potential Impacts on State and Local Governments

Because the proposal applies government-wide, states, local governments and pass-through entities administering federal funds could face changes in grant management practices, monitoring requirements and subrecipient oversight responsibilities. Items of particular attention include:

• Compressed Implementation Timeline and Regulatory Misalignment. The proposal's effective date is Oct. 1, 2026, and would apply to all Fiscal Year 2027 funding and is an aggressive timeline for state implementation. States that receive federal pass-through funds are themselves subject to their own administrative regulations, legislative appropriations structures, and grant management policies, many of which may need to be updated to conform with the new Uniform Grants Regulation. Unlike federal agencies, many states cannot simply adopt federal rule changes. They often must go through their own rulemaking or legislative processes, which operate on independent timelines that may not accommodate the federal schedule. This compressed window could force states to operate under conflicting requirements or risk noncompliance.
• Expanded Federal Termination Authority and Funding Vulnerability. The proposed rule significantly expands federal agency discretion to modify, suspend, or terminate grants that no longer align with current agency priorities or "the national interest," mirroring a procurement-style "termination for convenience" standard. For states, which rely on federal grants for substantial portions of their budgets, this expanded authority creates fiscal exposure as early termination or suspension could leave states holding programmatic and staffing commitments that cannot be unwound quickly, forcing either emergency budget actions or disruption of services to residents.
• Increased Subrecipient Monitoring Burden. States that pass federal funds through to local governments, nonprofits and other subrecipients would face heightened monitoring and oversight obligations under the proposed rule. The rule strengthens requirements for pass-through entities to monitor subrecipient compliance with the expanded nondiscrimination and foreign collaboration restrictions, which are areas where state capacity, legal interpretation, and existing contracts may not align with federal expectations.
• Transition Costs from Elimination of Fixed-Amount Awards. The proposed elimination of fixed-amount (lump-sum) awards would require states and their subrecipients to shift to cost-reimbursable grant structures across a wide range of programs. Many state agencies and their nonprofit subrecipients have built grant administration systems, accounting practices, and staffing models around fixed-amount awards due to their administrative simplicity. Transitioning to cost-reimbursable models requires more granular expense tracking, documentation, and audit readiness, adding costs and complexity. The transition burden will fall disproportionately on states administering high volumes of smaller, formula-based pass-through awards.