2025 Spring Zoom Meeting

April 4, 2025

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Potential Risks to State Budgets: How Will Changes in Federal Funding Impact Your State?

The Senate Presidents’ Forum convened for a virtual meeting on April 4, 2025, to discuss the impact on the states of potential federal budget decisions. The presenter, Marcia Howard, has served as Executive Director for the Federal Funds Information for States (FFIS) since 1998. FFIS is a non-partisan, non-advocacy organization that, since its founding in the mid-1980s, has provided rigorous research and analysis of the impact on states of federal budget actions. She provided a brief overview of the different budget processes and options available to Congress for FY2025 and FY2026.

Marcia Howard

Executive Director and Executive Editor

Federal Funds Information for States

Marcia Howard’s Bio

To download Marcia Howard’s complete slide presentation, click here.

Presentation

Appropriations vs. Reconciliation

The regular federal appropriations process can be used to do anything: for example, appropriate funds, authorize programs, make changes to mandatory and discretionary programs, raise or suspend the debt limit, or amend Social Security.

Currently, a full-year continuing resolution (CR) is proposed for FY2025 that mostly maintains FY2024 funding but tallies slightly less than FY2024. Importantly, the appropriations process eliminates earmarks. But passing this resolution requires bipartisan support because of the potential for a Senate filibuster.

By contrast, the reconciliation process can be used only to amend mandatory spending (except Social Security), modify taxes, and to address the debt limit. It requires that both chambers of Congress agree to a concurrent budget resolution. Following these instructions, committees of jurisdiction identify specific policies to meet these goals in the form of a reconciliation bill. Most importantly, a 20-hour limit on debate in the Senate and the non-debatable motion to proceed means a reconciliation bill cannot be filibustered in the Senate. This allows the Senate to pass a reconciliation bill by a simple majority, with the vice president able to cast a tie-breaking vote, rather than needing 60 votes to end debate.

Source: Federal Funds Information for States

Current reconciliation directives from the House target $2 trillion in mandatory spending reductions from FY2025 to FY2034, including substantial cuts in energy, commerce, education, workforce, and agriculture allocations, plus additional “unspecified” cuts. If less than $2 trillion is cut, the Ways and Means Committee’s deficit increase directive will be reduced by the difference. The Senate reconciliation directive adds significant 10-year costs to current policy extensions, producing a deficit increase of $5.8 trillion.

UPDATE: The Senate passed an amended budget resolution for FY2025 on April 5. If approved by the House, it will unlock a reconciliation process that enables major tax-and-spending legislation to fast track and bypass the Senate’s 60-vote filibuster rule with a simple majority.

Medicaid Impact

Reconciliation options propose significant changes to Medicaid including converting Medicaid to a per capita capped system, eliminating the enhanced matching rate for the Affordable Care Act (ACA) expansion population, and reducing the federal match to the state's Medicaid expenditures.

SNAP Impact

The Supplemental Nutrition Assistance Program (SNAP) would undergo substantial revisions with the reconciliation proposals, including changing or undoing the Thrifty Food Plan update, ending broad-based categorical eligibility for SNAP and the Low-Income Home Energy Assistance Program (SNAP-LIHEAP) linkage, and restricting exemptions to the 20-hour-per-week work requirement for able-bodied adults without dependents (ABAWD).

Other Reconciliation Options

Reconciliation proposals could repeal more than 40 programs across the departments of Energy, Commerce (NOAA), EPA, Interior, Transportation, and also repeal tax policies (including the direct pay option for states). There could be substantial impacts on health and human services, such as altering or eliminating ACA subsidies, amending Inflation Reduction Act (IRA) drug policies, prohibiting or restricting non-citizen eligibility, and eliminating the Prevention and Public Health Fund. Human Services agencies could face the elimination of Social Services Block Grants (SSBG), and a reduction in Temporary Assistance for Needy Families funding.

Rescissions vs Impoundment

Ms. Howard differentiated between rescissions and impoundment. Rescissions require legislative action and target unobligated balances, meaning no grant agreement has been executed. Mandatory funding provided in reconciliation bills (e.g., IRA) could be rescinded in a reconciliation bill.

Impoundment is an executive action by which the president can withhold funds that have been appropriated/obligated by Congress. Funding freezes are an example of impoundment.

Both rescission and impoundment are regulated under the Impoundment Control Act (ICA), which provides the only legal mechanism for the president to delay or withhold funding, not cancel it.

The Impoundment Control Act requires that the president notify Congress before delaying or withholding funds. However, the current administration has not complied with this act and may challenge its constitutionality, Ms. Howard noted.

Conclusion

Ms. Howard concluded by looking back to the first Trump administration’s FY2018 budget proposal, which sought to eliminate 92 programs, significantly from Health and Human Services, Education, and the Environmental Protection Agency.

She acknowledged that there are many open questions:

What will happen to funding allocated to states in the Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA), and the CHIPS and Science Act?
How will impoundment/court cases play out?
How will States respond?

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Discussion

Comments are paraphrased for conciseness.

Caroline Carlson (SPF Executive Director – Moderator):

Invited Senate leaders to discuss the potential impacts of federal budget changes on their States.

Sen. Rodric Bray (Senate President Pro Tempore, Indiana):

We have a two-year budget and our updated forecast shows only modest gains, so we will have a plain vanilla budget; cautious and conservative, with not many investments in economic development. Medicaid funding is the biggest issue, and if the federal share of Medicaid expansion is reduced, this could be a significant challenge to the state budget.

Sen. Bob Duff (Senate Majority Leader, Connecticut):

What is the likely timeframe for getting a reconciliation budget proposal?

Ms. Howard:

Memorial Day is the goal that leaders have discussed.

The programs are not being eliminated but the allocated funding is being held up. These actions may face court challenges.

— Marcia Howard

Sen. John Arch (Speaker of the Legislature, Nebraska):

Our budget planning is similar to Indiana’s — it’s a conservative budget with no frills. However, if the FMAP rate drops significantly and federal funds dry up, the state will have to fill that gap. We have 30-day cancellation clauses in contracts with our providers, and the contracts don’t allow for sudden stops in funding.

Ms. Howard:

There is a difference between what is “allowed by law” to happen and what the administration is doing. It is theory versus fact. The programs are not being eliminated but the allocated funding is being held up. These actions may face court challenges.

Sen. Ronald Kouchi (President of the Senate, Hawaii):

At 2024 year-end, the state had a $1.5 billion surplus and, in the end, we carried over $2 million to $5 million. The legislature will adjourn in May if we have produced a balanced budget for FY2026. However, we have a special session planned for the third week of November to review the federal budget that starts October 1 and address funding shortfalls if they occur. To date, some FEMA funds have not been released for the Maui fires. Holding off these FEMA funds poses challenges for states facing weather emergencies.

Sen. Ronald Kouchi (President of the Senate, Hawaii):

Holding off FEMA funds poses challenges for states facing weather emergencies.

— Sen. Ron Kouchi

Sen. Rob Wagner (President of the Senate, Oregon):

The Oregon legislature adjourns at the end of June, and we get our revenue forecast at the end of May. We started out in a decent budget position, but we are being conservative in planning the budget as ARPA funds terminate and federal funds remain in question. As an income-tax and trade-dependent state, we could face challenges as tariffs impact our economy. We may be facing the perfect storm.

Sen. David Sokola (Senate President Pro Tempore, Delaware):

While the reconciliation process does not need a super-majority to pass, it would expire after 10 years if it does not save the money anticipated.

Ms. Howard:

In the past, it was customary for the Office of Management and Budget (OMB) to score the proposed budget and predict its 10-year impact. However, today, the budget chair has the discretion and can ignore the budget impact.

Sen. David Sokola:

A second issue with the withholding of federal funds is how many state positions are partially paid for with those funds and how states will make up the deficit. Meanwhile, with markets being disrupted our revenue projections are down. As a state with no sales tax, we rely on income taxes, and falling markets mean that Mandatory Minimum Withdrawals from people’s investment accounts will be lower, thus tax revenue will be lower. All revenue projections will need to be reduced in the June revenue forecast. We’re usually done with the budget by mid-June.