Changing Federal Landscape: Impacts on State and Local Governments
The year 2025 has brought new leadership in Washington, DC. Recent actions by the Trump Administration bring potential cascading effects for state and local government leaders and stewards of public funds. Understanding the changes to the regulatory landscape and the disbursement of federal financial assistance can inform the actions governments should take to enhance their accountability mechanisms and compliance activities. By strategically assessing how these actions impact operations, governments can mitigate risks and identify and leverage opportunities to strengthen operational and fiscal resilience.
Party change and a unified federal government sets the stage for rapid federal regulatory change, impacting the entire spectrum of public sector entities. The new administration promotes deregulation as a central policy. It aims to reduce regulations significantly and rapidly across federal programs, including shifting programmatic rulemaking and compliance responsibilities back to the states. Since the Inauguration on January 20th, the Trump Administration has directed the suspension of payments of federal financial assistance, the elimination of diversity, equity, and inclusion initiatives at federal agencies and by federal contractors, and the freezing of federal hiring, among other actions. The swiftness with which executive orders are enacted and implemented may diminish time for states and localities to prepare and adapt. Legal and administrative challenges may result in the reversal of certain actions but extend the period of operational uncertainty.
The Department of Government Efficiency (DOGE), an advisory body to President Trump, has stated ambitions to significantly minimize or outright eliminate various federal agencies. Recently, the administration has moved to shut down the United States Agency for International Development (USAID), with aims to fold it into the State Department. The administration is already acting upon its stated goal of reducing the size of the federal workforce by 10%. Through February, more than 200,000 probationary federal workers have been laid off, with an additional 75,000+ accepting the administration’s ‘Fork in the Road’ deferred resignation program. Specifically, the layoffs have included 700 at the Centers for Disease Control and Prevention (CDC) and 1,500 at the National Institutes of Health (NIH) and 200 at the Federal Emergency Management Administration (FEMA). These moves reflect the administration’s broader approach to governance: eliminating bureaucratic inefficiencies and redirecting resources.
Many state government departments and agencies mirror their federal counterparts, such as the Department of Education, the Department of Health and Human Services, and Emergency Management agencies. Discussions about completely disbanding the Department of Education or eliminating FEMA suggest that funds previously managed at the federal level would be redirected to the states. The influx of funding would be accompanied by a corresponding increased need for governance structures to ensure accountability. A reduction or elimination of federal components in these areas may require states to enact new laws, establish or expand agencies, and develop compliance and accountability frameworks to fill the void, particularly in areas where federal regulation previously informed state actions.
The Trump Administration pushes the dual approach of applying heavy scrutiny in some areas, such as DEI, while aggressively cutting regulations elsewhere to accelerate processes and reduce bureaucratic drag. For example, the Department of Health and Human Services (HHS) recently paused grant review panels, pending review by a presidential appointee. There may be an increased focus on program audits and oversight related to programs under new scrutiny. For states and localities, this could mean that federal agencies tighten the screws on grant accountability in some areas. State and local governments must anticipate these shifts and reevaluate their approach to risk assessment and monitoring to ensure compliance.
Shrinking federal departments may also shake up how grants flow to states and localities. Federal agencies may loosen rules, allowing states and local governments to use federal financial assistance with fewer flow down requirements. Federal policy changes may also lead to changes in certain formula grant allocations, decreases in competitive grant opportunities, and an overall decrease in total federal financial assistance as the administration pursues its objective to shrink the Federal budget. State and local governments must adopt a proactive and strategic approach to navigating this evolving landscape.
Expanded Enterprise Risk Management (ERM) systems that enhance risk assessments across agencies can identify vulnerabilities caused by a changing federal landscape and harness existing resources to mitigate risks. A robust internal audit function can also ensure compliance with new or expanded program governance and operating rules.
The shifting landscape underscores the need for expert guidance. BRONNER offers 30+ years of experience providing advisory and assurance services for federal funds compliance, risk assessments, and audits. Click here to learn how BRONNER’s tailored solutions can support your entity’s efforts to:
Firm up its ERM and internal audit programs to address gaps created by deregulation.
Navigate the regulatory and control landscape, including understanding how new policies affect grant eligibility and compliance.