NLC’s Federal Action Agenda is guided by three core principles: Strengthen the Federal-Local Partnership, Avoid Unfunded Mandates and Safeguard Local Authority. Among our specific advocacy priorities, the very first is “Simplify Federal Requirements for Communities.”
Key Takeaways
- OMB’s proposed overhaul of federal grant rules would affect nearly every form of federal funding that cities, towns and villages receive, with changes slated to take effect October 1, 2026.
- Several provisions would increase administrative burdens on municipalities, introduce new compliance requirements, and allow grants to be terminated mid-award.
- Other provisions could make it easier for municipalities to apply for grants, including plain language requirements and standardized application processes.
- NLC is urging members to submit comments to OMB before the July 13 deadline and has resources available to help.
On May 29, the U.S. Office of Management and Budget (OMB) released an all-of-government proposal that advances some of these aims for cities, towns and villages, but that would also permit federal over-reach into choices and values best determined at the local level.
The wide-ranging proposal “Regulation for Federal Financial Assistance” (Document number 2026-10817) would substantively change the Uniform Guidance (“2 Code of Federal Regulations (CFR) Part 200”) by elevating and expanding the force of Executive Orders beyond federal agencies to individual grantees at the state and local level and increasing the number of administrative burdens on grantees. The changes, if adopted, would go into effect swiftly on Oct. 1, 2026 for most federal funding streams.
OMB’s three stated goals for the proposal are to:
- Improve transparency and accountability
- Elevate OMB edicts from guidance to formal regulations, and
- Reduce regulatory burden on federal grant administrators and grantees.
Improving transparency and accountability, plus sensibly reducing the cost burden of federal regulations, are both laudable goals. Points of view differ on whether this proposal would accomplish those aims overall. The remaining aim — elevating OMB edicts from guidance to formal regulations — sounds like a bureaucratic issue, but is much more consequential than that for communities.
While the National League of Cities supports transparency and accountability measures, and advocates to simplify federal requirements on communities, concerns remain about the impact that specific changes could have on municipalities. This includes outcomes that increase regulatory burdens and compliance costs to federal grantees, and could ultimately jeopardize access to federal funds with little or no recourse for impacted communities.
What’s at Stake for Local Governments
Increased Administrative Burden on Communities
Federal grants are already a major undertaking that require consistent attention from application to management to reporting outcomes and verification of compliance. OMB’s proposed changes would further increase these burdens without providing additional resources or funding. Adding new steps to the compliance and reimbursement process for federal grantees would be particularly troublesome for small, rural and under-resourced communities.
Changes sought by OMB include:
- Requiring all payment requests from municipalities to include written justifications describing the purpose of each payment and the specific award-related work it supports.
- Granting agencies the authority to add or remove specific conditions throughout the period of performance based on “risk factors” or “other factors” associated with a recipient or program, without providing specific guidance on what the ”risk factors” and “other factors” are.
- Requiring all recipients and subrecipients of federal financial assistance to participate in the Department of Homeland Security’s E-verify program for work associated with federal grants.
- Extending Buy America-style provisions beyond infrastructure to all federal awards regardless of domestic production capacity,
- Requiring states to run pre-payment checks through Treasury’s Do Not Pay (DNP) system before disbursing pass-through funds, which may delay access to funds for both local governments and residents.
- Discouraging cost-reimbursement contracts between grant recipients and their vendors or contractors (e.g. engineering firm, contractor). Local governments must submit a written justification if they want to use a cost-reimbursement contract.
Taken together, such new regulatory requirements would be a step backward from NLC’s federal advocacy goal to Simplify Federal Requirements for Communities.
The changes could, among other things, limit the authority of individual federal agencies to accommodate real differences between grantees, such as the Alternative Compliance Examination Engagement Report the U.S. Treasury granted small cities and towns that received ARPA State and Local Fiscal Recovery Fund grants. Without that accommodation from Treasury, all municipalities would have been subject to the more complex and substantially higher-cost Single Audit requirements placed on the largest cities due to their proportionate increase in SLFRF grant funds.
Make Federal Funding More Uncertain and Unwieldy
Federal grant funding is already an uncertain and unwieldy resource for communities. Many municipalities pay federal grant writers to compete for awards that may not be selected. When they are, grant agreements can take two or more years to be finalized. Grant reimbursements for local governments can already be frozen during federal government shutdowns. OMB’s proposed changes would introduce additional uncertainty by allowing awards to be modified or terminated based on shifting Executive Branch priorities, even when recipients are meeting program objectives and have made significant local investments.
Changes sought by OMB include:
- Allowing agencies to terminate a grant award during the period of performance if it is determined that the award no longer aligns with program goals or Executive Branch policies in effect at the time of termination.
- Preventing individual agencies from exercising discretion in grant compliance, or making reasonable accommodation for conditions not anticipated by statute
- Requiring pass-through entities to ensure their subrecipients do not take actions that could significantly damage the reputation of the pass-through entity, the federal agency making the award, or the federal government.
- If a subrecipient’s public statements are deemed “reputationally harmful,” the federal agency may direct the pass-through to terminate the subaward, or terminate the prime award to the pass-through entity entirely. This could impact how states disburse funds on a local level, and could significantly increase the regulatory burden of municipalities as pass-through funders.
- Eliminating fixed amount awards and subawards.
Grant terminations disrupt services and strain local budgets. If your community has experienced a grant termination — even a temporary one — let us know by filling out NLC’s survey.
Risk of Politicizing Federal Grantmaking
Federal grantmaking should be consistent, transparent and accessible to all eligible communities, with clear policy goals and measurable outcomes. Several provisions raise concerns that decisions could become more subjective or politically influenced rather than grounded in objective policy criteria.
Changes sought by OMB include:
- Allowing agencies to consider an applicant’s “history of questionable practices” when deciding their eligibility for a grant. OMB does not provide guidance on what “questionable practices” means, allowing individual federal agencies — and compliance officers — wide latitude on how to enforce.
- Permitting agencies to cooperate with private individuals or organizations in pursuing their own private cause of action or remedies for grant noncompliance.
- Expecting recipients to adapt to Executive Orders, even when those directives are not codified in law and may change over the course of a grant’s period of performance.
- Introducing “pre-issuance review,” which means that, as part of the broader merit review process, political appointees at each agency — rather than career experts — will ensure that proposals selected for funding are consistent with applicable law, federal agency priorities and the national interest.
- Requiring municipalities that receive federal funding (including as subrecipient) not discriminate on the basis of the viewpoint, content or subject matter of speech — including on the basis of political, ideological or religious affiliation or perspective — in providing services for events, meetings or other expressive activities, regardless of whether those activities are federally funded.
Proposals That May Benefit Communities
NLC supports the proposed provisions that would make it easier for municipalities to apply for and manage federal grants.
These provisions include:
- Reinforcing the requirement that Notices of Funding Opportunities (NOFOs) should be written in “plain language.”
- Requiring that applicants apply for federal grants using Grants.gov unless a program-specific exception is expressly authorized.
- Encouraging agencies to use Statements of Interest (SOIs) as part of the application process when high application volume or lengthy proposals are expected.
- Requiring executive summaries (generally limited to 500 words) in NOFOs, with limited exceptions.
- Requiring NOFOs to be posted for at least 30 days.
- Encouraging agencies to strive to ensure that NOFOs are accessible to a broad range of applicants, including those that have not previously received federal awards.
Take Action
Join NLC for a co-hosted webinar on Wednesday, June 17, which will provide an overview of the proposed rule, its implications for local governments and the key provisions municipalities should watch closely.
Before the July 13 comment deadline, send OMB a comment letter describing how these changes would impact your community. You can also share your letter or broader concerns with your Members of Congress to build awareness ahead of the October 1 implementation date.
For More Information
If it goes into effect, the OMB guidance will have significant impacts across the board, from state pass-through funding to municipalities to how nonprofits in your community would receive funding.
For more analysis, please see the resources below:
- National Association of Counties (NACo)
- Government Finance Officers Association (GFOA)
- National Council for Nonprofits (PDF)
- Lawyers for Good Government
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