Federal budget season always brings a whirlwind of terms, timelines, and political maneuvering – and it’s a lot more complicated than usual this year. This update unpacks the key federal budget processes and highlights recent (discouraging) developments in appropriations negotiations, a new executive order reshaping federal grantmaking, and a White House memo that could impact nonprofits and other grantees.

Reconciliation, Appropriations, Rescissions, Oh My!

Feeling confused by all of the budget lingo floating around? You’re not alone. Below, we break down the federal government’s four major budget processes:

• Reconciliation is a special legislative process that allows Congress to advance budget legislation quickly and, increasingly, along partisan lines. Legislation passed through reconciliation must be compliant with the Byrd rule, which is to say, the legislation must be related to federal spending and revenue.

• Established by the Congressional Budget Act of 1974, reconciliation bills are not subject to the usual 60-vote threshold in the Senate, making it easier to pass legislation with a simple majority vote (51 votes).
• The most recent example of this is the “One Big Beautiful Bill” Act, which was signed into law in July. Another prominent example of a bill passing through the reconciliation process is the “Inflation Reduction Act” of 2023.
• Appropriations, commonly known as the “federal budget process,” is the procedure through which Congress funds discretionary federal programs each fiscal year.
  • Discretionary programs include defense, education, transportation, environmental protection, law enforcement, border security, international assistance, and more.
  • The new fiscal years begin on October 1 and last until September 30 the following year.
• Rescissions are the cancellations of previously appropriated funding by Congress.
  • Both Congress and the president can propose rescissions, though Congress must make the final approval.
  • Congress and the president can propose rescissions through the annual appropriations process or through a special process outlined in the Impoundment Control Act of 1974.
• Continuing Resolutions (CRs)are temporary spending bills that allow the federal government to continue operations when Congress or the president has not approved final appropriations before the October 1 deadline.
  • Without final appropriations or a CR, a lapse in funding could result in a government shutdown, meaning all non-essential programs close and workers are furloughed.
  • CRs generally continue the level of funding from the prior year’s appropriations or the previously approved CR from the current year.

Nonprofits Brace as Government Shutdown Threat Increases

With nearly three weeks until the end of the fiscal year and the expiration of federal funds, leaders in both parties are still determining their positions on FY2026 spending bills. There are two options for extending government funding before the September 30 deadline: a short-term stopgap into November or December, or a longer-term continuing resolution until January or February. The alternative? A government shutdown that, as of this writing, seems increasingly likely.

Fiscal hawks and the White House are pushing to keep federal funding flat with a stopgap bill lasting through January or later. Meanwhile, Democrats and some top Republicans prefer a short-term extension to fund the government through November or December, giving legislators more time for bipartisan negotiations. Democrats warn that there will be a funding lapse if Republicans refuse to negotiate with them, and they are floating possible concessions Republicans could make in exchange for cross-party support. The main option under discussion is extending the enhanced Affordable Care Act premium tax credits, which are set to expire at the end of the year. The outcome will depend on whether congressional leaders can bridge these differences in the weeks ahead.

Executive Order Would Substantially Change Federal Grantmaking

On August 7th, the Trump Administration issued an executive order titled “Improving Oversight of Federal Grantmaking.” Framed as a response to concerns about the alignment of federal grants with the Administration’s priorities, the executive order introduces sweeping reforms to the long-standing federal grantmaking process:

• The EO requires all federal agencies to designate a senior appointee who will be responsible for reviewing and approving all discretionary grant opportunities, coordinating with the Office of Management and Budget (OMB), and ensuring alignment with agency missions and Administration priorities.
• The order mandates centralized review to ensure that federal funding cannot be made available for programs that (1) use racial preferences, (2) reject binary sex classifications, (3) support undocumented immigration, or (4) promote what the EO deems “anti-American values.”
• The EO encourages senior appointees to prioritize awards with lower indirect cost (IDC) rates and directs the OMB to revise federal guidance in a manner that limits IDC reimbursements.
• Federal agencies are directed to include provisions in all grants that allow agencies to terminate a grant “for convenience.” This would mean that agencies could end a grant at any time, not just for cause, but also if the award is determined to no longer advance agency priorities or national interest.

This EO introduces a politically charged and potentially disruptive approach to federal grantmaking, generating substantial uncertainty for grantees, particularly in academia, scientific research institutions, and of course, the nonprofit sector. For more, please see this analysis from Arnold & Porter LLP.

DOJ to Investigate Lobbying Activities of Federal Grantees

On August 28th, the Trump Administration issued a memo to the Attorney General directing the U.S. Department of Justice and federal department and agency leaders to “investigate whether Federal grant funds are being used to illegally support lobbying activities (See, 31 U.S.C. 1352) and to take appropriate enforcement action.” The memo states that “the possible use of Federal grants as slush funds for political and legislative advocacy raises serious legal concerns.” However, the referenced statute, referred to as the Byrd Amendment, does not prohibit nonprofits or for-profit businesses that receive federal funds from lobbying. Instead, it merely prohibits grantees from using federal funds to influence other federal funding decisions.

The Internal Revenue Code allows 501(c)3 public charities to lobby for or against legislation, given that they stay within their lobbying limits, report their lobbying when required, and use unrestricted funding. While federal grants often prohibit grantees from using appropriated funds to lobby, they rarely prevent nonprofits from using unrestricted funds to advance their legislative priorities.

The memorandum directs the Attorney General to report to the President on the results of the investigations within 180 days. It is unclear what, if any, enforcement actions federal agencies may take.

As Congress works against approaching deadlines and the administration reshapes federal grantmaking, the next few weeks will be critical for nonprofits and other stakeholders who rely on federal funding. We’ll continue monitoring developments closely and share updates as they unfold.

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