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President Donald Trump addresses attendees at a summer event held on the White House’s South Lawn, Wednesday, June 4, 2025, in Washington (AP Photo/Alex Brandon).
A group of states is suing the Trump administration over plans to strip away billions of dollars in previously-allocated federal funding.
New Jersey, alongside 20 other states and Washington, D.C., claims in an 80-page legal complaint that the federal government, under the Office of Management and Budget (OMB), is engaging in an “unprecedented and unlawful campaign.” This action aims to reduce congressionally-allocated funds by relying on “a single subclause buried in federal regulations.”
The legal action argues that the “nationwide slash-and-burn campaign” misinterprets the regulation and accuses the administration of breaching the Administrative Procedure Act (APA) — the federal law overseeing administrative bodies — in at least two specific manners.
The Trump administration, for its part, has cited 2 C.F.R. §200.340(a)(4), a regulation that says funding can be terminated “if an award no longer effectuates the program goals or agency priorities.” Perhaps notably, the regulation in question is an internal rule — not a statute — which generally governs the behavior of OMB, in a section containing guidance to other administrative agencies.
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The states say the government has cited the clause to provide agencies “with virtually unfettered authority to withhold federal funding any time they no longer wish to support the programs for which Congress has appropriated funding.”
“And it has made a concerted decision, reflected in its uniform practice across a wide range of federal agencies, to invoke the Clause as grounds for terminating billions of dollars of federal funding to Plaintiffs,” the complaint goes on.
This interpretation of the clause, the lawsuit argues, “is a dramatic departure from past practice and OMB”s own interpretation.”
The clause itself is relatively new — only created by the OMB in 2020.
And, the lawsuit says, the agency has long understood the clause to only apply sparingly — and under very specific circumstances.
From the filing, at length:
At that time, it made clear that the Clause granted federal agencies only limited authority to terminate grants. OMB explained that the Clause permitted federal agencies to terminate grants where, for instance, “additional evidence reveals that a specific award objective is ineffective at achieving program goals,” or where “additional evidence . . . cause[s] the Federal awarding agency to significantly question the feasibility of the intended objective of the award.” At the same time, OMB clarified in its final guidance that, under the Clause as written, agencies “are not able to terminate grants arbitrarily.” OMB reiterated that purpose of the Clause in 2024, when it was revised to provide that an award could be terminated “pursuant to the terms and conditions of the Federal award, including, to the extent authorized by law, if an award no longer effectuates the program goals or agency priorities.”
Now, the states say, the Trump administration is simply using the clause to cut funding on a massive scale — and citing its authority in a conclusory fashion “without any attempt to identify why the grants did not align with the agency priorities that were identified at the time of the grant award.”
This understanding of the clause is entirely novel — native to the second Trump administration and its modus operandi of vast funding cuts due to the influence of the U.S. Department of Government Efficiency (DOGE).
“Consistent with OMB’s [past] guidance, Plaintiffs accepted federal grants with no notice or indication whatsoever that the federal government could change its priorities and terminate grants on a whim,” the complaint continues. “Indeed, Plaintiffs are not aware of a single instance prior to January 2025 in which a federal agency relied on the Clause to terminate a grant on the grounds that agency priorities had changed after the award of the grant.”
And those cuts are as impactful as they are unlawful, the lawsuit claims.
“The results have been devastating,” the complaint goes on. “With the stroke of a pen, federal agencies have deprived States of critical funding they rely on to combat violent crime and protect public safety, equip law enforcement, educate students, safeguard public health, protect clean drinking water, conduct life-saving medical and scientific research, address food insecurity experienced by students in school, ensure access to unemployment benefits for workers who lose their jobs, and much more. Federal agencies have done all of this without any advance notice, without any explanation to the State recipients, and in direct contravention of the will of Congress.”
The states say the Trump administration’s use of the clause to cut such substantial funds is unconstitutional.
Again, the filing, at length:
Defendants’ expansive interpretation of the Clause and the Agency Defendants’ parallel regulations incorporating the Clause would violate the separation of powers by effectively creating a backdoor to unlawful impoundment. Where Congress has appropriated funds and directed that they be spent on particular grant programs, terminating those grants based on changed agency priorities has the effect of unlawfully impounding and refusing to spend Congressionally appropriated funds. By the same token, where Congress has appropriated funds and directed that they be spent on a particular objective, yet the agency terminates grants because it has substituted new priorities for the objective Congress set out by statute, that too has the effect of unlawfully impounding Congressionally appropriated funds for the objectives Congress itself identified.
The lawsuit goes on to argue that such an “unlawful” use of the clause doubly violates the APA. First, the plaintiffs say, the use of the clause is contrary to law — a basic claim that the action is not permissible under the APA. Second, the plaintiffs say, the interpretation is arbitrary and capricious, a term of art which applies to government actions that go too far and eschew formal processes — whether internal rules or broader statutory laws.
Importantly, the plaintiffs are not seeking an injunction to claw back any of the canceled awards. Rather, they are asking the court for a declaratory judgment that “regulations incorporating the Clause do not independently authorize the terminations of awards based on a failure to effectuate agency priorities identified after the grant was awarded.”
