When the Money Stops

If January felt chaotic for nonprofits, it’s because it was. On January 27, 2025, the Office of Management and Budget (“OMB”) issued a memorandum directing federal agencies to pause disbursement of certain federal funds—acutely affecting programs linked to foreign aid, DEI, and climate policy. The freeze was set to begin the very next day.

Cue the backlash. Just two days later, OMB released a second memorandum—M-25-14—claiming to rescind the freeze. But the plot thickened when White House Press Secretary Karoline Leavitt contradicted that statement, implying that M-25-13 remained in force.

Two federal lawsuits quickly followed: one in D.C. by a coalition of nonprofits (National Council of Nonprofits v. OMB), and another in Rhode Island by 22 states and D.C. (New York v. Trump). The plaintiffs alleged violations of the Administrative Procedure Act (APA), the Spending Clause, and even the First Amendment.

The courts reacted swiftly. On February 3, the D.C. District Court granted a temporary restraining order (TRO) and later issued a preliminary injunction barring OMB from implementing “unilateral, non-individualized” freezes on disbursements. The court went further: OMB was prohibited not only from enforcing the original memo, but from reinstating it “under a different name.” OMB has appealed, and briefing is scheduled through December. Meanwhile, the Rhode Island court issued its own TRO on January 31 and a preliminary injunction on March 6. When the government sought a stay, the appellate court swiftly rejected it. Oral argument is set for November 12—less than a month from now.

This litigation underscores a few things that we (academics who study nonprofits) should care about. First, the lawsuits raise urgent questions about whether the Executive Branch can unilaterally suspend funding authorized by Congress. Nonprofits that rely on federal grants—often under multi-year awards—now face real regulatory risk. Second, and importantly for § 501(c)(3) entities, the appearance of political punishment via funding denial may reframe ongoing debates about IRS viewpoint discrimination and eligibility for charitable status. Third, nonprofits managing federal awards must now navigate a new era of contingency planning. If executive discretion can override Congressional appropriations, what’s next?

As appellate courts weigh in this fall, we should track not only the outcome but also the administrative record that OMB has been ordered to produce. How these cases resolve will shape not just APA jurisprudence but the financial and operational stability of the entire nonprofit sector.

CJR