A federal district court issued a significant decision limiting the government’s ability to terminate federal grants based solely on policy or priority changes adopted by a new presidential administration. In New Jersey v. OMB, the court held that the federal grant regulations do not permit agencies to revoke previously awarded grants simply because an agency’s goals or priorities have changed after the award was made. Although the decision is likely to be appealed, it provides important guidance for federal grantees and reinforces that agencies must operate within the terms of the award and applicable law when seeking to terminate grant funding.

Federal Grants Termination for Convenience Regulation

In New Jersey v. OMB, twenty-three states and the District of Columbia challenged the administration’s use of the termination for convenience provision in the Uniform Guidance, 2 C.F.R. § 200.340(a)(4), under the Administrative Procedure Act (APA). The regulation permits a federal agency to terminate funding “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.”

The administration has terminated or threatened to terminate billions of dollars in grants to states, universities, and nonprofit federal grantees, including health centers and Head Start programs, relying on this provision. While many termination notices have offered little to no explanation, others have expressly stated that the administration’s current priorities differ from those in effect when the grants were originally awarded.

The plaintiff states challenged the administration’s claim it could lawfully terminate grants based solely on changes in agency priorities adopted after the grants had been awarded. The administration argued that the prospect of future terminations was too speculative to constitute a justiciable injury, was neither imminent nor certain, and did not constitute final agency action. The district court rejected those arguments, concluding that the threatened terminations were sufficiently concrete and imminent to establish jurisdiction and that the regulation itself constituted final agency action subject to judicial review.

Administration May Not Alter “Priorities” After Awarding a Grant   

On the merits, the court agreed with the plaintiff states that the termination for convenience provision does not permit agencies to rescind grants based on program goals or agency priorities identified after award. The court also noted that both the current and prior administrations recognized termination authority is limited to actions taken “pursuant to the terms and conditions of the Federal award.”

Finally, the court stated that allowing a federal agency to revoke grants after Congress had expressly authorized and mandated that the agency issue such grants would impinge on Congress’s exclusive Constitutional authority to direct the expenditure of federal funds under the Spending Clause.

What Federal Grantees Need to Know

Terminations for convenience remain fraught with uncertainty for federal grantees. As the court observed, the prospect of unilateral grant termination without explanation or justification creates significant uncertainty for grantees and disregards their reliance interests.

The federal government may appeal the court’s decision. Nevertheless, the ruling underscores that the grantee community must remain vigilant, monitor judicial and regulatory developments, and pursue appropriate legislative reform.

Federal grantees should carefully review any termination notice they receive and promptly evaluate administrative and judicial remedies. As New Jersey v. OMB demonstrates, agencies’ authority to terminate federal grants is not unlimited, and courts may restrict agency actions where warranted.

Stay current on the latest updates by joining Feldesman’s upcoming Federal Grant Update webinar on August 25, 2026, at 1 p.m. ET.

Feldesman’s federal grants attorneys will continue monitoring developments in litigation involving the restoration of federal grants. If you have any questions, please contact Phillip A. Escoriaza, Steve Kuperberg, or Ted Waters.