OMB Federal Funding Freeze Spurs Widespread Confusion, State AGs' Lawsuit

Judge Loren AliKhan said at the close of a virtual hearing that the “brief administrative stay,” which will last until 5 p.m. ET Monday, aims to keep the current funding situation in place while legal challenges to the OMB memo move through the courts. The freeze was set to go into effect at 5 p.m. ET Tuesday. AliKhan’s ruling capped off a day in which confusion reigned in Washington over the exact scope of the Trump administration’s proposal.

The initial memo, which acting OMB Director Matthew Vaeth released Monday night, required that agencies "identify and review all federal financial assistance programs and supporting activities consistent with the President's policies and requirements." After the freeze took effect, agencies were to submit "detailed information on any programs, projects or activities subject to this pause" by Feb. 10.

OMB quickly issued a second memo Tuesday clarifying that the spending freeze “does not apply across-the-board” but rather is “limited to programs, projects, and activities implicated” by Trump’s executive orders. These include a Jan. 21 directive pausing spending on some Infrastructure Investment and Jobs Act (IIJA) initiatives. That order dealt only with energy and “Green New Deal” aspects of IIJA, not its $65 billion in connectivity spending, including the $42.5 billion BEAD program.

However, in conjunction with the initial memo, OMB also asked the FCC and other agencies to provide information by Feb. 7 on all “Federal financial assistance” programs. An OMB spreadsheet we obtained seeks information on BEAD, USF, seven other Commerce Department connectivity programs and seven additional FCC initiatives, including rip and replace. Other FCC initiatives under review: the lapsed affordable connectivity program, the COVID-19 telehealth initiative, the $200 million cybersecurity pilot program for schools and libraries, and the connected care program.

There's "no question this policy is reckless, dangerous, illegal and unconstitutional," said New York Attorney General Letitia James during a press conference held by the six Democratic AGs. "Our lawsuit will seek an order, a court order, to immediately stop the enforcement of the OMB policy and to preserve essential funding for Americans."

Trump "is not a king," said New Jersey Attorney General Matt Platkin. "He does not get to wake up in the morning or after an afternoon nap and direct his entire government to stop funding critical services that Congress has duly authorized and appropriated."

Capitol Hill Uncertainty

OMB’s initial memo prompted confusion and consternation on Capitol Hill. Before the clarification was circulated, some Senate Commerce Committee members voiced concerns that Trump’s spending pause could affect many federal telecom programs. Senate Appropriations Committee Democrats pointed to a range of effects of the freeze "if [it's] implemented broadly," as OMB's initial guidance indicated. The Democrats said it would potentially halt IIJA spending and warned that "funding for the 988 Suicide and Crisis Lifeline ... will be cut off."

Senate Commerce members still expect that BEAD's uncertain future will earn repeated mentions during the committee's Wednesday confirmation hearing for commerce secretary nominee Howard Lutnick. That panel will begin in 253 Russell immediately after the committee completes a 10 a.m. meeting to vote on its rules for the 119th Congress (see 2501230019).

Senate Public Works Committee Chair Shelley Moore Capito, R-W.Va., told us “the White House and OMB really need to clarify who and how [the spending freeze] impacts things like” BEAD. She noted her office was receiving “a lot of calls today asking for clarifications.” Capito, also a Senate Commerce member, said she hopes OMB will “quickly scrutinize” BEAD “and get everything back on track.” She fully expected the issue to arise during Lutnick’s hearing unless the White House offered additional clarification.

Likely Senate Communications Subcommittee ranking member Ben Ray Lujan, D-N.M., said people “all across America, Democrats and Republicans … are asking questions about why the projects that will make a difference in their communities and lower costs for the American people” are under threat from the Trump administration. Senate Commerce member John Hickenlooper, D-Colo., said he will “be interested to hear [Lutnick’s] response” to questions about reducing spending on programs like BEAD, “but I think he will recognize that the president is who sets the terms for his Cabinet, so he will have to do as he’s told.”

'Chaos'

The Schools, Health & Libraries Broadband (SHLB) Coalition is among the groups that raised concerns about the future of the FCC's USF programs, BEAD and other federal broadband funding. “The OMB memo is a concern and needs immediate clarification,” said Executive Director John Windhausen. It "emphasizes the Trump administration’s priorities to make America stronger, reduce inflation and make America healthy," he said, and the E-rate and Rural Health Care programs "do just that."

“What a recipe for chaos, dislocation and unintended consequences, as well as Trump’s intended disruption,” said former FCC acting Chairman Michael Copps. He noted that Congress created BEAD and the other programs, so the “question becomes how long is Congress going to accept its docile little puppy role under its new master? Not just programs, but people’s lives are at stake. It's shaping up to be a real catastrophe.”

The executive order, unlike a freeze that Trump issued when he took office Jan. 20, likely covers BEAD, New Street’s Blair Levin told investors Tuesday. “Even without the memo, we would not have been surprised to see NTIA informally pause spending while it awaits guidance on how the Trump administration wishes to proceed with the program,” he said. “The operative question for investors is what happens” after Feb. 10. The memo also “likely accelerates the policy debate about the future of the program.” Levin said one likely outcome is changes to BEAD similar to those sought by Senate Commerce Chairman Ted Cruz, R-Texas (see 2411220035).

The freeze “appears to be quite broad, so on its face, it seems to capture BEAD funding that may still be held by the federal government, which is the vast majority of it,” emailed Cooley’s Robert McDowell. The memo is “producing a lot of questions regarding its effect on programs with regular funding flows, such as USF,” he said: “But decisions are moving rapidly in the Trump administration, so we can assume that these questions will be answered soon and that uncertainty will be short-lived."

The OMB memo isn’t an issue for BEAD-funded networks but could be for the tribal broadband connectivity program, Treasury’s capital projects fund and other broadband programs that are further along, wrote Jade Piros de Carvalho, Bonfire Infrastructure Group vice president-broadband advocacy and partnerships. Reimbursements will be halted “for a while,” she said Tuesday.

Numerous Questions

Other regulatory lawyers also said Tuesday that they are fielding many questions from clients trying to understand the freeze's implications. Telecom associations mostly declined comment until they get a better handle on what it means.

The freeze probably gives “enough ambiguity in its terms so that new agency heads can pause some projects that they don’t think fit into the president’s agenda, but possibly allow others to continue,” said Kristian Stout, director-innovation policy at the International Center for Law & Economics.

Joe Kane, Information Technology and Innovation Foundation director-broadband and spectrum policy, said the Trump action will likely apply to BEAD but not most USF payments. The latter program is “insulated both by the fact that the FCC is an independent agency and that USF itself is administered by a technically private entity.”

The OMB memo contains language carving out programs that provide individual assistance, which could be seen as a sign that the policy won't apply to the Lifeline Program, according to Nelson Mullins attorney John Heitmann, who represents the National Lifeline Association.

Other attorneys told us they thought it could affect BEAD and rip-and-replace funding and slow state broadband deployment efforts. The latter could feel the effects quickly if their funding is paused, and they can’t pay workers, said University of Minnesota professor Christopher Terry. “Our building season for running fiber in the ground is kind of short. If this goes on for three or four months, and those people don't get paid for the work that they're doing to prep, you can guarantee they're going to be behind, and we're going to miss a window, and that's going to set us back another year.”

From a legal perspective, the freeze is a “flagrant violation” of federal laws restricting the White House from overriding spending decisions made by Congress, said Georgetown University Law Center professor Steve Vladeck in a newsletter to subscribers Tuesday. The policy will likely lead to a flurry of lawsuits, injunctions and a quick emergency appeal to the U.S. Supreme Court, he said. The White House is likely to argue that laws restricting the president’s authority to refuse to spend federal funds -- called impoundment -- are unconstitutional, he said: “That argument is a loser, but it’s a good bet that it’s going to be up to the Supreme Court to say so -- and probably a heck of a lot sooner than we might have predicted as recently as yesterday.” Vladeck added, “If presidents can impound appropriated funds at any time and for any reason, then there’s not much point to having a legislature.”

OMB said the policy is not an impoundment, but instead “a temporary pause” to assess agency compliance with the president’s executive orders. However, the memo uses language that is unlikely to survive legal scrutiny, said Brent Wilkes, Hispanic Federation senior vice president-institutional development. During an FCBA panel Tuesday on the White House’s diversity, equity and inclusion order (see 2501280066), Wilkes said, “It's all about 'woke' programs and things like ‘Marxist’ ideology.” He added, “It's just kind of surprising that somebody would put that in a legal document.”