Funding Cuts and Flat Funding: Doing More With Less

Government-funded nonprofits know the perils of financial planning and forecasting around public grants all too well.

2026 has been no different, and one date matters more than any other this fall as organizations prepare for their next fiscal year. On December 11, 2026, the stopgap funding bill Congress passed in September expires. Until then, federal agencies are funded at FY 2026 levels. The same bill also blocks the Office of Management and Budget from finalizing its rewrite of the federal grant rules until that date. On December 11, both the budgets and rules come back up for decision.

The messaging so far has been consistent: more requirements, stricter enforcement, and funding that is flat at best.

Flat is the “good” outcome

The FY2026 Labor-HHS bill provided $194.9 billion, 1.6% less than the comparable FY2025 level. The House Appropriations Committee's FY2027 bill sits $5.6 billion (3%) below the FY2026 enacted level.

Head Start received an $85 million increase after consecutive years of near-level funding that have not kept pace with inflation, and the President's FY2027 budget proposal holds funding flat again. Flat funding in a period of rising costs is a government cost savings mechanism with the biggest burden passed down to the grantees.

In January 2026, SAMHSA sent termination notices to about 2,000 grantees covering roughly $2 billion, then reversed course within a day. While the funding came back, the uncertainty stayed.

State Medicaid is next. Starting January 1, 2027, 44 states (including DC) must condition eligibility for expansion adults on work requirements. The Congressional Budget Office estimates this will reduce federal spending by $326 billion over ten years. For health centers, that's a revenue problem: the Commonwealth Fund estimates up to 5.6 million community health center patients could lose coverage, costing health centers up to $32 billion over five years.

Requirements are moving the other way

In May 2026, HHS launched AERO: an AI-driven review of at least five years of Single Audit history across all 50 states. (We wrote about it here.) Compliance enforcement is no longer limited by staff time.

Some of this is already in place. Since March 2025, every drawdown through HHS's Payment Management System has required a written justification that federal staff review before funds are released. The proposed grant rules would make payment justifications a permanent, government-wide requirement, and go further: E-Verify participation for all recipients and subrecipients, and subaward reporting on SAM.gov no later than the end of the month following the subaward. Fixed amount awards would no longer be permitted unless authorized by statute, which means more cost-reimbursement documentation, not less.

Program reporting keeps changing, too. In the 2026 HRSA UDS, the revenue tables (9D and 9E) moved from cash to accrual reporting. In California, County DMH funding from the former Mental Health Services Act shifted to the Behavioral Health Services Act on July 1, adding new reporting requirements while the state's share doubled from 5% to 10%, leaving counties 90% of the allocation instead of 95%.

Who bears the burden

As organizations are asked to do more administrative work, and in many cases more programmatic work, for what amounts to less funding, staff bear the most immediate burden. The finance teams, grants and compliance teams, and program teams who oversee and manage all of the funding requirements get stretched even thinner across their many responsibilities. Same (or less) headcount, more reporting lines, a justification behind every drawdown, and less room in the budget to expand the program.

Worse, the people most affected are the communities these organizations serve. In a February 2026 survey of 380 nonprofit CEOs, the Center for Effective Philanthropy found that 73% had seen demand for their services rise since January 2025, while 30% had reduced staff and 26% had already cut services. The downstream effect of nonprofits having to handle more overhead with less funding is that program sizes often shrink, teams slow down hiring, and program participants and communities feel the screws tightening.

The immediate response to all of this is not to hire more people; the funding likely is not there for it. It's to make each recurring compliance requirement and deliverable cheaper to produce and easier to defend, with the evidence attached before anyone asks for it.

That's where Fiscle comes in.

— The Fiscle Team

Sources
Peter G. Peterson Foundation — What Is a Continuing Resolution? — https://www.pgpf.org/article/what-is-a-continuing-resolution/
Congressional Research Service — The Uniform Grants Regulation — https://www.congress.gov/crs-product/LSB11464
Congressional Research Service — Status of FY2026 Labor-HHS-Education Appropriations — https://www.congress.gov/crs-product/R48616
House Appropriations Committee — FY27 Labor-HHS-Education Act — https://appropriations.house.gov/news/press-releases/committee-approves-fy27-labor-health-and-human-services-and-education
National Head Start Association — FY26 Appropriations — https://nhsa.org/about-nhsa/newsroom/press-releases/congress-completes-appropriations-package-small-increase-to-head-start/
National Head Start Association — President's Budget Maintains Head Start Support — https://nhsa.org/about-nhsa/newsroom/statements/president-budget-maintains-head-start-support/
Roll Call — White House reverses $2 billion cut to mental health, addiction grants — https://rollcall.com/2026/01/14/hhs-cuts-2-billion-in-mental-health-addiction-grants/
KFF — Medicaid Work Requirements Tracker — https://www.kff.org/medicaid/medicaid-work-requirements-tracker-overview/
KFF — A Closer Look at the Work Requirement Provisions — https://www.kff.org/medicaid/a-closer-look-at-the-work-requirement-provisions-in-the-2025-federal-budget-reconciliation-law/
Commonwealth Fund — Millions of CHC Patients Could Lose Medicaid Under Work Requirements — https://www.commonwealthfund.org/blog/2025/community-health-center-patients-medicaid-coverage-work-requirements
HHS — HHS Cracks Down on Years of Unchecked Audit Findings — https://www.hhs.gov/press-room/asfr-aero-audit-enforcement-risk-oversight-initiative.html
U.S. Department of Labor — PMS Mandatory Payment Justification — https://www.dol.gov/sites/dolgov/files/VETS/files/GO_Memo_02-26_PMS_Mandatory_Payment_Justification.pdf
Potomac Law Group — Major Overhaul Affecting Federal Grant Recipients — https://www.potomaclaw.com/news-Major-Overhaul-Affecting-Federal-Grant-Recipients
HRSA — 2026 UDS Manual — https://bphc.hrsa.gov/sites/default/files/bphc/compliance/2026-uds-manual.pdf
California DHCS — MHSA vs. BHSA Funding — https://www.dhcs.ca.gov/BHT/Documents/MHSA-vs-BHSA-Funding.pdf
LA County DMH — Behavioral Health Services Act Companion — https://file.lacounty.gov/SDSInter/dmh/1205744_BHSAIPCompanion_FINAL_ENG_4.3.26.pdf
Center for Effective Philanthropy — State of Nonprofits 2026 — https://cep.org/wp-content/uploads/2026/05/CEP_State_of_Nonprofits_2026_FNL.pdf