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AN E.REPUBLIC THOUGHT LEADERSHIP PAPER
The Big Shift By Katherine Barrett and Richard Greene
States and localities are losing federal funds and gaining responsibilities. What does it mean for
government leaders and industry partners?
Introduction
During the first half of 2025, a series of federal actions, employee reductions and cost- cutting proposals have begun to pull back billions of dollars that previously had gone to states, cities and counties. As a result, we’ve entered an era in which state and local governments must make dramatic changes in the way they do business. These changes will impact the governments themselves and the individuals they serve — as well as private sector entities that depend on government services and contract with states, cities and counties. “The federal government is the only entity capable of assisting
local and state governments’ infrastructure and resources from being overwhelmed,” said Clarence Anthony, CEO and executive director of the National League of Cities. “Cities, towns and state governments alone are not prepared to fill the gap from the federal government potentially pulling back from its current role.” This is reminiscent of the “New Federalism,” that was part of President Richard Nixon’s agenda. But while Nixon’s plans were for a shift of responsibility, money and power to the states in collaboration with the federal government, the current administration’s shift of responsibilities requires lower levels of government to figure out how to deal with a cadre of life- and-death issues on their own.
Note: This is the first in a two-part series examining the impact of federal policy and funding changes that are pushing states and localities in key areas. This installment covers cybersecurity and disaster toward greater self-sufficiency preparedness and response. Part two will cover health care, social services and education.
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The Big Shift
More Pressure on State and Local Budgets
S tates will vary in their response based on geography, local economies, the urban- rural mix, technological sophistication, economic development, and level of commitment to social welfare and education. But in general, stress on state budgets will create pressure to raise taxes, delay capital spending, defer maintenance, reduce training programs, bypass needed technological improvements, increase debt, shortchange long-term fiscal commitments (for example, to pensions) and reduce aid to localities. On the other hand, budget and political pressure may also accelerate technological innovation and increase collaboration among governments and with the private sector and academia. Most recently, a $1 trillion reduction in Medicaid funding over the next decade was passed as part of the mega-budget bill signed by President Trump at an Independence Day celebration on the White House lawn. Those cuts and the accompanying rules have an obvious impact on lower-income individuals who depend on public insurance for health care. They will also prompt an onslaught of new administrative duties for state managers
as they deal with stricter rules for eligibility determination and new Medicaid work requirements. These additional requirements could provide new private sector opportunities. But that will depend on whether state budgets and spending priorities allow Medicaid programs to build upon contract relationships with companies that provide software solutions to aid eligibility verification, improve data sharing and use artificial intelligence (AI) to streamline Medicaid administrative processes. An emphasis on stronger fraud detection also favors businesses that offer technology for auditing health claims, tracking improper payments and analyzing data patterns that signal potential fraud. On the other hand, diminishing federal funds will likely have a negative impact on hospitals, Medicaid managed care companies, home health providers, nursing homes and medical professionals. In addition, about $300 billion carved from the Supplemental Nutrition Assistance Program and school meal funding will deliver a blow to the bottom line of grocery stores and other small independent businesses.
“Cities, towns and state governments alone are not prepared to fill the gap from the federal government potentially pulling back from its current role.”
Clarence Anthony, CEO and Executive Director, National League of Cities
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Budgets passed by states and localities for fiscal year 2026 are now mostly placeholders, according to William Glasgall, public finance adviser for the Volcker Alliance. When legislatures are back in session, they will have to deal with the pressure brought about by cuts that flow down from Washington. Fiscal uncertainty already has prompted several states and medium-to-large cities to freeze hiring. For example, Massachusetts Gov. Maura Healey imposed a hiring freeze in May, which covers the executive branch. Alaska Gov.
Mike Dunleavy announced a hiring freeze about the same time. While the loss of federal funding is wrinkling into multiple corners of state and local governments, four areas that are of most concern to government leaders and the private sector are disaster relief, cybersecurity, health care and social services, and education. This report delves into cybersecurity and disaster relief and preparedness.
Reduced Federal Support for Cyber
M any cities, counties and states rely on assistance from the federal Cybersecurity and Infrastruc- ture Security Agency (CISA) to help them defend against relentless cyberattacks. This partnership has gained importance, given the growing sophistication of attacks, amplified risks created by AI, chronic under- funding of local cybersecurity budgets and vulnerabilities created by outdated public sector technology systems. The Trump Administration originally proposed cutting CISA’s budget by $495 million; that amount was reduced by the House, with $134 million in cuts remaining when the final reconciliation bill passed. CISA is expected to have about 900 employees in 2026, according to Department of Homeland Security planning documents, a 65% reduction in its workforce. CISA has also formally ended federal support for the Multi-State Information Sharing and Analysis Center (MS-ISAC), which until this year had provided free cybersecurity resources to roughly 19,000 public sector members, the vast majority of which are state, local, tribal and territorial governments. MS-ISAC, which received $27 million in federal funding last year, has been fundamentally important in helping states and localities detect threats before they become disasters. It was founded as a grassroots effort about 20 years ago, when states began to collaborate on cyberthreats.
With the loss of federal funding, MS-ISAC has begun charging state and local governments for membership, with fees based on the size of the jurisdiction. “I’m afraid that we’re going to lose those under-resourced organizations that may not have the capabilities to pay for membership, or they may just not even be aware that’s available to them,” said MS- ISAC executive committee member Robert Beach in August. Beach is chief technology officer for the city of Cocoa, Florida. In a statement released in September, CISA said the changes were part of the agency’s transition to a new model to directly support state, local, tribal and territorial (SLTT) governments. The agency said it will continue to provide grants, free tools and cybersecurity expertise to states and localities. It added that the new approach “reflects CISA’s mission to strengthen accountability, maximize impact and empower SLTT partners to defend today and secure tomorrow.” Federal funding was also eliminated earlier this year for the Election Infrastructure Information Sharing and Analysis Center (EI-ISAC), which provides critical cybersecurity tools and technical assistance to elec- tion offices across the country. This operation is now effectively halted.
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The Big Shift
A lthough needs outweigh resources, states have so far been able to grow their cybersecurity budgets. “Our surveys have demonstrated there’s more dedicated funding going to cyber resources and cyber personnel,” said Doug Robinson, executive director at National Association of State CIOs (NASCIO). “But they’ve also been relying on the federal government to assist them through the MS-ISAC [and] through cyber grants.” However, the future of key federal cyberse- curity grants is uncertain, too. The State and Local Cybersecurity Grant Program, created in 2021 by the Infrastructure Investment and Jobs Act, is set to expire this year. The program was designed to deliver $1 billion in cybersecurity funding to state governments over four years, with 80 percent of those dollars ultimately flowing to cities, counties and tribal govern- ments. It has become an important resource for whole-of-state cybersecurity approaches, where states collaborate closely with local governments to strengthen cyber protection across jurisdictions. The grant program’s future appeared grim over the summer, but continuation in some form now seems more likely. Reauthorization language was included in temporary govern- ment funding legislation in September with States Are Stepping Up
bipartisan support, although no budget amount was specified. Multiple state and local government groups — including NASCIO, National League of Cities and National Association of Counties (NACo) — have urged Congress to continue the grants. Rita Reynolds, NACo’s former CIO, said she has seen “great strides with the state and local cy- ber grant program” and raised concerns about the prospect of it ending. Noting that states and localities “have been able to keep only a quarter of a step behind the bad guys.” Reynolds said cutbacks in MS- ISAC services will put governments at an even bigger disadvantage. “They’re just going to fall further behind,” she said, “because there’s just a lot of clever people out there who want to hack into systems, particularly with the use of AI, which seems to be a real threat.” Given other budget pressures, state and local appetite for technology modernization appears to have lessened. In an EY State and Local Government Tech Modernization Survey that was released in June, 300 state and local IT leaders were asked to rank their priorities. While 54% put cybersecurity as a top priority, that compared to 56% who said their top priority was reducing costs and 47% who put tech modernization on top.
“Our surveys have demonstrated there’s more dedicated funding going to cyber resources and cyber personnel.”
Doug Robinson, Executive Director, NASCIO
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Security Partnerships May Increase
B ut where there are challenges, there are also opportunities, Reynolds noted. “Private industry is very supportive of working with local government to find solutions,” she said. “I think we’ll see more partnerships between the public sector and private industry as well as partnerships with universities.” State technology associations will also play an important role in bringing state and local leaders together to address regional needs. “It comes back to networking and to building relationships,” Reynolds said. “We’re all in this together and it’s going to take all of us, the technology village, pulling together.” According to a July 3 article in WeLiveSecurity, “Governments are among the largest consumers of cybersecurity services, and private companies are often reliant on the revenue from these contracts. Thus, any reduction in contracts may lead to reductions in headcount and in investment in research and
development. At the same time, it may further accelerate demand for automated features and AI support — perhaps even beyond what is currently proven efficacious.” Using artificial intelligence to automate cybersecurity functions like threat detection and response is already one of the most common AI use cases for state and local governments, according to research from the Center for Digital Government. Interest in these and other automation technologies could grow as states and localities attempt to stretch their cybersecurity dollars. For example, the recent announcement of winners in a multi-award cooperative contract announced by the North Central Texas Council of Governments and its collaborator, Civic Marketplace, included AI-enabled support for cyber security operations that help local governments automate monitoring and incident handling. That solicitation, geared to local governments, had 76 company award winners for a wide variety of AI products.
“I think we’ll see more partnerships between the public sector and private industry as well as partnerships with universities.”
Rita Reynolds, Former CIO, National Association of Counties
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The Big Shift
A Future Without FEMA?
L egally, states and localities have always borne the sole responsibility of dealing with calamitous events like hurricanes, tornados and wildfires. But when they can’t cover the costs, the Federal Emergency Management Agency (FEMA) has stepped in to provide necessary resources, without which devastated areas could remain in dire condition indefinitely. The Trump administration has already cut more than 2,000 full-time employees from FEMA and has threatened to eliminate the agency altogether. These cuts have also required states return more than $880 million that had already been allocated under the Building Resilient Infrastructure and Communities (BRIC) program. Although the July 4 budget bill did not specifically reduce FEMA’s budget, it included $150 million in funding cuts for weather forecasting at the National Oceanic and Atmospheric Administration. That follows earlier staff reductions and cuts to grants and research funding that raised concerns about a decline in weather prediction capability, particularly given the constant widespread threat of wildfires, floods, hurricanes and other serious weather events. The recent budget did include an additional $2.9 billion for the U.S. Department of
Agriculture’s emergency and crop insurance programs. This agriculture-related funding will help rural areas with rebuilding damaged irrigation, clearing debris and generally recovering more quickly when hit by floods or wildfires. Setting aside that increase, plentiful worries exist over FEMA’s future, with President Trump announcing on June 10 that he intended to begin phasing out FEMA after the end of the current hurricane season. The ultimate impact is uncertain, but Bloomberg unearthed a memo in mid-June that stated, “Potential changes included eliminating long-term housing assistance for disaster survivors, halting enrollments in the National Flood Insurance Program and providing smaller amounts of aid for fewer incidents — moves that by design would dramatically limit the federal government’s role in disaster response.” A FEMA Review Council, established by a presidential executive order in January 2025, will issue final recommendations in mid to late November. In July, comments from Trump administration officials, including Homeland Security Secretary Kristi Noem, suggested the
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administration was moving away from eliminating FEMA in favor of transforming or restructuring the agency, while continuing to emphasize a shift of responsibilities to state and local governments. Every state already has some form of emergency management agency, but with far less federal funding and support, they will need to take on bigger financial and logistical, and response coordination responsibilities. Some states will likely “explore bolstering interstate cooperation through mutual aid agreements (such as the Emergency Management Assistance Compact, (EMAC)” according to the State Energy and Environmental Impact Center at the NYU School of law. But “those pooled resources are likely to be inadequate to replace FEMA Preparedness Grants and emergency response training opportunities historically provided by FEMA,” the center said. Other growing state responsibilities would include public alert and warning programs, as well as emergency shelter and temporary housing. The potential costs for states and localities are staggering. Consider Hurricane Helene, which was the most severe hurricane to hit the country since Katrina in 2005. “Our entire county operating budget is between $16 and $17 million a year,” said Josh Morton, director of the Saluda County Emergency Management Division in South Carolina. “We have estimated that for us to have responded to Helene without any federal assistance we would have to increase property taxes by roughly 35% to make up the difference on the local level. We would also have to hire a lot of extra county staffing post- disaster, so that number would probably be closer to 45% or 50%.” Morton, who is also first vice president of the International Association of Emergency Managers, added, “FEMA can move its staff and funding around to wherever the disasters are. And by doing this at a national level, as
opposed to a local level, it’s actually saving the taxpayers of this country a lot of money,” Dramatic cuts to FEMA have important implications for the private sector as well. “Disaster recovery has become a pretty big industry,” said Wendy Ellard, co-leader of Baker Donelson’s Disaster Recovery and Government Services Team. “There are debris removal contractors, there are debris removal monitors, there are a slew of professional consultants that have made it their business to assist after these large events. Many of the accounting firms, including the Big Four, have disaster recovery branches now.” According to Ellard, “These professionals are preparing themselves now to provide more support to the states and locals. But there are rules regarding how these professionals can be engaged, like competitive procurement laws. States and locals will have to pay attention to those requirements, so they can set up contracts in advance. They’ll need to engage those professionals now and have standby contracts in place.” In addition, FEMA reductions could have broad impacts on local economies if disasters take a bigger toll and recovery is delayed due to lack of funds. There will be plenty of challenges. In general, less centralized management means more variation in policies and practices that the private sector will deal with. Insurance companies, particularly, will face additional pressures. FEMA’s disaster aid has limited insurance company losses in the past. Drastic reductions raise the specter of greater claim frequency and size, and the need for changes in market offerings. As with cybersecurity, challenges create opportunities for firms that can offer innovative insurance ideas and partnerships that speed up effective recovery operations, or provide much needed help in disaster risk reduction. Demand will likely increase for predictive technology, data analytics, AI expertise and climate modeling.
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The Big Shift
T he shift in government responsibilities and reductions in federal funding will inevitably have a major impact on state and local governments, their residents and their partners in private industry. That impact will vary based on a variety of factors, including economic conditions, revenue strength, budget stress, political outlook and potential policy changes. Particularly in the areas covered in this report, impact will also depend on potential external events, such as a crippling cyberattack on a Conclusion
large city or a catastrophic emergency like the high-fatality flash flood of the Guadalupe River in Kerr County, Texas, in July or the devastating Los Angeles area wildfires in January. For the private sector, similar factors will create both opportunities and barriers to building government business. Inevitably, there will be winners and losers, depending on a company’s past relationships, political savvy, industry strength, and how its products, insight and innovative outlook intersect with state and local needs.
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