The uncertainty surrounding federal grants, budgets, priorities and policies has been a challenge leading up to the passage of the “One Big Beautiful Bill.” State, local and education (SLED) government leaders have been working overtime to set their new goals and budget items and come up with a coherent purchasing outlook for 2025-26 and beyond.

The new funding bill will have some net benefits to contractors in the SLED market as well as the potential for slowing in demand based on significant cuts or declines in available federal funding. These negative impacts can potentially require some tough decisions and various actions to offset them such as using up rainy day funds, reducing spending on staff or reducing contract purchasing spend. But as we’ll show, they aren’t likely to represent a severe drop in purchasing activity.

But first, let’s take a look at the positive side of the ledger with recent analysis by GovWin’s federal market analysis team. Their recent free report on the new budget and contractor opportunities provides valuable insights and details. The total of the new appropriations flowing to SLED government comes to $41.6 billion over the coming years. Over half will go toward rural health programs with the remainder spent on the border wall and additional law enforcement and security efforts. 

New Additional Sources of State and Local Funding

• $25 billion for carrying out rural health transformation programs (Title VII Section 71401)
• $10 billion for border wall construction, detection/interdiction of illicit substances and unlawful aliens who committed a crime. (Title IX Section 90005)
• $3.5 billion for law enforcement efforts at the state and local level “related to crimes committed by aliens, drug and human trafficking, and to counter gang or other criminal activity.” (Title X Section 100055)
• $1 billion for “security, planning, and other costs related to the 2028 Olympics” (Title IX Section 90005)
• $625 million for “security and other costs related to the 2026 FIFA World Cup” (Title IX Section 90005)
• $500 million for “state and local capabilities to detect, identify, track, or monitor threats from unmanned aircraft systems” (Title IX Section 90005)
• $450 million for law enforcement related to the “Operation Stonegarden Grant Program” (Title IX Section 90005)
• $300 million reimbursement for “extraordinary law enforcement personnel costs” for protection activities to assist the Secret Service in presidential protection (Title IX Section 90006)
• $200 million “to develop Government Efficiency grants for states” (Title VII Section 71121)

Analysis of Funding Reductions and Potential Impacts

The following changes have been identified as leading to losses in federal funding over the coming years. Keep in mind much of it will not be directly contractor-addressable but there will likely be many indirect negative impacts from tighter SLED budgets in general.

• As much as $1 trillion in Medicaid cuts over 10 years are estimated with new work requirements, which can harm SLED public health care and potentially close many rural hospitals. (https://www.kff.org/tracking-the-medicaid-provisions-in-the-2025-budget-bill/ )
• Public health block grant funding is reduced, limiting federal support for health departments. (https://www.kff.org/tracking-the-medicaid-provisions-in-the-2025-budget-bill/ )
• Reduced food assistance for low-income families through the Supplemental Nutrition Assistance Program (SNAP). (https://www.kff.org/medicaid/issue-brief/the-implications-of-federal-snap-spending-cuts-on-individuals-with-medicaid-and-other-health-coverage/ )
• Community Development Block Grants will see significant reductions including $3 billion in environmental justice block grants that are cancelled. (https://www.nahro.org/news/fy-2026-budget-proposes-devastating-cuts-to-housing-and-community-development-block-granting-rental-assistance-to-states/
• $1 billion less in Affordable Housing Preservation funding along with reduced subsidies for rent.  (https://www.cbpp.org/research/housing/2025-budget-stakes-many-households-could-lose-needed-rental-assistance )
• Funding for economic development grant programs will be significantly reduced. (https://www.congress.gov/119/plaws/publ4/PLAW-119publ4.pdf
• Changes in FEMA can result in scaling back reimbursements for federal disaster relief funding to state and local governments. (https://www.fema.gov/sites/default/files/documents/fema_disaster-relief-fund-funding-requirements_fy25.pdf
• States will pay more in matching funds for federally funded infrastructure projects. (https://www.fhwa.dot.gov/infrastructure-investment-and-jobs-act/apportionment.cfm
• Funding for state and local government cybersecurity grants is reduced. (https://statescoop.com/slcgp-cyber-funding-state-ai-accessibility-2025/)
• Clean energy tax credits for solar projects and EV tax credits will be phased out.
• Some federal funding programs may be frozen depending on alignment with new rules, policies and priorities.

Since so much of the impact relates to Medicaid, SNAP and community development block grant losses that disproportionately affect lower income and vulnerable populations, governments will have tough choices to make that will play out differently on a state-by-state basis.

One option is to replace the missing federal dollars by increasing state social spending. Some states may want to and be able to raise taxes and other states will move to accept reductions in the size of their social safety net, helping far fewer at-risk families, do less to revitalize struggling urban neighborhoods, etc. In the current political environment, there seems to be plenty of interest even among the most progressive state governments in pursuing new cost-cutting and efficiency initiatives because 1) the appetite for new taxes is low and 2) governors are adapting to the new realities of waning stimulus, economic uncertainty and federal cutbacks.  

Drawing on state reserves or “rainy day funds” is an option that many fiscally conservative governors will resist. Finally, they can reduce staffing costs through automation and/or reduce contract/purchasing spend. In our recent analysis of governor’s agenda items, many states are talking about adding to their rainy day funds in the current 2025-26 fiscal year as a buffer and several cautioned against drawing from it as conditions tighten. One governor explained that these reserves are supposed to be set aside for extreme emergencies like a big natural disaster or severe recession.

But we can take a preliminary speculative stab at what might be possible for cuts in actual contractor-addressable demand. Let’s assume a total net loss of $50 billion a year must be taken out of buying goods and services, after factoring in any increases from the multi-year $42 billion in new federal initiatives listed earlier, and other offsetting measures. The current SLED market for contractor addressable purchasing is just over $2 trillion a year, so that would come to around 2.5%. However, it would fall harder on state governments to budget for—which generally receive the federal funds first and then disperse them to various local entities while also having a large share of the state budget in health and social welfare.

Currently SLED purchasing dollars are growing at around 4% year-over-year as of Q1 2025 and may slow over the coming months as we enter the new 2025-26 fiscal year starting in July. To be on the conservative side, let’s assume it would otherwise slow to only half that pace or 2% year-over-year on its own due to tighter budgets from waning stimulus, a slower economy, a lack of ability to raise taxes and new efficiency initiatives. Having to absorb a 2.5% reduction from these new federal impacts when the market is only growing 2% would mean a net loss or decline of only 0.5% during that first year of full impact. So, little change in total dollars even under this very “slow” scenario. But given inflation it would mean slightly fewer units of actual products and services purchased. 

However, those vendors offering volume discounts, pre-existing long-term contracts and cooperative purchasing, or certain kinds of strongly trending themes like law enforcement or IT that help to control overall costs could fare better. Bottom line: It would be a slowing factor but not a severe crisis in spending for vendors and suppliers.

Again, keep in mind that depending on the product type and vertical, some companies might continue to grow their SLED sales and do very well while others could see additional slowing. Some top-level observations:

• IT related companies providing efficiency-gaining solutions are expected to fare better than other industries as officials can justify continued spending for ROI.
• Public safety—especially law enforcement—and border wall-related suppliers or vendors can benefit from expanded federal funding in the specific areas outlined in the first part above.
• Health, social services and related community support vendors will likely suffer due to changes in Medicaid and SNAP benefits as well as reduced Community Block Grant funds.
• Projects related to climate change, EVs and “green” solutions will often suffer due to the de-prioritization of these in federal funding.
• Science and research related companies may suffer due to federal cutbacks, particularly in higher education settings.

Sources:

• H.R.1 - 119th Congress (2025-2026): One Big Beautiful Bill Act
• The Big Shift: An Analysis of the Local Cost of Federal Cuts | National Association of Counties
• How Would Potential Federal Budget Cuts Impact State Budgets? | Tax Policy Center

Wrapping up

GovWin’s comprehensive database of competitive RFP opportunities is used to produce our quarterly SLED market Snapshot reports that are free for suppliers and vendors. With the new July-June common state government fiscal cycle kicking off, Q3 2025 will provide us a first look at how the volumes of competitive opportunities are being affected. Historically, we found that bid requests are not just a major source of business but their trending reflects a form of in-advance or proactive market communication about direction—in a way not that different from how the stock market “prices in uncertainty.”

This is mainly because of the typical 4-18 month lags from when an RFP is posted to when payments finish being made, as well as the fact that competitive RFPs will reflect the more discretionary, higher risk and custom projects. Other types of buying of standardized products and services such as through statewide or cooperative methods are often made using pre-existing multi-purchase contracts that don’t need a brand-new bid request. Officials will be more careful about obligating future dollars to purchases being put out to bid now, especially ones that are not absolutely needed at the moment.

If governments are starting to worry that 12 months out their fiscal picture might be tighter than previously thought, they will make advanced moves to delay or limit some of the new custom RFP requests. It may still go out, but maybe not in that one quarter, or maybe with a smaller scope of work. They may play a “wait and see” game with the approvals until they have better visibility into their future finances.

As our speculative 2.5% example of possible impact demonstrated, the market can slow quite a bit but will remain vast in scale, resilient and highly important to the economy and meeting basic public needs. And history shows that it can and does recover after a particularly slow year. Even in recessionary times total spending on purchases seldom goes negative for the nation as a whole and when that happens the temporary net loss is typically minimal. Our annual Hotspots in SLED Government Contracting report continues to show how there will always be many niche areas of demand growing much faster than normal due to various trends, priorities and changes in legislation.  

Stay tuned for more analysis in our upcoming GovWin reports and thought leadership.