Devex Pro Insider: Is the State Department walking off a fiscal cliff?

This is a special Saturday edition of Devex Pro Insider from Senior Reporter Michael Igoe. For the next few months, this newsletter will tackle some of the biggest questions about the future of U.S. foreign aid, with insider reporting and analysis delivered straight to your inbox. It took six months for President Donald Trump’s administration to break the U.S. foreign aid system. They have about eight weeks to put it back together. So much of the development community’s attention has focused — understandably — on everything that has been cut: the project terminations, the entire budgetary line items deemed expendable, the staggering loss of professional talent and expertise, the abrupt severance of relationships and trust. But on the other side of those massive disruptions, there is another looming challenge: What to do about everything that still remains. The State Department officially took control of U.S. foreign aid programs on July 1. The 2025 fiscal year ends on Sept. 30. When that happens, some of the billions of dollars in funding that Congress appropriated for aid spending will expire if it is not spent. That sets up a mad scramble in the next two months as the State Department, which is undergoing its own reorganization and staffing reductions, must assemble an aid delivery system it has never managed before from the salvaged parts of an agency — the U.S. Agency for International Development — they just dismantled. “There is a small group that has an appropriate amount of fear, but everyone else is acting like they don’t have constraints [around responsible aid spending],” a former senior USAID official tells me. This week, we got a closer look at some of the behind-the-scenes anxiety that people involved in this transition process have experienced. My colleague Elissa Miolene scooped a whistleblower complaint laid out in painstaking — and painful — detail by a current USAID contracting officer who documented months of concern about project terminations and the transfer of authorities to the State Department. “In the end, stripped of our positions and denied lawful guidance, institutional accountability, and ethical leadership, all I could do was bear witness, document the truth, and refuse to lend my name to actions that violated the law and the public trust,” wrote Andrea Capellán, a director in USAID’s Office of Acquisition and Assistance, in a memo packed with links to original documents and emails. And still the question remains — now that USAID is no longer in charge of foreign aid, how is the State Department going to make good use of the billions of dollars in funding it has absorbed? But let’s be honest, there are many more questions than that. ICYMI: State Dept takeover of USAID is an 'impending train wreck,' experts say Implausible deniability In fact, that’s the theme running through Capellán’s whistleblower complaint. She and other contracting and agreement officers at USAID asked questions about the directives they were receiving and their leadership’s plans for upholding legal obligations, and — according to Capellán — they got very few answers. Much of the whistleblower memo pertains to project terminations, the consequential question of whether the people ordering terminations had the authority to do so, and whether those terminations were done on the basis of an actual award-by-award review, or something more arbitrary. In Capellán’s view, it was clearly the latter. “I do not believe there is any evidence of individual determinations or analysis for any USAID awards,” she writes in the memo. That assertion — and the documentation Capellán provides to support it — will likely make its way into the court cases challenging the legality of the Trump administration’s mass cancellation of USAID contracts. But for the question I’m raising here — what happens now? — another part of Capellán’s memo jumps out. “Transferring an entire Agency’s portfolio of active awards to the State Department, who has no official authority, skill, or capacity to manage these awards, is not only irresponsible but opens up the [U.S. government] to innumerable liabilities as well as fraud, waste, and abuse,” she writes. It’s one thing to read that statement in early August, after it has been raised repeatedly by many in the U.S. development community. But it’s another thing to read the April 7 memo that Capellán includes alongside it, which documents the series of related questions that USAID contracting and agreement officers raised to their senior leadership, but which she says went unanswered. They include: “How does the State Department intend to absorb and implement USAID’s unique contracting and grantmaking authorities if USAID ceases operations?” And: “Will State conduct routine, on-site monitoring and supervisory visits to validate technical approaches as well as programmatic compliance with federal contract and grant regulations?” In her reporting, Elissa finds that there are different opinions about this whistleblower memo. For some, it offers “stunning” corroboration of a “sham” process that defied court orders. For others, it takes aim at the wrong people — procurement leaders operating in an environment where any refusal to follow orders would have gotten them fired. I expect we will learn more soon about the battles that took place inside USAID over whether to try and protect the agency from annihilation, or to try and mitigate the damage of a State Department takeover. I know there are strong views on both sides. Regardless, at a moment of increasing alarm about the State Department’s ability to spend billions of aid dollars responsibly, one thing is pretty clear: they were warned. And in Capellán’s telling, there was one consistent response to those who raised concerns. “Ignore, ignore, ignore.” Exclusive: USAID director alleges 'malfeasance' since Trump aid freeze Court watch: The latest on the USAID docket + Devex is taking a summer break next week, so I’ll be back with the next edition of this special Pro Insider on Saturday, Aug. 16. In the meantime, Devex will be sending out deep dives on key development topics, including the unraveling of USAID, MDBs, the future of U.S. foreign aid, and more. If you’d like to receive them, please sign up for the daily Newswire. Waiting is the hardest part Some are still holding out hope for a review process that adds clarity to the foreign aid funding picture. A longtime U.S. aid expert tells me that development advocates are still “desperately” trying to get the Trump administration to issue its long-promised and repeatedly delayed foreign assistance review. On the first day of Trump’s presidency, he announced via executive order that U.S. foreign aid programs would be subject to a 90-day freeze, during which they would undergo a review to determine whether they served his foreign policy goals. Then the review seemed to be over early, when Secretary of State Marco Rubio announced it had concluded with the cancellation of about 80% of USAID’s programs. Then, in April, it was extended for an additional 30 days in order to — in the words of Trump appointee Jeremy Lewin — “fit nicely with the budget proposal.” It’s still anyone’s guess what that means. “The review’s status is unclear,” the Congressional Research Service concluded in late June. So, given the latest insider account from a contracting officer who regarded the whole review process as a sham, why are we still paying attention to this? The reason is pretty simple — and pretty alarming: the State Department has yet to clearly articulate which programs can be funded under this new phase of U.S. foreign assistance. “The main thing that no one understands is — how much money is left, and what programs are they allowed to spend it on?” says the longtime development expert I mentioned above. In theory, that is the sort of information a foreign assistance review might be expected to provide. In reality, no one seems to have any idea what sort of detail to expect from this process, or whether to expect anything at all. Will it be a country-by-country breakdown of foreign assistance programming that will be permitted to continue? Or will it be a broad overview of programmatic categories that are permissible, with different parts of the State Department given discretion to make specific decisions? “If you’re not health and you’re not humanitarian, are you even going to be allowed to program your funding?” asked the former senior USAID official. Again, lots of questions and little transparency. And when you’re barrelling towards the end of the fiscal year, it’s a problem if you don’t know how much money you have, or what you are allowed to spend it on. In an interview with The New York Times columnist Ross Douthat this week, Lewin — the 28-year-old Trump appointee who worked alongside Elon Musk and is now deputy USAID administrator — responded to the criticism that this foreign aid reform process has been overly rushed and marked by disruption. Lewin said that Rubio is thinking about reforms with “a historical lens, a generational lens.” “When you think about reforms in that way, the cost-benefit of some disruption in the short term versus the long-term benefit of significantly realigning foreign policy and foreign assistance for the American people, it makes a lot more sense why you’re willing to tolerate some degree of disruption,” he said. Background reading: Remaining USAID programs now under State Department, 5,200 programs canceled More money, more problems Last month, the U.S. Congress approved Trump’s proposal to rescind about $8 billion in foreign assistance funds that were appropriated during the last two fiscal years. Charles Kenny — writing for the Center for Global Development — calculates the remaining funds that need to be spent to be about $21 billion, or maybe more. A lot of U.S. foreign aid funding is available for multiple fiscal years, but some of that $21 billion will expire if it is not spent before the current fiscal year ends. According to the advocacy group Stand Up for Aid, close to 500 programs fall into that category. Despite that hefty balance sheet and short timeline for spending it, Kenny writes, “there is little sign of any significant foreign assistance obligations since March.” It is not unusual for a U.S. government agency to face a buildup of funds that must be obligated at the end of the fiscal year — USAID routinely fell into the same pattern. It’s possible that State Department leaders will have prepared their staff for some frenzied weeks in order to get that job done. The message could be: “For the last two weeks of September, bring a cot, because you’re sleeping here,” the longtime foreign aid expert tells me. But for the State Department, it is also not business as usual. As we have reported, Rubio has absorbed foreign aid funds at the same time he has overseen the dismantling of the workforce that managed them — while taking on a comparably tiny team to fill the gap. It adds up to the equivalent of about 6% of USAID’s staff, managing about 62% of its funding, according to Kenny at the Center for Global Development. If it is true that the State Department has more money than it can spend before the end of the fiscal year, the Office of Management and Budget may have a “solution” — though few in the development community would call it that. Budget director and ardent aid critic Russell Vought has repeatedly floated the idea of another budget rescission — but one that is timed so close to the end of the fiscal year that it freezes funds until they automatically expire. This controversial — and legally questionable — maneuver is known as a “pocket rescission,” and it is something Vought has been eager to test for years. In fact, he tried to do the same thing to USAID funds during Trump’s first administration, but was ultimately unsuccessful. Faced with a time crunch and major budget management questions, the State Department might not object so strongly. “It is the perfect get out of jail free card for a flailing State Department,” the former senior USAID official tells me. “It gives Vought the pocket rescission he wants and absolves their unprepared acquisitions process from failure.” If that happens, it might buy the State Department some time, but it won’t answer the bigger questions about what foreign assistance spending and delivery look like in a post-USAID world. As I said, answers have been hard to come by. ICYMI: US Congress clears Trump's $9 billion rescissions package Plus: Thousands of USAID staffers compete for just 300 new roles + The Trump effect: Explore our dedicated page to catch up on all the latest news, in-depth analysis, and exclusive insights on how the Trump administration’s policies are reshaping U.S. aid and global development.