Vermont's Housing Lifeline at Risk: Inside the Multi-State Fight Against Federal Funding Caps
On November 25, 2025, Vermont Attorney General Charity Clark joined a coalition of 20 states in a major lawsuit against the U.S. Department of Housing and Urban Development (HUD) and the Trump Administration. Filed in federal court, the lawsuit challenges new federal rules that threaten to upend how homelessness services are funded across the nation.
For over two years, Vermont has grappled with an acute housing crisis. Now, state officials argue that a sudden shift in federal policy—moving away from the “Housing First” model toward a punitive “Treatment First” approach—could destabilize the state’s safety net and lead to mass displacement.
This explainer breaks down the lawsuit, the policy changes at the center of the dispute, and what this means for Vermont residents.
The Core Conflict: Housing First vs. Treatment First
To understand the lawsuit, one must understand the philosophical shift occurring in Washington.
For the past two decades, federal homelessness policy has been guided by a bipartisan consensus known as “Housing First.” This model posits that stable housing is a basic need that should be met immediately. Once a person is housed, they are better positioned to address issues like substance use or mental health. Data cited by the National Low Income Housing Coalition indicates this model creates housing retention rates of 85-90% and reduces the use of expensive emergency services like ERs and jails, a finding supported by HUD’s own archives.
The incoming administration, influenced by the Heritage Foundation’s “Project 2025” and the Cicero Institute, has declared this model a failure. They advocate for a “Treatment First” approach (sometimes called “Housing Fourth”). Under this model, housing is viewed as a reward for sobriety and compliance. Proponents argue that unconditional housing enables addiction and public disorder, a concern echoed by appointees like Secretary Scott Turner.
This ideological shift was operationalized in July 2025 via Executive Order 14321, titled “Ending Crime and Disorder on America’s Streets.” As analyzed by KFF, the order directs agencies to prioritize funding for programs that mandate treatment and enforcement.
The Mechanics of the Change: Why Funding is at Risk
The legal battle focuses on the “Notice of Funding Opportunity” (NOFO) for the Continuum of Care program. This is the primary federal grant system for homelessness, distributing nearly $4 billion annually according to the National Low Income Housing Coalition.
Attorney General Clark’s complaint alleges that the FY2025 NOFO introduces mathematical changes that make it nearly impossible for existing Vermont shelters and housing programs to survive.
1. The 30% Cap
Previously, there was no cap on how much grant money could be used for Permanent Supportive Housing (PSH)—long-term housing with support services. In Vermont, PSH accounts for nearly 80% of the federally funded portfolio, according to an analysis by the National Alliance to End Homelessness.
The new rules cap PSH funding at 30%.
The Impact: To comply with this rule, Vermont’s housing coalitions would theoretically have to defund and shut down approximately half of their existing housing units to meet the new math. The lawsuit argues this creates a “fiscal cliff” that guarantees mass evictions, a risk highlighted by the National Alliance to End Homelessness.
2. The Tier 1 Reduction
Federal grants are divided into “Tier 1” (safe, likely to be renewed) and “Tier 2” (competitive, high risk).
Old Rule: 95% of a state’s existing programs were protected in Tier 1.
New Rule: Only 30% of programs are protected in Tier 1.
The Impact: This forces 70% of Vermont’s homeless service providers to compete annually for their survival against new criteria that favor the Administration’s “Treatment First” priorities, a concern raised by the National Association of Counties.
Social and Cultural Mandates
Beyond the math, the lawsuit challenges new requirements regarding gender and immigration that conflict with Vermont state law.
The “Biological Sex” Requirement
The new funding rules disqualify programs that use definitions of sex other than “binary biological sex.” This contradicts HUD’s own existing “Equal Access Rule,” which requires federally funded housing to be open to all, regardless of gender identity.
The Vermont Conflict: Vermont state law explicitly prohibits discrimination based on gender identity. Local shelters are now in a “double bind”: if they comply with federal rules to get funding, they violate state civil rights laws; if they comply with state laws, they lose federal funding. This creates barriers for vulnerable populations, including youth, as noted by the Metro Denver Homeless Initiative.
The “Sanctuary City” Penalty
The new rules penalize applicants located in “Sanctuary Jurisdictions”—areas that limit cooperation with federal immigration enforcement. The lawsuit argues that a city’s immigration policy has no relevance to the effectiveness of a homeless shelter, making this penalty an illegal attempt to coerce local governments.
The Legal Argument: “Rule by Memo”
The Attorney General is not just arguing that these policies are bad, but that they are illegal. The lawsuit rests on three main legal pillars:
Violation of the Administrative Procedure Act (APA): Major changes to federal regulations usually require a “notice-and-comment” period where the public and states can weigh in. The lawsuit alleges the Administration bypassed this legal requirement, effectively rewriting the law through a funding memo.
Arbitrary and Capricious: Under the law, agencies must provide a reasoned explanation when they reverse course on factual findings. The complaint argues HUD ignored 20 years of evidence supporting “Housing First” without providing new data to the contrary.
Impoundment: The plaintiffs argue that by creating rules that make it impossible to spend the money Congress appropriated, the Executive Branch is illegally “impounding” (withholding) funds.
Why This Matters for Vermont
While this is a national lawsuit, the stakes in Vermont are uniquely high due to the state’s specific economic and housing landscape.
High Reliance on Federal Funds: Unlike larger states like New York, which have massive state-funded housing budgets, Vermont relies heavily on federal dollars. Approximately 45% of Vermont’s dedicated permanent supportive housing beds are funded by the specific grants being targeted, per National Alliance data and local reports.
No “Exit” Strategy: The “Treatment First” model relies on people “graduating” from transitional housing into the private rental market. However, Vermont has a rental vacancy rate of roughly 1-2%, one of the lowest in the nation, according to the Vermont Housing Finance Agency.
Cost Shift: If federal funds are cut and tenants are evicted, the financial burden shifts to the state. The lawsuit contends that costs will spike in emergency rooms and correctional facilities—services that are significantly more expensive than supportive housing, a reality underscored by the Vermont Coalition to End Homelessness.
What Happens Next
The Immediate Timeline
The filing of the lawsuit is the first step. The coalition of Attorneys General has requested a preliminary injunction. If granted by the Federal District Court of Rhode Island, this would “freeze” the new rules, forcing HUD to process grants under the old 2024 standards while the legal case proceeds.
If the Lawsuit Fails
If the court allows the new rules to stand, Vermont housing providers will face the new funding application deadline in early 2026. At that point, local Continuums of Care would be forced to make difficult decisions about which programs to cut to meet the 30% cap.
The Humanitarian Risk
Housing advocates warn that without court intervention, 2026 could see a wave of program closures. For the thousands of Vermonters currently in federally subsidized supportive housing, this would mean the loss of their homes and a likely return to homelessness or reliance on emergency shelters that are already at capacity, as detailed in the 2025 State of Homelessness in Vermont Report.