A coalition of 20 states and the District of Columbia filed a lawsuit Tuesday against the Trump administration over major changes at the United States Department of Housing and Urban Development that shift billions in homeless-assistance funding from permanent housing to transitional services.

The action matters now because it challenges the federal government's power to reallocate program funds without congressional approval and could affect tens of thousands of Americans experiencing homelessness.

New York Attorney General Letitia James is leading the action, which includes 19 other states and two governors, and seeks a court order to block implementation of the policy changes.

The lawsuit targets HUD's revised rules governing its Continuum of Care (CoC) program, which distributes funding to local governments and nonprofit organizations that assist people experiencing homelessness.

Under the new policy, more than half of the program's budget for fiscal 2026 would be shifted from permanent to transitional housing, and recipients would be required to participate in work or service.

Previously, the CoC program allocated roughly 90% of its funds to permanent housing solutions. Under the new rule, that cap is reduced to just 30%, according to Politico.

HUD Secretary Scott Turner defended the change as necessary to move away from what the administration deems a failed "housing first" model, one that places people in housing without preconditions like employment or treatment. HUD said it will instead focus on helping recipients achieve "long-term self-sufficiency."

In its suit, the coalition argues that HUD is overstepping its legal authority under the Administrative Procedure Act and usurping Congress's constitutional power over federal spending. The states contend the funds were intended to be distributed solely on the basis of need, not conditioned on work or other programmatic compliance.

HUD internal documents suggest the policy could put up to 170,000 people at risk of losing permanent housing assistance.

While the Trump administration frames the change as a streamlining of homeless assistance and an effort to break cycles of dependency, state officials counter that the move threatens vulnerable populations and local communities reliant on existing funding structures.

"These funds help keep tens of thousands of people from sleeping on the streets every night," James said in a release. "I will not allow this administration to cut off these funds and put vital housing and support services at risk."

The lawsuit was filed Tuesday in federal court and names HUD and the administration as defendants.

States involved include Arizona, California, Colorado, Connecticut, Delaware, Illinois, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, Oregon, Pennsylvania, Rhode Island, Vermont, Washington and Wisconsin, as well as New York and the District of Columbia.

This legal challenge arrives amid broader scrutiny of the administration's housing policy shifts, including efforts to restructure federal housing agencies and reduce regulations in the affordable housing space.

The outcome of this case could set a precedent for how far federal agencies may go in redirecting funds within legislatively approved programs, and whether states may block such reallocation.