Can a department renege on a student's "guaranteed funding"?

I am the Graduate Coordinator of my department, so I have some experience both reading and writing letters like this. I find the phrasing

"although we will be able to renew the assistantship in most cases, renewals are contingent upon the availability of funds".

strange. It is not clear to me what "most cases" is quantifying over: you are only one case.

But here's a key point: what is being taken away from you in going from a letter in which funding is guaranteed to a letter in which renewal is contingent upon the availability of funds? In all cases the renewal must be contingent upon the availability of funds, right? Within the culture of American universities it would certainly not be acceptable for your department to, say, go over budget on renovations and then tell a student "We're sorry, but funds are no longer available -- we warned you!" Not having the funds to cover promises made to students would be a nightmare scenario in any department that I know of. A subtle linguistic change in a contract would not affect that.

However, I agree that the new letter is not exactly encouraging. In my view you are well within your rights to inquire about the meaning of it, and you should of course do so before you sign the contract. I would discuss this with the department official who wrote the letter, unless you feel uncomfortable doing so, in which case you could act through a suitable intermediary (ombudsperson, faculty advisor...).

In conclusion, I think it is highly unlikely that your funding will get cut, but they are taking from you some peace of mind -- which is also worth something! I'm sorry for that, and I wish you the best.

You may want to review the initial offer letter that you received from the program. You may find that the language there is not absolutely "guaranteed"—there is almost always a bit of "wiggle" language such as "subject to adequate progress" or something similar that does not completely commit them to paying you for the full term no matter what. (What if you just decide to take the money and do nothing the whole time?)

However, at public schools, one must also remember that they are subject to state laws and regulations that a private school would not face. The change may be coming at a policy level higher than that of the department.

While labor laws depend on the country/state/region, your contract that guarantees funding probably doesn't really guarantee it. From a labor law perspective, if you are even classed as an employee and the letter is seen as an employment contract, what do you think your recourse is if they do not pay you? If you were in a union position you might have a collective agreement that would provide a means of enforcing the contract, but in reality the guarantee is worth only as much as the reputation of the university.

That said, it cannot hurt to ask your graduate student faculty chair about the wording.