B is not a great answer. The structure of the sentence leads us to expect "it" to refer to the subject: the federal government. For more on structural expectations, see my comments here:
https://gmatclub.com/forum/while-high-o ... 57408.htmlSo is D an improvement? Unfortunately not. First, "it's" means "it is." For possessive, we need "its." This is one of many funny little quirks of English that really is an ironclad rule.
There's another really interesting meaning difference here."Provided for by" is not the same as "provided by." It suggests that we expected the district authorities to have planned or made allowances for the funding, not that they actually provided the funding. If the authorities are individual people, this might make sense than the other choices, all of which state that the district authorities were actually expected to provide funding. But it's hard to see what this alternative is really supposed to mean. The authorities were supposed to have made plans for dealing with any funding that turned up? It doesn't really work. I think the meaning really depends on our interpretation of this phrase, and it would depend on knowledge of government that we can't expect to have. (What government are we talking about? It doesn't sound like the U.S.)
In the end, we need some adjustments to make this sentence work, including the addition of "the" in a few places. The GMAT might give us a corrected version like this:
The federal government provided the majority of funding for the natural museum filled with local relics--funding that might have been expected from local sources.
OR
The federal government provided the majority of funding for the natural museum filled with local relics, when the local government might have been expected to make the largest contribution.