Nonprofit Financial Struggles Bring Risks for Local Government

At a time when a growing number of Americans are struggling to keep up with household expenses and losing health insurance, nonprofit safety nets are increasingly under pressure.

On average, nonprofit organizations get just under 30 percent of their funding from government sources. A new national survey by the Urban Institute found that in 2025, almost half of the nonprofits that receive government funds experienced funding disruptions, for reasons ranging from delays and pauses to funding freezes. Rates were higher among groups serving the poor and people of color.

“It's helpful to have something that puts into numbers the stories that we've been hearing from nonprofits across the country,” says Sarah Saadian, senior vice president of public policy and campaigns at the National Council of Nonprofits. The Trump administration has done more than delay funding, she says. It has also terminated it, sometimes with little warning.

Researchers didn’t ask about the share of disruption from federal versus state sources, says the report’s lead author, Lewis Faulk, associate professor of public administration and policy at American University. But comments from survey participants suggest that federal delays were the primary cause of funding problems.

Faulk’s research centers on nonprofit management and finance. One of the important findings from this new report is that at present, uncertainty among nonprofits is great enough that they are unable to plan for the future. State and local governments that rely on them need to think about how they can offset losses or at least help them through this difficult period, he says.

The restricted access to federal dollars that Faulk and his colleagues found reflects a change in attitude about the work of nonprofits — also referred to as non-governmental organizations, or NGOs — within the new administration.

Under Suspicion

A February 2025 memorandum from President Donald Trump called for all federal agencies to review their funding to NGOs. Many are “engaged in actions that actively undermine the security, prosperity and safety of the American people,” he said.

Funding delays were well underway in June 2025 when a House subcommittee on government efficiency held a hearing titled "Public Funds, Private Agendas: NGOS Gone Wild." In opening remarks, the subcommittee chair at the time, Rep. Marjorie Taylor Greene, suggested nonprofits were using federal dollars for political influence, pursuing policies Americans oppose. She said this included support for illegal immigration and “green energy scams.”

Diane Yentel, president and CEO of the National Council of Nonprofits, gave testimony regarding real-world consequences of cuts in 2025. Food banks were serving fewer meals and nonprofit health clinics were closing, she said. Nonprofits that respond to disasters, address substance abuse and serve young mothers were at risk.

“Defending and supporting their essential work should not divide us along political lines,” she said. “It should unite us as Americans.”

When nonprofits close their doors, the need for their services is still out there, Saadian says. In fact, other Urban Institute research reveals that nearly 70 percent of nonprofit organizations expect demand for their services to increase.

Laura Tomasko, senior policy program manager in the Center on Nonprofits and Philanthropy and a co-author on the Urban Report, is struck by a finding that compounds this dilemma. “When you look at all nonprofits across the board, whether they lost government funding or not, there is diminished sentiment for hiring among nonprofit leaders,” she says.

In the fall of 2024, 56 percent planned to hire new staff in the next 12 months; this went down to 38 percent in 2025. “That absolutely is about government funding,” she says, “but it’s also about broader changes to the funding ecosystem that supports nonprofits.”

Backbones, Not ‘Do-Gooders’

Cheryl Kagan has served in the Maryland Senate since 2015. “I’ve been working on nonprofit legislation for virtually my entire tenure,” she says. Legislators accept that small businesses need support in hard times, she says, and the same should be true for nonprofits.

Nonprofits are in every nook and cranny of every state, Kagan says, bright red or bright blue. They serve the abused, provide literacy programs and support art that lifts communities up. They’re not just “do-gooders,” she says, but the backbone of every district, from fire stations to homes for veterans.

If funding shortages cause nonprofits to close their doors, government will be forced to pick up the slack. “That would mean higher taxes,” Kagan says, “and government probably wouldn't be able to provide support nearly as effectively as those that have been doing it for years.”

Some grant programs require nonprofits to complete funded work before they are paid. A decade ago, Kagan created a “Nonprofit, Interest-Free, Micro Bridge Loan” program that provides short-term loans up to $25,000 to help nonprofits waiting for payment for work done under government grants. She sponsored a law that requires the state to pay nonprofits as promptly as it does small business, and another that created a “nonprofit navigator” in state government to assist nonprofits. (This was the first such position in any state, she says.)

Within the council on nonprofits, Kagan founded a National Nonprofit Caucus of State Legislators, an open bipartisan group working to identify ways states can better assist nonprofits. “I learn from what Montana did, or Connecticut, or Alabama, and they can learn from what Maryland has enacted,” she says.

Unanswered Questions

States are already grappling with cuts to Medicaid and the Supplemental Nutrition Assistance Program (SNAP), Tomasko says. “What’s happening on the side is diminished capacity among service providers that they are likely counting on to be there to fill in.”

Faulk’s research hasn’t yet encompassed how much private philanthropy is stepping in to fill federal gaps. There are limits to this, he says. In some cases, private and corporate donors are making smaller grants to more organizations.

The question of what the “way forward” might be is both essential and unanswered. It’s not just the organizations that lose funding that are affected.

The relationship between nonprofits and government is interdependent. “When part of that safety net is taken away or pulled back and it can't be replaced,” Faulk says, “there are going to be economic costs on communities.”