On August 20, Philanthropy Roundtable released its latest report on the critical importance of philanthropic freedom: How Government Funding Compromises Nonprofit Independence. Philanthropy Roundtable Visiting Fellow Jack Salmon reveals the extent to which nonprofits now depend on this funding, how that dependence has grown since the 2008 recession and the detrimental impacts charitable organizations face because of their heavy reliance on this one source of revenue.
Public funding for nonprofits — whether from federal, state or local sources — is not, in itself, a bad thing. Such funding proved to be a blessing during the Great Recession as both individual and institutional donors faced their own financial stress. It proved equally important when COVID-19 took lives and placed an increased burden on the nation’s healthcare systems, locked down businesses and schools, disrupted normal business operations and sparked a sharp recession in early 2020.
The recent cuts in federal funding, however, are a stark reminder of the danger of over-reliance on public funding by nonprofits. The statistics in the Roundtable’s report show clearly the development, pervasiveness and sharp growth of such dependence.
- Since 2008, federal grants made to nonprofits have more than doubled, with most of that growth occurring since 2019. Nearly one-third of nonprofit revenue came from government sources in 2021-2023.
- Large nonprofits with expenditures exceeding $1 million report almost half their revenue comes from government funding. In fact, a Candid blog from February of this year noted, “Over 35,000 nonprofits— about a third of government grantees — rely on these grants for more than 50% of their total revenue.”
It may not be surprising that the growth in government (especially federal) funding for nonprofits during two periods of national crisis added fuel to an unhealthy dependence building since the tremendous expansion of federal funding through the Great Society programs of the 1960’s. What is surprising, however, is the deliberate decision on the part of some nonprofit leaders to turn away from traditional development methods, as noted in this research.
Even as government funding has grown to today’s numbers, fundraising advisors to nonprofits have continued to stress the importance of diversifying sources of revenue to include both private and public money from a variety of sources and — when possible — earned income as well. Yet the lure of government funds appears to have distracted many charities from the admittedly more complex and time-intensive work of developing long-lasting relationships with individual, corporate and foundation donors, thus adding to their current financial concerns.
As someone who writes primarily about and for philanthropic donors, I have found it difficult to understand this trade-off. Why would nonprofit leaders increasingly critical of donor-centric engagement and restricted gifts bind their organizations to the demands that typically accompany public funding? As Salmon notes, “Government grants and contracts often come with strings attached, dictating how funds must be used and what activities are permissible.”
For proponents of trust-based philanthropy, why accept grant agreements with “stringent evaluative and regulatory provisions designed to ensure accountability and consistency in service delivery [including] requirements for financial management, adherence to accounting standards, meeting minimum quality benchmarks, alignment with core program goals, and compliance with national policy priorities such as environmental sustainability and equal opportunity?”
For charitable leaders dedicated to preserving their organizations’ missions, why risk putting yourself at the “mercy of political whims and bureaucratic decrees” subject to change as political leaders come and go?
And for those who adhere to a Tocquevillian notion of a nimble, vibrant and independent civil society whose voluntary associations are accountable to the individuals and communities they seek to serve, why allow the charitable work so necessary for human flourishing to be held captive by a centralized administrative bureaucracy?
The executive order issued on Aug. 7 suggests the likelihood of even more top-down decisions regarding federal funding and is a warning to current recipients not to rely on current or future awards. With this in mind, along with evidence in Salmon’s report of government funding frequently crowding out private giving, nonprofits would be wise to move quickly in adopting fundraising practices to diversify their sources of revenue.
Build new relationships with private donors or foundations and strengthen existing relationships. Consider new corporate sources of support. Initiate or revive a planned giving program to take advantage of the generational transfer of wealth. It’s not a matter of eliminating all public funding, but rather, as Salmon advises, “balancing the benefits of public funding with the need for independence.”
Donors also should move quickly to help aligned nonprofits seeking to reduce government dependence. These organizations may need capacity building support to revive and strengthen more diversified fundraising programs. They may also benefit from general operating support, as more flexible funding will counter the dictates of public funding.
Our nation prides itself on its long history of a vibrant and voluntary civil society, responsive to the needs of citizens and communities and centered on philanthropic freedom. Let’s not trade that legacy for government-run “generosity.”
