Trump Funding Cuts Show Why Nonprofits Should End Reliance on Federal Grants

The brief freeze on federal nonprofit grants earlier this year — and subsequent actions by the Trump administration — highlight a deeper, more enduring concern: the extent to which many nonprofits rely on government funding, and the vulnerability this creates for both the organizations and the people they serve.

Civil society is strongest when it’s rooted in voluntary action — neighbors helping neighbors and communities solving problems from the ground up. Yet today, much of the nonprofit sector is drifting from those roots. Organizations that once thrived on private generosity and civic initiative now find themselves shaped, in large part, by government priorities and funding streams.

A report by my organization, Philanthropy Roundtable, released last week — Strings Attached: How Federal Grants Compromise Nonprofit Independence — outlines a quiet but growing risk: As public funding increases, the independence and flexibility that make nonprofits effective and trusted begins to erode.

The numbers laid out in the report are striking. Nearly one-third of nonprofit revenue comes from federal, state, or local government. In areas such as health, education and human services, the proportion is even higher.

Public funding brings with it a host of requirements: reporting protocols, regulatory compliance, and program restrictions. To meet those requirements, nonprofit leaders say they are forced to direct less funds to delivering services and more to organizational administration and management.

Over time, these changes can lead to mission drift. An organization may gradually begin to reflect the goals of the grant, not the needs of its community, becoming less agile, less responsive, and often less trusted by those it serves. Leadership and governance may be affected as well. A study of nonprofits in New York City found that board members of organizations that received government funding were not as involved in fundraising.

Decreased Private Giving

The report also highlights a related secondary effect: the decline in private giving that can accompany increased government support. Economists call this the crowd-out effect. Studies on donations to the sector broadly found that for every dollar in public funding, nonprofits lose 30 to 40 cents in private donations. That number rose to 50 cents when the research focused specifically on human-service nonprofits.

This isn’t simply because donors perceive less need. It’s also because nonprofits may scale back their own fundraising, assuming public funds will fill the gap.

This financial trade-off can reshape the sector. Organizations begin to operate more like de facto government agencies than community institutions. They become more cautious in their advocacy, more constrained in their innovation, and more aligned with regulatory expectations than local priorities.

Our study found that larger nonprofits are particularly affected. Those with budgets of more than $1 million reported that nearly half their revenue comes from government sources. These organizations are more likely to have the administrative infrastructure to manage complex grants, while smaller, grassroots nonprofits — those closest to the communities they serve — are often crowded out. The result is a more centralized, less diverse, and less representative nonprofit landscape.

All of this runs counter to the needs of a strong, independent nonprofit sector, which draws its strength from private giving and its legitimacy from the people it serves. Independence isn’t just a philosophical preference. It’s a practical advantage. Independent nonprofits are more likely to take risks, challenge conventional approaches, and adapt quickly to change.

A Plan of Action

So what should be done?

First, philanthropic donors should prioritize long-term, flexible support — especially for organizations that choose to operate without government funding. Nonprofits that run exclusively on private charity should be seen as an attractive investment: Their choice to forgo government dollars allows them to maintain independence and stay focused on their core mission.

Second, nonprofit leaders should weigh government funding with care. Public grants can support important work, but they also come with trade-offs. Leaders should ask: Will this funding help us advance our mission — or pull us away from it? Nonprofits that spend years building trust with the communities they serve should carefully consider how adhering to government funding requirements, such as sharing sensitive information with public agencies, might impinge on that trust.

Third, policymakers should consider how requirements such as additional operational rules, auditing, and performance evaluations shape nonprofit behavior. Adjustments to indirect cost rates, including rent, utilities, and expanded support staff, can also increase administrative burdens and deepen financial dependence.

The nonprofit sector has long been a pillar of American life, reflecting the generosity, creativity, and civic spirit of communities across the country. But its strength lies in its freedom to speak, serve, and lead without undue constraint. That’s why nonprofit leaders must always carefully weigh the costs and benefits of all the funding they pursue — particularly government funding — keeping in mind their mission and values.

The growing entanglement between government and civil society deserves closer attention. A healthy democracy requires space for independent institutions — trusted not because they echo the state, but because they stand apart from it. That space is worth preserving.