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By Richard Levey
Nonprofits were experiencing funding interruptions long before the federal government shutdown began on October 1. Nonprofits began receiving notices of disruptions in late January, with 21% losing at least some government funding, 27% experiencing a delay, pause or freeze, and 6% receiving a stop-work order.
The impacts primarily taking effect during second-quarter 2025, according to How Government Funding Disruptions Affected Nonprofits in Early 2025, a report from The Urban Institute.
The problem was not limited to the 37% of organizations that receive money directly from the federal government. During 2024, another 60% received money from a state and a comparable amount were issued funds from local governments. But, cuts at the federal level have echoes. On average, more than one-third of state government revenue and almost 10% of local government revenue comes from the federal government, with another quarter of local government revenue coming from the state, according to the report.
The report features anonymous commentary from nonprofit leaders. Regarding the trickle-down impact of federal to state to local funding, one such leader told researchers, “[Our organization] does not receive any direct government funding…While we have not been directly impacted by reductions in government contracts or grants, the broader pullback in federal funding is having a significant indirect effect. As federal dollars diminish, both foundations and individual donors are shifting more of their resources to larger organizations that they perceive as better positioned to meet growing needs…This dynamic is creating a growing level of financial uncertainty for [our organization] and for small nonprofits more broadly.”
Another individual expressed concern that the government funding cuts could end up exacerbating competition among nonprofits. “The challenge for us and other small nonprofits who did not rely on federal grants is now we are in competition with larger nonprofits that did rely on them and lost funding for DAFs (donor-advised funds), private foundations, etc.”
The researchers found disrupted nonprofits were more likely to have a greater portion of their funding sourced from the government. Altogether, nonprofit leaders told researchers half of their funding came from private sources, 28% came from governments, 18% was earned revenue, and 4% was from a variety of sources. Disrupted nonprofits, however, relied on government funding for 42% of their revenue, followed by 39% of their revenue coming from private funding, 16% from earned revenue and 4% from other sources.
The larger the nonprofit — by expense level — the more likely it was to report a government funding disruption. A comparatively low 18% of organizations with annual expenses between $50,000 and $99,000 experienced disruptions, as did 29% of those with expenses between $100,000 and $499,999, 42% of those with expenses between $500,000 and $10 million, and 56% of those with annual expenses in excess of $10 million.
Leaders at organizations that experienced funding disruptions are slightly more likely than others to believe need for their offerings will increase during the next 12 months. While 68% of all nonprofits anticipated increased demand, 73% among disrupted nonprofits predict greater need. As one nonprofit leader put it, “Many of our constituents and members are recipients of federal money and we are experiencing pain as a result of their pain, so we are downstream victims of the new environment.”
Already, nearly twice as many nonprofits that experienced funding disruptions reported scaling back their programming as compared to all nonprofits (23% to 12%). More than one in five (21%) have decreased the number of people they served, compared with 12% of all nonprofits. And 13% of disrupted nonprofits have decreased their total number of programs offered, compared with 7% of all nonprofits.
As one anonymous nonprofit leader put it, “Expect major impacts on the state budget from federal cuts which will directly affect state-funded programs we provide. We cannot make up for projected changes with fundraising.”
Strained service offerings are only part of the damage the disruptions have caused: Disruptions cost jobs. During the first four to six months of 2025, 15% of all nonprofits reported cutting headcount, a figure that nearly doubled (to 29%) among disrupted nonprofits.
That headcount reduction is likely to keep reverberating during the next 123 months: while 53% of all nonprofit leaders anticipate hiring new staff during the next year, that figure drops to 39% among disrupted nonprofits. Conversely, while only 3% of all nonprofit leaders believe they will have to make layoffs during the next year, that figure jumps to 15% among disrupted nonprofits.
A full copy of the report is available here: https://www.urban.org/sites/default/files/2025-10/How_Government_Funding_Disruptions_Affected_Nonprofits_in_Early_2025.pdf
