In early 2023, as we were emerging from the COVID-19 pandemic, I published Managing Your Nonprofit for Resilience (Wiley 2023), also known as MNFR. One of the topics I covered in the book was the numerous reasons why nonprofits need effective risk management. (Purchasers can see what I mean in MNFR's Appendix 1.) These reasons included financial concerns, technological challenges, staffing issues, and problems related to boards and volunteers, among others.
Since it has now been more than two years since MNFR was published, and much has changed. I want to examine how the 50 factors outlined in MNFR's Appendix 1 have changed since the book’s release. Today’s post will focus on the issue of underfunding. In Challenge 1, I noted that “most nonprofits do not have sufficient resources for all the activities they wish to perform.” As we will see, the situation has worsened.
(This post is the first of a series dealing with each of the 50 challenges identified in MNFR. For most or all of these challenges, I will post two posts, the first post presenting and updating the challenge, and the second describing steps nonprofit leaders can take right now to address the issue.)
Restating the Challenge – Why Underfunding Hurts Nonprofit Resilience
MNFR identified underfunding as a top challenge that undermines sustainability and resilience. When nonprofits operate on shoestring budgets or “cobble together a patchwork of funding sources” that barely cover restricted program expenses, they often cannot invest in core infrastructure or future needs. Essential capacities – like technology, staff development, and reserve funds – get shortchanged, leaving organizations with high staff turnover and burnout, and unable to grow stronger over time. In the long run, underfunded nonprofits struggle to be resilient because they lack a cushion to absorb shocks, innovate, or scale their impact. Simply put, underfunding starves mission-driven organizations, weakening their ability to deliver on their purpose and respond to crises – a direct threat to nonprofit resilience.
What’s Changed Since 2022? (2023–2025 Trends and Developments)
The Federal Crisis Since January 2025
As my recent writing has made clear, the public funding landscape for nonprofits shifted in early 2025. A new federal administration took office on January 20, 2025, and with it came significant changes affecting nonprofit funding:
- Temporary Freeze on Federal Grants: In one of its first actions, the administration announced a government-wide pause on federal grants and loan disbursements to nonprofits pending a review. This order, even though short-lived, was described by the National Council of Nonprofits as a “potential five-alarm fire” for organizations and communities. Nonprofits suddenly faced the prospect of halted funding for vital programs – from medical research to food aid and domestic violence shelters. Even a brief pause in federal funds exposed how vulnerable many nonprofits are when government revenue streams are interrupted. Indeed, some charities had to consider tapping reserves or cutting services during the uncertainty. The pause was soon blocked and rescinded after public outcry and legal challenges, but it served as a wake-up call about nonprofit funding fragility.
- “Alignment” of Funding with New Priorities: In the months after, the administration signaled more lasting changes. In May 2025, a Presidential memorandum ordered a review of all federal funding to nongovernmental organizations, instructing agencies to “align future funding with the interests of the United States and the priorities of [the] administration.” This broad policy shift introduced political and ideological criteria into funding decisions. With roughly 1.5 million nonprofits receiving some form of federal support, the impact will be widespread. Programs not aligned with the administration’s agenda will face cuts. For nonprofits, this adds another layer of uncertainty and potential underfunding. In Congress, debates are underway in 2025 around tax reform, including proposals that alarm nonprofit advocates (such as giving the Treasury power to revoke tax-exempt status more easily, or imposing new limits on charitable deductions). Any federal policy that disincentivizes giving or reduces public funding flows translates directly into tighter budgets on the ground.
In short, federal policy changes in 2025 have heightened the risks of underfunding.
The Slower, Background Crisis
Even without the last six months, however, underfunding has remained a pervasive problem – and by many measures, it has intensified. Recent data and sector reports paint a sobering picture of nonprofits’ financial health in 2023–2025:
- Widespread Funding Shortfalls: Nearly half of nonprofits lack sufficient funds to deliver all their programs and services in 2025, particularly (but not exclusively) in light of federal shifts. A national survey found 47% of nonprofits did not have the funds needed to meet current program demands, up from 38% the previous year. This funding gap is driving anxiety across the sector – about 50% of nonprofit leaders are concerned about their organization’s financial stability, a sharp rise in concern from the prior year. Due to underfunding, 75% of nonprofits have cut staff or reduced programs to balance their budgets. Furthermore, about 65% of organizations report being hampered by staffing shortages, often a direct result of underfunding, as nonprofits can’t offer competitive pay to fill positions.
- Rising Costs and Post-Pandemic Pressures: The broader economic context has been a mixed bag. A relatively strong economy in 2024 led over half (56%) of surveyed nonprofits to report a net increase in income that year. However, rising operating costs due to inflation and wage pressures and the expiration of pandemic-era relief funding have created new uncertainty. While emergency funds like PPP loans helped in 2020–2021, these one-time sources are gone, leading to a "funding cliff. Demand for services has surged—the same report noted that 77.6% of U.S. nonprofits surveyed said demand for their services rose in 2024, due to public health crises, natural disasters, economic strain, and other societal issues. Yet resources haven’t risen at the same rate, leaving nonprofits stretched thin. Underfunding amid increased demand means nonprofits are asked to do more with less, often leading to mission compromises.
- Philanthropic Giving Trends: Individual charitable giving – historically the largest revenue source for nonprofits – has shown worrisome signs. For the second consecutive year, individual contributions declined in aggregate. The combination of tax law changes and economic uncertainty dampened giving. One analysis found donors are giving an estimated $16 billion less each year after recent tax law changes. On the positive side, there is a growing movement in philanthropy toward more flexible, trust-based funding that could alleviate underfunding. In a 2023 survey, 40% of nonprofits reported an increase in offers of multi-year support, and nearly 50% saw reduced or removed restrictions on grants they received. Many foundations during 2020–2022 adopted “trust-based philanthropy” practices (unrestricted grants, simplified paperwork), and some have continued these practices. This means more funders are now more willing to cover overhead or provide general operating support. While this is encouraging, it’s not yet the norm across all funding. Underfunding of core costs persists, as many donors and grantmakers still target funds to programs and expect nonprofits to operate on lean overhead. The notorious “overhead myth” – valuing charities for low administrative expense – has been challenged but not fully defeated. Nonprofits in 2025 still report pressure to under-invest in administrative capacity due to funder expectations.
Underfunding in 2025: Worse, Better, or the Same?
Has the underfunding challenge improved or worsened since 2022? Based on the evidence, underfunding remains a critical threat, and by several indicators, it has worsened. The fact that nearly half of nonprofits cannot fully fund their existing programs in 2025 is a sign of pervasive financial strain, comparable to or worse than before the pandemic and worse than during the pandemic itself More nonprofit leaders are feeling anxious about finances now than just a year or two ago, which suggests growing strain rather than relief. External factors have created a perfect storm: inflation and labor costs are eating into budgets, emergency COVID funds have dried up, donor behavior has not rebounded to pre-2020 norms, and the federal government has soured on the sector. Meanwhile, the need for nonprofit services has grown dramatically, which amplifies the pain of underfunding: more people to serve, but not enough resources.
To be fair, it’s not all bad news. Some funders and partners have recognized the dangers of underfunding and started to change practices. Yet most nonprofits still operate with razor-thin margins and scant safety nets. Indeed, many have had to downsize in the last two years due to financial shortfalls, which is a strong indicator that the problem persists unabated.
Given all this, underfunding remains as relevant a challenge as ever – arguably still Challenge #1 for a reason. Nonprofit leaders in 2025 cannot afford to ignore the risks posed by inadequate funding. In our next post, we will discuss what to do about this challenge.
