Challenges Faced by Nonprofit Agencies in a Competitive Funding Environment
Nonprofit agencies have long been used to provide community-based services throughout the United States. Whether it is social services, mental health services, housing resources, educational resources, or many others, nonprofit agencies fill gaps that Americans need. These nonprofits frequently rely on federal government or state government funds to operate and provide services to those in need. The ugly truth is, that over the past few decades, our State/Federal Government (who fund nonprofit agencies) has been the competitors in providing services, the biggest critics about what we should be achieving as outcomes, and the architects of why it is so difficult to meet their expectations through continual cuts to our funding. In this article, I will discuss how government funded services, competition, unrealistic expectations, shrinking dollars, and organized labor have created an unsustainable environment for nonprofit agencies.
Government expects their contracted nonprofit agencies to hit benchmarks and produce outcomes that are unrealistic and unreachable. We are tasked to meet “performance indicators” for lower recidivism rates, higher employment levels, better mental health statistics, reduced ER visits etc., despite being given a skeleton crew and a shoe-string budget to do so. It’s laughable if it wasn’t so pathetic.
Funders want outcomes but they don’t want to pay for them. There is this idea that because we’re nonprofits we should pull our caring for these missions directly from our butts. Yeah, we love what we do, we’re passionate, but you can’t trumpet mission-driven devotion and living off of volunteered labor to justify reluctance to properly fund a worthy cause.
“We love these kids. We’ve just hired three more people this month. Our offices are tiny, but they have personality. We don’t really use evidence-based practices but we have lots of activities. Stay tuned! And by the way… Fundus more!”
If that somehow doesn’t sell you, here’s another thing about working for nonprofits who are funded by the government. The government decides if we meet our contract goals. They review our contract progress, analyze our outcome data and then decide if we should get our funding renewed. See how that happens to tie together? It’s a flawlessly designed cycle of failure.
When we don’t meet the outcome goals they designed us to be unable to meet, we get scrutinized and sometimes even punished by having our funding pulled. So instead of owning what we actually do with the clients we serve, we have to spend hours and hours writing “assessment reports” on how everything went, making it sound like we hit the moon so you’ll keep giving us money.
It’s this weird lack of trust that creates a system where we can’t be honest with each other and actually come together to craft social programs that might actually work.
As much as anything else, an organization is limited by the resources invested into it. Nonprofits are often expected to overcome limited investments of money by proving that they can comply with program mandates and produce strong outcomes on paper. What gets lost in the conversation about funding nonprofits is how inconsistent investments of resources impact what nonprofits can actually do – and, by extension, what outcomes they can produce.
I have worked for nonprofits that had enough funding to hire qualified staff, train them, pay for decent office space, buy quality program materials, and support their programs with adequate infrastructure. With enough support and the ability to actually do the work we were hoping to do, we were able to produce strong outcomes.
I have also worked for nonprofits where funding did not allow us to keep staff long enough for clients to develop a relationship and feel secure, or to fill open positions in a timely manner (caseloads often doubled when someone left), or afford necessary trainings, or purchase research-based program materials, or support our program with necessary infrastructure. With limited support and an inability to actually follow through with our programs as we wanted to, we struggled to produce favorable outcomes.
So when funders look at outcome data from these types of organizations and see “weak outcomes,” what they are really seeing is an underfunded program. Continued lack of funding based on this type of outcome data creates a cycle of retribution where programs are underfunded because they produce poor outcomes, which causes them to have even poorer outcomes.
The practical impact of years of insufficient and decreasing dollars on the capacity of nonprofit agencies can’t be overstated. Agencies that once were thriving with ample staff and able to develop innovative and nimble programs to meet client needs have been whittled down to the point where they can barely function. Staffing Shortages One of the most tangible impacts of lower funding rates is the impact on agency staffing. Nonprofits have traditionally paid their staff less than government and private sector employers, but as purchasing power has decreased many agencies are unable to recruit employees, even for entry-level positions. And when they are able to, turnover is high as burnout, low pay and emotional exhaustion take their toll on employees working with traumatized clients. Those who pay the price for turnover are usually the clients who need stability the most.
Infrastructure Some of the less visible but equally harmful impacts of decreased funding are to the infrastructure that nonprofits need in order to do their work. Computers become outdated and are never replaced. Offices become rundown. Data collection and analysis skills diminish. Organizations stop investing in themselves in terms of learning from their successes and improving programs because they lack the time and money to do so. Innovation There’s no money for innovative projects that don’t guarantee a successful outcome. Employees are less resilient, less knowledgeable about their clients, and programs start to wither. Workplace morale Declining funding doesn’t just hurt a nonprofits ability to serve clients – it destroys employee morale. Employees who entered the nonprofit workforce to help people begin to feel that their organization cannot do its job because there aren’t enough resources. Compassion fatigue sets in and employees grow cynical about their work.
One of the worst kept secrets not known to most is how nonprofits actually compete with government agencies for clients. State agencies and federal agencies provide identical services to nonprofits — think mental health services, workforce training, homeless services, child welfare, drug treatment, etc. Imagine a playing field in which you are dependent on your competitors for financial resources while also trying to beat them at their own game. This is the situation that nonprofit organizations find themselves in regularly.
Competing against government agencies obviously puts nonprofits at a disadvantage. Government agencies have the benefit of public funding (think Medicaid reimbursement rates), civil service jobs that allow employees to keep their jobs even if they don’t perform well, infrastructure, and the inherent advantage of being a government agency. Nonprofits are forced to scramble to find funding from a variety of sources to make up for low government reimbursement rates, have little to no infrastructure, and must compete for employees in an arena where they can’t come close to matching government salaries and benefits.
When you have this set up, it creates an odd system in which nonprofits are expected to do more with less and are judged unfairly when they don’t meet expectations. Case in point: when a nonprofit struggles to meet goals or hits a snag in their service delivery, the government agency they are “partnering” with will often receive continued — if not increased — funding to address the issue, while the nonprofit is looked at to shoulder the blame and have their contract decreased. The government agency is almost never held publicly accountable.
On top of competing for clients with government agencies, think of how strange it is that nonprofits are expected to “partner” with the government while also being your competition. It’s no surprise that relationships between nonprofits and government agencies can be somewhat contentious.
Essentially, it’s a dysfunctional relationship from the start. At best government funding (think grants, contracts, subsidies, etc.) provides nonprofit agencies with money to offer services to the public while extending the government’s reach without having to run those programs internally. At worst it sets nonprofits up to fail.
Costs of services are never fully funded. Nonprofits are expected to pay for administrative overhead, indirect costs, and aspects of program costs that aren’t explicitly stated in a government contract. Many nonprofits are forced to beg private donors and foundations for money just to stay afloat. If you’ve ever been told to “let them know if there’s anything they can do to help,” you’ve been offered the false hope of nonprofit fundraising.
Government funds dry up without notice. Programs that nonprofits build up can be cut overnight by government changes in policy and funding. When the government doesn’t re-contract, organizations are faced with the terrible decision to axe a program (and lay off employees) that could serve the community.
Government compliance requirements for funding eat away at budgets. Nonprofits are required to comply with governing standards in exchange for their money. The time and resources spent on audits, reports, and making sure everything is done by the book are cost-prohibitive for most nonprofits.
As if the pressures of inadequate funding, unrealistic expectations, and government competition were not already sufficient to push nonprofits to their breaking point, many organizations now face an additional and particularly acute dilemma in the form of competing demands from organized labor unions and government funders. This tension represents one of the most complex and politically charged challenges in the nonprofit sector today, and it places organizations in a genuinely no-win situation that threatens their very survival.
Organized labor unions have increasingly turned their attention to the nonprofit sector, recognizing that workers in these organizations often face some of the most challenging working conditions and lowest compensation levels in the broader service economy. Union advocates argue — correctly — that nonprofit workers deserve fair wages, comprehensive benefits, safe working conditions, and protections against arbitrary termination. These are not unreasonable demands. Many nonprofit employees are highly educated professionals who provide critical services and who deserve to be compensated accordingly.
However, the push for better salaries and benefits runs directly into the brick wall of government funding levels. State and federal contracts and grants typically set reimbursement rates that do not account for the kind of salary and benefit packages that unions are demanding. When nonprofits attempt to meet union-negotiated compensation standards, they find that their funding is simply insufficient to cover the increased costs — and government funders show little inclination to increase reimbursement rates to bridge the gap. The nonprofit is thus caught between the legitimate demands of its workforce and the financial constraints imposed by its primary funders, with no good options available.
This dilemma is further complicated by the political dynamics at play. Government officials who publicly champion workers’ rights and union causes are often the same officials who control the funding levels that make meeting those workers’ demands impossible. Nonprofits are left to absorb the contradiction, facing potential labor action if they fail to meet union demands and financial insolvency if they attempt to do so without additional funding. The result is a sector under existential pressure, squeezed from multiple directions simultaneously, with little relief in sight.
The challenges facing nonprofit agencies funded by state and federal governments represent a systemic crisis that demands urgent attention and honest reckoning from policymakers, funders, and the broader public. These organizations serve some of the most vulnerable members of our society, delivering critical services in communities where government agencies are often ill-equipped or unwilling to venture. Yet the structures that are supposed to support their work — government funding relationships, oversight frameworks, and compensation systems — have instead become mechanisms of constraint and contradiction that make sustainable, high-quality service delivery increasingly difficult to achieve.
Addressing this crisis requires fundamental changes in how government entities relate to the nonprofits they fund. Reimbursement rates must be adjusted to reflect the true cost of delivering services, including fair compensation for workers. Outcome expectations must be calibrated to align with available resources and the genuine complexity of the populations being served. The competitive dynamic between government agencies and nonprofits must be replaced by genuine collaboration built on mutual respect and shared accountability. And the growing demands of organized labor must be acknowledged and addressed through adequate public investment rather than being left for individual nonprofits to resolve on their own.
Without these changes, the nonprofit sector will continue its slow decline — losing staff, reducing services, and failing to meet the needs of the communities it was created to serve. The stakes could not be higher, both for the organizations themselves and for the millions of people who depend on them.
