Where Did the Funding Go?

In January, George Jones, CEO of Bread for the City, knew that his organization was going to have a budget shortfall at the end of its fiscal year in June. But he was confident that it would be small and the group would be fine. In just a few months, that picture changed.

It became clear in April that several big foundation grants the 50-year-old organization was expecting would not come through. One grant maker who gave the group $1 million the previous year renewed its grant for only $200,000. Then city grants Jones counted on didn’t materialize. In June, the organization, which provides food, medical and dental services, and other assistance to people in need in Washington, D.C., found itself $4 million short of its $23 million annual budget.

Some grant makers told Jones they were pausing to reassess their strategies. Some donors were waiting to see what happened with the presidential election. In many cases, he never found out what changed. “We don’t have that latitude to go in and grill our funders,” he says.

Bread for the City

While funders responded generously to emergency needs during the pandemic, demand for services at Bread for the City never abated. Inflation has caused costs to rise. The group feeds up to 7,000 households a month, and the increased cost of food has cut into its budget. Wages have increased, both because of the need to compete for employees as private-sector wages rose and from a desire to pay people more equitably. Before the pandemic, the lowest salary at the group was about $19 an hour. Now it’s $25 an hour, and no full-time employee earns less than $50,000 a year.

The organization halted new hiring, scrapped cost-of-living increases, and stopped serving food at events and staff meetings. It let consulting contracts expire. Jones wanted to make sure he did everything he could to avoid letting staff go.

“We were hoping that we were going to be able to muddle through this fiscal year with those reduced costs,” Jones says.

But when the group realized it would be $4 million short, Jones knew the organization needed to take more drastic measures. It had enough reserves to cover the shortfall but not enough to cover it for multiple years. Plus, the group needs a financial cushion to operate. It spends about $2 million a month, but its revenue stream is inconsistent. Some months it might bring in a few hundred thousand dollars and others several million. About 40 percent of the money comes in December.

This summer, the organization laid off 20 of its 140 employees.

Bread for the City isn’t alone. Organizations across the country are facing dire financial straits that have led to hiring freezes, program cuts, layoffs, and in some cases, closures. The examples cut across geography and cause area. Two other nonprofits that provide food to low-income Washington, D.C., residents laid off staff this year. The voting-rights group Fair Fight laid off 75 percent of its staff in January. Museums in cities across the country have laid off employees. Big Brothers Big Sisters of the Mid-South in Memphis closed last year. Centro Latino, a 20-year-old Iowa group that aided immigrants, closed in October.

Minnesota Council of Nonprofits

The financial picture can shift quickly with little warning, leaving nonprofits too little time to raise the funds they need. In a survey in Minnesota, 79 percent of nonprofits said they expected to experience financial distress in the next 12 months, up from 47 percent in 2022. In a survey of New York nonprofits, 62 percent of organizations said they’re concerned about funding basic operations, up from 50 percent in 2023. For a quarter of groups, finances are so bad they are considering reducing services. With the Trump administration set to take office in January, nonprofits face additional uncertainty in the volume of urgent needs they may have to meet, possible changes to laws and regulations, and the potential loss of government funding for important services.

Put all these factors together, and you get a rocky financial landscape for the nonprofit world.

“We’re absolutely seeing more challenges for the nonprofit sector around financial distress, and the financial sustainability of organizations, along with a rising demand for services,” says Nonoko Sato, executive director of the Minnesota Council of Nonprofits. “We are getting calls from organizations that are about to close their doors very quickly.”

A Heavy Decision

The past five years have been a time of significant change for nonprofits. Many shifted their work to respond to the overwhelming needs of their communities during the Covid crisis, and some refocused their missions and internal structures during the push for greater racial equity in 2020. Inflation and calls for pay equity pushed up wages and costs. The wave of Covid-related money from donors, foundations, and the government is over, but demand for services never subsided. Amid the upheaval, longtime CEOs left their jobs in large numbers, saddling a new generation of leaders with complex challenges.

Now, a drop in grants, donations, government contracts and funding, and even earned revenue is threatening many nonprofits’ ability to deliver services and in some cases even survive.

Kinship Partners, a youth-mentoring group in Minneapolis founded in 1986, brought on Amy Gray as CEO in late 2020. During her first year, the organization received $100,000, about a third of its budget, in Covid-related funding. The following year, the group raised more money than it had ever raised before. There was record attendance at events. Grant makers that hadn’t supported the group in years came back, and the organization attracted new smaller donors as well. But staff retention was a challenge, as it has been for many nonprofits. Some employees retired, while others left after restructuring. To attract and retain new staff, Kinship Partners had to raise some salaries by 30 percent. With fundraising up and a small team she was excited about, however, Gray thought the 38-year-old nonprofit was going into 2024 in good shape.

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Early this year, the longtime bookkeeper retired, and Gray spent more time monitoring the bank account. Soon she noticed that the balance was getting low. One grant maker that had given the group 80 percent of what it requested in 2023 gave just 25 percent of what it requested in 2024. In March, she was waiting to hear back from another grant maker that had provided about 30 percent of the group’s budget for more than a decade. At first, the funder asked for more information. Eventually the grant maker told Gray that the foundation was changing its funding priorities.

“I made the decision for myself that if we didn’t get that funding, that I would resign,” Gray says. She felt that the exceptional program team she had assembled could work with the board to keep the organization afloat without her, if necessary. “We’re primed, we’re just on the precipice of really being able to move forward and do the work that I’ve been wanting to do for the past two and a half years. We’re finally there. We just need the money to get us through this next year.”

Rather than the usual $70,000 that grant maker had awarded Kinship in the past, it gave only $10,000 and another $10,000 as a matching grant.

Gray told the board that she would try to bring in more money if the board was willing to pitch in and help in a significant way. She says the board members were unwilling to commit to doing the work.

Gray arranged for the group’s two program staff to continue their work for another organization. Gray and the board dissolved the group, and she started to look for a job.

“I remember sitting at the board meeting when they said, ‘Well, I guess somebody needs to make a motion to dissolve,’ then there was just kind of this heaviness around the table,” Gray says. “They took a moment to acknowledge that this is a really tough motion to make, but we know it’s the right one. It’s just hard.”

For some nonprofits, like Kinship, financial realities are moving so fast that closure becomes the only option. The Minnesota Council of Nonprofits did a study of dissolutions of charities there. Between 2021 and 2023, the number of nonprofits that filed papers with the state to close increased by 35 percent. It also found that the average age of nonprofits that are closing is going up.

Across the country, some grant makers are stepping away from earlier funding priorities. Many provided money for racial-equity efforts, and they may be scaling back because of concerns about the settlement in the lawsuit that challenged the Fearless Fund’s grant program for businesses that are majority owned by Black women, says Kathleen Enright, CEO of the Council on Foundations. But she says the settlement doesn’t affect the vast majority of grant makers and their racial-equity efforts.

Kevin Dean, CEO of the Tennessee Nonprofit Network, says that he’s met with nearly a dozen nonprofit leaders in a month that are about to close their doors. Several Memphis grant makers and big donors have scaled back their giving significantly or changed priorities with little notice, leaving many nonprofits in the lurch, he says. Some grant makers are holding back on making grants and cutting down on how much they are giving.

Grant makers can be fickle. Jocelynne Rainey, CEO of Brooklyn Org, the borough’s community foundation, says she’s watched grant makers rush in to fund and then back away from criminal justice and immigration as those issues rise and fall in popularity. They’re providing little notice to grantees about these changes.

Some nonprofits have seen support dry up from several grant makers at once. Other grant makers are returning to giving restricted dollars so groups have less flexibility in how they use the funds they do have, Rainey says. At the same time, state and local budgets are tight, and groups are waiting longer to be reimbursed for the services they provide, further stretching organizations’ budgets and complicating cash flow.

Demand for the Nonprofit Finance Fund’s training on budgeting, financial planning, leadership development, and coaching has increased. And with changes in policies and funding likely to happen during the second Trump administration, nonprofits are going to need that kind of expertise even more. Nonprofits need to make sure they understand their business model and regularly review detailed financial reports to make smart decisions about their organizations, says Aisha Benson, the fund’s CEO. Nonprofits can look to President Trump’s last term to help them better understand the changes and risks they face. And they need to communicate those to funders.

“Everybody’s in that mode right now, saying, ‘Where are we protected and where are we exposed, and if we’re exposed, what’s our contingency plan? How do we work with philanthropy?’” Benson says. “I think it’s important that our leaders open up conversations with their funder partners as appropriate.”

Collaboration will also be important, says Preeta Nayak, a partner with the consulting firm Bridgespan. Nonprofits can benefit from working with others in their cause areas to better understand what policy changes may be coming and to advocate for their needs. Leaders need to communicate with their board members about all this and perhaps even find consultants who can help with urgent social media or fundraising campaigns, she says. They need to be prepared for rapid changes both programmatic and financial.

“There’s how your funding is going to be affected. But then there’s also how your work is going to be affected, how your community will be affected, and what might that mean for the cost of business,” Nayak says. “There may be something you’re going to do that you’ve never had to do before.”

Pain of Rising Costs

Many organizations are dealing with pain on both sides of the ledger. As financial support has decreased and become less predictable, expenses have shot up. Inflation has hit nonprofits as hard as anyone.

Bedford Stuyvesant Restoration Corporation, a nonprofit that has been serving that community since the 1960s, owns Restoration Plaza, a 1970s-era development that brought one of the first large grocery stores into the neighborhood decades ago. It also owns a historic former milk factory that was converted into offices where neighborhood nonprofits rent space.

The real estate provided a reliable income stream for the group for decades. But since the pandemic, that has changed. What was once a great financial asset turned into a liability. More people are working from home, so fewer need office space. Many nonprofit tenants are also struggling and not renewing their leases. Some commercial tenants may also fail to stay. Large parts of the property are in need of repairs because of long-term deferred maintenance. The cost of those repairs has climbed — and the cost of maintaining the historic buildings is only increasing. Liability insurance for the group’s properties went up 40 percent this year alone.

Blondel Pinnock, CEO of Bedford Stuyvesant Restoration Corporation, says the organization has also tried to boost benefits and wages for employees where it can — its mission, after all, is to close the racial-wealth gap — but that also increases costs.

Over time, the combination of higher expenses and declining revenue became too much. In October, the group laid off about 20 percent of its staff.

“We can’t continue operating in a deficit. We have to really sit and look at our total financial picture, take a look at all of our assets, take a look at all of our funding sources, and make some really critical decisions that will move the organization forward,” Pinnock says. “We will be taking until the end of the year to try to think through strategically where our next steps lie and where our path lies in the future.”

Many museums also face increased costs, says Marilyn Jackson, CEO of the American Alliance of Museums. Extreme weather driven by climate change is pushing up the cost of flood and fire insurance. Some museums are paying $500,000 a year for fire insurance. As average temperatures rise, museums are also spending more on air conditioning to keep temperatures stable for visitors and collections. Before joining the alliance earlier this year, Jackson led the Muhammad Ali Center, which spent as much as $30,000 a month on air conditioning.

The majority of museums are in good financial health and more than half of museums report that their finances are better than they were before the pandemic, Jackson says. Yet layoffs have been reported at high-profile institutions across the country, including the Newport Art Museum, the Portland Museum of Art in Maine, the San Francisco Museum of Modern Art, the Dallas Museum of Art, and the California Academy of Sciences.

Grant makers have not responded well to inflation, says Enright, at the Council on Foundations. Few, if any, have adjusted their grants for the real decrease in nonprofits’ buying power. For a $100,000 grant to go as far today as it did in 2019, it would need to be $125,000.

“A little bit of it is the tragedy of the commons,” Enright says. Because it affects everyone, “no one takes responsibility.”

An Increase in Loans

Some nonprofits were always going to face financial distress, says Jan Young, executive director of the Assisi Foundation of Memphis. Organizations founded during the pandemic to help meet urgent needs may not have had a sound business model. Others were able to paper over fundamental financial problems thanks to the flood of Covid-related funding. Now that dollars are harder to come by, those fundamental problems are rising to the surface, forcing layoffs and closures. At the same time, she says, many established and well-run groups are also having problems. Unfortunately, the Assisi Foundation, which funds about 25 groups a year, can’t help everyone, she says.

Assisi has an open grant-application process — and foundation staff talk to every eligible applicant, in part to help the grant maker learn more about the community. In some instances, the foundation has helped organizations that it does not fund meet other nonprofits that can help. At times it has paid a consultant to work with an applicant on a business plan or fundraising strategy rather than make a grant.

Grant makers need to be better about providing predictable and flexible funding, says Enright, at the Council on Foundations. If grant makers are going to pull back funding, they need to give grantees a year or two to prepare for the change.

With traditional sources of funding failing them, some nonprofits are turning to loans to augment their finances — something that can help groups that face short-term problems such as a delay in payment from a grant or contract. In 2023, 70 percent of community-development financial institutions, most of which are nonprofits, saw an increase in demand for loans, primarily from other charities. The Nonprofit Finance Fund, also a CDFI, has seen a jump in loan applications and its total amount of lending. Loan applications rose by 50 percent in 2023 compared with 2022. They are up another 25 percent just through October. In 2022, the Nonprofit Finance Fund loaned $30 million to nonprofits. So far this year, it has loaned $80 million.

Propel, a Minneapolis-based CDFI, has seen its working capital loans to nonprofits double in the last year. The average loan size grew from $150,000 to $250,000. But loans aren’t a solution for all organizations, says Ellie O’Brien, Propel’s CFO. Although Propel has a default rate less than 1 percent of loans, it recently had to write off loans to four nonprofits that dissolved.

“We’ve also seen recently applications where we knew that a loan wasn’t going to help turn that organization around, and within weeks, those organizations have closed,” O’Brien says. “That’s emotional for us, too, to not be able to support the sector where we wish we could. And then vital services are no longer available to communities that need them.”

A Creative Solution

The past few years have been challenging for HERE Arts Center in New York City. The organization, founded 30 years ago, runs a performance space, but audiences haven’t returned to pre-pandemic levels. The group had been running a deficit for years and was eating into its assets to continue operating. In June, the center’s founding director retired, and it brought on four co-directors.

Donors stepped up and provided additional, often unrestricted funding during the pandemic, but now that the emergency is over, many funders have moved on, says Lauren Miller, one of the center’s new co-directors. Some grant makers changed priorities and dollars have been scarce, she says. Like many new CEOs who have started in the past few years, Miller has found that some donors won’t support an organization in the first years after a leadership change.

“Just when we need new solutions and we need people to think differently and give differently, we’re seeing philanthropy retrench back to the pre-Covid status quo,” she says.

Miller and her co-directors have cut costs. Instead of large, costly productions, the organization is focusing on more one-person shows. It has just nine staff members, down from a peak of 20. The organization is trying to expand its base of donors. The center’s goal is to find a larger number of donors who make modest gifts, rather than depend on a handful of large donors who can give a lot, but who will have a big impact on the group’s finances if their giving changes. Miller wants to partner with other arts groups to seek funding together — many of them have similar missions and even work with the same artists, so why should they compete for money?

The center’s board chair came up with an innovative solution to help it address the financial shortfall. She created a donor-advised fund to give HERE Arts Center a loan. It was money that Miller says the chair was planning to give to charity, perhaps over several years. By structuring the support as a low-interest loan, the group got the money it needed up front. The center is paying back only interest on the loan to start, so the payments are low now while the group needs to conserve funds. The money that the group pays on the loan goes back into the DAF so it can be used for other charitable purposes later.

“By creating these very favorable conditions that can move the money quickly to where we needed it, it protected the organization. It was a real lifesaver,” Miller says. “We could start the next fiscal year fresh without having to make dramatic cuts to our staff or to our programs.”

The DAF was created, and the loan is being serviced by FJC: A Foundation of Philanthropic Funds. The group works with donors to help nonprofits fill funding gaps that government, banks, and other donors and grant makers won’t. A commercial lender never would have made the loan to HERE Arts Center, says Sam Marks, FJC’s CEO.

“You really needed a lender that was looking at it not just from a perspective of credit risk, but from a perspective of really understanding the fundamental business and committed to the mission — a real friendly, mission-based lender,” says Marks.

This creative approach has made Miller optimistic that the center can thrive in the coming years — and also that philanthropy, at least in some places, is starting to become more agile and listen to the needs of nonprofits.

“Those of us who are doing things differently and who are trying to innovate and create more interconnection, partnering with our peers instead of competing with them, and bringing new programs in and widening the aperture of what’s possible for our service, we’re being forced to take calculated risks to survive the present circumstances,” she says. “I think we need philanthropy to be as entrepreneurial and risk taking and innovative if they want to see us succeed in those risks.”