Amid Shutdown and as Economy Falters, State and Local Governments Must Fund Nonprofits and Preserve Services

With the Federal government shutdown, state and local governments face urgent and additional pressure to act on behalf of nonprofits and the communities they serve. September’s jobs report reflects an economy under strain. Unemployment is at its highest in the past four years and more industries lost jobs than gained them, extending a trend since April. In this season of uncertainty, inflation, and federal funding cuts, communities are relying on nonprofits to hold the lines and preserve access to food, healthcare, childcare, affordable housing, and more. In turn, nonprofits are relying on state, county, and city leaders to act to preserve critical community infrastructure. 

With over one-quarter of Americans living near or below the poverty line, the work of many nonprofits is helping people meet basic needs. For decades, government at all levels has outsourced the provision of critical services to nonprofit partners – and needs to invest in that infrastructure now so it can continue to drive social and economic well-being.  

Nonprofit Finance Fund’s recent survey of US nonprofits found 85% of nonprofit respondents expect demand for services to increase in 2025, and more than half (54%) don’t expect to be able to meet that demand.  

When nonprofits are in trouble, we are all in trouble. Nonprofits keep families from homelessness when a parent loses a job. They run after-school programs that give children a place to go after school. They build health centers, affordable homes, and parks. They are among the first to show up when a natural disaster hits. They are as essential as roads and bridges. And, like roads and bridges, they need investment.  

The fallout of cuts and the fight for essential services such as SNAP and Medicaid continue to make headlines. Meanwhile, communities across the country are left to grapple with federal funding cuts and neighbors in need.  

The shutdown will make things worse in two primary ways: it will further delay reimbursements owed to nonprofits by the federal government, and it will create increased demand as families now going without paychecks still need to buy food and cover housing, health, and other needs. These pressures compound the many other program-delivery and operational challenges nonprofits face during a shutdown. 

As people lean on nonprofits, state and local governments have an opportunity to be better partners. While we can’t expect them to fully replace lost federal dollars, there is plenty of room to act.  

Here are five things that state and local governments can do now: 

1. Respond urgently to the current crises. Use lessons from COVID and other rapid-response deployments of support to help nonprofits deal with lost federal grants and maintain services. For example, allow flexibility so nonprofits can better respond to shifting community needs.  
2. Pay a portion of funding up front. Typically, governments pay strictly on a reimbursement basis, so nonprofits often need to hire staff and launch programs knowing it will be months before they receive payment for those expenditures. Paying a portion of contracts up front would help nonprofits mobilize and maintain community services.  
3. Pay nonprofits on time. Nonprofit Finance Fund’s survey showed 55% of survey respondents with government funding reported being paid late. Nonprofits cope with delays by dipping into reserves, pausing programs, and delaying payments to vendors, all of which negatively impact the communities they serve. They may also take on debt, if they can access it, and government doesn’t reimburse for interest payments.  
4. Pay the real, full cost of service delivery. 70% of survey respondents said they could only charge an “indirect” cost rate – which covers things like information technology and rent – of 10% or less, a rate acknowledged in October 2024 OMB Uniform Guidance as insufficient to run a healthy organization. While paying indirect costs may be less popular than paying for direct costs, any person who runs a business or nonprofit knows there are many indirect costs that are absolutely vital to maintaining a healthy organization. Communities can’t have services without the organizations to deliver them. 
5. Connect and coordinate with state nonprofit associations for a sense of how federal pullbacks are playing out locally, and for partnership on response strategies.  

Taking these actions will shore up the nonprofit infrastructure, which directly supports service delivery as well as economic growth. Nonprofits employ about 10 percent of the US private workforce and contribute $1.4 trillion to the economy annually. This dual role as service providers and economic engines is what makes investments in nonprofits so compelling, and cuts and job losses so detrimental.  

Everyone has a stake in the future of the US nonprofit infrastructure. Our divisive political landscape is a major hurdle to progress on what should be shared goals like affordable healthcare, food for hungry children, and quality early education. As a nation, we are reckoning with the promises we make to our people, and struggling to preserve and expand access to the American dream.  

Strong nonprofits are essential to strong communities. As the shutdown causes new strain, unemployment rises, and inflation continues to hit communities hard, nonprofits that deliver essential services must rely on state and local government leadership.