The New Era for Nonprofits

For six decades, the federal government has both funded and relied on nonprofit service providers to implement a range of policies and programs passed by Congress. But now, this system is collapsing.

The government supports many nonprofits directly, through federal grants and contracts, and indirectly, through funding streams that pass through state and local government. However, the second Trump administration now routinely expresses hostility toward nonprofits and has declared it will “stop funding NGOs that undermine the national interest.”

The administration has made good on this vow with grant reviews and cancellations, spending freezes, impoundments, and recissions. Tens of thousands of nonprofit employees have already lost their jobs. The spending cuts enacted in the One Big Beautiful Bill passed by MAGA Republicans will further crimp federal funding for nonprofits—even as it increases demand for their services.

However, the hybrid system’s demise is not something we can attribute only to the administrative tornado that is the second Trump administration. Tracing the system’s historical evolution indicates that its sudden toppling resulted from mounting contradictions that, like so many termites, ate away at its foundations and legitimacy for decades. In light of these accumulated problems, we should not try to salvage the old hybrid system. But we can reimagine it—and now have little choice but to do otherwise.

Tracing the system’s historical evolution indicates that its sudden toppling resulted from mounting contradictions that, like so many termites, ate away at its foundations and legitimacy for decades.

The Rise of the Hybrid System

The public-private hybrid system of service provision originated with liberal reformers in the early 1960s. The Ford Foundation piloted several programs that used community-based nonprofits to deliver services and benefits to urban residents. Democratic Presidents John Kennedy and then especially Lyndon Johnson picked up on and sought to embed these approaches into federal policies. They formed the backbone of Johnson’s War on Poverty and his expansive push for a Great Society through initiatives like Head Start, VISTA, Job Corps, and community action programs.

It was not only liberals and Democrats who favored the federal government’s growing reliance on nonprofits to deliver its domestic policies and programs. In 1977, conservative scholars at the American Enterprise Institute published a report titled To Empower People: From State to Civil Society on how the federal government could and should implement its policies via voluntary groups and congregations. These ideas gave Ronald Reagan and George H. W. Bush a template to reduce the government’s bureaucratic footprint by turning instead to what Bush later termed “a thousand points of light” in civil society.

The ongoing development of the public-private hybrid system featured prominently in subsequent administrations across both parties. It was embodied in Bill Clinton and Al Gore’s quest to reinvent government, George W. Bush’s initial push for compassionate conservatism, and Barack Obama’s efforts to spur social innovation and fund “what works.” It has been, up until recently, a bipartisan endeavor.

This approach has led nonprofit service providers to become increasingly dependent on government policy and funding streams. A recent Urban Institute survey of nonprofits highlights this dynamic, finding that “in 2022, 68 percent of nonprofits received government grants or contracts and 29 percent of nonprofits’ revenue came from government agencies.” Thirty-eight percent of the responding institutions had directly sought federal grants in 2022, and 27 percent had received them. Ten percent reported that they had received federal contracts.

The Fall of the Social Services Industrial Complex

From the outset, critics of using the hybrid system for delivering social services flagged its inherent risks. Liberals like Democratic Senator Daniel Patrick Moynihan and Independent Sector President Brian O’Connell warned that nonprofits’ growing reliance on government funding threatened their ability to serve as agents of pluralism and countervailing power. As O’Connell put it, “My experience tells me that long-term government support of an agency or complex of agencies creates a quasi-governmental entity with decreasing value as an independent force.”

In Nonprofits for Hire: The Welfare State in the Age of Contracting, an important 1993 scholarly study, political scientists Stephen Rathgeb Smith and Michael Lipsky validated these concerns. They also documented how the hybrid system had led nonprofits to become less voluntary and responsive and more professionalized and bureaucratized. Under its auspices, more and more nonprofits functioned as agents of state authority with the people and communities they served, an ambiguous role that risked muddling the legitimacy of government and nonprofits alike.

Meanwhile, many of the same conservatives who back in the mid-1970s had welcomed the public-private hybrid as a way of empowering people realized two decades later that they had underestimated the threat of government co-option. Under the hybrid system, Peter L. Berger and Richard John Neuhaus observed, “the very vitality that originally distinguished the [nonprofit] institutions from government agencies is destroyed. Indeed they become government agencies under another name. This is not just an eventuality. It has already happened, across the board.”

Many of the same conservatives who back in the mid-1970s had welcomed the public-private hybrid as a way of empowering people realized two decades later that they had underestimated the threat of government co-option.

Reform-minded leaders and civil servants in the Clinton, George W. Bush, and Obama administrations sought in different ways to fix the hybrid system by reining in bureaucracy and using data and evidence to fund policies, programs, and nonprofits that delivered better results. However, these efforts did little to stem the massive flow of federal funds to and through federal agencies, programs, and nonprofit service providers that formed what I called in 2012 “the social services industrial complex.”

Collectively, participants in this complex managed to resist efforts to recast the system by presidents and reformers who saw the pressing need for improvements. Ultimately, however, the complex resisted change at its own peril. Its self-defense mechanisms have shown themselves to be brittle indeed in the face of political leaders and appointees determined to “deconstruct the administrative state” and the hybrid system of social service provision that has, over six decades, emerged as an integral part of it.

Where Do We Go from Here?

Transforming the hybrid system would have taken a sustained bipartisan commitment over multiple administrations, with each building on earlier reform efforts. In a parallel universe, where Jeb Bush won the 2016 election, spent two terms implementing a blend of compassionate conservatism coupled with social innovation, and handed over the keys of the federal government to a newly elected President Josh Shapiro, this transformation may yet take root. But here in reality, where Donald Trump won the 2016 election, and then in 2024 was reelected to a second term by Americans who had witnessed his first, the prospect for an inside-the-system transformation has been obliterated.

So long as the MAGA faction remains dominant in the GOP, the consensus needed at the federal level to reconstruct the hybrid system is a nonstarter. Moreover, with the fiscal imbalances facing the federal government—mounting interest payments on huge deficits as far as we can see, and looming shortfalls in funding for Social Security and Medicare—the resources for any such renewal would be increasingly scarce. And given all problems with the hybrid system, we should not attempt one.

Accepting the demise of the hybrid system does not mean we should sit on our hands. The individuals, families, and communities the system was meant to help are no less in need, and many face ever more troubled circumstances. Those of us who seek more effective, sustainable, and legitimate ways of helping them have a lot of work to do. We can begin by anticipating the elements that could comprise a better alternative.

A new framework will not come to life overnight, but we can anticipate some tangible changes and normative shifts that could begin to form a new, more resilient system.

First, nonprofits should shift away from dependence on the now unreliable federal government and work more with state and local governments when it comes to public funding of social services. This will entail widespread experimentation and variation across the many diverse laboratories of democracy in America. Some efforts will fall short. Others will succeed. We can learn from both outcomes.

Along these lines, nonprofits should pursue more holistic and neighborhood-based solutions. Federal programs tend to target individuals or families in need, zeroing in on one problem at a time. But individuals and families often have many needs at once, and many of them are best met through flourishing communities. While the current upheaval in our nonprofit system creates tension points, it also frees up nonprofits and state and local governments to adopt sensible new approaches.

Individual and foundation funders can also reallocate support away from advocacy for federal policies and funding that is not likely to bear fruit. Instead, they can prioritize grants to underwrite effective direct services on problems where the federal government is retrenching. Over the life of the hybrid system, old-fashioned charity became increasingly passé, and “systems change” strategies en vogue among philanthropists. The pendulum is now swinging back.

Instead, they can prioritize grants to underwrite effective direct services on problems where the federal government is retrenching.

The hybrid system has long masked what services our government is committed to providing to people in need, and why, and who is responsible for delivering them. This has limited support for these government programs and their nonprofit providers alike. We will need more clarity and less opacity on both of these fronts in the years ahead.

To clarify different organizations’ roles, we may also need new legal entity formats that better reflect how nonprofits primarily funded by the government operate. Such entities are not government agencies, for-profit contractors, or privately funded nonprofits. This leaves room to grant them status and affordances similar to other special entities, like charter schools, so they can flourish in their roles.

Social service nonprofits serve as a critical support for tens of millions of Americans in need. These organizations’ role in our society should not be exploited as a political cudgel. Setting our system on the correct course will require changes both creative and varied enough to confront the litany of shortcomings that weighed down America’s hybrid setup. The goal should be to build a new, better system—not to patch together the vestiges of our old one. We should avoid the trap of thinking we simply need to rewind and repair the disruptions of the past six months. The problems we ultimately need to solve have been accumulating for six decades.

Daniel Stid is a nonresident senior fellow at the American Enterprise Institute (AEI), where his work focuses on civil society, philanthropy, and democratic governance.