Stefanie Stark Asks, “Is Your Nonprofit Prepared for Cuts in Federal Funding?”

Stefanie Stark Asks, “Is Your Nonprofit Prepared for Cuts in Federal Funding?” has been shared by a veteran nonprofit CEO who has worked for current White House cabinet officials. Here’s Stefanie Stark’s take on how organizations will be affected by the current administration.

Over the past two weeks, I’ve received many frantic calls from nonprofit executives who are experiencing the uncertainty of a sea change in the face of the federal grant funding freeze. A sea change is a profound transformation, a shift so deep it feels like the ground beneath you has moved. A sea change is not an incremental change. It’s sudden, and it’s a fundamental reordering of the landscape of the world in which we live. That sea change brings a certain shock and awe to those experiencing the sudden changes. But after the shock, adaptation, balance, and transformation of the nonprofit is possible once you get your sea legs.

The federal grant funding freeze has unfolded over a short but chaotic period from late January into mid February 2025. On January 20, President Trump signed executive orders pausing federal funding streams to review alignment with his administration’s priorities. Most of the EO’s and federal guidance announced significant policy shifts in diversity, equity, and inclusion (DEI) programs, energy, trade, foreign development, immigration, and a host of other areas. The freeze was aimed at all federal assistance, including grants to nonprofits and NGOs, with a particular focus on those involved with supporting “Marxist equity, transgenderism, and Green New Deal social engineering policies.”

MEET STEFANIE STARK AT NANOE’S FEBRUARY 26, 2025 WEBINAR – BE AWARE, YOUR NONPROFIT FEDERAL GRANT AUDIT IS COMING

In response to the EOs, some federal government agencies have already given “stop work” orders to recipients of federal grants to stop work and cease spending allocated federal funds. In a memorandum issued on January 27, 2025, the acting director of the White House Office of Management and Budget (OMB), Matthew Vaeth, instructed all federal agencies to “temporarily pause all activities related to obligations or disbursement of all Federal financial assistance,” pending a government-wide review. The memo sparked immediate legal and political challenges. While a court has temporarily enjoined the January 27 memo, and the White House has walked back some of its scale, there is much confusion in the nonprofit sector about how the Executive Orders and the OMB pause of federal financial assistance will be implemented.

Legal Challenges:

As of February 13, 2025, the federal grant funding freeze has been significantly impacted by various legal challenges and administrative responses.

1. Legal Challenges & Court Order: A federal judge in Washington, D.C. first issued a temporary restraining order (TRO) on January 28, 2025, against the funding freeze, effectively pausing the implementation of the federal grant and loan disbursement halt. The court ruled that existing grants and agreements must continue until at least Feb. 3, citing the need to prevent immediate harm and confusion caused by the freeze.
2. On January 29, 2025, The Office of Management and Budget (OMB) rescinded the original memo (M-25-13) that directed the freeze, following legal challenges and public outcry. However, this did not entirely resolve the issue as there was confusion regarding whether the freeze itself or just the memo was rescinded. The Trump administration clarified that while the memo was rescinded, the executive orders prompting the review of federal spending remained in effect. This indicated that the administration was still moving forward with evaluating and potentially realigning federal financial assistance with its policy priorities.
3. On February 10, A federal judge in Rhode Island ordered the Trump administration to comply with his order to unfreeze federal grants, after attorneys general in 22 Democratic states claimed the directive was not being fulfilled. U.S. District Judge John McConnell directed the Trump administration to immediately end any federal funding pause until he decides whether to indefinitely block the freeze while litigation is ongoing.
4. As of February 13, 2025, the temporary restraining orders (TROs) against the Trump administration’s efforts to impose a federal grant funding freeze are actively in place. While the temporary restraining orders are currently preventing the implementation of the federal funding freeze, legal proceedings are continuing, and the outcomes are uncertain.

MEET STEFANIE STARK AT NANOE’S FEBRUARY 26, 2025 WEBINAR – BE AWARE, A NONPROFIT FEDERAL GRANT AUDIT IS COMING

Which Nonprofits Are at Risk?

There are over 1.5 million nonprofits in the U.S. Approximately 30% of all U.S. nonprofit 501(c)3 organizations receive federal grant funding annually. In 2023, federal grant funding specifically allocated to 501(c)3 nonprofits in the U.S. totaled $318.56 billion. The U.S. government offers over 900 grant programs through 26 federal grant-making agencies, covering categories like education, health, public safety, and more. Potentially tens of thousands of charities receiving federal grant funding will be impacted by the federal grant funding freeze.

The executive orders propose pausing funding streams to allow the Trump Administration to identify programs that are inconsistent with its policy goals. Specific funding streams mentioned in the Seven Referenced Orders include:

• New obligations and disbursements of development assistance funds to foreign countries and implementing NGOs, international organizations, and contractors (pursuant to EO 14169);
• Federal funding to non-governmental organizations supporting or providing services, either directly or indirectly, to “removable or illegal aliens” (pursuant to EO 14159);
• Financial commitments made under the United Nations Framework Convention on Climate Change and the U.S. International Climate Finance Plan (pursuant to EO 14162);
• Funds appropriated through the Inflation Reduction Act of 2022 and the Infrastructure Investment and Jobs Act;
• Funding for “diversity, equity, inclusion, and accessibility mandates, policies, programs, preferences, and activities in the federal government” (pursuant to EO 14151);
• Funding used to “promote gender ideology” (pursuant to EO 14168); and
• Funding for “elective abortion” and promotion thereof (pursuant to EO 14182).

On January 21, OMB issued Memo M-25-11 providing guidance regarding Section 7 of EO 14154, which requires agencies to immediately pause disbursement of funds appropriated under the Inflation Reduction Act of 2022 and the Infrastructure Investment and Jobs Act. The memo clarifies that the freeze only applies to funds supporting programs, projects, or activities that may be implicated by the policy established in the executive orders.

MEET STEFANIE STARK AT NANOE’S FEBRUARY 26, 2025 WEBINAR – BE AWARE, A NONPROFIT FEDERAL GRANT AUDIT IS COMING

Based on the information available from various news sources, here is an overview of some of the charities and types of organizations that were potentially affected by the federal funding freeze announced in January 2025:

• Catholic Charities USA: There were specific mentions of President Trump’s orders targeting funding for Catholic Charities, suggesting a significant impact on their operations, particularly in relation to immigration services.
• United Way Worldwide: Articles indicate that this organization was among those potentially facing funding cuts, although the exact nature of their involvement with federal grants wasn’t detailed.
• American Red Cross: Similarly, the Red Cross was listed in news articles as one of the organizations whose funding might be at risk, especially concerning services related to immigration.
• Lutheran Immigration and Refugee Service: This organization was named as facing potential bankruptcy due to the cessation of federal funding for NGOs involved with immigration.
• HIAS (Hebrew Immigrant Aid Society): Also listed as an organization potentially affected by the freeze, given its focus on refugee and immigration aid.
• Global Refuge: Mentioned as having potential funding issues due to its work with refugees and immigrants.
• Jewish Family Services: Highlighted in news articles as possibly losing federal support, affecting its community services.

Broader Categories of Affected Charities:

• Nonprofits and NGOs: The freeze was aimed at all federal financial assistance, including grants to nonprofits and NGOs, with a particular focus on those involved in what the administration described as supporting “Marxist equity, transgenderism, and Green New Deal social engineering policies.”
• Health Care, Education, and Social Service Programs: Organizations providing these services, like Head Start, were initially unable to access funds, leading to concerns about scaling back operations.
• Programs for People with Disabilities: Organizations that receive federal funding to support programs for people with disabilities could be impacted, with specific mention of services like Meals on Wheels potentially at risk.
• Research and Educational Institutions: Universities and research institutions with federal grants were also mentioned as potentially affected, with research projects possibly facing disruptions.
• Community Services: Any charity or service provider relying on federal grants for operations, from food pantries to senior centers, were initially in a state of panic regarding their ability to continue services.

Important Notes:

• The freeze was temporary and faced legal challenges, with a judge blocking parts of it, thus some funding resumed or was never fully stopped.
• The administration clarified that direct benefits programs like Social Security, Medicare, and SNAP were explicitly excluded from the freeze.
• The situation is fluid, with the memo causing widespread confusion, which to its eventual rescinding after significant backlash.

This above list reflects the fluid situation based on the available information up to mid-February 2025. Charities might experience varied impacts depending on the specifics of their funding arrangements and the eventual legal outcomes of the challenges to the freeze.

Be Aware, A Federal Grant Audit is Coming:

The Trump administration has ordered a federal grant audit for nonprofit charities and NGOs receiving federal funding over $750,000. Here are some key points related to the audit based on the current information available:

Executive Order: On February 6, 2025, President Trump signed an executive memo ordering a review of funding to all non-government organizations (NGOs) that rely on federal dollars. This was reported by Reuters.

Scope and Purpose: The audit aims to review how these funds are being used, particularly in light of President Trump’s policy priorities. This includes ensuring that funding aligns with his executive orders, which target programs related to diversity, equity, inclusion (DEI), gender equity, and environmental initiatives often labeled as “woke” or part of the “Green New Deal.”

MEET STEFANIE STARK AT NANOE’S FEBRUARY 26, 2025 WEBINAR – BE AWARE, A NONPROFIT FEDERAL GRANT AUDIT IS COMING

Reaction: Nonprofits, charities, and NGOs have expressed concern over the potential disruption of their services due to the audit and the temporary funding freezes. Catholic Charities USA, among others, has urged the administration to reconsider these actions, highlighting the impact on the millions who depend on their services.

Current Status: Despite the rescission of the initial broad freeze memo by the Office of Management and Budget (OMB) due to legal challenges, the audit order remains in effect, indicating a continued scrutiny of federal grants. However, the exact implementation and outcomes of this audit are still unfolding.

Preparing for the Audit: Nonprofit organizations that rely on federal funding would be wise to take proactive steps now to assess and mitigate potential risks that these kinds of policies could create in the coming weeks and months. To safeguard operations, nonprofits receiving over $750,000 in federal funding should follow these key steps as soon as possible:

1. Conduct an Internal Audit
   Federal funding uncertainty poses significant risks for nonprofit organizations. Now is the time to conduct an internal audit in order to prepare for a federal audit.
2. Identify At-Risk Federal Funding
   Review all federal funding streams, including both direct grants and pass-through funding from state or local agencies. Start with identifying any grants that may be considered at risk under the executive order’s criteria. Since pass-through funding originates from federal sources, even if your direct grantor is not a federal agency, the source of funding could still be impacted.
3. Evaluate Grant Termination Requirements
   Once you’ve identified at-risk funding sources, thoroughly examine the termination clauses in each grant agreement. If your organization receives pass-through funding, request a copy of the termination language from the direct federal award to understand the conditions under which funding may cease. This step is imperative for planning a response should funding be suspended or canceled. Seek legal counsel to assist in measuring your organization’s exposure.
4. Assess the Impact
   Understanding how a potential funding freeze affects your nonprofit is critical. Take inventory of the specific programs, employees, contractors, and other expenses supported by federal dollars. This evaluation will help you with contingency planning and assess the severity of potential disruptions.
5. Determine Cash Flow and Sustainability
   Evaluate your nonprofit’s financial sustainability by determining how long programs can continue operating without federal funding. Do you have sufficient cash reserves to cover short-term funding gaps? Can you reallocate unrestricted funds temporarily? Understanding your financial bandwidth is imperative for making informed decisions.
6. Develop Your Action Plan
   If a funding freeze occurs, a well-structured response plan will minimize disruption. Identify which services would need to be canceled or paused. Plan for workforce reductions if necessary. Work with HR, legal counsel, and financial advisors to ensure compliance with all laws. Designate the staff members responsible for executing various aspects of the plan and ensure that all necessary documentation is prepared.

Below are some initial steps federal grantees may consider taking now.

• While Memo M-25-13 may have been rescinded and the TRO under New York v. Trump prohibited the implementation of pauses in funding that are based on Memo M-25-13 and the executive orders (including the Seven Referenced Orders), the directives related to funding pauses remain the subject of continued legal challenges and additional guidance in the coming weeks and months.
• Regardless of whether pausing program funding is upheld as enforceable, the Trump Administration’s policy goals may lead to significant shifts in required contract and grant provisions and related program rules for federal financial assistance, which could affect both new awards as well as existing contracts.
• Nonprofits that receive funds directly or indirectly from the federal government (whether as contractors, grant or loan recipients, subrecipients, or otherwise) should identify federal funding streams and determine whether any such funding streams are affected by the executive orders, including the Seven Referenced Orders.
• Nonprofit recipients and subrecipients with awards covered by Executive Orders that pause funding should look closely at the terms and conditions of their award agreements, agency-specific implementations of the Uniform Guidance (including appeal procedures for grant disputes, to the extent the agency has them), and the authorizing statute and any implementing regulations for the programs they are working on to evaluate their options if the government suspends or terminates their awards. To the extent possible, recipients and subrecipients should also try to limit costs that were not foreseeable prior to the “pause,” as agencies may later assert these costs are unallowable.
• Nonprofits under contracts funded in whole or in part by federal grants and loans that are affected by the executive orders should review the terms of their contracts to determine whether the contract may be terminated. Seek legal counsel to advise and represent you.
• Nonprofits currently negotiating contracts to be funded in whole or in part by federal grants and loans that are affected by the executive orders should consider adding clauses addressing the unavailability of federal funds. Seek legal counsel to advise you.

Here’s the Good News:

While there are arguments on both sides, here are some important takeaways where it might be seen as beneficial for many charities in the U.S.:

1. Reevaluation of Funding Priorities:
   The funding freeze allows for a review of how federal funds are being used, potentially aligning them more closely with the missions of charities. Many nonprofits will benefit from a reallocation of funds that prioritizes their core activities.
2. Reduction in Bureaucracy:
   The pause could lead to a simplification of grant application and management processes. If the review results in less bureaucratic overhead, all nonprofits with few resources for navigating complex federal systems could benefit from streamlined procedures.
3. Focus on Local Needs:
   The freeze will likely push funding towards local, grassroots, community-focused initiatives rather than larger, more nationally and internationally-oriented programs. Smaller and mid-sized charities often work at the grassroots level, directly addressing local community needs, which will likely become more prioritized.
4. Encouragement of Private Funding:
   70% of all philanthropic dollars in the U.S. come from individual donors and private foundations. The uncertainty around federal funding will encourage all charities to diversify their funding sources. This will lead to stronger relationships with individual donors, businesses, and private foundations, creating more sustainable funding models in the long term.
5. Potential for New Opportunities:
   If the review leads to the cessation of funding for certain programs, there could be a reallocation of resources to other areas where smaller, local charities operate. This would mean new opportunities for funding in sectors not previously heavily supported.

Diversify, Diversify, Diversify!

All U.S. charities receiving federal grant funding will have to adapt to the sea change. In the ever shifting landscape of the nonprofit sector, the way to get your sea legs during any time of uncertainty is to diversify your revenue streams. Nonprofit organizations who rely heavily or solely on government grant funding will inevitably experience turmoil or, worse, potentially become insolvent. By focusing now, today, on cultivating major gift donor relationships, and establishing an endowment (your rainy day fund), charities can weather any sea change and ultimately scale their missions in ways they never have. The future does not depend solely on how policy evolves but how nonprofit organizations adapt to the new funding landscape. Don’t wait. Diversify your funding now.

MEET STEFANIE STARK AT NANOE’S FEBRUARY 26, 2025 WEBINAR – BE AWARE, A NONPROFIT FEDERAL GRANT AUDIT IS COMING

Stefanie Stark Asks, “Is Your Nonprofit Prepared for Cuts in Federal Funding?”  was first posted at INSIDE CHARITY

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