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Donors still demand the impossible: do more with less. But as costs climb and funding tightens, nonprofits are being pushed to the breaking point.
In Managing Your Nonprofit for Resilience (2022), I listed the “nonprofit starvation cycle” as one of 50 reasons why it is so hard to run a nonprofit. This post, third topic in a series (which starts here), explains why the starvation cycle is so pernicious, examines what’s changed since the book’s release, and evaluates whether the problem is better or worse in mid-2025.
Donors and grant makers often (wrongly) equate low overhead with efficiency, expecting charities to direct nearly every dollar to programs. In response, nonprofit leaders skimp on so-called “indirect” costs – things like technology, financial systems, staff training, and fundraising capacity – or even fudge their financial reporting to meet those strict expectations. This satisfies funders temporarily but leads to a downward spiral: critical infrastructure deteriorates, staff experiences burnout, organizations can’t invest in the necessary tools or personnel for success, and funders use the underfunding as the new baseline. In other words, constantly starving “back-office” functions jeopardizes an organization’s very existence and its ability to fulfill its mission. At its core, this starvation cycle means nonprofits are left “so hungry for decent infrastructure that they can barely function as organizations—let alone serve their beneficiaries.”
The spot of good news is that in the past few years, the nonprofit sector has been talking more openly about the overhead myth and the starvation cycle. A documentary film, Uncharitable (2023), and mainstream media coverage put this long-running debate back in the spotlight. Major charity evaluators have also continued shifting their stance. In late 2023, Charity Navigator – known for rating nonprofits – overhauled its rating methodology to downplay the overhead ratio and focus more on impact, explicitly encouraging donors to ask “What does the money do?” rather than fixating on expense percentages.
Many nonprofits and funders learned hard lessons during the COVID-19 pandemic. The crises of 2020–2021 demonstrated that organizations with some financial cushion and robust operations were far more agile in responding to community needs. Donors and boards have begun to accept the importance of reserves and unrestricted support. Carrying funds forward from year to year and investing in staff and systems enable nonprofits to weather the unexpected. There’s a growing recognition that while nobody wants waste, adequate overhead is essential for effectiveness.
Still, most trends are exacerbating the cycle, starting with the federal government. While the Office of Management and Budget (OMB) updated its Uniform Guidance in 2024 to reimbursement for nonprofit indirect costs, most recent federal policy moves have been profoundly damaging to nonprofit interests. Furthermore, specifically as to overhead, the nonprofit world was stunned when the National Institutes of Health (NIH) announced a new policy capping indirect cost reimbursements at 15% for all new and existing research grants, representing a drastic cut for nonprofits and universities that had negotiated higher overhead rates (often 50% or more). While this NIH cap is a very specific case and may yet be reversed or modified, it highlights a broader point: overhead remains in the crosshairs.
New research continues to underscore the persistence of the starvation cycle. A recent academic study (Hung, Hager & Tian, 2024) revealed widespread distrust and manipulation related to overhead reporting. An estimated 20% of nonprofits were found to be out of compliance with IRS requirements for reporting true fundraising and admin costs. In other words, a sizable number of organizations likely under-reported overhead on their Form 990s, no doubt because the pressure to look “efficient” on paper remains intense.
Inflation over the period between 2021 and 2025 increased costs across the board, including salaries, rent, and supplies by almost 20%. As a result, nonprofits need to spend more on their overhead just to maintain the same level of service. Yet many revenue streams didn’t keep pace with inflation. By early 2025, as pandemic-era relief funds dried up and donations softened, a “great nonprofit downsizing” began. Organizations face tough choices to cut staff or programs because they cannot cover rising operating costs.
The starvation cycle remains pernicious. While more stakeholders may acknowledge the problem, by most measures the starvation cycle has not fundamentally abated. If anything, the financial pressures of the past two years have exposed how many organizations are about one shock away from crisis due to chronic underfunding of nonprofit infrastructure.