Editors' Note: Nonprofits and the City
A halo effect has long surrounded American charities and the people who work for them. Individual nonprofits might be accused of being misguided, corrupt or ineffectual, but generally, people assumed that nonprofits had good intentions and were trying to make the world a better place.
No longer.
In recent years, nonprofits have been accused of all manner of offenses, including being more interested in self-perpetuation than solving social problems. Exorbitant nonprofit CEO salaries and high-profile cases of fraud routinely generate outrage on social media. The New York Times has even hired a reporter specifically to investigate nonprofit abuse.
All of this is crucial context for the claim, recently articulated by Crain’s New York Business, among others, that nonprofits in New York City amount to a “shadow government” operating with little public scrutiny or accountability.
This argument is based on the fact that, while mayors come and go every few years, there is a core group of large nonprofit social service providers that remains the same no matter who runs the city. You can find their executive directors serving on the transition committees for mayor and other important elected offices. You can also find their executive directors going back and forth between government and the nonprofit sector, often taking leadership positions (prominent examples from Mayor Eric Adams’ administration include Ashwin Vasan, Sheena Wright, Jess Dannhauser, Anne Williams-Isom and Sue Donoghue, among others).
The intimate relationship between government and nonprofit service providers is both personal and financial. The City of New York spends billions paying nonprofits to provide childcare, housing, drug treatment and other human services. Many of these grants and contracts go to the same organizations year after year. To many observers, it all looks rather cozy. (You can add the City of New York to the list of those concerned with the arrangement: At the end of 2024, the Department of Investigation announced findings from an investigation into dozens of City-funded nonprofits that found, among other things, conflicts of interest, nepotism and concerns about excessive pay for CEOs.)
While mayors come and go every few years, there is a core group of large nonprofit social service providers that remains the same no matter who runs the city.
There are numerous reasons why cities turn to nonprofits. But high on the list is the fact that nonprofits are free of a number of constraints that encumber government.
Over the generations, government agencies have become barnacled with thousands of restrictions — civil service rules, legislative mandates, collective bargaining agreements and more. As Matt Yglesias argues, the outsourcing of core government functions to nonprofits is “downstream of public sector labor issues. Policymakers place a large premium on finding ways to do things outside of civil service and collective bargaining rules, which means they should maybe be looking at changing those rules rather than contracting out everything.” Picking up on this theme, blogger Noah Smith suggests that government outsourcing amounts to the privatization of City services and the undermining of state capacity. He also believes that outsourcing invites corruption and patronage from unscrupulous politicians.
Yglesias and Smith are far from the only critics who have been asking tough questions about American nonprofits of late. A prominent example of a right-wing critique of the nonprofit sector is Jonathan Ireland’s “The Nonprofit Industrial Complex and the Corruption of the American City” in American Affairs. Ireland bemoans the billions of dollars of public funds that are “effectively stolen” from taxpayers and given to nonprofits with “glaringly insufficient safeguards to ensure that the money is used in a manner likely to serve the public interest.” According to Ireland, it all amounts to “money for nothing.”
On the left, critics argue that the notion that nonprofits comprise an "independent sector" is a misnomer — they are essentially in the pocket of the state. For these detractors, nonprofits siphon money and energy away from the kinds of radical organizing that might upend existing power dynamics.
In response, proponents of the nonprofit sector argue that, far from “money for nothing,” nonprofit service providers give City government enormous bang for their buck. Indeed, because nonprofit workers often make less than their peers in government — and because nonprofits are not subject to the same burdensome regulations or collective bargaining agreements that constrain City agencies — they can often offer higher levels of service delivery for less money. One nonprofit leader told City & State that critics of the nonprofit sector should “be careful what they wish for — if we were to eliminate all of New York’s nonprofit service providers and replace them with government workers tomorrow, the quality of life in New York would go down, not up.”
Since Alexis de Tocqueville first identified civic associations as one of the distinguishing features of American democracy, nonprofit groups have served as part of the backbone of civil society in the United States. Viewed from this perspective, the fact that New York City has a particularly vibrant nonprofit sector is one of the city’s core strengths — and an important bulwark against calamity. In good times and bad, nonprofits help knit the city together, operating as an important bridge between the state and individual citizens.
Since Alexis de Tocqueville first identified civic associations as one of the distinguishing features of American democracy, nonprofit groups have served as part of the backbone of civil society in the United States.
In recent years, nonprofit advocates have come to feel that the relationship between the nonprofit sector and local government is broken — but not for the reasons that critics outline. For example, a coalition of New York nonprofits has argued that both the city and the state have systematically held down wages at the organizations they contract with. They claim that workers at nonprofit service providers “generally make about 71% of what government employees make, and 82% of what private sector workers receive for the same role.”
Fair pay is one problem. Timely pay is another.
According to John MacIntosh of SeaChange Capital Partners, about 35% of the City of New York’s total budget is spent on goods and services from third parties. The largest share of this is spent on human services from nonprofit organizations — about $9.9 billion in fiscal year 2023. Unfortunately, the City has a very hard time executing contracts and paying its bills in a timely fashion. As a result, many nonprofits must essentially perform the work first, then wait for months to get paid. This places enormous stress on organizations, forcing them to take out cash flow loans just to make payroll.
Episodic efforts are made by the City to reform its procurement process — the Adams administration has created a special Office for Nonprofit Services to help ensure timely payments, for example — but these issues remain a regular source of exasperation for all too many New York City nonprofits. Indeed, according to the City Comptroller’s Office, things have actually gotten worse of late.
What should the relationship between government and the nonprofit sector look like? Are there things that nonprofits do better than government? Do nonprofits have too much power in New York City — or not enough? In this issue of Vital City, we take a closer look at the “nonprofit industrial complex,” asking what role nonprofits should play in urban governance and New York City in particular.
In our first section, “Historical Lessons,” we explore the intersection of the public and independent sectors over time with the help of Leslie Lenkowsky, Daniel Stid, Michael Woodsworth and Benjamin Soskis. As these authors make clear, for good and for ill, American nonprofits have been inextricably connected to the state for quite some time.
Next, we turn to “The Great Debate,” asking several experts from government, academia and the nonprofit sector to wrestle with the pluses and minuses of government reliance on nonprofit service delivery. These authors lay out the negatives, including, as Majora Carter points out, a long tradition of nonprofits that seem to profit from public and private grants without meaningfully improving the conditions of life in low-income neighborhoods. But the positives of the current model also come into sharp focus as well, with several contributors, including Mindy Tarlow and Jessica Katz, pointing to the advantages that nonprofits have over government when it comes to being responsive to the idiosyncratic needs of discrete populations.
Finally, we turn to “Currents,” where we look at recent developments and emerging trends in the nonprofit sector. Among other things, Justine Olderman details the lessons she learned from managing young staffers intensely focused on issues of social justice. Robert Pondiscio describes how charter schools have reached an inflection point. And Rich Leimsider reveals the perils and potential of artificial intelligence.
What should the relationship between government and the nonprofit sector look like? Are there things that nonprofits do better than government? Do nonprofits have too much power in New York City — or not enough?
The tensions between government and the nonprofit sector have been with us for a long time. But change may be in the air. Nonprofit advocates like John MacIntosh and Doug Bauer believe that the Trump administration poses a number of threats to the sector, including potential cuts in funding and politicized reviews of organizations’ tax-exempt status.
How many of these threats will come to fruition is anyone’s guess, but the first few weeks of the new administration have been ominous. In particular, Trump’s orders to review all grants to nonprofits, to temporarily freeze federal funding and to target diversity, equity and inclusion programs are real and credible dangers to many American nonprofits.
While battles to defeat all of these initiatives will be waged in the courts and on Capitol Hill, Trump has already succeeded in disrupting the nonprofit sector, sowing chaos and stifling the public discourse. We had commissioned an essay on DEI for this issue but it wound up being pulled by its author because they were concerned about potential blowback for their organization. That’s not a sign of a healthy public square.
But even as nonprofits figure out how and when to fight the Trump administration, they would be wise to keep one eye on the issue of public accountability, which is where right-wing and left-wing critiques of the sector converge. In an era of declining confidence in all manner of institutions, nonprofits can no longer take public trust for granted.