It's mostly navy run right now is my understanding, and used by journalists, so I don't see how it's that much of a downgrade.

It was started by the Navy way back in the '90s for secure communication online. Then the source was released like a year after being made public and development was funded by the EFF until the Tor Project itself was officially founded.

They still do (or did?) get grants from a few federal agencies though. But they had no strings attached. This is probably what you're thinking of.

Source: Hung out with a few Tor devs in Berlin a few years back. Including He Who Shall Not Be Named.

I think they meant it's believed that most/some exit nodes are run by US intelligence to spy on people. Not that development has anything to do with them now.