Have we stopped to think about what it actually means to be a “Four Star Charity?” Or whether the criteria by which these charities are judged are actually . . . good?
Many donors love to see a “Four Star Charity” rating from places like Charity Navigator when deciding which organizations to give to. And nonprofits, understandably, are quick to boast when they’ve received a good rating.
But have we stopped to think about what it actually means to be a “Four Star Charity?” Or whether the criteria by which these charities are judged are actually . . . good?
Ratings systems can be deceptive things, so it’s important to understand them. Let’s take a look at a few of these criteria and the flawed logic behind them.
UNDERSTANDING CHARITY NAVIGATOR
Charity Navigator claims that it can “guide your intelligent giving.” It does this by rating nonprofit organizations on a scale from 0 stars to 4 stars. These ratings are based on an organization’s IRS tax status, revenue, length of operations, location, public support, fundraising expenses, and administrative expenses.
Taking into account these seven criteria, the ratings are arrived at by analyzing “Financial Health” and “Accountability & Transparency.” Financial health is determined based on the financial information that each charity provides in its tax return—the infamous IRS Form 990. There are seven metrics that “financial health” is based on: Program Expense Percentage, Administrative Expense Percentage, Fundraising Expense Percentage, Fundraising Efficiency, Program Expense Growth, Working Capital Ratio, and Liabilities to Assets Ratio.
At first blush, this may be compelling: this is showing us that organizations spend their money well . . . right? It may not be so simple.
BEAN COUNTING FUNCTIONAL EXPENSES
Let’s take fundraising expenses for example. According to Charity Navigator, you get a 0 out of 10 if you spend more than 25% of your overall budget on fundraising, if you fall into the category of “General” or “Grantmaking.” To receive a 10 out of 10 in this category requires that you spend only 0-10% of your revenue on fundraising.
Where are the exceptions? Well, “Public Broadcasting and Media” organizations get to spend up to 35% of their revenue on fundraising before they get a 0. Why? Because they “use expensive air time to raise money.”
What about organizations identified as “Food Banks, Food Pantries & Food Distribution” or “Humanitarian Relief Supplies”? Incredibly, they score a 0 if they spend more than 20% of their revenue on fundraising. The explanation here “these charities demonstrate very little need for spending on overhead.” Why? Where is that demonstrated. The Navigator goes on: “Their median fundraising expenses fall below the median for all of the charities we rate.”
Interesting. So, because food banks do spend less on fundraising, Charity Navigator determines that they ought to spend less on fundraising. (If you’ve read David Hume, you might recognize this as the “is-ought fallacy.”)
MAKING FUNDRAISING BAD
Here’s the main problem with these formulae: they assume that money spent on fundraising is money not well spent. There’s no explanation why that would be the case, though.
Of course, money spent on fundraising is not spent on programs—feeding the hungry at food banks or promulgating your messaging in broadcasting. That’s true. But money spent on fundraising is money spent to bring in more money.
And more money means more mission.
Increase fundraising expenses are not necessarily wasteful; they are wise expenditures precisely in order to more successfully advance your mission. If you want to save more babies, feed more people, educate more children—whatever your mission may be—you need money to do it! And that growth, that “more money,” means more fundraising and more fundraising expenses.
To be clear, the problem is not the various ranges that Charity Navigator uses for its rating (or the strange distribution of those ranges across types of organization). The problem is the question itself. An organization is not effective because it spends little on fundraising. It is not effective because it spends a lot on fundraising. An organization is effective if it sets a goal and achieves that goal, year after year.
Counting percentages across the budget won’t tell you that. Knowing the leaders, reading their messaging, watching their growth, asking them questions—that is how you determine if they are effective.
PROGRAM GROWTH AND PROGRAM MISSION
Charity Navigator also states that “organizations that demonstrate consistent annual growth in program expenses are able to outpace inflation and thus sustain their programs year to year. These organizations also supply givers with greater confidence by maintaining broad public support for their programs.” In a certain sense, this seems intuitive. Organizations should grow continuously to fulfill their mission . . . right?
Consider an organization that runs a yearlong residential fellowship program for 5-7 recent college graduates. This program is one of intense study and emphasizes the importance of the community of fellows. Does consistent growth make sense for this organization? Not necessarily. If the program emphasizes the community of the fellows, they may not want to limitlessly add more students. Once capped on students, there is a point of diminishing returns in terms of the value of additional dollars. They can only use so much money each year. Sure, they could store it away, but do “effective” charities hoard money away, or do they spend it on programs?
So, in this case, there is a point at which it is good for them not to grow. Sure, they need to keep up with inflation, but they don’t need to grow. Growth for growth’s sake is not the sign of a good nonprofit. Growth for the sake of mission, is.
Once again, my quarrel is not with their metrics, but with the criterion itself. Charity Navigator rewards organizations that grow and grow and punishes organizations with humble and local goals with a strategic vision to stay a certain size.
WHY DO WE GIVE?
Giving is not about statistics, impact, and expense percentages. Giving is about advancing a mission you care about, and the rubber—or gold—stamp of approval from a group like Charity Navigator cannot tell you if that organization successfully advances the things you care about—and it may well punish organizations best aligned with your interests.
So, until such a bright day when Charity Navigator collapses and we are all saved from its obtuse and absurd ratings system, give to the organizations you know, trust, and love.
The other reason to avoid Charity Navigator is they appear to operate under their own guise, NOT at the request of a given non profit. That is, we set up a 501c3 in the local community. Some months later we became aware of Charity Navigator. They had a page for us, which they created because they scrape the IRS filings. It was accepting donations. We have no account with them in any way, never requested this, did not authorize it. That sure seems like fraud if they are just collecting donations in our name without our knowledge or consent. Contacting them about this, they didn’t seem to think it was a big deal because “they would have sent us any funds”. Kinda not the point, and the trust is pretty much already shot.
Charity navigator and other nonprofit rating organizations merely serve as a starting point if you feel a need to get deep in the weeds. Many people do not have the time to sift through IRS 990 forms and other detailed data. I have a select group of charities that were culled from CN and then further considered for donations. One metric I filter out is charities that obtain funding from federal, state or local sources as some of that revenue is being provided by my income tax $$ and the idea of double donating does not make sense when there are thousands of worthwhile nonprofits to choose from.
What is really needed is “How impactful to its stated goals is this organization? ” I find all the current ratings websites to be woefully short on this most important issue. Completely nonexistent yard mark for goals is actually more accurate. How do the nonprofits rate their impact? How do they know how much good they are doing? — other than by how did we do in fundraising? That, as is presented in the opinion piece above, is not a good measure of success. It is the easiest measure of success. But, it may not be a valid measure of success. Yearly (or lifetime) success evaluation is what is needed. That will require a whole separate independent rating model. The nonprofits, in addition, would have to provide information about specific goals, and how close they came to achieving those goals. Difficult, yes.
I will not give to American Red Cross look what the CEO makes a year.
I disagree. It is quite easy to donate to charities that support causes you have a passion for which also have high ratings. This is because non-profit raters like Charity Navigator rates so many organizations in each category that invariably several will have 3-4 stars. I don’t have the time, tools, money, or skills to do my own research. Until a better method comes along this seems the best way to avoid throwing money away. That said, you raise great questions. Rather than advocating for donating to organizations regardless of their quality, how about making suggestions to the rating non-profits on how they might improve their methodology? Or make suggestions to the public / your readers on how we can realistically supplement the ratings, especially when making a larger donation, to avoid the worst pitfalls you raise?
Totally agree with advice to ignore Charity Navigator. Their rating of Wreaths Across America has caused confusion and misunderstanding with the Pastor who controls two local cemeteries. He uses Charity Navigator to justify keeping our local group from placing wreaths on over 600 veterans graves. Very sad.
I enjoy the input of statistics. Without being able to scour 990 forms, you wouldn’t be able to spot conflicts of interest (like the ones at a certain unnamed nonprofit where the president raises donor funds to purchase books from a publishing company he owns that publishes books that he has written). However, automated metrics usually just don’t cut it. Conflicts of interest, ethical investment portfolios, the off-duty reputation of the nonprofit CEO and other such valuable data are simply not conveyed by metrics on program growth and fundraising dollars.
A couple of examples serve to illustrate the valid examples in this article. One donor called me a few years ago, asking why we spent a whopping 18% on overhead, when such-and-such Abbey spent less than 5% on overhead. This other Abbey, she said, had explained that its monks earned no salaries – they had taken a vow of poverty and dedicated their lives to the mission. I tried to explain to her that those other monks still need to eat and sleep in a house; our “overhead” reflected the fact that we do not lump monastic living expenses under “program expenses”. This same example can be played out in volunteer programs as well, if a nonprofit includes volunteer luncheons and training under “event expenses” rather than their fundraising budget. In other words, a clever organization can manipulate the metrics to look better on a charity rating.
Another illustration of this article is a religious nonprofit I know well in Wisconsin. This nonprofit lacks the dedicated alumni or major donor base that our nonprofit enjoys. Instead, they rely almost solely on a direct mail solicitation program to meet their program expenses. They also employ “freemiums” in their direct mail acquisition. As most fundraisers know, direct mail with freemiums nets a much lower return on investment than alumni major donor work. This nonprofit actually raises more overall revenue than we do each year due to their huge direct mail base, but they get to keep less of it. This is not the nonprofit’s fault — they still are able to channel a large budget toward their program ministries — but they are limited to the donor base available to them.
So, I agree with this article that you should support the nonprofits that you know, trust, and love. Part of earning that trust is being able to prove your efficiency and effectiveness, and being transparent with your financial numbers. But, automated across-the-board metric scoring simply doesn’t show the pieces of the puzzle that a donor really needs to see. Only deep questions, individual research, and personal relationship-building will show that.
No no no. Donors need data inputs to help guide decisions. Of course asking tough questions is smart and beneficial. But the unquantified, unproven reliance simply on “organizations you know, trust and love” is rudderless. Society benefits when people use their reasonable faculties. Perhaps more, rather than fewer factors, will expand donation frequency and average donation. Without those inputs organizations and supporters cannot even approach evaluating program outcomes.