Unless otherwise noted, Charity Navigator’s responses come from written answers prepared by John (Pat) Dugan, board chairman, and Sandra Miniutti, vice president for marketing.
STOP EVALUATING CHARITIES BASED ON OVERHEAD EXPENSES — FOCUS ON IMPACT
Charity Navigator signed a letter with the BBB Wise Giving Alliance and GuideStar in 2013 urging donors to consider more than just overhead costs when deciding where to give. But nonprofit experts complain that the group still gives higher marks to organizations that keep fundraising and administrative costs low.
That reflects “the short-sighted, old way of thinking that less is more rather than the emerging philanthropic philosophy of investing in results,” writes Eric Walker, a senior adviser to InsideNGO, an association of global relief and development nonprofits, in a critique of the watchdog.
Charity Navigator’s Response
It has no plans to stop evaluating the “financial efficiency” of charities. But finances now account for just half of a charity’s rating; the rest is based on good-governance policies, and finances will have an even smaller role once the watchdog group begins rating how well charities report their results, planned for the end of 2016.
Ken Berger, Charity Navigator’s just-departed chief executive, says finances and governance are like the two small wheels of a tricycle, with the big wheel representing results: “If you don’t keep your eye on finance questions, today’s results can be tomorrow’s bankruptcy.”
REVERSE YOUR DECISION TO COUNT JOINT COSTS AS FUNDRAISING EXPENSES
Charity Navigator in 2012 changed the way it calculated fundraising and program costs, challenging a longstanding practice called “joint-cost allocation.” That allows nonprofits to count some expenses for activities connected to fundraising appeals — for example, educational messages — as program costs on their financial statements and tax filings.
Charity Navigator now generally categorizes joint costs as fundraising expenses, saying most donors are unaware of the accounting technique and would not bless it if they were. Critics say the group shouldn’t override independent financial auditors and that its stance has hurt charities like Special Olympics International, which relies heavily on postal appeals. The watchdog demoted that charity from three stars to two in 2013 as it calculated higher fundraising costs.
Shannon McCracken, a senior fundraiser, says Special Olympics follows standard protocol when applying joint costs — for example, when it includes schedules of events in fundraising appeals. The group needs people to cheer on the athletes, she says, but “can we afford to send millions of invitations without a fundraising ask? No.”
Charity Navigator’s Response
“We do not apply the joint-cost reversal to charities without significant review by our analysts.” If they determine that a charity’s programs are focused primarily on education or advocacy, “we accept that their mailings are mainly program related, even if a small ‘ask’ is included.” Only 5 percent of rated charities report joint costs, and the policy has affected the ratings of less than 1 percent.
STOP PENALIZING CHARITIES FOR NOT GROWING
Charity Navigator gives charities better scores if their primary revenues and program spending are growing. But critics say that unfairly hurts groups that are retrenching for good reason. An example is the American Humane Association, which has a two-star rating over all and just one star for financial health.
Robin Ganzert, its chief executive, says when she took over in 2010, she worked to reverse several years of deficit spending that occurred because the recession hurt the charity’s ability to support programs it started after receiving a big bequest.
“We had to make some hard decisions,” she says. That involved shedding some government contracts that did not cover all costs and consolidating more than 40 programs. Charity Navigator says the charity’s primary revenue in 2013 fell 2.8 percent from four years earlier and program expenses fell 16.6 percent. Ms. Ganzert faults “an algorithm that doesn’t give any credit for putting our house in order.”
Charity Navigator’s Response
If charities want to stay in business, they have to be financially sustainable. “Therefore, our methodology rewards small to modest growth.” It adjusts calculations so charities are not penalized when they have a year of exceptional revenue and to take into account economic downturns. It adjusted the American Humane Association’s score because of the recession, but its revenue decline was “atypical” for animal-welfare charities. However, the watchdog recognizes the concern and will continue to discuss alternatives with nonprofit leaders.
COUNT VOLUNTEER TIME WHEN EVALUATING A CHARITY’S FINANCES
Charity Navigator gets most of its data from Form 990 tax filings, which do not collect information about volunteer time. But Jan Masaoka, chief executive of the California Association of Nonprofits, wants it to try to account for such contributions.
“A nonprofit that provides most of its services through volunteers can look as if it does almost nothing if only services that are expenses are counted,” she said in a recent letter to the watchdog’s board.
Charity Navigator’s Response
It would like to include these hours and has discussed the idea with nonprofit leaders, but “these have not resulted in a viable solution.” While audited financial statements include data on volunteers, they are not public documents so are not available for all charities. Furthermore, organizations do not report the data in a consistent way.
BE MORE CAREFUL ABOUT DONOR ADVISORIES
Charity Navigator began issuing “donor advisories” several years ago after some highly rated charities, including the Central Asia Institute, got into legal trouble. Wayne Pacelle, chief executive of the Humane Society of the United States, blasts the group for issuing a donor advisory about a lawsuit his charity was involved with, accusing the watchdog of not understanding the issues involved. The June 2014 advisory, which is replacing the charity’s rating for at least a year, cited media reports and legal documents about a $15.7-million settlement the society and other animal-welfare groups agreed to pay to Feld Entertainment in a battle over alleged circus-elephant abuse. The Humane Society was not a plaintiff in the suit against Feld but became involved after it merged with a plaintiff, the Fund for Animals. Feld sued the groups after a judge found they had paid a key witness. Mr. Pacelle says they settled to limit their financial risk, insurance covered most of the cost, and charities should not be penalized for trying to advance their missions through legal action against powerful interests.
Charity Navigator’s Response
When deciding whether to issue a donor advisory, a committee considers factors like how reliable the source of information is, how serious the charges are, and whether the charges are proven. Charities get a chance to respond and report corrective action they have taken. The settlement in the Humane Society case was sizable, substantive court rulings were issued against the group, and a judge found the plaintiffs’ primary witness unreliable.
MAKE SURE THE NEW CHIEF EXECUTIVE HAS NONPROFIT EXPERIENCE
When Ken Berger, Charity Navigator’s chief executive, left suddenly last month, Mr. Dugan said the board was looking for a leader with technology expertise to guide the watchdog as it expands to rate more charities and evaluate results reporting.
But in her letter, Ms. Masaoka of the California Association of Nonprofits urged the trustees to pick someone who also has “experience with a wide range of nonprofit work” and to add nonprofit members to the mostly corporate board.
Charity Navigator’s Response
“The person we engage should: be a proven leader of a successful organization; have a history of nonprofit passion and experience; and have a high level of familiarity with the technology that is critical to reaching ambitious goals.” The board has one “outstanding” nonprofit member, Thomas Murray, who led the Hastings Center, a bioethics think tank, for many years.