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.
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.
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.”)
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.
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.
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.