Charity Ratings?

Don Griesmann reminded me today in his blog about one of my pet year end peeves… the charity ratings that pop up in magazines like Forbes or are published on self-proclaimed watchdog sites like Charity Navigator. (I get particularly incensed at a business magazine editor claiming to know what the most effective charities are — give me a break.) With just under a million public charities in the US, there is no way that anyone could possibly know of every charity that is doing a great job.

One enormous hole in these rating systems is the lack of a handy report to measure societal impact. And you know that these raters are not investigating each and every charity firsthand. So these rating systems are mostly based on the information that can be gleaned from the Form 990. This results in too much attention on finances, in particular the ratio of program vs management/fundraising expenditures.

While it is a noble pursuit to try to help the public make more informed decisions about the charities they donate to, unfortunately, there is no easy rating system for measuring community benefit.? Here’s the problem with using low overhead as the determinate of effectiveness:

• The info on 990s, from which these systems receive their data, is unreliable. Studies of 990s show that there are many mistakes, with under reporting of fundraising expenses a frequently occurring error.? Show me two accountants, and I’ll show you two different methods of classifying expenses.
• Less sophisticated organizations rarely use full cost accounting to its fullest to allocate program related overhead thereby disadvantaging themselves by showing excessive overhead.
• The more an organization relies on gifts from many individuals, the more likely they are to have higher fundraising costs. It just costs more to manage all of those relationships than it does to secure a few big grants or huge contributions of inkind services.
• Spending more on fundraising may also result in having more money available for program, period. A national organization I worked for ratched up its proportionate fundraising expenses which caused its ratio of program to overhead to drop from 75% to 70%. But at the end of the day, the organization was spending millions more dollars on program than it had at the lower overhead cost. Is that bad?