April 17, 2015

Calif. Nonprofit Association Urges Charity Navigator to Make 2 Big Changes

The California Association of Nonprofits, taking advantage of a change of leadership at Charity Navigator, has sent a letter urging the prominent watchdog to make two changes to the way it evaluates charity finances and to spread the message that charities can suffer if they don’t spend enough on overhead costs.

It also asked the group to select a new head who has experience with "the wide range of nonprofit work."

Ken Berger, Charity Navigator’s chief executive for almost seven years, departed abruptly this month after the board decided it wanted a more tech-savvy leader.

That created an opening for the association, known as CalNonprofits, to try to engage the group’s board as it searches for his successor, said chief executive Jan Masaoka. "People are paying a little more attention than they are normally."

The letter, authored by Ms. Masaoka and addressed to John (Pat) Dugan, Charity Navigator’s co-founder, and other trustees, asks the watchdog to count the value of volunteer time when evaluating a charity’s finances and change the way it assesses the costs involved in joint fundraising and educational campaigns.

Its comments about overhead reflect widespread complaints about the role Charity Navigator has played in promoting what critics call the "overhead myth," the concept that charities that devote more spending to programs and less to fundraising and administrative costs are more "efficient."

"A factory that underinvests in overhead," the CalNonprofits letter says, "will soon find its roof is leaking, its electrical systems failing, without adequate insurance, and without the investments in staff compensation and training that are key to success." It urged Charity Navigator to "talk about the twin problems of overspending and underinvesting in shared operational expenses — with underinvesting the far more common situation."

‘Letter to Donors’

Charity Navigator, along with the charity-information groups GuideStar and the BBB Wise Giving Alliance, issued a "letter to donors" in 2013 urging people not to judge charities only by their overhead costs. Charity Navigator still gives higher marks to groups that keep such spending low, though that is only one measure of financial health it uses.

The group, which evaluates more than 8,000 charities and awards them from zero to four stars, also judges organizations on their openness and accountability policies and plans to start rating them on how well they report their results by the end of 2016.

"Through the years, we’ve consistently shared the message that overhead expenses are a necessary part of operating a charity," Mr. Dugan and Sandra Miniutti, Charity Navigator’s vice president for marketing, wrote in a response to CalNonprofits. "This is reflected in our methodology in that the financial health of a charity accounts for just 50 percent of its rating."

As the group works toward measuring results reporting," it added, "financial health will potentially play an even smaller role in each charity’s rating."

CalNonprofits said Charity Navigator should count the value of volunteer time when assessing a charity’s financial health because "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."

Mr. Dugan and Ms. Miniutti said the watchdog would like to include those hours and has discussed the idea with nonprofit leaders and industry experts. However, it has been hindered because the data is not reported on Form 990 tax filings, they said. . While it can be found on audited financial statements, "those are not public documents and, as such, we do not have access to the data for all the charities we rate."

Mixed Costs

The California association also asked Charity Navigator to change its controversial policy of counting all "joint costs" — those that apply when fundraising solicitations have an educational component — as fundraising costs. Charities are allowed under some circumstances to apply a portion of those costs to programs.

But Charity Navigator generally disallows it, arguing that donors are not aware of the practice and "would not embrace it if they knew a charity was employing it." That stance that has drawn fierce criticism from fundraising trade associations and others for overruling a practice that is allowed by accounting rules and the Internal Revenue Service.

Mr. Dugan and Ms. Miniutti said Charity Navigator applies the "joint-cost reversal" only after significant review by its analysts.

"If our team of professional staff determines that a charity’s programs are focused primarily on education or advocacy, then we accept that their mailings are mainly program related, even if a small ‘ask’ is included," they wrote. They said only 5 percent of the charities it rates report joint costs and less than 1 percent have received lower ratings because of the policy.

CalNonprofits said Charity Navigator should find a chief executive who, in addition to technology experience, has "a commitment to nonprofits as central vehicles through which people take care of one another, develop and protect shared values, and serve as the ‘marketplace of ideas.’ "

"It’s a bit of a cliche, but true," Mr. Dugan and Ms. Miniutti responded. "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."

Send an email to Suzanne Perry.