Charity Navigator’s expanded “Encompass” system, which increases the number of rated charities from about 9,000 to about 160,000, relies heavily on measures related to overhead costs, much like its current “star” rating system.
Many nonprofit advocates, watchdogs, and experts — including Charity Navigator — have been advocating for years for less emphasis on overhead when evaluating charities.
Michael Thatcher, Charity Navigator’s CEO, said the rating system will be revised soon in ways that will de-emphasize overhead.
Charity Navigator’s ratings had previously included about 9,000 charities, to which it assigned from zero to four stars. Many charities, especially relatively new ones, weren’t eligible for those ratings. Among the requirements to receive a star rating, charities must have filed at least seven years’ worth of tax data and must have at least $1 million in annual revenue.
Now the new “Encompass” rating system includes charities that have filed three years’ worth of tax forms with the Internal Revenue Service, and there is no annual revenue requirement, although nonprofits must electronically file their tax forms.
Instead of star ratings, nonprofits rated by Encompass get a numerical score of 0 to 100, based on program spending as a percentage of total spending, a liabilities-to-assets ratio, whether members of the nonprofit’s board are independent, and whether the nonprofit’s website is listed on its IRS Form 990. Those factors and others are combined to create a “Finance and Accountability” score for nonprofits.
In addition to impact measures, still to come are ratings that evaluate a nonprofit’s leadership and innovative work, as well as its management of staff, and its ability to connect with the people it serves and make diversity, equity, and inclusion a priority.
Thatcher said that Charity Navigator decided to post the finance and accountability score ahead of the other measures because it was ready, and the organization didn’t want to hold back data that could help donors.
“We felt this was especially important in this moment when nonprofits, many of them less established,” are doing remarkable work responding to the critical issues of Covid-19 and racial justice,” Thatcher said.
Charity Navigator reported strong usage statistics in recent months as the health crisis and protests are propelling donors to seek out more information about charities. In July, the number of visitors to the site increased 22 percent compared with the same month last year.
‘Moving in the Right Direction’
Rick Cohen, spokesman for the National Council of Nonprofits, praised Charity Navigator for expanding the number of charities it ranks.
“We’re thrilled that they’re moving in the right direction on that,” Cohen said.
A favorable ranking on a well-known site like Charity Navigator can provide a fundraising boost for some charities. The absence of a ranking is sometimes misconstrued as a demerit for a charity, when it may mean nothing more than that it was too small to qualify for a star rating, Cohen said.
Cohen added that it was “disappointing” that Charity Navigator’s new system, at least for now, still relies substantially on overhead, especially since the ratings group joined efforts to dispel the “overhead myth,” which Charity Navigator and other organizations defined seven years ago as “the false conception that financial ratios are the sole indicator of nonprofit performance.”
“This was a prime opportunity to put the overhead myth to rest,” Cohen said.
Cohen noted that a focus on overhead is especially problematic amid the Covid-19 pandemic because charities will need to spend money on personal protective equipment, hand-sanitizing stations, additional cleaning supplies and services, and remote work technology — all of which will be counted as overhead.
“Overhead is going to explode for the next year or so,” Cohen said.
Plans to Expand
Charity Navigator’s Thatcher said many donors still care about overhead expenses, so that data will remain part of the ratings. However, Thatcher says, within six months Charity Navigator will start expanding the kinds of information it presents about nonprofits, particularly their impact, and as that happens, overhead expenses will be de-emphasized.
The expanded ratings started with financial data from the Form 990 because that’s what Charity Navigator knows best, Thatcher said.
“Over time, its weight is going to drop significantly,” Thatcher said, referring to overhead.
He agreed that Covid-19 will force many nonprofits to spend more on overhead so a team will work on how to adjust the financials accordingly.
“We’re in an awkward spot because we’re going to do this, but we can’t say how yet,” Thatcher said.
Thatcher said that to expand its ratings into areas not covered by the Form 990, Charity Navigator will work with groups that collect other kinds of data. For example, ImpactMatters offers data intended to help donors quantify the impact of their giving, with ratings of one to five stars for a charity’s ability to deliver services.
Other groups that will provide data to Charity Navigator include Classy, an online fundraising company; Candid, which provides data about foundations and nonprofits; and GlobalGiving, which matches donors with community-development programs and reviews of charities to determine if they are running programs as they describe.
Data Glitches
For now, Charity Navigator’s new system is far from flawless. For example, the new ratings system gives the World of Speed a 100 out of 100 rating. Charity Navigator extols its education and community-engagement programs and has a working “donate to this charity” button for the World of Speed.
The museum in Oregon announced in mid-May that it was closed for good.
Also, the websites listed for several organizations that the Chronicle spot-checked weren’t functioning, including many that were given positive marks for having a listed website.
Thatcher acknowledged that keeping up with recent events, such as closures or allegations of wrongdoing, “is a little bit of a problem for us,” but he added that Charity Navigator will keep its listings as up-to-date as possible with the help of users of the service, partners, and its staff.
Making Adjustments
Nonprofits that are newly rated by Charity Navigator have varying views of the importance of watchdog rankings.
Jane Leonard, president of Growth & Justice in St. Paul, Minn., which provides research, data, and analysis intended to support more equitable economic systems, said she believes the new ratings are fair and provide important information.
She said she’s also very interested to see how Charity Navigator will quantify impact when it rolls out that feature; measuring the number of meals served by a nonprofit may be far more clear-cut than assessing the impact of an educational nonprofit, she said.
Leonard said her organization, which got a perfect score in Charity Navigator’s new ratings, has a budget of about $300,000 annually. She said that being rated by a service like Charity Navigator can be helpful for fundraising.
“As people make decisions about where they want to invest their funds, where they want to help, it does provide some assurances,” she said. “I serve on boards, I donate to organizations, and I do find that it creates some confidence when there is a seal of approval for the organization you want to make some investments in.”
Philip Webb, chief operating officer of the New Jersey Institute for Social Justice, said his group also was pleased to be included in the new ratings, which helps with fundraising. “I think it enables us to be more transparent to our donors,” Webb said.
However, the charity was docked 25 points because its ratio of program spending to total spending was 68.6 percent in its most recent three years of tax filings. Charity Navigator’s ratings call for a program-spending ratio of at least 70 percent.
Webb said the New Jersey Institute for Social Justice went through a strategic reorganization a few years ago that caused a temporary increase in overhead costs. The trend line is now moving in a better direction, and the nonprofit will have a 72 percent program spending ratio for fiscal 2019, which isn’t reflected yet in Charity Navigator’s score.
The nonprofit will be among those looking for score adjustments in the future related to Covid-19 expenses. Webb said the charity this year will see a spike in costs for technology upgrades, and postal costs have gone “through the roof” for a variety of reasons, including shipping supplies to people working at home.
“There have been a lot of new costs this year that we had not been projecting at all,” Webb said.
Grace Bauer-Lubow, founder of Justice for Families, had a different view of the value of rating services. She said she didn’t see much value in the limited data that Charity Navigator is presenting so far.
Also, the data was old and inaccurate, she said. For example her organization was given a score of 90, with 10 points deducted for not having a listed website even though the organization does have a working website. Charity Navigator says her group’s headquarters is in Sulphur, La., but Bauer-Lubow said it has relocated to New York.
She said she would be happy to see her organization’s addition to Charity Navigator’s ratings drive additional donations, but she was skeptical.
“I just didn’t think the information they showed was enough to help us in some way,” she said. “If it helps, we’re certainly glad to have the help.”
