May 28, 2002
By Kate Shatzkin
Ratings: Watchdog groups try to steer donors to worthy organizations. But their methods and criteria leave the evaluations open to question. You open your mailbox to find a letter from a nonprofit group that wants your money. How do you figure out if the charity is worthy?
A handful of charity-rating organizations, also nonprofit, aim to tackle that question. But their methods are different, evolving and, some experts say, open to question themselves.
The latest such organization, Charity Navigator, recently launched its Web site, claiming to be the largest and most objective source of charity evaluations.
The site, which lists 1,100 nonprofits from around the country in a searchable database, rates charities by analyzing their Form 990s -- a public Internal Revenue Service document nonprofits must file each year.
Even with Charity Navigator's debut, most of the more than 200,000 public charities across the country are not comprehensively evaluated. Organizations that raise less than $25,000 a year are not required to file the Form 990.
Since the Sept. 11 terrorist attacks, charity watchdogs have taken on a new prominence.
Daniel Borochoff, president of the American Institute of Philanthropy, was one of the first and most vocal critics of the American Red Cross' initial handling of the $900 million it ultimately raised. The Red Cross was criticized for planning to spend the money on causes other than the victims.
The Better Business Bureau's Wise Giving Alliance, which also recently took over the work of the National Charity Information Bureau, caused a stir when it removed its favorable report on the Red Cross from its Web site after the disaster.
The alliance says it will complete a new report on the Red Cross once it receives updated information from the charity. In the meantime, the Red Cross has demanded unsuccessfully to be reinstated.
The Internet has made information on charities -- once to be gained only from the groups themselves -- widely available. Prospective donors can download Form 990s, which include detailed financial information, from a site called Guidestar, simply by typing in the group's name.
For the past few years, they also have been able to find free reports on 350 charities at the Better Business Bureau site.
Borochoff's site, which gives letter grades to 450 charities, offers only some for free; a full list costs $3.
Guidestar offers a more expensive evaluation service, with individual reports on charities costing from $29 to $59. A group called the Evangelical Council for Financial Accountability has a free online list of Christ-centered nonprofits that have agreed to certain standards.
And some state associations that represent nonprofits have developed their own, even more detailed voluntary standards as a tool for assuring the public and attracting donors.
The Maryland Association of Nonprofit Organizations was among the first to introduce such a system. It requires organizations to meet 55 "standards of excellence" to get a seal of approval.
In contrast to its competitors, the Wise Giving Alliance reports on whether a charity has met the rating service's 23 standards.
Charity Navigator was started by John P. Dugan, the retired founder of a biotechnology marketing company who wanted to provide better information for the donating public, says Trent Stamp, executive director of the organization.
Charity Navigator analyzes financial details in a Form 990, looking at areas such as fund-raising expenses, how much a charity spends on its mission, and how much it raises. It then rates the charity on a star system, with four stars the top rating.
Because it uses only Form 990s -- while the other major watchdogs also ask nonprofits for information such as audited financial statements, annual reports and other documents -- Charity Navigator says it can evaluate many more groups than the others, and can compare them more objectively.
But Form 990 has serious flaws, experts say.
It is filed once a year, and organizations frequently request extensions, causing its data to be out of date. Charity Navigator's Web site, for example, lists Dr. Bernadine Healy as the American Red Cross president, a job she left in a very public spat last year.
Many of Form 990's questions are intentionally vague, to cover the thousands of different kinds of groups that must file it, says Marcus Owens, former director of the IRS division that regulates exempt organizations.
And some organizations hedge on the form, he says, counting some of their fund-raising expenses as program costs -- and falsely improving their performance. By itself, Form 990 data "gives a false impression of definitiveness," Owens says.
But Stamp, of Charity Navigator, shrugs off such problems. "The 990 allows no latitude," he says. "It's not perfect, but it's mandatory and it's uniform, and it's the best we have at this point."
The Wise Giving Alliance recently released a draft of new standards to make charities more accountable. In one notable change, the new rules bump up the amount that should be spent on a charity's mission from 50 percent of its income to 65 percent of its expenses.
The American Institute of Philanthropy looks for 60 percent; to get four stars from Charity Navigator, a charity would have to spend more than 75 percent.
The new Wise Giving rules also go beyond financial analysis to set minimum standards for an agency's board; allow donors to remove their names from lists that charities sell to other organizations and spend money as donors want it spent.
For the first time, the alliance will ask organizations to regularly evaluate how effective their programs are, and to make those evaluations available.
"In recent years, more and more attention has been drawn to the importance of looking beyond the numbers," says Bennett Weiner, chief operating officer of the alliance. "Is it successfully accomplishing its mission?"
A panel of experts hopes to release a final set of standards sometime this summer.
So where do these different evaluation systems leave the inquiring donor? Sometimes, confused.
In some cases, watchdogs agree about a charity. Despite its recent troubles, the Red Cross still gets an A from Borochoff's rating service and four stars from Charity Navigator, though the jury is still out at the Wise Giving Alliance.
But the differences in other evaluations can be stark.
Take, for example, the Alan Guttmacher Institute, a New York organization that produces research on reproductive health and sexual behavior. On the American Institute of Philanthropy Web site, it rates an A-.
But Charity Navigator gives the institute only two stars -- based in part on high administrative expenses and in part on a reduction in the amount spent on its mission over time.
The Wise Giving Alliance does not rate the institute.
One reason for differences in ratings is that Charity Navigator takes into consideration the amount a group raises, and adds points for growth over time.
But Borochoff says that looking at the quantity of revenues raised misses the distinction between charity and profit-making businesses.
In the charitable world, he says, it is more responsible for a nonprofit to raise only what it needs.
Copyright © 2002, The Baltimore Sun