The Past and The Future
Ken Berger, President and CEO of Charity Navigator
April 1, 2009
On the anniversary of the launching of our web site (April 15, 2002) it has been a tradition for us to either reflect back on the past year or forward on the year(s) to come. This year, I will do both.
Last year, we did not write an anniversary article because Charity Navigator was looking for a new President & CEO. So I will take a two year look back. Perhaps the most significant event occurred in November of 2007 when Charity Navigator, a private foundation at the time, filed with the IRS to become a public charity. As a result, we are now in what is called the five year advance ruling period and hope to be permanently approved by the IRS in November of 2012. One of the key changes this entails is that, whereas in the past we relied almost entirely on funding from our founders – the Dugan family – we now intend to rely upon a much more diverse array of funders. Consequently, last November/December, for the first time we reconnected on a large scale with donors and asked all who had been so generous with unsolicited gifts in the past to consider giving again. The response was tremendous! We were greatly heartened and encouraged by the enormous increase in donors to Charity Navigator as a result of the mailing. We will still need more to join us but the message is clear – many of our users understand the cost of objectively analyzing data on over 5,000 charities a year and our critical importance in helping them to make wise giving decisions.
You may have also noticed that for the first time, we are accepting paid advertising on our web pages. These ads are increasingly catered to our users’ interests. Since we are unique among our peers, in that our services are completely free to both donors and charities that use our seal, we hope that strategies like this will help us to continue to operate at no cost to our users. In addition, we will be asking foundations and corporations to play a much bigger role in supporting us. Of course your voluntary individual donations will remain critically important too! In spite of the anticipated decline in funding of charities during these challenging economic times, we believe that donations to Charity Navigator will increase because of our vital role in assuring that every penny you donate to charities counts. In fact, we think we are needed now more than ever!
Our transformation into a public charity also means that we intend to “walk the walk” and not just “talk the talk” about what it means to be a four star charity. We are in the process of implementing a wide variety of good practices here at Charity Navigator, that we believe all charities should follow. We are also seeking to transform our evaluation system of charities to include two additional dimensions (beyond financial health) – accountability (including transparency) and outcomes. You will be hearing more about these components of making wise giving decisions in the months ahead.
Looking beyond Charity Navigator to the charitable sector as a whole, there are a number of issues that we believe will become increasingly important in the coming years. Since we favor top ten lists, I have limited myself to that many. They include:
Increased Funding by the Federal Government
– This prediction may appear obvious, but the consequences may be less so. Currently, all levels of government (federal, state and local) provide approximately 40% of all funding to charities. Thanks to the economic stimulus package we anticipate this percentage will rise. As a consequence, charities will become more dependent upon what is arguably the least efficient form of funding for them (pays for less than half of a typical charity’s infrastructure costs, while imposing the most onerous reporting requirements).
- Decreased Funding from Other Sources – Most foundations have seen a major drop in their investments. Most corporations have seen a major drop in their profits. Most individuals have also seen a sizable drop in their net worth. All of this adds up to less money to be given to charities. That is about 20% of all funding to charities (individual, foundation and corporate giving combined). The other 40% (after 20% from private contributions and 40% from government) or so comes from fees for services. This too will suffer as people have less money to buy services (such as tuition, health care, etc.). The only good news here is that individual giving is somewhat recession resistant. In other words, people will give less, but still more than you would expect in bad economic times.
- Rising Demand for Charities to Provide Information on Their Impact – We estimate that about 10 to 20% of charities are measuring their performance. However, perhaps as few as 2% are not just measuring, but actually showing objectively measurable impact (aka middle to long term outcomes, in our preferred terminology). As money becomes harder to raise, the few who can show their impact will be rewarded and the rest will feel increasing pressure to go down the outcome measurement road. We think this is a VERY good thing to happen!
- Mergers, Program Closures and Layoffs – Professor Paul Light at NYU has estimated that, due to the economic crisis, approximately 200,000 charities will have to close their doors. We hope that, even though you can’t normally get a Golden Parachute, charity leaders will consider the options of mergers more seriously. Foundations can lend a hand here by funding the costs of mergers. Meanwhile, we have already begun to hear reports around the country of agencies laying off staff, closing programs or closing entirely. We agree with Professor Light that there will be more and probably many more closures. The small silver lining in all of this is that some inefficient charities may go bust or will be acquired by their more efficient peers. However some of the good guys are going to close down too.
- Scandals As Always, Only More So – The charitable sector is estimated to be around $1.5 trillion in annual revenues. When that kind of money is involved, bad people will inevitably do bad things. The governmental entities that are responsible for policing the sector are understaffed. The regulations available to them are often inadequate anyway. Scandals will continue to bubble up. A bad economy may only increase the reports of scoundrels who line their pockets by perpetrating scams. Since there is not as much revenue to sustain things like Ponzi schemes, more of the scoundrel charities will go bust and hit the front pages. Whereas it is good news that more of these jerks will be found out and charity Board Members may become more vigilant, it is bad news as it further weakens the public’s trust in the charitable sector.
- Charities Having Problems Filing the New IRS Form 990 – It is estimated that the new IRS form 990, which larger charities must complete on an annual basis, will require 5 times as long to complete. It will entail involving more staff and consultants in completing the form, since the charity will be reporting on entirely new dimensions of their work (governance matters, etc.). We anticipate that many charities will file for the maximum extensions and still get it wrong the first time they fill it out. They will then be required to resubmit the document, causing further delay. As a result, the problem of a lag of time before a charity’s IRS information report becomes publicly available, will only increase. The good news is that this additional information will shed more light into the operations of the larger charities and thereby increase accountability and transparency.
- A Greater Divide in Opinion Over the Role of Government in the Charitable Sector – As the federal government grows larger and (as noted above in item 1) becomes an even larger funder of certain types of charities, the debate over the role of government in the charitable sector will increase. Since charity staff leadership are predominantly liberal leaning, some of the criticism may be muted (as was the case with the proposed reduction in the charitable tax deduction for the affluent). However, many charity Boards are made up of more conservative individuals. In addition, some participants in the sector (such as those who are managing donor advised funds) have interests and perspectives that are more independent of party affiliation and therefore are likely to increasingly raise the question of what type of role the government should play.
- Arts, Humanities and Cultural Charities Take A Beating – This category of charities is already starting to implode. We are seeing more reports of bankruptcies, layoffs and program cutbacks in this sector than any other. They rely to a great degree on donations from the affluent and from fees for services. When people must chose between them and other types of charities, they often are low man on the totem pole. Hence, they will take a beating.
- Health Care Charities Remain King of the Hill – We have noted before that approximately 60% of that $1.5 trillion in revenues goes to health care charities. Add to that, the plans for universal health care and over $600 billion in the stimulus package for this purpose and you can see how they are king of the funding hill!
- Religious Charities Remain Strong – Religious charities get the largest share of private contributions (over $100 billion of the $306 billion total in 2007). As noted in item 2, individual giving is recession resistant. Furthermore, as I have noted elsewhere, I believe in the hierarchy of giving, people prioritize religious charities (especially houses of worship) first. Therefore, I believe they will endure best in these challenging times.
Looking Toward You
In conclusion, Charity Navigator arrives at its 7th anniversary with great optimism about the future. In spite of all of the bleak predictions in our top ten list, the heart of the charitable sector remains strong. The American people give more than twice as much to charity each year as people in any other country in the world. We also break the record for the percentage engaged in volunteerism with over 61 million of us pitching in. Based on all of this time and treasure that is poured out of the hearts of so many, we know we will weather the storm together and continue to do great things. We look forward to staying in touch as we go down the road.