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Some charities don't make grade in online scores

San Francisco Business Times

November 10, 2006

Bay Area nonprofits say ratings aren't always fair
by Sarah Duxbury

A one-star rating from Charity Navigator almost cost Peninsula Habitat for Humanity a $25,000 gift.

A long-term supporter saw the nonprofit on Charity Navigator's list of 10 charities shrinking in a hurry -- groups whose program expenses have shrunk more than 34 percent for each of the past three years -- and questioned her usual donation.

The donor is one of 3 million Americans who visit Charity Navigator's web site to get Morningstar or Zagat-like ratings of over 5,000 nonprofits. The 4-year-old New Jersey-based nonprofit watchdog considers organizational efficiency using financial information pulled from 990s, the forms registered nonprofits file with the Internal Revenue Service.

But there are limits to the seemingly objective data on those tax returns, and some nonprofits worry that they could unfairly suffer as more donors turn to online resources that help average people access public information on charities.

An incomplete picture

"Our program isn't shrinking," said Jennifer Fagerstrom, director of development at Peninsula Habitat. "For every (donor) who calls, how many look at (the one-star rating) and take it at face value? It can cause serious damage to our organization."

Habitat sold 14 houses in 2003 and eight in 2004. Though it sold just one house in 2005, seven sold in 2006 and 11 will sell in the 2007 fiscal year.

Fagerstrom said that Habitat is a construction company. It counts unsold houses as assets, not as program expenses, on its 990. That, coupled with the uneven workflow that comes with using only donated parcels of land, means that the nonprofit's operational expenses might seem to be shrinking on its 990, but the picture on its annual audit is far more clear.

Habitat says it is being unfairly dinged by Charity Navigator. Nor is Habitat alone in claiming that the one-size-fits-all nature of Charity Navigator's metric fails to account for organizational specifics and misrepresents a charity's performance.

All the same

Trent Stamp, CEO of Charity Navigator, dismisses such concerns.

"We're trying to put out data because we think there's far too little data in the nonprofit world and that there's value in numbers and trends," Stamp said. "Every charity claims they are different, they are outside the norm. That's simply not true."

Stamp said that of 37 Habitats for Humanity ranked by Charity Navigator, five have one star, and more than 10 have four stars.

Charity Navigator exists to help kitchen table donors, those without access to planned giving experts, foundations or lawyers who can advise them. Stamp acknowledged that the 990 might not be the perfect document to evaluate every charity, but since it is the only form universally required, it is the most fair one out there.

Charity Navigator says it looks at either three or five years of returns to avoid rating charities on a one-year anomaly. It also tries to take different models into account. For example, because museums are more expensive to run than human service agencies, they are allowed higher average administrative expenses than food banks. Like organizations are compared to each other.

Because it pulls all its data from 990s, Charity Navigator cannot account for geographic differences, like the high cost of living in the Bay Area, which could make our charities measure unfavorably against those in other regions, something Stamp acknowledged.

"For the majority of groups in America, our rating system works and is helpful for donors, giving them some sort of report on how an organization is doing financially," Stamp said. "It's a piece of the giving puzzle."

Charity Navigator clearly states that donors should also talk to a charity to understand its work and its business model, as the Habitat for Humanity donor did.

The question remains how many potential donors actually do that.

Marketing collateral

It's easy to see how four-star charities can use positive ratings to market themselves.

Catholic Charities CYO suffered a mismanagement scandal six years ago and following a turnaround has received four stars from Charity Navigator for two straight years -- a fact it touts on its web site, mailings and other documents.

"It has certainly added to the confidence level donors feel about the way we're utilizing and stewarding the funds we receive," said Marti Sullivan, director of development at Catholic Charities in san Francisco. "In an environment like the Bay Area, competition for philanthropic dollars is quite high, so anything we can do to add external validation of our worth ... is only an advantage."

She doesn't know of any specific grants the rating has won Catholic Charities, but she is happy to have it.

Nonprofits that rate poorly on Charity Navigator similarly say they do not know for certain of donations lost because of it, but they worry that could happen as Charity Navigator's popularity grows.

"My biggest concern is it doesn't tell the full story," J. Mullineaux, SFMOMA's development director, said of its two-star Charity Navigator rating. "We're such a healthy organization. We have a $110 million endowment, our assets are strong and we keep growing, though admission is down this year because of the opening of the de Young."

Then there are the quirks of how different groups account for expenses. At the Asian Art Museum in San Francisco, security costs are booked as programming expenses; at SFMOMA, they are considered operational expenses, Mullineaux said, which makes it look as if the museum spends less on programming.

Barbara Boecke, development director at Fine Arts Museums of San Francisco said its one-star rating owes to it filing two 990s -- one for the museum organization, called the corporation, and one for its endowment -- but Charity Navigator only considers the 990 for the corporation. She plans to accept Charity Navigator's offer to allow FAM to consolidate the two 990s to garner a more accurate rating. Boecke said donors are starting to pay attention, though she did not think the low rating influenced any major donors.

"We're lucky. Our donors totally understand the costs and the return and our need and the ratios of our fundraising," Boecke said, adding that FAM has over 1,000 donors who annually sign checks for $1,000 or more, contributing a reliable $4 million. But those donors require special events like private museum nights to keep them engaged, and those are expensive and could look like frivolously high fundraising costs.

One way to evaluate

Groups that have suffered a sudden drop in their ranking highlight some of the limits of the Charity Navigator system.

Juma Ventures, a San Francisco social enterprise that employs at-risk teens as ballpark concessionaires in San Francisco and Oakland, closed an ice cream shop it operated in San Francisco's Marina district to expand its higher-impact concession business -- and crashed to a one-star rating.

"If anything, the organization is healthier now than when we had a four-star rating," said Jim Schorr, Juma's executive director. Shutting the scoop shop resulted in a steep decline in Juma's operating budget from $3 million to $2.1 million, Schorr said. But this year's budget is back up to $2.8 million.

"We had to take a step back in order to be able to step forward," Schorr said. "Without the strategic context, it's probably not reflective of our actual health."

Similarly, Boys & Girls Club of San Francisco fell from four stars to one, despite raising funds to open a new clubhouse and continuing to expand its services while reducing administrative costs.

Charity Navigator says its star ratings are a snapshot of an organization's fiscal health as represented on their IRS returns, and there are many other ways to measure a charity's health, which donors should also consider.

That donors are becoming more informed and taking a more active, hands-on approach to giving will only strengthen the nonprofit sector, all agree. Charity Navigator exists solely to make the process easier, and its success is undeniable.

"It's becoming a bigger deal in my mind," Habitat's Fagerstrom said of her low rating. "It's not a crippling thing at this point. ... But as time goes by, these types of web sites are going to have more influence in the philanthropic community. That's not necessarily a bad thing, but we just need to be sure the information is accurate."

Sarah Duxbury covers nonprofits and philanthropy for the San Francisco Business Times.

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