Tuesday, September 13, 2016

Evaluating Charities Not Currently Rated by Charity Navigator: Part 1

Although Charity Navigator rates more organizations than anyone else in America has ever attempted, we still receive requests to rate additional charities. The truth is that we've already evaluated the majority of the organizations that meet our criteria, but we do realize there are many worthy organizations that we do not currently evaluate. That’s why we’ve created this quick guide to help donors do their own due diligence on the charities seeking their support. While there are many more factors that go into a complete Charity Navigator evaluation (see our  Methodology), we’ve pulled some simple, easy-to-find facts that will help you decide which charities deserve your contributions.

A note before you start:
Charities are required to submit an annual Form 990 with the IRS. This document provides information about a charity's finances and governance practices. This guide to evaluating charities not currently rated by us uses the Form 990 (just as we do in our complete evaluations) to review certain elements of a charity’s performance. So, the first thing you need to do is to locate the charity's profile page on our site and scroll to the bottom of the page. There you'll see links to the charity's Form 990 (you will need to complete a free registration process and log into the site for the links to function). Simply click on the charity's most recently filed Form 990 and keep it open while you follow the steps below.

There are three main things to look at when evaluating a charity:
  1. Financial health of the organization
  2. Accountability and transparency
  3. Results

1. Examine the charity's financial health

(Starting in 2008, the IRS introduced a new design for the Form 990. If you need to examine an older version of the Form 990, you can find the information at the bottom of each paragraph.)
  • Program Expenses: The majority of charities listed on our site - seven out of ten non profits - spend at least 75%of their expenses directly on their programs. That means the organization should spend no more than 25% of their total expenses on administrative overhead and fundraising costs combined. To determine the percentage going to programs for the charity you are reviewing, scroll to page 10 (Statement of Functional Expenses), find Line 25 (total functional expenses). Divide column B (program services) by column A (total expenses) then multiply by 100. The resulting figure is the percentage that organization is spending directly on their programs and services. For a more detailed break out of the program expenses, review the "Statement of Program Service Accomplishments" located on Page 2, Part III.
    (For an older version of the Form 990: To determine the percentage going to programs, take the amount on page 1, line 13 (Program Service Expenses) and divide that by the Total Expenses listed on line 17. Statement of Program and Service Accomplishments' is located on Page 3, Part III)
  • Executive Pay: Our research - based on the analysis of thousands of mid to large charities in America - shows that the average CEO compensation is about $130,000 annually.  On page 7 of the Form 990 (Compensation of Officers, Directors, etc.) organizations are required to report the CEO's pay and any current officers making over $100,000 annually.  As you examine salaries, keep in mind that a variety of factors impact pay including geographic location, size of the organization, and type of work performed.
    (For an older version of the Form 990, you can review the CEO's compensation on Page 5, Part V-A or Schedule A, Page 1.)
  • Growth of Program Expenses: Determine if the charity you are considering supporting is expanding or shrinking over time. You can quickly do this by comparing the Total Program Expenses- page 10, line 25B of the current year with the prior year(s). While the growth doesn't need to be dramatic, charities that are shrinking are very likely cutting the very programs that you want to support.
    (For an older version of the Form 990, you can locate Total Program Expenses on page 2, line 44B.)
  • Professional Fundraisers: If a nonprofit uses a professional fundraiser, then be aware that part of your donation (usually a considerable amount) will go to that for-profit fundraising firm and not to the charitable programs/services that you intend your donation to fund. You can determine if a charity uses professional fundraisers by examining the charity's Form 990 in Part I, line 16a, column b and in Schedule G (which offers a more detailed breakdown). If the charity is spending a lot on outside fundraising firms with little going towards its charitable mission, then you may want to look for another charity to support. For more information on this topic, see our tips for What To Do When A Charity Calls and our  Top 10 list of Charities Overpaying their For-Profit Fundraisers.
  • Fundraising Costs Allocated to Program Costs: Joint costs, reported in Part IX, line 26, refer to activities that combine educational campaigns with fundraising. Joint costs can disguise a charity’s true fundraising costs and inflate its programs. You can see the amount of joint costs in a nonprofit's program expenses by dividing line 26, column b by line 25, column b (total program expenses). You may want to consider supporting another charity if this ratio is high.
  • Types of Support: Take a look at lines 1a through 1g (on page 9, "Statement of Revenue") to learn about a charity's funding sources. Some charities rely heavily on membership dues (line 1b), or government support (line 1e) while others survive almost solely on individual contributions and fundraisers (line 1f; 1c) and still others depend on program service revenue (line 2g). Having multiple sources of revenue can be beneficial for a charity. For example, if an organization experiences a drop in donations from individuals, then it can draw from other revenue sources to sustain its programs. If a charity has no revenue listed on line 1f, then it may not even be prepared to accept private contributions.
    (For an older version of the Form 990, take a look at lines 1a through 1d, line 2, and line 3. These represent different ways charities can earn revenue.)

Visit our blog next Tuesday for Part 2.

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