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Wednesday, March 20, 2013

Is Charity Navigator the Mean-Looking Hall Monitor from South Park?

According to an article in the Chronicle of Philanthropy, that’s how the Direct Marketing Association described us in their recent nonprofit conference. Why? The Association and its nonprofit members (who rely on direct mail to solicit funds from the public) do not like the recent adjustment we've made to our rating system in respect to their “Joint Cost Allocations.”

Haven’t a clue about joint cost allocations and what that has to do with your charitable endeavors? Well, you’re not alone. Let me explain.

According to an accounting rule known SOP 98-2 or ASC 958-720-45, charities are permitted to report a portion of their costs from combined educational campaigns and fundraising solicitations as program costs. And when they do, the IRS requires that they disclose the allocation on the Form 990. In most cases, charities utilizing this technique allocate a small percentage of their solicitation costs to program expenses from fundraising expenses. However, we believe that donors are not generally aware of this accounting technique and that they would not embrace it if they knew a charity was employing it. Therefore, as an advisor and advocate for donors, when we see charities using this technique we factor out the joint costs allocated to program expenses and add them to fundraising (there are a few rare exceptions where we allow joint cost allocations to stand). The result is that out of more than 4,000 charities reviewed thus far, 66 now have lower star ratings.

Why did we make this change to our methodology? Check out the Chronicle of Philanthropy’s article, Watchdog Cracks Down on Misleading Statements on Fundraising Costs, for the background on this adjustment to our rating system. It has to do with the National Veterans Foundation, Anderson Cooper and our commitment to helping donors make informed giving choices.

So, are we offended to be called the “Mean-Looking Hall Monitor from South Park?” No, we can take it. This type of response is in the nature of what happens when you make judgments and rate organizations. There will always be some that you cannot please --- we are a charity rating service after all!  

But what really concerns us is that wasting time calling us names doesn't change anything. Where is the outrage in the sector with regards to excessive joint cost allocations? Where are the charities that refrain from this practice? They should be standing up and demanding that other charities change their ways. Why are the charities that engaged in inefficient direct mail fundraising continuing to do so? It is a short-sighted, scorched-earth policy that infuriates donors when they learn how much of their gift was devoted to fundraising. In the end it violates the trust that donors have in the entire sector and can put all of us at risk of losing funding. That is truly what is mean spirited and defies common sense!

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Doctor Spell said...

No doubt charities use the educational component of the solicitation to allocate the cost away from fundraising and to a program cost.

John G in AZ said...

You make a sweeping indictment of direct mail as "inefficient." Are you counting bequests made by donors whose only link to a charity was through the mail? These "out of the blue" bequests are routine for nonprofits with mature direct mail programs, and they change the ROI exponentially.