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Wednesday, June 1, 2016

CN 2.1 Is Here!

Today, we launched CN 2.1, an enhanced charity rating system, that provides potential donors with better information to make even smarter giving decisions. 

As a result of the updated rating system, which is still based on a one- to four-star rating:
●   27% of the 8,000 charities received new star ratings
●   19% of the charities’ star ratings improved by one star
●   8% of the charities’ star ratings decreased by one star
●   14 charities saw their ratings increase by two stars
●   Two charities, Law Enforcement Legal Defense Fund and National Police Defense Foundation, saw their ratings decline by two stars.
Some of the notable ratings changes include:

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Chad said...

If a Charity like Compassion International that has received a 4-star rating for 15 years looses a star and is now considered a 3-star organization, I have serious doubts about Charity Navigator as a whole. How could a charity like Compassion, that has such a solid operating model, been in place for over 60 years, employs over 3000 people world-wide, has 1.8 million children enrolled in their program, supports over 7000 churches in 26 countries, has over 800,000 monthly donors in the US alone, and takes ZERO money from government grants. Not only that, but during the latest recession, from 2008-2013, Compassion maintained its incredible growth while most other non-profits were shrinking. If that doesn't speak to the financial stability and trust in the program from donors, I don't know what does.

I think you might want to consider coming up with CN 2.2 soon... because 2.1 clearly can't be trusted.

Unknown said...

Thank you for your interest in Charity Navigator and for taking the time to write.

We like to think of intelligent giving as a long-term commitment, more akin to marriage than dating. So we recommend that donors take the time, upfront, to find organizations they can support for many years to come. And when they find that charity, they should feel confident in giving it their financial support and telling it that they’ll be there through thick and thin. We believe that only then will long-term, sustainable change take place.

So, if your favorite charity’s rating has declined under CN2.1, we certainly don’t advocate that you jump ship. Rather, we hope you’ll see this as an opportunity to seek more information from the charity about its financial position and how it hopes to improve it over time.

That said, I sympathize with your disappointment with Compassion International’s new score. But keep in mind that 3 out of 4-stars is still a ‘good’ rating under our methodology and not a cause for concern. Furthermore, as you rightly point out, the charity has consistently held a high rating in our system so you know it has a track record of excellence.

Let me also highlight why their financial score changed:
· Compassion International previously earned 9.7 points (out of 10) for the primary revenue growth metric. By removing this metric from our rating system, the charity lost those points.

· We added a new metric, Liabilities to Assets, to our financial rating metrics. Compassion International only earned 5 (out of 10) points for this metric.

· None of the scores for the existing metrics declined. In fact, one went up- program expenses from 8.2 to 9.5 (out of 10).

Chad said...

First of all, I want to thank you for what you do at Charity Navigator. Evaluating charities for the public so that they (the public) can make better decisions about where their hard earned money goes is critical to ensure that people are giving to charities that use the donations in a responsible way.

There are no magic rules that apply to all nonprofits when it comes to doing an evaluation of the nonprofits health. I'm sure as an organization that evaluates charities you have struggled with this when coming up with a formula to do the evaluations.

For purposes of the discussion, I'll define debt ratio (not for you but others who might be reading this). The debt ratio indicates an organization's financial solvency by measuring the relationship of its total liabilities and debt to its total assets (book definition). Higher ratios could indicate financial problems in the future but for an organization like Compassion, a score of 5 out 10 on debt ratio just doesn't make sense.

An organization's debt ratio may be distorted if it carries a high proportion of "grants payable" or "grants receivable" on its balance sheet. Grants payable—the unpaid portion of grants and awards that the organization has committed to pay other organizations or individuals—are carried as liabilities on the balance sheet. Grants receivable—funds pledged to the organization by government agencies, foundations, and other organizations—are carried as assets on the balance sheet. From looking at Compassion's tax statement you can see on Page 10 in FY 15 Compassion gave $513,258,156 in grants to foreign organizations. That would be those 7000 churches I mentioned in my first comment. You can see on page 11 of the tax form that grants receivable is 0. Compassion does not take government grants. And you can also see that their grants payable (unpaid portion of grants) is $46M. Compassion gives almost all of the money that comes in away in the form of grants. Should their overall score be downgraded because that? No, of course not. The people they give the grants to (church staff) are the ones helping the 1.8 million children in their program.

In the case of Compassion, the debt ratio is a very poor way to measure their health as an organization. Maybe if Compassion had not been around for over 60 years and was not so well established it would be a better measure. But looking at the debt ratio to measure Compassion's health doesn't work at all.

Shouldn't organizational longevity be a measure of good health? Shouldn't number of employees that have been with the organization for more than 5 years be a measure of health? Maybe you do use those things? I’m not sure…

I agree with everything you said in your first paragraph, especially the part of finding charities to give to for a long time, year after year. Shouldn't the number of long term donors be a measure of good health?

Is public support percentage used in your measure of health? You can see on page 15 of their 990 that Compassion receives over 99% of their support from the public. Meaning nearly all of their income comes from individual contributions. Seems to me this could be a good indicator of a healthy non-profit. An organization that gets a big grant one year might suffer the next year if the grant money goes away and no individual donors step in to fill the gap. A long established history of consistent donors is a great way to measure the health of an organization.

Unknown said...

Thank you for your kind words about our service and for your serious interest in this topic! We very much welcome and value your thoughtful feedback.

Now, regarding the LTA metric it is not a question of “good” vs “bad” liabilities. This new metric measures whether the organization owes anything in comparison to the assets they have on hand. The specific liabilities and their amounts may be in line with the charity’s mission however, the organization is still committing to providing something in the future and that is informative in terms of overall financial health. This new metric in our system is capturing what it was designed to capture- if there are commitments owed and how that relates to the assets the organization has on hand. Regardless of the type of liabilities there is still a claim on assets as a result of the liabilities. If an organization has a high amount of grants payable, they should have a good portion of assets to cover the grants they are promising. If an organization has a high amount of deferred revenue, that does show that they have taken in cash, but they still owe something as a result and so they will be spending resources in the coming year to provide the services for which they have already been paid. Much can happen financially between the pre-payment (Deferred revenue) and the provision of the paid for services. This metric/ratio is, in addition to our other metrics, an important piece of the financial health of a non profit.

That being said, we will continue to collect feedback on this new metric, and we are definitely open to revising and refining the metric moving forward.