A popular charity-rating website is changing the way it rates nonprofit groups, saying the new method gives donors a better picture of how a particular charity performs over time.
Charity Navigator, which rates charities on a zero- to four-star scale, will start using the new rating system Wednesday. The system changes the way the group assesses a charity’s financial health, but it leaves intact the way it rates a group’s “accountability and transparency,” the second major performance category.
Charity Navigator is one of the more influential charity assessment organizations, rating about 8,000 charities. Many groups consider the rating “absolutely critical to attract new resources and donors,” said Elizabeth Ashbourne, executive director of the Partnership for Quality Medical Donations, which helps coordinate supplies and equipment for disaster relief operations.
The change in the overhead rating also means that it is now possible for groups to score a perfect 100 points overall — and 49 charities will do so.
Michael Thatcher, president and chief executive of Charity Navigator, said website users would still see charities rated on an overall scale of zero to four stars.
“Will the user experience be dramatically different?” he said. “I don’t think so.”
But some underlying measures have been adjusted, based on a continuing analysis by Charity Navigator’s staff in collaboration with a task force made up of financial experts from the nonprofit world. The group also surveyed all the organizations it rates. The new ratings mean donors “can have even greater confidence in the financial health of the charities they choose to support,” Thatcher said.
Elizabeth A.M. Searing, a nonprofit specialist and assistant professor at Rockefeller College of Public Affairs & Policy at the University of Albany (SUNY) and a member of the task force, said, “All of the changes they made are definitely improvements.”
For example, ratings for expenses for program costs, administration and fundraising will be calculated by averaging data from the charity’s three most recent fiscal years, rather than using data from the most recent fiscal year. That approach helps eliminate wide swings in a charity’s rating from year to year, Thatcher said, and more accurately portrays a charity’s financial health.
The group dropped a measure of a charity’s primary revenue growth as not truly reflective of a nonprofit organization’s financial health. A charity may, for example, be given a large donation that must be recognized for accounting purposes in one year, yet receive the money over a period of several years.
A new measure was added to calculate the ratio of a group’s liabilities to assets, to flag possibly excessive debt.
The new system also tweaks the way a charity’s administrative expenses, or overhead, are evaluated. Under the current system, charities cannot score a “perfect” 10 points on that measure unless they had zero administrative expenses, which isn’t realistic in most cases. Under the new system, charities can get a 10 if they score within a given range for their type of nonprofit group. Searing said the change helps charities avoid “starving themselves” to avoid the appearance of high overhead.
The change in the overhead rating also means that it is now possible for groups to score a perfect 100 points overall — and 49 charities will do so, Thatcher said.
Nearly three-quarters of charities will not see a change in their overall ratings under the revised system. About 19 percent of charities will see their ratings go up, while about 8 percent will go down.
“There’s always going to be someone who’s unhappy,” Thatcher said.
Thatcher said the advisory panels help strike a balance, allowing input from professionals who know the nonprofit sector while guarding against any undue influence that might skew ratings.
“You don’t want to get too close to any individual charity,” he said.
Here are some questions and answers about assessing charities:
Q: Should I worry if my favorite charity’s rating drops?
A: “We don’t advocate that a donor jump ship if a rating changes,” said Sandra Miniutti, vice president of marketing for Charity Navigator.
Rather, she said, a change suggests that donors should seek more information from the charity and see if it offers a good explanation. In that way, she said, donors can educate themselves about the charity and decide over time if they want to continue supporting it.
Q: Why doesn’t Charity Navigator rate a charity’s operational effectiveness?
A: Charity Navigator’s long-term goal is to add a “results reporting” component, or an assessment of how effective each charity is in accomplishing its mission. That takes time, since each type of charity may use different criteria.
“The hard part,” Thatcher said, “is figuring out just what each should be measuring.”
Q: What other sources are available to help me assess a charity?
A: Other sources for information on nonprofit organizations include BBB Wise Giving Alliance, CharityWatch, GuideStar and GiveWell.