Saturday, August 14, 2010

Evaluating charitable organizations

While researching how one might evaluate a charity, I came across two helpful websites, both of which have been cited in national media as authorities in this area.

First, the American Institute of Philanthropy (AIP) website offers a wealth of information for understanding better how a charity operates.  Ratings are provided for charities to allow individuals to determine whether or not they want to support a particular organization.  AIP indicates that top rated organizations:
generally spend 75% or more of their budgets on programs, spend $25 or less to raise $100 in public support, do not hold excessive assets in reserve, and receive "open-book" status for disclosure of basic financial information and documents to AIP.
Details of their criteria are available on their site.

This not for profit organization also offers articles that offer insight into governance, accountability, solicitations and other topics.  Here are some of their tips for giving wisely: 
  • Find out where your dollars go
  • Remember:  “Tax Exempt” does not always mean “tax deductible”
  • Do not be misled by a charity’s familiar name
  • Ask if the charity is registered by federal, state and/or local authorities
Similarly, Charity Navigator rates organizations.  This website indicates that they are independent and a non-profit organization themselves.  Their ratings tables seem more complicated.  At first I thought they were less stringent than the AIP because their scoring allow for program expenses of up to 30% to receive points.  However, they have detailed criteria per type of charity and include primary revenue growth, and program expense growth, which AIP does not.  They also calculate working capital ratio just as AIP does, which measures the ability to operate into the future without any further income.

Charity Navigator also offers tips for choosing a charity to support:
  • Review executive compensation
  • Check the charity’s commitment to donor’s rights
  • Concentrate your giving
Charity Navigator offers studies, such as the metro market study of charitable causes, a CEO compensation study, and a special events study.  I would characterize their offerings as industry analytics and their role as providing an overview of industry trends, where I would characterize AIP’s offerings as “whistle-blower” activity in focusing on news alerting readers about poor practices by individual organizations and across the industry.

I did like the fact that Charity Navigator offers a search box to quickly find information about a charity, where on the AIP site you will need to search the Top Rated and A-Z menus options to find information on individual organizations.  Further, AIP releases many of its ratings in its print report only, which needs to be purchased. 

As an interesting experiment, I compared the same charity at both websites.  Here are the results:
  • Reading Is Fundamental (RIF)  received a grade A from AIP, and 2 stars from Charity Navigator.  No details are provided on the AIP website other than the grade.  Charity Navigator provided all of the details for the current and historical ratings for free.
  • National Trust for Historic Preservation was rated 2 stars on Charity Navigator and B+ on AIP.
I recommend both sites for your research.  Use the compiled information from both to make decisions on the causes you want to support.

Addendum 8/16--

As a courtesy, I notified both organizations about our article.  I am adding a quote from AIP here as it will help to further delineate each of these organizations' work:

What sets AIP apart from other sources of charity information is our thorough and rigorous analysis of every group that we rate. Other rating organizations do not use the same standards when evaluating charities. . . At AIP, our analysts perform a thorough and in-depth evaluation of a charity’s IRS form 990, including schedules and attachments, audited financial statements, and annual reports in order to determine how a given charity is actually raising and spending your donated dollars.  Our function is not to please the charities, but rather to provide the donating public with the information they need to make better informed giving decisions. . . Our criteria is generally thought to be the strictest in the sector.