Navigating Those Charity Ratings

In April 2010, Charity Navigator, which calls itself the country’s “largest and most-utilized evaluator of charities,” downgraded its rating of the Humane Society of the United States from four stars (the highest rating) to three. That included giving HSUS a measly one star for “organizational efficiency”—a measure of how effectively charities fund their programs. (HSUS’s high fundraising costs did them in.)

One year later, Charity Navigator updated its rating of HSUS again, based on the organization’s 2009 tax return. HSUS kept its three-star rating, but with a lower overall score than other animal organizations like the ASPCA and PetSmart Charities. And that “organizational efficiency” score crept up to a middling two-star level.

These are not stellar scores. By comparison, Charity Navigator gave overall four-star ratings to 52 humane societies and SPCAs. Seven of them also received four stars for organizational efficiency. (Why isn’t HSUS among them?)

Charity Navigator’s evaluations aren’t terribly sophisticated, and HSUS is truly lucky for that. If the charity rating service were to dig deeper into HSUS’s tax return, it might take away some of the stars that HSUS has left.

We recently told you about how HSUS and other charities play hide-the-ball with the IRS when they declare their fundraising costs. In 2008, for example, HSUS’s tax return showed that overhead costs ate up 29 percent of its budget. But that number should actually be 50 percent, according to an analysis conducted by Animal People News, an inside-the-animal-rights-movement watchdog newspaper.

Once a year, Animal People tries to unravel the financial thread of “joint costs”—the result of only counting a small portion of a fundraising mailer toward “overhead” costs, and describing the rest as “education,” even though the mailing’s real purpose is to raise money. This is legal, but those “joint costs” aren’t counted on the first page of a nonprofit’s tax return—so Charity Navigator doesn’t consider them.

What would happen if Charity Navigator did take notice of the fact that HSUS’s real overhead percentage in 2009 was 42.5% (according to the Animal People formula)?

The American Institute of Philanthropy, another nonprofit charity watchdog group, recently estimated that HSUS spends between 26 and 49 percent of its expenses on fundraising. We’ll take the middle road and presume that it costs HSUS about 38 cents to raise each dollar. (HSUS raised about $100 million in 2009.)

Plugging this data into Charity Navigator’s formula, HSUS ought to have a far lower score—just 43.9 points (out of 70) instead of 53.3. That would translate to just two stars overall, which Charity Navigator says represents a charity that “underperforms most charities in its Cause.”

It would also put HSUS’s organizational efficiency at an embarrassing zero stars.

You know what they say about being at the bottom—there’s nowhere to go but up. But given HSUS’s track record of consistently over-spending on overhead, it could find itself stuck in the basement for quite some time unless there’s serious internal reform.

We always encourage readers to give locally to help pets. But we’ll also add this: Be sure to find a charity that spends its money efficiently on its program services.


UPDATE: Here’s our math, for the sake of openness.

  Current CN Score Adjusted Adj. CN Score
Org. Efficiency        
Program Exp. 77.80% 7.60 57.50% 5.75
Admin. Exp. 3.70% 10 3.70% 10
Fundraising Exp. 18.30% 5 38.80% 0
Fundraising Eff. $0.23 5 $0.38 2.5
Score   27.60   18.25
Org. Capacity        
Prim. Rev. Growth 1.90%   1.90%  
Prog. Exp. Growth 10.90%   10.90%  
Working Cap. Ratio 1.06   1.06  
Score   25.67   25.67
Total Score   53.27   43.92

Posted on 04/21/2011 at 2:02 am by humanewatch.

Topics: Fundraising & Money