Keeping an Eye on the Nation's Nonprofits
by Joe Lindsley Jr.
Americans give more to charity than any other nation, and typically they expect their money to go where they intend. The Internal Revenue Service has significant reporting requirements for nonprofit organizations, but it can be difficult for an average donor to determine whether a charitable organization is spending money wisely or wasting it on administrative largess.

Marion and John Dugan of Philipstown

In the face of this, Garrison residents John and Marion Dugan created Charity Navigator in 2001 to evaluate the integrity of American nonprofits. Today the service, with its extensive website, monitors 5,448 charities using a fourstar rating system. Due to the number of nonprofits, the organization only looks at those with more than $500,000 in public support.

Even as the IRS strengthens its 990 reporting requirements, Charity Navigator has been seeking ways to measure the actual effectiveness of America's nonprofits, a relatively unprecedented goal and one that sends shivers down the spines of some nonprofit executives.

According to its extensive and award-winning website, Charity Navigator measures the day to day functioning of nonprofits as well as their long-term financial health. If an organization relies on only a few key donors, it will receive lower marks than one that has built up a broad base of support, less contingent on the whims or fate of a handful of donors.

Additionally, the service reports on donor privacy policies, a key concern for many; 2,100 of the charities it rates have no such policy, while 2,550 have very strict policies. The remaining 800 allow donors to remove their names from any lists that might be shared with other organizations.

Charity Navigator's four star rating system already has had an impact on the nonprofit world. With some charities, "once their stars [go] up, there is a dramatic effect on their receipts," Dugan says. Indeed, Organizations that receive the full four stars trumpet their status, and those that lose stars also seem to lose donors. The American Red Cross, for example, used to advertise its star rating on envelopes sent to donors but when it lost two stars all of the stars disappeared from its mailings.

Measuring the impact of charities is not easy, so to date Charity Navigator has focused on navigating through the financial information nonprofits report to the IRS via Form 990. The service purchases the forms, which are then scrutinized by its seven analysts, led by President Ken Burger, in their Mahwah, N.J.. headquarters.

To highlight the best and worst of the nonprofit world, Charity Navigator's website features numerous "top ten" lists. There are the 10 Slam Dunk Charities, such as the Austin Community Foundation, recognized for fiscal health and for respecting donor privacy. There are 10 Charities Drowning in Administrative Costs, such as the Boys Choir of Harlem which reports that 66.3 percent of its budget goes toward such expenses.

Unfortunately, some charities have employed clever accounting methods to make them look more effective and efficient than they really are. But, as Dugan says, because all the information Charity Navigator collects comes from the IRS, any misrepresenting might have legal repercussions on the charities involved.

"If they're giving fraudulent information to the government, we actually call them [the charities] and talk to them," Dugan said. Of course, "If they're a little on the slippery side, they don't want to talk to us," he added.

The organization's new push is the gargantuan task of measuring the results achieved by charities. Dugan says that Charity Navigator is "trying to measure outcomes."

But that type of measurement is difficult. Donors want to know, Dugan says, "If you're saving whales, how many whales do you save? If you're saving souls, how many souls do you save?" But how does one measure such things, particularly the intangible benefits many charities claim to provide?

To begin, Charity Navigator's analysts with meet some experts who have studied charity effectiveness. Next they will select a "pretty homogenous group," such as private secondary schools and then they will determine a selection of standards by which those organizations can be judged and compared. In the end, they will likely incorporate an "end-user" rating system, such as that for which Zagat has become famous.

Charity Navigator also releases sundry studies and reports, including its recently released, fifth annual CEO Compensation Study. The groups analysts discovered that nonprofit CEOs make an average salary of $158,075. Typically salaries are tied to an organization's success, but some revelations were surprising: The Masonic Homes of California, which only has been given two stars for spending 45 percent of its money on administrative costs, pays its CEO $1,224,987.

Other CEOs receive their salaries from multiple sources, which, according to the report allows them "to report a lower salary on any one Form 990, satisfying donors who want to keep the number low." And others seem to be a family affair, where several people with the same last name pull in a significant amount of cash. Feed the Children, for example, pays Larry Jones $228,334, Frances Jones $176,699, and Larri Jones $155,327.

The highest paid CEO in the study was the president of the University of Delaware, who makes $2,377,1000. A professor at Columbia had the highest salary overall, at $4,301,018, while USC's Pete Carroll came in second at $3.9 million.

Originally, the Dugans selffunded the service, which is now seeking contributions from the public. Dugan, who is chairman of the board of a public company and also former president of the Putnam County Historical Society, says he and his wife have a fondness for the Hudson Valley.

"I love it here," he says. "I love the history and the natural beauty." He said that Philipstown in particular is home to some "very interesting people."

Why Doesn't Charity Navigator Evaluate Land Trusts and Preserves?

 

In Philipstown, there are a number of nonprofit land trusts—Scenic Hudson, Hudson Highlands Land Trust, and Open Space Institute—but Charity Navigator no longer rates them because such organizations "have the potential to realize wild fluctuations in revenue from year to year due to inconsistencies associated with large land acquisitions and donations of valuable real property.

"To further complicate matters, within the sector there remains some disagreement as to how certain related expenses should be reported on the IRS Form 990. Inconsistent factors may yield inconsistent evaluations over time and so in keeping with our promise to provide reliable information and to evaluate all charities fairly, we have decided to no longer evaluate charities classified as Land Trusts and Preserves," according to the FAQ section of charitynavigator.com.

To check up on other charities, visit charitynavigator. com.