Charity Navigator Changes Its Rating System

May 31, 2016       Mark Hrywna      

More than 2,100 of 8,000 organizations evaluated by Charity Navigator, or about 27 percent, will see their ratings change due to a new ratings system to be activated on June 1. There is no change, however, to its embattled stand on joint allocation cost.

The enhanced ratings system to be unveiled by the Glen Rock, N.J.-based nonprofit updates seven metrics used to assess an organization’s financial health. No changes were made to the metrics for accountability and transparency, which comprise the other half of a charity’s rating.

The new metrics introduce a Liabilities to Assets Ratio and “better capture an organization’s financial efficiency and capacity by allowing for higher scores in program expenses, removing the volatile primary revenue growth metric,” according to Charity Navigator.

“After years of research and consultation with donors, charities, and independent advisors, we believe CN 2.1 is an even more accurate reflection of a charity’s true worth for the public’s consideration,” Charity Navigator President and CEO Michael Thatcher said.

Ratings still range from 0 to 4 stars but 27 percent of the 8,000 nonprofits assessed — approximately 2,160 charities — will receive new star ratings. Only 49 charities earned perfect scores of 100.

The last significant change in the rating came two years ago when the organization implemented a 100-point scoring method for the rating (90-100 would translate to a four-star rating, anything less than 55 would receive zero stars).

The changes provide the potential for a full 10 points on the high end of a charity’s finance score and raise the bar on the low end of the finance score.

If a charity spends less than 33 percent of its budget on programs, it automatically would receive a zero for its entire financial score (half the rating). Under the new ratings, that remains the same but if an organization spends between 33 percent and 50 percent on program, it would receive zero out of a possible 10 points for its program expense. At the other end of the spectrum, an organization spending more than 85 percent on program would be able to get a full 10 points for that portion of its financial rating.

Ratings improved by one star for 19 percent of charities examined — about 1,520 — under the new system. There was a one-star reduction for 8 percent, approximately 640 organizations. Fourteen charities had their rating increase by two stars and only two nonprofits – Law Enforcement Legal Defense Fund and National Police Defense Foundation – had a two-star rating decrease.

About 390 charities with an overall four-star rating dropped to three stars and of those, 80 were the result of a new Form 990, not the change in methodology. On the other hand, 698 nonprofits with an overall three-star rating increased to a four-star rating. Among the notable organizations seeing a ratings change are the Alzheimer’s Association and Compassion International, both dropping from four stars to three, and The Leukemia & Lymphoma Society, going from three stars to two. Dress for Success and the Autism Research Institute went in the other direction, with a three-star rating moving up to four stars.

Most feedback to the changes has been positive, Thatcher said. There isn’t much interaction with very low-rated charities, he said, as that’s not something on which those organizations seem to be focused.

The most difficult scenarios have involved organizations that received a four-star rating as recently as February as a result of their latest tax form but given the new methodology will rate as three stars. “It’s difficult. In general, feedback has been, you’re moving in the right direction but it’s hard when you get caught in that transition phase,” Thatcher said. CN is working on adding a note in a nonprofit’s ratings page indicating that it received a four-star rating based on the previous methodology, information which could be available via the historical ratings page.

“Some of the things we’ve changed definitely fit in areas where there’s been concern” from some organizations and trade groups, Thatcher said, such as removing the revenue growth metric and taking a three-year average rather than the just the most recent fiscal year.

CN’s highly controversial stand on joint allocation cost and privacy are still areas that are outside of the financial ratings but likely to have disagreement, he said.

The absence of impact or results reporting tends to leave financial metrics or ratios as a basis for evaluation, according to Thatcher. “The sooner we get to being able to talking about impact, the easier it will be for all of us,” he said. “We’re looking for a place we all can live with. At the end of day, we’re moving in the right direction,” he said.

Thatcher put a timeline of 12 months to include results reporting in the ratings, which would be the next big step for Charity Navigator’s evolution. He hopes to have first version of the results reporting released but first wanted to finish work on Charity Navigator 2.1 to clean up the financial metrics to build a better base for the rating.

MAP International received a sneak peek of the ratings changes during an April meeting of the Partnership for Quality Medical Donations (PQMD), of which it is a member. The removal of the three-year average and revenue-growth metric were changes that many members of PQMD appreciated, according to Jodi Allison, MAP’s vice president of global giving. The growth metric, in particular, used to penalize organizations that experienced a spike in donations, such as beneficiaries of the Ice Bucket Challenge in 2014.

“I feel like it’s all moving in a very positive direction,” Allison said. “Anytime that you are making changes that result in a more fair analysis of a nonprofit is a positive change,” she said.

MAP International currently holds a four-star rating and Allison does not expect that the adjusted system will change that. Organizational leaders do not anticipate making any operational adjustments to complement the ratings system but will monitor how MAP and other organizations fare.

Charity Navigator’s web site saw more than 9 million visits last year and had some 40,000 unique donors.