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General Ramblings: Letter Of The Law

By Paul Clolery - April 1, 2013

A draft of a letter of protest to be sent to the self-proclaimed watchdog group Charity Navigator is making its way around the sector. It regards Charity Navigator’s method for determining whether a charity is a good steward of donor largess.

Well, that should certainly scare them into changing the position.

As first reported by The NonProfit Times in an October 1, 2012 cover story and parroted recently in other outlets, Charity Navigator changed the way it rates organizations based on joint allocation costs. Charity Navigator decided to exclude joint allocation costs from its rating system, not including them in program expenses.

Joint allocation costs, under certain guidelines and criteria in accounting standards, allow a portion of certain materials to be split between program expenses and fundraising expenses. There is now also having to prove community impact.

The methodology is the polar opposite of how charities account for such things based on Internal Revenue Service (IRS) guidelines and Generally Acceptable Accounting Principles (GAAP).

Charity Navigator President and CEO Ken Berger acknowledged that the change would affect the rating of some charities. The organizations and their for-profit fundraising partners are starting to see those reduced ratings and they are horrified.

Where has the Fundraising Industrial Complex been for five months? Sending a letter to an organization where there has long been a scorched earth policy regarding charities seems a little tame compared to the damage being done to the reputations of charities.

Charities have long had love-hate relationships with watchdog groups. They grovel for a gold star from organizations that don’t even meet their own arbitrary standards. For example, Charity Watch, which until recently was known as the American Institute of Philanthropy, declines to put its own Form 990 on its website but insists on transparency by others.

Along with the IRS, just about every state attorney general and the National Association of State Charity Officials examine the finances of nonprofits. Charities spend tens of thousands of dollars to comply with the law but also contort to receive high ratings from rating services that in some cases are as inane as being one step above Yelp. Many of the so-called watchdogs have made the space between themselves and a television camera a very dangerous place.

Here’s the kicker. The vast majority of donors don’t care. Also in that October 1, 2012 issue were the results of a national study by Opinion Research on behalf of The NonProfit Times. Half of donors who make a gift as a result of a direct mail appeal do not do any Internet research about the organization before writing the check. That’s an increase from 47 percent during 2008. Less than one-quarter (22 percent) of donors who go online check in with a ratings agency, down two points from 2008 but up from 11 percent in 2005.

The U.S. Census Bureau reported there were 311.8 million Americans in 2011. Charity Navigator reported to The NonProfit Times that during 2011 it had 3.4 million unique visitors to its website. That’s barely 1 percent of all Americans.

All of the rating services claim that they have the donor’s best interest at the core of their missions. That’s the problem. They don’t have the best interest of the charitable sector at their core. There is one that does objectively examine records and the sector needs to take more notice.

The BBB Wise Giving Alliance (WGA) has long been tough on charities but has adjusted its position based on economic realities. In December 2009, the WGA began considering the recession’s impact when evaluating charities’ fundraising and program expense ratios.

At the time, WGA President & CEO Art Taylor said spending ratios have limited value in assessing the worth of a charity and too much reliance on them is unwise. “With the economy going sour, donors who fail to look beyond overhead ratios can unduly penalize good charities. We all need to be reasonable, particularly to those charities that otherwise meet rigorous accountability standards,” Taylor said at the time.

Leaders in the charitable sector have long said there needs to be self-regulation. Here’s that opportunity. The signees of the letter to Charity Navigator need to fund the BBB Wise Giving Alliance as a fair broker of nonprofit information. They need to coalesce around the WGA and anoint it as the service the sector trusts to provide fair and accurate assessments.

It is going to cost a few dollars to get the WGA scaled up to handle the increased responsibilities. If each of the signers allotted just $50,000 annually for the next few years, that would start the development of a truly independent industry self-enforcement agency. The foundation world provided millions of dollars over the years to GuideStar, which was the first organization to digitize the federal Form 990 and get it into the hands of the public and researchers. Perhaps some of the same forward thinkers with deep pockets can help to fund this effort.

Independent Sector and the Leadership 18 of United Way Worldwide need to convene a meeting and put forth the wisdom and financial resources to make this happen. For now, the for-profit marketing firms hired by charities need to stay away from what might develop. There needs to be more than a perception that the nonprofits have developed these guidelines without the influence of those who might profit from them. That might be an unfair assessment, given the many agencies that are of the highest integrity. Sometimes you just have to do things yourself for the long-run good.

Such a beefing up of the BBB will save money in the long run and prevent further contortion of nonprofit financial statements. The sector leadership needs to stand up and take control of how the sector is regulated and perceived.  NPT

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