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Alert: Changes to Charity Navigator’s Rating System

June 10, 2016

Influential assessment organization Charity Navigator unveiled a new rating system Wednesday, June 1, that it says gives donors a better picture of nonprofit organizations’ performance over time. Charity Navigator updated seven metrics used for evaluating charities’ financial health, which comprise half of the overall rating. Metrics for accountability and transparency, which make up the other half, are unchanged.

Charity Navigator CEO Michael Thatcher said that the user experience will remain largely the same, and organizations will still be rated on a scale of zero to four stars. Many nonprofit organizations consider their Charity Navigator star rating a critical metric that can help them obtain resources and attract new donors, according to the New York Times.

Key measures being adjusted include:

  • Three year averages used for five of the seven financial metrics
    • Before: The program expense, administrative expense, fundraising expense, fundraising efficiency, and working capital ratio metrics were calculated using data from the most recent fiscal year.
    • After: Each of these five financial metrics now uses averages of data from the three most recent fiscal years.
  • Liabilities to assets ratio
    • Before: Not included in rating criteria.
    • After: Used as a measure to detect solvency issues or future liquidity issues.
  • Program spending
    • Before: The program expense metric score generally equaled an organization’s program expense percentage multiplied by 10 (e.g., if an organization spent 85 percent of its expenses on programs, it would receive an 8.5 for its program expense metric).  However, organizations spending less than 33 percent of budget on programs automatically receive zero points for their full financial score (which makes up half their Charity Navigator rating).
    • After: The program expense metric is now calculated using a table that is more favorable than before for organizations with high program expense ratios, but is less favorable than before for organizations that spend less than 50 percent of its budget on program expenses.  Generally, organizations spending more than 85 percent of budget on programs receive 10 out of 10 points for the program expense metric. Those spending between 33 and 50 percent of budget on programs receive zero points for the program expense metric.  As before, organizations spending less than 33 percent of budget on programs automatically receive zero points for their full financial score (which makes up half their Charity Navigator rating).
  • Revenue growth metric
    • Before: Used as a measure to evaluate a charity’s sustainability.
    • After: Not included in rating criteria.
  • Deficit adjustment
    • Before: If a charity operated with ongoing deficits, the charity’s program expense score was adversely impacted.
    • After: No longer used in calculating a charity’s ratings.

Nonprofit Times reported that more than 2,100 of the 8,000 organizations Charity Navigator rates (approximately 27 percent) will experience a change in their ratings as a result of the new system implemented June 1. Ratings improved by one star for 19 percent of charities examined, and dropped by one star for 8 percent. Fourteen charities saw their rating increase by two stars and just two saw their rating decrease by two stars.

We recommend that organizations rated by Charity Navigator evaluate the new criteria to determine the impact that it will have on their rating and prepare development and program personnel with the information necessary to respond to stakeholder inquiries.

Charity Navigator rates 501(c)(3) public charities that have filed at least seven years of Forms 990.  Charity Navigator does not evaluate 501(c)(4) organizations, 501(c)(3) public charities that are not required to file a Form 990 (such as churches and their integrated auxiliaries), organizations that receive most of their funding from government grants or fees they charge for their program services, private foundations, or organizations that file Form 990-EZ or Form 990-N.

Additionally, Charity Navigator requires charities to have public support (i.e., generally, contribution revenue excluding government grants) of $500,000, total revenue of $1,000,000, and fundraising expenses of more than $0 for the two most recent fiscal years in order to be evaluated.

 

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