How We Rate Them
Rating charities is challenging. Nonprofit organizations are diverse in their activities and missions. But all charities have to file public Form 990 tax returns with the IRS providing some transparency about how they use donations and operate.
Using this data, we have created a rating system that pulls out key points from each charity. Based on that data, we offer our opinion about effective organizations.
In addition to those numerical factors for scoring a charity, we provide unscored information that donors may find noteworthy, including insider relationships, offshore investments, and scandals.
Our rating system is comparable to a Consumer Reports for veteran charities. We provide the public a free gauge to evaluate a veteran charity organization prior to donating.
- Percentage of Budget Spent on Programs. All charities have some overhead. Our standard is that a charity must spend at least 75% of its budget on programs that deliver what is needed in order to be recommended. Those charities that spend 85% or more of their budget on programs are eligible for our “Highly Recommended” designation.
- Use of Joint Costs. “Joint costs” is an accounting method whereby charities can classify some costs as “program” spending that really might be fundraising. For example, a charity may send out a fundraising letter, but count most of the letter as an “educational program” expense because the letter informs the recipient about an issue. This can be used to excess. Some charities classify millions of dollars as “program” or veteran benefit expenses that are more typically considered marketing for donations. Many donors, if they were aware, might consider these costs better classed as marketing or overhead than money spent delivering “program” services. Charities are allowed by the IRS to use joint cost accounting. But many don’t, and we frown upon it. If we calculate that a charity is using joint costs of more than 5% of their budget, which allows them to look more effective, we do not recommend donating.
- Fundraising Campaign Results. Some states require charities to disclose the results of their solicitation campaigns that use paid fundraisers. In some cases, a charity may keep 80% or more of what is raised. In other cases, the solicitation company may keep most or all of the money raised. We look at state records. If we see a history of solicitation campaigns with less than 50% of the money raised going to the charity, then the charity does not meet our standards.
- Excessive Asset Reserves. Some charities are sitting on a pile of money. In general, we believe a charity should be spending donations, not sitting on them. If a charity has assets equal to or greater than three years’ budget, we do not recommend giving. However, we may make exceptions on a case-by-case basis, and we will disclose this in our review.
We believe there are details about a charity that donors may want to know, so we provide additional information for donor awareness. We do not score this information.
- Insider relationships. Charities have to report insider transactions such as employees who are related to officers. If we see this, we will disclose it in our review.
- Offshore investments. Some charities keep money in hedge funds in offshore tax havens including the Caymans and Bermuda. This may be used by charities to avoid or minimize paying unrelated business income tax.
- Scandals. There may be lawsuits, governmental investigations, or news stories on charities. If we are aware of relevant information, we will disclose it in our review.
Appeals Process / Charity Response
We are committed to accuracy, and there are many nuances in the world of charities. If a charity wishes to provide additional information or context, we are always open to considering it. Inquiries can be sent to [email protected].