Which Charities are Doing a Good Job

At a meeting of the Estate Planning Council (Richmond, VA) this past week, a gentleman pressed me on the point of wanting to know how one can tell if a charity is doing a good job. How can a donor know that his or her money is going to solve a social problem, rather than pay a lot of unnecessary operating expenses?

The answer to this question is not simple, although some try to make it seem so. First, we have to take all religious organizations off the table, including the widely admired Salvation Army. They do not file public information, so the answer to the efficiency question is, "Do you trust them?"

An increasingly referenced source of information is Charity Navigator, which gives one to four stars to charities based on their level of non-program expenses, compared with others in their field, broadly defined. This is useful information, but it would be a mistake to view it as definitive. As a former credit analyst, I would have lost my job had my analysis ended with the computation of ratios based on reported data. Ratios are useful for helping to formulate the right questions. They are virtually useless when considered as answers.

As an example, here are the Charity Navigator ratings for some Richmond-area charites that are widely supported in our community (1 is lowest, 4 is highest) -- Central Virginia Food Bank (3), Children's Museum of Richmond (2), The Community Foundation Serving Richmond and Central Virginia (4), Cross Over Ministry (2), Lewis Ginter Botanical Garden (2), Make-A-Wish Foundation of Central and Western Virginia (2), Maymont Foundation (2), Meals on Wheels Serving Central Virginia (3), Richmond Ballet (3), Richmond SPCA (4), Richmond Hill (2), Richmond Symphony (2), Special Olympics Virginia (3), United Way of Greater Richmond and Petersburg (2), Virginia Historical Society (3), Virginia Museum of Fine Arts Foundation (4), Virginia Opera (2) and Virginia Performing Arts Foundation (1).

To illustrate my point about how ratio-based ratings are useful only as data on which to base questions, let's look closer at the lowest-rated charity on this list, and coincidentally alphabetically last. The Virginia Performing Arts Foundation (www.vapaf.com) is engaged in an early stage renovation and construction project that will greatly enhance the Carpenter Center -- a vintage performing arts locale -- and will construct useful new performing spaces in the heart of downtown Richmond. To this point, it has only spent money, and it is fair to ask how wisely that money has been spent. However, it will not have any program-related expenditures until these projects are completed and open to the public. So, what does it tell us that this nonprofit is so poorly rated compared with The Pittsburgh Cultural Trust (4) and Jazz at Lincoln Center(4)? Not much.

The real question is, "How should a donor dig deeper?" How does one evaluate the risk and potential reward of a grant to the Virginia Performing Arts Foundation? This is where I recommend that donors work with their local community foundations, because that is where they get real analysis. Highly skilled grant program officers meet with the management of these organizations and ask the "why" questions. They evaluate the strength of the boards. They make judgments on the importance of the mission and the likelihood of success when nonprofits like the Virginia Performing Arts Foundation take on significant risk. Their role is analagous to the mutual fund manager, who adds value to all of the fund's clients by relying on in-house staff to get to know first-hand the companies in which they choose to invest. How many of the great investments of our time were made when a now-renowned company had negative earnings?

So, in answer to my friend at the Estate Planning Council, just as investors are increasingly turning to low cost, high quality mutual funds to provide answers in the for-profit arena, donors are increasingly turning to community foundations in the not-for-profit arena. Therein lies my recommendation: give me (or your local community foundation) a call.

Robert Thalhimer

Comments

In this case your analysis appears completely wrong. As a frequent user of CN I would never, ever look at the star rating alone, that may have been your primary mistake.

CN also shows $1 million on program expenses and $5.1 million in administrative. If you take the few minutes to scan the 990, you will see $3.7 million of management expense is attributed to the write-off of a Richmond city receivable. That is likely the actual cause of the low star rating and should prompt the question.

As to construction, $409,153 in program expense is attributed to construction-related expenses. Why do you make the assumption that the reconstruction is reducing the program expense ratio? If the building is used for a program, it should be a program expense. That is not too confusing, to me at least.

It is surprising to me how many of the new watchdog groups, such as yourself, are making superficial comments regarding the lack of usefulness of fundraising and adminisitrative expense ratios. I was hoping you would provide the first concrete example I have seen of misleading information coming from use of the ratio, but apparently not.

Best of luck.

Posted by: Erich Riesenaberg

Thank you for your comment, Mr. Riesenaberg. I think I'm the one who has greater first-hand information on Virginia Center for the Performing Arts than you do. While seem bothered by the $3.7 million write-off of an obligation from the City of Richmond, gathered correctly from the 990, what you do not know is that this was a necessary step to freeing up over $20 million of new funding from that same source.

There were no assumptions in this analysis. My analysis was the result of a direct site visit with the CEO and other staff, and detailed review of the 2007 audited financial statements, which are not yet available. This is my point. A community foundation gains access to this kind of information, which the general public only sees one to two years later, when it is largely outdated, and when Charity Navigator finally picks it up.

Posted by: Robert L. Thalhimer