The 2010 Charity 100: Where is your money going?

The idea of creating a ratings system for charities first occurred to me while eating curried shrimp and eggplant with my uncle Art at a Chinese restaurant in Toronto’s Yorkville district. As rain poured down outside, we got into a deep discussion about which charities most deserve your money. My uncle, a retired professor who lives in Buffalo, N.Y., donates around $8,000 a year to human rights groups, poverty advocates and environmental organizations, but he worries about how his money is used. Like many donors, he’s happy to give generously if his money is actually helping people­—but he has no guarantees that it is.

Recent studies and newspaper headlines are enough to give any donor doubts. In 2008 the Hospital for Sick Children Foundation was criticized for giving former president Michael O’Mahoney a lavish $2.1-million golden parachute. A Toronto Star investigation in 2002 revealed that almost one in six Canadian charities was spending more money on running the organization than on the actual charitable work. Data from five American states shows that less than half the money collected by for-profit contract fundraisers actually reaches the charities. Meanwhile a 2003 study by Harvard Business Review and McKinsey & Co. found that non-profits in the U.S. could free up $100 billion a year by changing operating practices to become more efficient.

My family has strong ties to the non-profit sector, so I know that many organizations are lean and well-run, constantly stretching their limited dollars to push important causes forward. But a few bad apples can taint the barrel, and it’s tough to find out which apples are bad. The Canadian government tries to regulate charities through its tax collection arm, the Canada Revenue Agency (CRA), but with only 270 staffers overseeing 85,000 charities—and a mandate that’s more concerned with tax evasion than charitable program outcomes—mismanaged organizations and outright scams can and do slip through the cracks.

To me, it seems that part of the solution is to give potential donors more information so they can judge the charities for themselves. If an independent third party could delve into the charities’ financials and come up with a fair and easy-to-use ratings system, Canadians would be more likely to direct the $14 billion that they donate every year to the charities that most deserve their money. That’s why we have decided to attempt what many say is impossible: establish the country’s first ever grading system for Canada’s 100 largest charities. We know that such a system is controversial and doomed to be incomplete, but having some information is better than none—and the key financial indicators can be telling.

For instance, we think it’s useful to know how much of your money is absorbed by overhead, and how much goes directly to the cause. We understand that charities need to spend some of the money they receive on things like accountants and offices for support staff—but if a charity is spending more on such things than the cause itself, we think there’s some explaining to do. We also think it’s helpful to get an idea of how much a charity is spending to raise each additional dollar in its fundraising efforts. Imagine if you donated $10,000 to a charity, only to find out that all of your money was used to air annoying hospital lottery TV ads, rather than helping people. In our rating system, we also keep an eye out for charities that don’t seem to need your money, because they never use it. Believe it or not, some charities already have years of reserves in their vaults. Do you really want to add another $1,000 to a growing pile of dusty, unused money? Finally we look for red flags such as poor governance and secretive charities that won’t divulge what they do with your money, even when donors ask.

There are many other important things you need to know before giving to a charity, such as how valid its mission is and how successful it is at accomplishing its goals. But such factors are difficult to measure through hard numbers, so we weren’t able to incorporate them directly into our rating system. Instead, we did the best we could with the data currently available through the CRA’s 2008 charity information filings to come up with what we call the MoneySense Charity Standards Grade. This score is based on similar systems already in place at charity rating agencies in the U.S., and it’s designed to make it easier to spot when key financial ratios at a charity are out of line for its sector. It also helps donors identify charities with overly large or small reserves, or those without proper governance. By applying it to Canada’s largest 100 charities—as measured by the dollar amount of public donations they receive—we’re simply hoping to help our readers make the most effective use possible of the limited dollars they have available to give.

How much goes to the cause? The first factor we looked at was how much of your donated money goes to the cause itself, versus administrative and fundraising costs. Yes, sometimes you need to spend money to raise money. But Kate Bahen, managing director of Charity Intelligence Canada, a Toronto organization that advises donors, says that charities can get carried away and spend more time empire-building than helping the people they’re supposed to help. “There are some organizations that are incredibly nimble and cost-efficient,” she says, “while others have an incredibly bloated cost structure.” Because of this, she says, the percentage of income an organization spends on administration and fundraising can be revealing.

In our rating system, charities receive 10 points if 85% or more of their overall annual expenses go to charitable programs, 7.5 points if 75% to 85% go to programs, and so on. Charities that spend less than 60% on charitable programs get zero points.

One wrinkle we ran into was how to grade fundraising organizations such as the United Way or hospital foundations, which don’t run charitable programs themselves. Such organizations exist mainly to funnel money to outside groups, so in these cases we decided to count the money they transferred to other organizations as program expenses. As well, fundraising organizations generally have lower overhead costs (as they are not running programs directly), so we held them to a higher standard, awarding top marks only if 90% or more of their expenses go to other charities. Fundraising organizations with less than 70% going to other charities received no points in this category.

How efficient is the fundraising? Spending big bucks on galas, telemarketing, door-to-door campaigns and TV ads can raise awareness of a charity—which in turn can bring in even bigger bucks. But some charities are more efficient at this than others. So the next factor in our Charity 100 grade is how much each charity spends on fundraising for every $100 raised.

This is a controversial subject, because from a charity’s point of view, spending $90 to raise $100 makes perfect sense. After all, at the end of the day you end up with $10 more to spend on your charitable programs. “But from a donor’s perspective, do you want 90 cents of your dollar to go to fundraising costs, and only 10 cents to go to charitable programs?” asks Bahen. “It’s prudent to seek charities with low fundraising costs where your dollar will have more impact.”

To rate the charities on fundraising efficiency, we divided the amount spent on fundraising in a year by the amount raised. A charity gets a top mark of 10 points if it spends $10 or less to raise $100. It gets 7.5 points if it spends between $10 and $20 to raise $100, and so on. If it spends $35 or more, it gets zero points. That cutoff point may seem arbitrary, but both the American Institute of Philanthropy and the Better Business Bureau Wise Giving Alliance cite $35 as a reasonable upper limit to the amount that should be spent to raise $100. The CRA agrees, saying that a charity which spends $35 or less to raise $100 is unlikely to generate concerns about its fundraising costs.

For organizations that focus primarily on fundraising for outside causes, such as hospital foundations and the United Way, we again demand a higher level of efficiency, since fundraising is pretty much all they do. For these organizations, we awarded full points to those that spend less than $5 to raise $100, while organizations that spend more than $30 to raise $100 were given a zero.

When we looked at how efficient the top 100 charities were at fundraising, we were surprised to find that many big-name organizations spent far more than our $35 cutoff. For instance, the Heart and Stroke Foundation of Ontario spent $61, and the Canadian Cancer Society Ontario Division spent $43. When we looked closer, we quickly found out why their fundraising expenses were so high: lotteries.

It turns out that using lotteries to raise money is particularly costly, as they rely on pricey TV ads, cash prizes, cars and trips, all of which have to be paid for. But Heart and Stroke Foundation of Canada chair Irfhan Rawji argues that the Ontario lottery generates $10 million in profits—money it couldn’t raise otherwise. “Calculating a fundraising efficiency ratio from the information from the CRA doesn’t tell the whole story for an organization like the Heart and Stroke Foundation, which raises money in many different ways,” he says.

That’s a reasonable argument, but we still stuck to our $35 limit. That’s because we felt that lottery expenses really are a hard fundraising cost. Lotteries can be so expensive, in fact, that they can result in a huge waste of your donated money. In 2008, the BC Cancer Foundation lost more than $600,000 on an unsuccessful lottery.

When looking at the fundraising efficiency grades, however, keep in mind that there could be valid reasons for a low score. A new charity, or one working on a less popular cause, such as helping drug addicts, will usually have higher fundraising expenses, for example.

Is the charity run properly? A charity is only as good as the men and women in charge, and “many have concluded that an organization with a strong and active board is less likely to have other problems,” says Bennett Weiner, of the Better Business Bureau Wise Giving Alliance. We agree, so we decided to make strong governance one of the categories in our rating.

Half of the points in this category are awarded based on a short governance questionnaire that we sent out to all 100 charities. We based our questions on the Better Business Bureau’s governance standards and adapted them based on the opinions of various Canadian experts about standard practices in well-run organizations. Organizations got half a point for every question they answered “yes” to. Twenty-nine of the 100 organizations we contacted responded to our questionnaire. Those which did not respond at all—even after a follow-up phone call—got zero.

The remaining points in the governance category were awarded for transparency. Susan Phillips from Ottawa’s Centre for Voluntary Sector Research and Development, says that of all the factors used for assessing charities, “transparency is the most important.” Charities should expect to be accountable to the public if they rely on the public for donations, and we felt it’s not right for a charity to ask you for money, then refuse to tell you how that money is spent.

While researching our rating system, we found a huge range in attitudes when it came to secrecy. Some charities were open with their financial information when we requested it. Others, however, had bare bones websites and refused requests to provide information. “Many organizations are not interested in transparency,” says Mark Blumberg, a charity lawyer with Blumberg Segal LLP. “They want to be private fiefdoms where they can secretly do what they want and put out the information they think you need to know.”

In order to rate the top 100 charities on transparency, we looked at both what information they provide automatically and how they deal with specific requests. For instance, if a charity posts complete audited financial statements on its website, it receives four points; if it posts only partial financial statements online, or if it agreed to provide us with complete audited financial statements only upon request, we gave them two points. If a charity refused to provide financial statements, or didn’t respond at all, it got zero points. If the organization had a privacy policy on its website explaining how personal information was used, it got another point. We awarded a bonus point in the governance category to charities that disclosed the exact salary of their executive director, as we believe that charity leaders—just like CEOs of public companies—should be transparent about their pay. Only 11 out of the 100 charities gave us this information.

Do they even need your money? How would you feel if you found out your $10,000 donation to a charity from three years ago hadn’t been touched? Not too good, we imagine, yet it happens all the time. That’s because some charities build up massive reserve funds that sit in investment accounts for years. “It’s mind boggling,” says Bahen. “People think they’re making a difference and helping find a cure for disease in this lifetime, but the money’s being parked in investment accounts. It’s just going to Bay Street.”

Charities argue that large reserve funds give them long-term stability and provide income, which is true, but we felt that if reserve funds were ballooning beyond three years’ worth of expenses, it could mean that a charity is not in urgent need of new donations.

The American charity evaluator, Charity Navigator, believes that a healthy charity needs to have some rainy day funds on hand, so we decided that a charity should have at least three months’ reserve to get a top score of 10 points in this category. Organizations got no points if they ran a deficit and had no reserve funds (except for hospitals and major art galleries, which tend to have little money in reserve due to regular government funding), or if they had more than five years’ worth of funds on hand. Keep in mind that there could be some legitimate reasons for a charity to temporarily have a large amount of money in reserve, for example, if it is saving up for a new building or if it has just received an unusually large donation.

How to use our rating system The MoneySense Charity 100 provides a quick way to tell if a charity is meeting industry standards for its finances and governance. But many people I spoke with warned me there are crucial things you need to know about a charity that can’t be captured by comparative data. There’s no quick solution. To find a charity you can support with confidence, you need to do some research, and some thinking.

Start with an issue that you’re passionate about. Don’t rely on telemarketers and door-to-door salespeople to tell you what’s important to you. Much of this type of soliciting is done by for-profit fundraisers, meaning a chunk of your donation will be skimmed off before it even reaches the charity. Instead, be proactive: look online or on our Charity 100 for organizations working in the area you’re interested in until you find a few that you think might be a good fit.

If the organizations you like are on the Charity 100, at this point you may want to see if they are meeting financial and governance standards. You’ll find that on our chart we have divided the charities up into sectors and awarded them easy-to-read letter grades, just like those awarded in school. (When calculating the overall grade, all categories were weighted at 100% except for the reserve fund score, which was weighted at 50%.)

One important point we’d like to make is that we only compared each charity to other charities within the same sector. So you can’t say that a charity that got an ‘A’ in the Fundraising Organizations category is necessarily better than a charity which got a ‘B’ in the Social Services category. Because we normalized the scores across each sector, it’s quite possible that a less efficient charity in one sector will get a higher grade than a more efficient charity in a different sector.

Finally, even if a charity you’re interested in receives a low overall grade, don’t write it off automatically—it’s possible the charity may have a legitimate explanation. Instead, look at the subcategories to see where the charity is weak and where it is strong, and read the charity’s website to make sure you have a clear understanding of what it does, how it is structured and its track record. As you do your research, it may become clear why it has unusually high fundraising costs, for instance, or no reserve fund. It doesn’t hurt to do a quick Google search to see what people are saying about the organization, and if you still have questions about the charity, you should call.

The most important thing is to get an understanding of the overall effectiveness of the organization’s programs. Good financial health and governance are irrelevant if an organization isn’t accomplishing anything. If it’s an addiction centre, find out how many addicts have been successfully rehabilitated in the last year. For a land trust, find out how much land has been purchased. Ensure that the organization has a long-term strategic plan, as well as regular evaluations to measure and improve the results of their programs.

We think our Charity 100 is a valuable tool for Canadian donors. But we know it’s far from perfect. More sophisticated systems, such as the one used by Charity Navigator in the U.S., have customized target ranges for program costs, fundraising efficiency and reserves for various sub-sectors within the charity field. They also use more than one year of data, to smooth out irregularities such as large one-time donations.

Any measurement system is only as good as the data it uses, and unfortunately, the data available to us was limited in both quantity and quality. In some cases, the numbers may not be accurate due to differences in how charities categorize costs, in others, because charities provided the CRA with misleading or erroneous data.

In fact, after completing this process, we feel strongly that the Canadian government needs to provide donors with more information and do more to ensure its accuracy. Both the U.S. and England have stronger disclosure requirements for charities. As well, while little governance information is collected in Canada, in the U.S. the IRS asks for detailed senior executive salary information as well as including questions similar to the ones in our governance questionnaire.

Charities need to do their part too. While many are doing a great job of being transparent, some are doing as little as possible. At the very least, large charities need to publish detailed annual reports and post their full audited financial statements online.

We feel that providing the public with high-quality easy-to-access data benefits everyone—except, of course, those charities that have something to hide. Pertinent information presented in a useful manner can save donors a lot of time too. My uncle Art in Buffalo spent years weeding out bad charities from his list. He looked at their finances, read appeals with a critical eye, and phoned and wrote when he had concerns. If a charity didn’t respond with credible answers, he stopped giving. Now he’s at the point where he feels confident that all the charities he gives to are doing good work, and he’s proud to support them. We hope our ratings will help you feel more confident about the charities you support too.

Research by Emma Marshall and Jacqueline Nelson