Which charities use your money most efficiently?

Roberta Langtry was a generous donor, but she could be difficult. The retired teacher had a habit of calling up the staff at the Nature Conservancy of Canada, an environmental charity that purchases land to preserve it, with a laundry list of complaints.

“Why are you sending me a mailout on glossy paper?” she asked staffer Helen Kim in her no-nonsense school teacher voice during a phone call in the late 1990s. “It’s a waste of money. You should send it out on recycled stock, or better yet, don’t send it at all.” When the charity made the mistake of sending Langtry a coffee table book to thank her for donations totalling several thousand dollars a year, she phoned again. “I’m a pensioner and I live very frugally,” she said. “I spend 40% of the money that comes back to me on the charities I support and I would prefer that all the money go towards securing land.”

Kim made sure the requests were followed up on, and over time, she even developed a warm relationship with Langtry. So she was saddened when she took a call in the summer of 2005 and Langtry reported in her matter-of-fact manner that she was suffering from liver cancer, and felt her “time was coming soon.”

A few months later Kim received a call from the executor of Langtry’s estate. He told her that Langtry, who never married, drove an aging Volvo and lived in a one-storey home in East Toronto, had secretly amassed a fortune, thanks in part to some savvy stock bets. She had left the charity the largest donation in its history: $4.3 million. “I never guessed that she had that kind of money,” says Kim. “It was a shock.”

A large chunk of Langtry’s donation went to purchase land in the Happy Valley Forest, a ecologically significant site in the Oak Ridges Moraine region near Newmarket, Ont., home to the red-shouldered hawk and several species of salamander. The forest is one of 75 sites that the Nature Conservancy protects across the country, totalling two million acres of land.

Langtry’s legacy lives on, and at the Nature Conservancy’s headquarters in Toronto, staff haven’t forgotten her dogged insistence that donated money is not to be wasted. To this day, they make do with donated furniture and second-hand computers. Staff get multiple quotes on substantial purchases to make sure they’re getting the best price, and expenses are scrutinized by upper management. All in all, it spends just $11 out of every $100 in expenses on overhead, which is one of the reasons it received an ‘A’ grade on MoneySense’s 2011 Charity 100 rating of the 100 largest charities in Canada.

MoneySense created the Charity 100 rating system last year for donors like Langtry, who fear that their money isn’t always spent the way it’s supposed to be. No one likes feeling that their money is being squandered on lush offices, expensive fundraising dinners or frittered away due to poor management. When you donate money, you want it to be used directly to help the cause at hand, whether it’s conserving land for future generations, finding a cure for cancer, helping children in developing countries or providing disaster relief to the victims of an earthquake.

As Carl Harvey, a MoneySense subscriber, frequent donor, and retired accountant from Peterborough, Ont., told us: “I worry that the money does not get through to the people who need it. The money gets hung up on salaries and other administrative costs. I realize that it costs some money to run these organizations, but it shouldn’t be the majority of the funds.”

To help donors get a better idea for how efficiently charities use their money, we set up a sophisticated rating system that grades charities on how they perform in four different categories: program spending efficiency, fundraising costs, governance and reserve fund size. We scour each charity’s annual tax filings for clues as to how efficiently the charity is run, and we personally contact each and every charity on the list and ask them to fill out a detailed questionnaire designed to measure how well they are governed. Once we’ve gathered all the data, we analyze it and assign each charity a letter grade in the four categories, based purely on the numbers. Then we tally up their scores to arrive at an overall letter grade, just like you get on your report card in school.

How much goes to the cause?
The first factor we measure to arrive at our overall grade is the percentage of your donation that goes to completing the charitable work, versus the amount spent on overhead. We recognize that healthy organizations need to invest in things such as equipment and staff training, so it’s important that a certain percentage of a charity’s spending goes toward administration. But we felt that if a charity was spending far more on overhead than other charities in its category, that raises a red flag.

For instance, in the health charity category, most charities spend between 60% and 90% of their money on programs, but as you can see in our rating chart there are a few charities in that sector that spend only 40% to 50% on programs. Because their spending on programs is significantly lower than other charities, we gave them a low grade in that category.

In general, we believe that a highly efficient charity should be spending just 15% on overhead, so we give our best score to charities that spend 85% or more on programs. For organizations that don’t run programs directly, for example, hospital foundations and fundraising organizations, we measure them based on how much money they give to their recipient charities. We give top marks for fundraising organizations that flow 90% or more of their expenditures to other charities, leaving just 10% for overhead.

How efficient is the fundraising?
The second thing we look at is the cost of fundraising. This is a sore point for donor Carl Harvey, who worries that some of the money he gives to more than 20 charities each year is spent on the mailings they keep sending him. “I have a stack of letters from the charities that’s four inches high,” he says. “They’ve barely cashed my cheque and they’re writing me for more money.”

In order to get a picture of which organizations are raising money the most efficiently, we calculate how much it costs each charity to raise every $100. For example, United Way of Greater Toronto spends just $8.98 to raise every $100 for its member social service agencies. Julia Gorman, the vice-president of resource development, says keeping fundraising costs low is engrained in the organization’s culture. For instance, rather than holding flashy galas, the United Way tends to lead corporate fundraising drives. That way, the corporations raising the money absorb much of the cost of raising it. “Everything we do is done to maximize the amount of money we can get out to our member agencies,” Gorman says.

A charity that operates programs gets top marks for spending less than $10 to raise $100, while fundraising organizations that support outside programs, like the United Way, get the most points for spending less than $5 to raise $100. Charities that spend much more than the norm to raise each $100 get a lower grade. While many charities don’t include the costs involved in running lotteries in the fundraising ratios in their annual reports, we do include them, as we feel that these are hard costs that are spent acquiring funds.

Is the charity professionally run?
The third factor we look at is governance. The majority of the points in this category are based on a survey that MoneySense sends to the charities. It’s based on the Better Business Bureau’s Standards for Charity Accountability and Imagine Canada’s Standards for Charities and Nonprofits, and it includes questions about such things as whether an organization has a multi-year plan and a formal code of ethics.

We follow up with each charity by telephone, and organizations that don’t respond at all get zero points for the survey, as we feel charities should be accountable to requests for information, especially when they are made on behalf of their donors. We also give points to organizations that post their complete audited financial statements on their websites, as we believe that charities should not be hiding their finances from public view.

For example, World Vision, which assists children living in poverty in developing countries, did well in the governance category, receiving a score of 10.6 out of 10 (we give one bonus point to organizations that disclose the CEO’s exact salary). The charity got a high score on our governance survey and received points for posting its financial statements online. “We disclose our CEO’s salary and post our financial statements because we want to send a message of accountability to our donors and constituents,” says Caroline Riseboro, World Vision’s vice-president of public affairs. “Our donors expect us to be good stewards with their donations, so we want to show them our commitment to transparency.”

Do they really need your money?
The final thing MoneySense looks at is a charity’s reserve fund, meaning how much the charity has in the bank. We believe that a healthy organization should have some money set aside for a rainy day, but if it has many years of income sitting in a slush fund, it may not be in dire need of additional donations. In some cases, there may be legal restrictions on how this banked money is used—for instance, the charity may not be able to spend the principal, but must invest it and spend only the returns on that investment. However, we still felt that if a charity has enough sitting in the vaults to fund its projected activities for years, it may be in less urgent need of new donations than a charity which only has enough to pay for a few months’ worth of costs. In this category we gave full points to charities that have between three months and three years of reserves on hand.

The response: criticism and praise
When we produced Canada’s first comprehensive charity rating system last year we expected a response, but we were surprised by the steady stream of questions, praise and criticism that came in throughout the year. Charities that received high grades called us requesting reprints to give to donors and mentioned their ratings in annual reports and career postings. Journalists from other media outlets phoned asking for assistance with their own stories, and charities that were too small to make it on our list asked for help in crunching their own program and fundraising costs. Several organizations told us they decided to post their financial statements online in response to our story.

However, we also found that many within the charitable sector had concerns. “In terms of pushing the sector towards more accountability and transparency, I think the Charity 100 is good, but I’m not sure if the focus on program costs is going to drive the right behaviour in the sector,” says Rosemary McCarney, CEO of Plan Canada, a charity that supports children in developing countries. “There’s an idea out there that a charity is good if it spends only 20% on administration and fundraising and 80% on program costs, and if you’re out of that approximate range, somehow you’re bad or inefficient. I don’t think that’s necessarily true.”

She points out that organizations in certain parts of the sector may have legitimate reasons for spending more on administration, such as higher labour costs. McCarney also says our system penalizes charities that want to invest in things such as IT systems or staff training, which may push up administrative costs.

Dan Pallotta, a well-known former professional fundraiser in Boston, has a harsher view of our rating system. “It’s a deeply flawed way of rating charities, because nowhere in there is there any objective measure of the actual impact they’re having, which is the only reason they should exist in the first place,” says Pallotta, whose book Uncharitable argued that non-profits are hindered in solving important social problems by limits on salaries and fundraising expenses. “If you’re unable to enquire into the most important thing, then I don’t think people should be publishing ratings, frankly.”

Pallotta also takes issue with the idea that there’s something wrong with high fundraising costs, arguing that the main competition is consumer spending. “If a charity spends 90 cents to raise a dollar and 10 cents goes to the cause, that’s better than if that 10 cents went to popcorn and a movie.”

Improving the Charity 100
We listened carefully to all of the feedback we received, and if we thought a suggestion was worthwhile, we implemented it.

For instance, to help address Plan Canada’s concern that a large one-time outlay on a new IT system could inflate a charity’s administration costs in a given year and make it look less efficient, we switched from using one year’s worth of financial data to three. It meant many more hours of analysis, but we agreed that looking at the average annual spending over the past three years gave us a more accurate picture of how a charity usually spends its money.

To address the concern from fundraiser Dan Pallotta and others that our system doesn’t include a measure of what a charity has actually accomplished with your money, we decided to add a whole new section. This year MoneySense asked each charity to submit a short statement describing its accomplishments over the past year. Fifty-eight of the charities on our list decided to take part, and you can find the edited statements in “The bottom line”.

Finally, we beefed up our governance survey to make it more comprehensive, and we’re pleased to say that our response rate from the charities rose from 29% last year to 58% this year. We also adjusted the way we calculated our reserves to increase accuracy. Even with these changes our system isn’t perfect, but it’s definitely stronger.

How to use our ratings
You can either focus on the letter grades we hand out in each of the four main categories (program spending efficiency, fundraising costs, governance and reserve fund size), or the final grade, depending on what’s most important to you. Either way, keep in mind that we normalize the scores for each type of charity, so that we are effectively comparing each charity to its peers. That means a Health charity which received all ‘B’s for the four sub-categories could potentially score higher overall than a Social Services charity that got some ‘A’s. In other words the absolute scores matter—but how well each charity does in comparison to other similar charities matters too.

After consulting our chart, if you find that an organization you support doesn’t fare well, it doesn’t mean you should automatically cancel your cheques. Instead, investigate further by visiting the charity’s website or reading its annual report. There could be legitimate reasons why an organization spends more on administration or fundraising than its peers. If you still have questions, call the charity to discuss your concerns.

Also, be sure to check out the accomplishments listed in “The bottom line” to see if the organization is doing work that you think is important. (If there is no listing, it’s because the charity opted not to take part.)

Finally, we also advocate a more proactive approach to giving in general. Rather than just responding to random calls to give to various causes, whether it’s a friend running a marathon or a fundraiser you happen to meet in the street, consider taking the time to draw up a proper giving plan. Sit down with your family to discuss which charitable goals are most important to you and use our list to research the charities that are best accomplishing those goals. That way you can maximize the impact of your donations by giving regularly and making sure you’re paying the charity directly, instead of through intermediary fundraising companies on the street or on the telephone that keep a chunk for themselves.

We hope that by following these methods, and using the Charity 100 as a reference, more of your hard-earned dollars will go towards supporting your vision for an improved society. With more money going to the best organizations, we hope to see more projects like the Nature Conservancy’s Happy Valley reserve in the future. After all, the more effectively your donations are used, the more good gets done for every dollar you give.