September 12, 2003

By Chad Konecky

ckonecky@cnc.com

http://www.charitynavigator.org

By definition, charities should be beyond reproach. But the nation's largest watchdog has rated some North Shore foundations as causes with less effect.

Pet lovers out there may be interested to learn that Salem's Northeast Animal Shelter, New England's largest non-profit shelter, earned a one-star or "poor" rating from the nation's largest charity evaluator.

And philanthropically minded folks -- with or without a furry friend at home -- might be stunned to hear the newly renovated Peabody-Essex Museum in Salem employs one of the 10 highest-paid CEOs (Dan Munroe at $287,503 in 2001) amongst Charity Navigator's lowest-rated charities, nationwide.

Enron this is not. But as non-profits come under heightened scrutiny from watchdogs and donors alike -- a regulatory fire fueled by sequential scandals at the Red Cross, the United Way and The Nature Conservancy over the past two years -- many charities are being red-flagged for inefficient fiscal practices and apparent shortcomings in programmatic effectiveness.

Charity Navigator currently rates 111 Massachusetts non-profits in nine categories, including six charitable organizations along the North Shore, based on 2001 financial data.

Of those, the Beverly-based Trustees of Reservations, a land conservancy, rated highest with 68.19 of a possible 70 points (a four-star score), while the Northeast Animal Shelter scored lowest with 35.83 points -- despite a three-star rating for how well it turns revenue growth into program growth.

Founded in 2001, Charity Navigator (CN) rates non-profits upon two modes of performance -- organizational efficiency and organizational capacity -- by plugging federally reported financial data into proven models, formulas and ratios.

As of this week, there were 2,518 charities in CN's database rated via this methodology, more than five times the penetration of the next biggest charity evaluator.

CN's finance-based evaluations encompass charities in all 50 states as well as Puerto Rico, plus hundreds of organizations operating internationally.

"Good oversight involves looking at financials regularly," confirms Ed Becker, executive director of the Essex County Greenbelt Association, a wildlife habitat conservancy, which also owns a four-star rating from CN. "But that data only tells part of the story. It's just a snapshot of a non-profit's financial conduct. You have to look at the other aspects: whether they're delivering on mission and meeting program obligations."

But sometimes just a snapshot provides enough to reveal a world of misuse, misrepresentation and systemic inefficiency.

Last fall, United Way of America executives conceded the organization's accounting practices tallied contributions with bookkeeping methods that made totals look more robust and expenses appear smaller.

A stunning series of reports published in the Washington Post this May detailed alleged business practices by The Nature Conservancy, the world's largest private nature preserve system, which benefited the charity's benefactors.

Among those allegations:

Reports of a program whereby TNC purchased raw land, attaching certain development restrictions, then resold the property to TNC benefactors at greatly reduced cost.

These benefactors, in turn, would allegedly tender a cash donation in the amount of the difference and seek a related charitable tax deduction.

Plenty noteworthy, too, is former American Red Cross President Bernadine Healy's abrupt resignation from office at the close of 2001 after a controversy over how the organization handled donations it received following the September 11 terrorist attacks.

Those whistles were blown because the transgressions occurred at highly visible international foundations.

Far fewer people hear about organizations like the United Children's Fund, which allocated only $5,000 of a $2 million revenue stream to children, according to CN executive director Trent Stamp.

The reason?

Governmental oversight of America's 16,000 for-profit, publicly held companies is Orwellian, compared to the accountability of the 865,000 charitable organizations through which nearly 15 percent of this country's Gross Domestic Product flows, a figure in excess of $400 billion.

Why should anyone who doesn't give a charitable dime care?

Because state, local and federal governments contributed more than $250 billion of taxpayer money to America's charities in 2001.

Meanwhile, as the number of U.S.-based charities doubled from 1992 to 2002, the number of IRS agents assigned to monitor them stayed the same.

Forget Enron; it seems America's charities are high-wire acts bereft of a safety net.

Given current oversight realities, instances of misappropriation aren't so much rampant as they are inevitable.

Put another way, the fox isn't living in the hen house, but the joint is built atop his den.

"Financial analysis provides fair and even-handed insight into how successfully a charity is delivering," says Sandra Miniutti, director of external relations for New Jersey-based CN.

"It's certainly providing an accurate evaluation of how a charity is spending its money."

CN does not recommend potential donors use its ratings as the only factor in deciding whether to support a particular organization.

But for non-profits like the Northeast Animal Shelter, when CN underscores inflated fundraising costs vs. comparable peer charities (39 cents of every dollar the shelter raised in 2001 went toward fundraising expenses), the resulting one-star rating can be damaging.

Especially given how competitive the market is for donor dollars.

"Absolutely, it can have a negative effect," says Northeast's administrator Randi Cohen, noting the shelter places 4,000 pets annually, four times the placement rate of Pittsfield's Berkshire Humane Society, which earned a three-star rating from CN.

"We had a different fundraising consultant (in '01) and they definitely padded the bill. But nobody's going to look into it to figure out why we got one star. I'm upset that old information is being used."

What gives?

In a Harvard Business Review report this spring, former U.S. Senator Bill Bradley co-published an article with McKinsey & Co. consultants claiming America's charities are wasting $100 billion a year.

The report speculated that if the bottom half of America's charities on the financial efficiency scale operated nearly as efficiently as the top half, $100 billion in additional resources would be at their disposal.

The current culture of charitable foundations, though widely strapped for paid administrative support, consistent volunteerism and steady donor dollars, does indeed operate under lax regulatory rules.

For-profit companies must file quarterly financial statements, submit audited annual tax returns and deliver an audited annual report to the SEC within 90 days of their fiscal year's end. Non-profits must merely file an informational return within 135 days of their fiscal year's end.

That's the [IRS] Form 990, the foundation of the interpreted data CN bases its ratings upon.

Four-month filing extensions are granted to non-profits without the risk of interest accrual.

Seems lax. And lax can make fat.

"This is about misuse of the public trust," says Andy Kendall, executive director of the Beverly-based Trustees of Reservations (TOR) for the last three years.

"The easiest way to measure a charity's effectiveness is how much money goes toward its purpose. That's as easy to measure as profitability in the private sector. That's our responsibility as an institution."

TOR is delivering. The conservation entity spent only seven cents of every dollar raised on fundraising efforts and dispensed only 10.4 percent of its total functional expenses upon administrative costs for its fiscal year ending (FYE) March of 2002. TOR also returned more than half its primary revenue growth to accounts funding program expansion. And TOR boasts enough net liquid assets to survive almost eight years without raising another penny.

That compares favorably with peer charities like Southern California's four-star Wildlands Conservancy (66.50 overall points, FYE June '01), which showed nearly identical administrative expenses and a better growth ratio, but less than a year of operating liquidity.

The four-star American Farmland Trust (62.82 points, FYE September '02) grew programs more aggressively than TOR, but spent more to raise a dollar (18 cents) and also showed less endowment.

The Vermont Land Trust (63.1 points, FYE June '02) fund-raised, administrated and grew more efficiently than TOR, but reported less than a year of operating liquidity.

CN disclaims that "the vast majority of charities pursue their missions in fiscally responsible ways," but the watchdog insists the current system for monitoring charitable activities is insufficient.

Because CN groups charities into nine categories of purview (Health, Education, Arts, etc.) and subdivides those classifications into a total of 29 more narrowly defined causes (medical research, technical institutes, museums, etc.), organizations are measured against their truest peers.

That means Salem's Northeast Animal Shelter is evaluated against charities in the business of animal rights, welfare and services as opposed to, say, wildlife conservation. Apples to apples, as it were.

Not that the fruits of the system couldn't use some polishing.

CN generally gives charitable foundations high scores for cash in the bank, termed the working capital ratio, a reflection of how long an organization's net liquid assets could sustain it.

But too big a nest egg could mean a charity hoards funds it should be dispensing.

"We're not about putting together a war chest and sitting on it," says Kendall, noting that 95 percent of TOR's preserves sprawl within five miles of half of Massachusetts' 6 million residents.

"Our mission is protecting open space. The cultural and natural treasures of Massachusetts are disappearing before our eyes. We can't squirrel money away or we won't have anything to protect tomorrow.

"At the same time, we have to protect the future of the properties we do have," he adds. "Forever. And that's a long time. So how you use your resources requires discipline."

CN acknowledges its analytical shortcomings.

"Documenting a charity's programmatic effectiveness is a hot topic throughout the charity world, but no standard exists to do that," says CN's Miniutti. "Any attempt to do so right now would be too subjective. The most comprehensive format right now is analyzing the Form 990s."

Art-rithmetic

Form 990's resulting qualitative inflexibility contributed to the Peabody-Essex Museum's substandard CN rating of two stars (48.37 points) based upon its FYE December '01 numbers.

Because the institution had already begun closing galleries and discontinuing services in anticipation of its expansion as well as escrowing revenue to pay the bill, the museum's program growth ratio and its total expenditure on programs was far below normal, says museum spokesman Greg Liakos.

Program funding constituted only 48.4 percent of the museum's total functional expenses in the year analyzed. Liakos says that figure averaged 72 percent from 1993 to 2000.

Still, the museum's administrative expenses, 41.7 percent of functional expenses in '01, were higher than every peer charity CN listed, including Boston's Society for the Preservation of New England Antiquities (22.5, FYE March '02), New York's Jewish Museum (17.2, FYE June '02) and New Jersey's Newark Museum (34.4 percent, FYE December '01).

Liakos also attributed that gap to impending expansion. But certainly, the PEM's CEO salary factored into the equation. Dan Moore made 36, 30 and 15 percent more, respectively, than his counterparts at the above institutions for the fiscal year reported. For the record, only the antiquities society earned a better rating (three stars) than the PEM, as both other listed peers received two stars.

Moore was singled out in CN's top-10 list nationally (see adjacent chart) because he received more than $250,000 in annual pay, but headed an organization devoting less than 60 percent of its budget to programs and services in the year reported.

Liakos characterizes Moore's salary as "not inconsistent" with peer organizations.

CN's evaluation also showed the PEM growing its programs at a lowly rate of 3.5 percent, just ahead of inflation and only ahead of Newark amongst its listed peers. That despite revenue growth of 25.5 percent during FYE '01.

Liakos again attributes the low figure to the calm before an expansion storm that wrought 25 new galleries, a new public performing arts center and a new education center this past June. He was asked to provide an updated program expenses growth figure, but could not.

"We have a greater sense than ever that we're fulfilling our mission," says Liakos. "If they evaluate us fairly a year from now, we'll be where we should be."

The kindness of strangers

American individuals gave close to $200 billion to non-profit organizations in '01. The overwhelming majority of donors gave without any objective data as to whether the charities were spending that money wisely. People essentially wrote checks solely out of the goodness of their hearts.

Commendable.

But blindly faithful, nonetheless.

Fundraising costs can be a smoking gun for charities that drift from fiscal responsibility and sound management practices. The average charity in the CN database spends 10 percent of its income on fund raising.

Some charities' donations are mitigated by high-priced third-party fund-raisers or fundraising consultants who, for example, bill indirectly for mailing-production fees they subcontract. Northeast's Cohen says that was the case in '01, when the shelter spent 38.9 percent of its budget on fund raising.

That figure compared unfavorably with CN-classified peer charities (in FYE December '01) such as humane societies in Berkshire (23 percent), New Hampshire's Monadnock region (6.1) and New Hampshire's Upper Valley (7.4), the latter two having earned four-star ratings from CN.

Cohen notes Northeast's fundraising expenses dropped in its most recent fiscal year, but only to 38.5 percent. Still almost four times the CN average.

"This is a mom-and-pop operation except when you consider the huge volume we do," says Cohen. "We're always looking to cut corners and we learned a long time ago you have to spend money to make money. I don't even work out of our Salem facility. I work out of my house because we don't have the room for me. We only have three board members and one is unpaid."

CN's numbers lend credence to Cohen's point. Northeast's administrative costs are considerably lower (FYE December '02), at 7.5 percent, than listed peer charities. Berkshire spends double that on overhead at 15.1 percent, while Monadnock (12.3) and Upper Valley (11.1) also appear less administratively streamlined, despite their fundraising efficiency.

"Fund raising can be a high line item if you're having big fancy galas in New York City with Nobel laureates," says Katie Clapp, president of Newburyport's volunteer-driven FRAXA Research Foundation, which supports research on fragile X syndrome, the leading inherited cause of autism and mental impairment among Americans.

"We've done some of that because it's worth it. But otherwise, we're bare bones. I'm the only one that gets paid and I don't get paid a lot."

Clapp's salary in fiscal year 2002 was $60,000 drawn from an operating budget of $922,413.

So how in the name of Mother Teresa can a relative colossus like TOR, boasting total revenue of better than $20 million in FYE March '02, hold its fundraising expenses to 7.7 percent?

"High-profile directors of development don't usually hang around for more than a couple years in this business," explains Kendall. "Think about all that institutional knowledge that walks out the door. Ours has been here 15 years. With that level of consistency, continuity and knowledge of the donor base, we're much more able to understand the needs of our membership and therefore spend less to raise more."

In the end, that's what CN attempts to quantify and, in so doing, serve as a guide to intelligent giving.

Visitors to http://www.charitynavigator.org  can discover charities like the four-star rated Sierra Club are raising money and delivering aid to intended recipients in fiscally efficient ways, while some, such as Greenpeace (one star), are not.

CN is a non-profit and is unaffiliated with any other charity in the world. The watchdog does not evaluate organizations classified as churches or foreign missions such as, believe it or not, the Salvation Army, because these charities are not required to make their financial information public.

(The Salvation Army has denied CN's request for the requisite information.)

CN also declines to evaluate charities that receive almost all their funding from government grants or from access fees.

Like the four North Shore charities owning a four-star rating from CN, metro Boston non-profits tend to score well with the nation's largest evaluator. In a study released earlier this summer, CN compared the median performance and size of the largest non-profits in the top-20 metropolitan markets. Boston rated second behind Houston in overall performance with a median score of 58.58 (of a possible 70), ahead of 18 other metro markets and the national median of 56.04.

"Rating non-profits is a very important form of oversight in trying to provide increasingly sophisticated donors with the information they can't get elsewhere," says TOR's Kendall. "Charity Navigator isn't the only one doing it, but it's an important service and we hope to stay at the top of their ratings system."

http://www.townonline.com/lynnfield/news/local_regional/nss_feanscharitable09122003.htm

http://www.charitynavigator.org