Changes to Charity Navigator’s Rating System

Written on July 19, 2016

Influential assessment organization Charity Navigator unveiled a new rating system June 1, which is intended to give donors a better picture of organizations’ long-term performance. The nonprofit updated seven metrics used for evaluating charities’ financial health, which comprises half of the rating. Metrics for accountability and transparency, which make up the other half, are unchanged.

Charity Navigator CEO Michael Thatcher said that user experience will remain largely the same, and organizations will still be rated on a scale of zero to four stars. Many nonprofit organizations consider their Charity Navigator star rating a critical metric that can help them obtain resources and attract new donors, according to The New York Times.

Key measures being adjusted include:

Expenses for program, administration and fundraising costs:

  • Then: Calculated using data from the most recent fiscal year.
  • Now: Averages data from the three most recent fiscal years.

Liabilities to assets ratio:

  • Then: Not included in rating criteria.
  • Now: Used as a measure to detect potentially excessive debt.

Administrative expenses and overhead:

  • Then: Only organizations with zero administrative expenses could receive 10 out of 10 points.
  • Now: Organizations that score within a given range for their type of organization can receive 10 out of 10 points.

Program spending:

  • Then: Organizations spending less than 33 percent of their budget on programs automatically receive zero points for their full financial score (which makes up half their Charity Navigator rating). This remains unchanged.
  • Now: Criteria expanded such that organizations spending more than 85 percent of their budget on programs receive 10 out of 10 points for program expense. Those spending between 33 and 50 percent of their budget on programs will receive 0 out of a possible 10 for the program spending criteria.

Nonprofit Times reported that more than 2,100 of the 8,000 organizations Charity Navigator rates, (approximately 27 percent) will experience a change in their ratings as a result of the new system . Ratings improved by one star for 19 percent of charities examined, and dropped by one star for 8 percent. Fourteen charities saw their rating increase by two stars, and just two saw their rating decrease by two stars.

We recommend organizations evaluate the new criteria to determine the impact it will have on your rating and prepare development and program personnel with the information necessary to respond to stakeholder inquiries.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Warren Averett is an independent member of the BDO Alliance USA. This article was borrowed with permission from BDO USA, LLP.

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