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Heifer International’s Response to Charity Navigator Rating
- Charity Navigator is one of the primary charity rating services along with BBB Wise Giving Alliance. Recently, Charity Navigator revised its rating of Heifer International from three stars to two stars (based on a four star system) for our fiscal year 2012 results. In contrast, the BBB Wise Giving Alliance awards Heifer its highest rating.
- Charity Navigator evaluates two dimensions …accountability/transparency and financial. Heifer received four stars for accountability/transparency and one star for financial results. The composite score resulted in the two star rating for FY12 only. Heifer received three stars overall for the previous eight years of rating.
- Financial measures include program, administrative and fundraising expenses (as a percent of total expenses or, alternatively, the functional allocation). Other considerations include fundraising efficiency (percentage of fundraising expenses to total revenues), revenue and program expense growth (over three to five years) and the working capital ratio (the ratio of current assets to current liabilities). Charity Navigator gives Heifer one star for the financial dimension.
- Charity Navigator’s financial dimension is based on the IRS Form 990 and does not value periodic growth investments needed to scale up program impact, diversify fundraising, or build global systems. These investments to diversify revenues and integrate operating systems will yield substantial efficiencies and better information for decision making in support of scaling up program impact. Investments typically require an exception to functional allocation, or the percentages of an organization’s funds spent on programming versus fundraising and administrative costs.
- Charity Navigator ignores joint support cost allocations in its financial dimension, despite the fact that joint support costs are in line with generally accepted accounting principles – this negatively impacts charity ratings now and in the future. For the year ended June 30, 2012, Heifer identified joint costs of approximately $11.4 million, of which $4 million was allocated to program spending. Joint support costs occur when an expense can be considered both fundraising and program/education based on criteria of purpose, audience and content. Examples of joint support costs include World Ark magazine and the Gift Catalog.
- Prior to fiscal 2012, Heifer’s board approved the FY12 budget with an exception to its executive limitation on functional allocation. This exception enabled short-term investments in fundraising and administrative costs that will yield exponentially more impact long-term. The one star financial rating partially reflects this temporary functional allocation change as well as the effects of a natural growth in revenue and program expenses. Periodic investments in Heifer’s growth strategies – scale up program impact, diversify and increase fundraising and build global systems – will yield exponentially more missional impact long-term.
- The IRS Form 990, including the functional allocation, determines the financial rating. Despite this, the chief executive officers of three rating services, including Charity Navigator, issued a recent joint letter entitled “The Overhead Myth” that states in part: “The percent of a charity’s expenses that go to administrative and fundraising costs − commonly referred to as overhead − is a poor measure of a charity’s performance … In fact, many charities should spend more on overhead. Overhead costs include important investments that charities make to improve their work − investments in training; planning; evaluation; and internal systems; as well as efforts to raise money so they can operate their programs.”
- According to “The Overhead Myth” letter: “The people and communities served by charities don’t need low overhead, they need high performance.” Heifer International is committed to running an efficient, high performance organization. Periodic investments are necessary for exponential long-term growth. Clearly, the most important measure of a charity is impact. It is why we exist…and none of the rating services currently address how effective a charity is in its programmatic mission. This is a significant gap that provides opportunities for us to engage in dialogue that leads to greater understanding across the nonprofit sector.