Charity Finances: A Resource for Year-End Giving

A reader of Joanna Depue's "More or Less Church" wrote to her last week about a post on MOLC from several months ago about Episcopal Relief and Development. The woman indicated that she had looked at ER-D's "990s" and was surprised at how high the staff salaries are. She was dismayed about that use of funds and was now hesitant to give to them.

Obviously, we all wanted to know what the woman, Ann, was talking about, since it's our impression that ER-D is a well-run institution. So, as the local numbers person, I said I would check it out. What follows responds to Ann's comments and also presents some general information that you might find helpful as you plan your own year-end charity donations to whatever organizations you might support.

What Is a 990?
First, "990" is the IRS form that tax-exempt organizations file every year instead of a tax return. It is very detailed. The form alone is 11 pages long. The total submission, including supporting schedules, runs much more than that. ER-D's for 2008 is 53 pages long, and the Heifer Project, which I chose for comparison, is 54 pages. The form asks about the charity's purpose and for a list of activities undertaken toward that purpose. It asks about officers, by name, and their salaries, and it asks a series of policy questions, including the general basis for establishing those salaries. The form says right at the top "Open to Public Inspection" and among those policy questions is one asking how people get access to the form. In ER-D's case, the form is available through a link right on the homepage of the website. Here, right in the middle. In the website's "About Us" section, there are links to the previous six years of these statements.

Part IX of the 990 concerns the charity's expenses by type – grants it makes, benefits it pays, purchases, employee compensation, etc. And it asks the charity to specify the division of those expenses into the actual running of programs, administration of the organization and fundraising.

For ER-D, we see that the Executive Director makes over $200,000 in salary and benefits, and several other top officers have compensation of $100,000 or more. These figures might well seem startling. At the same time, we also see that total outlays run to nearly $29,000,000, of which about 5% is administration and 10% goes for fundraising. Those numbers and ratios make it look that the organization might not be so profligate. How can we judge this?

ER-D has two designations that give us a way to get to some comparative information without having to comb through the 990s for all the charities we might be interested in.

The Better Business Bureau Seal
ER-D carries the seal of the Better Business Bureau as an "Accredited Charity". The BBB's "Wise Giving Alliance" has established 20 standards for good practice by charities. These involve governance, management of expenditures, reporting accuracy and public disclosure. Reports on conformity with these standards appear on the BBB website for more than 1,000 organizations. These reports are quite specific about ones that do not conform and what the failings are. The Wise Giving people conduct the "BBB seal program" among the institutions that meet all 20 standards and then submit material for periodic reviews of their compliance. Charities that are eligible for the seal must apply for it and pay a fee to display it, and not all of them choose to do that. Here is a link to the relevant section of the BBB website where all of this is explained.

Charity Navigator Ratings
ER-D also has a numerical rating from a group called Charity Navigator. This organization was formed in 2001 to do exactly what we want to do here, make comparisons among charities for the quality of their operations. They comb through the IRS 990s for over 5,400 organizations of all kinds: arts, colleges, health researchers, patient support organizations, animal rescue funds, libraries and – among numerous other categories – development and relief organizations. Their rating system examines ratios of program expense to total expenses (more is better), administrative expense to total expense (less is better), fundraising to total expense, revenue growth and expenditure growth, and fundraising efficiency, that is, how much the organization spends to raise $1 in donations. Financial management measures include how many years' worth of operating expenses the charity has in cash assets (more is generally better) and a negative item for running persistent operating deficits. These ratios and measures are put onto a numerical scale and added up. Charities are assigned a number of stars, from zero to 4, corresponding to the sum total of points they achieve. This assessment, because it is based on numerical measures, is almost totally objective, and the scores allow individual organizations to be compared to overall nonprofit finances as well as their own category.

For 2007, the latest rating available, Episcopal Relief and Development had 61.19 points and received 4 stars. Many charities in the category of international relief and development did receive this highest rating, 117 of 207, although some well-known ones, including the Heifer Project (55.25) and Lutheran World Relief (59.26) come in with 3 stars. The differences compared to ER-D include proportionately higher fundraising expenses for Heifer and almost no program expansion at the Lutheran charity. Heifer and ER-D have both been growing rapidly. The Lutheran group, however, has one of the highest numerical scores for management efficiency, and as you see, its total is less than 2 points lower than ER-D's. In the total scoring, the charity next above ER-D is Doctors Without Borders, at 61.23 points.

Visit Charity Navigator. Browse to your heart's content there. It's a fascinating and informative site. www.charitynavigator.org.

Do CEOs Make Too Much Money?
Now, about those officers' salaries. Charity Navigator has also done some comparisons of CEO pay. This is a matter of some concern for donors, including the woman Ann whose query to More or Less Church started this topic for us. She's not alone. On the webpages where each charity is discussed, there's a "Comments" tab. On Heifer's page these comments constitute a real debate about whether relatively large expenses, including the CEO's salary, are valuable. On the ER-D page, there are five comments, all expressing some degree of distress that officers of an anti-poverty organization make such "big bucks", and writers are in fact disappointed that ER-D's pay scale seems not any more restrained than Heifer's.

Our commentary here so far, based on the Better Business Bureau and Charity Navigator analyses, suggests these ER-D salaries are not out of line. Navigator has gone further in classifying the salaries; they have calculated averages on three bases: the category of the charity's activities, size and location of headquarters. In the 2009 CEO Compensation Study, the average among CEOs at all 5,448 institutions is $158,075. By category, salaries at international relief agencies do tend to be lower, $131,096. But size and geography more than counter-balance that. For all those organizations larger than $13.5 million in expenses, the average is $286,760. And for all those located in New York City, the average is $220,735. So by those comparisons, the ER-D President, at about $220,000, is only average for New York and well below average for the size of the operation he is responsible for managing.

And this very last phrase is an important one. The Navigator analysts explain to us that we potential donors often miss one of the main aspects of charity administration. The executives who run these operations do very much the same kind of work as executives of profit-making companies. They manage employees and – especially in the case of something like ER-D – they coordinate very complex world-wide undertakings. They need to have highly professional skill-sets and extensive experience. So we can hardly expect to pay them a substandard wage. Indeed, the Navigator people say, in underlined text, "You're better off supporting a charity that is fiscally efficient, achieving its programmatic goals and paying its CEO well, than a charity that has substandard fiscal health, fails to live up to its mission, but under-pays its CEO." Right. Just ask a family in Africa who's getting mosquito nets from ER-D.

One other notion. These statements and data all cover 2007 and 2008. The financial world and the world economy has, of course, looked very different in 2009. So we need to monitor all of this as later information becomes available. Deficits and income and outgo have likely changed a lot this year, and not for the better. In the meantime, if you are able, support the charity of your choice. They really need it.