How American Institute of Philanthropy Rates Charities
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How AIP Rates Charities
AIP weighs the criteria carefully
Selecting a charity to support is a bit like playing God. Ideally, it should take into account your most deeply held concerns and convictions.
Before sending in a donation to a group, you can now consider how well it will spend your money by referring to the AIP’s Charity Rating Guide. Each organization is listed by category with its phone number, financial performance measurements and an overall grade (where enough information is available). You can also review the ratings of other charities in the same category to compare a particular group with those which do similar work.
The Guide indicates whether or not an organization is eligible to receive tax-deductible contributions, noting those charities which may have separately incorporated entities with a different tax-deductibility status.
The Guide shows which groups are new or have received an updated evaluation.
The Guide shows which groups have provided AIP the following documents (which we have requested): annual report, complete audited financial statements and Internal Revenue Service form 990 with Schedule A where applicable. Donors may want to consider an organization’s accountability to AIP when making giving decisions.
Omission of charities from the Charity Rating Guide or this web site does not imply a negative evaluation or rating.
Some groups receive large amounts of donated goods and services. These items can be difficult to value and distort the calculation of how efficiently a charity is spending your dollars. Donated items are generally excluded from AIP’s calculation of the following ratios:
PERCENT SPENT ON CHARITABLE PURPOSE
This is the portion of total expenses that is spent on charitable programs. In AIP’s view, 60% or greater is reasonable for most charities. The remaining percentage is spent on fundraising and general administration. Note: A 60% program percentage typically
indicates a “satisfactory” or “C range” rating. Most highly efficient charities are able to spend 75% or more on programs.
When a range of numbers is given, the higher number, in most cases, reflects the charity’s own decision on how much is spent on charitable program expenses. The mailings and phone calls of these groups may serve a dual purpose: raising funds and educating donors. However many of these groups consider such mailings and phone calls to be largely educational and their costs to be primarily program expenses. In some cases AIP adjusts the higher number. For example, AIP may differ with a group’s decision that the cost of acquiring new donors or members is a program service. Fundraising costs, i.e., direct mail and telemarketing, are often factored in as program expenses. If you agree that fundraising activities serve as a bona-fide educational or program purpose, you may decide that this higher number reflects your goals.
The lower AIP number assumes that all direct mail telemarketing and solicitation costs are separate fund-raising expenses and should not be included with direct program service costs. If you do not consider any portion of a charity’s direct mail and telemarketing solicitations to be a bona-fide program or if you are a new contributor and do not want to fund solicitation campaigns, the lower number reflects your goals. (The AIP letter grade ratings are based on this assumption.) Please note, however, that the work done by certain types of nonprofit organizations may warrant a greater allocation of direct mail and telemarketing costs to program expenses. Please see “Exception for Social Welfare Groups” below for more details.
COST TO RAISE $100
This dollar amount reflects how much is spent to raise each $100 of funds collected. In AIP’s view, $35 or less to raise $100 is reasonable for most charities. When a range is given, the lower amount usually reflects the charity’s own decision on how much direct mail and telemarketing costs are bona-fide fundraising expenses. In some cases, AIP adjusts the lower number to reflect its different view on whether an item is a fundraising expense. The higher AIP number assumes that all (please see “Exceptions for Social Welfare Groups” below) direct mail and telemarketing solicitation costs are fund-raising expenses.
AIP helps you to judge the fundraising efficiency of a charity by comparing fund-raising expense with related contributions, i.e., money that was brought in as a result of fundraising activities; whereas many charities compare (by pie charts or ratios) their cost to raise money with total income, which can include patient revenue, investment income, sales proceeds and other items that are not affected by fundraising outlays. This erroneous comparison often makes a charity’s fundraising efficiency appear better than it actually is. The following comparison illustrates this point:
Erroneous Comparison:
$100,000 fundraising expense
$1,000,000 total income
10
100
=
=
10%
Using this formula, a charity can claim that only 10% of its total income was spent on fundraising. This percentage may look great in a charity’s promotional material but it is not a meaningful measurement of fund-raising efficiency.
AIP Comparison:
$100,000 fundraising expense
$200,000 related contributions
50
100
=
=
50%
Using this formula, one can see that Charity X has a fund-raising efficiency of 50% or that it costs the charity $50 to raise $100. This ratio is useful because it tells donors how much a charity is spending to obtain your contribution and how much is left to spend on charitable programs and general administration.
EXCEPTION FOR SOCIAL WELFARE GROUPS
The mailings and phone calls of social welfare groups that are not eligible to receive tax-deductible contributions, identified by the “nt” designation in the Charity Rating Guide, may serve a dual purpose: raising funds and recruiting/educating members to write their congressman or make other attempts to influence legislation. AIP counts up to 30% of the cost of such mailings and phone calls as program expenses in its lower number for “% Spent on Charitable Purpose,” its higher number for “cost to raise $100” and its overall grade. Please note however, that many of these groups consider such mailings and phone calls to be largely educational and allocate over 30% of these costs to program expenses. These accounting differences may cause lower overall grades for some social welfare organizations.
YEARS OF AVAILABLE ASSETS
This column shows how long a charity with large reserves of available assets could continue to operate at current levels without any additional fundraising. In AIP’s view, a reserve of less than three years is reasonable and does not affect a group’s grade. When years of available assets are 3 years or more, they are shown in a separate chart.
GRADE
The letter grades for most charities are based on “% Spent On Charitable Purpose” and “Cost to Raise $100,” and assumes that direct mail and telemarketing solicitations are fund-raising costs. (Please see “Exception for Social Welfare Groups” above.) When a charity’s years of available assets are three years or more, their grade is reduced and reported in a separate chart.
Groups with “years of available assets” of more than five years are the “least needy” in AIP’s view, and receive an “F” grade regardless of other measurements. (Please see “Charities with Large Asset Reserves” below.)
AIP encourages each donor to consider these factors and others, which you may feel are more significant, when making charitable giving decisions. AIP provides this information to help you make your own decision concerning which charity to support. The letter grades represent the opinion of AIP.
A charity’s rating is based solely on the above criteria. The grades are:
A = Excellent B = Good
C = Satisfactory D = Unsatisfactory
F = Poor ? = Insufficient Information
When information is given only on the national headquarters and the charity does not include its affiliates in its financial statements, “National Office” or “N.O.” appears after the group’s name.
GRADE CHANGES
Does a charity's grade fluctuate much? Usually new evaluations of charities do not result in more than a letter grade change, though it is important to regularly check the grades of your favorite charities because there are exceptions. For example, the grade of United States Association for UNHCR (United Nations High Commissioner for Refugees) went from A- to D to C to B to C over a several year period.
CHARITIES WITH LARGE ASSET RESERVES
AIP strongly believes that your dollars are most urgently needed by charities that do not have large reserves of available assets. AIP therefore reduces the grade of any group that has available assets equal to three to five years of operating expenses. In AIP’s view, a reserve of less than three years is reasonable and does not affect a group’s grade.
These reductions in grades are based solely on the charities’ asset reserves as compared to budget. If you agree with these charities that reserves greater than three years’ budget are necessary to enhance their long-term stability, you may wish to disregard the lower grades that AIP assigns on the basis of high assets.
AIP’s definition of “years of available assets” includes funds currently available for the charity’s use, including investments that the charity has set aside as a reserve but could choose to spend if it wanted to do so.
CATHOLIC CHARITIES, UNITED WAY WORLDWIDE, VOLUNTEERS OF AMERICA AND UNITED JEWISH COMMUNITIES
These groups are composed of hundreds of local organizations. Each of these is governed by local volunteers and primarily raises and spends money in their own community. AIP’s Charity Rating Guide currently focuses on national organizations.
HOW TO LEARN MORE
After selecting your favorite charities, you can call or write to them for a description of their mission, program activities and recent accomplishments. (Phone numbers are provided in the Charity Rating Guide and addresses can be found on the Internet or in the reference sections of most public libraries.) Insist that the descriptions of program activities be clear and quantifiable (for example, How many hungry were fed? or How much land was protected?) and coincide with the time period and categories of the financial statements.
WORDS OF CAUTION
Charity financial reporting is inconsistent, unclear and often incorrect. To form a basis of comparison, adjustments have been made to the financial reports of some of the organizations in this guide. For example, if a charity does a lot of direct mail soliciting but includes only a small portion of its total postage and printing in fund-raising expenses, then AIP’s rating will reflect a larger share of these items in fundraising.
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Last Update: January 20, 2010
