POTOMAC, Maryland — In today’s age ruled by the computer scientists who populate Silicon Valley, numbers dominate people’s decisions. The prime example is Rotten Tomatoes, a website that produces percentage ratings for films based on their critical acclaim. This site has become so ingrained into daily life that it has become a modern tradition to check the “Tomatometer” before deciding on a movie.
Comparable sites also exist for nonprofit organizations. But instead of relying on expert reviews — as Rotten Tomatoes does — sites such as Charity Navigator and CharityWatch focus on the “efficiency ratio.” This number answers the donor’s question of “What percentage of my money is going towards the cause?”
Just as colleges promote their low acceptance rates to attract qualified applicants, nonprofit organizations are increasingly showcasing this efficiency ratio — often in a neat and tidy pie graph — in newsletters and flyers to ensure potential donors of their fiscal responsibility.
But this has created a problem similar to that of colleges manipulating statistics and waitlist rates to artificially drive acceptance rates down. Nonprofits, under extreme pressure to gain donors, are finding ways to inflate their efficiency ratios.
A Chronicle of Philanthropy article investigated the United Service Organization’s (USO) spending breakdown. According to newsletters it sent out to donors, 90 percent of USO funds account for its program costs. Its Form 990 tax document, however, tells a different story. Only about 72 percent of funding goes toward program costs. The rest goes toward management and fundraising.
The difference arrives in the form of donated goods. USO receives nearly $200 million in the form of celebrity performances and facilities. When factored into total funding, the efficiency ratio skyrockets, and gives donors more confidence in the efficacy of their charity.
Statistical manipulation aside, some believe that the efficiency ratio in itself does a disservice to the aims of nonprofits.
Charity Navigator, in a 2004 study, found that the majority of nonprofits — close to 70 percent — are fiscally responsible despite variation in efficiency ratios.
In March 2013, Dan Palotta gave a TED talk entitled “The Way We Think About Charity Is Dead Wrong.” He argued that the efficiency of a charity is not as important as what one actually achieves. Successful organizations require well-managed and happy workers, and nonprofits are no different.
The problem really lies in the dependence of nonprofits on donor funding. Many nonprofit organizations simply must play the numbers game, because the efficiency ratio — whether or not it is a good measure of a charity’s work — has become the sole number donors consider before investing in an organization.
Nonprofit experts mostly agree that this occurs because there is no good way of evaluating a charity — at least statistically. Sites like Charity Navigator have attempted to include more criteria, like transparency and accountability, in rating nonprofits.
But it really comes down to the donor’s willingness to research.
United Way of Rhode Island boasts a 100 percent efficiency ratio. Potential donors might believe that this number means United Way is supremely efficient. But the reason its efficiency ratio is so high is due to the nature of its funding: its administrative and funding costs are paid for by a trust fund set up by a rich philanthropist in the 1930s.
That said, Charity Navigator still rates United Way highly, but docks down its efficiency ratio to 84 percent.
Perhaps statistics should only be used to define a lower bound: if a charity spends less than a certain percentage of their funds on program costs, it is probably not the best place to donate. But true evaluation may need to follow art’s example of portfolios. Simply examine a charity’s body of work that shows the best that it can accomplish, and then decide if it’s worth it.