Nonprofit bosses making almost as much as the president of the United States. Tax-exempt organizations spending more than a third of their money on overhead and fundraising. Numerous charities posting sub-par scores on a national rating scale.
Is there any excuse for such performance by Middle Tennessee charitable organizations? You might be surprised at the answer.
A comprehensive City Paper examination of all major Nashville charities has turned up numerous examples of seemingly questionable stewardship. And in a few instances, further investigation raises additional questions. For the most part, however, closer scrutiny reveals case after case in which numbers alone fail to convey a full picture of how well an organization is carrying out its mission.
Real or random?
In June, when national rating service Charity Navigator published a report on nonprofit performance in the 30 largest metropolitan markets of the U.S., Nashville ended up in 26th place. Among other shortcomings, the study found that local charities spend a higher percentage of their total costs on fundraising and more per dollar raised than the national norms.
Charity Navigator, based in Glen Rock, N.J., labeled some of Nashville’s best-known nonprofit institutions as middling-to-poor performers. Cheekwood, the Girl Scouts of Middle Tennessee, the Martha O’Bryan Center and Nashville Public Radio each earned just two of a possible four stars under the rating group’s system. The Country Music Foundation, operator of the Country Music Hall of Fame and Museum, got just one star.
In a city whose nonprofits are collectively a major economic force and an important focus of social life — as well as the linchpin of a community-wide effort to recover from May’s flooding — the bad grades arrived with a jolt.
“I think the entire Charity Navigator program is bogus,” said Lewis Lavine, president of Nashville’s Center for Nonprofit Management. “It’s random information, and any use of it does detriment to the sector.”
Charity Navigator bases its ratings on financial data that organizations must reveal every year in a publicly available tax filing known as Form 990. The methodology takes into account ratios that reflect on a nonprofit’s efficiency in spending the money it raises, along with numbers that bear on the solvency and financial health of the entity.
In a blog post earlier this year, Charity Navigator CEO Ken Berger conceded that “critics have correctly observed that CN’s fiscal rating system is one-dimensional and does not tell the whole story of a charity’s value, and therefore can cast in a negative light some nonprofits that are, in fact, doing effective work.” Berger said he and his team had “taken these criticisms to heart” and were revising their methodology in an effort to cover all aspects of nonprofit performance.
That said, the numbers and ratios clearly mean something. Charity Navigator is not the only entity highlighting them: So does the GivingMatters.org charity clearinghouse created by the Community Foundation of Middle Tennessee, which offers a page of financial information on each of about 850 nonprofits in Nashville and surrounding counties. (GivingMatters does not rate the organizations.)
Charity Navigator covers only about 30 Middle Tennessee nonprofits, several of them quite small and of a low profile. To gain a broader view of performance in the local nonprofit sector, The City Paper crunched Form 990 data, primarily gathered from GivingMatters, to identify Nashville’s major charities and evaluate how they are spending the funds entrusted to them.
Our research focused on 32 organizations based in Nashville and neighboring counties that exist primarily to further social, civic or artistic causes. In an effort to maintain apples-to-apples comparisons, we excluded educational and health care institutions. To keep the focus on major charities that raise money from the public, we included only those that had posted revenues of $3 million or more and individual contributions of $1 million or more in at least one of the most recent three years for which numbers were available.
We then analyzed several aspects of the data. Applying Charity Navigator’s current efficiency methodology to the 23 entities not covered by the rating service, we calculated how each would rate if covered. And using executive compensation information disclosed in Form 990, we examined the relationship between pay and performance.
A deep dive into the ratings
Twelve charities merit four-star ratings, according to the calculations, scoring above 38 on Charity Navigator’s 40-point scale. The Community Foundation, which the rating service does cover, comes out on top with a 39.78 — the 11th-highest rating of any nonprofit in the national Charity Navigator database of more than 5,000 organizations. Catholic Charities of Tennessee and the Nashville Alliance for Public Education are close behind.
Anyone familiar with the work of those three organizations will not be surprised at their high rankings. Each is well known locally for its success in carrying out its mission.
Also earning four stars, however, are Easter Seals of Tennessee and Mercy Ministries of America, both of which have experienced serious problems in recent years (see “Paying for poor performance”).
“Nonprofits should be evaluated by their outcomes,” Lavine said. “I think it’s absolutely appropriate to talk about the Easter Seals financial picture during the years it ran up to bankruptcy. That’s a question of management. That’s a question of the board. You look at outcomes, and bankruptcy is a bad outcome.”
Charity Navigator spokeswoman Sandra Miniutti said Mercy Ministries also gets high marks from other rating systems, such as the Better Business Bureau’s Wise Giving Alliance and the Great NonProfits website. “I think that shows that one-dimensional systems do not tell the whole story,” Miniutti said.
At the bottom end of the scale, 10 charities came in with scores that would earn either two stars or just one. Yet close examination of the causes for many of the low ratings revealed circumstances that made their underlying data essentially meaningless.
The Country Music Foundation’s rating was skewed by expenses related to its $750,000 settlement in 2008 with the bankruptcy trustee for the estate of Bob McLean, a museum donor who turned out to be a Ponzi-scheme fraudster. The trustee was required to go after the Hall of Fame for assets funded by the crime, even though it had accepted the gifts in good faith.
In some cases, including the Girl Scouts, high fundraising expenses reflected the amount of executive compensation that an organization chose to allocate as fundraising-related, an accounting issue that can vary widely among charities. In other instances, high administrative overhead costs pulled ratings down but turned out, upon investigation, to result solely from anomalies in how expenditures were accounted for in tax filings.
Marsha Edwards, CEO of the Martha O’Bryan Center, cited another way tax reporting can present deceptive appearances. An apparent deficit sent her organization’s rating downward, but the vagaries of multi-year fundraising were the real cause.
“The law requires us to treat any kind of pledge as cash, but of course it isn’t cash,” Edwards said. “The way our 990 has to be written, it makes it look as though we had a very poor year on the financial side. From a tax point of view, that all makes sense. But it does not make sense as a way to judge organizational efficiency.”
The City Paper’s analysis looked at three aspects of chief executive compensation: average total annual compensation for the three most recent years for which numbers were available (either 2007-09 or 2006-08), a comparison of that number with the norms at similar organizations, and the average rate of increase in CEO pay over the three-year period.
Executive pay at nonprofits is a hot topic across the country, with some leaders facing accusations that they have overly enriched themselves at the expense of charitable missions. But Nashville offers no egregious examples in that regard. Most of the CEOs listed in the chart “Comp champs” are paid ample salaries with ample cause.
Alan Valentine has led the Nashville Symphony’s efforts to build the Schermerhorn Symphony Center and a $120 million endowment. With its investment portfolio hammered even before its home was flooded, he has given up a 7 percent contractual bonus and had no other pay hike since 2008. Journey Johnson runs one of the nation’s most successful YMCA organizations. Ellen Lehman has led the Community Foundation since its founding in 1991, and Rick Schwartz has led the Nashville Zoo to a nearly eightfold rise in attendance since it opened at Grassmere in 1997.
Although Charity Navigator’s rating system does not evaluate CEO pay, the organization does publish an annual compensation report that gives the median pay levels for leaders at entities of different sizes in different regions. By those norms, four of the five execs listed by The City Paper are earning well in excess of the norms for the types of charities they are running. Hugh Travis of the Boy Scouts is making more than double the norm while the Scouts’ base of participating youth has been shrinking.
One of these CEOs, the Community Foundation’s Lehman, is actually making slightly less than the median for leaders of large organizations in the South.
The chart (“Over and under”) shows how each CEO pay package locally compares with Charity Navigator’s median numbers.
Measure by measure
Charity performance is clearly hard to define, but in a difficult economic environment that forces nonprofits to compete strenuously for donations, many parties are trying to find effective ways to judge how well charities are doing their jobs.
The Center for Nonprofit Management’s Lavine pointed out that much creative thinking is going into this task of late. The local affiliate of Second Harvest Food Bank, for instance, is now measured by its national organization based on pounds of food given to the poor as compared with poverty rates in its geographical area.
“For those that don’t have easily quantifiable measurements, we are strongly suggesting they find indicators that are,” Lavine said. “Donors in Nashville are starting to look at outcomes. Most of the grant applications that you see now have some kind of output or outcome component to them. You have to give them a report on outcomes before you can get a renewal, for example.
“All of us in the industry are trying to look for ways we can legitimately measure success. It’s not easy.”