Charity Navigator Updates Rating System, 27 Percent of Charities Get New Star Rating

Charity Navigator last week unveiled the details of its long-promised tweaks to its rating system. Dubbed CN 2.1, the changes take effect today, and include several updates to the way the watchdog calculates charities' financial health.

Under the new rating system, Charity Navigator will use three-year averages in its calculations for program expenses, administration expenses, fundraising expenses, fundraising efficiency and working capital ratio. It previously factored in most recent fiscal year only for these calculations. The organization also dropped primary revenue growth as a metric, replacing it with liabilities-to-assets ratio, a new metric calculated using data from a charity's most recent fiscal year.

The most significant change, though, is Charity Navigator's new calculation for overhead. Before, charities could not attain a perfect 10-point overhead score if their administrative expenses were greater than zero—a virtual impossibility. The new system allows charities to score 10 points if their administrative expenses fall within a predefined range for each vertical. (For example, an arts charity will have different parameters than a health charity.) The change also makes it possible for charities to attain a 100-point overall score.

In a press release, Charity Navigator outlined the impact of the new rating system:

• 27 percent of charities received a new star rating—19 percent saw a one-star increase, while 8 percent saw a one-star decrease
• 14 charities had a two-star rating increase
• Two charities had a two-star rating decrease
• 49 charities now have a perfect 100-point overall score

Nonprofits and fundraisers have criticized Charity Navigator and other industry watchdogs for inaccurately representing charities with overly simplistic ratings formulas and over-reliance on financial data, especially in regard to overhead. The changes are the latest step in Charity Navigator's plan to overhaul its ratings, partially in response to that criticism. The organization ultimately plans to include results reporting in its ratings formula—though questions remain over the feasibility of that goal.

Still, the 2.1 update appears to be an improvement, if an incremental one.

"The new financial metrics in 2.1 have come a long way in honoring Charity Navigator’s commitment to fighting the overhead myth while still providing information on nonprofit financial health,” Elizabeth A.M. Searing, assistant professor at University of Albany's Rockefeller College of Public Affairs and Policy, said in a testimonial.