There are way more than 1 million tax-exempt nonprofits in the United States, according to the Internal Revenue Service. The new Forbes ranking of the Top Charities includes only 100. Yet the Forbes list can help you evaluate any charity you might consider donating to. Why? Because analytical techniques are similar. The only real difference is the number of zeros.
But first, a description of the Forbes list and its methodology. Our array is of the 100 largest charities, as measured by the amount of private support received in the latest fiscal period for which there is available data. It is quantitative, based on numbers, and not judgmental based on our opinion. However, on occasion we have removed a charity for accounting we considered wildly misleading. Largest is not necessarily the best, although they are often the best-known brand names.
Information we gather usually comes directly from the charities themselves, in the form of audited financial statements, IRS Form 990 filings, annual reports or Forbes survey forms that many charities fill out and return. They cover fiscal years that generally ended in 2020. Some charities turn around their results rather quickly, others more slowly. So we have results for fiscal periods ending in 2021, and a few for periods ending in 2019.
The private support we count for our rankings can be gifts from individuals, their estates, corporations, other nonprofits, and federated campaigns, as well as fundraising special events. Donations can be in cash, securities, goods, real estate and even labor if the charity is able to quantify that in its reports (many don’t try). What we don’t include are government grants (public, not private), revenue from sales or services (business transactions) and investment returns.
These omissions can be substantial. In the fiscal year ending June 30, 2020, No. 11 Catholic Charities USA, of Alexandria, Va., which oversees a network of social services, received government support of $1.33 billion, the highest on the list, on top of $1.03 billion in private support. No. 92 Smithsonian Institution, a collection of cultural facilities in Washington, D.C. actually owned by the Federal Government, received $183 million in private donations during its fiscal year ending September 30, 2020, but $1.1 billion in government support.
No. 21 Lutheran Services in America, a major provider of health and social services, received $626 million in private donations but a whopping $22 billion in other income, mainly fees for daycare and other services. No. 24 Mayo Clinic, with major health facilities in three states, received $578 million in gifts but $14 billion in other income, again mainly fees for services. For the fiscal year ending December 31, 2020, Chicago-based YMCA of the USA, No. 8, had $1.33 billion in private support but another of $3.9 billion in other revenue, mainly fees from health clubs (but, thanks to the pandemic, a dramatic 37% fall from $6.25 billion the year before).
To be counted by us, a contribution must be based on pure charitable intent, with the donor getting back nothing beyond the satisfaction of supporting a favored cause. So we don’t count as a private donation membership dues, reasoning that the donor/member is receiving a thing of value, like reduced admission fees for a museum. For each charity we list separately private support and government support. Everything else coming in is included in other revenue, and the three categories summed as total revenue.
Since our list trends toward charities that appeal to the general public, we don’t evaluate certain categories of nonprofits. Among them: purely academic institutions (which tend to concentrate on their own alumni), donor-advised funds often run by some of the big financial companies (which are not operating charities but a holding vehicle for money that will eventually go to an operating charity), and the many religious entities that aren’t required to make public their financial information (an obvious exclusion). We also avoid nonprofits with very few direct donors (such as virtually every private foundation) and charities that receive most of their donations indirectly from federated campaigns, community chests and such vehicles.
For each of the 100 charities on our list, we calculate three financial efficiency ratios, also indicating the direction of change from the prior year if available. Therein lies the value of the Forbes list in helping to evaluate similar charities not on the list.
Which leads to our annual caution: Don’t compare efficiency ratios for different kinds of charities. The ratios for a museum or foreign aid provider can’t be usefully compared with those of, say, a hospital or a single-illness charity.
But in the same category, the ratios can be very helpful in analysis. The Forbes list covers a wide range of categories, including health care, domestic and international needs, environmental, animal welfare, religious and youth. Say you’re looking at donating to a local food bank. It’s possible to dig up financial filings and then compare financial efficiency ratios to the five food banks on our list. If ratios are a lot worse at the charity you’re interested in, you can contact them and ask for an explanation.
Another caution: Financial efficiency measures are just a starting place for analysis by a would-be donor. Overhead, a direct or indirect component of these calculations, is not in and of itself bad. Like any enterprise, charities have to pay for things like rent, insurance and utilities. The goal is to identify those charities with out-of-whack ratios—often due to wildly high fundraising costs—and no acceptable reason for them.
Information needed to calculate efficiencies of many nonprofits can be found on the IRS Form 990 tax return (parts VIII and IX), a formal financial statement or an annual report. (The IRS lets charities with annual gross receipts below $200,000 or end-of-year total assets of less than $500,000 file a far-less-revealing form called the 990-PF, or, if the annual gross receipts are below $50,000, a 990-N, which literally is a postcard.) Many charities now include some or all of these documents on their own websites. Look around for a link to “financials,” “financial information,” “accountability,” “990,” “annual report” or “about us,” or try punching in those terms into a search box. Many filings can be downloaded for free from Guidestar, Foundation Center, ProPublica and, even if the charity isn’t based there, the New York State Attorney General. Or just contact the charity and ask for a set of filings.
Here’s a rundown on the financial efficiency ratios we calculate, and what they mean:
CHARITABLE COMMITMENT This shows how much of a charity’s total expense went directly to its charitable purpose (also known as program support or program expense), as opposed to management, certain overhead expenses and fundraising. The math is simple: program support expense divided by total expense. The average this year is 87%, unchanged from last year. Charities receiving most of their donations as gift-in-kind fare better here, mainly because individual gifts are larger and involve little or no fundraising expense. Charity watchdogs such as the Better Business Bureau Wise Giving Alliance say charitable commitment should be no lower than 65%. Only two charities on our list were below that threshold. Dallas-based Susan G. Komen, which funds cancer research and services, was 62% for the fiscal year ending March 31,2020. Returning to the list, Barack Obama Foundation was even lower, at 56%, but that nonprofit is in the process of building a presidential library in Chicago. The way construction costs are accounted for can adversely affect that ratio. On the list for the first time, Michael J. Fox Foundation for Parkinson’s Research showed an 87% charitable commitment ratio, among the highest of single-illness charities doing research.
FUNDRAISING EFFICIENCY This measure calculates the percent of private donations remaining after deducting the costs of getting them. Here in words is the formula: private donations minus fundraising expense, with this result divided by private donations. The average for all 100 charities is 91%, 1 point higher than last year, meaning that it cost 9 cents to raise $1. But this average embraces many different kinds of charities using many different fundraising procedures. With fewer but larger donations and perhaps puffed-up valuations, some gift-in-kind charities look very efficient, with fundraising efficiencies of 100% (rounded) or very close. At the other end are charities employing expensive direct-mail and telephone solicitation. While the BBB considers 65% to be the bottom of respectability, at Forbes we long have drawn the line at 70%. There is no charity on the list below that level. The Fox Foundation clocked in at 93%, highest among its peers.
DONOR DEPENDENCY This revealing-but-ambiguous ratio calculates how badly a nonprofit needed contributions to break even. The formula: private donations minus surplus, with this result divided by private donations. A ratio of 100% means revenues were the same as expenses. A ratio above 100% means the charity had more expenses than revenue. A negative ratio (below 0%) means the charity had an annual surplus greater than all private donations! (This is often a hospital, such as No. 24 Mayo Clinic, which in the fiscal year ending December 31, 2020, received $578 million in donations but posted a surplus of $1.97 billion, generating a donor dependency ratio of -241%). The average for this year’s list is 75% the typical charity was able to put away 25% of donations for the future. Last year’s average ratio was 77%, meaning 23% of donations were banked. Annual differences are often largely due to varying investment returns. The ambiguity comes in interpretation. For the other two ratios, the higher the ratio, the better, especially in reviewing year-to-year change. But the meaning of this ratio depends on the donor. Should the donor be seeking a charity that badly needs contributions it is likely to put to work immediately, a ratio above 100 might be considered good. On the other hand, if the patron is looking for a charity that can better stand on its own long term, a ratio below 100—but not too far below—might be seen as better. This ratio tends to smoke out charities pleading for money when they actually have substantial financial reserves or other kinds of revenue. Fox Foundation’s ratio here was 84%, meaning it banked less than the typical charity on the list.
How else to get information? Why, the Internet, of course.
Use Google to run the name of your charity of interest (but beware names of similarly sounding charities, often a problem with nonprofits containing the word “cancer” in their name). Run the same search on Bing, which frequently will put different material at the top of the search results. Then repeat the same searches again but add the word “scam” or “fraud.” This can be a quick way of getting to any derogatory information. But be sure the source is legitimate.
The Better Business Bureau Wise Giving Alliance (www.give.org) is one of several charity watchdogs that can provide an evaluation of a specific charity if it is of any size, but the review focuses primarily on good-governance issues. Consider avoiding a charity that declines to provide information to the BBB. Another helpful source is Charity Navigator. Charity Watch is useful, although it is largely a paid service, Also, every state has a governmental office, usually located in the state capital, that regulates charities and can be contacted to see if there are complaints. The online IRS Exempt Organization Search database will let you check if a donation to your charity of interest qualifies for a tax deduction.
Finally, there’s the issue of charities cold-calling you on the telephone for donations, often using soundboard technology employing a voice generated by a computer that is monitored by a human. We recommend you ignore these pitches. Few reputable charities solicit that way. Chances are that most of any donation will go to the paid telemarketers rather than to a good cause. Or even, worse, to a political action committee masquerading as a charity, where contributions aren’t tax-deductible at all. In some circles they’re known as “faux charities,” which government regulators so far have done very little to rein in.