First Book and the Difficulty in Rating Charities

I recently learned with dismay that my favorite charity, First Book, has lost its prized four-star rating on Charity Navigator. First Book is an organization that provides books to low-income children; I wrote about it here. It is dear to my heart because education enabled my own family to come out of poverty not too long ago, and children who don't know how to read don't stand a chance in life - they aren't even given the option between studying hard or falling behind; the choice is made for them. I was very happy to contribute to a charity with such a worthy cause that is closely aligned with my own priorities. I have followed First Book for several years now and receive emails from them regularly; the rating loss was very unexpected. As a matter of fact, I have yet to receive an email from the organization about it, email that I hope would detail the steps they are taking to remedy the situation or the reasons why they believe that being judged according to this or that metric is misguided.

First Book had held its four-star rating for many years, but Charity Navigator changed the way it computes its ratings over the summer - as it so happens, The Economist wrote about measuring charities' efficiency back in November and mentioned the new ratings: "These scores originally looked simply at overheads as a percentage of money raised. This proved a poor guide, as low overheads may mean not thrift but ill-paid (and incompetent) staff. In July [Charity Navigator] revamped its ratings to give more weight to transparent and well-run charities. Charity Navigator is also testing a new “impact” rating, which it hopes to roll out in 2012."

Not only did First Book's rating dropped, but it dropped to two stars. The report summary is available here. Its overall rating now consists in two sub-ratings, "organizational efficiency", where First Book gets four stars, and "organizational capacity", where it gets only one. Charity Navigator explains its methodology here. I am not quite sure where the new measurement of "transparent and well-run charities" is taken into account; the idea behind quantifying organizational capacity, which cost First Book its top rating, is "to determine how well [the charity] has sustained its programs and services over time, and whether it can continue to do so, even if it loses support or faces broad economic downturns." An issue for the organization is that it had negative program expense growth; also, its working capital ratio was only 0.19 years, which means it has little cash in reserves if donations stop.

The task of rating charities is made particularly difficult by the wide array of organizations being analyzed, each with vastly different missions, donor bases and operating structures. To Charity Navigator's immense credit, it distinguishes between the types of nonprofits (food banks, fundraising organizations, community foundations, museums) to compute its numerical scores, as explained here; however, if you click on Charity Navigator's "10 Charities with the Most Consecutive 4-Star Ratings" link, you end up with a list of 8 universities, including Harvard and Yale, and the Children's Aid Society as well as the Center on Budget and Policy Priorities. 

Clearly, in spite of Charity Navigator's attempts to level the playing field by adjusting scores, development offices in private universities have a much different task than nonprofits fighting hunger in disadvantaged neighborhoods. Universities will not fold because giving is down; they have a well-defined donor base enjoying a close link with the organization (whether these people choose to donate or not). So sure, Harvard has a working capital ratio of 6 years and Yale of 5.2, compared to First Book's paltry 0.19 year, but they are in a completely different league. For instance, Yale had a revenue of $2.6bn (yes, billion) and functional expenses of $2.8bn for a deficit of $113mil, but since its net assets are valued at $17bn, I'll venture it's going to be alright. Harvard had a revenue of $-2.5bn (with $2.5bn in primary revenue and over $-5bn in some mysteriously-named "other revenue"), and functional expenses of $4bn, but its deficit of $6.5bn is more than covered by its net assets valued at $29bn. Steering away from these outlier points, universities definitely face challenges too as they attempt to ensure affordable education for deserving students, among other things, but their foundations benefit from built-in advantages too. People served by, say, food banks, rarely become rich enough to send donations later.

With revenues of $44mil and expenses of $42mil, First Book is not small - it recently celebrated the milestone of distributing 80 million books, in its 18-year existence. The link above to a Publishers Weekly article also provides an interesting glimpse into its operations: for instance, First Book operates a free National Book Bank and a deeply discounted online bookstore , "which sells exclusively to Title I programs for disadvantaged children." An issue pointed by CEO and co-founder Kyle Zimmer is that “With emerging technology like print on demand, the number of books in excess inventory [which publishers can then donate to First Book] is likely to go down.” The organization also uses its purchasing power to buy books at a steep discount; publishers like that books can't be returned. While the charity distributes a total of 7.5million books last year, it hopes to double that next year; this goal seems unrealistic in light of the ratings loss.

I hope that First Book's two-star rating is only temporary, and that the organization will make the necessary improvements to receive four stars again next year. In the meantime, I gave it the benefit of the doubt and donated anyway.

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More interesting links to the Charity Navigator website: MIT(3 stars), Lehigh University (4 stars), Allentown Art Museum (gasp! 1 star only!), United Way of the Greater Lehigh Valley (3 stars), Habitat for Humanity of the Lehigh Valley (4 stars), Metropolitan Museum of Art (4 stars), Carnegie Hall (3 stars). Organizations that get only 1 star include Arizona State University Foundation, the Virginia Opera and the Alabama Shakespeare Festival. You can also find a list of the top 10 super-sized charities here with the expenses of each charity totaling over $500mil in its most recent fiscal year.

Comments

[Brian Minter]

Hi Aurelie,

First Book understands and appreciates the value of Charity Navigator’s efforts to develop analytical ways to evaluate the efficiencies of non-profits. Their analyses, while imperfect, are continually being modified as the sector evolves. The site itself says in the review of their methodology that donors should not pay attention solely to their star ratings because there are other complexities to consider.

For example, in First Book’s case, one of our models is the First Book National Book Bank (FBNBB). It’s the only online centralized system to receive large volumes of excess inventory from publishers and redistribute them to programs we serve – literally giving millions of new books to kids in need. First Book’s publishing partners control when we receive such donations, which are often on a massive scale. Sometimes we receive books in December, but it takes us until January to distribute them. The fact that we receive revenue in one year which is not expensed until the next results in a lower rating for that portion of the formula, as does the size of the contributions. As you noted, our rating for efficiency is still 4-stars.

As a First Book supporter, we know you are familiar with the newest innovation, the First Book Marketplace which at scale will solve this problem of access to great educational resources for those in need. We are excited to be on the threshold of a tremendous phase of growth and impact. In fact, First Book has never been in a better, stronger financial position. We are debt-free, enjoying robust multiyear relationships with strategic partners, applying individual donations efficiently to create the most impact, and reaching more programs serving children in need than ever before.

Please get in touch if you’d like to talk about this in greater depth. Regardless, we appreciate your continued support of our work.

Brian Minter
First Book
bminter at firstbook.org

[Aurelie C. Thiele]

Hi Brian,

Thanks a lot for sharing this information! I was so disappointed and even shocked when I found out First Book had lost its 4-star rating. Your comment makes me feel much better about my decision to donate anyway. As you mention, there are other complexities to consider and, while I did look into other charities promoting literacy as possible alternatives before I decided to donate again, I feel First Book's size, track record, national reach and continued top rating for efficiency allow it to have more of an impact than a smaller charity. I do hope First Book will regain its 4-star rating soon, though!

You make an interesting point regarding revenue that is not expensed until the new year. I hadn't noticed that the Fiscal Year Ending for First Book was December - I can certainly imagine that December is an important month for donations & contributions and that it is not always practical to distribute books right away.

The First Book Marketplace is a great concept and definitely deserves its 2007 Social Enterprise Innovation Award!

Keep up the good work.
Aurelie

[Nick Kastango]

Dan Pallotta at HBR has some interesting thoughts on the evaluation of non-profits: http://blogs.hbr.org/pallotta/2010/11/our-ineffectiveness-at-measuri.html

[Aurelie C. Thiele]

Great link! Thanks, Nick. That HBR blog post really was eye-opening.

This part gave me pause: "[The literature] is devoid of any discussion about how these new efforts [to measure charity effectiveness] will marshal any more money for it than is currently available to measure overhead. Which is a pittance — the combined annual budgets for the three watchdogs (Charity Navigator, Better Business Bureau Wise Giving Alliance, and American Institute for Philanthropy) is about $3 million annually, or 0.000013% of the $225 billion that American individuals donate to charity annually. It's less than a pittance; it's statistically zero." -Dan Pallotta

I don't think Pallotta has come up with a convincing/realistic replacement, but the ideas he describes in his post have merit nonetheless.