Look closely at charities so you can make most of donations
As many as half of all charitable contributions are made between Thanksgiving and the end of the year, according to Charity Navigator, a watchdog group. But just because you gave to a charity last year doesn't mean it deserves your largess this time around. While the spirit of giving is upon you, grab a cup of cocoa and review the philanthropic decisions that you made a year ago.
Follow the money. Most tax-exempt organizations are required to file IRS Form 990, which gives details about the organization's finances and governance. The form, or a link to it, should appear on the charity's Web site. Line 12 shows total revenue, and line 18 shows total expenses. Compare those numbers with the same lines on the previous year's form, which should also be available. If the charity is thriving, both revenue and spending will have grown at least 3 percent to 5 percent over the past year, says Sandra Miniutti, of Charity Navigator. That level indicates that the charity has the ability to meet long-term goals.
Also, look at how the charity spends its money. Most charities spend 60 to 75 percent on their programs, with the remainder going to administrative and fundraising costs. If the percentage for overhead is more than 30 percent, call the charity and ask for an explanation. For example, some charities, such as museums, have relatively high maintenance costs.
A charity should end its fiscal year with at least six months' worth of working capital (called the "working capital ratio" at Charity Navigator), the better to sustain operations if donations decrease or the demand for services spikes - or simply to keep the place running. "Donors need to understand the need to reserve money for mundane things such as electric bills," Miniutti says. That said, nobody loves a hoarder. Be sure the charity is spending appropriately on programs and not just saving for saving's sake. The largest charities pay their chief executive an average of $150,000 annually, or about 3 percent of the organization's total spending, according to Charity Navigator. Compensation depends on variables including where the charity is located and the level of expertise the chief executive brings to the organization. If he or she pulled in a salary that far exceeds the average, find out why.
Vet the feedback. Expect the charity to provide a clear description of its mission, a rundown of its board members and a summary of finances, says Bennett Weiner, chief operating officer of the BBB Wise Giving Alliance. A proactive charity will also periodically let you know about its day-to-day activities by posting blogs, Facebook albums or YouTube videos. If you are not satisfied with the level of communication, let the charity know - and drop any that refuse to provide details. "Charities doing great work are eager to tell their story," Miniutti says.
Look for evidence that the board exercises oversight, including approving the budget, reviewing the performance of the chief executive and signing off on fundraising contracts, Weiner says. Showing up counts, too. If the board fails to meet face to face at least three times a year at evenly spaced intervals, it isn't doing its job.
Weigh the results. Expect the annual report to lay out how the charity met its mission, including the challenges it faced and the milestones it met. Be sure the goals and results were measurable - say, number of meals served - and not just general statements, such as "fed the hungry." For instance, SOME (So Others May Eat), in Washington, reports that it served 288,390 meals in its dining rooms in 2009, an increase of 17,000 meals over the previous year. Those numbers demonstrate impact, says Michael Nilsen, of the Association of Fundraising Professionals. "People want a sense of the concrete." If you can't get a handle on the reported results, talk to staff members to get the insiders' take.
Charities sometimes stray from their mission, in part because funds earmarked for specific purposes can shift an organization's priorities. Be sure your money went where you intended it to go, and also determine whether your goals have changed or become more focused since you last donated. For instance, rather than give to an organization that funds breast-cancer research, this year you may want to fund mammograms for women in your community.
If the checkup leaves you with mixed feelings, it may be time to take your donation elsewhere.
- Kiplinger's Personal Finance