Dear Nonprofiteer, Why should charities be punished for being prudent?

Dear Nonprofiteer,

I received this in an e-mail newsletter from Chicago Non-Profit, a newish organization that aims to “connect Chicago’s charitable community.” I’m not familiar with AIP, but the wording that concerned me was the section I’ve highlighted below. I’ve been working with the board on developing a reserve that is sizable vis a vis the monthly operating costs of our organization. I believe it is both responsible and completely mission-driven to ensure that the organization can weather fiscal crises.

How do Charities Rate?

There are over 15,000 registered charities in and around Chicago. Cook County alone is home to over 10,000 of these charites – yet we continue to hear about a charity in the press every now and again that has abused people’s trust; often discouaging people from giving more to charites. Charities are not about to stop asking for money, however – so the question becomes how can we ensure we are giving money to a fiscally responsible charity?

Unfortunately, the non-profit industry is highly unregulated, offering few barriers to keep people from starting a charitable organization and raise money for a “good cause.” A great resource in arming yourself with some education about a charity, however, is the American Institute of Philanthropy (AIP). Located in Chicago, AIP’s founder Dan Borochoff has created a rating system that is easy to understand yet more complicated than some of the more well-known rating systems. Unlike other rating organizations, AIP does not charge non-profits to be rated. This helps to reduce the risk of a charity’s influence of skewing data. Additionally, AIP doen’t reward charities who sit on large fiscal reserves. Rather, AIP applauds and encourages charities to spend the money they’ve raised on programming – which are the reasons the charities were founded in the first place.

What are your thoughts?

Signed, Unreservedly Pro-Reserve

Dear Reserve:

The Nonprofiteer is familiar only in passing with AIP and other charity watchdogs; but she’s happy to report that AIP’s formal position statement on reserves is more nuanced than the report you received of it. It reads as follows:

AIP strongly believes that your dollars are most urgently needed by charities that do not have large reserves of available assets. AIP therefore reduces the grade of any group that has available assets equal to three to five years of operating expenses. In AIP’s view, a reserve of less than three years is reasonable and does not affect a group’s grade.

These reductions in grades are based solely on the charities’ asset reserves as compared to budget. If you agree with these charities that reserves greater than three years’ budget are necessary to enhance their long-term stability, you may wish to disregard the lower grades that AIP assigns on the basis of high assets.

This seems like a reasonable perspective: except in special cases (of which none come to mind), a three-year reserve ought to be sufficient to enable an agency to weather a financial crisis. If it’s not, that must be because the agency has a completely nonfunctional financial model, in which case three years ought to be sufficient to discover that and amend the model, or else be compelled to go out of business.

Criticism of excessive reserves doesn’t in the slightest preclude what you’re doing, which is to come up with some multiple of your monthly operating expenses as an umbrella for a rainy day; but this not-so-subtlety apparently was lost on the newsletter editor, who preferred a snappy phrase like “programming…the reason charities were founded to begin with.”

There’s a complicated conversation to be had about the proper role of endowment in the life of charities. The Nonprofiteer herself is mostly anti-endowment, and has watched with glee as people have finally awakened to the fact that institutions sitting on billions of dollars are nonetheless asking college kids to wash dishes 20 hours a week to pay their tuition. But she also understands that endowments have a role to play in assuring the financial stability of institutions designed to last into the indefinite future, and it sounds like the people at AIP understand that, too. It’s a shame that the discussion–in lay publications, but also in our trade press, apparently–seems so often to be over-simplified into, “Naughty charities, hoarding money or spending it on overhead while the poor get poorer.”

That’s one reason the Nonprofiteer doesn’t spend much time investigating the charity watchdogs; she thinks their work, intentionally or un-, plays into the hands of those who think the Red Cross shouldn’t have a paid staff but should put every dollar it receives into this week’s disaster.

The other reason she pays relatively little attention to these groups is that she finds disproportionate the amount of effort necessary to assess the assessments they put forward. Each watchdog makes a set of decisions about what’s proper or im- in charity management, and by the time she’s compared this particular gang’s standards to her own she’s too worn out to give money to anyone.

Which may be the point; but she hopes not.


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