A:

Can’t resist a good “Top Ten” list, can you? I bet you do the Cosmo quiz every month, too!

We love lists, too, but we do have a bone to pick with Charity Navigator’s. For those of you who are unfamiliar with it, Charity Navigator (CN) is a nonprofit organization that evaluates charities based on their publicly available IRS 990 statements. Their purpose is to help donors decide which charities would make good use of their money. To do this, they run financial ratios (like program expenses as a percent of total expenses) to assess organizational efficiency and sustainability. Using these ratios, they assign a charity zero to four stars (like the Michelin Guide or Yelp), as well as offering helpful lists of “charities performing similar types of work” and their ratings for comparison.

On a conceptual level, we think this is great. The past couple of decades have seen a trend towards higher public expectations for nonprofit transparency and accountability, and we think this will continue. Museums need to prepare for a future in which donors and citizens who support nonprofit museums through their tax dollars want detailed information on how those funds are being used and benchmarks by which to evaluate the results.

But we have a beef with the way this is actually playing out. As researchers ourselves, we’re painfully aware that just because something is expressed in numbers doesn’t mean it’s true. Numbers can be misinterpreted as easily, maybe more easily, than words. So it is incumbent upon any group or individual interpreting museum financial numbers to do so with an honest appraisal of the strengths and weaknesses of their methodology. Take ratio analysis, for example—the oft-used practice of comparing a charity’s overhead expenses (“bad”) to its program expenses (“good”). Many museums have huge infrastructure burdens in the form of collections and historic buildings that drive up the costs of building maintenance, insurance, HVAC, etc.  To the extent that these necessary costs show up as overhead (remember, overhead = “bad”), they can make museums look artificially top-heavy compared with other types of charities that have no comparable expenses.

Staff at CN assured us when we spoke with them in June that they take this into account when computing their ratings for individual museums. (And, they point out, they are happy to add comments and addenda submitted by the rated charities. You might want to check your page and see if you want to take them up on this offer.) However, since its inception in 2002, the site has evolved from a straightforward library of ratings for individual charities, adding editorial content like opinion pieces and “Top Ten” (and “Bottom Ten”) lists that rank efficient and inefficient organizations in a number of categories. That’s where the trouble begins.

Take the recent “Top Ten Charities Stockpiling Your Money” list. CN introduces the organizations featured on this list as follows: “Each has stockpiled at least two years of reserves in the bank. Each has grown its revenues at least 25 percent for each of the past three to five years. Despite those deep pockets, these charities operate stagnant operations, expanding their programs by less than the rate of inflation (3 percent). Shouldn’t all that cash be used more aggressively?”

Seven of the ten charities on this list are museums, when museums only constitute 4 percent of the charitable sector. Does this mean museums are the Grinches of the nonprofit world? We don’t think so. Rather, it reflects the uncritical utilization of simple financial benchmarks that don’t apply very well to the way museums actually work. Let’s pluck the top two from this list to examine in detail. Historic New England (HNE), listed as number two, has had some hard times recently (as have many museums), running operating deficits in two of the three years covered by CN’s calculations (’05 and ’06) with a healthy recovery to a surplus in ’07. So, yes, it increased its income without increasing its expenditures commensurately—because it was balancing its budget and rebuilding its reserves! For its part, the Cleveland Museum of Natural History (number one on the list) merged with and absorbed the assets of two other nonprofits—EcoCity Cleveland and HealthSpace Cleveland—during the period covered by CN’s formula. A major merger like this makes it impossible to compare one financial year to another in this span, both because the organization suddenly becomes larger (“assets are up!”) and it takes time to eliminate redundant overhead and redeploy those resources (“program expenses are not rising as fast!”). In the real world, the museum is now beginning to reap the benefits of the fledgling distance learning program it acquired as part of the HealthSpace program portfolio and is now projecting a 60 percent increase in audience served. So programming has, in fact, expanded, but only after a necessary three-year lag to absorb and redeploy the new skill set it acquired through the merger.

This last point—time—is critical. Museums are in business for the long haul, but many of CN’s lists look only at short-term trends. A CN “Top Ten” list formula may rely on three years of data, but major financial events in the life of a museum (notably capital campaigns and building projects) play out in a longer time frame—five or even 10 years in many cases. To return to the actual case of Historic New England, the “stockpiling” CN flagged reflects the rebuilding of investments decimated by the financial downturn following 2001. The organization actually has a very aggressive spending rate on its endowment—4.75 to 6.1 percent—exceeding IRS recommendations. But HNE looks at a five-year rolling average on which to apply that rate. That conservatism means HNE endowment spending does not rise as fast as assets do during frothy years in the market, but it also means that endowment spending does not plummet immediately when the bubble breaks. We bet HNE’s donors are happy now that the organization did not indulge in the “spending party” necessary at the height of the bubble to look better on the CN formula.

Maybe it’s easy for us to snark about Charity Navigator’s “Top Ten” lists because we’re museum finance geeks. But it behooves us as a field to be vigilant and to make sure our own house is in order before we criticize how others rate us. If we let outside groups like CN set the terms of the discussion, we may not feel the results are fair or appropriate—but then we need a better, clearer, more accurate and more persuasive story of our own to share.

Elizabeth E. Merritt is founding director of AAM’s Center for the Future of Museums, and Erik Ledbetter is director of international programs. Parts of this article appeared earlier on the Center for the Future of Museums blog at www.futureofmuseums.org.