As a layman: first and foremost correlation that pops in my mind is high reserves ~ responsible spendings. A charity so rich it is dumping money onto buying castles won’t get this negative badge, neither will one that isn’t buying castles but still is set on course to let go their employees the moment the funding slows down.
If the charity evaluator is only evaluating reserves, and not things like imprudent spending, there is definitely a risk of creating perverse incentives.
I don’t know about SoGive, but I believe other charity evaluators mark a candidate down for having either too little or too much in reserves.
Yeah, having some reserves is obviously sensible risk management.
But if an organisation has a policy of holding 3-5 years worth of reserves, this implies that for every dollar donated which is used on its activities in a given year, another 3-5 dollars worth of donations simply ends up sitting in a bank.
When there are many other EA-aligned organisations doing valuable work that are struggling for funding, the opportunity cost appears substantial.
Assessment of reserves seems most useful when considering organisations that would otherwise be recommended because their activities seem valuable, so it’s not like Castle Buying Charity would be recommended just for having a sensible reserves policy.
Unless I’m missing something major, the opportunity cost is mostly modelled well enough by the discount rate of your donations vs investment returns (or high-interest savings accounts, depending on what the company does) over 3-5 years.
I may also be missing something major, but I was thinking of opportunity cost in terms of the foregone benefits achieved by donating to another organisation.
But if an organisation has a policy of holding 3-5 years worth of reserves, this implies that for every dollar donated which is used on its activities in a given year, another 3-5 dollars worth of donations simply ends up sitting in a bank.
An organization could have a lot of reserves but still have revenue and program expenses roughly equal, no?
Suppose an organization spends 1⁄4 of its reserves every year, and earns a 5% return on those reserves. If I make a $1 donation, the org would increase its spending by $0.25 in year 1. In year 3 it would increase its spending by (0.75)*(1.05)*(0.25) = $0.20. Year 3 it would spend $0.16, Year 4 it would spend $0.12, etc. In the limit the full donation, plus accrued interest gets spent, even if it sits in a bank for a while. The timing would concern me only if I felt that money spent on nuclear security this year would be significantly more valuable than money spent in subsequent years.
As a layman: first and foremost correlation that pops in my mind is high reserves ~ responsible spendings. A charity so rich it is dumping money onto buying castles won’t get this negative badge, neither will one that isn’t buying castles but still is set on course to let go their employees the moment the funding slows down.
If the charity evaluator is only evaluating reserves, and not things like imprudent spending, there is definitely a risk of creating perverse incentives.
I don’t know about SoGive, but I believe other charity evaluators mark a candidate down for having either too little or too much in reserves.
Yeah, having some reserves is obviously sensible risk management.
But if an organisation has a policy of holding 3-5 years worth of reserves, this implies that for every dollar donated which is used on its activities in a given year, another 3-5 dollars worth of donations simply ends up sitting in a bank.
When there are many other EA-aligned organisations doing valuable work that are struggling for funding, the opportunity cost appears substantial.
Assessment of reserves seems most useful when considering organisations that would otherwise be recommended because their activities seem valuable, so it’s not like Castle Buying Charity would be recommended just for having a sensible reserves policy.
Unless I’m missing something major, the opportunity cost is mostly modelled well enough by the discount rate of your donations vs investment returns (or high-interest savings accounts, depending on what the company does) over 3-5 years.
I may also be missing something major, but I was thinking of opportunity cost in terms of the foregone benefits achieved by donating to another organisation.
An organization could have a lot of reserves but still have revenue and program expenses roughly equal, no?
Ah yeah—in that case I think my point would only apply if the org was increasing its overall revenue and expenditure.
Suppose an organization spends 1⁄4 of its reserves every year, and earns a 5% return on those reserves. If I make a $1 donation, the org would increase its spending by $0.25 in year 1. In year 3 it would increase its spending by (0.75)*(1.05)*(0.25) = $0.20. Year 3 it would spend $0.16, Year 4 it would spend $0.12, etc. In the limit the full donation, plus accrued interest gets spent, even if it sits in a bank for a while. The timing would concern me only if I felt that money spent on nuclear security this year would be significantly more valuable than money spent in subsequent years.