S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Health Care■ Other liabilities, such as incurred but not reportedclaims, malpractice claims paid and pending,guarantees, leases, and other debt; and■ Endowment funds available at the university insupport of faculty practice operations or debt.Legal covenantsStandard & Poor’s requires legal and security provisionssimilar to those used in other health carefinancings. A GO or revenue pledge is customary,and a mortgage is not required, although a negativepledge on assets is needed if the GO pledge is used.A liquidity covenant is an important considerationand may be requested to help maintain balancesheet strength. Criteria for funding debt-servicereserve funds vary according to the rating categoryand are consistent with other health care financings.Although Standard & Poor’s prefers to havephysician salaries subordinate to the repayment ofbonds, this covenant alone is not sufficient toensure an investment-grade rating, since, withoutadequate physician compensation, the clinic is atrisk for turnover and subsequent loss of businessand revenue. ■Human Service ProvidersHuman service providers serve individualswho have development disabilities or aresuffering from mental illness, and who typicallyneed substantial support to function at their highestlevel. The human service providers supporttheir clients with distinct programs to meet distinctchallenges.CriteriaThe following rating approach is applicable toquasi-governmental providers and freestandingtraditional nonprofit community agencies. Aprovider’s organizational model, governmentalrelationship, and type of service provided, amongother factors, will be given greater or lesserweight, depending on each situation. Due to theconstrained reimbursement systems in which theproviders operate, and the generally weak reservesheld by these organizations, ratings tend to rangefrom high speculative-grade (‘BB’ level) to mediuminvestment-grade (‘A’ level).Major factors in Standard & Poor’s RatingsServices review include:■ Service essentiality;■ Provider assessment;■ Management quality;■ Financial analysis;■ Funding agency relationship;■ Fund raising history; and■ Pledged security and legal structure.EssentialityThe most important factor is essentiality, whichincorporates the likelihood that government,through funding agencies, will continue to fund certaincritical services. Because many human serviceproviders have break-even operations and limitedliquidity, Standard & Poor’s relies on strong serviceessentiality to boost credit quality.The courts have mandated community-basedtreatment for developmental disabilities and mentalhealth, making these services essential. On the otherhand, chemical dependency programs as well as daycare and training programs receive less supportfrom the judiciary, government, and the public.Therefore, Standard & Poor’s views these servicesas less essential as well. However, if a provider candemonstrate a history of funding support for lessessential services, this would be a positive factor inthe rating determination. A history of funding supportby leading state or local agencies through goodand bad times is also a critical factor.The providerStandard & Poor’s looks at two key items whenassessing the provider: An analysis of services providedand the provider’s market position.Services should be self-supporting from their fundingsources with a minimum of subsidization frominvestment income or contributions. A broad array ofservices offered to a variety of populations minimizesthe impact of funding reductions or market forces inone or two particular service lines. However, if takento the extreme, this strategy can expose the providerto additional risk if lines of business are new andunproven, or do not complement other service offerings.For example, if a provider takes on a highly specializedtreatment, such as services for severelyautistic children, without prior or related experience,this can expose the provider to additional risk.Standard & Poor’s also reviews geographic diversity,172 Standard & Poor’s Public Finance Criteria 2007