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

Human Service Providerswhich can diversify funding and market risk.However, there is additional risk if the provider’sservice area is too large to manage, or so small that itis vulnerable to competition.Standard & Poor’s analysis of market positionseeks to understand the provider’s importance in aservice area. A dominant market position, includinglargest number of clients served, most contractsreceived, or high barriers to entry in a specific serviceniche are favorable factors. Standard & Poor’s investigatesmarket penetration, contracts received andlost, as well as competitors’ strengths and weaknesses.Of particular concern are a number of for-profitproviders that are entering the market. In addition, itcan be difficult to assess the competition since measurableunits of output and cost are not standard andoften not measured within the industry.ManagementThe quality of management affects all factors inStandard & Poor’s credit evaluation. Management’shistory and track record, its ability to maintain aviable organization and strategically move it towardthe future are integral to Standard & Poor’s analysis.Evidence of an experienced management team,one not reliant on one or two people, is key.Standard & Poor’s assesses the sophistication ofmanagement practices by analyzing strategic plans,use of cost measures, and standard procedures.Standard & Poor’s will also investigate the strengthand oversight of the board of trustees. Where appropriate,accreditation by national bodies, such as theCommission on Accreditation of RehabilitationFacilities, can indicate compliance with professionalstandards. In addition, the level and degree of stateoversight is especially important given overall statemandates to provide these services.Financial analysisFinancial analysis, similar to that for revenuebonds, emphasizes a strong track record of financialviability that allows the organization to maketimely debt service payments. This includes an historicalanalysis of utilization and types of contracts,and how these contribute to profitability.Standard & Poor’s looks at referral patterns togauge whether major referral sources will continue.Standard & Poor’s also looks for evidence of aservice backlog, such as a waiting list. Sinceproviders have minimal price flexibility,Standard & Poor’s emphasizes cost control in itsanalysis and looks for treatment costs on a perclientbasis. Standard & Poor’s also asks providersto discuss examples of historical problems affectingfinances, management, funding and treatment, andhow they were remedied.Revenue and income trends are reviewed includingoperating and excess margins, debt service coverageand the overall debt burden of the organizationon a historical as well as pro forma basis ifnew debt is being issued. Liquidity and debt structureare also important to determine the provider’sflexibility and cushion against future events.Various liquidity measures, including unrestricteddays cash on hand as well cash to pro forma debtare two important metrics as well as various measuresof overall leverage. Most human serviceproviders are not highly profitable organizations,and margins are generally not as high as for comparablyrated health care providers. Some providersrely on gift income to balance operations.An established fundraising program, and a steadystream of bequests and fundraising can sometimesoffset weak operating performance if similar levelsare achieved on a recurring basis. However, overtime, most organizations rated by Standard andPoor’s are able to break-even based on programrevenues alone. The presence of an endowment canprovide a steady source of operating income forsome providers. In this case, Standard and Poor’swould ask about whether there is a standard spendingpolicy that can provide some operational stability,or whether the endowment is only used to coveroperating deficits that might occur.Funding agenciesAn integral component of the provider’s financialstrength is its relationship with the funding agencies,the major sources of revenues. Since providersoften rely on one-year renewable funding contracts,it may be difficult to assess revenue-stream quality.Standard & Poor’s generally speaks directly withthe major funding agency in order to understandseveral key points about the durability and strengthof major contracts. These points include:■ The nature of the contracts with the provider;■ How contracts are awarded and renewed;■ The history of cancellation and funding cutbacks;and■ The day-to-day working relationship with theprovider.Standard & Poor’s reviews the nature of the contractsand their award procedures to evaluate thecompetitiveness of the process. Standard & Poor’sfavors contract renewals based on performance, notprice, because the former supports financial andtreatment stability. If contracts are frequently canceled,Standard & Poor’s will be concerned aboutthe quality of the selection process as well as thequality of the agency’s revenue stream.Cancellations will be unlikely when there are strongcooperative relationships between the agencies andproviders. In addition, the use of various types ofintercepts from different funding programs canpotentially provide credit enhancement.www.standardandpoors.com173