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

Education And Non-Traditional Not-For-Profitstion rates of 90% or more. A retention rate of 65%or below, or conversely, an attrition rate of 35%from year-to-year can be cause for concern.Graduation rates nationwide are dropping overtime, and a failure of students to continue their educationalprogress represents a significant concern forinstitutions, both in terms of maintaining institutionaldemand and demonstrating favorable outcomes.Graduation rates tend to correlate withselectivity—the more selective an institution, thehigher the four-and five-year graduation rates.Institutions with a large number of engineering programstend to have slightly lower four-year graduationrates, but five-year graduation rates should becloser to the norm for its competitive peers.FinancesStandard & Poor’s analysis of a private university’sfinancial strength focuses on revenue and expenditurecomposition, financial operating performance,financial resources, balance sheet liquidity, anddebt burden. Standard & Poor’s evaluates at leastfive years of historical audited information, as wellas current year’s budgets to actuals, and any forecastsor multi-year financial plans that are beingused by management.Revenues. Standard & Poor’s evaluates historicaland projected trends in revenue composition. Adiversified revenue base is viewed positively, sincemultiple revenue sources tend to mitigate fluctuationsor shortfalls in an individual revenue stream.Larger institutions with graduate programs andresearch activities tend to have greater revenuediversity. Many smaller colleges and universitiesalso demonstrate less dependence on tuition andfees because of gift income and endowment levels,which provide annual operating income. However,at many private institutions, tuition and fee incomeusually accounts for at least 20% of total revenues.Standard & Poor’s considers financial aid to be adiscretionary expense item, and therefore we grossuptuition and fee revenues. Unlike the health caresector, where discounts are contractually determined,financial aid is not a contractual obligation.Research grants, endowment income, private gifts,public grants, and auxiliary income from dormitories,dining, and parking facilities can reducereliance on tuition.Standard & Poor’s assesses an institution’sability to raise revenues through tuition adjustments,intensified research activities, or auxiliaryoperations. Tuition rates are compared with competitors’charges to determine rate flexibility.Research grants are reviewed for diversity insource, purpose, and recipient. For most institutions,research revenues tend to be nearly equalto research expenses, although a thoroughaccounting of all costs may show otherwise—thatthe costs of research actually exceed revenues. Anew area of revenue for many colleges and universitiesis patent income and royalties, especiallyfrom the development of new drugs. Generallythis revenue is a small source for most universities,however, major discoveries can lead to hundredsof millions of dollars over the life of apatented drug. Generally, these revenues areviewed favorably and can provide additional revenueto an institution. Conversely, the revenuestend to be accruing to already highly rated, andusually revenue-diverse, institutions.An institution’s endowment spending policy alsois reviewed to determine income-raising capabilityand to ensure that the endowment corpus is beingpreserved. Many colleges and universities are experimentingwith new spending models and movingaway from an historical industry standard thatallows spending 5% of a three-year moving marketvalue average. Concerns that might cause an institutionto adjust its endowment spending modelinclude smoothing spending levels in volatile marketsand guaranteeing a minimum or maximumlevel of spending. Ultimately, institutions that adjusttheir endowment spending models are hoping toimprove the predictability of spending rates.Whatever the model, Standard and Poor’s examinesdeviation from prior spending practices, especiallywhen the rate of spending exceeds or is substantiallylower than comparable peers.Finally, Standard & Poor’s examines pastfundraising experiences, as well as planned fundraisingefforts, and proposed purpose of gifts. Alumniparticipation rates usually are highest for collegesand universities, which have produced mostly undergraduates.Alumni of graduate and professionalschools tend to donate at lower rates than alumniwith undergraduate degrees. Alumni participationrates tend to be highest at small to medium, liberalarts colleges, where rates of 40%-60% are notuncommon. Alumni participation rates are lower atpublic colleges and universities, but some flagshippublic universities, which have produced hundredsof thousands of alumni, have strong fundraisingrecords and development potential.Expenses. Standard & Poor’s evaluates expensesand assesses an institution’s ability to reduce costs ifrevenues decline. A high ratio of fixed to variablecosts limits this flexibility. Faculty commitments,financial aid budgets, utility costs, plant maintenanceneeds, health care costs, pension payments, and debtservice payments constrain financial flexibility.Standard & Poor’s looks at historical expendituretrends and will investigate large percentage increases.178 Standard & Poor’s Public Finance Criteria 2007