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

Higher EducationRisk managementStandard & Poor’s evaluates institutions for theirability to plan in the event that operations becomedisrupted for any reason. Many institutions arenow developing an office of risk management, orappointing chief risk officers, who oversee thedevelopment of contingency and emergency plansfor the institution. Standard & Poor’s asks aboutinsurance coverage in three areas: property andcasualty, business interruption, and liability.Operating resultsStandard & Poor’s analyzes a college’s incomestatement over the most recent five-year period,focusing on activity within unrestricted net assets.Generally, Standard & Poor’s expects at least modestoperating surpluses over the long run, signifyingthat revenues are sufficient to meet all operatingneeds, including depreciation and plant renewalexpense. However, a one-or two-year operatingdeficit is not considered a problem, if the schoolhas a large, liquid financial cushion. Standard &Poor’s notes whether the school includes depreciationas a budgeted expense. Often, year-end GAAPresults are negative, because depreciation was not abudgeted item for the year.Endowment and long-term investment poolsDepending on its size and restrictions, endowment(or a long-term investment pool) gives an institutionsignificant financial strength and liquidity.Growth trends in endowment are examined, andinvestment and spending policies are analyzed.Endowment levels are compared with an institution’sdebt level and budget, and a per studentendowment level is calculated and compared withthose of other colleges and universities. Generally,the larger the portion of unrestricted endowment,the better, but even a largely restricted endowmentcan provide significant strength, as it also producesspendable endowment income. Restricted endowmentfunds also may be somewhat fungible, freeingup other operating funds that can be used for otherpurposes. In addition, endowments restricted forscholarships or faculty chairs may lend programmaticstrengths and help a college attract studentsand faculty.Investment performance is compared to broaderbenchmarks such as the National Association ofCollege and University Business Officers(NACUBO) mean, which is published every yearbased on a national survey, and to particular benchmarksselected by the institutions themselves. Thesemeasures provide a yardstick—how well did theinstitution’s investments perform relative to itschoices. Standard & Poor’s generally asks for acopy of the investment report reviewed by theboard on a quarterly basis. This report typicallyprovides important information on asset classes,recent investment performance, and highlights anyanomalies related to investment performance.Liquidity of the endowment is a growing concern ascolleges and universities diversify their investmentportfolios in an effort to enhance return and reducevolatility. Standard & Poor’s asks how frequentlythe portfolio is valued; management should beaware of what portion of the invested assets arehighly liquid—could be valued on a daily basis asmarketable securities. If large portions of theendowment are “locked-up” in private equityarrangements, that would need to be disclosed duringthe rating process. Most schools spend a prespecifiedportion of their endowment on annualoperations. The most common spending policy hasbeen that 5% of a three-year market value averageof the endowment will be utilized for operations.Because of recent fluctuations in equity markets,however, more schools are adopting spending policycaps or collars—to spend no more or less than acertain percentage of the endowment. Standard &Poor’s considers an endowment spending rate above6% to be high, and above 8% to be excessive.LiquidityIn general, liquidity measures how long a schoolcould function without taking in additional revenue.Three different measures are used to assess bothoperating and debt liquidity: cash and investments,unrestricted resources, and expendable resources.Each of these figures is drawn from the balancesheet and then compared to operating expenses,total debt (long-term and short-term) outstanding,and pro forma debt. Because endowment is includedin the balance sheets of private colleges and universities,available liquidity can include sources derivedfrom all funds of the institution—endowment, operatingfunds, and internal plant funds. Standard &Poor’s does not exclude endowment from its assessmentof liquidity, unless the endowment is restrictedfor a specific purpose. Therefore the calculation ofavailable liquidity rests on the type of equity andgenerally includes only unrestricted or temporarilyrestricted net assets. However, unrestricted equityand temporarily restricted equity should be supportedby sufficient liquid assets such as cash and marketablesecurities. If unrestricted resources tooperating expenses exceed 100%, or a year of annualoperating expenses, the school exhibits good liquidity.Conversely, institutions with unrestrictedresources to operating expenses below 30% havemore limited cushion and operating constraints.Unrestricted resources at less than 25% of proforma debt are a concern.www.standardandpoors.com179