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

Education And Non-Traditional Not-For-ProfitsDebtA college or university’s total debt burden or totalamount of debt outstanding relative to its operatingbudget also is part of Standard & Poor’s financialanalysis. One way to measure a university’s debtburden is to compare maximum annual debt serviceto annual operating expenses. A ratio greater than10% generally indicates an excessive debt burden,and over 7% is considered to be moderately high.However, schools with particularly high levels ofendowment and liquidity, and good operating performance,often can support a greater debt load.Unrestricted resources are particularly importantwhen evaluating unenhanced short-term or demandfeature debt. Standard & Poor’s compares the variable-ratedebt burden in a “worst-case scenario”with unrestricted and expendable resources andwith operating expenses. There are no guidelines asto what the ideal debt structure should be for a collegeor university. In general, the higher the level ofendowment, the greater the amount of variable ratedebt issued by these institution. When a universityhas a very high level of floating-rate debt (above50%), Standard & Poor’s expects the institution tobudget for a higher cost of capital to cover anyunexpected rises in interest rates. Most interest rateswaps for highly rated colleges and universities areused to hedge interest rate exposure—to convertvariable rate payments to a fixed rate of interestand therefore ensure some predictability in futurepayments. Standard & Poor’s expects that issuerswho enter into swaps or other derivative instrumentsunderstand their use and can quantify therelative risks of these transactions and provide aswap management plan, whether the swap is usedto hedge interest rate risk on debt instruments or toenhance investment return.Management And GovernanceDecisions in admissions, finances, and debt strategycan be critical to an institution’s future andreveal a great deal about management’s philosophy.The choices made by different schools in verysimilar circumstances can mean the differencebetween ongoing viability and financial distress,or even closure. Standard & Poor’s analysis evaluatesmanagement’s:Ability to foresee and plan for potential challengeManagement’s ability to anticipate the impact ofevents such as changes in the general educationmarket, demographic trends, or deferred maintenanceneeds is assessed.Strategies and policiesWhether proactive or defensive, the policies adoptedby an institution must be evaluated in light ofhow realistic or attainable they are. WhileStandard & Poor’s does not try to determinewhether one strategy is better than another, it doesevaluate whether a strategy seems realistic. Forexample, a college budget that assumes an incomingclass of 500 freshmen when recent new enrollmentshave consistently been below 450 would notbe convincing.Track recordAn institution’s track record indicates how managementwill deal with new situations and problems.Standard & Poor’s examines the effectiveness of pastoperations and plans and evaluates management’sability to lead an institution through industry andenvironmental shifts.TenureSudden or frequent management turnover can be asign of stress or weakness. While less quantifiablein and of themselves, management decisions directlyaffect the variables involved in Standard & Poor’sdemand and financial analysis.Board composition and structureStandard & Poor’s evaluates boards and governanceby looking at a number of areas. Theseinclude board composition, committee structure,strategic planning, board financial contributions,and board elections. A board should be an independentbody that is able to replace a president orother senior leadership. A recent trend is a reductionin the number of board members. Certainly aboard needs to be large enough to have an appropriatecommittee structure: generally includingaudit, finance, academic affairs, and an executivecommittee. Most boards meet on a full basis fourtimes a year. Less frequent board activity could be aconcern unless there is an active executive committee.A board should be financially independentfrom the college and conflicts of interest shouldalways be disclosed.DebtLegal provisionsSecurity pledges. Standard & Poor’s debt ratingsrefer to a specific bond issue; they are not a generalstatement about the issuer. In contrast, an issuercredit rating is a current opinion of an obligor(such as a college or university) to meet its financialobligations. An issuer credit rating focuses on theObligor’s capacity and willingness to meet its financialcommitments as they come due. The opinion isnot specific to any particular financial obligations,as it does not take into account the specific natureor provisions of any particular obligations.The demand and financial analysis describedabove allows Standard & Poor’s to assign ratings to180 Standard & Poor’s Public Finance Criteria 2007