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

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

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Higher Educationa general obligation pledge of a private university.Most private universities that sell debt issue unsecuredgeneral obligations, supported by a full faithand credit pledge. Sometimes particular issuingauthorities (since most private universities who issuetax-exempt debt must issue debt through a taxexemptconduit issuer) require a lien against certainrevenues of the institution and the maintenance oflegal covenants such as asset to liability ratios.However, these legal requirements would not raise aprivate college debt rating above its GO rating.<strong>Public</strong> universities, in contrast, may issue a varietyof debt types and very few have the ability to issuefull faith and credit debt. However, a school’s flexibilityto raise tuition and fees charged against all students,for example, allows Standard & Poor’s to rateunlimited student fee or tuition fee pledges for publiccolleges and universities on par with an institution’sGO rating. This policy is important in analyzingpublic institutions because many public schools arerestricted in their use of GO and state appropriationpledges. Other types of security pledges may beapplied to a university’s bonded debt, such as pledgesof revenues from a specific enterprise, including dormitoriesand parking systems, or a limited pledge oftuition or student fees (see section on privatized dormitoriesand enterprise financings for more informationon auxiliary revenue bonds).Standard & Poor’s views debt secured by enterprisefunds to be generally weaker than GO ortuition pledges. For example, a dormitory bond’srevenue source may be limited to room rentals,while a GO or tuition pledge implies a much broaderrevenue-raising capability. A bond secured bytuition or a school’s GO pledge is likely to experienceproblems only if the entire school experiencesdifficulty. An individual dormitory, on the otherhand, could close without necessarily affecting universityoperations. However, if the revenues pledgedare from a large dormitory system, and most studentslive on campus, dormitory revenues could perhapsbe as important to the college’s overall healthas tuition and student fees. <strong>The</strong> dormitory’s value tothe school largely determines the distance betweenthe dormitory rating and the school’s GO rating.CovenantsRate covenants and additional bonds tests also areexamined. However, with the exception of enterprisedebt, these provisions generally carry lessweight in university analysis than in other types ofbond issues for other municipal enterprises. Thisde-emphasis is because the payment of debt servicedepends less on the maintenance of specific ratesand charges than on demand for the institution’sservices and its financial health. Additional bondstests for virtually all GO pledges do not enhancebondholder protection because the requirements,which are usually based on assets and liabilities,impose no real constraint on the college. However,enterprise operations must set rates to provide sufficientcoverage; therefore, for enterprise-backeddebt, Standard & Poor’s prefers rate covenants andadditional bonds tests with substance. Ratecovenants usually require institutions or their governingboards to set rates and charges which wouldenable debt service coverage to meet greater thansufficient coverage. Minimum rate covenants of1.15x-1.2x are acceptable, if debt service coverageis historically good and stable. <strong>The</strong> strongest additionalbonds tests require historical revenues to beat least 1.25x future maximum annual debt service,including the proposed bonds. Many other additionalbonds tests in this sector are proposed, ratherthan historical, and allow certification of futurerevenues by a business officer of the college.Debt service reserve policies. Cash flow considerationsin colleges and universities usually are less ofa problem than in other municipal enterprises;therefore, reserve funds are not always necessary.While it is true that tuition revenue inflows are seasonal,the presence of unrestricted resources andendowment often compensates for the absence of areserve, or rainy day, fund. Nevertheless, bondssecured strictly by enterprise revenues generallyrequire a fully funded debt service reserve fund,even if the college has a large endowment.Other liabilities and debt-like instrumentsStandard & Poor’s also incorporates other liabilitiesin its analysis of financial resources. <strong>The</strong>se caninclude short-term debt outstanding at year-end,unfunded pension liabilities and postretirement benefits,contingent liabilities, debt obligations of affiliatesand wholly owned subsidiaries, and operatingleases. Because our analysis focuses on retained equity,versus strictly cash and investments, all liabilitiesreduce the amount of equity. <strong>The</strong>refore, all liabilitiesare indirectly captured in Standard & Poor’s calculationof unrestricted and expendable resources. Alarge unfunded liability relating to postretirementbenefits such as health care and pensions could be ofconcern if management has no plan for how to fundthese liabilities or benefits over time. Many collegesand universities are frequent users of commercialpaper and variable rate debt obligations. Often commercialpaper has been authorized, but not issued. Ifa commercial paper program is dormant, or the institutionhas never issued up to the authorized amountof the program, only the actual amount issued by thecollege will be incorporated in the financial ratiosbased on audited financial statements. However, ourrating takes into account the possibility that additionalmay be issued.www.standardandpoors.com181

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