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

Education And Non-Traditional Not-For-ProfitsRating Public Colleges And UniversitiesStandard & Poor’s rating approach for public universitiesis similar to that used for private institutionsin terms of demand, management, finances,and legal provisions. However, since fiscal 1996,financial accounting for private institutions has differedfrom the accounting standards that publicinstitutions follow. As a result, Standard & Poor’smaintains two different sets of financial ratios foruse in evaluating colleges and universities. In addition,since a major portion of a public university’sannual budget comes from state sources, analysis ofstate support is also a rating factor. State mandatesand policies also can greatly influence the demandand financial characteristics of a public university.State supportOn average, public colleges and universities derivemuch less than half of their unrestricted operatingbudgets from state appropriations and the amountprovided for operating support continues to declineover time. On the other hand, many states provideconsiderable capital support for construction andmaintenance of academic facilities along with generaloperating support. Standard & Poor’s evaluatesstate support by focusing on the following factors:■ The state’s GO rating, which provides a snapshotof a state’s economic, debt and financial conditionand offers a basis for evaluating the strengthof higher financial education support.■ The track record of appropriation support forhigher education within a given state. Particularattention is paid to how higher education fares intimes of financial stress at the state level.Standard & Poor’s is interested not only in howsuccessful individual institutions are in obtainingappropriations, but also in the strength of astate’s overall support for higher education.■ The history of allocations to the specific institutionbeing rated. In addition, Standard & Poor’scompares the institution’s historical percentageshare of total higher education appropriationwith that of other state institutions.■ Nominal amount of state support and changes inthe funding formula which might benefit highergrowth,stable, or slow-growth institutions; and■ The history of state appropriations per full-timeequivalent enrollment. Some of the highest levelsof support on an FTE basis, such as at theUniversity of California and University of NorthCarolina, are virtually double other flagship peers.While not the sole rating feature, a state’s generalcreditworthiness (often measured by a GO rating)may provide a helpful starting point for a publicuniversity rating. An analysis of an individual publicinstitution’s demand and finances, combinedwith similar information about the state’s otherpublic universities, allows Standard & Poor’s todevelop a range of possible ratings. The highest ratingsfor public colleges and universities are usuallyassigned to flagship institutions characterized byhigh funding levels, nationally recognized academicprograms, and unusually strong admissions orfinancial position. Other state schools generallyreceive lower ratings, depending on the strength ofstate support to specific institutions, financial andadmissions characteristics, and the security pledge.However, ratings tend to be higher than for privatecolleges and universities because of the presence ofstate support.While a state has unlimited taxing power, a stateuniversity may have less flexibility because a majorportion of its annual budget is at the discretion ofthe state legislature. Thus, without overwhelmingdemand or financial strength, a state university’screditworthiness usually does not exceed or evenequal that of its sponsor state. Public institutionshave broken through this barrier on the basis ofhighly selective demand, large endowment holdings,and/or comprehensive research programs, andbroad revenue diversity. Most public universitiesare not affected by a positive or negative change ina state’s financial condition, except that a fundingenvironment can become more favorable if a state’sfinancial condition improves. The degree of change,if any, in a rating will reflect institutional demandand financial characteristics, as well as the university’srole in the state system of higher education andits funding history.During periods of fiscal stress, many public universitiesare able to increase tuition and fees considerably,without any reductions in demonstrateddemand. Universities with significant insulatingcharacteristics could experience some fiscal strain, iftheir respective states make cuts to higher education,but it may not be demonstrated in the university’sfinancial results. Standard & Poor’s evaluateseach institution on a case by case basis, in the eventof state rating changes, to determine whether theoutlook has changed, or the financial circumstancesare unchanged, better, or weaker.State policiesIn addition to actual appropriations, underlyingstate mandates and policies also impact public universityfinances and must be considered in the ratingprocess. Mandated tuition caps, budgetaryreversions back to the state, required remission ofexcess or unspent dollars back to the state, and limitson bonding for specific projects can all affect aninstitution’s financial operations. These policiesmake analysis of a public university’s finances quite182 Standard & Poor’s Public Finance Criteria 2007