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

Education And Non-Traditional Not-For-Profitsdifferent from that of a private institution. Forexample, while a large financial cushion allows auniversity more flexibility and independence fromthe state, some public institutions are limited as tothe amount of unrestricted reserves they can retain.Standard & Poor’s considers public colleges anduniversities with unrestricted resources below 5%of total annual operating expenses to be vulnerableto severe operating constraints. Capital campaignsto increase unrestricted resources or endowment arelooked upon favorably.MissionAlthough analysis of demand is similar for privateand public universities, ratings of public schools aresometimes skewed by the institutions’ role in providingeducation and the importance of state support.Standard & Poor’s generally regardsacceptance and matriculation rates as key factors indetermining an institution’s overall demand position.However, public institutions generally havemore liberal or open admissions requirements, andacceptance rates for public schools (ranging from30%-80%) are generally not as competitive asthose for comparably rated private institutions. Inaddition, while some premier public institutionshave very high student quality indicators, andacceptance rates may equal those of more selectiveprivate institutions, many public institutions exhibitlower quality measures because of open admissionspolicies. However, a public university may be a primaryprovider of higher education, or the state’sflagship institution and matriculation rates may bevery high. Thus, public universities are often highlyrated, despite having less admissions flexibility thantheir private counterparts.Legal provisionsSince public universities enjoy state funding support,they have less need to guard against revenuevolatility. Where the debt being rated is a GO, orequivalent, of a public institution, a debt servicereserve is not needed if a college has met tworatios for each of the past three years. First, unrestrictedresources divided by operating expensesand interest, should exceed 5%. Second, maximumannual debt service divided by unrestrictedresources should be less than 50%. In Standard &Poor’s view, meeting these two ratios demonstratesenough liquidity to mitigate the absence of a debtservice reserve.Rating Community College DebtAs the role of community colleges has expandedover the past decade, enrollment growth andimproved state support have resulted in increasedcreditworthiness for these institutions.Community colleges have developed along thesame lines as public four-year institutions. However,while public colleges and universities look much thesame from state to state, community colleges existin many different forms.In some states, community colleges fall under theresponsibility of large flagship universities. Otherstates have less centralized systems, whereby individualcommunity college districts have beenformed that resemble independent school districts.Other structures include a state board of educationthat oversees activities of community colleges, inmuch the same way as a state board of regents governsfour-year institutions. Finally, some states donot even have community colleges, but, rather, electto offer technical and vocational classes throughtheir four-year institutions.The wide array of structures has led to debtbeing issued under a variety of security pledges. It isthis variety of security pledges, rather than any realdifferences in debt-repayment ability, that hasresulted in the ratings on community college debtbeing spread across the spectrum, from potentiallya ‘AAA’ where debt is secured general obligationsor ad valorem tax revenues to the ‘BBB’ category.Most community colleges are supported by threemain revenue sources:■ Local ad valorem property taxes;■ State appropriations; and■ Tuition and fees.These income streams can be pledged individuallyor in combination to create numerous securitypledges. The most common pledges, in descendingorder from broadest and most creditworthy to narrowest,include:■ A GO pledge of all of the school or district’sresources, including ad valorem property taxes;■ A pledge of tuition or tuition and fees, excludingproperty tax support;■ A pledge of one or more unlimited student fees,excluding tuition and property tax support; and■ A pledge of auxiliary (dormitory, dining hall,parking) revenues.Depending on the underlying security, ratingsassigned to the debt of a single community college,or district, could vary from one issue of bonds toanother. Community college revenue bonds aretypically rated below GO bonds, depending on thebreadth of the pledged revenues. Issues secured bytuition and fees, and other enterprise revenuesmight be rated higher than revenue bonds securedsolely by enterprise revenues of the community college.All ratings still take into account the communitycollege’s financial performance and othercredit characteristics.184 Standard & Poor’s Public Finance Criteria 2007