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

Private Elementary And Secondary Schoolstuition as their main source of revenues, althoughendowment income and auxiliary revenues fromsources such as boarding fees, summer programs,and rental facilities provide significant support forsome schools. However, for more highly ratedschools, endowment income and private contributionsare increasingly important. Most independentschools run annual fundraising campaigns, andmajor comprehensive fundraising or capital campaigns.The largest of these campaigns is generallymuch smaller than the largest of capital campaignsfor colleges and universities, but the alumni basefor most independent schools is quite limited.Parental participation rates for many of the schoolsrated by Standard & Poor’s are quite high—as highas 90% or more. Alumni participation rates vary,but can be much higher than a comparable level ata private liberal arts college.Standard & Poor’s also examines expenses andfixed costs, such as tenured faculty, operation andmaintenance of plant facilities, and debt service. Ingeneral, primary and secondary schools do not havetenured faculties, giving these schools greater abilityto react to fiscal pressures than educational institutionsthat award tenure to faculty. On the otherhand, these schools are often so small that it maybe difficult to achieve economies of scale seen inlarger institutions. It is not uncommon for a schoolwith fewer than 400 students to receive an investmentgrade rating. However, it is likely that it is notstrong operating margins, but a good balance sheet,balanced operations, and good demand that drivean independent school rating.The debt service burden is assessed by looking atmaximum annual debt service as a percent of operatingexpenses. Because of their small size, andsmall operating budgets, independent schools debtservice burden is often a high percentage of operatingexpenses. A debt load above 10% could be significantand may be a rating factor, however, itdepends on whether the school has the existingoperational capacity to take on the debt. A troublingindicator is the need to raise the endowmentdraw to support the increased costs of debt service,particularly if the increase in endowment spendingresults in a rate well above 5%. Day schools withoutlarge auxiliary operations present a special case.For example, in the context of a small budget andlack of tenured employees, even a high maximumannual debt service could be considered manageableif operating performance is good and an endowmentprovides additional support. Many independentschools issue variable rate debt secured byletters of credit or other credit enhancement. MoreRelevant Admissions Statistics*■ Headcount enrollment and projections.■ Total full-time equivalent enrollment.■ Total number of boarding and/or day students.■ New student information—including applicants,acceptances, and matriculants for each class, ifavailable, and average SSAT scores or SAT scoresof graduating seniors.■ Top 10 competitor institutions and win/loss statistics.■ Attrition and/or retention rates.■ Colleges and universities attended by graduating seniors.■ Day and boarding tuition and fee charges.■ Average room and board charge.■ Number of part-time and full-time faculty.*Five-year historical data required.of these schools are using interest rate swaps tohedge the interest risk exposure on the transactions.Standard & Poor’s evaluates swaps to calculate aDebt Derivative Profile (DDP) score.Standard & Poor’s reviews a school’s annualoperating results to determine long-term financialstability and strength. Liquidity analysis principallycompares cash and investments, unrestrictedresources, and expendable resources with operatingexpenses and debt. Unrestricted resources exceeding100% of expenses indicate strong liquidity position.Schools with unrestricted resources to operatingexpenses below 50% have more limited cushion andoperating constraints. Often, again because of theirsmall operating budgets, most independent schoolshave higher relative resources to expenses and debtthan a comparably rated college or university.Finally, Standard & Poor’s reviews facility needs,capital plans, and deferred maintenance to determinetheir potential impact on future financialstrength. Strong operating results may be significantlyoffset by substantial deferred maintenance,which can cause future financial strain. Little or nodeferred maintenance would be an added financialstrength to a school. Some independent schools failto account for depreciation in their operating budgets,which subsequently results in a year-end declinein unrestricted net assets. Because Standard &Poor’s evaluates liquidity using net equity ratios,the drop in unrestricted net assets directly leads to adrop in liquidity. If a school does not budget fordepreciation, Standard & Poor’s will evaluate thequality of the physical plant for signs of neglect andwill ask about annual allocations to plant renewaland replacement.www.standardandpoors.com193