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

Education And Non-Traditional Not-For-ProfitsNon-Traditional Not-For-ProfitsThe substantial number of rated not-for-profitcorporations generally falls into four broadareas that are separate from the traditional sectorsof health care and higher education. They are:■ Cultural institutions and attractions;■ Voluntary membership organizations;■ Endowed and charitable foundations andcorporations; and■ Research institutions.In many respects, the only similarity betweenthese four entities is their tax-exempt status. Yet,despite this diversity, Standard & Poor’s RatingsServices has developed a common rating methodologyto assess their creditworthiness. This methodologybuilds on our criteria for hospitals anduniversities, yet incorporates the unique characteristicsof each new nonprofit entity. In general,Standard & Poor’s public finance does not ratepolitical parties and churches.Rating MethodologyThe four main credit factors considered for eachorganization are:■ Demand for the organization’s productsand services;■ Management and governance;■ Financial performance and resources; and■ Debt and capital structure.While these factors are the same as those used forassessing many types of credits in public finance,the focus of the evaluation is quite different,depending on the type. For cultural institutions,demand is often the focal point. Most of the culturalinstitutions rated by Standard & Poor’s areadmissions-driven, and earned income is a functionof the number of people who attend or visit a facility.For membership organizations, the primaryfocus is the tie between the organization and itsmembers, and an analysis of the service or servicesprovided. Membership revenue may not be thelargest source of operating income for the organization,but the relative importance of the corporationto a particular industry is often a key factor.Analysis of endowed foundations focuses less ondemand and more on financial resources and balancesheet strengths, and the likelihood of growthor stability, or the possibility of reduction in thepool of assets. The driving factors behind the analysisof research organizations are the nature andlevel of the research, whether the costs of researchare fully reimbursed, and an entity’s ability to withstandfunding changes. Most of the research institutionsrated by Standard & Poor’s, in addition to asizable research base, also benefit from the presenceof long-term investments or endowment.DemandStandard & Poor’s assessment of demand requiresa thorough understanding of each entity, its mission,market, and niche. An important componentshaping the character of these organizations is anissuer’s tax-exempt status. Such status entitles nonprofitsto an exemption from taxes on related businessincome and to issue tax-exempt debt—twosignificant advantages not available to for-profitcounterparts. Conversely, not-for-profits often runbreakeven financial operations; but because theseorganizations retain earnings without shareholderdistribution, they tend to build reserves over time.Standard & Poor’s reviews an organization’scharter to assess its mission and changes in this roleover time. Depending on the primary activity of theorganization, we examine various measures ofindustry effectiveness and performance. For example,when assessing a museum, Standard & Poor’smight review net revenues per visitor, a commonindustry statistic. When assessing an endowed orcharitable foundation, assessment of fundraisingefficiency (what portion of dollars raised is spent onprograms and what portion on administrativecosts), is also important. This point is especiallytrue for organizations that engage in direct mailfund drives and which raise a substantial portion oftheir annual budgets from external donors.An assessment of competition or competitiveposition is also important. Unlike a municipality,which provides essential services and therefore islikely to survive despite fiscal stress, nonprofitsmust have a role unique enough to ensure ongoingviability. Closing a local service nonprofit organizationmight not cause significant long-term distressor dislocation to the local community or users. Butclosing an important federally sponsored researchinstitution that provides essential research for thefederal government might be more disruptive to thegovernment of the entities in this sector rated byStandard & Poor’s. However, very few of theseinstitutions go out of business. Some organizationshave voluntarily rescinded their exempt status and200 Standard & Poor’s Public Finance Criteria 2007