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

Non-Traditional Not-For-Profitsconverted to taxable, or proprietary corporations.Typically, any tax-exempt debt would be refundedat that point.Management and governanceManagement is an important credit factor, particularlyfor nonprofits wrestling with industry competitionand often limited financial flexibility.Standard & Poor’s assesses management and governanceby reviewing:■ The composition of the board of trustees, itsexpertise, its independence, its committee structure,and its role in setting financial guidelinesand goals;■ The quality of management information readilyavailable in the rating process;■ Operational policies, investment and debt policies,and strategic plans;■ The ability to anticipate and react to new developmentsin the marketplace; and■ Current tenure of existing administrative officersof the organization and their relevant experiencein the industry.While nonprofit corporations are not required tofully adopt the provisions of Sarbanes Oxley at thistime, in practice many of them voluntarily adoptmost of these as practices, with the exception ofcertification of financial statements. Most of theorganizations in this sector that achieve investmentgrade ratings also engage in multi-year financialplanning and can easily produce budget models thatforecast future operations.Since many exempt organizations rely on largeendowments, balance sheet management (bothasset and liability) also is important. Standard &Poor’s reviews investment policies, investment performancerelative to market benchmarks, currentasset allocation, and spending policies. As far asliabilities, Standard & Poor’s reviews debt policies,existing debt structure (including any off balancesheet or subsidiary liabilities), plans forreducing any postretirement liabilities, andemployment cost structure.What is a Nonprofit?A nonprofit organization is an entity organized so that no partof its income benefits a private shareholder or individual. Anonprofit corporation usually applies for a tax-exemptionunder Subchapter F of the Internal Revenue Code. The majorityof tax-exempt organizations rated by Standard & Poor’sderive their tax-exempt status from Section 501(c)(3) of theInternal Revenue Service Code.Financial performance and resourcesFinancial analysis begins with an historical overviewof the institution’s operations. The not-for-profitcorporations rated by Standard & Poor’s almostuniversally report their operations under FASBreporting guidelines. Financial analysis typicallyincorporates five years of historical performance,current year’s preliminary results, and the nextyear’s operating budget. If 5-year, or multi-year forecastsare available, these documents provide a goodindication of management’s assumptions aboutfuture business activities. Within the financial context,Standard & Poor’s examines:■ Growth in the operating budget andbudgeting practices;■ Revenue diversity and cyclicality and the opportunityfor future revenue growth;■ Expense flexibility, or the ability to make programmaticchanges without negatively affectingdemand; and■ Rate flexibility, particularly in those cases wherethere is significant industry competition;■ Financial performance on an aggregate basis,measured by the existence of operating surplusesor deficits;■ And financial resources, measured by cash andinvestments and unrestricted and expendableresources.Affiliated organizations are generally consolidatedin financial statements of the entity being rated,and Standard & Poor’s analysis incorporates theassets and operations of subsidiary corporations ofnot-for-profits. Projections beyond the currentbudget year also are reviewed, for they often revealnew program directions and can be a gauge ofmanagement’s realism. Important financial ratiosinvolve the assessment of debt burden and operatingcushion.For debt burden, Standard & Poor’s examinesmaximum annual debt service as a percentage ofexpenses and total debt relative to cash and investmentsand to total unrestricted resources. Unlessthere is an ability to adjust rates on an ongoingbasis, Standard & Poor’s expects current operatingsurpluses to cover total debt service, including principaland interest associated with new debt. Whilemany nonprofits operate on a breakeven basis,Standard & Poor’s believes that these organizationsshould have an operating cushion to shield themfrom inevitable economic cycles. Operating marginvaries by type of organization. Some membershiporganizations demonstrate a high level of profitability,while some charitable organizations only breakevenfrom year-to-year. The most important cushionratio compares unrestricted resources to expenseswww.standardandpoors.com201