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

Non-Traditional Not-For-ProfitsCultural InstitutionsWhile the rated universe of cultural organizationslargely consists of museums, the rating approach issimilar for all types, including zoological parks,public radio and television stations, aquariums, andhistorical sites. Rated issuers are highly diverse,ranging from fine arts to natural history institutions.They also vary widely in their constituencies(adults, children, tourists, or local residents), admissionand membership levels, revenue sources, andfinancial flexibility.To assess demand for a cultural institution,Standard & Poor’s examines:■ The national and/or international prominence ofthe collection;■ Admissions and membership levels and trends;■ Competition from and location near other localmuseums, similar organizations, and touristattractions; and■ Fee structure and rate flexibility.Service area economic conditions also play animportant role, particularly when the institution hasa more limited, local draw. In addition, admissionand membership trends often are affected by theuse of blockbuster or special exhibits, a phenomenonsomewhat unique to museums. These supershows usually run for a limited time and, despitehuge crowds and swelling revenues, often aremoney-losing propositions. Nonetheless, blockbusterscan have a longer-term positive effect byattracting new members and repeat visitors.Because blockbusters dramatically inflate revenuesand expenditures in show years, it is often difficultto make accurate financial plans. As a cultural institutionassumes long-term debt, it is important that itDocumentation Requirements■ Official statement or other disclosure■ Bond resolution or trust indenture■ Lease or mortgage■ Five years audited financial statements and current year’sbudget summary■ Entity descriptive information■ Legal opinions**In addition to tax and validity opinions, Standard & Poor’smay require certain bankruptcy-related opinions, includingthe status of the issuer under section 303(a) of the BankruptcyCode-the inability of a creditor to file an involuntary petitionagainst the issuer-preference opinions, and, if applicable,nonconsolidation opinions. Most private universities issuetax-exempt debt through conduit issuers. Sometimes thisrequires additional documentation such as loan agreementsand information on the intent to perfect security interests.budget for these variations and maintain an adequatefinancial cushion to offset fluctuations. Infact, the highest-rated museums enjoy significantfinancial flexibility, with endowment and unrestrictedmonies well in excess of the annual operatingbudget, even though they do not always produceconsistently good operating margins.The visible civic role played by many culturalinstitutions often results in high levels of municipalgovernment and/or private donor support.Attendance-based cultural facilities with cyclicalrevenue streams, limited outside support from governmentalor private donors, and no endowment,would be unlikely to achieve investment-grade ratings.Start-up cultural organizations are not likelyto be rated investment grade, since they do nothave a record of attendance or membership, andmight not have an endowment. Museums thatundergo significant expansions must demonstratethat there is some predictability to their current revenuesource, such that projections seem attainable.In fact, most forecasts are far more positive for firstyear attendance after a major project completionthan what actually occurs.An important part of Standard & Poor’s analysisof a cultural institution is a review of the proposedproject, particularly its potential impact on attendanceor membership and the organization’s missionand focus. Exempt organizations often receivesubstantial governmental support, which might offsetthe risks associated with increased debtissuance. Therefore, the outlook for future governmentaland private support is a crucial part ofStandard & Poor’s analysis.Membership OrganizationsOne subset of not-for-profits that has garnered significantmarket interest is voluntary membershiporganizations. Such entities range from professionalmembership organizations to trade associations,religious organizations, and scientific societies. Therating analysis depends, in large part, on the primaryactivity of the organization and the benefitsderived from membership.As with other not-for-profits, Standard & Poor’sanalysis of a membership organization begins witha comprehensive evaluation of the operating historyof the institution and its current activities andmanagement. While actual membership growth isimportant as a proxy for demand, the main focusis on understanding an institution’s particularindustry and role within that industry. To that end,Standard & Poor’s examines offered services, membershiptrends, and measures of industry effectivenessand performance. Some organizations have arole so unique that they have no competition intheir particular industry. For example, thewww.standardandpoors.com203