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

Non-Traditional Not-For-Profitsparamount importance. Standard & Poor’srequests at least five years of historical financialdata and asks for portfolio and endowment datasuch as quarterly board reports.In evaluating endowment, Standard & Poor’slooks beyond size at a number of specific factors,including:■ Growth in endowment assets over time;■ Asset allocation policies and quality of the investmentpool, and a comparison to targeted investmentmix;■ Historical rates of return compared to broadermarket or customized benchmarks;■ Relative liquidity and availability of the portfolio;■ Endowment spending policies; and■ Restrictions on use of earnings and principal.Since the endowment is the basis for any ratingof an endowed organization, Standard & Poor’smay require legal covenants restricting the foundation’suse of its endowment. Generally, restrictionsmandate liquidity and asset coverage tests, andlimit additional debt issuance.While the above analysis focuses primarily onthe balance sheet, foundation mission, activities,and budgetary flexibility are also important. Todate, rated foundations tend to fall into one oftwo categories—independent or grantmaking andoperating. Although, one type is not necessarilymore creditworthy than the other, grantmakingentities may have more budgetary flexibility thanoperating foundations that actually run their owncharitable programs. Standard & Poor’s is particularlyinterested in the type of activity supportedby a foundation and the extent to which it cancurtail this support and control operating costs.Once started, Standard & Poor’s assumes thatcertain programs or foundation giving would bedifficult to stop, particularly if the foundation isthe sole sponsor.Research InstitutionsWhile nonprofit research institutions abound, thosemost capable of achieving investment-grade ratingsgenerally have a long history of working with agovernmental agency, or have a medium-to-highlevel of endowment. Despite their close ties to governmentsor sponsors, research organizations oftenface considerable credit risks, including contractnonrenewal and cyclical support for the type ofresearch being sponsored. Because of these risks,small institutions in a single competitive field, or ina field with a low funding priority, are more likelyto receive lower ratings.As with most areas of credit analysis, Standard &Poor’s reviews industry information to assess a nonprofitresearch organization. Specific governmentalcontracts are needed if the institution is operatingunder an especially large or long-term contract thatprovides the bulk of its operating income.Management meetings might include not only theinstitution’s management, but also large sponsors togauge ongoing support for the organization.Standard & Poor’s considers the following factorsto be particularly applicable when ratingresearch institutions:■ History of research programs and dollar amountof funding;■ Areas of research specialization and competition;■ Growth in the number of contracts and funding;■ Diversity of research—both classified and unclassified;■ Indirect cost recovery rates currently in place andtimetable for renegotiation■ Funding stability—options for contract renewal ifless than five years to termination dates; and■ Budgetary flexibility and the capacity to downsize.Other lines of inquiry go beyond the research programand include an evaluation of management,financial operations and resources, and debt burdenas previously discussed. Like membership organizations,Standard & Poor’s expects rated institutions toinclude permanent staff whose functions includefinancial management and day-to-day operations.Most research institutions rated by Standard &Poor’s are financially and operationally autonomous;however, any ties to a parent organization wouldinvolve an analysis of this relationship. Researchinstitutions receiving federal funds for research havean incentive to issue tax-exempt debt for facilities.These organizations can include the costs of facilitiescapital in their requests for reimbursement. Formany of them, being able to recoup the cost of capitalmakes debt a more favorable option than leasingresearch facilities.Bondholder security for debt issued by theseorganizations is typically a GO of the institution,but for many research organizations, direct andindirect costs of research are the primary sources ofRelevant Statistics for Research Institutions■ History of research programs and funding■ Areas of research specialization and competition■ Growth in the number of contracts, funding levels, andrate of indirect cost recoveries■ Diversity of research-both classified and unclassified■ Funding stability-options for contract renewal if less thanfive years to termination dates■ Budgetary flexibility and the capacity to downsizewww.standardandpoors.com205