■Other liabilities, such as incurred but not report-
ed claims, malpractice claims paid and pending,
guarantees, leases, and other debt; and
■Endowment funds available at the university in
support of faculty practice operations or debt.
Legal covenants
Standard & Poor’s requires legal and security provi-
sions similar to those used in other health care
financings. A GO or revenue pledge is customary,
and a mortgage is not required, although a negative
pledge on assets is needed if the GO pledge is used.A liquidity covenant is an important consideration
and may be requested to help maintain balance
sheet strength. Criteria for funding debt-service
reserve funds vary according to the rating category
and are consistent with other health care financ-
ings. Although Standard & Poor’s prefers to have
physician salaries subordinate to the repayment of
bonds, this covenant alone is not sufficient to
ensure an investment-grade rating, since, without
adequate physician compensation, the clinic is at
risk for turnover and subsequent loss of business
and revenue.■Health Care172 Standard & Poor’s Public Finance Criteria 2007
H
uman service providers serve individuals
who have development disabilities or are
suffering from mental illness, and who typically
need substantial support to function at their high-
est level. The human service providers support
their clients with distinct programs to meet dis-
tinct challenges.Criteria
The following rating approach is applicable to
quasi-governmental providers and freestanding
traditional nonprofit community agencies. A
provider’s organizational model, governmental
relationship, and type of service provided, among
other factors, will be given greater or lesser
weight, depending on each situation. Due to the
constrained reimbursement systems in which the
providers operate, and the generally weak reserves
held by these organizations, ratings tend to range
from high speculative-grade (‘BB’ level) to medium
investment-grade (‘A’ level).
Major factors in Standard & Poor’s Ratings
Services review include:
■Service essentiality;
■Provider assessment;
■Management quality;
■Financial analysis;
■Funding agency relationship;
■Fund raising history; and
■Pledged security and legal structure.
Essentiality
The most important factor is essentiality, which
incorporates the likelihood that government,
through funding agencies, will continue to fund cer-tain critical services. Because many human service
providers have break-even operations and limited
liquidity, Standard & Poor’s relies on strong service
essentiality to boost credit quality.
The courts have mandated community-based
treatment for developmental disabilities and mental
health, making these services essential. On the other
hand, chemical dependency programs as well as day
care and training programs receive less support
from the judiciary, government, and the public.
Therefore, Standard & Poor’s views these services
as less essential as well. However, if a provider can
demonstrate a history of funding support for less
essential services, this would be a positive factor in
the rating determination. A history of funding sup-
port by leading state or local agencies through good
and bad times is also a critical factor.
The provider
Standard & Poor’s looks at two key items when
assessing the provider: An analysis of services pro-
vided and the provider’s market position.
Services should be self-supporting from their fund-
ing sources with a minimum of subsidization from
investment income or contributions. A broad array of
services offered to a variety of populations minimizes
the impact of funding reductions or market forces in
one or two particular service lines. However, if taken
to the extreme, this strategy can expose the provider
to additional risk if lines of business are new and
unproven, or do not complement other service offer-
ings. For example, if a provider takes on a highly spe-
cialized treatment, such as services for severely
autistic children, without prior or related experience,
this can expose the provider to additional risk.
Standard & Poor’s also reviews geographic diversity,