Rating Public Colleges And Universities
Standard & Poor’s rating approach for public uni-
versities is similar to that used for private institu-
tions in terms of demand, management, finances,
and legal provisions. However, since fiscal 1996,
financial accounting for private institutions has dif-
fered from the accounting standards that public
institutions follow. As a result, Standard & Poor’s
maintains two different sets of financial ratios for
use in evaluating colleges and universities. In addi-
tion, since a major portion of a public university’s
annual budget comes from state sources, analysis of
state support is also a rating factor. State mandates
and policies also can greatly influence the demand
and financial characteristics of a public university.
State support
On average, public colleges and universities derive
much less than half of their unrestricted operating
budgets from state appropriations and the amount
provided for operating support continues to decline
over time. On the other hand, many states provide
considerable capital support for construction and
maintenance of academic facilities along with gen-
eral operating support. Standard & Poor’s evaluates
state support by focusing on the following factors:
■The state’s GO rating, which provides a snapshot
of a state’s economic, debt and financial condi-
tion and offers a basis for evaluating the strength
of higher financial education support.
■The track record of appropriation support for
higher education within a given state. Particular
attention is paid to how higher education fares in
times of financial stress at the state level.
Standard & Poor’s is interested not only in how
successful individual institutions are in obtaining
appropriations, but also in the strength of a
state’s overall support for higher education.
■The history of allocations to the specific institu-
tion being rated. In addition, Standard & Poor’s
compares the institution’s historical percentage
share of total higher education appropriation
with that of other state institutions.
■Nominal amount of state support and changes in
the funding formula which might benefit higher-
growth, stable, or slow-growth institutions; and
■The history of state appropriations per full-time
equivalent enrollment. Some of the highest levels
of support on an FTE basis, such as at the
University of California and University of North
Carolina, are virtually double other flagship peers.
While not the sole rating feature, a state’s general
creditworthiness (often measured by a GO rating)
may provide a helpful starting point for a public
university rating. An analysis of an individual pub-lic institution’s demand and finances, combined
with similar information about the state’s other
public universities, allows Standard & Poor’s to
develop a range of possible ratings. The highest rat-
ings for public colleges and universities are usually
assigned to flagship institutions characterized by
high funding levels, nationally recognized academic
programs, and unusually strong admissions or
financial position. Other state schools generally
receive lower ratings, depending on the strength of
state support to specific institutions, financial and
admissions characteristics, and the security pledge.
However, ratings tend to be higher than for private
colleges and universities because of the presence of
state support.
While a state has unlimited taxing power, a state
university may have less flexibility because a major
portion of its annual budget is at the discretion of
the state legislature. Thus, without overwhelming
demand or financial strength, a state university’s
creditworthiness usually does not exceed or even
equal that of its sponsor state. Public institutions
have broken through this barrier on the basis of
highly selective demand, large endowment holdings,
and/or comprehensive research programs, and
broad revenue diversity. Most public universities
are not affected by a positive or negative change in
a state’s financial condition, except that a funding
environment can become more favorable if a state’s
financial condition improves. The degree of change,
if any, in a rating will reflect institutional demand
and financial characteristics, as well as the universi-
ty’s role in the state system of higher education and
its funding history.
During periods of fiscal stress, many public uni-
versities are able to increase tuition and fees consid-
erably, without any reductions in demonstrated
demand. Universities with significant insulating
characteristics could experience some fiscal strain, if
their respective states make cuts to higher educa-
tion, but it may not be demonstrated in the univer-
sity’s financial results. Standard & Poor’s evaluates
each institution on a case by case basis, in the event
of state rating changes, to determine whether the
outlook has changed, or the financial circumstances
are unchanged, better, or weaker.
State policies
In addition to actual appropriations, underlying
state mandates and policies also impact public uni-
versity finances and must be considered in the rat-
ing process. Mandated tuition caps, budgetary
reversions back to the state, required remission of
excess or unspent dollars back to the state, and lim-
its on bonding for specific projects can all affect an
institution’s financial operations. These policies
make analysis of a public university’s finances quiteEducation And Non-Traditional Not-For-Profits182 Standard & Poor’s Public Finance Criteria 2007