different from that of a private institution. For
example, while a large financial cushion allows a
university more flexibility and independence from
the state, some public institutions are limited as to
the amount of unrestricted reserves they can retain.
Standard & Poor’s considers public colleges and
universities with unrestricted resources below 5%
of total annual operating expenses to be vulnerable
to severe operating constraints. Capital campaigns
to increase unrestricted resources or endowment are
looked upon favorably.
Mission
Although analysis of demand is similar for private
and public universities, ratings of public schools are
sometimes skewed by the institutions’ role in pro-
viding education and the importance of state sup-
port. Standard & Poor’s generally regards
acceptance and matriculation rates as key factors in
determining an institution’s overall demand posi-
tion. However, public institutions generally have
more liberal or open admissions requirements, and
acceptance rates for public schools (ranging from
30%-80%) are generally not as competitive as
those for comparably rated private institutions. In
addition, while some premier public institutions
have very high student quality indicators, and
acceptance rates may equal those of more selective
private institutions, many public institutions exhibit
lower quality measures because of open admissions
policies. However, a public university may be a pri-
mary provider of higher education, or the state’s
flagship institution and matriculation rates may be
very high. Thus, public universities are often highly
rated, despite having less admissions flexibility than
their private counterparts.
Legal provisions
Since public universities enjoy state funding sup-
port, they have less need to guard against revenue
volatility. Where the debt being rated is a GO, or
equivalent, of a public institution, a debt service
reserve is not needed if a college has met two
ratios for each of the past three years. First, unre-
stricted resources divided by operating expenses
and interest, should exceed 5%. Second, maximum
annual debt service divided by unrestricted
resources should be less than 50%. In Standard &
Poor’s view, meeting these two ratios demonstrates
enough liquidity to mitigate the absence of a debt
service reserve.Rating Community College Debt
As the role of community colleges has expanded
over the past decade, enrollment growth and
improved state support have resulted in increased
creditworthiness for these institutions.Community colleges have developed along the
same lines as public four-year institutions. However,
while public colleges and universities look much the
same from state to state, community colleges exist
in many different forms.
In some states, community colleges fall under the
responsibility of large flagship universities. Other
states have less centralized systems, whereby indi-
vidual community college districts have been
formed that resemble independent school districts.
Other structures include a state board of education
that oversees activities of community colleges, in
much the same way as a state board of regents gov-
erns four-year institutions. Finally, some states do
not even have community colleges, but, rather, elect
to offer technical and vocational classes through
their four-year institutions.
The wide array of structures has led to debt
being issued under a variety of security pledges. It is
this variety of security pledges, rather than any real
differences in debt-repayment ability, that has
resulted in the ratings on community college debt
being spread across the spectrum, from potentially
a ‘AAA’ where debt is secured general obligations
or ad valorem tax revenues to the ‘BBB’ category.
Most community colleges are supported by three
main revenue sources:
■Local ad valorem property taxes;
■State appropriations; and
■Tuition and fees.
These income streams can be pledged individually
or in combination to create numerous security
pledges. The most common pledges, in descending
order from broadest and most creditworthy to nar-
rowest, include:
■A GO pledge of all of the school or district’s
resources, including ad valorem property taxes;
■A pledge of tuition or tuition and fees, excluding
property tax support;
■A pledge of one or more unlimited student fees,
excluding tuition and property tax support; and
■A pledge of auxiliary (dormitory, dining hall,
parking) revenues.
Depending on the underlying security, ratings
assigned to the debt of a single community college,
or district, could vary from one issue of bonds to
another. Community college revenue bonds are
typically rated below GO bonds, depending on the
breadth of the pledged revenues. Issues secured by
tuition and fees, and other enterprise revenues
might be rated higher than revenue bonds secured
solely by enterprise revenues of the community col-
lege. All ratings still take into account the commu-
nity college’s financial performance and other
credit characteristics.Education And Non-Traditional Not-For-Profits184 Standard & Poor’s Public Finance Criteria 2007