OVERVIEW AND SCOPE

These criteria apply to U.S. and non-U.S. not-for-profit education providers that have the characteristics of a public finance entity and meet all of the below attributes:

• Mission: The entity has a public policy objective;
• Motive: The entity is not commercially driven, as may be demonstrated by not-for-profit status; and
• Distributions: Gains may be generated, but the entity retains earnings in the service of its public policy objective or distributes to another entity with a direct and explicit public policy objective.

These criteria are used to assign S&P Global Ratings' public or confidential stand-alone credit profiles (SACPs), issuer credit ratings (ICRs), and issue credit ratings. Included in scope are entities and their various security pledges (see Appendix 1):

• Public colleges and universities;
• Community colleges and community college districts (tuition/fees and tax-backed);
• Private colleges and universities; and
• Independent schools (day and boarding), also known as private elementary and secondary schools.

These criteria do not apply to for-profit education providers, U.S. not-for-profit charter schools, and other K-12 public schools.

All entities are hereafter collectively referred to as "education providers," unless specifically noted. Entities that are public colleges and universities and community colleges are referred to as "public education providers" and private colleges and universities and independent schools are referred to as "private education providers."

In certain circumstances, the education provider may offer both two-year and four-year programs to postsecondary students. These entities are rated as a community college if the provider's mission is predominantly focused on providing open access to postsecondary education, preparation for workforce development, and skills training through two-year programs. For all other cases, the education provider is rated as a public college or university.

The criteria may also include an education provider whose revenues come primarily from nonacademic sources such as health care. These entities are rated under these criteria if they are driven by an academic mission and governed as such.

METHODOLOGY

These criteria combine an education provider's enterprise and financial risk profiles into an anchor, as shown in chart 1, which is the starting point in determining the credit rating. Next, the criteria establish the SACP after applying positive or negative modifiers, caps, and the holistic analysis. Finally, the criteria reach the ICR after incorporating external factors. The issue credit rating is then established by evaluating the specific instrument and the breadth of the legal security pledge (see Appendix 1).

The enterprise risk profile considers industry risk, economic fundamentals, market position, and management and governance. The financial risk profile considers financial performance, financial resources, and debt and contingent liabilities. Each factor is assigned an assessment ranging from "extremely strong" (the strongest) to "highly vulnerable" (the weakest), which equates to a numeric score of '1' to '6', respectively.

The criteria are not intended to be prescriptive, but rather provide a general approach to our analysis of the issues considered relevant to global not-for-profit education providers.

Framework

The criteria use similar elements as our criteria for other public finance enterprise sectors, which are depicted in chart 1. This approach addresses strategic and operational activities that affect a provider's creditworthiness. These criteria incorporate environmental, social, and governance (ESG) related credit risks and opportunities predominantly within the market position assessment. Governance is incorporated within the management and governance, financial resources, and debt and contingent liabilities assessments.

The analysis includes seven primary factors: four enterprise risk profile and three financial risk profile factors, and each of these factors is described in the "Primary Credit Factors" section. Because some factors are more likely to affect credit quality than others, each factor is assigned a weighting, as shown in charts 2 and 3.

The enterprise risk profile assesses the operating environment and incorporates broad industry factors and organization-specific factors. Market position receives the highest weighting because it captures an education provider's role and importance in its respective industry. Once determined, the initial enterprise risk profile assessment may be further adjusted for credit factors not otherwise captured. Examples of those circumstances are outlined in "Adjusting The Initial Enterprise Risk Profile Assessment."

The financial risk profile assesses the education provider's operating performance, financial resources, and debt characteristics. Once determined, the initial financial risk profile assessment may be adjusted for credit factors not otherwise captured. Examples of those circumstances are outlined below in "Adjusting The Initial Financial Risk Profile Assessment."

Table 1 indicates how the enterprise risk profile and financial risk profile assessments are combined to reach the anchor. The framework uses modifiers and caps to adjust the anchor when warranted. Table 1 uses lowercase letters to highlight that the outcomes are not ratings themselves, but rather indicative credit levels suggested by the enterprise and financial risk profile assessments. In cases where table 1 presents a range of outcomes, the choice between the two outcomes is based on the education provider's relative position within the range, including our forward-looking view of the factors comprising the enterprise risk and financial risk profiles.

Table 1

Determining The Anchor
	Financial risk profile
Enterprise risk profile	1	2	3	4	5	6
	Extremely strong	Very strong	Strong	Adequate	Vulnerable	Highly vulnerable
1 Extremely strong	aaa	aa+	aa-	a	bbb+/bbb	bb+/bb
2 Very strong	aa+	aa/aa-	a+	a-	bbb/bbb-	bb/bb-
3 Strong	aa-	a+	a	bbb+/bbb	bbb-/bb+	bb-
4 Adequate	a	a/a-	a-/bbb+	bbb/bbb-	bb	b+
5 Vulnerable	bbb+	bbb/bbb-	bbb-/bb+	bb	bb-	b
6 Highly vulnerable	bbb-	bb	bb-	b+	b	b-

The next step is to apply any relevant modifiers and caps, when warranted, and our holistic analysis to reach the SACP. The holistic analysis helps capture a broader view of creditworthiness. The holistic analysis can result in a one-notch impact up or down. The adjustment may be based on factors including a forward-looking view of an issuer's operating and financial performance and may include positive or negative characteristics that the anchor does not separately identify. It may also reflect a comparable rating analysis when relevant, or strengths or weaknesses not fully reflected in the anchor.

Next, when relevant, is the consideration of external factors such as:

• The potential for extraordinary intervention from a related government when the entity is within the scope of government-related entities (GRE) criteria (see "Government-Related Entities," March 25, 2015).
• The potential support (or negative intervention) from a group or group member (see "Group Rating Methodology," July 1, 2019).
• The possibility for an issuer to be rated above the related government (see "Ratings Above The Sovereign: Corporate And Government Ratings—Methodology And Assumptions," Nov. 19, 2013).

If an education provider is a GRE, then the provider's final SACP is used to determine the ICR under GRE criteria. If the final SACP is above the sovereign rating, we also use Ratings Above The Sovereign criteria to determine the final ICR.

Once the effect of any external factors is incorporated, we arrive at the ICR. The ICR reflects the general creditworthiness of the entity and does not incorporate the security pledge or covenants provided to bondholders for any debt instrument. Excluding these additional considerations, the education provider ICR typically equals the final SACP.

In the final step of our analysis, if we rate a specific debt instrument, we review the legal structure of the instrument to determine the issue credit rating. As part of this analysis, we evaluate the security pledge and covenants to determine the issue credit rating. This analysis most often results in an issue credit rating that is the same as the ICR. However, the two may differ in some circumstances based on the nature of the pledged revenues, security features, the incentive to pay, and the presence of supporting entities to particular debt obligations. For U.S. education providers, see "Assigning Issue Credit Ratings Of Operating Entities," May 20, 2015, for how we assign an issue credit rating and "Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness," Nov. 20, 2019, for how we assess debt whose rating is linked to a related obligor's creditworthiness.

It is typical for non-U.S. education providers to issue secured or unsecured debt at the enterprise level as general obligations (GO) of the issuer and to pledge all resources to repay the debt. In these situations, we typically equalize the issue credit rating with the ICR, unless we determine that the issue presents contractual subordination risks. If we determine contractual subordination risks are present (i.e., senior creditors are granted prioritized access to a pledged revenue stream after default), we typically notch down the rating on the subordinated issue from the ICR. Depending on our analysis of the subordination provisions, we may adjust the rating by one notch if the ICR is investment-grade and up to two notches if the ICR is speculative-grade.

For SACPs and ratings below 'B-', see "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012.

Guidelines For Assigning Analytical Assessments

The assessment starts with historical and current performance metrics, including review of volatility and trend of past results. Enterprise risk profile assessments, and market position specifically, are generally based on the three most recent periods of information as defined by academic years. Financial risk profile assessments are generally based on the three most recent periods of information as defined by audit period. With the exception of maximum annual debt service (MADS) burden, we typically weight periods 45%, 35%, and 20% from most recent to least recent period, respectively. When evaluating historical data, our analysis is typically supported by information reported in a format consistent with market standards in the relevant jurisdiction. For the calculation of MADS burden, we evaluate the current or pro forma calculation, as applicable.

These criteria assess the forward-looking view of the education provider's performance based on the context in which that performance occurs and may use pro forma debt or projected metrics. There are instances where we may adjust weightings of factors and subfactors if we believe that results in one or more of the periods contain unusual items or are otherwise not indicative of future performance.

If any assessment falls at or near a midpoint, we generally assign the stronger assessment if trends are improving or we believe future performance will improve. Conversely, we generally assign a weaker assessment if trends are weakening or we believe future performance will be weaker. For each assessment, we may also take additional considerations into account. Smaller adjustments of one or two assessment levels are typically made.

Primary Credit Factors

Enterprise Risk Profile Assessment:  considers general industrywide factors common to the sector irrespective of the jurisdiction, as well as issuer-specific factors. Assessments for each factor range from '1' (the strongest) to '6' (the weakest). The factors and their weightings are:

• Industry risk (10% weighting);
• Economic fundamentals (10% weighting);
• Market position (60% weighting); and
• Management and governance (20% weighting).

Industry risk (10% weighting)

Industry risk enhances the comparability and transparency of ratings across sectors by comparing and scoring the industry risk. This assessment is based on "Methodology: Industry Risk," Nov. 19, 2013, with the exception of the profitability ratio. Instead of the profitability ratio, we use enrollment as a more appropriate measure because not-for-profit education providers are driven by a mission to educate students, which is in large part measured by enrollment. Industry risk is generally the same for not-for-profit education providers rated under these criteria because it reflects factors common to them all, such as cyclicality and competitive risk and growth. The other components of the enterprise risk profile assessment identify the extent to which an issuer's particular attributes entail higher or lower overall risk than is suggested by this general industry risk assessment. See Appendix 2. Not-for-profit education providers are assessed as "low risk" when compared with other industries and sectors.

Table 2

Industry Risk Assessment
Industry Name	Global Industry Risk Assessment		Cyclicality Assessment		Competitive Risk and Growth Assessment
Not-for-profit education providers	Low risk	2	Very low risk	1	Low risk	2

For cases in which an education provider has a non-education business segment that materially influences the credit profile on a consolidated basis, the industry risk assignment is based on that non-education business segment. As part of our analysis, we may consider whether the portion of revenues of the non-education sector is, or is trending toward, a majority of a provider's total revenues on a consolidated basis, which may affect the industry risk score.

Economic fundamentals (10% weighting)

The economic fundamentals assessment is initially based on GDP per capita as a measure for income levels and economic activity, with assessment levels calibrated in Appendix D (Sector And Industry Variables) of "Sovereign Rating Methodology," Dec. 18, 2017. Depending on the reporting norms in each country, another nationally recognized proxy for GDP per capita indicator (such as gross state product per capita) may be used. In other situations, when GDP per capita is inappropriate, the assessment focuses on gross national product per capita.

Generally, we use GDP per capita for the regions(s) where the education provider is located, which is often the primary source of demand. Since education providers commonly provide services at a local, state, or provincial level, we typically apply the local or state GDP per capita. However, the assessment may be based on national GDP per capita for providers that have a significant national draw of students where geographic concentration is not limited to the state, province, or locality.

The assessment of economic fundamentals may include consideration of additional economic characteristics. These additional considerations may result in an economic fundamentals assessment that is stronger or weaker than what the GDP per capita thresholds indicate.

Example of a positive consideration:

• Economy exhibits exceptionally favorable employment, socio-economic, or political trends or other factors that support revenue collection.

Example of a negative consideration:

• Economy exhibits substantially weak employment, socio-economic, or political trends that undermine revenue collection.

Market position (60% weighting)

Market position is the most influential factor of the enterprise risk profile. The market position assessment measures the role and importance of a provider within its respective sector and its demand trends, including diversification and volatility. We specifically evaluate population size as a demand characteristic in the market position assessment for community colleges because it defines the service area and is positively correlated with demand. The assessment has two steps:

First, the initial market position assessment is based on a quantitative analysis. We use equally weighted metrics unique to each type of education provider. These metrics are tailored to the mission of each of these provider types and their ability to generate revenues. To the extent that a metric is not available, then we equally weigh the remaining metrics to arrive at the initial market position assessment. The following metrics may be used to determine market position, depending on education provider type as shown in table 3:

• Selectivity rate: A highly selective provider is generally able to attract demand over time.
• Matriculation rate: A higher matriculation rate indicates a provider has strong student demand.
• Retention rate: A high retention rate reflects an education provider's ability to retain students over time.
• Full-time equivalent (FTE) enrollment: A larger FTE enrollment can create both economies of scale and enrollment diversity, which may limit enrollment volatility.
• Service area population size: Demand for a community college generally correlates to the size of its service area.
• Total headcount: Higher headcount drives tuition-based revenues. It also creates economies of scale and enrollment diversity, which may limit enrollment volatility.

Second, the final market position assessment is determined after the application of qualitative adjustments (table 4). Qualitative considerations may result in a final assessment that is stronger or weaker than the initial assessment.

Table 3

Assessing Market Position For Education Providers -- Step 1: Quantitative Assessment
Public Colleges and Universities:
	Assessment
Metric	1	2	3	4	5	6
Selectivity rate	<50%	50% to 75%	75% to 85%	85% to 95%	>95%	100%
Full-time equivalent (FTE) enrollment	>50,000	50,000 to 20,000	20,000 to 10,000	10,000 to 5,000	5,000 to 1,000	<1,000
Retention rate	>80%	80% to 70%	70% to 60%	60% to 55%	55% to 45%	<45%
Community Colleges:
	Assessment
Metric	1	2	3	4	5	6
Service area population	>1,500,000	1,500,000 to 500,000	500,000 to 350,000	350,000 to 150,000	150,000 to 100,000	<100,000
Full-time equivalent enrollment	>50,000	50,000 to 20,000	20,000 to 10,000	10,000 to 5,000	5,000 to 1,000	<1,000
Private Colleges and Universities:
	Assessment
Metric	1	2	3	4	5	6
Selectivity rate	<20%	20% to 40%	40% to 65%	65% to 80%	80% to 95%	>95%
Matriculation rate	>45%	45% to 30%	30% to 20%	20% to 15%	15% to 10%	<10%
Retention rate	>97%	97% to 92%	92% to 80%	80% to 70%	70% to 60%	<60%
Independent Schools:
	Assessment
Metric	1	2	3	4	5	6
Selectivity rate	<15%	15% to 30%	30% to 50%	50% to 70%	70% to 90%	>90%
Matriculation rate	>70%	70% to 60%	60% to 50%	50% to 40%	40% to 30%	<30%
Headcount	>1,200	1,200 to 900	900 to 600	600 to 400	400 to 200	<200

Table 4

Assessing Market Position For Education Providers -- Step 2: Commonly Applied Qualitative Adjustments
Characteristic	Examples
Key market position: Holds unique position in region, nationally, or internationally	Very large monopolistic provider (improve).
	For public colleges and universities, flagship or land grant institutions (improve).
	For community colleges, sole provider of secondary education in region (improve).
Diversification: Access to a geographically diverse student body	For private education providers, 50% of student body from outside the state, province, or country; or for public education providers, 30% of student body from outside the state, province, or country (improve).
	Multiple campuses or academic sites that add geographical diversity (improve).
	For private and public colleges and universities, more than 30% of FTE enrollment is graduate (improve).
Enrollment trends: Positive or negative demand trends	For all education providers except community colleges, FTE enrollment growth of greater than 15% cumulatively over the past five years (improve), or FTE enrollment decline of more than 3% per year for two or more consecutive years (worsen).
	For all education providers except community colleges, more than 10% decline in applications for three of the past five years (worsen).
	For private universities, very large FTE enrollment of greater than 25,000 (improve) or very small FTE enrollment of fewer than 1,400 (worsen).
	Strengthening (improve) or weakening (worsen) demand over the long-term from changes in student demographics and affordability (social capital) or access to qualified personnel (human capital).
Student quality: Above-average student quality	For community colleges, strong success and persistence metrics, including student retention rates, course success rates, certificates awarded, transfer rates via transfer agreements, and partnerships with local colleges and universities (improve).
	For all education providers except community colleges, graduation rates or standardized test performance scores are 20 percentage points above the national level (improve).
Institutional quality: Characteristics that improve or damage an education provider's reputation and desirability	Prestigious faculty base with typically more than 85% possessing terminal or advanced degrees (improve).
	Loss or risk of loss of institutional accreditation (worsen).
	National, independent rankings that enhance external reputation, including designation as an institution receiving sponsored research (improve).
	Elevated social risks, including institutional scandals that can affect reputation and demand (worsen).
Other factors: Any current or anticipated consideration inadequately reflected in the initial assessment	Actual or anticipated volatility attributed to environmental, social, and governance factors that are unaddressed such as significant weather or seismic events, public health issues, security concerns, or changes in government policies that drive behavior changes (worsen).
	Incomplete demand data (worsen).

Management and governance (20% weighting)

The management and governance assessment measures the strength of an education provider's management team and the oversight provided by its governance. The assessment evaluates management's actions, or lack of action and includes consideration of the following key factors:

• Strategic positioning: Includes clarity and specificity of strategic plans;
• Risk management: Incorporates the articulation of operational and financial risks and mitigation plans to handle such risks, including factors related to cyber risks and ability or inability to mitigate other ESG factors; and
• Organizational effectiveness: Includes management's depth and breadth of experience and a demonstrated ability to operate and execute on plans while maintaining financial strengths.

Table 5 provides typical characteristics of not-for-profit education providers at each of the six assessment levels from extremely strong to highly vulnerable. In general, each assessment is based on the variety of factors in the table and evaluates the preponderance of factors to determine the initial assessment. Where the table combines a range of assessments, such as extremely strong and very strong, the overall assessment is determined based on the organization's relative strengths within the range.

Given the direct impact management practices have on an organization's credit profile, any materially deficient subfactor may harm credit quality. For example, scandals can have a negative impact on enrollment and highlight issues with risk management, culture, and oversight governance. Accordingly, if any one factor presents material risk to the enterprise's credit profile, the management and governance assessment is generally capped at vulnerable even if we assess the remaining factors more favorably.

Table 5

Management Assessment
Area of interest	Extremely strong or very strong	Strong or adequate	Vulnerable or highly vulnerable
Strategic positioning	Evidence of specific financial and operational goals with clear measures of achievement. A record of market leadership and of achieving financial and operational goals; successful relative to peers.	Plans lack depth or specific financial or operational goals. A record of achieving most financial and operational goals.	Limited evidence that plans exist. If there are plans, they are superficial. Strategy is inconsistent with the provider’s capabilities or market conditions. Abrupt or frequent changes in strategy, acquisitions, divestitures, or restructurings. Management often fails to achieve its financial or operational goals.
Risk management & financial management	Management has successfully instituted policies and strategies that mitigate key operational and financial risks. Management proactively adjusts revenue assumptions, capital spending, operating costs, and cash management to meet or exceed financial forecasts; uses assumptions we consider reasonable in support of annual budgeting and financial forecasting; maintains multiyear financial forecast on a rolling basis that includes capital needs, justification for them, and a summary of the most likely funding sources for such projects; maintains an adequate level of business interruption insurance or contingencies; and maintains a capital structure that is in line with the organization's capabilities and resources with managed exposure to renewal risks, interest-rate fluctuations, and unexpected acceleration. External risk considerations are fully incorporated into mitigation efforts, including climate and cyber risk.	Management has set standards for operational performance that are achievable and similar to industry norms. Assessments that we consider strong or adequate fall short of the risk management and financial management practices detailed under an extremely strong or very strong assessment, while including few if any of the deficiencies or concerns included under a vulnerable or highly vulnerable assessment. Management has sufficient contingencies in place to deal with external risks, including climate and cyber risk.	Management lacks the wherewithal, discipline, or commitment to achieve set standards, or has low standards. A history of actual results materially falling short of the budget. Management adjusts operations on a reactionary basis or is extremely deficient in adjusting revenues or expenses when needed to ensure cash flow needs are met; makes assumptions we consider unrealistic or overly optimistic when budgeting; conducts little to no financial or capital planning; lacks a clear plan to address significant deferred maintenance issues; has no or an inadequate level of business interruption insurance or contingencies; and has a debt profile that has a relatively high percentage of unhedged variable-rate debt, debt with acceleration features beyond those found in typical master trust indentures, or frequent access to the capital markets to roll over short-term debt. Management has limited contingencies in place to deal with external risks, including climate and cyber risk.
Organizational effectiveness	Management has considerable expertise, experience, and a record of success in the operations of its business. It has good depth and breadth across its major cost and revenue centers.	Management has sufficient but unexceptional expertise and experience in the operations of its business. Its depth or breadth is limited in some areas.	Management lacks the expertise and experience to fully understand and control its business. The provider often deviates significantly from its plans. The loss of key personnel would seriously affect the provider’s operations.

In addition to management practices, governance is assessed as either neutral or negative. There is no favored governance structure for an education provider. The governance structure is generally considered credit neutral if management has the ability and capacity or tools to operate the enterprise or project on a viable basis, is largely independent from politics, and has capable professionals who are engaged in risk oversight and can balance interests appropriately. When the governance structure is negative, the overall management and governance assessment is either vulnerable or highly vulnerable. As a consequence, the anchor may be separately lowered, typically by one to three notches (see table 13), if we believe the governance deficiencies are likely to have an impact on operations.

Adjusting The Initial Enterprise Risk Profile Assessment

The initial enterprise risk profile assessment may be adjusted upward or downward to arrive at the final enterprise risk profile assessment. This adjustment reflects the assessments of strengths or weaknesses not already incorporated in the initial enterprise risk profile. In such situations, the initial enterprise risk profile assessment typically is adjusted by one level. For example, the initial assessment may be adjusted by one level when the education provider is viewed as having an aggressive mission, policies, or strategy or for country-specific situations as outlined below. On an exceptional basis, there may be additional situations not yet observed that may result in an adjustment of greater than one level.

We may negatively adjust the enterprise risk profile if component factors are likely to weaken the profile over time. For example, we may apply a negative adjustment in anticipation of a weakened enterprise profile due to the education provider falling behind peers in a highly competitive environment.

The enterprise risk profile may also be adjusted based on country-specific considerations when the regulatory framework and systemic support provide additional strength or weakness that is not otherwise factored into the assessment. We generally adjust the enterprise risk profile positively when there is a well-established regulatory framework with strong oversight and a precedence of systemic ongoing support. We generally adjust the enterprise risk profile negatively if the regulatory framework introduces a degree of uncertainty to an education provider's operations.

Financial Risk Profile Assessment:  evaluates the financial strength of an education provider. There are three factors evaluated as part of the initial financial risk profile assessment. Assessments for each factor range from '1' (the strongest) to '6' (the weakest). The factors and their weightings are:

• Financial performance (30% weighting);
• Financial resources (35% weighting); and
• Debt and contingent liabilities (35% weighting).

While the weights are the same for both public and private education providers, the levels for particular assessments vary by provider type. These differences in metric calibrations reflect the ongoing support received by public education providers, which reduces cash flow volatility, provides additional revenues, and requires less balance-sheet support. In comparison, private education providers receive less government support and as a result, budget for and hold higher levels of cash and investments.

Financial performance (30% weighting)

The financial performance assessment reflects current and future expectations about operating income and ongoing debt servicing capabilities. The assessment has two steps:

First, the initial financial performance assessment (table 6) is determined based on a quantitative analysis focused on operating margin. This measures surplus revenue after covering operating expenses and long-term needs, including interest and depreciation expenses. The initial assessment may be based on an alternative metric where accounting reporting varies (see Appendix 3).

Second, the final financial performance assessment is determined after the application of qualitative adjustments (table 7). Qualitative considerations can cause the final assessment to be stronger or weaker than the initial assessment.

Table 6

Assessing Financial Performance For Education Providers -- Step 1: Quantitative Analysis
Metric	Asset class	Assessment
		1	2	3	4	5	6
Operating margin	Public universities	>5%	5% to 1%	1% to (2%)	(2%) to (5%)	(5%) to (6%)	<(6%)
	Community colleges	>5%	5% to 1%	1% to (2%)	(2%) to (5%)	(5%) to (8%)	<(8%)
	Private universities, independent schools	>5%	5% to 3%	3% to 0%	0% to (3%)	(3%) to (5%)	<(5%)

Table 7

Assessing Financial Performance For Education Providers -- Step 2: Commonly Applied Qualitative Adjustments
Characteristic	Examples
Financial flexibility: Demonstrated ability or inability to raise operating revenues without undermining demand	Endowment spend rate less than 3% (improve), exceeds 6% (worsen).
	Ability to raise significant financial support and lessen reliance on tuition (improve).
	Faculty and staff characteristics that permit (improve) or limit the ability to adjust the expenses base (worsen).
Revenue diversity: Diversification or concentration of revenues affecting the ability to mitigate shortfalls in any given revenue stream	No single revenue source, as a percentage of adjusted operating revenues, is greater than 30% for public education providers or 40% for private education providers (improve).
	Student-derived revenues, as a percentage of adjusted operating revenues, is greater than 70% for public education providers or 80% for private education providers (worsen).
	A single source of nonstudent-derived revenue (other than revenues from tax levies) that is greater than 40% (worsen).
Pension costs: Material increase or anticipated increase in required pension or other postemployment benefit (OPEB) obligation costs to the education provider	Meaningful risk of acceleration of pension and OPEB payments likely to cause budgetary stress due to the increase in such payments (worsen).
Other factors: Any current or anticipated consideration inadequately reflected in the initial assessment	Ongoing external support that provides a material and stable source of income, typically accounting for over 30% of total adjusted operating revenues, which help limit cash flow volatility (improve).

Financial resources (35% weighting)

The financial resources assessment measures how an education provider's reserves may affect its debt servicing capability and resources available to assist it in times of financial stress. The assessment has two steps:

• First, the initial financial resources assessment (table 8) is determined based on a quantitative analysis focused on cash and investments to annual operating expenses.
• Second, the final financial resources assessment is determined after the application of qualitative adjustments (table 9). Qualitative considerations may result in a final assessment that is stronger or weaker than the initial assessment.

Table 8

Assessing Financial Resources For Education Providers -- Step 1: Quantitative Analysis
Metric	Asset class	Assessment
		1	2	3	4	5	6
Cash and investments to operating expenses	Public universities, community colleges	>90%	90% to 60%	60% to 30%	30% to 20%	20% to 15%	<15%
	Private universities, independent schools	>580%	580% to 390%	390% to 150%	150% to 80%	80% to 50%	<50%

Table 9

Assessing Financial Resources For Education Providers -- Step 2: Commonly Applied Qualitative Adjustments
Characteristic	Examples
External support: Exceptional financial support from an external source	Additional support above the level already incorporated into our assessment of financial resources, from related governments, support from a non-related foundation, trust, or institution (improve).
Limited liquidity: Operational risk due to low liquidity levels	Declining or poor liquidity levels that increase the risk of meeting short-term obligations (worsen).
Other factors: Any current or anticipated consideration inadequately reflected in the initial assessment	Plans to fund capital requirements without an expected corresponding increase in cash and investments (worsen).

Debt and contingent liabilities (35% weighting)

The debt and contingent liabilities assessment measures an education provider's leverage from debt and other liabilities, including the extent to which current and proposed contingent liabilities and off-balance-sheet obligations may affect its debt servicing capability. The assessment has two steps:

• First, the initial debt and contingent liabilities assessment (table 10) is determined based on a quantitative analysis focused on two primary metrics. The first metric is MADS as a percentage of operating expenses and measures the debt servicing capacity of the provider based on the greatest amount of debt service expected under its current or pro forma debt structure. MADS is a more conservative and forward-looking measure than annual debt service. The second metric is cash and investments to total debt and measures an education provider's reserves that may affect its ability to pay off debt. The initial assessment is calculated from the simple average of our assessment of these metrics.
• Second, the final debt and contingent liabilities assessment is determined after the application of qualitative adjustments (table 11). Qualitative considerations may result in a final assessment that is stronger or weaker than the initial assessment.

Table 10

Assessing Debt And Contingent Liabilities For Education Providers -- Step 1: Quantitative Analysis
Metric	Asset class	Assessment
		1	2	3	4	5	6
Maximum annual debt service burden	Public universities, private universities, independent schools	<2%	2%-4%	4%-6%	6%-8%	8%-10%	>10%
	Community colleges	<2%	2%-4%	4%-6%	6%-12%	12%-20%	>20%
Cash and investments to total debt	Public universities	>360%	360% to 175%	175% to 145%	145% to 85%	85% to 20%	<20%
	Community colleges	>200%	200% to 100%	100% to 70%	70% to 50%	50% to 20%	<20%
	Private universities, independent schools	>400%	400% to 200%	200% to 100%	100% to 40%	40% to 20%	<20%

Table 11

Assessing Debt And Contingent Liabilities For Education Providers -- Step 2: Commonly Applied Qualitative Adjustments
Characteristic	Examples
External debt service support: Ongoing, substantial, and external support for debt service payments	Related government or other third party has a commitment to cover a meaningful portion of an education provider’s debt service payments (improve).
	Evidence of limited funding or limited access to funding from a related government or third party that has previously provided debt service support (worsen).
Debt structure: Level of risk and flexibility relative to a provider's capabilities	Early deleveraging, typically characterized by 65% or more of debt maturing in 10 years or less (improve).
	Aggressive debt structure, more than 50% of total debt exposed to risks associated with currency, interest rate, acceleration, or remarketing, or maturities without a credible refinancing plan (worsen).
Contingent liabilities: Unfunded or unaddressed contingent liabilities	Unaddressed contingent liabilities, and, in certain cases, off-balance-sheet debt, without adequate liquidity or a credible plan to address associated risks (worsen).
Pension & other postemployment benefits (OPEB) liabilities: Large, unfunded obligations based on a forward-looking view of costs and risks	A sizable level of pension and OPEB obligations, relative to overall balance sheet (worsen).
	Low pension funded ratio signaling elevated risks after incorporating the risk level of actuarial assumptions (worsen).
	Pension contributions are not actuarially recommended, are based on weak actuarial methods or assumptions, or when required contributions are not regularly funded (worsen).
Other factors: Any current or anticipated consideration inadequately reflected in the initial assessment	Material additional or anticipated debt needs without specific plans to increase resources in support of this debt (worsen).

Adjusting The Initial Financial Risk Profile Assessment

The initial financial risk profile assessment may be adjusted upward or downward to arrive at the final financial risk profile assessment. This adjustment reflects strengths or weaknesses not already assessed, including financial policies. On an exceptional basis, there may be additional situations not yet observed that result in an adjustment to the initial financial risk profile assessment.

We do not positively adjust for financial policies because good policies are already reflected in a provider's overall financial health. We generally adjust the financial risk profile by one assessment level when we view an education provider as having a negative financial policies assessment. Examples of characteristics that we believe may result in a negative financial policies assessment and pose a significant credit risk to the education provider are outlined in table 12.

Table 12

Financial Policies Assessment
Area of interest	Examples of negative characteristics
Transparency and disclosure	The audit or other form of financial data is qualified or late (i.e., not published within a reasonable time frame following fiscal year-end).
Investment allocations and liquidity	If applicable, the education provider’s investment management policy is more aggressive than its capabilities. The provider needs to access lines of credit regularly to meet working capital needs.
Debt profile	Lack of effective policy or debt management is aggressive. Contingent liability debt is more than 50% of total debt, or the debt structure primarily consists of unhedged variable-rate debt with maturities not well staggered and no significant liquidity to offset this debt.
Contingent liability principles	Liquidity levels are below the level of potential liabilities under its contingent liability documents. The entity has a high exposure to interest rate swaps, with the total notional amount outstanding, including basis swaps, greater than 50% of long-term debt.

Modifiers And Caps

Due to certain conditions, the SACP may move a specified number of notches above or below the anchor, as described below. Other conditions may place a specific cap on the SACP. Examples of these conditions are outlined in table 13. In cases when multiple overriding conditions exist, the anchor is adjusted by the net effect of those conditions. In those cases, the cap considers entity-level overriding conditions before it considers related government overriding conditions. However, rating caps are absolute, meaning that positive relative modifiers, other than any holistic adjustment, cannot cause the rating to exceed the cap. On an exceptional basis, there may be additional situations that have not yet been observed that could result in rating overrides or caps.

Table 13

Examples Of Modifiers
Modifiers/Cap* that generally:	Additional comments
Cap the anchor in the 'bbb' category
Significant deferrals of appropriated funds or other measures that may reduce resources from the education provider.	Stand-alone credit profile (SACP) generally capped at either the ‘bbb’ category if the risk of a reduction in resources is present or at the GO rating of the affiliated general government if this risk materializes.
Cap the anchor in the 'bb' category
Education provider has unsustainable business practices reflected by one or more financial risk profile factor(s) that are exceptionally weak and cannot be offset by available financial resources.
Education provider receives a going concern opinion or is recovering from a financial crisis, emerging from recent bankruptcy, receivership, or has consultant oversight following an event of default (including covenant violations).	SACP generally remains capped at the ‘bb’ category until the education provider achieves a resolution of its covenant default(s) and reestablishes sustainable financial performance commensurate with a higher rating level.
Cap the anchor in the 'b' category
Education provider’s management demonstrates a lack of willingness or is unable to support debt or contingent liability obligations, or we believe the enterprise or project may be considering bankruptcy or receivership filing.	If the obligation is currently vulnerable to nonpayment and dependent on favorable business, financial, and economic conditions to meet its financial commitment on the obligation, the rating is in scope of our 'CCC' criteria. Otherwise, the anchor is generally up to two notches below the outcome suggested by table 1 and capped at the ‘b’ category.
Notch the anchor up
Education providers benefit from tax levies.	SACP may be up to four notches higher than suggested by table 1. The number of notches is generally determined by a combination of size and wealth of the tax district population to the extent that it differs from the economic fundamentals assessment, diversity of the tax base, growth rate of assessment base, significance of tax revenues to total revenues, capacity for increased tax levies (both legally and politically), and durability of the taxing authority. In general, higher notching benefits are applied to those education providers with a strong and growing tax base and where there exists a willingness and ability to increase tax levies for operations.
Exceptional cash and investments that are greater than approximately 6x the outstanding debt for public education providers, or approximately 7x outstanding debt for private education providers.	SACP generally may be one notch higher than suggested by table 1. Where cash and investments are exceptional and exceed the aforementioned levels because the amount of debt is very low, the usefulness of the ratio is limited and the adjustment may not be applied.
Notch the anchor down
Education provider’s management and governance assessment is vulnerable or highly vulnerable.	SACP is generally one to three notches lower than suggested by table 1 if the enterprise risk profile assessment does not adequately capture the weak management and governance characteristics.
Education provider is a specialty provider with a narrow demand profile, such as a stand-alone law, medical, or pharmacy school.	SACP is generally one notch lower than suggested by table 1.
*Depending on the severity of the condition, we may assign a rating below the cap.

APPENDIX 1: AUXILIARY SYSTEMS AND LIMITED STUDENT FEE REVENUE BONDS

Education providers may issue auxiliary system (i.e., enterprise) or limited student fee bonds to finance the construction of facilities, including residence, parking, dining, athletic, student union, or a combination thereof. Our assessment evaluates the strength of the relationship between the revenue and projects supporting the bonds and the related education provider.

Limited Student Fee Bonds

For bonds supported by limited student fees, we typically assign an issue credit rating one or more notches below the ICR when the pledged revenue is narrow or not central to the provider. See "Assigning Issue Credit Ratings Of Operating Entities," May 20, 2015.

Auxiliary System Bonds

The assessment of auxiliary system bonds generally starts with an ICR on the education provider that issues the bonds. This is because demand for an auxiliary system is typically correlated to demand for the sponsoring education provider, which is reflected in the education provider's long-term credit quality. In most cases, we assign auxiliary revenue bond ratings of one-to-three notches below the ICR on the education provider.

The magnitude of adjustments is based on the preponderance of available information and our view of the relevance of the following factors to the overall assessment:

• Scope of the pledged revenue stream: We assess the scope and size of the auxiliary system measured by its nominal revenue base and pledged auxiliary system revenues as a proportion of total education provider operating revenues and total debt outstanding. Higher ratios for these metrics are generally viewed favorably. Security for auxiliary revenue bonds is generally narrower than sources supporting an education provider's general creditworthiness. Therefore, ratings on auxiliary bonds typically are not equal to the ICR on the education provider, unless secured by unlimited student fees, or a very broad pledge of revenues that we view as on par with an education provider's general obligation.
• Connectivity and essentiality to the education provider: We assess the education provider's level of involvement with the auxiliary system and the likelihood the education provider would provide support if demand for the auxiliary was insufficient and resulted in weak debt service coverage ratios. Residence, parking, athletics, and research are often considered central to an education provider's core education business, in cases where the auxiliary is essential for attracting and retaining students and faculty, even though the auxiliary may not comprise the vast majority of the education provider's revenues.
• Demand for the facility: We assess whether demand will be maintained at an adequate level. For residence facilities, this is generally measured by historical and projected occupancy rates. For parking systems, this is generally measured by demand relative to the total number of available parking spots. Student demand for other auxiliary system pledges, such as dining and athletic, are similarly evaluated.
• History of financial operations: This includes historical, current and/or pro forma MADS coverage. Typically, we expect that auxiliary systems rated one notch below the ICR on an education provider maintain positive and predictable operations.
• Legal provisions: This includes rate covenants and additional bonds tests. Rate covenants in bond documents commonly cover annual debt service and operating expenses. A typical rate covenant might set minimum coverage of 1.20x the following year's debt service and operating expenses. We generally consider MADS coverage in order to stress the calculation for the highest future year's debt service, even though annual debt service coverage is usually stipulated as the rate covenant in bond documents. Additional bonds tests protect bondholders against the possibility of future debt weakening or diluting a specific auxiliary system's pledged revenue base. Typically, we view historical-based additional bonds tests more favorably than projection-based tests. We view the absence of an additional bonds test negatively.

APPENDIX 2: INDUSTRY RISK FOR NOT-FOR-PROFIT EDUCATION PROVIDERS

Based on the Industry Risk criteria, the industry risk assessment reflects the risk of the not-for-profit education industry compared with other industries. The industry risk assessment results from a combination of component assessments of:

• Industry cyclicality, and
• Industry competitive risk and growth environment, which is based on the degree of the effectiveness of barriers to entry, levels and trends of profitability, substitution risk, and growth trends observed in the industry.

Table 14

Industry Risk Assessments
Assessment	Assessment description
1	Very low risk
2	Low risk
3	Intermediate risk
4	High risk
5	Very high risk
6	Extremely high risk

The education sector demonstrates minimal cyclicality. We do not measure the profitability ratio as indicated in industry risk criteria. Instead, we use enrollment as a more appropriate measure because not-for-profit education providers are not driven by a profit margin. Not-for-profit education providers are driven by a mission to educate students, which is in large part measured by enrollment. The combination of a sub-assessment of 1 for industry revenues and a sub assessment of 1 for enrollment results in a cyclicality assessment of 1.

When measuring the second component of industry risk, we assess the competitive risk and growth environment. There are three factors that are low risk:

• Effective barriers to entry from start-ups (due to facility, technology, and capital requirements) and established accreditation or regulation processes in different countries;
• Risk in growth trends as government, legal, and regulatory conditions tend to change gradually and modestly; and
• Trends in industry profit margins, which are overall stable, but slim, and influenced by gains and losses in investment income.

There is one factor that's medium risk:

• The product substitution from outside the industry, such as for-profit education.

The combination of a competitive risk and growth assessment of '2' (low) and a cyclicality assessment of '1' (very low) results in an industry risk assessment of '2' (low). This risk assessment is the same for all not-for-profit education providers because the risks related to barriers to entry, profit margin, and competition in these diverse, mature, and interconnected sectors are similar.

APPENDIX 3: GLOSSARY

Accounting standards:  In general, U.S. public education providers follow standards promulgated by the Governmental Accounting Standards Board and private education providers follow the Financial Accounting Standards Board. Universities in other countries may follow International Financial Reporting Standards, national accounting standards, or adopt cash-based accounting. Because accounting standards differ by country, some institutions do not prepare financial statements on a full accrual basis. The criteria allow for adjustment of financial information when generally accepted accounting principles (GAAP) basis statements are not available. Typically, these criteria use full accrual accounting, and if depreciation expense is not included in operating expenses, add it as an operating expense to increase consistency in our analysis.

Adjusted operating expense: 

• Private education providers: Operating expenses + institutionally funded financial aid + interest expense
• Public education providers: Operating expenses + institutionally funded financial aid + interest expense – non-cash pension and other postemployment benefits (OPEB) expenses

Depending on the reporting norms in each country, these formulas may be adjusted.

Adjusted operating revenue: 

• Private education providers: Total operating revenues + institutionally funded financial aid + endowment spending - realized and unrealized gains/losses.
• Public education providers: Total operating revenues + institutionally funded financial aid + government appropriations + government grants + endowment spending - realized and unrealized gains/losses.

Depending on the reporting norms in each country, these formulas may be adjusted.

Adjusted net operating income:   To increase comparability between providers in scope of these criteria, we may adjust net operating income to include or exclude various items from the income statement, resulting in an adjusted net operating income. The calculation of adjusted net operating income usually begins with the line labeled "excess (deficiency) of operating revenue over expenses," "change in net assets from operating activities," or "operating income/(loss)" and is then adjusted to include or exclude the following items, which are sometimes classified as nonoperating items in financial statements.

Items typically included in calculation of adjusted net operating income:

• Annual endowment spending for operations
• State appropriations for operations
• Investment earnings on working cash funds
• Gift income
• Other items determined to be a regular, consistent, and ongoing part of an education provider's annual financial performance

Items typically excluded from calculation of adjusted net operating income:

• Net assets released from restriction for capital
• Noncash defined-benefit or OPEB accruals
• Unrealized gains/losses on investments
• Changes in swap valuation
• Nonrecurring revenue/expenses
• Extraordinary items
• Gains/losses from debt refinancing
• Asset impairment or other one-time financial events

Depending on the reporting norms in each country, the formula above may be adjusted.

Cash and investments:   Measures balance-sheet resources. Cash and investments = cash + unrestricted and restricted financial investments, including their related foundations.

Certificates awarded:  Proportion of students who earn a credit-based certificate, associate degree, or associate degree for transfer at a community college or similar institution.

Contingent liabilities:  Contingent liabilities refer to any debt obligations, derivative agreements, or other exposures for which the draws on an education provider's cash reserves could occur or result in acceleration of these liabilities.

Debt service:   Annual principal and interest payment on all obligated and nonobligated debt, as appropriate, including long-term bonds, lease obligations, mortgages, and bank debt. We may make an adjustment to annual debt service to normalize debt service for variable-rate debt, draws on lines of credit, commercial paper, bullet maturities, debt guarantees, swaps, and unusual debt service structures.

Endowment spending draw:  A formula that determines a sustainable amount of investment and endowment income that can be budgeted and spent in one year, irrespective of fluctuations in realized and unrealized gains or losses in investments.

Funded status of defined-benefit plan (%):  Fair value of pension plan assets/projected benefit obligation x 100.

Government support:  Government support is typically considered to be recurring operating appropriations available for general operations. Operating support is generally considered a subsidy, but funding for research, student loans, or grants for other services are not. There are many private providers that regularly provide contracted services, such as sponsored research, to governments. We do not typically consider this type of operating activity to be a subsidy. Internationally, systems of government support vary, and in some countries, such as Mexico and the U.K., some forms of research funding may be considered government support.

Maximum annual debt service (MADS):  Maximum annual principal and interest payment on all obligated and nonobligated debt, as appropriate, including long-term bonds, lease obligations, mortgages, and bank debt. MADS may be adjusted to normalize debt service for variable-rate debt, draws on lines of credit, commercial paper, bullet maturities, debt guarantees, swaps, and unusual debt service structure.

MADS burden (%):  (MADS/total operating expense) x 100.

MADS coverage:  The number of times an education provider or auxiliary system is able to cover its MADS from cash flow generated through operating and non-operating activities.

Matriculation rate:  The percentage of students who enroll relative to the number of applications that were formally accepted. For higher education and community college providers, this rate typically relates to first-year students relative to first-year acceptances, but may also apply to graduate or transfer student matriculants relative to graduate or transfer student acceptances, respectively. For independent schools, this rate applies to all student matriculants relative to total acceptances.

Nonobligated debt:   Nonobligated debt is typically not a direct obligation of the provider. This debt does not appear on the provider's balance sheet, but we may still consider it a liability of the provider.

Obligated debt:   Debt that is considered a direct obligation of the provider and appears as a liability on its balance sheet.

Operating expense:  Expenses incurred while performing the provider's principal business activities, which may include instructional, research, depreciation, amortization, interest, maintenance, auxiliary, and pension and OPEB accrual expenses.

Operating income:  Total operating revenue minus total operating expenses.

Operating margin (%):  (Adjusted net operating income/total operating expense) x 100.

Retention rates:  Typically defined as the number of returning students from the first to second year. A high percentage indicates a high-quality student base that can perform academically, as well as an institution that has programs and processes in place to retain students.

Selectivity rates:  The total number of accepted student applications relative to the total number of completed student applications. Selectivity rates typically relate to first-year student applications relative to first-year acceptances, but can apply to graduate and transfer student acceptances, respectively. For independent schools, this rate applies to all students who applied relative to the total number of students accepted.

Total debt:  Current and long-term portion of debt payable for an education provider as reported in audited financials for such provider. Debt includes any obligations that we consider debt-like, when revenues of the education provider are intended to service it. Commercial paper, notes payable, reported lease obligations, or outstanding balances on lines of credit (or certain other arrangements that function like lines of credit) of the enterprise or project are also counted as debt.

We include the related foundation's debt in our calculation of the education provider's cash and investments to debt metric. Debt does not include accounting adjustments for unamortized bonds premium, discount, and deferred refunding charge. Off-balance-sheet debt is a financing option used by many universities. Depending on our assessment of the level of involvement of the sponsoring education provider and its economic interest, control, and connectivity to these projects, we may include this debt as indirect education provider debt.

Transfer rates:  The total number of students who transfer from a community college or similar program to a four-year institution.

REVISIONS AND UPDATES

• On Aug. 29, 2024, we republished this criteria article to make nonmaterial changes to the "Economic fundamentals" section to reflect that sector and industry variables can now be found in Appendix D of "Sovereign Rating Methodology," Dec. 18, 2017. We also updated the contacts and the "Related Publications" section.
• On Sept. 9, 2024, we republished this article to correct a publishing error in Appendix 2: Industry Risk for Not-For-Profit Education Providers. We corrected the classification of the level and trend of industry profit margins subfactor of the competitive risk and growth environment component of industry risk to low risk from medium risk.

RELATED PUBLICATIONS

Related Criteria

• Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness, Nov. 20, 2019
• Group Rating Methodology, July 1, 2019
• Sovereign Rating Methodology, Dec. 18, 2017
• Assigning Issue Credit Ratings Of Operating Entities, May 20, 2015
• Government-Related Entities, March 25, 2015
• Methodology: Industry Risk, Nov. 19, 2013
• Ratings Above The Sovereign: Corporate And Government Ratings—Methodology And Assumptions, Nov. 19, 2013
• Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
• Contingent Liquidity Risks in U.S. Public Finance Instruments: Methodology And Assumptions, March 5, 2012
• Covenant And Payment Provisions In U.S. Public Finance Revenue Obligations, Nov. 29, 2011
• Principles Of Credit Ratings, Feb. 16, 2011
• Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
• Privatized Student Housing For Higher Education, June 19, 2007

Analytical Contacts:	Felix Ejgel, London + 44 20 7176 6780; felix.ejgel@spglobal.com
	Laura A Kuffler-Macdonald, New York + 1 (212) 438 2519; laura.kuffler.macdonald@spglobal.com
	Robert Tu, CFA, San Francisco + 1 (415) 371 5087; robert.tu@spglobal.com
	Avani K Parikh, New York + 1 (212) 438 1133; avani.parikh@spglobal.com
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Methodology Contacts:	Robert D Dobbins, San Francisco + 1 (415) 371 5054; robert.dobbins@spglobal.com
	Kenneth T Gacka, San Francisco + 1 (415) 371 5036; kenneth.gacka@spglobal.com