S&P Global Ratings maintains more than 100 ratings in the broad and highly diversified U.S. not-for-profit sector as of Feb. 26, 2024. Entities rated under the not-for-profit criteria include 34 cultural institutions, 30 membership and service organizations, 17 research institutions, 14 foundations, and eight university foundations. Entities within each subsector vary significantly in their business model, organizational structure, or revenue composition. Given the vast and diverse array of operating models within the sector, the ratings spectrum is quite wide, ranging from 'AAA' to 'BB+', although the majority of our ratings are in the investment-grade category. Despite the disparity, credit quality is generally high, in our view, with more than half of our ratings in the 'AA' or 'AAA' categories and only 10 in the 'BBB' and 'BB' categories. Ten of the 16 entities rated 'AAA' are traditional private foundations, all of which maintain robust financial resources for the purpose of providing grants and funding pursuant to their strategic mission. The remaining six are cultural and research institutions. Across the 'AA' and 'AAA' rating categories, most entities maintain healthy cash and investments that provide cushion as operations ebb and flow and, in many cases, are distributed annually to support operations. Many of these entities, particularly cultural institutions, hold established brand names known to many in the U.S. and the world.

Post-Pandemic Rating Recovery

In April 2020, we placed the majority of our rated not-for-profit entities on negative outlook following the onset of the pandemic. Since then, our analyses show that most entities managed through the height of the pandemic successfully and have largely returned to full pre-pandemic operations in a similar, if not stronger, financial position. As a result, of the 51 entities placed on negative outlook in April 2020, 41 have since been revised to stable, two have been revised to positive, three were upgraded and assigned stable outlooks, and five were downgraded and assigned stable outlooks. Both entities with positive outlooks are cultural institutions, reflective of those institutions' recovery to near-pre-pandemic attendance in addition to steady financial resource growth. Similarly, all three upgrades were to service organizations that weathered operating uncertainty and emerged with consistent operating surpluses and stronger financial resources. While all five downgraded entities maintain operations that are highly reliant on in-person activity, only two of the ratings were lowered due to the pandemic's impact on operations; others either had pre-existing operating challenges or issued material additional debt that resulted in the downgrade. In April 2020, we also revised the outlook on three entities to stable from positive but, over the past three and a half years, all three were upgraded. Finally, of the four entities that were on negative outlook prior to April 2020, three have since been downgraded, and one has had its outlook revised to stable. On the whole, we believe that entities across the not-for-profit sector have successfully returned to normalized operations, which is reflected in our current ratings and outlooks.

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Cultural Institutions

Across the subsector, we've found that demand for in-person attractions and events like museums and the performing arts has not fully recovered to pre-pandemic levels. For many institutions, the generally slow recovery of tourism and, in particular, international tourism, has hampered the return to pre-pandemic demand. While some institutions have increased ticket prices to help the recovery, many found that admission and membership revenue alone was not enough to offset rising expenses stemming from inflationary and labor-market pressures. Many institutions that reduced staff and cut benefits to adjust for lower operating revenue during the height of the pandemic are now finding that hiring those same employees back is costlier than before the pandemic. Higher operating expenses and a relatively slow recovery of demand have led several institutions to lean on their endowments, while others have found lifelines in lines of credit and other short-term financing. As we predicted in our report, "A New Dawn For Shuttered U.S. Nonprofits", published May 13, 2021, on RatingsDirect, institutions with healthy financial resources and endowments have fared better than others in recent years because they've used their endowments to rehire staff, make programmatic enhancements, and fund other initiatives quickly. In fact, financial resource strength was a key for all three of the cultural institutions that were upgraded. Similarly, both downgrades recorded since May 2021 were due, in part, to deteriorating financial resources.

To capitalize on some of the engagement efforts implemented during the pandemic, many institutions continue to invest in digital and online programming. Many museums have increased investment in online collections and exhibitions, which has helped them reach new audiences and keep members and frequenting guests engaged. During the height of the pandemic, several performing arts institutions leaned into online broadcasting of their performances. Although this effort largely kept visitors engaged with the institutions, it did little to offset revenue lost from closing their doors. While many institutions have shifted focus from these online programs as they've reopened their doors, some have indicated that they're here to stay. Over the near term, we believe that relatively higher expenses will keep operating margins compressed but expect easing inflation and generally improved economic conditions will slowly drive attendance closer to pre-pandemic levels. During this time, we suspect management teams will continue dipping into their endowments and pursuing philanthropic avenues to plug operating holes and get their institutions back up and running.

Foundations

Our rated universe of foundations includes traditional private foundations, operating foundations, and university foundations, all of which fundraise and manage investments pursuant to the foundation's strategic mission. However, while traditional private foundations rely heavily on investment returns and use an annual endowment draw to provide grants and funding for charitable activities, operating and university foundations are also engaged in research, development, or other activities that is reflected in a revenue-and-expense makeup that is often more diverse than traditional private foundations. Despite market volatility in recent years, foundation endowment values largely remain well above pre-pandemic levels due to robust returns in fiscal 2021. While many recorded losses in fiscal 2022, a market rebound in 2023 enabled some to claw back what was lost. Private foundations continue to manage large and well-diversified investment portfolios to maintain current ratings in the face of market volatility, with minimal changes to their annual grantmaking distributions. The Ford Foundation, Rockefeller Foundation, The California Endowment, and the W.K. Kellogg Foundation Trust issued a combined $2.3 billion in 2020 and 2021 to increase grantmaking during a time when many beneficiaries were in need. Operating and university foundations, on the other hand, tend to have less expense flexibility, although many recognize royalty and auxiliary revenue, for example, in addition to annual endowment draws. For most of these foundations, this revenue diversity and highly experienced investment management teams helped minimize the impact of the volatile market felt across the industry over recent years. In the future, we expect foundations rated by S&P Global Ratings will remain stable. While most now see the likelihood of a U.S. recession as remote, stubborn inflation, an upcoming election, and geopolitical risk could yield some market volatility in 2024. However, we continue to believe that the endowments held by our rated foundations managed well and are of a sufficient size to withstand some market volatility without jeopardizing their ability to fulfill their mission.

Membership And Service Organizations

The membership and service organizations largely showed resiliency through the pandemic. Although operating revenues for many organizations slipped due to cancelled in-person events and conferences and, generally, limited operations, the expense budgets of many membership and service organizations are quite flexible and management teams quickly pared back expenses. For many membership organizations like AARP, the Association of American Medical Colleges, and the Sigma Theta Tau International Honor Society of Nursing, while total operating revenue is highly reliant on membership and associated fees, the payment of those fees was not jeopardized by stay-at-home orders, dedensification, or any other pandemic-related safety precautions, which helped most record operating surpluses through the height of the pandemic. Other membership and service organizations like the YMCA and Salvation Army, which rely heavily on in-person programming, felt an immediate impact at the start of the pandemic and were forced to offset this pressure with material expense reductions. They have since resumed with in-person offerings, albeit at a slower place. However, they tend to have ample financial resources and fundraising, which, during the height of the pandemic, helped patch holes in operations. Over the next few years, we expect the subsector will generally remain stable, but believe that membership organizations, in particular, will be required to adapt to changing market demands to demonstrate their value proposition.

Research Institutions

At the onset of the pandemic, as governmental and nongovernmental entities worked to address the immediate needs of the public, we revised the outlooks to negative on many research organizations that rely on those entities for annual funding due to the uncertainty of the funding. Over the past four years, however, we found that public and private funding to research organizations was largely uninterrupted. While some institutions reported that funding was delayed initially, we understand that most, if not all, were made whole by fiscal 2021. Despite some funding delays, research activity at many institutions was seamlessly transitioned online and, for those conducting field or lab research, most returned to their work by the summer of 2020. Since then, most research organizations have largely picked up where they left off, and some have even seen grant revenue increase over the past two years. We do believe, however, that the subsector faces headwinds as federal funding for most research remains stagnant. While recent legislation has sought to bolster funding to grantmaking agencies such as the National Science Foundation, the Department of Energy, and the National Institute of Standards and Technology, the risk of political gridlock in Washington, D.C. has fueled many highly grant-reliant organizations to seek other funding sources. For several years, management teams have indicated that increasing revenue diversity and securing funding from sources beyond the federal government is critical to long-term financial sustainability. Research institutions are increasingly turning to funding from corporate and other nongovernmental entities, broadening philanthropic efforts, and increasing annual endowment draws. Some institutions also benefit from royalty revenue. Long term, we believe that research organizations, particularly those that rely heavily on federal grants and contracts, could face pressure absent a material turnaround in federal research and development funding policy. Over the near term, however, we believe that operating results for research-intensive organizations will remain stable as most maintain flexible expense budgets and many federal and nonfederal contracts span several years, which affords institutions ample time to adjust. These flexibilities have also insulated research institutions from federal government shutdowns and budget impasses in the past; in these situations, institutions have generally continued receiving funding for existing contracts through the pandemic and, while new grant application review is often stopped or slowed, endowments have helped bridge the timing gap. The majority of our rated research organizations maintain healthy endowments and financial resources, which have been, and will continue to be, used to smooth operating variability.

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