U.S. Not-For-Profit Sector: Overview

S&P Global Ratings maintained more than 100 ratings in the broad and highly diversified U.S. not-for-profit sector as of Feb. 24, 2025. Entities rated under the not-for-profit criteria include 35 cultural institutions, 29 membership and service organizations, 18 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 broad and diverse array of operating models within the sector, the ratings spectrum is quite wide, ranging from 'AAA' to 'BB+', although all but two of our ratings are in the investment-grade category. Despite the ratings disparity, credit quality is generally high, in our view, with more than half of our ratings in the 'AA' or 'AAA' categories and only 11 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 'AAA' entities are cultural and research institutions. Across the 'AA' and 'AAA' rating categories, most 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 not-for-profit entities, particularly cultural institutions, hold established brand names across the U.S. and worldwide.

Research Institutions

Over the past year, our rated research institutions have largely remained stable. While inflationary pressure and a competitive labor market have yielded sharp expense increases, favorable market conditions in recent years have supported investment and financial resource growth at most institutions, enabling management teams to lean on investment draws to smooth operating variability without jeopardizing long-term balance-sheet strength. Many research institutions also received greater philanthropic support and reported increased grant funding from corporate and nongovernmental sources.

For several years, management teams have emphasized the importance of enhancing revenue diversity and growing nongovernmental funding due to the gradual decline in federal funding for research and development to many grantmaking agencies. Several institutions rely heavily on grants from the National Science Foundation, the Department of Energy, the National Institute of Standards and Technology, and the National Institutes of Health, each of which have faced funding pressure in recent years. Under the Trump administration, federal research funding is one area at risk for potential cuts , and many grantmaking agencies have paused or slowed grant review panels in the wake of a recent executive order broadly banning funding for diversity, equity, and inclusion initiatives as well as climate change.

At this time, it's unclear if and how the new administration's priorities will reshape federal funding for research and development. The impact of material cuts on federal research spending could be substantial. However, we believe that in the near term, operating results for research-intensive organizations will generally remain stable as most maintain flexible expense budgets and can, if necessary, wind down research activity if grant revenue slows.

Cultural Institutions

Demand for museums and the performing arts has continued to recover, although only some have seen attendance rebound to pre-pandemic levels. For many institutions, the generally slow recovery of tourism and, in particular, international tourism, has hampered the full recovery of demand. As institutions continue to face rising expenses from inflationary and labor-market pressures, many have increased ticket prices, invested in new and innovative programming to improve attendance, and found other opportunities for revenue growth. Higher operating expenses and a relatively slow recovery of demand have also led several institutions to lean on their endowments to hire staff, make programmatic enhancements, and fund other initiatives quickly, while others have relied on lines of credit and other short-term financing. Broad economic uncertainty and fluctuating funding from governmental sources have forced these institutions to focus more on enhancing revenue diversity and increasing nongovernmental funding, with many targeting greater support from private and corporate donors and foundations to fund key initiatives and high-profile exhibitions.

Many institutions have continued developing their online and digital programming after introducing the initiatives during the pandemic. We expect that over the next few years online exhibitions and performances will remain an avenue for institutions to strengthen their brands, reach new audiences, and increase revenues, with some having already launched live-streaming performances and others that have leveraged online courses and workshops. Based on our discussions with management teams, most expect attendance will continue to recover to pre-pandemic levels but believe innovation and attractive programming will be required to keep demand strong. We expect that, over the near term, institutions will see increases in operating expenses and we suspect management teams will continue dipping into their endowments and pursuing philanthropic avenues to diversify their revenue sources and invest in key initiatives and programming.

Foundations

Our universe of foundations is highly rated and encompasses traditional private foundations, operating foundations, and university foundations, each of which engage in fundraising and investment management aligned with their strategic missions. Traditional private foundations predominantly depend on investment returns and use an annual endowment draw to finance grants and charitable activities. By contrast, operating and university foundations are actively involved in research, development, and various other initiatives, resulting in a revenue and expense structure that is typically more diversified than that of traditional private foundations. Following some market volatility, endowment values largely grew in recent years, with some surpassing previous record high levels set in fiscal 2021. Private foundations continue to maintain extensive and diverse investment portfolios, enabling them to weather market fluctuations effectively while sustaining their grantmaking activities.

Over the past year, private foundation grantmaking activities have remained largely consistent, although some foundations have reverted to normal giving levels after providing increased support during and immediately following the pandemic. While operating and university foundations tend to have less expense flexibility, many recognize royalty and auxiliary revenue, for example, in addition to annual endowment draws, enabling them to withstand market volatility. We anticipate that most of our rated foundations will remain stable but recognize that federal policy changes could test the subsector. With several provisions from the Tax Cuts and Jobs Act set to expire at the end of 2025, Congress is likely to propose a budget reconciliation bill over the next year. We believe that certain revenue proposals outlined by the House Budget Committee, such as taxation of charitable donations, could affect some of our rated foundations. Despite some uncertainty, we believe that the investments held by our rated foundations are well-managed, maintain healthy liquidity, and are of a sufficient size to withstand volatility without jeopardizing their ability to fulfill their mission.

Membership And Services Organizations

Membership and services organizations have continued to show stability and resiliency over time. In the past year, memberships across most organizations have largely increased or held steady. Programming- and membership-associated revenues continued to recover due to the resumption of activities after cancelled in-person events and limited operations during the pandemic. Several organizations have cited inflationary pressures and job-market volatility as catalysts behind expense increases; however, management teams have demonstrated flexibility in their overall expense budgets and adjusted costs in line with fluctuating revenues. For many membership organizations like the American Association of Retired Persons (AARP), the Association of American Medical Colleges, and the American College of Physicians, total operating revenue is highly reliant on membership and associated fees, which have shown stability. Other membership and service organizations like the YMCA, which rely heavily on in-person programming, modified their expense base to be in line with variable event-related revenues, particularly amidst pandemic-related closures. Furthermore, they tend to have ample financial resources and fundraising, which also supported operations. We expect that over the next few years 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.

Ratings Performance

Since our last outlook report, "U.S. Not-For-Profit Sector Has Recovered, But Some Entities Are Still Catching Up," published Feb. 29, 2024, on RatingsDirect, we've raised the ratings on three institutions, with each upgrade driven, at least partially, by strengthening financial resources and a trend of operating success. We also assigned three new ratings, with The MITRE Corporation rated 'A+' in May 2024, Southern Oregon Goodwill Industries rated 'BBB' in November, and the Young Men's and Women's Hebrew Association rated 'A-' in December.

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