Cost of Doing Nothing

The financial ramifications of Penn State's failure to take action in the Sandusky scandal could haunt the school for years
August 06, 2012

When NCAA president Mark Emmert slammed Penn State with sanctions in the wake of the Jerry Sandusky scandal, he fulminated against campus cultures in which "sports themselves can become too big to fail." Now, like many a big Wall Street bank in recent years, PSU is asking itself, How much is our malfeasance going to cost?

The answer is unclear. What's known is that the school must pay an unprecedented $60 million fine which cannot be financed by cutting money from other sports. The NCAA noted that the penalty amount is equal to a year of the Nittany Lions' gross football revenue, but the financial hit will be felt across PSU athletics. U.S. Department of Education data reveals that the $60 million is almost equal to two years of the athletic department's net income, which was reportedly $31.6 million in 2010--11. Then there is the four-year postseason bowl ban, which will cost Penn State its share of Big Ten conference bowl revenue—a loss of $13 million.

There will also be other, less easily quantifiable costs to Penn State's bottom line. Last week Wall Street rating agency Moody's Investors Service announced that the university could receive a credit downgrade because of concerns about weaknesses in the school's management and governance practices. Penn State currently has Moody's second-highest rating and approximately $1 billion in outstanding bonds. A downgrade would make it more difficult for the institution to borrow money.

In addition, corporate sponsors have begun distancing themselves from Penn State, which less than a year ago was one of the most pristine brands in sports. A day after the Freeh Report was made public, State Farm announced it "will not directly support Penn State football this year" and will pull all ads from PSU home games. (State Farm declined to provide monetary figures to SI.) General Motors spokesman Pat Morrissey said the automaker is also reconsidering its university sponsorship.

Still, the most pressing concern for the university may be the tens of millions of dollars that it could end up paying in civil suits to Sandusky's victims. (So far, only Victim 2 has indicated that he will be suing the university.) PSU is currently in a legal battle with Pennsylvania Manufacturers' Association Insurance Company, its primary liability insurer, over who will be on the hook to pay any settlements.

The Department of Education is also investigating Penn State for possible violations of the Clery Act, which requires colleges that participate in federal financial aid programs to collect and disclose information about on-campus crimes. The Freeh Report found that PSU administrators failed to have a compliance plan in place for the law. If the DOE finds that the school violated the Clery Act, it could revoke the $660 million the school receives annually in federal student aid. No school has ever lost that aid.

There is one area in which the PSU faithful can control the school's financial fate: donorship. Over the last fiscal year, during the height of the Sandusky scandal, university donations totaled $208 million, the second-highest total ever. The Nittany Lion Club booster group also collected $82.4 million in 2011. Still, athletic director Dave Joyner seems to be preparing for the worst. Abandoning metaphor for clarity, Joyner sent a mass e-mail to club members last week stating, "I need your help."

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