Penn State credit cut on Sandusky costs, Pa. decline

Penn State's credit rating on nearly $900 million it owes investors has been cut to Aa2 from Aa1 by Moody's Investors Service "in anticipation of the substantial financial impact on the university from the ultimate cost of future settlements and possible judgments, stemming from sexual abuse claims made by victims of convicted former assistant football coach, Gerald Sandusky," Moody's said today.

Total damages to the 84,000-student Penn State system are still unknown; state and federal criminal investigations may be pending, according to Moody's.

"The rating action also reflects governance and institutional culture challenges facing the university," the report added. Penn State's own investigation of the Sandusky mess shows the state-affiliated school has been "highly dependent on a few senior managers operating with inadequate board oversight."

Penn State has agreed to hire a new president from outside the university, a chief compliance officer and a chief ethics officer, "but it could take time for the strong internally focused culture of Penn State to fully implement and embrace" these changes.

Still, Moody's added, "we expect that Penn State will remain a leading US public university with favorable student demand, positive operating performance, high donor support and a strong research position."

Besides governance and liability problems, "enrollment and tuition pricing challenges from the ongoing demographic decline in Pennsylvania high school graduates" threatens future Penn State enrollment, Moody's added. Penn State also faces higher pension and healthcare costs for its retirees.

(See also Moody's downgrade of the Pennsylvania state college system in my item yesterday.)

On the positive side, Penn State is still raking in money from donors. The school collected $209 milllion in the last fiscal year, down from 236 million the year before. That's less than the $279 million Penn State gets in Pennsylvania state subsidies this fiscal year, but since that's only about 7% of total spending, the school faces "minimal decline in revenues" even from future state budget cuts, Moody's concluded.

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