The Financial Fallout at Penn State


The child molestation scandal at Penn State University allegedly involving former defensive coordinator Jerry Sandusky, and the people who may have covered it up, is a reputational issue that PSU will never get over.

But aside from the stomach-turning details, an important question that remains unanswered is this: what’s going to happen to the school financially?

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College is big business. Not just college sports, but college itself. PSU has an operating budget of $4.6 billion. The scandal has caused a review by Moody’s of a potential downgrade of its $1 billion in debt.

Football brings in just $72 million in revenue, a substantial amount but less than 2% of revenue of the school’s operating revenue.

However, the potential contagion effect is obvious.

PSU gets around 31.4% ($1.43 billion) from tuition and fees, and 25.9% of its revenue from its Hershey Medical Hospital ($1.18 billion), and these will not likely change significantly due to the scandal.

Government grants and contracts account for 12.4% ($563.4 million) of revenue with state appropriations bringing in 7.3% ($333.9 million). Private gifts, grants and contracts account for 7.2% ($328.9 million), and auxiliary enterprises make up 8% of revenue ($363.8 million)

PSU has operating expenses of $4.1 billion and increased its cash and cash equivalent position to $1.57 billion in the year ending June 30, 2011. Total current liabilities are $1.047 billion. PSU is doing very well, and a short-term hit on the school can be easily absorbed.

Most sponsors that can are going to bail on PSU until the scandal has been dealt with. PSU could lose the entire football program revenue and not miss it.

But the problem comes with the Tiger Woods contagion effect -- how will the scandal impact enrollment and donors?

More than 50% of PSU revenue is subject to being hit -- from enrollment to auxiliary businesses to private grants and donations.

Schools that win in sports see their overall revenue increase, a known fact among colleges. The winning team brings in several times the revenue that the sport program itself brings to the college.

This is the destruction of an icon. Joe Paterno just became the coach in division one athletics with the most career wins and was probably the most iconic coach in college football today. His reputation being ruined by not reporting the abuse to the police is something he will never get over and something that PSU will take years to overcome.

In most people’s minds there is not a crime worse than child molestation -- certainly I feel it is the most heinous crime that can be committed. To have this happen at what appeared on the outside to be an exemplary program is something that will always be with this school.

How this affects the school financially will be played out over the next several years when future enrollment and grants are used as decisions whether or not to support this institution.

It’s likely that a cleanup of the football program, a prosecution of those who did wrong, and a winning team will bring sponsors and donors back. America forgives, especially if the one to be forgiven is winning.