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Judy Loy: As Penn State Scandal Impact Widens, a Look at Collateral Damage

by on November 20, 2011 10:53 AM

I debated on writing this article. My town is in a state of grief and disbelief, and as such I find it hard to look at the nickels and dimes involved. We all know that it doesn't matter or compare next to the alleged victims' stolen youth.

I am a graduate of Penn State, and I married a "townie." We call State College home, and I have lived here for the past 20 years. I have always been proud of both, and I still am, because a majority of locals and Penn State faculty are good, upstanding citizens. Our town and the university that enriches it have been marred by an alleged evil man's deeds. The long-term effect on our town, the university and the people who live here are still unknown.

However, every local person I talk to says: "The worst is still to come." I think we are all preparing ourselves for the next set of bad news, which for now arrives daily: on television, online and in the national and local papers.

Owning an investment firm in State College and being a financial advisor in Centre County, I have a duty to shed light on the business side of this equation. The human side is paramount and is being handled by many great non-profits in town, including the Centre County Youth Services Bureau. My job is looking at the financial side of things, and there is no employer in Centre County bigger than Penn State. What impact could this have on PSU financially?

This is a valid concern, or so says Moody's Investors Service, a credit rating agency which performs analyses on commercial and government agencies. On Nov. 11, the service said it might downgrade the credit ratings of Penn State. The university currently has $1 billion in debt outstanding with a high credit rating of Aa1. In its statement, Moody's said it will evaluate "the potential scope of the reputational and financial risk" of the Sandusky scandal.

PSU has a total operating budget of $4.6 billion.

Let's start where the fingers are being pointed, at the Penn State football program. The program is ranked fifth-highest of any college program in the country, with a revenue of $72 million. In addition, $24.1 million in revenue came from sponsorships and merchandise sales linked to the football program, which are now in jeopardy. Penn State's athletic department is financially independent from the rest of the university, meaning financial problems in football will not directly affect the school.

However, there is a correlation between winning in sports and overall revenue increases. Quality recruiting may be hurt by the damage to the school's squeaky-clean image and doubts about the program's future. There is talk of Penn State getting the "death penalty" from NCAA, which means the football program would not be allowed to play for at least a year. The NCAA is waiting to make a decision until further information is available, charges are clarified and legal issues are resolved (It would be appropriate for the media to follow suit, but I digress). Also, it may directly affect the downtown businesses that depend and thrive on football weekends and student traffic.

Thus far, no large corporate sponsors have pulled their support from Penn State. PNC Financial, Highmark and GM are standing by the university. Any more damaging news could harm future commitments. Cars.com did pull sponsorship of ESPN's coverage of Saturday football games for two weeks, citing the Sandusky scandal as the reason. Sherwin-Williams pulled its logo from the news-conference banner. These were the only companies that I could find so far that distanced themselves from Penn State.

The financial fallout could affect Penn State directly in many ways. The first is in legal fees and defense fees. Because Gary Schultz and Tim Curley are charged with crimes related to their duties at PSU, the university is covering their legal fees. On top of those legal fees, Penn State's Board of Trustees has hired an outside law firm to investigate the issue. The potential cost of that is estimated in the millions. Finally, civil lawsuits could add untold costs in forthcoming years. There are rumors that the Board of Trustees is putting together a fund to handle these future costs.

A bigger concern is the alumni and students who account for the future of Penn State. There are more than 500,000 alumni who collectively gave $195.3 million to Penn State last year. Will they continue to give with the scandal enveloping the university? The good news is that many may want to show their support for the university during its darkest hours and may give more to help pull university through. Being a member of Penn State's alumni and its extensive network of contacts is a big part of Penn State's allure, and Joe Paterno was an iconic figure for the university and his presence was used at many fundraising events to help build support. This will most likely not be the case in coming years.

Tuition has been increasing exponentially at higher-education institutions, especially Penn State. Before, the costs did not put a damper on enrollment due to Penn State's reputation. Will potential students consider Penn State's premium tuition given the uncertainty facing the university at this time?

The reality is there are a lot of questions facing Penn State financially. As with the outcome of the trials and the investigations, only time will tell. The truth is, Penn State and the sleepy town of State College may never be the same.

Yet, I know my town and many of its residents and Happy Valley's true character and tenacity that define who "WE ARE" will persevere.



Judy Loy, ChFCâ, is a Registered Investment Advisor and CEO at Nestlerode & Loy Investment Advisors, State College, Pa. A graduate of Penn State University, Loy has been with the firm since 1992, assisting clients with retirement planning, brokerage services and investment advice. She can be reached at jloy@nestlerode.com.
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