Financial Fallout Of The Penn-State Punishment

By Aaron Levitt | August 07, 2012 AAA
Financial Fallout Of The Penn-State Punishment

After weeks of speculation, the NCAA finally brought the hammer down on Penn State's embattled football program. The school was left reeling after a sexual abuse scandal rocked the top-tier football program. Several investigations concluded that Penn State's board and executive committee failed to properly investigate allegations against ex-assistant football coach Jerry Sandusky. Sandusky was later convicted of sexually abusing 10 boys over 15 years on university property.

SEE: Financial Implications Of College Football Playoffs

The much-needed punishment Penn State received for its role in covering up Jerry Sandusky's crimes was undoubtedly stiff, and the case has become a lightning rod for intercollegiate athletics and the surrounding community. With the punishment now handed down from the NCAA, the question remains what exactly will be the long-term fallout from those actions.

Stiff Penalties
Citing "hero worship" and a "warped athletic culture," NCAA President Mark Emmert issued a landmark ruling and levied unprecedented penalties against the Penn State football program. These included banning Penn State from bowl games for four years and imposing massive scholarship reductions. Additionally, the school was hit with $60 million fine. Penn State will pay $12 million a year for the next five years into a special endowment that will be used to fund programs for the prevention and treatment of child abuse. That $60 million fine from the NCAA is in addition to the $13 million levied by the Big Ten Athletic conference.

Finally, the NCAA went after the university's beloved former head coach, Joe Paterno, who was fired for his role in the scandal. President Emmert vacated all of Penn State's victories from 1998 through 2011, removing 111 wins from the football program. This removed Paterno from having the most all-time wins in major college football.

Penn State president Rodney Erickson said that the university would have faced even more disciplinary measures had it rejected the NCAA's initial penalties. This included a dreaded four-year "death penalty" for the program. Essentially, that would have effectively shut down football at Penn State.

What Happens Now?
Given the severity of the penalties, it's only natural to begin to think about the long-term effects on the school. Certainly, there will be severe repercussions from the scandal. The real question is just how far the fallout will extend. Some analysts have postulated that enrollment in the university as well as donations could drop. Neither has taken place so far. However, there are some real financial concerns beginning to take shape.

No Bowl Game Revenue
One obvious concern is the lack of bowl game revenue. The four-year ban prevents the university from attending these events and therefore the school will not be eligible to receive its share of the conference's bowl revenues. The university has been a bowl game fixture for quite some time and the revenue hit is hard. The Big Ten title game alone is worth roughly $13 million. As one of the few profitable programs in the country, Penn State's football revenues are used to support a wide range of other intercollegiate sports for both men and women. Any reduction in revenue will ultimately trickle down and hurt those other organizations.

Secondly, Penn State is already losing money from advertising sponsors. Insurance agency State Farm recently announced it will pull its ads from broadcasts of PSU home games. Likewise, GM has begun reviewing its relationship with the university. Analysts estimate the university could face an exodus of sponsors who are unwilling to have their brands linked to the sexual abuse scandal.

Additionally, ESPN reports that sales of Penn State related merchandise have begun to drift lower. Sales of Penn State clothing have fallen, from about $80 million in 2010 to $60 million after the scandal broke last year. Analysts estimate that PSU will only gross only about $45 million in T-shirt sales this year.

With all the fines and litigation, Penn State's credit rating has begun to suffer. Ratings agency Moody's reported that it may cut the university's Aa1 rating on its $1 billion worth of outstanding debt. The rating agency said it was concerned about a report by former FBI director Louis Freeh as well as other state and federal investigations that are currently underway.

SEE: A Brief History Of Credit Rating Agencies

The Bottom Line
After receiving some of stiffest penalties in NCAA history, the fallout from this sexual abuse scandal is beginning to take shape at Penn State. While this punnishment is indeed warranted, the consequences of losing bowl games and football revenue will affect much more than only the football program.

comments powered by Disqus
Related Articles
  1. 5 Famous MLB Players Who Went Broke
    Investing News

    5 Famous MLB Players Who Went Broke

  2. The Irreplaceable Brand Of Donald Trump
    Investing News

    The Irreplaceable Brand Of Donald Trump

  3. What If Donald Sterling Ran Your Company?
    Investing News

    What If Donald Sterling Ran Your Company?

  4. 10 Golf Tips To Help Investors Tee Off
    Trading Strategies

    10 Golf Tips To Help Investors Tee Off

  5. Play The Market Like Tiger Plays Golf
    Active Trading

    Play The Market Like Tiger Plays Golf

Trading Center