John Engler may have a tin ear, but there is nothing wrong with his eyesight. He knows how to read the writing on the wall.
So we can guess that the acting head of Michigan State University read a message along the lines of “Larry Nassar’s predations may cost big bucks right now, but they will cost a lot more if you keep wallowing in the cesspool he left behind.” Which probably explains why Engler agreed to have the school pay $500 million to settle with Nassar’s victims, just a couple of months after he tried to persuade the courts and the Michigan Legislature to let Michigan State off the financial hook entirely.
It sounds like a big number and, of course, it is. In fact, it may be the largest sum a university has ever paid to settle a sexual abuse case; by way of comparison, Penn State initially paid just under $60 million to 26 individuals abused by Jerry Sandusky, and that figure has reached more than $109 million total in the years since. But $500 million is still a pretty manageable tab for an institution like Michigan State. The school has over 45,000 full-time equivalent enrollees and annual revenues of about $2.5 billion, according to Moody’s. Even after a recent ratings downgrade, its credit rating from that agency is Aa2, a solid investment-grade level.
The real financial risk of the scandal is to the school’s reputation, its future enrollment, its donor support and potentially even its media revenue as a major sports power in the Big Ten conference. An amicable settlement with Nassar’s victims, including the 332 who have already come forward and any others yet to be identified, would greatly reduce these threats. Michigan State has said it will pay $425 million now, and set the remaining funds aside in a trust for anyone who comes forward later.
Nobody at Michigan State was talking last week about where the settlement money will come from. Some Michigan lawmakers have already stated adamant opposition to putting the state’s taxpayers on the hook. Thomas Harnisch, director of state relations and policy analysis at the American Association of State Colleges and Universities, told The New York Times that the settlement money would likely come from some combination of insurance, state aid and revenue from student tuition, but that “I think definitely borrowing money is going to be a key piece to paying for this.”
I would likewise guess that the school will fight to extract as much as it can from its insurers or from other parties involved in the scandal, and will borrow whatever else is needed to cover the debt. Issuing tax-exempt bonds (which the school can do as a subdivision of the state) at 5 percent interest or so for 10 years would bring the annual debt service down to a reasonable number for an institution of Michigan State’s size. It won’t be without pain – $60 million or so of annual principal and interest has got to come out of somebody’s hide – but it is doable.
This settlement is not the end of the story. Some of Nassar’s victims have also brought claims against other parties, including USA Gymnastics and the United States Olympic Committee. And as part of the settlement, there will be no nondisclosure or confidentiality agreements. Michigan State will, rightly, have to cope with the ongoing reputational fallout of its connection to Nassar.
The settlement does, however, clear the decks so that Engler’s successor does not have to deal with Larry Nassar in any direct way. That is the goal Engler set for himself, and it seemed like quite a stretch to me when I wrote about his hardball tactics just last month.
But give the man credit. He can read, and he scores high on comprehension too. He got the message and solved the math problem. That ought to qualify him for graduation with distinction.
Posted by Larry M. Elkin, CPA, CFP®
John Engler may have a tin ear, but there is nothing wrong with his eyesight. He knows how to read the writing on the wall.
So we can guess that the acting head of Michigan State University read a message along the lines of “Larry Nassar’s predations may cost big bucks right now, but they will cost a lot more if you keep wallowing in the cesspool he left behind.” Which probably explains why Engler agreed to have the school pay $500 million to settle with Nassar’s victims, just a couple of months after he tried to persuade the courts and the Michigan Legislature to let Michigan State off the financial hook entirely.
It sounds like a big number and, of course, it is. In fact, it may be the largest sum a university has ever paid to settle a sexual abuse case; by way of comparison, Penn State initially paid just under $60 million to 26 individuals abused by Jerry Sandusky, and that figure has reached more than $109 million total in the years since. But $500 million is still a pretty manageable tab for an institution like Michigan State. The school has over 45,000 full-time equivalent enrollees and annual revenues of about $2.5 billion, according to Moody’s. Even after a recent ratings downgrade, its credit rating from that agency is Aa2, a solid investment-grade level.
The real financial risk of the scandal is to the school’s reputation, its future enrollment, its donor support and potentially even its media revenue as a major sports power in the Big Ten conference. An amicable settlement with Nassar’s victims, including the 332 who have already come forward and any others yet to be identified, would greatly reduce these threats. Michigan State has said it will pay $425 million now, and set the remaining funds aside in a trust for anyone who comes forward later.
Nobody at Michigan State was talking last week about where the settlement money will come from. Some Michigan lawmakers have already stated adamant opposition to putting the state’s taxpayers on the hook. Thomas Harnisch, director of state relations and policy analysis at the American Association of State Colleges and Universities, told The New York Times that the settlement money would likely come from some combination of insurance, state aid and revenue from student tuition, but that “I think definitely borrowing money is going to be a key piece to paying for this.”
I would likewise guess that the school will fight to extract as much as it can from its insurers or from other parties involved in the scandal, and will borrow whatever else is needed to cover the debt. Issuing tax-exempt bonds (which the school can do as a subdivision of the state) at 5 percent interest or so for 10 years would bring the annual debt service down to a reasonable number for an institution of Michigan State’s size. It won’t be without pain – $60 million or so of annual principal and interest has got to come out of somebody’s hide – but it is doable.
This settlement is not the end of the story. Some of Nassar’s victims have also brought claims against other parties, including USA Gymnastics and the United States Olympic Committee. And as part of the settlement, there will be no nondisclosure or confidentiality agreements. Michigan State will, rightly, have to cope with the ongoing reputational fallout of its connection to Nassar.
The settlement does, however, clear the decks so that Engler’s successor does not have to deal with Larry Nassar in any direct way. That is the goal Engler set for himself, and it seemed like quite a stretch to me when I wrote about his hardball tactics just last month.
But give the man credit. He can read, and he scores high on comprehension too. He got the message and solved the math problem. That ought to qualify him for graduation with distinction.
Related posts: