Bloomberg News

Penn State May Seek Immunity After Skirting Public Laws

November 17, 2011

(Updates with governor’s comment in 12th paragraph.)

Nov. 16 (Bloomberg) -- Pennsylvania State University, after years of skirting public-school rules, may claim protection from liability under commonwealth laws that shield government entities, if it faces suits related to a child-sex scandal.

Moody’s Investors Service is examining the school’s relationship with the state to see whether claims of sovereign immunity apply, analysts said yesterday. Fallout from abuse charges against an assistant football coach and perjury accusations against two administrators led to the dismissal of Joe Paterno, the head coach, and Penn State’s president.

The commonwealth’s flagship state-supported school has successfully claimed to be exempt from freedom-of-information laws that apply to most public institutions, including competitors such as Ohio State University and the University of Texas. Penn State’s unusual position has for years shielded the school and its football program from public scrutiny.

“Because this is an unprecedented development in many areas of liability risk, it may not be clear even to them what the situation is,” John Nelson, a Moody’s analyst in New York, said in a telephone interview. “These are things that have to be decided by counsel and possibly the courts. It could just take a while to evolve.”

Three Charged

Jerry Sandusky, the former assistant coach, faces charges of sexually abusing boys as young as 10 at the school. Timothy Curley, the athletic director, and Gary Schultz, a former vice president for finance and business, were charged with failing to report an allegation related to Sandusky and then lying to a grand jury. A preliminary hearing for Curley and Schultz was postponed Nov. 15, at the request of prosecutors.

In addition to Paterno, 84, college football’s most successful coach, with 409 wins, the scandal claimed the job of President Graham B. Spanier, 63. Both were fired Nov. 10. Neither man faces charges related to the scandal.

Sandusky is accused of assaults on eight boys from 1994 to 2009, when he ran The Second Mile, a charitable children’s organization, according to Pennsylvania Attorney General Linda Kelly. Sandusky, 67, denied the accusations against him in a telephone interview Nov. 14 with Bob Costas of NBC News.

“For the immediate future we are more focused on examining what went wrong at Penn State in the past and how to make sure Penn State meets the expectations the public has for us going forward,” Bill Mahon, a spokesman for the university, said in an e-mail, responding to questions about possible legal strategy.

Wave of Change

The school’s credit rating may be cut in the wake of the sex-abuse scandal, New York-based Moody’s said last week in a report. It cited the potential for lawsuits, settlements, and declines in philanthropic and state support, as well as “significant management and governance changes.”

The school traces its roots to 1855 when it was started as a private agricultural college, and 1863, when the Legislature made it the state’s only land-grant institution.

Since 1887, Penn State has received annual appropriations from the Legislature, even though it remained a privately chartered organization, according to its website. The university describes itself as “not state-owned and -operated” yet with the “character” of a public school as a “state-related” institution.

Corbett Comments

Governor Tom Corbett, a Republican, said the scandal will “reopen that battle,” in reference to making the university comply with public records laws. “There are certain things I’ve mentioned before that would indicate I would like to see more openness,” he said today at a press briefing in Philadelphia.

In March, the university cited a decline in state funding as leading to tuition increases, including in the discounted rate for Pennsylvania residents. The school has more than 80,000 students attending classes on more than 20 campuses statewide.

While it gets financial support from the commonwealth, Penn State is set apart from its higher-education system, Nelson said. The University of Pittsburgh, as well as Temple University in Philadelphia and Lincoln University are also state-related schools, he said.

Penn State doesn’t use government or tuition money to fund its athletics programs, which it describes on its website as “an auxiliary enterprise” that is “self-supporting.” The school, with an operating budget of about $4.1 billion a year, sought $364.2 million in state support for fiscal 2012.

Liability Shields

Some states have strict liability-limiting statutes that protect government agencies against lawsuits, in contrast to private nonprofit organizations. Whether such laws apply to Penn State wasn’t immediately clear to Moody’s analysts.

“We’re not lawyers, so we can’t answer the question,” Nelson said.

Some Penn State employees are covered by the State Employees’ Retirement System, a public pension. Sandusky got almost $150,000 in a lump-sum payment when he retired and has been receiving almost $59,000 a year since then, according to Pamela Hile, a spokeswoman for the plan.

Penn State’s debt is graded Aa1, the second-highest Moody’s rating, because of “very strong student demand and other credit strengths linked to its status as Pennsylvania’s flagship and land-grant university,” the company said in its Nov. 11 report. The school has about $1 billion of rated debt outstanding.

--With assistance from Heather Perlberg in State College, Romy Varghese in Philadelphia and Mark Niquette in Columbus, Ohio. Editors: Ted Bunker, Mark Tannenbaum.

To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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