Penn State May Seek Immunity After Years of Skirting Public Laws

Story first appeared in the Bloomberg News.

Pennsylvania State University, after years of skirting public-school rules, may claim protection from liability under commonwealth statutes that shield government entities, if it faces lawsuits related to a child-sex scandal.

Moody’s Investors Service is examining the school’s relationship with the state to see if claims of sovereign immunity may apply, analysts said yesterday. Fallout from charges against an assistant led to the dismissal of Joe Paterno, Penn State’s marquee football coach, and its president.

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

This most recent scandal is an unprecedented development in many areas of liability risk, it may not be clear even to Penn State what the situation is. Many legal issues need to be decided by corporate counsel and possibly the state and federal courts.

Jerry Sandusky, the former assistant coach, faces charges of sexually abusing boys as young as 10 at the school. In addition to Joe Paterno, 84, college football’s most successful coach, with 409 wins, the scandal also claimed the job of President Graham B. Spanier, 63. Both were fired by Penn State on Nov. 10, 2011.

Defendant Denies Accusations

The charges against Sandusky involve alleged 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.

The unviersity's credit rating may be cut in the wake of the sex scandal rocking the university, 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.”

Penn State University 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.

State Funding

Since 1887, Penn State has received annual appropriations from the Pennsylvania 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.

In March, Penn State 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.

The University of Pittsburgh, as well as Temple University and Lincoln University, both in Philadelphia, are also state-related schools.

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.

Moody's declined to provide specifics citing that they are not lawyers and so Moody's declined to answer the questions.

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 a spokeswoman for the plan.

Penn State’s debt is graded Aa1, the second-highest Moody’s rating, because of strong student demand and other credit strengths linked to its status as Pennsylvania’s flagship and land-grant university. Penn State has about $1 billion of rated debt outstanding, with many lawsuits on the short-term horizon.