Penn State’s long-term credit rating was downgraded on Friday from Aa1 to Aa2 with a stable outlook by Moody’s Investors Service.
In the report by Moody’s , the reason for the downgrade is the uncertainty behind the cost of future settlements related to the Jerry Sandusky sex abuse case, according to a Penn State Live press release.
Moody’s added that Penn State has a “stable outlook” due to the expectation that the university will continue to implement former FBI Director Louis Freeh’s 119 recommendations for university governance and that the settlements will be resolved in the future.
“The unknown or uncertainty of the situation is what has caused the downgrade,” Penn State Spokeswoman Lisa Powers wrote in an email.
The downgrade is expected to have little effect due to low interest rate levels and because the university does not have any plans for large capital improvement projects, which would require borrowing, Powers explained.
Moody’s report also noted the solid financial status of the university and that there is “no real downturn” in enrollment or fundraising, Powers said.
Powers also explained that she was not aware if Penn State had been downgraded at any point in the past, but that the rating has been upgraded twice since 2001. The university expects to be returned to Aa1 status when the future of the pending litigation becomes clearer and the cases are resolved.
On July 24, Moody’s originally announced it would review Penn State’s credit rating, saying a decision would be made within 90 days.
As previously reported, David Jacobson, a spokesperson for Moody’s, said lowering the university’s credit rating means it will cost the university more to borrow money and that the value for certain bonds could potentially drop.
Board of Trustees members on the Committee on Audit and Risk met Friday morning during the special meeting of the board. The committee discussed a draft of the 2011-12 review of audited financial statements, including the costs of potential university liabilities.
University Corporate Controller Joseph Doncsecz said there is still “sufficient uncertainty” for the cost of litigation in the settlement talks.
The downgraded rating is still the third-highest rank out of a possible 21 ratings by Moody’s.
“This action will have no impact on tuition, and fortunately, due to historically low interest rates and no anticipated borrowing in the near future, will have a negligible financial impact,” Senior Vice President for Finance and Business David Gray said in the press release.
Representatives from Moody’s could not be reached for comment by press time Sunday.
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