Howes: MSU can afford $500M Nassar settlement, but can it afford trustees?
Michigan State University’s $500 million settlement with 332 women sexually abused by Dr. Larry Nassar has yet to be approved by the school’s trustees, but two prominent ratings agencies already have rendered their verdict: MSU can afford the payout.
“The university has the financial strength to absorb the proposed settlement within its strong credit profile,” Moody’s Investors Service said in a note Monday. “MSU has significant unrestricted liquidity, approximately $1.9 billion of cash and investments available within a year as of fiscal 2017,” which ended last June 30.
Using “current reserves, debt or operating cash flow to fund settlement costs will have a modest negative effect on the university’s ability to invest in new strategic initiatives. Assuming no insurance proceeds, we estimate the cost to the university at approximately $20-$30 million annually, or about 1 percent of operating expenses, based on either debt service for a 30-year financing or the loss of investment earnings on $500 million.”
The school generates $270 million a year in operating cash flow and its current debt service is less than 3 percent of operating expenses, Moody’s says. That means MSU has “ample ability to absorb additional debt service related to the settlement amount.”
The trustees and an administration headed by Interim President John Engler are not likely to tap any single source for $425 million to settle current cases or to create a $75 million fund for new cases that may be filed, according to two sources familiar with the situation. Nor are insurance policies from 10 different carriers expected to be sufficient.
In a plan to be presented to the trustees at their June meeting in East Lansing, Engler and his team are likely to propose using multiple financial sources to fund the settlement. They include insurance proceeds, higher tuition for all but incoming freshmen, departmental budget cuts expected to be as high as 2.5 percent, delayed expenditures on planned capital projects, cash reserves and the issuance of debt.
Those are steep, if absolutely necessary, prices to pay to atone for the bad leadership and inept governance that enabled Nassar to prey on hundreds of young women. A lot of people will pay for his legacy, too, for the lax oversight exercised by MSU's politicized board of trustees, former President Lou Anna Simon and too many of her administrators.
Students will pay -- if not in inflated tuition, then in diminished programs. Faculty will pay -- in budgets cut more than they otherwise would be. Athletes will pay in programs tarnished by the stain of Nassar. The university itself will pay in higher borrowing costs, major hits to its reputation and probably lower donations from disgusted alumni.
Establishing a fund to settle claims with more than 300 women abused by Nassar is not the end of the Michigan State scandal so much as the end of the beginning. Moody's maintains a negative outlook for the school because of ongoing legal costs, likely changes in policy, efforts to find a permanent replacement for Simon and other senior officials, and continuing investigations into the medical school dean and others.
Skepticism from ratings agencies, the news media, state lawmakers, even the MSU faithful should be no surprise to Spartan Nation. The university's inability to reckon with the Nassar scandal, epitomized most by trustees too easily buffaloed by Simon and her team, makes it likely an investigation by a special counsel for the state Attorney General could expose more culpability within university leadership.
We still don't know enough about who in the administration knew what when. Did sitting trustees in emails and text messages downplay the mounting Nassar mess or make excuses for the behavior of Dr. William Strampel, the former medical school dean ousted from office and charged with preying on female students?
Michigan State desperately needs to overhaul its leadership culture, a necessarily self-critical exercise that will be difficult – if not impossible – to execute with trustees who essentially own the Nassar debacle. Meaningful culture change can’t be led by creatures of the culture needing change.
In a separate ratings action, S&P Global Ratings issued what it calls a "CreditWatch with negative implications" on Michigan State. It "reflects our view of the potentially negative impact of this settlement on MSU's financial profile, including, but not limited to, potential weakened operating performance and deterioration of available resources and liquidity for an indeterminate period," analyst Ashley Ramchandani said in statement.
Emphasis here on "indeterminate period." Michigan State is embarking on a long, painful reckoning that will shape who it can attract to become its next president and what qualities he or she needs to bring to campus. It also will determine whether the trustees who are part of the problem that made Nassar possible are the people best equipped to pick the next leader.
On recent evidence, the answer is no.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.