USA TODAY International Edition
How will MSU pay Nassar’s victims?
Settlements could soar into hundreds of millions
“I think the survivors deserve huge payouts . ... But I worry about how MSU is going to pay.” Mark Thomas Father of two Michigan State University students
DETROIT – When each of Mark Thomas’ daughters entered high school, he made a deal with them: He’d pay for their college tuition if they’d find scholarships and jobs to cover the rest.
Two of his three daughters have taken advantage of the deal to head to Michigan State University. His third daughter is a high school sophomore who wants to follow in her sisters’ footsteps.
That means Thomas is used to writing checks to MSU — and it’s why he’s going to be very interested in what happens in closed-door mediation sessions that started last week in New York between the university and lawyers for Larry Nassar victims.
“I think the survivors deserve huge payouts,” Thomas said while on campus visiting his daughters. “MSU could have stopped him decades ago, and they didn’t. But I worry about how MSU is going to pay for those settlements.”
Thomas and other parents and students concerned about tuition costs aren’t the only ones carefully watching. Michigan state legislators have said they don’t want any tuition money or state aid spent on settlements. Several financial rating firms have either lowered Michigan State University’s outlook or placed it under investigation as they wait to see a dollar figure.
Michigan State isn’t commenting directly on how it’ll pay.
“It’s really premature to comment on any possible or pending lawsuits payments,” spokeswoman Emily Guerrant said. “While MSU is committed to reaching a fair settlement through mediation, those efforts are not finalized yet.”
In many ways, Michigan State is entering uncharted territory. There’s no exact comparison — although Penn State, with its Jerry Sandusky case, comes closest. Sandusky was convicted of sexually assaulting boys while a coach at Penn State, and officials there covered it up.
“One clear difference between the two schools’ lawsuits, however, is the number of plaintiffs,” Roy Eappen, a senior analyst for Wells Fargo Securities, wrote in his first-quarter highereducation review. “Penn State has at least 35 accusers, and the university has paid out $109 million.”
That’s a little more than $3 million a victim.
Michigan State is facing roughly 300 victims, according to figures in court records. At $3 million a person, that’s $900 million.
So can Michigan State handle that type of payout? That’s up in the air, financial experts said.
“Though similarly rated, Penn State had better cash flow during the time of its scandal relative to Michigan State,” Eappen wrote. “In addition, Michigan State is a more tuition-dependent institution. The reliance on health care revenue by Penn State likely helped insulate the school against concerns in loss of enrollment.”
Penn State runs a medical system. Michigan State brought in $859 million in tuition revenue in 2016-17, according to its audited financial statements. That’s 29% of its total revenue of $2.9 billion. If the university’s reputation has suffered from the scandal, it could see a drop in the number of students enrolling, which could lower that income.
On the other side of the ledger, the university has $1.1 billion in outstanding debt. Ashley Ramchandani, a credit analyst with S&P Global Ratings, said it considers Michigan State in good shape financially with debt and probably could add some if needed.
Michigan State also ended the past fiscal year with $1.1 billion in unrestricted net assets. That’s money that isn’t legally contracted to a certain project but often is set aside for particular projects.
The two biggest chunks of what the university has set aside unrestricted net assets for are infrastructure ($557 million) and programs ($400 million).
So what else can the university dig into to get its money? That depends, experts said.
The school has an insurance policy with about $39 million of coverage. Penn State had to sue its insurance company to get it to pay. Even if Michigan State’s pays right away, there could be a lot of money still needed.
“The only real option is borrowing the money,” said Robert Kelchen, a professor specializing in higher education finance at Seton Hall University.
He is unaware of any public university that has ever declared bankruptcy, largely because states would step in and bail it out. However, he doesn’t think Michigan State is in any danger of that, thanks to its reserves and ability to borrow funds.
Several lenders probably would let Michigan State borrow money. However, the interest rate the university would pay would depend on how ratings agencies see the university’s finances.
If the money is borrowed, payments would have to be made.
All of that is why interim President John Engler has been saying, including during a legislative hearing last month, that tuition is going to have to handle the costs. That didn’t sit well with some state senators who have put a provision in the higher education budget — which has yet to be passed — saying no tuition money or state aid can be spent to settle.
The school could raise tuition rates on out-of-state students or graduate students to generate more revenue, Kelchen said, but that carries risk as well. If prices jump, would those students want to go to a school whose reputation has taken a battering in recent months?
And so Thomas and his daughters will wait. “We love MSU,” he said. “My girls are getting a great education here. But I don’t see why they have to pay because the administration covered up everything. Fire everyone who knew and didn’t work. Don’t pay them big payouts when they leave.”