Rutgers scandal could cost New Jersey taxpayers millions more

Reuters News
Posted: Apr 12, 2013 5:54 PM
Rutgers scandal could cost New Jersey taxpayers millions more

By Hilary Russ

(Reuters) - Getting rid of an abusive college basketball coach has already cost New Jersey taxpayers more than $1 million, but the awkwardly handled saga could cost them millions more in years to come.

That's because one of Wall Street's top credit rating agencies said that the controversy over video-taped episodes of physical and verbal abuse by a Rutgers University coach, and the delay in his dismissal, could contribute to a downgrade of the public university's credit rating.

The events surrounding Mike Rice's firing "raise questions about governance and management practices at the university, and strengthen the possibility of government investigations and possible legal actions," Moody's Investor Service said in a comment for bond investors released on Friday.

Rice, head coach for the Rutgers Scarlet Knights men's squad since 2010, was dismissed in early April after ESPN aired footage of him screaming homophobic epithets at players, hurling basketballs at them and shoving and kicking them.

Then Tim Pernetti, the athletic director who initially opted just to discipline Rice only to later dismiss him when the video went viral and sparked national outrage, resigned.

Between the two, state taxpayers are already on the hook for more than $1.25 million in severance costs and bonuses. But the Moody's report suggests the tally could rise.

Rutgers, with $1.2 billion in public debt outstanding already, has an eye to raising as much as $410 million more in the municipal bond market to finance new construction projects. The bond measures have already been approved by New Jersey voters.

Moody's cited the university's inadequate response to Rice's behavior when it was first reported to officials last November. At that time, school President Robert Barchi had subordinates view the tapes, and the school suspended and fined Rice instead of firing him.

In addition to the departures of Rice and Pernetti, an assistant basketball coach and the university's interim general counsel have also quit.

"Rutgers' initial response highlights inward-looking governance and management practices that are prevalent among U.S. universities," Moody's said in the comment.

"Questionable" disclosure practices about operations at any U.S. college invite criticism and government regulation, the Wall Street credit rating agency added.

It is a sensitive time for Rutgers. It is in the midst of assimilating two medical schools as a part of a reorganization of New Jersey's public medical education system. Integration is supposed to take effect on July 1.

The total amount of debt Rutgers will take on in connection with the merger is uncertain, but it's estimated to be at least $450 million. As a result of that debt assumption and the plans to issue new debt for capital projects, Moody's said in November it was reviewing the school's credit rating, currently a highly rated Aa2, for a possible downgrade.

Credit ratings downgrades often lead investors to demand a higher interest rate.

Over time, even small increases in borrowing costs can add up. For instance, the average effective yield for a AA-rated tax-exempt general obligation municipal bond is 1.79 percent, according to Bank of America/Merrill Lynch Fixed Income Index data. If a bond rating sinks down into the single-A range, the effective yield rises to 2.46 percent. Yields are also sensitive to the term of borrowing, with longer-dated debts costing more.

Over the life of a 7-year bond, the typical effective duration of a municipal security in the Merrill Lynch index, that higher interest rate can get pricey. Each one-tenth of a percentage point would add about $1.5 million of interest costs for taxpayers on the $410 million of debt Rutgers plans to sell.

As it seeks to boost its national profile for research, Rutgers has also been pushing athletics programs. It was admitted to the Big Ten athletic conference in 2012, a move that will bring more exposure and increased athletic revenue.

As a Big Ten member, Rutgers can also work with other prestigious members on joint research proposals, Moody's noted.

(Reporting by Hilary Russ; Editing by Vicki Allen, Dan Burns and Grant McCool)