Mild sanctions on Penn State for covering up child molestation just got milder

Last Monday the NCAA dialed back the already mild sanctions on Penn State for covering up years of child molestation.

The school is now eligible for post-season games after sitting out two years. The initial penalty was a four-year ban.

The school can resume its full amount of allowed scholarships instead of cutting them back just a little bit for four years. They only took a two-year reduction in scholarships.

The Wall Street Journal describes the end of sanctions: NCAA Lifts Penn State’s Postseason Ban.

This post is part of the conversation on this blog on the severity of punishment for egregious behavior. Should there be capital punishment, as with Arthur Andersen? Or should there be cost-of-doing-business punishment, as with the big banks and Penn State.

I discussed this two years ago: On capital punishment of organizations – Arthur Andersen and Penn State – corporate death versus mild sanctions

Let’s walk through the four penalties imposed on Penn State. Let me explain why this was mild and is now milder.

Wins voided – Wins for the previous 14 seasons were voided. That remains in place. Knowing how statistics minded most sports fans are, I’m confident everyone will long remember the “real” stats.

Ban from bowl games – Initially the ban was four years. School is eligible this year. That means the school only sat out two years.

Research for my previous article indicates a bowl is worth about $13M, so since the school is expected to be in post-season play this year (according to the WSJ article) it will likely recover $26M over the next two years that it wasn’t expecting. That will cover the cash flow from the fine for two years. That’s a $26M windfall from the previously mild penalties.

Scholarships reduced – My previous article reported the school had to cut total scholarships from 85 to 65 and the number of new scholarships from 25 each year to 15 each year. My previous research indicated there is a 100 player roster.

That means 35 instead of 15 players have to pay their way; 65 instead of 85 get full ride.

The scholarships have been restored to the full number. That means the 66th through 85th best players on the squad will get a scholarship. The 86th through 100th best players will still have to actually pay for college. That isn’t much of a hit to the program’s competitiveness.

So the trim in scholarships was reduced from 4 years to 2.

In my opinion, that was a very minor sanction and even that has been removed for two years.

That minor reduction apparently had no impact on the program since they have had two winning years since the penalties and would have been bowl-eligible each year, according to the WSJ article.

$60M fine – My previous calculation put that into perspective. That appears to be a large number, but consider the following context:

• It is one-fourth of one percent of Penn State’s annual income.
• It is equal to 1.2 years of the football program’s $50.6M annual revenue.
• Amortized over the 14 years of child molestation, that would be equal to about 8.5% of annual income of the football program.
• Payment of the fine is spread over five years, or $12M per year, which is 30% of the football programs gross margin of $40M a year. That means there isn’t any cash flow pressure on the school or football program.

So it is essentially an 8.5% retroactive tax over 14 years with payment spread over 5 years to ease the cash-flow impact.

Now go back to the lifting of the ban on post-season play. The expected earnings from the bowl games for the next two years will offset the cash flow of the penalty for those two years.

That essentially reduces the $60M ban down to around $34M. Spread over 14 years of molestation turns that into something in the range of 4.8% of the football program’s annual revenue. That substantially reduces the tax bite.

What mild penalties were initially imposed have been dialed back to a fraction of what they were.

As we have seen with the unending list of big bank fiascos, the scholarship and financial penalties imposed on Penn State are in the range of cost-of-doing-business.

Your thoughts?

Comments welcome, if they are professional.