Moody's Investors Service said it has downgraded Pennsylvania State University's long-term rating to Aa2 from Aa1.

The rating outlook is stable at the lower rating level.

The downgrade of Penn State's rating to Aa2 from Aa1 reflects the anticipation of the substantial financial impact on the university from the ultimate cost of future settlements and possible judgments, stemming from sexual abuse claims made by victims of convicted former assistant football coach, Gerald Sandusky.

The university's board has taken actions to provide an expedited settlement process, including hiring a nationally known law firm with expertise in settling high profile multiple claim cases, which offer prospects of settling substantial numbers of claims within a year or less. However, the total number of claims and the ultimate full cost to the university is unknown and may not be known for years, but could be significant. Investigations by the State Attorney General and the U.S. Department of Justice remain active and further charges could emerge.

The rating action also reflects governance and institutional culture challenges facing the university. Substantial reforms reflecting best practices are now underway and intended to overturn a university culture cited in the Freeh Report as being highly dependent on a few senior managers operating with inadequate board oversight.

The reforms include creation of a chief compliance and ethics officer reporting to the board, the election of a new board chair, and a board decision that the next president will not be a Penn State insider. These planned steps suggest significant future improvement in university governance and management, but it could take time for the strong internally focused culture of Penn State to fully implement and embrace the recommendations of best practices.

The stable outlook reflects Moody's expectations that the ultimate resolution of victims' claims, though possibly substantial, will be manageable at the lower Aa2 rating. Penn State should remain a leading public university with favorable student demand, positive operating performance, high donor support and a strong research position.

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