cfo.com

Print this article | Return to Article | Return to CFO.com

The Money Bowl

The real competition in big-time college sports is over who can spend the most.
Joseph McCafferty, CFO Magazine
August 1, 2006

It's enough to make legendary college-football broadcaster Keith Jackson cry, "Whoa, Nellie!"

During a three-year project completed in 1999, the University of Texas spent $90 million to upgrade and expand the football stadium on its Austin campus. Now, less than seven years later, Texas is at it again. Last February, fresh from a Rose Bowl victory that clinched a national championship in football, the university's regents approved another $150 million to further remodel and expand the Darrell K. Royal-Texas Memorial Stadium. Expected to be completed in 2008, the project will add another 10,000 seats and 44 premium suites, bringing the total seating capacity to more than 90,000.

The University of Texas isn't the only institution of higher learning lavishing funds on stadium makeovers. In Ann Arbor, the University of Michigan is spending $226 million to overhaul Michigan Stadium and add 83 suites and 3,200 club seats. The "Big House" is already one of the largest stadiums in the country, with a capacity of more than 107,000. Meanwhile, Oklahoma State, which competes with Texas in the Big 12 conference, is putting the finishing touches on a $102 million upgrade to its football stadium. Last January, the athletic program announced a gift of $165 million from oilman and alumnus T. Boone Pickens, earmarked for further renovations to the stadium and other athletic facilities. It was the largest-ever gift to a National Collegiate Athletic Association (NCAA) athletic program.

Ed Goble, associate athletic director for business who acts as sports CFO at the University of Texas, is unapologetic about the sums Texas is spending. "You've got to have great facilities if you are going to remain competitive," he says. "If we can pay for it, we'll do it."

Goble's words could serve as a motto for college athletic departments around the country. In the name of competition, universities are spending more and more on state-of-the-art stadiums, arenas, gyms, practice facilities, and weight rooms. Seeking to please fans and alumni, they are bidding higher sums for coaches and spending more to lure prize recruits.

But as programs vie to outspend one another, many go deep into the red, forcing schools to raise student fees and seek new sources of support. (Texas is a rarity: its program is self-sufficient and usually runs in the black.) Indeed, although many schools have increased revenue by adding premium seating and charging for seat licenses and ticket guarantees, they haven't improved their financial positions much, if at all. Unlike in the corporate world, most universities don't bother to track the returns on their sports investments beyond the win column. Despite the myth of massively profitable college-sports franchises built on the backs of unpaid players, only a handful of athletic programs manage to break even without university or student-fee subsidies.

Some argue that successful athletic programs bring intangible benefits to their schools, in the form of publicity and image enhancement. But research has cast doubt on the value of such reflected glory (see "Money Well Spent?" at the end of this article).

"College sports is the only business in America that has no bottom-line responsibilities," says Rodney Fort, a sports economist at Washington State University. "Even nonprofits have to watch the bottom line to some degree." In his 2000 book Beer and Circus, which takes a critical look at the world of university athletics, Murray Sperber, an emeritus professor at Indiana University, called college sports "the most dysfunctional business in America." Six years later, Sperber says it's as true as ever.

Haves and Have-Nots
According to an analysis by the Indianapolis Star newspaper of the 2004–05 budgets of 164 public universities, just 9 percent of these Division I schools had athletic departments that were able to support themselves. The rest received a total of more than $1 billion in student fees, general school funds, and other subsidies. Without the financial assistance, the average school would have lost $5.7 million, according to the Star.

"Except for a handful, they are all losing money," confirms Daniel Fulks, a professor of accounting at Transylvania University in Kentucky. Fulks, who analyzes athletic budgets for the NCAA, adds that the gap between the haves and the have-nots is getting wider. Many have-nots are trying to keep up, he says, but are destined to fail. "It's not so much difficult as it is impossible," says Fulks. "I call these schools 'the pretenders.'"

Consider the disparity between Ohio State, which competes in the Big 10, and Iowa State, which belongs to the Big 12. Ohio State has the largest athletic budget in the country, spending more than $90 million last year. For 2006–07 it has budgeted $97.5 million with a full-time staff of 300 to support 36 sports, with more than 900 student-athletes participating. The Buckeyes athletic department is completely self-supporting and usually operates in the black. "We are very lucky. Ohio State [football] has such a following that even in a down year we can expect to have sellouts," says Susan Henderson, senior associate athletic director, who acts as CFO of the athletic department.


The picture at Iowa State, which made ends meet last year with just over $28 million, is much bleaker. "We haven't been competitive," admits athletic director Jamie Pollard. He says that while you don't have to be the biggest to be the best, Iowa State, which has the smallest athletic budget in the Big 12, is too far from the median. "We just have to try to be the best we can be with what we have," says Pollard. It's not easy. Iowa State still supports 18 varsity sports played by more than 450 student athletes. While the athletic program reported a $700,000 surplus for the 2004–05 academic year, it was far from self-sufficient. Data from the Indianapolis Star shows the school relied on $2.6 million of general university money and more than $1 million in student fees.

Smaller schools in big conferences are forced to make do with what they have or spend money they don't have to keep up. "We basically have two choices," says Dave Marmion, assistant athletic director for finance at Wake Forest University in Winston-Salem, North Carolina. "We can either spend out of control and go into the red, or spend smarter, which is what we try to do." Wake Forest, which competes in the Atlantic Coast Conference, doesn't release budget figures, but Marmion says larger conference rivals like Florida State and the University of Miami spend far more.

Pollard, former CFO of the University of Wisconsin athletic department, concedes that the spending race is "staggering" and "never ending." But he doesn't blame big schools for spending what they do. "To each his own," he says. "It's a competitive business." Pollard's view is that the race will continue as long as fans are willing to support it: "Until consumers stop investing in it, the market drives it."

Revenue Generators
Indeed, fans seem to have an insatiable appetite for college-sports tickets, television broadcasts, and apparel. The biggest schools seemingly can grow revenues at will — and in recent years have been less shy about doing so, pushing further into the realm of blatant commercialization.

Rather than rebuke colleges for any excesses, the NCAA — in more of an admission of reality than a change in policy — gave college athletics its blessing for running up the score on revenues. "Let us end the ambivalence and do the best job we can developing revenue for our athletics departments," NCAA president Myles Brand told athletic directors at a convention in January. "Athletics, like the university as a whole, seeks to maximize revenues. In this respect, it has an obligation to conduct its revenue-generating activities in a productive, sound, and businesslike manner." It was a sharp departure from Brand's earlier warnings for athletic departments to tone down the commercialization.

"There's no doubt that the brakes are off on efforts to increase revenues," says Stephen A. Greyser, a marketing professor at Harvard Business School who studies the business of sports.

While Henderson says Ohio State keeps tight controls on costs, the school is focused on developing additional sources of revenue. That goal is shared by universities around the country, and it's not just premium stadium seating they are pursuing. A common trend among athletic departments is to outsource the sales of broadcasting rights and sponsorships to professional sports-marketing companies. Last year, for example, Boston College handed over sponsorship sales to Fenway Sports Group, the marketing arm of the Boston Red Sox. T.J. Nelligan, who runs Nelligan Sports Marketing, says such agreements can increase broadcasting and sponsorship revenue exponentially. The University of Louisville, for example, credits its outsourcing deal with Nelligan for increasing its broadcasting and sponsorship revenue from $700,000 in 1996 to $7 million last year.

Borrowing another page from the professional-sports playbook, universities are also beginning to sell naming rights on their stadiums. Louisville is reportedly seeking $40 million for the naming rights to a new arena it is building on campus. (Such a deal would dwarf the $5 million Louisville received to name its football stadium, which opened in 1998, after a pizza chain: Papa John's Cardinal Stadium.) The University of Minnesota already sold the naming rights to its new football stadium, expected to be completed in 2009, to TCF Bank for $35 million. Elizabeth Eull, associate athletic director for administration and finance and CFO of the athletic department, says some on campus squawked over the deal, which will help fund the $248 million project. "There was some discontent, but it's a situations where you say, 'This isn't going to get done without [selling the naming rights],'" she says.

It doesn't stop there. In June, Big 10 officials announced plans to team with Fox Cable Networks to launch the Big 10 Channel, which will cover Big 10 sports 24 hours a day. If it's successful, other conferences will be sure to launch dedicated cable channels of their own. College-sports television contracts, even aside from the monster deals with the big-four broadcast networks and ESPN, can be wildly lucrative. An all-college-sports network, CSTV, was launched in 2003 and purchased by CBS in January for $325 million.

All told, Division I-A colleges increased revenues by 34 percent from 1999 to 2003 (the latest year for which data is available), when the average athletic program brought in $29.4 million.


Spendthrift U.
In the corporate world, revenue growth like that would certainly be something to cheer about — but not if costs were increasing just as fast. And that's the case, unfortunately, with college athletics. Costs are rising nearly dollar-for-dollar with revenues. In 2002–03, Division I-A schools averaged $27.2 million in total spending on athletics. "As good as we are at bringing it in, we are just as good at spending it," admits Texas's Goble.

Worse, spending on the cash cows of men's football and basketball doesn't necessarily generate an incremental increase in revenue. According to an NCAA study commissioned in 2003, an increase in operating expenditures of $1 on football or men's basketball in Division I-A was associated with additional revenue of just $1. In other words, increasing spending, even on the profitable sports, has yielded no return on investment at all.

Those who follow the economics of college sports say the system is set up to encourage athletic departments to spend all the revenue they can make. "There's no tight oversight from the university, due to a vocal group of alumni that want to win," says Andrew Zimbalist, a professor of economics at Smith College who studies the business of sports. He says athletic directors are driven to expand the territory they control. "The more they pay coaches and the bigger the stadiums get, the more the ADs are worth," he says. "There are no shareholders to show a profit to."

Yet out-of-control spending isn't just the result of ADs trying to expand their domains, but also of the imperative that colleges must win, at all costs. "In the corporate world, the bottom line is profits, and if the company does well, everyone goes home happy," says Iowa State's Pollard. "In college sports, the bottom line is a championship, and everyone else goes home unhappy." He says this drives athletic departments to spend everything they can to further that goal. "They could stand up and say, 'This is insane, I'm going to stop it,' but they would get fired." College ADs are under pressure to do everything they can within the rules to win, says Pollard, including spending all of their resources. Anything less means they didn't try hard enough.

When schools don't spend everything they bring in, they generally bank those revenues in reserve funds to guard against a down year. At Ohio State, profits were squirreled away with the expectation that the department would lose money in the 2004–05 academic year, when the football team played only six home games instead of the usual seven. "We knew that was coming, so we were able to prepare for it," says Henderson. Likewise, the University of Texas banked its 2005–06 surplus in a reserve fund.

Only a few schools ever send money back into the general university fund. The department of athletics at Ohio State, for example, pays the university a fee of more than $4 million annually in overhead charges to support basic campus infrastructure. The University of Kentucky's athletic department contributes $1 million a year to the president's office for nonathletic need-based scholarships, says Rob Mullens, deputy director of athletics.

To be sure, some cost escalation is uncontrollable. Athletic departments, which generally pay back scholarship money at the list price, are subject to the same runaway tuition costs that all students are seeing. Mullens says that the cost to cover athletic scholarships at Kentucky has increased 12.5 to 15 percent in each of the last four years.

When athletic departments lose money, they often raise student fees to cover the deficit or dip into the university's general fund. For example, when the University of California at San Diego went $300,000 into the red this past academic year, its student-affairs department covered the shortfall, and the school put an increase to student fees on the table. Students will vote in a referendum to raise the fee this fall. Similarly, Colorado State University, which expects an annual deficit in its athletic department of $1 million in coming years, is looking to raise what students pay into the sports program from $53 a semester to $68 a semester, bringing in an additional $720,000 each year. And on the infrequent occasions when Ohio State runs in the red, the university covers the shortfall, but charges the athletic department between 5 and 6 percent interest on what it considers to be a loan. "We're expected to be in the black every year," says Henderson.

Facing a shortfall after a scandal-plagued couple of years and an expensive contract buyout for former football coach Gary Barnett, the University of Colorado obtained an $8 million loan in June from the general university reserve fund at a rate that CFOs would kill for — 2 percent.

Stretching the Dollar
Plenty of universities, however, say they have no choice but to watch the cost side closely. Minnesota, which in 2002 was projecting a deficit of $31 million in its athletic program by the 2007–08 academic year, recently conducted a top-to-bottom review of its sports budget and cut costs anywhere it could. "We looked at every nickel," says Eull. The program now operates close to break-even, with less dependence on general university funds.

Charges that athletic directors spend foolishly ring false to Suzette Fronk, assistant athletic director for business affairs at the University of Toledo in Ohio. She says the athletic department is under tremendous pressure to rein in spending after years of running a deficit. "We don't just have to balance our yearly budget, we're also working against a [loss] carry-forward."


While the athletic department finished the last academic year with a surplus of $800,000, it was not a typical year for the Rockets. Generally they have lost money, and when they do, they start the next year in the hole. After last year, the department still has a deficit of $3.17 million to make up.

A few years ago, Toledo athletics, facing a budget shortfall of $1 million annually, went into turnaround mode, says Fronk. After a thorough review of its finances, the department decided to eliminate three sports: men's swimming and men's indoor and outdoor track and field. The move would ease budget pressures and help the school comply with Title IX, a government mandate to provide gender equality in athletics. "It was like giving up three of your children," recalls Fronk. To avoid having to make further cuts, she says the department operates as lean as it can. Fronk negotiates room rates with hotels and even pushes for discounts on meals when teams are on the road.

Fronk says she would like to see more-equitable revenue sharing to level the playing field for the haves and the have-nots. "Those of us have-nots say that we could do so much with that $1 million the others are blowing."

For its part, the NCAA says there's not enough data to tell whether there is a spending race in college sports, according to CFO Jim Isch. But he admits there is evidence of a growing gap between the haves and have-nots. "We're monitoring it and collecting more data before we make any changes," says Isch. The NCAA does share a portion of its $6 billion television contract with CBS to televise the March basketball tournament with all schools, even those that don't make the field of 64, but the cut isn't very high. Fronk would like to see mechanisms where rich athletic departments would share more of the spoils with the have-nots.

That scenario is unlikely to become reality, though. Explains Transylvania's Fulks: "The people in a position to change things are the ones that are benefiting the most from the way it works now."

Joseph McCafferty is departments editor at CFO.


Unaccountable
Muddled accounting makes comparing finances in college sports nearly impossible.

Universities readily admit that they monitor athletic spending at their peers. After all, you have to know what the Joneses are doing in order to keep up with them. The trouble is, obtaining a clear view of a rival's finances can be all but impossible.

The National Collegiate Athletic Association (NCAA) requires all schools to submit detailed financial information, but it doesn't release that information to the public or share it with other schools. Instead, it releases aggregated revenue and spending data, organized by conference. Universities are also required by the Equity in Athletics Disclosure Act (EADA) — part of the Title IX gender equality in athletics law — to disclose some financial data to the public. But the EADA requirements (as well as the NCAA's) have few standardized accounting rules. The result makes comparisons among universities very difficult.

"Those numbers can be very misleading," says Eric Ziady, associate athletic director for business operations at Boston College. He says that schools compute their figures differently. For example, some include capital expenditures and debt servicing in the reports; others don't. Some include the cost to manage sports facilities — expenses such as security and maintenance — while others carry those expenses on their general books. "Things included or excluded in gross numbers can sway budgets by tens of millions of dollars," says Ziady.

Efforts are under way to improve the comparability of finances in college sports. Rule changes enacted for the 2006–07 school year require universities to file financial reports using a common set of accounting definitions and have them audited by a third party. The new guidelines also require schools to report capital expenditures and the athletic department's share of costs being picked up by the university. "We believe it will significantly improve the quality and reliability of our data," says Jim Isch, CFO of the NCAA.

The NCAA is also making changes to promote more transparency. After the coming year, schools will be able to view the financials of up to 10 peers, says Isch. While the public will still be kept largely in the dark, sharing data among universities offers them some hope of understanding — and hence controlling — athletic spending. — J.McC.


Winners and Losers
Some college athletic programs run a surplus, but many go well into the red.
Most Profitable Athletic Programs
University of Georgia $23.9*
University of Michigan 17.0
University of Kansas 10.1
Virginia Tech University 8.3
University of Texas 7.3
University of Iowa 6.7
Kansas State University 5.5
Texas A&M University 5.3
University of Alabama 5.3
Louisiana State University $5.1
Least Profitable Athletic Programs
University of Arkansas-Little Rock -$8.7*
University of California-Berkeley -7.9
University of Cincinnati -4.1
University of North Texas -3.1
University of South Carolina -2.7
West Virginia University -2.3
University of Washington -2.2
University of Hawaii -2.2
University of Nevada -1.8
North Carolina State University -$1.3
* Revenues minus expenses for the 2004–05 academic year (in $ millions). The numbers are presented here as reported to the NCAA. Schools differ greatly in how they report financial information.
Source: Indianapolis Star analysis of data obtained through public-records requests.

Money Well Spent?


Colleges generally justify spending on athletics by pointing out the intangible benefits that they bring to the universities. They argue that sports is the window through which many people come into contact with the school and that such exposure is worth a lot. (During most televised college events, each participating school gets one free minute to air a promotional message.) Athletic success increases the number and quality of university applicants, the argument goes, and improves alumni giving.

There is some anecdotal evidence that supports these claims. The idea is known as the Flutie factor, for the overall growth and academic improvement seen at Boston College after the school racked up victories on the football field under Heisman Trophy winner Doug Flutie in the mid-1980s.

Empirical evidence, however, doesn't necessarily back up the theory that athletic spending leads to academic success. A study commissioned by the National Collegiate Athletic Association in 2003 found no relationship — positive or negative — between increased spending on big sports and incoming SAT scores. However, the study's authors admit that with only eight years of data, the period could have been too short to see the relationship. Most surprising of all, the study found no link between increased athletic spending on marquee sports and alumni giving, either to sports programs or to the university itself. (As Notre Dame alumni might tell you, the link between winning and giving — not part of the study — is likely a lot stronger.)

But it appears difficult to spend your way to victory on the athletic field. The same study found no statistical relationship between changes in operating expenditures on football and changes in winning percentages between 1993 and 2001. One possible explanation for this is that as long as everyone is increasing spending, the status quo is maintained. But the evidence shows that schools will have a hard time achieving academic success by spending their way to it on the sports fields. — J.McC.




CFO Publishing Corporation 2009. All rights reserved.