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January-February 2011

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A Game Change: Paying for Big-Time College Sports

College presidents often think of athletics as the “front porch” of their campuses. After all, name recognition goes a long way when attracting students, right? And a winning football team doesn't hurt either!

In order to generate the revenues needed to build both and support a winning football team, athletics departments have historically focused on ticket sales, game programs, and advertising revenues. For a long time, an annual incremental increase was all that was needed to keep up with the rising costs of salaries and scholarships.

But as athletic departments began to increase coaching salaries and replace, repair, and update aging stadiums with ones designed to deliver more revenues and a better fan experience, budgets have been seriously stressed. The pressure has been on to generate new revenue streams. This article will describe why that pressure has become so intense and trace those streams back to their origins in order to determine who pays for college sports — and at what cost.

The Big Ten

Leading the way in the last decade in generating new revenue for cash-strapped campuses has been the Big Ten Conference, which in August 2007 launched a cable television venture called the “Big Ten Network.” Despite the fact that the Conference's football dominance has lagged behind that of the Southeastern Conference and the Big 12, the Network recently announced that it had turned a profit in the second quarter of 2009, less than two years later. And no wonder: The network is now seen in nearly 90 million homes and recently struck a deal to allow international fans to log on and watch their favorite schools and teams compete.

The recruiting advantages of such exposure are obvious: Coaches can say to their recruits, “Come to the Big Ten, where your family can watch you play on television.” No other conference has yet provided this sort of spotlight for all its teams.

But the main motive is financial. Despite a very public battle involving the Network, Comcast, and Time Warner in 2007–8, the media, conference commissioners, and coaches hail the new venture as one of the most innovative ideas ever in collegiate athletics, in large part because it provides a revenue stream of almost $9 million dollars per year to each member. All told, the Big Ten Conference members stand to reap a minimum of $2.8 billion over the next 20 years. Other conferences, feeling pressure from their schools to create this type of exposure for their teams, are scrambling to negotiate similar arrangements. But because of the timing of their existing arrangements, those deals are several years off.

Meanwhile, the Big Ten Conference announced in December 2009 that it would spend the next 12 to18 months reviewing the possibility of expanding its membership. If the Big Ten eventually grows to 16 teams, as some are predicting, the additional revenue generated annually from the three different media platforms (cable, broadband, and mobile) will enable the new members to earn the same as the current members do, although possibly not right away.

The announcement sent shockwaves through the college sports fraternity; cash-strapped athletics departments are chasing after the millions of new dollars that are on the table. Which team would they choose? Which would leave their current conferences? Rutgers? Missouri? Texas? Maryland? Nebraska? Notre Dame? And what would happen to the other athletic conferences if the dominoes continue to fall? Which would survive? Which wouldn't?

By mid-summer, the answers became clear. Nebraska joined the Big Ten Conference as its 12th member, and fellow Big 12 members Colorado and Utah joined the Pacific 10 Conference. The Big 12 Conference nearly imploded over the course of one weekend, as it lost two schools (Nebraska and Colorado) and almost lost four more (Texas, Oklahoma, Oklahoma State, and Texas A&M nearly left for the Pacific 10 Conference).

Winners and Losers

College sports, as played by the top universities, have entered an entirely new era. Television is willing to pay substantial sums for lucrative marquee match-ups each week. The Universities of Texas and Notre Dame just signed to play each other for four consecutive years—imagine the television ratings for those games! Next we may find ourselves with a “super-conference,” where four national conferences of 16 teams each will dominate the media and the revenues.

This creates a dilemma for the next group of 70–90 schools. How should they respond? One possible move would be to stop participating in Division I sports and redesign their programs to meet the needs of students. But there are signs that instead, most have ramped up their efforts to join the winners' circle.

What are those signs? The most obvious one is the accelerated spending rate in athletics. It has been rising, according to the Knight Commission, at a rate of two to three times that of the other areas in higher education.

The second warning sign is runaway coaching salaries. The belief that, in order to win, an institution must hire a “name” coach is pervasive in the mid-majors. One only has to look at Rutgers, which, in trying to elevate its national profile, has spent over $2 million dollars annually on head coach Greg Schiano's salary and in 2008 added $250,000 to it from an outside source without disclosing the supplement to the general public. That salary, coupled with a $102 million stadium renovation, makes Rutgers a clear example of the arms-race mentality that exists in college athletics.

A third warning sign is the updating or replacement of athletic facilities. An expensive proposition under any circumstance, it is particularly problematic during the current recession, when faculty are being asked to take furloughs, teach larger classes, and absorb cutbacks in their research assistance while students are struggling with rising tuitions and student-loan debt loads. A case in point is the University of California at Berkeley. The San Francisco Chronicle reported that the Cal football team would relocate to AT&T Park in 2010–2011 while their on-campus stadium is retrofitted and renovated to “21st-century standards.” The cost? $321 million.

Motivations

Many of today's athletic conference affiliations, traditional rivalries, and post-season bowl games began in the 1920s and 30s. While the names of some conferences have evolved, the basic premise has not: Large schools want to play against other large schools that they see as members of an aspirational peer group. Are they as good as or better than we are academically? Do we increase our prestige by aligning ourselves with them?

A college's leadership team's desire to raise an institution's profile has much to do with this. “Mission creep”—becoming increasingly like institutions that are higher in status—has touched intercollegiate athletics. No longer is Division I made up of large universities only; today, smaller campuses of less than 5,000 students have joined it. Dartmouth, Lehigh, and Saint Joseph's University in Philadelphia are a few of the institutions that have done so.

Presbyterian College in South Carolina is a case in point. The college, with just over 1,200 students, has recently completed its transition to full membership in Division I. The athletics program's mission statement says in part, “The mission of the Presbyterian College Department of Athletics is to serve the College by producing winning teams for all sports.” However, a quick survey of their team results during the transition to Division I reveals 16 varsity programs, most with losing records, trying to compete against other small to mid-sized Division I programs. The college's men's basketball team members did receive national attention—not for their winning record but for being “road warriors”; in 2008, they played 25 away games.

The obvious question is, then, if its teams aren't winning, why did Presbyterian College decide to move to NCAA Division I athletics? The answer: because their peers were already there. Wofford, Elon, and Gardner-Webb were recruiting from the same high schools as Presbyterian, and the college's coaches believed they were losing recruits to those schools because of the prestige of Division I athletics.

Ticker Envy

One of the places that such prestige is established with the general public is on television. Twenty-five years ago, ESPN television and other channels showing sports began to run a “crawl” that updated sports scores along the bottom of the screen. The big-time schools (Ohio State, University of Southern California, Oklahoma, and Penn State) joined the professional leagues (NFL, NBA, MLB and NHL) in having their in-game and post-game results posted in real time. Quickly, the average fan came to believe that those were the only scores that mattered.

If the most efficient way to get people to know about your college or university is by getting on the ticker at the bottom of the screen and you have to be in Division I to get on the ticker, then many schools will want to move to Division I. In fact, so many have applied for re-classification from Division II to Division I that the NCAA has implemented a four-year moratorium for new Division I members. According to USA Today, the new membership re-classification fee for schools that join Division I when the moratorium is lifted may approach $1.3 million.

Like Presbyterian, many schools want to be in Division I to raise their profiles. ESPN and other regional and national sports channels determine what schools are worthy of that honor based on television ratings: The higher the ratings, the more likely a school will reappear on television. If you happen to be aligned with a conference that has a television arrangement and you are contractually guaranteed so many appearances, though, your scores will be on the ticker even if your games aren't broadcast.

Who Pays, and How Much?

Conventional wisdom is that athletics departments function like other auxiliary units on campus: as self-sustaining enterprises. But for many schools, institutional support means the difference between having an athletics program or not. When USA Today examined the 119 Football Bowl Subdivision athletic programs in 2010, the newspaper found that, on average, 60 percent of their income came from the universities' general fund and/or student fees. Subsidies for big-time athletics collectively totaled $800 million in 2009, up 20 percent from four years previously.

Matthew Denhart and Richard Vedder, from the Center for College Affordability, published a study in 2010 analyzing the accelerating cost of the arms race. They found a substantial disparity between Division 1 schools in the conferences with less lucrative media deals (Conference USA, the Sunbelt Conference, the Mid American Conference), and the Mountain West Conference and those in the conferences with more lucrative ones (the Big 10, the Big 12, the Southeastern Conference, the Pacific 10, the Atlantic Coast Conference, and the Big East) when using institutional funds to subsidize athletics. By and large, the former are taxing their already-overburdened students more than the latter.

To show in sharp detail the challenges facing schools that are trying to keep pace, the Center authors determined the ratio between a school's total subsidy to athletics and its FTE students by conference (see Table 1).

Table: Table 1. The Athletics Tax, 2004–05 and 2008–09


2004–05

2008–09

Growth

Subsidy per FTE

$395

$506

28.1%

Subsidy as a % of tuition revenue

7.48%

8.33%

11.4%

Source: College Athletics Finance Database, IPEDS Data Center, Denhart and Vedder
 

The “tax” at institutions from the Conference USA, the Sunbelt Conference, the Mid-American Conference, and the Mountain West Conference is nearly 14 to 17 percent of students' total bills, as compared to 4 percent at schools in the other conferences (see Figure 1).

One way that these subsidies can fly under the radar is by being incorporated into student fees rather than tuition. For years, student fees have been used to supplement technology, student activities, and laboratory costs. But in recent years, athletics departments have been going to student government associations to ask for contributions ranging from a few thousand dollars to hundreds of thousands of dollars annually. According to the Center for College Affordability, between 2004–2005 and 2008–2009, the average athletics fee a full-time student is assessed has increased 28 percent.

Such fees are rarely itemized on “cost of attendance” Webpages; ask most college students how much of their fees go towards the athletics department, and they will probably answer with a shrug. And legislators, whose political antennae quiver at growth in tuition, are less likely to track increases in fees. At Longwood University in Virginia, for instance, students contributed $2,202 each to the athletics department in 2009–2010, in addition to the fees they paid for other activities.

The University of New Orleans is good example of how dependent athletic departments have become on student fees. When Hurricane Katrina hit the city in 2005, the campus was partially destroyed, and enrollment declined by 7,000 students over the next few years. Although the NCAA reduced the number of teams the university was required to have to remain a Division I program, the loss of thousands of students who each paid $100 to subsidize the athletics department was disastrous to the athletic budget.

In November 2009, Chancellor Timothy Ryan announced UNO was moving to nonscholarship Division III. When asked why, he said,

We have to compete with the big guys and very few can. We have 12,000 students paying fees to support 150 student athletes and that's just out of whack. With the way the state of Louisiana funds this University, we just can't afford to keep up with the Joneses.

Chancellor Ryan was publically criticized by the former athletics director and the sports media for taking what they considered the easy way out. They felt he should have somehow found more money to keep the athletics program in Division I.

In setting fees, today's students are making decisions about spending not just for themselves but for the next generation of students. The University of Minnesota student government committee, for instance, agreed to tax current and future classes $25 per semester to build a $221 million football stadium on campus. Historically, Minnesota has had trouble attracting students to games; most observers believed it was because the team played in a municipal stadium located a mile from campus. But students abandoned going to the games in droves once the Golden Gophers began losing midway through their first season in their new stadium. It remains to be seen how many students will buy season tickets in 2011 and beyond.

Coaches' Salaries

What really stirs the ire of athletics reformers when it comes to big-time athletics are coaching salaries. Some presidents and athletic directors argue that head football and head men's basketball coaches are running multi-million-dollar organizations and thus deserve their $1 to 4 million annual salaries. Others say that the need to pay what the marketplace will bear is the reality of competing in Division I.

But Big Ten Conference Commissioner Jim Delany makes the point that talk radio, blogs, and the ESPN Sports Center create an artificial market that presidents and athletic directors feel they must respond to only because their donors, alumni, and other stakeholders do. Each week, win or lose, fans weigh in on the contract status of the head coach. If the coach has a terrible season, the pressure builds to fire him. If he has a great season, the pressure is on to sign him to an extension, whatever the cost.

Rather than operating in an environment where contracts are reviewed at or near the end of their terms, contracts are now renegotiated almost annually. Early termination of coaches has become so common that it is not unusual to have two full staffs (the old one and the new one) on the payroll for months at a time.

Academic Funding and Athletics

The funding crisis in California has prompted several University of California faculty members to go public with their belief that the UC system administration is more interested in pleasing its bond raters than in keeping class sizes manageable, supporting research, and limiting layoffs. One of the most vocal faculty members—Bob Samuels, president of the University Council–American Federation of Teachers and a lecturer at UCLA—wrote a column for The Huffington Post in which he pointed out that a combination of reduced state funding and poor portfolio performance has required the university to refinance its current and future debt at the lowest possible interest rates.

In setting the interest rates for debt, rating services take into consideration profit centers such as hospitals, government-funded research grants, and successful Division I football programs. Moody's Investors Services produced a report in 2007 about the long-term credit (and interest-rate) benefits of an intercollegiate athletics program that generates substantial revenues.

Moody's notes that a “carefully managed, successful intercollegiate Division I athletics program can have a positive credit impact on a university.” One measure of a “carefully managed program” is financial self-sustainability, an unlikely feat for nearly all Division I programs. Even the vaunted University of Oregon's athletics program cannot meet the strictest definition of self-sufficiency; The Oregonian recently reported that the academic support services used by the Ducks had been financed from the university's general fund since 2001.

But it takes money to raise money—money for salaries, scholarships, facilities, and infrastructure to enable a university to mount a Division I team. The facilities and infrastructure can be financed through long-term debt at a percentage determined by credit raters. [Editor's note: for a discussion of debt markets, see Kent Chabotar's article in the July/August 2010 issue of Change.] And universities with access to millions of dollars of federal research grants can use that income to lower their interest rates, which allows them to borrow in order to build luxurious athletic facilities.

However, among other conclusions, Moody's points out in its summary opinion that

athletic success can create negative publicity surrounding the large investments and high coaching salaries required to maintain such programs. These investments typically do not lead to other benefits, such as attracting faculty or research funding, which are core components of a university's mission and financial planning.

In this context, it is interesting to see that the faculty at Berkeley, in light of the current fiscal crisis, passed a resolution recommending that the university stop subsidizing the athletics program. And the chancellor responded by eliminating four varsity teams. Universities have to be mindful of borrowing to build athletics programs and facilities at the expense of faculty development and research, or they risk losing a commitment to their core mission.

Conclusions

A few short years ago, playing a 12th football game solved the answer to the financial problems of many intercollegiate athletics programs. But since the 12th game became mandatory in 2006, the Knight Commission found that only one additional football program has finished in the black. During that same period of time, the average salary of a head football coach increased 46 percent.

Where we are headed is clear: television revenues designated for those deemed marketable by media companies, student fees increasingly being used to subsidize debt-ridden programs, exorbitant coaches' salaries, and colleges' leveraging their current income streams to incur new debt on athletics facilities.

Who can change this course? Presidents can (and probably will) make cuts around the margins (reducing contests, dropping non-revenue sports, cutting positions), but they are swept up in the larger competition (with some exceptions: Northeastern recently eliminated its football team—and, interestingly, reports no drops but instead increases in numbers of student applications and donors.) And the NCAA, often criticized by the media for its perceived impotence on financial issues, lacks the executive power to implement rules if the membership has shown little to no interest in following them.

The Center for College Affordability calls for states to legislate how much of the state allocation can be directed to athletics, recommending a 5 percent cap. But the argument from athletics directors and coaches is likely to be, “How can we compete against private schools that don't have this restriction?” And what if some states choose to impose such a cap while others lack the political will to do so? Such issues cannot be addressed state by state.

What is left is to ask the federal government for regulation under the Sherman Anti-Trust Act. The Act is invoked when business consolidation no longer allows for a fair and competitive marketplace. Like the corporate mergers that have resulted in just five or six international companies that control the entertainment and media world, if left to its own devices, college sports will soon consist of 40 or so “haves” and 90 or so “have-nots,” with a handful of schools fighting for a title that it would be a stretch to call a national championship. The remaining schools will be left far behind, removed from the national stage.

Alfred Mathewson, law professor at the University of New Mexico, has written an extensive analysis of how the Sherman Anti-Trust Act might apply to intercollegiate athletics. The federal government, having granted colleges and universities substantial tax benefits and resources in the forms of financial aid and research grants, already exercises broad authority over higher education via the Higher Education Act and Department of Education regulations. A quid pro quo of more regulation might be contested, but it would not be unprecedented.

Indeed, intercollegiate athletics has already been substantially affected by federal law: The Equity in Athletics Disclosure Act, the Americans with Disability Act of 1990, and Title VI and Title IX of the 1964 Civil Rights Act have produced positive social changes by regulating athletics. Title IX (1972), which requires schools that receive any federal funding to treat male and female athletes equitably, has had the most impact in regulating how funds are raised and spent in intercollegiate athletics.

Mathewson has taken that idea one step further, suggesting that a “commercial” conference structure and an “educational” conference structure be established. The federal government having defined the rules and regulations for intercollegiate athletics under those two constructs, colleges and universities could choose to operate within the conference most appropriate to them—just as, to some degree, they currently cede some of their autonomy to their conferences. Even though this would entail reorganization within the current NCAA structure, it might help control spending by the all-but-a-handful of institutions that cannot afford to compete in Division I and steer them towards providing an athletic experience compatible with their academic missions.

America has been justifiably proud of its higher education system for a long time. But the athletics arms race has the potential to do serious damage to that system if left unchecked. The Knight Commission on Intercollegiate Athletics has rung the bell loudly on three different occasions, saying the college sports business model is not sustainable in today's economy, but it is powerless to create change by itself. Revisiting the antitrust exemption for college athletics could be the first step towards creating some fiscal sanity in this area of higher education.

Resources

1. Art and Science Group, LLC. (October 2009) Knight Commission on intercollegiate athletics: Quantitative and qualitative research with football bowl subdivision university presidents on the costs and financing of intercollegiate athletics: Report of findings and implications, Knight Commission on Intercollegiate Athletics., Washington, DC.

2. Asher, M. and Tuby, K. (July 2007) Intercollegiate athletics programs: A winning or losing game?, Moody's Investor Services Special Comment Report., New York, NY.

3. Assimov, N. (July 13 2010) UC Berkeley urged to slash athletics subsidy, Chronicle., San Francisco.

4. Bachman, R. (October 7 2010) Oregon athletic department uses state money for academic needs despite claims of self-sufficiency, Retrieved from http://blog.oregonlive.com/behindducksbeat/2010/10/oregon_athletic_department_use.htmlThe Oregonian

5. Brackin, D. (June 20 2007) Ticket sales alone should recoup costs for U buyouts: The $5 million price tag to remove Glen Mason and Dan Monson could be paid off within three years.. Minneapolis Star-Tribune,

6. Carey, J. (May 12 2009) Knight Commission told restraint in college spending must start at top, Retrieved from http://www.usatoday.com/sports/college/2009–05-12-knight-commission_N.htmUSA Today

7. Crumpacher, J. (May 11 2010) Cal football to temp at AT&T Park. San Francisco Chronicle, Retrieved from http://articles.sfgate.com/2010–05-11/sports/20892965_1_baer-football-program-giants

8. Denhart, M. and Vedder, R. (March 2010) Intercollegiate athletics subsidies: A regressive tax, The Center for College Affordability., Washington, DC.

9. Faraudo, J. (October 7 2010) Baseball rally on Saturday to protest Cal's budget cuts, Retrieved from http://www.insidebayarea.com/cal-bears/ci_16272526Contra Costa Times

10. Fulks, D. (August 2010) NCAA revenues / expenses Division I report • 2004 – 2009, NCAA., Indianapolis, IN. Retrieved from http://www.ncaapublications.com/productdownloads/REV_EXP_2010.pdf

11. Gillum, J. (April 12 2010) Schools raising fees to keep up with the cost of college sports, Retrieved from http://www.usatoday.com/sports/college/2010–04-01-college-sports-subsidies_N.htmUSA Today

12. Kirwan, W. and Turner, R. G. (December 19 2009) Playoffs not the answer to college football's financial crisis, Washington Post

13. Kirwan, W. and Turner, R. G. (September/October 2010) Changing the game: Athletics spending in an academic context. Trusteeship Magazine 18:5, Retrieved from http://agb.org/trusteeship/2010/9

14. Lombardi, J. V. (2007) Taxing the sports factory, Retrieved from http://www.insidehighered.com/blogs/reality_check/taxing_the_sports_factoryInside Higher Education, October 1

15. Margolin, J. (July 22 2008) Rutgers reveals more secret football deals with Greg Schiano, Retrieved from http://www.nj.com/news/index.ssf/2008/07/rutgers_reveals_more_secret_de.htmlNewark Star Ledger

16. Matthewson, A. D. (2007) By education or commerce: The legal basis for the Federal regulation of the economic structure of intercollegiate athletics. UMKC Law Review 598, pp. 763.

17. Samuel, B. (January 28 2010) How America's universities became hedge funds, Retrieved from http://www.huffingtonpost.com/bob-samuels/how-americas-universities_b_440954.html

18. Schlabach, M. (July 13 2009) Programs struggle to balance budget, Retrieved from http://sports.espn.go.com/ncaa/columns/story?columnist=schlabach_mark&id=4314195ESPN

19. Springer, S. (October 4 2010) Yes, there's life after football: Northeastern, thriving without it, seen as a model by some schools, Retrieved from http://www.boston.com/sports/colleges/football/articles/2010/10/03/yes_theres_life_after_football/Boston Globe

20. Staples, A. (August 4 2009) Gap growing ever wider between college sports' haves, have-nots, Retrieved from http://sportsillustrated.cnn.com/2009/writers/andy_staples/07/31/college-economy/index.htmlSports Illustrated

21. Upton, J. and Gillum, J. (September 21 2010) USA Today database: What NCAA schools spend on athletics, Retrieved from http://www.usatoday.com/sports/college/2010–09-21-student-fees-boost-college-sports_N.htmUSA Today

22. Weiberg, S. (August 13 2009) Moving up to Division I may get pricey, Retrieved from http://www.usatoday.com/sports/college/other/2009–08-12-Notes_N.htmUSA Today

23. Wolverton, B. (May 21 2009) Commercialization in college sports may have ‘crossed the line’, report says.. Chronicle of Higher Education, Retrieved from http://chronicle.com/article/Commercialization-in-College/47265

Karen Weaver is the director of athletics, intramurals, and recreation at Penn State Abington. She began this position, her third directorship, in 2006. Previously, she served as an associate athletics director at the University of Minnesota. She was the broadcast announcer and assistant producer for men's and women's field hockey at the 1996 Centennial Olympic Games in Atlanta, Georgia, and is currently working with the Big Ten Network as a color analyst.

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