Can college athletics continue to spend like this? – USA TODAY
Bubble, in a sports context, typically refers to college basketball teams with middling résumés, or perhaps the sort of gum that comes with trading cards. Economist Andrew Zimbalist suggests college sports may be facing a bubble of a different sort, the kind that goes — pop!
Total revenue for the 50 public schools in the Power Five conferences rose by $304 million in 2015, but spending rose by $332 million from the year before, according to a USA TODAY Sports analysis of financial information that schools annually report to the NCAA. At the 178 public schools in Division I conferences outside the Power Five, revenue increased by $199 million, but spending rose by $218 million.Revenues in college sports are rising, and have been for decades, thanks largely to TV rights fees for football and men’s basketball. But expenses are rising even more: Athletics departments typically spend more money than they generate. By the NCAA’s reckoning, fewer than two dozen public schools can cover their annual operating expenses without money from university coffers, government sources or student fees.
(Louisville and Rutgers are removed from the computations because they moved to Power Five conferences during the time frame. The analysis is based on documents acquired in conjunction with the Sports Capital Journalism Program at Indiana University-Purdue University Indianapolis and the Grady Sports Media Program at the University of Georgia.)
Zimbalist says this kind of spending is not sustainable, and he thinks litigation of some stripe — courts deciding players can be paid beyond their scholarships, for instance — could cause the bubble to burst. Among the other potential wildcards are an ongoing lawsuit pertaining to athlete compensation limits that seeks hundreds of millions in damages, concussion lawsuits, or a change in the National Labor Relations Board’s position on college athletes unionizing.
“There are big-time things leading it to pop,” says Zimbalist, a professor of economics at Smith College and author of Unpaid Professionals: Commercialization and Conflict in Big-Time College Sports. “It’s an unstable situation.”
Jeffrey Orleans, an attorney who specializes in higher education law with a focus on athletics governance and administration, says it’s a bit like the killer asteroid theory: Something could fall from the sky and blow up college sports’ economic model.
“There’s so much out there that it’s hard to feel comfortable,” he says. “On the other hand, it could be like the Cold War. For 50 years we had all kinds of ways the world could have blown to hell, and somehow we survived it.”
NCAA president Mark Emmert says the very fact that so few athletics programs are self-sufficient demonstrates their worth in terms of building community and providing opportunity.
“A very small number of the 1,100 (NCAA members) have a positive cash flow on college sports, so those schools are making a decision that having a successful athletic program is valuable to them despite the fact they have to subsidize it with institutional money,” Emmert says. “The same thing is true for a lot of academic programs. So every school has to sit down and say, ‘What is this worth to us?’ ”
Kansas State president Kirk Schulz, chair of the NCAA board of governors, believes the bubble metaphor is overwrought.
“I’ve heard that now for the last 20 years and I don’t want to be skeptical and say nothing like that could happen that would ever change the direction of intercollegiate sports,” Schulz says. But he compares it to predictions of a bubble in higher education where prospective students would one day decide that degrees for ever-higher tuition just aren’t worth it anymore.
COLLEGE BASKETBALL: Coaches’ salaries
“And guess what? We all have record numbers of people who want to come and pay these tuition rates and get these degrees from our institutions,” Schulz says. “So I’m a little skeptical about the gloom and doom of a bubble that’s going to burst and everything is going to go south.”
Even so, Schulz agrees that athletics departments cannot continue to outspend revenue indefinitely. He blames the building of more and more buildings.
“I worry that we put ourselves in this mode where whatever we have right now is not good enough,” he says. “We’ve always got to build something bigger and better with more school colors and more logos. And I don’t think it is sustainable.”
Will TV revenue continue to rise?
Schools’ figures for the 2014-15 fiscal year were affected by changes in the methodology they are supposed to follow in compiling certain revenues and expenses for the NCAA. Among the Power Five conferences, the revenue increase was driven in part by an influx of bowl money from the inaugural College Football Playoff and the SEC Network’s debut. The amounts generated by those enterprises are likely to keep rising, but not nearly as sharply as they did in 2015.
Meanwhile, the expanding expense side of the ledger will be under additional pressure from scholarships based on the cost of attendance, which didn’t begin hitting athletics department budgets until the beginning of fiscal 2016.
Still, A.J. Maestas thinks an elite portion of the Power Five schools will continue to do quite well because their revenues have room to rise even more. He is president and founder of Navigate, a firm that measures marketing investments in sports and entertainment.
“If you take a look at affinity, passion, ratings and licensing — all the metrics that would be highly correlated with revenue — and you picture a bar chart that compares the NBA to college basketball and the NFL to college football, the college versions would be below the pro versions, but not by nearly as much as people might think,” Maestas says. “But if you look at revenue, it is radically below.”
Matt Balvanz, Navigate’s vice president of analytics, says the firm is projecting the NCAA’s top 25 athletics programs can expect revenue to grow by 116% in the next 10 years. By contrast, the firm predicts revenue growth of 63% in the NFL and NBA, 55% in the NHL and 48% in Major League Baseball.
But how will TV revenue keep going up in a world where cord-cutters are leaving cable TV and cord-shavers are opting out of high-priced sports channels where they can?
“No matter how tough things are at ESPN right now, nobody ever cuts their way to greatness,” Maestas says. “We see signs that consumers are willing to pay … for premium content, and college football is premium content.”
Neal Pilson is a former president of CBS Sports and founder and president of a consulting company specializing in sports television, media and marketing. He says skeptics “have been predicting a bubble in TV rights” since the mid-1980s — and he should know. He was one of them.
“The (then) president of CBS Sports, to whom you are speaking, predicted rights fees would go down because there just wasn’t enough business to support the rights fees we were paying,” Pilson says. “He was wrong, obviously. Shortly after, he and his network paid $1 billion for the NCAA tournament. And everything has progressed in one direction since then.”
The progression took another leap forward last week, when CBS Sports and Turner paid $8.8 billion for an additional eight years of the tournament, through 2032. “It tells us,” Pilson says, “that the appetite and interest in major sports properties is a fixed part of our TV sports culture.”
Pilson points out many of the conference TV rights packages are wrapped up for years, with a significant exception. The Big Ten Conference’s deals, expiring in 2017 and under negotiation now, are “going to be a bellwether, a gut check,” he says. “If there’s a bubble, we’re going to see it in the negotiations coming up.”
Bearable for Bearcats
Navigate’s projections of high revenue growth are only for the top 25 programs. What about everybody else, particularly those schools outside the Power Five?
“It’s going to be a challenge, obviously, with costs increasing if you are not in that top tier,” Balvanz says. “It’s going to be really tough to find those trigger points to maximize revenue. It’s going to force them to be more and more creative.”
On a dollar basis, Cincinnati’s athletics program is one of the most heavily subsidized at a Division I public school, receiving nearly $23.2 million from the university in 2015. But it also is being creative in cutting costs. Omar Banks, the department’s chief financial officer, says revenues are expected to decline in future years for complicated reasons having to do with the breakup of the old Big East, UC’s tenure in the American Athletic Conference and how units of revenue from the NCAA men’s basketball tournament are being distributed.
Cincinnati has instituted rules banning plane travel for non-conference games, saving “a couple hundred thousand dollars,” and capped per diems at $45, saving upwards of $75,000, he says. The department’s operating expenses rose from $25.2 million in 2005 to $59.5 million in 2013, not adjusting for inflation. Its expenses have decreased since ($55.4 million in 2014 and $51.7 million in 2015).
In 2015, USA TODAY Sports found, there were 21 public-school athletics departments that spent at least $100 million – more than double the number at that level in 2012.
“Those schools, when they amass their surpluses, they’re creating this new demand for high-priced coaches,” says Banks, president of the College Athletics Business Management Association. “They can probably weather the storm much better than we can.”
Cincinnati’s football team has made a bowl game nine times in the past 10 years, its men’s basketball team has played in the past six NCAA tournaments and its women’s soccer team won the 2015 AAC tournament. But Banks says that even with the cost cutting, if it doesn’t increase revenue from ticket sales and annual fundraising, “we could be looking at the percentage of subsidy that we receive becoming much higher.”
Orleans, a consultant to the reform-minded Knight Commission, says that’s precisely the problem: “I think the schools that are relying on all this external revenue are potentially in a fragile place. What I think is getting less attention is all the schools in Divisions II and III and some in Division I that don’t have access to all these huge revenue streams but whose costs are being driven up by the spending habits that trickle down from the top.”
Combined GDP of Serbia and Estonia
Tom McMillen, executive director of the Division 1A Athletic Directors’ Association, quibbles with the term bubble but says Zimbalist is right that court cases pose a potential threat, including two in which the plaintiffs are seeking an injunction that would lift the NCAA’s new, cost-of-attendance-based limits on athlete compensation.
“There are a lot of challenges,” McMillen says. “The millions of dollars that the conferences and the NCAA are spending defending the model are eating away at dollars that could be put to more productive use. (The athlete-compensation litigation) in particular is existential. It blows up the model of college sports. If that would ever happen, there’d be a race to Congress to get some relief.”
Some members of Congress do not look kindly on the NCAA. Rep. Charles Dent (R-Pa.) is among five members who introduced a bill that would establish a Presidential Commission on Intercollegiate Athletics, which would be required to review and analyze a variety of issues in college athletics, including its financing. The bill would also require schools to provide four-year scholarships, and offer baseline concussion testing for athletes in contact sports.
“The NCAA is simply incapable of reforming itself,” Dent says. “It’s important for us to have a serious conversation about how all these conferences are going to be able to survive in this new system” where the Power Five have more autonomy.
Over the past 11 years for which USA TODAY Sports has compiled their NCAA financial reports, public schools in Division I have spent $71.3 billion on athletics — roughly the combined GDP of Serbia and Estonia. Add in athletics spending at private schools, which don’t have to release their figures publicly, and that’s probably around $100 billion.
Zimbalist says athletics departments simply can’t keep spending so much. “Politically, it’s not sustainable,” he says. “Legally, it’s not sustainable. Economically, it’s not sustainable.”
Zimbalist says he is working to try to get the American Council on Education, a consortium of presidents, and the Association of Governing Boards of Universities and Colleges, a consortium of boards of trustees, to support Dent’s bill. He thinks presidents and boards will need to work collectively if they are to forge real change.
“I think that everybody realizes now” that change is coming, he says. “College presidents know they can’t continue financially” the way things are. “Individual presidents can’t do anything. They’ve tried in the past, and all they’ve ended up doing is getting themselves fired.”
Schulz is leaving Kansas State this year for Washington State, where athletics director Bill Moos sent a letter to donors last month acknowledging a departmental budget deficit of more than $13 million for fiscal 2015. That was its second consecutive shortfall of more than $13 million, and came even with the department receiving $6.1 million in subsidies. Moos’ letter said, “we continue to work extremely hard to maximize our existing revenue stream as well as identifying and securing innovative new ones.”
Schulz says he can’t say much about all that until he gets there and begins working on it. But he believes that college presidents are going to show more restraint on coaches’ salaries in coming years.
“I think many of us have reached the limit on what we can do on football salaries, for example,” he says. “Can a Kansas State pay a football coach $5 million a year? Probably could, but I’m not sure we’re willing to go that far. … Those are the types of constraint that are going to be there. But I see those as more of a gradual set of changes than this overnight, everybody is deciding to do something. I just don’t think that’s realistic.”
Contributing: Christopher Schnaars, Brent Schrotenboer