The Al Franken Show (which was broadcast on Air America) would have a game show each Friday called “Wait! Wait! Don’t Lie to Me.” Hosted by both Al Franken and Salon.com columnist Joe Conason, the game consisted of a statement being played for a caller. The caller then had to decide if the person making the statement was telling the truth, telling a lie, or telling a weasel. A weasel is a statement that’s technically true, but would lead a person to believe something that wasn’t true.
On Monday, Myles Brand – president of the NCAA – was quoted as follows in an article written by Tom Coyne of the Associated Press.
Only six Division I athletic departments have shown a profit during the past six years, Brand said.
In the spirit of the Al Franken show – which I certainly miss – let’s ask the question: Is this statement from Brand the truth, a lie, or a weasel?
The Economics and Accounting of College Sports
Let’s start the answer with a bit of perspective on basic economics and Division I athletics. Profit is revenue minus costs. On the revenue side, Andrew Zimbalist reported that from 1960 to 1981 revenue of the top 150 institutions in intercollegiate sports grew by annual rate of 8%. From 1982 to 1997, the annual rate was 8.7%. So the revenue picture looks pretty bright in college sports.
On the cost side, college athletics has a huge advantage. The workers who generate the revenue – the student-athletes – do not receive a salary. And it’s not entirely clear what the true cost is for the aid the schools give the athletes.
Robert Sandy, an economist at Indiana University Purdue University Indianapolis (IUPUI) noted in the Handbook on the Economics of Sports the following: “…accounting studies generally treat the main cost of an athletics program, the grants-in-aid to athletes, as costing the colleges the full price of tuition and room and board. The treatment is absurd except in a handful of highly selective colleges such as Stanford University or the University of Notre Dame that have a queue of qualified applicants who would be willing to pay the list price for tuition and room and board. The vast majority of colleges have excess capacity and no such queue.”
Sandy goes on to cite Brian Goff, an economist at Western Kentucky. In reference to the accounting studies that claim college athletics are not profitable, Goff raises the following points. First, when you look at the various revenue streams coming into Division I programs (gate, broadcasting, etc…), it looks like many high-profile college programs are earning revenues similar to those earned by mid-level professional sports teams. The money spent on college athletes, even if you allowed universities to count the full value of the grants-in-aid package, results in a “payroll” of only about $12 million. Such a “payroll” is far less than what professional sports teams in baseball, football, basketball, and hockey pay their players.
Given that no one argues that professional sports teams are losing money in the long-run, Sandy notes that “Goff concludes that claims that even the highest-revenue college sports programs lose money consistently are dubious. He argues that it requires creative accounting to make it appear that high-profile college programs lose money and that moreover, an accurate accounting would show that the vast majority of Division I programs make money.”
The problem lies in the phrase “accurate accounting.” Sandy notes that the Big Ten conference – in an effort to contain rising spending – asked their financial officers to share financial data so that a common method could be determined to measure costs. Unfortunately the financial officers found it “impossible to reconcile their different accounting systems.” Sandy also cites another study commissioned by the NCAA that examined financial data from 17 colleges. Again, the data could not be reconciled.
The Movement to Division I
Sandy, along with Peter Sloane, wrote “Why Do U.S. Colleges Have Sports Programs?” for the Economics of College Sports. In this chapter was a study examining the benefit of a college or university moving into Division I. The authors, in the conclusion to the study, stated “The results raise some interesting questions. One is that if they are true, why don’t all colleges that can possibly beg or borrow the money start Division I-A programs? One response is that they are doing that. It is difficult if not impossible to jump many steps in the sports affiliation ladder at the same time, but the 109 net increases in affiliation level from 1991 to 1999 suggest that colleges are charging up the ladder at a rapid pace.”
As Sandy and Sloan note, colleges and universities are trying to move into Division I (including Cal-State Bakersfield). If all these programs were losing money, wouldn’t we expect the migration trend to be the opposite?
Answering the Question
It certainly is possible that what Brand says is technically true. The accounting data from the NCAA Division I athletic programs might consistently show that these programs lose money. But when we consider the revenue and costs streams of these programs, the accounting practices of the universities, and the rush of programs to move up the affiliation ladder, it’s hard to conclude that Brand’s statement gives you an honest picture of the financial health of Division I athletics. In other words, I think Brand’s statement is a perfect example of a “weasel.”
Perspective from Baseball History
I think it’s important to spend just a moment asking why Brand feels it’s necessary to claim Division I athletics is losing money. Baseball established free agency in 1976. Prior to free agency, players were bound to each team by the reserve clause. Studies have shown that this clause resulted in players being paid less than the value the player created for their respective teams. Despite this favorable labor arrangement, though, baseball teams – since the 19th century –claimed to be losing money.
Let’s imagine, though, that the opposite was claimed. Let’s imagine that baseball for 100 years both restricted the pay to its players and claimed to be making a substantial profit. How long do you think it would take players to start questioning their compensation levels in such an environment?
College athletics is very much like baseball before 1976. Research has shown that athletes in football and basketball are being paid a wage less than the value that is created for the schools. Given this circumstance, schools have to claim – despite the levels of attendance and the revenue from national television contracts – that Division I athletics loses money. To claim otherwise would lead many people – and not just economists – to ask why the reverse Robin Hood effect , where universities take money from impoverished athletes and give it to rich coaches and other employees of the university, is allowed to continue.
– DJ
The research I am cited can be found in the following works:
Economics of College Sports; eds. John Fizel and Rodney Fort; Praeger Publishers (2004).
Mike
August 24, 2007
It seems like you’re saying that college athletes should be paid the value that they bring to their school.
If I’m a Rhodes Scholar, or some other academic prize-winner, should I get paid by my college as well? Or if I hosted the biggest party on campus, which became legendary due to some youtube viral video, and caused a 3% increase in applications the next year because so many people wanted to be at this party school… should I get paid for that as well? How much?
ASG
August 24, 2007
Mike, no, but if your school begins an institutionalized effort to bring in students experienced in party-planning in order to attract more people to their campus, and yet pays those party planners nothing despite that all of their costs are out-of-pocket? Does the picture begin to look a little bit more dubious?
Of course, you also invite the question of the value of receiving an education in return for athletic services. That degree can make them quite a bit more money in the future. The problem is that so many athletes (except at a few elite schools) are brought onto a campus, play sports for a few years, and then graduate without much of an idea of what to do next.
mrparker
August 24, 2007
My major problem with the NCAA system is the
fact that these kids are not payed in
addition to not having an opportunity to make
money while they are amatuers.
My other problem lies with whoever the
accountants for the NCAA are.
Here’s a hint: If the IRS does not collect
taxes from the players on their compensation
then the compensation has no monetary value.
The guy who caught Bonds’ 756 needed to
sell his ball immediately to pay the taxes
he owed on his new “500k”. However, I don’t
think the IRS will be collecting on the
200k that Brady Quinn was “paid” by Notre
Dame.
Jason
August 24, 2007
The accounting is difficult indeed. It’s clear that for many DivI-A basketball and Football (and to some extend baseball) players, the value of the degree is nil if there is no plans to actually finish the degree. The athletic departments do gain considerably from high profile athletic talen, though I’d add that for the highest profile talent, there *is* compensation beyond the room and board and ‘education’. A player at USC or Notre Dame or any other athletic powerhouse receives exposure, has had a professional publicity department raise awareness of the athlete, enhances their draft position and consequently, their future earnings.
Richard
August 24, 2007
A big piece of this story is sports induced donations to general university endowments. Elite schools don’t rely on sports to spark this revenue stream but it appears important to many of the public universities. Have there been studies of otherwise considered equal quality universities with different levels of sports emphasis and sports success and attempts to measure impact of this difference on endowment giving?
Richard
August 24, 2007
There are some jobs in a local market where former college athletes can do ok even without a college degree. The visibility and positive vibes can be a leg up in some sales positions.
Richard
August 24, 2007
An endowment study would have to address not just program quality but differences in income of the regional market and level of high status seeking students from out of market.
Westy
August 24, 2007
It should be noted that as far as NCAA athletic departments turning a profit; if they operated independently most men’s major sports programs would be profitable. There is a substantial cost in supporting non-revenue generating sports programs, which includes programs that serve the purpose of meeting Title IX requirements.
mrparker
August 24, 2007
good point westy…that wasn’t brought up
before
MT
August 24, 2007
Those recruiting budgets must be killing them!
Seriously now, I understand that seats in college stadiums may not be not priced as professional seats would be. But even so, it is hard to imagine how a bunch of field hockey and fencing squads, etc. could cost so much as to drain the entire cash flow generated by major men’s sports. It could be nice to see a full set of numbers for even one school. I imagine for state schools one could find out some more disclosure than for private.
I could also imagine there might be an incentive to overstate the money spent on Title IX programs since more women than men attend college.
It would also be ironic if Div II or III programs were more profitable…
But, if Brand’s statement were true, I do believe more colleges should reduce their Divison I sports!
dberri
August 24, 2007
MT,
I think if Brand’s numbers were true then you would have to see more college reducing Division I sports. But they don’t. It is just not believable that you could have a business with such a favorable labor arrangement that cannot turn a profit.
Unfortunately,as the research I cite indicates, getting accounting data that can be analyzed is very, very difficult.
MJB
August 25, 2007
A key point that you didn’t mention – and one I’d love to see you develop further – is the fact that the NCAA and its institutions receive tax-exemptions. Thus, coupled with “slave labor”, the NCAA benefits dramatically from claiming to not have profited from the athletic enterprise.
andy zimbalist
August 25, 2007
Dave, there are a variety of issues in the finances of college sports that you seems to obscure in your
comments. While it is true that the opportunity cost of housing and feeding many players at schools with excess capacity is below the tuition, room and board, it is also true that the numbers of players affected by this vary considerably from school to school (it is not just Stanford vs. the world.) Also, let us once and for all clarify the debate so that we are comparing apples and apples. Brand is talking about entire athletic programs, ie, 15 to 30 teams, Goff is talking about the football team, and
gcaprio
October 19, 2007
VERY interesting article in WSJ today about OSU:
http://online.wsj.com/article/SB119275242417864220.html?mod=hpp_us_editors_picks
Includes this quote:
“Ohio State was one of just 19 schools to turn a profit on athletics in 2006, according to data collected by the NCAA. OSU says its athletic department is self-sufficient — it uses sports revenues to pay for its teams and operations”
– Griffin