Wait! Wait! Don’t Lie to Me

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 19^th 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

Hat Tip to Henry Abbott of TrueHoop for noting the Coyne article and the Brand quote this past Tuesday.

The research I am cited can be found in the following works:

Handbook on the Economics of Sport edited by Wladimir Andreff and Stefan Szymanski; Edward Elgar Publishing Limited (2007).

Economics of College Sports; eds. John Fizel and Rodney Fort; Praeger Publishers (2004).

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Posted in: Sports Econ