Sportsgeekonomics

http://deadspin.com/infographic-is-your-states-highest-paid-employee-a-co-489635228

Six Major College Conferences revenue in 2011-12, per EADA: $5,184,916,365

Those same conferences in 2010-11, also per EADA: $4,882,657,118

One-year Change: $302 million.

http://sportsmediaguy.wordpress.com/2013/04/12/the-ncaa-a-change-gonna-come/

A must read: http://law.scu.edu/sportslaw/file/Drummond-speech.pdf 

I hadn’t realized it, but David Drummond’s remarks from Santa Clara Sports Law Symposium are online.  Link is above.  Go read!

http://video.msnbc.msn.com/all-in-/51399243#51399243

I’d recommend reading Dave Berri’s “How About a Free Market for College Athletes?”

(note: for some reason i though I’d posted this a while back, but I couldn’t seem to find it on the website.  So forgive the duplication, but here it is again)

Making Riches look like Rags: How NCAA-style accounting can transform a small profit into a two million-dollar loss.

In 2011, the University of Nebraska-Omaha (UNO) made the strategic decision to move from Division II sports to Division I, and in the process to abandon football and wrestling as intercollegiate sports.  The argument was that these programs were costing UNO too much, and that with the envisioned increases in expenditures, it was felt that cutting these two programs would free up money to support the other sports.  “UNO athletic director Trev Alberts said the university couldn’t afford to keep football and wrestling in its move up from Division II to join the Division I Summit League, which doesn’t sponsor the two sports.”[1]

This note focuses on the question of whether the football and wrestling programs were actual net drains of cash for the University as a whole, and looks specifically at two of the largest components of the cost of a program – direct institutional support and the cost of athletic scholarships, also known as Grants-in-Aid or GIAs.   Importantly, this is an incremental analysis – it assumes the rest of the accounting is correct, and asks whether the marginal impact of institutional support and grants-in-aid, when properly accounted for, change the bottom line.  The conclusion is that the nature of UNO’s accounting (using a system designed by the NCAA) greatly understates the revenues of the UNO program as related to students receiving parital GIAs, and as a result overstates the net drain on cash of the football and wrestling programs.  Rather than losing approximately $1 million from scholarships and direct institutional support, the two programs actually turned a modest profit from the tuition and other fees paid by football players and wrestlers, but because of UNO’s accounting, the school did not recognize the substantial revenue benefits stemming from these partial scholarship recipients and walk-ons.  This led to a substantial miscalculation of the cost of these programs, and likely a poor decision to cancel the two sports in hopes of reaping cost savings.

The Pernicious Accounting Impact of Related-Party Transactions

The first and most obvious problem with UNO’s athletic department’s reported accounting numbers is that there is no recognition of the fact that a good deal of the expenses on the UNO athletic departments books are payments made to, or receipts from, the University itself.  This creates the obvious accounting issue that it does not matter what price is chosen for a given good or service if the buyer and the seller are two parts of the same entity.  For example, if UNO decided to charge its athletic departments a $1 million per athlete “accounting fee” on top of any other costs, then a team with 10 athletes would appear to cost the university an additional $10 million.  But of course, this $10 million expense would be matched with an equal amount of revenue to the school from this “accounting fee,” and the net cost to the school would be zero. 

Even if the ‘accounting fee” stemmed from an actual underlying cost associated with providing accounting services to the athletic department, the $10 million figure would tell us nothing about the true cost.  If the accounting services provided to the athletic department really cost the school $50,000 in incremental expenditures, the fact that the school charges the athletic department $10 million say zero about the true financial impact on the university.  It is this phenomenon which makes it so difficult to determine the true costs to a school for the self-supplied goods and services for which the athletic department recognizes expenses; the result is that the athletic department’s accounting figures are rendered somewhat useless for making smart business decisions, in particular whether cutting a sport is profitable or not.

Related-Party Transactions: Direct Support vs. Grants in Aid.

A perfect real-life example of the issue illustrated above with the fictional “accounting fee” is the fact that UNO hands the athletic department a chunk of cash that it calls “direct support” and then takes most of the money right back by charging the school full retail price for the athletic scholarships the department gives to athletes. 

To put some real numbers on in, in the 2009-2010 season, UNO claims to have provided $863,474 in University support to football, but then it charged the athletic department $684,539 for the GIAs which were granted to the schools 74 scholarship football players.  Those 74 football players shared 36 full scholarships, meaning that on average each got just slightly less than a half-scholarship.  For wrestling, the school provided $208,476 in direct support, and then took back $163,862 for grants-in-aid.   UNO’s books thus show $848,401 in expenses related to financial aid.[2] 

Here the NCAA is keen to step in and point out that direct institutional support provided by a school to the athletic department isn’t real revenue – they use the term “allocated” revenues to distinguish them from “generated” revenues that come from outside parties such as television networks or ticket purchasers.[3]  Thus, under this methodology (espoused by Transylvania University Accounting Professor Dan Fulks), a school should deduct from the books the entirety of the direct institutional support provided to these two programs, or $1,071,950.[4]  That would argue that holding all other revenues and expenses constant, the NCAA view of the UNO football and wrestling programs is that they lost $850,000 in scholarship expenses and that we should deduct a further $1 million to back out revenue that wasn’t actually “generated.”[5]

In truth, economically, neither the $850,000 nor the $1 million figure has any real bearing on the cost of providing athletic scholarships.  The Fulks method, which treats the scholarship costs as correct and then further deducts direct institutional support, without recognizing that much of the support is simply a related-party transaction, create the illusion of a nearly $2 million gap, when nothing of the sort exists.  Clearly, the net amount, the $178,935 difference for football[6] or the $44,614 for wrestling[7] (a total of $223,549), can represent an actual cost to the school.[8] 

As for the rest, as with the “accounting fee” example above, what matters is not the price the school charges itself for those scholarships, but the actual out-of-pocket cost the school incurs by providing those services.    If there were zero cost to providing the room, board, tuition, fees, and required books associated with a scholarship, then regardless of how much or how little UNO charged the athletic department (and then “funded” via institutional support), the true cost of those services would be zero.  Calling it a billion dollar expense doesn’t make it one.  On the other hand, to the extent those services do have a cost (and certainly some do: food, for example, is not free), then on top of the net support $223,549 we would need to add those out-of-pocket expenditures to determine the impact to the university of providing those scholarships.

However, in addition to determining the true costs, it is also critical to determine whether there are any revenues left off of the athletic department’s books that stem from the granting of a GIA.  At some level, this would seem impossible – how could giving a scholarship result in revenues, above and beyond the sports-related revenues already recognized on the athletic departments P&L?[9]  But the critical thing to remember is that the UNO, like most schools, grants most of their scholarships (across all sports) in the form of partial GIAs.  UNO differs from major programs in that it uses partial scholarships for football as well as the Olympic sports, such as wrestling, where the practice is fairly universal.

As any product manager will tell you, if giving a discount can increase total purchases, what looks like an expense (e.g., a 10%-off coupon) is really revenue (the 90% of the price that the consumer paid, but would have spent elsewhere without the coupon).  But nothing in the NCAA accounting on which the UNO relies credits the athletic department for any of that revenue.  Thus it is critical to properly calculate not just out-of-pocket costs, but also any inflows of cash directly related to the granting of GIAs to football players and wrestlers.

The Components of a Grant-in-Aid

When a school gives a single student a 100% GIA they provide a full grant of tuition and fees, room, board, and required books and supplies.   UNO spreads out its GIA grants across multiple athletes, so that few, if any, receive a full scholarship.  UNO accounting does not break down whether a student on a half scholarship got 50% of each component or instead got 100% tuition remission and no housing allowance.  UNO may very well skew their awards to the elements of the scholarship that have the least cost impact on the university; nevertheless, the analysis that follows assumes that a half scholarship covers half of every category, rather than, say, giving 100% of tuition and charging full price for room and board.  Based on this assumption, the analysis that follows breaks down the GIA grant into its four major components (tuition and fees, room, board, and required books and supplies) and shows the true economic impact of each on the school’s bottom line.

Tuition

Football: UNO’s NCAA accounting submission indicates that in 2009-10, UNO provided 74 football players with some form of a GIA, and that the aid was equal to 36 full-time GIAs.  Thus, on average the school is effectively giving each player a half scholarship.[10]    In-state Tuition at UNO was listed at $6,280.[11]  That means that, on average, when UNO provides a football player with a scholarship, the flow of money is in to the University, not out, and each accepted scholarship generates $3,225 in revenue.  Totaled across the 74 players, this sums to $238,640.

Wrestling:  Using the same logic as above, there are 9 full scholarships granted to wrestlers, over 27 athletes, which means on average those 27 athletes are paying 2/3 of a full-level of tuition.  With in-state Tuition at UNO is listed at $6,280, the wrestling team’s scholarship players generated $4,187 in revenue for each of the 27 players.  That totals $113,040.[12]

Obviously, revenue is not the same as profit, but absolutely none of this revenue is credited to the team on UNO’s books.    Whenever expenses are recognized but the associated revenue is not, this will tend to understate profits.  Calculating those costs is tricky, especially without access to the school’s more detailed accounting, but except under very specific circumstances, failing to recognize any revenue is almost certainly wrong.

Answering the cost question requires a key assumptions to address the following question: What would the school do with the athlete’s admission slot if it did not give that slot to the athlete – would it replace him with a full-paying student?  An average-paying student?  No student at all?  If the answer is that by admitting an athlete on 50% or 33% scholarship, UNO chooses not to admit a student who would pay 100% of tuition, then (likely by accident) accounting for zero revenue and all of the cost of a scholarship is an excellent estimate of the impact to the school.[13]   But according to ESPN, this is not the case at UNO – the school is unable to get as many students to attend as it wants, and would admit many more if they were willing to attend.[14]  As a result, if the football player or wrestler were denied a scholarship and thus went elsewhere to play his sport and study,[15] there is no replacement student available.  The forgone revenue from admitting a scholarship athlete is zero, whereas the forgone revenue from choosing not to offer a scholarship is half or two-thirds of the cost of tuition.

The costs then are not opportunity costs, i.e., lost opportunities for revenues, but instead are the actual costs of providing 74 football players and 27 wrestlers with a year of college instruction.  It is tempting to say that on the margin, this cost is zero.  If you take a campus of 11,000 students and plop 101 athletes, freshman through seniors, into the mix, do the school’s costs change perceptibly?  As tempting as that is, nevertheless one hundred students probably do have incremental costs associated with their attendance.  As an estimate for the costs, one can think of the cost of a full-time college instructor, which at UNO appears to be less than $40,000 per year.[16]  If every 40 students generate the need for a one full-time instructor, then 100 athletes cost no more than $100,000 to educate (and thus it costs about $1,000 to provide each athlete with the actual tuition associated with tuition).

So with this assumption in hand, it’s clear that the school is actually making money on the tuition portion of its football and wrestling scholarships, because when it admits a football player on a half scholarship, it costs them something like $1,000 to provide that student with instruction, and even with a 50% discount, the student is paying $3,225 in revenue, for a tuition-only profit of $2,225.  For wrestlers with a one-third scholarship, the net profit on tuition is higher, $3,187 per athlete per year.  And for each out-of-state athlete paying out-of-state tuition, the profit would be $4,800 to $6,400 higher still.[17] 

UNO’s mix of football players in 2010 was about two-thirds in-state, one-third out of state.[18]  And thus, for football, the total profit on tuition is well approximated by tallying 50 in-state students x 2,225 in profit, plus 24 out-of-state students x $7,030, for a total football tuition profit of $279,970.

Wrestling seems to have slightly more out-of-state students,[19]  but given the approximate nature of this analysis, the two-thirds in-state, one-third out of state assumption makes sense for wrestling as well.  Therefore, the total profit on tuition is 18 in-state students x $3,187 in profit, plus 9 out-of-state students x 9,954, for a total wrestling profit from tuition of $143,712.

Room:

Generally speaking, housing is often a scarce resource on college campuses.  Unless dorms are sitting vacant, then every time someone receives discounted access to a room, this displaces another resident, one who might have paid full price.  So unlike tuition, where for UNO there is likely zero forgone revenue and a fairly low marginal expenditure associated with a scholarship, it is quite likely that every dorm room provided at a discount to an athlete directly reduces the schools revenue from housing, dollar for dollar.  And similarly, for athletes who live off campus and receive a rent stipend, this expenditure is a true cost.  This analysis therefore assumes that on-campus housing is a scarce commodity, which is the most conservative assumption possible.[20] 

In 2010, the school listed the cost of room and board at $8,140, without providing a breakdown between the two costs.  Assuming that 75% of this cost is driven by room means means the room component runs at around $6,100 per student.  So if housing is an actual scarce resource, by giving away 74 spaces at 50% rather than full price costs the school $220,000 a year.[21]  For 27 wrestlers, who are on one-third scholarships, this costs the school $55,000 per year.  These values are the upper bound on what it really costs, since any otherwise vacant room carries zero marginal cost to provide.

Board

In contrast to providing housing, which is a scarce resource on most campuses, for a school to provide one student with food does not generally require that the school forgo feeding another student.  Instead the analysis can focus directly on the costs of the food versus the revenue taken in.

When an athlete consumes food provided by the school, there is a real cost associated with that consumption.  But just as certainly, the University pays less for food than it charges for a meal plan.  So the correct cost for board is not what the school charges at retail to full-paying students, but rather what it costs the school, on the margin, to provide those 74 football players and 27 wrestlers with food, less the money that they get from those 74 students on from the 50% that they pay in, or the football team and the 27 students who wrestler and pay two-thirds of the food price.

It is not uncommon for the markup on food to be at least 100%, meaning the school may charge twice as much at retail as it actually costs to provide the food to athletes.  If it then gives football players a 50% discount, this almost perfectly covers the school’s costs.   For wrestlers who pay two-thirds of the cost, this means the school takes in more than their costs, they make a small profit of $340 per athlete.[22]  Thus the 27 wrestlers generate a profit for board of $9,158.

Here it is important to recognize that the economics are very different if the school is providing an allowance for food by writing the student a check, rather than providing them with a discounted on-campus meal plan.  To the extent athletes are getting checks to purchase food off campus (and not using that check to buy a university meal plan), the correct cost to the school is the amount of money on the check. 

Books

Like on-campus food, books sold by the on-campus bookstore can be thought of, economically, as limitless.  Books cost real money to give to athletes, but they are not scarce, so that selling a given book at a discount to a wrestler will not prevent the school from ordering another copy of that book and selling it at full-price to another student.  Therefore, the analysis can focus on the difference between the revenue that selling the book at a discount generates (none of which is currently on the books of the school), versus the cost of acquiring that book from the publisher or distributor.

As with food, a 100% markup is common for bookstores.[23]  So by the same logic as above, providing a 50% discount (as is the case for football) doesn’t cost the school money – they simply break even.  And for the wrestlers who are paying two-thirds of the retail price, each discounted book generates a small profit.

UNO’s costs of attendance figures list books and supplies at $950 per year.  So each wrestler on one-third scholarship pays $633.  Assuming a 100%, those books and supplies only cost the school $475, leaving a profit of $158.  For the 27 athletes, this sums to $4,275.[24]

The true costs of Grants-in-Aid

As is clear from the above analysis, the stated costs to the athletic department of providing football ($684,539) and wrestling (163,862) grants-in-aid bears almost no relationship to the actual cost to the university of providing discounts to those 101 students.  Tuition, Board, and Books all generate profits to the school because of the revenue stemming from the grant of a partial scholarship.  Housing, under the conservative assumption that every dorm room at UNO is occupied, has a real cost, but on net, the profits from the other components outweigh the costs of providing housing.  For football, the total profit is approximately $60,000[25] – a far cry from the loss of $684,539 the school claims.  For wrestling, where the discounts are smaller, there is a clear profit of approximately $100,000.[26]

Nowhere on the UNO athletic department books will you find any recognition that these sports are generating a profit by offering partial scholarships.  But in an environment where a scholarship acts much more like a coupon that induces a purchase (that otherwise would go to another school), then measuring the cost of a scholarship without recognizing the direct revenue it generates is clearly going to generate the wrong economic conclusions.

Walk-ons

Moreover, this analysis has not yet taken into account any of the financial benefits of walk-ons to a University.  Although some walk-ons choose to attend college independent of the decision to walk on to a specific sport, for many the decision of which college to attend depends, at least in part, on their belief that they will be able to walk-on to a specific sports program.  Some see it as a way to earn a scholarship, others as a way to participate in intercollegiate sports despite being not quite good enough to earn a scholarship.   Therefore, it is likely that at least some of the walk-ons at any given school would have gone elsewhere if their sport had not been offered.

At UNO, the football team had 112 participants in total; 38 football players got no athletic GIA at all.  Some of those students might have come to UNO regardless of whether the school had a football program.  For those walk-ons the economic impact to UNO of their playing football is a small cost (providing uniforms, travel costs) that is already included in the schools expenses.  But for each student that came to UNO specifically with the goal of walking-on to the football team, and who would have gone to a different school in the absence of football, the revenue UNO receives from these walk-ons is directly attributable to the presence of a football team.  Wrestling had 5 walk-ons.  Given UNO status as the premier Division II wrestling program, it could be the case that all 5 of the walk-ons would have gone elsewhere had UNO not offered wrestling.   

How many of these 43 athletes would have gone elsewhere is impossible to determine without detailed research into their personal decision-making process.[27]  But if half the walk-ons would have gone elsewhere, then 21 athletes would not have attended UNO.  The loss in revenue is thus 21 times $6,280 in tuition (less $1000 in the cost of instruction, as calculated above), plus $950 in books (which this analysis assumes is half profit), plus approx $2,000 in food (of which half is profit, again by assumption) is lost.[28]   Netting out the costs of each components of the GIA, each lost walk-on costs the school $6,755 in incremental profit per student, or a shade over $140,000 for the football and wrestling walk-ons, on top of the $160,000 in total profit from scholarship recipients’ GIAs.  Or put another way, accepting one hundred-some scholarship athletes and another forty-some walk-ons did not cost UNO a dime in net scholarship dollars, despite showing hundreds of thousands of dollars of expenses on the books.  Instead, it earned the school approximately $300,000 in incremental profit.

Conclusion: NCAA accounting turns a small profit into a million dollar loss

UNO’s accounting tells us that granting GIAs to football players and wrestlers cost $848,401.[29] Those same books tell us that the programs needed a direct institutional subsidy of $1,071,950, ignoring the fact that nearly 85% of that subsidy is sent right back to the University as a related-party payment for scholarship costs that are priced at full retail, rather than at the actual cost to the university.  The NCAA (Fulks) accounting methodology advocates that schools sum these two expenses, and would thus conclude that scholarships plus direct subsidies cost the school nearly $2 million dollars.  Under this methodology, no adjustment is made for any of the revenues (and thus profits) generated by these scholarships.

Economically, this is simply wrong – there is no politer way to express the fact that deducting the retail price of GIAs that (a) cost the school less than the retail price to provide and (b) are “paid” for by an offsetting direct support line items that has no bearing to the true costs results in an extreme overstatement of costs to the school.

The correct way to think about scholarship costs (as well as any other related-party transaction where the athletic department is nominally making a payment to the school and then receiving a subsidy to cover that payment) is to break through the accounting fiction that is generated by moving money from one pocket to another, and to look at the net effect.  UNO gave the athletic department $1,071,950 for football and wrestling, and then it immediately took back $848,401 to give 101 partial scholarships to the athletes on those teams.   Economically, this transaction consists of two components: (1) UNO provided a net subsidy to those programs of $223,549,[30] and (2) the UNO gave out discounted scholarships to 101 athletes (who likely would have not attended otherwise) and admitted 40-plus walk-ons (some of whom would have gone elsewhere if their sports had not been offered) that could have had a cost, but in fact results in a net profit to UNO of approximately $300,000 once the impact of GIA-driven revenues and revenues from walk-ons is considered.  Economically, the benefits from the second transaction more than outweighed the costs of the first.  But a failure to recognize the “funny money” nature of related-party transactions (esp. when adjusted in the wrong direction as the NCAA advocates) results in accounting figures that paint an upside picture of the economic reality of the UNO scholarship program.

Rather than losing over $1 million dollars (or nearly $2 million with the NCAA adjustment), the programs turn a small profit on scholarships, enough to entirely cover their direct institutional support, even before taking into account many of the other accounting methodological choices that often lead to understated revenues or overstated costs (such as failing to attribute licensing revenue to the athletic department). 

There may have been smart reasons for UNO to drop its football and wrestling programs, despite those programs’ on-the-field success.  The school may feel it improved its brand, solved a Title IX problem, etc.  But it should not claim that it saved money by dropping those programs.  It only reduced its net revenue at a time when its other costs were on the verge of tremendous increases.

Patrick Hruby’s current Sports on Earth piece,The Gold-Plating of College Sports, is a very well-written piece on this phenomenon.  Sports economics explained very well.  And he cites favorably to our own sportsgeekonomics.com study of the same issue: Monopoly Rents in Action: Gold-plating among Non-Revenue Sports at FBS programs: An Empirical Study.

So what’s not to like?  Go read it!

Update: Dan Wetzel has a similar take that is worth reading as well:

O’Bannon case against NCAA sheds light on big-time athletic departments’ fuzzy math

http://www.cbsnews.com/8301-400_162-57574401/march-madness-ncaa-fights-full-court-press-on-player-pay/

No time to discuss, but I encourage you to read Brian Montopoli’s piece.