Sportsgeekonomics

Musings on Sports Economics

Myth 3: Paying players will mean that schools cannot afford to play football or basketball anymore. After all, almost all Athletic Departments are losing money now, so they would all go out of business if they were forced to pay athletes.

(Previous Myth)

In terms of myths, this one is a two-headed hydra. It combines the idea that there has to be some sort of wage schedule set by a committee (i.e., Myth One) with the idea that the result will be that the committee would pick a number that some school can’t afford.  But a market system of pay will not impose a one-size-fits-all solution, mandatory minimum wage on all colleges. 

 

As an example, currently the University of Texas (“Texas”) has a choice whether to pay its head football coach Mack Brown $5 million per year in base salary.  Texas negotiated with Brown, and when the dust settled decided it was in their interest to offer him $5 million (plus bonuses), all without asking permission of the other NCAA schools.  Grants to college athletes would be set the same way – each school (or conference) should be allowed to offer each student what it sees fit and let the market sort things out.  Across American industries, there are high-paying and low-paying firms, and so there would be high-paying and low-paying schools.  Schools that earn less money from football and basketball will make smaller offers, but they will still be able to field teams. 

 

The second head of this myth is the very pernicious idea, which has gained currency since Mark Emmert took the helm of the NCAA,[1] that because the Athletic Department at most of the thousand-plus schools in the NCAA lose money as a whole, almost no school can afford to pay their football and basketball players.  In essence, the money that should go to pay players is being spent elsewhere, so we’re very sorry players, but we’re broke.

 

Of course, this is ridiculous on several layers.  The simplest myth to dispatch is that we don’t need to lump together the thousand-plus NCAA schools when talking about athletes who will end up being paid in a market-base system.  Division II and Division III, the FCS level of Division I, and even a good chunk of the FBS would basically not change in the world where schools can choose to pay their college athletes.  Most of those schools are hosting sports on their campus in a much more traditional amateur sense, for the benefits of the athletes, with some level of on-campus interest, and with very little outside fanfare or television coverage.  In rare cases, a small school might want to add some cash to their current scholarship offer, but that’s unlikely.  In the real world outside the NCAA myth bubble, the changes we’re talking about are going to take place at the approximately seventy-five schools in the six major conferences.

 

Just to give this some perspective, these are the football and basketball revenues from all 345 Division I schools, broken down into key categories. [2]

 

(footnote 21 on table is actually [3] here)

 

What we call the NCAA or even what we call Division I, consists of two or three entirely different economic animals.  Seventy-five or so schools are housing massive profit centers on their campuses in their football and basketball programs.[4]  For the much larger groups of schools that are running their sports teams as much smaller, break-even activities,[5] sports are just not the same thing at all, and whenever the NCAA asks you to think about college sports economics and tries to talk about Division II and Division III, or even the lower two-thirds of Division I, they are playing hide the ball.

 

Even when we keep the focus on the six BCS AQ conferences, the NCAA still wants to obscure the debate.  Mark Emmert, NCAA president, has said that only fourteen NCAA schools make money on sports and so most schools can’t afford to pay their athletes.[6]  That seems hard to believe given that the seventy-three schools in the AQ conferences earned $1.4 billion in aggregate.  But the trick is that the NCAA is throwing in all of the non-revenue sports, and then asking you to believe that when college football players get paid, so too will college wrestlers, even though football players are bringing in over a billion dollars and wrestlers aren’t bringing in anything.  That’s just not how markets work.

 

More broadly though, the myth is that the Athletic Department as a whole is the right unit of analysis and that spending on football compensation will only occur when a school’s entire program earns a profit.  In other words, if the department loses money, no one gets paid.

 

But campuses abound with money-losing departments that nevertheless pay the talent.  Traditional colleges and universities do not exist to make money, and in general, most of the departments on a campus simply cannot make money.  Instead, departments like Classics, Anthropology, History, and Psychology spend more than they bring in, and the school covers the cost of professors, of secretaries, of graduate students, and of academic scholarships with money from donors, with tuition money received, and in the case of public universities, with tax-payers’ money.

 

Schools do this because having a History Department (that has no real source of revenue) is part of the university’s mission.  If having big-time sports on a BCS AQs school’s campus is also part of the total mission of the schools (a statement I think the NCAA would support),[7] then the entire college community should support the program, just as it supports History and Psychology and the like.[8] 

 

The idea that before we pay student-athletes, the Athletic Department must make money is a false argument.  We do not ask History professors to work solely for room and board because the History Department doesn’t make money, and in particular, we do not allow colleges to collude on the salaries of History professors in order to help History Departments break even.  Similarly, we don’t ask college sports coaches to work for a price-fixed wage just because the Athletic Departments don’t earn money, although in the past the NCAA has tried to do just this and lost in court.[9] 

 

The profitability (or lack thereof) of the Athletic Department as a whole should not be an excuse to collude on player compensation.  Such an argument would never withstand rule-of-reason scrutiny.  Indeed, under the antitrust rule of reason, cost cutting is not a valid justification for otherwise anticompetitive conduct.[10]

 

But if the NCAA is right that almost everyone is losing money, then why are all of these money-losing schools spending millions on athletic programs now?  Why are schools clamoring to get into Division I if it’s a money-losing venture?  There are now 345 Division I schools; in 1985 there were only 282.[11]  Demand to move to Division I has been so great that in 2007, the NCAA imposed a four-year moratorium on new schools from moving up to Division I.  This moratorium has only just ended, and immediately new schools are seeking to join.[12]  Running a Division I program is much more expensive than Division II.  When economic actors are clamoring to spend more, it means that spending is profitable.  Either hundreds of universities are irrational, or, after looking at the total benefit of having great sports on campus, these schools are making a rational decision that paying the current cost of scholarships is actually worth the cost. 

 

Schools want to move to Division I because, taken as a whole, the school thinks Division I is more profitable, in money and in non-pecuniary benefits, than Division II.  Maybe the accounting that shows schools losing money is riddled with problems that understate revenues and overstate costs, so they are more profitable than they look.[13]  Maybe fielding a quality sports program helps attract better scientists and poets.  Maybe donations go up after a March Madness win.  Maybe it just feels better to have a Saturday football tradition and the university wants to offer its community that experience.   Those are all great reasons to be in Division I, but they are bad reasons to collude with other schools just to keep the down cost of the on-field and on-court talent. 

 

A market system would let us test the NCAA’s claim that further spending is impossible.  End the collusion for a few years and let’s see whether schools think they are too poor to pay for that star recruit, or instead if they decide, on the margin, the benefits of that athlete continue to exceed his (increased) cost.

(Next Myth)

[1] Tom Farrey & Paula Lavigne, Selling the NCAA, ESPN.Com, March 13, 2011,  http://sports.espn.go.com/espn/otl/news/story?id=6209609.

[2] I created this chart based on data obtained from the EADA website - http://ope.ed.gov/athletics/.

[3] That’s Billions with a B.  The other cells are in millions.

[4] Victor A. Matheson, Debra J. O’Connor & Joseph H. Herberger, The Bottom Line: Accounting for Revenues and Expenditures in Intercollegiate Athletics, College of the Holy Cross, Department of Economics Faculty Research Series, Paper No. 11-01, available at http://college.holycross.edu/RePEc/hcx/Matheson-OConnor_CollegeAccounting.pdf.  See also Goff, B. L., Effects of University Athletics on the University: A Review and Extension of Empirical Assessment, Journal of Sport Management, 2000, 14, 85-104, who found that over 70% of the schools in major D-I conferences earned over $1 million in profit from their combined football and basketball programs.

[5] Again, here EADA accounting can mislead whether schools really break-even or not, since some schools will force their books to balance by an accounting entry.  The impact of this accounting is much more important for the small schools, some of which may actually be losing money, because those schools simply have fewer off-the-books revenues to even things out.  Where Matheson et al. found that almost all BCS AQ schools had profitable football and basketball programs, they found only three to sixteen non-AQs made profits in football and nine to twenty in men’s basketball. See Matheson et al, supra note 21.  On the other hand, there have been more in-depth studies of individual small schools (in fact, all of the good studies are of small schools) and they generally show that once all of the off-the-books revenues are added in and all of the overstated expenses are taken out, football is profitable for small schools despite these break even accounting numbers.  See Clifford R. Skousen & Frank A. Condie,  Evaluating a Sports Program: Goalposts vs. Test Tubes, Managerial Accounting, 60, 43-49 (1988); see also Melvin V. Borland, Brian L. Goff & Robert W. Pulsinelli, College Athletics: Financial Burden or Boon?, Advances in the Economics of Sport, Volume 1, 215-25 (Gerald W. Scully ed., 1992).  See also Jeremy Howell & Daniel Rascher, An Analysis and Assessment of Intercollegiate Athletics at the University of San Francisco, University of San Francisco, CSRI Conference (2011), available at http://www.csriconference.org/docs/2010%20Presentations/Thursday%20PM/Rascher_2010_ThuPM.pdf, which focuses on sports other than football. See also Brian Goff, Effects of University Athletics on the University: A Review and Extension of Empirical Assessment, Economics of College Sports  82, 66-85 (John Fizel & Rodney Fort eds., 2004), who estimates that when small schools lose money on football and basketball, it’s “likely less than $1 million.”  In my own research, I found that the University of Nebraska-Omaha’s Division II football team probably was earning a small profit on the order of $100,000 but the school claimed to be losing $1.3 million on football alone.  See Paula Lavigne, Wrestling with the Truth in Nebraska, ESPN Outside the Lines, May 11, 2011 http://sports.espn.go.com/espn/otl/news/story?id=6488960.  In the end, these schools are choosing to keep these programs.  So in total, when they add up all of the money and non-money reasons for having football and basketball, schools are acting as if they are coming out in the black.

[6] Tom Farrey & Paula Lavigne, Selling the NCAA, ESPN Outside the Lines, March 13, 2011 http://sports.espn.go.com/espn/otl/news/story?id=6209609.

[7] This question has actually been examined in the sport management literature.  Even though most college and university mission statements do not address particular sub-units (like sports), one study showed that about 10% of schools with big-time athletics do explicitly list athletics in the mission statement.  Charles T., Clotfelter Big-Time Sports in American Universities, 28-29 (Cambridge University Press, 2011).

[8] My point is not that providing high-quality sports opportunities is as equally central to the mission of the university as providing a high-quality education.  Instead, my point is that if it is the case that the university community is unwilling to spend any of its own money on minor sports, then they should cancel those sports.  If instead they do value the minor sports, they should spend university money to support them, not dock the pay of their revenue producers to cover it.  The fact that football and basketball may be generating a profit is a bad reason to divert those profits to pay for something that no one on campus would pay for if that money weren’t just sitting there.

[9] Law v. NCAA, 134 F.3d 1010 (10th Cir. 1998).

[10] “The NCAA next advances the justification that the plan will cut costs. However, cost-cutting by itself is not a valid procompetitive justification. If it were, any group of competing buyers could agree on maximum prices. Lower prices cannot justify a cartel’s control of prices charged by suppliers, because the cartel ultimately robs the suppliers of the normal fruits of their enterprises.”  Id. at 1022.  See Phillip E. Areeda, Antitrust Law, 1504, at 379.

[11] Big 12 Coaches Favor Expanding NCAA Tournament, CBS Sports.Com (last visited July 27, 2011) http://www.cbssports.com/collegebasketball/story/10056974.

[12] Doug Lederman, NCAA Freezes Division I Membership, InsideHigerEd.Com, August 10, 2007 http://www.insidehighered.com/news/2007/08/10/ncaa.  The University of Nebraska-Omaha will enter Division I for 2011-2012.  Paula Lavigne, Wrestling with the Truth in Nebraska, ESPN Outside The Lines, May 11, 2011 http://sports.espn.go.com/espn/otl/news/story?id=6488960.  The University of North Alabama has announced it will begin a six-year transition to Division I in 2011-12. UNA Board Approves Resolution to Pursue NCAA Division I Status, University of North Alabama Lion Athletics (last visited July 27, 2011),http://www.roarlions.com/General_News/2011_DIVote.html.

[13] See, supra note 2 and accompanying text, for a discussion of some of the problems with NCAA accounting.

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Andy Schwarz

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