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The NCAA Isn’t Going Broke, No Matter How Much You Hear It

Once or twice a year, as predictably as the launch of college football season or March Madness, we’re treated to the “everyone’s broke” meme in college sports. Sometimes it’s pegged to the football season. Sometimes we hear about it in the context of a new TV deal worth billions. And sometimes it’s tied to the release of new numbers, as was the case last week when USA Today released its trove of college sports accounting data as a resource for researchers everywhere. Along with the data they compiled, Erik Brady, Steve Berkowitz and Jodi Upton put out a companion piece addressing the familiar claim that college sports are reaching a crisis point where they will begin to crumble under their own cost. As economics professor Andrew Zimbalist says in the article, “It’s an unstable situation.”

The USA Today article then pivots from its ominous opening, quoting industry participants such as school presidents and former TV executives who have their doubts about the situation — the theme being that claims of financial doom are nothing new for college athletics, and they’ve not come true yet. But in a story built around financial reports showing that 90 percent of the industry is losing money, the clear theme seems to be “this time it’s real.” It’s unsustainable!

A sober reading of the history of these claims of unsustainable spending leads to a very different conclusion — specifically: NCAA expenses track with revenue and have done so for decades. But rather than hand-wringers learning from the past and ferreting out Occam’s ledger — the accounting isn’t telling the whole story — decade after decade we see similar fretting over schools losing money on college sports yet spending more and more, surely building to a “bubble” that has to burst. “This time it’s real” has been part of this sky-is-falling rhetoric for over a century.

For example, in 1975, the NCAA was worried about costs. As many economists and historians before me have noted,1 this worry over costs coincided with a period of economic stagnation and inflation in which much of America was worried about costs. NCAA members gathered in what was called a “special” convention with the goal of taking collective action to control costs. The president of the NCAA opened the conference with a dire warning that likened the crisis to an urgently needed amputation:

Due to the intense competitive nature of the intercollegiate athletics, it seems the only way to successfully curtail costs is at the national level. … The NCAA, to be an effective instrument, must adopt measures to curtail costs which may well guarantee the continuation of intercollegiate athletics. … We urge you to put aside, or at least put in second place, your special interests and put as primary the goal of curtailing costs so intercollegiate athletics may survive. It is probably better to cut off the hand than to die.

The members made it clear that the crisis was dire and the solution was NOT to raise more revenue, because that wasn’t realistic. The only answer was to lower the cost of scholarships. A representative from Bowling Green explained:

We know that the generation of new income is unlikely, if not impossible. It is only the number of grants, the source of funds and the revised basis for grants that any real economies can be made. For most of us, a good many of the other proposals here are nickel and dime stuff, when we are talking about real dollars, we are talking about grants-in-aid.

The result in 1975 was that the elements of cost of attendance that had been allowed previously (course supplies and a monthly stipend known colloquially as “laundry money”) were banned by common agreement. Of course, revenue did go up, and not surprisingly, expenses managed to keep rising at the same rate — the money saved by lowering the cost of scholarships simply moved into other forms of spending.

Here’s what that revenue growth has looked like since 1992, shown against the growth in the list cost of tuition.

Screen Shot 2016-04-20 at 12.52.10 PM

The story was much the same about 30 years later, in 2006, when the NCAA convened a task force to study levels of spending. The conclusion, as expressed by task force chairman Peter Likins? “There seems to be an unsustainable trend in financing athletics.”

We can find even more examples of the NCAA sustaining “unsustainable” spending. In July 1929, at the end of a boom decade, the Carnegie Foundation put out a detailed report documenting what it saw as many evils in the college sports scene of the day.2 The study found that: “Since 1906 [college sports’] intensity has not abated, intercollegiate rivalry has not grown appreciably kinder, and specialization has much increased; costs have mounted amazingly.”

More than two decades earlier, in 1902, the New York Daily Tribune ran a study of the elite of college sports,3 what we now know as the Ivy League, and found that other than Harvard and Princeton, athletics were finding it “difficult to make ends meet.” The biggest culprit? The cost of providing food for athletes was overwhelming some schools. The only answer, at least for Yale, was to balance the yearly deficit for athletics by dipping into “undergraduate subscriptions” (i.e., student fees) among the student body as a whole.

So the modern NCAA’s tale of woe — expenses outpacing revenues, students forced to pick up the tab for athletes receiving perks — is older than the NCAA itself, which was founded four years after the Daily Tribune exposé. For more than a century the crisis has persisted, ever looming, never arriving. So what’s going on here?

As far back as Howard Bowen’s revenue theory of cost, economists have known that within the context of a nonprofit organization, if a department on campus gets a budget, it spends it. Revenues grow, budgets grow, spending grows. The NCAA itself commissioned a series of reports (in 2003, 2005 and 2009) by several economists, which basically said each new dollar of college sports expense goes hand in hand with a new dollar of revenue. And NCAA President Myles Brand even bragged about this dynamic in a 2006 speech:

Universities attempt to maximize their revenues and redistribute those resources according to their educational mission. Universities are nonprofit corporations, and as such, they do not generate profits for private owners or shareholders. But they do have an obligation to generate significant amounts of revenue to pursue their mission.

The definitive word goes to University of Michigan professor Rod Fort, author of a 2010 paper on the topic in the Journal of Intercollegiate Sport. Fort shows what all of these anecdotes and the economic theory predict, which is that college sports expenses have grown at the exact rate as revenues for as long as the data exists. Even writing in the midst of the Great Recession of 2007-09, Fort found that “little seems to threaten the sustainability of FBS athletic departments,” and he used (and showed) data (the NCAA’s own revenues and expenses reports) to support his claim.

What Fort found was that from 1960 until 2006, “In real terms, the annual growth rate in the average report of both revenues and expenses is 4.9%, nearly twice the typical growth rate in the economy at large.”

Graphically (and extended out to 2010, with thanks to Fort for his data), here’s the trend:

schwarz-ncaabubble-1

Year after year expenses zoom ever upward, but so do revenues. Revenue and expenses are basically locked together like you’d expect of a department that spends its budget and a budget that’s set based on expected revenue.

And indeed, almost on cue, despite all of the gnashing of teeth and rending of garments over the unsustainability of college sports revenues, news arrived Tuesday that the Big Ten has negotiated a new deal that blows its old deal out of the water, estimated to be worth $40 million for each of the 14 schools in the innumerately named conference.

So how has this perpetual crisis rhetoric survived so long in the face of year-over-year revenue growth? The best explanation comes from a working paper by two economics professors at Western Kentucky University, Brian Goff and Dennis Wilson, which explains how useful it is to look poor whenever someone comes looking for money:

Keeping awareness of the rent flow4 low, permits either certain athletic or other university officials discretion over use of the flows. As a result, the most common practice over many decades has been to minimize or diminish apparent surpluses. In fact, the supposed losses have been a means for university presidents to pursue “cost containment.”

In other words, we’re always in a crisis because the people in power have a vested interest in seeming poor. This means many of those who’ve been predicting a looming college sports apocalypse have something very much in common with your run-of-the-mill apocalypse cult: They have something to sell. It’s worked for a century, so why not keep selling it until people stop buying?

Footnotes

  1. Including Rod Fort and Victoria Jackson.

  2. To give you a sense of the zeitgeist in academia, the study also took a swipe at the new phenomenon of universities opening crass, unseemly schools of business.

  3. Thanks to journalist Rachel Bachman for the link.

  4. “Rent flow” is econ speak for what normal folks might call “ongoing monopoly profits.”

Andy Schwarz is an antitrust economist and partner at OSKR, an economic consulting firm specializing in expert witness testimony.

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