Friday, March 29, 2013

Athletic Accounting

(1)  Report to Faculty
At the November 2012 FCC meeting athletic director Norwood Teague responded to a question about the annual subsidy the athletic department receives from the general fund of the University:

[Teague] said he was unsure where the funding from the University would end up; there is very little such funding now, about $1.8 million in an $80 million budget.

See p. 2 of the November 15, 2012 FCC report (emphasis added).

Actually, the $1.8 million represents only the direct support the athletic department received from the general fund in fiscal year 2012.  The athletic director failed to mention the multi-million dollar indirect support that the department receives each year.

Let us look at the subsidy to the athletic department in fiscal year 2011 (the most recent year for which complete information is available).  Central administration made an allocation of $7.8 million to the athletic department from the general fund of the University.  See p. 76 of the June 20, 2011 report of the Board of Regents.  This included $2.3 million in direct support and $5.5 million in indirect support.  See line 7 and line 8 of the Revenue/Expense Summary in the 2011 U of M Annual Report to the NCAA.  

The athletic department returned the $5.5 million to central administration for its cost pool assessment.  But central administration then used a significant part of that assessment to pay expenses of the athletic department, including the following:

athletic facilities operations and maintenance $1,226,740
(portion of facilities management costs attributed to athletic department facilities)
athletic department share of utilities in buildings also used by other units $756,821
athletic department partial debt service $811,300 
Total $2,794,861

(2)  Annual Report to NCAA

The presentation to the FCC is not the only occasion when the administration has omitted the full amount of external revenues of the athletic department.  The NCAA requires each member institution to submit an annual report.  Line 2 of the Revenue/Expense Summary is for "student fees."  The definition instructs the institution to "include student fees assessed and restricted for support of intercollegiate athletics."  In fiscal year 2011 the administration collected $950,598 in student fees for payment on the football stadium debt.  Yet the administration reported a zero amount for student fees to the NCAA.

Line 6 of the Revenue/Expense Summary is for "direct state or other government support."  The definition instructs the institution to "include state, municipal, federal and other government appropriations made in support of the operations of intercollegiate athletics."  In fiscal year 2011 the administration received $10,249,950 in state appropriations to be applied to the stadium debt.  Yet the administration reported a zero amount for direct state support to the NCAA.

The administration explains that it reports zero amounts on line 2 and line 6 because the administration does not route these financial transactions through the athletic department--central administration collects the fees and state appropriations and applies the funds to the stadium debt.  But the NCAA definitions are not limited to only those transactions that are handled by the athletic department.  The definitions reach all student fees and state appropriations that support the athletic department.

The administration reports that in February 2013 it checked with the NCAA regarding the student fee and the state appropriations.  The "recommendation" of the NCAA was to continue to omit reporting those sources of funds to pay the stadium debt.  No reason was given for the recommendation.  The NCAA apparently accepts the rationale of the administration--a rationale that elevates form over substance.

In the wake of the Penn State scandal President Kaler pledged "transparency and accountability" on matters related to the athletic department.  See the July 24, 2012 Star Tribune report on U's Big Benefit from Penn State:  Lesson Learned.  Does the administration fulfill this pledge when it reports zero amounts for the student fee and state appropriations?

(3)  Greater Revenue, Even Greater Expenses

Why does the athletic department continue to receive multi-million dollar subsidies each year?

In 2006 the U of M received $10.7 million from the Big Ten conference.  By 2011 the Big Ten allocation to the U of M had more than doubled to $22.9 million. See the January 19, 2013 Star Tribune report on An Expanding Pipeline.  This additional revenue was more than sufficient to replace both the direct and indirect annual subsidy from the general fund as well as the student fee for the football stadium.

But the athletic arms race simply continues at an accelerated pace.  The more money the athletic department receives, the more it spends.  In 2004 the athletic department budget was just under $50 million.  By 2012 the budget had exploded to more than $80 million.  The fuel for this explosion was the television revenue from the Big Ten Network.  See the January 20, 2013 Star Tribune report on Big Ten Bringing In Big Money As TV Star.

Yet the NCAA reports "a widening gap between schools with self-sufficient athletics programs and schools [such as the U of M] that rely on institutional subsidy to balance their athletic budgets."  See the June 2011 NCAA report  (emphasis added).

(4)  Athletic Debt on Steroids

The U of M administration has incurred a staggering debt for athletics.  The "athletically-related facilities annual debt service" is $19,585,000.  The total "athletically-related outstanding debt balance" is $236,606,000.  See line 6 and line 7 of the Capital Expenditure Survey on p. 27 of the 2011 U of M Annual Report to the NCAA.

Part of the debt is for the $137 million in special purpose bonds (Series 2006) issued by the University to pay a portion of the cost of construction of TCF Bank Stadium.  The principal and interest on those bonds will be paid by the citizens of Minnesota to the tune of $10,250,000 per year for more than 20 years.  See pp. 52, 54 of the 2012 U of M annual financial report.   Most of those citizens will never attend a single game, and most could think of far better uses for their hard earned tax dollars than providing entertainment (for six games per year).

Now the athletic department will pay $2.5 million (that it does not have) to the fired basketball coach to do nothing next year.

The athletic director assures us that:

[the budget is] in good shape, and if we did not feel good about that from our own budget, we would not have been haphazard about a decision like this.

But the actual fiscal record undermines the credibility of the U of M administration (again). 

Several myths are used to persuade us to keep running this fool's errand.  The reality is that it is a losing proposition from any perspective (athletic or economic or academic).  See The Gopher "Brand."

(5)  A Solution

There is a solution that would enable the University to disentangle itself from the big business of the major revenue sports while allowing the games to continue.  The football and basketball teams should be organized as separate corporations.  The University would grant a license to those corporations to use the University name for the teams.  The license fee would be a percentage of the revenues generated from ticket sales, broadcasting rights, advertising, etc.  The license fee income would be used to support the non-revenue sports that the University decides to retain, such as track and swimming. 

This is a solution that would enable the sports fans to continue to enjoy the games and would enable the University to focus on education, research, and public service--the reasons for its existence.

Michael W. McNabb

University of Minnesota B.A. 1971; J.D. 1974
University of Minnesota Alumni Association life member

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