Be skeptical when big college athletic departments act broke

Whenever the national conversation shifts to further compensating student-athletes or the fiscal health of college sports at large, a familiar talking point gets trotted out. Here’s an example, from a New York Times post by a former college athlete:

McDavis wasn’t the first person to make that claim. Congressional reps have said it too, and so does the NCAA itself.

Here’s the thing: no matter what the official NCAA records say, it isn’t true, for a lot of reasons.

Colleges dramatically overstate what they actually spend on scholarships.

If you pull up a school’s report on the USA Today or Department of Education databases, “scholarships” are generally listed as either the second- or third-largest expense, behind salaries and facilities. Tuition is expensive, and if you add up the sticker price for tuition, room, board, books, and more, you could be looking at more than $50,000 an athlete. So it’s easy to see how a school could list scholarship spending at over $10 million a season (in FBS, the median is around $6 million, per the NCAA).

That’s what it says on paper, but the school isn’t actually cutting checks like that.

As economist Andy Schwarz has explained several times, here for Vice, the athletic department is “paying” the school, using something called transfer-price accounting. But that isn’t an accurate depiction of real costs.

This is true whether the department is called ‘communications’ or ‘athletics.’ If central school accounting says each full scholarship costs $50,000, then to the department head or Athletics Director (AD), it likely feels like a real cost. But to the school as a whole, unless forgoing that scholarship really increases total cash by $50,000, that’s not what it actually costs.

Currently, when athletic departments give a scholarship, they commonly get charged the full retail price (sometimes of an out-of-state student) regardless of the actual cost to the school of providing one more space at the school. The food and books provided probably costs half of what they charge. The real cost of tuition and dorm space is probably de minimis, unless by giving that space to an athlete, a paying customer is forced out. Except for very selective schools with tight space constraints, most of the expenses listed as part of an athletic scholarship are overstated and sometimes purely fictional transfer prices.

Scholarship spending does cost something, but unless giving a football player a scholarship means a full-tuition student can’t attend, the school’s not actually losing that entire 50 grand. Very few colleges are so full that they literally have to give up a chemistry major’s lecture seat every time they give a scholarship to an athlete.

If a school is trying to grow enrollment, which is the case for many FBS institutions, the actual scholarship cost, according to Schwarz, might be “pennies (or at least dimes) on the dollar of listed cost.”

And even if, for the sake of argument, you use university math, there’s still a startling takeaway:

Tons of other accounting tricks make this math really messy.

Every school’s situation is different, but looking at their accounting is a lot more complicated than just adding up things listed as costs and revenues.

• Athletic department revenue from merchandising, for example, might be underreported because the revenue gets shared with other university departments first.
• A single year’s expenses might be substantially inflated because a construction project, previously kept off the books, is added all at once.
• Other transfer-price accounting rules, from utilities to some facility upgrades, might be counted as expenses without accurately representing true costs.
• Some athletic departments donate all surplus straight to the university.

For an extreme example, the University of Alabama system briefly shuttered UAB’s football program while citing budgetary concerns, as raised in a report for which the system agreed to pay $80,000. Well, according to a 110-page counter by sports economist Daniel Rascher and Schwarz, the system wildly overstated costs and understated revenue.

The three sports in question did not cost the university anywhere near the $3.75 million indicated on UAB’s accounting statements. Instead, we conclude the three sports were effectively break-even to slightly positive. Football and bowling showed a modest positive return [even before adding in College Football Playoff revenue, which goes to every FBS conference].

It’s messy. Administrators don’t mind that.

The same thing is true about the “subsidies” most athletic departments get from the university.

Those can mean anything from direct cash transfers from student fees to a whole slew of accounting tricks. Let’s look at a few quick examples.

In 2014, Tennessee was listed as taking more than $12 million in subsidies — despite having a 102,000-seat stadium and an SEC television contract. The accounting made the Vols look less sustainable than similar schools:

According to a report in Tuesday’s USA Today, the University of Tennessee athletic department derived 12 percent ($13.552 million) of its revenue from subsidies. That’s a misleading figure, though, UT officials say, as the majority of it is money that has never actually existed.

Example: Thompson-Boling Arena is one year older, therefore it is worth [$8.36 million] less than it was the previous year.

That $8.36 million was a “Depreciation” line item in UT’s 2011 subsidy report. According to GoVolsXtra’s report, Tennessee only took about $1 million of what most of us would actually think of as subsidies — in this case, student fees. The athletic department meanwhile sent $6.84 million to the school, so if we were to limit the subsidies category to student fees, then the University of Tennessee actually made about $5.8 million off of its athletic department that year.

It’s impossible to standardize this stuff enough for a single list to tell every story.

Also that year, Oregon’s athletic department claimed self-sufficiency, despite its books looking different than those listed by USA Today as including no subsidies. At Florida, what appeared to a less-informed outsider to be a sports-over-academics budget decision actually involved two completely different budgets.

One year, Phil Knight single-handedly got Oregon to #1 on USAT’s revenue list. The paper also once counted Bret Bielema’s Wisconsin buyout as part of his Arkansas salary, which shot the sub-.500 Razorbacks coach up to #3 on the money list.

Even within a single conference, accounting methods are so varied that comparing any single financial item is a challenge.

Many school budgets are certainly in bad shape. But we can’t just look at a list of numbers capped by a word like “subsidy” and assume no one can afford to invest in anything new.

Beyond accounting, there’s no incentive for athletic departments to show a profit, which helps incentivize wild spending.

If you aren’t profitable as a business, you’ll have consequences. That’s not really true for athletic departments.

That’s why coaching salaries have exploded, facilities are constantly renovated (even if the research says it doesn’t even really help recruiting), and accounting might show dubious losses. Economists call it “gold plating,” or covering everything you have in gold because you have nowhere else to put the gold.

Sports economist Rascher said as much when he testified during the Ed O’Bannon trial.

How many schools actually make money is a complicated question, but it’s certainly more than two dozen.

You’d really have to get into the weeds for multiple years to get comprehensive data, but it’s hard to imagine many schools that are getting massive TV contracts are not, practically speaking, either making money or easily capable of doing so with some different accounting.

For example, per the 2018 USA Today data, UCLA posted exactly the same amount in expenses ($104,106,646) and revenue. What are the odds of that? And even with the struggles of the Pac-12 Network, it’s hard to envision UCLA not making money from athletics. Other major programs like Missouri, which has an SEC deal, and North Carolina, one of the biggest brands in college sports, have listed expenses higher than revenues, likely based more on transfer-price accounting than a true reflection of the athletic department.

The best estimate is that the vast majority of power conference schools and at least a few non-power conference programs “make money” from athletics.

Some schools, fuzzy math and all, almost certainly don’t. A few should look at limiting expenses by dropping down a competition level. Others might argue that spending heavily on athletics, even if it won’t provide a financial return, is still worth it for other reasons, like engaging alumni or marketing the university.

Why does this matter? It all depends on the context.

If an athletic department “reports” a small loss on paper but is actually distributing plenty of money to other university departments and fully funds all player obligations, then that only matters to bean counters.

But if schools try to plead poverty when it comes to providing benefits to students, then the math becomes problematic. If anybody is getting $50 million a year in conference distributions, like all individual Big Ten schools are, and they’re trying to say with a straight face they’re too poor to do anything — whether that means hiring another baseball coach or better compensating athletes — they’re just making choices to spend their money elsewhere.