Chapter 2: Expenses
As noted above, universities in the Football Bowl Subdivision sponsor football and also must fund at least 15 others sports, and most universities actually sponsor significantly more. Some athletic departments have more than 250 employees, including coaches, administrators, academic advisers, marketing and ticket sales personnel, videographers, and sports medicine staff. Some have as many as 900 student-athletes on their men’s and women’s teams, with an average of 493 per institution.
One of the primary ways in which university athletic programs are distinct from professional sports is that the labor cost of the athletes involved is largely fixed. An athlete participating in football, basketball, women’s gymnastics, women’s tennis, or women’s volleyball receives a scholarship equivalent to tuition, room, board, books, and mandatory fees. Athletes in most other sports receive partial scholarships. Universities are not required to award all the scholarships permitted in a given sport, and most do not fully fund grants in all the sports they offer. There are no requirements for facilities, spending, or any other expense category as it relates to a particular sport.
Division I athletic programs operate as semiautonomous units within the university enterprise, but they share commonalities with both academic and auxiliary enterprises. Attached to their universities, they report to their central administrations. Some athletic “associations” are separately-incorporated 501(c)(3) not-for-profit corporations. They offer academic services to student-athletes, much as academic units do to students as a whole. They simultaneously serve student-athletes and also mandate their participation in particular activities without compensation beyond a grant-in-aid. This is not dissimilar in form to on-campus jobs such as those of residence hall assistants or graduate assistants, but is different enough to prompt debates about whether student-athletes constitute an unpaid labor force.
The median budget for athletics programs in the Football Bowl Subdivision is about $40 million, but that number is deceiving. There is a wide gap in spending from the very top programs to the bottom. If we split big-time athletics programs into 10 deciles of 12 institutions based on expenses, the median budget for the lowest decile was $14 million in 2007 and the median budget for the top decile was $83 million. The highest spending categories for the average athletics program includes the following:
- Salaries and benefits, especially coaches’ salaries (32 percent of total expenses);
- Tuition-driven grants-in-aid—or sports scholarships (16 percent);
- Facilities maintenance and rental (14 percent);
- Team travel, recruiting and equipment and supplies (12 percent combined);
- Fund-raising costs, guaranteed payments to opponents, game-day expenses, medical costs, conducting sports camps and other miscellaneous costs (12 percent).
The greatest challenge facing universities and their athletics departments today is dealing with the rapid rise of expenses. Athletics expenses are growing at an annual rate approaching 7 percent, according to a variety of studies (For more information, see references to Cheslock, Fulks, and Orszag and Israel at the end of this report.)
At the same time, revenues are not keeping up. In 2009, the National Collegiate Athletic Association published a report that found median operating spending for athletics increased 43 percent between 2004 and 2008, but median revenue generated by athletics programs grew only 33 percent over the same time period (Fulks, 2008). In another telltale spending reality a few years earlier, the NCAA reported in 2005 that athletic expenses rose as much as four times faster than overall institutional spending between 2001 and 2003 (Orszag & Orszag, 2005).
The myth of the business model – that football and men’s basketball cover their own expenses and fully support non-revenue sports – is put to rest by an NCAA study finding that 93 [of the then 119 FBS] institutions ran a deficit for the 2007-08 school year, averaging losses of $9.9 million.
There are two key challenges facing athletics programs when it comes to cost reduction. First, athletic programs cannot control university tuition and fees, which determine the cost of scholarships. Second, they have not controlled salaries, particularly coaches’ salaries. Between 2005 and 2007, total coaches’ salaries in the top decile of big-time programs increased by 25 percent, according to the data supplied by the NCAA. A separate study from the NCAA found that for head football coaches alone, in the period from 2004-2006, the median salary across the top tier of major athletic programs increased by 47 percent, by 20 percent for head women’s basketball coaches, and 15 percent for head men’s basketball coaches (Fulks, 2006). The Chronicle of Higher Education reported that University of Southern California football coach Pete Carroll, at more than $4 million per year, was the highest-paid employee of any kind at any private university in the nation in 2007 (Brainard, 2009).
In an article on coaches’ compensation, USA Today found that at public universities, the salaries are comparable: Bob Stoops at the University of Oklahoma received a raise early in 2009 to $3.7 million, plus an $800,000 bonus should he remain at his job through 2011. The University of Florida’s Urban Meyer received a raise of $750,000 weeks before the start of the 2009 season, lifting his annual salary to $4 million.
The University of Alabama's Nick Saban, Louisiana State University’s Les Miles, Ohio State University’s Jim Tressel, and the University of Iowa’s Kirk Ferentz are all being paid more than $3 million per year. While they are among the highest-profile university employees and may have multi-year contracts, coaches can be fired for not winning enough games despite meeting or exceeding other expectations, such as leading teams with high graduation rates. Coaches can also break their contracts and jump to another university for massive pay raises, leading to the proliferation of buyout clauses in coaches’ contracts. While the competition among top universities for elite faculty members and administrators can be intense, it tends not to be as public as the battle for coaches.
An example of this process is the story of the University of Memphis men’s basketball coach John Calipari jumping to the University of Kentucky. Calipari, who was being paid a reported $2.5 million in 2008-09 at Memphis, jumped to Kentucky for a reported eight-year, $31.5 million contract. As with many coaches’ deals, Calipari was also guaranteed, among other things, two “late model, quality automobiles,” a country club membership, income from basketball camps at university facilities and hundreds of thousands of dollars in performance incentives. Kentucky paid Memphis $200,000, the amount Calipari was required to compensate his former institution for voiding his contract.
“We’re the pre-eminent basketball program in the country,” Kentucky athletics director Mitch Barnhart told the Memphis Commercial Appeal, “and if we want a premier coach, then that’s what it takes to get it done” (McMurray, 2009).
Calipari’s contract was negotiated weeks before the state of Kentucky, facing a statewide budget deficit, cut back funding to the university by 2 percent, according to published reports. As part of the cuts, about 20 faculty positions were eliminated or remained unfilled.
Football and men’s basketball make enough operating revenue to cover their operating expenses at more than half of the elite athletics programs, including salaries of their head and assistant coaches and additional personnel. During the period from 2004-2006, 54 percent of those football programs reported external revenue (i.e., that from ticket sales, television contracts, and other sources outside the university) that exceeded operating expenses for their football teams, according to the NCAA (Fulks, 2006). Men’s basketball programs achieved greater financial success, with 57 percent producing net revenue during the same three-year period.
With few exceptions, however, reported operating surpluses from the two marquee sports were not enough to cover the costs of an athletic department’s other sports offerings, whether it be 14 or 24 squads. The myth of the business model – that football and men’s basketball cover their own expenses and fully support non-revenue sports – is put to rest by an NCAA study finding that 93 institutions ran a deficit for the 2007-08 school year, averaging losses of $9.9 million. That was more than twice as large as the average net revenue ($3.9 million) for the 25 programs that reported an operating surplus in 2008.
Even so, this may understate the true cost of intercollegiate athletics at any given institution. Data produced by NCAA member institutions suffer from varying methods of accounting; for instance, the major item of capital costs for facilities, the projected costs of maintaining an athletic department’s infrastructure, the time spent on athletics issues by the central administration, and other factors generally are not fully included in athletic departments’ financial statements or reports to the NCAA. Also, colleges have different ways of accounting for the cost of athletes’ grants-in-aid: Many big-time programs pay the full cost of tuition to the institution, but sometimes colleges forego such revenue by, for instance, placing athletes on in-state tuition.
Overall, spending on athletics appears to have created a so-called “arms race” between competing athletic programs and institutions. Economists Jonathan Orszag and Mark Israel (2009) define an arms race as “a situation in which the athletic expenditures by a given school tend to increase along with expenditures by other schools in the same conference.” In their analysis of the college sports business, using data from 2004-2007, Orszag and Israel (2009) found evidence to support such a dynamic; one university spends an additional dollar in operations costs in Conference X and a rival in the same conference spends an increased 60 cents, and the spending continues among those who can afford it and even those who cannot.
In 2007, two of the nation’s most watched conferences, with some of the most popular college sports brands among its members, posted some of the largest financial deficits of the 11 top-tier football-playing conferences. The median net revenue for one league’s member athletic departments was negative $7.2 million; for another it was negative $10.4 million. For the former, its red ink had grown by 44 percent since 2005. Meanwhile, every athletic program in three less prosperous conferences relied on more dollars from their central administrations than they were able to generate on their own.
Consider these disparities. The University of Alabama, one of the nation’s most prestigious football powers, is paying salaries of nearly $6.6 million to its head football coach and his nine assistants for the 2009 season. That’s more than 32 bowl-subdivision programs spend on football as a whole, according to an analysis by the Orlando Sentinel (Limon, 2009). The “have-not” institutions within each conference cannot compete revenue-wise with some of their “have” peers because of stadium capacity, fan demographics and other factors. Some athletic directors believe these intra-conference disparities are as much of a threat to financial stability as the differences among conferences. It is, said one athletic director, similar to the disparities in Major League Baseball, in which the Pittsburgh Pirates and Kansas City Royals must try to compete for players in the same market as the New York Yankees and Los Angeles Dodgers.
Iowa State University of the Big 12 is an example of a have-not school in a big-time conference. It brings in a respectable $17 million per year in football revenue. Among its competitors are Texas, with $73 million in football revenue, and Nebraska, with $49 million in football revenue. But Iowa State’s fans and boosters expect its program to retain coaches and build facilities at the same level as their richer Big 12 colleagues. Keeping up with the Joneses is increasingly difficult, if not impossible.