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Financial Problems at UC Berkeley

2010 April 28
tags:
by Brad Humphreys

And it has nothing to do with the sorry state of the State Budget.  I got an interesting cold call yesterday from a faculty member at UC Berkeley.  He is a member of a task force examining the financial crisis in the Cal Athletic Department.  According to an article in the Daily Californian, the athletic department was subsidized by the university to the tune of $13.7 million dollars last year, including a $5.8 million dollar “loan” from the “former vice chancellor of administration.”  I can guess where the “former” came from.  Based on the article, things got rather heated at a meeting to discuss the preliminary report of the task force that took place yesterday.

Economists have long recognized that accounting problems associated with intercollegiate athletics makes it very difficult to assess the financial impact of big time college sports.  No generally accepted accounting procedures exist in this area, and accounting differences across campuses (and within individual institutions over time) makes it almost impossible to determine the profitability of a big time college athletics program.  TSE co-blogger Brian Goff wrote one of the best case studies I know of, and concludes that even a relatively small athletic program like Western Kentucky produces a small surplus on average.  I have no idea what the actual state of the athletic department budget is at Cal, but where there’s smoke, there’s fire.  If the Cal athletic department is losing money, many other large athletic programs may also be in the red.

I was contacted because the relationship between athletics and donations is one of the issues being studied by the task force.  I have written a couple of papers on the topic that find a small positive correlation between athletic success and donations, and a larger impact of the presence of a Division I-A football program on state appropriations.

It will be interesting to see how this plays out in Berkeley.  The final report is due in the summer.  In a financial environment where faculty are taking furlough days that amount to an 8% pay cut, and where many departments are eliminating telephones for everyone but the chair, it’s easy to see why faculty would be up in arms about almost $14 million flowing from the university to the athletic department.

5 Responses
  1. yardbird permalink
    April 28, 2010

    Regarding the “former vice chancellor of administration”:
    If you infer that this administrator was fired for his obvious malfeasance, then you would be very much mistaken.
    This administrator was promoted, to a system wide position.
    Now instead of doing damage to the finances of a single campus, he will proceed to mismanage funds across the UC system.
    The man in question is Nathan Brostrom, formerly of JP Morgan, where he was the architect of what was at the time the largest municipal bond deal in the history of the State of California. To look at the widespread allegations of muni bonds over the last decade is to gain some very significant insight into how the current crop of regents and administrators of the UC system go about running the show.

  2. ktnd permalink
    April 29, 2010

    I taught at a prominent Midwestern university for 15 years. While there I learned that approximately 80% of Division I athletic budgets are red. Some are made whole by the universities themselves, while others depend on alums and booster clubs to balance their budgets. Whether or not school and athletic administrators, or alums, would go for it, it is undeniable that the single easiest way to reduce upward pressure on tuition is to eliminate sports programs.

    Would I want to see this? Not on your life. But as the parent of two sons currently at Berkeley, it’s pretty tempting.

  3. Victor permalink
    April 29, 2010

    Just a comment to ktnd. Virtually every college and university operates in the red overall, not just in athletics, and requires donations to make its budget whole. To the extent that athletics make a college a desirable place to donote money and encourages contributions, it’s hard to see why donations shouldn’t be considered a regular part of an athletic program’s revenue stream.

  4. ktnd permalink
    April 29, 2010

    To Victor: your claim about “overall red budgets” is not true. For one thing, it ignores the difference between private and public institutions. For another, it ignores the fact that no school, anywhere, operates solely and exclusively on tuition. It’s a common rule of thumb that the closer a school is to being fully tuition-driven, the closer it is to extinction. External sources of income are fundamental to the nature of education per se precisely because the overall “products” of education — knowledge and informed citizens — are essential to society.

    So with regard to athletic budgets in particular, the question is not whether external contributions are required to remain black. Of course they are; I hardly expect the left tackle to pay for his share of the team’s expenses! The question raised by Mr. Humphreys’ article is, rather, should any part of that external subsidy come from budgets otherwise and initially targeted to specifically-academic units. Biology students should not have to pay for the football team either. And when push comes to shove — which is the context of Mr. Humphreys’ article — athletic budgets must give way to academic ones. Otherwise the school’s mission is inverted.

    (ps: this is not an abstract discussion for me. I earned a varsity letter at Berkeley in the 70s, and my two sons are athletes there right now. I am deeply appreciative of the value of sports in a student’s life. And I am also interested in how public dollars are allocated when they’re in short supply.)

  5. Mac permalink
    May 2, 2010

    I agree with ktnd, however, I think sports is very important to the college scene and to the youths that can do both athletics and academics. I am not convinced that the shortfall in the budgets is entirely because of athletic programs. I believe there is waste in resources that can be consolidated. When a university expenses 65% of their budget for salaries, I think that is ridiculous. You see many professors and chancellors want to protect their jobs and the big salaries they command so, the first thing they want to do is to reduce any funds that may prevent them from getting raises so they support the cuts in athletic programs. What they do no understand is without federal and state aid many of them would not have a job because tuition alone would not cover their salaries and operation costs. Other than football and maybe basketball it would be difficult for athletic programs to be self funding. So, let’s not have any grand delusions about athletic programs being self funded. It would be interesting to see how many alumni contribute to academic programs versus those that contribute to athletic programs. I’d bet the number is in favor of the athletic programs.

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