College Athletic Finances — The Untold Story

The two recent posts on college finances hit upon one of my pet subjects. With Mel Borland and Bob Pulsinelli here at WKU, I conducted an in-depth investigation trying to get at the real economic costs and benefits of our athletic programs– a surprisingly difficult and idiosyncratic job. (It reinforced Ronald Coase’s point about many important facts are in the details). This appeared in Gerald Scully’s Advances in the Economics of Sport. Later, I published a review and extension of efforts to assess the financial status of schools in the Journal of Sport Management (April 2000). These studies along with one by Skousen and Condie from Utah State in 1988 helped me come to a better appreciation of just how many studies and reports that rely on college athletic budgetary figures are close to meaningless. In many cases, reported revenues from athletics exclude off sizable items such as merchandise sales and sometimes even concessions and parking. Also, and even more problematic, the revenues transferred by booster clubs to cover scholarships may wind up as credited to general funds rather than athletic revenues.

Arriving at the true economic cost of tuition scholarships is critical because they represent a huge line-item in athletic budgets, especially at higher priced schools. Skip’s post hones in on the key issue — separating meaningless paper transfers from real economic costs — easy in theory, but no so easy in practice. In practice, distinguishing them depends on institution specific situations and practices. Generally speaking, the reported “costs” overstate actual economic costs in that the tuition “costs” are valued at full, “list” price when the actual costs are less, often way less.

For example, at a public institution with excess capacity in classrooms, adding or eliminating 100 students (whether athletes or otherwise) has little impact on actual instructional expenses. Further, the entry or exit of these 100 students neither closes or open additional space for a separate 100 “paying customers” since space already exists.

Institutions with no excess capacity, more common at very selective private or elite public institutions like Cal, incur real costs. Properly valuing the amount is tricky because it depends on who is displaced by their presence. If the displaced students were representative of the student body as a whole, then the average tuition paid would be the appropriate per-unit figure, which is usually far below the top “list” price at elite institutions. If the displaced students were, themselves, scholarship recipients of some other kind, then the amount would be near zero.

Why would schools under-report revenues and over-report costs? In some places, that’s just the way the accounting structures are setup. They are tradition-bound and so opaque as to mask true relationships. In other cases, my guess is that the practice evolved by design or happenstance so as to permit the big revenue producers to hide just how much of a commercial enterprise they are in. For one thing, it helps stave off calls for paying players. I recall magazine reports from the 1980s describing how Notre Dame and Michigan were “losing money” on football. Let’s see, they operate wildly popular (semi) professional sports operations without having to dole out 60% of revenues to athletes –if only I could land such a money losing operation!