A Better Look at Sports Budgets

NCAA plans new system for collecting and reporting athletics revenues and expenses -- though with limited public disclosure.
June 23, 2006

The National Collegiate Athletic Association's new academic rules for Division I athletes may or may not result in the sort of transformative change that college sports leaders hope for, but what can't be disputed is that the NCAA has taken steps to confront a perceived problem: that not enough athletes are getting a meaningful education.

The same cannot be said, historically, about the large set of financial problems looming in big-time college sports: Over the years, the association's leaders have done comparatively little about the fact that spending on Division I sports appears to be climbing much faster than colleges' other expenditures, and that institutions seem to be sustaining that rate of spending by depending increasingly not on sports revenues but on funds -- often derided as "subsidies" -- from students or the institutions' general coffers.

Attacking that problem has been much harder, says Peter Likins, president of the University of Arizona, because "we do not play well together when it comes to money." The intense competition among sports programs makes institutions wary of sharing financial information with one another, says Likins, who heads a task force of college presidents studying the future of college sports: "We compete, and that means holding money close to the vest."

Financial reporting that the colleges have done -- to the NCAA and to the federal government as part of the Equity in Athletics Disclosure Act -- suffers from wildly inconsistent accounting definitions, and that variation and the lack of cooperation have made it difficult to truly know who's spending and earning what. The lack of transparency, in turn, makes efforts to understand and eventually control the spending, on individual campuses and among NCAA members, nearly impossible. Presidents and other decision makers don't know how their institutions compare to peers, which makes it harder to make intelligent decisions about how and where to spend money. The lack of trust among sports officials only contributes to the sense that nobody really has an accurate picture, and faculty groups and other proponents of sports reform have frequently called for greater disclosure of financial information to campus constituents and to the public.

This fall, the NCAA is poised to take what Likins and others describe as at least a first step toward figuring out just what the financial picture in college sports really looks like. After years of discussion and collaboration with their counterparts at the National Association of College and University Business Officers, NCAA officials have developed a new accounting system under which sports programs would report financial information to the NCAA using a common set of definitions aimed at teasing out more precisely what colleges spend on sports programs. For the first time, the reports would include capital expenditures and athletics departments' "indirect" share of costs, for such things as energy and security, that might be borne by the institutions.

The NCAA will also require the financial reports to be audited by a third party, and the NCAA plans to report the new and improved information to the public, though only in the aggregate, without individual institutions' names attached.

"What we're hoping, and what we believe, is that once these new definitions are in place, we'll see improved clarity and consistency, and it should be a much better tool for our campus decision makers, presidents and boards, to use to make good decisions about their programs," said James L. Isch, the NCAA's chief financial officer.

Adds Myles Brand, the NCAA's president: “This will significantly improve the transparency of college sports finances.”

Whether the new accounting system makes a difference will depend, some experts on sports economics say, on how it's carried out. "At least they're willing to recognize that there's no uniformity now," says Andrew Zimbalist, the Robert A. Woods Professor of Economics at Smith College and author of Unpaid Professionals: Commercialization and Conflict in Big-Time College Sports (Princeton University Press, 1999). "But the NCAA has always wanted to portray a positive financial picture, and based on history, they might be using it as a smokescreen to say ‘we've solved the problem.’ Anybody who feels satisfied until they show that they can produce some standardized definitions and a truly verifiable auditing system is lacking the appropriate amount of caution."

Limitations in the Data

The NCAA has long published financial information about its members' athletics programs, in aggregate, and sports programs have for a decade reported their finances to the federal government under the Equity in Athletics Disclosure Act, which aims to reveal their spending on women's and men's sports.

But both the federal data and the biennial reports the NCAA produces (which are prepared by outside researchers, currently Daniel Fulks, an accounting professor at Transylvania University) have had significant limitations, most notably because of the wide variation in how officials at individual colleges interpret the definitions used in the survey and report their data. Some institutions, for instance, would include in their athletics department budgets the money they spend on security at sporting events; others would not (letting the campus police department pick up the tab). The current reports also provide little if any information about colleges' capital expenditures, on facilities and the like.

As the NCAA-appointed task force of presidents set out to assess the landscape in college sports, the lack of solid financial data was a major impediment, says Likins. When presidents or board members try to make sound decisions about athletics -- Should we build this stadium? Is this basketball coach worth that price? Should we be contributing this much to the athletics budget? -- they often lack the data to do it intelligently, he says. "CEO's need to have data to make decisions. You want to ask yourself, 'What is normative in my industry, in my line of work?' But we can't do that, because there are no accounting rules that everybody follows."

That's what the joint committee of NCAA and NACUBO officials set out to achieve, and their work forms the basis of the NCAA's new financial reporting system. Among the most significant changes:

Indirect costs. A major shortcoming of existing athletic financial reporting is that many athletics department budgets do not report any costs for university services that they share in --  which can include obvious things like grounds maintenance, utilities and security, and less obvious ones such as a share of the human resources or controller’s office. The NCAA plan does not dictate what proportion of the costs an athletics department should pick up, says Isch, but insists only that it be “reasonable,” as determined by the auditor.

Generated vs. allocated revenues. The NCAA report will divide a sports program’s revenues into those funds that an athletics department raises through its own activities – ticket sales, fund raising, television and other media rights, sponsorships, concessions and the like – and those that given to the department “freely and specifically” by other parties: state and local funds, student fees, and direct institutional support.

The idea is to more clearly delineate what it means when an athletics department says that it is “self-sufficient,” which many claim to be. “A number of our own committee members had made comments that they thought their programs are self-sufficient, but it turns out that not all costs were being charged,” says Likins. That’s not necessarily a bad thing, he says, since many people involved in college athletics believe that the pressure on sports programs to generate all their own funds puts undue pressure on them to cut corners. But everyone ought to know how much support is coming to a department from other university sources, Likins says.

Capital expenditures. The lack of information about facilities and other capital costs present an incomplete picture about the overall health (or lack of it) of a sports program. The NCAA’s new accounting system, which requires colleges to report their athletics debt service and outstanding debt, only goes part of the way there, Isch acknowledges, “but the idea is to develop trend analysis, and this is a good start for the first year.”

The other big change going forward is that the NCAA will now require an outside audit of the financial information universities submit. Isch says the association doesn’t plan to dictate who does the audit -- “it could be an accouting firm, or the state auditor, as long as there is real independence” -- but Likins says he’d like to see the association go further. “When I say there should be an audit, I mean that I’d like the NCAA to have the authority to engage a third-party auditor” who would have the ability to look across institutions, he says.

Zimbalist says such an approach would give the new accounting system much more credibility. “If everybody gets to select their own third-party auditor, it could very easily become a hand in glove thing,” he says. “Every [athletics director] could happen to be friendly with an accountant in town, so the definition of independent will be important.”

The NCAA’s new approach is also going to be unlikely to satisfy those who have called broader disclosure to the public about sports finances; such pressure is increasing on higher education generally, through prodding from Congress and from the Secretary of Education's Commission on the Future of Higher Education, and colleges' sports programs are no exception.

The association’s first report using the new format this fall will include information only in the aggregate; still to be decided by the association’s members, Likins says, is whether the NCAA will eventually give individual colleges reports that compare them to other similar institutions (without names attached).  

“The acute need to develop common ways of accounting was absolutely compelling, and hard to resist,” says Likins. “But the much more politically complex debate is about how much of thsi data would be disclosed and to whom.” Once colleges report information to the NCAA, virtually all public institutions will choose or be compelled to make it public. But private institutions, often fiercely protective of such information, probably won’t -- and Likins is unapologetic about that.

“Our purpose is not your purpose,” he says -- meaning that the NCAA’s goal in collecting improved financial information is not to help journalists delve more deeply in the fiscal situation of big-time sports.

“Our goal is to facilitate decision making by responsible authorities,” Likins says. “In the process, there will be a lot more public information, and it’ll have a higher level of credibility. But our goal is to help trustees and CEOs to make better decisions about their athletics programs, and if we don’t do that, then we have not accomplished our mission.”

James J. Duderstadt, president emeritus and University Professor of Science and Engineering at the University of Michigan and a member of the education secretary's higher education commission, agrees that the NCAA will have achieved an important goal if it can prod colleges into producing better information about the financial condition of their sports programs -- "issues that A.D.'s frequently try to hide," he says. "To the degree they standardize the information, and use audits to test it, at least inside the tent they’ll know what they’re really spending."

But over time, Duderstadt suspects, pressure will build for a broader release. "I think eventually that will have to happen. These are highly visible programs, and there is just too much demand for public knowledge."


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