The Financial (Un)Sustainability of College Athletics

ESPN 30 for 30 voice: What if I told you an industry existed in which 326 of its 351 (93%!) constituent organizations aren’t profitable? In fact, on average, these organizations run multimillion-dollar deficits and many of them have never been profitable. We aren’t talking start-ups. This industry has been around since 1852. Of course, this type of financial (under)performance isn’t possible without subsidies, so, naturally, federal and state governments have been pouring billions of dollars annually (i.e., our tax dollars) into the industry to keep it afloat. What’s more, possibly unbeknownst to you, you may have contributed thousands of dollars in additional subsidies to fund organizations in this industry when you were 18-22 years old. However, despite the widespread lack of financial sustainability, this industry’s biggest players have nearly tripled their revenues since 2005, and their growth is only accelerating.

Welcome to the world of college sports and, more specifically, NCAA Division I intercollegiate athletics. Before we dive in, let’s get a few things straight:

• Why should you care about this article? If nothing else, because it’s always good to know where some of your tax dollars are going. But if you’re anything like me and have a passion for sports, finance, politics, governance, intriguing stories, mind-boggling statistics, problem-solving or any combination of the above, you’ve come to the right place. Read on.
• I’m a supporter of college athletics through and through. This article is an exploration of the incredible world of college sports, not a criticism.
• This article is completely unrelated to my job and doesn’t reflect the views of my employer. I’m also not getting paid to write this. The only thing motivating me to write this is passion, and because I want to hear your thoughts and spark a conversation.
• I’m doing the noble thing and commenting on problems without offering solutions. If the reception to this article is good – or, at least, not hostile – I’ll write a follow-up with my two cents. Let’s dive in.

Something with which I’ve grown increasingly fascinated recently is the complexity and depth of the finances and governance of college athletics, in part due to this blog’s opening statistic. But don’t take it from me; take it from the NCAA. In 2020, the NCAA released its annual report (a must-read) that examines revenues and expenses at athletic departments throughout the NCAA with data collected from fiscal years 2004-05 through 2018-19. Although the report doesn’t reflect the more recent financial challenges schools are facing from the impact of the COVID-19 pandemic (which I’m sure will make the next annual report even more fascinating), there are some astounding – and alarming – trends contained within it that illuminate the vast differences between and within autonomy (i.e., “Power Five”) schools and their Division I counterparts (i.e., nonautonomy FBS, FCS and non-football schools).

Some key takeaways from 2019:

• Total athletics revenue reported among all NCAA athletic departments in 2019 was $18.9 billion. $10.6 billion (56%) was generated revenue (i.e., athletic departments’ revenues generated from ticket sales, broadcast rights, NCAA and conference distributions, contributions from alumni, royalties, etc.), leaving $8.3 billion (44%) that had to be subsidized by other sources, such as student activity fees, government support and institutional support. Almost half of all revenues were subsidies. Crazy.

• Even crazier, Power Five schools accounted for 72% of those revenues and 43% of total spending. Division I schools as a whole accounted for 96% of all NCAA-generated revenues and 83% of spending. There are only 65 Power Five schools across the NCAA’s 1,200+ member institutions across all three divisions. That’s less than 5.5% of all schools generating 72% of all revenues. What can we learn from this? Big-time football reigns supreme.

• Operating results vary widely between and within groups. At the FBS level, one athletic department had a $65 million operating loss, while another finished the year with a $44 million surplus (a net difference of $109 million). At the FCS level, no school turned an operating profit. Subsidies ranged from $2 million to $42 million, with a median value of $14.3 million. As for the non-football Division I schools, similar to the FCS, not a single institution generated more revenue than it spent. Median subsidies were $14.4 million.
• Let’s investigate the rifts further. Over the past 15 years, median generated revenues and expenses at Power Five schools grew by 149% and 159%, respectively. At the remaining FBS schools, revenues are up 47%, while expenses rose nearly twice as fast at 92%. It’s an arms race, and the Power Five is pulling away. The median expense gap between Power Five schools and other FBS schools has jumped from just over $26 million in 2005 to $80 million in 2019. In the past five years, median institutional support for Power Five schools is down 9%. Among their FBS counterparts, it’s up 18%.

• But that’s just the tip of a massive iceberg. I find these next few trends particularly interesting – and alarming. While it’s true that, at the FBS level, the schools that spend more than their counterparts are able to achieve higher self-sufficiency (i.e., cover more of their total expenses with generated revenues), this does not hold true for FCS and non-football schools. Not only is there no statistically significant correlation between spending and self-sufficiency (meaning these schools aren’t inching toward profitability by spending more in the ever-accelerating arms race that is college athletics), the biggest spenders at these levels are in fact seeing annual losses growing at faster rates than their lower-spending counterparts. Take a close look at the images below. Astounding.

• What does this mean in summary? The picture is incredibly bleak for any institution not at the top. Not only does it seem increasingly impossible keep up with the growth of the nation’s largest FBS schools, it seems increasingly impossible to just break even. On average, every athletic department outside of the highest-spending quartile of FBS schools (i.e., the top half of the Power Five) is seeing declining net generated revenue. What’s worse, the hope that increased spending at the FCS and non-football levels will one day result in schools “turning the corner” toward profitability appears to be a fallacy. Instead, losses are accelerating.
• Even within the FBS, while the highest-spending quartile of athletic departments (~32 schools) is over 100% self-sufficient, the second-lowest- and lowest-spending quartiles are only 50% and 40% self-sufficient, respectively. Said differently, the bottom quarter of FBS schools with respect to annual budgets (which are still large!) can only cover 40% of their expenses with the revenues they generate, and the next quartile up can only cover 50%. The rest is subsidies. Median FBS subsidies in 2019 were $7 million.

So, is there any hope? If past is prologue, no. In college sports, the rich are getting richer. Let’s home in on football since that’s what’s driving these disparities. 22 of the 28 total College Football Playoff (CFP) berths have gone to 5 teams: Alabama (6), Clemson (6), Ohio State (4), Oklahoma (4) and Notre Dame (2). Each of the four schools in the 2020 CFP semifinals (i.e., Alabama, Ohio State, Clemson and Notre Dame) also happened to be among the top six nationally in football spending. What’s more, of the nation’s top 300 high school football players in the 2021 recruiting class, 98 (and counting) are going to 6 schools: Alabama (21), Ohio State (17), Clemson (17), Georgia (15), LSU (14) and Oregon (14). The talent pool is even more concentrated the further up you look. Of the top 100 players, 44 are committed to 5 schools: Alabama (13), Ohio State (10), LSU (8), Clemson (7) and Georgia (6). 13 of 247 Sports' 34 five-star recruits are headed to Alabama or Ohio State.

The cycle of the nation’s powerhouses continuing to get stronger doesn’t seem to be slowing down. It’s only accelerating, thereby widening and further entrenching the inequities between our nation’s college athletics programs. 

But as I contemplate this reality, I can’t help but ask, “Does it matter?” Is everything we’ve explored thus far objectively and inherently bad? Is it wrong for Ohio State and Alabama to bring in more money together than the entire Sun Belt Conference, and nearly more than the Mid-American Conference? Is it wrong for these extreme inequities – at least in terms of revenue, expense and profit – to exist? Is it fair to hold college athletic departments to the same standards to which we hold corporations (i.e., require they become profitable)? I’m not being facetious. I truly don’t know the answer.

That said, I think we can all agree that more value is better than less value, and a financial surplus is better than a deficit, but “value” takes many forms. Even the 181 CEOs who came together in 2019 to release a new statement on the purpose of a corporation drafted a much more comprehensive definition of value that corporations exist to deliver. Does the same definition apply to college athletic departments? If departments claim it doesn’t, then how do we reconcile that with the extreme commercialization of college athletics over the past several decades? What’s the purpose of college athletics after all? Given America is the only country in the world where athletics play such a massive role in the higher education system, are college athletics furthering or hindering the core mission of higher education institutions? I don’t know. You tell me. The Drake Group seems to have some interesting thoughts. 

For what it’s worth, there’s something called the Flutie Effect. After Doug Flutie completed a last-second “Hail Mary” to topple the University of Miami in 1984 in one of the most thrilling games in college football history, applications to Boston College jumped 30% in 2 years. Northwestern University’s applications shot up 21% after winning the Big Ten Championship in 1995. On average, when a school’s football team rises from mediocre to great on the gridiron, applications increase by 18.7%. It seems a school’s fame in athletics can serve its institution well. Greater awareness. More applicants. Heightened selectivity. At least, in theory.

Like I said, I’m doing the noble thing and withholding my thoughts about potential solutions to the problems above, if indeed they are problems… If reception is good, I’ll opine.

Luke

Other Food for Thought

• As a component of his student loan / college tuition forgiveness program, Joe Biden is proposing providing up to four years of free tuition at public colleges and universities (and HBCUs and MSIs) for families with annual income below $125,000. How would this impact college athletics scholarships? Could this mean many future student-athletes would have their tuition subsidized completely by the federal government, alleviating pressure on athletic departments? What about private institutions, like my most recent alma mater, Northwestern University? What are the Title IX implications, especially if some sports (e.g., football and men’s basketball) tend to be comprised of lower-income student-athletes relative to other sports (e.g., lacrosse and tennis)? How might this influence recruiting? Could this cause universities to recruit – rightly or wrongly – from lower-income markets to boost savings on tuition? Or, to put it more starkly, offer a low-income prospect over a wealthier one to save on tuition payments?
• Division I schools seem to have at least one thing in common with respect to spending: their share of expenses allocated for coach and administrative compensation. At every Division I level in 2019, anywhere from 32-37% of expenses went toward coach and administrative compensation, with just under 20% of all spending going toward coach compensation. Of the $18.8 billion spent by the 1,200+ NCAA member schools across all three divisions in 2019, $3.6 billion went toward financial aid for student-athletes, while $3.7 billion was spent on coach compensation.

• The CFP is a completely separate entity from the NCAA, governed by separate people, principles, policies, etc. Technically, to be considered an NCAA sport, the sport’s championship series must be organized by the NCAA. Football is the only exception. In 2019, the CFP generated $462 million in profit (across only three football games). Nearly 80% of the $462 million distributed to 130 FBS institutions went to schools from Power Five conferences.

• Per Axios Sports, a study released by the National Bureau of Economic Research finds that college athletics’ amateurism rules create a system that transfers money away from poorer, largely Black students to wealthier, mostly White students, coaches and administrators. FBS schools typically field men’s and women’s teams in roughly 20 different sports (Ohio State had 35 in 2018, with 1,065 athletes), but 58% of revenue comes from football and men’s basketball. That money goes to coaching staffs and athletic departments, and supports non-revenue sports, whose athletes often come from wealthier backgrounds. Non-revenue-generating athletes come from neighborhoods with average incomes 37% higher than college football and basketball players. 
• 15,782 (40%) of the 39,495 Division I basketball and football athletes will not graduate (52% of all Division I men’s basketball players, 38% of all Division I football players and 38% of all Division I women’s basketball players). At the root of this problem is systemic racism. 56% of Division I men’s basketball players are Black; they graduate at a rate of 47% compared to 57% for White players. 49% of Division I football players are Black; they graduate at a rate of 62% compared to 71% for White players. 45% of Division I women’s basketball players are Black; they graduate at a rate of 62% compared to 68% for White players. If graduation rate is a measure of success, are athletic departments delivering?
• In an effort to generate revenue in creative ways during the pandemic, the University of Colorado took the first major step in dismantling college sports’ decades-long aversion to gambling, signing a five-year deal to partner with a sports betting company. They’re the first, and almost certainly not the last.

Additional Resources Not Linked Above

• College Athletics Financial Information (CAFI) Database
• College Athletes Bill of Rights
• The Drake Group Praises Proposed College Athletes Bill of Rights: But Notes Significant Flaw in Massive Sorely Needed Reform Bill
• Sportico - Silencing the Spoilsports: How 'Pay the Players' Drowned Out College Sports' Fiercest Critics