What happens when the recession hits?
We've written a lot about the headwinds many schools and athletic departments are facing when times are relatively good. What happens when the times are bad?
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I feel like there have been a few broad themes that I’ve hit multiple times since I started this project close to a year ago. One of those themes is that college athletics, and college…period, faces some potentially stiff economic headwinds. Attendance at live events is down almost everywhere. Many schools are facing a combination of declining state support and declining enrollment, while costs, from athletic to administrative, continue to rise.
All of that is happening while the economy (well, for some people anyway) was humming along. But what happens when we hit a recession?
Take this, from Bloomberg, written a few days ago, before Monday’s stock market dip:
While few economists have said the economy may already be in recession, some are beginning to say one is probably imminent. Mark Zandi, chief economist of Moody’s Analytics, says the chance of a recession this year is at least 50%.
In the financial markets, in contrast, recession talk is rampant. “This is what the start of a recession after a long bull market feels like,” John McClain, a portfolio manager at Diamond Hill Capital Management, told Bloomberg News today. “This is the first day of seeing some panic in the market.”
And then of course, Monday happened. Via CNBC:
The Dow Jones Industrial Average sank more than 2,000 points on Monday, its worst day since 2008, as fears about the spread of the new coronavirus and an oil price war sent investors scrambling out of stocks.
The Dow dropped 2,013.7 points — 7.79% — as Boeing, Apple, Goldman Sachs and Caterpillar cut the index by at least 100 points each. The Dow ended the day at 23,851.02 and represented its single-worst day since Oct. 15, 2008, when it fell 7.87%.
The S&P 500 plunged 7.6% to 2,746.56 as investors punished financials and energy stocks. Energy names in the S&P 500, including Exxon Mobil, Hess and Marathon Oil, finished the day down more than 20%. Financial stocks ended down more than 10%. The equity benchmark suffered its worst day since Dec. 1 2008.
I’m not a financial analyst, but that seems pretty bad, right?
One of my first thoughts after hearing about the potential oil price was how this might impact North Dakota, the second-largest crude oil-producing state in the country, behind Texas. A decline in oil prices could potentially have a major negative impact on the state’s budget forecast. Via Inforum:
Lynn Helms, director of the state Department of Mineral Resources, released a statement Monday saying while it’s never a good time for such a significant price drop, “the timing of this drop does allow the state to plan ahead for the next legislative session and will allow lawmakers to adjust priorities in preparation for the next biennium.”
The price in the North Dakota budget forecast is $48.50 per barrel at the wellhead, said Helms, which “we are significantly below at this point.”
“While the impact on revenues from gross production tax and extraction tax will be immediate,” he said, “it typically takes 3 to 6 months to work those impacts into any type of revised revenue forecasting.”
And the negative impact isn’t just potentially in North Dakota. Here’s a clip from the Tulsa World:
Several Oklahoma companies saw their stock prices plummet Monday. WPX, a Tulsa-based driller, fell 46%. ONEOK, a Tulsa mid-stream company, lost 38%.
“Unfortunately, the stock prices for most of our oil and gas companies were already trading lower when oil was in the 50s than three years ago when it was in the 20s,” Dollarhide said. “This just exacerbates the situation for those companies, the ones with a lot of debt.
“… We’re trying to keep the general economy out of the recession. But our oil and gas economy already is in a recession and it’s trying to swim out of it. You fear for additional layoffs and certainly companies being on the brink of bankruptcy or a forced merger of equals just to stay afloat to buy some time for a couple more years to get out of this funk.”
So if we’re to assume that a significant drop in oil prices only impacted areas whose economies are closely tied to that industry, then you’d look at places like Texas, or Oklahoma, or North Dakota, to be adversely impacted. Maybe that impacts state support for higher education (if revenues to the state are down, spending has to go down or other taxes have to go up, one would assume). It might impact how much money local donors might give to local universities. It might create incentives for families to move out of state. All of those factors could negatively impact universities, and thus, athletic departments, within the state.
But those price drops didn’t happen in a vacuum, they happened while the entire national economic system is facing fears and disruptions thanks to coronavirus, disruptions that may only be getting started, rather than cooling down.
If an athletic department is already operating on a relatively thin margin, what happens if they’re unable to host events at anywhere close to expected capacity during the spring, or worse, the fall? What happens if schools suddenly need to substantially increase expenses to support campus public health initiatives, or programs to facilitate a quick pivot to more on-line education, and resources become scarce elsewhere? What happens if folks lose their job and can’t send another check to ol’ State U, or can’t buy tickets for the Ball State game, or can’t buy a shopping cart full of officially licensed merchandise?
I’m just a humble blogger who likes to make terrible jokes on Twitter, not a financial analyst, but it sure seems to me that any large business or institution better have backup plans in case they miss revenue targets in the near future. I wonder if any schools approach the upcoming college basketball coaching carousel with a teensy bit more financial conservatism?
Probably not. But saving a few extra nickels and dimes right about now couldn’t hurt, right? Especially since
wait, schools might not have insurance for this stuff?
Again, I’m not a fancy financial analyst, but my understanding is that you buy insurance to make sure a catastrophe, even a statistically unlikely one, doesn’t financially ruin you. My house is not likely to burst into flames or get swallowed up in the hungry embrace of Lake Michigan, but I pay a little bit of money to some faceless company hoping that in the event that does happen, somebody will cut me a check.
Apparently, there are lots of universities that might not be covered in the event they lose money, or maybe worse, as a result of fallout from Coronavirus. Here’s Inside Higher Ed:
But outbreaks pose a particular challenge. Unlike fires, floods and storm damage, very few colleges are insured against financial losses due to a biological disaster.
A campuswide outbreak could be costly, and lost tuition revenue from a decrease in Chinese student enrollment could have lasting effects for which colleges are not insured. Typical college insurance plans pay out next to nothing for pandemic-related losses, and purchasing new policies amid the outbreak is difficult and incredibly expensive.
Experts are looking ahead at what the coronavirus could mean for fall enrollments. International enrollments, particularly enrollments from China, have been a major point of concern. A decrease in tuition revenue as a result of the coronavirus outbreak wouldn’t be covered by property or business contingency insurance plans.
A survey of more than 230 colleges by the Institute of International Education found that 76 percent of institutions reported that recruiting events in China had been affected by the coronavirus outbreak. Recruiting events include "tests like IELTS and TOEFL, recruitment events like college fairs, and other engagements."
Apparently, there are a few schools, like Illinois, that have specific policies to protect them in the event of lost tuition from international students, but those are rare.
It seems that even in the best-case scenario, plenty of schools could be out some money. Lots of schools, like Rutgers, Northwestern, Penn State and Virginia, have canceled university-sponsored spring break trips. Other schools are canceling classes, or moving them all to online only. College basketball games at Johns Hopkins were played without fans, and I expect additional contests over the next month, either in basketball, or spring sports, will be played in empty stadiums and arenas. A decline in enrollment, either from international, or domestic students, could have very negative effects, especially for smaller schools.
I wonder if the lack of that insurance may play a role in larger schools being so reluctant to either postpone or cancel sporting events, even while classes or other aspects of campus life are disrupted. Can schools afford to lose the potential revenue from tickets, concessions, and parking? Are they not insured for the loss of that potential revenue? And if they’re not, do professional sports leagues, like the NBA and MLS, also lack that insurance?
In the big picture here, the potential impact on college sports is not anywhere close to the most important thing to consider here. The immediate health and safety of students, staff, and society at large of course come first, and ideally, the economic burden on staff, especially contractor staff like food vendors, would be considered and remedied before the struggles of more highly paid athletic administrators and coaches.
But this is a college sports newsletter, so we’ll ponder those things here. And I would not be surprised if the aftermath from all of this may mean some schools face significant financial difficulties. If I wasn’t sitting on a billion-dollar endowment, maybe now is not when I’d decide to spend tens of millions on a new baseball stadium or something.
But hey, I’m just a blogger.
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