Good morning, and thanks for spending part of your day with Extra Points.

I’ve got lots of cool stuff to share today. Let’s get into it.

1) This afternoon, Bryan Fisher and I will record this week’s episode of Going For Two with Andy Thomason, the Assistant Managing Editor of The Chronicle of Higher Education. Andy just wrote a book about the UNC academic scandal, and we’re going to talk about that, the history of college athletic scandals, The Carolina Way, and more. If you have a question, feel free to send it along.

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I’ve got a few more announcements after the newsletter.

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To get ready for tax season, I’ve been spending a lot of time digging into the books here at Extra Points HQ. Apparently, I need to figure out if my little small business was actually profitable?

You’d think that’d be a pretty simple question. I can look at my bank statement, see more money is coming in than going out, and there you go, profit.

But my accountant tells me that actually, this is a more complicated question, because how we define revenues and expenses can go beyond my company bank statement. Should I categorize a portion of my internet, phone or utility bill as an expense? Are there other expenses that I’m not properly accounting for? Am I still “profitable” if I had to pay myself the minimum wage for every hour I spent on this enterprise?

Even if the math gets complicated, this is an important exercise not just because I don’t want to get sent to some IRS gulag, but because generating profit is the primary reason my company exists. I have plenty of more high-minded goals for Extra Points, but I can’t accomplish any of them if I can’t pay the bills. I’m running a business.

Big-time college sports is a big business too. But when it comes to accounting, they’re not trying to show a profit. And their books are going to look very different from yours or mine.

Here’s a recent example. Let’s consider the Cal Golden Bears.

Jon Wilner at the Mercury-News obtained a copy of Cal’s FRS report for FY2020, the financial report that all NCAA member institutions must file each year. The report shows that Cal’s athletic department generated $110.5 million in revenues and $97.9 in operating expenses. Cal’s athletic department took in more money than it spent…so it’s profitable, right?

Well, not so fast.

First, like with any athletic department, it’s worth taking a closer look at what constitutes revenues. Cal didn’t bring in $110 million in TV distributions, ticket sales, sponsorships and donations, after all. This year, Cal received $25.1 million in university support. That number alone is nearly double the surplus Cal athletics reported.

University support can mean a lot of different things in these reports. In this case, that support, in part, seems to come from the university taking responsibility for some of Cal’s athletic department debt. Thanks to a stadium renovation project that went fantastically over budget, Cal carries more debt than any other athletic department.

That $25.1 million in university support might also just be a result of tweaks in internal accounting scheduling. Via Wilner:

In many ways, the $25.1 million booked as revenue was simply a change in accounting — the money came to athletics on the front end of the budgeting process, rather than at the end of the fiscal year, before the books closed.

“I hardly need to say this was not a good way to budget,’’ {Cal Chancellor Carol } Christ wrote of the pick-up-the-check approach.

“The incentives were all wrong and this annual practice erroneously and unfairly conveyed the sense that what is actually an efficiently and effectively managed department did not know how to handle its resources.”

So was the department profitable? Well, that depends on how you want to categorize facilities debt…and also how you want to categorize scholarship spending or specific endowment returns or a litany of other factors.

Cal athletics also isn’t trying to make a profit, or even show a profit.

If there was, say, stakeholder pressure to make sure those FRS reports showed the department generating more revenue than expenditures, well, the accounting department could probably find a way to show that without having to do anything like dropping sports or significantly cutting spending. But that pressure doesn’t exist.

I think it is reasonable to say that Cal athletics, like many D-1 athletic departments, is not financially self-sufficient. If it had to rely 100% on revenues from TV, tickets, sponsorships and department-specific donations, it would not be able to sustain current levels of spending.

Is that a bad thing? Well, again…it depends.

Let’s consider another example.

Back when I was an undergrad at Ohio State, I played in the university steel drum band. I had actually learned to play steel drums in high school, and since I couldn’t fit any percussive instruments in my dingy off-campus hovel, playing in the band gave me a chance to continue practicing and performing.

Like you might expect from a steel drum band, the whole enterprise was pretty low-key. Nobody was going to decide to attend Ohio State because they wanted to play steel drums. We played around campus a few times, but nobody was going to pay real money to book us. It was just a chance to pick up a few credit hours, learn a new instrument, and hang out with other displaced band dorks.

Steel drums aren’t cheap. They need to be re-turned occasionally. Ohio State had to pay our instructor. There were probably other costs associated with using the classroom and renting the vans we used to move the drums whenever we performed. There is no way the class was financially self-sustaining.

Does that mean Ohio State shouldn’t have offered it? Should they have required the group to secure corporate sponsorships or perform enough to bring in more money? Would it only be worth doing it if the program could be used to recruit students or directly impact topline revenue?

Some people might think so! But others might argue that even if the program lost money, it was still worth doing because it provided values that weren’t so easily quantified.

I can count the number of times I’ve played steel drums after graduation on like, two fingers. I can’t say playing in that band made me more likely to donate to Ohio State. It didn’t prepare me for a future career. But I’m still glad it was there! My time in Columbus was a little more fun and a little more rewarding because I got to fumble around steel drums when I was supposed to be doing my political science homework.

This isn’t a perfect analogy, but this thinking is part of why schools fund athletic departments

Beyond revenue generation from tickets and TV, and beyond their ability to help recruit students, many school administrators believe that funding intercollegiate athletic departments provide value that isn’t as easily measured or quantified, and that value benefits both students, and the university at large.

Cal appears to believe this argument. Here’s Cal’s chancellor, writing to the campus community:

I believe that our Intercollegiate Athletics program has great value for the Berkeley campus. It provides our student-athletes with opportunities to compete at the highest level of their sport and develop qualities of leadership and character that will serve them extraordinarily well in their chosen professions. Intercollegiate Athletics also provides us with invaluable opportunities to come together, to strengthen the ties that bind us to the campus, and to feel and celebrate our identity as members of the Cal community.

If you believe this argument, then you don’t necessarily need the athletic department budget to be self-sustaining in order to accomplish university goals.

Whether the department is “profitable” or not then becomes almost moot. The bigger question is whether the athletic department administrators are being good stewards of university resources, whether the opportunity costs of athletic spending are too great, and how well the athletic department continues to serve the greater institutional mission.

Now, it’s important to point out that we’re dealing with a lot of money, so it is reasonable to ask some hard and pointed questions about department finances and institutional goals that you wouldn’t ask a smaller class or auxiliary. Ohio State isn’t spending $100 million on steel drums. It isn’t even spending $100,000 on steel drums..or at least, they sure weren’t when I was in school. An athletic department should certainly be subject to greater scrutiny.

Athletic department profitability is an accounting question and one that can obfuscate what you actually want to know

As more FY2020 FRS reports come in, I imagine you’ll find some smaller G5 programs that report surpluses, and plenty of P5 programs reporting substantial deficits. Taken without any other context, I’m not sure you can extrapolate a ton of about athletic department financial health from just those figures.

I don’t think the important or interesting questions about athletic department finances are really about profitability. Saying, “oh, we’re not profitable” can be a crutch used to argue against expanding athlete benefits, or in defense on exploitive amateurism rules. It might also lead a school to drop Olympic sports programs that actually provide plenty of revenue for the institution, or to fall out of Title IX compliance. It can lead to bad decision-making.

That isn’t to say that looking at department revenues and expenses is worthless. Far from it! If part of the entire point of having an athletic department is to use it as a tool to better engage students and local community members, and students and locals aren’t buying tickets, well, that’s something a school should know! If pursuing sponsorship deals doesn’t put additional burdens on athletes, and leads to additional revenues, well, that’s a good thing! There is useful information in these reports!

But context is critical. Not every athletic department is trying to be Alabama or Ohio State. Not every school is Alabama or Ohio State. What lessons one should take from a financial report depends on the school, their goals for the department, their geography, and a bunch of other factors.

That’s the stuff worth asking about. Not profitability.

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