Friday, May 16, 2008

Intercollegiate Athletes: A Scandal Out of Control

By Richard Vedder

In the broader context, intercollegiate athletics are a relatively small operation, rarely consuming more than five percent of the resources of an institution. But they have enormous visibility, and are the face of higher education for millions of sports fans. At the highest (Division I) levels, they have long abandoned much pretense of being amateur sports financed by modest gate receipts and television revenues.

A new NCAA report on sport finances makes this point. It is a big improvement over earlier reports, and the NCAA is insisting on somewhat more honest accounting, and is having outsiders enforce uniformity in financial reporting. The report still has a long ways ago, however, before it is a truly transparent and honest accounting of intercollegiate athletics today. For example, there is no data reported by the name of institution. Capital outlays are not accounted for in an honest manner using conventional GAAP standards. "Generated revenues," thought to represent receipts for sport activities, include alumni donations --some of which would come to the universities anyhow --and maybe to serve the academic mission of the institution. In short, the report is still too secretive and too dishonest. But it is a big step forward, and it reveals plenty.

The data in the report are so depressing and so outrageous that I simply could not read more than small sections at one sitting for medical reasons --I might have a stroke (I am, unfortunately, being serious here). A typical Division I school --not the schools typically competing in BCS bowl games --loses minimally $8 million a year on their athletic programs --and probably at least $12 million if honest accounting were used. Revenues generated commercially (e.g., gate receipts, endorsements, TV income) have been rising far slower than outlays, so the athletic deficits are growing very rapidly --by double digit annual percentage amounts in many, many cases.

Football head coach salaries are rising at an annual average rate (2004 to 2006) of over 20 percent a year --while deficits before institutional subsidies are mounting. Put differently, taxpayers, philanthropists, and student tuition payers are footing the bill --usually unwittingly and unwillingly --for massive increases in salaries.

I am usually dead set against any price-fixing, cartel type arrangements. But this is a situation where competition fueled by tuition and taxpayer dollars is causing growing financial harm to academic programs. This is beside the fact that sport competitions interrupt academic schedules, not only for athletes but many others (including student fans who should be studying).

Here is what ought to happen. The Presidents of top universities in the major Division I conferences should get together, with special approval of the Anti-Trust Division of the Justice Department, with a goal of changing the rules of the game with respect to intercollegiate athletics. No athletic directors, coaches, gung ho alums (e.g., T. Boone Pickens who gave over $100 million for athletics at Oklahoma State) should be allowed near the meeting site.

Possible thing the university presidents might agree to:

1) No more than two percent of institutional revenues excluding auxiliary enterprises may be devoted to subsidies for intercollegiate athletics (at my school, that would free up more than $5 million annually for academics --or allow for a tuition reduction of at least 3 percent).

2) Over a five year transition period, the salaries of top coaches and athletic directors will be reduced to a maximum of three times the average academic year salary of full professors at that institution, but not in excess of that of the university president. A lower limit (e.g., two times full professor salaries) would be placed on top second tier coaches, like offensive and defensive coordinators, assistant basketball coaches, etc. Alumni "gifts" to coaches and other strategies to avoid these limits would be strictly prohibited --with extremely tough penalties for violations.

3) The length of regular season football shall be ten games, with up to a maximum of one post or pre season event (e.g, bowl game); basketball seasons shall be limited to 24 games plus up to four post season games; baseball teams cannot play more than 45 games or more than 28 game days.

3) Football teams shall be limited to 60 players. Red shirting and other practices designed to lengthen the college career of athletics artificially shall be prohibited.

4) No athletic competition will allowed during the final examinations week of an institution.

5) Bowing to commercial reality, athletes would be allowed to be paid up to an amount equal to 10 percent of the average salary of assistant professors in addition to other funds (tuition rebates, room, board, and books) provided. Student editors of school newspapers and those with other demanding extracurricular jobs are often paid, so this merely treats athletes the same, and reduces slightly the economic exploitation of them by uber-high paid coaches).

If the presidents of schools with good academic AND athletic reputations such as Michigan, Duke, Illinois, Southern California, Wisconsin, UCLA, Notre Dame, University of North Carolina, Texas, Cal Berkeley, Florida and Georgia got behind this --as well as the Ivy League and other prestige private schools (e.g., Northwestern and Stanford)--you probably have enough momentum to make it happen. If 20-25 premier universities with strong athletic and academic reputations say "enough is enough," perhaps the rest will go along. And, if they do not, perhaps we will shame the jock schools ultimately into submission.

I do not like price controls. I do not like competitors getting together. But when an activity is financed not by market forces but rather by taxpayer subsidies hidden from the public eye, this is the lesser of two evils. While there are other approaches (legislative mandates, accreditation withdrawal, Department of Education regulations), this would be the least intrusive way to proceed.

Would this kill college sports and ruin the Saturday afternoons of millions of sports fans? No. This would merely return us most the way back to the way sports were conducted a half a century ago --when we filled stadiums with tens of thousands of screaming fans just as we do today.

1 comment:

Daniel said...

Is this a case of market failure or is the level of output close to the socially optimal level? As a proponent of free markets, I agree with Dr. Vedder's argument that collegiate sports should not be subsidized with taxpayer dollars and student fees.

At my university, all students are required to pay around $1500 in general fees, which many agree are athletic event pre-sale tickets and gym membership. This are goods that I, and many others, would prefer to pay for by occurrence. It is certain that I have not consumed my $1500 worth this year.

Another issue is that some sports are funded, while others are not. Free market theory would suggest that those programs whose marginal revenue is equal to or greater than its marginal cost, be able to keep their doors open. Programs whose costs outweigh their benefits are not efficient and need to find a way to cut costs or close up shop.

At my university, the club hockey team is one of the more popular sports and it packs the arena game in and game out, despite that fact that it is not a school sponsored event and students have to pay a nominal $3-5 gate fee. To my knowledge, the players are not on scholarship, but yet they are very competitive and supportive of the club. Approaching game day, you will see the players around campus promoting the game, and they are not getting paid! This is an efficient way of conducting an athletic program.

It is true that some sports are just not spectactor sports and fail to attract fans. Is it fair that these teams should be cancelled. This point could be argued. However, from an economic standpoint, if students are unwilling to attend these events even though there is no additional cost, then there does not appear to be any value added to the university, especially not enough to support these teams financially.

This is a sticky situation because millions of Americans love college sports. It is a way for them to support their alma matter and cheer on their local teams. However, we must not lose sight of the fact that the primary function of universities is to educate tomorrow's workforce. We do want students to be well-rounded and participate in activities that complement their education; however, other university organizations are not receiving anywhere near the financial support as athletics. The chess, drama or spanish clubs are not on the recruiting warpath for the elite high school competitors, nor do they receive anywhere near the financial support that athletics do. Is this to say that athletics are more important than these other organizations?

There definitely are some ways to trim costs in higher education and make it more affordable, and athletics is one of them.