The Business of College Sports. A question of Equity and Ethics Don’t I have the right to do what I want with my own money? Or are you envious because I am generous

The policy questions are, within public universities, does the NCAA play a role in the disparities between NCAA Division I athletic programs in power versus non-power conferences? Do student-fees fund flailing athletic programs? Do prospering athletic programs benefit the academic side of campus? Using a sample of public institutions, I analyze how profitable power conference universities allocate the revenue they generate from athletics. Are their excess funds redistributed to the students, athletics, or academics? Then an alternative method of revenue distribution is discussed that would address the objective of a level playing field.

The data was compiled from the Department of Education and USA Today. The schools in the survey consists of all NCAA Division I public institutions. Data was not available across variables for the private institutions. Furthermore, private institutions may have different budget and accounting procedures than public institutions. Regressions were performed at the university level as opposed to the conference level; pooling data would hide variation within conferences. Two hundred and twenty two schools are included in the sample. A few schools, such as Army and Navy were omitted for data consistency purposes.

The sample period for this paper is the academic year 2009-2010. This academic year follows on the heels of a severe recession where states across the country were forced to incur budget cuts. Higher education was a casualty of the war on spending. Since 2008, 43 states have reduced funding for public universities (Johnson, Oliff, and Williams, 2011, p. 6). The severity of the cuts varied by state and by school. This has resulted in higher tuition and fees, as well as faculty pay cuts and firings. Using 2009-2010 might skew the results since schools with profitable athletic programs may be able to adapt to funding cuts better than less profitable athletic programs. Non-profitable athletic departments rely on student fees to stabilize spending.

(EQ. 1) Student Fees _i = _o + ₁STR _i + _ ACS _i + ₃ PowerConf _i + ₄ Profit _i +

₅ Coach/Part _i + ₆ Other + e₁

(EQ. 2) STR _i = _o + ₁Profit _i + _ PowerConf _i + _{3 i} Coach/Part + ₄ Students Fees +

₅ Other + e₁

(EQ. 3) Expenses _i = _o + ₁Profit _i + _ PowerConf _i + _{3 i} Coach/Part + ₄ Students Fees + ₅ Other + e₁

Equation 1 estimates the impact of a vector of variables on the percentage of athletic department expenses funded by student fees. The STR variable is the student teacher ratio of the university. ACS is average class size.²⁷ There is no distinction between the quality of teachers within the public Division I institutions. STR and ACS are instruments for estimating the correlation between student fees and academics. Given the collinearity between the two variables they are implemented separately in the equation. A negative coefficient, ₁ implies that holding everything else constant, a reduction in the student teacher ratio or size of the class will increase the student fee percentage of the athletic budget. PowerConf is a dummy variable used to designate whether or not a school belongs to a power conference. A value of 1 is assigned for Power Conference schools, zero otherwise. The variable Profit represents the profit margin of the athletic department. Using the profit margin adjust for university size.²⁸ A negative coefficient for either of these variable would imply that affiliation with a Power Conference reduces student fee percentage of the athletic budget. Or, the schools that have higher profit margins tend to draw their revenue from athletics as opposed to students fees. Coach/Part is the ratio of coaches per participant. A positive correlation would indicate that the more coaches hired the higher the student fees percentage dedicated toward athletic programs. Other variable were implemented into the equation to determine how the schools allocated the student fees.

Equation 2 estimates the impact of school specific athletic department variables on the student teacher ratio. The intent is to estimate the impact of athletic department financial success or conference affiliation on academic focus. A coefficient that is not significantly different from zero, imply a disconnect between athletic success (Profit), athletic conference affiliation (PowerConf), commitment to athletics (Part/Coach) and student funding percent of athletic budgets (Student Fees).

Equation 3 estimates the factors that contribute to athletic department expenses. The question proposed is what inspires athletic spending. The variables are the same as Equation 2. It is suspected that PowerConf will have more exorbitant athletic expenditures and athletic department profits will be channeled back into the athletic department. The empirical evidence suggests that Student Fees are necessary to fund non-profitable athletic department. The non-profitable athletic department tends to be housed in smaller universities. Therefore, the expected correlation between Student Fees and relative Athletic Spending is negative. After controlling for profits and power conferences, this relationship should be offset since Student Fees add to athletic budgets. The emphasis on coaches hired is captured with the Part/Coach variable.

Table 5 contains the regression results for Equation 1 and some variations. The dependant variable is the percentage of athletic department expenses funded by student fees. In the first column, the PowerConf coefficient is negative and significant. The value of the coefficient was .25. Therefore, holding other factors constant student fees are 25 percent less in power conference schools than non-power conference schools. There is also a negative correlation between the number of coaches per participant and student fees. Even after controlling for power conference affiliation, schools with lower coaches per participant have higher student fees percentages. This result is consistent with the empirical data and our a priori hypothesis. The student teacher ratio has no impact on the percentage of athletic department expenses funded by student fees, nor does the profit margin of the university. The second column displays the results using ACS instead of STR. The results were basically the same. In the third column, the coefficients are listed for a similar equation that substitutes “profit” in nominal dollars for profit margin and power conference affiliation. The notable result is nominal profit leads to lower student fees. Universities with profitable athletic department are able to reward their student body with lower fees. The fourth column uses profit margin as opposed to profit. Using the profit margin adjusts for school size. In this equation, the coefficient is negative but only significant at the 10 percent level.

Table 6 provides the results for equation 2; this equation estimates the impact of school specific athletic department variables on the student teacher ratio. The coefficients are not significantly different from zero. These estimates imply a disconnect between athletic success (Profit), athletic conference affiliation (PowerConf), commitment to athletics (Part/Coach) and student funding percent of athletic budgets (Student Fees). The equation reveals a mutually independent relationship between academic success and STR. The second column displays the same result using ACS as the dependant variable.

Table 7 presents the results for Equation 3. The dependant variable is nominal athletic department expenses. The coefficient value of the PowerConf variable is near 51 million. Power Conferences budgets are $51 million greater than non-power conference universities, holding other factors constant. As expected profit margins positively impact spending. Once again the student fees variable is negative even after controlling for profit margin and Power Conference. This may be explained by the outliers among athletic programs. Some of the Power Conference universities profits are extremely high while some on the largest losses are Power Conference universities. These results suggest that profitable athletic departments spend their proceeds on the athletic department expenses. However, students benefit when athletic departments profits subsidize student activity fees.

In NCAA Division I public universities, the students bare a larger burden of the athletic department expenses in the non-power conferences than power conferences. Yet, the NCAA legislative committees and revenue distribution plan favors the power conferences. To some extent the NCAA revenue distribution creates the profit of the Power Conference schools since some of their profit can be attributed to the NCAA payout. That being said, the power conference schools have a greater ability to earn profit without the assistance of the NCAA.

The NCAA appears disingenuous in their objective of providing a “level playing field” or “ensuring equitable competition.” A more equitable approach would replicate the revenue sharing system of the for-profit Major League Baseball (MLB) or the National Football League (NFL), where owners agree that parity leads to profit. In MLB large market teams are levied a luxury tax that is distributed to the small market teams. This Robin Hood type policy promotes more parity, assuming the receiving team uses this money to invest in quality players. Franchises that have kept the proceeds for profit have been mired in mediocrity. The NFL model is more cooperative and perhaps a better fit for the NCAAs. The television contracts revenue, merchandising revenue, and forty percent of the gate receipts are pooled and equally distributed among the teams. This cooperation leads to parity and additional profit for all members.

The NCAA has compiled $445 million in marketable securities and cash. This money could be used to support smaller school’s athletics or provide seed money for start-up football programs. The evidence suggests that smaller schools are fighting to compete and they are using student fees to fund their operations. If the NCAA’s goal is equity then the current system of side payments to large conferences contradicts their objective. While cooperation is not the foundation for American capitalism, it works well in professional sports as a means of maximizing league profit. A more equitable and comprehensive system of revenue distribution should be a goal of the NCAA, otherwise students fees will rise or students-athletes will not have the opportunity to compete in inter-collegiate athletics.

Even though the objective of the NCAA is to create a level playing field and equity among member institutions, the NCAA revenue distribution and legislative structure support the dominance of profitable Power Conference universities. Universities in the Power Conferences receive close to 50 percent of the revenue from basketball proceeds and are guaranteed placement in the lucrative BCS football games. Coaches and athletic staffs spend in excess of $50 million more than their non-power conference counterparts. Meanwhile, the student-athletes provide free services in the monopsonistic labor market. And, school representatives avert unethical practices to insure economic rents.

Profitable athletic programs provide some positive externalities for the student body and the athletic department at profitable institutions. The athletic department profit leads to lower student fees necessary to support athletics, particularly in the Power Conferences. The percentage of athletic department spending that is funded by student fees is twenty five percent lower in Power Conference public universities. The profit does not appear to seep into the academic side of campus. Assuming comparable faculty quality among public universities, there is no significant difference between student teacher ratios and average class sizes in Power Conference institutions versus non-power conference institutions. The negative spillover effect of profit driven college athletics has never been more apparent than in present times. A more equitable plan for sharing revenue should be developed to insure the objective of a level playing field and equitable competition.

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