The Deficit’s Not on the Jumbotron: Snowballing Spending in College Sports

Hyun Ho Lee

The first inklings of what was ahead came in 2007 with the creation of the Big Ten Network. Sports have always been a revered tradition at colleges across America, but huge TV contracts, especially those resulting from conference networks, ushered in a new age of big business sports for the NCAA. Over two waves starting in 2010 and culminating in 2014, the landscape of college athletics transformed through conference realignment driven primarily by the financial potential of conference networks and football conference championship games. The unintended consequence of massive revenue growth from television is that athletic programs, saturated in cash, have created an unsustainable environment of snowballing spending in college sports.

Non-FBS Cornell University, which competes in the scholarship-free Ivy League, provides a look into the past of major college sports. The financial change happening at the top football schools over the last decade has not affected schools like Cornell directly; Cornell continues to receive negligible revenue from television. The university instead supports its athletic program on the three traditional revenue pillars: donations, university subsidies and operating income from ticket sales and student activity fees.

According to Larry Quant, deputy director of athletics for finance and administration at Cornell, each of these revenue sources account for about a third of the Cornell athletic program’s total operating budget. Considering Cornell receives about $6 million in annual gifts in support of operations and collects another $4 to $5 million annually from its $105 million athletic endowment, it can be estimated that Cornell operates on roughly a $30 million budget receiving around $10 million each from university subsidies and athletic operating income in addition to donations.

The financial breakdown for athletic departments at the top football schools now is very different. Primarily behind robust growth in TV contracts and licensing, big time college sports has seen its revenues skyrocket. An increase in revenue has not led to an increase in profitability, however. Surprisingly, the opposite is true. With the promise of even bigger TV contracts tomorrow, an 83% increase in overall revenue for the 126 Football Bowl Subdivision (FBS) schools was outpaced by an increase in spending of 115% between 2004 and 2013. Accordingly, the business model of many top athletic programs currently depends heavily on increasing television revenue to support liberal spending practices.

FBS athletic departments have used the influx of television revenue to participate in an arms race to hire top coaches and upgrade facilities. The average FBS head football coach today makes almost $2 million a year and some schools like Michigan pay $10 million a year to have a premier coach like Jim Harbaugh lead their program. Schools spend millions of dollars every year getting the newest and shiniest upgrades under pressure to attract top recruits.

Auburn football demonstrates this spending mentality well. The program generates in excess of $100 million in revenues per year yet continues to post deficits due to spending ranging from private jets to multi-million-dollar coaching salaries. The newest purchase, a video board the size of a 5 story building unveiled at their football field in 2015, cost $13.9 million and was approved despite the athletic department posting a deficit of $17.1 million in 2014. It can be argued that for programs like Auburn, which draws 80,000 plus fans to every home football game and enjoys generous support from its alumni, the innate value of a successful football team is worth the paper losses. However, significant new investments in athletic departments at the top schools trickle down to encourage less successful programs to spend more as well.

The spending culture has affected the way nearly all athletic programs conduct business, even at schools like Cornell. For example, Cornell competes directly with FBS schools in sports like lacrosse and hockey. When a school like Duke invests millions in its lacrosse program, it makes it much harder for Cornell to attract talent and run a winning lacrosse team without matching spending.

Consequently, the widespread belief is that a program must spend more to be more successful. If a program struggles, the accepted solution is to pad budgets, not squeeze them. Rutgers football is an interesting case study for this behavior. New Jersey’s largest public school, Rutgers has aspired for the last decade to become a top tier program. Following a move to the Big Ten, the school subsidized a $102 million expansion of the football stadium in 2009, billing it as the key to making Rutgers a profitable athletic program. This promise has not materialized; the annual deficit for the athletic program has continued to grow steadily from $22.7 million in 2004 to $36.3 million in 2014.  Schools have shown they are even willing to take funds from their students’ tuition and mandatory fees, about $1400 per student at Rutgers, to subsidize athletic departments.

Subsidies for athletic departments have increased even amid an overall cost-cutting environment at many public institutions. In 2010, Rutgers froze wages for its entire faculty to shrink its budget by $30 million but continued to invest heavily in its sports programs. Overall, annual spending at the 126 FBS programs has increased from $2.6 billion to $4.4 billion over the past 10 years.

Despite rigorous cost increases, college athletics have continued to grow. Exorbitant spending increases have been matched over the past 10 years by similarly exorbitant revenue increases from TV contracts. Immune to clear signs of concern, companies continue to pay ever higher fees for the rights to broadcast college sports. Earlier this year, the Big Ten announced that it had split its television contracts between ESPN, FOX and CBS in a deal that is collectively worth $440 million annually for the next 5 years. This deal is not unique. In 2014, CBS paid $800 million for the rights to broadcast three weeks of March Madness, a contract that was only worth an inflation adjusted $12 million 30 years ago.  Television revenue continues to feed the spending machine.

However, the inherent value of these television contracts has a limit and cannot continue to match the growth rate of prices indefinitely. A decrease in television revenues would cause sharp changes to the spending habits of athletic programs, and there is evidence that the bubble in TV contracts has already begun to leak.

Data collected by Nielsen shows that the number of people who watch college sports has remained fairly steady over the past decade. However, the number of sports television programming hours and the price companies are willing to pay for the programing has increased exponentially. In addition, the way people view college sports has become less profitable as people increasingly cut the cord and go for cheaper alternates. In 2014, cable saw subscriptions decrease for the first time ever and the household penetration of cable TV has declined from over 88% in 2010 to below 80% in 2015.

Sports programing is especially exposed to risk from technological changes due to its disproportionately high cable costs. While the median cable fee for a channel is $0.14/month, sports channels must charge considerably higher fees to operate. ESPN, for example, charges by far the most of any channel at $6.04/month. Baked into most cable packages, ESPN has been able to convince millions of individuals who do not watch ESPN to pay its high cable fees. However, the disruption of a-la-carte television sources like Roku, Apple TV and Netflix has created cheaper, more flexible options for viewers. ESPN has lost nearly 10 million subscribers since 2013 and its performance continues to drag down the stock of its parent company Disney.

Sports television faces real risks related to paying for television contracts above their intrinsic value. The business of major college sports, propped up by TV revenue, will experience deficits and cost cutting if these risks materialize. Athletic departments will have to either cut sports or adopt more sustainable spending practices.  

Here, FBS schools could benefit from studying Cornell. Cornell’s athletic department carries 37 varsity sports and roughly 6% of every incoming class is made up of recruited athletes. However, the athletic department does not receive any revenue from television contracts and accepts only a third of its operating budget in subsidies from the university. In comparison, Football Championship Schools (FCS), which includes Cornell, obtain 71% of their revenues from university subsidies on average.

Cornell does this through sustainable spending practices including coaching endowments and funding capital projects with donations. The athletic department at Cornell is unique in that it created the country’s first endowed coaching position and currently has the most named coaching positions of any school in America. Cornell also does not use university money to upgrade its facilities and the recent $8 million Schoellkopf renovation and $5 million Lynah project were entirely funded by gifts from alumni, parents and fans of the program.

Over the next decade, the expansive growth of television contracts, which has characterized the past decade in college sports, should slow down. Athletic departments will have to adapt their spending habits to reflect the downturn of revenue. The cost of winning has risen in college sports and universities will need to decide if and how they will continue paying.