Friday, May 15, 2015

Joe Nocera's Dog Just Won't Hunt

Joe Nocera, eminently readable as always, starts from a fundamental premise that powerful college sports-oriented alumni always win against the academic side ("Books vs. Games", NYT, May 12).  Of course there are other elements in the sports constituency than just alumni, but I digress.

Nocera reels off a number of truths that he holds to be self-evident:

"... the athletic department's out-of-control costs..."
"...Rutger's athletic department has consistently run large deficits."
" that might have gone to professors’ salaries or other academic needs."
"...took it out of the hide of the students themselves."

Hammering the point home on books vs. games:

"It [Rutgers] is responsible for educating 65,000 students. Why isn’t that more important that (sic) competing in the Big Ten?"

As the final nail in the coffin:  "Why does the tail always wag the dog?"

But as Jason Winfree and I point out in our 15 Sports Myths (Stanford U. Press, 2013), there is a much more productive explanation of the relationship between university administrators and their athletic departments.  Universities actually do both books and games and carefully weigh value and cost margins in making their spending decisions on each.  The choice by university administrators to put relatively small amounts of money into their athletic departments pays off in relatively small ways, but typically with a believable and legitimate return if you look in the right "spot" (only mild apologies for the doggy pun).

Compared to this alternative economic and policy description, the "tail wags the dog" belief is a dog that won't hunt.

Rather than just spending what it wants with university administrators close at hand with the poop bag, actual budget hearings place the athletic department in the same setting with the rest of the programs at the university.  The allowed spending decision comes first, then the spending.  And that budget is then overseen by the Board of Regents, the Governor, and then on to the legislature.  The athletic department is as controlled in its spending as any other program on campus.  [This may cause chuckles among those dissatisfied with the spending control over universities, generally, but that doesn't distinguish the athletic department on this dimension in any way.]

In an assertion begging justification, Nocera simply names the difference between generated revenues and actual expenditures a "deficit".  But this "deficit" actually represents the administrators' determination of the added amount of money they wish to spend in order to have their athletic program at its desired size and scope.  As it goes, the current level of administrative spending at Rutgers is around 25%  of the total (it has not always been that way, and last year's level is higher, which is why Rutgers is interesting).  However, especially during a conference transition, this is not uncommon and administrators expect to see a return on that investment.  If things go at Rutgers as they have elsewhere, they will, as Winfree and I have documented for all of college sports.

Next up for Nocera:  The administration's portion represented " that might have gone to professors’ salaries or other academic needs."  Having already ignored the budgeting process within the university, might as well ignore the rest of the budgeting process beyond the university!  Administrators decide the right level of spending at their university, tote up research revenues, ask their legislature and other funding sources to cover the rest, and spend the proceeds according to their request.  If $20 million or so for athletics is granted, and then administrators spend it on something else, they will have some explaining to do in the next budget round.  If university administrators tried to spend the allocation to athletics on academics, as Nocera suggests, it is likely that the next go-round would see $20 million or so less in the Rutgers budget.  Budgeted funds are simply not always as fungible across different purposes as many believe (desire?) them to be.

And taking it out of the hides of students is also an assertion outside reality.  Student fees go to fee-backed student activities, and the distribution of that budget is determined by student government.  So, actually, student government spends the money on athletics because that is the (admittedly never perfect) reflection of the self-assessed welfare of student government leaders.  Usually, this is also the source of the lower-price ticket quid pro quo.  Yes, I recognize the imperfect nature of the reflection of the preferences of some students.  But that is hardly unique to this little democracy.

Besides, we're really just not talking about all that much money from the overall Rutgers budgeting perspective.  Nocera reports $183 million through 2022.  Taking that to mean 7 years, that's $26 million on average.  Nocera also reports Rutgers' annual budget is $3.6 billion.  So, that's .026/3.6 = 0.7% on athletics (yes, less than 1%).

As to the faculty response, let's turn to just the 27.6% of budget, or $994 million, that goes to instruction (and ignore all of the other spending on students like housing, dining, aid, services, share of library and plant operations, etc.; see Rutgers budget description).  First, again, that's 26/994 = 2.6% and relatively speaking just not very large.  But, second, $26 million is $26 million and we are a jealous lot.  Any dollar going to anything except what we cherish (usually our own program and our own salary) is mis-spent.  And all of us would like $20 million added to our favorite.  Alas, third, as noted above, that $20 million or so a year isn't really ever going to go to our heart's desire in the first place.  Benefactors agreed to spend it on athletics, not on us.

So, university administrators balance books and games, just as they balance economics books against sports management books against everything else that the university is expected to do.  All of the dogs line up to be fed and they are, each according to their contribution to the goals of university administrators--research, teaching, and service.  They each have also already wagged their tails and their ration is the result of that demonstration.  The academic side does mostly research and teaching, and the sports side does mostly service.  But all are valuable to university administrators which is why they "feed" them all in the first place.

Pitting one against the other misses the point of just what it is that universities are up to in the first place, fomenting conflict along the way.  And to what end?

Saturday, May 9, 2015

Before We Get Too Carried Away with the 8-year Project Royals...

Announcers are not sports economists, so I don't hold this too much against Rex Hudler (guest announcer on the Tigers game the other day).

Hudler went on a bit about how the KC Royals should not be such a surprise.  According to Hudler, the team was eight years in the making with careful strategy/moves etc. by sharp management.

No doubt; Kendrys Morales is really coming through for example, and some low-salary pitchers are going great guns so far.

But let's not forget this:

2011- Royals ranked last (30th) in MLB payroll at $36.1M.  They also received $29M in revenue sharing to take into...

2012 - Royals move up to 27th in MLB payroll at $60.9M.  If the increase of $24.8M all came out of previous revenue sharing, that would still leave $4.2 M.  The Royals received $16M in revenue sharing at the end of 2012, so their revenue sharing account now contained $20.2M.  And we're off to...

2013 - Royals move up to 22nd in MLB payroll at $80.5M.  If the increase of $19.6M all came out of previous revenue sharing, that would still leave $600,000.  The Royals received $36M in revenue sharing at the end of 2013, so their revenue sharing account now contained $36.6M.  And we're off to...

2014 - Royals move up again to 19th in MLB payroll at $92M. If the increase of $11.5M all came out of previous revenue sharing, that would still leave $21.1MM.  I could not find any published report of revenue sharing for 2014 (and a quick check with guru Maury Brown - @BizBallMaury - informed me that even devout followers cannot find the data anymore).  But don't let that us stop us...

2015 - Royals move up to 16th in MLB payroll at $113.6M.  The increase was $21.6M.  Given the $21.1M left last year, and given that net sharing to the Royals was surely positive in 2014, it appears a truly trivial amount came out of the 2014 share to get to this payroll level.

So, net revenue sharing proceeds for the Royals more than covered the 33% per annum nominal growth in payroll observed over the last few seasons.

Indeed, nearly all of 2014 net sharing must have gone into other player development expense, since that is required under the CBA and monitored by the Commissioner's office, and reviewable by the players.  At least in the case of the Royals, it looks like revenue sharing has done its job.  [I haven't looked at any other teams and this need not be true in all cases, as many others have argued in terms of "revenue sharing freeloaders" or some such.]

It takes sharp management to get where the Royals are today with pretty close to the median payroll.  But let's not forget that their payroll has dramatically increased, as tempting as it is to attribute it all to outstanding management on and off the field.