When "Subsidies" Really Are Investments: Rutgers Athletic Department Unfairly Trashed

Carl Laemmle in his younger years.

[OK, so he is not really a monster.  But Carl Laemmle was the producer of all the original monster hits--Dracula, Frankenstein, The Mummy, and The Invisible Man.  Maybe somebody else would have anyway, but he did it.]

Just recently, the athletic department at Rutgers was trashed vigorously in the press for the largest per student subsidy of athletics of all FBS schools.  Berkowitz and Upton at USAToday.com, Adelson at ESPN.com, and Reed at Ralph Nader's League of Fans blog.  In 2010, Rutgers received $27 million from the university and student fees (42% of the department budget); $115 million in total since 2006.  I calculate that to be a growth rate of about 7.4%.  This put them at the top of some sort of ranking of university support and student fees in the FBS for 2010.

Sigh.

The USAToday article quotes Patrick Nowlan, executive director of the Rutgers teachers' union, "A student doesn't come to Rutgers to attend a football game.  They come here to get an education--and then maybe to attend a football game."

But (according to the same article) AD Tim Pernetti puts it this way, "With athletics being the big window into everything we do here at Rutgers, and being that we've been able to do it in a positive way, it is an investment in the branding and marketing of the entire place, not just the athletic department."

As with all things, the answer is surely in the middle.  Sports are neither a recess awarded to students chained to their desks all semester nor the end all and be all of branding the entire university.  But what does ring true is that university support of athletics is an investment with a return.

Interestingly, not a single article I could find put it in these terms:  "Investment in athletics at Rutgers grows 7.4% annually since 2006."  Instead, we get the following headlines.  From the USAToday pair, "Rutgers athletic department needs fees, funds to stay afloat"; from the ESPN writer, "Rutgers relies heavily on subsidies"; from the Nader blog, "Rutgers students forced to pay nearly $1,000 each to fund athletics."

This is the worst type of thoughtless shrieking and casts university support of athletics as a requirement to cover bad management at best and extortion from students at worst.  Nothing could be further from the truth.

Jason Winfree, my colleague here at Michigan, and I, in our upcoming Stanford University Press book, document the following from the work of many economists:

• University support of athletics is small relative to university revenues.
• There are returns to the university support of athletics.
• The returns are small in absolute terms.
• The rate of return on university support (as opposed to its absolute level) is quite sufficient.

For example, Rutgers' total university revenues for 2010 were in the neighborhood of $1.9 billion (Tuition and Fees, Grants and Contracts, Auxiliaries, State Appropriation, Federal Appropriation and Endowment Income).  So university support of athletics was in the area of 1.4% of Rutgers' revenues.  It doesn't take much return in terms of gains elsewhere across the university to make an acceptable return (student application quality, faculty quality, donations at large, appropriations from the legislature).

[By the way, academic support was $610 million, 32% of its total revenues, or 23.5 times larger than university support of athletics.  Moving the entire $26 million athletic support over to academics would represent a 4% increase.]

Do ADs ask university administrators for money?  Yes, at all but a very few universities.  Do university administrators have to give it to them?  No, and often they don't (during the recession, numerous ADs have had their support from their universities cut).  So why do administrators fund athletics?  Because the investment pays, just as it does for the English department or the Engineering School.  If ADs show increased value to the university, they get a larger allocation just as does any other department that can do the same.

By all means, there should always be an ongoing dialogue about the proper place of any activity at the university.  But a thoughtful and careful assessment would be wise rather than barely concealed self-interested ranting and raving by faculty and college sports haters.  For university administrators, athletic departments create value just as do the other departments on campus.  Investment is the better word than subsidy in this case.

Bet You Thought I Had Disappeared...

[My daughter's artwork this time, and appropriate for this post title.]

You may have noticed my absence for a while, or you may not have noticed. Not much of a blog if one doesn't blog, eh.

Explanation: Busy helping a pro golfer convince the IRS that he produces both appearance value and image value, and that the latter was larger. Also I'm teaching a new course for me, research methods of all things. But it has proven fun for me (hope so,for the students). And then there was no more time in the day.

But I'll be doing better from now on.

Note I've added my new colleague's blog to my list, Stef Szymanski's "Sporty Business."

Also, let me note that nearly nobody posts any comments, even though my "statistics" report shows you are lurking. Give it a try even though you have to identify yourself. I bet you will find it refreshing to be responsible for what you say.

Coming to a "Sports and Monsters" near you:

Did Manning really generate $233 million for the owner of the Colts?
The Mets, Sterling Equities, and the Madoff fallout.
Value of teams to communities.

And, as always, if you have a topic, hit the link!

THIS IS SO MISGUIDED I HAD TO POST RIGHT AWAY (SORRY NO MONSTER)

This so flies in the face of even Econ 101 that I had to post it right away.  Sorry no monster, I was in a hurry.

Sportsfans.org is a sports fan movement attempting to right many perceived wrongs.  But that should never get anybody off the hook for using really (really) bad logic that flies in the face of even the most basic economic concept.

Headline Dec. 6, 2011:  "High Costs of Sports on TV Always Passed on to YOU"

Grab Line on the webpage:  "Think your cable/satellite bill is high now?  Wait till the costs of the latest NFL TV rights deal are passed on to you."

Weak Thinking:  NFL charges cable/satellite providers whatever it wants for rights fees.  The media providers then pass it along, with markup, to poor slack-jawed NFL fans.  Which they pay because, well, that's just how badly they need their sports fix (I guess; this part is never really covered by anybody who adopts this view).  The cruel, insensitive, and eminently greedy NFL laughs all the way to the bank.

Econ 101:  Both the NFL and media providers are constrained in what they can charge by the willingness of NFL fans to pay for games, given the other options that fans consider to be substitutes.  It is the job of both the NFL and cable/satellite providers to estimate this willingness to pay.  They set their agreement on the basis of those estimates.  If the NFL and media providers are correct, fans pay as estimated and they make profits.  If they are wrong, they sell less than they had hoped, because they charged too much, and they make less than they planned.  This is true whether the NFL has market power or not.

Possible Motive for Publishing Such Weak Thinking:  Sportsfans.org is trying to build membership and interest in their cause.  They say inflammatory things to fuel that interest.

************

Now, perhaps pushing this kind of misinformation serves the needs of sports fans.org, but that can only be in the short run.  In the long run, what will sports fans.org do when it cannot come through on this issue--as long as fans are willing to pay more, the NFL and media providers will gladly charge them for it.  If this is stymied, politically somehow, we are in a regime of price controls that we know will simply reduce the availability of what buyers want most.  Fans will get lower cable/satellite bills because they get less sports programming than they are willing to pay for.

Garbage in, garbage out.

A HARD RAIN'S A-GONNA FALL

Click for IMDB Including Trailer

The discussion is already occurring:  "What to do at Penn State?"  I have my opinions as well.

But this blog is a place for sports economics rather than opinion.   It isn't the economist's job to take sides as an economist.  We reserve that to our non-professional side where we are free to have our opinions like everybody else.  The economic contribution I think of goes like this.

The athletic department is part of an organizational hierarchy at the university at large.  As such, there are levels upon levels of principal-agent oversight going on.  For university oversight, at large (we'll get to the athletic department shortly), there is an immense of amount of slack in this oversight.  This produces quite a bit of independent action by all units at the university with the reckoning coming at budgeting time.

By and large, while not without failures here and there, the monitoring works pretty well across campus.  It has its greatest chance for catastrophic failure as follows.  With lots of slack, an ideologically homogeneous unit with strong external clientele will obtain more freedom than other units.  The chance that this type of unit will do something counter to the welfare of the institution, at large, goes up.

And this special set of circumstances describes the oversight relationship between university administrators and the athletic department to a tee.   [This has been known for years by economists, but has been ably presented by Prof. Clotfelter in his current book Big-Time Sports in American Universities.]

Now, as long as this independence is constrained to just hiring multi-million dollar coaches, or putting up multi-million dollar scoreboards when other academic units struggle, no real harm is done.  That money comes from athletic boosters (by donation or paid attendance, etc.) explicitly for an athletic purpose and never would go to academics in the first place.

But this independence (especially the homogeneous ideology part) has a chance to produce unit cover ups of rule breaking and even criminal behavior.

Unfortunately at PSU, university administrators allegedly committed acts of complicity instead of taking decisive, public, counter-action.

The lesson from economics is that the oversight process is flawed.  Indeed, that the probability of a PSU-type episode was non-zero is clearly predicted.  But hindsight is 20/20 and the question now concerns future action.

On the one hand, just don't play the game at all.  This was the choice early on at The University of Chicago when then President Hutchins abolished big-time football after the 1939 season.  If the costs are so high for university administrations, they can follow suit.

Football fans will scream, but the impact will be small.  Most university administrations spend very little on athletics (trivial percentages of their operating budgets), some none at all.  And the returns to the university end up to be quite small as well (again, as a percent of operations).  The primary hit would be on student leisure choice.  Any number of high-quality institutions simply do not have big-time football.

On the other hand, administrators can recognize the holes in the monitoring process and fix them.  This does not drive the chance of a PSU-like occurrence to zero (nothing can).  But it will reduce them, probably dramatically.  This will undoubtedly result in curtailing the independence of athletic directors, with accompanying pain.  But all administrations face this same possible negative outcome and they have collective decision bodies to do the job across all of college football.

Pulling a third hand out of my hat, it could be that the monitoring process is as efficient as it can get.  This makes for the dismal (science) prediction that, on rare occasion, as in the rest of society, bad things will happen in college sports.  What to do about it now becomes a society-wide issue and beyond the college sports arena.  If the small probability of a truly bad outcome is onerous enough, politically, then Congress can act.

As Bob Dylan put it:

And it's a hard, it's a hard, it's a hard, and it's a hard
It's a hard rain's a-gonna fall.

Right now, it's falling on Penn State.  If the same homogeneous ideology of football exists at other places (an empirical question that will be simply stated as true without any investigation, I suspect), the forecast is cloudy with a chance of rain.

Transcontinental College Football--A New Subdivision in the Making?

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WOW!

That's all I can say.  If the Big East successfully woos Boise State, it will be the first transcontinental football conference.  If it had wooed Utah instead, it would be reminiscent of driving the transcontinental railroad "golden spike"; Promontory Summit is about 90 miles from SLC.  On the other hand, Boise is a good 250 miles farther west than SLC!

Whether Boise State accepts or not depends on their expectation of improved chances regarding the BCS National Championship.  This is truly a great case of decision making at the margin for BSU since it isn't clear they can do any better in the Big East than they've done in the Mountain West.

But to me the more interesting response is by The Mountain West Conference and C-USA... their own transcontinental response if you will.  They have a new college football "association" on the drawing board.  Details are completely sketchy at this point but just the two of them span a vast part of the U.S.  It also is important to note that the two stress that this is a football only "association".

An "association" of 22 FBS football programs, none of which really has any hope of making a BCS game, smacks to me of the creation of a new college football subdivision.  The two tout right now that they have terrific TV appeal to go with geographic match ups.  All they need now is the MAC and Sun Belt to buy into it.  Programs in this larger version of the "association" play in 25%-30% of the non-BCS bowl games and could easily create their own version of the BCS.

Which brings us back to BSU.  It's perhaps a little more likely that Boise State's decision at the margin will lead them to refuse the Big East.  Then what?  The Big East could easily leave the BCS (or be forced out by the rules that specify BCS conference size) and join with these other conferences in their "association".

The rise of rival associations is naturally to be expected in the current conference shake out.  After all, it is the FBS that is the novelty, D-IA used to mean that ANY team could contend but FBS means a team can only contend from a BCS game.

So, what do you all think?  What will BSU do?  And what of the Big East?  Informed economic perspectives welcome (as opposed to arguments based on past allegiance and "money crazy" athletic directors).

The University of Texas and the SEC

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So Texas A&M is bound for the SEC.  Two questions arise.

One.  Why does the SEC want A&M?  Two.  Why is (what's left of) the Big 12 just sitting there?

One answer seems to work for both questions.

The University of Texas is moving to the SEC.

["Aha!  Watson, the game is afoot."  Basil Rathbone was the most famous Holmes, but the picture and link here remind us of an earlier monster movie role.]

Logic.  None of the so-called "equity conferences" needs to add anybody unless they bring enough revenue potential with them to raise the conference average (this could happen by increasing conference membership to 12 so there can be a Conference Championship).  A&M alone does not do this for the SEC, but A&M and Texas fits the bill.  And the strategy is enviable--first make sure that A&M wants to go so there is no interference from the Texas legislature.  Not only was there no interference, but the board of regents (all appointed by the governor) has already given its blessing.  For those doubters--who raises the average for the SEC besides Texas?  Somebody from the ACC?  Miami is now a leper and that leaves FSU or Clemson.  Nope.

Logic.  What's left of the Big 12 sits there because there really are only two teams that fit the "raise the average" requirement, BYU and Notre Dame (let's not even get started on the likes of Boise State or Houston, economically weak sisters).  Even if BYU would come (they could have just said so when they went independent, but they didn't), ND has made it clear by passing on the Big Ten that they prefer independence.  So what's left of the Big 12 may not even be able to get back to 10 teams, let alone the 12 that it takes for a believable Conference Championship.  And Texas knows this.  If they stay, it's the annual Texas-Oklahoma game and that's it.  Since the Longhorn Network is only of value to people in the state of Texas, it is completely portable and no threat to the SEC Network.

Prediction Consistent with the Logic.  Oklahoma and ND join the Big Ten (or Oklahoma and Mizzou, if ND stays indie).  That makes two conferences of 14.  The Pac 12 is right behind with BYU and somebody to go to 14 (the Pac has always been the weaker of the Big 4 and will have to settle for "somebody" to round out 14; I think Oklahoma State, but maybe this is Boise State's big chance).

Logic.  This allows the BCS to squeeze more schools out of the "equity conference" distinction.  The BCS would benefit from dumping the Big East and, if both of the premier Texas schools move to the SEC, and Oklahoma moves to the Big Ten, the BCS can dump the remaining Big Rest as well.  That makes 4 equity conferences rather than 6; the money gets preserved for fewer teams.

Slowly but surely, the Big 12 is working its way backward through history.  Originally, the Big 12 was the Big 6 and then the Big 8.  It never would have made it past 8 if it weren't for the wandering Texans-- Texas, Texas A&M, Baylor, and Texas Tech left the SWC to join the Big 8 in 1994.  That move was the final nail in the coffin of the SWC.  The move of A&M to the SEC, soon to be followed by Texas, and ultimately Oklahoma, signals the end of the Big 12 as well.

Gimme that old time Monster

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Went with the wife and friends to see Cowboys and Aliens.  It was an OK popcorn muncher.  But I was disappointed since I had higher expectations of a Jon Favreau film.  Where's the depth of treatment of...THE MONSTER?

So, to console myself, the next day I watched The Thing From Another World (1951).  Back when men were men, women laughed at them all the time, and a monster was really the star of the show.