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College Sports’ Rising Costs Becoming Institutional Level Problem

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JohnWallStreet
January 23, 2024

College Sports’ Rising Costs Becoming Institutional Level Problem

College sports has a spending problem–beyond the facilities arms race. 

Athletic departments around the country are struggling to generate revenues capable of offsetting runaway expenses. Inflation, NCAA deregulation (think: changes in recruiting guidelines, change in the definition of a full scholarship), and COVID-related loan obligations have all driven up the cost of operation in recent years.

“The cost to colleges and universities in student-athlete recruitment and acquisition is higher than it’s ever been. Then you add deregulation, more liberal transfer guidelines and chaos in NIL, it makes these commitments more like a series of one-year contracts,” Tim Pernetti (president of IMG Academy and former director of athletics at Rutgers University) said. “Then you face the cost to retain student-athletes including developing deep NIL resources, and making massive experience investments which is another challenge entirely.”

College sports insiders estimate that ~75% of Division I athletic departments now rely on some form of institutional support, with some receiving tens of millions in subsidies annually.

“Faced with these rapidly changing dynamics, many colleges and universities are under tremendous pressure to generate more revenue and having to subsidize athletics at a higher rate than they have historically,“ Pernetti said.

The University of Arizona is among them. Arizona Athletics, which has historically been self-sufficient (save a few million dollars in student fees), was $30 million in the hole last year. Central campus stepped up to cover the overage, and will be expected to do so again this year.

Athletics’ budget imbalance has been a topic of consternation in Tucson. The school’s financial situation has been well-documented. Last night, Arizona relieved popular athletic director Dave Heeke. Heeke just hired new head football coach Brent Brennan last week.

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The challenges on the expense side of the equation exist everywhere in college sports, including at my beloved alma mater; the University of Arizona. Travel costs have risen post-pandemic (think: fuel for private charters, hotel rooms) and the costs associated with financial aid continue to climb as tuition keeps rising. Schools are now tasked with repaying funds they never intended to borrow too. 

“The marketplace sees the visible new facilities and physical investments, they do not understand how schools have [also been forced to] increase investment in academic support, and life skills such as wellness, financial literacy, mental conditioning, nutrition and more,” Pernetti said. “Programs need do more than ever before in holistic personal development to differentiate themselves from the competition, because the number of student-athletes that can truly capitalize on meaningful NIL compensation is still very small.”

It’s been reported that Arizona Athletics has fallen $85 million short in recent years. But that total is misleading. The figure includes a $55 million payment the department received from central campus during the pandemic. 

While reports have indicated the administration is unhappy about the speed at which the money is being paid back, athletics never viewed it as a loan (which is why it never made efforts to repay it). There are no installments budgeted for the year ahead, either.

$30 million is the ‘real number’ Arizona Athletics needs to account for. 

It spent $125 million to operate at an elite level in ’22-’23 (see: football’s highest final ranking in a quarter century, MBB finished #8 in AP poll), but only took in $100 million of revenue. The missing $5 million is the rights money the Pac-2 conference members withheld from distribution. 

So, how will Arizona close the gap and right size its athletics department moving forward? That likely won’t be decided until a new AD is hired.

But one must assume it will start with enhancing existing revenue streams and creating some new ones. The school’s renegotiated multimedia rights agreement, which begins next year, will add $3-4 million annually to the top line. 

Arizona’s athletic department coiuld also become more strategic with football and basketball seating (think: Hornets renovation, Baylor’s decision to downsize) and ticket sales, and generate some more revenue from a revamped seat licensing program. 

Arizona Athletics can work on the cost side of the ledger too. 

The department has historically operated in a decentralized manner, with each sport maintaining its own budget. The belief is centralized administration and purchasing (think: food, hotels, airfare) could save the school several million dollars per year.

The aforementioned revenue growth and cost savings will make the deficit more manageable, but Arizona Athletics is still likely to fall ~$20 million short this year.

Central campus will be asked to help balance the budget until it can be right-sized. Arizona Athletics’ rainy-day fund was exhausted during the pandemic. 

Institutional subsidies, like the one the Wildcats will receive, have become commonplace in college athletics (see: Rutgers University lent athletics $84 million over a recent six-year period).

Schools are willing to pay them because “exposure and visibility in collegiate athletics are at an all-time high for colleges and universities,” Pernetti said. “It’s a year-round conversation. Athletics is their single strongest marketing vehicle, it’s literally the front lawn.”

Some will argue against Arizona investing in sports at a time when the University is facing broader financial challenges. So, look for the school to get creative and try to absorb some of the athletic department’s costs (think: facilities management) rather than sending more cash out the door. Centralizing a portion of Athletics’ existing on-campus business and operational responsibilities could trim as much as $10 million from the deficit annually. 

Arizona seems unlikely to immediately discontinue any of its sports. Cutting programs at the bottom of the value chain isn’t going to save much money.

However, once the balance sheet has been right-sized, sharp money is on the school re-evaluating its varsity offerings. It can’t afford to be nationally competitive in 22 sports any longer.

For context, most Big 12 schools sponsor 16 or 17 programs. Arizona will be moving to the Big 12 conference at the completion of the current academic year.

Budget cuts could also coming to many sports as the University is expected to double down on the programs generating the greatest ROI (see: football and men’s basketball).

Baseball, softball, and women’s basketball will presumably continue to receive support too. Albeit to a far lesser degree. As fast as WBB is growing, it’s not growing fast enough to solve the school’s existing revenue/expense imbalance.

Not with costs climbing as fast as they are.

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