Pleading poverty

Andy Schwarz does a terrific job of exposing the bullshit behind the insistence that big time college athletics are almost universally run in the red.  (If the economics are truly that dire, why do schools keep making the jump to D-1 sports?)

Even better, he makes three proposals for more honest accounting.

Step 1: Split athletic departments into two parts, one for football and basketball, one for everything else.

In essence, this splits profit generation from how those profits are spent, and quickly disentangles the false connection between football profits and field hockey expenses.

If the two departments were split into, say, the Football and Basketball Department (FBD) and the Olympic Sports Department (OSD), the schools themselves (and Congress, if it so chooses) could make better decisions about whether FBDs were being run efficiently enough to generate sufficient profit, or whether the people in charge of the FBDs were wasting money, perhaps by paying themselves too much

Step 2: Cash accounting only.

Schools should use, and publish, cash-based accounting for their FBDs. No accrual accounting, no cost allocations, and no transfer prices. Unless an activity results in cash flowing out of the university (and not just from one university department to another), the FBD pays nothing for it.

Note: that means paying nothing for scholarships. Why? When the school charges the athletic department for a scholarship, no actual money leaves the university. The price it assigns for managerial purposes is ripe for funny-money bookkeeping…

Step 3: Provide honest incentives and use public scrutiny to keep things that way.

Once we have true measures of cash flow generated, schools should base the salary of their FBD directors on how much money they hand to the university in cash flow each year–or better yet, on a five-year average to avoid short-term gaming. To wit: the University of Texas’s FBD director could earn base pay of $50,000 per year, plus, five percent of all cash flow above a minimum target…

All of that is good.  When you’re spending public dollars, the more transparency, the better.  There’s one little problem, though.

Much as H.L. Menken advised that no one ever lost money underestimating the intelligence of the masses, I think it is nearly impossible to overestimate the power of profit-sharing on an administrator’s desire to show profits. Right now, if the choice is between handing your school $5 million in profits or $1 million in losses–and the latter lets you hand out raises to everyone in your department (including yourself) without affecting your tenure in any way–it’s hard to avoid the temptation to spend every dollar in your budget. Such is the oft-wasteful reality of use-it-or-lose-it budgeting: costs rise to whatever level is allowed.

Well, unless you’ve got a reserve fund to tend to, I guess.  But the overall thrust of what’s there is laudable.  If nothing else, it’s a valid platform from which to discuss meaningful reform.  When the Coalition to Save Collegiate Sports comes calling with its proposals, perhaps it’s a starting point worth raising in response.

15 Comments

Filed under College Football, It's Just Bidness

15 responses to “Pleading poverty

  1. j4k372

    I disagree with his second step. Accrual accounting is more complex than cash accounting, but it gives a much better representation of the financial health of a business. He can say it allows “funny-money bookkeeping”, but that’s why the books are audited by third parties.

    I understand splitting the books into football/basketball vs other stuff. That seems like a good idea.

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    • Bulldawg165

      I was about to post the same thing. I may be a bit biased considering I’m a CPA and former Big 4 auditor, but cash accounting leaves far more room for “funny money” accounting than accrual accounting does. I think the author is mistaking “government accounting” for accrual (yes, for those who don’t know, the gov’t actually gets its own special way of accounting), when it’s even WORSE for “funny money” accounting than the aforementioned cash method.

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  2. Scorpio Jones, III

    Love and money…not a combination that leads to rational thought.

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  3. mp

    Another variable that I don’t usually see accounted for is alumni donations. It’s not current revenue, but it is potentially off-setting future debt. I have read somewhere that there is a correlation between athletic success and donations – not just the Athletic department, but also the general endowment. That seemed to be missing from the UAB study.

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  4. I’m not sure his premise is completely relevant to big money athletic departments. He brings up the issue of transfer-pricing for various departments, but I think that only comes into play when the athletics are under the university’s umbrella. At UGA they are separate entities. You can’t have phony pricing without a cash transfer on both sets of books without some liability or receivable to offset the entry.

    You could play games like that on an unconsolidated basis for departmental financial statements, but when they are consolidated, non-exchange transactions are to be eliminated. I’m not sure that even relates to UGAAA’s financial statements anyway.

    Cash accounting is a horrible idea. You already have a statement of cash flows that mitigates how estimates can alter the financial outlook.

    It seems his real issue is compensation. I don’t necessarily disagree with him there. And, lots of schools that say they operate in the red do it to themselves (Auburn). But the reality is that P5 schools are doing really well. G5 schools, while not impoverished, are not swimming in vaults of gold either.

    If we want to find out if there is enough money to pay players more, the answer is yes, there is.

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  5. This would be key:

    Unless an activity results in cash flowing out of the university (and not just from one university department to another), the FBD pays nothing for it.

    Note: that means paying nothing for scholarships. Why? When the school charges the athletic department for a scholarship, no actual money leaves the university. The price it assigns for managerial purposes is ripe for funny-money bookkeeping…

    It is totally bogus for a University to claim the cost of scholarships by using what other student’s pay. The University is making a profit off those students at that rate, and the marginal cost of an additional 98 students (85 football, 13 basketball) is minimal.

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    • Bulldawg165

      “and the marginal cost of an additional 98 students (85 football, 13 basketball) is minimal”

      Especially when you push most of them into pointless majors with a TA leading the class

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  6. Athens Dog

    Just another confirmation on why I flunked accounting and changed majors…………

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  7. AusDawg85

    Those proposals lack sufficient accounting insight (which is an art and not a science anyway). But reforms to standardize the reporting would go a long way to finding some transparency.

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  8. South FL Dawg

    It’s not an accounting problem. When people are used to lying it doesn’t matter what rules you give them.

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