Following a Problematic, Yet Predictable, Path: The Unsustainable Nature of the Intercollegiate Athletics System John J. Cheslock Pennsylvania State University David B. Knight University of Queensland Joint with David Knight. Exceptional work.

Everything should be made as simple as possible, but not simpler. Albert Einstein Underlying philosophy – (1) Identify the core elements of the argument (2) Make the argument easy to communicate to others.

A Simple Idea Diverging Revenues Cascading Expenditures Ensuing Subsidies Walk the audience quickly through the basic argument.

Diverging Revenues Great inequality at a point in time with elite schools earning much more revenue than other schools. Increasing inequality as the elite schools saw their revenue go up by greater amounts.

Diverging Revenues: Underlying Theoretical Complexity Changing marketplace: More money in the system. Winner take-all market: A disproportionate share of the money flows to elite programs. Changing marketplace [More money in the system.] Rise of television revenues: Late 1980s - $55-75 million. Today: $1.01 billion. [Increase of over 1,000%] Institutions figure out how to extract more money from fans. Fan base growing more wealthy. [Derek Bok makes same argument about HI ED in general.] Winner take-all market [A disproportionate share goes to elite programs.] Rewards determined by relative performance. Positive feedback loops.

Start with history of winning Start with history of winning. Then move through the various linkages until I return to history of winning. Note that this explains why (a) elite schools remain elite (b) it is so difficult for other schools to break into the elite tier.

Cascading Expenditures: Point in Time Walk viewer through Figure A. Walk viewer through Figure B. Note to items about Figure C: (1) Elite programs spend almost all that they generate (2) Other programs spend much more than they generate. [Expenditures cascade while revenues don’t.] Figure D – Deficits occur when expenditures exceed revenues.

Cascading Expenditures: Over Time Note approach of these graphs – Differences over time for each school. Go over same principles – (1) Elite schools increase spending to match almost all of the increase in revenue (2) Other schools see expenditures increase but not revenues. Deficits increase as a result.

Cascading Expenditures: Underlying Theoretical Complexity Elite athletic programs increase spending when their athletic revenues increase. Resource Dependency Theory Revenue Theory of Costs Increased spending at elite athletic programs lead to increased spending at other athletic programs. Positional Arms Race [Positional Externalities] New Institutional Theory Elite athletic programs could see their revenue be used to support non-athletic activities. RDT – Limited ability of institutional leaders to allocate resources. RT of Costs – No limit to amount of dollars elite institutions could spend for reasonable activities. PAR - Competitive forces cause other institutions to which to keep up. Why do they try to keep up? (a) RDT – Limited ability of institutional leaders to disarm. (b) Pscyhological factors – Optimism. Escalation of commitment. PE – A $1-$2 million salary doesn’t seem that high when others are paid $5 million. A $8 million training facility seems reasonable whether other schools build a $28 million training facility. NIT – Regulations made with an assumption that athletics programs are wealth. Universities mimicking their elite counterparts. Coaches and athletic directors pushing for spending patterns like those at the elite programs.

Ensuing Subsidies Contract to diverging revenue: (1) Subsidies are highest at non-elite programs (b) Subsidies are growing most rapidly at non-elite programs.

Ensuing Subsidies: Can This Be Sustained? Subsidies: Large and growing Subsidies: Heightened opportunity cost Subsidies: Large and growing Nine of the 93 schools had per-student subsidies above $1,000 in 2010. [Up from four in 2005.] 27 schools had figures above $750. [Up from 17.] Average listed four-year tuition in 2010 was around $7,000. Transition: No problem increasing institutional subsidies if schools funding is increasing and students are not averse to tuition increases. Subsidies: Heightened opportunity cost Declining governmental funding. Resistance to tuition increases.

Policy Options Alter revenue distribution Limit expenditures at the top Limit the cascading of expenditures Take no action Such a policy (a) reduces revenues at the top which (b) limits expenditures at the top which (c) limits expenditure cascades which (d) limits subsidies. The KC’s report emphasized the distribution of NCAA basketball revenue and BCS revenue, and that proposal would alter revenue distribution somewhat along these lines. Recent NCAA proposals – Limit number of non-coaching personnel. Limit foreign tours. Create a new athletic division that only contains high-revenue programs. What happens? (a) revenues stop diverging (b) increasing subsidies cause schools to drop out (c) schools continue to increase their subsidy and the system “muddles through”.

Relevant Quotes “I think when we make it, we have a right to spend it. That’s the way America is.” Mack Brown, University of Texas head football coach “We eat what we kill.” Ed Goble, Chief Financial Officer, University of Texas Athletic Department Brown quotes Key omitted point – They only make the money because other schools participate. Quote emphasizes institutional freedom. Those other schools don’t have to participate in football. Key point to your survey of presidents – They don’t feel the ability to choose. Great for this slide to be after a study of boards and before a study of cases where institutions chose to de-escalate. Goble quote Don’t criticize our spending – We are only eating what we kill. Don’t take our revenue – We should be able to eat all that we kill.

Relevant Quotes II “At Texas, it may be sustainable. But think about the schools that are desperately struggling to stay in the game and are dramatically increasing the university’s subsidy of intercollegiate athletics and aren’t succeeding in improving their financial position. Texas, in a certain sense, elevates the stakes of the game so that schools … are further motivated to make financial commitments to try to catch up.” Peter Likins, Former President, University of Arizona Two Points: Texas is note the sole driver of the situation. They just provide the best quotes. This argument doesn’t fit well on a bumper sticker. See the previous two slides.