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Antitrust exemption may aid college sports’ untenable situation

The finances and the legal framework of college sports are both on shaky ground. The status quo, even with some tweaking, will not provide a stable foundation going forward.

The NCAA just released its latest Revenues and Expenses Report for Division I athletic programs. The picture is not pretty. At the FBS level, the median deficit of the 128 athletic programs was $12.9 million in 2014-15. At the FCS level, it was $12.0 million and at D-I without football, $11.8 million. The largest financial loss on an operating basis in FBS was $44.6 million, and 52 programs had operating losses of more than $16.6 million.

Overall, only 24 of the 128 programs (18.75 percent) experienced a net operating surplus (generated revenue exceeded operating costs).

As troublesome as these operating deficits are, the actual financial situation of FBS athletic programs is still worse. First, most capital costs, particularly facilities financed by debt outside the athletic department, are not included in these operating figures. An NCAA study in 2005 estimated that the average FBS program had capital costs exceeding $20 million annually. Second, many indirect expenses, such as a pro rata share of the university president’s and top staff’s compensation, along with their office rent and operating costs, are not included. Third, donations to the athletic program are considered part of generated revenue, yet some of these funds may come at the expense of donations to the general fund. (Some of these additional expenses are offset by over-counting tuition costs related to athletic scholarships.)

When a full and proper accounting is done, there are typically only a half-dozen or so FBS programs in any given year that experience a true financial surplus.

How can typical FBS athletic programs be throwing off tens of millions of dollars of deficits every year when television, postseason bowl and sponsorship revenue has been growing so robustly and athletes’ compensation is suppressed?

To be a competitively successful program, with salary payments to athletes prohibited, the most effective way to recruit the best athletes is by providing successful coaches, lavish facilities, higher cost-of-attendance allowances and effective support systems.

Unlike a typical commercial enterprise, college sports programs do not have stockholders who demand a profit at the end of each quarter so that the price of the company’s stock will rise or that dividends may be paid out. Rather, college sports programs have stakeholders (e.g., boosters, season-ticket buyers, alumni, administrators, students and state legislators) who, above all else, want winning teams. The primary pressure placed on athletic directors is to find a way to win, not a way to make profits.

College sports program stakeholders put pressure on ADs to win on the field, not produce profits.
Photo by: GETTY IMAGES

What this means is that when the typical AD at a power five conference school sees additional revenue entering the program, the first and dominant thought is: “How can I put that revenue to use to build a more successful program?” In the hypercompetitive world of big-time college sports and the arms race it engenders, there is always some additional enhancement that an AD is yearning to make.

In short, the current situation is not financially sustainable.

The legal standing of college sports is also on thin ice. In recent years, there have been numerous antitrust challenges to NCAA rules through cases involving pay and benefits to college athletes, the number and duration of athletic scholarships, athletes’ ability to receive advice or representation from an agent or lawyer, length of the playing season and selection of teams for postseason championships, and payment of assistant coaches. The nation’s antitrust laws are not easily applied to college sports.

The Sherman Act of 1890 prohibits all contracts, combinations or conspiracies in restraint of trade that are unreasonable. It was intended to govern commercial activities. Colleges and universities enter into contracts and combinations in order jointly to compete in sports. In antitrust cases involving intercollegiate sports, the first question is whether the challenged rule is fundamentally commercial in nature. If answered affirmatively, the next question is whether the rule is unreasonable because it causes significant anticompetitive effects.

If the rule causes anticompetitive effects, then these effects must be balanced against any procompetitive effects it engenders. There are, however, no clear rules, no clean-cut balancing tests with objective criteria, and few other mechanisms to make these judgments unambiguously. The outcomes of court cases, then, depend heavily on the subjective evaluation of evidence by judges in different jurisdictions at the trial, appeals and Supreme Court levels. Unfortunately, last month the U.S. Supreme Court denied certiorari in the O’Bannon case, leaving substantial confusion about the interpretation of amateurism and its impact on the popularity of intercollegiate athletics.

Litigations based on labor law against the NCAA also have been brought and, at least, one case remains under appeal.

These litigations not only end in nebulous and shifting guidelines for the rules of college sports, they require gargantuan resources to prosecute. The O’Bannon case was first filed in 2009. After the trial court decision, the O’Bannon plaintiffs were awarded costs of more than $40 million to be paid by the NCAA. The NCAA had to pay its own legal expenses on top of that. The costs rose further as the case was prosecuted twice at the appeals court and Supreme Court levels.

One solution, as suggested by Gerry Gurney, Donna Lopiano and myself in “Unwinding Madness: What Went Wrong with College Sports and How to Fix It,” is to provide college sports with a limited and conditional antitrust exemption. It would permit the NCAA and its member schools to impose certain rules such as prohibiting payment for play (e.g., salaries) to athletes without fear of violating the antitrust laws, while allowing certain types of payments and benefits (e.g., payments for third-party endorsements) to athletes. These exceptions would be provided if cost-control measures are implemented (e.g., capping coaches’ salaries and facilities spending) and player-centric measures are implemented (e.g., protecting the health, safety and well-being of college athletes and requiring the primacy of academics in intercollegiate athletics). Thus, the proposed limited and conditional antitrust exemption would promote socially and educationally desirable policies while simultaneously promoting greater cost savings in intercollegiate athletics.

It is time for Congress to set public policy regarding college sports.

Andrew Zimbalist (azimbali@smith.edu) is the Robert A. Woods Professor of Economics at Smith College. His new book, due next month from Brookings, is “Unwinding Madness: What Went Wrong with College Sports and How to Fix It.”

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