Staying out of the fiscal red zone

From his corner office on the third floor of the Morgan
Intercollegiate Athletics Center, Dan Guerrero calmly watches over
one of the most successful sports programs in the nation. But last
fall, a set of numbers sitting in front of Guerrero gave the UCLA
athletic director reason for concern. During the 2003-2004 academic
year, UCLA’s Athletic Department ran a $163,943 budget
deficit. Despite capturing three national championships, the budget
was in the red for the first time in 14 years. For most
universities, running a deficit is not terribly uncommon and does
not carry severe repercussions. Danger only arises if an athletic
department consistently and grossly fails to meet its budget. For
example, UCLA was forced to cut men’s swimming and gymnastics
11 years ago because of lingering budget-related issues. The most
recent deficit didn’t call for such drastic measures.
However, it raised eyebrows, particularly since many of the
contributing symptoms aren’t expected to disappear anytime
soon. Seeking to compensate for these perennial factors, Guerrero
went through a comprehensive exercise with his senior staff
approximately a year ago, examining every operation and every sport
in order to find ways to balance the books. It appears to have been
a fruitful meeting. Earlier this month, all NCAA member
institutions were required to release their net revenues and
operating expenses as part of the Equity in Athletics Disclosure
Act. According to this report, UCLA brought in $44.5 million and
generated about a $2,000 surplus. It was a modest amount compared
to the multimillion-dollar surpluses turned out by schools in other
parts of the nation. Nevertheless, it was considered a notable
accomplishment for a department facing increasing monetary
pressures and fielding two major sports programs that have
struggled recently. “We have to be competitive and
entertaining and compelling enough for people to donate,”
Guerrero said. “The proof is in the pudding. If we put out a
good product, people will want to support it.”

Home is where the difference is Some say
it’s all about location, and if that’s the case, UCLA
fits right in with its geography. Not a single Pac-10 school had a
multimillion-dollar surplus according to the EADA report.
Meanwhile, California and Washington ran deficits of over $1
million. Of the 30 schools researched for this article, none
outside the Pac-10 ran a deficit last year. Furthermore, each of
the other five major football conferences (the Big Ten, SEC, ACC,
Big East and Big 12) all had at least two schools running
multimillion-dollar surpluses. To Guerrero and others, this
isn’t particularly surprising. With football and men’s
basketball serving as the major economic drivers, athletic
departments that sell tickets in these sports tend to have the
highest profit margins. “It doesn’t matter who Texas
plays, they’re going to fill the stadium every game, year-in,
year-out,” Guerrero said. “When you know you have that
revenue stream coming in, it’s a different market that
supports the program unconditionally. That’s not the reality
in a lot of West Coast situations. It’s a whole different
model.” Cal’s Deputy Director of Athletics Steve Holton
also sees a difference between Pac-10 programs and the rest of the
nation. “You’re going to see 70,000-80,000 at a
football game in the other big conferences,” Holton said.
“You have to be very successful in order to get that kind of
attention here.” Like Berkeley, Guerrero feels that general
fan support in Los Angeles is much more conditioned on success,
citing the Dodgers as the only local franchise that has always
drawn in fans regardless of their record. “You’d love
to be able to pack the Rose Bowl every game, but that’s not
L.A.,” Guerrero said. “When USC was down, they were
averaging 45,000-50,000 a game. It’s cyclical. If your
product goes bad again, your fans won’t come. That’s
very difficult to manage, there’s no question about
it.”

The “winning” factor Success in one
of the major sports does not necessarily translate into budgetary
surpluses though. Despite a 10-win football season in 2004, Cal ran
a multimillion-dollar deficit for the fourth year in a row.
Meanwhile, Vanderbilt, which finished last in the SEC in football
and sixth in men’s basketball, had roughly a $700,000
surplus. “It’s not as entrenched in the culture here as
other parts of the country,” Cal’s other Deputy
Director of Athletics Teresa Kuehn said of the college sports
scene. “There’s so much competition for entertainment
in this market. In some of the other conferences, the schools are
the pro sports. The fan base is more stable than in the west. We
have fair-weather fans.” And as seen in Cal’s $8
million deficit a year ago, those fans may not magically appear
overnight. Athletic departments are aware that one strong season
may not immediately boost revenue figures. “As positive a
season as we’ve had football-wise, the community in general
sits back and waits to see if it’s for real or not,”
Guerrero said. Many schools struggle to field competitive programs
in either of the major sports, adding an additional obstacle to
generate money and stay solvent. Though Texas has not been one of
those universities in recent years, Chris Plonsky, the
Longhorns’ director of women’s athletics and external
services of all athletics, has tried to ensure her school will
generate surpluses regardless of how the major programs perform.
Last year, Texas brought in almost $90 million, good enough for a
$15 million surplus according to the EADA report. Though she admits
these figures were partly due to nationally ranked football and
men’s basketball teams, Plonsky feels they could be sustained
without that same level of success. “Winning solves a lot of
problems, but it has more to do with buying in with the people in
the programs,” she said. With boosters contributing
significant amounts to athletic departments, Plonsky has made a
concerted effort to sell the charitable aspect of financing a
student’s education. Pitching things such as tax
deductibility rather than BCS rankings, the Longhorn Foundation
raised over $20 million last year, up from $4 million when Plonsky
headed the marketing department in 1993. “We sold our
fundraising foundation almost like a 21st sport,” she said.
“We want people to buy into the concept of donating on an
annual basis, where no one asks what the record will be.”
Plonsky added that she does not feel geography itself adequately
explains an athletic department’s ability to run a surplus.
Additionally, she acknowledged that while Texas did generate a
healthy surplus, the $15 million amount shown in the EADA report
was not accurate. Because the report does not mandate uniform
accounting rules, schools themselves decide whether to include
things such as camp revenues or debt servicing, causing certain
discrepancies.

Cuts that make the grade When the 2003-2004
numbers were released, there was a laundry list of explanations for
UCLA’s budget deficit. Buyouts from contracts for former
football and basketball coaches, Bob Toledo and Steve Lavin
respectively, were six-figure sunken costs the department had to
absorb. A 30 percent allocation cut from the student government
slashed an annual source of funding. And a 32 percent spike in
tuition increased the scholarship costs footed by the athletic
department. “When I came in, our scholarship budget was
around $5 millon,” said Guerrero, who is in his fourth year
at the helm. “This year, we’re projecting those
scholarships to be almost eight million. We’ve made a
commitment to women’s rowing to add a couple scholarships to
continue to meet Title IX. That’s where it makes it harder to
meet your budget.” For Cal, meeting its budget is even
harder. The Bears carry 27 varsity sports and 923 student-athletes,
the most in the Pac-10. Comparatively, UCLA has 22 sports and 585
student-athletes. Texas has 18 sports and 509 student-athletes.
Kuehn feels this is a factor contributing to Cal’s long-run
deficit problem. “Financial aid alone is such a big part of
our budget,” Kuehn said. “We’ve had operating
cuts anywhere from 15 to 30 percent.” Kuehn has heard the
rumors that Cal will have to cut back on funding some of its sports
to meet its budget. However, in her four years at Cal, she insists
that there hasn’t been any serious talk of doing this.
Instead, the Bears have drawn back in areas such as facility,
equipment, and custodial operations. “We’ve gone
through real painful expense cuts,” Kuehn said.
“We’ve tried to make most of the cuts in administration
to salvage student athletics to keep it competitive. We want to
maintain the experience of students.” Though there may not be
serious talk of some varsity sports being stripped at Cal,
officials within the department are acknowledging the increased
pressure to scale back. Holton said the department has repeatedly
asked coaches to take a look at their expenses and find ways to
reduce costs. “The level of hotels you stay at, the per diem
amount, type of transportation, and whether you schedule games in
the western third of the country,” Holton said. “Those
are things we ask coaches to take a hard look at.”
UCLA’s situation may not be as dire as Cal’s, but
Guerrero approached the department’s deficit in 2003-2004 in
a similar manner. To save money on operations, UCLA made a
concerted effort to rein in the types of expenses it could control.
For example, Guerrero noted that opening up the gates half an hour
later at the Rose Bowl saved the department significant amounts of
money in game management during football season. “We pretty
much cut operations,” said Guerrero, noting that UCLA
didn’t compromise any of the sports budgets and actually
increased academic support. “We didn’t fill positions
that could have been. We streamlined and consolidated. We became a
leaner operation.” With the UC regents recently announcing an
eight percent fee increase next year, both Cal and UCLA’s
athletic departments may feel pressured to get even leaner. Both
would prefer to shoulder this greater monetary burden through gains
on the other side of the books. “We’re just now
starting to reap the benefits of the investment in our revenue
sources,” Kuehn said. “We put a lot of money into
football, our fundraising, and marketing units. It does take some
time, but I think we’re doing fairly well growing our
revenues.” These revenue sources come from a variety of
areas. Last year for instance, UCLA generated new sources by
reworking and extending its contract with adidas and by cutting a
deal with Sirius satellite radio for broadcast rights. However, the
biggest boon that put UCLA back in the black stemmed from help from
the outside.

The impact of third-party marketing firms In
2004, UCLA joined a growing list of schools that contracted its
multimedia rights and corporate sponsorship sales with a sports
marketing firm. These firms sign deals with advertisers on behalf
on numerous universities, allowing corporate sponsors to affiliate
themselves with multiple schools while working with just one
agency. Guerrero estimates that ISP Sports, which has partnerships
with 25 schools across the nation, brought in an additional
$500,000 of net income for UCLA’s Athletic Department last
year. “You can maximize the power that you have in your local
market with a national sales force that is tied to other
schools,” Guerrero said. “The ISP network may be at 20
campuses and they can go to one sponsor and say I can bring you 20
universities. The UCLA relationship may help Vanderbilt just
because that company may want to get involved with UCLA.”
Likewise, UCLA has benefited when corporate sponsors seeking a
relationship with another ISP-affiliated school also commit to the
Bruins. These sorts of benefits may help explain why ISP has added
six of its 25 schools in the last year and a half. “If
someone within an athletic department is in charge, they may have
other responsibilities like ticket sales or half-time promotions
that are a part of college sports or marketing,” ISP
spokesman John Justice said. “The marketing we do is focused
on large corporate sponsors. We can bring clients to athletic
departments that they couldn’t bring on their own because of
our contacts.” In June, Cal entered a 10-year contract with
ISP sports that guarantees its athletic department an annual rights
fee and additional consideration for revenue generated by the firm.
The agreement is expected to help bring in an added one million
dollars in net income, according to Holton. He noted that since
ISP’s arrival, Cal has landed lucrative sponsorships from
companies such as Allstate and Chevron. “ISP has got the
ability for companies to purchase at a better rate,” Holton
said. “The (companies) can look at how many universities
there are when buying a corporate package. It’s a much better
base for us being aligned with them. There’s a lot more
revenue than we could generate on our own.” Other schools
have also benefited from these third-party marketing firms. Texas,
which has had a long-standing partnership with Host Communications,
recently extended its contract through 2015. “Host Marketing
pays us an enormous percentage for everything they sign on our
behalf,” Plonsky said.

The consequences of running a deficit Though
universities work with corporate sponsors all the time, they are,
in practice, a far cry from the corporate world. Despite fielding
perennial powerhouses in numerous sports, Cal has been running
primarily deficits ever since the men’s and women’s
athletic departments merged. Unlike a private company, the
perpetual deficit has not signaled the department’s doom.
Since each university is responsible for its own budget, it would
be at the chancellor’s discretion to come down hard on the
athletic department. To date, Cal hasn’t faced severe
repercussions, but Kuehn realizes her department can’t keep
running deficits forever. “While the campus supports us,
they’re not interested in subsidizing athletics,” Kuehn
said. “We’re going to come to an impasse: Either
balance the budget or face tough decisions.”

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