Selling the NCAA

It's NCAA tournament time, and once again the Texas Longhorns' men's basketball team has a spot at the dance. All over the state fans will be slipping on burnt orange and looking for super-sophomore Jordan Hamilton and teammates to entertain them and erase the memory of last year's first-round exit. Televisions will hum, merchandise will be sold and the business of college basketball will come to a close for the year. Last season, the men's basketball program generated $15.6 million in revenue.

If this were the NBA, in which players get 57 percent of league revenue, the 13 scholarship players on last year's roster would have been paid an average of $684,102 each.

University of Texas football brought in $93.5 million in 2009, with quarterback Colt McCoy leading the Longhorns to the national championship game. Punch the numbers. NFL players get 58 percent of league revenues. If McCoy and his 80 teammates on scholarship were to divvy up that share of the pie, the average cut would be $672,676.

Instead, each athlete, by NCAA rule, could receive no more than tuition, fees, room, board and books -- valued at $18,172 for in-state students, $35,924 if for out-of-state.

"I personally think that it's the greatest injustice in American sports," said Andrew Schwarz, a Bay Area antitrust economist who has studied college sports finances. "We have these people that everyone loves to watch on TV and in person. We adore them, we adulate them, but we do not let them benefit from all of the money that they generate in anywhere near the way they would if there was a market system in place."

One of the top jobs of new NCAA president Mark Emmert, as the representative for the presidents of the leading universities who hired him, is to preserve the lid on player costs, while letting the market work its magic in just about every other aspect of college sports, from licensing fees to sponsorship deals to television contracts. The NCAA men's basketball tournament that begins Tuesday will mark the start of a new 14-year, $10.8 billion deal with CBS Sports and Turner Broadcasting.

Emmert has several tools at his disposal, in confronting Schwarz's argument.

Chief among those is the claim of poverty -- that NCAA programs could not afford to offer a hotshot player more than the value of a scholarship. "Fourteen schools out of the 1,100 last year actually had positive cash flow out of intercollegiate athletics," Emmert said, one of his talking points he shares with audiences across the nation when defending the NCAA's economic model.

That number (14) comes from the NCAA's most recent analysis of athletic department finances at member institutions, based on data supplied by schools for the 2008-09 school year. The NCAA notes that 25 schools in each of the prior two years generated more revenue than expenses, before the nation's economic recession took hold.

But the NCAA understates the amount of revenue that flows into athletic departments.

An ESPN review of the financial statements submitted by individual schools to the NCAA, Department of Education and the Internal Revenue Service found that half of all athletic departments in the Football Bowl Subdivision -- 60 of the 120 -- brought in more money than they spent during the 2008-09 year (and another 21 broke even). The organization arrives at its lower number of 14 schools in the black by not counting what it calls "allocated revenue," which it considers direct and indirect support provided by the university, student fees and direct government support. That's almost $10 million in excluded revenue at the median FBS school, according to the NCAA report.

The NCAA stopped counting allocated revenue in its 2004 report, according to NCAA spokesman Erik Christiansen. "College presidents wanted to know the real cost of intercollegiate athletics without any institutional support," he wrote in an email to ESPN.

Schwarz considers that method to be misleading because any support that flows the other way -- from the athletic department to the university -- counts as an expense in the eyes of the NCAA. Some athletic departments, for instance, give money annually to their school. Further, Schwarz argued, any payments made by universities to athletic departments could be seen as marketing fees, given that sports teams provide enormous publicity for universities.

"The NCAA wants to say these programs are horribly expensive and there's not enough money for them, but on other hand they admit they're valuable to the campus," he said. "They provide advantages in fundraising and help with admissions by driving up the quality of applicants. Those benefits don't show up on the balance sheet."

On the expense side, there are also caveats. NCAA member schools provide $2 billion a year in athletic aid to students, Emmert said. But most of those costs stay within the university; it's one department, athletics, transferring money to another, such as the bookstore. Tuition, the largest chunk of any athletic scholarship, carries no real hard cost, as it's just a seat in a classroom (though it could count as an opportunity cost, if it's true that seat would have been taken by a non-athlete paying full tuition).

Some athletic departments are showing signs of financial distress, including those at the BCS level at which entertainment dollars flow most freely. The University of California-Berkeley recently announced it is cutting baseball and men's gymnastics, in response a budget crisis in the university system that will reduce institutional support for athletics. And among the weakest programs in the FBS, football and men's basketball teams -- the breadwinners elsewhere -- often fail to cover even their own costs, much less those of other teams such as softball or tennis that lose money, according to the NCAA.

But most athletic departments are rebounding nicely from the recession. The NCAA hasn't yet released its report on the 2009-10 financial statements submitted by schools, but ESPN's independent review of the records shows that 76 of the FBS schools had higher revenues than expenses last year, up from 60 the year before. In all, 99 schools either broke even or had revenues in excess of expenses.

At the top, the rich keep getting richer. The most prominent football programs generate surpluses in the tens of millions of dollars. Texas set the pace in 2009 with $87.6 million in revenue, then added another $6 million on top of that in 2010 by advancing to the BCS National Championship Game, in which the Longhorns lost to Alabama. With bonuses, Longhorns football coach Mack Brown made a record $6.4 million that season and his assistants another $3.6 million, according to the audited financial statement the school submitted to the NCAA. The team splurged on travel, dropping $2.4 million, and other costs. Still, the Longhorns couldn't spend anywhere near the cash they generated. Total team expenses came to $23.8 million -- for a tidy surplus of $70.1 million. After all other athletic department expenses were paid, $13.1 million remained.

More largesse is in the pipeline. In January, ESPN committed $300 million over 20 years to the Longhorns to set up a cable channel dedicated to University of Texas content.

DeLoss Dodds, Texas athletic director, declined to respond to requests for an interview. Longhorns spokesman Nick Voinis said that while Texas has the cash to pay athletes above the value of their scholarships, the school would be against having that option.

"I'm not sure what athletic director would be in favor of that," Voinis said. "Where do you draw the line? How much do you pay them? Not that many schools could afford it."

The idea of being able to offer a blue-chip recruit a scholarship, plus some, terrifies Ross Bjork, athletic director at Western Kentucky University. "That could be a scary day because then you'd get into the have-and-have-not discussion, where our budget is $20 million and their budget is $100 million. They can pay their athletes more."

Karl Benson, commissioner of the Western Athletic Conference, invoked the possibility of implications from Title IX. "The day that the NCAA permits pay-for-play, if it's done for only a certain class of student-athlete -- football and men's basketball -- there will be lawsuits that follow from other sports. The gender equity issues would be massive unless you paid every student-athlete, regardless of sport or gender, the same amount."

Schwarz dismissed those fears as unfounded, noting that Title IX, a federal law designed to promote equitable educational opportunities, does not require that schools spend equally on men and women. Texas spent $8.7 million on men's basketball last year, $4.3 million on women's basketball, a gender disparity reflected in overall spending for the athletic department, too. Yet, Texas stays out of Title IX hot water because half of its athletes, like half of its campus undergraduates, are women.

As for Bjork's expressed concern, Schwarz said the glamour schools get the best talent today, even without the ability to offer more than an athletic scholarship.

"Right now, we see big programs beating up on small programs for the first few weeks of college football season, so we already have that," he said. "It is just that the people on the big team would have, I don't know, $40,000 a year in their pocket and the people on the small teams might just be getting a scholarship. But it wouldn't change the allocation of talent much at all when it is all done. There might be a little bit of shifting in conferences. Some schools might say, 'we want a scale down and compete against other schools that do not want to pay quite as much.' But we see conference shifting all the time. Right now, all sorts of schools switch to other conferences for money reasons.

"Any time there is a big change in the system, it is hard. Athletic departments would have to actually do some math, and that could be challenging, but they are smart people. Our universities are filled with lots of smart people that can solve all sorts of math problems. And in the end, we will have this great American tradition without the sort of indentured servitude that we have now."

Won't happen on his watch, Emmert insisted.

"They are not employees, they are students," he said. "We want them to be students, and we expect them to be good students. That's really the line in the sand that I'm drawing. This isn't about the [financial] resources. This is about, 'Do they work for us? Or are they our students?' They're our students."

The NCAA has long been aggressive at defending legal challenges to its control over athletes, and Emmert appeared to be preparing for the next assault. Upon joining the NCAA in October, the former University of Washington president replaced longtime general counsel Elsa Cole with an outside litigator, Donald Remy, who he hailed in the news announcement for "his commitment to amateur athletics."

Emmert also has some judicial language on his side. In 1984, the Supreme Court ruled against the NCAA in a case that would allow schools to negotiate their own television contracts. But Justice John Paul Stevens, who wrote the majority opinion, dropped in one line that was unrelated to the central legal issue, stating, "In order to preserve the character and quality of the 'product,' athletes must not be paid, must be required to attend class, and the like."

Schwarz said he has worked with plaintiff's lawyers who want to test that language but have gotten intimidated. He said he wonders if it's ripe for a challenge now that Stevens and rest of the '84 court have retired. He also takes heart that the NCAA wasn't very good at predicting the future, if it lost the case. Its lawyers argued the games would be hurt. But just the opposite happened. College sports have never been more popular.

"Imagine a world in which paying the athletes wasn't a problem, wasn't an infraction, and what those [NCAA] enforcement people were doing was actually making sure the people in sports programs were students," he said. "With one cross-out of one NCAA bylaw, you could free up a lot of resources and get rid of a lot of bureaucracy. You could let the market prevail and find ways to really achieve the ideal of the student-athlete."

In the meantime, college athletes will look to achieve in the ideal basketball tourney.

Tom Farrey and Paula Lavigne are reporters for Outside the Lines. They can be reached at tom.farrey@espn.com and paula.lavigne@espn.com