Swank new practice facilities and 100-acre athletics villages may be magnetic recruiting tools, but they can be awfully rough on a balance sheet.
That is what some athletics departments have learned as they grapple with the bills from costly projects conceived in flush times.
Like eager homeowners living beyond their means, athletics programs were swept up in the recent boom. From 2003 to 2008, the largest departments raised nearly $4-billion in private donations to finance capital projects. They borrowed heavily to cover the rest. Smaller programs shelled out, too—in some cases more than they could afford.
This year new football stadiums, often the priciest projects, opened at the University of Minnesota ($289-million) and the University of Akron ($62-million). Remodeled stadiums welcomed fans at Oklahoma State ($288-million) and Rutgers ($102-million). And the University of Michigan, home of the second-largest football stadium in the country, is completing a $226-million renovation of its Big House.
Yet little is known about the actual debt that athletics programs have taken on. The NCAA and the National Association of College and University Business Officers have collected some data. But they are not confident of the quality of the numbers and have yet to publish any findings. Neither of the largest credit-rating agencies, Standard & Poor’s and Moody’s Investors Service, tracks colleges’ athletics-related debt.
Even without hard data, many experts say they are concerned about the fiscal strain the recent spate of building has placed on athletics departments—and the colleges that may be forced to come to their rescue.
“We could be entering a period when we don’t see these big projects anymore,” says Mary Peloquin-Dodd, a managing director at Standard & Poor’s. “I think there could be a fundamental shift in what’s financed in college sports.”
A Spike in Debt
Overall debt at colleges and universities has risen sharply in recent years. Between 2004 and 2008, the median outstanding debt at the 200 public universities rated by Moody’s has climbed 56 percent, to $178-million. Debt levels grew at twice as fast a rate as revenue increases on those campuses.
Although athletics debt alone is hard to track, the flurry of construction is evident. Ms. Peloquin-Dodd says she saw a spike in athletics spending between 2000 and 2007, when many big departments had one or more major projects in the works.
Analysts at Moody’s do not believe that major athletics programs will suffer much, but that those striving to join the elite ranks may be forced to pull back. Conversations about institutional priorities, however, will become tougher on every campus, they say.
“If you’re able to find a school going ahead with [an athletics project] and able to articulate the value of it, that struggle between those choices is going to be interesting,” says Roger Goodman, a Moody’s vice president. “It was easier in the past because you weren’t laying people off and had some ability to pursue a good number of your priorities. Now the debate is tougher internally.”
Many colleges fold their athletics debt in with bond issues that include other capital improvements. But the bigger athletics departments sometimes go directly to banks and other financial institutions to pay for their projects. Now that the credit markets have tightened, credit-rating agencies are seeing a slowdown in stadium and arena renovations and upgrades.
For those athletics departments that can still take on debt, the cost of borrowing money has gone up. “Banks are reluctant to provide credit for lots of institutions, and the credit they’re providing is more expensive,” Ms. Peloquin-Dodd says.
She worries that in a faltering economy, some athletics departments—particularly those in smaller Division I conferences—may have difficulty making their debt payments, as private donations, ticket sales, and seat-license revenues decline.
“If those seat-license donations don’t come in, or major donors don’t come through, universities could be forced to pay for the projects themselves during a time when they really can only afford to finance deferred maintenance projects or the most critical projects on campus,” she says.
Some colleges have reined in their plans for expansion: Kansas State University recently put on hold plans for $70-million in new or improved athletics facilities. But others are moving ahead: The University of Arizona announced in August that it intends to spend $378-million over the next 20 years on a dozen major sports projects, including modernizing its basketball arena and adding 5,000 premium seats to its football stadium. The work, which officials say will be paid for solely with private money, is pending approval from the Arizona Board of Regents. (In September the regents said they would take a hard look at athletics spending in the state.)
At the University of Iowa, plans for a $47-million renovation of the basketball arena call for the cost to be covered by private donations and athletics revenue. But the university will also borrow money to pay for the construction.
If handled properly, debt can be fuel for long-term growth, says Judith Van Gorden, senior vice president and chief financial officer at the Arizona State University Foundation. “It’s what makes this engine work—that we have access to debt that enables us to grow and improve.”
But “debt is a long-term obligation,” she adds. “It requires careful planning and long-term thinking, so you don’t end up in a place where you lose your flexibility and the ability to continue to run your institution.”
Costly Ambitions
When visitors toured Oklahoma State’s new end-zone facility at Boone Pickens Stadium in August, they saw the bricks and mortar of the Cowboys’ ambition.
The seven-story building boasts posh offices for coaches, a 20,000-square-foot gym, and a palatial locker room with flat-screen televisions. It adjoins the 60,000-seat stadium, which now includes more luxury seats.
T. Boone Pickens, the Texas oil tycoon and a 1951 Oklahoma State graduate, has his own locker in the stadium that bears his name. He visited three weeks before the season opener. “Do I feel like I got my money’s worth here? I do. I sure do,” he said that day, in a broadcast available on the Internet. “It’s good for the recruiting, no question, because when a recruit comes in here and sees what we have, they know we’re serious.”
Nearly four years ago, Mr. Pickens gave $165-million to Cowboy Athletics Inc., the athletics department’s nonprofit corporation. His aim was to improve the performance of the football team, which for years had dwelt at the bottom of the Big 12 Conference.
Cowboy Athletics used that donation to secure a $300-million credit agreement to finance the construction of the end-zone facility and an athletics complex. The athletics department had already spent $50-million to buy up the existing structures on a nearby 100-acre tract, where it intended to build a new baseball stadium, tennis facility, and equestrian center, among other amenities.
The nonprofit corporation’s Board of Trustees, of which Mr. Pickens is a member, then invested the entire donation in Mr. Pickens’s energy hedge fund. As the markets soared, the athletics investment peaked last summer at more than $400-million.
But the euphoria was short-lived. By October 2008, the original donation’s value had plummeted to $125-million, forcing athletics officials to table the idea of the athletics complex and obtain a $38-million loan from the university to complete construction on the end-zone facility. Within the next year, Oklahoma State plans to issue a $38-million bond to cover the athletics department’s shortfall.
Leveraged to the Hilt
One week after Mr. Pickens cut the ribbon in Stillwater, the University of Akron opened the gates of its new, $62-million football stadium. The university has built 11 academic and other buildings in the past nine years, including the stadium and a $20-million field house, which opened in 2005. Debt from those projects has made Akron one of the most leveraged universities in the country, according to Moody’s.
To meet the annual debt service of $3.1-million on the stadium, Akron’s athletics department “has a huge burden” to raise private donations, meet ticket-sales requirements, and fill the luxury suites, says Hunter R. Yurachek, executive senior associate athletic director.
“I equate it, in my mind, to taking a mortgage out on a home,” he says. “A very expensive home.”
Athletics officials are banking on the still-tenuous Ohio economy to make their investment work. So far they have brought in $23.5-million, mainly from local companies. And ticket sales are holding up: The Zips sold out all 30,000 seats their first home game, have doubled the sale of season tickets from last season, and sold all 16 of the stadium’s luxury suites at $20,000 each.
A big stadium expansion hasn’t gone so well at Rutgers University. After the Scarlet Knights’ successful 2006 football season, officials announced a $102-million facelift for Rutgers Stadium, which opened in 1938. But state contributions and private donations, originally expected to cover some $30-million, soon fizzled. Gov. Jon S. Corzine of New Jersey chipped in $1-million of his own money, but the project still came up short. The university is now borrowing the entire $102-million.
Conservative budgeting, meanwhile, has helped the University of Central Florida avoid problems as its debt level climbed sharply this decade. Since 2003 the university has built seven new sports facilities, including a basketball arena, football stadium, and rowing center. Its athletics debt payments have increased from about $400,000 a year in 2006 to an estimated $3.7-million this year, says Brad Stricklin, associate athletic director for business and finance. But revenue from the new football stadium—the team is averaging 35,000 fans a game, after budgeting for 22,000—has helped offset the increased debt service.
Some states set limits on how much debt a public university can shoulder. In the Oregon University System, for example, universities are not permitted to take on a debt burden that exceeds 7 percent of their total expenditures.
At the University of Oregon, bonds for capital projects in athletics have crowded out other, more pressing projects, says Nathan Tublitz, a professor of biology and a former chairman of the faculty senate.
In the years since the university announced plans for a new, $200-million basketball arena, “we’ve only added one new dorm and have not remodeled any,” says Mr. Tublitz, who is a co-chair of the Coalition on Intercollegiate Athletics, a national, faculty-led reform group. “The dorm-renovation project was set aside because of a higher priority of the basketball arena.”
A Going Concern
At Oklahoma State, the chain of events surrounding the stadium’s renovations, and the program’s reliance on one donor’s assets, has raised flags. In an independent review of the athletics department last year, auditors questioned whether it had the financial strength to be a “going concern.” In a separate report released this summer, Moody’s zeroed in on athletics debt as a determining factor in the university’s credit rating. (The agency gave the university a stable rating outlook.)
Oklahoma State officials defend their decisions to rely so heavily on a single donor. “I don’t go along with calling it a gamble,” says David C. Bosserman, vice president for administration and finance. "[Mr. Pickens] gave us a gift outright. We had the cash in our hand to use.”
Mike Holder, the athletic director, says he is comfortable with the Cowboys’ ability to meet this year’s $4.6-million debt-service payment. Ticket sales are up by 15 percent from last season. The athletics endowment, valued at $2.5-million in 2003, reached $25-million in 2008. And last year alone, the Cowboys received $28-million in cash gifts.
Some faculty members, though, have been unsettled by the way the athletics program has proceeded. Concentrating the entire Pickens donation under one manager, for example, drew heated criticism.
But more recently, when the program came up short in completing the end-zone building, faculty members felt it was better to have the university lend the money than to borrow it from outside, says Bruce W. Russell, an associate professor of civil engineering and chairman of the Faculty Council.
If anything, the recent loan will almost certainly galvanize faculty members in their perennial campaign to eliminate the university’s nearly $1-million annual subsidy to athletics, he says.
Even those athletics departments that haven’t benefited from the largess of donors like Mr. Pickens may be forced to be more conservative in their plans, observers say, now that the flush times are clearly over.
“In the past, people might have said, ‘Sure, we can go out and borrow $200-million and not worry because we don’t have to start paying on it right away,’” says Ross Bjork, senior associate athletic director at the University of California at Los Angeles. “That’s just not happening anymore. Any prudent AD will say, ‘I don’t want to mortgage the future.’”
