While significant attention is often paid to building stadiums and arenas for professional teams, the same cannot be said for some college facilities. There are often contentious political battles between those who want to spend public funds to become or stay a big time sport city and those who do not want to spend scarce public funds to help make a wealthy team owner even wealthier. Similarly, debates often rage around city halls as to whether to put in a new field (whether soccer, football, baseball, etc.) at a local park and whether the financing makes sense. Each facility needs to be built based on financial metrics. For example, a professional sports team might want to build a stadium to increase its revenue stream. It is hoped that such a project would be cash positive. In contrast, a local park might need more fields to meet public demand, and there might not be little or no potential revenue. That project is not motivated by revenue but to serve a perceived public need. As such, the field project would either be cash neutral or, more realistically with maintenance costs, cash negative. It is important to examine the two extremes of a stadium for profit generation and a stadium to benefit stakeholders’ nonfinancial needs as a college facility falls in between. A college stadium needs to generate revenue, but it also must meet the needs of a nonprofit educational institution. Every facility project will have some impact on cash flow. Whether it is a city helping to fund a $500 million stadium or spending $500,000 to install a new artificial turf field and drainage system, the impact on a local budget could be significant. The city might have to borrow funds, reallocate funds, issue bonds, or try to find funding from a state or federal government. The budgetary impact could be significant, and that is why there are so many intense battles around building sports facilities with public funds.
Political battles might not be as public with college facilities, but building and operating these facilities is no easy task when it comes to college campuses. There are numerous stakeholders with a vested financial position. If it is a public university, then elected officials might want to promote their benevolence by agreeing to build a new stadium with public funds. Loyal alumni who want the new stadium might chip in. Local businesses might get into the action as well. Those opposed to such an effort might argue that funds are needed for classrooms, labs, or teacher salaries. Others might argue that a large chunk of the expenses will be borne by students who will have higher fees to help subsidize the facility or athletic department. All these arguments are valid and have merit as building a large facility is an expensive undertaking that will affect cash flow for years to come. It is not just the initial building cost that affects cash flow and possible debt service. A majority of the costs associated with the lifetime (typically 30- to 50-year facility life span) cost of a facility will be employee salaries and maintenance costs such as daily cleaning, heating, or electricity. Thus, the decision to build a new stadium has serious financial implications for years to come.
Financial Implications
Wealthy alumni might be able to single-handedly provide a university with enough funds to build and or maintain a stadium. In December 2005, T. Boone Pickens made a $165 million gift to his alma mater, Oklahoma State University. He has given close to $1 billion over the years to the school, including over $265 million to OSU athletics. Due to his donation, the stadium is now called Boone Pickens Stadium.
Not every stadium-related story is such a happy one, and not all schools have a sugar daddy to help them out of trouble. From 2009 to 2013, public universities in the United States reported increasing their annual expenditures on football to more than $1.8 billion, a 21% jump in inflation-adjusted dollars. The latest numbers available from the Knight Commission (Knight Commission, 2013) on Intercollegiate Athletics highlight that Football Bowl Subdivision schools paid on average over $69,000 in yearly debt obligations associated with athletics. Students interested in tracking college sport finance can utilize the Knight Commission’s database to critically examine university athletic expenditures (www.knightcommission.org). During the 2009 to 2013 time period, public universities’ reported debt on their athletic facilities had grown to $7.7 billion, a 44% jump in inflation-adjusted dollars (Sirota & Perez, 2016). Every year, universities collectively must pay more than a half billion dollars to pay down athletic-related debt—roughly double the annual debt service payments for public universities’ athletic facilities from 2008. If revenues from ticket sales, merchandising, and fund-raising do not cover the bills, which is normally the case, students and the general public are on the hook by way of higher student fees, higher tuition, and taxes. This provides less incentive to be accurate with financial projects. This is not meant to imply that universities do not care, but similar to other public projects it is not their money. In contrast, a wife–husband team opening a small fitness studio using their own money would not have large public coffers to bail them out of trouble if financial projections are wrong.
There are several glaring examples of poor financial planning associated with building college facilities. One such example is the University of California, Berkeley, which was trying to reduce athletic subsidies and then took a gamble to increase revenue by expanding sports facilities. UC Berkeley incurred $445 million of debt to renovate its football stadium and build a new student athletic center. The result was weaker-than-expected attendance and ticket sales. The football team suffered a drastic attendance drop to 36,548 fans per game in 2017, a 22% drop from the 2016 average of 46,628 fans. This resulted in a decrease in ticket revenue of close to $200,000 (delos Santos & Weinstein, 2017). Projections were for increases rather than decreases, which made it more difficult for the university to repay the debt it undertook to renovate and build the facilities.
Table 1 University of Akron Total Athletic Debt Balances
Year
Debt total
2006
$18,810,873
2007
$15,100,158
2008
$14,342,130
2009
$14,169,365
2010
$84,749,805
2011
$80,607,145
2012
$77,391,565
2013
$73,371,134
2014
$68,086,688
2015
$66,425,689
Source: Knight Commission (2013 and 2018).
University of Akron Stadium
Some examples of colleges spending to make it big entail smaller schools who want to move up to a higher conference or division. This is a risky gamble. While it has paid off for some schools, it has not for others. As an example, the University of Akron completed construction of a $62 million stadium in 2009. To build the new stadium, several dormitories had to be demolished, and the properties of local tenants were acquired using eminent domain. Displaced students were put into a local hotel converted from an old Quaker Oats Company oat silo and surrounding area purchased for over $22 million. The Zips, who now play at 30,000-seat InfoCision Stadium, reported drawing a total of 55,019 fans for six games (less than 10,000 per game—the lowest in Division I college football, according to the NCAA) in 2014. It was the lowest number reported by the university since 2005, when the team attracted 54,464 and played at their old off-campus stadium named the Rubber Bowl (Armon, 2015). The attendance average for 2016 was 10,337. As of 2013, the school faced more than $73 million in debts for its athletic facilities. That is part of the more than half-billion in debts which, school officials told local media, has led to layoffs and to higher fees for students. Table 1 highlights the total athletic debt balances owed by the University of Akron athletic department.
In 2013, Akron had annual debt service obligations of $5,267,482. Table 1 shows the potential impact of a major capital expenditure where the debt increased over fivefold from 2009 to 2010 due to building the new stadium. While the university is making payments on the debt obligation, the strain on finances can affect the university’s ability to borrow funds for other projects or to spend. Obviously the university felt that an investment in the stadium would produce a positive net cash flow. Maybe it would have helped them gain a coveted invitation to a bigger conference, maybe it could have helped with recruiting, maybe it would have made the student body happy, or maybe it would have made some alumni happy. There are numerous maybes—every financial projection requires some maybes. However, proper financial planning will minimize the maybes and try to find the most likely scenarios. It would be interesting to see if the university undertakes a worst case, most likely, and best case scenario analysis as to future attendance and revenue streams and compare those projections to actual revenue amounts.
Colorado State University Stadium
Akron is not alone in its effort to spend money hoping to generate additional revenue. While the stadium was supposed to help the university move to a better conference, it needed to also generate enough revenue to justify the expenditure. Colorado State University (CSU), in the sleepy city of Fort Collins (population 158,000), decided to spend $238 million to build a new football facility that opened in 2017. With principal and interest payments, the school of 32,000 students will be forced to pay close to $400 million ($12 million every year for over 30 years just for the new stadium and not counting any future repairs or renovations). Even before the facility was planned, the school was already using tuition, student fees, and taxpayer money to subsidize its football program. The expected cost to maintain the new stadium was estimated to be around $3 million a year.
CSU’s athletic department, similar to most public universities, operates at a deficit. It spent more than $38 million on operations but generated only $18 million from ticket sales, donations, concessions, and advertisements in 2016. The football program itself ran a $6 million deficit in 2016. An independent analysis by journalists found that from 2012 to 2016, roughly half of CSU’s athletic department budget, approximately $83 million, came from student fees and general fund subsidies. Between 2010 and 2014, the amount of CSU student fees going to athletics has jumped 10% (Sirota & Perez, 2016). CSU students pay around $115 in athletics-associated fees every semester. CSU tuition also increased over 130% from 2006 to 2016, while per-athlete spending on football went up by 70%. Such a huge increase in spending is consistent with the larger trend of football-spending increases outpacing academic-spending increases over the past 20 years (Sirota & Perez, 2016).
As with any cash flow analysis, it is not just about the total revenue or expenses. There is a cost to raising capital. In CSU’s case, potential construction cost overruns and the lag in $110 million in fund-raising goals could harm CSU’s future credit rating. In 2015, Standard & Poor’s (a major credit rating agency) downgraded the school’s credit outlook to negative. The primary concern was the university’s new debt levels. It was initially hoped that in the first two years of fund-raising, the university could find $30 million for the project, but after breaking ground and a year from opening, donors had only committed around $26 million (Sirota & Perez, 2016).
Convention Sports and Leisure International (CSL) issued a market analysis as part of a full financial feasibility study commissioned by CSU in 2012. Feasibility reports are often conducted to ascertain whether a project is feasible, possible financial issues, and what economic impact could be expected. CSL has undertaken hundreds of such reviews for universities and their athletic departments. The CSL report was very positive about the stadium and its potential benefit to the university. Thus, it can be argued whether such reports are appropriate if each and every one of them showed a positive impact for each project (Maxcy & Larson, 2014).
CSL undertook capital budgeting analysis to project low, base, and high revenue projections for the new stadium. CSL’s report increased the annual cash flow by 3% each year over the course of the 30-year period to help reflect inflation, even though inflation had not been near 3% in a number of years. It also adjusted its cash flow estimates by assuming a 4% increase in attendance for each of the first five years of the facility’s life, which is unrealistic since the normal honeymoon period for a new facility is only one to three years. CSL’s projected revenue increases alone led to CSL net stadium revenue projections that would more than double (would increase by 119.5%) for the lowest revenue scenario projection, more than triple (210%) for the base scenario, and more than quadruple (344%) for the high revenue projection (Maxcy & Larson, 2014).
An academic article examined this stadium deal. The researchers examined the net present value and associated discount rates based on some CSL projections. Of course, only time will tell if the feasibility report was anywhere close to being a reliable instrument upon which a major investment could be made. The researchers offered the following two interpretations of the initial capital cost of the investment:
The entire cost of $259.05 million was calculated as the sum of the estimated stadium cost plus the estimated cost of the parking and transportation upgrades ($226.5 million + $32.55 million).
The initial cost of capital at $146.05 million reflected the university’s promised fund-raising goal of $113 million, which was mandated to be raised in gifts and donations before the project was supposed to proceed (Maxcy & Larson, 2014).
The researchers concluded that the financial projections only worked if the most optimistic revenue projections were met and the university was able to work around the lowest chosen discount rate. Thus, only in the most unlikely positive situation would CSL’s projection pan out. The article went on to explore how five other college football stadium projects fared (including the University of Akron). The results showed that revenue due to the new stadiums increased between 29% and 86%. These numbers appear impressive, albeit not as generous as CSL had suggested. However, what is often not taken into the consideration with increased revenue is possible increased costs. The stadiums studied each saw stadium expenses increase from 30% to 60%, which would eliminate most purported gains associated with the new stadiums (Maxcy & Larson, 2014). The primary added costs entailed bond repayment obligations for the new or revised stadium.
Besides the economics behind the new stadium, the following list highlights some of CSU’s stadium facts by the numbers (Stephens, 2015).
$220 million—Cost of stadium
$18.5 million—Cost of the attached 82,975-square-foot academic and alumni center
17.56—Acres on campus the stadium occupies
41,000—Total capacity, including standing room
36,000—Total seats
10,000—Seats reserved for students, the same as at CSU’s old Hughes Stadium
800—Club seats
210—Box seats
150—Seats in the Ram’s Horn Club that provides views of the field and scenery
22—Suites with open air seating
5—Stadium retail shops
9,100—Square footage of the stadium’s weight room
3,700—Square footage of player lounge
These numbers highlight that the university was more focused on alumni and boosters with less than 25% of the seating capacity dedicated to students. Many other large public universities have a greater percentage dedicated to students, who are helping to foot the bill for the stadium. This could possibly lead to upset students who are paying for the facility but might not be able to enter.
The cost for a season ticket pass for 2017 was $225 for students. Those wanting the premium seats had to join the Ram’s Club, which has an added expense of $100 to $500 to receive the opportunity to purchase tickets. Approximately 13,000 season tickets were sold for 2017. Also, there was significant attention placed on the stadium’s luxury seating. The stadium is small compared to many D-I stadiums in the 60,000-plus range, but the average attendance for 250 D-I programs was around 28,500 in 2016. Can the Fort Collins market sustain so many corporate or wealthy supporters? It might be easier to find such large donors in a big city such as Denver than in a smaller city. That is where having solid contracts in advance can be a significant benefit. Contractually obligated revenue from major donors willing to sign a 10-year lease on a suite, as an example, could help finance the facility or can be used by the lender as collateral to obtain better lending terms.
CSU’s new stadium opened in 2017. Attendance for the first game was 37,583. Over the course of the season the attendance average was 31,169 over seven games. The average in 2015 was at a 10-year high of 26,575. Thus, the new stadium drew more fans, but every facility has a honeymoon period drawing new and more fans over the first three years.
An anonymous donor paid $20 million to name the playing field after former coach Sonny Lubick. The university is still seeking a sponsor for the stadium naming rights (Lyell, 2017). That means that the Denver Broncos’ Mile High Stadium, Colorado University’s Folsom Field (named after a former coach) and CSU’s stadium do not have naming rights deals, and the prospects would look very weak for any such future sponsorship. If the university was counting on naming right funds to help cover debt service, it was surely barking up the wrong tree. According to one source, the Rams’ stadium project was fully bonded in March 2015 with an array of football revenues (contractually obligated revenue) planned to meet and exceed the annual debt service. Thus, any major gifts or sponsorship deals would be set aside in a stadium rainy-day fund that could be accessed if football revenues dipped, according to the university’s athletic director (Frederickson, 2017).
Conclusion
These two detailed examples help show that financial planning can have a variety of uncertainty. Revenue streams might not be enough, and additional cash might be needed. Where such cash comes from can be very controversial. A winning record can sometimes help (CSU’s record from 2014 to 2017 was 21-18), but fund-raisers cannot control that. That is why consistent revenue streams are needed. Similarly, programs need to invest to grow and generate more revenue, but adding too much debt can doom even a great program. This case helps highlight why managing cash flow, capital expenditures, and monitoring revenue streams is so important not just for professional sports teams but also collegiate teams.
Address the type of financial analyses that would be appropriate for analyzing the budget and comparing it with those of similar colleges.
Evaluate the university’s fundraising options.
Recommend the best option for funding.