This is an excerpt from Sport Finance 4th Edition With Web Resource by Gil Fried,Timothy DeSchriver & Michael Mondello.
Part IV Case Study
Financing a College Football Stadium
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.
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.
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.