...and then, Profit!

Luke 14:28 "For which of you, intending to build a tower, does not sit down first and count the cost, whether he has enough to finish it--

I posted before why I thought the Ags are making a mistake with the SEC move. Here is a little more detail about one aspect of the move that really puts them at risk- the financial model. I think they know it, too, and that explains why the TAMU president, R. Bowen Loftin, is giving so many interviews hostile to UT and the Big 12. More on that later, though. First, let’s look at the numbers.

Here is the financial data submitted to the federal government with respect to Title IX requirements for TAMU, their Big 12 peer Texas, and their SEC peer LSU (peer comparisons are important, because they give insight into whether an organization is under-funding or over-funding a particular aspect of a program):

Texas-

Revenue 2004 - 2005 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 - 2010
Ticket sales 33.51 34.28 44.56 44.69 55.39 56.74
Student fees 1.67 1.69 1.88 1.83
Guarantees 0.23 0.57 0.6 0.32 0.5 0.46
Contributions 22.32 26.51 27.19 35.06 37.29 37.11
Compensation and benefits provided by a third party 0.00 0
Direct state or other government support 0.00
Direct institutional support 1.35
Indirect facilities and administrative support 0.00
NCAA/conference distributions including all tournament revenues 11.50 12.57 10.7 11.35 14.33 14.75
Broadcast, television, radio, and internet rights 0.17 0.05 0.19 0.22 0.34
Program sales, concession, novelty sales, and parking 2.91 3.82 3.59 3.3 3.89 3.7
Royalties, licensing, advertisements and sponsorships 8.59 9.74 9.37 16.64 18.16 22.07
Sports camp revenues 4.22 4.96 4.76 4.52 4.52 4.79
Endowment and investment income 1.37 2.1 1.36 1.05 1.66 1.41
Other 1.81 1.51 0.97 1.34 2.5 2.19
Subtotal operating revenue 89.65 97.76 105.05 120.29 138.46 143.56
EXPENSES
Athletic student aid 5.75 6.62 7.48 6.99 7.89 8.44
Guarantees 1.07 1.26 1.56 2.6 2.41 2.09
Coaching salaries, benefits, and bonuses paid by the university and related entities 12.40 14.11 15.82 17.81 19.7 22.4
Coaching other compensation and benefits paid by a third party 0.00
Support staff/administrative salaries, benefits and bonuses paid by the university and related entities 18.52 20.03 20.92 22.7 24.63 25.12
Support staff/administrative other compensation and benefits paid by a third party 0.00
Severance payments 0.00
Recruiting 1.11 0.93 1.16 1.29 1.32 1.26
Team travel 5.17 6.04 5.62 6.99 7.62 7.7
Equipment, uniforms and supplies 2.01 2.49 2.34 2.46 2.69 2.79
Game expenses 10.06 11.41 15.05 16.23 18.5 18.89
Fund raising, marketing and promotion 5.04 5.14 5.75 6.87 8.39 7.54
Sports camps expenses 1.79 2.44 2.18 2.18 2.47 1.92
Direct facilities, maintenance, and rental 13.89 13.77 13.79 16.36 22.02 23.27
Spirit groups 1.00 1.37 0.9 1.07 1.33 1.26
Indirect facilities and administrative support 0.00
Medical expenses and medical insurance 0.90 1.36 1.7 1.64 1.68 1.85
Memberships and dues 0.24 0.24 0.25 0.25 0.34 0.36
Other operating expenses 3.45 3.54 2.72 5.54 6.65 5.55
Total operating expenses 82.40 90.74 97.24 111 127.65 130.44
Delta 7.25 7.02 7.81 9.29 10.81 13.12

TAMU-

Revenue 2004 - 2005 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 - 2010
Ticket sales 24.73 26.29 27.86 30.14 30.35 32.46
Student fees
Guarantees 0.27 0.3 0.17 0.31 0.31 0.04
Contributions 17.56 23.31 13.13 28.34 32.94 20.51
Compensation and benefits provided by a third party
Direct state or other government support
Direct institutional support 0.38 0.38 3.79 3.26 4.46
Indirect facilities and administrative support 0.46
NCAA/conference distributions including all tournament revenues 10.65 9.44 11.47 12.86 12 11.9
Broadcast, television, radio, and internet rights 0.49 0.32 0.03
Program sales, concession, novelty sales, and parking 2.67 3.05 2.74 3.01 3.02 2.58
Royalties, licensing, advertisements and sponsorships 2.75 3.15 8.86 9.22 9.22 9.68
Sports camp revenues 3.11 3.6 4.56 4.81 4.64 4.39
Endowment and investment income 0.50 0.42 0.33 0.37 0.16 0.1
Other 0.60 0.46 0.71 0.15 1.01 1.12
Subtotal operating revenue 64.18 70.71 73.66 92.48 98.12 82.77
EXPENSES
Athletic student aid 4.67 5.3 5.56 5.44 5.98 6.66
Guarantees 1.02 1.35 2.31 2.79 2.26 2.56
Coaching salaries, benefits, and bonuses paid by the university and related entities 10.16 10.59 11.45 11.6 14.12 13.28
Coaching other compensation and benefits paid by a third party
Support staff/administrative salaries, benefits and bonuses paid by the university and related entities 11.60 11.84 13.37 15.95 14.61 14.25
Support staff/administrative other compensation and benefits paid by a third party
Severance payments 0.40 0.25 0.12 2.2 1.88 1.28
Recruiting 1.02 0.91 0.99 0.94 0.93 0.83
Team travel 4.55 4.47 6.06 6.5 4.67 5.13
Equipment, uniforms and supplies 1.90 2.29 2.58 1.49 1.83 1.73
Game expenses 1.28 1.63 2.01 2.08 2.13 1.97
Fund raising, marketing and promotion 0.24 0.3 0.22 0.14 0.11 5.46
Sports camps expenses 2.35 2.36 2.75 2.97 2.96 2.94
Direct facilities, maintenance, and rental 8.73 10.05 10.87 11.42 12.86 12.72
Spirit groups 0.40 0.19 0.15 0.14 0.15 0.17
Indirect facilities and administrative support 0.46
Medical expenses and medical insurance 0.56 0.61 0.6 0.74 0.63 0.67
Memberships and dues 0.17 0.11 0.16 0.1 0.14 0.12
Other operating expenses 9.35 9.2 11.18 12.94 12.55 11.63
Total operating expenses 58.87 61.46 70.38 77.43 77.81 75.94
Delta 5.31 9.25 3.28 15.05 20.31 6.83

LSU-

Revenue 2004 - 2005 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 - 2010
Ticket sales 23.36 21.48 28.3 28.52 35.45 31.72
Student fees
Guarantees 1.01 0.83 0.06 1.5 0.04 0.5
Contributions 11.19 17.41 19.56 23.25 31.17 38.26
Compensation and benefits provided by a third party 0.71 0.99 0.92 0.82 0.8 1.09
Direct state or other government support
Direct institutional support
Indirect facilities and administrative support
NCAA/conference distributions including all tournament revenues 11.63 12.12 12.58 14.18 13.5 19.88
Broadcast, television, radio, and internet rights 2.51 4.85 5.98 6.84 7.25 7.01
Program sales, concession, novelty sales, and parking 4.45 4.85 5.18 5.33 6.21 7.84
Royalties, licensing, advertisements and sponsorships 3.25 1.15 1.53 2.35 2.85 2.52
Sports camp revenues
Endowment and investment income 0.63 0.68 0.91 1.18 1.24 1.12
Other 2.19 3.07 1.25 1.06 2.36 1.09
Subtotal operating revenue 60.94 67.43 76.27 85.02 100.88 111.03
EXPENSES
Athletic student aid 6.82 7.06 7.39 7.78 8.5 8.85
Guarantees 2.55 2.23 2.52 1.84 3.72 2.62
Coaching salaries, benefits, and bonuses paid by the university and related entities 8.64 8.93 10.31 12.81 13.97 15.15
Coaching other compensation and benefits paid by a third party 0.60 0.88 0.77 0.72 0.7 0.91
Support staff/administrative salaries, benefits and bonuses paid by the university and related entities 9.68 10.38 10.89 12.69 13.73 14.27
Support staff/administrative other compensation and benefits paid by a third party 0.11 0.11 0.15 0.1 0.11 0.17
Severance payments 0.28 0.14 0.37 0.27 0.38 0.45
Recruiting 0.81 0.76 1.01 1.08 1.11 1.09
Team travel 3.68 3.27 3.39 4.14 4.46 4.16
Equipment, uniforms and supplies 1.18 1.9 2.35 2.36 2.6 2.46
Game expenses 3.71 3.54 3.97 4.04 4.98 5.7
Fund raising, marketing and promotion 0.57 0.71 1.32 0.85 1.06 1.03
Sports camps expenses
Direct facilities, maintenance, and rental 8.70 12.37 13.31 15.5 18.81 21.3
Spirit groups 0.58 0.5 0.48 0.58 0.7 0.59
Indirect facilities and administrative support
Medical expenses and medical insurance 0.48 0.66 0.62 0.65 0.61 0.68
Memberships and dues 0.08 0.05 0.05 0.06 0.07 0.07
Other operating expenses 7.39 11.73 14.33 15.67 18.97 22.83
Total operating expenses 55.86 65.22 73.23 81.15 94.45 102.33
Delta 5.08 2.21 3.04 3.87 6.43 8.70


At first blush, you think that the Ags are fine. They have had more revenue than expenses, just like Texas and LSU. Good to go? Not quite. Check out this article:

Loftin Releases Budget Numbers For A&M Athletic Department In 2010

It turns out that the financial data detailed above does not list debt payments, which had crept up to $6 million per year for the Ags (per linked article figures), putting them deep in the red. Not listing this debt is a discretionary choice for the Ags when filling out this form. In an audited accounting system, debt would be lined out separately or put in the account for which the debt was assumed. They needed a $16 million interest free line of credit (see "Direct institutional support") to keep them from having to slash budgets or start borrowing to pay debt (never a good idea).

So, in order to pay back the interest free loan (by the way, a simple financial analysis shows that a $16 million loan paid back 5 to 15 years later with no interest is akin to a $5 million gift), and balance the books, they had to get funds (in the seven figures) from their fund-raising arm and athletic endowment, The 12th Man Foundation (see "Contributions"). They also have to keep expenses low. They play approximately the same sports as Texas, but spend 80% less on "Game Expenses" (facilities and parking rentals from the school, traffic management and security expenses), and 40% less on travel (given that Austin has a major airport, and the Ags have to bus to Hobby for non-charter flights, you would think they would pay more), and 30% less on uniforms. The "Game expenses" number is shocking, but when you notice that "Other expenses" is notably higher than Texas’, you wonder if it’s just a different accounting choice.

Aggie athletics finances have been a problem, and the Ags recognize it. Per the linked study, they had a problem with accountability for spending. The 12th Man Foundation had too much autonomy, which lends itself to cronyism and the waste associated with it. The Ags took the step of re-organizing it, and making it accountable to the university.

President Final Report

Here is the situation the Ags are in now. They have cut expenses, and now find themselves spending about $20 million less per year than Texas and LSU. The Ags’ teams are performing well at that spending level, but the concern for them is how sustainable that is. At some point, competitiveness will require them to spend more on coaches, facilities and support. Where will that money come from?

Then, there is the facilities issue. Spending on facilities for non-revenue sports drove up the debt that caused TAMU’s AD to seek help from the university’s general funding. This reveals a dramatic difference in thinking between UT AD DeLoss Dodds and TAMU AD Bill Byrne. Dodds is very conscious of the need for an Athletics Department in a wealthy state-funded university to be financially self-sufficient. Rival schools would not look kindly upon Texas or TAMU using state resources to fund games, while other state schools had to get by without the resources of a Permanent University Fund. Therefore, Texas funds facilities for non-revenue sports from donations, and only borrows (via bonds paid back by increased revenues from new facilities’ added seats and suites) for facilities for revenue sports. TAMU had borrowed for non-revenue sports, and was struggling to pay the debt while still funding all other sports. In the article linked above, Byrne is noted as believing the school (as opposed to the Athletic Department) should pay to cover shortfalls from non-revenue sports.

Aggies Insider: Plans to expand Kyle Field

The best known Aggie facility, Kyle Field, badly needs refurbishing at the least, and perhaps even rebuilding. The electrical power system and plumbing systems are a constant source of trouble. Of the grand old stadiums in the state (DKR Texas Memorial, the Cotton Bowl, Kyle Field), Kyle Field is easily in the worst shape. How much would a major renovation cost? I don’t know, but the for reference, the North End Zone expansion at DKR Texas Memorial Stadium cost $170 million (razed old single level end zone, built new two-level end zone with added seats and suites). Anything of that level of effort addressing (at a minimum) the lower level of Kyle Field would probably have to cost over $300 million. If enough suites are added, bonds could be issued (backed by suites’ sales) to cover most of the expense…if those suites can be sold. Currently, Kyle Field has 68 luxury suites. For comparison, DKR Texas Memorial Stadium has 99 total (52 on east side, and 47 in north end zone). Can the Ags sell enough new suites to cover the cost of renovation? In short, the Ags need to address Kyle Field in the near future, and said project will require a lot of capital, both from donations and debt. Financing a stadium redo will be a lot easier if the football team is winning big (because of increased demand for seats and suites), and much more difficult if they aren’t.

The biggest sources of Athletics Department funds are Ticket Sales, Contributions ("12th Man Foundation", "Longhorn Foundation", etc.), Direct institutional support (frowned upon for public universities), NCAA/Conference distributions (Tier 1 and 2 media rights), and finally Broadcast, television, radio and internet rights (Tier 3 rights). The Ags actually do well on Ticket Sales. They have a large and enthusiastic fanbase. On contributions, they do fine with respect to the success they have (not) had (Texas and LSU saw contributions spike after MNCs). On conference distributions they have done better than the average Big 12 team, and almost as well as Texas. They fall short of LSU’s SEC distribution, but the new Big 12 contracts promise similar amounts. They make almost nothing (as Texas did) on Tier 3 rights, while LSU banked a bunch. Checking other schools, you see that NU made a lot on Tier 3, as did KU, Kentucky, Alabama, and Florida. Basically, teams with large fanbases for football and/or basketball made a lot of money on Tier 3, if they could carve it out and market it. This is one of the reasonsSEC schools play D-1AA teams- the Tier 1 and 2 contracts pass those games up, freeing them for Pay-per-view The SEC has discussed a conference network to pool Tier 3 rights and revenues, but no firm plans have been announced.

So, TAMU had several options for solving the financial problem of falling behind its peers. They could win more games, which would have the happy effect of allowing higher ticket prices and driving higher donations. The problem here, obviously, is that it isn’t as simple as deciding to win more games. They could package their 3rd tier rights and probably get somewhere between $5 – 10 million more for them (in the past, TAMU has resisted pay-per-view for fear that it would hurt ticket sales). And they could switch conferences, going from a Big 12 contract that paid $20 million per year to a SEC contract that pays $20 million per year. Oh, and did I mention that the Ags will have to pay the Big 12 a penalty for leaving that will range from $9 to 18 million?

So, construct the following financial model. Immediately, The Ags’ revenue drops $9 to 18 million in a one time hit (Big 12 penalty). Travel expenses go up in all sports from here on out (In the Big 12, a TAMU golf team trip involves 2 – 4 hour bus rides, or a 2 hour bus ride to Hobby, followed by a 2 hour flight. In the SEC, the typical golf team trip might be a 2 hour bus ride to Hobby, a 2 hour flight to Birmingham, followed by a 2 hour bus ide to Auburn). How much does other revenue have to increase in years 1 thru 10 to come out even? That doesn’t even account for the need to invest in facilities and coaching salaries.

The Ags are saying that donations and ticket sales are going up significantly, and that will cover the added expenses. They also anticipate increased revenue from 3rd tier rights (either pay-per-view, or packaged in a SEC network). I would argue:

    1. Those numbers will only stay up if the Ags have success in the SEC. If the Ags don’t have success, they will discover that Ag fans and boosters are no more interested in supporting a SEC loser than they were in supporting a Big 12 loser.
    2. Those increased donations are needed just to close the $20 million/year gap with LSU and Texas, without even getting into offsetting the Big 12 penalty.
    3. Pay-per-view of Tier 3 football games only adds revenue if the broadcast doesn’t hurt ticket sales. In other words, if the Ags are winning, Pay-per-view will make money. If they’re not, it won’t.

There is another source of funding- The 12th Man Foundation- which covered prior shortfalls. The problem is that the recession and prior AD budget crisis reduced the endowment to a precarious $45 million (check out how a reduced endowment and current low interest rates have driven endowment income down 80% for the Ags). That is uncomfortably low. When you consider travel costs are going up with the SEC move, that there is a Big 12 penalty to pay, that spending (for competitive reasons) will need to increase $20 million per year, and that the Ags need to spruce up Kyle Field, it’s pretty easy to see how precarious their position is. If they have any trouble raising funds, they will fall into a vicious cycle of underfunding in one of the nation’s most competitive conferences.

Which leads to my answer for the question of why Bowen Loftin is calling Powers a conniver, and the Big 12 a puppet organization.

12th Man Foundation

A&M sees parallels with Mizzou

"President of a university" is a very strait-laced and high profile position. It is very, very unusual to see one "call out" competition and engage in partisan sniping. Even if the athletic competition is curtailed, Loftin is still a partner with (UT President) Powers in the stewardship of the Permanent University Fund. They are still aligned on 95% of the higher education issues that come before the Legislature. Why would he risk that relationship? Either he is a lifetime nerd tripping on the attention he’s getting from the cool kids, or he is purposefully making an ass out of himself, trying to goad the Big 12 into moving on negotiations of the penalty. Frankly, I had originally subscribed to the latter theory, but Loftin’s callouts of Kim Mulkey and his claim of SEC competitiveness "from day one, sir!" support the former. Maybe the answer is both- the Ags want to force the Big 12 to give on penalty negotiations, even if it’s only because they have made us all sick of them, and Loftin is loving it because of his new status as a destroyer of worlds.

He had better enjoy it while he can. Next year, everybody won’t be cheering him on to make a move. The fans will be asking him for results, and he will be asking them for donations- donations to keep up, donation for buildings, and donations to cover shortfalls. There will only be a problem if there is a gap between the actual results and the expectations the Ag fans have. What are the chances of that happening?

Imagine the Ags going 6 – 6, 7 – 5, with a few ugly losses to teams the Ag fans know little about? Driving ticket sales and contributions flat, and forcing the AD to compete with even fewer resources? Trying to attract recruits to a downtrodden program, a cash-starved non-consequence of a program playing in a decrepit stadium?

Have the Aggies counted the cost?

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