The cost-benefit of college sports

October 11, 2013

A Moody’s report published on Thursday looks at the risk that expensive athletics programs pose to American universities. The majority of these programs lose money, but it has been arguable that athletic success typically enhances a university’s image. It’s a spending gamble, then, for schools to employ to attract students. Moody’s writes:

Universities pursue high-profile sports programs for the opportunity to increase brand recognition, student demand, and donor support. However, that upside comes with financial and reputational risks that require careful oversight. As the commercial success of big-time college sports has grown, so too have the potential benefits and risks to universities.

Here are the risks:

» Budgetary Strain: 90 percent of athletic programs are not self-sustaining, requiring growing subsidies, which divert funding away from other university operations.

» Public Scrutiny: Scandals cause reputational impact that is magnified by media attention and unwanted national focus. [Think Penn State]

» Debt Capacity: Increasing capital investment for athletic facilities can deplete debt capacity in the absence of exceptional fundraising.

» Uncertain Future Costs: Current cost structure does not incorporate potential impact of concussion treatment or movement away from amateur athlete model.

There is, of course, risk in all types of investment and activities. But big rewards for college athletics tend to be clustered around those in the Big 12 and Southeastern Conferences:

Student demand has tended to increase at universities with athletic programs that have risen to national prominence. For example, Texas Christian University’s (TCU, Aa3 stable) remarkable football seasons in 2009 and 2010 paved its way into the more prestigious and lucrative Big 12 conference.

Undergraduate applications at the university increased by 60 percent from fall 2009 to fall 2011, with a much higher percentage coming from outside the state of Texas. With a newly renovated football stadium and a secure spot in one of the NCAA’s (National Collegiate Athletic Association, Aa2 negative) five major conferences, we expect student demand at TCU will continue to benefit from its intercollegiate athletic program.

It’s easy to understand the allure of a big jump in applications, especially from out-of-state students, which are the most profitable type of students for colleges and universities.

The potential boost to student demand from athletics is of growing importance because of heightened competition among universities amidst strains on enrollment. In fall 2012, the number of students attending four-year colleges declined for the first time in six years, highlighting the need to establish a strong brand in an increasingly competitive environment for students.

Even programs without winning records can generate interest from prospective students by offering a more complete campus experience, while also strengthening the relationship between a university and its local community.

Interestingly, the Ivy League schools (Brown, Columbia, Cornell, Princeton, Harvard and Yale University, Dartmouth College and the University of Pennsylvania) are not allowed to give athletic scholarships. They boast campuses where college sports are a less important attraction.

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