Friday, January 3, 2014

Getting Athletics Accounting Straight

The Missoulian reported this week that Montana University System college athletics “generated $50.2 million in revenue and turned a $571,331 profit in 2013.” That’s pretty good news. It’s nice to know that at a time when college and university budgets are tight, classes are being cut, and salaries are lagging,  sports programs are generating enough revenue to cover their expenses, have some money left over, and be self-sustaining.

But alas, it isn’t really so.

The Missoulian got its figures from a report by Frieda Houser, the university system’s accounting and budgeting director, and while the sportswriters got the numbers right, they got what the numbers mean wrong.

Case in point is that $571,331 of “profit.” Houser calls this tidy sum the “excess of total revenues over total expenses,” and while that might sound a lot like “profit,” it isn’t. Profit for a private business is what is left over after all the revenue generated by sales of goods and services is reduced by all the expenses (rent, wages, contracted services, utilities, borrowing costs, and so forth) that have to be incurred to produce whatever is being sold in the first place. In the case of professional sports teams, for example, revenue comes from ticket sales, television rights, merchandize (think NFL gear), and, increasingly, luxury boxes.

What Houser calls “revenue,” however, includes a whole lot of money that is not generated by athletic programs from these kinds of sales, or from contributions from fans. Instead the money comes in the form of “student fees,” “direct institutional support” and “indirect facilities and administrative support,” all items that are considered, in the world of NCAA financial reporting, to be subsidies. For Montana university system sports as a whole, those subsidies total $27.8 million. That’s 56 percent of $50.2 million in total revenue for all sports reported by Houser. If athletics in 2013 had had only the revenue it could generate for itself through contributions and sales of tickets, broadcast rights, sponsorships, advertising and the like, the profit reported by the Missoulian would have become a loss of $27.3 million.  By that measure, at any rate, athletics are certainly not self-supporting.  They are, instead, a drain on university system financial resources.

For what it’s worth, Montana is not alone here. Every year Division I colleges and universities all over the country report revenue and expense figures to the NCAA, and every year, almost every program in the country reports that a significant share of its revenue comes from subsidies. On the flip side, very few programs “turn a profit” and are self-supporting.*

For a lot of folks – who believe that successful teams add luster to a school’s reputation, attract more students, and inspire more alumni giving – there’s nothing amiss here. Subsidies are simply the price the institution has to pay to enjoy the benefits of a successful program. For others, subsidies, astronomical coaches’ salaries and new stadiums are evidence that institutional priorities have run off the rails. But no matter what side of that debate you come down on, you’ve got to agree that there’s no point arguing in a vacuum of information.**

We are not well served by chipper press accounts of profits that aren’t really profits or revenues that come largely out of the hide of students or other university programs. Surely when we attend athletic events we should know that the taxpayers are helping pay our way. When we pay our taxes, we should know that some of the money is going to support athletic programs that can’t support themselves. And when the campus and Missoula communities engage in a full blown debate about academic priorities, as they are doing right now, the dollars going to athletics should be part of the conversation.

* Click here for a USA Today summary of the athletics finances of 227 Division 1 schools.

** For a careful and balanced analysis of who wins in the tug of war between athletics and academics, see this report by the Delta Cost Project.

Job Creation Bean Counting

As I’ve said in a previous post, if we’re trying to figure out how to use public resources effectively, we really shouldn’t use job creation as our guide. Not that job creation is unimportant or that unemployment is not a serious problem. We obviously want everybody who wants a job to have one. But when we do put people to work, what they are working at matters. If it didn’t, any old job in any old useless public project - paying people to dig holes in the ground and fill them up again, say – would be as good as any other. We want people not just to work, but to work at something meaningful and productive.

All that may sound pretty obvious, but it’s surprising how often we hear from policy makers and interest groups and editorial writers that job creation, any job creation, is good, and more job creation is better. Consider, for example, this statement from Rep. Austin Knudsen in a recent Missoulian column, “Environmental review laws are designed to make sure that we’re balancing environmental concerns with job creation.” *

Well, no they’re not, and just a smidgen of thought should make that clear.  If we decide to allow some environmentally destructive activity – draining a wetland, for example – just because there will be lots of jobs created in the process, what we are saying, in effect, is that it’s okay to destroy the environment as long as it takes a lot a work to do it! That’s crazy talk. It’s only what we build in its place that can plausibly justify draining the wetland. It’s not putting people to work that counts, but what those people are doing.

To be fair, Knudsen didn’t invent this kind of job creation bean counting, and he has no monopoly on it. It’s not just developers or their allies who talk about job creation. Environmental advocates do it as well. The result is that our energy policy debates, for example, often consist of arguments about whether there are more jobs in coal, or oil, or wind, or solar, or energy efficiency or what have you.  Apparently without realizing it, the contending parties want us to select as our favored energy source whatever takes the most work and is therefore potentially the most costly!

Don’t get me wrong: government should certainly use its resources to promote job growth, particularly when the economy is in recession, or recovering from a recession “joblessly,” as it is now. One way of encouraging job growth is through fiscal policy: manipulating taxes and government borrowing and spending to stimulate demand for goods and services and the labor necessary to produce them. The question with fiscal policy is how much stimulus is needed, and more than one economist, even Keynes himself, has pointed out that what government spends on really doesn’t matter much; anything will work. As a matter of macroeconomic policy that’s true, but it doesn’t mean that when we decide to spend and put people back to work, we should be oblivious to what they are actually doing.

Well, almost. Back in 2009, when he thought the stimulus bill was too small to produce real recovery from the Great Recession, Paul Krugman wrote that what we needed was the threat, however imaginary, of an invasion by space aliens. That would convince us to start building a multi-quadrillion dollar Death Star, and hire lots and lots of people to do it (if you’re a Star Wars fan, you’ll remember that this puppy was about the size of the moon).

Krugman was messing with us, obviously, but his point was that sometimes, in a recession, if we want to make the spending needed for recovery palatable to fiscal conservatives and budget hawks, we need a cause, however wasteful. Wars fill that bill nicely. It’s like that odd notion that natural disasters are good for the economy because of all the jobs created cleaning up in the aftermath. True, but pretty darn perverse.

* Knudsen in his column is taking on the decision of Washington state regulators to assess the impacts in Montana of increased coal train traffic that would follow the building of a new coal export facility. I commented on that aspect of Knudsen’s piece in an earlier post.

Wednesday, January 1, 2014

Bad Thinking About Good Neighbors

Rep. Austin Knudsen, a bright light in the House Republican caucus, is in high dudgeon, and no wonder! According to Knudsen, the state of Washington is conducting an environmental review of a proposed Pacific Coast coal shipping port that boils down to nothing less than “a blatant attempt to undercut coal mining in Montana and Wyoming…” The “heart of this issue,” Knudsen says, “is whether one state [Washington] can dictate what is produced in another state [Montana].

If you haven’t heard about this nefarious effort to strangle Montana coal production, don’t be surprised. Knudsen has to go way out of his way to put this construction on what Washington regulators are actually doing, which is, simply enough, assessing the environmental impacts of building the port and hauling a bunch of coal to it. And being good neighbors, apparently, they are assessing those environmental impacts not just on Washington, but on Montana and Idaho. Anywhere, in short, where building the port is going to mean a lot more coal trains rumbling through the countryside.

While we usually applaud this kind of neighborliness, Knudsen is upset about it because he apparently concludes (without explanation) that an expansive review will necessarily lead to the port not being approved, or being delayed so long that the investors will give up on the project. Hence the “blatant attempt to undercut coal mining in Montana.” So confident is he in this line of thought that he doesn’t even acknowledge that transporting more coal by rail, the inevitable result of building a new port, could have environmental impacts in Montana worthy of consideration by Washington regulators. No, for some unknown reason, the Washington folks want to do Montana coal in, nothing’s going to stop them, and that is the sum total of what’s going on here.

Knudsen implies that any decision not to build the port is tantamount to Washington improperly dictating to Montana what it can and cannot produce. That being so apparently means that Washington must allow the port to be built. Why that doesn’t represent Montana dictating to Washington what it must produce, which presumably is just as improper as the other way around, Knudsen leaves unexplained.

On one matter, Knudsen may have a point, however garbled. That is that in deciding whether or not to engage in any particular activity, we all – households, businesses, regulators, everyone - have to strike a reasonable balance between the environmental costs and economic benefits that the activity entails. But the way Knudsen says we should assess those economic benefits is all wrong. It’s an important point, and I’ll comment on it more in a future post.