Fear the deficit
Fear the deficitPublished December 3, 2012
Editor's note: This story is revised from the print edition.
Just a decade removed from winning the NCAA championship in basketball and competing in the Orange Bowl in football, the University of Maryland athletic department is broke.
That’s the main reason university officials used to explain why it decided to divorce itself from the ACC, an athletic conference that it helped found nearly 60 years ago. Maryland officials say the school will have more financial flexibility and resources as a member of the Big Ten Conference.
But Maryland’s financial reasons for making the move lead to larger questions about how the school got into such a financially precarious position, and what it means for college athletics overall.
How can a large state university, with a solid history of athletic success, find itself so deep in the red that it had to cut seven Olympic sports? And why, after it cut those sports to balance the budget, was the move to the Big Ten still necessary to firm up the department’s finances?
|Maryland President Wallace Loh (left) announced the shift to the Big Ten at a news conference where he was joined by Big Ten Commissioner Jim Delany, Maryland Chancellor Brit Kirwan, University System of Maryland Chairman James Shea and Maryland Athletic Director Kevin Anderson.
“It’s emblematic of the world now. There’s never enough,” said Todd Turner, a college consultant and former athletic director at North Carolina State, Washington and Vanderbilt. “You have way too many people influencing decisions who are not ultimately responsible for them and are not connected to higher education. [Athletic departments] have gone from being grounded in higher education to being commercial entities.”
The fact that Maryland’s athletics are under water is not unique in college athletics, particularly in the ACC, where only Virginia Tech made more money than it spent in fiscal 2009-10 without help from university subsidies. In fact, none of the ACC’s eight public schools turned a profit in their athletic department in 2010-11.
Compare that to the cash-rich Big Ten, where athletic departments at eight of the 11 public schools made more than they spent in 2010 before subsidies; seven of them turned a profit in 2011. The SEC led the way with nine schools turning a profit before subsidies.
Of the 120 schools in the NCAA’s Division I Football Bowl Subdivision, only 23 turned a profit before subsidies in fiscal 2011, meaning that the Terps were one of 97 that didn’t.
Maryland’s athletic department, however, was paying its own bills until the 2010-11 athletic year. Even though expenses had outpaced revenue by $2 million to $3 million each year from 2006 through 2010, the department was able to cover the shortfall with reserves it had built from the more fruitful years.
But in the 2010-11 athletic year, the athletic department depleted those reserves and borrowed from the university to cover a $7.8 million shortfall. That was when Maryland made two costly coaching changes in its two biggest revenue-producing sports.
Maryland fired its popular football coach, alum Ralph Friedgen, after a season in which the ACC honored him as the
|Maryland’s financial problems accelerated after the school fired football coach Ralph Friedgen (left) and hoops coach Gary Williams retired.
Both changes rocked the athletic department’s finances. Maryland spent nearly $3 million paying off Friedgen and his staff for the additional year that was left on the coach’s contract. The school also created a high-paying administrative job for Williams that guaranteed him more than $800,000 over the following two years.
That was only the start. New football coach Randy Edsall was guaranteed $2 million a year — the going rate for top coaches. Maryland also had to pay Edsall’s former school, Connecticut, $400,000 to cover his buyout.
The Terps later hired a basketball coach that year, Mark Turgeon from Texas A&M, and agreed to pay him a guaranteed $1.9 million a year. Maryland forked over $250,000 to buy out Turgeon’s Texas A&M contract, as well.
“What you’re seeing is presidents and boards and ADs funding things at incredibly high levels and doing some completely illogical things that take on enormous debt and pays salaries that don’t fit in the academy at all,” Turner said. “You’ve got people outside the program dictating decisions that are not financially sustainable. They might be donors, rights holders, media, people not accountable to higher education, telling you who to play, when to play, who to hire. There’s enormous pressure to feed the beast.”
Administrators typically count on a financial boost from the excitement generated by new hires, typically in the form of increased ticket sales and contributions. But the hiring of Edsall and Turgeon, who replaced two popular alums, did nothing to spur new revenue.
Edsall, in particular, has had a difficult time generating excitement around the football team, which won only two games in 2011 and four games this season. In Turgeon’s first season, the basketball team failed to make a postseason tournament.
Those poor on-field and on-court performances have a direct effect on Maryland’s bottom line — attendance and donations are both down significantly (see chart).
Football attendance is down more than 31 percent, from a high of 52,426 in 2005 to this season’s average of 36,022. Season-ticket sales declined for six straight years, and one-third of the 63 suites in the $51 million Tyser Tower at Byrd Stadium are unsold.
Donations also dropped considerably. Maryland records show that Terrapin Club donations in 2010-11 were $9.1 million, continuing a downward three-year trend before 2012 donations saw a slight increase to $10.3 million. The booster club reached a high of $15.3 million in donations in 2008.
Maryland Athletic Director Kevin Anderson said that nearly 3,000 members of the Terrapin Club had dropped out of the program since that high point.
Draining the reserves
By the close of fiscal 2011, Maryland’s expenses outpaced revenue by $7.8 million, which forced athletics to drain the last $6.6 million in the reserve fund and required the athletic department to borrow $1.2 million from the university to cover the difference.
Maryland receives about $15 million in subsidies (student fees and state funds) from the university, according to USA Today’s database of athletic department finances. When the athletic department cannot balance its budget, it must borrow the balance from the university and pay it back with interest.
|Declining attendance further accelerated a drop in revenues for Maryland's athletic department.
When the athletic department cut those seven sports this year, its projections showed total deficits climbing as high as $17 million in 2017 if the department didn’t act. What was missing from those projections, however, was the new revenue that would come from the ACC’s 15-year, $3.6 billion TV deal with ESPN, which was renegotiated after Syracuse and Pittsburgh were added. Nor did the department have the information on new revenue that would come from the college football playoff.
Loh, who was hired in August 2010, and Anderson, Loh’s choice to succeed Yow when she left for North Carolina State, agreed that cutting the sports was the remedy to their financial woes. They acted on it in July after the president appointed a committee to review athletic spending.
“We will emerge this fall better able to meet our goals of having fiscal responsibility,” Anderson said.
The cuts projected to save $3.5 million to $5 million annually in future years. Budget projections showed Maryland athletics getting back in the black by 2014-15.
Big Ten seen as quick fix
Brian Ullmann, the school’s assistant vice president for marketing and communications, tried to offer some insight into what happened between July when those sports were cut — thereby saving the budget — and the November announcement that the Terps were leaving the ACC.
“The elimination of sports was needed to close a persistent operating deficit — it basically got [athletics] back to even,” Ullmann said. “The department would still continue to be reliant on ticket revenues from football and men’s basketball each year. That’s not a reliable revenue stream. The move to the Big Ten provides increased and guaranteed television revenues. That provides a level of true fiscal sustainability for the department.”
Throughout his announcement on Nov. 19, Loh referenced the athletic department’s financial hardship, despite the previous cuts, and framed his comments around the survival of Terrapin athletics.
“Presidents will not have to sit around wondering whether Maryland athletics, as we know it, can survive,” Loh said of the Big Ten move.
While deciding whether to leave the ACC for the Big Ten, Maryland faced a difficult choice: Stay in the ACC and rebuild its football and basketball organically — by getting more competitive, selling more tickets and suites, and growing the donor base — or take the money the Big Ten offered and never worry again about the empty seats in the football stadium or basketball arena.
Ultimately, the Terrapins took the security of the Big Ten, a move that surprised many boosters.
“I’m somewhat stunned by the speed and secrecy behind this move,” said John R. Tydings, a Maryland alum who formerly was on the University of Maryland College Park Foundation’s board of trustees. “The process was too expeditious.”
From the 2014-15 season when Maryland officially begins play in the Big Ten through 2020, the Terps are expected to make $95 million more than if they stayed in the ACC. That’s because the Big Ten makes significantly more money from television than the ACC. In 2012, the Big Ten paid each of its schools $24 million, compared with the ACC’s payout of $13 million.
The ACC’s revenue will increase substantially with its new ESPN deal beginning this year, a deal that was enhanced considerably with the addition of Syracuse and Pittsburgh as conference members. That annual overall average of $240 million is expected to grow even more now that the ACC has added Notre Dame as a member for all sports except football, but it won’t keep pace with the Big Ten, which will have a new richer network deal in 2017 to go with revenue
from its own channel.
“This guarantees the financial sustainability of Maryland athletics for a long, long, long time,” Loh said of the Big Ten move. “Somebody has to pay the bills.”
Breaking down Maryland’s numbers
Maryland football attendance
Maryland’s athletic budget
Maryland’s projected budgets
(minus the seven sports that were cut earlier this year, but not counting Big Ten revenue)
*Based on budget projections from the University of Maryland’s presidential review of intercollegiate athletics. Years 2006-11 are actual figures.
Terrapin Club contributions
(includes major gifts and endowment revenue)
Source: University of Maryland