College Sports Should Be Treated as a Source of Funding for Nonprofit Universities, Not as a For-Profit Business

Within the last few weeks, the world of college sports has been rocked by two major developments, one internal and one external. First, the NCAA, the governing body for college sports, changed its rules to allow the members of the five biggest athletic conferences to spend more money on their football programs than the smaller and poorer universities are allowed to spend. Then, before that decision could even be digested, a judge issued a ruling in the O’Bannon case, invalidating the NCAA’s rule that prohibits players from receiving compensation for the use of their images in video games.

The O’Bannon decision is creating great consternation, because the judge’s ruling opened up a large number of important questions, while providing only vague hints as to how to answer them. Everyone involved in the case, and commentators across the country, were left scratching their heads. And while the NCAA’s new internal rules are at least clear on their face, no one seems to agree on the implications for college sports going forward. All of this, moreover, is happening only a few months after a federal ruling that has raised the possibility that college football (and maybe basketball) players could form and join labor unions.

Rather than try to parse the nuances of those recent developments—as important as they are—in this column I will instead focus on a broader issue. There is a continuing misunderstanding about the very nature of college sports, with a presumption that the ever-larger amounts of money involved automatically make college football and basketball professional sports in all but name.

However, when people unthinkingly apply a for-profit approach to college athletics, I think they have made a serious mistake, a mistake that causes considerable confusion in thinking about the many issues facing college sports. That confusion begins, in large part, with a simple misunderstanding of two basic financial terms: revenues and profits.

Revenues and Profits: How Can a Billion-Dollar Business Not Be All About Making Money?

As I have perused the discussions of the NCAA’s recent developments, cynical comments are often preceded by the claim that college football and basketball are “money makers,” with the universities greedily refusing to share their “profits” with the players. From there, the claim is that the players are being exploited, while someone else earns all of those profits.

For example, a friend recently asked whether it bothered me that universities are “making money” from the efforts of supposedly unpaid athletes. I have to admit that, although I am certainly worried about the wellbeing of college athletes, I found it strange indeed to hear the situation described as a matter of economic exploitation, with evil universities purportedly making money at the expense of exploited laborers.

People are understandably impressed by the large amounts of revenues that universities receive from television networks, merchandise sales, and so on. But there is a huge difference between profits and revenues. If a person were to take a look at the amount of money flowing through, say, the United Way, the numbers would make her eyes pop. Millions upon millions of dollars show up in the accounts of nonprofit organizations every year, and something close to the same amount of money flows out again. That is what makes them nonprofit organizations. The whole point is to collect money and then to use that money for tax-exempt purposes, such as supporting educational, charitable, and cultural endeavors.

The institutions involved in college sports are, with one unimportant exception noted below, legally organized as nonprofits, and for good reason. To take two prominent examples, neither UCLA (a public university) nor Stanford (a private university) is “in business,” even though much of what they do generates huge cash flows that those universities then use to fund their various activities. Both universities field football teams that are highly competitive (both of them playing in the Pac-12 Conference, which is one of the elite 5 conferences that will now play under different rules). But neither university exists to earn profits for a set of owner/shareholders. (The sole exception to the general rule that institutions involved in college sports are nonprofit organizations is Grand Canyon University, which announced in 2012 that it would join the Western Athletic Conference, making it the first for-profit university to compete in Division I.)

This means that commentators are generally thinking about college football through the wrong lens. The right question is not, “Why are universities allowed to earn profits from sports?” but “What rules should apply when a nonprofit university collects revenues from its athletic programs?” The framing of the question can fundamentally alter the answers that we might reach.

The Nonprofit Model and the Modern College Sports Colossus

Upon hearing a claim that college football and basketball programs are “nonprofit,” skeptics will inevitably object that this cannot possibly be accurate. Surely, these skeptics will insist, there are people getting rich from college sports, but it is not the players. Just look at all the money sloshing around!

Other than the general suspicion that money equals corruption, the two most common complaints are that the coaches and the university presidents are the ones who are “jealously guarding their profits.” But both of these groups of people should be covered by the rules governing nonprofits, which limit the compensation of highly compensated members of an organization. If they are not, or if those rules are not being enforced, then the answer is not to increase the costs of running football programs but to treat these individuals correctly under the nonprofit model.

Even if there are some highly compensated people at the top of the pyramid, moreover, this is not a reason to abandon the nonprofit approach. There are plenty of nonprofits that rely on volunteer workers, but that also have fairly well paid executives (as well as some paid staff). There is nothing inherently wrong with running a nonprofit organization by relying on largely uncompensated effort that is managed by some fairly well-paid professionals.

If a university is using its revenues (net of reasonable administrative costs) to support its core mission of education, then that is an entirely appropriate way for a nonprofit organization to run any revenue-generating activity. If it is not, then the answer is to tighten those rules and their enforcement, not to treat nonprofit universities as if they are for-profit corporations, merely because a lot of money is flowing into and out of their bursars’ offices.

The Compensation of College Athletes: Cynicism and Reality

To be clear, it is ever more important to remind ourselves that college players are, in fact, compensated. As I wrote in a Verdict column in December 2013, there is a strange tendency even among the most respected sources to call college athletes “unpaid,” because the NCAA does not allow players to receive cash wages or salaries. What they do receive, however, is potentially much more important: cost-free access to a college education.

As I argued in that earlier column, the belief that full-ride scholarships—covering tuition, room and board, and expenses, the aggregate of which can be worth as much at a quarter of a million dollars over four years—are somehow not “compensation” seems to betray a certain anti-intellectualism. Yeah, we seem to say, education is good, but cold hard cash is better.

But perhaps there is a further explanation for people’s cynicism. After all, there is plenty of anecdotal evidence that some college players are not receiving a real education. The football players at Northwestern University who won the preliminary ruling allowing them to unionize complained that the amount of time spent on football made it impossible for them to be real college students. Although the evidence shows that Northwestern has one of the highest graduation rates in all of college football every year, a former starting quarterback complained that he was forced to change majors, preventing him from achieving his dream of becoming a physician.

Even worse, there are periodic scandals involving players who take fake courses, or whose papers are written by graduate assistants, or who are given inflated grades when coaches put pressure on professors to allow athletes to slide through on little or no work.

Let there be no mistake, none of these things is acceptable. The question, however, is whether these problems somehow support the argument that the players fundamentally deserve to be paid in money, because the value of the non-pecuniary educational benefits are (at least for some) not as large as we would hope. That would not be the appropriate conclusion to draw.

Let us imagine, completely against all of the evidence, that no college football or basketball players received any value at all from the education that they are supposed to be receiving as student-athletes. Even so, they are still given free room and board, and in almost every university in the country, those accommodations are spectacularly comfortable.

Moreover, the athletes are being given the chance to audition for a career in professional sports. Although only a tiny fraction of college athletes ever cash a professional paycheck, the simple opportunity to try to make it at the highest level is priceless, in the eyes of many of these young athletes.

The other complaint about universities’ use of revenues, after all, is that they have become engaged in an arms’ race, trying to outdo each other with ever more lavish training facilities. As a matter of running a nonprofit operation, this is actually a bad practice, and it should be reined in. But it also sheds quite a different light on the idea that universities are somehow “profiting” at the expense of the athletes. These gilt-edged facilities make the four years of athletic eligibility even more appealing and comfortable to the athletes, and they also maximize players’ abilities to audition for the professional leagues.

Again, the nonprofit model does not require compensation for “work,” but universities are in fact offering compensation in various forms, at the very least allowing a tiny cadre of student-athletes to experience four years of college in ways that no one else will ever know.

And although it is not even required that universities provide adequate health and disability insurance for “workers” who generate revenues through these dangerous activities, I am pleased to see that some “football factories” are finally seeing the wisdom and humanity of providing better insurance coverage. If the other students at the university are going to benefit from the revenues generated from the big-time sports programs, it at least seems only fair that the young adults whose bodies are being broken and beaten should be able to walk and think when the last whistle is blown.

The Myth of Big Profits in Athletic Programs

Finally, one must go back to the basic question of just how much money is being generated to support the nonprofit enterprise at the heart of a university. The discussion above implicitly presumed that the athletic programs are bringing in so much revenue that they are subsidizing the rest of the universities’ activities. This is not, in fact, true.

In 2012, only 23 out of 228 public universities had athletic departments that avoided being revenue drains to their universities as a whole. Even if it made sense to think of these universities as profit-seeking enterprises, therefore, they would be among the worst capitalists ever.

Indeed, the psychic benefits that citizens and state legislators receive from big-time sports programs must be rather substantial, because universities are getting taxpayers to spend extra money to support even mediocre sports programs. At Rutgers, for example, the people of New Jersey (and the students who pay millions of dollars in extra fees to support the athletic department) regularly pay millions of extra dollars above and beyond whatever money the football and basketball teams are taking in from TV, ticket sales, and so on.

In short, the presumption that large revenues automatically lead to large surpluses is simply wrong. And even where it is true, there need be no reason to condemn a system in which one part of the nonprofit enterprise generates money for the rest of the nonprofit enterprise.

The recent developments in college sports, which I noted at the beginning of this column, are pushing universities further and further into a spending race in which a wages-and-profits model is displacing a revenues-for-nonprofits model.

Some people argue that there is now too much money involved in big-time college sports for us to indulge in the quaint fantasy of amateurism. In fact, there is too much money involved for us not to insist that the system truly lives by the rules of nonprofit organizations. When universities actually use sports-generated funds to support higher education, that is to be applauded, not dismissed as either cynical exploitation or misplaced idealism.