Article: Splitting Audience Could Make UM's $240 Million Dollar Athletics Debt A Heavier Lift
Very interesting read with a lot of useful info. Hope you all can enjoy on a slow newsday.
http://www.crainsdetroit.com/article/20170226/NEWS/170229865/splitting-…
February 27th, 2017 at 11:55 PM ^
Good find and interesting. I didn't realize how much debt the department had as we often hear it is self funded. They make a profit on an annual basis but certainly nowhere enough to pay down debt in a meaningful way. But fine to service the debt. Since their rates are based on the University as a whole and not just the AD they will get good rates for a very long time.
ESPN data is also interesting - I wonder how much longer ESPN can pay more and more when it has lost 10% (approx) of it's user base (99M to 90M). The BTN money was not really mentioned.
February 28th, 2017 at 7:35 AM ^
Maybe we shouldn't cackle with glee when we hear about the plummeting ESPN viewer metrics. Nah! They will have deserved every painful moment they receive. Their spending was out of control for years while they seemingly printed money. Now they are finally forced to pay attential to their financials and it isn't coming easy for them. Increased competition and the popularity of cutting the wire is a lesson for which they are unprepared.
February 28th, 2017 at 12:10 AM ^
Wait, what? Our athletic department is 240 million in debt?
February 28th, 2017 at 12:16 AM ^
February 28th, 2017 at 1:14 AM ^
Yes but no. For example the suites will one day be a revenue producer but for the time being they are paying off the cost to build to them. Does that make sense?
February 28th, 2017 at 12:39 PM ^
No, that doesn't make sense.
Yes - they are in debt. Even if they had more cash on the balance sheet than outstanding obligations, if they had the obligations they would be in debt.
That being said, there is a difference in terms of what kind of debt you're in. A homeowner that carries a mortgage is "in debt." That debt, however, is different than a consumer who rents their residence and has large unpaid credit card balances.
You could try to argue that, for the example given, owing money on the stadium expansion is like owning real estate: i.e. a theoretically appreciating asset. But some time after the expansion is paid for, there will be additional capital required to maintain the facility.
All debt is not bad. But let's not pretend the situation is something it isn't.
February 28th, 2017 at 1:18 PM ^
I can't help you then if you don't understand that. Michigan's AD is financially sound. There's an operating budget and then there is a capital budget. The capital budget is generally paid for through donor solicitiations over an extended period of time. That's the type of "debt" Michigan is in. Michigan's operating budget, despite it's massive expenses, still produces an annual surplus and the AD doesn't take a subsidy from the university's general fund unlike most other places. Michigan isn't building or doing anything they can't pay for. That should be the point of this.
February 28th, 2017 at 1:25 PM ^
I understand it completely. It is your comment that doesn't make sense to me. In your original post, you said, "Yes and no." There is no "no" about this. The athletic department has debt.
I agree that Michgan is doing things the right way. I think the way the university administration and athletic department are working together is good and commendable. I also think the debt load is totally sustainable (the point of my comment that not all debt is bad).
I just want to be sure we are calling a spade a spade.
- The athletic department has debt.
- The university guarantees that debt.
- The university has additional debt.
None of this is bad.
February 28th, 2017 at 1:33 PM ^
I should have been more nuanced in my answer. My "yes and no" was merely an attempt to say 'yes' Michigan has debt but 'no' not in the way the poster or most people think of debt. You pointed that out in your subsequent post, so I think we're both on the same page here.
February 28th, 2017 at 12:04 PM ^
I would have thought that was impossible based on the (relatively) free labor model, but here we are.
It pulls at my curiosity. What institutions aren't "in debt?"
February 28th, 2017 at 12:26 AM ^
February 28th, 2017 at 12:31 AM ^
February 28th, 2017 at 12:40 AM ^
I knew the university tacked on a lot of long-term debt with all the facility upgrades, but I didn't know it was that much. The cynical side of me wants to have the numbers checked. The author mentions adding $21 million in debt for the new weight room, but that is being fully funded by donors.
Also, the 2.1 billion for the entire university seems really high as well. I guess they are always upgrading and rebuilding something though.
Glad to know it's not an issue though. I think the author is trying to make something out of nothing. If things ever got really rough, we could pay the AD debt with donations alone I bet.
February 28th, 2017 at 3:46 AM ^
It is not an issue NOW, based on current projections which include Harbaugh filling Michigan Stadium on Saturdays. It would seem to me that it is imperative to get hockey back on track and to bring back the buzz that basketball had a few years ago and get some of this debt paid off more quickly. I have real concerns that the sports revenue model is about to change as is being shown by what is happening with ESPN viewership along with fan attendance nationwide. We have one more really good deal but after that, things could get dicey.
We saw very quickly what a few bad years did to attendance and even with Harbaugh, most games the student section has lost a large piece of its attendees by halftime. The world is changing.
While revenue in the B1G is always split evenly, there are a couple of schools, Michigan, OSU and PSU that command large TV markets. At some point, I wonder if these schools will start looking at a different model for revenue sharing. Things didn't work out well with Texas, but if dollars become scarce, schools might start assessing their true individual worths in terms of audience.
February 28th, 2017 at 4:52 AM ^
February 28th, 2017 at 10:18 AM ^
Point well taken. As someone who doesn't currently live in Ann Arbor, I hadn't been to a hockey game in a couple of years but I thought attendance had slipped well below the level you indicated in your response.
February 28th, 2017 at 3:29 PM ^
February 28th, 2017 at 4:25 AM ^
It isn't uncommon depending on rates and current investment returns to pay through debt rather than directly from cash even with cash on hand. Also with donations, you can get into situations where you have the donor money backing but not immediately available via structured but guarenteed over time donations (often done to spread out the tax benefits over multiple years). Likewise in the corperate world, it isn't unheard of with a company with billions to 10s of billions of liquid assets/cash sitting around to instead fund via a bond issue. Same goes for individuals, I know several who finance their real estate purchases via debt methods when they have well more than enough cash on hand to buy the real estate outright because of the tax and financial advantages of doing so.
February 28th, 2017 at 11:11 AM ^
Yes. Thank you for stating it clearly.
February 28th, 2017 at 1:08 AM ^
I'm so glad these monstrosities on top of our stadium were added for the necessity of such a massive debt. Will probably take another 10 years and then they'll want to replace the stadium altogether, starting another depressing cycle
Oh i know, let's get Ross to pay it off!
I feel like this has truly perverted the concept of amateur athletics. No need to point at SEC bagmen for that
February 28th, 2017 at 1:09 AM ^
The suites are absolutely beautiful and I'm so glad people like you are miserable about it.
February 28th, 2017 at 1:25 AM ^
Lol yeah sure just replace it. Between the initial build and the recent renovation, Michigan has spent $227 million in construction costs in the 90 years the big house has been around. Not bad to keep it safe and modern.
Meanwhile , you have places like PSU that dumped $100 million in theirs a decade ago to add another layer to the erector set, and engineers are already saying it might be too unsafe to keep open for much longer.
Michigan was very responsible with the upgrade.
February 28th, 2017 at 7:47 AM ^
But back in Zoidberg's day the players hung their clothes on nails, lifted milk cannisters, and smoked a pack a day. If it was good enough for Harmon, it should be good enough for today's players.
Plus, he obviously didn't read the article.
February 28th, 2017 at 7:24 AM ^
Are you equating basic economics with buying players?
February 28th, 2017 at 8:54 AM ^
The $226M cost covered a renovation of the entire stadium. The structures were part of that cost but we were spending a lot even without them. The suites are intended to generate revenue to allow us to pay down the costs more quickly.
February 28th, 2017 at 1:46 AM ^
That's all I got to say.
February 28th, 2017 at 2:40 AM ^
February 28th, 2017 at 6:26 AM ^
I do think that is part of the reporter's point here - to show the ever increasing costs of big time athletics and how some schools like Michigan can afford it while others will likely struggle, especially if the ESPN money valve gets shut off.
February 28th, 2017 at 7:08 AM ^
But curious why the negs--is it because I said I was comfortable with long-term debt? Dave Brandon as Reagan?
February 28th, 2017 at 7:12 AM ^
February 28th, 2017 at 7:49 AM ^
Playing the politics card along with the Brandon card will get you negged every time.
February 28th, 2017 at 10:53 AM ^
Exactly this.
1) Stating, without any evidence, that certain "good programs" are using right wing models and certain "bad" programs are leftists is going to piss off the left leaning readers.
2) Comparing Ronald Reagan, the most popular Republican President of the last half century, to the most loathed figure in Michigan Sports is going to piss off the right leaning readers.
He's probably being negged by both sides.
February 28th, 2017 at 1:30 PM ^
I was talking economics, but if people read politics into that, okay.
Also, I wasn't trying to compare personalities, character, or popularity. Only this:
USA : USSR :: Michigan : Cal-Berkeley
and therefore
Reagan : Gorbachev :: Brandon : UC AD
Just explaining, no defensiveness. Neg away as ye see fit.
February 28th, 2017 at 10:29 AM ^
- the same with the Glick - Ed Martin's pantheon for The revenue sport.
What Brandon did was throw Brandon's gilded never, never land of non-revenue sports venues on top of it. That move seems less fiscally responsible to me - especially in the context of cable subscriber loss and possibly having to pay revenu sport athletes.
However, I get your point that much like Reagan, Brandon goosed the gas pedal just to put the lesser earning schools in a losing ground or ever increasing massive debt competitive position.
As for how this is reported - I believe the small profit the AD reported is after paying the loan payments. I also wonder if they take the massive Ross-type donations and invest them in trust to pay the debt payments rather than reducing the principle owed.
Either way, if I am Warde and his CFO, I am keeping Ed Martin and Jim Hackett on my advisory board (And Glick and Ross as well).
February 28th, 2017 at 11:15 AM ^
February 28th, 2017 at 8:51 AM ^
Are they sure about these figures? I had heard that we had gotten the debt down to something like $150M.
February 28th, 2017 at 7:31 AM ^
most of us have debt, especially when buying a first house
it isn't always the amount of debt but where it stands relative to the rest of the financial picture
February 28th, 2017 at 8:05 AM ^
February 28th, 2017 at 8:15 AM ^
Where it gets interesting to me is that all of this debt is predicated on Michigan's reputation and public perception of its programs. That's where it really helps to have coaches like Harbaugh, Beilein, Hutch, Red, KBA, etc.
"If things did go bad for athletics — I'd give that a low probability — the University of Michigan at large would be obligated to backstop that obligation," Hegarty said. Instead, the university could write the athletic department an internal loan from cash on the overall balance sheet, and the department would pay it back with interest, he said.
Like the article notes, things are unlikely to go bad for athletics at Michigan given the current forces in charge and the trajectory of our major programs.
Now if a school has a major scandal, the whole premise for the debt craters, and you've got real problems as a school.
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So when PSU puts a shit ton of money into their stadium and then their history of enabling and covering up decades of child rape comes to light, PSU has a problem going well beyond the athletic dept.
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When Baylor undergoes an expansion of its training facilities, and its history of covering up student rape comes to light, Baylor has a problem going well beyond the athletic dept.
- When MSU invests in its training facilities, upgrades its stadium, and makes other improvements, and allegations are rife that MSU enabled a sexual predator doctor along with other sexual abuse allegations, MSU has a problem going well beyond the athletic dept.
These are problems for the troubled universities outside of debt service (i.e., they will negatively impact future revenues regardless of whether there were bonds issued to fund athletic facility improvements - and enrollment will suffer if a school has a tarnished reputation). But to the extent they have debt service that they plan to address with sports revenues - Houston, they have a huge frickin' problem.
February 28th, 2017 at 8:27 AM ^
February 28th, 2017 at 8:52 AM ^
I don't know if that makes a difference, since we try to keep university and athletic finances are separate. I suppose it's a nice little emergency backup though.
February 28th, 2017 at 9:01 AM ^
The fact that the university writ large is ultimately obligated for the debt impacts the rating of the bonds (for bond issuance), which in turn reduces the interest rate. At the risk of oversimplifying, like many financial matters, the less risk there is the lower the return on investment.
So given that there is a huge endowment at the ultimate obligor of the debt, Michigan can demand a lower interest rate on its debt.
(Another way to think of it is the difference between an English major who is unemployed looking for a loan, compared with an English major who is unemployed but has her wealthy parents' willing to guaranty her debt. The first is lucky to get a loan of any sort, while the second has a much easier time. And gets a better [i.e., lower] interest rate than the English major without a guaranty.)
On the "finances being separate" piece, that's really more of a budgetary issue. The bondholders (or any other creditor) really doesn't care about the internal budgeting, so long as the overall credit picture of the ultimate obligor is good.
February 28th, 2017 at 10:55 AM ^
I'm afraid the AD has worked out the same deal as the "too big too fail" banks - "privatized" profit with "socialized" risk.
The University and AD finances are seperated - until the AD can't pay their bills, then the University at large is on the hook.
February 28th, 2017 at 12:55 PM ^
I guess that's one take on it. But...really?
Michigan's athletic department has been almost without fail, in the black. The AD pays out of state tuition for scholar-athletes not from Michigan. The history and reputation of the athletic department have almost certainly had a favorable impact on the University as a whole.
Those facts simply are not true for many other schools where the athletic department is a heavy burden.
Yes, the AD debt is guaranteed by the University. But an active Board of Regents works closely with an administration that has put significant emphasis on reviewing funding for the AD: ex ante, concurrently, and ex post. I agree completely that if there is a house of cards, and it falls down, the University will be left holding the bag. But decades upon decades of history would argue that the house is built well and on a solid foundation.
The upside is that the AD gets to take advantage of the Univeristy's financial reputation and stellar debt rating. This in turn keeps costs down, making it easier for the AD to keep its focus on the things it does well.
The job of the CFO of any large company is to consider the strategy of the organization and then optimize sources and uses of funds. In the case of Michigan, they have robust controls in place to ensure the effective operation of subsidiaries, like the Athletic Department. As long as those in the subsidiaries meet the requirements of the controls, and the controls are sufficient to protect the organization, the subsidiaries should be allowed to operate.
February 28th, 2017 at 11:56 PM ^
I'm not arguing the AD is poorly run, or that the AD shouldn't be backed by the University credit (it will be no matter what)...
I'm arguing that AD profits should also be flowing into the academic side of the university at a significantly higher level.
I guess I can see that from the original post, but that certainly was not how I read it (and how I assume others read it) given the second point seems to be nonexistant in the first post.
Regardless, it's a fair point and one that certainly can be discussed, but it's heavier in the philsophy of how an AD should be run than in the nitty gritty of how debt is handled that seems to be the focus here.