alum96

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.

Yo_Blue

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.

mvp

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.

Maizen

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. 

mvp

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.

 

Maizen

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.

Bluetotheday

February 28th, 2017 at 12:26 AM ^

It's encouraging to her from Bernstein the AD is healthy, despite the 240-311MM debt. It's hard, maybe impossible to come to conclusion when we aren't looking at the ADs financial statements.

Yooper

February 28th, 2017 at 12:31 AM ^

the university is providing the facilities and resources necessary to compete at the highest level and managing the financing of same responsibly. I am proud of that.

Blueblood2991

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.

bluebyyou

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.

JonnyHintz

February 28th, 2017 at 4:52 AM ^

Selling out hockey and basketball games isn't going to make a difference. The arenas are both so small and the tickets so cheap that it isn't going to do much of anything at all. Hockey has an average attendance of 5,618. Yost has a listed capacity of 5,800. Those missing 182 fans at $30 a ticket is only generating an extra $5,460 per game. With only 20 games being played at Yost, that's only $109,200 a season. You're not even putting a dent into that debt with that. Not only that, the issue isn't the Athletics Department. The Department actually MAKES money every year. Usually profits are over $10 million. The hockey team missing a few dozen fans isn't changing that, and it certainly isn't the cause of any debt.

funkywolve

February 28th, 2017 at 3:29 PM ^

Most venues anymore announce attendance as tickets sold** not how many people used their ticket to enter the arena. The university obviously gets the ticket money whether the purchased ticket is used or not. However, just because attendance for a game says 7500 doesn't necessarily mean there were 7500 people sitting in the stands for that game. ** often times they also count everyone in the facility (media, ushers, etc) which is why you sometimes see the announced attendance greater than the capacity of the venue.

ats

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.

drzoidburg

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

Blueblood2991

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.

jmblue

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.

steve sharik

February 28th, 2017 at 2:40 AM ^

I personally don't have a problem with the long-term debt, but where I raised an eyebrow is where the CFO said if we get into trouble with future revenue streams, there is "room to price up;" i.e. raise ticket prices. That seems illogical given that a drastic decrease in revenue would likely follow from a significant drop in demand and thus a ticket price hike to offset lost TV revenue wouldn't work. What I find most interesting is that schools like Michigan, Texas, Ohio State, and Florida are using a Reagan economic arms race strategy, with schools like Cal Berkeley playing the role of the Soviet Union. The top revenue schools are going to raise the cost of doing business so high as to bleed the others to death. The long term effect being that the big revenue schools will dominate the non-revenue sports as the low revenue schools won't be able to fund those sports. Why do I sense the presence of Dave Brandon being the Reagan figure?

Johnny Blood

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. 

SpikeFan2016

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. 

NRK

March 1st, 2017 at 12:46 AM ^

I don't think he's really stating #1. It's a pretty well accepted historical (non-political) fact that Reagan increased defense spending in an effort to hasten the USSR's collapse, given that the US economic system (regardless if headed by Democrats or Republicans) was vastly out performing the Soviet economic model. Wikipedia mentions it in the Reagan article (https://en.m.wikipedia.org/wiki/Ronald_Reagan) and the Cold War article (https://en.m.wikipedia.org/wiki/Cold_War_(1985–91) ), the history.com page on Reagan (http://www.history.com/topics/us-presidents/ronald-reagan), The Washington Post (http://www.washingtonpost.com/wp-dyn/articles/A26273-2004Jun8_2.html) as well as many other places. Don't confuse Reaganomics or trickle down economics (a domestic right wing spending policy) with Reagan's increase in defense spending to put economic pressure on the USSR. Besides, while teetering on the No Politics rule, there's plenty of conservatives who don't believe in increased spending (so arguing increased spending = right wing is a bit troublesome in itself - that is actually a point many conservatives have made about Reagan. See: https://mises.org/library/sad-legacy-ronald-reagan-0). Okay stepping back off that ledge, and only doing so to argue the original statement was less political than suggested. I didn't net the OP, but my position is that the spending is not Brandon-specific, so I don't agree with evhe analogy.

steve sharik

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.

maizenbluenc

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).

reddogrjw

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

Mongo

February 28th, 2017 at 8:05 AM ^

What corporation in America can build new factories from one year's operating cash flow? Like none. It looks like the budget is balanced after full debt service (interest and annual installment), such that these 30 year capital projects can be paid off in about 10 years. Folks, that is like a AA-rated municipal government profile. Plus, the AD has the explicit backing of the entire UM organization and the implicit backing of 500k willing alumni donors who bleed Maize & Blue. That debt could be paid off in one simple fund raising campaign if needed. Who's got it better than us ? ... NOBODY !

Everyone Murders

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. 

  • 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.
     
  • 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. 

Everyone Murders

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.

mvp

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. 

NRK

February 28th, 2017 at 11:56 PM ^

That is an incredible simplification a complex economic issue topped with a poor analogy. Frankly, NOT using UM's AAA rating as a backing to leverage exceptional rates would be considered foolish by some. While I don't do this type of myself I've worked with a lot of people whose job is similar to what Hegarty does. Generally speaking if you think something might happen, they've probably already run multiple financial scenarios on it to determine short term and long term impact and have a plan to adapt.

pescadero

March 1st, 2017 at 7:47 AM ^

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.

NRK

March 1st, 2017 at 9:41 AM ^

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.