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Here's How The NCAA's Black Magic Accounting Turns Profit Into Loss

Most athletic departments say they're losing money despite billion-dollar TV contracts. Now we know how.

by Aaron Gordon
Apr 23 2015, 4:25pm

Robert Deutsch-USA TODAY Sports

It's hard to explain standard NCAA accounting practices without sounding like a complete idiot. At some point, you have to say that a positive turns into a negative, a profit into loss, just like that. Daniel Rascher and Andy Schwarz (who has contributed to this site) had to do just that in a report released today about the University of Alabama at Birmingham's decision to cut its football, bowling, and rifle programs.

The report provides one of the clearest cases to date on the NCAA's accounting practices, detailing precisely how most athletic departments claim to lose money despite billion dollar TV deals and a labor force that works for free. Although the report pertains to UAB's decision to cut its three programs, supplemental surveying of existing literature confirms that the practice is embedded in NCAA accounting procedures, which enforce conformity between member institutions but do not create accurate, actionable financial assessments.

Read More: Screw the Math: UAB Can Afford Football, So Why Is It Choosing Otherwise?

These accounting procedures may have contributed to UAB's decision to cut its football program, which it initially claimed lost the university money. However, as Schwarz has argued for this site and the report emphasizes in further detail, the NCAA-mandated accounting practices turn a $500,000 profit into a $3.8 million loss. They do this, in part, by arguing that raising prices decreases revenue.

You read that correctly. UAB and the NCAA reports that the more money they make, the less money they make.

How does this happen? Take athletic scholarships. The UAB athletic department considers the player's tuition, room, board, and other expenses as losses, since the university bills the athletic department for those expenses. If tuition goes up, the UAB athletic department is billed for more money.

But this is a fundamental misunderstanding of what a cost is; the university is simply paying itself. Assuming the scholarship athletes aren't taking a non-athlete's place (which they aren't at UAB, since it's trying to grow the student body), then the marginal cost of each additional athlete is close to zero. The school will always come out even since it's paying itself. But the athletic department is only half of the equation, so when the athletic department shows its books, it looks like the scholarship cost money.

Here's the really crazy part: the more money the university makes, the greater the loss the athletic department reports.

Here's an example, based on the one provided in the report. Take two athletes on half-scholarships, who are identical in every way except one is from Alabama and the other from Tennessee. The Alabama resident pays in-state tuition of $7,000 a year, the Tennessee resident pays out-of-state tuition of $15,000 a year. With 50 percent scholarships, the in-state athlete will pay $3,500, while the out-of-state athlete pays $7,500. Meanwhile, the athletic department is billed for the same amounts, due to the 50 percent scholarships.

Blazers football. Photo by Marvin Gentry-USA TODAY Sports.

The thing is, the athletic department writes these as loses. So the out-of-state student is paying the university $7,500 yet is being reported by the athletic department as a loss of $7,500. Compared to the in-state student, the out-of-state student is earning the university more than twice as much money. Yet, because the athletic department is essentially reporting the complete inverse, they're saying the out-of-state student is losing them more money.

Remember, the student's actual cost to the university is almost nothing. That $7,500 is almost all profit, yet the athletic department has managed to make it sound like it is losing $7,500. Just like that, profit becomes loss. It's like if you suddenly decided to pay yourself $100 for brushing your teeth, but only counted the part where the $100 left one hand, not when it reached the other.

This bizarre accounting of in-kind aid, where one department pays another, accounts for a major reason why athletic departments can cry poor. In this way, they imagine their labor costs are actually far from zero, that they have to pay for tuition, room, board, food, and other scholarship expenses. But the university doesn't have to spend very much money to provide those services to 100 football players, and any expenses they do incur is more than made up by tuition payments from walk-ons and partial scholarships.

There are plenty of other neat little tricks deployed to make athletic departments appear unprofitable. For example, schools tend to associate sports-related revenue with other departments for accounting purposes. Athletic apparel bought in the school bookstore is counted as bookstore sales. Concessions sold at the stadia are marked as food services, same as the sales from the dining hall. When Pepsi pays millions to be the exclusive soft drink provider on campus—including the football stadium—that money bypasses the athletic department's accounting.

Not only is this happening at UAB, but the report explicitly states this is standard accounting procedure across the NCAA. "For every Athletic Department's public accounting data we have reviewed (numbering into the hundreds)," the report reads, "the existing institutional accounting standards insist that this profit-increasing situation be recorded as an increase in cost that decreases profit."

Read that last part again: this profit-increasing situation be recorded as an increase in cost that decreases profit.

Truncated version: this profit-increasing situation decreases profit.

The NCAA, ladies and gentlemen.

UAB Athletics - Rascher and Schwarz With Orlando Full Report