Today, I wanted to talk about the recent change in management of the Athletics Facilities Financing. Cal recently put out a huge report on it, which you can find here.
I read through it and am hopeful that I can provide insight into what it says in this post. First things first, I'm not a financial expert. In fact, I recently traded my sole cow for a series of magical beans. Hope that one works out, FINGERS CROSSED!
Having said that, I did go to Cal, so I presume I'm a genius the likes of which we haven't seen since 19th century feminist Margaret Fuller. So, hopefully, this all turns out well. Plus, if I do screw something up, you can yell at me in the comments and yelling at me in internet comments is currently America's #1 growing business sector! AMERICA! LOVE IT OR YELL AT ME IN THE COMMENTS!
Before we get into the nittiest of the gritty, I feel it prudent to define our terms today and provide greater context. The background to this piece is that Cal had to provide seismic updates to its football stadium (California Memorial Stadium). In doing this, Cal decided to also upgrade the facilities with non-seismic upgrades (i.e. a massive overhaul of the facilities themselves). This cost money. Lots and lots of money. We'll get into that in a second. Cal initially had a plan to pay off all this money. This plan has not been going really well, so they had to revise their plan. And that is the basic overarching point of the post here. Now, let's get into the details.
BONDS (NOT BARRY)
Cal decided to issue bonds to pay for this plan. What are bonds? Webster's Dictionary defines bonds as "I don't know, but this is what I stole from Wikipedia:
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market.
Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or short term commercial paper are considered to be money market instruments and not bonds: the main difference is in the length of the term of the instrument."
Man, Webster's Dictionary has really fallen apart, hasn't it? Long story short, bonds are basically Cal taking on debt to pay for this. How much debt? They've taken on $276 million for Memorial Stadium upgrades and $124 million for the Simpson Center (SAHPC), which is to say the new, fancy facilities next to Memorial Stadium. The report also states that they have $45 million remaining in bonds to be issued.
Bottom line: They've taken on $400 million worth of debt so far and they anticipated spending $45 million more.
My reaction when reading this:
Yes, that is a lot of Tostitos! But, wait, there is good news! This debt does not have to be paid off by tomorrow or else Sandy Barbour's thumbs are broken. While payment terms differ for various different types of bonds issued, the last payment does not have to be paid until 2112! 2112! President Marshawn The Third will be in his 8th term of office by then.
It's not quite so easy, though. The real problem will start in the 2030s. Until the 2030s, Cal can just pay off the annual interest payments on the debt and be A-OK. However, starting in the 2030s, Cal will have to start paying down the principal of the loans or else be in breach of the debt service. A KQED story on this matter notes what the future might holds:
Some projections showed Athletics might not be able to make payments starting in the 2030s when the debt service balloons. The debt is structured so that for the next 20 years, Cal only needs to make interest payments on the debt. The principal kicks in in the early 2030s, resulting in payments between $24 million and $37 million per year.
Additionally, due to historically low interest rates, Cal was able to get the debt for cheap. The KQED story says that it is 4% for most of the debt. I guess that is historically low, but I lack context to independently judge that.
Now, I'll be honest with you. I don't know exactly what happens if you fail to service your debt principal. Does a sleazy looking guy show up and say "That's a nice football stadium you got there, would be a shame if something bad happened to it"? Do repo men show up to tow the stadium away? The KQED story actually addresses that issue somewhat:
Though the Berkeley campus has pledged that Athletics will make its debt payments, ultimately the Regents are on the hook for the bonds.
So, it appears that if Cal cannot make the payments, the Regents would have to step in. Presumably, this would be a disastrous financial burden on the Regents and the UC system in general. I'll also note this one item from the KQED story that surprised me greatly:
At a meeting of the Board of Regents in September 2009, a Berkeley campus administrator, armed with numbers from Athletics, told the Regents that 65 percent of ESP tickets were sold to date, even though the actual figure was far lower. Convinced the plan was viable, the Regents approved $321 million in debt financing for the stadium.
When asked about the discrepancy, Barbour and other administrators said Athletics had changed its definition of the word "sold."
Uhhhhhhhh...... They must have used that crappy old Webster's Dictionary above in defining the word "Sold." How Bill Clinton of them. This seems out of character for Sandy and I was shocked to read this. I'd like to learn more. Maybe they just meant that the definition of sold included seats where people had shown significant interest, but not quite 100% pulled the trigger. Or started the paperwork, but weren't finished yet? I don't know.
Anyway, the problem that Cal faced was that its initial plan to ensure that the loan payments were always going to be made was faring poorly. Cal's plans was to use ESP seats (more on this in a moment) and planned to have all ESP seats sold by June, 2013. That won't happen and Cal is quite honest about it.
Let's delve deeper into ESP seats (the main revenue stream to pay off the debt). ESP seats are the super 1% seats that cost a ton of money. You can find out more here
The most expensive seats can cost up to $450,000.00 (over 30 years) or $225,000 in one lump sum payment. That is for one ticket! But you get it for up to 50 years. Cal's plan was basically to jack up the prices, but give you access for up to 50 years and hope that people bought in. As anybody who went to any Cal game last year can attest, people didn't really buy in and so that is why Cal is making this change.
If you click on the link at the top of the this post, you can see the charts outlining seats sold and monies received etc etc for every quarter of the last three years. I've also placed the most recent chart below:
Table 1: Summary of ESP Seats Secured through 12/31/12
|Field Club Seats||Stadium Club Seats||Univ. Club Seats||Total FY 13|
|Total Seat Inventory for Sale*||1,426||1,051||425||2,902|
Seats Sold to Date
|Seat Sales in Progress||12||3||4||19|
|Percent of Goal -
Number of Seats Sold
|Percent of Goal - Number
of Seats Sold and Sales in Progress
|Total Dollar Value of
Seat Inventory for Sale
|$84 million||$126 million||$63 million||$273 million|
|Dollar Value of Seats Sold*||$57.1 million||$72.6 million||$21.6 million||$151.3 million
You can see that Cal has only reached 65% of its goal and I think part of that has to do with the fact that Cal's total seats for sale decreased slightly. In the December 31, 2011 chart, it says that 3,198 seats are for sale. Now, it says that as of December 31, 2012 only 2,902 seats are for sale. Plus, when you break it down by the three categories (from cheapest to most expensive: Field Club, Stadium Club, University Club) you can see that people are buying the (relatively) cheapest seats. 76% of the Field Club seats are sold as of December 31, 2012, while only 25% of the University Clubs seats are sold. So, even when Cal is selling seats, they aren't getting the biggest ones out the door. Out of the $273 million potential sales, Cal has currently made $151.3 million worth of ticket sales. However, as noted above, people can opt into payment plans as long as 30 years. So, while it is true that people have agreed to pay $151.3 million, none of that is actually guaranteed and people can back out whenever (more or less). This chart notes actual cash received through December 31, 2012:
Cash Received Summary
|Cash Received Summary|
|FY 10 ESP Revenue||$14,367,534|
|FY 11 ESP Revenue||$13,461,021|
|FY 12 ESP Revenue||$12,910,763|
|FY 12 Naming Rights Revenue||$714,286|
|FY 13 ESP Revenue||$2,064,874|
|FY 13 ESP "Perk Sales" Revenue||$210,755|
|FY 13 Philanthropic Naming Revenue||$0|
|Total Cash Received through December 31, 2012||$43,729,233|
**Annual ESP payments are due on April 1st.
Cal has received in actual cash approximately $43 million, although that number does include about $1 million of non-ESP payments (naming rights etc etc). A few things jump out here.
1. The revenue has gone down from ESP sources each year. 14 mil in 10, 13 mil in 11, 13 mil in 12, and only 2 mil to date in FY13 (which goes from July to June, so it is half over). Not good.
2. The vast, vast, vast, vast VAST majority stems from ESP sources, which means that if ESP seat sales are going poorly (which they are), then Cal will be in trouble.
Fortunately, Cal has two decades to get this figured out and they have the brightest minds at Haas School Of Business (and elsewhere) to redo the models. So, we've looked at the problem (the debt) and the proposed solution (the ESP seats), let's look at the changes to the proposed solution to make it better solve the problems.
CHANGES TO THE REVENUE SALES PLANS
Let's take the changes turn by turn as outlined in the Cal Report.
1. New Sales Staff. Cal has hired a sales staff specific to ESP. Previously, the Intercollegiate Development Office was handling the sales. Hopefully, this dedicated staff can handle the matters better and make this program a 100% success. It could have been better to augment the marketing department, too, on top of the sales department. The KQED story has more information on this new sales team:
For fiscal year 2013, the budget for entire Marketing, Sales and Service group is $2.7 million out of a nearly $90 million Athletics budget, according to public records received by the Investigative Reporting Program. Payroll for Honerkamp's elite premium sales team of five people is $500,000, according to a department spokesperson.
2. New Ticket Options. They've created corporate bundles (which potentially is why the sum of potential ESP seats decreased over time as noted above). These are just two year contracts instead of the up to 50 year contracts. They don't appear to be cheaper, but having a two year commitment instead of a longer term commitment makes it palatable for corporate interests. And if there is one things Cal is known for, its pleasing corporate interests! Apparently, 26 new University Seat purchases have been made with the corporate bundles.
Plus, there are "perk pricing" seats, which are discounted seats on a short term basis for ESP buyers. So, you can get an extra seat for your friend to this game or that. These perk pricing seats have already generated $200,000 in revenue according to Cal.
The basic thrust of these changes is that there was minimal flexibility with the previous plan. This meant that people were concerned about entering into extremely long term payment plans, especially with the financial downturn. This increased flexibility (and discounts) has already started attracting interest and will hopefully goose ticket sales a bit.
3. Future Revenue. This isn't really a change for now, but the report does discuss new revenues that they anticipate. $2.5 mil annually from media rights for the new post-season playoff that should come on board in 2014. Multi-million dollar payments for other media rights once the current contract is up in 2017 (2017!). Hopefully, those revenue streams will go online at the appropriate times and be as anticipated. Otherwise, things could get ugly.
4. Facilities Rental. Who wants to get married at Memorial Stadium??? Some money can be made from this and Cal will hopefully start getting that soon.
So, these are the changes that Cal discusses. They note that their new goal is to 70-120 seats per year until all seats are sold. They believe that with these changes, they can accomplish that goal. Cal runs through a series of different models based on a variety of factors, such as donations, seat sales, return on investment etc etc etc. They discuss how things may have gone under the old model (showing that in some worst case scenarios, shit gets real in the 2030s and 2040s). Under this new plan, they believe that their models show problems will only arise starting in the 2050s and only if the annual earnings rate is well below historical norms. I lack the context to know whether a 4% annual earnings rate is well below historical norms, so I can only take their word for it.
If Cal's projections are accurate, then Cal can pay off the debt early. If not, Cal will have time to make additional changes in the 2020s, 2030s, 2040s, and beyond. These changes are partially borne out of the realities of today, but also are made in an abundance of caution. They have decades before things REALLY go downhill, but Sandy doesn't want to put the Athletic Directors Of The Future (presumably Sandy until we are ready for Robo-Sandy) in a really bad situation.
Cal has taken on a LOT of financial responsibility and so far things are not looking great. Problems will not arise for decades, but if Cal does nothing, it could get truly bleak. I'm somewhat concerned about this changing the definition of the word "sold" thing, that seems out of character for Sandy. Cal is planning on using hyper expensive ESP seats to help pay off the debt, but it does not look like they are going to reach their goal, so they made some changes to the plan.
I am hopeful that with these changes (mostly relating to increased flexibility in purchasing the expensive ESP seats), Cal will be able to accomplish its goal of selling all of the ESP seats and ensuring financial stability for Cal and UC system for the next century. Whew, that is a lot! What is your thought on this? What do you think about the ESP plan in general? What do you think about the debt Cal has taken on? What do you think about the changes in the ESP plan? Tell us your thoughts in the comments and GO BEARS!