Cal's debt problem has been released into the wild, and it's metastasizing fast -- or so the popular press would have you believe. The San Francisco Chronicle was first to publish skepticism of Cal's ability to pay off the newly renovated stadium, followed by increasingly inflammatory articles on Yahoo.com and the Washington Monthly that extend the distance from any factual information. These articles make it seem like there is no chance of repayment, but their biased perspective missed three key points:
1. The inevitability of the upgrade at the particular Memorial site and unfortunate delays
2. The true financial forecast
3. The priorities of UC Berkeley and Cal Athletics
First, you have the Chronicle article that started it all. Nanette Asimov starts immediately with hyperbole:
UC Berkeley's plan to sell special football seats to pay off nearly half a billion dollars in stadium debt has long inspired skepticism, as if Cal were setting up a lemonade stand to finance a home mortgage.
Then, a Yahoo.com Dr. Saturday article. Frank Schwab does not provide independent analysis, instead spreading the Gospel of Chronicle to a newer, larger audience. Without providing any of his own research, Schwab merely states that the limited Chronicle article "is thorough and paints a pretty frightening picture."
Then, a Washington Monthly article from Cal professor Michael O'Hare discusses the upgrade in the context of an upgrade to the art museum (moderately irrelevant, but used as a hammer against athletics). His article is incredibly sarcastic, which masks his lack of facts.
The problem with these stories is that they gloss over the real numbers to provide a superficial analysis. It is easy for the Chronicle to find some scare quotes to put into a one-page story. It is much harder for writers to read through a 100-plus-page report and crunch numbers with the genuine information. Here at CGB, we have read many sources, including the independent report from several Haas professors on the project, and we can put these critical articles in greater context.
Let's crunch actual numbers and examine the reasons behind the renovation. First, inevitability.
This is no red herring; this is the reason why the project was initiated. The stadium is built on an earthquake fault. Before the upgrade, you could see that the two halves of the stadium had moved 6 inches apart over the last 80 years.
It was so bad that a report in 1997 rated Memorial Stadium's earthquake safety as poor:
A POOR seismic performance rating would apply to buildings and other structures expected to sustain significant structural and nonstructural damage and/or result in falling hazards in a major seismic disturbance, representing appreciable life hazards.
Appreciable life hazards! If an earthquake hits during the Big Game, thousands of Cal's best donors would perish. Even if nobody died, you'd still have a useless ruin. Then, Cal would be scrambling to rebuild, including moving all the sports around and fixing up the stadium. And that's in the best-case scenario that nobody died. Why wait until AFTER the disaster to take action?
The New York Times reported in 2011:
The U.C. Regents had ordered the campus either to fix the stadium ...or to find a new place for the Bears to play.
None of the above skeptics mention this decree. They depict Cal as choosing to prioritize football over other students/student-athletes. The Washington Monthly suggested Cal should have just rented out the Oakland Coliseum instead of renovating Memorial. How straightforward! Unfortunately, there are several major problems with this assertion:
1. Impossible. My understanding is that the Raiders vetoed Cal playing at the Coliseum in 2011. So, O'Hare's proposal may be out anyway. Even if it isn't, there are many reasons why it is not prudent.
2. Harm Cal Athletics. It would destroy the tradition of Cal football and significantly harm Cal athletics. Moving games from on campus to the farthest edge of a different city would abolish the magic of having an on-campus stadium. We'd be like UCLA! There may not be a dollar value assigned to destroying tradition, but the impact remains colossal. Building that tradition with students/fans is crucial for donations.
Football is the financial engine for Cal athletics, a locomotive for non-revenue sports. Moving to the Coliseum and away from Memorial would depress attendance. Depressing attendance would be disastrous given the weight of ticket sales in supporting athletics. This could require UC Berkeley to give more money to athletics to subsidize losses, an issue which is further discussed below.
3. Harm Berkeley. It would significantly harm the Berkeley economy. Oddly, Professor O'Hare states the opposite:
The stadium, which is indeed beautiful and in an awesome location, isn't actually very good for the business-type football we use it for because there's no parking and thus no tailgating, it's a big uphill hike to get to from your car or transit, and there's no commerce around it for eating and drinking
The author must not have ever been to campus on a gameday. There is substantial tailgating all across the campus.
As Cal is in an urban area, there are no massive parking lots for tailgating (as we saw with AT&T Park in 2011). It is not your classic tailgating where everybody drives to a single location and then idles for hours until kickoff. On gamedays in Berkeley, restaurants all around campus are jam-packed with people. Fans go to local businesses to buy items for tailgating or the game itself.
The spread of pre-game activities throughout town helps the city of Berkeley. There is more value for the city compared to fans just grabbing supplies at their home supermarkets before tailgating in one lot, attending the game, and then going home. The football games are a massive boon to the economy and visibility for downtown Berkeley, and Professor O'Hare's attempts to state otherwise severely harm his credibility.
4. Scheduling. The scheduling would be problematic. Cal would be competing with the A's for scheduling. Cal would have to play on weekends that the A's were not playing at the Coliseum, which could be challenging to predict, especially since college football schedules tend to be scheduled significantly earlier than baseball schedules. Additionally, if the A's made the playoffs, it could be difficult to maintain the schedule. Remember how bad it may have been if the Giants made the playoffs in 2011 when Cal was playing in AT&T Park? It would be worse if the A's were playing at the Coliseum. Candlestick is being torn down, so AT&T may be the only option. AT&T has around 22,000 fewer seats than the Coliseum, meaning that potentially not all ticket-holders would have their tickets honored. Moving the game at the last second would be a total disaster!
5. Doesn't Solve Problem. It does not solve the problem of death trap Memorial. Even if the football team left, Memorial would have to be fixed up or razed. If they still provide the upgrade, it leaves Cal with a large bill and a diminished ability to raise income to pay it off since the team is now at the Coliseum.
Many sports outside of football and the marching band use Memorial for games, training, and camps. For instance, the new Student-Athlete High Performance Center ensures that the field hockey team no longer has to change at the edge of the playing field. Additionally, the stadium was placed on the National Registry Of Historic Places in 2006, abrogating most demolition possibilities.
6. Unintended Consequences. It would not provide practice space for football. If they can't practice at a death trap football stadium, they'd continue practicing at Rugby's Witter Field. During the upgrade, this forced the national championship-winning rugby team to become itinerant wanderers with no home field. So, the football team abandoning Memorial would not stop the required Memorial upgrades and would have harmed many other sports teams.
O'Hare has not considered the ramifications of having the team play at the Coliseum. I suspect he just looked at the cost of renting the Coliseum and went from there. So, there aren't options outside of upgrading the facility, but that reality isn't reflected in these articles.
Cost Increases Due to Delays
All of the articles harp on the eye-poppingly large cost of over $400 million dollars. However, no analysis is provided regarding the years-long delay thanks to litigation and illegal occupation. For those new to the story, Cal tried to upgrade the stadium, but starting in 2006, people moved into the trees next to the stadium in an attempt to stop the upgrade. They were merely a sideshow to the lawsuit from the Panoramic Hill Association (people who live next to the stadium). This whole process delayed the building for years. This delay increased costs substantially and forced Cal to play one season at AT&T Park in San Francisco.
So, when you see the $400-plus million, remember that some amount of that stems from the delays inherent to Berkeley. Building ANYTHING in Berkeley is complicated, and the price tag is inflated due to this. None of the articles come close to mentioning this.
ESP Ticket Sales
Next, the articles discuss Cal was previously selling Endowed Seating Program tickets haphazardly. These are expensive football seats ticketholders can purchase for years at a time, raising capital to pay off the debt. The other writers pounced on the juicy tidbit the Chronicle initially presented: that Cal's previous efforts in ESP ticketing were haphazard. They make it seem like an impossibility that Cal will reach their goal.
Yes, the reality is that there were problems with Cal's prior efforts to sell these tickets. However, Cal has recognized those problems and is taking steps to rectify the matter. The articles still make it seem as if Cal will be unsuccessful, even with the new plans.
However, many key aspects to the plan are not included. For example, the Chronicle article states:
And even if every endowment seat were sold, Cal would still be short by $134 million, nearly a third of its debt, officials learned recently.
There are several key problems with the statement. As noted in a report from Haas Professors, selling ESP seats is not the only way that the debt is to be paid off.
There are six main ways:
1. ESP Seat Sales
2. Other Seat Sales
4. New Media
5. Rental Revenue
6. Investment Earnings
So, while the Chronicle's statement is true, it is misleading as it ignores FIVE other revenue components. They lump them together in a way that makes them seem like subsets of ESP sales and not additional sources of income. There is no mention of investment earnings at all and the Haas School of Business Report is mentioned in passing in one sentence. The article states that the report is "encouraging," without further discussion of the only independent analysis here.
Outside of the ESP seat sales, the most important section is Investment Earnings. I looked closely at investment earnings in a previous post. Note that the 2053 references are to the year when Cal plans on having paid off most of the debt. The models below show the balance between funds raised from selling seats and revenue generated by investing that income:
Table 5: Break-even returns
For various realized proportions of the ESP sales forecasts in 2013-2021 shown in Table 3, this
table shows the minimum return that needs to be earned on FFE investments each year in order for
the FFE balance in 2053 to remain positive.
Sales Proportion Return (%) 0.0 8.44 0.1 7.97 0.2 7.51 0.3 7.06 0.4 6.61 0.5 6.16 0.6 5.73 0.7 5.3 0.8 4.88 0.9 4.46 1.0 4.06
So, if Cal sells 10% of its remaining ESP seats, they'd have to get nearly 8% return on investments to break even by 2053. Conversely, if they sell 90%, they only need 4.46% return. Since Cal has a plan to sell 100%, they'd only need 4.06%, below their standard average return.
The report notes that in a worst case scenario (i.e. no more seat sales and only 2% return), Cal doesn't run out of money until 2034. So, even in the worst case scenario, we have 20 years of "THE ECONOMY HAS BEEN IN SHAMBLES FOR DECADES" to try to generate alternate revenue.
Now, this report isn't from Cal. It isn't from me. This analysis is from Haas School of Business professors retained to do an independent analysis. Their bottom line is that if Cal is able to sell all ESP seats by 2021 (the new, more realistic goal) and gets even below-average return on their investments, they will have enough funds to pay off the stadium debt. 8% is an accomplishable return, so the pressure to sell tickets is somewhat less than you think.
The next argument from these articles paints the school as prioritizing athletics over academics. The Yahoo article states:
It also is another example of misplaced priorities in even some of the most respected universities in the United States...
The Washington Monthly article uses the Berkeley Art Museum in a false dichotomy about how misguided Cal's priorities are. The analysis there is somewhat inaccurate and just designed to cast Cal in a negative light.
The Chronicle article states:
At the same time, the regents have said debt repayment should come from the intercollegiate athletics budget. That department already uses campus funds, however, relying on yearly contributions from a discretionary account to pay its bills. This year, the campus contributed $4.5 million.
This is money that UC Berkeley gives to Cal athletics. We discussed that further in the the Title IX post and the Overall Cal Athletics post. Bottom line, UC Berkeley wants it to be as small as possible.
However, this is not a strong argument against Cal's priorities. Many other schools have direct institutional support. When you have a business based off of 2 profitable products, but you are legally required to support many, many other unprofitable products, you often are going to need additional funds from the school itself.
Having said that, UC Berkeley does want DIS to be as low as possible, particularly essential in the current budget climate. Valued reader BandAlum has put together a chart of DIS from 2002-2012, using Cal's own numbers:
San Jose Mercury News sportswriter Jon Wilner put together a balanced series of posts on this topic just yesterday. Wilner notes that the $4.5 million subsidy number for FY 2012 stems from the approximately $7 million UC Berkeley gave to Cal athletics minus the money Cal athletics returned to UC Berkeley. Yes, in FY 2004, FY 2011, and FY 2012, Cal athletics gave money back to UC Berkeley. Band Alum put this chart together that shows the DIS with subtractions taken out when Cal athletics gave money back to UC Berkeley.
You can see in the first chart that DIS peaked in 2010 at nearly $10 million. At that time, Cal athletics tried to minimize DIS funds by proposing cutting 5 sports if donors didn't step up. The support number has decreased substantially each year since. Notice the immediate and rather large decrease in the second chart from 2010-2011. Wilner notes that the subsidy for FY 2013 will be approximately $2 million, which means that it has decreased yet again! Additionally, the subsidy for FY 2013 and FY 2014 will be less than .5% of the total UC Berkeley budget (approximately $2 billion).
The articles here do not provide this additional context. Instead, they portray Cal athletics as suckling alone at the teat of its mother school. The reality is more complex. The reality is that Cal athletics is taking steps to minimize its subsidy and that it is but a miniscule fraction of UC Berkeley's total budget.
Paying off stadium debt is an extremely complex situation involving a variety of factors. These articles make limited statements reflecting their broad biases and fail to take into account these additional factors. They rely on scare quotes from longtime critics who are unlikely to change their opinions in the face of contradictory data. They provide misleading statements regarding income and collegiate priorities. They use sarcasm and snark to bolster their weak arguments.
What are your thoughts? Tell us in the comments!
[Many thanks to TheBuckeyeBear for extensive editing on this piece!]