Bloomberg: Cal Athletics faces largest debt among all college programs

As usual, Cal Athletics is in the news for all the reasons you don’t want to be in the news. This involves debt, which is something our Golden Bear program will be dealing with for probably the rest of our adult lifetimes.

Bloomberg is running a few features on the state of college athletics, and how a lot of tough questions lie ahead for the future of each sports. As you’d expect, Cal is prominently featured.

Cal sports are in big trouble. After completing the most expensive college football stadium overhaul ever, the Golden Bears now owe more money than any other college sports program. Hobbled by debt service payments, the athletic department ran a $22 million deficit last year and expects to end this fiscal year deep in the red.

A university task force is looking for possible solutions, including reducing the total number of Cal’s sports programs. Any cuts could endanger some of the school’s most successful teams, which cost a lot more than they bring in, and Chancellor Nicholas Dirks recently gave the group more time. “Everything is on the table,” said Robert O’Donnell, a lecturer at Berkeley’s Haas School of Business who co-chairs the task force.

It is true that debt on its own doesn’t mean that a program is running entirely in the red. Some of college’s biggest blue bloods incur major debt service, including defending national champion Alabama. So Cal’s problem with debt service is everyone’s problem.

However, several of the programs incurring the deepest debts (Texas A&M, Washington, Texas, Oregon, Michigan, LSU) also enjoy some of the broadest donor support from alumni. And it doesn’t appear anyone comes close to matching Cal’s current $400+ million debt problems.

Cal enjoys enough support to offset regular costs that balances a regular budget, but in no way do they come close to matching the insane $400+ million debt the Bears must repay on the Memorial Stadium renovation.

And Cal’s yearly $18 million debt service will still keep the program in the red. The Bears have been searching for revenue everywhere they can find it. That includes an incoming Under Armour deal ($7 million a year), naming rights for Kabam field ($1.5 million a year) and an incoming radio deal (which will hopefully be around $8-10 million a year?). Add in the occasional neutral site game, leasing out Memorial Stadium luxury suites for events, and you’d think we’d have our checkbooks balanced?

Now you might think those numbers above would cancel out our debt service on a yearly basis, but Cal still ran an $8.4 million deficit in 2015. Jon Wilner recapped the main issues.

The increase can be attributed to a litany of factors, including:

♦ The combination of NCAA legislation requiring schools to pay for the full cost of attendance and a jump in tuition for out-of-state students — when tuition rises, so does the cost of scholarships — added $1.5 million to Cal’s expenses.

♦ The amount the Bears return to central campus as part of the university’s internal taxation system increased by almost $1 million. (The total amount sent back to campus, $4.63 million, largely offsets the subsidy the Bears receive.)

♦ The largest jump in expenses — $6 million, or two-thirds of the overall increase — came in the form of compensation and benefits.

During the 2016 fiscal year, according to documents, the Bears paid a lump-sum amount to basketball coach Cuonzo Martin (per his contract), gave football coach Sonny Dykes a raise and filled a handful of senior-level positions that had been vacant for several years.

Additionally, changes in university policy contributed to a seven-figure jump in the costs of benefits.

So Cal’s decision to extend Sonny Dykes actually has put them in a financial pickle. They are probably less than impressed with his results, but any sort of buyout the program would have to pay due to early termination (plus the hiring of a new coach) would add at least a few million dollars to the yearly deficit.

Also, the Bears are looking far into the future. That debt service is spiking in a few decades. Here is the most alarming part of the situation. More from Bloomberg:

Cal’s debt service last year cost nearly three times as much, the main reason why a department that generally balances its budget had such a massive deficit. Annual payments will be $18 million until 2032, when they jump to $26 million. They’ll peak at $37 million a year in 2039. The school plans to pay off the full sum by 2053, though the loan extends to 2112.

Cal is basically presuming that college revenue is on a continuous upward trend. That’s a dangerous road to assume given the two basic sources of revenue for any athletic program: Ticket revenue and TV/radio contracts. It’s likely that college sports will stay profitable for another decade, but can we presume that the trajectory is skyward?

Ticket sales are looming as a huge issue. Cal football ticket sales dipped 4% in 2016 to about 46,628 a game and I’d imagine Cal basketball ticket sales will also dip slightly (last year’s team generated far more buzz than this year’s) due to an unimpressive non-conference schedule and no UCLA/USC home games. With Cal’s 2017 schedule lacking marquee matchups aside from USC and Ole Miss, I’d imagine another ticket decline.

Of bigger concern is the ESP sales, the primary source of ticket revenue for Cal. ESP sales have stalled since their inception in 2012. The empty chairbacks on the West Side of Memorial have become a running four year joke. With Cal confined to late night television and six and 12 day selections playing havoc on football fans, ticket sales are in danger of a plunge without a good football team.

Here is TwistNHook’s analysis of FY2015 regarding ESP sales:

Pledge Seat revenue dropped almost 2 million. Pledge Seats are the 1% seats in the ESP section that are $$$$$$$$$$$$$$$$$$$$$$$$$, but you get them for 50 years. Keep in mind that FY15 is July 14-June 15. So, that includes a sub .500 and bowl-less 2014 football season and the run up to a potentially great 2015 season (which turned out to be pretty good). The Pledge Seats decreased from FY14-FY15. There are different numbers because Cal sometimes uses the June 30, 2015 date and sometimes they use an August 31, 2015 to squeeze in more Pledge Seats. No matter which cut off date they use, the seat sales went down.

If we extend further extrapolation, it’s hard to see ESP pledges going too far up with Jared Goff declaring for the draft and 2016 being categorized as a rebuilding year. The eye test at ESP didn’t seem to indicate any substantial change. The big issue is how the situation will look in 2017 if Cal cannot make noticeable improvements on the field.

That leaves Cal’s primary source of long-term revenue in TV, and the cable sports bubble is facing its own issues. The bursting of the ESPN bubble could have deep long-term ramifications for all of college athletics. ESPN is facing a pinch of their own.

But mounting subscriber losses at the sports network have dragged down Disney's share price. In 2013, ESPN's subscriber count topped out at 99 million; Disney's latest regulatory filings last month show it has lost 9 million subscribers since then. Reports this year by the ratings company Nielsen seemed to punctuate those losses, suggesting that ESPN lost a record-breaking 621,000 customers between October and November.

Although ESPN disputed Nielsen's methodology, and Nielsen briefly withdrew its analysis, the firm later said it stood by the troubling numbers and released new estimates showing that an estimated 555,000 subscribers fled ESPN between November and December.

With subscribers to the Worldwide Leader dropping for a second straight year, it’s quite possible the next sports contract will not be as lucrative for departments dealing with major debt services. If it’s bad for bluebloods like Alabama and Texas, what does it mean for a program deep in the red like Cal?