Broken But Not Broke: Fixing College Sports

When Walter Byers took over the position of Executive Director of the NCAA in 1951, he did so adamantly against even awarding athletic scholarships. It was only the sheer perseverance by coaches and administrators that precipitated his eventual surrender.

Nonetheless, when he told the Associated Press in 1995, "I believe the athletes should have the same access to the commercial marketplace that the supervisors and overseers as well as other students have," it begged the question: what changed in 44 years that so perversely swayed his paradigm?

It wasn't a sudden, seismic shift but rather a series of smaller, subtle tremors. But Byers has seen the principles of amateurism erode dramatically into a cesspool of commercialism and we're unknowing enablers.

(For background on Byers and the history of the NCAA, see part one of this piece, Corrupting College Sports)

Listen to any university press conference and see how many times you can pluck out certain buzzwords, notably "student-athlete." You'll rarely, if ever, hear a player described in any other term.

It's a form of psychological warfare meant for conditioning your brain. The trick is often employed by the government, the media and aspiring politicians. This technique is referred to as Intensify/Downplay according to Hugh Rank, a professor at Governors State University and 1976 recipient of the Orwell Award for Honesty and Clarity in Public Language.

Powerful speakers can promote or intensify ideas subconsciously in your mind using repetition, association and composition patterns while dismiss or downplay others using omission, diversion and confusion. Adolph Hitler is best known for utilizing these same principals during World War II when hiding the atrocities committed from the German people.

Have you ever told a lie so many times and for so long you started believing it yourself? That's an example of the effects of intensifying. The mind is susceptible to long-term coercion and the NCAA has been predisposing you to the rhetoric long enough many are along for the ride.

The purported educational mission of the NCAA is tailored to this as well as the non-profit, tax-exempt status granted by the Internal Revenue Service. The mission statement reads: "govern competition in a fair, safe, equitable and sportsmanlike manner, and to integrate intercollegiate athletics into higher education so that the educational experience of the student-athlete is paramount."

It's likely not an accident education is mentioned twice in the same sentence. The NCAA enjoys its tax-free status, as do member institutions, by serving the public and promoting education, which are prerequisites of IRS tax code 501(c)(3).

A report by the Indianapolis Star in 2006 suggested this status was the subject of inquiry by a congressional committee. In fact, NCAA President Myles Brand and several other representatives flew to Washington D.C. to testify before the committee, taking the legal position it wasn't so much how much money was earned, but how the money was spent.

That may or may not be true, depending on how the law is interpreted. The IRS has a three-part test for NPOs to determine whether income is considered "unrelated business income" (UBI):

• Is the activity generally considered a trade or business? If the answer is no, it's not subject to UBI. If yes,
• Is the activity regularly carried on? If yes,
• Is the activity substantially related to its exempt purpose?

It's the third part that the NCAA hopes will continue to be construed in their favor. And on the organizational level, they might have a case.

Though the NCAA brought in $749 million of revenue in 2009-10 according to the NCAA Revenue & Expenses report, 86 percent of which came from contracts with CBS/Turner Sports and ESPN for rights to broadcast championship events, 68 percent of this revenue was redistributed back to all member institutions. Another 16 percent was allocated to association-wide grants, scholarships and awards. The rest was used for operational expenses of the NCAA, eligibility center and championships.

Of the distribution to member schools, 61 percent was given back to Division I institutions via the Division I distribution plan. This is made up of 40 percent the Basketball Fund, 27 percent grants-in-aid, 13 percent sports sponsorship and the remaining 20 percent split between academic enhancement, special assistance, student-athlete opportunities and conference grants.

With that plan, a case could be made that about 50 percent of all revenue was allocated back to schools for academic-related reasons. Is that substantial? That's the multi-billion dollar question.

To make matters worse, the BCS has recently come under scrutiny for its NPO status. Last fall, the pro-playoff lobbyist group, Playoff PAC filed a complaint to the IRS against three of the four BCS bowl entities for what it believed to be violations of tax-exempt status. In fact, earlier this year, Fiesta Bowl CEO John Junker was terminated because he solicited political endorsements to allies of the BCS, presumably in exchange for political support lest there be an inquiry into the antitrust legality of the BCS.

Junker, who reportedly earned over $600,000 a year, lends credence to Playoff PAC's claims. In addition, Sugar Bowl CEO Paul Hoolihan reportedly earns $645,000 while non-BCS executive Jim McVay of the Outback Bowl received over $800,000 last year according to a CBS Sports report.

These exorbitant salaries are the basis in which a case could be made against the system's tax-free benefits.

THE BUSINESS OF MY BUSINESS

In arguing the NCAA was in violation of the Sherman Antitrust Act in 1983, attempting to control and limit television appearances, University of Georgia President Fred Davidson successfully surmised, "My general feeling is that our people would be better able, taking everything into account, to run our business than would be the NCAA-the business of our business."

Today, athletic departments, such as Georgia, operate on separate balance sheets away from their respective institutions. Based on 225 member institutions that responded to FOIA requests by the USA Today college finances database, nearly $6.7 billion was reported in 2009-10, which is an estimated $10.1 billion of 337 active members. Of that, $433 million was redistributed via the NCAA distribution plan.

By NCAA reporting guidelines, according to the 2004-10 Revenue & Expenses report, member institutions categorize revenue in one of two ways: allocated and general.

Allocated revenue is comprised of donations by third-party sources, direct assistance from the institution, state tax relief or student fees - which are paid by the general student population that is allocated from the university to athletics.

General revenue is the blanket term for all self-sustaining revenue, including rights fees, conference distributions, marketing, royalties, ticket sales, concessions, parking, bowl payouts, sports camps, guarantees (being paid to play a road game) and the distribution plan-which is most noted for the Basketball Fund.

The Basketball Fund comprises 40 percent of the total revenue and is based on the number of units accumulated by each conference over a 6-year rolling cycle. A unit, awarded to a conference for every appearance or victory by a member school, counts in each of the six years in the cycle. In the current plan, a unit is worth nearly $240,000 each.

Since the Big East earned 24 units this past year (11 teams plus 13 victories), nearly $5.76 million will be included in the payouts to the Big East each of the next six seasons in addition to units accumulated the next five years.

Additionally, the plan pays out for sports sponsorship (currently $28,000 for each varsity sport beginning with 14) and the grants-in-aid fund. This fund partially supplements the cost of academic aid by giving $270 for each counter. The payout is structured in four tiers similar to marginal tax rates. At the high end, every counter over 150 is given a weight of 20 whereas counters 1-50 are only weighted as one.

Counters are the number of scholarships allowed by sport. Since some sports offer fractional scholarships, you might see three players split the full cost of a scholarship.

Overall, the average Division I school funded 19 varsity sports last year, according to the NCAA Sports Sponsorship report. While participation reports show an average of 500 athletes participating in total, there are an estimated 278 average counters (or sum of full and fractional scholarships) at FBS institutions, 245 at FCS institutions and 163 at schools without football. That's an estimated 78,300 counters or full scholarship awards in total.

How much did that cost member institutions?

Using the data from the college finances database, in 2009-10 about $1.08 billion was applied to student aid over 225 schools. That's an estimated $1.62 billion to grants-in-aid last year. But remember, nearly $10.1 billion was earned - which means only about 16 percent of all revenue was allocated toward direct student financial aid.

Going back to our test, would you consider that substantial?

In total, the 2009-10 Revenue & Expenses report show an average per school of $15.9 million in expenses. For FBS schools, an average of $45.9 million was reported; $12 million for FCS schools and $10.5 million for non-football schools. For these same institutions, however, the college finances database show an average operating revenue of $52.3 million, $13.1 million and $8 million. That means an average surplus of $10 million for FBS schools, with 65 of 100 reporting institutions showing a surplus.

According to an NCAA report released in 2010, only 14 of 120 FBS schools reported a surplus in 2009. The NCAA Revenue & Expenses report covering 2004-10 reported 22 schools showing a surplus for the entire period.

Why the discrepancy? The difference lies in the reporting.  A change made in 2008 by the NCAA essentially meant that all allocated revenue (as defined above) was not counted in a school's revenue unless it was specifically guaranteed in amount by the third-party source. This is logical in whether or not an athletic department is self-sustaining, but it also is misleading because many departments spend more knowing they'll have that revenue in their back pocket.

Departments carry a large burden: recruiting, travel, personnel and compliance expenses as well as the high cost of facilities. But it's the more flimsy, sometimes frivolous coaching salaries that are of concern.

While only 16 percent of Division I-wide revenue is going directly back to the students (average of about $21,328 per full scholarship value), an estimated $1.7 billion went toward paying Division I coaches in 2009-10. 

The NCAA permits three paid coaches in all sports, except for basketball and football. Based on those numbers, we could expect a maximum of about 21,230 paid coaches in Division I athletics-men or women. There are about 168,500 total athletes. Meanwhile, the average coach was paid just over $80,000-nearly four times more than the average scholarship value.

Coaches and bowl CEOs aren't the only one doing well for themselves. A 2009 Bloomberg News study found that athletic directors at 92 FBS institutions accounted for over $30 million in salaries. For all FBS schools combined, that would be an estimated $40 million or about 0.6 percent of all revenue and an average of $333,333 per individual.

Are these salaries exorbitant? Do they detract from a "substantial" amount being redistributed back into the stated mission? These are the questions that are wholly uncertain but completely relevant.

SANTA'S LITTLE HELPERS

When athletes enroll at a university, the athletic department cuts a check to the registrar's office for the cost of tuition, room & board (if living on campus) and textbooks for required courses. Students living off-campus receive a check prior to the quarter or semester in the amount of a meal plan accounting for 21 meals a week and the average cost of living for on-campus rooms at that university.

In exchange for these benefits, the athlete shoulders a large burden of responsibility. They're expected to attend class, practice, study tables and, while involuntary, extra film sessions to show a level of dedication. In doing so, they live in a fish bowl and must adhere to higher codes of conduct, while spurning overtures from boosters offering added perks.

Athletes are prohibited from accepting benefits, gifts or discounts from anyone outside of family or an established friend. What constitutes a family friend can be a dicey definition.

In 2000, Michigan basketball player Jamal Crawford was ruled ineligible because, during his high school career, he was staying with a man in Seattle his mother had asked to act as Crawford's guardian. The man, Barry Henthorn, had also agreed to provide Crawford with his own scholarship agreement. On appeal, the suspension was later reduced to six games and an additional eight games for his attempt to declare for the NBA after signing a letter of intent to play for Michigan.

The moral of the Crawford story was that even in high school, the NCAA has arbitrary powers to determine whether it believes you should have access to additional benefits, regardless of the real motivation.

In addition to avoiding impermissible benefits, athletes cannot profit off their own likeness. They're unable to sell their autographs, pictures or even earned memorabilia.

The latter was a hot topic in 2003 when members of the Georgia football team were found to have sold SEC Championship rings on auction giant eBay. Though initially suspended, the NCAA withdrew the punishment because the rules were considered unclear at the time. Later that summer the NCAA sent out a memo to institutions clarifying their stance against selling items given to the athlete for recognition.

Though the NCAA has somewhat scaled back the ability for institutions to exploit athletes, they still earn a significant revenue for their schools. That's also the crux of a lesser-used legal argument in support of paying players.

While many people argue that athletes are already being paid, via grant-in-aid expenses, the law does not consider that payment but rather a secondary benefit. The U.S. Department of Labor considers actual payment as adhering to Federal minimum wage guidelines where the money is paid directly to the employee to determine the usage.

In 2008, the U.S. DOL began cracking down on abuse of interns - the usage of unpaid interns to do the work of employees. Some would dismiss the idea out of hand that athletes should be considered employees, but consider they're required to attend practice to stay on scholarship. Consider the DOL Fact Sheet #71 which clarifies the subject of interns.

According to the DOL, the following six conditions must be met for an individual to be classified as an unpaid intern:

• The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
• The internship experience is for the benefit of the intern;
• The intern does not displace regular employees, but works under close supervision of existing staff;
• The employer that provides the training derives no immediate advantage from the activities of the intern and on occasion its operations may actually be impeded;
• The intern is not necessarily entitled to a job at the conclusion of the internship; and
• The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

 While some of requisites are met, arguably, it's hard to justify the employer (athletic department) gaining no immediate advantage from the activity of the intern. In fact, it seems to be quite the opposite.

This leaves the NCAA, or at least member institutions, with legal quandaries all over: antitrust considerations, tax-exempt legalities and labor ramifications.

Is there a way, intellectually, to preserve amateurism but tackle these problems collectively? Perhaps.

NO BUSINESS LIKE SHOW-ME-THE-MONEY BUSINESS

According to a Monday Associated Press story, NCAA President Mark Emmert is calling an August retreat for over 50 university presidents to consider the future of Division I athletics. I won't be invited, but I have a few ideas of my own they should consider.

First, to nip the problem in the bud, they must find a way to minimize the hype received by athletes prior to ever stepping foot on campus. To do so, I would take away some of the ability to fuel the recruiting chatter.

Currently, coaches of NCAA institutions are not allowed to comment on recruits publicly, other than to confirm whether they are recruiting an individual. Let's apply this to the athletes.

Prohibit high school athletes from commenting publicly on recruiting, campus visits or favorite schools if they want to retain future eligibility. Further, they should be unable to appear on televised events to make a verbal commitment, unless they're also simultaneously signing their letter-of-intent.

The athlete can be properly educated on this as soon as they're able to receive recruiting materials from college programs. These steps would control the recruiting hype and would also benefit the player, as it means fewer recruiting services and reporters hounding them for interviews.

Further, I would push back the recruiting process, beginning later in a high school athlete's career and overhaul the LOI program-eliminating oversigning completely.

I also support some fundamental changes to scholarship tenders. I'd make them for the full four years, allow athletes to transfer without penalty if they're released for any reason, and remove the requirement to seek an institution's release if the athlete desires a transfer (but must still sit the required year).

Financially, let's create the stipend being discussed by Big Ten Commissioner Jim Delany. His suggestion was to pay roughly $3,000-5,000 per athlete. I'm on board with a system I'll compare to work-study.

It goes like this: every full scholarship is given a value of minimum wage ($7.25) for each hour the sport dedicates to required practice during the year. This includes up to 20 hours a week during the playing season, 8 hours a week during school but out of season and two hours of individual skill sessions during the summer-the maximum amounts per week as governed by the NCAA.

Using a rough estimate of a 20-week season, that's roughly 400 hours in-season, 160 hours out-of-season and 24 hours during the summer or 584 total hours. That works to roughly $4,234 per full scholarship, which is in the ballpark of Delany's idea. Athletes on a fractional scholarship would receive the stipend in direct proportion to the amount of their scholarship received. If, for whatever reason, a player has an unexcused absence from practice, he or she could be docked the hour-value of the stipend.

Though I believe Delany is using the idea to also put distance between the haves and the have-nots in major D-1 athletics, it could fulfill the intellectual void missing from the current system.

Second, I would use the carrot-on-a-stick approach to rewarding compliance, academics and good behavior.

For each full scholarship, I would allot an annual bonus of roughly $2,200 into an escrow account. At the end of an athlete's eligibility, the $8,800 bonus would vest and pay out upon graduation if the athlete meets a certain GPA, avoids any criminal conviction and remained eligible to compete by the NCAA.

Likewise, to the universities, I'd have a similar reward on an annual basis (roughly an average $518,000) paid in proportion to the number of varsity sports they sponsor. However, a prorated share will be denied to the university if they are unable to meet a specified team GPA, satisfactory Academic Progress Rate and avoid probation or have athletes otherwise ineligible for competition in certain sports. Prorated funds denied a school for violating sports will be divided evenly among rule-abiding institutions of that sport.

Last, but certainly not least, I'd open up the free market, somewhat, to athletes.

An organization would be set up, similar to performance royalty organizations (PROs) in the music industry that would negotiate, oversee and distribute athletes' free-market earnings.

Each athlete could sell personal memorabilia within dollar values established by the NCAA and could register prospective paid appearances, autograph signings or endorsement deals by fully vetting the transactions through the university. These deals must not be with boosters or persons with known ties to the athletics programs and cannot be set up by the university itself. All negotiated earnings would go directly to the PRO until expiration of the athlete's eligibility

Upon expiration, the athlete would be paid by the PRO all monies earned in proportion to the number of transactions of each type, based on the national average. So if an athlete at UAB had been paid $100 to appear in a Birmingham local spot, an Alabama football player had been paid $500 to appear in a similar spot, they both would be paid the national average for all TV spots they appear (we'll say $300 for ease of explanation). This prorated payment eliminates much of the inherent recruiting advantage that would be gained for some programs, but still allows incentive to negotiate a better deal for an athlete (thus boosting the national average).

So where would all the money come from? Even the most optimistic agents of change would agree, despite the somewhat exaggerated profit-loss statements by university officials, the money isn't likely sufficient to support these proposals in full. Fortunately, I believe we can have our cake and eat it too.

The answer: institute a 16-team playoff for Division I football which would include 11 automatic bids from the 11 conferences and five at-large bids. By Jim Delany's admission, according to published reports, a football playoff would net likely four times more than the amount of revenue currently paid through the BCS ($175 million). This means some $875 million annually.

To fund our 78,300 scholarships at $4,234 apiece ($331.5 million), we can simply apply 40 percent of this playoff revenue to our work-study fund ($350 million). What about our athlete and institution bonuses? The $175 million apiece needed to fund those would be split among another 40 percent of the pie.

And, finally, the remaining 20 percent plus any overages would go to our newly-created Football Fund built like the Basketball Fund. Each appearance as well as each victory yields one unit apiece (total of 31 units). That's about $5.6 million per unit, paid to the conferences directly to be redistributed to the institutions.

So we're left with athletes getting paid the full cost of their expenses, the ability to tap into the free market, athletes and institutions motivated to play by the rules and focus on academics as well as a further incentive for the marginal athlete to graduate. Oh, and the long overdue playoff. Is it a perfect system? There probably never will be such a thing. But it gets us closer.

Walter Byers would be proud.