Managing Revenues and Expenses Final

Programs that benefit community
-Meet societal needs (Demographics)
-Have the power to levy taxes: (Who pays? Is it pay to play?)
-Generate funds for operation and construction
-Operate based on perceived needs of the electorate (needs of events)
Tax Dollars Spent on Community Sport
According to U.S. Census Bureau report for 2007:
-$30.5 billion spent in 2004
-A $5.4 billion increase from 2000
Financial Management Trends
Increased demand for services:
-Public awareness of health and wellness needs
Increased variety of services and facilities
Designed to appeal to a broad demographic
-Controversies over pricing
*If you cut taxes, park and rec will suffer
Pricing Paradox
Pricing is supposed to keep public programs affordable, BUT Lowered taxes have resulted in less money for programs Community sport and recdepartments are expected to: -Provide multitude of affordable programs
-Operate as self‐sufficient entities or generate revenue to offset expenses
Sources of Funds
Tax subsidies
-Support bonds for construction (69% of costs) -Support operations (52% of revenues)
Example: Tennis in Cayce, South Carolina -New tennis complex is being funded through taxsupported bonds -County and city are paying half each
Major Sources of Public Funding
Property taxes (personal property-land value)
Sales taxes
Excise taxes
Pay‐as‐you‐go financing
Bonds
Property Taxes
Most often used to fund construction or operations
-Real property: Land and structures built on land
-Personal property: Everything else that has value
Tax Rates
Millage (millage rate):
-Total amount of mills levied by city, county, school district, etc. in which the resident lives
-One mill = 1/1000 of a dollar (1/10 of a penny)
Assessing Property Value and Tax Due
Fair market value of property
assessment ratio
-Fair market value―value for which the property can reasonably be sold on open market, with a willing buyer and seller -Assessment ratio―percentage of resident’s property that is subject to taxation
Assessed Value Calculation
Fair market value of residence = $250,000
Assessment ratio = 4%
-Assessed value = FMV X assessment ratio
-Assessed value = $250,000 X 0.04
Assessed value = $10,000
Property Tax Due
Assessed value X millage rate Lexington County millage for operations is 83.063
Property tax due = assessed value Xmillage Property tax due = $10,000 X.083063 Property tax due = $830.63
New property tax needs
-Proposed new facility will cost $12.5 million, with annual operating budget of $1.8 million -Municipal bond will pay for facility: 30 years at 5.3%; payment = $841,160 -52% of operations will be paid for by increase in millage($936,000 per year) -Millage rate for those living in the district will increase to provide funds for operating and construction costs
(City bonds will pay for facility itself (New Property Tax Needs))
Steps in Calculating New Mileage
1.Calculate net assessed value of property -NAV = total assessed value
-tax exempt property
2.Calculate required tax rate
-Tax rate = required tax/NAV 3.Calculate the impact of the proposed tax -Property tax increase = assessed value of property millage rate increase (new tax to affect community)
Sales Tax
Second most common tax source for funding sport facilities Regulations vary by state: -In South Carolina: 6% sales and use tax -In Missouri: Sales taxes are used at three levels, for state, county, and city
*Different states have different rules
Pay-as-You-Go Financing
Rarely used for new facilities -Delay between decision to build a new facility and the time it is built
An inequitable and inefficient method -Some residents may pay the full cost of a facility and never use it
Bond Financing
-Term : Single payment-end of period
-Serial: Single payment-life of bond
Voter or legislative approval is needed
To fund capital projects for community rec programs: -Revenue bonds
-General obligation bonds
Certificates of Participation
-Use of COPs is growing, especially in places where there are strict limits on borrowing. -Hancock Amendment (Missouri) -A city creates a corporation to handle financing and then pays lease fees to trustee, who pays financial institution.
Private Sources of Revenue
Fundraising, Grants, Advertising, Sponsorship
Collaborative Financing
Joint use agreements -Formal agreements between parties outlining how facilities will be shared -Public school districts and community recreation programs Public/private partnerships -Collaborations between public and private sectors
Arms Race
Continuous building of bigger and better facilities for the sole purpose of landing key recruits Ohio State University
University of Florida
University of South Carolina
Gettysburg College
Also, a race to change NCAA divisions
*Ex. Gettysburg College-focus on quality of degree and playing time (smaller school)
Revenue Distribution
Men’s basketball, sponsored sports, scholarships, academic enhancement (tuition, scholarships), student-athlete opportunities, conference grants (offset conference cost), special assistance fund.
Conferences
-Revenue from NCAA flows through conference to member schools -Conferences set policy on how revenue is divided -Example: SEC BCS bowl games >Participating school receives $1.7 or $1.8 million, plus travel allowance >Remainder is divided by 13 and equally distributed
Division I FBS (Major Conferences)
-Football Bowl Subdivision (FBS)—BCS schools >Received average of $26.4 million in revenues from NCAA -FBS—Non‐BCS schools
>Received average of $11.5 million
-Non‐FBS schools
>Received average of $5.5 million
Importance of Football Revenue
-Accounts for 57% of SEC member institution revenues and 49% of Big 10 revenues -NCAA v. Board of Regents (1984) >NCAA control of football TV rights violated Sherman Act
Division I FBS (Minor Conferences)
-Examples: Western Athletic Conference (WAC) and Conference USA (C‐USA) -Rely on having 12 teams in a conference to generate revenues >C‐USA earned $982,000 in football championships and $4.2 million from NCAA basketball tournament
NCAA Member Schools
-Distributions from conferences is a small proportion of overall departmental revenues -Most revenue comes from football
>SEC at high end: 57%
>Big East at low end: 36%
Zero-based budgeting
Balance out at end of year, can’t carry over debt to new year
Financial Difficulties
-90% of Division I programs have expenses greater than revenues
-Only 19 DI‐FBS schools were self-supporting
Financial Profitability
-Difficult to measure
-Individuals analyzing athletic department performance frequently treat revenues in varying ways
-Indianapolis Star:
>Reported only expense‐to‐revenue differences >Ignored significant variations in the way departmental revenues were reported at many schools
Department-generated Revenues
ticket sales come from department
Allocated revenues
revenues all schools get: university, conference, NCAA
Debt Service
-Some analysts report only operating expenses >Forget to include debt service and cost of replacing
facilities in expenses
-Small number of self-supporting
athletic departments (maybe only 10)
Division I Trends
-Median revenues increased 16%
>Ticket sales
>Contributions
-Median expenses increased 23%
>Grants‐in‐aid (scholarships)
>Salaries and benefits (coaches and admin)
Primary Expenses
-Increasing tuition costs on campus (offering scholarships)
-Market demand for top coaches
Coaching Salary Increases
-Football
>47% increase between 2004 and 2006 >Median for assistant coaches increased 23%
-Basketball
>Men’s head coach -15% increase >Women’s head coach -20% increase
Other Trends in Division I Schools
-Disparity in program‐generated revenue
-Disparity in expenses
-Football and men’s basketball reported surpluses (make $, other programs lose $)
Athletic Department Fundraising
-Operating expenses are increasing faster than operating revenues. -Cash contributions from alumni are the second‐largest source of revenue. -Development department is becoming increasingly important
Trends in Fundraising
-Athletic department spending is growing 15% faster than university spending. -Athletic departments are pressured to reduce reliance on allocated costs. -Tuition is rising faster than inflation. >Big issue at smaller schools , as larger percentage of revenue comes from student fees.
Pressures on Development Office
-Generate greater amounts of operatingrevenue -Raise funds for capital projects -Does giving to athletics impact giving to other programs on campus?
-Trends in Division I FBS schools: >Athletics accounted for 15% of university’s total donations in 1998 and 26% of total in 2003.
Capital Campaign
-Intensive effort to raise funds in a given time frame for a specific purpose -Major gifts needed to reach goal—defined as $25,000 or more -Major gifts table:
>80/20 rule
>90/10 rule
>Rule of thirds-third now ,third later
*athletics and universities have capital campaign
Athletic Support Groups
-Booster club responsible for most athletic department’s annual giving programs
>Non‐profit and tax exempt >Separate legal entity from university (own foundation account not related to athletics)
-Example: Wolfpack Club at North Carolina State University
Linkage of Tickets and Giving
-The only way to guarantee the purchase of a basketball season ticket may be to give at half or full scholarship level.
-Point systems: >Points based on amount of annual giving, number of years a donor has given, and number of years a donor has purchased tickets.
>More points = better seats
*Ex. Stroh season tickets are giving them choice where to sit
Restructuring Seating
-Some schools reassign seats every year based on points -Some schools reassign seats periodically -Some schools add seat licenses for prime seats
Endowments
-Provide for programs in perpetuity -Invested, and then only a portion of fund’s annual return is used for the fund’s specific purpose.
-Uses:
Scholarships, Coaching salaries, Program‐specific support
*Year in, year out
*Game guarantees, travel, comp.
Purpose of Professional Sport Leagues
-Make decisions that are imperative for league viability: >Financial survival
>Concern for operating procedures
Ownership Structure of Leagues
-Franchisee/franchisor >Commissioner, league office, and team owners >League collects revenues and distributes them to each club >Leagues can have affiliated for‐profit entities -Single entity structure >A single group or individual owns the league and all teams
Single Entity Structure
-Advantages:
>Place clubs in preferred cities
>Assign players to teams >Promote competitive balance via player assignments >Constrain salary costs -Provides limited economic incentive to individual clubs -Frequently found in new start‐up leagues
Ownership Rules and Policies
-New owners
-Debt
-Expansion-over seas, new market
-Territorial rights-where team can and can’t go
“Big 4” Professional Leagues
Major League Baseball
National Basketball Association
National Football League
National Hockey League
MLB
-Labor:
>2007-2011 collective bargaining agreement >$326 million in local revenue annually filter from highest to lowest revenue franchises >$380,000 minimum salary in 2007, going to $400,000+ by 2011 >Continuation of luxury tax
NBA
Labor:
>2005-2010 collective bargaining agreement >Maximum salary set (some exemptions)
>Rookie three‐year contracts:
▪ Age limit 19
▪ First two years can be assigned to NBA Development League
NFL
Labor:
>2006-2011 collective bargaining agreement >Opt out option enacted in 2010
▪ Salary cap: None (or floor), but restrictions on salary
NHL
Labor:
>2005-2011 collective bargaining agreement >Restricted free agency-more players can go
Key Elements of Baseball’s Structure
-Early years:
>Membership restricted
>Monopoly rights to territories-controlled >Players bound to clubs through reserve rule -In modern period:
>Exempt from antitrust statutes
Restrictions in Modern Period-All Pro Leagues
Restrict entry
Assign exclusive territory (city, state)
Collude on revenue sharing
Antitrust statutes
Sports Broadcasting Act of 1961
Competitive Balance
-Concern of officials in most leagues: >Make sure that every team has a financial opportunity to field a competitive team >Attract media and fan attention -Many diverse viewpoints on whether competitive balance is needed or how to achieve it
Methods for achieving competitive balance
Player draft and supplemental player assignments-last place team drafts first
Salary slotting
Free agency and collective bargaining
Salary caps
Salary arbitration
Luxury tax
Revenue sharing
Salary Cap and Salary Floor
Salary cap:
> Restriction on the maximum amount any team in a league can pay to players >Intended to balance teams’ spending on players
Salary floor:
>Minimum salary level for a team
>Base level of commitment
Salary (Luxury) Tax
-Consequences for exceeding a salary cap or salary threshold -Required of teams whose payroll exceeds a set “tax level”
Revenue Sharing
-Designed to narrow the gaps in the financial resources of the participating teams -Usefulness depends on two factors:
1. Relationship of central revenues to total revenues
2. Sharing rules adopted
Types of Revenue Sharing
Media revenue
Gate receipts
Merchandise sales
Sponsorship agreements
Central and Local Revenue Pools
Central: Revenues directly paid to the league Local: Revenues paid directly to the team
Emerging Revenue Sources
Luxury seating-club
Seat licenses
Ticket reselling
Variable ticket pricing
Securitization