Penn State's plan for $60 million hit

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First of two parts.

UNIVERSITY PARK, Pa. -- Now that a few months have passed since the NCAA punished Penn State, it's time to try to get a grip on exactly what the $60 million fine levied by the organization means for the athletic department and what it might mean in the future.

Caveat: It's not that easy to predict, given the lack of precedence, lack of clear financial data, and the numerous slogans and metaphors employed by Penn State athletic director Dave Joyner.

Joyner, for instance, describes the situation by saying Penn State has been put in a cage by the NCAA. Thus, Penn State has become "cage fighters." Of the year and change since the Jerry Sandusky scandal hit, he calls it a war zone, saying it's not over: "We're in an occupation, if you will, and so now we're rebuilding."

The "war zone" he's trying to describe looks something like this: Penn State athletics will pay $60 million over five years to the NCAA. It will lose about $3 million annually for four years because it will not receive Big Ten Conference bowl revenue. Average attendance for football games has decreased by about 7,500 per game compared to 2010. And merchandise sales have dropped significantly, from 12th nationally last year to 20th in the first quarter of the 2012-13 fiscal year, according to data from the Collegiate Licensing Company.

Penn State is doing little to counteract the financial setbacks. The $60 million fine will be taken care of by an internal loan from the university and from the athletics reserve fund, which totals about $8 million. The first loan, to cover the first $12 million installment of the fine (four more annual payments will be made), carries an interest rate of 4 percent for 30 years.

Cuts will be minimal. The football program's budget will not be reduced, Joyner said, and non-revenue sports cannot be reduced, according to the consent decree agreed to by the NCAA and the university.

Joyner said the major athletic department reductions involve forgoing some capital maintenance projects (which he said should account for a savings of $2 million to $3 million annually) and skipping the purchase of a new football scoreboard, which would have cost $10 million to $13 million. In the absence of that purchase, cash flow over the next several years should benefit by an extra $1.5 million. For capital projects -- there are no major ones scheduled -- Joyner said the department would rely more on donations.

Will this be enough to handle a $60 million hit?

According to a Penn State spokesperson the athletic department plans to build a new football scoreboard for the 2014 season.

Sports economic experts said Penn State's athletic department likely will be able to succeed with little complication if the football program continues to make a sizable surplus, but they question whether Penn State could be cutting or reallocating soft costs that won't necessarily show up on a traditional ledger.

Joyner has gone as far as saying that Penn State will increase spending for football but wouldn't give a specific answer for how they would have the financial means to do it.

"I can tell you that, yes, things are going to be tight," Joyner said. "They are. Based on the projections, we'll do OK and keep watching what we're doing and continuing to move forward."

Coming up short?

Looking back, the Penn State athletic department was a model of financial success in the twisted business of big-time college athletics, lately defined by overspending.

From 2004 to 2011, its annual expenditures nearly doubled while it continued to operate in the black. According to data provided to the Department of Education from the latest fiscal year, July 2011 to July 2012, Penn State spent $94.2 million and made $108.2 million. It also had debt services totaling $13.1 million.

But a few years ago, long before the NCAA sanctions, the athletic department did not project its surplus would last. In a graph posted on the department's website, it claimed there would be a shortfall starting in 2014, and it would grow to about $10 million by 2018.

The graph and its gloomy prediction was presented to support the creation of STEP, the Seat Transfer and Equity Plan, requiring football season-ticket holders to pay annual donations on top of the amount they paid for tickets.

Given its predicted shortfall from the announcement of STEP in 2008, compounded with a $60 million payment to the university plus interest, it would seem an even larger shortfall would be possible in the coming years. Joyner denied this.

He said the unplanned financial issues, i.e. the fine and the lack of bowl revenue for four years, have not caused the department to predict a shortfall because the money made through STEP has allowed the athletic department to maintain its surplus.

But how successful has STEP been? Multiple reports have placed its revenue at $4 million annually in 2011 and 2012. The increased revenue has come at a significant expense: Fewer people, be it because of STEP, the Sandusky scandal or otherwise, are attending games. The average attendance in 2012 was 96,730, down from 104,234 in 2010, the last year before STEP.

Using the actual ticket price of $55 and assuming that the empty seats would have been filled by season-ticket holders, this drop to the 2012 level means Penn State made nearly $2.9 million less over seven games than it would have at the average attendance level in 2010. The 2012 level of average attendance brought in $3.95 million less than if Penn State had averaged a sellout crowd, as it did in 2007. Considering those statistics, the current state of STEP seems far less lucrative.

Joyner said the revenue brought in by STEP had exceeded the department's expectations, but added that it wouldn't reach ideal revenue levels until all the available seats are sold. The athletic department has announced changes to STEP for this coming season, reducing the minimum donation for 11,500 seats.

The comforts of flexibility

Penn State is counting on donations from other sources. Joyner said the athletic department has become "development dependent," given the financial restrictions.

Penn State has not released its annual report to the NCAA that would detail the total of contributions it received for 2012, though Joyner said the fundraising group The Nittany Lion Club contributed a record $17.5 million last year, $100,000 more than its previous best level, according to The Associated Press.

Joyner said donations likely would be used for capital projects. As a report by the Patriot News of Harrisburg illustrated, they might be used for funding elsewhere. The Patriot-News reported that football coach Bill O'Brien was given a raise of $1.3 million for the coming year, paid for by a donor. O'Brien denied it.

The athletic department doesn't have to publicly specify how or where it allocates those funds, and Penn State is exempt from Freedom of Information requests. Thus, there is a lack of clarity for how money is allocated and spent within the university and its athletic department.

"Budgets of universities are very alienable things, and there's a lot of soft money that floats around, and you don't know exactly where the hearts of expenditures are," said Brian Goff, an economics professor at Western Kentucky University whose work in sports economics has been widely published.

On a cash-flow level, the 4 percent, 30-year rate loan for this first $12 million installment of the $60 million fine will cost the athletic department about $687,000 per year. Should the terms stay the same for the next four installments of the fine, the athletic department will be drained of $3.4 million a year starting in 2017.

"Whether this means an extra office staff position could be eliminated, or we're not going to fill it, who knows," Goff said. "When some non-revenue trip comes up a couple years down the road, they may never say we cut this trip because of this, but, certainly, if they are going to pay $60 million, whether it's in athletics or outside athletics, there would be some expenditures not made that would have been made."

Goff said the football team's revenue-producing ability should keep that budget hit from being too severe. Even in its latest, less-lucrative annual report, the football program totaled a surplus of $36 million (compared to nearly $53 million the previous fiscal year). That money is directed toward paying for non-revenue programs and paying off capital debts, and the loans from the university will turn the $60 million essentially into another debt.

Joyner said the athletic department would have the opportunity to restructure the loans if the athletic department decided it could pay them off sooner. With that degree of flexibility and long terms of the first installment, the fine, hefty as it sounds, won't bite Penn State with as much force as seemed possible back in July.

Still, on the day O'Brien reaffirmed his commitment to Penn State football earlier this month, Joyner said he would be elated if somehow the sanctions and thus financial restrictions were loosened. He used yet another buzzword to capture this possibility: "a God-bomb."

A God-bomb, he said, is when something happy occurs for you. "I always hope a God-bomb falls out of the sky," he said.

Tomorrow: The impact on non-revenue sports.

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Mark Dent: and Twitter @mdent05. First Published February 8, 2013 5:00 AM


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