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Yes, the NCAA is a powerhouse, but it’s vulnerable

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Greg Andrews

The NCAA is on a trajectory to zoom past $1 billion in annual revenue, fueled by a gigantic media contract for the NCAA men’s basketball tournament—one of the nation’s most-popular sporting events.

That’s a pretty good place for the Indianapolis-based National Collegiate Athletic Association to be, right? In 2010, CBS and Turner Broadcasting System agreed to pay $10.8 billion through 2024 to secure the multimedia and marketing rights for the tournament. Just this year, the NCAA will pocket $700 million from the deal.

What public company wouldn’t want to have the financial firepower of the NCAA, the not-for-profit that governs college sports and stages its championships? In its latest fiscal year, it reported $913 million in revenue and a mere $53 million in debt. Most of the revenue—$527 million in the year ended Aug. 31—flows back to Division I schools and conferences.

Yet if the NCAA were a public company, investors also would be fretting about the risks—most notably the thicket of litigation that could upend the definition of amateurism and pave the way for athletes to get paid.

Then there’s the fact that the Turner/CBS contract accounts for 75 percent of the NCAA’s revenue—a concentration that leaves it exposed if something would happen to its marquee tournament. The thrashing the organization is taking these days in the court of public opinion also poses what credit analysts call “reputational risk.”

As Standard & Poor’s analyst Jessica Matsumori notes, “Their balance-sheet indicators are incredibly strong and could be indicative of a AAA or higher rating”—were it not for the risks related to litigation, reputation and revenue concentration.

Instead, S&P rates the NCAA a step below, AA+, with a stable outlook. Moody’s Investors Service doled out a similar Aa2 rating but last June changed the outlook to negative.

The change “reflects increasing litigation and regulatory risks that could potentially alter the NCAA’s operations,” analyst Dennis Gephardt wrote in the June report.

“The escalation of risks reflects the growing perceived disconnect between the amateurism of student-athletes, as codified by the NCAA, and the commercial success of high-profile college sports. Increased public discourse about the best interest of student athletes combined with highly publicized litigation could destabilize the current intercollegiate athletic system and negatively impact the NCAA and its member universities.”

If member schools end up paying star athletes, it’s not unreasonable to think they would look to the NCAA for financial help, Gephardt said in an interview.

In a March report, he noted that while universities already face a challenging financial environment, the cost of paying players wouldn’t necessarily be overwhelming. He cited a hypothetical example of a university with $500 million in expenses and $20 million in athletic media contracts. Sharing half of the media payments, $10 million, with players would boost the university’s overall expenses 2 percent.

The NCAA seems unfazed by the legal onslaught. In its latest audited financials, it says it doesn’t believe resolving pending cases “will result in material losses or have a material adverse effect” on its finances.

That’s not to suggest the NCAA isn’t planning for a rainy day. About a decade ago, the organization’s executive committee and finance and audit committee decided to enlist Deloitte to conduct a formal risk assessment, a process that spurred the organization to create and aggressively fund an endowment. That endowment held $336 million at Dec. 31, within sight of its $380 million goal.

The NCAA also developed a “financial recovery plan” that would allow it to meet its expenses for one year if something bad happens to the NCAA men’s basketball tournament. The plan includes chopping $46 million from operating expenses, pocketing $225 million from event-cancellation insurance and drawing $215 million from the endowment, Chief Financial Officer Kathleen McNeely said.

“Predominately our money comes from one contract,” McNeely said. “It is logical you would create a risk-mitigation plan if something would happen to that revenue stream. Certainly, none of us expect anything to happen.”

If the NCAA finds itself in crisis and needing to change course, it might struggle to adapt quickly, given the sometimes-conflicting interests of its 1,100 member institutions, many with widely varied financial resources, credit analysts say.

Indianapolis has a lot riding on the NCAA successfully navigating the challenges. The headquarters, wooed away from suburban Kansas City 15 years ago, had an economic impact on Indiana of $138 million in 2012, according to an NCAA-commissioned study.

It employs about 500 people at its headquarters on the Central Canal downtown, 86 of whom earn more than $100,000 a year, an NCAA filing with the Internal Revenue Service shows.•

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