NCAA built tournament safety net of nearly $400 million and then spent it

The NCAA saw this coming more than 15 years ago.

Not the outbreak of a deadly virus that would become a global pandemic and force the association to cancel its Division I men’s and women’s basketball tournaments.

But the NCAA did have the foresight to begin planning for an unknown catastrophic event that would threaten its biggest and most lucrative event.

By 2014, the association had accumulated a nearly $400 million cushion as a hedge against a massive loss of revenue from the tournament. However, at the direction of its governing board of college presidents, the NCAA distributed that money to schools to help them with increasing costs and spent it on their behalf in other ways, including a $208.7 million legal settlement.

The NCAA depends on the basketball tournament for nearly all of its annual revenue, more than half of which gets distributed directly to Division I schools and conferences. The money comes mostly from a multi-billion-dollar media and marketing contract with CBS and Turner, but it also comes from ticket and merchandise sales.

The NCAA had $1.12 billion in revenue for a fiscal year ending Aug. 31, 2019, according to its newly released audited financial statement. Of that amount, $804 million came from the CBS/Turner deal. Another $170 million was attributed to “championships and NIT tournaments,” with a sizable portion of that likely coming from the men’s basketball tournament.

The full financial implications for the NCAA — and, thus, for member schools and conferences — of canceling this year's tournament are difficult to assess because the CBS/Turner deal and various other event-related contracts are not public, and it is likely that the association has some form of insurance.

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"NCAA leadership and membership committees are identifying and working through the considerable implications related to the decision to cancel remaining winter and all spring championships in response to the COVID-19 pandemic," the NCAA said in a statement. "While some decisions can be made quickly like the suspension of recruiting activity, others may take time to reach conclusion. As details become available, we will share with our membership and the public."

Gabe Feldman, director of the Tulane Sports Law Program, said provisions related to unforeseen circumstances “are a part of every major contract,” and it would relieve both the NCAA and CBS/Turner of their obligations in this instance. So the NCAA would not be breaching the contract by not having an event, but CBS/Turner would not have to pay for this contract year.

Feldman and Southern Cal sports business professor David Carter both predicted that this would have no impact on the parties’ future relationship. “They’ve really treated each other as strategic partners,” Carter said. “There’s a symbiotic relationship — they need each other.”

But the NCAA’s 2020 Revenue Distribution Plan calls for the NCAA to pay out roughly $600 million to the schools and conferences from April 15 through June 10. The new audited financial statement showed the association with more than $400 million in unrestricted net assets, and it likely has the ability to borrow against the future value of the CBS/Turner deal, which has more than $12 billion remaining on it between now and 2032.

“The NCAA will be fine,” said Barbara Osborne, a sports administration professor at the University of North Carolina. “It is the membership. It will have future tournaments. It has sponsorships. But all schools will be having huge belt tightening because of this. This is going to affect higher education as a whole and school budgets overall. That’s going to impact the institutional subsidy for athletic programs. …

 “Athletic department budgets will be smaller because conference payouts will be smaller. A lot of mid-majors desperately rely on these dollars (from the NCAA, the conferences and the institutions). It’s not a pretty picture.”

Avoiding all — or at least some — of this was what the NCAA’s leadership, including college presidents, had in mind in 2004 when they set aside $45 million for a fund that was designated as a quasi-endowment. That meant the money was intended to be retained and invested, but unlike a permanent endowment, its principal could be spent.

The original goal for its growth was $500 million, and the hope was that in addition to protecting against a loss of revenue from the basketball tournament, the fund also would eventually throw off money to support NCAA programs. After putting in the initial $45 million, the NCAA began to annually add a portion of its annual operating surpluses to the quasi-endowment, which also retained any investment earnings.

According to NCAA financial statements, the fund was worth $123 million at the end of fiscal 2006, $209 million at the end of 2010 and $385 million at the end of fiscal 2014.

In March 2016, with schools having been allowed to begin providing scholarships based on the full cost of attending school and other new benefits, the NCAA Board of Governors — its top policy-making group — approved a one-time supplemental distribution of $200 million to Division I schools. Rules about the schools’ use of that money were put in place in an effort to make sure it would be spent on new or enhanced programs to benefit athletes, as opposed to coaches’ salaries or improve purely athletic facilities.

"In recent years, Division I has made a number of rule changes in order to provide additional support for college athletes," the association said in a statement announcing the move. "However, those new rules also increased the financial load on many Division I programs.  With the new scholarship rules taking effect this academic year, the Board of Governors which has the authority to manage assets held in reserve – decided the support was needed at this time."

In November 2016, the NCAA proposed the $208.7 million settlement of a lawsuit brought on behalf of tens of thousands of college athletes who received traditional sports scholarships rather than a new version that covers the cost of attendance.

The NCAA and 11 major conferences were co-defendants in the suit, but when the settlement was publicly disclosed in February 2017, the association said in a statement that the Board of Governors  “determined the settlement will be funded entirely from NCAA reserves, and no conference or member schools will be required to contribute.”