How the economy is affecting college athletic departments

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In an effort to cut costs, newspapers across the country have merged their sports and business sections, but even the most miserly publisher couldn't have predicted how the worlds of college sports and business would collide in Tuesday's edition of the Tulsa (Okla.) World.

In one top story, billionaire energy magnate T. Boone Pickens announced a $63 million donation to the Oklahoma State athletic department to bolster a fund that had lost $282 million in the past four months. In another, an attorney for Tom Kivisto acknowledged that his client had received a termination letter from SemGroup, the Tulsa-based energy company that collapsed during Kivisto's reign as CEO. What does that have to do with sports? Kivisto, a former Kansas basketball player, remains on the hook for a portion of the $12 million donation he made to build the Jayhawks a new football practice facility. That donation inspired Kansas athletic department officials to name the school's football field after Kivisto.

The examples at Oklahoma State and Kansas are extreme, but almost every athletic department in the nation must deal in some way with the fallout from the recent economic plunge. Like most businesses, college athletic departments invest their money, hoping for a higher return than if they simply stored it in a savings account. Most years, that's exactly what they get. This year, however, stock and commodities markets have tanked, and that loss has drained athletic department endowments and pension funds. Making matters worse, the credit crunch that precipitated the decline has made it more expensive for programs to secure financing for construction projects.

To cope, some schools will have to use operating funds to cover interest they typically would have received from their endowments. Others will have to either adjust timetables or halt capital improvement projects such as stadium or arena renovations. In the meantime, all will have to encourage donors to keep giving in spite of uncertain economic times.

At Oklahoma State, several city blocks have been cleared to build an athletic village that would include facilities for the baseball, softball, track, soccer and equestrian teams as well as an indoor practice facility the football team would share with other sports. The estimated completion date was 2011. That space will remain empty, however, until officials can raise the money to complete the project. At a press conference Tuesday to announce Pickens' most recent gift, Oklahoma State athletic director Mike Holder said the department will focus on renovating the west end zone of Boone Pickens Stadium and on building the indoor facility, for which donor Sherman Smith gave $20 million.

"We'll get that [indoor facility] done," Holder told reporters. "I just can't tell you when that will be. Three months ago, it would have happened a lot sooner than it will as of today."

Earlier this year, funds for the project existed -- on paper. In January 2006, Pickens donated $165 million to Oklahoma State's athletic department. It was the largest single donation to a college athletic department in history, and it provided Oklahoma State with a significant base for its fundraising efforts. Pickens took it upon himself to grow that investment, asking that his gift be invested with BP Capital, Pickens's own hedge fund. So Holder allowed BP Capital to invest that money along with an earlier $6 million gift from Pickens as well as another $31 million Holder had raised from other sources.

Holder said the original $202 million swelled to $407 million in July. Then the bottom fell out of the stock market. By the time Oklahoma State officials cashed out of the fund, they had $125 million remaining. The market had swallowed the other $282 million. Oklahoma State's athletic department fared better than Pickens. A 60 Minutes story that aired Sunday revealed that BP Capital lost $2 billion in value.

But like Pickens, who has weathered the rise and fall of markets before, Holder hopes to have Oklahoma State's athletic department building again. "My only regret is ... we need to take a pause," Holder said. "I don't want to use the term stop, because I really believe it's a pause. We have every intention to build what we started north of the football stadium. It's just a matter of it's going to take a little bit longer than we anticipated."

Athletic departments across the country likely will take a similar approach. Susan Parrish, the controller for Florida's athletic department, said the market drop will have its greatest effect on long-term, capital projects.

"For the very short term, it's depressing, but it hasn't had a tremendous impact on our day-to-day operations," Parrish said. "However, your long-term projections and projects like buildings and things you would use your long-term money for, you now have to re-evaluate. You may not have that money to do that, and you certainly wouldn't want to sell [investments] and lock in your loss."

The economic dip has forced Rutgers to re-evaluate its stadium expansion plans. The first phase -- a new mezzanine section with 1,000 seats -- was finished in September at a cost of $35 million. That left $67 million from the original projected budget for phase two -- an additional 13,000 end zone seats, but the bids for that phase came in higher than expected. That does not bode well, considering the myriad financial issues the department faces. As of two weeks ago, the school's endowment had lost 10 percent. Compounding the problem, the credit crunch had driven up the cost of private financing, and donors had slowed their giving. In a presentation earlier this month to the school's Board of Governors, Rutgers president Richard McCormick explained that those factors forced officials to devise a new plan.

"Given these facts, I have asked University Facilities and the Division of Intercollegiate Athletics to develop options for the stadium that would continue to place priority on constructing additional seats while reducing the overall cost," McCormick told the board. "When we have more information, we will be able to decide how to complete the project in an economic fashion. This is only prudent, given the new realities we face."

As long as the market doesn't remain in the tank for a prolonged period, most athletic departments shouldn't see a change in their day-to-day operations. They may have to take short-term hits to cover money that would have come from an endowment, but as long as the economy begins to grow again at a normal rate, the endowments should be safe. Of greater concern are the donor gifts that fund those capital projects and help those endowments grow.

"The problem for us, and probably for all athletic programs, is what is it doing to your fan base and your boosters?" Florida's Parrish said. "Even your high-dollar donors are probably invested in the stock market, and they're probably feeling the pain that everyone else is."

Parrish said she won't have a concrete idea of how much the economy has affected giving until January, when football season-ticket renewals begin rolling in. After that, she said, departments across the country should know how much they've lost.

The challenge for athletic departments will be finding new ways to encourage donations from boosters less willing to part with their money. Officials at Cal weren't planning ahead for an economic downturn when they devised their Golden Bears Forever campaign, but they may have found a potential solution anyway. Cal essentially is offering a mortgage on a 22-, 20- or 19-inch wide piece of property that officials hope will help endow Cal athletics in perpetuity. That's right, Cal boosters can buy what amounts to a fixed-rate (six percent), 30-year mortgage on their seat at Memorial Stadium.

"We're not asking them to do anything more than they have been doing," Cal associate athletic director Dave Rosselli said. "We're asking them to continue doing what they've been doing on an annual basis -- but make a long-term commitment to us."

Stadium Capital, a Chicago-based arm of Morgan Stanley, helped Cal officials devise the plan, which allows boosters to retain the license to their seats for 50 years. And just like a split-level duplex, those boosters can sell those seats on the secondary market and keep the profit. The cost of high-end seats includes parking, field access and access to an air-conditioned club level that will serve premium food and drinks.

The most expensive seats cost $225,000 each up front, or fans can agree to pay $50,391 a year for five years or $15,421 a year for 30 years -- and a portion of each donation is tax deductible. The cheapest seats cost $40,000 up front or $2,741 a year for 30 years. Rosselli said the goal is to raise $300 million, which would hopefully grow to more than a $1 billion.

Rosselli said Cal's endowment has historically grown by about 10 percent a year. Because of the downturn, he said it likely will not grow this year, but it doesn't appear that it will sustain any significant loss. Over the long term, he said, the endowment should grow. Rosselli said that of the approximately 2,000 boosters who responded to a survey, about 80 percent expressed interest in the plan. He said that the department would only need about 800 accounts to reach its initial goal. The challenge, he said, is convincing boosters who don't have T. Boone Pickens-sized wallets that paying consistently for 30 years will benefit the program more while allowing them to handle the downswing in the economy.

"We're allowing people to go out 30 years in case of a cash flow shortfall they might have now," Rosselli said. "I can't say that we formulated this in response to the economy, but it certainly does insulate them from the effects of the economy."