NCAA News Archive - 2006

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NCAA response to federal inquiry backs tax-exempt status


Nov 20, 2006 11:40:07 AM

By Michelle Brutlag Hosick
The NCAA News

The NCAA responded November 13 to questions from the chair of the U.S. House of Representatives Committee on Ways and Means about how intercollegiate athletics furthers the educational, tax-exempt purpose of the NCAA and higher education. The response from NCAA President Myles Brand verifies intercollegiate athletics’ relationship to higher education and addresses misconceptions held by the general public about student-athletes’ academic performance and athletics programs’ financial success.

The full text of the response is available at www.ncaa.org.

The initial letter, sent to Brand last month by committee Chair William Thomas (R-California), challenged several Association principles, including the amateur status of student-athletes and the sincerity of the Association’s efforts at academic reform. The questions particularly revolved around the popularity of Division I football and men’s basketball and the escalation of coaches’ salaries.

While the NCAA already had responded to committee requests earlier this year for information regarding the Association’s tax-exempt status, Brand said the Association would treat the latest inquiry seriously. Thomas, who did not seek another term in the November election, will likely be succeeded by New York Democrat Charles Rangel. With the shift in power in Congress, it is unclear whether Rangel will pursue the matter further.

In a thorough response that addresses each question specifically and includes lengthy appendices supporting the Association’s tax-exempt status and clarifying the academic reforms made in recent years, Brand pointed out that the scale of popularity of an enterprise does not diminish its educational value.

"The lessons learned on the football field or men’s basketball court are no less in value or importance to those student-athletes than the ones learned on the hockey rink or softball diamond — nor, for that matter, than those learned in theater, dance, music, journalism or other non-classroom environments," Brand wrote. "The fundamental purpose of intercollegiate athletics is the education of student-athletes in both the classroom and on the field or court. The scale of the sport does not alter the fundamental purpose."

Similarly, Brand said because men’s basketball and football are popular enough to command high prices from television networks interested in purchasing the rights to telecast the events does not undermine their educational purpose.

"If the educational purpose of college basketball could be preserved only by denying the right to telecast the events, students, university faculty and staff, alumni, the institutions of higher education themselves and even the American taxpayer would ultimately lose," Brand wrote. "The scale of popularity and the media attention given to football and men’s basketball do not forfeit for those two sports the educational purpose for which they exist."

In response to questions about academic performance, Brand explained requirements Division I student-athletes must meet before being eligible to participate in athletics and detailed the progress-toward-degree requirements once a student-athlete is enrolled. Brand also noted that according to data from freshmen entering college in 2004, the most recent data available, Division I scholarship student-athletes on average earned higher SAT scores and higher high school grade-point averages than college-bound students overall. Brand also pointed out that once a student-athlete is enrolled in an academic program, he or she must make specific, measurable progress toward a degree — a minimum of 20 percent per year.

The NCAA response also describes Division I’s Academic Performance Program, which includes a more accurate graduation-rate methodology and increased core-course requirements from incoming high school students. The APP emphasizes eligibility — determined by whether student-athletes meet academic requirements and are making progress toward graduation — and retention at an institution. The program is enforced through a penalty and recognition structure that affects individual teams.

Thomas’ letter also called into question "excessive spending" on coaches’ salaries. Brand’s response indicated that coaching salaries are market-driven, much the same as the salaries for top-tier faculty in medicine, engineering, law and other disciplines. He said the outside compensation package for both top coaches and top faculty are based on their ability to earn beyond the campus. Also, the NCAA is limited by the Sherman Antitrust Act to influence institutional spending.

Brand did refer, however, to the recent report of the Presidential Task Force on the Future of Division I Intercollegiate Athletics, which acknowledged the need to address fiscal responsibility in intercollegiate athletics on a campus-by-campus basis. To assist in that effort, the NCAA, with the help of the National Association of College and University Business Officers, has developed more consistent and clear definitions for reporting of financial data and requires an independent, third-party review of the data before submission.

Those data will be made available to presidents, along with aggregate peer group data, to help universities examine their spending behaviors and to improve campus decision-making. Also included in the reports will be new metrics that will alert presidents to areas in which their spending history may indicate abnormalities or risk. The aggregate data, by category, also will be made transparent to the public.

"Through speeches, articles and most recently through the work of the Task Force, we have urged moderation in the growth rate of athletics budgets," Brand wrote. "However, the NCAA’s ability to influence them is limited."

NCAA response

Excerpts from the NCAA’s response to a letter from Ways and Means Committee Chair William Thomas:

Q What benefits does the NCAA provide taxpayers in exchange for its exemption?

A Those who represent the federal taxpayer, members of Congress, have long recognized the educational value of athletics competition at the college or university level, and that income derived from intercollegiate athletics competition is substantially related to the educational functions of colleges and universities. In the Revenue Act of 1950, both the House and Senate agreed on this point. The Senate report noted, "Athletics activities of schools are substantially related to their educational functions. For example, a university would not be taxable on income derived from a basketball tournament sponsored by it, even where the teams were composed of students of other schools." The House report states, "Of course, income of an educational organization from charges for admissions to football games would not be deemed to be income from an unrelated business, since its athletics activities are substantially related to its educational program."

More recently, the U.S. Supreme Court recognized the importance of the regulatory role of the NCAA in preserving amateurism in college sports. In NCAA v. Board of Regents of the University of Oklahoma 468 U.S. 85 (1984), the Supreme Court said, "The NCAA plays a critical role in the maintenance of a revered tradition of amateurism in college sports. There can be no question but that it needs ample latitude to play that role, or that the preservation of the student-athlete in higher education adds richness and diversity to intercollegiate athletics and is entirely consistent with the goals of the Sherman Act."

Specifically, federal taxpayers through their representatives have recognized the educational value of athletics as a benefit to them and the regulatory role of the NCAA as important to the maintenance of that benefit.

Q Officials from the NCAA, athletics conferences and universities have explained that college football and basketball should be tax-exempt because some universities generate a profit from those sports that is used for other university-sponsored sports. How does playing major college football or men’s basketball in a highly commercialized, profit-seeking, entertainment environment further the educational purpose of your member institutions?

A The fact that some intercollegiate athletics programs at some schools generate revenues in excess of expenses is not inconsistent with the fact that such programs contribute to the schools’ overall educational programs. The modern comprehensive university and, indeed, American higher education would not exist without the ability of some disciplines and activities to generate income that helps pay for other disciplines and activities.

Not all disciplines and activities are in equal demand or enjoy the same appeal. Athletics and a few other activities are more interesting — and entertaining — to the general public and media than others. The ability of some to generate revenue is not insignificant to the rest of the campus. Higher education takes in revenue from all its sources and then redistributes those resources to meet its mission. For example, revenue from Psychology 101 classes (because of their number and size) typically generates more revenue and, in effect, subsidizes philosophy classes, which cannot draw enough students to pay for themselves. This is the business model for higher education (and for other types of tax-exempt organizations), and intercollegiate athletics works the same way. Revenue from football and men’s basketball is redistributed to pay for sports that generate little or no revenue. ...

The most successful programs in terms of generating revenue share the same educational goals with the least successful. Unlike other campus activities of educational value, the visibility of athletics models developmental characteristics of sports to non-athletes, as well.

Q Educational institutions in other NCAA divisions spend a fraction of the amount Division I-A schools spend on their football and men’s basketball programs. What additional educational value is received by participation in Division I-A athletics beyond that which is received by participation in other division or intramural athletics?

A Generally speaking, educational institutions in other NCAA divisions spend a fraction of the amount Division I-A schools spend on any of their other educational programs. For example, the budget for the mathematics department, as well as the athletics department, at Ohio State University is larger than the budget for the mathematics department, or athletics, at Defiance College in Ohio. Even though each institution has invested to a considerably different level, both are providing a quality educational experience and meeting the expectations of their students. In fact, because of higher amounts of outside revenue to support athletics at Ohio State, the athletics budget at Defiance — or any other Division II or III institution — is considerably higher as a percentage of institutional resources than at Division I schools.

Is the difference in the educational experience of students at a large public university quantitatively better than at a small private college? It may or may not be, but we generally don’t try to make that quantitative differentiation. We understand that there are different approaches for a variety of reasons and to accommodate a diversity of circumstances. A more robust athletics program is often identified as one of the advantages of attending a larger school.

The range and cost of programs — in athletics as well as in academics — are largely responsive to expectations of students, parents, alumni and others, as well as the financial circumstances of each institution and are difficult to quantify. Nonetheless, all NCAA member institutions conduct their athletics programs consistent with the academic missions of their respective campuses.

Q Would requiring the public disclosure of the professors, courses and academic majors of athletes help ensure that they receive a quality education?

A Privacy provisions of the Family Education Right to Privacy Act would prohibit such public disclosure, and it is not clear that such public disclosure would, in fact, ensure a better quality education. Likewise, if more student-athletes major in a specific discipline, it does not follow that such students receive an education of less quality or are subject to less rigorous academic standards, much less that there is academic fraud. As noted earlier in this letter, the standards for instruction and the integrity of academic offerings are the purview of the faculty and their responsibility, rather than the NCAA. Moreover, it would be contrary to the freedom of choice accorded all students to require that student-athletes take certain majors and not others.

Q How many member institutions generate a net profit on the operations of their athletic departments (excluding university subsidies such as student fees or general school funds and services)?

A Intercollegiate athletics is not offered to generate a profit. That is the fundamental difference in purpose between intercollegiate athletics and professional sports. If profitability were the standard for college sports, only 23 Division I institutions (based on data reported for the 2004-05 academic year) would conduct athletics programs. Further, if profit were the motive, even those 23 (of more than 1,000 member institutions) would likely only conduct football and men’s basketball programs.

The data that identify these two dozen institutions with positive net revenues do so without accounting for depreciation. Under generally accepted accounting principles, however, depreciation of athletics facilities should be deducted to determine a true profit. While we do not have data to know the exact number that would still report net revenues if depreciation were included, we estimate it would be fewer than 10 institutions of more than 1,000 member colleges and universities.

Q The NCAA receives 85 percent of its revenues from the sale of television rights. What is the influence of television networks on the NCAA’s decisions?

A The fact that television networks are interested in purchasing the rights to telecast college events is the result of the popularity of these events to American taxpayers. Television networks purchase the rights to meet a demand, and pay for the purchase with their own sale of advertising time on the telecasts to commercial entities. None of these circumstances makes the purpose of intercollegiate athletics anything other than educational in nature for those who participate. If the educational purpose of college basketball could be preserved only by denying the right to telecast the events, students, university faculty and staff, alumni, the institutions of higher education themselves, and even the American taxpayer would ultimately lose.

Further, if the American public had the same popular interest in French lectures or accounting classes as they do in athletics, television would be just as eager to telecast those events and to sell commercial time to pay the rights fees. Transforming those academic offerings into commercialized events would not undermine the educational purpose for which the offerings are made.


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