March Madness Makers and Takers
The way the NCAA distributes the staggering revenue from the basketball tournament has created a polarized system where some schools make money and others just take it.
By David Ingold and Adam Pearce | March 18, 2015
Twenty five years ago, the NCAA decided something had to be done about March Madness money. The year before, CBS agreed to pay a record $1 billion to broadcast the 1991-1997 tournaments. That was fine with the powerhouse basketball schools that routinely made it into the postseason: Under the rules at the time, they divided most of the revenue based on the number of games they won.

Conference officials feared that without a change, a handful of schools would get rich while others got nothing, and the student athletes competing in the tournament would face increasing financial pressure to win games.
 
 
The Basketball Fund Is Born
So in 1990 the NCAA created the “basketball fund,” a plan intended to more fairly divvy up tournament revenue and parcel it out among the country’s Division I schools.

The new plan cut the amount of the payout that’s directly tied to teams’ wins and losses. Most of the tournament’s TV revenue is now earmarked for things like academic programs and financial assistance for student athletes. Even schools that don’t play in the postseason get a cut.

The remaining amount makes up the basketball fund—and it’s no small pot. Last year the fund totaled about 28 percent of the tournament’s TV revenue, or about $194 million. These coveted dollars are won or lost on the basketball court, and the battle among schools to claim them accounts for a lot of the Madness each March.
 
 
How It Works
Teams earn a “unit” for every tournament game they play up to the championship game. So a team that makes it to the final four will earn five units. Each unit is worth a specific amount each year. Instead of paying schools directly for the units they win, however, the NCAA now gives the units to a team’s conference, and the conference is responsible for distributing the money to its members. A conference can divide up the money however it wants, but the NCAA suggests schools evenly split the payout, and most conferences follow the recommendation.
The End of the $300,000 Free Throw
One goal of the basketball fund was to reduce the financial impact of individual wins and losses. Under the old system in which schools were paid each year for their wins, a player who missed a single game-winning free throw cost his team $300,000 or more. The fund changed that by spreading out the tournament payments over six years; and since that money is also split among the dozen or so teams in a conference, the dollar value attached to any single game is diluted.

Every unit won in 2015 will be worth at least $1.6 million over six years. For a strong team like Kentucky, which might earn as many as five units if it makes it to the final four, that once meant a massive payout at the end of the tournament. Under the basketball fund, those units will be split with the other 13 schools in the Southeastern Conference—dropping the per-school value of its units earned this year to about $560,000 over the next six years.
Conferences Are Key
One big effect of the fund is that it shifts the emphasis from winning teams to winning conferences. All 350 Division I teams will get a cut of this year’s $200 million basketball fund—but strong conferences with many winning teams will rack up more units and take home a much bigger share of the pile.

The nation’s top basketball programs have historically been in one of six major conferences: the ACC, Big East, Big Ten, Pac-12, Big 12, and SEC. These conferences only account for 20 percent of the teams in Division I, but they’ll likely receive about 60 percent of the basketball fund payout this year.

The fund is supposed to be about rewarding performance, and it’s fitting that the top programs will receive the largest cut of the money. But the strongest conferences also include schools with weak basketball programs—and they get an equal cut of the winnings even if they didn’t play a single game in the tournament.
 
 
A System of Makers and Takers
This focus on conferences instead of teams has resulted in a system of makers and takers, where colleges in a conference lean on a few key schools with powerful basketball teams to earn money for everyone else.

Take Michigan State, a Big Ten school that’s earned 21 units during the current six-year payout period. That translates to about $5.1 million for the Big Ten in 2015 alone. After its earnings are lumped together with the rest of the conference and equally doled out, MSU will get back one-third of the amount it’s put in. Other top makers include Duke, Kansas, Kentucky, and North Carolina.

This effect is magnified in smaller conferences, where a single team could be responsible for the bulk of tournament appearances. Gonzaga University plays in the West Coast conference and is responsible for half of its revenue. It gets back an even smaller share, roughly 20 percent of what it contributes.

The inverse can be true for weak programs in strong conferences. An extreme case would be Northwestern University, which also plays in the Big Ten. Unlike Michigan State, Northwestern has never made it to the NCAA tournament – not once since 1939.

Despite contributing zero units over the last 30 years, Northwestern has received an estimated $24.5 million from the fund. This year, the school will receive roughly $2.2 million, the same amount as Michigan State.

The chart below compares how much schools have earned for their conference and how much they've gotten back. It assumes conferences equally split their basketball fund revenue like the NCAA suggests. Looking at all the schools together, it's clear that some are getting back a lot more than they put in.
 
 
Movers and Shakers
Schools are continually changing conferences, typically to improve their financial situation. Though football-related money is the biggest motivator, all that jumping around also has a big impact on the basketball fund, since schools rely heavily on one another for units. Conferences with multiple earners can tough out the loss of a powerful team. But the departure of a breadwinner can mean a huge financial hit for weaker conferences.

Take the Horizon League, a mid-sized conference with schools from the Midwest that doesn’t have the depth of the ACC or Big Ten. Twice the conference has lost its top earner to the Atlantic 10, a more financially attractive conference. Xavier left in 1995, Butler in 2012. The last of the units Butler earned for the Horizon League expire in 2016, and if another program doesn't step up, the League’s revenue could drop to $1.6 million in 2017 from $5 million in 2011.
 
 
The West Coast conference now faces a similar situation with Gonzaga University. Located in Spokane, Washington, Gonzaga earns more than half the conference’s units and is a #2 seed in the tournament. A strong March Madness showing could increase its attractiveness to more powerful conferences. The school is already rumored to be a contender to join the new Big East. That leaves West Coast schools to cheer Gonzaga's success, count the millions it brings them, and pray everything stays the same.