A loosely supervised operation becomes increasingly central to the mission of a storied institution. Its star performer receives millions in compensation. The risks are not well understood—and primarily off the books. Cross out American International Group and write in Penn State, and you’ve got pretty much the same script, right?
AIG’s derivatives trading unit in London was a money spinner, which is one reason the bosses in New York were willing to look the other way. But the athletics program at Penn State, which is dominated by football, isn’t a profit machine. Sports contributed $106.6 million in revenues in the school’s 2010 fiscal year, according to a report from the National Collegiate Athletic Assn. Yet that only came to 2.5 percent of the university’s roughly $4 billion in operating revenue. Subtract expenses for marketing, recruiting, and salaries—including former football coach Joe Paterno’s $1 million-a-year compensation—and Penn State is left with about $18.6 million.
That’s “chump change” in the overall budget of big state schools, says James Duderstadt, a former University of Michigan president. Only 22 of 120 programs in college football’s biggest division reported a profit last year, the NCAA says.
So how could (now former) Penn State President Graham Spanier allow his athletic department to take risks that would damage the image of the whole university? The answer is the halo effect: the remarkable force a winning sports team exerts on a university’s brand and student recruiting power. The success of Boston College quarterback Doug Flutie—especially his legendary 1984 Hail Mary pass and his Heisman trophy—helped transform a regional college into an internationally known, highly selective institution. Annual applications jumped 12 percent in 1985, to 16,163, and have since doubled. Annual giving has risen from $20 million in the 1980s to more than $100 million today, according to Boston College spokesman Jack Dunn.
Similarly, Boise State University credits its Broncos football team with giving the school a big boost after the team won the Fiesta Bowl in both 2007 and 2010. One donor from California specifically cited an article about the team when he sent a $250,000 pledge in support of a new business building, says spokesman Frank Zang. Applications soared 9 percent after the 2007 victory and 4 percent after 2010. The percentage of out-of-state students, who pay almost three times the tuition for in-state students, now stands at 19 percent. Members of this year’s freshman class hail from as far away as Saudi Arabia and Japan.
George Mason University’s Patriots basketball team made it to the 2006 NCAA Final Four after defeating University of Connecticut, a historic upset. The team’s 22 hours and 50 minutes of airtime on national television would have been worth $550 million at prevailing advertising rates, according to a report by the school’s Center for Sports Management. Freshman applications jumped 21 percent, to 13,350, the following year, with out-of-state applications up 54 percent. The school exceeded the goal of its capital campaign by $32 million.
Virginia Commonwealth University made its first appearance in the Final Four this year. The school estimates the value of the TV exposure at $1 billion, says Robby Robinson, associate athletic director. VCU expects a surge in applications and donations similar to George Mason’s. “It gave us an unquantifiable amount of positive publicity,” says Robinson. “From a national perspective, it put VCU on the map from Miami to Seattle.”
Penn State’s Paterno, the coach with the most wins in major college football history, was a huge magnet for donors. The football program’s cachet helped the university’s endowment more than quintuple to a record $1.83 billion since 1995. When an athletic program puts those kinds of numbers up on the board, university administrators face a big temptation to look the other way when scandal surfaces. It’s not the money that’s blinding. It’s the halo.