Comparing Pac-12 expenses to other Power Fives: Is spending in San Francisco reasonable or excessive?
The Pac-12 provided an increased level of transparency last month with the release of its annual financial data.
In addition to the federal tax filings, the conference included a breakdown of revenue and expenses for each half of the whole: the Pac-12 Networks and conference-side operations.
Within that information — full Hotline analysis here — was a statement of great interest in this corner of the galaxy:
“The Conference’s annual expenses place it in the middle of its Autonomy Five peer group in terms of level of annual operating expenses as reported in publicly available Form 990s.”
Expenditures at Pac-12 HQ have drawn scrutiny for several years and entered the public sphere in Dec. 2017, when Cal chancellor Carol Christ told the Hotline:
“I’m fairly critical of the Pac-12 organization. Like many central organizations — you could think about the office of the president here as an analogy, and it’s just human nature — you tend to elaborate your own organization rather than understanding that it should be as small and efficient as possible for the benefit of the members.”
Additional comments by campus officials and reporting by media outlets, along with the ongoing attempt to take on a strategic partner in exchange for a cash infusion, have sharpened the focus on spending by commissioner Larry Scott and his staff.
Scott’s response was always that the Pac-12 has a different business model, one that makes comparisons with other Power Fives difficult.
No other conference operates its own media company, whose revenue and expenses are combined with conference operations and reported as a single, consolidated entity on the federal tax filings.
To that end, the transparency provided by the Pac-12 last month with its FY2018 financials helps us compare expenses to those of Autonomy/Power Five peers.
According to the conference, FY18 operational expenses unrelated to Pac-12 Networks were $40 million.
For the purposes of this exercise, we’ll call them Central Office Expenses — all the costs you’d expect a conference to incur on an annual basis.
We’ll also employ the very same two-step methodology the Pac-12 used to conclude that its expenses were in line with peers.
1) The Pac-12 focused on Part IX of the tax filings: The statement of functional expenses. Line 25 is for “Total Functional Expenses,” which include:
Compensation of officers and key employees; salary and wages; benefits; legal, IT; advertising; occupancy; travel; and conference events (i.e., the cost of the football championship game or basketball tournaments).
2) From that figure, the Pac-12 subtracted the amount allocated for grants to domestic organizations — the money distributed to the schools.
Pretty simple, right:
Total expenses – distributions to the schools = central office expenses.
The Hotline acquired the FY18 filings from the other Power Fives and compared their expenses to those of the Pac-12.
Here’s what we found (all figures rounded to the nearest million):
ACC
Total functional expenses: $458 million
Grants to schools: $421 million
Central office expenses: $37 million
Big Ten
Total functional expenses: $717 million
Grants: $685 million
Central office expenses: $32 million
Big 12
Total functional expenses: $374 million
Grants: $346 million
Central office expenses: $28 million
Pac-12
Total functional expenses: $393 million
Grants: $353 million
Central office expenses: $40 million
SEC
Total functional expenses: $648 million (adjusted; see below)
Grants: $604 million
Central office expenses: $44 million
(Note: The SEC lists $671 million for total functional expenses, but that figure is misleading because of the conference’s unique methodology.
(The SEC includes as expenses $23 million for what a spokesperson called “bowl participation payments and travel reimbursements that are paid directly to member institutions.” Essentially, that $23 million is a financial pass-through that isn’t a true central office expense.
(In order to create an apples-to-apples comparison with other conferences, which don’t include bowl payments/reimbursements within their total functional expenses, the Hotline has removed the figure from the SEC’s total functional expenses: $671 million minus $23 million equals $648 million.)
What are we left with?
Total central office expenses:
SEC: $44 million
Pac-12: $40 million
ACC : $37 million
Big Ten $32 million
Big 12: $28 million
By this methodology, yes: The Pac-12’s central office expenses are in line with other Power Fives.
However, we don’t know all the details. Because the Pac-12 is two entities in one (conference and network), the accounting lines are a bit blurred.
In the same breakdown of revenue and expenses that it provided last month, the Pac-12 included this note:
“Certain allocations of expenses are made between Conference and Networks budgets to account for shared services and facilities, as well as for certain limited personnel roles that have responsibilities across both Conference and Networks.”
Exactly how much is allocated from the conference to the networks, and vice versa, we don’t know. Those details have not been made public.
Where the Pac-12 falls short, in our opinion, is the revenue side — and specifically in central office expenses as a percentage of grants.
This could be considered a subjective approach, but it seems reasonable when viewing the situation from the perspective of the campuses:
What are the schools getting compared to what’s being spent at HQ?
After all, the conference office exists to serve the schools, and every last available penny should be distributed.
Our approach seems valid because Pac-12 Networks expenses are removed but all revenue is factored into the amount allocated for grants, including the very media revenue the Pac-12 Networks are generating.
So let’s make this a two-step process:
Total revenue
(Taken from statement of revenue)
Big Ten: $759 million
SEC: $660 million
Pac-12: $497 million
ACC: $465 million
Big 12: $374 million
And finally …
Central office expenses as percentage of total distributions:
Pac-12: 11.3 percent
ACC: 8.8 percent
Big 12: 8.1 percent
SEC: 7.2 percent
Big Ten: 4.7 percent
Lastly, we should mention the cost of doing business in San Francisco as compared to Birmingham, Greensboro, Irving and Rosemont.
It’s higher … it’s substantially higher … and therefore adversely impacts the Pac-12’s cash churn for its membership.
That oh-so-costly bed was made by Scott and the presidents/chancellors back in 2011, when the revenue expectations were vastly higher than the revenue reality we see today.
In that regard, the schools must take some responsibility for the inefficiency.
One other key point:
The revenue opportunity presented by being in San Francisco, near so many potential tech companies/media partners, was part of the justification for placing the Pac-12 Networks on 3rd Street in the first place.
All these years later, there has been little revenue to show for the location decision.
There’s that word again.
Revenue.
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