The BCS is just the tip of the iceberg. Welcome to the weird, tax-free world of college sports.
Don't Miss: Incredible Pokemon Gifts
Let’s start before the season even began. Florida Atlantic University – a public, four-year college based in Boca Raton – recently completed a $70 million football stadium with “6,000 premium seats,” including “24 suites, 26 loge boxes, 1,000 premier club seats and 4,000 priority club seats, and the latest, state-of-the-art amenities.” In February, the school approved a $6 million sponsorship deal to name the stadium with The GEO Group, a for-profit prison company with a controversial history of repeated human rights violations.
The President of FAU, Mary Jane Saunders, commented on this transaction. “We are incredibly grateful for this wonderful gift. It is so exciting to now have a name for our beautiful stadium, and I couldn’t think of a better way to do that than by way of philanthropy.”
Needless to say, this proposal met fierce resistance from students and public interest groups concerned about naming a college football field after a prison company and alleged violator of international law. My proposed suggestion – GEO Group Field at Geneva Accords Stadium, located in Guantanamo Bay – was not taken into consideration, and, eventually the GEO/FAU deal was cancelled under public pressure. FAU is now looking for another sponsor for the stadium.
Technically speaking, however, neither The GEO Group nor Florida Atlantic University was involved in the naming transaction. The agreement to name the stadium was a philanthropic donation from The GEO Group Foundation to The FAU Foundation. (Every major athletic department has its own foundation for the purposes of tax-deductible donations).
The GEO Group and FAU didn’t have to use separate nonprofits for this deal to be tax-free, however. Commercial sponsorships of college athletics facilities are completely tax-deductible for a company as a charitable or business expense, and, due to a 1997 rule from Congress, tax-exempt for colleges and universities as well due to classification as a qualified expense related to their educational mission. While it may appear to the reader that this is purely a business deal and not at all related to a university education, I would argue that learning the lesson of how easily powerful organizations can avoid paying taxes is, in a sense, pretty educational.
Although the FAU example fell through because of the implications of sponsoring prison torture, most deals do not. In 2006, the University of Maryland agreed to sell naming rights to its football field to Chevy Chase Bank, which has a branch on campus. This sponsorship deal is untaxed as a charitable donation, even though the contract is entirely cognizant of the business implications of the decision. In the event that the campus branch of the bank loses its location, there would be a “diminution in the value of the Naming Rights to the Bank,” and the Bank can stop making payments and cancel the deal. In addition, as part of the contract, the University of Maryland Athletics Department has to transfer their accounts to Chevy Chase Bank, which means, “The Bank may charge customary fees for providing such bank account services.” If the team does not play a full slate of home games during the year, the bank can even get a refund on part of its donation.
The same year, oil magnate and Twitter mic-dropper T. Boone Pickens gave $165 million to a charitable foundation attached to Oklahoma State University for a new football stadium and new housing and dining options for OSU athletes. Whether that is worthy of charity is not even the issue here: Less than one hour later, the foundation invested all of Pickens’ donation money – plus another $37 million in other donations – into a hedge fund run by Pickens. The university feted Pickens as a charitable hero and honored him with a wood-paneled locker next to the players’ in the new stadium.
But naming-rights deals are not the only way that college football programs utilize the tax code with their stadiums. Schools often fund their stadiums by taking on tax-exempt debt. Public universities often have the authority to issue their own tax-exempt bonds, and private nonprofit universities can usually do so as well through “educational facilities authorities.” In some cases, this borrowing is backed at least in part by student tuition.
The Congressional Budget Office released a report in 2010 arguing that due to this tax-favored borrowing, colleges and universities were engaging in indirect tax arbitrage. By keeping the interest benefits of their assets while not paying the same level of interest on new liabilities, they make lower payments on their borrowing than they take in from gains on their lending and investments. The CBO explains that this arbitrage amounts to a pure federal subsidy.
In the case of Oklahoma State, the arbitrage is clear. After taking Pickens’ money and reinvesting it into Pickens’ hedge fund, the school borrowed money (tax-exempt) to build the stadium. By borrowing at this lower, tax-exempt rate while investing the original donation and keeping the gains of that investment, the school was attempting to earn money simply off of its tax-favored status.
With the stadiums built, it’s time for football season. As higher education journalist Daniel Golden writes in the Wall Street Journal, tickets for the fanciest seats – costing $50,000 to $90,000 per year – are not taxed at a regular schedule. He explains, “Suites – usually featuring 16 seats, catered food, televisions and high-speed Internet access – are priced at $50,000 to $90,000 a year. Under a 1988 federal law, taxpayers may deduct 80% of payment for the right to purchase seating at a collegiate sports event — though not a professional one – as a charitable contribution.”
Here is a chart for premium football tickets at Texas Tech University, a well-known large public research university in Lubbock. A Platinum Section ticket costs $6,189 – but only $189 is technically a “ticket” that is taxed normally. The next $2,000 is called a “contribution” and is 80% tax-deductible, as Golden explained, and the majority of the ticket – $4,000 – is considered a charitable donation and is entirely tax-deductible. That’s a really expensive $189 ticket!
An article from Bloomberg estimates that this ticket “donation” scheme for luxury seats could add up to $1 billion per year, or hundreds of millions of dollars of lost tax revenue from wealthy individuals who happen to enjoy college students running into each other.
If, due to raucous, tax-deductible cheering, the local team does well enough during the season, they get to play in one of the nonprofit BCS bowl games that occur in December and January. The Orange Bowl (now the FedEx Orange Bowl, due to its tax-free sponsorship by FedEx), for example, is technically run by the Orange Bowl Committee, “an independent organization to support and produce activities and events that enhance the image, economy, and culture of South Florida.” In 2009, the Orange Bowl Committee made $40.8 million dollars in revenue, including $1.2 million in direct government grants. According to Ken Stern, from 2007 to 2009, the Sugar Bowl (sponsored by Allstate Insurance) garnered over $5.4 million in direct federal subsidies. Every bowl game except the Rose Bowl (presented by Vizio) has received direct government grants in recent years in addition to benefits from their tax status.
How do these nonprofits spend their money? Average executive pay for the 4 bowls is upwards of $500,000, which is far higher than the average for similarly-sized nonprofit entities. This doesn’t even take into consideration the fact that being a CEO of a bowl game is not even a full-time job in some cases: The (Tostitos) Fiesta Bowl’s CEO, John Junker, earned nearly $600,000 in 2009 for working only 21 hours per week. These nonprofit bowl games also spend a good chunk of their revenue on alliterative and fun-sounding tax-free vacations. The Orange Bowl hosts Summer Splash, an all-expenses paid private Caribbean cruise for select coaches and athletic directors, and the Fiesta Bowl runs Fiesta Frolic, a golf retreat at Phoenix-area resorts. Full disclosure: I have yet to be invited to any of these.
Then there’s the NCAA – also a nonprofit. The schools themselves are either nonprofits or outright public institutions. The best players will be drafted by the NFL (also a nonprofit) and play in taxpayer-subsidized stadiums. And all of these players are “nonprofits” in a different sense of the term, as they are not allowed under NCAA rules to receive any monetary compensation for their labor.
It is difficult to estimate the total amount of tax-favored benefit accrued to college football through their nonprofit status. Adding together sponsorship deals, luxury seat deductions, tax-exempt borrowing for stadiums, bowl games, tax deductibility of donations to athletic programs, the NCAA, and more, it’s well into the billions of dollars per year. And that’s only football; basketball season has already started, and much of the same applies there.
Perhaps there is reason for society to decide that certain types of charitable activities to be subsidized and treated differently than other industries. I have argued in favor of re-thinking the entire nonprofit sector; others have pointed to redistributive charities that help the less fortunate as the only ones that deserve special status. Regardless of your preferred solution, college football makes clear the questionable nature of the current paradigm: There is a very tenuous and opaque distinction between nonprofits and private businesses, and many of the tax-exempt organizations that are classified as “nonprofits” bear little connection with any sense of charitable, educational, scientific, or religious mission.
This BCS bowl season, I’ll be on my couch, in my plaid onesie pajamas, drinking hot chocolate, and raising my eyebrows in the general direction of college football. There’s plenty of reason for it.
Don't Miss: See the first leaked Black Friday 2016 Ad