The specter of empty college football stadiums this autumn means more than disappointed fans—it also means the biggest athletic departments will face huge budget deficits. That’s starting to worry Wall Street. For one, there are early signs of concern in the municipal bond market, where money is raised for projects like stadium renovations, that the pandemic will interrupt the football revenue stream needed to pay the people who own the debt.
“Bonds used for athletic improvements will fall apart if there’s a second wave of COVID-19 and no TV or attendance revenue from college sports,” says one muni bond trader who isn’t authorized to speak to the press. While the trader and others admit that’s an unlikely scenario, the bond market hates risk. The persistence of COVID-19 creates lots of it.
While schools competing in the Football Bowl Subdivision (FBS) pull in huge amounts of revenue—almost $8 billion a year—they spend nearly every penny. “The general rule of thumb is, if you generate the money, you spend it,” says Victor Matheson, a sports economics professor at College of the Holy Cross. “That’s the general way most sports programs work, especially at a Power Five school.”
That means a revenue shortfall can create a cascading series of problems. FBS schools carry $9.2 billion in athletic-related debt, according to the latest data available (year-end 2018) from the Knight Commission. Staying current on that debt costs schools more than $722 million a year. The University of California–Berkeley is the most indebted with $438 million, much of that stemming from the renovation of Memorial Stadium in 2012. Cal is one of 32 schools, all Power Five, with more than $100 million in athletics debt. Texas A&M had the largest debt service payment in 2018, at $23.3 million, on $317 million of athletics-related debt. (The Knight Commission data covers 110 public schools and excludes the 17 private top-level football schools.)
A canceled football season—or even just games without fans—would mean college athletic departments would face a massive funding gap, adds Matheson. For example, Ohio State University took in $70 million from ticket sales (roughly 90% from football), totaling more than one-third its annual budget. Other revenue streams, such as charitable donations tied to seating access and corporate marketing sponsorships, amount to tens of millions more at risk. The financial situation at every other large program is similar, Matheson says. FBS schools made $1.56 billion in ticket sales in their latest year, according to NCAA data.
In April, a planned $15.4 million bond offering to be backed by athletic facility revenues at the University of Iowa was pulled from the market, probably due to lack of interest stemming from the pandemic, say two market participants. The Iowa bonds included a university pledge to impose student fees to cover the debt, according to the ratings agency Moody’s. It’s not clear how much market reaction there is to other athletic-backed munis, given a few billion dollars of college athletics debt is barely a blip on the $3.7 trillion muni bond market. Plus, while large budget gaps and heavy indebtedness suggest bond defaults by athletic departments are possible, it probably won’t happen.
“There is the incentive on the university side to step in. The university either recognizes or doesn’t recognize the sports program is instrumental to their livelihood,” suggests Chad Lewis, Senior Director at FitchRatings, which rates municipal bonds.
More likely: Budgets get closed by dropping non-revenue sports and cutting jobs of assistant coaches, trainers, compliance officers, events staff and so on down the line, says Matheson.
Even then, athletic departments won’t enjoy the same municipal market as they did in the past. “The irony is they’re used to being highly rated credits—the larger schools with the larger football programs. This changes the game. My sense is we’ll probably see some downgrades,” says Triet Nguyen, a long-time municipal bond trader who is now an executive at DPC Data, a bond data provider. Ratings downgrades will raise the cost schools pay to finance new projects and may even force some projects to be put on hold.
“If sports aren’t happening now, or might not happen this year, sports-dependent financing will be more difficult to sell,” says Matt Fabian, a partner at Municipal Market Analytics, Inc., a bond analysis and research firm. “No one wants to bet against the pandemic while it’s still raging.”
