Budgeting Finance in Sports Exam 1

What is Finance?

• Finance is loosely defined as '“the management of money”

- it is a subset of economics

- the approach and decision making is similar in finance and economics

• Finance differs from accounts

- Accounting primarily examines past decisions and outcomes regarding money

- Finance primarily examines future decisions and outcomes regarding money

Accounting=past Finance=future

Areas of Finance

Three main areas of Finance:

1) Managerial Finance

2) Financial Services

3) Financial Institutions

Managerial Finance

• Area of finance that manages the financial affairs of businesses

• Including sports related firms

- How do we minimize taxation?

- Which project should we fund?

- How to organize a firm to attract capital

- How to attract capital?

- How should capital be raised?

- Which free agent should we sign?

Financial Services

• Areas of finance that brings advice and financial products to individuals, businesses, and government (ex: investment advice)

Examples of this includes items such as:

- deciding what type of securities to own- stocks or bonds?

- what firm’s stock should you own?

- how should you diversify your retirement savings?

Financial Institutions

• Refers to government-controlled management of a financial system

Examples include control of the money supply and control of interest rates.

- In the Unites States, the Federal Reserve System (the Fed) controls the money supply and interest rates

- The Fed is the central banking system in the United States (they regulate the nation’s financial institutions which includes mortgage policies and personal lending policies)

- The Fed’s goal is to keep the U.S. economy healthy

Financial Statements

• The primary source of information used to evaluate the financial health and performance of an organization

Three Financial Statements:

1) Balance Sheet

2) Income Statement (Profits {P} and Losses {L})

3) Statement of Cash Flows

Balance Sheet

• Picture or snapshot of the financial condition of an organization at a specific point in time

Three sections:

1) Assets

2) Liabilities

3) Owner’s Equity

• Assets= Liabilities + Owner’s Equity

• Assets and Liabilities are listed in order of liquidity (how quickly something can be converted into cash) meaning cash is your most liquid asset

• Owner’s Equity is often an estimate

Income Statement

• Shows the organization’s income (or loss) over a specified period
  of time, often on an annual or quarterly basis

- Also called statement of earnings, operating statement or profit-
and-loss statement

Two Types of Accounting:

1) Cash Basis

2) Accrual Basis

• Do income statements truly reflect actual earning or profit?

• Issues:

- Depreciation or amortization

- Taxation

- Research and Development (R&D)

- Marketing and Advertising

Cash vs. Accrual Accounting

Accrual Accounting

• Records revenue and expenses when transactions occur but before money is received or dispensed

• provides a more accurate view of a company’s health by including accounts payable and accounts receivable

Cash Basis Accounting

• Records revenue and expenses when cash related to those transactions is actually received or dispensed

• Generally used by sole proprietors and smaller businesses

Statement of Cash Flows

• Tracks the actual movement of cash into and out of an organization over a period of time

• provides a simpler explanation of cash generated and spent

Three sections:

1) Operating activities

2) Investing

3) Financing

Financial Ratios

• Provide key information about a company’s condition and performance

Reasons why financial managers engage in ratio analysis:

- to evaluate how well a company is operating in the current time period

- to compare current and past performance

- to compare current and historical performance to industry standards

- to study efficiency of operations

Liquidity Ratios

• can determine a debtor’s ability to pay off current debt

• Liquidity ratios determine a company’s ability to cover short-term obligations and cash flows, while solvency ratios are concerned with a longer-term ability to pay ongoing debts

Ex: quick ratio, current ratio, and days sales outstanding

Asset Management Ratios

• Asset turnover ratio

- ratio of a company’s total sales or revenue to its average assets

- helps investors understand how effectively a company is using its assets to generate sales

• This ratio can be used only for comparison to companies in the same sector, as a “good” or “bad” number varies widely among industries

Leverage Ratios

• Type of financial measurement that evaluates the level of debt relative to another financial metric

• May also be used to measure a company’s mix of operating expenses to get an idea of how changes in output will affect operating income

• Ex: Debt-equity ratio, equity multiplier, degree of financial leverage, consumer leverage ratio

Profitability Ratios

• Window into the financial performance and health of a business

- Assess a company’s ability to earn profits from its sales operations, balance sheet assets, or shareholders’ equity’

- Higher ratios are generally better than lower ratios, indicating success at converting revenue to profit

- Used to assess a company’s current performance compared to its past performance, the performance of other companies in its industry, or the industry average

Two Categories:

1) Margin Ratios

2) Return Ratios

Margin Ratios: give insight, from several different angles, into a company’s ability to turn sales to turn sales into profit

• Gross margin, operating margin, net profit margin

Return Ratios: offer several different ways to examine how well a company generates a return for its shareholders using the money they’ve invested

• Return on assets, Return on equity

Market Value Ratios

• Used to evaluate the current share price of a publicly held stock

- Employed by current and potential investors to determine whether a company’s shares are overpriced or underpriced

- Market value, price-to-earnings ratio, book value per share, dividend yield

Financial Ratios Image

End of WEEK 1

Sports Finance in Perspective

• The importance of sports in society far exceeds the importance of its total revenues

• Total revenues and economic importance are small compared to the press it gets

Methods used in to Finance Sport Organizations

Debt: Borrowing money that must be repaid over time, usually with interest (Ex: Construction of Yankee Stadium)

Equity: Exchanging a share or portion of ownership of the organization for money (Ex: Green Bay Packers’ renovation of Lambeau field)

Retained earnings: Reinvestment of prior earnings (Ex: Packers Franchise Preservation Fund)

Government: Funding provided by federal, state, or municipal sources, including land use, tax abatements, direct stadium financing, state and municipal appropriations, and infrastructure improvements (Ex: Tax-backed bonds issued by the City of Arlington, TX to support AT&T Stadium)

Gift: Charitable donations, either cash or in-kind (Ex: Donations totaling $85.4 million to Texas A&M with most money going toward Kyle Field)

Structure of Sport Businesses

• Affects tax and legal obligations with different benefits

• Franchise Ownership Model

- Single Owner/Private Investor

- Multiple Owners/Private Investment Syndicate Model (most common model in America)

- Multiple owners/Publicly traded corporation Model

• League Structure

- Single Entity Ownership

- Distributed Club Ownership

• For profit, non-profit, government entity

• Similarities to other businesses:

- Value Creation

- Revenue Growth

• Differences:

- Diverse objectives of firm owners

- Competitive imbalance

- Leagues respond w/ salary constraints, revenue sharing, + other forms of corporation

Prioritizing Profits

• Many believe that owners are so rich that they don’t care about profits…that their teams are “play things”

• But owners do care about profitability

Ex:

“We’re doing what every responsible corporation in America does-- look for ways to
improve the bottom line... unfortunately, this is a business, and revenues from season
ticket sales and corporate sponsorship in Long Beach have fallen short of expectations...
frankly, the financial losses of the team were just too great to justify playing another
season there.”
• Gary Cavalli, American Basketball League (Co-founder) on shutting down a franchise (AP, NY, 8/26/98)

Revealed Preference Theory

• Revealed preference theory, pioneered by American economist Paul Samuelson, is a
  method of analyzing choices made by individuals. These models assume that
  the preferences of consumers can be revealed by their purchasing habits

• What are examples of owner behavior that reveals their preferences about profits and the
  bottom line?

Ex:

- They still convince cities to build multi-million-dollar stadiums for their teams
- They have been willing to stage “player lockouts” during collective bargaining (i.e.,
NBA 1998, NHL 2004, NBA 2011, NFL 2011)
- They have colluded to avoid competitive bidding for players (MLB 1985-87)
- They frequently raise ticket prices

• Franchise Values have also risen dramatically

Rising Franchise Values

• Recent Expansion and Relocation Fees
  - NHL Las Vegas Knights expansion fee ($500 million)
  - NFL Rams & Chargers relocation fee ($645 million each)
  - NFL Raiders relocation fee ($378 million)
  • Owners generate profits through franchise ownership
  - Almost all are profitable through yearly operational budgets
  - All are profitable through franchise sales
  - Almost all are profitable in both manners
  • Sales prices would NOT continue to rise if owning a professional sports franchise was not profitable
  • Apply economic principles such as demand and supply, productivity and costs, and profitability to analyze behavior in the sports industry

Average Annual Player Salaries

• The “average” is skewed by “superstar” salaries

• In reality, a large percentage of players are earning far less than the “average” value

• The “median” would be a better measure of common player salary

The Impact of Superstar Salaries on Average Player Salary

• Superstar salaries inflate the “average”; the majority of players receive less
  than the average salary

• The “median” is unaffected by outliers and is a more accurate reflection of
  “typical” player salaries than the average.

Fan Poll Results

• Historically, fans feel that players are overpaid

• In 2009, an ESPN/Seton Hall Univ. poll found that 40.3% of respondents felt
  that overpaid players were the #1 problem in MLB (Steroids 2nd with 22.5%)

• In 2009, a Rasmussen survey found that 30% of respondents believe sports
  stars should only be able to make $1M per year

Demand Theory in Sport

• Fans are willing to pay to consume sports products and events

• Demand: quantifies consumer willingness to pay for a given product while taking into account the scarcity implicit in that product
  - demand is the relationship between prices and quantities demanded by consumers
  - price and quantity are inversely related (as one increases, the other decreases)
  - As the price of a ticket increases, the number of people willing to buy that ticket decreases

Demand Determinants

• Items that change demand at every price level
  1. Fan income; more income = increased demand
  2. Population; more potential consumers = increased demand
  3. Fan tastes and preferences
  4. Fan expectations about the future
  5. Price of other goods fans enjoy (prices of substitutes); price of a substitute rises, increased
  demand for the primary good
  6. Price of other goods that fans consume with the primary product (prices of complements); lower
  price for complements, increased demand for the primary good

Ex. of Substitute products: Going to a Braves Game instead of a GSU football game

Ex. of a Complimentary product: free parking to a GSU football game; $1 hot dog night at a game

On-Field vs Off-Field Decision Making

Sport Side: General Manager, Coach and Coaching Staff, Players, Analytics, Scouts, Medical, Trainers/Conditioners, Equipment, Logistics

Business Side: CFO/CEO, Marketing, Sales/Ticketing, Human Resources, Finance, Legal, Government, Community, Operations, Facilities

• Various possible combinations on-field/off-field and success/failure

-Profit w/o winning (on-field failure; off-field success)

-Nirvana (on and off field success)

-Zone of death (on and off field failure)

-Expensive glory (on-field success; off-field failure)

Club Variability- Finances

• Compound Annual Growth rate (CAGR)

- Investment’s annual growth rate over a period of time

• By sport

- Some sports are more financially viable than others

Ex: NFL football vs NHL hockey

• By league

- Leagues in the same sport can differ in revenue and valuation

Ex: European Premier Soccer leagues

• Within League

- Clubs differ within the same league

• Global differences

Leverageable Assets and Inherited Liabilities

• Country and Sport

- Economy size and strength

- Sport stature in country

Ex: Despite being popular in India, cricket remains relatively unknown in the United States

• League and its Infrastructure

- Revenue-generating capacity

- Economic/business model

• Ownership

- Capacity and willingness to invest

- Power base/relationship networks

• Management Strength

- Leadership abilities

- Domain experience

• City and Region

- Market size and Economy strength

- Competitive landscape

• Arena or Stadium-Context

- Revenue-generating capacity

- “State-of-the-art” status

- Sharing rules with city/county

Ex: Two stadiums in France show the variation in stadiums b/w Ligue 1(big) and Ligue 3 (small)

• Team On-Field Performance

- Current/recent success stature

- Heritage success stature

• Strength of Players and Coaches

- Current squad status and contract context

- Heritage player/coach status

• Branding and Sponsorship Strength

- Revenue-generating capacity

- Brand resilience to shocks

- Global aspects of the brand

• Fan Base Strength

- Size and Loyalty of the fan base

- National/regional mix of the fans

- Global reach of the fan base

• Media Contracts and Ownership

- Revenue-generating capacity

- Potential for regeneration

- Media ownership assets

• Real Estate Ownership

- Revenue-generating capacity

- Ability to “capture” new real estate assets

Alternative Ownership Models

• Private/Single Individual or Family Owner Model
  - Chelsea (EPL) – Roman Abramovich

• Private/Investment Syndicate Owners Model (most common in North America)
  - Boston Celtics (NBA)

• Public Traded Company/Multiple Owners Model
  - Manchester United (EPL) – listed on New York Stock Exchange

• Subsidiary of Publicly Traded Company Model
  - Tohoku Rakuten Golden Eagles (Nippon Professional Baseball) – Rakuten Owner

• Association/Co-Operative Model
  - FC Barcelona (La Liga)

Investment Syndicates

• Increasingly adopted in modern professional sports

- billion-dollar price tag on clubs

- wealthy investors seeking diversification

- immense media pressure

• An ownership group of 2 or more

Key Aspects

- Equity sharing

- Profit/loss sharing

- Risk sharing

- Decision rights

• Leagues typically require syndicate to appoint “single
  person” as representing the syndicate in case of
  voting/link to league headquarters

Juggling the Motives of Multiple Stakeholders

• Club vs. League view
  - Revenue sharing rules

• Club vs. Player view
  - Collective bargaining

• Club vs. Fan view
  - Period of on-field failure

• Club vs. City/Government view
  - Stadium construction financing

End of WEEK 2

Government Operated

• Businesses" that are funded and managed by Local/County/State/National governments or municipalities.

• Funded through government budgets (city, local, and/or state taxpayer dollars and
  government revenues.)

Examples:
• Parks and Recreation Departments
• High School Athletic Departments (public schools)
• Community Centers
• Public College Athletic Programs (many, but not all)
• Olympic Programs (also seen in Nonprofit structure)

Nonprofit Organization

• Nonprofits aim to provide programs for public benefit.

• Can accept donations, which are tax deductible for donors

• Primary sources of revenue for nonprofit firms are from membership and registration fees, broadcasting rights, and sponsorship sales.

• Sources and magnitude of these revenues are going to vary from organization to organization.

• Profits generated by a nonprofit are supposed to be re-invested into organization but are often paid out to executives in the forms of salary increases and bonuses.

• Any group of people can form a nonprofit organization, which is also known as a 501(c)(3).

Examples of nonprofit organizations in sport:
• New York Marathon
• Special Olympics
• Little League Baseball
• YMCA

Sole Proprietorship

• This is a structure characterized by having only one owner

- Most common business structure

• Advantages
- Easy to form, manage, maneuver, and sell
- Low startup costs, compared to other options
- Total control by single owner
- No shared profits
• Disadvantages

- Limited ability to raise capital
- Owner takes on all losses
- Unlimited personal liability against owner
- Owner must be multi-talented
- Limited long-term stability for employees
Examples:

Small fitness studio, local sporting goods store

General Partnership

• This structure is classified by an equal division of ownership
- Owners share in business operation and management.
- Shared profits and liabilities

• Advantages
- Revenues taxed only once (not at company and personal level)
- Flexibility (still a simple business structure relative to a corporation)
- Enhanced decision making? (more experience in decision making because more owners)
- Easy to form and sell
• Disadvantages
- Liability is significant (owners can be held personally liable for injury)
- Ability to raise capital is limited (compared to a corporation)
- Possible limited managerial capability (compared to corporation)
Examples:

Typically similar to what is seen in sole proprietorships

Limited Partnership

• Structure is the same as a general partnership
- Difference is that one owner acts as the decision maker and the rest of the owners provide only financial support

• Advantages
- Revenues taxed only once (not at company and personal level)
- Flexibility (still a simple business structure relative to a corporation)
- Enhanced decision making? (more experience in decision making because more owners)
- Easy to form and sell
• Disadvantages
- Liability is significant (owners can be held personally liable for injury)
- Ability to raise capital is limited (compared to a corporation)
- Possible limited managerial capability (compared to corporation)
Example:

You would see this structure when one owner has a greater “working knowledge” of the industry. A common example is a fitness club or a martial arts center

C Corporation

• This is commonly known as a” corporation” and it must comply with state laws based on the state in which it is headquartered.
• Corporations must develop and follow corporation bylaws.
• “Shareholders” are owners of the corporation and expect to see a return on investment through dividends.
• The Board of Directors (chosen by shareholders) determine policy of the corporation. These firms can issue stock.

• Advantages
- Liability protection for shareholders (difficult for shareholders to be held personally liable)
- Ownership interest easily transferrable
-Easier ability to hire talent (more resources relative to previous examples)
• Disadvantages
- Double taxation (must pay both corporation and personal taxes)
- Complex to legally form
- Corporation answers to shareholders (can slow decision making)
- More stringent government regulation for corporations relative to previous examples

S Corporation

• Structure very similar to a C Corporation.
- Can have up to 100 shareholders (individuals with ownership interest).
- Can own subsidiaries and tax-exempt organizations.
- Can issue stock (one type only).
- Has seen a reduction in popularity as a business structure (see disadvantages below).
• Advantages
• No double taxation for shareholders
• Ability to own other companies spreads out liability
• Disadvantages
• Must be based in United States
• Partnerships, corporations and international investors cannot invest in an S Corporation (so
limits potential sources of income)

Limited Liability Corporation (LLC)

• Rising in popularity, mainly due to simplicity of formation
- Formed based on state guidelines and can be owned by other corporations.
• Advantages
• Classified as a partnership for federal tax purposes, which reduces overall income tax
payments
• Similar liability protection as is seen in corporations (though ownership group can
vary in size)
• Disadvantages
• New in nature, so legal issues are determined by state laws, which vary (no national
regulation)
• Examples: Any conceivable type of sport-based business (the decision depends on which
business structure fits their business model).

Comparing Business Structures

• In general, sole proprietorships are the opposite of corporations.
• The weaknesses of sole proprietorships are the strengths of a corporation and vice versa.
• Partnerships are somewhat of a compromise, depending on the complexity of the
ownership group.
• One structure may be optimal for one firm, while another may be optimal for a different
firm.

Specifics of Sport Ownership Structure

• Four unique characteristics of sports ownership structure.
o Vertical Integration
o Media Ownership
o Beer/Concession Corporation Ownership
o Cross-Ownership

Vertical Integration

• This refers to owning every possible aspect of the business process, from start to finish.
o The most common example in sports are media companies who also own a pro sports
franchise.
o This allows for control of franchise, media production of that product, and sale of media
advertising against that product.
o Financially appealing because the firm does not need to negotiate (and pay transaction costs)
with outside entities to distribute its product to consumers.
 An example of this would be Fox Sports owning the Colorado Rockies.
• Other Major Common Examples of vertical integration:
o Major & Minor League Baseball teams owned by same group
o NFL starting and owning the NFL Network (now Disney); MLB & MLB Network; NHL & NHL
Network
o Big 10 Conference starting the Big 10 Network

Media Ownership

• There are numerous examples of media companies owning major league sports franchises over history because of the vertical integration advantages

Ex: CBS, Yankees; Walt Disney, Anaheim; Fox Sports, Colorado; etc

Beer/Concession Corporation Ownership

• There is also a history of beer and concession companies owning professional sports franchises due to the similarity in consumer bases between the firms.

Here are some examples:
• MLB
o Mike Illitch (Little Caesars Pizza), Detroit, 1993-
o Anheuser Busch, St Louis, 1953-1995
o Labatt Blue, Toronto, 1976-2000
• NHL
o Mike Illitch (Little Caesars Pizza), Detroit, 1982-
• Major Sponsorship/Naming Rights Deals
o Coors – Colorado Rockies
o Miller – Milwaukee Brewers
o Busch – St. Louis Cardinals

Cross Ownership

• This occurs when individuals or firms own multiple franchises in different leagues.

- For example, someone may purchase a NBA team and then years later also buy a NHL
franchise.
• Advantages
o Can acquire knowledge about running a team and use it to benefit your other
franchise(s)
o Less administrative payroll costs (if teams are located in the same location)
o Advertising – more cost effective, less overhead

Ex:

• During the 2004-05 NHL Lockout, 13 of the 30 NHL owners also owned a MLB or NBA franchise.
During this lockout, the NHL lost an entire season of play as the owners did not stage games as
they were attempting to bargain against the players union to reduce player salaries.
• So, what happened during the lost NHL season? There was increased attendance at other pro
sports events.
• What did this mean for these NHL owners? This means they cut out their biggest NHL cost (player salaries) and saw increased revenues through attendance for the other franchises they owned.
o Indirectly indicates that owners had enhanced bargaining power against the players.
o Given the short life span of players, the players had an incentive to get back to playing quickly
in order to earn a salary.

NFL

• NFL is the most restrictive North American (NA) League for cross-ownership.
• Prior to 1997, NFL majority owners could not also be a majority owner of another NA
major pro sports franchise.

- For example, you could not be the majority owner of
Buffalo Bills (NFL) and Detroit Pistons (NBA).
• League wanted NFL owners to concentrate on making their NFL franchise as profitable
as possible, which indirectly benefits all league owners. NFL owners got around this by
having family members or subsidiary firms listed as majority owner.
• Until 2018, a majority NFL owner can only be the majority owner of another NA major
professional franchise, as long as it is not located in an NFL city.
• Example: Paul Allen was the majority owner of both the Seattle Seahawks (NFL) and
the Portland Trailblazers (NBA).

• Currently allows cross ownership in other leagues
• Rothstein (2024)
• "Currently, NFL rules prohibit institutional ownership -- including sovereign wealth funds,
pension funds and private equity firms -- in teams and stipulate a team's primary owner must
have at least a 30% stake in the franchise unless granted an exemption. A franchise can take
on limited partners, but no more than 25, including the majority owner, are allowed to buy in. A
new buyer can take on up to $1.2 billion in debt to acquire a team (existing owners have a $700
million debt limit)"

Community (Public) Team Ownership

• Community ownership of sports franchises does exist...but it’s not common. There are only two examples in modern, major NA professional sports.
• Green Bay Packers
• Packers are currently the only major professional sports team that is “owned” by a city. There
are over 100,000 “stockholders”. No dividends are paid to shareholders. There is a limit on the
number of shares one can own. Shares must be sold back to the team (not on stock market).
• The NFL no longer allows public or community ownership of franchises. The GB Packers have
been “grandfathered” in.
• Boston Celtics (were “publicly” owned from the 1980’s to 2003)
• In the 1980’s, the Celtics sold “shares” of stock. When the team was sold in 2003, shareholders were forced to sell.
• Original Purchase Price: $10.60
• Final Sale Price: $27
• NBA no longer allows community or public ownership of franchises.

• Why do leagues (NFL, MLB, NBA, NHL) not want community ownership?
• Do leagues want teams to have the ability to move?
• Yes. Leagues do not want teams to move often, but they want franchises the ability to relocate to more profitable markets if the right opportunity presents itself. The threat of relocating also provides leverage to franchise owners to get public funding for a new venue
• Public balance sheets
• If a franchise is owned by a city or community, this means that the financial records of the franchise will be public record. Because franchises are profitable, this reduces the leverage the franchise owner has in negotiating with the city it operates in for a publicly funded venue.
• Team Value (Private vs. Community Ownership)
• Private owners are driven by profit. Community owned franchises are less likely to be driven by profit. There is revenue sharing in all of the NA major sports leagues
• League has a vested interest in having franchises that generate the highest levels of revenues and profits. This is more likely to be accomplished by having a private owner as opposed to a community owned team

Single-Entity Ownership

• Major NA pro sports franchises (NFL, NBA, MLB and NHL) have individual owners.
- MLS soccer has a different ownership structure. The league was originally organized as a
syndicate where the league owned all of the franchises. Investors buy into the league structure,
which means that the entire league and all of its teams are owned by a single group.
• Now that the league has developed, owners have the ability to purchase ownership stakes in
specific franchises.
• This ownership structure means that all decisions (at the league and individual team level) are
handled by the league as a whole. This creates a number of questions regarding competition and parity and what is the most beneficial for the league financially.
• What happens to competitive balance?
• Do you want all of the teams to be of equal quality?
• Do you want strong teams in the biggest markets?
• Do you want dynasties?

TAXES

• Taxes are vitally important from both the individual and firm perspective

Tax Burden by State

• The state with the highest tax burden is California, with a personal income tax of 9.3%
and sales tax of 7.3%.
• The state with the lowest tax burden is Wyoming, with a no income tax and sales tax
of 4%.
• There are 9 states with no income tax, including: Wyoming, Alaska, South Dakota,
Florida, Tennessee, Nevada, New Hampshire, Washington, and Texas.
• There are only 5 states with no sales tax, including: Oregon, Montana, Delaware, New
Hampshire, and Alaska.

The Importance of Taxes

• As we saw in the “Business and Ownership Structure” lecture, corporations and
partnerships have certain tax advantages.
o Losses can be used to offset gains in other businesses
o Losses can be claimed on personal income tax statements
• The bottom line is that there are tax implications for “being profitable” and “not being
profitable”

Tax Definitions

• Ordinary income (personal) - Income earned through wages, salary, tips, commissions, and
bonuses
• Ordinary income (business) - Income earned through the sale of goods and services
o Generally, this ordinary income or taxable income for a firm is equal to gross income (gross
profit)

o Gross profit = revenues – cost of goods sold (including production & sales costs)
• Ordinary income has both an average tax rate and a marginal tax rate

• Average tax rate = taxes paid/ordinary income
• Marginal tax rate = additional tax rate from each additional dollar of earned ordinary income over a specific threshold

Calculating Taxes Examples

• Joe’s Sporting Goods earned $60,000 in ordinary income in 2026. Determine the firm’s total taxes paid, average tax rate, and marginal tax rate, based on the following tax rate table

• Use the tax chart to find the ordinary income and apply the formula outlined on the right-hand side of the chart.
  • Total Taxes Paid = $7,500 + .25($60,000-$50,000)
  o TTP = $7,500 + .25($10,000)
  o TTP = $7,5000 + $2,500
  o TTP = $10,000
  • Average Tax Rate = Taxes Paid / Ordinary Income
  o ATR = $10,000 / $60,000
  o ATR = 0.166666666 = 16.67%
  • Marginal Tax Rate = 25.00%

Ex #2:

• Diana Taurasi earned $88,555 in ordinary income in a given year. Calculate her total taxes paid, average tax rate, and marginal tax rate, based on the following tax rate table

•Total Taxes Paid = $13,750 + .34($88,555-$75,000)
o TTP = $13,750 + .34($13,555)
o TTP = $13,750 + $4,608.70
o TTP = $18,358.70
• Average Tax Rate = Taxes Paid / Ordinary Income
o ATR = $18,358.70 / $88,555
o ATR = 0.2073 = 20.73%
• Marginal Tax Rate = 34.00%

Important items to remember about tax rates

• The marginal tax rate is more commonly used in financial decision making because you
are taxed at a higher rate as earned ordinary income increases.
• Firms/people try to find ways to reduce their “taxable income”
o You keep a smaller percentage as earnings increase

How do you account for income from interest and dividends?

• Businesses can earn income from interest payments received or from collecting on
dividends.
• Income from interest received is counted as ordinary income.
• Income from dividends (received by a corporation) are subject to 70% exclusion for tax
purposes and the remaining 30% is added to ordinary income and is taxable
o Variable percentage by year, marginal tax level, etc.

Income from Dividends Examples

• Assuming 70.00% of dividend income is tax exempt, and a flat tax rate of 40.00%, calculate the taxes paid on $145,000 of dividend income.
• Taxes Paid = (Dividend Income)(% taxed) flat tax rate
o TP = ($145,000)(1.0 - 0.7) (0.40)
o TP = ($145,000)(0.3) * (0.40)
o TP = $43,500 (0.40)
o TP = $17,400

*Dividend Income is always 30% or 0.3

Ex #2:

• Assuming 70.00% of dividend income is tax exempt, and an escalating tax scale (see below), calculate the taxes paid on $255,000 of dividend income.

• First, you need to find the taxable amount. It is not $255,000 because not all dividend income is taxed for a corporation.
• Find the taxable amount.
o Taxable amount = $255,000 (.30)
o Taxable amount = $76,500
• Next, find the tax bracket for the taxable amount calculated above ($76,500).
o Taxes Paid = $13,750 + .34($76,500-$75,000)
o TP = $13,750 + .34($1,500)
o TP = $13,750 + $510
o TP = $14,260

Income from Interest Example

• The Atlanta Hawks receive $100,000 of ordinary income and $100,000 from interest income as a part of a sponsorship deal. Calculate their taxes paid and profit after taxes if there is a flat 40.00% tax rate.
• Remember that interest income is counted the same as ordinary income.
• Taxes Paid = (Ordinary Income + Interest Income)(flat tax rate)
o TP = ($100,000 + $100,000)(0.40)
o TP = ($200,000)(0.40)
o TP = $80,000
• Profit After Taxes = Ordinary Income – Taxes Paid
o PAT = $200,000 - $80,000
o PAT = $120,000

Taxes with Interest Income in and Interest Payments out

• Corporations can use interest payments out (example – interest payments on a stadium bond) to reduce their taxable income.
• This is a substantial tax advantage and a way for a corporation to reduce their taxable income.

Ex:

• The Atlanta Falcons earn $120,000 in ordinary income, $120,000 in interest income, but also make a $50,000 interest payment out. Assuming a flat tax rate of 40.00%, calculate their taxes paid and profit after taxes.
• Taxes Paid = (Ordinary Income + Interest Income – Interest Payment Out) (flat tax rate)
o TP = ($120,000 + $120,000 - $50,000) (0.40)
o TP = ($190,000)(0.40)
o TP = $76,000
• Profit After Taxes = Ordinary Income – Taxes Paid
o PAT = $190,000 - $76,000
o PAT = $114,000

Jock Tax

• An income tax levied against athletes to a city or state who earn money (a portion of their salary) in that jurisdiction
• Example:
• If a professional baseball player has 225 duty days from spring training until the conclusion of
the season and 25 of those days are spent playing games in California, he will receive a tax bill
based on 11% (25/225) of his yearly salary earned in that state

Tax Exempt Status for Universities

• Colleges and universities enjoy partial tax-exempt status
• For some of their income, taxes are not paid
• Previously, donors could write off donations to the school and the athletic department, but this
was changed by tax law in 2017
• When athletic donations were tax deductible, it was common for schools to require season
ticket holders to make a sizable donation, especially if fans wanted to purchase the best seats.
Essentially, athletic departments gained more revenue since they had a mechanism to allow
fans this tax deduction
• While some might argue university donations are good for society and should be tax
deductible, it was not clear that it should have been seen as a donation
• Gray area of altruistic giving and simply purchasing a product. New tax law will presumably
change the way college athletic tickets are sold and revenues will decrease.
• Colleges and universities also receive revenue from commercial activities outside of sports,
and those may be subject to federal and state taxes

END OF WEEK 3/4

Venue Financing

• Sports venues are constructed through three types of funding
o Full private financing
o Full public financing
o Combination of private and public financing

• Private financing is when team ownership contributes to the construction of the venue.

• Public financing is when the local city/county/state government contributes to the
construction of the venue.

How is public funding awarded?

• Public financing (funds) are awarded in two ways:
o Politicians have the ability to simply legislate a public stadium subsidy for a franchise
o The potential for the award of the public subsidy can be placed up for a public vote

*• The majority of public stadium subsides have come from politician legislation with no
public vote (Kellison & Mondello, 2014).

• Since 2000 (Sport and Urban Policy Initiative, 2017):
o 50 publicly funded projects awarded using legislation
o 15 stadium subsidy projects brought to a public vote

Public vs Private Financing

• Public Versus Private Financing
o What is unique about sports venue construction?
o Team owners are being subsidized by local governments (indirectly through
taxpayers/consumers) by having their venues paid through public (taxpayer)
contributions.

• Why does this happen?
o Local governments feel pressure to keep the franchise in their local market
o Fans do not want their local team to move
o Politicians do not want to be “the one in office” when the team decides to relocate

• Why does the franchise owner have the advantage?
o Open markets that are a viable and “real” relocation threat exist. In other words, a franchise owner can say “if you don’t help me pay for a new venue, I will move to city X.”
o Think of the viable open markets in NFL, MLB, NHL and NBA
▪ NBA: Tampa, St. Louis, Cincinnati, San Diego, Kansas City, etc.
▪ MLB: Portland, Charlotte, Orlando, etc.
▪ NFL: Toronto, London, Mexico City, Portland, etc.
▪ NHL: Seattle, Atlanta, San Diego, Charlotte, Portland, etc.
o There are many good open markets across each league.
o Over history, owners have threatened to leave to move to these open markets, unless their
current city helps build a new venue for them.

How does public financing work?

• Public can contribute through:
o Higher property taxes
o Higher standard sales taxes
o Additional new taxes on specific items (these taxes already exist, the tax rate just increases)
▪ Rental car tax
▪ Alcohol tax
▪ Tobacco tax
▪ Gaming tax
o Diversion of taxes from the general fund to the stadium construction fund
▪ City/state simply takes funds from the reserve to help pay for a new venue

Who is really paying for stadium construction?

• If the venue is privately funded, then the brunt of the stadium costs are paid by fans. Why?
o Owner raises prices to purchase everything in a new venue. Fans pay these higher prices.
Also, there is a “honeymoon” period in new venues where attendance rises for the first few
seasons. It then returns to normal levels.

• What is not paid for by the fans is paid for by the owner. Why?
o This is unlikely, but the owner would have to cover any venue costs that are not made up by
the higher priced and additional sales associated with the new venue.

• If the venue is publicly financed, then taxpayers in the taxed municipalities bear the brunt of the costs.
o This is clear. The original financing comes from public money. The owner, however, still raises
the price of all attendance related items, so fans still pay in this manner as well.

Why public financing occurs?

• Politicians make the case for four positive externalities that occur when a local government kicks in public financing. Positive externalities are scenarios that improve life or another person’s welfare.
• These four positive externalities may or may not actually occur, but politicians sell these ideas to citizens to get them on board with supporting public funding of a venue.

Creation of Social Capital

• This is the idea that sports can help in connecting with people unlike ourselves to partake in
community wide celebrations.
o Creates a sense of unity in a
community
o Builds bridges across socio-
economic boundaries
o Creation of social capital holds
cities and societies together

Ex: reciprocity, participation, citizen power/proactivity, values/norms, diversity, sense of belonging, networks (bonding/bridging), feelings of trust and safety

Relocate Economic Activity

• The trend of sports venue construction in the 1970s and 1980s was to build in the suburbs with easy interstate access. Along with a move of people out of the cities and into the suburbs, this has weakened the tax bases of many major cities.
• The idea is that constructing a venue downtown has the ability to generate economic activity and increase the tax base (if consumers move back or spend money within city limits).
o *Major issue for cities such as Baltimore, Cincinnati, Detroit, Milwaukee, Pittsburgh, Buffalo and St. Louis which have seen a substantial percentage of residents move out of the city and into the suburbs

Define the Identity of the City/Region

• The idea is that a new venue has the ability to create an identity/image/figure of speech that is well-understood across the country.
o i.e. - Fenway Park, Yankee Stadium, Wrigley Field
• The city of Indianapolis attempted to do this with Conseco Fieldhouse & Lucas Oil Stadium (and model the look of these two new venues after historic HS basketball arenas, which are well-rooted in the history of the state of Indiana)
o Is this easy to accomplish? No.
o The idea is that the venue design (along with team performance) has the ability to change the
brand/image of a city
• Likewise, the politicians claim a new venue will help the team and that a team’s performance has the ability to change the city’s image nationally and make residents proud to live in the area.
o Think of Green Bay as a major league city
o Again, is this easy to accomplish? No.

Economic Development

• The idea is that the presence of a well-educated workforce and “idea-generators” that help create business, products and processes is vital to economic development....and this is associated with having entertainment to attract these types of thinkers to an area.
o Politicians claim that the presence of a “major league” city can be viewed as a positive to young, well-educated people and this could indirectly spark economic development. Do you believe this? Is this easy to accomplish?

• It is true that firms move to areas where these highly skilled people exist in the labor force. But how much does this have to do with the presence of major league sports?

“Public” Taxes help pay for Venues

• Ticket tax – this is a tax added to the cost of the ticket. This is also known as an amusement tax.
o Added as a percentage (+5%) or as a fixed fee (+$7.50) to the ticket price
o Tax only impacts “users” of the facility. Why? Only people who attend the game pay the tax.
o Net result = fans pay higher ticket prices, team receives less ticket revenue, and fewer fans attend games (but depends on consumer willingness to pay).
o Why does the team receive less ticket revenue? This is because the team does not lower the face value price of the ticket. Therefore, the tax raises the overall price of the ticket to the consumer, which means less people attend, all else equal (law of demand).

• Parking tax – usually occurs at parking lots and structures by the venue and during an event held at the venue
o Structure similar to the ticket tax (% or flat fee)
o Tax only impacts “users” of the facility
o Can this impact team revenues? Yes, if the team owns the parking lots and less people pay to park in the lots.

• In-Facility Sales Tax – an additional tax on all transactions within the facility
o Usually a percentage of purchase price
o Tax only impacts “users” of the facility
o If fans avoid “in-facility” purchases, this hurts team revenues

• Sales Taxes – a small increase in the general sales tax for all retail sales that goes towards venue construction
o Example – 6% sales tax increased to 6.5%
o Tax impacts all that purchase in the given city, so it impacts both users and nonusers of the facility
o Why does this work even though non-users pay? The small increase usually has little political opposition.
o Even a small % increase generates a large amount of $ and the impact on the individual taxpayer is very small.
• Property taxes – very small increase in the rate at which real estate is taxed
o Tax on the “assessed value” of a property for property owners
o Generates a significant amount of revenue, which is dependent on the number of property owners in the geographical area taxed.
o Opponents of this tax increase are those on fixed-incomes and those who believe increased property taxes should support education/other public services

• Income tax – a small increase on household income
o Example – a 0.5% increase on those households making between $100K and $150K per year. So the tax rate may increase from 24% to 24.5%.
o A small increase generates substantial revenue which again depends on the number of households impacted by the tax increase
• Sports district tax – taxes generated in a specific area around the proposed venue are used to help fund the venue construction
o The city will map out a geographical area around the existing or newly proposed venue and any purchases in that area are subject to the new tax. This revenue is then used to help fund the venue
• Sin tax – tax on the purchase of alcohol or tobacco
o Affects only users of these products
o *Considered “voluntary” tax. Why? Because you do not have to buy alcohol or tobacco.
o Does this tax impact users of the facility? It depends.

• Gaming tax and lottery tax – a tax on gambling winnings or lottery ticket purchases
o Lottery proceeds for a period of time can go towards venue funding
o *Opponents of this tax are those who wish to continue to have tax revenues from these two sources go to their normal location (this is a tax that supports education in most states).
• Tourist tax – an additional tax on hotel rooms or rental cars
o Lower level of voter opposition because tax largely falls on visitors
o If the taxes are too high, it could shift tourism patterns and reduce economic activity in an area.
• Food and Beverage tax – an additional tax on food and beverages sold at restaurants and pubs within a given geographical area.
o The city can select any geographical area in its jurisdiction to apply this tax for a set period of time.
o Considered a “voluntary” tax as you are not forced to buy food and beverage from restaurants and pubs

Tax Revenue Generation Examples

• Assume voters in the city of Minneapolis approve an increase in the city’s hotel tax to help construct a new stadium for the Minnesota Vikings. The tax will be in place from 1/1/2019 to 12/31/2019. The city hotel tax will increase from 14.00% to 14.75%. If $337.50M is considered taxable hotel sales during the time period...

• How much tax revenue is generated in total?
o (taxable amount)(tax rate) = total tax revenue
o ($337,500,000)(0.1475) = $49,781,250

• How much tax revenue will go toward stadium construction?
o (taxable amount)(% of tax rate which goes towards venue construction) = stadium contribution
o ($337,500,000)(0.0075) = $2,531,250

• How much tax revenue is kept by the city?
o total tax revenue – stadium contribution = amount city keeps
o $49,781,250 - $2,531,250 = $47,250,000

Tax Revenue Generated Example

• Assume the city of San Diego owns the parking lots around the San Diego Chargers existing stadium. The city of San Diego has agreed to publicly fund a portion of a new venue for the Chargers through a new parking tax on these lots. The city and team are trying to determine whether to add a $5.00 flat tax surcharge per parking space or a 22.00% surcharge per space. They estimate that 655,000 parking spots will be sold using the flat surcharge option
and 705,000 parking spots will be sold using the % increase option. All parking spaces cost $20.00.
• How much tax revenue is generated using the flat surcharge option?
o (# of spots sold)(flat tax per spot) = tax revenue
o (655,000)($5) = $3,275,000

• How much tax revenue is generated using the % increase option?
o [($ per spot)(% tax per spot)] (# of spots sold) = tax revenue
o [($20.00)(0.22)] (705,000)
o ($4.40)(705,000) = $3,102,000

• Which option is the best choice for the Chargers?
o The flat tax option is better for the Chargers because $3,275,000 > $3,102,000

Tax Revenue Generated Example

• The city of Sacramento has agreed to fund a portion of a new venue to keep the Kings in town. The city is considering implementing either a food and beverage tax in the stadium district area or a sin tax applied to all tobacco sales in the city. Both plans would last three years. The city plans a 1.25% tax increase for food and beverage and estimates $925,000,000 per year in taxable sales. Alternatively, the city plans a 1.15% tax increase on tobacco sales and estimates $995,000,000 per year in taxable sales.
• Calculate the tax revenue for stadium construction generated under each option
o Food and beverage option
▪ (taxable sales)(% tax increase)(# of years) = total tax revenue
▪ ($925,000,000)(0.0125)(3) = $34,687,500

o Sin tax option
▪ (taxable sales)(% tax increase)(# of years) = total tax revenue
▪ ($995,000,000)(0.0115)(3) = $34,327,500

• Which option generates more tax revenue for the Kings?
o The food and beverage option is better for the Kings because $34,687,500 > $34,327,500

END OF WEEK 5

Origins of College Sports

• Harvard University and Yale University Regatta (1852)
• Harvard prevailed in a 2-mile (3.2 km) race proposed by executives from the
Boston, Concord, and Montreal Railroad as a way of boosting tourism and
travel
• First intercollegiate athletic competition

• Latter half of the 1800s
• College sport events were essentially run by students, sometimes as social occasions, other times as highly competitive contests
• By the early part of the 1900s
• Shift toward professional coaches, overspecialization, and an emphasis on winning against rivals was well underway (Smith, 1994)
• White House Conference on Football (1905)
• Prompted by deaths and charges of brutality in college football and hosted by President Theodore Roosevelt
• Purpose was to encourage representatives to carry out both the letter and the spirit of the football rules or risk the sport being banished
• Helped lead to Intercollegiate Athletic Association of the United States (IAAUS), which became
known as the NCAA in 1910

Governing Body Level- NCAA

• Governing body of intercollegiate athletics
- Outlines rules for everything from practices to DVD players, text
messages to dinner parties
• Non-profit organization
- Most revenue from media contracts, sponsorships and event
attendance
- Revenue distributed to members

NCAA Conferences

• 100+ conferences within the NCAA
• Run by a Commissioner who is hired by member Presidents and works primarily with Athletic Directors
• Historically, schools with similar minded outlook form a conference
• Similarities in budgets, enrollment, geography, etc.

NCAA Colleges

• Head executive at this level is the Athletic Director, who often reports to the senior executive of the college
- Responsible for all decisions within university athletics department
• Includes business-side and playing-side employees
• Includes both student-athletes and students with non-athlete roles
Ex: radio broadcasting, ticket sales, etc.

Other National Governing Bodies

• National Association of Intercollegiate Athletics (NAIA)
• Established in 1940
• At its most powerful in the early 1970s, the NAIA had a membership of 588 institutions and was considered a realistic competitor of the NCAA.
• The relationship today, however, is markedly different; membership is less than half
of what it was four decades ago (about 250 institutions)

• National Christian College Athletic Association (NCCAA)
• Focuses on “the maintenance, enhancement, and promotion of intercollegiate
athletic competition with a Christian perspective”
• Serves 96 Christian liberal arts institutions and Bible colleges
• Provides dual affiliation in selected college sport governing bodies including NCAA
Divisions II/III and the NAIA

• National Junior College Athletic Association (NJCAA)
• NCAA rejected a petition from 13 two-year colleges in California to grant their teams and
athletes permission to compete at the NCAA Track & Field Championships
• NJCAA First Constitution (1938)
• Accepted by its charter members and the organization held its first national championship
event a year later in May 1939.

NCAA Finances

• NCAA financial model (1952-1984)
• Revenue sources: membership dues, ticket, and marketing revenue from sponsored championships, and broadcast rights for college football
• Initial fears among members that television would undermine the sport’s popularity
resulted in a conservative approach to the negotiation of broadcast rights.
• NCAA limited the access teams had to national broadcasts but relented somewhat by
allowing schools to explore regional broadcasting deals

• NCAA v. Board of Regents (1984)
• Compromise brokered within the NCAA regarding football was challenged by the
University of Georgia and the University of Oklahoma
• Schools successfully argued before the U.S. Supreme Court that the NCAA’s exclusive
control of college football broadcast rights violated the Sherman Antitrust Act.
• Outcomes
• NCAA no longer controlled the television rights for what was then called the College
Football Association (CFA)
• Revenue no longer shared with the NCAA and was retained instead in conferences and
by schools
• Television rights for college basketball became the center of the revenue model for the
NCAA

Firm/Operational Structure: Pro Sports Versus FBS Athletic Departments

• Professional Sports Franchises
o Organized as for-profit firms
o Privately owned or are subsidiaries of publicly traded companies
o Regulation in place (league level) to reduce costs and promote profitability
o Objective function: maximize profit (money left after expenses are paid)
• NCAA FBS Athletic Departments
o Always part of a state or private university (not-for-profit)
o Operated as one unit within a larger organization
o Regulation in place (NCAA level) to restrict costs
o Objective function: maximize revenues (money brought in)

• Given that the objective functions are different, should we expect the financial outcomes of these two types of “firms” to be the same? No.

Current State of NCAA FBS Athletic Department Finances

• The common perception is that NCAA FBS athletic departments spend wastefully and are trapped in an expenditure arms race.
• “This formal governance shift is troubling to some who believe it will hasten the arms race of
extravagant expenditures...The arms race of expenditures represents a win-at-all costs
phenomenon wherein athletic administrators outspend one another...The arms race has been
pursued at all levels of intercollegiate athletics but some of the most detrimental effects of the
spending are most clearly evident at the Division I Power Five level...” - Weight, Navarro, Huffman

• Revenues are substantial and rising over time
• ~50 FBS programs generate over $100M per year (2023-24)
• Top of list dominated by SEC and Big 10
• Revenues are lower than NFL team revenues
• Top programs have comparable revenues to bottom half of NBA teams

• Average total revenues are approximately equal to average total expenses
• Largest reported expenses are generally in line with largest reported revenues
• *This data is consistent with firms operating in a not-for-profit environment
• Fort (2016, Journal of Amateur Sport)