Why College Football Players Should Not Get Paid and America’s One Percent Problem

Recent scandals in college athletics have once again focused attention on the misguided premise that amateur student athletes should get paid more than their present compensation, compensation often worth more than six figures annually.  Many believe this because Americans have, and have always had, a one percent problem, a premise that will be explained more fully below.  While it is popular in these times to saber-rattle and adopt the populist soap-box position that college athletes should get paid, this piece attempts to convince the reader that such a proposition makes little sense, at least if one focuses on the college system as a whole.

Back in the nineteen-eighties, shows detailing the largess of celebrities such as Lifestyles of the Rich and Famous drew large audiences.  In the early 2000’s, MTV introduced Cribs, which featured the often grotesque largess of celebrities palacious mansions, sprawling and cavernous edifices that featured amenities commensurate with the country’s most elite and exclusive vacation resorts.  And today, scores of Americans watch the antics of shallow social dilettante ne’er do wells packaged as the “real” house of wives of Anywhere, U.S.A. (still waiting for the episode where a mother of four returns home from her second job to cook dinner for her family of five.  Now that shit is real!).  Such shows persist because we are a capitalistic society built on the foundation of a premise that we too may join the ranks of the elite one day when our proverbial ship comes in (better known as the “American Dream,” last seen alive and kicking before we put an actor in the White House, but I digress).  As this mentality permeates our culture, it should be no surprise that sports’ fans apply this same concept to the issue of amateur sports, then wrongfully conclude that college students who play a game in exchange for a cost-free education should thusly be compensated for it in the form of some sort of salary.

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So how exactly does this 1% problem impact the issue of remuneration for college athletes you ask?  Inevitably, when the discussion of paying athletes is addressed, it centers around the elite college player that either could play professional football right out of high school or one that could command several hundreds of thousands of dollars on the open market in the form of endorsement deals from sports apparrel companies that most assume operate in the fringes of the black market now anyway (referred to by many not so affectionately as “bag men”).  So for instance, when it was rumored that Cam Newton’s father took in excess of six figures through his church for his son to matriculate at Auburn University, right around the time he suddenly flipped his commitment from Mississippi State, some  gravitated to chat boards to suggest that, even if true, such an action was justified given the gross financial inequity that has at times overshadowed the games themselves.  The thing is, though, and irrespective of whether the player some have dubbed as $cam Newton got paid, it ignores the reality that players of his ability and marketing appeal are the gross exception rather than the rule, members of the 1 % referenced above that are clearly outliers in the sport.

Many believe that boosters funneled money through Cam Newton’s father’s church to convince him to switch from Mississippi State to Auburn.

We know this because of simple math.  Just looking at FBS Division One players in college, the highest level of college football*, the ranks from which the majority of future NFL players will be drafted from, there are 130 teams that typically feature roughly 110 players per team, for a total of 14,300 players, give or take.  In 2011, for example, 254 total players were drafted in the NFL, meaning that, based just on numbers alone, a FBS player has approximately a 1.7% chance of being drafted each year.  Stated succinctly, one’s chances of going from freshman football sensation to paid professional is not much better than success on typical state lottery scratcher tickets.  What this means, then, is that the vast majority of players that play college sports are really doing it for a “free” education, even if they don’t realize it at the time.  The question then becomes, why would you design a system to pay players when in reality barely more than 1% are athletes that would command a salary on the open market if such market regulations were not in effect?  This is why I often say that those that advocate for paying the players are those in the population that are mathematically challenged–one would never design a system to benefit approximately one in a hundred of its participants.  While some may wryly smile at the concept of a “student-athlete,” data suggests that that is exactly what the vast majority of collegiate athletes are.  Most kids are indeed trading their athletic talents and efforts for a subsidized education which will at some point earn them a higher salary on the open market.

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There is no question that college football is just printing money.  It is estimated that the NCAA makes approximately $12 billion dollars annually.  That’s billions with a “b.”  According to this article, 24 college programs had revenue (before expenses) of $100 million dollars or more in 2016-17.  Texas A&M lead the way with total revenue of approximately $192 million with the University of Texas just behind at about $182 million.  The playoff games alone generate almost $600 million dollars, which is staggering when you consider that you are basically talking about only 3 football games.  Texas A&M felt so flush with cash that they offered Jimbo Fisher the richest head coaching contract in the history of the sport, at least in terms of total dollars: 10 years totaling $75 million.  To state it succinctly, college football isn’t in danger of going broke  any time soon.  Those making the argument that players should be paid a share of this money are doing so in large part as a reaction to these staggering figures.  But even if these figures told the whole story (and revenue numbers above do not account for expenses or long term debt, addressed in more detail below), the argument that athletes should get paid a salary fails to consider the basic economic principle of supply and demand that guides actors in a free market place.  Though I will spend most of this piece objecting to the comparison of the student-athlete to a worker in a market place, to make a point, I will do so here.

In a free market place, the compensation that one is paid will be a reflection in part on the number of workers willing to take a job at a given wage.  If a worker is offered wage X for a week’s work and the employer is unable to fill positions, the rational economic actor will be forced to raise wages to attract employees, maybe doubling the salary to 2X.  Raising the salary to the appropriate level will stimulate demand in the position from workers so that there is neither a glut of applicants interested in the position or too many willing to take the job.  This is a pretty simplistic analysis of the law of supply and demand.

What does this have to do with college football players you ask?  It’s very simple.  The offer made by schools is a scholarship that covers tuition, room and board, plus other perks to include food, health care, practice facilities, access to elite coaching, a strength and conditioning coach, tutoring services, promotion on television for f up to four years, to name but a few of the benefits typically extended to the college athlete.  If athletes found this offer unacceptable, we would expect to see schools unable to fill their rosters, forcing the schools to increase their offer.

Instead, what we see is maximum competition for the limited scholarship slots that the schools have (85 total), where top programs often have multiple kids waiting to accept an offer (and I can’t remember the last article I read about the lesser D-1 schools unable to fill their rosters).  In fact, and while many might not know this, college programs are permitted to have a total roster of 125 players, with most settling around the 110 mark.  Since schools can only offer 85 scholarships at the FBS level, the balance of players are made up by “walk-ons,” which is a term that refers to players who are willing to play college football without a scholarship.  Thus, the demand to play college football far exceeds the supply.  It is worth noting that supply and demand only works in a market place where the consumer has a choice, the objection often lodged by “pay the players guy.”  But the player does indeed have a choice, and remember, the player that we are focusing on here is the elite player since he is the one purportedly foregoing a salary to play college football.  While players out of high school are not eligible to play in the NFL for three years (something that draws no empathy for a guy that needed to complete three years of law school before he could begin capitalizing on his education), a regulation that functions to artificially increase the supply of college players, the Canadian Football league, the Arena Football League, indoor football leagues, and soon a new developmental league known as the Pacific Pro Football League, have no such barriers for kids just out of high school.  This author surmises the reason more of these blue chip kids don’t go these routes and immediately begin earning income is that the 3-4 year investment playing college football maximizes their future earning potential, just as college does on average for students in other disciplines.

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As you can see from my short biography at the about page, I started law school in 1997, having dabbled in the market place for almost seven years at various “professions” until I grew tired of being under-compensated.  For those that have done it, going back to school later in life is a culture shock when one has already grown accustomed to having regular income, no matter how meager that income may have been.  What was about to happen, though, was not just a pay cut, but a reduction of my salary to zero, because, not only was I no longer gainfully employed full time while I pursued the study of law, I would soon learn that I would be prohibited from having any kind of job at all my first year in law school, with the threat of potential expulsion should I violate such a rule.  All of this is to say, this author remembers vividly the challenges of pursuing a degree while trying to live off of couch cushion money and gourmet Ramen Noodle recipes.  I can only imagine how difficult this might be if, in addition to my studies, I had what amounted to another full time job practicing a grueling sport.  But fans that make the argument that college football players should get paid a salary ignore a very basic reality regarding the purposes of institutions of higher learning–college students matriculate for the purpose of obtaining a skill that will one day compensate them at a higher rate than would otherwise be the case without that fancy piece of paper–at least that is the theory anyway.

I also suspect that most will know what I am about to write but may still be a bit shocked as to the extent that the following is true–the Federal government ear-marks many billions of dollars for research grants for our institutions of higher learning.  In 2015, for example, American Universities spent $68.8 billion dollars on Research and Development grants (“R&D” hereafter), with John Hopkins University leading the way in receiving approximately $2 billion dollars from the Federal Government.  Of the 1,871 schools that spend money on R&D, 10 universities were identified as having spent a billion dollars or more, with the Federal government covering more than 50% for 7 of the 10 schools on that list.  Here is a list of the 40 colleges that spend the most on R&D should you be curious.

Why am I mentioning this here you ask?  Well, because most of these R&D labs are staffed at least partially by students who are either paid nothing thanks to the wonderful concept of internships or next to nothing (though hardly scientific, here is one unsubstantiated discussion from students that suggest they aren’t paid during the year but can earn anywhere from $8 to $14 an hour in the summer.  It is worth noting the posts are from 2006).  Indeed, online research bears this out–for those students lucky enough to get one of these positions, it almost certainly will be in the form of work exchanged for class credits, and nothing more (here is one representative offer from The Ohio State University in a lab describing rodent fossils from Montana which states under compensation, “student can work for academic credit or voluntary experience”).  And these students typically are NOT receiving a scholarship in exchange for work completed as interns, meaning that they are often truly doing it only for the sake of the experience itself or school credit that could be obtained by taking another class.  Likewise, I remember my introduction to being a research assistant for a university professor–in exchange for my tireless research hours, I received credits and a few lines on my resume while my professor used said work in publications that were a core requirement of his then six-figure salary-publish or perish as they say in university circles.

What “pay the athlete guy” ignores is that colleges have often traded on the cheap labor of their students in exchange for an education that will compensate them in the future at a higher rate than that which exists in the population as a whole.  As you can see, the value of R&D dwarfs the profits of many FBS college football programs, and yet, the blood, sweat and tears of the unpaid interns goes largely unnoticed by the population as as whole.  The only reason that people are up in arms over the “plight” of the college athlete is because the games are on television, and anytime anything is put on the idiot box in this country people lose their damn minds (I must admit, I too would not watch a show featuring some really smart science guy or gal doing clinical trials either).  Our football obsession aside, there is no logical basis for treating football players any differently.

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As John. D. Rockefeller Jr, once explained, the rationale for low-cost or free education in this country was premised on the fact that it was expected that college graduates would one day seek employment in the ministry or other low paying position that were equally beneficial to society as a whole.  As such, the government funded partially or fully the cost of a college education with the rest paid for by endowments from wealthy patrons that donated for the good of public society.  But this concept changed in the early 20th century as the focus of college shifted from the notion of the public good to preparation for a future high earning job that benefited the graduate, and with this, a sense that the student should bear the cost of a college education.  As such, the cost to the individual of college education has grown exponentially as we have entered the 21st century, with costs often rivaling that of a modest home in many American cities.

In 1931, the cost of tuition and room and board at Vassar was a whopping $1200 for out-of-state students and $500 for in-state students.  Fast forward to present times, the average cost for a year of college in 2016 at a four year institution ranged from $9,410 for public institutions to $32,410 for private institutions.  By way of comparison, that same Vassar eduction cost $52, 320 a year in 2016, meaning that a four year degree will exceed more than $200,000 in total, borne in many instances almost completely by the individual if he or she does not qualify for a scholarship or a government grant.

And the rising cost of tuition to now be absorbed fully by the student in most cases is only part of the story.  Since most students can’t afford the cost of tuition up front, most borrow money to finance their education.  In 2016, the average student loan debt was $37, 172.  As a for instance, let’s say you have a Stafford student loan with a 6.8% interest rate.  If you pay just under $300 a month, you will pay about $30,927 just in interest alone, meaning that you will eventually pay 50% more in interest on top of the original principle amount (for my mathematically challenged 1%, that means paying back double your original loan amount).  Many students are still paying off student loans well into their fifties.  Some are forced to delay starting families and buying a home, and worse, of the $1.2 trillion dollars of student loan debt (calculated as of 2015), some $500 billion dollars sits in limbo as the borrows either can’t pay it back because they are unemployed or grossly under-employed (if you are bored, Google student loan horror stories).

From 1980 to 2015, tuition at public schools has increased almost four fold while it has increased approximately 2 1/2 times at private universities.

While we can debate whether the cost of an education is fair compensation for the student-athlete, especially in football where the risk of injury is significant, it is disingenuous to suggest that college athletes that earn a scholarship aren’t being given something of real value in return.  What is often lost in the calculus, again because of our 1% obsession, is that FBS schools extend 85 full tuition scholarships to their athletes.  Again, looking at the numbers, this means that the full cost of education is covered for the approximate 98.3% of the athletes that do not have the requisite talent level to capitalize off of their athletic skill set on the open market.   So, for an out-of-state Stanford student athlete that will never go pro in the NFL, the school covers approximately $249,452 in educational fees before one dime of interest is added to the equation.  Should that Stanford grad struggle to gain employment, he or she won’t have the stress of making life decisions such as being forced to take a high paying job they don’t want, or delaying other life goals such as starting a family or buying a home.  Simply put, and especially for those that do not have the talent to play professionally, the cost of tuition is a real benefit for the next 25 plus years after the student leaves college, something that millions of Americans who aren’t similarly situated understand all too well.

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But the cost of tuition, room and board, and books is not all that is provided to the college student athlete.  Colleges are spending record amounts on facilities, trainers, and coaches, which means the athletes are given free access to state of the art commodities that can be used to elevate talented but raw athletes into professionals.  From one article in 2014 that looked at the spending of the then 48 Power 5 FBS conference teams, those schools spent a combined $772 million on athletic facilities, an 89% increase from 2004.  On April 19, 2013, the University of Tennessee dedicated a new $45 million dollar training center which included: a 145,000 square foot home for the football team; a two-story weight room; a hydrotherapy room; an amphitheater-style meeting room; and a public entrance featuring a water-fall.  One Forbes article suggested that football and basketball players typically pay between $2,000 and $3,000 per week for similar training in the weeks leading up to their pre-draft workouts.  Multiply the costs of this weekly over four years, and the total cost is staggering.  In short, college athletes are getting first rate facilities and nutritionists that rival professional teams, costs that are included as part of their four year scholarship.  From that same Forbes article, it was estimated that the value of the full scholarship, room and board, plus coaching and training ranged from between $50,000 to $125,000 per year, depending on the sport and whether the school was public or private.  To put that in perspective, a salary of $127,694 dollars would put a wage earner just outside of the top ten-percent of household incomes in the United States in 2013.

And costs for new state of the art facilities isn’t all that has risen in college football in recent years, as coaches salaries continue to go through the roof.  Nick Saban leads all coaches with a salary of $11.1 million.  The SEC has 10 coaches that make $3 million dollars or more.  But it isn’t just in the south; the B1G Ten has 3 coaches that rank in the top 12, while the ACC’s top coach, William Swinney, is just a few coins under $9 million.  Just in 2016, Jim Harbaugh, the coach at the University of Michigan, was the highest paid coach.  That didn’t last long, as Nick Saban passed him, then Texas A&M offered Jimbo Fisher a 10 year $75 million dollar deal to lure him away from Florida State; while not the highest per annum, that contract represents the largest in NCAA history in total dollars.

While the average value of NFL coaches salaries still remains higher, some of the top coaches in college football have salaries that match or exceed their NFL counterparts.  All of this means that some of the best in the business are remaining in college when kids are putting the polish on their games before heading to the NFL.  For instance, when Jim Harbaugh left San Francisco, many assumed he would end up with either the Raiders or the Jets who were in the market for a coach at the time.  Instead, Michigan ponied up some serious dough to lure him to Ann Arbor.  And it isn’t just the head coaches salaries that are rising, but so are the salaries of the assistants and staff members, as demonstrated by this piece which detail 15 assistant coaches with salaries that exceed seven figures.  All of this is to say that the level of coaching has increased dramatically at the college level, and while cartoons like the one above at the right take umbrage with coaches’ salaries relative to the value of scholarships, the players also benefit from this tutelage as a cost-free perk of playing college football.

Calculating the cost of facilities and coaching salaries is the easy part of the equation.  College programs that have been around since the nineteenth century have established brands that predate the players arrival at the school, and broadcast rights for the games give the player a platform to showcase their talents that would not exist without audiences that have been built in many cases for more than a century.  For instance, from the fall of 2017, the Wall Street Journal valued the Ohio State Football program at $1,510,482,000, number one in all of college athletics.  As a point of reference, The Ohio State football program dates back to 1886, meaning that players that will be there for only three or four years benefit from a brand built and maintained at the school’s expense for 131 years.  The value to the athlete is the showcasing of his skill set for future employers for 3 to 4 years visa-via coverage of the games on television.  And again, while one can calculate the revenue that the schools generate, calculating the benefit of this cost-free coverage to the athlete is next to impossible to do.  From that same Forbes article referenced above, the author points out that it is easier for pro teams to evaluate the talent after watching tapes of televised college games, which is critical when one considers that almost all of the NFL players are drafted from the college ranks.  From this, the author concludes, “[t]his lowers the uncertainty about their future performance and means they get larger contracts when they go pro…[t]o some students this publicity and help from coaches talking to pro teams likely carries a large economic value.”

 

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The 1% problem discussed above doesn’t just extend to the number of athletes that will eventually turn pro one day.  According to Jeff Benedict and Armen Keteyian, authors of The System: The Glory and Scandal of Big-Time College Football, figures from 2010-11 academic year show that only 22 of the 120 top-tier football programs broke even or made a profit.  Typically what happens as part of our 1% centric focus is that the public sees articles demonstrating that top programs like Alabama have profits in the tens of millions of dollars, and this gets extrapolated as if this is somehow representative of all of college football.  So while Alabama had reported revenue in 2011-12 of $110 million dollars with operating expenses of $41.5 million, 82% of college football programs have costs that exceed revenue, meaning that they are operating in the red.  According to Benedict and Keteyian’s figures, the overwhelming majority of top-tier programs require their universities to allocate funds from elsewhere in the school’s budget to cover football operating expenses.  As those two authors put it, “Football Bowl Subdivision schools spent more than $91,000 per athlete compared with just over $13,000 per [non-athlete] student.  Yet students across the country faced steep tuition hikes and increased fees.”  What this quote suggests is that society should be upset, not with the treatment of the student-athlete, but instead with the expense that is passed on to the rest of the student population that is subsidizing big time college football.  And the Benedict-Keteyian piece isn’t the only one drawing these conclusions.  Another report from 2013 concluded that all but 20 FBS schools had expenses that exceeded revenue.  The average loss among Power 5 conferences was $2.3 million.  At all other FBS schools it was $17.6 million.  Conference USA Commissioner Britton Banowsky testified during the Ed O’Bannon class-action suit that “none of his conference’s programs are self-sustaining financially and that shortfalls have to be made up with subsidies and, occasionally, student fees.  He suggested that some schools might consider dropping football if forced to share revenue with athletes.”

This Bloomberg piece detailed the crippling debt that colleges face today because of the cost of athletic competition.  So while Alabama revenue figures tell one story, the Crimson Tide owe more than $225 million dollars over the next 28 years, a staggering debt figure when one considers annual revenue.  But Alabama isn’t emblematic of the problem, because annual revenue far outstrips amortized debt figures, meaning that realistically, Alabama football will be just fine.  But as of 2014, athletic departments of at least 13 schools had debt obligations of $150 million dollars, money that is typically borrowed for new facilities in the arms race to keep up with the Jones.  The concern here is with those programs that sustain massive levels of debit but do not generate the annual revenue to cover it.  For instance, the University of California at Berkeley recently completed the most expensive college football stadium overhaul ever.  Now the Golden Bears owe more money than any other college sport’s program.  As a result of debt service, the Golden Bears ran a $22 million deficit in 2016, a staggering amount for a Power 5 program that is often considered one of college football’s  blessed “haves.”  Such debt must be troubling for California, a member of the Pac 12, whose conference is lagging behind in the financial arms race in large part because of issues selling its network to Direct-TV.

All of this is to say that while power house programs like Alabama could afford to pay student-athletes if forced to do so, programs operating in the red would not be able to.  Some of those football programs might cease to exist, while those that survived, would end up passing the costs on to students if boosters and wealthy alumni didn’t step up to cover the costs.  And for those schools where college football covers the costs of other non-revenue sports, one would almost certainly see many of those sports’ programs eliminated to offset cost of athlete salaries.

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Perspective as it pertains to this issue likely colors one’s opinion as to whether student athletes should get paid.  For instance, many weighing in on this issue are NFL first fans that see the college ranks as a sort of minor league system for the NFL.  And, from the NFL perspective, this makes sense, as almost every single player drafted in the NFL comes from the college ranks.  But flip this on its head and analyze it from the perspective of college programs, where only roughly 2% of college players will ever get drafted by a NFL team, and the issue of salaries for athletes looks much different.  Because of these numbers, the schools really are in the business of educating people, with only a small percentage of its student base constituting student-athletes, with an even smaller subset of that class likely to become professionals in their given sport.  It is this perspective problem that keeps some from understanding the unique challenges that colleges face should it be forced to treat its student-athletes as employees.

In 2014, Kain Colter, a quarterback’s for the Northwestern Wildcats of the B1G Ten Conference, led a movement to unionize the football team under the theory that the players were employees of the school.  Initially, a regional director of the N.L.R.B. in Chicago ruled that players on scholarship were employees based on the hours they spent each week on football, the strict rules set by coaches and the financial aid they received as compensation.  In 2015, the N.L.R.B. dismissed a petition by the Northwestern Football players which effectively meant that the board was ducking the central question as to whether college football players were employees of the university  The Seventh Circuit Court of Appeals also agreed that student-athletes are not employees of the school.  

Chief amongst the rationale for the N.L.R.B.’s decision were the complexities of the NCAA, to include the fact that some schools are public and others are private, and that the governing structure of the NCAA allows individual conferences to unilaterally make their own independent rules.  The bottom line for now is that student-athletes are not considered employees of the schools that they attend.

Former Northwestern quarterback Kain Colter was almost successful in convincing the NLRB that Wildcat football players were employees of Northwestern.  

One issue that really highlights the difference between the professional sports leagues and the NCAA is the federal requirement of Title IX that regulates the latter.  Title IX guarantees gender equality in athletic opportunities.  “Title IX is a Federal statute that was created to prohibit sex discrimination in education programs that receive Federal financial assistance.”  Initially, there was confusion as to whether Title IX had anything to do with athletics.  In 1974, Senator Jacob Javits and Congress passed the Javits Amendment which became part of Title IX.  This amendment clearly stated that “Title IX would be inclusive in all athletics.”  Thus, it is very well established that opportunities for men’s and women’s programs have to be equal in all respects, which includes the accommodations and conditions around those opportunities.

Many legal pundits have opined that there is likely no viable end-around Title IX which would allow schools to pay only those athletes who are in profitable sports, which typically includes only men’s football and at some schools men’s basketball.  In one instance for example, a federal judge ruled that Quinnipiac University, which had attempted to eliminate women’s volleyball by replacing it with competitive cheerleading, had violated Title IX.  And it wouldn’t just be women’s sports that would object to unbalanced pay for play; most men’s sports are not for profit entities at the college level as well.  Donna Lopian, president of consulting group Sports Management Resources, says pending litigation against the NCAA lobbying for pay is “the biggest potential game-changer” and could “hurt men’s and women’s sports.”  The cost of paying revenue-generating players–plus the costs of paying female athletes to comply with Title IX–would be prohibitive to college sports programs.”  From above, many programs to include those in Power 5 conferences in FBS football are already operating in the red given the costs necessary to compete at that level–any order that would require some sort of across the board payment of athletes under Title IX could very well break the system.

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And no piece on the potential payment of athletes would be complete with out considering everybody’s favorite government agency, the Internal Revenue Service.  As things stand now, and because they are classified as student-athletes, athletes are not taxed on the benefits detailed above from the market value of tuition and room and board to the services provided to them by the schools to include coaching, training facilities, etc.  And this status was further cemented by the N.L.R.B. refusing to consider the question as to whether students are really employees of the university.  “If they are paid more than the cost of attendance,” says Matt Mitten, the director of the National Sports Law Institute of Marquette Law School, “they would likely be characterized as employees.  And that has a number of implications.”  Mcmillen went on to say the following:

… I think when you change the system to a compensatory model it has all sorts of repercussions … the repercussions are such that right now if you’re a kid sitting on the bench at the University of Maryland’s women’s basketball team, … and you’re from out of state, you have a nice scholarship, that’s probably 30,000. You get room and board, unlimited food, healthcare, disability, tutoring, and so forth. I mean it’s probably sixty-some thousand dollars of benefits.  Now, all that’s tax-free.  So, if you move to a compensatory system for a few athletes, because they deserve, you know, a bigger share, you affect everybody down the line, including that athlete sitting on the bench, all of a sudden now, that athlete will have a tax-bill of $10-$15,000, the school’s not going to be able to gross it up, so the kid is going to end up with less.

Classifying college student athletes as employees could potentially open Pandora’s Box–players could unionize, could potentially sue for workers compensation, the schools might be subject to tort liability, and students might be forced to pay taxes on benefits that they receive from schools that would now be deemed their employers.  Some vehemently disagree with this proposition, such as this author.  But read that piece carefully– the author concludes that players would not be taxed because of  Revenue Ruling 77-263, 1977-2 C.B. 47 which holds that the “…athletic scholarship awarded  by the university is primarily awarded to aid the recipient in pursuing studies and, therefore, is excludable under section 117.”  But the interpretation of this section of the code is presumably premised on the classification of college players as student-athletes and not as employees of the university.  Notice what would happen here-compensation would shift from a scholarship to complete a degree to compensation for playing a game, which doesn’t sound a whole lot difference from the professional athlete who must pay taxes.  One wonders what happens should that box be opened–if students were really employees, would the I.R.S. reevaluate the tuition exception and determine that the employees must be taxed at fair market value for all benefits given to school employees?  What if the athlete didn’t finish school?  Could one really argue their primary purpose was education if they didn’t end up obtaining a degree, but instead went on to play sport professionally?  I do not pretend to the know the answer to this question, but from someone who has studied tax law, I can tell you that this is precisely the kind of benefit the I.R.S. would deem as income in other realms, so a review of this limited exception doesn’t sound completely out of the question, at least if you understand how the machine that is the I.R.S. operates.  Should that happen, its hard to imagine where 19, 20, and 21 year olds would be able to come up with the capital to cover tax bills on tuition and related services that could be valued up to a quarter of a million dollars or more annually.  Sure, those athletes on the brink of getting seven figure NFL contracts will be just fine, but as we explored above, this isn’t the case for 98.7% of college football players.  If the I.R.S. alters its tax policy, and that is a big if, this could represent a lose-lose for both the players and the schools.

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Finally, I want to comment on what has become the trendy fake compromise solution to this problem: allowing the athletes to cash in on their likeness visa via endorsement deals.  As I was writing this, yet another piece popped in the functional equivalent of water-cooler news that is supposed to pass for journalism these day over at this site.  Mr. Sailee’s solution is to continue to give scholarships to players while allowing them to capitalize on their likeness, something that I think likely happens sooner rather than later.  Under his plan, royalties earned by star players are placed in the functional equivalent of a 401K plan that the player can either: a) draw upon after leaving school with apparently no tax consequence; or b) upon need if still in school with tax penalties similar to what the rest of us incur should we make an early withdrawal from our 401K plans.  First of all, it is not entirely clear why Mr. Sailee believes that the athletes would ever be able to take this money tax free.  From the discussion above, and under Revenue Ruling 77-263, 1977-2 C.B. 47, scholarships are tax free because their primary purpose is educational.  I have no idea how posing in a Nike add for a pay check is an educational exercise, the precise reason people unfamiliar with tax law should probably refrain from commenting on it.

The larger issue is one of unintended consequences, and quite frankly, probably doesn’t disqualify a suggestion that makes sense from an equity perspective.  While Sailee goes off about the value of television contracts, to me, this misses the point–schools make money off the players likeness while selling apparel, apparently even after the athletes are long gone.  It is absurd that schools can capitalize off this likeness while the players can’t, and a while back I suggested the very same idea of putting this revenue into a trust of sorts which will continue to maintain the amateur status of the athlete.  The solution also makes sense from the perspective that it allows only those people who have valuable images to capitalize off of them, and it is done outside of the framework of the schools themselves which ostensibly would not implicate Title IX (this of course assumes that the athletes themselves enter into agreements with third parties so that the schools themselves are not part of the equation).  So far, so good.

The unintended consequence of this is the abuse–something that Sailee hints at while not fully appreciating the full ramifications.   He offers:

Of course, the risk of local businesses exploiting the system and paying the star quarterback, the backup long snapper and everybody in between the maximum allowed exists. But if the NCAA is allowing a somewhat-modified version of the Olympic model anyway, the legal endorsement transactions will be recorded and declared.

I agree with him as far as this goes.  I have always hated the argument that we shouldn’t attempt to regulate an activity because there will always be scofflaws that cannot be regulated.  Were that the case, we might as well abolish murder statutes because some will still kill people anyway.  The problem, however, is a bit more nuanced than this.  As this is a free enterprise solution, it will bring with it a free enterprise consequence.  Take a look at this piece which ranks the most valuable college football programs.  The consequence of this will be that our old friend, the rational economic actor, will intervene to fully capitalize on the marketing of a player’s likeness.  What does that mean exactly?  Well, if Ohio State has the most valuable brand, then it would make sense for shoe apparel companies to direct a high level recruit to Ohio State, even offering a tiered payment for endorsement deals based on the tier of the school the player chooses.  You might say, “those schools get the best athletes most of the time anyway, so what’s the big deal,” and while that is true to a large degree, this may further exacerbate the gap between the haves and have-nots.  At least now, with a level playing field, kids may choose to go to some other school which can offer them something Ohio State cannot, early playing time for example.  Make this about the size of endorsement checks, and well, it isn’t hard to see more of those kids flocking to the biggest programs even if that means a few of them have to ride the pines.  Sailee, like others, continue to compare the NCAA model to the Olympic model, which is a terrible comparison.  For the Olympic athlete, they are not free agents set to choose to play for the country that will pay them the most in endorsement deals–if you are born and live in the United States, you will play for your country, and the endorsements will be what they will be.  Still, having said that, and because this is an equity issue, I do believe the players should be able to capitalize off of their likenesses, but people shouldn’t be naïve as to the unintended consequences of these endorsement deals which will seek to only maximize the offeror’s financial advantage.

So why do I suggest that this is a “fake compromise” in my opening remarks to this section above?  Because Sailee ends his piece by suggesting that “[i]t’s at least a start.”  Which means for Sailee and others, allowing players to capitalize on their likeness is merely the beginning of a very slippery slope that ends with amateur athletes collecting paychecks.  Sailee goes on to conclude, “[s]olving this issue doesn’t need to be difficult, and it really shouldn’t be as divisive as it seems to be. Scholarships, training, connections and everything that goes along with being a student-athlete today are massive benefits that normal students don’t receive. But that doesn’t mean it’s enough compensation considering what universities, athletic departments and coaches are raking in off their labor.”  For this author, like many in the population, his distraction at the hands of the shiny object has blinded him to the legitimate difference between a student-athlete and a corporate employee and the complexities of applying the business model of the latter to that of the former.  That, and Mr. Saillee apparently isn’t very good a math either.

 

*note, for simplicity sake, I am only including Division I FBS players.  There are two Division One subdivisions, the other being the FCS.  In addition, there are two other divisions in college football, Division II and Division III.  While the bulk come from Division One FBS, players from these lower divisions do indeed get drafted in the NFL.



Categories: College Football

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