In a Time of Massive Budget Cuts, Cal May Have to Borrow for a Football Stadium

Rachael Myrow here, host of the California Report, with an AM post from somewhere in California…

It’s such a California story. UC Berkeley’s Memorial Stadium sits on an earthquake fault line. It’s going to cost about $321 million to renovate. It would be, says the Wall Street Journal today, “one of the most expensive renovations in college sports history.”

The university originally intended to fund the project privately, presumably from Bears fans of the type that regularly clog Berkeley streets on game days.

“But three years into the fund-raising effort,” writes Rachel Bachman in the Journal, “a projected $270 million from the sale of seats has failed to materialize. At the end of December, the school had collected only $31 million… Now it has become clear that the university will have to borrow the vast majority of the money.”

If revenue projections fall short and don’t cover the bond payments, the shortfall would come from campus funds.

After the state legislature last year slashed hundreds of millions of dollars from the University of California system, tuition at UC schools rose, and then rose again.

Nobody argues about the need for seismic upgrades, especially after those Berkeley shakers just a few months ago, one of which was centered right near the stadium. But some may question whether the university can afford  $270 million for a football team right now.

Perhaps the loudest critic is Brian Barsky, a computer science professor who’s written repeatedly in the Daily Cal about funding for collegiate athletics. He quoted as saying it’s “disconcerting that the university may be gambling with student fees and other academic funds to cover a massive financial commitment for a football stadium.”

The Journal does acknowledge the new Pac-12 television-rights deal, expected to nearly double Cal’s broadcast revenue before expenses. Will it be enough for the athletic department to wean itself from university support? What’s that cliche? Only time will tell…

UPDATE:  Herb Berenson of UC Berkeley contacted us after this post to offer some Bear Perspective. The Assistant Athletic Director, and the guy in charge of athletic communications writes the Wall Street Journal article contained “a number of errors,” which he itemized thusly:

Why is the Memorial Stadium project being financed? It has always been the intention to use external financing for the renovation and seismic retrofit of Memorial Stadium. This is common practice in financing many types of capital projects, from large endeavors, such as the Memorial Stadium construction, to smaller ones, including home purchases. The Athletic Department, using non-public funds, will be able to make its debt payments through an increase in operating revenue generated from such avenues as the Endowment Seating Program (ESP) seat sales, enhanced Pac-12 media rights, the institution of a facility fee and donor philanthropy. It should be noted that, to date, the project has been financed using debt at lower interest rates and longer maturities than initially modeled.

Cal has received $31 million in cash from ESP sales to date. Does this mean the $270 million goal for the program is not realistic? About 85 percent of ESP participants have chosen to spread their payments over time, which means they are paying annually up to 30 years. As of December 31, Cal had received $31 million in cash from ESP sales, which corresponds to a total projected value of over $144 million to be paid by the end of the payment contracts. The original goal of $270 million remains. The plan has always been for the Athletic Department to use its operating revenues to make debt payments on an annual basis over the next 30-35 years.

The $31 million received also comes four months before the reopening of the stadium. We anticipate the number will assuredly grow as kickoff for the first game of the year approaches and as the football season gets underway. The goal is to sell 90 percent of the available capacity in the ESP sections, and that goal is targeted for June 2013.

Will the campus have to account for any Athletic Department shortfall? No central campus funds have been used to finance this project, and it is intended to be managed so that none will be. The Athletic Department and university have gone to extraordinary lengths to inform interested parties about the financing model, including posting on Calbears.com (see Facilities Project Summary and ESP Financial Reports). This analysis suggests that even under a highly conservative, worst-case scenario, the project does not face a financial problem until at least 2038, and that case assumes that no intervening action is taken over the next 26 years.

Did the university pledge tuition revenue to obtain debt financing at a lower interest rate? As is standard practice for debt issuance in higher education, all forms of university revenue, including tuition revenue, are pledged.

Whether or not you think the project is a good idea, I think you’ll agree it’s worth hearing from all sides, at length.

Related

  • Spazzy A Mgee

    Rachel, the notion that only $31 million has been raised out of $270 million necessary is deeply misconstrued by Bachman’s report.  The $31 million refers to up-front cash on hand generated from seat licenses, which are held for fifty years.  The $270 million is a fundraising goal which is to be met over _decades_.  Currently, there is a total of $144 million pledged, wherein people pay for their seat licenses in installments over a long period of time, as one would pay for a car.  There is a huge difference, and many years remain to make up the difference. 

    Moreover, the tone of most of these stadium-critical articles seems to accuse the football team of being the primary driver of athletic budget loss, but to the contrary, it is the profits of the football team at almost every school which covers the losses of many other NCAA sports at individual schools.  The programs which lose the most tend to be womens programs which are mandated under Title IX.  Simply getting rid of the football team solves no problems in that regard. 

    • Guest

      The $144 million pledged is very soft.  The Athletics Department tried to sell the Endowment Seating Program as a binding committment.  When few people signed on, the program had to be changed so the enrollees can walk away at any time without penalty.

      The football team generates huge liabilities such as the $321 million loan for the stadium improvements.  If the stadium financing scheme fails, the debt service is going to suck millions of dollars out of Berkeley’s academic programs.  Is football worth the risk?

  • Cal Engineer

    I find it toubling that Prof. Brian Barsky lements about Cal Athletics striving to be the best it can be while his own department overlooks a major opportunity to secure revenue and provide service to students.  I speak of the opportunity to offer an evening MS program in Computer Scence.  A similar offering is provided to MBA students by Cal’s Haas School of Business.  Student fees for the Haas evening program generate roughly $45,000 per student.  By continually focusing on providing an excellent education in innovative ways, the Haas program has steadily improved its national rankings. 

Author

Rachael Myrow

From KQED’s Bureau in San Jose, Rachael Myrow’s mandate is to cover politics, economics, technology and culture in a region that stretches from Burlingame to Edenvale to Fremont. She also covers food and blogs for Bay Area Bites. Her posting as Silicon Valley Correspondent follows more than seven years as the daily host of KQED's California Report, broadcast on NPR affiliates throughout the state. She continues to guest host The California Report Magazine and Forum, and files as a freelancer for NPR and PRI’s The World. Before KQED, she worked for Marketplace and KPCC in Los Angeles.

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