Monday, April 05, 2010

Is the NCAA welfare-enhancing (Part 2)

According to the NY Times, tonight's NCAA Division I Men's Basketball Championship between Duke and Butler features a game of David vs. Goliath in terms of basketball expenses (ie: budgets).

Butler's basketball budget: $1.73 million.
Duke's basketball budget: $13.89 million.

Butler's total endowment: $164 million.
Duke's total endowment: $6 billion.

So, we can calculate expenses per endowment (like expenses per assets):
Butler: 1.05%.
Duke: 0.23%.

Duke's basketball budget is a smaller percentage of their total endowment. Is that a good way to measure the cost of a program? I think a better measure might be basketball expenses vs. total spent by school on academics over the course of the year. I don't have that number yet.

BTW-- according to the U.S. Department of Education,
"Duke and Butler had the two highest NCAA graduation rates — 92 percent and 90 percent, respectively — of any of the men’s basketball teams in the Sweet Sixteen, and they graduate more than 75 percent of their African-American players."

One is probably supposed to read the above quote and say "Hooray, these programs are doing it right! Winning and graduating players." Butler would obviously be the champion in terms of bang-for-your-buck. They're getting more wins and graduates per dollar spent than Duke is. But this is deceiving.

Questions you have to ask:
1. What kinds of degrees are players graduating with? A degree in Sports Management is not equivalent to a degree in Nuclear Physics. A school can boost its graduation rate by having players enroll in degrees that are relatively easy.

I couldn't find info about major for any of the Butler players. A few of the Duke players have it listed in their personal bio. I count 2 History majors, 2 Visual Arts majors, 2 Economics majors, and 1 African-American Studies major.

2. What is the expected reward of their 4 years at respective schools? This is a function of several things including:
a. Degree earned.
b. Quality/rank of the academics of the institution.
c. Quality of the player-- if he's good enough to play professionally he's going to earn more than someone who is going into social work or something. The more NBA-quality players you have the higher the average reward will be for the team.
d. Quality of the student-- GPA, honors, etc.

Some of these are difficult to compare across institutions. Duke ranks higher in most areas than Butler, but it depends on the department chosen. Butler has the only player projected to be drafted by the NBA this year, Duke has 3 projected for next year.

According to this graph, according to the median cash compensation for Butler and Duke alumni who are 5-15 years into their careers are:
Duke alumni: $104,000.
Butler alumni: $74,700.

But does having a basketball program have anything to do with the above salaries? One could argue that by giving someone a scholarship to play basketball who would not otherwise have gotten into the university, you've given him higher income possibilities. But this also fails to properly take costs into account (I'll address this in my next post).

3. How much revenue does the basketball program generate for the overall university? Good luck finding an estimate for that unless you're on the board of one of the schools.

4. Is it worth it for the money either school is spending? Is spending an additional dollar on basketball worth it relative to spending on other programs? Resources are allocated efficiently if an additional dollar spent on basketball yields the same output per dollar as an additional dollar spent on, say, the science program.

Where am I going with this mess of numbers? I really just want to illustrate the cost of having a basketball program and show it's really hard to flesh out the benefits in terms of the costs. Defining success is also difficult. A dollar spent on basketball is a dollar not spent on something else, so opportunity costs matter. It's the opportunity costs that are at the heart of my thinking.

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