How Title IX Actually Makes Money For Some Schools

It’s pretty common to hear that Title IX creates a huge financial burden on colleges such that even if a school is lucky enough to be making millions on football or basketball, federal law mandates that a certain amount be spent on women’s sports. Leaving aside how this story implies schools are being forced to support women’s sports against their will (which I hope isn’t true), it also misses the fact that in some circumstances, women’s sports make money.

Yes, so-called “non-revenue” can be profitable. This isn’t saying they always are, because the conditions need to be right; but when they are, a school that is out of compliance with Title IX because it doesn’t have enough women participants could actually add a sport and increase its net cash in-flow after expenditures. Seems counter-intuitive, right? But it’s true. Come join me on a short, economic journey through arithmetic-land, where the only bias is a strong belief that when facts and common sense collide, facts win.

Opportunity Costs Matters

Opportunity Cost is a central concept in economics. A Free concert ticket is not free if to get it you have to skip 3 hours of work at $30/hour (after taxes) to wait in line. It cost $90 because you end up $90 worse off, even though the money in question didn’t go to pay for the ticket. You still paid.

This can work the other way too. If a school has room to expand, then offering a discount on tuition is more like a coupon than an expense. Say the school charges a list price of $40,000 and once the fixed costs of setting up a university are in place, the incremental cost (what economists call “marginal cost”) of one more athlete is $20,000. Adding another student who pays full price is obviously a net benefit of $20,000, right? Ok, now do the same math, but imagine the student is offered a coupon for $15,000 off. Wow, major expense, right? Well, yes and no. If the student is going to attend regardless of whether she gets the coupon or not, then yes—the world without the coupon shows a profit of $20,000. The world with the coupon shows a profit of $5,000 and total profit has been driven down by the value of the coupon. That’s a cost.

But, what if the student in question will go elsewhere if she doesn’t get the discount? Then the two worlds to compare are the one where she does attend, and the school profits by $5,000 or the one where she doesn’t attend, and revenues and costs both increase by zero. $5,000 is better than zero, and so what looked like a $15,000 cost was actually $5,000 in net revenue.

But it’s not just whether the specific student in question will attend or not. The correct question (in terms of figuring financial cost or benefit) when offering a discount to any student is what would the school do with the slot if they chose not to offer the discount. Obviously, if they’d give the slot to the same person and she’d attend anyway, then giving the discount doesn’t make financial sense. It could be good for other reasons (like philanthropy), but handing a coupon to a customer who would purchase the same product without the coupon is a net cash drain.

But the same would hold true if absent the coupon, a different person would take the slot and pay more. In our scenario above, if the $15,000 discount isn’t offered and the women in question opt to attend college elsewhere, and then the university turns around and offers a $10,000 discount to someone else, the school ends up better off giving the lower discount. And so the entire question hinges on what the next-best alternative is.

This is what economists call Opportunity Cost. That is, what opportunities do you lose when you choose one path and forgo others? When normal people wait in line for three hours to score a free ticket to a concert, economists see the opportunity cost of that time as potentially being as high three hours of lost wages. If you take in $30/hour after taxes, and you could buy that same ticket for $40 without waiting in line, you just traded away $90 in opportunity cost to save $40 in expenditure and you lost $50 in the process.

Not convinced? Take a look:

Scenario 1: Skip 3 hours of work to get a free ticket.

· Revenue: Zero

· Expense: Zero.

· Profit: Zero.

Scenario 2: Work 3 hours and buy a $40 ticket.

· Revenue: $90 net of taxes

· Expense: $40

· Profit: $50

Now of course, this doesn’t take into account whether waiting in the line was kind of fun because it reminded you of your crazy days following Phish around the country, or whether Bob from Marketing was going to be on your ass for those three hours making it a living hell. Clearly, with respect to humans, there are costs and benefits of working or standing in line that are difficult to put into profit and loss terms. But if you are a non-human entity—like a university—those questions of fun can be left to the side and the focus can be on cash. And clearly here the free ticket is more expensive.

So, Do Women’s Sports Really Make Money?

So, when a school is thinking about adding a women’s sport, the correct economic question is not a simple “how much will we spend?” Instead, the (economic) question should be “comparing this to the world where we don’t add the team, which has a better net revenue position?” Both scenarios might make money or might lose money, but looking at just one in isolation can’t tell you which is better. One bedrock principle of the field of Economics is that unless you look at the tradeoff between the choices, you cannot say whether the first choice is (economically) profitable or not.

So, back to our extremely hypothetical case of a school thinking about adding a women’s sport. Let’s put some numbers on the decision. Let’s assume that if you leave out the cost of the scholarships themselves, a school would need to add $112,599 in expenses to run this sport for a year. These expenses are as follows:

This data come from the 2013-14 University of Alabama-Birmingham and represent the women’s Bowling team. So this is a realistic set of expenses (again, absent scholarship costs) for a small women’s sports team. And yes, the school is kind of in the news lately because it did cut this team along with football and rifle.

Now let’s look at those scholarships. Let’s assume (consistent again with the UAB reported financials) that this hypothetical team provides athletic scholarships to 8 women, with a total retail value of $97,348 and the school further determines that across these eight women, the net discount is 31% (that is, the school gave out something like 2.47 scholarships shared across eight women). Recognize that after the $97,348 is deducted, the University will still take in the remaining 69%, which across the eight women comes to $217,949. That is, the full price for these eight women is $315,297 and the school has offered athletic scholarships such that the price is reduced by the $97,348 in scholarships such that the net in-flow of revenue is $217,949.

So, is that 31% discount good or bad for our hypothetical school? Trick question: the answer is “it depends” and as always, what it depends on is the forgone opportunity costs.

Question 1: Will the women on this hypothetical team go elsewhere if not offered a scholarship and/or if the team doesn’t exist?

If these eight women are coming regardless, then there the forgone revenue of offering these discounts is exactly equal to the discount itself and the economic cost happens to match the listed cost—the scholarships are lowering revenue by $97,348 compared to a world without the team. This is one of those happy accidents where the accounting the economics happen to match up. So Celebrate.

But unfortunately, it’s also pretty unlikely that eight out of state, high-level bowlers would have come to this school if competitive bowling and a partial scholarship were not part of the package. If these eight women will all go to some other school if bowling and/or discounts aren’t an option at the school in question, then the question becomes—can those eight slots be filled with other paying customers? If the school is trying to grow and doesn’t have eight suitably qualified students (who aren’t already coming to the school anyway) just waiting for a slot to open up, then instead of costing $97,348 to give scholarships, it’s actually costing the school $217,949 NOT to give them.

You can follow, to the precise letter, every financial accounting standard on the books and unless you step away and look at the economic/opportunity cost, you will see a net expense where there is actually net revenue. And indeed, by itself, this net shift towards revenue might be enough, as in this example, to tip the balance towards profit, because $217,949 in net cash in is enough to pay the $112,599 in cash expenses and leave around $100,000 in positive cash flow.

This isn’t actually the end of the analysis. For one thing, if you are choosing between educating eight additional students vs. no additional students, there are likely to be some other costs, the kind that accounting and economics agree on. Eight more women in classrooms might be enough to justify the University adding a part-time instructor, or running a slightly higher electricity bill in the dorms, or any similar incremental cost to the university as a whole. Since this example started with UAB, I looked at what the state of Alabama’s Commission on Higher Education ballparks the increased cost of education an additional student to be and found it to be something around $3,000 to $3,750 per student. So say it ends up being $3,600—that adds a costs of 8 * $3,600 or $28,800.

Those should be factored in. In the end, the tally looks like this:

Eight more women athletes also generate other revenues, despite being in a non-revenue sport. Perhaps a few donations will trickle in—say $2,520, just to put a small number on it. Plus, the NCAA pays schools something like $33,200 for every sport they field after 13. So if the school is already in D1, which requires 14 sports, then adding this sport will kick in another $33.2K or so. And the NCAA also gives a school money for every athletic scholarship it offers. The amount varies, but once you’ve given out 150 scholarships, every scholarship thereafter nets a school about $6,000. Meaning that 2.5 scholarships will net a further $15,000 from the NCAA, give or take.

Plus, these women spend money on campus for all sorts of incidentals and some of the money flows back to the school itself.

So the school has some incremental costs of educating these eight women, and incremental revenue of around $50,000 from donations and the additional money the NCAA will give for having one more sport with 2.5 scholarships. Is that enough to cover the additional teaching expenses that 8 women bring? Yes, very probably ($50,000 > $28,800), but if you add the net revenue from the rest of the P&L—tuition revenues of $217,949 (net of discounts) less sports expenses of $112,599, then it seems a pretty easy decision that adding this hypothetical sport might make the school money IF, and this is a big IF, IF the school would otherwise not get a paying customer to fill the slot otherwise. But if that is the case, then this is what the total P&L ends up looking like:

So adding this team will make the school money, rather than cost it. This is true as a matter of basic arithmetic despite everything you’ve heard about Title IX being some horrible drain on the health of athletic departments. Schools are quick to pat themselves of the back for being so noble as to incur these losses, and it always strikes me that they do protest a bit too much how they both love having women’s sports and also how much credit they should get for being bold enough to comply with Federal law by supporting them. This line of argument verges close enough to hypocrisy on its own, but the story is even less about self-sacrifice and doing the right thing if those women’s programs are secretly making money and that fact is being obscured because the standardized accounting shows a loss of $208,427 rather than the $110,000 gain.

Recognize what this means for the American public and policy decisions: perfectly acceptable financial accounting methods take what is an economic—real money!—gain of around $110,000 and make it look like a loss of $208,000.

It Ain’t Bias if it’s True

This may be a surprise to people used to thinking of women’s athletics as a cost center, but in essence a sport with a high number of partial scholarships and/or walk-ons operates in a fashion similar to Division III. In Division III, schools use the lure of being able to play intercollegiate sports to attract paying customers who would otherwise go to school elsewhere. There, scholarship costs are zero. Accounting Revenues might also be close to zero, so Division III will usually look like a money loser too, but IF (and again a big IF) the sports bring in paying customers (the athletes themselves) to admissions slots that would otherwise go unused, a lot of revenue is being hidden from view. That doesn’t mean every school should switch to D-III, but it does mean that D-III makes many schools more money than their accounting data show.

Similarly, with a Division I program with a low net scholarship level, the same theory applies, but the school simply chooses to charge these athletes less to attend (e.g., on average the eight women each pay 69 percent of full list price). Otherwise, the idea of charging athletes for the privilege of playing intercollegiate sports still applies. If you want to use a label call this “pay for Play” but the athletes are doing the paying. Using the draw of competition and Sunday coupon pull-out to attract customers who would otherwise go elsewhere can be profitable, and that is true even if the accounting rules require a school to make it look like a money loser.

Andy Schwarz is an antitrust economist and partner at OSKR, an economic consulting firm specializing in expert witness testimony. Follow him on Twitter, @andyhre. Photos via Getty and AP.