The Pac-12 is facing a potential revenue hit of $15.5 million as a result of canceled postseason basketball tournaments.
It could make that loss disappear instantly. All the schools need to do, is say the word.
The conference is sitting on a stash of cash — emergency cash, to be precise.
More than $20 million of it.
“Fortunately,” commissioner Larry Scott told the Hotline earlier this week, “our members had the foresight to create a reserve fund.”
That fund was designed for precisely the scenario that unfolded in March, when coronavirus forced the cancellation of the Pac-12 and NCAA tournaments — a double whammy likely to result in a loss of approximately three% of annual revenue.
The conference has approximately $22.5 million sitting in a strategic reserve fund designed to offset what an internal Pac-12 memo describes as “Unusual and Extraordinary Events,” which includes “natural disasters.”
A global pandemic that caused a suspension of college sports, forced Pac-12 campuses to empty and brought the economy to a halt would seem to qualify.
The fund was created before Scott took over in the summer of 2009 and held about $2.5 million at the time.
A few years later — after the signing of the $3 billion contract with Fox and ESPN and the launch of the Pac-12 Networks — the presidents and chancellors approved an annual commitment of $5 million.
The conference stopped the reserve funding after four years, resulting in the current amount of $22.5 million.
The following memo, written by Pac-12 chief financial officer Brent Willman and obtained by the Hotline, outlines the strategy:
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To: CEO Group
From: Brent Willman
CC: Larry Scott and Woodie Dixon
Date: May 14, 2018
Subject: Reserve Policy Summary
“Upon the completion of FY 2018, the Pac-12 will have achieved the first reserve benchmark of $22.5 million by contributing $5M by year-end. There has been considerable discussion on continuing reserve funding and if so, what metric we should use to determine the appropriate amount.
CFOs and ADs
Generally, the University CFOs, Athletic Department CFOs and Athletic Directors propose discontinuing the further funding of the reserve fund. However, some CEOs expressed concern that a major event could require additional funding to the reserve.
Reserve Fund Committee
Pac-12 formed a Reserve Fund Committee to review the need and potential methodology on future reserve funding. The committee consists of Gregg Goldman of Arizona, Jamie Moffitt of Oregon and Brent Willman of the Pac-12.
The discussion included an attempt to quantify the amount of the reserve based on at risk financial metrics.
1. Revenues — since 85% of the revenues are contractual and the remaining variable amounts are somewhat predictable during the budget cycle, revenues did not appear to be of appropriate concern.
2. Expenses — expenses are fairly predictable during the budget cycle and can be greatly influenced through management oversight.
3. Unusual and Extraordinary Events — Litigation, settlements and natural disasters could have a significant impact on the financial statements in a given year. The committee discussed a risk analysis of pending or threatened litigation or the impact a (natural) disaster could have on operations. The discussion included building a matrix to evaluate the likely financial impact of an unusual and extraordinary event combined with the likelihood the event would occur in a given year. This type of analysis would then produce a fund target to measure against the current balance. Additional annual funding, if required, would be capped at $2M.
This analysis has not been completed to date and for budgeting purposes, we have included a $2M contribution for fiscal year 2019.
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The Hotline has not confirmed whether an additional $2 million was added to the reserve fund in 2019, increasing the total to $24.5 million.
(Pac-12 financial documents for the 2019 fiscal year will be made available in May.)
Only the CEO Group (i.e., presidents and chancellors) has the authority to approve a drawdown of reserves.
No decision has been made as the conference seeks clarity on two issues:
— The Pac-12 expects a loss of $4 million in ticket revenue from the cancellation of the men’s basketball tournament, but it has business interruption insurance that could mitigate the hit.
The conference needs time to “sort through the contracts” and determine the extent of the revenue loss due to ticket refunds, according to Scott.
— The Pac-12 is also embarking on what Scott described as a “cost savings exercise” for the remainder of the fiscal year.
The shutdown of spring sports (and conference championships in each) combined with cancellation of scheduled executive events caused by social distancing will likely result in a reduction of expenses.
(Examples of the executive events would be the annual meetings for athletic directors and head coaches in Arizona in early May and the CEO Group meeting in San Francisco later in the month.)
Once there is clarity on the insurance coverage and the cost savings and the full scope of the revenue hit is known the presidents and chancellors will decide whether to tap into the reserve fund.
At most, each athletic department stands to lose $1.3 million in revenue, based on a total hit of $15.5 million.
“The members will have to determine if they want to access the reserves or manage their way through it,” Scott said.
There is good reason to leave the reserves alone:
If the pandemic causes a disruption to the football season, the financial impact would make the losses incurred this spring seem like pocket change.
The CEO Group might decide to absorb the 2020 budget hit so the reserves are available, in full, for FY21.
After all, the vast majority of the Pac-12’s annual revenue — both at the conference and campus levels — comes from football:
— Each home game generates several million dollars in ticket sales, parking, merchandise and concessions, although the total varies widely.
Washington generated $25 million in tickets sales during the 2018 season, according to its NCAA revenue/expense report, while UCLA’s total for the same season was $12.4 million.
— Meanwhile, the Pac-12’s TV contracts for the regular season, the conference championship game and the postseason (Rose Bowl and College Football Playoff) account for more than $400 million annually.
Each campus collects about $30 million annually in revenue tied to football media rights.
If several games are canceled this fall … if the season gets cancelled … the Pac-12 will need every cent of that reserve fund.
And tens of millions more.
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