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Salaries for College Athletes: An Economic and Legal Approach

This paper was written for a class entitled 'Law and Economics'.  The focus of the class was the relationship between social economic factors and legal theory and application.  This was not a law class or a law school class.  I am not a lawyer or a law student.  I only have basic understanding of the legal matters addressed in this paper and used the cited text book as my main source.

Now that the disclaimer stuff is out of the way, this is the paper that I wrote for the class.  I have decided to go ahead and post it in its current form and not update it for topics I did not have room to discuss due to page requirements.  I personally believe that this paper is not detailed enough.  When I find some time I would like to get into more detail on the economics of players, the effect on Title IX on athletic budgets, how much money is contributed from tv contracts, the percentage of capital siphoned off by conferences and the NCAA and the efficacy of openly paying players with respect to the problem of stopping unwarranted compensation. 

            With the on-going issues of college athletes and athletes' families taking money from professional agents and members of the colligate community, there has been a rise in volume in the debate of amateurism in college sports.  This has been especially true with high profile cases in college football.  Currently, the NCAA governs rules and punishments on violations in amateurism.  The NCAA is not a legal body, but it is a regulating one.  Member schools enter into the NCAA voluntarily in order to access the benefit of fair competition with other universities.

            The NCAA makes amateurism one of its main concerns because they want to promote relative equality among college programs.  The NCAA isn't naïve enough to believe that all programs are created equal.  They have separated the competitive field into three divisions and have separated Division 1 into two subdivisions for football.  The intention of these divisions in conjunction with other regulation (such as scholarship limits) is to even the competitive playing field.  Since its inception in 1906, the NCAA has been tasked with consolidating rules, protecting the health and well being of student-athletes, and preventing unfair competitive practices by member institutions.

            The current debate on amateurism has many detractors of the current system.  The people believe that allowing schools to pay athletes will alleviate the pressure for athletes to take money.  The efficacy of this stance, while important, is not the central issue of this paper.  Here we will be discussing the economic arguments of this issue.  To assist with this analysis, I have used football and athletic budget data for the Division 1 Football Bowl Subdivision (FBS).  The NCAA releases this data and it was compiled by Indystar.com and USA Today.  Indystar compiled the 2004-2005 data by sport for the major sports and USA Today compiled the total athletic department for the 2008-2009 academic year.  This data is helpful in determining the financial impact to the academic institutions.

 

The NCAA

The NCAA was founded in 1906 to "protect young people from the dangerous and exploitive athletics practices of the time."  Early-day football resulted in many injuries and was usually run by student groups that would hire players.  This led to many universities dropping the sport.  Under the direction of President Theodore Roosevelt,  62 universities and colleges became charter members of the Intercollegiate Athletic Associate of the United States (IAAUS).  The organization took its present name in 1910.

            After World War II, the NCAA instituted ‘sanity rules' to establish guidelines in recruiting and financial aid to curb abuses.  In addition, members were worried about how TV would affect game attendance.  As college athletics grew, so did the scope of the NCAA.  In 1973, the membership divided into divisions separating programs with varying level of commitment.  The association began administering women's sports in 1980.  After a tumultuous period in the 1980's (marked by scandals at member institutions and the loss of TV control rights from the US Supreme Court), the NCAA founded the President's Commission.  The Presidents commission is made up of university presidents from all three divisions and is charged with setting the groups agenda.[1]

Contract Law

            Although the NCAA is a regulatory body and not a legal entity, the theory of application of legal standards in regulation is similar.  In the case of student-athletes participating in collegiate sports, the legal theory that applies falls under contract law.  Players contract with university for their services as athletes.  The athlete agrees to play for the university.  In return, the school provides a free education with room and board.  This contract is renewable on a yearly basis and can be exited by either party at the end of the school year.  The design of this system includes offer, acceptance and consideration, the three elements of a contract.

            The NFL doesn't allow players into the league straight out of high-school.  Therefore, most players believe that if they want to make a career out of playing football they have to play at the collegiate level.  This has led some to argue that players enter into the contract under economic duress.  That is, that the collegiate system has a monopoly on the market for players.  This only holds true if there are truly no other options for players out of high-school.  That is not the case.  Players can play in the Canadian Football League, Arena League or in Europe.  While it is true that it is rare that players make it to the NFL from these other leagues, it is possible and has happened.  Since players do have other choices, there is not a true monopoly to cause duress.

            Players also know the NCAA regulations when they agree to play at the collegiate level.  The rules associated with playing in college are open to public viewing and are well documented.  In addition, the recruiting process gives coaches adequate time to evaluate the talent of athletes.  There is no asymmetry in information.  Taking into account the lack of duress and the ample use of information, there doesn't seem to be a reason to invalidate the contract.

            The second contract is between the member institution and the NCAA.  The member instructions agree to NCAA governance and to abide by the regulations.  In return, the NCAA agrees to regulate all member institutions equally and to create a fair competitive environment.  This contract is just as important as the contract between player and university.  The relationship between the university and the NCAA determines the nature of the relationship between the university and the student-athlete.

Violation of the Contract

            The main issues in the debate are adequate compensation for student-athletes and effective enforcement of NCAA compliance regulations.  The argument for adequate compensation is that it would remove the incentive for student-athletes to take money from outside (non-university related) as well as university affiliated agents.  Under this new system, where would we find efficient breach?  For breach of contract between the NCAA and member institutions, incentives against breech are already in place and the NCAA is constantly working to find how much it is willing to invest to prevent breach.  For the purposes of this paper, we are going to assume that the market will determine efficient breach between these two parties and that bargaining between the NCAA and member institutions set the determining market factors (not a completely unreasonable assumption).

            The two ways for a breach in contract between a university and a student-athlete to occur are for the university or an agent (booster) of the university to pay a player for his services or for a non-university agent (such as a sports agent) to pay a player for an expectation of a future business relationship.  When a breach occurs where the university pays a player, the university also breaches its contract with the NCAA.  This type of breach is already covered under the terms of that contract and is subject to the regulations and penalties of that regulating body.  While this behavior still occurs, the NCAA has made considerable strides to curb such behavior and member institutions know the risks.

            When a breach occurs where a player accepts payment from an outside source, the only recourse for compensation of breach is for the university to remove the eligibility of the player to play.  While this doesn't actually provide compensation to the university, it does create an incentive not to breach.  If a player wants to be able to play at the next level or to receive a high draft status, playing time is crucial.  In cases where the student-athlete has received small benefits (in many cases unintentional) he/she has to repay the amount of that benefit to a charity.  This is the only case of money damages in this system.  In larger cases, money damages are unenforceable.  For instance, if a student-athlete accepts large cash payments from an agent with an agreement to sign with that agent when the athlete turns pro, the NCAA will declare that athlete ineligible to play on the collegiate level.  In these cases, it is not possible for the student-athlete to regain eligibility since he has violated the amateur standard.  If the athlete no longer has a means to return to the college game, he has no incentive to return the money or to donate it to charity as punishment.  The NCAA no longer has effective control over the athlete.

            The university does not have an incentive to invest in reliance, either.  Paying players a salary can be considered a form of reliance.  There are two reasons why this approach to reliance cannot be trusted as effective.  First, if all players are paid the same base salary on top of their scholarship, there is no way to differentiate between top level talent and average to lower talent.  There cannon be a compensation system in place that rewards expected talent levels without creating a market that shops players to the highest bidder.  This system would also induce the same problems we see now on the college level down to the high-school level by creating agents that match high-school players with colleges.  Second, if salaries for college players were capped (lets assume a standard college wage, $10, the same as an assistantship), reliance damages would be difficult to collect.  In the NFL, players can be fined if the behave in a manner that is considered a breach of their contract with their team or with the NFL.  If universities were paying college athletes, reliance damages could be collected in the same way.  However, if student-athletes are given a scholarship plus a base salary, the scholarship cannot be ‘fined' and the base salary may not be enough in order to effectively fine the athlete without seriously hurting their ability to live (pay rent, etc.).  Even if a university could afford such a system, there does not seem to be enough incentive for universities to voluntarily enter into such a contract.

Financial Burden on Universities

            So far, the discussion has been limited to college football players.  If these players are to be compensated with salaries for their work, why should other sports be different?  Men's basketball suffers from the same problems, so the argument can be made to compensate them as well.  What about women's basketball, soccer, track & field or swimming and diving?  Do we compensate all student-athletes the same?  Where do we draw the line?

            While the rest of these sports are outside the scope of this paper, it is easy to see what a slippery slope this is.  Many athletic budgets are already strapped for operating funds and could not afford such measures.  Very few athletic departments can stand alone as a revenue generating agency and almost all of these are on the major Division-I level.  Taking all of the Division-I schools whose athletic budgets are public (private schools do not have to publicly report), it is easy to see what the effect of paying football players has on these schools' budgets.  Using NCAA regulations on practice time and roster size limitations, paying a Division-I football team a base salary of $10/hr would cost athletic departments and additional $273,000 per year.  This includes all mandatory practice times allowable throughout the year.  This does not include ‘voluntary' (which we all know are not truly voluntary) film session and workouts.

            Using the 2004-2005 academic year data, 32 Division-I football programs did not produce a positive cash flow.  Adding in the cost of paying players, this number goes up to 36, or 30.77% of the programs.  Looking at athletic budgets as a whole, we see a much more dramatic change.  Using the 2008-2009 total athletic department number, the number of programs that lose money goes from 38 to 61 or 52.59%.  The major reason for the difference is that football is one of the large money programs and is used to fund other programs within the department.  It is important to note that this only takes into consideration football player and the damage would be much more severe if we included basketball and baseball as well.

Recommendations

            Paying college athletes could lead to a colleges doing away with athletics all together since they would no longer be affordable.  This model is not viable for institutions that are state supported since funding is tight and tax-payers would be unwilling to pay.  However, there are possibilities to de-incentivize such behavior.  Not much more can be done on to the student-athlete.  However, the agents do have a governing body of their own, the NFL Players Association.  Also, in many states, sports agents have to register with the state and have to operate under legal statutes.  Using these mechanisms, a liability measure can be enacted on agents if they cause ineligibility of college athletes.  This legal theory falls more under tort law than contract law, but can be an effective means of holding these parties responsible for their actions.  The agent can then decide for himself if the risk of paying liability damages (in the form of fines or civil penalties) is worth the possible reward of signing a star player.  This would give the agent a negative economic incentive to counter-balance the positive ones.

 

[1] www.ncaa.org

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