CASE ANALYSIS:

The athletics program at the University of Cal-Berkeley is one of the premier collegiate athletic programs in the country ranking in the top 10 all-time of most NCAA championships won by a particular school. Despite this competitive success, Cal Athletics, which sponsors 30 intercollegiate sports, has undergone significant financial difficulties in the last several years. The athletics department has run budget shortfalls for six consecutive years since 2013-14 and has accumulated budget deficits totaling $89m during this timeframe.

The annual budget deficit incurred by the athletics department the last several years has been covered by the university's central campus. The Chancellor of the university and the Cal athletic director agreed that this subsidy from campus would not be viewed as a loan and would not have to be repaid by the athletics department at some point in the future. However, to further complicate matters, Cal's central campus is also facing financial difficulties with a $110 million budget shortfall as of 2018-19.

A large contributor to these financial hardships was the 2012 construction of a new $153 million Student-Athlete High Performance Center and a $321 million renovation of California Memorial Stadium, the school's football stadium. In total, the university incurred a controversial $445 million of debt which it planned to finance with the sale of special stadium seats in the school's 'Endowment Seating Program'(season tickets). The high price tag associated with the stadium renovations was primarily related to the need to retrofit the seating bowl to make it compliant with the state's earthquake safety regulations.

To avoid significant financial obligations in the immediate future, the athletics department structured the loan where the university would make $18 million interest-only annual payments on the debt for the first 20 years. This $18 million annual payment accounts for approximately 20% of Cal's athletics' budget. The principal repayment on the loan begins in 2032 when the annual debt payment will rise to about $26 million per year and eventually escalate to approximately $40 million per year. The debt payments are scheduled to continue for 100 hundred years from its 2013 inception, concluding in 2113 (yes, really, a 100-year loan). Over the entirety of the 100-year loan, the total financial obligation for the two facilities including interest payments will exceed $1 billion.

Prior to beginning construction, the university claimed that $215 million had been raised (pledged) toward the project by early 2010. However, as of June 30, 2017, only $67.29 million had been received toward the project, far short of the $215 million that had been claimed six years earlier.

Recently, the University Chancellor has promised immediate and future cuts to aid in balancing central campus's budget. However, as athletics continues to incur budget shortfalls to support their 30 intercollegiate sports, many are questioning the athletic department's spending and fiscal responsibility. The University Chancellor has publicly stated she does not intend to cut any sports. But as deficits rise, other university faculty and local residents have argued the current athletic financial model is not sustainable and major changes need to be made to move the university forward.

DIRECTIONS:

Given the information above, analyze the annual income statements from Cal athletics for the last five years and answer the following questions below.

QUESTIONS:

1. Calculate the following:
   1. What was the percentage change in total operating revenues from FY2015 to FY2019?

1. What was the percentage change in total expenses (operating + non-operating) from FY2015 to FY2019?

1. Identify at least three expense items from Cal's income statement that are significantly driving their expense growth in the last five years. Discuss some of the possible reasons these expense items have continued to rise despite running a budget deficit.

1. If you were advising the athletic director at Cal, what budgeting advice would you provide? Be specific in your answer.

1. What budgeting approach (discussed in the textbook or researched online) would you recommend in order for Cal athletics to balance their budget within the next three years? Please thoroughly explain your answer.

1. In recent years, central campus has covered any budget deficit that Cal athletics has incurred. Do you believe it is the responsibility of central campus to absorb financial shortfalls incurred by athletics? Or do you believe that athletics should be a self-sustaining enterprise? Why or why not?