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B–6

BOARD OF REGENTS MEETING

B–6/209-20

9/10/20

Intercollegiate Athletics Fiscal Year 2021 Operating Budget Update

INFORMATION

For information only.

BACKGROUND

Intercollegiate Athletics’ (ICA’s) Fiscal Year (FY) 2021 budget presentation in

May 2020 reflected a best-case scenario for the department at a time when much

was still unknown about COVID-19’s impact on sport operations in Fall 2020 and

beyond. Since then, the Pac-12 CEO Group voted unanimously to postpone all

sport competitions through the end of the 2020 calendar year. The updated FY21

budget included here reflects the following assumptions, as well as actions taken

by ICA, which resulted from that decision:

• A truncated football season in winter/spring;

• Unlikely to have fans at events (however we are prepared to host fans if

circumstances change);

• Lower sponsorship revenue; and

• Staffing and operational cuts equal to roughly $28 million.

The changes presented fall within the ranges approved in June, and so do not

require approval by the Board of Regents.

ICA has also provided its Quarterly Borrower Risk Report, which includes the

following elements:

1. Up-to-date financial status, including revenues, expenses, net margin and

reserve levels;

2. Major threats to future revenues, including COVID-19 impact;

3. Ongoing efforts and plans to return to covenant compliance;

4. Overall unit risk assessment; and

5. Updated projections based on the most current information (e.g. ticket

refunds).

The presentation highlights the considerable longer-term challenges faced by

ICA. These challenges necessitate a significant fundraising effort in FY21 to

avoid total depletion of the reserves ICA has built up over the last few decades.

Attachments

1. UW Intercollegiate Athletics – FY21 Budget Update

2. Intercollegiate Athletics (ICA) Quarterly Borrower Risk Report – September

2020

3. Intercollegiate Athletics: FY21 Operating Budget Update, Board of Regents

Presentation

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UW Intercollegiate Athletics | FY21 Budget Update

*based on information available as of August 21, 2020

FY21 FY21 FY21

June 2020 BOR Sept 2020 BOR Sept 2020 BOR Base-Case Update Update w/ add'l

fundraising JULY 1, 2020 BEGINNING RESERVE BALANCE $38,981,000 $38,981,000 $38,981,000

REVENUE

Gate Revenue $29,869,000 $0 $0 Too early to assume fans at events in Spring 2021

Contributions $24,956,000 $17,095,000 $32,095,000 Reflects Huskies All In gifts and credits from FB 2020; add'l $15M fundraising goal to maintain reserves

NCAA / Conference $38,878,000 $20,128,000 $20,128,000 TV rights from spring FB, lower NCAA distributions

Royalties, Adv & Sponsorships $15,099,000 $9,958,000 $9,958,000 Decrease in MMR and other third party sponsorships

Tuition Waivers $4,447,000 $4,501,000 $4,501,000

Other Revenue $10,848,000 $6,842,000 $6,842,000 Loss of game-day revenue (concessions, parking, etc.)

TOTAL REVENUE $124,097,000 $58,524,000 $73,524,000

EXPENSE

Salaries $37,267,000 $33,868,000 $33,868,000 Benefits $9,273,000 $8,447,000 $8,447,000 Athletics Student Aid $16,325,000 $16,405,000 $16,405,000

Sport Operational Expenses $43,268,000 $28,207,000 $28,207,000 Shorter sport seasons and no fans at events (40% cut compared to normal operating activity)

UW Institutional Overhead $2,650,000 $0 $0 1 year exemption approved by President

TOTAL OPERATING EXPENSES $108,783,000 $86,927,000 $86,927,000

NET OPERATING INCOME $15,314,000 ($28,403,000) ($13,403,000)

Debt Service $14,345,000 $14,345,000 $14,345,000

NET OPERATING INCOME LESS DEBT SERVICE $969,000 ($42,748,000) ($27,748,000)

DEBT SERVICE COVERAGE (based on full payment) 1.07 (1.98) (0.93)

Minor Capital Exp / Deferred Maint $2,571,000 $2,571,000 $2,571,000 Softball project (funded by gift in PY) CASH FLOW AFTER INVESTMENT IN CAPITAL ($1,602,000) ($45,319,000) ($30,319,000)

Reserve adjustment: refunds for Football 2020 ($6,390,000) ($6,390,000) Collected prior to July 1, 2020; refunded in fall 2020

Adjustment for 1 year of debt deferral $13,345,000 $13,345,000 Pending Board approval in Sept 2020

JUNE 30, 2021 RESERVE BALANCE $37,379,000 $617,000 $15,617,000

September Assumptions

Voluntary contract reductions, department-wide furloughs, other staffing cuts (note: June base-case included 5% reductions; 12% additional have been made since then for 17% total)

ATTACHMENT 1

B-6.1/209-20
(3)

(1) 1.25x minimum Debt Service Coverage requirement, measured at fiscal year end

(2) One-year’s debt service minimum reserve requirement. FY21 reserve balance forecast assumes Board approval of one-year ILP debt deferral (3) Includes non-operating revenue

(4) Includes non-operating expenses

(5) If negative, debt service is paid from reserves

Intercollegiate Athletics (ICA)

Quarterly Borrower Risk Report – September 2020

(Data as of August 28, 2020 - $ in millions)

Overall Unit Risk Assessment:

ICA’s risk to repay debt obligations is high. ICA has a highly concentrated revenue stream (football and related revenues) and limited ability to reduce operating expenses in alignment with revenue reductions.

Intercollegiate Athletics

Preliminary FY20 - Actuals

Q1

(Jul – Sept) (Jul – Dec) Thru Q2 (Jul – Mar) Thru Q3 (Jul – Jun) Thru Q4

Covenant Status

Debt Service Coverage (1) 1.46x n/a n/a n/a (1.98x)

Reserves (2) $39.0 $24.4 $10.5 ($4.4) $0.6

Reserve Requirement (waived through FY21) $10.0 $10.0 $10.0 $10.0 $10.0 Prior Year Revenue Year-to-Date (3) $133.8 (FY19) $22.6 $54.7 $83.8 $126.5

Current Year Revenue Year-to-Date (3) $126.5 $6.9 $11.4 $21.7 $58.5

Difference ($7.3) ($15.7) ($43.3) ($62.1) ($68.0) Prior Year Total Expenses Year-to-Date (4) $119.8 (FY19) $21.8 $54.8 $82.3 $109.9

Current Year Total Expenses Year-to-Date (4) $109.9 $14.8 $33.0 $58.1 $89.5

Difference ($9.9) ($7.0) ($21.8) ($24.2) ($20.4) Net Revenue Available to Pay Debt Service (5) $16.6 ($7.9) ($21.6) ($36.4) ($31.0)

Major Assumptions

Selected Indicators

Estimates as of 8/21/20 % of Season Tickets Total $ in Millions

2020 Football Season Tickets Donated to Huskies All In Campaign 15% $3.2

2020 Football Season Tickets Credited to 2021 Spring and/or Fall 55% $11.7

2020 Football Season Ticket Refunds 30% ($6.4)

Unit Risks & Mitigations

Treasury & OPB Mitigations

Treasury Credit Assessment

 Spring football season with truncated schedule. Revenues assume conference distributions related to TV rights, but exclude additional revenue from fans in attendance (too early to predict).

 Delayed start for men's basketball season; NCAA tournament still played.

 Student athletes in the footprint throughout the year, participating in activities approved by medical team.

September 2020 assumptions include the following mitigation strategies:

 Voluntary salary reductions, department-wide furloughs, layoffs (17% cut).  Continued cost containment, spending freezes and operational cuts (40% cut).  Significant fundraising initiatives in order to maintain debt service requirements.

In a no or further limited sports scenario, these are additional mitigation strategies ICA may explore:

 Discussion with donors about re-direction of H2P/BBall Ops pledges to operations.  Temporary suspension of activities regardless of Pac-12 policies, limit supporting

expenditures to scholarships and academic services only.

What has been done:

 Reduction of ILP rate from 4.50% to 4.25%.  UW overhead will be waived for FY21.  Donations to UW Athletics to address

COVID-related impacts will be covered under President Cauce’s current blanket “exemption” to the gift assessment for COVID gifts.

 A one-year ILP debt deferral will be provided for FY 21, subject to BOR approval.

 In FY21 ICA is unable to pay a full year of debt service. FY22 and onward, debt repayment risk is considered high. By March 2021, ICA is projecting to run out of reserves and net revenues to pay for debt service.

 ICA’s debt is approx. 9.3% (ending FY20) of the University’s total debt portfolio. ICA’s total revenue is 2% (FY19 audit) of the University’s total revenue.  ICA’s primary revenue stream is concentrated on event ticket sales and TV rights. Without football and men’s basketball revenues, ICA will likely be

unable to support a fiscal year of annual debt service totaling $14.4 million.

 ICA operates on a narrow margin, making them highly sensitive to any revenue disruptions and revenue impairments.

 ICA has demonstrated ability to cut costs to partially manage revenue loss. However, these mitigations do not appear to offset total losses - additional mitigations are likely needed.

 For the University to sustain a long-term Athletic program, ICA will likely require additional support in the coming months.

 Overall, ICA is expected to remain out of compliance with ILP loan covenants through at least FY21. If ICA’s reserves are depleted this year this will present an intermediate-term financial risk to the University that will need to be monitored and managed.

ATTACHMENT 2

B-6.2/209-20
(4)

Intercollegiate Athletics

FY21 Operating Budget Update

Board of Regents Presentation

September 10, 2020

ATTACHMENT 3

B-6.3/209-20

9/10/20 Page 1 of 8

(5)

Fall sports cancellation; possibility of spring football season

Fans unlikely (financials reflect this assumption, however we are prepared to host fans if

circumstances change)

Revenue impact significant due to loss in gate, donations and TV revenue

Sponsorship revenue impacts

Lower multi-media rights sponsorship revenue due to loss of games and fans

Delayed payments from other sponsors

Our new “best case” scenario

Still many uncertainties

FY21 Updated Financial Assumptions

B-6.3/209-20 9/10/20 Page 2 of 8

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Maintain sport sponsorship and operations for all 22 teams

Student-athlete support services fully funded

Medical health and wellness / mental health services

Sports performance / nutrition

Academic services / student development

Financial aid / compliance

Diversity, equity and inclusion programming and education

Increase investments recommended by medical team and COVID-19 committee

Proactive mitigation strategies to financially recover as quickly as possible

Guiding Principles for FY21

B-6.3/209-20 9/10/20 Page 3 of 8

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UW Intercollegiate Athletics | FY21 Budget Update

*based on information available as of August 21, 2020

FY21 FY21 FY21

June 2020 BOR Sept 2020 BOR Sept 2020 BOR Base-Case Update Update w/ add'l

fundraising JULY 1, 2020 BEGINNING RESERVE BALANCE $38,981,000 $38,981,000 $38,981,000

REVENUE

Gate Revenue $29,869,000 $0 $0 Too early to assume fans at events in Spring 2021

Contributions $24,956,000 $17,095,000 $32,095,000 Reflects Huskies All In gifts and credits from FB 2020; add'l $15M fundraising goal to maintain reserves

NCAA / Conference $38,878,000 $20,128,000 $20,128,000 TV rights from spring FB, lower NCAA distributions

Royalties, Adv & Sponsorships $15,099,000 $9,958,000 $9,958,000 Decrease in MMR and other third party sponsorships

Tuition Waivers $4,447,000 $4,501,000 $4,501,000

Other Revenue $10,848,000 $6,842,000 $6,842,000 Loss of game-day revenue (concessions, parking, etc.)

TOTAL REVENUE $124,097,000 $58,524,000 $73,524,000 EXPENSE

Salaries $37,267,000 $33,868,000 $33,868,000

Benefits $9,273,000 $8,447,000 $8,447,000

Athletics Student Aid $16,325,000 $16,405,000 $16,405,000

Sport Operational Expenses $43,268,000 $28,207,000 $28,207,000 Shorter sport seasons and no fans at events (40% cut compared to normal operating activity)

UW Institutional Overhead $2,650,000 $0 $0 1 year exemption approved by President

TOTAL OPERATING EXPENSES $108,783,000 $86,927,000 $86,927,000 NET OPERATING INCOME $15,314,000 ($28,403,000) ($13,403,000)

Debt Service $14,345,000 $14,345,000 $14,345,000

NET OPERATING INCOME LESS DEBT SERVICE $969,000 ($42,748,000) ($27,748,000) DEBT SERVICE COVERAGE (based on full payment) 1.07 (1.98) (0.93)

Minor Capital Exp / Deferred Maint $2,571,000 $2,571,000 $2,571,000 Softball project (funded by gift in PY)

CASH FLOW AFTER INVESTMENT IN CAPITAL ($1,602,000) ($45,319,000) ($30,319,000)

Reserve adjustment: refunds for Football 2020 ($6,390,000) ($6,390,000) Collected prior to July 1, 2020; refunded in fall 2020

Adjustment for 1 year of debt deferral $13,345,000 $13,345,000 Pending Board approval in Sept 2020

JUNE 30, 2021 RESERVE BALANCE $37,379,000 $617,000 $15,617,000

September Assumptions

Voluntary contract reductions, department-wide furloughs, other staffing cuts (note: June base-case included 5% reductions; 12% additional have been made since then for 17% total)

B-6.3/209-20 9/10/20 Page 4 of 8

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Voluntary salary reductions, department wide furloughs, layoffs = 17% reduction in salaries and benefits

(approx. $8M in savings)

Continued cost containment / spending freezes and operational cuts = 40% in operational reductions (approx.

$20M)

Significant fundraising initiatives will be necessary to maintain debt service requirements for future years.

-

Debt service payment of $14.3M resumes in FY22; additional fundraising goal assumes 1 year of debt

service in reserves at conclusion of FY21. This will be necessary to meet ILP covenants in FY22 and beyond.

-

ICA experiences occasional deficits due to irregular cash flows of some of our seat related gifts; reserves

will allow ICA to weather these deficits without entering into another FSP.

-

Discussion with donors about redirecting H2P/Bball ops pledges may also be necessary.

UW overhead waiver for FY21.

Donations to UW Athletics to address COVID-related impacts will be covered under the President’s current

blanket “exemption” to the gift assessment for COVID gifts.

One-year debt deferral will for FY21, subject to BOR approval.

Mitigation Strategies

B-6.3/209-20 9/10/20 Page 5 of 8

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Aggressive fundraising goals may not be met.

No or further limited sports scenario could result in losses of an additional $20M.

Limited amount of additional expenses can be cut while still adhering to guiding principals:

- $16.4M in scholarships (guaranteed by Pac-12 CEO’s)

- 65% of salaries and benefits tied to guaranteed contract employees

- $4.5M in medical, mental health and nutrition expenses (could escalate based on Pac-12

Medical Advisory Committee requirements).

- $4.0M in academic support, student athlete development and compliance

Risks and Limitations

B-6.3/209-20 9/10/20 Page 6 of 8

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Attendance concerns related to COVID-19

Revenue loss may be significant; unclear long-term impact on season ticket base.

Changing landscape of college athletics

Name, Image and Likeness (effective 7/1/21)

- Allows student athletes to engage in business activities, have paid partnerships with third-parties,

hire agents and advisors

- Many unknowns (i.e. recruiting impact, cost of monitoring/education)

Alston vs. NCAA ruling (effective immediately)

- Permissible to now cover ‘education-related benefits’ beyond what’s calculated in cost of attendance

(i.e. computers, science equipment, study abroad, academic or graduation awards)

- Title IX implications (no disproportionate benefits)

- Conference guidelines currently under review

Longer-term Challenges and

Considerations

B-6.3/209-20 9/10/20 Page 7 of 8

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ICA to continue to provide FY21 updates to BOR if/when operating plans change.

Completion of Quarterly Borrower Risk Reports

Board follow-up if redirection in H2P/Basketball Ops pledge payments necessitate an

updated financing plan.

Spring financial update to BOR with updated long-range projections.

Next Steps

B-6.3/209-20 9/10/20 Page 8 of 8

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