You are here

A look into the NCAA’s financial contingency plan

Association’s robust four-part plan successfully implemented after COVID-19 impact

Editor’s Note: View this article in print in the June issue of National Association of Collegiate Directors of Athletics’ publication, Athletics Administration.

Before the COVID-19 public health crisis, no one anticipated the NCAA Division I Men’s Basketball Championship being canceled, but the Association was prepared for such an unlikely possibility.

The NCAA’s long-standing contingency plan has evolved since its creation, but, for the most part, it’s always looked the same: robust insurance, leveraging financial reserves, reduction in Division I revenue distributions and NCAA operating budget cuts.

The Association’s contingency plan was put into motion March 12, when the NCAA Board of Governors canceled all remaining 2020 winter and spring championships. Between losses from ticket sales and its multimedia agreement with CBS Sports and Turner, the NCAA is projected to lose more than $700 million in revenue from the cancellation of the 2020 Division I men’s basketball tournament.

Since March 12, the plan has functioned exactly as it was intended.

“The remediation plan is working as designed. If the NCAA can get through next year without any major problems, we should be back to normal for our fiscal year beginning Sept. 1 of 2021. That’s pretty incredible for losing two-thirds of your revenue in one year,” said Kathleen McNeely, NCAA senior vice president and chief financial officer. “We had a plan. We’ve implemented the plan. And the plan is working.”

Event cancellation insurance is a big reason why. 

For more than a decade, the NCAA has strategically procured revenue-protecting event cancellation insurance coverage with broad terms and conditions to safeguard the Association’s primary source of revenue: the Division I men’s basketball tournament.

The NCAA’s coverage includes communicable disease and pandemic coverage, both of which are rare in more commonly held business-interruption insurance policies. The Association also obtains insurance only through financially stable insurers rated A- or better by the AM Best credit rating agency. Additionally, the NCAA proactively secures coverage terms at least one year in advance. This means coverage already is in place for the 2021 Division I Men’s Basketball Championship, with identical terms and conditions.

For this year’s tournament, the Association held event cancellation insurance between multiple policies totaling $270 million, which includes loss of both ticket and media rights-related revenue. This amount was on the high end of this kind of coverage offered by insurance underwriters compared to cost, McNeely said.

Which answers at least one other question surrounding the Association’s contingency plan: Why wasn’t the NCAA insured for more?

Much like how the insurance underwriters and actuaries perform diligent risk assessments to determine pricing, the NCAA conducts risk assessments to carefully determine the amount of coverage to maintain. Using outside consultants, these assessments are based on several factors, including probability of a full event cancellation versus relocation or postponement, and the probabilities of lost ticket revenue and media rights-related revenue.

In this case, the probability of the NCAA canceling the entire Division I Men’s Basketball Championship was determined to be extremely low. Putting hindsight aside, McNeely said, the NCAA is responsible to its membership to carefully analyze its assessed financial risk when determining the appropriate amount of insurance to procure.

“I can’t even say that membership would have had an appetite for what that premium would have cost us, annually, for additional insurance,” McNeely said. “The amount of insurance we held was healthy, especially given the probability of the risk.”

Put another way: Insurance was just one part of the contingency plan.

Financial reserves were another. Their use also has been questioned in recent months.

The NCAA and its membership always have included financial reserves as one part of the contingency plan, never as a complete replacement of lost revenue. The Association’s reserves have been restructured during McNeely’s nearly 10-year tenure at the NCAA, but the ability of those reserves to make up for the cancellation of the Division I men’s basketball tournament has remained the same.

Part of the NCAA’s overall reserves previously were kept in a quasi-endowment. In an October 2015 meeting, the Board of Governors decided to liquidate the quasi-endowment and approved a $200 million one-time distribution to Division I schools. For perspective, the NCAA’s entire reserves were valued at $698 million in 2016. The $200 million distribution occurred in 2017, and its funds were earmarked for the direct benefit of student-athletes and their academic success.

In an April 2017 meeting, even though the NCAA was one of multiple defendants, the Board of Governors also voted to use nearly $208.7 million from the liquidated quasi-endowment funds to pay the entire grant-in-aid class-action lawsuit settlement. The board made this decision for the benefit of student-athletes. Specifically, the funds were set aside for current and former Division I basketball and Football Bowl Subdivision student-athletes from the 2009-10 academic year through the 2016-17 academic year who did not receive cost of attendance as a part of their scholarship

Soon after, based upon McNeely’s recommendation the Finance and Audit Committee increased the NCAA’s operating reserves policy from requiring four months’ worth of operating revenue budget, not including revenue distribution, in reserves to six months’ worth, or roughly $200 million. Since then, the NCAA has bolstered and diversified its reserves. For the 2019-20 fiscal year, they were valued at $414.3 million.

“The remediation plan never changed,” McNeely said. “The difference is the NCAA strengthened our reserves once we no longer had a quasi-endowment that required annual increases.”

Ultimately, the Board of Governors approved a plan to use up to $50 million from the NCAA’s operating reserves for this year’s Division I distribution, another part of the contingency plan.

Before March Madness was canceled, the NCAA was scheduled to distribute $600 million to Division I schools in 2020. Two weeks after the cancellation, the Board of Governors voted unanimously to distribute $225 million to Division I schools.

As the NCAA constitution guarantees, Division II and Division III still will receive their 4.37% and 3.18%, respectively, of the Association’s actual revenue. Division II projects to receive $13.9 million in revenue this fiscal year, $30 million less than originally budgeted, a nearly 70% drop. Similarly, Division III’s projected budget fell from $33 million to $10.7 million. Both divisions have their own reserves policies, however, to help weather the shortfall. 

Still, the NCAA is making a concerted effort to do more for its membership and student-athletes through the fourth part of the contingency plan: Association-wide cuts.

The NCAA underwent a comprehensive review of operations with the goal of reducing expenses and identifying resources to be redirected to support student-athletes. Of approximately $412.5 million originally budgeted for operating expenses over the next 18 months, the national office identified ways to save $176 million. That’s nearly 43% in cuts.  

These savings come from a variety of measures, too.

President Mark Emmert and the NCAA’s nine other highest-paid executives took a 20% pay cut, while the rest of the President’s Cabinet took a 10% salary reduction. Other measures include canceling or deferring national office programs and initiatives, a salary and hiring freeze at the national office and implementing virtual committee meetings through at least the end of June. 

If there are net positive assets at the end of fiscal year 2020, McNeely said a supplemental distribution may be made to Division I schools — the same process that happens every year. From fiscal year 2015 to fiscal year 2020 — excluding fiscal year 2017 when the $200 million one-time distribution occurred — Division I schools have received more than $150 million in supplemental distributions.

“We are doing everything we can this year to recover so that we’re not in the red at the end of the year,” McNeely said. “At the end of the day, our responsibility is to membership, and that responsibility includes making sure the NCAA is fiscally operating back at normal levels in 18 months. That is the number one goal.”