Does the ‘Fair Pay to Play Act’ signal an overhaul of the future of college sports, or is it just California dreaming?
By Leo Kelly and Noel LaMontagne
It’s the shot heard round the NCAA world. Not a three-pointer, or a last-second field goal, but rather a shot at the NCAA and the traditions of the amateur status of its athletes.
On September 30, 2019, California Governor Gavin Newsom signed into law the Fair Pay to Play Act, which says colleges in California cannot punish their athletes for collecting endorsement money. This is a bill that could forever change the landscape of college sports, as the new law allows student-athletes to hire agents and earn income from the marketing of their likeness.
This means that one of the current core tenets of the NCAA’s identity and business model will be illegal in the state of California starting in 2023. While this concept has been hotly debated for years, the NCAA has managed to withstand the push for amateur compensation. But with the passing of the California law, the entire NCAA community is now thrust into a furious debate and must resolve the question of the meaning of amateur athletics in very short order.
In this white paper, we discuss the implications of a state passing a law to govern a national entity, the effects of compensating college student-athletes, and the impact on the athletes (compensated and non-compensated), their families and the relationship between professional sports and the NCAA. The purpose of this white paper is NOT to opine on whether or not athletes should be compensated, but rather to point out important issues that add to the debate.
The Gold Rush?
The decision by a single state to pass a law governing the NCAA is truly remarkable. It is not productive to speculate as to the political motive of passing such a law. The question is what the implications will be for California-based NCAA schools and schools from the other 49 states. Clearly, it is not possible to allow California (or any number of other copycat states – Florida, Illinois and New York have already proposed similar legislation) to stand alone in allowing for compensation of college athletes. This would clearly give California schools a competitive advantage for the very best athletes. Imagine if only the Los Angeles Rams could pay players – they would fare very well in free agency.
The NCAA has already responded to this new law by stating that under this rule, California colleges and universities would not be eligible to compete in NCAA athletics. California will now have to decide to retract the law or create its own collegiate athlete association. Other states also face the decision to follow California and fight the NCAA or join some type of new coalition. While the law brings the issue to an immediate debate, a pathway through a single state seems to further complicate the situation rather than bring clarity.
The big question: Should they be compensated, and if so, how?
If money is being made off an athlete’s likeness and success in college, then why would that athlete not be compensated? Unfortunately, this is not a simple question. The California law does not address the complexities of the situation or the nuances of college sports. It is very easy to look at Alabama football, Duke basketball or Texas baseball and make a sound case for compensating star athletes. The question becomes more complicated as the analysis delves further into the system, taking into consideration schools with less established programs and sports with less attendance and attention. The question is further muddied by the issue of stars vs. their teammates.
Alabama vs. Alabama State
There is no question that a game of Alabama vs. Alabama State is going to have a predictable outcome. Alabama University has won17 NCAA championships, five in the last 10 years alone. Alabama not only has a clear advantage over State in recruiting because of its tradition and its position as a national championship contender every year, but also because it puts athletes in the NFL. Each year the question of a greater divide between the haves and the have-nots continues to build. Division 1 Football Bowl Subdivision (FBS) schools are spending tremendous amounts of capital to build amazing facilities to draw this new generation of athlete. The same is true for every major NCAA sport. The objective is to build competitive teams that bring in student-athletes that want to affiliate with top athletic programs and alumni and corporate donors. If successful, this also leads to significant revenue from TV, product marketing and bowl games, which drives further revenue.
There are numerous stories of winning athletic programs building further success for an institution. One only needs to drive down Lancaster Street in Bryn Mawr, PA to see the spectacular growth of Villanova University in the years following their two NCAA Basketball National Champions in three seasons. Villanova’s amazing results begs the appropriate question: would they have achieved as much under the new California law? In a system that compensates athletes for marketing revenue, will athlete compensation drive the further bifurcation of powerhouse schools and the rest of the NCAA? How does a school with great academics and a wonderful campus and culture compete against the promise of significant compensation? While most athletes will not benefit from the law, it is the elite athlete that differentiates the top programs from the rest, and those star athletes will have little choice but to funnel into fewer choices of schools, creating a two-tier Division 1 college experience.
Who benefits and who doesn’t?
What is truly fascinating about the current law is how unclear the solution is. Who is compensated and how? How do you measure compensation? Are there limits? Is the compensation shared? There are many other questions that will need to be answered. The concept seems simple. A great athlete is a star at a school. They drive TV viewership and sell shirts, hats and other gear. Since that athlete is the star and is driving revenue for their school, then they get paid! On the surface, it’s easy for any capitalist to agree. That said, as one peels back the layers, it gets significantly more complex.
First, it is important to note that many elite college athletes DO get “paid.” They receive subsidized college tuition, room and board, and food, and today they also receive a stipend to cover basic expenses. Together, this adds up to a significant amount of money per year. It is easy to look at the one or two stars in a top-five program in football or basketball and make a case that these forms of compensation are inadequate. However, when considering every college athlete in every sport that receives these benefits, the amount of “compensation” that is paid to college athletes is extraordinary. But it would be more than fair to allow these few elite athletes to receive additional “compensation” because of the revenue they bring to the institution.
So the question becomes, what benefit do these athletes gain from their stardom? The NCAA is truly a wonderful vehicle for athletes to use their unique talent to obtain an education – often for free – that will allow them to have a stream of compensation for the rest of their lives. The present value of that stream of income is remarkable. But not every athlete completes school. It is no secret that the NCAA has an issue with elite athletes leaving college to pursue lucrative professional sports contracts. Obviously, this desire is greater with athletes whose financial position is more challenged. In this case, the contract with the school is different. Here the school is agreeing to feed, board and pay expenses while a player uses the school’s incredible platform to showcase their talent on the most competitive stage, with the largest crowds and the prime TV spots to secure a professional sports opportunity. There is also a very fair argument that players with stressed financial situations need to leave school early because the compensation benefits far outweigh the benefit of staying for a diploma.
So, if an elite athlete is being paid for their success, like a professional athlete, does that mean they must sign a contract to stay in college for four years? After all, they are using the school’s reputation, history, facilities, and other players and coaches to succeed. An argument could be made that this would help kids stay in school, and that may be true for these few elite athletes, but what about the supporting cast? If a top-ranked quarterback in the SEC enjoys success and consequently has his image marketed aggressively, it’s a short bridge to argue for compensation. But what about the five linemen that provide the pocket and time for him to throw? Or the fullback that picks up the blitz? What about all the other players, coaches and support personnel that add to the quarterback’s success? How does one divide that?
In professional sports, it’s easy. Each athlete is compensated based on the value they bring to their team. In the California law system, the solution is less clear. Compensation is based on popularity and marketing. Additionally, what about the women’s lacrosse player or the men’s diving star or the A golfer in a school? All important contributors (and potential future donors) of the institution. The issue is a complex one that requires more than a shotgun approach.
The Dream Team
“Do you believe in miracles?” We still remember listening to this iconic game and hearing Al Michaels shout those now famous words. In 1980, our families struggled, as many did, and we had to listen to the 1980 Olympic hockey team on the speakers of a broken TV console. It’s both of our favorite sports memory! There is a magic to that moment. A group of hungry, tough and gritty college players beat the world’s best professional hockey team, the USSR. We have heard many fans of that moment lament that it can never be repeated because the Olympics now allow professionals into the games. It is a valid point. Yet, every year, we watch with great enthusiasm the Bowl Championship Series, the FCS Football Championship, March Madness, the College Baseball and Softball World Series and many other college championships. While our country loves professional sports, these moments capture special attention. Why?
We would say it’s because these are not professional athletes. These are hungry, tough and gritty kids trying to become the next great story and being cheered on by generations of alumni who feel deeply and strongly about their alma mater. The prize is greatness, not dollars. If compensation enters college sports, does that change the dream team? How does it affect the locker room? Will we see the same ambition and drive for the benefit of the team, or will marketing of one’s self and individual glory become the first order of business?
Where there is money…
The NCAA has certainly dealt with its share of controversy surrounding recruiting practices, grading and even paying athletes. Now add marketing compensation to the mix. How will that be governed and gauged? Putting aside the basic question of loyalty to one’s self vs. one’s school and team, there is also a question of potential corruption. Can a school promise its athletes the benefit of marketing opportunities with alumni and organizations doing business with the program and its fans? For example, if Johnny is between school A and B, and school A is playing it straight and school B gets Al from Al’s Used Cars, who is an alum and fan, to use Johnny in its marketing, then has school B manipulated the system? While this example may seem extreme, once Pandora’s Box is open, these are the situations that could – and will – result. A detailed governance and policing mechanism will be required to manage the problem at all levels.
Clearly the question of compensating college athletes beyond scholarships and stipends is not a simple one. When viewing this decision in its simplest and most capitalistic form, allowing athletes to receive money for their contribution to the revenue of the institution seems appropriate and fair. However, as more variables are brought into the debate and the focus is expanded to reflect the complex reality that this is amateur sports, finding a clear point of view becomes much more difficult. While California’s law has brought the debate to the forefront, it does not address many of these more intricate issues. This may be why California won’t even put this into motion until 2023; they want to force the conversation and be the catalyst to change but are unsure what the change actually looks like. Further, having this law in one state (or any number less than 50) creates an unfair competitive landscape. This is untenable and will most certainly need to be addressed or we will see the birth of the CCAA.
As wealth advisors with a special focus on working with athletes and entertainers, we know firsthand the challenging and unique financial needs they have. While extending an athlete’s professional career increases their earning lifetime and opens doors they can benefit from monetarily, it also reshapes the landscape of college athletics and what it means to be an amateur, rather than a professional, athlete. This law and similar legislation could have serious impacts on how these individuals think about their finances, and when. As other states, and the NCAA, decide what course of action to take, we expect there to be further developments that could affect the entire future of college sports.
About Verdence Capital Advisors
Leo Kelly is the founder, CEO of Verdence Capital Advisors, a nationally-recognized private wealth advisory and multi-family office firm headquartered in Hunt Valley, Maryland, with an office in Northern Virginia. Prior to launching Verdence in 2017, Leo served as a Partner at HighTower Advisors and a Managing Director at Merrill Lynch.
Noel LaMontagne joined Verdence’s /PRO team in March of 2019, following an NFL career with the Cleveland Browns and more than 15 years as a sports advisor. Noel brings his experience as both a professional athlete and as an advisor to other athletes to this key segment of Verdence’s business.
Verdence/PRO team focuses on supporting athletes and entertainers throughout their lives, as they transition into new chapters and face new challenges. Verdence is committed to the principle that advice should be transparent, customized and given without bias. For more information, visit www.verdence.com.