UC Berkeley's Endowment Seating Program Doesn't Quite Add UpThe Campus's Plan to Go Into Debt to Retrofit Memorial Stadium Is a Problematic Issue
Tuesday, January 25, 2011
Category: Opinion > Op-Eds
On Nov. 5, 2009, seven of my colleagues and I brought the "Academics First!" resolution to the best-attended Academic Senate faculty meeting in years where it passed by a large margin. At that meeting, the administration provided a document entitled "Financial Models for California Memorial Stadium (CMS) & the Student Athlete High Performance Center (SAHPC)" promising that if "IA is unable to sell 75 percent of the seats prior to the start of construction, IA will be ready to further evaluate the size and scope of its program." What happened to this commitment?
It is disconcerting that the stated criterion is a percentage of seats sold as if all seats provide equal revenue when some seats are priced more than five times higher than others. Thus, the number of seats sold is not the appropriate metric; rather, the critical factor is the actual amount of cash raised.
The administration has explained that the financial plan is to establish a permanent IA endowment whose earnings will service the debt for the CMS and SAHPC, a commitment that will exceed $900 million, even if assuming lower interest payments than those approved by the regents. According to the Chronicle of Higher Education, the Cal Endowment Seating Program (ESP) is supposed to raise $400 million by 2014. The "Official Website of Cal Athletics" currently states "As of Jan. 15 (2010), nearly 1,700 of the ESP seats have been sold totaling more than $215 million" (http://www.calbears.com/genrel/011910aaa.html). But at the Task Force on IA's public forum on April 27, 2010, details about numbers of seats sold were revealed that can be used as the basis for a calculation that leads to a drastically lower amount, as will be explained below.
The ESP website claims that donations to the ESP "help the University build its endowment" but really the ESP is separate from the endowment of the university (http://www.calesp.com). The ESP's lowest-priced seat category is $40,000 and prices rise as high as $225,000. With such hefty price tags, it is hardly surprising that only 7 percent of participants have been willing to pay a one-time upfront fee, with the other 93 percent opting to spread their expenditure over periods of 5 or 30 years.
But it is a misconception that this is an installment plan or mortgage requiring annual payments; in fact, the ESP website describes an "annual renewable program - no long-term encumbrance or contract." Seat holders can stop paying annual payments at any time in what is really a pay-as-you-go annual seat "rental" program.
IA cannot rely on a steady stream of income from these 93 percent of seat holders. Common sense dictates that it would be foolhardy to blindly forge ahead, plunging into deep debt, given an uncertain future. Over a 30-year time span, seat holders may wish to stop paying due to illness, death, relocation, reduction in personal income, changes in family situation, a poor-performing football team, economic recession, etc.
Or seat holders may stop paying during that 30-year time span because the renovated stadium might be out of service and require significant repairs, if not completely abandoned, after suffering damage in an earthquake. The USGS reports a 31 percent probability of an earthquake of magnitude 6.7 or greater in the next 30 years on the Hayward Fault, the most dangerous fault in the Bay Area, which runs directly through the stadium.
In fact, since the stadium straddles the fault line, this construction project violates the Alquist-Priolo Earthquake Fault Zoning Act of 1972 whose stated purpose is "to prohibit the location of developments and structures for human occupancy across the trace of active faults." Rather than abide by existing law, the UCOP Senior Vice President for External Relations influenced first Governor Schwarzenegger in Aug. 2009 regarding California Senate Bill 113, allowing the university to spend more than 50 percent of the property value to retrofit the stadium, and then Assemblyman Roger Niello in March 2010 regarding California Assembly Bill 2133, fully exempting the stadium from the application of the act.
Of the three major categories of seats, the most sluggish sales are for the most expensive seats with only an estimated 134 of the 472 University Club seats sold. Roughly half of the 1,568 middle category Stadium Club seats and 1,158 lowest category Field Level Club seats have been sold. But only 7 percent of ESP participants are paying upfront, leaving 11 percent opting to pay a lower 5-year annual fee and a whopping 82 percent paying a much lower 30-year rate, with no obligation to continue to pay in future years. To calculate the total cash raised would require knowing what this distribution is for each of the various seat categories; however, in the absence of this knowledge, the same distribution will be assumed for all seat categories.
Moreover, the ESP website states that a "20 percent down payment option would only require a payment of $548." Thus, it appears that claims about the number of ESP seats "sold" include some seats that correspond to as little as $548 cash received. Nonetheless, to provide the most optimistic calculation possible, this fact will be ignored and instead the assumption made that all payments are in full.
Based on the above assumptions and the seat fee "donation schedule" provided on the ESP website, the calculation of the amount raised by the ESP yields $8 million, $3 million, and $9 million for upfront, 5-year annual fee and 30-year rate payments, respectively, totaling $20 million comprising $4 million, $12 million and $4 million, for "University Club," "Stadium Club" and "Field Level Club" seats, respectively.
Since IA's website's claim of $215 million is more than ten times this calculation, IA should follow the university's motto of Fiat Lux and provide a detailed explanation of its claim.
If this $20 million calculation is reasonably close to the truth, then approximately $380 million, or 95 percent of the $400 million IA endowment, still remains to be raised. Although nothing is impossible, IA provides no convincing argument that it will succeed in raising so much more money in the near future. This is all too reminiscent of the practices based on unfounded expectations that catalyzed the sub-prime mortgage crisis.
Editor's note: this piece follows the Dec. 3, 2010 op-ed "Financial Plan Is on Shaky Ground" by the same author.
Clarification: A previous version of Tuesday's op-ed, "UC Berkeley's Endowment Seating Program Doesn't Quite Add Up," may have implied that the sales figures provided regarding the nearly 1,700 ESP seats having been sold and having totaled more than $215 million were as of Jan. 15, 2011. The figures were as of Jan. 15, 2010.
Brian Barsky is a UC Berkeley professor. Reply to [email protected]
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