June 5, 2013 To: Faculty Council Members From: Tom Mondschean, FC Representati e, !

usiness Re: Financial "ssues Related to the #roposed $tadium " ha e had some con ersations %ith Je&& !eth'e and !ob (o)oman about the proposed stadium and " thou*ht " mi*ht share %hat " ha e learned %ith my Faculty Council collea*ues+ " am not interested in e,pressin* all the pros and cons about this proposal+ Rather, " %anted to e,plain the proposal as " understand it &rom the &inancial perspecti e as accurately as " can+ " %ill &rom time to time e,press my analysis about an issue, but " %ill try to label it as such+ This memo has been re ie%ed by central administration be&ore " ha e sent it out+ Funding the Construction of the Stadium -e#aul and the Metropolitan #ier and .,position /uthority 0herea&ter 'no%n as Mc#ier1 %ill contribute 230 million each to the construction o& the stadium+ The City o& Chica*o %ill use T"F money to secure the land 0e,pected cost o& 240550 million1+ Mc#ier and -e#aul %ill co5o%n the stadium based on the pro rata share o& the land ac6uisition and construction costs 0Mc#ier *ets the City7s sta'e1+ -e#aul7s o%nership sta'e in the &acility is li'ely to be around 355408+ This %ill be an asset on -e#aul7s balance sheet+ -e#aul %ill hold the asset &or 50 years, a&ter %hich Mc#ier could buy us out at &air mar'et alue+ The City still needs to purchase the land that it does not already o%n+ The stadium %ould be bet%een 21st and 22nd 0Cerma' Rd+1 on the north and south, and #rairie and "ndiana on the east and %est+ The stadium %ill be 4 bloc's &rom the Chinato%n stop on the Red 9ine, and 2+5 bloc's &rom a ne% :reen 9ine stop that %ould be built in the ne,t t%o years+ The "llinois Central also stops nearby+ Moreo er, there is a par'in* *ara*e one bloc' a%ay already a ailable that %ould be used by the stadium+ Analysis: -e#aul %ill ma'e a one5time payment o& 230 million in cash to ac6uire a sta'e in the stadium+ This money %ill be &unded mainly throu*h debt issuance, thou*h the ;ni ersity mi*ht recei e some charitable *i&ts to de&ray this cost+ "& %e issue debt &or this pro<ect, the bonds must be ta,able 0%hich increases the interest rate on the bonds1+ /ssumin* a 58 annual interest rate and a 30 year paybac' period &or the bonds, the annual debt ser ice payment %ould be 24,553,=00+4=+ "n a letter si*ned by se eral &aculty, it %as su**ested that the 230 million could be better used in other areas such as hi*her &inancial aid &or students+ >e should be care&ul to distin*uish bet%een one5time purchases such as this proposal and annual e,penditures such as student &inancial aid+ "t is not a &air comparison since %e %ould not use lon*5term capital in estments to &und operatin* e,penses 0at least " hope not1+ "n a letter &rom the /thletic !oard, it %as asserted that ?@the /thletic !oard does not see the in estment o& 230 million in a public5pri ate stadium as detractin* &rom the uni ersity7s &inancial health+ First, the cost to -e#aul %ill be &ar less than the 230 million &i*ure+ / 1

substantial portion o& the &inancin* o& this pro<ect %ill come &rom namin* ri*hts &or the &acility, %hich is a stream o& re enue that %ould not e,ist outside o& this deal+A The re enue &rom the namin* ri*hts has been &olded into the operatin* bud*et &or the athletic department, so to include it as a %ay to reduce the up&ront cost as %ell as an annual re enue stream is double5countin* its alue+ "t does not chan*e the &act that -e#aul has in ested 230 million+ #art o& this 230 million includes an intan*ible asset that %e can lease+ "t does not reduce the amount %e in est or the amount %e need to borro%+ $ince the bud*et treats it as a re enue stream to the /thletic -epartment, that is ho% " am *oin* to ie% it+ >hat this proposal does do is use capital resources &or one area o& the ;ni ersity that could potentially cro%d out potential in estments in other areas o& the ;ni ersity+ The ;ni ersity has a current direct debt load o& 231= million as o& January 31, 2013+ "t &unded the construction o& the Theatre $chool !uildin* 0230 million, already included in the debt load1 primarily &rom debt issuance, and there is a plan to pro ide a ne% $chool o& Music buildin* 0appro,imately 2B0 million to be &inanced1+ The stadium pro<ect %ould use 230 million o& lon*5term capital &unds as %ell+ "t is %orth notin* that Theatre, Music and /thletics all ha e e,penditures that are not &ully co ered by the re enues they *enerate+ "t is li'ely that the Music $chool %ill be built be&ore the stadium+ Reasonable people can disa*ree on %hether this is the best use o& scarce capital resources, especially at a time %hen bud*ets are ti*ht in the short5term and the underlyin* economic model &or colle*e education may be at ris' in the lon*5term due to challen*es &rom MCCCs and online pro iders o& educational ser ices+ Cne o& the bene&its &rom a cost sa in* perspecti e is the use o& public transportation and the par'in* *ara*e that is already there to *et people to and &rom the stadium+ Dot ha in* to build a par'in* *ara*e is a lar*e cost sa in* 0bet%een 2505=0 million i& they had to build one &rom scratch1 &or the pro<ect+ "& %e tried to build our o%n stadium, %e %ould ha e to pro ide par'in*, especially i& %e located the stadium in 9incoln #ar'+ . en thou*h the stadium %ould be se eral miles &rom the 9incoln #ar' campus, the easy transportation lin's 0especially &or students %ith ;#ass cards1 plus the use o& dedicated ser ice roads that connect the 9oop %ith McCormic' #lace %ould reduce tra el times &or people attendin* the *ame &rom either the 9oop or 9incoln #ar'+ Operating Costs After the Stadium is Finished /&ter the stadium is &inished, the cost o& usin* the stadium by the /thletic -epartment is incorporated into the bud*et o& the /thletic -epartment 0Cther uses such as assemblies and *raduations %ould be paid &rom other ;ni ersity -epartment bud*ets1+ "t is %orth notin* that the durin* the current bud*et year %hich ends June 30, the ;ni ersity e,pects that the net operatin* de&icit &or the /thletic -epartment %ill be 215,42=,442+ !y comparison, the de&icit &or &iscal year 2010, three years a*o, %as 211,331,BE5+ "n other %ords, the subsidy to the /thletic -epartment this year %as appro,imately 23+=5 million lar*er than it %as <ust &our years earlier+ "n the bud*et &or the &iscal year startin* July 1, the operatin* loss is bud*eted at 21= million+ These &i*ures do not include the stadium+ The operatin* de&icit that is &orecasted &or the /thletic -epartment in the &irst &ull year o& operations is 215+3 million, sli*htly lo%er than the current 2

de&icit+ 0Dote: the administration contends that the increase in the de&icit %as deliberate to increase coachin* salaries and pro*ram in estments+ "t belie es these in estments ha e been made, more in estments in these cate*ories are not e,pected, and the stadium is the third piece that needs to be in place in order to ma,imi)e the alue o& these in estments+ Moreo er, the administration has pointed out that our de&icit on /thletics is amon* the lo%est amon* the !i* .ast schools, especially on a per student basis+1 "t has been stated that the stadium deal has been structured so that the impact on the operatin* bud*et %ould be minimal, so that this deal %ould not cause tuition to be raised &or this purpose+ !ased on the spreadsheet that " ha e seen, this is true+ Fo%e er, a number o& assumptions %ere made to ma'e this happen+ First, *ate receipts are assumed to increase &rom the current 21 million to 23 million in the &irst &ull year %e play at the ne% stadium+ $econd, corporate sponsorship 0%hich included namin* ri*hts &or the stadium and any places inside the &acility1 is &orecasted to increase by 21+= million per year+ Third, TGHradio ri*hts and tournament re enue are also e,pected to *o up by 21+= million+ Thus, the total re enue pro<ection used is about 25+2 million hi*her based on these assumptions+ Cn the e,penditure side, it is assumed that there is no chan*e in salaries and bene&its or maintenance relati e to the current &iscal year+ There is a 23+=4 million e,pense &or interest on the stadium debt, 2500,000 increase in department e,penses, and a 420,000 increase in rent+ There is an e,pense that is called ?namin* ri*hts asset amorti)ationA %hich is 2==1,134, %hich " thin' is a noncash item that is included+ Analysis: First, i& the re enue pro<ections &or a triplin* o& tic'et sales do not pan out, it %ould increase the de&icit accordin*ly+ The ;ni ersity o&&icials " spo'e %ith really belie e that this %ill occur+ "t %as pointed out, &or e,ample, that bud*eted *ate receipts &or FI2013 %ere 21+B million+ This has been true &or the pre ious three years and yet *ate receipts came in at about 21,000,000 in each o& the three years, a short&all o& 2B00,000+ " don7t ha e the &i*ure &or the current year, but the record o& &orecastin* tic'et sales in recent years has not been *reat+ >e %ill *et 1008 o& tic'et sales 0instead o& currently B081, %e %ill ha e s'ybo,es and premium seatin*, and maybe %e can raise prices %ithout hurtin* demand+ $o maybe *ate receipts %ill *o up+ Clearly, it is a ris'+ $ince -e#aul does not *et par'in* or concessions re enue, the issue o& %hether tic'et purchasers attend the *ames or not is less o& a ris' to -e#aul and more o& a ris' to Mc#ier+ $econd, the operatin* de&icit calculated in the income statement pro<ections " ha e seen does not include any principal repayment+ "t is contended that the interest component o& the debt ser ice is an operatin* e,pense but the principal component does not a&&ect operatin* mar*in and is lar*ely o&&set by the add5bac' o& non5cash items such as namin* ri*hts amorti)ation, e6uipment depreciation, etc+ " ha e only seen the net &i*ure a&ter all these items are ta'en into account+ "& you amorti)e the 230 million o er thirty years, it %ould add around 21 million to the annual e,penses+ " must con&ess that " ha e tried to understand these &ine points o& accountin* and %ould need more time and detail to ma'e sense o& this+ Third, the bud*et assumes that salaries and bene&its are unchan*ed &rom the FI2012 data+ This seems unrealistic+ "& one o& the ob<ecti es o& buildin* a ne% stadium is to &ield a better 3

bas'etball team that %ill increase tic'et sales and *eneral interest in -e#aul, it seems hard to belie e that this can be done %ithout increasin* operatin* costs+ ;pon as'in* this 6uestion, the ans%er " recei ed is that the in estment in personnel has already been made and %e do not need to increase salaries &urther to *et the impro ement %e hope &or+ /ll %e seem to need is a better &acility and that %ill attract the players %e need to build a better 6uality team that %ill attract &ans to our *ames+ " %ill lea e this to my collea*ues to <ud*e this &or themsel es, but " must con&ess to be a doubtin* Thomas on this one+ Conclusion " ha e tried to e,plain as clearly as " can ho% this deal %ill %or' &inancially &or -e#aul+ " am con inced that the people %ho ne*otiated this deal belie e that -e#aul *ot the best deal it could, and that the data and <usti&ication &or the stadium ha e been done in a transparent manner+ Moreo er, " belie e that it %ould be di&&icult to ima*ine ho% a stadium could be built that %e %ould be able to use as much as this deal allo%s at anythin* near %hat %e are spendin*+ The Jbene&its o& athletics to &uture re enues and to recruitmentJ ar*ument has been made &or many years durin* $R/C meetin*s+ "t %as made %hen " ser ed on $R/C in the 200252004 period+ The subsidy to the /thletic -epartment in the FI2003 bud*et %as 24+E million, %hile the subsidy in the current year, FI2013, bud*et is 215+4 million+ "n other %ords, the annual subsidy has tripled o er the past decade+ >e already *et a bene&it 0hope&ully a substantial one1 &rom %hat %e do already+ Cne can use this ar*ument to <usti&y any subsidy alue+ The real 6uestion is %hether the stadium e,penditure %ill lead to an additional bene&it that is *reater than the additional cost+ "t is not clear to me that this %ill be the case+ Cur applicant pool has been impro in* in 6uality and 6uantity %ithout a massi e in estment in athletics+ The 6uestion " %ould ha e is %hat %ould %e need in additional bene&it 0both economic and noneconomic1 to ma'e this in estment %orth%hile, compared %ith in estin* in the academic side o& the uni ersity 0especially in our hi*her mar*in pro*rams1K Finally, my e,perience &rom a decade a*o tells me that misallocation o& capital resources can be problematic+ / decade a*o, &undin* a ti*er sanctuary, a steno*raphy school, and !arat Colle*e, amon* other thin*s, may ha e been %orth doin* a priori, but a&ter the dot com meltdo%n caused se ere enrollment declines in C-M and Commerce, our hi*hest net mar*in colle*es, %e had serious problems that needed to be addressed+ >e ha e already made a number o& important capital in estments o er the past decade+ $ome %ill enhance enrollment, others %ill impro e the 6uality o& the -e#aul e,perience %ithout necessarily brin*in* in additional re enue+ Cne has to as': are %e puttin* our scarce capital resources to their best useK -o %e ha e enou*h resources in reser e i& %e need to respond to challen*es to our academic business modelK "s this a ris' %orth ta'in* at this timeK " am not sure %hat my ans%er to these 6uestions %ould be at this time+