Ask Barry: Penn State Beaver Stadium Debt

Since last week’s post Penn State Athletics: The fuse on the timebomb is lit I’ve received a lot of feedback from readers who are expressing shock and disappointment about the situation Penn State has gotten itself into. Below are some of the questions I’ve been asked and my take on the answers. If I’ve missed your question or you’d like further discussion, feel free to reach out to me at barry@barryfenchak.com. I will reply.

And since it’s Alumni Trustee election season, I encourage you to reach out to candidates Jay Paterno (incumbent), Ali Krieger (incumbent), Karen Keller, and Dr Joseph DeRenzo. If you are able to contact them please let me know how it went.

You talked about the huge debt load Penn State Athletics is carrying, but how does that compare to other universities?

The $535 million in debt is very disconcerting, but it is not surprising nor something that snuck up on us. In fact, I wrote about that pending debt explosion two years ago, here: Why we can’t afford the Beaver Stadium Renovation Proposed by the Penn State Board of Trustees Leadership.

That level of debt is the most in the nation, and the highest in history for any university athletic program.

The previous record holder was the University of California-Berkeley (Cal) at $440 million, accrued during the tenure of Sandy Barbour as their athletic director. Florida State, which recently completed a major stadium renovation similar in style to the Beaver Stadium renovation for around $260 million, now has a total debt of approximately $437 million.

By the finish of the partial renovations to Beaver Stadium, Penn State’s Athletics total projected debt load of $800 million or more will be the most highly indebted college sports program in history and probably more than double that of second place.

Our annual debt service (the interest and principal we have to pay each year on that debt) will be, by far, the largest in the country at approximately 20% and will consume a far greater portion of our athletics revenue than any of our competitors. This will be the situation for the next 30 years, and any additional debt we take on will only compound the strain. Don’t forget that there is still two-thirds of Beaver Stadium left to renovate, at a estimated cost of $300 million.*

Why did the Trustees vote for the $700 Million renovation?

Many of you commented that the Athletic Department composed a long list of assumptions that (aside from me) went unquestioned, and that many of them have turned out to be, in your opinions, magical thinking:

• Revenue growth will outrun debt service and expense growth

• Operating cost growth will magically be reduced to one-third of the historical rate of 7.13%

• No large unbudgeted expenses

• No need for major capital expenses for 30 years

• Donor and corporate enthusiasm will be robust

• Football success will remain consistent

While most trustees did vote in favor, not all did. In addition to myself, Alumni Trustee Lubrano voted against, and three others abstained from voting (Alumni Trustees Brown, Paterno, and deLevie). An additional four did not show up for the meeting (Trustees Black, Hasenkopf, Mumin, and Pegula).

Why did most of them vote Aye? Simple answer, for those who are unfamiliar with the Board dynamics, is that voting Aye is what they always do. Many members of the Board have never voted No on anything, which is unsurprising given that the majority of trustees nominate and appoint each other. You can see the stunning history of Board rubber-stamping here.

What made this vote incredulous was the lack of information, and in my opinion the presentation of disingenuous information, provided by the Board and University leadership:

• No alternatives were presented or deliberated

• Critical information regarding the proposed project was not provided, and was denied when requested (by me)

• Incredulous statements where neither challenged nor discussed, and attempts to
  engage in deliberation or discussion were curtailed by Board leadership

In summary, as the official video shows, the Board approved this hugely impactful and costly proposal after what I would characterize as a slideshow and brief question and answer period during which many questions were ignored. My first-person observation was that most trustees appeared fine with that, which casual conversation seemed to reinforce:

• “As long as we get better elevators!” (to the President’s suite)

• “I don’t care.” (regarding the scope and cost of some items)

• “What’s the point of discussion? We all know we are going to do this.” (in
  regards to the $700 million renovation, when information about alternative options was being requested)

• “I’ll wait and see what management presents.” (Management never presented anything)

The increases in revenue are a good thing but expenses are also increasing at rapid rates. What has been done to control spending?

For years, the Board rarely required Athletic Directors Sandy Barbour or Pat Kraft to demonstrate any administrative rigor with regard to Athletics’ spending. Penn State Athletics’ operating costs have been increasing by roughly 7.15% per year for the last 15 years, but when trying to sell the Beaver Stadium renovations, the Board and Administration leadership contended that operating expenses moving forward would only average 2.5% per year. There was no discussion or plan how this 65% cut would occur.

To the contrary, the university-wide culture seemed to be ‘if we spend more money we must be doing a better job.’ Examples being the gigantic pay raises approved for President Neeli Bendapudi, having the highest paid football coaching staff, and the most expensive stadium renovations. This culture gives the appearance that it is all ‘Other People’s Money’, and that it will be someone else’s problem when the money runs out. This is a direct failure of Board oversight.

What ever happened to the $70 million for winterizing Beaver Stadium?

Great question. In May 2023, the Board was first asked to approve of a $70 million expenditure to study options for maintaining Beaver Stadium and to conduct a winterization project to make the venue usable in cold months. I was the only trustee to vote against the project, since it was apparent to me that this expenditure of $70 million was not designed to be spent on the stated purpose but instead a maneuver by Board leadership to initiate a massively expensive stadium renovation as a fait accompli, without Board deliberation, discussion, or evaluation.

After that vote, I continued to raise my concerns in multiple meetings with Board leadership and at full Board meetings, and was repeatedly provided with incorrect information and disingenuous and demeaning responses from Board leadership.

As things progressed, it was clear that funds authorized by the Board in the May 2023 expenditure (the $70 million) were, as I expected, not being used for the stated purposes. The winterization costs were $5-6 million, and the studies of alternatives were actually a $25 million payment to Populous to begin the design of the renovation. A year later, in May 2024, the Board was presented with a plan to renovate the stadium that focused on rebuilding the west stands, changing portions of the bleacher seating areas to premium seating, reconfiguration of various suites, and a rebuild of the west side press box. No other options were presented.

In the end, approximately half of the approved $70 million was used for the stated purposes, while the rest was misappropriated to start renovation work that had not been approved by the Board. This was work that the Board leadership had repeatedly and adamantly stated was not to be engaged in prior to thorough deliberation of Beaver Stadium options and with Board approval.

Sadly, to the best of my knowledge Anthony Lubrano was the only other trustee to ever raise and pursue these concerns. See: My comments from the Penn State Board of Trustees Meeting November 10, 2023

What were the other options besides spending $700 million on Beaver Stadium?

The $700 million partial renovation was the only option presented to the Board (see video here).

Unfortunately, when it came to the May, 2024 vote for the actual Beaver Stadium project, the transparency of Board leadership was even more opaque. Despite being repeatedly promised by Board leadership, there was never any meaningful consideration or deliberation of other options; for example, ways in which Beaver Stadium’s viability could be economically addressed to insure it remained a useful, safe, and thriving venue for Penn State football in the decades to come. Instead, the massive renovation project of one-third of the building was presented as the only viable option.

They said the first 15 years after the Beaver Stadium upgrade would be net cash positive, and that would then provide a buffer for the following 15 years of deficits. Why?

We knew that media revenue share for Big10 programs would rise substantially in 2024 due to the recently negotiated contract and the advent of the College Football Playoffs (which generate significant new TV money). In addition, the stadium project would bring in considerable up front revenue in the form of philanthropy (including naming rights and other new revenue streams). Those revenue stream increases and one time up-front contributions should be at their peak in current years before dropping off, while the debt costs would continue for 30 years and expenses increase at a compound rate throughout the entire time frame. The plan was for large net profits to be available to pack away to cover future deficits.

My concerns were, and remain, that the Days of Wine and Roses will not be as rosy as projected. Reasonable projections based on historical data show Athletics’ income statements turning to a systemic deficit (the term used to describe Penn State’s recent university-wide budget troubles) within the next 5-8 years, and long-term net income diving far more rapidly than Penn State’s projections.

Isn’t the money from the Elevate contract for ticketing supposed to cover all these costs?

It was certainly presented that way by Athletic Director Pat Kraft. The parameters of the business relationship between Penn State and Elevate (information that I had to sue the University for in court: Why I Am Suing A Board That Answers To No One) remain under lock and key in Old Main, so any details about the security and viability of Penn State’s main source of income will become evident only when financial reports are filed in the coming years.

The presence of the Elevate agreement raises, rather than mitigates, my concerns for the long-term fiscal health of Penn State Athletics.

* Note: It is worth pointing out that much of the funding transferred from general University funds to the Athletic Department in the wake of the Sandusky/NCAA settlements remains on the books, although those debts may not be reflected on financial statements. That sum is to be repaid to the University in future years, although the University is not charging the Athletic Department interest on most of those funds.

As a former Penn State alumni-elected trustee, I enjoy sharing my personal observations,
concerns, and ideas about Penn State. I invite you to contact me with your opinions so that we can engage in meaningful conversations on those topics: barry@barryfenchak.com.