» «

NCAA Division II - Breakout
An Era of Change - Enhancement Fund/Distribution of Revenue - Affect of Lifting the Membership Moratorium
(Monday, June 15, 10:30-11:30 a.m.)

Ron Prettyman:

Good morning. My name is Ron Prettyman. I'm the athletics director at Cal State Dominguez Hills and a member of the NACDA Executive Committee. The topic of this session is the "Enhancement Fund and the Distribution of Revenue and the Affect of Lifting the Membership Moratorium." This is one of those topics that many of us have complained about over the years. That reminds me of a story. This is about a man who became a monk in an order where silence was the cardinal rule. He was only allowed to say two words every 10 years. After the first 10 years, the head monk called him and said he could say his two words. The man replied, "Food cold." He left. Another 10 years passed and the man was summoned to the office again. This time, he said, "Bed hard." After 10 more years, the man went to the office and said, "I quit." Before he left, the head monk said, "I'm not surprised that you're quitting. You've been complaining since you got here."

Well, this is one of those things we've all complained about. Sometimes the distribution has effected positively, sometimes negatively. We're going to spend some time talking about that today. One of our speakers today is Nancy Mitchell, the NCAA chief of staff for Division II. She's been at the national office in numerous capacities since 1985. Mike Racy, the assistant chief of staff for Division II. He's been at the national office since 1993. Jerry Hughes, athletics director at Central Missouri State University, will be our representative on this panel and will assist on the interaction in talking from a membership perspective about distribution and the effect of lifting the moratorium.

At this point, I'll turn it over to Nancy.

Nancy Mitchell:

Thank you Ron. What Mike Racy is passing out is a copy of the Division II budget. It, obviously, has some relevance for the enhancement fund, which is the focus of today's discussion. Before we get into the specifics of talking about the enhancement fund and possible changes in the distribution method for the enhancement fund, we thought it might be a good idea to first review for you, the Division II budget in general.

You may recall that under the previous governance structure, before we went through all of the restructuring and became a more federated organization, there was no Division II budget per se. There was one budget for all three divisions and, basically, anything that Division II wanted to do that had a financial impact or an impact on the association's budget had to be approved by the Executive Committee. The Executive Committee, under the old structure, basically, controlled the purse strings for all three divisions. It was dominated by Division I. The new Executive Committee is dominated by Division I also, but it has a little different role. Basically, under the old structure, it wasn't always easy to get Division II programs or expenditures approved through a Division I-dominated committee. Jerry was a member of the Executive Committee a couple of times and I think he can attest to the difficulty in getting some of the recommendations through the Executive Committee from Division II if they had a budgetary impact.

As part of the new structure, Divisions II and III were each guaranteed a percentage of the association's operating revenue on an annual basis. By guaranteed, we mean that it is set forth in the NCAA constitution and it can't be changed without a two-thirds vote of the entire membership. All three divisions would have to vote and there would have to be a two-thirds vote to change that percentage. Division II's guaranteed percentage is 4.37 percent of the association's operating revenue. If you look at the sheet that Mike just handed out, it will give you a good sense of how the budget is put together and what actually comes out of the Division II budget.

I'm going to focus on the 1998-99 preliminary budget. If you go down a couple of lines, you'll see that Division II's 4.37 percent revenue allocation is $11,836,000. What has to come out of that $11 million, is championships' expenses. Championships' expenses for Division II are allocated there. That total is $6,328,000, so that comes out of the 4.37 percent. Also, the Division II enhancement fund, the $3 million that's set aside for this, comes out of the 4.37 percent. So, you get down to a $2,508,000 excess revenue over expense, basically. That's what you're left with. Five percent of that goes into a membership trust. Five percent annually, goes into a membership trust. This year, l998-99, it's $592,000. That is a rainy day fund. If something happens and we need to tap into some extra money, that is there. It will grow on an annual basis.

Putting all of that away and the championships' expenses, the enhancement fund expenses, you're still left with approximately $2 million, or in this case, $1,916,000 of unallocated funds, money that is not yet spent. That's something that the Division II membership should give us input on over the course of the next few months in terms of what are some ideas for ways to spend that unallocated money. That's going to get some focused attention over the next couple of years. Lots of ideas have been thrown out about how to spend that unallocated money. Possibly a Division II special assistance fund for student-athletes similar to the Division I special assistance fund for student-athletes who are having financial difficulties and can't take care of some of the personal necessities they have. You can put more money into the enhancement fund. The $3 million could be increased. Certainly, championship expansion, bracket expansion are things that would come out of the unallocated expenses. There are lots of creative ideas out there, so keep an eye out for the NCAA News, when this issue is being discussed. At the next convention, we'll have some feedback on how to use those unallocated funds. If you're just sitting there thinking, here's an idea. Send it to me or Mike and we'll get it working through the process.

There's the Division II budget. I'd like to take a couple of minutes to walk you through the process in terms of how the budget is put together and approved and who all is involved in this process. It's important to know who's involved. First, any recommendations that comes from a Division II committee that involves a financial budgetary impact has to go to the Division II Management Council and then also to the Division II Presidents Council. The Management Council moves it on up to the Presidents Council for final approval.

The Division II Budget and Finance Committee is a group that Jerry is a member of. Their role in the budget process is evolving. This committee is made up of representatives from both the Division II Management Council and the Division II Presidents Council. It looks at the recommendations that are coming through the system that have a budgetary impact and they advise the Management Council and the Presidents Council regarding the budget. They will give them all of the things that our committees want to do that have a budgetary impact. Let's look at that and see if our Division II budget has enough money to handle this. If so, does it make sense to spend our money on whatever those recommendations are? They will advise the Management Council and the Presidents Council about those issues. The ultimate approval over the Division II budget rests with the Division II Presidents Council. That's important to remember. The Presidents Council is in charge of the Division II budget.

That's the main point of all of this. Division I has no control over this Division II budget. This is Division II's money and Division II can decide, through its governance groups, how it wants to spend its money. All three divisions could get involved if Division II is doing something that is contrary to the association's basic principles, whatever that might be. I can't imagine what it would be at this particular time, but if there is something like that, the Executive Committee, which is made up of all three divisions, could say, Division II, we don't like what you're doing. Again, I can't imagine that anything like that would happen. That is the only time that Division I would step in and have anything to say about the Division II budget.

I have some general thoughts and questions that we've gotten about the Division II budget that are of interest. The first one is the impact of the restricted earnings coach lawsuit and the judgment against the NCAA on the Division II budget and on Division II. There was a $67 million dollar judgment against the NCAA that came out of the restricted earnings coach case. A lot of folks are asking if that means that they will come after our money. Please remember that Division II's 4.37 percent allocation is guaranteed in the constitution. So, that percentage cannot be changed unless all three divisions agree by a two-thirds majority vote. We haven't heard any talk of people trying to change the 4.37 percent or trying to come after Division II's money. The impact is going to be felt more in Division I, and perhaps some association-wide expenses.

The other issue is the growth in membership and what affect this has on the Division II budget. We've got about 25 to 30 provisional members in the Division II process right now who will become active members within the next couple of years, 1998-99 or 1999-2000. You're going to have about 25 or 30 new members over the next couple of years. Now that the membership moratorium has been lifted and, as you recall, that was really a ban on accepting new members while we were going through the transition to the new governance structure. Now that that moratorium has been lifted and schools can apply to be members, we've had, as of June 12, 17 applications come in from schools that specifically said they want to be members of Division II. The deadline for accepting applications is June 15. That's probably about what we're looking at. The provisional member process now is not a three-year process, but a four-year process. When those schools start in 1998-99, they've got four years before they will become active members.

There have been a lot of questions about what happens if we do get a significant growth. I don't know if we can classify 17 new members and 25 to 30 in the pipeline as significant growth, but it will have an impact. If there is significant growth, that is something that has been worked out through the negotiations when we moved to the new structure. If there is a significant growth and if it looks like the 4.37 percent isn't going to be enough to handle all of those new members and we've used all of our money, we can go back to the Executive Committee and say we need to talk about this 4.37 percent. That could be re-negotiated. I hope we never get to that point, but it is possible and it is part of the original agreement that was reached. If the growth is such that it has a major impact, you can come back and we'll talk about it.

That's just a run through of the Division II budget. Right now, I'll turn it over to Mike to talk about the specifics of the Division II enhancement fund.

Mike Racy:

Thank you Nancy. We're going to pass out a survey that was done last summer. Before I start talking about the survey, I'll wait until everyone gets a copy. Many of you may know that checks were sent out to conferences and institutions regarding the enhancement fund and the distribution of dollars for this past year. The Division II enhancement fund, as Nancy indicated, is a $3 million fund. Currently, that distribution formula calls for one-half of the fund to be divided evenly among all eligible active Division II members. The check that went out in May to our Division II membership for that equal distribution was in the amount of $6,224. The remaining half of the fund, $1.5 million, is distributed to conference offices and independent institutions based upon their participation in a Division II men's basketball championship from 1992 through 1997. Obviously, your conference offices received the amount of money that corresponded with the number of units they accumulated based on that distribution participation plan.

I'd like to take a few minutes to describe to you where we're at in this distribution process, consideration in possibly changing the distribution formula for the enhancement dollars and then I'll turn it over to Jerry who will give a little background about why we have the current plan and where we go from here. The survey that Nancy has distributed is a survey that was put together by a budget transition group. In Division II, shortly after the 1996 convention, we put together a series of project teams and sub-committees to look at different issues. One such group that was formed was a budget sub-committee. Their charge was to do a survey and to analyze whether or not the Division II membership felt like it was time to change the formula or the model that we use as a division to distribute the enhancement dollars. There was also a second part of this survey. That relates to the information you saw on the budget that Nancy shared with you about all of the unallocated surplus, unallocated money that we have in Division II and exactly what should be done with that.

First, let's talk about the budget sub-committee's survey results as it relates to the enhancement fund. Again, this was a July 1997 survey. The first page provides you with a profile information of the Division II membership in responding to this particular instrument. You'll see at the top of the page, 212 represents the number of Division II institutions that returned this survey. This represents more than 80 percent of our active member institutions. Our research staff felt like we had a very good scientific document that our budget sub-committee could look at in trying to reach a decision whether or not to change the distribution formula. The entire first page is the profile information for the Division II membership that completed this instrument.

On page two, in the background information, you have a description of what I shared with you of the current distribution formula for our Division II membership, how the enhancement dollars are sent back to our institutions. The Budget Sub-Committee decided to take about five or six different options or suggestions they had heard. We had a forum in 1997 at the convention where some ideas were expressed. The Budget Sub-Committee tried to filter those suggestions and decide which ones they could present in a model to the membership to react to.

Instead of setting forth all of the different models or options in a survey instrument for the membership to choose which one they liked best, the Budget Sub-Committee decided, instead, to let the membership evaluate each option. You'll see that you have in the survey on pages two, three and four, a brief description of each model and then an opportunity for the member institutions who responded to this survey, to rank one through six, how they favored that particular model. One was the rating the institution was expressing with the greatest favor. Six was a rating where the institution was saying they do not favor it at all. The in-between was the range the institution could respond with.

The first model is just status-quo. Maintaining the distribution formula as it currently exists. Again, that's half equal to the member institutions and conferences based on success in the men's basketball championship. The second model on top of page three is similar to the current method that we have. It would factor in success in the women's basketball championship, so you would have half equal distribution, $1.5 million equally to our member institutions, the other $1.5 million to conferences based on success in men's and women's basketball championship.

The third model that's described is a model that would distribute $3 million of the enhancement fund to institutions based solely on the total number of sports sponsored by the school. The more sports you sponsor, the greater your check would be from the Division II enhancement dollars.

The fourth model is just a straight out equal distribution plan. They would take the entire $3 million, get rid of the basketball formula, and distribute everything equally to institutions or conferences. Based on this past year, each unit would have been worth approximately $12,500.

The fifth model was an equal distribution sports sponsorship model. It combines the models that we mentioned in three and four. You take $1.5 million and distribute it equally. The other $1.5 million would be based on the number of sports being sponsored.

The sixth model, and maybe some of the commissioners could speak to this, but this is a model that the Division II Collegiate Commissioners set forth. That would be having the fund based on equal distribution and the other half would be based on the number of schools in the conference and the number of championships that the conference is sponsoring.

Last summer, the Budget Sub-Committee was getting ready to go out of business. With the start of the new structure, we started what we call the Budget and Finance Committee. They began operating last August or September. Last July, the Budget Sub-Committee performed their last official act as a group. They analyzed this document and made recommendations to the Management Council and the Presidents Council related to the enhancement fund. They were unable to reach any definitive conclusion as far as what to do or what to recommend. They analyzed this document. They drew a line between three and four. The opportunity to rate one, two or three. They felt that was more of a favorable rating from the membership. Four, five and six were on the other side of the fence, the institutions not favoring that particular model. They drew a line directly through three and four on each response and the only model that had over a 50 percent favorable rating was the equal distribution model, number four. If you add up the favorite and number two and number three, that comes to about 55 percent. It was not an overwhelming mandate by the membership, let's go with this particular model. The Budget Finance Committee did share this information with the Management Council and the Presidents Council and both groups were reluctant to change the distribution formula based solely on this instrument.

We're still up in the air as to how the distribution formula will be changed, if at all. It's important to remember that the distribution formula for the enhancement dollars is not something that's set forth in the Manual. It's not a bylaw or a piece of legislation that will be changed at the convention. Instead, it's a decision that will be made by the Management Council and the Presidents Council. That's why sessions like this are so important. It's the opportunity for you and the membership to react to different models, or even suggest a new model that hasn't been thought of before. I do anticipate that within the next six to eight months, another survey will be sent out to the membership. This time, you may see the new Budget and Finance Committee taking three or four models and having the membership actually rank or choose of these three or four models, which do you prefer. Based on that information, the Management Council and the Presidents Council may be in a better position to decide whether or not to change the distribution formula.

The last few things I wanted to mention on the survey have to do with the information on pages five and six. This was the Budget Sub-Committee's attempt to survey the membership on what it feels is the best way to use the unallocated surplus or the unallocated funds in Division II. As you saw in the budget information, following the 1997-98 academic year, Division II had about $1.3 million of unallocated funds. Following the upcoming year, it's projected that another $1.9 million dollars will be added to that account. You've got more than $3 million sitting out there for Division II to decide how to use that money. In section three of this survey instrument, is a survey how that money should be used. Again, the different models are listed, A, B, C, D, E, F and G. You can read the description of each of their distribution of the surplus. The ones who receive the most favorable rating, again, drawing a line through three and four, were the suggestions of ways to send that money back to member institutions. Item A, on the bottom of page 5, talks about increasing the Division II enhancement fund. You would take that entire $3 million of unallocated surplus and add it to the enhancement fund for distribution back to the membership. Item B is a similar type of suggestion. It would be a supplemental distribution to the membership each fiscal year. Both of those suggestions received about 63 percent favorable rating.

The other two suggestions that had a lot of support, items F and G, and both of those have to do with Division II championships. Item F is a bracket expansion and had about a 58 percent favorable rating. Item G is enhancing current championship policies with about a 55 percent favorable rating.

Again, the Budget Sub-Committee was not comfortable in what to suggest as far as how we should use this money. The Management Council and the Presidents Council, ultimately, decided we're not going to do anything right now, because with the moratorium being lifted, we're just going to wait and see how many schools we get into the membership where we may need to use some of that money to enhance our championship services. I anticipate that and Jerry can get into this a little bit, that this will be top priority for the Management Council and the Presidents Council during the next few meetings, is to see how we need to use that Division II surplus and how we put it to use for the membership.

Jerry Hughes:

Thank you Mike. I will touch on, just briefly, a little bit how we got to this point. Nancy and Mike have done an excellent job. I will tell you where we go from here, but I'm really interested in the input from this group on your ideas that I can take back to the Budget and Finance Committee meeting. We have a meeting July 2 in Chicago.

We now have the wherewithal to control our own destiny and to control our own budget. In the late 80s and early 90s, you remember the first membership structure that Dick Schultz brought to the table. That's where the $3 million enhancement fund came out. It was thought that if we provide this enhancement money, we might lure some Division I members down to Division II. A few did, but most did not. We met at a Kansas City airport, three representatives from Division II and three representatives from Division I and we hammered out this $3 million enhancement fund. The Executive Committee tried to figure out how to distribute that fund.

Division I has a model that takes into consideration lots of different things from sports sponsorship to success in championships. We didn't feel like any of those made a lot of sense to Division II because of the differences in our programs. A lot of us had conferences, so we decided to send half over to the conference. The members of that conference could decide if they wanted it to come back to the institution or leave it in the conference office to run the conference. There was only one championship that every conference in the country had an automatic in and that was men's basketball. We used men's basketball as the vehicle for some championship quality programs to distribute the money based upon the units. The rationale at that time, good or bad, you can argue, but this money really came from the new CBS contract, so we're going to use men's basketball as the vehicle in Division II to distribute money back to the conferences. As I said, equal distribution went to institutions. That's how we got here.

We all owe Chuck Lindemenn. He did a great job on the Executive Committee. We knew how much we were spending on championships and we knew how much we were getting for Division II, but he got figured in the $3 million. Originally, Division I wanted to give us what they were spending on our championships, even with the $3 million aside, not figuring this in the formula. Chuck was able to get that in, so we got a percent annually on the $3 million, which makes a difference, obviously.

The sub-committee met and we couldn't find a vehicle that we wanted because we were a short-term life once the new structure went in. We couldn't find a formula that we wanted to impose upon the membership, so we decided to wait until the new structure got in place. We also didn't want to touch the reserve until we had a better clear-cut answer from the membership as to how they wanted the reserve touched. We have 25 or 30 people hanging there ready to come in and then we've got 17 new members just starting the first phase. Before we start jumping into the $1.9 million, we need to look at everything. The number one opportunity for Division II is championship opportunities. People want their student-athletes to have the opportunity for championships. Is bracket expansion the first priority now? Or is it I want it now in my institution? Divide it up, send it to me and let me decide how to spend it. But, $1.9 million doesn't go very far that way. As you know, with the way the enhancement fund is, that would not go very far for some of us.

As Mike mentioned, we could look at some student-athlete welfare issues. We're really looking for ideas from our membership. I do believe out of our July 2 meeting, there will be some type of new document sent to all of you. I do believe that it will be very cut and dried. Possibly with two, three, no more than four, but maybe just two, three, yes, no, ranking. So, we don't get across the whole continuum and we know how the membership wants the money back. We know what issues are important. I know that championships are very important. That's why we protected the reserve. If we look at bracket expansions, see what we spend on travel, per diem. At this point in time, I'll turn it back to you, Ron.

Ron Prettyman:

Thank you for the presentation today. This is an issue where we've had a wide-spread area of ideas, as you can see on the survey. This will be a good opportunity to allow your voice to be heard. There are current conversations going on how we're going end up with this distribution. Not everybody is going to be happy. In our particular conference, we will take a huge hit. Most other conferences will have a huge increase. It will effect each of us in different ways. I would encourage you to be vocal with your opinions on this. Let the committee members know.