Urban Meyer's Rich, but Are Taxpayers Footing Too Much of the Bill?

Monday, Florida announced that Urban Meyer signed a six-year contract extension that makes him the third-highest paid college football coach in America. Meyer will pocket $4 million a year and, with the extension, pass LSU's Les Miles and Alabama's Nick Saban to become the highest paid coach in the SEC.

After all, Meyer's won two national titles in four years at Florida, gone 11-1 against the big three rivals on his schedule (Georgia, Tennessee, and Florida State), and most of the commentary has endorsed his pay. Collectively the college football cognoscenti seems to believe that Meyer is "worth" the money. Why? Because the market dictates that he deserves that salary.

And it completely ignores that, you, I and every taxpayer are footing part of the bill.

Saying Meyer is "worth" his salary is an easy answer that relies upon the perceived infallibility of free market-principles to dictate salaries. Often this principle makes sense in competitive businesses. If one company is willing to pay a set amount for an employee, then a second company can either match or reject that offer.

Eventually, the theory would hold, a free and efficient marketplace can determine the value of virtually anything. That's all well and good when it comes to for-profit entities, that is companies that pay taxes on their profits.

But here's a little catch that no one seems to pay attention to, you and I are subsidizing big coaching salaries because the athletic departments at major universities operate as not-for-profits.

They don't pay a single dollar of tax. And if athletic departments aren't paying taxes then you and I, as taxpayers, are subsidizing college coaching salaries.

When it comes to college coaches, we aren't dealing with a purely market-driven environment. Colleges are able to pay more for their big-time coaches than they would otherwise because they aren't paying taxes on their athletic profits.

Let's put that into context. Say an NFL team wants to pay their head coach $4 million a year. That same team makes a profit of, let's say, $50 million a year. Assuming a corporate tax-rate in the neighborhood of 33 percent, that means an NFL team would pay around $16.6 million in tax. Colleges don't ever pay these taxes. Now the individual coach pays a personal income tax, but the college never does.

It's a primary reason why schools like LSU can make a, wait for it, $32 million dollar profit on football against only $16 million in cost. That means they're making $2 in profit for every $1 they spend. Those rates of return don't exist in any other industry in America today. And they don't pay taxes on it! Meaning their cost structure is an inaccurate reflection of what their product actually costs. Now colleges may argue that they plow those profits back into other, non-money-making pieces of the athletic department, but that doesn't change the fact that American taxpayers are subsidizing coaching salaries.

Big time.

And if colleges aren't paying these taxes on their profits, then relying upon the logic of a purely market-based economy, one predicated on competition that returns a profit, doesn't make sense.

That doesn't mean that heads of colleges are acknowledging this fact. LSU Chancellor Sean O'Keefe told USA Today after working out Les Miles's contract extension in 2008: "Is this a favorable trend? The answer is: Of course not. That said, it's also market dynamics. The value of things is determined by the demand that exists. There's nothing unfair about that."

LSU's athletic director Skip Bertman echoed the argument in the same article:

"I go back to professional baseball and Alex Rodriguez making $25 million a year. Or to Julia Roberts and $20 million for one movie. Are those people worth it? Of course not. But if that's what the marketplace is and enough people are willing to watch Alex play or Julia Roberts in a movie, they have a right to get that.

"I don't think this is any different."

Wrong.

It's very different. You can't cite examples of for-profit corporations paying salaries to major league baseball players or movie stars in order to justify your college coaching salaries. You just can't.

Put simply, colleges can't argue that a pure-market based economy is dictating their coaching salaries because they don't function in a purely market-based economy. The only thing they really share in common is that college coaching salaries, just like CEO salaries at for-profit entities, have been escalating at a remarkable rate over the past 15 years.



In 1996, Steve Spurrier became the first college coach to make $1 million a year. One year later, Spurrier locked down an extension that would see his salary cross the $2-million threshold by 1999. In 2006, Oklahoma's Bob Stoops became the first coach to top $3 million a year. By 2008, at the latest, the $4-million barrier fell to USC's Pete Carroll. (Private schools aren't required to disclose contracts like public universities, so the salaries of Carroll and Notre Dame's Charlie Weis, most notably, are not as certain). By 2011, Stoops will make $5 million per year.

The march through each million-dollar barrier makes news, but the story they miss is this: Where are we headed in five, 10, 15, or even 25 years? In the past 16 years, we've seen the high water mark for coaching salaries quintuple. From Spurrier's million-dollar contract in 1996, there are now nearly 70 million-dollar coaches.

Using this data set, I farmed out the numbers to a Ph.D. of mathematics at the University of Maryland. He indexed the numbers for inflation, assigned data values that I still don't understand (because I'm a math idiot) and predicted that, by 2026, another 15 years from Stoops' $5 million in 2011, the top coach in America will be earning $23.7 million. And by 2035, the top coach in America will hit $50 million per year. Which brings up an ominous question: Are salaries this high for nonprofit employees even permissible when the government is allowing them nonprofit tax breaks and the beneficial status that comes with that?

I talked to several sources, inside the SEC athletic departments and inside the IRS to get at the crux of the issue.

The basic rationale for granting nonprofit status to any entity is because that nonprofit does something that we as a society consider of "public value." For instance, colleges are 501(c)(3) nonprofit organizations under the tax code that qualify for an exemption under the educational prong. One of the fundamental tenets for a nonprofit entity is that they cannot provide excessive benefits to individuals. Why? Because then the purpose of their nonprofit exemption shifts from providing something of societal value to enriching individuals. And we're subsidizing that enrichment by not taxing that activity. As a result, the IRS has a penalty provision that allows them to tax excess benefit transactions, i.e. when someone is paid too much given they work at a nonprofit entity.

Now where this gets tricky is that college coaches aren't necessarily "disqualified persons" under the IRS code. Disqualified persons are members of the board of directors of a college, the CEO, or CFO's. If you aren't one of these three classes of people named in the regulation, then there's a facts-and-circumstances test applied to see whether or not an individual has a significant influence on the entity. If they do, then a salary such as those made by college coaches can be scrutinized.

So far the IRS hasn't applied this scrutiny to college coaching salaries to reach a ruling about whether or not they are disqualified persons under the regulation.

While the IRS hasn't yet acted yet to get involved in the pay of college coaches, one person I spoke with pointed out that the marketplace value is only part of the public equation. Merely using the market argument to make the case for these salaries neglects the marketplace of public opinion. And if coaching salaries continue to increase at the trajectory that we've predicted above, that public opinion can become a tremendous albatross to nonprofit universities that have to justify paying their coaches millions more than any public employee in the state.

If a coach begins to make $10 or, amazingly, $20 million a year, in the next 15 years, the marketplace of public opinion may very well shift. And the government could get involved.

How?

By using the same rationale they've used with banks and General Motors. Once we give you taxpayer money -- or in this case, don't demand tax revenue -- the government has argued, we have a right to look at how you're compensating your employees. If the government can set the pay scales of for-profit companies receiving government money, why can't they do it for nonprofit colleges that they -- and by extension we taxpayers -- are subsidizing via the tax code?

Put plainly, they can.

In fact, maybe this would be the best way for President Obama to actually bring about a playoff, threaten to look at the nonprofit status of athletic departments across the country.

So as football becomes an even bigger business and continues to roll up huge profits, this is something to watch. These coaches aren't making their money in a vacuum, we're all helping to pay them these salaries via the tax code.

Urban Meyer may make four million now, but all of us are allowing it to happen. Not just Florida fans.