Sometimes football is a funny thing.
Miami Dolphins owner Steve Ross just gave the University of Michigan the largest single donation ever made to a university by a private citizen.
Yet, somehow this has produced a negative reaction among fans of the team. Questions abound. Why is this a negative development? Should we not hail Ross for his incredible generosity toward higher education?
There is a temptation to be dismissive by saying the fans are being ridiculous and selfish in failing to think the issue through on all sides. This is the quick and easy reaction to what seems like it could be a complex issue with lots of emotion attached. I rarely go in for that sort of thing.
Where’s the Beef?
The truth is that Dolphins fans are not at all unhappy about one of our nation’s prestigious public universities receiving such a boon. They’re bitter that the very owner of the football team they hold so dear to their hearts seems more interested in committing charitable acts toward an out-of-state football team in which he has no staked financial interest, as opposed to the one he owns in South Florida.
The act itself, donating $200 million to the University of Michigan—including $100 million earmarked for the Michigan athletics program—serves as a bright light that illuminates other aspects of Ross’ ownership of the Dolphins that many of the team's fans are angry about.
This offseason, Ross spent a lot of time and effort convincing the public that the Dolphins are in desperate need of approximately $350 million worth of stadium upgrades in order to maintain a competitive product in the NFL.
In a television interview, former CEO Mike Dee used terms like “bleak” to describe the Dolphins’ future following the failure of the public-private venture that would have funded upgrades to the stadium.
The question on everyone’s mind is, if the stadium upgrades are so necessary to maintain the long-term solvency of the franchise, why couldn’t Ross pay his own way on the upgrades to the stadium he owns?
If the Dolphins’ long-term future looks “bleak” without the upgrades, yet the future looks significantly better with them, the Dolphins themselves have constructed a decision that makes business sense. The investment, while unpleasant in the short term, will be accretive in the long term at the very least by maintaining the team’s future revenue outlook if not growing it significantly.
Despite this, the Dolphins insisted that the public share in the cost. Their arguments made sense. They based them on the classic ‘free rider’ dilemma—the sort of arguments that are often used to justify compulsory taxation.
The idea is that since the local Miami economy would benefit from the upgrades by virtue of large events that would be attracted to the stadium (e.g. Super Bowls), the upgrades represent a public good. If the stadium upgrades present a public good, the public should be compelled to share in the cost. After all, Ross is not in the business of giving free rides.
Yet, that is what makes this donation to the University of Michigan, especially the portion allocated to the athletics program, is so provocative. If Ross is not in a very charitable mood when it comes to stadium upgrades which are justifiable in a business sense, but will also provide incidental benefits to the Miami community for which he expects compensation, then why is he in such a charitable mood when it comes to funding the Michigan Wolverines football team?
The situation likens to a parent kicking one son out of the house unless he begins to pay rent, then turning around and gifting (coincidentally) the exact amount of the rent to another son in the form of a new laptop. One can’t help but feel a bit less loved.
The perceived affront digs up a lot of mixed feelings from the Dolphins' fanbase toward an absentee owner who resides and does business during the year in New York. Ross even attempted to buy the New York Jets in 1999 before successfully purchasing the Miami Dolphins 10 years later.
Seeing the Other Side
Many arguments have been put forward defending Ross, but most of them are unnecessary.
Ross does not need defending because he so valued higher education that he magnanimously granted $200 million of his own private wealth to one of the nation’s most esteemed public universities. He can. and should, do what he feels is best with his own wealth. It is only up to the rest of us to discern what his pattern of behavior tells us about his commitment to the Dolphins and the city of Miami, and to adjust our own commitment to his businesses accordingly.
One argument commonly fronted in favor of Ross’ commitment to the Dolphins is the citation of all the new contracts his general manager Jeff Ireland gave to new players this offseason.
That argument does not pass the smell test.
The NFL is not Major League Baseball. Owners do not have a high amount of discretion over how much they compensate their players. According to Gregg Rosenthal of Pro Football Talk, the new Collective Bargaining Agreement dictates that teams are compelled by league rules to spend at least 89 percent of the salary cap from 2013 to 2016. With the 2013 salary cap at about $123 million, that gives teams only between $13 and $14 million per year of wiggle room, which the team can use to be “cheap” or “generous”.
Armando Salguero of the Miami Herald cited the NFL Players Association in noting that the Dolphins still have over $22 million in salary cap space in 2013.
In addition, a cursory glance at the Dolphins’ 2014 salary commitments, via Spotrac, shows that the team has significantly less in salary commitments for 2014 than the estimated salary cap for that year should it remain the same as 2013.
That means the Dolphins are still operating underneath the long-term salary floor established for the 2013 through 2016 seasons. For all that some people cite the contracts given out this offseason as proof that Ross is committed to the Dolphins, the team is compelled to spend even more money or else run the risk of penalties under the Collective Bargaining Agreement.
Ross did not green-light doling out of contracts this offseason out of some overly generous commitment to the team. He had to give those contracts out by league rules.
One other common argument used in Ross’ favor is that his donations to the University of Michigan are tax deductible. While this is true, the matter bears qualification because very few people out there understand the labyrinth in tax laws enough to intelligently comment on the tax benefits enjoyed via the donation versus potential tax benefits that might be enjoyed via a $350 million stadium upgrade outlay.
One person who is qualified to discuss those issues intelligently is Paul Humphrey, a licensed CPA in California who operates an accounting business, 7 Day Accounting. I asked Humphrey if he had any insight he could share with tax neophytes about what kinds of benefits that Ross might have received as a result of the donation, versus tax benefits he might have received via the stadium outlay.
“The potential tax benefits to Mr. Ross for donating $200 million to charity equates to roughly $80 million in tax dollars saved (assuming the highest federal individual income tax bracket of 39.6 percent),” he said, stipulating that, “his AGI (Adjusted Gross Income) would have to exceed $400 million for the full donation to be realized in that year. Any unused donation amount can be carried forward for up to five years.”
Regarding potential tax benefits from an equivalent $200 million outlay on stadium improvements, Humphry estimated the potential long-term tax break to be nominally worth about $70.2 million. Humphry added that "he can't take the tax break all in one year. Depending on how the improvement is classified, you're likely looking at depreciation over 39 years.”
So while the nominal amount of the tax break is similar, the fact that it is spread over such a long time period makes the charitable donation worth more.
In another life (i.e. “real” life) I have had quite a bit of experience with financial and accounting concepts. I know that, given the time value of money concept and with interest rates where they are, the difference between the present values of the two tax breaks is roughly between $35 million and $45 million, depending on whether Ross will be able to deduct all of the tax benefit from the donation in the present year or if he must space it out over five years.
So, those who bring up the fact that, dollar for dollar, $200 million given to the University of Michigan is not the same as $200 million poured into Sun Life Stadium are correct. The $200 million donation is closer to the equivalent $155 million to $165 million spent on the stadium.
What is the bottom line here? It is that Ross significantly damaged his own arguments in favor of a public-private partnership to fund stadium upgrades.
Instead of engaging in all, or at least some, of the stadium upgrades that the team supposedly needs so desperately—upgrades that would have benefited him financially in the long run, he spent $100 million on a college football team.
That act shows his own mindset relative to the team he owns versus a team he doesn’t own. It also shows that when a combination of politicians and early-voters decided that funds are better spent elsewhere than on stadium upgrades, they actually displayed a viewpoint that Ross secretly shares.