Four months ago, the Pac-12 dismissed two senior executives for failing to properly report years of overpayments by a media partner that totaled at least $50 million.
The situation was bad enough given the facts presented at the time — the media partner, later identified as Comcast, assuredly will attempt to recoup the money — but the financial damage to the Pac-12 campuses ultimately could prove much worse.
We’ll get to those gruesome details momentarily. For now, our focus is on the cleanup process:
How the schools plan to cover the shortfall if Comcast withholds at least $50 million in payments and the Pac-12 Networks, in turn, cannot meet the annual revenue distribution goals that have been baked into campus budgets.
To make the Hotline’s position clear: The athletic departments should not, under any circumstances, take the hit.
The expected reductions in distributions from the conference office to the athletic departments should be covered by the university presidents using campus reserves.
After all, the presidents are responsible for this mess, not the athletic directors.
The presidents have oversight of the Pac-12 Networks.
The presidents control the auditing process.
The presidents hired former commissioner Larry Scott, approved his organizational structure and allowed him to establish a media company with an inadequate system of checks and balances.
In a legal complaint filed last month in San Francisco, the two dismissed executives, CFO Brent Willman and Pac-12 Networks president Mark Shuken, claim they told Scott about the Comcast overpayments after the mistake was discovered in an audit in 2017.
No documentation to support this claim is provided in the complaint. But even if Scott didn’t know, he should have known about the overpayments as the chief executive of the company — a chief executive who reported directly to the presidents.
The athletic directors were not part of the command chain.
The presidents alone were responsible for Scott, the Pac-12 Networks and the auditing process. They need to accept responsibility for their flawed oversight and make the athletic departments whole.
Any other outcome takes money, resources or both away from the athletes.
How much, exactly?
The $50 million figure cited in the Pac-12’s timeline of events is based on $5 million in annual overpayments from the first year of Comcast’s distribution agreement with the Pac-12 Networks (2012-13) through the fiscal year that ended just before the mistake was discovered (2021-22). Sources expect the company to recoup the amount by withholding it from future payments.
But there’s another layer to consider. Comcast’s contract with the networks runs through next summer, meaning there are two additional fiscal years (2022-23 and 2023-24) in which the company could withhold $5 million in payments that have been included in the Pac-12’s financial forecasts.
That would bring the total to $60 million over the course of the 12-year distribution agreement.
Sure, that figure could be negotiated downward. But it could zoom higher if additional overpayments are discovered — not an unreasonable outcome given the complicated nature of the Pac-12 Networks.
Although details remain hidden from public view, one source told the Hotline that the overpayments resulted from Comcast offering both the Pac-12 Networks’ national and regional feeds in some markets — and mistakenly paying the Pac-12 double (for each subscriber) as a result.
The financial damage could be mitigated by expense reductions at HQ. Commissioner George Kliavkoff’s decisions to create a remote work environment for conference employees, move the Pac-12 Networks to a production studio in the East Bay and trim his executive staff could create in excess of $6 million in annual savings starting in the 2023-24 fiscal year.
But those savings shouldn’t be used to offset the Comcast fiasco. After all, the presidents allowed Scott to set up shop in downtown San Francisco and spend as he saw fit. Any cash resulting from streamlined conference operations should be spun off to the athletic departments without strings attached.
Instead, the presidents need to pay for the Comcast mess by pulling levers that exist outside the normal flow of athletic operations.
We see two options: Dip into the Pac-12’s emergency reserve fund — how much remains following COVID-related withdrawals is unclear — or use campus discretionary funds. The universities are multi-billion-dollar entities. Surely, the presidents can find $5 million stashed in an Ivory Tower closet.
They must accept responsibility for the lack of oversight. For their lack of oversight.
And since the Hotline isn’t in the business of pulling punches, let’s expand the framework of accountability. The presidents actually owe their athletic departments far more in restitution (for lack of a better term) from mismanagement during the Scott era:
— The presidents established the organizational structure that allowed him to serve as both conference commissioner and chief executive of the networks.
— The presidents negotiated the contract (and subsequent extensions) that allowed Scott to take home in excess of $45 million during his decade-long tenure, according to Pac-12 tax filings obtained by the Hotline over the years.
— The presidents allowed Scott to sign a rental agreement for two floors in downtown San Francisco that is believed to have cost the conference more than $70 million in occupancy over time.
— The presidents approved the creation of a media company with a flawed business model that failed to meet revenue promises and has spun off just $20 million per campus (approximately) over the past decade. (That’s right, Scott took home twice as much in salary as his brainchild distributed to any given school.)
— And the presidents were responsible for a chief executive whose company failed to prevent at least $50 million in overpayments by a distribution partner.
The damage over time to the athletic departments is immense. They will never be made whole.
The least the presidents can do is offer to clean up this mess.
*** Send suggestions, comments and tips (confidentiality guaranteed) to pac12hotline@bayareanewsgroup.com or call 408-920-5716
*** Follow me on Twitter: @WilnerHotline
*** Pac-12 Hotline is not endorsed or sponsored by the Pac-12 Conference, and the views expressed herein do not necessarily reflect the views of the Conference.
