clock menu more-arrow no yes

Filed under:

Explaining the multi-million dollar loans that Northwestern paid Pat Fitzgerald, Jim Phillips

New, 36 comments

It's very possible that this loan is a form of a buyout clause.

Stephen Lam/Getty Images

In the midst of Northwestern's 222-page Form 990 tax report released Wednesday chronicling the school's expenses for 2013, there was a list of employees who received loans from the University as part of a "compensation package." Head football coach Pat Fitzgerald and Athletic Director Jim Phillips were among those benefitting from the loans.

Fitzgerald received a $2.5 million loan and Phillips got two loans totaling $1.13 million.

Why is Northwestern paying Fitzgerald and Phillips the loans? Why not add that money to their salaries of $2.48 million for Fitzgerald and $930,885 for Phillips?

When asked, the University declined to comment on the subject, and as a private institution, it is not required to release specific details of any contracts.

However, there are some strong possibilities as to why Northwestern, Fitzgerald and Phillips are dealing with these loans, according to research and Florida State University law professor and tax law expert Jeff Kahn.

General Notes

- The loan to Fitzgerald listed on the 2013 Form 990 is not new. It first appeared on the 2011 form, and its continued appearance since does not mean that the University is paying Fitzgerald a new $2.5 million loan every year. Rather, the form requires Northwestern to report loans outstanding, so this is one loan, paid in 2011, that has not yet been repaid.

- The "balance due" on the loan has increased over the years is most likely the interest rate increases. From the original $2.5 million loan in 2011 to $2.57 million in 2012 and 2013, the increases are required to be included by law as the interest, along with the loan itself, remains unpaid.

- Fitzgerald signed a 10-year contract extension in May of 2011, and the loan first showed up on the 2011 Form 990, which contains data for the fiscal year beginning Sept. 1, 2010 and ending Aug. 31, 2011. So if the loan was part of the new contract, the 2011 form is the one on which it would've first appeared.

- Schools paying loans to football coaches isn’t entirely uncommon, but it still isn't common. What differentiates this situation from others is that loans are usually used when coaches have been bought out of previous contracts. For example, when Purdue hired Darrell Hazell away from Kent State in 2012, Hazell’s contract at Kent State required Hazell to pay a fee to get out of the contract. This is common practice, and is often known as a "buyout clause." Whenever this is the case, the coach’s new employer — his new university — almost always pays the buyout fee, or reimburses the coach for paying it.

One way to do that is through a loan. Hazell’s buyout was $650,000, so Purdue loaned him money so that he could pay the fee, according to Steve Berkowitz of USA Today. The key point is that the loan is forgiven on a pro rata basis — meaning each year, the amount of money that Hazell owes Purdue on the loan decreases. This incentivizes Hazell to see out the entirety of his contract at Purdue because, if he reaches the end of his deal, he will never have to repay the loan.

Because Fitzgerald never had to buy himself out of a previous contract with another school, his situation (and Phillips's) with Northwestern is still a bit different. For the sake of clarity, we will focus primarily on Fitzgerald's dealings with Northwestern.

Possible explanations for Fitzgerald's loan

If Northwestern expects Fitzgerald to eventually pay off the loan, "then for tax purposes, it's basically a nothing," Kahn, who has written on the topic of taxes and buyouts for head coaches in major college football, told Inside NU. "It's not part of his compensation, it doesn't really improve his economic position. Because although he gets the money, he's got to pay it back at some point.

"If it's really a true loan, and they're charging a rate that the IRS [deems] adequate interest, it's not part of his compensation, and it's just a deal between the university and Fitzgerald."

If the loan were for, say, a house, this would be the case. But given the nature of the loan, its listing as a "compensation package," and the fact that in three years, none of it had been repaid, this scenario seems unlikely. Fitzgerald also apparently purchased his house a year and a half earlier, in January of 2010.

So the real question, Kahn says, is, "Is there actually a bona fide loan here? Or is there an agreement that this is never going to get paid back?"

If there is no expectation from either side that the loan will be repaid, then it is essentially just a one-time payment from the university to Fitzgerald. According to Kahn, it is the equivalent of compensation then, and should be listed as such. Yet, Northwestern hasn't listed the loan that way.

Provided there are no unknown tax loopholes, this scenario also seems unlikely. If this scenario were actually the case, according to Kahn, "the IRS can come in and say, ‘Look, the facts show there was no intention to repay this; both parties know that. It's not a loan, it's a fake loan.' If that happens, it's income right when he got the money."

Thus, from Northwestern's perspective, it would not be beneficial in any way to list the $2.5 million as a loan rather than as compensation. The moment it becomes compensation in the eyes of the IRS, it is taxable.

A cynic might say that Northwestern just wants to conceal the full value of its coach's salary. But to be clear, Northwestern is not paying Fitzgerald an extra $2.5 million every year; it was just one loan in 2011. So the school wouldn't be able to conceal anything about the yearly salary in this manner.

The most likely possibility is that the $2.5 million loan paid to Fitzgerald by the university is essentially an unconventional way of structuring his buyout clause.

Here's how Kahn explains it:

"If it's a legitimate loan, and both sides expect it to be repaid, or at least it's arguable that it's going to be repaid, the IRS can't come in and say ‘No, this is complete fraud. It's not a loan, it's part of compensation.' But I wonder if there isn't a side agreement, an unwritten agreement [between Northwestern and Fitzgerald] that [says], ‘Look, as long as you stick around, we'll forgive this at some point. But if you go flirt with, and then take, the Penn State job, or University of Michigan job, or whatever, we're going to call the loan.

"So this might be a kind of gentleman's buyout to say, 'We're giving you this loan, wink wink, if you stick around, five years down the road, we'll forgive it, it's your money. But if five years down the road you tell us you're moving on, we'll say, well, we have this loan, it's time to pay up.'"

With a traditional buyout clause, a coach — or, realistically, his new university — would pay his old school a fee to jump to a new job. If the buyout fee were $1 million, for example, the coach would have to pay $1 million to leave, and his new university would reimburse him. If the buyout clause is structured as a loan, the coach is still losing $1 million if he leaves. But rather than starting at 0 and being docked $1 million, he's starting at $1 million and going back down to 0. His new university would likely still reimburse him. So with a loan, the coach is being rewarded for staying, rather than facing a penalty for leaving. But in both situations, the value is the same.

So this raises a few questions. First, why would Northwestern structure a buyout in this way?

It has to do with tax. The loan that Northwestern currently has out to Fitzgerald is not taxable. And then if in, say, three years, after a 10-win season, Fitzgerald is offered the Texas job and decides to take it, and must repay the loan, that repayment is not taxable either. But if Fitzgerald has a conventional buyout clause, and if he were to leave for Texas, both the $2.5 million that he was paid up front (likely as a bonus; see below) and the $2.5 million buyout fee that would be paid by Texas would be taxed.

That leads to the second point. This wouldn't just be a buyout clause, because Fitzgerald would eventually, potentially, be getting paid an extra $2.5 million on top of the salary he collected over the years. The loan would wrap a buyout clause and a bonus — possibly Fitzgerald's signing bonus, if we connect the dots and assume the loan was paid in conjunction with the 2011 contract extension — into one. To structure something in this way, you need cause to pay your coach some sort of compensation, not just to institute a buyout fee.

There is even the possibility that the loan acts as not only a bonus and a buyout fee on Fitzgerald's end, but the buyout fee for the university as well. If Northwestern were to fire Fitzgerald, the university would need to pay to get out of the contract. If this is the case, and NU did make that decision, they would forgive the loan.

So essentially, three things — some bonus, possibly a signing bonus; the buyout clause for if Fitzgerald were to leave; and the buyout clause for if Northwestern were to fire Fitzgerald — may have all been wrapped up into this one loan.

To be clear, this is all informed speculation. We are not sure this is what Northwestern and Fitzgerald have set up. But it seems to be the most likely scenario.

Phillips's loans

Nearly everything above could also apply to the loans Northwestern gave to Phillips. It could very well be his buyout clause. One difference is that Phillips's loans showed up for the first time on the 2013 form, meaning they are more recent.

The main oddity though is that one of them seems to have been almost fully repaid. It looks as if the university initially loaned Phillips $350,000 (in addition to the other loan of $1.1 million), and all but $27,778 of the smaller loan has been repaid. It's unclear why that would be, but that one could just a more traditional loan for a house or some other purchase.

So is this a big deal?

No, in all likelihood, it is not. It's more of a quirk than anything. It's interesting though, and seems to be a pretty unique situation. And if what we see as the most likely possibility is indeed the case, then Fitzgerald's buyout is $2.5 million, which would be significant. But it doesn't appear as if Northwestern is doing anything that should incite skepticism. The loans seem to be a creative way to make a more financially beneficial situation for the University and for Fitzgerald and Phillips.