June 30, 2011
So, 22 out of 30 NBA teams are losing money. That's what the NBA keeps pushing, and for some reason this is starting to mean something to people. To them it probably means that the NBA's economic model is hopelessly flawed, that the owners are working their best to break even and failing despite record revenues coming in from all money-making angles, and that the entire system needs an overhaul. Even if that means illegally asking players to give back money they earned under a previously negotiated collective bargaining agreement as some sort of starting point, as the owners asked recently when demanding players pass on collecting the 8 percent escrow payouts that they're due under the 2005-2011 CBA that is still functioning until the end of Thursday.
The problem with all this, for years, is that NBA teams always lose money. For years the only teams that made money were in Chicago (not because of Michael Jordan, but because the ownership group ran its major market payroll like that of a small market payroll, with some exceptions) and Los Angeles (not the Lakers, but the Clippers, who don't spend money on anything save for a few top free agents). Things have changed recently with the Lakers, Knicks and a few others; but to look at an NBA team in a vacuum is a ridiculous notion, because for ages NBA owners have treated their teams as write-offs within a multi-tiered economic model that involves both the owners' other financial interests and holdings, the relationship the owners had with the various hands that run the team arena, and the revenue-sharing model of the NBA as a whole.
So to look at the amount of money coming in, and the amount going out, is not to tell the whole story. This isn't to say that the NBA's players have to step off their stubborn demands, as these two sides "try to" possibly "avoid" a lockout, but because teams and owners have long used various and legal principals to write off expenses and claim them as losses, to then write off those losses and spiral, spiral, spin and spin.
Deadspin's Tommy Craggs has obtained some paperwork detailing the New Jersey Nets' finances, from three years from June of 2003 to June of 2006. In a detailed investigation, he documents just how these teams take modest profits and turn them into significant losses once the paperwork is all filed. Not because these owners are schemers and liars, but because that's the way it has always been done. It's smart business. And for some reason, in the fourth CBA negotiation in 16 years, the owners have managed to shape the narrative away from outrageous rookie contracts and holdouts (1995), ridiculous and uncapped individual player contracts (1998), and out-of-control player behavior (2005), and focus instead on the simplest thing for a paycheck-to-paycheck nation to understand:
These players are taking all of our money.
Except, they're not. Too much of it, perhaps, but not enough that the current model can't be fixed with just a few tweaks. And Craggs will explain why, if you take the time to read.
Let's start with looking at a listed $25 million "Loss on player's contracts," in the Nets paperwork, which is actually nothing of the sort. Here's Craggs:
The first thing to do is toss out that $25 million loss, says Rodney Fort, a sports economist at the University of Michigan. That's not a real loss. That's house money. The Nets didn't have to write any checks for $25 million. What that $25 million represents is the amount by which Nets owners reduced their tax obligation under something called a roster depreciation allowance, or RDA.
Bear with me now. The RDA dates back to 1959, and was maybe Bill Veeck's biggest hustle in a long lifetime of hustles. Veeck argued to the IRS that professional athletes, once they've been paid for, "waste away" like livestock. Therefore a sports team's roster, like a farmer's cattle or an office copy machine or a new Volvo, is a depreciable asset.
The underlying logic is specious at best. As Fort points out, a team's roster at any given moment isn't actually depreciating. While some players are fading with age, others are developing and improving. But the Nets don't have to pay more taxes when a player becomes more valuable. And in any case, the cost of depreciation is borne by the athletes themselves, when they pass their primes and lose their personal earning power.
This isn't some net, no pun intended, loss. And, as Craggs mentioned, there was never a $25 million check written. This was just a tax benefit that the Nets count as actual lost revenue.
As NBA Players Association head man Billy Hunter contended to ESPN.com's Larry Coon recently, "If you decide you don't count interest and depreciation, you already lop off 250 [million] of the 370 million dollars." And that's quite a bit. That's not just because Joe Johnson(notes) signed a terrible contract.
Craggs goes on to detail just why the Nets actually lost money in 2004-05, despite trimming some salary obligations (Kenyon Martin(notes) was sent packing for draft picks the summer before, and the team waited half a year before filling his salary slot with Vince Carter(notes)) and making the playoffs again.
Bruce Ratner purchased the team in hopes of making ungodly amounts of money off of it once he eventually moved it to Brooklyn. That year, Ratner's group smartly spent a goodly chunk of money "presenting the team to Brooklyn," and while that may not make up for the entirety of the team's loss, it's not insignificant. It certainly isn't insignificant to Ratner, or at least it wasn't, who had planned on spending what was pocket change to him in order to make it back and then some times 10 once the team found itself in New York City.
Now, most of these dealings took place under the second-to-last collective bargaining agreement, before the current one was tweaked and signed off on in 2005. On top of that, neither Ratner nor the original ownership group owns the Nets any more. So you'd be wise in wondering if this all holds up in 2011, how typical this all is, and why it should stop us from thinking a change is needed when the contracts of Jamaal Tinsley(notes), Danny Granger(notes) and T.J. Ford(notes) combine to earn $25 million from the Pacers last year in front of an average of 13,000 fans a night.
You should read Craggs' work because this is typical. And it's not wrong, nor is it illegal. It's smart business, usually practiced by owners who have been in the league for a while, who don't expect to turn huge profits on their teams just as long as their other interests are sound, and the team does well enough to write enough of it off at the end of the year.
It's the new group, led by a younger group of owners who paid outrageous sums for their teams (all fees written off, of course, but allowed to stand as a sign of lost money in the paperwork), immediately spent like mad under the Mark Cuban model (forgetting, of course, that Cuban spent smart even as he spent like mad), and now expect their basketball teams to turn the same profit (sans shifty paperwork) that their other businesses do.
And it doesn't work like that. Not when you sign Quentin Richardson(notes) to that much money. Not when you don't utilize restricted free agency. Not when you bid against yourselves, or spend as much money on a GM in a small market as the league's average salaried player would make.
So read Craggs' work. Bone up. The players have a lot of giving in to do, because it's on them to come correct and make a solution possible. But also be wary of that "22 out of 30." Because it's been happening for years, and for years NBA owners didn't want it any other way.