We’re in the first day of what is expected to be a rather lengthy NBA lockout, and by now we all know what this is about: money. Because the owners, whose interests are collectively voiced by Commissioner David Stern, claim they’re losing between $350-$400 million each year under the current Collective Bargaining Agreement (CBA), they want to change it. Big time. If you need a basic primer on what the owners and players each want for the next CBA, read this.
Many people, including myself, and the NBA Players Association (NBPA) assume the owners are playing games with the numbers and are not losing the money they claim to be, if they’re even losing money at all. Well now we have some specifics that shed light on how twisted the financial books can become to make team profits look like losses, and small losses look like huge ones. Below are two pieces that have been published online in the past 24 hours that do just that. Please read them – I’ve included a brief summary of what you’ll find at each link.
Deadspin: NJ Nets audit and the soon-to-be-famous RDA
Deadspin’s Tommy Craggs published a piece yesterday using the New Jersey Nets’ audited financial information from 2003 to 2006. You absolutely have to read this article since it details how the team's ownership made a $7 million profit come out as a $28 million loss. The key item that was illuminated for the public in Craggs’ column is something called Roster Depreciation Allowance (RDA). Teams are allowed to claim their rosters depreciate in value each year, and the numbers gathered from the Nets’ financials from June, 2004, show they claimed a $25 million loss due to RDA on a $52 million roster. Like a business that claims their company cars are losing value each year due to wear and tear, professional sports teams can write off their depreciating team roster. But keep in mind they don’t actually “lose” any of this money. They never paid anything to “own” the players. Most of the players are young and aren’t really “depreciating.” Plus there’s the fact the team isn’t writing a check to anyone for this amount. It’s a loss they never lose.
Craggs further explains that the owners are then able to take their new-found “loss” on the team and pass it along to their personal income tax forms, where they save approximately 33 percent of that loss. In New Jersey’s case, the owner got another $9 million in tax savings because he was now about to show the team was losing $27.6 million, even though it only lost closer to $2 million before the RDA was factored in. He further goes on to explain how even when a team is truly losing money—meaning they wrote more checks out for expenses than cash coming in—it’s not an accurate description of what’s really happening to that owner's money. A vast majority of owners own an NBA franchise as one part of a much larger portfolio of investments. They may own the arena the team plays in and make tons of money on the building by increasing rent to themselves (as the team), allowing their team books to take a hit on larger rent. They may own properties such as hotels, malls, or restaurants near the arena and make a ton of money on each of those because their team attract so many people to that area many nights a year. You get the idea. Rodney Fort, a sports economist at the University of Michigan, calls it “an element in a billionaire’s wealth-generating portfolio.” A team may legitimately be losing money in a year, but the owner certainly isn’t losing money by owning the team.
Larry Coon: Losses on the sale of teams and non-basketball-related operations
Larry Coon, the salary cap guru who runs the most respected website about the CBA, wrote a piece for ESPN yesterday that examined how owners make losses appear out of nowhere in relation to the sale of teams. For example, the Nets added an extra $90 million total to their losses in 2005 and 2006 that were simply there to balance the books – again, not money that was actually lost, as in someone was writing a check. It simply balanced the books. Coon also shows how the Hornets would have had a profit in 2009 if they weren’t paying a huge amount of interest on the debt the team owed. A big part of this has to do with how the franchise is run from the top; they loaned team owner George Shinn $35 million at a low interest rate while borrowing $100 million at a higher rate. As Coon explains, this portion of their debt “is unrelated to the actual basketball operations of the team” and “unless the players can share in the profit when a team is sold, they don’t want to be burdened with the costs associated with buying the team in the first place.”
Again, please read these two articles and recognize that the owners are indeed working every legal angle available to make losses appear on their teams’ ledgers that aren’t real losses. TV viewership of the regular season and post-season was up significantly this year, ticket prices were up, arena capacity was over 90 percent for the seventh consecutive season, and overall attendance increased as well, so it was hard to believe the owners were losing around $370 million, the figure David Stern keeps referring to. And now that some media organizations have gotten their hands on a couple teams’ books, we can see how funny those numbers really are.
I’m not suggesting fans should blindly go along with everything the NBPA wants for the players in the next CBA, but fans should at least be privy to the truth when teams claim the CBA needs to be changed because they’re losing massive amounts of money.