By David Aldridge, TNT Analyst
Posted Aug 4 2009 2:57PM
"Some teams are slitting their economic wrists." --NBA Commissioner David Stern, July, 2009
This was the Summer of Dichotomy in the NBA.
A lot of teams were active, and spent grandly. But individual players didn't get the huge paydays of years past.
The relative haves spent money like it was going out of style, going tens of millions of dollars above the luxury tax threshhold. But many more teams, for one reason or another, stood pat.
So, is the NBA, in this still-lagging economy, relatively speaking, okay? Or is it in dire economic trouble?
That question will serve as the backdrop for the beginning, on Tuesday, of negotiations between the league's special labor relations committee, and the National Basketball Players' Association on the next Collective Bargaining Agreement. The current CBA runs through the 2010-11 season, and the owners could extend it an additional year, but no one expects anything but a re-opening, and both sides have agreed to get talks started sooner rather than later in hopes of heading off a work stoppage/lockout in two years.
(I know. You don't want to read about labor talks, and I don't want to write about them. But the reality is that everything in the game -- including next summer's celebrated free agent class -- will be directly impacted by what the NBA and the union come up with, or don't come up with, in these talks. What follows is just a primer about the key issues that the owners and players will be arguing over in the months to come. It's like cold medicine. You have to take it every once in a while.)
Owners are adamant that the economic health of the game is in peril. Several teams lost millions of dollars, with ticket sales and advertising down across the league. The league's worst cases, like New Jersey, fell through the floor economically, with estimated losses at or near $10 million. Several other teams were just behind, "only" losing seven figures. And those numbers are multiplied in many cases when you factor in the losses suffered by owners in their other businesses during the recession.
The Kings' owners, the Maloof Family, own the Palms Casino in Las Vegas -- a city hit hard by the economic slowdown. Suns owner Robert Sarver had investments in transportation companies like Mesa Airlines, according to a source with knowledge of the Suns' business holdings, and do you know any airlines that made money last year?
"They lost a fortune. Hundreds of millions in losses," said a source who speaks regularly with many NBA owners and has extensive knowledge of many owners' portfolios.
NBA Commisioner David Stern said in Las Vegas during the NBA's Summer League last month that fewer than half of the teams in the league made money last season. During a Finals news conference, Stern projected losses of up to 10 percent of revenue next season. Additionally, Stern wrote in a memo to team owners last month that revenues next season could fall between 2 1/2 and 5 percent next season. Ultimately, all of this could lead (in a worst-case scenario) to a salary cap reduction to around $50 million and a luxury tax threshhold of $61 million for 2010. That would have a devastating impact on teams that are clearing cap room in order to make a run at one or more free agents from the LeBron James-Dwyane Wade-Chris Bosh-Joe Johnson class.
The owners, according to several sources, are looking for a rollback on the revenue guarantees to players. Currently, players are guaranteed 57 percent of all Basketball Related Income -- just about any money that comes from an NBA team, including ticket sales from all games (including exhibition and playoff games), broadcast rights to games, concessions and parking sales, merchandise, team sponsorships and beverage sale rights. In addition, players get 40 percent of the take from the sale of luxury suites and arena signage, and up to 50 percent of arena naming rights.
Owners want to reduce the players' split from 57 percent of BRI to somewhere around 50 -- and more than a few owners want a split in their favor. Either idea, union sources have told me over the past couple of months, is DOA.
With the caveat that a wish list at the beginning of negotiations is just that, and that both sides will certainly have some give in them before a new deal is done, the source with access to the owners says they have several other significant changes on their agenda going into the negotations, including:
• Implementing a hard cap. "A hard, hard cap," the source said. The NBA has operated with a "soft" cap since the implementation of the salary cap in 1984, with several kinds of exceptions allowed to either re-sign players already on a team's roster or to entice players from other teams to sign. These include the famous "Larry Bird" exception that allows a team to exceed the cap in order to re-sign its own player; the "mid-level" exception, starting with the average salary paid in a given season, and going out up to five years with annual eight percent raises; and the "bi-annual" exception, which teams can use every other year, and is generally used to help sign veteran players.
A hard cap, such as is used in the National Football League, would eliminate all exceptions. Teams would have a specific amount they could spend on salaries, and could not exceed it for any reason;
• Higher luxury taxes. A "supertax" that would basically double the luxury tax to $2 for every dollar a team exceeds the tax threshhold, from its current $1. The league tried to implement a supertax in the last negotiation with the players, but the union held firm against it, feeling it would have a devastating impact on free agency;
• Shrinking the gap between salary cap and tax threshhold. A smaller spread between the salary cap figure and the tax threshhold. Next year's cap is set at $57.7 million; the tax threshhold is $69.9 million.
For the past few months, Stern has spoken of trying to find an "appropriate divide" of revenue between players and owners. He says that in a recession as deep as this, no company is immune, including his, and that the players have to meet the owners halfway economically to find a joint solution.
"What we want to be able to talk to the players about is, these are the facts, here's where we are, this is where we have to get to," Stern said during the NBA Summer League in Las Vegas last month. "Let's work together on how we get to a workable system, which recognizes the risk that invested capital is at, which sometimes makes money, and sometimes loses money -- and most recently, it's been a losing situation. And the owners would like to see whether they can get out from under that situation."
But players, obviously, don't see such a desparate financial different picture.
Take San Antonio, whose owner, Peter Holt, is chair of the league's negotiating committee with the players.
San Antonio is one of the league's smallest television markets, ranking 37th among U.S. NBA teams in television market as of Jan. 1, 2009, according to Nielsen's "people meter" data. But it's ninth-largest in population according to 2007 estimates, and houses the corporate headquarters of five Fortune 500 companies, including four in the top 176. Holt has never been a big spender; even through the Spurs' era of four championships in nine seasons, Tim Duncan was the only player who received anything close to a max contract.
Yet this summer, Holt okayed the trade for Richard Jefferson from Milwaukee, a transaction that will cost Holt $29 million more than if he had kept the expiring contracts of Bruce Bowen, Kurt Thomas and Fabricio Oberto (who were dealt for Jefferson). Jefferson is due $14.2 million this coming season and $15 million in 2010-11.
He spent the full mid-level exception on free agent Antonio McDyess, for three years and $15 million in guaranteed money. He coughed up another $1.3 million for center Theo Ratliff. Add in the salaries for rookies DeJuan Blair and Jack McClinton, and the Spurs' payroll for next season will be right around $80 million, which means Holt is on the hook for at least another $10 million in luxury tax payments if the current projected $69.9 million threshhold for next year is accurate.
Holt says there is a method to his seeming madness. Basically, the Spurs are loading up for two years -- which coincides with all but the final year of Tim Duncan's contract. By 2011-12, the Spurs will have just two players under contract -- Duncan and McDyess, and McDyess's deal is only partially guaranteed. San Antonio's time among the league's top spenders has an expiration date.
"In our case, lots of things over the years played out," Holt said in Las Vegas, when he was named chair of the committee. "I get credit, R.C. (Buford, the general manager), Pop (coach Gregg Popovich). But we lucked out on some deals, to be blunt with you. Then, we have an ownership group that's strong. No money has come out of that business, ever, or at least since 1993. So the debt on the Spurs is way down. And so we, as owners, have decided to give us a transition period, are willing to take some hits. But the main reason is that because we have such little debt on the business ... it gives you opportunties that in the past, we didn't have to take advantage of."
But Holt is not the only owner taking on short-term pain for a chance at a championship.
Seven teams -- Boston, Cleveland, Dallas, the Lakers, Orlando, San Antonio and Utah -- will break the $80 million team salary mark next season, according to salary figures obtained by NBA.com. Each is subject to paying more than $10 million to their fellow owners in luxury taxes.
Three other teams -- Denver, New Orleans and Washington -- will pay $73-78 million in salary and $3-9 million in taxes. Houston and New York are likely tax payers, though it's possible they could get under the tax by trading one or more players without taking salaries back to get under the threshhold. A few other teams, like Chicago and Milwaukee, are teetering on the pay/don't tax pay precipice.
That's about half of the league that's near or above the tax threshhold. Not over the salary cap, which will be $57.7 million next season, a drop of nearly $1 million from the 2008-09 figure of $58.68 million. At or above the tax threshhold is supposed to be the last line of defense to keep owners from overspending. By comparison, last season seven teams paid the luxury tax.
The offseason spending spree is what Stern was talking about in the quote at the top of this story. But that's a different issue, the league says, from the need to get a more equitable split with the players.
For its part, the union points out that players have already kicked in hundreds of millions of their own salary to owners, in the form of the "escrow" account system in which players committed to return 10 percent (going forward, just eight percent) of their salaries to owners if player salaries exceed a certain amount -- a guaranteed rebate, if you will -- to help owners cover revenue losses. According to CBA guru Larry Coon's blog, players gave back $204.9 million of their $1.69 billion in salaries and benefits to owners last year, which was $20 million more than they gave back in 2007-08.
How, then, the players ask, can owners cry poor mouth to the union, when so many of them are spending oligarch-style?
"The only answer I have for that is, we've done that for many years," Holt said with a laugh in Vegas. "They (the union) know it's coming, and we know it's coming. It'll be fine. I'm not worried about that part; I'm more worried about how these teams are going to survive, and how do we keep doing this?"
The union points out that it is the players who have given back in each of the most recent collective bargaining agreements with the owners. Their contracts have gone from seven years in length (six if they were signing with another team) in the old CBA to six (and five) in the current one. The maximum amount of their yearly raises have gone from 12.5 percent (10 percent if they were signing with another team) to 10.5 percent (and eight) in the current one. Signing bonuses have gone from up to 25 percent of the total of a player's contract to 20; domestic players can no longer enter the draft straight out of high school, now needing to be at least a year removed from high school (during which time they can play college basketball, play in the NBA's Developmental League or play abroad); the luxury tax is now in effect every season instead of just when player salaries exceed a certain percentage of BRI.
The players also point out that the league was able to increase its existing $1.7 billion line of credit from financial institutions JPMorgan Chase and Bank of America earlier this year, which gave teams access to lower-interest loans they could use to pay existing bills or otherwise improve their financial standing. Several teams took advantage of it, including Orlando, which is in the process of building a new arena that will open in the 2010-11 season.
Of course, owners would point out that the percentage of BRI guaranteed to players has gone from 48 percent of BRI in 1999 to its current 57 percent, among other concessions to the players. And owners will have to deal with their own internal splits between the haves and have-nots. Unlike the NFL, where the home and road teams split the gate revenue (roughly 60-40), NBA home teams take all of their gate revenue, after the league takes a cut off the top for league expenses. So a team such as the Lakers, which can charge thousands for courtside seats and has a huge local television rights deal, is going to have more cash and be in a different stratosphere from, say, Milwaukee or Minnesota.
It is easy, and tempting, to dismiss all of this as millionaires versus billionaires, especially when there are millions of people who don't have jobs, or access to health care, in cities like Detroit whose industries are on the brink of collapse. No argument. But the NBA, like the NFL, like Hollywood, like Broadway, like the Grand Old Opry, is an entertainment business. People go to games to take their minds off work and stress and trouble.
So, yes, nobody in this negotitaion is going to go hungry. But the competitive nature among teams is still strong. This summer's spending frenzy proves it. While the bartering between players and owners goes on behind closed doors, teams are still trying to win on the court. That has not changed. Yet.
"When you win, then the hook is set," Holt said. "And then when you get this close, it could be even worse. Every owner is so competitive -- and if you look at them, not only in basketball, but all of their other businesses. And then you get this close, you say, okay, I'll pay that money to get me over the hump. I think some of that is certainly going on."
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