Last of a series
In city after city, politicians and business leaders have stared at the possibility -- real or imagined -- of losing their NBA teams and reached into taxpayers' pockets in a blind effort to placate David Stern and his 30 emissaries of doom, i.e., the owners.
In Sacramento, Mayor Kevin Johnson -- a three-time NBA All-Star -- mobilized lawmakers and business leaders to stave off the threat of the beloved Kings moving downstate to Anaheim. He did it with promises of increased ticket sales and corporate sponsorships, as well as a new downtown arena -- the final price tag of which, and who's paying, remain a mystery. In Indianapolis, city leaders caved to the threat of the Pacers abandoning city-owned Conseco Fieldhouse for parts unknown and agreed to fork over $33.5 million to a team that loses money every year (while living virtually rent-free) and hasn't had a winning season in seven years.
And in New Orleans, the Hornets moved off life support and into the warm bosom of Stern's NBA last December when the franchise was taken over by the other 29 owners in a last-ditch effort to avoid having its relocation to the Big Easy in 2002 go down as an abject (and costly) failure. Leaked, audited financial statements from 2009 provided little hope any investor capable of understanding a balance sheet would want to buy the hopeless franchise, much less keep it in a market that features the smallest television audience of the NBA's 30 cities.
|More on NBA Lockout|
Part III: Revenue sharing won't cure imbalances across the NBA, but it's part of the solution. Read >>
Now, the latest boondoggle perpetrated on the tax-paying public is the shutdown of the NBA, a lockout that appears so nasty and irretrievable that there could be no pro basketball in any of those cities, and those far more viable, for a long time. In a search for compromise, we have explored altering the split of revenues among owners and players (Part 1), a new cap system that would restore competitive balance (Part II) and a revenue-sharing plan that could help struggling teams catch up (Part III). Now, we tackle the elephant in the room, the ultimate form of NBA taboo: the C-word, contraction.
And the question is: If the NBA is losing so much money -- $300 million last season and $1.845 billion during the six-year collective bargaining agreement that just expired -- then why continue to pour good money after bad into markets that have proved beyond any doubt they cannot support an NBA team without massive transfers of wealth that have failed to make them viable?
The idea was floated, mostly as a negotiating ploy, last October after a Board of Governors meeting in New York. That was the day Stern dropped this bombshell, which had been alluded to before but never driven home with so much certainty: The owners were seeking a $750 million to $800 million annual reduction in salaries in a new CBA, or a rollback of 33 percent.
The owners have since moved $650 million off that initial proposal, offering the players a flat $2 billion in salary and benefits over a 10-year CBA, while the players have offered to slow the growth of salaries by $100 million a year. The two sides finally were scheduled to meet Friday -- at the staff level, with no big wigs, owners or players -- for the first time since the owners imposed a lockout on July 1. They are a long way from holding an actual bargaining session, much less agreeing to a new deal.
But if the owners and players want to find hundreds of millions more to close the gap, they should look no further than eliminating the two teams that are the biggest drains on a business model the NBA says can no longer operate in this much red. Before addressing which teams need to go, we need to understand the pros and cons of contraction -- and some history.
Since its heyday as a 23-team league in the mid-1980s, the NBA has steadily expanded -- to 25 (Charlotte Hornets, Miami Heat), to 27 (Orlando Magic, Minnesota Timberwolves), to 29 (Toronto Raptors, Vancouver Grizzlies), and finally to 30 (Charlotte Bobcats). Of the seven most recently added teams, two (Vancouver and Charlotte) no longer occupy the cities they expanded to and only the Heat and Raptors are considered money-makers for the league. (The Magic have been successful on the court, twice advancing to the NBA Finals, but according to Forbes Magazine lost $23.1 million in 2009-10, their final season in the old Amway Arena before moving last season to the new, $480 million, city-owned and financed Amway Center.)
The Hornets are in New Orleans, where they may not survive, and the Grizzlies are in Memphis, where they have wallowed near the bottom of league gate-receipts tables -- though last season's run to the Western Conference semifinals could provide a spark, if not a cure-all.
The Timberwolves somehow are still in Minneapolis, where they have been a drain on the public coffers ever since the city agreed to assume the debt, operational expenses and renovation responsibilities associated with the 20-year-old Target Center in 1995.
"It was one of those gun-to-your-head kind of deals," said former Minneapolis councilman Paul Ostrow, who wasn't on the council at the time but subsequently was a frequent and strident opponent of the city going further into debt to support the team and its aging arena. "It was like, 'We're going to leave town unless you do something.' "
Though both the league and players privately acknowledge that contraction has been discussed during collective bargaining, it has not been seriously considered, according to sources on both sides. Thirty player jobs would be lost, an anathema to the union, and no one would wish job losses on the dozens of basketball and non-basketball staffers whose livelihoods would be harmed.
But job losses already are being incurred league-wide since the lockout was imposed. This week, the NBA laid off 114 employees across an array of departments and closed its Tokyo and Paris offices in what it described as an unrelated cost-cutting move aimed at saving $50 million. The Pistons (15) and Bobcats (seven) are among the teams that have laid off employees, with more cuts undoubtedly on the way.
If it is possible to look beyond the micro-impact and see how contraction would fit into the new NBA dynamic owners are seeking, it is difficult to imagine any measure that would do more to accomplish the league's stated goals: Create a system where all 30 teams have a chance to compete for a championship and make a profit. There is one serious flaw with that goal: no matter how you split up the pie, it may be impossible on both fronts unless you reduce the number of teams.
|Thanks to Sacramento mayor and three-time NBA All-Star Kevin Johnson, the Kings remain in California's capitol city for now. (Getty Images)|
Even before the league takeover, the Hornets were a bottomless pit of misallocated resources. According to the '09 statements, the Hornets' ownership group was carrying $111 million in long-term debt, including $73.8 million borrowed from the league credit facility. Of the latter amount, $22.7 million is due in June 2013 -- although previous maturity dates were renegotiated and extended because, obviously, Shinn and his partners were tapped out.
As of June 2009, the Hornets still owed $12.6 million of the $30 million relocation fee associated with the move from Charlotte; the initial annual payments were delayed three years. In 2007, the state of Louisiana -- the poorest in the nation, according to Money Magazine -- agreed to pay 20 percent of the remaining balance from the relocation fee. As of June 2009, the state had paid $2.5 million.
An inquiry to New Orleans Mayor Mitch Landrieu's office regarding any debt obligations held by the city associated with New Orleans Arena and the Hornets was referred to Deputy Mayor Andy Kopplin, who did not respond.
In 2009, the Hornets received $3.4 million in revenue assistance from the NBA, had a $3.9 million relocation payment deferred, collected $28.3 million in national broadcast rights fees and $9 million in local broadcast fees -- and had a $5.8 million operating profit nearly wiped out by the crushing debt and interest payments the team had incurred. This is no way to run a business, with no reason to think it would get better if the NBA were somehow able to sell the team for more than it paid Shinn and borrowed from him -- not to mention additional debt taken on by the league to close the sale.
The buck has to stop somewhere, and the boondoggles have to end.
Aside from the financial benefit of eliminating teams that cannot support their own operations, contraction would have a ripple effect that would make the NBA more competitive, more compelling and thus more profitable. For starters, you'd have only 28 teams sharing the approximately $930 million a year in national broadcast rights money, amounting to an additional $2 million per team each season until the agreements with ABC/ESPN and TNT expire in 2016. You'd have two fewer teams collecting luxury tax money (a net benefit to the other 28 of $4.6 million based on expected tax payments for the 2010-11 season), and two fewer teams needing to participate in a revenue sharing program the NBA says it wants to triple from $60 million to at least $180 million a year in conjunction with a new CBA.
Not inconsequentially, you'd eliminate about $100 million in player salaries and benefits, some of which would be repurposed over time to more deserving players. Desirable players from the two teams contracted would be distributed among the remaining 28 teams -- the best way would be a draft or some sort of lottery -- with the essential, on-court result of contraction being that the worst 30 players in the NBA would have their jobs eliminated. That's sort of how it goes in the real world, no?
Contraction wouldn't be good for those players, but it would be the most effective antidote imaginable for the dilution of talent that has been one of the crippling symptoms of overexpansion. It wouldn't be a dollar-for-dollar net benefit, since -- presumably -- higher-paid players would be absorbed by other teams to replace lower-paid players. But in general, eliminating two 15-man rosters would get the owners closer to the 50-50 split of basketball-related income they are seeking. The owners would benefit, and so would the 420 or so players who remained.
If we have learned anything from the past quarter-century of NBA basketball, it's that fans love super teams. The vast majority of teams that have been successful during this time have been built around two or three superstars (the Lakers and Celtics of the '80s, the Bulls of the '90s, the Lakers and Spurs of the '00s, the Celtics of the '10s and now the Heat). Other than Miami, which fell short of a title in its first try after teaming LeBron James and Chris Bosh with Dwyane Wade, these teams have won. They've also captured the imagination of fans, driven TV ratings and thus driven revenues -- not dragged them down.
The free-agent bonanza of 2010, along with star-studded teams in L.A., Boston, Chicago and New York, not to mention high-dollar teams like Dallas and mid-majors like Oklahoma City, resulted in a record $3.8 billion in league-wide revenues last season. No matter what kind of system the NBA devises, that number that will continue to face a headwind from a handful of incapable markets where success and profit simply are not possible without massive transfers of wealth and talent from the teams people want to watch.
Opponents of contraction often argue it's too expensive; by the time the departing owners are paid off, governments are reimbursed for all the arena debt they've incurred and penalties are paid to break leases with those arenas, the numbers add up. While this may be true in Memphis and Charlotte, where the debt obligations and lease penalties amount to hundreds of millions, it is not true in Sacramento and Milwaukee, where the teams are on year-to-year leases with their antiquated buildings. And it's certainly not true in New Orleans, where, after all, the other 29 owners already own the team.
The balance of Shinn's loan would have to be paid back (it has to be paid back regardless), other debt would have to be repaid or refinanced, and the state would have to be reimbursed for its portion of the relocation fee. But clearly, the owners wouldn't demand a contraction fee or buyout from themselves. As for the $10 million penalty for breaking the lease with New Orleans Arena, it would be reduced by the amount of the unpaid relocation fee if exercised on June 30, 2012, or June 30, 2013, according to the Hornets' financial documents. All told, the price would still be high. But would it be any higher than the cost of supporting the team year after year with money and resources leached from teams in more viable markets?
Would the state of Louisiana be sad to see the Hornets go? Probably, but I'm not sure why. There's also this nugget from the team's amended lease agreement: In 2008, the state with the lowest median income in the United States paid the Hornets $6.4 million to cover revenue shortfalls. To the relief of the impoverished, jobless and victims of Hurricane Katrina, that was more than enough for the team to pay free agent James Posey the full mid-level exception that year. Through the magic of NBA trades, Posey doesn’t have the state of Louisiana to kick around anymore; he's now a burden to taxpayers in Indiana, where he'll make $6.9 million next season -- but only if there is one.
Sadly, until the owners and players embrace the notion of less being more, the NBA will continue to slog through a long, painful lockout with each side futilely trying to find hundreds of millions of dollars that's sitting right there under their noses -- right on the balance sheets of the league's worst-performing teams.
And until then, taxpayers in New Orleans, Memphis, Charlotte, Milwaukee, Sacramento, Indianapolis and Minneapolis will continue to pay for money-losing teams with years of debt and taxation schemes that politicians haven't even begun dreaming of yet -- all in the name of veiled threats about the teams leaving town or never showing up in the first place if they don't pay up.
In Memphis, industry experts estimate the annual payments on the $250 million bonds issued to build the Grizzlies' FedEx Forum at $13.6 million. At least residents can take solace in the fact the Grizzlies' lease is so ironclad that the team can essentially never leave or be contracted. Same in Charlotte, where published reports indicate the cost of breaking the team's lease with the publicly financed Time Warner Cable Arena is $150 million.
In Indiana, the public is on the hook for $33.5 million over the next three years for operational expenses and improvements to Conseco Fieldhouse, even though the team keeps all the basketball revenue from the arena and had nowhere else to go. And in Minneapolis, city residents already saddled with millions in debt from the Target Center are now having $5 million a year for the next 10 years diverted from the city budget to pay for capital improvements at the building. At the same time, debate rages about who's going to pay for $155 million in additional renovations the Timberwolves have asked for -- at a time when the state of Minnesota, which has consistently ignored requests from the city to share some of the Target Center burden, has been in the midst of a government shutdown.
"Let's say the city didn’t maintain the facility and just said, 'We're walking away from the whole thing. We don’t have any money,' " said Ostrow, the former Minneapolis councilman. "The city would still be on the hook for the debt."
And yet for every city struggling with the cost of having an NBA team that can't compete or pay its bills, there's another one -- fueled by a new crop of politicians -- ready to fork over millions of money that isn't theirs and tax revenues that may never be generated. So to Sacramento, where the public pilfering to finance a new arena for the Kings has only begun, and Milwaukee, where lawmakers have so far resisted paying for a new arena for the Bucks to replace the 23-year-old Bradley Center, I have some advice:
Save your time and money. The NBA would be better off without you -- and you, more importantly, without it.