Is The NBA Really Losing Money?
Sports economists weigh in after players receive high-priced deals.
by Kyle Stack / @KyleStack
Now that this summer’s NBA free agency period has calmed down, we can attempt to make sense of the dizzying array of money that changed hands. While NBA fans tend to be somewhat jaded by the exorbitant salaries doled out to even under-performing players (think $35 million to Jim McIlvaine in 1995 or $73 million to Erick Dampier in 2004), this summer’s spending awoke even the most mellow fans. Call it the Summer of Skepticism.
Skepticism in how exactly team owners can be losing the kind of money the League claims they’re losing yet still afford to splurge the way they did during the last month. It’s difficult for the public to believe owners are struggling financially when Amir Johnson gets $34 million or Brendan Haywood signs for $55 million. Hand out contracts like that and cries of financial strife can fall on deaf ears.
It was during All-Star Weekend in February that league commissioner David Stern claimed the NBA was projecting a loss of $400 million for the ‘09-10 season. In mid-July, Stern lowered that number to $370 million. That figure is important because Stern has used it to highlight the financial struggles the League has been in for several years. Of course, it might not be realistic despite the League’s efforts to show the NBA player’s union its financial books.
“That’s one of the great mysteries in professional sports franchises,” said Gabe Feldman, Director of the Sports Law program at Tulane University, of the skepticism regarding the $370 million loss. “You can look at the books in so many ways and one person can say a team is losing millions of dollars and the other can say a team is making millions of dollars. It depends how you define costs and revenues.”
John Vrooman, a professor in sports economics at Vanderbilt University, said that the revenue numbers for the League should be accurate because they’re used to determine basketball-related income, which helps determine the following season’s salary cap. The problem might lie on the cost side.
“Acceptable accounting costs include depreciation of 50 percent of the franchise price in the first five years of ownership, salaries paid to ownership and families, interest on ownership loans to the franchise and fees paid to management companies that have the same team owners,” Vrooman wrote in an e-mail message.
He added that when owners in all sports leagues complain about the costs of running their team, people remain skeptical until they “see behind the smoke and mirrors,” as Vrooman wrote. “Sports accountants are paid to turn profits into losses for federal/state tax shelters but also for cries of poverty when posturing for public sentiment in the collective bargaining process,” Vrooman said.
For Robert Boland, a sports business professor at New York University, the free-wheeling spending of this year’s free agency period is a matter of owners dismissing fiscal responsibility.
“It’s just another example of why owners can’t help themselves,” Boland said in a phone conversation. “That’s why leagues want salary caps. That’s why leagues constantly come back to the [player's] union and rules and regulations and to enforce fiscal responsibility.”
There’s obviously a salary cap in the NBA — and it’ll be $2 million higher next season than what was predicted. NBA teams were given a welcome bit of relief when it was announced July 7 — the day before players were allowed to officially sign contracts — that the cap for next season would be $58 million.
The most dire predictions for next season’s cap were made last summer, when it was thought it might shrink from $57.7 for the ‘09-10 season to roughly $50 million for 2010-11. Just before the figure was released, $56 million was viewed as the most likely number but the bump to $58.044 million means next season’s cap will be larger than that of last year. (The tax threshold for next season is $70.307 million. Any team whose overall salary pays $1 for every $1 they spend that exceeds that figure.)
“This internal contradiction in basketball-related income growth will be difficult for NBA owners to wink and nod their way out of,” Vrooman said.
NBA owners do need to spend money to an extent since there is a team payroll minimum. That number is 75 percent of the salary cap, which puts next season’s salary cap minimum at $43.533 million. Boland pointed out that a problem with that scenario is it forces teams to spend. Even if it is necessary for their to be bylaws which make teams spend a certain amount of money, it doesn’t ensure that the money will be spent wisely. Teams with lower payrolls might spend more on an average player just to give themselves clearance from hitting that salary cap floor. A quick glance down the list of players who received astronomical deals this off-season shows just how wasteful teams’ spending can be.