NBA Labor Negotiations Breakdown

by April 20, 2010

by Kyle Stack / @NYsportswriter

You might have heard that the NBA’s player’s union and the League’s team owners are in a dispute. If you’ve paid consistent attention to the NBA through the last two years, then you’re probably familiar with the topic of the union and owners looking to revise the current Collective Bargaining Agreement (CBA) before it expires, which it is set to do June 30, 2011. If they don’t do it by that date, then the owners will likely impose a lockout on the players.

There are several reasons for that dispute, which I will attempt to explain in this post. Before I do, it’s prudent to define a few terms of the CBA negotiations so that they make sense when you read about it; otherwise, it probably wouldn’t matter if I had written this story in English or Kashubian. Here are explanations for them:

CBA — The agreement determines how the League functions, primarily from a financial perspective. It sets rules for the salary cap, player salaries, team transactions, the NBA draft and many, many other topics. It’s very important.

BRI — This is known as basketball-related income. It includes any income received by the NBA, NBA Properties or NBA Media Ventures, which include all game receipts, broadcast rights and concession sales. There are many other factors in this and in the CBA in general, which can all be read at Larry Coon’s CBAFAQ.

Salary cap — There seems to be a lot of confusion as to how the salary cap is determined for each upcoming season. Each summer, the NBA projects the BRI and benefits for the upcoming season, takes a defined percentage of that projected BRI, subtracts benefits and makes adjustments if the previous season’s BRI fell below projections. Then they divide the number of teams in the League, which gives them each team’s cap number. Again, it’s explained very concisely in CBAFAQ.

David Stern (left) and Mark CubanI asked Coon and Robert Boland, a Sports Management professor at New York University, to help explain the trials and tribulations of the NBA’s current financial picture.

To review, the League and union are far apart in current talks. The League initiated a proposal in February which expressed its desire to completely turn over the NBA’s financial structure. In it, the League expressed the following desires:

• To eliminate fully guaranteed player contracts.
• To reduce the players’ percentage of BRI from 57 percent to somewhere in the low to mid-40s, depending on which report you read.
• To replace the “soft” salary cap, in which teams can exceed the cap through various player contract exceptions, with a “hard” salary cap, which wouldn’t allow teams to exceed the cap.
• To replace maximum contracts, six years for re-signings and five years for everything else, to four and three years, respectively.
• To make players who currently have large contracts to alter them in order for them to satisfy the new agreement.

David Stern has said he expects a counterproposal from the player’s union in late April/early May, but the table has already been set. These talks will be intense. The desire to dramatically revamp the NBA’s current fiscal system comes on the heels of reports that roughly half the League’s teams — and possibly many more — will lose money during the ‘09-10 season. Forbes reported in December that 12 teams would lose money this season while an unidentified source from an AOL Fanhouse story from February reported that as many as 25-27 teams could lose money this season.

Guaranteed player contracts have left teams throughout the League with cap-killing deals. (Think Jermaine O’Neal earning $23 million or Michael Redd making $17 million just for the ‘09-10 season.) That’s where this discussion will start.

Is it reasonable for owners to desire the elimination of guaranteed contracts and to cut the number of maximum years available in a deal?

“There is certainly room for a meeting point in the middle,” Coon said. “Maybe it’s changing the number of years or guaranteeing a certain percentage, maybe it’s to lower the base salaries and have incentive-based pay or to tie in contracts to league revenue. There are some things you can do in order to tweak it.”

Tracy McGrady and his enormous $23 million salary this season represent exactly why owners are tired of player contracts being structured the way they are. If you combine the ‘08-09 and ‘09-10 seasons, McGrady will have earned over $43 million despite playing in just 65 games.

Knee and back problems have labored him to the point that he’s a shell of himself as a player. The former two-time scoring champion averaged just 12.1 points during that 65-game span from 2008-10 even though he was 29-31 years old for most of that timeframe, which is considered part of the prime of an NBA player’s career.

Owners feel like they need leverage against a player rapidly deteriorating; they don’t feel like they should be held accountable for big bucks under what they could consider unforeseeable circumstances, such as a player’s ability declining because of an injury suffered after the contract was signed.

Coon reasoned that McGrady, like many other players, could argue they gave up their bodies for the League and earned their money for their previous play. In other words, McGrady’s current contract isn’t just for how he played previously in his career but for the fact he was injured on the job.

Which group of player contracts is giving owners the most heartache?

Surprisingly, it might not be the superstars.

“They don’t really like the middle class,” Coon said. NBA owners can stomach the game’s best players making mega-bucks. What they can’t rationalize are the players who earn contracts such as the mid-level exception (five years at $33 million last off-season). Since there are more middle-class players than those at the top of the salary pyramid, it’s likelier for poor play from the middle-class players to have a bigger cumulative negative effect than bad years from the top-paid players. (Of course, the O’Neal or McGrady contracts are obviously still debilitating.)

In the case of these negotiations, though, it might be more sensible for the owners to go after the highest-paid players since there are fewer of them.

“You have 400 players voting on the ratification of a new agreement,” Coon said. “Let’s say there is a lockout and it goes a few months. The players will start feeling the pinch because 375 of those guys can’t afford to go through a year-long lockout; they need that income. So what if the owners float a proposal that gives the players the means to get back to work, but it really screws the maximum salary players?”

Tracy McGrady While the higher paid players obviously wouldn’t like being singled out, Boland pointed out that their astronomical salaries could set the stage for strife within the player’s ranks once the labor talks become more heated later in the year. The players would have to band together to form a strong front against the owners but their own feelings about each others’ salaries could prevent the millionaire players from making the billionaire owners seem like the bad guys.

“The problem I see for the players in doing that is they would need a strong basis of internal cohesion,” Boland said. “They’ve always been too jealous of each other to make that work.”

So the owners might just go to the lower-class, and possibly middle-class, players to get a deal done.

“The owners could float a proposal that they know is going to appeal to enough players to ratify an agreement,” Coon said.

How did the League’s economic struggles develop?

David Stern proclaimed in February that the League would take a $400 million hit this season and that it had been losing at least $200 million in each of the four previous seasons of the current CBA, signed in 2005.

The first observation one might ask about Stern’s $400 million claim is whether he’s posturing for positioning in the labor talks. After all, $400 million is a very big number for a league which appears almost as popular as ever. But the League appears willing to let others confirm that number.

“The League has offered to open up the books to players,” Coon said. “They offered an independent financial institution to go in, examine the books and certify them, meaning they verify the fiscal information the owners are alluding to. As long as the player’s union is satisfied with the impartiality of that type of agreement, then sure it is a valid number.”

There are varied reasons for why the League has fallen on hard times.

Boland noted that expansion from the late ’80s/mid-’90s has contributed mightily to the League’s financial troubles. It started with the Miami Heat and Charlotte Bobcats in 1988 and the Orlando Magic and Minnesota Timberwolves in ’89, then continued with the Toronto Raptors and Vancouver Grizzlies in ’95 and the Charlotte Bobcats in ’04.

“The NBA used expansion to drive revenue through expansion fees,” Boland said. “Now they’re left with a few more teams in a few more marginal markets than they might like to have.”

In an April 2008 story in the Seattle Post-Intelligencer, Dallas Mavericks owner Mark Cuban spoke out against expansion fees, which are spread out evenly to every other team in the League. The Raptors and Grizzlies paid $125 million each in expansion fees, which at the time was reportedly four times as much as any other fee before it, and the Bobcats paid $300 million.

Cuban explained that expansion is nothing more than a “loan” since the expansion fee pales in comparison to long-term financial interests such as equity ownership of the NBA and TV money that become smaller pieces of the pie for each team with the addition of another squad.

Boland also said other troubles stem from the few number of teams making money in the League, since many teams in small and mid-sized markets have had trouble attracting fans to games. Slow growth in television and global revenue is also “where the pinch is coming,” Boland said. The fact that league-wide revenue has suffered exacerbates the team-specific financial issues. In good economic times, Boland explained, teams would have a generous amount of league revenue to cover for their weak earnings.

Coon said the League’s greatest share of revenue, its $930-million-per-year television deal with ESPN/ABC and TNT that runs for six more seasons after the end of this one, will likely stay active even in a lockout, which means owners could still collect TV revenue money while not having to pay player salaries during a work stoppage. That doesn’t solve all their worries, though.

“You’re still looking at fewer people buying luxury boxes, declining ticket sales and anything else dealing with gate attendance,” Coon said of owners’ worries.

The owners want the players’ share of BRI to be drastically reduced from 57 percent to somewhere in the 40s.

Some people, including this author, are dismayed that the owners would allow the players to take such a large percentage of BRI but Coon explained it was a result of the times when the current labor deal was signed in 2005.

“It’s a two-way negotiation and in the previous environment, you were dealing with a booming economy,” Coon said. “They figured that was enough and that they would all be making a profit.”

While owners want a bigger chunk of the NBA change, it’s unrealistic for every team to be successful, even if that’s the goal of the League and the owners collectively.

“A successful franchise is successful for a reason and it’s not dependent on them to prop up other franchises that might not have made spectacular decisions,” Coon said. “Some of it can be solved through revenue sharing but some of the rest of it is the players making too much to sustain [a stable economic picture].”

The owners want to replace the “soft” salary cap with a “hard” salary cap. Which is more advantageous to the League?

The obvious benefit to a salary cap is it “levels the playing field,” as Coon described. Wealthy teams aren’t able to scoop up every talented player, unlike in Major League Baseball where the New York Yankees can freely trade for a star player with big-time money left on his contract, such as Curtis Granderson, and bat him seventh without batting an eyelash; most other MLB teams can’t afford to do that.

Unlike the NFL’s “hard” cap, the NBA’s cap allows teams to exceed the cap in order to re-sign its own players, which is a good rule according to Boland.

“I think the NBA certainly benefits from having the Larry Bird exception,” Boland said of the scenario in which teams can exceed the cap to re-sign its own player. “The ability for teams to keep players in their market [is important].”

Plus, teams that are a productive player or two away from becoming a title contender can activate many other exceptions, such as the aforementioned mid-level exception. But that can swing either way. It can help bring in a player who can be crucial to a deep Playoff run or, if used on the wrong player, it can become an albatross.

“If a team gets screwed because of an injury, they’re screwed for a long time, like the Knicks,” Coon said. “If there was something mitigating that where teams could dig themselves out from a hole faster, maybe that mid-level exception isn’t so burdensome. It’s not in the League’s best interest to have a team financially handicapped with no prospect for improvement.”

Where do David Stern’s interests lie?

There’s no question that Stern, as NBA commissioner, wants the League to get through these negotiations with as little negative publicity as possible. But that doesn’t mean he necessarily has the best interests of the players in his heart as much as he does the owners. After all, he works for the owners.

“The commissioner is hired by governors who are in almost every case an owner,” Boland said. “The commissioner in every sport works for the owners to a degree. They hold the power to fire him, which is one of the reasons Stern has already treaded lightly in disciplining them [at times].”

What leverage do the players have?

That’s a tricky question to answer. Boland and Coon don’t believe the player’s union holds much leverage in talks against the League and its owners.

“The owners always win in a situation like this,” Coon said. “They’re independently wealthy so they have the wherewithal to keep going without basketball.”

The owners’ number one expense — player salaries — would come off the books in the event of a work stoppage. As odd as it sounds, the owners of some financially-strapped teams could actually break even — which to them probably feels like making money — for the year if a lockout were to occur. Not only would player salaries grind to a halt, the team wouldn’t have to pay for team travel expenses (flights, hotels) or in-game expenses (arena workers, game entertainment), among other saved costs.

Coon pointed out the average career length for an NBA player is five years. One missed season obviously represents one-fifth, or 20 percent, of missed time for the average NBA player’s career, which is magnified by the fact that most average NBA players don’t enjoy the endorsement revenue that many of the League’s star players do.

Ultimately, it becomes obvious the player’s union needs to stick together if it wants to maximize its leverage.

“It’s got to be the guys about whom the League cares,” Coon said. “If it’s the players like LeBron [James] and Kobe [Bryant] and those guys who speak out, the owners will at least take notice.”

Of course, the players could still have a couple points of leverage to play, although they hold slightly lower significance in the big picture of these labor negotiations.

“I don’t think the player’s union cares about the minimum age rule,” Boland said about the rule which maintains that no U.S. player can make himself eligible for the draft unless he is one year removed from his high school class’ graduation. (International players must turn 19 during the calender year in which their draft is held). “But they know it bothers Stern, so that gives them some leverage.”

Boland said Stern would probably like for the age rule to increase so that an eligible player would have to be two years removed from his high school class’ graduation. The reason Stern doesn’t press that further, as Boland explained, is that “he would have to negotiate something else to give back to the players to get that.”

“The only real leverage the players have is to play somewhere else in the world,” Boland said. “And that isn’t a real threat right now.” Coon might disagree.

Could the NBA’s superstars sign contracts with European teams?

Remember the rumors during the summer of 2008 that LeBron would consider signing for a foreign team that offered him $50 million per year? Or the “report” in which Kobe allegedly conceded he would play in Italy, where he spent much of his childhood, for the same amount per year?

At the time, it seemed unfathomable that NBA superstars would ditch the NBA to play in a foreign league with considerably less talent and a far less lavish lifestyle. Yet Coon penned a story for the New York Times in which he pondered the increased leverage for the player’s union if a slew of superstars signed with foreign squads.

“I’m hearing even though the economy in Europe is just as much — if not more — of a mess as it is here, the basketball leagues, such as in Greece, are doing pretty well,” Coon said.

In that case, one-year, $5-million deals for the stars would create leverage against the NBA’s owners.

“They’re getting a better deal for themselves and long-term they’re getting more money because the [labor] agreement isn’t as stifling as it would have been had they caved in earlier,” Coon said.

Still, it remains to be seen if the NBA’s most well-known players are willing to take one for the team, so to speak, by signing with foreign squads.

Does the NBA need international investors to continue?

It isn’t just brand-new Nets owner Mikhail Prokhorov who has bragging rights to becoming a recent international investor in the NBA.

Chinese businessman Albert Hung agreed last year to a 15 percent stake in the Cleveland Cavaliers, which could be worth as much as $70 million considering Forbes magazine’s current estimated value of the franchise at $476 million. (The deal, while likely to go through, is still pending.)

That deal, the circumstances of which were somewhat uncertain when first reported last spring, seems to make more sense after Mitch Lawrence reported in an April 17 column for the New York Daily News that the Cavs are projected to lose $10-15 million this season on top of roughly $40 million in losses the past two seasons.

Of course, Prokhorov, the Russian multi-billionaire who many are familiar with from his 60 Minutes piece in which he flashed an AK-47 at his home and hung out with women half his age in a Russian nightclub, is expected to be approved by the NBA on his $700 million bid to become the next owner of the Nets.

Boland explained it’s not a mystery why foreigners are looking to put their money into NBA franchises.

“If you think about it from Communist China or the former Soviet Union, where they respected rights of private property for 12 minutes, NBA franchises are a fairly safe haven at this point,” Boland said. “To take cash out of commodities or some other wealth resource in another country and to put it into something a whole lot safer is attractive to them.”

Boland went on to say that if an investor has cash from somewhere else then an NBA franchise is appealing since franchise values haven’t declined dramatically. “That’s something the League fears,” Boland said of teams experiencing big drops in value. He said that’s why Michael Jordan’s deal to purchase the Bobcats from Bob Johnson was approved so quickly and why Oracle co-founder and CEO Larry Ellison has been worked into the Warriors’ potential ownership change. The League doesn’t want any franchise to fall so far out of favor that a precipitous drop in value could take place. That could happen if an ownership deal took too long to complete.

“One of the things that keeps franchise values high and leagues healthy, to a degree, is a large number of potential bidders on franchises,” Boland said. “That doesn’t exist right now.”

The integration of international investors can also help the NBA expand its already impressive global market, which Boland said might not be growing at the pace the NBA wants.

“I think they view Asia and maybe some European markets as attractive for a television or digital distribution,” Boland said. “There is a risk involved. In many cases, foreign owners are people who are pouring in capital to protect them from more volatile markets in their home country. Of course, they can give a lot of economic knowledge to the League about their home country.”

How will this labor negotiation end?

Coon and Boland weren’t terribly optimistic. Both conceded it would be challenging to forge an agreement by the June 30, 2011 date. But it’s not impossible and in labor negotiations, no matter the industry, it’s often not until the deadline date is clearly impending that both sides tend to give in a little more than in previous talks.

Stern and many of the NBA’s owners were a part of the League when it went through its last work stoppage — the 1998 lockout. Surely they remember the carnage left in that battle and the negative public sentiment that went along with canceling more than 30 regular season games and the All-Star Game that year. (And this NBA fan remembers the disappointment of Allen Iverson, in his prime, never getting the chance blow out his hair and wear No. 6 like Dr. J in front of his homecrowd Philadelphia audience for that All-Star contest which never happened.)

The NBA is a league ripe with superstars whom fans like, but a lockout would likely have far-reaching negative consequences. It’s impossible to predict exactly how the labor talks will shake out. Yet with the NFL also at a critical stage in terms of its own labor agreement and the divergent feelings of its owners and player’s union, now is as good a time as any for sports fans to pay more attention to the ways in which their favorite league is financially constructed.