When the owners and David Stern blame the NBA lockout on rising expenses, don't believe that it's player contracts that are growing out of control.
In the course of making their case in the lead-up to the 2011 NBA Lockout, the league's franchise owners have argued that the current system doesn't work because players make too much money. As evidence, the league has said that owners have yet to make a profit in any season under the current collective bargaining agreement. A source familiar with the audited financial reports presented to the players' union tells SBNation.com that the NBA lost $1.5 billion between 2005-06 and 2009-10, and is looking at estimated losses of $300 million for the 2010-11 season. (Note: Forbes also reported these numbers on Wednesday.)
A season which saw amazing ratings increases, an attendance bump and -- as a result -- a not-inconsequential revenue bump. Yet the losses continued, according to the NBA's financials. That must mean that expenses keep piling up, right? And that must mean player salaries are out of control, right?
Well, not really.
Under the now-expired collective bargaining agreement, player payroll is tied to a benchmark -- 57 percent of basketball-related revenue. The league actually keeps 8 percent of each player's annual salary in order to keep payroll costs at that 57 percent threshold; if total payroll comes in under 57 percent, enough money in escrow goes out to the players to true up the books. If total payroll exceeds 57 percent, owners keep the portion in excess that's in escrow. The benchmark is a legit constraint; TrueHoop's Henry Abbott has brilliantly noted that the 57 percent benchmark is effectively the hard cap that the NBA owners seek.
As such, as revenue grows, player salaries grow proportionately. If revenue falls, player salaries fall proportionately. The NBA can argue (and has argued) that the deal they signed in 1999 and re-upped in 2005 sucks, and that's it's not tenable. But blaming rising player salaries is similarly not tenable. Salaries are tied to revenue, so payroll only goes up if there is more money being earned off of the men who make that revenue possible.
But what about about total league expenses to put on a show, or more accurately, about 1,300 or so shows a season? Those expenses sure as spit aren't tied to revenue -- teams can spend whatever they want. If Mark Cuban wants to spend $20 per towel and upgrade his team's hotels on the road, he can do that. If Paul Allen wants to give Steve Francis $30 million to go away, he can do that. If James Dolan wants to give Jerome James $30 million to eat the last poppyseed bagel for five years, he can do that.
Have owners spent themselves into oblivion outside of player salaries? Here's a chart, based on the operating losses data from the NBA's audited financials and furnished to SBNation.com, that shows annual growth in revenue and non-player payroll spending by the 30 NBA teams from 2005-06 to 2009-10.
In 2007, 2008 and 2009, "other expenses" grew more than revenue or payroll did. From 2006 to 2007, revenue and payroll each grew 6.6 percent. Given the NBA's claimed losses, non-payroll expenses grew 9.8 percent between those seasons. That's a massive uptick in comparison. The gap exists in 2008 and 2009, as well. Strangely -- very strangely -- the 30 NBA teams actually shrunk non-payroll expenses in 2010, despite modest upticks in revenue and payroll. Non-salary expenses had been growing at 4-10 percent over the previous years ... and the NBA cut it by almost 1 percent out of the blue.
If you adjust to keep non-payroll expense growth at the same level as revenue growth -- essentially coupling claimed expenses with revenue, which isn't an actual suggestion for the new CBA but an exercise to show the impact of rapidly growing non-salary costs -- you'd knock about $340 million off of the league's reported losses over the past five years. That doesn't fix the problem entirely -- remember, the league says it lost $1.5 billion over that span -- but it's something worth keeping in mind.
When the owners blame the lockout on rising expenses, don't believe that it's player contracts that are growing out of control. It's the cost of putting on a season ... and whatever else is hidden in the still-unexplained mystery meat that is "other expenses."