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The Importance of Interest Payments in the CBA Negotiations

During the last couple of weeks, I've tried to crunch some numbers in an attempt to get to the heart of what the owners seem to be asking for in the Collective Bargaining Agreement (CBA) negotiations with the Players Union (NBPA), and why their proposals seem to be so far apart from each other.  So far, I've posted two pieces on my own site related to this number crunching and am currently working on a third one that deals with revenue sharing - I hope to get that one up at some point in the next week.

Anyway, I read the online piece by Ken Berger at CBS Sports this morning that suggests that the two sides are about $2 billion apart (cumulative over a 6 year period) in trying to divide Basketball Related Income (BRI).  And it inspired me to consider one factor in these negotiations - the amount of interest that teams pay on a yearly basis to finance team purchases.  And, after looking at some numbers, it would appear that maybe this one issue might explain a big part of that difference.

Derek Fisher has publicly acknowledged that $130 million in interest payments (the amount in 2010-11 that teams paid in finance charges related to the purchases of their franchises) is not considered by the NBPA to be a legitimate consideration in these negotiations.   While the owners say that this amount is a true, out-of-pocket expense, the players contend that the choice by owners to finance the purchase of their franchises has no relevance to the amount of salary guaranteed to players.   After all, they argue, players don't share in the profits when a franchise is sold - so why should they share in the costs of financing the purchase?  As such, instead of accepting the owner's claim that the NBA lost $300 million in 2010-11, the players argue that the true loss was closer to $170 million.  As such, the players have proposed giving back close to $100 million (57% of $170 million) in each year of the new CBA, a reflection of their previous percentage of BRI.

My question is - how does either the inclusion or exclusion of this $130 million play into the difference between the two sides?  Let's take a look at the numbers.   And as we do, understand that, as with any analysis of numbers, I have made several basic assumptions for these projections.   Since BRI increased by 3.8834% annually during the 6 years of the previous CBA, I am assuming that it will continue to increase by that amount each year in the future.  Since my best guess is that BRI comprised 90.5146% of total league revenues in 2010-11, I assume that will continue to be the case.   Since my best guess is that 'other expenses' (ie, all expenses other than player salaries and benefits) increased by 4.07527% annually during the 6 years of the previous CBA, I am assuming that they will continue to increase at that rate in the future. And finally, as described above, I am assuming that the owners believe that the league lost $300 million last season while the players believe the loss to be $170 million.

(Note that there are also a few other assumptions I have made in putting these numbers together.  If you feel a need to understand more about each and every one of these assumptions, they are described in greater detail in the posts I've made on my site here and here.  But my sense is that most will not have a need to do so.)

The players have reportedly adjusted their proposal to reduce their guarantee of BRI from 57% to 53%.  Here, then, to the best of my ability, is how the next 10 years would look from the perspective of the owners if players were guaranteed salaries and benefits equal to 53% of BRI, including the figures from last season for comparison (click on the chart to enlarge):

53a_medium

Such a guarantee would result in a cumulative loss of  -$1.120 billion over 6 years and -$2.141 billion over 10 years (6 years because the players are rumored to want a 6 year length on the next CBA and 10 years because the owners would reportedly prefer a 10 year CBA).  However, from the perspective of the players, this is how the next 10 years would look (you'll note the difference in the starting point of 2010-11 because of the exclusion of $130 million in interest payments):

53b_medium

So, from their perspective, by eliminating interest payments from the equation, the true league-wide loss would only be -$0.221 billion over the next 6 years or -$0.511 billion over 10 years.   Quite a difference between the two charts, right?  It would appear to me that, because the two sides view the inclusion of interest payments differently, agreement on a 53% guarantee would be nearly unthinkable to the owners and much more reasonable to the players.

 

Now let's take a look at things with a different proposal. 

What would be the projected picture if the player guarantee of salaries/benefits was 45% over the next 10 years?  First from the owner's perspective:

45a_medium

Looking at things from the owner's perspective, the next decade would put the league into the black, to the tune of a cumulative $0.978 billion over 6 years or $1.647 billion over 10 years.   However, by not considering interest payments as part of the picture, players would see the next CBA period more like this:

45b_medium

From the player's perspective, the league would make a cumulative profit of $1.877 billion over 6 years or $3.277 billion over 10 years.   So, again, we have a huge difference.   The owners would probably consider such a proposal quite reasonable, allowing them to make a decent profit, while the players would almost certainly see the owners making too much profit at the expense of the players under these terms.

 

So what's the answer?  

Can a middle ground be found that would be agreeable to both sides, at least in terms of a guaranteed percentage?  Perhaps.   Let's look at a guarantee of 48.5%, first from the owner's perspective:

485a_medium

Such an agreement would appear to bring the league out of the red to pretty much break even.  Over a 6 year period, the league would make $0.60 billion in profit while over 10 years they would lose -$0.10 billion.   However, looking at things from the player's perspective yields this:

485b_medium

This would, in the player's eyes, give the league a cumulative profit of $0.959 billion over 6 years and $1.620 billion over 10 years.  Is this enough of a middle ground to please both sides?  IMO, if my projections are in the ballpark of reality, this is close to where the agreement can be made.   Especially if you consider that, if instead of a revenue growth of 3.8834%, revenue actually increases by 4.5%, the owner's perspective will yield this projection:

485c_medium

Even this modest increase in projected income would put the league at a cumulative profit of $0.412 billion over 6 years or $1.021 billion over 10 years.

 

To summarize:

Here is a chart showing the bottom line of this analysis for each of these proposals, showing percentage guarantees of BRI that would go towards player salaries and benefits and what the result would be for the league as a whole:

Summary_medium

 

So what does all of this mean?

Ultimately, I acknowledge that all these numbers are simply my best guesses at trying to frame the dispute between the two sides in a way that hopefully makes sense to most of us.  But it would appear to me that each side, if they simply focus on presenting a proposal that 'seems reasonable' from their perspective, will end up far apart if they cannot agree fully on the legitimacy of that $130 in interest payments (or whatever amount they end up being in years to come).  There would seem to be, then, two ways to come to an agreement on BRI percentage:

  1. One side could persuade the other to fully embrace their perspective on the validity of this amount in these negotiations. 
  2. Both sides could eventually give a bit and agree to a compromise that neither would consider fully reasonable.   

Honestly, I put little faith in the first.   I don't think that the owners will be able to convince the players of the validity of including the interest payments in the books.   Nor do I think that the players will be able to convince the owners to remove those payments from the ledgers.  Meaning that I believe that resolution, if it comes, will come in some form of the second happening.

And, based on these numbers, if I had to guess on the final split,  I would anticipate that such a compromise will probably be nothing more than a 48.5% guarantee of BRI to the players, especially given that the owners probably have more leverage long term than the players do in these negotiations.   From what I see in this analysis, this percentage at least brings the league out of the red to satisfy owners and yet probably doesn't ensure extravagant profits at the expense of player salaries.  I would not be surprised, however, if the eventual split was 48% or perhaps even a bit smaller.  But 48.5% seems to split the current difference fairly evenly, in my mind.  This would also seem to be in line with Ken Berger's most recent report that the owners were sticking to a proposal on Thursday in which players would "still be getting an average of less than 49 percent of revenues over the life of a new CBA,"

Note that this assumes that the owners are firmly convinced in the complete validity of the claimed losses and in a desire to bring the entire league out of the red.   If the players end up with a significantly higher percentage of BRI guaranteed to them, it could be an indication that the owners were not steadfastly committed to both.  Either that or they're banking on greater increases in revenue than I've assumed in my calculations....

Finally, let me point out that even if the owners are able to get the league as a whole into a state of profitability, it doesn't ensure that every team will be profitable.   That, in my opinion, would require a much better system of revenue sharing.   But I'll leave that discussion for a different post.....

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