As LeBron James and other top NBA free agents cash in, league is left to confront its economic woes

By Amy Shipley
Washington Post Staff Writer
Thursday, July 8, 2010; D01

When LeBron James appears live on ESPN Thursday night to officially announce where he will play basketball next season, he will cap an unprecedented free agency period for the NBA.

In the last week, NBA executives have criss-crossed the country in private jets and luxury automobiles, passing out whopping contract offers like business cards and begging James and other free agent stars to accept their $100 million deals instead of those from other teams. On Thursday, the first day contracts can be signed, at least eight players are expected to ink deals totaling around $800 million.

Yet many who have observed the frenzied courting that has infected entire cities -- Miami-Dade County was officially renamed Miami-Wade County for the week as the Heat sought to re-sign all-star guard Dwyane Wade -- say the free-flowing funds and mad grab for stars belie a league in financial distress, its owners engaging in economic recklessness that is all but encouraged by a broken economic system.

Twenty-five of the 30 NBA teams lost money last season, according to two people with access to the league's accounting, and NBA Commissioner David Stern has publicly claimed the league would sustain $380 million to $400 million in losses in 2009-10. Stern declined to comment for this story.

The NBA Players Association disputes those figures and contends the league is in far better shape than its accounting indicates. But even the union acknowledges that more than a half-dozen franchises are in financial trouble. They "concede the point," an individual with knowledge of the union's thinking said, "that seven, eight, nine teams need help."

Making their moves

As the speculation surrounding James's decision hit a fever pitch Wednesday -- most believed he would choose to either stay in Cleveland or sign with New York, Miami or Chicago -- Wade and fellow free agent Chris Bosh appeared on ESPN to announce that Wade would remain with the Heat and Bosh would join him. Both could earn as much as $125 million over six years, but the pair might accept less if they can lure James to Miami.

Already in recent days, Amare Stoudemire has said he will sign with the Knicks for $100 million over five years, and Joe Johnson has said he will return to the Atlanta Hawks for $119 million over six.

With the collective bargaining agreement between the owners and players due to expire next July, some say the league is headed for a financial day of reckoning not unlike what the NHL went through when a lockout wiped out the entire 2004-05 season.

"Basketball does have a serious problem," said Robert Boland, an attorney who has negotiated NFL contracts and is a professor of sports management at New York University. "The NBA has not yet had its great cost cut."

With the average NBA franchise ending last season $13 million in the red, according to the league's figures, many owners are gambling, perhaps foolishly, that the expensive addition of a star player from a historically talented free agent class will generate interest in their franchises and ignite a significant payoff in the box office.

"Ten years ago if you had said there'd be six players earning nine-figure contracts, people would have looked at you like you had two heads," said Robert Tilliss, the founder of Inner Circle Sports, a sports financing firm that works with the NBA and several teams. "But the teams feel they need them to attract fan interest and [boost] all of these other revenue streams . . . It's just the way the system is set up."

Many NBA owners or ownership groups are burdened by the high cost of paying off debt from recently built arenas or recently purchased franchises; by next year 15 teams will have gotten new arenas and around a dozen will have experienced ownership changes since 1999. Meantime, gate receipts were down about $100 million from last year, a drop of about 8 percent, according to two people with access to the figures. The drop came largely because teams cut ticket prices in the wake of the recession; attendance fell just over 2 percent.

Potomac business mogul Bruce Levenson, a former Washington Capitals minority owner who since 2003 has held an ownership stake in the Atlanta Hawks, said balancing the team's priorities with fiscal realities presented a major "conundrum" as the Hawks negotiated with Johnson after losing millions during the 2009-10 season. In the end, Levenson said, the team feared the consequences of letting Johnson flee to another team.

"What kind of system has [lesser stars] making the exact same amount of money as LeBron James?" longtime Washington-based agent David Falk said. "Instead of holding down the salaries of four or five very special players, what it has done is raise the salary of 30 players that are clearly not franchise players."

Trying to move up

Teams that failed to land big stars or never entered the bidding in the first place face not only the difficulty of building a winner short-handed, but also the challenge of overcoming the public perception that they have no chance of contending -- which hurts season-ticket sales, sponsorships and broadcasting packages right off the bat.

"The most significant challenge facing the NBA today is the gap between the teams at the top and bottom," said sports consultant Andy Dolich, a former Capitals executive who has worked for NBA, NFL and Major League Baseball front offices. "It's three-dimensional chess that has to be played right now to deal with the economic uncertainty."

The NBA has a cap on salaries, but it is a "soft cap" that can be exceeded by teams who wish to re-sign their own players, which explains how it is that middle-market teams like the Cavaliers and Hawks can afford to offer James and Johnson maximum deals. The NHL and NFL employ a "hard cap"-- though the NFL is currently operating under no cap since the owners opted out of the last agreement -- that cannot be exceeded.

Like Major League Baseball, the NBA imposes a luxury tax on teams that surpass certain payroll amounts, but several people with knowledge of the situation said the luxury tax distributions have not significantly helped struggling teams.

A key area that needs beefing up, several experts said, is revenue sharing. Tilliss pointed out that the NFL shares 90 percent of its revenue; the NBA, less than 50 percent. Revenue-sharing along with more cost controls would create more parity, he said.

NBA Players Association chief Billy Hunter declined a request to comment for this story. But Hunter previously dismissed Stern's $400 million in losses figure as "baloney" and accused the league of using creative accounting to make the balance sheet look worse than it is. Union officials point out that the total amount paid to players has risen only about 10 percent over the last four years, or about 2.5 percent a year, from about $1.85 billion to $2.04 billion, according to two people with knowledge of the figures.

There are still buyers

The league recently has experienced difficulty in luring buyers for teams on the market, and Robert L. Johnson lost money on his $275 million sale of the Charlotte Bobcats this year (Johnson paid $300 million for the franchise six years ago). Even so, deep-pocketed buyers are eventually stepping up. A Russian billionaire purchased the New Jersey Nets; California billionaire Larry Ellison is in line for the Golden State Warriors; and Ted Leonsis bought the Wizards.

The league continues to attract new owners, Stern said in June, "because they think we're going to get a new collective bargaining agreement, to put it that simple."

Stern said he hopes to have a new agreement before the current one expires.

The NBA "probably needs a creative look at the whole system," Falk said. "If you want to change the conduct, change the rules . . . The rules aren't working."

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