The Biz

The NBA has a new way to help smart teams--and to punish dumb ones. What's not to like?

The typical NBA player makes more than $2 million a year, but there's one thing pro hoopsters hate about their paychecks: 9% is set aside in an escrow fund before it ever hits their pockets. What happens to all those Benjamins? The answer is about to change, and it could have a big impact on your favorite team.

Under the 2005 labor deal, players as a group are entitled to 57% of "basketballrelated income" generated by the NBA and its teams, including revenues from ticket sales, TV and radio deals, parking and concessions. The escrow fund ensures that player compensation doesn't zoom past that 57% limit. If, at the end of a season, teams have paid players less than 57% of total league revenues, players get their money back. But if salaries have gobbled up more than 57%, the league keeps the difference.

Last season, the NBA and its clubs raked in $3.174 billion. But teams had agreed to pay individual players $1.96 billion— more than their negotiated 57% collective share ($1.809 billion). So the NBA retained the difference, taking back $151 million from the escrow fund.

There's a second pool of coin that accumulates every season: luxury tax payments. Last season, six teams had payrolls surpassing the CBA's $61.7 million limit; they collectively forked over $71.6 million in luxury taxes. Every team that doesn't pay luxury taxes gets a one-thirtieth share of that booty. But that still leaves a sizable chunk— $14.3 million in 2006— to be doled out. Add up these two caches of money, and in 2005-06, the league collected more than $165 million on which NBA Central had first dibs.

Now here's the cool part: The CBA says the league can spend escrow and luxury tax money on "league purposes" as long as it doesn't restrain player salaries. And this year, David Stern will direct those funds to teams that actually deserve them.

Traditionally, the league has split the extra escrow money evenly among all clubs and used luxury tax leftovers to help franchises in the red. But since 2003, it has also paid the consulting firm McKinsey & Co. to evaluate team business operations. McKinsey looks at factors such as the size and wealth of a team's local population to determine how good each franchise is at squeezing dollars from its market. This year, for the first time, the NBA will use the supersecret report as the basis for allocating a good chunk of the escrow cash (league officials won't say how much) and luxury tax overages.

This decision comes not a moment too soon, with the league's small-market clubs clamoring for help. Small-town teams don't enjoy lucrative local media deals, and they get doubly whacked if they pass the luxury tax threshold to improve their rosters (by paying the tax, then losing the right to get money back from other clubs' tax payments). The NBA's planning committee, a 10-owner group led by Wyc Grousbeck of the Celtics, spoke with Stern about this issue for nearly three hours on Dec. 5. And the owners of the Blazers, Bobcats, Bucks, Grizzlies, Hornets, Jazz, Pacers and Timberwolves sent Stern an urgent plea for "serious revenue sharing" on Sept. 29.

By handing out funds according to efficiency, Stern can address their concerns. To well-run clubs like Indiana and Utah, he can say, "You deserve help because your only crime is playing in a small market." To basket-case businesses like Minnesota and Portland, he can say, "Run your clubs better, and get your fans back onboard. Then we'll talk."

At a press conference recently, Stern said that shared money "has to be connected with performance, so that the recipients are maximizing the potential of the markets in which they're located, rather than just getting a certain revenue share." He's absolutely right, of course. Stern's way is smarter than the manner in which the NFL shares its gigantic TV bounty among all teams, which is to say, indiscriminately rewarding clubs like the Cardinals and Lions no matter how badly they screw up. And it's far wiser than Major League Baseball's approach, which funnels cash from high revenue clubs (even small-market teams that perform well, such as the Mariners) to lowrevenue clubs (even big-market teams that are lousy, like the Phillies).

In the long run, Stern believes, new markets for basketball, like China, will flood the league with enough money to lift all its franchises. But for now, this is a smart way to keep troubled but deserving teams afloat.

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