Special Investigative Report

Ensuring Fan Driven Sports Policy Decisions

The Case of the Giant Taxpayer-Eating Squid by FansUnited.org

An Investigation into How the NBA’s New G League Covertly Infiltrated Taxpayer Wallets


Last Updated: April 17, 2018

Executive Summary

FansUnited.org was created in order to give fans a much-needed voice in sports. Last summer, as we were launching from the opening bell at Nasdaq, the NBA was launching its new sponsorship deal between Gatorade and its former Development League. This was first time in history that any league had ever sold its naming rights to a vendor. We thought that this was worthy of further investigation.

Low and behold we discovered:

  • A striking growth rate as the number of teams essentially tripled in a decade. This growth rate paralleled the phenomenal growth rate in sports franchise valuations (led by the NBA) whose growth rate quadrupled that of the DOW 30  (i.e., the Dow Jones Industrial Average) over the same period.
  • In addition to the enormous wealth creation at the NBA level, the G League extracted over a billion and half dollars in taxpayer funded facilities deals that in some cases included benefits for the NBA parent club (a la practice facilities).
  • Despite receiving taxpayer funding, and as is the case throughout sports, there has been zero financial transparency by the NBA, the respective teams or the G League affiliated franchises.
  • With the local funds now "locked," the various municipalities are subject to "relocation risk" and potentially escalating demands from team owners and leagues as we have witnessed throughout sports (a la the most recent relocation of the Chargers, Rams and Raiders in the NFL).
  • Various additional findings as we have detailed in this report.

Per our investigation, "there is but one macroeconomic conclusion that can be drawn: the current system is rigged against fans/taxpayers and must change." To this end, we have proposed two major initiatives:

  • The G League Remedy calls for the three remaining G League cities to seek a proportionate equity interest in their G League franchise ownership as a quid pro quo for their capital investment. And,
  • The Major League Sports Remedy calls for elected officials in professional sports cities to seek an equity interest in their respective local franchises in exchange for taxpayer funded facilities.

We call these initiatives the "Piece of the Rock Pledge". Those seeking public office and who choose not sign the pledge will face the wrath of the voters!

Please read on and enjoy the report!


FansUnited Investigative Report on the NBA’s new G League
aka, "The Giant Taxpayer-eating Squid!"

"Welcome to the G League!" What? You’ve never heard of the "G League"? While it’s been around for over a decade, few of America’s rabid sports fans have noticed it, and even fewer have chosen to participate in it. Formed in 2001 with just 8 teams, the league was initially the development league (or "D League") to be shared among a handful of NBA franchises. As the "giant squid" began to bulk up, silently devouring city after city, by 2016 it had grown to sufficient critical mass to warrant a large sponsorship fee from Gatorade. Hence, the "G League" brand was born. The giant, tax-consuming beast has grown to include every NBA city except for three (Denver, New Orleans and Portland).

Despite the unrivaled financial success of all NBA franchises (whose lowest valued franchise in New Orleans is worth over one billion dollars), they continually escalate the usage of taxpayer money to fund new venues. The absolute and percentage increase in the average franchise values by league for all major sports league teams are depicted in the following two charts1:

Average Franchise Value (In Millions of USD)

Infographic: Average Franchise Value (In Millions of USD)

% Growth 2002-2016

Infographic: Average Franchise Value (In Millions of USD)

The growth rate of the NBA eclipses all other leagues and, in fact, exceeds by a factor of four times that of the DOW 30 (i.e., the Dow Jones Industrial Average, the well-known stock index that measures the collective stock prices of America’s leading companies). These numbers are unprecedented and defy any rational, competitive free-market metrics. There is but one macroeconomic conclusion that can be drawn from these numbers: the current system is rigged against fans/taxpayers, and must change.

We have, therefore, undertaken an investigative review of the G Leagues’ structure and operations as a model for improving the balance between the interests of the owners, players and fans/taxpayers. The G League’s relatively new entry into the world of sports provides an opportunity for potential structural reforms needed throughout sports. Our in-depth investigation is intended then, to not only expose the degree to which the "giant squid" seeks to further play municipalities against one another for financial gain, but to identify potential solutions to this systematic problem throughout the sporting world.

To be clear: FansUnited stands with the fans!

In order to present a fair and balanced view, we will initially walk you through some of the operating details and "benefits" provided by the G League.

Profile of the G League:

  • Historically, the Development League (or "D League") was a shared resource among a small number of teams for the purpose of accelerating the skill levels of players who would otherwise be riding the bench at the pro level. This is comparable to, but less complex than, the MLB’s Minor League system. As the success of the NBA has mushroomed in recent years, so too has the demand by smaller markets for D League franchises. To be clear here, these smaller markets have illusions of grandeur and seek to benefit from the respective pro teams’ success in nearby, larger markets.
  • To entice NBA teams to locate G League teams to their communities, local cities use Tax Increment Financing (TIF) subsidies. These are state sanctioned programs that allow for the diversion of tax revenues of a TIF district to subsidize the redevelopment of the area. There are thousands of TIF’s in the country. In fact, the State of California placed a moratorium on them in order to address their recent budget shortfalls2.
  • Ever mindful of the fragmented and competitive nature of the local markets, the NBA teams enjoy enormous negotiating leverage in the bake-off for G League locations. Desperate to expand their shrinking tax base and curb urban blight, local government executives are easy marks for sharp-shooting NBA team negotiators.
  • Each G League team has or seeks to have the following assets:
    • Facility – A dedicated facility that meets rigid league requirements in terms of capacity, services, transportation, parking, amenities and quality.
    • Roster – A roster of 12 players, two of whom can have a "two-way contract" which allows them to spend up to 45 days of that season at the pro level. That player’s compensation will reflect a blend of their pro-rata share of his G League salary (currently capped at $25k) and the annual NBA minimum (currently $818k).
    • Facility naming rights – Even though the city generally retains ownership of the facilities, the G League franchise retains the potentially lucrative naming rights.
    • Ancillary use of the facilities – Many of these facilities can be shared with the parent NBA teams (practice), WNBA (games), NHL (practice and games) and various entertainment venues (primarily concerts and indoor soccer events).
    • Geographic convenience – Each G League franchise seeks close geographic proximity to their NBA parent team. For example, the thousand-mile relocation of the Erie Bayhawks to College Park, Ga (near Atlanta airport) opens up numerous potential synergies to include practice facilities for the Atlanta Hawks.

To be sure, the G League has come a long way in a relatively short period of time. It represents an earnest effort to fortify the rosters of the NBA rosters. Notwithstanding this progress, our investigation turned up numerous, serious concerns about the legitimacy and fairness of certain parts of the G League structure.

The Results of our Investigation:

Below you will find a summary of these potentially problematic and risky elements resulting from the expansion of the G League.

  • The complete absence of any financial transparency: Professional sports teams, to include the NBA, are notoriously private enterprises. As such, we believe that they have every right to their privacy so long as they meet the following two vital criteria:
    1. They must operate in a competitive, free market without collusive or monopolistic business practices. (While their attorneys will surely argue to the contrary, such claims are a farce and every fan/taxpayer knows it!)
    2. Taking taxpayer money to fund various parts of their operation creates an obvious full financial disclosure requirement.
    It is imperative, therefore, that under any scenario, the NBA (and all professional sports leagues) and their respective teams provide standardized, de minimis financial information to the public. Such public disclosure is long overdue!
  • Relocation Risk: The long history of fan abandonment by the NBA, NFL, MLB and NHL (as indicated in the following chart) demonstrates a very clear pattern of bad faith negotiations, outright greed and legal extortion by the respective leagues, franchises and owners against the fans and taxpayers of America. No league, team or owner is above this criticism as these monopolists have consistently placed their financial interests ahead of the passions of the fans, the goodwill of the communities they have pledged to serve, and their obligations as good corporate citizens. Hence, the evolution of the G League has done nothing to provide assurances to municipalities that they will not be abandoned or extorted by the siren song of alternative locations. map History of Professional Team Relocations in North America
  • The Sad History of Minor League Baseball: As part of our review, we looked at the expansion history of other leagues with development teams. Surely the NFL is not a valid comparison, as its dependence on college teams as a farm system is legendary. Hockey is not on a scale with the NBA, as most of their minor league affiliations are Canadian club teams. Thus, the only meaningful precedent is Minor League Baseball ("MiLB"). The degree of municipal cannibalization in MiLB is unlike anything else in the history of American commerce. Teams move from city to city like locusts seeking a fresh source of nutrition. Despite their history of frequent relocations, these teams are amazingly profitable. At least one MiLB franchise (located in Sacramento) is worth over $50 million3. Stunningly, there are 247 "farms teams" in MiLB4. Virtually every team is affiliated with a Major League club and subject to supervision by the MLB Commissioner. More so than in any other sport, MiLB competes directly with colleges for talent. This is an important distinction as both the NFL and NBA have established barriers to player entry straight out of high school. Hence, one of the challenges surrounding the evolution of the G League is to not recreate the MiLB environment of short-term geographic decisions and relocations, which all accrue to the peril of taxpayers.
  • The diversion of resources to support non-G League activities: As indicated in the attached table, many G League teams have been established or relocated so that they might facility-share with the NBA parent club and others. In every case, the existing NBA franchises already have perfectly acceptable practice and training facilities! The formation of the G League has the highly undesirable impact of shifting the cost burden of upgraded practice facilities for non-G League members to the unwitting taxpayers. One such example is the Washington Wizards and their new G League affiliate, the "Capital City Go Go," who will occupy a mixed-use facility costing taxpayers $65 million. The Wizards and affiliates will utilize 38% of the space yet will cover an embarrassing low 7% of the cost!

    On Sept 16, 2015, D.C. Mayor and Wizards owner celebrate! Clueless politicians are routinely outgunned at the bargaining table and, yet, shamelessly declare victory before the voting public!

    Source: Washington Post
  • The Billion-Dollar Bonanza: When discussed at the individual G League team level, one can rationalize some of the cost, city by city. However, when taken in the aggregate, as we have done in the attached table, the combined financial burden borne by taxpayers exceeds one billion dollars5. There is something unconscionable about such flagrant spending while these very same municipalities make very painful budget cuts, slash local services, and under-fund schools, hospitals and much-needed infrastructure.
  • Hiding the Ball: We are deeply disappointed that the NBA has chosen to covertly execute this development plan. Clearly, such an ambitious expansion strategy did not just happen by itself overnight. It is the product of much secret planning, private deliberations and backroom owner approval. Nowhere could we locate any guidance issued to the public so that the macro-economic impact at both the local and national levels might be discussed and debated. We find that the opacity of the NBA exhibited in this rollout plan is troublesome. It begs the question: what more have they with held from us?

    How many times will fans allow Lucy to move the ball on them? Fundamental change is sorely needed. Unlike a Peanuts cartoon, this is not a laughing matter!

    For further details, request Exhibit I, which provides various details of each G League Team, facility, ownership.

Potential solutions and our recommendations:

Suffice it to say, it is unfortunately late in the game to be addressing these concerns. The latest "Giant Taxpayer-eating Squid" has not only been born, it has been nurtured and fortified by the NBA in the finest monopolistic traditions of professional and collegiate sports. The taxpayer obligations have been locked down and the sponsorship money has begun to flow. Once again, the fans have been divided, subverted and conquered. Had the NBA been a bit more forthright a few years ago – and had FansUnited been in existence(!) – we would not be behind the eight ball in conducting such a review and putting forth constructive and progressive proposals.

In an odd sort of way, the Giant Squid may have unwittingly provided fans with an unexpected remedy. In fact this remedy is so profound that, in addition to applying it to the remaining G League cities (Denver, New Orleans and Portland), we will launch a national campaign that applies to all major league sports in terms of future facilities negotiations.

The G League Remedy – city officials seeking a G League franchise must pledge to seek an equity stake in the G League affiliate as a quid pro quo for receiving taxpayer funding. We call this initiative the "Piece of the Rock Pledge". Those who fail to sign the pledge will face the wrath of the voters in this fall’s elections. This approach will address virtually every concern we have raised in our review. Specifically, as an equity participant the municipality will receive:

On behalf of every sports fan who roots for the underdog, who dares to dream of such epic glory, who believes that Cinderella is more than just a fairytale and who simply wants the opportunity to compete for the gold... we thank you.

  • Access to all of the financial information available to other owners;
  • Reduced relocation risk;
  • A seat at the table in discussing strategic endeavors and long range plans;
  • A financial return on its investment; and,
  • An open dialogue with the NBA regarding it policies and plans.

Conceptually, the math associated with such ownership is simple. The municipality receives a pro rata share of the team equity as a quid pro quo for its capital investment in the facility.

The Major League Remedy - We believe that the remedy for the NBA G League can serve as a prototype for all of professional sports which suffers with the same symptoms as we have expressed in this report. (While Green Bay Packers fans have periodically been able to buy "common stock" of the team, such stock is not treated as a security, and actually conveys little to no legal rights of ownership of the team.)6 We will, therefore launch our "Piece of the Rock Pledge" for all city, state and federal office candidates in the US and Canada. We strongly encourage all candidates (to include incumbents) seeking public office as well as the NBA, NFL, MLB and NHL owners to embrace the concept of participation by municipalities in the equity interests of professional sports teams.

Here is an early draft of our proposed "Piece of the Rock Pledge" to be signed by all candidates who "stand with the fans!".

The "Piece of the Rock" Pledge

I_______, do hereby pledge to the fans and taxpayers of (city, district or state of_________) whom I seek to represent to vote to deny the federal tax exempt status for any municipal bonds whose proceeds would be used to fund sports team facilities in which the municipality does not have an ownership interest. I further pledge to support and assist state and local officials seeking said ownership. I will oppose and otherwise not support any legislation or transaction that fails to meet this ownership requirement.

Under separate cover we will be forwarding copies of this investigative report and recommendations to the Mayors of Denver, New Orleans and Portland, as well as to the NBA Commissioner’s Office and various media. We will also work with the fans in each of these respective major league communities to implement these recommendations. Thank you for allowing us to share our thoughts with you!

1 Forbes, 2017
2 National Law Review, October, 2014
3 Forbes, July 2016
4 Ibid
5 Request Exhibit I, which provides various details of each G League Team, facility, ownership.
6 See the 2011 Green Bay Packers “Common Stock Offering Document” for details on the limitations of ownership of such stock here.

Contact:


Patrick Healy, Founder and CEO
PHealy@FansUnited.com
www.FansUnited.org