Will Athletes Fall Off the Fiscal Cliff?

            With the 2012 elections and General David Petraeus sex scandal having mostly faded from the public’s consciousness, the next big issue in politics appears to be the fiscal cliff. What is this cliff and how does it get fiscal? (Yes, making oblique allusions to 1980s pop songs is the best way to make a discussion on tax policy more interesting.)  President George W. Bush helped facilitate the passage of a series of mostly “temporary” tax cuts that were set to expire in 2010. While these cuts reduced marginal income tax rates for all income levels, the wealthiest Americans (individuals or married couples filing jointly that make $388,530 or more per year) were the greatest beneficiaries as their income tax rates reduced from 39.6% to 35%. With the country still feeling the impact of the 2008 recession and high unemployment rates, President Barack Obama and Congress decided to extend these tax cuts through 2012.

            As 2012 comes to an end, however, these tax cuts will automatically expire unless Congress and the President agree to another extension or a permanent solution that reduces marginal tax rates. While promising to fight for lower and middle class tax relief, a key plank of President Obama’s reelection campaign hinged on letting the tax rates return to the 39.6% rate.

            A recent Forbes SportsMoney article showcases how the expiration of the tax cuts (or looming tax increases) would impact athletes who use their physical skills to become wealthy Americans. In a blog post entitled “Could Tax Savings Expedite Free Agent Baseball Signings?”, Tony Nitti argues that baseball players have an economic incentive to ensure as much of their income as possible counts as being earned in 2012. Because the minimum annual salary for a major league baseball player is $480,000, every single major league baseball player falls in the highest income tax bracket. Their rates will increase by 4.6%, and that could mean paying thousands of dollars more a year in taxes. Therefore, players will look to sign contracts as quickly as possible to achieve major tax savings.  For example, suppose a team would “sign [Josh Hamilton] to a 7-year, $140 million deal. If Hamilton’s agent, Michael Moye, is successful in moving $15 million of the contract into a 2012 signing bonus, Hamilton stands to save $825,000 in federal income tax.” Hamilton would achieve these savings because as much income as possible would be taxed at 35% rate instead of the 39.6% rate.

            While Nitti is accurate that marginal tax rates will increase for baseball players, he omits the fact that most people in the highest income brackets do not pay the marginal rate. In fact, the effective tax rate (what people actually pay in taxes) for the highest income tax payers is often far lower than the marginal income tax rate. One of the key platforms of Governor Mitt Romney’s presidential campaign was to eliminate deductions for the wealthiest Americans in order to generate billions of dollars in government revenues that could be used to reduce the federal government’s budget deficits. By definition, that means that there are billions of dollars in deductions being taken by wealthy Americans, including athletes, for things like retirement accounts, healthcare insurance, mortgages, capital gains, charitable giving, and education. In addition, aggressive accounting measures such as creating trusts or deferring income into overseas accounts create alternative methods to reduce one’s tax burden. According to the Urban Institute and the Brookings Institution, these efforts have helped 80.3% of people making over $200,000 pay an effective annual income tax rate of 25% or under from 2000-2008. This also means that the tax savings players would achieve by signing in 2012 versus 2013 will be dramatically less since their effective tax burden would be so much lower than the marginal rate.    

            Another major problem with Nitti’s analysis is that he fails to account for state income tax rates. In particular, Florida, Texas, and Washington all have baseball teams where players (or any individual) pay no state income tax. This is not the first time that someone has failed to account for state income tax rates when evaluating athlete compensation. The most famous example of when many people “forgot” to factor in state income tax rates occurred with Lebron James. While many people criticize James decision to leave Cleveland Cavaliers, most at least found it admirable that he took less money to join the Miami Heat. In reality, James is actually making more money by going to Miami than by staying in Cleveland because he pays no state income tax in Florida. Baseball players’ agents can and will factor in state income tax rates before making any decisions about where their clients will play for the 2013 season. Rushing to make a deal without factoring in effective tax rates or state income taxes would be a penny wise but more than a pound foolish.  

           

               

Do Terps Really Stand To Tarnish Image For A Big Payday in Big Ten?

           I am one of the few people happy about the University of Maryland’s move from the Atlantic Coast Conference (ACC) to the Big Ten Conference (Big Ten). Having grown up in Maryland and attended Northwestern University, I am excited to see football games between the Terrapins and Wildcats in either of the two smallest football stadiums in the Big Ten.            

            For most sports fans and media members, however, the moves by Maryland and Rutgers University (who is leaving the Big East) to the Big Ten conference seem like little more than “money grab”. More specifically, both the schools and the conference want to make more money through the Big Ten Network. Started in 2007, the Big Ten network provided each conference school (except for Nebraska this year) with $24.7 million in revenue this year.

            While B6A has often advocated for sports organizations maximizing all potential revenue streams, I recognize that strategic decisions cannot be made in a vacuum. Sports managers and decision makers need to gauge how attempts to make more money will impact their brands and via reactions by fans, boosters, sponsors, media, and employees. The damage caused by the vehement opposition by fans and the media to the school’s brand is the main argument against Maryland’s move to the Big Ten. The school was a founding member of the ACC when the conference was created in 1953. In addition, basketball games with Duke University and the University of North Carolina have created some of the Maryland's most iconic athletic moments. It does not make sense to many Maryland fans to jettison these games to play schools like Northwestern or the University of Iowa.

            Both the brand and revenue arguments, however, are questionable at best and flawed at worst. From a brand perspective, Maryland was already less likely to play its “rival” schools given the ACC’s recent expansion to 14 schools. Maryland’s protected rival (i.e. the school it would be guaranteed to play in all conference games) was the University of Pittsburgh. Since Pitt only recently joined the ACC in 2011, Maryland really has no history in competing with the school. In fact, Maryland’s stronger academic, recruiting, and athletic rival is probably Pennsylvania State University – a school already in the Big Ten. In addition, the recent additions of Pitt, Syracuse University, Boston College and Notre Dame (for all sports other than football) to the ACC makes impossible for all schools to play against each other in a football or basketball season making it games against Duke and UNC less frequent. Most importantly, not all of the school’s core audience members are against the change. In fact, Kevin Plank, the founder and CEO of Under Armour as well as the school’s biggest booster, applauded the team’s move to the Big Ten.

            If the brand argument has its flaws then what about the financial argument? That seemed like a no brainer. Maryland is leaving the ACC primarily to make more money. While the school is likely to make more money, it is actually far from a guarantee that this will occur. The ACC signed a new agreement with ESPN through 2027 that provides each school with $17.1 million in revenue. The additions of Maryland and Rutgers to the Big Ten mean that each of the 14 schools in the Big Ten would make about $20.3 million per year per school (a $2.6 million dollar year-on-year increase for Maryland) if media rights agreements remain constant.
             However, Maryland is currently required to pay a $50 million exit fee to the ACC for leaving the conference. B6A is not anticipating a significant change in the other sources revenue for Maryland by moving to the Big Ten. We do not see a great improvement in-game, sponsorship, merchandise, or event revenue based the on Maryland playing schools like the University of Michigan and The Ohio State University in football or Indiana University and Michigan State in basketball when the school already plays against nationally recognized programs like Florida State University and the University of Miami in football or Duke and North Carolina in basketball. Therefore, the school would rely on its increase in the media rights agreement to cover this costs. Because the school is only making $2.6 million more per year by leaving the ACC and joining the Big Ten, it would take over 19 years to pay off the exit fee.

            However, this assumes that Maryland will both have to pay the full $50 million and the Big Ten Network will not generate any increases it revenue. Neither part of the previous statement is likely to occur. First, it appears unlikely that the school will have to pay the full $50 million exit fee. Even though the $50 million fee is legally binding according to sources, it can be paid over a number of years. B6A believes that Maryland and the ACC will work out an agreement where the school will pay more up front to leave the conference but less in overall dollars. How much is difficult to anticipate, but we believe it will be somewhat closer to the $20 million dollar exit fee that existed for teams leaving the conference in 2011 (i.e. before the conference added four additional schools). We also think it is unlikely that Maryland will challenge the $50 million fee in court (as has been mention by the university’s president) and instead negotiate a lower amount in a settlement agreement.

            The larger question is will the Big Ten Network achieve the revenue growth targets that it is betting on by adding Maryland and Rutgers. The conference wants to make the Big Ten Network into a national network that could compete with the likes of ESPN and the NBC Sports Network. Adding schools like Maryland and Rutgers would give the conference a reason for cable providers in the Washington D.C. and New York areas to carry the Big Ten Network on their basic tiers (many carry the network on a premium sports tier). The increase in audience would mean an increase the carriage fees and advertising rates for the Big Ten Network as well as increase the number of companies who want to purchase advertising time on the channel. The addition of Maryland and Rutgers is expected to enhance the Big Ten Network’s annual revenue by up to $200 million (or about an additional $14.3 million per school).  

            While it is likely that adding Maryland and Rutgers will increase carriage fees and advertising revenue by some amount, it is far from certain that it will result in a $200 million increase on an annual basis. Maryland and Rutgers are not the universities that dominate their media markets. Maryland faces stiff competition from the University of Virginia and Penn State from a football perspective and Georgetown University (among others) from a basketball perspective. Rutgers certainly is not the dominant school in the New York television market as Syracuse and Notre Dame attract larger audiences. More importantly, professional teams have traditionally dwarfed college teams in the Washington and New York media markets in terms of ratings and interest.

            In addition, the Big Ten Network is not renegotiating its television contracts until 2017. Since Maryland is joining the Big Ten Conference in 2014, it will not see any impact of the new Big Ten television revenues for three years. If it has to follow a similar path as the Nebraska did when it joined the Big Ten conference in 2011 then it will also not receive the same portion of revenue as the other current Big Ten Schools in at least its first two years in the conference. Yet, it still has start to paying the conference exit fee likely starting ten months before leaving the conference. Therefore, it appears the school will not recoup its losses on its exit fee losses for at least five years after it starts making exit payments to the ACC even if that fee is reduced from $50 million.

And what happens if the league does not receive its estimated increases in revenue? While the sky appears to be the limit right now for current media rights deals, it is possible that the landscape could change over the next four years. In fact, there is an argument to be made that media rights deals are experiencing a bubble in the same way that the housing and technology markets experience a bubble before their collapse. If the league receives less than a $200 million annual increase then it could take Maryland even longer to make up the money it is losing by paying the ACC exit fee. If the media rights deals do decline in value and the Big Ten Network actually makes less money than in previous agreements then Maryland could be in more troubling financial situation than it is now.  

            The larger of point of this admittedly long analysis is that the popular sentiment may not actual hold true when it comes to analyzing Maryland’s move to the Big Ten. Maryland is unlikely to suffer the long-term damage to its brand base of its move from the ACC. The financial impact of Maryland moving to the ACC is not the guarantee it appears to be. The truth, like many of the universities in the Big Ten when it comes to their geographic location in the United States, lies somewhere in the middle.      

Miami Makes Out Poorly With Marlins

             Multiple sources have reported that the Miami Marlins have agreed to trade “just about any (Marlins) player making money” to the Toronto Blue Jays. This includes players signed last offseason to expensive contracts like Jose Reyes and Mark Buehrle. In addition, this is not the first major trade that the Marlins have been involved in the past year. The team had already traded both Hanley Ramirez and Heath Bell during a disappointing 2012 season. The Marlins remaining best player Giancarlo Stanton summed up the reaction by many of the team’s fans when he tweeted, “Alright, I'm pissed off!!! Plain & Simple.”

            This seeming fire sale of many of the team’s best players was not supposed to happen to the “new” Miami Marlins. The Florida Marlins had been notorious for trading or releasing the team’s best players because the team could allegedly not afford their salaries. After both the 1997 and 2003 World Series wins, the Marlins jettisoned either high salaried veterans or younger players poised to sign large contracts to other teams. The Marlins had long stated that its having to play in what is now known as Sun Life Stadium (where the Miami Dolphins play football) caused the team to be unable to draw fans and to generate enough revenue to sign star players. The team also argued that it needed a new publicly financed stadium for the organization to be profitable – even though Deadspin showed the team made millions of dollars in operating income in the 2008 and 2009 seasons.  When the Marlins came to an agreement with Miami-Dade County to subsidize $409 million of the $515 million of a new stadium through public bonds, it seemed like team’s frugality era may be over.

            So why is the team now trading many of its best players? The stadium became part of a surface identity strategy. In essence, the Marlins employed strategies and tactics that on the surface were largely aim to appeal to its Latino fan base. In particular, the Marlins, were trying to target Cuban American baseball fans. There are three heavily publicized examples of these efforts. First, the team decided to place location of the new stadium near the site of the Orange Bowl to be closer to many of Miami’s Cuban American residents in Little Havana. Second, the team designed both the interior and exterior of Marlins Park had with the “inspiration for the stadium’s electric color scheme, with its fluorescent-green outfield wall, [from] the palette of the Spanish painter Joan Miró.” Third, the team traded for and hired Ozzie Guillen to be its manager not only because of his previous success with the Chicago White Sox but also because of he was of Latino descent. While this surface identity strategy was being implemented, the Marlins did also make a significant commitment to making their team better on the field. The team signed multimillion-dollar contracts with players like Reyes, Buherle, and Heath Bell while pursuing a long-term deal with Albert Pujols.

            Ultimately, all of the elements of both the off-the-field and on-field strategy failed. The stadiums location is a major problem as there is a lack of infrastructure in place for many fans to arrive and leave from Marlins Park. Little Havana is filled with small side streets and only 5,000 new parking spaces were made available even though the new stadium is very difficult to access via public transportation. In addition, Marlins Park’s design has had its supporters but also many critics. For example, Hall of Fame pitcher and ESPN broadcaster Orel Hershiser said the stadium looked “like a cruise ship had a baby with a spaceship.”

            Perhaps the biggest symbol of failure with this surface identity strategy, however, came from Guillen. The Marlins first manager grew up in Venezuela – which obviously is a different experience than many of the residents who migrated from Cuba to Little Havana. And Guillen is not shy about expressing his opinions. He immediately angered many of the Marlins Cuban American fan base by expressing support for Fidel Castro. His comments caused the Marlins to suspend the team’s manager for five games. After returning to the Marlins bench, Guillen managed the team to a 69-93 record. While Guillen was fired after his first season, he is not the only person who caused the team’s on-field problems. None of the free agents matched or exceeded the value of their contracts with their performance during their initial year of their contracts.

            These failures have created a nightmare scenario both for the Marlins and Miami-Dade County. Attendance projections for the new stadium vastly overestimated actual attendance during the first season at Marlins Park. The team’s inability to generate high enough increases in stadium / gameday revenues meant it was saddled with player contracts it could not afford. In addition, Miami-Dade County is now likely going to have to pay $2.4 billion in principal and interest payments on its $409 million in bonds without every obtaining the expected commercial and residential development around the stadium that county officials hoped for when agreeing to the subsidies.

            While there is plenty of blame to spread around, the core problems stem from the team’s surface identity strategy employed to attract Cuban American fans. To be clear, there is nothing wrong with trying to appeal to a certain demographic group or market segment. In fact, the Los Angeles Angels of Anaheim have implemented a successful strategy in targeting Latino fans.

It is the execution of the Marlins strategy that has been the problem. The team appears to have believed that placing a stadium in Little Havana even when there was little infrastructure to support the venue would cause more fans to attend games. It also seemed to believe that hiring a Venezuelan American manager to appeal to a Cuban American fan base even when manager did not come from the same background as its Cuban American fans. Yes, the Marlins made seemingly bad player personnel decisions. But the team was never going to successfully appeal to the Cuban American fan base using this surface identity strategy. Instead, the team could have spent more money on developing infrastructure around the stadium to make it easier for fans around Little Havana to attend games. The organization could have hired qualified Cuban Americans for jobs within the business and team operations side of the organization as well as signed more contracts more vendors from the Cuban American community. Instead, it made decisions largely to appeal to certain demographics in ways that were both expensive and did not make sense. While the team does have a new stadium, the new Miami Marlins now look a lot like the old Florida Marlins.

Do Sports Impact Elections?

             Most Washington Redskins fans had two reasons to be disappointed yesterday. First, the team probably played its worst game of the season during a 21-13 loss to the Carolina Panthers. Second, the Redskins’ performance seemingly all but guaranteed that Mitt Romney will win the Presidential election. You may be asking yourself how does the Redskins losing mean Romney wins and why would Redskins fans be upset about this? The Redskins performance in the game has accurately “predicted” the winner in 17 of the past 18 Presidential elections. If the Redskins win the game before the election then the incumbent party remains in the White House. If the Redskins lose that game then the incumbent party loses the election. The Redskins loss means that Romney should win the election. While which candidate will win Virginia is too close to call, both Maryland and the District of Columbia voted overwhelmingly for President Obama in 2008 and that trend should continue in tomorrow’s election. Since the team draws most of its fans from the District of Columbia, Maryland, and Virginia, many Redskins followers would be facing another tough loss tomorrow.

            Yet, you probably will not see too many Redskins fans writing off President Obama’s chances in the same way they already are writing off the team’s chances of making the playoffs this season. One logical reason would be that many political prognosticators ranging from The New York Times FiveThirtyEight blogger Nate Silver to the Center For Politics and University of Virginia Professor Larry Sabato have predicted there is a high probability of President Obama winning the Electoral College (and thus the election) after tomorrow’s vote (they also predict Obama will win the popular vote but with much less certainty). One less than logical reason is that a National League team winning the World Series usually means that the incumbent party wins the election. This has been an accurate “predictor” of which party wins in 16 out of the past 23 elections. Since the San Francisco Giants won the World Series, President Obama has a good chance of winning the election.

Relying on sports to predict the outcome of election would probably cause Vice President Joe Biden to call “malarkey”. One of the oldest mantras in the statistics is that correlation does not equal causation. While the relationship between Redskins and/or national league performance in The World Series and Presidential elections are an interesting phenomenon, in no way do the Redskins and Giants performance influence the outcome of the Presidential election. It is just lucky that it turns out that way. In fact, no sports team performance has any direct impact on elections.

            As College Gameday Host Lee Corso would say, “Not so fast my friends.” The performance of sports teams does have actually seem to have an impact on elections. A study performed by professors at Stanford Graduate School of Business and Loyola Marymount University found that “a win in the 10 days before Election Day causes the incumbent to receive an additional 1.61 percentage points of the vote in Senate, gubernatorial, and presidential elections, with the effect being larger for teams with stronger fan support.” This may seem like a small effect, but an 1.61 increase in incumbent support is a huge difference in this Presidential election. For example, Romney is ahead by 1.5 points over Obama in Florida according to the Real Clear Politics average of polls. Yet, wins by the University of Miami, Florida University, and Florida State over the past few days could have impact in helping President Obama eke out a victory in the state (although the fourth quarter loss by the Miami Dolphins did not help Obama’s efforts).

            Should the outcome of sporting events play any impact in elections? The authors of the study seem to think no. In addition to calling sports contest “irrelevant” to elections, they found that impact of sports outcomes on decision-making processes are reduced when people become more aware they are using sports to help make political decisions (they argue that the impact sports has on politics occurs at a subconscious level).

Yet, the authors’ analysis seems to be a little irrelevant in this regard. Whether or not these results in sporting events should matter in elections is not as importan as the fact that there is any impact at all. These findings provide sports organizations with tangible evidence to show how the outcomes of games really do impact the decision making process for items that seemingly have no relationship to sports. This can and should be used as a critical piece of evidence in sponsorship negotiations by sports teams and leagues to show just how pervasive the impact of sports are in other parts of life (i.e. how the outcome of sporting events can impact how people determine which products to buy).

While it is extremely unlikely that the Redskins and Giants performances will determine the outcome of the elections (the teams are based in heavily democratic states), it is possible that a combination of other teams performances over the past few days could help determine who wins tomorrow’s elections.