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 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. 

What Presidential Debates Actually Have To Do With Sports

There is one thing that both Republicans and Democrats can probably agree on when it comes to presidential debates – there is an over abundance of sports metaphors and clichés used both by candidates and commentators. Debates are typically described with “winners and losers”, “which candidate takes the lead”, and who “scores the most points”. Candidates “practice” for debates with “coaches” and “coordinators”. Because President Barack Obama is a well-known basketball fan, many pundits described his performance last night with comments like, “President Obama engaged in a four corners basketball strategy and tried to run out the debate clock.”

Despite the overuse of sports imagery when it comes to Presidential debates, the candidates actually did discuss issues that are highly relevant and topical to the sports industry. A significant portion of the debate centered on Medicaid, Medicare, Social Security, and the Affordable Healthcare Act. In particular, the Medicare and Social Security debate have the strongest parallels to the healthcare issues currently being discussed in the sports industry. These programs have functioned like a defined benefit plan typical to traditional pension plans. Many people ages 65 or older receive certain guaranteed benefits based on their income levels and need for healthcare services. The combination of these programs covers a large majority (if not all) of these healthcare costs. Obama wants to largely keep the same system that exists now for Medicare and Social Security in place while reducing the costs that the government pays to service providers. Romney, using a similar version of the plan articulated by his candidate for Vice President Paul Ryan, wants to start changing Medicare by adding with what is commonly known has a voucher system. In this version of defined contribution plan, the government would provide senior citizens with a certain amount of money through a voucher and allow people to choose how they want to spend their money.

This is almost the exact same issue that was at the center of the National Football League’s lockout of its referees. Essentially, the referees wanted to continue a defined benefit plan that would be similar to how Medicare currently functions. The NFL would pay referees’ pensions at a certain levels given their ages and years of service to the league. The NFL wanted to move to a defined contribution plan that would work more like the voucher system. Essentially, the NFL would make smaller contributions but allow the referees the chance to pursue their own strategies for their retirement investments. The NFL and its referees agreed to a hybrid approach in which all referees employed by the NFL before 2017 would have a defined benefit plan. All referees employed after 2017 will have a defined contribution plan.

While the regular NFL referees returning to work may have grabbed the most headlines, there is potentially a much more important development on the sports pension / healthcare front that could reshape the entire sports industry. The state of California recently passed legislation for college athletes who suffer serious or career-ending injuries that “requires the universities to pay future medical costs for on-the-field injuries… They also will have to cover insurance deductibles and pay health care premiums for low-income athletes, among other provisions.”

There is little doubt that financially supporting athletes who suffer career-ending injuries while playing sports is morally and ethically the right thing to do. The real question has always been whether this is economically feasible or sustainable. Supporters say this is feasible because this legislation only applies to schools with $10 million in media revenues. Yet, even these schools are struggling to keep athletic programs from being eliminated. For example, the University of California, Berkeley, which makes more than $10 million in media revenue, has eliminated sports programs all together because of a lack of funding. In addition, unfunded pension liabilities are crippling both the public and private sectors. State governments face massive budget shortfalls because of their unfunded pension liabilities (i.e. they do not have the money to pay the benefits that were promised to government workers) while one of the major causes of the bankruptcies of General Motors was the pensions payments that needed to be made to its retired workers.

It is worth paying attention to the impact of California’s new legislation has on these schools. In particular, will these new costs cripple athletic departments and/or cause more programs within athletic departments to be eliminated. In addition, this new legislation may spur other states to pass similar bills. Former athletes are much more likely to have significant healthcare costs after their careers than the average person of the same age. This means they often are the type of person that is the most expensive for health insurance companies and government supported healthcare programs. More and more state governments may want to transfer these costs back to these colleges and universities, particularly private institutions, to help reduce their own liabilities when it comes to healthcare.      

The only thing that we know for certain is that most organizations are really just beginning to deal with the health care crisis in the sports industry. It will be interesting to see how the debate and policies in the public sector shape the future of the sports industry on these issues.     

Mistargeting Sports Voters

             After the Democratic and Republican National Conventions and the Labor Day Weekend, many political pundits believe that the Presidential campaigns begin in “earnest”. No, this does not mean that the campaigns can seem to be as ridiculous as the plotlines in an Ernest movie like Ernest Scared Stupid. Despite the millions of dollars spent by each campaign, only now do many voters start really paying attention to the Presidential race. Therefore, both the Obama and Romney campaigns are looking for ways to connect with people to win their votes for the November election.

            One common strategy that campaigns have used in the past to present their candidates as “regular guys” was to have them attend sports games or watch games with fans at local bars. In a recent Politico article, Jonathan Martin and Maggie Haberman describe how this can be a particularly effective tactic for President Obama in showing how he is different from Governor Romney. While the President is enjoying a White House Honey Ale (yes, the White House now does brew its own beer) with Washington Nationals fans, he can remind voters about who does not seem to like bars or sports: “It’s the other candidate running for president, the guy who happens to be a teetotaler and who refers to ‘sport’ as though he were doing an impression of Mr. Burns or an English Olympics official.”

            Martin’s and Haberman’s point is that watching sports is a great way for the President to establish himself as a regular guy because the Average American loves to watch sports. There is just one problem with this analysis. The average sports fan is not really the average American. Despite what many people may see and hear on sports talk television and radio, the average sports fan is usually more affluent and more educated than the average American. According to 2011 NHL league data, “the average household income (HHI) for an NHL fans is $104,000, highest of the four major sports, followed by Major League Baseball ($96,200), the NBA ($96,000), and the NFL ($94,500). Sixty-eight percent of NHL fans have attended college, a significantly higher percentage than the other three sports (ranging from 60.4 percent to 63.6 percent).” According to the U.S. Census Bureau, the median household income for the United States was $50,054 and the median percentage of people who attended college was 44 percent.  

And this does not just count fans of the four “major” professional sports leagues – the NFL, NBA, MLB, and NHL. According to Scarborough Sports Marketing, “[Mixed Martial Arts] fans have sound financials. They are 15 percent more likely than the average American adult to have a household income of $75k+ and 10 percent more likely to own a second home.”

We are not questioning whether political campaigns should present their candidates as “regular” people. We are questioning whether using sports is an effective channel to connect with “regular” people. The reason that this practice will likely continue to occur is the popular perception that sports fans and average Americans are the same type of people. Therefore, campaigns and the media should portray candidates watching, participating, or commenting on sports as a way to prove that they are “regular” people.

Taking this approach to sports fans can and often has backfired with political campaigns. For example, John Kerry famously said that “I just go for Buckeye football, that's where I'm coming from,” while talking to crowds in Michigan. Governor Romney said that London might not be prepared to hold the Olympics only days before the event. Neither of these candidates may have made these gaffes if their campaigns did not try to use sports as a way to connect with “regular” voters.   

   Sports organizations can also learn a lesson from these mistakes and misperceptions. Many sports managers do know that their fans are affluent and educated. It is usually part of their ticket, media rights, and sponsorship sales documents and agreements. Yet, they can often fail to complete an audience analysis when it comes to other elements critical to the fan experience. This can lead to organizations making significant investments in areas that have little value for audience stakeholders. For example, many sports organizations are making significant investments in wireless and location based technologies at their venues. Yet, technology may actually be taking away from fan’s enjoyment of the game. As Dallas Mavericks owner Mark Cuban states, “I can’t think of a bigger mistake than trying to integrate smartphones just because you can. The last thing I want is someone looking down at their phone to see a replay.” 

            Again, we are not saying that sports organizations should not invest in technology. It is critical, however, to make sure that technology is actually what its customers, fans, and stakeholders want to improve their experience. Whether it comes to politics or sports, completing an audience analysis is critical to ensuring your organization employs the right strategy and tacti