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Thursday, February 12, 2004
'Independent' audit yields same results

By Jim Kelley
ESPN.com

I suspect that if you had any portion of your assets -- say, the bulk of your retirement income -- invested in a company, like Enron or Adelphia Communications, which has been under fire for questionable accounting procedures, then you don't put a whole lot of stock in an audit and evaluation put forth by former U.S. Securities and Exchange Commission chairman Arthur Levitt on behalf of the National Hockey League.

It's also reasonable to suspect that an audit said to be independent but paid for by one party with a vested interest in its outcome would be about as fully believed by the general public as cigarette hazard warnings issued by tobacco companies or weapons of mass destruction reports issued by U.S. intelligence agencies.

They are, for the most part, all viewed as having a certain amount of truth, but not necessarily the whole truth and nothing but the truth.

However, it is difficult, if not impossible, to look at Levitt's findings that support the NHL's claim of almost $300 million in losses last season and argue that there is nothing of merit there. The league appears to make a compelling case for its fiscal problems.

The question is: Is it a snapshot or, as NHL commissioner Gary Bettman is fond of saying, the whole picture?

The second question is: Does it even matter?

Let's deal with the picture portion first. Levitt, the former boss of the SEC and a well-respected man in economic circles in both New York and around the world, has gone to what appears to be exhausting lengths to verify something that we -- and we suspect the NHL Players' Association -- already knew. He verified that the NHL and its member franchises generate substantial income (nearly $2 billion according to his accounting team) and substantial losses (some $273 million before accounting for interest and depreciation). That Levitt's grand total pretty much matches almost dollar for dollar with what the NHL has claimed all along might convince more than a few fans that the league has a good case. But it's also likely to raise a few eyebrows among the skeptics and certainly with NHLPA executive director Bob Goodenow, who is already questioning its merits -- not the least of which is based on the fact the players' association had no role in the process.

That said, however, it's a given that the NHL has fiscal problems. Everyone, even the NHLPA accepts that. It's why the NHLPA opened the first formal session of collective bargaining on a new contract by proposing its members take a five percent pay cut.

But left unsaid in the Levitt report (and certainly not addressed by the good folks who paid to have it authored) is how much of the problem is created by the NHL and its member clubs. Both Levitt and commissioner Bettman took different approaches there. Levitt said that type of analysis didn't fall within the scope of the audit. Bettman said it didn't matter how they got to this point, only that they get beyond it and fix the problems.

Now, I'm all for fixing the league's problems and, for the record, I think 75 percent of revenue -- the figure put forth by Levitt and, with a one-percent differential, by the league prior to the Levitt report -- going to players salaries, if true, is excessive. I also believe the commissioner and Levitt when they say the costs are inconsistent with reasonable and sound business practices and that the figures, by percentage, substantially exceed such payouts to players by both the National Basketball Association and the National Football League -- the other two professional sports leagues with salary caps.

But again, we knew all that. What we still don't know is how it got this way and, more importantly, what to do about it. We don't know what percentage of the losses were created by the NHLPA maximizing its ability to use the current CBA to its advantage and what percentage comes about because certain segments of the ownership group grossly mismanage their businesses.

We don't know why the league continued on a path of vicious expansion over the last decade and whether or not that contributed to the problem. We don't know why the league twice extended the current CBA (the last time for seven years in 1997) and whether or not that was a prudent decision regarding an agreement that they claim is killing them.

We don't know why a league that has the most restrictive free-agent guidelines among all of the so-called big four sports can't keep a handle on its player costs. Heck, we don't even know why a league would agree -- as this one did almost 10 years ago -- to guarantee contracts, give automatic qualifying raises to players even if they had poor seasons or fail to install a cap on rookie bonuses (which negates a collectively bargained rookie salary cap).

The league was not only whipped at the bargaining table, but in the area of contract enforcement and franchise management as well. As a result, all those decisions have come back to cost the NHL a heck of a lot of money.

We know that, for the most part, teams have handled contract negotiations poorly and have compensated for those failures in the form of high-ticket prices. We can say with some certainty that they've expanded recklessly and that they've continued the outdated tradition of entrusting multimillion dollar companies in the hands of men who, for the most part, are hockey talent scouts and don't have the most basic training in how to run complex business entities.

In the grand scheme of things, the league spent close to three quarters of a million dollars to say it was losing money, but never said how it came to be that way. It will claim that it was money well spent if it gets the players' association to acknowledge that the figures are accurate (or reasonably so) and I don't disagree.

Yet you have to wonder if this changes anything.

The players' association never never questioned the league's math skills, but it always has questioned the numbers that are being added and subtracted. Because each team's business structure is different, Levitt said he used the NBA's CBA as a model in determining what fell under "hockey revenue" in each team's report. Goodenow called that process "fundamentally flawed."

But even if the two sides mutually determine what constitutes hockey revenue, agree on the validity of those numbers and then do the math, the final dollar amount may not matter.

The league still wants a system that saves it from itself, a fixed-cost system like the NFL and NBA. The players' association still wants a marketplace system like the one that reigns in Major League Baseball.

Since that is the crux of problem and neither side wants to move from that, nothing has really changed.

The most encouraging words spoken on Thursday came when Bettman said that if the losses are accepted for what they are and the two sides can lower the rhetoric, move on and solve their problems, the league could have 30 healthy franchises.

If that were to happen, it would be money well spent and a great day for hockey, as well.

Jim Kelley is the NHL writer for ESPN.com. Submit questions or comments to his mail bag.