In a recent issue of The Hockey News, Bill Daly defended the Arthur Levitt report by asking all critics to read it first. Perhaps Daly should've asked his boss Gary Bettman to read it first -- Bettman, in the news conference introducing the report, said, "Actually, we thought the percentage of gross revenue taken up by player salaries was 76%, he [Levitt] said 75%."
Actually, he said no such thing. Levitt said 75% of net revenue, not gross revenue, goes toward total player costs, not just salaries. These are significant differences. What the NHL calls net revenue (a measure it invented all for itself that comes closest to what everyone calls gross profit) is gross revenue net of direct costs -- except for player salaries, as direct a cost as there is for a hockey operation. Other costs, such as travel expenses, insurance, social security, and the like, make up part of the 75% Bettman incorrectly called "player salaries" -- Levitt even includes minor league salaries, which would be fine if minor league revenues were included, but they were not.
Actually, I take it back -- Levitt didn't write "gross revenue" but he did say it. When asked quite plainly during the press conference introducing his report, "Can you tell me what the gross revenues of the League actually equal," Levitt responded, "two billion". But he probably just misspoke in the heat of the Q and A.
And the very next question? "Can you tell me what comes under the universe of player costs? I assume that's more than just what they are paying in salary." Deferring to his lieutenant Lynn Turner, the response was, "salary and bonuses, benefits and other payments including pension benefits, CBA monies, those are the type of costs that are all included in the player costs." No mention of travel expenses, insurance payments for injured players, minor league salaries, NHL award payments (that's part of what he meant by "CBA monies") -- those might have prompted additional questions.
The truth is, the NHL doesn't want anyone to read the report, and doesn't expect anyone to. The whole world parrots their net revenue of $1.996 billion, player costs of $1.494 billion, and the 75% ratio between the two without understanding of what those terms mean. The NHL even created its own web site for CBA issues that quotes Daly's letter to THN challenging critics to read Levitt's report, the transcript of Bettman's introductory press conference with its misstatement about player cost ratio, the transcript of Levitt's introductory press conference with its misstatement about gross revenues, and the full report itself.
The NHL attempted to bolster its case for a salary cap by hiring former SEC chairman Levitt to audit the league's finances for 2002-03. Despite Bettman's misreading, Levitt did indeed bolster the NHL's case, reporting $273 million in operational losses, additional losses of $100 million in interest payments (a non-operational cost), and a player cost ratio he claims is out of whack with other leagues.
That's $273 million in operational losses -- not true earnings after accounting for interest, tax, depreciation, and amortization (except for the $100 million selectively reported for one type of interest) -- for hockey operations as stand-alone entities, not including the joint operations at least 22 teams enjoy with related business entities like arenas, other sports franchises, and media networks. And that's 75% of net revenue of nearly $2 billion (aka gross profit), not gross revenue, going for total player costs, not just salaries.
Net revenue is not a term you will find in any accounting glossary. The closest you'll come is net sales, allowing deduction for returns, discounts, and undeliverable merchandise from gross revenue. Gross profit, the closest accounting term to the NHL's net revenue, is net sales minus the actual cost of goods sold -- for a hockey operation, the cost of food sold by concessions, for example. The NHL goes beyond that, deducting every direct cost from gross revenue, not just cost of goods sold (to extend the concession example, the cost of labor).
Look at any financial report for any company in the world, and you will not see anything resembling what the NHL calls net revenue (you'll find reports that show net revenue in the sense of net sales). Every other company in the world wants to maximize revenue, and then account for cost, not understate revenues and overstate a single expense category, as the NHL does for public consumption (their actual books have still not been scrutinized in full by anyone, including Levitt).
No surprise, despite his so-called independence, that Levitt came within $12 million of the league's own loss declaration and within 1% of its player cost ratio. But me, I'm a diehard skeptic, especially when nearly a hundred owners each worth hundreds of millions or billions of dollars cry poverty over less than $300 million -- less than the total amount they kicked in to help themselves weather a lockout. So I read the report, in detail (even before Daly exhorted me to -- my article originally started with the sixth paragraph, the others prepended in response to Daly). And I read other documents the report refers to, such as the NBA and NFL Collective Bargaining Agreements (CBAs).
And I hate to say it, but I come away believing Levitt has performed a conscious, if completely legitimate, sleight of hand, designed first, last, and always to support the NHL's claims, not test them.
....
So what are we, in the final analysis, supposed to make of all this? Bill Daly tells us to read the report before criticizing it, yet Gary Bettman misquotes the key finding in the report, which is then universally parrotted by people who clearly did not read the report. Daly tells us that at minimum the report should lay to rest the NHLPA's claim that the NHL's finances are unaudited, even though Levitt is clear in his report that not every team's finances were audited and that team audits are not likely to match the UROs, and is clear in his overall philosophy that auditors tend not to be as independent as they are supposed to be in order to ensure their future employment.
Levitt tells us at least twice, with no equivocation, per his assignment, that the URO instructions for 2002-03 were adequate and the teams complied with them, but tells us too that he corrected inadequacies in the 2001-02 URO before sending the 2002-03 URO out to the teams, and that he corrected results reported by the teams. Levitt tells us that he "would neither underwrite as a banker any of these ventures nor invest a dollar of [his] own personal money in a business which appears to be heading south."
And yet, five teams have changed hands during or since the doom and gloom season his report covers, five others have been bought since 2000 (salary escalation already well under way by then), and an eleventh team (Toronto) has had significant changes to its capital structure and controlling interest due to a major equity transaction. Daly tries to explain that away by saying, "Recent investors in NHL clubs have invested at significantly discounted (even depressed) values." In other words, they have done what smart investors always do -- buy low, hoping to one day sell high. But the former SEC chairman, stockbroker, and economic development chief, who should know about the concept of buying undervalued assets, wouldn't "invest a dollar" in this business.
It's like watching clothes spin endlessly in a dryer -- as long as no one actually stops the spin to take a cold hard look at the laundry in the harsh glare of the public eye, the truth remains safely hidden and the spinmeisters have done their job.
