Bruce Murphy
Murphy’s Law

How Sen. Kohl Will Profit From Your Taxes

By - Jul 23rd, 2001 03:47 pm
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Everybody knows the Milwaukee Bucks are losing money. Owner Herb Kohl, vice-president of business operations John Steinmiller, Milwaukee Journal sportswriters, and national magazines have told us the Bucks are at the bottom of the National Basketball Association and are bleeding red ink. That’s why the team needs a taxpayer bailout to bring in more revenue.

Records of the state tax paid by the Milwaukee Bucks shows the team has been profitable for eight straight years, including the strike-shortened season of 1998-’99.

In fact, records of the state corporate income tax paid by the Milwaukee Bucks show the team has been profitable for eight straight years and for 11 of the last 14 years. Even in the strike-shortened season of 1998-’99, the Bucks made a profit. And the team seems likely to show a profit for the ninth-straight year, given that last season earned the Bucks substantial additional revenue from their long run in the playoffs.

This contrasts with claims made by Kohl and others. Forbes magazine’s annual ranking of sports franchises concluded the Bucks lost $14.9 million for the 1998-’99 season. In fact, the team’s net corporate tax paid shows it made a profit of $26,152.

For the next season, Forbes estimated the Bucks lost $13 million. Steinmiller said the figure was inaccurate because it didn’t reflect undisclosed expenses. In fact, the team made a profit of $24,797.

For the last two years, Kohl has told the Milwaukee Journal his team is losing money. “I’ve said we operate in the red, but I never felt it served any purpose to be more specific than that,” Kohl said. “We are a business that is laying out its situation honestly and openly.”

Based on assurances from Bucks representatives that the team’s situation is dire, civic leaders have concluded the Bradley Center must be renovated in order to provide more revenue for the Bucks. Robert Milbourne, executive director of the Greater Milwaukee Committee, the elite group of business leaders, declared, “the Bucks are losing money. There’s no question about that. Bringing in [general manager Ernie] Grunfeld, [coach] George Karl, and signing players like Ray Allen. The spending they’re doing is significant.”

But Bill Blake, a former owner who, along with co-owner Jim Fitgerald, sold the Bucks to Kohl, says “It would surprise me if Herb was not keeping his expenses and revenues in line. It’s not his personality to run up costs.”

The value of Kohl’s team has risen from $19 million to $131 million and will rise higher if taxpayers pay to renovate the Bradley Center.

Blake, by way, says the Bucks made a modest profit in eight of the ten years he was an owner of the team, which suggests the team has been out of the red for most of its last 25 years. But the real value of the business, he says, comes with its resale. “A mutual fund doubles your investment money in five years. We got a six times return over ten years. We bought the team for $3 million and sold it for $19 million.”

Since Kohl bought the team in 1985, its value has risen from $19 million to $131 million, according to Forbes’s annual rankings. And the magazine has generally been conservative in its estimates. It listed the Seattle franchise as worth $187 million and it sold for $200 million a few months later: it listed the Dallas Mavericks at $167 million, and a recent sale of much of its stock pegged the team value at $280 million.

One key to franchise value is the arena being used and the various revenue centers it has. As recently as 10 years ago, the Bucks ranked 16th among 27 franchises because its deal with the Bradley Center was so attractive. But as other teams have added sports bars and restaurants, club seats and other revenue-generating amenities, they have passed the Bucks franchise, which now ranks second last among 29 teams. In short, if the Bradley Center is renovated, and restaurants and other retail businesses are added, the Bucks will see their $131 million value rise significantly.

Much has been made of Kohl’s promise that if he ever sells the team, it will be to a local owner. Marc Ganis, president of Sportscorp., a Chicago-based sports valuation firm, says this will depress the value and is “to Sen. Kohl’s credit.” But Blake and Fitgerald also sold locally, and as a result, probably got 25% less, Blake estimates. And it was still a huge return.

Kohl may have lost money for a few years. The net tax records show he did not pay a tax for the 1985-’86, 1989-’90, 1990-’91, and 1991-’92 years, which means the team lost money or broke even. But franchises typically show paper losses in their first five years or more, because the law allows them to depreciate their player contracts, while also including salaries as a cost, which in effect lets them double count the cost of players. As a result, says Blake, a sports team “can have high revenues and high depreciation.”

Generally, the courts allow an owner to depreciate half the purchase value of the team for this, or about $9.5 million for Kohl. Given the prevailing tax rate of the time, Kohl would have collected a tax break worth about $4 million. Without this, the team might have shown a profit of that amount in his early years of ownership.

Kohl also benefited from the fact that philanthropist Jane Pettit paid for building the Bradley Center. Even in the 1990s, when taxpayer bailouts have been common, NBA teams paid, on average, for 64% of the costs of a new arena, according to a study by Prof. Frank Pfeiffer of the University of Charlotte.

The Bucks do not get as big a cut of Bradley Center revenues as many NBA teams. Most owners get a much higher percentage of suite revenue, for instance. But, unlike Kohl, they also contributed to the cost of constructing the building.

David Skiles, executive director of the Bradley Center, says it would be inappropriate to ask Kohl for a contribution to a renovation, given his “incredible generosity” in buying the team. In fact, the Bucks have been a very profitable investment for Kohl, whose net worth is now estimated at $300 million by Roll Call, making him the third wealthiest member of the U.S. Congress. Any subsidy of the Bradley Center will simply assure Kohl’s investment gets an even better return, while his net worth rises all the higher. Good luck selling that goal to taxpayers.

This article was originally published by Milwaukee World.

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