Calculating the Salary Cap

We’ve all been operating under the assumption of a $56.1 million projected salary cap, which was provided by Commissioner Stern prior to the playoffs. How did he come by that figure?

During July Moratorium, the league will project both basketball-related revenues (“Projected BRI”) and player benefits for the upcoming season. They will then look at the previous season’s Projected BRI to see if it was below the actual results (“BRI”). They will use these two data points to calculate the salary cap.

The league will take 51% of Projected BRI, subtract projected benefits, and make adjustments if the previous season’s BRI was below projections. They will then divide the result by the number of NBA teams to arrive at the cap.

( Projected BRI * 51% – Projected Benefits – (Projected BRI – BRI from last season, only if positive) ) / 30

This season’s BRI is almost certain to fall below original projections. I estimate that last July the league projected BRI growth of 1.6%. At the same time, they issued a warning that BRI could fall as much as 5%-10%, leading to original salary cap forecasts of $50.4 million to $53.6 million. The revised BRI decline of 0.5% then led to a bump in forecasts to $56.1 million.

Why would the league forecast BRI growth of 1.6% and issue a warning it could fall by as much as 10% at the same time?

The answer lies in how Projected BRI is determined.

It would seem the league could control the salary cap by producing a Projected BRI that best suits their needs. However, this is not the case. There are specific and defined rules by which the league needs to determine Projected BRI.

For purposes of projecting BRI, revenues are broken down into two classes: broadcast and related revenues (like TNT) and all other. Since broadcast revenues are generated from long-term contracts, the amount that applies to the upcoming season can typically be accurately forecasted. Therefore, only the other revenues are subject to subjectivity. In order to avoid that subjectivity, the other is projected by taking the previous season’s other revenue and increasing it by 4.5%.

That’s it. It’s really quite an easy formula.

The hard part, and the part that is always hotly debated, is what constitutes “revenue.”

Basketball-related revenues include all the sales generated by all the basketball teams, whether through ticket sales, concessions, novelty items, parking, arena naming rights and various other items. It also includes national broadcast revenues, network cable television contracts and various other items. Sounds easy enough. But in the real world, it’s much more complicated.

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Backing into the historical salary cap calculations is not an easy task. The league does not make historical Projected BRI figures public, which is clearly the single biggest contributor. However, it is possible to do so – and thus reverse engineer the historical salary caps – using complex algebraic equations. I do so here.

http://heathoops.net/salary-cap/

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