League-Wide Spending is Down, Keeping Luxury Tax Projection Up

Those among us who have been biding our time until the start of the 2013-14 NBA season by creating hypothetical machinations whereby the Miami Heat maintains and extends its current dominance into the 2014-15 season and beyond are quietly getting some good news.

League-wide spending is down.

Which means salary cap and luxury tax projections for next season are staying up.

The league is currently projecting a 2014-15 salary cap of $62.5 million and a tax level of $76.1 million. Pending league-wide revenue performance during the course of the season, these projections seem fairly safe for now.

The cap and tax levels are set by calculations based on projected amounts for revenue (termed BRI) and benefits for the upcoming season. The projected BRI is negotiated by the league and players’ association. Each year the sides meet to agree on an amount. Barring any adjustments that are necessitated, they typically use the projected revenues from national broadcast rights (which is determined in advance), plus the BRI for the previous season (other than national broadcast rights) increased by 4.5%.

The salary cap calculation takes 44.74% (53.51% for the tax level) of the league’s projected BRI, subtracts projected benefits and then divides the total by the number of teams in the league. Adjustments are then made if total salaries and benefits paid to the players in the season prior were significantly higher or lower, as a percentage of league-wide revenues, than was agreed in the CBA.

The current 2014-15 projections assume a 4.5% increase in revenues. They are based on an estimated $4.672 billion of projected BRI and $217 million in projected benefits (including $47 million of benefits, or 1% of BRI, to be allocated to the player benefits pool). They assume no salary-related adjustments.

The rest is basic math. Simply multiply the projected BRI by the respective percentages for the cap and tax threshold, subtract projected benefits, and divide the difference by 30. That’s it.

But these are early estimates. We’ve seen them change before. We saw them change for this season.

At the start of the 2012-13 season, the league issued preliminary guidance for 2013-14 of $60 million for the salary cap and $73 million for the tax level.

That never happened. When the numbers were finalized a year later, the salary cap was set at just $58.679 million and the tax level at just $71.748 million. These numbers are now in effect. They are significantly smaller than first projected.

It was a quiet revelation that meant very little to most Heat fans. But it had very serious ramifications.

The Heat adjusted to the miss, and the resulting consequences of the league’s new progressive tax system, by taking steps that were very unpopular with Heat fans. They utilized the amnesty provision to waive Mike Miller. They declined to utilize the Mid-Level Exception.

It was frustrating for us to consider transactions motivated purely by the savings. But it was financially necessary. Despite these actions, the decreased luxury tax threshold ended up costing the Heat in excess of $3 million. That may not sound like much, but consider this: without that luxury tax miss, the Heat could have utilized its Mid-Level Exception in full and finalized a 14-player roster at roughly the same cost as it is now paying. And had the Heat more creatively managed its team salary, it could have finalized a full 15-player roster that included a Mid-Level exception player for less money than it is paying today. Samuel Dalembert and Chris Kaman each wound up accepting MLE-type deals.

So why are the cap and tax projections for this season so far off from initial forecasts?

The issue that caused the drop had little to do with the revenues. They were growing largely as they should. The BRI projections off of which the finalized 2013-14 cap and tax figures are based are nearly identical to those initially forecasted the year before (just $10 million short, to be precise). The NBA continues to be a strong and expanding entity.

The problem was that the players earned too much of that expanding revenue stream. The lockout locked-in a baseline 50/50 split of league-wide revenues. Players are therefore entitled to a 50% share of those revenues (which can increase to as much as 51% or drop to as low as 49% based on whether revenues exceed or fall short of forecasts), which is paid to them in the form of salaries and benefits.

League-wide revenues last season were $4.293 billion. The players earned $2.109 billion in salaries and $205 million in benefits, for a total of $2.314 billion, or 53.89% of revenues.

While the league’s escrow system adjusted the players’ share back to their designated level (49.96%), it caused a $1 million downward adjustment to the 2013-14 cap and tax amounts. That, in turn, is why the finalized cap and tax numbers fell short of initial estimates.

The downward adjustment serves as an inducement for teams to maintain the integrity of the agreed-to revenue split. It kicks in when the players made so much in the season prior that the escrow system (which is funded with 10% of each player’s paychecks) barely had enough funding to reduce their share of revenues back down to the agreed-to level. It reduces cap space and increases the tax penalties of high spenders, causing teams around the league to reduce their spending in the following season.

It’s working.

This time around, things are looking better.

With the regular season about to get underway, league-wide spending is down.

League-wide revenues for this season are projected at $4.471 billion. Cumulative salaries are currently $2.142 billion(1) and benefits are projected at $210 million, for a total of $2.352 billion, or roughly 52.6% of revenues.

That’s still too much. But not enough to cause a downward adjustment to the 2014-15 salary cap and tax figures.

The adjustment takes effect only if the difference between what the players actually earn in salaries and benefits and what they are entitled to earn based upon their agreed-to split of revenues, called an overage, is at least 6.0% of what they actually earn in salary and benefits. So far this season, the difference is just 5.0%.

Things can certainly change. Revenues can fall short of expectations. Benefits can increase beyond expectations. New player contracts can be signed that call for additional salary spending to players.

While things are looking good so far, there’s not a whole lot of cushion.

The final league-wide revenue, player salary and player benefits figures will not be tabulated until July moratorium after the season ends. The finalized player salary figures can increase between now and then with new signings throughout the season, decrease with the release of players on less than fully guaranteed contracts, and change based on the determination of whether performance bonuses in various contracts were earned. Trades, unless they involve a player who has a trade bonus in his contract, will not affect these figures.

Assuming the league’s projected BRI and benefits figures for this season each prove reasonably accurate, an additional net $25 million in new salaries can be added throughout the season before the adjustment mechanism kicks in.

Once league-wide salaries figures reach $2.167 billion, that’s it. There’s no more room. The 2014-15 salary cap and tax figures would start to decline (again, assuming accurately projected revenue and benefits figures). They would each fall by $1,000 for every additional $30,000 or so in salaries added thereafter.

It would appear, at least for now, that the league’s 2014-15 projections – $62.5 million for the salary cap and $76.1 million for the tax – are safe from spending-related adjustment.

That’s great news for the Heat.

For almost two years, columnists have been writing, prematurely, about the inevitability of the Heat being forced to break apart its Big Three core prior to the 2014-15 season for financial reasons, as the introduction of the repeater tax was to make it prohibitively expensive to keep it together. Things appear to have changed rather dramatically.

We now have a clearer depiction of owner Micky Arison’s willingness to spend. We have a more accurate projection as to where the tax level will be. And we have a better sense for how truly dominant this team can be when completely healthy. If Wade, James and Bosh want to keep the core together – each has an early termination option after the season – it would now appear a far more manageable feat than ever previously predicted.

(1) This figure assumes the minimum required team payroll of $52.8 million for the Philadelphia 76ers. It also includes roughly $110 million in amnesty payouts. 

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