Salary Cap and Luxury Tax Projections for 2014-15 Keep Rising
The NBA has issued new projections for the 2014-15 and 2015-16 salary cap and luxury tax thresholds. All 30 teams were informed this week via league memorandum that the 2014-15 cap and tax threshold are now projected to be $63.2 million and $77.0 million, respectively. The numbers for 2015-16 are now projected to be $66.5 million and $81.0 million, respectively.
It should be noted that these are non-binding forecasts that have been circulated more than months before the official salary cap and luxury-tax threshold for the 2014-15 season are announced in early July, following a league-wide audit (that’s what July Moratorium is for). As part of the audit, accountants jointly appointed by the NBA and the player’s association finalize the total revenue haul during the past season and, on that basis, project the revenues for the upcoming year.
They then take 44.74% of that projected amount, subtract projected benefits, and divide by 30 (the number of teams in the league) to get the salary cap for the season ahead. Adjustments are then made to the cap if players received way too much (or way too little) in salaries and benefits for the then prior season relative to the finalized revenue figure; this serves as a mechanism to maintain the integrity of the agreed-to revenue spit between owners and players. The luxury tax uses a similar formula, but is based on 53.51% of projected revenues.
The salary cap and luxury tax values for the current season are $58.679 million and $71.748 million, respectively, which means the new cap projection for next season represents a 7.75% increase over this season. This is a pretty big jump — the league’s baseline assumption for year-to-year increases is 4.5%.
Part of that growth is something of an illusion. Some of it is driven by the reversal of an artificially depressed salary cap for the current season. The cap for this season should have been about $60 million. But the league imposed a $1 million one-time downward adjustment because league-wide salaries were too high – a relic of the transition to the new CBA and the amnesty waivers it forced. Utilizing the single-use amnesty provision, which the vast majority of the league has done, removes the salary of its waived player from the team’s cap and tax calculations, but does not remove the underlying salary obligations that count toward league-wide salary. However, based largely on the burn-off of amnesty payouts (which were $109 million this season) and teams’ ability to adjust their spending to the new and harsh realities of today’s progressive luxury tax environment, we shouldn’t ever see a downward adjustment again.
The cap for this season was based on projected revenues of $4.47 billion. It now appears that the league may have underestimated. The data suggests the league is currently estimating revenues for this season to come in at $4.50 billion.
On that basis, the league has revised upward its projections for future seasons as well. The league is now predicting revenue growth over the next two seasons of more than the 4.5% baseline assumption – current growth forecasts have instead been boosted to 5.0% in each season, to $4.725 billion in 2014-15 and $4.961 billion in 2015-16.
In arriving at its current $63.2 million cap projection for next season, the league is taking its $4.725 billion revenue projection, multiplying it by 44.74%, subtracting $217 million in projected benefits, and dividing the result by 30. The luxury tax calculation replaces the 44.74% with 53.51%.
This is the second time that forecasts have increased over the course of the season. Last July, the cap and tax projections for 2014-15 were $62.5 million and $76.1 million, respectively. By early November, the league had already revised its projections to $62.9 million and $76.6 million. And now they’re projecting $63.2 million and $77.0 million, which indicates that not only is the league making a lot of money, it’s coming in even faster than they anticipated.
The players are guaranteed a percentage of whatever money comes in. The guarantee calls for 50% of forecasted revenues (the forecasts were made in 2011), plus or minus 60.5% of the amount by which the actual revenues exceed (or fall short of) those forecasts, with hard limits of 49% and 51% of the actual revenues.
The original revenue forecast for 2014-15 was $4.66 billion, so with an actual revenue of $4.725 billion, if it comes to fruition, the players would get 60.5% of the difference, or $39.3 million, on top of their 50% guarantee ($2.33 billion), for a total of about $2.369 billion, or 50.14% in total.
This is all very good news for the Miami Heat.
If the Heat is able to keep LeBron James, Dwyane Wade and Chris Bosh — who all have early termination options in their contracts this summer but haven’t said whether they will use them — then they will be above the salary cap.
It would also mean the Heat will be above the luxury tax threshold, and the tax is a big deal to the Heat because it becomes a lot more punitive next season. Because the Heat was a tax-paying team this season and the previous two, Miami will have to pay a “repeater tax” next season, combined with the regular incremental tax.
Bottom line: If the Heat is $5 million over the tax threshold next season, its tax bill would be nearly $9 million. If the Heat is $10 million over, around where they were this season, the tax bill would top $26 million. With a modest increase to $15 million over, the tax bill would reach a whopping $44 million.
So let’s say the Big Three stays in Miami at the salaries they are due to earn next season in their current contracts: $20.59 million for both James and Bosh, and $20.048 million for Wade. That would add up to $61 million.
Throw in the $2.15 million due Norris Cole, $4.6 million for Udonis Haslem (who assuredly won’t opt out) and $1.6 million for Chris Andersen (who might not opt out, either), and that’s $69.5 million.
And Miami would still have at least seven more roster spots to fill, which would put it over the tax threshold. One could go to center Justin Hamilton, who has an $816,482 non-guaranteed salary for next season. Others could go to the Heat’s first-round draft pick ($1.1 million), its second-round draft pick, and/or 2013 second-round draft pick James Ennis.
But with a tax threshold of $77 million, the extra maneuverability could make it easier for Miami to re-sign Mario Chalmers and/or use its taxpayer mid-level exception (which will be $3.27 million) and/or use its $2.2 million trade exception (acquired in the Joel Anthony/Toney Douglas trade) without sustaining a crushing tax hit.