NBA Sets Salary Cap and Tax Level Numbers for 2014-15

On Thursday July 10 at 12:01 a.m. ET, the NBA’s 2014-15 season begins. That’s when the league’s salary cap, luxury tax threshold, maximum salaries and other figures all adjust to their new values.

Most NBA business ceases for the first several days of July as the league conducts its annual audit to determine the league’s revenues from the previous season. With that figure in hand, the league huddles with the players association to project revenues for the coming season, and uses it to calculate the new cap, tax and related figures.

Revenues on the season came in at an all-time high $4.52 billion, up 5.3% from the previous year and more than $50 million higher than initially projected. On that basis, the league then projected revenues for next season to increase another 4%, to $4.71 billion.

To get the salary cap for the season ahead, they took 44.74% of that projected amount, subtracted projected benefits, and divided by 30 (the number of teams in the league). Adjustments are then made to the cap if players received too much (or too little) in salaries and benefits for the completed 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 finalized figures were announced at 5 p.m. Wednesday in a memo distributed by the league to all member teams.

The new salary cap has been set at $63.065 million, a 7.5% increase from last season. That is slightly less than the $63.2 million estimate teams had been using since April, but higher than previous forecasts. Last year at this time, the league initially forecasted a cap of $62.5 million, before increasing it to $62.9 million in November and again in April.

The new luxury tax line will be $76.829 million, a 7.1% increase from last season. Tax projections started at $76.1 million last year at this time, before rising to $76.6 million in November and $77.0 million in April

The salary cap and luxury tax levels from this past season were $58.679 million and $71.748 million, respectively.

The growth rates in the cap and tax levels are substantial, but also somewhat misleading. Some of it is driven by the reversal of artificially depressed figures for this past season. The cap and tax for this past season should have been about $59.7 million and $72.7 million respectively, but the league imposed a $1 million one-time downward adjustment to each figure because league-wide salaries from the prior season were too high – a relic of the transition to the new CBA and the amnesty waivers it forced. Without the salary-related adjustment, the cap and tax would have grown by 5.7% and 5.6%, respectively.

There were no salary-related adjustments this time around, as teams have adapted their payrolls to account for the lower spending allotments under the current collective bargaining agreement. According to the CBA, the players were entitled to receive 50.09% of the league’s revenues in 2013-14 – no more, and no less. They actually received 51.78%, but the appropriate adjustments were made via the escrow system. Ten percent of each player’s paycheck throughout each season is withheld and deposited into a separate escrow account. At the end of each season, if the players earned too much, the league takes back the excess. To knock the players down from what they received (51.78%) to what they were entitled to receive (50.09%), $76.4 million was withdrawn from the escrow account this year and returned to teams, with the remaining $138.0 million returned to the players. The overage was small enough that no adjustment to the salary cap or luxury tax was warranted.

When the salary cap increases, so too do maximum player salaries, which are also determined on the basis of projected league revenues. For 2014-15, players with fewer than seven years of NBA experience will be able to receive up to $14,746,000, those with seven to nine years will be able to receive up to $17,695,200, and those with more than 10 years will be eligible for up to $20,644,400. The max for each of LeBron James, Chris Bosh and Dwyane Wade will be the latter figure, which is roughly equivalent to the salaries from which they opted out last month.

The league, as it typically does, used a 4.5% rate as its guide post for revenue growth from sources other than its national TV rights deals (which amounts were set at the time the deals were signed in 2007), 4.1% overall, to calculate the 2014-15 salary cap. That growth, however, figures to change in the years ahead.

The league provided teams with early projections for the 2015-16 salary cap and tax threshold in the memo as well. Their initial projections are for a salary cap of $66.3 million and a tax level of $80.7 million. The revenues that underlie these projections are approximately $4.94 billion, representing a more robust 5% expected rate of growth (5.5% from sources other than national TV rights). The league will provide teams with updates to these projections over the course of the upcoming season.

The following year however, the 2016-17 season, is when the massive revenue growth happens. 2016 is when the NBA’s current national TV deal expires – an eight-year agreement that promises pro basketball a total of $930 million per year from ESPN/ABC and TNT, divided equally among all thirty teams. Media rights deals for sports programming has exploded in the intervening years in the television landscape that social media sculpts, as networks bid up prices to secure access to one of the few remaining DVR-proof properties. The new deal could top $2 billion over eight or more years, on average. The $1.1 billion jolt won’t be felt immediately, as these deals contain escalator clauses in them, but it would be reasonable to expect a jolt of somewhere closer to $750 million, maybe more maybe less. That would imply revenue growth of more than 20%.

The new salary cap figure means the Heat will be capable of producing as much as $60.0 million of cap space this summer, with only Norris Cole under guaranteed contract ($2.0 million) and only Shabazz Napier under exclusive draft rights ($1.0 million), though it remains unclear as to whether the Heat will choose to do so. The figure does not include the salary cap holds for the team’s free agents (which can all be renounced) or roster charges (which technically don’t reduce cap space, but rather force a team to re-allocate its cap space under certain circumstances).

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