Home > Commentary > NBA Salary Cap For 2015-16 Hits $70.0M, Luxury Tax At $84.7M

NBA Salary Cap For 2015-16 Hits $70.0M, Luxury Tax At $84.7M

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On Thursday July 9 at 12:01 a.m. ET, the NBA’s 2015-16 season begins. That’s when the league’s salary cap, luxury tax threshold, maximum salaries and other figures all adjust to their new values; when free agents can be can signed; and when players can be traded.

Most NBA business ceases for the first several days of July as the league conducts its annual audit to determine its 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 for the now-completed 2014-15 season came in at an all-time record $4.84 billion, up 7.0 percent from the previous year (the highest annual growth rate for the league over a full season in the last eleven years), smashing projections for the season issued last year at this time (off of which the salary cap was based) by a whopping $132 million!

On that basis, the league then projected revenues from sources other than national TV rights to increase by the standard 4.5 percent and added them to the revenues call for in the national TV rights deals (which were set when the deals were signed in 2007), which came to a total of $5.04 billion.

To get the salary cap for the season ahead, the league takes 44.74 percent of that projected revenue amount, subtracts projected benefits, and divides by 30 (the number of teams in the league). The luxury tax uses a similar formula, but is based on 53.51 percent of projected revenues. Adjustments are then made to the cap if players received either too little or too much in salaries and benefits for the just completed season relative to the finalized revenue figure.

The players are contractually guaranteed to receive an exactly 50 percent share of initial revenue forecasts that were determined when the CBA was originally negotiated in 2011, plus or minus 60.5 percent of the amount by which actual revenues exceed or fall short of the forecasts, with a lower limit of 49 percent of actual revenues and an upper limit of 51 percent of actual revenues.

To ensure players do not receive more than their fair share of league-wide revenues, 10 percent of players’ salaries is withheld from their paychecks and deposited into an escrow account. At the end of each season, the players’ guaranteed share of revenues is compared to the amount they were actually paid in salaries and benefits. If the players received more than their fair share of revenues, then the overage is returned to the teams from the escrow account. The players then receive any escrow money that remains. To help ensure such an overage does not happen again, if there is an overage and the system is getting close to exceeding what the league can get back through the escrow system, then the following season’s salary cap (and tax level) may be reduced in order to put on the brakes.

For the 2014-15 season, $218.6 million was deposited into the escrow account.

If the players received less than their fair share of revenues throughout the season in the form of salaries and benefits, the league returns the full amount of the escrow and simply cuts the players a check for the difference. To help ensure such an underpayment does not happen again, the league increases the following season’s salary cap and tax level equal to the amount of the shortfall divided by the 30 teams in the league. The artificially inflated salary cap promotes higher spending on player salaries, and thus decreases the likelihood of a shortfall in the following season.

The system is designed such that the salary cap for each team is set at 44.74 percent of revenues, but the players are actually entitled to receive between 49 and 51 percent of revenues (the exact percentage is tied to the league’s financial performance).

In the past, this has never really been a problem. The NBA has a soft salary cap. Almost every team in the league used to exceed the salary cap by a large enough amount every season – many even exceed the luxury tax – that the players always wound up receiving their fair share of revenues. Typically, in fact, the players wound up getting far more than to which they were entitled, and the league’s escrow system would knock them back down.

Lately, however, it has become a far more significant problem. Punitive new cap rules — hard caps, increasing luxury tax consequences, etc. — coupled with more destructive roster construction models have caused teams to dramatically ratchet down their spending. For the first time ever, two teams failed to reach the league-wide minimum team salary requirement this past season. Eight teams ended the season below the salary cap (excluding cap holds). On the high end, a recording-tying low of five teams were taxpayers this year by a cumulative record-breaking low of just $26 million.

With league-wide revenues of $4.84 billion for the 2014-15 season, $180 million higher than the $4.66 billion originally forecasted when the CBA was negotiated, players were entitled to 50.39 percent of revenues, or $2.44 billion, in salaries and benefits. Throughout the season, they received just $2.38 billion, a $57.3 million shortfall.

The league will therefore return to the players the full $218.6 million from the escrow account, and cut a check for the additional $57.3 million shortfall. It will mark the largest shortfall check sent to players in league history.

The shortfall, in turn, caused an increase to the salary cap for the 2015-16 season of $1.9 million.

To arrive at its salary cap and luxury tax figures, the league took its $5.04 billion revenue projection, multiplied it by 44.74 percent and 53.51 percent respectively, subtracted projected benefits, and divided the result by 30. It then added the $1.9 million adjustment to the final tallies. On that basis, the new salary cap and tax thresholds were set.

The new salary cap has been set at $70.00 million, an 11.0 percent increase from last season. That is substantially larger than the $66.3 million initial projection from last year at this time (which contained no salary-related adjustment) and the $67.1 million project issued last April (which contained a $500K salary-related adjustment).

The new luxury tax line been set at $84.74 million, a 10.3 percent increase from last season. That is substantially larger than the $80.7 million initial projection from last year at this time (which contained no salary-related adjustment) and the $81.6 million projection issued last April (which contained a $500K salary-related adjustment). 

When the salary cap increases, so too do maximum player salaries, which are also determined on the basis of projected league revenues. For 2015-16, players with fewer than seven years of NBA experience will be able to receive up to $16,407,500, those with seven to nine years will be able to receive up to $19,689,000, and those with more than 10 years will be eligible for up to $22,970,500.

The new figures were announced in a memo distributed by the league to all member teams late Wednesday.

As part of the memo, the league also informed member teams that it is holding constant its cap and tax projections for the 2016-17 season, when revenues will explode higher with the introduction of the league’s new national TV money from ESPN/ABC and TNT, and beyond.

The projected 2016-17 salary cap remains at $89 million, and the tax level remains at $108 million.

At those levels, players with fewer than seven years of NBA experience will be able to receive a starting salary of up to $20.9 million, those with seven to nine years will be able to receive up to $25.0 million, and those with more than 10 years will be eligible for up to $29.2 million.

Given that the finalized salary cap for 2015-16 shattered previous expectations, it may surprise you that the league didn’t increase projections for 2016-17 as well.

They actually did. Just not in a way that you might have guessed.

While league utilized a $5.04 billion revenue projection for the 2015-16 season in its $70 million cap figure, it is actually expecting revenues for the 2015-16 to come in at closer to $5.12 billion. That, in turn, caused the league to increase its revenue projections for the 2016-17 by about $125 million, to $6.4 billion! Which increased the 2016-17 salary cap projection by about $2 million.

But if higher revenues caused the 2016-17 cap projection to increase by $2 million, why did the league keep it constant?

The answer lies in what players are projected to earn in salaries and benefits for the 2015-16 season.

Despite the whopping $2.5 billion in new contract money doled out thus far, the league is projecting that the players will once again fall short of receiving their fair share of revenues in 2015-16.

There are multiple problems contributing to the lack of spending around the league, including a desire of many teams across the NBA to retain maximum flexibility for the summer of 2016, an unwillingness to cross the tax threshold given the league’s new punitive consequences, and an inability to catch up to a rapidly evolving salary cap environment.

When salary caps jump so quickly, it can be difficult for teams to catch up with their spending. In many cases, a large portion of a team’s roster is already set based upon the rollover of multi-year contracts that were signed under the auspices of a lower salary cap. When the cap then rises significantly, teams can be left with a large amount of cap space and a limited number of quality players on which to spend it.

The burn-off of amnesty payouts only exacerbates the issue. The amnesty provision was negotiated into the current CBA to help ease the transition into the new and more restrictive salary cap rules. It is a one-time opportunity for teams to release one player via the waiver process and remove him from their team salary and luxury tax computations. Teams are still required to pay these players, of course, and their salaries still count toward the players’ share of revenues.

Only three players across the NBA are still eligible to be waived via the amnesty waiver process – Al Horford, Mike Conley and Kevin Durant – and, in practical reality, not a single one will be. In addition to that, there will be no remaining salary payouts to players waived via the amnesty provision in previous years. Amnesty payouts will therefore fall from $87 million last year to $0 this year. That’s $87 million of salary that needs to be re-spent somewhere.

The league is projecting that teams won’t get all the way there. They are projecting teams to spend roughly $2.33 billion on salaries, which would equate to a shortfall of roughly $40 million. If it holds up, the league would once again cut the players a check for that amount this time next year. It would then cause a $1.3 million upward adjustment to the 2016-17 salary cap.

That shortfall, however, is actually substantially less than the league was previously projecting.

Back in April, the league was projecting an underpayment to players of $100 million for the 2015-16 season. That, in turn, caused a $3.3 million upward adjustment that was incorporated into the initial $89 million 2016-17 salary cap projection. The reduced $40 million projected underpayment causes just a $1.3 million adjustment. The difference: a $2 million decrease in the 2016-17 cap projection.

And so, if increasing revenue forecasts cause salary cap projections for 2016-17 to increase by $2 million and increasing player salary and benefits forecasts cause salary cap projections for 2016-17 to decrease by $2 million, the net effect is to keep cap projections for 2016-17 constant.

The league also provided updated projections for five years into the future. The league’s revised guidance was as follows:

 ($MM) 2016-17 2017-18 2018-19 2019-20 2020-21
Salary Cap $89 $109 $102 $104 $109
Luxury Tax 108 129 123 126 133

Projections beyond 2016-17, however, are something of an illusion.

They suggest that revenues will continue to grow sharply in 2017-18. But the vast majority of the $19 million cap increase projected for that season has absolutely nothing do to with revenue growth at all but rather with another, this time shocking, salary cap adjustment.

When the salary cap jumps from $70 million next season to a projected $89 million in 2016-17, nearly every team in the NBA will be flush with cap space. In fact, teams will have so much cap space that they will certainly not be able to ramp up their spending quickly enough to accommodate the increased spending power.

Teams around the league will have far too much cap space upon which to compete for a select few quality players, leaving many in the lurch with nobody on which to spend it. Many may not even reach the salary cap. For the first time ever (in a tax-triggered season), the league could be facing a situation where not one team in the entire NBA will pay the tax.

In fact, a whopping $14 million of the $19 million increase projected for the 2017-18 salary cap is the result of an adjustment that is based on the assumption that players will not receive their fair share of revenues from the season prior, suggesting that the league is forecasting an underpayment by teams to its players of $430 million when the new TV deal kicks in in 2016-17!

But that’s not the only problem.

League-wide revenues will eventually stabilize. And when they do, payrolls around the league will catch up. And when that happens, there won’t be any more payroll-related salary cap adjustments. But when you have a massive adjustment inflating the salary cap one year and that adjustment disappears the next year, the cap will naturally crater. And so, naturally, the league is projecting the cap to fall from $109 million in 2017-18 to just $102 million in 2018-19, despite what one could assume will be a steady increase in league-wide revenues.

The result of these salary cap adjustments are cap levels that will keep spiking and catering based on factors that have nothing to do with revenue performance.

(This, by the way, is one of several reasons why I have been so strongly against the salary cap calculation methodology agreed to by the league and players association in their collective bargaining).

But, more importantly, none of it may ultimately matter.

Any projections that extend beyond the 2016-17 season should be taken with a great deal of caution. The collective bargaining agreement has a mutual opt out provision for both the players and owners for after the 2016-17 season, and it will likely be exercised by the Dec. 15, 2016 deadline. And any new collective bargaining agreement to follow will likely correct for its salary cap calculation shortcomings and avoid circumstances that cause massive one-time swings (as well as make other adjustments about which I will write when the deadline approaches). This remains true even if neither sides elects to opt out, and instead the sides agree to simply amend the existing collective bargaining agreement.

No matter what ultimately happens in the years to come, one thing is clear: The future of the NBA seems brighter than ever!

Categories: Commentary Tags: ,
  1. Eric
    July 9th, 2015 at 09:42 | #1

    How did this lead to the Gerald green signing? I figure they are using the tax payer exception but wouldn’t this cost the heat 2.5x that? Don’t get it, love the get, worried about the money and still don’t think it vaults the heat into contention not even in the east

  2. July 9th, 2015 at 10:15 | #2

    @Eric
    Green will be signed at the minimum.

    Assuming a 15-player roster, adding Green and subtracting another produces no significant impact on the Heat’s total payroll obligations.

  3. Eric
    July 9th, 2015 at 13:29 | #3

    Its kinda shocking that Gerald Green could be had at the minimum.

  1. July 13th, 2015 at 17:56 | #1
  2. July 13th, 2015 at 17:56 | #2
  3. July 16th, 2015 at 02:20 | #3
  4. July 17th, 2015 at 02:10 | #4

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