NBA’s 2016-17 Salary Cap Now Projected to Hit $94 Million
Salary cap projections for the 2016-17 season keep rising, backed by exploding revenues.
When the NBA announced its new nine-year, $24 billion national television rights deals with ESPN/ABC and TNT in October 2014, which kick in next season, initial projections for the 2016-17 salary cap came in at about $86 million.
Now, just two months later, the league has raised its projections once again. The NBA sent a memo on Friday afternoon to all 30 teams informing them that the 2016-17 salary cap is projected to be $94 million, while the luxury tax threshold is projected at $113 million.
Despite the substantial increase, even those revised figures appear to be slightly conservative. The league’s latest guidance is rounded to the nearest million-dollar, even though it is likely that, internally, it is utilizing a more precise (if undoubtedly preliminary) estimate. Leveraging the information provided in the memo, the more precise figure can be calculated. The league actually appears to be projecting a salary cap of $94.4 million and a luxury tax threshold of $113.6 million.
Why the $2.4 million increase in the salary cap projection over the past two months alone? According to the league, the increase was based on “business outperformance since the previous estimates.”
In short, that means that with the audit of the books for the 2015-16 season now underway, revenues continue to wildly outpace even the NBA’s own estimates. The latest cap increase suggests that in the past two months, the league has raised its 2015-16 revenue estimate by another $67 million, to a whopping $5.3 billion!
How much is that? It would represent a $465 million increase over last season alone, and a more than $1.0 billion increase over the last three years.
When the latest Collective Bargaining Agreement was executed in 2011, the parties were projecting 2015-16 revenues of just $4.87 billion.
The huge increase in revenue is coming from a variety of sources.
Gate receipts, which grew by about $100 million in 2014-15, will spike again, along with related concessions and merchandise sales, thanks in large part to the Golden State Warriors’ record-breaking 73-win season, the retirement tour of the Los Angeles Lakers’ Kobe Bryant, and a long and successful NBA playoffs (the Conference and NBA Finals will have gone a cumulative 20 games when they are completed on Sunday, just one shy of the 21-game maximum).
Commissioner Adam Silver has also landed several new sponsorship deals and extensions of existing arrangements at rates that far outpace their previous amounts.
Anheuser-Busch InBev extended its partnership with the NBA, which began in 1998, for another four years in December. Financial terms of the deal were not disclosed, but the new deal, which kicked in immediately, is considered to be among the league’s largest.
PepsiCo replaced Coca-Cola as the league’s official beverage partner after 29 years, in a five-year deal struck in April 2015 that kicked in this past season. Financial details were not disclosed, but PepsiCo is also considered one of the league’s largest sponsors.
International revenues are also booming.
Internet giant Tencent started a deal with the NBA in July to provide live games and other programming in China. The pact, worth $500 million over five years, also has a revenue sharing component that could add an additional $200 million.
The story is the same on the local TV front, where both the Atlanta Hawks and New York Knicks started new contracts this past season.
Add it all up, and it comes to the projected all-time NBA record revenue total of $5.3 billion.
With its latest revenue forecast for the current season in hand, the league then set out to update its revenue forecast for the upcoming 2016-17 season. On top of the $5.3 billion baseline, the league added in two things: (i) the incremental revenues called for in the new national TV rights deals, which will vault higher by a seemingly ludicrous $1.1 billion next season, and (ii) projected growth elsewhere. In doing so, it arrived at a $6.6 billion figure.
When the last Collective Bargaining Agreement expired in June 2010, NBA revenues were $3.8 billion. Six seasons later, they’re projected to reach $6.6 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.
Revenues are growing so fast that teams are having a difficult time catching up in doling out new contracts to their players.
According to the latest Collective Bargaining Agreement, players are entitled to between 50 and 51 percent of league-wide revenues (the exact amount is determined when the revenue figure is finalized) in the form of salaries and benefits. Yet, despite the influx of massive new contracts, teams aren’t spending anywhere near enough to meet that standard.
The NBA is currently expecting that players will fall short of receiving their fair share of 2015-16 revenues by $133 million. Any shortfall, as determined during July Moratorium, will be paid to the players in a lump sum after the season. At current levels, each NBA team would need to kick in $4.4 million.
The salary cap for 2016-17 will be adjusted higher by the amount of the per-team shortfall for the 2015-16 season, which represents the final piece of the league’s latest calculation.
The resulting $94.4 million salary cap projection would, in turn, increase maximum salary payouts.
A player with 0 – 6 years of NBA experience (such as Hassan Whiteside) can now expect to receive a maximum first-year payout of $22.2 million, while a player with 7 – 9 years of NBA experience (such as Kevin Durant) can now expect to receive a maximum first-year payout of $26.6 million, and a player with 10+ years of NBA experience (such as LeBron James) can now expect a maximum first-year payout of $31.0 million.
In the 1997-98 season, Michael Jordan made $33.1 million. It’s still the highest single-season NBA salary ever.
At the time, the salary cap was $26.9 million. The concepts of maximum salaries and the luxury tax didn’t exist back then, and teams were allowed to exceed the cap to re-sign their own free agents. So in the summer of 1997, Jordan signed a one-year, $33.1 million contract with the Chicago Bulls that would be impossible under the maximum salary rules, which were established in response to the contract starting with the 1999 Collective Bargaining Agreement.
If LeBron James were to re-sign with the Cleveland Cavaliers at the max this summer, based on current salary cap projections, he could potentially eclipse that total in the second year of his contract ($33.4 million).
The latest projections would also increase the maximum potential salary cap space the Miami Heat would have available to spend this summer.
Miami will start the summer with six players under contract for the 2016-17 season – Chris Bosh, Goran Dragic, Josh McRoberts, Justise Winslow, Briante Weber ($219K guaranteed) and Josh Richardson (non-guaranteed). Those six players will cost a combined $49.8 million.
At a $94.4 million salary cap, the Heat would have — after subtracting that $49.8 million, the cost to retain the right to re-sign Tyler Johnson to a contract that exceeds the cap, and necessary roster charges — up to $42 million or so of cap space with which to spend on free agents.
The salary cap, luxury tax and maximum salary figures will all be finalized upon completion of the league-wide audit on July 6th. Free agency will officially begin the following day.