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NBA Lowers Its 2017-18 Salary Cap Projection From $107M to $102M

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The NBA’s salary cap projection for the 2017-18 season has dropped from $107 million to $102 million, according to a league memo distributed by the league to its member teams.

The luxury tax projection has dropped in turn, from $127 million to $122 million.

The reason for the drop had nothing to do with the league’s revenue growth projections, which continue to increase, but rather with increasing player salaries.

To arrive at a projected salary cap figure, the league must first project revenues for that season. The league then 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. These adjustments can be quite large.

The players are contractually guaranteed to receive a 51 percent share of those revenues in the form of salaries and benefits. 

To ensure players do not receive more than their fair share of league-wide revenues, 10 percent of their 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.

If the players receive 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.

With its earlier salary cap projections of $107 million for the 2017-18 season, the NBA had been projecting an underpayment to players of $375 million for the 2016-17 season. That, in turn, caused a $12.5 million increase in the projected 2017-18 cap.

With the massive amount of new contracts doled out thus far this summer, player salaries figure to be far higher than the league initially projected – still short of providing the players their fair share, but significantly less short than previously estimated. The league is now forecasting a shortfall of just $200 million. That, in turn, would cause a $6.7 million increase in the projected 2017-18 cap.

What was once a $12.5 million increase is now a $6.7 million increase, which implies a $5.8 million drop in the projected salary cap.

That the salary cap only decreased $5.0 million, versus the $5.8 million drop caused by shortfall increase, suggest that projected revenues, in fact, are now growing even more than initially projected. Revenues for the 2017-18 season are now projected to top $6.9 billion.

When the salary cap decreases so too do maximum player salaries, which are determined as a percentage of it.

For 2017-18, players with fewer than seven years of NBA experience are projected to receive up to $24.0 million, players with seven to nine years of experience are projected to receive up to $28.8 million, and those with 10+ years of experience are projected to receive up to $33.6 million.

Despite the unfortunate news for teams hoping to maximize their salary cap space for the summer of 2017, the news gets substantially better in the years thereafter.

The league also provided updated salary cap projections through the 2020-21 NBA season, all of which have increased.

The salary cap projects to climb to $108 million in 2018-19 (vs. $105 million), $109 million in 2019-20 (vs. $106 million) and $114 million (vs. $112 million) in 2020-21.

The tax threshold is expected to rise to $130 million (vs. $126 million), $132 million (vs. $129 million) and $139 million (vs. $136 million), respectively.

The league’s updated projections, however, should be considered tenuous at best.

Both owners and players have the right until December 15 to opt out of the current Collective Bargaining Agreement, which would take effect following the 2016-17 NBA season.

While NBA owners love the current deal, which reduced the share of revenues allocated to players from 57 percent to the current 51 percent, players are naturally less thrilled. As a result of the shift, players have surrendered $1.5 billion over the past five years (an amount which figures to grow rapidly). They feel like they made significant sacrifices when the NBA was claiming poverty, and now that profits and franchise values are soaring, they’re likely to want some back.

If they are successful in getting some back, it could increase future salary cap levels even more.

On the other hand, the current adjustment mechanism, which has and will continue to artificially prop up salary cap levels due to owners’ inability to keep pace with rising revenues in the contracts they dole out to players, could potentially be re-worked or even eliminated, which would decrease future cap levels considerably.

These opposing forces make projecting future salary cap levels beyond the current 2016-17 season exceedingly problematic, and should therefore be relied upon only with extreme caution.

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