NBA Salary Cap for 2016-17 Set at $94.143M, Tax at $113.287M

On Wednesday July 7 at 12:01 a.m. ET, the NBA’s 2016-17 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 2015-16 season from the national TV rights deals with ESPN/ABC and TNT were pre-set when the deals were signed back in 2007, at $1.03 billion.

Revenues from all other sources blasted higher to $4.26 billion, up nearly 11 percent from the previous year (the highest annual growth rate for the league over a full season in more than a decade), smashing projections for the season issued last year at this time (off of which the salary cap was based) by a whopping $247 million!

Where did all that growth come from?

Gate receipts spiked, along with related concessions and merchandise sales, thanks in large part to the Golden State Warriors’ record-breaking 73 win season and long playoff run as well as the retirement tour of the Los Angeles Lakers’ Kobe Bryant.

Commissioner Adam Silver 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.

Verizon replaced Sprint as the league’s sponsorship content provider in November, signing a contract worth around $400 million over three years. 

Tissot partnered with the NBA in October as the league’s first ever official timekeeper, signing a contract worth around $200 million over six years.

State Farm in January extended its multi-million dollar partnership with the NBA for six more years.

International revenues also boomed.

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 was 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 came to an all-time NBA record revenue total of $5.29 billion! 

With its total revenues for the 2015-16 season in hand, the league then projected revenue for the upcoming 2016-17 season. On top of the $5.29 billion baseline, it added in two things: (i) the incremental revenues called for in the new national TV rights deals, which will vault higher by a massive $1.1 billion next season, and (ii) projected growth elsewhere.

In doing so, the NBA arrived at a projected $6.55 billion in revenues for the 2016-17 NBA season.

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 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.

For the 2015-16 season, $235.8 million was deposited into the escrow account.

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 $5.29 billion in revenues – not only $247 million higher than the $5.03 billion projected figure off of which the $70.0 million salary cap was based, but also $419 million higher than the initial forecasts of $4.87 billion when the Collective Bargaining Agreement was drafted in 2011 – the players were entitled to $2.69 billion, or 50.83 percent of revenues, in the form of salaries and benefits.

Throughout the season, they received just $2.56 billion, a $130.9 million shortfall.

The league will therefore return to the players the full $235.8 million in player salaries held in escrow and cut them a check for the additional $130.9 million shortfall, for a total return of $366.7 million.

The shortfall, in turn, caused an increase to the salary cap for the 2016-17 season of $4.4 million.

To arrive at its salary cap and luxury tax figures, the league took its $6.55 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 $4.4 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 $94.143 million, a 34.5 percent increase from last season. That is substantially larger than the $89.0 million initial projection from last year at this time.

The new luxury tax line been set at $113.287 million, a 33.6 percent increase from last season. That is substantially larger than the $108.0 million initial projection from last year at this time.

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

For 2016-17, players with fewer than seven years of NBA experience (e.g., Hassan Whiteside) will be able to receive up to $22,116,750, those with seven to nine years of experience (e.g., Kevin Durant) will be able to receive up to $26,540,100, and those with 10+ years of experience (e.g., LeBron James) will be eligible for up to $30,963,450.

The new figures were announced in a memo distributed by the league, surprisingly early, to all member teams on Sunday. Such memos are typically released on the last day of moratorium.

What the memo did not contain? Projections for the 2017-18 season, which will be released on the last day of moratorium.

Future NBA salary caps are getting increasingly more difficult to project, due not only to revenues exploding beyond imagination but also the (as I’ve been saying for six years now, flawed) adjustment mechanism.

The latest projection for the 2017-18 salary cap, provided by the league in April, was $107 million. That projection included a $12.5 million adjustment based on a projected $375 million shortfall in player salaries and benefits for the 2016-17.

With the eye-popping new salary payouts doled out thus far during the first three days of July, the league wants to take the extra few days until moratorium is complete to establish an updated projection for 2016-17 player salaries and benefits and, in turn, the cap and tax figures for 2017-18.

Despite the uncertainty regarding the 2017-18 salary cap, one thing is certain: revenues will continue to rise well into the future.

Local TV deals are still expanding. The Dallas Mavericks inked an extension in the fall with Fox Sports Southwest worth more than $50 million a year. The Orlando Magic and Cleveland Cavaliers both begin new local TV deals with the 2016-17 season. The Los Angeles Clippers’ current deal has expired. In all, as many as 10 teams, including the Miami Heat, have or are expected to sign new deals or reset their existing ones at big increases by the end of the 2017-18 season.

In June, Nike signed a massive new deal to replace Adidas as the NBA’s uniform provider starting with the 2017-18 season. The eight-year contract is worth more than $1 billion, an average of $125 million, up from the $400 million over 11 years, an average of $36 million, that Adidas was paying.

NBA owners last season approved a three-year pilot program to allow teams to sell advertising space on their jerseys. The program will begin with the 2017-18 season, and could add upward of $150 million in incremental revenues.

By the time the 2017-18 NBA season is completed, league-wide revenues could top $7 billion!

One potential headwind for the league along its massive revenue growth trajectory is the impending labor dispute with the players. 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 2016-17 exceedingly problematic, even when issued by the league, and any such projections should therefore be considered tenuous at best.

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