NBA Reduces Salary Cap Projections Despite Rising Revenues

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The NBA salary cap has experienced staggering growth in recent seasons.

The cap jumped from $58.7 million in 2013-14, to $63.1 million in 2014-15, to $70.0 million in 2015-16. That’s a near 20 percent growth in just two years.

But it’s nothing compared to what happened this season.

On the strength of new national TV rights deals with ESPN/ABC and TNT, the cap soared higher than helium-sucking angels: to $94.1 million.

The outsized growth was projected to continue.

At the start of the regular season in October, the league was projecting a salary cap of $103 million for 2017-18, and a salary cap of $107 million for 2018-19.

But the growth, at least for now, is finally starting to taper off. At the Board of Governors meetings in New York on Dec. 15, teams were advised that cap projections were declining:

  • For 2017-18, the salary cap is now projected at $102 million, with a luxury tax threshold of $122 million.
  • For 2018-19, the salary cap is now projected at $103 million, with a luxury tax threshold of $125 million.

The drop in the latter season is particularly rattling — not only because it represents a $4 million drop, but also because it represents just a $1 million increase over the previous season projection.

Are league-wide revenues finally beginning to slow? 

Nope.

The league’s revenue projections didn’t change at all with these latest projections. What changed is every other component that makes up the salary cap calculation.

The NBA and the National Basketball Players Association ratified a new CBA on Jan. 19, 2017, ensuring that the league will achieve labor peace for at least the next six seasons.

At the highest of levels, not much changes in the new deal.

The split of league-wide BRI, always the most contentious battle in any collective bargaining negotiations, will remain the exact same as in the previous agreement – the players will receive between 49 percent and 51 percent in the form of salaries and benefits, with the final figure tied to the comparison of league-wide BRI to pre-established benchmarks.

The escrow system, which protects the integrity of the BRI split, will remain the exact same.

The salary cap will be calculated the exact same way.

The luxury tax will be calculated the exact same way, and teams will be penalized just as severely for crossing it.

But unlike the split of BRI and the escrow system, keeping the salary cap and luxury tax calculations the same, counterintuitive as it may seem, actually represents a significant change from the way in which they were calculated in each of the past two CBAs. To understand why requires an understanding of how the cap and tax are calculated.

As part of the league’s annual audit during Moratorium, accountants jointly appointed by the NBA and the players’ association finalize the total revenue haul for the past season and, on that basis, project the revenues for the season ahead.

Revenues for the coming season are projected based upon an agreement between the NBA and the player association. If the parties can’t agree, revenues are then projected by taking the revenues from the prior season from all sources other than the national TV rights deals, and then increasing them by 4.5 percent. To that, the league adds the revenue called for in the national TV contracts for the coming season to get the total projected amount.

To arrive at the salary cap for the season ahead, the league then takes 44.74 percent of that projected amount, subtract projected benefits, and divides by 30 (the number of teams in the league). Adjustments are then made to the cap if players received too little, or way too much, of their designated share of BRI in the form of salaries and benefits in the prior season. The luxury tax uses a similar formula, but is based on 53.51 percent of projected revenues.

The system is designed such that the salary cap for each team is set at 44.74 percent of BRI even though the players are entitled to receive between 49 and 51 percent.

This is done for good reason. The NBA has a soft salary cap. Teams can spend above the salary cap. Most do. Some, in fact, spend above the luxury tax level. The cap calculation therefore needs to be set at a lower percentage of BRI, to account for the fact that most teams will spend above it.

In the end, the goal is to have the salary cap, when combined with the minimum team salary on the low end and the luxury tax on the high end, set at a level that will cause teams to spend on player salaries and benefits an amount which is very near the 49 percent to 51 percent of BRI to which players are entitled.

The escrow system then takes care of the rest on the back end, to make it exact.

If players didn’t make enough in salaries and benefits to reach their designated share of BRI, the league cuts the players a check for the “shortfall” at the end of the season. To ensure a shortfall doesn’t occur the following season, the league takes the amount of the shortfall, divides it by 30, and adds the result to the salary cap the following season. That, in turn, artificially increases the salary cap. The higher the salary cap, the more teams will spend, the less likely a shortfall is to occur the following season.

If players made more in salaries and benefits than their designated share of BRI, the league takes back the “overage” at the end of the season. They do this by withholding 10 percent of the paychecks each player receives throughout the season, and placing the funds into escrow. If there is an overage, they take back the excess money from the escrow account and return the rest back to the players. If the overage is very large, the league will decrease the salary cap in the following season to help put the brakes on spending.

Neither the league nor the players ideally want to deal with a significant shortfall or overage. The percentage of league-wide revenues used to calculate the salary cap is therefore a very important figure. It sets the stage for everything.

The 44.74 percent figure they selected isn’t random. Its roots trace back all the way to the 2005 CBA.

Back then, players were entitled to a 57 percent share of BRI, and a 51 percent figure was utilized to calculate the salary cap. In other words, the cap was set based upon a BRI projection that was 10.5 percent lower than the split of BRI to which they were entitled, in order to accommodate the fact that most teams will spend above it. The presumption was that this would ultimately yield player salaries and benefits very near their designated share of BRI.

The very same 10.5 percent reduction was carried over into the 2011 CBA. The players split of BRI decreased from 57 percent to between 49 percent and 51 percent, with the baseline being 50 percent. Applying a 10.5 percent discount to a 50 percent share of BRI yielded a 44.74 percent figure off which to calculate the salary cap.

But here’s the thing: Players are no longer receiving 50 percent of BRI. The league’s new national TV rights deals with ESPN/ABC and TNT ensure that players will receive their maximum 51 percent, not just for the 2016-17 season but also for every season covered under the new CBA.

At 51 percent, an equivalent cap calculation should utilize a 45.63 percent figure after applying the 10.5 percent discount. Instead it continues to utilize the 44.74 percent figure. The lower figure effectively decreases the salary cap by more than $2 million per season over where the league previously felt it should be in order to generate total player salaries and benefits near their designated share. That cap reduction should lower team spending on salaries by around $2 million or so. Which should cause a baseline shortfall of around $60 million per season.

There are other factors that exacerbate that potential shortfall.

The salary cap is rising so far so fast that several teams simply haven’t been able to catch up with their spending. An all-time record high six teams are currently projected to fall short of the minimum team salary this season, which would shatter the previous record high of two from last season.

Harsher penalties for teams crossing the luxury tax threshold have also caused a decline in spending at the high-end. An all-time record low two teams are currently projected to cross the luxury tax threshold this season (by an all-time record low amount); the previous low in a tax-triggered season was five.

The lower salary cap (relative to the players’ designated share of BRI), when combined with lower across-the-board spending on player salaries, will produce one powerful result: There is going to be a massive shortfall this season.

According to its latest projections, the NBA is projecting a whopping $210 million shortfall for the 2016-17 season!

The $210 million shortfall will not only force the league to cut the players a check to make them whole, it will also cause a $7 million increase in the 2017-18 salary cap.

It’s not the first shortfall the league has ever experienced, but it is the largest. The league previously cut the players checks to cover shortfalls of $26.0 million in 2010-11, $57.3 million in 2014-15, and $130.9 million in 2015-16.

***

So… If the league didn’t adjust the cap calculation to account for players receiving their full 51 percent of BRI, and if the league kept intact the same stiff penalties for spending past the tax threshold, is it safe to assume these shortfalls will continue on into the new CBA?

Nope.

The parties agreed to other changes in the new CBA, which will counteract this trend.

Benefits Increase

The new CBA provides material enhancements to all manner of player retirement, health, and other benefits, including the establishment of a new health insurance benefit and new education/career development programs for retired players. The cost of these benefits for currently-active players will be included in the total calculation of player benefits, paid for through the players’ share of BRI.

These enhancements will cause projected player benefits for next season to spike by around $30 million, over and above the typical year-to-year increase. Projected benefits are a component of the cap calculation. Increasing them by about $30 million causes the salary cap to fall by about $1 million.

In fact, it is precisely this increase in benefits that is causing the $1 million drop in the salary cap projection for 2017-18 (from $103 million to $102 million). It is also responsible for $1 million of the $4 million drop for 2018-19 (from $107 million to $103 million).

Salaries Increase

The new CBA also provides sharp across the board increases in salaries. Minimum salaries are rising by 45 percent. Rookie-scale contracts are rising by 45 percent (to be phased in over three years). The three mid-level exceptions will rise by 45 percent. The bi-annual exception will rise by 45 percent.

Cap holds are also increasing in the new CBA. Roster charges for teams carrying fewer than 12 players during the offseason are increasing 45 percent. Cap holds for unsigned first round draft picks are increasing 20 percent. Cap holds for players coming off rookie scale contracts are increasing by up to 25 percent (starting in 2018-19).

These changes will cause cap space around the league to drop, which will cause teams to spend further and further above the salary cap in the years to come. Player salaries will rise as teams utilize higher-valued exceptions that will allow them to exceed the salary cap by larger percentages than in the current CBA.

Then there is the spending that doesn’t impact a team’s salary cap position but still counts towards the players’ share of BRI. Like the salaries of players on two-way contracts. And increases in the salaries of players on existing rookie-scale and various low-value contracts (which will increase beyond what their cap hits will reflect).

All of these system changes in the new CBA will cause huge increases in future projected salaries.

In fact, it is precisely this projected increase in salaries for next season that is causing the other $3 million drop in the 2018-19 salary cap. In its latest figures, the NBA increased projected salary payouts for the 2017-18 season by $125 million, despite no change to its projected revenue figure. Whereas the league was previously projecting a $100 million shortfall, it is now projecting a $25 million overage.

A $100 million shortfall for 2017-18 would have increased the 2018-19 salary cap by $3.3 million. Now, that’s gone!

***

So… Why are cap projections coming down?

For 2017-18, the NBA has reduced its salary cap projection by $1 million. But it has nothing to do with revenue. The drop is due primarily to a $30 million spike in projected benefits.

For 2018-19, the NBA has reduced its salary cap projection by $4 million. But it has nothing to do with revenue. Of the $4 million drop, $1 million is due to the spike in projected benefits, and the other $3.3 million is due to the spike in projected salaries.

***

So… How did the league arrive at its new salary cap projections?

2017-18 Projection

The league initially expected to generate $6.7 billion in BRI for this season. That projection remains largely unchanged.

On that basis, a projected BRI for the following season was established: $7.0 billion.

To calculate its 2017-18 cap projection, the league:

  • Took that $7.0 billion of projected BRI, subtracted projected player benefits (which will spike by $30 million), and divided the result by 30; that’s $95 million.
  • Took the $210 million projected shortfall for this season and divided it by 30; that’s $7 million.

To arrive at its projected cap figure for next season, the league then simply added the $95 million and the $7 million together to get $102 million.

2018-19 Projection

In arriving at its projected BRI for the upcoming season, the league utilized a $7.0 billion figure. But it’s actually projecting BRI for next season to rise higher than that, thanks in large part to the introduction of an entirely new revenue stream – jersey patch advertisements. Such jersey advertising is expected to generate at least $5 million of new revenue per team, and for some teams possibly up to $15 million or more.

In other words, there is perhaps around $200 million in potential new revenues that is not being included in the projected BRI figure for next season. That means BRI could reach higher than $7.2 billion for the 2017-18 season, a growth of more than 8 percent from the $6.7 billion it’s projecting for this season!

On that basis, a projected BRI for the following season was established: $7.6 billion.

To calculate its 2018-19 cap projection, the league took that $7.6 billion of projected BRI, subtracted projected player benefits (including the $30 million spike), and divided the result by 30; that’s $103 million. Since the league is no longer projecting a shortfall for next season, there was no adjustment added to that. The figure stays at $103 million.

Therefore, to suggest that the 2018-19 salary cap is only growing by $1 million, from $102 million to $103 million, is correct. But it’s also misleading. The revenue-generated portion of that growth is more like $7 million, from $95 million to $103 million, which is more than 8 percent.

***

Revenues are still growing. What’s really happening is that spending on player salaries and benefits is finally catching up. Adjustments are being eliminated. The league is reaching a new steady state, at a far higher base.

At the start of the 2005 CBA, league-wide revenues were at $3.1 billion. By the end of this season, they’ll jump to $6.5 billion. By next season, they’ll hit $7 billion. From there, $8 billion could only be a couple seasons away. If you extrapolate all the way out to the end of the new CBA, they could exceed $9 billion.

Will the league be able to maintain this high level of growth into the future?

Only time will tell.

3 Responses

  1. Gregory says:

    The enormous salaries for a small number of stars parallels the 1% problem in our country – a few get most of the spoils. How can teams keep a roster together under such circumstances? There needs to be a cap on how much any player can make, sorry.

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