NBA Drops 2017-18 Salary Cap Projection $2M, to $99M, As Revenues Track $70M Short of April Estimate

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With less than 24 hours left before the start of the draft and just ten days until the start of free agency, NBA teams were provided an updated projection for the 2017-18 salary cap — and it’s not nearly as high as was previously projected.

The league notified its member teams in a memo last Wednesday that it is currently projecting the new salary cap will come in at $99 million, about $2 million less than the $101 million it was projecting just prior to the start of the playoffs in early April.

The luxury tax has also been lowered by $2 million, to $119 million from the previous projection of $121 million.

The drops were caused primarily by the number of playoff games being far fewer than expected, as the playoffs were dominated by numerous lopsided series.

A total of just 79 (of a possible 105) games were played – tied for the fewest since the NBA expanded the first round of the playoffs to a best-of-seven format in 2003. Since the expansion, the playoffs had lasted as few as 79 games (2007) and as many as 89 games (2006 and 2014), with an average of 84.4 games.

The issue became magnified as teams advanced further through the playoffs. The Conference Finals and NBA Finals, typically the biggest playoff money-makers, lasted a combined 14 (of a possible 21) games – tied for the fewest ever(1).

The impact extended far beyond fan frustration. It impacted revenue. In a big way.

Largely as a result of the short playoffs, league-wide revenue is tracking $70 million short of the NBA’s projection from April 6!

That, in turn, formed the basis of the cap drop.

At the end of each season, accountants jointly appointed by the NBA and the players’ association finalize the total revenue (or, more technically, “BRI”) haul for the past season. The league had been expecting to generate $6.65 billion in BRI for this season. With the $70 million projected decline, that’s now $6.58 billion.

Once the total BRI haul for the past season is determined, the league (in conjunction with the players association) uses it to project BRI for the coming season. With BRI dropping from $6.65 billion to $6.58 billion this season, the league has dropped its projection for next season from $7.0 billion to $6.9 billion.

To arrive at the salary cap for the season ahead, the league then takes 44.74% of that projected 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% of projected revenues.

Adjustments to the cap are then made if players received too little, or way too much, of their designated 51% share of BRI in the form of salaries and benefits in the just completed season.

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.” 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.” They do this by withholding 10% 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.

In recent seasons, revenues have been growing so high so fast that teams have had an impossible time keeping up with their spending. Despite the massive contracts that were doled this season, it was still nowhere near enough to get the players up to their 51% share!

Players will earn roughly $3.20 billion in salaries and benefits this season. With the BRI drop from $6.65 billion to $6.58 billion, their designated share drops from $3.39 billion to $3.36 billion. But that’s still way more than they got. The shortfall, in turn, drops from $195 million to $160 million. The league will therefore return the full amount in escrow to the players, and cut them a check for another $160 million.

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

  • Took the new $6.9 billion projected BRI figure, multiplied it by 44.74%, subtracted projected player benefits from the total, and divided the result by 30; that’s $93.5 million. The $70 million drop in revenues caused this part of the calculation to drop by about a million dollars (from $94.5 million to $93.5 million).
  • Took the new $160 million projected shortfall figure for this season and divided it by 30; that’s $5.3 million. The $70 million drop in revenues caused this part of the calculation to drop by about $1.2 million (from $6.5 million to $5.3 million).

To arrive at its projected cap figure for next season, the league then simply added the $93.5 million to the $5.3 million to get $99 million.

The lower salary cap will reduce maximum salaries, which are calculated as a percentage of it. Players with up to six years of experience can earn up to 25% of the cap; that’s now a projected $24.8 million. Players with 7-9 years of experience can earn up to 30% of the cap; that’s $29.7 million. Players with 10+ years of experience can earn up to 35% of the cap; that’s $34.7 million(2).

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The revised salary cap and luxury tax projections could put further strain on teams in all spending brackets.

Teams like the Cleveland Cavaliers and Portland Trail Blazers, which have spent exorbitant amounts in the past few seasons, could face harsher penalties with the lower tax threshold.

Teams like the Golden State Warriors, Los Angeles Clippers, Toronto Raptors and Utah Jazz, to retain core players which are about to hit free agency, could be required to spend well into the lower tax threshold. The Warriors could be a taxpaying team next season, for just the second time in their history, when Stephen Curry’s contract shifts from the most team-friendly in the NBA to perhaps the most expensive in NBA history. The lower tax threshold will increase the  Warriors’ tax burden for this coming season substantially. On the other hand, Curry’s maximum salary will drop, which will lower his future salaries for each of the following four seasons, when the Warriors’ payroll could sky higher than helium-sucking angels!

Teams like the Washington Wizards, which are trying to avoid the tax, could be further challenged. The Wizards are one of three NBA teams which has never paid it. They traded away Andrew Nicholson earlier this season, possibly with an eye toward being able to re-sign Otto Porter even at the max and still avoid paying it. That becomes substantially more difficult now.

Teams like the Miami Heat and Boston Celtics, which are trying to maximize cap space to make a major free agent run, will see their potential cap space shrink. At the new lower cap level, the Heat would be able to generate anywhere from $29 million to $40 million of cap space on its own this summer (with the range based upon its decisions with Wayne Ellington, Josh McRoberts, Rodney McGruder and Okaro White), which, at the high end, would be enough to clear a max salary slot for the likes of a Gordon Hayward, but with less than $10 million left over. The Celtics would now need to trade Terry Rozier and clear the rookie-scale cap holds of 2016 first-round picks Guerschon Yabusele and Ante Zizic, or trade one of their rotation players, to create room for a max salary slot. They, however, could have bigger plans in mind.

The finalized salary cap and luxury tax figures for the 2017-18 season will be distributed to teams by June 30.

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Since the primary source of the salary cap decline is due to an excessively short 2016-17 playoffs and, in the absence of contravening information, the presumption has to be that the 2017-18 playoffs will be of normal length, the lower salary cap for 2017-18 will not have a corresponding effect on the following season. As such, the league kept its 2018-19 cap projection constant, at $102 million — a figure which is based on substantial projected revenue growth

The lower 2017-18 salary cap will, however, have an indirect impact on 2018-19 and beyond — in that it will slightly increase future Mid-Level exceptions (Non-Taxpayer, Taxpayer and Room), Bi-Annual Exceptions, Rookie-Scale Contracts, minimum salaries, Apron calculations and cash available for trade. Each of these figures is fixed for the 2017-18 cap year, but is based on salary cap growth for each season thereafter. Therefore, a lower 2017-18 salary cap will cause a higher growth rate for 2018-19, which will increase each of these figures (if only slightly) for 2018-19 and set a higher baseline for each season thereafter.

Notes:

(1) Since the league expanded the last two rounds to a best-of-seven each in 1958. Also happened in 1989.
(2) Certain players can qualify for higher-tier maximum salaries than for which their tenures would otherwise qualify.

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