On Thursday July 9 at 12:01 a.m. ET, the NBA’s 2015-16 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 now-completed 2014-15 season came in at an all-time record $4.84 billion, up 7.0 percent from the previous year (the highest annual growth rate for the league over a full season in the last eleven years), smashing projections for the season issued last year at this time (off of which the salary cap was based) by a whopping $132 million!
On that basis, the league then projected revenues from sources other than national TV rights to increase by the standard 4.5 percent and added them to the revenues call for in the national TV rights deals (which were set when the deals were signed in 2007), which came to a total of $5.04 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.
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 players’ 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 2014-15 season, $218.6 million was deposited into the escrow account.
If the players received 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.
The system is designed such that the salary cap for each team is set at 44.74 percent of revenues, but the players are actually entitled to receive between 49 and 51 percent of revenues (the exact percentage is tied to the league’s financial performance).
In the past, this has never really been a problem. The NBA has a soft salary cap. Almost every team in the league used to exceed the salary cap by a large enough amount every season – many even exceed the luxury tax – that the players always wound up receiving their fair share of revenues. Typically, in fact, the players wound up getting far more than to which they were entitled, and the league’s escrow system would knock them back down.
Lately, however, it has become a far more significant problem. Punitive new cap rules — hard caps, increasing luxury tax consequences, etc. — coupled with more destructive roster construction models have caused teams to dramatically ratchet down their spending. For the first time ever, two teams failed to reach the league-wide minimum team salary requirement this past season. Eight teams ended the season below the salary cap (excluding cap holds). On the high end, a recording-tying low of five teams were taxpayers this year by a cumulative record-breaking low of just $26 million.
With league-wide revenues of $4.84 billion for the 2014-15 season, $180 million higher than the $4.66 billion originally forecasted when the CBA was negotiated, players were entitled to 50.39 percent of revenues, or $2.44 billion, in salaries and benefits. Throughout the season, they received just $2.38 billion, a $57.3 million shortfall.
The league will therefore return to the players the full $218.6 million from the escrow account, and cut a check for the additional $57.3 million shortfall. It will mark the largest shortfall check sent to players in league history.
The shortfall, in turn, caused an increase to the salary cap for the 2015-16 season of $1.9 million.
To arrive at its salary cap and luxury tax figures, the league took its $5.04 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 $1.9 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 $70.00 million, an 11.0 percent increase from last season. That is substantially larger than the $66.3 million initial projection from last year at this time (which contained no salary-related adjustment) and the $67.1 million project issued last April (which contained a $500K salary-related adjustment).
The new luxury tax line been set at $84.74 million, a 10.3 percent increase from last season. That is substantially larger than the $80.7 million initial projection from last year at this time (which contained no salary-related adjustment) and the $81.6 million projection issued last April (which contained a $500K salary-related adjustment). Read more…