NBA Increases 2016-17 Salary Cap Projection to $92M, Tax to $111M

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The NBA has issued updated projections for the 2016-17 salary cap and luxury tax thresholds.

All 30 teams were informed this week via league memorandum that the 2016-17 salary cap is now projected to be $92 million, while the luxury tax threshold is projected at $111 million.

The numbers represent a substantial increase from the NBA’s initial projections for the 2016-17 season issued last July – which called for a salary cap of $89 million and tax threshold of $108 million – as well as a massive increase over the 2015-16 cap and tax of $70.0 million and $84.74 million, respectively.

The primary reason for the jump is the new national TV rights deals with ESPN/ABC and TNT, nine-year pacts worth a combined $24 billion which will pump in an incremental $1.1 billion of revenues next season.

National TV revenues, however, aren’t the league’s only source of revenue growth. Not by a long shot.

The updated cap figures suggest the league is now expecting revenue growth for the 2015-16 season from sources other than national TV rights to come in at more than 9 percent, when the figures are finalized in less than three months.

The huge increase in revenues, which comes on the heels of a huge increase last season as well (8.2 percent year-over-year growth), will come from a variety of sources.

Gate receipts, which grew by about $100 million in 2014-15, will spike again, along with related concessions and merchandise sales, thanks in large part to the Golden State Warriors’ record-breaking 73 win season and the retirement tour of the Los Angeles Lakers’ Kobe Bryant.

Commissioner Adam Silver has 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 are also booming.

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 is the same on the local TV front, where both the Atlanta Hawks and New York Knicks started new contracts this past season.

The league is now expecting total 2015-16 revenues to come in at more than $5.2 billion, smashing the projections off of which the $70 million salary cap was based by about $185 million.

On that basis, the league is projecting in excess of $6.5 billion in revenues for the 2016-17 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.

Revenues are growing so fast that teams are having a difficult time catching up in doling out new contracts to their players.

According to the terms of the 2011 Collective Bargaining Agreement, players will be entitled to 51 percent of league-generated revenues for 2015-16 and future seasons.

While league-wide revenues have yet to be tabulated, the NBA is currently expecting that players will fall short of receiving their fair share by $93 million. Any shortfall, as determined during July Moratorium, will need to be paid to the players after the season. At that level, teams would need to contribute about $3.1 million each.

As a result of the shortfall, the 2016-17 cap and tax figures would be adjusted upward by a corresponding amount.

To arrive at its $92 million salary cap (and $111 million luxury tax) figure, then, the league is taking $6.5 billion in revenues, multiplying by 44.74 percent (53.51 percent), subtracting projected benefits, and dividing the total by 30. To the result, it is adding $3.1 million.

The new figure, $92 million, is a testament to the NBA’s incredible revenue growth.

But the outsized revenue growth doesn’t stop there. It will continue on 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 expires after the 2015-16 season. 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 annually, an average of $125 million, up from the $400 million over 11 years, an average of $36 million, that Adidas was paying.

NBA owners earlier this week 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, total revenue growth since 2012-13 (the first full season under the current Collective Bargaining Agreement) from sources other than the new national TV rights deals will outpace the total revenue growth from the national TV rights deals themselves. By that time, league-wide revenues should top $7 billion!

Revenues are growing so fast, in fact, that it is becoming increasingly challenging for teams to pay the players their 51 percent share of those revenues in the form of salaries and benefits. Last year, team missed the mark by $57 million. This year, the league is projecting a $93 million shortfall. In 2016-17, as a result of the exploding salary cap and relatively few quality players on which to spend the resulting league-wide cap space, the NBA is projecting a massive $375 million shortfall. And that figure, if you can believe it, is actually down from earlier projections.

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, and any such projections should therefore be considered tenuous at best.

The league did provide updated projections through the 2020-21 season in its latest memo. The projections, however, are based on an assumption of no changes to the salary cap during the potential upcoming lockout. They are as follows:

2017-18: $107 million salary cap / $127 million luxury tax

2018-19: $105 million salary cap / $ 126 million luxury tax

2019-20: $106 million salary cap / $129 million luxury tax

2020-21: $112 million salary cap / $136 million luxury tax

While any such projections after next season can not necessarily be replied upon, the projections for the 2016-17 season are very real, and figure to help the Heat considerably.

Miami will start the summer with six players under contract for the 2016-17 season – Chris Bosh, Goran Dragic, Josh McRoberts, Justise Winslow, Briante Weber ($219K guaranteed) and Josh Richardson (non-guaranteed).

In addition, at a projected $92 million salary cap, Miami would have the right to sign Tyler Johnson to a contract that exceeds the cap, and an additional $40 million of cap space with which to spend on players such as Hassan Whiteside, Dwyane Wade and any other.

Of course, the latest figures provided by the NBA are only projections. The 2016-17 salary cap and luxury tax levels will be finalized upon the conclusion of the July Moratorium on July 6th.

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