New cap, tax and lockout projections

The NBA issued new projections for the 2014-15 and 2015-16 salary cap and luxury tax thresholds. The 2014-15 salary cap is now projected to be $63.2 million and the tax level is projected to be $77.0 million. The numbers for 2015-16 are now projected to be $66.5 million and $81.0 million, respectively.

Note that these are only updated projections. The official numbers won’t come out until July, when the league conducts its audit. The cap and tax thresholds are based on revenues for the current season. When they count all the beans in July (that’s what the July Moratorium is for) they also project the revenues for the upcoming year. They then take 44.74% of that projected amount, subtract projected benefits (a little over $200 million) and divide by 30 (the number of teams in the league) to get the cap. The luxury tax uses a similar formula, but is based on 53.51% of projected revenues.

Both the cap and tax values can be adjusted from the above amounts. See Question 13 of my FAQ for full details on how the salary cap is set, and Question 21 for the luxury tax.

The salary cap and luxury tax values for the current season are $58.679 million and $71.748 million, respectively, which means the new cap projection for next season represents a 7.7% increase over this season. This is a pretty big jump — the league’s baseline assumption for year-to-year increases is 4.5%. It would indicate a projected BRI (Basketball Related Income, i.e., revenues) of about $4.75 billion for next season.

Remember that the players are guaranteed a percentage of the money that comes in. The guarantee is 50% of forecasted revenues (the forecasts were made in 2011), plus or minus 60.5% of the amount by which the actual revenues exceed (or fall short of) their original forecast, with hard limits of 49% and 51% of the actual revenues.

The original revenue forecast for 2014-15 was $4.66 billion, so with an actual revenue of $4.75 billion, the players would get 60.5% of the difference, or $54.45 million, on top of their 50% guarantee ($2,33 billion), for a total of about $2.384 billion. The hard limits (49% and 51% of actual revenues) would be $2.327 billion and $2.422 billion, so we’re fine — the players collectively would be guaranteed about $2.384 billion, which is about $79.4 million per team in salaries and benefits, or about $72 million per team in salaries alone.

Also noteworthy is that the projections themselves have increased over the course of this season. Last July the cap projection for 2014-15 was $62.5 million, which itself would have represented a 6.5% increase over this season. At the All-Star break the league revised its projection to $62.9 million, which would have represented a 7.19% increase over this season. And now they’re projecting a 7.7% increase, which indicates that not only is the league making a lot of money, it’s coming in even faster than they anticipated.

What’s the source of all this new money? I don’t have a firm answer on that one yet, but new local TV deals have kicked-in in several markets, and the Nets’ move to Brooklyn and the Barclays Center also have a lot to do with it.

What does all this have to do with another lockout? The current CBA extends through the 2020-21 season, but both sides have an opt-out in 2016-17 — which means either side can unilaterally decide at that time to end the agreement and re-open negotiations for a new one. The timing of the opt-out is not an accident — it’s set for right after the new national TV deals will be negotiated.

Let’s go back to the previous negotiation — the league opted-out of the last agreement because they felt the system was unsustainable. They said that most teams were losing money, and they couldn’t let things continue as they were. They sought a big give-back from the players, a more restrictive system, harsher penalties for high-spending teams (further keeping salaries down), and much greater revenue sharing. This led to a lockout and canceled games. In the end, the owners received most of the concessions they sought, because, frankly, the owners always win in situations like these. The owners were willing (or at least bluffing that they were willing) to cancel the season entirely rather than play another year under the existing system, and the players couldn’t afford for that to happen.

So what’s going to happen in 2017? The circumstances are entirely different now. Most or all teams are now profitable, thanks to the changes they negotiated in the new agreement, Franchise values have skyrocketed (the Milwaukee Bucks, the least valuable team in the league, is about to sell for around $550 million, which Mark Cuban calls “a bargain”). And on top of that, the league is about to receive a windfall of new cash in the next TV deal.

So it’s no longer a matter of ceasing operations because they can’t afford to play another season under the existing system — now it’s a matter of figuring out how to split the pie equitably so they can all keep the money rolling in.

My prediction is that the players will opt-out of the agreement in 2017 because they will feel they gave back in 2011, the system is now fixed, there’s a lot of new money rolling in, the teams are now making money hand over fist, and they will want to regain some of their previous concessions as well as receive their fair share of the new money. Further, the league will be more obliged to give it to them.

So I expect the players to opt-out in 2017, and for the league to impose a lockout on July 1, 2017 (because they can’t do business without an agreement in place), However, negotiations will be quick and smooth (similar to 2005), and there will be a new CBA in place in time for the 2017-18 season to begin on time.