NBA CAP – ABBONDANZA!
You look at the table before a big Italian dinner and wonder which delectable you will put on your plate first. There is pasta, fish, meat, salad, desserts as far as the eye can see, in vibrant colors and emitting terrific smells. You can’t have one of each because you will pay the price in terms of food coma and an expanding waistline. You have never seen such an assortment before. Abbondanza, right?
The NBA will be facing a transformational, Abbondanza-situation as soon as the 2017-18 season. Because of a new TV contract with the league, the salary cap in place is expected to rise, according to Commissioner Adam Silver, to as much as $108 Million. Think about it. Having $108 Million to distribute, not necessarily evenly, amongst 15 or so supremely talented and athletic individuals. That works, right? Everybody’s happy, right? Until they’re not. The owners should be thrilled, because a salary cap that high means the League has signed a HUGE television rights deal, to which the networks were willing to agree because the game of basketball has never been more popular, especially overseas. (Yesterday, I taught a class on financial data and technology to a group visiting from China. At one point, given the growing use of analytics in sports, I tried to draw a parallel between analytics in business and sports and I asked the group what sports they liked. Waiting for the translator to relay the question, I then got a shy answer from one of the class who said “NBA”.) The players should be thrilled because even though they had operated under a cap for a long time, since 1984-85, with many superstars and even journeymen making incredible salaries, more is always better, right? But what about the fans? They don’t seem to care because they continue to stream into stadia and buy all manner of souvenirs, many paying high ticket prices, so apparently they’re happy, and happier if cap restrictions allow a stud from another team to sign with their favorite squad to turn the team’s fortunes around. The networks are happy because they can show a premium sports product, drawing advertisers who want to be associated with something so popular.
A little history first. In that first year (84-85) under the cap, each team was limited to, wait for it, $3.6 Million in total payroll. Seriously?
Many players today wouldn’t even get out of bed for that money. The NBA’s current cap is $70 Million, which one would have thought would instill some fiscal discipline, (not unlike a personal budget with champagne tastes but there are all kinds of exceptions allowing a team to exceed the cap which I am not going to try and understand or explain). Those ‘exceptions’ include the famous Larry Bird exception where, depending on a player’s experience, a team can exceed the cap up to a point to sign one of its own free agents, a concession to try and preserve some roster continuity, the lack of which being one of my major objections to the whole concept of free agency and salary caps. How does the cap get figured out? This is where the concept of basketball-related income (BRI) comes into play. More BRI, higher cap. And this is where, occasionally, the players and the League/team owners aren’t so thrilled and disagree quite vehemently.
The cap is set at a percentage of BRI and that percentage is specified in the Collective Bargaining Agreement (CBA) between the League and its players. It had been as high as 57%, now closer to 51%. Also determined as part of the CBA is a definition of what exactly is included in BRI, Can’t be sure about how to divide the pie if you don’t know what the filling is, right? Oh, and before I forget, just because there is a salary cap with plenty of (wink-wink) exceptions, does not mean that a club can go hog wild. There is a luxury tax, which is imposed when a team’s total salaries hit an amount which is even in excess of the cap. So, in that case, every dollar spent on salary above the luxury tax threshold ends up costing a team $1.50 or even $1.75, depending on how far above the cap the team is and the level of recidivism. Still with me? An interesting luxury tax story: (from Wikipedia) “The tax threshold in 2005–06 [when penalties for over-payment were dollar for dollar] was $61.7 million.
In 2005–06, the New York Knicks’ payroll was $124 million, putting them $74.5 million above the salary cap, and $62.3 million above the tax line, which Knicks owner James Dolan paid to the league. Tax revenues are normally redistributed evenly among non-tax-paying teams, so there is often a several-million-dollar incentive to owners not to pay the luxury tax.” Championships won by the Knicks as a result of their profligacy.? None. Shocker. Championships won by the Knicks since 1973, despite employing at one point or another every famous coach, it seems, and playing in the media capital of the world and in the World’s Most Famous Arena, the mecca of basketball? None. As I do with everything else, I have to believe there is a data analytics solution to picking players and even coaches and if there is, it’s clear the Knickerbockers pay no attention. The Nets are another example where a free-spending and willing-to-part-with draft picks in trades owner can leave a franchise bereft of hopes and potential for years. But I digress. What will teams do to exploit the inflated cap? Unclear, but, given they all know what’s coming and which contracts will be expiring before the after the 2016-17 season (before the higher cap kicks in for 2017-18) and beyond, they are at this moment figuring which of their guys they want to keep and what it will take to do so, which players will be available and what it will take to sign them and maybe even if they have the right coaching staff in place for the type of team they will be putting on the floor. The choices they make over the next two years, setting them up for the feeding frenzy in 2 years, will determine the franchises’ fortunes for years thereafter.
I have seen many stories recently about how, if you want to do your child a favor, make sure they learn how to code. Well, based on this, I would suggest you get them some instruction in how to be a salary cap expert. Additional concerns for you budding capologists out there. The cap will rise this year and next, and then will actually decrease in the years following. There is an interesting provision where if teams don’t spend to the cap, it will go up the next year to insure the players get a ‘fair’ cut. With the cap rising so much, forecasts are expecting that salaries won’t quite reach the cap value, leading to the next increase. When that fluctuation settles back down, the cap will shrink leading to the unfortunate situation where contracts signed now may flip from looking like a bargain to an albatross to say nothing about what if the player underperforms.