Salary cap implications of the Coronavirus

[Richard4444]

Some doubts:

1) Could NBA cut next seasons players salary based in a revenue drop forecast based in force majure clause to preserve teams cap space? Or it would be necessary an new agreement between the parts?

2) Players after april are receiving 20% less based in force majure clause but they already received a great amount of the salaries and some already been paid 100%. If the cut proves to be not enough and and the end of the season players make 70% of the actual revenue and owners only 30%, owners could make more than 50% in the following seasons to get even.

[DBoys]

Some doubts:

1) Could NBA cut next seasons players salary based in a revenue drop forecast based in force majure clause to preserve teams cap space? Or it would be necessary an new agreement between the parts?

NBA cannot just change the CBA and/or contracts as they see fit, to fix things. The force majeure clause is a cancellation of the obligation to continue the old and now-unworkable CBA. Once triggered, it takes agreement on how to replace it and move forward.

2) Players after april are receiving 20% less based in force majure clause but they already received a great amount of the salaries and some already been paid 100%. If the cut proves to be not enough and and the end of the season players make 70% of the actual revenue and owners only 30%, owners could make more than 50% in the following seasons to get even.

Yes. How they get back to 50-50 split (including the debt from this season) and protect better against uncertain revenue in future years, that would undoubtedly be the primary issue to be resolved.

[ranger001]

Bobby Marks suggested that the NBA could negotiate to increase the escrow to something like 30%, which would put a billion dollars back into owners pockets if needed.

[DBoys]

Bobby Marks suggested that the NBA could negotiate to increase the escrow to something like 30%, which would put a billion dollars back into owners pockets if needed.

That's one possibility they might negotiate. Although, based on the league's own stated expectations, I don't think "cap/contract numbers as is, but with 30% in escrow hold back" would be nearly enough escrow, if they went that direction. Public statements have told us the league is working on the scenario of having no fans in attendance (which strips away 40% of season revenue) and no TV or promotion in China (no telling how big of a hit that is). And with the hit to the US economy, will TV ad sales be there? Actual ad sales impact the amount they get from TV revenue. If no one has money to spend, it alters everything.

[GoCeltics123]

https://basketball.realgm.com/wiretap/258157/NBAs-Salary-Cap-For-20-21-Could-Decline-By-As-Much-As-%2430M

[Smitty731]

https://basketball.realgm.com/wiretap/258157/NBAs-Salary-Cap-For-20-21-Could-Decline-By-As-Much-As-%2430M

Operative word there is "could". In that same article, the one the quote was pulled from, the author says he doesn't expect it.

[NYG]

Is there any sense to having 4 levels...

1. A smoothed salary cap lower than the $115 Million projected

2. A “softer” luxury tax where you are penalized but not as significantly as traditionally that comes in lower than the true luxury tax

3. A true luxury tax at a higher amount closer to the projected which has the traditional penalty

4. The apron which is about $6 Million above the true luxury tax with traditional apron rules

.

[NYG]

Respectfully, "Let's leave the cap at 109.1 and the tax at 132.6 until it all balances out" has no chance whatsoever, if you're actually paying the players those numbers. That idea not only doesn't necessarily fix the short term, but it also doesn't have any way to keep future years from being just as bad of a split, or even worse.

If leaving the cap at $109.1 has no chance, where do you see it ending up as we get more clarity?

[DBoys]

Not sure. The obstacle creating the prediction problem is how hard it is to get a sense of what the NBA will do about fans in the stands. In a no-fan universe, the disparity between contracts and cap (reflecting revenues) is so wide that there has to be some sort of significant revision to the terms of the CBA (maybe even a redo).

Covid, and how we all deal with it, is an ongoing unknown. So far, we haven't seen an indication that the NBA would reverse course and opt to try to play in front of fans, but the idea of an entire season with teams traveling to play in empty arenas is a failure in so many ways.

If there are no fans, the cap has to be far below $90M. That's simple math. And that doesn't work with existing contracts being retained as-is.

[Whopper_Sr]

How will having fans back in seats affect the player escrows? Is there a formula for how the additional revenue (from tickets, concessions, merchandise, etc) is incorporated into calculating the escrow funds?

[DBoys]

How will having fans back in seats affect the player escrows?

The players and teams split the revenues (which they call BRI), so the more tickets and stuff they sell for their performances, the more each is owed. The amount allowed in salaries (the cap, or limit) is based on expected BRI, and before the season starts, those future game day revenues are obviously just a guess, So escrow is a hold back, to try to make sure that some of the outgoing to players can be readjusted afterwards, so that the money ends up being split properly.

When the season is over, it's just a calculation.
1 They add up all the actual BRI for the season.
2 Then they calculate 50% and 51%. That's the least and the most the players were supposed to get.
3 Then they compare that to the total amount paid to players via game checks.
4 Finally, the escrow is used to balance the books so that the players end up with the right amount.
a - If the return of the entire escrow would take total salaries to between 50-51%, then it is returned in full to the players who paid it, and no adjustment is needed.
b - If the escrow would take total salaries above 51%, then the owners keep the amount that would be above that number, and the rest goes back to the players. Whatever percentage of the total escrow account is being returned, each player gets that percentage of his own escrow that was held.
c - If the escrow is all returned and the result is lower than 50% of BRI going to the players, then the owners have to write a check to the NBPA (who then distributes per whatever their formula is) that will get the total up to 50% for the season.
d - If the games checks alone are already over 51%, then the players don't have to write a check to make up the difference. But, the owners keep all the escrow AND the next season's cap (and now escrow as well) will be adjusted to make up the difference and try to keep the overpay from happening again.

Is there a formula for how the additional revenue (from tickets, concessions, merchandise, etc) is incorporated into calculating the escrow funds?

Most but not all revenue is simply added dollar for dollar to BRI, including the items you named. But see www.cbafaq.com/salarycap.htm#Q11 for more details.

[Whopper_Sr]

How will having fans back in seats affect the player escrows?

The players and teams split the revenues (which they call BRI), so the more tickets and stuff they sell for their performances, the more each is owed. The amount allowed in salaries (the cap, or limit) is based on expected BRI, and before the season starts, those future game day revenues are obviously just a guess, So escrow is a hold back, to try to make sure that some of the outgoing to players can be readjusted afterwards, so that the money ends up being split properly.

When the season is over, it's just a calculation.
1 They add up all the actual BRI for the season.
2 Then they calculate 50% and 51%. That's the least and the most the players were supposed to get.
3 Then they compare that to the total amount paid to players via game checks.
4 Finally, the escrow is used to balance the books so that the players end up with the right amount.
a - If the return of the entire escrow would take total salaries to between 50-51%, then it is returned in full to the players who paid it, and no adjustment is needed.
b - If the escrow would take total salaries above 51%, then the owners keep the amount that would be above that number, and the rest goes back to the players. Whatever percentage of the total escrow account is being returned, each player gets that percentage of his own escrow that was held.
c - If the escrow is all returned and the result is lower than 50% of BRI going to the players, then the owners have to write a check to the NBPA (who then distributes per whatever their formula is) that will get the total up to 50% for the season.
d - If the games checks alone are already over 51%, then the players don't have to write a check to make up the difference. But, the owners keep all the escrow AND the next season's cap (and now escrow as well) will be adjusted to make up the difference and try to keep the overpay from happening again.

Is there a formula for how the additional revenue (from tickets, concessions, merchandise, etc) is incorporated into calculating the escrow funds?

Most but not all revenue is simply added dollar for dollar to BRI, including the items you named. But see www.cbafaq.com/salarycap.htm#Q11 for more details.

Thank you for the breakdown. This is a topic of interest but I'm unfamiliar with how the numbers work.

For instance, the $8.3B total revenue for the 19-20 season was 10% lower than that of the 18-19 season. It's cited that the NBA suffered losses of $800M in gate receipts and $400M in merchandise and sponsorships.

With this in mind, how do we project this for the 20-21 season? The league notified teams that a season without fans would result in a 40% loss in total revenue, which is absolutely massive.

Let's say they finish the 72 game season (barring any COVID-19 hiccups) at 25% fan attendance across the board. In this case, the projected loss of revenue will simply be reduced by 25% (approximately $1B)? Is it that simple?

[DBoys]

Hard to answer that, because I think their public statements of doom don't match the actual impact on the numbers.

I say that based on
(1) the fact that they actually RETURNED some escrow to players after the 2019-20 season (even though their statements would indicate the players had been paid way too much),
(2) there was relatively little escrow increase this season and next, even though the cap was supposedly set artificially high with an expectation of no butts in seats (which according to their words supposedly drains off 40%, as you noted), and
(3) the spending on contracts this off-season was like a drunken sailor on leave - very aggressive, teams trying hard to spend all they were allowed. No financial hardship in evidence.

So I don't trust any of it, and will wait to see how it plays out.

[Whopper_Sr]

Hard to answer that, because I think their public statements of doom don't match the actual impact on the numbers.

I say that based on
(1) the fact that they actually RETURNED some escrow to players after the 2019-20 season (even though their statements would indicate the players had been paid way too much),
(2) there was relatively little escrow increase this season and next, even though the cap was supposedly set artificially high with an expectation of no butts in seats (which according to their words supposedly drains off 40%, as you noted), and
(3) the spending on contracts this off-season was like a drunken sailor on leave - very aggressive, teams trying hard to spend all they were allowed. No financial hardship in evidence.

So I don't trust any of it, and will wait to see how it plays out.

Well... that certainly muddles things. I was initially skeptical of the league's swift decision to move forward with the 20-21 season considering all the uncertainty that surrounds it. It's still difficult to fathom why they're so confident even when taking the success of the Bubble into account.

If having no fans at all or at a greatly reduced capacity does NOT affect the cap, escrows, etc the way we expect it to, what's the underlying theme here?

Also, where can I access this information? I didn't find anything of that sort from my research.

[DBoys]

Not sure which information you want to find.

The NBA's Collective Bargaining Agreement in 2017, which governs all these issues, is online if you want to read it. https://cosmic-s3.imgix.net/3c7a0a50-8e11-11e9-875d-3d44e94ae33f-2017-NBA-NBPA-Collective-Bargaining-Agreement.pdf It has the basic framework, with the vast majority of the details, of how the partnership between players and owners works.

If you want to read a Q&A formatted FAQ that attempts to explain that CBA and its working details, see http://www.cbafaq.com/salarycap.htm

As for the tweaks to that 2017 CBA, to modify the financial setup in light of the covid (and China) issues that began last season, afaik they do not yet exist in any way online other than reports via media. That's available via "Prof Google."

One outlet that has done a good job of compiling some of those reported tweaks is hoopsrumors.com.

Re "If having no fans at all or at a greatly reduced capacity does NOT affect the cap, escrows, etc the way we expect it to, what's the underlying theme here?" --

My point is that I don't trust what they are telling us, that 'so-and-so will take ___ % from our revenues.' If we can't believe them, then there's no point in trying to predict the impact of various scenarios on total revenues.

The CBA tweaks this fall were incredibly small, not large, in line with what they might do if there was a 10-15% drop, not 40% they had claimed was looming. We saw the same thing in the 2019-20 season and how it played out, as the players escrow went way up for the last part of the season, the NBA lost all their attendance for about 20% of the season plus all of the playoffs, and yet they had to give 2/3 of that extra escrow back to the players because it wasn't needed!