Escrow Calculation

[answerthink]

I have a question in regards to situations in which there is an Overage which the Escrow is insufficient to cover.

Larry Coon's FAQ (Question 15, Example C) describes the issue. In his example, the Total Salaries is $1.81B, Total Salaries and Benefits is $1.91B, the Escrow amount is 10% of Salaries or $181M, and the Overage is $200M. But then Larry states "The players can't lose more than 10% of their salary and benefits, so the owners are owed $191 million." This is where my confusion is. He goes on to say that since the Escrow only holds $181M, the difference between what the owners are owed and what is available in the Escrow account (what the CBA calls "Aggregate Compensation Adjustment Amount Shortfall") of $10M will be subtracted from players' salaries in the following season.

According to the language of the CBA, I see the math slightly different. The "Aggregate Compensation Adjustment Amount Shortfall" is calculated as the "Aggregate Compensation Adjustment Amount" minus the Escrow amount. "The Aggregate Compensation Adjustment Amount" is the lesser of: (i) "the Aggregate Salaries and Benefits Adjustment Amount" (which is $191M) and (ii) the designated % of Total Salaries (which is $181M). The problem is that (ii) appears to utilize the same calculation as the calculation of the Escrow amount (in that they both utilize the same % of players' salaries, both incorporate only the portion of incentive compensation that is actually earned, both include all current and former players that are included in Team Salary as well as players that suffer long-term injuries, and both add back the portion of minimum contract amounts that are reimbursed by the league), so there would seem to never be an "Aggregate Compensation Adjustment Amount Shortfall." Article VII, Sections 12(a)(2), (3) and (9) describe the issue.

My sincere apologies for the long post, but I would greatly appreciate if someone could help me with what I am missing...

[answerthink]

I know this question appears to be a bit obscure, but it is actually quite important to something I am doing and I don't know where else to turn. I would greatly appreciate any insights.

Allow me to simplify my question: For 2009-10...
(i) "Agg. Comp. Adj. Amt." (Art VII, Sec 12(a)(2)) can never be more than 9% of salaries
(ii) "Escrow Amount" (Art VII, Sec 12(a)(9)) is 9% of salaries
(iii) the salary definition used for (i) and (ii) is the same
(iv) "Shortfall" (Art VII, Sec 12(a)(3)) = (i) - (ii), if positive

How can there ever be a shortfall? What am I missing?

[Dunkenstein]

An Overage occurs when the amount salaries & benefits exceeds the Designated %. When the Designated % of Salaries is less than the Escrow Amount, the players get some of the escrow money back. When the Designated % of Salaries is greater than the Escrow Amount a Shortfall occurs and the players get none of the escrow money back. In fact, according to Larry Coon a portion of their next season's salary is deducted to make up some or all of the difference. The players can't lose more than 10% of their salary and benefits.

EDITED AS I GOT A BETTER UNDERSTANDING OF OVERAGES AND SHORTFALLS.

[answerthink]

Dunkenstein,

Thank you very much for responding to me. If you don’t mind, I have a couple of follow-up questions:

(A) In your response you indicate that there could only be a "Shortfall" if (ii) is smaller than (i). I believe the definition of “Shortfall” is the amount by which the Escrow funds are less than the Aggregate Compensation Adjustment Amount (“ACAA”). Doesn’t this definition mean there is only a “Shortfall” when the ACAA is greater than the Escrow Amount?

But by definition, the ACAA Amount can never be greater than 9% of Salaries (which is equal to the Escrow Amount). Doesn’t that mean there could never be a “Shortfall”?

(B) In your response you indicate that there is a “Shortfall” when there is no overage. Why then would the “Shortfall” be subtracted from players’ salaries the next season (as per Art VII, Sec 12(e))? In such a case, the players haven’t made more than their 57% share of BRI…

I want to assure you that I do not mean to be difficult. I really appreciate your help. I must be making a very simple and stupid mistake somewhere in my logic …

[Dunkenstein]

Dunkenstein,

Thank you very much for responding to me. If you don’t mind, I have a couple of follow-up questions:

(A) In your response you indicate that there could only be a "Shortfall" if (ii) is smaller than (i). I believe the definition of “Shortfall” is the amount by which the Escrow funds are less than the Aggregate Compensation Adjustment Amount (“ACAA”). Doesn’t this definition mean there is only a “Shortfall” when the ACAA is greater than the Escrow Amount?

You're correct. I totally misunderstood Shortfalls. I have attempted to correct my previous post.

As for the rest of your questions, I don't have the time to study this arcane issue in order to give you a proper answer. I was making an attempt to read and interpret the language of the CBA in an effort to answer your questions, since you seemed so desperate to get an answer to them. This issue of shortfalls and overages does not fall into an area with which I have any previous understanding. Larry is probably the only person who might truly understand this issue.

[answerthink]

Thanks Dunkenstein. I'm asking partly because the situation I am describing happened this past season (and salaries will be adjusted in the upcoming season). The frustrating part is that I understand the concept quite well. It’s the language that is problematic. Hopefully, Larry will see the question and respond.

It’s also interesting that, in certain cases, player salaries and benefits can exceed the CBA-mandated 57% of BRI (even after all adjustments are made).

[Dunkenstein]

Dunkenstein,

Thank you very much for responding to me. If you don’t mind, I have a couple of follow-up questions:

(A) In your response you indicate that there could only be a "Shortfall" if (ii) is smaller than (i). I believe the definition of “Shortfall” is the amount by which the Escrow funds are less than the Aggregate Compensation Adjustment Amount (“ACAA”). Doesn’t this definition mean there is only a “Shortfall” when the ACAA is greater than the Escrow Amount?

But by definition, the ACAA Amount can never be greater than 9% of Salaries (which is equal to the Escrow Amount). Doesn’t that mean there could never be a “Shortfall”?

(B) In your response you indicate that there is a “Shortfall” when there is no overage. Why then would the “Shortfall” be subtracted from players’ salaries the next season (as per Art VII, Sec 12(e))? In such a case, the players haven’t made more than their 57% share of BRI…

I want to assure you that I do not mean to be difficult. I really appreciate your help. I must be making a very simple and stupid mistake somewhere in my logic …

I had some time and studied the issue of Overages and Shortfalls some more. Just about everything I wrote in my original post was incorrect. I have tried to correct it. Again, I don't claim to be knowledgeable in this area.

As I interpret the language, the percentages for the ACAA used in 12 (a) (2) are the same as the Escrow percentages. When total benefits and salaries surpass those percentages, that's when the ACAA Shortfall kicks in.

[answerthink]

Dunkenstein, I appreciate you spending all this time on this topic. I believe you are now getting a better understanding of this section of the CBA and my question. Further thoughts on your updated response:

I believe the intent of the CBA is to return funds to the teams when there is an Overage. The concept has little to do with the calculation of Escrow. It has more to do with determining whether the players have received more, in Salary and Benefits, than their Designated % of BRI. The Escrow is simply the mechanism which allows the teams to be reimbursed if the players have made too much.

If there is enough money in the Escrow account, the portion of the Escrow that is required to knock the players’ % of BRI (in Salary and Benefits) down to the Designated % of BRI is reimbursed to the teams. The rest is returned to the players.

The problem arises when the Escrow is not big enough to return enough money back to teams to knock the players’ % of BRI (in Salary and Benefits) down to the Designated % of BRI. This is when I believe there is a “Shortfall.” In this case, the entire Escrow is returned to the teams. Players’ salaries are then adjusted down the next season. The question is, how much?

The amount to be deducted that would make the split of BRI equal to the Designated % would be the rest of the Overage (the portion that couldn’t be returned to teams because the Escrow wasn’t big enough). But the CBA doesn’t define “Shortfall” this way. The CBA defines it as you describe it (i.e., the lesser of the Designated % of Salaries and the Aggregate Salary and Benefits Adjustment Amount, minus the Escrow; but since the Escrow wasn't enough to cover the Overage, we know that the calculation is Designated % of Salaries minus Escrow). The problem – and the original reason for my question – is that the Designated % of Salaries is equal to the Escrow, according to their calculations (both use the same % and both define the term “Salary” the exact same way). So, I believe there could never be a “Shortfall.” That is my question…

A couple of notes as it relates to Larry’s explanation…

First, I believe the 10% of Salary and Benefits he was using was just an example. The %s are defined in the CBA. I believe the appropriate % for 2008/09 was 9%.

Second, Larry states that players can’t lose more than 10% of their Salary and Benefits. What I believe Larry is saying, in CBA language, is that the “Shortfall” is calculated as the Aggregate Salaries and Benefits Adjustment Amount minus the Escrow amount. But I think you and I now agree that this does not appear to be what the CBA states. Importantly, though, I also believe it is what the CBA intends to say.

Again, since it is difficult to communicate intent in text, I would like to reassure everybody I mean no disrespect to anyone. I know I must be making a very stupid mistake in my logic somewhere…

[LarryCoon]

I haven't pored through this section of the CBA like I have other sections, but I did have a conversation about it (in the past, not since you asked the question) with someone whose job it is to understand it. My takeaway from that conversation is that the intent IS as you surmised the intent to be. I never noticed a discrepancy between the intent and the actual language, but if the language is off, it wouldn't be the first time that's happened.

Let me take another gander at it to see what I can see. Can't promise it'll be today -- this is the kind of thing for which I have to set aside a block of time and actually pay attention.

[answerthink]

Thank you very much Larry. I look forward to your response.

A couple of equally technical follow-up questions would be:

(1) Is the amount of any such shortfall considered an adjustment to (and therefore included in the calculation of) each player’s individual respective “Salary” and “Base Compensation” for purposes of determining each player’s Escrow amount the following season? Would the amount of any Minimum League-Wide Roster payment be considered “Salary”?

The definitions provided for “Salary” and “Compensation” would support an argument that they both would count as “Salary”. However, the following points make it less obvious:

- The actual sections that deal with these concepts -- Article XXIX, Section 3(c) for roster payments and Article VII, Section 12(e)(3) for shortfalls -- do not provide specific clarification. (On a separate note, Section 12(e)(3) utilizes the defined term “Cash Compensation,” which I believe is another apparent error in the CBA in that I don’t believe it is actually defined anywhere; and if it’s two defined terms, then “Cash” appears not to be defined).

- As it relates to roster payments, the definition of “Total Salaries” specifically calls out that it includes roster payments, which it would not need to do if such payments were already included in each player’s individual “Salary”.

- As it relates to shortfall amounts, including it in each player’s “Salary” would have a compounding negative effect from the league’s perspective (not only did the players make too much money the year before – a portion of which the league will never get back because the Escrow wasn’t large enough – but the current year’s total Escrow amount would be lower due to the shortfall’s downward adjustment of each player’s “Salary”). Further, the last phrase of Section 12(e)(1) would suggest such shortfall would not be included.

(2) If the amount of such shortfall is indeed considered an adjustment to each player’s individual respective “Salary”, then by definition it is also an adjustment to both (i) each team’s “Team Salary” and (ii) “Total Salaries.” If the amount of such shortfall is not considered an adjustment to each player’s individual respective “Salary”, is it considered an adjustment to “Team Salary” or “Total Salaries”?

(3) Does the Total Salaries for 2005-06 provided in the second chart to question 15 in your FAQ include the expansion team? According to its definition I believe it should not. I ask because the Escrow is exactly 10% of that number (and its calculation includes expansion team players).

I apologize for the overly technical nature of my questions. I am asking because I have created a spreadsheet which successfully calculates all key mathematical figures for each historical year covered under the current CBA (including each Projected BRI that was used, Salary Cap, Luxury Tax Threshold, MLE, Escrow Payment, Tax Payment, etc.) and then rolls these formulas forward to projected years, allowing the ability to make very educated guesses about the future. This spreadsheet is quite important to me, and can’t be finalized until these last few items are sorted out. If there is a more appropriate forum, please let me know.

[answerthink]

Larry,

If you don't mind, I have an additional question as to where the actual results in your FAQ come from. I ask because I am attempting to cross reference the figures and am having difficulty.

As an example, I believe the MLE is determined as 108% of the following formula: Total Salaries for the previous year / (13.2 * # of non-expansion teams). The implied Total Salaries that produce the historical MLE amounts don't seem to match the actual Total Salaries that were reported in the FAQ in any year other than the current (and the differences appear to be too large to be the result of rounding).

I realize I am inundating this board with overly technical questions. I have a few others as well, which I am trying to space out. I am a new poster and this is the forum suggested in the FAQ. If people would like me to stop, I can certainly do so.

[satyr9]

Sorry if I don't live up to the standards of this thread for attention to detail, but I thought I'd try and wrap my a head around this thread. Are you asking if they will adjust players salaries this season in addition to the usual escrow to make up the shortfall from last year (the shortfall being that the amount collected from escrow was not enough once it was returned in its entirety to the owners to bring the total cost of NBA salaries to equal 57% of BRI?)

Without actually knowing, I would've just assumed (probably not a good idea xD) that they would just carry the outstanding 28 million (wasn't that what it was in Larry's FAQ?) on the books for next year's escrow, not try and take that shortfall out of the salaries on top of the escrow amounts. Unless there's a specific section in the CBA that states explicitly they get to exceed the escrow percentage in the event of a shortfall the previous year, then I think this is the most likely outcome, but since you and Larry are obviously more familiar with the CBA (my only knowledge of it comes from his FAQ), my opinion probably doesn't count for all that much, but I'm curious and I thought I'd throw my 2 cents in.

If that is the case, then I think it seems likely that shortfall will only increase next year as well, since salaries are not down that much from last year and it sounds unlikely at this point that any decrease in salaries will be commensurate with decrease in revenues so this discrepancy is only going to get larger. I wonder what would happen if you reached the end of a CBA with a debt like this outstanding? Anyway, feel free to disregard if I misunderstood the question or didn't really contribute anything new. Good luck with the hunt!

[answerthink]

According to the provisions of the CBA, salaries are indeed adjusted downward the following season by the amount of the shortfall. (They are not adjusted downward enough, however, to bring total salaries and benefits to the designated % of BRI; this is a concept I describe above.) This is in addition to any escrow amounts that are withheld in the following season.

I would suggest your solution might not be as effective a means to ensure the designated % of BRI is upheld as is described in the CBA. To better see this, imagine a hypothetical scenario in which there was a shortfall, the shortfall amount simply increased the amount of the escrow collected in the next season and, ultimately, there was no overage in such season. In this scenario, the entire escrow would be returned to the players, the owners would never recover such funds and the integrity of the BRI split would be compromised.

Your conclusions, however, may still prove correct. Based on my calculations, the league will most certainly be facing another shortfall in the upcoming season (if the BRI drops as projected). The problem is likely to get worse as the escrow % drops from 9% of salaries to 8% two seasons from now. As you point out, since we may be left with a shortfall two seasons from now this concept will most certainly be dealt with in any new CBA that is agreed upon.

Please note that I am just an average basketball fan with no access to any league sources. Any conclusions I’ve drawn are based upon mathematical calculations supported by specific references to the CBA. I have created this topic to ask questions where I believe (i) the language of the CBA may be in error, (ii) the CBA does not provide enough detail to describe a certain situation or (iii) information provided in the CBA contradicts information provided in the FAQ. As such, I do hope for a response from Larry or somebody who has knowledge of the league's intent...

[semifiction]

So overall this is a very confusing issue.

One simple thing I'm confused about is if players are guarenteed at least 57% of revenues (what was agreed upon in the lock out of 99), how can the escrow system keep the salaries to 57% of BRI?

I guess this is related to your reply answerthink. Just that they will have the maximum escrow deducted presumably each year but still be over the 57% BRI?

[FGump]

Working off of Dunk's excellent summary, the following seems to me to be the simple framework that the complex Escrow wording is trying to create. My additions are noted and I have italicized a couple of items by Dunk that I think needed some minor editing.

EDITED LATER in bold to reflect the later discussion and clean up some terminology errors.

1 An Overage occurs when the amount salaries & benefits exceeds the Designated %.

ADDED 2 < Escrow is a predesignated amount of money set aside from salaries to cover a possible Overage - ie, the owners collectively paying too much in salaries compared to the revenues that ultimately were gained - for a season.>

3 When the OVERAGE is less than the Escrow Amount, the players get some-to-all of the escrow money back and the NBA gets the rest.

4 When the OVERAGE is greater than the Escrow Amount, the players get none of the escrow money back.

5. A SHORTFALL occurs when the entire designated Escrow amount was not actually collected and some or all of it would have been payable to the NBA. In that situation, a portion of their next season's salary will be deducted to make up the difference.

6 The players can't lose more than 10% (or a lesser predesignated percentage, depending on the season in question) of their salary and benefits, not counting any shortfall. (This number is only 9% this season, and 8% in later seasons of this CBA.)

[answerthink]

I would suggest the following updates:

3. When an Overage occurs, money is taken from the escrow account and given to the NBA. The rest is returned to the players.

4. If there is not enough money in the escrow account to pay back the Overage amount, a shortfall occurs.

4b. This was accurate as originally written. If there is a shortfall, the amount of the Overage not paid back from the escrow is deducted from players’ salaries in the following season… up to a limit. Players cannot lose more than a certain % of their salaries and benefits (10% in the example provided by Larry in his FAQ, and referred to in 5 above). If the Overage is greater than 10% of salaries and benefits, player salaries in the following season are adjusted downward only up to this amount, and the NBA is not entitled to the rest of the Overage.

5. The limit of 10% of players' salaries and benefits (actually, a percentage that starts at 10% for the 2005-06 season and falls to 8% by the 2010-11 season) is a concept that is tied into the shortfall definition.

[FGump]

Okay, on closer examination of those sections based on what is just written, it all fits.

The "shortfall" would then merely be an accidental under-withholding in light of the fact that the final numbers will not be known until the season is completed. Such shortfall only becomes relevant in a season in which the players are required to forfeit to the league in excess of the amount actually escrowed, and that's when a shortfall is collected from the ensuing season's salaries.

As an example, this year the NBA will be entitled to as much as a 9% giveback if the salaries are way through the roof in relation to revenues. If as the season plays out they inaccurately estimate and only withhold 8.85% rather the the full 9%, then this is the mechanism whereby next season they can go back and get the difference right off the top, paid in installments.

[answerthink]

that's not quite it. perhaps an example is the best approach.

Case 1
If the NBA makes $1B in revenue, the players are only allowed to receive 57% of that, or $570M, in salary and benefits. Let’s say the players actually made $530M in salaries and $70M in benefits. Since this $600M total is greater than the $570M they were allowed to make, the $30M difference is the Overage… and the players would have to give it back.

Rather than the NBA going to each player at the end of the season and taking back the money, the players instead put a certain percentage of their salaries into an escrow account as they receive their paychecks. In the 2005-06 season, the amount was 10%. Since the players made $530M in salaries, at the end of the season there would be $53M in the escrow account. Since the players made $30M too much, $30M of the escrow is given back to the NBA and the other $23M of the escrow is returned to the players.

Case 2
If we now assume the NBA made $1B of revenue and the players made $580M in salaries and $70M in benefits, the players would need to give back $80M ($650M in salaries and benefits - $570M they were allowed to make). The escrow (10% of salaries) would only be $58M, so it would all need to be given back. The additional $22M would also still need to be dealt with. But… by rule, the players must only give up a total of 10% of their salaries and benefits, or $65M. They already gave back $58M. So, only $7M of the total $22M would be taken out of players’ salaries the following season.

If we think about what happened, the players made $580M in salaries and $70M in benefits. They were forced to give back the $58M they put into the escrow and an additional $7M the next season. Overall, they made $585M in salaries and benefits ($580M + $70M - $58M - $7M). That represents 58.5% of the NBA’s $1B in revenue.

I believe this type of situation happened last season.

[FGump]

that's not quite it. perhaps an example is the best approach.

Case 1
If the NBA makes $1B in revenue, the players are only allowed to receive 57% of that, or $570M, in salary and benefits. Let’s say the players actually made $530M in salaries and $70M in benefits. Since this $600M total is greater than the $570M they were allowed to make, the $30M difference is the Overage… and the players would have to give it back.

Rather than the NBA going to each player at the end of the season and taking back the money, the players instead put a certain percentage of their salaries into an escrow account as they receive their paychecks. In the 2005-06 season, the amount was 10%. Since the players made $530M in salaries, at the end of the season there would be $53M in the escrow account. Since the players made $30M too much, $30M of the escrow is given back to the NBA and the other $23M of the escrow is returned to the players.

Case 2
If we now assume the NBA made $1B of revenue and the players made $580M in salaries and $70M in benefits, the players would need to give back $80M ($650M in salaries and benefits - $570M they were allowed to make). The escrow (10% of salaries) would only be $58M. It would all need to be given back. The additional $22M would also still need to be given back. But… by rule, the players must only give up a total of 10% of their salaries and benefits, or $65M. They already gave back $58M. So, only $7M of the total $22M would be taken out of players’ salaries the following season.

If we think about what happened, the players made $580M in salaries and $70M in benefits. They were forced to give back the $58M they put into the escrow and an additional $7M the next season. Overall, they made $585M in salaries and benefits ($580M + $70M - $58M - $7M). That represents 58.5% of the NBA’s $1B in revenue.

This is what happened last season.

So if we can avoid all the wordiness and move to the bottom line, what you're saying is that the designated Escrow amount will only be withheld up to a certain percentage of salary, but that ultimately the same percentage is due from benefits if needed, and the shortfall is the adjustment the following year. Which is basically the same sort of concept I was pointing to - the players owe X %, it's not quite all there, so the league gets the rest of what's due (to collect the full amount up to that limit) the ensuing year. Agreed?

So to use an example, in each year let's say salaries are sky high and the players owe/must pay the full 10%. Ignoring how it's calculated for either deductions or payments, let's say they only had 9% deducted. Therefore, the following year, they will pay the uncollected-and-due 1% (and it will be paid by the players as a whole and then prorated down to them proportionate to their salary, not on an individual basis or a debt-from-last year basis individually), and that will be on top of the up-to-10% to be deducted for that year itself. And once that 1% has been collected, that's the full limit to any amounts due from the players for year 1 and nothing else is due or collected thereafter. Agreed?

The 1% would be your Shortfall that you were originally trying to figure out how it would ever exist. Agreed?

[answerthink]

I believe it is a bit more complex than that unfortunately, but I mostly agree. I definitely agree that the maximum adjustment to salaries the following season is the same % of benefits.

I originally asked the question because while this is the intent of the CBA, it is not what the CBA actually says (as it relates to the shortfall). What the CBA actually says is impossible, which I was able to confirm independently.