Escrow Calculation

[rugby-hook]

This discussion is priceless, but we need to extend the analysis two steps further to truly understand the full impact on salaries this season:

1. Do teams pay the luxury tax on returned amounts of escrowed salaries? If not, then teams that are paying the LT are getting a signficant break and it may encourage some teams to crawl slightly over the LT. While these teams will forfeit their distributions, they avoid the LT payment which is also beneficial.

2. The escrow refund and avoidance of the LT could save teams from significant salary dumps at the deadline? If the LT is not paid on refunded escrow funds, then teams like NO will get $7.0+m back as well as avoid the LT payment since they are only $4.0mm over the LT cap. Avoiding the LT payment is signficant could be a bigger economic payoff than the LT distribution. Further, non-payment of the LT on returned escrow funds will also reduce the LT distribution as well.

Thanks for your assistance on this matter.

[answerthink]

1. Teams pay the luxury tax if their team salary is above the tax threshold. Team salary includes the portion of player salaries which is placed into escrow (independent of whether those escrow funds are ultimately returned to the players, the teams or a combination).

2. The escrow and the luxury tax are related but separate concepts in the current CBA. The luxury tax is paid by teams that are over the tax threshold (and given in large part to the teams that are under it). The escrow is used to ensure that total league-wide salaries and benefits do not exceed the designated % of BRI. If they do, the difference is returned to the teams in equal shares. This returned amount has no impact on a team's luxury tax position.

[rugby-hook]

I understand why and how the escrow and LT were created and operate. Both parts are fundatmental to the CBA. However, these principles conflict in a decling cap environment.

Multi-year contracts are unavoidable; it is unwise for every player to be on a 1 year deal. The cap exists to help teams plan. When the cap is falling, even contracts with no raises become liabilities, which undercuts the cap and the CBA.

Further, if the escrow exists to defend the BRI percentage and the funds are returned to the team, rather than the players, it makes like sense to impose the LT when the real salaries have been reduced. The BRI exists to insure that teams receive their percentage fo the revenues. The escrow is returned to insure that teams have their moneis, they should be freed of the LT implications on returned monies.