Hard Cap

[Agenda42]

However the owners choose to finance their teams is up to them. If they decide to burden them with debt then that is their choice. If the players want to protect against overleveraging they can do what the IRS does (e.g., see section 163(j) of the Internal Revenue Code) and limit the benefit of interest expense on leverage over a certain amount.

How owners finance their teams stops being purely up to them when they insist that their poor financial decisions be funded by the players.

That said, your solution is reasonable.

The previous CBA did not guarantee players no more or no less than 57% BRI. Due to its mechanics, players could receive no less than 57% BRI but could receive effectively more than 57% BRI. This one sided situation is a result of a limit on the amount of player salaries and benefits that was deposited into the escrow account. If player salaries and benefits were above 57% BRI by more than the maximum escrow amount and because the owners could only receive at most the entire escrow account then the players could receive more than 57% BRI. If the relationship above persisted then the amounts would not balance over time either.

The maximum escrow amount is huge though. The league would have to be paying out 66% BRI before escrow to be seeing any more than 57% BRI after escrow. Has there ever been a case where the league paid out more than 57%?

[answerthink]

I haven’t read this string at all, but saw the last question. Hopefully this answers it for you…

Septhaka is correct in that the players could receive more than their designated percentage of BRI in the previous CBA, but is slightly incorrect in that the owners could indeed receive back more than the escrow amount. If the overage was more than what was available in the escrow account, player salaries would be reduced the following season to compensate. However, players could not be required to give back more than a designated percentage of their salaries and benefits (8% this past season).

The situation actually happened in 2008-09.

The players made 63.1% of BRI in salaries and benefits. The escrow account lowered it back down to 57.7%. There was a $26 million shortfall. Player salaries were reduced the maximum allowable amount the following season to compensate ($11 million), but it still left the players making 57.4% of BRI for 2008-09.

[ranger001]

I haven’t read this string at all, but saw the last question. Hopefully this answers it for you…

Septhaka is correct in that the players could receive more than their designated percentage of BRI in the previous CBA, but is slightly incorrect in that the owners could indeed receive back more than the escrow amount. If the overage was more than what was available in the escrow account, player salaries would be reduced the following season to compensate. However, players could not be required to give back more than a designated percentage of their salaries and benefits (8% this past season).

The situation actually happened in 2008-09.

The players made 63.1% of BRI in salaries and benefits. The escrow account lowered it back down to 57.7%. There was a $26 million shortfall. Player salaries were reduced the maximum allowable amount the following season to compensate ($11 million), but it still left the players making 57.4% of BRI for 2008-09.

The Larry Coon FAQ says that "extra" money would be deducted the following season (Q15). Doesn't that mean money above the 8%?

[answerthink]

Yes, it does. But it also states, perhaps not so eloquently, that the reduction is limited. Players can’t lose more than a certain percentage of their salaries and benefits (anywhere between 10% and 8%, depending on the year). These two concepts, when combined, are equivalent to my second paragraph above.

The situation I describe above is similar to Larry’s hypothetical Example C. In it, the players make 63.7% of BRI in salaries and benefits ($1.91 billion). The escrow ($181 million), returned in full to the owners, lowers it back down to 57.6% of BRI.

But there is still a $19 million shortfall. Player salaries are therefore reduced the maximum allowable amount the following season to compensate. Since the players can’t lose more than 10% of their salaries and benefits, or $191 million, and they’ve already given back $181 million through the escrow, they give back the difference, $10 million, the following season. But that still leaves them making 57.3% of BRI. Through deficiencies in the escrow system, the players make an extra $9 million…

[ranger001]

I thought the way the escrow works is that they start off withholding the escrow money(e.g. 8% in 2010-2011).

Thus I would think when they say "extra" money it would be money above the 8%. In your example in the 2009-2010 year I would think they would take the extra money in the following year, giving a withheld amount greater than the 9% carded for that year.

Or is there some sort of range for the escrow money?

[answerthink]

Escrow funds are withheld as the players receive their compensation.

In 2009-10, $11 million was deducted from player salaries and remitted to the league in order to accommodate the shortfall from the prior season. In addition, escrow funds were withheld from player salaries to accommodate any potential overage for that season. There was a $170 million overage, but the $192 million in escrow was enough to cover it; the rest of the escrow was returned to the players.

I am having difficulty understanding your question. Perhaps if you state it more clearly, I can do a better job for you.

[ranger001]

Ok, in 2008-2009 the escrow percentage was 9%. Lets say a players paycheque for the year was 1,000,000. That means the league would have withheld 90,000. So this guy loses his 90K since the overage was more than the escrow, every player in fact lost their 9%.

Now in 2009-2010 the same guy has the same paycheque. How much of his paycheck would be withheld during the year? ( Not considering the end result of how much he gets returned back, just how much gets withheld)

My understanding is that the same 9% would be withheld plus an additional amount from the previous year to cover the shortfall that the overage was more than the escrow. This additional amount being the "extra money" that Coon refers to.

[answerthink]

Yes, you are correct… except that the additional amount you reference would not fully cover the amount by which the overage exceeded the escrow.

If he made $1,000,000 again in 2009-10, the same $90,000 would have been withheld and placed into escrow. He would also have lost his pro-rated share of the $11 million referenced above.

[ranger001]

So your're saying that only 9% would ever be withheld in 2009-2010? So what is the "extra" money that Coon says would be deducted the following season?

[mysticbb]

That "extra" money is $11m, and the player loses his share of that money. If the overall salary and benefits for all players in 2009-10 is $2000m, the $1m would be 1/2000. That means he also loses 1/2000*$11m = $5500 additional due to the max reduction coming from the previous year.

Got it?

[ranger001]

Ah ok, now i think I see what you guys are saying, thanks.

If the overage exceeds the escrow that extra money is added to the overage for the next year. But it only works to balance out if the overage is below the escrow by at least the extra amount from the previous year.

If theoretically every year the overage exceeded the escrow then the players would always get more than 57%.

[mysticbb]

If the overage exceeds the escrow that extra money is added to the overage for the next year.

Not everything, that is limited. The overaged in 2009 exceeded the ESCROW by $26m, but only $11m were refundable in the next season.

If theoretically every year the overage exceeded the escrow then the players would always get more than 57%.

Indeed, it is. That is a flaw in the system.

The ESCROW system basically makes sure that the players have to pay for bad contracts, exept for the small part which is not refundable, if the overage exceeds the ESCROW.

[answerthink]

Actually, no... Overages are not combined. If the overage exceeds the escrow in any given season, the difference (or a portion of the difference, as the case may be) is subtracted from player salaries the following season. Any potential overage for that following season is dealt with separately.

Actually, no... It wouldn’t be completely accurate to say that if every year the overage exceeded the escrow then the players would always get more than 57% of BRI. The players would make more than 57% of BRI only if the overage is greater than the designated percentage of salaries and benefits (8% this past season).

Also, as a minor update to the proration formula provided above, it is actually based on salaries alone. Art VII Sec 12(e) describes it in more detail.

Keep in mind that this situation only happened once (in 2008-09), and even then it was only very slight (players made 57.4% of BRI).

[ranger001]

Actually, no... It wouldn’t be completely accurate to say that if every year the overage exceeded the escrow then the players would always get more than 57% of BRI. The players would make more than 57% of BRI only if the overage is greater than the designated percentage of salaries and benefits (8% this past season).

So if the overage was always greater than the designated percentage, would the players always get more than 57%? Is this a theoretically possible situation?

[answerthink]

Yes, and yes.

In 2008-09 the overage was greater than 9% of player salaries and benefits, and the players received 57.4% of BRI. A similar situation could certainly have happened in any season. But keep in mind just how rare it actually is.

[ranger001]

As Spock would say "interesting". Thanks.

Puts some background into why the owners proposed the flex cap.