Salary cap implications of the Coronavirus

[Fencer reregistered]

If I'm reading the FAQ correctly, especially questions 12 and 17, the NBA's imminent huge loss of income will NOT have a big effect on future cap numbers. In particular:
-- The cap is based on projected revenue each season, with a limited clawback if the projection was too optimistic.
-- If there's a one-time shortfall in revenue, the players may have to give up 10% of their salaries or so that season to share the pain.
-- But if revenues are projected to bounce back the next season, it's back to business as usual.
-- While the revenue projection is a negotiated figure between the NBA and the Player's Association, I'm not aware of cases when that negotiation has been contentious in the past, nor of reasons to think it will be contentious this year even given the extraordinary circumstances.

http://www.cbafaq.com/salarycap.htm#Q12

Do I have this right?

[bondom34]

If I'm reading the FAQ correctly, especially questions 12 and 17, the NBA's imminent huge loss of income will NOT have a big effect on future cap numbers. In particular:
-- The cap is based on projected revenue each season, with a limited clawback if the projection was too optimistic.
-- If there's a one-time shortfall in revenue, the players may have to give up 10% of their salaries or so that season to share the pain.
-- But if revenues are projected to bounce back the next season, it's back to business as usual.
-- While the revenue projection is a negotiated figure between the NBA and the Player's Association, I'm not aware of cases when that negotiation has been contentious in the past, nor of reasons to think it will be contentious this year even given the extraordinary circumstances.

http://www.cbafaq.com/salarycap.htm#Q12

Do I have this right?

Pulling from Leroux and Hollinger (assuming lost games or empty arenas):

https://theathletic.com/1670647/2020/03/11/covid-19s-impact-on-the-salary-cap-is-an-addendum-to-a-fraught-situation/

Do the math on an NBA regular season with roughly nine home games left per franchise, and you’re talking over $500M. Because BRI is roughly split with the players and then is cut 30 ways to produce a cap number, playing the rest of the season in front of empty crowds could theoretically drop next year’s cap by $8M.

That’s the regular season, mind you – doing the same for the playoffs, where the average gate is higher, would siphon away millions more.

One of the other fascinating wrinkles of this story is that there does not have to be any impact on the cap for 2020-21 or any future season. The Collective Bargaining Agreement intentionally focuses cap projections on the actual income for that season to protect against situations where something significant makes the past non-representative. A reasonable scenario here would be if the players and owners ever agree to permanently reduce the number of regular season games: since that would have discernable, projectable effects on league-wide revenue, the expectation is that it would be incorporated in projections for the first year it goes into effect rather than having to wait.

This situation is different, however, because the shift in income is both before the 2020-21 cap calculations and temporary, though we have no idea how long it will last at the moment. Inevitably, the players would argue that something like COVID-19 will not affect the next season nearly as much so relying on 2019-20 numbers is unfair.

However, the owners have a big piece of leverage in those negotiations. Article IV, Section 9(a) of the CBA dictates that if the two sides cannot come to an agreement, the league will use a combination of national TV rights fees (since they’re known and locked-in) and BRI from the previous year. As such, the fallback would presumably include a lower cap for 2020-21. While some franchises would be hurt by that posturing, it would reduce expenses for teams by lowering salaries since max contracts, Mid-Level exceptions, the rookie scale for draft picks and minimum contracts all have ties to the salary cap figure. Since players will sign multi-season contracts this offseason, those savings will carry over for years even if the cap returns to “normal” in 2021-22.

On the other hand, any dip in the cap in 2020-21 would also engender an artificial jump in 2021-22. This is because the actual revenue from 2020-21 would likely greatly exceed that reflected in the cap number, and the CBA includes catch-up provisions to even those numbers out over the course of the deal.

The result? An instance where smoothing would likely be a good idea. Hopefully, the two sides are more able to get something done than the last time this came up.

As such, our best guess is that a significant drop in gate revenue and related income for the 2019-20 season will produce both a lower 2020-21 salary cap than previously projected and some genuine public frustrations between the owners and players because of the unusual circumstances. There are far more important concerns stemming from COVID-19 but hopefully this helps clarify the basic elements of what comes next from a CBA/salary cap perspective.

[Fencer reregistered]

Ahh. I forgot that the smoothing bit was a contentious negotiation. But IIRC it wasn't about the estimated true contractual number; rather, the league was asking for a move away from the true contractual number, the union declined, and Kevin Durant wound up going to Golden State.

[bondom34]

Ahh. I forgot that the smoothing bit was a contentious negotiation. But IIRC it wasn't about the estimated true contractual number; rather, the league was asking for a move away from the true contractual number, the union declined, and Kevin Durant wound up going to Golden State.

The old ESPN report was they'd still have gotten 51%, I think their perception was they were going to somehow get screwed out, then realized a year after what they'd done.

I'm not totally sure how it'd work (hoping Smitty drops by at some point as he'd be a good source for this too).

[Fencer reregistered]

Ahh. I forgot that the smoothing bit was a contentious negotiation. But IIRC it wasn't about the estimated true contractual number; rather, the league was asking for a move away from the true contractual number, the union declined, and Kevin Durant wound up going to Golden State.

The old ESPN report was they'd still have gotten 51%, I think their perception was they were going to somehow get screwed out, then realized a year after what they'd done.

I'm not totally sure how it'd work (hoping Smitty drops by at some point as he'd be a good source for this too).

I doubt we know for certain what the league's best-and-final offer was or would have been, but I lean toward your theory that something could have been worked out that preserved the substance of the revenue split.

[DBoys]

As I understand it, the OP synopsis is a bit amiss. It's been three years (2017 CBA process) since I've had any reason to do a deep dive on the CBA mechanisms for the cap, but IIRC the CBA rules are structured in a way to ensure that get 50% over the course of the agreement. Period.

So yes the mechanisms for setting the cap are based on projected revenues, but when the previous cap left the split unequal, the setup provides for adjustments to recoup it back to the 50%. When the players get too much, the salary hold-back is part of that, but if that's not enough, then that money owed by the players to owners isn't erased, but rather they use a formula to alter future cap to get the money back. It works the other way, too. (IIRC they take a bite out of the future BRI, or add to it, as needed.)

If this lingers, there's also the possibility that the NBA could work with the PA to figure out solutions, with the ultimate hammer that they could void the CBA (essentially voiding all future contracts) if it lasts more than 60 days and they see no better alternative. That's the extreme end of the scale, of course, and quite unlikely. But this is all uncharted territory being navigated - the league has been shut down.

[d-train]

The impact of the coronavirus is the salary cap is going to tank for at least 1 year. I expect owners and players are going agree to temporary changes aimed at mitigating the lost revenue. These will be calendar and location changes to salvage the playoffs. I don't anticipate any changes to how the salary cap and taxes are determined, except the salary cap amount is going to be smaller and taxes will probably be higher. Most players negotiating their contracts this free agency are going to be pinched.

[Fencer reregistered]

The impact of the coronavirus is the salary cap is going to tank for at least 1 year. I expect owners and players are going agree to temporary changes aimed at mitigating the lost revenue. These will be calendar and location changes to salvage the playoffs. I don't anticipate any changes to how the salary cap and taxes are determined, except the salary cap amount is going to be smaller and taxes will probably be higher. Most players negotiating their contracts this free agency are going to be pinched.

I think that's true mainly to the extent that 2020-21 revenues are weaker than previously expected.

But that now seems much likelier than I assumed it to be when I started this thread.

[DBoys]

The impact of the coronavirus is the salary cap is going to tank for at least 1 year. I expect owners and players are going agree to temporary changes aimed at mitigating the lost revenue. These will be calendar and location changes to salvage the playoffs. I don't anticipate any changes to how the salary cap and taxes are determined, except the salary cap amount is going to be smaller and taxes will probably be higher. Most players negotiating their contracts this free agency are going to be pinched.

I think that's true mainly to the extent that 2020-21 revenues are weaker than previously expected.

But that now seems much likelier than I assumed it to be when I started this thread.

Once they closed down the league, it changed everything.

The bottom line is that the NBA and the players are partners, and each are due a 50-50 split of the revenues (which includes the substantial player benefits package). The contracts were in place and players being paid with an expectation that the revenues for the year were going to be $6 billion more or less. But once you lop off 20% of the regular season, plus kill the playoffs, then revenue is inevitably going to fall way short of expectations.

It looks like their best case scenario is a restored NBA partial season and playoffs of a sort, that will be weird - a patched together set of games with no butts in seats, no tickets or concessions, and played out for TV. TV revenue will depend on ratings - do people want to watch that, or will they say "Screw it"? And that seems to be the BEST case scenario.

Future caps have to be lower until the owners get their equal share caught up, and until life is back to normal. And let's not forget that the league already got hit by the Morey/China revenue loss. It looks to me like we may see a severely lowered cap for several years.

[d-train]

Reportedly, owners and players agreed to increase escrow from 10% to 25% for remaining 19-20 paychecks and for paychecks partially into 20-21. A 25% contingency seems way to low for what's going on. Even if, new contracts are ratcheted down this free agency period.

[DBoys]

Reportedly, owners and players agreed to increase escrow from 10% to 25% for remaining 19-20 paychecks and for paychecks partially into 20-21. A 25% contingency seems way to low for what's going on. Even if, new contracts are ratcheted down this free agency period.

Yep. If they end here, they are short maybe 25% of the whole season revenue (loss of 20% of regular season and all the playoffs and playoff revenue). That would be a loss of $1.5 billion (and players share $750 million). They are only holding back an extra 15% on the last 2-3 payments (which I estimate to be no more than an extra $80-100 million hold-back). A partial finish to the season could also reduce some of that loss.

It's better than nothing, but it looks like just a small start to the financial changes that have to be coming.

They won't impose new artificial limits on free agency and contracts offered. The future cap, whatever it is, will be the mechanism for that, and for getting the revenues balanced between players and owners.

[d-train]

Reportedly, owners and players agreed to increase escrow from 10% to 25% for remaining 19-20 paychecks and for paychecks partially into 20-21. A 25% contingency seems way to low for what's going on. Even if, new contracts are ratcheted down this free agency period.

Yep. If they end here, they are short maybe 25% of the whole season revenue (loss of 20% of regular season and all the playoffs and playoff revenue). That would be a loss of $1.5 billion (and players share $750 million). They are only holding back an extra 15% on the last 2-3 payments (which I estimate to be no more than an extra $80-100 million hold-back). A partial finish to the season could also reduce some of that loss.

It's better than nothing, but it looks like just a small start to the financial changes that have to be coming.

They won't impose new artificial limits on free agency and contracts offered. The future cap, whatever it is, will be the mechanism for that, and for getting the revenues balanced between players and owners.

Players with contracts that have a season 1 base year 19-20 or older are going to be robbing players with a season 1 base year 20-21 or newer.

[DBoys]

"Players with contracts that have a season 1 base year 19-20 or older are going to be robbing players with a season 1 base year 20-21 or newer."

In a way that's true. The players pool of money might be "distributed" among players with some degree of disparity for a while. It's never bothered them before, however, enough to take the steps to correct it, so I don't think that will happen this time either, but we'll see.

[d-train]

"Players with contracts that have a season 1 base year 19-20 or older are going to be robbing players with a season 1 base year 20-21 or newer."

In a way that's true. The players pool of money might be "distributed" among players with some degree of disparity for a while. It's never bothered them before, however, enough to take the steps to correct it, so I don't think that will happen this time either, but we'll see.

Well, it's not a question of whether players are bothered by it. Players, unlike owners, have competing interests. Rookies, super-stars, stars, average rotation players, and bench riders all have competing interests. And, the length of their earnings window is vastly different, even though it's relatively short for all players.

Owners are unified on one single common interest above all other interests. The less they have to pay players, the better.

[DBoys]

Owners are unified on one single common interest above all other interests. The less they have to pay players, the better.

Not really part of the landscape in this situation, because the CBA in place has already erased that as a possibility. The player pay in total is all driven by the total revenues earned by the league-player partnership. The players get a pool of money, and it won't get any bigger or smaller no matter what size the contracts are.

The issue you spotlight is a player-player issue. Their desire (or lack of same) to smooth out market oddities and see pay distributed "fairly" to all players, relative to each other, is all on them. And the results, fair or not, will impact only them.

[d-train]

Owners are unified on one single common interest above all other interests. The less they have to pay players, the better.

Not really part of the landscape in this situation, because the CBA in place has already erased that as a possibility. The player pay in total is all driven by the total revenues earned by the league-player partnership. The players get a pool of money, and it won't get any bigger or smaller no matter what size the contracts are.

The issue you spotlight is a player-player issue. Their desire (or lack of same) to smooth out market oddities and see pay distributed "fairly" to all players, relative to each other, is all on them. And the results, fair or not, will impact only them.

It's a player vs player issue that is created by an owner vs player issue. IOW, it's not an issue for players to resolve among themselves. The market oddities are a result of players with nearly no individual bargaining power having equal say in the collective bargaining as players with tremendous individual bargaining power. And, some players with tremendous bargaining power having no say in collective bargaining. The owners have increased this 'oddity' by greatly expanding the number of players with nearly no individual bargaining power into the collective bargaining process.

[DBoys]

"IOW, it's not an issue for players to resolve among themselves."

Actually, it is. The league will pay the money.

If the players wanted to, they could opt for leveling/averaging mechanisms from year to year, so that each year players can get about the same sort of new deal opportunity no matter what year they are up for a new deal. Or, as they always have, they can just let it be random, and whoever happens to be a free agent in the right year gets a bunch extra, while those in the wrong year get a lot less.

They chose random - insisted on it, in fact, when given the chance to level things out. If they don't like the consequences of their insistence, that's entirely on them. You bought it, you own it.

It's generally up to the players to drive their split. They are organized in a union, which is ostensibly for such a purpose. All players have a say if they want one. (The idea that the stars have relatively no say in union matters is ridiculous, as they actually have huge influence there, in the same way as on the court.) Whether they choose to use the union to fix this issue (or any other contractual concerns)? It's really driven by them, and no one else.

[NYG]

What would you project as a reasonable salary cap/luxury tax figure for the 2020 off-season as of today?

[DBoys]

That's a completely unanswerable question, unfortunately. There are so many unknowns, some in relation to what happens to the rest of this season, and its revenues, and some in relation to how next season is played out.

Next season's cap is going to be built on (a) projected revenues for next season, which can be anywhere from "normal" to "completely gutted again" depending on how and when the NBA is able to go back to normal, and (b) some degree of adjustment to make sure the owners are ultimately made whole from the shortfall in revenues this season.

As for the shortfall this season, so far the revenues are apparently short about 25% of the season's projections, or $1.5B, but doing some sort of rest-of-season and playoffs would get them some revenue to reduce that number. By how much, there's no way to know. We're in uncharted territory here, with no decision yet as to what they will do, nor knowledge of what sort of money that will bring in.

One already negotiated mechanism to balance the payout between players and owners so that they both share in the shortfall is via reducing actual paychecks for the remainder of this season. That was the 25% that has been publicized already, and it begins on payments beginning May 15. It needs to be noted that salary payouts to players are not all scheduled the same way (some players get 24 equal payments, 2 per month, while others were set up with heavily front-loaded payouts of some sort or another, and some may have been paid their entire salary already).

Even in the event they end up with balanced books between players and owners this season (not likely, it wouldn't seem), the possibility exists that next season may look very different. Will they play a full schedule? Will they have fans in seats, with ticket sales and concessions? Will they have to discount prices? The virus issues are only impacting the last 20% of this season plus the playoffs, but those same concerns will impact ALL of next season, not just part of it.

Taken together, it wouldn't shock me to see a cap as low as $100M. That's just a guess, because we have only very general ideas of what might happen. The vast majority of the cap number will be derived from their calculation of projected revenue for the season, and this epidemic (with its roller coaster of possibilities) will have a major impact on that math as it unfolds. At $100M, that would only be a revenue reduction of 15% for a season of (probable) much lower attendance, concessions, TV rights/ad sales, and maybe fewer games. And is the China issue over?

[NYG]

That's a completely unanswerable question, unfortunately. There are so many unknowns, some in relation to what happens to the rest of this season, and its revenues, and some in relation to how next season is played out.

Next season's cap is going to be built on (a) projected revenues for next season, which can be anywhere from "normal" to "completely gutted again" depending on how and when the NBA is able to go back to normal, and (b) some degree of adjustment to make sure the owners are ultimately made whole from the shortfall in revenues this season.

As for the shortfall this season, so far the revenues are apparently short about 25% of the season's projections, or $1.5B, but doing some sort of rest-of-season and playoffs would get them some revenue to reduce that number. By how much, there's no way to know. We're in uncharted territory here, with no decision yet as to what they will do, nor knowledge of what sort of money that will bring in.

One already negotiated mechanism to balance the payout between players and owners so that they both share in the shortfall is via reducing actual paychecks for the remainder of this season. That was the 25% that has been publicized already, and it begins on payments beginning May 15. It needs to be noted that salary payouts to players are not all scheduled the same way (some players get 24 equal payments, 2 per month, while others were set up with heavily front-loaded payouts of some sort or another, and some may have been paid their entire salary already).

Even in the event they end up with balanced books between players and owners this season (not likely, it wouldn't seem), the possibility exists that next season may look very different. Will they play a full schedule? Will they have fans in seats, with ticket sales and concessions? Will they have to discount prices? The virus issues are only impacting the last 20% of this season plus the playoffs, but those same concerns will impact ALL of next season, not just part of it.

Taken together, it wouldn't shock me to see a cap as low as $100M. That's just a guess, because we have only very general ideas of what might happen. The vast majority of the cap number will be derived from their calculation of projected revenue for the season, and this epidemic (with its roller coaster of possibilities) will have a major impact on that math as it unfolds. At $100M, that would only be a revenue reduction of 15% for a season of (probable) much lower attendance, concessions, TV rights/ad sales, and maybe fewer games. And is the China issue over?

Great response! Thanks! How is luxury tax calculated exactly. At a $100 Million salary cap, am I doing the math right by saying luxury tax would be $119.6 Million and $125.6 Million would be the apron?

MAX Contracts would be $25 Million, $30 Million and $35 Million?