Breaking Down The CBA
Sports economists weigh in on the NBA owners’ latest proposal.
Hard salary cap
The reason why NBA owners desire a shift from a “soft” to a “hard” salary cap is understandable, explained Robert Boland, a sports management professor at New York University.
“They found that their cap has been too flexible and has too many exceptions that allow it to be exceeded,” Boland said during an phone interview. The largesse of the exception-type contracts handed out has been popularized by the mid-level exception, which has enabled a slew of role players to garner multi-year $30 million-plus contracts.
Boland sees the challenge of a hard cap in the NBA as one centered around the lack of local revenue sharing among teams. Revenue sharing in the NBA is restricted to national television and licensing rights, which prohibits teams in smaller markets from attaining the financial security of the sports’ financial titans.
In its annual valuing of NBA teams, Forbes reported that for the 2009-10 season the Lakers and Knicks generated more than $200 million in revenue while the Bobcats, Pacers, Timberwolves, Grizzlies, Bucks and Nets generated less than $100 million of revenue.
Boland said that while a system without local revenue sharing among teams is less than ideal, a hard cap could present problematic unintended consequences. He explained that should player salaries be stifled – players already deal with maximum salary contracts whereas no such system exists in the NFL – there could be an even more rapid exodus of star players, through free agency or trade, from small markets to large ones, as witnessed since last July by Bosh, James, Amar’e Stoudemire, Carlos Boozer, Carmelo Anthony and Deron Williams.
“The unintended consequence will be teams will lose players they’ve invested in and developed to bigger market teams,” Boland said. The idea is that if a player’s salary is decreased then it will possibly encourage the player to value even more where he plays, or for whom he plays.
John Vrooman, a sports economic professor at Vanderbilt University, noticed a different problem with the $45 million proposed cap – it misrepresents how the league has treated its luxury tax, which Vrooman claimed in an email message can be construed as a de factor hard salary cap.
The luxury tax was implemented during the 2005 CBA negotiations and is intended as a way to cap each team’s spending. (Teams have to pay $1 for every $1 their payroll exceeds the luxury tax for that season.) The tax is determined by calculating 61 percent of that seasons’ projected basketball-related income. BRI is determined by a multitude of factors, including regular season gate receipts, broadcast rights and arena club revenues. (The full list can be found under No. 13 of Larry Coon’s eternally helpful CBA FAQ site.)
The luxury tax was set at $70.307 million for the 2010-11 season, which denotes a BRI of approximately $3.457 billion. (Quick math: multiply $70.307 million by 30 teams, then divide the product of that calculation by .61 to attain the $3.457 billion figure.)
Vrooman suggested that the NBA’s worst case scenario for revenue loss during the 2010-11 season will be five percent. Stern had contended in October that the NBA would lose roughly $340 million for the 2010-11 season, although the May 12 ESPN.com report, among others, has stated sources admitting the projected loss for this season is $300 million. A loss of $300 million for the NBA would represent an approximate 8.7 percent drop in revenue from the projected BRI of $3.457 billion.
Yet Vrooman wrote that in the scenario of a five percent drop in revenue, a $45 million hard cap would represent just 41 percent of basketball-related income, down from the luxury tax’s current place of 61 percent. Under Vrooman’s logic, a $300 million loss this season would result in a future $45 million hard cap representing a 43 percent cut of BRI. It’s important to note the implications of the hard cap potentially not taking effect until the 2013-14 season. However, it’s reasonable to assume that broadcasting rights and other basketball-related income can grow in future seasons – at least that’s a result one would expect if the NBA and the Player’s Union agree on a CBA. In that case, a $45 million cap could represent an even less significant part of BRI than 43 or 41 percent, if the league’s revenues grow from their current totals. (It’s also important to note that the current salary cap is defined as 51 percent of BRI.)
Wrote Vrooman: “I get a creepy feeling that the NBA owners want to be like the hardcore NFL owners, who are intent on breaking the player’s union. Player salaries in the NFL have also been consistently around 58 percent of NFL revenues. There is no real increase in pressure on profits from player salaries in either the NFL or the NBA and the 20 percent cut in the [NBA] hard cap [from the luxury tax] is a grandstanding, union-busting proposal without merit. The NBA’s problem is the same as the NFL’s problem. There is way too much disparity among the clubs’ revenue streams, which is a problem that should be settled between rich and not-so-rich owners and not between owners and players.”