NBA AM: Smoothing Out The NBA Salary Cap?

Smoothing The Cap?:  The NBA and its teams have been sorting through the details of how the new enormous TV rights package will impact business operations on many fronts. One of the biggest is the salary cap.

With $24.4 billion in new rights money headed to the NBA over nine years starting with the 2016-17 NBA season, there have been some mechanical concerns that the NBA and the Players’ Association are said to be sorting through.

The NBA’s salary cap number is not an arbitrary amount. That figure is arrived at using a complex formula that was agreed upon by the players and the owners in the current Collective Bargaining Agreement.

The NBA on its own cannot manipulate that number, it would require the consent of the players and that’s something sources say the NBA is investigating.

This becomes meaningful because as things stand in July of 2016 the NBA could see its salary cap figure jump from what’s expected to be $66.3 million in July of 2015, to well over $80 million in July of 2016.

That might sound like a good thing to fans, but for many that kind of increase is problematic. First it would create a lot of cap space for a small handful of teams, and it would also radically change what “normal” looks like on the contract front.

A maximum contract for a player with six years or less in the NBA is set at 25 percent of the cap. Players with seven to nine years in the NBA can receive 30 percent of the cap, while players with ten or more years in the NBA become eligible for 35 percent of the cap.

So take someone like Oklahoma City’s Kevin Durant, who will be the poster child for the 2016 Free Agent class. He will be eligible for 30 percent of the cap. Against a $66.3 million cap that is a first year salary of $19.89 million, against an $80 million cap that figure swells to $24 million in the first year.

There are some real concerns about that radical of a year-to-year jump and how it may unfairly reward 2016 free agents and teams with cap space that summer.

Enter the concept of smoothing. The NBA it seems would rather slowly, but significantly increase the cap in 2016 to ease its teams and the salary landscape into the new economy.

Story: Ten Thing To Know About The New TV Deal.

NBA players, by virtue of their contract with the owners, are guaranteed to receive a fixed percentage of revenues based on total revenues collected. After this new TV deal kicks in, the players will be almost locked into to a guaranteed 51 percent of revenue, so regardless of where the salary cap is set, if the total value of salaries and benefits paid to the player is not at least 51 percent the NBA would then write the Players’ Association a check for the balance.

This is the crux of smoothing. Rather than massively jump the salary cap, which would potentially unfairly benefit the 2016 free agents, the plan believed to be presented sets the cap somewhere in the middle of $66.3 million and $80 million, likely $70-$75 million, and look to a lump sum shortfall payment as the answer to evenly and fairly distribute the difference.

This isn’t a cut and dry process.

While it seems on the surface the Players’ Association is interested in this plan because it would allow all players to receive additional monies, there are also limitations that a lower cap would present, most notably the Luxury Tax. Like the salary cap figure, the Luxury Tax figure is set based on a formula, most teams are unwilling to cross the Luxury Tax line, and in many cases the cap system can create a hard cap just over that Luxury Tax amount.

It’s unclear how a smoothing plan would incorporate and account for the tax line.

The other part is while smoothing, by way of a lump sum payment is a neat and clean way for the NBA to deal with a new influx of cash and a huge jump in the salary cap, how the Player’s Association would distribute those funds becomes unclear as well. They could simply issue an equal installment to every player, or devise some sort of formula to issue monies based on some criteria like percentage of cap.

One league source suggested that a lump sum payment could be, at least in part, held back as a war chest of sorts for what’s expected to be a labor fight in 2017, when the players are expected to opt out of the current CBA.

With new leadership in place on the player’s side it will be interesting to see if new Executive Director Michele Roberts uses this opportunity to buy some good will among the rank and file, by way of a nice lump sum check to every player, rather than fighting a smoothing plan and letting the 140 or so players headed to free agency absorb the gains from the new TV deal.

This is issue is far from decided, so there will clearly be more to know in the coming weeks, however team sources say they are not planning for a massive cap increase in 2016, so that’s at least one indicator that something on the smoothing front could be agreed to.

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