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Analyzing the NBA's New Salary Cap Figures

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A run down of how the NBA came to their Salary Cap and Luxury Tax figures.

Derick E. Hingle-USA TODAY Sports

Yesterday marked the close of the July moratorium and with it came a league memo detailing the findings of the league audit following the 2014-2015 NBA season:

The National Basketball Association today announced that the Salary Cap has increased by 11% to an all-time high of $70 million for the 2015-16 season. The tax level for the 2015-16 season increased by 10.3% to $84.740 million.

The Salary Cap and tax level go into effect at 12:01 a.m. ET on Thursday, July 9, when the league’s "moratorium period" ends and teams can begin signing free agents and making trades.

The minimum team salary, which is set at 90% of the Salary Cap, is $63 million for the 2015-16 season.

The current Collective Bargaining Agreement provides for three different mid-level exceptions depending on a team’s salary level. The non-taxpayer mid-level for this season is $5.464 million, the taxpayer mid-level is $3.376 million and the mid-level for a team with room under the Salary Cap is $2.814 million.

(courtesy of Kevin Draper from Deadspin.com with emphasis added)

This league memo contains exactly 2 numbers that are important to note: the Salary Cap and the Luxury Tax. The minimum team salary is kind of interesting, but we know it's 90% of the Salary Cap so we can always figure this out when given the Salary Cap. The announcement of the mid-level exceptions is odd because those values were agreed upon in 2011 when the Collective Bargaining Agreement (CBA) was signed.

This information is just about all we need to figure out the health of the NBA economy, so let's dive in.

Determining Other NBA Information

(All of these numbers are subject to rounding errors, so think of these as approximate values instead of exact.)

Projected Basketball Related Income (BRI)

When the NBA announces the Salary Cap and Luxury Tax, we can always back out what the Projected BRI is for that Season. I have discussed this particular issue before in describing how the new national TV deal affects the NBA. To give you the main takeaway, here is a formula for how you can calculate the Projected BRI:

$$\text{Projected BRI}_{t} = \frac{30}{0.0877} * (LT_{t} - SC_{t}) $$

What this tells us is that the NBA has a Projected BRI of $5,042,189,282 for the 2015--16 NBA Season! The NBA previously had projections of $67.1 million Salary Cap and $81.6 million Luxury Tax, which implied a Projected BRI of $4,960,091,220. This represents an approximately 1.4% increase in Projected BRI than what was previously expected. Although this increase contributes towards the unexpected increase in Salary Cap, this is only one of three reasons for the increase.

Further, Larry Coon has previously reported that the National TV Deal for the 2015--16 Season is for $1.03 billion. This implies that the Non-TV portion of actual BRI from the 2014--15 Season was $3,839,415,581. Larry Coon reports that total actual BRI for the 2014--15 Season was $4.840 billion, from which we can back-out that the TV portion of the 2014--15 Season was $1,000,584,419. This is slightly less than my previous guess of $1.005 billion from my article attempting to predict the impact of the new national TV contract for the NBA.

Projected Benefits

Determining the Salary Cap essentially involves knowing Projected BRI and Projected Benefits (401K, medical plans, pensions, etc. for the players) and using equations. We already solved out Projected BRI, so now we can use the formula for Salary Cap to back out Projected Benefits:

$$SC_{t} = \frac{ \text{Projected BRI}_{t}*0.4474 - \text{Projected Benefits}_{t} } { \# \text{ of teams (30)}}$$

If we plug and chug the values we obtained, we would get a Projected Benefits of $155,675,485. The previous Projected Benefits were $206,144,812 (not accounting for a potential adjustment factor). So what gives? Well, Projected Benefits did fall but not by as much as it seems.

The above formula is generally correct unless the NBA fails to pay out their stipulated portion of Salaries and Benefits in a given year. If the NBA fails to pay out their fair share, then the difference is paid out to the NBPA for that particular year and then they use this amount to push up the Salary Cap (and Luxury Tax) for the following Season. A slightly more cumbersome formula could be presented as:

$$SC_{t} = \frac{ \text{Projected BRI}_{t}*0.4474 - \text{Projected Benefits}_{t} } { \# \text{ of teams (30)}} + \text{Per Team Adjustment Factor}_{t}$$

Where the per team adjustment factor is generally equal to 0 due to the escrow system in place.

We turn to another key piece of information which is that the Player's Guaranteed Share of BRI was 50.39% and that the NBA failed to pay out enough in Salaries and Benefits to meet this share. The NBA had a shortfall of $57,298,826 which is paid directly to the NBPA. The NBPA then disburses this amount to the 400+ players who participated this Season in any way they like.

But that is not where the value of the shortfall ends. This shortfall is then divided by 30 and added onto the Salary Cap and Luxury Tax for the following Season. So the Salary Cap and Luxury Tax increases by $1,909,961 all because the NBA failed to pay their players enough money in the 2014--15 Season as stipulated by the CBA.

This implies that without the adjustment factor, the NBA would have projected a Salary Cap of $68.1 million with a Luxury Tax of $82.83 million.

After accounting for this adjustment factor, we can back out that the NBA has Projected Benefits of $212,975,485 for the 2015--16 Season. Previously, the projections of $67.1 million for Salary Cap and $81.6 million also had a $500,000 Salary Cap adjustment which implied a Projected Benefits of around $221 million. The Salary Cap adjustment was reported from Albert of HeatHoops.com (a wonderful site for those interested in the Salary Cap). If there were no adjustment factor and Projected Benefits stayed at $221 million, then the Projected BRI from above would indicate a Salary Cap of $67.6 million and a Luxury Tax of $82.3 million.

From the preceding paragraph, we also see that the decrease in Projected Benefits of around 6% has also contributed to the increase in the Salary Cap and Luxury Tax. Although this is a larger percentage change, the overall magnitude is less than the change in expected BRI.

Maximum Salaries

The NBA is funky with how they calculate Maximum Salaries for players with 0-6 years experience, 7-9 years experience, and 10+ years experience. They mention that the levels are 25%, 30%, and 35% of the Cap respectively, except the NBA uses a different calculation for this Cap. They use only 42.14% of Projected BRI instead of the 44.74% used to determine the Salary Cap. But since we calculated the Projected BRI, Projected Benefits, and were given the per Team Adjustment we can back out that the Cap used for Maximum Salaries is $65,641,961. From this, we know the tiers of the Maximum Salary are as follows:

  • 0-6 years is $16,410,490.
  • 7-9 years is $19,692,588.
  • 10+ years is $22,974,686.

These values are within rounding error of the official values as reported by Jeff Zillgit:

So this was a fun exercise to go through. I hope you learned a bit about the Salary Cap.