As we wait for more certainty surrounding the 2019-20 NBA Season and all the activities that lead up to the off-season which follows, it might be beneficial to know why we at Peachtree Hoops have not discussed much related to the 2020-21 NBA Salary Cap even though other media outlets have had a fair amount of coverage, discussion, and projections. We have already discussed the specific Salary Cap issues facing the Atlanta Hawks for 2020-21 but, for that exercise, simply assumed the current projection of a $115 million Salary Cap would be in place. There is, however, a large difference between a team specific Salary Cap issue and the league-wide conundrum of what the Salary Cap will be set at that we have yet to discuss.

The oversimplified answer is that there is no way to project what the 2020-21 NBA Salary Cap may be. This is not from a lack of Collective Bargaining Agreement (CBA) knowledge on the staff’s part nor because we do not know what the Basketball Related Income (BRI) for the 2019-20 NBA Season will be. Even if someone could tell us with certainty the 2019-20 BRI, there would still be no way of determining the 2020-21 NBA Salary Cap due to the coronavirus pandemic causing league officials to consider altering the start date of the 2020-21 NBA Season which in turn alters future revenue streams of the NBA.

Interestingly enough, an answer of “I don’t know” in relation to the 2020-21 NBA Salary Cap is the most informed answer one can give. We’ll cover the bases for how the Salary Cap is constructed to detail why we don’t know what the 2020-21 NBA Salary Cap will be and also highlight how the actual BRI for 2019-20 (whenever we find out what this value actually is) is likely to have a minimal impact on future years for the Salary Cap.

Salary Cap Function

For the NBA, the Salary Cap is a “soft cap” in that it can be exceeded in circumstances where an NBA team holds an Exception in signing or acquiring a player. All teams are subject to the same Salary Cap level although teams will typically have different Exceptions available to them which explains why Team Salaries differ across the NBA.

One of the main functions of the Salary Cap is to restrict the spending of NBA teams in an attempt to achieve the predetermined player’s share of guaranteed BRI for a given season. The player’s share comes in the form of both salaries and benefits in a season. The CBA guarantees a player’s share of no less than 49% of BRI and no more than 51% of BRI.

“Notwithstanding anything to the contrary in the foregoing, in no event shall the Designated Share for any Salary Cap Year be less than forty-nine percent (49%) of BRI or greater than fifty-one percent (51%) of BRI.”

This range is based on an agreed upon value in the CBA called Forecasted BRI and the actual BRI amount that is generated for a given season. The Forecasted BRI was initially agreed upon in the 2012 CBA and was largely unchanged in the 2017 CBA in spite of the massive influx of the National TV deal which began in 2016 and actual BRI started to greatly exceed the Forecasted BRI values. For the current 2019-20 Season, Forecasted BRI is $5.807 billion and any amount over $6.36 billion in actual BRI triggers the 51% guarantee and any amount below $5.25 billion triggers the 49% guarantee — any BRI in between these amounts is on a sliding scale between 49% and 51%.

While Forecasted BRI determines the guaranteed share of BRI for the players, the Salary Cap is not set by Forecasted BRI but instead by Projected BRI (more on this in a bit). The enforcement of this guaranteed share is accomplished by appropriately setting the Salary Cap and through the channels of an Escrow account and Overage payments from the NBA.

Setting the Salary Cap

The literal definition of the Salary Cap in the CBA is an algebraic expression which depends on Projected BRI and Projected Benefits for a given season. Once those two values are determined, the Salary Cap is derived and would equal around 40% of Projected BRI since the Projected Benefits has been about 4% of Projected BRI each year.

“...the Salary Cap for each Salary Cap Year covered by the Term of this Agreement will equal forty-four and seventy-four one hundredths percent (44.74%) of Projected BRI for such Salary Cap Year, less Projected Benefits for such Salary Cap Year, divided by the number of Teams scheduled to play in the NBA during such Salary Cap Year, other than Expansion Teams during their first two (2) Salary Cap Years in the NBA.”

This highlights that the CBA anticipates teams will generally exceed the Salary Cap every season since this amount is much less than the guaranteed share for the players. This makes sense because of all the various Exceptions that teams have available to them, although it is difficult to accurately predict how many Exceptions teams will use in constructing their teams. By and large, setting the Salary Cap will determine the total salaries in a given year although this fluctuates. Total salaries for 2017-18 was about 113% of the total Salary Cap (30*$99 million) which was a bit lower than the historical average of about 120% since 2000. For reference, the only time since 2000 when total salaries did not exceed 110% of the Salary Cap was the infamous cap spike of 2016-17 when total salaries only comprised 105% of the Salary Cap. Or in other words, a good rule of thumb is to expect about 120% of the Salary Cap to end up as total salaries unless there is an unprecedented rise in the Salary Cap.

There is a timing problem with setting the Salary Cap and determining the player’s guaranteed share as the Salary Cap is set prior to the start of a season and BRI for that season won’t be known until about a year later.

Overages and Escrow

While the players are guaranteed a portion of BRI for a given season, BRI is calculated after the season is played and longer after the Salary Cap for that season has been set. For the 2018-19 NBA Season, the Salary Cap was set on June 30, 2018, the majority of contracts were signed by July 31, 2018, and the BRI for the 2018-19 NBA Season was not known until June 29, 2019.

In effect, the Salary Cap is set based on Projected BRI, an expectation of what BRI for that season will end up being, and there are three outcomes that can happen at the end of a season:

1. Projected BRI ends up being actual BRI, a perfect match that never happens but would likely result in no adjustments;
2. Projected BRI ends up being less than actual BRI, a situation that can result in an Overage where the NBA will make up the difference in a check they send to the NBPA;
3. Projected BRI ends up being more than actual BRI, the players were likely paid too much money and need to repay the owners to ensure the CBA mandated guaranteed share of BRI.

The actual result in players earning more/less in salaries is not literally tied to Projected BRI but is through their signed contracts for a given season, however because Projected BRI sets the Salary Cap and the Salary Cap largely determines total salaries I am being a bit loose with terminology here.

Clearly the first scenario is the most ideal although it never happens. In instances with the second scenario, there is a clear mechanism which will ensure the players receive their guaranteed percentage of BRI with the Overage. However, the third scenario is one which is difficult to ensure the players do not earn more than their share of guaranteed BRI. This is where the Escrow account comes into play.

Escrow is an account where a portion (10%) of player salaries are set aside each paycheck and withheld until the end of the league season has completed. One can think of this as a tax on the players, although in the case of scenario 1 or 2 the entire Escrow is returned to the players. For a typical situation in the NBA where actual BRI falls short of Projected BRI, this 10% withholding of salaries has been an effective measure for ensuring the guaranteed share of BRI is achieved. However, this system was not designed for a massive decrease in BRI that may be caused by a global pandemic.

Projected BRI

The CBA provides a literal definition for the Projected BRI that determines the Salary Cap:

““Projected BRI” for a Salary Cap Year means the amount determined as follows: Prior to the start of each Salary Cap Year, the NBA and the Players Association shall meet for the purpose of agreeing upon Projected BRI for that Salary Cap Year. In the absence of an agreement of the parties otherwise on or prior to the last day of the Moratorium Period of the applicable Salary Cap Year, Projected BRI for such Salary Cap Year shall be the sum of amounts determined in accordance with the following ...”

Standard business practice has deemed that the default process described in the CBA would be how Projected BRI is calculated. A simple explanation for this is that the NBA would calculate Projected BRI by factoring in the predetermined National TV revenue for the upcoming season and add that to the non-National TV components of BRI with a 4.5% growth rate from the previous season. For a more in-depth procedure in how this functions, you can read about this process from my 2015 article on how the new National TV contract would affect Salary Cap growth for future seasons.

With the coronavirus pandemic placing downward pressure on 2019-20 BRI, it is unlikely that the standard practice for calculating Projected BRI will still be in place because the coronavirus should effectively be a one time negative income shock that will not persist in future years. This has already been alluded to by Michele Roberts’ comments on how the NBPA anticipates the 2020-21 NBA Salary Cap to be set by claiming the “salary cap for 20-21 should be calculated fairly.”

This is the crux for determining the 2020-21 Salary Cap and why no one can make a solid projection. As of this writing, there are currently reports that indicate the NBA is willing to push back the start of the 2020-21 NBA Season to December. Such a large shift would require some in-depth research into how ticket prices, merchandising, and possible short-term adjustments to TV contracts would alter the BRI for that season. Without knowledge of how the 2020-21 NBA Season will be conducted, it is difficult to accurately predict what the Projected BRI may be which should halt discussions of what the 2020-21 NBA Salary Cap will be until more information is known.

2019-20 BRI

The 2019-20 NBA Salary Cap was set with an implied Projected BRI of approximately $8 billion. We know that the National TV revenue for 2019-20 was set to be $2.475 billion which leaves around $5.525 billion in residual BRI. At this current juncture, we can start to make guesses as to how low BRI might fall under different scenarios.

John Hollinger and Danny Leroux estimated a potential $500 million may be lost if the rest of the NBA regular season does not resume. Brian Windhorst and Tim Bontemps came up with a similar decrease of $500 million of a canceled regular season. Bobby Marks implied that a possible $2 billion reduction in BRI if the NBA cancels the entirety of the 2019-20 NBA Season. Albert Nahmad estimates a potential drop of $600 million if the NBA continues the season without any fans while also indicating a range of $1 billion to $2 billion in lost revenue if the rest of the NBA season is canceled. Ben Golliver of The Washington Post reported a team executive speculating a potential $1.2 billion in lost revenues due to a suspended season while also pointing out a regular season game brings in about $2 million in revenue per team. Neil Paine of FiveThirtyEight similarly estimates about $1 billion in lost revenue from a suspended season. Jabari Young of CNBC reports a potential loss of between $800 million and $1 billion in revenue from a canceled season.

The exact components of BRI can loosely be classified as television contracts, arena signage, licensing agreements, and gameday. While these are usually talked about as revenues, the formula for BRI generally subtracts off customary costs and expenses resulting from each component, such as labor costs for concessions, and these values should mostly be thought of as net incomes. While we do not have much detail on the contracts related to these income streams, some components are more or less fixed (television contracts, signage, jersey sponsors, etc.) while others are clearly variable (gameday). Clearly, some of the television contracts or signage contracts may depend on a certain number of games being played so it’s difficult to assume these are completely fixed values.

Forbes provides estimates of NBA team valuations and revenues which are broken apart by gate revenues and “other.” The Forbes data are the best publicly available data on NBA finances and can allow us to get a sense of how much gate revenue is at stake for a particular season and we can augment this with the known National TV revenues. From the 2002-03 Season onward, the share of total revenues from the gate has declined from about 36% to about 22% which shows a diversification of revenues for the league as a whole but that gate revenues are still an important component of revenues. At the same time, National TV has increased in value but has mostly comprised around 27% of total revenues — although there is a clear jump in value for the newly signed 2016 contract. What this tells us is that the “other” streams of revenue are the recent drivers of increased revenues — although it’s not clear how much components of these “other” streams are changing. The “other” streams would entail local television contracts, international television, signage, jersey sponsors, merchandise, etc.

2019-20 Escrow

With what will be a decrease in 2019-20 BRI, it is difficult to pinpoint where the revenues will fall and by how much. However, the fall will almost certainly trigger all of the current Escrow account to be paid to the NBA in order to achieve the 51% guaranteed share. The current 10% of salaries in Escrow may not be enough to achieve this guarantee, which is a topic that Jeff Siegel of Early Bird Rights has touched on.

Indeed, on April 17 the NBA announced that players will have an additional 25% of their paychecks withheld beginning on May 15th and effectively create a second Escrow account that Jeff mentions. Albert Nahmad points out that the second Escrow will create an additional $450 million account which along with the current $380 million in the original Escrow will act as an $830 million in 2019-20 player salaries that are withheld in attempt to achieve the 51% guaranteed share if BRI greatly decreases.

Lurking in the background is the 2020 word of the year, Force Majeure, which is a provision in the CBA which allows the NBA to collect 1/92.6th of a player’s salary for every canceled game. So far, there are 259 remaining games (or 17.2 per team) and the playoffs count for 5.6 games regardless of whether or not a team makes the playoffs. That would result in about 25% of total salaries at risk of being wiped away through this provision or about $950 million. With the recent additional withholding of player salaries, the amount of withheld salaries will be about $120 million short of the full Force Majeure amount. So the provision is still in play although in some circles this would be described as “close enough for government work” and should functionally work for avoiding major disputes between the NBA and NBPA.

Escrow Penalty Rollover?

Currently, the players have around $3.8 billion in total salaries with Projected Benefits in the $300 million range. Subtracting away the Escrow amounts from total salaries and adding in the Projected Benefits gives roughly $3 billion committed to the player’s guaranteed share at the moment. This amount can safely ensure from a BRI drop of a bit less than $2 billion from the current Projected BRI. However what if BRI drops by an even greater amount? How might the NBA recoup these funds to maintain the player’s guaranteed share of BRI?

One thought that many people have is that the NBA could recoup these funds by withholding more of the player’s 2020-21 salaries and effectively treat this as repayment of a “loan” of overpaying the players in 2019-20. While this could functionally work, it brings up an issue of fairness for players who collected salary in 2019-20 but not 2020-21 as well as players who collect salary, or a larger salary, in 2020-21 but not 2019-20. In short, why should someone like Vince Carter be subsidized by the players in 2020-21? That is an issue to be addressed within the NBPA in how they want to internalize potential taxes on future players to compensate current salaries. However, I’m not going to speculate on the politics of the NBPA.

TL;DR

“I don’t know” is the correct answer to the 2020-21 NBA Salary Cap, but if you need to have an answer it’s not going to depend on the 2019-20 BRI because the NBA/NBPA are going to negotiate what they deem a fair Projected BRI for the 2020-21 NBA Season (which sets the Salary Cap). And if 2019-20 BRI ends up extremely low, it’s likely only affecting contracts for that Season as it’s not fair to tax future players for current problems.