The New CBA: Limits For Taxpaying Teams
Today’s topic in the NBA’s new collective bargaining agreement:
LIMITS FOR TAXPAYING TEAMS
2005: No additional limits for taxpaying teams.
2011: Taxpaying teams have a smaller mid-level exception, can acquire less salary in trade and cannot use the biannual exception. Starting in 2013-14, teams more than $4 million above the tax level cannot receive a player in a sign-and-trade transaction.
Winners: Players. This is all the owners could get after seeking a hard cap and later a “flex” cap. Taxpaying teams now have less access to exceptions. This will give small-market teams a competitive advantage. For example, instead of weighing equal $5 million offers in Los Angeles and Minnesota, a free agent might have to choose between a $3 million offer in Los Angeles and a $5 million offer in Minnesota.
The New CBA: Luxury-Tax Distribution
Today’s topic in the NBA’s new collective bargaining agreement:
LUXURY-TAX DISTRIBUTION
2005: Teams that did not pay tax each received 1/30th of the total tax fund. Taxpaying teams forfeited their tax distribution and their money was used for “league purposes” such as the revenue-sharing program.
2011: No more than 50 percent of the tax funds can go exclusively to teams that did not pay tax.
Definition: The money collected from escrow and luxury tax may be distributed to teams or used for league purposes, subject to certain rules. Note that in some cases, taxpaying teams receive more than enough money to offset the luxury tax they pay. The distribution rules are different for escrow money and tax money. Escrow: Some or all of the escrow money may be reserved for league purposes. This is likely to be a small percentage of the total escrow amount, but there is no cap on the amount that is used for league purposes. The league could, at their discretion, use all of it. Tax money: Teams under the tax level receive a full share (1/30) of the tax money. (Note that if the league expands, the fraction changes.) Any remaining tax money that is distributed to teams must go to all teams in equal shares.
Winners: Economical owners. A team that previously was $1 under the tax line received a full tax distribution (about $2.4 million in 2011), but a team $1 over the tax line received nothing. This “tax cliff” no longer exists. The new system softens the blow for teams that exceed the tax line by just a little. Teams near the tax line would have pay the amount in tax, but could still be eligible for a payout to offset their tax bill. The new agreement stipulates that no more than 50 percent of the tax funds can go exclusively to teams that did not pay tax, but does not specify what happens to the other 50 percent. It is possible the remaining tax money will be distributed to all teams in equal shares, but it’s also possible the NBA will reserve this money for “league purposes.”
The New CBA: Luxury Tax
Today’s topic in the NBA’s new collective bargaining agreement:
LUXURY TAX
2005: Teams paid $1 for every $1 their salary was above the luxury-tax threshold.
2011: Teams will pay $1 for every $1 their salary is above the luxury-tax threshold in 2011-12 and 2012-13. Starting in 2012-13, teams pay an incremental tax that increases with every $5 million above the tax threshold ($1.50, $1.75, $2.50, $3.25, etc.). Teams that are repeat offenders (paying tax at least four out of the past five seasons) have a tax that is even higher at $1 more at each increment ($2.50, $2.75, $3.50, $4.25, etc.).
Definition: The luxury tax is a mechanism that helps control team spending. Commonly referred to as a “luxury tax,” the CBA simply calls it a “tax” or a “team payment.” It is paid by high spending teams — teams whose payroll exceeds a predetermined tax level. The tax level is determined prior to the season, and is computed by taking 61% of projected BRI, subtracting projected benefits ($112 million in 2005-06), and adjusting for whether the previous season’s BRI was above or below projections. They then divide by the number of teams (except expansion teams in their first two seasons) to arrive at the tax level. Here are the tax levels in each season, and the teams that paid the tax:
Winners: Non-taxpayers. Tax-bracket teams like the Lakers, Mavericks, Celtics, Heat will think twice about obliterating the salary cap because a more punitive tax penalty – presumably. The Lakers’ tax bill last season when the tax was dollar-for-dollar was about $19.9 million. Under the new system, being that far over the tax line would cost them $44.68 million. If they were a repeat offender, they would owe $64.58 million.
The New CBA: Minimum Team Salary
Today’s topic in the NBA’s new collective bargaining agreement:
MINIMUM TEAM SALARY
2005: Teams had to spend at least 75 percent of the salary cap.
2011: Teams must spend at least 85 percent of the cap in 2011-12 and 2012-13, and at least 90 percent of the cap in later years of the agreement.
Winners: The players. Raising the salary floor means spending more money on players. The shallow end of the salary pool just got a little deeper. The higher salary minimum also could affect teams’ amnesty decisions. Teams might decide to hang on to high-salaried players rather than amnesty them in order to meet the new minimum team salary requirements.
Note: Players lost 16 games (roughly 20 percent of their 2011-12 salaries) because of the lockout.
The New CBA: Amnesty
Today’s topic in the NBA’s new collective bargaining agreement:
AMNESTY
2005 CBA: One player could be waived prior to the 2005-06 season. Salary of waived player did not count toward luxury tax.
2011 CBA: One player can be waived prior to the start of any season, throughout the length of the new CBA agreement. Only one player can be amnestied and it must be from a previously existing contract. Contracts signed under the 2011 CBA are not eligible. The salary of the waived player will not count toward the salary cap or luxury tax. Teams with cap room can submit competing offers to acquire an amnestied player at a reduced rate before free agency and that player can sign with any team.
Definition: Amnesty is defined as “a general pardon granted by a government, especially for political offenses.” The NBA definition could be something along the lines of “a delete button for organizations that feel they’re paying a player too darn much.” In the NBA version of Monopoly, this is the equivalent of a “Get Out Of Jail Free” card. It’s also an opportunity for a player to get out of a bad situation at full salary. Teams with cap room can benefit greatly from amnesty by being able to submit a competing offer to claim an amnestied player at a reduced rate. Example: If Cleveland uses its amnesty provision on guard Baron Davis ($28.8 million for two years), a team that is $5 million below the salary cap can submit a $5 million offer to acquire Davis’ contract. If that offer is the highest, the team acquires Davis and is responsible for $5 million of his salary, with Cleveland responsible for the balance ($23.8 million).
Winners: Tough-luck owners, dumb owners. Sadly, amnesty penalizes teams that have chosen wisely, invested well and don’t need to be bailed out (see Thunder). Immediate executors of the amnesty clause figure to include Portland (Brandon Roy), Orlando (Gilbert Arenas), Cleveland (Davis), Detroit (Richard Hamilton), New Jersey (Travis Outlaw) and Charlotte (DeSagana Diop). Washington is so out of whack, the Wizards might choose to keep Rashard Lewis just to reach the increased league minimum. The benefits of amnesty are greater now than in 2005 because 100 percent of the player’s salary is removed for both cap and tax purposes. Also, rather than having to use amnesty this season, teams can save it for later use throughout the length of this new CBA. Teams like the Thunder will have an amnesty hole card, but likely will never reap the same financial break of tough-luck owners and dumb owners.
The New CBA: BRI Revenue Sharing
The NBA lockout lasted 149 days, robbed us of 16 regular-season games and wiped out the entire preseason schedule. After nearly two years of bickering, players and owners grudgingly agreed to disagree, a new collective bargaining agreement is about to be ratified (hopefully), training camps are set to begin Dec. 9 and opening day appropriately lands on Christmas Day.
Though we are headed for happy holidays, what took so long negotiating the new CBA? Truth be told, I’d love to fully understand all this myself.
The 2011 CBA should help stabilize the monetary strain for ownership. The league claims losses of roughly $1 billion the last three seasons and 22 teams are losing money. The players’ union disputes these figures.
The 2005 CBA allowed players to prosper financially like never before, thanks to lengthy guaranteed contracts and 57-percent BRI revenue sharing, both of which have been reduced in the new deal.
The new CBA is still not complete. Negotiations for so-called “B-List” issues began Friday. The final version still must be written, proofed and re-proofed. The details we will share are based on the last proposals made public.
From now until the Thunder’s first preseason game on Dec. 18 at Dallas, we will share one aspect every day of the new CBA and together we will do our best to better understand the issues that put us through withdrawals for 149 days. This is an attempt to educate us all. Your remarks are welcome. If you’re a lawyer or economist, your insight would be greatly appreciated.
We begin with one of the heavyweight issues:
BRI REVENUE SPLIT
2005 CBA: Players received 57 percent of Basketball Related Income (BRI).
2011 CBA: Players receive 51.15 percent of BRI this season. It then fluctuates from 49 to 51 percent thereafter – 50 percent, plus or minus 60.5 percent of the amount by which BRI exceeds or falls short of projections; 1 percent of BRI from the players’ share is used to fund a new pool for post-career benefits.
Definition: BRI generally is the income received by the NBA, NBA Properties or NBA Media Ventures as a result of basketball operations. This includes: regular-season gate receipts; broadcast rights; exhibition game proceeds; playoff gate receipts; novelty, program and concession sales (at the arena and in team-identified stores within proximity of an NBA arena); parking; proceeds from team sponsorships; proceeds from team promotions; arena club revenues; proceeds from summer camps; proceeds from non-NBA basketball tournaments; proceeds from mascot and dance team appearances; proceeds from beverage sale rights; 40 percent of proceeds from arena signage; 40 percent of proceeds from luxury suites; 45-50 percent of proceeds from arena naming rights; proceeds from other premium seat licenses; proceeds received by NBA Properties, including international television, sponsorships, revenues from NBA Entertainment, the All-Star Game, the McDonald’s Championship and other NBA special events. Specifically not included in BRI are proceeds from the grant of expansion teams, fines, and revenue sharing (e.g. luxury tax).
Winners: Big win for the owners, given the $370 million, $340 million and $300 million losses claimed the previous three years because of the 2005 BRI agreement that was ridiculously tilted in the players’ favor. Each percentage point equates to roughly $40 million, which means at least $240 million in additional revenue each year for the owners compared to the previous deal.
