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CBA: The NBA model

Sunday, December 21, 2003

When the NHL was looking for new leadership in the early 1990's, it turned to the National Basketball Association. The NBA had gone through a major boom in the 1980's, was enjoying immense popularity on a national and international scale and, most important, had implemented the envy of team owners -- a salary cap.

And the NHL tapped Gary Bettman, who played a major role in developing the NBA's salary cap in the mid 1980's, as the first ever Commissioner of the National Hockey League.

The cap that Bettman helped develop for pro basketball in the 1980's is considered a soft cap. Unlike the NFL's system of a hard cap, which teams are not allowed to exceed, the NBA's system gives teams the flexibility to go over the cap under certain situations. In fact, most teams are usually over the cap.

But the principle of the cap is still the same. The goal is to allocate a certain percentage of league revenue for players. So here is a look at how the NBA does business.

NBA Salary Cap

Like the NFL's cap, the NBA cap is complex. The NBA's salary cap is based on the total income of all NBA teams, which is called basketball related income (BRI). The players are guaranteed 48.04 percent of the BRI. This season (2003-04) the salary cap is $43,840,000.

There is also a minimum team salary, which is set at 75 percent of the cap. For 2003-04 the will be $32,880,000 next season. There are minimum player salaries and maximum player salaries that depend on the length of service in the league.

But there are several exceptions. This is taken from the NBA's Official Web Site:

Starting in 2001-02, still concerned about escalating player salaries, the league implemented an escrow system. This was a major bone of contention in negotiations that led to a lockout in 1998, but the players finally agreed to it..

The plan calls for ten percent of each player's paycheck go into the escrow account. If player salaries exceed 55 percent of the BRI, the overage amount goes to back to the owners and what remains goes to the players. If salaries don't exceed the 55 percent mark the players get all the money back.

The NBA also has a so-called luxury tax system. This kicks in when league-wide player salaries exceed 61.1 percent of the BRI. If that happens then teams must pay a dollar for each dollar they are over the 61.1 percent threshold. Teams that were under the threshold get a 1/29th share of the revenue. If player salaries do not exceed the luxury tax limit than no team, regardless of its payroll, pays the tax.

For example, in 2001-02, the New York Knicks did not have to pay a luxury tax even though their team payroll was $85 million. That led some to wonder what the point of the salary cap was. As long as teams like the Los Angeles Clippers and Chicago Bulls spend little enough on salaries to keep league-wide salaries under the 61.1 percent threshold, teams like the Knicks and the Portland Trailblazers can continue to vastly exceed the cap without penalty.

But in 2002-03 that all changed. The Knicks, Trailblazers and 14 other teams did have to pay the tax because league-wide salaries exceeded the 61.1 percent threshold.

That meant that $347 million dollars was redistributed around the league. $173 million came from luxury taxes and the other $174 came from the escrow account from player salaries.

Portland was the big loser. The Trailblazers paid $52 million in luxury taxes on their $104 million payroll. They got their share from the escrow account, which amounted to $7.1 million. So the Trailblazers lost $44.9 million in the redistribution scheme and ended up losing somewhere in the range of $90 million overall last season.

The Dallas Mavericks said their operating loss for the season would be about what they paid in luxury taxes, which was $18.5 million.

The 13 teams that did not have to pay luxury taxes ended up receiving $14.7 million each in the redistribution process. For a team like Cleveland, the $14.7 million payment made them a profit.

The San Antonio Spurs, won the league championship last season, had to pay only $200,000 in luxury taxes. They picked up $13.9 million in the redistribution process and that was the difference in the team making a profit for 2002-03.

"The tax is working," Spurs owner Peter Holt told the told Bloomberg News last summer. "Without it, I couldn't be in business right now. I would have had to move out of San Antonio, and I could never had kept [star] Tim Duncan."

Utah was one of the teams that pulled in $14.7 million.

"I would think the collective-bargaining agreement is working, not necessarily for small markets, but for teams that spend judiciously," Kevin O'Connor, the Jazz's vice president of basketball operations, told the Salt Lake Tribune. "Teams that spend what players are worth will benefit, and teams that spend too much will pay a price."

Economist Dan Rosenbaum said the reason behind things like salary caps and luxury taxes is pretty simple.

"The reason leagues do it is because it's an effective way to keep teams from spending so much on salaries," Rosenbaum told the Dallas Morning News.

But Rosenbaum has concerns about the way the NBA operates its economic system.

"This isn't a completely crazy system," Rosenbaum told the News last summer, "but the NBA is probably overdoing it and creating a lot of perverse economic incentives."

Rosenbaum, an economist at the University of North Carolina-Greensboro, is an expert on the luxury tax issue. He estimated that the five highest payroll teams last season, who totaled a $30 million annual profit in 00-01 and 01-02, lost about $105 million in 02-03.

"The mechanism by which teams earn profits has changed. Avoid paying the luxury tax and your team will be profitable, no matter how bad you are. Pay the luxury tax, and you likely will be losing a lot of money, regardless of whether you are successful on the court," Rosenbaum wrote for the RealGM.com web site. "In fact, the luxury tax has become so dominant that an argument could be made that a luxury tax expert, such as Irwin Mandel of the Chicago Bulls, is worth more to a team than all but a handful of players."

And writing in an academic paper, Rosenbaum had this to say: "In addition, key parameters of the tax system, such as the threshold at which it first takes effect and even whether or not it will take effect in a given season, are not known until after the season is over. Thus, teams are forced to make complex, longterm contract decisions without knowing the full costs of those decisions. In some cases, these parameters unknown to the team may double or triple the cost of signing a particular player. Again, rarely as economists do we get to observe how economic agents respond to this level of uncertainty. Interestingly, it appears that many teams have responded by adopting a highly risk averse strategy, where their behavior is governed by the constraints under what they consider to be the worst case scenario."

But it's not just the economics that concern people. There is also the competitiveness issue. By allowing teams to use the "Larry Bird Exception" top teams are able to keep their top free agents.

If Los Angeles' Shaquille were a free agent any other team that tried to sign him would have to create salary cap room. But the Lakers don't have to. The goal is to allow teams to keep their top, most popular players. But some argue that just helps create dynasties like the Lakers, while the Los Angeles Clippers wallow in mediocrity or worse.

"Teams.... still cling to the false premise that by dumping contracts and creating cap room, they will one day sign a big-name free agent who will lift them from the basement," Bryan Curtis once wrote for Slate. "Problem is, it almost never works that way. Salary cap room doesn't make bad teams better. It relegates them to NBA road kill for years to come."

And in some cases exceeding the cap dooms teams to be road kill as well. The Knicks are the perfect case. Their payroll is about $90 million this season, more than double the cap.

That prompted New York Daily News columnist Mitch Lawrence to write this: "The Knicks' salary ledger is a monument to excess, if not delusional thinking at Two Penn Plaza. Line by line, it shows how reckless overspending is killing any hopes for a championship," Lawrence wrote. "In an age of a mid-$40 million league salary cap, the Knicks then will continue to be at double the cap, precluding them from ever getting a franchise-type free agent, like Shaq or Tim Duncan or Kobe Bryant."

There is also the argument that the big market teams still dominate in the NBA. Since 1984, only six franchises have won the NBA championship: Boston, the Lakers, Chicago, Houston, Detroit and San Antonio. Only San Antonio is not a top ten market. Baseball has had 13 different franchises win the World Series. Twelve NFL franchises have won the Super Bowl. Nine NHL franchises have won the Stanley Cup.

But despite the 13 different World Series winners since 1984, Major League Baseball is still considered the king of disparity in professional sports. And, like the NHL, baseball doesn't have a salary cap. A look at how Major League Baseball conducts its business in our next report.

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