A Primer on Cap-Smoothing: the NBA's BRI Problem

Adam Silver answers a question. (Credit Pat Sullivan from the AP for the photo.

Two days ago, Zach Lowe stirred up a minor storm on Twitter with a tiny aside in an otherwise non-controversial piece about the frustrating tête-à-tête between Eric Bledsoe and the Phoenix front office within his restricted free agency. The offending aside, in its essence:

And that’s where things get interesting: Executives on lots of teams have gotten the sense from the league office that the NBA will try to smooth the increase of the cap level to minimize the impact of any massive one-year jump in revenue. Exactly how it would do that is unclear. The precise team salary cap — $58 million last season, $63 million this season — is tied to overall league revenues; the two rise and fall together. Players are guaranteed about 50 percent of the league’s “basketball-related income,” and the league and union set the cap figure so player salaries add up to a number in that 50 percent ballpark. The league’s specific plan for smoothing out the cap increase is unclear, and in the end, it may opt against doing so at all. The players will receive their guaranteed 50 percent share of revenues regardless of any engineering.

There's a lot of misunderstandings about how exactly this cap smoothing plan could work, and those misunderstandings spread in a controversy so deadly it almost became a twitpocalypse. (Alright, I lied. It was a pretty average twitter controversy. I just wrote that so that I could use the word "twitpocalypse.") Much like Lowe, I don't feel this is all that controversial. And I generally think a cap smoothing plan could be an ideal situation for both the league as a whole and the players as a collective. That sounds weird at the outset, especially because as-described the cap smoothing plan is effectively depressing player salaries.

But there are a lot of key facts about the NBA's general operating agreement that lead me to that conclusion, and I realized while arguing about this that most people were totally unaware of these. While I tried to explain my rationale in 140-character chunks, I quickly realized that Twitter was a terrible medium for this kind of a complicated explanation. Let's try it in post form. My intention is to try and explain a) why it's necessary in the first place, b) what such a proposal would need to entail, and c) a few off-the-cuff ideas of how the parameters of this proposal might look. But to start to explain this, one must start at the very beginning, which can be done by answering a hypothetical posed to me by the incomparable @basquiatball.

• • •

What would the NBA offseason look like if the cap doubled?

The NBA's 2015 salary cap was set about a month ago. The exact figure was $63 million dollars. Let's say, for the purposes of this argument, that the NBA's basketball related income will roughly double in the 2016 offseason, for reasons unknown to all of us. Ergo, the cap (a figure that's tied intricately to BRI) suddenly jumps from this year's $63 million figure to a total of $120 million dollars. This has a lot of side-effects, as the cap figure has a massive impact on the NBA's salary structure. The most important ones for our purposes:

  • An NBA team's minimum collective salary is set at 90% of the NBA's salary cap figure. This past year, it was set at $56 million dollars. In this scenario, it jumps to $108 million dollars.
  • The maximum salary of an NBA player is set at a certain percentage of the cap depending on how many years the player has been in the league. This would result in maximum salaries jumping like so:
    • 0-6 years: 25% of cap. Jumps from a starting salary of $14.7 million to $30 million.
    • 7-9 years: 30% of cap. Jumps from a starting salary of $17.7 million to $36 million.
    • 10+ years: 35% of cap. Jumps from a starting salary of $20.6 million to $42 million.
  • The tax level is set at a certain percentage of BRI, meaning that it matches the cap level. It would rise from $77 million to $146 million.

I filled out a spreadsheet with every contract currently on the NBA's books. The NBA currently has salaries roughly totaling $2 billion dollars for the 2015 NBA season. In a scenario where every team opens up so much cap room, it's a fair assumption to state that every single player in the NBA with a qualifying offer or a player option will reject it and every player with an early termination option will exercise it. With those assumptions, players who remained on the books with their guaranteed contracts would represent $1.3 million of those $2 billion in contracts. The players who represented the other $0.7 billion would become free agents.

At this juncture, let's take a step back to try and understand the mechanisms by which the league and the players meet the overall player salaries proposed in the 2011 CBA. According to that CBA, the players receive 49 to 50% of basketball related income. The cap total (and cap floor) is tied to BRI in such a way that forces teams to dole out salary so that the players get their agreed-upon share. If a team does not meet the minimum salary among all their players, the difference between their total salary and the salary floor is paid out in equal margin to all players on their closing day roster.

Still. With max salaries doubling and every team in the market for every player in free agency, what do you really think is going to happen? Nobody on that free agent market that gets picked up is going to get a minimum salary -- too many teams with too much money will ensure that. If BRI doubles, the total amount that goes back to the players in salary will need to approach $4.3 billion dollars despite only having $1.3 billion dollars on the books in guaranteed money to the players with existing contracts. Even assuming that some teams don't get all the free agents they want and are forced to end the season under the salary floor, that still means that salaries for the players on the free agent market (the ones who made up just 0.7 billion of the NBA's salary in 2015) will need to approach $2 billion dollars for the numbers to work out, with the remaining $1 billion dollars being distributed in payments to players on sub-floor teams. That means that virtually every player in that free agent class will see their salaries double or triple over their previous contract while players with guaranteed contracts see little to no impact from the massive salary boost.

• • •

Why is this bad for the players?

Now that the previous scenario has been laid out, this one should be easier to understand. To put it plainly: every non-free agent in the NBA gets screwed. The NBA doesn't really have many avenues for adjusting to massive shifts in the cap -- under the current CBA, players on existing contracts aren't going to see the benefit of a massive cap increase until they hit free agency. And by that point, the rush on contracts might very well be over. Sure, they'll get MORE in their next contract, but how much more?

Again, let's return to our example. Let's say that BRI projections stay completely flat after rising to $120 million dollars. In the 2015 offseason, we calculated that there would be $1.3 billion dollars of guaranteed salary on the books alongside a BRI projection that would lead the players to require $4.3 billion dollars of the NBA's revenue. In the 2016 offseason, after the projected 2015 spending spree of $2 billion dollars on the 2015 free agents, the total guaranteed salary would instead be roughly $3 billion dollars, leaving $1.3 billion to divvy up between all free agents on the market. This would lead to raises, assuredly -- the new class of free agents have salaries that summed up to roughly $600 million dollars, so those free agents are likely to double their salaries.

But notice what happened in the previous offseason -- due to the wild fluctuation caused by the rapidly rising cap, free agents in the 2015 market ended up with almost triple their previous salary as teams got into predictable bidding wars with their bounty of cap space. Once that cap picture stabilizes and the market starts to look like a normal one again (that is, with 5-6 teams with big cap room and the rest working around the margins), the NBA would return to a generally stable world where future free agents saw their salaries increase to match the big BRI increase. But future free agent classes would never quite see as much of an increase as the initial run -- there wouldn't be as many teams able to engage in large bidding wars nor would there be as much of a need for teams to sign overpaid contracts in an effort to avoid missing the salary floor.

Hence, the big problem. Suddenly increasing the cap by a massive amount DOES increase salaries, which is good for the players in aggregate. But that increase is NOT evenly distributed -- it provides a larger-than-deserved bump to the players who happen to enter free agency during that free agent period without any means of redistributing that money to players on guaranteed contracts. Even after the 2011 CBA decreased the number of years on contracts and forced more of the league into free agency on a yearly basis, the number of players who enter free agency in any given offseason is still much less than half the players in the league. Which means that 30-40% of the league would be reaping the benefits of the increased revenue without any of the players on guaranteed money seeing a dime of it until their own respective free agency periods.

That's simply not a good look. It penalizes:

  • Veterans who signed long contracts as injury insurance.
  • Rookies still on their now comically underpaid rookie deals.
  • Any player whose team convinced them to sign a longer deal to help foment team stability.

That's a hell of a lot of the league. It's pretty hard to see a situation where the 30-40% of the league entering free agency could outvote the 60-70% of the league that would be stuck on the sidelines, watching as free agents gobble up the NBA's suddenly-bountiful cap room with obscenely huge guaranteed contracts. If the league could come up with a cap smoothing proposal that keeps such a free agency period from happening, it's a good bet that most players would support it.

• • •

Isn't salary suppression illegal? Why would the players give up money?

Returning to Zach's quote for a moment, there's one sentence that bears repeating:

The players will receive their guaranteed 50 percent share of revenues regardless of any engineering.

This is a core point of any particular cap smoothing proposal. In no universe will the players NOT receive the share of BRI they were promised during the 2011 CBA negotiations. That wouldn't just be bad form -- it would be completely illegal per the NBA's operating agreement, and probably lead to the end of the league through the courts. Even if the salary cap is artificially depressed, the players will still receive their agreed-upon share of the pie. The question therefore is one of distribution -- cap smoothing would be an effort to prevent uneven assignment of the revenue increase, essentially a way to prevent one season of lucky free agents from gobbling up 60-70% of the NBA's salary cap in the near term.

 

Having established that the players are going to receive their money regardless, the question becomes one of the league itself. Why would Adam Silver and the owners want to implement a smoothing proposal if they aren't actually getting any more money? If we consider the players' vested interest in an even distribution of salary, the league has a vested interest in preventing the variety of other ill side effects stemming massive jump in the cap as well. In a world where every team is suddenly under the cap, the chances of any particular team actually accumulating enough salary to go over the tax line in a meaningful way is extremely low. Ergo, the various teams who depend on tax payments would suddenly be without their main source of income. Because every single player who could possibly finagle his way into free agency would do so, the league would look almost completely different from one year to the next -- 40-50% of the league would likely change teams when you account for all the trades and machinations teams would go through to try and attract the star players of the free agent class.

That isn't necessarily a bad thing, but it isn't ideal either. Given the NBA's focus on competitive balance and the subsidizing of small markets, that kind of an offseason free-for-all could be seen by many owners as an anathema to balance and a reward to teams in large markets who haven't managed their cap space particularly well. Hence, the league office has a vested interest in keeping the cap figure stable regardless of whether they get any extra money in doing so.

• • •

How would a cap smoothing proposal work?

So. We know the league's BRI estimates are likely to rise 30-40% after the league agrees to a new TV deal -- that's nowhere near the wild scenarios described in this post, but it would cause a similarly deleterious impact on the league's salary structure. While I'm no legal expert, there are a few ways I could imagine a cap smoothing proposal being both legal under the 2011 CBA and operating in such a way that both the league and the NBPA would agree to it. They are as follows:

SCENARIO #1: EVERYONE AGREES TO PRETEND THE CAP IS LOWER.

I mostly just included this one because it's the most obvious result, even if it's extraordinarily unlikely. The basic idea is that teams would simply operate as though the cap is near historical levels, rising by 5-6% instead of 30-40%. They'd sign contracts commensurate with those from previous free agency periods but reflecting the gradual increase. This is silly for obvious reasons. Even in the unlikely event that all teams collectively agreed to operate under a lower threshold to keep salaries in roughly equivalent ranges, the method by which the CBA deals with a salary shortfall (the aforementioned equal assignment of sub-salary floor money to all players on the team below the floor) is a wildly imprecise method of evening out the league's salary. It would still raise the salaries of free agents signed in that free agency period, and it would grant an equal portion of the pie to minimum-salary journeymen and superstars stuck in max deals. And it would also assign larger raises to players on teams with low salary obligations (like tanking teams) at the expense of teams that are trying to field title contenders. Even if Silver could somehow convince the teams to do that, it's unlikely the result would be to anyone's liking.

SCENARIO #2: THE LEAGUE AND NBPA MUTUALLY AGREE TO DISTRIBUTE EXTRA SALARY THROUGH THE NBPA

There was one way for the NBA to fix errors in the cap that I didn't mention in this post. Per Larry Coon's CBA FAQ:

Since individual salaries are negotiated before the season starts (in many cases years before), and BRI is not determined until the season concludes, there are mechanisms in place to adjust when salaries miss their target. If the players receive less than their guaranteed share of BRI, the league cuts a check to the players association for the difference, and this amount is distributed to the players (this happened in 2010-11, under the 2005 CBA).

This may be the most likely smoothing plan. In this scenario, the league would knowingly keep the BRI estimate lower than expected in concert with the NBPA, which would artificially depress the cap. The remainder of player salary would then be distributed to the players by the NBPA at the end of the season, with the NBPA deciding how to split the large imbalance among all its players. This would probably go on for a few years, increasing the cap by 5-10% each year until the shortfall isn't a massive number anymore. There might be some quibbles among some players with max salaries that this artificial smoothing deflates their max salaries, and that's a very valid point. But this is probably the fairest option.

SCENARIO #3: THE LEAGUE ADJUSTS FOR THE BRI INCREASE BY SHORTENING THE NBA SCHEDULE

Both the league and the players have expressed for some time that the NBA's schedule is a bit too long for comfort. The players don't like the increased risk of injury that comes with a longer season or the unnecessary back-to-back stretches that make it hard to stay at top form all year, while the league isn't particularly fond of the anemic basketball that gets played for months of the NBA's calendar or the widespread perception that the NBA's regular season doesn't matter. The NBA has maintained for quite some time that it would like to add some kind of midseason tournament to manufacture new interest in their product and add different parameters for a successful season outside of the simple "NBA championship or bust" framework they have now.

My thought is that it's possible -- unlikely, but possible -- that the league could use this BRI increase as a way to justify shortening the NBA season. Depending on how much they shortened the NBA season, they could depress BRI projections enough to maintain a relatively even cap despite adding the new national TV deal. They could keep the basic skeleton of the schedule the same (that is, start in October and end in late April) but implement 2-3 weeks of dead time around the all-star break, effectively giving NBA players a month off in the middle of the year. That month would lie dormant until the 2017 CBA negotiations, when the NBA could introduce a plan to hold a two week midseason tournament directly in the now-empty weeks. They could structure the TV deal to include basic parameters for covering the midseason tournament with exact terms to be negotiated after the CBA deal, giving an instant BRI boost as soon as the tournament is agreed upon.

If there are fears that the tournament's addition could push the league into a similar cap situation to the one it's facing now, the league and the NBPA could negotiate terms such that tournament income is considered "post-BRI" asset income, much like NBA jerseys. That way, players would get paid for the tournament separately from their salary, allowing the league and players to profit off the

There are a lot of ways the NBA could manage this in a way that benefits both the players and the league. At this point, only one thing is certain -- it's unlikely either side has a great appetite to see how the 2011 CBA holds up in the aforementioned stress case. Artificially easing the cap increase could benefit all parties involved, despite how odd that sounds in a vacuum. Keep an eye on this -- as the NBA's new T.V. deal approaches, this back-and-forth between the league and the players is only going to get more interesting.

3 comments on “A Primer on Cap-Smoothing: the NBA's BRI Problem

  1. Another possibility is to have the salary cap based on the average of the previous 5 years of BRI. Then the cap won't spike even if BRI does, and you get the added benefit of lessening the impact of a crash if BRI somehow plummets later.

  2. Your first point about the potential uneven participation in BRI increases is the obvious reason why James insisted on a contract with a player option at the end of each year. Regardless of when the revenue comes, he will get the max in the most uneven of years.

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