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The Silver Lining of the Salary Cap Cloud

10/20/2009

As ESPN's Marc Stein broke some news about the NBA salary cap level for 2009-2010, and more importantly about some surprising NBA projections about what it might be for 2010-2011. Any team that hoarded cap space for the summer of 2010 is, today, faced with the possibility that they may have far less available than they had hoped.

While the memo had bad news for the basketball staffs, looking to spend more and more to acquire talent, I expect the memo was borderline thrilling to some, including poor teams, many owners and the bean counters who worry about teams' balance sheets.

There are four ways this memo might make them happy.

$6.5 Million in Cash for Every Team on July 29
Remember the NBA's escrow system? Basically, reported amounts for player salaries are not precisely the amounts they get. Instead, a percentage of every player salary is held aside, in escrow. At the end of the year, the league tallies up how much players made as a percentage of the league's "basketball-related income."

If the basketball-related income was high, then the players get their money back.

If the basketball-related income was low, then the owners get a mulligan on some of what they agreed to pay the players.

The result, is a pretty good recession buster for the owners. At the moment there's nearly $205 million in the escrow account. $194 million of that, according to the memo, will be distributed equally to the 30 teams on July 29 -- meaning each team gets $6,467,847 in cash. The rest goes towards benefits (a long story), meaning teams will also each be spared $363,087 they would have been expected to contribute for next year.

In effect, each team will get about $6.8 million, the vast majority in cash.

Lower Salaries for the Same Players
The news in the memo, undeniably, has the potential to simply reduce the price of top basketball talent (Andre Miller or Shawn Marion for the mid-level exception, anyone?). Any team hoping to sign LeBron James or any other 2010 free agent now has more impetus than ever to shed salary. 

One of the biggest effects this could have will be on players who are soon to come off rookie deals hoping for max contracts. Think about someone like Brandon Roy. The maximum contract for veterans like LeBron James or Dwyane Wade is calculated as a percentage of his previous year's salary -- basically, they can get a 5% raise. So they're largely unaffected. But Roy is still earning rookie scale, and is looking for much more than a 5% raise. His maximum is based on the league's basketball-related income, which has gone down and could go down further.

Which means the maximum he could get each year is almost certainly going to be less than what, say, Chris Paul got in his extension.

Does that mean players like Roy might, in light of that, sign a shorter deal to get to free agency sooner? (In free agency, players have the ability to make even more.) It's certainly possible.

Luxury Tax Disbursements to 23 Teams
You probably know about the NBA's luxury tax. A refresher: Teams pay one dollar to the NBA for every dollar they spend in salary in excess of a certain amount, which we now know was $71.15 million this past season. That means seven teams will pay, and they are, as Stein reports:

New York ($23,736,207), Dallas ($23,611,661), Cleveland ($13,707,010), Boston ($8,294,664), Los Angeles Lakers ($7,185,631), Portland ($5,899,356) and Phoenix ($4,918,136). 

The other 23 teams, however, each get 1/30th of that money back, in cash. That means the 23 teams not listed above are each about to get $2,911,756, which is not a bad little shot in the arm.

Help for Low Revenue Teams
If you're doing the math at home, you'll realize that the luxury tax arrangement means the league is sending out 23 luxury tax payments, and each one of those is a 30th of what they took in.

So, inspector, where are the other seven 30ths? It is something I have always wondered.

Meet the NBA's Revenue Assistance Plan for low revenue teams. I'll be honest, I don't know much about this, but I can tell you it's described a little in the memo from the NBA Stein reported on:

In accordance with the league's Revenue Assistance Plan, the remaining $20.4 million of "undistributed" tax funds will be used to fund assistance payments to teams for the 2008-09 season.

(Under the Plan, up to $49 million of assistance will be paid to low-revenue teams for the 2008-09 season. The assistance payments will be funded in three tiers: first, with "undistributed" tax funds ($20.4 million); second, to the extent that additional funding is needed, with contributions from the 30 teams in proportion to each team's local revenues (up to one-third of total assistance payments); and third, to the extent that additional funding is needed, the shortfall will be funded with distributions from league entities.) 

Anyway you slice it, that's up to $49 million for the team's sorriest teams. How it is divided and under what terms it's disbursed is unclear.

This might not seem like all that much. But consider those teams that are hurting. They're trying to sell tickets for tens or hundreds of dollars a pop, or season tickets for thousands. Faced with difficult economic times, many teams have laid off front office staffers with regular working salaries.

Now all 30 of those teams will have a $6.8 million shot in the arm. 23 of them will get an additional $2.9 million in luxury tax. And the lowest revenue teams will apparently be getting even more funds than that -- even as player salaries likely get cheaper. 

A bad day, to be sure, for those dreaming of being tens of millions under the cap. But not so dire, I suspect, for those who write the checks.