Explaining the NBA Salary Cap Explosion

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On June 17, Yahoo reported that the NBA is currently projecting the 2016-2017 salary cap to hit an all time high of $94 million dollars – an even higher spike than previously anticipated. The cap for this past season was only $70 million, so the increase means that most teams will be able to sign at least one, but possibly two players to maximum contracts this upcoming season. Depending on years of experience, max players will receive between $22 million and $31 million per year.

As such, NBA fans should expect to see a huge rise in the amount of money being negotiated by top players around the league and a very exciting free agency season beginning Friday, when teams are able to start negotiating with free agents.

What is to blame (or thank) for this epic cap spike?

The cap is determined by the rules laid out by the NBA’s 2011 collective bargaining agreement (“CBA”). Pursuant to the CBA, the annual salary cap number – the amount teams can spend on free agents – hinges on projecting “basketball related income” (“BRI”) to be received by the NBA and its subsidiaries in the upcoming season. Over twenty pages in the CBA are devoted to defining BRI, but essentially it includes ticket sales, concessions, parking, advertising, merchandising rights from jersey and apparel sales, and (most notably) television contracts, among others.

While the NBA has seen a recent rise in attendance, and consequently income related to concessions, parking, and apparel sales, that rise only attributes to roughly $2 million dollars of the total cap increase. The real reason for the upcoming salary cap increase is an extremely lucrative broadcast rights deal secured by the NBA in October of 2014, and set to take effect this upcoming season.

Pursuant to the nine-year deal negotiated by the NBA, ESPN and Turner will pay a collective $2.6 billion per year to the League for exclusive broadcasting rights. That trumps the current deal with those networks by approximately $1.67 billion. Under the terms of this deal, 164 of the NBA’s 1,230 regular season games will be nationally televised; up 74 games from the previous deal. Additionally, under the new deal, the NBA made a distinction between “window exclusivity” and “game exclusivity.” Meaning that although ESPN and Turner will have exclusive rights to certain games, local television will be able to broadcast other games that are being played at the same time (much like the NFL’s flex scheduling).

What is the impact?

27579728370_6407325512_zThere is more than meets the eye with a rising cap. Not only will the cap number increase, but the NBA’s luxury tax and salary floor levels will also be higher. This means that many fewer teams will be forced to pay the League’s punitive luxury tax for being well over the soft cap. Also, certain teams (looking at you Philadelphia) that are well below the salary cap may struggle to reach the minimum amount that a team must pay its players. If a team does not reach the salary floor, it must pay its players the difference between the team’s total salary and the floor.

So, if you were wondering why LeBron James only signed a two-year deal with a player option after year one with the Cavs, you have your answer (and no, he won’t be taking his talents back to South Beach). Lebron (and/or his agent) realized that getting back on the market after one year would allow him to sign a higher maximum contract, and six to eight million dollars more in the upcoming season. With the cap going up again in 2017, expect James – and other surefire superstars such as Kevin Durant – to sign a short-term deal for the same reasons.

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