Negotiations present several challenges to the league and players

When the league decided to suspend the NBA season due to the coronavirus, a lot of revenue was set to be lost. If the rest of the regular season continues without spectators, the NBA could lose over $500 million in gate revenues that could decrease the salary cap projection by as much as $8 million. Playoff games without spectators could have the NBA lose an additional $166 million in gate revenues, as estimated by Tom Haberstroh of NBC Sports.

With so much uncertainty as to how the season will continue, the loss of revenue will decrease the amount of money to be collected by both sides. It also could further decrease the salary cap projection for 2020-21. By exactly how much is yet to be determined. Based on the estimates that exceed $500 million in revenue, the salary cap could decrease by more than $10 million. The league and players have a lot of issues to navigate and discuss in regards to the designated share in revenue this season and the salary cap next season.

LOSS OF BASKETBALL RELATED INCOME (BRI)

It is important to understand that there is a designated share where players earn 51 percent of BRI. If revenue is lost, they could lose money but still out-earn their designated share, also known as an overage. There is an escrow system in place where 10 percent of player salaries and benefits are withheld in case of an overage. At the end of a season, if there is an overage, the difference can be taken out of escrow and returned to teams.

So far, players are still being paid on time, with most players receiving their normal payment amounts on March 15th. Most teams have completed about 80 percent of regular-season games, meaning they should be compensated for completing that many games. However, most players haven’t been paid up to date for the amount of time they’ve contributed up to this point in the season. Generally, players start getting paid on November 15th in either 12, 24, or 36 installments. Players still need to get paid, but depending on how much BRI is lost, an overage could still occur even if the league took back the full 10 percent from escrow.

SALARY CAP DECREASE

If there is an overage, salary cap mechanisms would have it naturally decrease. Still, it is probably in both parties’ best interest to avoid a drastic decrease. Fortunately, there is language in the NBA Collective Bargaining Agreement (CBA) that allows teams and players to negotiate the salary cap amount, rather than make it according to the exact BRI amount. The league and players could agree to a reasonable adjustment in good faith that works for both sides.

Agreeing to a salary cap amount that doesn’t deviate too low from the current projected amount preserves the balance of future salary cap seasons. If the 2020-21 salary cap is decreased significantly while player salaries remain the same, that means player salaries greatly exceeded the salary cap. This is assuming the league is back to normal revenue-wise. The surplus in BRI relative to a lower initially projected BRI would cause the 2021-22 salary cap to artificially spike. Owners historically have tried to avoid such situations, as it could start a repeat of the 2016 offseason. It is unclear if decreasing the 2020-21 salary cap projection beyond $10 million would cause a spike in 2021-22 as severe as the one in 2016-17, but most owners would still like to prevent it.

For the players, more cap space in the 2020 offseason means more money available for free agents to sign with. In 2014, the NBA signed a new broadcast deal with Turner and Disney that would raise their broadcast revenues from $930 million annually to an average of $2.6 billion annually. As the new deal was about to be implemented for the 2016-17 season, the salary cap was set to dramatically increase as well. The players did not agree to a more conservative amount to increase the salary cap, also known as “smoothing”, allowing 2016 free agents to maximize their earnings.

Even more problematic would be the lower luxury tax that corresponds with a lower salary cap. If the salary cap were to decrease by more than $10 million, the luxury tax line would decrease by around that amount as well. The combination of that and player salaries remaining the same could put many teams over the luxury tax line next season without signing a single player. Having a situation like that is inefficient to the whole league, and hurts both players and teams.

Both sides could agree to a smooth decrease of the salary cap instead of allowing a drastic drop. They could even agree to not have the salary cap projection decrease at all. The reasoning is that a loss of BRI in the 2019-20 season may not have any implications on the 2020-21 season. After the 2011 work-stoppage ended, the league and players agreed to make the salary cap for 2011-12 the same as the amount of 2010-11. This was done despite the loss of revenue that corresponded to a reduced regular-season schedule in which 16 games’ worth of broadcast and gate revenue was lost. Perhaps something similar can be agreed upon in order to keep the status quo.

OTHER ISSUES

There are other things that will need to be negotiated upon afterward. Players and owners could use this opportunity to address upcoming issues. Following the 2005 and 2011 CBA negotiations, both sides agreed to amnesty clauses that allowed teams to waive one player and wipe said player’s salary completely off their books. This was done to bail out teams from undesirable contracts, which became prevalent for most teams. Creative measures could be needed to counteract next year’s salary cap. For example, if the salary cap is lower than anticipated, making cap space less available, the league and players could agree to add an extra exception that could only be used in the 2020-21 season.

A shortened season complicates incentives. Many players have incentives contingent on games or minutes played. If the regular season is reduced, players with incentives stand to lose even more money. Some compromise must be made between the players and league where perhaps games and minutes requirements are prorated for the total amount of regular-season games and minutes actually played.

With the salary cap projection in position to decrease, and thus players set to lose money in free agency, one would assume that the players would agree to a salary cap amount that isn’t significantly lower than the current salary cap. Where things can get ugly is if one side decides to get unreasonable. For example, though highly unlikely, the players could decide to allow the 2020 salary cap to decrease naturally if it means an even higher salary cap projection for the 2021 offseason. On the other side, owners could demand that players agree to reduce their designated share for 2019-20 beyond what is stipulated in the CBA if the regular season continues with no fans, or games get canceled. Such extremes expressed by either end would signal the end of good faith, which could delay the return of basketball beyond this season.

All these issues mentioned, along with many other things that haven’t been thought of yet, are ongoing issues that require constant communication between the league and players. If games are missed, the league could issue a termination of the CBA, under the Force Majeure provision. The broad timeline of the suspension versus the window in which the league can issue the termination of the CBA leaves very little room for error. The league can only terminate the CBA within 60 days of the Force Majeure event. The league suspension began on March 11, meaning both sides should play ball and try to have agreements on most BRI and salary cap issues by May 9.

All indications so far are that both sides are cooperating and want to save the season. Several things both sides have agreed upon so far is a moratorium on transactions and the elimination of drug testing during the suspension. Both sides stand to lose way too much money if they let things go wrong.