The CBA: My Last, Best Offer

It’s June 27, and in a few days, there will be a lockout.

As of the time I’m writing this, the NBPA representatives are saying that the owner’s demands cannot be met.  These demands, reported Tuesday by Ken Berger, have changed significantly in form from the owners’ offer used in the comparative on June 1, but not in substance.  The result of both offers greatly reduces the players’ share of BRI (from 57% to below 40%), institutes a hard cap, and effectively ends fully guaranteed contracts.

The owners new offer includes a “flex” cap at $62 million while guaranteeing the players $2 billion per year in salaries and benefits over the next 10 years.  The players consider the “flex” cap the same as a hard cap — I’ll explain this later, but the players are right — and they note that $2 billion guarantee essentially means that they won’t share in the future growth of the league.  Billy Hunter says that the current offer would cost the players $8.2 billion over the next 10 years compared to the current system, and $7.0 billion compared to the players current offer (of roughly a 54.3% BRI split).

The new CBA has been a topic of discussion for two years now, and the first formal offers are almost a year old.  In that time, neither side has made any material move towards the middle.

And that’s why there will be a lockout.

The Offer

A few days ago, David Aldridge published his ideas to avert the work stoppage.  While the NBA Blogosphere and Twitterverse were both very receptive to Mr. Aldridge’s ideas, I was not.  The unfortunate few who follow me on Twitter (@toothpicksray) saw my criticisms.  These primarily centered around the $20 million exception and the bi-annual amnesty clause.

Though I still would not like to see his proposals implemented, my complaints were unfair in two aspects.  First, I did not give sufficient weight to his 50/50 BRI split.  Second, I committed the sin of attacking someone’s ideas without offering alternatives of my own.

What follows are my alternatives for a 10-year CBA.

The New BRI Split

Current Agreement – Players are guaranteed 57% of the Basketball Related Income (BRI) to be paid in the form of Salaries and Benefits.

Current Players’ Offer –Players are offering to reduce the amount guaranteed from 57% to 54.3%.  The percentages are based on targeting a $500 million reduction vs. the current agreement over a 5-year period – or an average of $100 million per year.

Current Owners’ Offer – David Stern said the new offer guarantees at least $2 Billion per year to the players.  In effect, still generates a BRI split reduction, but phases it in more slowly.  In terms of dollars over the course of a 10-year CBA, it has roughly the same impact as the previously proposed $900 million reduction to BRI (for expenses), followed by a 50/50 split.

Union Chief Billy Hunter claims that the current owners’ offer would reduce the players’ share of the NBA pie over the next 10 years by more than $8 billion versus the current agreement and about $7 billion versus the players’ current offer.  This remains an extremely aggressive stance on the part of the owners – one that seems unlikely to be agreed upon without a lengthy lockout designed to effectively “break” the union.

My Proposal – Players would receive 51% of the first $4 billion of BRI, then 67% of any BRI above $4 billion.  Cap on overall effective BRI split at 58.5%.

The owners have been claiming annual losses of $300-400 million, and their demands have basically been aimed at getting $700-800 million in savings annually.  The players dispute the claimed losses.  They also argue that gap should not be filled entirely from their share.  As noted above, they have recently offered what amounts to about $100.

This offer gives the owners a savings of roughly $230 million at a BRI level of $4 billion (which should reasonably approximate current levels).  This acknowledges the owners’ claim that the business is not as healthy as desired, but neither moves them towards (virtually) guaranteed profits nor puts them in a position to recoup losses from the previous agreement.

At the same time, it gives the players a greater share of the growth, which provides an opportunity to get back to an overall 57% share — albeit gradually.  They would have more risk, but more opportunity.

Without direct access to the numbers for current and future years being used in these negotiations, I am forced to use the anecdotal information available to generate overall impact.  Based on the comments by Messrs. Stern and Hunter, I believe their revenue projections would indicate that:

• under the current agreement (57%), the players would receive a little over $30 billion over the next 10 years.
• under the players’ offer, the players would receive about $29 billion over the next 10 years.
• under basically both versions of the owners’ offer, the players would receive just under $22 billion over the next 10 years.

Broadly speaking, this seems to indicate significant revenue growth during the period, perhaps averaging 5% annually.  Using that somewhat gross assumption, my proposal would pay the players just a little under $29 billion over the life of the CBA.  That is roughly $1.2 billion lower than the current agreement and roughly the same as the players’ proposal.  However, it is about $7.0 billion higher than the owners’ current demands.

Obviously, these differences will fluctuate based on future revenues.  The faster the revenue grows, the fast the players’ share approaches an effective rate of 57%.  The slower revenue rises, the longer they linger below.  As an example (not a prediction), if BRI were to rise at a relatively stable (though optimistic) 5% per year, the players would end up at an effective rate of 57.1% in the tenth year and receive a little over 54% of the full 10-year revenue.

Note: There is a cap of 58.5% of effective BRI rate. This means that the players will never receive more than 58.5% of total BRI.  In practice, this means that at approximately $7.5 billion, the players will be receiving an effective BRI split of 58.5%.  Any BRI above that, the will receive the 58.5% split, not the 67%, in order to maintain that balance.

The Salary Cap System

Current Agreement – A “soft” cap with exceptions and a luxury tax.  As always, see Larry Coon.

Current Players’ Offer – Effectively, the same as the current system.

Current Owners’ Offer – A “flex” cap with a midpoint target of $62 million.

What’s a “flex” cap?  An unnecessarily convoluted hard cap.

The $62 million “midpoint” being thrown around would operate as a soft cap.  Bird and Mid-Level Exceptions would remain as a means to go past it.  However, above the $62 million there is an actual hard cap…so, hard cap.

My Proposal – Hard Cap

If you’ve read my previous work, you are now thoroughly unsurprised.  However, I think that the owners’ desire for a hard cap is only a little less fervent than my own.  Why?  Well, Kevin Garnett wasn’t wrong the other day, when he said the owners want “control.”

Of course, they do.

The hard cap is a reasonable target.  In fact, while I believe the BRI split should be the most important decision point for the players, it is the salary cap system that needs to be the single most important decision point for the owners.  The owners’ approach with the “flex” cap disappoints me.  Playing games with the “flex” cap was dishonest, insulting, and utterly counterproductive.

The players, however, do not consider it a reasonable target.  Billy Hunter has said that guaranteed contracts are the “life blood of professional basketball,” while Derek Fisher has said there will be no agreement with a hard cap.  The BRI split is crucial, but, really, this issue is/was/always may be the casus belli in this conflict.  I have always felt that this would be the hill that both sides would be willing to die on.

So, why am I including it in this offer?  In order to answer that, I want to address what a hard cap means and, just as importantly, doesn’t mean for the two parties.  First, it doesn’t mean this:

"“A hard cap would cut hundreds of millions of dollars in player contracts, including those of star players.” – David Aldridge One man’s way to avert NBA’s looming lockout June 20, 2011."

A hard cap will not do this.  The controlling issue on the dollars due to players is the BRI split.  What a hard cap creates is 1) a short-term transition phase that could create some upset depending on how it is handled, and 2) a long-term market environment where long, fully-guaranteed contracts will become virtually extinct.  Both are important to understand, but it is the latter — the loss of the fully-guaranteed contracts — that creates the discord.

Net-net, the players don’t like it, because they fear it will cost both long-term security for individual players and possibly that one big contract that sets them for the rest of their lives.  Owners want it, because it provides the cover necessary to pull back from offering 4-, 5-, and 6-year guaranteed contracts that the market has created as expectations.  That, in turn, allows owners and front offices more flexibility — and control — in terms of running and building their team.

I’ve considered both, and below are the details of my hard cap arrangement.

• The hard cap level will be established by taking the Players’ projected share of BRI, reducing it by $100 million to account for benefits, and dividing it by 30.  For example, a BRI of $4.0 billion would generate a hard cap amount of $64.7 million.  At $5 billion, the cap would be $87 million.  (Note: a hard cap established by the players’ BRI split virtually guarantees that the negotiated salaries and benefits will not meet the Players’ guarantee.  This hole will be filled by the owners, but the mechanics need to be sorted out.  I have an idea, but I can’t decide whether it’s brilliant or insane, so we’ll let that sit for today.)

• Contract length limitations will remain the same as the current agreement — six years for your own players, five years for other teams’ players.

• There will be no express limitation on guaranteed contracts — though the hard cap will create practical limitations.  However, all deals longer than three years must have a negotiated, league-approved buyout agreement.  Also, it will be required that at least the first two years of all deals longer than three years be guaranteed, and at least the first year of any two- or three-year deal will be guaranteed.  Also, any nonguaranteed year in a multi-year deal becomes guaranteed if the player is on the roster for opening night.  One year contracts may be fully nonguaranteed, becoming guaranteed on January 1.  Ten day contracts will function the same as today.

• A player’s cap hit will be the average salary over the course of the contract.  Buyout amounts will be straight-lined over the balance of the initial contract.  The actual payment of the player may be negotiated.  For example, a player signing a 4-year, $40 million contract will hit the cap at $10 million per year.

• A team’s payroll may not exceed the salary cap at any point during the season.

• If a team is found in violation of the salary cap, they must get below the cap immediately, and they will be charged three times the excess for the first offense.  All additional offenses will be penalized with the loss of a draft pick. (These will need to be calibrated.  I want teams to take the cap extremely seriously, but I’m not sure I want to create a situation where a $25,000-screw up costs a team a draft pick.)

• Injuries – I don’t have a fleshed-out arrangement, but I would put provisions in place that would protect both the team and the player in the event of catastrophic injury.  Of course, the biggest difficulty in this regard is actually determining what would qualify as a “catastrophic injury.”

• Sign-and-trade deals will be allowed only to match salaries.  The contract will be under the limitations associated with signing another team’s free agent.  Therefore, you could not do a sign-and-trade to get six years instead of five.

The above are the core details of the arrangement, but there will need to be a transition period.

Here’s how I suggest handling the transition:

• Time Line
  The actual hard cap will not be fully in place until the 2014-2015 season.  During the interim period, the calculation will be used to establish the luxury tax threshold.  The old soft salary cap will be abolished entirely.  Using a $4.0 billion example, teams would be able to spend up to $64.7 million without having to use exceptions.  Any thing above that will be subject to a luxury tax.

• Exceptions
  The Larry Bird exception will remain in place until the hard cap is fully implemented, then be abolished entirely.  The Mid-Level & Bi-Annual Exceptions will be available for the 2011-12 and 2012-13 seasons, and abolished entirely starting with the 2013-14 season.  All MLE & BAE signings must expire by the end of the 2013-14 season.

• Future Contracts
  Beginning with Summer 2011, all new contracts must meet the requirements outlined above, including the negotiated buyout agreements and guarantee requirements.

• Current Contracts
  All existing contracts will be executed based on the terms as signed.  All guaranteed monies will be paid, and there will be no salary rollbacks.

• Amnesty
  Prior to the 2014-2015 season, teams over the cap will have a one time Amnesty to remove up to $10 million from their cap figure.  They will still have to pay the players guaranteed monies, but it will not count against the cap.  If they are more than $10 million over the cap, or cannot field a roster of at least 13 players under the cap after using the $10 million amnesty, then they will lose a 1st Round draft pick in addition to having to get their payroll under the cap.  (You’ve had three years to plan for this, I’m not feeling sorry for you.)

This arrangement will reduce the long-term commitments of the owners, but it will not leave the players entirely “disposable.”  Front offices will still need to plan years into the future, but they should be able to avoid being trapped for three, four, or five years at a time.

The owners’ have been (not inaccurately) accused of trying to “guarantee” profits for at both the league and team level.  However, it should be noted that the players’ insistence on holding onto their guaranteed contracts and over half of the BRI amounts more or less to the same thing.

As I said earlier, the Players should maximize their BRI, while the owners should seek to maximize their control.

Other Meaningful Items

The BRI split and the Salary Cap System are far and away the most important things in this conflict.  If the two sides agree on these items will clear the way for a final signing.  None of what is below will prevent overall agreement.  Some may be meaningful to only one side or the other.

Rookie Contracts
This doesn’t need to change much but the following is my suggestion:

• The rookie scale will be reduced by 10%, which is consistent with the BRI reduction being made on the 1st $4 billion above.

• Rookie contracts will be four years — 1st two guaranteed, team option for third and fourth years.

• The “Qualifying Offer” will be abolished, meaning players will become unrestricted free agents after their fourth year.  However, the following two adjustments will be made:
  • Teams will be allowed to sign their draft picks to extensions up to June 30 after the fourth year vs. the current deadline of October 31st prior to the fourth year.
  • Contract offers for another team’s draft pick will be limited to three years in length.  Teams may offer their own draft picks extensions of up to five years in length prior to June 30th, and contracts of up to six years once the draft pick hits free agency.  All offers must follow the contract and cap rules as outlined above.

Max Contracts
As of the 2014-15 season, “max” contracts will be abolished.  Teams are free to pay a player as much as they can fit into their cap space.  (This should be interesting.)

Minimum Contracts
I’ve said before that “a hard cap is a hard cap is a hard cap.”  This is going to be a close to an “exception” I’m going to come.  The Minimum Contract will follow the same rules as today, with the league “reimbursing” teams for the difference between a veteran’s minimum and that of a third year player.  However, teams may not have more than three players eligible for this reimbursement.

NBA Developmental League
In order to encourage use of the NBADL, I propose the two following items:

• Each team will be required to “sponsor” at least two players at NBADL standard salary rates, which are $12,000, $18,000, or $24,000 per season.  The team will hold the “rights” of these players for one season, renewable, but another team can claim them simply by reimbursing the first team for the salary amount.   This will not count against either the team’s cap figure or the Players’ BRI split.

• If a team assigns a first- or second-year player to their NBADL affiliate for the entire season, they may exempt up to $2 million of that player’s salary from their cap figure.  If that player is brought up to the parent team at any point during that season, his entire salary counts against the cap. Update: The “assigned player” would not count towards the 15-man roster limit.

Roster Requirements/Limitations and Activations
Rosters can be no more than 15 players, no less than 13 players.  The league agrees to an average roster size of 14 players. There will be no more “Inactive” list.  All players on the roster may dress every night.

The Draft
The first round will remain the same.  The second round will be abolished by 2014.  This allows players not taken in the first round (and thus, not getting guaranteed contracts) will be free to find the best opportunity for them.

The Age Limit
Abolish the age limit for 2012 Draft. Look, I agree with the idea of an age limit.  I think it would be good for quality of play, but I think it is basically useless as currently constituted.  I’d like to see it move up, but don’t consider that practical.  Therefore, if I can’t get a useful one, I see no reason to continue the one-and-done charade.

In Parallel: The New Revenue Sharing Structure

The other day, I was fortunate enough to have a really interesting tweet-versation with Nate Jones (@JonesOnTheNBA) about whether or not the NBAPA should or could legally compel the NBA to bring revenue sharing into the CBA negotiations.   I believe that they’re separate, but Mr. Jones is a smart guy who made some damn good arguments.

This is my piece and my world, so I get to hold them separate.  However, I consider enhanced revenue sharing an imperative for the NBA.

Most importantly, while I don’t believe they should have a seat at the table for this discussion, I believe that the NBAPA and guys like Nate Jones deserve to see a practical and concrete proof of good faith efforts in regards to revenue sharing.

Of course, I am a small market guy, and as you read this, there are big market guys winding up to hit me in the face with questions as to why they should subsidize me.  That’s a fair question, but I think I have a way around that.

These ideas are mine, but they were formed by reading about the NFL labor situation, specifically these two outstanding documents:

• More Like the United Nations than McDonald’s: Economic and Policy Aspects of the NFL Labor Dispute by Stephen F. Ross and Benjamin Woodworth
• NFL Lockout 2011: The Revenue Gap Problem by One.Cool.Customer on Bloggin’ the ‘Boys

What dawned on me as I tried to understand this situation is the relationship of team revenues to BRI to team costs.  One of the issues in the NFL is that the amount of unshared revenue has increased over the last few years, and that revenue is included in the calculation of the salary cap.

In the NFL, approximately 70% of BRI is shared, primarily driven by the national TV contract.  However, this is down from a few years ago, when it was 80-85%.  As a result, as the NFL Salary Cap has climbed, it has put what the lower revenue owners feel is undue hardship on them.

In the NBA, only about a quarter of the BRI comes from shared revenue, exaggerating the difficulties.  And this is the genesis of my Revenue Sharing proposal.

For every dollar of BRI that a team generates, they are responsible for the creation of a liability — monies owed to the players.  The liability is based on the agreed upon BRI split.  Under the current system, it would be 57 cents.  Under my proposal, it would start at 51 cents and escalate as BRI grows above $4 billion.  However, that liability is shared by the league as a whole.

Therefore, my revenue sharing proposal is simple:  For every dollar of BRI generated, a team will kick a commensurate amount into the “pool” to be distributed equally among the 30 teams.  Using the reported new $150 million annual local TV deal for the Lakers, they would kick $76.5 million per year into the pool.  The Kings, who are said to have an $11 million per year local TV deal, would kick in $5.6 million.  This would flow throughout the rest of the BRI (excluding the already shared revenue like the national TV contract), and look something like this:

(Click Here for Larger Version)

The “Net Impact” column indicates the amount of change for each team using the 2010 figures reported by Forbes.  These are some pretty gross assumptions, but it should give you a sense of scale.  The highest revenue teams — the Knicks and the Lakers — would see about $50 and $45 million less in revenues, respectively.  The lowest revenue teams would gain between $15 and 20 million each.

Jerry Buss and James Dolan may have just thrown up in their mouths a little.

Oh, well.  There are two things to keep in mind here.  First, this isn’t giving away money with no basis — this is covering the liability created by your own activity.  Second, the Lakers payroll costs for 2010 were about $112 million, including luxury tax.  Under my hard cap rules with the $3.8 billion revenue figure above, they would hover around $65-66 million (salary plus benefits).

At the end of this, the range of revenues will be from a low of $108 million (New Jersey Nets) to a high of $175.4 million (New York Knicks), instead of $89 million to $226 million.  The rich will remain the rich.  The poor should become viable.

A Brave New World

There should be enough here to pretty much make everyone unhappy.  It’s important to remember that I gravitate towards fair or balanced rules without necessarily being worried about fair or balanced results.

As a Pacer fan, I believe this removes some very real obstacles currently standing in the way of my team being able to consistently build and maintain a good basketball team.  However, it also removes excuses.  Though luck will always play some role, I believe this creates an environment where organization, planning, and smarts are paramount.  I do not know what will happen, and it’s both exciting and terrifying at the same time.

So what does this proposal mean to the two sides?  This is a net “win” for the owners, though I’m not entirely comfortable with that terminology.  In the short term, the players would be giving up some of their BRI share (about $230 million at $4 billion), but there is a mechanism to get that back at higher revenue levels.  (Note:  that accelerator, as well as some of the aspects of the rookie contract structure were inspired by things written by David Aldridge).

They are also, in effect, giving up widespread fully guaranteed contracts.  This is something they value greatly, but to be brutally honest, I don’t see any more birthright to that than the owners would have to guaranteed profits.

It’s often asked why the players have to “give up” things.  Well, there are three, thoroughly mundane reasons.

First, this is with whom the owners are negotiating at the moment.  We’ve already heard stories of salary roll backs for front office personnel — including Larry Bird, who supposedly took a significant reduction on his $5 million salary.

Second, this is far and away the largest segment of the cost stack.  David Aldridge said, “Players, of course, don’t want their paychecks to finance profit certainty when no other business has that kind of arrangement with its workers.”

That’s not really true.

All manners of business use their workforce’s paycheck to manage profitability.  Difference is that in this context, this comes in the form of reducing the Players slice of the pie.  In the rest of the world, it comes in the form of wage freezes or reductions, hiring freezes, furloughs, four-day weeks, hour reductions, and, of course, layoffs.   Players are an odd hybrid of employees and product, so the analogy here isn’t pure.  Regardless, the tug of war will always exist and will always mimic labor relations in other industries.

Third, this is where the large risk and the waste is.  There is no sound formula to determine what a player is worth, and in the current market, mistakes cost tens of millions of dollars.

Sure, people can look at a Jerome James-type signing and know that it was stupid, but what about Brandon Roy?  Where does Danny Granger fit on the scale between bad contract and bargain?  Tyson Chandler was worth $12.6 million to the Mavericks, but would he have been worth that to the Pacers or the Hornets?  Zach Randolph has spent the better part of the last few years being considered a boat anchor, but damn, was he good this year.

This is my last, best offer.

I believe it to be far better for both parties than what either are currently offering (at least as reported).  It represents a lot of movement for both parties.

But is it enough for either?

http://www.eightpointsnineseconds.com/2011/06/the-cba-my-last-best-offer/