CBA Talk: Splitting the Baby

There was lots of activity last week, and as we sit here today, we’re either close to or very far away from having a season. In any case, Harvey Araton of the New York Times put on his thinking cap and came up with an interim solution:

Having already agreed to a reduction in total revenue, from 57 percent to a reported 53, the players should not be expected to give everything up at once, and not if it is unclear that it’s necessary.

But if the owners can prove in three years that at least one-third of the teams are still losing money, then the agreement should allow for the implementation of a hard cap to be phased in over the following two years, allowing teams over the threshold to prepare for it.

Conversely, if the league continues its upswing, its revenue streams are growing as the union has claimed they will and fewer teams are in the red, then the deal could proceed for its duration with the soft cap.

This is a creative solution that is certainly worth considering, but there could be some obstacles. The most significant of which is the thought of getting three years down the road and revisiting the whole financial argument over what are “true” losses again. It could take months just getting the two sides to agree on how that would even be defined.

Second, regardless of how much people want it to go away, most, if not all of the owners would like a system with a hard cap. While it would be simple to lay the blame at the feet of Robert Sarver and Dan Gilbert, the truth is it’s unlikely the two of them have enough juice within the community of owners to derail a deal. Though they may be the most vocal – perhaps obnoxious – of the “hawks”, they must be getting support from some of the other owners, possibly including the influential pair of Boston’s Wyc Grousbeck and Dallas’ Mark Cuban.  The internal machinations of the owners is only a subject for speculation for us.

However, Chris Broussard’s discussion of the subject gives a solid summary of the motivations:

There are three reasons why the owners favor a hard cap, with each owner falling into one of the three camps. Some, such as some big-market owners, want a hard cap because of the increased revenue-sharing plan that’s coming. Some want a hard cap so that they cannot be outspent by their opponents, and others want a hard cap to protect themselves from giving out bad contracts, according to sources.

So, pretending that we on the outside get to put ideas into the conversation, I’d like to offer up another attempt at a structure that both sides might find workable.

The Proposal

BRI Split

Players would receive a guarantee of 53% of BRI.

This is the most widely rumored figure from last week’s abortive meetings. It does not represent significant movement from the 54.x% offered at the end of June, but for the sake of staying consistent with Harvey’s solution, let’s use it.

The Cap System

The system will include both a soft cap – more accurately described as a “threshold” – and a hard cap. Structurally, it is similar to the “flex” cap system previously proposed by the owners, but it is not the same. The mechanics would be:

  • The “soft cap” or “threshold” would be set by reducing BRI by $100 million to cover benefits, then taking 47% of the remainder and dividing by 30 (or total number of teams). Teams may spend above the threshold using an exception system that will be largely the same as the previous system – with changes to be outlined below.
  • A hard cap – which no team will be allowed to exceed at any point during the season – will be established by reducing the BRI by $100 million, then taking 65% of the remainder and dividing by 30 (or total number of teams).
  • A salary “floor” will be established at 75% of the soft cap. Any team who fails to meet or exceed this baseline in payroll will be ineligible for participation in the supplemental revenue sharing program.*  (* This is assumed to be the new program, which is expected deal with currently unshared revenue streams. The team will still receive their share of the national revenues – including television – as they do now.)
  • The luxury tax will be abolished. It will be unnecessary with the hard cap, and its revenue sharing function will be replaced in any new revenue sharing program the league implements.

Exceptions/Cap Holds/Matching Salaries for Trades

As noted above, all previous exceptions will remain – Bird, Early Bird, Mid-Level, and Minimum – with the following change:

  • The Bi-Annual exception will be abolished, but replaced with a Tri-Annual Mid-Level Exception (TAMLE). This would be a second Mid-Level Exception (MLE), but with limited use.  Like the standard MLE, it can either be used in full, or broken up. However, once any part of it is used, it is frozen for three years. If the full amount is used, then it is unavailable to the team for the next two years. If part is used, then the remainder will be available for use in the current year, or the next two.

Cap Holds (or the “free agent amount”) are assumed to function in the same way as under the current system.

There will no longer be a requirement for matching salaries in trades.  The only requirement is that once the trade is complete, neither team may exceed the established hard cap.

Of course, the single biggest change for all of these will be that there will be a hard cap over which none of these will be available for use.

Escrow/Meeting the Guarantee

Just as under the previous system, a soft cap and exceptions can be expected to result in the total negotiated salaries and benefits exceeding the percentage of BRI guaranteed. In this program, 10% of players’ salaries will be held in escrow.

If the total salaries and benefits are below 53%, then the players will receive all of their escrow back, plus any additional monies needed to meet the 53% guarantee, just as happened this year. If they exceed 53% by the escrow amount or less, then the owners will keep the overage from escrow and return the balance to the players, just as happened pretty much every year before last year.

If the overage exceeds the escrow, the players will keep anything over that amount. For example, if the amount held in escrow is $175 million, and the overage is $200 million, the owners will keep the $175 million, and the players will keep the $25 million.

If this happens two years in a row, then that will result in a 1% increase in the BRI guarantee to the players for the remainder of the agreement. This will continue throughout the agreement, so if the owners were to exceed the guarantee plus escrow in every year of a six-year CBA, the annual BRI guarantees would be 53%, 53%, 54%, 55%, 56%, 57%.

CBA Length

This proposal is for six years – with a caveat. If a one- or two-year transition period is used to allow teams to adapt to the hard cap (most notably, the Lakers), then I would change the proposal to seven years. The goal is to have five full years with the system fully implemented.

The Dollars

The Forecasted Revenue (BRI)

Trying to project the future revenue streams for the NBA is problematic at best. For someone on the outside like me, it’s little more than a sophisticated wild ass guess. For that reason, I’ve elected to keep it simple by projecting a flat 4% growth off of the 2011 BRI number of $3.817 billion. The 4% figure seems to be widely accepted within this conversation.

It’s true that such a steady curve is unlikely – particularly given potential impact of the new Lakers local TV deal, as well as the new national TV contract that would come up before this expired. Yet, while it’s true that such fluctuations will have practical impacts, they are not material in this forum.

 (in Billions USD)

The “Soft Cap” Threshold

These projection show that even at the lowered BRI split, the threshold will continue to climb. This is driven both by the steady growth and a slight change in methodology. Whether or not this slight change is adopted would make very little difference in the practical use of the system.

The reduction of the BRI from 57% to 53%, and the soft cap percentage from 51 to 47 will naturally result in a slightly lower soft cap than would have been seen under the previous CBA. This is illustrated in the chart above by the green and red bars.

The Hard Cap

And this, more likely than not, is where it either all comes together,  or people leave the room in a huff. This may be a “blood issue” for the union, but it’s also something that Stern has said the vast majority of the owners want. We need to get this from “non-negotiable” for the NBPA to something they can live with, and the avenue comes from something Alan Hahn reported Billy Hunter himself said:

Even some of the debate over the hard cap system is a matter of semantics. Hunter said the union isn’t fundamentally opposed to a hard cap because, he said, they would accept a hard cap with an astronomical 65 percent share of the BRI. In other words, set the hard cap at a ridiculously high number that only a few teams could afford to hit.

It is sometimes a gift (and sometimes not) to be able to willfully ignore part of  what someone is saying. That is to say, to understand the speaker’s intent, but to also hear it “wrong” in such a way as to open a new door. Clearly, Billy Hunter is telling the owners that he cost of getting a hard cap is too rich for their blood.

As you know by now, I elected only to hear the “65 percent” and Alan Hahn’s added “set the hard cap at a ridiculously high number that only a few teams could afford to hit it.” And now I can say that I have a hard cap that Billy Hunter will accept, even though it’s not quite with a straight face.

Under this proposal, with the actual BRI of $3.817 billion, the 2011 hard cap would have been about $80.2 million. According to Shamsports, only three teams exceeded that amount – the Lakers, the Mavericks, and the Magic. Using Patricia Bender’s info to go back to 2006, you’ll find eight in 2006, four in 2007, and seven each in 2008 through 2010. It’s a number that will be difficult to reach, even without the luxury tax as an additional curb on spending.

However, it is also a number that virtually any market could live with to field a contender, particularly given an improved revenue sharing system. People often point out that spending doesn’t guarantee success. That’s true, but not spending clearly restricts the number of ways you can be successful. Look through the teams that went deep in the playoffs with small payrolls, and most will be getting a lot of mileage out of one or two rookie deals. If you roll those teams out a couple years, you’ll find their payrolls often skyrocket.

The Obstacles

I brought them up with Harvey Araton’s piece, I need to try to identify them with mine.

The biggies are straightforward. The owners potentially would want something closer – both on BRI split and cap system – to their previous proposals. The players swear they’ll never accept a hard cap.

I’d caution the owners not to reach too far. Most of the reasoning can be found in my “Meet in the Middle” piece. The hardliners need to recognize a real – and important – gain here, so league as a whole can move forward. This is likely as close as the owners will ever get to their “dream” system, because the NBPA is just too powerful and the cost of cancelling games or a season is far too costly and risky.

The players are a more difficult conversation. Their concerns about what they could lose under a hard cap are valid, though the rhetoric is alarmist and overblown, even under the owners’ proposed “flex” cap. That being said, it needs to be addressed.

Rather than listening to all the “blood issue” talk, I’m going to point to some comments made by Jared Dudley as reported by Brian T. Smith of the Salt Lake Tribune:

The hard cap? As a player myself, no guaranteed deals — that’s basically what a hard cap is; no guaranteed contracts. It’s not football. It’s not injuries and everything. I understand that the common thing is they don’t want players that make a lot of money not playing. Look, if you were a business or you were a restaurant, you don’t pay someone that you think’s not [working]. We’re not going to put it all on the owners. We’re going to take some of the blame. But, hey, we’re willing to work on it. We’re just not willing to give up guaranteed contracts and $800 million.

This proposal doesn’t ask for $800 million. Using the revenue projections above, it averages about $175 million per year. In addition, if the owners can’t control their spending, the players could see their share grow.

It’s true that even a high hard cap like this will squeeze some players, and we may see fewer 5- and 6-year deals fully guaranteed in the out years, it will not be anywhere near as pervasive or immediate as feared. These fears may be somewhat allayed by the addition of the TAMLE and the removal of the requirement to match salaries in trades (provided both teams remain under the hard cap). These offer some benefit to both the owners and the players.

The bigger obstacles are practical. First, I have devoted no time to transition. Immediate implementation would not affect most teams, but there are a very small handful that would have difficulties. The Lakers face the biggest issues, having almost $95 million in contracts next season (13 players) and $91 million in 2012-13 (8 players). This program would target avoiding salary rollbacks, but clearly either an amnesty program or a one- or two-year transition would need to be worked out. On the plus side, these numbers did pass the “Heat check.” I could see no year where the Miami’s big three could not be kept together, though they will be unable to stack up quality MLE vets like cord wood.

Second, if the owners’ spending exceeds the BRI guarantee plus escrow – which would amount to them hitting about 58.9% of BRI – there may be no way for them to roll that back. From a practical perspective, it’s important to remember that these are not centrally controlled, and, even if they were, how can you tell any team they can’t sign a player, because it puts the league over the secondary threshold? Worse, from a legal perspective, you may be guilty of collusion if you even try.

That particular aspect may need to be removed, or the owners would just have to hope they could individually exert some modicum of restraint. In any case, the practical problems come from the change, and, really, the large gap between the 53% guarantee and the 65% hard cap.

But then again, it’s not an altogether bad thing for teams to be further penalized for “throwing good money after bad.” There’s a significant and meaningful discussion to be had about the wisdom of putting ex-players in positions of power where they are dealing with professional agents when millions – sometimes tens of millions – of dollars are on the line. It is imperative the NBA to learn how to develop real front office talent, perhaps even more important than learning how to develop basketball talent.

Finally, it’s not out of the realm of possibility that even this hard cap could end up being permanently out of reach for some teams. This is the core problem with using aggregate NBA revenue and aggregate NBA growth. Neither is evenly distributed among the 30 teams. This is as good a time as any to say that I consider it pointless to implement a hard cap without sensible revenue sharing, and I only consider it marginally less so to implement revenue sharing without some kind of ultimate lid on spending.

Practical Solutions To Be Had

Really, there’s little difference between what the small and mid-market hawks want and are trying to get, and what the “middle class” of players has and is trying to keep. They want to believe they can succeed – prosper – on the court and in the ledger. They’d like to matter, and they’d like some security. That’s both the owners and the players. Meanwhile, those currently prospering – on both sides – are understandably concerned about coming out the other side of this in worse shape.

It’s time for the owners to start caring about what the players care about, and for the players to start caring about what the owners care about. There are ways to make this work. There are ways that may not make everybody happy, but will make everybody think they’ve got a shot. And that goes a long way.

Maybe this is one of them. If not, I’m capable of coming up with endless different ways to try to make both sides feel that they have at least a puncher’s chance of having what they want. If you listen to and respect the desires and motivations of each, but ignore the rhetoric, then there are practical (though imperfect) solutions to be had.

I know there are smarter and – more importantly – better informed people than me involved in the conversation on both sides. I know this can be done.

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