Finally, we get to the meat of the CBA history. The last decade and a half has defined these negotiations in several ways, and it started in 1998 when the owners saw that the revenue split had grown to 58%. This was caused by the ever-growing team salaries described earlier and was well over the limiting 51.8%. So the owners nullified the CBA, bringing about the 1998-99 lockout.
The revenue split had been rising steadily because it was not defined in the CBA – the revenue split was supposed to be controlled by the salary cap. However, with teams utilizing such exceptions to the cap as Bird Rights, rookie exceptions, and minimum salary exceptions, the average payroll was growing quickly far beyond the salary cap. The salary cap system was failing – it was designed to define a precise relationship between the league revenues and the player salaries – but had instead become a sort of ‘floor’ for team salaries, as more and more exceptions were used to stay ahead of the competition.
Another very important point is player raises. In standard contracts, there were high yearly raises (10.5% for new players, 12.5% for retained free agents – these have since dropped to 8 and 10.5) and this was also a problem. Early in NBA history, revenues grew quickly, so there was no impact. But in more recent times, growth slowed (in terms of percentage) and projections now assume a growth of 4% per year going forward. Consider that for a second: revenues are growing by 4% per year; a standard player contract has 8% annual raises. See the problem?
These issues defined the 1999 CBA negotiations. The league attacked the salary cap structure, and established the luxury tax and escrow systems to restrain team spending above the cap. The luxury tax was meant to be a deterrent to team spending, but proved too soft to truly impact the big spending teams. It would only be active if the player salaries exceeded the escrow capabilities though, so it was a fallback plan of sorts. A maximum salary scale was also put in place – this was considered a big win for the owners, but was really not a big picture game changer. ?The real win was the escrow system.
The escrow system was put in place to help keep the player salaries in check. The way it worked was that the owners held 10% of player salaries in check until the end of the year, when total player salaries versus revenues was calculated, and compared to a newly-agreed-upon limit to player salaries.
If the player salaries exceeded the allowed amount, a portion of the escrow equaling the overage was kept by the owners, and rest given to the players to give them exactly the BRI split agreed upon. At this time, the revenue split was defined as 55% – this was seen as a win for the owners, considering the 58% it had been sitting at before the negotiation. However, keep in mind that the original split limit of 50-50 had been eroded by the system concepts the players had put in place years earlier.
Unfortunately for the owners, the players weren’t going to give in to these demands without something in return. On top of the generous BRI split definition, the players also got the Mid-Level Exception. This allowed teams another method of going over the cap to sign free agents. The owners allowed this as they believed their new luxury tax and escrow systems would keep the BRI split from growing even with additional exceptions.
The Effects of the ’99 Agreement
And so the ’99 lockout ended in time to save half the season, and the league went on as before. And I do mean entirely as before. The new luxury tax prevented a few teams from spending that high, but was treated as a new, much higher ‘cap’ by the rest of the league. Team salaries kept growing, with the mid-level exception being used excessively – often driving the salaries of the low-level free agents each year up, as even teams over the cap could suddenly offer the average salary; supply stayed the same, demand (money available) went up.
Of course, the owners had that escrow system in place! So none of this mattered unless the system drove spending up so high that even holding back 10% of all player salaries, close to 200 million dollars, would not cover the overage. And that could never happen.
Then it did. For several years running. The effective BRI split jumped up to 60% in 2001 – well above the 55% defined in the agreement (as a note, this was the first year the escrow system was in place; it was not in effect the first 3 years of the agreement). This was within a decimal point of providing an overage beyond 10% – in the first year of the escrow system! The next year? 65.5%. This resulted in an overage of 280 million – well beyond the 174 million the owners were allowed to hold in escrow. So the players got a $110 million bonus. The year after? 63.4%. Another overage above 200 million – and in those years, the BRI was between 2.5 and 3 billion, nowhere near the 4 billion they are close to now.
In 2004-05, there was a jump in revenues that allowed the escrow system to cover the smaller jump in player salaries, but that is partially because the agreement defined the BRI split in 04-05 to be 57% instead of the previous 55%. Once again, the player salaries ended up at 60.3% – a value that would have been an overage beyond the control of the escrow if the original 55% had been kept.
Check back in tomorrow for the third part of the series – the infamous 2005 CBA.