All locked out and no place to go, Part 3: The 2005 Agreement

So the system had to be fixed. The owners saw that even with their escrow system, the salary cap structure and exceptions were driving spending (in a competitive environment) up beyond their control. So, in the negotiations in 2005, the owners took steps to control salary growth.

The owners established the luxury tax as independent of the escrow system - if a team went over the tax, they paid the tax, period. This was seen as a good way to discourage team spending, despite the ineffectiveness of the previous conditional luxury tax. The tax threshold was set at 61% of BRI, to try to prevent teams from driving the BRI split up above that.

And the owners attacked the salary cap structure. They reduced the maximum years and salary for maximum contracts. The cut the maximum raises for all contracts, thus lowering the value of the mid-level exception in particular.

Unfortunately, to make cuts to the big contracts, and establish their tax (which players saw then as a hard cap, believe it or not), they had to give back.

And the players’ union was wily. They exchanged the slightly reduced pay for superstars and mid-level guys for drastically increased pay for low-level players. The $1M exception was changed to the low-level exception (or bi-annual exception, if you prefer) and was worth twice as much.

On top of that, since the players were conceding so much in the system negotiations, they won the finance negotiations once again. The BRI split was raised to a standard 57% - which was once again seen by casual observers as an owner victory, since the effective split was in the mid-60’s in the previous agreement. In reality, the owners were once again being pushed up away from the original 50-50 split concept by the salary cap exception structure.

Of course, the players weren’t done. They also attacked the escrow system. With the owners’ new system rules in place, especially the luxury tax, it was felt that they wouldn’t need to hold back a full 10% in escrow. So they scaled it back to 8% over the length of the agreement.

However, the owners did manage to put in an addendum that when there was excess overage, it would be deducted from the next year’s salaries. So, for example, if the players were paid 10 million more than the escrow withheld, then 10 million would be deducted from the baseline for the next year’s salaries (reducing the effective BRI% from 57% to, say, 56.5%). This addendum works only under a situation where small corrections are applied each year. In the case where the correction continues to grow over the course of time, eventually the players would be effectively suffering salary rollbacks every year (and we all know how players feel about salary rollbacks…). Money would be taken from the existing player contracts to be given to free agents.

Also, as salaries are cut back, teams save money, leaving the top spenders with more money to spend the next year. This acts as encouragement to go over the tax threshold - sure, it hurts to pay the tax, but you are probably getting back at least 8% of your team’s salary in escrow (for a top spending team, that can be close to 8 million), and likely even more at the end of the year. It would have even stronger an effect on the teams under the tax - they could spend more, right up to the tax threshold, as they would be getting escrow back as well as payouts from the tax paying teams. ?So, the overspending actually might accelerate under these conditions.

Overall though, this is a fairly sustainable situation, but not one the union would ever support for long. Consider being in a job where having a co-worker sign a contract directly impacts your pay in a negative way. The players would start to ask, what is the point of being able to sign the large contracts we fought for, when each year other players signing contracts will shrink my actual pay? A strike would be inevitable if the yearly corrections grew over time (which they would, in a vacuum).

What Happened Since

And so things went back to the way they were. Rich teams spent into the luxury tax, almost every other competing team spent right up to the limit, and only a few rebuilding teams stayed under the cap. Player salaries kept going up.

The luxury tax and escrow system worked at first. Although player salaries kept going up, revenues were growing at a rate that allowed the escrow to keep them in check (at 57%). Until 2008-09, when the escrow had reduced to 9% (it has since dropped further to 8%), and the player salaries had finally caught up to the owners - once again, the overage exceeded the escrow by more than the 9% allowed. In this case it was only by a few dozen million dollars, but it was a wake up call to the owners.

The correction for the overage was applied the next season, but the overall numbers didn’t slow much - since the exceptions exist, the players could still sign for much more money than they are entitled to, and all the correction affected was the entitlement amount. So, with the plummeting market and an overage in spending in a supposedly overage-proof system, the owners started to cut back on costs - if a team wasn’t likely to win the championship, they were likely to cut salary and tank. Suddenly, the bottom teams in each conference were no longer winning 25 games - they were winning 15. More teams dropped to below .500, as the top spenders continued to spend, racking up 60+ wins, and the rest of the league, forced to watch their money in a revenue-sharing-light league, started to fall behind. The playoffs in the east could be attended by teams well under .500. Last year, as the pinch continued, and teams cut even more spending, parity was shot even further. Last year the owners managed to cut spending to below the 57% (of course they ended up having to top that up).

This has left the league in an interesting position. With the formation of superteams like the Heat and the continuation of super-spenders like NY, LAL, ORL, etc, the league now has a system where it can stay under the expected BRI split, at sacrifice of league parity. Most of the owners are unhappy about this, for obvious reasons. Those being mostly that owners do genuinely want to win for the most part, and that with so many teams not truly competing, individual team profits start to suffer.

However, the above scenario would probably be acceptable, and fixable with a few system changes, if it weren’t for that 57% BRI number. The 57% is far, far above what the revenue splits were ever intended to be. It is only the failing of the salary cap system that caused it to rise so far.

Remember to check back tomorrow, as we’ll get into the goals of the owners in this negotiation, and what we’ve discussed so far means in terms of what will happen this season.

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