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All locked out and no place to go, Part 5: Conclusions

… or How I Stopped Worrying and Learned to Love the Lockout

Well. It seems like the players have been winning CBA negotiations for decades now, and it might be time for them to lose one. The players’ pay has been increasing with time, but somewhat faster than league revenues have been - hence the increase in BRI splits. This has played into negotiations as though it was the owners’ fault that they spend so much.

Unfortunately, the system in place, with so many cap exceptions, means that smaller and even mid-market teams have to gamble and give high value and long term contracts to players who may not deserve them, due to the excess of artificial cap space every year. This is the only way for them to keep up with the big market teams. This has evolved to a point where something like the Miami Heat is possible - without cap exceptions, they would never have been able to put a team around those three players, and in coming years, those exceptions will allow them to build a dynasty almost by default. And of course they will use every penny they can - a team trying to compete tends to do this.

With the combination of competitive factors, a constant supply of players and ever increasing demand for them (represented through increasing amounts of available money - exceptions - to pay them), the current salary cap structure is unstable and will eventually yield a scenario where the league as a whole is losing money. Whether you believe this has happened yet (as the owners claim) or not, it is inevitable under this system.

So the owners will take their chance here to stabilize the system. They will insist on a hard cap or very stiff luxury tax. In the case that they relent on the luxury tax, they will demand a high escrow percentage - probably in the 20% range to cover all possible salary growth (or simply keep the risky overage clause, hoping to make it to the next negotiations before it goes nuclear). And in either case, they will push to get the system back to its equilibrium - where it started in the 50-50 range.

It is easy to say that the owners’ concessions thus far in the negotiations mean little. However, consider the difference between the hard cap they proposed and the luxury tax they are now proposing. One means no growth in BRI over time, the other means potential for the same problems over again. That is a real concession. If they go down to a stiff but not ridiculous luxury tax, they will have made a real significant concession there.

Look also at the 50-50 split offered by the owners. When the players started at 57 and the owners at 46, everyone said the players were being selfless - not asking for a raise - and the owners being greedy - cutting salaries by 20%. But once again, if you look deeper, there is a reason the players weren’t asking for more than 57% - they are already winning money hand over fist at that percentage, because they’ve learned that with the soft cap system in place, eventually they will surpass their escrow limit and earn more than the CBA allows them to. And there is a reason the owners were asking for 46% - with the soft salary cap in place, they know that very early in the new CBA, that number will effectively rise to 50% and higher if a more robust escrow system or luxury tax isn?t put in place. Consider that if the real status quo is 50-50, the owners asking for 54% and the players asking for 57% is cast in a very different light.

So since the owners backed off the hard cap, we’ve seen them start to attack exceptions again. A miniature MLE, eliminating sign and trades, restricting Bird Rights to teams that have had the player for at least one season, possibly eliminating the bi-annual exception. And the players have agreed with a few of these, and will probably make their stand on the escrow percentage - if they can keep it low, say at 8%, even with reduced exceptions they should be able to surpass whatever level of BRI they are entitled to within the next few years, especially if they can eliminate that year-by-year correction in the previous CBA (which was an unsustainable band-aid solution for the problem the exceptions caused the owners).

The Way I See It Ending

All in all, I fully expect the owners to come out of this one winning pretty much whatever they want. They’ll certainly come out looking that way, even if the players do win some major points.

The ownership will probably give in on:
- the salary rollbacks and the hard cap (since the players see it as a blood issue);
- instituting an insane luxury tax (instead using the one they have proposed, without the addendum that the tax triples if you exceed the threshold 3 times in the span of 5 years - although I like that rule);
- increasing the escrow percentage too much (it may go back to 10%)

In exchange they will likely get:
- much reduced exceptions (MLE, LLE, reduced raises);
- a BRI split of 50% (as it should be);
- retain the ability to take back any overage the next season

They have to be careful with that last condition, as it is effectively a larger ratio of escrow, but without preempting the costs - they are recovered the year after, and it can have a snowball effect similar to the exceptions. The players will likely oppose it, but they really are at a disadvantage, and the only way the owners take off that band-aid is if they get an actual solution - a hard (or hardish) cap.

Of course, that’s this time around. I fully expect the owners to push even harder for a hard cap the next time around, unless the escrow covers the overage every year of the new agreement. Once this CBA is done, the players will probably push for more exceptions, after six years of reduced salary. And the owners will probably give it to them if they can get a hard cap, even at say 60% of the BRI, with a smaller amount guaranteed to the players. That would stabilize the system and tie player salaries to revenues for good. The year-over-year corrections would be eliminated, thus protecting the existing contracts from rollbacks.

My Perfect World

Actually, a middle ground solution that I think would work wonders is a flex cap system, so to speak. The players have already rejected an offer of a flex cap, but of course, that doesn’t mean anything - things change when you’re not getting paid. My idea is a soft cap defined at 50% of BRI, a guaranteed 50% BRI to the players at minimum, and a hard cap (and maximum pay to the players) at 60% of BRI.

No year-by-year raises (or deductions) would exist in player contracts - you get your raise in the next contract you sign (this would have to be offset by increasing the signing value of max contracts). A reduced MLE, Bird rights (limited to players at least one year with the club), minimum salary and rookie scale exceptions (rookie salaries probably cut to 2 or 3 years to appease the players) as well as a reduced trade exception (say, 110% rather than 125%) would be needed to exceed the soft cap. No LLE or S+T would exist, and there would be no exceeding the hard cap under any circumstances.

This gives the players the potential to earn 60% of BRI - more than they are now, and in a league with good parity (competitiveness top to bottom), the owners may get very close to this level of spending. The players are guaranteed at least 50%, which is what they will probably settle for this year anyway, but have earning potential above that when the league is going well financially and many teams are in the playoffs. In those years when costs are too high or attendance is suffering, the owners can cut costs, knowing that they will pay out only 50% to the players, and the league can weather any storm that comes its way. And in the boom years (which should be most years, if the projections are correct) the players can earn more than they were able to under the last CBA. Long term, the hard cap keeps the system stable.

With the reduced value of the MLE and no player raises, it will take longer for teams to get stuck up against the hard cap and not be able to retain their players, giving teams a chance to win a few trophies before the system catches up to them. Everybody wins.

Final Notes

All of this discussion of course ignores the other issues up for debate, such as the internal revenue sharing the league will impose (outside of the CBA if they have their way, included in the CBA if the players get their way) and any other system changes to encourage parity that may be agreed upon (such as non-guaranteed deals, but that will never happen - the players would take a hard cap before relinquishing their guarantees), but those are secondary and are not driving the lockout.

I expect the situation will be resolved in time for a partial season - sometime in December if I had to bet. Of course, I still wouldn’t be surprised if the lockout stretches for an entire season or ends tomorrow - it all depends on how stubborn the players decide to be, because the owners are going to be stubborn. I expect the majority of players are not prepared to wait out the owners, and as such it should come to an end when the paychecks aren’t rolling in. But it would take a psychic to really know - there are so many factors in play, such as just what the owners decide to really ask for, and how unified the player body truly is.

Anyway, I hope you enjoyed this run-down of where we are, and I look forward to any questions, comments, or corrections you might have. I’ve done my research, but there’s a good chance someone knows something I couldn’t find - so feel free to join in if you think there are other factors involved, or something else more important to the discussion.

Finally, how do you think this lockout ends, keeping in mind the way past lockouts have gone and how the progression of the agreements over time have impacted the league? Do you have a suggestion for a fair and equitable deal for both sides, that can grant the money and flexibility the players want and the league viability and profits the owners want?

Thanks for reading!

All locked out and no place to go, Part 4: End Game

So what does this mean? The revenue split was always meant by both the owners and the players to be 50-50 (or thereabouts). It was implemented incorrectly. So now the owners finally have a situation where they can make it right. Of course, they want a 46-54 split, but greed has ever been the driver of these negotiations. The fact that the players’ opening salvo was an offer to keep the current CBA active is an indication that they know just how good they have it. 57% is a huge cut of the revenues. Add in the limited escrow and the loose luxury tax and excessive exceptions, and that number would only rise again over time, even with the next-year corrections in place.

This is why the current situation is unsustainable - that 57% that everyone claims is ‘fixed’ is by no means fixed, and even a cursory glance at the BRI splits over league history shows that.

This examination of the history of the CBA negotiations has shown that there are three drivers for the owners (and players) to push for CBA changes.

1) The Hard Cap

The owners want a hard cap. And most think it is for parity’s sake, and it would help with that. But it is really the defining aspect of limiting the growth of BRI. If there is a hard cap set for a specific percent of BRI (say, 57%), then the owners will never be able to spend above that, and will simply top the players up to 57% every year. That would stop the growth dead.

The inclusion of exceptions to the hard cap could throw this off, but if it is limited to say, limited Bird Rights (one player per year, at a reduced salary), rookie, and minimum salary exceptions, then the spending should control itself - at some point it will become too hard to add talent while over the soft cap, and especially while above the ‘hard’ cap. High-paid teams will stagnate, and eventually move their players for expiring contracts to get back under the cap.

It should be noted that a very stiff luxury tax would operate in much the same way - they would have to set the bar lower so the ‘never going to spend that much’ point is not much higher than a hard cap would be. In this case, some escrow protection would be necessary, but it should be stable in the long run.

2) The Escrow Limit

Failing an effective hard cap, the owners need that withheld escrow to protect themselves from overspending. The escrow percentage has been between 8 and 10% and has been shown to fail to completely contain overspending under each of the last two CBA’s. Increasing this limit is the quick fix solution - it would help reduce the overpayment of players by more effectively covering the overage each year.

Unfortunately, without system changes, the effective BRI percentage would likely continue to grow each year. By settling for a soft cap and an increased escrow limit, the owners would be betting that they would get to the next CBA negotiations before the players’ salaries caught up to the escrow (which would almost certainly happen, if you want a league with any parity at all).

3) 50-50 Split

This has always been what the owners wanted. It used to be what the players wanted. At the time of the initial salary cap creation, it was the logical value (or range, at least) to use, and it remains so today. Everyone was happy with it then, and the players are only unhappy with it today because they tripped backwards (or were very shrewd negotiators decades ago) into higher percentages through cap exceptions meant to aid in player freedom.

The owners will not settle for much above the 50-50 split, and I’d be astonished if the next CBA has a split above the 51.8% defined in the 1995 renege clause.

Check back in tomorrow for final thoughts on what this all means for the lockout, and where we go from here.

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.

All locked out and no place to go, Part 2: The Beginning of the End

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.

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