Exmining Impact of New CBA After Uneventful Trade Deadline

Speaking to reporters earlier in February Stern was quoted as saying "[i]t's not about size, it's about revenue, San Antonio is a small market ... four championships, pretty good. Oklahoma City? Pretty good."

"Teams are going to have to manage well to get the best players they can," he said. "They'll have to manage well to hire the best coach, manage well their roster under the cap, manage well with tickets and sponsorships to do the best business they can. Every team has the ability to be competitive and profitable under our current system.

"It's not about market size. It's about management."

Seeing that I’m not the biggest advocate for parity I gave only a passing thought to these comments until last week’s dud of a trade deadline.  Its normally an annual tradition in the NBA for one of the teams that feels they are on the verge make a move to add a real contributor at the deadline; however last Thursday we saw no such things.  Instead [according to RealGM] this year marked the first time in 6 years that not a single all-star was dealt at the all-star break.

So what role does the new Collective Bargaining Agreement (CBA) have to do with this?  Depends on who you ask -- most seemed to erroneously believe sweeping changes would be felt immediately after the CBA was ratified, it always seemed logical to me that the majority of teams would not truly change course until the more punitive portions are implemented.  Now that teams know that we are mere months away from the aspects discouraging overspending being put into operation we are seeing that the vast majority of teams are being more fiscally responsible.

What are these punitive portions you ask?  Good question, and to answer it I’ve taken snippets from Larry Coon's excellent FAQ on the NBA’s salary cap to detail four different ways that the new CBA attempts to make management and not market size the most vital aspect to running a successful franchise >>>>> http://www.cbafaq.com/salarycap.htm.

http://www.cbafaq.com/salarycap.htm#Q21 21. What is the "luxury tax?" Why does it exist? How is it determined? Who pays it? The luxury tax is a mechanism that helps control team spending. While it is commonly referred to as a "luxury tax," the CBA simply calls it a "tax" or a "team payment." It is paid by high spending teams -- those with a team salary exceeding a predetermined tax level. These teams pay a penalty for each dollar their team salary (with a few exceptions, see below) exceeds the tax level. The tax level is determined prior to the season, and is computed as follows:  The amount of tax a team pays depends on the season, the team salary as of the team's last regular season game, and whether the team is a "repeat offender": For 2011-12 and 2012-13, teams pay $1 for every $1 their team salary exceeds the tax level. There is no repeater rate. 2013-14 teams pay an incremental rate based on their team salary. There is no repeater rate. For 2014-15 teams pay an incremental rate based on their team salary. They pay the repeater rate if they also were taxpayers in all of the previous three seasons. For 2015-16 and all subsequent seasons, teams pay an incremental rate based on their team salary. They pay the repeater rate if they were taxpayers in at least three of the four previous seasons. Here are the tax rates beginning 2013-14: Team salary above tax level Non-repeater Repeater Lower Upper Tax rate Incremental maximum Tax rate Incremental maximum $0 $4,999,999 $1.50 $7.5 million $2.50 $12.5 million $5,000,000 $9,999,999 $1.75 $8.75 million $2.75 $13.75 million $10,000,000 $14,999,999 $2.50 $12.5 million $3.50 $17.5 million $15,000,000 $19,999,999 $3.25 $16.25 million $4.25 $21.25 million $20,000,000 N/A $3.75, and increasing $.50 for each additional $5 million. N/A $4.75, and increasing $.50 for each additional $5 million. N/A For example: A team with a team salary $12 million over the tax level in 2011-12 pays a tax of $12 million. A team with a team salary $12 million over the tax level in 2013-14 pays a tax of $21.25 million (the incremental maximum of $7.5 million for $0 to $4,999,999, plus the incremental maximum of $8.75 million for $5 million to $9,999,999, plus $2 million times the incremental rate of $2.50 for $10 million to $14,999,999). A team with a team salary $4 million over the tax level in 2015-16 pays a tax of $10 million ($4 million times the repeater rate of $2.50 for $0 to $4,999,999) if they also were taxpayers in three of the previous four seasons, or pays a tax of $6 million ($4 million times the non-repeater rate of $1.50 for $0 to $4,999,999) if they were not taxpayers in at least three of the previous four seasons.

What it means?  That the days of teams trying to “buy a title” (i.e. spend so much above the rest of the league that they have a completive advantage) may be over.  As the example illustrated the transition to a system involving tax brackets that has even harsher rates for repeat offenders from a dollar-for-dollar tax means costs will skyrocket if teams don’t change their spending habits.

Looks like those habits are in fact changing too. While all transactions have a financial aspect to them, the deals this year seemed to be even more focused on financial ramifications. We saw 2 contenders (Oklahoma City and Memphis) deal away players with all-star talent (i.e. James Harden and Rudy Gay) in large part because their old teams  already had multiple players making big bucks and wanted to cut costs.   In the old days that would have never happened.

http://www.cbafaq.com/salarycap.htm#Q23 23. Other than financial penalties, are there restrictions on taxpaying teams? In addition to the tax payments described in question number 21; taxpaying teams have the following restrictions. Note that most of these restrictions aren't triggered unless the team would be over the "apron" -- the point $4 million above the tax level -- following a signing or trade. - Teams above the apron cannot use the Bi-Annual exception. - Teams above the apron have a smaller Mid-Level exception. Teams above the apron can offer contracts no longer than three years, while other teams can offer four. The starting salary is also lower (for example, in 2011-12 it is $3 million for teams above the apron, versus $5 million for other teams). - Taxpaying teams can acquire less salary in a simultaneous trade. - Starting in 2013-14, teams above the apron cannot receive a player in a sign-and-trade transaction (see question number 89).

What it means? Today’s NBA now there has a true impediment for overspending that goes beyond dollars and cents.  Gone are the days where the only obstacle for improving a team was how deep an owner was willing to dip into his wallet -- now overspending means a team is restricted in the transactions they can make to acquire talent.  

The most significant restrictions come into effect in free agency: now teams who have spent too much are barred from adding an average salaried player using the mid-level exemption (instead they can only offer a contract that is 40% lower to start).  Additionally the loophole allowing teams over the luxury cap “apron” to add top level free agent talent even though they have no cap space has finally been closed.  

These changes work to make cap space more valuable, as the big spenders will not have the same flexibility to continue amassing talent unless the players are willing to pay for peanuts.

http://www.cbafaq.com/salarycap.htm#Q24 24. How does revenue sharing work? How is it different from the luxury tax? The high revenues generated by the big-market teams increases BRI, which increases the salary cap, which increases the amount all teams (including low-revenue, small-market teams) are forced to spend on player salaries -- leading to an unsustainable system. The league's revenue sharing plan works in parallel with the CBA (including the luxury tax) as a one-two punch to address franchise economic disparity. It is designed to help redistribute money from high-revenue teams (generally in big markets) to needier teams (generally in small markets). By 2013-14 all 30 teams are projected to be profitable under this system if they meet reasonable revenue and expense standards.  The NBA also had a revenue sharing system in place with the 2005 CBA. It was funded entirely through luxury tax revenues, and paid an average of $40 million per season. However in many cases teams were getting back money they had put into the pool themselves, so the net redistribution of money was much lower than the gross distribution. Under the old plan teams received much less than under the new plan, with the highest individual receipts averaging $5 million. With the new plan, $181 million is projected to be redistributed in 2013-14, with two teams projected to receive over $20 million each, and seven teams over $16 million each.  The basic idea behind the plan is that teams contribute an equal percentage of their total revenues into a common pool (minus certain expenses such as arena expenses), then receive an allocation equal to a 1/30 share of the pool1. Small market teams with lower revenues will therefore contribute less than they receive, and will be net beneficiaries under the plan. Large market teams will contribute more than they receive, and will be net payers under the plan.

What it means?  Say what you will about how reliable the figures used by the league during the last CBA negotiations were, but the assertion that now every team in the league “should” be profitable is huge.  I also like that the size of a team’s market will determine how much they are expected to pay, so small markets like Oklahoma City or Charlotte are not expected to bring in the same amount of revenue as a big market team like the Knicks.

Seeing the value that the two teams that have been up for sale since the ratification of the new CBA looks like this provision is also having its intended effect.

In conclusion seems that the provisions in the CBA as it relates to the new luxury tax, restrictions on high spending teams and the increased revenue sharing had a will influence the league for years to come.  Mark my words -- the limited transactions completed at the trade deadline was no coincidence, and expect the trend to continue as teams adjust to the league’s new financial climate.  What will the result be? 

No guarantees, but here’s hoping Sterns quote that “[e]very team has the ability to be competitive and profitable under our current system” comes to fruition.