Kevin Durant and Mark Cuban Verbally Spar Regarding Max Contracts & Guarantees

We’re less than a week from the announcement of the new media deal and discussions about the new Collective Bargaining Agreement ("CBA") are out in mass.  We've already heard from the movers and shakers such as Mark Cuban, LeBron and Kevin Durant regarding restructuring maximum deals and the possibility of removing guaranteed contracts.

After LeBron and Kevin Durant publicly lobbied the owners to remove maximum salaries; Cuban responded with the following:

Mark Cuban http://probasketballtalk.nbcsports.com

“If you give up guarantees, [i]t’s a trade-off….” “It was discussed during the lockout time among owners, but never got anywhere. So it was just one of those trial balloons. I’m not offering this as a negotiation, I’m not suggesting it, all I’m saying is that was something we discussed before, and max contracts are always big question, guarantees are always a big question. But we have two years before that’s even an issue, so no point discussing it now.”

These contrasting viewpoints have polarized much of the NBA fan base; and as such I thought I could shed a little light on the issues being discussed:

Maximum Deals.  As a direct result of explosion of contracts given to star athletes which occurred during the mid-to-late 90’s; one of the owner’s biggest wins during the lockout of 1999 was the imposition of maximum contracts.  Fresh off the megadeals signed by Shaquille O’Neal (signed seven-year, $121 million contract in 1996) and Kevin Garnett (in 1998 signed six-years, $126 million while only 21 years old) the owner’s had a legitimate reason to fear the increasing costs of superstars.  Additionally the owners had an unlikely ally here as they had the support of the vast majority of the players in the union.  These players realized that the star’s salary being capped leaves more money available for the rest of the players on the team; and because these players represent the lion’s share of the union this alliance was enough to approve the inclusion of max deals. While I am optimistic that the value of max deals will increase substantially; I doubt the influx of money will be enough to defeat those two powerful forces and totally remove max deals.

Guaranteed Contracts.  While most of us know that the bulk of NBA contracts are fully guaranteed; most of us do not seem to know why, mistakenly believing that the basis of the guarantee lies with the CBA.  The truth is the only NBA contracts mandated by the CBA to be guaranteed are those belonging to 1st round picks on their rookie deals. Any other guaranteed contract was the result of the negotiations as they exist in the current market not the CBA. Therefore any changes in the structure of contracts would be the result of a change in the market and not the CBA.

So while it was interesting to hear these powerful voices make their stances known regarding labor issues; I am not optimistic that this will result in any changes. 

NBA, I Salute You

Congratulations NBA.  In just 3 short years; the league has gone from being perceived as full of “thugs” and hemorrhaging money to having its future interests firmly secured by totally restructuring their image and taking progressive financial steps to secure a massive influx of revenue.

Image.  While no one is ready to claim that the NBA is ready to rival the NFL, the fact that ESPN/ABC and Turner sports are willing to triple the media deal with the NBA proves just how desirable the league currently is.  Players like LeBron James, Kobe Bryant, Kevin Durant, Carmelo Anthony, Dwight Howard, Blake Griffin, and Chris Paul are among the most recognizable faces in sports. Don’t believe it?  Try to tune in to an hour of TV without seeing one of their commercials.   

While it can be argued that much of this is due to those respective stars and not the league, the league’s contribution cannot be denied.  The NBA’s implementation of the dress code, exile of Donald Sterling and willingness to embrace ideas other leagues have been historically tone-deal to (i.e. gambling), that have made it easier for the casual fan to accept the product. 

Influx of Revenue.  Beyond the revenue being produced by the new TV deal; the NBA has taken several steps to make the NBA a more financially healthy league.  The first and likely most significant was the CBA of 2011 which not only increased the money that the owners are entitled but also strengthened revenue sharing among the teams to ensure that cash-strapped teams have an additional stream of cash.

While the effects of the mega media deal on the CBA, salary cap, etc. are yet to be determined; the most significant development of this new deal is how expertly the NBA has navigated the tumultuous waters that permeated the league after the ugly labor battle. 

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.

Lockout of 2011: What Effects (If Any) Will There Be Long-Term

by Kevin L. Davis (@EsquireSports)

With the lockout finally over and an unusual NBA season is set to begin (which will start on Christmas Day for the first time in league history), I thought what better way to begin this journey than to examine the effects of the lock-out post-mortem.  Instead of focusing on which side “won,” I thought it would be better to discuss how the NBA as a whole won or lost in 3 key categories:  buzz among fans, financial impact, and competitive balance.

BUZZ AMONG FANS

After a season where ratings where at a record high, fans and analysts steamed for months with doom and gloom projections about the damage the lockout would cause to the league.  As the lockout consumed the entire summer and most of the fall, most seemed to believe that the NBA was inflicting a blow to itself that would cause long-term damage to its popularity, but looking at the positive response I’ve seen amongst fans it seems that they couldn’t have been more wrong.

This goodwill started on the early morning hours of November 26^th when David Stern and Billy Hunter (the leader of the NBPA) announced that a tentative agreement had been reached to end the lockout.  Within instants the outpour of response from the fans proved that any damage was already being forgiven.

Twitter (everyone’s favorite gauge of what’s “hot” nowadays) blew up with posts about the NBA returning and every new station in the country brimmed with excitement about the impending return of the NBA.  For all the disgust fans had of millionaires and billionaires bickering about money, they could not deny their excitement to see their favorite NBA players hoop it up for real.

FIANANCIAL IMPACT

Heading into this lockout the league claimed losses of $300+ mil in the last 3 seasons.  For all the sites who disputed the numbers and the talk about what percentage of BRI the players should give up it almost was forgotten how poorly the league was performing as a whole financially.

While neither the Players nor the Owners ended up happy with the financial split as it was agreed to, it seems clear that establishing a band where the Players share is reduced from 57% to a band varying between 49 and 51% helps remedy this problem.  Assuming the league were to bring in the exact same revenue as earned in 2010-11 this new system would save Owners somewhere between $229 million and $305 million.  This one change seems enough to take a business that has been operating deeply in the red and give it a chance to be profitable.

COMPETITIVE BALANCE

Although the Owners were not successful in getting all the changes they wanted, the new Collective Bargaining Agreement will bring forth several additions that will achieve a more balanced payroll among the NBA teams.  The hope is that these changes will help improve the chances of a team to compete no matter the size of its market.  Will it work?  My prediction is that it definitely will.

The league did greatly improve the revenue sharing system as well as make key changes to the floor and ceiling that teams will spend.  They did this by first increasing the minimum a team must spend from 75% of the cap up to a percentage that once fully implemented will be 90%.  This new floor means that teams will be forced to spend about $9 mil more than the currently imposed minimum (up to $52.2 mil from about $43.5 mil).  A de facto salary ceiling was also created by overhauling the penalty when a team exceeds the luxury tax (currently $70.3 mil in payroll).  Starting in 2013-14 the new more punitive luxury tax will tax teams at an elevated rate instead of at a dollar for dollar as the old rule did.  

While these changes mean that unless an Owner decides he will not be deterred by these steep taxes, the days of big spending teams having roughly double the payroll of small market teams are over.  However the question is how big of a difference will this make?  It has been proven time and time again that in the NBA you don’t win without a star, and next to nothing was done to help small market teams keep their stars. 

While many perceive this is a negative I for one see this as a positive.  While the attention Chris Paul and Dwight Howard are getting must annoy their fan-base it keeps people talking about the NBA.  As seen with the LeBron and Carmelo mini-dramas over the last few years, the energy that produces is good for business.

CONCLUSION

I think it’s fair to say that the NBA as a whole was a big winner in all 3 categories.  Seeing that we only lost 16 games and there will be games on the first major basketball holiday (Christmas) my gut says any ill feelings still lingering in fans will be forgiven. 

Although things got ugly at several points during the lockout, all I can say to both sides is great job getting it done.

My Proposal for Labor Peace in the NBA

by Kevin L. Davis (@EsquireSports)

As the labor debacle wages on, the debate as to whose right and whose wrong is over.  Now if we want to have a season that starts on time both sides are going to have to make major concessions and compromises.

Here goes my proposal as to what should happen so both sides can come away feeling like they achieved key victories, while also making the league more financially stable.

Hard Cap or Soft Cap

This is the key issue right now.  Billy Hunter has called taking a hard cap a "blood issue" that he claims he is willing to lose a season instead of taking, and some owners feel just as strongly that one should be imposed.

I would keep the soft cap in place but would make it a lot "harder."  How you ask - easy by eliminating most of the exceptions that allow Teams already over the cap to bring in players from other Teams (including the MLE) and lengthen the amount of time needed to attain Bird rights. 

This way teams would be limited to go over the cap to sign minimum salaried players or to re-sign their own guys (if they have been under contract long enough to have Bird Rights).

Players Share of Revenue

Currently the Players are entitled to receive 57% of league revenues.  Seeing that everyone agrees many teams are losing money, that percentage is completely too high to ensure the financial health of the league.

Therefore this percentage must be decreased drastically.  I would have the Players decrease their share from 57% to right at 50%.  That is a big sacrifice by the Players, but its worth it if they can keep the soft cap system in place. 

Length of Contracts

The current CBA which allows contracts to be a maximum of 5 to 6 years is too advantageous to the Players.  Period.  In this market where most people can and are being fired on the whim, it is unrealistic to expect NBA contracts to remain as they are where for the most part they are fully guaranteed and extend so far into the future.

I would recommend having Players sacrifice here to shorten max length of contracts to 4 years if going to a new team and 5 years if re-signing.

Effect of Buy-outs/Amnesty Provision

As I mentioned earlier the previous CBA counts all money paid to a bought out player on a team's salary cap for all the remaining years left on the deal.  This means if a Player whose under a 2 year contract for $12 million is bought out for $10 million, then the team takes a $5 mil cap hit for the next 2 seasons.  Because of this in the current system once a relationship sours between a Player and the Team, the only options the Team has are to:

1) keep him and hope things get better,

2) trade him for peanuts,

3) send the Player home and pay him his full salary, or

4) buy the Player out but still have him count fully against your teams cap. 

This level of job stability is basically unknown in America, and with this labor dispute occurring during the current political climate it does not bode well for the Players.  With that in mind, I suggest a system where if a Player is bought out the Team can distribute the money given to the Players over the next 10 cap years (thus lessening the cap hit).  This would give the team more ability to part with troubled players, while still giving the Player the money he is entitled too. 

If that idea doesn't sound good to you I propose in the alternative an expanded Amnesty provision.  In my proposal every 2 years Teams would be able to buy out a Player and he not count for salary cap purposes. 

Revenue-sharing

Here's another of the major issues that must be resolved to end this labor dispute.  Many teams are suffering and because of that this system must be expanded to give teams in smaller markets an infusion of cash. 

While its unclear if the Owners have relented on their demands to be allowed to determine revenue sharing amongst themselves, its clear the whole system of revenue sharing must be expanded. Currently certain items of revenue including that from local TV deals are not included in revenue. I would remove those restrictions and include all moneys earned through operation of the franchise used to calculate revenue.

Conclusion

All the posturing and hard-lining was nice but it is time to get down to business if we want the season to not be interfered with because of this labor non-sense.  At the end of the day we are all fans first and therefore missing games this season would be a huge black-eye for the league.

As I've said all along, although its clear that talent-wise the league is in a great place, there is no guarantee the fans will come back if games are missed.