Possible salary cap fallout of suspended NBA season

The future of the NBA’s 2019-20 season is still in doubt. At this point, we don’t know if play will resume at all and we may not get an answer for awhile. It’s fun to speculate about how the league could safely start games immediately (my idea: pay a remote island, maybe St. Helena, a bajillion dollars to host), but the bottom line is that it’d take a second force majeure sized event to make a full 82-game season feasible.

Cancelled games will mean lost revenue for the NBA. The specific details are impossible to determine with exacting certitude, but NBA cap guru Albert Nahmad has put together the best possible educated guess. (I’ll summarize a couple key points here but if you find this topic interesting absolutely read the full article.)

How much money is the league losing?

The first point Nahmad makes is that the league will lose revenue. Probably a lot of revenue. In the pre-COVID-19 world the NBA projected to bring in about $8 billion — Nahmad’s educated guess concludes that they could come up more than 10 percent short of that figure:

So, could total potential revenue losses top $1 billion if the entire rest of the season is cancelled? Perhaps. Could it get anywhere close to $2 billion? I’d say that’s highly unlikely. You’re probably looking at somewhere between $1.0 billion and $1.2 billion. For simplicity, I’ll choose $1.0 billion if the league is shut down entirely, $750 million if it resumes in full with no fans, and $500 million if they’re able to get fans back in attendance for the playoffs.

tl;dr: The NBA is going to bring in less money than they anticipated at the start of the season. Possibly a lot less.

What will happen to the the salary cap?

The 2020-21 salary cap is currently projected to be about $115 million. Almost without doubt, the cap will not be $115 million next year. Since the 2020-21 cap will be estimated base on the final 2020 revenue, Nahmad projects that the cap could fall to about $91 million if the league does come up $1 billion short of its projected $8 billion in revenue and does not smooth or adjust the calculation.

It will be absolute chaos and/or disaster if the cap does fall that low. The Blazers, for example, have $93 million in guaranteed salary committed to just seven players. The Warriors have spent $142 million — $50 million over the worst case scenario salary cap — on seven players. It’s no exaggeration to say that a $24 million drop in projected cap would fundamentally change everything we know about offseason NBA transactions.

Nahmad suggests the following solution to prevent cap chaos:

I believe they will ultimately be able to come to agreement. Quite simply, it’s in both parties’ best interests. If they can’t agree, the default mechanisms in the CBA would need to apply, at which point the salary cap would plummet. Nobody wants that.

So if they do agree on a mechanism for setting the salary cap, what approach would be best, and what implications would it have?

I believe the best possible approach would be to set the salary cap based on a conservative estimate of true projected revenue for next season (i.e., exclude the impact of any 2019-20 revenue losses that are not deemed recurring), and to eliminate any salary-related cap impacts.(7)

Utilizing such an approach would reflect an accurate representation of the league’s financial health for next season, and avoid any escrow-related issues on the back end. The cap would still likely fall from its current $115 million, but only due to revenue losses that were deemed recurring in nature (which is how it should work anyway).

Note that the NBPA rejected cap smoothing in the past, but under very different circumstances. Check out Nahmad’s full article for speculation about how the owners will respond if no agreement can be reached.

The tl;dr here is that the salary cap will probably decline from $115 million but the league and players can negotiate to prevent a precipitous plummet.

Will players miss any paychecks?

The players and owners will split revenue 51 percent to 49 percent, respectively, regardless of how far the final figure drops. As of now, players expect to receive their full April 1 paycheck — an escrow account holding 10 percent of their salaries will account for the revenue shortcomings for now. Things will become more complicated if the revenue declines to the point that it overwhelms the “safety valve” capacity of the escrow account. Nahmad explains:

However, there is one (and only one) scenario in which the integrity of the 51/49 split could be threatened — if the league sustains a big enough revenue loss, the players could wind up earning such a large percentage of the reduced revenues that the escrow funds aren’t enough to bring it back down to 51%. If so, players could potentially wind up making more than their designated share, and there is no direct mechanism covered in the CBA to get it all the way back down. Players don’t, for example, simply cut the league a check (like it works the other way around).

Nahmad goes on to explain that the NBA CBA dictates that the players and owners will negotiate in good faith to resolve the consequences of “Revenue Decline” and lays out a couple speculative options.

The tl;dr here is that the players are being paid, for now, but if the season suspension drags on the player’s union and governors will need to negotiate a settlement to cover account for the revenue decline. The exact form of that settlement is unclear.

Go read the full article

Here’s a link to Nahmad’s article one more time, for good measure.