View Full Version : Hollinger Cap Note

01-07-2009, 04:27 PM
I'm a bit of a cap nerd (a DLord wannabe, if you will) and I found this fascinating.

Link (http://sports.espn.go.com/nba/news/story?page=predictions09/nba)

John Hollinger, ESPN.com: If you're looking for a significant development to watch in 2009, look no further than the economy's effect on the salary cap -- something that will have major implications as soon as the February trade deadline.

Throughout the salary cap era, the modus operandi has been that the league's salary cap increases every season. This has been largely true over the past two decades and has become the cornerstone of both team cap planning and player contracts (most of which contain 10 percent annual raises).

Plug a serious recession into the equation, however, and things change. Dramatically.

The 2009-10 cap number is based on the league's revenues in 2008-09 -- the league adds 4.5 percent to the non-TV basketball revenue from the previous season, then adds the value of that season's TV contract, and from that, presto, a cap number churns out.

Since the cap number is basically an estimate of what the current season's revenues will be, that 4.5 percent is key. There's a provision in the collective bargaining agreement that allows the league to "make up" cap money if the cap was set too high a year earlier (the players have the same provision if it was set too low).

While much of the league's revenue for this season (season tickets, sponsorships, etc.) came in a long time ago, and thus wasn't affected by the changing economic conditions, there still should be enough of an effect on the revenue to make the revenue increase this season less than 4.5 percent -- kicking in the make-up provision in 2009-10.

The net effect, multiple league sources tell me, is that the cap is likely to increase little, if any, next season. Whether it increases will depend largely on team's walk-up sales the rest of the season.

That has huge implications league-wide because the luxury tax level moves in lockstep with the cap. Teams have built their salary structures on the assumption of a rising tax -- but instead, many teams are locked into salaries for next season that will increase 10 percent without any corresponding increase in the tax level.

The upshot is if the tax level doesn't rise, at least 12 teams are threatening to be over next season's tax level on current contracts alone -- including several teams that have been adamant about staying under it in the past.

That, in turn, is likely to make the next 12 months very interesting from a trade perspective, as teams try to move contracts to position themselves under the suddenly lowered tax line. We also might see shockingly little activity in the free-agent market, as too many teams will have their hands tied by financial considerations.

And if you think the summer of 2009 looks bad, just wait until the much-hyped summer of 2010. First, the league's revenues are likely to be much lower in 2009-10 than they are this season, and that's the number that's the basis for setting the 2010-11 cap. The many season-ticket holders and sponsors who couldn't get out of their commitments this fall instead will jump ship a year from now, creating a revenue shortfall league-wide.

That, in turn, will result in the make-up provision having a major effect in the summer of 2010. And since the cap in 2010 will have been set off a lowered revenue base, it will turn into a double-whammy.

To illustrate, I modeled a situation in which league revenues increase by 2 percent in 2008-09 but declined by 3 percent in 2009-10. I'm not saying this will happen, but just humor me for a second.

If that were the case, the cap would decrease by about 0.5 percent in 2008-09 ... and then it would decrease by a whopping 5.6 percent in 2009-10. The cap would go all the way down to $55.2 million that year.

Remember all those teams that projected to be able to offer max deals to the likes of LeBron James (http://sports.espn.go.com/nba/players/profile?playerId=1966) and Chris Bosh (http://sports.espn.go.com/nba/players/profile?playerId=1977) in the summer of 2010? Those projections were based on a cap number in the $60 million range, not the $50 million range; needless to say, some of them might have to rework their plans. And others, like the Knicks, might not find it so easy to squeeze in two max-level contracts under the cap if it's not at the $63-65 million level we heard thrown around this fall.

Players will feel the effects as well. Max- and mid-level contracts will be scaled lower, and in general, free-agent money will be far less plentiful. It also means fewer players are likely to opt out of contracts over the next two summers.

So as we go into 2009, pay attention to all that arcane financial data and contract legalese that goes into setting the cap level. The effect could end up being far greater than anything that takes place on the court.

01-07-2009, 04:37 PM
great find jthig

01-07-2009, 07:19 PM
interesting thought, but i disagree with his premise that the nba will lose money. i think that people with disposable income will still keep going to the games, simply because they want to get away from the real world. people will sooner not replace their 4 year old car than choose to not pay $200 for a night at an NBA arena. therefore, while his theory is legit, I don't think it will hold water when push comes to shove