A suggestion for changes in how the salary cap and MLE are computed

By Dan T. Rosenbaum

In "What will the salary cap, luxury tax threshold, and mid-level exception be in 05-06 and 06-07?", I said that significant changes to the collective bargaining agreement would result in big changes in my estimates of the salary cap, luxury tax threshold, and mid-level exception. (Folks posting my estimates generally have ignored that admonition.) But in this piece I would like to lay out how I think the formulas should be changed and how that might affect these estimates.

First of all, let's review the technical details about salary cap formula.

Salary Cap:

Salary cap = [Projected BRI * 0.51 - (29/30) * Projected Benefits]/29, where

• 29 is the number of non-expansion teams in their first two seasons (equals 30 in 2006-07).
• 51 percent is the salary cap percentage that was increased from 48.04 percent in the previous CBA.
• I am using $114 million and $120 million for Projected Benefits in 2005-06 and 2006-07, respectively.
• Projected BRI = Estimated National TV BRI + 1.08 * Previous Season Non-National TV BRI - Previous Season BRI Shortfall.
• Previous Season BRI Shortfall = Previous Season BRI - Previous Season Projected BRI. (This shortfall is never less than zero.)

Because of a $37 million lump sum payment from Fox Sports to the Los Angeles Lakers that will result in a bump up of BRI of about $64 to $74 million, BRI will almost surely exceed Projected BRI in 2004-05. Thus, the Previous Season BRI Shortfall is likely to be zero in the 2005-06 salary cap calculations. However, because that lump sum payment will not reoccur in 2005-06, the Previous Season BRI Shortfall is likely to be substantial in the 2006-07 salary cap calculations. And that is likely to result in the salary cap falling in 2006-07. (It will also fall because the number of non-expansion teams will increase to 30.)

This adjustment for previous shortfalls is what causes the lumpiness in the year-to-year salary cap calculations. Every other year there is a shortfall and this results in small increases (or decreases) in the salary cap followed by huge jumps in the next year. My suggestion to fix this jumpiness is the following.

1. Instead of the 1.08 multiplier on Previous Season Non-National TV BRI, the league should use the average growth rate of Non-National TV BRI over the previous three seasons.
2. The league should do away with any adjustment for previous shortfalls. If an adjustment is absolutely necessary, I would suggest that it be averaged over three years and only be based upon National TV BRI.
3. The league should go back and spread the $37 million lump sum payment (from Fox Sports to the Lakers) over the life of that contract. If I had my way, I would even allow this change to affect the calculation of 2004-05 BRI, except for in calculations for whether or not the luxury tax is triggered. (Teams had planned on no luxury tax partially because of this lump sum payment.)

The first two suggested changes are not that important in and of themselves. Alone they project the salary cap to $50.8 million in 2005-06 and $49.90 million in 2006-07. (This is relative to $51.0 and $49.4 million.)

But the third suggestion is very important. This projects the salary cap to $49.2 million in 2005-06 and $49.9 million in 2006-07.

Luxury Tax Threshold:

The luxury tax threshold formula, if it is now based upon projected BRI, is the same as the salary cap formula, except that 0.51 is replaced with 0.6111. Under the three suggestions for changes above, the luxury tax threshold would be $59.8 million in 2005-06 and $60.6 million in 2006-07 (versus $61.9 million in 2005-06 and $59.9 million in 2006-07).

Mid-Level Exception:

Mid-Level Exception = 1.08 * [Previous Season's League-Wide Salaries/(12.5 * 29)]

• League-Wide Salaries do not include expansion teams in their first two seasons.
• 29 is the number of non-expansion teams during their first two seasons.
• Only injured players whose salaries do not count for salary cap or luxury tax purposes are not counted in Previous Season's League-Wide Salaries.

My suggestion is the following.

1. Instead of the 1.08 multiplier, my suggestion is to use the average growth rate of BRI over the past three seasons (use only first two seasons in 2005-06 so as not to use BRI numbers from previous TV contract).
2. Instead of assume 12.5 players per team, I suggest assuming 14.
3. I suggest including all salaries, including those of injured players removed from team salary.

These changes would result in a smaller MLE of about $4.6 million in 2005-06 and $4.9 million in 2006-07.

I do not know if these formulas are up for debate in the drafting of the new collective bargaining agreement, but these are the result of my suggestions for potential changes.

Salary cap, luxury tax threshold, and mid-level expection using my suggestions for potential changes (earlier projections in parentheses)

2005-06

• Salary Cap - $49.2 million ($51.0 million)
• Luxury Tax Threshold - $59.8 million ($61.9 million)
• Mid-Level Exception - $4.6 million ($5.2 million)

2006-07

• Salary Cap - $49.9 million ($49.4 million)
• Luxury Tax Threshold - $60.6 million ($59.9 million)
• Mid-Level Exception - $4.9 million ($5.6 million)

Last updated: 1:00 AM, July 16, 2005