How Durant May Have Doomed Us to a Lockout and a Proposal to Reform the NBA CBA for the Promotion of Parity

The Golden State Warriors won 73 games last season. They broke the NBA record for most wins in a single season, previously held by the 72-win Chicago Bulls. They failed at their ultimate goal of winning an NBA Championship, but nobody is worried about the Warriors. And we all know why.

On the 4^th of July, Kevin Durant broke the Twittersphere when he announced his intent to sign with the Warriors. This move was slightly unexpected. Although it had been speculated for months, nobody thought it would materialize. Durant wasn’t thought of as a guy who was willing to form a super-team. In 2010, 8 days after LeBron James went to Miami, Durant tweeted:

Oh the irony. With that said, I can’t blame Durant for his decision. He will win rings (most likely), be in a big market, and be in perhaps the coolest city in the U.S. (subjective opinion here).  Durant was disappointed to leave Seattle[1], and I am willing to bet there is a lot more in common between SF and Seattle than there is between OKC and Seattle. He returned the Northwest, a culture that more than likely fits his interests and desires more so than OKC. The professional, business, and personal reasons all add up. This team will be indomitable, no doubt. Owners and fans alike are all left wondering this crucial question: How did the Warriors have the financial ability to sign Kevin Durant to a maximum contract?

In short, this was possible because of the NBA’s new TV Deal. In 2013, the NBA Salary Cap was $59 million. However, in 2014 the NBA signed a massive media deal with ESPN and TNT worth $24 billion in revenue to the league over the next nine seasons. As a result, there was a huge influx in the Basketball Related Income (“BRI”) which pushed the 2016 – 2017 salary cap to $94.143 million. There is a positive correlation between the BRI and the salary cap. As a result, every team had room to sign a max player this summer. Oops. This is how the Warriors had enough room to sign Kevin Durant. The Cap is expected to increase by 8 million next season, thus giving the Warriors more room to sign an impact player, a scary proposition. As ESPN writer Zach Lowe this summer, “This star hoarding is only possible because of an unprecedented spike in the salary cap, and both the league and players union must reckon over what they have wrought here.”

This issue brings about a concern among NBA owners.[2]

Owners are concerned with the growing lack of parity in the league. On the whole, when NBA games are more competitive and the standings are closer, the league is more entertaining on the aggregate. Most importantly, when a fan actually believes his or her team has a legitimate shot at winning an NBA Championship, that fan is willing to be more engaged. If a fan is more engaged, then he or she may be willing to invest more in the team. None of this is rocket science. It makes sense. Owners want their teams to be good, want the fans to be engaged, and want more in revenue. The eminence of super-teams has created an ambivalence. On one hand, super-teams are huge economic drivers for the league. On the other hand, there is a persuasive argument that the league is better off when more teams are competitive, i.e. when more parity exists. Silver also agrees, saying, “I’ve read several stories suggesting that that’s something the league wants, this notion of two Superteams, that it’s a huge television attraction… I don’t think it’s good for the league, just to be really clear. Just to be absolutely clear, I do not think that’s ideal from a league standpoint… it’s about designing a collective bargaining agreement that encourages the distribution of great players throughout the league.”[3] 

Now the interesting part. The current CBA runs from 2011 to 2021, however there is an Early Termination Option (“ETO”) built into the agreement. The NBA and NBPA each have an option to terminate the CBA on June 30, 2017 by notifying the other party on or before December 15, 2016. Thus, a lingering question. Will the NBA owners notify the players of their intent to terminate the CBA early? Assuming they do, what would be some solutions to the growing lack of parity?[4] After all, the new CBA was intended to promote parity. Below is a plan that could serve as a framework to promote parity in the League. If the owners decide to opt out, this is one idea they should push, even if only part of it is successfully bargained.

Reforming the NBA’s CBA for the Promotion of Parity.

      This idea is a conglomerate of a franchise tag, a hard salary cap, and cap smoothing. It is not a panacea to end all super-teams, but it is an effort born out of pragmatism and realism. This option is designed to be palatable to both the NBA and the NBPA. It promotes parity without hampering an individual player’s autonomy. It is a 3 Pronged Approached.

a.     Part 1 – Institute a Soft Tag: Simply put, if a team drafts a player, then that team has the ability to tag that player as the franchise player. The deal would be sweet, better than what the normal Bird Rights Free Agent would be able to attain. The player would have the option to accept a 1-year deal worth the average of the top 2 paid players at his position, and then add an additional percentage to the total. Much like the NFL, it would come in two formats, an exclusive and a non-exclusive. In the exclusive, the player would get a significantly higher percentage mentioned above, and in the non-exclusive deal the player would a significantly lower percentage. Furthermore, the exclusive option limits the player to only negotiate with the team he is resigning with for specified period of time, while the non-exclusive would allow the player to negotiate with multiple teams.  If theory matches reality, the player will follow the money. But don’t take my word for it, Pat Riley has recently advocated for this option, albeit in a different application. Riley said, "I believe that there should be a franchise tag on one of your guys… a franchise player to me would be a player in which you can pay him as much money as you want.” This is a good idea. It makes it difficult for the player to say no, but also gives the player the option.

b.     Part 2 – Institute a Hard Cap and Do Away With the Max Contract: A hard salary cap and doing away with the maximum contract is another way the NBA could restore parity to the League. A hard salary cap is where the League sets a maximum amount allowed for player salaries, and no team can exceed that limit. The NBA currently has a soft salary cap. A soft salary cap has a set limit to player salaries and provides for several major exceptions to allow teams to exceed the salary cap. However, there is a tax. In the NBA, for every dollar a team exceeds the tax threshold, which is $113.287 million for the 2016 – 2017 season, there is a corresponding tax payment that is made to the league.[5] Also if the league were to abolish the maximum player salary limits, a max player could receive a contract that exceeds 35% of the cap, thus the market value of a player to a team would not be artificially deflated and match the economic reality. Doing away with the max contract (and also the other designations in section Q of the CBA) would be a good thing for players because it lets them operate in more of a free market. It is also a good bargaining chip for the League if it bargains for the hard cap.[6] Take this hypo:

In a hard cap system of $100 million, the market may dictate that LeBron James garnishes $45 million. This is not far off from reality considering he has $31 million max contract in a $94 million soft cap. A player could easily get more than this in the future, considering LeBron is past his prime. If this is the case, then this stratifies the market and each player knows where he stands. If I am Kyrie Irving, I would argue for $35 million a year (conceivable considering Giannis Antetokounmpo is now making $25 million a year). In this hard cap scenario where the market dictates the pay (the max would be abolished) LeBron James and Kyrie Irving would command $70 million a year. If you are the Cavs, then you have to spread that $30 million more strategically. If I am Kevin Love and Milwaukee has the cap space, I jet to the Bucks and make $30 million a year. In this hard cap system, the premier players would stage the market and the teams would follow suit, finding the best ways to strategize the cap successfully.

I hear the objectors. However, there is empirical evidence that a hard cap increases parity. Since 1983, only 12 of the NBA's 30 teams have won a championship. If you take away the last 2 winners, Cleveland and Golden State, it goes to 10 teams over 31 years. Compare that to the NFL since its hard cap was implemented in 1994, where there have been 12 different Super Bowl champs. The difference of 2 additional teams per 11 years, is subtle, yet noticeable. The difference slightly increases for the NHL, where the hard cap was introduced in 2006. Since that time there has been 7 different teams that have won the Stanley cup in 11 years. The cumulative impact over time results in more parity. As you can see, when we project the 11 year rates to 33 years, we see that more teams win championships in the leagues that have implemented a hard cap. 

• NBA = 12 teams over 33 years
• NFL = 18 teams over 33 years 
• NHL = 21 teams over 33 years

I understand the NFL has more randomness associated with its playoff system. However, I am willing to bet that once you isolate that randomness variable in multi-variable analysis model, we would still find a high correlation coefficient proving that a hard salary cap causes more parity in the league, as opposed to a soft cap. In fact, a research study entitled, An Analysis of the Effects of the 1993 NFL Salary Cap on Competitive Balance and League Revenue:  Has anticompetitive behavior led to better competition?, completed in 2005 by Charles N. Baschnagel lends credence to this argument. 

"In summary, the results of my analysis suggest that the 1993 CBA sustained a high level of intra-season parity in the NFL and are correlated with increases in various measures of inter-season parity. While the NFL was able to achieve high levels of parity by implementing a "hard" salary cap, the NBA appears to have decreased its levels of intra-season and inter-season parity with the institution of its "soft" salary cap in 1984 and that the "luxury tax" has only been mildly effective at increasing the level of intra-season and inter-season parity in the NBA."

On the whole, this would end all the cap exemptions, simplify the system, and promote more parity because at the end of the day, the players would chase after the money, at the expense of winning. The average NBA career is approximately 5 years, so every player has to maximize their value because in the world of sports nothing is a guaranteed. This is a crucial part for promoting parity[7] (This FN embodies some fair criticisms of a hard salary cap proposal, but keep in mind no solution is full proof).

c.     Part 3 – Institute a Cap Smoothing Mechanism: Cap smoothing is not a new idea.[8] As noted earlier, the salary cap is determined by the BRI. The salary cap spiked this year due to the large influx of cash in the BRI. This resulted in nearly every NBA team having enough cap room to sign a max player. The largest influx in the cap prior to this season was $7 million, but this year it went up by $24 million.[9] If the cap was more apt to accommodate large influxes in the BRI to avoid spikes and become stabilized, then situations like this past summer’s anomaly could be avoided. This would require changing the amount of BRI that is calculated to predict the salary cap:

Salary Cap = (BRI)44.4 – (Projected Player Benefits) / (30)

Where there are abnormally large influxes in the BRI, there should only be a predetermined percentage of that unusual influx that affects the cap. This is known as smoothing and it would artificially deflate the salary cap, deviating from the formula above. By smoothing, the cap increase would contemplate normal growth, diminishing any chance of an anomalous summer, and the extra BRI would be distributed to the players via the NBPA.

While the proposal above is pragmatic, realistic, and has utility, another idea needs to be discussed. It presents more questions than answers, but I went to law school, the bastion of esoteric and academic ideas, so it feels most natural to give it an honorable mention.

NBA teams should be regulated much like business are in the United States under antitrust laws. In the U.S., antitrust laws are necessary to promote competition in the market place. Much like the laws work in the U.S., the NBA could implement a framework to keep teams from building super-teams via free agency. This would not be easy to implement, but sometimes complex problems are not solved by simple solutions. It would be an ambitious endeavor, one that may be dangerous for the NBA to venture in, because it would largely be subjective in nature. As a result, it could be too political for fans to muster, and they may cry foul as NBA executive and bureaucrats make these decisions. Nonetheless, teams can always build super teams naturally. Much like natural monopolies exist, natural dynasties can exist in the League. Where the line is drawn, however, is where teams buy up talent in the League. If companies are regulated, then why not teams? That is the logic I am getting at. Now, enjoy the octopus metaphor images below. 

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[1] 

[2] Owners also have an interest in avoiding financial shortfalls. As the salary cap rises, so does the floor, which has been fixed at 90% of the cap. In the 2015-2016 NBA season, the league projected that teams finished with a $93 million salary shortfall. NBA has projected an even larger shortfall for the 2016-2017 season, at $375 million. Furthermore, in a Board of Governors meeting in July, Commissioner Adam Silver claimed that 1/3 of the League operated at a loss. These shortfalls may have teams wanting to take a larger percentage of the BRI, thus having owners decrease their shortfalls. In 2005, the CBA dictated that player got 57% of the BRI, but for this current CBA, players are receiving approximately 49-50% of the BRI. This adds to the level of complexity as owners may want to ensure they receive a majority of the BRI.

[3] http://thecomeback.com/nba/more-money-more-super-teams-less-parity-inevitable-nba-lockout.html

[4] This article will assume only these two issues as the most pertinent when it comes to the issue of opting out. There are other issues, such as the age limit and the revenue sharing among teams.

[5] (refer to full chart on CBA FAQ http://www.cbafaq.com/salarycap.htm#Q21)
[6] http://www.forbes.com/sites/jimpagels/2016/07/04/individual-max-contract-rules-destroy-any-semblance-of-nba-parity/#7874eb1d7f0e

[7] There are some negatives to a hard salary cap. Itwould constrain teams who are trying to retain their star players. This may not matter given that the constraint is League wide, but it still could allow star players to team up and take less money to play together. However, as I said above players will generally chase after the money. Further, a hard salary cap would terminate the current “Bird Rights Free Agent,” which allows a team to exceed the cap to resign its player to a maximum contract. This is invaluable to smaller market teams.

[8] http://www.espn.com/nba/story/_/id/12461874/players-union-rejects-salary-cap-smoothing-historic-cap-increase-nba-set
[9] Id.