If you have not read NBA Collective Bargaining Agreement – Part One, I suggest you read it first. Much of the discussion in Part Two will build off the information from Part One.
Now that we understand from where the current Collective Bargaining Agreement came, we can begin to discuss the motives of both the owners and players.
A lockout is a tool used by owners in collective bargaining. By locking the players out of the facilities, the owners gain leverage in negotiations. If players are not allowed into team facilities and subsequently games are canceled, the players do not receive pay checks. This tactic theoretically will induce the players to meet the owners’ demands. However, the owners are not the only ones with leverage. By canceling games, the owners are not getting ticket revenue, which is detrimental to their bottom line. The truth is that owners are much more prepared financially to sustain an extended work stoppage than the players. This assertion can be supported simply by seeing to what extravagant lengths Dallas Maverick’s owner, Mark Cuban, is going when celebrating his recent NBA title. Owners are wealthier than players. Owners have other investments which will allow them to “scrape by” in case of a lockout. The players, however, do not have as diverse portfolios as owners. Although several NBA players have lucrative endorsement deals, many players rely simply on their NBA salaries, which in comparison to the owners’ bank accounts are minuscule.
Both sides have strong interests in finding labor peace because the NBA is booming. The fourth, fifth and sixth games of the Heat-Mavericks series eclipsed those corresponding games of last year despite the presence of the NBA’s most storied franchises – Lakers and Celtics. Most all the finals games received the highest ratings since 2004.
Coming as somewhat of a surprise last summer, the league announced the 2010-11 salary cap would increase approximately $2 million. The salary cap is derived from a complicated formula and is based on the league’s revenues from the preceding season. For the salary cap to increase $2 million, the league’s basketball-related revenues (BRI) would have had to increase to approximately $3.68 billion from the previous year. The increased interest in the league generated by “The Decision” and its aftermath should only mean greater revenue once the 2010-11 numbers are released.
As we saw after the 1998 lockout, any type of work stoppage would have lasting affects on the league’s popularity. Ticket sales and ratings dipped for three consecutive years after the 1998 lockout. Therefore, a lot is at stake in the negotiations. If November rolls around and a new CBA is not in place, the league may feel the consequences beyond the 2011-12 season. It would be ridiculous to say that both sides do not know the importance of getting a deal done before games are missed. The owners and the players know, but the real question is what are they willing to sacrifice to ensure labor peace?
What are the most important issues being negotiated and where does each side stand?
The media has thrown out a bunch of topics that are supposedly being contested in the CBA negotiations, such as: league contraction, raising/lowering age restriction, drug testing procedures, rookie salary scale, franchise tags, and pensions. However, all those issues are minor compared to the three major ones:
- Basketball-Related Income (BRI) Split
- Hard Cap System vs. Soft Cap System
- Guaranteed vs. Non-Guaranteed Contracts
In my opinion, the BRI split between owners and players is the most important issue. Unfortunately, it is the issue on which the sides are furthest apart. In 2005 CBA negotiations, the owners agreed to give the players no less than 57 percent of the BRI in exchange for a reduction in annual player raises. This was the first time ever that the owners expressly agree to give the players a fixed amount of the BRI total. A decision, I believe, David Stern and the owners regret. The players do not want to give back any benefit they gained from previous negotiations, but the owners want to take back a percentage of the BRI. To be exact, the owners are asking the players to reduce their BRI share from 57 percent to a 50-50 split. According to Ken Berger from CBSsports.com, league revenues in 2009-10 – the last season for which final numbers are available – totaled about $3.6 billion, the players would get half of the $2.7 billion left after expenses, or $1.35 billion. That’s $700 million less than the players’ share under the current system, or a reduction of more than one-third.
The owners are asking for such a drastic reduction because – according to league accounting – NBA teams lost a combined $370 million last season. David Stern has said on multiple occasions that the league cannot continue under the current structure – too many teams are losing money. The players, however, are not buying it. The players association is accusing the owners of “cooking the books” to show loses when really most teams are financially healthy. The players may have a valid point; if NBA teams are such financial black holes, why did the Warriors sell for a record $450 million last summer? We are all left to wonder. Why don’t the players perform their own accounting on teams’ books, you ask? NBA teams are private businesses. No laws exist which compel a private business owner to provide financial details of their businesses. Only the owners know the true financial situations of their teams.
I say that the BRI split is the most important issue because that’s where all the money is – nearly $700 million. The same dispute is at the heart of the NFL labor problems. The owners want a bigger piece of the pie. In order for the owners to get a larger piece, the players must be willing to share. Past players fought hard to get the owners to agree to the 57 percent BRI split, and current players will not give any back without major concessions from the owners, none of which have been made. Derek Fisher, president of the players association, recently said that the owners have made is clear that if the players do not accept their current proposal, there will likely be a lockout. The owners do not sound like they are in any mood to be making concessions.
Hard Cap System vs. Soft Cap System
We have all heard the terms “hard cap” and “soft cap,” but it is important to understand how each one operates. The NBA currently has a soft salary cap system. The NHL formerly had a soft cap until a lockout wiped out the league’s entire 2004-05 season. A dispute over the type of cap system to utilize prompted the owners to lock out the players. After the longest lockout in professional sports history, the NHL now has a hard cap.
A hard cap system is one where the league sets a maximum amount teams can spend on player salaries and teams may not exceed the maximum under any circumstances. In contrast, a soft cap system is one where the league a salary maximum, but teams can spend above it in specific situations. The specific situations are called “exceptions” and are all outlined in the CBA. The two most common exceptions are the “Larry Bird Exception” and the “Mid-Level Exception.”
With the mid-level exception, teams are allowed once a year to sign a player to a contract equal to the average NBA salary, even if the team is over the salary cap already, or if the signing would put them over the cap. The exception may be used all on one player or split among multiple players. It is available to any team that exceeds the salary cap at the beginning of the offseason. The Larry Bird exception allows teams to exceed the salary cap to re-sign their own free agents, at an amount up to the maximum salary. To qualify as a “Bird free agent,” a player must have played three seasons without being waived or changing teams as a free agent.
Those are only two of the many exceptions currently written into the CBA. Those are the most common ones, but they illustrate how the Lakers and Mavericks can have payrolls over $90 million when the salary cap is set at $58 million.
The players have pledged to never accept a hard cap system. Their argument against a hard cap is pretty simple. No one is forcing the owners to sign Drew Gooden to a five-year, $32 million contract, or give Joe Johnson a deal that will pay him over $20 million a year when he’s 35. The players argue that the owners should be responsible for these lousy contracts, not the players. Players are asking why they should have to sacrifice money from their pockets to rescue the owners from bad business deals. The owners’ response is just as simple. The owners need protection from the dumbest owners. When the Bucks gave Gooden that deal, it set the market for serviceable back-up power forwards at $6 million per year. When less-capable general managers constantly over pay players, salaries become inflated and all other owners lose money.
The owners and the players are very far apart on this issue. However, I do not think that this is the most important aspect of the negotiations. The owners could ultimately live with a soft cap system as long as the players give back a large portion of the BRI. As the negotiations play out, I predict that the owners will gradually concede salary cap exceptions in an effort to gain back as much of the BRI as possible. The end result may be that the new CBA will contain fewer salary cap exceptions, but the players will cling tightly to the Larry Bird and Mid-Level exceptions.
Guaranteed vs. Non-Guaranteed Contracts
The final demand the owners are making in negotiations is to have player contracts non-guaranteed. For the most part, all current NBA player contracts are fully guaranteed, meaning that the team is on the hook for the entire contract, even if the player is not or was never worth the money spent (Exhibit A: Eddie Curry). Non-guaranteed contracts are employed by the NFL. Teams promise to pay a certain amount of the contract’s value but not nearly the entire amount. If a player does not perform well, the team can release the player at any moment for any reason. The team is only responsible for the amount guaranteed.
NBA owners covet this system. The main reason: it allows teams to erase bad decisions from the books more quickly. For example, let’s say a general manager (GM) has a dream one night that Darko Milicic is going to have a breakout season, so he wakes up, calls Darko’s agent, offers him $20 million over 4 years and Darko accepts. Under the current system, the team must pay Darko the entire $20 million, even if the GM’s dream proves to be inaccurate. However, under a non-guaranteed system, the GM would be able to offer Darko the same contract but make only $5 million guaranteed. Therefore, after one season the team can decide they made a terrible mistake signing Darko for four years and simply release him. This would be perfectly acceptable as long as the team paid Darko the $5 million of guaranteed money. See how beneficial that could be for teams? Instead of a bad contract haunting teams for four years, they can get rid of it after one season.
Another change that could assist teams in erasing mistakes more quickly is shorter contract lengths. In the 2005 CBA negotiations, the players conceded to the owners one year on contract lengths – from seven years to six. This time around the owners want even shorter contract lengths. The shorter the contact, the quicker the teams can erase mistakes.
The players will resist non-guaranteed contracts because having a contract fully guaranteed provides desirable security. In a non-guaranteed system, if a player gets injured in this middle of his contract and the team has already paid him his guaranteed money, the team may release the player. Non-guaranteed contracts would also create uncertainty as to the players’ family situation. If a team can release a player at any point, a player could go from playing in Boston to LA to Miami within the same season. If you are not a star player in the league, knowing where to settle your family would be stressful and complicated.
However, this could be an area where owners and players find common ground. As we saw last summer, even top players are willing to take less money if it means landing in the right situation. In my opinion, owners are ultimately going to want some type of flexibility to mitigate mistakes. The players would prefer giving up length on contracts rather than going to a non-guaranteed contract system. There is room for compromise in this area, but it is up to the owners and players to find it.
Those are the main issues being discussed in the CBA negotiations. If the two sides can agree on those three issues, all the other side topics will fall into place. The current CBA agreement is not perfect. Some players are being grossly overpaid as a result of the system. Similarly, some teams are losing money as a result of the system, so changes are justified. However, the sides are still very far apart. All signs are pointing towards a long summer.