DAVID STERN'S SURPRISE - AND OUR RESULTING CAP/TAX PREDICTIONS (FOR NUMBERS GEEKS ONLY)
David Stern had his State of the NBA interview about a week ago. As he has since February, he tossed out more economic predictions. In some ways it was quite confusing and seemed to be contradictory: he said revenues are expected to drop quite significantly in the 2009-10 season, but the league's cap and tax numbers for 2009-10 (which per the CBA will be based on "revenue projections" for 2009-10) will probably stay about the same. Then the cap and tax will take a significant drop not in 2009-10 but rather in 2010-11.
How could it be possible for them to expect lower revenues, yet have a steady cap level when the cap is based on projections? Our immediate reaction was that maybe people misunderstood exactly what he was saying. But we privately got word from several, including the very reliable Marc Stein, that Stern not only made that point, but also asked for and received confirmation on the specifics from the league's numbers guru (Joel Litvin) as part of the conversation. So is the league planning to fudge the numbers, in an attempt to reduce the panic trades that would come from a huge drop in cap and tax levels this summer? We wondered, but as we dug deeper and consulted some cap cohorts like Larry Coon, we're convinced that's not the culprit here either.
Instead, the "problem" lies within the CBA itself - and it has some very interesting ramifications.
The problem is, while the cap and tax numbers are based on projections, those are projections that are (as odd as it sounds) backward-looking rather than forward looking. So instead of factoring in the big revenue drop that they see coming, the CBA forces the league's projections - on everything except the national broadcast income - to simply use last year's revenue and ADD 4.5%. When that misses the mark, they just get it back by raising or lowering the following year's cap and tax by the amount they missed.
The result? While the revenues will be going DOWN in 2009-10, the cap and tax levels will STAY STEADY - which means relatively easier spending than should otherwise be expected, with less tax penalties. Cutting back will be more optional than mandatory in 2009-10 for tax-averse teams.
But payback is coming. It all gets made up in the summer of 2010, with the result being that there will be a huge cap drop to make up for the almost-certain "cap error" that's coming in 2009-10. And that fiddles with that big free agent year in a major way.
What we had previously been expecting - based on the idea of projections combined with the NBA's prior words - was a two-year cap/tax progression something like this:
2009-10 ... cap $55M ... tax $67M
2010-11 ....cap $56-58M ... tax $68-71M
In that scenario, we might have seen some teams forced to do some quick dumping of players to avoid tax in 2009-10. Instead, here's what the league seems to be saying now (the numbers are mine, based on the specifics they have offered):
2009-10 ... cap $58-59M ... tax $70-71M
2010-11 ....cap $52M ... tax $64M
In the latter, far fewer teams will have an incentive for dumping salary immediately. And a year later, things will change even more drastically. It just got a lot more challenging for teams trying to carve out spending room for the summer of 2010 as everyone's spending room probably will be lowered by $4-5M and maybe more. It will also now be even less likely for a team to have pure cap room to entice a free agent with both plenty of money PLUS a solid core in place. For teams like the Mavs, it will be much harder this summer to straddle the fence between being a team with 2010 cap money and being a team with 2010 sign-and-trade offers and a solid core.
But it also opened some doors of opportunity this year. Teams who just "lost" $4-5M of spending room for that summer may be even more anxious now to find a taker for contracts running past June 2010. And will even fewer teams be willing to spend aggressively in free agency and use their MLE this summer?
