One of the main reasons for last year’s NBA lockout was that the owners wanted to impose some sort of fiscal discipline on the game. They didn’t want basketball to turn into the farce that is modern baseball, where a handful of teams with the deepest pockets monopolize all the best free agents and, as a result, all the championships. To that end, the NBA’s new Collective Bargaining Agreement imposes a salary cap to limit the payrolls of individual teams and also has a luxury tax—to begin in the 2001-2002 season—to penalize those teams that exceed the cap. If you look at the current salary structure of the league, it looks as if that effort at discipline is working. Virtually all of the most successful teams have payrolls within the fairly narrow range of $45 million to $50 million. (One way to look at this is to think in terms of a basketball price/earnings ratio, where price is the number of millions a team spends on players’ salaries and earnings are wins. Most good teams have p/e ratios of less than one: Miami [.978], Utah [.984], Phoenix [.877], Philadelphia [.863] are typical, meaning that in the NBA right now the consensus is that you have to spend just under a million dollars to “buy” a regular season win.) The cap is also credited with the emergence of highly cost-conscious rebuilding strategies in places like Chicago and Orlando. Earlier this month, Lakers sources said that owner Jerry Buss was balking at paying Shaquille O’Neal the full $83.5 million, three-year contract extension Shaq is due in 2003 because Buss didn’t want to pay the luxury tax. That sounds like fiscal discipline is working. Right?
Well, actually not. And for proof look no further than this year’s playoffs, where the final four teams also happen to be the teams with the four highest payrolls. In fact, Portland ($73.9 million) and New York ($71.3 million) are spending almost $20 million more on players than the third highest-spending team and $30 million more than the average for most competitive franchises. (The p/e for the Trail Blazers is 1.25 and for the Knicks an outsize 1.426.) Portland and New York, quite simply, bought their way into this year’s playoffs, which, under the collective bargaining agreement, wasn’t supposed to happen. What went wrong?
The answer is that the agreement has a crippling loophole. First of all, the NBA has what is called a “soft” cap (unlike the NFL, which has a “hard” cap), in order to promote stability. What that means is that a team is allowed to exceed the cap in order to re-sign its own free agents. In other words, if I’m Orlando and I want to sign Tim Duncan this off-season, I’m limited by how much room I have under the cap. If I’m San Antonio, trying to re-sign Duncan, I can pay him whatever I want. The soft cap explains why Portland has a payroll of almost $74 million, even though the cap is $34 million: They are awfully generous when it comes to re-signing players.
To rein in teams that over-exploit the soft cap, the collective bargaining agreement also includes a luxury tax. According to a complicated formula, a second cap is created—significantly higher than the first—and for every dollar a team is over the second cap, they’re required to pay a dollar in penalties. (See this FAQ on salary caps for more info.)
But here’s where the loophole comes in. The second cap doesn’t automatically apply to big spenders. It kicks in only when the total of all players’ salaries exceeds 61.1 percent of total basketball revenues for that year. And that 61.1 percent is a very generous level. In all, it’s never been breached. Last year—prorated for a full season—players’ salaries were about 58 percent of revenue. This year, even after players’ salaries jumped a whopping 18 percent in the off-season, the National Basketball Players Association estimates they’ll reach only about 59 percent of revenue. It’s possible, for course, that by 2001-2002, when the luxury tax kicks in for the first time, continued salary inflation will have pushed us above that mark. But that season, it should be pointed out, will be the fourth and final year of the NBA’s television deal with NBC. And if, as expected, the next deal is more lucrative, the share of revenues taken up by salaries is going to fall again. The luxury tax may well only be a one-year phenomenon.
The genius—if you want to call it that—of the Trail Blazers and the Knicks, in other words, is that they recognized, in advance of everyone else, that the luxury tax was essentially toothless. So long as most NBA teams exercise some restraint—which most owners clearly want to do—the system allows teams like the Knicks and Trail Blazers to spend all they want. The fact that the Clippers spend only $22.5 million and the Bulls spend $27 million means that Portland can get away with paying Damon Stoudamire $10 million a year and Jermaine O’Neal—Jermaine O’Neal!—$5 million a year. It’s hard to comprehend just how idiotic this system is. The reason we have regulatory or enforcement systems of any sort—from the IRS to police departments—is not because most of us want to break the law; it’s because a tiny minority wants to break the law. Professional sports are no different. Competitive inequities are caused by the actions of a small number of owners—like George Steinbrenner or Peter Angelos or Paul Allen—who, by virtue of their temperament or deep pockets, are willing to pay anything for a winner. A solution that gives the profligate few carte blanche is not a solution. We gave up half the season last year for this?
