Analyzing the NBPA’s seemingly contradictory statements on BRI and the salary cap for 2020-21

Update: After this article was published, an agent on Tuesday’s conference call reached out to me to let me know that there was no talk of a reduction in projected BRI for the 2020-21 season. The earlier reporting is still analyzed below, but you should take that reporting hypothetically rather than literally.

The longer the COVID-19 pandemic rages, the longer sports will have to remain sidelined. At first, the NBA shut down the league for at least 30 days, but as that April 10 deadline approaches, commissioner Adam Silver stated in an interview on Monday with TNT’s Ernie Johnson that the league will not have a decision on what will happen with the remainder of the 2019-20 season until May 1 at the earliest.

On Tuesday, the Players Association held a conference call with player agents to inform them of ongoing developments in the negotiations with the league on how the financial impact of this hiatus will be divided between the league and the players. SNY’s Ian Begley reported on the two most important talking points of that call:

1 – The NBPA told agents to “anticipate a large reduction” in Basketball Related Income (BRI) for the 2020-21 season.
2 – The 2020-21 salary cap is “unlikely to drop significantly” from the projection of $115 million, which was made before the pandemic took hold in North America and put sports (and pretty much everything else) on hiatus indefinitely.

On the surface, these statements are directly contradictory. By the rules set forth in the Collective Bargaining Agreement, the salary cap is calculated as a percentage of projected BRI, so any drop in BRI should correlate with a drop in the salary cap, just as the massive rise in BRI over the last decade has led to the salary cap going from $57.70 million in 2009-10 to $109.14 million in 2019-20. The CBA also puts limits on what percentage of BRI each side receives, with an escrow arrangement in place to deal with any deviations in actual revenue from projected revenue.

However, the escrow rules are meant to deal with smaller deviations in revenue, such as the revenue lost from the NBA’s battle with China earlier this season. The rules are not meant to deal with a situation in which nearly a quarter of the season is lost, which is why the NBA and NBPA are negotiating to put a plan in place for how best to deal with the league’s financial fallout of the pandemic.

Still, even if the league and players have to negotiate the 2020-21 salary cap, in addition to a host of other things, one would think that a “large reduction” in BRI would naturally lead to a drop in the salary cap from the projected $115 million, unless the owners are willing to take a much smaller cut of BRI than they negotiated in the 2017 CBA. That’s always a possibility, and it would be good PR for the league to show financial strength in the wake of the pandemic. However, the owners paying hundreds of millions of dollars for good PR doesn’t quite seem like a good idea, particularly with certain owners in dire straits with their other businesses.

One way in which the league and PA can have its cake and eat it too is by changing the escrow formula for the 2020-21 season. As things stand, each player pays 10 percent of his Base Salary into an escrow account, which is used at the end of the league year to ensure the league and players each get their fair share of the actual amount of BRI for the preceding year. Since the salary cap has to be set in advance, the league and players association do the best they can to project BRI, then use the escrow as a buffer to move money back to the owners.

If there is going to be a drop in BRI, then the league and players could agree to increase the escrow amount taken out of each player’s salary, with the knowledge that the total escrow amount would almost certainly go to the owners at the end of the year. If the two sides can agree on a projection for 2020-21 BRI, then they can figure out how short a $115 million cap would leave the owners and use the escrow system to push more money from the players to the owners. It’s not necessarily the normal way in which they use the escrow system, since it’s supposed to be used as a buffer for both sides, but nothing about this situation is normal.

Altering the escrow arrangement would benefit both sides – the players would get the $115 million salary cap and the public win in negotiations, but the fine print of the increased escrow percentage would funnel more money than usual back to the owners to make up for the loss in revenue. Each side would still get their cut of BRI, but the salary cap and contracts signed this summer would be, in essence, artificially inflated compared to the normal 10 percent escrow system.

Another note on how the financials have been handled for 2019-20 thus far:

To this point, the financial losses have been entirely incurred by the league’s owners, with full paychecks paid to the players on March 15 and April 1. In one week from this writing, the April 15 paychecks are set to arrive in players’ bank accounts, but there has been no commitment from the NBA that those checks will be for the full amount players have received in their ten previous installments. Another aspect of the NBPA’s conference call addressed the possibility of withholding of player salary, though a decision has not been made yet, per Begley’s reporting on the same conference call.

Last week, ESPN’s Adrian Wojnarowski reported that the two sides had been negotiating withholding up to 25 percent of player salaries going forward and putting that money in escrow, to be returned to the players should the season resume, but to protect the owners if the season is canceled. Further reporting from The Athletic’s Shams Charania indicated that the league wanted to withhold 50 percent of player salaries going forward, while the PA was offering 25 percent. A 50 percent reduction in salary going forward would just about match the league’s Force Majeure withholding amount – even though players have only received ten payroll checks, there are a large number of players who have advance payments in their contracts and a few who are paid on a 12-check schedule, rather than the standard 24-check schedule. While I can’t be sure of the precise amount of cash already paid to the players as a whole, a 50% reduction for the remaining checks owed to players starting on April 15 should get pretty close to the amount the league could withhold by invoking the Force Majeure clause.

All of these things and plenty more play into the negotiations between the league and players association. Should the PA take a stand against withholding anything from the remaining 2019-20 paychecks, the league could invoke Force Majeure or ask that the players withhold even more from their 2020-21 paychecks in order to rebalance things in the long run. That extra withholding, like the escrow solution I posited above, could also take place over multiple years.

There are lots of options for how the two sides can handle this and every other issue brought about by this hiatus, but the players association telling its constituents that the projection for 2020-21 BRI is bearish but the cap will remain at the same level tells us something about what they’re hoping to achieve in the new agreement. Whether they’ll be successful in that pursuit remains to be seen, as well as what they would have to give up in order to achieve those goals. A modified escrow system is one way in which everybody can walk away happy, but there’s still plenty of time for the two sides to figure out exactly how they want to handle things.