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Saturday, April 19, 2014

Economics 2010

Recently the NBA front office has sent out a memo to teams about a potential reduction in the salary cap for 2010. According to the league conservative estimates has the cap shrinking to just under $54M, but it’s also possible to go as low as $50M. Of course the player’s union was upset at this memo, because it could lower rookie and free agent signings this year. The New York Times duo of Abras and Beck look over the numbers with Larry Coon as how they pertain to potential 2010 free agents.

The announcement added new dimensions to the landscape of next summer’s potential galaxy of star free agents. While teams have been budget conscious this summer, LeBron James may reconsider his plans. He is due $15.78 million for the 2009-10 season and $17.15 million if he plays the final season of his contract.

If James decides to forgo the final year, he will earn $16.59 million in the first season of a new contract with the Cleveland Cavaliers or another franchise. The number is a slight decrease from his current contract with the Cavaliers, under which he is set to make $17.15 million, and is based on his earning a 5 percent increase from his 2009-10 contract.

Under the collective bargaining agreement, there is a seniority system involving how much teams can pay in maximum salaries, broken into three categories.

James, Chris Bosh and Dwyane Wade signed extensions after the 2006 season so that when their contracts expired, they would fall into the second tier of players who have tenure between 7 and 10 years. Their maximum salaries would be 30 percent of the salary cap or a 5 percent increase from their previous season’s salary.

The players could opt out and earn slightly less at the front end of the contract and make it back, based on annual raises, along with the security blanket of having a long-term contract, should they be injured.

Another option is that the star players could sign extensions to their current contracts, but that could put their earnings at the whim of the future collective bargaining agreement after the current lame duck system expires in 2011. At most, James could tack on three years to his current contract via an extension.

A player’s best interest, Coon said, may still be to test free agency. That would allow James and his peers to collect as many years as they can under the current collective bargaining agreement.

“Signing an extension is a mistake because you’re putting yourself in the mercy of an agreement that hasn’t been negotiated,” Coon said.

TrueHoop goes over four ways the lower salary cap helps the league.

$6.5 Million in Cash for Every Team on July 29
Remember the NBA’s escrow system? Basically, reported amounts for player salaries are not precisely the amounts they get. Instead, a percentage of every player salary is held aside, in escrow. At the end of the year, the league tallies up how much players made as a percentage of the league’s “basketball-related income.”

The result, is a pretty good recession buster for the owners. At the moment there’s nearly $205 million in the escrow account. $194 million of that, according to the memo, will be distributed equally to the 30 teams on July 29 — meaning each team gets $6,467,847 in cash. The rest goes towards benefits (a long story), meaning teams will also each be spared $363,087 they would have been expected to contribute for next year.

Lower Salaries for the Same Players
The news in the memo, undeniably, has the potential to simply reduce the price of top basketball talent (Andre Miller or Shawn Marion for the mid-level exception, anyone?). Any team hoping to sign LeBron James or any other 2010 free agent now has more impetus than ever to shed salary.

Luxury Tax Disbursements to 23 Teams
You probably know about the NBA’s luxury tax. A refresher: Teams pay one dollar to the NBA for every dollar they spend in salary in excess of a certain amount, which we now know was $71.15 million this past season. That means seven teams will pay, and they are, as Stein reports:

New York ($23,736,207), Dallas ($23,611,661), Cleveland ($13,707,010), Boston ($8,294,664), Los Angeles Lakers ($7,185,631), Portland ($5,899,356) and Phoenix ($4,918,136).

The other 23 teams, however, each get 1/30th of that money back, in cash. That means the 23 teams not listed above are each about to get $2,911,756, which is not a bad little shot in the arm.

Help for Low Revenue Teams
If you’re doing the math at home, you’ll realize that the luxury tax arrangement means the league is sending out 23 luxury tax payments, and each one of those is a 30th of what they took in.

And finally Alan Hahn details how this affects the Knicks pursuit of LeBron.

The current contracts on the payroll for 2010-11:
Eddy Curry $11.2M
Jared Jeffries $6.8M
Danilo Gallinari $3.3M
Wilson Chandler $2.1M
Jordan Hill $2.2M
Toney Douglas $892,500K
Total: $26.4M

With only six players under contract, and no first round pick (Utah has the rights to it) that leaves five “cap hold” slots (one left empty for the player you’re trying to sign) at $473,604 each and brings the total to $28.7M. Now, keep in mind, that is just in the current condition as we blog today. If the Knicks add any players — such as Grant Hill, or sign David Lee to an extension — the numbers obviously change. But we’re working off the current state of the payroll right now. We’ll use this as our base as the situation changes.

Now, if the early prognostications are accurate, the NBA salary cap could be as low as $50M in 2010-11. Let’s use that as our doomsday formula here. Keep in mind the projections could be wrong and the cap number could be higher, which would change everything. But if we believe the doomsday prophecies, that would leave — not counting Lee, Robinson or any other UFA’s holds and Bird Rights — just $21.3M in cap space for the Knicks to spend in free agency in the big summer of 2010. If you add just Lee, we’re talking significantly less money to spend in free agency under the cap. Perhaps not even enough to offer a max contract to LeBron James.

The CBA gives power to the “home” team for free agents. They have the ability to sign their own player to a maximum of six years with 10.5 percent raises each year. All other teams can only go five years at length and 8 percent.

In LeBron’s case — and that of Dwyane Wade, Chris Bosh, Joe Johson, Amare Stoudemire, et al — the plummeting NBA salary cap could actually result in taking a loss in the first season. Consider that LeBron’s option year of 2010-11 pays him $17.1M. If he opts out and the cap drops to $50M, the max LeBron would make in 2010-11, the first year of any new deal with any team, including Cleveland, is $15M.

The Cavs can go six years at 10.5 percent raises, which would make their maximum deal total about $116.5M, with an average of roughly $19.4M per.

A team such as the Knicks can only do five years, with 8 percent raises, which would make their maximum offer total about $88M, and an average of $17.6M per. Now the Knicks could be creative and perhaps give LeBron an opt-out after the third year (2013), when he will be 28 years old and still very much in his prime. The NBA has to certainly hope they have, by then, to have a new CBA in place and, God willing, the economy could be in a recovery, which would send the salary cap limits upward. The Knicks would have James’ Bird Rights and then could open the Cablevision vault.

Those are big ifs, of course.

If LeBron signs an extension this summer (July 18th is the date he can) with the Cavs, with the salary cap set at $57.7M, by the max contract formula (30 percent) he would get $17.3M in the first year (slightly more than the option year on the current deal) and the total package to stay in Cleveland would bring him a six-year deal worth about $134.9M, with $22.4M per annum.

25 comments on “Economics 2010

  1. David Crockett

    My initial thoughts are that this probably means gridlock for much of the rest of this off-season. Perhaps we will see some relatively dollar neutral trades, but probably not. I’ll be a tad surprised if any of the restricted free agents end up moving, and I won’t be surprised if none sign for anything above the 1 year qualifying offer.

  2. Count Zero

    “Isn’t Isiah teaching Economics 2010 at FIU?”

    LOL – SNAP!!!

    Personally, I don’t think this changes our strategy.

    1) LBJ was never a sure thing — at best it’s 50/50
    2) I’ll take the over on the 2010-11 cap being $52MM
    3) We still need to clear cap, and that still means ditching either Curry or Jeffries or preferably both

    Even if you don’t have the cap to land LBJ, Wade or Bosh, $20MM in cap space is still a good thing. Flexibility opens many doors.

  3. Jafa

    So much for the much touted free agency bonanza of 2010. Looks like teams will be cap constrained, other will probably shed good players or let them walk because they can’t afford to keep them (in an attempt to get under the new cap), players will take less money and shorter deals to play on contenders (if you not going to get big money, might as well take less and play on a team that has a shot and hope that being a member of a team that went to the finals will pay off later – see Turkogul) and parity will disappear in the NBA.

    Actually, parity has already disappeared in the NBA. If you had to answer the question “what teams will be featured in the 2010 East and West conference finals, our responses will not be too dissimilar due to the concentration of talented players on a handful of teams.

    At least we have an owner with deep pockets that doesn’t mind paying the luxury tax, so we should have a leg up (I hope).

  4. Ted Nelson

    It will be interesting to see how this affects the Big 3 2010 FAs (LeBron, Wade, and Bosh). It has to increase the odds of them both signing extensions and exercising their options to wait till 2011, at least somewhat (thereby decreasing the odds of them hitting the open market). I’m not completely familiar with how the max salary works, but I suppose that they can just make a 15% (or something) increase on their previous year’s salary and, therefore, the amount that they can earn won’t be impacted my the lower cap figure… anyone have more insight on that?

    Sign-and-trade might be the Knicks’ best bet at a max FA or two, so I don’t have any problem with keeping two good players in Nate and Lee on reasonable contracts. Having players other teams want signed to contracts at or below market value is another form of cap flexibility.

  5. Frank O.

    Does the fact that the Knicks signed a deal with Douglas and not yet with Hill mean anything?
    Could the Knicks be holding off of Hill to wait to see what Lee does and then perhaps seek to trade Hill if Lee stays?

    It occurred to me…

  6. Ricky_J

    “2) I’ll take the over on the 2010-11 cap being $52MM”

    I’m with Count Zero on this. First, the economy has turned the corner and should continue to improve over the next 11 months. Secondly, this is shaping up to be a really special season with the chasm between good and bad teams increasing, all the interesting storylines etc. I’d like to know what is and isn’t included in “BRI” but all these factors should bode well for attendance, merchandising etc

    Overall I don’t like the Knicks’ odds of landing one of the Big 3, but the actual cap concerns me much less than other factors.

  7. Brian Cronin

    By the way, Lee’s cap hold next season (if he took the Qualifying Offer) is $8.1 million, so the Knicks don’t even get any flexibility, cap-wise, by him signing the QO.

    Just get him signed for roughly $8 million, Donnie!

  8. Brian Cronin

    Also, I agree with the Union when they point out that most of the money the League gets was locked in years ago.

  9. jon abbey

    “the economy has turned the corner and should continue to improve over the next 11 months.”

    this couldn’t be further from the truth, but keep hoping.

    I believe that having the cap room for two maximum deals was never essential. if LeBron and Wade and possibly Bosh want to play together and try to win titles and do it in NYC (as they may or may not have decided in Beijing), then they can each take $8 or $10 million a year to do it. if they win a title in NY, let alone multiple ones, they’ll be set for life and have a good chance of making more money in the end, not that that’s the only important thing.

  10. Jafa

    I’m with you Jon Abbey. The economy has not turned a corner yet, and when it does, most people will not want to make the same mistakes twice – they will save more and spend less on discretionary things like going to see basketball games.

    I’m predicting in 2010 FA stars will be willing to take less money to play on a winning team (ones that are willing to pay the luxury tax to get/maintain talent) as long as they can make back that revenue in endorsements and marketing deals – all boding well for the Knicks.

  11. Ricky_J

    Not to take the “Economy 2010″ theme too literally, but the economy shrank 6% so far this year and it’s forecast to grow by 2% from here on out. There are still a lot of problems out there, but the fact remains that that is a turnaround.

    “People won’t make the same mistakes twice.”
    I agree. My view is that they’ve already made the bulk of corrections in behavior and there’s little evidence to expect a sharp drop from this point.

  12. TDM

    ““the economy has turned the corner and should continue to improve over the next 11 months.”

    this couldn’t be further from the truth, but keep hoping.”

    “I’m with you Jon Abbey. The economy has not turned a corner yet, and when it does, most people will not want to make the same mistakes twice – they will save more and spend less on discretionary things like going to see basketball games.”

    Ditto that. Cash is king. Consumer confidence is in the crapper and not coming back anytime soon. Even Dolan has tightened his purse strings. No athlete wants to become the next Sprewell and turn down a reasonable deal only to end up unemployed. Next off season will be no different than this one.

  13. Brian Cronin

    So, wait, Portland gets Kirk Hinrich just for being a facilitator?

    Not bad!

    Also, McDyess to the Spurs is a great (if low key) pick-up for the Spurs.

  14. Count Zero

    “The economy has not turned a corner yet, and when it does, most people will not want to make the same mistakes twice – they will save more and spend less on discretionary things like going to see basketball games.”

    Ha! Never underestimate the ability of the American public to repeat the same mistakes not twice, but over and over and over. Go-go dot-com era — we got suckered. Go-go housing boom — we got suckered. The pattern will repeat again starting in 2011 and ending in 2014.

    If the majority of the American public had any financial sense whatsoever, lottery tickets wouldn’t sell the way they do. The most casual statistical analysis reveals lotteries as a tax on people who can’t be bothered to do math. And yet, millions of people still keep spending $50 and more per week hoping to hit it big. If they put that money in a bank and collected simple compound interest for 40 years, they wouldn’t need to win the lottery.

    Trust me — the American public has learned nothing from this that they won’t forget as soon as the economy turns around. I’ll bet the farm on that. :-)

  15. cwod

    Hahn’s Twitter mentions that Chris Mullin is rumored to be joining our front office.

  16. Caleb

    I don’t think Stern’s memo is worth the keyboard he used to email it – it’s just a negotiating tactic, to drive down FA salaries this summer and lay down a marker for negotiations next year on the new deal.

    Whether or not the economy has turned around, recessions have never made a significant dent on sports leagues and I don’t see any chance it will cut revenue by 10-15 percent — especially since the TV contracts are already locked in, and attendance was UP this year. Sheesh.

    That said, this is a bad recession and I won’t be shocked to see the cap drop for the first time — but I predict something in the $55-58 million range.

    Of course, if it falls further it would have a big impact on the Knicks and many other teams. But 2010 is still going to be a wild market. For one thing, all the big players will be FAs — Larry Coon is right that no agent will tell his client to wait for the new collective bargaining agreement, i.e. summer 2011. Stern is on the warpath and the next deal could be a tough one for the union. Aside from that, teams have worked so hard to clear cap space that even if the number is $52 million, a lot of teams will have room.

    I did a quick count last week, guessing that the cap would stay flat. Obviously, the list is super-rough, and could also undergo some huge shakeups – but it shows pretty clearly that many teams will have money to spend.

    This list assumes a $58 million cap… but even at $53 million, you’ve got 6 or 7 teams who can make a max offer — and they’re good draws, not Memphis and OKC.

    *>$25 million cap space
    Cleveland
    Miami
    New Jersey

    *$20-25 million cap space
    Chicago
    Houston
    Minnesota

    *$15-20 million cap space
    LA Clippers
    Oklahoma City
    Sacramento
    Utah

    *$10-15 million cap space
    New York
    Atlanta
    Memphis
    Portland (down to @$5m if the Boozer/Thomas/Hinrich deal flies) Toronto

    *0 – $10 million cap space
    Boston
    Detroit
    Milwaukee
    Phoenix
    Washington

    *Capped Out
    Charlotte
    Dallas
    Denver
    Golden State
    Indiana
    LA Lakers
    New Orleans
    Orlando
    Philadelphia
    San Antonio

  17. Ted Nelson

    “I don’t think Stern’s memo is worth the keyboard he used to email it – it’s just a negotiating tactic, to drive down FA salaries this summer and lay down a marker for negotiations next year on the new deal.”

    Agreed.

    Also, while consumer spending is down and unemployment is up, corporate sponsorships may be a big piece of the NBA’s pie. If companies are feeling good about next year they may commit to season tickets and sponsorship deals. I have no idea where the NBA’s revenue comes from proportionally, as far as ticket sales (individuals vs corporate), merchandise, TV, sponsorships, etc… Would be interesting to know.

    “Also, McDyess to the Spurs is a great (if low key) pick-up for the Spurs.”

    Really great summer for the Spurs… I had been wondering if they’d lost it. RJ, Blair plus a couple intriguing guards in the 2nd (Dallas will look pretty bad, and SA amazing once again, if Nando de Colo is better than Rodrigue Beaubois long-term… they both play on the same team and de Colo is the better player, Beaubois the better athlete…), now McDyess…
    Haislip was an intriguing pick-up as well. He played very well in the Spanish ACB league, but didn’t do as well in the Euroleague. Still an exceptional athlete, good first step for a big. Has improved his shot, hitting 41% of 4.8 3s per game in Spain… only 24% is Euroleague. TS% of 63 in Spain, but only 52 in Euroleague. Not a rebounder. Might be destined to be a Euro star or end of the bench NBA guy, but could crack their rotation as a 4th big.
    I heard from a European scout that Tiago Splitter is coming to SA next season… They took him 28th in the 2007 draft, and he’s developed into one of best bigs in Europe since. Was second banana in Tau’s frontcourt to Scola when they drafted him. I’m a big fan and think he’d be great next to Duncan. Not an NBA All-Star, but a guy who knows how the play the game, plays D, moves without the ball and finishes, and improved post game.

  18. BigBlueAL

    Well if the cap is reduced alot next year, so would the luxury tax right??? That would mean more teams over the tax who probably would do whatever they can to stay below it and since the luxury tax is nothing to the Knicks at least that could be to their benefit no????

    Just looking for a silver lining because right now it has been very frustrating, from the draft to the frustration of waiting to see what happens with Lee and Nate to now the supposed lower salary cap number for next season just looking for some positive news….

  19. Caleb

    I don’t think it’s bleak – the Knicks are in okay shape. They’re only one move away from the flexibility to sign one big free agent, and they have until February to pull it off. Meanwhile, the market has really driven down the price on Lee and Robinson. In general, you get the sense that all the FAs will play the market, and many consider NY an attractive destination.

    I think Jordan Hill was the worst news of the summer, but hopefully I’m wrong. A lot of people like him.

    I really hope the Knicks don’t lowball Lee to the point of a mid-level offer. Four years at $30 million, or 5 years at $40 million, would still make him one of the better bargains in the league. There’s no point in pushing your luck to make him even cheaper. Don’t force him to play for the Q offer. Like we saw with Ben Gordon, that creates a lot of bad blood and in 2010 there will be 10 teams who can afford to pay DL — you don’t want to be in that position.

    In January or February, if it really looks like the cap will be in the low 50s… which I seriously doubt… the Knicks can look toward a trade, instead of free agency — we have >$30 million in expiring contracts, plus Curry and Jeffries expiring in 2011, so any team looking to shed a long-term contract will look to Walsh. Right now I don’t see any great options, but I’m sure a few teams will underperform and start looking to dump their long-term deals.

  20. jon abbey

    yay, no multi-year deal for Grant Hill, he’s going back to Phoenix. also, Steve Nash is signing an extension there, so people can stop dreaming about him too, again thankfully. YOUNG PLAYERS, PLEASE!

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