Now that the Knicks have formally cemented a sign-and-trade agreement with Marcus Camby for Josh Harrellson, Jerome Jordan, Toney Douglas and 2nd round draft picks in 2014 and 2015, the cap picture is coming into focus. In short, the Knicks face significant restrictions, but as a result of the ingenuity of Glen Grunwald and the favorable Jeremy Lin/Steve Novak Early Bird arbitration, the team is in much better shape than Knicks fans had hoped at the end of the playoffs.
A Little History
For the past thirty years, if the Knicks’ salary cap were a painting, it would be Picasso’s Guernica. Horrors abounded and the closer you looked, the more grotesque it became. Red Auerbach twisted the Knicks into a pretzel to prevent them from signing away Kevin McHale, and for the next twenty five years it felt like the Knicks never had any cap space. When Patrick Ewing neared the end of his career, New York traded his expiring contract for a series of bloated deals (Glen Rice and Luc Longley) that put the Knicks on a losing treadmill for a decade. Despite MSG’s vast financial resources, the team could only attract fast-food quality players at four-star restaurant prices: Shandon Anderson, Howard Eisley, Penny Hardaway, Stephon Marbury, Eddy Curry, Stevie Francis and Zach Randolph to name a few. The Knicks compounded those cap-draining moves with ridiculous MLEs: Clarence Weatherspoon, Jerome James and Jared Jeffries (love him at the vet’s minimum, but what a bust on the first go).
Four years ago, under the leadership of Donnie Walsh, the Knicks bit the bullet and finally decided to clean up the cap situation in an effort to have enough cap room to sign LeBron James as a free agent in the summer of 2010. The Knicks gathered Al Harrington, Larry Hughes, and anyone else with a pulse and a contract that expired in 2010. Their hopes rose to a fever pitch when LeBron James elected to announce The Decision just thirty miles from NYC. And after their hopes were cruelly dashed, they consoled themselves with Amar’e Stoudemire.
Getting Carmelo Anthony took more cap room than expected, because the Nuggets insisted that the Knicks take back Chauncey Billups (good player, bad contract) and Renaldo Balkman (returned like a bad penny). After getting eliminated in 2011, New York had to quickly decide whether to exercise a $13 million option on Chauncey Billups. If not, the Knicks would owe him a $3.7 million buyout, which under the 2005 CBA would not leave enough room for a maximum bid. So, just before the lockout, the Knicks extended Billups one more year.
2011-12 Season – Glen Grunwald Gets Creative
After the new CBA was signed, it appeared that the Knicks were consigned to more years of cap room purgatory. The salary cap was reduced, meaning that the max contracts awarded to Stoudemire and Anthony under the old CBA would take up more than 60% of the Knicks’ cap room. With Billups’ $13 million contract, it appeared that the Knicks’ nose would once again press against the window, watching as other teams feasted on free agents. But New York’s front office creatively engineered a sign-and-trade for future 2012 Defensive Player of the Year Tyson Chandler, using the amnesty clause provided by the new CBA to shed Chauncey Billups contract and $3 million from the Dolan’s bank account to move Rony Turiaf.
At the same time, the Knicks made a series of moves that led to major salary cap benefits: Signing Steve Novak off of waivers, signing Jeremy Lin off of waivers and signing J.R. Smith to a $2.3 million contract with a player option for a second year @ $2.5 million. Although the conventional wisdom assumed that the Knicks did not obtain Early Bird rights to resign Novak and Lin by claiming them off of waivers (foolishly accepted as gospel by yours truly), the NBPA won an arbitration finding that the Knicks held Early Bird rights to Lin and Novak. This victory had three important consequences.
- First, the Knicks would be able to spend up to 104.5% of the league average salary ($5.3 million) to resign each of Lin and Novak without utilizing the Mid-Level Exception;
- Second, because the Knicks would not use the Mid-Level Exception to resign Lin or Novak, they would not be subject to the $74 million hard cap imposed on any team that uses the full Mid-Level Exception; and
- Third, because Jeremy Lin was coming off of his second year contract, under the Gilbert Arenas rule, no other team could offer Lin more than $5.0 million per year for the first two years of his contract. If a team wanted to bid more, it would have to back-load the deal with up to $15 million starting in year 3 of the offer.
GM Glen Grunwald made three other shrewd moves at the back end of the roster. He signed Josh Harrellson and Jerome Jordan to two-year minimum contracts, with the second year non-guaranteed. Near the end of the season, when Jared Jeffries was injured, he signed Dan Gadzuric to a two-year veteran’s minimum contact, with the second year non-guaranteed. Because Gadzuric was more than a ten-year veteran, his minimum salary was over $1.3 million (although the Knicks would only have to pay $750k (the second year veteran’s minimum)). As we will see below, the Gadzuric, Jordan and Harrellson contracts provide the Knicks with wiggle room to use trade exceptions to bring in veterans through sign-and-trade transactions at a salary above the veteran’s minimum.
The Current State Of The Knicks Salary Cap
The Knicks must have at least 12, and up to 15, players signed to the active roster. They also must carry Renaldo Balkman’s $1.675 million salary, despite the fact that he was waived last year. (All figures via HoopsHype)
Knicks are well over the $58 million salary cap, the $70 million luxury tax and the $74 million “apron.” Because they are over the salary cap, the Knicks cannot sign a free agent without using an exception to the salary cap: trade exceptions, Bird exceptions, Mid-Level Exceptions and Bi-Annual Exceptions. Because the Knicks are over the luxury tax, they cannot utilize the full $5.0 million Mid-Level Exception or the $2.0 million Bi-Annual Exception. Rather, the Knicks can only use the Taxpayer Mid-Level Exception (the “mini-MLE”) of $3.0 million.
Currently Signed & Staying – $57.1 million
These are the players who are currently signed and who will stay on the salary cap for next year.
|(Renaldo Balkman) – waived||$1,675,000|
In addition, the Knicks signed James White to a one year deal. Although his agent said it was for “just less than” the veteran’s exception of $1.4 million, since he only has 2 years in the league, I believe he could not be signed for more than $864,000.
Will Be Signed As Of July 11 – $19,040,000
These are the five players that the Knicks will sign as soon as the July Moratorium lifts on July 11. Jeremy Lin is signing a 4 year/$28.6 million contract (5/5/9.3/9.3(team option)). Steve Novak is signing a 4 year/$15 million contract (average of $3.75 million). Marcus Camby is signing a 3 year/$13.2 million sign-and-trade with Houston. Grunwald pulled this off by sending Toney Douglas ($2 million – guaranteed), Jerome Jordan ($762k – non-guaranteed) and Josh Harrellson ($762k – non-guaranteed) to Houston along with second round picks in 2015 and 2016. Jason Kidd is signing a 3 year/$9.3 million mini-MLE contract.
Finally, a moment to discuss the return of JR Smith – announced yesterday. He will sign a contract to return for $2.8 million. There is a player option for a second year at $2.9 million, which functions as injury insurance for Smith. Last December, when Smith sought to return from playing in China during the lockout, Grunwald convinced Smith to take a $2.3 million contract with a player option for a second year at a 4.5% raise. Because Smith did not have two years on this contract, the Knicks did not hold Early Bird rights (which would have allowed the Knicks to offer a starting salary of $5.3 million), they could only offer $2.8 million — a 20% raise from last year’s salary. That salary was close enough to the mini-MLE of $3.09 million that Smith did not entertain offers from other teams. It is not clear whether Smith would have considered a full MLE offer (starting at $5.0 million) from another team. It is safe to say that Smith bonded with the Knicks and Coach Woodson.
At the end of this year, the Knicks will hold Early Bird rights to Smith, which would allow them to offer a two – four year contract starting at $5.3 million. Another team still might swoop in with a much bigger offer, so it is uncertain whether Smith will be a Knick after this year.
Hoped For Returnee – $762k against salary cap
The Knicks hope to bring back Jared Jeffries, but have serious limits on what they can pay. Jared Jeffries can only be brought back with either a 20% raise under non-Bird rights (which would bump his salary to $1.4 million) or for the 10+ year veterans minimum of $1.3 million. If Jeffries takes the veteran’s minimum, the Knicks will only pay $762k of his salary (the second year veteran’s minimum) and the NBA will pay the balance. Equally important, the Knicks will only pay tax on the first $762k.
|Jared Jeffries||$1,352,181 ($762k against salary cap)|
One More Slot
The Knicks still need to fill at least one more slot on the active roster. They could bring back Dan Gadzuric at $1.35 million, which is currently non-guaranteed. More likely, they will try to trade for one more player, who can have salary of up to $1.79 million (($1.35 million x 125%) + $100,000). A team looking to drop $1.79 million in salary would take Gadzuric, waive him and not be responsible for any of his salary. For example, the Lakers could rid themselves of $1.1 million owed to Christian Eyenga, and thereby also shed $1.1 million in additional tax liability. The Knicks can also need to sign at up to three veteran’s minimum free agents.
Landry Fields will sign a 3 year/$20 million offer sheet ($5 million/$5 million/$10 million) with Toronto on July 11. The Knicks will have until July 14 to match, but that is unlikely now that JR Smith is staying. Resigning Fields would carry a hefty tax burden ($5 million this year/$12.5 million next year/$25 million in year 3), which would not make sense if Fields is going to be a third string wing player.
TOTAL – Around $79 million
The Taxman Cometh
The NBA has announced the salary cap for the coming year is once again $58 million. The salary cap is set at 50% of Basketball-Related Income (“BRI”). David Stern has broadly hinted that although per game revenues went up this year, because teams only played 66 regular season games (instead of the normal 82), BRI went down. Ordinarily, that would mean that the salary cap would go down, but the new CBA guaranteed that the salary cap would not be reduced this year.
Because the salary cap remains at $58 million, the luxury tax will kick in at $70.4 million. That means teams must pay $1 in tax for every dollar of salary over $70.4 million. So, the Knicks are looking at approximately $9 million in taxes.
After this year, the luxury tax becomes much more punitive. It will be a graduated rate starting at 150%. Once a team is more than $5 million over the tax threshold, the marginal tax rate moves up to 175%. Once a team is more than $10 million over the tax threshold, the marginal tax rate moves up to 250%. So, if the Knicks were $15 million over the tax threshold next year, they would pay $28.75 million in luxury tax.
Starting in 2014-15, there is an even more punitive “repeater” tax scale. It applies to teams that exceed the tax threshold for four years in a row in 2014-15. Because the Knicks did not exceed the tax threshold last year, they cannot be “repeater” taxpayers in 2014-15. But after 2014-15, any team that pays tax in four out of five years (and the Knicks almost certainly will in 2015-16 if they keep Carmelo, STAT, TC and Lin) must pay the repeater tax. The repeater tax rate starts at 250% (100% higher than the ordinary tax rate) and remains 100% above the ordinary tax level in all brackets. So, if the Knicks were to exceed the tax threshold by $15 million in 2015-16, they would pay $43.75 million in luxury tax.
Other than taking a big chunk of Jim Dolan’s money, the luxury tax will provide a strong incentive for less flush teams to stay below the tax threshold. Only teams that do not pay tax are eligible to receive tax payments from the league. The NBA will distribute 50% of tax revenues to non-taxpayers. (The other 50% will be used in revenue sharing). If the Knicks and Lakers each pay $45 million in luxury tax in 2015-16, each of the other 28 teams would forfeit at least $1.5 million in tax distributions if they exceed the tax threshold by even one dollar. For close-to-the-bone teams like Milwaukee, Utah, New Orleans, Phoenix and Sacramento, the tax threshold will pretty much function as a hard cap.
If you liked last year’s roster, you will love the Knicks for the next three years. Glen Grunwald has figured out a way to keep last year’s team together, plus add Kidd and Camby. But for the next three years, the Knicks will be limited to their current roster, plus one mini-MLE player per year.