Blake Murphy Sports Writing

Title: NBA Free Agency Guide: Part 1, Salary Cap Rules
Date: July 1, 2008
Original Source: The On Deck Circle
Synopsis: Attempting to get my Larry Coon on, I previewed the NBA offseason by first explaining some of the more important salary cap rules.

NBA Free Agent Season has officially begun…kind of. July 1 marks the first day that teams can open negotiations with free agents, but no deal can be made official until July 9. Luckily, this gives us fans a little more than a week to salivate over rumors and endless possibilities…or, to try and figure out the salary cap situation surrounding free agency. Today, I aim to give you a primer for the NBA Free Agent period, beginning now with a look at the salary cap rules surrounding the signing of free agents.

In general, the NBA’s salary cap is a soft cap, meaning that there are ways for teams to cross the threshold. This can be done via exceptions, minimums, trades, and owning player rights, all of which will be explained shortly. Keep in mind that any actual cap figures I use are rough estimates, since the league won’t announce the official cap for 2008-09 until the number crunching has ceased on July 9. The cap is usually set at 51% of the league’s Basketball Related Income, and it has increased at a fairly steady rate for the past few seasons, so I’m anticipating a salary cap of $59M with a luxury tax level of $71M, though these may be slightly higher than the announced levels. So, without further ado…

The Salary Cap
Congratulations, you’re one of the 13 teams that are presently below the salary cap threshold! What has your clever financial maneuvering won you this offseason? Sadly, because of so many rules and exceptions, not a whole lot. There is very little to keep teams above the cap from nabbing the marquee free agents, so these 13 teams don’t have a huge bargaining advantage. This goes doubly when you consider that of the 13 teams with cap space, only 9 have more than the expected mid-level exception (about $6M). I’ll get into those details more momentarily, but the basic premise you face being under the cap is this: you have a little extra bargaining power with free agents, but there aren’t many cases where you can offer significantly more money than another team (though you possess the ability to bring in multiple players).

I didn’t know where else to put this, but it made some sense here: A team that is slightly below the cap, such as the Heat this offseason, does not have the benefit of cap space and exceptions – the exceptions are added to their cap total, as if assumed they will be used, and then the team must use them. The team also has the option to renounce their exceptions, though this case would be a rare one. It is a little confusing, but basically you can assume that any team within the Mid-Level Exception ($6M) of the cap is essentially at the cap threshold and will be forced to use exceptions.

Bird Rights and Resigning Your Own Players
There’s actually an incentive written into the Collective Bargaining Agreement to attempt to keep players with their teams for a longer period of time. Foremost, you can go above the cap if re-signing your own players. The first way is via the Larry Bird Exception, where a team may re-sign a player who has been with that team for at least three years to any deal up to the maximum contract. There are also incentives such as the allowable annual raise to be 10.5% instead of 8.5% and that the deal can be a full year longer (6 instead of 5 years), meaning you can offer your own player more money than another team can. This is a great way to keep players with franchises for a long time, with the one problem being that a player’s Bird Rights are traded when he is (and that’s why you see things like sign-and-trades or players traded in the final year of their contracts). There is also the Early Bird Exception, where a player with at least two years of service time with that team can be signed for up to 175% of his previous contract amount or the Mid-Level Exception, whichever is greater. Finally, there is the Non-Bird Exception, where a player can re-sign with his previous team for up to 120% of his last contract amount. All three of these exceptions allow teams to exceed the salary cap and allow them to retain players for six years versus the standard five.

Mid-Level Exception
The Mid-Level Exception is a CBA loophole meant to assist teams from being handcuffed by bad fiscal management in the past. At least, I think that’s what it’s for, since it gives teams the right to spend up to the average league salary (roughly $6M this year) on players in the free agent market. This amount can be given to a single player or split among several free agents. Unfortunately, this exception is only offered to teams above the salary cap, meaning you can’t combine the mid-level exception with cap space to offer a player a monster deal. An added benefit of the MLE is that even if it is used for a multi-year contract (note: the annual raise can be a maximum of 8%), the exception is only officially used in the year the signing is made (for example, the Raptors signed Jason Kapono last offseason with the MLE, but the exception is available to them this year again).

Bi-Annual Minimum Exception
Like the Minimum Exception below, the Bi-Annual may be used once every two years by teams looking to sign players for double the minimum salary. The Bi-Annual is set at $1.91M for this coming season, meaning those teams that didn’t use it last year may use it this year, split between several players or just on one, for contracts up to two years in length. Basically, it’s an added bonus for teams looking to sign players close to but not at the veteran minimum.

Minimum Exception
Teams may sign any number of players at the league’s minimum contract value, for up to two years (the second year also has to be the league minimum contract value). This is so teams are not forced to enter the season short on players (or, if you’re a contending team, so you have a nice cheap way to fill out your roster after spending $60M+ on The Big Three).

Rookie Exception
Teams are always allowed to sign their draft picks (the NBA mandates rookie contracts based on a scale) even if it puts them over the cap.

Traded Player Exception
Salaries don’t have to match exactly in trades; they have to be within 125% +/- $100,000 of each other, meaning teams can take on added salary via trades. Ever hear the term ‘sign-and-trade?’ Well, this is why it gets done, as it allows teams to essentially offer players large contracts while the team losing the player gets some value in return, usually in the form of a trade exception or draft picks (note: the trade exception is a dollar amount that is a bit confusing, but it basically means if you trade a $2M player for a $1M player, you have $1M extra you can receive in a trade later, with that $1M exception moving to the other team. These exceptions do expire, though).

Buy-Outs
While this doesn’t appear to be a major player in the market this year, except for possibly Stephon Marbury and Jamal Tinsley, if a player agrees to a buy-out, the agreed upon buy-out amount counts against the cap, not their original salary. The buy-outs are not league mandated, so a bought out player could reasonably help his old team out in a big way, though I don’t think this is very likely, especially for Tinsley. You gotta make it rain, right?

Luxury Tax
The luxury tax is a level set above the salary cap to further negate teams from overspending. Most teams will try to avoid the luxury tax, since once you cross that line you must pay the league one dollar for every dollar spent, but there are several teams (not just the Knicks) who don’t mind throwing around the extra cash. In fact, 8 teams are already above next year’s anticipated luxury tax line before using any exceptions. This threshold acts as a deterrent for roughly half of the league, but you’ll see some teams come dangerously close and essentially treat this as a ‘hard’ salary cap.

Incentives
Incentives may be built into contracts but they are somewhat rare and their hit against the cap is left to the league’s discretion based on the likelihood of the incentives being achieved.

Maximum Contract
Just thought I’d point out that a maximum contract is the most a team can offer a player on the free agent market. If he’s coming from another team, the deal can be up to 5 years, starting at a league-set maximum based on years of service (roughly $13M or $15M) or 25% of the cap (roughly $14M), whichever is higher, with an 8.5% raise each year. If he’s being re-signed by his previous team, that increases to 6 years with a 10.5% raise each year.

Restricted Free Agents
Like any sport, a player is a restricted free agent if his contract mandates so and he is tendered a qualifying offer from his team. RFA’s are free to negotiate as if they were free agents, but the player’s original team has the right to match any offer and the player is forced to stay there. Players can accept one-year contracts from their teams in hopes of becoming unrestricted free agents the following season.

Hope this helped clear some things up…add any more rules or questions in the comments below!