True to his word, Commissioner David Stern has canceled two weeks of the upcoming NBA season (100 games). More than 100 days into the NBA lockout, with no end in sight, fans want to know what is really going on? Why can’t a bunch of millionaire players and billionaire owners reach a common ground and ‘bring the game back to the people that are practically paying their salaries?
The major point of contention has been Basketball Related Income (BRI) which includes all income received by the NBA from purchases of tickets to games, player jerseys and other NBA-related merchandise. Under the old Collective Bargaining Agreement (CBA) the players were receiving 57 percent of this income to the owners’ 43 percent. The owners want a new agreement that splits the BRI 50-50. The players have rejected this offer, but have conceded to a 53-47 split which the owners have balked at. To people not making millions of dollars at their job this looks like millionaires and billionaires acting like babies over 3 percent of income. The 3 percent reportedly amounts to $120 million.
The Collective Bargaining Agreement is the contract between the NBA (the commissioner and the 30 team owners) and the NBA Players Association that dictates the rules of player contracts, trades, revenue distribution, the NBA Draft, and the salary cap, among other things. In June 2005, the NBA’s 1999 CBA expired, meaning the League and the players’ union had to negotiate a new agreement; in light of the fiasco that was the 2004–05 NHL lockout, the two sides quickly came to an agreement, and ratified a new CBA in July 2005. The new agreement expired following the 2010–11 season.
Little changed in terms of the salary cap between the 1999 and 2005 versions of the CBA. In exchange for agreeing to the controversial player age minimum, the players received a slightly higher percentage of the League’s revenues over the course of the new agreement. Additionally, the League’s maximum salary decreased slightly in comparison to the 1999 CBA.
Maximum Individual Contracts under the CBA
The maximum amount of money a player can sign for is contingent on the number of years that player has played and the total of the salary cap. The maximum salary of a player with six or fewer years of experience is either $9,000,000 or 25% of the total salary cap (2010-11: $14,511,000), whichever is greater. For a player with 7–9 years of experience, the maximum is $11,000,000 or 30% of the cap (2010–11: $17,413,200), and for a player with 10+ years of experience, the maximum is $14,000,000 or 35% of the cap (2010-2011: $20,315,400).
Because the NBA’s salary cap is a soft one, the CBA allows for several important scenarios in which a team can sign players even if their payroll exceeds the cap. The exceptions are as follows:
Once a year, teams are allowed to sign a player to a contract equal to the average NBA salary, even if the team is over the salary cap already, or if the signing would put them over the cap. This is known as the Mid-level exception (MLE). The MLE may be used on an individual free agent or split among multiple free agents, and is available to any team that exceeds the salary cap at the beginning of the off-season. The Mid-Level Exception for the 2008–09 NBA season was $5.585 million. The MLE is $5.854 million for the 2009–10 NBA regular season.
Examples include the Toronto Raptors’ acquisition of Jason Kapono during the 2007 off-season, and the Los Angeles Lakers’ signing of Ron Artest in 2009.
The bi-annual exception may be used to sign any free agent to a contract starting at $1.672 million. Like the mid-level exception, the bi-annual exception can also be split among more than one player, and can be used to sign players for up to two years, with raises limited to 8% per year. This exception was referred to as the “$1 million exception” in the 1999 CBA, although it was valued at $1 million for only the first year of the agreement.
An example of the bi-annual exception was the Los Angeles Lakers’ signing of Karl Malone to a contract before the 2003–04 season.
The NBA allows teams to sign their 1st-round draft choices to rookie “scale” contracts even if their payroll exceeds the cap.
Larry Bird exception
Perhaps the most well-known of the NBA’s salary cap exceptions, it is so named because the Boston Celtics were the first team permitted to exceed the salary cap to re-sign one of their own players (in that case, Larry Bird). Free agents who qualify for this exception are called “qualifying veteran free agents” or “Bird Free Agents” in the CBA, and this exception falls under the auspices of the Veteran Free Agent exception. In essence, the Larry Bird exception allows teams to exceed the salary cap to re-sign their own free agents, at an amount up to the maximum salary. To qualify as a Bird free agent, a player must have played three seasons without being waived or changing teams as a free agent. This means a player can obtain “Bird rights” by playing under three one-year contracts, a single contract of at least three years, or any combination thereof. It also means that when a player is traded, his Bird rights are traded with him, and his new team can use the Bird exception to re-sign him. Bird-exception contracts can be up to six years in length.
Early Bird exception
This is the lesser form of the Larry Bird Exception. Free agents who qualify for this exception are called “early qualifying veteran free agents,” and qualify after playing two seasons without being waived or changing teams as a free agent. Using this exception, a team can re-sign its own free agent for either 175% of his salary the previous season, or the NBA’s average salary, whichever is greater. Early Bird contracts must be for at least two seasons, but can last no longer than five seasons. If a team agrees to a trade that would make a player lose his Early Bird Rights, he has the power to veto the trade.
A much-publicized example for this was Devean George, who vetoed his inclusion into a larger trade during the 2007–08 season that would have sent him from the Dallas Mavericks to the New Jersey Nets.
Free Agents who qualify for this exception are called “non-qualifying free agents” in the CBA, meaning they do not qualify under either the Larry Bird Exception or the Early Bird Exception. Under this exception, teams can re-sign a player to a contract beginning at either 120% of his salary for the previous season, or 120% of the league’s minimum salary, whichever amount is higher. Contracts signed under the Non-Bird exception can last up to six years.
Minimum Salary Exception: Teams can sign players for the NBA’s minimum salary even if they are over the cap, for up to two years in length. In the case of two-year contracts, the second-season salary is the minimum salary for that season. The contract may not contain a signing bonus. This exception also allows minimum-salary players to be acquired via trade. There is no limit to the number of players that can be signed or acquired using this exception.
Traded Player Exception:
If a team trades away a player with a higher salary than the player they acquire in return (we’ll call this initial deal “Trade #1”), they receive what is called a Traded Player Exception, also known colloquially as a “Trade Exception”. Teams with a trade exception have up to a year in which they can acquire more salary in other trades (Trade #2, #3, etc.) than they send away, as long as the gulf in salaries for Trade #2, #3, etc. are less than or equal to the difference in salary for Trade #1. This exception is particularly useful when teams trade draft picks straight-up for a player; since draft picks have no salary value, often the only way to get salaries to match is to use a trade exception, which allows trades to be made despite unbalanced salaries. It is also useful to compensate teams for losing free agents as they can do a sign and trade of that free agent to acquire a trade exception that can be used later. Note this exception is for single player trades only, though additional cash and draft picks can be part of the trade.
Disabled Player Exception:
Allows a team that is over the cap to acquire a replacement for a disabled player who will be out for either the remainder of that season (for in-season injuries/deaths) or the next season (if the disability occurs during the off-season). The maximum salary of the replacement player is either 50% of the injured player’s salary, or the average salary, whichever is less. This exception requires an NBA-designated doctor to verify the extent of the injury.
Note that while teams can often use one exception to sign multiple players, they cannot use a combination of exceptions to sign a single player.
Types of free agents
There are two types of free agency under the NBA’s Collective Bargaining Agreement: Unrestricted and Restricted. An unrestricted free agent is free to sign with any team, but a restricted free agent is subject to his current team’s Right of First Refusal, meaning that the player can be signed to an offer sheet by another team, but his current club reserves the right to match the offer and keep the player. An offer sheet is a contract offer of at least 1 year made to a restricted free agent. The player’s current club has 7 days to match the offer or loses the player to the new team. For 1st-round draft picks, restricted free agency is only allowed after a team exercises its option for a fourth year, and the team makes a Qualifying Offer at the Rookie-scale amount after the fourth year is completed. For any other player to be a restricted free agent, he must be at most a three-year NBA veteran, and his team must have made a Qualifying Offer for either 125% of his previous season’s salary or the minimum salary plus $175,000, whichever offer is higher.
Rookie scale salary1st-round draft choices are assigned salaries according to their draft position. The first overall pick receives more than the second pick, the second more than the third, and so on. Each contract is for two years, with a team option for the third and fourth seasons (the previous CBA provided for three year contracts with an option for the fourth season), with built-in raises every year to compensate for increases in the average salary. In 2005, the scale went like this for lottery picks:
Many NBA contracts are structured with options for either the player or the team. An option simply gives the party that controls the option the right to extend their contract for one more season at a salary no less than the prior year’s amount.
When a team is willing to sign an upcoming free agent, but the player’s current team wants something in return, it might be in the best interest of both clubs to execute a sign-and-trade deal. This occurs when one team signs one of its free agents and immediately trades that player to another team. A sign-and-trade is beneficial to both the player and the teams; the player receives a bigger contract than he might ordinarily get from a team that he would like to play for, while the trading club gets something in return for a free agent, and the recipient of the trade gets the player they desire. Sign-and-trades are a reality in the NBA because of the CBA’s rules: unlike baseball, where teams losing free agents are compensated with draft picks or cash, NBA teams that lose free agents receive no compensation.
When a team initiates a sign-and-trade agreement, it must trade the signed player immediately; teams cannot renege on the arrangement and keep the player for themselves, using the other team’s financial situation to leverage the signee into a more favorable deal for themselves. Also, the contract signed before the trade must be for at least 3 years, with the first year guaranteed.
The most recent and infamous execution of this agreement brought LeBron James and Chris Bosh to the Miami Heat.
Trading and the Salary Cap
Teams below the salary cap may trade without regard to salary, as long as they don’t end up more than $100,000 above the cap following a trade.
Teams above the cap (or teams below the cap but would end up more than $100,000 over the cap following a trade) cannot acquire more than 125% plus $100,000 of the salary they trade away. There is no lower limit—teams may divest themselves of as much salary as they wish in a trade.
No free agent signed in the off-season can be traded until December 15 of that year or until three months have passed (whichever comes later), a rule that prevents teams from signing free agents with the intent of using them strictly as trade fodder. For draft picks this moratorium lasts 30 days.
If a team acquires a player in a trade, they are allowed to trade that player straight-up for another individual player immediately. However, if they wish to package that player with another and make a trade, the team must wait 60 days before doing so.
While the soft cap allows teams to exceed the salary cap indefinitely by re-signing their own players using the “Larry Bird” family of exceptions, there are consequences for exceeding the cap by large amounts. A luxury tax payment is required of teams whose payroll exceeds a certain “tax level,” determined by a complicated formula, and teams exceeding it are punished by being forced to pay one dollar to the League for each dollar by which their payroll exceeds the tax level.
While most NBA teams hold contracts valued in excess of the salary cap, few teams have payrolls at luxury tax levels. The tax threshold in 2005–06 was $61.7 million dollars. In 2005–06, the New York Knicks’ payroll was $124 million, putting them $74.5 million above the salary cap, and $62.3 million above the tax line, which Knicks owner James Dolan paid to the league. Tax revenues are normally redistributed evenly among non-tax-paying teams, so there is often a several-million-dollar incentive to owners not to pay the luxury tax.
In the summer of 2005, the new CBA provided an amnesty clause: a one-time opportunity for each team to waive one, and only one, player and avoid having him count against the team’s luxury tax calculation. The amnesty provision only affected the team’s luxury tax status, though. The waiving team must continue to pay the player, his salary continues to count against their salary cap, and all other salary calculations are unaffected. However, the team may not re-sign or re-acquire the player for the length of the terminated contract. In all other respects, the player is treated just like any other waived player.
The amnesty provision was derisively named the Allan Houston Rule (with Houston being symbolic of a free-agent class that was signed to ill-advised maximum contracts before the luxury tax was initiated), but the Knicks chose not to waive Houston under its terms, instead releasing Jerome Williams. Other players who were waived using the amnesty provision included Michael Finley, Brian Grant and Derek Anderson.
The luxury tax level for the 2008–09 season was $71.15 millon. For the 2009–10 season, the luxury tax level is set at $69.92 million. The luxury tax for the 2010–11 NBA season will be $70,307,000.
Similar to baseball, small market teams like Toronto have had trouble keeping superstar talent with the defections of Vince Carter, Tracy McGrady and the aforementioned Chris Bosh for little to nothing in return. David Stern is reportedly taking a hard line with the players union to prevent star players from jumping ship to form “super teams”. There is also a theory that the players will relent to the owner’s demands when they start missing game checks. Conversely, union president Billy Hunter has stated he has prepared his players “for two years for this”.
Buckle up, NBA fans. There is a possibility the entire NBA season can go by the wayside. The last time there was a work stoppage in the ’98-’99 season there was no All-Star game, yet the game recovered. With the 2010-’11 season being one of the best for the league in years will the people be as forgiving?