In last month's NBA draft, the Clippers waited, and waited... and waited some more, before paying a reported $600,000 fee to acquire the rights to the 56th overall pick, selecting Branden Dawson from Michigan State. Since then, Dawson's put together an impressive summer league portfolio But, for just a few minutes, let's look past the basketball side of the deal and consider the financial ramifications.
Each team is given a certain amount of money per season to use as trade bait. For the 2014-15 season, which technically didn't end for a few days after the draft, each team was allowed $3,300,000. The Clippers utilized $300,000 of this money in the Jared Cunningham trade mid-season, leaving them with an even 3 million going into the draft, which they were considered highly likely to use in order to buy into the second round.
Just as rumored, buying into the second round was exactly the move the Clippers made. Steve Perrin and I had the following exchange on twitter at around the time of the 50th pick:
Steve: "There's a point at which it makes no sense to buy into the draft. If there are 10 guys left you like, some will go undrafted anyway."
Me: "At the same time, the money is use it or lose it, and they can guarantee the rights to a guy instead of fighting in FA."
Steve: "It's only use it or lose it if it's not your money. I know Ballmer's got plenty, but throwing $1M at a guy with no chance?"
Me: "Don't buy it just to buy it, but if they really like a guy, it's worth it to guarantee his rights."
Both of our basic arguments were sound. Steve's point was that if the Clippers weren't going to get a guy who was good enough to make the team, it was throwing away money, and even if using that money wouldn't hurt the team cap-wise, it still comes out of Steve Ballmer's pocket. My point was that if the Clippers had let a guy that they liked go undrafted instead of securing his rights, he then possesses the power to sign with any team he sees fit, and some teams could be willing to give a larger salary or more guaranteed money.
However, the Clippers front office managed this minor deal as majestically as possible, managing to secure the best of both worlds. Not only did they get their guy (and forget the debate about whether they should have preferred another prospect for the sake of this argument), but, believe it or not, they made money on the trade.
How, you ask? Well, Dawson signed for the rookie minimum as his starting salary, meaning his cap hit will be $525,093 for the 2015-2016 season. The cap hit for a veteran's minimum player, whoever it was that would have been signed in that roster spot, would have been $947,276. The difference between the two is an initial savings of $422,183--still ending with a net cost for the Clippers of $177,817. However, this season is almost sure to see the Clippers as taxpayers, and this comes with additional penalties.
The luxury tax takes effect in tiers: every $5 million over the tax line comes with a higher penalty. For the first $4,999,999 over the tax, the team is charged $1.50 for every $1. For the next $5,000,000, the penalty is $1.75 for every $1. The penalties continue to go up with every additional $5,000,000, to $2.50 per $1, then to $3.25 per $1, and thereafter increasing by $.50 per dollar for every additional $5 million.
I currently expect the Clippers to end up over $10 million over the tax line for a 14-man roster, including Dawson. However, by either waiving the non-guaranteed contract Jordan Hamilton the team could move their roster down to 13 players total, which is the league minimum. This would leave them with 13 players at $10.8 million over the tax line, meaning they'd pay $1.50 per $1.00 for the first $4,999,999 over ($7,4999,998.50), $1.75 per $1.00 for the next $5,000,000 over ($8,750,000), and $2.50 for the last approximate $800,000 ($2,000,000). That gives Ballmer a total tax penalty bill of about $18,250,000... phew.
However, if the Clippers had opted not to trade into the draft, and signed a veteran's minimum player in Dawson's roster spot, they would have had $600,000 more in-pocket, but lost significant money. At that $2.50 per $1.00 rate, that $422,183 is an additional $1,055,457.50 that would be tacked on to the Clippers' tax bill. Add that to the actual difference in salary, and the Clippers saved $1,477,640.50 by paying a rookie instead of a veteran. That's right--the Clippers made money on this trade.
This math would be true for any rookie player signing for the minimum, even if the Clippers hadn't spent the money to buy a draft pick. However, by buying in, the team was able to ensure they gave a player they liked their 13th roster spot, instead of carrying a non-player on their roster had they picked up a random undrafted free agent to grab these savings. That $600,000 fee that the Clippers front office paid to ensure that they got their guy? Well, the almost $1.5 million of savings for Ballmer makes that much, much easier to write off.