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Summer Salary Cap Mailbag #2: Back to the Basics

This week’s questions have to do with laying the groundwork, rather than exploring potential summer scenarios.

NBA: NBA Draft Brad Penner-USA TODAY Sports

Welcome back to our summer salary cap mailbag series. Our first mailbag was pretty popular, so thank you all for participating with wonderful questions and insightful comments. As we ramp up towards free agency opening the afternoon of Sunday, June 30th, we’re really in the peak time of year to discuss these cap issues, so I’ll likely do one or two more next week, and possibly continue the series into July as we react to the moves made around the league rather than just speculate about them.

For this edition of the mailbag, I opted for some questions that more lay the groundwork for how some salary cap and free agency stuff works. Then, we can build to more specific questions that are grounded in the context of this summer as the series progresses.

If you have any questions, comment below! And keep an eye out for a tweet soliciting questions for the next mailbag.

Roberto Contreras: Best resource to learn to do trade and salary math in general?

Lucas: If we’re gonna go basic, let’s go real basic. This is a great question to get us started.

The unfortunate truth is that the NBA’s collective bargaining agreement is prohibitively complicated. The copy that I have, which I believe is the most up-to-date, is 600 pages long, and the entire thing is written in that very formal and confusing legal writing style where you have to read every sentence 10 times before you’re sure you’re following what’s going on. The truth is that for a deep understanding of the cap, you need the CBA. I think you should be able to find a PDF of it if you do enough googling.

Luckily, there isn’t tremendous need for casual fans to look at the CBA itself. I probably only have to reference it a handful of times a year, and I spend my time sitting around writing columns like this one. For a much more casual (but still long and dense!) reference, most people I know will use Larry Coon’s CBA FAQ. Coon is my first stop, normally when I need a hint for something I don’t remember, and I use his FAQ frequently. For example, when thinking about the Clippers’ options at the room exception this summer, I quickly checked his guide to confirm that it can only be used to offer two-year deals, unlike the taxpayer MLE (3 years) and the full MLE (4 years).

Coon is really the only resource I regularly go to when I need to check the rules or remember how something works. For salary information, the two best resources in my opinion are Eric Pincus’ cap sheets at Basketball Insiders and Jeff Seigel’s cap sheets at Early Bird Rights. I use Basketball Insiders more frequently, mostly out of habit because I have been using Pincus’ cap sheets since before he was even at Basketball Insiders and well before I became aware of Early Bird Rights. That is generally the best source of information for all the little details, like how much of a partially guaranteed contract becomes guaranteed on what date, or when a trade exception expires, or how much cash a team has left to trade in a given year. I will say that between the two, Basketball Insiders is normally slower to update after moves are made. I think that Jeff has some really advanced stuff going on on the back-end, and he’s also just generally extremely on top of stuff. During busy times, his sheets can be updated within minutes of a deal breaking, giving you a really good starting point for figuring out what the next steps might be. Basketball Insiders gives you a very accurate picture of where teams sit going into free agency, but normally will wait to update until mid-July when the dust has settled. For example, Early Bird Rights already has Mfiondu Kabengele’s rookie scale deal included in the Clippers’ cap sheet, while Basketball Insiders does not.

Of all of these sites, the one that I still use most often is Mark Deeks’ ShamSports. ShamSports was the original salary database I used, but it went inactive in recent years as others (like Eric and Jeff) started doing similar work. Recently, though, it’s been back with a vengeance, launching a new tool called The Capulator, which is in my view the most comprehensive and useful salary cap tool available to the public by a mile. I don’t think I’ve used an excel spreadsheet to work through scenarios since it came out. I will advise, though, that I think the Capulator might be more useful the more you know about the cap going in—it might be tougher to navigate for folks who don’t fully grasp the basics, and it has some blind spots (for example, it doesn’t check salary-matching trade math, so you have to know that your trade works going in).

Mackenzie Powers: Is the trade for Kabengele already finalized for cap account purposes? If it isn’t, is there any benefit to delaying completion of the trade to do other signings first?

Lucas: The Clippers’ acquisition of Kabengele is already complete and has been announced by the team, so his cap hold is already on the team’s books. However, there could have been some value if the team had been able to hold off on doing the deal—maybe an extra million or so in salary cap wiggle room.

The truth is, though, that such a move wouldn’t have been very practical for the Clippers or their trade partner, the Nets. Such a delay would have likely meant Kabengele missing or arriving late to Summer League (not a travesty, to be sure, but an inconvenience). But for the Nets, the entire point of moving this late first-round pick was to clear that extra ~$1M (the difference between Kabengele’s hold and an empty roster charge), so for them to hold on to him in their cap space while the Clippers used their own would have sort of defeated the purpose from their perspective.

There’s probably some fantastical timeline you could construct in which the Clippers sign all their guys while the Nets make handshake deals, and then the Nets trade Kabengele to the Clippers and sign their last guy once he’s off the books. But in reality, that would be far too messy for these teams to manage during what should be an extremely hectic first week of July for both franchises.

Mike: Did the Lakers really miss cap details in their trade for AD?

Lucas: As much as I love to dunk on the Lakers (and oh boy do I), the answer here is probably not. The Lakers got pretty fortunate on lottery night and ended up with the #4 overall pick. It is almost universally true that draft picks have more trade value before they turn into a player—with a pick, you can choose who you want or do any number of trades. Once you’ve got a prospect, the possibilities are much more limited. The Lakers have reportedly gotten indications that they aren’t really being considered by any of this summer’s biggest free agent names. The pressure was on to get Anthony Davis, and the #4 pick was the Lakers’ best bet.

First-round rookies have cap holds that eat into their teams’ cap space, but until they sign their contract, they don’t have any outgoing salary for trade purposes. Once they sign their contract, they can’t be traded for 30 days. In order for the Lakers to acquire Anthony Davis using salary-matching, they need that pick’s salary to be part of their outgoing money.

But it just wasn’t possible from a logistic perspective, similar to what I just went through on the Nets and Kabengele, though of course on a larger scale. The trade has to be agreed to before the draft, so the Pelicans have access to the pick as an asset rather than just getting whoever the Lakers select. That means that, if you’re waiting until July 30th, both teams need to go through their entire July free agency with many of their subsequent signings and trades being handshake deals that couldn’t be officially completed until after this trade. Consider that the Pelicans didn’t actually want to use the 4th pick, but rather wanted to flip it (and they did, packaging it with Solomon Hill, pick 57, and a future 2nd to Atlanta for picks 8, 17, and 35). Now you’ve got two top-10 picks missing Summer League and three NBA franchises waiting in limbo during the busiest month of the season.

I said that with Kabengele there is some hypothetical timeline you could construct where it works out, but reality is too messy for it to be feasible. This is like that, but exponentially more complicated because we’re dealing with a third team, a bunch of extra players, significantly bigger money, and a significantly longer delay before the deal would be finalized.

So did the Lakers get the best outcome? No. But I don’t think the best outcome was actually logistically possible given the need for the Pelicans to have the pick as a trade-able asset going into draft day. The Lakers wanted Davis, and they got him. Sacrificing what amounts to about 4M in extra cap space to ensure that you have him in hand is worth it.

Tizme: Do you think we have assets that might interest Toronto in a sign and trade to give Kawhi the extra year?

Lucas: I’d say that a sign-and-trade for Leonard is extremely unlikely. The first reason is that the question includes a false premise—Kawhi can not get an extra year on his deal if Toronto signs-and-trades him. While that was once the case, the CBA now only allows players to get in a sign and trade what their new team would be able to give them in free agency, meaning that the only way Kawhi can get 8% raises and a 5th year on his contract are if he chooses to stay with the Raptors. If the Clippers sign him, those numbers are 5% and 4, and he’d be limited to that in a sign-and-trade as well.

Still, there’s some reason for the Clippers to pursue a sign-and-trade, even if they can’t give Kawhi extra money that way. Think about why it would be better for the Lakers to add Anthony Davis at the end of the summer rather than the beginning—instead of absorbing him into cap room, they would be using the league’s salary matching rules to exceed the cap when acquiring him. For trades this big (there’s more flexibility for smaller trades), teams can take back 125% of what they send out, plus $100,000. So, in theory, the Clippers could make a handshake deal with Kawhi and the Raptors, quickly use up their remaining cap space, and then send out $27M while bringing in Kawhi’s new 32.7M salary—going over the cap by about $5M. That’s $5M more to add help than you would have had if you’d just signed Kawhi directly into space.

The problem is that you have to come up with that 27M to send out, and it has to be stuff the Raptors want. For the Clippers, that means Gallinari and Jerome Robinson have to leave—but do the Raptors want either of those guys? Maybe those salaries get sent to a third team so Toronto doesn’t have to absorb them, but that means finding a third team that wants to play ball and likely compensating them for doing so (and you’d have next-to-no leverage since it’s quite apparent to other teams that you need this trade to get Kawhi), as well as compensating Toronto for helping to facilitate the deal.

We already have some pretty major questions about if the Clippers will be able to find a quality Gallinari replacement should they choose to trade him and use that money in free agency this summer instead. I’m not sure an extra $5M in that endeavor does anything but give you the opportunity to overpay guys who are probably worse than him—and it would probably cost you Robinson and future draft picks.

John Raffo: Can you give definitions of the salary cap line, the apron, and the threshold? Can you illuminate when the repeater tax is triggered? Where do the Clips stand right now regarding the repeater tax? How is the repeater tax calculated and what does it have to do with the threshold or the apron? Not a Clips question but how on earth are the Thunder in salary cap hell, they have two max players and a bunch of okay guys?

Lucas: Okay, I had to pare this down quite a bit, but I think I still got to the core of the original questions. Let’s start at the end: OKC is in salary cap hell because they signed guys to dumb contracts. We remember how hard it was for the Clippers to build a team around two max guys in Chris Paul and Blake Griffin—and they were on 30% and 25% maxes. Westbrook and George are on 35% and 30%, respectively. Both of those deals are obviously defensible given those guys’ talent. But if you’re gonna have two-thirds of the cap tied up in two superstars, you need big-time bargains on the roster.

Instead, OKC is paying Steven Adams 26M next year. Dennis Schroeder will make 15.5M to be the backup point guard. Andre Roberson, a shooting guard who can’t hit a shot, will make 10.7M. Jerami Grant at 9.3M is probably their only good value outside of the young guys and minimum-salary deals. And the failed Patrick Patterson experiment is still taking $5.7M of their cap next year for a guy who isn’t really rotation-caliber. Their situation is sort of like Portland’s—you can debate whether or not Damian Lillard and C.J. McCollum are a good enough two-max tandem to win a ring (or if it’s wise to max two 6’3” guys on the same team), but the real problem is that when they had chances to add help, they gave eight-figure annual salaries to Evan Turner, Meyers Leonard, and Maurice Harkless.

With that out of the way, let’s start with the requested definitions. I’ll use my own words here so forgive me if they aren’t technically correct (I’d refer back to the CBA FAQ that’s linked above for more formal definitions), but hopefully they’ll be digestable.

Salary Cap: The Salary Cap is the number that teams can spend up to while they build their teams. This year, the NBA has projected that the salary cap will be $109,000,000. However, the NBA notably (infamously?) has a “soft” cap, which means there’s ways to get past that $109M marker using any number of “exceptions,” such as the mid-level exception, bird rights, the rookie exception, or salary matching in trades. When you’re under the cap, you can basically go wild and do whatever you want, throwing money at players from all around the league. When you’re over the cap, you are mostly limited to re-signing your own players, signing your draft picks, making trades, and targeting outside free agents under very limited circumstances.

The Luxury Tax Threshold: So, there’s a bunch of ways to get above the salary cap, like we just talked about. Some of them, like signing a rookie to his scale contract or adding a minimum-salary free agent, don’t add very much money to the books. But bird rights can often cause team salary to skyrocket. For example, Milwaukee has Khris Middleton’s bird rights for $19.5M and Malcolm Brogdon’s bird rights for $1.9M. Middleton will likely get a maximum-salary deal worth $32.7M, while Brogdon could easily get paid in the $12-15M range. Just with those two players, Milwaukee could end up exceeding the cap by $25 million.

The Luxury Tax is way of keeping these teams in check. Along with the cap, it’s set based on the league’s revenue. This year, the luxury tax threshold is $132M. In future years, for every dollar the cap increases, the tax threshold will go up about $1.30.

When a team’s salary surpasses the luxury tax threshold, they have to pay penalties—a tax—to the league. Some of that money can be split among the non-taxpaying teams as a form of revenue sharing. The luxury tax is incremental, so while you pay $1.50 for every $1 you go over the threshold for the first $5M, the rate on the next 5 million is $1.75, etc., etc. For the 2017-18 season, the Cavaliers had a $136M payroll plus over $50M in tax payments. Expensive rosters become exponentially more expensive on the wrong side of the threshold.

The Repeater Tax: So, just as the luxury tax is meant to discourage teams from spending too much money, the repeater tax is an additional measure meant to discourage teams from repeatedly spending too much money. If a team has been in the tax for three of the last four seasons, they are repeater-tax eligible. As I mentioned above, the luxury tax is incremental. “Repeater status” just means that each of the increments is a dollar more expensive. So, instead of the first $5M costing you $1.50 for every dollar you go over, it costs you $2.50.

A team that is $20M over the luxury tax threshold will pay $45M in taxes. A repeater-eligible team that is $20M over the luxury tax threshold will pay $65M in taxes. To sneak in the answer to your Clippers question, they were taxpayers in 2016 and 17 but not in 18 or 19, so they are not repeater-eligible this year. I would also project that they are incredibly unlikely to be a tax team this season, given the amount of cap space they plan on using, meaning that they’d be clear of any lingering repeater implications from the Lob City era going forward. I’ll note that it’s sort of unclear how important the repeater tax should be to NBA fans—being over the tax can limit the team’s roster flexibility (see the apron description below), but the rate that a team is paying really only impacts the owner’s checkbook.

The Apron: The apron is a much, much more obscure feature than the salary cap or luxury tax. I mentioned above that the NBA has a “soft cap” of $109M, but that teams can exceed it a bunch of different ways. Hypothetically, an NBA owner could legally give every single bird rights free agent a max contract, provided he could pay like a billion-dollar luxury tax bill. It’s not financially feasible, but it’s legal.

Approximately 6M above the luxury tax threshold, the Apron functions as an optional “hard cap” for teams. Nobody wants to be hard capped, but the league puts a ceiling on how high teams can spend if they want to acquire players using certain types of transactions. So, you may have heard of the mid-level exception, or MLE. That’s shorthand for “non-taxpayer mid-level exception.” As an additional punishment, taxpaying teams do not have access to that “full” mid-level exception. Instead, they get the smaller “taxpayer mid-level exception,” which this year is the difference between a four-year, $40M deal and a three-year, $18M deal.

The way that the league enforces this is that any team who uses the non-taxpayer MLE is subsequently hard-capped at the apron for that year. They can still become taxpayers as they fill out their roster, but only by a few million. If a mid-season trade offer comes along that involves them taking on additional salary, they may have to turn it down because of that hard cap.

There are three other kinds of moves that set the apron as a team’s hard cap: having another team sign-and-trade a player to you, using the bi-annual exception, or retaining a restricted free agent whose bird rights you do not possess using the Gilbert Arenas provision.

John Raffo: Can you explain cap holds one more time? I find the logic elusive.

Lucas: I’ll spare the devoted readers who have made it this far the fully detailed explanation and just provide the gist: since teams are able to exceed the soft cap to sign their own free agents, there is the potential for a loophole where teams just sign their own guys last.

So the Warriors, with Durant and Thompson both entering free agency this summer, could have $20M in cap room to go get whoever they want, and then exceed the soft cap to keep those two guys. Obviously, that’s extremely unfair. So when one of your own players’ contracts expires, you keep a “cap hold” for them on your books in exchange for retaining their bird rights. If you want the room, you can renounce the bird rights and get rid of the hold—but then you would have to find a way sign them the same as any other free agent (leftover cap room or a free agent exception).

Cap holds are set as a percentage of the player’s salary from the prior season. The percentage applied can vary drastically depending on the player’s situation.

Sometimes, this can work to a team’s advantage. For example, Patrick Beverley’s cap hold is $9.5, but he is likely to make more than that this summer. The Clippers could keep his $9.5M hold on the books, use up the rest of their cap space, and then sign him last to a deal worth more than that, effectively increasing their cap space.

A player like JaMychal Green, however, presents problems. His $15M cap hold should be well over what any team will give him on the market this summer. The Clippers could renounce him and re-sign him with cap room, but losing his bird rights would mean only being able to give him 5% raises instead of 8%. Another option would be to sign him using his bird rights before pursuing other free agents. If Green signed a deal for 8M, that smaller number would replace his 15M hold, opening up additional space for the Clippers without them having to renounce him.

Okay, that was a mouthful, but I’m glad we did it. It was fun, right guys?

... guys?

Leave your questions for the next summer salary cap mailbag in the comments. I’ll peruse and pick some out for another mailbag sometime next week. And I promise that after this one, we’re going to get back into stuff that is more concretely grounded in the potential upcoming events this off-season.