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NBA’s Construct Promotes Pat Riley’s Vision

November 26th, 2011 Leave a comment Go to comments

It took a 15-hour session pitched between the NBA and player representatives in New York that spilled over from Friday into early Saturday morning. It took nearly half a year, from pre-draft negotiations in early summer spread nearly into the precipice of a chilly East Coast winter. But it’s over. The NBA and its players have come to a tentative agreement, and the NBA lockout is over.

The NBA was taking direct aim at the Miami Heat when it issued, if you believe Commissioner David Stern’s stern ultimatum, its final collective bargaining agreement proposal. Michael Jordan and his roving gang of hard-line scallywags were trying their damndest to force Pat Riley to break apart his creation.

In an ironic twist of fate, though, the agreement that was struck not only fails to prevent such a construct in the future, it actually encourages it.

The tentative deal makes it expensive – prohibitively expensive – for teams to spend beyond the tax threshold. It also forces certain teams that use certain exceptions to stop spending entirely, under any circumstances. It’s essentially a hard salary cap in disguise. Ah, the financial parity!

But this isn’t the NFL. There aren’t 53 guys on an active roster. There aren’t 26 different positions to consider. There are as few as 13 guys, playing five positions. True, game-changing talent is sparse. Each one has an enormous impact.

Think for a moment about what could happen under such a construct.

If, for example, every team in the league were given exactly $60 million to spend, how would you spend it? Would you give 13 mid-level talent guys mid-level money? Or would you give three maximum talent guys maximum contracts and fill out the roster with throw-ins?

The Heat is proving out a new construct for success in today’s NBA. Grab a legitimate grouping of three superstars and all else you need is a cast of marginally-talented three-point-shooting throw-ins to let them maneuver in space, some of whom occasionally play a little defense, and you’ve got yourself a legitimate title contender. Teams have a very healthy fear of the Heat, and a realistic understanding of how difficult it is to beat them four times in seven games. They seem to get how little a non-star player really affects those odds.

Of course, the joining of forces of three game-changing talents is an exceedingly rare thing. It requires not only the desire of three such players, but also the foresight of a team to clear enough salary to even make it possible. It might happen but once a decade… or not at all.

The point, however, is that it is possible – even more possible under the current deal than it was under the last collectively bargained deal. 

Under both systems, the maximum contract of a player with 7-9 years of experience is less than one-third of the salary cap (30% of the adjusted cap, or roughly 28% of the salary cap we commonly refer to). Three can fit quite comfortably, and with room to spare.

The Miami Heat took advantage of this fact. Riley spent several infuriating years clearing as much cap space as possible for the summer of 2010 in an effort to sign three game-changing talents. He took a huge risk. If Chris Bosh elects to pair up with LeBron James in Cleveland, Dwyane Wade likely bolts for Chicago and your Miami Heat become the doorstop of the league for the next decade. But he didn’t.

Two things, both of which would no longer exist under the current deal, will kill the Heat in future seasons: (i) the players’ baseline salaries won’t adhere to the new, lower salary cap and (ii) the annual raises of those contracts won’t adhere to the new, lower max raises and will therefore rise disproportionately to salary cap growth.

The first is a non-issue for a team emulating the strategy. If the salary cap gets slashed, the value of maximum contracts will get slashed proportionally.

The second is strongly mitigated. The contracts of James, Wade and Bosh each call for 10.5% annual raises; the contracts of Mike Miller and Udonis Haslem call for 8% annual raises. That’s quite hefty when you consider that league-wide revenues grew at a much more tempered 4% over the past six years.

In the current agreement, annual raises are limited to 7.5% for a team’s own free agent, and just 4.5% otherwise. League-wide revenues are projected to grow at a compounded annual rate of at least 4.5% over the next decade, and that excludes the potential huge growth from new national TV deals six years in. So… not only can a team theoretically fit three max contract free agents under the salary cap, their contracts could actually decrease relative to the rise in the salary cap in future seasons.

Here’s a pdf copy of the tentative deal. And below is what it means mathematically (it contains various assumptions, which are footnoted appropriately, but the results match all publicly-disclosed future values provided by the league):

Tentative_Deal_Summary

Let’s build a hypothetical roster to prove out how the league’s parity-driven proposal actually does anything but.

We’ll start with a Year 3 model because the sides have agreed to a gradual shift toward the new revenue approach, with 2011-12 and 2012-13 to include some facets of the previous collective bargaining agreement.

The salary cap, from above, would be $60.1 million in 2013-14.

Three max contracts for players with Dwyane Wade’s tenure would cost $50.6 million. Nine temporary roster charges would eat up another $4.4 million, leaving $5.1 million for a fourth supposed starter. The rest would need to be some combination of minimum contract players and second round draft picks (much like the Heat of today).

But wait. Since the roster was constructed with cap space, this hypothetical team would have access to a new exception created for just these scenarios. The exception allows a team using room to thereafter sign one or more free agents to a contract with a total first year salary of up to $2.5 million (growing 3% annually) and up to two years in length.

This hypothetical team will now exceed the salary cap (again, much like the Heat of today). But it will remain so far below the luxury tax threshold that it would be eligible to exercise the full-midlevel exception in future seasons. And not just once. Every season thereafter. That’s huge!

Here’s a look at how the roster could evolve over time under the current tentative agreement:

That’s three max contract players, one full mid-level talent, one not quite mid-level talent, and the rest minimum contract players for 2013-14… basically the Miami Heat of today. By 2016-17, though, it’s three max contract players, three full mid-level talents, one barely below full mid-level talent, and the rest minimum contract players. That’s a veritable dynasty.

And here’s the kicker. This hypothetical team would not incur a single luxury tax bill. Ever. Instead, the hypothetical owner of this hypothetical dynasty could sit back, relax, and collect the proceeds of other teams’ tax bills as they incur massive penalties in a desperate attempt to compete.

So you see, the current deal doesn’t discourage the formation of super-teams. It incentives teams to do it!

It basically says, “Go build your tri-headed dynasty. Because nobody else can be the Dallas Mavericks of this past season. Nobody else can spend such a ridiculous sum of money to create enough depth to put up a fight against your team, which has a total salary barely above the salary cap.”

And if you thought a tri-headed dynasty was too easy to achieve now, imagine it in a world where contract lengths are shorter and crippling cap-eaters can be amnestied (for existing contracts) or “stretched” (for new contracts) away.

Oops!

The deal does, however, unilaterally crush existing powerhouses like the much-maligned Heat for having built their empires under the auspices of an agreement that was more economically favorable. But it does nothing to prevent them from forming in the future. Oh, the hypocrisy of it all.

The league would be vulnerable to, say, Chris Paul, Blake Griffin, and Dwight Howard joining forces in L.A. in 2012 if they so chose. Imagine how ridiculous that would be. Or how ridiculously flawed. Two legitimate superstars with nearly identical playing styles? Sounds familiar.

The Clippers currently have just two players with guaranteed contracts alongside Griffin through the 2012-13 season (Mo Williams and Ryan Gomes). One could be amnestied if billionaire owner Donald Sterling so chose. That would provide enough cap space to sign both Howard and Paul to max contracts, work out a reasonable long-term deal with then restricted free agent Eric Gordon, and still keep current rookie Al-Farouq Aminu. The Clips would then be in position to use the full mid-level exception on a free agent of its choosing and use Griffin’s Bird rights to re-sign him to a max contract the following season, when Griffin’s rookie scale deal expires.

That’s starters Chris Paul, Eric Gordon, Al Farouq Aminu, Blake Griffin, and Dwight Howard all under contract as early as 2012… another full mid-level exception player in 2013… AND this construct would still be nowhere near the luxury tax line.

Improbable? Absolutely. But that’s not the point. Every possible dynasty is improbable. The point is that it’s possible.

Parity is a nice thought. But the concept is a bit naive. Certain teams will always have an advantage.

States with no income tax have an advantage over states that do. States near water have an advantage over states that are landlocked. The city of Angels has the Hollywood intrigue. The city of Apples has an energy unlike any other.

It is a stupid goal anyway. The league is at its most popular when there is specifically not parity.

The vilified Miami Heat of 2010-11 proved that. The nation was far more intrigued hating LeBron James than it ever was watching the revered version of the same man trying to make a go of it with a cast of throw-ins.

The NBA has always been a league of dynasties, with few teams able to break through and challenge the hegemony of the dominant franchises.

Consider the past.

1950-1960: Minneapolis Lakers, 4 titles
1960-1970: Boston Celtics, 9 titles
1980-1990: L.A. Lakers, 5 titles; Boston Celtics 3 titles; Detroit Pistons, 2 titles
1990-2000: Chicago Bulls, 6 titles; Houston Rockets, 2 titles
2000-2010: L.A. Lakers, 5 titles; San Antonio Spurs, 3 titles

You’ll notice the 1970-1980 decade is missing. That was the only period in league history that can truly be considered democratic. Eight different teams won championships: the Celtics, Knicks, Bucks, Lakers, Warriors, Blazers, Bullets and Sonics. That would seem to be the kind of parity the league is now seeking.

The league was never less popular in its history than that period. The league was so unpopular at the time that its Finals games had to be shown on tape delay. In the most egalitarian 10-year stretch in league history, no one watched on television, and people hated the on-court product.

David Stern scored a major victory in these negotiations.

He had been bracing for this fight for two long years. He wanted to clean Billy Hunter’s clock. He set himself up to win big, and he did. He forced the players to swallow a 50-50 deal. That’s a $343 million per year giveback over ten years.

When you are up $3.4 billion, you take your chips off the table, grab a beer, and celebrate. You celebrate because you know that the owners you represent are going to become filthy, stinking rich in the next decade. And it’s not just the $3.4 billion in cost savings. It’s the exploding revenues amidst the soaring popularity of the sport. The national TV rights deals with ESPN/ABC and TNT that you screwed up in 2007 could nearly double in size, from their current $930 billion baseline, when they are re-negotiated in 2016. The Lakers just struck the largest ever local TV rights deal with Time Warner Cable; 20-years, $3 billion. The Knicks just struck the largest ever sponsorship deal with JP Morgan Chase; 10-years, $300 million. The Nets just struck the largest ever arena naming rights deal with Barclays; 20-years, $200 million.

But Stern also screwed up.

He was trying to create a parity that isn’t even achievable. And isn’t popular anyway. And so he ended up agreeing to a deal that encourages the very thing he was trying to prevent. That was an equally major victory for the players.

In the end, both sides have walked away with a key victory. In that way, the result was quite fair. The only team hurt in the crossfire was the Miami Heat.

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  1. RemoteHeatFan
    November 29th, 2011 at 18:42 | #1

    Albert, just wanna say, I missed your well thought out and written posts. The one thing that is missing in all of this discussion is the definition of BRI. BRI imo, is a slanted formula that benefits the owners, not the players. I suspect that there is a 10-20% haircut off of the real revenue the league generates to determine BRI. That is money that is not split with the players.

    In other news, I do like how the Memphis mayor was considering suing. What is often not mentioned is that these teams play in publicly financed arenas. I suspect that the next arena that is built (Sac?) will have some clause in there protecting the city from loss of revenue.

    • November 30th, 2011 at 16:09 | #2

      As you suggest, BRI does not encapsulate all league-generated revenues. I discuss the concept briefly in this post. While the players were earning 57% of BRI in the past collective bargaining agreement, they were earning closer to 50% of actual revenues. I suppose that one could argue in response, however, that BRI does not include sponsorship dollars either.

      More than half of the approximate $6 billion cumulative cost to build all 28 arenas (excluding renovations, and the as yet unfinished billion-dollar Nets new home) has come from public funds. Of the 28, 12 are privately-owned. The rest are leased. The terms of these leases vary widely. In the twelve years the Heat has played in American Airlines Arena, a $213 million venue sitting on $38 million of county land, the team hasn’t paid anything for its use. In fact, the county has paid $64 million in operating subsidies to the Heat. The contract has no protection for the county in the event of a lockout.

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