Analyzing A Potential Miami Heat Offer to Chris Andersen
When the Miami Heat signed Chris “Birdman” Andersen in January, they were hoping for an extra body off the bench who could bring energy, rebounding and defense. Since joining the team, the veteran forward/center has given them much more than that.
Outside of LeBron James, Andersen was the Heat’s most important player on offense during various stretches of the regular and postseason. Andersen was the beneficiary of James’ creative passing, scoring mostly at the rim, mostly on dunks, adding vertical floor spacing to the Heat’s offense, drawing double and triple teams away from the perimeter, and forcing opposing defenses to pay the ultimate price for their help defense.
Outside of James, he was also the Heat’s most important player on defense at times. James has praised Birdman profusely in the past, comparing him to his former Cleveland Cavaliers teammate Anderson Varejao for his hustle and energy. He blocks shots, he’s versatile enough to check both frontcourt positions, and he rebounds the basketball.
The Heat repeated as champions because they have LeBron James. But they wouldn’t have been nearly as dominant as they were without the contributions of their many secondary players, guys who know their roles and do what they’re supposed to do. Birdman has shown that he can be as valuable to the team as anyone not named James, Wade or Bosh.
He was a wonderful addition for the Heat this past season. A perfect fit. The missing piece at a position of desperate need. But he’s also a soon-to-be 35-year-old, low-minute, high-energy reserve. How should the Heat value such a player? How much can they afford to pay?
Basic mathematics could provide the answers.
Andersen is still owed $4.8 million from the Denver Nuggets for next season, the final season of a contract which was terminated utilizing the amnesty provision in July 2012. That’s already a nice chunk of guaranteed money.
He will double-up when he signs his new contract in July. But not entirely. If the Heat (or any team) were to sign Birdman to a contract for next season, the Nuggets would be allowed to reduce the amount of money it still owes him by a commensurate amount. This is called the right of set-off.
It is not a straight dollar-for-dollar offset. When a player is claimed off amnesty waivers, it is a straight dollar-for-dollar offset. But Andersen wasn’t. He cleared waivers, became an unrestricted free agent, and was subsequently signed by the Heat. Therefore, a different set of rules applies. The amount Denver would get to set off is equal to one-half the difference between Andersen’s new salary and the $762,195 minimum salary for a one-year veteran at the time his contract was terminated. So, to figure Andersen’s combined total compensation, the formulas would be as follows:
1. Set-off Amount = (New Salary – $762,195) / 2
2. Total Compensation = Salary from Denver – Set-off Amount + New Salary
There are only three types of contracts the Heat can offer Andersen: (i) the $1,399,507 minimum, (ii) up to 120% of the minimum, or $1,679,408, using his Non-Bird rights, or (iii) up to $3,183,000 using the Taxpayer Mid-Level exception.
For Andersen, the math would work out like this:
Set-off Amount: ($1,399,507 – $762,195) / 2 = $318,656
Denver Pays: $4,818,000 – $318,656 = $4,499,344
Miami Pays: $1,399,507
Total Compensation = $5,898,851
Andersen would make $1,080,851 more than his original contract with Denver
120% of Minimum Salary:
Set-off Amount: ($1,679,408 – $762,195) / 2 = $458,607
Denver Pays: $4,818,000 – $458,607 = $4,359,394
Miami Pays: $1,679,408
Total Compensation = $6,038,802
Andersen would make $1,220,802 more than his original contract with Denver
Set-off Amount: ($3,183,000 – $762,195) / 2 = $1,210,403
Denver Pays: $4,818,000 – $1,210,403 = $3,607,598
Miami Pays: $3,183,000
Total Compensation = $6,790,598
Andersen would make $1,972,598 more than his original contract with Denver
Therefore, the difference between the most the Heat can offer (the MLE) and the least they can offer (the minimum) is only $891,747 to the Birdman for next season. For the Heat, when including the tax, it’s many millions more.
Next season is a high-tax season for the Heat as the more punitive “incremental tax” kicks in. The following season starts the “repeater tax,” a tax so great that just about the entire country is calling for the team as presently constructed to be dismantled. The Heat needs to be mindful of offering a big money contract to any player, let alone one who averages only around 15 minutes per contest, and particularly mindful of multi-year contracts that would extend into the 2014-15 season.
Because Andersen’s Denver contract expires after next season, there would be no set off for 2014-15 and beyond. Given the onerous tax consequences, that could make it more difficult for the Heat to stay competitive in a potential multi-year contract.
Andersen is going to get a contract offer from the Heat. That’s a certainty. The question is how big, and how long.
Does a Mid-Level Offer Make Sense?
Should Arison spend the more than 6.3 million extra dollars it would cost for next season in order to offer Chris the bigger Mid-Level contract, when he would only be netting an $892K benefit? Of course not!
Should Arison spend the $12.5 million ($3.3 million salary, plus at least $1.75-per-$1 in luxury tax, plus $1-per-$1 in repeater tax), or possibly much more, that it would cost in the second year of such a Mid-Level contract? Is one year of a 36-year-old Chris Andersen worth $12.5 million to an owner desperately trying to keep his core together? Of course not!
So the Mid-Level Exception is out. It just doesn’t make financial sense. Not for one year, and certainly not for two or more.
That leaves only a minimum salary contract or a 20% increase from the minimum.
Does an Offer at 120% of the Minimum Make Sense?
Should Arison offer the 20% increase? It would certainly be a nice gesture – even if it does only net Andersen an extra $140K, and even if it costs Arison almost 6x as much ($770K).
But here’s the thing. It could cost the Heat much more than that. The $140K rounding error could wind up costing the Heat millions of dollars. The reason requires an understanding of how minimum salary contracts work.
When a player has been in the NBA for three or more seasons, and is playing under a one-year minimum salary contract, the league reimburses the team for part of his salary — any amount above the minimum salary level for a two-year veteran. For example, in 2013-14 the minimum salary for a two-year veteran is $884,293, so for an eleven-year veteran like Andersen, with a minimum salary of $1,399,507, the league would reimburse the team $515,214. Only the two-year minimum salary is included in the computation of team salary and luxury tax, not the player’s full salary. They do this so teams won’t shy away from signing older veterans simply because they are more expensive than younger veterans.
While that ~$500K per season probably doesn’t sound like much, it is significantly more than you might realize. The incremental difference, when incorporating the tax, would be at least $1.4 million next season, and at least $2.0 million the season after.
That’s right! Signing a player like Andersen to a two-year minimum salary deal would cost at least $3.4 million more than signing him to two consecutive one-year minimum salary deals. Even though the player himself makes equivalent money. He wouldn’t lose a cent.
There is no equivalent reimbursement when a team pays a player more than the minimum, even if it’s only $140K more. So, by giving him the 20% increase, it costs Arison not only the extra $770K but potentially also the $1.4 million in savings of a single season minimum salary contract. That’s $2.2 million of savings made possible by asking Andersen to forgo a measly $140K. And in a potential second season, it costs Arison not only the extra $1.1 million difference in salaries to Andersen but potentially also the $2.0 million in savings of a single season minimum salary contract. That’s another $3.1 million of savings made possible by asking Andersen to forgo a measly $306K. That’s $5.3 million of savings to Arison, and it only costs Andersen a mere $446K. Total.
Should Arison spend the 5.3 million extra dollars it would cost over the next two seasons in order to offer Chris the 20% increase, when he would only be netting a $446K benefit? Of course not!
So the 20% increase is out. It just doesn’t make financial sense. Not for one year, and certainly not for two or more.
That leaves only a minimum salary contract.
What About a Compromise?
After next season, the Heat would hold Andersen’s Early Bird rights. Therefore, even if he were to accept a one-year minimum salary for next season, he would then be able to negotiate a contract of up to the still-to-be-determined ~$6 million league-average salary for 2014-15.
Would a minimum salary deal in the first year followed by a second, larger contract the following year be a nice compromise?
For Andersen, it would make a great deal of sense. Next season’s compensation will be augmented by his Denver payout, so playing at the minimum salary wouldn’t be such a burden. The following season, in which there is no Denver payout, he’d be drawing the increased salary from the Heat to compensate.
For the Heat, it’s more challenging. While offering just a minimum contract for next season would save the Heat $6.3 million, offering a substantial increase in the season after, whatever the amount would ultimately be, would cost the Heat at least 4x as much, in what will already be the most expensive season in team history, which is untenable for a then 36-year-old playing less than 15 minutes per contest.
So What’s the Logical Conclusion?
That leaves really only one logical conclusion: a one-year minimum salary offer for next season, and a marginally illegal, undocumented promise of a minimum salary contract the following season if Andersen should so desire (marginally illegal because future contract offers are not allowed; however, without documentation, it is nearly impossible to know they exist).
As you can see, the job of an NBA general manager is quite complex. This math is just one small part of the decision-making process involved in the determination of what type of contract offer to just one player, on a team with at least 13 players.
It’s not easy stuff. So let’s summarize. Let’s take a look at what Andersen would pocket, and the least possible amount it would cost the Heat, for each primary alternative the Heat has in its arsenal. The following summary assumes a two-year commitment (the maximum contract length the 35-year-old is likely to receive on the open market):
Minimum Salary (Consecutive One-Year Deals)
- Andersen Earnings: $5.9 million next season; $1.4 million the following season
- Heat Cost: $2.4 million next season; $3.4 million the following season
- Total Andersen Earnings Over Two Years: $7.4 million
- Total Heat Cost Over Two Years: $5.9 million
Minimum Salary (One Two-Year Deal)
- Andersen Earnings: $5.9 million next season; $1.4 million the following season
- Heat Cost: $3.8 million next season; $5.4 million the following season
- Total Andersen Earnings Over Two Years: $7.4 million
- Total Heat Cost Over Two Years: $9.3 million
120% of Minimum Salary
- Andersen Earnings: $6.0 million next season; $1.8 million the following season
- Heat Cost: $4.6 million next season; $6.6 million the following season
- Total Andersen Earnings Over Two Years: $7.8 million
- Total Heat Cost Over Two Years: $11.2 million
- Andersen Earnings: $6.8 million next season; $3.3 million the following season
- Heat Cost: $8.8 million next season; $12.5 million the following season
- Total Andersen Earnings Over Two Years: $10.1 million
- Total Heat Cost Over Two Years: $21.2 million
As depicted above, the consecutive minimum salary deal structure would save the Heat at least $15.4 million or more over two years, as compared to the MLE deal many are calling for, but only requires Andersen to sacrifice about 18% of that amount, or $2.8 million. That’s huge savings for Arison — in fact, it’s about as much money as each of the Big Three earned last season — which can be redeployed elsewhere in order to sustain a championship ball club.
Will Andersen Accept?
Would Andersen accept such an offer? What is his value on the open market?
Andersen is coming off a highly productive season for the Heat. However, it was actually less productive than his previous season with the Nuggets, after which no team in the NBA wanted him. Whether or not that’s exclusively because of a pedophile investigation, which is now presumably behind him, nobody can be sure. But he’s still a limited-minutes player. He’s still an injury risk. He turns 35 years old next month. The biggest contract he’s ever received paid him an average salary of $4.3 million, and he was waived in the middle of it.
It’s possible that another team could offer more than two years at the mini-MLE, but it’s not very likely.
He, and his agent Mark Bryant, will certainly ask for that much from the Heat. But, again, it only pays him $2.8 million more than the minimum over the course of the two years. Would he be willing to sacrifice that amount to be a continuing part of a Heat dynasty, where he is embraced by his teammates and coaches and fans and the city, where he is such a wonderful fit?
Andersen has never really had that break-the-bank contract on which to fall back. He’s made just over $24 million thus far into his drug-shortened NBA career (that cost him another $10 million and change in voided salary), and he’s guaranteed at least another $5 million for next season. That’s $29 million.
This will probably be the final time in his career to substantially increase that total. It is probably the last time in which he may be able to command larger than the minimum salary. Sacrificing $2.8 million would represent almost 9% of his career earnings for this opportunity.
It would certainly be understandable if he were to chase the money. He already has that elusive NBA title. Andersen’s decision could very well come down to Pat Riley’s mastery of explaining the concepts presented herein, as well as his powers of persuasion. Andersen wouldn’t be the first player on the Heat roster to accept a discount. In fact, he’d be the ninth!
It’d be nice to be able to give him more money. He deserves it. But it’s simply not a wise financial decision. The Heat should offer a one-year minimum salary contract with an undocumented second year promise. Whether Andersen will accept, only time will tell.
Note: The analysis contained within this post conservatively assumes the $1.75 tax bracket, which applies to teams that are between $5 and $10 million above the tax threshold. Should the Heat’s team salary extend beyond that level (this past season, it was $13 million above), the differences in cost between the possible contract offers would get even more dramatic, and the points contained within this post would get even more poignant. For the Heat to stay within that level, it would require, at the very least, that Mike Miller be amnestied.