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For the Heat, Amnesty is a Big-Money Decision

This post is an elaboration of a June 23 post regarding the fate of Mike Miller. It details the calculations supporting the conclusions that were drawn — that, despite public comments by Pat Riley to the contrary, Mike Miller will be amnestied — so that readers can appreciate the complexity of the situation and decide for themselves the appropriate course of action. 

Wednesday is a key day in the NBA.

It’s the league’s equivalent of National Signing Day – the day in which new contracts can be signed and trades can be executed. After more than a week of furtive negotiating, non-binding agreement, and heart-palpitating waiting, everything becomes official.

It’s also the start of the amnesty waiver window, a seven-day period that this year runs from July 10 to July 16, when eligible teams may designate eligible players for amnesty release.

Amnesty was added to the Collective Bargaining Agreement that ended the 2011 lockout. Because of the new, far more onerous luxury tax consequences that will be fazed in starting next season, teams have been allowed to designate one player for waiver in a manner such that his remaining salary would not count against the salary cap and luxury tax. While amnesty eases salary-cap and luxury-tax concerns, teams still have to pay out the player’s remaining salary, including any remaining option years.

Teams are only allowed to make such designations each offseason during a one-week window starting the day after the moratorium ends. When that happens, all other teams are immediately notified by the league. They are then allowed place a claim in order to acquire the amnestied player, but only if they have the necessary cap space to do so. Teams can make either a full or partial waiver claim.

When a team makes a full waiver claim it acquires the player, assumes his full contract, and pays all remaining salary obligations; the waiving team has no further salary obligation to the player. A partial waiver claim is a bid for a single dollar amount. If no team makes a full waiver claim, the player is awarded to the team submitting the highest bid in a partial waiver claim; the amount of the partial waiver claim is then subtracted from the waiving team’s continuing obligations to their amnestied player. The minimum possible bid a team can make is the minimum salary applicable to the player for all remaining guaranteed seasons of his contract.

Fifteen of the league’s 30 teams have already utilized their amnesty provision in previous seasons. An additional one has no remaining players who qualify for amnesty.

Which brings us to the Heat, one of the remaining 14 teams yet to act. 

The amnesty provision applies only to players who have been under contract continuously from the expiration of the previous CBA to the time it is to be utilized. The Heat have six players eligible to be amnestied: LeBron James, Dwayne Wade, Chris Bosh, Mike Miller, Joel Anthony and Udonis Haslem.

Scratch the first three off any list of amnesty possibilities. Short of career-threatening injury (knock on wood), it’s not happening.

But with the Heat deep into the luxury tax, an amnesty move cannot be summarily dismissed, even with Heat president Pat Riley a week ago proclaiming just how much he likes his two-time championship roster as-is.

That’s because of how much the luxury tax rules have changed.

The luxury tax is a mechanism that helps control team spending in an effort to promote financial and competitive parity among the league’s thirty teams. It is paid by high-spending teams – those with a team salary exceeding a predetermined tax threshold – and distributed, in part, to those that don’t exceed the threshold.

The luxury tax as a concept didn’t exist prior to the turn of the century. When it was first introduced, it was triggered for individual teams only when total league-wide spending exceeded a predetermined level, kicking into place for the first time ever after the 2002-03 season. With the introduction of the new Collective Bargaining Agreement in 2005, the tax was guaranteed in every season for any individual team that exceeded the threshold. It used to be that it cost teams above the threshold $1 for every $1 their team salary exceeds the tax level. It was a costly penalty, but a manageable one.

That’s no longer the case. Starting with the 2013-14 season, teams pay an incremental tax rate based on their team salary. Starting with the 2014-15 season, they pay an even more punitive repeater rate if they were also taxpayers in all of the previous three seasons. Starting with the 2015-16 season, they pay the repeater rate if they were taxpayers in at least three of the four previous seasons.

Each individual tax rate is paid at each increment above the tax level. The taxes paid for each increment are then summed together to generate the total tax obligation. The increments, and their respective tax rates, are as follows:

Tax Rates (at Each Increment Above the Tax Level):
1. From $0 to $5,000,000 = $1.50
2. From $5,000,000 to $10,000,000 = $1.75
3. From $10,000,000 to $15,000,000 = $2.50
4. From $15,000,000 to $20,000,000 = $3.25
5. Each Additional $5,000,000 Increment = Previous Tax Rate + $0.50

Repeater Rate:
Incremental Tax Rate + $1.00

So, for a team whose combined salary obligations are $20 million above the tax threshold, adding a new player to a marginal $1 million contract could cost as much as $5.75 million – his salary, plus $3.75-per-dollar in taxes, plus another $1.00-per-dollar in repeater taxes. It’d cost the owner 5.75x what the player is actually making!

Which brings us to Miller, Anthony and Haslem. Each has two seasons left on his contract, each with the second at his option. The salaries for those next two seasons: Miller at $6.2 million and $6.6 million; Haslem at $4.34 million and $4.62 million; Anthony at $3.8 million and $3.8 million.

Based on salary and usage, Anthony’s and Miller’s names have been most closely associated with amnesty.

Because the incremental tax rate increases as team salary increases, in order to calculate the true savings of amnestying a player, a team must first know what its team salary is just prior to amnestying the player. The higher team salary is, the more tax savings will be generated by utilizing the amnesty provision.

The Heat is still very much in the midst of determining who will be on the roster, and thus what its team salary will be, for the upcoming season. The following season – in which the contract of every player on the roster expires or is subject to an option – is even more uncertain.

Given these factors, it would be impossible provide a reasonable guess as to what the savings would be. But a reasonable range can be provided.

Let’s assume the bottom of the range is the lowest it possibly could be. Whoever is amnestied, let’s assume that if his salary is removed, the Heat would no longer owe any luxury tax whatsoever (i.e., team salary would fall to exactly the level of the tax threshold) – an absurdly unreasonable assumption that won’t happen under any scenario in which the Big Three stay together, but a nice baseline from which to start.

For Anthony, the math would work out like this:

2013-14: $3,800,000 x $1.50 = $5,700,000
2014-15: $3,800,000 x (1.50 + $1.00) = $9,500,000
Total Tax Savings: $5,700,000 + $9,500,000 = $15,200,000

For Miller, whose salary is greater than the $5 million increments and would thus span two tax rates, the math would work out like this:

2013-14: $5,000,000 x $1.50 + ($6,200,000 – $5,000,000) x $1.75 = $9,600,000
2014-15: $5,000,000 x (1.50 + $1.00) + ($6,600,000 – $5,000,000) x ($1.75 + $1.00) = $16,900,000
Total Tax Savings: $9,600,000 + $16,900,000 = $26,500,000

But, again, these savings are unrealistically low and only serve as a baseline.

Now let’s attempt to figure out what a more realistic assumption might be.

With the 12 players under guaranteed contract, the Heat is currently $14 million above the projected luxury tax threshold for the coming season, which will be finalized by July 10.

Most of us want to retain Chris “Birdman” Andersen, even if it were to cost the Mid-Level Exception to do so, and then want the Heat to sign Greg Oden and whatever other minimum salary player that catches our eye. Sound reasonable?

Doing so takes team salary from $14 million above the tax threshold to as much as $20 million above the tax threshold.

It’s difficult to say with any degree of certainly what a likely outcome might be for the 2014-15 season – LeBron James, Dwyane Wade, Chris Bosh, Mike Miller, Udonis Haslem and Norris Cole will all receive substantial raises if their options are exercised; Mario Chalmers, Shane Battier and Ray Allen all have expiring contracts and would need to be re-signed for replaced. Without having a more exact idea, let’s assume that the Heat remains roughly $20 million above the tax threshold. It could be less. It could be far more. (The Heat has just 7 players with contracts that extend through 2014-15, 6 shy of the 13-player minimum, as is already $3 million above the latest projected threshold; if Birdman is given a multi-season MLE contract this week, that would be 8 players and $6 million above).

What would the tax savings be for the Heat by amnestying either Miller or Anthony if team salary were to be $20 million above the tax threshold prior to doing so in each of the next two seasons?

For Anthony, the math would work out like this:

2013-14: $3,800,000 x $3.25 = $12,350,000
2014-15: $3,800,000 x (3.25 + $1.00) = $16,150,000
Total Tax Savings: $12,350,000 + $16,150,000 = $28,500,000

For Miller, the math would work out like this:

2013-14: $5,000,000 x $3.25 + ($6,200,000 – $5,000,000) x $2.50 = $19,250,000
2014-15: $5,000,000 x (3.25 + $1.00) + ($6,600,000 – $5,000,000) x ($3.50 + $1.00) = $26,850,000
Total Tax Savings: $19,250,000 + $26,850,000 = $46,100,000

So, for Anthony, that’s a potential savings of between $15 million and $29 million.

For Miller, it’s a potential savings of between $27 million and $46 million.

The savings increase even further.

If Miller is claimed on amnesty waivers, the savings would increase dollar for dollar by the amount of the highest waiver claim that is submitted. If, for example, a team were to place a partial claim on Miller at the minimum possible amount, it would produce another $2.8 million in savings.

If Miller were to clear waivers and subsequently sign a new contract as a free agent, the Heat would also get to reduce their obligations to Miller. However, it wouldn’t be a straight dollar-for-dollar offset. Instead, the savings for each of the next two seasons would be equal to one-half the difference between Miller’s new salary, whatever that may be, and the $788,872 minimum salary for a one-year veteran at the time his contract was terminated. That could produce more than $300K per season in added savings.

That’s as much as $49 million in savings by amnestying Miller: $49 million!

Now, $49 million is just as unrealistically high as is $27 million unrealistically low. The true savings will probably lie somewhere in the middle. But even at the average of $38 million, we’re still look at extreme savings.

Mike Miller is a wonderful guy, and a great player. But is he worth $38 million over the next two seasons?

Even with his significant resources, these are huge numbers for Heat owner Micky Arison to consider. Efficiency therefore would equal amnesty. Maximum efficiency would mean Miller.

The Heat made it to the 2010-11 NBA Finals on a $64 million total payroll. The following season, one shortened by a lockout and correspondingly reduced salary payments, Arison spent a total of $65 million in support of his team’s first championship of the Big Three era. This past season’s repeat came at a cost of approximately $91 million, far and away the most in team history.

Maintaining a team salary that is $20 million above the tax threshold would cost, at current tax level forecasts, a whopping $136.6 million!

Unless.

Unless the Heat can trade Miller or Anthony, or perhaps both. Doing so would free the Heat from no only their tax implications but also their payroll obligations. The Heat is undoubtedly in the midst of such discussions as we speak.

Starting Thursday, we’ll get a read on the Heat’s emotion-vs.-expenses continuum. In the balance is a player, in Miller, who put the Heat over the top in the first of their successive championship-winning games and started the second.

Note: The assumption of this post is that if the amnesty provision were to be utilized, the amnestied player would not be replaced. If that is not the case, the relative tax savings would be correspondingly reduced.

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