Miami Heat Sign Joe Johnson to Rest-of-Season Minimum Salary Deal

Pat Riley wanted to add what could very well be a core piece to the Miami Heat roster, and he apparently wasn’t willing to wait to do it.

Just days after extolling the virtues of cleansing his team of its repeater tax issues, Riley officially signed coveted guard-forward Joe Johnson to a rest-of-season minimum-salary contract just an hour or so after he cleared waivers on Saturday night.

The move vaults the Heat right back over the luxury tax threshold.

If Riley had instead signed Johnson a mere eight days later, on March 6th (or thereafter), Miami would have instead remained below the tax threshold.

Johnson will earn $414,481, of which the Heat will owe just $261,894. The rest will also be paid out by the Heat but be reimbursed to the team by the league office at the end of the season.

The true cost of the Johnson signing for the Heat could be significantly higher, however, if Riley doesn’t take action to drop the team below the tax threshold by April 13th. That’s the final day of the regular season, the day in which the Heat’s team salary will be locked in for the purposes of the tax calculation.

Crossing the tax line would impact both this and future seasons.

The Johnson signing puts the Heat $43,894 over the line, which would trigger a tax payment of $109,736. Crossing the line would also disqualify the Heat from receiving a tax distribution – a pro rata payout given to non-taxpaying teams totaling 50 percent of the payments made by tax teams – currently projected at $2.6 million.

The cost of Johnson’s contract would therefore effectively become: $262K in salary + $110K in luxury taxes + $2.6 million in tax distributions forgone = $2.9 million. 

Exceeding the tax threshold would also affect future seasons, in that it would tack on an extra year toward the “repeater tax” clock.

The repeater tax, an extra $1 surcharge for every dollar by which a team exceeds the tax level (over and above the league’s already punitive incremental rates), is charged if a team pays the tax for a fourth time in any rolling five year period.(1)

While that may appear ominous, the implications are perhaps less severe than one might think.

The Heat was $11.3 million over the luxury tax threshold only July 10th. At that point, the team’s total payroll and related costs for the season were projected at $126.9 million.

Even with the Johnson signing, the team’s total payroll obligations are still just $92.4 million today.

In that light, perhaps redeploying a mere $2.9 million of the $34.5 million in savings on a player who Riley clearly believes could make a significant impact is not such a bad thing.

The same may be true in regards to any possible longer-term implications.

If the Heat is able to avoid the tax this season (and assuming it will avoid the tax next season as well, which is all but certain), the repeater tax will not be an issue in Miami until at least the 2020-21 season. But even if it does pay the tax this season, the repeater tax still won’t be an issue for the Heat until at least the 2019-20 season. So, avoiding the repeater tax this season really only has an impact on one future season (2019-20).

And if the Heat avoids the tax in even just one of the four seasons between 2016-17 and 2019-20, then paying the repeater tax this year will have no bearing on the future at all!

Perhaps, then, getting Johnson as soon as possible was more vital for the Heat than any of the potentially negative consequences for this or future seasons.

To say that avoiding the tax is not important to the Heat organization, however, would be disingenuous. It did spend eight months, completing five trades, to do so. It clearly is of value. And it is still achievable.

There are three primary ways by which the Heat can still avoid the tax this season:

1. A buyout. If the Heat were to buy out any player on its current roster, the amount of the negotiated savings that is applicable to this season would be subtracted from team salary for the purposes of the tax calculation. Remember, we’re only talking about needing an extra $44K of room.

But a buyout would essentially require not only that an existing player agree to be released from his contract, but also that he agree to reduce the remaining salary obligations he is owed in the process. Who on the current Heat roster would Riley even ask to do such a thing?

Let’s assume that’s not going to happen.

2. A league-mandated suspension. When a player gets suspended by the league, he automatically loses 1/110th of his salary for each day covered by the suspension. The player’s team, in turn, gets to reduce its team salary for purposes of the tax calculation by an amount equal to one-half of the players’ dollars lost to suspension.

Do the math, and it gets you to this: If any one of Chris Bosh, Dwyane Wade, Goran Dragic or Luol Deng incurs even a one-day suspension that is officially issued by the league office (i.e., not the team), the resulting tax savings would drop the Heat below the tax threshold.

That’s right. If any of those four players loses his mind for even just a second, it could benefit the Heat hugely.

Take one for the team, Dwyane. Throw a punch!

At some point, though, moving from basketball fans (and owners) to promoters of violence for the purpose of monetary savings just feels wrong. Right? The league office generally works in coordination with the offending player’s team in these types of situations anyway, and, fully aware of the Heat’s tax situation, would surely urge the team to dole out any such punishment in order to avoid inadvertently helping the team to avoid the tax as the result of player violence (though there are certain actions that require a league-mandated suspension, such as picking up a 17th technical foul).

So, short of Wade going on an epic multi-game rant that merits him an additional 14 technical fouls over the next 23 games – the transparent logic for which would make it downright hilarious – let’s, for the purposes of our morality, not count on that to happen either.

3. A waiver claim. This option has been previously covered  in detail (so you can skip the next several paragraphs if you’d like), and comes primarily care of the Philadelphia 76ers (or Portland Trail Blazers).

The Sixers currently have a team salary below the league-mandated $63.0 million salary floor.

Teams which finish the season with a team salary below the salary floor are surcharged for their shortfall, with the money distributed among the players on that team. “Team salary” for the purposes of the floor is calculated based upon the sum of all salaries that underlie each team’s current and previously terminated contracts as of the last day of the regular season, independent of how much the team may have actually paid out on those contracts.

Teams below the floor can therefore save a great deal of money by claiming players off waivers who have been released by their teams late in the regular season. By doing so, the full value of the contract they will have claimed would count toward the minimum team salary calculation, thus reducing the shortfall, even though the vast majority of it will have been paid by the team which released the player.

The Sixers are currently $2.86 million below the salary floor.

They are clearly aware of their fate. At the trade deadline, the Sixers acquired Joel Anthony as part of a three-team trade that involved the Houston Rockets and Detroit Pistons. The primary motivation for the Sixers’ involvement in the trade was to pick up an extra second-round draft pick (in 2017, from the Denver Nuggets via the Rockets) as well as to acquire the $2.5 million salary of Anthony, a player they never intended to play.

Taking on Anthony’s salary would have saved the Sixers $2.5 million in shortfall payments, at a cost of only the $808K then remaining to be paid on his contract.

The Pistons, however, voided the trade.

As a result, Philadelphia lost Anthony, and the associated savings for claiming him.

It, in turn, did two things that could benefit the Heat: it made the strategy again viable (Philly would’ve had limited need for it if they had successfully accomplished it with Anthony), and it showed that the Sixers are willing to take this type of approach to achieving savings.

The most obvious candidate for such treatment would be Beno Udrih, who is out three months after undergoing surgery two days ago to repair a torn plantar plate in his right foot.

Udrih has a $2.2 million salary on his expiring contract. The vast majority of that amounthas already been paid out by the Heat and Memphis Grizzlies.

If the Heat were to waive Udrih, the Sixers might be enticed to claim him.

Claiming Udrih would save the Sixers $2.2 million in shortfall payments, at a cost of just the prorated salary remaining on his contract. If he were waived today, that would be just $536K.

The net savings for Philadelphia by claiming Udrih if he were waived by the Heat today: $2.2 million (shortfall payments) – $536K (salary payouts) = $1.6 million!

And the Heat wouldn’t necessarily need to waive Udrih today. In fact, the longer it waits to do so, the more attractive Udrih’s contract would become to the Sixers. That’s because Udrih’s remaining salary obligations decline by the day.

If the Heat were to theoretically waive Udrih just before the end of the regular season, the Heat would have effectively already paid his entire salary, leaving the Sixers with virtually the entire $2.2 million in savings!(2)

The benefit for the Heat: When a player is claimed off waivers, the waiving team gets to remove the player’s contract off the books entirely.

In the case of Udrih, the Heat will have cleared his entire $2.2 million off the books for the purposes of the tax calculation.

What would that do? The Heat is currently $44K above the tax threshold. Subtract $2.2 million from that total, and you get to $2.1 million below!

That’s more than enough for two more players. The Heat currently has 14 players under contract. Dropping Hdrih would make 13. Adding to two more would bring the roster back up to the 15-player maximum.

(If you skipped the above paragraphs, which I basically copied from my previous post, rejoin the post here).

Waiving a player and thereafter hoping that a team such as the Sixers claims him off waivers is perhaps the most viable method by which the Heat could again drop below the tax.

But it also has another intriguing implication.

Follow this logic closely, because it might get just a tad confusing: The Heat knows the only dependable method by which it can fall below the tax is if it chooses to waive a player and another team claims him. That will either happen, or it won’t. But if it does happen, no matter which player the Heat waives to make it happen(3), it will drop below the tax by at least $903K.

That amount of room below the tax is more than enough to sign two additional players, and so so right now.

What does that mean? It means that there will no longer be any talk about waiting for a certain period of time in order to sign someone and stay below the tax. That concept no longer exists. Forget about it. If the Heat finds someone it wants to sign, it can sign him right this second, or at any other time from now until the end of the season. Waiting a few more days will make the contract slightly less expensive, but it will not help the Heat in attempting to drop below the tax.

So, from this point forth, the only consideration for the Heat in adding a new player to the roster is the actual cost to do so. And that is rather easy to calculate.

The total cost to the Heat of adding any additional player would be, as of today: $251K in salary + $627K in taxes = $878K total. And for every day it waits to do so, the Heat would save $20K off that total ($5,572 in salary + $14K in taxes). And if the Heat eventually manages to drop below the tax line, those costs drop by more than 70 percent (i.e., the tax portion of the total).

So as the buyout deadline approaches and you find another player you might want the Heat to sign, ask yourself only one question: Is that player, when considering all of the available alternatives, worth investing $878K or less for the rest of the season (and playoffs)?

If so, there is no financial reason not to try to do so.

Whether or not the Heat will do so has still to be determined. But one thing is certain: it has secured the services of Johnson for the rest of the season.

When the season is up, the Heat will get Johnson’s Non-Bird rights. Non-Bird rights will allow Miami, at the cost of a $980K cap hold, to exceed the cap to re-sign him, but only to a contract with a starting salary of up to $1.9M, with a term of up to three years, and with annual raises of up to 4.5 percent of the first year salary. If that would prove not to be enough, the Heat would need to utilize either cap space or an available exception to re-sign him. Or let him go.

Hopefully with a championship ring in hand.

Note:

(1) The Heat have previously paid the tax in each of the 2011-12, 2012-13 and 2013-14 seasons, but avoided it last season.

(2) Of course, waiting too long could cause the Sixers or Blazers to claim a player waived by another team instead.

(3) With the exception of Josh Richardson and Joe Johnson, players whom the Heat would clearly not waive this season in order to create tax savings anyway.