Chicago Bulls: Salary Cap Maneuvering in Action

February 7th, 2014 3 comments

Update (June 7): The Bulls didn’t follow my advice. They did waive Erik Murphy as I speculated. But they added more players too quickly, and ended up rolling the dice with regard to the bonuses of Joakim Noah and Taj Gibson. Noah made All-NBA First Team, and earned his $500,000 bonus. Gibson didn’t make the All Defensive First or Second Teams. As a result, the Bulls missed the tax by just $291,164. 

This post has nothing to do with the Miami Heat but I, as a salary cap person, love intricate luxury tax maneuvering. The situation described herein is about as fascinating as it gets for me. It should be noted that the idea for this post was not my own. It stemmed from an incorrect post I read elsewhere, for which I happily provided the correction, and then decided to write a unique version for myself, with my own story line, and drawing my own conclusions. This post is long and it’s tedious, but the end result is utterly spectacular (well… spectacular for people who are amazed by how teams maneuver around luxury tax issues).

Most of us assumed that when the Chicago Bulls acquired the contract of the unremarkable Andrew Bynum in trade last month, it was to drop them below the luxury tax.

It was. But the process has been far more complicated than most of us, apparently including Bulls management themselves, realized.

For a long time, it appeared as if Bynum would be shipped off to Los Angeles, so that the Lakers could capitalize on his unintendedly valuable contract.

The nature of Bynum’s contract essentially meant that he was auditioning for the Cleveland Cavaliers from the date he was signed on July 19 all the way through the guarantee deadline on January 7, an audition he failed. Bynum’s deal called for a $12.25 million salary this season, of which only $6.0 million was guaranteed. Next season’s salary of $12.54 million was fully unguaranteed. Therefore, a two year contract was really just a six month commitment. But it also meant that any team which acquired his $12.25 million salary in trade could immediately thereafter terminate his contract, thus reducing his salary and resulting cap charge from $12.25 million to $6.0 million.

The Lakers have been luxury tax payers for six straight seasons. They were in position to leverage that $6.25 million delta to sneak below the tax for this season, producing huge up-front savings. And because they are unlikely to be taxpayers next year as they tear down their roster and rebuild, two consecutive years below the tax would have had an added benefit – no “repeater taxes,” which are paid by taxpaying teams that were also taxpayers in at least three of the previous four seasons, for the Lakers for the entire life of the current CBA, which will almost certainly be terminated after the 2016-17 season.

It was a potentially massive financial windfall for the Lakers at a cost of just the expiring contract of Pau Gasol (and another irrelevant throw-in to make the math work).

The Cavs had been after Gasol since this past summer, when they had extensive discussions with the Lakers, and were more than eager to make the swap. But the Lakers were demanding more for Gasol than just the massive financial savings. The Cavs refused.

That’s when the Bulls swooped in.  Read more…

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Miami Heat at the NBA Trade Deadline

January 21st, 2014 No comments

The Feb. 20 N.B.A. trade deadline is now officially less than a month away.

The Miami Heat started their dealings early this season, shipping Joel Anthony to the Boston Celtics along with a million dollars and two draft picks (one second-rounder and another that was originally Philadelphia’s and will likely become a pair of second-rounders). In return, the Heat got a player from Golden State, but this deal wasn’t about Toney Douglas as much as it was about the benjamins.

Anthony, who lost his role to Chris Andersen last season and had been a reclusive presence on the court ever since, ultimately became a casualty of the Heat’s cash crunch and managing partner Micky Arison’s desire to creep closer to the luxury-tax line. He didn’t get there, not with this deal, but it did save him around $20 million, and it did eliminate one of the obstacles to reshaping the roster after this season, when LeBron James, Dwyane Wade and Chris Bosh can all opt out of their existing contracts.

Now, it’s conceivable that only Norris Cole ($2.0 million) and Udonis Haslem ($4.6 million option) will be under contract on July 1, as Arison, Pat Riley and the Heat try to retain James, Wade and Bosh, and perhaps Mario Chalmers, Ray Allen, Michael Beasley and even Greg Oden.

That’s the long-term vision.

The short-term? The trade did nothing to advance the cause. The Heat, championship material as they are currently constructed, nonetheless have various needs that have yet to be addressed.  Read more…

Miami Heat Trade Joel Anthony in Three-Team Deal

January 15th, 2014 No comments

The Miami Heat have traded center Joel Anthony to the Boston Celtics, as part of a three-team deal, in exchange for guard Toney Douglas from the Golden State Warriors.

The Heat also sent the Celtics $1 million in cash and a pair of draft picks to complete the deal: A 2016 second-round pick and a lottery protected first-round pick originally acquired from the Philadelphia 76ers that will become a pair of second-rounders in 2015 and 2016 if the Sixers fail to make the playoffs this season and next.

The trade isn’t about Joel Anthony and isn’t about Toney Douglas.

It’s also not about Greg Oden, who appears to be on the verge of moving into the Heat’s rotation, or about Andrew Bynum, and how money freed up from today’s trade might make such a signing more financially palatable.

The trade is, more than anything else, a continuing recognition that the harshest elements of the new Collective Bargaining Agreement will take its toll on how the Heat do business.

This past summer, it was the amnesty release of Mike Miller. Then it was declining to utilize the mid-level exception. Now it’s moving Anthony’s untenable contract off the books, a move, when accounting for his 2014-15 salary will save the Heat at least $20 million.  Read more…

Should the Miami Heat Take Interest in Andrew Bynum?

January 7th, 2014 No comments

In a move that has the Chicago Bulls thinking about the future but could have major implications for the Miami Heat in the present, the Bulls executed a significant trade with the Cleveland Cavaliers Tuesday morning. They sent forward Luol Deng to the Cavs in exchange for center Andrew Bynum, three future draft picks and huge payroll savings.

The Bulls get a first round draft pick owed to the Cavs by the Sacramento Kings, which is top-12 protected in 2014, top-10 protected from 2015 through 2017, and, if not conveyed, converts to a 2017 second round pick if it is in the top 55 and nothing if not. They also get second round picks in 2015 and 2016, acquired by the Cavs from the Portland Trail Blazers. Finally, the Bulls will be able to swap positions with the Cavs in the first round of the 2015 draft as long as the Cavs’ pick is outside the top 14.

In addition to the draft picks, the Bulls will recognize huge payroll savings because Bynum’s current $12.25 million salary is only $6 million guaranteed. The trade will cut about $7.8 million off their cap and get them out of the tax. Chicago will save about $6.8 million in salary payouts and $12.3 million in taxes, as well as qualify for a tax distribution (paid to teams below the tax from half of the tax proceeds of teams above the tax) currently estimated at $3.2 million. That’s more than $22 million in instantaneous savings(1).

In order to recognize the savings, the Bulls will terminate Bynum’s contract shortly. He’ll then be placed on waivers at 5:00 pm, where he’ll remain for the following 48 hours, during which time other teams may assume his contract. No team in the league has the necessary cap space (or a large enough trade exception) to claim him. At 5:00 pm on Thursday, Bynum will become an unrestricted free agent.

Rumor has it that he wants to join the Los Angeles Clippers or the Heat.

Should the Heat be interested? Absolutely!  Read more…

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Suck For Luck Revisited

December 30th, 2013 No comments

Note: This post has been updated periodically since November 6, 2011, the day the Dolphins secured their first win of the season, as more and more information has become available to prove out my point. It has been a source of great frustration for me since that time. 

The Miami Dolphins were 0-7. Despair had long since set in.

No team in NFL history had ever rallied from such a dreadful start to the regular season to make the playoffs. It simply wasn’t going to happen.

It was a familiar story. The Dolphins didn’t make the playoffs the prior season either. Or the season before that. In fact, they had only made the playoffs once in the previous ten years. After a decade of failure from which to rebuild, the Dolphins were still among the worst teams in football.

Andrew Luck, then finishing out a record-shattering college career at Stanford, was widely considered the ultimate prize in the next NFL draft. He was the most highly rated quarterback to come out of college since Peyton Manning. A can’t miss prospect. A sure thing.

A small group of frustrated Dolphins fans connected the dots and began endorsing a radical concept: Why not tank the rest of the 2011 season to ensure they get him?

The “Suck for Luck” campaign quickly took off by word of mouth. The “Miami Dolphins Suck For Luck” movement took off on Facebook. The #suck4luck movement exploded on Twitter. Signs were made. T-shirts were printed.

Eventually, just about all of South Florida embraced the concept.

Fans started actively rooting against the team so that it could land their prized quarterback with the No. 1 overall pick. ESPN draft guru Mel Kiper said it best, saying that if he were a Dolfan, he would be “celebrating losses as a victory.”

Even Dolphins owner Stephen Ross embraced the concept. Ross told his friends he would be willing to deal with short-term losses if the end result would be the franchise quarterback he so desperately wanted.  Read more…

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Million-Dollar Roger Mason Jr. Decision Due by Jan. 7

December 27th, 2013 No comments

The date in which all N.B.A. contracts become fully guaranteed for the rest of the season, Jan. 10, is looming. That leaves the Heat with a decision to make on the non-guaranteed contract of Roger Mason Jr.

Mason Jr. plays a somewhat valuable role for the Heat as a versatile three-point shooting specialist who serves as the team’s third string option at both the point and shooting guard positions. But he (along with Michael Beasley, who has undoubtedly earned his keep), is also the only player who has a less than fully guaranteed contract.

Mason Jr. is a 10-year N.B.A. veteran. He is playing under a one-year contract. He is earning $1,399,507, the minimum salary for a player with his tenure.

When a player has been in the N.B.A. for three or more seasons and is playing under a one-year contract at the minimum salary, the league reimburses the team for part of his salary – any amount above the minimum salary level for a two-year veteran. As a result, the Heat is only responsible for $884,293 of his salary, equal to the minimum salary for a two-year veteran. The league will reimburse the Heat for the rest at the end of the season. Therefore, if Mason Jr. plays out his contract, he really only costs the Heat the smaller amount, and only the smaller amount is included in team salary for cap and tax purposes. They do this so teams won’t shy away from signing older veterans simply because they are more expensive than younger veterans.

As for the mechanics of how the reimbursement works, the Heat is responsible for Mason Jr.’s full prorated salary of $8,232.39 per day (equal to his $1,399,507 salary divided by the 170 days in the regular season), until the total reaches $884,293. At that point, the league reimburses the Heat for the rest. With the regular season having started on Oct. 29, he will earn that much by Feb. 13, 2014. His services from that point on essentially become free of charge.

However, if the Heat want to capitalize on his non-guarantee, they will have to waive him by no later than 5 p.m. on Jan. 7. That’s because all non-guaranteed contracts across the N.B.A. will become fully guaranteed on Jan. 10, so a player needs be gone by no later than Jan. 9 to avoid the guarantee and it takes 48 hours for a waived player to actually clear waivers. Players continue to get paid while they are on waivers.

By that time, Mason Jr. will have already earned $600,965 on his contract. Therefore, if the Heat were to waive him on Jan. 7, they’d be saving a total of $283,328. When including the tax, given the Heat’s current tax position, that amount rises to $991,649.

The Heat is already spending $110,077,842 on player payroll obligations this season, an amount at which the team presumably isn’t anywhere near profitable, so, to some extent, every dollar counts – particularly a million of them.

However, there is some degree of financial justification not to waive him in order to capitalize on his partial guarantee.  Read more…

Miami Heat Are Talking Trade, But With Limited Assets to Offer

December 7th, 2013 4 comments

Dwyane Wade has already missed five of the Miami Heat’s first twenty games this season.

The Heat have a lot of legitimate concerns over the health of Wade – he hasn’t been healthy, really, in any of the last three postseasons; he is still recovering from offseason OssaTron treatments to deal with tendinitis in both of his knees, long after the typical recovery timeframe for such procedures; he is in the early stages of a season-long maintenance program designed to treat and preserve his troublesome knees; and they have no good indication of how his thirty-something body will hold up over the rigors of an eight-month NBA season.

They also understand that flipping one of the team’s centerpiece performers in and out of what has become a flotsam of rotations is sending the Heat into a rhythmic chaos.

The Heat over the last two seasons reinvented themselves as a small-ball scoring machine built upon killer shooting, intricate motion offense, and a furious trapping defense. Battier spotted up for 3s and guarded power forwards so LeBron wouldn’t have to, Bosh stretched his range, the read-and-react playbook expanded, and Miami became unguardable.

Now they’re scrambling to maintain any semblance of consistency. They have just a single reserve shooting guard, Ray Allen, on the whole of the roster. Coach Erik Spoelstra has compensated for uncertainty on the perimeter by playing Norris Cole and Mario Chalmers together more, an ultra-small look that could prove untenable as time marches on. LeBron James has played about as many minutes without Wade this season as with him.

The Heat, simply, has no continuity. And so, with no clear alternative, the Heat have initiated trade talks seeking backcourt help.  Read more…

Through Severe Knee Injuries, Dwyane Wade Continues to Endure

November 17th, 2013 No comments

dwyane-wade-knees

Despite his passion for the game, Dwyane Wade was not much more than an average basketball player as a youngster. Initially, he made a bigger impression on the football coaches at H.L. Richards High School in Oak Lawn, on the South Side of Chicago, than he did on basketball coach Jack Fitzgerald’s squad.

A gritty cornerback and wide receiver, Wade showed promise on the gridiron, but he couldn’t kick his obsession for basketball. He idolized former Chicago Bulls star Michael Jordan. So he spent his second season with the Bulldogs on the sophomore basketball team.

Determined to earn time on the varsity squad, Wade worked out rigorously before his junior year in the summer of 1998, improving his ball-handling skills and his outside shot. Wade’s body cooperated, too, as he shot up four inches to six-feet, two-inches tall.

Always a tenacious rebounder, Wade now had the size and skills to excel in all phases of the game. Recognizing an emerging star, Fitzgerald made the junior his go-to guy. Wade did it all for the Bulldogs. If Richards needed to break the press, Fitzgerald put the ball in Wade’s hands. If the team needed a hoop in close, Wade got the ball in the post. For the year, he averaged 20.7 points and 7.6 rebounds, and opened eyes all around Chicagoland.

He responded to the extra attention with an even more marvelous senior season. Wade went for a double-double almost every game that year, averaging 27.0 points and 11.0 rebounds while leading his team to a 24-5 record and a berth in the round of 32 (the title game of the Eisenhower Sectional) of the 256-team 1999-00 Illinois High School Association (IHSA) Class AA State Championship (though without the acclaim of former Heat player Patrick Beverley, who made it all the way to the final four with his Marshall high school team in 2005-06, or Derrick Rose, who won it all with his Simeon high school team in both 2005-06 and 2006-07). Wade set school records for points (676) and steals (106) in a season that year.

The college scholarship offers didn’t come pouring in, though.

Wade dreamed of playing for Michigan, inspired by the Fab Five. But some of the schools looking at Wade, Michigan included, stopped looking when his first ACT score was low. Fearing he wouldn’t be able to cut it academically, most backed off.

“My first set of scores wasn’t bad,” Wade said. “They were disastrous. They sucked.”

Due to his academic problems, Wade was recruited by only four college basketball programs for the incoming class of 2000 –  DePaul, Illinois State, Bradley and Marquette. Each remained interested in Wade even though he struggled to get his ACT up to the qualifying standard. In three tries, he never did.

The Golden Eagles nonetheless accepted Dwyane as a partial qualifier, meaning he could practice with the basketball team as a freshman but not suit up for games due to a lack of compliance with the NCAA’s Proposition 48.

Academically ineligible for play during his freshman year at Marquette, Wade sought tutoring to improve his writing skills in order to regain eligibility. When he became eligible to play the following year (2001–02), he led the Golden Eagles in points (17.8), rebounds (6.6), assists (3.4), steals (2.5) and blocks (1.1), and guided the team to a 26-7 record and its first NCAA tournament berth since 1997.

Wade had displayed not only perseverance but also toughness, playing the latter half of the season through injury. After the season, in March 2002, Wade underwent arthroscopic surgery on his left knee to deal with a small tear in his lateral meniscus. The torn portion of the meniscus was removed, and Wade was back on the court training for his junior year within weeks.  Read more…

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Revenues, Salary Cap and Tax Projections for Next Season All Rising

November 8th, 2013 No comments

The N.B.A.’s revenues are apparently booming right alongside the broader economy.

During the negotiations that ended the lockout in December 2011, the players union and team representatives jointly created revenue forecasts for the league that extended from the 2012-13 season all the way out through the 2020-21 season.

Those forecasts are quite important because they form the basis off of which to determine how the league’s revenues earned in the years to come are split between the players and owners. Starting in 2012-13, players are guaranteed to receive 50% of those forecasted revenues, plus (or minus) 60.5% of the amount by which actual revenues exceed (or fall short of) those forecasts, with a lower limit of 49% of actual revenues and an upper limit of 51% of actual revenues.

When the accountants tabulated the results for the 2012-13 season last July, they determined that the league earned $4.293 billion in revenue, which, despite representing a massive 12% increase over the last full N.B.A. season in 2010-11, fell short of the initial forecasts by $15 million. That shortfall meant the players were only entitled to 49.96% of revenues.

On the basis of these stellar yet slightly disappointing results, the league issued official projections for the 2013-14 season in July, off of which the current salary cap and luxury tax are based, of $4.471 billion, a projected annual growth of 4.1% – again an impressive number, but $10 million short of initial forecasts. That shortfall, if it holds true when revenues are finalized in July 2014, would mean that the players are only entitled to 49.98% of revenues.

At the same time, the league issued preliminary guidance for the 2014-15 season, so as to help its member teams in planning for the future. Preliminary guidance is only meant to be illustrative, and is of no binding effect until it becomes an official projection one year later. The cap and tax guidance provided were $62.5 million and $76.1 million, respectively, which was based on a preliminary 2014-15 revenue projection of $4.672 billion, a 4.5% annual increase over the $4.471 billion projection for this season. That figure is actually $12 million greater than the initial forecast from December 2011. If it were to hold true when the numbers are finalized in July 2015, it would mean that the players would be entitled to 50.03% of revenues next season. But there’s a long way to go between now and then – almost two full years.

Just a week into the season, the league has already provided its first update. It’s good news. Projected revenues for the 2014-15 season have jumped from $4.672 billion to $4.700 billion, which is now a whopping $40 million higher than originally forecasted in December 2011. If that holds true when the numbers are finalized in July 2015, the players would be entitled to 50.09% of revenues for the 2014-15 season.

More importantly to Miami Heat fans, as the revenue estimates for the 2014-15 season increase, so too do the cap and tax projections, which are always based on revenue projections taken in the first week of July for the upcoming season. They started at $62.5 million and $76.1 million, respectively, in July. They’re now at $62.9 million and $76.6 million. That may not sound like such a big increase, but that slight boost alone could produce tax savings to owner Micky Arison of approximately $2 million or more. And things figure to only get better from here.

The salary for this season is $58.679 million, and the luxury tax level is $71.748 million. It would now appear that, despite the fact that the cap and tax figures were calculated based on 51% of revenues in the last collective bargaining agreement and are now based on just 44.74% of revenues, a 12.27% reduction, because league-wide revenues are rising so sharply, we are going to achieve all-time record cap and tax levels next season, shattering the old records by a massive 7% each.

The N.B.A. is certainly thriving. While individual teams like the Heat may choose to lose money in support of a winner, the league as a whole would appear to be a massive profit machine. And things figure to get a whole lot better in the near future. The N.B.A.’s national television contracts with ESPN/ABC and TNT, which pay an average of $930 million annually over the life of the eight-year contract, extends through the 2015-16 season. Some industry experts expect that figure to at least double when the new deal is finalized. That could add around a billion dollars in incremental revenues every season, which would have a profound impact on cap and tax figures down the road. At least for now, the future appears bright for the country’s greatest professional sports league.

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League-Wide Spending is Down, Keeping Luxury Tax Projection Up

October 27th, 2013 No comments

Those among us who have been biding our time until the start of the 2013-14 NBA season by creating hypothetical machinations whereby the Miami Heat maintains and extends its current dominance into the 2014-15 season and beyond are quietly getting some good news.

League-wide spending is down.

Which means salary cap and luxury tax projections for next season are staying up.

The league is currently projecting a 2014-15 salary cap of $62.5 million and a tax level of $76.1 million. Pending league-wide revenue performance during the course of the season, these projections seem fairly safe for now.

The cap and tax levels are set by calculations based on projected amounts for revenue (termed BRI) and benefits for the upcoming season. The projected BRI is negotiated by the league and players’ association. Each year the sides meet to agree on an amount. Barring any adjustments that are necessitated, they typically use the projected revenues from national broadcast rights (which is determined in advance), plus the BRI for the previous season (other than national broadcast rights) increased by 4.5%.

The salary cap calculation takes 44.74% (53.51% for the tax level) of the league’s projected BRI, subtracts projected benefits and then divides the total by the number of teams in the league. Adjustments are then made if total salaries and benefits paid to the players in the season prior were significantly higher or lower, as a percentage of league-wide revenues, than was agreed in the CBA.

The current 2014-15 projections assume a 4.5% increase in revenues. They are based on an estimated $4.672 billion of projected BRI and $217 million in projected benefits (including $47 million of benefits, or 1% of BRI, to be allocated to the player benefits pool). They assume no salary-related adjustments.

The rest is basic math. Simply multiply the projected BRI by the respective percentages for the cap and tax threshold, subtract projected benefits, and divide the difference by 30. That’s it. Read more…

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