NFL Provides Model For NBA To Repair Dysfunctional Cap
On Feb. 21, the Knicks acquired Carmelo Anthony from the Nuggets in a blockbuster NBA trade that had been months in the making. In the never-never-land of NBA trades, the deal would've been nearly impossible to pull off without a very real $11.3 million contract being traded to Minnesota in the form of an imaginary player named Eddy Curry.
Curry, who hasn't appeared in an NBA game since Dec. 17, 2009, possessed one of the most valued and peculiar assets in the sport: not a low-post game, and certainly not rebounding ability, but rather a hefty expiring contract. Curry's salary, plus a 15 percent trade kicker, was tossed into the machine like dirty socks into the laundry to help the glamour-market Knicks -- who regrettably had given Curry a $60 million contract in 2005 -- acquire one of the game's marquee players.
It wasn't as egregious as semi-retired Keith Van Horn signing a $4.3 million contract just so the dollars could be included in the trade that sent Jason Kidd from the Nets to the Mavericks in 2008. But trades involving overpaid, underperforming (or non-performing) players like Curry have become one of the scourges of a collective bargaining agreement that needs to change dramatically, one way or another, at the end of the lockout.
In Part I of our series on finding compromises and workable solutions to the bargaining impasse between the owners and the National Basketball Players Association, we addressed the most important issue -- the split of revenues. The next step is to find a way to fix the system that delivers the money to the players. Hard cap? Soft cap? Flex cap? No cap? What would Dr. Seuss do? What's the best way to reinvent the wheel so the players feel they're fairly compensated and the owners get a system that achieves their stated goals of improving competitive balance and maximizing profits?
Two caveats: 1) I am not a lawyer, accountant or actuary, and there are a lot of smart people on both sides who are much better at math than I am. My goal is to add some common sense to the equation and generate some healthy debate about how the NBA's pay structure and cap rules could make the product better; and 2) None of what I am about to say will work without a substantial enhancement of the NBA's revenue-sharing plan, which is by all accounts badly in need of improvement. (That will be Part III of this series next week.)
You are going to see a lot of similarities between what I am proposing and what the NFL already has had. The NFL system isn't perfect, but there's a lot to like -- starting with, of course, far more substantial revenue sharing. So if we're taking a fresh look at how the NBA does business, make like Melo and tip your cap to yourself if you know that the first issue that has to be decided is ... the cap.
The players want to maintain a soft cap with a plethora of exceptions that allow teams to exceed it. The owners have proposed what they call a "flex cap" with a $62 million midpoint and undefined upper and lower limits. Any salary system with an upper limit is, by definition, a hard cap. And by the same logic, any cap that can be exceeded isn't a cap at all. I am with the players (and the agents) when they point out that nothing in the current system forces owners to overpay players with multiyear guarantees and the like. The problem is, the tools currently at management's disposal aren't giving low-revenue teams a chance.
Often, the teams that are in the worst shape are the ones in the middle -- not the five highest-paying or the eight lowest-paying, but the 17 teams in no-man's land. Those teams -- like Portland, Houston and Atlanta, all of which will pay luxury tax for this past season -- have an untenable choice: Spend beyond their means, lose money and create the illusion that they are competing for a championship; or make like Sacramento and Minnesota (i.e. spend the bare minimum and have really entertaining halftime shows with Frisbee-catching dogs).
The NBA can't fix its competitive imbalance problem without revenue sharing. But revenue sharing will be for naught if the gap between the big spenders and non-spenders isn't narrowed significantly. When luxury-tax payments (both paid and received) are factored in for the 2010-11 season, the Lakers ($112 million), Magic ($111 million) and Mavericks ($104 million) each will have spent more than double the four lowest-paying teams: the Cavaliers and Timberwolves (both $51.9 million), Clippers ($49.4 million) and Kings ($42 million), according to data compiled from league salary figures. (And remember: More than $12 million of Minnesota's payroll was because of buyouts, principally Curry's.)
The most effective way to narrow the gap is to institute a hard cap with little or no funny business, wiggle room or exceptions. The cap just needs to be higher -- higher than it was last season, and much higher than the absurd $45 million the owners originally proposed. So to get the number, let's go back to my proposal that has the players getting 52 percent of basketball-related income in the first year of the new CBA. That's $1.976 billion, less $150 million in benefits, divided by 30 teams, and voila: the salary cap for the 2011-12 season is $60.9 million.
According to league salary figures, nine teams have committed payrolls above that amount for next season: the Lakers ($93.5 million), Magic ($76.1 million), Spurs ($73 million), Trail Blazers ($70.2 million), Suns ($67.7 million), Heat ($66.2 million), Celtics ($65.8 million), Hawks ($65.1 million) and Bulls ($62.7 million). There are two ways to deal with this problem, and the NBA should do both: 1) Phase in cap compliance for two years; and 2) Allow for the restructuring of contracts to provide an avenue for teams to keep their core players while getting under the cap, as in the NFL.
For the first step, the two-year phase-in, we'll set a second-tier limit allowing teams to spend up to last season's average payroll for the 2011-12 and '12-'13 seasons: $67.5 million. That spares the Heat, Celtics, Hawks and Bulls. If those teams, the other five already projected to be over $67.5 million -- or any other team, for that matter -- wants to spend more than the second-tier cap, they're welcome to. But they'll have to pay the worst-performing financial teams for the privilege and will have to plan to be under the hard cap in '13-'14, when the second-tier cap will go away.
We're not calling this a luxury tax; there is no luxury tax under my proposal. First, this is a temporary measure to prevent teams from having to gut their rosters to comply with the new hard cap and to provide emergency assistance to the teams that are losing the most money. In addition to addressing roster continuity, we're also addressing the owners' stated losses in the process. For every dollar above $67.5 million in payroll in Years 1 and 2 of the new CBA, teams would pay a dollar into what I'll call the small-market reinvestment fund. (This is an age-old trick of politicians, calling taxes "investments." If it's good enough for them, it's good enough for me.)
If the five teams currently over the $67.5 million threshold stayed right where they are, and no other teams joined them, that would be $43 million to divide up among the league's worst-performing teams -- with the eligible teams being determined by a vote of the Board of Governors, based on the NBA's own financials, which state, for example, that 11 teams lost in excess of $20 million each during the 2009-10 season. (The figures would be updated to include 2010-11, and teams would be ranked for assistance based on their average loss in those two seasons.)
This would help the marquee teams by not forcing them to tear up their rosters, and clearly, it would help the worst-performing teams by directing the overspending at the top to the teams that need it most. (Under the current system, non-tax-paying teams each receive 1/30th of the luxury tax paid, an arcane and not very useful way of redistributing wealth.) While $43 million may not seem like a lot, this would be in addition to the NBA's goal –- announced last week by commissioner David Stern –- to increase the revenue-sharing pool from $60 million to between $180 million and $200 million. (We'll fully tackle the revenue-sharing issue in Part III.)
So what happens if, as expected and desired, spending increases among the lower-paying teams below the cap to the extent that player salaries exceed 52 percent of basketball-related income? Beyond the contributions of teams above the $67.5 million tier, any overage in player salaries should be returned by the players -- similar to the current escrow system, but with a catch. That money also will be directed to the teams that the league has stated in its audited financial statements and tax returns are doing the worst financially.
After the first two years, tier 2 of the cap will go away. Based on current revenue projections and my previous proposal to give players 52 percent of the first $3.8 billion in revenues and 25 percent of the rest in 2013-14, the cap that year would be $63.45 million. Every team will have had two years to get into compliance, with the tools they need to do so creatively with minimal disruption to their rosters, if that's what they want.
As for the second step, we'll focus on allowing teams to keep their best players while bringing pay more in line with performance over time. The key points will be NFL-like signing bonuses to convert future guarantees into money that can be prorated for cap purposes; limiting guaranteed years on future contracts to three (with the exception of two franchise players designated by each team, who could get five years guaranteed if they re-signed with their teams as free agents); and allowing base salaries to rise or fall during the course of a contract, depending on a team's priorities and how it decides to manage its cap.
An NFL-like system would give the Lakers the flexibility to pay Pau Gasol and Kobe Bryant while filling out their roster. (Getty Images)
Here's how it would work: After the 2011-12 season, the Lakers will owe Kobe Bryant approximately $58 million in guaranteed money over the next two seasons. By himself, Bryant will count $27.9 million against the Lakers' cap in '12-'13; add Pau Gasol ($19 million), and the Lakers' two top players will account for nearly $47 million -- 70 percent of the second-tier cap, which would still be in effect for the '12-'13 season.
So the Lakers do what they do in the NFL. GM Mitch Kupchak goes to Bryant and Gasol and tells them if they want the Lakers to compete for a championship, they have to restructure their contracts. Bryant will want (and deserve) all the money he's guaranteed in one form or another; he and the Lakers signed a contract stating he would get that money. So with Bryant's consent, the Lakers tear up the two remaining years of that deal and replace it with a five-year, $70 million extension -- $50 million of which is paid as a signing bonus that is prorated for cap purposes over the life of the deal. The base salaries may be allocated in any fashion the two sides agree to, provided at least $8 million is guaranteed (or Bryant wouldn't agree to it) and provided the numbers fit within to-be-negotiated minimum and maximum salary parameters.
In its simplest form, Bryant's new deal would have a base salary of $4 million annually, with the first two years guaranteed. So Bryant gets the $58 million he is owed, and the Lakers get his cap number down from $27.9 million in '12-13 to $14 million (the $4 million base plus the $10 million salary-cap proration.) They could do the same with Gasol (who is owed $38.3 million over the same two-year period), and with Andrew Bynum (whose $16.1 million team option for '12-13 could be replaced with a cap-friendly extension that either includes a signing bonus, base salaries that decline over time, or both).
What if Bryant still looks like he's going strong heading into the 2014-15 season, when he'll be owed a measly $4 million in nonguaranteed salary at age 36? His agent, Rob Pelinka, would demand an early-termination clause he can exercise on Sept. 1, 2014. To keep the unamortized portion of the signing bonus ($30 million) from accelerating against their cap, the Lakers will gladly restructure his deal again so Bryant is paid what he is worth at that stage of his career. (Under my plan, Sept. 1 will be akin to the NFL's June 1, after which teams can waive a player and spread the unamortized signing-bonus money over two seasons instead of taking the hit all at once.)
This mechanism would do more than allow capped-out teams to comply with the new cap when the phase-in period is over in 2013. It would give teams the payroll flexibility they need to churn the roster and remain competitive, and it would allow a small-market team like Oklahoma City to sign Russell Westbrook, James Harden and Serge Ibaka to extensions while adding more supporting talent -- provided those second-tier stars agree to cap-friendly contracts and Kevin Durant restructures his to conform to the team's cap needs.
Teams would have the flexibility to manage their payroll and cap in ways that fit their strategy -- pay now while the championship window is open, or clear future space for a big free-agent class. Executives and agents would have to get used to a world where max contracts with 8 or 10.5 percent built-in raises are no longer the norm. Owners say they want pay to be more reflective of performance; if so, sign players to contracts with front-loaded guarantees and/or base salaries declining over time.
Agent Mark Bartelstein, who represents players in both the NBA and NFL, said owners can sign players to such contracts now. Bartelstein said it's "disingenuous" for NBA officials talk about competitive balance when it could be addressed through revenue sharing.
"In terms of having a flexible system where players have movement and flexible choices, that system is broken for the players," Bartelstein said. "If they address revenue sharing properly, it will not only greatly improve competitive balance, but it will also improve revenues around the league and that will allow everyone to prosper. To hide behind the expense side is just not fair."
But the problem is, teams competing for free agents are compelled to offer deals with built-in raises and often pay max or full mid-level dollars to players who don't deserve it because that's what the market bears. It's a misallocation of resources that constantly comes back to bite teams when the player fails to play up to his contract.
Let's say 2011 free agent Tyson Chandler is worth approximately what Al Horford and Joakim Noah are worth (five years, $60 million). Give him a five-year deal with a $30 million signing bonus and $30 million in guaranteed base salary over the first three years. Chandler gets his money during his remaining prime years when he's worth it, and his team has him at a manageable cap number during that time (the $6 million prorated bonus plus a base of, say, $4 million in the first year). That way, you're not desperately shopping the ginormous expiring contract of a broken-down Tyson Chandler at the trade deadline in 2015. If Chandler is still playing at a premier level, his team will want to restructure his deal -- or he'll be waived and get market value as a free agent.
Another way to do it would be similar to the NHL: Sign a free agent like Chandler to a seven-year, $60 million deal with the money substantially front-loaded and the cap number being the average salary. So Chandler would get $20 million in the first year, $10 million in each of the next three, $5 million in the fifth year and $2.5 million in each of the final two. He would be getting $30 million over the first four years (when he's worth it), the team wouldn't be crippled with a huge contract at the end, and his cap number each year would be $8.6 million (the average of the deal).
However it's done, the goals should be giving teams more flexibility and tools to turn over rosters and be competitive, while stemming the persistent cycle of bad contracts for players who are undeserving of enormous raises in the back end of their deals.
"The zero-sum-game nature of sports dictates that some teams are going to go haywire, like Sacramento," a former NBA executive said. "Historically, those guys spent on payroll and were in go-for-it mode for a while. And then things went south on them. And when things go south, you sort of go down swinging, continue to spend and find yourself locked into all these long-term obligations. The same cycle happened in Memphis, Philly, all these markets where the team goes south and business goes way south with it, and then you're trapped. There's always this rotation through the league where somebody is being crushed by the nature of the system."
Are the owners and players committed to changing the system for the better, or simply protecting their own interests? This is what we'll find out during the long fight ahead: Whether the players are interested in turning dead money into live money, and whether the owners really want competitive balance or simply are exerting their power to force the players to take massive pay cuts.
"No matter what, you can't have a system where Eddy Curry can overeat, sit on the end of the bench, be paid $12 million and get a $700,000 trade bonus for never getting on a plane to Minnesota," the former executive said. "In order to make a trade work, you can't give Keith Van Horn some phony baloney contract so he could he can never go to New Jersey."
That's the system we have. And that's the system we'll continue to have unless both sides wake up and do what's needed to make it better.
