The Downbeat #1377: Money Burning Holes Edition

Russ Isabella-USA TODAY Sports

Wherein we talk about the impeding growth to the Salary Cap...coaches getting paid...Players about to get overpaid...Superstars and superteams...and the Jazz's Salary Cap situation.

Cap and Tax Projections. If you've been following the NBA and haven't been sleeping under a rock for the past 3 years, then you are well aware that the NBA Owners took the NBA Players to the woodshed during the owners' imposed lockout in 2011. We are now ready to enter league year 4 of the 2011 Collective Bargaining Agreement, and new victories by the NBA are still being revealed every day.  Let's take a quick look on how some lesser discussed topics are altering how we enjoy our professional basketball entertainment.

First let's take a quick look at how the NBA's salary cap has changed over the past 3 years and where it is projected to be going over the next two.

NBA League Year Salary Cap * Annual Increase Luxury Tax * Annual Increase
2011-12 $          58.04 0.0% $          70.31 0.0
2012-13 $          58.04 0.0% $          70.31 0.0
2013-14 $          58.68 1.1% $          71.75 2.0%
2014-15 (projected) $          63.20 7.7% $          77.00 7.3%
2015-16 (projected) $          66.50 5.2% $          81.00 5.2%
* In millions of dollars

As you can see, in the 3 years immediately after the NBA lockout, the Salary Cap and Luxury Tax figures remained relatively flat. That however is projected to change over the next two years at the Salary Cap and Luxury Tax amounts are anticipated to jump nearly $10MM over the next two seasons.  This of course means that the NBA's revenues themselves have also are beginning to leap.

So what does this all mean for the future of the NBA and the owner's profits?  Larry Coon explains the implications best:

The current CBA extends through the 2020-21 season, but both sides have an opt-out in 2016-17 — which means either side can unilaterally decide at that time to end the agreement and re-open negotiations for a new one. The timing of the opt-out is not an accident — it’s set for right after the new national TV deals will be negotiated.

Let’s go back to the previous negotiation — the league opted-out of the last agreement because they felt the system was unsustainable. They said that most teams were losing money, and they couldn’t let things continue as they were. They sought a big give-back from the players, a more restrictive system, harsher penalties for high-spending teams (further keeping salaries down), and much greater revenue sharing.

...

So what’s going to happen in 2017? The circumstances are entirely different now. Most or all teams are now profitable, thanks to the changes they negotiated in the new agreement, Franchise values have skyrocketed (the Milwaukee Bucks, the least valuable team in the league, is about to sell for around $550 million, which Mark Cuban calls "a bargain"). And on top of that, the league is about to receive a windfall of new cash in the next TV deal.

Of course by now we all know that $550MM is mere pocket change compared to the $2BN price tag that Steve Ballmer agreed to purchase the Los Angeles Clippers for.

While the long-term values of the franchises and future CBA negotiaitons are severely impacted by what is going on now, in the short-term there are a few trends that are worth monitoring as unintended consequences to the NBA owner's suddenly being flush with cash.

Coaches Getting Paid.  Earlier this week, SBNation's own Tom Ziller discussed the unintended consequences of coaches getting huge salaries in the new NBA environment:

What the lockout deal has created is a league with very few ways for NBA owners to burn money. They'll still find ways, mind you. Fisher's new boss, James Dolan, is showing he is an elite cash-burner. High-dollar contracts to unreliable players (say, J.R. Smith) is one way to waste money in the new NBA. Paying non-stars like stars (Andrea Bargnani) and giving too-rich contracts to older players who will be useless if injured (Amar'e Stoudemire) are other methods.

...

There's one other path toward spendthrift insanity: burn that cash where there is no salary cap. That'd be in the front office and on the bench. Case in point: Dolan gave Phil Jackson $60 million over five years to do a job he's never done before and is giving Derek Fisher $25 million over five years to do a job he's never done before.

Unlike NBA player salaries, NBA Coaching salaries are not always reported and even when they are there are inaccuracies.  However, according to the website http://www.otherleague.com the highest paid coaches for the 2014-15 season are: Stan Van Gundy ($7MM), Greg Popovich ($6MM), Steve Kerr ($5MM), and Derek FIsher ($5MM). Of course the most notable aspect is that the 3 new coaches are getting the highest including 2 former players that have never even coached before.

Derek Fisher's case is perhaps the most interesting as a result of the $3.6MM raise he got over being a player in the 2013-14 season (he made $1.4MM with OKC).

Perhaps the most obscene example of NBA front office personnel salaries gone wild, was the reported deal that failed New Jersey Nets coach John Calipari turned down:

At the end of the day a fan of a small market team such as the Jazz has to wonder, where this leaves our team?  While paying a large salary to an NBA coach doesn't always equate to success, you have to wonder what limitations in potential salary might have done to the pool of potential candidates for the Utah Jazz job.

At the Tyrone Corbin firing press conference, Jody Genessy of the Desnews ask Dennis Lindsey whether the Jazz might have a limit on the salary to pay the new coach, and Lindsey did not have an answer to that question at that time.

While I am generally pleased with the Quin Snyder hiring and think he is a good risk for the future of this current Jazz team, a fan has to wonder whether Utah's inability to compete with New York, San Francisco and Detroit money might have affected who the candidates for our head coaching position were.

Players About to Get Overpaid. With the Salary Cap about to leap another 7.7% this year and by leaps and bounds in 2016-17, current and future free agents are about to get overpaid.  While arguing why some team could/should overpay Lance Stephenson this summer, Zach Lowe summarized the reason why that is thusly:

And here’s another wrinkle a lot of front-office guys are kicking around: We now live in a world where half the league enters each offseason with a ton of cap room, just as the cap is rising at a fast and unpredictable rate. Every team is trying to chart the cap and figure out smart ways to spend in this environment. A lot of executives are wondering if teams with room will try to use it up by offering mammoth one- or two-year contracts to "risky" players, and/or structuring deals so that the guaranteed salary declines each year.

As to the first part of his statement, the Jazz's prized "Financial Flexibility" is now the calling card of nearly half the league.  This of course is caused by the fact that most NBA contracts are now 4 years or less, so many teams have a number of expiring contracts each season.

We know from classic economic theory that if there is a vast amount of money to spend and a limited quantity of products to spend it on, that the cost of said products will rise.  Accordingly, this means a guy like Lance Stephenson could be overpaid simply due to the fact that there are a number of teams who may bid his price up.

More realistically it means, a sane guy like Jazzman Gordon Hayward is about to get overpaid due to the fact that there are limited players his age and at his position available. There are plenty of teams with a ton of rookie deal (i.e. below market rate employees) players on their roster and who have the ability to overpay for the limited resource such as Gordon Hayward (think Steve Ballmer and the LA Clippers).  Teams like Phoenix, Boston and Philadelphia immediately sprout to mind.  Luckily, in Hayward's case the Jazz have the right of first refusal and thus they will be able to keep Hayward, even if it costs them significantly more than they want.

Furthermore, while Hayward's contract is about to give Jazz fans heartburn, just remember with the projected cap increases over the next 4 seasons, there is a good chance that even at his current skill level, Gordon Hayward making $12-14MM per year may be a good value if the Salary Cap is at or approaching $80MM in 2018-19 when a potential new 5 year deal would be set to expire.

The Players Fight Back.  While the owner's won most of the CBA battles, there remains one big issue that is empowering the NBA's star players to control their own destiny.  That of course is the cap on maximum salaries which makes it so the best NBA players are generally considered underpaid based on the actual on court value they bring to the court.

This fact of course empowers the Kevin Love's of the league on short-term contracts to threaten to walk unless they get their way.  The Jazz already had fear of this when they made the Deron Williams trade.

But the caps on maximum salary are also the impetus for the formation of super teams, as Miami pulled off in 2010.  As reported by Brian Windhorst yesterday, the Heat are up to their old tricks again as the will make a run at Carmelo Anthony in July:

The mere concept would require the star trio of LeBron James, Dwyane Wade and Chris Bosh to all opt out of their current contracts by the end of the month and likely take further salary reductions in new deals that start next season to give Miami the ability to offer Anthony a representative first-year salary. The Heat also are prevented from making any formal contact with Anthony until July 1 and can do so then only if he opts out of the final year of his current contract. Anthony has until June 23 to notify the Knicks of his intentions, according to sources.

...

Sources say internal conversations within the Heat organization about pursuing this course have run concurrently with Miami's bid to win a third consecutive championship, with sources adding that James in particular is likely to try to recoup potential salary sacrificed through fresh off-court business opportunities if the Heat's new dream scenario does come to fruition.

James' off-court business is booming, thanks to a string of investments paying off massively and the prospect of new opportunities in endorsements and entertainment projects promising to expand his wealth significantly in coming years.

What this all boils down to is that since NBA stars such as LeBron are making so much money off the court, the caps in place for their on-court salary are becoming less important to them.  In this particular instance, LeBron could choose to give back a few million in annual salary to allow the Heat to free up cash to bring Carmelo into town.

While the NBA no doubt likes the TV revenues generated by super teams, one of the big mantra's of the 2011 lockout was the return of competitive balance.  So long as the caps on maximum salaries incentivize star players like Kevin Love to beg for trades, or LeBron and Carmelo to accept slightly less than market rate, you have to wonder if small-market teams like Utah will ever truly be able to compete on a consistent basis ever again.

Jazz's Cap Situation. With the new Salary Cap projections in play, I've compiled a quick look at what the Jazz's balance sheet is going to look like in July. Notably,you'll see guys like John Lucas III and Ian Clark not on this chart.  While the Jazz have them under contract they are unguaranteed salaries and I suspect none of the players absent from this list will be back next year.

2014-15 Projected Utah Jazz Salary Cap Room
Player 2014-15 2015-16 2016-17 2017-18 Total
Derrick Favors $12,950,000 $12,000,000 $11,050,000 $12,000,000 $48,000,000
Enes Kanter $5,694,674 $7,471,412 $13,166,086
Gordon Hayward $4,677,708 $4,677,708
2014 5th Pick $3,012,500 $3,148,100 $3,283,600 $4,160,321 $13,604,521
Trey Burke $2,548,560 $2,658,240 $3,386,598 $4,588,840 $13,182,238
Alec Burks $3,034,356 $4,175,274 $7,209,630
Jeremy Evans $1,794,871 $1,794,871
2014 23rd Pick $1,075,300 $1,123,700 $1,172,100 $1,989,054 $5,360,154
Rudy Gobert $1,127,400 $1,175,880 $2,121,287 $3,145,869 $7,570,436
Cap Hold $507,336 $507,336
Cap Hold $507,336 $507,336
Cap Hold $507,336 $507,336
Cap Hold $507,336 $507,336
Total Cap Holds $37,944,713
Salary Cap $63,200,000
Estimated Cap Room $25,255,287
Luxury Tax $77,000,000
Estimated Luxury Tax Room $39,055,287

So where do you think Utah should park its estimated $25MM in Salary Cap Room?

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