Extension Junction, What's Your Function?

"Show me the money!" – Jerry Maguire

Earlier this summer there was much buzz regarding the Utah Jazz reaching out to veteran power forward Paul Millsap and attempting to negotiate a long-term contract extension. However, due to the intricacies with the NBA’s Collective Bargaining Agreement (the "CBA"), the Jazz were unable to make a contract offer to Millsap that approximated what he and his agent felt was his market value. Thus the Jazz are now forced to play out this season in the hopes that they are able to extend their relationship with Millsap once he becomes an unrestricted free agent. At that point the Jazz will be able to offer Millsap more money, should they choose, but Millsap will no doubt have other suitors for his services as well and he may choose to join another franchise that he feels is more committed to him financially and with his role on the basketball court.

While the future of Millsap has likely been punted until next offseason, the Jazz do have several other veterans that are eligible for contract extensions. The Jazz have the exclusive opportunity to negotiate with each of these players now and try to hammer out a long-term agreement, should both parties so desire. Such an arrangement could benefit each player by giving them long-term financial security that they would have to otherwise wait a full season for. The Jazz may benefit by this if they can retain each of their guys at a rate that is below market.

Let’s take a moment and examine the Jazz’s extension options with its current roster.

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NBA Contract Extensions 101

Some NBA veteran Player Contracts can be extended or renegotiated prior to their expiration. See CBA Article VII, Section 7(a) and (c). However, unless a team is under the Salary Cap it cannot renegotiate any of its current Player Contracts. See CBA Article VII, Section 7(c)(3). Since the Jazz are well above the Salary Cap for 2012-13, they will not be able to renegotiate any current Player Contracts, however the Jazz can extend certain Player Contracts of their veterans, so long as they qualify under the CBA.

In order to qualify for a contract extension, a "Player Contract covering a term of four (4), five (5) or six (6) Seasons may be extended no sooner than the third anniversary of the signing of the Contract." See CBA Article VII, Section 7(a)(1). Accordingly, Al Jefferson (4th anniversary of 5 year contract), Paul Millsap (3rd anniversary of 4 year contract), Mo Williams (5th anniversary of 6 year contract), and Marvin Williams (3rd anniversary of 5 year contract) are eligible for contract extensions between now and June 30, 2013. Randy Foye (1 year contract), Earl Watson (2 year contract), Jamaal Tinsley (2 year contract), DeMarre Carroll (2 year contract) and Raja Bell (3 year contract…HA!) are not eligible for contract extensions, and will all be free agents on July 1, 2013.

Extensions to NBA veteran Player Contracts are limited to a total of four seasons, which includes any years remaining on the player’s current contract. See CBA Article IX, Sections 1 and 2. On the other hand, as unrestricted free agents, each of the extension eligible players listed above are eligible for 4 year free agent contracts from other teams, and 5 year contracts from the Jazz. Therefore, it may be in the player's best interest to wait until free agency to secure a contract that takes them through the 2016-17 or 2017-18 seasons. The first year salary of an NBA veteran contract extension may be any amount that is up to 7.5% greater or lesser than the last year of the player's previous Player Contract. See CBA Article VII, Section 5(c)(3)(i). Thus for the purposes of calculating the size of an extension to one of its players, the Jazz are limited by the size of the final year of salary in each player’s contract.

There are a handful of other provisions which apply, but which we do not need to get into for the purposes of this article (for example both Mo Williams and Marvin Williams have incentive bonuses in their contracts which I will not get into here). Additionally, the Jazz could work into any of these extensions various player or team options which would allow the team or player to terminate the contract earlier then I discuss in each of the scenarios below. Now that the groundwork has been laid, let’s take a look at what the Jazz could do with each of their four extension eligible candidates:

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Al Jefferson

Remaining Contract years: 1 year, $15m
Maximum Contract Extension (including 2012-13 salary): 4 years, $15m, $16.1m, $17.3m, $18.4m
Maximum Contract Amount: $50,750,000 in new money through 2015-16 season
Minimum Contract Extension (including 2012-13 salary): 4 years, $15m, $13.9m, $12.8m, $11.6m
Minimum Contract Amount: $38,250,000 in new money through 2015-16 season
Previous Contract: 5 years, $65m

Analysis: I’ve seen some Jazz fans question why the Jazz engaged in contract extension talks with Millsap and not Jefferson. I think the large financial commitments laid out above are the main reason for this. Jefferson (well really his agent) will no doubt try to maximize the value of Jefferson’s last major contract payday and would thus argue for the maximum $50,750,000 in new contract value. With two young and developing big men on the roster, it would be hard for the Jazz to justify an average annual expenditure of $16.4m for Jefferson, when there is a decent chance that he could lose his starting job at any time over the upcoming four seasons. Furthermore, while Jefferson remains an effective starting center for the time being, the least the Jazz could offer him on an annual basis amounts to a contract averaging $13.3m over the next 4 seasons. While Jefferson may debatably be worth that amount on the open free agent market, it is questionable whether the Jazz should be ready to tie their hands next summer with such an extension. Accordingly, unless Jefferson gets out to a better than expected start this season, I feel fairly confident in predicting that the Jazz will not hold extension talks with Jefferson until he approaches free agency next summer.

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Paul Millsap

Maximum Contract Extension (including 2012-13 salary): 4 years, $7.2m, $7.7m, $8.3m, $8.8m
Previous Contract: 4 years, $32m
Remaining Contract years: 1 year, $7.2m
Maximum Contract Amount: $24,840,000 in new money through 2015-16 season

Analysis: Much ink has already been spilled in Jazzland over this issue, so I will just summarize it briefly. The Remaining Contract year in Millsap’s contract is $7.2m. It is reported in several trusted NBA sources on the internet that the amount is $8.6m. The reason for the discrepancy is due to the fact that Millsap received a $5.6m signing bonus in the first year of his last contract. For Salary Cap purposes that signing bonus is prorated by $1.4m per season, so while the Jazz have an actual salary cap charge of $8.6m this year, Millsap’s salary for this season is only $7.2m. Where this creates problems is that the Jazz are limited in offering Millsap a 7.5% raise over his base compensation (not including the salary cap figure) thus giving them the ability of only offering him an additional $24.84m in new contract money. I didn’t list the minimum extension amount the Jazz could offer, because as we all know by now, Millsap has turned down the Jazz’s maximum extension offer and will be pursuing free agency in July 2013.

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Mo Williams

Maximum Contract Extension (including 2012-13 salary): 4 years, $8.5m, $9.1m, $9.8m, $10.4m
Maximum Contract Amount: $29,325,000 in new money through 2015-16 season
Minimum Contract Extension (including 2012-13 salary): 4 years, $8.5m, $7.9m, $7.2m, $6.6m
Minimum Contract Amount: $21,675,000 in new money through 2015-16 season
Previous Contract: 6 years, $51.1m

Remaining Contract years: 1 year, $8.5m

Analysis: A Mo Williams contract extension presents an interesting game of chicken that the Jazz may have to play this year. While the Jazz have a decent amount of leverage with Millsap and Jefferson in that they have suitable replacement at power forward and center already on the roster, the Jazz clearly do not have an adequate starting caliber point guard on their bench presently. Thus, which would typically be a situation where a team would normally require the new guy to prove himself on the floor before they offer him another contract, the Jazz may opt for the safer route and lock up Mo Williams to an affordable contract in the hopes that he can give them adequate starting point guard play for the next few years.

This situation is a tad reminiscent to what happened with Jameer Nelson and the Orlando Magic this past offseason. While the Dwight Howard drama was far from settled, the Orlando Magic saw few point guard options in free agency and chose instead to re-sign Nelson for 3 years and $25.2m (all but $4m) guaranteed. This would seemingly set a market for Mo who is arguably a comparable player at this point in his career and thus an extension starting at $21.7m may be a reasonable approximation of market value. While I do not expect to see the Jazz to re-sign Mo at the outset of the season, if Mo plays well, we could have an extension announcement by the All-Star break.

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Marvin Williams

Remaining Contract years: 2 years, $8.3m, $7.5m
Maximum Contract Extension (including 2012-13 and 2013-14 salary): 4 years, $8.3m, $7.5m, $8.1m, $8.6m
Maximum Contract Amount: $16,687,500 in new money through 2015-16 season
Minimum Contract Extension (including 2012-13 salary): 4 years, $8.3m, $7.5m, $6.9m, $6.4m
Minimum Contract Amount: $13,312,500.00 in new money through 2015-16 season

Previous Contract: 5 years, $37.5m

Analysis: Marvin William’s contract is a tad different then the rest, specifically he has an Early Termination Option which allows him to void the final year and $7.5m of his contract should he so desire. The CBA provides that "a team and a player shall not be permitted to extend any Player Contract with a term that has been shortened as a result of the player’s exercise of an Early Termination Option." See CBA Article VII, Section 7(a)(2)(ii). Thus in order for Marvin Williams to be able to sign an extension with the Jazz he must waive his ability to terminate his contract prior to adding additional years unto his contract.

With two years remaining on his contract, it may seem premature to discuss an extension with Marvin. However, the timing may be optimal if the Jazz feel they could get some value by offering Marvin long-term security now in return for lesser financial obligations in the future. Perhaps the Jazz could look at extending Marvin’s contract by the least amount possible for 2014-15 and 2015-16. At this point the least amount the Jazz could pay him in those two years is a total of $13.3m. When you add that $13.3m in new money to the $15.8 that Marvin is already owed, you get a fairly pricey 4 year, $29.1m contract. While it would be nice to lock up Marvin at this time in the hopes that he finally proves himself worthy of a #2 overall draft pick, the minimum financial commitment to doing so is more than the Jazz will likely want to spend.

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So Will the Jazz Extend Anybody During this Season?

At this point I do not believe the Jazz will try to offer any extensions to any of the three other veteran eligible players. That could certainly change if any of them get off to spectacular starts at the beginning of the season, especially in the case of Mo Williams who plays a position that is very uncertain in the Jazz’s future. Unlike Millsap, the reality for the other three players is that their large final year salaries likely make them iffy extension candidates and ultimately questionable for the Jazz’s long-term plans. Accordingly, unless Millsap changes his mind and opts to make a deal, I’d expect the Jazz to preserve the maximum amount of cap space they can in 2013-14 and hope that they can either retain each of these guys for a reasonable amount or sign their replacements.