An Idiot's Guide to NBA Front Office Finances

Adam Fromal@fromal09National NBA Featured ColumnistJuly 24, 2013

It's time to be like Michael Jordan and figure out front-office finances.
It's time to be like Michael Jordan and figure out front-office finances.Sam Sharpe-USA TODAY Sports

If you're like me, you grew up wanting to be like Mike.

Well, now you get to pretend that you actually are the greatest basketball player of all time, just not the version of him that played 15 years ago. You get to be like Michael Jordan right now, trying to figure out how in the world you manage the finances of an NBA front office. 

In order to avoid pulling an M.J.—balancing out the positive records set as a player with negative ones during your tenure as a front office member—you'll need to understand four main offseason topics: the salary cap, how to sign players, salary cap exceptions and the amnesty clause.

The Salary Cap

When discussing any salary figures, three numbers have to be kept firmly in mind: the salary cap (where free spending stops), the luxury-tax threshold (where teams start being penalized for overspending) and the apron (where restrictions are placed on player movement). 

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For the 2013-14 season, the first two have been set at $58.679 million and $71.748 million, respectively. That makes the apron $75.748 million, as it's always set $4 million above the luxury tax. Below, you can see a visual representation of these three numbers: 

As you can probably tell based on the color-coding, the three levels of expenditures are increasingly dangerous to front offices.

Spending money while under the salary cap remains perfectly fine, but things get tricky once operating in the yellow area. That means that you're over the salary cap but under the tax level, limiting the type of players you can acquire. 

Similar restrictions and additional ones occur after moving into and past the red, which is indeed possible even if our chart doesn't show that. 

The cap, which is calculated each year based on projected benefits and basketball related income (BRI), is what we call a "soft" one. As opposed to a "hard" cap, one that would serve as a strict ceiling on expenditures, teams are allowed to exceed it under certain situations. You can see how the salary cap has progressed over the years: 

Starting in 2013-14, teams are also required to spend 90 percent of the cap, up from 85 percent in the past. This number doesn't have to be met by the beginning of the campaign, but rather at the conclusion. 

It won't be a problem for most of the spend-happy owners in the Association, though.

When a team is operating under the cap—as determined by the combination of all players' salaries and cap holds—it has the most freedom when attempting to lure players. Free of worry, it can offer any type of free-agent money up to the level of a maximum contract. 

Essentially, it's in the green. 

The Los Angeles Lakers will fall into this category during the 2013-14 season, when nearly all their contracts come off the books. They can spend money chasing marquee stars like LeBron James and Carmelo Anthony without worrying about exceeding the cap. 

When you move into the yellow, teams are no longer able to just sign free agents to typical contracts. They instead have to work with sign-and-trade deals to acquire them or use cap exceptions (more on that later). They can also re-sign their own players without such maneuvers. 

This set of rules applies to the red area as well, although teams in that section are now subject to the luxury tax. Installed as a way to curtail massive spending—something that still doesn't seem to bother uber-rich owners like the Brooklyn Nets' Mikhail Prokhorov—the tax depends on how far over the threshold a certain team is. 

In 2013-14, the most a team will end up paying will be $3.75 for every dollar over the threshold. This is enough to push the Brooklyn Nets to a tax bill worth more than the luxury-tax threshold, which makes it the largest in NBA history

These aren't the only restrictions with regard to the cap either. 

Once a team has exceeded apron, it can no longer use the bi-annual exception, has a smaller mid-level exception (more on that later) and is subject to trading restrictions. 

Different Ways of Signing Players

When a player hits free agency, he falls into one of two categories: restricted or unrestricted.  

If in the latter, a player is free to do as he pleases while on the open market. He can join any team with the cap space to sign him for the contract agreed upon. His old team has no control over his decision, and he is therefore without restrictions. 

LeBron will be the preeminent example of an unrestricted free agent if he opts out of his final year with the Miami Heat. As a result, he'll be chased by every team with money to spend, and the Heat will have no say in the decision other than the pitch they give him. 

Restricted free agency is a bit more complicated, but the process can be broken down into a few steps:

  1. Players qualify as restricted free agents (RFA) when hitting free agency after less than four years of NBA service or when finishing the fourth year of a rookie-scale contract.
  2. Teams must submit a qualifying offer for either 125 percent of the previous year's salary or the minimum salary that year plus $200,000, whichever is greater.
  3. The RFA decides whether or not to sign the qualifying offer. If he does, he's under contract. If he doesn't, he remains an RFA.
  4. The player and a new team agree to an offer sheet, which includes length, compensation, payment schedule, bonuses and guarantees.
  5. The old team has three days to exercise its right of first refusal and match the offer sheet. That brings the RFA back, regardless of the player's personal desires.

Let's use Jeff Teague as an example. 

The Atlanta Hawks point guard played out the first four years of his NBA career with Atlanta, which decided to pick up the team options for the final two years of his rookie-scale deal. After the Hawks submitted a qualifying offer, Teague became an RFA. 

He signed a four-year, $32 million offer sheet with the Milwaukee Bucks, but general manager Danny Ferry exercised the right of first refusal. Now Teague remains with the Hawks. 

Restricted free agency is quite important going into the next offseason, as John Wall, Paul George, DeMarcus Cousins, Greg Monroe and more young studs will become RFAs if they don't sign extensions. 

There is also a third way to acquire a free agent: a sign-and-trade. 

This type of move allows teams to grab free agents (either restricted or unrestricted) by completing a trade and skirting the free-agency rules about exceeding the salary cap. All they have to do is give something in return, which is the motivation for the team losing the player in question. 

However, not all rules can be avoided. A team engaging in a sign-and-trade cannot be above the apron, nor can it exceed it later in the season. 

The motivation for a player is obvious, as he gets to join his desired team. However, he also has the potential to make more money because the contract he signs is technically with the old team. If he has Bird Rights—spending three seasons without changing teams via free agency—then he can sign for a fifth season and is subject to annual raises of 7.5 percent rather than 4.5 percent. 

You may have heard about Dwight Howard leaving $30 million on the table by spurning the Los Angeles Lakers, and here's how his salary breaks down: 

As you can see, the difference in salaries isn't that apparent until the fourth year, and then the fifth year pushes the Lakers' possible expenditures well ahead. Of course, no sign-and-trade was completed, but it's still an interesting example. 

Types of Salary Cap Exceptions

Teams are ultimately controlled by the salary cap, as they can't sign players unless they stay under it. That's why teams like the Miami Heat can't just go out and land another superstar. 

However, there are many different salary cap exceptions that typically get used during an offseason. There are disabled player, bi-annual and reinstatement exceptions as well, but those don't come into play as often. 

Larry Bird Exceptions can be used on any level of player—Chris Paul, for example—but the other kinds typically apply to lower-tier free agents. For example, J.R. Smith signed with the New York Knicks for the Early Bird Exception this offseason, while Andrei Kirilenko inked a (controversial) deal with the Brooklyn Nets for the Mini Mid-Level Exception. 

Typically, these CBA loopholes, other than the Bird ones, are used to fill up rosters with bargain-bin players willing to accept lesser contracts. 

Larry Bird Exception

When a new collective bargaining agreement was put into practice during the early 1980s, Larry Bird was supposedly the first player to re-sign with his team. No player had been allowed to exceed the salary cap to re-sign with his old team before, and the rule bears "Larry Legend's" name because he was the groundbreaker in this situation. 

I say supposedly because it's technically not true. 

After the 1983-84 season, the salary cap ceased to exist for a short period until the new CBA could be put into place. When the C's inked Bird to a seven-year deal for $12.6 million, there was no exception used because the new $3.6 million salary cap was not yet in place to block the move. Think about how staggeringly low that number is for a second. 

Technically, the first Boston player to be signed with the Larry Bird Exception was Cedric Maxwell, but his name just wouldn't let the rule have the same ring to it. 

The goal of this exception is to allow teams to retain their players without fear of the salary cap. It's what has allowed organizations like the Los Angeles Clippers to hold onto max-contract players (Chris Paul) and less expensive players (Matt Barnes) even in the face of the cap. 

If a player has been under contract for three seasons without changing teams via free agency, he has Bird Rights and can be re-signed under these rules. The resulting contract can be between one and five years (the only way a free agent can sign a five-year deal) for up to the maximum salary. Players can also receive annual raises of 7.5 percent. 

It's also important to note the order in which moves must occur. Due to cap holds, a team cannot attempt to game the system by signing other teams' free agents until pressed up against the cap before re-signing a player through the use of the Larry Bird Exception. 

Early Bird Exception

If a player is eligible for free agency after just two years spent without changing teams via free agency, he qualifies for the Early Bird Exception instead of the regular one. Only a few things change. 

One-year and five-year contracts are no longer possible, and the maximum salary changes from just 175 percent of the previous year's salary to either that or the average salary on the last contract, whichever is greater. 

Non-Bird Exception

The Non-Bird Exception is technically still a Bird Exception, despite its name. 

It is eligible when a team renounces its Early Bird rights so that it can re-sign a player to a one-year deal. Essentially, renouncing rights means giving up the ability to use any of the aforementioned Bird exceptions so that a player doesn't count against the salary cap. 

The maximum salary drops to 120 percent of the previous year's terms, and the value of the annual raises decreases to 4.5 percent as well. 

Mid-Level Exceptions

As you can see up above, there are three different kinds of mid-level exceptions. 

The Taxpayer Mid-Level Exception is used when a team is already over the apron or would be pushed above by using the exception. It can be split up and used to sign players to deals between one and three years. 

For teams who wouldn't be over the apron but would still be over the salary cap after using the exception, the Non-Taxpayer Mid-Level Exception can also be split up, but players can be signed for up to four years. Using this also sets up the apron as a de facto hard cap.

Finally, there's the Room Mid-Level Exception, more commonly known as the Mini Mid-Level Exception. Used when a team cannot take advantage of either of the previous two exceptions, it can be split up as well, but the maximum contract length is just two years. 

All three types do allow for 4.5 percent increases in annual salary, and only one kind can be used each year. 

Other Exceptions

Using the Rookie Exception, teams are allowed to sign their first-round draft picks to rookie-scale contracts even when it pushes them over the cap. 

Take the Brooklyn Nets, for example. 

Even though they entered the offseason well above the luxury-tax threshold, they are still able to give Mason Plumlee a typical rookie-scale contract because they drafted him in the first round. 

The same is true for teams signing players who are willing to accept minimum contracts. These one- and two-year deals with no annual raises or bonuses can be handed out freely in order to fill up a roster. 

Rookies who were second-round picks fall into this category as well. 

The Lakers are the premier example of a team using minimum contracts to fill out a roster. Even after losing Dwight to the Houston Rockets, they've been able to sign players like Nick Young to minimum deals in order to complete their team. 


The Amnesty Clause

We've discussed ways that teams can acquire players during the offseason, but there's also a one-time method of removing a player's salary from the books: the amnesty clause. Teams can use this to either cut ties with an overpaid player or part ways with someone in order to clear up salary-cap room or lessen the blow of a luxury-tax payment. 

Starting under the new CBA in 2011, teams could use this amnesty clause once before the end of the 2015-16 season on a player whose current contract was signed prior to the 2011-12 campaign. 

Twenty teams have used the provision thus far, including the Lakers (Metta World Peace), Heat (Mike Miller), Milwaukee Bucks (Drew Gooden) and Toronto Raptors (Linas Kleiza) this offseason.

You can find a breakdown of the remaining eligible players and teams here, courtesy of ESPN's Marc Stein. However, it's a little out of date since Stein published before the Bucks and Raptors used the clause. 

Above, you can see an up-to-date representation of the ratios that exist between players who have been amnestied, are eligible to be amnestied and can no longer have that clause used on them.

So let's use World Peace as an example. What happens when a team does use the clause?

World Peace was owed $7,727,280 for the 2013-14 season, but that number no longer applies to the salary cap or luxury tax for the Lakers. They still owe him the money (minus what he earns with a new contract), but it's off the books for those calculations, which serves as the motivation for such a move. 

At this point, World Peace hits the waiver wires, where teams can place bids for his services over a 48-hour period. If no one bids, as was the case here, the small forward becomes an unrestricted free agent.

However, if teams had decided to bid, they'd be doing so for the right to give World Peace a contract offer. Had a team like the Charlotte Bobcats bid on World Peace and won, he likely would have played overseas or decided to retire. 

Fortunately for the artist formerly known as Ron Artest, that didn't happen. He cleared waivers and was able to sign with the New York Knicks for two years and $3.2 million. 

The other hidden benefit of the amnesty clause is that it allows Kobe Bryant to demonstrate his social-media brilliance. He did so following a torching of the Dallas Mavericks in response to Mark Cuban's ill-advised statements about the Lakers potentially amnestying him: 

As is the case with any other financial matter, the amnesty clause can be a little complicated. Fortunately, it isn't too hard to understand. 

NBA front offices must keep all of these numbers, rules and restrictions in mind whenever they go to work trying to improve their teams. You might not always hear about the nitty-gritty details, but they're important to understand so you can realize both why teams are making decisions and how they're able to do so. 

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