How NBA Free Agency, Salary Cap Work

Kerry Miller@@kerrancejamesCollege Basketball National AnalystAugust 7, 2018

How NBA Free Agency, Salary Cap Work

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    LeBron James
    LeBron JamesGregory Shamus/Associated Press

    NBA Free Agency is this glorious conglomeration of a roller-coaster ride, falling dominoes, fake Twitter accounts and math you thought you'd never have to use after high school, but how exactly does it all work?

    Unlike in Major League Baseball, where Bryce Harper is free to sign a $1 billion contract this offseason if some owner wants him badly enough, the NBA has a salary cap. And unlike in the National Football League, where most of the players (aside from quarterbacks) are largely interchangeable, one star can be the difference between missing the playoffs and reaching the NBA Finals.

    So, every year, at 12:01 a.m. ET on July 1, the NBA's offseason temporarily becomes more entertaining than its regular season. Max deals, mid-level exceptions, offer sheets and "Bird Rights" rule the sports world as the pieces frenetically fall into place.

    The 2018 free agency fracas has already come and gone, but this guide to free agency and the salary cap should help you better understand the annual off-the-court mayhem.

What Is a Salary Cap and How Is It Determined?

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    How did the Thunder have cap room for Paul George?
    How did the Thunder have cap room for Paul George?Rick Bowmer/Associated Press

    Let's begin with the what and the why before beginning our descent into the how.

    In a nutshell, a salary cap is a spending limit designed to promote/enforce competitive balance across the league. Unlike in Major League Baseball, where the big-market clubs will annually spend three or four times as much on salaries as teams like the Milwaukee Brewers and Tampa Bay Rays, the NBAas well as the NFL and NHL—has a salary cap that is supposed to stop the most lucrative teams from simply buying championships.

    The rise of "super teams" in recent years might suggest that system is broken, but we've also seen 29 of 30 franchises reach the playoffs in the 2010s. (Sorry, Sacramento.) There's simply no chance that would be the case if the Los Angeles Lakers and New York Knicks were allowed to spend triple what the New Orleans Pelicans and Milwaukee Bucks can afford based on differences in revenue streams in those markets.

    Each year, the salary cap is derived from basketball-related income, or BRI. This includes revenue from tickets, broadcast rights, merchandise and concession sales, team sponsorship and promotions, championship parades and several dozen other things. Under the current Collective Bargaining Agreement (CBA), the players get between 49 and 51 percent of the BRI.

    Benefits and an escrow account (in case BRI falls short of projections and the players "owe" money at the end of the year) are also extracted from the players' share, and the exact amount/percentage is determined by how close the league comes to hitting its projected BRIa number that both the owners and the players association negotiate before the season. It's a complicated formula, and even cap experts who know the CBA and revenue forecasts inside and out aren't able to say with certainty what the cap will be each year. Just know that the number isn't pulled out of thin air.

    Thanks to a huge spike in broadcast rights (as well as league interest in general), the cap skyrocketed from $70 million in 2015-16 to $94.1 million the following season. Since then, it has continued ticking upward, though not as much as initial projections. The cap for the 2018-19 season will be $101.869 million.

What Are the Minimum and Maximum Amounts an Individual Player Can Get Paid?

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    Chris Paul
    Chris PaulMarcio Jose Sanchez/Associated Press

    In addition to a team salary cap, there are strict guidelines about how much money each individual player can make when signing a new contract.

    Both the minimum and the maximum amounts available to a player are based on his number of years in the league.

    For instance, if a team wants to sign a free agent who is entering his second year in the NBA, it would owe him at least $1,349,383 in the first year of his deal. That is precisely the amount that Antonio Blakeney, Kadeem Allen, Monte Morris and Daniel Hamilton signed for this summer. But players with at least 10 years of experience are due a minimum salary of $2,393,887 in any new dealsthe "veteran minimum" that 41-year-old Vince Carter signed for with the Atlanta Hawks.

    These minimums change each year proportionally to the salary cap, as do the maximums.

    The scale for the maximums is a bit easier to digest, albeit with a couple of superstar caveats:

    • 0-6 years in the league; maximum first-year salary is 25 percent of cap
    • 7-9 years in the league; maximum first-year salary is 30 percent of cap
    • 10+ years in the league; maximum first-year salary is 35 percent of cap

    If a player coming off his rookie contract (four years in the league) was named MVP, Defensive Player of the Year or All-NBA, he is allowed to sign a five-year deal starting at 30 percent of the cap. Blake Griffin, Paul George and Derrick Rose all met those qualifications and were paid handsomely for it. There's also a similar provision called the "designated veteran player exception," which allows a free agent with only 7-9 years of experience to sign for 35 percent of the cap.

    As far as multiyear deals go, after the first season, max salaries can increase each season by up to eight percent of the first-year salary if the player re-signs with the same team and five percent if he changes teams. Thus, even though both LeBron James and Chris Paul signed four-year maxes this summer and are making identical amounts ($35.65 million) in 2018-19, the latter is going to make about $6.4 million more over the lifetime of the contract because he stayed with Houston, while James departed Cleveland for Los Angeles.

If There's a Cap, Is There Also a Floor?

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    Will the Kings spend enough money this year?
    Will the Kings spend enough money this year?Rich Pedroncelli/Associated Press

    It hasn't stopped teams from "tanking" to improve their odds of winning the draft lottery, but, yes, there is a salary floor. It is 90 percent of the salary cap, which equates to $91.682 million for the upcoming season.

    If a team's salary is below that mark at the time of the final game of the regular season, it is required to distribute additional money to the players on the roster until it has actually spent the 90 percent. However, the team is not allowed to use this as a workaround to pay a player more than the league maximum for his stature.

    Failing to spend enough to reach the floor rarely happens, though, and it's only by a slim margin if it does.

    Even a few years ago, when the cap jumped by more than $24 million in one summermeaning the floor also went up by nearly $22 millionteams found a way to get there. Granted, for most of them, it meant spending recklessly on guys like Timofey Mozgov, Joakim Noah and Bismack Biyombo with multiyear deals worth around $16 million annually. But, darn it, they reached the floor.

    To help the small-market teams spend (at least) the salary floor and still (hopefully) turn a profit, there's a revenue-sharing pool. But let's not pretend all 30 teams are getting an equal share of the NBA's collective annual income every year. As ESPN's Brian Windhorst and Zach Lowe reported after the 2016-17 season, even after accounting for revenue sharing, the Los Angeles Lakerswho went 26-56 that season, by the wayhad a net income of $115.4 million, while a bunch of franchises lost money.

What Happens If a Team Goes over the Salary Cap?

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    The Warriors will be paying a lot in luxury taxes once again.
    The Warriors will be paying a lot in luxury taxes once again.Associated Press

    Before we proceed any further, this is a good spot to note that the NBA has a "soft" salary cap, which makes the reported cap figure more of a rough guideline.

    NBA owners are welcome to spend more on 2018-19 salaries than $101.869 million. In fact, thanks to various exceptions that we'll get into a bit later, most teams do end up spending quite a bit more than the cap number you'll hear floating around. For instance, last year's salary cap was $99.1 million, but there were only seven teams who spent less than that.

    The more noteworthy figure for cap discussions is the luxury tax threshold, but even that number doesn't much matter if the owner has deep enough pockets.

    This year, the luxury tax threshold is $123.733 million. Any team with a salary exceeding that mark will have to pay the following penalties:

    • $1.50 for each dollar spent up to $4,999,999 over the limit
    • $1.75 for each additional dollar spent up to $9,999,999 over the limit
    • $2.50 for each additional dollar spent up to $14,999,999 over the limit
    • $3.25 for each additional dollar spent up to $19,999,999 over the limit

    So, if a team's salary ends up being $139.733 million, the owner has to pay a total of $32 million in luxury tax*. (Broken down as $7.5 million for the first $5 million over the threshold, $8.75 million for the next $5 million, $12.5 million for the next $5 million and $3.25 million for the final $1 million.) And that isn't as much of a deterrent as you might think, as Spotrac's cap tracker calculates that both the Golden State Warriors and Cleveland Cavaliers were a little more than $16 million over the luxury tax threshold last year.

    Those tax rates are for non-repeat offenders, though. If a team has paid a luxury tax in at least three of the previous four seasons, it then enters into the the repeater tax rate of an additional dollar for every dollar spent. That means the previous numbers increase to $2.50, $2.75, $3.50 and $4.25, respectively, and a repeater who goes $16 million over the threshold would be forced to pay $48 million instead of $32 million. As a repeater, Cleveland did end up paying more than $50 million in luxury taxes last season. (And still somehow gave LeBron James nothing to work with.)

    To further discourage endless spending, there's also an "Apron" that puts restrictions on what exceptions and transactions are available to a team that goes at least $6 million over the luxury tax threshold. But rather than diving further into that, let's just outline some of the cap exceptions.

    *The penalty money from taxpaying teams is earmarked for "league purposes." Though there's no mandate for how it is used, typically half goes toward funding the revenue-sharing program and the other half is distributed to the non-taxpaying teams (on top of what they would already receive from the revenue-sharing program).

What Are Bird Rights?

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    Larry Bird
    Larry BirdDarron Cummings/Associated Press

    Whether you see it phrased as Bird rights, Larry Bird exception or veteran free agent exception, the heart of the concept is that teams are allowed to exceed the salary cap to re-sign their own players.

    As you can probably guess, the idea dates back to Larry Bird's playing days with Boston. The salary cap was agreed to for the 1983 season, but Bird had just signed a seven-year contract that September to remain with the Celtics. Rather than force them to blow up the team to get under the cap, the Larry Bird exception was created to allow Boston to exceed the cap.

    35 years later, dozens of players are signed using Bird Rights on an annual basis.

    The guidelines are:

    • If a player has been with the same team without being waived or changing teams as a free agent, he is eligible for a five-year max contract (based on number of years of service, as previously discussed) regardless of whether adding that amount would put the team over the cap.
    • If a player has been with the same team for two years before hitting free agency, he is eligible to re-sign with the team using "Early Bird Rights." He can sign for up to 175 percent of his previous year's salary or the current average salary, whichever is greater. The deal must be for at least two years, but no more than four.
    • There's also a non-Bird exception, in which a player can sign a deal with the same team where he finished the previous season for up to four years with a starting salary up to 120 percent of his previous year's salary.

    If at any point a player is waived or changes teams via free agency, the clock on his Bird Rights reset. If a player is traded, though, his Bird Rights are traded with him and will be applicable when he comes up for free agency.

    For an example of how Bird Rights can impact a free agent's decision to stay or go, let's look at Stephen Curry's recent deal with Golden State.

    Using his Bird Rights, Curry was able to sign a five-year max (with annual 8 percent increases) worth $201.2 million during the summer of 2017. Had he signed elsewhere (with annual 5 percent increases), the best he could have got would've been four years for $149.1 million. That's an abnormally large difference given Curry's stature, but any player worthy of a max contract who opts to walk is leaving a substantial amount of money on the table.

Are There Other Exceptions for Exceeding the Salary Cap?

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    DeMarcus Cousins
    DeMarcus CousinsBen Margot/Associated Press

    It would almost be easier to explain what signings don't count as exceptions to allow a team to exceed the salary cap. In order to sign a free agent who's demanding more money than the mid-level exception offers (more on that shortly), a team must fit his first season salary into cap space. Aside from that situation, though, a team can almost always use one of the following exceptions to add a free agent.

    In addition to the various levels of Bird Rights that allow a team to re-sign any player it had on the roster at the end of the previous season, here are the options for adding to the roster when cap space otherwise wouldn't allow it:

    Rookie Exception: Teams are always allowed to sign their first-round draft picks for 120 percent of the rookie scale. Typically, teams who draft in the top five will wait to sign their picks until after free agency begins, just in case they want to sign someone else with cap space before using this exception.

    Minimum Player Salary Exception: Teams can sign as many players as necessary to one-year or two-year minimum-salary deals. Getting veterans like Rashard Lewis and Chris Andersen to agree to short-term, minimum-salary contracts and not having it count against the cap was a big reason the Miami Heat were able to build their early 2010s dynasty. Same goes for how the Warriors filled out their 2017-18 roster with the likes of David West, JaVale McGee and Jordan Bell.

    Non-Taxpayer Mid-Level Exception: Teams below the "apron" are allowed to sign a free agent to a deal of up to four years with a first-year salary determined by that year's cap. For the 2018-19 season, that amount is $8.641 million, and it will change proportionally along with the salary cap in subsequent years. Alternatively, teams could sign multiple players for a combined first-year total of up to $8.641 million, as the Charlotte Hornets did this summer with Tony Parker (approx. $5 million), Dwayne Bacon ($1.4 million) and Devonte' Graham ($1 million).

    Taxpayer Mid-Level Exception: Similar to the above exception, but one of the penalties for going above the apron is that those teams get less "bonus" space to work with. For this coming season, the amount is $5.337 million in the first year, and the maximum number of years in the deal is three instead of four. This was the exception the Warriors used to sign DeMarcus Cousins.

    Room Mid-Level Exception: Only available to teams who have cap room and who have not yet used a different mid-level exception or a bi-annual exception. (More on that momentarily.) The amount for this exception is capped at $4.449 million in 2018-19 and can only apply to deals up to two years in length.

    Bi-annual Exception: Like the room exception, the bi-annual exception can only be used on deals up to two years long, but the amount ($3.382 million in 2018-19) is considerably less than the room exception. This can only be used once every other year.

    Disabled Player Exception: If a player is ruled medically out for the rest of the season, his team can sign a replacement to a one-year deal worth up to 50 percent of the injured player's salary, or trade for a player in the last year of his contract who is due up to 50 percent of the injured player's salary.

    Long story short, there are plenty of ways for teams to spend more than the cap, and they usually do. It's why the luxury tax threshold is significantly higher than the stated salary cap.

What Makes a Player a Restricted Free Agent?

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    Marcus Smart was a restricted free agent this summer.
    Marcus Smart was a restricted free agent this summer.Associated Press

    Most free agents are unrestricted, meaning they are free to sign anywhere and for up to the max allowed based on their number of years in the league.

    But there are also three cases in which a player can become a restricted free agent, which gives his previous team the right of first refusal on any contract he wishes to sign.

    The most common case is a first-round pick about to enter his fifth season in the league. After exercising options on his third and fourth years, teams can then submit a one-year qualifying offer at a price set in the rookie scale. The player can either take that one-year deal and become an unrestricted free agent the following summer or sign an offer sheet from a different team. When the latter occurs, the original team can either match the amount and retain the player for the number of years and dollars stipulated in the offer sheet or they can let the other team sign him.

    Another relatively common case is a non-first-round pick who has been in the league for up to three years and who has received a qualifying offer from his original team worth at least 125 percent of his previous year's salary. The offer sheet game of chicken also applies here.

    The third case involves players on two-way contracts, which is also common, but it's rarely reported on since those players don't even make a dent in the salary cap. For them, a qualifying offer is either the minimum salary or another two-way contract.

    Once upon a time, when restricted free agents signed with a new team, their old team would get a compensatory pick or some sort of monetary consolation for their loss. But now, teams always have the opportunity to retain their restricted free agents, so there's no participation trophy for letting them walk.

Last Question: What Is the "Moratorium" Period in Early July?

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    DeAndre Jordan
    DeAndre JordanMichael Owen Baker/Associated Press

    The July Moratorium is the period between 12:01 a.m. on July 1 and 12:00 p.m. on July 6 during which all negotiations are technically just verbal agreements.

    If you're a fan of college basketball or football, think of it as the period leading up to National Signing Day in which recruits who say they're "100 percent committed" could still change their minds and sign elsewhere.

    There's nowhere near as much "flipping" during the NBA's moratorium. The vast majority of deals agreed to in the first five days of free agency end up becoming official on July 6.

    But that vast majority didn't apply to DeAndre Jordan during the summer of 2015, when he made a verbal agreement to sign with the Dallas Mavericks before going through some sort of buyer's remorse and re-signing with the Los Angeles Clippers before the moratorium endedchanging NBA Twitter into the 24/7 chaos as we know it today. (Paul Pierce tweeting a picture of a rocket ship during the "emoji war" will never not be hilarious.)

    There are some signings that can become official during the moratorium. Most notably, teams can sign their first-round draft picks. Also, a restricted free agent can sign a qualifying offer to remain with his current team. Players can also be signed to minimum-salary or two-way contracts.

    The big "Woj bombs" two minutes after free agency begins, though? Those aren't official deals until July 6.

                                    

    Team and player salary information courtesy of Spotrac.com.

    For other questions about the ins and outs of free agency and the salary cap, Larry Coon's FAQ has already answered probably every question you can imagine. This piece isn't even long enough to be a CliffsNotes version of that mammoth guide to the Collective Bargaining Agreement.

    Kerry Miller is a multisport writer for Bleacher Report. You can follow him on Twitter, @kerrancejames.