Xanadu? A Subtle New NBA Trade Rule
2011 CBA's BIG CHANGE IN THE NBA TRADE GAME: A BIG ADVANTAGE FOR THE TEAMS THAT FOLLOW THE NBA SCRIPT
As we've worked through the details of the new rules in the NBA's recently signed CBA, we discovered that its "renegotiation-and-extension" provision was going to be of of almost no value - or at least, not the landscape-altering rule in player acquisition as had been advertised. Rather than a game-changer, it's one that will rarely be used, if ever.
Now we've bumped into one that is apt to have far more effect than anyone yet recognizes.
THE NEW TRADE RULE
The existence of the rule itself isn't news. It's a less restrictive trade-matching provision for teams below the tax line, generally allowing non-taxpayers in a trade to take back up to 150% of their outgoing players' salary (rather than the 125% allowed in the 2005 CBA). Within the same rule there's also a provision they can take back their outgoing players' salary plus $5 million, and there's another part of the rule that says "or 125%..."
150%? $5 million? 125%? All of that in one rule leaves questions as to how will it work.
But more importantly, since teams don't pay tax until the summer at season's end, and since their amount of tax (or lack of same) isn't determined until the season is over, how will the "non-taxpayer" qualification be determined? We'll answer this one first.
DETERMINING TAXPAYER STATUS
For purposes of this rule, whether a team is considered a "taxpayer" will be determined by the team's "Team Salary" at the time the trade is complete. Team Salary is determined at any time by (in general) adding up all the salaries on the roster plus some adjustments, primarily including the value of existing unused exceptions to the cap (such as an MLE, trade exceptions, and so on), cap "holds" for unsigned free agents or first round picks, and an amount for each empty roster slot for fewer than 12 total contracts and holds. (For a lengthier detailed explanation on Team Salary, see Larry Coon's CBA FAQ )
It's important to understand that while the contracts in the Team Salary calculations are hard numbers, the holds and exceptions are not as rigid. They represent set-asides to add more players and go farther over the cap. However a team can remove most of those additions to Team Salary by renouncing their rights to use them. And with this rule, the league has given teams an incentive in certain situations to do exactly that.
For example, let's suppose there was a team that was eligible for but had not yet used (and did not intend to use) their $5 million MLE, and they wanted to do a trade as a non-taxpayer. But when they add up the numbers, they find the trade would put their current Team Salary a million or two over the tax line at the end of the trade, making them ineligible for the non-taxpayer flexibility.
One possible solution for them would be to renounce their MLE exception. That would permanently eliminate their ability to use the MLE that season, but in our scenario they weren't going to use it anyhow. By renouncing it rather than simply let it sit unused, they immediately would lower their Team Salary by $5M and have the added trade flexibility they want. (Note: the MLE and several other exceptions have the flexibility to be used in smaller pieces, but a team cannot do a partial renouncing and simply reduce the size of an exception to suit their situation. When renounced, everything unused at that point is completely erased from their possibilities.)
Furthermore, the rule does not require that the Team Salary stay below that tax line for the rest of the season, only that it be below the number when the trade is complete. So a GM might do an initial more flexible trade that puts the Team Salary right below the tax line, then another with the tighter restrictions that takes that jump over the tax line if so desired. Of course, becoming a taxpayer is not something teams covet, so ....
With the need to figure out when (or if) to renounce exceptions and gain extra flexibility, this is a thinking GM's rule.
HOW DO THE NUMBERS WORK?
150%? $5 million? 125%? The rule itself has multiple moving parts numerically, but in practicality it works like this.
Any non-taxpayer team (as defined above) will get an applicable "take back a player(s)" exception for each player they send away in trade, and when the exception is used in that same trade, the exception for each player would be as follows:
• Send away a player with a first year salary of $9.8M or less and receive a "trade exception" usable now for up to 150% of that salary plus $100,000
• Send away a player with a first year salary of between $10M and $20M and receive a "trade exception" usable now for "salary plus $5M"
• Send away a player with a first year salary of $19.6M or more and receive a "trade exception" usable now for up to 125% of that salary plus $100,000
It's crucial to add two important side notes. 1) When used in a trade at the same time, these trade exceptions can further be combined with those from other players in the same trade. 2) The above multipliers are per player, not per trade. While one $20M player creates a possible return of $25.1M in players, a package of two $10M players creates a possible return of $30M.
In the 2005 CBA, there was a 25% cushion, and now for those willing to be under that tax line, that flexibilty has been doubled to 50%. Given the scarcity of players with salaries in excess of $19.6M, and the abundance of those with salaries below $9.8M, this rule should effectively make the salary-matching twice as easy for non-taxpayers in the vast majority of trades.
THE BROADER IMPLICATIONS
In making trades easier, the rule will certainly have an impact on the NBA landscape. But its ease of use may well give it an impact that extends beyond trades.
First a bit of NBA history. In the salary cap era of the 80s and 90s, trades were extremely difficult to do because the salaries going each direction had to align almost precisely if both teams were over the cap. As a result, they were relatively rare, especially by today's standards, and rebuilding a team was quite difficult because it was so hard to change the roster.
In the 1999 CBA, the league created a mass of new rules to make player acquisition easier. The most significant were the ones providing for a Mid-Level Exception (MLE) for teams over the cap - a free agent signing opportunity to spend up to the "average player salary" in free agent acquisitions each year, despite already being over the cap - and the loosening of the trade reins by allowing a 15% cushion rather than requiring an almost-precise salary match for a trade to be approved. Loosely speaking, instead of having to send away the same amount of salary they were receiving in a trade, a team over the cap was given an allowance to take back up to 115% of the salary they sent away. In 2005, this was loosened a bit more, to 125%.
As the rules loosened, trades became a regular feature of the NBA landscape for creative and aggressive GMs. ... like the people who run the Dallas Mavericks.
However, all that new flexibility also came with a price. That ability to add extra salary gave plenty of opportunity for teams to spend more and more aggressively despite a supposed cap on salaries, if they so desired. For the Mark Cubans of the world, trades became a tool used to "take salary off your hands" and amass more and more talent, and despite a supposed cap on player salary, team payrolls became limited by little other than a team's willingness to keep spending. Gradually keeping up with the competition got more and more expensive, and the league began to fear that teams were spending themselves into the poorhouse in their attempts to keep up with each other.
As a result, the league's stance in the negotiations over the 2011 CBA initially focused on a proposal to simply abolish all these mechanisms to surpass the cap, and instead institute a strict limit (aka a "hard cap") on each team's player payroll. When the players balked, the hard cap idea went away - but the league's desire to somehow keep team payrolls somewhat balanced did not.
Will this provide some of what they were looking for?
On its surface, this rule gives some incentive to stay below the tax line. In making player acquisitions easier, there is the potential for teams to make changes more quickly and in larger amounts. To GMs looking to shake things up, it's an enticing carrot, and a bigger and better trade tool for aggressive GMs than ever before.
But lurking beneath the surface of all this is something more. Can you hear the whispers that GMs will be getting in their head?
• That trade exception that you haven't used yet from a trade 4 months ago? It counts against that Team Salary, and it makes you technically a taxpayer and unable to use the non-taxpayer flexibilty. Just trash it so you can do this super-wonderful trade.
• Forget that MLE. throw it away. You don't want to do the extra spending anyhow.
• The BAE too. You can only use it every other year, so why not just remove the idea of using it this year?
• Remember that player who retired a year ago - maybe his name was Keith Van Horn and he's still technically adding a large cap hold to your salary - you're gonna have to get rid of that $16M cap hold and renounce his rights to keep from technically being over the tax line. You'll never need his rights anyhow.
• The first-rounder in Europe that you never signed, there's a cap hold for his rights. Why let him clutter your Team Salary?
Why would any of that matter? It's because some of those rights, once renounced, vanish forever. Others are gone for a year. And the absence of any of them lessens the ability of a team to later ramp their salary up past that tax line. In other words, once spending has been braked below that line, the mechanism for getting this trade flexibility (having to renounce some of your options to spend) will make it easy to stay stopped at a salary level below the tax line.
Ultimately the NBA sees their Xanadu as a world in which every team is below the tax line. And in that ideal world trades become super-easy for all - many using the super-flexible 50% cushion as the salary-matching requirement, and others (those involving teams below the actual cap line when the trade is complete) with no matching needed at all. With such minimal impediment to player acquisition and movement, team rebuilding (when you can find another team willing to swap) becomes far simpler, which was the NBA's original goal in loosening the trade and payer acquisition limits many years ago.
The potential impact is that under this rule, we'll see teams stopping voluntarily without crossing the tax line - and removing those extra spending tools that are going unused but sitting in the background, tossing them in the trash so they don't get used later. When hovering below that tax line, there are other new rules that will minimize the granting of new annual exceptions in future years, providing further encouragement to stay near or below that tax line.
And maybe one day we'll discover that this rule that gets teams to voluntarily toss aside their spending opportunities is the path that will lead to the NBA's land of milk and honey for all.
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