Danny Fulgencio

An NBA Geek's Reading Of The New CBA: On Cap Tricks, Loopholes And 'Getting An Edge'

Mavs owner Mark Cuban says he reads the new CBA thinking, 'OK, how can I find a way to bust this thing to get an edge?' We've read it, too. Inside, our in-depth analysis: 'An NBA Geek's Reading Of The New CBA: On Cap Tricks, Loopholes And 'Getting An Edge'

The NBA has a new Collective Bargaining Agreement that has now been written and ratified, and will go into effect on July 1. It was designed to aim for the status quo in general, with both owners and players enjoying the huge money all are making from the league's skyrocketing revenues. But accompanying that wish was a willingness to tweak things here and there, to erase problems being encountered by one side or the other (or in some cases both).  

The major agendas we see in the new deal were to (a) balance the contractual restrictions so that players signing for contracts with specified limits (max salary, minimum, and yearly exception amounts) would receive a proportionate share of the cap as it changes from year to year, (b) create better ways for each team to keep its players, especially elite ones, thus allowing more balance throughout the league, (c) create better ways for teams to develop raw project players and keep them after doing the work, and (d) enhance the player-owner relationship as partners rather than employees, by giving more say and responsibility to the players. We've already outlined the broad strokes of the first two in our previous articles  as well as the impact on the Mavs future, and we'll spend time on the other items down the road.

Dallas Mavericks owner Mark Cuban is on-record as saying that as he digs into the CBA he thinks, "OK, how can I find a way to bust this thing to get an edge?''

Indeed, for those like me who have an inner geek that loves the little things, "the edge'' (and the new rules intended to avoid such "edges'' are part of the attraction. Additionally, now it's time to look at how the CBA is targeting some specifics, that fall outside the big agendas, that is, the tweaks included in the new CBA to end some cap tricks, close a few CBA loopholes, and address or prevent issues of concern. 

WHAT ARE CAP TRICKS AND LOOPHOLES, AND WHY DO THEY EXIST?

Cap tricks and loopholes flow from the nature of the CBA itself. It is neither a league-decided set of rules and limits, nor one determined by the players, but rather a negotiated operating system for both, filled with compromises everywhere. Once it's agreed to and ratified, the legal concept is that it is what it is, and both sides have to live with what they allowed. In that reality, sometimes rules end up being written in such a way that they allow more than really intended. 

Aggressive NBA GMs have made somewhat of a cottage industry in finding creative ways to gain an advantage by identifying such accidental loopholes and designing cap-skirting tricks to exploit them. And since that extra latitude was part of what was bargained for, each loophole or trick can continue to be used until a future CBA when new rules are written to end it.

In addition, sometimes the rules are clearcut, but an extra-aggressive GM will take actions that cross the line with a disdain at the ability to be caught. In such cases, one resolution is to create new CBA wording to keep the situation from arising again.

And sometimes, a potential loophole is recognized ahead of time, and the CBA will close that door before it's ever opened.

We see specific tweaks addressing all of the above in the new CBA.

SPECIFIC LOOPHOLES CLOSED 

1 OLD PRACTICE/RULE - Team A uses some of team B's payroll spending to help fulfill its Minimum Team Salary obligation 

The NBA rules require every team to have a player payroll of at least 90% of the salary cap, and if a team falls short then at season's end they have to write a check to the players on the team to make up the difference. But low-spending teams have found a way to keep from writing that check, by in effect getting another team to "pay" part of their player payroll for them.

This is done by  taking advantage of the way the NBA calculates total team salary for the year. Such total is based on the player salaries of the team's roster at year end, which means that a mid-season player move from one team to another will also move his cap charge for the entire year to the new team, even though much was already paid by the prior team. So, for example, if a team was $6M short of the minimum, then at the trade deadline they would try to get an unwanted player who makes $6M for the year via trade or by claiming him off the waiver wire, and then their "team salary" jumps $6M while they only have about $2M left to pay him, saving $4M. Since such players typically serve no purpose to teams acquiring them other than the financial angle, we often see them waived shortly thereafter, creating the odd spectacle of a team adding a player and them immediately paying to get him off the roster.

This loophole has allowed such teams to avoid supplemental pay to players stuck on low-salary teams (whose talent level is presumably reflective of the lack of spending), and to bear less of the financial burden that the owners have to the players each season. And as previously noted, it's also created an incentive for teams to weirdly add and pay for players that have nothing to do with fielding a team for games, and it's being displayed right now as multiple teams are trying to claim-and-waive the contract of the already-retired Mo Williams in order to get "stuck" with his full season contract on their ending payroll. (The full story of how Williams' contract has been volleyballed around the league this season is quite ludicrous, and is well-explained here.) 

The solution was simple.  In future years, a team's minimum salary obligations will ONLY get credited  for what the team actually paid in player payroll. 

2 OLD PRACTICE/RULE - A team can use non-guaranteed or partially guaranteed contracts (aka "instant-expiring" or DUST-Chip-like deals) to circumvent the rules intended to have similar salary going both ways in a trade 

The root of this loophole is in the fact that most NBA contracts are fully guaranteed, such that the player will still get paid even if he can no longer perform at the level expected when the deal was signed. But teams want a way to hedge their contractual bets with some players. So the rules also allow contracts that offer little-to-no guarantee, which allows a team to assess its desire for the player at future dates instead, and perhaps waive him without added payroll or cap consequence.

With such contracts, GMs figured out at some point that they could use them as an advantageous trade tool, as one could be sent out to satisfy trade-matching rules after which the new team could waive the player and have no cost or cap hit. In essence, this has allowed teams to move players from team A to team B, with no real contractual obligation being sent back, and as a result has given certain players added value as trade chips who then end up without a team after being waived. The Mavs were one of the earliest to use this loophole, creating such contracts more than a decade ago, and it was the core concept behind the use of Erick Dampier's contract, in what we called "The DUST Chip," to land Tyson Chandler for nothing in the summer of 2010, and which ultimately led to a Mavs title the following June.

That loophole is now being closed. For trade-matching purposes, beginning in July the only salary that will count will be the guaranteed portion of the applicable trade-match year of a contract. 

3 OLD PRACTICE/RULE - A team is allowed to pay up to 120% of "rookie scale" for their 1st-rounders, while the cap hit for an unsigned 1st-rounder is 100% of rookie scale, motivating them to keep their 1st-rounder unsigned until they have spent all their cap room elsewhere 

Since almost all rookie 1st-rounders get signed for 120% of rookie scale (the allowable range is 80-120%) teams have been rewarded with a bit of extra cap room each summer, keeping them unsigned on their books at 100% and then later signing them for 120% after their free agent spending is done. 

In the future, the cap hit for an unsigned 1st-rounder will be 120% of rookie scale. Not only will this remove the extra cap room from the free agent market, but by removing any motivation to wait, it will  get the 1st-rounders signed sooner and able to participate fully in Summer League. (Unsigned 1st-round players rarely participate, because without a guaranteed contract in place, an injury could jeopardize their first payday.)

4 OLD PRACTICE/RULE  - Players coming off rookie scale contracts are typically headed for a sizable raise, and under restricted free agency control. As a result, teams usually gain a big advantage in waiting to work a deal, knowing the player can't get sign elsewhere without a chance to match, and having a rather small cap cost to keep their Bird Rights (allowing a deal up to max salary limits) to allow other spending in free agency before circling back to sign the player later 

This issue is hard to eliminate completely because there's always an uncertainty about how much a player will command in free agency. But the rules addressed this issue to a degree, by raising the cap hold to keep those Bird Rights (beginning in summer 2018). Those cap holds will now be 250% or 300% (up from 200%/250%) of the player's prior salary, depending on whether that prior salary was more or less than league average.

5 OLD PRACTICE/RULE  - Trades made between the end of the season and the end of June are done with trade-matching using contractual amounts for the season just completed

This was more of a weird oddity in the rules rather than a loophole, as it made no sense to use numbers that neither team will be paying to calculate whether contracts that are intended to be more-or-less the same size in payout truly are. We don't know why the rule was originally written that way, and don't know of any situation where teams exploited it in some way. In any event, the oddity will be gone, in favor of a new rule making after-season trades use the upcoming season's salaries for trade matching.

SPECIFIC CAP CIRCUMVENTION AND ABUSE ADDRESSED

Every CBA explicitly prohibits "under the table" agreements between team and player, but even when a situation arises that looks like it must have involved some sort of side agreement, it's hard to prove. So the new CBA has closed the door on two "possibilities" that could (and may already) have led to abuse.

 1 Last season the Miami Heat had a payroll problem. They were headed for yet another year of luxury tax payments, beginning at about $11M over the line, which would have put them in the "repeater" category with a surtax on top, and removed them from eligibility for certain revenues shared by all the non-taxpaying teams. So all season they whittled, and at the trade deadline completed the last trade (of five total) to put them a hair below the tax threshold. 

However, a few days later Joe Johnson was waived by the Nets, and he wanted to sign with Miami who badly needed him. But when they gave him a rest-of-season minimum-salary contract, it bumped them back above the tax line again by a bit. With the trade deadline already passed, their fate was sealed.

Or was it? A few days later, in an odd transaction that made no sense, Heat GM Pat Riley persuaded Beno Udrih, who was injured and out for the season, and whose contract was expiring at season's end, to agree to accept a negotiated "buyout" of the last six weeks of his contract. In so doing, Udrih gave up about $100,000 that he otherwise would have gotten for those 6 weeks of non-playing, and forfeited his Bird rights that summer. That savings moved the Heat back under the tax line for the year.

It was widely speculated in NBA circles that the Heat had offered him some under the table inducement, or perhaps a promise to somehow make it up to him the next season. Sure enough, the Heat signed him to a deal in August and then waived him before the season ever began. But even though it all looked very fishy, unless they had a written agreement on the side, who can prove a quid pro quo was in place?

Not coincidentally, a rule in the new CBA is being added to help prevent the possibility of this happening again. Beginning in July, if a player is bought out of a contract for a reduced amount, he can't sign with that team again until at least a year later, and maybe longer. That eliminates the ability for a team to secretly promise, "Take less here, and we'll make it up to you on the next deal" as his next deal will have to be with someone else.

2 The new CBA also addressed some unintended and theoretical ramifications of a rule from the 2011 CBA, known as the stretch-waiver. That rule allowed teams to spread a waived player's salary over multiple years, lessening the cap hit. But when it first appeared, NBA cap enthusiasts quickly recognized the opportunity that had been granted for various cap-altering schemes with such a rule. Some included ideas of teams and players using under-the-table contract-altering moves, although to my recollection, we did not see this happen in actuality.

These ideas were based on the opportunity a team might have to plot with an accommodating player to create extra cap room by altering his contract into a stretch payout via a waiver.  For example, say Larry Loyal (a 10-year NBA veteran) was about to enter the final year of his contract for $12 million. So the team goes to him and asks him to work with them to add some cap room, and still get him the full $12M and a bit more. He agrees, they stretch-waive him (with the cap hit for the $12M now stretched over 3 years), and then re-sign him to a one-year minimum salary deal that is partially subsidized by the league. As a result, he gets (approx) an extra $1M from the team and another $500K from the NBA, and the team gains an extra $7M that summer to spend in free agency.

That possibility is no longer. A new rule is being added that prevents the team from re-signing that player for at least two years, and maybe even longer. They can still gain cap room by waiving him and losing him, but the possibility to keep and use him after paying all that money has vanished.

PROBLEMS REPAIRED OR PREVENTED

1 Using the Arenas Rule, designed to help a team keep its young non-Bird free agent, as a contractual tool to mess with a team's cap in a so-called "Poison Pill" contract (problem repaired)

About a dozen years ago, the NBA saw a problem in its rules when Gilbert Arenas, an emerging star, first became a free agent. He had been drafted in the 2nd round by the Clippers, and like most teams the Clippers had no cap room and made him a typical salary offer for a second-rounder, a minimum-salary deal for the max length possible (2 years). But he was far better than the typical 2nd-rounder, and by his second year, Arenas was averaging 18 ppg, 6 apg, and 5 rpg.

The problem came from the fact that LA wanted to keep him and pay him, but the rules got in the way of keeping their own free agent. Having only been in the league for two years, the Clippers had the right to match any offer, but since they were otherwise over the cap then the most they could match was the amount of the Early Bird Exception (or MLE money). Washington swooped in and offered him far more, and he was gone.

In order to prevent a team from being boxed into the same corner again, the rules were amended at the next CBA to add a provision for such a player who had only been in the league for a year or two and was a free agent. Nicknamed the Arenas Rule, outside teams were limited in their offers to such players, with the first two years of such an offer limited to an amount starting at EB/MLE money, thereby allowing a team to use either an EB exception or MLE to match. But to offer more financial opportunity for such a player who exceeded expectations, such deals were allowed a huge salary jump in years 3-4, with odd cap accounting rules implemented, where the offering team would have to have cap room for the average salary and be charged that cap hit each year if they got him, while a matching team would have a cap hit that mirrored the payout, initially equal to the MLE but then with a huge jump in later years.

Such special accounting made sense as a tool to allow a team to be able to match the salary that they otherwise couldn't. But what if they had cap room, and would prefer the "average salary" cap hit that the offering team was using? It didn't matter. That was only for the offering team .

In the new CBA, this is being changed. On an Arenas Rule contract, a matching team will now be able to choose its cap hit method, if it has cap room, making it easier for such a team to retain a player it has found and developed.

2 Having fans and popularity potentially impact a player's qualification for a higher maximum salary at the end of a rookie contract - (problem repaired)

To help address the issue of a young star player who out-played his contract considerably, the 2011 CBA added a provision (nicknamed the Derrick Rose rule) that allowed players to have a higher max salary on their second contract if they met any of certain criteria. One of those was being selected twice as an All-Star game starter.

However, while starting that game is certainly an honor, it's also just a contest played to gain fans for the league. Accordingly, the league has allowed its starters to be decided by fans, whose agenda isn't always about picking the most deserving players to start. Unfortunately that creates the conflict of having potentially-arbitrary fan voting affecting the potential size of a player's contract.

The new CBA simply eliminates an All-Star Game selection from having any bearing on such matters. 

3 Having a vague process that impacts cap charges for teams, and future player eligibility, to determine life-threatening player-team medical issues (problem repaired)

In the future this may be known as the Chris Bosh Rule, and undoubtedly it was designed with his case in mind.  The details aren't necessary to write at this point, but the process in such cases is now going to be very precise rather than vague. A team will no longer be able to hold a player's career in limbo if he can actually play, and at the same time the door will be closed to players who have a genuine medical risk and should not be playing again. Included are strict limits on what either player or team can say as a situation like this plays out over time. Given the structure and protection for both sides built into this new process, it seems to me that Miami might (and should) opt to wait until July 1 to proceed with Bosh. 

4 The new "Designated Player" mega-deal is designed to keep elite and almost-elite players on the same team as always, so players and teams will look for ways for a player to leave and still get rewarded (problem prevented)

The new CBA creates the potential of a mega-money extension for certain players after their 8th or 9th season, with the opportunity to get a guarantee of the next contract well in advance, and at a number that far exceeds anything that could be available by changing teams as a free agent. The difference in contracts could be as much as $80M this summer, and as the cap rises each year that number will only get larger. 

That raises the question of whether a player could sign such a deal while forcing a trade, thereby getting the bigger money but changing teams. The simple answer is no. The league recognized the potential for such attempts to occur, and has included a provision in the rule that the player is ineligible for ANY trade for one full year after signing such a mega-deal. Problem prevented.

5 Summer free agency has been starting with cap room uncertain, and players and teams forced to wait a week or more to ink the commitments already made (or not, as in D Jordan) -  (problem addressed)

It is impossible to prevent players from indecisiveness, but rules are being changed and added that are likely to help the process in free agency. 

Gone will be the wait for the cap and associated numbers. The timetable has been changed to have those numbers by June 30, allowing every team, player, and agent to know exactly what they're working with. Tied to the cap each summer will be proportionate adjustments in max salary limits, minimums, annual exceptions, rookie scale amounts, the size of the tax "apron," and more. 

At the same time, the moratorium period will only last 5 days, ending at noon on July 6th. In the Jordan debacle, the 5th day was about the point at which he made his initial commitment to the Mavs, so this new format allows time to work deals while also taking out such a long wait to formalize them after they are done. And with restricted free agents, the new rules will allow offer sheets to be signed on the spot, during the moratorium, rather than having any wait at all. The matching time, however, won't begin until the moratorium ends, but it's also been shortened by a day.

Coming soon (in 2 parts): Should the Mavs chase a playoff spot for the rest of the season, or chase the best draft pick possible? We break down the issues for you from both sides, with the aid of some passionate fans on each side of the debate. 


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