There is going to be a deal.
Road map to NBA labor peaceBy Chad Ford
Three months ago, during All-Star weekend in Denver, NBA commissioner David Stern and National Basketball Players Association president Billy Hunter expressed optimism that a deal would be reached on a new collective bargaining agreement before the end of the season.
Last week, sparked in part by an ESPN Insider report detailing the dissatisfaction of a number of player agents with the owners' offer, the NBA announced the owners had canceled all further talks with the players. With the current collective bargaining agreement set to expire on June 30, deputy commissioner Russ Granik used the word "alarming" to describe the status of relations between the two sides.
However, in the past two days, Stern and Hunter have hinted that talks between the owners and players have quietly resumed. Can a deal be struck in time to avoid a lockout?
The current economic system is not broken. Stern acknowledges that a well-managed team can be both profitable and competitive in the NBA, and he has used words like "tweaks" and "non-economic" to characterize the issues that need to be resolved. For his part, Hunter, who fought the 1998 agreement vigorously, now wants to protect it.
So the heated rhetoric we have heard from both Stern and Hunter in the past week or so is at odds with the facts of the situation. Each side knows a deal is within reach and that a lockout would be disastrous, as it has been for the NHL.
Since the news of labor unrest broke last week, Insider has spoken with numerous sources directly involved in the talks to ascertain how a lockout could be averted. Voices from all sides – NBA brass, NBPA officials, agents and even a couple of players – have weighed in.
If both parties really want labor peace, this might be the road map that gets them there:
Currently, players can sign a fully guaranteed contract for a maximum of seven years if they re-sign with their current team. Players signing with a new team in free agency can ink a six-year deal.
This is a major issue for the owners, who often get stuck with the bill for players who become injured or don't pan out. Teams have few options if they want to part with a player with a bad contract. They can hope he retires, try to trade him (usually taking back another bad contract in return) or try to buy out the contract.
Owners are asking for the maximum length of contracts to be reduced to five years across the board. At one point, the players had offered to shorten the max to five years for players signing with new teams and six years for players re-signing with their current team.
On Tuesday, Stern referred to the owners' position on this issue as "non-economic," for two reasons:
One, the owners, according to Stern, are willing to guarantee players receive a minimum of 57 percent of the owners' basketball-related income in the form of salaries each year. Individual contracts may shorten, but players won't be taking pay cuts, Stern says, because 57 percent is the current amount of BRI that goes to players.
Two, Stern reasons that the issue is really about "the game," not money. Since the owners are willing to guarantee the players a certain amount of the pie, then owners believe they should have the flexibility to divvy up that 57 percent among players in a way that allows for better basketball decisions. By Stern's reasoning, with shorter contracts the owners will be able to ensure that the most deserving players receive the money and that players who struggle because of injury or poor performance are washed out of the system more quickly.
The players, and especially their agents, see this as a restriction on the free market. They reason that if an owner is willing to give a player a seven-year contract, the player should be allowed to sign it. Agents, in particular, are trying to protect the long-term financial interests and security of their clients and, by extension, themselves.
What's the compromise? Parties on both sides should accept that five years is probably the magic number. Owners would prefer even shorter contracts. Players would prefer no restriction on the number of years they can sign.
Both sides risk being overzealous. If maximum contracts were to become too short, owners would constantly have to renegotiate with players. They ardently want to rid their rosters of the players who are not earning their salary – but at the risk of also losing the ones who are.
Would Cleveland's owners want to put themselves and their fans through a LeBron James negotiation every three years? On the other hand, if contracts become too long, players who sign for below-market contracts, or are stuck on bad teams or at the end of the bench will suffer.
For months, players and management have remained far apart on this issue.
Under the current CBA, players are allowed maximum raises of 12.5 percent per year if they re-sign with their current team and 10 percent if they sign with a different team in free agency (these raises are built into the overall contract amounts).
Owners contend the raises are now out of whack with financial reality. Last year, the salary cap stayed flat. In years past, it has increased by small, incremental amounts. If salaries rise 10 to 12.5 percent per year and the cap is rising at a rate closer to 3 percent, more teams will likely exceed the cap each year, and will start paying luxury taxes or incur more tax if they're already over the cap.
To curb the growth of salaries, owners have proposed significantly rolling back the maximum raises for free agents.
This is a major sticking point for the players, who look forward to those big payouts at the end of a contract. So far, the players have been looking to increase raises to 15 percent annually to offset the fact that they may lose two years of guaranteed contract length.
Where is the middle ground? Right where they're standing, actually.
If contracts were to become shorter, and if the two sides would agree on the 57 percent share for players, the size of the annual raises becomes less significant. If both sides were to agree to maintain the status quo on this issue, they could move on to bigger topics.
The mid-level exception
The mid-level exception is available every year to teams that are above the league's salary cap. Every year, a team can use the exception to sign a player for a maximum of six years, with 10 percent raises. The mid-level exception is based on the average salary of players in the league – currently $4.9 million.
Owners argue that the exception has blown a huge hole in the cap. Because teams can use the exception every year, the numbers really start to add up. Owners believe lowering the mid-level exception and implementing shorter contracts will bring things under control.
Each side still wants the loophole – the owners just don't want to be able to drive a semi through it.
The owners would like to split the mid-level exception into two pieces. Under this concept, teams could sign two players with the exception: one for 75 percent of the exception, the other for 25 percent. As things stand now, teams would have a $3.7 million slot and a $1.2 million slot.
Right now, most teams are forced to offer the full $4.9 million to top players in free agency. Under the proposed system, some teams would continue to offer the top exception, at $3.7 million, but choose not to use the $1.2 million exception, in effect lowering payroll.
The players would like to keep the exception where it is. They claim the reduction in guaranteed contract years addresses the owners' financial concerns. The owners counter that by agreeing to raise the cap (see below), they would be guaranteeing the average player salary will rise to $5.5 million, which also would raise the exception.
How can they make a deal? It looks as though the owners' dream of splitting the mid-level exception won't fly with the players. However, the players might be willing to reduce the maximum number of years a player can sign a mid-level exception contract to four. Again, the owners appear willing to trade more up-front dollars to individual players in exchange for shorter contract lengths.
The salary cap
The current CBA bases the salary cap on the owners' basketball-related income. The cap is set at 48 percent of BRI. Last year, that came to $43.87 million.
According to sources, the owners have agreed to increase that percentage to 51 percent, thus raising the salary cap.
Sources say the cap would, in that case, rise to between $47 and $50 million next year, which would be a concession to the players.
The luxury tax
Players (and some owners) dislike the luxury tax. However, it's the best way for Stern to deter owners from what he deems excessive spending.
Currently, the league doesn't determine the luxury-tax threshold until after the season. That means teams spend all year trying to guess what the number will be. Teams unwilling to risk paying the tax tend to get conservative and try to stay a few million under the projected threshold to protect themselves against fluctuations.
Last season, teams whose payrolls exceeded $54.6 million paid a dollar-for-dollar tax on the amount they were over the threshold. For example, the Knicks' payroll last season was $94.4 million. That means they paid the league $39.8 million in tax penalties. The total taxes paid by teams last season amounted to more than $157 million.
Continued... The luxury tax kicks in when total player salaries exceed 61.1 percent of total basketball revenues. That threshold jumped to 63.3 percent this season – giving the owners their first shot in a long time at a season without a luxury tax.
The tax probably isn't going away, regardless of what both sides might want. In fact, the latest proposal from the league, according to sources, pushes for a "super tax." Owners who exceed the salary cap by more than a certain percentage would be penalized $2 for every dollar they're over the tax threshold.
In theory, that's a bigger penalty than is now in place, but in actuality, it has more bark than bite. For the "super tax" to kick in, teams would have to be well above the regular luxury-tax threshold. Under the current proposal, only two or three teams would have to pay it.
How do the sides reach peace on the issue? The owners want stiffer penalties for teams that go well beyond the cap. If the players were to agree to a $1.50-on-the-dollar tax for teams that exceed the luxury tax threshold by $12-20 million and a $2 super tax for teams that exceed the threshold by more than $20 million, the system would punish the very largest spenders without penalizing the whole league.
Owners would have to make a concession to get the new tax structure. In the new agreement, players (as well as most general managers) would like to see the league give teams the figure before the season begins, so teams know exactly how much money they have to spend throughout the year.
Player escrow account
Currently, players must pay 10 percent of their salaries into an escrow account each season. If, at season's end, the total amount of player salaries exceeds 57 percent of the league's total basketball-related income, that money goes to the owners of teams that stay below the luxury-tax threshold (and a few that fall within a certain "cliff threshold"). If it doesn't exceed 57 percent, the players get their money back.
For the past two seasons, salaries have been at more than 60 percent of BRI, and therefore the players have lost the escrow money to the owners.
Naturally, the players want to end this system. They already pay personal income taxes at a high rate. Factor in the 10 percent that's taken off the top of their salaries, and the take-home pay for players is substantially reduced.
Owners are reluctant to make the change. The windfall teams got last year from the escrow tax, combined with the fees paid by owners who were over the luxury-tax threshold, put roughly $8 million back in the pockets of those owners who were under the tax threshold or in the cliff threshold. For several teams, that rebate meant the difference between turning a profit and posting a loss for the season.
Sources say the owners might be willing to compromise by lowering the escrow amount (from 10 percent to 5 or 6 percent). They are unwilling to eliminate it completely, however.
This is a major sticking point for both sides. While owners are pushing for a number of items that would bring financial relief over the long term, they are unwilling to completely forfeit their financial position now to get that relief.
There potentially is another significant development in this area. Under current rules, the NBA has sole discretion over the use of the escrow money. Currently, it redistributes the cash (and luxury-tax revenues) to teams that are under the luxury-tax threshold. In essence, Clippers owner Donald Sterling gets a bonus for being cheap.
The union hates this rule and has tried, without success, to litigate it in court. The players believe the current use of the escrow money amounts to another tax on teams over the threshold, which are not only paying money into the system but also losing out on the rebates that go to the thriftier teams.
Owners are willing to change the distribution rules so that luxury-tax revenues would be distributed equally among all 30 teams.
The owners are ready to make both of these compromises, which should please the players. It means less money out of players' paychecks and fewer penalties on owners who want to spend big.
Restricted free agency
Under current rules, teams have 15 days to match any offer sheet on a player they have restricted free agency rights to. This rule often drags out the free agency process for both teams and players.
While the union originally fought hard to get rid of restricted free agency altogether, they've been willing to compromise by shortening the period that teams have to match to five days.
According to sources, it looks like this is a compromise both sides can live with.
The NBA minimum wage, currently starting at $385,277 and increasing each year a player is in the league, will increase significantly, sources say. This is an obvious concession by the league and should placate the large number of players who sign minimum deals.
Rookie salary scale
Currently, first-round picks are tied into a league salary scale. When a first-round pick signs a contract, the first three years are guaranteed, with a team option for the fourth year. Players are paid a set amount based on where they were selected in the draft.
The current proposal, according to sources, modifies that deal in favor of the owners. Under the new rules, first-round picks would get the first two years of their contracts guaranteed. The third and fourth years of the contracts would be team options.
This is another proposal to which the union is adamantly opposed. In this case, they're turning the tables on owners a bit and saying, if you want shorter guaranteed contracts, we want free agency sooner. That is, the union wants players drafted in the first round to get a two-year guaranteed contract with a team option for the third year. After that, players would become restricted free agents, one year earlier than under the current rules.
The argument is a little disingenuous. The reason the owners want more years on rookie contracts is because the costs are lower (thanks to the rookie salary scale) and because a team has more time to develop and evaluate a player before signing him to a long-term extension. While shorter guaranteed contracts would help teams get rid of players who turn out to be busts, the costs on the back end would be much higher.
The compromise? Leave things where they are now. Players get to keep that three years of security and owners get to keep players on the rookie scale an extra year.
Currently, teams can have a maximum of 15 players on their rosters, with a minimum of 11. Under current proposals, the minimum would be raised to 14. This is another concession by the league.
The owners also have agreed to do away with the injured list, changing to inactive and active lists. That means teams no longer will have to create false injury reports in order to manage their roster.
For years, both GMs and players have been complaining about restrictive trade rules that mandate all trades be within 15 percent and $100,000 of each other in salary. Those standards make many trades impossible.
Expect the league to loosen those trade rules significantly under the new CBA. That includes widening the gap between salaries traded and received to 25 percent.
There is also a movement on both sides to dump base-year compensation rules that limit a team's right to sign a free agent and then trade him during the first year of the contract.
These proposed changes would loosen restrictions on player movement, something the union has more interest in than the owners at this point. On this issue, GMs who would like more freedom to make trades find themselves on the players' side.
Why is the age limit – the most publicized piece of the negotiations – the last on the list?
If an agreement on all of the above items is reached, but the players remain opposed to an age limit, it's not a significant enough issue to trigger a work stoppage. The bottom line: The league won't lock out the players over an age limit.
It's true Stern has spoken out repeatedly for an age minimum of 20 (though he has shown a willingness to compromise at 19). He doesn't like NBA GMs and scouts sitting in high school gyms scouting teenagers. But he isn't willing to bargain in order to get the age limit. The players are demanding economic concessions in exchange for an age minimum. Right now, according to the various sources Insider has talked to, Stern doesn't have enough support from the owners on this issue to make any concessions.
Furthermore, with the league very close to an agreement with the players on turning the NBDL into a true minor league, the argument for an age limit is weakened.
While the public seems to be generally in favor of an age minimum, a number of NBA GMs are against it, especially if they're able to send their young players to a minor league for development.
Would the game be better with an age limit? Maybe, maybe not. Is the issue worth a lockout? No. If the league were to drop the issue, could it be the symbolic gesture that jump-starts negotiations again? Absolutely.
The bottom line
Labor peace is possible in the NBA. Put aside the pride, the egos, the posturing and the greed and there's a deal to be reached that improves the game, makes NBA teams profitable and guarantees NBA players remain the highest-paid athletes in professional sports.
There's a way for owners to gain more flexibility to improve their roster and chances of winning a title without overspending, and a way for the union to gain greater financial protection as an overall body.
The NBA's owners and players are part of a symbiotic whole. The success of one almost always guarantees the success of the other. Compromise is never easy, and it's clear that both sides might be forced to sacrifice a little more to make it happen. However, giving up things in the short term can lead to bigger rewards down the road.
If a lockout is averted and the product becomes better as a result of a new agreement, the NBA's revenue should increase, and with it, the amount of money the players and owners take home at the end of the year.
Both sides have too much to lose and too little to gain in a lockout. Why rush to labor war when labor peace is within their grasp?
Chad Ford covers the NBA for ESPN Insider.