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Breaking down changes in new CBA
New labor deal could mean much heftier luxury taxes for big spenders
By Larry Coon
Special to ESPN.com
Following a take-it-or-leave-it offer from the league, the dissolution of the players' union, the filing of a federal antitrust lawsuit, and a 15-hour settlement negotiation, the two sides in the NBA labor dispute came to a tentative agreement to settle the players' lawsuit. This agreement is expected to lead to a new collective bargaining agreement (CBA) and allow teams to resume business on Dec. 9 -- with opening day slated for Christmas.
Although many "B-level" issues remain to be resolved, this tentative agreement provides the framework for what will become the new CBA. The changes in the tentative agreement represent sweeping changes to the NBA's economic system. Here is a summary of the principal deal points as they relate to the 2005 CBA.
Length of the agreement
• 2005 CBA: Seven years, with a league opt-out in 2011 (which the league invoked).
• 2011 CBA: Ten years, with a mutual opt-out (either side can opt out) in 2017.
• Who benefits? While it is encouraging to think that we won't have to witness another lockout until 2022, in all likelihood one side will invoke its option in 2017 to reopen labor negotiations. Since right now this deal appears to greatly favor the owners, it is reasonable to think the players will opt out -- especially since the national TV contracts are up for renewal in 2016, and the league expects an injection of new revenue. But this may not turn out to be the case -- the 2005 CBA was thought to favor the league, as well.
• 2005 CBA: Players receive 57 percent of Basketball Related Income (BRI).
• 2011 CBA: Players receive 51.15 percent of BRI in 2011-12. In later seasons players receive 49 to 51 percent of BRI (50 percent, plus or minus 60.5 percent of the amount by which BRI exceeds or falls short of projections); 1 percent of BRI (from the players' share) is used to fund a new pool for post-career benefits.
• Who benefits? This is the biggest win for the owners in this agreement. After losing $370 million, $340 million and $300 million in the past three seasons under the previous CBA, the league entered negotiations looking for a fundamental reset of the NBA's economic system -- and got it. In addition, players will lose approximately 20 percent of their 2011-12 salaries -- a result of the games missed due to the lockout.
• 2005 CBA: 8 percent (in 2010-11) withheld to ensure players receive no more than the agreed-to revenue split. If escrow withholding is insufficient, salaries are reduced the following season to compensate.
• 2011 CBA: 10 percent withheld in every season. If the escrow withholding is insufficient, the shortfall is taken out of the players' post-career benefits pool. Salaries are not adjusted the following season.
• Who benefits? The players win here by getting the league to agree not to take any shortfall from their salaries the following season. Since there will be no rollback of existing salaries, the escrow system will likely be stretched to its limits in the early years of this agreement, and the players' salary losses are capped at 10 percent no matter what happens.
• 2005 CBA: One player can be waived prior to the start of the 2005-06 season. The salary of the waived player will not count toward the luxury tax.
• 2011 CBA: One player can be waived prior to the start of any season (only one player can be amnestied during the agreement, and contracts signed under the new CBA are not eligible). The salary of the waived player will not count toward the salary cap or luxury tax. Teams with cap room can submit competing offers to acquire an amnestied player (at a reduced rate) before he hits free agency and can sign with any team.
• Who benefits? As with the amnesty provision in the 2005 agreement, this provision allows teams to kick one bad contract to the curb. The benefits to amnesty are greater now than they were in 2005 -- 100 percent of the player's salary is removed for both cap and tax purposes. The other big change is that teams are allowed to pocket their amnesty card to use later -- so teams that managed their cap well to this point benefit because they don't have to use it or lose it.
Teams with cap room can benefit greatly from the amnesty provision by being able to submit a competing offer to claim an amnestied player at a reduced rate. For example, if Cleveland uses its amnesty provision on Baron Davis, a team that is $5 million below the salary cap can submit a $5 million offer to acquire Davis' contract. If that offer is the highest, the team acquires Davis and is responsible for $5 million of his salary -- with Cleveland responsible for the balance. This happens before Davis becomes a free agent and can sign on his own with a team like Miami.
• 2005 CBA: Some of the undistributed funds from the luxury tax were given to teams in competitively disadvantaged markets.
• 2011 CBA: A new plan approximately triples the amount of money that is revenue-shared. Details of this plan are yet to be finalized.
• Who benefits? Small-market teams. Teams like the Lakers, with their new $3 billion local television contract, will be perennial payers into this system, and teams like Charlotte and Milwaukee will be perennial beneficiaries.
Minimum team salary
• 2005 CBA: Teams must spend at least 75 percent of the salary cap.
• 2011 CBA: Teams must spend at least 85 percent of the cap in 2011-12 and 2012-13, and at least 90 percent of the cap in later years of the agreement.
• Who benefits? The players. Although it was once rare for teams to be below the salary cap, it became more common in the latter years of the 2005 agreement as teams struggled to cope with financial markets. For example, the Sacramento Kings traded for Marquis Daniels at the 2011 trade deadline because their payroll was below the 75 percent minimum. By raising the salary floor, teams are required to spend more money on player salaries.
The higher salary floor could also affect teams' amnesty decisions. Teams might decide to hang on to high-salaried players rather than amnesty them in order to meet the new minimum team salary requirements.
• 2005 CBA: Teams paid $1 for every $1 their salary was above the luxury-tax threshold.
• 2011 CBA: Teams pay $1 for every $1 their salary is above the luxury-tax threshold in 2011-12 and 2012-13. Starting in 2012-13, teams pay an incremental tax that increases with every $5 million above the tax threshold ($1.50, $1.75, $2.50, $3.25, etc.). Teams that are repeat offenders (paying tax at least four out of the past five seasons) have a tax that is higher still -- $1 more at each increment ($2.50, $2.75, $3.50, $4.25, etc.).
• Who benefits? I'll tell you which teams don't benefit -- the perennial taxpayers, like the Lakers and Mavericks. When the league was unable to negotiate a hard cap, they settled for the next best thing -- a more punitive luxury tax that will make teams think twice before committing to a higher payroll. For example, the Lakers' tax bill in 2011 (when the tax was dollar-for-dollar) was about $19.9 million. Under the new system, being that far over the tax line would cost them $44.68 million. If they were a repeat offender (paying tax at least four of the previous five years) they would owe $64.58 million!
Distribution of luxury-tax funds
• 2005 CBA: Teams that did not pay tax each received 1/30th of the total tax fund. Taxpaying teams forfeited their tax distribution -- their money was used for "league purposes" such as the revenue-sharing program.
• 2011 CBA: No more than 50 percent of the tax funds can go exclusively to teams that did not pay tax.
• Who benefits? The previous tax system created a "cliff" at the tax threshold -- a team that was $1 under the tax line received a full tax distribution (about $2.4 million in 2011), but a team that was $1 over the tax line didn't receive anything.
Because of this cliff, teams needed to be very careful with their spending when they were near the tax threshold -- in fact, it looks like Houston was burned in 2011 by straying just $800,000 above the limit. The new system softens the blow for teams that exceed the tax line by just a little. For example, under the new system, Houston would have had to pay $800,000 in tax, but may have been eligible for a payout to offset their tax bill.
However, while the new agreement stipulates that no more than 50 percent of the tax funds can go exclusively to teams that did not pay tax, it doesn't specify what happens to the other 50 percent. It is possible the remaining tax money will be distributed to all teams in equal shares, but it's also possible the NBA will reserve this money for "league purposes."
Additional limits for taxpaying teams
• 2005 CBA: No additional limits for taxpaying teams.
• 2011 CBA: Taxpaying teams have a smaller midlevel exception, can acquire less salary in trade, and cannot use the biannual exception. Starting in 2013-14, teams more than $4 million above the tax level cannot receive a player in a sign-and-trade transaction.
• Who benefits? Throughout the labor dispute, the league has tried to improve competitive balance by installing a very restrictive cap system -- first asking for a hard cap, then a "flex" cap, and then a highly punitive luxury tax, before finally settling on a luxury tax with more teeth. In addition to an incremental tax penalty, taxpaying teams now will have less access to exceptions. This will give small-market teams a competitive advantage -- for example, instead of weighing equal $5 million offers in Los Angeles and Minnesota, a free agent might be forced to choose between a $3 million offer in Los Angeles and a $5 million offer in Minnesota.
• 2005 CBA: By mutual agreement, teams can alter the payment schedule to waived players. The remaining guaranteed salary is applied to the team's salary cap across the remaining years of the player's contract.
• 2011 CBA: The player's remaining salary and his cap hit may be stretched across twice the number of seasons remaining on the contract, plus one (for example, the salary and cap hit for a player waived with two seasons remaining may be stretched across five seasons). This is entirely at the team's discretion, but it applies only to contracts signed under the 2011 CBA.
• Who benefits? Teams with bad contracts. For example, if a team has an underperforming player with one season remaining at $12 million, the team can waive him and stretch his salary across three seasons at $4 million per season. This will help with cash flow and provide $8 million in cap relief for the current season.
Free agents and restricted free agency
• 2005 CBA: A cap hold of 150 percent to 300 percent continues to count against the team's cap for its free agents who have Bird rights or were first-round picks. A team has seven days to match an offer sheet to its restricted free agent. Qualifying offers to restricted free agents are based on the player's draft position.
• 2011 CBA: Cap holds are reduced for most players who have Bird rights or were first-round picks, and now range from 150 percent to 250 percent. Teams have three days to match an offer sheet to its restricted free agent. Players can qualify for a better qualifying offer by meeting certain criteria. High-drafted players might receive a lower qualifying offer by failing to meet the same criteria.
• Who benefits? The reduction in cap holds provides teams with additional cap room to spend on other team's free agents -- giving players slightly higher salaries and promoting player movement.
The reduction in the waiting period from seven games to three games is a big win for restricted free agents -- teams are often very hesitant to make offers to restricted free agents because they don't want to tie up the salary amount on their cap for an entire week while the other team makes up its mind whether to match.
The higher qualifying offers help ensure that lower-drafted players who become starters or regular rotation players receive a salary that is in line with their performance. Conversely, the lower qualifying offer for underperforming high draft picks helps protect teams. For instance, rather than submitting an $8.8 million offer to retain the rights to Greg Oden, Portland would be able to offer much less. In fact, I fully expect this to be nicknamed the "Greg Oden Rule."
• 2005 CBA: Six years with 10.5 percent raises for Bird free agents; five years with 8 percent raises for other players. Maximum salaries are approximately 25, 30 or 35 percent of the salary cap, depending on the player's years of service.
• 2011 CBA: Five years with 7.5 percent raises for Bird free agents; four years with 4.5 percent raises for other players (including all sign-and-trade transactions). The maximum salaries are the same as the 2005 CBA, except players coming off their rookie scale contracts qualify for the 30 percent maximum if they meet certain criteria. Minimum and rookie scale salaries are frozen near their 2010-11 levels until revenues rise enough that the reduction is proportional to the 12 percent reduction in the overall system.
• Who benefits? These changes provide the league with more cost control. The exception is the higher maximum salary for fifth-year players who meet certain league honors (MVP, an all-NBA team member twice, or an All-Star twice), which lets young superstars (think Derrick Rose) cash in with a bigger contract sooner.
The higher maximum salary for fifth-year players can also benefit teams. In 2006 LeBron James, Dwyane Wade and Chris Bosh all signed shorter extensions (which allowed them to become free agents in three years) rather than signing on for the maximum five years. The three players timed their free agency to follow their seventh season in the league, when they became eligible for the 30 percent maximum. Allowing franchise players such as these to sign for the higher maximum sooner reduces the temptation for these players to sign shorter contracts, delaying their eventual free agency.
• 2005 CBA: Players coming off their rookie scale contracts can extend for five additional seasons. All other veterans can extend for five total seasons, which includes the seasons remaining on their current contracts.
• 2011 CBA: Players coming off their rookie scale contracts can extend for four additional seasons, although the team can designate one player who is eligible for five seasons at the maximum salary. A team can have only one designated player on its roster at any time. All other veterans can extend for four total seasons, which includes the seasons remaining on their current contract. The extension in an extend-and-trade contract is limited to three total seasons, which includes the seasons remaining on the current contract.
• Who benefits? The teams benefit here, just as they do with shorter free-agent contracts -- teams' future salary commitments are reduced. In addition, limiting extend-and-trade contracts to three seasons (including the seasons remaining on the player's current contract) helps reduce situations like the one the Nuggets were in last season with Carmelo Anthony.
• 2005 CBA: Five years starting at the average salary ($5.765 million in 2010-11), with 8 percent raises.
• 2011 CBA: For non-taxpaying teams, four years starting at $5 million (base salary grows by 3 percent annually beginning in 2013-14), with 4.5 percent raises. Taxpaying teams are limited to three years, a $3 million base salary (which grows by 3 percent annually beginning in 2013-14) and 4.5 percent raises. Teams with cap room (therefore losing their midlevel exception) get a new midlevel that is for two years and starts at $2.5 million (growing 3 percent annually).
• Who benefits? Very few full midlevel contracts handed out under the 2005 CBA turned out to be good bargains in their later years. Reducing the size and length of the midlevel exception will help teams rid themselves of bad contracts.
The new exception for teams with cap room will benefit teams that clear cap room to sign free agents. For example, in the summer of 2010 Miami gutted its roster in order to obtain James and Bosh. This left the Heat with a small amount of cap room to sign players like Mike Miller. But once they reached the salary cap, they could offer only minimum-salary contracts. Under the new CBA, once they reach the cap, they could still offer one or more players a total of $2.5 million.
Disabled player exception
• 2005 CBA: Five years, starting at the lesser of half the replaced player's salary or the average salary, with 8 percent raises.
• 2011 CBA: One year, starting at the lesser of half the replaced player's salary or the non-taxpayer midlevel exception.
• Who benefits? This exception provides teams with the ability to sign an emergency replacement for an injured player. Under the previous CBA, the player could be signed to a five-year contract, meaning a permanent replacement could be obtained. This also opened the door to situations where the injured player returned to the team while his replacement was still on the roster. By reducing to one year in the new CBA, this exception will more closely match its intent -- to provide a short-term emergency replacement for an injured player. Teams will now have to fend for themselves if the player's injury keeps him out for more than a year.
• 2005 CBA: Teams over the cap can acquire no more than 125 percent plus $100,000 of the salaries they trade away. A team can receive up to $3 million cash in any trade.
• 2011 CBA: Taxpaying teams can acquire no more than 125 percent plus $100,000 of the salaries they trade away (same as 2005 CBA). Non-taxpaying teams (based on their post-trade salary level) can acquire up to the lesser of 150 percent plus $100,000, or 100 percent plus $5 million of the salaries they trade away. The cash a team pays or receives in trade is limited to $3 million annually.
• Who benefits? The relaxation of the salary matching requirements will facilitate player movement. The addition of the provision that allows teams to acquire up to 100 percent plus $5 million of the salaries of its traded players will also reduce "trade ballast" -- extra players thrown into a deal merely to make a trade legal. The number of crazy trades should therefore be reduced.
The limitation of cash in trades (to $3 million annually) will have a big effect on draft-pick trades. It is now common for first-round picks to be sold for up to $3 million each prior to the draft. By limiting teams to $3 million annually, these trades will be reduced.
Base year compensation
• 2005 CBA: Applies for six months (but no later than June 30) after a player is re-signed with Bird rights or receives an extension of his rookie scale contract, and receives a raise greater than 20 percent. Base year compensation limits the player's outgoing salary for trade purposes.
• 2011 CBA: The criteria for determining whether a player is subject to base year compensation are the same. Players subject to base year compensation cannot be traded before Jan. 15, except in a sign-and-trade. If the trade is allowed, then base year compensation is applied to the player's outgoing salary only in a sign-and-trade transaction.
• Who benefits? Base year compensation prevents teams from re-signing players to higher salaries in order to facilitate a future trade. Preventing these players from being traded at all (except in a sign-and-trade) also helps to reduce crazy trades, where extra players are added to both sides of the deal to make the salaries match.
Re-signing a traded player
• 2005 CBA: If a player is traded and subsequently waived by his new team, he cannot re-sign with his original team for 30 days (during the season) or 20 days (during the offseason) following the trade.
• 2011 CBA: If a player is traded and subsequently waived by his new team, he cannot re-sign with his original team for one year following the trade or until July 1 after the last season of the player's contract, whichever is earlier.
• Who benefits? The tighter salary-matching rules in the 2005 agreement often required the addition of ballast (extra players thrown in for salary matching purposes) to make a trade legal. These players were often unwanted and unneeded once the trade was complete, and were waived soon after the trade was consummated -- often finding their way back to the team that traded them after a short vacation. For example, the Cavs sent Zydrunas Ilgauskas to the Wizards as part of their 2010 trade for Antawn Jamison. The Wizards waived him a week later, and he subsequently re-signed with the Cavs for the remainder of the season.
The relaxation of trade rules should reduce -- but not eliminate -- the need for trade ballast. When it does occur, this rule change will prevent the team from reacquiring the player in the same season. This is a mixed blessing. On one hand, it will eliminate these wink-wink deals where players are traded with the full expectation of returning later. On the other hand, it might create a situation where an able-bodied player is unable to work in the league, because the only team that has an available roster spot and is willing to sign him is prevented from signing him.
Larry Coon is the author of the NBA Salary Cap FAQ. Follow him on Twitter.