Hard Cap: Who Really Gets Hurt?

Zephid —  August 3, 2011

On a day when the NBA has fired the first volley of legal action against the Players Union, there’s a lot of talk about who is to blame and who is holding up negotiations. One of the biggest issues at hand is the Hard Cap.

Many of us are probably fairly knowledgeable of what a hard cap entails, but a little refresher seems in order. In the previous CBA (the one that just expired), the NBA had a “soft cap,” where teams could sign whoever they wanted up to a certain limit (a little over $58M last season). However, once teams reached that limit, they could only sign players in excess of the limit using various exceptions, including the Mid-Level Exception (once a year, each team can sign a player at the average salary of the league), the Bi-Annual Exception (once every two years, each team can sign a player to a nominal amount of money (around $1-2M per year, for max 2 years), Traded Player Exceptions (when they make a trade in which they take on additional salary), and various “Larry Bird” Exceptions (whereby teams are allowed to re-sign their own players to larger contracts that put them over the cap). To prevent teams in bigger markets from continually accruing salary and simply outspending other teams, the CBA included the luxury tax, which forced teams to pay an extra dollar for every dollar they were over the luxury tax limit (somewhere around $70M last season). This served to limit a number of teams from overspending, the San Antonio Spurs being a prime example of a team that was very leery of exceeding the luxury tax limit for many seasons.

However, if teams could pay the extra money, they could just keep spending and spending away. Teams like our Lakers and Dallas paid out over $90M each this past season, 3 times more than the Kings and Nuggets have on their current payrolls for this season. Thus, a lot of small market teams (and fans of those teams), have started to call for a hard cap. A hard cap would make the salary cap limit absolute: there would be no exceeding the salary cap, regardless of the circumstances. The NFL currently has a hard cap system, and many attribute the parity of that league to the hard cap.

Tim Donahue of Eight Points, Nine Seconds, a Pacers blog, recently wrote an article claiming small markets need a hard cap. Donahue makes the case that a hard cap rewards disciplined spending and good management, something that many small markets have (such as Portland and Oklahoma City). Since large market teams can’t simply outspend the small market teams, the performance of the team would depend entirely on whether the team’s management could put together a cost-effective group of players that fit as a team.

That sort of argument seems to be the norm. Royce Young, however, a blogger for the Daily Thunder as well as CBSSports, makes a strong case that a hard cap could make keeping stars in small markets very difficult. One of the most useful parts of the past CBA were the various forms of Larry Bird Exceptions, allowing teams to keep their own players, even if doing so meant they would skyrocket past the cap. While this didn’t prevent Lebron James from bolting Cleveland, it did help Dallas keep Dirk Nowitski (and then win a championship at our expense… #anti-coping). However, if a hard cap is instated, a team like the Thunder may have a lot of trouble holding onto their good young players, like Russell Westbrook, James Harden, and Serge Ibaka. If all of those players want extensions, the Thunder will be extremely strapped for cash under a hard cap, considering Westbrook will almost certainly be a max level salary player and Ibaka will also command a high salary as a quality big man. Thus, even if teams draft smartly and make good decisions, it may become impossible for teams to hold on to their star players.

So does a hard cap hurt small market teams or large market teams? It certainly hurts dumb teams more than it does smart teams; any team willing to give Rashard Lewis $120M or similarly for Gilbert Arenas will get severely punished by their own cap inflexibility. Most would say it prevents large market teams from outspending small market teams, and for the most part, I agree. The Lakers would certainly have to give up one of Bynum, Gasol, or Odom to be under the salary cap, and it would have to be for almost nothing in return. A hard cap would definitely level the playing field in terms of spending power not dictating team strength.

However, a hard cap would produce a new imbalance in the NBA landscape, being that some teams are in states with low or no state income tax. California, for instance, had a state income tax of 11% for people making over $1M. Compare that to Florida and Texas, which have no state income tax, and it becomes clear that tax policies have a strong effect on where NBA players want to sign. A player could sign in Orlando for $9M and make the same amount as if he signed in LA for $10M.

As for whether a hard cap hurts the players or the owners, it definitely saves the owner’s from feeling forced to overspend on players. But as Henry Abbott points out in this very insightful post on TrueHoop (rare, I know), the NBA already has a de facto hard cap in the form of BRI sharing. In the previous CBA, the players received 57% of BRI, and that’s it. If 57% wasn’t enough to cover all player salaries, the players would simply receive less money (taken out ahead of time in the form of escrow). So while a hard cap may limit the value of some contracts, the CBA still dictates how much of BRI the players will receive, and in turn how much they are paid.

But you know who the real loser is in all of this hard cap business?: The NBA Trade Machine aficionados. A hard cap would make trade conditions extremely stringent, salaries having to match almost dollar for dollar, given that teams won’t be able to exceed the cap. And I don’t buy any of this “flex cap” crap the owners are pushing, because once you reach the flex cap limit, it becomes hard cap, plain and simple. Gone will be my days of somehow finagling Andre Iguodala onto the Lakers roster (and with it, my hopes and dreams!). In this respect, I think a hard cap hurts the NBA, because trade scenarios and MLE signings are some of our favorite topics of discussion (no matter how speculative they become). Yet the hard cap will almost certainly level the playing field for small market teams. Thunder fans just shouldn’t come complaining when they have to give up Serge Ibaka for nothing.

Zephid

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19 responses to Hard Cap: Who Really Gets Hurt?

  1. Wouldn’t the Lakers have to give up more than just one of their big three. I mean, Kobe alone is using 30m a year, so that might leave just another 28m or so for the other 13 players altogether, will there be a grace period maybe for teams like the Mavericks and Lakers? This post just raised many more questions in my mind.

  2. I hate the effects of a hard cap and am very much against it.
    The big effect to me as a fan is it forces teams to waive players year after year only because of the hard cap.
    They are not waived because of how good or bad they played, but just because of the hard cap.

    Teams draft young players and sign free agents to build up a good team, only to have to waive them because they can’t afford them in their next contract.
    So they waive the good $6M player and sign a $2M mediocre veteran or unknown talent to replace them and the team performance suffers.

    Good role players and fan favorites are constantly being waived in order to sign cheaper mediocre substitutes.

    I’ve watched this happen year after year in the NFL, and it really pisses me off.

    If the NBA somehow forces a hard cap on the players, I hope someone sticks a hard cap up David Stern’s a$$.

  3. I don’t know. It’s actually fairly absurd when you think of it, that multi-million dollar franchises with the best advisors and accounting firms that money can buy, can’t figure out how to balance a budget. And at any rate, the players’ union has already agreed to meaningful cuts. If a team doesn’t want to pay more than “x” dollars because they can’t afford it, then don’t. If the league and the owners jointly, want to cap expenditures, do it. Apart from contracts that already exist, they players or their representatives, can’t force teams to pay beyond what the teams WISH to pay. Is this naive? Maybe, but it seems to me that it might be more practical for the owners to put their financial houses in order rather than to sue the players for “bad faith”. Unless of course, they’re more interested in union-busting than in actually working out a ceiling on expenditures. Nice post btw, Zephid.

  4. I like the idea of the “Larry Bird Rights” but think that it should be extended to a player who plays with “one team” for over 6 years. There should be an exception for loyalty. The Dirks, Kobes, and Duncans should be rewarded and it should not affect what the team does with its other players.

    Though San Antonio was successful, not every team can do what they did financially and personnel wise. They built the perfect team around the icons that they had in Timmy and the Admiral. No other team (the Lakers, Boston, or Dallas) was able to duplicate that blueprint. It’s akin to what Atlanta was able to do with their farm system in 1980’s baseball. Nowadays, teams overspend for their superstars or almost superstars.

    The Eddie Curry, Agent Zero, Rashard Lewis, and Joe Johnson contracts are what’s killing our game. Limit those and you limit the bad decisions and need for a hard cap.

  5. I thought Bill Simmons had an interesting proposition to solve the NBA cap situation…
    http://www.grantland.com/story/_/id/6749669/if-ruled-nba-world

  6. Rusty Shackleford August 4, 2011 at 6:27 am

    Best article I’ve read on here in a while. After reading it I can see why the two sides are so far apart. I just hope they get something done so I can watch some ball this fall.

    #4 – Check 2010 SF Giants. Other than Barry Zito (blah) and Aaron Rowand (double blah) they aren’t overpaying for anyone on that squad.

  7. I don’t see how they can possible implement a hard cap. Unless they null all player contracts and resign every player to a new salary teams are STUCK with players they have under contract, meaning they will be OVER any hard cap. (Well at least teams like the Lakers, Dallas, and so on)

    The only other thing I can think of is if make all player contracts non-guaranteed, then they can cut players to make it under….but even that isn’t feasible.

    Lakers would have to cut most of the team just to keep Kobe. They would have to cut Bynum, Gasol and Odom to keep Kobe.

    No idea how the owners could pull it off, unless it is a 5 year plan to get to a hard cap.

  8. Trey Johnson will not be playing with Lakers next year, even if there is a season:

    http://espn.go.com/los-angeles/nba/story/_/id/6831791/los-angeles-lakers-trey-johnson-headed-italy-no-opt-out

  9. Trey? Noooooo!!!! What are we going to do without him on our D league team?

    Btw… I’m still hoping we can get Iggy for Odom and have him guard PGs.

  10. Happy for Trey, he seemed like a blue collar type player trying to make his dream become reality. Make that paper homie, I aint mad atcha. Hopefully the second rounders LA picked up will follow , almost forcing the hand of the FO to find a legit upgrade at the point.

  11. 7: It would have to make the provision of
    easing everyone into hard cap territory.

    I don’t think anyone would want a hard cap full
    in effect as soon as an agreement was made.

    Bye.

  12. #7. Gabriel’s right. Any hard cap would likely be rolled in over a 3 year period to allow teams to get under the cap. That said, I’d feel for teams that built rosters for the long term with big money/high quality players only to have to try and trim salary after a hard cap was instituted after those deals were done.

  13. 11) 12)
    how long do CBA’s usually last? I thought they were like 5 years or around there.

    By the time the hard cap is in place, it won’t be around long enough to determine if it is working or not…

    I am not a fan of the hard cap idea.

    I actually liked Bill Simmon’s CBA fix, but it was to radical for it to be considered.

    At the very least, contracts need to be shortened and only partially guaranteed. Maybe allowing limited performance bonuses outside of whatever cap is decided upon.

    Simple things like that will fix the biggest problems we see in the NBA today.

  14. +1 for any performance base incentives making base salaries lower, but inturn providing monetary compensation for whats lost on the front end. Definitely would make the saying earning a paycheck mean something in the league.

  15. Another vote against the hard cap proposition.

    I agree that contract lengths need to be shortened. But one idea I haven’t seen a lot is to include more team and player options along with buyouts. You sort of see that now, but it’s usually for the entire remaining amount.

    I like how baseball does it where if the team doesn’t pick up the option, they have to buyout the player. I think this helps both sides. The player is guaranteed a certain amount of money but the club protects itself from long term by paying out.

    The buy out provisions in the last CBA was too unwieldy. I think an baseball type option would help the flexibility.

  16. #5 –

    The Simmonds article was interesting up to a point but then it got so long that I couldn’t breathe and had to stop reading. I did like the fact that he named his plan after Dave and refuse to accept that it paid hommage to some movie.

    Presented forthwith, my own “Dave” plan:

    #1 – ask the players if they would take 1.5 additional points off the BRI, phased in over a three-year period.
    #2 – stop offering so much in premium salaries when there’s no legit competing offers.
    #3 – accept the concessions offered from players; work out internal power trips on your own, accept the union’s right to exist and get ready to start making money again during a crappy economic downturn.

    Bold, isn’t it?

  17. #6

    I was referring to basketball when I spoke of overspending but it applies to baseball too. The fact that the Angels picked up the tab for Vernon Wells perplexes me to no end.

  18. Performance based incentives don’t work in a team sport since it encourages individual goals over team goals.

    Say a player needs to raise his ppg by 1.0 to make an incentive clause. So he shoots the ball more.

    His teammates don’t complain too much because, well, they need to hit their performance triggers as well. Lots of empathy all around. Or lots of fighting all around.
    Either way, it’s not good.

    There’s lots of things the owners can put in the CBA to protect themselves from themselves, since that seems to be what their main worry is.
    Any or all of –

    3 year/4 year maximum contract (new team/current team) replacing the current 5/6 years.

    Reduce the dollar amount of maximum contracts and raises.
    Reduce the MLE from $5M to $3.5M.

    Make ALL contracts a team option after 2 years. The players get some guaranteed money, but the team can waive a player if they think they’re not getting the player performance they thought they would get (without needing measured incentives).

    The owners/David Stern have a fixed agenda of how they want to “fix” the NBA’s economy and are not willing to truly negotiate to find a compromise that is good for both parties.

    There is no need for a hard cap.

  19. The devil is in the details.
    A hard Cap w/a provision for Cap-free buyouts will be a huge advantage for teams/owners willing to spend.
    The Lakers,Mavs and even Magic have been willing to spend $15-20mil in LUX Taxes. W/a hard Cap the Lux Tax is history. Even a hard Cap at $70mil would free up some $40mil in budgeted salary costs. The Lakers(and Knicks and any team w/an owner willing to spend)could afford to buy out any player they wanted in order to clear space for a trade or sign whatever hot FA there might be.
    The current Owner wanted Cap is so low,The Lakers,Mavs and Magic could afford to buyout EVERY player under such a Cap,replace them and still have less in payrolls costs than they paid in 2010/11.

    Second,w/salaries being so reduced,top Players are going to cluster in markets where off-court incentives are huge-major media endorsements,acting/singing opportunities,South Beach,etc. Top players will be fleeing small markets as soon as they can.
    The franchise player tag…the League’s been there,done that. It was originally called the Franchise Player Contract and in a shot period of time became the “max contract”. And just how long is the Franchise tag to last,after all LeBron,Wade,Bosh all signed extensions w/their original teams.
    Does the League really think a dozen or so KG-in-Minn-situations will save it?

    Personally,I’d do away w/any restrictions on contracts other than rookie contracts(which I’d make identical,only w/preset Cap-free signing bonuses,the better the pick the more the signing bonus) and set a team salary floor equivalent to money team gets from National TV deal and NBA Merchandising(today @ $35mil) and a hard cap at twice that. Teams could sign players to any length,and amount they want so long as they don’t exceed the Cap. Teams can buyout any player they want Cap-free,they just have to pay-off the full remainder of the contract.(I’d even let teams pay for another team’s buyout in a player trade. NY,LA will always be flush w/cash,this lets them spend it-not neccessarily smartly,eh Isiah?-w/out killing Franchise values w/heavy Revenue Sharing.)