Rockets and League Luxury Tax Standings

I just saw this article and thought it was very interesting but LONG.

http://www.*********************/forum/showthread.php?s=&threadid=39986&forumid=63

Here are some of the HIGHLIGHTS


OVER THE CLIFF PROVISION WITHOUT CREATIVE SALARY DUMPING

Teams in this group are over the cliff provision and without creative salary dumping are likely to pay a 100% tax on every additional dollar that they spend. Both Boston and Toronto are very cost conscious with even Danny Ainge talking about how unlikely it would be that he would use his MLE. The Lakers have a much bigger revenue base, so I expect them to bite the bullet and use their MLE. Thus, including their own free agents, I expect only one to two MLE-size contracts for this group.

6. Toronto - [Committed in 03-04: $59.5M] (Profits: +$5M in 00-01, +$5M in 01-02, and -$5M to +$5M in 02-03)
Free Agents: N’diaye, V Lenard, J McCoy, R Alston, Baston


7. Boston - [Committed in 03-04: $56.6M] (Profits: +$10M in 00-01, +$17M in 01-02, and +$26M to +$36M in 02-03)
Free Agents: M Bryant, M Blount, W McCarty, G Long, B Coles


8. LA Lakers - [Committed in 03-04: $55.8M] (Profits: +$31M in 00-01, +$44M in 01-02, and +$24M to +$34M in 02-03)
Free Agents: Horry(t), Murray, S Walker, Madsen, Shaw, Pargo(ng)


9. Houston - [Committed in 03-04: $54.6M] (Profits: +$4M in 00-01, +$7M in 01-02, and +$22M to +$32M in 02-03)
Free Agents: Posey(r), Collier, J Hawkins, Morris, Maddox(t)

(I assume Houston does not necessarily pick up Maddox’s team option.)

After tasting the sweet honey of staying under the luxury tax threshold in 01-02, Houston will likely see their profits fall even if they don’t spend much in free agency. I do not see Houston adding anyone in free agency unless a deal was made to get Van Gundy. I also am not sure they will offer enough to keep Posey, even though they have extended him a qualifying offer.


FREE AGENT ANALYSIS

Overall, this market is very difficult to predict, because so much hinges on what the Clippers and Spurs decide to do. But here are a few guesses that I have.

The MAX Players
Duncan – He resigns with San Antonio – easiest call of the season.
Kidd – I think he stays with New Jersey with a maximum six-year contract, although I think a trade with Dallas is a possibility. (What about Finley, Nash, Bradley, and filler for Kidd and Mutumbo?)
J O’Neal – If Indiana can complete a Croshere and one of Harrington/Artest/Bender for Brandon and filler, then I think O’Neal stays with Indiana. Otherwise, I think he leaves for San Antonio.

The Clipper Restricted Free Agents
Brand – Brand accepts his qualifying offer with the Clippers and waits for next year.
A Miller – Unless Utah picks up a good point guard in a trade, I think they sign Miller to a 6-year $50 to $55 million deal and the Clippers do not match it.
Odom – If the salary cap rises to $42 million, then Washington signs Odom to a 6-year $42 to $47 million deal and the Clippers do not match it. Otherwise, I think Odom either accepts his qualifying offer with the Clippers or the Clippers match another team’s offer.
Maggette – Maggette signs a three-year $16 million MLE contract with another team (possibly the Bulls or the Wizards), and the Clippers match it. Maggette is young enough that he can afford being stuck with the Clippers for another three years. The three-year MLE contract is more than he likely would get by accepting the qualifying offer and entering the free agent market next year.

The Centers
B Miller – B Miller re-signs with Indiana for $47 to $52 million over six years, and perhaps for a bit less if they re-sign O’Neal and are able to complete a trade for Brandon.
Olowokandi – Kandi signs for $45 million over six years with Denver.
Nesterovic – Minnesota goes for broke this summer, and re-signs Nesterovic to a 6-year $40 to 45 million contract.
Mourning – Unless Dallas trades for someone like Mutumbo, I think Mourning signs with Dallas for three years at the full MLE, provided that he is healthy.

The Veteran Power Forwards
K Malone – After bringing in A Miller, Utah saves the rest of its money for next year, perhaps for Brand. They offer Malone a one-year deal for $7 to $9 million. After being courted by a few different teams, Malone accepts it.
PJ Brown – Brown is tempted with a three-year MLE deal from the Lakers, but signs a four-year $25 to $30 million deal with New Orleans.
J Howard – Howard signs a three-year $16 million MLE deal with the Lakers.

Other Key Free Agents
Arenas – After coming close to signing a one-year MLE deal with the Warriors, Arenas signs a six-year $55 to $60 million deal with the Nuggets – just barely above what A Miller signs for.
Payton – If O’Neal does not re-sign with Indiana, I think that Payton and B Miller to the Spurs is a possibility – both being paid a bit over the MLE. Otherwise, I think that Payton is likely to end up in Miami or back in Milwaukee.
Pippen – If the Bulls are able to unload Rose or Robinson, he signs with the Bulls for two years for $10 million. Otherwise, he re-signs with Portland for a bit more than that.
Hamilton – I am not sure if there will be anyone competing with Detroit for Hamilton. I think he re-signs with Detroit for 6 years at $35 to $40 million.
Terry – The loser of the Payton bidding (Milwaukee or Miami) makes a bid for Terry. I suspect that Atlanta ends up with Terry for six years for $35 to $40 million.
Posey – I don’t see a lot of competition for Posey, perhaps the Bulls, and I see Houston ending up with him for five years at 4 years at $25 to $30 million.
S Jackson – S Jackson re-signs with the Spurs for six years for $30 to $35 million.

I think this will be about it in terms of who ends up with MLE-type contracts. I think the remainder of players in the list above will be paid significantly less than the MLE. I think the biggest bargains in this free agent market will be in this sub-MLE market.


Dan Rosenbaum is an assistant professor of economics at the University of North Carolina at Greensboro and has been cited in several newspaper and ESPN web-site articles on NBA-related issues. He also has done some consulting work for the National Basketball Players Association (NBPA), but this work in no way reflects that consulting work. Rosenbaum also has done some unpaid consulting for a couple NBA teams.

 

I do not know why that link did not work but here, you just need to do a cut and past

so here it is, in 2 parts

ENTERING THE BRAVE NEW WORLD OF THE LUXURY TAX
By Dan Rosenbaum

The NBA is entering the Brave New World of the Luxury Tax. Never before in the history of professional sports leagues has the profit structure changed so dramatically in one year as it has with the onset of the luxury tax this year in the NBA.

If we compare the 15 highest-spending teams in 2002-03 to the 14 lowest-spending teams, their profits in 2001-02 (before the luxury tax) were about equal ($125 million versus $122 million). But in 2002-03 the world changed. Those 15 highest-spending teams now are losing about $60 million, whereas the lowest-spending teams are seeing their profits rise to about $290 million.

The mechanism by which teams earn profits has changed. Avoid paying the luxury tax and your team will be profitable, no matter how bad you are. Pay the luxury tax, and you likely will be losing a lot of money, regardless of whether you are successful on the court. In fact, the luxury tax has become so dominant that an argument could be made that a luxury tax expert, such as Irwin Mandel of the Chicago Bulls, is worth more to a team than all but a handful of players.

Thus, in the new NBA, the place to begin to understand the free agent market is to analyze each of the 29 teams, paying close attention to their profits. Once we get a firm grasp of how the luxury tax is affecting these teams, then we can consider what kind of money will be available for various players.

So I start with the team analyses. At the bottom I list the assumptions made in these analyses.

KEY

In brackets is the projected team salary for 2003-04 prior to adding free agents, including all players signed for 2003-04 including first round picks at 120 percent of their rookie scale and team or player options that I am fairly certain will be picked up.

I have subtracted players who will come off of team salary during the season.

MLE stands for mid-level exception, which should be worth about $4.9 million. The million dollar exception is worth $1.5 million.

In parentheses are profits for 2000-01, 2001-02, and an estimate for 2002-03.

In the list of potential free agents for each team, player options are denoted as (p), team options as (t), restricted free agents as (r), and non-guaranteed contracts as (ng).
DEFINITELY OVER THE CLIFF PROVISION

Teams in this group pay a 100% tax on every additional dollar that they spend. Several of these big-spenders lost a lot of money in 2002-03; even teams like Portland and New York have started to talk about controlling their spending. As a group, these five teams totaled a $30 million annual profit in 00-01 and 01-02, but stand to lose about $105 million in 02-03. Including their own free agents, I expect only two to four MLE-size contracts for this group.

1. Portland - [Committed in 03-04: $79.8M] (Profits: -$19M in 00-01, -$22M in 01-02 and -$88M to -$98M in 02-03)
Free Agents: Pippen, Sabonis(ng), Daniels, Dudley, C Smith, Boumtje Boumtje(ng)

(I assume that Wallace does not exercise his player option. He would be crazy to do so. I assume that Portland does not necessarily guarantee the non-guaranteed contracts of Sabonis and Boumtje Boumtje.)

Paul Allen likely lost about $100 million in 2002-03, an order of magnitude bigger loss than the $20M losses he suffered the two previous years. A $100 million loss dents even Paul Allen’s wallet, so I think that Portland is thinking about cutting back.

I doubt that Portland picks up Sabonis’s non-guaranteed $7 million contract or re-signs Daniels (unless he comes back cheap). I suspect that Portland either re-signs Pippen for about $5 million to start or they use their MLE. I doubt that they do both, and it is possible that they may do neither.

2. New York - [Committed in 03-04: $79.9M] (Profits: +$29M in 00-01, +$25M in 01-02, and -$3M to -$13M in 02-03)
Free Agents: Ward(ng), Nailon, Postell, Pope

(I assume that Harrington and Knight exercise their player options. Harrington is a bit of a close call. I assume that New York does not pick up Ward’s non-guaranteed contract. The Knicks have to pay Ward $2 million if they do not quarantee his contract. I have included this $2 million in the committed number above.)

Luc Longley and Larry Johnson coming off the luxury tax books in 2002-03 helps the Knicks out a lot; they do still have to pay them, although insurance probably takes care of much of their salary. The key question is whether these savings tempt the Knicks to use their MLE.

I suspect that they will use their MLE, and I suspect that they re-sign Ward to a bit over the minimum if they do not land a good point guard.

3. Dallas - [Committed in 03-04: $72.5M] (Profits: -$23M in 00-01, +$3M in 01-02, and -$9M to -$19M in 02-03)
Free Agents: A Griffin, P Jones, W Williams, R Bell

Despite tremendous growth in revenues, Dallas still loses money due to the luxury tax, but I think Cuban still uses his MLE.

I know that there is talk of Malone coming to Dallas, but I think Cuban makes a run at Mourning or Olowokandi with the MLE. I think there is a reasonable chance that he gets one of these two, especially if the sign-and-trade for Kidd is successful. I suspect that Cuban also re-signs a couple of his own free agents to fairly inexpensive contracts.

4. Sacramento – [Committed in 03-04: $75.8M] (Profits: +$10M in 00-01, +$14M in 01-02, -$5M to -$15M in 02-03)
Free Agents: B Price, Cleaves, D Jones, J Jackson

(I assume that Divac does not exercise his player option.)

The luxury tax comes up and bites the Maloof brothers, and I think they are less aggressive in the free agent market. For evidence, see this article.

I suspect that the Kings re-sign J Jackson to something less than an MLE contract and try to trade Turkoglu for a lottery pick, which they would use on a future center. I don’t think the Kings use their full MLE (just part of it on J Jackson).

5. Phoenix - [Committed in 03-04: $62.9M] (Profits: +$25M in 00-01, +$19M in 01-02, and +$23M to +$33M in 02-03)
Free Agents: R Brown, S Williams, Langhi, Voskuhl, A Ford

(I assume that Gugliotta does not exercise his player option.)

With Marion’s extension kicking in, the Sun’s profits practically disappear in 03-04. However, Colangelo is happy with his young team and stays put, not using his MLE. He is waiting for the day when the contracts for Gugliotta and Hardaway come off the books. He does try to re-sign S Williams and Voskuhl.

OVER THE CLIFF PROVISION WITHOUT CREATIVE SALARY DUMPING

Teams in this group are over the cliff provision and without creative salary dumping are likely to pay a 100% tax on every additional dollar that they spend. Both Boston and Toronto are very cost conscious with even Danny Ainge talking about how unlikely it would be that he would use his MLE. The Lakers have a much bigger revenue base, so I expect them to bite the bullet and use their MLE. Thus, including their own free agents, I expect only one to two MLE-size contracts for this group.

6. Toronto - [Committed in 03-04: $59.5M] (Profits: +$5M in 00-01, +$5M in 01-02, and -$5M to +$5M in 02-03)
Free Agents: N’diaye, V Lenard, J McCoy, R Alston, Baston

Toronto doesn’t have enough money to go after a top-of-the-line coach, so it is very unlikely that they use their MLE. I don’t see Toronto being very active in free agency, although I expect them to be aggressive in trying to shed salary.

7. Boston - [Committed in 03-04: $56.6M] (Profits: +$10M in 00-01, +$17M in 01-02, and +$26M to +$36M in 02-03)
Free Agents: M Bryant, M Blount, W McCarty, G Long, B Coles

(I assume that Boston picks up Bremer’s non-guaranteed contract, and Sundov exercises his player option.)

Even with the new owners and even though Boston is earning a healthy profit, all the talk out of Boston suggests that Ainge won’t be spending much money this free agent season. Getting under the luxury tax threshold seems to be a priority with Boston, so I don’t see them using their MLE. Most of the action in Boston seems to be centered around trading Antoine Walker.

8. LA Lakers - [Committed in 03-04: $55.8M] (Profits: +$31M in 00-01, +$44M in 01-02, and +$24M to +$34M in 02-03)
Free Agents: Horry(t), Murray, S Walker, Madsen, Shaw, Pargo(ng)

(I assume that the Lakers do not pick up their team option on Horry and that the may or may not pick up Pargo’s non-guaranteed contract.)

The Lakers have one of the highest revenue streams in the NBA, so they certainly can afford to pay luxury taxes. In order to keep Kobe happy and keep Shaq from retiring, I think they do make an attempt to add quality players through both trades and through their MLE and Million Dollar exceptions.

9. Houston - [Committed in 03-04: $54.6M] (Profits: +$4M in 00-01, +$7M in 01-02, and +$22M to +$32M in 02-03)
Free Agents: Posey(r), Collier, J Hawkins, Morris, Maddox(t)

(I assume Houston does not necessarily pick up Maddox’s team option.)

After tasting the sweet honey of staying under the luxury tax threshold in 01-02, Houston will likely see their profits fall even if they don’t spend much in free agency. I do not see Houston adding anyone in free agency unless a deal was made to get Van Gundy. I also am not sure they will offer enough to keep Posey, even though they have extended him a qualifying offer.

SLIGHTLY ABOVE OR BELOW THE LUXURY TAX THRESHOLD

It is this group and the next group that are most affected by the luxury/escrow tax system. It is these middle spenders that determine how well this system constrains costs.

Why does the luxury/escrow tax system affect the middle spenders most severely?

Well, in addition to paying the salaries for any players they add and dollar-for-dollar luxury taxes, they also lose a part their luxury/escrow tax rebates. This part of the rebates is worth $8 to $10 million and is lost on a prorated basis with about the first $3.5 million spent above the luxury tax threshold (the point where the cliff provision ends) spent above the luxury tax threshold.

Thus, for a team right at the luxury tax threshold, it costs them $15 to $17 million to add a player for $3.5 million ($3.5 in salary, $3.5 in luxury taxes, and $8 to $10 million in lost rebates). For a team above the cliff provision, it only costs $7 million to add a $3.5 million player.

Because of this extremely high cost of adding salary for teams in this group, it would not be crazy to assume that none of these teams sign (or re-sign) a player to a MLE-sized contracts. But teams care about more than profits and with a couple new owners in this group, I expect one to three MLE-sized contracts from this group. Remember this includes teams re-signing their own players.

10. Minnesota - [Committed in 03-04: $53.0M] (Profits: +$5M in 00-01, +$9M in 01-02, and -$3M to +$7M in 02-03)
Free Agents: Nesterovic, Woods, Gill, Lopez, R Strickland, Trent, Wilks

Even with Brandon not counting towards team salary, adding just $6.4 million in salary costs the Wolves about $22 million in profits, dropping them from about a $13 million profit to a about $9 million loss. If they trade Brandon for a full-fledged salary, they risk posting huge losses. There are not many teams (if any) who could use luxury tax relief more than Minnesota, so it is unclear whether they will trade Brandon. So what do they do, especially with Garnett (who desperately wants a better team) up for an extension next year? Every dollar they spend this year may save them money with Garnett next year.

The Peeler/Smith for Cassell/Johnson trade may add enough scoring punch for the Wolves, so that they do not have to trade Brandon for additional firepower. With this trade, they may simply re-sign Nesterovic and a few of their own free agents, but there is a lot of talk about Brandon being traded to teams like Chicago, Indiana, Portland, and Dallas.

Four of Minnesota’s own free agents were important parts of the rotation, so unless they strike out with their own free agents, I do not see the Wolves using their MLE. Unless Taylor has a little bit of Cuban in him (which it appears he might), I think holding on to Nesterovic is at best a 50/50 proposition, but I think they have a good chance of retaining Gill, Strickland, and Trent.

11. Golden State - [Committed in 03-04: $52.5M] (Profits: +$3M in 00-01, -$1M in 01-02, and +$10M to +$20M in 02-03)
Free Agents: Arenas, Boykins

Re-signing Arenas and Boykins to $6 million combined with no other free agent activity would likely result in Golden State’s profits dropping by $21 million, again from about a $11 million profit to a $10 million loss. Arenas and Boykins are nice players, but they simply are not that worth that much. I think there is a good chance that the Warriors’ are this year’s Raptors, and they don’t even offer Arenas a full MLE.

However, the Warriors may offer Arenas the MLE to save face, but behind the scenes not ensure Arenas that the money will be there once the (perhaps one year) MLE deal is up. Also, they could be aggressive in re-signing Boykins to further alienate Arenas.

On the other hand, the near-max demands may result in Arenas coming back to Golden State hat in hand late in the free agent season, signing a one-year deal for the full MLE.

12. Atlanta - [Committed in 03-04: $51.9M] (Profits: +$6M in 00-01, +$4M in 01-02, and -$3M to +$7M in 02-03)
Free Agents: D Johnson, Terry(r), Glover, E Davis, Newble, Ham, J Jackson, Moore

(I assume that A Henderson exercises his player option.)

With new ownership coming in sometime during the summer, I think there is a good chance that Terry and Glover are not re-signed. (Atlanta did not extend a qualifying offer to Glover.) Unless the Hawks make a trade to add some players, they are likely to be above the cliff provision even without re-signing Terry, which would lower the cost to re-signing him (to a $5 million starting contract) from about $19 million to just $10 million. But even $10 million is pretty steep for Terry, so maybe Atlanta sits still and waits for 2005-06, when a lot of their contracts end.

13. Memphis - [Committed in 03-04: $52.3M] (Profits: -$13M in 00-01, +$1M in 01-02, and -$2M to -$12M in 02-03)
Free Agents: Batiste

With Reeves not counting towards team salary, West has a chance to keep his team under the luxury tax threshold, which would allow the Grizzlies to earn a small profit and save some money for later years. With two first rounders to integrate with a young team, I think West holds the line in free agency this year, not using his MLE. Using his MLE likely would cost the Grizzlies more than $15 million. West, however says he will be very busy. We’ll see.

A FEW MILLION BELOW THE LUXURY TAX THRESHOLD

Like the group before them, this group faces huge penalties once they start paying the luxury tax. For the most part, I see these teams most interested in their own free agents, and not counting Jason Kidd (who I think re-signs with , I see only two to three MLE-sized contracts, including teams re-signing their own free agents.

14. Philadelphia - [Committed in 03-04: $48.9M] (Profits: +$11M in 00-01, +$18M in 01-02, and -$2M to +$8M in 02-03)
Free Agents: Coleman, K Thomas(r), Skinner, Hill, Clancy(ng)

(I assume that M Williams exercises his player option and that the Sixers do not necessarily guarantee Clancy’s non-guaranteed contract.)

With Coleman coming completely off the books and Geiger not counting towards luxury taxes, the Sixers are positioned for a dramatic increase in profits. I see them making an attempt to re-sign K Thomas for less than the full MLE, and maybe re-signing Skinner or Hill to something slightly above the minimum. If they lose Thomas, I suspect they might spend a bit of their MLE, but otherwise I see them basically treading water this summer.

Update: Philadelphia reportedly is offering Kenny Thomas a six-year $50 million deal.

15. Seattle - [Committed in 03-04: $48.1M] (Profits: +$2M in 00-01, +$6M in 01-02, and +$7M to +$17M in 02-03)
Free Agents: E Campbell, Ollie, Sesay(ng), Drobnjak(t), R Evans, R Murray(ng)

(I assume that Seattle does not necessarily guarantee Sesay’s or Murray’s non-guaranteed contracts or pick up Drobnjak’s option.)

If Seattle just re-signs or picks up the options for its own free agents (not counting E Campbell), then they will be edging close to the luxury tax threshold. I do not see them doing much else, and I see very little chance that they use their MLE. As we saw in last year’s Rashard Lewis negotiations, Seattle is one of the most luxury tax wary teams in the league.

16. Milwaukee - [Committed in 03-04: $47.9M] (Profits: -$16M in 00-01, -$9M in 01-02, and -12$M to -$22M in 02-03)
Free Agents: Payton, J Sampson(ng), Peeler(ng)

(I assume that J Caffey exercises his player option and that J Sampson and Peeler do not necessarily get the non-guaranteed contracts guaranteed.)

If Milwaukee does not guarantee Peeler’s contract, then they may have enough room to offer Payton a bit more than the MLE, without going to deep into luxury tax territory. Milwaukee, as much as any team, will be eagerly anticipating the announcement of the 2002-03 luxury tax threshold and the 2003-04 salary cap, so that it can figure out just how expensive adding Payton might be.

After three luxury tax trades getting rid of Glenn Robinson, Ray Allen, and Sam Cassell, Milwaukee finally has its financial house in some order. But in the meantime their team has gotten much weaker.

17. Chicago - [Committed in 03-04: $46.2M] (Profits: +$52M in 00-01, +$39M in 01-02, and +$48M to +$58M in 02-03)
Free Agents: C Blount, Hoiberg, Brunson

(I assume that the Bulls pick up Hassell’s option.)

The first thing to notice about the Bulls is that they are fabulously profitable. They are one of the few teams in the league that could afford to go deep into luxury tax territory and still be profitable. Reinsdorf has stated that he would be willing to pay the luxury tax for a championship team (still need to find reference to this quote), but it is unclear whether he will pay it for a team still a long ways away from a championship.

To analyze the Bulls’ situation, it is probably more important to think about how any free agent signings this year affect their bottom line in future years. For 04-05, Rose, Curry, Chandler, Williams, Marshall, Robinson, their 2003 first rounder, and their 2004 first rounder (late lottery or early non-lottery) add up to $42.5 million. Re-signing Crawford and Fizer to MLE-sized contracts would put the Bulls on the verge of the luxury tax, even if they sign no other significant free agents this year or next. The same is true if any of these players are traded for a player with equal or greater salary.

If Crawford and Fizer sign MLE-sized contracts, in 05-06 the Bulls would be at $44.1 million counting just Rose, Williams, Robinson, Fizer, Crawford, and three first round picks. If one of Chandler and Curry gets the maximum, and the other gets a bit more than the MLE, then the Bulls would likely be looking at a payroll well into luxury tax territory. And again this is losing Marshall and not adding another significant free agent.

Adding another long-term free agent to this equation just makes it more complicated, so I do not see the Bulls adding another long-term free agent. Perhaps a player for this year and next, but unless they are able to trade Robinson and/or Rose, I do not see the Bulls making a long-term commitment to a player at the full MLE. Even with Williams’ injury, I do not see Reinsdorf being willing to pay luxury tax (and lose luxury/escrow distributions) on this year’s team. I think it is highly unlikely that the Bulls will use both the full MLE and any injury exception they might get for Williams.

18. New Jersey - [Committed in 03-04: $45.4M] (Profits: -$11M in 00-01, +$5M in 01-02, and +$20M to +$30M in 02-03)
Free Agents: Kidd, L Harris, A Johnson, Scalabrine, Marshall

I think that New Jersey is in negotiation for a new stadium, so I think they spend every penny they can to keep Jason Kidd. In order to keep Jason Kidd, I think they use their full MLE and million dollar exception. They might want to take their chances on a Jason Terry or Gilbert Arenas. I think in the end they keep Jason Kidd.

 

Here is the second half of the article

TEAMS IN ESSENCE OVER THE SALARY CAP

These teams technically could renounce all of their free agents and exceptions and be a few million under the salary cap. However, there would be no advantage to doing so, so these teams are in essence above the salary cap. Including their own free agents, I expect this group to sign (or re-sign) six to ten MLE-sized contracts – not counting the Clippers. This does not count Indiana re-signing Jermaine O’Neal.

19. Detroit - [Committed in 03-04: $40.6M] (Profits: +$18M in 00-01, +$13M in 01-02, and +$20M to +$30M in 02-03)
Free Agents: J Barry, R Hamilton(r), Sanchez(ng), D Manning, D Reid

(I assume that the Pistons do not necessarily guarantee Sanchez’s non-guaranteed contract.)

With Detroit re-signing Cliff Robinson, they are not really under the salary cap, but they are in an enviable position. I see them re-signing R Hamilton to a bit above the MLE and B Barry to $2-$3 million (if they don’t get Delfino to come over immediately). The Pistons are so deep, I am not sure what use they would have for another MLE player, but maybe instead of J Barry, they go after a player with a full MLE. With Curry, Rebracca, and H Davis coming off the books next year, they have the room for another MLE player.

20. Cleveland - [Committed in 03-04: $40.4M] (Profits: +$7M in 00-01, +$6M in 01-02, and +$12M to +$17M in 02-03)
Free Agents: J Jones(r), Palacio, S Parker, T Brown

I suspect the Cavs let Jones go, with the logjam at the wings (Davis, Miles, James, and Wagner). Through a trade or with their MLE, I expect the Cavs to get a point guard and a veteran power forward. The Cavs salary structure is favorable for years to come, so they certainly could afford using their full MLE, but do they? It is hard to tell with Cleveland – who is bound to pack the house next year with or without adding another MLE player.

21. Indiana - [Committed in 03-04: $39.2M] (Profits: +$1M in 00-01, +$3M in 01-02, and +$6M to +$16M in 02-03)
Free Agents: R Miller, J O’Neal, B Miller, E Strickland, T Hardaway(t)

(I assume that Indiana does not necessarily pick up Hardaway’s team option.)

If Indiana offers O’Neal a maximum contract (likely to be slightly above $12 million), Indiana has only about $3 million left to offer all of its other free agents before it starts paying luxury taxes. If, in addition to re-signing O’Neal, Indiana re-signs B Miller and R Miller to contracts slightly above and below the MLE, respectively, the Pacers are well above the luxury tax threshold for every year in the foreseeable future, even if they sign no one else to anything more than the minimum. In that scenario, the Pacers probably lose $20 to $40 million over the next five years.

On the other hand, if they let O’Neal go, they probably can stay under the luxury tax threshold. In that scenario, the Pacers probably make at least $40 million over the next five years.

So if you owned the Pacers, what would you do?

Stern loves to brag about how the luxury/escrow tax system helps the small-market teams, but Indiana is about to become one of the big victims of luxury/escrow tax system. Unless they are willing to lose lots of money, they are going to have to break up a nice team that Walsh has put together. Small market teams simply cannot afford to pay much luxury tax.

Perhaps Walsh can pull a magic rabbit out of his hat and trade Croshere (maybe combined with Harrington, Artest, or Bender) for cap space, but about half the league is desperately looking for that same magic rabbit.

22. Orlando - [Committed in 03-04: $37.6M] (Profits: +$13M in 00-01, +$8M in 01-02, and +$13M to +$23M in 02-03)
Free Agents: D Armstrong, DeClerq, Vaughn, Kemp, Oyediji, Burke, Whitney

I suspect that Orlando tries to re-sign a couple of its own free agents, especially its point guards and DeClerq, to contracts less than $3 million to start and uses its full MLE for a big man.

23. New Orleans - [Committed in 03-04: $36.3M] (Profits: -$1M in 00-01, -$8M in 01-02, and +$7M to +$27M in 02-03)
Free Agents: K Anderson, PJ Brown, Moiso, Pack

PJ Brown will be a hot commodity this summer, and with him being from the New Orleans area, one would think New Orleans has a big advantage in retaining him. I think the Hornets should offer him a bit more than the MLE, just so he isn’t tempted. But this is the Hornets we are talking about here, so who knows what they will do?

The Hornets also are in a good position to use their MLE, but again this is the Hornets, so who knows if they will use it? The Hornets certainly are one of those teams that is going to get rich off of the luxury/escrow tax system.

24. Miami - [Committed in 03-04: $34.2M] (Profits: +$1M in 00-01, +$8M in 01-02, and -$6M to +$4M in 02-03)
Free Agents: Mourning, L Ellis, Best, Stepania, House, M Allen, S Marks, K Johnson(t)

(I assume that A Carter exercises his player option. I assume that Miami does not exercise the team option of K Johnson. Also, note that to get this space under the salary cap, the Heat has to renounce all of its exceptions and free agents, including Alonzo Mourning and Malik Allen.)

Note that we have to add about another $1.5 million to Miami’s committed total because of the 11 player minimum. If the salary cap hits at $41 million, this would put Miami just $5.3 million below it, less than the full value of the MLE and million dollar exceptions. I think the Heat will just use its MLE and million-dollar exceptions, since this would give them the option of signing some of their own free agents, as well. So unless the salary cap is much higher than $41 million, Miami likely will not be below the salary cap.

With a productive #5 pick, a semi-healthy Mourning (if they can re-sign him), solid MLE and million dollar additions, Miami could be right in the hunt again for the Eastern Conference crown. I think that is the route they will go, especially with Riley at the helm.

25. Los Angeles Clippers - [Committed in 03-04: $12.1M] (Profits: +$11M in 00-01, +$16M in 01-02, and +$15M to +$25M in 02-03)
Free Agents: Olowokandi, Brand(r), Odom(r), A Miller(r), Maggette(r), Piatkowski, Rooks, Zhizhi(t), Parks

(I assume that the Clippers guarantee Jaric’s contract and do not necessarily pick up the team option on Wang Zhizhi.)

Simply not renouncing Brand, Odom, Maggette, and A Miller ties up about $34.5 million, so until most of the Clippers have found homes, the Clippers will not be under the salary cap. I think there is a very good chance that all four of these players eventually take the qualifying option from the Clippers. But that is a bit of a risky move, since I do not see many teams with a lot of space under the salary in the summer of 2004 - more on this below.

I do not, however, see the Clippers with any significant free agent signings, except for their own players.

TEAMS UNDER THE SALARY CAP

It will be interesting watching these teams and the Clippers to see who spends their money this year and who saves their money for next year. I will discuss in more detail my predictions about these teams after I discuss the free agents. Overall, I expect this group to offer about five to seven MLE or above contracts, not including Tim Duncan.

26. Washington - [Committed in 03-04: $35.2M] (Profits: -$6M in 00-01, +$13M in 01-02, and +$30M to +$40M in 02-03)
Free Agents: Lue, Russell, Jordan, Oakley, Simmons

(I am assuming that Stackhouse exercises his player option for $6.9 million. Update: Washington signed Stackhouse to a two-year extension for $18.7 million – quite a bit more than I think he would have received on the open market.)

Note that we have to add about another $0.4 million to Washington’s committed total because of the 11 player minimum. If the salary cap hits at $41 million, this would put Washington just $5.4 million below it, less than the full value of the MLE and million dollar exceptions. However, the Wizards already have a lot of players (and not much in terms of its own free agents), so I would expect them to renounce their free agents and exceptions so that they are under the salary cap. This way they would be able to offer a player slightly more than the MLE exception.

27. San Antonio - [Committed in 03-04: $24.4M] (Profits: -$2M in 00-01, +$8M in 01-02, and +$2M to +$12M in 02-03)
Free Agents: Duncan(p), D Robinson, D Ferry(ng), Kerr, Claxton, S Jackson, K Willis, Bateer

(I assume that Duncan exercises his player option and I have included Tim Duncan’s very likey $12.6 million contract in the committed category. I assume that San Antonio does not guarantee Danny Ferry’s contract.)

To get San Antonio’s salary cap space, we should add $0.9 million for Stephen Jackson’s salary cap hit, and $1.5 million because of the 11 player minimum, which puts San Antonio at about $26.8 million. (This is assuming that San Antonio can get completely out of Danny Ferry’s $4.5 million contract. If a large fraction of that contract is guaranteed, then San Antonio may not have enough salary cap space to offer Jason Kidd or Jermaine O’Neal a maximum salary contract, depending on where the salary cap ends up.)

Once San Antonio signs Duncan, it only has enough salary cap space for one maximum salary player or two players at slightly above the MLE. Thus, adding Jason Kidd likely would result in a minimum salary player (or slightly above) backing up Duncan and Rose, which would really hurt their chances of beating the Lakers again. I think lots of people are wildly overestimating how much salary cap space San Antonio has.

San Antonio also renounces Speedy Claxton (and all of their other free agents, except Stephen Jackson) under this scenario. Failing to renounce Speedy Claxton would result in another $3 million hit to the salary cap – something the Spurs are very unlikely to do. Also, if teams start offering Stephen Jackson money right away in the free agent season, the Spurs may have no choice but to let him go. They cannot afford to re-sign Jackson for something near the MLE until after they have acquired their other free agents. Thus, the Spurs very easily could lose Jackson as well.

However, long-term is where the Spurs have the most serious problems. Under reasonable scenarios for re-signing Ginobili, Bowen, and Parker in the next few years, along with a maximum salary free agent pick-up this year, the Spurs easily could be between $10 and $20 million above the luxury tax threshold in 2005-06 through 2008-09. Given their small market, this would practically guarantee that they would lose a lot of money during these years, even if they were winning championships.

As mentioned above, the luxury/escrow tax system is a killer for small market teams trying to keep together a dynasty, and even though Peter Holt thinks the luxury tax system is good for his team, he is wrong. Unless changes are made to this system, in a few years he will have to choose between losing a lot of money and breaking up his team.

28. Denver - [Committed in 03-04: $23.1M] (Profits: -$8M in 00-01, -$5M in 01-02, and +$8M to +$18M in 02-03)
Free Agents: J Howard, S Williams, D Harvey, C Andersen, J Harrington(ng), Savovic(ng), Yarbrough(ng), Trepagnier, A Harrington

(I am assuming that Denver does not guarantee its non-guaranteed contracts to J Harrington, Savovic, and Yarbrough, but remember Denver may not be able to get completely out from under these contracts. Also, given how much space Denver has, they may end up guaranteeing them.)

Note that we have to add about another $1.8 million to Denver’s committed total because of the 11 player minimum. If the salary cap hits at $41 million, this would put Denver at about $16.1 million below the salary cap. This would require that Denver renounces Juwan Howard. Denver should be in a competitive position for players above the MLE. However, there are not a lot of players that are worth more than an MLE that will not be retained by their own teams. I would not be surprised if Denver stocks up on one-year contracts and tries their hand next year when restricted free agents from the Clippers and other teams may be back on the market.

29. Utah - [Committed in 03-04: $22.6M] (Profits: +$3M in 00-01, +$2M in 01-02, and +$14M to +$24M in 02-03)
Free Agents: Malone, Stockton, Cheaney, M Jackson, Padgett, Arroyo, Massenburg

Note that we have to add about another $0.7 million to Utah’s committed total because of the 11 player minimum. If the salary cap hits at $41 million, this would put Utah at about $18.7 million below the salary cap. Utah may not want to immediately renounce Karl Malone, perhaps signing and trading him for an ending contract and a draft pick or future prospect. Utah, like Denver, should be in a competitive position for players above the MLE. However, there are not a lot of players that are worth more than an MLE that will not be retained by their own teams. I would not be surprised if Utah stocks up on one-year contracts and tries their hand next year when restricted free agents from the Clippers and other teams may be back on the market. I will discuss this in more detail below.

FREE AGENT ANALYSIS

Maximum Salary Players: Duncan, Kidd, J O’Neal, Brand(r)

Each of these three players is likely to command the maximum salary, although Elton Brand may take the qualifying option with the Clippers, so that he can become an unrestricted free agent next year. Personally, I think the Spurs would be best off with Jermaine O’Neal or a combination of Gary Payton and Brad Miller, which would leave Jason Kidd for the Nets or (in a sign-and-trade) for a team like the Mavericks. I think Indiana will do everything in its power to keep Jermaine O’Neal, so I think it is very unlikely that any of these players end up with a team like Denver or Utah.

Below Maximum Salary, Possible MLE Players:
Center (6): B Miller, Mourning, Olowokandi, Nesterovic, Sabonis(ng), E Campbell
Power Forward (6): PJ Brown, J Howard, K Malone, Horry, Coleman
Small Forward/Shooting Guard (10): Maggette(r), Odom(r), Pippen, S Jackson, R Hamilton(r), Jim Jackson, Posey(r), R Miller, K Thomas(r), J Jones(r)
Point Guard (4): A Miller(r), Arenas, Terry(r), Payton

There are 26 players in this list, but many probably are reaches for an MLE. If I add up the number of MLE players from each of the groups of teams above, it adds up to between 19 to 33 MLE contracts. Because I do not think there are that many players that teams will be willing to pay the luxury tax for, I am expecting 19 to 22 players on this list to land salaries at the MLE and up to the maximum, with 4 to 7 landing contracts significantly above the MLE. Consequently, 4 to 7 of these players are likely to be available for less than the full MLE.

Possible Above Minimum Players, Below MLE Players:
Center (8): K Willis, Rooks, Zhizhi(t), S Marks, Kemp, Burke, DeClerq, Voskuhl
Power Forward (10): D Ferry(ng), M Allen, C Blount, Skinner, T Hill, G Trent, S Walker, Madsen, S Williams, P Jones
Small Forward/Shooting Guard (19): D Harvey, Russell, J Barry, L Harris, Hoiberg, D Johnson, Glover, Newble, Ham, Gill, W McCarty, V Leonard, A Griffin, R Bell, W Williams, Nailon, L Ellis, Peeler(ng), Piatkowski
Point Guard (17): M Jackson, Kerr, Lue, Best, Whitney, D Armstrong, J Vaughn, E Strickland, A Johnson, R Strickland, Boykins, D Jones, Ward(ng), K Ollie, K Anderson, A Daniels, Claxton

Adding the 4 to 7 remnants from the above group to this list of 54 players results in a lot of players who could be had for about the million dollar ($1.5 million) exception. Most of these players probably will get minimum contracts. It is in this group where the best bargains are likely to be found.

Overall, this market is very difficult to predict, because so much hinges on what the Clippers and Spurs decide to do. But here are a few guesses that I have.

The MAX Players
Duncan – He resigns with San Antonio – easiest call of the season.
Kidd – I think he stays with New Jersey with a maximum six-year contract, although I think a trade with Dallas is a possibility. (What about Finley, Nash, Bradley, and filler for Kidd and Mutumbo?)
J O’Neal – If Indiana can complete a Croshere and one of Harrington/Artest/Bender for Brandon and filler, then I think O’Neal stays with Indiana. Otherwise, I think he leaves for San Antonio.

The Clipper Restricted Free Agents
Brand – Brand accepts his qualifying offer with the Clippers and waits for next year.
A Miller – Unless Utah picks up a good point guard in a trade, I think they sign Miller to a 6-year $50 to $55 million deal and the Clippers do not match it.
Odom – If the salary cap rises to $42 million, then Washington signs Odom to a 6-year $42 to $47 million deal and the Clippers do not match it. Otherwise, I think Odom either accepts his qualifying offer with the Clippers or the Clippers match another team’s offer.
Maggette – Maggette signs a three-year $16 million MLE contract with another team (possibly the Bulls or the Wizards), and the Clippers match it. Maggette is young enough that he can afford being stuck with the Clippers for another three years. The three-year MLE contract is more than he likely would get by accepting the qualifying offer and entering the free agent market next year.

The Centers
B Miller – B Miller re-signs with Indiana for $47 to $52 million over six years, and perhaps for a bit less if they re-sign O’Neal and are able to complete a trade for Brandon.
Olowokandi – Kandi signs for $45 million over six years with Denver.
Nesterovic – Minnesota goes for broke this summer, and re-signs Nesterovic to a 6-year $40 to 45 million contract.
Mourning – Unless Dallas trades for someone like Mutumbo, I think Mourning signs with Dallas for three years at the full MLE, provided that he is healthy.

The Veteran Power Forwards
K Malone – After bringing in A Miller, Utah saves the rest of its money for next year, perhaps for Brand. They offer Malone a one-year deal for $7 to $9 million. After being courted by a few different teams, Malone accepts it.
PJ Brown – Brown is tempted with a three-year MLE deal from the Lakers, but signs a four-year $25 to $30 million deal with New Orleans.
J Howard – Howard signs a three-year $16 million MLE deal with the Lakers.

Other Key Free Agents
Arenas – After coming close to signing a one-year MLE deal with the Warriors, Arenas signs a six-year $55 to $60 million deal with the Nuggets – just barely above what A Miller signs for.
Payton – If O’Neal does not re-sign with Indiana, I think that Payton and B Miller to the Spurs is a possibility – both being paid a bit over the MLE. Otherwise, I think that Payton is likely to end up in Miami or back in Milwaukee.
Pippen – If the Bulls are able to unload Rose or Robinson, he signs with the Bulls for two years for $10 million. Otherwise, he re-signs with Portland for a bit more than that.
Hamilton – I am not sure if there will be anyone competing with Detroit for Hamilton. I think he re-signs with Detroit for 6 years at $35 to $40 million.
Terry – The loser of the Payton bidding (Milwaukee or Miami) makes a bid for Terry. I suspect that Atlanta ends up with Terry for six years for $35 to $40 million.
Posey – I don’t see a lot of competition for Posey, perhaps the Bulls, and I see Houston ending up with him for five years at 4 years at $25 to $30 million.
S Jackson – S Jackson re-signs with the Spurs for six years for $30 to $35 million.

I think this will be about it in terms of who ends up with MLE-type contracts. I think the remainder of players in the list above will be paid significantly less than the MLE. I think the biggest bargains in this free agent market will be in this sub-MLE market.

ASSUMPTIONS
(1) I have guessing a 2003-04 salary cap of $41 million and a 2002-03 luxury tax threshold of about $52 million. The Clippers are predicting a 2003-04 salary cap of $40 to $42 million, and Frank Hughes is predicting a 2003-04 luxury tax threshold of $52.5 million, so this assumption seems about right.
(2) I have assumed that teams under the cap renounce all of their free agents and trade exceptions, unless their trade exeptions would put them over the cap.
(3) I have included salaries for 1st rounders at 120% of the rookie scale. See Larry Coon's site for a fabulous description of CBA issues. Thanks, Larry!
(4) I have assumed that teams do not exercise team options, except in the most obvious of cases. See Patricia Bender’s site for more on daily transactions and lots of other stuff. It is a truly fabulous site. Thanks, Patricia!
(5) What I call “profits” is before taxes and before stadium debt payments. I also expect that some substantial revenues are not included in these “profits,” such as some licensing revenue and synergies to other business the team owns. Furthermore, since one-time payments, such as expansion fees, and franchise appreciation are not included in these “profits,” I suspect the “profits” that I report are lower bounds for the “true profits” that these teams receive.
(6) My salary and contract status information comes from a highly reliable non-public source. It is occasionally wrong, but is better than what is at HoopsHype and is often reported in various newspapers.

I might add some more to this post later, or add some additional analysis in a later post in this thread. Please let me know if you see some mistakes in this thread, and I will try to make changes if I agree with what you call a mistake. I certainly hope this starts an interesting set of conversations. Have Fun!

Dan Rosenbaum is an assistant professor of economics at the University of North Carolina at Greensboro and has been cited in several newspaper and ESPN web-site articles on NBA-related issues. He also has done some consulting work for the National Basketball Players Association (NBPA), but this work in no way reflects that consulting work. Rosenbaum also has done some unpaid consulting for a couple NBA teams.

 

I think LA has everyone beat on that one. Once the Yao advertisements kick in full gear and half of our games are on national tv our profits will sky ROCKET