The NFL has a real salary cap. A "hard" cap. Teams are simply not allowed to spend one dollar above a certain payroll total.
It's very simple.
The NBA doesn't operate that way. It has a "soft" cap—which makes everything confusing.
But the new collective bargaining agreement, signed to end the lockout in December 2011, has moved the league closer towards what will be a hard cap in practical terms for most teams most of the time. This fact has affected offseason player movement last summer, but now that all of the new CBA's provisions have kicked in, the transition is complete.
The league has entered its new salary cap era, and teams with high payrolls now face severe restrictions on the ways they can acquire new players. This isn't your father's CBA, and the effects of the "harder" cap will be seen across the free-agent market.
First, some history.
The Salary Cap
In the past, the NBA's structure has meant that the salary cap was a cap in name only. Through trades and various payroll exceptions, teams have been able to (and almost all did) go above the cap regularly. It is a reality that has allowed even wild-spending teams to be at least small players in the free-agent market.
Under the old CBA, there were some (small) penalties for spending above the cap level. But they were minimal, and most teams operated most seasons in excess of that level. In practice, teams seemed to view the structure more as if there were benefits for being under the cap than there were drawbacks for going over.
There were two limitations of note for going above the cap:
- Teams below the cap could spend up the cap level on any free agents they want; teams above the cap were limited to acquiring free agents through the "mid level" and "biannual" exceptions (which have allowed teams to sign player to salaries starting around roughly around $6 million and $2 million in recent seasons).
- Teams below the cap were able to engage in trades for high-salaried players without sending back players making equivalent salaries. Teams above the cap must match salaries in trades. An example of how this can benefit an under-the-cap team: Midway through the 2011-12 season, the Indiana Pacers were able to trade merely a second-round pick to the Toronto Raptors for Leandro Barbosa, who made roughly $8 million. An over-the-cap team would have had to send back a player (or players) who made around $8 million.
Given the difficulty it takes to hire 15 quality guys to play professional basketball for under $58 million (the cap level in recent years), the mid-level exception has been the method most good teams have relied on to acquire new talent. The other has been sign-and-trade deals, in which over-the-cap teams could get another team to sign a free agent and then send him their way. (This is how the Los Angeles Lakers acquired Steve Nash last summer).
Neither is as good as being below the cap.
But since it is nearly impossible to both win games and stay under the cap, most teams trying to win games always lived above the cap unless they were specifically shedding enough salary to get under the cap for luring a big-name free agent. In a typical season, however, only around five teams—if that—would be far enough below the salary cap each summer to be in a position to sign major free agents.
The Luxury Tax
Above the salary cap is the luxury tax threshold.
This is a payroll level (around $70 million) that, once a team passes, requires it to kick back money to the league. The theory is that teams spending above the luxury tax level are being reckless (and may be over-leveraging their big-market advantage), so they have to pay a fee for doing so. Those dollars are then piled up by the league, which distributes payments at the end of the season, through revenue sharing, to the more fiscally responsible teams.
That extra cost—a minor annoyance to teams like the Lakers and New York Knicks—was the only penalty for spending mass sums on payroll, however.
Whether it spent $71 million or $171 million (a hypothetical payroll level that no team has ever come close to hitting), the team still retained all the privileges of every other team over the cap. No matter how much a team spent, it never lost the ability to keep acquiring players by using salary cap exceptions (mid-level and biannual) or conducting sign-and-trade deals.
That has changed. In a big way.
Enter "The Apron."
Now, above the luxury tax is a spending category that severely restricts a team's ability to acquire new players.
This "apron" kicks in at $4 million above the luxury tax level.
Teams that operate below the apron retain all the player-acquisition rights of any franchise that is over the cap. But teams over the apron forfeit several of the most tried-and-true ways teams have used to improve:
- They cannot engage in sign-and-trade deals.
- They cannot use the biannual exception (which has allowed teams to sign a player with a first-year salary around $2 million in recent years).
- They can still use the mid-level exception, but it becomes a "mini mid-level exception." The tool that once allowed over-the-cap teams to sign players to a league-average salary (around $5 million in recent years) now becomes much less enticing (falling to around $3 million).
The intent was clear: The NBA no longer wants teams that spend wildly to continue improving.
The league didn't institute a hard cap. It just instituted a "cross this line and you're pretty screwed" threshold. By limiting the ways a team can improve once it passes the apron (in addition to making the luxury tax payments much more expensive), the new CBA forces teams to be more fiscally responsible—or else be stuck with the same roster they have right now.
The Brooklyn Nets are the most obvious case study.
Wanting to make a big splash when it arrived in Brooklyn, the team spent wildly, giving a max contract to Deron Williams, trading for Joe Johnson and his huge salary and handing out Monopoly money paydays to Brook Lopez and Kris Humphries.
But now the team has a bloated payroll that might not even allow it to retain Andray Blatche in the offseason, let alone find anyone else willing to take the tiny contracts they are able to offer (via the mini mid-level exception and veteran minimum deals).
For a franchise that just lost in the first round of the playoffs to a Chicago Bulls team without Derrick Rose and with the flu, the new realities of the CBA and the apron are about to throw a wet blanket on the spending fest that took place before the team relocated.
The Mid-Level Exception
The new CBA also tinkered with the mid-level exception for all teams above the cap. In the past, teams could offer free agents a five-year deal starting at the league average salary (which was nearly $6 million in 2010-11).
Now, teams below the apron can only offer a four-year deal starting with a first-year salary around $5 million, according to Larry Coon of ESPN. As noted above, teams above the apron can only offer the mini mid-level, which is for just $3 million, but also can only run a maximum of three years.
This duration restriction is just one more way that teams above the apron suffer a competitive disadvantage in the free-agent market.
The Room Exception
The so-called "room exception" is new in the current CBA. The rationale for including it follows the same logic as the rest of the new provisions: Encourage teams to spend less.
In the past, teams that were, for example, one dollar over the salary cap were awarded the right to use the mid-level exception to sign a player to a deal with a starting salary around $5 million.
But a team that was frugal but only able to get, say, $1 million below the cap was out of luck. It wasn't permitted to use the mid-level that the $1-over-the-cap team could use. So that was a bummer because there is no way to sign a quality player for $1 million.
Some benefit for being thrifty.
The league, with controlling salary costs in mind, naturally wants teams to not spend on salary where possible, so the room exception was created to reward teams that are just a little bit under the cap.
Now, those teams can offer a contract with a starting salary of up to $2.5 million even if that would take them over the cap.
The Amnesty Provision
The new CBA included what essentially is a salary cap "get out of jail free card." Each team was allowed to make one mistake contract disappear permanently off its books.
The ramifications for this on the free agency market are two-fold:
- It has introduced new free agents to the market. Half the teams have already used their amnesty, and the number of players eligible to be amnestied is dwindling. So the provision's effect on free agency will be marginal this offseason compared to years past, but there still may be an extra player or two out there.
- Any team that uses the provision may become a bigger player in the market. To use a wild hypothetical example: The Lakers could amnesty Kobe Bryant and not re-sign Dwight Howard. This would improbably put them under the salary cap and allow them to go after players who they otherwise would not have been in the market for.
As far as the amnesty process goes, the player still receives the full amount left of the contract that he is owed; the total simply no longer counts against his team's salary cap/luxury tax/apron status.
Amnestying a player is the same as waiving him, and other teams are allowed to make bids for his services. Teams can bid any sum up to the player's full previous salary. The team that makes the winning bid then pays the player that total while the original team makes up the difference so that the player gets the full salary he had negotiated for years ago.
There are two other main restrictions:
- The player's contract must have been signed under the old CBA; anyone signed (to an original deal or a contract extension) after the end of the lockout is not eligible.
- The contract must have been signed by the team that amnesties the player; a team cannot trade for a player on a "legacy" contract and then amnesty him.
Here is a full list of the players who have been amnestied so far, according to Larry Coon's Salary Cap FAQ:
- Brooklyn Nets: Travis Outlaw
- Cleveland Cavaliers: Baron Davis
- Dallas Mavericks: Brendan Haywood
- Denver Nuggets: Chris Andersen
- Golden State Warriors: Charlie Bell
- Houston Rockets: Luis Scola
- Indiana Pacers: James Posey
- Los Angeles Clippers: Ryan Gomes
- Minnesota Timberwolves: Darko Milicic
- New York Knicks: Chauncey Billups
- Orlando Magic: Gilbert Arenas
- Philadelphia 76ers: Elton Brand
- Phoenix Suns: Josh Childress
- Portland Trail Blazers: Brandon Roy
- Washington Wizards: Andray Blatche
Recently, Kevin Pelton of ESPN tweeted that there are roughly "44 players in the league left still eligible for the amnesty provision."
Bryant is one. It seems hard to believe—impossible, really—that the Lakers would make such a drastic move to save money.
But Bryant is trying to recover from a devastating injury and is on the books for more than $30 million next year, according to ShamSports—a sum that will cost the team at least twice that total in real dollars (presuming they re-sign Dwight Howard) due to the luxury tax.
Mike Miller is another player who could be on the amnesty block.
The Miami Heat are facing a huge tax bill of their own, and Miller has been hobbled by injuries and age. If the team doesn't think he can contribute next season, they can amnesty him and save some $20 million over the next two years in real dollars.
The new CBA has changed the league drastically. Free-spending ways now severely impede a team's ability to improve. The NBA has come closer to having a hard cap.
The structure remains dizzyingly complicated, however, so fans hoping their teams can sign a new player this summer shouldn't feel bad if they are confused. A lot of league executives still seem to be.
The biggest takeaway is that spending too much restricts movement.
Well, the Nets have gotten to the point where they are probably hoping that the Heat amnesty Mike Miller so that they can offer him a mini mid-level exception.
Spend responsibly, my friends.
Note: Unless otherwise sourced, the information used in this post was gathered by reviewing league sources as well as reading the work of and having conversations with Larry Coon of ESPN and Hoopsworld.