CBA Talk: Simon Is Willing to Spend, But Is He Willing to Spend Enough?

Last Thursday in his year-end press conference, Larry Bird lobbed this little comment over the fence at his owner, Herb Simon:

“The big question of mine to him is, ‘Now that we have the money, will we be able to spend it?’ ” Bird said during his season-ending news conference. “We waited three years to get to this point, and now what can we do?” Mike Wells – Indianapolis Star

Later the same day, Rich Nye “the Sports Guy” for WTHR 13 reported that Herb Simon hoped Bird would stay with the team, and that the two would meet soon to discuss it.  Regarding Bird’s concerns about being able to spend the money, Nye wrote:

Simon responded that Bird’s questioning whether Simon would invest in free agent players “sort of disappointed” him. Simon says he has no problem spending up to the threshold of the NBA salary cap luxury tax.

So problem solved.  I mean, Simon’s “sort of disappointed” comment probably loosely translates to “kind of pissed,” but, no biggie.  Simon having no problem spending up to the luxury tax threshold should allay Bird’s concerns, right?

Maybe.

But maybe not.

It really depends on whether or not Bird thinks that luxury tax limitation will prevent him from fielding a contender or not.  It’s an open question with the new Collective Bargaining Agreement (CBA) on the horizon.  However, under the current CBA — or a new one that is materially unchanged — Simon’s unwillingness to pay the luxury tax would be a significant, perhaps insurmountable obstacle to building a team that could contend for an NBA title.

Death and Taxes

Consider the following information from the 2009-2010 season (salary info via Shamsports).

(In Thousands US $)

The chart above shows the average payroll based on whether teams qualified for the playoffs, and how far they went.  The Pacers and the other 13 teams that failed to qualify are in the “Lottery” bar on the far right, while the Lakers and the Celtics make up the “Finals” bar on the far left.  This shows a pretty dramatic correlation between spending and winning.

Of course, correlation does not equal causation.  That’s one of the favorite deflections of statistical information, but in this case it has some merit.  One of the most common counter-arguments that pops up whenever a small market whiner like me starts whining is that spending doesn’t equate to success.  This is true, and the simplest way to exemplify this is to just point at the New York Knicks’ payroll for the last few years.

However, that is never the point. It doesn’t matter that spending doesn’t guarantees success.  It’s that not spending is likely to lead to failure.

Of the 16 teams in last year’s NBA playoffs, 11 were luxury taxpayers.  Of the five that weren’t, four were eliminated in the first round.  The lone non-taxpayer to make the second round was the Atlanta Hawks.  The Hawks lost four straight games to the Magic by an average margin of 25 points per game.

Win a Championship, Lose (More) Money?

The Los Angeles Lakers were the World Champions last year with a payroll of $91.4 million.  Indulge me in a little of flight of fancy, and let’s pretend that the Pacer organization and the Laker organization — rosters, coaches, front office — switched places last year, and Kobe Bryant led the Indiana Pacers to the title.

Now, let’s do a little math.

The (real) Indiana Pacer payroll was $66.7 million so flipping rosters would have added $24.7 million in costs.  The “new” payroll is also over the luxury tax threshold, which would have cost another $21.4 million in taxes, as well as the forfeiture of an estimated $3.5 million rebate the (real) Pacers received for being under the threshold.  In strictly roster costs alone, the “new” roster would have added $49.6 million in costs to the Pacers’ ledger.  Throw in the difference between the $3.0 million paid to then-Pacer coach Jim O’Brien and the roughly $10.3 million paid to Phil Jackson, and Herb Simon could have a Championship for only about $57 million more dollars in costs.

Of course, there are returns.  According to Forbes, the Pacers had $95.0 million in revenue, including $15.0 million in gate receipts.  Assuming sellouts every night (something that has not happened here for the NBA Pacers) and a doubling of average ticket prices, as well as 12 playoff games, would net Pacers Sports & Entertainment (PS&E) — after giving the league its cut — perhaps an additional $35.0 million in revenue.  This would leave about $22.0 million in additional payroll and coaching costs to be offset by additional broadcast, advertising, and other revenue. Maybe they could do that, maybe not.  It would be exceedingly difficult, as the local television contract and advertising market in a small market like Indy are never going to be all that lucrative.

But … even assuming that the Pacers were able to add $57.0 million in revenue through the various streams available to them, that would only offset the additional costs.  Which would mean that the Pacers would still have a loss of almost $17 million (Forbes).  It is not at all unrealistic to contemplate a scenario in which the Pacers would have lost more money winning a championship than they did going 32-50.

So, What Can the Pacers Spend This Summer?

There are two really big traps when discussing Pacer “cap space.”  The first is the use of expiring contracts in the discussion.  The Pacers have over $33.5 million worth of contracts coming off their books this summer, including over $5 million related to Jamaal Tinsley.  However, that number cannot be used as a proxy for their available cap space.

Without getting too far into the weeds, the NBA currently uses a “soft cap” system, which sets a salary cap ($58 million in 2010-2011), then allows teams to use various exceptions to go over it.  The Pacers are over the cap at $65.1 million for this season.

However, when a team drops well below the cap — as the Pacers will this summer — all of those exceptions (excluding the Minimum Player Exception) become unavailable to them.  Therefore, what you have to do is look at the difference between the actual (or expected) salary cap and the payroll under contract.  (This is certain to change under the new CBA, which will be the dictating document, but it is likely to become more strict, not less, so these assumptions are conservative.)  A side effect of this is that it is virtually impossible for the Pacers to go over the luxury tax this summer, so Simon’s limitation — for this year only — will be moot.

The Pacers have approximately $35.6 million in committed contracts for the 2011-2012 season.  Using the current cap figure of about $58,000, the Pacers would have a little over $22 million available cap space.  Approximately $2 million of that will go towards their 2011 draft picks (assuming they keep them), so they’ll have $20 million available to spend on free agents (or to take back additional salary in trades) this summer.

And here’s where the second trap rears its head — the future.

The Pacers have to pay attention not only to their available cap space this summer, but also must consider what impact this summer will have on future summers.   This is most notable when it comes to re-signing their current players – particularly the young ones.

Danny Granger is signed for three more years, but several other potential core players will come due soon.  Both Roy Hibbert and Brandon Rush will be due for new contracts next summer, while Darren Collison and Tyler Hansbrough become due the summer after that.

For an example of what can happen, let’s look at the Portland Trailblazers.

They had the second lowest payroll (to Oklahoma City) in last year’s playoffs at $58.2 million.  However, like OKC, their payroll was artificially depressed by the fact that their two best players — Brandon Roy and LaMarcus Aldridge — were still on their rookie contracts.  This year, Portland’s payroll increased by over $16.5 million — $13 million of which was the impact of raises to Roy and Aldridge.  (This doesn’t even consider the condition of Brandon Roy’s knees, and the $68 million or so remaining on his contract.)

This scenario brings up two potential alternatives for the Pacers, neither particularly attractive.

The first is that Simon’s luxury tax restriction remains in place, meaning that Portland has to forgo one of their recent signings or trades (Roy, Aldridge, Andre Miller, Marcus Camby, Gerald Wallace).  We’ve seen this before with the Pacers when they elected to let first Brad Miller and then Peja Stojakovic go on the open market.  The second is that Pacers do the signings, but then are paying the tax for a first round exit, and potentially have saddled themselves with an unmovable contract in the form of Brandon Roy.

A Beggar’s Choice

It’s the fear of the second trap that could cause the most cognitive dissonance between Herb Simon and Larry Bird.  If the league were to continue under the current CBA, and I were Simon, I would not allow Bird the freedom to “spend” the entire $20 million — at least not on free agents.  In my mind, spending all of that available cap space leaves me with two unappetizing possibilities.  The first is the distinct danger of being a taxpayer down the road as the contracts mature.  The second is ending up in the same salary cap prison that the Pacers have spent years trying to escape.

Of course, the CBA is almost certain to change this summer, and for small market teams like the Pacers, it is imperative that these changes be significant.  The current soft cap system allows for richer teams (be they large market or simply deep pocketed owners) to “buy the pot.”  Or … if not to outright buy the pot, they can certainly bully teams with their stack.  Quite frankly, this next CBA will likely determine whether teams like the Pacers will exist in their current form or city 10 years from now.

Personally – and I know this is somewhat oversimplified -  I’d consider anything short of a hard cap with significant restrictions on guaranteed contracts disappointing.  Players would hate to hear this, but I’d actually prefer a lockout that achieves these goals – even if it costs the full season – to no work stoppage and an agreement that hasn’t materially changed from the current one.

The hard cap is the best (albeit imperfect) mechanism for maintaining competitive balance.  The restrictions on guarantees prevents mistakes from being debilitating.  It’s all well and good to want to punish bad owners, but the truth of the matter is that it only hurts the NBA as a business to have its franchise put in jail for multiple years.  I am opposed to franchise tags because (a) the rookie contract and restricted free agency structure is sufficient, and (b) I actually think more player movement, not less, is the solution to teams being able to get better faster.

As of right now, however, it’s all up in the air.  I have no strong sense as to what kind of agreement will actually be worked out.  Until we find out what the new rules are, we only know the current ones.  And those current ones raise serious questions as to how much money is enough.

Tags: CBA Talk Herb Simon Larry Bird

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