Paul George & Pacers Close to Deal — A Look at the Financial Implications

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Paul George will soon become the Indiana Pacers first “Designated Player,” according to Adrian Wojnarowski and Marc Spears of Yahoo! Sports.

All-Star forward Paul George and the Indiana Pacers are finalizing a five-year, $90 million-plus maximum contract extension, league sources told Yahoo Sports.

A deal is expected to be signed this week, league sources told Yahoo.

Great news for the Pacers and their fans, as Paul George’s performance last season included a Most Improved Player award and culminated in an Eastern Conference Finals run that featured 19 points, 7 rebounds, and 5 assists a night from George. In simple terms, it means that Indiana will have their four best players from that run (including Roy Hibbert, David West, and George Hill) for at least the next two seasons.

But, any time a team makes a commitment this large, it has wide-ranging financial implications. Let’s take a look a the dollars involved, and what they may mean to the Pacers as this contract ages.

PG’s Paycheck

The report from Woj & Spears says “five-year, $90 million-plus maximum contract extension,” which is both clear and unclear at the same time. The only thing we can take with absolute certainty from this report is that the Pacers & George have agreed to make this contract subject to what is commonly called the “Rose Rule.”

The only thing we can take with absolute certainty from this report is that the Pacers & George have agreed to make this contract subject to what is commonly called the “Rose Rule.”

The “Rose Rule” was added in the new CBA and allows a player with four years of experience to be eligible for a max equal to 30% of the adjusted salary cap, instead of the normal 25%. To qualify, said player must have (a) won the Most Valuable Player award, (b) be voted by the fans to two or more All Star games as a starter, or (c) earn two All NBA awards (First, Second, or Third Team). This allows the team and the player to negotiate a contract with the starting salary of anywhere between 25 and 30% of the first year’s adjusted salary cap.

Paul George has put himself in position to qualify by being named Third Team All NBA last season. That is why PG’s contract is being reported as higher than the 5-year, $80-million John Wall extension. Wall’s contract shows the 25% max, while PG’s clearly indicates at least the opportunity of achieving as much as the 30%.

Wall’s contract will likely be closer to $84 million over the five years, which means George’s could exceed $100 million.

However, it’s important to note that the number for both contracts are likely under-reported. The 5-year $80mm number for Wall appears to be based on this year’s cap number, but that contract, like Paul’s, will actually be based on the cap figure for the 2014-15 season. (Well, actually, about 94% of the team’s salary cap figure for that season.) Based on early projections for the ’14-15 cap, Wall’s contract will likely be closer to $84 million over the five years, which means George’s could exceed $100 million.

Here’s a look at the range in which Paul George is likely to be paid over the next five years:

 

roserangeAt this moment in time, Paul George has not qualified for anything more than the 5-year, $84.1 million extension available to (potentially) every former 1st round pick entering his fourth year. In order to earn the accelerator, George will have to be named to one of the All NBA teams this year (a definite possibility, perhaps even a likelihood) or win the MVP (a very long shot). If he does not, then the contract highlighted in yellow will be what the Fresno State product will take home for the next five years.

But, if he does, the Yahoo! report indicates that his deal could be any one of the figures highlighted in blue. Occam’s razor – and the use of “maximum contract extension” in the report – leads me to believe that the deal is, in fact, for the 30% max that will actually end up being $100.9 million over the five years, with a $17.5 million 2014-15 cap hit. Also, the fact that the deal is (reportedly) going to be signed a full month before the deadline indicates it’s one that Paul and his agent couldn’t refuse. The 30% max is literally the best possible contract Paul George could receive, this year or next.

But, those of us who spend a great deal of time looking at the cap and contracts understand that “maximum” is less definitive than it implies. Often, you have to clarify “which max?” before moving on. It’s worth bearing this range in mind while there is some uncertainty as to the details.

This is especially true as we consider the cap implications for the Pacers.

How the Contract Fits

Regardless of where Paul George’s contract ends up, it is going to have a huge impact on the Pacers’ cap position. There are few, if any, bargains greater than a good player on a rookie contract, and George’s $2.6 million last season and $3.2 million this are about as cost effective as it gets in the NBA. So, let’s take a look at the payroll.

payroll(Source: Shamsports and @MarkDeeksNBA)

Looking at this information makes me believe that it is almost certain that this is the last season for Danny Granger in a Pacer uniform. 

…this is the last season for Danny Granger in a Pacer uniform.
George’s contract leaves Indiana between $6.0 and $8.9 million below a luxury tax threshold with only 11 players under contract. The Pacers have repeatedly said they would not exceed the tax threshold, and it’s a warning that should be taken at face value.

A note on the Pacers and the tax threshold – Whenever this subject comes up, there are invariably people who argue that Herb Simon may be willing to “go over the tax for a little bit” to keep a contending team together. While you can never say “never,” I believe it is foolish to expect the Pacers not to make good on this warning.

Herb Simon has been making this caveat for years, and there’s no reason not to take him seriously. Indiana hasn’t paid the tax since 2006, and the threshold ($75.7 million) represents a large increase over recent payrolls – before considering any taxes.

The new CBA does allow that only 50% of tax proceeds goes to non-taxpayers. Some have used this to argue that the penalty for the lost tax distribution is not as harsh and that the Pacers will “get some back.” That is not entirely true. The other 50% is used for “league purposes,” which may or may not result in money being returned to Indiana.

Further, the higher tax rates and accelerators actually make a share of 50% of the tax proceeds greater than a 100% share under the old tax structure. Based on current 2013-14 payroll projections, a share of 50% of proceeds would be $3.2 million, while a 100% share under the old tax would only be $2.9 million. (If you adjusted the change in BRI split between the CBA, the 100% share would drop to $0.8 million.)

It should be assumed that Indiana will treat the tax threshold as a de facto hard cap, and exceeding it would be an extraordinary event.

Given those strictures, Indiana will only be able to re-sign one, but not both, of Lance Stephenson and Danny Granger. As it stands today, Lance Stephenson seems to be the overwhelming choice based on (a) youth and (b) affordability. Additionally, there are very few positive scenarios that I can come up with where Granger ends up being more affordable than Stephenson.

A note on extending Lance Stephenson – As a second round pick, Lance did not get a “rookie scale” contract. As such, he is not eligible for the special exceptions that accompany such a deal. He is eligible for an extension, but only starting at 7.5% above his 2013-14 salary, which is just over $0.9 million.

The most Indiana could offer Stephenson prior to next summer is a 4-year, $4.1 million contract. While I’m sure the Pacers would be pleased with that, they – along with Lance, his agent, and any random NBA follower – know that he will command much more money than that, if his career continues on its current path.

There are always options to create more space, but those also always involve unloading players. However, trading Danny Granger is not high on the list of these. It is important to keep in mind that Granger’s contract expires at year end. Any deal that sends the New Mexico vet out and returns a player whose contract does not expire impinges on next year’s available payroll. The deal should not be measured solely on the comparison of Danny’s departure vs. the new player(s)’ arrival. It must also consider the possible loss of Lance Stephenson, should the Pacers not be able to fit both under the tax threshold.

Among the 11 players under contract for 2014-15, there are two who definitely have partially unguaranteed contracts. The first is Orlando Johnson, but his contract is the minimum, so there is very little money to be saved there. The second is Luis Scola’s.

Scola is on the books for a little less than $4.9 million in ’14-15, but only $0.9 million is currently guaranteed. (Actually, it’s $1.5 million, but Houston will pay part of it.) It could exceed $1.9 million in guarantees owed by the Pacers, if the Argentinian power forward meets a couple of very attainable benchmarks. So, Indy could create between $3.0 and $4.0 million of additional space by releasing Scola next summer.

I don’t know about you, but I don’t like any of the readily imaginable scenarios in which Indiana decides waiving Scola next summer is a good thing for the Pacers.

The Pacers could also release players with guaranteed money and avail themselves of the “stretch provision.” This allows the remaining cap hit to be spread over twice the remaining years on the contract, plus one. The only reasonable contract for this is Ian Mahinmi, which could potentially generate an additional $2.4 million in breathing room. However, I find this extraordinarily unlikely, primarily because I believe that Mahinmi is a solid back up 5, making what solid backup 5’s make. I suspect the Pacers agree with me on this.

However, all of these concerns are what you call “first world” problems. 

However, all of these concerns are what you call “first world” problems.
Locking up Paul George is absolutely the right thing to do here. Should Paul get a second mention among the top 6 players at his position in the NBA, he will have largely proven his value on the floor. While the Pacers will face hard choices going forward, they have positioned themselves as well as could possibly be expected to play good basketball and contend at a high level for the foreseeable future.

With Paul George, and Roy Hibbert, David West, and George Hill before him, the Pacers have committed to players that the fans and the city can fall in love with, again. It’s hard to imagine many better paths the organization could have taken toward erasing the bitterness of the JailPacer era.

 

 

 

 

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Tags: Salary Central

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