Pacer Cap Situation – July 3rd Snapshot

Good morning.

There has been plenty of activity for the Pacers since the NBA Free Agency period opened on July 1st. Lance Stephenson has seen the Pacers’ offer and decided to test the market. The Pacers have added more shooting, in the persons of C.J. Miles and Damjan Rudez. They’ve taken a flyer on undrafted free agent, Shayne Whittington.

The Pacers’ still hope that Lance will find their reported 5-year, $44-million offer the best deal in what may be shaping up to be a tough market for Born Ready. However, they’ve lined up at least one possible Plan B – meeting with Rodney Stuckey sometime today.

A few weeks ago, I outlined the Pacers’ cap situation at the time, but events of the last two days have changed that significantly. Here’s a quick snapshot of where Indiana is estimated to be, as of the morning of July 3, 2014.

I’m not really in a knowledgeable position to speculate on what the Pacers are doing, or what will happen over the next few days. It seems obvious that they are trying to retain Lance Stephenson, while once again attempting to improve their bench. Beyond that, there are very few that can tell you what their actual plan is.

However, looking at Indiana’s financial situation can help understand some things they can do, some things they can’t do, and some things they must do. In order to translate the beans counted above into useful information, we must consider the following points:

• The Indiana Pacers will not pay the luxury tax. This point has been made and reiterated by Pacer owner Herb Simon and PS&E President Larry Bird almost ad nauseum for the last half decade. It is a de facto hard cap. The relative merits of that particular philosophy are unimportant at the moment, as only the practical implications matter. Those practical implications are that the Pacer 2015 payroll will not exceed $77 million in cap-included salaries. (For a great writeup from an outside source, check out Paul Flannery’s piece from yesterday.)
• The Indiana Pacers are now operating under an ACTUAL hard cap. The new CBA has special rules for teams making free agent signings that take them from under the tax threshold to over it. This is because the tax threshold is not only a dividing line for who pays and who doesn’t, but also a dividing line for what types of exceptions a team has available to sign players. The relevant language per Larry Coon is, “when a team is below the apron and uses its Bi-Annual exception, receives a player who is signed-and-traded, or uses its Mid-Level exception to sign a player to a contract larger than the Taxpayer Mid-Level exception allows, the team becomes hard-capped at the apron for the remainder of that season. This eliminates any potential loophole where a team could first use one of these exceptions and subsequently add salary to go above the apron, since adding salary first and then using the exception would be illegal.” By signing C.J. Miles to the 4-year, $18 million contract reported, the Pacers are subject to a hard cap at “the apron.” The apron is tax threshold plus $4 million, or $81 million. (Note that the Pacers are slightly over the $81mm, if Lance accepts their offer. However, while this would create minor logistical issues – in that they’d need to clear money before signing Lance – it isn’t really a meaningful obstacle for Indiana, because they’re going to get down to $77 million anyway.
• The deadline for being under the tax threshold is the last day of the season. This means that they can go over the tax threshold temporarily, but won’t have to pay it, as long as they reduce their payroll to below $77 million by April of next year. However, they can never exceed the $81mm hard cap they are operating under.
• The Minimum Player Exception is the only cap exception the Pacers have left to sign free agents for which they do not have Bird or Early Bird Rights. The Miles & Rudez signings used up the Non-Taxpayer MLE, and their Bi-Annual Exception was used last season on C.J. Watson. They have an unlimited amount of MPEs, but it will only attract minimum level players.
• The Pacers have two trade exceptions available to add salary. The Scola and Granger trades generated traded player exceptions. Indiana as a $1.1 million exception that expires in late July related to Miles Plumlee, and a $4.3mm exception that expires in February related to Danny Granger. These cannot be used to sign free agents, nor can they be combined with anything else to make them bigger. They can, however, be used to trade (or sign and trade) for a player that would fit it either of those slots. They would have to send back some nominal asset – a draft pick or, for example, the rights to Stanko Barac in the deal. It is possible that they’d use this, but given their current situation, it’s unlikely they’d want to do a trade without sending out some salary.
• The Pacers retain Bird Rights to Evan Turner and Lavoy Allen. As reported, the Pacers did not extend qualifying offers to either of these players. However, that is not the same as renouncing their Bird Rights. Declining to make a qualifying offer makes the players unrestricted free agents, but the Pacers can still re-sign them using Bird rights. Indiana and Lavoy Allen have expressed some mutual interest, but it was somewhat tepid. There have been no indications that the Pacers or Evan Turner are particularly interested in continuing their relationship.
• If Lance accepts the offer, the Pacers will have to clear at least $4 million in salaries to get back under the tax threshold. The oft-discussed release of Luis Scola would save a little over $2.9mm. Other options include using the “stretch” provision on any of the other guaranteed contracts. This would allow the Pacers to spread the pay and cap hit over twice the remaining years of the deal, plus one. Chris Copeland and Ian Mahinmi have been the most-mentioned candidates. Stretching Copeland would reduce his cap hit from $3.1 million this year to $1.0million over the next three. Stretching Mahinmi would spread his $4million cap hit in 2015 (and 2016) over the next five years at $1.6 million per. I find these to be very unlikely options, as both players have proved useful in the past, and the savings on either would be reduced by the $915k spent for a minimum level replacement.
• If Lance signs elsewhere, the Pacers will have approximately $3.6 million in space under the threshold to find a replacement. This assumes no player moves. A cap-reducing move, like releasing Scola, could increase that number. Releasing Scola bumps the available room to over $6.5 million. However, since they are out of major exceptions, that player would have to be acquired through Bird Rights (Turner, Allen) or trade.
• The Pacers must carry at least 13 players on their roster. This is why you must always factor in a replacement player, if waivers or trades take the total players under contract below 13.

There are likely thousands of permutations of what could happen with the Pacers over the next few days. These bullet points really only highlight limitations, but should help to at least broadly outline the possible and impossible.

As always, Mark Deeks’ Shamsports and Larry Coon’s CBA FAQ were relied on heavily in the creation of this post.