Pacers Need to Get Creative to Get Jeff Teague to Sign an Extension

The Indiana Pacers got Jeff Teague, but he only has one year left on his contract. If Larry Bird wants to lock him up long term, he can — but it gets a bit complicated.

Shortly after news dropped that the Indiana Pacers had acquired Jeff Teague in a three-team deal, Adrian Wojnarowski reported the Pacers planned to work on a contract extension with their newly acquired point guard.

Teague is entering the final year of a deal that will pay him about $8.8 million (after a 10% “trade kicker” bonus) in the 2016-17 season. Locking up the 28-year old product of Indianapolis’ Pike High School for several more years would only make sense for the Pacers. However, there are some limitations that will likely require some creative thinking on the part of Larry Bird and his cap experts in order to make a contract extension lucrative enough for Jeff Teague to sign.

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How the CBA Treats a Contract Extension

The first issue comes from Teague’s current deal. Any extension would be based on his salary this coming year of $8.8 million — and the size of the annual raises are limited based on a number of factors.

A normal veteran’s extension would allow a first-year salary on the extension of only up to 107.5% of the final year of his current contract, about $9.5 million in this case. The length of the contract extension would be limited to a total of four years: the final year of the current contract plus three additional, with 7.5% (of the base year) annual raises. This would add three years and just over $30 million to Teague’s deal.

Unfortunately, a contract extension done this summer would not be considered a “normal” veteran’s extension under the current CBA.

In order to avoid circumvention of salary cap rules, the CBA treats any extension signed within six months of acquiring the player in a trade as an “extend-and-trade” transaction, and that limits the length of the extension to three years: the final year of current deal plus two additional with only 4.5% raises. Under this rule, the most the Pacers could offer is two more years and about $18.8 million.

While $18.8 million dollars is a great deal of money, it is certain to be considered well below market for a player with Jeff Teague’s resume and reputation. When Teague signed his four-year, $32 million offer sheet with the Bucks in the summer of 2013, his $8 million first year salary was equal to 13.6% of that year’s $58.7 million salary cap. The $9.2 million the Pacers could offer as a first year extension would only be about 8.5% of 2017-18’s projected $108 million cap figure (which is a projection that may be low).

Teague and his agent would reasonably view that as a de facto pay cut for a player who has been named an All-Star and posted top-10 seasons in assists and steals since signing his current deal. Neither this — nor the $9.5 million Indiana could open with after waiting six months — will entice Jeff Teague to sign an extension.

However, there is another path the Pacers could take that would allow them to offer Teague a great deal more money.

Offering a Realistic Extension to Jeff Teague

The CBA allows contracts of four or more seasons to be renegotiated after the third anniversary of its signing. So Jeff Teague’s contract  can be renegotiated on or after July 13 of this year. At that point, the Pacers could offer Teague a raise for the 2016-17 season up to his maximum salary per the CBA — an estimated $26.4 million in this case — provided they have available cap space.

It’s this last provision that makes this a rarely used option. In most years, most teams operate above the cap, thus eliminating this option in all but the rarest of cases. The most notable case was Oklahoma City’s renegotiation-and-extension of Nick Collison’s contract in 2010 .

However, with the cap exploding from $70 million to the most recently estimated $94 million next year, teams are awash in the highly coveted “room.” The Pacers have as much as $33 million of room, and they could easily fit any conceivable Jeff Teague raise — up to and including the roughly $18 million increase to his maximum salary of $26.4 million.

This newly renegotiated salary would then become the “base year” for the extension. It would still be limited to the extend-and-trade parameters of two additional years and 4.5% raises, but the dollars available would be much larger.

Instead of the two years, roughly $19 million available under a conventional extension (that Teague would laugh at), the Pacers could offer Teague anywhere up to an $18.4 million raise in the current year and two more years beyond that worth as much as $56.4mm. That would be $74 million more over the next three seasons, than he is slated to make now.

Now, making that kind of offer seems to be neither a likely nor prudent approach for the Pacers to take. But it does give a good idea of the flexibility the Pacers could have in regard to locking up Jeff Teague beyond next year. Indiana’s available cap space gives them room to maneuver, and there are plenty of ways to get creative with the renegotiation.

As noted above, the rule allows the Pacers to offer a salary anywhere between Teague’s current $8.8 million and his max of $26.4 million for the upcoming season. From there, the first year of the extension — the 2017-18 season — can be anywhere from 60% to 104.5% of the base year. So, Indiana could max Jeff Teague this season — at $26.4 million — then drop the following season as low at $15.9 million with a 4.5% raise for the final year. This would give Teague roughly $59 million over the next three seasons, about $50 million more than his current contract. It would also open up more space in the later years of the deal, arguably paying Teague “below market” in those years. (Of note: “Market” is an admittedly fuzzy term in the cap set by the new TV deal.)

The Middle Ground Approach

Alternately, Indiana could make a more traditional offer. Let’s pretend Teague would command $18 million on the open market, if he were a free agent this summer.

The Pacers could give him a renegotiated deal of $18 million for this year, then 4.5% raises would give him about $38.4 million over the two additional years. This scenario would give the Indy native about $56.4 million over the three years of the deal. There are any number of permutations that can be used based on the options provided by the space and by the rule.

In short, if the Pacers are committed to ensuring Jeff Teague will be in Indiana beyond next season, then they have ample means to get it done.

The Cap Space Fallout of an Extension

But, of course, there are costs associated with those means. First and foremost, the renegotiate-and-extend approach would require consuming some of this summer’s cap space. That’s not an immediate problem, as the Pacers will have as much as $32.7 million in space ($24.9 million, if they don’t renounce Ian Mahinmi).

Almost any raise to Teague would prevent Indiana from offering the $30.8 million starting salary to 10-year vets, but  they aren’t likely to be serious players for LeBron James or Al Horford. Any increase over about $6.6 million for Teague would prevent the Pacers from offering the $26.4 million max to #KevINDYrant or a player like Nicolas Batum. And. finally, a raise to Teague’s max would drop the Pacer’s cap space down to between $7.3 and $15.1 million (depending on the disposition of Mahinmi’s cap hold).

While that would still offer a chance to sign quality players in a normal cap year, this most certainly will not be normal. More than two-thirds of the teams in the league could have more than $20 million in available space. That money will be spread over a limited number of free agents, and we could see players like Marvin Williams, Bismack Biyombo, and Kent Bazemore commanding $15 million — or even much larger — starting salaries. If the Pacers get too loose with their offer to Teague, they could end up with a decent amount of room, but nobody in their price range worth spending it on.

The second — and trickier — issue will be one of timing. The Pacers can’t technically renegotiate Teague’s deal until July 13. Free Agency opens on July 1, and the moratorium will only be six days this year. This means that most deals will be agreed to between July 1 and July 6 (then officially signed on July 7), one full week before the Pacers can renegotiate with Jeff Teague. Of course, the Pacers will likely have preliminary discussion with Teague and his agent prior to the actual renegotiation, but the timing is still less than ideal.

Ultimately, the moves the Pacers make during the moratorium could dictate what options they have regarding Teague’s renegotiation. Alternately, those same moves could telegraph what the Pacers’ have planned with their new point guard. If they go on a spending spree with most or all of their available cap room, consider a renegotiation with Teague unlikely.

In any case, Indiana’s interest in Jeff Teague has long been rumored, and both Larry Bird and Nate McMillan have been open about their desire to have a “true” point guard (whatever that may be). Now that they have him, they have plenty of ways to keep him around, if they really want to.

Next: The Official Indiana Pacers 2016 Draft Primer

Thanks to Larry Coon and Cole Zwicker for their input on the CBA rules on Extensions.