Indiana Pacers salary cap economics 101: The Room Exception

The Indiana Pacers are out of cap room after signing Tyreke Evans, meaning they have limited means to add more players. One of those ways is the room exception.

It’s happening. The Indiana Pacers acquired Doug McDermott and Tyreke Evans in free agency. After some cap-cutting moves and renouncing of some free agents, the Pacers were able to squeak out just enough cap room to acquire both of the fresh new Pacers.

So, now what?

Kevin Pritchard and the rest of the guys in the front office have to finish constructing a roster. They only have 14 players right now, which is technically the minimum you are allowed to carry, but the organization would almost certainly like to use all of the 17 allocated roster slots to get as much depth as possible.

Adding three (one of which is a two-way contract) players is a challenge when the salary ledger looks like this:

So, what are the Indiana Pacers options?

One of their remaining three roster slots will be occupied by a two-way contract. Last year, Edmond Sumner, Alex Poythress, and Ben Moore had these. This season, only Sumner is inked to one. The other one is still available to sign a player. 50th pick Alize Johnson could be a candidate, but it is too early to tell.

Anywho, two-way contracts don’t count against the salary cap, so that’s easy. The Pacers just have to decide who they want. It is the other two roster spots that will need to be filled more creatively by the Pacers brass.

There is one non-creative solution that could be done. Any team in the NBA can sign a player to a minimum contract at any time (unless they are subject to the hard cap — which the Pacers are not). In theory, Kevin Pritchard could just bring in two veterans on minimum contracts to fill out the rest of the roster.

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But that would be a poor use of roster spots and would come at an opportunity cost because the Pacers have a much more effective way to add a player at a competitive salary: the room exception.

What is the room exception? I’m glad you asked! The room exception is a salary cap exception that is available to teams who spent money using cap space in the offseason (as opposed to adding players via trades or what have you). Teams that use salary cap space (like the Pacers did on McDermott and Evans) lose the opportunity to use Non-Taxpayer Mid-Level, Taxpayer Mid-Level, and Bi-Annual exceptions and instead are granted access to the room exception.

What does the room exception do, exactly? It allows teams who signed a player(s) using cap room to exceed the salary cap. It can be used to sign a player to a deal that can be up to two years long and can start at up to a value of $4.449 million. Players can be granted raises up to five percent from year one to year two when using this exception. At most, it can be used to sign a player to a two-year, $9.12 million dollar deal. But anything under that, in both years and dollars, is legal as well.

Clear as mud?

The additions of Evans and McDermott make one thing clear: the Pacers are contending. They are not rebuilding. They are not tanking. The team is contending for an Eastern Conference title.

This exception can also be split across as many players as a team sees fit. Multiple players can be signed using the room exception so long as their base salaries in the 2018-19 season combine for less than $4.449 million.

The additions of Evans and McDermott make one thing clear: the Pacers are contending. They are not rebuilding. They are not tanking. The team is contending for an Eastern Conference title. The room exception is their best tool to add a player for more than the minimum, which in the current cap-strapped environment could improve the roster considerably.

For a contending team, this is an attractive tool. Kevin Pritchard could decide to use it on a veteran who could help add depth or could contribute right away. He could use it to take a flyer on a young guy and hope that he could take some steps forward. Pritch could even decide to split it up on two players who are worth more than the minimum to improve the roster. The opportunities are plentiful.

Ron Baker and Aron Baynes signed the room exception last season. This offseason, we have already seen Pacers beloved Lance Stephenson received the exception from the Lakers. It is a useful tool that can net a team a real contributor.

In my personal opinion, the Pacers should acquire a forward with this exception. Someone like Nemanja Bjelica, James Ennis, or Luc Richard Mbah a Moute could be worthy candidates of the contract. But these names are just speculation.

Once the exception is used, it is gone and the only way to add more players is through minimum contracts. Pritchard cannot waste this valuable tool. It could go a long way in improving the Indiana Pacers roster and substantiating their depth.

Next: Thaddeus Young vs The Raccoon: The matchup of the summer

The Pacers don’t have to use the room exception, but unless ownership wants to keep the cost of the team down, there isn’t really a reason not to. The next step for the Pacers free agency is likely going to be adding a player via the room exception. Who will it be? We will find out soon enough.