The Pelicans’ Glass Salary Ceiling

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Published: July 10, 2017

The New Orleans Pelicans have been slow in Free Agency. They’ve re-signed Jrue Holiday, signed their lone draft pick Frank Jackson, and brought back Darius Miller on a deal for camp. The latter two are likely for the minimum, and Miller’s deal may be completely unguaranteed. I’ll effectively ignore his specific contract. Fans and writers seems to be getting restless and are worried about the possibility that a move significant enough to bring in wins and keep DeMarcus Cousins in the offseason is not possible.

I think there are several issues that need to be considered about the moves available to them, which are far more limited than commonly appreciated. I also want to address the constant issue of the Pelicans and the tax.

Just so you know, here’s what I am going to say:

  • I am worried
  • There is really is no other course of action at this point but to wait for a trade
  • We may be waiting into the season, to the trade deadline, or even until the very end of June 2018

Now, read on if you want to understand why I say these things. The middle is technical, but the end is less so.

Much thanks to Larry Coon’s CBA FAQ for years of help and Basketball Insiders for their salary cap collections. Of course, there’s always help from our team here at the site and around the NBA community. I’ve had much help over the years, and I’m glad to have helped others in a similar way. It is my hope that articles like this show the importance of real analysis, not just reading cap sheets and quoting rules like a robot with a personality disorder, by people that follow the team locally and specifically who partner with guys that cover the whole League. It just might show that a GM’s job is harder than you might think.

Many Caps

We casually talk about the cap when we discuss many salary related issues governed by the CBA. The agreement is in place to give owners and the players’ union advantages and protections in salary negotiations and movements. In this case, I just want to talk about the spending limit.

The CBA gives a salary cap every season, which is a kind of limit of spending on salary. It is a soft cap, so while it can’t be exceeded arbitrarily, it can be exceeded using exceptions. These exceptions come in a few varieties, but they are specific and highly technical in some cases.

There is also a luxury tax line. When certain conditions are true when a team is spending above the cap, the tax kicks in. The team incurs certain financial penalties and transaction restrictions. $6m above the tax line is the Apron, which is a hard cap that is triggered in some circumstances. Jot this down.

Lastly, each team has its own budget. These budgets can change with circumstances, but the situations that justify exceeding the budget are carefully weighed. No business operates on infinite money. At bottom, these are businesses, and they can operate at a loss or reduced profit from operations for only so long. Ignoring this is just plain stupid. This fact, however, has not seemed to lower the number of people who forget the other fact. It’s fun to play with other people’s money, and sports-moralists want to denigrate owners who fail to spend, which they should do when appropriate, but the whole picture must be considered, too.

All of these factor into a team’s total spending. It’s like a crime: means, motive, opportunity. (hint: you’ll see this much more in local circles starting . . . now!)

Why the Hard Cap is Important Now

NBA salary calculations are not always “Dude, add these numbers up.” The NBA is a world of cap holds and arcane rules.

For the hard cap, a relatively new beast introduced in 2011, is more interesting than is normally realized. It only applies to teams who do at least one of the following:

  • Receive a player in a sign-and-trade
  • Use the Bi-Annual Exception
  • Use the Non-Taxpayer Mid-Level exception in a way that is not compatible with the Taxpayer Mid-Level Exception

It applies for the season when a team participates in any one of those events, which are the common ways, aside from standard trades, that a team significantly improves its roster when it is over the salary cap. The hard cap is set at the apron, $6m above the tax line (you jotted this down). Determining if a team is over the apron, or will be over it in the case of a hard cap (which would disallow such a move), involves a different calculation than going over the cap. This is at least in part justified by the fact that soft cap is something can elect to exceed or not, whereas the hard cap is something there is a prohibition against exceeded. This prohibition is the “hardness” of the hard cap. This different calculation is not only what makes it interesting, but it is part of the drag on the Pelicans’ offseason to this point.

Because of this, things that may not even happen must be considered in the hard cap calculation. After all, a hard cap can not under any circumstances be violated. So, every eventuality through the season must be considered, and those considerations constrain teams from making certain moves . . . or even doing the things that trigger the hard cap in the first place. These eventualities are baked into the calculation.

The Pelicans and the Hard Cap

Rather than discuss the entire calculation, let’s get to the meat. There are a few sources of some hidden padding under the hard cap that is not clear when just looking at a standard salary summary.

Right of the top, all incentives are included in the hard cap calculation. Likely incentives are typically included in a player’s salary figure one finds reported in the standard locations, while unlikely incentives are not. So, the hard cap factors in these otherwise invisible unlikely incentives. When introduced, this only applied to new contracts, but this has continued from the prior CBA into this one. The Pelicans are laden with these things.

To be clear, the term “unlikely” is technical here. A likely incentive is one that a player would have triggered in their most recent season. For example, if the incentive is triggered by being named the MVP, then it is unlikely if that person was the MVP last season, and it is likely for the reigning MVP.

Jrue Holiday’s contract has $24m in incentives over 5 seasons. If evenly spread, this is $4.8m per season, and it’s about $4.7m this season if it is proportional. Only about $1m of that needs to be likely each season, but the rest of it may be unlikely, which is important here. Asik’s contract has $1m per season in unlikely incentives. Hill and Ajinca have some incentives, including likely ones, and the unlikely ones total a decent fraction of a million. In the end, it does matter if the incentives are likely or unlikely, and in fact the character of the incentive can change (as noted above), which can affect cap room if a team has some (which the Pelicans do not, and if they did this would not be an article). The tax is based on incentives paid, not likely or unlikely categories. The unlikely incentives, however, are easier to miss in this kind of calculation.

Beyond this, minimum salary players effectively have their salaries count as 2-year vet minimums, whether this is an increase or a decrease. The Pelicans have 5 minimum contracts, 3 not fully guaranteed, and the net effect of this rule is another about $0.75m amount of padding under the apron creating downward pressure on the Pelicans salary. Also, other minimum salary players will count about $1.47m in this figure, even if they are rookies, like Frank Jackson, earning $815,615.

All totaled, then, if the Pelicans triggered the hard cap, say, by offering a 4y contract to Jackson instead of a 3y contract (just to keep the numbers the same here), then the hard cap would cash out as keeping the base salary + likely incentives (at this point in time) . . . the things on a standard salary sheet . . . a couple million below the tax line. Based on Jrue’s base contract and likely incentives, they can offer less than $6m in new salary if the hard cap is triggered.

Said another way, their effective hard cap appears to be below the tax line due to their ample unlikely incentive, for the most part . . . and mostly Jrue Holiday . . . and because of their extensive use of minimum level contracts, to a lesser degree. This is because those hidden factors total over the $6m overage to generate the apron above the tax.

The incentives are not the issue. The situation would be the same if the incentives were base salary, but it would be more clear. If there were not incentives, there would be no problem, but then there may be no contract, for better or for worse.

Frank Jackson Contract

The details are still a little vague, but the deal is reported to be for three seasons: the first two guaranteed, a third year partially guaranteed. All years are likely for the minimum. This three season deal was signed using the Mid-Level Exception, and it is consistent with the Taxpayer and Non-taxpayer versions. Dell has done deals like this before, such as with Russ Smith.

The advantage for Jackson is the guaranteed money, including a partial guarantee for the third season. Many second round picks do not get that much money guaranteed. The advantage for the Pelicans is that if Jackson completes the deal, he’ll be a restricted free agent, and the Pelicans will retain his Bird Rights. This will instead be true for the receiving team if the Pelicans trade him, which also helps his value as an asset. This will allow the Pelicans to sign him under most circumstances at the end of this deal and to do so in an environment that tends to attract fewer bidders. If the deal was just for two seasons, he’d be a restricted free agent, but the Pelicans would have only Early Bird Rights, leaving exposure to an “Arenas-style” deal. If the deal were for four seasons, he would be unrestricted, though the Pelicans would have his Bird Rights. So, the three season play for a second round pick is a smart play for all parties.

It is important to note that by signing him relatively early, he’ll be available for trade just 30 days after signing since he was a draft pick, not a free agent. Thus, a team looking for youth may see him as an asset for a trade a little later this summer but before camp starts. He’ll also be healthy by camp, which would help on that front. In an article where “wait” was used so often so early, maybe that matters.

I do think, however, that this move made in this way at this time is quite telling of a much larger truth about the Pelicans’ offseason.

The Punchline

Because the Pelicans have so little room in the event of a hard cap, they are in effect bound to keep their salary additions to the taxpayer midlevel exception, less Frank Jackson’s contract value of $815,615 likely, or about $4.38m, and just 3y contracts maximum length. They can also add some minimum salary. If they were hard capped, this figure would be even less after adding in a minimum player to round out the roster to 15, up from the current 13, counting Frank Jackson and the nonguaranteed players from last season. In other words, they are virtually constrained to less than their remaining Taxpayer MLE if they want a 15 man roster. This makes the pursuit of Nick Young in a different light, especially with the later signing of Frank Jackson to that 3y deal. Really think about what that means.

This leaves the primary mode of acquisition of talent being trades. Since you really don’t know how a trade is going to be constituted, you need to keep the hard cap out of the situation as long as possible. As such, I don’t expect the hard cap to come into play until the situation is more crystalized, for better or for worse. This may be once the trade is completed, once they are sure there will be one and they need to make moves to facilitate it, or they just give up on the idea for now, make the most of what they can, and hope that winning comes in and saves them.

Commentary

The incentives are not an issue, as they just hide the lack of flexibility a little in the cases when there is a lack of flexibility. The issue is said lack of flexibility. This is, to me, the second time Dell has been in this spot in an avoidable way, and it is tied, to some extent, to the prior case. In Gentry’s first season, the Pelicans were pretty strapped, and they signed Asik to his current deal, Ajinca, Cunningham, and others. At the time, I was ok with the moves, but Michael McNamara and Ryan Schwan were against the length of the Asik deal. This is one reason why. In Dell’s defense, the Asik contract could be a little more valuable than it might seem as his contract runs out due to the mostly nonguaranteed money in it. This was by design and for that purpose. However, the acquisition of Demarcus Cousins has limited Asik’s usefulness on the team even more than Asik himself and some bad luck have limited his own usefulness. Asik’s play may improve to be worth his contract, as it was in the past, but that does not help the team in this offseason when it needs to make moves to help keep DeMarcus Cousins, nor is it likely he will get the minutes to contribute that value in full. However, hope springs eternal, and we should all be rooting for Omer if you think about it. Trust me. Or, think about it.

In order to make the right moves, the Pelicans will have to operate from a position that is weak in a few ways. They may have to dump or stretch contracts just to use the typical tools available to a team in free agency, or the necessity to avoid the hard cap may prevent them from improving the team with options typically available to non-taxpaying teams. They have to improve themselves like a team that does pay the tax even though they are a team that likely will not.

This is not about the willingness to pay the tax. This team will pay the tax in the right cases. Those cases have not presented themselves. The tax structure and all its trappings have other effects, as noted above. Those restrictions on mechanisms for adding salary are in a sense binding. That is part of the price of an incentive-laden roster. If the incentives kick in, it is likely due to some good play. They aren’t going to spend up to the tax knowing all this in an effort to keep Cousins, have the incentives kick in, then blow up the roster as if that will help keep Cousins. There would be no point in going through the show. They’d just flip Cousins, which would likely cost them Davis in the end, which discounts the value of this move just a touch too much. In the short term a team can look like a taxpayer and then get under the required limit later. So, there is no need to even have a tax discussion in July when the determination is in the following June. It is a concern, but if it was that big of a concern, they’d just accept the hard cap, which would likely keep them from being a tax team, and they’d point to the CBA as the cause. They have actively maintained the flexibility to exceed the hard cap in the past, and they are doing it now (so far). It’s all about the case for doing so.

Speaking of Cousins, part of the issue here is the addition of DeMarcus Cousins greatly changing the timeframe the team has been operating under. His addition was unexpected, but no one can blame the Pelicans from making the move in a league where, more and more, stars attract stars. Still, the “rhythm” of their cap is all out of whack as a consequence, and everyone knows it. It’s make or break this season. In that sense, I don’t blame Dell. What were “wait and see” type moves (as opposed to clearly good or clearly bad . . . though some will disagree with me since they had their own calls . . . wunderbar, congrats) have become extremely inconvenient to say the least. Still, the Cousins move had to be taken, and this offseason has to be dealt with. No small move is going to matter much anyway. The team needs to either rely on growth within their roster, their novelty in the NBA, or they need a big move. And luck, though many novices will disagree with this point.

Waiting is not without problems. Nonguaranteed contracts become guaranteed. Dante Cunningham will find a home, and he may not wait if you happen to be counting on him as a sign-and-trade asset (the Pelicans can send a sign-and-trade player and avoid the hard cap). Other teams may make better offers for a star in time.

All totaled, waiting however long it takes for a trade is the right play. It may never come. That doesn’t excuse the lack of flexibility at this point. We don’t know what moves Dell could have made last season to free up space this offseason, but the 2018 pick was off the table due to the Cousins trade. Protections on that pick made trading future picks problematic. That is now taken care of, as it was at the tail of the 2016-2017 season, but no deal was done then. Holiday negotiations were likely the priority, for better or worse, so here we are. The Frazier move was a help, no doubt. No doubt.

The Pelicans made a big trade last season, and it can happen again. If the environment is not right now, there is nothing to be done. I commend them for exercising patience and waiting for a move with real weight. Again, stars are looking to move to stars, and right now some teams have hope. Carmelo and the moves it may take to move him are hope to some franchises today. Later, those perspectives may changes and the discarded summer deals suddenly look acceptable.

It’s all, nevertheless, extremely risky. I can deal with that. It’s not fun, but I don’t see another way for them to have kept Davis given the way the first few seasons played out. Those Pelicans team might have worked, but they didn’t. That failure had a cost. Part of overcoming that cost is this Sword of Damocles I wrote about four years ago looking like it could come down early.

This is more dire and more risky than it was before signing Jrue’s contract, the lower cap coming in, the lack of success in trades for some of the more desirable guys out there early in the offseason, like Smart or Bradley. A tightening market may help the Pelicans a bit in keeping Cousins next season, which is a prerequisite for keeping Davis, but winning will help more. Winning early and winning often is essential here from where I sit.

Risk is part of it though. As I mentioned above, luck is absolutely a factor. You never know when it will hurt you or some other team. I never look at it as good luck. It’s just risk, it’s just unfortunate things that pop up. Some are more expected than others, but risk abounds. You can’t pretend it’s not there. You have to embrace it and build around it. You have to leverage it, and you have to bow down to it. As someone who has studied and work with this topic on a number of levels and for a long time, it is second nature to me. For others, it will take some digesting to understand all the risks between any team and its goals, let alone a title.

The goal is getting Davis to re-sign. That looks like it requires stars, so you probably have to keep Cousins or trade him for a star. So it’s all about Cousins’ unrestricted free agency decision. Maybe they can lose and keep him. Great. To me, you just go all in to make it through this gate, then hope you survive one more season, and so on.

To me, the highest hope is that Phoenix sees fit to part with Bledsoe. Swapping Asik for Knight is not a help on the salary front, but it gives them bad salary that can play as opposed to bad salary that can’t. Do that, and just make it work with whatever they want. Other than that, Lin is a move, though not as splashy, that may help the backcourt that will be opened up by the big men.

I’m just sitting back and waiting for a splash. If that doesn’t happen, we have to hope for a strong start to the season. If that fails, there will be changes to generate wins or to change the perception of the team. Ahem. The only hope at that point is that a star wants to play here, but he needs more than just two stars to feel good forcing his way out. He needs a reason, and winning will be the only thing left to try.

Or, rather: to try to try.

The day comes for us all, and it will come for this team. Maybe this season. Maybe next. It has to one day, though. I’d go down swinging, and I know for a fact Dell would prefer that too, even against fearful odds.

Dell: Please . . . I’m with you here, I get it . . . just make the right move so we can do this all against next season.

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