sonics financial faq

By Kevin Pelton, SonicsCentral.com Staff Reporter

Written: September 20, 2002 (last update 9/20/02)

In an effort to educate Sonics fans on what the team can and cannot do because of the collective-bargaining agreement, I've put together this FAQ with information specific to the Sonics on their salaries and cap position in coming years. For more general information of greater depth, please visit Larry Coon's NBA Salary Cap FAQ, a tremendous resource for understanding the vagaries of the CBA. If you enjoy legalese, the actual CBA is available online through the Players Association website.

What salaries have the Sonics committed to for this season and beyond?

The NBA does not release official salaries, but thanks to media reports and the general salary information the league does divulge (minimum salaries, etc.), we can gain a good understanding of what various players are making. The best current resource for this is HoopsHype.com and the following salaries are updated from their information (they remain highly unofficial):

Some notes: Red indicates a player option, green a team option, and blue a qualifying offer (more later). Lewis' actual cap value may be higher depending on option clauses in his contract which were not made public. The total at the bottom does not include qualifying offers.

What is the salary cap for each season?

The salary cap for the 2002-03 season is $40.271 million. For following seasons, the cap has yet to be determined and will not be until the previous summer. We can only guess at what the cap will be in those seasons.

How can the Sonics be over the cap this season?

The NBA's salary cap is not a hard cap, meaning it can be exceeded. There are a number of exceptions which allow a team to exceed the cap:

"Larry Bird" exception: This is the most commonly known exception. Players who have not changed teams via free agency or been waived in the last three years (and have at least three years experience) are eligible for this exception, which allows their current team to go over the cap by any amount up to the maximum salary to re-sign them. Contracts may be any length up to seven years with 12.5% raises. The Sonics used Bird rights to re-sign Rashard Lewis.

"Early Bird" exception: This gives the team slightly less rights than "Full Bird" rights, but is easier to obtain. If the player has not changed teams via free agency or been waived in two years (and has at least two years experience), his current team can exceed the salary cap by up to the median salary to re-sign him. Contracts must be between two and six years with 12.5% raises. For this summer, the value of the "Early Bird" exception is $4,545,000.

Non-Bird exception: If a player does not qualify for either of the Bird exceptions, his team can still re-sign him, but only for 120% of his previous salary or the minimum salary for a player of his experience, whichever is greater. Contracts may be up to six years with 10% raises.

Median exception (aka "Mid-level" or "Middle-class" exception): This exception is given to each team each summer to sign or re-sign a player at the median salary (thus, its value is the same as the "Early Bird" exception). It can be split on multiple players. Contracts may be up to six years with 10% raises. The Sonics used this exception this summer to re-sign Jerome James and last summer to sign Calvin Booth.

"Million-Dollar" exception: Strangely, the "million-dollar" exception is not actually worth a million dollars. Its value is escalating upwards. For the 2002-03 season, it is worth $1.4 million, and next year it will be worth $1.5 million. It can be split and contracts may be for one or two years with 10% raises. However, teams cannot use this exception in consecutive years. The Sonics have not used their "million-dollar" exception since the 2000-01 season (Dickey Simpkins, who did not make the team).

Teams can also go over the cap to sign their first-round picks, to sign players at the minimum for up to two years (as the Sonics did with Ansu Sesay), and if they have received specific exceptions from the league through trade or because of injury. The Sonics currently have only the "million-dollar" exception available to them.

So the Sonics will be under the cap next season?

Maybe. They will have the opportunity to be, but the figure quoted there represents a minimum (other than not picking up Peja Drobnjak's option). The Sonics' own free agents -- Gary Payton and Kenny Anderson -- will count on the cap if unrenounced. Both will count for 150% of their salaries for this season, $19.6 million for Payton and $13.8 million for Anderson. As well, the Sonics' first-round pick (if they make one) will count against the cap, as will the median and "million-dollar" exceptions.

If they renounce Anderson, Payton, and their exceptions, the Sonics will probably be able to clear about $7 million or so under the cap. However, this will leave them far short of having enough money to be a real free agent player for next summer's top free agents (Tim Duncan, Jason Kidd, Jermaine O'Neal, Andre Miller, Elton Brand, Jerry Stackhouse, Reggie Miller, and Karl Malone, amongst others). Instead, the Sonics will at best be fighting for second-tier free agents like Detroit's Richard Hamilton, Golden State's Gilbert Arenas, and Sacramento's Keon Clark. The Sonics could clear more money by trading one of their players for a player with an ending contract. Whether they may try this or not is unclear.

Why wouldn't the Sonics renounce their free agents and exceptions?

No matter what, the Sonics probably will renounce Anderson, who is not expected to return. If the Sonics renounce Payton, however, they will lose their Bird rights to him, meaning they cannot exceed the cap to re-sign him. Thus, if the Sonics sign an outside free agent using cap space next summer, the only way they can bring back Payton is at the veteran minimum. Something tells me Payton won't be too happy about that.

As for the exceptions, once renounced they are gone and cannot be used. Thus, the Sonics would probably not renounce them (or Payton) until they were sure they were going to sign a free agent.

There is one exception to this rule. If the Sonics sign a restricted free agent -- as players like Andre Miller, Brand, Hamilton, and Arenas will be -- and that deal is matched by the player's team, they can 'unrenounce' anything renounced to make the offer.

So if the Sonics sign a free agent using cap space next summer, they would probably lose Payton and would definitely lose their chance to sign a free agent with the median exception?

Yes.

So why on earth would they do that?

Good question, but I'm afraid only Howard Schultz, Rick Sund, and Wally Walker can answer that one.

I hear a lot about the 'luxury tax'. Can you explain how that works?

The last CBA put in a provision that teams that went over a certain level would be taxed an equal amount for every dollar that they spent over the tax -- but only if the tax is enacted, which is based on league-wide expenditures and revenues. The CBA stipulated that players can only make a certain percentage of what is called 'Basketball-related income'. If the players end up making more (based on end-of-season auditing), then they lose a portion of their salaries (known as the escrow amount) and teams with salaries over a given level (determined by a formula I won't go into based on BRI).

What makes the tax particularly odious for teams is that they not only have to pay the tax but also lose their chance to receive money distributed by the NBA -- both luxury tax collections and the escrow amount. This is a far bigger deterrent than the dollar-for-dollar payment itself.

How are the Sonics reacting to the tax?

Prior to this season, the Sonics had taken a firm stance that they would not pay the tax. However, this changed this summer. Projections indicate that after signing Lewis, the Sonics will pay the tax next season, though whether they will or not will not be known until next July. The Sonics were willing to pay the tax for one season because they viewed retaining Lewis for seven years as so important. In the future, expect the Sonics to make moves designed to keep them from paying the tax.

What will that mean next summer and beyond?

That's not entirely certain, but probably not very much. It's unlikely the Sonics could reach the tax limit for the 2003-04 season unless they re-signed Payton for the maximum amount (probably slightly less than $15 million) and signed a free agent using their median exception. For the 2004-05 season, the Sonics may have some serious luxury tax concerns because Desmond Mason will probably be starting a new contract and the team's only free agent, Brent Barry, is one they'll probably want to re-sign. The 2004-05 season will be the owners' option year of the CBA, after which it will expire. Thinking beyond that is simply impossible; there may not even be a luxury tax.

Let's go back to the salary chart quickly. I see a player option for Lewis during the 2007-08 season. What does that mean?

This clause allows Lewis to 'opt out' of his contract after five years and is known as an Early Termination Option. It can only be after five seasons and is generally only used on seven-year contracts like Lewis signed. There is some question still as to whether Lewis got an ETO, but both the Tacoma News-Tribune and Hoopsworld.com's Steve Kyler reported he did, so I'm going under that assumption. If Lewis plays as well as he hopes, he will have the chance to get another mega-contract in five years.

Let's discuss the other options on the chart. It seems like they are mostly for first-round picks. What kind of deals to these players get?

Under the new CBA, all first-round picks get identical deals except for salary, which is based on a 'slotting system' that limits their salaries to 20% up and down from an assigned amount. These contracts contain three guaranteed years and a team option. The team has until October 31 of the player's third season to decide whether to pick up the fourth year option. The Sonics have already done this for Mason this summer and will have to decide on Vladimir Radmanovic next summer. After four years -- if the fourth year is picked up -- the player becomes a restricted free agent if the team makes him the qualifying offer listed in blue. However, the team also has the option to work out a long-term extension during the summer after the player's third year. These extensions are fairly common, and it is expected that Mason and the Sonics will make a long-term deal next summer.

What about second-round picks?

They are not bound by any salary structure. Most second-round picks sign for the minimum. The primary exceptions to this are foreign players who have played overseas for several years and can command large salaries in Europe -- like the Sonics' Drobnjak. He was able to earn a three-year deal (though there's a team option for the third year) for a little more than the minimum. This has also worked out well for the Sonics, who have Drobnjak locked in at a low salary for three years, after which they will have Full Bird rights to re-sign him. Shorter deals for second-round picks can often lead to them going elsewhere for more money, as happened to the Sonics with last year's second-rounder, Earl Watson, who signed with Memphis.

So the Sonics will retain the rights to this year's second-round pick, German Peter Fehse?

Yes, the understanding is that they will. Percy Allen of the Seattle Times reported that the Sonics will bring Fehse to training camp this season, but later added that he would not be given a chance to make the team. The understanding at this point is that Fehse will not get a contract and will just practice with the team in order to allow the Sonics to assess his development. Fehse has signed with one of Europe's top teams, Benetton Traviso of Italy, and will likely play for them while the Sonics retain his rights.

You mentioned something after the chart about option clauses affecting Lewis' value. What does that mean?

Lewis' contract includes $15 million worth of incentives. These are assigned by the league based on whether they are considered 'likely' or 'unlikely' to be achieved. This designation is based primarily on the past. For example, if the qualification was the Sonics had to win 50 games, then that would be unlikely because they did not last season (though if the Sonics had added a free agent who had made them likely to improve that much, this might change. Such a scenario happened with Miami when the Heat signed Juwan Howard during 1996; the contract was ultimately voided). In general, likely bonuses count against the cap, unlikely ones don't.

Something I always hear about is BYC players and how they are more difficult to trade. Could you explain this?

When a free agent with Bird or Early Bird rights whose team is over the salary cap is re-signed or a rookie contract is extended by a team over the cap and the player receives a raise of more than 20%, they become a Base Year Compensation player. This affects the team's ability to trade them because the player is only counted as half of his salary going out in a trade (but his full salary going to the new team). Since salaries must essentially match up in trades, they become difficult with BYC players.

There are a few ways around this. Trading with a team under the cap or with a trade exception that allows them to take on more salary than they send out is the easiest. It's also possible to get the total salary on each side high enough that the league's allowable 15% + $100,000 difference in salary covers the difference made by BYC.

This designation usually lasts for one year; Lewis will lose his BYC status next September 19.

But Lewis can't be traded now anyway, right?

Correct. Players like Lewis signed (or re-signed) as free agents or to rookie deals can't be dealt for three months or until December 15, whichever is earlier. For players acquired in trade, they cannot be dealt in combination with other players for two months (meaning the deadline will soon pass for Anderson, Vitaly Potapenko, and Joseph Forte, who were acquired on July 22). They can be traded by themselves immediately.