The Financial Future of the Big 3 Ideal

30
May

Follow the money. It’s all about the money. Money is power. SHOW ME THE MONEY! Every sport, if you want to take the true mystique and glamour out of it, can be broken down to brass taxes. That may sound boring, but if you follow the money, you’ll be able to learn much more interesting things about the future of a team, in this case the Miami Heat and their Big 3.

I have some doom and gloom thoughts on the future of the Miami Heat, but let’s remember that the heads of most teams are significantly better equipped to deal with these problems and more knowledgable about the options than we ever will be. The Miami Heat might already have their plan mapped out to avoid this inevitable future. This is still a valuable question to look at. Will the 2011 NBA CBA cripple the future of Big 3 movements and the Miami Heat in particular.

Let’s look at the facts. You can find a lot of information about the 2011 NBA CBA on the great Wikipedia and a site run by Larry Coon. The actual 2011 CBA is unfortunately not available online at the moment. For our discussion we must go through a few specific parts, the luxury tax payer limitations, the types of exceptions allowed under the CBA and the Miami Heat payrolls since the 2011 CBA was signed.

Miami’s Big 3-Year Run

The easiest first step is the Miami Heat’s payroll since 2011, the luxury tax threshold and why this all matters. In the 2011-12 season, the total payroll of the Miami Heat was $77,363,284 according to ShamSports and the Luxury Tax Threshold was $70,307,000 according to a story by CBSSports. Strike one.

The Luxury Tax Threshold remained the same for 2012-13 at $70,307,000 and the Heat payroll increased to $83,827,163 (Basketball Reference). Strike two.

Finally, now this is based on projections but, the Luxury Tax Threshold for 2013-14 is being calculated at over $84,000,000. The huge increase is based on Commissioner David Stern’s announcement that he expected $5 billion in total revenue for the league. IF this is true, and this is a big if since it represents a 20% increase in revenue in one year, then the $84 million threshold is correct, if not it will be lower, but let’s take the high calculation and run with it. Currently, the Miami Heat have 13 players under contract for a total of $86,464,629 and notable contributor Chris Andersen is not one of those 13 players. There are 4 players to keep in mind in this calculation; PG Mario Chalmers, SG Ray Allen, SG/SF James Jones and SF Rashard Lewis. All of those 4 players have optional contracts in one form or another. Ray Allen ($3,229,050), James Jones ($1,500,000) and Rashard Lewis ($1,399,507) hold player options and Mario Chalmers ($4,000,000) holds a team option. Ray Allen is very unlikely to opt for free agency over the salary and Jones/Lewis would likely need to retire to have a legitimate reason to not exercise their player options. Chalmers is a bit more interesting, while he has been a good PG for the Heat, PG Norris Cole has gotten better every year and could take over for Chalmers if the team decided to save $4,000,000 off their salary. For right now, let’s assume that they won’t get the bonus of saving on ANY of those mentioned players. $86 million > $84 million. Strike three.

What all this means is that IF the Luxury Tax Threshold is as high as $84 million (unlikely) then the Heat could hope for Jones to retire, decide not to exercise their team option for Chalmers and make a few minimum salary moves to stay under that $84 million number. But assuming the Luxury Tax Threshold is significantly lower, say around $77 million, the Heat have no real hope of getting under the line and will be paying for the third straight year since the signing of the 2011 CBA. Which puts them directly in the sights of the dreaded repeater tax.

The Repeater Tax

This is the wolf hiding in the woods for every team after the new CBA was signed. Whenever you hear someone on TV or in an article talk about teams trying hard to avoid paying the Luxury Tax, it isn’t usually because of the initial rate, but because of the chance of paying into the repeater tax. Here is the table created by Wikipedia and based off Larry Coon…

Amount over tax threshold Standard tax Repeat offender tax
$5 million or less $1.50 $2.50
$5 million to $10 million $1.75 $2.75
$10 million to $15 million $2.50 $3.50
$15 million to $20 million $3.25 $4.25
$20 million to N/A $3.75 + increase of $.50 for every $5 million increase $4.75 + increase of $.50 for every $5 million increase

There are a few things to straighten out to fully understand the repeater tax and how it applies to NBA teams and their payroll. First of all, you are only subject to the repeater tax starting in the 2014-2015 NBA season if you have paid the luxury tax in all three of the previous seasons since the signing of the new CBA (2011-2014). Second, and this applies to the standard luxury tax as well, you pay the allotted amount ($5 million or less – $2.50/$1 over the threshold) up to the next level. I will do a little math for the next section to help you understand just a little bit more. For now just keep this in mind and we will come back to it.

Simply looking at the table however, you can see why teams are so afraid of this, if you are more than $20 million over the tax threshold and a repeater, you’re paying $4.75 for every single dollar that applies to that allotment (math will be later). This could cripple the Heat once they are subject to it in 2014-2015 and now let’s look at why it might happen.

The Miami Heat in 2014-2015

We have no idea what the luxury tax threshold will be in 2014-2015, and this is not an informed opinion on the subject, but for the sake of argument, let’s take a roughly similar increase from the projected and say the 2014-2015 Luxury Tax Threshold will be about $83 million. When you look at the Basketball Reference page for the Miami Heat future payroll you see something interesting; the Heat could have zero players and zero dollars on their payroll at the beginning of 2014-2015…as of now. Let’s make one thing clear, that won’t be the case going into that off-season. But, for this futures exercise, it is what we have to work with.

James, Wade and Bosh will all make over $20 million for the 2014-2015 season, but they all have ETO’s (Early Termination Options). This is essentially a player option except instead of the player needing to exercise it to tack that year onto the contract, the player needs to stand pat to tack that year on or exercise the option to become a free agent. In other words, the commonly called opt-out clause. Miller, Haslem and Anthony all have Player Options for that season (based on proposed salaries, very unlikely for any of them to opt against exercising those option) and Norris Cole will have his Team Option for that season (likely picked up to keep a solid PG at a pittance of just over $2 million). Everyone is talking about one, two…or three of Bosh, James and Wade to opt out that season and hit the free agent market. This is a huge possibility for LeBron James, but based on performance and age the past couple seasons, would it be a wise career move to turn down $20 million for Chris Bosh or Dwyane Wade?

This is all very interesting…to me, but let’s look at this as if all of these players WILL be under contract so that we can understand what is going on with this dreaded repeater tax. Assuming that, we are looking at only 7 players being under contract for a total of $78,402,206; $4.5 million under our proposed Luxury Tax Threshold. Good news Heat fans, they are under that threshold. Bad news Heat fans, even the Big 3 can’t take the court and succeed with 7 players under contract, they will likely have one or two players on rookie deals (roughly a total of $2 million between the two) putting the Heat at $80,402,206; $2.6 million beneath the threshold. They will also need about 4-5 more NBA level contributors, coming in at between $3 million and $4 million a piece. Imagining it were that easy to sign such players…the salary of the team jumps up to roughly $96 million; $11 million ABOVE the Luxury Tax Threshold.

This is our first problem going forward. When you’re above the Luxury Tax Threshold you are VERY limited in your options to sign players above the salary cap. Normally you have ways to fit players onto your team via Mid-Level Exceptions, Bi-Annual Exception and Sign-and-Trade transactions. These penalties under the new CBA limit you to a smaller Mid-Level Exception, no Bi-Annual Exception and no use of Sign-and-Trade transactions. Severely limiting your signing of players to $3 million via the Mid-Level Exception and veterans on minimum salary deals. Going through some scenarios in my head, I don’t see a great way for them to reach my proposed $96 million, but that is a problem in itself because with their current roster construction, I project that as the lowest amount the Heat could reasonably imagine competing for a title with.

The Math

Let’s have some fun though and imagine that I am a seer and accurately project that they will have a payroll of $96 million in 2014-2015. How much money will they have to pay as a repeater team? Here is where the jumps in allotment matter for the teams. The Heat will pay $2.50/$1 over the threshold for the first $4,999,999; $2.75/$1 from $5 million to $9,999,999; and $3.50/$1 from $10 million to $14,999,999. That means if they are $11 million over they will pay $2.50 in taxes for $4,999,999; $2.75 in taxes for $4,999,999; and $3.50 in taxes for $1,000,000. This brings us to a grand total of…$12,499,998 + $13,749,997 + $3,500,000 = $29,749,995. Almost $30 million in luxury taxes, or almost a full 1/3 of their total payroll. Between taxes and payroll the Heat (in this scenario) are paying away $125,749,995. That sounds more like a New York Yankees payroll than an NBA payroll.

Conclusion

No team wants to pay that much money in salary and taxes to keep their team together. With the harsh new repeater tax (which any teams looking to install the Big 3 idea would likely end up with) this could be the quick end to the popular new idea of signing 3 max players and filling the rest of the roster in with veteran minimums. There are only so many veteran minimum players (they won’t be minimum if multiple teams want them) and the reason this has worked so well for the Heat is because they are dealing with LeBron James, the single greatest player in the NBA bar none.

I for one have no idea what the Miami Heat will do, and with the likelihood that LeBron James opts out prior to the 2014-2015 season, it may be a moot point because they will field a team that falls below the Luxury Tax Threshold in that scenario. But the Miami Heat are the obviously perfect test case to determine the efficacy of the Big 3 model going forward under the newish CBA…and it doesn’t look good for that model. Teams will have to be smarter than ever with their money, and really, wasn’t that the point?

About the author: Colby Rogers

Colby is the Editor-in-Chief, Founder and Lead Contributor to Other League. Also a law student focusing on Labor & Employment law and intersections with law and sports. You can find him on Twitter via @Colby_OL.