CapTalk: Portland, An Exercise In Frugality

As everyone already knows, the Portland Trailblazers have possibly the most promising, young roster in the NBA. They have a young emerging core of Brandon Roy (going into his 3rd year), LaMarcus Aldridge (3rd year), and Greg Oden (rookie, due to his season-ending injury last year), and have been able to surround them with a surplus of young talent, including rookies Jerryd Bayless, Rudy Fernandez, and Sergio Rodriguez, along with Steve Blake (6th year), Travis Outlaw (6th year), and Martell Webster (4th year). Combine these guys with Ike Diogu, Channing Frye, and Joel Przybilla, and you have the most solid 12-man rotation in all of basketball. However, the most surprising element of this young talent is that the Blazers will have a two year window (2009-10 and 2010-11) where they will have around $54 million in total salary.

As I cited in my last post, the luxury tax level will be a little above $71 million next year. Extrapolating by comparing the increase from last year to this, I can estimate that the salary cap will be somewhere around $72-$73 million come 2009-10. and a little more than $1 million larger in 2010-11. However, as of right now, barring any extensions/new contracts, the Blazers will have about $53 million in total salary in 2009-10 and only $34 million in 2010-2011. This means that they will have about $20 million free to spend next summer, and about $40 million to spend in the all-important summer of 2010, when Lebron James, Dwyane Wade, and Chris Bosh, among others, all become free agents.

This of course comes with some caveats: the Blazers will extend some old contracts between now and 2009. The team would be stupid to let Steve Blake, their only true proven point guard, walk when he's working for only $4.5 mil this year. Assuming he comes back at less than $6 mil, I would jump if I were the Blazers. Secondly, it would be more than stupid for the Blazers to extend merely qualifying offers to Martell Webster, Channing Frye, and Ike Diogu. When someone becomes a restricted free agent, they get assigned a cap hold by the league, which basically decides how much they count against the salary cap even if they remain unsigned and unwaived. This is especially limiting because the cap hold is generally two to three times that player's current salary.

Assuming in 2009, Portland picks up team options on Roy, Oden, Aldridge, and Sergio Rodriguez, they will still have to decide what to do with Frye, Webster, and Diogu. Say they let Frye and Diogu walk, and resign Webster at 1.5 times his old salary. Thus the cap holds on all three of them which would have been between $26 and $39 million gets reduced to $7.5 million for Webster. Next, let's assume that Portland decides to hold onto one of either Travis Outlaw or Rudy Fernandez (they play similar positions with similar styles involving being excellent slashers and fair jump shooters, while playing little defense). Fernandez would be much cheaper, considering he makes less than $2 mil a year, while Outlaw makes $4 mil a year and will be looking for a lucrative extension.

Thus, we're left with Outlaw, Frye, and Diogu off the books. There's some speculation on Blazer's Edge about the Blazers trading these three for Tayshaun Prince, who would be perfect in their system. If Outlaw, Frye, and Diogu all continue to improve, I can't see how Detroit doesn't make this trade. Detroit is on the verge of dying of old age (most of their core is over 30) and they'll be reloading by the end of 2009. Naturally this trade is a no-brainer for Portland, because their only hole is at SF, where they need someone who defends the perimeter and can make 3's, both of which Prince can do and a whole lot more. This still leaves the Blazers some $20 mil below the luxury tax level in 2009. Let's assume that Brandon Roy signs a contract extension for $15 mil a year (same as Chris Paul), and Lamarcus Aldridge also resigns for $15 mil (a little less than Elton Brand, more than Andrew Bogut), that still leaves the Blazers with about $10 mil to throw at a new free agent, say, Shawn Marion in case the aforementioned Prince trade doesn't work out. Or Lamar Odom. Or Mike Bibby. Or even Allen frickin Iverson. Not saying any of them would take $10 mil a year, but there are lots of possibilities. Imagine if Roy or Aldridge take one for the team and sign a below-value contract. Then there'd be lots of money to go around.

Overall, the key to the Blazers current flexibility are the fact that their players are signed on the cheap as of now, and won't be able to ask for a raise for a couple years. However, hopefully by the time they get around to signing extensions, they'll have earned them.

CapTalk: The Lakers and The Luxury Tax

In the NBA, it is common knowledge (and common sense) that some markets are just bigger than others. According to Forbes, the LA Lakers are valued at $560 million, ranked 2nd in the NBA in terms of franchise value (behind the ailing NY Knicks) in 2007. "Good for the them, they still didn't win the championship last year," you may say. This is true. However, having such a high market value gives the Lakers a noticeable advantage over other teams: their tolerancy level with regard to the luxury tax. As I explained in my last post, the luxury tax is calculated as such:

Total Team Salary - Luxury Tax Level = Luxury Tax Payment

Thus, for each dollar a team is over the luxury tax level, they pay two dollars, one which is already going to their players and one to the League, which then distributes the money to all the franchises that are under the luxury tax (a great boon for teams such as San Antonio, which classically enjoy running their team as just below salary cap level, thus giving them a several million dollar swing in overall revenue).

During the 2007-08 season, the luxury tax level was set at $67,865,000 (TrueHoop), with the Lakers being over the cap by $5,131,757. One might think that this is a lot of money, but the Lakers payment was almost one-fourth that of the NY Knicks and the Dallas Mavericks (both around $19 million). Looking ahead, the NBA announced that the salary cap for the 2008-09 season will be $71,150,000, with the Lakers salary (assuming they make no roster cuts) will be $82,305,701, giving them a luxury tax payment of around $11 million, a huge increase from last year. This is mostly due to a full-year of Pau Gasol and the new contract received by Sasha Vujacic.

However, there are two large variables that may affect these numbers in the coming years. First is whether the Lakers wish to retain Lamar Odom, who is currently making a cool $14 mil as the Lakers 4th best player, and the second is how large of an extension they give to Andrew Bynum.

Purely from a basketball stand-point, if someone were to ask, "do you want to keep Lamar Odom," I'm pretty sure Lakers GM Mitch Kupchak would say, "hell yeah," or something along those lines (maybe a more business-like line, such as "why yes!") However, with the twin towers of Bynum and Gasol taking up the power forward and center spots in the lineup, Lamar Odom is relegated to either starting at small forward or coming off the bench as either a center or PF.

Both of these propositions come with negatives. If Lamar starts at small forward, his best qualities become nullified: he has excellent speed and ball-handling skills for a guy who's 6'10", and he's an excellent rebounder. Starting at small forward would cause Lamar to be guarded by a smaller player, negating his speed and slashing ability, and take him further away from the basket, where most of the rebounds will be gobbled up by Bynum or Gasol. If Lamar comes off the bench as center or PF (most likely PF), he will have to be focused and ready to come into the game cold and contribute immediately (something which he has had problems with in the past). Plus, Lamar is making far too much money to be on the bench playing only 20-25 minutes a game (which will be all he gets with Bynum and Gasol ahead of him).

I have a tendency to lean towards the second option, with Lamar playing some sort of point forward role. Given that his contract expires this year, and he comes back at a discount (somewhat unlikely, but possible), which let's say will be around $12 mil, it will lessen the blow the Lakers take in terms of luxury tax. However, I do think shedding Lamar's contract in a trade or free agency will be a mistake, considering how well Lamar played last year.

Next is the contract extension of Andrew Bynum. Bynum will be making a little less than $3 mil this year, obviously way below his market value (with last year's averages of 13 pts, 10 rbs, and 2 blocks per game). Given that Elton Brand just signed a new contract that tops at $18 mil a year and Emeka Okafor signed an extension that tops at $14 mil a year, you can expect Bynum to be somewhere between there. Let's assume a round $15 mil per year over 5 years for Bynum as an extension. This will put the Lakers at somewhere around $30-$35 mil over the cap next year. Needless to say, this is a massive amount of money.

Honestly, I do not think the Lakers will be able to keep Odom long-term unless he takes a massive pay-cut. They are just too far over the salary cap, and their only short-term source of relief will be when Odom's contract expires next summer. An interesting point of intrigue comes in the form of Kobe Bryant's player option after next year. Bryant can choose to opt-out of his current contract and sign a new deal after next year. If Bryant were to take a marginal pay-cut (say $5-$8 mil), this would go a long way toward keeping Odom. Yet, there's really no end in sight for the Lakers.

With the contracts of Trevor Ariza, Jordan Farmar, and Chris Mihm expiring in the near future, the Lakers will have to extend deals to these key role players as well, probably pushing them further over the luxury tax level. However, without any financial ramifications, the Lakers are built to win, right now. If they want a championship, though, they may have to hurry. Those luxury tax bills will add up quickly, even for the Lakers.

The main problem children for the Lakers are the contracts of Vladimir Radmanovich (VladRad, as I like to call him) making a cool $6 mil a year to shoot three's, give up lay-ups, and sit on the bench in crunch time, and Luke Walton (or SonofBill, as he is often called on Forum Blue and Gold, the most insightful Lakers blog I've found), who signed a lucrative 6-year, $30 mil deal and promptly decided to start sucking again. The worst part is that both of their contracts are untradeable; they're too long and too costly for such little return in play.

For all their salary cap problems, the Lakers are still possibly the best positioned team in the NBA to be successful for the foreseeable future (the other being the Portland Trailblazers....*sniff*, I smell another blog post coming soon). But, championship teams have been derailed by the salary cap before, and it wouldn't be surprising if the salary cap cut the Lakers contention window a little short.

CapTalk: My Dream Job

Edit: I've decided to turn this post into a new running column, "Cap Talk," dedicated to the finances of the NBA.

Another Edit: I had to correct some mathematical errors and errors in describing the cap. This was before I had done enough reading to truly understand some nuances of the cap. Please forgive the errors.

For those of you who know me, you know that I have few very strong passions in life. These (in no particular order) are: anime, finance, mathematics, irrational thoughts, high-fructose corn-syrup, racist jokes, and basketball. The past couple weeks have really been a large mish-mash of all of those put together: catching up on my anime, applying to full time jobs, working as a math CA/starting math classes, trying to get one of my friend's laid instead of myself, eating various overly-sweetened snack products, managing to insult four ethnic minorities in the span of ten seconds, and spending a lot of excess time looking at the salaries for various NBA teams as the off-season winds down.

The first few seem pretty reasonable for me in any given week. However, the last one is seemingly a little off; most of the off-season's trading action in the NBA is over, and the regular season isn't starting for a few weeks. That's when I realized that all effort I have exhibited towards getting full-time employment in Financial Company X has been completely misguided. I've thought all along that I wanted to go into finance, into business, the corporate world, thinking that once I got there I would know what I truly wanted. Yet the more I think about it, I realize that even my greatest financial dream (running my own billion dollar hedge fund), does not even come close (both in feasibility and enjoyment) to what I would truly love to do: be an NBA Business Analyst.

"WTF is that?" you may ask. Well an NBA team is the same as any other business, they have compensation and operating costs as well as massive profits. They just happen to do it selling basketball paraphernalia and tickets to sporting events involving (mostly black) men throwing a rubber ball around a hardwood floor. Having interned at Legg Mason last summer where all I did was expense analysis, I find that this would be an amazing outlet for my skills and experience.

Even though I know I would inevitably have to start out analyzing the cost-to-benefit ratio of Kobe Bryant jerseys vs. Kobe Bryant hats, my dream would be to one day be able to focus on what I truly enjoy: analyzing the NBA trade possibilities with respect to the salary cap.

Those of you who don't know the NBA, it has a soft-cap, meaning that any team that spends over a league-set amount on player salaries has to pay the difference between what they are paying their team and the luxury tax level. This is called the luxury tax. In other words, they have to pay:

Player Salaries - Luxury Tax Level = Luxury Tax Payment

The repercussions of this is that they are effectively paying two dollars for every one dollar they are over the cap. Some teams (Lakers, Knicks, Celtics) can afford to do this because of their excessive profit margins. However, teams in smaller markets (ie Grizzlies, Timberwolves, Sonics... er, Thunder) will be unable to pay such a penalty. This naturally gives teams from larger markets an advantage. However, there are several benefits to being below the salary cap: You can sign free agents (those that make you go over the salary cap) without impunity, you can take on extra salary when trading for players, and the most obvious, you save money. But the true skill to manipulating the cap is being able to maximize the amount of talent on your team for the amount of salary you're paying.

Now players are coming and going non-stop, but this isn't half the problem. Most of the problem comes from players demanding pay-raises/contract extensions. The poster-child for this dilemma shall be the Summer of 2010, when LeBron James, Dwyane Wade, Chris Bosh, Carmelo Anthony, and a multitude of other superstars will be opting out of their rookie extension contracts and entering the free agent market. This coming season, Lebron James shall make approximately $14 million. However, given his level of talent, he is obviously worth more than that, probably upwards of $20-25 million per year. In case you didn't know, there is a very large difference between $14 million and $25 million. Cleveland's total salary for next season will be somewhere around $85 million, which will be something like $20-$25 million above the projected cap. Their dilemma lies in how much they are willing to pay in luxury taxes in order to keep James.

God, just writing about this stuff makes me cream my pants. All right, not quite, but it's close. Very close. I have a feeling it will be extremely difficult, but if this whole finance thing doesn't pan out/interest me enough, I will most definitely turn toward my new-found passion: using my math/finance knowledge on my favorite sport, basketball.