How the NBA salary cap devastates the New York Knicks

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For NBA executives, the magnitude of the impending off-season trumps even the on-court performance of their team. Alas, these managerial transactions are often baffling even to the most refined fan. Why can’t the team sign a particular free agent? How can the team trade or re-sign certain players? Why would it waive or amnesty someone?

The resolution to those propositions lies in the adequacy of team’s navigation of the NBA salary cap. In theory, a cap on salaries benefits the entire league by enabling teams to control its spending on players while simultaneously promoting league parity.

Spending control

Left to their own devices, general managers are tempted to hand out big contracts to ensure immediate results. These urges are often fueled by an eager owner yearning for the services of a player perceived to be a star. Because the star quality of the majority of players is subjective – save a LeBron – results often do not commensurate with the size of the contract.

As been repeatedly demonstrated, signing the wrong player for big money can devastate a franchise for years, sometimes decades. The futility of the New York Knicks in the last 14-plus years can be directly attributed to the dreadful contracts ‘Doled’ out to the likes of Allen Houston, Stephon Marbury, Eddie Curry, Jerome Jones and Amar’e Stoudemire – obligations exceeding $360 million.

Without the existence of a salary cap, can anyone expect Knicks owner James Dolan to make shrewder signings in the face of increasing unpopularity and mounting pressure from the fan base? In other words, the salary cap creates the prospect of saving the owners from themselves.

League parity

If limiting costs controls expenses, league parity increases revenues. In a free NBA market, only a handful of owners, typically located in large markets (New York, Los Angeles, Chicago), would have the resources to sign the best players and, therefore, remain competitive. Through the salary cap, minor market teams have the ability to attract the type of players that enable teams – e.g. the Spurs or the Thunder – to become and remain successful.

A balanced, competitive league increases the quality of any regular season game and gives fans an emotional investment in their local team. The resulting increase of gate, merchandise and television revenues – as well as the increased status of the game itself – benefits all NBA teams and the value of the league itself.

Yet, even with a salary cap in place, no cost restrictions will prevent a team from making the kind of player transaction that can cause significant damage to the long-term prospects of the franchise. Mr. Dolan is clearly exhibit one. Therefore, the importance of competently navigating the cap cannot be understated.

The NBA version of the cap

The NBA salary cap is the most complex of its kind – a system laden with enough intricate complexities to comprise a college major. It’s unique among U.S. professional major league sports in that it employs a “soft” cap. While MLB has no cap, both the NFL and the NHL instituted a “hard” cap which, under no circumstances, may be surpassed. By contrast, NBA teams are able to exceed the salary cap in one of two ways – either through a dollar-for-dollar luxury tax or by utilizing one of the available cap exceptions.

The cap limits change annually. Interestingly, the NBA does not release the cap figures for the upcoming season until the end of the moratorium period – when no contracts can be signed – and free agency season begins. For the 2014-2015 season, the maximum amount a team is permitted to shell out in collective player salaries is close to $63.1 million. Roughly half (14) of the league’s 30 teams currently fall below that ceiling.

Bird exception, mid-level exception, traded player exception, designated player exception, room exception and the like – all convoluted avenues for a team to sign players while exceeding the cap maximum with impunity. Even within each exemption, each player must be evaluated on a sliding scale based on various factors such as the amount of years played and which team is offering the contract. The details of the various exceptions are therefore subjects of a different schmooze. Currently, twelve teams exceed the cap maximum without paying the luxury tax.

The remaining four teams are in luxury tax territory. The Knicks are infamously one of them – with the Nets, Clippers and Celtics rounding out the list. Similar to the maximum cap figure, the level at which luxury tax may be charged is an equation negotiated as part of the Collective Bargaining Agreement between the owners and players. For the 2014-2015 season, the luxury tax threshold is approximately $76.8 million. Teams whose salaries exceed this threshold pay a dollar-for-dollar tax on the excess amount into a league-wide escrow fund. The beneficiaries are teams below the maximum cap.

The Apron tax as the key restriction

There’s yet another threshold level. The “apron tax” is always set at $4 million above the luxury tax – this season: $80.8 million. Exceeding the apron tax carries consequences beyond monetary penalties in that it limits the use of certain cap exceptions, making it difficult for those teams to acquire any players – much less a good one. Naturally, the two New York teams, by far, surpass all thresholds – including the apron. Still needing to sign its draft choices to rookie contracts, the Knicks payroll is estimated to reach $91.4 million.

Mr. Dolan may consider luxury tax payments a slap on the wrist, but exceeding the apron restrains the Knicks in other significant ways. Arrays of various exceptions become unavailable – e.g. the bi-annual exception cannot be used, the mid-level exception becomes smaller – all limiting the Knicks from signing adequate players to support Carmelo Anthony. In trading a player, the Knicks essentially must ship out more salary than they bring in – typically an unattractive option for teams looking to add talent. The Knicks will also be unable to receive a player in a sign-and-trade transaction.

Hence the organization is extremely limited in its ability to sign or acquire players. More than likely, the team will settle on players acquired through the minor cap exceptions, resigning to another mediocre season at best. Rather than rooting for the folks in jerseys, Knicks fans are cheering for the front-office suits to withstand any impulse to take on contracts that extend beyond this season. The 2015 offseason will see the Knicks below the cap for the first time in the 21st century.

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