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June 27, 2008

Resigning Chris Paul to a long-term deal is a top priority for the Hornets during this free-agency period.
As everyone around the NBA realizes, the New Orleans Hornets are entering the 2008 free-agency period with one primary objective: to sign All-Star and Most Valuable Player runner-up Chris Paul to a contract extension. Obviously, the team will be required to make a significant investment in CP3 in order to sign him long term. But with three other Hornets starters already locked in to lucrative and long-term deals, how does New Orleans have enough cap flexibility to offer the 6-foot point guard a large deal?

To answer this question and learn more about the salary cap and the moves NBA front offices make, we sat down with Hornets director of basketball administration Andrew Loomis. The Tulane University graduate assists Hornets general manager Jeff Bower in assessing the teams salary-cap situation and is involved in all Hornets player contracts.

Like many things in life, due to the complexity of the rules governing it, there are plenty of misconceptions or half-truths that are often reported by the media or discussed by fans about the salary cap.

Here are six things you might not know about the cap and NBA finances:

1) Spending equals winning? Not necessarily.
Hornets director of basketball administration Andrew Loomis
Unlike in Major League Baseball, where franchises at the top of the payroll lists such as the Boston Red Sox and New York Yankees are consistent playoff qualifiers, there is no strong correlation in the NBA between team salaries and competitiveness. The New York Knicks have had one of the leagues top-two payrolls in recent seasons, yet they havent had a winning season since 2000-01.

According to the website Hoops Hype, the Knicks had the NBAs second-highest payroll in 2007-08, behind Dallas. In another example, Miami was seventh in highest payroll, yet finished with the worst record in the league.

At the opposite end of the spectrum, Utah and Orlando both won division titles during the 2007-08 season, despite ranking 26th and 27th, respectively, in team payroll (New Orleans was 19th, according to Hoops Hype).

To have a quality basketball team, you dont have to spend, spend, spend, Loomis says. You have to be savvy with how you spend, and careful with how you spend. One thing people look at is cost-per-win. For the Hornets, as a business, our cost-per-win may have been lower than a lot of teams (in 2007-08). Thats something we assess at the end of the year to see how we did (as a front office) from a business standpoint.

2) Teams that manage their salary cap effectively do so by planning years in advance
Salary-cap managers throughout the NBA put together spreadsheets that map out how much money each of their teams players will make over the next several years. The document provides teams with a simple way to monitor what they have already committed in payroll for future seasons.

In the Hornets case, the bottom line on their spreadsheet for 2008-09 is partly impacted by player options. For example, if Melvin Ely picks up his player option for next season to ensure his return to the Hornets, his salary-cap figure will be included in next seasons payroll. If Ely declines his option thereby becoming an unrestricted free agent who can sign with any NBA team his new cap number would become $0. Jannero Pargo also has a player option for 2008-09 that he has said he will exercise, to become a UFA. New Orleans has a team option on Hilton Armstrong for the 2009-10 season based on his rookie contract; the Hornets have until Oct. 31, 2008 to pick up Armstrongs option.

3) and staggering contracts.
In some instances, it makes sense to front-load a players long-term contract, because by doing so, it clears more salary-cap room in the latter years of the deal. For example, if the Hornets anticipate signing Player B to a lucrative deal beginning in 2010, but are currently in talks with Player A on a long-term contract of his own, they may draw up a payment schedule that gives Player A more money in, say, the first two years of his four-year agreement. That way, there will be more salary-cap room for Player B to re-sign when his deal kicks in during the 2010-11 season.

Its important to note that as a result of this approach, a player who signs a four-year, $40 million contract is not necessarily making exactly $10 million in each year of his contract. For example, he may actually be making $15 million the first year, $10 million in each of the next two years, and $5 million in Year 4 of the deal. A teams salary-cap number is computed separately from year to year; it is NOT based on the average salary of a player over the length of his contract.

Players and agents often agree to front-loaded contracts for two reasons. Obviously, drawing up a deal this way means they get a larger amount of money sooner. But it also often makes it easier for the team to reach a contract agreement that is palatable to both sides.

Jannero Pargo is New Orleans most significant free agent entering the 2000 signing period.
4) Exceptions provide teams with more flexibility than you might think.
When you read about how a certain NBA team has no room under the salary cap, you may believe that means the club is completely hamstrung and unable to make moves to improve its roster. Thats not entirely true. There are several clauses in the collective-bargaining agreement (CBA), known as exceptions, that enable teams to sign free agents from other teams or their own roster.

The most prominent exceptions are: a) the mid-level exception and b) the bi-annual exception. The mid-level exception is valued at the leagues average salary, or roughly $5 million. The bi-annual exception can be used by teams in non-consecutive years to sign another teams free agent.

You can get the cap to work for you, rather than against you, Loomis explains. Given the amount of exceptions that exist, if you are savvy and have understanding of the rules, its a benefit. You dont have to go out and be extreme. You have to be methodical and strategic in how you plan for everything.

5) The NBAs rules allow teams to retain veteran players more easily than in other sports.
Under a provision known as the Larry Bird Exception, a team can re-sign its own free agents without those contract values counting against the salary cap. That makes it considerably more likely that a star player will play his entire career with the same NBA team, if thats his desire. Thats a stark contrast to the NFL, which has a rigid salary cap. In pro football, players often price themselves out of being able to return to their current team, because NFL teams have a finite amount of money to spend under the cap. The NFLs usage of a hard salary cap is a primary reason behind why Super Bowl-winning teams often lose a large group of their key contributors during the ensuing offseason. Its also why NFL teams often have to make the gut-wrenching decisions to release longtime, productive veterans who may also be fan favorites, but are scheduled to make too much money to justify a return to the roster.

6) League officials are valued resources in sorting out the rules of the CBA.
The collective-bargaining agreement is a complex document that is written in legal language and is 280 pages in length (the actual document can be viewed on the Players Association website, www.nbpa.org). The CBA is so extensive that its possible that no one has a firm understanding of every single rule in the book.

We rely on the NBA league offices legal department to clarify interpretations of rules, says Loomis, who makes a point of re-reading the entire CBA every offseason. If there are questions about how a rule applies, they are a phone call away, whether its contract-related issues or player-related issues. They are an invaluable resource for us in trying to answer questions we might have.

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