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Salary Cap Freakonomics

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Salary Cap Freakonomics

With the free agent market officially open for business starting at 12:01am EDT on July 1, Philadelphia 76ers President and General Manager Ed Stefanski is at the front of the line, as the Sixers are one of the few teams with significant salary cap space.

As was the case with the draft process, Stefanski will have plenty of support from within the Sixers front office, but there is one employee whose contributions are vital to the cause but doesn’t see his name appear in the news.

Andy Speiser, Senior Vice President of Finance and Chief Financial Officer for the Sixers, does more than just balance the books; he is also an advisor to Stefanski on matters regarding the complexities of the NBA salary cap.

In his 16th year with the franchise, Speiser is a life-long sports fan who found his way to the Sixers more by chance than anything.

Prior to joining the Sixers, Speiser worked for McDonnell Douglas Truck Services as their corporate controller. Through that position, he dealt with the audit firm which also did business with then-Sixers owner Harold Katz. Katz was in search of a new controller/CFO and asked the firm to supply candidates. Speiser was the firm’s recommendation.

"I thought getting the job offer would be a long shot," Speiser said. "So I went into the interview process with the goal of getting a second interview because I wanted to meet Harold Katz. Who gets to meet a sports owner? Obviously, I got the interview with Harold, was offered the job and the rest is history."

During his first season with the team, Katz called Speiser to ask for his help in answering a salary cap question.

"I was very excited and thought, 'Here’s an opportunity,'" Speiser said. "I researched the heck out of it and made sure what I provided him with was the most thorough, decisive answer hoping he would come back to me with more cap questions... and he did."

Keep in mind that these duties are in addition to Speiser’s main role of overseeing the franchise’s finances. This puts him in an unusual situation of being an “outsider” with inside information on the potential deals Stefanski and the Sixers front office discuss.

"For every deal made, there are a hundred that aren’t," Speiser explained. "My family and friends get mad because I can’t tell them about rumors or divulge any transactions before they happen."

Even though Speiser admits to being a huge NBA fan, he is quick to point out he separates his personal opinions from this aspect of his job.

"It is not my job to give advice on the evaluation of players we are signing or trading for, so I don’t," Speiser said. "Obviously, everyone has their opinions but I have no trouble keeping my mouth shut. I’m very aware of my role."

When most people hear trades being discussed, they think of the impact it will have on the teams involved. Not Speiser. His first thought is whether or not the trade works.

"That’s how my mind works, no question," Speiser said. "When I’m talking hoops with friends and trade scenarios come up, I try not to squash anyone’s dream trade, but I’m always working out the numbers in my mind to see if the trade works under the salary cap rules. Usually they don’t."

Speiser is quick to point that it’s a combined effort in tackling the salary cap.

"Salary cap analysis is a collaborative effort," explains Speiser. "Ed (Stefanski) and Tony (DiLeo - Sixers Senior Vice President and Assistant General Manager) are both cap experts and I know my stuff as well. There’s no one person who can do it all. We’re a team."

SIXERS.COM sat down with Speiser to have him explain some of the terminology and rules related to free agency and the salary cap that you’ll be hearing this summer, from the basics to the detailed.

Why can teams go over the salary cap in the NBA?
Speiser: Bottom line is even though there is a salary cap, there are seven exceptions that allow you to sign players and exceed the cap. It’s not a hard cap like football and hockey have.

The most commonly used exception is the Free Agent Exception. When one of your players has an expiring contract, you can sign him to a contract and exceed the cap. How much you can sign him for depends on which of the three categories he falls in. There is a) The Bird Exception, b) The Early Bird Exception, and c) The Non-Bird Exception.

SIXERS.COM NOTE: Below is the detailed explanation of each of these provisions:

(1) Qualifying Veteran Free Agent (“Bird”) Exception. A team may re-sign its own free agent to a first-year salary of up to the maximum player salary if he played for the team for some or all of each of the prior three consecutive seasons (or, if he changed teams, he did so by trade).

(2) Early Qualifying Veteran Free Agent ("Early Bird") Exception. A team may re-sign its own free agent to a first-year salary of up to the greater of (a) 175% of the player’s salary in the last season of his prior contract, or (b) 108% of the average player salary for the prior season, if he played for the team for some or all of each of the prior two consecutive seasons (or, if he changed teams, he did so by trade). A contract signed using the Early Bird Exception must be for at least two seasons.

(3) Non-Qualifying Veteran Free Agent ("Non-Bird") Exception. A team may re-sign its own free agent who is neither a "Bird" nor an "Early Bird" player to a first-year salary of up to the greater of (a) 120% of the player’s salary in the last season of his prior contract, (b) 120% of the player’s applicable minimum salary for the current season, or (c) if the player is a Restricted Free Agent, his Qualifying Offer amount.

What are the other types of exceptions teams can use to sign players, even when they are over the salary cap?
Speiser: The other exceptions include:

1)The Mid-Level Exception. Teams can sign one or more players to contracts whose first year salaries total no more than 108% of the Average Player Salary for the prior season [that figure was $5.356 million in 2007-08]. It can be used to sign your own free agent or another team’s free agent and the term can be for a maximum of five seasons. This exception can be used every season.

2) The Bi-Annual Exception. This exception was $1.83 million last season and will be $1.91 million this season. It’s when you can sign a player, or players, to a one or two year contract(s) and you can use it every other year.

SIXERS.COM NOTE: The Sixers did not use their Bi-Annual Exception in 2007-08, therefore it is available to them for the upcoming season.

3) The Rookie Exception. Teams can sign their first round pick for up to 120% of his Rookie Wage Scale amount. The contract cannot be for less than 80% of the Rookie Wage Scale amount.

4) The Minimum Salary Exception. You can always sign a player a minimum salary contract for either one or two years.

5) The Disabled Player Exception. This one doesn’t get used very often. That’s where you can replace a player who suffers a season-ending injury with another player making up to 50% of the injured player’s salary up to a maximum of 108% of the average player salary for the prior season.

SIXERS.COM NOTE: There are two rules to using this exception as outlined below by the NBA’s official language

(a) If the player is injured between July 1 and November 30 and is determined to be out for that season, the team has 45 days from the date the Exception arose to use the Exception (In general, a Disabled Player Exception arises on the date the team knew or reasonably should have known that they injury or illness would cause the player to miss the season); or

(b) If the player is injured between December 1 and June 30 and is determined to be out for the subsequent season, the team has until the following October 1 to use the Exception.

6) Finally, there’s the Traded Player Exception. If you’re over the cap a traded player can be "simultaneously" replaced (in the same trade) with a player or players whose total salaries are within 125% of the salaries you are trading away.

Also, a traded player can be replaced in a “non-simultaneous” transaction by one or more players whose total salaries do not exceed 100% of the salaries you have traded away.

Explain how teams can sign another team’s free agent to a multi-year deal when the average salary of the deal exceeds the team’s current cap space.
Speiser: You can use all your cap room for the first year salary and can then increase (or decrease) by up to 8% of the first year salary during the term of the contract. For example if you had a contract with the first year salary of $10 million, the annual salary can increase (or decrease) $800,000 during each year of the contract.

Why do free agents still count against the cap for a team when they are unsigned?
Speiser: Your own free agents are included in your team salary as a "cap hold" until they are either signed or renounced. They are included as a cap hold in your team salary at an amount determined by their prior year salary and their length of service.

How can a team with cap space, which has its own free agents it wants to resign, still go out and sign another team’s free agent?
Speiser: A strategy might be to first negotiate with another team’s free agent and use your cap room to sign them. Then come back and negotiate with your own free agent and sign them with one of the Free Agent Exceptions listed above.

How do Base Year Compensation players affect trades?
Speiser: If a team is over the cap when they sign their own free agent and his first year salary has increased by more than 20% over the last year of the old contract, he is subject to base year compensation. If he is then traded within a year of the contract signing date, the trade exception applicable for the team is 50% of his salary. That makes it very difficult to trade the player during that first year.

Can you explain the Luxury Tax?
Speiser: Every season there is a "Tax Trigger" amount that is calculated at 61% of the league-wide revenues (divided by 30 for the total teams in the league). At the end of the season, if your team salary is over the "trigger" you must pay a dollar for dollar tax to the league for the amount you are over.

Every year, the NBA announces the new Salary Cap number. Is part of your job to try and predict whether the cap will increase and if so, by how much?
Speiser: Yes, and it becomes more important in a year like this when we are under the salary cap so we can project how much room we will have.

Every team gets audited each year to determine the exact revenues and player costs for the season just ended. Those figures are used to project out and set for the next year the Salary Cap, the Luxury Tax level, the Mid-Level Exception and the individual Maximum salaries. Those figures will be announced on July 8th and, in the meantime, we project what we think that number will be. We try to do conservative projections and you’ve heard Ed [Stefanski] say we think we will have at least $11 million in cap space this summer.

You always hear of signing bonuses in regards to NFL contracts, but not with NBA deals. Why is that? Also, how do they count against the cap?
Speiser: The reason for that is the NBA primarily has fully guaranteed contracts while the NFL does not; so with NFL contracts the signing bonus is the guaranteed money. Signing bonuses in the NBA count against the cap and are spread evenly over the length of the contract.

When Golden State traded Jason Richardson to Charlotte on Draft Day last season, the Warriors received a $10 million trade exemption from making the deal. What does that mean and how does a team get a trade exemption?
Speiser: This is an example of creating a trade exception in a “non-simultaneous” transaction, as described above. When that occurs, you have up to one year from the original trade to utilize the exception.

SIXERS.COM NOTE: In the Golden State/Charlotte scenario… the Bobcats had the requisite cap space to absorb Jason Richardson’s contract without trading back equal salary to the Warriors; Golden State therefore received a trade exception for the disparity in salary from the trade

What does it mean when players have “Limited Salary Protection”?
Speiser: Though most contracts in the NBA are fully guaranteed, not all of them are. So, for example, maybe a team has only guaranteed a portion of the last year’s compensation for that particular player contract.