Friday, July 25, 2008

Professor McFruity: Understanding the Mid-Level Exception and Restricted Free Agency

(That's Josh Childress signing a contract in Athens)

I have written a lot lately about Josh Childress, the mid-level exception, and restricted free agency, and it has been brought to my attention that not all of my reader(s) understand exactly what these things are. So here's a little breakdown.

Mid-Level Exception: The basics
The mid-level exception is an amount that every team in the NBA is allowed to spend each season even if they are over the salary cap. It's an "exception" because it allows teams to spend more on player salaries than the salary cap normally allows for. The mid-level exception is, as its name suggests, equal to the league average salary (it's not technically the exact average, but close enough). For the upcoming year, the mid-level exception amount is $5.585 million. Further, a mid-level contract offer can last up to 5 years, with a maximum 8% raise each year. Finally, the mid-level exception can be split up and offered to multiple players, but cannot be combined with cap space to offer a larger contract to a player.

MLE Background
To understand the mid-level exception, you have to remember that in the NBA, there is a salary cap. So let's go back a few steps and figure out what all this is. First of all, most of the rules regarding player salaries and benefits are enumerated in the Collective Bargaining Agreement, or CBA. The CBA is an agreement between the NBA Players Association, which is like the union for NBA players, and the NBA (their employer). Among other things, the CBA guarantees the players as a group will receive 57% of NBA revenues each year. For the purposes of this discussion, the important things to note are that the CBA defines, each year, a salary cap, a minimum payroll (the minimum that each team must spend on players in a given year, equal to 75% of the cap), maximum and minimum salaries for individual players based on years of service, rookie salary scales, and the exceptions to the salary cap. In a future post, I'll go over the relationship of rookie salary limits and European players.

The CBA allows for a series of notable exceptions to the salary cap. This link has an explanation of every single one of these exceptions. As you can see, there are a lot of ways that a team can spend over the salary cap, which is why, in practice, the luxury tax often serves as more of a threshold that teams aren't willing to go over. This article includes a little background on what the motivations were for having a mid-level exception at all. The basic idea is that before there existed a mid-level exception, decent players who became free agents would get severely underpaid in years in which not many teams had salary cap space (ie, had a total payroll below the salary cap, allowing them to sign free agents for more than the minimum salary). So the mid-level exception came around, which allows teams to go over the salary cap and sign players to league-average contracts. Historically, the mid-level is often misused to overpay below-average players (example: Jerome James in New York), to fill in a missing piece for a good team (James Posey this year with the Hornets) or to make lowball offers to above-average free agents when the market for the free agent's services is limited (this is basically the situation that Josh Childress was in this summer). A team who has employed a player for a couple years is entitled to his "Bird rights," meaning they can go over the salary cap to make whatever offer they think is appropriate, but if the team is cheap, like the Hawks, they may still try to squeeze the player if they think he doesn't have other options. I won't go into the notion of the "sign and trade" here except to point out that as you increase the number of parties in a negotiation, it becomes that much harder to reach an agreement.

Restricted Free Agency
Ok, so in talking about Childress I've also often brought up the idea of Restricted Free Agency. What is that? Restricted Free Agency exists only for players who are early in their careers (first 3-4 years in the league), and is kind of like a compromise/limbo between true free agency and no free agency. When a player becomes a restricted free agent, he is able to shop his services to any team in the league, as would a regular free agent, but if he agrees to a contract offer from one of the teams, his current team has the right (the team acquires the right by extending a one-year qualifying offer to the player) to match the offer within 7 days and keep the player. Theoretically, restricted free agency should allow a player to determine his worth in the market and get paid. However, there's a glitch. To see why, consider this hypothetical example: Mr. Player just finished his fourth season for Team A, and is now a restricted free agent. Experts have determined that a fair salary for Mr. Player, given his current production and his projected growth, is $9 million/year. Team B is currently $12 million under the cap, and is interested in signing Mr. Player, and they've also developed back-up plans in case they are unable to reach an agreement with Mr. Player. However, they know that Team A likes Mr. Player and would probably match a fair offer. Because Team A has 7 days to match the offer, Team B is worried: once they extend an offer to Mr. Player, the proposed contract begins to count against the cap even though they might not end up employing Mr. Player. So in a worst-case scenario, they extend a fair offer to Player, Team A waits 7 days and then matches the offer, and in the intervening week (while Team B was only allowed $3 million in cap room while awaiting a decision regarding Mr. Player) the players that Team B targeted in their backup plans have signed with other teams. So Team B is left completely stranded. This possibility is what often stops teams from even making an offer to a restricted free agent -- the possibility of losing their cap room for 7 days and ending up with nothing. The only ways around this dilemma for Team B are to overpay for Mr. Player to such an extent that Team A no longer has an interest in matching the offer (for instance, offering all $12 million that they have available), or skipping Mr. Player altogether and going straight to the back-up plans. As we've seen, teams that overpay non-superstars tend to get mired in mediocrity for long stretches, so in practice a lot of teams with cap space just avoid making offers to restricted free agents (note, for instance, that Josh Smith, a promising and future all-star that a lot of teams would love to have has not signed an offer with any team yet). Now, there are other teams without cap space who might be interested in Mr. Player but all they can offer is the mid-level exception of about $6 million. Team A can now offer $7 million, which is more than any other team can afford, and they get Mr. Player for $2 million less than he's worth. So, traditionally, players have no leverage as restricted free agents, and this article highlights the extent to which they end up underpaid relative to their true free agent peers. The way Josh Childress got around this, of course, was by gaining leverage outside of the NBA. So yeah, good for him. Also, he seems to be having a great time in Greece (via TrueHoop):

Links to check out if you want to know more
Everything you ever wanted to know about the CBA and the salary cap is explained clearly here. It's much easier to search that site than to try to wade through the text of the CBA.

For current and future salaries for every team, the most thorough and up-to-date sites I've found are: ShamSports, HoopsHype, and draftexpress. The draftexpress site is particularly useful because it allows you to search and sort salaries by a variety of criteria, while ShamSports is very accurate and detailed. HoopsHype is easy to navigate.

For past salaries, basketball-reference has salaries for each year by team if you look at the team pages, and by player (for each year the player has played) at individual player pages.

Ongoing transactions can be tracked at nbastuffer. That's a great reference to keep up on where everyone is going in the offseason.

And finally
This is totally unrelated, but I found it sort of amusing. A comment at freedarko by someone named "The Other Van Gundy" -- "Maybe all of Childress's Stanford friends went abroad and he felt like he missed out. That's the solidly middle class thing to do, right? Go to Europe and maybe get a handjob from some Dutch girl?"

1 comment:

  1. i now have a grasp of the mid-level exception!

    and i learned about restricted free agency as an added bonus!

    a classy writer who answers his uninformed fans questions. thank you fruithoopz!