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CBA 101: An Introduction to the Basics of the Salary Cap

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Daniel Hackett starts his CBA 101 series with a look at the basics of the salary cap, including exceptions, Bird Rights and cap holds.

John E. Sokolowski-USA TODAY Sports

Hey all. Welcome to the first of a series of posts where I'll be outlining the basic rules of the NBA Collective Bargaining Agreement. We'll start out simple, and gradually get more complicated.

Good sources for more information on the salary cap include the CBA itself and of course Larry Coon's CBAfaq.com.

In this post, I'm going to talk about the salary cap in the most general sense, and touch on some key ideas to understand when talking about team salaries, cap room, and exceptions.

The Salary Cap

Let's start with the very basics. A salary cap is a limit to the amount a team can spend in terms of annual salary.  A traditional salary cap is a hard cap - every team can spend up to the salary cap amount, but no more.

The NBA's salary cap is not a simple hard cap.  They employ what is called a "soft cap."  With a soft cap, a team can only sign free agents up to the cap, just like with a hard cap.  So a team with $20 million in room under the cap can sign a $20 million free agent, and a team with less than $20 million in cap space cannot.

The difference with a soft cap is that there are exceptions that allow teams to spend money to move their total salary above the cap, in very specific ways.

For reference, this year's salary cap is about $63 million.

Exceptions

There are very specific ways that teams can exceed the cap. The following are the most common exceptions to the salary cap.

  1. Minimum Salary Exception:  At any time, a team can sign a player to the minimum salary, on a one or two year deal.  They do not need cap room to do so.  The veteran minimum salary this year is $915,000 (rookies and sophomores on minimum deals make a bit less).
  2. Mid-Level Exception (MLE):  Every year, each team can sign a player to a contract for approximately the league average salary, even if they do not have cap room to do so.  The MLE this year is a contract starting at $5.3 million, for up to 4 years.  The MLE can be split to sign more than one player - so long as the salaries do not combine to exceed that $5.3 million total. As a note, there are different versions of the MLE - there is a smaller version for tax-paying teams, and an even smaller version for teams that used cap room to sign a free agent first.  There is also an exception called the Bi-Annual Exception - it is like another MLE, but smaller, and can only be used every other year.
  3. Traded Player Exception:  If you make a trade, and you are over the cap, you can receive more salary coming back in that trade than you send out, within certain limits (typically between 25% and 50% more).  This allows teams to increase their salary through trades.  Not to be confused with trade exceptions (where a team can absorb a salary without any outgoing salary), often confusingly referred to as TPE's, which we will get into in a later post.
  4. Bird Rights:  Bird Rights, named after Larry Bird, are a team's right to re-sign its own free agents. So, if you have a player who played with your team last year, and you want to re-sign him, you do not need cap room to do so. As with the MLE, there are a bunch of different versions of Bird Rights, but they all essentially boil down to re-signing your own free agents without cap room.

The Problem with Bird Rights

So, there is a problem with the idea of Bird Rights. Can anyone see it?  The issue is as follows.

Let's use the example of the Toronto Raptors this past summer.  Coming into the summer, they had three important players heading to free agency - Kyle Lowry, Patrick Patterson, and Greivis Vasquez.  With the rest of their players, they had about $50 million in committed salary.  That meant they had over $10 million in cap room to work with.  Now, clearly the team could not sign all three players with that $10 million.  Luckily, Bird Rights would allow them to sign all three even though they didn't have cap room for all three.  Here's the trick though - that seems like a waste of that $10 million in cap room, right?  They'd be able to sign all three whether they had $10 million or no cap room at all, because of their Bird Rights.

So a smart front office might think:  What if we signed a free agent (let's say, Luol Deng) for $10 million, then used our Bird Rights to re-sign our free agents?

Based on the simple definition of Bird Rights, there's no reason why that wouldn't work.  But it is not in the spirit of what Bird Rights are for - they aren't supposed to open the door to drastically improve your team.  They are meant to help keep an existing team together.

So, the enterprising folks down at the NBA offices came up with the idea of a cap hold.

Cap Holds

A cap hold is a dollar amount that sits on a team's cap and prevents them from exploiting loopholes like the one described above.  Basically, any player to whom you have the rights, has a cap hold associated with them, that sits on your team salary and clogs up space (reserves that cap room for the free agent).  You can free up that cap room by renouncing your rights to the player - meaning you can no longer exceed the cap to re-sign them.

This past summer, the Raptors had that $10+ million in potential cap room, but they also had cap holds for Lowry, Patterson and Vasquez on their cap.  Those cap holds added up to over $20 million - meaning the Raptors actually had no cap room at all, unless they let all their free agents walk.  So, you can see that cap holds work to close that loop hole.

Other kinds of cap holds exist as well.  Unsigned first round draft picks have a cap hold.  Empty roster spots have a cap hold (for the minimum salary) so that you can't use all your cap space then use the minimum salary exception to fill out your roster.

So there you have it.  That is basically how the salary cap works to separate teams with cap room from those who are using exceptions to exceed the cap.  Next week we'll touch on the other team salary thresholds (the tax, the apron, and the floor).  Then we'll get into more detail on things like trades, extensions, and other common salary cap issues.

As we go along with this, I'll try to answer any specific questions related to the post in the comments, but if there are any larger topics you want covered, sound off in the comments as well, and I'll dedicate a future post to covering it in-depth.