The Thunder, Pau Gasol and the salary cap

The Thunder are still relatively new to the Oklahoma City area, which means there are a lot of fans who still are not very familiar with the NBA salary cap and how it works. To really appreciate what moves are possible in free agency, you first need to have a basic understanding of how the system works.

I struggled with ways to explain this to the layman without over-complicating the matter. There are full NBA collective bargaining agreement FAQs available, but these often contain overly complex descriptions without examples that casual fans can relate to.

But then the universe provided me with an easy out: The Thunder reportedly are going after current Lakers big man Pau Gasol. Explaining how and why OKC is able to pursue Gasol will also give me the chance to explain some of the details of how the salary cap works. There are three possible avenues OKC can take to sign Gasol, but first let’s start with the basic question:

What is the salary cap?

A lot of casual fans think “salary cap” roughly translates to “teams have this much money, and once they spend it all, they’re out. They have no more.” That is what’s known as a hard cap, and that’s true in the NFL, but that’s not how it works in the NBA.

In the NBA, “salary cap” roughly translates to “this is the amount of money all teams can spend on contracts however they want.” If a team is under the salary cap, they can offer money to any free agent until they reach the cap. They don’t have to worry about exceptions, trades, salary dumping or non-guaranteed contracts; they can just spend on whomever they want until they reach the cap.

Teams that are consistently competitive and have given out big contracts are almost guaranteed to be over the cap. For context, last season’s salary cap was $58.679 million. Kevin Durant, Russell Westbrook and Serge Ibaka will make approximately $47.96 million combined next season, and that’s only on three players.

Just about any team worth its salt will naturally be over the cap. They are still able to spend money, but going over the cap restricts the ways in which they’re able to do so. This is also why the amnesty provision doesn’t do what many fans think it does.

For example, let’s say the Thunder are over the cap by $7 million and Kendrick Perkins makes $9 million. Many fans think the Thunder can just amnesty Perkins and then will have $9 million to use on free agents. That’s not how it works.

Because OKC is over the cap by $7 million, losing Perkins’ contract (they’d still have to pay him; his salary just wouldn’t count against the cap) would put them $2 million under the cap. That means they only have $2 million to freely sign new free agents. Losing big salaries can prevent teams from going into the salary tax (more on that in a bit), but it doesn’t create space that can be used freely unless that team is already under the cap. The only other way to acquire players is to use salary exceptions, which would still be true with Perkins on the team. And that’s where the Thunder’s pursuit of Pau Gasol comes in. Here are the three ways in which OKC can acquire him:

1) Use the mid-level exception

Any team that is over the cap must make use of a series of different exceptions in order to spend their money. The most commonly used in free agency is the mid-level exception, and there are actually two different versions: one for taxpayers and one for non-taxpayers.

To be labeled a taxpayer, a team must be so far over the salary cap that it dips into the league’s luxury tax. Last season, the tax limit was set at $71.748 million, or approximately $13 million more than the salary cap. If a team goes over the tax limit, it must start paying additional money on top of every dollar it spends.

The Thunder are under that tax limit, which means they have access to the non-taxpayer mid-level exception. That exception is a set number every season, and this offseason it’s $5.3 million. Basically, that means OKC has $5.3 million to spend on any free agents.

That $5.3 million can be divided up for multiple free agents or spent completely on one. So the Thunder could extend this offer to Pau Gasol, hoping he is willing to take a significant pay cut – he made more than $19 million last season – to pursue a championship.

This would provide the Thunder with the most contract flexibility. Gasol would be signed to a straightforward free-agent contract, meaning OKC could sign him to a one- or two-year deal if it wished. That would keep Gasol from still being on the books when the Thunder need to negotiate the next contracts for Durant and Westbrook.

It’s difficult to gauge how likely this outcome is, since it requires Gasol to take such a significant pay cut. Reports have indicated he is at least willing to listen to mid-level exception offers from championship contenders, so it may not be too farfetched. A more likely scenario, however:

2) Use their traded player exception

Do you remember good old Kevin Martin? Well he’s still a major factor in the Thunder’s decision-making process. When OKC lost him to Minnesota last season, they executed a sign-and-trade for him. The way that works: A potential free agent negotiates a new contract with a new team, but instead of signing directly with that team, they sign with their current team and allow themselves to be traded.

So last offseason, the Thunder signed Martin to a $6.5 million contract (which he negotiated with Minnesota) and then instantly traded him to the Timberwolves. OKC did not get back any salary in return, which creates a traded player exception. Basically, anytime you send away salary without getting back an equal amount, a traded player exception makes up the difference.

So since the Thunder traded away $6.5 million and received zero dollars in return, a $6.5 million trade exception was created. The NBA collective bargaining agreement says a $100,000 buffer is added to such exceptions, so the actual operating amount of the exception is $6.6 million.

These sorts of deals are often known as “non-simultaneous trades.” Essentially, the Thunder traded away Kevin Martin and had a year to figure out who they were actually trading him for. For two teams that are over the cap to trade players, they normally have to match salaries. But this trade exception allows OKC to acquire a player who makes $6.6 million or less without sending anything in return, regardless of their cap situation.

So now the Thunder can do the opposite of what they did last season with Minnesota. Gasol can sign a $6.6 million deal with the Lakers and be instantly traded to the Thunder for nothing in return. Just like OKC last year, the Lakers would then receive a traded player exception of their own, which they would have a year to complete.

Now you may be asking “Why would the Lakers do that? Why wouldn’t they just sign him to $6.6 million and keep him?” The CBA has a specific rule on sign-and-trades, and these deals are specifically negotiated and teams are not allowed to go back on their word. The signing carries an automatic trade with it; it’s part of the negotiation process. And Gasol wouldn’t take such a pay cut to stay in LA, where he can’t win a championship.

So Gasol would negotiate his new contract with the Thunder and tell the Lakers he plans to leave. The Lakers would then execute the trade for the purpose of getting something – the trade exception – back in return instead of just losing Gasol outright.

So, essentially, the Thunder would have traded Kevin Martin for Pau Gasol, they just would have waited a year to do it. The traded player exception must be used within a year of acquiring it, and the Thunder traded away Martin on July 11, 2013. That means they now have a week to use the exception before it disappears and becomes useless.

Using this traded player exception would allow Gasol to make more money and it would allow the Thunder to save its mid-level exception to use on other free agents. OKC has been pursuing guard Anthony Morrow as well, and he isn’t as valuable as Gasol. So it would make sense for the Thunder to use their trade exception on Gasol, then the mid-level exception on Morrow, allowing them to address their two biggest needs — an offensive post presence and strong outside shooter.

So while this may be the most likely scenario, there’s still one more possibility:

3) Use a sign-and-trade with matching salaries

As I mentioned in the above scenario, trades normally require both teams to match salaries in any deal. The concept for this scenario would be similar to the one above: Execute a sign-and-trade so the Lakers get something in return and don’t let Gasol walk for nothing. But in this case, the Thunder would send players instead of their trade exception.

Because Gasol would likely be worth at least $10 million per season on the open market, the most obvious candidate for the Thunder to trade away in this deal is Kendrick Perkins. He’s scheduled to make more than $9 million, he’ll be on the last year of his deal and he’s obviously a disposable piece on the Thunder.

However, because the Lakers wouldn’t receive a traded player exception in this scenario, they would need the pot to be sweetened. It would be naïve to think they would just take Perkins for Gasol straight up. OKC would need to toss in a young asset – most likely Perry Jones, though Andre Roberson or the rights to foreign player Tibor Pleiss are other possibilities – and a future first-round draft pick.

Then, depending on how much salary the Thunder send away in the deal, they could indirectly sign Gasol for the same amount. So let’s say OKC sends away Kendrick Perkins and Perry Jones, who are scheduled to make $10.2 million combined next season. The Lakers could sign Gasol for that amount, then instantly trade him to the Thunder for Perkins and Jones. Because the salary would be acquired by trade instead of through free agency, that would be doable.

The downside to this: Per the CBA, players acquired by sign-and-trade must be signed for at least three seasons. That could put a potentially big financial burden on the Thunder in the third year of Gasol’s deal, which is when Kevin Durant will need a new contract. If Gasol is still making $10 million, the Thunder will be more limited in what they can offer KD.

This basically would require OKC to negotiate a frontloaded contract with Gasol. Give him big money in his first year in Oklahoma City, then let that number diminish in the following two seasons, giving the Thunder more financial flexibility.

This is the win-win-win scenario. Gasol would still make good money, the Thunder would dump the Perkins contract and get a big man with offensive skill, and the Lakers would get a young asset and draft pick in return for a player who was leaving anyway. Perkins’ contract would also be an expiring deal next season, which could be attractive for any mid-season trades to make salaries work.

In case some of this has been a little too confusing, lets break down the three Gasol scenarios in note form:

1) Use the mid-level exception
– Because OKC isn’t in the luxury tax, it has $5.3 million to spend
– That number can be spread across multiple free agents or spent on one
– This would require Gasol to accept a $5.3 million deal, a significant pay cut

2) Use the traded player exception
– Because OKC traded Kevin Martin, it has a $6.6 million trade exception
– This allows OKC to trade for anyone who makes up to that much money
– The Lakers could sign and trade Gasol to get their own exception
– This would allow OKC to save the MLE for other free agents

3) Use a sign-and-trade with matching salaries
– Would need to be centered on sending Kendrick Perkins to the Lakers
– Would allow OKC to sign Gasol for approximately $10 million
– For the Lakers to take it, OKC would have to include a young asset and pick
– Would be the most beneficial for all parties (except for Perkins)

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