The 2010 Free Agency Feeding Frenzy? Not Going to Happen? Why Extensions Will Be Signed Across the Board!

The media buzz for the past two years has been huge around the free agent class of 2010. We are told that many teams are dumping salary to clear cap space for that year. The draw is, of course, LeBron James, Dwyane Wade, Carmelo Anthony, Amare Stoudemire and Chris Bosh among the top players. All are either reported to have opt-out or player option clauses to exercise before June 30, 2010 making them possible free agents in 2010. Sorry folks the party might be over before it starts. In my review below you will see that the max contract players who are offered an extension this year will likely take them or lose huge salary money. The major free agent market in 2010 will instead deflate into mostly lesser players. I recognize that marketing contracts might offset this loss but that is a factor unknown to me so for the sake of discussion I am leaving it out. If you have specific facts that cover this factor you are welcome to cite them below along with the discussion. I also recognize the allure of two of the above playing together and that also is an unknown to be debated but one or both will take a monetary hit to do so. Read the review and consider the discussion questions below:

Free Agents are limited to a maximum contract amount in the first year (for 7-year veterans) of 30% of the salary cap. They negotiated player options or opt-out clauses because they expected the salary cap to remain stable or continue to rise as it has every year in recent times and because their present contracts limited them to 25% of the salary cap for the first year when effective. However the salary cap's decline this year and the expected drop next year ($8M expected) has changed the numbers drastically.

A Player may sign for 6 years with his own team and 5 years with another team Signing with the same team yields 10.5% of first year increases each year. Signing with another team yields 8% of first year increases each year. These differences are valued below.

For contracts effective 2007-2008 the maximum salary for a player of four years was $13.0M and increased to $17.1M for 2010-2011 (opt-out year). In the first two years following the signing of those contracts the above five saw the salary cap increase from $53.1M to $58.7M (110% increase). A similar increase over the next two years would bring the salary cap to $64.8M and a nice benefit for opting out. However the salary cap has now declined in year three and is expected to drop to $50M in 2010. So with 30% of of $50M maximum to re-sign with their own team a player receives $15M (note the actual amount is smaller by a 1% or 2% because of escrow I think) in the first year providing a net reduction of $2.1M from his opt-out year. But wait it gets worse. That is first year. You may already know all that.

My reading of the Larry Coon's excellent NBA Salary Cap FAQ would indicate that a Larry Bird Exception for re-signing a player has a maximum of that 30% of salary cap. However the extension of a player is based on the last year of his present contract plus 10.5% of first year increases. That changes the equation even more. Once opt-out is taken that right is presumably lost. (note the numbers may not add for rounding) I had an assist in this fanpost from an article here by George Thomas on Ohio.com. (Stoudemire's numbers are slightly higher)

Numerical Review:

2010-2011 Salary Cap = $50.0M (all numbers in millions)

                                  Opt out        Opt out      Extend with
                              Same Team   New Team  Same Team
2010-2011                  $14.1            $14.1              $17.1
2011-2012                  $15.5            $15.2              $18.9
2012-2013                  $17.0            $16.3              $20.9
2013-2014                  $18.5            $17.4              $22.6
2014-2015                  $20.0            $18.6              $24.3
2015-2016                  $21.4            $20.5              $26.1

Totals                       $106.5         $102.1             $130.1

2010-2011 Salary Cap = $57.7M (all numbers in millions)

                                  Opt out       Opt out       Extend with
                              Same Team  New Team    Same Team
2010-2011                   $16.2         $16.2               $17.1
2011-2012                   $17.9         $17.5               $18.9
2012-2013                   $19.6         $18.8               $20.9
2013-2014                   $21.3         $20.1               $22.6
2014-2015                   $23.0         $21.4               $24.3
2015-2016                   $24.7         $23.7               $26.1

Totals                        $122.9       $117.8             $130.1

Summary:

The difference between old team and new team signing for a max contract free agent in 2010-2011 works out to be $5.1M over the life of the contract favoring the old team if the salary cap stays the same next year as this year. The difference between old team and new team works out to be $4.4M favoring the old team if the salary cap declines as reported to $50M. So there is not a huge effect from the cap change. This is why most newsmen are dismissing the difference (Although $4-5M is big either way compared to my budget!).

But the difference between extending and opt-out signing with a new team is $23.6M favoring extending over the life of the contract at $50M salary cap and $28.0M favoring extending with the old team vs. signing with a new team. If you consider the cap at $57.7M the difference between extending and opt-out signing with the old team is $7.2M favoring extending and signing with a new team the difference is $12.3M favoring the old team. Clearly the potential drop in cap will drastically alter the dynamics of decision.

Discussion:

It is an intriguing risk-reward dynamic for both team and player. It is a sliding scale for both depending on the level of economic distress you factor into the equation. So consider each separately;

If you are the player do you want to move teams with at least $12.3M loss of revenue and more likely $28.0M or more? Why would you not extend if offered if you decide to stay with your current club? Finally do you sign now or wait until the last possible minute to see what the economy will do?

If you are the team do you offer the max contact while leaving $28.0M on the table? Or would you want to negotiate a number somewhere in the middle? And with the risk/reward changing monthly with the economy and league revenue do you allow the player to have the same contact offer in June as he is offered now or would you offer with a decreasing % each month?

A final question to consider: If you are the league charged with maximizing profits for the teams do you issue overly dire warnings of the salary cap coming down to assist teams in getting lower contract amounts? How would you do that and still maintain credibility?