NBA Salary Cap

The NBA Salary Cap is the limit to the total amount of money that National Basketball Association teams are allowed to pay their players. While this seems simple enough in concept, the salary cap is in actuality extremely complex, and contains many obscure rules and loopholes.
The amount that is actually the cap varies on a year-to-year basis, and is calculated as a percentage of the League's revenue from the previous season; for instance, in 2006-07, the NBA's salary cap was approximately US$53.135 million per team, and for the 2007-08 season it was $55.63 million[1]. Like many professional sports leagues, the NBA has a salary cap to keep teams in larger markets (with more revenue) from buying all of the top players and extending their advantage over smaller-market franchises. The 2008-09 salary cap has been set at $58.68 million.
The NBA had a salary cap in the mid-1940s, but it was abolished after only one season. The League continued to play without such a cap until 1984-85, when the current incarnation of the salary cap was instituted in an attempt to level the playing field among all of the NBA's teams and ensure competitive balance for the League in the future. Before the cap was reinstated, teams could spend whatever amount of money they wanted on players, but in the first season under the new cap, teams were limited to $3.6 million in total payroll.
Unlike the NFL and NHL, the NBA features a so-called soft cap, meaning that there are several significant exceptions that allow teams to exceed the salary cap to sign players. This is done to allow teams to keep their own players, which, in theory, fosters fan support in each individual city. By contrast, the NFL and NHL caps are considered hard, meaning that they offer relatively few (if any) circumstances in which teams can exceed the salary cap.
The Collective Bargaining Agreement, or CBA, is the contract between the NBA (the commissioner and the 30 team owners) and the NBA Players Association that dictates the rules of player contracts, trades, revenue distribution, the NBA Draft, and the salary cap, among other things. In June 2005, the NBA's 1999 CBA expired, meaning the League and the players' union had to negotiate a new agreement; in light of the fiasco that was the 2004-05 NHL lockout, the two sides quickly came to an agreement, and ratified a new CBA in July 2005. The new agreement will expire following the 2010-11 season, but the League has the option to extend it through the 2011-12 season if they wish. If so, the League must exercise its option to extend the agreement by December 15, 2010.
Little changed in terms of the salary cap between the 1999 and 2005 versions of the CBA. In exchange for agreeing to the controversial player age minimum, the players will receive a slightly higher percentage of the League's revenues over the course of the new agreement. Additionally, the League's maximum salary decreased slightly in comparison to the 1999 CBA.
Because the NBA's salary cap is a soft one, the CBA allows for several important scenarios in which a team can sign players even if their payroll exceeds the cap. The exceptions are as follows:
A team is allowed to sign one player to a contract equal to the average NBA salary, even if the team is over the salary cap already, or if the signing would put them over the cap. This is known as the Mid-level exception (MLE). The MLE may be used on an individual free agent or split among multiple free agents, and is available regardless of where a team stands with respect to the salary cap. The Mid-Level Exception for the 2007-08 NBA season was $5.36 million. The MLE is $5.585 million for the 2008-09 NBA regular season.
An example would be the Toronto Raptors' acquisition of three-point specialist Jason Kapono during the 2007 off-season.
The bi-annual exception may be used to sign any free agent to a contract starting at $1.672 million in 2005-06, but cannot be used two years in a row (and if the $1 million exception from the previous CBA was used in 2004-05, the bi-annual exception cannot be used in 2005-06). Like the mid-level exception, the $1 million exception can also be split among more than one player, and can be used to sign players for up to two years, with raises limited to 8% per year. This exception was referred to as the "$1 million exception" in the 1999 CBA, although it was only valued at $1 million for the first year of the agreement.
An example of the $1 million exception was when the Los Angeles Lakers signed Karl Malone to a contract before the 2003-04 season.
The CBA allows teams to sign their 1st-round draft choices to rookie "scale" contracts even if their payroll exceeds the cap.
Perhaps the most well-known of the NBA's salary cap exceptions, it is so named because the Boston Celtics were the first team permitted to exceed the salary cap to re-sign one of their own players (in that case, Larry Bird). Free agents who qualify for this exception are called "qualifying veteran free agents" or "Bird Free Agents" in the CBA, and this exception falls under the auspices of the Veteran Free Agent exception. In a nutshell, the Larry Bird exception allows teams to exceed the salary cap to re-sign their own free agents, at an amount up to the maximum salary. To qualify as a Bird free agent, a player must have played three seasons without being waived or changing teams as a free agent. This means a player can obtain "Bird rights" by playing under three one-year contracts, a single contract of at least three years, or any combination thereof. It also means that when a player is traded, his Bird rights are traded with him, and his new team can use the Bird exception to re-sign him. Bird-exception contracts can be up to six years in length.
This is the lesser form of the Larry Bird Exception. Free agents who qualify for this exception are called "early qualifying veteran free agents," and qualify after playing two seasons without being waived or changing teams as a free agent. Using this exception, a team can re-sign its own free agent for either 175% of his salary the previous season, or the NBA's average salary, whichever is greater. Early Bird contracts must be for at least two seasons, but can last no longer than five seasons.
A much-publicized example for this would be Devean George, who vetoed his inclusion into a larger trade during the 2007-08 that would have sent him from the Dallas Mavericks to the New Jersey Nets because he would have lost his Early Bird rights.
Free Agents who qualify for this exception are called "non-qualifying free agents" in the CBA, meaning they do not qualify under either the Larry Bird Exception or the Early Bird Exception. Under this exception, teams can re-sign a player to a contract beginning at either 120% of his salary for the previous season, or 120% of the league's minimum salary, whichever amount is higher. Contracts signed under the Non-Bird exception can last up to six years.
Minimum Salary Exception: Teams can sign players for the NBA's minimum salary even if they are over the cap, for up to two years in length. In the case of two-year contracts, the second-season salary is the minimum salary for that season. The contract may not contain a signing bonus. This exception also allows minimum-salary players to be acquired via trade. There is no limit to the number of players that can be signed or acquired using this exception.
Traded Player Exception: If a team trades away a player with a higher salary than the player they acquire in return (we'll call this initial deal "Trade #1"), they receive what is called a Traded Player Exception, also known colloquially as a "Trade Exception". Teams with a trade exception have up to a year in which they can acquire more salary in other trades (Trade #2, #3, etc) than they send away, as long as the gulf in salaries for Trade #2, #3, etc are less than or equal to the difference in salary for Trade #1. This exception is particularly useful when teams trade draft picks straight-up for a player; since draft picks have no salary value, often the only way to get salaries to match is to use a trade exception, which allows trades to be made despite unbalanced salaries. It is also useful to compensate teams for losing free agents as they can do a sign and trade of that free agent to acquire a trade exception that can be used later. Note this exception is for single player trades only, though additional cash and draft picks can be part of the trade.
Disabled Player Exception: Allows a team that is over the cap to acquire a replacement for a disabled player who will be out for either the remainder of that season (for in-season injuries/deaths) or the next season (if the disability occurs during the offseason). The maximum salary of the replacement player is either 50% of the injured player's salary, or the average salary, whichever is less. This exception requires an NBA-designated doctor to verify the extent of the injury.
Note that while teams can often use one exception to sign multiple players, they cannot use a combination of exceptions to sign a single player.
There are two types of free agency under the NBA's Collective Bargaining Agreement: Unrestricted and Restricted. An unrestricted free agent is free to sign with any team, but a restricted free agent is subject to his current team's Right of First Refusal, meaning that the player can be signed to an offer sheet by another team, but his current club reserves the right to match the offer and keep the player. An offer sheet is a contract offer of at least 2 years made to a restricted free agent. The player's current club has 7 days to match the offer or loses the player to the new team. For 1st-round draft picks, restricted free agency is only allowed after a team exercises its option for a fourth year, and the team makes a Qualifying Offer at the Rookie-scale amount after the fourth year is completed. For any other player to be a restricted free agent, he must be at most a three-year NBA veteran, and his team must have made a Qualifying Offer for either 125% of his previous season's salary or the minimum salary plus $150,000, whichever offer is higher.Waivers
NBA teams can release a player to the waiver wire, where he can stay for 48 hours (during the regular season). While he is on waivers, other teams may claim him, for his existing salary. If he is not claimed, he is said to have "cleared waivers," and is treated like any free agent, able to sign with any team.
Released/waived players with guaranteed contracts continue to be included in their former team's payroll. Players whose contracts are not guaranteed are included in team salary in the amount they made while they were with the team. Players on non-guaranteed "summer contracts" are not included in team salary unless they make the regular season roster.
If another team signs a released player who had a guaranteed contract (as long as the player has cleared waivers), the player's original team is allowed to reduce the amount of money they still owe the player (and lower their team payroll) by the right of set-off. Note that this is true if the player signs with any professional team — it does not even have to be an NBA team. The amount the original team gets to set off is limited to one-half the difference between the player's new salary and the minimum salary for a one-year veteran (if the player is a rookie, then the rookie minimum is used instead).
Luxury tax
While the soft cap allows teams to exceed the salary cap indefinitely by re-signing their own players using the "Larry Bird" family of exceptions, there are consequences for exceeding the cap by large amounts. A luxury tax payment is required of teams whose payroll exceeds a certain "tax level," determined by a complicated formula, and teams exceeding it are punished by being forced to pay one dollar to the League for each dollar by which their payroll exceeds the tax level.
While most NBA teams hold contracts valued in excess of the salary cap, few teams have payrolls at luxury tax levels. The tax threshold in 2005-06 was $61.7 million dollars. In 2005-06, the New York Knicks' payroll was $124 million, putting them $74.5 million above the salary cap, and $62.3 million above the tax line, which Knicks owner James Dolan paid to the league. Tax revenues are normally redistributed evenly among non-tax-paying teams, so there is often a several-million-dollar incentive to owners not to pay the luxury tax.
In the summer of 2005, the new CBA provided an amnesty clause: a one-time opportunity for each team to waive one, and only one, player and avoid having him count against the team's luxury tax calculation. The amnesty provision only affected the team's luxury tax status, though. The waiving team must continue to pay the player, his salary continues to count against their salary cap, and all other salary calculations are unaffected. However, the team may not re-sign or re-acquire the player for the length of the terminated contract. In all other respects, the player is treated just like any other waived player.
The amnesty provision was derisively named the Allan Houston Rule (with Houston being symbolic of a free-agent class that was signed to ill-advised maximum contracts before the luxury tax was initiated), but the Knicks chose not to waive Houston under its terms, instead releasing Jerome Williams. Other players who were waived using the amnesty provision included Michael Finley, Brian Grant and Derek Anderson.
The luxury tax level for the 2008-09 season, is set at $71.15 million.

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