Death and Luxury Taxes: The Thunder’s complicated future

The free agent market is open which means that Sam Presti can now officially offer contract extensions to James Harden, Serge Ibaka and Eric Maynor. It means Thunder fans, and interested parties across the entire league, might finally start to get a hint as to how Oklahoma City plans to answer this big dilemma.

It’s been something people have been jabbering on about ad nauseum for quite some time now. Can the Thunder keep Harden and Ibaka? Who will the Thunder pick? How can you decide? Do the Thunder need King Solomon to choose? Or at the very least, Newman?

Even when the Thunder made an incredible trip to The Finals, sportswriters, talking heads and everyone else wanted to discuss OKC’s future instead of just enjoying the moment. The whole point of this silly game is to win a title, not plan for 2016, and yet with the Thunder four wins away from glory, people were talking salary cap and the luxury tax.

Here it is though, time to start making offers, time to start trying to lock it all up. The Thunder already have Kevin Durant and Russell Westbrook on the books for the long-term. The plan all along for this team was to draft well, develop from within and build for a sustained run of success. In order to do that, retaining the players that led to previous successes would be necessary.

It’s not secret the Thunder have attempted to copy, or really, replicate the San Antonio Spurs model of building around a core, and then interchanging parts around that core group of players. The thinking is that with the fabric of the roster structured around a few key players, you can just find parts to fit in with it. The Spurs have done this masterfully with Tim Duncan, Manu Ginobili and Tony Parker. But you’ll notice a key difference there in that Spurs model compared to the Thunder one. Four is one more than three. And that’s what the Thunder have to do. Pay four guys. Not three.

Something, however, that’s lost in all this is that if the Thunder are truly following in the step of the Spurs, they won’t be entirely opposed to paying the big bad scary nasty ugly luxury tax. The Spurs did it. As of two years ago, in fact. It wasn’t something the Spurs really consistently broke into, but it also wasn’t mandated that they didn’t.

But you see what players are going for in this market. Even after a lockout when the main gripe was player salaries, you see Omer Asik get $25 million, you see Nicolas Batum rumored to be getting $45-50 million, you see Eric Gordon commanding max money, you see Roy Hibbert getting a max offer. It’s the way of the NBA. The market determines value and if some owner is willing to dish it out, it’s not like the player is going to refuse it. So when you see a team like the Thunder with some especially quality talent, you almost hear an opposing GM fistpumping about OKC’s future salary issues.

Is there any way around this though? Or are the Thunder destined to watch a critical core piece be torn from them because of David Stern’s new NBA where he believes in “player sharing” along with revenue sharing? Here’s my attempt to cover all bases about OKC’s future cap situation. It’s only an attempt. I probably got something wrong or left out an important factor. I’m not Larry Coon here. But if you tweet or email me asking about what the Thunder are going to do in the future, expect simply a cold, single link of this post in return.

Warning, math ahead

Let’s assume that Harden signs on the high end, for something a little heftier than Manu Ginobili did. Say, four years, $45 million. Let’s give Ibaka a four-year, $38 million extension. (Also, for this exercise, I’m not doing year-by-year salary increases.) For 2013-14 (the extensions don’t kick in until then), without Harden and Ibaka extended, the Thunder’s payroll would come to $53,311,817 in already committed salary, according to Sham Sports. Last season’s salary cap line was $58 million. But the actual luxury tax line, is much higher than that. That’s important.

How is the luxury tax number determined?

Like this: In 2012-13 the tax level was set by taking 53.51 percent of the projected BRI, subtracting projected benefits, and dividing by the number of teams in the league. For 2012-13 the tax level is guaranteed to be no less than $70.307 million. The only difference is that in 2013-14, there’s no guaranteed minimum.

Ken Berger of CBSSports.com explains it thusly:

Under the CBA ratified by owners and players in December, the salary cap and luxury tax threshold cannot go lower in 2012-13 than their levels in the first year of the deal — $58 million and $70.3 million, respectively. Despite a robust post-lockout recovery that included salvaging all $900 million or so of the league’s national broadcast revenues, sources familiar with the NBA’s finances believe overall revenues did not increase enough in 2011-12 to push the cap and tax significantly beyond current levels until 2013-14, the first season under a more punitive luxury tax designed to rein in big-spending teams.

This new luxury tax is largely what a lot of the lockout was about. The players and owners battled over how punishing it would be, with the league fighting for as close to a hard cap as possible and the players wanting it as soft as possible. The idea is to level the playing field for smaller markets with an attempt to discourage New York, Los Angeles, Chicago, Boston and other large market teams with deep pockets from busting over the tax with reckless abandon. Ironically though, it’s going to potentially affect the smallest market in the league the most.

The players’ situations

Here’s what Harden and Ibaka are facing: They’re both eligible for extensions this summer, not free agents or even restricted free agency. The Thunder can offer up to four years, but not five. Why? Because OKC already used its “Designated Player” five-year extension on Westbrook. (The Thunder are unique because they actually have two Designated Players, because Durant signed his under the old CBA. Lucky break.)

If OKC can’t reach terms on an extension with either, they go to restricted free agency. Meaning the Thunder would allow the market to determine their value and have the ability to match any offers made to them. A very possible scenario.

Oklahoma City’s situation

OK, let me use a completely made up, hypothetical situation just to try and illustrate how this thing could go.

Again, for 2013-14, which is when the harsher tax kicks in, the Thunder have about $54 million committed to the roster. If Presti adds no other players and trades all OKC’s draft picks, the Thunder will have between $16 million and $20 million to commit to Harden and Ibaka without stepping into the tax.

So let’s speculate, and realize I’m probably horribly underpaying Harden and Ibaka, but bear with me for the sake of the illustration. Add up Harden (roughly $11.5 per year) and Ibaka (roughly $9.5 million per year), Perry Jones III (roughly $1 million per year) and the whatever pick next season (let’s say $1 million again) and a D-Leaguer or something, which fills out a 13-man roster. (KD, Westbrook, Thabo, Perk, Ibaka, Harden, Collison, Aldrich, Reggie Jackson, Lazar Hayward, Minimum D-Leaguer, Perry Jones and 2013 Rookie.) That brings the Thunder to about $79 million. That’s about $9 million over the tax line. Which means, the Thunder would be paying $1.75 for every dollar over (because they’re paying over $5 million the tax threshold, but less than $10 million), bringing the tax payment to $15,750,000.

Yikes. You can see why so many have called this impossible.

And yes, that’s a pretty heavy check to write, but it’s not completely unreasonable. Especially when you consider this: The better the team, the deeper you’re expected to go. And the deeper you go, the more home games you have, the more tickets you sell, the more merchandise you move… you get the idea. It’s part of the reason the Spurs were always so willing to pay the tax. They made most of it back by being a contender. The extra games add up. The estimation that each home game alone is worth about $1 million in the playoffs. The Thunder played 10 home games this postseason. Boom, $10 million.

(OK, a couple other factors to weigh to try and cover the complexity of the whole thing. Maybe I’m underpaying Ibaka and Harden. I almost definitely am. If Harden’s a max level guy as some say he is, that’ll put the Thunder right against the tax before even considering Ibaka. If Harden and Ibaka together get more than my guess, the Thunder approach the next level of the tax line, meaning they pay $2.50 on every dollar. That’s a much tougher check to write. Another factor: Eric Maynor. I’m sure OKC would like to keep him, and I think he wants to stay. Paying him $3 or $4 million a year just bumps the number higher, which is bad. A  third factor: the sacrifice talk. If Harden, Ibaka and Maynor were really serious, they’d really have to sacrifice if they wanted to make this work under or at least barely over the tax. Harden would have to be looking at something like $8 million a year and Ibaka $6 million. That doesn’t sound very realistic at all to me.)

(Oh, and a fourth factor: Again, I’m not including the way NBA salaries actually work, with yearly raises. So if Harden got four years, $45 million, it could likely start something like $9 million in year one, $11 million in year two, $13 million in year three and $15 million in year four. So that’s going to affect the tax payment in 2016, 2017 and on and on, but maybe not as much in 2014.)

Options?

Assuming by keeping the core together, OKC puts a title contender on the floor every year, would it be worth the money to compete for rings, and experience this feeling, for the next five years? Especially if maybe you can make a chunk of it back? Not entirely absurd. At least not an option to entirely rule out.

From what I understand, the Thunder aren’t morally opposed to paying the tax, as some act like they are. Yes, they’re in the league’s smallest market and money is tighter here than in other places, but it doesn’t mean OKC’s ownership group is pinching pennies. Remember, these guys overpaid for the franchise, paid $30 million to move the team and were ready to drop even more if they had to.

(Sidenote: It’s an unspoken complication that Aubrey McClendon’s situation with Chesapeake could mess with the team’s finances, but that’s not a sure thing as of yet. As of now, these guys have some money. And I don’t get the impression they bought and moved the team to try and rake in profits. It seems to me to be more of a civic contribution, with it being icing if things finish in the black.)

Now, that’s leaving out another relevant factor. The penalty gets stiffer when you become a repeat tax payer. Starting in 2014-15, if you’ve paid the tax for three straight years, you’re a repeater and you pay $2.75 on every dollar for being $5 million over. That one won’t affect OKC. But starting in 2015-16 and going forward, you’re a repeater offender if you’ve paid in three of the last four years. That one, the Thunder will trigger, unless they make a move.

Which is another possibility. What if OKC just chose to pay the tax for two or three years, then got under the tax line by dealing a core piece, amnestying a guy or downgrading some? That’s a potential possibility, I think.

(Explanation: You’ve probably heard the “amnesty Perk” idea. For those that don’t know: In the new CBA, a clause was put in where over the life of the new agreement, you can “amnesty’ one player. You get to cut them off your roster and clear their salary off your books, but you still have to pay them. So if the Thunder amnestied Perk, it could take that cap number in, say, 2014 from $79 million to about $70 million. So you can see why that might be a good idea. And might be the end game for the Thunder.)

Another: Pay Harden (or Ibaka) and then roll the dice and let the market determine their value. Or you could do that with both. What I don’t love about this scenario is that dangling a hefty extension in front of their eyes now would probably be enticing because they could get that monetary security a year early, get paid well to stay with a team they clearly love playing on, and not risk some deep pocketed owner (read: Mikhail Prokhorov) swooping in and offering a max deal that you’re not likely to match.

Here’s some optimistic thinking for you: With the renegotiated CBA and league revenues reaching all-time highs, the salary cap is likely to rise over the next few seasons, which means the tax line will go up too. Maybe it heads to $75 million. Maybe even $80 million if the Thunder are extremely lucky. Point being, it could be worth the risk to just see. And you can always make a trade later to eat cash and get under the line. Pay it for a year or two, chase championships and dive under if it’s not working.

Or, finally, the Thunder just choose between the two, stay under the tax threshold, play 2012-13 chasing another title with the current core as is and then hope that a trio of Westbrook, Durant and Ibaka/Harden is good enough. And you know what, that’s probably the most likely scenario, unfortunately. Then again, having a team built around Kevin Durant, Russell Westbrook and James Harden/Serge Ibaka isn’t all that bad of a thing.

So… Harden or Ibaka?

Like I said, it’s likely going to come down to answering this. Despite trying to optimistically figure out how it might potentially possibly maybe be reasonable for the Thunder to pay the tax and keep both, the reality is that Oklahoma City is the smallest of small markets and outside of some extremely clever shifting on the part of Presti or some players taking massive cuts, it doesn’t seem plausible to avoid paying the penalty.

Which means the Thunder will have to choose. And how do you distinguish? You have the smooth, crafty lefty guard that won Sixth Man of the Year, was third on the team in scoring and provides an absolutely perfect mix of talent to blend alongside the rugged Westbrook and the impossibly efficient Durant. Or you have the shot blocking robot that was an All-Defense performer, protects the paint as well as anyone in the game and has a blossoming offensive game in which it’s not impossible to see him as a 15-10-3 guy?

How do you really pick between the two? Both have their positives, and really, few negatives. To me though, Harden is more important to winning, which as you know, is kind of key. Ibaka was extremely vital in last season’s Finals run, but I feel that the Thunder had a better shot of getting there without Ibaka than without Harden, if that makes sense. It wasn’t unusual for Ibaka to play only 18 minutes or so because of his questionable pick-and-roll coverage, while it was a rarity for Harden to play fewer than 30.

Also, the Thunder have steadily acquired some assets that could potentially replace Ibaka. Tibor Pleiss, Latavious Williams, Perry Jones III — probably wishful thinking but there are at least a few eggs in the incubator there. And remember: Ibaka was the 24th pick in the draft and was developed from the Thunder system. It’s not like he was a sure thing player.

It’s almost like asking someone to pick between their right arm or left. Cut off my right and that’s my dominant hand, the one that’s really important. But my left, kinda need that one pretty badly too. In an ideal world, I get to keep both. And it’s going to be extraordinarily painful to lose either. Especially when it’s probable that someone is going to pick up that left arm and beat me over the head with it at some point. Watching Serge Ibaka swat a Russell Westbrook assault on the rim would not be enjoyable.

Unsolicited advice

My plan, which is probably a terrible one? Pay Harden, pay Ibaka and prepare to pay the tax in 2013-14. Heck, pay Maynor too while you’re at it. Just grit your teeth and prepare to spend. Give this team at least two more years to chase a trophy. At least see if it’s worth it. After that, whether it’s failed or succeeded, if paying an additional $15 to $20 million a year is too much (which it probably surely is), start shuffling. You could trade Westbrook. You could trade Harden or Ibaka. You could move, maneuver and piece together. But you can’t get these guys back, only let them leave. I think it’s worth the money, and the risk, to try and see how long it can happen here in OKC.

Then again, it’s not my money. Which means I should probably shut up about it.

(Or have the city vote on MAPS V, a penny tax to pay for luxury penalty. That a joke, but really, it’s not that cray, right?)

Here’s the end game optimistic point of view, no matter what happens: As long as Clay Bennett owns the team, Sam Presti is running the front office and Kevin Durant and Russell Westbrook are on the roster — who are both locked up through 2016 — the Thunder will put a contending team on the floor. They may not be good enough to win, they may be missing some pieces and the system might crush the chance at a yearly dream run at The Finals, but this Thunder team is in a very good position going forward, regardless of what happens.

In the end, just trust it to sort itself out. And look forward to next season. It’s going to be a very good team regardless. How good, is the question.