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Houston: Life on the Lux

   Money Talks with shrink

While Minnesota fans keep an eye squarely on the 2010 Salary Cap, many teams are more concerned with the 2009 Luxury Threshold.  The lux has served as an effective mechanism for maintaining competitive balance in the superstar-driven NBA without instituting a hard cap that the Players Association would detest.  Big market teams can still spend over the luxury threshold, but the incremental costs become so expensive that in the last four years, between 22-25 teams have all finished the season below the threshold.  Let's take a look at the mechanics of the lux to determine why.

There are two parts to the luxury threshold, and the first is pretty straight forward.  For every dollar your team's total payroll is over the threshold, you pay an additional dollar into an NBA's escrow fund.

Houston is a team that is just over the luxury threshold, so they feel different economic constraints than other teams.  For example, last Friday, they waived forward Pops Mensah-Bonsu.  Pops was making $825,497, which is probably a fair salary.  However if he was on the roster on the final day of the season, Houston would be effectively be paying him twice that, $825,497 for salary plus $825,497 in luxury tax.  At 3.3 minutes/game, they decided he wasn't worth the $1.65 mil and the roster spot.  Pops had $50,000 guaranteed, and since they were over the lux, they decided paying him that money (again, doubled if they remain over the lux) was a better economic decision than retaining him.

The second component to the NBA's luxury tax rules deals with what to do with the luxury dollars the NBA collects.  This rule simply states that every team that is under the lux gets a 1/30th share of all the escrow fund.  David Stern and the NBA keep all the shares that aren't collected by teams over the lux for operating expenses.  Again, for a team like Houston, if they can drop a small amount of salary (which is already doubled), they will also get a bonus for reclaiming their lux share, which could be significant.  Strangely, this year, almost half the league is currently over the lux ..

Teams Over the Luxury Threshold on Nov 17, 2009
$3,374,049  New Orleans
$3,937,947  Houston
$3,947,172  Miami
$5,320,687  Denver
$5,622,091  Phoenix
$8,156,229  Washington
$9,976,833  San Antonio
$11,808,089  Utah
$12,140,953  Orlando
$12,651,917  Cleveland
$13,092,554  New York
$14,082,717  Boston
$17,891,715  Dallas
$21,421,066  LA Lakers
$143,427,019  total lux payments 
$4,780,901  lux share

The incremental costs for the Rocket's $3,937,947 is very high.  For example, suppose the Rockets had a player making $4 mil, but had a chance to remove his salary.  Their savings would roughly be:

$4.00 mil  Player's Salary
$3.94 mil  Luxury Taxes Recovered
$4.78 mil  Lux Share Recovered*
$12.72 mil TOTAL SAVINGS

As you can see, even if the player is well-worth his $4 million contract, the Rockets may move him because he isn't worth $12 million.  There is great incentive for owners to get their teams under the luxury threshold if they are close, and this is why the lux has helped create parity among very rich owners.


So while understanding the luxury threshold is fine from an academic point of view, many Wolves fans are probably thinking, "Why should we care?  We're safely below the threshold, and after this season, the lux may not affect is for years!"  However, if owner Glen Taylor is willing to spend, he could trade the space this year to a team over the lux, and get back incentive that could help us.  In fact, they've already started.

On October 20th, the Wolves acquired Nathan Jawai and cash considerations from Dallas for a Traded Player Exception and a Top 55-protected 2012 second rounder.  The pick will likely not be conferred, so in effect, Mark Cuban is paying us cash to take Jawai's contract.  Now, the Mavericks had roster size issues as well, but they are over the lux, so removing Jawai's $736,420 saves them double.  We don't know the amount of cash, but you could easily see that if Cuban offered $1 mil in cash, both teams make money.

The Wolves have two other trade exceptions they could use, $796,088 for Etan Thomas, and $732,625 for Quentin Richardson, and they can be traded for any player within 100% + $100,000 for salary matching purposes.  However, Minnesota has a much bigger asset with their ability to create TPE's, within the 125% + $100,000 salary match limit required since they are over the salary cap.

For example, suppose that Tracy McGrady received bad news about his knee surgery or back and he needed to miss the season.  His $22,843,124 salary would produce nothing for the Rockets.  Now suppose the Wolves offered Blount, Cardinal and Wilkins in an exchange of expirings, which would obviously not affect their cap space in 2010.   Houston would save about $4.5 mil in salary, plus $3.9 mil in lux tax, plus $4.8 with the lux share for a total of $13.2 million.  What kind of future assets could the Wolves expect for their $4.5 mil?  Cash plus a future pick?  Prospects?  $13.2 mil is a lot of savings.

Now McGrady is just an example, but it would not be surprising to see cost-cutting moves from Houston, New Orleans, Miami or Phoenix, with the lux share prize so close.  Other teams may try to reduce payroll and lux taxes as well if their season starts to unravel, particularly with the chance of more financial loss over the next few years. 

Minnesota is $8.3 million under the 2009-10 luxury threshold of $69.92, and we have a GM that likes to trade.  Hopefully Glen Taylor has made that money available to give David Kahn the flexibility to acquire more future assets from teams who need financial relief, particularly those living on the lux.