The Crunch is Coming

The financial landscape of the NBA is about to change rapidly and the Pelicans need to be prepared for it

In 2015 and 2016, the NBA and its teams were preparing for a massive influx of money due to a new TV deal. Teams knew this was on the horizon but even generous estimates left them unprepared for the tsunami of cap space washing across the league. Many players benefited from receiving unnervingly large deals from teams which found themselves flush with flexibility and no concrete plan on how to utilize it. Simply put, there was more cap space available than needle moving free agents. That money had to be invested somewhere and that’s how the Pelicans ended up with Solomon Hill on the books for 4 years. Of course the Pelicans weren’t the only team to fall victim to this, nor were they the worst of the lot when it came to poor contractual investments. They did, however, squander a meteoric rise in cap space to build a bloated roster that ultimately only won one playoff series and got torn down by Anthony Davis’s trade request.

Enter The New Collective Bargaining Agreement

The league is once again on the precipice of a new TV deal, and once again, it will be accompanied by the implementation of a new Collective Bargaining Agreement (CBA). This time, however, there are a few factors designed specifically to curb spending and make it prohibitively difficult to maintain a large payroll.

Firstly, there will be cap smoothing this go around. In the previous iteration, the lack of smoothing greatly benefited role players hitting free agency in conjunction with the cap boom and left the dollar pool dry for those who came after. The cap spike also allowed Golden State to acquire Kevin Durant and build one of the most powerful dynasties we have seen. Players and owners have agreed this time to smooth the cap raises. In the name of “more predictable cap growth”, the salary cap will not be permitted to increase by more than 10% in any Salary Cap Year.

Now the cap may very well rise rapidly over multiple years despite a cap on the yearly increase. The yearly raises compound, and if there is enough BRI to merit multiple 10% raises in succession, the cap growth will rapidly out pace even the max allotted raises in player contracts - which notably do not compound. This is important, we will come back to this later. Nevertheless, the new TV money isn’t set to kick until after the 2024-25 season. There are still two seasons left in the current media rights deal.

Secondly, the new CBA is far more restrictive and punitive on big spenders. While previously the costs incurred from spending big were largely limited to the deep pockets of owners shelling out the money, the new CBA materially changes the transaction landscape for teams. For starters, the new CBA cracks down more harshly on teams that go deeper into the tax than the previous one. Teams in the 3rd salary bracket and beyond will find themselves facing a more extortionate tax. Additionally, teams in repeater status will see their payments balloon, even if they are barely dipping their toes into the tax. Entering the tax might be a little easier for non-repeater teams, but diving into it and remaining there will prove costly.

It gets worse. Teams above the First Apron (roughly $7 million over the tax line currently) will be hampered by additional restrictions on trade salary matching as they will be prohibited from conducting deals in which the salary exceeds 100% of the outgoing amount. Teams in the First Apron will also be prohibited from signing buyout players whose salary prior to the buyout exceeds the non-taxpayer MLE amount. The buyout market is often a key mechanism for expensive teams to add “depth” in the middle of the season without the expenditure of any assets. The Clippers used this pathway to sign Russell Westbrook and the Heat did as well with Kevin Love. This will no longer be the case for many contenders with payrolls above the First Apron

The Second Apron is an entirely different beast. With the amount set to $17.5 million over the tax line beginning in the 2023-24 season, the introduction of the Second Apron and rules tied to it effectively create a hard cap by greatly limiting what teams are allowed to do. Here are some of the restrictions teams beyond the Second Apron face.

• Teams will be unable to use the taxpayer mid level exception to sign players

• Teams will be unable to aggregate players for salary matching purposes

• Teams will be unable to send cash in trades

• Teams will be unable to acquire players via outgoing sign and trades

• Starting in 2024-25, teams will be unable to trade draft picks that are 7 years out. These picks will be “frozen” and a team will be unable to trade it for at least four years, in which they have to be at or below the Second Apron for the three following years.

• Teams who enter the Second Apron in two out of four Salary Cap Years will see their “frozen” draft pick downgraded to the end of the first round

How This Will Impact The League

There is general surprise among league executives towards the immediacy of the changes being ushered in by the new CBA. Teams have carefully built over the past few years with a particular financial ruleset and now that ruleset is rapidly changing. This past summer saw teams such as Timberwolves and Hawks make costly “all in” trades, and now they face a different financial reality than the one they planned for, without the necessary assets to wiggle out of the coming squeeze. Contenders such as the Lakers, Warriors, Suns, Sixers, Celtics and the surprising Heat face key free agent decisions in addition to their already costly rosters. There are not enough cap space teams to accommodate the barrage of jettison that is coming, and the teams that are “fortunate” enough to be at the team building stage where they can accept incoming salary will charge an arm and a leg to be a dumping ground.

In fact, cap space teams now have even more reason to take on incoming salary from bloated rosters. The new CBA will prevent teams below the minimum required salary from receiving their share of the league revenue redistribution. This creates a crunch from both sides, despite it not being a terribly difficult task to reach the salary floor. The rush of teams trying to shed long term salary obligations may in fact make expiring contracts more valuable. This past CBA saw a decline in the value of expiring contracts as contract length decreased and overall money increased. The new CBA will at the very least create an environment in which expirings will be of use to tax paying teams in the very near future.

The immediacy of this crunch is unfavorable to teams trying to peak now. Many of the currently expensive teams have already had their time in the sun. Golden State has already won a championship. The Brooklyn experiment failed. It’s teams like Boston which built meticulously in order to accommodate Jaylen Brown and Jayson Tatum on super-maxes that are now facing a pathway that is inordinately more difficult. Sustainable building takes on an entirely new meaning, and the super max will once again be nerfed. We have already seen the immense difficulty in putting together a competitive roster with even one player making 35% of the salary cap and effective hard cap on rosters will now make this proposition even more difficult. The value of players on rookie scale maxes relative to the larger percentage maxes will be disproportionately higher.

Nevertheless, the new financial landscape may actually be one where more teams dip their toes into the tax than previously. As teams in the upper echelon of spending look to rapidly reduce their bills, the amount of revenue share available to teams will also go down. While previously ownership groups faced a decision where going $2-3million into the tax may have cost them upwards of $15-20 million when factoring in the amount of revenue share they would be missing out on, the smaller pool will reduce the delta significantly. Additionally, beginning in 2025-26, it will be materially cheaper for teams to enter the first two brackets of the tax than it has been in the past. All of these financial factors may drive more mid level teams into the tax for the sake of competitive balance. This year’s playoffs saw only two non tax teams win a round of the playoffs - the Sixers and the Heat. Every other team advancing beyond the first round is slated to pay the tax.

Where The Pelicans Stand

The Pelicans are one of the teams that carefully built their team with a different financial landscape in mind. This past summer, they inked long term extensions with CJ McCollum, Larry Nance, and of course Zion Williamson. Everyone knew the new media deal was around the corner, so securing these contracts under the current one meant that the Pelicans should see increased flexibility with any incoming cap jump. This may no longer be the case.

The Pelicans also built very carefully with regards to the tax. It was imperative that they not start their repeater clock too soon, lest they end up with massive payments when new deals for Trey Murphy or Herb Jones kick in. Or worse - be forced to trade important role players and assets in order to avoid a tax bill ownership would not sign off on. This past year the Pelicans came within $3 million of the tax line and spent four second round picks to dump Devonte` Graham and ensure there would be enough breathing room under the tax for the 2023-24 season (as Zion’s extension kicks in). The goal, it would appear, was to not enter the tax until the 2024-25 season and hopefully dip back out of it in the 2025-26 when the cap was set to rise with the influx of the new TV money.

As it stands, the Pelicans are fortunate for the following reasons:

• Zion did not meet 30% max criteria and his rookie max will start at the 25% rate

• Brandon Ingram will also only account for roughly 25% of the cap for the remainder of his contract

• CJ McCollum’s extension declines on an annual basis, and is projected to account for only 19% of the cap in 2025-26

The nature of these deals buys the Pelicans some immediate time if they do not wish to shake up the “Big 3”. In addition to the potential deals for Herb and Trey, Brandon Ingram only has 2 years left on his contract. He is currently extension eligible, however it does not make financial sense for Ingram to secure an extension this early. By waiting a year, Ingram will able to tack on another year to his deal and therefore earn more money at the higher max rate. Additionally, if Ingram makes All-NBA, he will be eligible for the 35% super max. If you’re Ingram’s agent, it’s worth waiting to see if he qualifies.

Unfortunately for the Pelicans, none of Ingram’s new deal will be at the pre-media deal rate. Williamson and McCollum are locked in through the new media deal, with Williamson’s 8% raises calculated off the first year of his extension. Ingram’s potential 8% raises will be calculated off a much larger figure based off the projected cap in 2025-26. Now as I mentioned earlier, the yearly cap raises compound and it is very possible the influx of new TV money hits the 10% ceiling in multiple successive years. But the team building advantage gained by having deals secured prior to this boom will not be as strong with Ingram. Note, this is all assuming he does not agree to anything less than a max.

Related, this is why it will be important to secure a 3rd year extension for Trey Murphy and not have any of his money tied to a percentage of the cap as is the case with maxes. With the new CBA allowing for all rookie extensions to be eligible for 5 years, it’s a no brainer for the Pelicans to work out a 5 year agreement with Trey as soon as he becomes eligible for his extension in the 2024-25 offseason. Likewise, the Pelicans can ink Herb Jones to a new contract that very summer (they can opt to agree to a new deal this summer as well). This has potential to be an extremely valuable deal in a growing cap environment.

What The Pelicans Should Do

Based on the projected financial landscape, it is no longer a smart idea to enter the tax in the 2024-25 season. The situation has changed and the Pelicans should do everything they can to avoid being left holding the bag when the financial crunch comes for high spending teams as they look to dump players. With Herb Jones entering his second contract and a potential Trey Murphy deal kicking the following year, the Pelicans may find themselves approaching repeater territory much sooner than anticipated with only unappetizing pathways out of it (expenditure of core players or future assets).

My recommendation for the Pelicans would be the following:

• Break apart the “Big 3” before the crunch sets in. It is not sustainable to have three high dollar figures on the books with extensions coming up for key players. Moving salary at a later date will only prove more costly in terms of assets or opportunity cost.

• Prepare for the expected cap growth. Do not squander it on a costly roster. This means do not invest in long term salary that will only cost you to move later. Look to gain contractual flexibility heading into the new TV deal instead.

• High dollar teams will want to reduce their payroll - this is an area that can be taken advantage of if the Pelicans create adequate flexibility. The new CBA gives additional salary matching flexibility for teams under the tax as well as allows them to use the non-taxpayer mid level as standard trade exception. There is potential here to secure rotation players as well as assets from teams looking to cut costs.

• Do not enter the tax sooner than the 2025-26 Salary Cap Year. This is the year the lowered rates for the first few tax brackets activate in addition to the year when the new TV deal sets in. Waiting until maximum flexibility and potential for cap growth to start the repeater clock is a must.

• Build on Zion’s contractual timeline. There is a significant advantage to having Zion locked in for 5 years at a rookie scale max. The cap should grow significantly in that time, and if the Pelicans build carefully, they should be able to construct a sustainable playoff team for years to come*.

• *As long as health remains. I know, I know - huge if.

Breaking Apart The Big Three

Breaking apart a group that only appeared in 10 games together seems extremely premature on the surface, but I believe it is a necessary step to ensure this team doesn’t end up hamstringing its future and solidifying a path to mediocrity. I believe the Pelicans very much would have liked to have a few years to evaluate this group before making a decision, but unfortunately the financial landscape is transforming swiftly. With several contract decisions rapidly approaching, the Pelicans need get ahead of the crunch and identify a direction with regards to team building. I believe that direction should involve building on Zion’s contractual timeline. He is the only player on the roster currently capable of driving the team towards a homecourt playoff berth. As stated above, having Zion locked in for 5 years gives the Pelicans a considerable amount of time to build.

Building around Zion means that “breaking apart the Big 3” by default involves moving one of CJ McCollum or Brandon Ingram. The argument for moving McCollum is simple - he’s the older and worse of the players. In the NBA, when given a choice, teams should always opt to retain or acquire the better player. However, there are two key benefits to retaining McCollum.

Firstly, McCollum’s presence as a leader around a young team cannot be understated. His professionalism both on and off the court has had a tangible impact on players such as Murphy, Jones, and Daniels. The team has invested a significant amount of resources in acquiring a leader like McCollum and they have finally found one that fits what they are trying to build. Also, the Pelicans guard depth behind McCollum is paltry, especially when compared to the wealth of talent on the wing. Replacing McCollum’s production will be difficult.

Secondly, McCollum’s contract situation may yet be a favorable one entering this new CBA and new media deal environment. With 3 years left on his deal presently, he will not be easy to move or an attractive option for teams. However, with a declining contract, McCollum is set to enter his final year just as the new media deal kicks in. As mentioned above - expirings may carry a greater value in the new landscape, and McCollum should represent an attractive opportunity for teams looking to either unload money or move off a disgruntled star (or both). Holding onto McCollum until the right moment may yet prove fruitful.

Moving Ingram is a tougher pill to swallow. Not only has Ingram been a productive, all-star level player - he represents the success of the Anthony Davis trade. An investment in Ingram showcases a significant win on David Griffin’s part. He bet on Ingram to succeed and was able to secure his second contract without a player option. Ingram, by all accounts, is also well liked and respected by players in the organization. Not only this, but as the Pelicans made post season pushes, it has been Ingram at the front both years, trying to guide the team to victory. The emotional investment will prove difficult to have truly objective conversations on him.

The argument for moving Ingram is two fold. Firstly, Ingram’s contract status provides a few windows of insight. With two years remaining, he is a much more attractive asset than if there was only one year remaining prior to free agency. Teams will be more keen to have two full years to work with Ingram and woo him into another contract.

Likewise, as discussed previously, any potential Ingram contract that the Pelicans secure in the future (provided he doesn’t simply leave at the conclusion of his deal), will be slated at a larger max in a larger cap. It will also kick in at the same time Trey Murphy’s deal will. This amount of financial commitment in the 2025-26 season will present significant obstacles in team building and the Pelicans will almost assuredly have to add assets to shed salary. The Pelicans have to weigh very carefully the costs of committing to Ingram long term that go beyond cutting his paycheck.

Beyond the contractual argument - a major reason to move Ingram now is the ability to secure the number 2 or number 3 overall pick in this year’s draft, with the prize being Scoot Henderson. Henderson, in my opinion, is the clear best player after Wembanyama, and someone worth considering moving Ingram for.

As it stands, it appears both Charlotte and Portland (holders of the 2nd and 3rd picks) seem interested in adding a talented wing due to redundancy at their guard positions. Charlotte is rumored to prefer Brandon Miller - the talented 6’9” prospect out of Alabama - over Scoot. However, there are a few things that cannot be overlooked.

• Mitch Kupchak is presently in charge of basketball operations in Charlotte. Kupchak selected Ingram with the 2nd overall pick when he was general manager of the Lakers.

• With reports that Michael Jordan is willing to sell his share of the team, it might be more attractive to new owners if the Hornets are more playoff ready. Acquiring Brandon Ingram over Scoot may certainly help them towards that end in the short term.

• Do not underestimate the sell of Kinston, NC born and Duke product Brandon Ingram returning to his home state. The Hornets may be in unique position to secure long term commitment from Ingram due to this.

Similarly, Portland is in search of more ready help for Damian Lillard and has advertised the fact the 3rd pick might be available for the right price. In my opinion, it is only worth engaging with Portland if Scoot is on the board at three. Mike Schmitz, now assistant GM in Portland, was one of Ingram’s biggest fans in the pre-draft cycle and has repeatedly touted Ingram as the best player in his class. There may be sufficient interest from Portland to work something out.

For the Pelicans, trading with either of these teams represents an opportunity to not only secure one of the best guard prospects in recent history, but also vital contractual flexibility in the coming years. The acquisition of the salary pieces necessary to make the trade work from either team should arm the Pelicans with enough options to fill out the roster around Zion, Trey, Herb, and CJ without any serious long term financial obstacles. For example, the Pelicans may choose to flip Anfernee Simons for a capable center. Likewise, Gordon Hayward could be a valuable expiring contract. Regardless - there are more pathways to add rotation players while bringing a rookie scale Scoot along than there are if they Pelicans commit large money to their Big 3.

A move of this magnitude is only possible in the next few weeks as we approach the draft, if possible at all. There will not be another clean way to restructure the contract situation for the Pelicans while simultaneously acquiring a potential all world talent. The Pelicans can accomplish several goals in one move while not necessarily sacrificing the short term wins either. There is a needle to be thread here. I believe not only is it possible, but that the Pelicans should aggressively attempt to do so. Either way, whichever direction the Pelicans pick, I hope they are decisive. The crunch is coming, don't let it crush you.