Thursday, July 1, 2010

Death, Taxes and Bruno (Opt-Out Capology)

Reigning Black

Any avid Spurs fan who's frequented a message board over the last handful of years knows the name, "Bruno." He's one of the most respected posters in the Spurs community and he's earned that respect largely for his mastery of NBA finance -- it's safe to say there are a fair amount of front-office types that could learn a thing or two from him.

That's not hyperbole.

Naturally, if you choose to put yourself out there and swim in the Frenchman's waters, you better be on point. You better have a grasp of the subject matter and be mindful to pay attention to detail. Because if you don't, you just might end up getting your feelings hurt (or at least find yourself getting humbled).

So when news broke Wednesday evening of Jefferson's decision to opt out of his final year, I naturally rushed to get all the necessary information to put a piece together as quickly as possible -- we're a new blog and it was the perfect opportunity to allow viewers to see what type of product we hope to offer. But lost in my haste to get out a piece was the latter prerequisite one needs to possess when delving into the Frenchman's territory: attention to detail.

Now excuse me as I foolishly dive into Bruno-infested waters.

From what I've been able to gather, Bruno takes some exception with the numbers I presented -- Holt's bottom line improving by a number in the ballpark of $25 million. What I believe his argument to be is this:

Jefferson makes $15.2 million in his final year, which would leave the Spurs $10 million over the luxury tax and the only way San Antonio could get under the tax, would be if Jefferson signed a contract that's first year had a value of $5 million dollars. Perfectly logical and it makes sense: $15 million (Jefferson's final year) minus $10 million (the amount over the luxury tax) equals $5 million (the maximum sum the Spurs could pay Jefferson in 2011 to find themselves back at the threshold).

There's nothing wrong with this assessment and Bruno's in no way off base, but there is a discrepancy in interpretation and the fault lies on my behalf. My haste to get out a post had me neglect the attention to detail I alluded to earlier.

The basis of my post was an assumption. And from that assumption I painted a scenario with a brush of certainty, had things played out a specific way. I said things "would" when it should have been "could," but based on an assumption -- one I failed to clarify -- where things "would" actually happen. Have I lost you yet?

Good. I was going for misdirection.

Now, to the real reason for the discrepancy in savings.

The thought process goes like this:

The first dollar in excess of the tax line is most expensive because it results in the loss of tax distribution. So that first dollar over the luxury tax actually costs you several million dollars -- the exact amount of the 2010 distribution should be known in a few days, the 2011 number won't be known until July, 2010.

So say you're $8 million over the tax line and you still have the Bi-Annual Exception available (the LLE). Using that exception will cost you $2 million in salary, plus $2 million in tax. So, in for a penny, in for a pound, or so goes the old adage.

Now, what if a team should find themselves something like $10 thousand below the tax line? That Bi-Annual Exception will cost you $2 million dollars in salary, plus $2 million dollars in tax, plus $3-5 million in would-be tax distribution (we generously went with $5 million, Bruno suggested closer to $3 million, no big deal -- we'll see where it ends up). That creates an even greater incentive to stay below the tax line -- not that there isn't plenty of incentive for a small-market team in the first place.

At this current moment in time, The Spurs are approximately $16 million under the tax line. It would be a fair assumption to believe that the Spurs will look to fit Jefferson, Splitter, Anderson and fillers into that figure. But we'll all have to wait and see how it all plays out -- in the event Bruno's scenario plays out (at least what I believe it to be) the Spurs would still stand to save around $15-16 million.

In the end, the discrepancy of our figures comes from the surrounding circumstances (i.e. the assumption the Spurs will adjust payroll to fill the $16 million dollar gap created by Jefferson's opt-out) and how they affect tax disbursement.

But, again, I am swimming in Bruno-infested waters.

And we all know how that usually works out . . .


  1. Nice peace. I was on the ST forum during this discussion. Very impressive on both your behalf's. I bow to both your impressive knowledge to detail. Someday I'll be there, but for now sadly I will continue to post stupid WTF pics.

  2. I did manage to make it over to ST and view that conversation (after the fact) and it's always a pleasure to read anything pertaining to the CBA coming from Bruno or Mel_13. We can all learn plenty from them.

    Appreciate the kind words and that you took the time, David -- and don't sell yourself short, the WTF pics are an essential part of the message board experience. ;-)