Leverage in the NBA

John Hollinger explains:

Allow me to explain. The entire guiding principle of most cap-related decisions in the past two decades is that the cap will almost always go up and sure as heck won’t go down. It’s embedded in the contracts, too, most of which contain either 8 percent or 10.5 percent annual raises. Thus teams feel safe gambling on a $5 million player. If they’re wrong, the cap will effectively erase the mistake in a season or two by continually rising.

In the current environment, however, some teams are going to be completely whipsawed by a cap that goes down just as their salaries go up. Clubs that have several players with long-term deals could be well under the tax threshold in 2009-10, and then be well over it in 2010-11 with more or less the same players. This is a real threat for the Philadelphia 76ers and Indiana in particular, and it could grab several other teams depending on what transpires in the coming months.

Since the salary cap and the luxury tax threshold in the NBA are both pegged to revenue, and since teams have a limited capacity (but there is some capacity) to reduce the number of players they field, average salaries need to go down. But because contracts are usually guaranteed, and most players have large raises written into their contracts, the decline in salaries is going to need to be borne by a relatively small number of players. Which means, basically, that any team with the financial resources to be hiring next offseason is going to be able to take advantage of incredibly employer-friendly labor market conditions.

Relatedly, right now the Miami Heat have only Dwayne Wade under contract for 2010-11. In other words, Pat Riley is in pretty good shape.