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Thursday, June 05, 2014

Chandler Parsons And The Rare Instance Of The Deliberate Overpayment

(originally published elsewhere)

After they picked him 38th in the 2011 draft, the Houston Rockets signed second round pick Chandler Parsons to a four year contract, one that paid slightly but not significantly above the minimum salary.

Giving three year contracts to early second round picks, or late second round picks that you really like, or undrafted players you really thought were going to be second round picks and are happy to get a chance at signing, is a trend that developed some years ago and continues to this day. It requires either cap space or a chunk of the mid-level exception to do it - the Minimum Salary Exception, the device which allows teams over the salary cap to sign players to the minimum salary, or trade for those who already are, is limited to two years in length. Nevertheless, teams quite regularly do this so as to lock up potential young pieces for three years, partly to give them ample opportunity to develop and partly to gain full Bird rights in preparation for any future contract.

Four year minimum salary contracts, or four year near-minimum salary contracts, are a logical extension of that. It, too, is not especially new - Bill Walker and the undrafted Quinton Ross come to mind as two players to have received this treatment prior to Parsons, and they certainly were not the only two. Lance Stephenson did so the year before Parsons, and his four year deal expires this summer, as the Pacers are all too aware of.

Parsons's contract contains a slight difference to those others mentioned. Specifically, the final year of Parsons's contract (2014/15) is both subject to a team option and an unguaranteed portion. This, too, is not unique - Gustavo Ayon was in the same situation last summer, Jamario Moon a better known recipient a few years ago, and the Sixers gave out seven such contracts last season alone. It gives the team slightly more leverage on the final season, should the player ever get that far. But in Parsons's case, the unguaranteed portion matters not. Partly because he was too good to ever be a candidate to be waived, and partly because it was reported yesterday that the option was likely being declined.

If Parsons's option is declined, he will become a free agent. Because he has completed only three seasons in the NBA, he can automatically become a restricted free agent. Players with three years or less experience can be made into a restricted free agent, whether they like it or not, if the team extends a qualifying offer - the only exception is former first round picks who had either or both option years on their rookie scale contract declined, which does not apply here. By declining his team option, then, Houston can have Parsons become a restricted free agent this summer rather than an unrestricted one next summer.

Parsons's team option for next year is for only $964,750, a mere dollop above the minimum salary of $948,163. Estimates of what he would be worth in a new deal invariably have eight figure average annual deals. If they decline the option and re-sign him, then, Houston stands to pay about $9 million more for Parsons next season than they need have done had they merely exercised the option. This is the rare occurrence whereby a team wants to pay a player more than it has to.

Taking this route gives Houston three theoretical advantages. Firstly, by having Parsons as a restricted free agent, they give themselves some control over his future. They would surely hope they can negotiate a price with Parsons without it coming to it, but, should he sign an offer sheet with another team, the Rockets have the right to match it. With full Bird rights and the opportunity to match any new contract, Houston cannot be outbid by any other suitor, a luxury they will not have next season (where they can offer more than anyone, but cannot guarantee their offer will be accepted). Secondly, Houston can lock a player for the future up long term, which is always something you want to do for those you genuinely value as part of the future. And thirdly, it gives rise to the possibility of using Parsons in a sign and trade this summer.

What it does not do is enhance their free agency prospects. By meeting the so-called 'starter criteria', the value of Parsons's qualifying offer is going to increase this summer from a mere $1,158,125 (125% of his previous salary of $926,500) to an amount equal to 100% of the qualifying offer determined by the rookie scale for the 21st pick in whichever draft class's rookie scale contracts are finishing this summer (i.e. 2010). That amount, $2,875,130, also becomes Parsons's free agent cap hold. And with that, the best part of $2 million in cap space disappears.

Furthermore, the sign-and-trade option is not an easy one. Base year compensation (the vehicle that made it difficult for players receiving big pay rises to be traded for a while afterwards) was basically eradicated in the 2011 CBA, yet remains in one circumstance - when players are being signed and traded by teams over the cap at the point of signing using Bird or Early Bird rights, and receive a raise in the first year of their new deal of greater than 20% of their previous season's salary. If they are, then the player's outgoing salary in trade calculations is taken to be the larger of their previous salary or 50% of what their new salary actually is, whilst their incoming salary for the recipient team will be taken to be their actual new salary.

The difference between these two figures can be several million dollars, which, even in light of the more flexible rules for salary matching under the new CBA, makes it more difficult to match salaries. More difficult still is the fact that any team receiving a player in a sign-and-trade transaction must finish under the apron (the point $4 million above the luxury tax threshold) upon the completion of that transaction.

This apron point figures to come in at around the $81 million mark, thereby making this not a great concern for most potential suitors, who are sufficiently far short of the mark to not be overly challenged by it. However, if you envision Parsons as a potential piece in a trade for Carmelo Anthony, this becomes a very real issue. And considering their supposed commitment to clearing out cap flexibility for a third maximum contract, their supposed interest in Anthony specifically, and the fact that declining Parsons's option rather smells of a desire to potentially use him in this way, that stipulation becomes an important consideration.

Clearing as much cap space as possible seems to be the aim here. The Rockets seem fairly convinced they can shift the contracts of Omer Asik and Jeremy Lin - both with one season left to run, both with $8,374,646 cap hits, but both actually being paid $14,898,938 next season - and they seek to do so with the intent to be able to fit in a third maximum value (or nearly maximum value) contract. Under contract for 2014/15 at the moment, they have only the following:

Dwight Howard: $21,436,271
James Harden: $14,728,844
Omer Asik: $8,374,646
Jeremy Lin: $8,374,646
Terrence Jones: $1,618,680
Donatas Motiejunas: $1,483,920
Francisco Garcia: $1,316,809
Josh Powell: $1,310,286
Omri Casspi: $1,063,384
Patrick Beverley: $915,243
Isaiah Canaan: $816,482
Robert Covington: $816,482
Troy Daniels: $816,482

Daniels's contract is a team option, and one readily declined. Garcia's 2014/15 season is a player option with a less certain future. The contracts of Powell, Casspi, Covington and Beverley are all fully unguaranteed and can be waived to open up cap space - unless some or all are alternatively used in trade machinations, this will certainly happen in the case of Powell, more than likely in the case of Covington, likely to in the case of Casspi, and not likely at all in the case of Beverley.

In a scenario whereby the first three are waived, where Daniels's team option is declined, where Garcia opts out, where Lin and Asik are traded for no returning salary, where Motiejunas and the #25 pick are traded to facilitate those above deals, and all of Daniels, Garcia and Jordan Hamilton are renounced, the Rockets's salary picture then looks as follows:

Dwight Howard: $21,436,271
James Harden: $14,728,844
Chandler Parsons: $2,875,130 (cap hold)
Terrence Jones: $1,618,680
Patrick Beverley: $915,243
Isaiah Canaan: $816,482
Roster charge: $507,336
Roster charge: $507,336
Roster charge: $507,336
Roster charge: $507,336
Roster charge: $507,336
Roster charge: $507,336

Total: $45,434,666

Assuming a $63.2 million salary cap (the most recent published estimate given by the NBA), that gives Houston $17,765,334 in cap space. This amount trusts an awful lot to a best case scenario where they are able to trade the significant contracts of Lin and Asik (receiving huge money to fringe starters) for no salary in return, and where Garcia is willing to opt out (presumably with the promise of another guaranteed salary after other business is completed). Despite all this, however, it might not be enough.

A maximum salary for Carmelo Anthony this summer, if he terminates his contract and becomes a free agent, will start at $22,458,402. Even for all their repositioning, and for all the useful players it would cost them, Houston still does not have the space to offer Melo the max in free agency. They would be closer if it was not for Parsons's cap hit spike, of course, but still not close enough. And with Howard and Harden earning as much as they do, they likely never will.

The use of the term "maximum" is always a bit liberal. Maximum contracts for players vary so wildly, as there are many things that go into calculating a maximum value contract for any player - the term "max" is liberally used to describe any contract paying about $16 million or more, whereas for many players it is a lot bigger than that. Indeed, the entire concept of one team sporting three max contracts is usually described with reference to the Miami Heat and their trio of Dwyane Wade, Chris Bosh and LeBron James, ignoring the fact that none of the three are actually earning the max. Nevertheless, the Rockets can be said to be positioning themselves for acquiring one more 'really really big' deal. And given that he is the best player potentially on this year's free agency market, and an oft-touted target of the Rockets, it is assumed that Carmelo Anthony is the intended recipient of it.

It is not Melo or bust for Houston this summer. It is also not Melo via free agency or bust. If Anthony does not terminate his contract and stays under contract, he is set to earn $23,333,405 next season, even more than a new max contract in free agency would cost. However, if trading for him, Houston would not have to engage in all the above salary trimming. Lin and/or Asik could theoretically be included in the trade to get him, as could the unguaranteed salaries of Powell, Casspi and Covington, which oh so coincidentally add up to a Raymond Felton-sized bad contract reliever.

However, it is going to cost them quite a lot to get Melo via trade. Especially if Parsons cannot be used as a piece of the deal (he can complete a sign-and-trade in theory, but the cap machinations of getting New York under the apron are difficult, and the assumption that Parsons will even want this a bold one). And it also trusts to New York playing ball and being complicit to an Anthony trade. The free agency route does not require that, but if Parsons's option is declined, the Rockets are going to have to trust that he plays ball.

If Parsons signs an offer sheet with another team early on in free agency, the amount of that offer sheet (if matched) becomes his cap hold. And it will be big enough to kill the cap space dream. Houston can ask him to wait, with the promise they will pay him once they have done paying external players, as it is the best way for them to load up their team, but what if he does not want that? If Houston has to do business with Parsons first, they lose their free agency opportunity both this year and next. Had he just hit the market next year, unrestricted, with a sub-$2 million cap hold, they would both not have the risk of his big offer sheet this year and have the same opportunity to juggle signing timings around next year. As it is, they will now face the very real possibility of disadvantaging themselves in two different free agent classes.

Think about it this way. If the Rockets decline the option and re-sign Parsons this summer to a four year, $40 million contract, they could in theory be saving themselves from having to give him four years and $48 million in one season's time, had Parsons spent next season further raising his value. But the interim year would have cost only $1 million. That is a total of five years and $49 million. Is that not essentially a $1 million profit on a player you value at $10 million per annum?

Is the security of four years and $40 million today better than the relative insecurity of five years and $49 million, especially when the immediacy of the four year contract is offset by its impact on your free agency position for two consecutive offseasons, diminishes all trade value, and costs you one year of cheap leverage? Do the Rockets not think they can keep Parsons in a year? Is the risk really that great?

Alex George: Statistical Inflation vs. Reality

In that one year, you give yourself time to gather more information about the player and his career prognosis, about , and (morbidly, but realistically) negate the risk of being tied down to a long term contract to a player with a serious injury, should Parsons suffer one in the upcoming season. If you have to pay slightly more at the end of that one season, it is worth it because of how cheaply you secured that one season. Unless the difference in price between this summer and next summer is a vast gaping chasm that the one bargain season cannot close, this move will mean the Rockets pay more for Parsons's services than they had to.

And if you are declining the option so as to trade him this summer, (a) why would you not trade him when his value was higher, i.e. when he was cheaper, and (b)......why are you trading him anyway? He's really good. It had better be for Melo.

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