It’s generally not well-known that the NBA was the first major pro sport to institute a salary cap. The modern form of it came in 1984, in the midst of the great Celtics-Lakers rivalry and the first season of Michael Jordan. The cap has served David Stern’s league well, controlling costs while incrementally making players richer than their counterparts in the other pro sports (to be fair, they play more than their counterparts as well). Even with a lockout that bit off a third of the 1998-99 season and the retirement of Jordan, the league’s recovery was quick and impressive. As the current season hits the midpoint, both sides are steeling themselves for another protracted battle. This time, it might last a while though it doesn’t have to.

Of the three leagues to have salary caps (NHL, NFL, NBA), the NBA is the only one to have what’s called a soft cap. The hard cap concept is simple – a team’s payroll can’t go over the limit, period. The soft cap allows teams to go over the prescribed limit ($58 million or so) to sign its own free agents for basically as much as they want. There’s also a luxury tax threshold (~$70 million) which creates a dollar-for-dollar penalty for every team whose payroll is above the threshold. Teams can also sign other teams’ free agents while over the cap, though they are restrictions in terms of what they can offer. What was initially designed as a way for teams to keep their franchise cornerstones in place has turned into an ugly monster in which most players are grossly overpaid and teams end up trading players more to get rid of contracts than to attain talent.

Exceptions were created to help teams keep their own players, which would in turn boost competition in the league. Over the past decade or so, the exact opposite has happened. One team has won five championships, another has three, and the others are perennial contenders, leaving most of the rest of league as also-rans. With a relatively short roster and the great impact a single player can have on a franchise, the results are somewhat understandable. What doesn’t make sense is the incredible number of players who get franchise-type money who are clearly best as second or third bananas, guys who really can’t carry teams.

Per Larry Coon’s NBA Salary Cap FAQ, here’s a list of the exceptions teams can use to sign free agents:

• Larry Bird – Famously misnamed because the Celtics supposedly used it to sign their superstar (not really). Allows teams to sign their own veteran free agents (three years or more on the same team) for any amount up to the max salary. Plenty of players are worthy of the coin, such as Kobe Bryant and Tim Duncan. For every success story, there are at least two huge failures such as Gilbert Arenas, Vince Carter, Tracy McGrady and Andrei Kirilenko.
• Early Bird (75% raise) and Non-Bird (20% raise) – Players who have been with their teams for two years can sign for a set percentage above their previous salary. These are actually pretty smart exception, though sometimes they act as preludes to big money deals via the Larry Bird exception.
• Midlevel – Perhaps the most contentious part of the current CBA, this exception allows teams to sign one player every year at the league’s average salary ($5-6 million). This tool has been severely abused and plenty of marginal players have received 5 year, $30 million contracts as a result. Particularly poor examples of these contracts include Vladimir Radmanovic, Brian “The Custodian” Cardinal, Jerome James, and Dan Gadzuric. Not surprisingly, two of the guys I just named are on the Warriors and another was once a Warrior. The exception is also important because in its current form, it’s the maximum teams who are over the cap can offer to other teams’ free agents. The Warriors suffered in the previous CBA when this wasn’t spelled out when they lost Gilbert Arenas to the Wizards, though in hindsight this might not have been such a bad thing. The league wants to eliminate or at least significantly curtail the use of the midlevel, while the players union loves it. Expect it to be available on a much more limited basis, like the next exception.
• Bi-Annual – Located somewhere between the midlevel and the veterans’ minimum salary, the BAE allows teams to pull in quality bench players for relatively cheap (~$2 million). As the naming suggests, it is only available every other year.
• Minimum – Allows teams to sign veterans or rookies for minimum scale. Also allows each signee to count only a certain amount against the cap, which could reduce luxury tax payments.

There are also exceptions such as the Traded Player Exception, in which a team receives what is essentially a voucher if the value of the players they send away in a trade is more than the amount they take in. All of these exceptions work against the league in that they provide no downward pressure on salaries. And that’s bad for a league that doesn’t have enough jobs to create serious competition among players for those jobs. When you look at the number of exceptions that can be used, it’s clear that a team can sign half of their roster even if they are already over the cap. It’s this model that has allowed some serious financial mismanagement among many teams. Of course, it’s easy to say that owners and GM’s don’t have to use these exceptions, but that runs counter to the notion of attempting to compete every year. It’s this desire to compete that pushes teams to put themselves in bad financial positions with contracts, and when those contracts don’t pan out as results on the court, salary dumps for pennies on the dollar.

To combat this, the NBA is trying to shorten maximum contract lengths from six years to five. Previously they had succeeded in reducing them from seven years to six. They’re also looking to reduce the guaranteed percentage the players get as part of the CBA, which currently stands at 57% – the highest of the major four pro sports. While I doubt they can get to 50% as the NFL has done, they could bump it down a few percentage points, which could mean $100 million or more in reduced free agent money every year. If they eliminate some of those exceptions or restrict their usage to once every 2-3 years, money could be spent more wisely and strategically. The owners are also talking about taking additional measures:

• Reducing rosters from 15 to 14 or even 13 players, while stabilizing the D-League as a more formal “AAA” league for injury callups
• Contraction of one or more teams
• Reuse of the amnesty clause (Allan Houston Rule)
• Expanding the draft

Unfortunately for the players, they have little leverage. Some of them could choose to play in Europe for a year, but that’s a hollow threat and wasn’t employed much during the last lockout. In the end, perhaps the biggest thing that the players could allow is the reuse of the amnesty clause, last used in 2005 after the current CBA was ratified. Also known as the Allan Houston rule, the clause allowed teams to get rid of certain highly-paid, injury-ridden players. While the players were still paid and they counted against the cap, they would not count against the luxury tax threshold, which could save teams somewhere in the nine figures if used appropriately. The clause could even be expanded to ensure that those contracts don’t count against the cap, though that’s a much harder sell. IMHO the amnesty clause should be in every NBA CBA going forward, just as a way to clean up garbage contracts on a once-per-CBA basis.

Posturing between management and labor started before the season started, and so far things don’t look good. It’s quite possible that just like the NFL, there will be some kind of work stoppage for the NBA next fall. Unlike the NFL, there are several ways to achieve the better cost certainty that Stern and the owners want to achieve. It’s really just a matter of how greedy they want to get about it.