Paul Millsap's next contract and the Over-36 rule

Currently, Paul Millsap has a salary of $20,072,033 for this season with a player option for $21,472,407 next. Unless something catastrophic happens, then Paul Millsap will decline his player option and become a free agent for the 2017 off-season. He will be 32 at the time and have 11 seasons under his belt. He’ll be eligible for the 10+ maximum salary, which is for approximately 35% of the cap and currently projected to be around $33.6 million per Albert Nahmad of HeatHoops.com.

Zach Lowe recently had a snippet of information about Paul Millsap when he surveyed the 2016 offseason transactions of the Atlanta Hawks so far:

(Note: The Hawks would normally be able to offer Millsap a five-year deal, but due to a quirk in the collective bargaining agreement called the over-36 rule, which is designed to limit contract length for older players, they would be capped at a four-year offer, per several league sources. The rule would also apply to LeBron James if he hits free agency again in July 2017. The union may fight to scrap it in collective bargaining talks.)

From: What exactly did the Atlanta Hawks do?

It’s true that the Over-36 Rule is one of the more complex issues in the CBA. Larry Coon’s CBA FAQ addresses the issue and does so in 1,750 words, which includes two footnotes! Believe me, it’s not simple or easy to understand.

But the interpretation, per Lowe and his league contacts, that the Over-36 Rule means that Paul Millsap cannot sign a 5-year contract is wrong. He can. And it may be beneficial to Atlanta to pursue this option. So let me run down 4 situations involving Paul to lay out his options next off-season and expound upon what the Over-36 Rule means through an example.

Oh and as a bit of helpful information, Paul’s cap hold for 2017 would be $30,108,050 and in 2018 it would be $32,208,611. Both of these are projected to be less than his maximum, so if Atlanta signs him at his max then they are best served to wait until all of their cap space is spent to then exceed the cap to re-sign Paul.

The Non-Atlanta Options for Paul

If Paul decides he would like to leave Atlanta, via signing directly with another team or through a sign-and-trade transaction, then his contract can be for up to 4 years with yearly 4.5% raises based on his starting salary. There are 29 other teams in the NBA and it’s likely that someone will be willing to offer Paul his maximum contract, so here’s what that would look like:

It would appear that Atlanta’s direct competition for Paul Millsap is a 4-year $143 million offer. They know this. Paul knows this. Other NBA teams know this. And since they all know that each of them know this, then Atlanta knows they must offer something more than this to retain Paul. This could be through money (discussed next), a higher quality team, or lifestyle opportunities in Atlanta. Paul’s been engaged with the NBPA to sharpen his real estate chops and currently has developments in Atlanta. So that’s a start.

But let me talk about the other contracts.

Atlanta’s 4-Year Max

Paul Millsap will have Bird Rights at the end of his current contract, which allows a team to offer their free agent 7.5% raises instead of the 4.5% raises I referred to above. Paul will also have played in the NBA for more than 8 seasons and with Atlanta for more than 4 seasons, so he could also receive a no-trade clause in his contract. This would push Paul’s total contract value to almost $150 million:

That extra $7 million might be enough to convince Paul to sign with Atlanta over other offers as well as the no-trade clause. But will Atlanta offer this? That’s hard to tell, especially because Atlanta would likely prefer to sign Paul to a 5-year contract, although this introduces some complexities. But let me explain further.

Paul’s 5-Year Max, and the Over-36 Rule

Paul will be 32 years old next off-season and that will also be his age entering the NBA season (he won’t turn 33 until February of that season). This means that Paul will turn 36 in a potential 5th year of a contract. If this happens, that invokes the Over-36 Rule.

The Over-36 Rule only applies to 4 or 5 year contracts and is triggered if a player is 36 at the start of a season. As this applies to Paul, the 5th year on his contract would fit the rule. The implications of the Over-36 Rule is that the 5th year’s salary will be treated as "deferred compensation" and spread out proportionally across the first 4 years of the contract. Initially, that 5th year will count as $0 on the cap sheet. But if Paul Millsap does not retire or is not waived by the end of the 2nd year, then the cap hits on his contract will be amended.

Effectively, this rule limits the total compensation for Paul to not exceed what his 4-year maximum would be at 7.5% raises. But he could still be paid over 5 years. This rule acts as another limitation on a player’s maximum salary. So here’s how Paul’s maximum contract would look for him and for Atlanta:

In the chart above, the column "Yearly Payout" would be the literal amount of money that Atlanta would pay Paul in year of his contract. But this is not how Paul’s contract would affect Atlanta’s cap sheet. As soon as Paul signs this hypothetical contract, his cap hits are reflected in the "Before Year 1" column. Paul would only earn, and cost Tony Ressler, about $26 million. But Paul would eat up $33.6 million on Atlanta’s cap. The "After Year 1" column is how Paul’s cap hits would look if he completes his first year on the contract without being waived or retiring, there is no change. However, if Paul does not retire and is not waived after his 2nd year then his cap hits will change. Paul’s cap hits will be amended downward from what would have been $38.6 million to $26.6 million in the 2019-2020 Season! And the subsequent 2020-2021 and 2021-2022 Seasons will also amend his cap hits to the $26.6 million!

This is a mighty attractive option to Atlanta. If Paul were to sign his 4-year maximum and then play all 4 years, he’d have cap hits of $38.6 million and $41.16 million in the final two seasons. That could really hinder the team’s ability to add on new talent to the team. However, under a 5-year contract the team would free up $12.04 million and $14.56 million in cap space for those seasons! At the same time, Paul Millsap would earn the same exact amount of money but at a smaller annual rate.

All of the sudden, this potential contract with the Over-36 Rule looks very attractive to Atlanta if they can convince Paul to sign it. At the same time, it’s good to recognize that Paul’s next best alternative to signing with Atlanta is a 4-year contract worth around $143 million. Paul could then imagine that when he is 36 he might still be able to command a final contract, but what might this be? If Paul’s age-36 salary is for less than $7 million, then he will have erred and would earn less than this 5-year contract would. If Paul can fetch a salary over $7 million, then he will cash in.

But is this a risk that Paul is willing to take? He already bet on himself once with his most recent 2+1 contract, so maybe he will roll the dice one more time.

Paul’s 5 Year Max Without Over-36 Rule

Zach Lowe alluded to the NBPA attempting to broach the Over-36 Rule in the CBA negotiations. If this rule is abolished, then Paul would stand to potentially gain almost $43 million in salary! He certainly would have an incentive to lobby the NBPA to change the rules in his favor. One the flip side, it is in Atlanta’s interest to lobby against abolishing this rule as they have a competing interest in having their business’s costs rise.

I stress that this is Paul’s maximum that Atlanta can offer if the Over-36 Rule is abolished. This does not mean that Atlanta will offer this amount. This is also assuming a change in the CBA, which may or may not be reasonable. And this is also assuming a $33.6 million maximum. If there are CBA changes, might the corresponding maximum salary also be amended upwards? Possibly.

I hope you have learned a bit about the complexities of the CBA here and what the corresponding options will be for Atlanta and Paul. I find that understanding the options available to parties in negotiations helps better understand the outcome.