The Golden State Warriors will enter the 2021 NBA season with a fully rested core of championship players in Stephen Curry, Klay Thompson and Draymond Green. What they do this offseason to add talent around that core may well determine whether they can extend their dynasty and add another championship ring to their collection.
But a contending team will come at a price. The biggest tool the Warriors have at their disposal to add talent who can help win now is the $17.2m traded player exception (TPE) they received for Andre Iguodala. Ordinarily, the Warriors would be expected to leave no stone unturned in a chase for a championship ring. But with the finances of the league uncertain, and the Warriors facing eye-watering luxury tax bills and a potentially empty Chase Center next season, these are not ordinary times.
The Golden State Warriors are a business
What is often missed in discussions about the Warriors, is that they are a business. This is a franchise whose dreams of dominance on the court are paralleled only by their dreams of dominance off it. The same level of ambition that led to five consecutive NBA Finals appearances, and three championship rings, also led to the creation of the beating heart of the business – Chase Center, their state-of-the-art $1.6bn privately-financed sports and entertainment complex in downtown San Francisco.
The aim of the Warriors organization is not just to be a world-beating basketball team, but to be a global sports and media empire. Think the West coast’s answer to Madison Square Garden and you’re a good way there. Chase Center provides the anchor, complete with retail, restaurants, commercial real estate, and a new hotel the Warriors are developing. Located in Silicon Valley, the possibilities around digital platforms to host original content, along the lines of an MSG Networks
All that’s to say, the Warriors are a business, not a vanity project. So the financial picture really matters.
The league is facing a tricky negotiation on finances
The NBA and Players’ Association are yet to really delve into the devil of the detail of the financial situation the league is facing. Approximately 40% of the league’s revenues derive from fans attending games in-person. The NBA is working hard to find ways to ensure at least part of next season can involve fans, but this is not a variable that is in their control. The Warriors are even more exposed than most – ESPN’s Brian Windhorst has reported that around 80% of their revenues come via Chase Center.
The scenario that’s been trailed most heavily is holding the salary and tax level flat for next season, and possibly beyond, with players then contributing a greater share of their salaries into the so-called “escrow account”, which gets later redistributed to teams if they are in line to get a lower share than the Collective Bargaining Agreement allows. The other options are dramatic, and may lead to a lockout as owners try to claw back money to cover expected losses. That’s in no-one interests, but it doesn’t mean it won’t happen given the sacrifices players may be asked to make.
The Warriors are facing enormous luxury tax bills
In the best-case scenario, the league and players’ association are able to negotiate a deal with the salary cap fixed at current levels of spending. This would mean a cap of $109.14m and a tax line of $132.6m.
For the Golden State Warriors that best-case scenario is still crippling financially. Just with the contracts they have on the books next year, including the second pick in the 2020 Draft, the Warriors will be paying around $157.5m in player salaries. That is $25m over the luxury tax threshold, meaning a tax bill of around $63.75m, and a total payroll and tax bill of $221.25m.
Add in the TPE and taxpayer Mid Level Exception (MLE), expected to be around $5.7m, and their salaries jump to around $177.5m. That is $45m over the tax threshold, meaning their salary tax bill jumps up by $100m to a whopping $163.75m. Overall they’d be on the hook for around $341m if they use all the tools they can to build a championship contender.
That would be a huge financial cost in the best of times. But at least they would have Chase Center revenues flowing in, which would make it plausible to spend that amount of money on their basketball team. In the current climate, those revenue streams are something they can’t count on.
Will the Warriors spend big on basketball?
Given the option, the Warriors have generally spent whatever they need to in order to put a winning team on the floor. The Warriors organization understands that the incredible success of their business — the franchise stands fifth in Forbes’ rankings of the world’s most valuable sports teams with a valuation of $4.3bn — gets an almighty assist from the likes of Curry, Thompson, and Green on the court. Indeed Warriors President Rick Welts has stated that “better teams are going to create more value period.”
But they have also made financially driven choices recently, most notably trading away a host of players at the trade deadline back in February, including D’Angelo Russell, to duck under the luxury tax line this season. This meant they will avoid the “repeater tax” in the 2021 season, which increases the tax penalties for teams repeatedly over the luxury tax. That has turned out to be a huge positive, potentially saving them as much as $45m.
Faced with this double-whammy of sky-high luxury tax bills and up to 80% of their revenues at risk, what will the Warriors do? Can they use all the tools at their disposal to put a winning team on the floor, most notably their $17.2m TPE?
The answer lies somewhere in the recognition that the Warriors’ do not harbor short-term ambitions. They have a long-term vision that they want to execute. They know at some point they will have fans back in Chase Center, and they are actively preparing for that. They may be some short-term pain to maximize their championship window, but with those future revenues they are in a better position than most NBA teams to weather the storm. Indeed ESPN’s Brian Windhorst previously reported that the Warriors were exploring a deal with Goldman Sachs
Crucially, if they do not use the $17.2m TPE, it expires. Absent trading one of their core, or the unlikely scenario of shifting the $94.7m left on Andrew Wiggins’ outsized contract, they will have no other option to add a veteran player earning above the taxpayer MLE for the foreseeable future. That means if they want to win, they need to use the TPE now or forever hold their peace.
The Warriors will have choices
The Warriors will certainly want to keep that salary slot alive, and with it future flexibility including the possibility of executing a superstar trade without having to include the negative value of Wiggins’ contract. So they’ll have to bite the bullet financially.
But within that framework they have choices. For starters, if they don’t use the taxpayer MLE, or just use it to hand out longer minimum contracts as they did to secure second-round draft pick Eric Paschall for an extra season on the cheap, the Warriors would save around $34.5m in salary and tax bills, spending a total of around $307m.
They can also add a useful player with the TPE and keep the salary slot alive without maxing out on the dollar amount. For example, taking in San Antonio’s Rudy Gay who is due $14.5m next year, would save another $16m in salary and tax penalties, taking the Warriors’ projected spend to $290m.
Their best option financially may actually be their best option on the court. If the Warriors combine the TPE with their draft pick they should be able to get a much better veteran. A trade of the number two pick for Marcus Smart and Boston’s 14th pick would not only give them a championship-level defense and a much deeper, more versatile wing rotation, but also save $9m in salary.
That could be enough to drop the Warriors down two luxury tax brackets, saving a further $50m. Combined with not using the taxpayer MLE, that would mean a total salary bill of around $163m and a tax bill of $85m, for a total cost of $248m in player salaries and luxury tax.
And with the prospect of a genuine championship contender, and a potential return of fans to arenas at some point in the 2021 season, that may well be a price worth paying.