Then came the tricky part. How would the money be paid? The arcane collective bargaining agreement between the NBA and the players, which expires at the end of this season, prohibits a team from renegotiating a contract, which means that Johnson's deal would have to be an extension of his original contract. So he will continue to be paid under his old contract, from $3.1 million this season to $4.4 million in 1996-97. In the summer of '97 the Hornets will pay him a signing bonus of $6 million. Then it's let the good times roll. The dollars climb from $8 million in '98-99, peak at $10 million in 2000-01—what a way to ring in the next millennium—then fall to $6 million in 2004-05. Why the up and down? To leave room under the cap for the Hornets to sign new players as Johnson's skills diminish.
Can the Hornets afford Johnson's contract plus the rest of their payroll? "We ran projections going out for 12 years, using worst-case scenarios, and no question we're fine," says Stolpen. According to Financial World, the Hornets, a well-managed small-market team, grossed about $39 million last year. Assuming modest 3% growth over the next eight years, the team would produce revenues of about $49 million in 2000. The average NBA team spent about 43% of its revenues on player compensation last season. At that rate the Hornets would spend about $21 million for salaries in 2000, $10 million of that amount going to Johnson. That could be tight. But by 2004 the team would be grossing $56 million, with $24 million for salaries—and only $6 million of that to Johnson. The numbers are ballpark, but Stolpen confirms the gist of these computations.
Any way you cut it, the Hornets are stuck with a monster liability. Since the contract is guaranteed, they must pay Johnson even if he dies, becomes disabled or merely fizzles. To protect itself, the team has constructed a bulwark of insurance policies. It wasn't easy: You can't just pick up an $84 million policy. And insurance companies became wary of basketball players after Magic Johnson said two years ago that he was HIV-positive, and they turned all the more leery following the deaths this summer of Boston Celtic guard Reggie Lewis and New Jersey Net guard Drazen Petrovic.
So far the Hornets have obtained two types of insurance on Johnson—a "key man" term life policy and a disability policy. The key man policy pays off if Johnson dies, compensating the team for the loss of his services. Stolpen will say only that the death benefit is eight figures. As for the disability insurance, the Hornets have insured themselves in the event Johnson has a career-ending injury. Annual premiums for the disability insurance are in the low six figures. Should Johnson suffer such an injury, he has additionally agreed to revise his schedule of payments. If he is hurt in the first four years of the contract, the balance owed him will be paid over 25 years; in the next four, it will be spread over 15 years; in the last four, the Hornets will pay the balance over 10 years.
Finally, the Hornets and Johnson are still piecing together an additional insurance package that will contain both whole-life and term components. It will work something like this: The team will pay about $50,000 a year for a $50 million death benefit—a 1,000-to-1 ratio. After 1998, when the value of Johnson's contract drops below $50 million, the Hornets will continue to pay 1,000-to-1 premiums for the balance of the deal. Johnson will pay about $450,000 a year for 10 years to build the whole-life component into a nice nest egg in a family trust. After his contract expires, the $50 million death benefit reverts to him. The Hornets' total bill for LJ's key man, disability and life premiums? In excess of $200,000 a year.
Penny to Heaven
The problem the Magic faced was how to sign Anfernee (Penny) Hardaway, the team's No. 1 pick in the '93 draft and the third overall selection, when it had no room under the salary cap. First, trade reserve center Brian Williams to free up a $1.24 million slot. A million-two? Pittance. Says agent Carl Poston, who worked with his brother, Kevin, in negotiating Hardaway's contract, "We wanted to get Penny what he deserved, but with that kind of slot we really had to be creative." The league allows a player to be paid the value of an available slot for the first year, and 30% of that amount—in this case about $372,000—can be added in each of the remaining years of a contract. For Hardaway that meant $1.61 million in year 2, up to $5.72 million in year 13, a total of $45 million, or about $3.5 million a year. Chicken feed, the Postons said, Hardaway needed significantly more.
But how could he get it? There's a way, but to figure it out you have to put on your creative salary cap. The Postons obtained a $20 million line of credit at 10% from the Magic that Hardaway can tap, in various increments, during the first six years of his contract. He can borrow $2 million this year, up to $4.9 million in 1997 and $2.8 million in 1998. What's so great about that? Any schmo can take out an unsecured personal loan. But not any schmo can be forgiven the debt. Though it isn't written in the contract, the speculation is that Hardaway won't have to repay any money he draws. If he doesn't repay, however, he could run afoul of the league, which would likely view the arrangement as an effort to circumvent the salary cap.
But the truth of the matter is Hardaway probably won't mine the line of credit, not too deeply anyway, since the Postons have every intention of renegotiating his contract. How is that possible under league rules? The brothers tucked a floating option clause into Hardaway's deal that allows him to become a restricted free agent if he achieves any one of 15 goals, all of them cream puffs: for instance, if he averages 2.5 assists or eight points or two rebounds a game. "The floating option allows Anfernee to play peekaboo with the market and come out whenever he wants," says Carl. Because a team may resign its free agents for any amount, regardless of its status under the cap, Hardaway could look for more money. While he's at it, he might find a new nickname. Penny doesn't cut it anymore.
Webber Goes on the Grill