We aren’t coming in to this thinking this is just a one year deal we are looking to the future and definitely looking ahead looking to see how we can go forward so this isn’t a quick stop for me.

On the surface it seems simple enough. Iguodala has two years remaining on his contract at $14,968,250 and $16,154,750 respectively, with an Early Termination Option (ETO) for the final year. This allows at least one or two years for he and the Nuggets to work out a new deal which will keep him around long term.

But what, specifically, are are the possibilities for Iguodala and the Nuggets going forward, and which of these various scenarios is most likely to play out in reality?

Let’s take a look at his four main options. (The quoted passages and many details below come from Larry Coon’s NBA Salary Cap FAQ. Bookmark it, and follow him on twitter: @LarryCoon).

Option 1: Sign an extension with the Nuggets before June 30, 2013, the deadline for exercising his ETO. In this case, his contract could run no later than the 2015-16 season, as there is a four season limit on extensions which includes the years remaining on the current contract.  This type of contract can have up to 7.5 percent raises.

Option 2: Exercise his ETO to become an unrestricted free agent (UFA) and re-sign with the Nuggets. Here, Denver would use the Larry Bird exception, which allows for five year deals and could result in a contract that ends as late as the 2017-18 season. Like extensions, Bird rights contracts have raises of up to 7.5 percent.

Option 3: Exercise his ETO to test the market as a UFA and sign with a different team. Since only the Nuggets have Iguodala’s Bird rights, this would result in a “standard” contract. According to Coon, “the “standard” length is four seasons and the “standard” raise is 4.5 percent – for example, when a team signs another team’s free agent using cap room.” In this case Iguodala’s contract could continue through 2016-17 at longest, and note the smaller 4.5 percent raises. As an example of how different a Larry Bird exception versus a standard contract might be, consider if Iguodala were to sign for $12,000,000 in the first year of either type, with maximum years and raises:

Given that Iguodala will be 33 years old upon completing the 2016-17 season, and would likely not be able to command nearly as high a salary in free agency at that time, the opportunity for a fifth year could be appealing. I don’t believe this is Denver’s best option (fan complaints might reach Kenyon Martin contract level proportions), but the option for a longer deal could be a strong selling point in the Nuggets’ favor.

Option 4: Allow the June 30, 2013 deadline for exercising his ETO to pass, accepting the $16,154,750 remaining on the final 2013-14 season of his current contract. Then, in a similar fashion to the three options above, extend before free agency or become a UFA in 2014 to then either re-sign with Denver or sign with another team.

Ujiri will surely seek to continue the pattern he has established of locking down solid players for generous but not unreasonably excessive salaries. There is bound to be some inherent tension on this front, as Iguodala took a lot of heat in Philadelphia over the past few seasons for being “overpaid,” but has more recently bolstered his value with a trip to the All-Star game, a superlative defensive 2010-11 season, and his role on the gold medal winning Team USA in the London Olympics.

For the most part, Iguodala is in the driver’s seat of his own destiny, holding most of the cards in negotiating a new deal. The Nuggets will not have wanted to lose Arron Afflalo for nothing except cap relief, nor to be put through another torturous year of a star player holding the franchise hostage. What leverage they do have will come from being able to offer more attractive contractual options than other teams, and perhaps, if Iguodala genuinely feels good about his new start in Denver, his desire to stay with the team.

The elephant in the room will be that roughly $16.1 million he’ll be owed in 2013-14 if he doesn’t opt for early termination. That’s a massive incentive to complete his current deal, especially in light of the fact that Ujiri has established a relatively frugal Nuggets spending culture. It is simply far too much money to easily walk away from, and in my opinion renders the first option above, extending prior to next summer’s deadline, the most unlikely of the four. If the Nuggets could pull off extending him for four years in the $12 million range on a contract ending in 2016, it would be ideal, but don’t expect that to happen.

The scariest prospect for the Nuggets of course is watching Iguodala leave for nothing, and it should be a genuine concern. In a league where overpriced contracts have become the norm, and players such as Eric Gordon who clearly are not in the same tier as the league’s top superstars can get maximum salaries, accepting less can be a tough pill for players to swallow, and Iguodala’s agent now has some impressive credentials in his arsenal.

So much will ride on Iguodala’s experience of the upcoming season. If he’s happy in Denver, thriving in the fast-paced offense and leading the team to an improved defense, he may determine that opting out of his final year and re-signing on a Larry Bird extension may be his best big-picture option. It would most likely entail taking a pay cut in 2013-14, but doing so with an eye on making more over the long term, and locking into a more stable, secure situation.

But that last big $16 million payoff in 2013-14 is hard to ignore. I suspect that next summer, after he lets the ETO deadline pass, we’ll be asking all these same questions once again.

Starting in 2012-13, teams pay an incremental tax that increases with every $5 million above the tax threshold ($1.50, $1.75, $2.50, $3.25, etc.). Teams that are repeat offenders (paying tax at least four out of the past five seasons) have a tax that is higher still — $1 more at each increment ($2.50, $2.75, $3.50, $4.25, etc.).

The desired effect is that these heavier penalties will give pause to even the deepest pocketed, biggest spending owners such as the Knicks’ James Dolan, the Lakers’ Jerry Buss, and the Mavericks’ Mark Cuban, when it comes to dishing out big bucks on salaries. (Though many might point to this summer’s free agency period as evidence the dissuasive effect has been minimal so far).

With the Kroenke family at the helm, the Denver Nuggets have been in the upper strata of teams with wealthy owners. According to a 2011 report by Yahoo’s Joe Dorish, Stan Kroenke was the fifth richest NBA owner, worth about $3.2 billion. While this may be technically inaccurate given the fact that he transferred ownership of the Nuggets to son Josh Kroenke in 2010, it seems fairly obvious that the money is all in the family, which happens to include Stan’s wife Ann Walton Kroenke, daughter of Wal-Mart magnate Bud Walton, who is more than a little well off in her won right. Which is all to say that the Nuggets have some big bucks behind them.

Even so, having money and spending money are not the same thing, and considering how much could potentially have been spent (the Knicks have paid a whopping $195 million in luxury tax, highest in the league), the Nuggets have shown some restraint since the tax went into effect. ShamSports‘ Mark Deeks (follow him at @MarkDeeksNBA) recently published some fantastic detailed information about how much every NBA team has spent in luxury tax since the system kicked in following the 2002-03 season. (Follow the link to see which teams have paid the most, and which haven’t paid any at all).

It turns out that among all the teams in the league, Denver has spent the 11^th most in luxury tax in the nine seasons since its implementation. The total amount the Nuggets have been taxed is $21,157,439, but the distribution of their payments has been quite uneven.

In the 2006-07 season, the Nuggets paid $2,022,418 in luxury tax, in 2007-08 they paid $13,572,079, and in 2009-10 they paid $5,562,942. In the other six seasons when the tax was in effect, they successfully kept the payroll low enough to avoid paying it.

Although the recent history of Nuggets player movement surely won’t be anything new to the fans who track it carefully, it can’t hurt to take a little stroll down memory lane to review in particular how Denver ended up paying over $13.5 million in luxury tax in 2008.

At that time, a perfect storm of massive contracts converged. 2004 saw what probably should be considered one of the most ridiculous moves in Nuggets franchise history. Then General Manager Kiki Vandeweghe shipped out three first round draft picks to the New Jersey Nets for Kenyon Martin in a sign and trade deal worth over $90 million over seven years. With annual pay raises of over $1 million each season, Martin was making upwards of $13, $14, $15 and $16 million respectively in each of his last four seasons with the Nuggets. His contract would prove to be an immovable albatross around Denver’s neck, which strangled their flexibility for the entire duration of the Carmelo Anthony era.

2004 was also the year Marcus Camby re-signed with the Nuggets on a six year, $65 million deal. Two years later, Denver made two more major signings. First, they re-signed Nene to a six year, $60 million deal. Shortly thereafter they extended Melo, who had been on his rookie contract up to that point, delivering him a maximum five year, $80 million deal which went into effect in the 2007-08 season.

So going into the 2007-08 season, Denver had about $44 million in guaranteed salary owed to four players – Martin, Anthony, Nene and Camby. The previous season they had paid about $2 million in luxury tax, with Andre Miller earning about $10 million, and role players filling out the roster to push the total payroll slightly over the threshold.

But then in December 2006, the triumvirate front office of Mark Warkentein, Rex Chapman and Bret Bearup saw the opportunity to add another star player alongside Melo, and traded Andre Miller to the Philadelphia 76ers for Allen Iverson, who was slated to make about $19 million in 2007-08 and $21 million in 2008-09. The result of this was that in the 2007-08 season, the Nuggets had committed over $65 million in guaranteed salary to their five top players. The salary cap was $55.6 million and the luxury tax was just under $68 million at the time, and given that a near-luxury limit payroll was committed to so few players, simply filling out the roster to its minimum number inevitably thrust the Nuggets deep into the luxury tax.

After Denver got swept in the first round of the 2008 playoffs by the Lakers, however, it appeared that Stan Kroenke became determined not to spend so exorbitantly on a roster that wasn’t delivering on the promise of postseason success. In a move that was fairly controversial at the time, the front office promptly dumped the contract of Marcus Camby off to the Clippers for a second round draft pick (or as most were calling it, “nothing”).

Just under four months later, shortly after the start of the 2008-09 season, they sent Iverson to the Pistons for Chauncey Billups (and Antonio McDyess, who was immediately waived). The end result of these, and a few other smaller maneuvers, was not only to successfully get under the luxury tax threshold in 2009, but at the same time achieve a playoff achievement which had been unprecedented in Melo’s tenure, getting out of the first round for his first time, then reaching the Western Conference Finals and giving the Lakers a run for their money before finally losing the series in six games.

This seemed to serve as proof of concept that by making smarter, more spendthrift moves, Denver could continue improving its roster without breaking the bank. After getting under the luxury limit in 2009, they did slip back over it again in 2010 due mostly to the pay raises on all those big contracts. But essentially the commitment to fiscal discipline has seemed to be a guiding principle which has continued as ownership has transferred from father to son and as Masai Ujiri has taken charge at the front office.

As the Nuggets move forward, the number of medium-sized contracts guaranteed to players who as yet are not bona fide stars will most likely force the front office to make some tough decisions. But having already shown their will to stay out of luxury tax territory over the past few seasons, we can almost certainly expect a continued effort to do so after the tax becomes much more punitive in 2013.

Bernie decided that it was not wise to pay Dikembe and Mutombo became a member of the Atlanta Hawks.  The rest is history.  Dikembe won three of the next five defensive player of the year awards and helped lead the Sixers to the NBA Finals in 2001 while the Nuggets crumbled into obscurity.

Clearly Bickerstaff chose poorly.  Mutombo was easily worth the money that he was offered.  Even so, Bernie may have actually been ahead of his time.  One of the keys to managing a team in the luxury tax era is recognizing when to say, “uncle” over a player’s salary.

The question then becomes how can one determine when a player’s salary reaches that tipping point?  That is much more difficult.  Clearly Bickerstaff misjudged Mutombo’s value.  If we move forward a few years it was clear that New Jersey was wise not to match Denver’s offer for restricted free agent Kenyon Martin (in the end Martin was not signed to an offer sheet, but the two teams worked out a sign and trade that paid Martin even more than he would have received from the proposed offer sheet).

When discussing the issue of allowing a player to sign with another team there is another issue that comes into play and that is maximizing your assets.  Losing something with value for nothing is rarely a good business practice.  It is clear that Masai Ujiri is a proponent of retaining assets.  When faced with the possibility of losing Nene to a team like Houston last fall, Ujiri signed him to a market level contract.  It was made clear soon after that the Nuggets management did not believe that Nene was going to be worthy of that contract as time progressed so he was traded.  Still, they took the necessary steps to get something as opposed to nothing.

Another example is Wilson Chandler.  When faced with the possibility of losing Chandler this summer as a restricted free agent, the Nuggets chose to sign Chandler to a market level contract.  The fact that Chandler is frequently at the center of trade rumors and the source of much speculation by fans is no coincidence.  I believe Ujiri signed Chandler so that he did not risk losing an asset for nothing.

That brings us to the topic of the day. The Nuggets are faced with a conundrum with JaVale McGee.  With the team salary steadily climbing the Nuggets need to be very careful to accurately gage McGee’s value.  Paying too much could result in risking incurring the luxury tax when it comes time to retain a core player such as Ty Lawson, offering too little will simply embolden McGee’s representation to seek out a larger deal elsewhere. At that point Denver could be faced with the possibility of being in the position of matching an exorbitant salary or lose a valuable asset for nothing.

Losing McGee for nothing would mean Denver traded Nene for three months of McGee, I am certain with Ujiri’s track record of retaining assets he will avoid that route at all costs.  The scary thing is, that could mean there may be no tipping point for McGee in Ujiri’s mind.  How much would be too much to retain McGee?

McGee himself is in an interesting position.  His value is more based on potential than past production. However, statistically last season he was the equivalent of Roy Hibbert.  You may have noticed that Hibbert is going to sign a four year, $58 million contact with the Pacers.  Of course there are intangibles involved.  Hibbert has been a much more stable influence in Indiana than McGee has.  Hibbert is more skilled as a scorer and passer and he has been an All-Star.  However, McGee is much more athletic and a better fit in Denver for their up and down style of play.  Plus there is the previously mentioned issue of potential.  Hibbert has already hit his ceiling.  He is never going to be much better than he is today. McGee could one day be far better than Hibbert.

Paying players based solely on potential is a fool’s game, but potential is always a factor in negotiations.

The Nuggets are currently in a good situation with McGee as the two sides are reportedly negotiating and no other team has as of yet stepped in to drive up the price.  Benjamin Hochman reported today that the average salary for McGee could be $10 million a year. While that is a lot of money, it is difficult to look at the market and decry that as a ridiculous amount of money.  It is fair to voice concerns about McGee’s lack of progress as a player over the years as well as his flighty moments on the court.

The Nuggets were faced with a similar situation in 2008 with another player who had worlds of potential, but was failing to put it all together on the court.  The team worked out a compromise that protected the Nuggets from getting stuck in a long term commitment, while still ensuring the player received some financial security.  That player was J.R. Smith and they signed him to a three year contract.

I believe the Nuggets should follow the same track with McGee.  By singing McGee to a three year deal for $27 to $30 million McGee receives his market value payoff and Denver has an early out if McGee never quite pan out.  This also provides a carrot for McGee to keep working as he can cash in on a larger deal after three seasons.

Had Denver signed J.R. Smith to a five year deal, he would still be on the books for $6-$7 million this season.  Instead he is playing in New York for half that.  If the Nuggets follow a similar path with McGee, hopefully it works out for both sides, but if not, Denver can say good bye to McGee and he can go play somewhere else for much less money just as J.R. is.

McGee is no Mutombo, but Ujiri is also no Bickerstaff.

Denver already has 11 players under contract for the 2012-12 season.  From highest salary to lowest they are, Danilo Gallinari, Arron Afflalo, Al Harrington, Wilson Chandler, Chris Andersen, Timofey Mozgov, Corey Brewer, Kosta Koufos, Ty Lawson, Kenneth Faried and Jordan Hamilton.  They have a bottom dollar team option on Julyan Stone, who would be number 12.  They also have two restricted free agents, Rudy Fernandez and of course JaVale McGee.  If they keep and use the 20^th pick in the draft, that player would be number 15 and Denver will have hit their 15 man roster maximum.  Do not forget their unrestricted free agent Andre Miller.

There is no doubt that at least one or two of the names listed above will not be with the Nuggets come the start of next season.

Financially, the Nuggets are in a good position considering they have so many quality players under contract.  Every single one of those 15 players listed above is good enough to deserve consistent minutes in the NBA.  The 11 players under contract have a combined salary for 2012-13 of $48,693,532.  That puts them $9-$10 million under the salary cap.  However, the salary cap does not simply consist of the salary of players under contract.  There are cap holds for restricted and unrestricted free agents, as well as the 20^th pick.  Add in the cap holds for Miller, McGee, Fernandez and their first round draft pick and the Nuggets cap number is over $74 million.

Denver does have the ability to create some cap flexibility.  First of all, if they renounce their rights to Andre Miller they will shave almost $12 million off the cap number.  Karl loves Miller, but it makes little sense for Denver to keep a 36 year-old point guard on the roster.  Denver offers Miller neither a starting job, nor a chance to win a title.  Despite Karl’s crush on him, the two sides are not a good match and even if Denver pursues him, I doubt Andre chooses to return.

While renouncing Miller outright would seem like a good idea, in and of itself, it does not provide Denver with any usable cap space.  It also removes the potential for a sign and trade.  With the caliber of teams Miller would be interested in signing with, a sign and trade may be the only way for him to get a market value contract meaning Miller could possibly bring in another asset.

The Nuggets can also cut ties with Rudy Fernandez.  Fernandez is popular with many Nuggets fans, however, I believe parting company with Rudy is the correct decision.  First of all, he is not very good at what is supposed to be his primary skill, shooting.  He has converted less than 33% of his three point attempts over the past two seasons mostly due to his poor base (his feet are too close together) and love of shooting off balance.  Fernandez is at his best when he is creating for his teammates.  Rudy won a lot of fans over early in his tenure with the Nuggets as he compiled three eight assist games in his first 11 contests.  Sadly, he only tallied more than three assists twice the rest of the season though to be fair the rest of his season only consisted of 20 additional games.  I would much prefer Rudy’s shots go to a player who is already a better shooter, Jordan Hamilton.

It may seem like a no brainer for Denver to make Fernandez his qualifying offer of $3.2 million to retain his restricted rights, but seeing as how he would have little sign and trade potential and his presence is not beneficial to the Nuggets, they should allow Fernandez to walk.  Rumor has it the Hornets have shown interest in Rudy and of course, he may one day follow through on his threat to return to Spain.

Aside from bidding adieu to Miller and Fernandez, Denver has one other option to clear money off their cap, amnesty.  There are three amnesty options for the Nuggets, Harrington, Birdman or none of the above.

Harrington was a prime option for amnesty last season; however, Big Al came into camp in shape and ready to play.  He proved to be a solid contributor on both ends of the floor and proved to be a warrior gutting out the final few weeks of the season with a torn meniscus.  Harrington’s play earned him another season, plus Harrington only has half of his salary guaranteed for both the 2013-14 and 2014-15 seasons.

Birdman is the other amnesty candidate.  It was clear that he had fallen out of favor with George Karl, although it was interesting that the time when Birdman ceased seeing the court was roughly the time the investigation into his off the court behavior commenced.  Plus the guaranteed portion of his contract is within one million dollars of Harrington’s guaranteed money over the next two seasons.  If Bridman is no longer in the team’s plans, amnestying him is a possibility.

The third option is not to amnesty anyone.  The amnesty provision was designed primarily to let teams out from under the weight of paying tax on their horrible contracts.  A potential side benefit would allow teams to create more cap space in order to go after free agents.  The Nuggets are not in danger of paying the tax and the most money they could create under the cap is roughly $9 million.  To do so, Denver would have to renounce Miller and Fernandez, amnesty Harrington and waive Julyan Stone.

It may sound appealing for Denver to take those steps to be a player in the free agent market, but consider Denver would still have to pay the guaranteed money due to Harrington, sign McGee to a new contract which will undoubtedly be north of eight figures annually and they would be adding a big money free agent prior to extending Lawson.  Under that scenario, Denver would be a tax paying team in 2013-14.  That is not going to happen.  Basically the chances of the Nuggets jumping through all of those hoops just to sign a subpar free agent resulting in paying the tax two seasons from now is lower than the ratings for the European soccer championships in Compton.

As currently constructed, Denver has fantastic depth, they have enough financial flexibility to retain their key young players for the next few seasons and they have a crafty front office who has shown they are willing to make difficult decisions.  Even if the Nuggets decide they need to retain Fernandez, or bring back Miller, they can afford to do so.

The bottom line is, if the Nuggets are going to make any franchise altering moves, it will be via trade, possibly on draft night.  Paying through the nose for a free agent this summer does not fit the long term plan, nor does it make sense.  Not to mention, Denver already has more players than they can play.

So enjoy draft night Nuggets fans.  It will probably provide the most exciting moments of the offseason to come out of Denver, even if all they do is make their three picks.

Player Salaries from Sham Sports