Solving the Cap Crisis

Depending on how close you follow the sport of hockey, you may or may not know that the current Collective Bargaining Agreement under which the National Hockey League operates is set to expire in approximately a year’s time. If a new CBA has not been agreed to by that time, then play will continue under the current one until a new agreement has been reached.

While we don’t necessarily have the threat of a lockout looming over the next season, there will still be plenty of points of contention up for debate before the NHL and the NHLPA will come to an agreement. The biggest sticking point will be the rash long-term, front-loaded contracts that circumvent the intention of the salary cap. The current system is not working, so it is up to the league and the player’s association to come up with something better.

Here’s what I would do if it were up to me…

First, if you haven’t yet done so, take a moment to read my article on the perils of the salary cap that I penned for Center Ice Chat just a week ago. The article was published just a few days before free agency began, and dredged up the seemingly annual issue of bogus contracts being filed by NHL teams. Also, read this wonderful piece by Greg Wyshynski of Puck Daddy for his take on the future of these such contracts.

The silly season, as free agency is known, is barely a weekend old and it has already lived up to it’s name. Players swapped jerseys and allegiances for the highest bidder, as teams combined to spend hundreds of millions of dollars in dozens of signings…and that was just on Friday afternoon.

Some interesting questions have been raised already about what is and what isn’t allowed in terms of a player’s contract under the current CBA.

Less than a year removed from the Kovalchuk Amendment, we have already seen another team have a player’s contract voided by the NHL for circumventing the salary cap.

The guilty parties in this case were the Philadelphia Flyers and Maxime Talbot. The Flyers signed Talbot to a 5 year, $9M contract on Friday.

You might be thinking, what could possibly be wrong with a deal that only averages $1.8M a season?

Well, apparently about $250k.

The Hockey Guys offer an easy-to-understand explanation of why Max Talbot’s contract violates the CBA. The easiest way of putting it is that if the Flyers had decided to give Talbot $2M in the third year of his deal (instead of $2.25) and $1.25M in the fourth year (instead of $1M) it would have been a legal contract. The same amount of money, over the same number of years, resulting in the same cap hit, just distributed sliiiightly differently.

I am absolutely dumbfounded by the fact that the NHL is concerned over whether Max makes that $250k in 2013-2014 or 2014-2015.

The Flyers aren’t gaining anything in terms of cap space here, they just messed up the distribution of salary. They aren’t cheating the cap, they just made a mistake.

I understand that it violates part of the CBA (although only by the most meager of margins), but considering some of the contracts they’ve allowed in the past, it seems silly that they can tell Philadelphia that their deal isn’t valid.

Last summer, the New Jersey Devils and Ilya Kovalchuk agreed to a contract that would run 17 years, and pay out a total of $102M. That deal was also voided, and although the NHL eventually won their case when it was later decided by an arbitrator, they were really grasping at straws.

You see, the Kovalchuk deal didn’t actually violate any part of the CBA. No, instead the NHL claimed that it violated the spirit of the CBA. They felt that neither Kovalchuk nor the Devils were acting in good faith when they signed the deal, that neither party intended to fulfill the obligations of the contract that would run until Kovalchuk was in his mid 40s, at which point he would only be making near the league minimum in salary.

The Devils ended up being fined $3M, as well as forfeiting a first and third round pick for their supposed circumvention of the salary cap. They eventually reached a league approved deal with Kovalchuk that ran only 15 years and $100M, and in effect brought the cap hit for the contract up from $6M to $6.67.

Kovalchuk’s was not the first contract to be investigated by the NHL either, although it was the first that was ultimately voided for the above reasons. Chris Pronger went through a similar situation the year before, because he was scheduled to make  more than $33M of his $34.45M contract in the first 5 years of his 7 year deal. The Flyers saving grace was Pronger’s age.

Any multi-year contract signed beyond a player’s 35th birthday will stay with the team no matter what. That means that even if Pronger retired before his contract expired (which is quite possible given that it extends until he is 42 and he has a vast history of injuries), the Flyers would be stuck with an annual cap hit of nearly $5M. Therefore, it is in teams best interests to avoid giving out multi-year deals to players past the age of 35 unless they are certain they are going to fulfill it. For that reason, his contract was allowed to stand.

You might be asking yourself, as I have often done, why does the league average out the salaries over the length of the contract to determine a player’s cap hit, instead of making their yearly salary their annual hit?

The reason for this is because it prevents teams from loading up any given player’s salary in years where they know they will have more cap space than others. For example, if I know that my team is going to struggle to make it to the salary cap floor next year, I could theoretically sign a player to a contract that pays them upwards of $10M next year, and then significantly less the following year. This prevents that.

However, because the cap hit is the average of the total salary payed divided by the years of the contract, it has opened a funny little loophole that teams have begun to take advantage of.

Actually, I’m surprised it took as long as it did.

The Detroit Red Wings were the first to dabble in the art of contract manipulation, when on January 28, 2009 they signed Henrik Zetterberg to a 12 year deal that would pay him $7M+ for the first 9 years, followed by yearly salaries of $3.5M, $1M and $1M for the final three years, effectively lowering his cap hit by over a million dollars. They dipped their toe into this pool again just three months later when they signed Johan Franzen to a similar length, where he would make $5+M for 7 years before the salary began to fall off in the final four years.

On July 1st of that year, the Hawks really tested the limits of the CBA, signing Marian Hossa to a 12 year contract that would see him paid $7.9M for the first 7 years of the deal, followed by him making only $8M in the final 5 seasons combined. The Pronger contract came a week later.

Before the 2009-2010 season began the Vancouver Canucks inked Roberto Luongo to a 12 year contract where the first 8 years saw him make approximately $57M (or what would amount to a cap hit of over $7M). Three years of approximately $1M in salary to Luongo reduced his cap hit to just over $5M, or a savings of nearly $2M.

Duncan Keith became the second Chicago Blackhawk with a “problem” contract in December, when he signed a 13 year deal with 6 years at the start of $7+M, and an eventual cap hit of about $5.5M.

Finally, this past weekend, Brad Richards and Christian Ehrhoff signed 9 and 10 year deals, respectively that would see them paid basically double their cap hit over the first several years of the deal, with “throwaway” years tacked on to the end to reduce the cap hits to a manageable amount for the Rangers and Sabres.

Somehow, all of these contracts, obvious flaws and all, survived the scrutiny of the NHL and were rubber stamped for approval.

What the NHL wants to eliminate in the next CBA is precisely that: deals with throwaway years tacked on to the end in order to artificially alter the cap hit in the team’s benefit.

One way to ensure that teams and players are honest in their intentions of fulfilling the contract is to arrange the salary paid chronologically from lowest to highest. Essentially, pay the player the lowest yearly amount he is scheduled to earn in any given year of the deal first, with the highest dollar amount coming last.

In practice, that would mean Brad Richards would be earning $1M for the next three seasons, and playing the full length of the contract — until past his 40th birthday — if he really wanted to earn that $12M owed to him in each of the final two years. This would end teams tacking on throwaway years at the end to lower the hit, because player’s wouldn’t want to be paid far below “market value” in the first few years of the deal, and teams wouldn’t want to be paying out $10M+ to a player nearing 40 years old.

I have another, slightly more mathematical solution to the problem of the artificially lowered cap hit, a formula I am calling the  mean/median method of determining a cap hit. The mean obviously refers to an average salary, while a median is used to eliminate extremes in number sequences (in this case, absurdly low yearly salaries). It works something like this.

First of all, you would determine the player’s average salary per year (the same way you would ordinarily determine the cap hit, by dividing the total dollar amount of the contract, divided by the term). Then, every year that a player’s salary paid is less than half of that amount is taken out of determining his actual cap hit.

Let’s say for example I signed a 10 year deal, where I was paid $50M. Ordinarily, that would be a cap hit of $5M. Let’s pretend my pay structure was such that I would receive $10M the first two years, followed by three years of $7.5M, then one year of $3.5M before finally making $1M in the final four years.

This contract would not violate the CBA’s rules in terms of how much a salary can decrease on a year-to-year basis. However, I have clearly adjust the cap hit from somewhere north of $8M, to just $5M by tacking on the garbage years at the end. In all likelihood, I would have retired after the 5th or 6th year of the deal, instead of sticking around to earn the final four million over four years.

In my new mean/median formula, however, the calculation would go something like this:

I have determined that the average salary per year (ordinarily the cap hit) is $5M. Half of this number is $2.5M. That means that any year where the salary earned is less than $2.5M will not count towards the cap hit. My new, adjusted cap hit would then be calculated like this. 10+10+7.5+7.5+7.5+3.5 = $46M. We then divide that by the appropriate number of years (in this case, 6) to arrive at the new cap hit. My actual cap hit would be $7.67 (46/6), which is much closer to what I would be making in any given year.

I’ll show you what it looks like in practice, using the NHL’s “problem contracts” as examples.

Johan Franzen‘s current cap hit: $3.954,545

Johan Franzen‘s cap hit under the mean/median method: $4.611,111 (or a difference of +0.65)

Henrik Zetterberg‘s current cap hit: $6.083,333

Zetterberg‘s mean/median cap hit: $7.1 (difference of +1.017)

Duncan Keith‘s current cap hit: $5.538,462

Keith’s mean/median cap hit: $6.575 (+1.036)

Christian Ehrhoff‘s current cap hit: $4M

Ehrhoff‘s mean/median cap hit: $5.285,714 (+1.285,714)

Roberto Luongo’s current cap hit: $5.333,333

Luongo‘s mean/median cap hit: $6.709 (+1.375,778)

Ilya Kovalchuk’s current cap hit: $6.666,667

Kovalchuk’s mean/median cap hit: $8.545,454 (+1.878,787)

Marian Hossa‘s current cap hit: $5.275,000

Hossa‘s mean/median cap hit: $7.412,500 (+2.137,500)

Brad Richards’ current cap hit: $6.666,667

Richards‘ mean/median cap hit: $9.5 (+2.833,333)

Implementing a mean/median mode of calculating cap hits would eliminate the ability of a team to tack on garbage years to a contract, to artificially lower the hit, because they would not be counted towards the hit in the first place.

There are three examples of players on what I consider to be fair long term contracts that I want to share with you.

Mike Richards of Los Angeles is on a 12 year deal with a cap hit of $5.750,000 that features exactly 0 throwaway years. The least Richards will ever get paid in any one year of the deal is $3M.

Rick DiPietro is on a 15 year deal with the Islanders that pays him exactly $4.5M a season. The Islanders felt like they had an elite goalie in the making with DiPietro, so the years that he was among the best in the league (and therefore likely requiring a salary  and cap hit of much greater than $4.5M) they would be saving money, while in the later years of his deal  — when his skills would presumably be declining — they would be paying a little more than market value for a starter. A fair deal all around, no matter how poorly it turned out for the Islanders with DiPietro’s recent injury history. And again, no throwaway years in this deal because he makes the exact same salary every year.

Finally, Mikko Koivu of the Minnesota Wild is on a 7 year deal that will eventually pay him a total of $47.25M. That brings a cap hit of $6.75, and since the lowest Koivu makes in any one year is $5.4M, it does not feature any throwaway years. In fact, the Wild are going to be paying him $9.18M in the final year of the deal, which shows that a player can receive a very high salary in a given year of his contract without having to tack on garbage years at the end to lower the hit.

The year Koivu is scheduled to make $9.18M is actually the final year of the deal, which coincides with my first proposition of arranging the annual salaries chronologically from lowest to highest.

Whether the NHL eventually adopts something similar to what I have laid out, or whether they go in a completely different direction, the need for change is obvious. Teams are cheating the salary cap by millions of dollars per year, and it is in everyone’s best interests for this issue to be solved.

If it were up to you, would you adopt my mean/median method? Or the chronological method? Or do you have another idea entirely? Let me know in the comment section, or by contacting me on Twitter!

Posted by Rob Benneian on 3:40 pm. Filed under Detroit Sports. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.