The New Rules and Loophole Lou
by Scott Reynolds on Sep 8, 2010 4:30 PM MDT
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As pretty much all of our regular readers will already know, the Ilya Kovalchuk contract situation has (mercifully) come to an end. Ilya Kovalchuk is officially a Devil, and will be for a long time to come. But along with Kovalchuk's new contract came a few new rules that I'd like to lay out, so that there's an easy place to come back to find them when they're needed in the future. After the jump, I'll take a look at those new rules, and talk about why I think Lou Lamoriello knew what was coming before he submitted the second Kovalchuk deal to the league.
First, the new rules. I'd like to have found a more official document than an article by Dan Rosen on nhl.com (nothing against Dan, it's just that he's not exactly Bill Daly or Gary Bettman), but his article was the most official source I was able to find:
The regulations will be added as a supplement to the Collective Bargaining Agreement and apply to all contracts signed from today.
(...)
The agreement includes two major regulations that go into effect immediately and will be a part of the Collective Bargaining Agreement until its expiration on Sept. 15, 2012. If there is no CBA at the start of the 2012-13 NHL season, the rules will be grandfathered until a new CBA is negotiated:
1. While players and clubs can continue to negotiate long-term contracts (five years or longer) that include contract years in a player's 40s, for purposes of salary-cap calculation the contract will effectively be cut off in the year of the contract in which the player turns 41.(...)
2. In any long-term contract that averages more than $5.75 million for the three highest-compensation seasons, the cap charge will be a minimum of $1 million for every season in which the player is 36-39 years of age. That $1 million value will then be used to determine the salary cap hit for the entire contract. If the contract takes the player into his 40s, the previous rule goes into effect.
So that's pretty simple. Anything that was signed prior to the Kovalchuk contract is grandfathered, and these new rules don't apply. Any contracts signed after the Kovalchuk deal will be governed by these new rules. The new rules only govern long-term deals, and only deals that pay out a substantial amount of salary in at least three seasons, so grunts signing longer-term deals won't be getting squeezed. The rules themselves will be in force for as long as the current CBA is in use.
One important issue to deal with here is the definition of "age". In the CBA, the League Year begins on June 30th, but the language above talks about "the player turn[ing] 41" during the year. So, when I use "age" in the table below, I mean the player's age as of June 30th +1. So a player who turns 35 on April 10th 2011 would be considered 35 for the 2010-11 season in the table below. Now, let's look at all of the contracts currently signed that would have been impacted by these new rules. If you feel the new rules should be interpreted differently, please let me know. Once again, the new rules don't actually apply to these deals, but if they did, this is how things would change (in the chart, the three columns are "salary", "the cap number under the old rules", and "the cap number under the new rules"):
The first thing I notice is that there are only five contracts in the entire league that would have been impacted by these new rules. Vincent Lecavalier? He's good. Duncan Keith? No problem. Henrik Zetterberg and Johan Franzen? They're just fine. Now, to me, that means that these new rules don't stop teams from circumventing the spirit of the salary cap - they just make it so that teams can't be ridiculous, and the league isn't embarrassed in the future by a contract that takes a player to fifty. These new limits are very reasonable, but they really won't change much of what's been going on; these long-term deals are far from a thing of the past.
Still, it's too bad the league didn't make the new rules apply to these deals too. Watching Canucks' fans see Luongo's cap number suddenly balloon almost $1.4M would have been hilarious. But I suppose it's not really fair to the teams to apply the rules retroactively, and not fair to the players to void their deals. Besides, it's not really in the league's interests to do damage to big-market teams like the Flyers, Devils, Canucks, and Blackhawks (the impact on the Bruins is negligible, though they are the only team who would have been impacted by the second new rule).
But it seems to me that Lou Lamoriello saw these new rules coming, and constructed Kovalchuk's contract as though they'd apply to him. How else can we explain the structure at the back end of this deal? The tail on most contracts declines every year, never rising, but this deal drops to $1M for three years before jumping to $3M and $4M in the last two! Whereas we might have expected a tail that went 4,4,3,1,1,1 we instead see a tail that goes 4,1,1,1,4,3. Why is that?
To game the (new) system of course! If Kovalchuk's contract was to be under the new rules, each season from 36-39 would have counted for at least $1M against the cap. By some coincidence, that's the exact figure at the bottom of Kovalchuk's deal in those years. Further, under the new rules, the last two years of Kovalchuk's contract wouldn't have counted in the averaging of his overall cap number for the first thirteen seasons. Instead, whatever salary he's paid in the year he turns 41 counts as his cap number for that season, and the same is true for the year he turns 42. Lo and behold, Lou brought the "circumvention years" forward a couple of seasons, and Kovalchuk is promised a bit more on the tail end of the deal, when he can be safely stowed in the minors or Russia if he's not playing well, but doesn't want to retire. Good old Lou always seems one step ahead, doesn't he? In this case, he's gamed a system that didn't apply to him a week before it had even become official!
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1. Love the tongue-in-cheek-ness, but in all seriousness, if we don’t think one of Bettman’s biggest cheerleaders had some inside knowledge about what the League was looking for in a renegotiated contract, then we’re all really naive.
2. Off-topic, but it is so annoying to see a CBA “amended”…oh wait…“supplemented” by a material change…without any discussion of a formal approval process. I’m assuming the NHL and NHLPA signed a formal document to make this change – but that to me is an amendment of the CBA. And I don’t see anything in the League’s constitution or bylaws that gives the League office the power to adopt or amend a CBA without Board approval. I would imagine the NHLPA governing documents say the same. Heck, who would even sign a document to bind the NHLPA at this point? This just smells of a bunch of Very Important People sitting in a room, without any oversight, and materially changing the most important document in the sport.
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It is rather odd that we never heard about player reps getting together on this. I’m pretty confident that they were informed and gave consent, but you’d think that there would have been a more formal gathering after the first Kovalchuk deal was deemed a circumvention.
by Scott Reynolds on Sep 8, 2010 8:51 PM MDT up reply actions
This isn’t going to affect my 13 year contract offer to David Backes is it?
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Nope. That one would be good (unless you had planned to pay him less than $1M in one of those later years).
by Scott Reynolds on Sep 8, 2010 8:39 PM MDT up reply actions
The increasing number on the back-end does one more thing though, and that is that it does increase the incentives for the player to keep playing, and is ‘slightly’ less likely to simply be a handshake and farewell number. Obviously that can all be disregarded is the ‘real’ contract is for 80m during his active days, and the rest is for show only…
Pushing the money back is just better for the Devils all around. Either Kovalchuk doesn’t last that long and they don’t have to pay him, or he does and they pay him a few years later than they had originally planned. As for the incentive, I’m pretty confident Kovalchuk will want to collect his money at the end of the deal, but if his play deteriorates, who knows what will happen. It’s hard to say what the economics of pro hockey is going to look like in 15 years!
by Scott Reynolds on Sep 8, 2010 8:44 PM MDT up reply actions
Who knows what the economics of planet Earth is going to look like in 15 years. Hockey players might be working two jobs in the summer to make ends meet, just like the “good” old days. Conn Smythe’s gravel pit redux.
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by Bruce McCurdy on Sep 9, 2010 12:29 AM MDT up reply actions
i don’t think lou knew what the rules were going to be. i think the league saw what lou was doing and realized that teams could still get cap savings by fobbing off medium-paying years into a player’s 40s, and that the league was going to have a hard time winning against such a contract at arbitration. these rules are specifically designed to prevent such contracts. so yes, lou was one step ahead, because he got the league to move to negotiate what seems to me a very favorable deal with the NHLPA to prevent this sort of deal from becoming the new ‘front-loaded’ contract.
Well, these rules don’t really prevent contracts like this. Certainly, the teams/players can’t mess with the system quite as much as they had in the past, but it would still be quite advantageous for teams to do exactly what Lou has done here. If the player is willing to have a bunch of guaranteed money on the back end, contracts can get pretty creative. Take Marc Savard’s situation. If the Bruins had wanted (and this presupposes they want to spend more than the cap), they could sign him to a deal that pays him 6,4,2,1,1,1,1,1 // 3,3,5,7,7. The “new” cap hit there would be $2.125M. The kicker is that Savard needs to be okay with getting his money later (which includes an extra $14M, but getting it so much later really is a kick in the pants) and playing five years in the minors and/or Europe so that the team isn’t on the hook for his cap hit in those last five years. To me, the system seems quite prone to abuse from the rich clubs. The biggest worry for them is that the rules change halfway through the deal.
by Scott Reynolds on Sep 9, 2010 10:06 AM MDT up reply actions
i don’t know why you’d propose such an absurd deal, no player would ever sign such a contract, nor (probably) any team. the time value of money makes that a horrendous contract.
the new rules do not prevent such a deal, but they strongly de-incentivize them. kovalchuk’s not likely to play for the money he’s getting on the back end, not in north america at any rate (unless he wants to chase NHL records). imagine a thornton deal with a tail that extends into his year 43 season that pays him 3 million, for instance. so something like 10 10 9 4 4 4 4 1 1 2 2 3. under the old rules, such a deal could knock his cap hit down significantly – it’s a 4.5 million dollar cap hit here, 5.2 million under the new rules. under the new rules, it actually makes it so that the player wouldn’t want such a deal, because he would have no real incentive to back-load some of the years he’s not going to play, because they don’t tamp down the cap hit.
also note that the new rules don’t prevent such deals as your savard absurdity from being called circumventions, either.
Kovalchuk’s “backloading” is, as far as I know, unique. It’s the only deal I’ve seen where the amounts rise on the tail. Everyone else just keeps going down, the idea being the player won’t be around to collect. As you said, there’s no reason for a player to pile money onto years they don’t plan to play, so why would Kovalchuk’s deal do this (instead of pushing the years with more money forward)? IMO, it was Lou and Kovi gaming the new system in advance. The big difference now is that the player needs to be willing to hang around to collect his money, not just retire and see the last years fall away. I’m sure that some guys will be willing to do that.
The time value doesn’t need to make the deal horrendous. If you feel $14M in extra money doesn’t make up for Savard getting it later, simply make the latter numbers higher until both parties agree It’s perfectly workable. Take the Thornton example above. Why would a deal that runs 9 8 7 4 1 1 1 1 1 1 4 7 11 11 to age 44 be “horrendous” for Thornton. The “new” cap hit would be $3.4M, which gives the player a much better chance to win, and he gets a lot of money guaranteed to ride out his career in Europe. Could the NHL call circumvention? I suppose they could, but I don’t think they’d have a slam-dunk win. The new rules seem to explicitly allow this. The big worry, to me, is having the rules changed in a new CBA when you’re in the middle of a monster deal (a change to “all one-way deals count against the cap no matter what” would be pretty devastating).
by Scott Reynolds on Sep 9, 2010 6:21 PM MDT up reply actions
Kovalchuk’s "backloading" is, as far as I know, unique. It’s the only deal I’ve seen where the amounts rise on the tail. Everyone else just keeps going down, the idea being the player won’t be around to collect. As you said, there’s no reason for a player to pile money onto years they don’t plan to play, so why would Kovalchuk’s deal do this (instead of pushing the years with more money forward)? IMO, it was Lou and Kovi gaming the new system in advance
yes, it is unique. it’s my view that that was to pass muster against any claims of circumvention, not to game the new system. there’s a reason why the kovalchuk contract was approved, and that’s because in part that I think the NHL was not convinced that it could defeat the contract in an arbitration hearing. if the NHL lost, it would welcome in more and more of these types of deals.
The time value doesn’t need to make the deal horrendous. If you feel $14M in extra money doesn’t make up for Savard getting it later, simply make the latter numbers higher until both parties agree It’s perfectly workable. Take the Thornton example above. Why would a deal that runs 9 8 7 4 1 1 1 1 1 1 4 7 11 11 to age 44 be "horrendous" for Thornton. The "new" cap hit would be $3.4M, which gives the player a much better chance to win, and he gets a lot of money guaranteed to ride out his career in Europe.
why does joe thornton want to spend his declining years playing professional hockey in europe? deferred contracts are what sunk the pittsburgh penguins into bankruptcy – while i don’t think that deferred contracts like this would sink any franchise, it would certainly put a gigantic burden on a team to have $11M in dead space on the books. plus there’s a good chance that loaning players out to european teams as a way of getting out of cap trouble may be eradicated in the next CBA.
furthermore, i don’t think joe thornton wants to be playing for $1M a year for 7 years. i don’t think that any player would ever sign a contract like that. the incentives are very small, the risks very large, for both sides.
i don’t think that any player would ever sign a contract like that. the incentives are very small, the risks very large, for both sides.
I don’t understand how this is risky for the player. It’s a guaranteed contract, so the’s going to get his money. The reason a player like Thornton would be willing to do it is because it improves his chances of winning the Stanley Cup, an important goal for a lot of players.
there’s a good chance that loaning players out to european teams as a way of getting out of cap trouble may be eradicated in the next CBA.
I think that’s by far the biggest risk. The assumption being made is that you can pay the player the money without dealing with the cap hit. A team like the Flyers might happily increase their budget by $10M if it meant buying some extra cap space (they’re doing it on a smaller scale already, as are the Devils, Red Wings, Blackhawks, and Canucks).
yes, it is unique. it’s my view that that was to pass muster against any claims of circumvention, not to game the new system.
It just seems to comport to the new rules too closely for it to be coincidence, at least to me. I don’t really expect deals like the one I proposed for Thornton’s (at least not until the next CBA is negotiated), but I wouldn’t be at all surprised to see a lot more tails that look like Kovalchuk’s on these long deals to circumvent the cap in a smaller way with less risk of killing yourself if the league changes the rules. For instance, the last six years of Hossa’s deal might have run 4,4,1,1,4,4 instead of their current 7.9,4,1,1,1,1. It would be enough to reduce his cap number $6.13M to $5.74M. That isn’t huge, but it’s not trivial either.
by Scott Reynolds on Sep 10, 2010 1:07 PM MDT up reply actions
I don’t understand how this is risky for the player. It’s a guaranteed contract, so the’s going to get his money. The reason a player like Thornton would be willing to do it is because it improves his chances of winning the Stanley Cup, an important goal for a lot of players.
who says contracts will be guaranteed in the next CBA? the risks aren’t that great for the players – fine – but i don’t think that a player wants to be playing into his mid 40s to collect a contract, no matter the payout. hockey is a physically debilitating game. so i don’t think a player would sign such a contract. nor do i think the league would allow it.
It just seems to comport to the new rules too closely for it to be coincidence, at least to me. I don’t really expect deals like the one I proposed for Thornton’s (at least not until the next CBA is negotiated), but I wouldn’t be at all surprised to see a lot more tails that look like Kovalchuk’s on these long deals to circumvent the cap in a smaller way with less risk of killing yourself if the league changes the rules. For instance, the last six years of Hossa’s deal might have run 4,4,1,1,4,4 instead of their current 7.9,4,1,1,1,1. It would be enough to reduce his cap number $6.13M to $5.74M. That isn’t huge, but it’s not trivial either.
Well, sure, but that’s because if you figure out the ‘real’ contract that the player wants to play for, the rest is just window dressing. Kovalchuk is a special case because he may want to play in Russia near the end of his career, and this contract enables him to do so pretty easily. He may also want to chase NHL records, and a high cap hit for a big salary would be intriguing to lots of small-market teams. The reason why Hossa’s contract doesn’t do that is because he’s out 4 million on the whole deal, assuming he doesn’t play to the end. Since the Devils finagled a way to make this Kovalchuk deal a 10/90 deal, instead of the 11/97 deal they first came up with, I don’t think he’ll have that big a problem with it.
The Frontloaded Nine from Tyler’s post last year, plus Kovalchuk, get an average of $17.2M above their cap hit for the next four years, which is enough to singlehandedly move up the amount of escrow kept by about 1% (last year’s number being about 10.8%). That’s a pretty fucking big chunk for ten contracts. Obviously, it goes down a bit over time, and the final years probably wind up decreasing the amount of escrow that would be paid back to the owners, but only if the player is still in the League by then, which…yeah. Right.
My question is, will this at least mitigate somewhat the effects this has on escrow? Or since all new deals will have a slightly modified structure (and presumably end before 40), will it simply shift things forward a little bit? (That is, fewer years of being paid massively over AND under the cap hit.)
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If I were a rank and file player I would not be at all thrilled about the PA appealing that case on behalf of Kovalchuk. To me the contract was every bit as much an attempt for the player to screw the other players as it was the team to screw the other teams. I wonder if a big part of the reason the PA rolled over so meekly on the matter was that for every guy who wins the lottery there’s 700 other guys who bought and paid for a ticket. The size of the pie changes not at all. So to argue the case is to chase their own tails.
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by Bruce McCurdy on Sep 11, 2010 3:09 PM MDT up reply actions
Yeah, this CBA makes it so that there are several issues where the players do not all have the same interests. The same is true of the owners. It should make negotiations in the next CBA quite interesting since both Bettman and Fehr will struggle to find issues that garner support from the entire group (beyond, we want the players’ share to be more/less).
by Scott Reynolds on Sep 11, 2010 7:27 PM MDT up reply actions
I think this is a small step forward for the lower-level players. It should serve to reduce the number of years the players are “under contract” but plan on being retired, but the effect won’t be very big. The new rules wouldn’t have any impact on several of the deals Tyler identified a year ago and the impact is minimal on most of the rest. These kinds of “retirement” deals will likely continue. It’s just that the rules are clearer now, so you won’t have another Hossa or Luongo or Kovalchuk pushing the envelope.
by Scott Reynolds on Sep 11, 2010 7:34 PM MDT up reply actions
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