Lets Discuss LTIR - A Puzzle of Misinformation

Ever since the news broke a few weeks ago that Andrej Sekera tore his achilles tendon, I have read numerous posts and comments every day relating to using the cap space the Oilers gain from putting Sekera on Long Term Injury Reserve (“LTIR”) to either replace Sekera, otherwise improve the roster or sign Darnell Nurse to a long-term contract (at a higher cap hit than a likely bridge contract will provide).

Unfortunately, it seems that many are either unclear or wrong with respect to how LTIR works vis-à-vis cap space (and, no wonder, the rules are extremely complicated and far from intuitive).

Personally, I am far from an expert on the LTIR mechanics, however, I feel I understand the mechanics enough from a high level to speak to a few misconceptions that I read about daily. The first is that putting Sekera on LTIR opens up $5.5M of cap space (that is, Sekera’s cap hit goes away while on LTIR) and the second being that the Oilers cannot put Sekera on LTIR until the first day of the season.

First and foremost, putting any player on LTIR does not get rid of the player’s cap hit, the cap hit remains at all times through the term of the contract. With that said, putting a player on LTIR may allow the team to go over the upper cap limit by a certain amount.

Secondly, a player can be placed on LTIR during the off-season and prior to the start of the regular season.

Additionally, the amount a team can go over the upper cap limit depends on the team’s cap hit at the time the player is placed on LTIR and how close they are the upper salary cap limit.

I am highly confident in the above 3 statements but the details and minutia are extremely complicated and there is indeed conflicting information from legitimate sources one can normally rely on. I believe my understanding of the following scenarios are true, however, I am happy for any feedback any reader may have, in particular, if they believe I have misstated something.

What is absolutely true is that a team needs to be cap compliant on day 1 of the regular season and the best case scenario (leading to the largest LTIR cushion to go over the upper cap limit) is for the team to be as close to the cap as possible on day 1 of the regular season and then place the player on LTIR. The team will be allowed to go over the cap by the amount of the cap hit of the player placed on LTIR minus the amount of cap space they had prior to the LTIR assignment.

For example, if the Oilers have a cap hit of $79M on day one of the regular season and then place Sekera on LTIR, they will be able to go over the cap by $5M ($5.5M equal to Sekera’s cap hit minus the $500K they were under the $79.5M upper cap limit) – the premise being the team can go find a “replacement player”.

We all know that a team can go over the cap by 10% during the off-season but must be cap compliant on day 1 of the regular season. If the Oilers have a total cap hit of $81M, they can place Sekera on LTIR on the last day of training camp, prior to the regular season, and become cap compliant. What is important to remember is that, in this scenario, the Oilers would not be able to add any additional cap commitment (they will only be allowed to go over the upper cap limit by the existing $1.5M on the premise that the injured player has already been replaced).

Of course, the first scenario, being cap compliant on day 1 of the regular season and then placing Sekera on LTIR, provides the largest ability for the Oilers to go over the upper cap limit (and the closer the team is to the upper cap limit on day 1 of the regular season, the more they will be able to exceed to the $79.5M limit via the LTIR cushion).

To maximize the amount of the LTIR cushion, the team could potentially be over the upper cap limit just prior to the regular season, send a player down to the AHL to get under the cap for day 1 and then finally place Sekera on LTIR. For example, If the team signed Nurse and then had a cap hit of $80M, they could send a player like Aberg down and his $650K cap hit would be totally buried resulting in the team being under the cap by $150K. The team could then place Sekera on LTIR and would be permitted go over the cap by $5.35M. Aberg could then be called up from the AHL and a material acquisition made. The risk, of course, in this example would be losing Khaira on waivers and sending Pontus Aberg down to the AHL would be more likely. In this scenario, the Oilers could add a player like Justin Faulk or Max Pacioretty early in the season with the LTIR cushion.

With that said, scenario two, being over the cap as the season approaches and using LTIR relief to become cap compliant, does give the Oilers the ability to add a contract right now and then use the LTIR relief on the last day of training camp to be compliant on day 1 of the regular season. In this scenario, the Oilers could sign Darnell Nurse to a longer term contract at any point in time.

With all of that said, Oilers management needs to tread lightly in any use of the LTIR cushion as:

(1) immediately after Sekera is activated (and, technically, he must be activated as soon as he is deemed fit to play), the LTIR cushion disappears; and

(2) the Oiler will need to be cap compliant once again on day 1 of the 2019/20 regular season.

The cap hit of a team is calculated on a daily basis and any amount they are under the cap on a given day leads to an accrual of cap space that can be used later in the year. In a non-LTIR situation, this allows teams who are under the cap throughout the season to add players later in the year, generally around the trade deadline. Unfortunately for the Oilers, this changes when the LTIR cushion is used. From a very high level, The LTIR mechanics include the calculation of an adjusted upper limit which is calculated as a function of the team’s cap space and the player’s cap hit and leads to an “accruable cap space limit” which will always be below the initial cap limit ($79.5M for the 2018/19 season).

What this leads to is that, unless the a team is operating with an aggregate cap hit under the accruable cap space limit, the team will not accrue any cap space that can be used later. If using the LTIR cushion, the team will never be below the accruable cap space limit and will never accrue any cap space to bank and use later in the year. The actual mechanic is much more complicated and includes the calculation and use of salary pools and performance bonus pools.

If the Oilers use the ability to go over the initial cap via the LTIR cushion (i.e. acquire Justin Faulk or sign Rick Nash early in the season) or use the LTIR relief on the last day of training camp to become cap compliant (i.e. sign Darnell Nurse to a long-term contract that takes the team over the $79.5M cap on day 1), they will not accrue any cap space to use later in the year.

In these scenarios, if Sekera is deemed fit to play during the regular season and is activated, management will be required to dispose of a player or players in order to open up the cap space for Sekera as the ability to go over the initial cap limit disappears, no cap space has been accumulated by virtue of being over the accruable cap space limit and the acquired player has taken the team over the cap.

Even if Sekera is not activated from LTIR during this coming season, the Oilers will be required to be cap compliant on day one of the 2019/20 season so, if management acquired a player such as Justin Faulk who’s contract extends beyond this coming season, then the acquired cap hit, in addition to Sekera’s $5.5M cap hit, will need to be managed next off-season and management would, undoubtedly, be forced to make moves to open up cap space just to be cap compliant.

In any acquisition using the LTIR cushion, the team must be cognizant of Sekera being activated from LTIR during this coming season and, even if they feel comfortable that they will not have to activate Sekera during this season, they must be cognizant of acquiring a player with a cap hit that runs in to the 2019/20 season or beyond. Let’s not forget, this team remains in a cap crunch heading in to next off-season with the need to sign two goalies (both Talbot and Koskinen are UFAs) as well as raises for players such as Khaira (who currently makes very close to the league minimum) and potentially a new Nurse contract if he only signs a one-year bridge.

If the team does feel comfortable that Sekera will not be activated this coming season, I do think this opens the door for a signing of Nurse to a long-term contract as this would only add $1M to $2M to next year’s salary cap (over a bridge deal) and that can be managed in the off-season.