Tuesday, July 20, 2010

The Kovalchuk Signing & The NHL CBA – How It All Works

It’s official: Ilya Kovalchuk has signed a 17-year, $102 million deal with the New Jersey Devils. The 27 year old forward is locked in through the 2026-2027 season.

Kovalchuk will earn $6 million each of the next two seasons, $11.5 million for the following five seasons, $10.5 million in the 2017-18 season, $8.5 million for the 2018-19 season, $6.5 million in 2019-20, $3.5 million in 2020-21, $750,000 the following season and $550,000 for the final five years.

He will be 44 years old when his contract expires. However, the expectation is that he won’t play until then. Unless your last name rhymes with Recchi or Chelios, playing into your 40s is unlikely.

It’s no secret that NHL teams are looking to ink star players to long term deals:

Henrik Zetterberg - 12 years/$73 million         Mike Richards - 12 years/$69 million
Vincent Lecavalier - 11 years/$85 million        Johan Franzen - 11 Years/$43 million
Roberto Luongo - 12 years/$64 million           Alexander Ovechkin - 13 years/$124 million
Marian Hossa - 12 years/$62.8 million                                                                           

In a lot of these cases, the player will probably retire before his contract is up.

So why are these types of deals structured this way and are they permitted under the NHL Collective Bargaining Agreement (CBA)?

Let’s start at the beginning – the salary cap hit. Under the CBA, the annual salary cap hit for a player’s contract is the average yearly amount of the total contract. So while Hossa is slated to make $7.9 million this coming season, the actual yearly cap hit for the Hawks is actually $5.23 million ($62.8 million divided by 12 years). In the case of Kovalchuk, his yearly cap hit will be $6 million, even though he will be making $11.5 million in 2011.

In the first 10 years of the contract, Kovalchuk will make $92.5 million dollars. By that time he will be 37 years old, and on the downside of his career. Should the Devils decide to part ways with Kovalchuk at that point, they could buyout the remaining 7 years of his contract, which would be two-thirds of the remaining $9.5 million. Beneficial for the Devils is that the buyout money is paid out over twice the remaining years of the bought out contract (note though that the resulting cap hit is not the buyout amount; that’s calculated by more complicated means). If Kovalchuk were to retire at any time, both sides walk away from the deal with no cap hit at all.

(Note – if a player is 35 or older when he signs, a buyout does not reduce the cap hit. This is why you generally see these players signed to 1 year deals).

So Kovalchuk is getting the money he wants with this heavily front loaded contract. The Devils are getting the man they want, but are able to soften the yearly salary cap hit by extending the contract by a number of years. This will put the Devils in a better position to surround Kovalchuk with good players, and possibly help re-sign a player like Zach Parise (although no guarantees on that).

Are these contracts permitted under the CBA on the assumption that a player very likely won’t play until he’s 44? Well, the CBA doesn’t expressly say that they are not permitted. So then you need to turn to the part of the CBA that talks about doing things to get around the CBA or to circumvent it.

Paragraph 26.3 of the CBA provides that teams and players cannot do anything that is “intended to or “has the effect of defeating or Circumventing the provisions” of the CBA.

So if the NHL can show that a player or team entered into a contract that was intended to get around the salary cap or entered into a deal whose net effect was to get around the salary cap, then that contract could be up for challenge.

At law, showing that parties intended to do something can be tough. In the case of the Kovalchuk contract, you would need some clear evidence that either party intended to get around the CBA. If you don’t have that, it will be tough to succeed.

You can still succeed on the second part of the test: even if there was no intention of circumventing the CBA, does the deal have the effect of defeating the CBA and the salary cap?

In theory, the structure of a contract itself can be evidence of cap circumvention if the team and/or player is unable to provide a reasonable explanation for its structure. The argument from the NHL could be, for example, that the structure of the deal by itself constitutes a cap circumvention by artificially lowering the cap hit with the last “throwaway years”. The NHL could say that the long term contract has allowed a team to manipulate the salary cap.

So why didn’t the NHL challenge the Kovalchuk contract? It may be tough for the NHL to take issue with a contract that expires when Kovalchuk is 44 years old since other deals are pretty close. Luongo’s deal expires when he’s 42, and the same with Hossa. Both Franzen and Zetterberg’s contracts expire when they turn 40.

Genie's out of the bottle.

All that and the CBA does not expressly rule out those types of contracts.

For the always astute Devils GM Lou Lamoriello, 17 years was probably as far as he thought he could push things.

In theory, this means that teams could sign players to 30, 40 or even 50 year deals. If an owner wanted to buy the Stanley Cup, it certainly could under the current CBA.

It wouldn’t be a surprise if the NHL wanted to impose a maximum contract length in the next round of CBA negotiations, or otherwise try and address this issue. The CBA expires in September 2011, although the union holds the right to extend that deadline by a year - which it did in June 2010. Until then, we will continue to see these types of deals.


Anonymous said...

Nice work man. I really like your blog.

That is a serious loophole in the CBA. I am guessing it will be addressed when they re-negotiate. It is one thing to do it for a 25-27 year old. But doing it for a 36 year old Pronger is not right. These guys will never play until the end of their deals. Some of these guys will be a cap hit of half a million or say until the late 2030's. I think it was the Isles that started this stuff with DiPietro.

Anonymous said...

Another great article Eric!

Anonymous said...

I never understood any of this before. Thanks for laying it all out. Seems like a pretty massive loophole - one that completely undermines the whole point of the cap in the first place. What happens if the player gets injured early on in the contract? Do the teams have to buy them out? Seems like it is all risk for the teams and all win for the players.

Anonymous said...

Interesting. I wonder how the Devils are going to handle their cap issues over the next few months and years (particularly if the cap goes down at some point). Didn't increasingly ferocious salary competition bring the league to a stand still a few short years ago?

It will be also be interesting to see whether Kovalchuk can earn his pay within the confines of the Devil's system.

P said...

Good article. Complete BS what some teams are doing. One of the points of a salary cap was to reduce salaries... it's not doing it, as a result, we'll never see another dynasty under this CBA.

Anonymous said...

Great read Eric!! Whose kidding who though...these contracts are circumventing the "spirit" of the CBA. Like you said though, that train has already left, given the other long term contracts that have been inked already. If this issue doesn't get rectified in the next round of negotiations, then GM's are going to have a field day!!

Eric Macramalla said...

If a player gets hurt, then team can be in trouble. So there is risk for all teams - you are correct. They could buy the player out, but if it's early on in the contract realistically nothing can be done (see dipietro).

A player expected to miss at least 10 games and 24 days due to injury can be listed as a long-term injury (LTI). An LTI can be covered by replacement players, as long as the replacement salaries do not exceed the salary of the injured player.

Eric Macramalla said...

Yes - big salaries caused the last lockout and resulted in 24% rollback of salaries. There is no guarantee that the salary will continue to rise; if it drops, Houston we have a problem.

RTWAP said...

I believe the PA has already voted to exercise their option to extend the CBA by one year (in June of this year).

I hope they put in a simple rule that says a player's salary paid and cap hit must match by the time their contract ends. So if Kovalchuk retires 6 years early then the Devils face a cap hit of $5.2mil for those 6 years to even out the cap hit and salary paid.

Eric Macramalla said...

Good point - last month NHLPA voted to extend current deal.

Anonymous said...

Eric.. In order for the NHL to show "intent" to get around the CBA, could the NHL argue that they would allow this deal to go through if the Cash Flow were reverse? (ie: $550K in the first couple of years, with salaries escalating from there). This way, if the team says no, then would the NHL not have a strong case that the team does not expect Kovalchuk to play the entire lengh of the 17 years - and in fact, their intent to get around the CBA rules?

Just a thought.

Good chat this morning with TGOR on the team.


Eric Macramalla said...

Agreed - they could say if figures were reversed it would be ok. However, Kovalchuk may not want to be paid so little; the money at the end of the contract may not be collected so he would miss out on it. I do agree that "intent" makes things interesting.

Anonymous said...

I agree with you that Kovalchuk would not like the deal (hence the reason why he wants it front loaded) - it was more a way to try and prove intent on the team's part.

Thanks for the insight!

Eric Macramalla said...

I agree with you. Interesting argument as well.