Monday, July 19, 2010

The Letter of the Law

So, Ilya Kovalchuck, the Waffling Russian, has signed for 17 years with New Jersey. He'll make about $10-million for several seasons of that contract and a total of $102-million. His cap hit, however, is less than six. Lou Lamoriello has officially entered the cheating cheaty cheater's club in the eyes of GMs who deal within the stated salary cap rules. The only exploitable cap loophole in the current CBA is the ability of teams to front-load contracts, so they can give the players long-term deals with low average cap hits. They do this knowing the player will be off the books long before the contract expires.

In idiomatic terms, there's a little thing called "the spirit of the law," however. Front-loading contracts certainly follows the letter of the law, in that there's nothing in the CBA that prevents the practice. It's obviously an end-run around the contract, though, which isn't exactly following the spirit of the law that is the NHL salary cap. The cap was introduced in the first place to prevent wealthy teams and perennial contenders from hoarding all the good players, leaving the also-rans with the dregs of the talent pool. The cap was supposed to ensure parity by making sure talent was spread evenly around, if only because the spendthrifts (yeah, I'm talking to you, Sather) wouldn't be able to afford to sign every good free agent or pay their young stars outrageous sums to keep them around. Better distribution of talent would enable small-market teams to compete without bankrupting themselves.

So now we've got bold GMs like Lamoriello, Paul Holmgren and Dale Tallon realizing they can still sign the big-name, big-talent players they covet by simply extending their contracts for enough years to make the average cap hit relatively painless. Holmgren may yet get burned for signing Chris Pronger to a seven-year, front-loaded deal, but only because Pronger signed after age 35 which means his cap hit counts even if he retires.

The NHL investigated the Pronger and Marian Hossa contracts because officials suspected the teams had negotiated early retirements as part of those deals. Of course, the investigation proved nothing. How could it, unless someone was stupid enough to write down what was implicit in the length of the contract itself? As the lengths and dollar values of the contracts themselves did not contravene the CBA, the league approved them. The NHL now has five days to approve the Kovalchuk deal, or challenge it. It will be allowed to stand, because Lamoriello has not broken the letter of the law, irrespective of its spirit.

Since the NHL has decided that it's going to allow those big, front-loaded contracts, a GM like Pierre Gauthier must re-examine the way he does business. The obvious conclusion is that he would be irresponsible not to take advantage of the loophole. Andrei Markov is coming into the last year of his deal with the Habs, and will need to be re-signed. (Despite the calls of some fans to trade him because he's been hurt twice in the last year and he's over thirty, make no mistake the General is the Habs' best player and will be retained.) Gauthier could try to negotiate a traditional contract with him for, let's say, $30-million over five years, with a cap hit of $6-million. Or he could follow in Uncle Lou's and Holmgren's footsteps and front-load a deal with Markov that would pay him $40-million for ten years, with the same $30-million Markov would have made in the shorter deal all paid up front and the remaining $10-million parcelled out over the last years of the deal. That would drop the cap hit to a very palatable $4-million, with the tacit understanding that Markov will probably retire long before he's 41 years old. He and his cap hit would then be off the books.

Even better, there's nothing stopping Gauthier from signing Markov to a twenty-year deal for $45-million total salary. He'd get $30-million or so in the first five years of the deal, then $15-million spread over the remaining fifteen, most of it concentrated in years six, seven and eight. It would bring Markov's cap hit down to a brilliant $2.25-million a year for the duration of his time with the Habs. When he retired at 38 or 39 years of age, he'd no longer count against the cap.

Considering the NHL's inability to plug the contractual loophole and other GMs' willingness to use it to their advantage, Gauthier is going to have to consider doing the same if he's going to compete. He doesn't have to be crazy about it like Lamoriello was with Kovalchuk. Uncle Lou will be stuck with that contract if Kovalchuk's production drops after he's thirty-five and he's still costing nearly $6-million against the cap for nine more years, or until he retires. If the cap hit is too high, even front-loading won't help reduce the damage when the player is no longer worth that price. While mega contracts are a risk, no matter how they're managed, there's still a definite benefit in using the front-loading tactic to reduce what would have been a reasonable cap hit to a negligable one, though.

Nobody would begrudge Markov $6-million a year for the last of his best seasons, for example. But everyone would dance for joy if Gauthier was able to cut a fair deal for the player, with a tiny cap hit that would benefit the team.

If the gloves are off for NHL GMs in exploiting the cap, the Markov extension is a great chance for Gauthier to join the party. He'd even be breaking new ground, in a way. To date, the big contracts have been given to big names who GMs feel might be the final pieces already-good teams need to put them over the top. Nobody's yet used front-loading to actually build a team in the first place. Imagine the damage the 'Hawks could have done to the league if they'd signed all their young stars for twenty years, with tiny cap hits that would enable the team to add big guns every year at the trade deadline? It's a scary thought.

Either way, though, Gauthier would be wise to jump on the front-loading trend. After all, playing by the spirit of the law doesn't get you far when your competition is playing only by the letter of it. It's reasonable to suspect that there's a limited window for this kind of deal because it's likely the NHL will close the loophole in the next collective agreement. The letter and the spirit of the law will be the same thing soon enough, and the bold GMs who take advantage before that happens will be better off than those who don't.


Anonymous said...

100 percent correct. There is no excuse for rich teams not to front load now. None.

The Habs could do this with 3 or 4 star players, let alone one. In fact, if we ever get a tax break, or a cap on pre tax salary only (FU Bettman idiot by the way for not insisting on that) the habs could front load half the bloddy roster, and pull off another dynasty...

Anonymous said...

Front loading is a fine idea for the right player. But it's like a marriage and can go bad in a hurry. To me, it's only good for Crosby or Ovetchkin and the long deals with lesser players are silly. What is Kovalchuk going to do for NJ? Maybe a few more points in the standings, maybe not. I like the guy alot but not for the rest of his carrer. Locking up Markov, no thanks. His best years are definitely behind him. Trade him before it's too late.

J.T. said...

@anon(the "trade Markov" one): I don't believe Markov's best years are behind him. I think he's got three or four good seasons left before he starts to decline, if he can stay healthy. That's the beauty of front-loading for a guy like him. You get him for a tiny cap hit, and you never have to worry about him not being value for money. Even if Markov dropped to third or fourth-best defenceman on the Habs roster, if his hit is small, he's still an asset. Front-load him and keep him until he retires.

Anonymous said...

Would you rather have the Gomez cap hit (and Gomez playing on your team) or Kovy's cap hit (and Kovy playing on your team)?
That's what I thought.
Kovy for 6 millions a year is clever...he's a great player.

TonyR. said...

I think it's debatable whether Gomez or Kovalchuk brings more to the table. Offensively, yes, defensively, no. As well, I would prefer to have Gomez over Kovalchuk in the playoffs. Re: the contract, I agree.

Anonymous said...

You're absolutely right. The only danger I see in this strategy is that a new CBA could impose RETROACTIVE costs to such contracts. E.g., any team with contracts of greater than 10 years in length faces a cap peanlty of $X.' Other than that, this approach is a no brainer and the Habs had BETTER employ it.

HoustonHab said...

GM’s have options with these sorts of contracts.

You can sign a big name UFA to a huge contract with a small cap hit. If the player doesn’t live up to your expectations you can

(1) trade him
(2) let him “bolt” to the KHL.
(3) ask him to retire
(4) bury him in the minors

The precedent is set for points 1, 2 and 3. Wait until a GM sends a big contract player to the minors (Huet?) and we will have all four.

Kovalchuk is tradable at a $6M cap hit for a few more years. NJ even has two years at $6M to evaluate him before the $11.5M a year cuts in. If Lou doesn’t like the cut of Kovalchuk’s gib after 2 years he can dump him on the leafs, Rangers or Habs before he has to pay the big bucks.

Does Kovalchuk care if he gets assigned to the AHL at 38 or so? No, he can always retire or bolt to the KHL when they are offering more money than he and NJ has remaining on the contract.

Olivier said...

Nice one. I think if the habs wanted in on this kind of stuff, they would have done so already.

They seem weary of using loopholes.

Patccmoi said...

100% agreed on the article


Actually I think that Markov is the first occasion the Habs realliy have to do this in the last 2-3 years when it became more common practice. I don't think they were sure enough of Cammy/Gionta to say 'let's get them for 12 years'. They're not sure that they will still want them until they retire (they might be more willing now, but they can't renegociate).

Plekanec was still pretty young, and I don't think they were willing to go for something as ridiculous as 15 years (the 17 years to Kovalchuk is really a total joke, I don't think GMs seriously considered going that overboard before Lou decided to just be shameless about it).

For Markov, he's at the perfect age to do this with 31. He still has some good years to give to the team, he was always a Habs and would likely be happy to retire as one, and you're sure of what you get with him, you know what he will bring to your team for the next years. And he's russian on top, which always makes the KHL option easier for them if you offer them many years at a very low price that they clearly won't play in the NHL.

There's absolutely no reason, out of having a 'fair-play' spirit, not to abuse the cap. And the GMs, including Montreal's, showed time and time again that this is a business and that this is what matters. You're there to compete, and to compete you need to use every possible advantage you can get, and this can be a very significant one.

I would honestly be sad if Markov has over 5M cap hit, and he could likely be obtained to around 4-4.5M. 45-50M for 12 years would do quite well.

Anonymous said...

The cap cheaters will eventually pay for their errors. Just because something looks good today doesnt mean it will in 10 years.

Bad business decisions always come back to haunt the makers.

We are starting to experience the downside of the massive contracts given to marginal players a few years ago ( see Souray, Ryder, and Huet) and we should rejoice that BG played by the rules and refused to overpay for them.

The Dipietro contract started the whole thing and the GMs still engaging in the practice will pay the price.

Anonymous said...

Kovalchuk for a 6 mil cap hit is ridiculous. Lou is a genius plain and simple. The Habs need Ilya more than any team in the league and I'm betting they never even tried. His number 17 was just waiting for him. Can you just imagine a 50 goal scorer in a Habs uniform again? Too bad that Habs management has zero imagination. Let's lock up Markov and Plekanec with long term deals - ughhhh.