Tuesday, July 03, 2007

The collective bargaining agreement
Fearing the devil you don't know

There are a lot of reasons the New York Rangers, Philadephia Flyers and others were "winners" in free agency on Sunday, and the majority of them have nothing to do with the NHL's salary cap rising $6-million to just more than $50-million.

Chris Drury grew up 40 miles from the Rangers' practice facility in Greenburgh, New York, and just 60 from MSG.
"As a kid, this was the team. Where I'm from, there's nothing bigger, better than the Rangers. Watching them win the Cup, I was a little bit older, but coming to Madison Square Garden, Brian Leetch, you name it, this was the place."
He was offered the same contract with the Buffalo Sabres, but on one of the few days in his career when he could pick his destination, Drury picked 'the team.'

After a motley, 16-year career in hockey that saw him leave home at 16, Brian Rafalski is also going home.
Brian Rafalski's first call was to his dad, Harry, whom he tried to tell the news even as the screaming in the background reached a joyous crescendo. The message was simple enough: Dad, I am coming home.
Home wasn't an option for Ryan Smyth, not after what happened at the trade deadline, but the west coast was where he wanted to be, with the chance to play eight dates in Calgary and Edmonton during the season. Colorado isn't home — but with Joe Sakic on the other end of the phone, convincing Smyth to come to what will be a winner, it felt close enough.

Close enough to turn down more money from the Islanders, and who knows who else among the 11 teams said to be bidding for him.

Kimmo Timonen joined his younger brother in Philadelphia, the worst team in the league last season; Todd Bertuzzi and Mathieu Schneider joined the defending champs. Paul Kariya went to struggling St. Louis from another small-market team, the Nashville Predators, despite the fact he'd be courted by many of the big dogs.

It's not necessarily about chasing the money, not when it's the same everywhere you turn, and it's certainly not about the pennies involved between one team spending to the new cap and another stuck a few percentage points behind at the old one. Twenty-seven of 30 NHL teams spent within $4-million of the salary cap last season, and with it on the rise to $50.3-million this season, there will be at least a handful of teams who drop off.

But they're not out of the running. At least not as much as the Islanders, who have the dough but not the arena, the atmosphere, the fans, the location, the organization to attract players who are suddenly free to go wherever they please. Ditto for Chicago and Los Angeles, who attracted flies on Day 1 and only waded in once the big fish were snared.

This collective bargaining agreement hasn't wrought a big-market success story so much as a mixed bag, wherein teams like the Calgary Flames and San Jose Sharks have retained their big-ticket stars while others have frittered those players away. The Sabres seriously erred when not re-signing at least one of Daniel Briere or Chris Drury well before July 1, as at least one of the players would have done so — and at a discount — in order to stay with what's been one of the league's top teams postlockout.

But if 27 teams were able to spend within pennies of a $44-million salary cap, how many will do the same at $50.3-million? And how much of that extra spending will be returned through escrow due to overspending?

Those are two of the pertinent questions here, to be sure, and I fully expect at least half the league's teams to hit $45-million or above, and for there to be some sort of escrow return. Players are now due 55.5 per cent of the league's hockey-related revenues, up from 54 per cent in 2006-07.

With the league's cap floor at $34-million, that won't leave a huge gap between the have and the have nots, and the fact the Sabres and others were even matching (and exceeding) contract offers like the one Chris Drury signed has to be encouraging. It's difficult to get behind the doomsday scenarios when we've seen the Carolina Hurricanes and Anaheim Ducks win the first two postlockout Stanley Cups, and teams like the Bruins, Flyers and Kings sink to the bottom of the pool.

Thus far, it's been smart spending and drafting that have won out, although you can certainly see scenarios on the horizon whereby the more extra revenue teams have to throw around will come in handy. The Sabres, for instance, wouldn't be able to erase as big a blunder as Alexei Yashin's contract, or build as extensive a scouting department as the Maple Leafs, and there's far less room for error for the small markets. Four years from now, the Flyers can throw money at Briere's enormous deal and make it (nearly) go away, and if the cap's even higher than where it is now (something that seems a distinct possibility), it won't hurt nearly as much as perhaps it should.

Because his contract is heavily front-loaded, a buyout would provide a lot of relief with Briere's contract after four years: The Flyers would have paid $33-million out to Briere at that point, leaving just $19-million over the remaining four years. With a buyout amount of $12.67-million spread over twice the remaining length of the the eight-year deal, we're looking at around an $1.58-million per season payout for eight years. Against the cap, the weighty early years of Briere's deal still have an impact, however, and the cap hit would average less than $2.5-million (see comments for a nice breakdown of how this works).

Not bad given he's due to receive $10-million in Year 1.

Even buyouts have their limits, however, something the Blackhawks discovered this summer when they weren't able to dump the likes of Jassen Cullimore. Teams can only buyout three players over the life of the collective bargaining agreement, making throwing money at your problems a limited proposition.

The only reward for failure these days is an abundance of cap room, but it takes more than just empty space to build a winner. Part of the reason the Rangers and Flyers were so well-positioned to buy big this summer was the fact they have such bargains on their rosters already:
  • New York's highest-paid forwards are just $4.94-million (Jagr) and $3.1-million (Straka) against the cap and netminder Henrik Lundqvist is a homegrown talent due a sizable raise from the $1.88-million he made last season. The Rangers don't have a single defenceman signed for more than Paul Mara's $3-million cap hit.

  • The Flyers had just one forward (Gagne) due more than $2.8-million per season before acquiring Briere and Scott Hartnell, and a ton of cheap young talent ready for second- and third-line roles. The team's starting goaltender doesn't have a hefty deal and the blue line wasn't weighed down by any big deals, especially if Mike Rathje spends the rest of his career as a long-term injury exception.
In other words, the only way you can take on a Drury/Gomez type tag-team is if there's plenty of cheap talent around them. There's a balancing act there between stripping down your team but still showing an ability to win to potential free agents. The Rangers and Flyers both went through recent rebuilds that brought in some underpriced youngsters, and it's that process which left them well-positioned to buy in to the bidding wars.

That changes if the cap continues to rise quickly, something that pundits are saying may not be the case. (That, I'm afraid, is going to require its own post.)

But the one thing this collective bargaining agreement has effectively done is limited the huge payouts to the league's actual stars. No longer are the Rangers dropping $9-million contracts on the likes of Bobby Holik, as the repercussions of doing so would be crippling under the cap — even a $50-million one. The low-end players are the ones getting squeezed, which is fine by me given it's the stars that generate revenues in the NHL.

This CBA certainly isn't a cure-all, and the quickly escalating salary cap — both at the floor and the ceiling — is one of the significant warts that continues to grow. Still, I'll take Gary Bettman's version of cost certainty over the free-for-all we had before, even if a capless NHL was the devil we knew.

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19 Comments:

At 12:38 PM, July 03, 2007, Blogger Kel said...

James, I believe there's a mistake in the cap hit calculation by the hypothetical buyout scenario for Briere's contract. Let's assume the actual salary for the final four years is $5M ($20M/4). Given the per season buyout amount of $1.67M. The "buyout saving" is $3.33M ($5M-$1.67M). The cap hit before buyout is $6.5M ($52M/8), so the cap hit after buyout is $6.5M-$3.33M=$3.17M. Note that the total cap hit over all 12 years (4 before buyout, 8 after) would be $45.33M. That's $11.33M per season for each actual paying season. Not a very attractive option, unless you have confidence that the cap will continue to rise by a lot every season into the future for the next 12 seasons.

On the other hand, GMs don't have that long of a tenure so they don't think that far into the future. Plus, the CBA doesn't last 12 years anyway.

 
At 12:42 PM, July 03, 2007, Blogger James Mirtle said...

I didn't think I was going to get that on the first go... will have another look at it.

Briere's contract goes like this:
$10-mil, 8, 8, 7, 7, 7, 3, 2

 
At 1:22 PM, July 03, 2007, Anonymous Anonymous said...

Okay, color me confused. Its the average amount of the contract per year that counts against the cap, but they buyout is a factor of the actual dollars paid?

 
At 1:28 PM, July 03, 2007, Blogger James Mirtle said...

I'm going to have to do a whole post on how buyouts work; it's too complicated to address here.

 
At 1:30 PM, July 03, 2007, Anonymous Anonymous said...

It's obvious that the cap has done nothing except move players to new teams...

Bettman has just created a new tossed salad that tastes like crap.

http://www.FireBettman.com

 
At 1:45 PM, July 03, 2007, Blogger Kel said...

If it's 10,8,8,7,7,7,3,2, let me redo the math. Cap hit for year 1-4 is $6.5M (average amount). Buyout amount is (7+7+3+2)x2/3/8 = $1.583M for year 5-12. Cap hit for year 9-12 is $1.583M. For year 5-8, cap hit depends on actual salary. For year 5 and 6, buyout saving is 7-1.583= 5.417. Cap hit is 6.5-5.417=$1.083M.
For year 7, buyout saving is 3-1.583= $1.417M, cap hit is $5.083M. For year 8, buyout saving is 2-1.583= 0.417, cap hit is $6.083M. To recap the cap hit for each year, assuming a buyout after year 4 is:

6.5, 6.5, 6.5, 6.5, 1.083, 1.083, 5.083, 6.083, 1.583, 1.583, 1.583, 1.583. Total is $47.247M

 
At 1:48 PM, July 03, 2007, Blogger Kel said...

Correction: total should $45.664M.

 
At 1:50 PM, July 03, 2007, Blogger James Mirtle said...

I think you've got it. Which means the average cap hit is around $2.45-million for the buyout years.

It's a good thing they made all of this so accessible for fans.

 
At 2:02 PM, July 03, 2007, Blogger Kel said...

Even though the average isn't too much, the year 7-8 cap hits are so big that it will cripple the team.

 
At 2:04 PM, July 03, 2007, Blogger James Mirtle said...

Even if the cap is at $60-65-million by that point?

 
At 2:58 PM, July 03, 2007, Blogger Kel said...

Even at a 65M cap, 6M is still 9.2%. In today's dollar (50.3M cap), that is $4.6M. By the way, if a team saves $4.6M in cap space until the deadline, it's useful for acquiring players with total cap hit close to $14M. It's up to you to decide whether it's significant or not.

 
At 3:28 PM, July 03, 2007, Blogger James Mirtle said...

The interesting thing is that by giving Briere such a low salary to end the contract, the cap hits will be that much higher in the final years. I wonder if there's any strategy involved there at all, or if there will be in the future.

Besides, the only point was that just because Briere received a $52-million deal, it doesn't mean it'll be on the Flyers' books all eight years. Even if they buy him out after six years, there's not that much cash to payout.

 
At 4:19 PM, July 03, 2007, Anonymous Anonymous said...

Did Paul Holmgren's cap-ologist used to work for Enron? Is the money actually like that over the life of the contract, or was it just presented in that order?

Wouldn't you rather(if you're the club) have year 1 be $10mm, then 2,3,7,7,7,8,8?

That way the cap hit would be $2.8mm in year 5-6, $1.8mm in 7-8, then get hit for $3.3mm in years 9-12 when everybody's rich as Rockefeller??

That way Briere would make an average of $10.45mm over the 4 years of the contract when he gets bought out, or $8.8mm if bought out after year 5.

 
At 5:03 PM, July 03, 2007, Blogger Kel said...

I think the strategy is to take the same cap hit but deliver more money to the player (ignoring the possibility of buyout). Front loading means the players get more money now, and because of the time value of money, it worth more vs balanced or rear-loaded.

 
At 5:08 PM, July 03, 2007, Blogger Kel said...

As I mentioned, I think the contract is front loaded to pay the player more money, not to avoid a high cap hit in case of a buyout. There are also restrictions in the CBA on how extreme the year-to-year salary difference can go within a contract

 
At 5:44 PM, July 03, 2007, Anonymous Alec said...

It's seems obvious that a 37 year old Briere will not be playing for the Flyers, so why wouldn't they do the contract as suggested above(10,2,3,7,7,7,8,8).

The $10mm upfront more than takes care of any future value of money functions, and designing the contract to be more cap friendly when he gets bought out while preserving his average pay over the life of his contract, especially with a no trade clause.

Maybe it's just me, but the moment Briere stops being a top 2 center is the moment he's out of the league, and it seems as if the way we think the contract is written hurts the Flyers when that moment comes.

Whereas the alternative I'm suggesting would pay him more than the average he would get over the life of the contract(and abusing the CBA) plus be less damaging to the Flyers long term.

 
At 6:25 PM, July 03, 2007, Blogger Kel said...

First of all regarding future value of 10,2,3,7,7,7,8,8 vs 10,8,8,7,7,7,3,2, assuming a modest 5% return, the first option gives a total of $64.48M after 8 years, whereas the other gives a total of $61.31M. That's $3.17M difference (advice: save money and invest NOW, not later).

I can speculate more on the front loading and come up with two more possibilities:

1) By year 7 and 8, Briere will have already earned 90% of his contract money by only playing 75% of time. He may be inclined to retire, which whould get the Flyers off the hook in terms of cap space (because he signed his multi-year deal before the age of 35)

2) By year 7, a team with a budget significantly lower than the cap can absorb the $6.5M in cap space (they have plenty given their budget) and the $3M and $2M in salary (which could be a bargain in terms of production).

 
At 7:00 PM, July 03, 2007, Anonymous Anonymous said...

Kel: reason no. 2 went through my mind. And it'll probably be a growth industry for small revenue teams: selling their cap space. In return for taking an aging star that can't perform to his cap value, the low revenue team, gets the player for his now devalued contract price plus draft choices or other players.

 
At 8:29 PM, July 03, 2007, Blogger Kel said...

the added benefit is that they can claim to their fans that they spend close to the cap :P

 

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