Massive loophole in the NHL salary cap?
The NHL's labor agreement has a loophole that allows teams to skirt the salary cap almost at will. That is, if I correctly understand Michael Farber's article in the July 16 Sports Illustrated (which I couldn't find online – maybe it's not up yet?).
According to Farber, when a player is given a multi-year contract that doesn't pay the same amount each year, the team's salary cap is debited the average annual amount. For instance, Daniel Brière signed with the Flyers for $52 million over eight years. That's an average of $6.5MM, which will be charged each season against the Flyers' cap. But for the eight years, Brière is actually being paid $10, $8, $8, $7, $7, $7, $3, and $2 million, respectively.
While this contract does add up to $52 million, its present value is obviously much higher than if it were eight equal payments. At an discount rate of 10%, the present value of Brière's contract is about $39.1 million. If the payments were equal, the PV would be only about $36.4 million. So the Flyers are effectively handing Brière a bonus of $2.7 million, right now, without it affecting the salary cap.
Obviously, the Flyers could game the system even worse, by paying Brière $51,999,993 this season, but only $1 for each of the last seven seasons. It still adds up to $52 million, and $6.5 million on the cap each year. But now the present value is $49.6 million, for a salary-cap-free bonus of $13.2 million.
That might be a bit obvious, though, and Gary Bettman would probably take notice.
Now, suppose the Flyers are so rolling in money that they're willing to pay Brière something completely unreasonable, like $50 million a year for 20 years. Technically, they can sign him to a billion year contract, at $1 per year, and front load all the money into the first twenty years. The cap gets charged $1 per year, for a billion years – and the Flyers barely notice. Brière gets rich, and the cap (in spirit, if not in letter) is blown away.
Of course, even if Gary Bettman could ignore the front loading, he couldn't let a billion year contract slip by. So here's another trick. According to Farber,
"Under the collective bargaining agreement, if a player signs a multi-year deal before the age of 35, and retires before it finishes, there is no salary-cap charge for the unplayed seasons."
So, suppose you want to sign a 34-year-old free agent to a six-year, $120 million contract, and the player plans to retire at 40. You'd normally take a $20 million hit to the salary cap each of the six years. But what if you sign him to a twelve-year, $120 million contract, instead, but front-load the contract onto the first six years? Now, his salary cap charge is only $10 million a year. And, when he retires at 40, the last six years of cap charge disappear completely. So you've doubled his salary over the cap charge, and gotten away with it!
If I understand this right, front-loading has the potential to undermine the intent of the salary cap, and allow the rich teams to continue to outspend the poor teams. Maybe in negotiating the agreement that ended the lockout, the NHLPA was a lot smarter than everybody thought?