Open a can of worms and guess what you’ll find? The Ilya Kovalchuk Contract

As a recovering auditor, I still struggle with finding fault in just about everything I see.  The job of an auditor is in part to go through the books of a client and identify errors, omissions and misstatements.  As an audit manager, my job was to review the work of other auditors and point out all the things they missed.  While I always tried to put in a few positive comments, the reality was that it was always one ‘good job’ for every ten ‘you did that wrong’.   These days, I have convinced myself that my ability to focus on the negative and always plan around it is actually a good thing.  Delusional?  Perhaps… 

It is with my auditor eyes that I shake my head and smile at the NHL.  No other league seems to create so many situations where they end up a laughing stock.  It is sort of fun to take pot shots at the NHL when the leader is someone like Gary Bettman.   While Gary is a brilliant lawyer and a devastating negotiator, he comes across as someone possessing the common sense and personality of a garden gnome.  Even if you were somehow able to teach Gary how to fist bump, there is literally no chance you could ever get him to ‘blow that shit up’, which is key to the fist bump in my opinion.  If you were to tell him that two plus two equaled four, his response would be to blink furiously fast in a fit of apprehension and confusion.  Tell him that hockey in the southern US doesn’t make sense and he will come to life and vibrate for an hour.

 In 2005, the NHL and its players ended a year long lockout with the signing of a new Collective Bargaining Agreement.  The key provision in the CBA was the introduction of a salary cap tied to league revenues.   No longer were teams able to freely spend on players and pay ridiculously high salaries, a topic I wrote about recently. As a former auditor, my natural interest would have been on identifying the weaknesses in the CBA and places where a team might be overly aggressive in their interpretation of its terms.

For NHL General Managers, the optimal utilization of their cap dollars has become critical to putting a championship caliber team on the ice.  The team that can cram the best team into the annual salary cap has the best chance at post season success.  Putting my auditor’s hat on, I would have focused my CBA audit work squarely on how a team might play games with the salary cap rules. 

For a top notch lawyer, Gary Bettman sure left a gigantic loophole in the CBA for GM’s to drive on through.  As I will illustrate later with some examples, a player’s average salary over the life of his contract represents the annual cap hit.  Although the cap might be $59 million, a smart GM might be able to squeeze salaries of $65-$70 million into a given year by awarding deals with extra years and low salaries at the end of the contract.  Bettman and his crack team thought about this day and put in language about a contract not being allowed to circumvent the ‘spirit of the CBA’.  Nowhere in the CBA was the spirit of the CBA actually defined. 

The Spirit of the CBA?

I guess Bettman wanted to keep things vague to ensure hockey writers had something to keep themselves employed over the summer.  If someone with common sense had been in the room, they might have suggested putting some clarity into the CBA to avoid future embarrassment.  The NBA for example sets a maximum length on contracts.   

The tool kit to optimal cap management has evolved since 2005.  In the first couple of years of the CBA, player contracts were fairly simple.  Sidney Crosby signed for 5 years and $43.5 million, or $8.7 million per season.  Alexander Ovechkin signed a 13 year deal that pays $9 million a year for six years and then $10 million for the next seven years.  The player’s cap hit each year was essentially equal to their salary as their salary was constant.

The following is perhaps an inaccurate writing of history, but to my eye the 2008 Vincent Lecavalier deal was the can of worms that started the NHL down the track that ended in the league rejecting Ilya Kovalchuk’s 17 year, $102 million deal earlier this week. 

In his 11 year $85 million deal, Lecavalier receives $10 million a year for seven years, $8.5 million in year eight and an average of $2.2 million the final three years of his contract.   Intuitively, this type of deal makes a lot of sense give a player’s production and value to his team diminishes as he gets older.  Lecavalier’s deal keeps him in Tampa until he retires, but pays him a smaller salary at the twilight of his career when he will have likely moved from the first line to the third line. 

As I noted earlier, it is the average annual salary over the life of the contract that counts for the salary cap.  For Lecavalier, this means a $7.7 million cap hit every year despite a cash salary of $10 million for most of the deal.  From a cap perspective, Tampa has created an additional $2.3 million of cap space by the way they structured the deal.  Eureka!!

NHL GM’s quickly saw the value of this type of deal and similar super long term deals with a tail end of lower salaries were awarded around the league.  Generally speaking, the deals were in the similar spirit as the Lecavalier deal where the team might pay the player less in later years to reflect their lesser contribution.  It was a bit of a game being played to create cap space, but the deals could be explained to the league with a straight face. 

During the 2009 offseason, the Philadelphia Flyers and Chicago Blackhawks were faced with severely constricted cap situations.  Each team had the opportunity to acquire star talent by the names of Chris Pronger and Marian Hossa.  Neither team could afford to pay them market value, at least from a salary cap perspective.  The solution was to utilize the Lecavalier concept and stretch it a little bit.

For Pronger, the Flyers signed him to a 7 year $34.9 million contract that has an average cap hit of $4.9 million.  He receives a more market value based $7.6 million the first years of the deal and a paltry $0.5 million the final two years of the deal.  The stretch was that Pronger was 34 when he signed the deal which would make him 41 by the time the deal was done.

For Hossa, the Hawks signed him to a 12 year $62.8 million contract with an average cap hit of $5.3 million.  He receives $7.9 million in the early years of the deal before tailing off with $1 million per year average over the final four years of his deal.  Hossa would also be 41 years old the final year of his deal.

All of a sudden we had teams signing players beyond what reasonably is expected to be end of their playing careers.  We had players receiving scheduled to receive salaries that no sensible 40 year old would play for.  To make things more interesting, if the players were too retire before the end of their deal, their average cap hit would fall off the table in the later years of their deal.  The Flyers can count a $4.9 million cap hit while paying $7.6 million salary and avoid a $4.9 million cap hit while paying $0.5 million salary if Pronger decided to retire at age 39.  It is a similar story for Hossa.

The NHL reviewed these contracts and opted to wink and nudge their validity, sternly informing us all that they had been reviewed to ensure they were within the spirit of the CBA.  They checked with the CBA and the CBA said, “Hooray!”

With league precedence in hand, the New Jersey Devils opted to try to stretch things a little bit further with the 17 year, $102 million deal to Kovalchuk.  The deal has a $6 million annual cap hit while at times paying as much as $11.5 million per season.  The deal ends with six years at under $1 million per season and expires when Kovalchuk will be 44 years old.  While Tampa Bay, Chicago and Philadelphia all created a roughly $2.5 million gap between salary and cap, the Devils have a whopping $5.5 million gap for five years of the deal.

The league rejected the deal and indicated that the spirit of the CBA had been broken.  They went and spoke to the CBA and the CBA frowned.  The CBA was all spirited, but the thought of a 44 year old Russian playing in Jersey was a veritable buzz kill. 

Possible arbitration looms to resolve the issue with many pundits questioning how the NHL can win their case.  How does the NHL define the line that moves a contract from silly to outright offensive?  Personally I have no idea, but my sense is that we will again bear witness to the legal genius that is Gary Bettman.  Just don’t expect a fist bump from him when he wins.

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2 Comments

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2 responses to “Open a can of worms and guess what you’ll find? The Ilya Kovalchuk Contract

  1. Ross Hudgins

    Hi Jon! LOL, loving your description of Bettman! Nothing quite like watching his little head spin when he flips into ‘super-liar’ mode.

    One has to wonder if the NHL will even be around when Kovy is 44 yrs young, or if it will self-destruct before then. I love hockey, but watching Bettman’s shenanigans decade after decade isn’t good.

    Loved your blog about free agency/playoff busts also…a must-read for NHL fans interested in the business of pro hockey…keep ’em coming!

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