12 Years, 64 Million Smackeroonies
The Canucks signed star goalie Roberto Luongo to a humongous 12-year, $64 million deal today. The many non-sports fans among my dear readers should keep reading, though, as there’s an interesting business angle to this story.
The NHL operates under a salary cap system. For the 2009-2010 season, teams aren’t permitted to pay their players a collective salary of less than $40.8 million (call that the ’salary underpants’, maybe?) and no more than $56.8 million.
This system, also used in other professional sports leagues, encourages parity and fairness among the teams. Teams in big cities like New York, can’t buy a championship by waving big money under the noses a slew of star players. On the other hand, a nefarious owner can’t, for whatever reason, operate a team on minor-league salaries. The NHL cap is only four years old but, by my estimation, so far, so good.
There are lots of ways, some legitimate and some dubious, to manipulate your salary cap ‘hit’–what your salaries are counted as against the cap–throughout the year. There’s even a slangy job title for the numbers man inside your organization who pays attention to these things–he’s a ‘capologist’.
A Handy Loophole
Most hockey players hang up the skates around the age of 35 or so. So why have the Canucks signed a 12-year contract with the 30-year-old Luongo that would have him playing through his 43rd birthday?
The deal, you see, is front-loaded. Luongo will earn much more money in the first few years of his contract than the last few. In fact, in the last two years, he’s only (forgive me, but this is professional sports) earn $2 million and $1 million respectively.
However, when the league calculates how a player’s salary impacts the salary cap, they take the average per year salary. When his contract kicks in next year, despite the fact Luongo makes $7 million in the first year, the ‘cap hit’ the league counts is only $5.33 million. This gives the Canucks valuable flexibility in managing the salaries of the other 22 players on the roster.
Will Luongo play until he’s 43? Almost certainly not. He’ll retire when he’s ready, and decline however much money is left on his contract.
It’s a loophole, and one that’s being exploited by several teams at the moment. It will be closed in the next few years, but everyone expects these existing super-long contracts to be grandfathered in.
Training Camp is Just Around the Corner
With Luongo signed long term, I like how the team is shaping up this fall. They recently acquired some defencemen who should be able to fill Ohlund’s skates, and the signing of Mikael Samuelsson seems like a wise move. It would be great if Cody Hodgson or Michael Grabner could make the team, too.
Luongo’s deal makes blue-chip prospect goalie Cody Schneider a high-value, tradeable asset. I expect GM Mike Gillis to hold off until well into the season before the goalie is moved, though. Gillis will assess the team, decide what they need, and use Schneider to buy it.
What do you think? Is the Luongo super-deal a good thing?
Ricardo