Monday, July 16, 2007

Was Rick DiPeitro's Contract Genius or Madness?

Sabermetric Research cites a July 16 Sports Illustrated article by Michael Farbe, in which he discusses a loophole in the NHL salary cap. At issue is that when a player is given a multi-year contract, the hit against the cap is the average salary for the length of the contract, and the not actual salary for that particular year.

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.

To illustrate the loophole, Sabremetric Research offers the following extreme example,

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.

Which brings us to Rick DiPietro's much-criticized 15-year, $67.5 million contract. On the surface, this deal seems irresponsible. Why offer such a young goaltender, or any player for that matter, such a long expensive contract?

Well, let's assume the Islanders only expect to get 10 good years from DiPietro. Roberto Luongo recently signed a three year contract with the Canucks at $6.75 million per season. Using that as a base, one option for the Islanders would be to sign DiPietro to a 10 year $67.5 million contract. This deal would represent a $6.75 million dollar annual hit on the salary cap.

Here is where the genius comes into play. By extending the deal to 15 years at the same $67.5 million, the Islanders reduced their cap hit to only $4.5 million per year.

You might think that one risk to this deal is that even though the Islanders are taking a smaller cap hit, they are taking the hit for 5 additional years. What if DiPietro does not play all 15 years, and retires after the 10th season? Again, the Islander's are protected.

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 the Islanders would not take any salary cap hit if DiPietro retires before the 15 year deal is complete. If DiPietro retires after year 10, he effectively gets a 10 year, $67.5 million contact. However, the Islanders cap hit was only $4.5 million per year. Suddenly, Garth Snow's first contract as Islanders GM seems much more like genius than lunacy.