Two dudes blogging and podcasting about the San Jose Sharks, straight from sunny California.

post More Kovy Talk, and Escrow- the Regressive Tax That Screws Scott Nichol

July 22nd, 2010, 8:48 am

Filed under: blog — Written by Mike

Now that the Kovy deal has been rejected, and no better description of the NHL’s flip-floppery exists than here, on Deadspin of all places, it’s basically impossible to predict what will happen next.  But my money is on the Devils  restructuring the deal slightly so that the NHL cap guys only chuckle to themselves instead of blow coffee out of their noses.  That appears to be the test that these contracts are subjected to.  A quirky smile means A-OK (Franzen, Ohlund), a girlish giggle will pass (Luongo, Zetterburg), and even a hearty laugh will squeak by (Pronger, Hossa, Lecavalier, Savard).  But a snarf on the keyboard?  Get that $%^! out of here.  As always, behindthenet puts the numbers behind the laughter quotient.

One interesting consequence of these contracts is what it does to the escrow situation, an obscure provision of the CBA, but one that affects all players.  For the ultra-mathy, dig deep into the details with this post by Tyler Dellow, but let me give you the quick-and-dirty.  The salary cap is a hard one- the owners will pay exactly 57% of revenues to the players this season.  However, they don’t know what the actual revenues will be until the season is over, so they do some estimations, and hold back a portion of every player’s salary in escrow accounts.  But here’s the needle- they will pay 57% of the actual salaries, not the cap hits.  So for all of those players that are actually making more than their cap hits (mostly superstars), that drives up the total salary number, which means the escrow withholding is bigger.  And even if the NHL was exactly correct in estimating revenues, the fact that these players made more than their cap hits (calculated based on estimated revenue), that means it’s likely that some or all of that escrow money will go back to the owners.

So the guys that are taking home their cap hit – middle and lower tier players like Scott Nichol – end up with a greater portion of their salary withheld.  These stars are feeding off of the collective, with the idea that they will give back when their salaries eventually are lower than their cap hits.  But we know that these players like Hossa, Luongo, and Kovy will likely retire before they fulfill that part of the contract.  They won’t have to pay the piper at the end, they’ll be on a beach somewhere.  I’ve read some stuff that the escrow number could be as high as 20% under some conditions, and that takes a whole hundred grand off of a guy that’s making the league minimum.  Not cool.

5 Comments to “More Kovy Talk, and Escrow- the Regressive Tax That Screws Scott Nichol”

  1. Jeremy says:

    Mike, as the resident capologist, you may be able to speak to this – the minimum salary was structured for every year of the current CBA. And thus, the NHL expects that every player’s contract pay league minimum – even if they sign a multi-year deal, the expectation is that the pay be at least at the minimum for every year of the contract.

    This is where the Kovalchuk contract fails, IMO. It’s unreasonable to expect league minimum to be at 525k 12 years from now. But it’s also where the NHL could be in a bind. The Savard contract does the same thing. (The Pronger contract does, as well, but I’m sure the NHL snarfed, and then ROTFLTAO when they realized Philly’s on the hook for the cap hit b/c it’s a 35+ contract)

    The other contracts that get around the cap at least end with salaries that are well above current league minimum. It’ll be interesting to see if the Savard contract is used as the closest comparable should the issue go to an arbitrator.

    • Patrick says:

      My understanding is that the team would be allowed to make an ad-hoc adjustment to the contract to raise it to the new minimum for those years.

      Obviously not for this deal, since the NHL wants to block it. But if somebody signed a 17-year contract for the league minimum every single year, or something like that.

    • Mike says:

      Future CBAs can choose to amend existing contracts to conform to new rules, or grandfather them in as they are. It’s not for sure which it will be. This is why the Devils took a big risk. It’s certainly not beyond the realm of possibility that the new CBA in 2012 will stipulate that all contracts will suffer the cap hit regardless of whether the player retires or not. Or perhaps another algorithm entirely of calculating cap hit.

      • Andy C says:

        The existence of these contracts just seems ludicrous to me – as a fan, having the salary cap and the transparency of it for the fans to see & then watching teams try to meet this cap by trading & waiving and having hands tied for free agents introduces another element to the game that makes the off-season as addictive as the regular season & creates (in theory) a level playing field – but these contracts are blatant cheating, which just gnaws away at this level playing field.

        The clearest way to stop this would be to see the new CBA along the lines of what Mike suggests, but not only retaining the cap hit on the retirement of a player, but on the other side where a team pays off a contract. I like the idea of using an algorithm to assess on the cancellation of any contract what the actual cap hit was in the previous years and applying any overspend as a reduction in the next year. (This is exactly how the tax system works over here in the UK!)

        This does have some precedence: – as you mentioned in a previous podcast, Chicago may go over the cap this year with payment of bonuses: this is allowable, but simply reduces their cap for the next year.

        – Sorry NJ Devils, but either the 2021-2022 NJ Devils suddenly have to face a $30m salary cap for the year or the 2026-27 NJ Devils still have a $6m cap hit.
        – Sorry Chigaco, but you signed the deal with Huet, so you live with it & can’t use that as a salary dump (not that they have done this yet).

        Wouldn’t it be great if the 2012 CBA came up with these terms & suddenly Chicago, Vancouver & Detroit were put in cap hell! Evil laughs

  2. Nick R says:

    “My money is on the Devils restructuring the deal slightly so that the NHL cap guys only chuckle to themselves instead of blow coffee out of their noses.”

    Well put.

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