Tuesday, January 8, 2013

What Cap Penalty will Luongo Cost the Leafs?

roberto luongo leafs trade rumour
If the Leafs want Roberto Luongo, it's going to cost them, even when Luongo is retired.

As more details begin to emerge from the tentative CBA, we are getting a clearer picture of what is going to happen with long-term, back-diving contracts. The NHL initially wanted to hammer teams signing these monstrous deals, forcing the full cap hit upon the signing team during a contract's remaining years if a player retired early. It didn't matter if the Vancouver Canucks traded Luongo, the cap penalty would revert back to Vancouver. Now, the cap penalty will be shared among teams when a player is traded.

Originally, if the Maple Leafs traded for Luongo the long-term ramifications of his contract weren't much of a concern—it was Vancouver's problem. Now when Luongo retires, however, the Leafs will be stuck with a cap penalty, the severity of which depends on when Luongo decides to hang up the pads.

Elliotte Friedman and Pierre LeBrun did the legwork on the cost of Luongo's cap penalty. Both reporters have already done a really good job of simplifying and summarizing what the cap penalty will look like, so for simplicity's sake, here's LeBrun's summary:

"To wit: let’s say the Canucks trade Luongo soon. Luongo has played two years of his 12-year contract, the Canucks paying him $16.716 million in salary but only absorbing a $5.33 million cap hit each year. That’s a cap savings of $6.056 million over two years so far for Vancouver. Under this new rule, should the Canucks trade him now and he retires with three years left on his contract, Vancouver would be charged that $6.056 million in cap savings over the final three years left on his deal from 2019 to 2022. However, let’s say for argument’s sake Luongo gets traded to Toronto, the Maple Leafs also would be subject to cap penalties if Luongo retires before the end of his deal.

To wit, part 2: If Luongo were to play the next seven years of his deal in Toronto before retiring, the Leafs would be paying him $43.666 million in salary but only counting $37.31 million against the cap over those seven years, a cap savings of $6.356 million. So if Luongo retires with three years left on his deal (because his salary falls to $1.618 million in the 10th year and then $1 million in the last two years of the deal), the Leafs would get charged that $6.356 million on their cap spread evenly over the remaining three years of his deal."

For Vancouver:
Salary: $16.716m
Cap Hit: $10.66m
Cap Saving: $6.056m
Years Remaining upon Retirement: 3
Cap Penalty per year: $2.02m

For Toronto:
Salary: $43.666m
Cap Hit: $37.31m
Cap Saving: $6.356m
Years Remaining upon Retirement: 3
Cap Penalty per year: $2.119m

But what will the cap look like in the future? Is willingly accepting a player that will inevitably produce a cap penalty poor cap management?

In short: no. It should be viewed as a small, unavoidable cost of improving the team now.

Since its introduction, the salary cap has grown at a rate of 8.75% annually, from $39 million in 2005-06 to $70.2 million in 2012-13. (Technically the salary cap is only $60 million this year, but that was artificially reduced in the CBA negotiations and doesn't truly represent what league revenues from 2005 to 2012 produced).

Now that HRR is split 50-50, the salary cap won't climb quite as quickly, even if league revenue does. However, by the time Luongo retires, the salary cap should still have undergone extensive growth, making a cap penalty of roughly $2 million palatable.

James Mirtle of the Globe and Mail did some excellent work projecting the future salary cap, assuming a growth rate of 5% and 6%. He assumed the salary cap would stay at $64.3 million for the next two seasons (likely to account for the fans failing to flock back quickly), but calculated that the cap would be over $80 million by the time Luongo retired.

Here is a table based on Mirtle's article outlining what the salary cap will be in the last three years of Luongo's contract depending on a certain growth rate. It also shows what Luongo's cap penalty will be as a percentage of the salary cap.

Salary Cap
Upper Limit
Cap Penalty

Table assumes zero cap growth from 2013-14 to 2014-15.

The Leafs cap penalty—$2,111,890— won't be very onerous. In fact, the Leafs are already paying more in dead weight. The buyouts for Darcy Tucker and Colby Armstrong are a combined $2 million this season, or 3.11% of the $64.3 million cap. Luongo's cap penalty, in comparison, would only be 2.62%, 2.49%, and 2.37%, even under a conservative growth rate.

The buyout cost to Tucker and Armstrong certainly hasn't impeded the Leafs' ability to make roster moves (as evidenced by the rampant Luongo rumours), so even if the cap doesn't grow quickly, Luongo's cap penalty will be manageable. If the cap does grow quickly, the penalty will be even less onerous.

In terms of actual salary, a cap hit between 2% and 3% is $1.286 million to $1.929 under the current salary cap. In terms of players, that could equate to a first-round pick on an entry-level contract (e.g., Nazem Kadri, who is making $1.72 million this season) or a veteran role player (e.g., Jay McClement, who is making $1.5 million this season).

But the scenario presented by LeBrun and Friedman represent a worst-case scenario for the Maple Leafs (and it doesn't even produce a penalty severe enough to hurt the Leafs).

According to Alec Brownscombe from Maple Leafs Hot Stove, Luongo's cap penalty is at its maximum if he retires after the 2018-19 season. If he retires at any other time over the course of the contract, his cap penalty will be as low as $345,250 a year (retires after 2013-14) and as high as $2.071 million a year (retires after 2017-18).

With the news that Luongo will produce a cap penalty to any team willing to trade for him, the cost just went up, even if only slightly. However, Brian Burke may be able to use this increased cost to the Leafs as leverage, squeezing Mike Gillis to retain some of Luongo's salary in a trade, or to take back a lesser return.

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