While Edmonton Oilers fans continue to wait for news on a Leon Draisaitl contract extension, the Carolina Hurricanes signed Seth Jarvis to an eight-year deal worth $63.2M.
Usually, this deal would have absolutely no bearing on the Draisaitl contract. However, an interesting wrinkle in that contract suddenly brings to light a new possibility to consider.
While an eight-year deal at $63.2M would be a $7.9M cap hit in the usual case, the cap hit is actually lowered to $7.5M due to some money being deferred to after the contract ends.
Essentially, Jarvis will be getting a signing bonus in what would be year 9, and therefore is outside the term of the contract and would lower the cap hit (as will be explained below).
This has gotten fans in a bit of a tizzy lately, as many are wondering how something that has been a part of the CBA for 11 years is only now coming to light and being used. This is especially the case where cap space has become such a big asset as seen by teams having to “pay” other teams to take troublesome contracts off their hands.
The CBA provisions
Article 11 is the section in the CBA governing the Standard Player’s Contract (“SPC”). 11.21 is the provision that allows deferred compensation amendments to an SPC.
Article 50 is the section regarding team payroll and the range (i.e. upper and lower cap limits).
50.2 is the section that deals with player salary and bonuses. 50.2(a)(ii) is the section regarding deferred salary, and is any salary earned during the term of the contract during which the services are performed (i.e. the player plays) but is not paid until after the contract term expires.
It should be noted that this doesn’t mean that the deferred salary is therefore just off the cap completely. The deferred salary is still counted in the year that the player plays that earns that salary, but it is counted at the present value (calculated at one-year LIBOR plus 1.25% at the time the contract is registered), or, if the deferred salary is to be paid with interest, the deferred salary shall then be counted as the stated cash amount.
50.2(b) deals with bonuses, and 50.2(b)(i)(A) deals with deferred bonuses. Just like deferred salary, a deferred bonus is one which is not paid until after the expiry of the contract. They are similarly calculated at present value (or cash value if paid with interest) for the year the player performs the services, not when they are paid out.
Why hasn’t it been used before?
If there is a somewhat easy, legal way to lower cap hits, why would it not have been used prior to now?
Well, you have to remember that what this means is that a player is not getting paid their money until after their contract. So if you defer money over a max term contract, you aren’t seeing it until nine years later.
In addition to just not having that money, present value of money is always higher than it is in the future, so you are also getting “less” money by having it paid out later.
Another little wrinkle is with respect to escrow and potential overages or shortfalls. If there needs to be an adjustment, the adjustment is made on the actual amount of the deferred salary/bonus, not the “present value” (section 50.11(b)(ii)(A) and (f)).
So as a player, there isn’t really any value to agreeing to a deal like this, barring some tax planning or other reasons that are far outside my scope of understanding.
Is it possible that the Shohei Ohtani contract with the Los Angeles Dodgers in the MLB is what has inspired this? That is a crazy deferral contract, mind you, but it certainly is possible that it triggered the Hurricanes to look into this possibility.
How this may effect the Draisaitl and Bouchard contracts
There have been reports that Connor McDavid, Draisaitl and Bouchard have had discussions about taking team friendly discounts in order to allow the Oilers to have a better chance at competing for a Stanley Cup during the terms of their contracts.
So perhaps instead of commanding a $14M+ contract, Draisaitl would instead take something in the $13.5M range to give the Oilers a bit of cap room.
But with this deferral possibility, Draisaitl could still get his money while keeping that lower cap hit.
One has to keep in mind again that this deferral doesn’t just wipe off the amount from the cap hit, as appears to be suggested in Frank Seravelli’s article. Nor do I believe that the deferred amount earns any interest. If the deferred salary is to be paid interest, then the stated cash amount counts towards the cap, in which case there is no cap savings.
But if the players would be willing to take a cut in the normal course in any event, perhaps they could be amenable to some deferral payments to achieve that. They may not want to do any extreme amounts (like Ohtani, for instance) but if Jarvis was willing to take enough deferral to knock off $400k per year of cap off his contract, one might think that players that have made a fair amount of money already would be even more likely to do so.
If all three of Draisaitl, Bouchard, and McDavid entered into contracts to allow for a similar $400k cap saving, that gives the Oilers and extra $1.2M to work with over the terms of their deals, which is not an insignificant chunk of change.
Whether or not this deferred payment option is used in any upcoming contracts remain to be seen, but it is a unique structure that one would think will be looked at even more in the future.
Photo by Curtis Comeau/Icon Sportswire
