CBA 101 Part 4: Cap Space Calculations

Image courtesy of openingfaceoff.netOne of the more complicated aspects of the National Hockey League’s Collective Barganing Agreement is actually the calculation of a team’s cap space.

There are so many contributing factors that is easy to misunderstand. I don’t claim to be an expert, but I do believe I have a fair understanding; so I hope to be able to articulate it so others might find it informative. There will be aspects of cap calculation that I omit, either because I plan to cover it at a later point in time, or simply because I have to draw the line somewhere.

Let’s start at the beginning. When a player is signed to a contract they receive a salary in every year of that contract. The amount of that salary can vary from year to year (in fact, that amount of variance has its own set of regulations). However, with respect to the salary cap, the only thing that matters is the cap hit, which is the average annual value of that contract. So if a Player signs a four-year deal where they make 5,3,6, and 6 million in those respective years, the cap hit would be five million ($20 million divided by four years).

Every year the NHL sets both an upper and a lower limit of the salary cap. There are all sorts of calculations that go into determining these values, but there is no need to get into it for the purposes of this article. Simply, no team can exceed the upper limit (with a couple exceptions), and no team can go below the lower limit.

The salary cap is actually calculated daily, rather than simply using the yearly numbers most people are accustomed to. The season is considered to be 185 days long. Claude Giroux’s cap hit is $3.75 million a year, which divided by 185 days, is $20,270. So for every single day Giroux is in the NHL with the Flyers, he counts $20,270 towards the upper limit.

Likewise, the Upper Limit is divided by 185 to create the “Daily Limit”. Any money remaining below the Daily Limit is “banked” to be used at a later time.

CapGeek’s explanation on the subject is quite good:

To understand how each team’s cap count is calculated, think of a bank account. For the 2011-12 season, teams got a “deposit” of about $347,567 each day which can be spent on player salaries [$64,300,000 salary cap upper limit / 185 days in the season]. The difference left over is “payroll room,” or the amount that has been “banked” for the future, if needed. “Payroll room” can never fall below zero, meaning teams can’t borrow from the future to pay for today.

So essentially, every day the Flyers are truly under the cap, they are “banking” space to be used later; so they could exceed the $347,567 Daily Limit.

CapGeek also has a wonderful chart that they use around the trade deadline that perfectly illustrates this. The chart shows two columns for every team, “Today” and “Deadline”; which show the team’s cap space at those respective times. Usually, the “Deadline” number is greater than the “Today” number, indicating the team would have more cap space at the deadline. This is because, $2 million would buy a team more at the deadline, than it would at any given day before it; because that $2 million is paying for daily salary over a shorter period of time. You don’t have to be a mathematician to understand that dividing a team’s remaining payroll room by fewer days will result in a larger per-day number.

Now let’s use some invented numbers to illustrate daily cap calculations. Let’s say there is an upper limit of $100 and the entering the season the Flyers have $80 in cap hits, resulting in $20 of cap space. Let’s also say that the NHL season is only 10 days long, so an $80 payroll would have an $8 daily hit.

Day 1 2 3 4 5
Yearly $$ Left 100 92 84 76 68
Days Left 10 9 8 7 6
Daily Limit 10.00 10.22 10.50 10.86 11.33
Daily Spend 8 8 8 8 8

You can see that for every day the Flyers spend under the Daily Limit, the next day’s Daily Limit increases. This is what I mean by “banking cap space”. (Note: by Daily Limit, I essentially mean…the maximum amount of money the Flyers could spend that day and each day throughout the remainder of the season and still be cap compliant.)

Day 6 7 8 9 10
Yearly $$ Left 60 48 36 24 12
Days Left 5 4 3 2 1
Daily Limit 12 12 12 12 12
Daily Spend 12 12 12 12 12

After five days, assuming no additions or subtractions to the roster, the Flyers have spent $40 ($8 X 5 days) of the $100 they are allowed for the entire season. That means that they have a remaining $60 to spend for the last 5 days of the season, or $12 a day. That is $4 more a day than what they had been spending.

So halfway through the season, with what appeared to be $20 in cap space from a “yearly perspective” (remember…$80 payroll on a $100 upper limit), the Flyers added a $40 player (and subsequently have a $12 a day payroll for the second half).

The reason that this is possible, is because the Flyers were “banking” $2 a day by not spending to the upper limit. It allowed them to take on a prorated contract, which if viewed from a “yearly perspective” would appear to be over the upper limit.

I’d also like to quickly touch on the topic of call-ups, with respect to the cap, rather than just consider trade acquisitions. Let’s say the Flyers enter the season with 300k in cap space. That is $1,621.62 of payroll room (300k / 185) that would be banked each day.

Now let’s say the Flyers wanted to recall Erik Gustafsson who has a 900k cap hit. Clearly 900k is greater than 300k, so one would think you can’t recall Gustafsson. However, Gus’ daily cap hit is $4,864.86. After two days, the Flyers would have banked enough cap space to recall Gus for one day. 2 days of banking space, plus the 3rd day’s existing $1,621.62 is just enough to cover Gus’s cap hit for a single day.

The important thing is that you cannot “borrow from the future”. You can’t recall Gus on Day 1 and just say “well, I’ll just make sure I’m under the cap for three days later.” You must have enough money to cover the daily cap hit at the time.

In Part 4, I will discuss Long-Term Injured Reserve and how it affects the cap. This is an important topic for Flyers fans as it is the only hope of seeing any sort of cap relief for Chris Pronger. However, LTIR space is not the same as cap space, and I hope to be able to illustrate that. LTIR is truly, not a good thing to be relying on.

In case you missed it:
CBA 101 Part 1: Waivers and Re-Entry Waivers
CBA 101 Part 2: 35+ Contracts – The Chris Pronger Story
CBA 101 Part 3: Slide Contracts