The buyout formula

So, news has broken that Sather plans, as many Ranger fans expected (and many other than me eagerly anticipated), to buy out the remainder of Captain Drury's contract. The same report claims that we are likely to do the same with Wolski's. Before looking at what that will mean for the Rangers' salary cap going forward, let's do a quick recap of exactly what it means.

So, buying out a contract is exactly what it sounds like: the team pays the player some of the money they owe, based on the contract they signed, but they relieve the player of his duties to them. The player is then an unrestricted free agent, free to go negotiate with no restrictions with whomever he likes.

Of course, the NHL does place some restrictions on the team. After all, if buying a contract out took it out of the cap entirely, super-rich teams could just eat up a bunch of good contracts and then buy out the ones it doesn't want. That would help them circumvent the cap, and also it would be obviously shitty for everyone. Hence these rules.

First, the calendar. Today is June 9, still clearly part of the 2010-11 season (the Bruins are thrilled to remind us). Technically, the 2011-12 season begins on July 1, 2011, with the current season expiring on the final day of June. Which means July 1st is the date that all contracts terminating the previous season have expired: impending unrestricted free agents actually become free agents and can start negotiating new contracts. That also means that any teams with potential restrictions on those negotiations must take care of their business by then. For example, restricted free agents must be given qualifying offers by then, or they will default to becoming unrestricted. Also, any buyouts must be complete by that date.

The window for buyouts is therefore very small: its starts on June 15 (or on the day after the end of the Finals, if they go past then), and it ends on June 30 (the last day of the season). In that window, a team can choose to buy out the remainder of anyone's contract, but they will get penalized for it under the salary cap (it may be desirable anyway, because in the short term, the penalty will be smaller than the salary in question).

The way the calculation works is a little complicated. I've covered it here before, in talks about Redden last summer, but it's always fun to go over again. First, you calculate the total monetary value of the buyout. Take the total remaining salary (not cap hit) on the years remaining in the contract, and multiply it by: 1/3 if the player is under 26, or 2/3 if the player is 26 or older. Drury is 34 (over 26), and he has one year remaining on his contract, with a paid salary of $5 million (despite his cap hit of $7.05 million, based on previous seasons in the same contract). That gives him a total salary buyout of $5 million, which means the monetary value of the buyout is 2/3 of $5 million, or $3.33 million.

The buyout will incur a cap hit for twice the length of the buyout. So, because the Rangers will buy out the final year of Drury's contract, the cap hit will last for two more years: the remaining year of the contract, and then one more. If they were buying out two years, it would last for those two years, and then two more. Et cetera.

Finally, here's how the actual hit is calculated. First, spread the buyout value out evenly across those seasons. In this case, $3.33 million / 2 years = $1.67 million per year. Call that the per-season buyout value. For the years remaining in the contract, the team owes the original cap hit, minus a "discount." The discount is calculated by subtracting the per-season buyout value from the player's salary for that season (for some reason). So, in Drury's case, the discount is his expected salary of $5 million, minus that figure of $1.67 million, or $3.33 million. That $3.33 million represents the amount we will save this coming season, off of Drury's $7.05 million cap hit, leaving us on the books for $3,716,667 (which I believe is the actual monetary amount we will end up paying Drury).

For the seasons after the contract would have ended, the team is charged an additional cap hit equal to that per-season buyout value. So, in this case, we'll also be charged $1.67 million against the 2012-13 cap.

So, the long and the short of it is this: if we kept Drury on the books, we would be on the hook for $7.05 million against the cap this season and nothing next season, and we'd have one Chris Drury. Instead, we will be on the hook for $3,716,667 this season and $1,666,667 next season, and we'll have zero Chris Druries.

Put a simpler way, we're paying $1.67 million under next season's cap and losing Drury in order to save $3.33 million under this season's cap. I will leave the determination of whether or not this is worth it to the reader, but I guess it depends what we end up doing with that space. It's worth noting that Larry Brooks has reported that the Rangers do not plan to buy out either Wolski's or Avery's contract, but that Glen Sather has indeed already told Drury that his will be bought out.

It's also worth noting that Brad Richards (with whom, as we learned earlier in this post, the Stars have until July 1 to try to work something out before he is an unrestricted free agent) has nothing but rumors surrounding him right now, including a couple that he's looking for a contract in the neighborhood of $7 million and 6 years, which is probably too rich for the Rangers' blood right now. Also, apparently the Leafs are very interested? Understand that Richards could just go hit the free agent market on July 1, or his negotiating rights could be traded by the Stars to some other team that would then sign him before that deadline.

So, that's the deal. Unlike most Ranger fans, I really still liked Drury. I think he brought a lot to the team, and I think a lot of Ranger fans are still knee-jerk opposed to anyone over 30 (unless he's a 30-goal scorer or Sean Avery), which isn't fair. Given that this was the last season of his contract anyway, I have to wonder if saving the $3.33 million was really worth it, but I guess it remains to be seen. At least, it gives us a little more room to re-sign some of our overworked youth, many of whom (Callahan, Dubinsky, Anisimov, Boyle, Gilroy, Sauer) are up for renewals this summer. I'll try to post a new look at our cap situation, given the latest developments, at some point soon.