No Virginia, there is no MLS Salary Cap

Will Russell

Santa Claus and the MLS Salary Cap have a lot in common. Do you believe in either?

Reader Discretion: Anyone that still believes in Santa Claus is advised to stop reading.

Time for honest truth, there is no Santa Claus. In a similar vein, nor is there a salary cap in Major League Soccer.

I suspect one of those sentences gives you more trouble than the other but it needn't be a bombshell or some kind of exposé on the league that casts doubt as to what we've been told over the years. Many of us, myself included, simply believed popular opinion that there was a salary cap and that it operated like robust caps in the National Hockey League and other sports.

Save yourself and your calculator some time and energy. There is no cap and Major League Soccer never said there was.

The Reality

What they said was that there is a budget for each team. In fact, on its official website, the league is fairly clear that each team operates with a salary budget of $2,810,000 and that "players counting against this budget are collectively known as the club's Salary Budget Players." Notice the word "budget"?

Once you understand the structure of Major League Soccer, you'll understand how important the word "budget" is. MLS is a single entity league, which means that it owns all the teams. Each franchise is simply an owner-operator.

As such, it maintains an overall budget for its expenses for all of its clubs. Important in the world of contracts in that it pays the salary of each player, minus the additional amounts paid to a team's Designated Player(s). As you know, these are players that make in excess of the league maximum.

Unlike the NHL, teams don't pay salaries out of their own revenues. And given that all contracts are held and negotiated by the league, there is little risk of a renegade owner driving up the cost of labour through inflationary contracts. Therefore, there is no need for a salary cap to restrict owner spending. MLS is the owner and it spends what it wants.

If you are still struggling with this information, consider how many times that the word "salary cap" appears in the league's Collective Bargaining Agreement . Zero. Consider how many times the method of calculation of a supposed cap appears. Zero. Consider the provisions, such as a luxury tax or having to sit a player as the Calgary Flames did a few years ago, for exceeding this rumoured cap. Zero. You will however find references to "budget" as well as acknowledgement that the league pays the salaries.

Ladies and Gentlemen, there is no salary cap.

Flex Those Budgets

To attempt to level the playing field, MLS sets the budget at the same number ($2.81M in 2012) for each club. Much like fantasy sports leagues the world over, Managers build their rosters against an overall number and operate within a series of (sometimes complex) roster rules as they work through the season. Seems fair and square, right?

Not quite.

Consider a large corporation. This entity starts the year with an overall budget and then sets budgets for each department. As the year goes, it will flex budgets to take advantage of opportunities, increasing some, decreasing others. All of this is done to the benefit of the corporation, not necessarily to the benefit of an individual department. This is the MLS budget process and the way that MLS flexes budgets is via Allocation Money.

What is important to note is that Allocation Money is made available to teams for a number of reasons. In 2010, the MLS Roster Rules stated that these reasons included "exceptional circumstances as approved by the Competition Committee." Sort of an open ended definition isn't it? Awarded allocation amounts are never made public.

This statement was removed by the league in its 2012 roster rules but by stating that "each year the MLS Competition Committee determines the allocation amount to be made available to each club," the spirit of flexing remains alive and well. If you want to check out the wording from 2010, thank Rob Morse who writes for the Portland Timbers, for keeping it alive on the web.

Ever wonder how some teams can seemingly pick up expensive players while apparently already spending at a suspected cap budget max? Wonder no more. They can do this with league approval, using allocation budget flexing.

What Counts Against Budget - Base or Guaranteed Compensation?

What of the salary data published by the MLS Player's Union? If we accept that there is no salary cap, by publishing base salaries and guaranteed salaries, which number counts against this allocated budget?

The answer is neither.

A source with intimate knowledge of the contract process highlighted that the numbers published on the MLSPU's website and the numbers the league uses for its budget purposes are different. The MLSPU provides two numbers. The base salary which is exactly what the name implies. The second is the guaranteed number which is the total value of the guaranteed payments under the contract, including agent fees, annualized over the course of the deal.

The league's budget numbers track purely on a cash basis (i.e., dollars paid are all included in the calendar year they are spent) while the MLSPU's guaranteed compensation number annualizes most bonuses. In addition, the league's budget numbers contain a mechanism to estimate/account for performance bonuses. The MLSPU's guaranteed comp number does not, since those amounts are not guaranteed.

The MLSPU publishes data to give prospective players and agents an idea of what may be considered "fair" when it comes to contract negotiation, they are not meant to be applied against a budget.

In essence, since the league doesn't publish salary information as it pertains to budget charges, we are left in the dark as to how much of the budget (pre-flexing) that a player's salary takes up. Further, given that it also does not release allocation amounts, it is impossible for you or I to figure out where our beloved Reds stand in relation to their position against the league's assigned budget.

Implication for Toronto FC?

Clearly, this makes it less fun for you or I as armchair managers to play with the salary amounts. It also means that players suspected of being at a "cap max" based on annual compensation may actually be low budget charge players in 2013.

For example, Richard Eckersley reportedly earns $210k per season as a base amount and $390k as reported by the annualized guaranteed amount published with the MLSPU. Many fans lament that he may be taking up a significant portion of the cap budget. However, if Eckersley's fees and signing bonuses were paid up front, that amount would come off the books in 2013. Meaning Eckersley's budget charge in 2013 might be in the $210k range. Much more reasonable.

Further, we often assume that players are moved to free up "cap space", however there is no guarantee that amounts saved off a budget by trading a player are immediately made available to the team. A trade could simply be a function of a team being over budget as a result of signing a player with a signing bonus that would come due in the current year, attempting to get its budget back in order.

Implications for the League

What are the implications for competition within the league? Consider this interesting scenario:

If the league has flexed its overall budget via allocation money with another club and finds itself near the top of its total planned expenditures, there are no guarantees that it will sign (and pay) the contracts of players that clubs are interested in.

Imagine for example that a team, oh let's pick one at random say, the LA Galaxy, has an opportunity to sign a player, oh say Robbie Keane in the summer of 2011. This might be one of those circumstances in which allocation money is used, with funds from LA, to take advantage of an opportunity. The league takes from its overall budget a sum necessary to complete the deal. LA's budget gets flexed, well beyond its original $2.81M allocation and the deal happens.

However, the league doesn't have unlimited funds. Its expenses are tied to its revenues. It will have to make a decision, if future opportunities arise, whether it will (or even be able to) flex the budget of another of its clubs, in a similar way.

Sounds fair doesn't it? Could LA get players with budget flexing while a team like Columbus finds itself shut out? You said it, not me.

While I am talking about some of the challenges with this model, ultimately, this structure has contributed to the health of the league. Expansion has been successful and the game is growing in popularity and doing wonderful things for aspiring youth.

That said, is this structure a good thing for the long term success of soccer in North America or to put it another way, does the league still require the proverbial training wheels?

Free market forces might help improve both the competitive nature of the league on the pitch and require the managers of its franchises to up their games as well. Teams' fortunes would rise and fall based on the talent and resourcefulness of their management staff. As good managers succeed, it will breed copycats and success could follow.

But if the concept of a free market and inflationary spending scares you in light of the decline in competition in leagues like the English Premiership, there is a middle ground. We could always try something that the MLS has never had.

Allow teams to spend their own revenues and implement an actual salary cap.

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