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Voodoo Economics: A Look at how the LA Galaxy Manage the Salary Cap

He's back.  Juninho returns to the Galaxy. How are they fitting under the cap? (Photo by Victor Decolongon/Getty Images)
He's back. Juninho returns to the Galaxy. How are they fitting under the cap? (Photo by Victor Decolongon/Getty Images)
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I woke up this morning to Josh Mayers of the Seattle Times reporting that the LA Galaxy had managed to secure Leonardo on a free transfer and they got Juninho back on a free loan. Suffice it to say that my initial response was not fit to print.

The top of the LA Galaxy roster boggles the mind. They have 3 DPs; Landon Donovan, David Beckham and Robbie Keane. Edson Buddle returns to the squad after a year in Europe. Leonardo and Juninho are now both back. They also still have the player they brought in when they thought that Juninho would not return, Marcelo Sarvas.

Which brings us to the issue of the salary cap. How did LA manage to secure this level of talent and stay within the MLS salary cap? The answer is, mostly, Allocation Money.

It's easy to overlook all of the little things that LA has done this off-season that brought in Allocation Money. They earned Allocation Money by advancing to the Group Stage of the 2012 CONCACAF Champions league and the Knock Stage of the 2011 CONCACAF Champions league. (The Sounders also earned the same Allocation Money.) LA earned Allocation Money when they traded Donovan Ricketts to Montreal. Expansion clubs are given large amounts of Allocation Money and I imagine that Montreal dropped a chunk of theirs to obtain the services of a veteran Goal Keeper with Rickett's pedigree. (Editor's note: We've also been informed that every MLS team gets allocation to account for talent dilution whenever a new team joins the league.) The Galaxy also likely earned Allocation Money when they loaned Donovan, Omar Gonzales and Keane to teams in Europe (Editor's Note: It's come to our attention that allocation money from loans is not quite this straight-forward, more later). Yes, the loan of Gonzales came with a high price tag when he was injured, but his loan fee likely still applies.

To protect the interests of the league in the global market place, specific Allocation Money amounts are not disclosed. But we do know a few things. For every transfer or loan fee equaling 1 million dollars or more, a team can apply ~$650K of their share of the fee toward their roster as Allocation Money. In the world of an MLS team, a 1 million dollar transfer fee makes a player a DP. In the world of the English Premiere League, a 1 million dollar loan fee almost equates to petty cash. It doesn't take much of a leap to imagine that LA may be sitting on a couple million in Allocation Money for their 2012 roster. When the salary cap for an MLS team is $2.8 million, adding another $2 million to a team's individual cap through the process of Allocation Money changes the landscape. If these numbers are correct, the Galaxy could have more than $3.8 million that they can distribute among the remaining 15-17 players on their Senior roster where the average MLS team only gets $2.8 million before Allocation Money. This raises their average Senior roster salary to ~$250K per player. Compare this to the average MLS Senior roster salary of $120K and LA's roster begins to make more sense.

(Editor's note: As it turns out, we probably over-estimated the amount of allocation money the Galaxy have. While allocation can be earned from loans, in situation's like Donovan's we overstated it. As it turns out, a MLS team only starts earning allocation on transfers or loans when the amount is above and beyond what that team has already paid the player out of their own pocket. So, in Donovan's case, that would mean the Galaxy would have to be getting millions of dollars in loan fees to start getting allocation. It's unlikely they got much. Still, the overall point stands, even if we may have overstated it a bit.)

But how the Galaxy are affording their roster is only half of the picture. The other half of the picture relates to how the Galaxy manage their team relative to the salary cap rules. Edson Buddle returns to the team because when he went to Europe, he went on a free transfer. LA retained his rights. Juninho and Leonardo return because Sao Paulo doesn't have room on their squad. LA was able to negotiate a free transfer and a free loan helping Sao Paolo address a couple of problems with the Sao Paolo roster. One man's junk is another's treasure. The Galaxy have shrewdly analyzed the MLS role in the global market and leveraged it to find bargain quality. (Seattle can't complain too vehemently. Mauro Rosales was the MLS deal of the year in 2011.)

In the case of the 3 LA DPs, they cashed in on the glamour and allure of living in LA. Beckham could have made more money playing for PSG, but his family loves living in Southern California. Robbie Keane came to LA in no small part because Beckham and his family sold Keane's significant other on living in LA. Donovan wants to live in LA and so he stayed in America rather than jumping to England on a permanent basis. Los Angeles and New York have international cache that no other American city possess. This is not the Galaxy's fault and they would be stupid not to capitalize. Seattle is capitalizing on its own brand of geographic cache. As Mauro Rosales said, "In the Summer, it is Paradise." Michael Gspurning and Adam Johansson raved about the Sounders' facilities, landscape and fans. Christian Sivebaek talked in his recent interview about how much his girlfriend and he love being in America.Yet LA's DP signings also allow The Galaxy to acquire Allocation Money through offseason loans. This is a mechanism that the Sounders have not used and the one example of how an aging Euro-Star looking for a payday can actually make sense in the modern MLS game beyond helping with the gate.

Los Angeles also manages their roster by looking for bargains in their role players. In the recent Re-Entry draft, LA drafted four players, all veterans. These players play for close to the league minimum while providing leadership. This further shifts the structure of the LA payroll. If the average LA Senior player is making $250K, but 4 of them are making $50K, then that's another $800K that can be redistributed. Now 8 non-DP players can be making DP player salaries of $350K. Theoretically the Galaxy could field a Starting 11 where every player makes $350K or more. This is the true definition of how a team can manage its budget within MLS rules and still adhere to the axiom that good players cost more. When the entire starting roster is making more, then the large DP salaries don't have the same negative impact in the locker room that they have in a situation where everyone is only making $120K.

The Galaxy also leverage youth development in their long range roster management. The LA area is a hotbed of youth soccer. This gives LA an advantage in the Home Grown player market. Players like Jose Villareal allow the Galaxy to reload. The team is also shrewd in how it drafts and trades. Kyle Nakazawa was a nice pick up.

The Sounders are positioning themselves as a force in MLS roster management. Ultimately, Seattle is not LA and the Sounders will use the MLS roster rules in different ways. But some of the MLS roster construction advantages only come with time. LA offers a glimpse of how that time compounds interest.

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