Tuesday, July 10, 2012

Top 8 NHL CBA Issues And Will There Be A Lockout

The NHL and NHLPA have been meeting to work on a new CBA.

Here are the top 8 CBA issues:

1) Player share of revenue

The bottom line is the bottom line and that means that the sides will negotiate what percentage of revenue players get. Right now it’s 57% of hockey related revenue. That percentage is a bit high when compared to the player share of revenue in the other 3 leagues. In the NBA, the players get 50% of revenue give or take 1% depending on the health of the league. NFL players get about 48.5% of league revenue. MLB does not have a cap but rather a luxury tax; however the player shares works out to about 47%.

So the 57% is arguably no longer the industry standard and the NHL will look to reduce the player share of revenue. Expect resistance from the Union. Stephen Fehr, brother to Donald and special advisor to the Union, recently said that last time around in 2005 the players made “massive concessions” and they were not prepared to do it again. Those massive concessions were a salary cap and a 24% rollback on salaries.

Ultimately, it would not be a surprise to see the player share of revenue fall to 52-53% together with the opportunity for an increase. However, for this to be realistic, the Union will need to concede on other key CBA issues.

There are creative ways to adjust revenue so that it is simply not a flat rate of all hockey-related revenue. The NHL can look to give players a different percentage of different streams of revenue – like in the NFL. The sides will need to creative – and they will be.

Issues are not addressed in isolation – they will all collide to form the new understanding between the parties.

2) Salary floor

The salary floor for the upcoming season is $54.2 million. A number of NHL teams in non-traditional markets can’t turn a profit when they are forced to spend to the floor. For the health of those clubs, the league will argue that the salary floor will need to be adjusted.

The Union’s mandate is to look out for the best interests of its members/players. That’s the Union’s job. So they will resist.

However, ultimately the players will be getting a fixed percentage of revenue. So this means even if there is no floor, the players will still get the full percentage. The bigger issue is that of competitive balance. Without a floor, some teams will be significantly outspent by others. 

3) Free agency

Under the old CBA, players became unrestricted free agents (UFA) at the age of 31. Now players become UFAs at the age of 27 or if they have played 7 years - whichever comes first. That’s why it’s called the 7/27 rule.

The new UFA age of 27 is a problem for NHL teams. A big problem and one that perhaps is undervalued in its importance. By dropping the UFA eligible age by 4 years, teams are faced with the potential of losing really good players when they hit their prime. So what teams have been doing is signing players in their mid-20s to long-term deals – which include buying up UFA years.

Case in point: Canadiens goalie Carey Price just signed a 6 year/$39 million contract. Price would have been a UFA in 3 years. The Canadiens didn’t want to lose him come UFA time, so they bought up 3 UFA years. Under the old system, Price would have still been a restricted free agent at the age of 30. It is therefore unlikely that he would have received such a big deal.

So we have really long deals being given out to young players for a lot of money.

This is something the league will want to address by pushing the UFA age to something like 29. However, expect resistance on this one from the Union. Players are getting well paid as a result of the earlier UFA eligibility and they won’t want to give that up. There is also something quite fundamental to be said about players being able to move freely within the league. Union like to protect the right employees to seek employment where they wish.

It doesn’t help that the NHL calculates its cap hit as the average yearly value of the contract and not what a player makes in a year (like the NFL for example). Being able to artificially reduce the cap hit by adding throwaway years may provide teams with an added incentive to extend contracts even longer. But that applies to signing older players mostly.

4) Contract Length/Structure

The NHL may explore restrictions on contract length. Ultimately, however, the sides may agree to restrictions on how long-term deals are structured and not on the number of years that may be allocated to a player.

5) Escrow

The league gives players a share of PROJECTED revenue and not actual revenue. So if the NHL guesses wrong on revenue that have to get money back from the players. So rather than ask for it back, they set some aside during the season in escrow. Initially, players were giving up about 8% of their salaries and now the number has climbed to over 20%. That’s high for players so they will seek to address that.

6) Burying contracts/Buyouts

Some say that the CBA has loopholes in it, allowing teams to bury contracts in the minors and not have the salary count against the cap. In reality, however, this is not a loophole. A loophole is an unintended consequence. This scenario, however, was not unintended – it was contemplated by the CBA.

NHL teams wanted to have some type of cap space relief for underperforming players and bad contracts. The NHL may have tried, by way of example, not to have buyouts count against the cap. However, they do. So the compromise was being allowed to send players to the minors to create cap room (with the exception of 35+ players).

Realistically speaking, the NHLPA knew that there were only a few teams that could afford to bury contracts in the minors solely for cap reasons. Indeed, this has been borne out by the facts as relatively few players have been sent to the minors for cap reasons.

There is also another relief valve – placing players on long-term injured reserve. As explained here, if a player is deemed “unfit to play”, the team can place him on LTIR, and by doing so, can exceed the cap in an amount equal to that player’s salary if needed.

Buyouts do count against the cap so that is unlikely to change.

Some teams may not be happy that rich teams can gain, in their view, a competitive advantage, by burying contracts. However, it doesn’t happen too often.

It would be surprising to see this provision of the CBA amended to preclude burying contracts in the minors. It may be tweaked though.

7) Safety/Equipment

Big big issue. Both sides will want to address this as it's in the best interest of the league, the Union and its members that the league have a safe work environment.

8) Conference alignment

In the proposed realignment of the league, the NHL proposed two Conferences of 8 teams and 2 Conferences of 7 teams. The Union exercised its right to veto the proposed realignment – and given that it came up right before CBA talks it made all the sense in the world for the Union to say no. Why give up any leverage going into negotiations.

With the proposed realignment, the NHL has set the table to expand by 2 teams. Owners would love that because expansion fees are not shared with the players. Expansion fees can start at about $250 million – but could be a lot more depending on the market.

The Union would like expansion since it would create new jobs.

So the NHL will want to get the Union to agree to realignment, and the Union should like the idea. It will happen.

Those are the top 8 CBA issues. 

Another issue includes an amnesty clause allowing a team to dispose of one bad contract (we will call it the Scott Gomez clause) so it doesn’t count against the cap. They would still pay the player though. Such a change would be a surprise to see. Many owners will not want to reward poor management.

Other issues that will be discussed are international play and the Olympics, minimum salaries, retired player benefits, drug testing and supplementary discipline.

Will There Be a Lockout?

Talk of a lockout remains premature. There are too many positive indicators for the business that is hockey. There has been a $1 billion boost in revenue since 2005; the average player salary has gone from $1.4 to $2.4 million; the league has new national and regional TV deals; attendance is up; the league has a good stable of national sponsors; and there is great forward momentum.

Adjustments need to be made to the NHL CBA. However, we are not looking at an overhaul of the business model like we saw in 2005. The big difference now is that player salaries are tied to revenue – which was not the case in 2005. This provides more in the way of cost certainty and control.

So the sides will make those adjustments while keeping an eye on the bigger picture – a game and business that is getting bigger and seeking a larger international footprint.


Michael said...

Very nice article. Thanks.

Anonymous said...

Probably one of the best write ups of what are the key issues in the negotiations for the next CBA. Thank you. It definitely cleared things up.