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Wednesday, August 15, 2012

Mandated Salary Floor Threatens NHL Season

As the National Hockey League careens towards the third lockout of players in two decades, we await news of the league's reaction to the National Hockey League Players Association's counterproposal.

The owners, acting for the time being as a united front, want additional contract givebacks that would operate to reduce the aggregate revenue percentage which players receive.  Some owners have no problem lavishing $100 million, 14-year contracts on star players, yet other owners are struggling under the weight of either perennial losses or crushing debt service.  

I have speculated in the past that at least two franchises are approaching bankruptcy.  I have previously written about the perilous financial state of several franchises including the New York Islanders, whose owner, Charles Wang, may have lost at least $250 million since buying the franchise in 2000.  Meanwhile, the New Jersey Devils are believed on the cusp of bankruptcy because their current owners simply owe too much money stemming from using debt to buy the team.  The Phoenix Coyotes' proposed sale to a new owner who would buy the club from the league -- which has operated the team for three seasons after buying it out of bankruptcy in 2009 in order to keep it in Phoenix -- is also being held up by financial considerations and has, ominously, failed to close.

While hockey is an undoubtedly popular sport among its niche, the economics of the NHL need tweaking.  The largest expense is player salaries, and the last collective bargaining agreement achieved cost certainty by imposing a rather narrow band within which teams' aggregate salary obligations must remain.  The problem, at least for low-revenue clubs, is that as NHL revenue league-wise has grown, the terms of the last CBA forced the salary band up, in turn raising the floor above a level where some teams can spend and remain profitable.  For example, the New York Islanders were right above the floor in the 2011-2012 season, spending about $47 million on player salaries.  This amount was about $10 million more than what they spent in 2005-06.  Had the previous CBA remained in place, the Islanders would have been required to spend about $53 million on salaries.  Factor in that club's losses, which have been estimated to be anywhere from $15-25 million per season (and could in reality be worse).  Simple math dictates that the previous CBA's salary floor and salary band structure have created an inflexible environment in which some franchises are virtually locked into substantial financial losses and, even worse, face a future of mandated additional spending which may outpace those clubs' ability to grow their own revenue.

A new collective bargaining agreement needs to recognize that mandated spending can cripple some low-revenue teams.  If one or more clubs fold or are contracted by the league, the lost jobs for players will overshadow the short-term benefits of mandated player salary spending.  Some franchises need additional flexibility at the low end of the salary scale.

One smart solution would be to increase the width of the salary band, so that the salary cap can rise more than the salary floor.  Another solution may be to untether the connection between mandated salary spending and a set percentage of hockey-related revenue.  Both solutions would help relieve low-revenue teams from the burden of having to increase spending as a result of the revenue-generating success of teams that virtually print money, like the Toronto Maple Leafs.  Perversely, such successful teams can now force weak sisters into near-oblivion, not by carpetbombing them in player salaries, but by generating so much hockey revenue that they impose cost increases, mandated salary increases, on all clubs through a sharply rising salary floor.

UPDATE 8/16/12 6PM: See this report from TSN in Canada, which has a similar analysis to mine.  Read the following passage:
The financial success of the wealthiest franchises over the last seven years ended up hurting the poorer ones.
That's because the salary cap was tied to overall hockey-related revenues and rose dramatically from $39 million in 2005-06 to $64.3 million last season, bringing the salary floor (the minimum teams must spend) up along with it. If next season was played under the current system, the cap would have been set at $70.2 million and the floor would have been $54.2 million.
The new CBA needs to protect low-revenue clubs from drowning, financially, in the wake of the one dozen or so financial behemoths in the league whose revenues are clearly in, er, another league.  Otherwise, the NHL cannot remain as a 30-team league with three teams in the New York area, teams in the Sunbelt like the Florida Panthers and Phoenix Coyotes, and even midwestern clubs like the Columbus Blue Jackets and Nashville Predators.

Eric Dixon is a New York attorney and former hockey season-ticket holder.

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