The new CBA Memorandum of Understanding (MOU) extends the current CBA four more seasons (through 2025/26). Hockey Men are thrilled that the players and owners were able to nobly put aside their natural enmity to Come Together for the Good of the Sport and Its Fans.
This is a potentially terrible deal for the PA because it does nothing to protect against slow HRR recovery and future growth, and just delays collection of likely escrow refunds to future seasons.
The players were certainly in a difficult position. The stoppage caused by Covid-19 has dramatically reduced the expected HRR for 2019/20 to approximately $4.3 Billion, assuming the NHL completes this season under the new “return to play” rules. When the season was stopped, the players had received the majority of their salaries. On the hook for a 50/50 split, with a dramatic decrease in HRR likely, the players were naturally concerned about…carry the 1…
The players hate escrow. They hate it and they hate its ass face! But the PA agreed to a hard 50/50 split years ago, and just last September, the PA declined its option to renegotiate the CBA after this season, extending the CBA through 2021/22. This was a bad idea at the time, that only looks worse for the PA in hindsight. Obviously no one could have predicted what Covid has done to the sport, but can you imagine the leverage the PA would have had during these CBA MOU and return-to-play negotiations if the CBA was set to expire on September 15, 2020?
Alas, with this season’s revenues dropping so dramatically, the players were faced with a huge increase in escrow for this season, and uncertainly about future seasons. The PA could refuse to play the season (which comes with its own legal risk), let 2019/20 HRRs fall where they may, and owe the NHL a ton of money. It's not surprising that the PA took a way out that seems, on its face, to be “safe”: soften the immediate and future escrow blows, and try to gain other benefits it finds important (cough*Olympics*cough). I always thought this was going to be the PA’s next CBA negotiation game plan, even pre-Covid. Covid just made the future more scary and uncertain.
The key provisions of new CBA MOU:
Escrow is capped for the remainder of the CBA:
2020/21 : 20 percent cap
2021/22: 14-18 percent cap (depending on revenues from 2020-21 season)
2022/23: 10 percent cap
2023/24, 2024/25, and 2025/26: 6 percent cap each season.
In 2020/21, the PA will “defer” 10% of salaries, with the hope of it being returned in installments from 2022 to 2025, depending on those seasons’ HRR/escrow.
NHL owners get to take the entire 2019/20 escrow funds right away, instead of waiting for the end of the season, the finalization of HRR as per the original CBA, and payment to the players of any escrow overages.
2020/21 salary cap will stay at $81.5 million, and will not go up until revenues reach $4.8 billion (basically where the NHL was pre-Covid). After that threshold is met, the cap will be based on HRR from two seasons earlier (another escrow mitigation tactic).
Early reports suggested that the CBA could extend another season if, at the end of this extension, the players still owed more than $125M in escrow refunds. I haven’t seen this in any of the more recent reports - but if this was included, I think you’ll see below that it would just exacerbate the players’ risk.
If you want a simple primer on escrow, and how the PA has been playing catch-up from the moment it agreed to a 50/50 split, nobody (@PetBugs13) wrote one here, and, this is the money quote:
…the only way revenues can catch up to salaries is if revenues grow faster than salaries.
The PA started the 50/50 split behind, and HRR has never grown fast enough to catch up. This CBA MOU is likely to only make that problem worse. If HRR doesn’t grow fast enough, it doesn’t really matter what the escrow “cap” is in a particular season - those overpaid salaries will be due and owning at some point because the owners will always be due their 50%. The players focused on half of the escrow equation (limiting salaries) and ignored the other half (ensuring growth of HRR).
I’ve run some different scenarios of HRR growth, and how it impacts the players’ share, escrow and the total monies that could be owed to the owners at the end of this CBA extension. Please understand this is a *highly simplified* estimate, with a number of assumptions to keep calculations simple:
Total player costs (salaries and bonuses) stay flat for the entire period, with one increase when Seattle joins (adding an additional league-average 82M in player costs). This is consistent with the CBA MOU’s inclusion of a flat salary cap for the foreseeable future, and obviously as HRR rebounds, the salary cap, and actual salaries paid, could rise.
Performance bonuses are assumed to paid at 50%, and I didn’t include any carryover bonuses. The 50% might be too high really, because Kaapo Kakko had $2.65M in possible bonuses, and those are…um…let’s just move on.
The “Players Share” normally includes contributions made to the players’ benefits fund (usually a small 6-figure amount) but those are not included here for simplicity sake.
HRR for this season, pre-Covid is estimated at $5B, based on different estimates, and this is a nice easy number for doing the Maths. [Tangent: if the NHL had finished the season at $5B, it would be the first time since 2005 (ignoring the 2012 lockout), when revenues did not grow over the previous season. Covid may have given the NHL a pass from some hard revenue-generation questions].
HRR for 2020/21 is estimated at $2.5M. I’ve seen no other estimate that suggests revenue for next season will be anywhere near the pre-Covid “normal” level of 2018/19.
Annual HRR revenue growth since 2005 is about 6.75% (excluding the 2012 lockout and the following season). I’ve assumed this level of growth in future years once HRR returns to that 2018/19 “normal” level.
Clearly, the NHL and PA are assuming that HRR will grow a lot faster than this, and the escrow cap levels reflect those assumptions. The CBA MOU notes that once HRR exceeds $4.8B, the salary cap will start growing again - but for simplicity sake, I have not included any cap growth. So while I am likely underestimating “player costs” in some future seasons, that actually helps the players under these models - a greater difference between lower player costs and higher HRR means less escrow.
I’ve included limited additional revenue from Seattle, even though lots of Hockey Men assume it will cause a huge increase. First, I don’t know why we assume Seattle will be such a windfall. The 6.75% annual growth average includes the impact of Vegas already. The year-over-year HRR growth for Vegas’s first season (9.71%) was only 1.66 percentage points higher than the growth from the season before (8.05%), and growth actually dropped to 4.73% in Vegas’ second season. Second, Seattle is coming in at time when we don’t know what attendance will be allowed, if any! Assuming Seattle is going to a huge boost to HRR, or even match whatever boost Vegas added, seems like a huge leap to me.
The other main HRR increase Hockey Men point to is the new US TV deal starting in 2022/23. I’ve assumed a 100% increase in the US TV deal ($400M per season vs. current $200M per season). That seems more than fair considering estimates before Covid. Even at $400M, the US TV deal would be worth about 12% of total pre-Covid HRR. Another $100M per season wouldn’t move the HRR needle that much.
Annual HRR figures come from Forbes. Salary data comes from CapFriendly. All figures $USD.
While I ran a number of different models, I wanted to highlight the model that was most favorable to the players - one in which HRR recovers to pre-Covid levels quickly (in 2021/22) - so after only the current partial season (2019/20), and one depressed full season (in 2020/21).
Let’s start with a look at the current 2019/20 season.
HRR for the current season is estimated at $4.3B. The players have agreed to turn over their final paychecks for this season, leading to a a reported 19.6 escrow percentage (also reported at about $500, which is a little lower than the actual math). Even this agreed upon escrow may be too high - as there is still an overage of about 50M.
“WTF?” Tangent: Typically, neither party can access salaries withheld in escrow until after the final HRR is agreed - the actual funds are held in an account by JPMorgan. For some reason, however, the PA agreed to let the NHL owners get access to this season’s escrow funds (about $500M) right away. Sure, the players are not likely to get any or much back (but that 19.6% could still be too high after final accounting). Did the PA agree to limits on how those funds can be used? If the owners make any money on investment, do the players get a cut? The NHL owners are rich individuals and corporations, and, at the very least, have access to extremely favorable lending facilities that will or could help them through this pandemic. The owners have that $650M Seattle expansion fee that is probably coming to them next season (and are still probably rolling in the piles of $500M from Vegas). And did the PA forget how reluctantly some NHL owners were to continue to pay employees during the pandemic? It’s just mind-boggling to me that the PA would agree to this without some conditions to ensure the owners use this money in a beneficial way, or even that players aren’t just acting as a source of interest free working capital.
So, is this $49 escrow surplus likely to help the players in the future years?
HRR in 2020/21 is estimated to be verrrry low - basically 50% of where the NHL thought it would be pre-Covid. The players tried to minimize escrow loss by (1) deferring 10% of salaries, and (2) agreeing to an unusually high 20% escrow cap. However, even with these reductions, I estimate the PA will still owe $626M to the owners. This completely swallows up the $49M surplus from this season, leaving the players in a $577M hole - after one season!
Also note that the NHL paid the players about $300M in July 1 bonuses for the 2020/21 season, so the players are already in a $300M hole to the owners before the current season is even done. Typically bonuses are subject to escrow, but since the CBA MOU was agreed to after these bonuses were paid, it’s not clear (1) if the NHL withheld any escrow from those bonuses, (2) if escrow was withheld, at what percentage, and (3) how that percentage lines up with the 10% deferral and 20% escrow cap.
I realize this is starting to get number heavy, but 2021/22 is when we start guestimating HRR. I assume Seattle will still join the league and both HRR and player costs will grow. For this and future season, I show estimates based on HRR returning to 100% of pre-Covid levels, HRR based on 75% of that, and HRR based on 50%. Under the CBA MOU the salary cap will stay flat - so player costs are basically not changing except for Seattle’s additional costs. Unless HRR rebounds right away to around $5.2B, the players are going to owe escrow. Totally unrelated aside: the NHL has never reached $5.2B in HRR, and it was wasn’t expecting to before Covid, but I’m sure it will reach that level right after a global pandemic that has no predictable endpoint.
Taking all this into account, the CBA MOU escrow cap range of 14-18% is extremely aspirational, because you can see that if HRR rebounds just to 75%, the players actual escrow will well exceed the 18% cap, and the players would owe an aggregate additional $900M above and beyond the caps!
2022/23 brings the new US TV contract, and the pattern continues. If the HRR has rebounded right away, and grows at its pre-Covid pace, the PA actually does well - getting 11.7% less than it should have. Of course this is unrealistic, because if revenue has rebounded in the prior season, the $4.8B HRR threshold is hit and the cap would have risen. Totally unrelated aside: the NHL has never given the PA back its entire escrow withholding for a season.
The fact that the CBA MOU includes a specific 10% cap (rather than a range) for this season suggests this is the year in which the NHL feels most confident about its HRR projections. 10% is right where the most recent full season final escrow withholding percentage ended up, after all. Maybe the NHL knows that the new US TV deal is going to be a real game changer, cause without it, the CBA MOU 10% escrow cap could be wildly low if HRR remains sluggish. This is also the season in which the owners are supposed to start giving the players back the 10% deferral from 2020/21 - but as you can see, it’s possible that the players would be in such a deep escrow hole that the 10% would never actually be returned, and would instead be used to offset those ongoing escrow obligations. Totally unrelated aside: LOL that the players agreed to let that 10% be repaid over 4 seasons, and not right away.
click to enlarge
2023/24, 2024/25, and 2025/26 are all basically the same, but with a 6% escrow cap - so click if you want to see the details. Note, however, that final reconciled escrow percentage hasn’t been below 6% since the 2011/2012 season (and the subsequent lockout). So sure, a 6% escrow cap sounds totally reasonable a few seasons into post-Covid world. The farther into the future we go, the more variable the possible HRR estimates would be anyway, and the more likely that players costs have started rising, but I hope you get the point by now: if HRR growth is too slow, the CBA MOU escrow caps will not save the players - they will still owe a lot of money to the owners…as shown…
…here. This is the CBA MOU if HRR grows at a “75% of normal” pace. When escrow is highlighted in red, it means that the escrow cap is lower than the actual escrow due; pale orange is escrow is less than escrow cap; blue means escrow was set too high and the players get over 100% back. In this scenario, it takes until 2024/25 just to get escrow to less than the cap (and for the HRR to clear the $4.8B threshold necessary to raise the salary cap). Only in the final season would the players get underpaid - but again that’s small underpayment would likely get eaten up by the rise in the salary cap I didn’t include .
TL;DR: Any hiccup in HRR growth could cause the players’ total escrow obligation to the owners to be well into the *hundreds of millions* of dollars by the end of this term.
What Should the PA Have Fought For?
The PA probably could not unilaterally ignore the terms of the existing CBA and claim that it did not legally owe the NHL the current escrow, or try to walk away from the CBA entirely. The CBA doesn’t include a “force majeure” type clause that would give the PA a specific opening to renegotiate. However, while I am not a labor lawyer, the effect of Covid on CBAs, at least in the US, is potentially open to some debate.
But even if the PA did not have a clear legal leg to stand on, the threat of legal action, and the possibility of a long, drawn-out legal battle over the CBA could have been a tool the PA used to pressure the NHL into PA-favorable concessions. I would argue that the PA had tremendous leverage that it failed to use in these negotiations. I don’t think it’s arguable that the NHL wants to get back to some level of normalcy as soon as possible so here are some leverage points the PA had:
The NHL expects to collect $650M in expansion fees from Seattle next season (none of which go to players under the original CBA) - a labor dispute that drags on could impact the timing of Seattle’s payment.
The NHL wants to get back on TV as soon as possible, hopefully to strong viewership that could enhance its value during the US TV deal negotiations.
The players were being asked to get back to action during an ongoing pandemic.
With these factors in mind, I think the PA should have fought for some combination of the following:
1. Specific HRR Growth Guarantees.
HRR is heavily attendance-dependent, and the biggest unknown in determining future HRR will be when fans can go to games in person again. Seattle revenue and a new US TV deal are nice, but they don’t move the needle to the same extent as fans in the stands at 32 arenas.
Based on the CBA MOU’s escrow caps, I think the NHL believes arena attendance will recover in 2022/23. That could be wildly optimistic. But even with the new escrow caps, the PA is at risk for huge escrow obligations immediately if the NHL’s HRR projections are too high, or if the pandemic recovery drags longer than the NHL is predicting. The PA should have forced the NHL to put in annual growth projections, and then if those projections failed, to adjust the players’ share of HRR accordingly. If the NHL can’t hit its HRR revenue projections, the owners should be on the hook for that, not the players.
2. Actual restructuring of the 50/50 split.
The NHL opened the door to adjusting the 50/50 split to reflect the decreased HRR and to not deal with a rapid decrease in the salary cap. But these are just temporary, and the owners are expecting to get all their money back. The PA could have pushed for a structured re-balance of the 50/50 split that moves back to a 50/50 split over time (ex: 60/40, then 58/42, then 56/44, etc.), or set more favorable terms for repayment of ongoing and future escrow obligations (ie maximum escrow caps over duration of CBA).
3. Allow for the PA to terminate the CBA if certain triggers happen (HRR growth targets not met, seasonal escrow exceeds $X, total escrow exceeds $Y).
4. Expand the definition of HRR/share some portion of the Seattle Expansion Fee. Haha, ok ok I know.
5. Obtain some equity or profit-sharing rights in the NHL and/or team values. Give the players a bonus share of NHL revenues when certain targets are met, or a small percentage of franchise values upon future transfer (like a realty transfer tax for franchises). To be fair, I haven’t given much consideration to the legal implications of this but this was a time for the PA to be thinking creatively and aggressively.
As you can probably tell, all of these are just different ways of saying “give the players a bigger slice of the NHL and its ancillary revenues”. I don’t really care how the PA got there - but I think it really failed to take advantage of a unique opportunity, and put too much trust in the NHL and its revenue projections. The risk to this plan should have been obvious to anyone.
The PA’s role is to protect the players today, and build a system that works for future players. This CBA MOU doesn’t do that, and, even worse, it might make future CBA negotiations more difficult. If the “players” are in debt to the NHL to the tune of hundreds of millions of dollars, they are negotiating from a position of weakness. Covid gave the PA a unique (and possible one-time) opportunity to re’balance the power under the CBA, and the PA failed.
But hey, a few dozen players might get to play in the Olympics every 4 years, so I guess it all balances out.
… Again I am right in my analysis.