Friday, January 11, 2013

Explaining the 2005 CBA and the 2012 Lockout

Being a grad student means that I have to write my fair share of papers. Being a grad student in a Sports Administration program means that I sometimes get to write my papers on hockey.

Such was the case last quarter, when I had to write a final paper for my Sports Finance and Accounting class. The assignment our professor gave us was ridiculously broad. Basically, the assignment was "write a 6-8 page paper on a subject having some small relation to sports finance and accounting." As this was mid-December, I of course opted to write an assessment of the NHL lockout, what each side was asking for, and how the lockout might be resolved.

With the topic, I bit off way more than I could chew. I realized that in order to write the paper, I had to read several portions of the actual CBA, which is like reading a very complicated book of laws and statutes in terms of ridiculously mind-numbing jargon.

Even though the lockout is now over, I figured my paper might make a nice post for the blog for people who are still confused over what the whole fight was actually about.

Full text appears after the jump. It's not Shakespeare, as I was panicking and majorly scrambling to finish this on time. I should hope this would go without saying, but this is my own work and research and you cannot reproduce or use it for your own purposes without my express permission. Bibliography is available but too much of a pain to reproduce on Blogger.

The 2012 NHL Lockout: How the Fight over Revenue Sharing is Killing the Season

Many sports arenas in North America have yet to lay ice on their floors this winter due to the fact that any team in the National Hockey League (NHL) has yet to play a game in the scheduled 2012-2013 season, which was to have begun on October 11, 2012. To this point, over 400 games have been cancelled due to the lockout that continues to keep NHL players off the ice. The disagreements between the NHL and its players' association has resulted in over 500 NHL players currently being out of work.

Following the September 15, 2012 expiration date of the Collective Bargaining Agreement (CBA) that was put into place in July 2005 as a result of the lockout of the 2004-2005 NHL season, the NHL Players' Association (NHLPA) and the league (represented by the team owners and the league's commissioner) have been unable to reach a consensus on terms of a new CBA. Because the players cannot play in the NHL without a CBA in place, the season is on hold until an agreement on a new CBA can be reached.

Lockouts in professional sports leagues are becoming more commonplace in the era of the Collective Bargaining Agreement. Each major sports league in America (Major League Baseball, National Football League, National Hockey League, and National Basketball Association) has had at least two labor disputes since 1981. Before the 2012 NHL lockout, the most recent major sports league lockout occurred in the National Basketball Association (NBA) in late 2011, shortening the 2011-2012 season from 82 to 66 games.

The 2011 NBA lockout, the fourth in that league's history, occurred as a result of disagreements between the league and the players' association over revenue sharing. Specifically, to end the lockout, the players finally had to agree to take a revenue sharing cut that would decrease their 57% revenue share to 50%, resulting in pay cuts for most players.

The 2012 NHL lockout draws strong parallels to the 2011 NBA lockout, both in lockout frequency and core issues. The NHL has locked out its players four times in the last 20 years. Three lockouts have occurred since 1994 while the league has been under the direction of current NHL commissioner Gary Bettman.

The last NHL lockout, spanning the entirety of the 2004-2005 season, lasted 310 days and cancelled 1,230 games. It was the first time any major sports league in North America cancelled an entire season due to a lockout. Teams lost approximately $2.1 billion in hockey-related revenue (ticket sales, broadcasts, sponsorships, and arena concessions) during the season. The economic impact was so severe that the Canadian government estimated a $170 million drop in the country's gross domestic product in 2004 and 2005 as a result of the lockout.

The issues at the heart of the current dispute are nearly all related to money and player contracts. Specifically, the league wants to limit the maximum contract length to five years (though the league's most recent proposal has increased that number to seven years, but only to re-sign a team's own unrestricted free agent), the length of the next CBA, player pensions, player contract buyouts and escrow limits, and perhaps the largest point of contention, revenue sharing.

In the 2005 CBA, revenue sharing between owners and players had players earning 57% of hockey-related revenues (HRR) to the owners' 43%. The 57% share was based on the condition that one season's HRR total $2.7 billion or more, an amount the NHL has met or exceeded in recent years. Hockey-related revenues, as defined by the 2005 CBA, include preseason, regular season and postseason game ticket sales, premium seating (box/suite) sales, revenues from television and radio game broadcasts and NHL networks, fan novelty sales, arena concessions, and some team and arena sponsorships.

The 2005 NHL CBA put into place for the first time in the NHL the salary cap, which limits the amount of money a team can allot to player contracts. According to the provisions of the 2005 CBA, the players' share of HRR determined the league's salary cap (and floor). The total salary cap varied by year, and was calculated at the beginning of each season based on projected HRR (for example, the 2011-2012 season's salary cap totaled $64.3 million). The 2005 CBA outlines the formula for calculating a Midpoint Value as follows:

[Preliminary HRR for Year Prior × Player Share % (if HRR > $2.7B, 57%) - Preliminary Benefits (which includes player pensions and insurance)] ÷ Number of teams (30) = Midpoint Value

After the Midpoint Value was determined, $8 million was added to it to determine the salary cap, and $8 million was subtracted from it to determine the salary floor (the minimum amount of money a team can spend on contracts). The CBA stipulated a revenue growth of up to 5% to adjust the Midpoint Value in each season.

Because the players' HRR share is directly tied to the amount that teams can spend on players, any adjustment in the player share would drastically change the kind of contracts teams could offer players, and by extension, change the players' salaries themselves. The 2011-2012 season's HRR totaled approximately $3.3 billion. Under the 2005 CBA, the players 57% share of HRR earned them $1.883 billion of that total amount.

However, in the current CBA dispute, the NHL favors an immediate 50-50 split of all HRR, which, if it had in place for the 2011-2012 season, would have given the players $1.65 billion. $23 million may not seem like much of a difference when both amounts are in the billions, but a very abrupt and immediate 7% decrease in the amount of money allotted to player salaries would certainly be felt by the players. Due to the fact that the the salary cap is linked to the players' share of HRR, the players would see a dramatic decrease in their salaries due to a sizable drop in the salary cap.

The owners argue that a 50-50 share makes the league fairer. Forbes reported that in the 2010-2011 season, 18 of the 30 NHL teams lost money. Of those, 13 teams each lost more than $5 million. Stu Siegel, former owner of the Florida Panthers, believes that for those unprofitable, typically small-market teams, the 2005 CBA's 43% owner share hurts the entirety of the club, down to its minor league team. While the players on the NHL team roster receive through salary and benefits 57% of the money the team makes, the 43% owner share must be used to pay the salaries of the team's general manager, coaches, front office employees, and the entirety of the minor league system, as well as covering the arena lease and other related expenses.

The owners have not helped their case in recent years, however, by signing players to massive, long-term, front-loaded contracts that serve to circumvent the salary cap so that they can secure the most coveted free agents. Frequently pointed to during this lockout as examples are the contracts of Zach Parise and Ryan Suter, just signed in July 2012. The Minnesota Wild wooed Suter from the Nashville Predators and Parise from the New Jersey Devils with identical 13-year, $98 million contracts. Each player would earn $12 million in each of the first two years of the contracts, but yet each contract would count approximately $7.5 million against the salary cap for each year of their length.

This is precisely what Siegel means when he refers to cap circumvention, as for the first few years, the players are actually being paid considerably more than their salary cap hit. Suter and Parise are not special cases; a special salary cap amendment had to be written for the 2005 CBA in September 2010 when the New Jersey Devils attempted to sign Ilya Kovalchuk to a 17-year, $102 million contract, which the league deemed illegal under the "Circumvention" clause of the CBA. After the NHL added the relevant amendments to the CBA, they eventually approved the distribution schedule of an edited 15-year, $100 million contract for Kovalchuk.

In light of these high-profile, front-loaded deals perceived to circumvent the salary cap, the fans, and certainly the players, are finding it difficult to muster sympathy for the owners, even the owners of losing markets. Therefore, if the players are going to agree to immediately shift to a 50-50 share, the owners would have to come up with a way to lessen the burden on players. In order to potentially appease the players, the league has attempted to negotiate a "make whole" proposition, in which the amount of revenue lost in the immediate 7% decrease would be paid back to players who are currently under contract.

The conditions of "make whole" provision stipulate that players who signed contracts under the 2005 CBA would be paid the difference between 50% of the actual 2012-2013 HRR and 57% of 2011-2012 HRR. The "make whole" provision is based on a steady 5% increase in HRR each season, and based on that projection, the players' 50% share in 2013-2014 would equal the $1.883 billion that players received under the 57% share in 2011-2012. Therefore, under the league proposal, the "make whole" provision would only be paid through the 2013-2014 season.

The "make whole" provision is certainly an improvement over the blunt 14% revenue share cut (from 57% to 43%) that the owners had initially proposed for players in July, but it could still amount to a noticeable difference in player take-home pay. If forced to take a revenue share cut, the players would likely favor a more gradual, subtle change than what "make whole" proposes.

In response, sports economist Andrew Zimbalist offers a slightly different plan that would efficiently lessen the players' pain of a sudden decrease. Zimbalist proposes keeping the players at a 57% HRR share for the 2012-2013 season, then very slowly phasing to a 50-50 split between the league and players, perhaps by a one-percent margin per year over a proposed seven-year CBA. The NHL has experienced revenue growth every year since 2005, and if the trends of growth were to continue, the players would possibly not even see a change in their salaries over those seven years due to the small shifts. They may not see much of an increase from year to year, but at least they would not see a perceptible salary cut.

Zimbalist's plan seems optimal for resolving the current conflict, as players would be more likely to accept a small, gradual cut, and the owners would still eventually arrive at their desired 50-50 share. However, it's a suggestion that does not seem to have been part of any offer yet from either side, and so the battle lingers as the clock to save the season is winding down.

To this point, all NHL games have been cancelled at least through December 30, and the annual Winter Classic (played on New Year's Day) and All-Star Game and Skills Competition (scheduled for February 2013) were already cancelled in November 2012. Hope is starting to fade, not only for the fans, but also the players.

As each negotiation has broken down, more NHL players have opted to play in Europe. League superstars like Alex Ovechkin (Washington) and Evgeni Malkin (Pittsburgh) have gone home to their native Russia to play in the Kontinental Hockey League (KHL), but even North American-born players like the Boston Bruins' Tyler Seguin and the Chicago Blackhawks' Patrick Kane have signed contracts to play in a European league.

After the most recent negotiations failed in the week of December 3, Sidney Crosby, the Pittsburgh Penguins captain and the face of the NHL since his rookie year in 2005-2006 (which, coincidentally, was the first season after the last lockout), expressed his growing desire to play in Europe as the hope of playing any games in the NHL this year diminishes. As league and players' offers continue to be rejected, players will continue to move to Europe to earn their salary this season.

The NHL was able to bounce back after the lockout of 2004-2005, but the recent actions of both the owners and players have soured the perceptions of some fans. It's difficult to tell if this particular lockout will have a negative impact on the league, but for their own sakes, both the players and the league should hope it won't hurt revenues.

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