Ownership concerns are still plaguing a handful of the NHL’s bottom-feeders, but collectively the league seems to have weathered the recession fairly well. While the NFL and NBA are facing uncertain futures on the labor front this summer, the NHL continues to gain momentum. On Saturday NHL Deputy Commissioner Bill Daly told the Sports Lawyers Association that he expects next year’s salary cap to rise to between $60.5m and $63.5m. The latter figure would represent a $4.1m bump from this season’s cap of $59.4m and a 63% rise since the cap was first initiated in 2005.
The NHL’s salary cap is directly related to annual hockey-related revenues (HRR) and by most measures 2010-11 has been a successful year for the league. Daly thinks this season’s revenues could push $3 billion and the NHL’s new 10-year broadcast deal with NBC Universal should only add to that number going forward.
A handful of general managers would certainly welcome the millions of dollars of spending freedom. According to the salary-tracking website CapGeek.com, nine teams are already within $10m of the lower end of Daly’s range heading into the offseason and free agency.
But it’s the players association that will ultimately have to determine whether the salary cap moves all the way to $63.5m and those GM’s are granted even more wiggle room. It may not be an easy decision.
Under the CBA, players are currently entitled to 57% of HRR. Since the salary cap is established prior to the season, a portion of each player’s paycheck is withheld in escrow each year to cover any overspending on player salaries. At the end of the year, the withheld money is then either returned to the players or kept by the league in order to meet the 57% target.
This typically wouldn’t be a big factor, but in recent seasons the system has gotten out of whack as GM’s have embraced a loophole in the cap system and signed star players to long-term, front-loaded contracts. The abuse reached a tipping point last summer when Ilya Kovalchuk signed a ludicrous 15-year contract that was to pay him pay him $11.5m in early seasons before falling to $550k in the final years.
The league ruled that the contract circumvented the salary cap and the CBA was amended to limit further abuse, but the rash of front-loaded deals approved in prior years still remain. A few examples:
- Roberto Luongo (Vancouver) – 2011 Salary: $10m, Cap Hit: $5.33m
- Vincent Lecavalier (Tampa) – 2011 Salary: $10m, Cap Hit: $7.73m
- Marian Hossa (Chicago) – 2011 Salary: $7.90m, Cap Hit: $5.28m
- Chris Pronger (Philadelphia) – 2011 Salary: $7.60m, Cap Hit: $4.92m
The dramatic disconnect between cap hits and salaries means that a team like Vancouver that routinely spends to the salary cap limit is actually paying out far more than that in actual salaries. As a result, the league has been forced to withhold as much as 18-percent of player paychecks in escrow in recent seasons to cover the spending overage.
Theoretically, the escrow effect of contracts like these will reverse a decade from now on the tail end of the deals when the cap hit exceeds actual salary paid, but a different generation of players will reap the benefits (assuming the same system is in place and the star players haven’t already retired by that time).
In a sense, the escrow tensions have pitted Luongo and the ‘haves’ against the ‘have-nots’ of the NHL. This leads to an important and perhaps polarizing strategic choice for the NHLPA.
After HRR is determined and a salary cap level is established, the players also have the ability to increase the salary cap number by 5-percent to account for expected revenue growth in the coming season. The NHLPA has always taken this escalator option and on the surface it seems like a no-brainer decision.
A higher salary cap means teams with full pockets can spend more and drive up the market price of this summer’s free agents. But if HRR doesn’t increase 5-percent next year to match the escalator, players with existing contracts are forced to surrender even more money to the league in escrow.
One school of thought believes that new NHLPA Executive Director Donald Fehr might use the escrow mess as a way to fire up emotions amongst the players heading into labor negotiations next summer.
Fehr could also be planning to point to the escrow disconnect as a reason to revamp the way the league shares revenues with players in the next CBA.
Either way, it seems Fehr is already laying the groundwork for a labor negotiation that figures to be the 63-year-old’s swan song. “When you’re dealing with professional athletes, the turnover rate is so high that for many of them, they’ll be there through one negotiation, or maybe one and a little more,” he told IIHF.com. “So the pressure is on you to really get it right all the time.”
But what exactly is ‘getting it right’?
Roberto Luongo is reaping the rewards of a system that allows him to earn the bulk of his money upfront.
The structure of the deal also gives the Vancouver Canucks short-term flexibility to spend more on players. (The Canucks are in the Stanley Cup Finals this year by the way)
But how about Luongo’s backup Cory Schneider who makes just $900k with a matching cap hit of $900k? How does he feel about watching more and more of his salary eaten up through escrow as NHL teams overspend on front-loaded contracts? Will he still be in the league ten years from now when the escrow effect of Luongo’s contract reverses?
If the NHLPA plans to put up a fight against commissioner Gary Bettman and the NHL next summer they’ll need to unite under one roof. How Fehr decides to handle hot-button items like the salary cap and escrow issue will go a long way towards determining whether they ‘get it right’.
*This article also appeared on Forbes SportsMoney*