Wednesday, August 09, 2006

Revenue Sharing and $36 Million

One aspect on the NHL CBA that will have a strong effect on the way some teams conduct their affairs is the revenue sharing agreement. This agreement is very complicated, but a summary of it can be found here.

This agreement isn't new this season, but it will affect this season differently than it did last year.

Last year the pot of revenue sharing monies potentially came from four sources. It came from centrally generated league revenues (TV contracts and mechandising), it came from left over escrow money due to the owners, it came from the playoff revenues of those teams that had playoff runs and it was directly contributed by the top ten revenue generating markets. There is a complicated formula for exactly how much comes from each source, but that is where the money comes from. The money is distributed to the teams that are among the 15 lowest revenue producing markets (as long as they are not from the very largest markets New York - Islanders and Rangers, Chicago or Los Angeles - Kings and Ducks). Exactly how much each team gets is again determined by a complex formula.

Now here is the change this season. Likely, escrow money that goes to the owners will be much larger than it was last year. This is because real revenue figures are used in the revenue projections instead of the lowball guesses used last year (in part to have an easy goal to exceed). In fact, the expectation of huge escrow payments worried the NHLPA so much that Ted Saskin got the salary reduced from the figure it would have been using the CBA formula. It is clear that more than half of the NHL's teams will pay more than the $36 million midpoint (halfway between the salary cap and floor) that would lead to zero escrow payments if the NHL exactly meets revenue projections. It is clear that those teams that exceed the midpoint will do so by a larger margin on average than those who fall below it. It is clear that the escrow account will be much larger this year than it was last year. Now the revenue sharing formula asks for 33% of money (which will be a minimum of 4.5% of the revenue of the NHL) coming from escrow - should this money exist in the escrow account. If we project an NHL revenue of $2.1 billion this is $94.5 million. $31.5 million would come from escrow accounts. Again using a $2.1 billion total revenue, this means the 54% of revenue that goes to the players is $1.134 billion in total. That works out to $37.8 million in player costs per team. Contracts are not all signed for next season, but total player costs obtained by adding up all the team salary cap hits at Irish Blues is already $1.194 billion. Even if we assume that there are no more contracts at all this season, that leave $60 million in escrow money at the end of the year. That makes a total escrow account of $60 million. $31.5 million goes directly to revenue sharing. What happens to the other $28.5 million (which we have likely underestimated)? It also gets shared but in a different scheme. It is gets shared prefernetially among the teams that don't pay their team as much as the salary midpoint. Right now only 5 teams (who may still sign players and add payroll) would qualify. They are: Edmonton, Nashville, Pittsburgh, St Louis and Washington. These teams would stand to get a few million dolars each for keeping payroll below $36 million. That is why teams are keeping the $36 million payroll figure in their thoughts.

Should the season go badly, it makes sense to dump enough payroll to get below the salary midpoint. That is part of the thinking of Boston and Buffalo when they walk away from salary arbitration deals. Should we have a bad season, we want to be able to reduce our payroll enough to gather these additional revenue sharing dollars. If we don't think we can have a playoff run, it makes financial sense to chase this money instead. Even if our payroll is too high at season's start, because we think we can compete, we will reduce it later if it turns out we do not compete. That is why taking on additional salaries that are larger than we planned is a bad idea.

This idea is one Tom Benjamin has kicked around on his blog, but most fans are unaware of the implication of this revenue sharing. That is why I thought it was a good idea to spell it out.

I predict that the mid-season salary dumping trades of at least one also ran team will make sense in this scheme. They want the additional revenue sharing money and are reducing payroll to get it.

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