The NHL’s Salary Cap Is Broken And There’s No Easy Way To Fix It
Something has been bugging me lately, and it took me until five days later to put words together – plainly spoken, the NHL’s salary cap system is broke and it’s not gonna be something that’s easy to correct until the next CBA.
Like every other day, on the 21st and 22nd I was cruising on Twitter to keep up with the developing hockey news of the day when I noticed the cap talk by guys like James Mirtle and Pierre LeBrun. The talk was the cap would still be going up its usual 5% to somewhere just north of $59M ($59.64M is the finalized cap ceiling). I then started hearing words like “artifical cap inflation” and “player compensation escrow account”, which finally mobilized me to download and read parts of the CBA. Woah.
Now, normally I don’t get into the business side of sports – it’s a world I don’t fully understand and it’s above my head, so I leave it alone. But as a fan of the NHL, I felt kind of compelled to tackle it this one time.
In order for the cap to increase for the following season, the league needs to experience at least $2.1B in revenue. Once that happens, the NHLPA takes a seemingly-useless vote on whether or not to activate the automatic 5% cap ceiling increase or vote on a different, lesser percentage change. What this rule doesn’t allow for is a proportional raising of the baseline revenue needed to activate the automatic cap ceiling increase. This means that regardless of how high the salary cap was coming out of the last season, the league still only needs to take in $2.1B for the NHLPA to raise it again. That kind of math explains how the salary cap went from $39M in 2005/2006 to the current $59.64M for 2010/2011. It gets gnarlier from here.
Under the revenue sharing agreement, if player compensation costs get too high, there’s an escrow account set-up that the players feed 1/5 (roughly) of their annual salaries into to help struggling teams cover the cost. Another stipulation of revenue sharing is that the top 10 teams in earned revenue must donate a fraction of their earnings to the weakest teams to help them operate. What this does is let teams continue to spend more and more money each year because the top ten markets and escrow accounts continue to feed back into the league to help everyone out.
(Slightly off-topic: Some NHL organizations actually think the Sabres have found a loophole in all of this by keeping ticket revenue down to make sure they don’t price themselves out of the Buffalo market. What this does, in fact, is allow the Sabres to collect shared revenue despite being a healthy team with sellouts and strong merchandise sales. On the other hand, the Sabres do raise their ticket prices by a small increment per game annually but it’s starting to in fact price fans out in this weak economy.)
So, the league doesn’t have a mandate in place to raise the minimum revenue level needed to allow the NHLPA to increase the salary cap year after year. That’s going to be a big problem in a few years when small market teams that spend to the cap are forced to start limiting what they can spend within the cap. With some of these teams, no amount of merchandise or attendance numbers are going to make up for a salary cap that could be skyward of $60M as early as 2011/2012. Let’s look at the Sabres as a model case. Larry Quinn is on record…somewhere (it’s very late and I’m very lazy at this point)…saying that the Sabres do not make a profit unless they make it out of the first round of the playoffs and this was two or three years ago! In the meantime, Regier has continued to spend close to an ever-increasing cap without the team making a profit. Merchandising and attendance help, but both are presumably down after two wishy-washy seasons and an embarrassing first round exit against Boston. The summer of 2011 will probably be bolstered by strong merchandise sales from the new jerseys, but still – the cap will most likely increase again, forcing Golisano to yay or nay spending more money on payroll.
At some point these smaller market teams, healthy or not, are going to have to say enough is enough and start becoming miserly when it comes to payroll. This, in turn, will start to constrict signing possibilities and force the team to ice a squad of youngins and washed-up pros. The trickle effect of that is decreased attendance and merch sales, which results in overall diminished revenues.. Hopefully, that happens the season before the current CBA expires so artificial salary cap inflation becomes the #1 topic going into NHLPA/NHL discussions.