Sunday, December 21st, 2014

On the Cap

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Larry Brooks spends a lot of words to explain why the players should vote to see the salary cap go up by 5% again next season. After all, if they don’t the salary cap might go down:

A lower cap will all but shut down the big-market engines that fuel the league and drive salaries. Close enough to the cap as it is, a reduction would all but force big market clubs out of the free agent market. A lower cap minimizes options for everyone. A lower cap could conceivably create the necessity for fewer qualifying offers, more buyouts and more salary arbitration walkaways.

Tyler Dellow has a good post that explains why this thinking is wrongheaded. Most players – the 80% or so of them with contracts subject to higher than necessary escrow – do not benefit when the cap keeps going up even when anticipated revenues do not justify the increase. Most players should not be expected to vote against their own self interest to subsidize FAs and big market teams because Larry Brooks thinks it is in everybody else’s interest to see that happen.

It is worth remembering that the league (and the media) characterizes this part of the CBA entirely incorrectly. This is not supposed to be an NHLPA decision. The salary cap is set by a formula that begins with the actual revenues achieved this year. The 5% escalator is supposed to be based on an estimate of the revenue growth for next year. The idea is clearly to establish the cap at a level that matches actual revenue. That 5% increase is automatic…

…unless or until either party to this agreement proposes a different growth factor based on actual revenue experience and/or projections, in which case the parties shall discuss and agree on a new factor. If a significant one time increase or decrease in league revenues is anticipated for the next league year, the parties will endeavour to estimate the anticipated increase or decrease and incorporate that estimate into the formula…

In other words, the parties are supposed to negotiate the cap each year within the framework of the formula. Ever rising escrow payments are not supposed to be a feature of the CBA. That the big market might be shut out of free agent bidding is supposed to be a feature of the CBA. Ever rising escrow is unfair to the players who win long term contracts. Raising the cap without the revenues to justify it subverts the system.

This paragraph has morphed into an “NHLPA option” to apply the 5% increase because the NHL controls the media and because the NHL benefits from a high escrow, high cap environment. Gary Bettman will always want the cap set as high as possible and he will never voluntarily live up to his obligation to more properly align revenues and salaries. Actual revenue (and player signing) experience makes it obvious that a revenue increase large enough to offset a 5% raise for the players is a pipedream. Escrow will likely be in the double digits again if the players allow the cap to go up by that much.

If the players don’t take action to reduce escrow now, when do they do it? Are they supposed to let it go up forever because that’s the way the league and Larry Brooks would have it?

I don’t think so.

Update: A reader asks:

I’m curious: Do you think there’s any argument for the PA voting to raise the cap? What about in the name of union solidarity (i.e. not fragmenting the membership)? Or in terms of keeping guys from getting demoted and bought out en masse? Keeping free agency alive? Isn’t the big markets winning good for both Bettman AND the players in terms of increased revenues?

I haven’t heard a good argument yet, but I haven’t run any numbers. How bad is the situation? What does escrow look to be with and without the bump? If there is no bump how tight will it be for the FAs? I suspect it will be pretty bad given the way Bettman announced the cap number, but I don’t know.

Solidarity is impossible. The membership has been fragmented since the end of the lockout. Partly that was because of the betrayal, but a big part of it is that the CBA sets the players against each other in a zero sum game. Solidarity is a train that left the station five years ago. Members will sometimes act against self interest because a union is solid, but they don’t act against self interest in an effort to create solidarity. That’s backwards.

The league is in this mess because the midpoint has been consistently overspent and because for the past three years the cap has gone up (or not gone down) even though revenues have not grown enough to keep up with the salary inflation. The problem keeps getting worse because the CBA has also led to long contracts. Every time the cap goes up, the teams can buy more of them which means even less flexibility when they finally do decide to face the problem. As long as the players solve the fundamental flaw in Gary’s CBA – it won’t work unless revenues are growing – by increasing escrow, the owners will happily go along. When do the players stop going along? Can’t you make these arguments every year?

Demotions and buyouts? An illiquid free agent market? This is a league problem, not a player problem. Why shouldn’t the league fix it? Instead of expecting the players to subvert the intent of this particular CBA clause and take voluntary pay cuts, let the league subvert a different part of the CBA. If they don’t want to spend a fortune on players in the minors or on players who aren’t playing for them any more, they can adjust the player percentage of revenue to provide the necessary liquidity. It doesn’t cost them much more to keep those players in the NHL and they don’t damage the product with mass demotions. It isn’t just the players who need a market for talent with enough liquidity to assure job offers to the best players. Teams need it too. The league needs it or they will lose players to Europe. The league needs it so they aren’t trying to sell a bunch of minimum wage career minor leaguers as NHL players while spending millions on payroll in the AHL.

If the union wasn’t so badly fragmented, they could take advantage of the problems.

Winners in the big markets are good for the players in terms of increased revenues but this will have zero effect on the vote in my view. The players don’t think that way. They won’t throw games to maximise revenues and they won’t vote so that Chicago can keep winning. (Black Hawks may vote to keep there team together though.)

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