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The NHL’s Five-Year Plan: CBA Update

When COVID-19 hit North America it came in hot and took no prisoners turning the professional sports world upside down. As countries across the world looked to their health experts and other countries for examples of what to do, sports leagues had nothing for comparison or guidance. Despite all the distractions around them, the NHL and the NHLPA (Player’s Association) were able to come together and quickly agree to a Memorandum Of Understanding (MOU) that extended the Collective Bargaining Agreement (CBA) through the 2025-26 season with a potential one year extension.

Before we get into the details of the MOU, let’s first look at all of the important dates outlined in the Return to Play (RTP):

July 13th – Start of NHL’s Phase 3 Protocols
July 26th – Teams arrive to Hub Cities (East – Toronto / West – Edmonton)
July 28 to 30th – Exhibition Games (one per team)
Aug 1st – Start of NHL’s Phase 4 Protocols / Qualification Round Begins
Aug 10th – Second Phase of NHL Draft Lottery (includes eight losing teams from Qualification Round)
Aug 11th – Start of the First Round of Playoffs
Sept 8th – Start of the Conference Finals (tentatively set for Edmonton)
Sept 22nd – Start of Stanley Cup Playoffs (tentatively set for Edmonton)
Oct 4th – Last day for the Stanley Cup to be awarded
Oct 9-10th – 2020 NHL Entry Draft
Mid Oct – Start of 2020-21 Free Agency (Oct 9 or seven days after the Stanley Cup is won, whichever comes later)
Nov 17th – Start of 2020-21 NHL training camp
Dec 1st – Start of the 2020-21 NHL season

As is everything these days, nothing is set in stone but this is the NHL’s best case scenario.

When it comes to CBA negotiations, the NHL and PA have a terrible track record in recent memory. Pre COVID, the league and players had another two years remaining on the CBA, and in my opinion were destine for a stalemate for one reason; Escrow. On the surface, Escrow is a financial measure that the owners use to essentially make themselves whole; this means if league revenues do not cover player salaries, then players will cover player salaries. The salary cap ceiling and floor are typically announced in the spring which is close to a year and a half before the completion of the NHL season so if league revenues come up short the players must cover the losses.

Confused? Most people are and I am willing to bet a few players don’t actually know what escrow is either. During the 2013 CBA negotiations, the main topic of debate was the split of Hockey Related Revenue (HRR). The players wanted half (50%) because this revenue was generated off their likeness and image, therefore they should be entitled to bigger piece of the pie. In an attempt to meet them half way the owners gave the players half and added in escrow to make sure that they would no longer have to dig into their own pockets to cover their losses.

Let’s use some actual numbers to put all of this into perspective, the 2016-17 salary cap was $73M and NHL revenues totaled $4.43B (50% = $2.215B / 31 teams = $71.45M) this $1.55M per team in missing revenue is then added to the escrow debt which the players must pay back. Including the carry-over debt, escrow was at 8% the following season even though the cap increased to $75M. Fast forward to this season, add in a Cap Escalator (a tool given to the players that allows them to raise the cap by up to 5% when they see fit) and the cap is at $81.5M while escrow has surged all the way up to 14%. Keep in mind, this was all before a pandemic hit, that 14% escrow came after a season where NHL revenues surpassed $5B, not after a year where COVID took out nearly $1B in potential revenue.

The MOU and CBA extension have laid out the foundation for the league to slowly recover over the next five years as opposed to trying to get back on their feet immediately. The league and owners are taking on a lot of inherited risk, but to protect themselves the players will be giving up a lot in the short term, for a long term gain. Starting next season, escrow will start at 20% then drop to 14-18% in 2021-22, 10% the following season and then 6% in ’23-’24 through ’25-’26. Should the escrow debt exceed $125M it will automatically trigger a one year extension to the CBA with an escrow level projected to be about 9%. The reason why escrow drops so low in the back half of the CBA is in part because the players will be forced to forfeit 10% of their 2020-21 salary that will be deferred in three equal payments from ’22-23 through the ’25-26 seasons. Players will also forfeit the final paycheque that they have deferred from this season to help pay off the escrow debt (totals roughly $140M).

Looking at the Habs, their players pay 50% in Income Taxes (rounding down) and in the 2020-21 season will forfeit another 30% to escrow. Thankfully the NHL has Offer Sheets!

Eluding to Free Agency a bit there, the good news for the players is the salary cap is fixed at $81.5M moving forward which explains why escrow is so high early on. In order for the cap to increase starting the 2021-22 season, revenue must surpass $3.3B and reach $4.8B for a $1M increase in the cap. Any revenue in between is pro-rated between these two limits, so using real numbers to put this into context, if the NHL generates $4B in revenue in the 20-21 season, the cap would be just under $82.2M for the ’21-22 season.($4B is 66.67% of the upper limit so $81.5M + $1M * 0.67 = $82.17M).

On the player side of things, they have the right to push the cap up by $1M every season if the league feels they are operating in good faith. The league has also implemented a Lag Formula for the back half of the CBA, therefore the salary cap will be determined by taking the revenue from the previous two seasons along with the projections for the upcoming season.

This addresses the meat of the MOU but there were a few ratification that were discussed in previous articles including a no penalty opt out of RTP as well as the return to the Olympics. The league has doubled the playoff bonus pool for this season, increased the minimum league salary from $700K to 750K (reaching $800K by 2025-26), and they decided to not cap the amount of a player’s salary that can be paid in signing bonuses.

Wrapping things up, the MOU included a few minor tweaks, all no-trade or no-move clauses will travel with the player in the trade. Using Montreal favourite PK Subban as an example, when he was traded from the Habs to the Predators his no-movement clause became void, now all clauses will travel with the contract. The No European Waivers Rule (aka the Ryan O’Reilly rule) allows players who have played in Europe prior to the start of the NHL season to rejoin their team without having to first clear waivers. Any contract signed moving forward that accounts for at least 7.5% of the total cap (at signing) or that lasts six or more years can have a max salary variability of 35% (highest to lowest yearly salary), basically outlawing front loaded contracts. This is adjusted a bit for veteran players, any player over 35 that signs a multi-year contract whose annual salary is constant for the duration of the contract, will no longer count against the cap if they retire before the end of the contract. Finally, player’s rehabbing injuries can do it in the city of their choice and retired players are now entitled to a $5000 health care subsidy (up from $3500).

The NHL and PA deserve a lot of credit, they were able to leave their egos and previous experiences at the door and put together the framework that will protect the league and allow it to slowly recover. With so much in limbo because of this pandemic the league has set themselves up to be prepared no matter the outcome while allowing the game of hockey to continue. We are only 11 days away from the Qualification Round and with the NHL’s foreseeable future secured, let the games begin!

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