Thursday, July 12, 2007

The collective bargaining agreement
Revenue sharing and escrow

Last season, 11 low-revenue NHL teams received more than $90 million in revenue-sharing payments (the proceeds came from the ten teams with the highest revenue and from a portion of playoff gate receipts), with the New York Rangers and Toronto Maple Leafs chipping in $10 million each. The only reason why the Buffalo Sabres, Pittsburgh Penguins, San Jose Sharks and Washington Capitals posted profits last season was because of the money they received from revenue-sharing.
These are the figures for the 2005-06 season; at this point, the revenue numbers from 2006-07 aren't yet available. But at least these can help put us in the ballpark in terms of the figures involved in the league's revenue-sharing plan, and just where that money comes from.

As per the CBA, that $90-million figure (which will be more than $103-million this year given increases in revenue) is drawn from four difference sources: central league revenues, escrow, playoff revenues and preseason/regular season revenues.

Let's provide a conservative estimate that central league revenues run at $350-million, of which only half of the portion greater than $300-million can contribute to revenue sharing and only up to 25 per cent of the total amount needed. This would mean $22.5-million would come from these central revenues.

If we plug in that number, what about the other $67.5-million? And how much does escrow account for?

Escrow's limited to as much as one-third of that leftover figure, but with reports from this most recent season placing the amount players lost in escrow at just 3 per cent, that will likely be too high. Players earned 55.5 per cent of the estimated $2.3-billion in hockey-related revenue from 2006-07, and a 3-per-cent drop would mean teams only received around $40-million in escrow.

The caveat here is that only the escrow funds from the top 10 revenue-producing teams are used in the initial revenue-sharing calculation, which leaves us with somewhere in the neighbourhood of 40-50 per cent of that $40-million ($16- to 20-million) that, because it is less than one-third of the remaining revenue-sharing amount, would contribute to it entirely.

Fifty per cent of the remaining revenue-sharing funds (we're down to close to $50-million based on the $90-million figure) are then drawn from playoff revenues, and what's called a "supplemental funding phase" takes the remaining 50 per cent from the top 10 revenue-producing clubs' (six of which were Canadian teams) preseason and regular season gate revenues.

Of course, we've got all sorts of fudged numbers here, but in this example, all four different revenue sources contribute close to an equal amount to the revenue-sharing pot. The remaining escrow funds would be used to either assist the welfare clubs further by putting them within reach of the salary midpoint (which is always set at $8-million less than the cap), or, finally, if there's anything left over, disbursed equally among all 30 clubs.

As far as I can tell, in other words, the teams at the top of the NHL's revenue food chain aren't likely to see all that much of that escrow money, especially if there are a lot of clubs below the salary midpoint. If escrow rises substantially in 2007-08, as some are predicting, it will be the low-revenue teams that benefit, at least so far as in that they'll be assisted up into the $42.3-million range as long as they qualify for revenue sharing (the Islanders and Devils don't apply given their market size).

Tom Benjamin's made this point before, but if a team's aiming for low payroll and revenue-sharing dollars, coming in below that midpoint figure is the way to go. Only three teams fell into that range last season ($36-million), despite the incentives, but it's a spot that becomes easier to hit as league revenues — and the salary cap — rise.

Getting back to a question asked by a reader last week in the comments, my best guesstimate out of all of this is that escrow ultimately accounts for 35 to 45 per cent of revenue sharing, depending on just how much higher player salaries are than their allotted percentage in a given year.


At 11:28 a.m., July 12, 2007, Blogger Kel said...

James, thank you very much for the information on revenue-sharing and escrow. You gave a very detailed account and more answers than what I originally asked (how escrow funds are distributed among teams).

It appears that as more teams carry large payrolls close to a higher cap, the incentive to stay below the midpoint of the salary cap and the floor increases, because more escrow money will be available to be shared. That's probably one of the ways the CBA helps a small market teams (I remember that teams in the biggest TV markets don't qualify for revenue-sharing), which ironically requires them to compete on ice with a payroll disadvantage.


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