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McKenzie: On Day 57, do you know where your CBA is?

Bob McKenzie
11/11/2012 12:53:33 PM
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It's Day 57 of the NHL lockout, do you know where your CBA is?
 
Maybe we'll find out more today, with the NHL and NHL Players' Association apparently set to resume bargaining this afternoon in New York.
 
The mere fact that they're back at the table so soon after Friday night's breakup brouhaha perhaps speaks to the realization on both sides that they can't allow this thing to go into a deep freeze, that as polarized as they seem at times, they obviously still feel the need to keep grinding away.
 
If either side were looking for an excuse to go all dark side of the moon, Friday would have provided it.
 
It's fair to say the NHL was angry, frustrated and disillusioned that its new and improved Make Whole provision was, more or less, summarily dismissed by the NHLPA.
 
And the NHLPA reacted angrily to veiled suggestions from the NHL that NHLPA executive director Don Fehr hasn't been entirely forthcoming with certain details of the NHL offer, specifically on Make Whole.
 
It's really hard to know where we are in the process right now and how they can push this peanut forward. On Friday, the two sides couldn't even agree how close or far we are from the kind of traction that could lead to a deal and the resumption of NHL games as soon as early December.  Fehr said on Friday night they're much closer on the structure of a deal. The NHL vehemently disagreed and doesn't see it as close at all.
 
Of course, in a memo to the players that was sent on Thursday night, Fehr told them "there is still a lot of work to be done and bridges to be crossed before an agreement can be made" so make of that what you will.
 
Ditto for the emotional outbursts after Fehr's communication skills were questioned. On that one, the media was hand-delivered a hot-button issue that didn't require math skills to break down. It was one of those CBA firestorms that erupted quickly on Twitter and generated far more heat than light on a day when the focus probably should have been more on what each side was actually offering to try to end the lockout.
 
My guess is the NHL's effort to discredit Fehr's communication skills was equal parts frustration and tactical.
 
There is no question the NHL has grown increasingly exasperated by Fehr, who takes passive aggressive to an art form. There is a notion within league headquarters that he has no interest in making a deal, that he's looking for this dispute to go nuclear so he can either challenge the NHL's entire salary cap system in a protracted battle that would likely carry over to next season or fight the owners for as long as it takes to, as Fehr is wont to say, break the cycle of owners putting a gun to players' heads in chronic takeaway negotiations.
 
The NHLPA response to that line of thinking is as long as the league continues to demand the players immediately take a much smaller share of revenue (from 57 per cent to 50 per cent) and surrender a variety of system and contracting rights, there's no logical reason to agree to a CBA that gives the players nothing in return for their many concessions, that the owners are making it far too easy for Fehr to just say no in every language the players speak.
 
Tactically, though, because negotiations aren't getting traction, there's probably a feeling within the NHL that there's nothing to lose by going after Fehr a bit, that while the attack will unify many players -- see the predictable Twitter campaign they're now waging -- it may also cause some others to want to know the precise details of what Fehr dismissively referred to as the NHL's "so-called Make Whole" provision.
 
And let's be honest. The players have regularly demonized NHL commissioner Gary Bettman in public. The longer this dispute goes on, the more likely it is that Fehr will find himself in the crosshairs, too. It goes with the territory and, truth be told, as much emotion as it generated on Friday night, it's just more white noise, a sideshow to the main event of actual negotiating.
 
This entire negotiation has been a complex mess from the get-go but with each passing day it only gets messier and that much more difficult to strike a deal.
 
In the heady days of mid-September, any time we broke down one side's proposal or the other, we were dealing with what we believed to be relatively solid projections. The NHL and NHLPA couldn't agree then on what the growth factor should be -- the NHL went with 5 per cent; the NHLPA with 7 per cent -- but there was a common sense that the industry was in growth mode and that was the single biggest ally to getting a deal done.
 
But now, 57 days in, knowing the 82-game schedule won't be played, knowing the Winter Classic is gone, knowing there are a lot of angry consumers who will show their displeasure by not consuming the NHL product at the same rate or at all whenever it resumes, well, that growth is suddenly a far greater variable that can't necessarily be counted upon.
 
I'd go so far as to suggest that if the NHL's revised Make Whole provision had been presented to the players a month ago, maybe even a couple of weeks ago, we would indeed be a lot closer to a deal.
 
Here's why:
 
Once you get past the notion that come hell or high water, and the folks on the Eastern seaboard have seen both of late, the NHL is going to reduce the players' share from 57 to 50, it's been a matter of how to do it without inflicting too much financial pain and suffering on the players, giving them as close to 100 per cent value on their existing contracts as possible.
 
Enter the NHL's "Make Whole" provision, a mechanism that is supposed to pay back the players the lost wages resulting from an immediate drop from 57 to 50.
 
In mid-October, when it was first proposed by the league (the precise details are a matter of public record in the NHL's formal offer that was posted on www.nhl.com), it was immediately written off by the players because it was to be fully funded by their own future share of Hockey Related Revenue and the deferred payback was stretched out over too many years. But in the past week, the NHL revised it to fully fund Make Whole with owners' money and all monies would be paid back by the second and third years of the deal with two per cent interest (though Fehr described the interest as "tiny").
 
The new NHL proposal on Make Whole would give the players $149 million in one year and $62 million in another year. That wouldn't necessarily make up every dollar that's lost by going from 57 to 50, but it would create a two-year transition period to significantly soften the blow before getting to a hard 50-50.
 
Now, I realize no one's appetite for crunching numbers is very hearty these days, but it still has to be done. Consider the following:
 
Last season's revenue of $3.303 billion with a growth factor of 5 per cent means the total projected Hockey Related Revenue for a full 2012-13 season would be $3.468 billion. The players' share of that at 50-50 is about $1.734B. But the players have been insistent on not taking a dollar less the $1.883B they took home in salaries last season. That leaves a shortfall of $149 million, which is the amount the NHL is prepared to pay back to the players as part of "Make Whole."
 
Even though this $149 million has been defined as "outside the system" or not part of the HRR breakdown, the truth is the owners still have to pay it out of their own pockets, so it's ultimately coming out of their share one way or another. Recognizing the $149 million is deferred by one year, if you were to include it as part of the $1.883 billion the players are guaranteed, the amended players' share in Year 1 of a new CBA would be the equivalent of about 54.3 per cent (1.883/3.468).
 
In Year 2 of a new CBA, with another 5 per cent factored in for growth, 100 per cent of HRR would be $3.641B. Fifty per cent of that (the players' share) is $1.82B but the NHL would top that up by $62 million to ensure the $1.883B they earned last season remains intact. This time, again realizing the $62 million is deferred for another year, the amended players' share in Year 2 of a new CBA would the equivalent of about 51.7 per cent (1.883/3.641).
 
All the propaganda aside, and recognizing there are other important issues besides cracking the how-to-share-HRR nut, I daresay that if the players were on Oct. 16 offered the chance to play an 82-game schedule, including the Winter Classic, with a deal that effectively gives them what amounts to 54.3 per cent in the first year, 51.7 per cent in the second year and then 50-50 after that, many would either take it or think long and hard about taking it.
 
But the NHL didn't make that offer on Oct. 16 and now the landscape has changed. We can't possibly play 82 games, there's no Winter Classic, there's no reasonable expectation of 5 per cent growth and all the financial modeling we did in August, September and early October is pretty much out the window. The two sides still have to negotiate as though it's all still in play because they're doing a long-term deal but it seems to me we've gone from difficult transition to next-to-impossible transition.
 
And here's the rub. It's only going to get worse. With each passing day, the number of games we can play in a saved season goes down. The longer the lockout goes, the more bitter and angry the consumers are getting, arguably less likely to consume the NHL product at the same rate as before.

That's why the NHL was apoplectic when Fehr's memo to the players on Thursday not only didn't include the details of revised Make Whole but was mostly dismissive of it as a tool to end the lockout. The league thought that if anything was going to break this labor logjam, it would be paying the players (as a group) no less than they received last season.
 
There's a tendency to suggest this latest offer from the NHL will be as good as the players will get, but some said that on Oct. 16 and the players got a better offer this week than then, so who's to know for sure. It's a delicate high-wire act, no question. Maybe saying no now will result in a better offer from the NHL in a few weeks or maybe this one is as good as it'll get and not taking it will allow the hawks amongst NHL owners to grab the steering wheel and head for the abyss. But if there's a so-called "better offer" to be had, it has to be weighed against playing even fewer games this season and even more lockout-related damage to HRR.
 
Fehr is fond of saying, what possible reason would the players take what's on the table from the NHL. Less money, less contract rights, what's in it for the players? On one level, that's accurate, but on another the answer to what the players would get from this deal is simple: Paid. They might not get 100 per cent of what they believe they're entitled to, but if they keep going down this road, they're headed for 100 per cent of nothing. For many players, they've already decided to screw the math and take a stand on principle. For others, though, they'll be doing a calculation of the true cost to them and not what they would lose if they take a deal they don't like but what they'll get -- nothing -- if they don't make some sort of an agreement.
 
The funny thing is you could, sort of, make a numerical case that the two sides really aren't that far apart. I mean, the NHL (albeit with the inclusion of short-term deferrals of Make Whole) are prepared to give the players $1.883B in Year 1 of the deal. The NHLPA's latest proposal to the league was to take last season's $1.883B and step it up annually with a compounding rate of 1.75 per cent. In other words, in Year 1 of the players' proposal, the players are seeking a guarantee of $1.916B or about $33 million more than what the league is prepared to pay.
 
Think about it for a moment: In a billion dollar business, the two sides "appear" to be just $33 million apart in their expectations for Year 1 of a new CBA. But that's fool's gold. The league estimates, under the NHLPA's latest proposal, the players could be getting as much as 60 to 65 per cent of HRR in a lockout-damaged season. Fehr would only say they want to put an overall deal structure in place before negotiating how to get around a shortened and/or lockout-damaged season.
 
So, in some ways, we're no further ahead at all. The two sides still seem to be stuck on the same philosophical divide. The players' proposal focuses not only on protection of the $1.883B they received last year, but guaranteed annual increases regardless of revenue growth or decline. The owners' proposal is intent on getting the player share down from 57 to 50 and while Make Whole will ease the financial strain on the players, it won't eliminate it.
 
In the meantime, the clock is ticking away and so are the number of games we can play this season and the HRR that might ultimately turn a tough year of two of transition into three or four difficult years.
 
Finally, a quick word on the system issues and contracting rights. Both the NHL and NHLPA believe these are critical issues and, to a point, they absolutely are. But only to a point and with a couple of exceptions, there shouldn't be a hill there that's worth dying on for either side.
 
The NHL's two most critical system issues are eliminating long-term, back-diving contracts and taking leverage away from players coming out of entry level who got inflated second contracts.
 
Back-diving is a huge issue for the league -- a legitimate one, too -- but using the 5 per cent variance provision it proposed (year to year salary fluctuations on a contract can't be more or less than 5 per cent) would instantly correct that situation and not cause the players' real hardship. There is, however, no desperate need for the league to have a term limit of five years if the 5 per cent variance rule is in place.
 
As for second contracts, the NHL proposed a potent combo of reducing the entry level phase to two years (instead of three) and delaying salary arbitration and unrestricted free agency by one year in each circumstance. That would unquestionably make it difficult for a player coming out of entry level to hit a home run on his second contract (Steven Stamkos, Drew Doughty, Taylor Hall, Jordan Eberle et al). But in a salary cap system, when there's a defined benefit of 50 per cent, these measures aren't likely to actually take money away from the players as much as they would simply re-allocate it. One thing the players can always count on, the owners will spend as much as they can, it's really just a matter of who gets it.
 
Of course, that cuts both ways. The players could say the NHL shouldn't worry about how the dollars are allocated. But the war against second contracts is one the general managers have asked for because it would assist them, within the salary cap system, in building their teams. Besides, truth be told, some veteran NHL players wouldn't be opposed to the youngsters having to wait to the third contract to hit their home run.
 
The obvious compromise on systems would be to include the 5 per cent variance rule, get rid of the proposed 5 year term limit, include a shorter period for entry level and a longer period to get to salary arbitration, but maintain status quo on unrestricted free agency. The NHL shouldn't expect to get every single thing it wants on system issues but it's foolish to think the NHLPA would reject system alterations across the board.
 
I'm not saying these issues are unimportant, but in the big picture, both sides need to get a grip.
 
If the NHL and NHLPA can crack the core economic issue of how to share the HRR, and how to specifically deal with this lockout-damaged season, those are the biggest hurdles and we should be on our way. If either side thinks maintaining lockout mode is worth a system issue that is more about reallocating dollars as opposed to taking them away from one side or the other, well, then they both deserve to die the slow, painful death this industry is headed towards if they don't figure it out real soon.

Bob McKenzie

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