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The CBA: Escrow

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NHL: Columbus Blue Jackets at Edmonton Oilers Perry Nelson-USA TODAY Sports

Today, the San Jose Sharks signed Evander Kane to a 7-year 49 Million dollar contract. It looks like a lot of money, and even more term. For a player who has never cracked 60 points, it might even look downright ridiculous. The good news however, is it gives me a good excuse to talk about something that no one wants to talk about: The upcoming lockout.

Yes, I know, it seems like the last one ended only two weeks ago, but this is where we are. The last time we had one, the big issue was contract term limits. The summer right before the lockout, the Minnesota Wild has just signed Zach Parise and Ryan Suter to identical 13-year, 98 Million dollar deals. It was outrageous. The players were able to command deals that every person in the world knew were never going to play out well. At the time, I heard a lot of people saying that the Owners and GMs should have shown some self control — I’m not denying that; However, I also need to point out that it isn’t that simple.

The league revenue split is an important part of the distinction that fans don’t particularly care to learn. It’s either that, or it’s that they haven’t found a teacher to explain it in a way that isn’t boring. The last thing anyone wants to do, is read about something boring. Boredom causes some of the biggest mistakes known to man. Sometimes it even leads you to opening a LinkedIn account and snooping around people you knew ten years ago before realizing that the site notifies who clicked their profiles. Sometimes it leads to taking up terrible hobbies like blogging. Sometimes even, it leads you to shopping on ebay for junk you don’t need, only for it to clutter up your house when it arrives in 3 days or less. Boredom is the reason you thought you needed that high powered laser that can pop balloons and start fires. Sometimes though, it’s important to push through it and take the lesson, regardless of how boring. That way, we can avoid looking like the loud, drunk, know-it-all in the bar who hasn’t bothered gaining an informed opinion before boasting about the solution to a problem he didn’t know existed.

By the end of the last CBA, the players split of league revenue was 57%. This CBA, it’s 50%. A very important part of this is that the revenue splits are guaranteed. It’s not as if the owners could all collude to only spend to the Cap Floor and pocket the leftover. The GMs and Owners can hand out big or small contracts to divide up the revenue among individual players, but regardless, they’re still getting the 50% of league revenue.

This is done through escrow. At the beginning of the season, the league will make a Hockey Related Revenue projection. They’ll add 15% of this number to set the cap ceiling, and 15% to set the cap floor. Because the cap ceiling and floor are set in June of the previous summer, and sometimes the projections aren’t accurate, there are a few variables that have to be hedged. This is done by using an escrow system.

Escrow is where each party puts a percentage of their revenue aside to cover the variables. Think of it as a locked-in savings account. At the end of the season, it has to be paid back to the party that’s owed, and it is paid back with interest. The percentage is calculated by a very complex system that I don’t quite understand. To makes things easy for my scenarios, I’m just going to use 15%. In reality, it is adjusted quarterly, based on league revenue projections, plus the escalator. To look at escrow history, click here.

Scenario A:

Every team — or at least the majority of them — spends to the Cap Ceiling.

The Cap Ceiling is 15% above the League revenue expectations. Therefore, the players would receive more than the 50% they are entitled to without Escrow. Both parties will be putting the same amount of their revenue into escrow throughout the season. Because the players will have received more than their negotiated share, the escrow will cover the difference. The owners will receive the amount they are entitled to, to divide among themselves.

Scenario B:

Every team — or at least the majority of them — spends only to the cap floor.

The complete opposite here. The players will have received less than the 50% they’re entitled to, and will likely get a complete refund and the owners share of escrow to cover the difference. This is one that has never happened, and I don’t ever expect it to.

Scenario C:

The League revenue projections are way off.

This one has happened. In 2014-2015, the Canadian Dollar fell so hard that it dragged league revenue down the toilet with it. If you haven’t noticed, hockey is kind of a big deal up in Canada. When our buying power goes down, so too does league revenue. In that particular year, the players gave up 12.95% of their salaries to cover the difference. This is what happens when their contracts are guaranteed and paid in USD.

The other issue at play, is the Escalator to which I have previously alluded. The Escalator is an agreement that both players and owners come to prior to the start of the off-season, just before free-agency opens. Each side has the right to vote for the Salary cap (Ceiling, floor, and mid point) to rise 5% above the amount it would be set based solely on revenue projections alone. So far, both sides have agreed to do this every year.

The downside for the players is that this almost ensures that they’re going to be the ones losing money on equalization payments via escrow. Unless the league actually has it’s revenue at least 5% above its projections, there is no way that the players get back more than they’ve paid. Particularly to a player like Connor McDavid who has already signed a monster contract. He wouldn’t want to use that escalator, because it’s just going to eat into his salary more and more every year.

The upside of the Escalator for the players, is that if they’re in need of a new contract, owners have more money to work with up front. If the cap increases, it’s easier for marginal players to get reasonable contracts, and it’s easier for pending free-agents to get a bigger deal. To a player like John Tavares who is looking for a monster deal this year, he’d vote for the escalator without hesitation to raise the maximum he can get.

This is another reason front-loading a contract is such an advantage to players. The less years that the escalator has been used during the duration of that deal, the less money the player will have lost in escrow.

Just for fun I thought we’d take a look at Connor McDavid’s contract. It’s an 8-year, 100 Million dollar deal. How much of that is he actually going to get? If we assume he’s losing close to 15% of it every year to escrow, it’s $85M, take away the 3% agent fee and the damn near 50% in taxes, and he’s probably only getting $40M over the course of that deal. It’s accepted that there’s nothing these players can do about taxes. Well, almost nothing, but these escrow payments are a huge extra tax that many players didn’t know they would have to be paying. It’s a strange world when GMs want a higher cap than the players, but it’s planting all the seeds for the next lockout.

I did initially wonder how signing bonuses came into play. If escrow is calculated quarterly and signing bonuses are paid out in July, I wondered if the player just recieved all his money and had to pay it back, or if a certain amount was just withheld. It doesn’t sound like something that would matter, but how many of you are happier getting a tax refund vs having to pay more in April? The only difference is that one side gave the other an interest-free loan for the past 12 months, and yet, most people would still prefer being on the side to have done the free lending. If players had to actively pay back their bonus vs having it withheld, I’d imagine similar angst.

Luckily, OriginalPouzar was able to use his CBA expertise to find me the answer in a matter of seconds. I thank him kindly for that.

Section 50.4 (D) (i) states:

Each Club shall withhold from each Player who is party to an SPC with that Club (and current Players who retire or otherwise cease playing in the NHL to the extent such Players continue to be paid under an SPC with that Club, including, without limitation, Players who were party to SPCs that have been bought out) an amount of each payment of the Player’s Player Salary and Bonuses for that League Year. The amount of each payment to be so withheld shall be calculated by multiplying the portion of each Player’s Player Salary and Bonuses to be paid during a pay period by the applicable Escrow Percentage that is then in effect during that pay period

In normal speak it means that it’s withheld at the current rate, whatever that happens to be.

Ideally, the NHL and NHLPA would be in a perfect marriage. The reality though, is that the only perfect marriage is one where the prettier party is blind, and the smarter one deaf. Neither the players or owners have a sensual deficiency to money.

I have no idea what the solution to this problem is going to be, but I can tell you right now, it’s going to be an all out war during the next round of CBA negotiations. The players have the right to opt out of the CBA in September 2019, and I have very little reason to believe that they won’t do it. All regarding escrow.

Sources:

Adrian Morrow Globe and Mail

Chris Beardy NHLNumbers

NHLPA CBA

Those sources have a lot more information than I put here. To get a full understanding is going to take a lot of research. If you don’t fell like putting the time in, just remember: Players are very unhappy.