PROS AND CONS OF TWO DEALS

On Tuesday the NHL came up with an actual proposal in the hopes of ending this asinine lockout. The NHLPA will make an official comment today or tomorrow and should have some sort of rebuttal later this week. The NHL’s offer won’t be accepted as is, but at least on the surface it looks like a good starting point.

Meanwhile the Katz Group sent a letter to Mayor Mandel, and then to numerous media outlets, advising Edmonton’s mayor that they won’t be addressing city council today. This wasn’t a surprise. The Katz Group has stated from the beginning they didn’t want to negotiate publicly. This doesn’t look a good starting point, but I don’t think it’s an end point either.

Here are the guts of the actual deal. The NHL sent this out today.

1. Term:

• Six-year Agreement with mutual option for a seventh year.

2. HRR Accounting:

• Current HRR Accounting subject to mutual clarification of existing interpretations and settlements.

3. Applicable Players’ Share:

• For each of the six (6) years of the CBA (and any additional one-year option) the Players’ Share shall be Fifty (50) percent of Actual HRR.

4. Payroll Range:

• Payroll Range will be computed using existing methodology. For the 2012/13 season, the Payroll Range will be computed assuming HRR will remain flat year-over-year (2011/12 to 2012/13) at $3.303 Billion (assuming Preliminary Benefits of $95 Million).

• 2012/13 Payroll Range
Lower Limit = $43.9 Million
Midpoint = $51.9 Million
Upper Limit = $59.9 Million

• Appropriate "Transition Rules" to allow Clubs to exceed Upper Limit for the 2012/13 season only (but in no event will Club’s Averaged Club Salary be permitted to exceed the pre-CBA Upper Limit of $70.2 Million).

5. Cap Accounting:

• Payroll Lower Limit must be satisfied without performance bonuses.

• All years of existing SPCs with terms in excess of five (5) years will be accounted for and charged against a team’s Cap (at full AAV) regardless of whether or where the Player is playing. In the event any such contract is traded during its term, the related Cap charge will travel with the Player, but only for the year(s) in which the Player remains active and is being paid under his NHL SPC. If, at some subsequent point in time the Player retires or ceases to play and/or receive pay under his NHL SPC, the Cap charge will automatically revert (at full AAV) to the Club that initially entered into the contract for the balance of its term.

• Money paid to Players on NHL SPCs (one-ways and two-ways) in another professional league will not be counted against the Players’ Share, but all dollars paid in excess of $105,000 will be counted against the NHL Club’s Averaged Club Salary for the period during which such Player is being paid under his SPC while playing in another professional league.

• In the context of Player Trades, participating Clubs will be permitted to allocate Cap charges and related salary payment obligations between them, subject to specified parameters. Specifically, Clubs may agree to retain, for each of the remaining years of the Player’s SPC, no more than the lesser of: (i) $3 million of a particular SPC’s Cap charge or (ii) 50 percent of the SPC’s AAV ("Retained Salary Transaction"). In any Retained Salary Transaction, salary obligations as between Clubs would be allocated on the same percentage basis as Cap charges are being allocated. So, for instance, if an assigning Club agrees to retain 30% of an SPC’s Cap charge over the balance of its term, it will also retain an obligation to reimburse the acquiring Club 30% of the Player’s contractual compensation in each of the remaining years of the contract. A Club may not have more than two (2) contracts as to which Cap charges have been allocated between Clubs in a Player Trade, and no more than $5 million in allocated Cap charges in the aggregate in any one season.

6. System Changes:

• Entry Level System commitment will be limited to two (2) years (covering two full seasons) for all Players who sign their first SPC between the ages of 18 and 24 (i.e., where the first year of the SPC only covers a partial season, SPC must be for three (3) years).

• Maintenance of existing Salary Arbitration System subject to: (i) total mutuality of rights with regard to election as between Player and Club, and (ii) eligibility for election moved to five years of professional experience (from the current four years).

• Group 3 UFA eligibility for Players who are 28 or who have eight (8) Accrued Seasons (continues to allow for early UFA eligibility — age 26).

• Maximum contract length of five (5) years.

• Limit on year-to-year salary variability on multi-year SPCs — i.e., maximum increase or decrease in total compensation (salary and bonuses) year-over-year limited to 5% of the value of the first year of the contract. (For example, if a Player earns $10 million in total compensation in Year 1 of his SPC, his compensation (salary and bonuses) cannot increase or decrease by more than $500,000 in any subsequent year of his SPC.)

• Re-Entry waivers will be eliminated, consistent with the Cap Accounting proposal relating to the treatment of Players on NHL SPCs playing in another professional league.

• NHL Clubs who draft European Players obtain four (4) years of exclusive negotiating rights following selection in the Draft. If the four-year period expires, Player will be eligible to enter the League as a Free Agent and will not be subject to re-entering the Draft.

7. Revenue Sharing:

• NHL commits to Revenue Sharing Pool of $200 million for 2012/13 season (based on assumption of $3.303 Billion in actual HRR). Amount will be adjusted upward or downward in proportion to Actual HRR results for 2012/13. Revenue Sharing Pools in future years will be calculated proportionately.

• At least one-half of the total Revenue Sharing Pool (50%) will be raised from the Top 10 Revenue Grossing Clubs in a manner to be determined by the NHL.

• The distribution of the Revenue Sharing Pool will be determined on an annual basis by a Revenue Sharing Committee on which the NHLPA will have representation and input.

• For each of the first two years of the CBA, no Club will receive less in total Revenue Sharing than it received in 2011/12.

• Current "Disqualification" criteria in CBA (for Clubs in Top Half of League revenues and Clubs in large media markets) will be removed.

• Existing performance and "reduction" standards and provisions relating to "non-performers" (i.e., CBA 49.3(d)(i) and 49.3(d)(ii)) will be eliminated and will be adjusted as per the NHL’s 7/31 Proposal.

8. Supplemental and Commissioner Discipline:

• Introduction of additional procedural safeguards, including ultimate appeal right to a "neutral" third-party arbitrator with a "clearly erroneous" standard of review.

9. No "Rollback":

• The NHL is not proposing that current SPCs be reduced, re-written or rolled back. Instead, the NHL’s proposal retains all current Players’ SPCs at their current face value for the duration of their terms, subject to the operation of the escrow mechanism in the same manner as it worked under the expired CBA.

10. Players’ Share "Make Whole" Provision:

• The League proposes to make Players "whole" for the absolute reduction in Players’ Share dollars (when compared to 2011/12) that is attributable to the economic terms of the new CBA (the "Share Reduction"). Using an assumed year-over-year growth rate of 5% for League-wide revenues, the new CBA could result in shortfalls from the current level of Players’ Share dollars ($1.883 Billion in 2011/12) of up to $149 million in Year 1 and up to $62 million in Year 2, for which Players will be "made whole." (By Year 3 of the new CBA, Players’ Share dollars should exceed the current level ($1.883 Billion for 2011/12) and no "make whole" will be required.) Any such "shortfalls" in Years 1 and 2 of the new CBA will be computed as a percentage reduction off of the Player’s stated contractual compensation, and will be repaid to the Player as a Deferred Compensation benefit spread over the remaining future years of the Player’s SPC (or if he has no remaining years, in the year following the expiration of his SPC). Player reimbursement for the Share Reduction will be accrued and paid for by the League, and will be chargeable against Players’ Share amounts in future years as Preliminary Benefits. The objective would be to honor all existing SPCs by restoring their "value" on the basis of the now existing level of Players’ Share dollars.

Here are my thoughts regarding this offer.

  • They are actually negotiating. Finally.
     
  • The fact the HRR is subject to mutual clarification is a bit unsettling.
     
  • Teams who make bad signings can’t just hide those players in the minors. About time. However, this hurts the journeyman minor-leaguer who makes $200,000. Teams might shy away from paying him to help mentor the kids. This will likely lead to more young players in the AHL, or veterans making only $105,000.
     
  • I don’t see the NHLPA agreeing to a five-year maximum, but as I wrote earlier, I think a seven-year max is reasonable and one the NHLPA will accept because it impacts such a small group of players. I’d actually prefer a six-year max, with the option for teams to sign their draft picks to seven years. This could entice some players to stay with their team for a longer period of time.
     
  • I’m not sure entry level deals being shorter will really save much money. It should in reality, because players would only have two years to make a big impact, but considering many teams were already signing young players to extensions before their third year started, Jordan Eberle, Taylor Hall, I’m not sure it will save much money.
     
  • Arbitration is another window dressing aspect. Last year not one player went to arbitration. I’m not sure either side would choose this as their hill to die on.
     
  • If they agree on limiting the length of contracts, will free agency be as big of a deal? Will it matter that much if it is seven or eight years of service. Teams won’t be able to front load contracts so Zach Parise and Ryan Suter would either take less money to play together or sacrifice having less cap space available for the team to build around them.
     
  • Allowing money to be part of trades could lead to more trades. Teams will still need to be smart with their money, but this could make deadline day more exciting.
     
  • I’m curious to know what % those top-ten teams paid last year into revenue sharing. $200 million seems like a big number, but if you have teams losing $20 million that revenue sharing pot will evaporate quickly.
     
  • Playing 82 games over a shorter time frame will lead to more injuries. I don’t see anyway the players will agree to an 82-game sched starting November 2nd.
     
  • If you want a more indepth explanation of the proposal, the NHL has one on their website.

My biggest beef is why did it take until October 16th to get a real proposal on the table? If the NHL had proposed this in the summer, would the NHLPA just scoffed at it? I don’t think so, but I guess we will find out today or Thursday.

Either way this is a good first step. Hopefully the remaining steps come in quick succession.

I don’t expect the NHLPA to love this proposal. I’m sure they aren’t fans of a $59.9 million salary cap. Even though 16 teams are currently over that threshold, according to NHLnumbers.com, I’ll bet Donald Fehr will want that number to be higher. It is all part of a negotiation, but I think this is a decent starting point.

THE ARENA

Yesterday the Katz Group sent a letter to Mayor Mandel stating they won’t be speaking to city council today. I respect their decision; however, I’m very interested to see what council will do. I could see them passing a motion to continue negotiating with Katz, but also start looking at other options, which will include building the arena themselves.

You can read the Katz letter here. They’ve stated from the beginning they didn’t want to negotiate in public, and going in front of city council today would have been just that. The main issue is that the city felt the New York deal was a done deal, while the Katz Group doesn’t. 

I’ve spoken to both sides, and on or off the record they both feel they are correct. It is hard to tell which side is telling the truth. Maybe both of them are, and if that is the case, then clearly there has been some horrible miscommunication.

Here’s how I see it.

  • The city needs a new arena, regardless of whether they partner with Katz. Obviously a private/public partnership is the best option, but if they can’t come to a deal the city needs to take the initiative and build the rink themselves. Once the city has a new arena, there is little chance the NHL leaves town.
     
  • The biggest reason why Bettman is fighting so hard to keep the Coyotes in Phoenix is because Glendale built them a rink. He does not want to leave a market that funded a new facility. If he does that, then the league has set an awful precedent which would likely scare off future cities from doing the same. Get a rink built in Edmonton and the NHL will stay.
     
  • I think Katz has a valid argument regarding the 35-year agreement. No one can predict how stable the economy will be or how strong the Canadian dollar will be over that time frame. If they include that he will get some of the CRL on the backend if the dollar drops significantly I think that is fair.
     
  • The main question I have is who is negotiating for the Katz Group, and do they have the ability to actually negotiate. If Mr. Katz has the final say, then he should be in the negotiating room. And if he isn’t then he needs to allow his guys the flexibility to make some decisions.
     
  • If the city builds the arena themselves they have to ensure there is an open competition to see who builds it, who manages it and they will need to recognize that the Oilers will want some non-game-night revenue. The Oilers are the only team in the NHL that doesn’t receive this funding. If you want your city to have an NHL team, you need to understand this and give them some nights. I’d look at the other 29 teams and find out what the average amount of evenings are and negotiate that number of non-game-nights with the Oilers.
     
  • The biggest problem with this deal from the start was that it focused too much on the Oilers and not enough on the City. Our city needs to improve our downtown core. We need to attract more corporate growth downtown, and if that happens then residential growth will follow. Thirty years ago we were leading the nation, but we’ve fallen every year since.
     
  • Every other Canadian city has invested in its business sector core, except Edmonton. If you look at any worthy economic study  it will show that neglect (in the business sector) has cost the city hundreds of millions, if not a billion, dollars in growth.
     
  • The arena will be the starting point, but it isn’t the end point. Lots more will need to be done, and that’s why ensuring the development around the arena is just as important, if not more, than the arena itself. Studies show that the Columbus arena project has increased taxes up to $30 million a year for the surrounding land. Our city needs to get moving and build the arena.
     
  • If they can’t come to an agreement with the Katz Group now, then look at building the arena on our own. I’m certain the two parties can still come to an agreement, but the longer we wait the bigger the cost. 
  • The fact that the players dont want to take less money even though they all know their cut of the pie is going to drop down to 50% will be the point here that kills this deal.

    It is wholly unreasonable for them to want their earnings to remain at 2011-2012 levels. They were never, EVER, guaranteed the face value of their contracts. They were only guaranteed that number as it reflected against their portion of HRR. If their share drops to 50% then so too should their Salary. Thus escrow.

    Now the PA is crying foul against Escrow and how it will affect their earnings.

    Donald Fehr is a monster.

  • Woogie

    Isn’t the big beef about tax money going to the arena? If the city builds it themselves, doesn’t that mean its 100% tax money?

    I don’t get it… Does the city want to use less tax money, or more tax money? Or is the issue about revenue? Is the city happy to spend 100% tax dollars if the revenues go to the city (along with all the risk).

    It appears to me that fundamentally people are just mad that Katz is rich. They want him to pay more. But if he won’t, then the city will be forced to pay it all.

    As much as I don’t understand what Katz is doing, I don’t understand the city. What do the adamant anti Katz councillors want? I’d like them to stand up and outline a plan for the future. Then at least us taxpayers can decide. Instead of going on a Katz witch hunt for some unknown ‘other option’ which might just be a whole lot worse.

    • Chris – You’re totally missing the point.

      The beef isn’t about tax money going into the arena. The beef is that tax money builds an arena AND that Katz then gets virtually all of the profits – concessions, parking, etc. (and not just on nights that the oilers play, but also on nights where there are concerts and other shows). At Rexall, the city paid for and owns the rink, and they (with Northlands) get parking and concession revenues when, for example, Justin Bieber comes to town.

      If the city kept getting that slice of the pie (or even a smaller slice), nobody would have a problem with the amount of tax money going into the rink. However, in the current deal for the new arena, the city bent over backward, basically gave the whole pie to Katz, AND is footing the bill to build it (Katz’s contribution comes from a loan he is getting from the city, and that he is allowed to pay off over 35 years).

      So… after the city offers this sweetheard deal, Katz comes back and now says it’s not enough and he wants more. My response is WTF??!!, and I am amazed that there aren’t more people who share my disdain.

      That’s the beef

      The beef (at least for me) is that the city should get a piece of that pie that is proportional to what it is putting into the new rink.

      The city

    • book¡e

      Chris, the current partnership deal is that the City pays all of the costs (100%) and the subsidizes Katz on an annual basis to the tune of about $4 million a year to use the arena in addition to allowing Katz full control of the arena and all of the profits.

      The alternative is that you build it yourself (thus forcing the league to keep the team here) and then you tell Katz that he can run it and that he can have all of the profits, but for doing so, he needs to pay rent of $5 million per year.

      The first example would give Katz one of the best three deals in the league in addition to being in the fourth best market in the league.

      The second would give him a middle of the road deal while he gets to stay in the 4th best market in the league.

      Katz is getting a bit insane with his demands – that is the problem.

      • DSF

        A couple of points:

        1) The City does not “pay all the costs”. $125 million of the cost is from a ticket surcharge that does NOT EXIST without the Oilers. The surcharge limits the market value of what the Oilers can charge for tickets so it is a real payment by the Oilers.

        2) The City has use of the arena for 4 weeks every year in which, presumably, it will hold events which generate revenue for the city. So, Katz DOES NOT get “all the profits”.

        3) Katz has agreed to pay the City $5.5 million for 35 years as a further contribution to the cost of building the arena. This is Katz’ original $100 million commitment. That he and the City agreed that he could access the capital required through the City borrowing the funds at a much lower rate does not make this “nothing”. It is still $100 million PLUS INTEREST.

        4) The issue that has become a stumbling block has become the amount Katz wants for maintenance and capital improvements over the 35 year term of the agreement. That this is an issue does not change any of the above.

        5) That the maintenance of capital improvements ask came so late is likely a huge mistake on Katz’ part. He says it was always anticipated in the agreement but it appears to have taken council by surprise and has led to all sort of speculation, like yours, that Katz is contributing nothing and getting all the profits. That is just not true.

        The real issue for Edmontonians right now is they are being held hostage….not by Katz but by the economic model of the NHL. Every other team in the league has a lease agreement that allows it to keep all arena revenue whether generated from hockey or not.

        You may disparage the economic model but I doubt that’s going to change things any time soon.

        • First, regarding the money from the ticket surcharge, while it is revenue that the Oilers give up, comes from the people who attend games. If there were no games that money would still be spent, the vast majority of it, within the city, producing revenues for those businesses, etc. Thus, while from the perspective of Katz, this may look like his money, from the perspective of the city as a whole, it is not. It certainly can’t be counted as an injection of $100 million into the project because this injection costs the citizens of the city elsewhere.

          Second, you make it seem like the “$100 million plus interest) is more than $100 million dollars. However, when you consider the time value of money, this ends up being considerably less value than $100 million dollars.

          Third, the economic model of the NHL is irrelevant to the economics of the deal from the perspective of the city. The economic model of the NHL is also irrelevant to the Oilers. The only question that matters is whether they can generate revenues that ensure profitability. Moving an NHL franchise imposes significant costs on that franchise. So long as the Oilers are making money the threat that they move isn’t a sufficient reason to make a bad economic deal.

          • Karth

            specifically addressing your first statement. I currently live in Calgary and friends and I come up to Edmonton between 8-10 times a year to watch the OIlers play. We stay at a hotel, eat out for all of our meals, and take the LRT in to see the game. Usually we go out for drinks in downtown. If there were no games I would not come to the city. It just would not happen.

          • cableguy - 2nd Tier Fan

            Oh brother…. Talk about text book idealistic economic BS.

            Your assertion that ticket tax money is just being shifted around is total bunk. Its based on a totally fictitious world where people sit down, and work out a monthly budget that has a fixed entertainment portion. If I don’t spend money on Oilers games, I’m not going to spend that exact dollar amount on other businesses in Edmonton. That’s an asinine concept.

            Lets say I save $4K on Oilers season tickets. What does a logical person do? Do they drop $4k on steaks at the Keg in South Edmonton Common and the extra big popcorn pack at the theater? Maybe some fancy leather boots from WEM. Highly unlikely… Average person (the “vast majority as you put it”) will save a portion of the money, thne take the family on a trip to Mexico, the wife to Vegas, or maybe take the kids to the Okanagan for 3 weeks next summer instead of 2.

            We live in EDMONTON, people aren’t shifting their $4K season ticket money into all sorts of other great options around town thereby creating some sort of entertainment dollar fixed rate, merely moving money around between all of the businesses in Edmonton. Give me a break….

          • It was a quick calculation so I might be off, but if you buy $4000 worth of Rib Steaks at Skyview Keg (accounting for GST as well) you can get roughly 135 lbs worth of meat. No tip for the wait staff, but they didnt really do anything, did they?

            Money well spent, I’m sure.

    • Woogie

      I’ve been following this pretty closely and I don’t know if anybody really knows what either side really wants. Which is what the problem is.

      I agree with Katz however, under no circumstance should the city negotiate with the Katz group publicly. No other P3 project is negotiated this way so why should they on this one???

  • Woogie

    One comment on the 35 year location agreement;

    The location agreement was promised outright by Katz from as far back as when he initiated the take over of the Oilers from the EIG.

    It wasn’t an ‘ask’ from the city. I think it has taken on that appearance over time though because it was an item of importance amongst the citizens when polled about the arena.

    It’s a good example of why there is so much frustration building. People want to believe that a deal is a deal and what is said matters but with each passing day it feels more and more like a game of Three Card Monty.