The CBA

29 Sep

Edmonton’s arena debate – more particularly, the financing aspects of the debate – is not going on in a vacuum. Rather, it’s being influenced by the economic incentives built into the National Hockey League’s Collective Bargaining Agreement, or CBA. The CBA is an important document to consider when discussing the proposed plan for a downtown arena, yet it hasn’t yet appeared on the radar of local media, politicians and the general public. Here, then, is a breakdown of that agreement, and how it affects the ongoing arena discussion here in Edmonton:

1) The CBA is the labour agreement between NHL owners and the NHL Players Association (NHLPA). It covers everything from the length of the NHL season to the NHL salary cap. The current version was agreed upon following the lockout of 2004-2005, and will expire in September of 2012.

2) The NHL is not a normal, competitive market. It’s more like a socialist utopia: by signing the CBA, the players and owners have agreed to a “fair share” of league-wide, Hockey Related Revenue (HRR). That fair share is fixed, depending on the amount of revenue the league brings in. It’s described perfectly here:

In most competitive markets, having your business generate “big-city revenues” while other competitors have lower revenues would give you relatively more money to invest in your enterprise, or more money to flow to the bottom line. But the NHL is not a normal market.

The market is distorted by the player’s fixed share of hockey-related revenues, and by the revenue sharing system.

Under the CBA the biggest cost – player salaries – is a fixed-proportion of league-wide revenue. Earn more revenue and you’ll ultimately pay more in salaries and more in transfers through the sharing system. Earn insufficient revenue, and your shortfall will be made up by revenue sharing.

3) Here is how the league-wide revenue is divided: for every dollar that’s labeled “Hockey Related Revenue” (HRR), the owners have to pay 56 cents to the players. With the remaining 44 cents they pay their expenses and make their profits. HRR is the operating revenue that owners use to run their teams.

4) The definition of HRR is outlined in Section 50.1 (a) of the CBA, and it is comprehensive. From sweaters to seats, television to Internet, almost any way a club can earn money is considered HRR. In addition, if anyone invents a new stream of revenue (i.e. the next Internet), that’s included in HRR, too.

5) There are some exceptions built into the agreement – revenue sources that aren’t called HRR, and where the owner gets to keep 100% of the cash (found in Sections 50.1 (a) and 50.1 (b)). These are the non-Hockey Related Revenues (non-HRR). Non-HRR cannot be used by the owners to run their teams.*

6) By far the largest exemption is for the financial benefits public authorities can create through arena building and renovation. To use two contrasting examples:

  • If a public authority pays a team $10 million a year to locate or stay in a community, all of the $10 million is counted as HRR. The owner keeps just $4.4 million, while the players get the rest.
  • But if a public authority builds an arena for $100 million, or creates a financial structure that produces the same result, the owner gets to keep 100% of the benefit from that wealth transfer. The CBA takes a broad, even eager, view of all the ways a public authority can structure the transaction to get around the HRR definition. It exempts:

“Any thing of value received in connection with the design or construction of a new or renovated arena or other Club facility including, without limitation, receipt of title to or a leasehold interest in real property or improvements, reimbursements of expenses related to any such project, benefits from project-related infrastructure improvements, or tax credits or abatements, so long as such things of value or other revenues are not reimbursements for any operating expenses of the Club.”

If the Katz Group gets the City of Edmonton to finance an arena, then, all benefits of that wealth transfer go to Daryl Katz. That includes a much higher team valuation, which will surely occur with a new arena and all of its new, Katz-controlled revenues.

7) In addition to the ‘build an arena’ exemption, there are other smaller features in the CBA that allow owners to insulate some of their revenue streams from being called HRR. These include:

  • Luxury Boxes: In an “affiliated arena” only 65% of box lease revenue (whether from hockey or other events), and only 65% of Club/Premium seat revenue counts towards HRR, rather than 100%. This means the owner ultimately keeps 63.6% of revenue from leases rather than 44%. Compare this to the treatment of gate receipts: 100% of the revenue from regular ticket sales count as HRR. All else being equal, an owner would rather build a luxury box which seats 10, instead of 10 new seats in the mezzanine. This is also why the sections designated as premium/club seats keep growing.
  • In Edmonton, for example, the plan is to increase the normal seat capacity from 16,839 to 18,000 seats. That’s an increase of 6.9%. Luxury seats will increase from 39 suites and 16 Skyboxes to 64 luxury suites, 12 bunker suites, 2 party suites, two restaurants, and a club lounge. The increase from 39 to 64 suites alone is an increase of 64%.
  • If the box lease or premium seat is only for non-hockey events, 0% of the revenue counts towards HRR. Parking and concession revenues on non-game days are also completely exempt from the HRR definition – owners can keep all of that revenue. This means that revenue from non-hockey events is especially valuable to owners (they keep all of it), but of no value to the team (none of the money is used to fund player salaries or hockey operations).
  • In addition, in an “affiliated arena” the club only counts 65% of fixed signage, naming rights sales and arena sponsorship revenue towards HRR. Again, it’s a case of the owner getting to keep 63.6% of the revenue rather than 44%.

8)  Last but not least, for parking and concession revenue the clubs get to deduct “direct costs” for these services, up to a limit. Obviously this creates an incentive to cram as many of their costs as possible into these categories, so they can pay for their costs with cheaper ‘pre-HRR-tax’ dollars rather than 44-cent ‘after-HRR-tax’ dollars.

  • 100% of parking revenues on NHL game nights count, but you can deduct direct costs up to 30% of the revenue (30% is a league-wide average; individual sites may vary).
  • 100% of concession revenues on NHL game nights count, but you can deduct direct costs up to 54% of revenues (again, a league-wide average).
  • By maximizing the costs you charge against parking and concession revenues on game nights, just 70% of parking revenue and 46% of concession revenue end up counting towards HRR.

The cumulative effect of the above is simple: it creates a strong economic incentive for owners to maximize financial benefits that don’t count towards, or only partially count towards, Hockey Related Revenue. These include arena financing, parking/concession revenues, and luxury box/club seat revenues. The lesson here is that not all revenue dollars are equal, and that not all are used for the same thing. Hockey Related Revenues are used to pay player salaries and redistribute wealth through revenue sharing. Non-Hockey Related Revenues, the revenues the Katz Group so badly desire, go directly into the owner’s pocket. There is no sharing with the players or other owners.

It is important for the City of Edmonton to understand this distinction, because it drives the Katz Group’s negotiating strategy. Citizens also need to understand this distinction, so that they’re not hoodwinked into thinking that the Oilers could ice a better team if only they received parking and concession revenues from concerts and rodeos.

More non-HRR for the Katz Group will not allow the Oilers to ice a more competitive hockey team. It will not allow them to offer a huge contract to a much sought-after free agent. It will not allow them to extend the contract of a beloved player on the current roster. Rather, that money becomes pure profit for Daryl Katz. There is nothing wrong with this in and of itself, obviously. Making money is the end goal of every business owner. But it’s a different story when that owner is making profits because the taxpayer is covering his costs. That’s corporate welfare, plain and simple.

 

*Note* Please read this link for errors I made in the writing of this post.

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2 Responses to “The CBA”

Trackbacks/Pingbacks

  1. The Corrections « Why Downtown? - October 14, 2010

    […] Oct After re-reading my posts from two weeks ago on the Collective Bargaining Agreement and salaries, and discussing the CBA with people, like Tyler Dellow, who understand it much better […]

  2. Waste Not, Want Not « Why Downtown? - September 30, 2010

    […] even,” and that “sustainability can only be addressed by a new arena….” Having already examined the NHL’s Collective Bargaining Agreement, we can move past the question of how exactly one can aid the Oilers on-ice product by getting more […]

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