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Why is the salary cap projected to stay flat when revenues should rise soon?

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There’s a new TV deal and fans in the stands, what gives?

Montreal Canadiens v Toronto Maple Leafs - Game Two Photo by Mark Blinch/NHLI via Getty Images

A few weeks back when the news that ESPN was going to become the new main US broadcaster for the NHL, many people thought that increase in television revenue over the current NBC deal would mean good things for the salary cap. Then came reports that the expectations of the NHL and its GMs are that the salary cap would stay flat for years.

Many teams sold tickets the season, and the remaining teams in the playoffs are all allowed to have paying customers in the seats. The hope is, of course, that all arenas will be able to sell to capacity next season. So surely the salary cap can go up, right?

Not by much.

This is the concept agreed to in the CBA extension contained in the Memo of Understanding voted on last summer:

Salary Cap

2020-21: $81.5 million

The cap will remain at that amount until HRR [Hockey Related Revenue] returns to between $3.3 and $4.8 billion. If HRR goes up, then a prorated amount between $81.5 and $82.5 will become the next salary cap. Once HRR tops $4.8 billion, the salary cap will rise by $1 million per year until the escrow debt is all cleared.

The expected HRR for this season is much less than last season and will not come close to that $3.3 billion threshold. So for this coming season the salary cap is mandated to stay at $81.5 million.

With new revenues on the TV side kicking in, the NHL’s forays into advertising on player equipment likely becoming permanent and the potential for full ticket sales, the 2021-2022 revenue should come into that range. But the reported increase in the TV deal is reported to be in the range of $200 million per year becoming $400 million, and million and billion are not the same thing. That increase doesn’t go very far.

The HRR amount that led to the record high cap of $81.5 million on 31 teams was almost $5 billion. So if the 2021-2022 numbers are very positive, the result could still be an amount that under the old formulas for determining the cap would have resulted in something less than $81.5 million. That’s why anything less than the previous revenue amounts will result in a cap increase of negligible amounts.

A salary cap of $82.5 million in 2022-2023 is the optimistic take.

And then comes the kicker. The most the cap can rise in a year is $1 million until the escrow debt, which is very large, is paid out. If the escrow debt stays above $125 million, there is a clause in the MOU that would trigger a one-year extension, with the cap frozen at 2025-2026 levels.

The reason for this is that the amount of salary paid to the players for 2019-2020 and 2020-2021 far exceeds 50% of HRR. The players are deeply in debt — that’s what escrow is, a fund to cover shortfalls on either side, and it’s deep in the red on the player side. That debt has to be paid out of the escrow that’s skimmed off of player salaries in the future. If the NHL continues to take in too little revenue to genuinely afford the salary cap they have now, that debt will rise, not fall.

In real numbers, the salary cap will look something like this:

  • 2021-2022: $81.5 million
  • 2022-2023: $82.5 million (at most, with the potential for no increase)
  • 2023-2024: $83.5 million (at most, could still be at 81.5 million)
  • 2024-2025: $84.5 million (at most, could still be at 81.5 million)
  • 2025-2026: $85.5 million (at most, could still be at 81.5 million)

The only way to jumpstart that rising cap is to have revenues so good they top $5 billion by enough to legitimately have a higher salary cap and clear the escrow debt both. That’s a substantial increase and would require more than the rising TV revenue and full ticket sales. Ticket prices would have to rise, attendance would have to reach something like sellouts in all buildings and other ancillary revenue would need to go up as well. International television sales would help, but the NHL, an evening event in North America is a middle of the night broadcast in most markets with hockey fans. Hockey can’t populate European TVs the way European soccer has taken hold as a daytime sport in North America.

The NHL, via expansion and parity — the two things Leafs fans hate most — was heading in the right direction for a rising cap. The rising US TV rights deals is tangible proof that the bet is they are still heading in that direction. But the pandemic is more than a two-year bump in the road, and forecasting sunny skies forevermore seems very unwise.

There is a tendency when numbers in the billions get tossed around for our minds to categorize those figures as so big as to be infinite. As a reality check on that, consider the coming NHL season with 32 teams and a cap of $81.5 million. If actual salaries come in at something close to the amount, and teams all operated near the cap — which more do now than they used to — that’s $2.6 billion just in player salaries for the players who appear on the active roster.

Not included is all the other costs of operating a hockey team, including the salaries of players who don’t count against the cap for whatever reason. Oh, and all those wages to the working people who produce the game experience and keep teams running.

The belt is going to be tight on every NHL team — even the Leafs and the Canadiens laid some people off or reduced salaries this season — so it’s really hard, fandom aside, to be upset that the NHL wants to avoid making it worse in the future.