SBJ/November 17 - 23, 2003/Opinion

Compromise can put NHL’s labor uncertainty on ice

It is clear that even with a hard salary cap, the NHL would not solve its economic problems. Last year, the average team payroll was $45.8 million.

If the team cap were somehow set as low as $35 million, based on last year's payrolls, there were still 14 small-market teams with payrolls below this level. Thus, the cap would not help them become profitable if they are not already; it would only make some of the high-payroll teams more profitable.

Whatever the system of salary restraint that the league puts in place, the NHL also needs to introduce a significant degree of revenue sharing. Other than the revenue from its relatively small national television deals and licensing (approximately $6 million per team), no revenue in the NHL is shared.

While the commissioner's office appears to accept that revenue sharing is needed, its backgrounder report states that "increased revenue sharing in the absence of 'cost certainty' would serve only to reallocate the league's current level of financial loss — it would do nothing to reduce losses."

This statement is partly true, partly false. The league wants salary restraint together with revenue sharing. Fair enough. But revenue sharing by itself, as it is practiced in MLB and the NFL, does help to restrain salaries and to reduce losses or grow profits.

Why? Suppose each team pays a tax of 33 percent into a pool that is redistributed to low-revenue clubs. Now, suppose that the New York Rangers are thinking of signing Ilya Kovalchuk (imagine he is 11 years older and a free agent) and the team estimates that he would raise team revenue by $12 million.

Without a revenue-sharing tax, the team would be willing to pay Kovalchuk up to $12 million. With the tax, the net contribution of Kovalchuk is only $8 million and the Rangers' offer would be correspondingly reduced. Thus, revenue sharing based on team revenue decidedly does reduce salaries.

Further, to the extent that revenue sharing will balance the competition on the rink, fans will be more interested in the games and league revenue should grow. The NHL should rethink its position on revenue sharing. (There are superior ways to design revenue-sharing systems that will provide a greater boost to competitive balance than those practiced in MLB and the NFL, but that is a subject for another piece.)

The NHL players union also reportedly offered luxury taxes on high payrolls. The luxury tax in MLB's new agreement provided for teams with payrolls in 2003 above $117 million to pay a 17.5 percent tax.

This is a very low tax rate compared with the nominal rate of 100 percent for teams above the NBA payroll threshold — and even more so when compared with the effective luxury tax rate in the NBA, which can surpass 300 percent.

Yet the low rate set in MLB was sufficiently effective that only one team (the Yankees) surpassed the $117 million threshold in 2003. It is not clear why this happened, but it is likely that one of the reasons is that teams used the threshold as a hortatory budget limit.

The new MLB agreement, combining luxury taxes with revenue sharing and some new team debt limits, seems to have been rather effective in reversing the upward salary momentum in the labor market. Last winter, free-agent salaries fell some 16 percent. They appear headed down again this off-season.

MLB's system of parametric controls rather than a strict payroll limit has a number of advantages.

First, it preserves a significant degree of market determination of a player's value. There is, after all, no fairer method to value one's labor in a market economy.

It also gives owners more entrepreneurial leeway. They can always sign a player if they want to — they just have to pay more to do so. The system is based on incentives, not quotas.

Second, it avoids the byzantine system of cap exceptions and capology that creates a variety of distortions and headaches for the NBA, and, to a lesser extent, the NFL.

Third, it avoids having to define revenue. Since salary caps set payroll limits as a share of revenue, in cap systems the union has a right to certify that revenues are being properly reported.

This entails not only looking at team financial statements but also looking at financial statements of related businesses with overlapping ownership — and sometimes detailed financial ledgers. It can be, to be blunt, a can of worms.

Fourth, union politics and ideology make a salary cap extremely difficult to get to, even if these and other problems can be overcome.

The obvious choice, especially since the NHL commissioner's office says it is willing to consider systems of salary restraint other than a cap, is to bargain over the design and degree of revenue sharing, luxury tax and debt restriction policies. Perhaps new preferences for weak teams could be added to the draft system as well.

The sooner the two sides can do this, the better off the NHL will be. Not only will it give them more time to reach an agreement and more time to design the proper incentives into the system, but it will ensure present and prospective corporate sponsors that the hockey industry is on the right path.

Equally important, it will let the fans know that the game will go on uninterrupted.

The NHL faces enough serious challenges in the entertainment marketplace without adding more problems of its own making. Spending the next 10 months bluffing and posturing will not accomplish anything positive for either the owners or the players. It is time to start real bargaining in a spirit of cooperation.

Andrew Zimbalist is Robert A. Woods professor of economics at Smith College.

Editor's note: This is the second of two columns examining the NHL's collective-bargaining status. Last week: Sorting through the rhetoric. Today: Crafting a new agreement.

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