This is an e-mail that I’m receiving more and more often these days, as the NHL’s “make whole” proposal gets an increasing amount of attention:
“I am unclear about the make whole. Based on the contracts in existence today, how many years would the make whole come into play? And can’t the owners essentially claw back the make whole by making sure any new contracts signed from here on out are artificially deflated? (I know the owners likely couldn’t help themselves and this is pie in the sky but isn’t this a way to convince themselves that they got what they wanted?) I hope you can understand what I’m asking; thanks for you time!”
- Brad Cooper
For those who maybe haven’t followed every nuance of these negotiations, the “make whole” was one of the key parts of the NHL’s last full proposal made back on Oct. 16.
It’s quite complicated, and not surprisingly, has confused a lot of fans and even parties on both sides of the table in CBA talks.
Here’s some of the wonderful legal language the NHL originally used to describe the provision:
The League proposes to make Players "whole" for the absolute reduction in Players' Share dollars... 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."
In English, what the proposal basically says is that the players’ share will drop from 57 per cent of revenues to 50 per cent and any cut in salary they take from the $1.883-billion they were paid last year will be made up to them over time.
The tricky part was that, in the NHL’s original offer, that amount would be coming out of the players’ share in future years, meaning players would be paying off some $200-million or more to other players and in fact getting less than 50-50 as a result.
All along, the league has indicated it’s willing to play with the numbers a little on the provision, and that has led to some believing the “make whole” is one possible solution to ending the lockout.
One word of caution, however: The initial reaction by players to the proposal was very, very negative, mainly because it included the somewhat absurd notion of players paying out part of their share to other players.
There’s some talk now that the owners are going to propose that they pay the “make whole” portion, which is a new wrinkle in all this and one that theoretically could shift another $211-million (or whatever the limit ends up being) to the players’ side, putting them even closer to an agreement.
How might that work?
Well, to answer Brad’s question, no the owners likely wouldn’t be able to claw this back by simply spending less. The biggest problem is in Year 1, where the players’ existing contracts are substantial at about $1.8-billion, meaning they will easily exceed a 50 per cent share already barring a 9 per cent increase in revenues. (Good luck with that.)
Teams, meanwhile, have committed roughly $1.3-billion in Year 2 (or 2013-14), leaving only $16-million per team to spend to fill out rosters that would by then have gaping holes.
Go over the $16-million and you add to the amount that would have to be made whole.
(There would likely not be any need to “artificially deflate” new contracts either; the available cash should be low enough that this would happen on its own as the 50-50 share will keep the cap lower as well. Tough news for the 2013 UFAs.)
One of the main issues here is that relying on the “make whole” as a fix-all solution pretty much guarantees a large escrow figure – probably in the 12 per cent range in the first year and closer to 4 per cent in the second if we’re talking about 82-game seasons, although that all depends on how revenues shake out.
That escrow would then – again, in theory – be returned to players at different times, with those on one-year contracts getting their money a few months later and those on long-term ones getting it three or more years later when new revenues are then supporting those payouts.
As I said, pretty complicated. But could this be a way to potentially save the season? Perhaps.
It hinges, for one, on if players with long-term deals mind having roughly 12 per cent of their salaries in Year 1 and another 4 per cent or so in Year 2 deferred and given back to them – potentially over the next decade – in smaller increments.
But, more importantly, if the league caps the “make whole” at only $210-million and revenues don’t increase much (as the result of the lockout or other factors), can players live with potentially getting less than what they’re “owed” on their current deals?
Because at this point, that looks likely.
There are other hurdles here, too. The “make whole” negotiation would appear to get more complex the more games are missed and revenues dip below $3.3-billion because players’ contracts are becoming ever-smaller in that first year.
Does having smaller contracts in Year 1 mean the money the players want guaranteed shrinks as well? Do they accept that portion of the hurt from a shortened season?
Just another thing to negotiate around.
The takeaway from all this? Well, the two sides were really likely only some $500-million to $600-million apart over the next five years in their last full proposals, and with the “make whole,” the league is believed to at least be contemplating adding in another $210-million or so on a deferred basis.
That puts them a fair bit closer, in order words, to splitting the remaining difference.
If players can live with a system that puts a chunk of their money off for a few years, there may be the foundations for a deal there.
But that sort of concession likely can’t happen if the league continues to demand the other contractual changes – to free agency, etc. – are made, and they haven’t even gotten around to discussing those in depth yet.
Still a ways to go.
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