Friday, December 21, 2012

Luxury Tax, Cost Flexibility, and Exploiting the Leafs' Monetary Advantage

The Pittsburgh Pirates are bad at baseball.

The term ‘bad’ is relative, of course. They would probably be a darn good softball team at your local diamond and might even tear up AA ball. However, when compared to their peers in Major League Baseball they don’t hit, pitch, or field baseballs all that well. As a result they have gone 20 years, since 1992, without making it into the post season.

To put that in perspective for a Leafs fan that is the equivalent of waiting until 2024 at least before witnessing playoff hockey (Phil Kessel would be 36).

The Pittsburgh Pirates turn a profit.

According to a 2010 ESPN article the Pirates made over $14 million in 2008 and over $13 million in 2007, all after taxes. They accomplished this by being prudent with all player costs and avoiding long term contracts to star players.

Herein lies the crux of what Donald Fehr, one of the founding fathers of the modern baseball luxury tax system, may be trying to implement in the NHL. Gary Bettman and the NHL want parity; a league where anyone can make the playoffs or win the Stanley Cup each year. In an ideal world, yes, we all want parity. You want a league where all teams have a real chance to win, but to do that in a league that as both a business and a sport you need to have one of or both of the following:

1. Strong revenue sharing

2. A lucrative TV contract.

The NHL has neither.



As a result, the top 10-12 teams are the only ones enjoying strong and steady profit margins while the bottom teams struggle to even make the salary cap floor. Some teams have even been forced to spend money fruitlessly on unnecessary contracts (Florida’s $16.4 million over 4 years to then 35 year old Ed Jovanovski). The combination of the cap system implemented in 2005 and over-expansion into non-hockey markets over the last 15 years is in large part why we find ourselves in the middle of this lockout. The two systems quite simply don’t integrate successfully, leading to persistent financial uncertainty for many franchises.

Teams like the Tampa Bay Lightning and their owner Jeff Vinik are crying poor, and rightly so - it’s estimated he lost nearly $30 million in 2011, despite the team putting together a deep playoff run. Conversely, teams like the Toronto Maple Leafs, New York Rangers, Philadelphia Flyers are quite capable of spending over the current cap number while remaining financially viable.

In a luxury tax system a team like Toronto would likely spend more than $100 million on annual player salaries, while Tampa Bay could lower its spend to a more manageable $20 to $25 million, assuming that’s what their revenue allows.

In that new system, the Leafs team would no doubt have an advantage over the small market teams; able to be more active in free agency and re-sign its star players. Forcing a team like Tampa to be more frugal with its signings, focusing more on a low cost veterans and entry level priced prospects who are under team control until they are UFAs.

Granted, a luxury tax system would hurt parity. The teams with the larger payrolls will likely enjoy greater success than the teams with smaller payrolls. But aren’t we ok with that?

Baseball is one of the most financially successful sports leagues on the planet and they have a severe disparity between the haves and the have-nots. Teams like the Yankees, Red Sox, Dodgers and, at least recently, Toronto Blue Jays (Mom, if you’re reading, I want a Reyes jersey for Christmas) are able to outspend the small market teams every year. It certainly doesn’t promote an equal chance to all teams, but it allows for financial stability across the league where franchises only spend what they can comfortably afford.

It remains to be seen what Donald Fehr and the NHLPA's endgame is. Are they simply waiting until the 11th hour before pulling the trigger on the best available offer from the owners? Or are he and players looking to fundamentally change the system on which the NHL is managed? Is the disclaimer of interest and possible decertification a step towards the MLB style luxury tax system that Fehr is so familiar with.

As a Leafs fan the closer we get to a free market system the greater our chances for success.  The team's financial muscle and the size of the team's fanbase would lead to an even more pronounced advantage over the league's have-nots. Perhaps more importantly, it would help the league become more financially stable where teams and fans alike can spend less time arguing over the distribution of dollars and cents and more time watching hockey.

3 comments:

Curt S said...

A good luxury tax system would allow the have-not teams to spend in ebbs and flows and ride the success cycle. Baseball was a little bit too permissive in the past but I think the new system is a little more restrictive on the high budget teams and that's a balance I wouldn't mind seeing the NHL seek to achieve if they ever re-examined the current system.

Garry J. Wise, Wise Law Office, Toronto said...

Good post, but it's parity, not parody.

Darren K said...

@Garry
Thanks for catching that, it has been corrected. Although, one could argue the NHL is becoming a parody of a legitimate sports league... sigh