There is mounting evidence that NHL players are preparing for a lockout with
countless tweets, blogs, and articles hinting that escrow may be the final
straw. There is no doubt that escrow is a growing concern, with some calling it
 the "dirtiest word in hockey dressing rooms." How will it be the major cause
of a lockout?Escrow Defined

Escrow is when money or assets are placed into an account or held by a third
party pending a completed transaction. A wide range of items can be held in
escrow including cash, securities (stocks or bonds), and other tangible assets
like the title to a car.

The most common use of escrow is when people purchase a home. Here the down
payment, or purchase price, of the home is placed into an escrow account along
with the title to the property. Once contractual conditions, like inspections,
are completed the payment is transferred to the seller and the title is passed
to the buyer. It is also not uncommon as part of a mortgage agreement for the
bank to set up an escrow account to cover taxes and insurance on the home,
including contributions to the escrow account as part of the monthly mortgage
payment.

Something important to remember is that the amounts collected in these accounts
 for things like taxes and insurance are based on a projection of what the
homeowner will owe at the end of the year. Because the amount is only a
projection and not exact the homeowner may pay more or less than they actually
need to over the course of the year. If the actual bills are lower than
projected there will be a refund issued. Conversely, if the estimates were too
low the homeowner may owe money.

In the NHL the same principles apply. A percentage of NHL player salaries are
deducted each pay period and deposited into an escrow account. At the
conclusion of the season that money is disbursed to the owners or players based
 on conditions in the NHL Collective Bargaining Agreement (CBA).Escrow was part
 of the new CBA ushered in by Gary Bettman following the 2012 lockout. (Amy
Irvin / The Hockey Writers)Escrow and the Salary Cap

To understand why these escrow accounts are necessary it is vital to understand
 how the CBA allocates money earned by the league throughout the season.

For the players, their share of Hockey Related Revenue (HRR) is allocated as
salary. This is outlined very specifically in the CBA. "Article 50 creates a
fixed relationship between League-wide Player Compensation and Hockey Related
Revenues, and provides that League-wide Player Compensation will rise or fall
in direct proportion to a rise or fall in Hockey Related Revenues." Section
50.4 (b) goes further, making it crystal clear that under no circumstances can
the players' compensation be more or less than the specified 50 percent share.

At the end of every season, a full accounting is done of league financials and
the HRR is calculated. These revenue totals are used to establish the salary
cap for the following season.

To calculate the salary cap, the HRR for the previous season is multiplied by
50 percent to establish the players' share and projected benefits are
subtracted from that amount. Benefits in this instance include, but are not
limited to, pensions and retirement plans. That value is then divided by the
total number of teams in the league.

To project for growth in league revenues, that number is increased by between
zero and five percent, often referred to as the "escalator clause". The new
total is established as the Adjusted Midpoint of the payroll range. Once the
Adjusted Midpoint is established, the CBA defines the upper limit (the salary
cap) and the lower limit (salary floor). These values are achieved by adding 15
 percent to the Adjusted Midpoint to determine the upper limit and subtracting
15 percent from the Adjusted Midpoint to set the lower limit.

#NHL and #NHLPA announce next season's salary cap is set at $79.5 million.
Could have gone up to as much as $82 million, players opted for 1.25% growth
inflator this season.

- Frank Seravalli (@frank_seravalli) June 21, 2018

To clarify, here is an example with hypothetical figures: The NHL reports HRR
of $1.4 billion and projects $80 million in player benefits. The $1.4 billion
HRR number is then multiplied by 50 percent to determine the players share of
$700 million. Then, the projected benefits of $80 million are deducted for a
value of $620 million. This is then divided by the number of teams, 31, for $20
 million. The last step is to increase this by five percent, or $1 million, to
$21 million which is the Adjusted Midpoint of the payroll range for the
following season. Adding 15 percent, or $3.15 million, would determine an upper
 limit of $24.15 million and a lower limit of $16.85 million.Why Escrow Is
Necessary for the NHL

If the salary cap is based on the percentage of HRR that players are supposed
to receive, why is escrow necessary? It is unlikely that player salaries, even
if based on historic HRR, will perfectly match the players' share of HRR for
the following season. Escrow ensures that all parties receive the correct share
 of HRR even when salaries do not perfectly match the players' share.

There are several important factors that create the disparity, including the
manner in which revenue growth is projected. The CBA establishes an increase of
 5 percent, with the option for either the league or NHLPA to propose an
alternate amount. This "escalator clause" has frequently been modified by the
players.

In the season immediately following the implementation of the current CBA, the
players voted for a five percent increase. Since then, the growth rate has not
been a foregone conclusion. A business cannot predict revenue growth with
certainty. Because the salary cap is established based on an imperfect
projection then player salaries will differ from 50 percent of HRR.

The growth factor (or cap escalator) was set at just 0.5%, so the NHL's cap
growth this summer was driven almost entirely by higher revenues. Playoffs in
particular were big I'm told. 

A lower growth factor will help control escrow, which is still an issue for
some players.

- James Mirtle (@mirtle) June 21, 2018

The most important variable is how teams spend. The only way for the cap
structure to allocate the players' share of HRR precisely would be if the
league spent, on average, the exact amount of Adjusted Midpoint. However, on
average teams do not spend exactly the Adjusted Midpoint. In fact, the majority
 of teams spend in excess of the Adjusted Midpoint.

As of July 29, only 12 teams currently have projected payrolls below the
Adjusted Midpoint of $69.15 million. Once all NHL rosters are set for opening
day there will likely be even fewer. The median NHL team is projected to spend
$71.12 million for the 2018-19 season, and the average team payroll is north of
 $70 million. With the majority of team payrolls outpacing the Adjusted
Midpoint, an overage is guaranteed.Effects and Player Opinion

Paychecks in the NHL contain deductions including for pensions, benefits, and
taxes as well as any portion that might go toward agent fees. However, on top
of these common deductions, they also include large deductions that go into the
 escrow account.

The sticker shock of seeing a drastically reduced payday is hard to swallow,
but is even more so when considering how the money in the escrow account is
distributed. In years when there is an overage, some percentage of the escrow
account is distributed to the owners to ensure the appropriate HRR split. In
every year the current CBA has been in place, players have not seen the full
amount they paid into escrow returned to them. In fact, in some
seasons, players have had as little as 1.6 percent returned to them, with only
 one season reaching a double-digit percentage return.(Source: Gavin Management
 Group, The Hockey Writers)

Even though this structure is in place to guarantee players and owners get
exactly the amount accorded by the CBA, it also creates a perception problem.
Because players are not receiving a full refund from the escrow amount, it
seems like they are not making the full salary specified in their player
contract. It is understandable that a player who is contracted for an amount
but, because of escrow, is actually paid roughly 10 percent less, would view
this as not getting what they were promised.

Another point of contention for the players is how HRR is calculated. The CBA
describes exactly what revenue sources are considered when calculating HRR.
Section 50.1 (b) (ii) states that HRR does not include, "revenues from the
relocation or sale of any existing Club (or any interest therein) or the grant
of any new franchise."

So, any expansion fees collected by the league, like the $500 million from the
ownership group of the Vegas Golden Knights, go to the owners and players still
 had escrow cut into their pay. Perception is key, and it could seem like
players were losing out on money not just once but twice.What's Next?

All signs point toward a lockout in 2020-21, especially according to the
players. And while escrow may not be the only reason, it is going to be a
significant contributing factor. For the players, the current situation is
untenable and any new agreement cannot be reached without some significant
changes. So, what can be changed to eliminate these concerns?

One option would be to remove the growth factor, the escalator clause, from the
 salary cap structure. If the salary cap for a given season was determined not
by a projection of expected revenue but rather the actual revenue from the
previous season, the need for such an extensive escrow would be reduced.

Although, not all players may like this change. Free agents, in particular,
would see a significant loss. Without the escalator, the cap would likely
increase at a slower rate, allowing teams less cap space to offer big contracts
 to players on the open market. This disconnect between players has already
been a challenge when the NHLPA has had to decide what the escalator should be
in a given year. There is no reason to expect unity on the matter during
upcoming CBA negotiations.Without the "escalator" clause, there would be fewer
massive paydays for free agents like John Tavares. (Charles LeClaire-USA TODAY
Sports)

Another option that would appease some players, but not others and certainly
not the owners, would be to use the revenue projections to set the upper limit
instead of the Adjusted Midpoint. If calculated this way, the likelihood of
players being overpaid relative to their share of HRR is reduced and,
therefore, so is the need for escrow. For players under contract, this means
they will have significantly smaller escrow deductions.

Just like removing the escalator altogether, free agents would see smaller
contract values since this would likely mean smaller increases to the salary
cap, making it harder for teams to hand out large salaries. The league also may
 not be keen on this, as it would increase the odds of a season when players
are underpaid relative to their share of HRR and would force owners to write
checks to make up the difference.

Yet another option to reduce or eliminate the need for escrow is to remove the
link between player salaries and HRR altogether. For players, this would make
the value of their contracts absolute. But because revenues are impossible to
perfectly predict, both sides would risk losing out significantly as the
league';s financial health ebbs and flows.

Regardless of what may happen going forward, for the time being, escrow is here
 to stay and undoubtedly, will be one of many contentious elements of the
current CBA that could contribute to another lockout.

The post How Escrow May Lead to Another NHL Lockout appeared first on The
Hockey Writers.

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