Monday, July 18, 2005

Budgeting with Escrow

Let's pretend the Oilers plan on spending 33 mil over the year. Let's also imagine they have some opinion about how much league revenues will be, and how much teams will spend on players. Perhaps they project Revenues of 1.7 B, as the league does, meaning that teams will collective spend 918 mil, after escrow adjustment.

Suppose the Oilers actually believe team spending around the NHL will total 968 mil (before the escrow adjustment dropping salaries to 918mil) . That means that 50 mil will be returned, collectively, to the owners. The Oilers portion would likely be their payroll divided by the total league payroll, multiplid by the total amount overspent. (33mil/968mil)*50 mil, or 1.7 mil.

Under those circumstances, if the Oilers could forecast them, the Oilers could budget and spend about 34.7 mil on salaries during the year, and receive enough back at the end of the year through escrow redistribution to bring their true budget in line at 33 mil.

That all leads to a question, which is:

In the case of the upcoming season specifically, can the Oilers, actually go ahead and spend 35 mil or so and REASONABLY assume they'll get a 2 mil check at the end of the year so that they'll have spent their budgeted 33 mil? That would require as mentioned above an escrow check returning about 5% of their payroll at the end of the year.

I can already hear the objection that this would be too "risky". "Why should we risk projecting, let's just play it conservative, spend what we spend and if we get money back at the end of the year, great. "

The problem with this approach is you are implicitly making a projection, by not projecting. You would be speculating that, league wide, teams will spend exactly 54% of revenue on player salaries. To relate it to the forecast above, not factoring escrow into your budget calculations would be exactly the same as saying " I believe revenues will be 1.7 B, and teams will spend 918 mil. This means that my 33 mil actually spent on players will be corrected via escrow to 33 mil. Another way of saying no escrow alteration is required, and the players get all their money back".

Furthermore, how conservative would it be to spend your budget without concern for how others are spending in a linked world? What happens if all teams combined pay 53% of league revenue to the players? Wouldn't that would mean (with the caveat that I don't know the exact details of the linkage at this point) that the owners still owe the players money, forcing Edmonton over their 33 mil budget?

I am not saying that projecting both league revenues and league wide salaries would be easy. But just because it's hard to predict doesn't mean one shoud bury his head in the sand and ignore the problem. For revenues the team might well be best off by simply using the league's revenue forecast. Player salaries shouldn't be as hard for a GM to forecast. It might be hard to forecast particularly accurately in July, before UFA season, but come January it should be fairly clear what teams will spend, collectively, on players. This will allow an astute GM to factor escrow into his budget, and affect his decisions with regards to adding/removing salary from his payroll as the season progresses, and as his team's place in the standings and chances of winning the Cup become more apparent.

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