Sports Contracts Need Context (Part II: Currency Exchange Rates)by Henry Greenstein October 12, 2020
Like all cultural institutions, sports are subject to the twists and turns of the global economy. The first part of this series discussed how journalists can use state income tax to contextualize personnel development in American sports leagues. This post will cover the comparable importance of currency exchange rates in player acquisition.
Securing Players (or Not) with Currency Exchange Rates
The NHL currently has seven teams in Canada, who in 2015 accounted for less than a quarter of the league but more than a third of league revenue. These teams acquire a significant chunk of their income, particularly from ticketing, in Canadian dollars, but pay players in U.S. dollars. As such, when the Canadian dollar is low, they effectively become poorer.
It might not be surprising that, as Nick Elliott demonstrated in a 2009 thesis, Canadian teams are more successful against American competition when the loonie is stronger. But because the league depends on its Canadian franchises for an outsized portion of its revenue, and has a revenue-sharing system in place, all teams suffer the consequences of an unfavorable exchange rate, most notably through a tightened salary cap. Between the 2015-16 season, during which a sharp decline in the loonie alarmed the NHL community, and 2016-17, the cap could have actually decreased, if not for the players’ invocation of an escalator clause. (Ultimately, it increased by a mere $1.6 million.)
A stagnant cap, which the league will actually experience next season as a result of the COVID-19 pandemic, significantly hampers roster development, preventing general managers from filling holes in their roster or negotiating new contracts with discontented stars. The unpredictability of the exchange rate is one of the few big-picture factors meticulous front offices cannot totally account for (like pandemics), but savvy journalists can observe these trends and speculate on their potential impact.
While the NHL is the most popular sports league in the U.S. to regularly contend with this phenomenon, the exchange rate does substantially impact the significant number of American imports in the CFL, who experience a similar shortfall to NHL front offices’ when the loonie is low (despite their inverse positions). These players can live in the U.S. but receive salaries in Canadian dollars, meaning that an unfavorable rate can hamper their already below-NFL-caliber salaries.
Currency exchanges are also well-worn territory for fans of European soccer, in which teams frequently engage in international transfers. As such, the sports world is not exempt from the consequences of seismic shifts like Brexit, which devalues the pound and hamstrings Premier League budgets.
In short, especially given the increasingly global nature of sports, currency exchange rates supply a unique angle for front-office discussion.
The impact of these financial circumstances is more dramatic than most fans may think. During that same 2015-16 NHL season, Las Vegas received an expansion bid over Quebec City. With the loonie in decline, and with Las Vegas in the income-tax-free state of Nevada, the fight for the 31st NHL team effectively represented a conflict between some of the most and least lucrative possible hockey contracts.
The synthesis of these factors — state income tax and currency exchange rates — predicted the outcome of an announcement that was extremely high-stakes for two major cities. Reporters who analyze future developments through these financial lenses could make exciting, trenchant insights of their own.