Turns out there is big money in junior hockey and it's not going to players

Reports filed in court pose some serious questions about the business of junior hockey and just how much money is involved.

We’re beginning to see why the Canadian Hockey League was so desperate to keep the details of its financial situation away from the prying eyes of the media and public. But if you’re going to pay the vast majority of your employees poverty wages, you’re also going to have to justify it by opening your books for all to see.

And what we’re seeing so far doesn’t look great for the CHL. A Calgary judge ruled Tuesday that financial statements and tax returns for the 42 teams in the OHL and WHL be unsealed. More, much more, will be revealed in the coming days, but separate reports filed in court pose some serious questions about the business of junior hockey and just how much money is involved.

At the heart of it all is a lawsuit that has been filed alleging that junior hockey operators should be paying their players at least minimum wage. A certification for the lawsuit against the WHL is being heard this week in Calgary. After that, it will be decided whether the lawsuit merits classification as a class-action lawsuit, meaning thousands of former players could be included as litigants. There is another certification hearing for the OHL lawsuit scheduled for March.

The CHL has long maintained that its players are student athletes and not employees and that paying them minimum wage would put many of them out of business. To back that up, it provided a financial analysis done by the accounting firm KPMG. But two reports filed by the plaintiffs – one by Brock University associate professor Kevin Mongeon and the other by forensic accountant Ronald Smith – call into question everything from the methodology to the accuracy of the KPMG report.

In the coming days, we’re about to find out that there is some big money out there in junior hockey and not much of it is going to the players. We’re going to learn that teams are paying their non-playing employees hundreds of thousands of dollars, even more than a million dollars, while many of the players earn $50 a week. For most teams, the amount they pay in salaries and benefits to non-players dwarfs the entire expense budget (which includes equipment, travel and scholarships), and in many cases is double the entire amount they spend on players.

Or as Smith put it: “There were significant expenses relating to management fees and remuneration for employees/directors, that are at times very significant and may not represent full economic value to the team.”

Smith’s report cited the Red Deer Rebels as an example. It pointed out that according to the Rebels’ own financial report, the team paid out $1.49 million in “management fees” in the fiscal 2016 year. That compared to $652,600 in 2012, $400,000 in 2013, $700,000 in 2014 and $725,000 in 2015. “Based on the large increase in the fiscal 2016 management fees,” Smith’s report says, “it appears that a significant portion of those management fees may be a distribution of profit.”

(THN.com reached out to Rebels’ owner, GM and head coach Brett Sutter for clarification, but did not hear back.)

It also points out that the Kelowna Rockets have a wholly-owned subsidiary that provides the team with bussing services, which means transportation costs are being paid to a company that the Rockets already own. “We do not know if the subsidiary is profitable or not,” Smith writes.

As for Mongeon, he found it odd that in a business where player costs are fixed and remain fairly constant from team to team, “the financial records shows a pattern that the clubs reported negligible accounting profits or losses, regardless of the amount of revenue reported. In other words, on average, high revenue clubs all reported high expenses, while low revenue clubs all reported low expenses. This runs completely contrary to economic predictions.”

He has a point. If the league is paying its players a pittance, that means its costs are basically fixed across the board. You would surmise, therefore, that the financial health of the team in any given year would be based on the revenues it generates, with the team generating far more revenues in years when its competitive than it year’s that it’s not. That’s the cycle of junior hockey.

“The clubs’ income statements, which show that their revenues and costs are highly correlated, do not accord with basic economic principles,” Mongeon writes.

Smith’s report also takes a look at five teams that were sold in 2014 and 2015, not one for less than $6.4 million. The report points out that the Prince George Cougars lost a combined $2.1 million in the three fiscal years before being sold in 2014 for $6.4 million. About the same time, the Regina Pats sold for $6.8 million with combined losses of $605,000 the previous three years. The Belleville Bulls sold for $10.3 million to a group that moved the team to Hamilton, after posting combined losses of $466,000 in its last three seasons in Belleville.

Smith’s report alleges that, “KPMG was greatly under-utilized due to the inherent limitations associated with the assignment that they were asked to complete,” and that it’s impossible without more detailed financials to determine whether teams would be significantly negatively impacted by paying players minimum wage.

Mongeon, on the other hand, says it’s fairly simple, that resources should be allocated to the areas of the business that most contribute to the revenues, which is the players. And that’s where the change in mindset has to come. Mongeon argues it’s not a matter of spending more money; it’s simply a matter of allocating revenues where they belong. Which basically means giving the players a bigger share of the pie and other employees a smaller share.

“The money that is currently collected by the club owners is generated by the players,” Mongeon writes. "Revenues would not be collected if they were not generated by the players. League and club administrators currently receive more money than they contribute to revenues. Payment to players will transfer money from league and club administrators, and other inputs to production, to players. The issue of player pay concerns the redistribution of revenues, and does not require the generation of additional revenues.”

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