The salary cap has become a subject of great debate lately. You might think that it’s just a number, and should be something that is easy to calculate, but there’s more to the story than that.
Look at a couple of news stories this past week. Reports suggest that both sports agents and the NFLPA expect “significant growth” in the salary cap in 2014, when the new TV deal kicks in. Patriots’ owner Bob Kraft made headlines saying quite the opposite.
“I don’t really see that happening,” Kraft said. “I think there’s going to be a smooth growth. I don’t think what happened in ’06 will happen in the future here because if you understand the labor agreement in the long-term part of this, there will be a smooth growth.”
So – who’s right? As with most things, reality isn’t quite that simple. There are two big factors that will impact the salary cap going forward, and make it difficult to forecast a number.
The 2006 comment from Kraft is in reference to the biggest single-year jump in the NFL salary cap – from $85.5 million per team in 2005 to $102 million in 2006, or slightly more than 19 percent. That jump was driven by new TV contracts as well, since most of the NFL’s revenue comes from television rights.
The new TV deal that goes into effect in 2014 does provide a significant increase in revenue to the league. The numbers that were widely published stated that national media rights fees jump more than 60 percent on average under the new deal. CBS, Fox and NBC currently pay $1.93 billion annually, and will ultimately pay $3.1 billion. That’s where the 60 percent comes from.
But the $3.1 billion number is for the last year of the new deal, which is 2022. The year-by-year numbers weren’t reported, but Sports Illustrated reported that “average fees from the three networks will increase by an average of 7 percent annually, a person familiar with the details said” and that “will take the total revenue from them from the current $1.93 billion per year to $3.1 billion by 2022.” The SI article also stated that “the person spoke on condition of anonymity because the figures weren’t made public.”
This is where the NFL has a public relations conundrum. They want to trumpet the size of the new deal and make the numbers sound as big as possible, but at the same time they want to downplay the growth discussion when it comes to things like the salary cap.
(It’s similar to the federal government reporting spending cuts on a 10 year basis. As an example, if we have a $1.7 trillion budget deficit, and the government announces a $500 billion spending cut, that’s significant, right? $500 billion is almost 30 percent of $1.7 trillion. But the fine print says it saves $500 billion “over 10 years” which averages $50 billion per year, or less than 3 percent of the deficit. The government has been playing that game for years.)
And the 7 percent number may even be high. If the $1.93 billion number is 2012 and $3.1 billion is 2022, that’s an average annual increase of only 4.85 percent per year, even though over 10 years it amounts to a 60 percent increase. Isn’t compound interest a wonderful thing?
The second factor that makes this difficult to calculate is the extreme complexity of the new collective bargaining agreement. It is available on the web, if you are in the mood for over 300 pages of light bedtime reading.
While the NFLPA is guaranteed a percentage of All Revenue, there are deductions from what is included in All Revenue (things like taxes, fees, a 1.5 percent stadium credit, etc.) and the player portion of the revenue also includes benefits.
Benefits for NFL players are a substantial cost, since it is a high risk job with a very short career length. The NFLPA has done a great job of improving care and programs for current and former players, including establishing the Legacy Fund, a $620 million (again, over 10 years) program created under the new CBA that is jointly funded by the NFL and the NFLPA. Of the $620 million, 51 percent comes from the NFL and 49 percent counts as benefit costs that are deducted from the players’ bucket before the salary cap is calculated.
The Legacy Fund is just an example – there are group insurance programs, player medical costs, tuition assistance programs, the 88 Benefit for former players with cognitive disabilities, long term care insurance, etc. The new CBA increases benefits to the players, but the cost of those benefits will limit the growth of the salary cap number.
The short answer is that the complexity of the agreements and the lack of availability from the NFL of year-by-year numbers for the new TV deal make it very difficult to accurately forecast the growth in the salary cap. As total football revenues continue to grow, there will be more dollars going to the players, but some of that will be going to fund increasing benefits costs. Just look at it as the NFL’s way of trying to make accounting a little more interesting.
